The
Kaufmann
Fund,
Inc.
[GRAPHIC OMITTED]
Annual Report
Year Ended December 31, 1998
<PAGE>
The Kaufmann Fund, Inc.
A SMALL COMPANY AGGRESSIVE GROWTH FUND
140 EAST 45TH STREET, NEW YORK, NEW YORK 10017
Shareholder Services Executive Offices Current Net Asset Value
(800) 261-0555 (212) 922-0123 (212) 661-4699
1998 ANNUAL REPORT
Dear Shareholder:
While small-cap stocks had a relatively poor year in 1998, they were
notably strong in the fourth quarter and appear to have begun the recovery that
we have been predicting. In the fourth quarter, Kaufmann was up 17.1%, while the
Russell 2000 (the most widely followed index of small cap stocks) was up 16.5%.
The Kaufmann Fund was up 0.7% in net asset value for the year, compared to the
Russell 2000 which was down -2.2%. For the ten-year period ended December 31,
1998, Kaufmann had a compounded average annual return, after all fees and
expenses, of 20.9%. This outpaced the Russell 2000, which averaged 12.9%
annually, and earned Kaufmann the 1 ranking among all small company funds for
the same period, according to Lipper Analytical Services.
In a world where business is becoming increasingly competitive, the wisdom of
investing in companies that have the strongest fundamentals is clear. Many of
the hottest Internet companies that are here today may be gone tomorrow. By
contrast, Kaufmann's core holdings are companies that we believe to be
strategically positioned to prosper in almost any foreseeable environment. These
companies have strong balance sheets and positive cash flow, even after capital
expenditures. The management of these companies are steadfastly focused on
achieving both rapid growth and consistent profitability. Such great growth
companies have often rewarded investors with superior rates of return over the
long term.
The relative valuations of true growth companies should become greater in
periods when most other companies begin to experience slower growth, and when
interest rates and inflation are declining. These are precisely the
circumstances in which we find ourselves. Yet, by historical standards, even the
best small-cap companies, the leaders and innovators in their markets, are being
valued at close to their lowest relative levels in over twenty years. We are
finding tremendous undervaluations among some of our favorite companies. This
too will change, as it often has in the past, and when it does Kaufmann
shareholders should benefit handsomely.
1998 was one of the most volatile years on record. Whatever its causes, such
volatility, in the context of a generally rising market, will often increase the
benefit of dollar-cost averaging. Many investors use Kaufmann's Automatic
Investment Plan (AIP) to take advantage of market volatility by "dollar-cost
averaging" -- when prices are lower, your monthly investment buys more shares.
Dollar cost averaging combined with Kaufmann's experienced managers and
diversified portfolio can provide a good opportunity to build wealth. We urge
all investors to use the AIP as a prudent way to benefit from fluctuations in
the Fund's share price.
<PAGE>
Looking ahead, the world appears to be moving towards a more stable situation,
with the central banks of the U.S. and Europe committed to doing whatever is
necessary to counteract any serious world economic slowdown. In such a setting,
the prospect of moderate economic slowdowns and falling interest rates should be
good for growth stock valuations, both absolutely and relatively. We anticipate
that the wide gap between the rate of earnings growth of the core companies in
The Kaufmann Fund's portfolio (typically 20% to 30%) and the growth rate of the
companies represented in the major indices (typically 5% to 10%) will become
more pronounced by the second half of 1999 and into the year 2000. We are
optimistic that, by the time this happens, the Fund will have resumed its
historical pattern of delivering to investors some of the highest returns across
the entire spectrum of investment possibilities.
We thank and applaud you for staying the course ... and pledge to continue to do
our utmost to reward your trust.
Sincerely,
/s/ Hans P. Utsch /s/ Lawrence Auriana
Hans P. Utsch Lawrence Auriana
Portfolio Co-Manager Portfolio Co-Manager
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per Share Data:
Net Asset Value, Beginning of Year $ 6.37 $ 5.84 $ 5.05 $ 3.76 $ 3.45
- ------------------------------------------------------------------------------------------------------------------------------------
Income from Investment Operations:
Net Investment Income (Loss) (0.040) (0.060) (0.030) (0.060) (0.060)
Net Realized and Unrealized Gain (Loss) on Investments 0.017 0.795 1.083 1.445 0.370
------------ ------------ ------------ ------------ ------------
Total From Investment Operations (0.023) 0.735 1.053 1.385 0.310
- ------------------------------------------------------------------------------------------------------------------------------------
Less Distributions:
From Net Investment Income -- -- -- -- --
From Net Realized Gain 0.667 0.205 0.263 0.095 --
------------ ------------ ------------ ------------ ------------
Total Distributions 0.667 0.205 0.263 0.095 0.000
- ------------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 5.68 $ 6.37 $ 5.84 $ 5.05 $ 3.76
- ------------------------------------------------------------------------------------------------------------------------------------
Total Return (a) 0.72% 12.59% 20.91% 36.89% 8.99%
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios and Supplemental Data:
Net Assets, End of Year (in millions) $ 4,621 $ 6,008 $ 5,341 $ 3,163 $ 1,593
Ratio of Expenses (after Expense Reimbursement) to
Average Net Assets 1.96% 1.89% 1.93% 2.17% 2.29%
Ratio of Interest Expense to Average Net Assets 0.01% 0.01% 0.01% 0.01% 0.02%
------------ ------------ ------------ ------------ ------------
Ratio of Expenses (after Expense Reimbursement Less
Interest Expense) to Average Net Assets 1.95% 1.88% 1.92% 2.16% 2.27%
Ratio of Net Investment Income (Loss) to
Average Net Assets (0.66%) (1.00%) (0.82%) (1.24%) (1.58%)
Portfolio Turnover Rate 59% 65% 72% 60% 47%
- ------------------------------------------------------------------------------------------------------------------------------------
Borrowings for the Year:
Debt Outstanding at End of Year (in thousands) $ -- $ -- $ -- $ -- $ --
Average Debt Outstanding during the Year (in thousands) $ -- $ -- $ -- $ -- $ 3,776
Average Number of Shares Outstanding during the Year
(in thousands) -- -- -- -- 333,175
Average Debt Per Share during the Year $ -- $ -- $ -- $ -- $ 0.01
</TABLE>
- ----------
(a) The total returns would have been lower had certain expenses not been
reduced during the years shown (see Note 3 of Notes to Financial
Statements).
