N-30D 1 0001.txt KAUFMANN FUND - 12-31-00 ANNUAL REPORT o DECEMBER 31, 2000 [graphic omitted] THE KAUFMANN FUND, INC. -------------------------------------------------------------------------------- 140 East 45th Street New York, New York 10017 INVESTING IN GROWTH COMPANIES FOR THE LONG TERM ------------------------------------------ For the most recent NAV call: (212) 661-4699 ------------------------------------------ ------------------------------------------ For questions regarding your account call: (800) 261-0555 ------------------------------------------ THE KAUFMANN FUND, INC. ANNUAL REPORT - DECEMBER 31, 2000 ------------------------------------------------------------------------------- LETTER TO SHAREHOLDERS ------------------------------------------------------------------------------- DEAR SHAREHOLDER: The Kaufmann Fund had excellent relative performance in what was for many investors an extremely difficult year. The Fund's net asset value was up 10.9% for the year ended December 31, 2000. For the five and ten-year periods ended December 31, 2000, the Fund had compounded average annual returns of 13.9% and 21.0%, respectively. Last year was a punishing year for many investors. The NASDAQ, an index highly reflective of America's fastest growing companies, fell 39%, the worst in its history. As to why this happened, the simplest explanation might be the best: world growth slowed sharply during 2000 under the weight of expensive oil and high interest rates. The Fund did well despite these conditions because, beginning last March, we correctly read the signals and defensively repositioned the Fund's portfolio. We gradually: o reduced exposure to the high fliers in technology and biotechnology o added to positions in financial and healthcare services o added to cash reserves o reduced the number of positions in the portfolio in order to increase the overall quality of investment while providing sufficient diversification. In our judgment the current year should generate positive returns for equities and be another good year for our shareholders. We can already foresee the re-acceleration of the global economy -- with the prospect of falling oil prices, falling interest rates, and falling tax rates. As a result, we see some terrific investment opportunities, and believe that 2001 will be a good year to re-deploy the Fund's cash reserves. The chart on the next page illustrates the growth of a $10,000 investment in the Fund compared to the Russell Midcap Growth Index for the 10-year period ended December 31, 2000.The Russell Midcap Growth Index measures the performance of mid-sized companies that are part of the Russell 1000 Growth Index. During the Fund's preceding years, performance was compared with the Russell 2000 Index. This index measures the performance of small-sized companies. Because of the Fund's current mix of assets, this index is no longer a basis for comparison. However, the chart shows the performance of both indexes. These indexes are unmanaged and shareholders cannot actually make an investment in them. As always, we will continue to invest the Fund's assets primarily in companies that can grow sales and earnings at high double-digit rates faster than the average company. Such exceptional growth, when achieved by companies with superior managements, strong balance sheets and sustainable competitive advantages, has rewarded investors over the long-term. The challenge is to apply our experience and discipline to identify such companies and to know when to buy and hold them.This is the challenge that continues to motivate and energize us every working day. We are thankful for your continued support and look forward to serving you for many years to come. Sincerely, /s/ Hans P. Utsch /s/ Lawrence Auriana Portfolio Co-Manager Portfolio Co-Manager -------------------------------------------------------------------------------- GROWTH OF A $10,000 INVESTMENT OVER 10 YEARS -------------------------------------------------------------------------------- THE KAUFMANN FUND RUSSELL MIDCAP GROWTH RUSSELL 2000 -------------------------------------------------------------------------------- INITIAL $10,000 Dec-91 17,931 14,703 14,604 Dec-92 19,961 15,984 17,293 Dec-93 23,597 17,773 20,558 Dec-94 25,718 17,389 20,183 Dec-95 35,204 23,297 25,925 Dec-96 42,551 27,368 30,202 Dec-97 47,906 33,538 36,956 Dec-98 48,083 39,529 36,014 Dec-99 60,321 59,804 43,669 Dec-00 69,103 52,778 42,350 This chart shows the growth of a hypothetical investment from December 31, 1990 through December 31, 2000 and assumes that all dividends have been reinvested. Past performance does not guarantee future results. Investment returns and principal value will fluctuate and you may have a gain or loss when you sell your shares. THE KAUFMANN FUND, INC. ANNUAL REPORT - DECEMBER 31, 2000 ---------------------------------------------------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS ---------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------- SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------- 2000 1999 1998 1997 1996 NET ASSET VALUE, BEGINNING OF YEAR $ 5.95 $ 5.68 $ 6.37 $ 5.84 $ 5.05 Income from Investment Operations: Net Investment Loss (0.050) (0.060) (0.040) (0.060) (0.030) Net Realized and Unrealized Gain on Investments 0.760 1.316 0.017 0.795 1.083 Total Income (Loss) from Investment Operations 0.710 1.256 (0.023) 0.735 1.053 Less Distributions: From Net Investment Income -- -- -- -- -- From Net Realized Gains 2.230 0.986 0.667 0.205 0.263 Total Distributions 2.230 0.986 0.667 0.205 0.263 NET ASSET VALUE, END OF YEAR $ 4.43 $ 5.95 $ 5.68 $ 6.37 $ 5.84 TOTAL RETURN (a) 10.86% 26.01% 0.72% 12.59% 20.91% ----------------------------------------------------------------------------------------------------------------------------- RATIOS AND SUPPLEMENTAL DATA ----------------------------------------------------------------------------------------------------------------------------- Net Assets, End of Year (in millions) $ 3,368 $ 3,476 $ 4,621 $ 6,008 $ 5,341 Ratio of Expenses (after expense reimbursement) to Average Net Assets (%) 1.89% 1.95% 1.96% 1.89% 1.93% Ratio of Interest Expense to Average Net Assets (%) 0.01% 0.01% 0.01% 0.01% 0.01% Ratio of Expenses (after expense reimbursement less interest expense) to Average Net Assets (%) 1.88% 1.94% 1.95% 1.88% 1.92% Ratio of Net Investment Loss to Average Net Assets (%) (0.80)% (1.19)% (0.66)% (1.00)% (0.82)% Portfolio Turnover Rate (%) 78% 78% 59% 65% 72% (a) The total returns would have been lower if certain expenses had not been reduced. (See Note 9 of Notes to Financial Statements.) ----------------------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements.
