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
Date of reporting period: June 30, 2004
ITEM 1. REPORTS TO STOCKHOLDERS.
Semiannual
Report
Needham Funds
Seeking to build wealth for long-term investors.
Six Months Ended June 30, 2004
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
Semiannual Report
For the Six Months Ended June 30, 2004
(Unaudited)
CONTENTS
<Table>
LETTER FROM THE ADVISER 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
VOTING PROXIES ON FUND PORTFOLIO SECURITIES 25
</Table>
Needham Funds SEMIANNUAL REPORT 2004
- --------------------------------------------------------------------------------
Dear Shareholders,
We at The Needham Funds, Inc. focus on buying growth stocks at reasonable
prices. In the volatile six-month period we have just experienced, we are
pleased that each of the funds was in positive territory for our investors.
During the six months ended June 30, 2004, the Growth Fund appreciated 3.10%,
the Aggressive Growth Fund appreciated 2.69% and the Small Cap Growth Fund
appreciated 7.01%. By comparison, the S&P 500 Index appreciated 3.44%, the
NASDAQ Composite Index appreciated 2.43% and the Russell 2000 Index appreciated
6.80%. Since June 30, the S&P 500 Index is down 6.61%, the NASDAQ Composite
Index is down 14.38% and the Russell 2000 Index is down 12.47% through August
12. The Funds' performance has suffered accordingly.
The Needham Growth Fund (the "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 Growth Fund's performance for the six-month period was in line with the rest
of the markets. However, we are not satisfied with a 3.10% return. Our cash
(3.52%) and short positions (7.91%) were not enough to offset the pressure on
our long portfolio. One of our key sectors, technology, was not treated well in
these markets. Our concentration in technology at 42.79% is high, and we are
continuing to reduce this sector throughout 2004 but only on a targeted basis.
Our best performing stocks were Ceradyne, Inc., Motorola, Inc., Harris Corp. and
Scientific-Atlanta, Inc.
The Needham Aggressive Growth Fund (the "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 Aggressive Growth Fund's performance was affected by our hedging and
shorting, which was a negative factor. The healthcare, consumer and business
services segments were the strongest for the Aggressive Growth Fund over the
past six months. The technology sector produced mixed results, and the media
sector had a small negative contribution. The Aggressive Growth Fund
particularly benefited from Biogen Idec, Inc., Rogers Corp., Autodesk, Inc. and
Hyperion Solutions Corp.
1
Needham Funds
- --------------------------------------------------------------------------------
The Needham Small Cap Growth Fund (the "Small Cap Growth Fund") seeks long-term,
tax-efficient capital appreciation by investing primarily in equity securities
of smaller growth companies that the Small Cap Growth 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 valuation discipline that
seeks to acquire growth companies at reasonable prices. The Small Cap Growth
Fund seeks tax efficiency by holding securities for a period of 12 months or
more to obtain long-term capital gain treatment and by offsetting capital gains
on the sale of securities with capital losses.
We were able to do better in the second quarter than the first, mainly due to a
rally at the end of June. We had reduced the short position down to 1.25% and
cash ended at 13.36%. The long positions of the Small Cap Growth Fund are
balanced appropriately in four sectors of our expertise. The Small Cap Growth
Fund benefited from several good performers: Eon Labs, Inc., First Horizon
Pharmaceutical, Bright Horizons Family Solutions and Ceradyne, Inc.
The portfolio turnover rate was 17.79% for the Growth Fund, 60.64% for the
Aggressive Growth Fund and 63.45% for the Small Cap Growth Fund for the six
months ended June 30, 2004. The expense ratios for the three funds were 1.74%
for the Growth Fund, 2.50% for the Aggressive Growth Fund and 2.50% for the
Small Cap Growth Fund for the six months ended June 30, 2004.
We think that the current economic trends still favor an up stock market in 2004
but the road is looking increasingly bumpy, given high equity valuations, the
presidential race, ballooning trade and fiscal budget deficits, and continued
political and military uncertainty in Iraq. One improving trend in the last four
months has been U.S. job growth, but the market appears to be focused on the
negatives and the summer doldrums have not helped. With that said, we are
hopeful that there will be a bounce either before or right after the elections
when investors realize that we have survived far worse market conditions and,
whether the press accepts it or not, corporate America is continuing to grow at
a modest but sustainable rate, which should bode well for the rest of 2004 and
beyond.
Sincerely,
<Table>
- -s- Vincent E. Gallagher -s- James K. Kloppenburg
Vincent E. Gallagher James K. Kloppenburg
Portfolio Manager Portfolio Manager
</Table>
2
SEMIANNUAL REPORT 2004
- --------------------------------------------------------------------------------
NEEDHAM GROWTH FUND TICKER: NEEGX
COMPARATIVE PERFORMANCE STATISTICS
<Table>
<Caption>
---------------------------------------------------------------------------------------------------------------------------
3 5
BENCHMARKS 6 MONTHS(11) 1 YEAR(12) YEARS(6)(13) YEARS(6)(14) SINCE INCEPTION(6)
--------------------------------- ------ ------ ------- ------- ------
Needham Growth Fund(1) 3.10% 26.19% 1.13%(7) 13.48%(8) 20.73%(9)(10)
NASDAQ Composite Index(2) 2.43% 26.70% (1.35%) (4.94%) 8.52%
S&P 500 Index(3) 3.44% 19.05% (0.69%) (2.20%) 9.23%
S&P 400 Midcap Index(4) 6.08% 27.90% 6.56% 9.03% 14.19%
Russell 2000 Index(5) 6.80% 33.32% 6.31% 6.72% 9.15%
</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 and 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 composed of the smallest
2,000 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 3.42%, assuming all dividends were
reinvested in shares of the Fund.
8. Total return for the five years was 88.19%, assuming all dividends were
reinvested in shares of the Fund.
9. Total return since inception was 395.39%, assuming all dividends were
reinvested in shares of the Fund.
10. The inception date of the Fund was 1/1/96. 1/1/96-6/30/04 (annualized
return).
11. 1/1/04-6/30/04.
12. 7/1/03-6/30/04.
13. 7/1/01-6/30/04 (annualized return).
14. 7/1/99-6/30/04 (annualized return).
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 JUNE 30, 2004)
<Table>
<Caption>
- ----------------------------------------------------------
SECURITY
- ----------------------------------------- % OF
TOTAL
INVESTMENTS+
-----
1) Ceradyne, Inc. CRDN 4.39%
2) National Semiconductor Corp. NSM 3.57%
3) Talisman Energy, Inc. TLM 3.39%
4) Motorola, Inc. MOT 3.37%
5) Scientific-Atlanta, Inc. SFA 3.06%
6) Seagate Technology Holdings STX 2.88%
7) Thermo Electron Corp. TMO 2.36%
8) Comcast Corp. Class A CMCSA 2.07%
9) ConMed Corp. CNMD 2.02%
10) Lucent Technologies LU 1.99%
</Table>
<Table>
<Caption>
- ----------------------------------------------------------
TOP TEN HOLDINGS = 29.10% 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 JUNE 30, 2004)
<Table>
<Caption>
----------------------------------------------------------------------
SECTOR LONG(1) (SHORT)(1) TOTAL(1)(2)
-------------------------------------- ------ ------- --------
Healthcare/Medical Devices/
Pharmaceuticals 17.73% -- 17.73%
Media/Leisure/Cable/Entertainment 10.53% -- 10.53%
Energy/Industrial/Metals 17.96% (1.93)% 16.03%
Consumer/Business Services/Financial 8.85% (1.09)% 7.76%
Technology & Telecommunications 47.68% (4.89)% 42.79%
Miscellaneous 1.64% -- 1.64%
Cash & Fixed Income Investments 3.52% -- 3.52%
(1) Percentage of total investments includes all stocks, fixed income
securities 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
-------------- --------------- ------------- -------------- ------------
Jan-96 10850 10014 10260 10106 9962
12160 10472 10424 10538 10287
12570 10404 10455 10574 10481
13530 11246 10609 10898 11045
14430 11746 10883 11045 11489
Jun-96 14150 11194 10924 10879 11020
13800 10207 10442 10145 10058
