UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM N-CSR
---------
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
INVESTMENT COMPANY ACT FILE NUMBER 811-9114
THE NEEDHAM FUNDS, INC.
(Exact name of registrant as specified in charter)
-------
445 Park Avenue
New York, New York 10022
(Address of principal executive offices) (Zip Code)
The Corporation Trust Company
300 E. Lombard Street
Baltimore, Maryland 21202
(Name and Address of agent for service)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(212) 371-8300
DATE OF FISCAL YEAR END: December 31, 2003
DATE OF REPORTING PERIOD: January 1, 2003 to December 31, 2003
ITEM 1. REPORTS TO STOCKHOLDERS.
Annual
Report
Needham Funds
Seeking to build wealth for long-term investors.
December 31, 2003
Needham Growth Fund
Needham Aggressive Growth Fund
Needham Small Cap Growth Fund
(NEEDHAM FUNDS LOGO)
www.needhamfunds.com
[Needham Funds LOGO]
445 Park Avenue
New York, New York 10022-2606
1-800-625-7071
WWW.NEEDHAMFUNDS.COM
Annual Report
December 31, 2003
CONTENTS
<Table>
MANAGEMENT DISCUSSION AND ANALYSIS 1
PORTFOLIO CHARACTERISTICS
NEEDHAM GROWTH FUND 3
NEEDHAM AGGRESSIVE GROWTH FUND 4
NEEDHAM SMALL CAP GROWTH FUND 5
SCHEDULE OF INVESTMENTS
NEEDHAM GROWTH FUND 6
NEEDHAM AGGRESSIVE GROWTH FUND 10
NEEDHAM SMALL CAP GROWTH FUND 13
SCHEDULE OF SECURITIES SOLD SHORT
NEEDHAM GROWTH FUND 9
NEEDHAM AGGRESSIVE GROWTH FUND 12
NEEDHAM SMALL CAP GROWTH FUND 15
STATEMENTS OF ASSETS AND LIABILITIES 16
STATEMENTS OF OPERATIONS 17
STATEMENTS OF CHANGES IN NET ASSETS 18
FINANCIAL HIGHLIGHTS
NEEDHAM GROWTH FUND 19
NEEDHAM AGGRESSIVE GROWTH FUND 20
NEEDHAM SMALL CAP GROWTH FUND 21
NOTES TO FINANCIAL STATEMENTS 22
REPORT OF INDEPENDENT AUDITORS 25
FUND MANAGEMENT 26
VOTING PROXIES ON FUND PORTFOLIO SECURITIES 26
</Table>
Needham Funds ANNUAL REPORT 2003
- --------------------------------------------------------------------------------
Dear Shareholders,
We at The Needham Funds, Inc. focus on buying stocks at reasonable prices and
thus, in a recovery year such as 2003, we expected each of the funds to do well.
We are pleased to report that all three of our funds had good results. During
2003, the Growth Fund appreciated 47.34%, the Aggressive Growth Fund appreciated
26.62% and the Small Cap Growth Fund grew 62.24%. By comparison, the Russell
2000 Index appreciated 47.29%. Two of the three funds outperformed their
benchmark indices.
The Needham Growth Fund seeks to create long-term, tax-efficient capital
appreciation for its investors. To this end, the Growth Fund targets companies
with products or services that are selling or marketing into growth markets.
These companies normally have earnings growth of at least 15-20%, product and
market dominance, and the ability to consolidate their market positions. They
may also have a competitive advantage by acquiring and retaining more customers
or driving costs down and profits up. The Growth Fund also looks for seasoned
and motivated managements with records of building shareholder value. Companies
with these characteristics sometimes find themselves in a temporary earnings
downturn or shortfall or may be in a product transition. This often causes
aggressive growth or dynamic growth investors to sell. At this point, the Growth
Fund may deem the stock to be reasonably priced and purchase it for long-term
capital appreciation. Hence, the discipline called "Growth At a Reasonable
Price," or GARP.
The Needham Growth Fund's performance was negatively affected by our large cash
position and short positions. But, we believe that cash and shorts can lessen
the downside in a declining market. The Fund's positions in the technology
sector performed well, led by National Semiconductor. The Growth Fund also
benefited from investments in Ceradyne, Inc., Merix Corp. and Motorola, Inc.
The Needham Aggressive Growth Fund seeks to create long-term, tax-efficient
capital appreciation for its investors. To this end, the Aggressive Growth Fund
targets the equities of companies with strong, above-average prospective growth
rates. The Aggressive Growth Fund invests, in general, in markets and industries
with strong growth rates, focusing on the market leaders in these areas. These
market leaders, especially as they break away from their competitors, tend to
garner a disproportionate share of the positive financial returns. Also
important is the long-term sustainability of the companies' leadership
positions. Thus, the Aggressive Growth Fund looks for companies with strong
management teams, superior balance sheets, above-average margins that can
generate excess cash, and strong R&D and brand spending in industries with high
barriers to entry.
The Needham Aggressive Growth Fund's performance was affected by our hedging and
shorting, which was a negative contribution. The consumer and technology
segments were the strongest for the Fund over the past 12 months. The healthcare
sector produced mixed results. The Aggressive Growth Fund particularly benefited
from Xicor, Inc., Pacific Sunwear of California, Inc., Universal Health Services
Inc. and PETCO Animal Supplies, Inc.
The Needham Small Cap Growth Fund seeks long-term, tax-efficient capital
appreciation by investing primarily in equity securities of smaller growth
companies that the Fund believes are trading at a discount to their underlying
value yet have the potential for superior long-term growth. Under normal
conditions, the Small Cap Growth Fund invests at least 80% of its total assets
in equity securities of domestic issuers that have market capitalizations of $2
billion or less and that are listed on a nationally recognized securities
exchange or traded on the Nasdaq system. Central to the Small Cap Growth Fund's
investment strategy is a sound
1
Needham Funds
- --------------------------------------------------------------------------------
valuation discipline that seeks to acquire growth companies at reasonable
prices. The Small Cap Growth Fund's primary focus, after value has been
established, is great management and sound financials.
Our high cash position and shorts had a slightly negative effect on the Needham
Small Cap Growth Fund's performance, which was driven by both the technology and
consumer/business services/financial sectors. The Small Cap Growth Fund
benefited from a host of names, specifically, First Horizon Pharmaceutical
Corp., Therma-Wave, Inc., Eon Labs, Inc. and Aceto Corp.
The portfolio turnover rate was 42% for the Growth Fund, 87% for the Aggressive
Growth Fund and 67% for the Small Cap Growth Fund for the year-ended December
31, 2003. The expense ratios for the three funds were 1.77% for the Growth Fund,
2.50% for the Aggressive Growth Fund and 2.26% for the Small Cap Growth Fund for
the year-ended December 31, 2003.
We think current economic trends still favor an up stock market in 2004 but the
road is looking increasingly bumpy, given high equity valuations, the looming
presidential race, ballooning trade and fiscal budgets, continued political and
military uncertainty in Iraq, and the modest U.S. job growth. With that said, we
believe that our cash positions and ability to short and hedge should come in
helpful given the current environment.
Sincerely,
<Table>
- -s- Vincent E. Gallagher -s- James K. Kloppenburg
Vincent E. Gallagher James K. Kloppenburg
Portfolio Manager Portfolio Manager
</Table>
2
ANNUAL REPORT 2003
- --------------------------------------------------------------------------------
NEEDHAM GROWTH FUND TICKER: NEEGX
COMPARATIVE PERFORMANCE STATISTICS
<Table>
<Caption>
---------------------------------------------------------------------------------------------------------------------------
BENCHMARKS 6 MONTHS 1 YEAR 3 YEARS(6) 5 YEARS(6) SINCE INCEPTION(6)
--------------------------------- ------ ------ ------- ------- ------
Needham Growth Fund(1) 22.39% 47.34% 5.82%(7) 17.99%(8) 21.68%(9)(10)
NASDAQ Composite Index(2) 23.77% 50.77% (6.35%) (1.45%) 8.75%
S&P 500 Index(3) 15.15% 26.68% (4.04%) (0.57%) 9.37%
S&P 400 Midcap Index(4) 20.65% 35.62% 4.83% 9.20% 14.29%
Russell 2000 Index(5) 24.93% 47.29% 6.32% 7.21% 8.85%
</Table>
1. Investment results calculated after reinvestment of dividends.
2. The NASDAQ Composite Index is a broad-based capitalization-weighted index of
all NASDAQ National Market & Small Cap stocks.
3. The S&P 500 Index is a broad unmanaged measure of the U.S. stock market.
4. The S&P 400 Midcap Index is a broad unmanaged measure of the U.S. stock
market.
5. The Russell 2000 Index is a broad unmanaged index comprised of the smallest
2000 companies in the Russell 3000 Index.
6. Compound annual growth rate. Assumes all dividends are reinvested in shares
of the Fund.
7. Total return for the three years was 18.49%, assuming all dividends were
reinvested in shares of the Fund.
8. Total return for the five years was 128.72%, assuming all dividends were
reinvested in shares of the Fund.
9. Total return since inception was 380.50%, assuming all dividends were
reinvested in shares of the Fund.
10. The inception date of the Fund was 1/1/96.
Note: The average annual returns shown above are historical and reflect
changes in share price, reinvested dividends and are net of expenses.
The table above does not reflect the deduction of taxes that a
shareholder would have paid on Fund distributions or on the
redemption of Fund shares. Investment results and the principal value
of an investment will vary. Past performance noted above does not
guarantee future results. When shares are redeemed, they may be worth
more or less than their original cost. Since inception, the Fund's
Adviser has absorbed certain expenses of the Fund, without which
returns would have been lower.
- -------------------------------------------------------------------------------
TOP TEN HOLDINGS*
(AS A % OF TOTAL INVESTMENTS, AS OF DECEMBER 31, 2003)
<Table>
<Caption>
- ------------------------------------------------------
SECURITY
- --------------------------------------- % OF
TOTAL
INVESTMENTS+
------
1) Seagate Technology Holdings STX 3.73%
2) Talisman Energy, Inc. TLM 3.31%
3) National Semiconductor Corp. NSM 3.17%
4) Ceradyne, Inc. CRDN 2.76%
5) Motorola, Inc. MOT 2.57%
6) Comcast Corp., Class A CMCSA 2.40%
7) Scientific-Atlanta, Inc. SFA 2.39%
8) Harris Corp. HRS 2.22%
9) Computer Associates Intl., Inc. CA 2.00%
10) Thermo Electron Corp. TMO 1.92%
TOP TEN HOLDINGS = 26.47% OF TOTAL INVESTMENTS+
* Current portfolio holdings may not be
indicative of future portfolio
holdings.
+ Percentage of total investments
includes all stocks, fixed income
securities, options and warrants plus
cash minus all short positions.
- ------------------------------------------------------
</Table>
SECTOR WEIGHTINGS
(AS A % OF TOTAL INVESTMENTS, AS OF DECEMBER 31, 2003)
<Table>
<Caption>
------------------------------------------------------------------
SECTOR LONG(1) (SHORT)(1) TOTAL(1)(2)
---------------------------------- ------ ------- ------
Healthcare/Medical Devices/
Pharmaceuticals 12.09% (1.38)% 10.71%
Media/Leisure/Cable/ Entertainment 7.17% -- 7.17%
Energy/Industrial/Metals 13.25% (1.86)% 11.39%
Consumer/Business Services/
Financial 6.74% (1.90)% 4.84%
Technology & Telecommunications 49.07% (4.66)% 44.41%
Miscellaneous & Options 1.56% -- 1.56%
Cash & Fixed Income Investments 19.92% -- 19.92%
(1) Percentage of total investments includes all stocks, fixed
income securities, options and warrants plus cash minus all
short positions.
(2) Total represents the difference between the long exposure and
the short exposure, which produces the net exposure.