THE KAUFMANN FUND, INC. ANNUAL REPORT - DECEMBER 31, 2000 -------------------------------------------------------------------------------- SCHEDULE OF INVESTMENTS -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- STOCKS 71.6% -------------------------------------------------------------------------------- Shares or Value Units Held (000s) ---------- ---------- FINANCIAL - 12.8% FINANCE - 9.5% Concord EFS, Inc. * 5,598,100 $ 245,966 Federal Agricultural Mortgage Corporation + * 500,000 11,688 Franklin Resources, Inc. 100,000 3,810 GreenPoint Financial Corp. ~ 400,000 16,375 IndyMac Mortgage Holdings, Inc. * 1,000,000 29,500 Ocwen Financial Corporation * 238,100 1,518 Shohkoh Fund & Co. Ltd. (JPY) ~^ 100,000 10,322 ---------- 319,179 ---------- INSURANCE - 2.2% ACE Limited 700,000 29,706 Philadelphia Consolidated Holding Corp. ~ + * 1,300,000 40,138 RTW, Inc. ~ + * 1,231,200 5,156 ---------- 75,000 ---------- VENTURE CAPITAL - 0.4% GreenField Technology Ventures Fund I, L.P. # * 1 94 incuVest L.L.C. - Class A # * 1 5,000 The Infrastructure Fund, L.P. # * 1 150 Peachtree/CB Partners, L.L.C # * 1 2,742 Peachtree/LeadScope, L.L.C # * 1 683 Peachtree/Medichem Partners, L.L.C # * 1 1,223 Peachtree/OpenNetwork Partners, L.L.C # * 1 982 Peachtree/Velquest Partners, L.L.C # * 1 487 Rocket Ventures II, L.P. # * 1 3,813 ---------- 15,174 ---------- REAL ESTATE - 0.7% Prime Hospitality Corp. * 35,000 407 Starwood Hotels & Resorts Worldwide, Inc. 600,000 21,150 Washington Real Estate Investment Trust 100,000 2,362 ---------- 23,919 ---------- TOTAL FINANCIAL 433,272 ---------- HEALTH - 22.0% HEALTHCARE SERVICES - 11.4% CareScience, Inc. * 284,800 214 Community Health Systems, Inc. * 155,000 5,425 CompDent Corp. - Voting Common +# * 248,612 122 CompDent Corp. - Convertible Nonvoting Com +# * 98,880 54 CompDent Corp. - Convertible Participating Pfd +# * 2,851 2,832 CompDent Corp. - Series B Convertible Pfd. +# * 1,134 1,258 Express Scripts, Inc. * 250,000 25,563 Health Management Associates, Inc. * 400,000 8,300 Healthcare Recoveries, Inc. + * 1,396,000 4,101 HEALTHSOUTH Corporation * 1,000,000 16,312 Laboratory Corporation of America Holdings * 100,000 17,600 Latin Healthcare Fund, L.P. # * 1 9,579 LifePoint Hospitals, Inc. * 72,500 3,634 Lincare Holdings, Inc. + * 5,000,000 285,313 Tenet Healthcare Corporation 100,000 4,444 ---------- 384,751 ---------- MEDICAL EQUIPMENT & SUPPLIES - 3.3% Amira Medical - Series A Pfd. # * 250,000 1,375 Amira Medical - Series D Pfd. # * 1,000,000 5,500 Aspect Medical Systems, Inc. ~ * 470,000 4,054 Bionx Implants, Inc. + * 862,750 1,186 Caliper Technologies Corp. # * 200,000 9,600 Cardinal Health, Inc. 335,000 33,374 Conceptus, Inc. + * 500,000 6,563 Cortek, Inc. - Series C Convertible Pfd. # * 500,000 1,000 Cryolife, Inc. * 300,000 9,075 Curon Medical Inc. * 200,000 803 De Novo (Q) Ventures I, L.P. # * 4 2,000 Dexcom, Inc. - Series B Pfd. # * 2,083,333 3,000 Diagnostic Products Corporation 74,500 4,070 Haemonetics Corporation * 300,000 9,263 Medtronic, Inc. # 94,453 5,132 Orthofix International N.V + * 826,900 15,814 Sanarus Medical Incorporated - Series A Pfd. # * 666,667 1,000 ThermoGenesis Corp. ~ * 556,400 974 Urologix, Inc. * 21,500 293 ---------- 114,076 ---------- PHARMACEUTICAL & BIOTECH - 7.3% ACADIA Pharmaceuticals Inc. # * 266,667 2,000 Aclara Biosciences Inc. * 95,000 1,033 AeroGen, Inc # * 296,296 2,676 Alexion Pharmaceuticals, Inc. ~ + * 104,900 6,812 Allos Therapeutics Inc. * 450,000 3,628 Aradigm Corporation * 380,000 5,557 Aradigm Corporation # * 666,667 8,775 Argonaut Technologies Inc. * 410,000 3,485 ArQule, Inc. + * 549,500 17,584 Array BioPharma Inc. ~ * 340,000 3,039 Aurora Biosciences Corporation ~ + * 307,500 9,667 Cephalon, Inc. - Convertible Pfd. 95,000 17,041 Charles River Laboratories International, Inc. * 220,000 6,022 CIMA Labs Inc. * 100,000 6,506 Collateral Therapeutics, Inc. ~ * 100,000 1,769 Corvas International, Inc. ~ * 100,000 1,438 CV Therapeutics, Inc. ~ * 69,000 4,882 Deltagen, Inc. * 300,000 3,131 diaDexus, Inc. - Series C Pfd. # * 645,161 5,000 Genomica Corporation # * 3,989,272 16,855 Genta Incorporated ~ # * 296,296 2,133 Genzyme Transgenics Corporation * 150,000 2,147 IDEC Pharmaceuticals Corporation ~ * 205,000 38,860 Inspire Pharmaceuticals, Inc. ~ * 100,000 2,606 Intermune Pharmaceutcials, Inc. * 170,000 7,586 IntraBiotics Pharmaceuticals, Inc. - Series G Pfd. # * 750,000 6,497 King Pharmaceuticals, Inc. * 300,000 15,506 Medarex, Inc. * 250,000 10,187 MitoKor - Series F Pfd. # * 266,668 2,000 NPS Pharmaceuticals, Inc. ~ * 100,000 4,800 Peptech Limited (AUD) ^ # * 31,250 0 Pharmacopeia, Inc. * 100,000 2,181 Rosetta Inpharmatics, Inc. ~ * 150,000 2,400 Serono SA * 150,000 3,591 Telik, Inc. * 300,000 1,988 Variagenics, Inc. ~ * 100,000 1,186 Waters Corporation * 175,000 14,613 Xenometrix, Inc. # * 6,619 2 ---------- 245,183 ---------- TOTAL HEALTH 744,010 ---------- RETAIL - 5.4% RESTAURANTS - 3.2% Bob Evans Farms, Inc. 36,600 780 California Pizza Kitchen, Inc. ~ * 100,000 2,825 IHOP Corp. * 100,000 2,169 J.D. Wetherspoon plc (GBP) ^+ 20,614,322 102,954 Landry's Seafood Restaurants, Inc. 16,700 166 Western Growth Capital Partners I, L.L.L.P # * 1 166 ---------- 109,060 ---------- RETAIL - 2.2% Abercrombie & Fitch Co. * 350,000 7,000 AutoZone, Inc. * 900,000 25,650 Family Dollar Stores, Inc. ~ 400,000 8,575 PETsMART, Inc. ~ + * 10,000,000 28,750 Ross Stores, Inc. 100,000 1,688 ---------- 71,663 ---------- TOTAL RETAIL 180,723 SERVICES - 13.6% BUSINESS SERVICES - 2.8% Cendant Corporation ~ * 2,650,000 25,506 Corporate Executive Board Company + * 1,059,900 42,148 CoStar Group, Inc. ~ * 228,900 5,408 Dispatch Management Services Corp. + * 1,260,600 59 Electricity Generating Authority of Thailand (THB) ^ * 10,000 7 Iron Mountain Incorporated ~ * 100,000 3,713 Kroll-O'Gara