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
Value
Shares (000s)
--------- ----------
STOCKS - 90.7%
CONSUMER (GROUP) - 1.7%
CONSUMER - DURABLES - 0.1%
Compass East Industry Pcl (THB) ^ 28,600 $ 170
Creative Master International, Inc. * 50,000 300
---------
470
---------
CONSUMER - NONDURABLES - 1.6%
Blyth Industries, Inc. + * 2,137,000 66,781
Department 56, Inc. * 50,400 1,893
Maxwell Shoe Company Inc. * 87,500 957
---------
69,631
---------
TOTAL CONSUMER (GROUP) 70,101
---------
FINANCIAL (GROUP) - 2.4%
FINANCIAL - DOMESTIC - 2.3%
Allied Capital Corporation 500,000 8,656
Federal Agricultural Mortgage Corporation * 145,000 5,383
GreenPoint Financial Corp. 79,000 2,775
Headlands Mortgage Company + * 1,800,000 37,688
Heller Financial, Inc. 550,000 16,156
Philadelphia Consolidated Holding Corp. + * 1,088,700 24,632
---------
95,290
---------
FINANCIAL - FOREIGN - 0.1%
ABN Amro Asia Securities Pcl (THB) ^ * 245,400 140
Adkinson Securities (THB) ^ * 319,100 279
Capital Nomura Securities Pcl (THB) ^ 366,700 635
Central European Growth Fund
PLC-Wts. (GBP) ^ # * 400,000 2
National Finance Pcl (THB) ^ * 1,000,000 316
Thai Reinsurance Pcl (THB) ^ 50,000 117
---------
1,489
---------
TOTAL FINANCIAL (GROUP) 96,779
---------
MEDICAL (GROUP) -32.5%
MEDICAL EQUIPMENT & SUPPLIES - 10.5%
Arrow International, Inc. 166,200 5,214
Bionx Implants, Inc. + * 960,500 7,984
Combact Diagnostics Sys. Ltd.
Series B Pfd. (ILS) ^ # * 22,502 1,000
Combact Diagnostics Sys. Ltd.
Series C Pfd. (ILS) ^ # * 3,522 0
Combact Diagnostics Sys. Ltd.
Ordinary Shares (ILS) ^ 666 0
DENTSPLY International Inc. 300,000 7,725
Diagnostic Products Corporation + 768,400 23,917
ENDOcare, Inc. + # * 2,000,000 4,000
ENDOcare, Inc. + * 499,300 983
Haemonetics Corporation * 500,000 11,375
Hanger Orthopedic Group, Inc. * 500,000 11,250
Medstone International, Inc. + * 500,500 3,285
NeoPath, Inc. * 250,000 1,484
Ocular Sciences, Inc. * 659,900 17,652
Orthofix International N.V. + * 1,000,000 14,000
PSS World Medical, Inc. + * 5,000,000 115,000
STERIS Corporation + * 5,900,000 167,781
Sunrise Technologies
International, Inc. - Warrants # * 11,500 0
SurModics, Inc. * 200,000 3,100
ThermoGenesis Corp. # * 576,000 3,600
ThermoGenesis Corp. # * 800,000 1,200
ThermoGenesis Corp. - Warrants # * 80,000 0
Trex Medical Corporation # * 22,000 237
Ventana Medical Systems, Inc. * 289,000 6,250
Xomed Surgical Products, Inc. * 450,000 14,400
Young Innovations, Inc. + * 200,000 2,625
Zoll Medical Corporation + * 980,600 8,703
---------
432,765
---------
MEDICAL SERVICES - 17.5%
ABR Information Services, Inc. * 10,000 196
AmeriPath, Inc. + * 1,000,400 8,941
Cardinal Health, Inc. 1,200,000 91,050
Coast Dental Services, Inc. + * 800,000 8,300
CompDent Corporation + * 1,158,300 12,017
Eclipsys Corporation 175,000 5,075
HBO & Company 6,166,125 176,891
Health Management Systems, Inc. + * 900,000 7,087
Healthcare Recoveries, Inc. + * 2,000,500 34,008
HEALTHSOUTH Corporation * 50,000 772
Health Systems Design Corporation * 118,900 802
IDX Systems Corporation * 240,000 10,560
Latin Healthcare Fund, L.P. # * 1,000,000 2,080
Lincare Holdings, Inc. + * 5,144,300 208,665
MedPartners, Inc. * 6,100,000 32,025
Omnicare, Inc. 398,000 13,830
Orthodontic Centers of America, Inc. * 500,000 9,719
Pacific Health Laboratories, Inc. # * 140,000 525
PAREXEL International Corporation * 460,000 11,500
Physician Reliance Network, Inc. + * 4,104,900 53,877
RTW, Inc. + * 1,312,000 8,364
Shared Medical Systems Corporation 100,000 4,988
Sheridan Healthcare, Inc. + * 900,000 7,538
Sterile Recoveries, Inc. + * 630,700 7,411
Transition Systems, Inc. * 100,000 1,500
Universal Standard Healthcare, Inc. + * 700,000 438
Universal Standard Healthcare, Inc. + # * 500,000 500
---------
718,659
---------
PHARMACEUTICAL & BIOTECH - 4.5%
Aastrom Biosciences, Inc. + * 1,892,598 5,441
Aastrom Biosciences, Inc. + # * 135,062 0
Alexion Pharmaceuticals, Inc. + * 837,300 11,199
Alkermes, Inc. * 305,500 6,778
Aradigm Corporation * 377,500 4,719
ArQule, Inc. + * 2,339,300 11,550
Aurora Biosciences Corporation + * 3,002,000 19,325
Aviron * 544,300 14,084
Dura Pharmaceuticals, Inc. * 1,200,000 18,225
ENZON, Inc. * 504,000 6,709
EPIX Medical, Inc. * 377,500 3,516
IntraBiotics Pharmaceuticals, Inc.-
Series G Pfd. # * 1,500,000 4,502
Millenium Pharmaceuticals, Inc. * 50,000 1,294
Neurogen Corporation * 78,400 1,372
NeXstar Pharmaceuticals, Inc. * 50,000 462
Peptech Limited (AUD) ^ # * 31,250 0
PharmaPrint Inc. * 200,000 2,625
Protein Design Labs, Inc. * 500,000 11,563
QLT PhotoTherapeutics Inc. (CAD) ^ * 528,000 12,228
Serologicals Corporation * 845,100 25,353
Sepracor Inc. * 50,700 4,468
Syncor International Corporation 10,000 273
Titan Pharmaceuticals, Inc. - Pfd. # * 46,131 0
Transkaryotic Therapies, Inc. * 56,100 1,424
Triangle Pharmaceuticals, Inc. # * 1,000,000 13,625
UroGen Corp. # * 66,500 0
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
(Continued)
Value
PHARMACEUTICAL & BIOTECH (continued) Shares (000s)
--------- ----------
ViroPharma Incorporated + * 583,000 $ 5,429
Visible Genetics Inc. # * 101,266 1,002
Xenometrix, Inc. # * 6,619 0
187,166
----------
TOTAL MEDICAL (GROUP) 1,338,590
----------
RETAIL (GROUP) - 15.3%
MAIL ORDER COMMERCIAL/INDUSTRIAL - 2.7%
Barnett Inc. + * 949,600 13,057
Global DirectMail Corp + * 2,500,000 58,438
Micro Warehouse, Inc. * 1,120,900 37,900
----------
109,395
----------
RESTAURANTS - 1.9%
J.D. Wetherspoon plc (GBP) ^ + 15,952,065 47,440
PizzaExpress PLC (GBP) ^ 1,500,000 19,987
PizzaExpress PLC (GBP) ^ # 950,000 12,658
----------
80,085
----------
RETAIL - 10.7%
BJ's Wholesale Club, Inc. * 200,000 9,262
Borders Group, Inc. * 1,100,000 27,431
Carrefour SA (FRF) ^ 1,000 755
Circuit City Stores - Circuit City Group 300,000 14,981
Family Dollar Stores, Inc. 850,000 18,700
Finish Line, Inc., The * 200,000 1,600
General Nutrition Companies, Inc. * 1,584,600 25,750
Hastings Entertainment, Inc. + * 597,200 8,361
Kohl's Corporation * 100,000 6,144
Lowe's Companies, Inc. 500,000 25,594
Office Depot, Inc. + * 4,500,000 166,219
PETsMART, INC. + * 5,863,800 64,502
ShopKo Stores, Inc. * 800,000 26,600
Staples, Inc. * 1,000,000 43,687
Western Growth Capital Partners I, L.L.L.P. # * 52,500 130
Xoom.com Inc. * 20,000 660