14320 10783 10662 10731 10643
15070 11589 11262 11199 11058
15000 11538 11573 11231 10886
15281 12210 12448 11863 11333
Dec-96 15156 12195 12201 11877 11624
15752 13034 12963 12322 11854
15836 12365 13065 12221 11567
15909 11738 13082 12094 11241
15951 11742 12755 11772 10976
16662 13607 14173 13271 12465
Jun-97 16923 13982 14844 13685 12869
17886 15263 15719 14659 13402
18064 15441 15091 14976 13909
18600 16369 15882 15752 14761
17944 15512 15386 15147 14261
17754 15585 16098 15372 14164
Dec-97 17529 14723 15794 15339 13900
17893 15781 16555 15664 14199
19376 17259 17749 16961 15264
18732 17785 18551 17654 15787
19279 18231 18774 17688 15902
18769 17360 18522 17237 15135
Jun-98 19461 18251 19261 17221 14940
18732 18285 19069 16672 13938
15025 16017 17502 14475 11919
16666 17038 17824 15099 12277
18503 17316 18769 16160 12601
18649 19717 20397 17421 13411
Dec-98 21009 21157 20996 17788 13539
21945 24515 21934 18276 14279
20668 22391 21253 17319 13128
21714 23682 22036 17652 13197
22481 24900 22959 19207 14524
24001 24198 22417 19291 14738
Jun-99 26325 25010 22666 19691 14901
27176 25858 22922 19888 14975
27760 27043 23287 19445 14578
27590 26866 22083 18700 14072
26252 29090 23621 19316 14313
30610 33817 24577 20596 15345
Dec-99 37757 39924 25520 21537 16904
38784 38139 24234 20927 16626
49482 45046 23775 22391 19373
46229 44880 26100 24264 18099
45987 37894 25315 23415 17010
42335 31464 24795 23126 16017
Jun-00 47171 38942 25407 23466 17417
45659 35968 25010 23837 16873
52620 39702 26562 26497 18153
50052 36077 25160 26316 17615
48137 32205 25054 25423 16830
41861 28536 23080 23505 15103
Dec-00 40552 24281 23193 25303 16408
49540 27338 23786 25755 17138
44000 22244 21895 24755 16430
41207 18100 20417 22872 15530
45529 20419 22066 25222 16697
46151 22149 22532 26549 17568
Jun-01 47902 21273 21612 25880 17836
45807 19974 21303 25493 16810
43237 17779 20060 24661 16261
38063 14766 18441 21594 14075
41141 17429 19582 23358 15261
34153 19027 20233 24228 16054
Dec-01 45479 19593 20641 25774 17225
45414 19108 20141 25023 16635
43466 16778 19752 25053 16209
46360 17889 20495 26844 17512
43809 16369 19253 26719 17671
41681 15671 19112 26268 16888
Jun-02 37146 14197 17751 24346 16048
32513 12891 16367 21987 13625
32219 12765 16475 22098 13590
28764 11384 14686 20318 12615
30696 12919 15977 21198 13018
35427 14371 16917 22423 14179
Dec-02 32611 12986 15923 21502 13391
32448 12850 15507 20874 13025
32300 13023 15274 20376 12631
31760 13065 15422 20548 12794
33954 14268 16692 22038 14006
38407 15555 17570 23864 15508
Jun-03 39258 15823 17795 24168 15790
42025 16921 18108 25026 16777
44546 17663 18461 26159 17546
44841 17440 18265 25759 17273
47182 18873 19298 27706 18668
48279 19154 19467 28671 19331
Dec-03 48050 19584 20488 29155 19725
50865 20202 20864 29786 20583
50309 19856 21154 30502 20768
49114 19515 20835 30631 20961
46985 18794 20508 29626 19892
48246 19456 20789 30240 20212
Jun-04 49539 20061 21193 30927 21000
</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(8) 1 YEAR(9) INCEPTION(5)
------------------------------------------------------------ ------ ------ ------
Needham Aggressive Growth Fund(1) 2.69% 16.45% 6.99%(6)(7)
S&P 500 Index(2) 3.44% 19.05% 2.98%
NASDAQ Composite Index(3) 2.43% 26.70% 6.81%
Russell 2000 Index(4) 6.80% 33.32% 11.52%
</Table>
1. Investment results calculated after reinvestment of dividends.
2. The S&P 500 Index is a broad unmanaged measure of the U.S. stock market.
3. The NASDAQ Composite Index is a broad-based capitalization-weighted index of
all NASDAQ National Market and Small Cap stocks.
4. The Russell 2000 Index is a broad unmanaged index composed of the smallest
2,000 companies in the Russell 3000 Index.
5. Compound annual growth rate. Assumes all dividends are reinvested in shares
of the Fund.
6. Total cumulative return since inception was 20.99% assuming all dividends
were reinvested in shares of the Fund.
7. The inception date of the Fund was 9/4/01. 9/4/01-6/30/04 (annualized
return).
8. 1/1/04-6/30/04.
9. 7/1/03-6/30/04.
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 JUNE 30, 2004)
<Table>
<Caption>
- ----------------------------------------------------------
SECURITY
- ------------------------------------ % OF TOTAL
INVESTMENTS+
------
1) Hyperion Solutions Corp. HYSL 3.02%
2) Rogers Corp. ROG 3.02%
3) Iron Mountain, Inc. IRM 2.78%
4) Express Scripts, Inc. ESRX 2.74%
5) Biogen Idec, Inc. BIIB 2.73%
6) ChoicePoint, Inc. CPS 2.63%
7) JetBlue Airways JBLU 2.54%
8) Precision Castparts Corp. PCP 2.52%
9) Autodesk, Inc. ADSK 2.47%
10) Affiliated Computer Services,
Inc. ACS 2.44%
TOP TEN HOLDINGS = 26.89% 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 JUNE 30, 2004)
<Table>
<Caption>
----------------------------------------------------------------
SECTOR LONG(1) (SHORT)(1) TOTAL(1)(2)
-------------------------------- ------ ------- -------
Healthcare/Medical Devices/
Pharmaceuticals 16.90% (0.40)% 16.50%
Media/Leisure/Cable/
Entertainment 4.74% -- 4.74%
Energy/Industrial/Metals 5.62% -- 5.62%
Consumer/Business Services/
Financial 27.88% -- 27.88%
Technology & Telecommunications 30.26% (3.82)% 26.44%
Miscellaneous 0.02% -- 0.02%
Cash & Fixed Income Investments 18.80% -- 18.80%
(1) Percentage of total investments includes all stocks, fixed
income securities 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
------------------ ------------- ---------------- ------------------
Sep-01 10000 10000 10000 10000
10120 9373 9549 9191
10780 10092 10910 9903
Dec-01 11230 10180 11026 10515
11040 10032 10937 10407
10770 9838 9794 10122
11290 10208 10442 10936
11110 9589 9555 10350
10870 9519 9147 10546
Jun-02 10030 8841 8287 10022
9450 8152 7525 8508
9370 8205 7451 8486
8880 7313 6645 7877
9220 7957 7541 8129
10062 8789 8802 9289
Dec-02 9304 8230 8030 8795
9151 8056 7871 8532
8905 7935 7976 8274
9059 8157 8172 8476
9540 8498 8560 8937
10236 9129 9527 10159
Jun-03 10389 9262 9706 10353
10911 9312 9752 10808
11239 9592 10819 11495
11126 9480 10713 11227
11515 10027 11560 12231
11781 10115 11732 12665
Dec-03 11781 10613 12015 13015
12211 10841 12374 13485
12273 10992 12162 13606
12191 10648 11747 13323
11863 10656 11512 13032
11863 10802 11917 13242
Jun-04 12099 10864 12041 13597
</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
SEMIANNUAL REPORT 2004
- --------------------------------------------------------------------------------
NEEDHAM SMALL CAP GROWTH FUND TICKER: NESGX
COMPARATIVE PERFORMANCE STATISTICS
<Table>
<Caption>
---------------------------------------------------------------------------------------------------------------
SINCE
BENCHMARKS 6 MONTHS(7) 1 YEAR(8) INCEPTION(4)
------------------------------------------------------------ ------ ------ ------
Needham Small Cap Growth Fund 7.01% 38.62% 32.25%(5)(6)
S&P 600 Index(1) 10.06% 35.15% 9.28%
NASDAQ Composite Index(2) 2.43% 26.70% 9.89%
Russell 2000 Index(3) 6.80% 33.32% 9.63%
</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 and Small Cap stocks.
3. The Russell 2000 Index is a broad unmanaged index composed of the smallest
2,000 companies in the Russell 3000 Index.
4. Compound annual growth rate. Assumes all dividends are reinvested in shares
of the Fund.
5. Total cumulative return since inception was 80.20% assuming all dividends
were reinvested in shares of the Fund.
6. The inception date of the Fund was 5/22/02. 5/22/02-6/30/04 (annualized
return).
7. 1/1/04-6/30/04.
8. 7/1/03-6/30/04.
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 JUNE 30, 2004)
<Table>
<Caption>
- -------------------------------------------------------------
SECURITY
- ---------------------------------------- % OF TOTAL
INVESTMENTS+
------
1) Eon Labs, Inc. ELAB 6.00%
2) Bright Horizons Family Solutions BFAM 5.99%
3) Advisory Board Company ABCO 3.39%
4) W.R. Berkley Corp. BER 3.15%
5) Ceradyne, Inc. CRDN 2.95%
6) Analogic Corp. ALOG 2.83%
7) Aceto Corp. ACET 2.58%
8) First Horizon Pharmaceutical FHRX 2.42%
9) PerkinElmer, Inc. PKI 2.39%
10) Viasys Healthcare, Inc. VAS 2.30%
</Table>
<Table>
<Caption>
- -------------------------------------------------------------
TOP TEN HOLDINGS = 34.00% OF TOTAL
INVESTMENTS+
* Current portfolio holdings may not be indicative of future
portfolio holdings.