Company * 223,400 1,340 Teledyne Technologies Incorporated * 650,000 15,356 ---------- 93,537 ---------- MEDIA - 6.5% Clear Channel Communications, Inc. * 1,400,000 67,812 CNET Networks, Inc. ~ * 425,000 6,793 Comcast Corporation * 1,000,000 41,750 Cox Communications, Inc. * 425,000 19,789 Entercom Communications Corp. ~ * 480,000 16,530 Grupo Televisa S.A. * 200,000 8,988 Infinity Broadcasting Corporation - Class A * 1,025,000 28,636 Lamar Advertising Company ~ * 570,000 21,998 SBS Broadcasting SA ~ * 100,000 2,619 United Pan-Europe Communications N.V. (NGL) ^ * 156,000 1,594 United Pan-Europe Communications N.V. ADR ~ * 450,000 4,725 ---------- 221,234 ---------- RECREATION & ENTERTAINMENT - 0.7% Carnival Corporation 161,000 4,961 Championship Auto Racing Teams, Inc. * 450,000 9,450 CINAR Corporation + * 995,900 4,046 Dover Downs Entertainment, Inc. 325,000 3,636 Speedway Motorsports, Inc. ~ * 64,300 1,543 ---------- 23,636 ---------- TELECOMMUNICATION SERVICES - 2.2% Allegiance Telecomm,Inc * 100,000 2,227 American Tower Corp. ~ * 400,000 15,150 Broadwing Inc. * 250,000 5,703 Crown Castle International Corp. * 50,000 1,353 Illuminet Holdings, Inc. # * 80,400 1,475 Illuminet Holdings, Inc. * 719,800 16,511 ITC^DeltaCom, Inc. ~ * 417,100 2,248 Nextel Communications, Inc. * 200,000 4,950 Nextel Partners, Inc. * 206,000 3,463 Qwest Communications International Inc. * 150,000 6,150 RateXchange Corporation - Warrants 3/15/03 # * 20,833 0 TALK.com, Inc. * 3,000,000 4,313 Yipes Communications Group, Inc. # * 1,538,461 10,000 ---------- 73,543 ---------- TRANSPORTATION - 1.4% Budget Group, Inc. ~ * 975,000 2,072 Frontline Limited ~ * 33,400 476 Frontline Limited (NOK) ~^ * 1,800,000 24,346 OMI Corporation ~ * 1,550,000 9,978 Teekay Shipping Corporation 300,000 11,400 ---------- 48,272 ---------- TOTAL SERVICES 460,222 ---------- TECHNOLOGY - 12.6% COMPUTER HARDWARE & PERIPHERALS - 0.8% EMC Corporation * 300,000 19,950 Exabyte Corporation * 750,000 2,578 Silicon Graphics, Inc. ~ * 475,000 1,900 Unisys Corporation * 200,000 2,925 ---------- 27,353 ---------- COMPUTER SOFTWARE - 2.2% Amdocs Limited * 800,000 53,000 Attunity Ltd. # * 45,000 199 Attunity Ltd. - Warrants 3/21/05 # * 9,000 0 Attunity Ltd. - Warrants 3/22/05 # * 9,000 0 Check Point Software Technologies Ltd. ~ * 50,000 6,678 Lightspan Inc. * 115,000 165 Network Associates, Inc. * 1,295,000 5,423 SensAble Technologies, Inc. - Series B Pfd. # * 1,333,334 4,427 SensAble Technologies, Inc. - Series C Pfd. # * 443,979 1,474 Siebel System, Inc. * 50,000 3,381 ---------- 74,747 ---------- DATA PROCESSING SERVICES - 3.2% Affiliated Computer Services, Inc. * 850,000 51,584 CSG Systems International, Inc. * 998,100 46,848 Ordina Beheer NV (NGL) ^ * 228,593 4,948 PEC Solutions, Inc. * 200,000 1,625 Ryan Hankin Kent, Inc. - Series B Convertible Pfd. # * 2,000,000 2,000 ---------- 107,005 ---------- NETWORKING & TELECOMMUNICATION EQUIPMENT - 2.5% ADTRAN, Inc. * 350,000 7,438 BreezeCOM Ltd. * 822,424 11,771 BreezeCOM Ltd.- Series B Convertible Pfd. # * 557,576 5,586 Cabletron Systems, Inc. * 100,000 1,506 Centerpoint Broadband Technologies, Inc. # * 556,587 6,000 Comverse Technology, Inc. ~ * 50,000 5,431 Expand Networks Ltd. - Series C Pfd. # * 1,059,322 2,500 Garmin Ltd. * 250,000 4,938 Integrated Telecom Express, Inc. * 530,000 2,534 JDS Uniphase Corporation * 150,000 6,253 Methode Electronics, Inc. 500,000 11,469 P-Com, Inc. # * 2,516,990 6,167 RADVision Ltd. ~ * 350,000 4,309 Stratos Lightwave, Inc. ~ * 25,000 427 Sunrise Telecom Incorporated ~ * 104,800 409 Tellabs, Inc. * 100,000 5,650 ---------- 82,388 ---------- ONLINE INTERNET INFORMATION - 1.4% America Online, Inc. * 650,000 22,620 eBay, Inc. * 150,000 4,950 Emailthatpays.com Inc. # * 17,200 4 Getty Images, Inc. ~ * 200,000 6,400 HomeStore.com, Inc. ~ * 167,600 3,373 Hotel Reservations Network, Inc. ~ + * 225,000 6,384 India.com, Inc. # * 2,884,615 3,000 internet.com Venture Partners III L.L.C # * 2 600 Mail.com * 876,300 630 TMP Worldwide Inc. * 10,000 550 ---------- 48,511 ---------- SEMICONDUCTOR & EQUIPMENT - 2.5% Analog Devices, Inc. * 200,000 10,237 Atmel Corporation * 1,150,000 13,369 Cabot Microelectronics Corporation * 10,000 519 Cypress Semiconductor Corporation * 250,000 4,922 MIPS Technologies, Inc. * 65,824 1,677 QuickLogic Corporation ~ * 500,000 3,469 Vitesse Semiconductor Corporation * 880,000 48,675 Xilinx, Inc. * 10,000 461 ---------- 83,329 ---------- TOTAL TECHNOLOGY 423,333 ---------- OTHER - 5.2% ENERGY - 3.2% Devon Energy Corporation 25,000 1,524 EEX Corporation ~ * 2,200,000 10,725 Enron Corp. 240,000 19,950 Forest Oil Corporation * 180,000 6,637 Kinder Morgan, Inc. ~ 410,000 21,397 NiSource Inc. * 100,000 3,075 NRG Energy, Inc. * 250,000 6,953 NUI Corporation 200,000 6,438 Ocean Energy, Inc. * 50,00 869 Oceaneering International, Inc. * 600,000 11,662 Orion Power Holdings, Inc. * 350,000 8,619 Triton Energy Limited * 100,000 3,000 UtiliCorp United Inc. ~ 200,000 6,200 Virginia Gas Company + * 593,000 2,224 ---------- 109,273 ---------- INDICIES - 1.6% DIAMONDS Trust Series I 200,000 21,356 Nasdaq - 100 Trust Series I * 400,000 23,350 Pharmaceutical HOLDRs Trust * 80,000 9,140 ---------- 53,846 ---------- INDUSTRIAL - 0.4% The Shaw Group Inc. ~ * 65,000 3,250 Simpson Manufacturing Co., Inc. * 200,000 10,200 ---------- 13,450 ---------- TOTAL OTHER 176,569 ---------- ------------------------------------------------------------------------------- TOTAL STOCKS (Cost $1,783,750) $2,418,129 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- CONVERTIBLE BONDS 0.8% ------------------------------------------------------------------------------- Face Amount ----------- APP Finance (VII) Mauritius Limited $ 12,000,000 $ 4,680 3.50% 04/30/03 PETsMART, Inc. + 37,500,000 23,625 6.75% 11/01/04 ------------------------------------------------------------------------------- TOTAL CONVERTIBLE BONDS (Cost $46,605) $ 28,305 ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- CONTRACTS 0.0% ------------------------------------------------------------------------------- PURCHASED OPTIONS Contracts Currency options, strike price, expiration: ----------- GBP, call @ 1.385, 01/29/01 780,000 $ 8 Equity options, strike price, expiration: Cendant Corporation, call @ 15, 01/20/01 5,000 31 Cendant Corporation, call @ 20, 01/20/01 7,000 44 SOLD OPTIONS Currency options, strike price, expiration: GBP, call @ 1.449, 01/29/01 (780,000) (3,728) ------------------------------------------------------------------------------- TOTAL CONTRACTS (Cost $5,149) $ (3,645) ------------------------------------------------------------------------------- ------------------------------------------------------------------------------- SHORT-TERM OBLIGATIONS 27.6% ------------------------------------------------------------------------------- Par Value or Shares ----------- COMMERCIAL PAPER - 1.2% Clipper Receivables Corp., 6.55%, 01/02/01 $ 42,613,000 $ 42,605 MONEY MARKET FUNDS - 10.4% SSGA Prime Money Market Fund 97,000,000 97,000 Citifunds Institutional Liquid Reserves Fund 252,875,793 252,876 ---------- 349,876 REPURCHASE AGREEMENTS - 16.0% State Street Bank and Trust Company, 6.45%, dated 12/29/00, due 01/02/01 (collateralized by Federal Agency Securities) 540,800,000 540,800 ---------- ------------------------------------------------------------------------------- TOTAL SHORT-TERM OBLIGATIONS $ 933,281 (Cost $933,281) ------------------------------------------------------------------------------- TOTAL INVESTMENTS 100% $3,376,070 (COST $2,768,785) ========== LEGEND % Represents percentage of total portfolio owned ~ A portion of these securities were on loan at December 31, 2000.Total market value of all securities on loan at December 31, 2000 was $202,657,962, for which the Fund had received $217,899,658 as collateral. ^ Foreign Denominated Security: AUD - Australian Dollar GBP - British Pound JPY - Japanese Yen NGL - Netherlands Guilder NOK - Norwegian Kroner THB - Thai Baht + Affiliated Company (See Note 2 of Notes to Financial Statements) # Restricted security - not registered under the Securities Act of 1933 (See Note 3 of Notes to Financial Statements) * Non-income producing during the year -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. THE KAUFMANN FUND, INC. ANNUAL REPORT - DECEMBER 31, 2000 -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2000 ----------------------------------------------------------------------------- AMOUNTS IN THOUSANDS ----------------------------------------------------------------------------- ASSETS ----------------------------------------------------------------------------- Investments in securities at value (cost $2,768,785) (See accompanying schedule) $3,376,070 Cash 4 Collateral for securities loaned, at fair value (Note 8) 217,900 Receivables Investment securities sold 49,987 Fund shares sold 2,145 Dividends and interest 2,585 Other 96 ---------- ----------------------------------------------------------------------------- TOTAL ASSETS 3,648,787 ----------------------------------------------------------------------------- LIABILITIES Payable upon return of securities loaned (Note 8) 217,900 Unrealized loss on foreign currency exchange contract (Note 1) 124 Payables Investment securities purchased 41,714 Fund shares reacquired 12,311 Investment Advisor 3,769 Other 4,172 Accrued expenses 803 ---------- TOTAL LIABILITIES 280,793 ----------------------------------------------------------------------------- NET ASSETS $3,367,994 ----------------------------------------------------------------------------- ANALYSIS OF NET ASSETS: Net capital paid in on Fund shares $2,524,209 Distributable earnings 843,785 ---------- NET ASSETS (equivalent to $4.43 per share based on 760,933,767 shares outstanding)(Note 6) $3,367,994 ========== ----------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. THE KAUFMANN FUND, INC. ANNUAL REPORT - DECEMBER 31, 2000 -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2000 -------------------------------------------------------------------------------- AMOUNTS IN THOUSANDS --------------------------------------------------------------------------- INVESTMENT INCOME --------------------------------------------------------------------------- Interest (including income on securities loaned of $2,052) $ 33,998 Dividends, net of $122 foreign taxes withheld (including $776 received from affiliated issuers) 3,640 Other (Note 9) 1,823 ---------- --------------------------------------------------------------------------- TOTAL INCOME 39,461 --------------------------------------------------------------------------- EXPENSES Investment advisory fee (Note 9) 54,427 Distribution fee (Note 9) 13,062 Shareholder servicing fees 3,280 Audit fees 540 Custodian fees and expenses 420 Interest expense (Note 5) 407 Printing and mailing expenses 277 Non-interested directors' fees and expenses 236 Legal fees 144 Registration fees 48 Miscellaneous expenses 206 ---------- Total expenses before reimbursement 73,047 Expense reimbursement by Investment Advisor (Note 9) (4,500) ---------- NET EXPENSES 68,547 --------------------------------------------------------------------------- NET INVESTMENT LOSS (29,086) --------------------------------------------------------------------------- Realized and Unrealized Gain from Investments and Foreign Currency Net realized gain (loss) on: Investment securities (including net realized gain of $171,074 on sales of investments $1,374,482 in affiliated issuers (Note 2)) Foreign currency transactions (2,632) 1,371,850 ---------- Net increase (decrease) in unrealized appreciation (depreciation) on: Investment