------------------------------------------------------------------
</Table>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
(LINE GRAPH)
<Table>
<Caption>
NEEDHAM GROWTH NASDAQ S&P 400 MIDCAP RUSSELL 2000
FUND COMPOSITE INDEX S&P 500 INDEX INDEX INDEX
-------------- --------------- ------------- -------------- ------------
1/31/1996 10850 10014 10260 10106 9962
2/28/1996 12160 10472 10424 10538 10287
3/31/1996 12570 10404 10455 10574 10481
4/30/1996 13530 11246 10609 10898 11045
5/31/1996 14430 11746 10883 11045 11489
6/30/1996 14150 11194 10924 10879 11020
7/31/1996 13800 10207 10442 10145 10058
8/31/1996 14320 10783 10662 10731 10643
9/30/1996 15070 11589 11262 11199 11058
10/31/1996 15000 11538 11573 11231 10886
11/30/1996 15281 12210 12448 11863 11333
12/31/1996 15156 12195 12201 11877 11624
1/31/1997 15752 13034 12963 12322 11854
2/28/1997 15836 12365 13065 12221 11567
3/31/1997 15909 11738 13082 12094 11241
4/30/1997 15951 11742 12755 11772 10976
5/31/1997 16662 13607 14173 13271 12465
6/30/1997 16923 13982 14844 13685 12869
7/31/1997 17886 15263 15719 14659 13402
8/31/1997 18064 15441 15091 14976 13909
9/30/1997 18600 16369 15882 15752 14761
10/31/1997 17944 15512 15386 15147 14261
11/30/1997 17754 15585 16098 15372 14164
12/31/1997 17529 14723 15794 15339 13900
1/31/1998 17893 15781 16555 15664 14199
2/28/1998 19376 17259 17749 16961 15264
3/31/1998 18732 17785 18551 17654 15787
4/30/1998 19279 18231 18774 17688 15902
5/31/1998 18769 17360 18522 17237 15135
6/30/1998 19461 18251 19261 17221 14940
7/31/1998 18732 18285 19069 16672 13938
8/31/1998 15025 16017 17502 14475 11919
9/30/1998 16666 17038 17824 15099 12277
10/31/1998 18503 17316 18769 16160 12601
11/30/1998 18649 19717 20397 17421 13411
12/31/1998 21009 21157 20996 17788 13539
1/31/1999 21945 24515 21934 18276 14279
2/28/1999 20668 22391 21253 17319 13128
3/31/1999 21714 23682 22036 17652 13197
4/30/1999 22481 24900 22959 19207 14524
5/31/1999 24001 24198 22417 19291 14738
6/30/1999 26325 25010 22666 19691 14901
7/31/1999 27176 25858 22922 19888 14975
8/31/1999 27760 27043 23287 19445 14578
9/30/1999 27590 26866 22083 18700 14072
10/31/1999 26252 29090 23621 19316 14313
11/30/1999 30610 33817 24577 20596 15345
12/31/1999 37757 39924 25520 21537 16904
1/31/2000 38784 38139 24234 20927 16626
2/28/2000 49482 45046 23775 22391 19373
3/31/2000 46229 44880 26100 24264 18099
4/30/2000 45987 37894 25315 23415 17010
5/31/2000 42335 31464 24795 23126 16017
6/30/2000 47171 38942 25407 23466 17417
7/31/2000 45659 35968 25010 23837 16873
8/31/2000 52620 39702 26562 26497 18153
9/30/2000 50052 36077 25160 26316 17615
10/31/2000 48137 32205 25054 25423 16830
11/30/2000 41861 28536 23080 23505 15103
12/31/2000 40552 24281 23193 25303 16408
1/31/2001 49540 27338 23786 25755 17138
2/28/2001 44000 22244 21895 24755 16430
3/31/2001 41207 18100 20417 22872 15530
4/30/2001 45529 20419 22066 25222 16697
5/31/2001 46151 22149 22532 26549 17568
6/30/2001 47902 21273 21612 25880 17836
7/31/2001 45807 19974 21303 25493 16810
8/31/2001 43237 17779 20060 24661 16261
9/30/2001 38063 14766 18441 21594 14075
10/31/2001 41141 17429 19582 23358 15261
11/30/2001 34153 19027 20233 24228 16054
12/31/2001 45479 19593 20641 25774 17225
1/31/2002 45414 19108 20141 25023 16635
2/28/2002 43466 16778 19752 25053 16209
3/31/2002 46360 17889 20495 26844 17512
4/30/2002 43809 16369 19253 26719 17671
5/31/2002 41681 15671 19112 26268 16888
6/30/2002 37146 14197 17751 24346 16048
7/31/2002 32513 12891 16367 21987 13625
8/31/2002 32219 12765 16475 22098 13590
9/30/2002 28764 11384 14686 20318 12615
10/30/2002 30696 12919 15977 21198 13018
11/30/2002 35427 14371 16917 22423 14179
12/31/2002 32611 12986 15923 21502 13391
1/31/2003 32448 12850 15507 20874 13025
2/28/2003 32300 13023 15274 20376 12631
3/31/2003 31760 13065 15422 20548 12794
4/30/2003 33954 14268 16692 22038 14006
5/31/2003 38407 15555 17570 23864 15508
6/30/2003 39258 15823 17795 24168 15790
7/31/2003 42025 16921 18108 25026 16777
8/31/2003 44546 17663 18461 26159 17546
9/30/2003 44841 17440 18265 25759 17273
10/31/2003 47182 18873 19298 27706 18668
11/30/2003 48279 19154 19467 28671 19331
12/31/2003 48050 19584 20488 29155 19725
</Table>
The table above does not reflect the deduction of taxes that a shareholder
would have paid on Fund distributions or on the redemption of Fund shares.
Investment results and the principal value of an investment will vary. Past
performance noted above does not guarantee future results. When shares are
redeemed, they may be worth more or less than their original cost. Since
inception, the Fund's Adviser has absorbed certain expenses of the Fund,
without which returns would have been lower.
3
- --------------------------------------------------------------------------------
NEEDHAM AGGRESSIVE GROWTH FUND TICKER: NEAGX
COMPARATIVE PERFORMANCE STATISTICS
<Table>
<Caption>
---------------------------------------------------------------------------------------------------------
SINCE
BENCHMARKS 6 MONTHS 1 YEAR INCEPTION(5)
------------------------------------------------------------ ------ ------ ------
Needham Aggressive Growth Fund(1) 13.40% 26.62% 7.31%(6)(7)
Nasdaq Composite Index(2) 23.77% 50.77% 8.23%
S&P 500 Index(3) 15.15% 28.68% 2.60%
Russell 2000 Index(4) 24.93% 47.29% 12.02%
</Table>
1. Investment results calculated after reinvestment of dividends.
2. The Nasdaq Composite Index is a broad-based capitalization-weighted index of
all NASDAQ National Market & Small Cap stocks.
3. The S&P 500 Index is a broad unmanaged measure of the U.S. stock market.
4. The Russell 2000 Index is a broad unmanaged index comprised of the smallest
2000 companies in the Russell 3000 Index.
5. Compound annual growth rate. Assumes all dividends are reinvested in shares
of the Fund.
6. Total return since inception was 17.81%, assuming all dividends were
reinvested in shares of the Fund.
7. The inception date of the Fund was 9/4/01.
Note: The average annual returns shown in the above table and accompanying
footnotes are historical, reflect changes in share price and are net of
expenses. The table above does not reflect the deduction of taxes that a
shareholder would have paid on Fund distributions or on the redemption of
Fund shares. Investment results and the principal value of an investment
will vary. Past performance noted above does not guarantee future results.
When shares are redeemed, they may be worth more or less than their
original cost. Since inception, the Fund's Adviser has absorbed certain
expenses of the Fund, without which returns would have been lower.
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS*
(AS A % OF TOTAL INVESTMENTS, AS OF DECEMBER 31, 2003)
<Table>
<Caption>
- ----------------------------------------------------------
SECURITY
- ------------------------------------ % OF TOTAL
INVESTMENTS+
------
1) Seagate Technology Holdings STX 2.75%
2) Comcast Corp. Special Class A CMCSK 2.73%
3) Rogers Corp. ROG 2.57%
4) Fox Entertainment Group, Inc. FOX 2.54%
5) Affiliated Computer Services,
Inc. Class A ACS 2.54%
6) Pacific Sunwear of California,
Inc. PSUN 2.46%
7) State Street Corp. STT 2.42%
8) Universal Health Services, Inc.
Class B UHS 2.35%
9) Community Health Systems, Inc. CYH 2.32%
10) Express Scripts, Inc. ESRX 2.32%
TOP TEN HOLDINGS = 25.00% OF TOTAL
INVESTMENTS+
* Current portfolio holdings may not be indicative of
future portfolio holdings.
+ Percentage of total investments includes all stocks,
fixed income securities, options and warrants plus cash
minus all short positions.
- ----------------------------------------------------------
</Table>
SECTOR WEIGHTINGS
(AS A % OF TOTAL INVESTMENTS, AS OF DECEMBER 31, 2003)
<Table>
<Caption>
----------------------------------------------------------------
SECTOR LONG(1) (SHORT)(1) TOTAL(1)(2)
-------------------------------- ------ ------- -------
Healthcare/Medical Devices/
Pharmaceuticals 16.82% -- 16.82%
Media/Leisure/Cable/
Entertainment 6.07% -- 6.07%
Energy/Industrial 5.20% -- 5.20%
Consumer/Business Services/
Financial 22.84% (0.32)% 22.52%
Technology & Telecommunications 28.80% (4.39)% 24.41%
Miscellaneous 0.04% -- 0.04%
Cash & Fixed Income Investments 24.94% -- 24.94%
(1) Percentage of total investments includes all stocks, fixed
income securities, options and warrants plus cash minus all
short positions.
(2) Total represents the difference between the long exposure
and the short exposure, which produces the net exposure.
----------------------------------------------------------------
</Table>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
[LINE GRAPH]
<Table>
<Caption>
NEEDHAM AGGRESSIVE NASDAQ COMPOSITE
GROWTH FUND S&P 500 INDEX INDEX RUSSELL 2000 INDEX
------------------ ------------- ---------------- ------------------
9/4/2001 10000 10000 10000 10000
10/31/2001 10120 9373 9549 9191
11/30/2001 10780 10092 10910 9903
12/31/2001 11230 10180 11026 10515
1/31/2002 11040 10032 10937 10407
2/28/2002 10770 9838 9794 10122
3/31/2002 11290 10208 10442 10936
4/30/2002 11110 9589 9555 10350
5/31/2002 10870 9519 9147 10546
6/30/2002 10030 8841 8287 10022
7/31/2002 9450 8152 7525 8508
8/31/2002 9370 8205 7451 8486
9/30/2002 8880 7313 6645 7877
10/31/2002 9220 7957 7541 8129
11/30/2002 10062 8789 8802 9289
12/31/2002 9304 8230 8030 8795
1/31/2003 9151 8056 7871 8532
2/28/2003 8905 7935 7976 8274
3/31/2003 9059 8157 8172 8476
4/30/2003 9540 8498 8560 8937
5/31/2003 10236 9129 9527 10159
6/31/2003 10389 9262 9706 10353
7/31/2003 10911 9312 9752 10808
8/31/2003 11239 9592 10819 11495
9/30/2003 11126 9498 10713 11227
10/31/2003 11515 10027 11560 12231
11/31/2003 11781 10115 11732 12665
12/31/2003 11781 10613 12015 13015
</Table>
The table above does not reflect the deduction of taxes that a shareholder
would have paid on Fund distributions or on the redemption of Fund shares.
Investment results and the principal value of an investment will vary. Past
performance noted above does not guarantee future results. When shares are
redeemed, they may be worth more or less than their original cost. Since
inception, the Fund's Adviser has absorbed certain expenses of the Fund, without
which returns would have been lower.
4
ANNUAL REPORT 2003
- --------------------------------------------------------------------------------
NEEDHAM SMALL CAP GROWTH FUND TICKER: NESGX
COMPARATIVE PERFORMANCE STATISTICS
<Table>
<Caption>
---------------------------------------------------------------------------------------------------------
SINCE
BENCHMARKS 6 MONTHS 1 YEAR INCEPTION(4)
------------------------------------------------------------ ------ ------ ------
Needham Small Cap Growth Fund 29.54% 62.24% 38.20%(5)(6)
S&P 600 Index(1) 22.90% 38.79% 6.81%
Nasdaq Composite Index(2) 23.77% 50.77% 12.99%
Russell 2000 Index(3) 24.93% 47.29% 9.77%
</Table>
1. The S&P 600 Index is a broad unmanaged measure of the U.S. stock market.
2. The Nasdaq Composite Index is a broad-based capitalization-weighted index of
all NASDAQ National Market & Small Cap stocks.
3. The Russell 2000 Index is a broad unmanaged index comprised of the smallest
2000 companies in the Russell 3000 Index.
4. Compound annual growth rate. Assumes all dividends are reinvested in the
Fund.
5. Total return since inception was 68.4%, assuming all dividends were
reinvested in shares of the Fund.
6. The inception date of the Fund was 5/22/02.
Note: The average annual returns shown in the above table and accompanying
footnotes are historical, reflect changes in share price and are net of
expenses. The table above does not reflect the deduction of taxes that a
shareholder would have paid on Fund distributions or on the redemption of
Fund shares. Investment results and the principal value of an investment
will vary. Past performance noted above does not guarantee future results.
When shares are redeemed, they may be worth more or less than their
original cost. Since inception, the Fund's Adviser has absorbed certain
expenses of the Fund, without which returns would have been lower.