----------
440,376
----------
TOTAL RETAIL (GROUP) 629,856
----------
TECHNOLOGY (GROUP) - 20.1%
COMMUNICATIONS EQUIPMENT - 1.2%
Asia Pacific Wire & Cable Corporation
Limited * 205,600 822
E-Tek Dynamics, Inc. * 70,000 1,873
JDS Fitel Inc. (CAD) ^ * 329,200 8,184
Powerwave Technologies, Inc. * 542,500 10,104
Tellabs, Inc. * 20,100 1,378
Uniphase Corporation * 400,000 27,750
----------
50,111
----------
COMPUTER HARDWARE & ACCESSORIES - 0.5%
Micron Electronics, Inc. * 500,000 8,656
PixTech, Inc. + * 678,169 1,632
PixTech, Inc. + # * 1,000,000 2,000
PixTech, Inc. + # * 266,297 6,000
----------
18,288
----------
COMPUTER SERVICES - 6.1%
Affiliated Computer Services, Inc. * 1,600,000 72,000
Concord EFS, Inc. * 1,200,000 50,850
CSG Systems International, Inc. * 500,000 39,500
Galileo International, Inc. 1,000,000 43,500
INSpire Insurance Solutions, Inc. * 500,000 9,188
Value
COMPUTER SERVICES (continued) Shares (000s)
--------- ----------
International Telecommunication
Data Systems, Inc. + * 1,000,000 $ 14,750
QRS Corporation + * 400,000 19,200
Realty Information Group, Inc. 85,000 1,073
Ticketmaster Online-CitySearch,
Inc. - Class B * 50,000 2,800
----------
252,861
----------
COMPUTER SOFTWARE - 7.0%
Amdocs Limited * 3,950,000 67,644
BMC Software Inc. * 250,000 11,141
Check Point Software Technologies Ltd. * 217,500 9,964
Compuware Corporation * 150,000 11,719
GreenField Technology Ventures Fund I # 1 75
Image Business Systems Corporation - Wts. # * 32,000 0
MAPICS, Inc. + * 1,100,000 18,150
MEMCO Software Ltd. * 166,500 2,539
Network Associates, Inc. * 500,000 33,125
New Era of Networks, Inc. + * 500,000 22,000
PLATINUM technology, inc. * 299,999 5,738
Puma Technology, Inc. 91,900 310
SensAble Technologies, Inc. # * 1,333,334 2,064
Siebel System, Inc. * 345,000 11,708
Sterling Commerce, Inc. * 350,000 15,750
Sterling Software, Inc. * 650,000 17,591
Synopsys, Inc. * 500,000 27,125
Transaction System Architects,
Inc. - Class A * 600,000 30,000
----------
286,643
----------
ELECTRONIC COMPONENTS - 0.8%
Aavid Thermal Technologies, Inc. + * 350,000 5,906
Flextronics International Ltd. * 200,000 17,125
Stanlite Pacific Ltd. (AUD) ^ # * 1,998,048 0
Vicor Corporation + * 1,000,000 9,000
----------
32,031
----------
SEMICONDUCTOR & EQUIPMENT - 2.7%
Alpha Industries, Inc. * 260,000 9,360
Altera Corporation * 500,000 30,438
DSP Communications, Inc. * 155,900 2,387
Intel Corporation 170,000 20,155
Peak Trends Trust 1,000,000 9,625
Vitesse Semiconductor Corporation * 900,000 41,063
----------
113,028
----------
TELECOMMUNICATION SERVICES - 1.8%
Advanced Info Service Pcl (THB) ^ 42,300 251
Billing Concepts Corp. + * 2,423,300 26,656
Illuminet Holdings, Inc. # * 20,100 358
SkyTel Communications Inc. * 700,000 15,488
Transaction Network Services, Inc. + * 1,645,400 33,011
----------
75,764
----------
TOTAL TECHNOLOGY (GROUP) 828,726
----------
OTHER (GROUP) - 18.7%
DISTRIBUTION - 1.0%
Central Garden & Pet Company + * 1,500,000 21,563
Keystone Automotive Industries, Inc. * 200,000 4,187
Wilmar Industries, Inc. + * 900,000 18,281
----------
44,031
----------
GOLD MINING - 0.7%
Barrick Gold Corporation 350,000 6,825
Euro-Nevada Mining Corporation (CAD) ^ 150,000 2,453
Getchell Gold Corporation * 205,700 5,605
Homestake Mining Company 350,000 3,216
Newmont Mining Corporation 350,000 6,322
Placer Dome Inc. 250,000 2,875
----------
27,296
----------
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
December 31, 1998
- --------------------------------------------------------------------------------
(Continued)
Value
Shares (000s)
--------- ----------
INDUSTRIAL - 0.9%
Asia Pulp & Paper Company Ltd. * 250,000 $ 2,047
Buckeye Technologies Inc. * 900,000 13,444
Cogeneration Pcl (THB) ^ * 139,600 108
JLM Industries, Inc. + * 400,000 2,050
Nuco2 Inc. + * 500,000 3,156
Owens Corning 121,200 4,295
Phoenix Pulp & Paper Pcl (THB) ^ * 201,100 0
Simpson Manufacturing Co., Inc. * 300,000 11,231
Tipco Asphalt Pcl (THB) ^ * 80,000 116
----------
36,447
----------
MEDIA & ENTERTAINMENT - 4.6%
Championship Auto Racing Teams, Inc. * 312,800 9,267
Cinar Corporation - Class B + * 1,000,000 25,375
Citadel Communications Corporation * 300,000 7,762
Clear Channel Communications, Inc. * 904,000 49,268
Cunningham Graphics International, Inc. + * 350,400 5,344
Infinity Broadcasting Corp. - Class A * 750,000 20,531
Lamar Advertising Company * 730,000 27,193
Loews Cineplex Entertainment Corporation * 800,000 8,100
Outdoor Systems, Inc. * 800,000 24,000
Panavision Inc. # * 46,363 0
Realm Production and Entertainment, Inc. # * 172,000 301
TMP Worldwide Inc. * 300,000 12,600
----------
189,741
----------
OIL & GAS - 0.6%
Hardman Resources NL (AUD) ^ # * 562,500 0
Oceaneering International, Inc. * 95,300 1,430
PTT Exploration and Production Pcl (THB) ^ * 3,300 23
Snyder Oil Corporation 1,075,000 14,311
St. Mary Land & Exploration Company 400,000 7,400
Virginia Gas Company + 400,000 1,350
----------
24,514
----------
REAL ESTATE - 0.1%
IRSA Inversiones y Representaciones S.A. 101,781 2,831
----------
2,831
----------
SERVICE - 10.4%
Ambassadors International, Inc. + * 940,000 13,865
Boron, LePore & Associates, Inc. * 100,000 3,450
Cendant Corporation * 17,300,000 329,781
Charles River Associates Incorporated * 202,500 4,430
CORT Business Services Corporation + * 500,000 12,125
Electricity Generating Authority of
Thailand (THB) ^ * 10,000 17
Kroll-O'Gara Company, The * 200,000 7,888
Marquee Group, Inc., The + * 3,219,500 14,488
Rentokil Initial PLC (GBP) ^ 5,500,000 41,577
----------
427,621
----------
TRANSPORTATION - 0.4%
Bangkok Expressway Plc (THB) ^ * 101,700 84
Carey International, Inc. + * 557,500 9,756
Dispatch Management Services Corp. + * 1,175,700 4,776
Eagle USA Airfreight, Inc. + * 100,000 2,450
----------
17,066
----------
TOTAL OTHER (GROUP) 769,547
----------
TOTAL STOCKS (Cost $2,302,015) $3,733,599
==========
Face Value
Amount (000s)
----------- -----------
CONVERTIBLE BONDS - 4.0%
Amkor Technology, Inc. 5.75% 05/01/2003 $15,000,000 $ 14,025
APP Finance (VII) Mauritius Limited
3.5% 04/30/2003 29,000,000 16,240
Central Garden & Pet Company 6% 11/15/2003 6,000,000 5,085
Hutchinson Technology Incorporated 6% 03/15/2005 24,000,000 33,120
MedPartners, Inc. Sr Note 7.375% 10/01/2006 10,000,000 8,050