+ Percentage of total investments includes all stocks, fixed
income securities and options plus cash minus all short
positions.
- -------------------------------------------------------------
</Table>
SECTOR WEIGHTINGS
(AS A % OF TOTAL INVESTMENTS, AS OF JUNE 30, 2004)
<Table>
<Caption>
-----------------------------------------------------------------
SECTOR LONG(1) (SHORT)(1) TOTAL(1)(2)
--------------------------------- ------ ------- ------
Healthcare/Medical
Devices/Pharmaceuticals 25.62% (0.19)% 25.43%
Media/Leisure/Cable/
Entertainment -- -- --
Energy/Industrial/Metals 12.97% -- 12.97%
Consumer/Business
Services/Financial 22.09% (0.73)% 21.36%
Technology & Telecommunications 27.21% (0.33)% 26.88%
Miscellaneous -- -- --
Cash & Fixed Income Investments 13.36% -- 13.36%
(1) Percentage of total investments includes all stocks, and
fixed income securities 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
----------------- ------------- ---------------- ------------------
May-02 9950 9892 9656 9872
Jun-02 9270 9380 8748 9382
8670 8055 7943 7965
8340 8133 7866 7944
7580 7635 7015 7374
8680 7879 7960 7610
11200 8289 8855 8289
Dec-02 10380 8010 8001 7828
10440 7734 7918 7614
9870 7486 8024 7384
9650 7545 8050 7479
10680 8158 8791 8188
12540 8815 9584 9066
Jun-03 13000 9045 9765 9231
14050 9515 10427 9808
14630 9965 10962 10263
15080 9599 10854 10024
16130 10510 11713 10920
16820 10908 11887 11307
Dec-03 16840 11119 12175 11620
17730 11420 12538 12040
17610 11640 12323 12148
17220 12017 12494 12536
16590 11402 11664 11636
17350 11577 12075 11823
Jun-04 18020 12058 12201 12140
</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 (Continued)
June 30, 2004 (Unaudited)
NEEDHAM GROWTH FUND
Schedule of Investments
June 30, 2004 (Unaudited)
<Table>
<Caption>
Shares Value
COMMON STOCK - (94.6%)
BIOTECH & PHARMACEUTICALS -
(3.1%)
Johnson & Johnson Co. 100,000 $ 5,570,000
Merck & Co., Inc. 100,000 4,750,000
---------------
10,320,000
---------------
BROADCASTING, MEDIA &
ENTERTAINMENT - (0.5%)
Liberty Media Corp.* 150,000 1,348,500
Liberty Media Intl Inc Cl
A* 7,500 278,250
---------------
1,626,750
---------------
BUSINESS SERVICES - (4.2%)
Affiliated Computer
Services, Inc. Class A* 45,000 2,382,300
BISYS Group, Inc.* 77,500 1,089,650
Choicepoint, Inc.* 25,000 1,141,500
First Data Corp. 50,000 2,226,000
Iron Mountain, Inc.* 100,000 4,826,000
Sungard Data Systems, Inc.* 100,000 2,600,000
---------------
14,265,450
---------------
CABLE TV & EQUIPMENT - (5.6%)
Comcast Corp. Class A*+ 250,000 7,007,500
Scientific-Atlanta, Inc. 300,000 10,350,000
Shaw Communications, Inc. 100,000 1,681,000
---------------
19,038,500
---------------
COMPUTER HARDWARE - (0.8%)
Planar Systems, Inc.* 200,000 2,678,000
---------------
CONTRACT MANUFACTURING &
MATERIALS - (2.6%)
Benchmark Electronics,
Inc.* 75,000 2,182,500
Merix Corp.* 130,000 1,474,200
Parlex Corp.* 200,000 1,300,000
Pemstar, Inc.* 640,000 1,484,800
Solectron Corp.* 350,000 2,264,500
---------------
8,706,000
---------------
EDA/CAD - CAM/INTELLECTUAL
PROPERTY - (1.4%)
Autodesk, Inc.+ 110,000 4,709,100
---------------
ELECTRONIC COMPONENTS &
DISTRIBUTION - (0.8%)
Vishay Intertechnology,
Inc.* 150,000 2,787,000
---------------
ELECTRONICS &
STORAGE - (4.2%)
Bell Microproducts, Inc.* 290,000 2,346,100
Datalink Corporation* 32,800 108,896
Datalink Corporation (PP)* 400,000 1,328,000
Komag, Inc.* 60,000 838,200
Seagate Technology
Holdings+ 675,000 9,740,250
---------------
14,361,446
---------------
</Table>
<Table>
<Caption>
Shares Value
ELECTRONICS, ELECTRICAL
EQUIPMENT & INSTRUMENTATION -
(0.9%)
Color Kinetics* 160,000 $ 1,601,600
Lecroy Corp.* 50,000 900,500
Robotic Vision Systems,
Inc. (PP)* 220,547 582,244
---------------
3,084,344
---------------
EXPLORATION, PRODUCTION,
REFINING & STORAGE - (5.4%)
Chesapeake Energy Corp. 450,000 6,624,000
Talisman Energy, Inc.+ 528,000 11,478,720
---------------
18,102,720
---------------
HEALTH CARE SERVICES - (1.3%)
D & K Healthcare Resources 45,000 540,000
Pediatric Services of
America, Inc.* 150,000 1,903,650
U.S. Oncology, Inc.* 135,000 1,987,200
---------------
4,430,850
---------------
INDUSTRIAL CHEMICALS, RESINS
& LAMINATES - (2.3%)
AXT, Inc.* 367,202 719,716
Pall Corp. 80,000 2,095,200
Park Electrochemical Corp. 185,000 4,671,250
Southwall Technologies,
Inc.* 728,000 364,000
---------------
7,850,166
---------------
LEISURE PRODUCTS - (1.1%)
Vail Resorts, Inc.*+ 200,000 3,832,000
---------------
MANUFACTURING & INDUSTRIAL
EQUIPMENT - (6.3%)
Ceradyne, Inc. (PP)* 415,951 14,878,567
Intevac, Inc.* 217,500 1,929,225
Sypris Solutions, Inc.+ 231,000 4,432,890
---------------
21,240,682
---------------
MEDICAL DEVICES & SUPPLIES -
(12.0%)
Analogic Corp. 115,000 4,879,450
ConMED Corp.*+ 250,000 6,850,000
Cutera, Inc.* 115,000 1,562,850
Epix Medical, Inc.* 83,000 1,751,300
HCA Inc. 85,000 3,535,150
Immucor, Inc.* 32,500 1,057,875
Laboratory Corp. of
America* 25,000 992,500
Schering-Plough Corp. 162,000 2,993,760
Thermo Electron Corp.*+ 260,000 7,992,399
Universal Health Services,
Inc. Class B 15,000 688,350
Viasys Healthcare, Inc.* 150,000 3,136,500
Waters Corp.* 70,000 3,344,600
Zoll Medical Corp.* 46,300 1,624,204
---------------
40,408,938
---------------
</Table>
See accompanying notes to financial statements.
6
SEMIANNUAL REPORT 2004
- --------------------------------------------------------------------------------
<Table>
<Caption>
Shares Value
NETWORKING & COMMUNICATIONS
EQUIPMENT - (0.2%)
Atheros Communications* 17,500 $ 184,450
Visual Networks, Inc.* 205,000 621,150
---------------
805,600
---------------
OIL/GAS EQUIPMENT &
SERVICES - (2.4%)
GlobalSantaFe Corp.+ 195,000 5,167,500
Offshore Logistics, Inc.*+ 110,000 3,093,200
---------------
8,260,700
---------------
OPTICAL COMPONENTS - (2.4%)
Agere Systems, Inc. - Class
B* 500,000 1,075,000
Newport Corp.* 250,000 4,042,500
Orbotech Ltd.* 150,000 3,052,500
---------------
8,170,000
---------------
SEMICONDUCTOR CAPITAL
EQUIPMENT - (7.1%)
ADE Corp.* 35,000 756,350
American Superconductor* 115,000 1,504,200
Brillian Corporation* 50,000 402,900
Brooks Automation Inc.* 213,400 4,300,010
FSI International, Inc.* 331,000 2,585,110
FSI International, Inc.