- --------------------------------------------------------------------------------
TOP TEN HOLDINGS*
(AS A % OF TOTAL INVESTMENTS, AS OF DECEMBER 31, 2003)
<Table>
<Caption>
- -------------------------------------------------------------
SECURITY
- ---------------------------------------- % OF TOTAL
INVESTMENTS+
------
1) Bright Horizons Family Solutions BFAM 4.13%
2) Berkshire Hathaway, Inc., Class B BRK/B 3.18%
3) Eon Labs, Inc. ELAB 3.12%
4) FTI Consulting, Inc. FCN 2.64%
5) Garmin Ltd. GRMN 2.64%
6) Advisory Board Company ABCO 2.59%
7) Aceto Corp. ACET 2.47%
8) Analogic Corp. ALOG 2.41%
9) Chesapeake Energy Corp. CHK 2.30%
10) W.R. Berkley Corp. BER 2.26%
TOP TEN HOLDINGS = 27.74% OF TOTAL
INVESTMENTS+
* Current portfolio holdings may not be indicative of future
portfolio holdings.
+ Percentage of total investments includes all stocks, fixed
income securities and options plus cash minus all short
positions.
- -------------------------------------------------------------
</Table>
SECTOR WEIGHTINGS
(AS A % OF TOTAL INVESTMENTS, AS OF DECEMBER 31, 2003)
<Table>
<Caption>
----------------------------------------------------------------
SECTOR LONG(1) (SHORT)(1) TOTAL(1)(2)
-------------------------------- ------ ------- ------
Healthcare/Medical
Devices/Pharmaceuticals 16.45% -- 16.45%
Media/Leisure/Cable/Entertainment -- -- --
Energy/Industrial/Metals 11.96% (0.31)% 11.65%
Consumer/Business
Services/Financial 26.64% (0.30)% 26.34%
Technology & Telecommunications 23.78% (3.74)% 20.04%
Miscellaneous & Options -- -- --
Cash & Fixed Income Investments 25.52% -- 25.52%
(1) Percentage of total investments includes all stocks, fixed
income securities and options plus cash minus all short
positions.
(2) Total represents the difference between the long exposure
and the short exposure, which produces the net exposure.
----------------------------------------------------------------
</Table>
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
[LINE GRAPH]
<Table>
<Caption>
NEEDHAM SMALL CAP NASDAQ COMPOSITE
GROWTH S&P 600 INDEX INDEX RUSSELL 2000 INDEX
----------------- ------------- ---------------- ------------------
5/31/2002 9950 9892 9656 9872
6/30/2002 9270 9380 8748 9382
7/31/2002 8670 8055 7943 7965
8/31/2002 8340 8133 7866 7944
9/30/2002 7580 7635 7015 7374
10/31/2002 8680 7879 7960 7610
11/30/2002 11200 8289 8855 8289
12/31/2002 10380 8010 8001 7828
1/31/2003 10440 7734 7918 7614
2/28/2003 9870 7486 8024 7384
3/31/2003 9650 7545 8050 7479
4/30/2003 10680 8158 8791 8188
5/31/2003 12540 8815 9584 9066
6/30/2003 13000 9045 9765 9231
7/31/2003 14050 9515 10427 9808
8/31/2003 14630 9965 10962 10263
9/30/2003 15080 9599 10854 10024
10/31/2003 16130 10510 11713 10920
11/30/2003 16820 10908 11887 11307
12/31/2003 16840 11119 12175 11620
</Table>
The table above does not reflect the deduction of taxes that a shareholder
would have paid on Fund distributions or on the redemption of Fund shares.
Investment results and the principal value of an investment will vary. Past
performance noted above does not guarantee future results. When shares are
redeemed, they may be worth more or less than their original cost. Since
inception, the Fund's Adviser has absorbed certain expenses of the Fund, without
which returns would have been lower.
5
Needham Funds
- --------------------------------------------------------------------------------
NEEDHAM GROWTH FUND
Schedule of Investments
December 31, 2003
<Table>
<Caption>
Shares Value
COMMON STOCK - (82.9%)
BIOTECH & PHARMACEUTICALS -
(2.7%)
Johnson & Johnson Co. 100,000 $ 5,166,000
Merck & Co., Inc. 100,000 4,620,000
---------------
9,786,000
---------------
BUSINESS SERVICES - (3.3%)
Affiliated Computer
Services, Inc. Class A*+ 45,000 2,450,700
Choicepoint, Inc.* 25,000 952,250
First Data Corp. 50,000 2,054,500
FTI Consulting, Inc.* 100,000 2,337,000
Iron Mountain, Inc.* 100,000 3,954,000
Provide Commerce, Inc.* 12,000 182,040
---------------
11,930,490
---------------
CABLE TV & EQUIPMENT - (5.7%)
Comcast Corp. Class A*+ 250,000 8,217,500
Comcast Corp. Special Class
A* 60,000 1,876,800
Scientific-Atlanta, Inc. 300,000 8,190,000
Shaw Communications, Inc.+ 150,000 2,328,000
---------------
20,612,300
---------------
COMPUTER HARDWARE - (0.9%)
Planar Systems, Inc.* 135,200 3,288,064
---------------
CONTRACT MANUFACTURING &
MATERIALS - (3.3%)
Manufacturers Services
Ltd.* 325,000 1,976,000
Merix Corp.*+ 180,000 4,415,400
Parlex Corp.*+ 200,000 1,582,000
Pemstar, Inc.* 640,000 2,105,600
Solectron Corp.*+ 350,000 2,068,500
---------------
12,147,500
---------------
EDA/CAD - CAM/INTELLECTUAL
PROPERTY - (0.7%)
Autodesk, Inc.+ 110,000 2,703,800
---------------
ELECTRONIC COMPONENTS &
DISTRIBUTION - (0.9%)
Vishay Intertechnology,
Inc.* 150,000 3,435,000
---------------
ELECTRONICS &
STORAGE - (4.9%)
Bell Microproducts, Inc.* 290,000 2,627,400
Datalink Corporation* 32,800 124,312
Datalink Corporation (PP)* 400,000 1,516,000
Komag, Inc.* 50,000 731,500
Seagate Technology
Holdings+ 675,000 12,757,500
---------------
17,756,712
---------------
</Table>
<Table>
<Caption>
Shares Value
ELECTRONICS, ELECTRICAL
EQUIPMENT & INSTRUMENTATION -
(0.4%)
Lecroy Corp.* 50,000 $ 900,500
Robotic Vision Systems,
Inc. (PP)* 220,547 705,750
---------------
1,606,250
---------------
EXPLORATION, PRODUCTION,
REFINING & STORAGE - (4.6%)
Chesapeake Energy Corp. 400,000 5,432,000
Talisman Energy, Inc.+ 200,000 11,320,000
---------------
16,752,000
---------------
HEALTH CARE SERVICES - (1.5%)
D & K Healthcare Resources+ 200,000 2,712,000
Pediatric Services of
America, Inc.* 150,000 1,446,000
U.S. Oncology, Inc.* 135,000 1,452,600
---------------
5,610,600
---------------
INDUSTRIAL CHEMICALS, RESINS
& LAMINATES - (2.1%)
AXT, Inc.*+ 367,202 1,141,998
Pall Corp. 40,000 1,073,200
Park Electrochemical Corp.+ 185,000 4,900,650
Southwall Technologies,
Inc.* 728,000 698,880
---------------
7,814,728
---------------
LEISURE PRODUCTS - (1.1%)
Vail Resorts, Inc.*+ 230,000 3,910,000
---------------
MANUFACTURING & INDUSTRIAL
EQUIPMENT - (3.6%)
Ceradyne, Inc. (PP)* 277,301 9,444,872
Sypris Solutions, Inc.+ 225,000 3,782,250
---------------
13,227,122
---------------
MEDICAL DEVICES & SUPPLIES -
(7.1%)
Analogic Corp. 113,733 4,663,053
ConMED Corp.*+ 250,000 5,950,000
Immucor, Inc.* 30,000 611,700
Laboratory Corp. of
America* 25,000 923,750
Thermo Electron Corp.*+ 260,000 6,552,000
Universal Health Services,
Inc. Class B 40,000 2,148,800
Viasys Healthcare, Inc.*+ 135,000 2,781,000
Waters Corp.* 70,000 2,321,200
---------------
25,951,503
---------------
NETWORKING & COMMUNICATIONS
EQUIPMENT - (0.2%)
Visual Networks, Inc.* 400,000 896,000
---------------
</Table>
See accompanying notes to financial statements.
6
ANNUAL REPORT 2003
- --------------------------------------------------------------------------------
<Table>
<Caption>
Shares Value
OIL/GAS EQUIPMENT &
SERVICES - (2.1%)
GlobalSantaFe Corp.+ 195,000 $ 4,841,850
Offshore Logistics, Inc.*+ 110,000 2,697,200
---------------
7,539,050
---------------
OPTICAL COMPONENTS - (2.5%)
Agere Systems, Inc. - Class
B* 500,000 1,450,000
Newport Corp.*+ 237,500 3,925,875
Orbotech Ltd.*+ 150,000 3,588,000
---------------
8,963,875
---------------
POWER SEMICONDUCTORS - (0.4%)
Mercury Computer Systems,
Inc.*+ 63,500 1,581,150
---------------
SEMICONDUCTOR CAPITAL
EQUIPMENT - (7.1%)
ADE Corp.*+ 35,000 648,200
American Superconductor* 115,000 1,593,900
Brillian Corporation*+ 50,000 422,500
Brooks Automation, Inc.*+ 213,400 5,157,878
FSI International, Inc.* 331,000 2,442,780
FSI International, Inc.
(PP)* 150,000 1,107,000
Helix Technology Corp.+ 175,341 3,608,518
MKS Instruments, Inc.* 134,100 3,888,900
Nova Measuring Instruments,
Ltd.* 82,500 485,100
Photronics, Inc.*+ 225,000 4,482,000
Three-Five Systems, Inc.*+ 125,000 655,000
Transmeta Corp.* 215,000 731,000
Trikon Technologies, Inc.*+ 122,500 687,225
---------------
25,910,001
---------------
SEMICONDUCTOR MANUFACTURERS &
COMMUNICATION DEVICES -
(6.9%)
Actel Corp.*+ 95,000 2,289,500
Atmel Corp.* 750,000 4,507,500
hi/fn, Inc.* 6 71
MEMC Electronic Materials* 150,000 1,443,000
National Semiconductor
Corp.*+ 275,000 10,837,750
Standard Microsystems
Corp.*+ 125,000 3,162,500
White Electronic Designs
Corp.* 96,300 847,440
Xicor, Inc.* 165,000 1,871,100
---------------
24,958,861
---------------
</Table>
<Table>
<Caption>
Shares Value
SOFTWARE - (8.9%)
Aspen Technology, Inc.* 300,000 $ 3,078,000
Computer Associates
International, Inc.+ 250,000 6,835,000
Hyperion Solutions Corp.* 110,000 3,315,400
Kronos, Inc.*+ 150,000 5,941,500
Phoenix Technologies, Ltd.* 300,000 2,424,000
Rainbow Technologies* 200,000 2,252,000
SPSS, Inc.*+ 197,500 3,531,300
Sybase, Inc.*+ 210,000 4,321,800
Synnex Corp.* 54,500 749,920
---------------
32,448,920
---------------
SPECIALTY RETAILING &
MANUFACTURING - (3.1%)
Brookstone, Inc.* 125,000 2,663,750
Carmax, Inc.* 100,000 3,093,000
Charming Shoppes, Inc.*+ 450,000 2,430,000
G-III Apparel Group, Inc.* 77,000 708,400
West Marine* 80,000 2,224,800
---------------
11,119,950
---------------
TELECOMMUNICATIONS SERVICE &
EQUIPMENT - (2.4%)
ADC Telecommunications,
Inc.* 360,000 1,069,200
Harris Corp. 200,000 7,590,000
---------------
8,659,200
---------------
WIRELESS COMMUNICATIONS &
EQUIPMENT - (6.5%)
Anaren, Inc.*+ 250,000 3,530,000
AT&T Wireless Services,
Inc.*+ 225,000 1,797,750
EMS Technologies, Inc.* 76,900 1,579,526
EMS Technologies, Inc.
(PP)* 100,000 2,054,000
Motorola, Inc.+ 625,000 8,793,750
REMEC, Inc.*+ 300,000 2,523,000
Viasat, Inc.*+ 169,000 3,234,660
---------------
23,512,686
---------------
TOTAL COMMON STOCK (Cost
$232,446,850) 302,121,762
--------- ---------------
INVESTMENT TRUSTS - (1.4%)
Central Fund of Canada (PP) 250,000 1,312,500
H & Q Healthcare Investors
Fund 109,985 2,006,127
H & Q Life Sciences
Investors Fund 108,683 1,685,673
---------------
TOTAL INVESTMENT TRUSTS (Cost
$4,811,155) 5,004,300
--------- ---------------
</Table>
See accompanying notes to financial statements.