PETsMART, Inc. 6.75% 11/01/2004 60,000,000 84,000
Universal Standard Healthcare, Inc.
8.25% 02/01/2006 5,000,000 3,900
----------
TOTAL CONVERTIBLE BONDS (Cost $144,681) $ 164,420
==========
Value
Contracts (000s)
----------- -----------
CONTRACTS - 0.3%
PURCHASED OPTIONS
Currency options, strike price, expiration:
British Pounds, call @ 1.694, 03/23/99 ^ 73,000,000 $ 1,688
Equity options, strike price, expiration:
Cendant Corporation, call @ 15, 01/20/2001 5,000 4,375
Cendant Corporation, call @ 20, 01/20/2001 7,000 5,075
SOLD OPTION
Currency options, strike price, expiration:
British Pounds, call @ 1.694, 03/23/99 ^ (73,000,000) (999)
----------
TOTAL CONTRACTS (Cost $5,148) $ 10,139
==========
Par Value
Value (000s)
----------- ----------
SHORT-TERM OBLIGATIONS - 5.0%
COMMERCIAL PAPER - 1.9%
Clipper Receivables Corp. 5.25% 01/04/99 $12,879,000 $ 12,874
Clipper Receivables Corp. 5.96% 01/04/99 13,652,000 13,645
Clipper Receivables Corp. 5.17% 01/05/99 12,441,000 12,434
Clipper Receivables Corp. 5.63% 01/06/99 12,376,000 12,366
Clipper Receivables Corp. 5.75% 01/07/99 4,390,000 4,386
Clipper Receivables Corp. 5.72% 01/08/99 21,503,000 21,479
----------
77,184
----------
REPURCHASE AGREEMENTS - 3.1%
State Street Bank and Trust Company, 4.80%,
dated 12/31/98, due 01/04/99
(collateralized by U.S. Treasury and
Federal Agency Securities) 80,000,000 80,000
State Street Bank and Trust Company, 5.25%,
dated 12/04/98, due 01/04/99
(collateralized by U.S.Treasury and
Federal Agency Securities) 50,000,000 50,000
----------
130,000
----------
TOTAL SHORT-TERM OBLIGATIONS (Cost $207,184) $ 207,184
==========
TOTAL INVESTMENTS - 100% (Cost $2,659,028) $4,115,342
==========
LEGEND
% Represents percentage of total portfolio owned
^ Foreign Denominated Security:
AUD - Australian Dollar
CAD - Canadian Dollar
FRF - French Franc
GBP - British Pound
ILS - Israeli Shekel
THB - Thai Baht
+ Affiliated Company (See Note 7 of Notes to Financial Statements)
# Restricted security - not registered under the Securities Act of 1933 (See
Note 8 of Notes to Financial Statements)
* Non-income producing during the year
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
- --------------------------------------------------------------------------------
SCHEDULE OF SECURITIES SOLD SHORT
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
Value
STOCKS Shares (000s)
- ------ --------- --------
Amazon.com, Inc. 272,700 $ 87,605
AMR Corporation 40,000 2,375
ASM Lithography Holding N.V 200,000 6,100
Apple Computer, Inc. 150,000 6,141
Applied Materials, Inc. 10,000 427
Armstrong World Industries, Inc. 27,900 1,683
Baan Company, N.V 5,000 52
Ball Corporation 50,000 2,287
Biomatrix, Inc. 46,300 2,697
Black & Decker Corporation 50,000 2,803
Books-A-Million, Inc. 30,000 390
Broadcast.com Inc. 10,000 765
Cadence Design Systems, Inc. 100,000 2,975
Case Corporation 50,000 1,091
Caterpillar Inc. 500,000 23,000
CheckFire Holdings Corporation 15,000 351
Cooper Tire & Rubber Company 100,000 2,044
CyberCash, Inc. 30,000 450
Cyberian Outpost, Inc. 35,000 962
Deere & Company 200,000 6,625
Dover Corporation 50,000 1,831
Dow Chemical Company 100,000 9,094
DuPont Photomasks, Inc. 20,000 849
Eaton Corporation 49,000 3,463
Etec Systems, Inc. 100,000 4,000
Ethan Allen Interiors Inc. 10,000 410
Fasternal Company 135,000 5,940
Gap, Inc., The 15,000 844
General Instrument Corporation 50,000 1,697
Georgia Gulf Corporation 50,000 803
Hewlett-Packard Company 10,000 683
Hillenbrand Industries, Inc. 50,000 2,844
IDEC Pharmaceuticals Corporation 75,000 3,525
Immunex Corporation 35,000 4,403
Imperial Chemical Industries plc 50,000 1,747
Innovex, Inc. 10,000 137
Inso Corporation 250,000 6,250
Integrated Health Services, Inc. 200,000 2,825
International Business Machines Corporation 10,000 1,847
KLA-Tencor Corporation 10,000 434
Lyondell Chemical Company 50,000 900
Magellan Health Services, Inc. 50,000 419
Medicis Pharmaceutical Corporation 300,000 17,887
MedImmune, Inc. 200,000 19,887
MedQuist, Inc. 25,000 987
North American Vaccine, Inc. 38,136 338
Northeast Airlines Corporation 110,000 2,812
Novellus Systems, Inc. 100,000 4,950
Nucor Corporation 50,000 2,163
O'Reilly Automotive, Inc. 20,000 945
Organogenesis Inc. 195,313 2,197
PacifiCare Health Systems, Inc. 10,000 795
Parker-Hannifin Corporation 50,000 1,638
Pharmaceutical Product Development, Inc. 50,000 1,503
PeopleSoft, Inc. 205,000 3,882
Perclose, Inc. 50,000 1,656
Pre-Paid Legal Services, Inc. 20,000 660
ProBusiness Services, Inc. 436,150 19,845
Province Healthcare Company 50,000 1,794
QUALCOMM Incorporated 170,000 8,808
Raytheon Company 10,000 533
Recoton Corporation 10,000 179
Republic Industries, Inc. 50,000 738
Rouge Industries, Inc. 20,000 175
Royal Group Technologies Limited 50,000 1,116
Sabratek Corporation 10,000 164
SAP AG 250,000 9,016
Securities Dynamics Technologies, Inc. 17,000 391
SONUS Pharmaceuticals, Inc. 20,000 135
Sotheby's Holdings, Inc. 50,000 1,600
Steel Dynamics, Inc. 40,000 470
Sunrise Technologies International, Inc. 10,000 59
Superior Consultant Holdings Corporation 200,000 8,700
Telefonaktiebologet LM Ericsson 450,000 10,772
Texas Instruments Incorporated 10,000 856
Tiffany & Co. 142,300 7,382
20th Century Industries 200,000 4,638
UAL Corporation 80,000 4,775
US LEC Corp. 297,000 4,399
--------
TOTAL SECURITIES SOLD SHORT $354,613
========
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1998
- --------------------------------------------------------------------------------
Amounts in thousands
(except per share amount)
Assets
Investments in securities at value
(including repurchase agreements of $130,000)
(cost $2,659,028)-- See accompanying schedule ................ $ 4,115,342
Cash and cash equivalents ...................................... 162,308
Cash denominated in foreign currencies ......................... 101
Deposit with custodian bank for securities sold short .......... 349,500
Receivable from brokers for securities sold short .............. 349,595
Receivable for investments sold ................................ 75,153
Receivable for fund shares sold ................................ 4,826
Dividends and interest receivable .............................. 4,005