(PP)* 150,000 1,171,500
Helix Technology Corp. 175,341 3,740,024
MKS Instruments, Inc.* 134,100 3,060,162
Nova Measuring Instruments,
Ltd.* 82,500 325,875
Photronics, Inc.* 225,000 4,261,500
Staktek Holdings Inc.* 89,000 467,250
Three-Five Systems, Inc.* 125,000 637,500
Transmeta Corp.* 215,000 470,850
Trikon Technologies, Inc.* 122,500 362,600
---------------
24,045,831
---------------
SEMICONDUCTOR MANUFACTURERS &
COMMUNICATION DEVICES -
(7.8%)
Actel Corp.* 95,000 1,757,500
Atmel Corp.* 750,000 4,440,000
MEMC Electronic Materials* 200,000 1,976,000
National Semiconductor
Corp.*+ 550,000 12,094,500
Standard Microsystems
Corp.* 125,000 2,915,000
White Electronic Designs
Corp.* 96,300 504,612
Xicor, Inc.* 165,000 2,496,450
---------------
26,184,062
---------------
SOFTWARE - (8.5%)
Aspen Technology, Inc.* 300,000 2,178,000
Computer Associates
International, Inc. 150,000 4,209,000
Concord Communications,
Inc.* 100,000 1,141,000
Hyperion Solutions Corp.* 110,000 4,809,200
Kronos, Inc.*+ 150,000 6,180,000
Phoenix Technologies, Ltd.* 300,000 2,097,000
Salesforce.Com* 8,800 141,416
SPSS, Inc.*+ 225,000 4,043,250
Sybase, Inc.* 210,000 3,780,000
---------------
28,578,866
---------------
</Table>
<Table>
<Caption>
Shares Value
SPECIALTY RETAILING &
MANUFACTURING - (3.9%)
Brookstone, Inc.* 187,500 $ 3,759,375
Carmax, Inc.* 125,000 2,733,750
Charming Shoppes, Inc.*+ 450,000 4,018,500
G-III Apparel Group, Inc.* 77,000 605,990
West Marine* 80,000 2,148,000
---------------
13,265,615
---------------
TELECOMMUNICATIONS SERVICE &
EQUIPMENT - (1.5%)
ADC Telecommunications,
Inc.* 360,000 1,022,400
Harris Corp. 80,000 4,060,000
---------------
5,082,400
---------------
WIRELESS COMMUNICATIONS &
EQUIPMENT - (8.3%)
Anaren, Inc.*+ 250,000 4,085,000
AT&T Wireless Services,
Inc.* 200,000 2,864,000
EMS Technologies, Inc.* 76,900 1,494,167
EMS Technologies, Inc.
(PP)* 100,000 1,943,000
Motorola, Inc.+ 625,000 11,406,250
REMEC, Inc.* 300,000 1,896,000
Viasat, Inc.* 169,000 4,216,550
---------------
27,904,967
---------------
TOTAL COMMON STOCK (Cost
$240,734,832) 319,739,987
---------------
---------------
INVESTMENT TRUSTS - (1.4%)
Central Fund of Canada (PP) 60,000 315,600
H & Q Healthcare Investors
Fund 152,136 2,650,210
H & Q Life Sciences
Investors Fund 113,483 1,772,604
---------------
TOTAL INVESTMENT TRUSTS
(Cost $4,775,508) 4,738,414
---------------
---------------
</Table>
See accompanying notes to financial statements.
7
Needham Funds
- --------------------------------------------------------------------------------
NEEDHAM GROWTH FUND
Schedule of Investments (Continued)
June 30, 2004 (Unaudited)
<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 $ 311,220
---------------
TOTAL PREFERRED STOCK
(Cost $2,554,580) 311,220
---------------
---------------
<Caption>
Par
CONVERTIBLE BONDS - (2.8%)
NETWORKING & COMMUNICATIONS
EQUIPMENT - (2.0%)
Lucent Technologies, Inc.
8.00%, 08/01/31 6,000,000 6,735,000
---------------
TELECOMMUNICATIONS SERVICE &
EQUIPMENT - (0.8%)
Nortel Telecommunications,
4.25%, 09/01/08 3,000,000 2,872,500
---------------
TOTAL CONVERTIBLE BONDS
(Cost $8,991,850) 9,607,500
---------------
---------------
<Caption>
Shares
SHORT-TERM INVESTMENTS -
(0.4%)
The RBB Sansom Street Money
Market Portfolio 1,341,840 1,341,840
---------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $1,341,840) 1,341,840
---------------
TOTAL INVESTMENTS - (99.3%)
(Cost $258,398,610) 335,738,961
---------------
---------------
</Table>
<Table>
<Caption>
Number of
Contracts Value
NAME/EXPIRATION DATE/STRIKE
PRICE
WARRANTS - (0.0%)
ELECTRONICS &
STORAGE - (0.0%)
Datalink, May 07, $4.50* 68,000 $ 58,668
ELECTRONICS, ELECTRICAL
EQUIPMENT & INSTRUMENTATION -
(0.0%)
Robotic Vision Systems,
Inc., May 05, $7.50* 55,137 6,144
---------------
TOTAL WARRANTS PURCHASED
(Cost $162,175) 64,812
---------------
---------------
TOTAL INVESTMENTS AND
WARRANTS - (99.3%)
(Cost $258,560,785) 335,803,773
---------------
---------------
Total Securities Sold
Short - (-7.3%) (24,617,250)
---------------
---------------
Other Assets, Less Other
Liabilities - (8.0%) 27,115,730
---------------
NET ASSETS - (100.0%) $ 338,302,253
---------------
---------------
---------------
---------------
</Table>
* Non-income producing security.
+ Security position is either entirely or partially held in a segregated
account as collateral for securities sold short.
PP Private placement.
See accompanying notes to financial statements.
8
SEMIANNUAL REPORT 2004
- --------------------------------------------------------------------------------
NEEDHAM GROWTH FUND
Schedule of Securities Sold Short
June 30, 2004 (Unaudited)
<Table>
<Caption>
Shares Value
SECURITIES SOLD
SHORT - (-7.3%)
EDA/CAD - CAM/INTELLECTUAL
PROPERTY - (-0.7%)
Ansys, Inc.* 50,000 $ 2,350,000
---------------
FINANCIAL SERVICES - (-1.0%)
Lehman Brothers Holdings,
Inc.* 45,000 3,386,250
---------------
MANUFACTURING & INDUSTRIAL
EQUIPMENT - (-1.8%)
Polaris Industries, Inc.* 30,000 1,440,000
Zebra Technologies Corp.* 52,500 4,567,500
---------------
6,007,500
---------------
NETWORKING & COMMUNICATIONS
EQUIPMENT - (-1.5%)
Juniper Networks, Inc.* 200,000 4,914,000
---------------
SEMICONDUCTOR MANUFACTURERS &
COMMUNICATION
DEVICES - (-0.3%)
Silicon Laboratories, Inc.* 25,000 1,158,750
---------------
SOFTWARE - (-2.0%)
Electronic Arts, Inc.* 75,000 4,091,250
Mercury Interactive Corp.* 50,000 2,491,500
Viisage Technology, Inc.* 25,000 218,000
---------------
6,800,750
---------------
TOTAL SECURITIES SOLD SHORT
(Proceeds $14,878,890) 24,617,250
---------------
---------------
TOTAL SECURITIES SOLD SHORT -
(-7.3%) (24,617,250)
---------------
---------------
Total Investments and
Warrants - (99.3%) 335,803,773
---------------
Other Assets, Less Other
Liabilities -
(8.0%) 27,115,730
---------------
NET ASSETS - (100.0%) $ 338,302,253
---------------
---------------
---------------
---------------
</Table>
* Non-income producing security.
See accompanying notes to financial statements.
9
Needham Funds
- --------------------------------------------------------------------------------
NEEDHAM AGGRESSIVE GROWTH FUND
Schedule of Investments
June 30, 2004 (Unaudited)
<Table>
<Caption>
Shares Value
COMMON STOCK - (84.5%)
AIRLINES - (2.5%)
Jetblue Airways Corp.* 15,000 $ 440,700
--------------
BIOTECH & PHARMACEUTICALS -
(7.6%)
Biogen Idec, Inc.* 7,500 474,375
Express Scripts, Inc.* 6,000 475,380
Pfizer, Inc. 11,000 377,080
--------------
1,326,835
--------------
BROADCASTING - (2.3%)
Fox Entertainment Group,
Inc. Class A* 15,000 400,500
--------------
BUSINESS SERVICES - (11.6%)
Affiliated Computer
Services, Inc. Class A*+ 8,000 423,520
Alliance Data Systems Corp.* 5,000 211,250
BISYS Group, Inc.* 8,000 112,480
Choicepoint, Inc.* 10,000 456,600
First Data Corp. 7,500 333,900
Iron Mountain, Inc.* 10,000 482,600
--------------
2,020,350
--------------
CABLE TV & EQUIPMENT - (2.4%)
Comcast Corp. Special Class
A* 15,000 414,150
--------------
EDA/CAD - CAM/INTELLECTUAL
PROPERTY - (2.5%)
Autodesk, Inc.+ 10,000 428,100
--------------
ELECTRONIC COMPONENTS &
DISTRIBUTION - (3.5%)
Ceva, Inc.* 10,000 79,100
Rogers Corp.* 7,500 524,250
--------------
603,350
--------------
ELECTRONICS & STORAGE - (0.5%)
Datalink Corporation (PP)* 25,000 83,000
--------------
ELECTRONICS, ELECTRICAL
EQUIPMENT &
INSTRUMENTATION - (1.3%)
Analog Devices, Inc. 4,000 188,320
Robotic Vision Systems, Inc.
