Fees and Expenses of the Growth Fund

 

This table describes the fees and expenses you may pay if you buy and hold shares of the Growth Fund.

 

 

Example

 

This example is intended to help you compare the cost of investing in the Growth Fund with the cost of investing in other mutual funds.

 

The example assumes that you invest $10,000 in the Growth Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year, that all dividends and distributions have been reinvested, and that the Growth Fund’s operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

 

1 Year		3 Years		5 Years		10 Years
$198		$612		$1,052		$2,275

 

Portfolio Turnover

 

The Growth Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Growth Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the example, affect the Growth Fund’s performance. During the most recent fiscal year, the Growth Fund’s portfolio turnover rate was 17% of the average value of its portfolio.

 

Fees and Expenses of the Aggressive Growth Fund

 

This table describes the fees and expenses you may pay if you buy and hold shares of the Aggressive Growth Fund.

 

 

Example

 

This example is intended to help you compare the cost of investing in the Aggressive Growth Fund with the cost of investing in other mutual funds.

 

The example assumes that you invest $10,000 in the Aggressive Growth Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year, that all dividends and distributions have been reinvested, and that the Aggressive Growth Fund’s operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be:

 

1 Year		3 Years		5 Years		10 Years
$209		$646		$1,108		$2,390

 

 

Portfolio Turnover

 

The Aggressive Growth Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Aggressive Growth Fund shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the example, affect the Aggressive Growth Fund’s performance. During the most recent fiscal year, the Aggressive Growth Fund’s portfolio turnover rate was 15% of the average value of its portfolio.

Fees and Expenses of the Small Cap Growth Fund

 

This table describes the fees and expenses you may pay if you buy and hold shares of the Small Cap Growth Fund.

Shareholder Fees (fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases		None
Maximum Deferred Sales Charge (Load)		None
Maximum Sales Charge (Load) Imposed on
Reinvested Dividends and Other Distributions		None
Redemption Fee (as a % of amount redeemed) on Shares Held 60 days or less		2.00	%
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management Fees		1.25	%
Distribution and/or Service (12b-1) Fees		0.25	%
Other Expenses
Dividends on Short Positions and Interest Expense		0.12	%
All Remaining Other Expenses		0.42	%
Total Other Expenses		0.54	%
Acquired Fund Fees and Expenses (a)		0.01	%
Total Annual Fund Operating Expenses		2.05	%
(a)	Acquired fund fees and expenses are not included in the Financial Highlights section of this Prospectus, which reflects only the operating expenses of the Small Cap Growth Fund.

Example

 

This example is intended to help you compare the cost of investing in the Small Cap Growth Fund with the cost of investing in other mutual funds.

 

The example assumes that you invest $10,000 in the Small Cap Growth Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year, that all dividends and distributions have been reinvested, and that the Small Cap Growth Fund’s operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions, your costs would be:

 

1 Year		3 Years		5 Years		10 Years
$208		$643		$1,103		$2,379

 

Principal Investment Strategies

 

Under normal conditions, the Small Cap Growth Fund invests at least 80% of its net assets in equity securities of domestic issuers listed on a nationally recognized securities exchange or traded on the NASDAQ System that have market capitalizations not exceeding $3 billion at the time of investment. The Small Cap Growth Fund invests, in general, in companies with strong growth potential that, for a variety of reasons, including the market’s inefficiencies, are trading at a discount to their underlying value where a catalyst is in place to eliminate that discount.

Principal Investment Risks

 

The Small Cap Growth Fund invests primarily in equity securities that fluctuate in value. Political and economic news can influence market-wide trends. Other factors may cause price swings in a single company’s stock or the stocks of the companies within a given industry. The Small Cap Growth Fund often invests in smaller companies that may have limited product lines, markets or financial resources. These smaller companies may trade at a lower volume than more widely held securities and may fluctuate in value more sharply than those of other securities. The Small Cap Growth Fund invests in stocks believed by the investment adviser to have the potential for growth, but that may not realize such perceived potential for extended periods of time or may never realize such perceived growth potential. Such stocks may be more volatile than other stocks because they can be more sensitive to investor perceptions of the issuing company's growth potential. Although the Small Cap Growth Fund is classified as “diversified” under the 1940 Act, the Small Cap Growth Fund may invest its assets in a smaller number of issuers than other, more diversified, funds. The Small Cap Growth Fund’s NAV may be more vulnerable to changes in the market value of a single issuer or group of issuers and may be relatively more susceptible to adverse effects from any single corporate, industry, economic, market, political or regulatory occurrence than if the Small Cap Growth Fund’s investments consisted of securities issued by a larger number of issuers. Loss of money is a risk of investing in the Small Cap Growth Fund.

Bar Chart and Performance Table

 

The information in the bar chart and table that follow provides some indication of the risks of investing in the Small Cap Growth Fund by showing changes in the Small Cap Growth Fund’s performance from year to year and by showing how the Small Cap Growth Fund’s average annual returns for 1, 5 and 10 years and for the life of the Small Cap Growth Fund compare to those of broad measures of market performance.

 

The Small Cap Growth Fund’s past performance (before and after taxes) is not necessarily an indication of how the Small Cap Growth Fund will perform in the future. Updated performance information is available on the Small Cap Growth Fund’s Web site at www.needhamfunds.com.

 

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During the ten-year period shown in the above chart, the highest quarterly return was 34.71% (for the quarter ended 6/30/03) and the lowest quarterly return was -23.72% (for the quarter ended 9/30/11).