7
NEEDHAM GROWTH FUND
Schedule of Investments (Continued)
December 31, 2003
Needham Funds
- --------------------------------------------------------------------------------
<Table>
<Caption>
Shares Value
PREFERRED STOCK - (0.1%)
CABLE TV & EQUIPMENT - (0.1%)
Adelphia Communications
Corp. - Convertible
Preferred Stock, 7.50%,
11/15/04, Series E* 182,000 $ 364,000
---------------
TOTAL PREFERRED STOCK (Cost
$2,554,580) 364,000
---------------
Par
CONVERTIBLE BONDS - (2.5%)
NETWORKING & COMMUNICATIONS
EQUIPMENT - (1.7%)
Lucent Technologies, Inc.
8.00%, 08/01/31 6,000,000 6,427,500
---------------
TELECOMMUNICATIONS SERVICE &
EQUIPMENT - (0.8%)
Nortel Telecommunications,
4.25%, 09/01/08 3,000,000 2,838,750
---------------
TOTAL CONVERTIBLE BONDS (Cost
$9,046,649) 9,266,250
---------------
Shares
TEMPORARY INVESTMENTS -
(16.1%)
PNC Bank Money Market 35,608,319 35,608,319
Provident Institutional
Fund - Tempcash
Portfolio 14,993,580 14,993,580
The RBB Sansom Street Money
Market Portfolio 7,828,429 7,828,429
---------------
TOTAL TEMPORARY INVESTMENTS
(Cost $58,430,328) 58,430,328
---------------
TOTAL INVESTMENTS - (103.0%)
(Cost $307,289,562) 375,186,640
---------------
Number of
Contracts
NAME/EXPIRATION DATE/STRIKE
PRICE
INVESTMENTS IN
OPTIONS - (0.1%)
CALL OPTIONS
PURCHASED - (0.1%)
CABLE TV & EQUIPMENT - (0.0%)
Time Warner, Jan 04,
$20.00* 1,000 5,000
---------------
</Table>
<Table>
<Caption>
Number of
Contracts Value
ELECTRONICS & STORAGE(0.0%)
EMC Corp., Jan 04, $12.50* 800 $ 52,000
---------------
EXPLORATION, PRODUCTION,
REFINING & STORAGE - (0.0%)
El Paso, Jan 04, $25.00* 1,600 8,000
---------------
NETWORKING & COMMUNICATIONS
EQUIPMENT - (0.1%)
Tellabs, Inc., Jan 04,
$7.50* 1,000 110,000
---------------
SEMICONDUCTOR MANUFACTURERS &
COMMUNICATION DEVICES -
(0.0%)
Advanced Micro Devices, Jan
04, $15.00* 1,000 65,000
---------------
TOTAL CALL OPTIONS PURCHASED
(Cost $1,934,452) 240,000
---------------
TOTAL OPTIONS PURCHASED (Cost
$1,934,452) 240,000
---------------
<Caption>
Shares
WARRANTS - (0.0%)
ELECTRONICS &
STORAGE - (0.0%)
Datalink, May 07, $4.50* 68,000 84,354
---------------
ELECTRONICS, ELECTRICAL
EQUIPMENT & INSTRUMENTATION -
(0.0%)
Robotic Vision Systems,
Inc., May 05, $7.50* 55,137 23,216
---------------
TOTAL WARRANTS PURCHASED
(Cost $162,175) 107,570
---------------
TOTAL OPTIONS AND WARRANTS
PURCHASED (Cost $2,096,627) 347,570
---------------
TOTAL INVESTMENTS, OPTIONS
PURCHASED AND WARRANTS -
(103.1%) (Cost
$309,386,189)(x) 375,534,210
---------------
Total Securities Sold Short
and Options Written -
(-9.2%) (33,523,325)
---------------
Other Assets, Less Other
Liabilities - (6.1%) 22,309,267
---------------
NET ASSETS - (100.0%) $ 364,320,152
===============
</Table>
* Non-income producing security.
+ Security position is either entirely or partially held in a segregated
account as collateral for securities sold short.
(x)The cost for federal income tax purposes is $309,704,448.
PP Private Placement. Securities are exempt from registration under Rule 144 of
the Securities Act of 1933. Such securities may be resold, normally to
qualified institutional buyers, in transactions exempt from registration. At
December 31, 2003, the aggregate value of Rule 144 securities amounted to
approximately $14,086,000, which represents approximately 3.9% of net assets
as of that date.
See accompanying notes to financial statements.
8
ANNUAL REPORT 2003
- --------------------------------------------------------------------------------
NEEDHAM GROWTH FUND
Schedule of Securities Sold Short
December 31, 2003
<Table>
<Caption>
Shares Value
SECURITIES SOLD
SHORT - (-9.2%)
BIOTECH & PHARMACEUTICALS -
(-1.3%)
Biotech Holders Trust* 35,000 $ 4,735,850
---------------
BUSINESS SERVICES - (-0.4%)
Memberworks, Inc.* 40,000 1,086,800
---------------
EDA/CAD -- CAM/INTELLECTUAL
PROPERTY - (-0.5%)
Ansys, Inc.* 50,000 1,985,000
---------------
FINANCIAL SERVICES - (-1.5%)
Lehman Brothers Holdings,
Inc.* 70,000 5,405,400
---------------
MANUFACTURING & INDUSTRIAL
EQUIPMENT - (-1.7%)
Polaris Industries, Inc.* 32,500 2,878,850
Zebra Technologies Corp.* 52,500 3,484,425
---------------
6,363,275
---------------
NETWORKING & COMMUNICATIONS
EQUIPMENT - (-1.0%)
Juniper Networks, Inc.* 200,000 3,736,000
---------------
SEMICONDUCTOR CAPITAL
EQUIPMENT - (-0.3%)
Rudolph Technologies, Inc.* 50,000 1,227,000
---------------
SEMICONDUCTOR MANUFACTURERS &
COMMUNICATION DEVICES - (-
0.8%)
Intel Corp.* 25,000 805,000
Silicon Laboratories, Inc.* 50,000 2,161,000
---------------
2,966,000
---------------
</Table>
<Table>
<Caption>
Shares Value
SOFTWARE - (-1.7%)
Electronic Arts, Inc.* 75,000 $ 3,583,500
Mercury Interactive Corp.* 50,000 2,432,000
---------------
6,015,500
---------------
TOTAL SECURITIES SOLD SHORT
(Proceeds $23,182,181) 33,520,825
---------------
<Caption>
Number of
Contracts
NAME/EXPIRATION DATE/STRIKE
PRICE
WRITTEN OPTIONS - (0.0%)
PUT OPTIONS WRITTEN - (0.0%)
CABLE TV & EQUIPMENT - (0.0%)
Time Warner, Jan 04,
$10.00* 500 2,500
---------------
TOTAL PUT OPTIONS WRITTEN
(Premium Received $158,745) 2,500
---------------
TOTAL OPTIONS WRITTEN
(Premium Received $158,745) 2,500
---------------
TOTAL SECURITIES SOLD SHORT
AND OPTIONS
WRITTEN - (-9.2%) (33,523,325)
---------------
Total Investments, Options
Purchased and Warrants -
(103.1%) 375,186,640
---------------
Other Assets, Less Other
Liabilities - (6.1%) 22,309,267
---------------
NET ASSETS - (100.0%) $ 364,320,152
===============
</Table>
* Non-income producing security.
+ Security position is either entirely or partially held in a segregated
account as collateral for securities sold short.
See accompanying notes to financial statements.
9
Needham Funds
- --------------------------------------------------------------------------------
NEEDHAM AGGRESSIVE GROWTH FUND
Schedule of Investments
December 31, 2003
<Table>
<Caption>
Shares Value
COMMON STOCK - (77.3%)
AIRLINES - (1.5%)
Jetblue Airways Corp.* 10,000 $ 265,200
--------------
BIOTECH & PHARMACEUTICALS -
(8.8%)
Aclara Biosciences, Inc.*+ 30,000 109,500
Biogen Idec, Inc.* 10,000 367,800
Cubist Pharmaceuticals,
Inc.* 20,000 243,200
Express Scripts, Inc.* 6,000 398,580
Neurochem, Inc.* 2,300 54,259
Pfizer, Inc. 11,000 388,630
--------------
1,561,969
--------------
BROADCASTING - (2.5%)
Fox Entertainment Group,
Inc. Class A* 15,000 437,250
--------------
BUSINESS SERVICES - (8.6%)
Affiliated Computer
Services, Inc. Class A*+ 8,000 435,680
Choicepoint, Inc.* 10,000 380,900
First Data Corp. 7,500 308,175
Iron Mountain, Inc.* 10,000 395,400
Provide Commerce, Inc.* 700 10,619
--------------
1,530,774
--------------
CABLE TV & EQUIPMENT - (2.6%)
Comcast Corp. Special Class
A*+ 15,000 469,200
--------------
EDA/CAD - CAM/INTELLECTUAL
PROPERTY - (1.4%)
Autodesk, Inc.+ 10,000 245,800
--------------
ELECTRONIC COMPONENTS &
DISTRIBUTION - (2.5%)
Rogers Corp.* 10,000 441,200
--------------
ELECTRONICS & STORAGE - (3.4%)
Datalink Corporation* 10,000 37,900
Datalink Corporation (PP)* 25,000 94,750
Seagate Technology Holdings+ 25,000 472,500
--------------
605,150
--------------
ELECTRONICS, ELECTRICAL
EQUIPMENT & INSTRUMENTATION -
(0.3%)
Robotic Vision Systems, Inc.
(PP)* 16,541 52,931
--------------
FINANCIAL SERVICES - (2.8%)
Piper Jaffray* 2,000 83,140
State Street Corp. 8,000 416,640
--------------
499,780
--------------
</Table>
<Table>
<Caption>
Shares Value
HOSPITAL & PHYSICIAN
MANAGEMENT - (2.3%)
Community Health Systems*+ 15,000 $ 398,700
--------------
INDUSTRIAL CHEMICALS, RESINS &
LAMINATES - (1.5%)
Park Electrochemical Corp. 10,000 264,900
--------------
MEDICAL DEVICES & SUPPLIES -
(5.2%)
Dendreon Corp.* 20,000 161,200
Medtronic, Inc. 7,500 364,575
Universal Health Services,
Inc. Class B 7,500 402,900
--------------
928,675
--------------
METALS & MINING - (2.1%)
Precision Castparts Corp. 8,000 363,280
--------------
OPTICAL COMPONENTS - (2.1%)
Corvis Corp.* 50,000 85,000
Orbotech Ltd.*+ 12,000 287,040
--------------
372,040
--------------
SEMICONDUCTOR CAPITAL
EQUIPMENT - (3.0%)
American Superconductor* 17,500 242,550
FSI International, Inc.* 35,000 258,300
FSI International, Inc.
(PP)* 5,000 36,900
--------------
537,750
--------------
SEMICONDUCTOR MANUFACTURERS &
COMMUNICATION DEVICES - (4.6%)
Intersil Holding Corp.* 12,500 310,625
Taiwan Semiconductor
Manufacturing Co. Ltd.
ADR* 25,000 256,000
Xicor, Inc.*+ 22,500 255,150
--------------
821,775
--------------
SOFTWARE - (7.9%)
Hyperion Solutions Corp.* 12,000 361,680
Kronos, Inc.*+ 7,500 297,075
MRO Software, Inc.* 15,000 201,900
Netscreen Technologies,
Inc.* 7,500 185,625
Pervasive Software, Inc.* 25,000 181,250
Plumtree Software, Inc.* 30,000 141,000
Synnex Corp.* 2,300 31,648
--------------
1,400,178
--------------
</Table>
See accompanying notes to financial statements.