(PP)* 16,541 43,668
--------------
231,988
--------------
FINANCIAL SERVICES - (2.8%)
Piper Jaffray* 2,000 90,460
State Street Corp. 8,000 392,320
--------------
482,780
--------------
HOSPITAL & PHYSICIAN
MANAGEMENT - (2.3%)
Community Health Systems*+ 15,000 401,550
--------------
INDUSTRIAL CHEMICALS, RESINS &
LAMINATES - (2.2%)
Park Electrochemical Corp. 15,000 378,750
--------------
</Table>
<Table>
<Caption>
Shares Value
MEDICAL DEVICES & SUPPLIES -
(4.0%)
Epix Medical, Inc.* 6,600 $ 139,260
Intuitive Surgical, Inc.* 10,000 190,000
Medtronic, Inc. 7,500 365,400
--------------
694,660
--------------
MEDICAL SUPPLIES & EQUIPMENT -
(2.8%)
Animas, Corp.* 5,000 93,250
Genvec, Inc.* 35,000 107,450
Guidant Corp.* 5,000 279,400
--------------
480,100
--------------
METALS & MINING - (2.5%)
Precision Castparts Corp. 8,000 437,520
--------------
OIL/GAS EQUIPMENT - (0.9%)
Xto Energy Inc. 5,000 148,950
--------------
OPTICAL COMPONENTS - (2.2%)
Corvis Corp.* 100,000 141,000
Orbotech Ltd.* 12,000 244,200
--------------
385,200
--------------
SEMICONDUCTOR CAPITAL
EQUIPMENT - (3.5%)
American Superconductor* 17,500 228,900
FSI International, Inc.* 35,000 273,350
Staktek Holdings Inc.* 20,000 105,000
--------------
607,250
--------------
SEMICONDUCTOR MANUFACTURERS &
COMMUNICATION DEVICES - (3.6%)
Taiwan Semiconductor
Manufacturing Co. Ltd. ADR 34,226 284,416
Xicor, Inc.* 22,500 340,425
--------------
624,841
--------------
SOFTWARE - (9.1%)
Ascential Software Corp.* 15,000 239,850
Hyperion Solutions Corp.* 12,000 524,640
Kronos, Inc.*+ 7,500 309,000
Pervasive Software, Inc.* 50,000 312,500
Plumtree Software, Inc.* 50,000 187,500
Salesforce.Com* 500 8,035
--------------
1,581,525
--------------
SPECIALITY RETAILING &
MANUFACTURING - (11.3%)
Carmax, Inc.* 10,000 218,700
Chico's Fas, Inc.* 5,000 225,800
Pacific Sunwear of
California, Inc.* 20,000 391,400
PETCO Animal Supplies, Inc.* 12,000 386,520
Restoration Hardware, Inc.* 50,000 365,500
Tiffany & Co. 10,000 368,500
--------------
1,956,420
--------------
TELECOMMUNICATIONS - (2.0%)
Scientific-Atlanta, Inc. 10,000 345,000
--------------
</Table>
See accompanying notes to financial statements.
10
SEMIANNUAL REPORT 2004
- --------------------------------------------------------------------------------
<Table>
<Caption>
Shares Value
WIRELESS COMMUNICATIONS &
EQUIPMENT - (1.1%)
EMS Technologies, Inc.*+ 10,000 $ 194,300
--------------
TOTAL COMMON STOCK
(Cost $11,533,925) 14,667,819
--------------
--------------
SHORT-TERM INVESTMENTS -
(18.6%)
PNC Bank Money Market 1,501,737 1,501,737
Provident Institutional
Fund - Tempcash Portfolio 863,519 863,519
The RBB Sansom Street Money
Market Portfolio 863,519 863,519
--------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $3,228,775) 3,228,775
--------------
--------------
TOTAL INVESTMENTS - (103.1%)
(Cost $14,762,700) 17,896,594
--------------
--------------
<Caption>
Number of
Name/ Expiration Date/ Strike Price Contracts
WARRANTS - (0.0%)
ELECTRONICS & STORAGE - (0.0%)
Datalink Corp, May 07, $4.50* 4,000 3,451
--------------
ELECTRONICS, ELECTRICAL EQUIPMENT &
INSTRUMENTATION - (0.0%)
Robotic Vision Systems, Inc., May
05, $7.50* 4,135 461
--------------
TOTAL WARRANTS PURCHASED
(Cost $11,591) 3,912
--------------
--------------
TOTAL INVESTMENTS AND WARRANTS -
(103.1%) (Cost $14,774,291) 17,900,506
--------------
--------------
Total Securities Sold Short -
(-4.2%) (725,035)
--------------
--------------
Other Assets, Less Other
Liabilities - (1.1%) 180,577
--------------
NET ASSETS - (100.0%) $ 17,356,048
--------------
--------------
--------------
--------------
</Table>
* Non-income producing security.
+ Security position is either entirely or partially held in a segregated
account as collateral for securities sold short.
PP Private placement.
See accompanying notes to financial statements.
11
Needham Funds
- --------------------------------------------------------------------------------
NEEDHAM AGGRESSIVE GROWTH FUND
Schedule of Securities Sold Short
June 30, 2004 (Unaudited)
<Table>
<Caption>
Shares Value
SECURITIES SOLD SHORT - (-4.2%)
MEDICAL DEVICES & SUPPLIES -
(-0.4%)
Laserscope* 2,500 $ 68,875
--------------
SOFTWARE - (-3.8%)
Eresearch Technology, Inc.* 22,500 630,000
Viisage Technology, Inc.* 3,000 26,160
--------------
656,160
--------------
TOTAL SECURITIES SOLD SHORT
(Proceeds $222,640) 725,035
--------------
--------------
TOTAL SECURITIES SOLD SHORT -
(-4.2%) (725,035)
--------------
--------------
Total Investments and
Warrants - (103.1%) 17,900,506
--------------
--------------
Other Assets, Less Other
Liabilities - (1.1%) 180,577
--------------
NET ASSETS - (100.0%) $ 17,356,048
--------------
--------------
--------------
--------------
</Table>
* Non-income producing security.
See accompanying notes to financial statements.
12
SEMIANNUAL REPORT 2004
- --------------------------------------------------------------------------------
NEEDHAM SMALL CAP GROWTH FUND
Schedule of Investments
June 30, 2004 (Unaudited)
<Table>
<Caption>
Shares Value
COMMON STOCK - (87.7%)
BIOTECH & PHARMACEUTICALS -
(10.0%)
Eon Labs, Inc.* 40,000 $ 1,637,200
First Horizon
Pharmaceutical* 35,000 661,500
Martek Biosciences
Corporation* 7,500 421,275
--------------
2,719,975
--------------
BUSINESS SERVICES - (14.1%)
Advisory Board Company* 26,000 925,600
Bright Horizons Family
Solutions* 30,500 1,635,105
Costar Group, Inc.* 4,828 221,750
Iron Mountain, Inc.* 12,500 603,250
Sitel Corp.* 110,000 464,200
--------------
3,849,905
--------------
CONTRACT MANUFACTURING &
MATERIALS - (1.6%)
Parlex Corp.* 15,000 97,500
Pemstar, Inc.* 150,000 348,000
--------------
445,500
--------------
ELECTRONICS & STORAGE - (3.3%)
Datalink Corporation* 40,650 134,958
Dataram Corp.* 30,000 276,000
Hutchinson Technology, Inc.* 20,000 491,800
--------------
902,758
--------------
ELECTRONICS, ELECTRICAL
EQUIPMENT & INSTRUMENTATION -
(2.6%)
Color Kinetics* 15,000 150,150
Garmin Ltd. 15,000 555,600
--------------
705,750
--------------
EXPLORATION, PRODUCTION,
REFINING & STORAGE - (1.1%)
Chesapeake Energy Corp.+ 20,000 294,400
--------------
FINANCIAL SERVICES - (6.2%)
Berkshire Hathaway, Inc.