 

Average annual total returns for the periods ended December 31, 2012

 

The following table shows the Small Cap Growth Fund’s average annual returns (before and after taxes) and the change in value of certain broad-based market indices over various periods ended December 31, 2012. The index information is intended to permit you to compare the Small Cap Growth Fund’s performance to several broad measures of market performance. The NASDAQ Composite Index and the Russell 2000 Index are relevant to the Small Cap Growth Fund because they have characteristics similar to the Small Cap Growth Fund’s investment strategies.

 

After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not include the impact of state and local taxes. In some instances, the “Return After Taxes on Distributions and Redemption” may be greater than the “Return Before Taxes” because you are assumed to be able to use the capital loss on the sale of shares to offset other taxable gains.

 

Your actual after-tax returns depend on your tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold their shares in a tax-deferred account (including a 401(k) or IRA), or to investors who are tax-exempt.

 

Average annual total returns for the periods ended December 31, 2012

 

	1 Year	5 Years	10 Years	Life of Fund (Since 5/22/02)
Return Before Taxes	8.53%	6.15%	10.10%	9.88%
Return After Taxes on Distributions	8.53%	5.48%	8.88%	8.73%
Return After Taxes on Distributions and Redemption	5.54%	5.14%	8.73%	8.57%
Comparative Indices (reflect no deduction for fees, expenses or taxes)
S&P 500 Index	16.00%	1.66%	7.10%	4.69%
NASDAQ Composite Index	17.75%	3.78%	9.46%	6.69%
Russell 2000 Index	16.35%	3.56%	9.72%	6.64%

 

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Investment Adviser

 

Needham Investment Management L.L.C. is the investment adviser of the Small Cap Growth Fund.

 

Portfolio Manager

 

The portfolio manager of the Small Cap Growth Fund is Chris Retzler. Mr. Retzler is Executive Vice President and has been Portfolio Manager of the Small Cap Growth Fund since 2008.

 

Purchase and Sale of Fund Shares

 

The minimum initial investment for individuals, corporations, partnerships or trusts is $2,000. There is a $100 minimum for subsequent investments. For IRAs, the minimum initial investment is $1,000 and there is no minimum for subsequent investments.

 

You may redeem your shares at any time by sending a written request to The Needham Funds, c/o U.S. Bancorp Fund Services, LLC, P.O. Box 701, Milwaukee, WI 53201-0701, by calling 1-800-625-7071, or by wire transfer.

 

Tax Information

 

The Small Cap Growth Fund intends to make distributions each year. The Small Cap Growth Fund’s distributions are taxable, and will be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account. Such tax-deferred arrangements may be taxed later upon withdrawal of monies from those arrangements.

 

Payments to Broker-Dealers and Other Financial Intermediaries

 

If you purchase the Small Cap Growth Fund through a broker-dealer or other financial intermediary (such as a bank), the Small Cap Growth Fund and its related companies may pay the intermediary for the sale of Small Cap Growth Fund shares and related services. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the Small Cap Growth Fund over another investment. Ask your salesperson or visit your financial intermediary’s Web site for more information.

 

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Investment Objectives, Strategies, Policies and Risks

 

Growth Fund

 

The Growth Fund seeks long-term, tax-efficient capital appreciation by primarily investing in the equity securities of public companies with above-average prospective long-term growth rates at value prices. These above-average growth rates are exhibited by companies at the vortex of rapid and fundamental changes in the world economy resulting from technological or demographic change. In this manner, the Growth Fund seeks to build wealth for long-term investors. The Growth Fund strives for maximum tax efficiency by balancing gains and losses. The central premise of the Growth Fund’s investment style is growth, but more specifically, “Growth At a Reasonable Price” or “GARP.” This style has become more popular as the markets have exhibited unprecedented levels of volatility and as investors have come to understand some of the dangers and disadvantages of momentum investing.

 

The Growth Fund generally seeks to invest in companies which exhibit the following characteristics:

 

●

Long-Term Value. In the short term, equity markets often incorrectly value stocks. Good companies are often undervalued based on short-term factors such as a disappointing quarter that is not representative of the strength of the business, undue general or industry-specific pessimism, institutions wishing to exit a large position in the stock or a lack of knowledge and support for the stock. The Growth Fund believes that these undervalued situations represent buying opportunities and that real underlying value does eventually assert itself.

 

●

Strong Growth Potential. The Growth Fund invests in companies that are likely to be beneficiaries of long-lasting economic trends resulting from fundamental technological change. The Growth Fund also considers management’s ownership of the company’s stock and what appropriate stock option plans are in place to incentivize all levels of management at the company.

 

●	Strong, Incentivized Management Team. The Growth Fund focuses on the quality of a company’s management team because it believes that management is the most critical element in determining the success of a business.

 

●

High Operating Margins. The Growth Fund will concentrate on industries or companies with the potential to deliver strong profits, not just high revenue growth. The Growth Fund focuses on companies with the potential for high profit margins and strong cash generation. Often, high margins are a sign that a company’s products and services have a high perceived value to its customers. High operating margins are also often indicative of companies with strong execution capabilities and provide companies with the financial flexibility to invest for future growth.

Principal Investment Strategy -- Growth Fund

 

The Growth Fund utilizes the following principal investment strategy:

 

●

Investment in Equity Securities. Under normal conditions, the Growth Fund invests at least 65% of its total assets in the equity securities of domestic issuers listed on a nationally recognized securities exchange or traded on the NASDAQ System. The balance of the Growth Fund’s assets may be held in cash or invested in other securities, including other domestic and foreign equity securities, common stock equivalents (mainly securities exchangeable for common stock), options, futures and various corporate debt instruments. In selecting equity investments for the Growth Fund, the Adviser seeks to identify companies in a variety of industries included in, but not limited to, the healthcare, technology,  specialty retailing, oil services and industrial, media/leisure/cable entertainment and business and consumer services sectors, which it believes will achieve superior growth rates based on its market research and company analysis. When investing in technology, the Adviser focuses on product cycles and unit growth. When investing in healthcare, the Adviser focuses heavily on demographic, regulatory and lifestyle trends. The Adviser will consider overall growth prospects, financial conditions, competitive positions, technology, research and development, productivity, labor costs, raw materials costs and sources, competitive operating margins, return on investment, managements and various other factors.