10
ANNUAL REPORT 2003
- --------------------------------------------------------------------------------
<Table>
<Caption>
Shares Value
SPECIALITY RETAILING &
MANUFACTURING - (10.7%)
Brookstone, Inc.*+ 5,000 $ 106,550
Carmax, Inc.* 10,000 309,300
Chicos Fas, Inc.* 5,000 184,750
Pacific Sunwear of
California, Inc.* 20,000 422,401
PETCO Animal Supplies, Inc.* 12,000 365,400
Restoration Hardware, Inc.* 35,000 166,250
Tiffany & Co. 7,500 339,000
--------------
1,893,651
--------------
TELECOMMUNICATIONS - (0.8%)
Scientific-Atlanta, Inc. 5,000 136,500
--------------
TELECOMMUNICATIONS SERVICE &
EQUIPMENT - (1.5%)
Harris Corp.+ 7,000 265,650
--------------
WIRELESS COMMUNICATIONS &
EQUIPMENT - (1.2%)
EMS Technologies, Inc.*+ 10,000 205,400
--------------
TOTAL COMMON STOCK (Cost
$10,960,083) 13,697,753
--------------
TEMPORARY
INVESTMENTS - (24.2%)
PNC Bank Money Market 2,382,954 2,382,954
Provident Institutional
Fund - Tempcash Portfolio 950,958 950,958
The RBB Sansom Street Money
Market Portfolio 950,958 950,958
--------------
TOTAL TEMPORARY INVESTMENTS
(Cost $4,284,870) 4,284,870
--------------
TOTAL INVESTMENTS - (101.5%)
(Cost $15,244,953) 17,982,623
--------------
</Table>
<Table>
<Caption>
Shares Value
NAME/EXPIRATION DATE/STRIKE
PRICE
WARRANTS - (0.0%)
ELECTRONICS & STORAGE - (0.0%)
Datalink Corp, May 07,
$4.50* 4,000 $ 4,962
--------------
ELECTRONICS, ELECTRICAL
EQUIPMENT, & INSTRUMENTATION -
(0.0%)
Robotic Vision Systems,
Inc., May 05, $7.50* 4,135 1,741
--------------
TOTAL WARRANTS PURCHASED (Cost
$11,591) 6,703
--------------
TOTAL INVESTMENTS AND
WARRANTS - (101.5%) (Cost
$15,256,544)(x) 17,989,326
--------------
Total Securities Sold
Short - (-4.6%) (808,140)
--------------
Other Assets, Less Other
Liabilities - (3.1%) 537,488
--------------
NET ASSETS - (100.0%) $ 17,718,674
==============
</Table>
* Non-income producing security.
+ Security position is either entirely or partially held in a segregated
account as collateral for securities sold short.
(x)The cost for federal income tax purposes is $15,256,544.
PP Private Placement. Securities are exempt from registration under Rule 144 of
the Securities Act of 1933. Such securities may be resold, normally to
qualified institutional buyers, in transactions exempt from registration. At
December 31, 2003, the aggregate value of Rule 144 securities amounted to
approximately $185,000, which represents approximately 1% of net assets as of
that date.
See accompanying notes to financial statements.
11
Needham Funds
- --------------------------------------------------------------------------------
NEEDHAM AGGRESSIVE GROWTH FUND
Schedule of Securities Sold Short
December 31, 2003
<Table>
<Caption>
Shares Value
SECURITIES SOLD SHORT - (-4.6%)
BUSINESS SERVICES - (-0.3%)
Memberworks, Inc.* 2,000 $ 54,340
--------------
SEMICONDUCTOR CAPITAL
EQUIPMENT - (-1.4%)
Rudolph Technologies, Inc.* 10,000 245,400
--------------
SOFTWARE - (-2.9%)
Eresearch Technology, Inc.* 20,000 508,400
--------------
TOTAL SECURITIES SOLD SHORT
(Proceeds $376,839) (-4.6%) 808,140
--------------
--------------
Total Investments and
Warrants - (101.5%) 17,989,326
--------------
Other Assets, Less Other
Liabilities - (3.1%) 537,488
--------------
NET ASSETS - (100.0%) $ 17,718,674
==============
</Table>
* Non-Income producing security.
+ Security position is either entirely or partially held in a segregated
account as collateral for securities sold short.
See accompanying notes to financial statements.
12
ANNUAL REPORT 2003
- --------------------------------------------------------------------------------
NEEDHAM SMALL CAP GROWTH FUND
Schedule of Investments
December 31, 2003
<Table>
<Caption>
Shares Value
COMMON STOCK - (88.5%)
BIOTECH & PHARMACEUTICALS -
(5.5%)
Eon Labs, Inc.* 19,000 $ 968,050
First Horizon Pharmaceutical* 50,000 560,000
-------------
1,528,050
-------------
BUSINESS SERVICES - (16.5%)
Advisory Board Company* 23,000 802,930
Bright Horizons Family
Solutions* 30,500 1,280,999
CDI Corp. 10,000 327,500
FTI Consulting, Inc.* 35,000 817,950
Iron Mountain, Inc.* 12,500 494,250
Journal Communication, Inc. 30,000 555,900
Sitel Corp.* 120,000 279,600
-------------
4,559,129
-------------
CONTRACT MANUFACTURING &
MATERIALS - (2.0%)
DDI Corp.* 5,000 73,500
Parlex Corp.*+ 15,000 118,650
Pemstar, Inc.* 112,550 370,290
-------------
562,440
-------------
ELECTRONICS & STORAGE - (3.0%)
Datalink Corporation* 40,650 154,064
Dataram Corp.* 40,000 172,800
Hutchinson Technology, Inc.* 16,000 491,840
-------------
818,704
-------------
ELECTRONICS, ELECTRICAL
EQUIPMENT & INSTRUMENTATION -
(3.4%)
Cognex Corp.+ 2,000 56,480
Frequency Electronics, Inc. 4,000 58,000
Garmin Ltd. 15,000 817,200
-------------
931,680
-------------
EXPLORATION, PRODUCTION,
REFINING & STORAGE - (2.6%)
Chesapeake Energy Corp.+ 52,500 712,950
-------------
FINANCIAL SERVICES - (6.6%)
Berkshire Hathaway, Inc.
Class B*+ 350 985,250
Brantley Capital Corp.+ 12,500 127,500
W.R. Berkley Corp. 20,000 699,000
-------------
1,811,750
-------------
</Table>
<Table>
<Caption>
Shares Value
GOVERNMENT IT - (2.2%)
NIC, Inc.* 10,000 $ 80,300
PEC Solutions, Inc.* 12,500 211,875
Sensytech, Inc.* 22,000 308,000
-------------
600,175
-------------
HOMEBUILDERS - (1.4%)
Beazer Homes USA, Inc. 4,000 390,640
-------------
HOSPITAL & PHYSICIAN
MANAGEMENT - (1.0%)
Vitalworks, Inc.*+ 60,000 265,200
-------------
INDUSTRIAL CHEMICALS, RESINS &
LAMINATES - (4.1%)
Aceto Corp. 30,000 766,200
Balchem Corp. 10,000 228,000
Pall Corp. 4,000 107,320
Southwall Technologies, Inc.* 35,000 33,600
-------------
1,135,120
-------------
MANUFACTURING & INDUSTRIAL
EQUIPMENT - (3.2%)
Ceradyne, Inc. (PP)* 15,000 510,900
Intevac, Inc.* 15,000 211,650
Sypris Solutions, Inc. 10,000 168,100
-------------
890,650
-------------
MEDICAL DEVICES & SUPPLIES -
(12.0%)
Analogic Corp. 18,200 746,200
Cantel Medical Corp.* 10,900 176,471
ConMED Corp.*+ 6,000 142,800
Exactech, Inc.* 15,500 228,625
Immucor, Inc.* 16,000 326,240
PerkinElmer, Inc. 32,500 554,775
Thermo Electron Corp.*+ 5,500 138,600
Viasys Healthcare, Inc.* 30,000 618,000
Zoll Medical Corp.* 10,500 372,540
-------------
3,304,251
-------------
NETWORKING & COMMUNICATIONS
EQUIPMENT - (0.2%)
Computer Access Technology* 10,000 42,500
-------------
OIL/GAS EQUIPMENT & SERVICES -
(1.3%)
Varco International, Inc.* 17,800 367,214
-------------
OPTICAL COMPONENTS - (2.5%)
Agere Systems, Inc. - Class
A* 35,000 106,750
Agere Systems, Inc. - Class
B* 120,000 348,000
Newport Corp.* 15,000 247,950
-------------
702,700
-------------
</Table>
See accompanying notes to financial statements.
13
Needham Funds
- --------------------------------------------------------------------------------
<Table>
<Caption>
Shares Value
SEMICONDUCTOR CAPITAL
EQUIPMENT - (6.1%)
3Com Corp.* 10,000 $ 81,700
American Superconductor* 17,500 242,550
Brooks Automation, Inc.*+ 7,000 169,190
FSI International, Inc.* 50,000 369,000
MKS Instruments, Inc.* 8,000 232,000
Therma-Wave, Inc. (PP)* 100,000 590,000
-------------
1,684,440
-------------
SEMICONDUCTOR MANUFACTURERS &
COMMUNICATION DEVICES - (1.3%)
Standard Microsystems Corp.*+ 10,000 253,000
White Electronic Designs
Corp.* 11,900 104,720
-------------
357,720
-------------
SOFTWARE - (4.3%)
Concord Communications, Inc.* 1,000 19,970
Mobius Management Systems,
Inc.* 26,000 328,900
National Instruments Corp. 8,000 363,760
Pervasive Software, Inc.* 30,220 219,095
Rainbow Technologies* 13,500 152,010
Synnex Corp.* 5,300 72,928
Unify Corp.* 50,000 43,000
-------------
1,199,663
-------------
SPECIALITY RETAILING &
MANUFACTURING - (3.4%)
Barbeques Galore Limited 5,600 25,200
Carmax, Inc.* 12,500 386,625
Restoration Hardware, Inc.* 40,000 190,000
Sturm Ruger & Co., Inc. 4,000 45,480
West Marine* 10,000 278,100
-------------
925,405
-------------
TELECOMMUNICATIONS SERVICE &
EQUIPMENT - (1.3%)
LCC International, Inc.* 24,900 133,514
Mobility Electronics, Inc.* 25,000 223,525
-------------
357,039
-------------
</Table>
<Table>
<Caption>
Shares Value
TRANSPORTATION - (2.0%)
Frontline Limited 16,000 $ 407,520
Genesee And Wyoming, Inc.* 5,000 157,500
-------------
565,020
-------------
WIRELESS COMMUNICATIONS &
EQUIPMENT - (2.6%)
Anaren, Inc.*+ 8,960 126,515
REMEC, Inc.*+ 40,000 336,400
Tessco Technologies, Inc.* 17,500 247,800
-------------
710,715
-------------
TOTAL COMMON STOCK (Cost
$19,285,046) 24,423,155
-------------
TEMPORARY INVESTMENTS - (28.6%)
PNC Bank Money Market 4,515,056 4,515,056
Provident Institutional Fund
- Tempcash Portfolio 1,694,265 1,694,265
The RBB Sansom Street Money
Market Portfolio 1,694,265 1,694,265
-------------
TOTAL TEMPORARY INVESTMENTS
(Cost $7,903,586) 7,903,586
-------------
TOTAL INVESTMENTS (COST
$27,188,632)(X) - (117.1%) 32,326,741
-------------
Total Securities Sold Short -
(-4.9%) (1,348,920)
-------------
Other Liabilities, Less Other
Assets - (-12.2%) (3,362,289)
-------------
NET ASSETS - (100.0%) $27,615,532
=============
</Table>
* Non-Income producing security.
+ Security position is either entirely or partially held in a segregated
account as collateral for securities sold short.
(x )
The cost for federal income tax purposes is $27,233,485.
PPPrivate Placement. Securities are exempt from registration under Rule 144 of
the Securities Act of 1933. Such securities may be resold, normally to
qualified institutional buyers, in transactions exempt from registration. At
December 31, 2003, the aggregate value of Rule 144 securities amounted to
approximately $1,101,000, which represents approximately 4% of net assets as
of that date.
See accompanying notes to financial statements.