Class B* 200 591,000
Brantley Capital Corp. 12,500 135,750
Factset Research Systems Inc 1,500 70,905
First Republic Bank 1,000 43,080
W.R. Berkley Corp. 20,000 859,000
--------------
1,699,735
--------------
GOVERNMENT IT - (3.5%)
Integral Systems Inc. 14,500 233,160
NIC, Inc.* 27,500 197,175
Sensytech, Inc.* 22,000 511,280
--------------
941,615
--------------
HEALTH CARE SERVICES - (0.1%)
Health Extras Inc.* 2,000 33,140
--------------
HOMEBUILDERS - (0.1%)
Hovanian Enterprises* 1,000 34,710
--------------
</Table>
<Table>
<Caption>
Shares Value
INDUSTRIAL CHEMICALS, RESINS &
LAMINATES - (2.6%)
Aceto Corp. 40,000 $ 704,000
Southwall Technologies,
Inc.* 35,000 17,500
--------------
721,500
--------------
MANUFACTURING & INDUSTRIAL
EQUIPMENT - (5.6%)
Ceradyne, Inc. (PP)* 22,500 804,825
Innovative Solutions and
Support, Inc.* 8,500 165,920
Intevac, Inc.* 22,500 199,575
Sypris Solutions, Inc. 19,000 364,610
--------------
1,534,930
--------------
MEDICAL DEVICES & SUPPLIES -
(15.6%)
Analogic Corp. 18,200 772,226
Cantel Medical Corp.* 12,500 269,375
Closure Medical Corp.* 12,500 313,875
Epix Medical, Inc.* 5,000 105,500
Exactech, Inc.* 12,500 271,250
I-Trax Inc.* 17,600 77,264
Immucor, Inc.* 16,500 537,075
PerkinElmer, Inc. 32,500 651,300
Viasys Healthcare, Inc.* 30,000 627,300
Zoll Medical Corp.* 17,000 596,360
--------------
4,221,525
--------------
OPTICAL COMPONENTS - (3.6%)
Agere Systems, Inc. - Class
B* 100,000 215,000
Excel Technology, Inc.* 16,000 532,000
Newport Corp.* 15,000 242,550
--------------
989,550
--------------
RETAIL &
MERCHANDISING - (0.2%)
Jos A Bank Clothiers, Inc.* 2,000 62,780
--------------
SEMICONDUCTOR CAPITAL
EQUIPMENT - (4.2%)
Brooks Automation Inc.*+ 4,000 80,600
FSI International, Inc.* 50,000 390,500
MKS Instruments, Inc.* 8,000 182,560
Therma-Wave, Inc. (PP)* 100,000 493,000
--------------
1,146,660
--------------
SEMICONDUCTOR MANUFACTURERS &
COMMUNICATION DEVICES - (0.9%)
Standard Microsystems
Corp.*+ 10,000 233,200
--------------
SOFTWARE - (4.9%)
Concord Communications,
Inc.* 42,000 479,220
Mobius Management Systems,
Inc.* 31,000 190,030
National Instruments Corp. 16,000 490,400
Pervasive Software, Inc.* 30,220 188,875
--------------
1,348,525
--------------
</Table>
See accompanying notes to financial statements.
13
Needham Funds
- --------------------------------------------------------------------------------
<Table>
<Caption>
Shares Value
SPECIALITY RETAILING &
MANUFACTURING - (1.3%)
Restoration Hardware, Inc.* 50,000 $ 365,500
--------------
TELECOMMUNICATIONS SERVICE &
EQUIPMENT - (0.8%)
Mobility Electronics, Inc.* 26,000 218,920
--------------
TRANSPORTATION - (2.0%)
Genesee And Wyoming Inc.* 22,500 533,250
--------------
WIRELESS COMMUNICATIONS &
EQUIPMENT - (3.4%)
Anaren Inc.*+ 8,960 146,406
REMEC, Inc.*+ 40,000 252,800
Tessco Technologies, Inc.* 30,000 520,800
--------------
920,006
--------------
TOTAL COMMON STOCK
(Cost $17,788,903) 23,923,834
--------------
--------------
SHORT-TERM INVESTMENTS -
(13.3%)
PNC Bank Money Market 948,424 948,424
Provident Institutional
Fund - Tempcash Portfolio 1,344,466 1,344,466
The RBB Sansom Street Money
Market Portfolio 1,344,466 1,344,466
--------------
TOTAL SHORT-TERM INVESTMENTS
(Cost $3,637,356) 3,637,356
--------------
--------------
TOTAL INVESTMENTS -
(101.0%)(COST $21,426,259) 27,561,190
--------------
--------------
Total Securities Sold
Short -
(-1.2%) (339,000)
--------------
--------------
Other Assets, Less Other
Liabilities - (0.2%) 54,700
--------------
NET ASSETS - (100.0%) $ 27,276,890
--------------
--------------
--------------
--------------
</Table>
* Non-income producing security.
+ Security position is either entirely or partially held in a segregated
account as collateral for securities sold short.
PP Private placement.
See accompanying notes to financial statements.
14
SEMIANNUAL REPORT 2004
- --------------------------------------------------------------------------------
NEEDHAM SMALL CAP GROWTH FUND
Schedule of Securities Sold Short
June 30, 2004 (Unaudited)
<Table>
<Caption>
Shares Value
SECURITIES SOLD SHORT - (-1.2%)
BIOTECH & PHARMACEUTICALS -
(-0.2%)
Cambrex Corp* 2,000 $ 50,460
--------------
BUSINESS SERVICES - (-0.7%)
Acxiom Corp.* 8,000 198,640
--------------
ELECTRONICS, ELECTRICAL
EQUIPMENT
& INSTRUMENTATION - (-0.2%)
Teradyne, Inc.* 3,000 68,100
--------------
SOFTWARE - (-0.1%)
Viisage Technology, Inc.* 2,500 21,800
--------------
TOTAL SECURITIES SOLD SHORT
(Proceeds $317,123) 339,000
--------------
--------------
TOTAL SECURITIES SOLD SHORT -
(-1.2%) (339,000)
--------------
--------------
Total Investments - (101.0%) 27,561,190
--------------
--------------
Other Assets, Less Other
Liabilities - (0.2%) 54,700
--------------
NET ASSETS - (100.0%) $ 27,276,890
--------------
--------------
--------------
--------------
</Table>
* Non-income producing security.
See accompanying notes to financial statements.
15
Needham Funds
- --------------------------------------------------------------------------------
Statements of Assets and Liabilities (Unaudited)
June 30, 2004
<Table>
<Caption>
NEEDHAM NEEDHAM
NEEDHAM AGGRESSIVE SMALL CAP
GROWTH FUND GROWTH FUND GROWTH FUND
- ------------------------------------------------------------------------------------------------------------------
ASSETS:
- ------------------------------------------------------------------------------------------------------------------
Investments, at Value (Cost $258,398,610, $14,762,700
and $21,426,259, respectively) $335,738,961 $17,896,594 $27,561,190
Cash 9,649,431 -- --
Warrants Purchased, at Value (Cost $162,175 and
$11,591, respectively) 64,812 3,912 --
Receivables:
Dividends and Interest 365,796 6,851 5,294
Investment Securities Sold 4,183,053 -- 11,204
Investment Securities Sold Short 14,953,778 222,640 317,123
Fund Shares Sold 222,785 -- 146,333
Prepaid Expenses and Other Assets 34,240 14,549 13,030
- ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 365,212,856 18,144,546 28,054,174
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
LIABILITIES:
- ------------------------------------------------------------------------------------------------------------------
Securities Sold Short, at Value (Proceeds $14,878,890,
$222,640 and $317,123, respectively) 24,617,250 725,035 339,000
Payables:
Investment Securities Purchased -- -- 309,004
Fund Shares Redeemed 1,493,472 -- 61,430
Due to Adviser 344,408 9,359 22,045
Accrued Expenses and Other Liabilities 455,473 54,104 45,805
- ------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 26,910,603 788,498 777,284
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS $338,302,253 $17,356,048 $27,276,890
- ------------------------------------------------------------------------------------------------------------------
Shares Issued and Outstanding $.001 Par Value
(Authorized 800,000,000, 100,000,000 and 100,000,000,
respectively) 11,181,592 1,468,188 1,514,022
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER
SHARE $30.26 $11.82 $18.02
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET ASSETS
- ------------------------------------------------------------------------------------------------------------------
Paid-in Capital 323,846,696 15,035,426 20,369,283
Accumulated Net Realized Gain (Loss) (53,049,071) (303,198) 794,553
Net Unrealized Appreciation (Depreciation) of
Investment Securities, Warrants and Securities Sold
Short 67,504,628 2,623,820 6,113,054
- ------------------------------------------------------------------------------------------------------------------
TOTAL NET ASSETS $338,302,253 $17,356,048 $27,276,890
- ------------------------------------------------------------------------------------------------------------------
</Table>
See accompanying notes to financial statements.