 

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Aggressive Growth Fund

 

The Aggressive Growth Fund seeks long-term, tax-efficient capital appreciation by primarily investing in the equity securities of public companies with above-average prospective long-term growth rates. While focusing on capital appreciation, the Aggressive Growth Fund also seeks tax efficiency and lowered risk exposure through the use of hedging instruments such as short selling and options. Typically, these above-average growth rates are exhibited by companies addressing the challenges of rapid and fundamental changes in the world economy resulting from demographic, political and technological change. In this manner, the Aggressive Growth Fund seeks to build wealth for long-term investors. The Aggressive Growth Fund strives to balance tax efficiency with the inherent volatility in rapid growth markets and industries. The central premise of the Aggressive Growth Fund’s investment style is growth, but more specifically to move early into emerging areas of rapid growth, to stay with the leaders in established growth markets and to exit or short areas and/or companies that the Aggressive Growth Fund believes can no longer sustain strong, above-average growth profitability.

 

The Aggressive Growth Fund generally seeks to invest in companies which exhibit the following characteristics:

 

●

Strong Growth Potential. The Aggressive Growth Fund seeks markets and industries with strong growth potential. Finding the areas with the greatest unmet needs leads one to the companies attempting to satisfy those needs, and often delivers strong growth opportunities. The Aggressive Growth Fund concentrates on market and industry niche opportunities with large, multi-year growth prospects.

 

●

Market Leaders. The Aggressive Growth Fund will focus on the leaders in these growth markets which often garner a disproportionate share of the positive financial returns. The Aggressive Growth Fund seeks to identify these leaders as they are emerging or re-emerging and before they are widely recognized. At times, this may require investing in private companies in various stages of development, subject to the investment restrictions set forth in this Prospectus and in the Statement of Additional Information. In selecting private companies for initial or continued inclusion in the Aggressive Growth Fund, the Fund shall employ the same investment strategies and standards used when selecting a publicly-held company.

 

●

High Operating Margins. The Aggressive Growth Fund will concentrate on industries or companies with the potential to deliver strong profits, not just high revenue growth. The Aggressive Growth Fund focuses on companies with the potential for high profit margins and strong cash generation. Often, high margins are a sign that a company’s products and services have a high perceived value to its customers. High operating margins are also often indicative of companies with strong execution capabilities and provide companies with the financial flexibility to invest for future growth.

 

●

Long-Term, Sustainable Growth. The Aggressive Growth Fund will focus on the sustainability of strong growth, not just the absolute rate of change. The Aggressive Growth Fund considers the best growth stocks to be those that can sustain strong growth over long periods of time. Many companies can grow rapidly over short periods of time; far fewer have the resources, positioning and execution abilities to deliver superior growth records over time.

 

●

Companies Addressing Unmet Needs. The Aggressive Growth Fund will invest in a company in any industry or geographic market where it believes that the company’s new or differentiated product or service is addressing a substantially unmet need. Most high growth companies are in high growth markets, but others arise in mature sectors of the economy where new products and services, particularly those that are technologically driven, present new growth opportunities. The Aggressive Growth Fund seeks to diversify among industries to moderate risk but will not do so at the expense of limiting growth opportunities.

 

●

Strong Management Strategy and Performance. Quality of management and balance sheets will play key roles in the Fund’s investment decision process. A key part of sustainability is having the managerial and financial resources to fund strong growth. Balance sheet trends are also an important indicator as to the health of a business. Beyond a management’s historical performance record, the Aggressive Growth Fund focuses on the overall strategic vision and tactical decisions in assessing a company’s growth potential.

 

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Principal Investment Strategy -- Aggressive Growth Fund

 

The Aggressive Growth Fund utilizes the following principal investment strategy:

 

●

Investment in Equity Securities. Under normal conditions, the Aggressive Growth Fund invests at least 65% of its total assets in the equity securities of domestic issuers listed on a nationally recognized securities exchange or traded on the NASDAQ System. The balance of the Aggressive Growth Fund’s assets may be held in cash or invested in other securities, including other domestic and foreign equity securities, common stock equivalents (mainly securities exchangeable for common stock), options, futures and various corporate debt instruments. In selecting equity investments for the Aggressive Growth Fund, the Adviser seeks to identify companies in a variety of industries included in, but not limited to the technology, healthcare, business and consumer services, media, communications, financial, energy and industrial sectors, which it believes will achieve superior growth rates based on its market research and company analysis. When investing in technology, the Adviser focuses on product cycles and unit growth. When investing in healthcare, the Adviser focuses heavily on demographic, regulatory and lifestyle trends. The Adviser will consider overall growth prospects, financial conditions, competitive positions, technology, research and development, productivity, labor costs, raw materials costs and sources, competitive operating margins, return on investment, managements and various other factors.

 

Small Cap Growth Fund

 

The Small Cap Growth Fund seeks long-term, tax-efficient capital appreciation by primarily investing in the equity securities of smaller growth companies which the Fund believes are trading at a discount to their underlying value yet have the potential for superior long-term growth. Typically, these above-average growth rates are exhibited by companies addressing the challenges of rapid and fundamental changes in the world economy resulting from demographic, political and technological change. In this manner, the Small Cap Growth Fund seeks to build wealth for long-term investors. The Small Cap Growth Fund strives to balance tax efficiency with the inherent volatility in rapid growth markets and industries. The central premise of the Small Cap Growth Fund’s investment style is growth, more specifically, growth stocks trading at a discount to their underlying value where a catalyst is in place to eliminate the discount through acceleration of revenues and earnings over a period of twelve months or more.