14
ANNUAL REPORT 2003
- --------------------------------------------------------------------------------
NEEDHAM SMALL CAP GROWTH FUND
Schedule of Securities Sold Short
December 31, 2003
<Table>
<Caption>
Shares Value
SECURITIES SOLD SHORT - (-4.9%)
BUSINESS SERVICES - (-0.3%)
Acxiom Corp.* 3,000 $ 55,710
Ask Jeeves, Inc.* 500 9,060
Memberworks, Inc.* 1,000 27,170
--------------
91,940
--------------
ELECTRONICS & STORAGE - (-0.3%)
Veritas Software Corp.* 2,000 74,320
--------------
ELECTRONICS, ELECTRICAL
EQUIPMENT, & INSTRUMENTATION -
(-0.6%)
Teradyne, Inc.* 6,000 152,700
--------------
MANUFACTURING & INDUSTRIAL
EQUIPMENT - (-0.4%)
Transact Technologies, Inc.* 4,000 96,800
--------------
NETWORKING & COMMUNICATIONS
EQUIPMENT - (-0.3%)
Juniper Networks, Inc.* 5,000 93,400
--------------
OPTICAL COMPONENTS - (-0.2%)
Sonus Networks, Inc.* 8,000 60,480
--------------
SEMICONDUCTOR CAPITAL
EQUIPMENT - (-1.7%)
Advanced Energy Industries* 6,000 156,300
Novellus Systems, Inc.* 3,000 126,150
Rudolph Technologies, Inc.* 5,000 122,700
Ultratech, Inc.* 2,500 73,425
--------------
478,575
--------------
</Table>
<Table>
<Caption>
Shares Value
SEMICONDUCTOR MANUFACTURERS &
COMMUNICATION DEVICES - (-0.3%)
ON Semiconductor* 5,000 $ 32,250
Silicon Laboratories, Inc.* 1,000 43,220
--------------
75,470
--------------
SOFTWARE - (-0.4%)
Eresearch Technology, Inc.* 1,000 25,420
Magma Design Automation,
Inc.* 3,500 81,690
--------------
107,110
--------------
TELECOMMUNICATIONS SERVICE &
EQUIPMENT - (-0.3%)
Adtran, Inc.* 3,000 93,000
--------------
WIRELESS COMMUNICATIONS &
EQUIPMENT - (-0.1%)
RF Micro Devices, Inc.* 2,500 25,125
--------------
TOTAL SECURITIES SOLD SHORT
(Proceeds $1,288,380) (-4.9%) 1,348,920
--------------
Total Investments - (117.1%) 32,326,741
--------------
Other Liabilities, Less Other
Assets - (-12.2%) (3,362,289)
--------------
NET ASSETS - (100.0%) $ 27,615,532
==============
</Table>
* Non-Income producing security.
See accompanying notes to financial statements.
15
Needham Funds
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities
December 31, 2003
<Table>
<Caption>
NEEDHAM NEEDHAM
NEEDHAM AGGRESSIVE SMALL CAP
GROWTH FUND GROWTH FUND GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------
ASSETS:
- ------------------------------------------------------------------------------------------------------------------
Investments, at Value (Cost $307,289,562, $15,244,953
and $27,188,632, respectively) $375,186,640 $17,982,623 $32,326,741
Option Contracts and Warrants Purchased, at Value (Cost
$2,096,627 and $11,591, respectively) 347,570 6,703 --
Receivables:
Dividends and Interest 317,223 4,242 22,471
Investment Securities Sold 23,995,380 992,666 1,315,024
Fund Shares Sold 754,943 -- 88,976
Prepaid Expenses and Other Assets 19,554 12,444 6,495
- ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 400,621,310 18,998,678 33,759,707
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES:
- ------------------------------------------------------------------------------------------------------------------
Securities Sold Short, at Value (Proceeds $23,182,181,
$376,839 and $1,288,380, respectively) 33,520,825 808,140 1,348,920
Option Contracts Written, at Value (Proceeds $158,745) 2,500 -- --
Payables:
Investment Securities Purchased -- 351,006 44,151
Fund Shares Redeemed 942,834 -- 4,611,817
Due to Adviser 1,129,423 25,680 31,227
Accrued Expenses and Other Liabilities 705,576 95,178 108,060
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 36,301,158 1,280,004 6,144,175
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS $364,320,152 $17,718,674 $27,615,532
- ------------------------------------------------------------------------------------------------------------------
Shares Issued and Outstanding $.001 Par Value
(Authorized 800,000,000, 100,000,000 and 100,000,000,
respectively) 12,414,640 1,539,375 1,639,494
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE $29.35 $11.51 $16.84
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET ASSETS
- ------------------------------------------------------------------------------------------------------------------
Paid-in Capital 362,027,496 16,074,818 22,514,354
Accumulated Net Realized Gain (Loss) (53,672,966) (657,625) 23,609
Net Unrealized Appreciation (Depreciation) of
Investment Securities, Option Contracts, Warrants and
Securities Sold Short 55,965,622 2,301,481 5,077,569
- ------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS $364,320,152 $17,718,674 $27,615,532
- ------------------------------------------------------------------------------------------------------------------
</Table>
See accompanying notes to financial statements.
16
ANNUAL REPORT 2003
- --------------------------------------------------------------------------------
Statements of Operations
For the Year Ended December 31, 2003
<Table>
<Caption>
NEEDHAM NEEDHAM
NEEDHAM AGGRESSIVE SMALL CAP
GROWTH FUND GROWTH FUND GROWTH FUND
- --------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
- --------------------------------------------------------------------------------------------------------------
Dividends $ 723,682 $ 26,365 $ 58,419
Interest 487,892 12,664 17,516
- --------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 1,211,574 39,029 75,935
- --------------------------------------------------------------------------------------------------------------
EXPENSES
- --------------------------------------------------------------------------------------------------------------
Investment Advisory Fees 3,835,899 189,531 159,787
Distribution Fees 764,981 37,962 32,799
Administration and Accounting Fees 280,155 84,996 80,749
Custodian Fees 59,429 20,027 23,088
Legal Fees 70,000 40,000 30,000
Shareholders' Reports 63,852 11,300 10,300
Directors Fees 34,081 1,622 1,843
Transfer Agent Fees 30,000 30,000 28,500
Audit Fees 41,800 33,500 33,100
Filing Fees 41,712 16,675 12,296
Insurance Expense 29,715 1,476 686
Other Expenses 187,656 18,053 12,399
- --------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 5,439,280 485,142 425,547
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
LESS: FEES WAIVED AND/OR EXPENSES REIMBURSED -- (106,094) (128,560)
- --------------------------------------------------------------------------------------------------------------
NET EXPENSES 5,439,280 379,048 296,987
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
NET INVESTMENT LOSS (4,227,706) (340,019) (221,052)
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT
SECURITIES, OPTION CONTRACTS AND WARRANTS
- --------------------------------------------------------------------------------------------------------------
Net Realized Gain (Loss) on Investment Securities and
Warrants (2,903,611) (353,954) 433,462
Net Realized Loss on Option Contracts (5,940,155) -- --
Change in Unrealized Appreciation (Depreciation) of
Investment Securities, Option Contracts and Warrants 129,463,632 4,137,165 5,036,679
- --------------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENT SECURITIES 120,619,866 3,783,211 5,470,141
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $116,392,160 $3,443,192 $5,249,089
- --------------------------------------------------------------------------------------------------------------
</Table>
See accompanying notes to financial statements.
17
Needham Funds
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
<Table>
<Caption>
NEEDHAM
NEEDHAM AGGRESSIVE SMALL CAP
NEEDHAM GROWTH FUND GROWTH FUND GROWTH FUND
- -------------------------------------------------------------------------------------------------------------------------------
May 22,
Year Ended Year Ended Year Ended Year Ended Year Ended 2002 to
December 31, December 31, December 31, December 31, December 31, December 31,
2003 2002 2003 2002 2003 2002*
- -------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
- -------------------------------------------------------------------------------------------------------------------------------
Net Investment Loss $ (4,227,706) $ (3,495,249) $ (340,019) $ (279,802) $ (221,052) $ (44,995)
Net Realized Gain (Loss) on
Investment Securities and Warrants (2,903,611) (20,889,349) (353,954) (303,671) 433,462 (234,886)
Net Realized Loss on Option
Contracts (5,940,155) (12,040,211) -- -- -- --
Change in Unrealized Appreciation
(Depreciation) of Investment
Securities, Option Contracts,
Warrants and Securities Sold Short 129,463,632 (96,059,471) 4,137,165 (2,713,257) 5,036,679 40,890
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS 116,392,160 (132,484,280) 3,443,192 (3,296,730) 5,249,089 (238,991)
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM:
- -------------------------------------------------------------------------------------------------------------------------------
Net Investment Income -- -- -- -- -- --
Net Short-Term Gains -- -- -- (331,791) -- --
Net Long-Term Gains -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
Total Distributions -- -- -- (331,791) -- --
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1):
- -------------------------------------------------------------------------------------------------------------------------------
Shares Issued 123,340,785 287,588,143 2,984,396 7,278,012 36,534,339 6,613,950
Shares Issued in Reinvestment of
Distributions -- -- -- 326,978 -- --
Shares Redeemed (139,987,612) (238,916,071) (2,982,016) (2,881,089) (18,736,691) (1,806,164)
- -------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions (16,646,827) 48,672,072 2,380 4,723,901 17,797,648 4,807,786
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS 99,745,333 (83,812,208) 3,445,572 1,095,380 23,046,737 4,568,795
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
- -------------------------------------------------------------------------------------------------------------------------------
Beginning of Period 264,574,819 348,387,027 14,273,102 13,177,722 4,568,795 --
End of Period $ 364,320,152 $ 264,574,819 $17,718,674 $14,273,102 $ 27,615,532 $ 4,568,795
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
(1) SHARES ISSUED AND REDEEMED:
- -------------------------------------------------------------------------------------------------------------------------------
Number of Shares Issued 5,075,842 11,422,140 270,519 671,800 2,421,448 654,732
Number of Shares Reinvested -- -- -- 36,482 -- --
Number of Shares Redeemed (5,941,281) (10,682,668) (300,480) (312,737) (1,222,102) (214,584)
- -------------------------------------------------------------------------------------------------------------------------------
(865,439) 739,472 (29,961) 395,545 1,199,346 440,148
- -------------------------------------------------------------------------------------------------------------------------------
</Table>
* The Needham Small Cap Growth Fund commenced operations on May 22, 2002.
See accompanying notes to financial statements.
18
ANNUAL REPORT 2003
- --------------------------------------------------------------------------------
NEEDHAM GROWTH FUND
Financial Highlights
<Table>
<Caption>
Year Ended Year Ended Year Ended Year Ended Year Ended
(For a Share Outstanding December 31, December 31, December 31, December 31, December 31,
Throughout each Period) 2003 2002 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 19.92 $ 27.78 $ 24.77 $ 26.47 $ 17.27
- ----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) (0.38) (0.25) (0.29) (0.12) (0.03)
Net Realized and Unrealized Gains (Losses)
on Securities 9.81 (7.61) 3.30 2.57 12.55
- ----------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 9.43 (7.86) 3.01 2.45 12.52
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------------------------------------------------------------
Net Investment Income -- -- -- -- --
Net Realized Gains -- -- -- (4.15) (3.32)
- ----------------------------------------------------------------------------------------------------------------------------
Total Distributions -- -- -- (4.15) (3.32)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 29.35 $ 19.92 $ 27.78 $ 24.77 $ 26.47
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 47.34% (28.29)% 12.15% 7.40% 79.72%
- ----------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (thousands) $364,320 $264,575 $348,387 $76,070 $42,144
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ----------------------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 1.77% 1.75% 1.87% 2.19% 2.50%
Ratio of Expenses to Average Net Assets (excluding
waivers and reimbursement of expenses) 1.77% 1.75% 1.87% 2.19% 2.84%
Ratio of Net Investment Income (Loss) to Average
Net Assets (1.38)% (1.01)% (1.04)% (1.07)% (1.63)%
Ratio of Net Investment Income (Loss) to Average
Net Assets
(excluding waivers and reimbursement of
expenses) (1.38)% (1.01)% (1.04)% (1.07)% (1.97)%
Portfolio Turnover Rate 42% 78% 150% 187% 145%
</Table>
See accompanying notes to financial statements.
19
Needham Funds
- --------------------------------------------------------------------------------
NEEDHAM AGGRESSIVE GROWTH FUND
Financial Highlights
<Table>
<Caption>
Year Ended Year Ended September 4, to
(For a Share Outstanding December 31, December 31, December 31,
Throughout each Period) 2003 2002 2001**
- -------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 9.09 $ 11.23 $ 10.00
- -------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) (0.23) (0.17) (0.03)
Net Realized and Unrealized Gains (Losses) on Securities 2.65 (1.76) 1.26
- -------------------------------------------------------------------------------------------------------------
Total from Investment Operations 2.42 (1.93) 1.23
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- -------------------------------------------------------------------------------------------------------------
Net Investment Income -- -- --
Net Realized Gains -- (0.21) --
- -------------------------------------------------------------------------------------------------------------
Total Distributions -- (0.21) --
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.51 $ 9.09 $ 11.23
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
TOTAL RETURN 26.62% (17.15)% 12.30%#
- -------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (thousands) $17,719 $14,273 $13,178
- -------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- -------------------------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 2.50% 2.50% 2.50%*
Ratio of Expenses to Average Net Assets
(excluding waivers and reimbursement of expenses) 3.20% 2.77% 4.05%*
Ratio of Net Investment Income (Loss) to Average Net Assets (2.24)% (1.76)% (1.23)%*
Ratio of Net Investment Income (Loss) to Average Net Assets
(excluding waivers and reimbursement of expenses) (2.94)% (2.03)% (2.78)%*
Portfolio Turnover Rate 87% 58% 45%*
</Table>
* Annualized.