Other receivables .............................................. 383
Repurchase Agreements, at value, held as collateral for
securities loaned ............................................ 485,948
-----------
Total assets ............................................... 5,547,161
-----------
Liabilities
Securities sold short, at value (Proceeds $237,965)
--See accompanying schedule .................................. 354,613
Payable for investments purchased .............................. 60,448
Payable for fund shares redeemed ............................... 23,732
Payable to Investment Advisor .................................. 99
Other payables and accrued expenses ............................ 1,303
Collateral on securities loaned, at value ...................... 485,948
-----------
Total liabilities .......................................... 926,143
-----------
Net Assets ..................................................... $ 4,621,018
===========
Net Assets consist of:
Paid in capital .............................................. $ 3,114,827
Accumulated net investment loss .............................. (193,067)
Accumulated undistributed net realized gain on investments
and foreign currency transactions .......................... 359,590
Net unrealized appreciation on investments and assets and
liabilities in foreign currencies .......................... 1,339,668
-----------
Net Assets, for 813,200 shares outstanding ..................... $ 4,621,018
===========
Net Asset Value Per Share
(based on 813,200 shares outstanding, 2,000,000
shares authorized with $.10 per share par value) ............ $ 5.68
===========
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
Year Ended December 31, 1998
- --------------------------------------------------------------------------------
Amounts in thousands
Investment Income
Dividends, net of $447 of foreign taxes withheld
(including $797 received from affiliated issuers) ............. $ 14,104
Interest (including income on securities loaned of $1,071) ...... 51,025
Other (Note 3) .................................................. 3,932
---------
Total income ................................................ 69,061
---------
Expenses
Investment advisory fee (Note 3) ................................ 79,655
Distribution fee (Note 3) ....................................... 17,716
Shareholder servicing fees ...................................... 4,186
Service fees (Note 4) ........................................... 4,571
Custodian fees and expenses ..................................... 654
Registration fees ............................................... 221
Loan commitment fee (Note 9) .................................... 346
Printing fees ................................................... 297
Audit fees ...................................................... 334
Non-interested directors' fees and expenses ..................... 259
Legal fees ...................................................... 183
Dividends on securities sold short .............................. 1,209
Miscellaneous expenses .......................................... 214
---------
Total expenses before reimbursement ........................... 109,845
Expense reimbursement by Investment Advisor (Note 3) ......... (5,697)
---------
Net expenses .................................................. 104,148
---------
Net investment loss ............................................... (35,087)
---------
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on:
Investment securities (including net realized gain of $113,415
on sales of investments in affilated issuers) ............... 619,634
Foreign currency transactions ................................. (4,735)
---------
614,899
---------
Changes in net unrealized appreciation (depreciation) on:
Investment securities ......................................... (574,212)
Assets and liabilities ........................................ 12
---------
(574,200)
---------
Net gain .......................................................... 40,699
---------
Net increase in net assets resulting from operations .............. $ 5,612
=========
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
Years Ended December 31, 1998 and 1997
- --------------------------------------------------------------------------------
Amounts in thousands
1998 1997
----------- -----------
Increase (Decrease) in Net Assets
Operations
Net investment loss ........................... $ (35,087) $ (56,595)
Net realized gain ............................. 614,899 299,348
Change in net unrealized appreciation ......... (574,200) 433,053
----------- -----------
Net increase in net assets
resulting from operations ................... 5,612 675,806
----------- -----------
Distributions to shareholders
From net investment income .................... -- --
From net realized gain ........................ (499,865) (188,600)
----------- -----------
Total distributions ........................... (499,865) (188,600)
----------- -----------
Share transactions
Net proceeds from sales of shares ............. 728,424 1,275,160
Reinvestment of distributions ................. 483,873 182,826
Cost of shares redeemed ....................... (2,105,187) (1,278,342)
----------- -----------
Net increase (decrease) in net assets resulting
from share transactions .................... (892,890) 179,644
----------- -----------
Total increase (decrease) in net assets ....... (1,387,143) 666,850
Net Assets
Beginning of year ............................... 6,008,161 5,341,311
----------- -----------
End of year ..................................... $ 4,621,018 $ 6,008,161
=========== ===========
Other information
Shares:
Sold .......................................... 116,161 212,036
Issued in reinvestment of distributions ....... 93,955 28,478
Redeemed ...................................... (339,616) (212,336)
----------- -----------
Net increase (decrease) ......................... (129,500) 28,178
=========== ===========
The accompanying notes are an integral part of these financial statements.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
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. 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 invetment securities.