 

The Small Cap Growth Fund generally seeks to invest in companies which exhibit the following characteristics:

 

●

Strong, Incentivized Management Team. The Small Cap Growth Fund focuses, above all, on the quality and capability of a company’s management team because it believes that management is the most critical element in determining the success of a business. The Small Cap Growth Fund also focuses on management’s ownership of the company’s stock and what appropriate stock option plans are in place to incentivize all levels of management at the company.

 

●

No Financial Leverage. The Small Cap Growth Fund strongly prefers companies that take risks in their business and not on their balance sheet. The Small Cap Growth Fund prefers to invest in small cap companies that are debt free. The Small Cap Growth Fund believes that financing availability for small cap companies is so limited that to add leverage to the balance sheet is both unwise and unacceptable.

 

●	Coherent, Well-Thought-Out Strategy. The Small Cap Growth Fund seeks companies that have well-defined plans to penetrate their markets and to grow their businesses. The company’s management must be able to articulate that strategy to its shareholders and the investment community.

 

●

Strong, Long-Term Growth Potential. The Small Cap Growth Fund seeks markets and industries with strong growth potential. Finding the areas with the greatest unmet needs leads one to the companies attempting to satisfy those needs, and often delivers strong growth opportunities. The Small Cap Growth Fund concentrates on market and industry niche opportunities with large, multi-year growth prospects.

 

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●

Market Leaders. The Small Cap Growth Fund will focus on the leaders in these growth markets which often garner a disproportionate share of the positive financial returns. The Small Cap Growth Fund seeks to identify these leaders as they are emerging or re-emerging and before they are widely recognized. At times, this may require investing in private companies in various stages of development, subject to the investment restrictions set forth in this Prospectus and in the Statement of Additional Information. In selecting private companies for initial or continued inclusion in the Small Cap Growth Fund, the Fund shall employ the same investment strategies and standards used when selecting a publicly-held company.

·

High Operating Margins. The Small Cap Growth Fund will concentrate on industries or companies with the potential to deliver strong profits, not just high revenue growth. The Small Cap Growth Fund focuses on companies with the potential for high profit margins and strong cash generation. Often, high margins are a sign that a company’s products and services have a high perceived value to its customers. High operating margins are also often indicative of companies with strong execution capabilities and provide companies with the financial flexibility to invest for future growth .

 

●

Companies Addressing Unmet Needs. The Small Cap Growth Fund will invest in companies that are developing new or differentiated products or services to address a substantially unmet need. Some high growth companies arise in mature sectors of the economy where new products and services, particularly those that are technologically driven, present new growth opportunities. The Small Cap Growth Fund seeks to diversify among industries to moderate risk but will not do so at the expense of limiting growth opportunities.

Principal Investment Strategies – Small Cap Growth Fund

 

The Small Cap Growth Fund utilizes the following principal investment strategies:

 

●

Investment in Equity Securities. Under normal conditions, the Small Cap Growth Fund invests at least 80% of its net assets in equity securities of domestic issuers listed on a nationally recognized securities exchange or traded on the NASDAQ System that have market capitalizations not exceeding $3 billion at the time of investment. The balance of the Small Cap Growth Fund’s assets may be held in cash or invested in other securities, including equity securities of larger companies, foreign securities, common stock equivalents (mainly securities exchangeable for common stock), options, futures and various corporate debt instruments. In selecting equity investments for the Small Cap Growth Fund, the Adviser seeks to identify companies in a variety of industries included in, but not limited to, the technology, healthcare, business and consumer services, media, communications, financial, energy and industrial sectors, which it believes will achieve superior growth rates based on its market research and company analysis. When investing in technology, the Adviser focuses on product cycles and unit growth. When investing in healthcare, the Adviser focuses heavily on demographic, regulatory and lifestyle trends. The Adviser will consider overall growth prospects, financial conditions, competitive positions, technology, research and development, productivity, labor costs, raw materials costs and sources, competitive operating margins, return on investment, managements and various other factors.

 

●

Focus on Long-Term Values. In the short term, equity markets often incorrectly value stocks. Good companies are often undervalued based on short-term factors such as a disappointing quarter for the company not representative of the strength of the business, undue general or industry-specific pessimism, institutions wishing to exit a large position in the stock or a lack of knowledge and support of the stock. The Small Cap Growth Fund believes that these undervalued situations represent buying opportunities. Lower quality companies are often overvalued based on short-term factors such as inordinate optimism about a new industry or technology, aggressive forecasts, investment banks promoting their clients, an earnings spike, momentum investors driving up prices or accounting gimmicks. These overvalued situations represent opportunities for short selling as, in the long term, real underlying value will eventually assert itself.

 

● Portfolio Turnover. The Small Cap Growth Fund’s annual portfolio turnover rate may exceed 100%.

 

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Principal Investment Strategies – All Funds

 

The following principal investment strategies are common to each of the Needham Funds (each a “Fund” and collectively, the “Funds”) :

 

●

Fundamental Company and Market Analysis. The Funds rely foremost on fundamental company and market analysis and secondarily on macroeconomic analysis, including trends in gross domestic product (“GDP”), interest rates and inflation, to arrive at investment decisions. The Funds put a premium on in-depth company and industry analysis. The Fund managers intend to visit with company managements frequently, attend trade shows and other industry conferences and develop other sources of independent insight. The Funds track key economic and political events as they affect the relative attractiveness and growth prospects of the portfolio companies. However, given the uneven history of economic forecasting and the fact that many of the best growth companies can continue to grow even in a challenging economic environment, the Funds will rely foremost on finding the best positioned companies and not on market-timing.