16
SEMIANNUAL REPORT 2004
- --------------------------------------------------------------------------------
Statements of Operations (Unaudited)
For the Six Months Ended June 30, 2004
<Table>
<Caption>
NEEDHAM NEEDHAM
NEEDHAM AGGRESSIVE SMALL CAP
GROWTH FUND GROWTH FUND GROWTH FUND
- --------------------------------------------------------------------------------------------------------------
INVESTMENT INCOME
- --------------------------------------------------------------------------------------------------------------
Dividends $ 573,726 $ 14,362 $ 112,352
Interest 412,932 7,917 5,079
- --------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 986,658 22,279 117,431
- --------------------------------------------------------------------------------------------------------------
EXPENSES
- --------------------------------------------------------------------------------------------------------------
Investment Advisory Fees 2,264,271 110,489 162,810
Distribution Fees 451,308 21,967 32,502
Administration and Accounting Fees 160,709 42,498 42,499
Custodian Fees 25,624 8,980 14,368
Legal Fees 39,980 17,502 17,496
Shareholders' Reports 39,573 6,397 7,779
Directors' Fees 14,801 731 1,034
Transfer Agent Fees 15,000 15,000 15,000
Audit Fees 22,888 16,749 16,549
Filing Fees 14,565 9,981 11,206
Insurance Expense 12,866 604 982
Other Expenses 81,534 9,808 10,625
- --------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 3,143,119 260,706 332,850
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
LESS: FEES WAIVED AND/OR EXPENSES REIMBURSED -- (39,747) (7,255)
- --------------------------------------------------------------------------------------------------------------
NET EXPENSES 3,143,119 220,959 325,595
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
NET INVESTMENT LOSS (2,156,461) (198,680) (208,164)
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENT
SECURITIES, OPTION CONTRACTS AND WARRANTS
- --------------------------------------------------------------------------------------------------------------
Net Realized Gain on Investment Securities and Warrants 1,946,252 354,427 770,944
Net Realized Loss on Options (1,322,357) -- --
Change in Unrealized Appreciation (Depreciation) of
Investment Securities and Warrants 11,539,006 322,339 1,035,485
- --------------------------------------------------------------------------------------------------------------
NET GAIN ON INVESTMENT SECURITIES 12,162,901 676,766 1,806,429
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $10,006,440 $ 478,086 $1,598,265
- --------------------------------------------------------------------------------------------------------------
</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
- ------------------------------------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended Six Months Ended
June 30, Year Ended June 30, Year Ended June 30,
2004 December 31, 2004 December 31, 2004
(Unaudited) 2003 (Unaudited) 2003 (Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------
OPERATIONS:
- ------------------------------------------------------------------------------------------------------------------------------
Net Investment Loss $ (2,156,461) $ (4,227,706) $ (198,680) $ (340,019) $ (208,164)
Net Realized Gain (Loss) on
Investment Securities 1,946,252 (2,903,611) 354,427 (353,954) 770,944
Net Realized Loss on Option
Contracts (1,322,357) (5,940,155) -- -- --
Change in Unrealized Appreciation of
Investment Securities, Warrants
and Securities Sold Short 11,539,006 129,463,632 322,339 4,137,165 1,035,485
- ------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 10,006,440 116,392,160 478,086 3,443,192 1,598,265
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM:
- ------------------------------------------------------------------------------------------------------------------------------
Net Investment Income -- -- -- -- --
Net Short-Term Gains -- -- -- -- --
Net Long-Term Gains -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1):
- ------------------------------------------------------------------------------------------------------------------------------
Shares Issued 42,983,928 123,340,785 783,684 2,984,396 14,229,702
Shares Issued In Reinvestment of
Distributions -- -- -- -- --
Shares Redeemed (79,008,267) (139,987,612) (1,624,396) (2,982,016) (16,166,609)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions (36,024,339) (16,646,827) (840,712) 2,380 (1,936,907)
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS (26,017,899) 99,745,333 (362,626) 3,445,572 (338,642)
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------
Beginning of Period 364,320,152 264,574,819 17,718,674 14,273,102 27,615,532
End of Period $338,302,253 $ 364,320,152 $17,356,048 $17,718,674 $ 27,276,890
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
(1) SHARES ISSUED AND REDEEMED:
- ------------------------------------------------------------------------------------------------------------------------------
Number of Shares Issued 1,406,700 5,075,842 65,519 270,519 813,317
Number of Shares Reinvested -- -- -- -- --
Number of Shares Redeemed (2,639,748) (5,941,281) (136,706) (300,480) (938,789)
- ------------------------------------------------------------------------------------------------------------------------------
(1,233,048) (865,439) (71,187) (29,961) (125,472)
- ------------------------------------------------------------------------------------------------------------------------------
<Caption>
NEEDHAM
SMALL CAP
GROWTH FUND
- ------------------------------------ ------------
Year Ended
December 31,
2003
- ------------------------------------ ------------
INCREASE (DECREASE) IN NET ASSETS
- ---------------------------------------------------------------
OPERATIONS:
- ----------------------------------------------------------------------------
Net Investment Loss $ (221,052)
Net Realized Gain (Loss) on
Investment Securities 433,462
Net Realized Loss on Option
Contracts --
Change in Unrealized Appreciation of
Investment Securities, Warrants
and Securities Sold Short 5,036,679
- -----------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 5,249,089
- ------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS FROM:
- ------------------------------------------------------------------------------------------------------------------------------
Net Investment Income --
Net Short-Term Gains --
Net Long-Term Gains --
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions --
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1):
- ------------------------------------------------------------------------------------------------------------------------------
Shares Issued 36,534,339
Shares Issued In Reinvestment of
Distributions --
Shares Redeemed (18,736,691)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 17,797,648
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET
ASSETS 23,046,737
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------
Beginning of Period 4,568,795
End of Period $ 27,615,532
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
(1) SHARES ISSUED AND REDEEMED:
- ------------------------------------------------------------------------------------------------------------------------------
Number of Shares Issued 2,421,448
Number of Shares Reinvested --
Number of Shares Redeemed (1,222,102)
- ------------------------------------------------------------------------------------------------------------------------------
1,199,346
- ------------------------------------------------------------------------------------------------------------------------------
</Table>
See accompanying notes to financial statements.
18
SEMIANNUAL REPORT 2004
- --------------------------------------------------------------------------------
NEEDHAM GROWTH FUND
Financial Highlights
<Table>
<Caption>
Six Months Ended
June 30, Year Ended Year Ended Year Ended Year Ended Year Ended
(For a Share Outstanding 2004 December 31, December 31, December 31, December 31, December 31,
Throughout each Period) (Unaudited) 2003 2002 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 29.35 $ 19.92 $ 27.78 $ 24.77 $ 26.47 $ 17.27
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) (0.29) (0.38) (0.25) (0.29) (0.12) (0.03)
Net Realized and Unrealized Gains
(Losses) on Securities 1.20 9.81 (7.61) 3.30 2.57 12.55
- ---------------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.91 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 $ 30.26 $ 29.35 $ 19.92 $ 27.78 $ 24.77 $ 26.47
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 3.10% 47.34% (28.29)% 12.15% 7.40% 79.72%
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period
(thousands) $338,302 $364,320 $264,575 $348,387 $76,070 $42,144
Ratio of Expenses to Average Net
Assets 1.74%* 1.77% 1.75% 1.87% 2.19% 2.50%
Ratio of Expenses to Average Net
Assets (excluding waivers and
reimbursement of expenses) 1.74%* 1.77% 1.75% 1.87% 2.19% 2.84%
Ratio of Net Investment Income
(Loss) to Average Net Assets (1.19)%* (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) (1.19)%* (1.38)% (1.01)% (1.04)% (1.07)% (1.97)%
Portfolio Turnover Rate 18%* 42% 78% 150% 187% 145%
</Table>
* Annualized.
See accompanying notes to financial statements.