9
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
(Continued)
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.
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. At December 31,
1998, the cost of securities purchased to cover short sales and the
proceeds from securities sold short were $578,436,613 and $406,784,822,
respectively. Securities sold short at December 31, 1998 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. Certain officers and directors of the Fund are
affiliated with Edgemont. 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, 1998, the Fund incurred
investment advisory fees of $79,655,324. 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
10
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
(Continued)
capital items, interest, taxes, extraordinary items and other excludable
items) are in excess of $650,000. A reimbursement of $5,697,251 was made
for the year ended December 31, 1998. 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 0.75%
per annum on the Fund's average net assets. For the year ended December
31, 1998, distribution expenses of $17,716,335 were incurred by the Fund,
equivalent to 0.33% per annum of the Fund's average net assets.
Redemption Fee
The Fund imposes a redemption fee of 0.2% 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, 1998, redemption
fees of $3,745,225 were charged by the Fund of which $1,089,053 were
allocated to cover the cost of redemptions. Excess fee proceeds of
$2,609,048 were added to the Fund's assets.
Brokerage Commissions
During 1998, the Fund placed a portion of its portfolio transactions with
Bowling Green Securities, Inc. ("Bowling Green"), for which brokerage
commissions of $27,000 were paid. Certain officers and directors of the
Fund are affiliated with Bowling Green.
4. SERVICE FEES
The Fund has an Authorization Agreement for the payment of a service fee,
not to exceed 0.25% per annum of the Fund's average net assets, to
broker-dealers that provide liaison services to investors, such as
responding to client inquiries and providing information on investments.
For the year ended December 31, 1998, service fees of $4,571,072 were
incurred by the Fund.
5. INVESTMENTS
Purchases and Sales of Investments
Purchases and sales of securities (excluding short-term investments and
securities sold short) aggregated $2,751,580,945 and $4,311,586,744,
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 59% for the year
ended December 31, 1998.
Tax Basis of Investments
As of December 31, 1998, the aggregate cost, for Federal income tax
purposes, of investment securi ties and proceeds of securities sold short
was $2,451,844,331 and $237,965,112, respectively. Accumulated net
unrealized appreciation aggregated $1,339,666,460, of which $1,590,389,624
related to appreciated investment securities and $250,723,164 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 $1,070,642 for the year ended
December 31, 1998. 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, 1998, the value of the securities loaned and the value of
collateral was $480,311,087 and $485,948,363, 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 shares. Transactions with companies which are or
were affiliates are as follows:
11
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
(Continued)
<TABLE>
<CAPTION>
Amounts in Thousands
Purchases Sales Dividend
Affiliates Cost Cost Income Value
- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Aastrom Biosciences, Inc.* $ -- $ 3,335 $ -- $ 5,441
Aastrom Biosciences, Inc. (restricted)* -- -- -- --
Aavid Thermal Technologies, Inc.* 16,085 3,776 -- 5,906
Access Health, Inc.* 15,662 8,167 -- --
Alexion Pharmaceuticals Inc.* 8,947 -- -- 11,199
Ambassadors International, Inc.* 1,924 3,261 -- 13,865
AmeriPath, Inc.* 5,290 1,075 -- 8,941
Anika Therapeutics, Inc.* -- 3,992 -- --
ArQule, Inc.* 13,442 -- -- 11,550
Aurora Biosciences Corporation* 28,336 28 -- 19,325
Barnett, Inc.* 4,603 582 -- 13,057
Billing Concepts Corp.* 13,874 6,328 -- 26,656
Bionx Implants, Inc.* 2,983 3,804 -- 7,984
Blyth Industries, Inc.* -- 18,031 -- 66,781
Cameron Ashley Building Products* 13 6,606 -- --
Carey International, Inc.* -- 9,230 -- 9,756
CCC Information Svcs Group* 14,392 23,918 -- --
Central Garden and Pet Company* 1,160 14,138 -- 21,563
Children's Comprehensive Services, Inc.* -- 4,465 -- --
Cholestech Corporation* -- 5,622 -- --
Cinar Corporation - Class B* -- 16,135 -- 25,375
CN Biosciences, Inc.* -- 9,120 -- --
Coast Dental Services, Inc.* 4,265 2,677 -- 8,300
Compdent Corporation* -- 5,275 -- 12,017
Computer Motion, Inc.* -- 4,854 -- --
CompX International Inc.* -- 11,625 -- --
CORT Business Services Corporation* 1,572 13,003 -- 12,125
Cost Plus, Inc.* 3,544 14,144 -- --
CSK Auto Corporation* -- 19,255 -- --
Cunningham Graphics International, Inc.* 7,902 1,644 -- 5,344
Diagnostic Products Corporation -- -- 184 23,917
Dispatch Management Services Corp.* 30,135 14,402 -- 4,776
Donnelley Enterprise Solutions Inc.* 114 15,345 -- --
Duff & Phelps Credit Rating Company -- 15,677 18 --
Eagle USA Airfreight, Inc.* 4,843 22,479 -- 2,450
ENDOcare, Inc.* 591 -- -- 983
ENDOcare, Inc.* (restricted) 3,504 -- -- 4,000
FinishMaster, Inc.* -- 3,361 -- --
Global DirectMail Corp* 18,958 8,625 -- 58,438
Hastings Entertainment, Inc.* 9,280 2,587 -- 8,361
Headlands Mortgage Company* -- 8,413 -- 37,688
Health Management Systems, Inc.* 1,241 2,915 -- 7,087
Healthcare Recoveries, Inc.* 5,307 -- -- 34,008
Information Storage Devices, Inc.* 290 5,558 -- --
International Telecommunication
Data Sys. Inc.* 20,450 5 -- 14,750
J.D. Wetherspoon plc -- 3,430 552 47,440
JLK Direct Distribution Inc.* -- 11,090 -- --
JLM Industries, Inc.* 488 646 -- 2,050
Learmonth & Burchette Mgmt. Systems Plc* -- 2,590 -- --
Liberty Technologies, Inc.* -- 816 -- --
LifeCell Corporation* -- 5,264 -- --
Lincare Holdings, Inc.* 50,860 12,582 -- 208,665
MAPICS, Inc.* 1,588 124 -- 18,150
Marquee Group Inc., The* -- 1,410 -- 14,488
Medstone International, Inc.* 4 -- -- 3,285