 

●

Disciplined Approach to Valuation. The Funds seek to enhance shareholder returns with a disciplined approach to valuations, both relative and absolute. Since the markets’ valuations fluctuate due to many factors, including economic and political uncertainties, inflation perceptions and competition from other asset classes, the Funds look to value stocks both relative to the market and relative to other growth companies, seeking to pay the least for the most amount of sustainable growth. While growth stocks have generally carried high relative valuations to the market, even the best of growth companies can become overvalued. The Funds will seek to find growth stocks typically trading at a discount, not a premium, to the market. However, the Funds intend to sell any holding if the absolute level of valuation, in their opinion, outstrips the growth potential of that company.

 

●

Issuer Concentration and Focus on Particular Market Sectors. Although the Funds are classified as “diversified” under the 1940 Act, the Funds may invest their assets in a smaller number of issuers other than, more diversified, funds. To the extent the Funds invest a significant portion of their assets in a few issuers’ securities, the performance of the Funds could be significantly affected by the performance of those issuers. See Statement of Additional Information — “Investment Restrictions.” As a fundamental policy, each Fund will not invest more than 25% of its net assets in issuers conducting their principal business in the same industry. However, each Fund at times may invest more than 25% of its total assets in securities of issuers in one or more market sectors, including the technology and healthcare sectors. A market sector may be made up of companies in a number of related industries.

 

●

Defensive Positions. Each Fund may temporarily invest up to 100% of its assets in cash or cash equivalents, investment grade debt securities or repurchase agreements for defensive purposes. Consistent with the Funds’ investment objectives and policies, the Adviser may make changes to the portfolios whenever it considers market, economic or political conditions to be unfavorable for profitable investing or it believes that doing so is in the best interest of the Funds. To the extent a Fund takes a defensive position, it may not achieve its investment objective.

 

●

Short Selling. The Funds may engage in short sales. In a short sale of securities, a Fund sells stock which it does not own, making delivery with securities borrowed from a broker. The Fund is then obligated to replace the security borrowed by purchasing it at the market price at the time of replacement. The Funds may make a profit or loss depending upon whether the market price of the security decreases or increases between the date of the short sale and the date on which the Funds replace the borrowed security.

 

Until the security is replaced, the Fund is required to pay the lender any dividends or interest which accrue during the period of the loan. In order to borrow the security, a Fund may also have to pay a premium and/or interest which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet margin requirements, until the short position is closed. In addition, the broker may require the deposit of collateral.

 

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A Fund will incur a loss as a result of the short sale if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. A Fund will realize a gain if the security declines in price between those two dates. The amount of any gain will be decreased and the amount of any loss will be increased by any premium or interest the Fund may be required to pay in connection with the short sale. When a cash dividend is declared on a security in which the Fund has a short position, the Fund incurs the obligation to pay an amount equal to that dividend to the lender of the shorted security. However, any such dividend on a security sold short generally reduces the market value of the shorted security, thus increasing a Fund’s unrealized gain or reducing a Fund’s unrealized loss on its short-sale transaction. Whether a Fund will be successful in utilizing a short sale will depend, in part, on the Adviser’s ability to correctly predict whether the price of a security it borrows to sell short will decrease.

 

In a short sale, the seller does not immediately deliver the securities sold and is said to have a short position in those securities until delivery occurs. While the short position is open, the Fund must maintain on a daily basis at the lending broker segregated liquid assets at such a level that the amount segregated plus the amount of collateral deposited with the broker as margin  exceeds the current market value of the securities sold short. The amount of such excess is determined by the broker in accordance with Federal Reserve Board Regulation T, New York Stock Exchange rules, and the broker’s house requirements. The Fund may meet such excess by depositing cash or marketable securities with the lending broker.

 

The Funds may short highly valued companies in high growth sectors with challenged cost structures and balance sheets, eroding competitive positions and rapidly decelerating end demand. High growth markets invite numerous competitors, many of which do not survive. In the early stages of new markets, it is not always clear who the real winners will be. As the better companies emerge, the Funds look to short the weaker competitors when the Funds believe their valuations do not yet reflect their weaker status.

 

All short sales must be fully collateralized and none of the Funds will sell short securities the underlying value of which exceeds 25% of the value of the net assets of the Fund. The Funds will also limit short sales in any one issuer’s securities to 2% of the respective Fund’s net assets and will not sell short more than 2% of any one class of the issuer’s securities.

Other Investment Strategies – All Funds

 

Each of the Needham Funds may also utilize the following non-principal investment techniques, among others:

 

●

Borrowing and Leverage. As a fundamental policy, each Fund may borrow from banks up to 25% of its total assets taken at market value (including the amount borrowed), and may pledge its assets in connection with these borrowings, and then only from banks as a temporary measure, including to meet redemptions or to settle securities transactions. The Funds will not make additional investments while borrowings exceed 5% of its total assets. If the Funds make additional investments while borrowings are outstanding, this may constitute a form of leverage. This leverage may exaggerate changes in the Funds’ share value and the gains and losses on the Funds’ investments.