securities (963,410) Translation of assets and liabilities in foreign currencies 20 ---------- (963,390) ---------- NET REALIZED AND UNREALIZED GAIN FROM INVESTMENTS AND FOREIGN CURRENCY 408,460 ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 379,374 ========== -------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. THE KAUFMANN FUND, INC. ANNUAL REPORT - DECEMBER 31, 2000 ------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS ------------------------------------------------------------------------------- YEARS ENDED DECEMBER 31, 2000 AND 1999 AMOUNTS IN THOUSANDS -------------------------- 2000 1999 ----------- ----------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS Investment loss - net $ (29,086) $ (40,228) Net realized gain from investments and foreign currency 1,371,850 449,948 Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies (963,390) 231,028 ----------- ----------- Net increase in net assets resulting from operations 379,374 640,748 Distributions to shareholders (1,170,155) (512,373) Share transactions (Note 6) 682,900 (1,273,518) ----------- ----------- Total decrease in net assets (107,881) (1,145,143) NET ASSETS Beginning of year 3,475,875 4,621,018 ----------- ----------- End of year $ 3,367,994 $ 3,475,875 =========== =========== ------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements. THE KAUFMANN FUND, INC. ANNUAL REPORT - DECEMBER 31, 2000 ------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS ------------------------------------------------------------------------------- SIGNIFICANT ACCOUNTING POLICIES The Kaufmann Fund, Inc. (the Fund) is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. The Fund is incorporated in Maryland. The investment objective of the Fund is to seek capital appreciation by investing principally in common stocks of growth companies for the long term. SECURITY VALUATION Investments in securities traded on a national securities exchange (or reported on the NASDAQ national market) are stated at the last reported sales price on the day of valuation; other securities traded in the over-the-counter market and listed securities for which no sale was reported on that date are stated at the last quoted bid price, except for short positions and call options written, for which the last quoted asked price is used. Short-term notes are stated at amortized cost, which approximates fair value. Restricted securities and other securities, for which quotations are not readily available, are valued using dealer supplied valuations or are valued at fair value as determined in good faith under consistently applied procedures as established by the Board of Directors. The ability of issuers of debt securities, held by the Fund, to meet their obligations may be affected by economic and political developments in a specific country or region. REPURCHASE AGREEMENTS In connection with transactions in repurchase agreements, it is the Fund's policy that its custodian take possession of the underlying collateral securities, the fair value of which exceeds the principal amount of the repurchase transaction, including accrued interest, at all times. If the seller defaults, and the fair value of the collateral declines, realization of the collateral by the Fund may be delayed or limited. FOREIGN CURRENCY Investment securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollar amounts at the date of valuation. Purchases and sales of investment securities and income and expense items denominated in foreign currencies are translated into U.S. dollar amounts on the respective dates of such transactions. The Fund isolates that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in market prices of securities held. Reported net realized foreign exchange gains or losses arise from sales of portfolio securities, sales and maturities of short-term securities, sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions, and the difference between the amounts of dividends, interest, and foreign withholding taxes recorded on the Fund's books and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in the values of assets and liabilities, including investments in securities at year end, resulting from changes in the exchange rate. OPTION WRITING When the Fund writes an option, an amount equal to the premium received by the Fund is recorded as a liability and is subsequently adjusted to the current fair value of the option written. Premiums received from writing options that expire unexercised are treated by the Fund on the expiration date as realized gains from investments. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or, if the premium is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security or currency in determining whether the Fund has a realized gain or loss. If a put option is exercised, the premium reduces the cost basis of the securities purchased by the Fund. The Fund as writer of an option bears the market risk of an unfavorable change in the price of the security underlying the written option. SECURITY LOANS The Fund receives compensation in the form of fees, or it retains a portion of interest on the investment of any cash received as collateral. The Fund also continues to receive interest or dividends on the securities loaned. The loans are secured by collateral at least equal, at all times, to the fair value of the securities loaned plus accrued interest. Gain or loss in the fair value of the securities loaned that may occur during the term of the loan will be for the account of the Fund. FINANCIAL FUTURES CONTRACTS The Fund invests in financial futures contracts solely for the purpose of hedging its existing portfolio securities, or securities that the Fund intends to purchase, against fluctuations in fair value caused by changes in prevailing market interest