19
Needham Funds
- --------------------------------------------------------------------------------
NEEDHAM AGGRESSIVE GROWTH FUND
Financial Highlights
<Table>
<Caption>
Six Months
Ended
June 30, Year Ended Year Ended September 4, to
(For a Share Outstanding 2004 December 31, December 31, December 31,
Throughout each Period) (Unaudited) 2003 2002 2001**
- --------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 11.51 $ 9.09 $ 11.23 $ 10.00
- --------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- --------------------------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) (0.16) (0.23) (0.17) (0.03)
Net Realized and Unrealized Gains (Losses) on Securities 0.47 2.65 (1.76) 1.26
- --------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 0.31 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 $ 11.82 $ 11.51 $ 9.09 $ 11.23
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN 2.69% 26.62% (17.15)% 12.30%#
- --------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- --------------------------------------------------------------------------------------------------------------------------
Net Assets, End of Period (thousands) $17,356 $17,719 $14,273 $13,178
Ratio of Expenses to Average Net Assets 2.50%* 2.50% 2.50% 2.50%*
Ratio of Expenses to Average Net Assets
(excluding waivers and reimbursement of expenses) 2.95%* 3.20% 2.77% 4.05%*
Ratio of Net Investment Income (Loss) to Average Net
Assets (2.25)%* (2.24)% (1.76)% (1.23)%*
Ratio of Net Investment Income (Loss) to Average Net
Assets
(excluding waivers and reimbursement of expenses) (2.70)%* (2.94)% (2.03)% (2.78)%*
Portfolio Turnover Rate 61%* 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
SEMIANNUAL REPORT 2004
- --------------------------------------------------------------------------------
NEEDHAM SMALL CAP GROWTH FUND
Financial Highlights
<Table>
<Caption>
Six Months
Ended
June 30, Year Ended May 22 to
(For a Share Outstanding 2004 December 31, December 31,
Throughout each Period) (Unaudited) 2003 2002**
- ---------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of Period $ 16.84 $ 10.38 $10.00
- ---------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ---------------------------------------------------------------------------------------------------------
Net Investment Income (Loss) (0.15) (0.06) (0.10)
Net Realized and Unrealized Gains (Losses) on Securities 1.33 6.52 0.48
- ---------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.18 6.46 0.38
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ---------------------------------------------------------------------------------------------------------
Net Investment Income -- -- --
Net Realized Gains -- -- --
- ---------------------------------------------------------------------------------------------------------
Total Distributions -- -- --
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 18.02 $ 16.84 $10.38
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
TOTAL RETURN 7.01% 62.24% 3.80%#
- ---------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------
Net Assets, End of Period (thousands) $27,277 $27,616 $4,569
Ratio of Expenses to Average Net Assets 2.50%* 2.26% 2.50%*
Ratio of Expenses to Average Net Assets
(excluding waivers and reimbursement of expenses) 2.55%* 3.24% 6.06%*
Ratio of Net Investment Income (Loss) to Average Net Assets (1.60)%* (1.68)% (2.04)%*
Ratio of Net Investment Income (Loss) to Average Net Assets
(excluding waivers and reimbursement of expenses) (1.65)%* (2.66)% (5.60)%*
Portfolio Turnover Rate 63%* 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 (Unaudited)
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 six months ended June 30, 2004 to not more than 2.50%
of average daily net assets of each Portfolio. For the six months ended June 30,
2004, the Adviser waived advisory fees in the amount of $39,747 and $7,255 for
NAGF and NSCGF, respectively. The Adviser waived none of its fees for NGF during
the six months ended June 30, 2004.
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 June 30, 2004, the components of distributable earnings (loss) on a tax
basis were as follows:
<Table>
<Caption>
NGF NAGF NSCGF
- -------------------------------------------------------------
Accumulated ordinary
income (loss) $ (2,156,461) $ (198,680) $ (208,164)
Undistributed long-
term capital gains -- -- 839,406
Accumulated capital
and other losses (52,040,447) (303,198) --
Unrealized
appreciation/
(depreciation) 66,496,004 2,623,820 6,068,201
- -------------------------------------------------------------
Total accumulated
earnings $ 12,299,096 $2,121,942 $6,699,443
- -------------------------------------------------------------
</Table>
At June 30, 2004, gross unrealized appreciation and depreciation for federal
income tax purposes of investment securities
22
SEMIANNUAL REPORT 2004
- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
(excluding short positions) was in the following approximate amounts:
<Table>
<Caption>
Gross Gross
Unrealized Unrealized
Appreciation Depreciation Net
- ----------------------------------------------------------------
Needham Growth Fund $96,629,301 $(19,704,573) $79,924,728
Needham Aggressive
Growth Fund 3,728,889 (602,674) 3,126,215
Needham Small Cap
Growth Fund 6,573,074 (417,388) 6,155,686
- ----------------------------------------------------------------
</Table>
For federal income tax purposes, the Fund measures its capital loss
carryforwards annually at December 31, its fiscal year end. At December 31,
2003, the following 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>
No distributions were paid by the Fund during the six months ended June 30,
2004.
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 six months ended
June 30, 2004, 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 Small Cap
Growth Fund 2.00% $636,591 23 $779 $1,500,000
- --------------------------------------------------------------------------------
</Table>
NGF and NAGF did not have any borrowings during the six months ended June 30,
2004. There were no outstanding borrowings by the Fund at June 30, 2004.
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 six months
ended June 30, 2004, NGF, NAGF and NSCGF incurred distribution fees in the
amount of $451,308, $21,967 and $32,502, respectively. For the six months ended
June 30, 2004, NGF, NAGF and NSCGF each paid 12b-1 fees to Needham & Company,
Inc. in the amount of $93,386, $13,595 and $10,026, 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 six months ended June 30, 2004:
<Table>
<Caption>
Purchases Sales
- ---------------------------------------------------------
NEEDHAM GROWTH FUND
Long transactions $31,506,626 $29,222,755
Short sale transactions 12,131,367 282,316
- ---------------------------------------------------------
Total $43,637,993 $29,505,071
- ---------------------------------------------------------
- ---------------------------------------------------------
NEEDHAM AGGRESSIVE GROWTH FUND
Long transactions $ 4,586,360 $ 4,534,126
Short sale transactions 439,070 113,289
- ---------------------------------------------------------
Total $ 5,025,430 $ 4,647,415
- ---------------------------------------------------------
- ---------------------------------------------------------
NEEDHAM SMALL CAP GROWTH FUND
Long transactions $ 7,801,703 $10,040,497
Short sale transactions 1,457,538 514,224
- ---------------------------------------------------------
Total $ 9,259,241 $10,554,721
- ---------------------------------------------------------
</Table>
During the six months ended June 30, 2004, NGF, NAGF and NSCGF each incurred and
paid brokerage commissions to Needham & Company, Inc. in the amount of $26,224,
$5,220 and $18,478, 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
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 there-
23
Needham Funds
- --------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
fore, 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.
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 six months ended June 30, 2004 is as
follows:
<Table>
<Caption>
Number of Premium
Options Written Contracts Received
- --------------------------------------------------------
Options outstanding at beginning
of period 500 $ 158,745
Options written -- --
Options repurchased -- --
Options expired (500) (158,745)
Options exercised -- --
- --------------------------------------------------------
Options outstanding at
June 30, 2004 -- --
- --------------------------------------------------------
</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. The maximum payout amount
could be offset by the subsequent sale of assets obtained via the execution of a
payout event.
Neither NAGF nor NSCGF had purchased or written options during the six months
ended June 30, 2004.
9. SHORT SALE TRANSACTIONS
During the six months ended June 30, 2004, 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 June 30, 2004, the market
value of securities separately segregated to cover short positions was
approximately $64,978,000, $4,354,000 and $776,000 for NGF, NAGF and NSCGF,
respectively. Securities sold short at June 30, 2004 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
SEMIANNUAL REPORT 2004
- --------------------------------------------------------------------------------
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 portfolios is
available, without charge and upon request, by calling collect at 1-212-705-0318
and on the SEC's website at http://www.sec.gov. Information regarding how the
investment adviser votes these proxies will become available on the SEC's
website at http://www.sec.gov or by calling the collect number listed above 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.
25
(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.
400 Bellevue Parkway
Wilmington, DE 19809
1-800-625-7071
Custodian:
PFPC Trust Company
301 Bellevue Parkway
Wilmington, DE 19809
Counsel:
Fulbright & Jaworski L.L.P
666 Fifth Avenue
New York, NY 10103
Independent Registered Public Accounting Firm:
Ernst & Young LLP
5 Times Square
New York, NY 10036
ITEM 2. CODE OF ETHICS.
Not applicable for semi-annual reports.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable for semi-annual reports.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable for semi-annual reports.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to open-end management investment companies.
ITEM 6. SCHEDULE OF INVESTMENTS.
Not applicable for periods ending before July 9, 2004.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to open-end management investment companies.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable to open-end investment companies.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which shareholders may
recommend nominees to the Registrant's board of directors.
ITEM 10. CONTROLS AND PROCEDURES.
(a) The Registrant's principal executive and principal financial officers have
concluded that the Registrant's disclosure controls and procedures (as
defined in Rule 30a-3(c) under the Investment Company Act of 1940, as
amended (the "1940 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 1940 Act and Rules 13a-15(b) or
15d-15(b) under the Securities Exchange Act of 1934, as amended.
(b) There were no changes in the Registrant's internal controls over financial
reporting that occurred during the Registrant's last 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.
(a) (1) 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 filing of an exhibit: Not
applicable for semi-annual reports.
(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 are filed herewith.
(3) Any written solicitation to purchase securities under Rule 23c-1 under
the Act sent or given during the period covered by the report by or on
behalf of the registrant to 10 or more persons: Not applicable to open-end
management investment companies.
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
are furnished 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: August 24, 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: August 24, 2004
By: /s/ Glen W. Albanese
---------------------------------------
Name: Glen W. Albanese
Title: Treasurer and Secretary (Principal
Financial Officer)
Date: August 24, 2004