 

●

Options, Futures and Forward Contracts.   The Funds may use hedging techniques, such as the buying and selling of options and futures contracts, where appropriate, to reduce some of the high volatility inherent to rapidly changing markets and industries. A Fund may also buy and sell options and futures contracts to manage its exposure to changing interest rates, currency exchange rates and precious metals prices. Additionally, the Funds may enter into forward contracts as a hedge against future fluctuations in foreign exchange rates. The Funds may buy and sell stock index futures contracts or related options in anticipation of general market or market sector movements. The Funds may also invest in indexed securities or related options, the value of which is linked to currencies, interest rates, commodities, indices, or other financial indicators. Options and futures may be combined with each other or with forward contracts in order to adjust the risk and return characteristics of the overall strategy. The Funds may invest in options and futures based on any type of security, index, or currency related to their investments, including options and futures traded on domestic and foreign exchanges and options not traded on any exchange. However, a Fund will not engage in options, futures or forward transactions, other than for hedging purposes, if, as a result, more than 5% of its total assets would be so invested. The Funds may engage in these kinds of transactions to an unlimited extent for hedging purposes.

 

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In summary, the keys to successful investing by the Funds include an understanding of macroeconomic and political trends, an evaluation of the high growth sectors of the economy, identifying a sector’s leaders and laggards, frequent visits with company management and an analysis of companies’ business fundamentals, quality of management and competitive position. After finding an attractive growth candidate for the Funds, the specific company’s valuation is evaluated relative to its prospects and competing candidates, both current holdings and other potential investments, to determine if enough price appreciation potential is available to warrant inclusion in the Funds.

 

The Funds will seek to reduce their risks with in-depth fundamental analysis, a focused assessment of risk versus return, a view for the catalyst in the individual stock and reliable monitoring of positions to be responsive to changes in industry and market fundamentals. The Funds will also attempt to reduce their risk by taking short positions in companies where they believe market fundamentals have been exceeded, as well as by the use of options to hedge positions. Furthermore, a Fund may maintain larger than normal cash positions when it is unable to identify attractive new opportunities.

 

The Funds will engage in a constant analysis of the existing Fund investments to ensure that the growth, profitability and valuation of the investments warrant their remaining in the Funds’ respective portfolios. Positions will be sold when they no longer meet the respective long-term investment objectives of the Funds. The Funds have adopted certain investment restrictions which are fundamental and may not   be changed without a shareholder vote. Except as specifically noted, the Funds’ investment objectives and policies described in the preceding pages are not fundamental policies and may be changed or modified by the Board of Directors of The Needham Funds, Inc. (the “Board of Directors”) without shareholder approval. However, neither the Growth Fund nor the Aggressive Growth Fund will change its investment objective without first providing written notice to its shareholders at least 30 days in advance. The Small Cap Growth Fund will not change its investment objective or 80% investment strategy without first providing written notice to its shareholders at least 60 days in advance. A complete list of the Funds’ investment restrictions, both fundamental and non-fundamental, and certain other policies not described in the Prospectus may be found in the Statement of Additional Information.

Principal Risk Factors – All Funds

 

The Funds invest primarily in equity securities, which fluctuate in value. Therefore, shares of the Funds will also fluctuate in value.  Loss of money is a risk of investing in the Funds.

 

Although the Funds are classified as "diversified" under the 1940 Act, the Funds may invest their assets in a smaller number of issuers than other, more diversified, funds. A Fund's NAV may be more vulnerable to changes in the market value of a single issuer or group of issuers and may be relatively more susceptible to adverse effects from any single corporate, industry, economic, market, political or regulatory occurrence than if the Fund's investments consisted of securities issued by a larger number of issuers. While political and economic news can influence market wide trends, other factors may be ignored by the market as a whole but may cause price swings in a single company’s stock or the stocks of the companies within a given industry. Business and economic developments affecting an industry in which the Funds invest a significant portion of their assets would likely have a greater effect on the Funds than those same developments would have on a fund invested in a wider spectrum of market or industry sectors.

 

The net asset values of the Funds’ shares, to the extent the Funds invest in debt securities, are affected by changes in the general level of interest rates.

 

The Funds may invest in preferred stock which may be subject to optional or mandatory redemption provisions.

 

The Funds intend to invest in technology companies. These companies generally operate in intensely competitive markets. This level of competition can put pressure on the prices of their products and services which could adversely affect their profitability. Also, because technological development in many areas increases at a rapid rate, these companies often produce products with very short life cycles and face the risk of product obsolescence. Other risks include worldwide competition, changes in consumer preferences, problems with product compatibility, the effects of economic slowdowns, and changes in government regulation. The securities of companies in these sectors may experience more price volatility than securities of companies in other industries.

 

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The Funds also intend to invest in health-care companies. The value of equity securities of these companies may fluctuate because of changes in the regulatory and competitive environment in which they operate. Many healthcare companies offer products and services that are subject to governmental regulation and may be adversely affected by changes in governmental policies or laws. Failure to obtain regulatory approvals or changes in governmental policies regarding funding or subsidies may also adversely affect the value of the equity securities of healthcare companies. Healthcare companies may also be strongly affected by scientific or technological developments and their products may quickly become obsolete. Furthermore, these companies may be adversely affected by product liability-related lawsuits.

 

Additionally, the Funds intend to invest in business and consumer services companies. These companies may be affected by the performance of the economy as a whole and may   also be affected by increases in interest rates and decreases in disposable income and consumer confidence.

 

Investments in smaller companies may offer greater opportunities for capital appreciation than larger companies, but may also involve certain special risks. These companies may have limited product lines, markets, or financial resources and may be dependent on a limited management group. These securities may also trade less frequently and at a lower volume than more widely held securities, and may fluctuate in value more sharply than those of other securities. There may be less available information about these issuers or less market interest than is normally the case with respect to larger companies. Furthermore, investments based on the anticipated long-term growth of a company may decline in value if the catalyst for such growth does not occur.