rates. Upon entering into a financial futures contract, the Fund is required to pledge to the broker an amount of cash, U.S. government securities, or other assets, equal to a certain percentage of the contract amount (initial margin deposit). Subsequent payments, known as "variation margin", are made or received by the Fund each day, depending on the daily fluctuations in the fair value of the underlying security. The Fund recognizes a gain or loss equal to the daily variation margin. Should market conditions move unexpectedly, the Fund may not achieve the anticipated benefits of the financial futures contracts and may realize a loss. The use of futures transactions involves the risk of imperfect correlation in movements in the price of futures contracts, interest rates, and the underlying hedged assets. SHORT SALES The Fund may sell a security it does not own in anticipation of a decline in the fair value of that security. When the Fund sells a security short, it must borrow the security sold short and deliver it to the broker-dealer through which it made the short sale. A gain, limited to the price at which the Fund sold the security short, or a loss, unlimited in size, will be recognized upon the termination of a short sale. FOREIGN CURRENCY CONTRACTS The Fund may enter into forward foreign currency exchange contracts primarily to hedge against foreign currency exchange rate risks on its non-U.S. dollar denominated investment securities. When entering into a forward currency contract, the Fund agrees to receive or deliver a fixed quantity of foreign currency for an agreed-upon price on an agreed future date. These contracts are valued daily, and the Fund's net equity therein, representing unrealized gain or loss on the contracts as measured by the difference between the forward foreign exchange rates at the dates of entry into the contracts and the forward rates at the reporting date, is included in the statement of assets and liabilities. Realized and unrealized gains and losses are included in the statement of operations. These instruments involve market risk, credit risks, or both kinds of risks, in excess of the amount recognized in the statement of assets and liabilities. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movement in currency and securities values and interest rates. FEDERAL INCOME TAXES The Fund's policy is to continue to comply with the requirements of the Internal Revenue Code that are applicable to regulated investment companies and to distribute all its taxable income to its shareholders. Therefore, no federal income tax provision is required. DISTRIBUTIONS TO SHAREHOLDERS Distributions to shareholders, which are determined in accordance with income tax regulations, are recorded on the ex-dividend date. USE OF ESTIMATES The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. OTHER The Fund records security transactions based on a trade date. Dividend income is recognized on the ex-dividend date, and interest income is recognized on an accrual basis. Discounts and premiums on securities purchased are amortized over the lives of the respective securities. Withholding taxes on foreign dividends have been provided for in accordance with the Fund's understanding of the applicable country's tax rules and rates. 2 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:
AMOUNTS IN THOUSANDS ----------------------------------------- PURCHASE SALES DIVIDEND AFFILIATES COST COST INCOME VALUE ------------------------------------------------------------------------------------------------ Aastrom Biosciences, Inc. * $ -- $ 3,800 $ -- $ -- Aastrom Biosciences, Inc. - Pfd. #* -- 395 -- -- Alexion Pharmaceuticals, Inc. * -- 70,969 -- 6,812 Alpha Industries, Inc. * -- 45,433 -- -- ArQule, Inc. * -- 37,309 -- 17,584 Aurora Biosciences Corporation * 70 93,886 -- 9,667 Billing Concepts Corp. * -- 3,812 -- -- Bionx Implants, Inc. * 331 83 -- 1,186 Carey International, Inc. * 507 8,588 -- -- CINAR Corporation * -- 5,180 -- 4,046 CompDent Corp.-Voting Common #* -- -- -- 122 CompDent Corp.-Convertible Nonvtg. Common #* 54 -- -- 54 CompDent Corp.-Convertible Participating Pfd. #* -- -- -- 2,832 CompDent Corp.-Series B Convertible. Pfd. #* 1,258 -- -- 1,258 Conceptus, Inc. * 4,689 -- -- 6,563 Corporate Executive Board Company * 3,906 2,123 -- 42,148 Cunningham Graphics International, Inc. * 219 3,891 -- -- Dispatch Management Services Corp. * 341 62 -- 59 Federal Agricultural Mortgage Corp. * 1,992 3,275 -- 11,688 Hanger Orthopedic Group, Inc. * -- 2,538 -- -- Healthcare Recoveries, Inc. * -- -- -- 4,101 Hotel Reservations Network, Inc. * 20,253 22,352 -- 6,384 Hutchinson Technology Inc., 6%, 3/15/05 -- 17,052 -- -- J.D. Wetherspoon plc (GBP) 15,706 708 776 102,954 Lincare Holdings, Inc. * 16,700 7,345 -- 285,313 MAPICS, Inc. * -- 2,293 -- -- Orthofix International N.V * -- -- -- 15,814 PETsMART, Inc. * 12,734 -- -- 28,750 PETsMART, Inc., 6.75%, 11/01/04 -- 5,500 -- 23,625 Philadelphia Consolidated Holding Corp. * -- 1,369 -- 40,138 PSS World Medical, Inc. * -- 8,336 -- -- RTW, Inc. * 241 -- -- 5,156 Systemax Inc. * -- 7,932 -- -- TriPath Imaging, Inc. * -- 1,053 -- -- United Payors & United Providers, Inc. * -- 6,238 -- -- US Oncology, Inc. * -- 19,486 -- -- Virginia Gas Company * -- -- -- 2,224 ZOLL Medical Corporation * -- 33,671 -- -- -------- -------- -------- -------- TOTAL OF AFFILIATED TRANSACTIONS $ 79,001 $414,679 $ 776 $618,478 ======== ======== ======== ======== * Non-income producing during the year. # Restricted security (See Footnote 3)
3 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, 2000, the Fund owned the following restricted securities (constituting 4.4% of net assets) which may not be publicly sold without registration under the Securities Act of 1933. 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.