# Non-annualized.
**The Needham Aggressive Growth Fund commenced operations on September 4, 2001.
See accompanying notes to financial statements.
20
ANNUAL REPORT 2003
- --------------------------------------------------------------------------------
NEEDHAM SMALL CAP GROWTH FUND
Financial Highlights
<Table>
<Caption>
Year Ended May 22 to
(For a Share Outstanding December 31, December 31,
Throughout each Period) 2003 2002**
- ------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 10.38 $10.00
- ------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------------
Net Investment Income (Loss) (0.06) (0.10)
Net Realized and Unrealized Gains (Losses) on Securities 6.52 0.48
- ------------------------------------------------------------------------------------------
Total from Investment Operations 6.46 0.38
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------------------------
Net Investment Income -- --
Net Realized Gains -- --
- ------------------------------------------------------------------------------------------
Total Distributions -- --
- ------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 16.84 $10.38
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
TOTAL RETURN 62.24% 3.80%#
- ------------------------------------------------------------------------------------------
Net Assets, End of Period (thousands) $27,616 $4,569
- ------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------
Ratio of Expenses to Average Net Assets 2.26% 2.50%*
Ratio of Expenses to Average Net Assets
(excluding waivers and reimbursement of expenses) 3.24% 6.06%*
Ratio of Net Investment Income (Loss) to Average Net Assets (1.68)% (2.04)%*
Ratio of Net Investment Income (Loss) to Average Net Assets
(excluding waivers and reimbursement of expenses) (2.66)% (5.60)%*
Portfolio Turnover Rate 67% 107%*
</Table>
* Annualized.
# Non-annualized.
**The Needham Small Cap Growth Fund commenced operations on May 22, 2002.
See accompanying notes to financial statements.
21
Needham Funds
- --------------------------------------------------------------------------------
Notes to Financial Statements
1. ORGANIZATION
Needham Growth Fund ("NGF"), Needham Aggressive Growth Fund ("NAGF") and Needham
Small Cap Growth Fund ("NSCGF") or ("the Portfolios"), are portfolios of The
Needham Funds, Inc. (the "Fund"), which is registered under the Investment
Company Act of 1940 as a non-diversified, open-end management investment
company. The Fund was organized as a Maryland corporation on October 12, 1995.
2. SIGNIFICANT ACCOUNTING POLICIES
Security Valuation: Investments in securities (including options) listed or
traded on a nationally recognized securities exchange are valued at the last
quoted sales price on the date the valuations are made. Portfolio securities and
options positions for which market quotations are readily available are stated
at the Nasdaq Official Closing Price or the last sale price reported by the
principal exchange for each such security as of the exchange's close of
business, as applicable. Securities and options for which no sale has taken
place during the day and securities which are not listed on an exchange are
valued at the mean of the current closing bid and asked prices. All other
securities and assets for which market quotations are not readily available are
valued at their fair value as determined in good faith by the Board of
Directors, although the actual calculations may be made by persons acting
pursuant to the direction of the Board of Directors. The assets of each
Portfolio may also be valued on the basis of valuations provided by a pricing
service approved by or on behalf of the Board of Directors.
Other: Security transactions are accounted for on the date the securities are
purchased or sold. The cost (proceeds) of investments sold (bought to cover) is
determined on a specific identification basis for the purpose of determining
gains or losses on sales and buys to cover short positions. Dividend income and
distributions to shareholders are recorded on the ex-dividend date. Interest
income is recorded on an accrual basis.
Use of Estimates: The preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates and those differences could be material.
3. INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES
The Fund has engaged Needham Investment Management L.L.C. (the "Adviser") to
manage its investments. The Fund pays the Adviser a fee at the annual rate of
1.25% of the average daily net asset value of each Portfolio.
The Adviser has voluntarily agreed to waive its fee for, and to reimburse
expenses of, each Portfolio in an amount that limits annual operating expenses
for each Portfolio for the year ended December 31, 2003 to not more than 2.50%
of average daily net assets of each Portfolio. For the year ended December 31,
2003, the Adviser waived advisory fees in the amount of $106,094 and $128,560
for NAGF and NSCGF, respectively. The Adviser also waived an additional $31,000
of advisory fees for NSCGF during the year ended December 31, 2003. The Adviser
waived none of its fees for NGF during the year ended December 31, 2003.
PFPC Inc. ("PFPC") acts as the Fund's Administrator. The Fund pays PFPC a fee at
the annual rate of 0.10% of the average daily net asset value of each Portfolio,
subject to certain minimums. PFPC also acts as the Fund's shareholder servicing
agent and transfer agent.
Certain officers and directors of the Fund are also officers and directors of
the Adviser.
4. FEDERAL INCOME TAXES
No provision for federal income taxes is required since the Fund intends to
continue to qualify as a regulated investment company under Subchapter M of the
Internal Revenue Code and distribute substantially all of its taxable income and
capital gains to shareholders. Because income tax regulations differ from
generally accepted accounting principles, the timing and character of income and
capital gain distributions determined in accordance with tax regulations can
differ from income and capital gains recognized for financial reporting
purposes. Accordingly, the character of distributions and the composition of net
assets for tax purposes can differ from those reflected in the financial
statements. These book/tax differences may be temporary or permanent in nature.
To the extent these differences are permanent, they are charged or credited to
paid-in capital, accumulated net realized gain (loss) or accumulated net
investment income (loss), as appropriate, in the period the differences arise.
These reclassifications have no effect on net assets or net asset value per
share of each portfolio.
As of December 31, 2003, the components of distributable earnings (loss) on a
tax basis were as follows:
<Table>
<Caption>
NGF NAGF NSCGF
- -------------------------------------------------------------
Undistributed
ordinary income -- -- --
Undistributed long-
term capital gains -- -- $ 68,462
Accumulated capital
and other losses $(52,982,601) $ (657,625) --
Unrealized
appreciation/
(depreciation) 55,275,257 2,301,481 5,032,716
- -------------------------------------------------------------
Total accumulated
earnings $ 2,292,656 $1,643,856 $5,101,178
- -------------------------------------------------------------
</Table>
During the year ended December 31, 2003, NGF, NAGF and NSCGF each reclassified
the current year's accumulated net investment loss to paid-in capital, in the
amounts of
22
Notes to Financial Statements (Continued)
ANNUAL REPORT 2003
- --------------------------------------------------------------------------------
$4,227,706, $340,019 and $46,085, respectively. NSCGF also reclassified $174,967
from accumulated net investment loss to accumulated net realized gains.
At December 31, 2003, gross unrealized appreciation and depreciation for federal
income tax purposes of investment securities (excluding short positions and
written options) was in the following approximate amounts:
<Table>
<Caption>
Gross Gross
Unrealized Unrealized
Appreciation Depreciation Net
- ----------------------------------------------------------------
Needham Growth Fund $82,140,863 $(16,311,101) $65,829,762
Needham Aggressive
Growth Fund 2,990,358 (257,576) 2,732,782
Needham Small Cap
Growth Fund 5,245,606 (152,350) 5,093,256
- ----------------------------------------------------------------
</Table>
At December 31, 2003, the Portfolios had capital loss carryforwards for federal
income tax purposes in the following approximate amounts:
<Table>
<Caption>
Expires on December 31,
- ---------------------------------------------------------------------------
2009 2010 2011 Total
- ---------------------------------------------------------------------------
Needham Growth Fund $1,284,000 $39,319,000 $12,380,000 $52,983,000
Needham Aggressive
Growth Fund -- 173,000 485,000 658,000
- ---------------------------------------------------------------------------
</Table>
NSCGF utilized capital loss carryforwards in the amount of $18,000 during the
year ended December 31, 2003.
5. TEMPORARY BORROWINGS
The Fund has entered into an agreement with the Custodial Trust Company for
temporary borrowing purposes, including the meeting of redemption requests that
otherwise might require the untimely disposition of securities. Interest is
calculated daily based on the Federal Funds Rate plus one percent. The Fund may
borrow from banks up to 25% of its total assets and may pledge its assets in
connection with these borrowings, provided that no additional investments shall
be made while borrowings exceed 5% of total assets. During the year ended
December 31, 2003, borrowings were as follows:
<Table>
<Caption>
Maximum
Weighted Weighted Amount
Average Average Number of Interest Borrowed
Interest Loan Days Expense During the
Rate Balance Outstanding Incurred Period
- ----------------------------------------------------------------------------------
Needham Growth Fund 2.26% $1,784,718 39 $4,303 $3,000,000
Needham Small Cap
Growth Fund 2.24% $ 214,706 17 $ 228 $ 400,000
- ----------------------------------------------------------------------------------
</Table>
NAGF did not have any borrowings during the year ended December 31, 2003. There
were no outstanding borrowings by the Fund at December 31, 2003.
6. DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940. Under the plan, each Portfolio pays Needham &
Company, Inc. and any other distributor or financial institution with which the
Fund has an agreement with respect to each Portfolio, a fee at an annual rate of
0.25 of 1% of each Portfolio's daily average net assets. For the year ended
December 31, 2003, NGF, NAGF and NSCGF incurred distribution fees in the amount
of $764,981, $37,962 and $32,799, respectively. For the year ended December 31,
2003, NGF, NAGF and NSCGF each paid 12b-1 fees to Needham & Company, Inc. in the
amount of $159,084, $25,643 and $9,311, respectively.
7. INVESTMENT TRANSACTIONS
The following summarizes the aggregate amount of purchases and sales of
investment securities and securities sold short, excluding short-term
securities, during the year ended December 31, 2003.
<Table>
<Caption>
Purchases Sales
- ---------------------------------------------------------
NEEDHAM GROWTH FUND
Long transactions $113,653,195 $190,756,092
Short sale transactions 225,759,426 204,534,506
- ---------------------------------------------------------
Total $339,412,621 $395,290,598
- ---------------------------------------------------------
- ---------------------------------------------------------
NEEDHAM AGGRESSIVE GROWTH FUND
Long transactions $ 10,465,355 $ 12,252,508
Short sale transactions 2,214,026 1,710,714
- ---------------------------------------------------------
Total $ 12,679,381 $ 13,963,222
- ---------------------------------------------------------
- ---------------------------------------------------------
NEEDHAM SMALL CAP GROWTH FUND
Long transactions $ 20,414,737 $ 5,898,453
Short sale transactions 2,284,555 3,196,465
- ---------------------------------------------------------
Total $ 22,699,292 $ 9,094,918
- ---------------------------------------------------------
</Table>
During the year ended December 31, 2003, NGF, NAGF and NSCGF each incurred and
paid brokerage commissions to Needham & Company, Inc. in the amount of $332,917,
$15,946 and $30,250, respectively.
8. OPTION TRANSACTIONS
The Fund may invest in options contracts to reduce the Portfolios' exposure to
fluctuations in the prices of portfolio securities and to prevent losses if the
prices of such securities decline. Similarly, such investments may protect the
Portfolios against fluctuations in the value of securities in which the
Portfolios are about to invest.
The Portfolios may write call and put options on securities they own or have the
right to acquire, and may purchase put and call options on individual securities
and indices written by others. Put and call options give the holder the right to
23
Notes to Financial Statements (Continued)
Needham Funds
- --------------------------------------------------------------------------------
sell or purchase, respectively, a specified amount of a security at a specified
price on a certain date.
The Portfolios are subject to market risk associated with changes in the value
of the underlying financial instrument, as well as the risk of loss of
appreciation if a counterparty fails to perform. For exchange-traded contracts,
the exchange acts as the counterparty to specific transactions, and therefore,
bears the risk of delivery to and from counterparties of specific positions.
Put and call options purchased are accounted for in the same manner as portfolio
securities. The cost of securities acquired through the exercise of call options
is increased by the premium paid. The proceeds from securities sold through the
exercise of put options are decreased by the premiums paid. Options on stock
indices differ from options on securities in that the exercise of an option on a
stock index does not involve delivery of the actual underlying security and is
settled in cash only. Call and put options purchased at December 31, 2003 and
their related market values are included in the accompanying Schedules of
Investments.
When a Portfolio writes an option, the premium received by the Portfolio is
recorded as a liability and is subsequently adjusted to the current market value
of the option written. Premiums received from writing options which have expired
are recorded by the Portfolio on the expiration date as realized gains from
option transactions. When a Portfolio enters into a closing purchase
transaction, the Portfolio realizes a gain or loss equal to the difference
between the cost of a closing purchase transaction and the premium received when
the option was written. If a written call option is exercised, the premium
received is added to the proceeds from the sale of the underlying security in
determining whether the Portfolio has a realized gain or loss. If a written put
option is exercised, the premium received reduces the cost basis of the
securities purchased. In writing an option, the Portfolio bears the market risk
of an unfavorable change in the price of the security underlying the written
option.