Microchip Technology, Inc.* 7,924 89,818 -- --
Minntech Corporation -- 7,767 18 --
Monarch Dental Corporation* -- 6,955 -- --
MoneyGram Payment Systems, Inc.* -- 13,999 -- --
Monro Muffler Brake, Inc.* -- 5,244 -- --
National Research Corporation* 3,165 1,850 -- --
New Era of Networks, Inc.* 3,000 21,093 -- 22,000
Nielsen Media Research* -- 1,719 -- --
Nu Skin Asia Pacific Inc.* -- 6,424 -- --
Nuco2 Inc.* 1,954 -- -- 3,156
Office Depot, Inc.* 1,289 3,818 -- 166,219
Orthofix International N.V.* 450 -- -- 14,000
Pameco Corporation* -- 6,570 -- --
Panavision Inc.* -- 25,721 -- --
PETsMART, Inc.* 45,742 -- -- 64,502
Philadelphia Consolidated
Holding Corp.* 1,658 -- -- 24,632
Physician Reliance Network, Inc.* -- -- -- 53,877
Pixtech, Inc.* -- -- -- 1,632
Pixtech, Inc. (restricted)* -- -- -- 2,000
Pixtech, Inc. (restricted)* 6,000 -- -- 6,000
PJ America Inc.* -- 9,871 -- --
Professional Staff PLC* 7,455 5,790 -- --
Promis Systems Corporation Ltd.* -- 1,390 -- --
ProSource, Inc.* -- 14,198 -- --
PSS World Medical, Inc.* 29,800 24,698 -- 115,000
QRS Corporation* 5,054 11,556 -- 19,200
Qualix Group Inc.* 595 1,151 -- --
RTW, Inc.* 366 232 -- 8,364
Rush Enterprises, Inc.* 698 6,763 -- --
Sabratek Corporation* -- 19,837 -- --
SCP Pool Corp.* -- 9,225 -- --
Sheridan Healthcare, Inc.* -- -- -- 7,538
Sterile Recoveries, Inc.* 653 1,017 -- 7,411
STERIS Corporation* 13,263 45,616 -- 167,781
TransAct Technologies Incorporated* 71 4,289 -- --
Transaction Network Services, Inc.* 14,070 25,740 -- 33,011
Trend-Lines, Inc.* 26 2,777 -- --
Universal Standard Healthcare, Inc.* -- -- -- 438
Universal Standard Healthcare,
Inc. (restricted)* 1,250 -- -- 500
Vicor Corporation* -- 30,411 -- 9,000
Viking Office Products, Inc.* 145 31,021 -- --
Virginia Gas Co. 1,400 -- 25 1,350
ViroPharma Incorporated* 5,838 -- -- 5,429
Wilmar Industries, Inc.* -- -- -- 18,281
Young Innovations, Inc.* 2,314 1,907 -- 2,625
Zoll Medical Corporation* 489 -- -- 8,703
---------- ---------- ---------- ----------
$ 446,316 $ 789,876 $ 797 $1,538,370
========== ========== ========== ==========
</TABLE>
* Non-income producing during the year
8. RESTRICTED SECURITIES
The Fund may not invest more than 10% of its net assets in securities
which are subject to legal or contractual restrictions on resale. At
December 31, 1998, the Fund owned the following restricted securities
(constituting 1.2% of net assets) which may not be publicly sold without
registration under the Securities Act of 1933 (the "1933 Act"). The Fund
does not have the right to demand that such securities be registered. The
value of these securities is determined by valuations supplied by pricing
services or brokers, or if not available, in good faith by or at the
direction of the Board of Directors. Certain of these securities may be
offered and sold to "qualified institutional buyers" under Rule 144A of
the 1933 Act.
12
<PAGE>
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
- --------------------------------------------------------------------------------
(Continued)
<TABLE>
<CAPTION>
Amounts in Thousands
Date(s) of Share/Par
Description Acquisition Amount Cost Value
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Aastrom Biosciences, Inc. 02/17/98 6,457 $ -- $ --
04/15/98 26,316 -- --
10/02/98 102,289 -- --
--------- --------- ---------
135,062 -- --
Central European Growth
Fund PLC - Wts. (GBP) 02/24/95 400,000 -- 2
Combact Diagnostics
Systems Ltd. (ILS) 11/02/95 22,502 1,000 1,000
Combact Diagnostics
Systems Ltd. - Ser.C Pfd. (ILS) 10/16/98 3,522 -- --
Combact Diagnostics
Systems Ltd. - Ord. Shrs. (ILS) 10/16/98 666 -- --
ENDOcare, Inc. 01/24/97 1,000,000 3,500 2,000
04/16/98 750,000 2,625 1,500
04/24/98 250,000 879 500
--------- --------- ---------
2,000,000 7,004 4,000
Greenfield Technology
Ventures Fund I 06/15/98 1 75 75
Hardman Resources NL (AUD) 04/08/93 100,000 34 --
04/13/93 100,000 35 --
04/15/93 50,000 19 --
04/23/93 100,000 34 --
08/11/93 100,000 31 --
02/06/95 112,500 4 --
--------- --------- ---------
562,500 157 --
Illuminet Holdings, Inc. 02/04/98 20,100 358 358
Image Business Systems
Corporation - Wts 04/22/93 32,000 -- --
IntraBiotics Pharmaceuticals, Inc.
- Series G. Pfd. 11/23/98 1,500,000 4,502 4,502
Latin Healthcare Fund, L.P. 07/15/97 1,000,000 2,080 2,080
Pacific Health Laboratories, Inc. 08/09/96 140,000 525 525
Panavision Inc. 06/05/98 46,363 767 --
Peptech Limited (AUD) 07/19/93 31,250 76 --
Pixtech Inc. 03/31/98 1,000,000 4,020 2,000
Pixtech Inc. 12/24/98 266,297 6,000 6,000
PizzaExpress PLC (GBP) 04/18/96 550,000 2,706 7,328
10/16/96 400,000 3,011 5,330
--------- --------- ---------
950,000 5,717 12,658
Realm Production and
Entertainment, Inc. 03/24/97 172,000 301 301
SensAble Technologies, Inc. 12/23/97 1,333,334 2,064 2,064
Stanlite Pacific Ltd. (AUD) 12/04/97 1,998,048 -- --
Sunrise Technologies
International, Inc. - Wts 09/01/92 5,250 -- --
09/28/92 6,250 -- --
--------- --------- ---------
11,500 -- --
ThermoGenesis Corp. 12/31/97 800,000 2,000 1,200
ThermoGenesis Corp. - Wts 01/27/98 80,000 -- --
ThermoGenesis Corp. -
Series A Convertible 12/29/98 576,000 3,600 3,600
Titan Pharmaceuticals, Inc. - Pfd. 03/28/95 46,131 100 --
Trex Medical Corporation 11/15/95 20,000 205 215
06/24/96 2,000 28 22
--------- --------- ---------
22,000 233 237
Triangle Pharmaceuticals, Inc. 12/30/98 1,000,000 $ 10,000 $ 13,625
Universal Standard Healthcare, Inc. 06/08/98 500,000 1,265 500
UroGen Corp. 12/27/95 66,500 3 --
Western Growth Capital Partners I,
L.L.L.P 12/31/97 52,500 130 130
Visible Genetics Inc. 11/19/98 101,266 1,002 1,002
Xenometrix, Inc. 07/10/92 6,619 50 --
--------- ---------
$ 53,029 $ 55,859
========= =========
</TABLE>
9. LINE OF CREDIT
The Fund has a $400,000,000 committed secured leverage line of credit with
its custodian bank. The Fund pledges 75% of its assets as collateral
against the line. Borrowings are charged interest at 0.50%, over the
current overnight Federal Funds Rate. The Fund incurs a commitment fee of
0.075% 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, 1998.