AMOUNTS IN THOUSANDS --------------------------------- DATE OF SHARE/PAR DESCRIPTION ACQUISITION AMOUNT COST VALUE -------------------------------------------------------------------------------------------------------------------------- ACADIA Pharmaceuticals Inc. 05/03/00 266,667 $ 2,000 $ 2,000 AreoGen, Inc. 07/06/00 296,296 2,000 2,676 Amira Medical - Series A Pfd 04/12/99 250,000 1,375 1,375 Amira Medical - Series D Pfd 04/12/99 1,000,000 5,500 5,500 Aradigm Corporation 03/10/99 666,667 7,000 8,775 Attunity Ltd. 03/09/00 45,000 765 199 Attunity Ltd. - Warrants 03/21/05 07/13/00 9,000 -- -- Attunity Ltd. - Warrants 03/22/05 07/13/00 9,000 -- -- BreezeCOM Ltd. - Series B Convertible Pfd. 11/05/99 557,576 2,300 5,586 Caliper Technologies Corp. 08/24/00 200,000 9,600 9,600 Centerpoint Broadband Technologies, Inc. 10/25/00 556,587 6,000 6,000 CompDent Corp. - Voting Common 05/24/95 60,000 36 30 04/21/97 75,000 46 36 04/22/97 65,000 40 32 06/30/99 48,612 -- 24 --------------- --------------- --------------- 248,612 122 122 CompDent Corp. - Convertible Nonvoting Com 07/12/00 98,880 54 54 CompDent Corp. - Convertible Participating Pfd. 05/24/95 855 834 849 04/21/97 1,069 1,060 1,062 04/22/97 927 938 921 --------------- --------------- --------------- 2,851 2,832 2,832 CompDent Corp. - Series B Convertible Pfd. 07/12/00 1,134 1,258 1,258 Cortek, Inc. - Series C Convertible Pfd. 02/29/00 500,000 1,000 1,000 De Nova (Q) Ventures I, L.P. 03/09/00 4 2,000 2,000 Dexcom, Inc. - Series B Pfd. 12/01/00 2,083,333 3,000 3,000 diaDexus, Inc. - Series C Pfd. 04/04/00 645,161 5,000 5,000 Emailthatpays.com Inc. 03/24/97 17,200 301 4 Expand Networks Ltd. - Series C Pfd 09/22/00 1,059,322 2,500 2,500 Genomica Corporation 02/17/00 3,240,740 7,000 13,692 03/10/00 748,532 3,368 3,163 --------------- --------------- --------------- 3,989,272 10,368 16,855 Genta Incorporated 09/25/00 296,296 2,000 2,133 GreenField Technology Ventures Fund I, L.P. 06/15/98 1 88 94 Illuminet Holdings, Inc. 02/04/98 80,400 358 1,475 incuVest L.L.C. - Class A 01/06/00 1 5,000 5,000 India.com, Inc. 09/14/00 2,884,615 3,000 3,000 The Infrastructure Fund, L.P. 08/11/00 1 150 150 internet.com Venture Partners III L.L.C 05/15/00 1 300 300 07/28/00 1 300 300 --------------- --------------- --------------- 2 600 600 IntraBiotics Pharmaceuticals, Inc. - Series G Pfd. 11/23/98 750,000 4,502 6,497 Latin Healthcare Fund, L.P. 07/15/97 1 1,000 1,000 09/28/98 -- 1,079 1,079 06/03/99 -- 3,000 3,000 05/16/00 -- 4,000 4,000 11/28/00 -- 500 500 --------------- --------------- --------------- 1 9,579 9,579 Medtronic, Inc. 03/15/00 94,453 3,000 5,132 MitoKor - Series F Pfd. 08/22/00 266,668 2,000 2,000 P-Com, Inc. 06/22/99 2,516,900 10,000 6,167 Peachtree/CB Partners, L.L.C 03/08/00 1 2,742 2,742 Peachtree/LeadScope, L.L.C 06/30/00 1 701 683 Peachtree/Medichem Partners, L.L.C 06/07/99 1 1,223 1,223 Peachtree/OpenNetwork Partners, L.L.C 10/05/00 1 982 982 Peachtree/Velquest Partners, L.L.C 09/14/00 1 487 487 Peptech Limited (AUD) 07/19/93 31,250 76 -- RateXchange Corporation - Warrants 03/15/03 03/15/00 20,833 -- -- Rocket Ventures II, L.P. 07/20/99 1 500 477 01/26/00 -- 750 715 03/23/00 -- 2,750 2,621 --------------- --------------- --------------- 1 4,000 3,813 Ryan Hankin Kent, Inc. - Series B Convertible Pfd. 06/05/00 2,000,000 2,000 2,000 Sanarus Medical Inc. - Series A Pfd. 11/16/99 666,667 1,000 1,000 SensAble Technologies, Inc. -Series B Pfd. 12/23/97 1,333,334 2,064 4,427 SensAble Technologies, Inc. -Series C Pfd. 04/05/00 443,979 1,474 1,474 Western Growth Capital Partners I, L.L.L.P 12/31/97 1 71 57 05/27/98 -- 47 38 11/17/98 -- 14 11 07/20/99 -- 35 28 07/24/00 -- 40 32 --------------- --------------- --------------- 1 207 166 Xenometrix, Inc. 07/10/92 6,619 50 2 Yipes Communications Group, Inc. 09/19/00 1,538,461 10,000 10,000 --------------- --------------- --------------- TOTAL AMOUNT OF RESTRICTED SECURITES $ 132,258 $ 147,162 =============== ===============
4 DISTRIBUTIONS TO SHAREHOLDERS On November 7, 2000, a distribution of $2.23 per share was declared. The dividend was paid on November 13, 2000, to shareholders of record on November 8, 2000. The tax character of distributions paid during 2000 and 1999 was as follows: 2000 1999 -------------- -------------- Distributions paid from: Ordinary income $ 198,926,283 $ -- Long-term capital gain 971,228,320 512,372,868 -------------- -------------- $1,170,154,603 $ 512,372,868 ============== ============== As of December 31, 2000, the components of distributable earnings on a tax basis were as follows: Undistributed ordinary income $ 37,260,813 Undistributed long-term gain 199,219,097 Unrealized appreciation 607,305,377 -------------- $ 843,785,287 ============== The difference between book basis and tax-basis unrealized appreciation is attributable primarily to the tax deferral of losses on wash sales and the realization for tax purposes of unrealized gains on certain forward foreign currency contracts and on investments in passive foreign investment companies. 5 LINE OF CREDIT The Fund has a $400,000,000 committed secured leverage line of credit. The Fund is required to pledge assets equivalent to its borrowings under the line of credit. The Fund incurs a commitment fee on the unused portion of the line of credit. Borrowings are charged interest at 0.50% over the current overnight Federal Funds Rate. No compensating balances are required. 6 CAPITAL SHARE TRANSACTIONS As of December 31, 2000, 2,000,000,000 shares of $.10 par value stock were authorized. Transactions in capital stock were as follows:
SHARES AMOUNT --------------------------------- --------------------------------- 2000 1999 2000 1999 --------------- --------------- --------------- --------------- Shares sold 38,614,486 43,175,069 $ 246,148,129 $ 230,600,975 Shares issued in re-investment of distributions 248,841,044 102,246,269 1,134,809,314 496,926,932 --------------- --------------- --------------- --------------- 287,455,530 145,421,338 1,380,957,443 727,527,907 Shares redeemed 110,894,428 374,248,398 698,057,347 2,001,045,334 --------------- --------------- --------------- --------------- Net increase (decrease) 176,561,102 (228,827,060) $ 682,900,096 $(1,273,517,427) =============== =============== =============== ===============