 

Short sales present the risk that the price of the security sold short will increase in value between the time of the short sale and the time the Fund must purchase the security to return it to the lender. The Fund may not be able to close a short position at a favorable price or time and the loss of value on a short sale is potentially unlimited. A Fund must borrow securities to enter into a short sale. If the lender demands the return of the securities, the   Fund must deliver them promptly, either by borrowing from another lender or buying the securities. If this occurs at the same time other short-sellers are trying to borrow or buy the securities, the stock   price could rise, making it more likely that the Funds will have to cover their short positions at an unfavorable price. This could happen regardless of whether or not the prospects for an issuer are favorable or unfavorable.

 

The strategies used by the Funds’ portfolio managers may fail to produce the intended result, and stock selection may underperform the stock market, the Funds’ benchmarks or other funds with similar objectives. There is no guarantee that the use of hedging techniques or derivative instruments will succeed in limiting the Funds’ exposure to stock market movements, or that the Funds will achieve their investment goals of long-term, tax-efficient capital appreciation.

 

In addition to the principal risks discussed above, an investment in the Funds may be subject to additional risks which include those risks discussed below.

Other Risk Factors – All Funds

 

Subject to the Funds’ investment policies and restrictions on investments in illiquid securities, the Funds may invest in privately-held companies. Investments in companies in the early stages of development, particularly those companies which have yet to offer securities to the public, may offer greater opportunities for capital appreciation than longer-established or publicly-held companies. However, investments in these companies are often riskier than investments in longer-established or publicly-held companies. Typically, there is very little public information available on these companies, their management philosophies and strategies may be untested, their product lines, markets and financial resources may be limited and the restrictions on resale of securities of such companies imposed by U.S. securities laws and by market forces in general may make it difficult for the Funds to liquidate any position it may have in such a company. Even if the Funds are able to liquidate a position in such a company, they may be forced to do so at prices which are not beneficial to the Funds. See Statement of Additional Information — “Description of the Funds and Investment Objectives and Policies.”

 

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Certain investment techniques described in this Prospectus, such as options and futures strategies and leverage, may entail risks and may result in significant capital loss. The Funds may engage in various strategies as described above, to varying degrees, both to seek to increase the returns and to hedge their portfolios against movements in the securities markets and exchange rates.

 

Options, futures and forward contracts can be volatile investments. Use of these strategies involves the risk of imperfect correlation in movements in the price of options and futures and movements in the price of the securities or currencies which are the subject of the hedge. If the Funds make a transaction at an inappropriate time or judge market conditions incorrectly, options and futures strategies may significantly lower the Funds’ returns. The Funds will comply with applicable regulatory requirements when implementing these strategies, techniques and instruments. Furthermore, there can be no assurance that a liquid secondary market for options and futures contracts will exist at any specific time. Options and futures contracts, and certain of the other investments described above and in the Statement of Additional Information, may be considered “derivative” investments, and entail certain risks described above and in the Statement of Additional Information.

 

In addition, the Funds may invest in the securities of non-U.S. issuers, which have risks that are different from the risks associated with investments in the securities of U.S. issuers. See “ Description of the Funds and Investment Objectives and Policies ” in the Statement of Additional Information.

 

The Small Cap Growth Fund may engage in active and frequent trading of portfolio securities. A higher portfolio turnover rate increases transaction costs and as a result may adversely impact the Small Cap Growth Fund’s performance. High portfolio turnover may also increase share price volatility and may generate more short-term capital gains that will generally be taxable to the Small Cap Growth Fund’s shareholders as ordinary income.

Who Should Invest in the Funds

 

The Funds are not intended to provide a balanced investment program. The Funds are most suitable for an investor who is willing to accept a higher degree of risk than is present in many fixed-income or certain other equity mutual funds.

 

Portfolio Holdings

 

The Funds generally make their complete portfolio holdings available on their Web site, after a 10-day lag following the end of the most recent calendar quarter, at www.needhamfunds.com under Needham Funds Quarterly Updates.  The ten largest equity holdings of each Fund also include the percentage of that Fund’s total investments that each holding represents.

 

A description of the Funds’ policies and procedures with respect to the disclosure of the Funds’ portfolio securities is available in the Funds’ Statement of Additional Information and on the Funds’ Web site at www.needhamfunds.com. Currently, disclosure of the Funds’ holdings is required to be made quarterly within 60 days of the end of each fiscal quarter, in the Funds’ Annual Report and Semi-Annual Report to shareholders and in the quarterly holdings report on Form N-Q. The Annual and Semi-Annual Reports are available by contacting the Funds’ administrator, U.S. Bancorp Fund Services, LLC, P.O. Box 701, Milwaukee, WI 53201-0701, by telephone at 1-800-625-7071, and on the Funds’ Web site at www.needhamfunds.com.

Investment Adviser

 

Needham Investment Management L.L.C. (the “Adviser”), 445 Park Avenue, New York, NY, 10022, was formed in 1995 and is registered as an investment adviser with the Securities and Exchange Commission. The Adviser is an affiliate of Needham & Company, LLC. Needham & Company, LLC is the Funds’ distributor and is an investment banking firm specializing in growth companies and their investors.

 

The Adviser directs investments of the Funds pursuant to a Restated Investment Advisory Agreement dated October 21, 2004 between the Funds and the Adviser (the “Advisory Agreement”). Each Fund pays the Adviser a fee at the annual rate of 1.25% of the respective average daily net assets of the Fund. This fee is slightly higher than that paid by most mutual funds. The Adviser or persons employed by or associated with the Adviser are, subject to the authority of the Board of Directors, responsible for the overall management of the Funds’ affairs.

