-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FL1LJt9lfugpi2HGO7jcLMNrq2i5txgcfuyw1j6WlWYqG/HLG7PwUvb6vCbvDAUC DQPrLaQ7yOPQZqj4Hl/QUg== 0001005477-99-003261.txt : 19990729 0001005477-99-003261.hdr.sgml : 19990729 ACCESSION NUMBER: 0001005477-99-003261 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990728 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KAUFMANN FUND INC CENTRAL INDEX KEY: 0000054771 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 132605091 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-01586 FILM NUMBER: 99671922 BUSINESS ADDRESS: STREET 1: 140 E 45TH ST 43RD FL STREET 2: STE 2624 CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2129220123 MAIL ADDRESS: STREET 1: 140 EAST 45TH ST STREET 2: 43RD FLOOR CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: PAW GROWTH FUND INC DATE OF NAME CHANGE: 19701022 FORMER COMPANY: FORMER CONFORMED NAME: PHILIPS APPEL & WALDEN FUND INC DATE OF NAME CHANGE: 19680711 N-30D 1 ANNUAL REPORT The Kaufmann Fund, Inc. [GRAPHIC OMITTED] Annual Report Year Ended December 31, 1998 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. 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 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS - --------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------------ 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
- ---------- (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 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS December 31, 1998 - -------------------------------------------------------------------------------- (Continued)
Amounts in Thousands Purchases Sales Dividend Affiliates Cost Cost Income Value - ---------- ---------- ---------- ---------- ---------- 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 ========== ========== ========== ==========
* 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 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS December 31, 1998 - -------------------------------------------------------------------------------- (Continued)
Amounts in Thousands Date(s) of Share/Par Description Acquisition Amount Cost Value ----------- --------- --------- --------- 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 ========= =========
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 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 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).
- ------------------------------------------------------------------------------------------- TESTING THE STRENGTH OF DOLLAR-COST AVERAGING - ------------------------------------------------------------------------------------------- TIME OF AMOUNT PURCHASE SHARES NUMBER OF PURCHASE INVESTED PRICE PURCHASED SHARES HELD - ------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------
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 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 -----END PRIVACY-ENHANCED MESSAGE-----