7 INVESTMENT TRANSACTIONS Purchases and sales of investment securities (excluding short-term investments and securities sold short) were $2,490,144,281 and $2,543,538,630, respectively. The U.S. federal income tax basis of the Fund's investments at December 31, 2000, was $2,768,784,492, and net unrealized appreciation for U.S. federal income tax purposes was $607,285,577 (gross unrealized appreciation $877,248,598; gross unrealized depreciation $269,963,021). 8 PORTFOLIO SECURITIES LOANED The Fund lends securities to certain brokers who pay the Fund negotiated lenders' fees. These fees, less costs to administer the program, are included in interest income and amounted to $2,051,909 for the year ended December 31, 2000. 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, 2000, the value of the securities loaned and the value of collateral was $202,657,962 and $217,899,658, respectively. Investment Advisory Fee and Other Transactions with Affiliates 9 INVESTMENT ADVISORY FEE Edgemont Asset Management Corporation (Edgemont) is the investment advisor of 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. For the year ended December 31, 2000, the Fund incurred investment advisory fees of $54,426,558. 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, capital items, interest, taxes, extraordinary items and other excludable items) are in excess of $650,000. A reimbursement of $4,500,662 was made for the year ended December 31, 2000. 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, 2000, distribution expenses of $13,062,374 were incurred by the Fund, equivalent to 0.36% 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 applied to the Fund's expenses for 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, 2000, redemption fees of $1,398,147 were allocated to cover the cost of redemptions. Excess fee proceeds of $12,707 were added to the Fund's assets. BROKERAGE COMMISSIONS The Fund places a portion of its portfolio transactions with Bowling Green Securities, Inc. (Bowling Green). During 2000, $20,000 of brokerage commissions were paid to Bowling Green. Certain officers and directors of the Fund are affiliated with Bowling Green. 10 COMMITMENTS AND CONTINGENCIES In the course of pursuing its investment philosophy, the Fund sometimes invests in limited partnerships and limited liability companies. These entities often require the Fund to commit to a total dollar amount to be invested. The actual investments are usually made in installments over a period of time. At December 31, 2000, the Fund had total commitments to limited partnerships and limited liability companies of $39,900,000; of this amount $21,634,900 was actually invested by the Fund leaving the Fund contingently liable for additional investments of $18,265,100. 11 PROPOSED AGREEMENT AND PLAN OF ORGANIZATION On October 20, 2000, Edgemont, the Fund's investment advisor, reached a definitive agreement with Federated Investors, Inc. (Federated) for the sale of Edgemont's advisory business to Federated. In connection with this sale, shareholders of the Fund will be asked to approve, at a special meeting of shareholders to be held on April 6, 2001, a proposed Agreement and Plan of Reorganization between the Fund and the Federated Kaufmann Fund, a newly organized series of Federated Equity Funds. The Federated Kaufmann Fund would be advised by Federated Investment Management Company, a subsidiary of Federated. Hans P. Utsch and Lawrence Auriana, the current portfolio managers of the Fund, will continue as co-managers and be responsible for the day-to-day portfolio management of the Federated Kaufmann Fund under employment contracts with Federated. The Federated Kaufmann Fund would have the same investment objective and strategies and substantially the same investment policies as the Fund. If the Plan is approved, the Federated Kaufmann Fund would acquire substantially all of the assets, and assume certain liabilities of the Fund. Federated Kaufmann Fund shares would be distributed pro rata by the Fund to the holders of its shares and the Fund would subsequently be dissolved. THE KAUFMANN FUND, INC. ANNUAL REPORT - DECEMBER 31, 2000 -------------------------------------------------------------------------------- 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 schedule of investments, as of December 31, 2000, 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, 2000, 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, 2000, 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 February 1, 2001 Certified Public Accountants THE KAUFMANN FUND, INC. ANNUAL REPORT - DECEMBER 31, 2000 ------------------------------------------------------------------------------- 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, investors tend to let their emotions guide their investment decisions. An effective investment strategy that assists in overcoming the emotional hazards of market volatility is "dollar-cost averaging." An investment plan using dollar-cost averaging is also a convenient way to lower your average investment cost. 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 is an automatic method to help you counter the natural human impulse to buy high and to sell low. The easiest and most painless way to dollar-cost average is to establish an Automatic Investment Plan (AIP). With an AIP, you can arrange for money to be withdrawn directly from your checking/savings account or paycheck. There are no checks to write or phone calls to make -- everything is done for you. It is a simple, effective and effortless way to set aside money. Decide on an amount you would like to invest and a specific time to make your investment. Maybe you want to invest $200 a month. Perhaps it would work better to invest every two weeks by taking $100 out of each paycheck. Once you have set an amount and a time period that works for your situation -- stick with it! Dollar-cost averaging works best 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. 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. 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 benefits such as diversification and professional management, can give you the best opportunity to build wealth. -------------------------------------------------------------------------------- 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 Pepper Hamilton, LLP 3000 Two Logan Square Philadelphia, Pennsylvania 19103 -------------------------------------------------------------------------------- INDEPENDENT AUDITORS Sanville & Company 1514 Old York Road Abington, Pennsylvania 19001 -------------------------------------------------------------------------------- This annual report must be accompanied with or preceded by the Fund's current prospectus. -------------------------------------------------------------------------------- THE KAUFMANN FUND, INC. [graphic omitted] ANNUAL REPORT -------------------------------------------------------------------------------- DECEMBER 31, 2000