10. FORWARD EXCHANGE CURRENCY CONTRACTS
The Fund enters into forward exchange currency contracts in order to hedge
certain firm purchase and sale commitments denominated in foreign
currencies. A forward exchange currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated
forward rate. The gain or loss arising from the difference between the
original contract and the closing of the contract is included in net
realized gain or loss on foreign currency transactions.
Fluctuations in the net value of forward exchange currency contracts are
recorded for financial reporting purposes as unrealized gains or losses by
the Fund.
Risks may arise from the potential inability of a counterparty to meet the
terms of a contract and from unanticipated movements in the value of
foreign currencies relative to the U.S. dollar. The face or contract
amount, in U.S. dollars, as reflected in the following table, reflects the
total exposure the Fund has in that particular currency contract.
At December 31, 1998 the Fund had outstanding for ward exchange currency
contracts as follows:
Value on U.S. $
Contract Origination Current Unrealized
Amount Date Value Depreciation
---------- ----------- ---------- ------------
Foreign Currency
Sale Contracts
Canadian Dollar
expiring 01/05/99 $1,637,129 $1,637,129 $1,662,102 $ (24,937)
Thai Baht
expiring 01/04/99 264 264 267 (3)
13
<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, 1998, 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, 1998, 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, 1998, 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 22, 1999 Certified Public Accountants
14
<PAGE>
The Power of Automatic Investing
Dollar-Cost Averaging: A Proven Long-Term Investment Strategy
Just as the stock market fluctuates with time, investor sentiment tends to
alternate between periods of enthusiasm and despair. Unfortunately, many
investors tend to let their emotions guide their investment decisions. An
effective investment strategy that assists in overcoming the emotional hazards
of the market is "dollar-cost averaging." An investment plan using dollar-cost
averaging is a convenient way to lower your average investment cost and improve
your overall timing of the market.
The key investment concept behind dollar-cost averaging is that when prices are
up you purchase fewer shares and when prices are down you purchase more. It's an
automatic method to help you counter the natural human impulse to buy high (when
everyone's excitedly jumping on the bandwagon) and to sell low (when everyone is
bailing out).
The easiest and most painless way to dollar-cost average is to establish an
automatic investment plan. With an automatic investment plan, you can arrange
for money to be withdrawn straight from your checking account or paycheck. This
way there are no checks to write, no phone calls to make, everything is done for
you automatically. It's a simple, effective and effortless way to dollar-cost
average.
Decide on an amount you'd like to invest and a specific time to make your
investment. Maybe you'd like to invest $200 a month. Perhaps it would work
better to invest every two weeks by taking $100 out of each paycheck. Once
you've set an amount and a time period that works for your situation -- stick
with it! Dollar-cost averaging only works if you make investments on a regular
basis.
In the end, one of the greatest benefits of dollar-cost averaging is that it
commits you to investing regularly, regardless of what is happening in the
financial markets. In this way, you avoid the temptation to guess whether you
are purchasing shares at a market low or a market high, and you make building
assets for the future a good habit rather than an agonizing decision.
Here's how it works
The table below helps illustrate this concept by assuming a monthly investment
of $200. Each month, the price of the investment fluctuates, resulting in the
purchase of fewer shares when the price is high, such as in June, and more
shares when the price is low, such as in May. After 6 months, a total of 206.549
shares have been acquired using a total investment of $1200. The average cost of
each share is $5.81 ($1200 invested divided by 206.549 shares), while the
average price of the shares is $5.92 (the average of the six purchase prices --
$35.50 divided by 6).
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
TESTING THE STRENGTH OF DOLLAR-COST AVERAGING
- -------------------------------------------------------------------------------------------
TIME OF AMOUNT PURCHASE SHARES NUMBER OF
PURCHASE INVESTED PRICE PURCHASED SHARES HELD
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
JANUARY $200.00 $5.34 37.453 37.453
- -------------------------------------------------------------------------------------------
FEBRUARY $200.00 $6.50 30.769 68.222
- -------------------------------------------------------------------------------------------
MARCH $200.00 $6.02 33.223 101.445
- -------------------------------------------------------------------------------------------
APRIL $200.00 $5.85 34.188 135.633
- -------------------------------------------------------------------------------------------
MAY $200.00 $4.67 42.827 178.460
- -------------------------------------------------------------------------------------------
JUNE $200.00 $7.12 28.090 206.549
- -------------------------------------------------------------------------------------------
AMOUNT INVESTED: $1,200.00
- -------------------------------------------------------------------------------------------
TOTAL SHARES PURCHASED: 206.549
- -------------------------------------------------------------------------------------------
INVESTOR'S AVERAGE COST PER SHARE: $5.81
- -------------------------------------------------------------------------------------------
INVESTOR'S AVERAGE PRICE PAID PER SHARE: $5.92
- -------------------------------------------------------------------------------------------
</TABLE>
Although dollar-cost averaging cannot guarantee a profit or protect against loss
in declining markets, it can potentially help make market fluctuations work to
your advantage. Dollar-cost averaging, combined with other key fund benefits,
such as diversification and professional management, can give you the best
opportunity to build wealth.
For assistance in completing an application or questions regarding your account
please call 800-261-0555.
15
<PAGE>
INVESTMENT ADVISOR:
Edgemont Asset Management Corporation
140 East 45th Street, 43rd Floor
New York, New York 10017
(212) 661-2443
- ---------------------------------------
CUSTODIAN:
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
- ---------------------------------------
TRANSFER AGENT:
Boston Financial Data Services, Inc.
P.O. Box 8331
Boston, Massachusetts 02266
(800) 261-0555
- ---------------------------------------
LEGAL COUNSEL:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
- ---------------------------------------
INDEPENDENT AUDITORS:
Sanville & Company
1514 Old York Road
Abington, Pennsylvania 19001