A summary of options written by NGF for the year ended December 31, 2003 is as
follows:
<Table>
<Caption>
Number of Premium
Options Written Contracts Received
- ---------------------------------------------------------
Options outstanding at beginning
of period 4,087 $1,099,498
Options written -- --
Options repurchased (2,337) (685,019)
Options expired (1,000) (167,995)
Options exercised (250) (87,739)
- ---------------------------------------------------------
Options outstanding at December
31, 2003 500 $ 158,745
- ---------------------------------------------------------
</Table>
In the normal course of business, certain of the Portfolios will trade and hold
certain fair-valued derivative contracts which constitute guarantees under
Financial Accounting Standards Board Interpretation 45. Such contracts include
written options where the Portfolios would be obligated to purchase or sell a
specified security at a specified price if the option is exercised by the
counterparty. The maximum payouts for these contracts are limited to the number
of contracts written and the related strike price. At December 31, 2003, NGF had
a maximum payout amount of $500,000 relating to a written put option contract
which expires in January 2004. The maximum payout amount could be offset by the
subsequent sale of assets obtained via the execution of a payout event. The fair
value of this contract as of December 31, 2003 is $2,500 and is included on the
statement of assets and liabilities.
Neither NAGF or NSCGF had purchased or written options during the year ended
December 31, 2003.
9. SHORT SALE TRANSACTIONS
During the year ended December 31, 2003, the Portfolios sold securities short.
Upon selling a security short, the Portfolios record a receivable for the
settlement amount and a corresponding liability, which is marked-to-market to
reflect current value. Securities owned by the Portfolios are segregated as
collateral while the short sales are outstanding. At December 31, 2003, the
market value of securities separately segregated to cover short positions was
approximately $111,782,000, $2,044,000 and $2,303,000 for NGF, NAGF and NSCGF,
respectively. Securities sold short at December 31, 2003 and their related
market values and proceeds are set forth in the accompanying Schedules of
Securities Sold Short.
10. FINANCIAL INSTRUMENTS
The Fund has always maintained a policy of valuing its securities positions and
derivative instruments at market values or estimated fair values and of
including any realized or unrealized gains or losses in income.
In the normal course of its business, the Portfolios may trade various financial
instruments with off-balance sheet risk. These financial instruments include
securities sold short and exchange traded options. Generally, these financial
instruments represent future commitments to purchase or sell other financial
instruments at specific terms at specified future dates. Each of these financial
instruments contains varying degrees of off-balance sheet risk whereby changes
in the market values of the securities underlying the financial instruments may
be in excess of the amounts recognized in the financial statements.
Securities sold short represent obligations of the Portfolios to make future
delivery of specific securities and, correspondingly, create an obligation to
purchase the securities at market prices prevailing at a later delivery date (or
to deliver the securities if already owned by the Portfolios). As a result,
short sales create the risk that the Portfolios' ultimate obligation to satisfy
the delivery requirements may exceed the amount of the proceeds initially
received on the liability recorded in the financial statements.
24
ANNUAL REPORT 2003
- --------------------------------------------------------------------------------
REPORT OF ERNST & YOUNG, LLP INDEPENDENT AUDITORS
To the Shareholders and Board of Directors of
The Needham Funds, Inc.:
We have audited the accompanying statements of assets and liabilities, including
the schedules of investments and securities sold short, of The Needham Funds,
Inc., (the "Fund") (comprising Needham Growth Fund, Needham Aggressive Growth
Fund and Needham Small Cap Growth Fund), as of December 31, 2003, and the
related statements of operations for the year then ended and the statements of
changes in net assets and financial highlights for each of the two years in the
period then ended. The 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. The financial highlights for each of the three periods ended December
31, 2001, 2000 and 1999 were audited by other auditors who have ceased
operations. Those auditors expressed an unqualified opinion on those financial
highlights in their report dated February 21, 2002.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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, 2003, 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 each
of the portfolios of The Needham Funds, Inc. at December 31, 2003, the results
of their operations for the year then ended, and the changes in their net assets
and financial highlights for each of the two years in the period then ended, in
conformity with accounting principles generally accepted in the United States.
[Ernst & Young Signature]
New York, New York
February 18, 2004
25
Needham Funds
- --------------------------------------------------------------------------------
FUND MANAGEMENT
Information pertaining to the Directors and officers of the Fund is
set forth below. The Statement of Additional Information (SAI) includes
additional information about the Directors and is available upon
request, without charge, by calling 1-(800)625-7071.
The address of each individual is 445 Park Avenue, New York, New
York 10022-2606. Each director serves until the next annual or special
shareholders meeting or until his successor is elected and qualified.
There is no stated term of office for Directors.
<Table>
<Caption>
NAME, AGE AND POSITION PORTFOLIOS IN THE
WITH THE FUND LENGTH OF FUND COMPLEX PRINCIPAL OCCUPATION(S)
TERM SERVED BY OVERSEEN BY DURING PAST 5 YEARS AND OTHER
DIRECTOR/OFFICER DIRECTOR/OFFICER DIRECTORSHIPS HELD BY DIRECTOR/OFFICER
DISINTERESTED DIRECTORS
Roger W. Johnson, 69, Since 1996. Three Chief Executive Officer & Chairman, Roger W.
Director Johnson and Associates, Director of Sypris
Solutions, Inc., Maxtor Corporation, Insulectro,
and Computer Access Technology Corporation.
Former CEO and Chairman, Collectors Universe
Inc. (a service provider in the collectibles
market) from 2001 to 2002.
James P. Poitras, 61, Since 1996. Three Currently retired. Chairman of Kyma
Director Technologies, Inc. (a specialty materials
semiconductor company) since 2001, Director
since 2000. Founder, Chairman, President and
Chief Executive Officer of Integrated Silicon
Systems (a computer software company) from 1985
to 1995.
F. Randall Smith, 65, Since 1996. Three Founder and Chief Executive Officer of Capital
Director Counsel LLC (a registered investment adviser)
since September 1999; Co-Founder and Managing
Partner of Train, Smith Counsel (a registered
investment adviser) from 1975 to 1999.
INTERESTED DIRECTORS
George A. Needham, 61, Since 1996. Three Chairman of the Board (since 1996), and Chief
Chairman & Director Executive Officer, Needham & Company, Inc. since
1985.
John C. Michaelson, 50, Since 1996. Three President & Chief Executive Officer, Needham
President & Director Investment Management, L.L.C. since January
1997. Managing Director of Needham & Company.
OFFICERS
James K. Kloppenburg, 48, Since 2001. Two Executive Vice-President of Needham Investment
Executive Vice-President, Management, L.L.C., Managing Director of Needham
Needham Aggressive Growth Fund & Company, since April 2001. Managing Director,
Needham Growth Fund Hambrecht & Quist, 1995 to 2001.
Vincent E. Gallagher, 60, Since Two Executive Vice-President of Needham Investment
Executive Vice-President May 2002. Management, L.L.C., Managing Director of Needham
Needham Small Cap Growth Fund & Company, since February 2002. Managing
Needham Growth Fund Director of Gerard Klauer Mattison, June 2000 to
February 2002. Managing Director of Needham &
Company, 1993 to 2000.
Glen Albanese, 32, Since 1998. Three Managing Director and Chief Financial Officer of
Treasurer and Secretary Needham & Company since January 2000. CFO of
Needham Asset Management since 1997.
</Table>
Messrs. Needham, Michaelson, Kloppenburg, Gallagher and Albanese are
deemed to be "interested persons", as defined in the Investment Company
Act of 1940, because of their affiliation with the Fund's investment
adviser, Needham Investment Management L.L.C. and/or because they are
officers of the Fund and may be deemed to be an "affiliated person" of
Needham Investment Management L.L.C. and of Needham & Co., Inc.
VOTING PROXIES ON FUND PORTFOLIO SECURITIES
A description of the policies and procedures that the Fund uses to
determine how to vote proxies relating to securities held in the Fund's
portfolio is available, without charge and upon request, by calling
1-212-705-0318. Information regarding how the investment adviser votes
these proxies will become available from the EDGAR database on the SEC's
Internet site at http://www.sec.gov when the Fund files its first report
on Form N-PX, which is due by August 31, 2004, covering the Funds' proxy
voting record for the 12-month period ending June 30, 2004.
26
(NEEDHAM FUNDS LOGO)
445 Park Avenue
New York, New York 10022-2606
1-800-625-7071
Investment Adviser:
Needham Investment Management L.L.C.
445 Park Avenue
New York, NY 10022-2606
President
John C. Michaelson
Executive Vice Presidents
and Portfolio Managers
Vincent E. Gallagher
Needham Growth Fund
Needham Small Cap Growth Fund
James K. Kloppenburg
Needham Growth Fund
Needham Aggressive Growth Fund
Directors
George A. Needham
John C. Michaelson
Roger W. Johnson
James P. Poitras
F. Randall Smith
Distributor:
Needham & Company, Inc.
445 Park Avenue
New York, NY 10022-2606
212-371-8300
Administrator, Shareholder Servicing
Agent and Transfer Agent:
PFPC Inc.
301 Bellevue Parkway
Wilmington, DE 19809
1-800-625-7071
Custodian:
PFPC Trust Company
8800 Tinicum Boulevard
3rd Floor Suite 200
Philadelphia, PA 19153
Counsel:
Fulbright & Jaworski L.L.P
666 Fifth Avenue
New York, NY 10103
Independent Anditors:
Ernst & Young LLP
5 Times Square
New York, NY 10036
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to the registrant's
principal executive officer and principal financial officer. The registrant has
not made any amendments to its code of ethics during the covered period. The
registrant has not granted any waivers from any provisions of the code of ethics
during the covered period. The registrant undertakes to provide to any person
without charge, upon request, a copy of its code of ethics by mail when they
call the registrant at (212) 705-0364.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's board of directors has determined that there is at least one
audit committee financial expert serving on its audit committee. F. Randall
Smith is an audit committee financial expert and is considered to be
independent.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees The registrant paid the following amounts to Ernst & Young
LLP, the registrant's principal accountant, for the audit of the registrant's
annual financial statements and services in connection therewith for the last
two fiscal years:
2002 2003
---- ----
$88,000 $98,000
(b) Not applicable.
(c) Tax Fees The registrant paid the following amounts to Ernst & Young
LLP, the registrant's principal accountant, for the preparation of tax returns,
tax consultation, research and related items for the last two fiscal years:
2002 2003
---- ----
$15,500 $14,400
(d) Not applicable.
(e) Before Ernst & Young LLP, the registrant's principal accountant, is
engaged by the Fund or its affiliates to render audit or non-audit services, the
engagement is approved by the Fund's audit committee.
(f) Not applicable.
(g) The following table indicates the aggregate non-audit fees billed by
the registrant's accountant for services rendered to the registrant, and
rendered to the registrant's
investment adviser (not including any sub-adviser whose role is primarily
portfolio management and is subcontracted with or overseen by another investment
adviser), and any entity controlling, controlled by, or under common control
with the adviser that provides ongoing services to the registrant for each of
the last two fiscal years of the registrant.
2002 2003
---- ----
$32,500 $12,950
(h) Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. (RESERVED)
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 10. CONTROLS AND PROCEDURES.
(a) The certifying officers, whose certifications are included herewith,
have concluded that the registrant's disclosure controls and procedures (as
defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the "Act")
are effective as of a date within 90 days of the filing date of the report that
includes the disclosure required by this paragraph, based on the evaluation of
these controls and procedures required by Rule 30a-3(b) under the Act.
There were no significant changes in the registrant's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of our evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred
during the registrant's second fiscal half-year that has materially affected, or
is reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 11. EXHIBITS.
File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(a) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant intends to
satisfy the Item 2 requirements through the filing of an exhibit: Not
applicable.
(b) Separate certifications for the principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2 under
the Investment Company Act of 1940, as amended (17 CFR 270.30a-2) are filed
herewith.
(c) Separate certifications for the principal executive officer and
principal financial officer of the registrant as required by Section 906 of the
Sarbanes-Oxley Act of 2002 are filed herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
The Needham Funds, Inc.
By: /s/ John C. Michaelson
________________________________________
Name: John C. Michaelson
Title: President (Principal Executive
Officer)
Date: March 10, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ John C. Michaelson
________________________________________
Name: John C. Michaelson
Title: President (Principal Executive
Officer)
Date: March 10, 2004
By: /s/ Glen W. Albanese
________________________________________
Name: Glen W. Albanese
Title: Treasurer and Secretary
(Principal Financial and
Accounting Officer)
Date: March 10, 2004