 

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The Adviser has contractually agreed to waive its management fee for, and to reimburse expenses of, each Fund in an amount that limits annual operating expenses (excluding taxes, interest, brokerage, dividends on short positions, fees and expenses of “acquired funds” (as defined in Form N-1A) and extraordinary items) and excluding shareholder redemption fees but including the management fee stated in the Advisory Agreement) to not more than 1.95% of the average daily net assets of the Growth Fund, the Aggressive Growth Fund and the Small Cap Growth Fund for the 12-month period ended April 30, 2014.  For a period of up to 36 months from the time of any waiver or reimbursement pursuant to this agreement, the Adviser may recover from a Portfolio fees waived and expenses reimbursed to the extent that such recovery would not cause the Total Annual Fund Operating Expenses of the Portfolio to exceed 1.95% of the average daily net assets of the Portfolio, but any such recovery will not include interest..

 

A discussion regarding the basis for the Board of Directors’ approval of the Advisory Agreement is available in the Funds’ Annual Report to shareholders for the period ended December 31, 2012.

 

Portfolio Managers

 

Mr. John   O. Barr is a graduate of Harvard Business School and Colgate University. From 1995 - 2000, Mr. Barr was a Managing Director and Senior Analyst at Needham & Company. He was an Institutional Investor All-Star and was ranked by Reuters as leader of one of the top software teams. He also served as Director of Research. From 2000 - 2002, he was a Managing Director and Senior Analyst at Robertson Stephens following semiconductor technology companies. From 2002 - 2008, Mr. Barr was a portfolio manager and analyst at Buckingham Capital Management’s diversified industry long/short domestic equity hedge fund. He focused   on telecom, semiconductors and software. He also has experience with financials, energy, exploration and production and mining stocks. From 2008 - 2009, Mr. Barr was the Founding and Managing Member of Oliver Investment Management, LLC, a long-short hedge fund focused on small cap technology and exploration and mining stocks. He rejoined Needham & Company in August 2009 as a Managing Director and a portfolio manager of hedge funds. He serves as Executive Vice President and Co-Portfolio Manager of the Growth Fund and as Executive Vice President and the Portfolio Manager of the Aggressive Growth Fund. He engages in a variety of portfolio management-related activities, including stock selection, research, company visits and market analysis.

Mr. Chris Retzler is the Co-Portfolio Manager of the Growth Fund and the Portfolio Manager of the Small Cap Growth Fund. Mr. Retzler has been with Needham Asset Management, LLC since 2005. Mr. Retzler is a graduate of the Columbia Business School and was a Fulbright Scholar. He began his career in 1994 with Merrill Lynch Investment Banking. When he left Merrill Lynch in 2002, Mr. Retzler was an associate in Mergers and Acquisitions where he participated in numerous stock and asset transactions across a wide range of domestic and global industries. From 2002 until he joined Needham, he was in charge of Winterkorn, a privately owned company. Prior to becoming Co-Portfolio Manager of the Growth Fund and the Portfolio Manager of the Small Cap Growth Fund, Mr. Retzler was Vice President of Needham Asset Management, LLC. Mr. Retzler’s responsibilities at Needham included examining and conducting due diligence on both existing and new investment opportunities for the Needham Funds. He also serves as Executive Vice President of the Growth Fund and the Small Cap Growth Fund. Mr. Retzler became Co-Portfolio Manager of the Growth Fund in January 2009 and Portfolio Manager of the Small Cap Growth Fund in January 2008. He engages in a variety of portfolio management-related activities, including stock selection, research, company visits and market analysis.

 

The Statement of Additional Information provides additional information about the Portfolio Managers’ compensation, other accounts managed by the Portfolio Managers, and the Portfolio Managers’ ownership of securities in each Fund.

Management of the Funds

 

The Directors of The Needham Funds, Inc. are responsible for generally overseeing the conduct of the Funds’ business. The Directors of The Needham Funds, Inc. are:

 

George A. Needham — Mr. Needham founded Needham & Company, Inc. (predecessor to The Needham Group, Inc.) in 1985. Mr. Needham is the Chairman of the Board and Chief Executive Officer of The Needham Group, Inc., Chairman of the Board and Chief Executive Officer of Needham Holdings, LLC and Chairman of the Board and Chief Executive Officer of Needham Asset Management, LLC. Mr. Needham received a BS degree from Bucknell University and an MBA from the Stanford University Graduate School of Business. Mr. Needham is also a principal of the respective general partners of several private investment limited partnerships.

 

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John W. Larson — Mr. Larson is currently retired. Mr. Larson was a partner at the law firm of Morgan, Lewis & Bockius LLP from 2003 until retiring in December 2009. Mr. Larson served as partner at the law firm of Brobeck, Phleger & Harrison LLP (“Brobeck”) from 1969 until retiring in January 2003, except for the period from July 1971 to September 1973 when he was in government service as Assistant Secretary of the United States Department of the Interior and Counselor to George P. Shultz, Chairman of the Cost of Living Council. From 1988 until March 1996, Mr. Larson was Chief Executive Officer of Brobeck. Mr. Larson has served on the board of Wage Works, Inc. (an employee benefits company) since 2000, and Sangamo BioSciences, Inc. since 1996. Mr. Larson holds a J.D. and a B.A., with distinction, in economics, from Stanford University.

 

James P. Poitras — Mr. Poitras is currently retired. Mr. Poitras was founder, President, Chief Executive Officer and Chairman of the Board of Integrated Silicon Systems, a computer software company, from 1985 to 1995. Mr. Poitras is presently a Director of Kyma Technologies, Inc., a specialty materials semiconductor company. Mr.   Poitras received a B.S. from Bucknell University. Mr. Poitras was a member of the Institute of Electrical and Electronics Engineers’ Industry Advisory Commission and has lectured widely on business development and entrepreneurship.

 

F Randall Smith — Mr. Smith is founder and President of Capital Counsel LLC, a registered investment advisory firm. He was a co-founder and Chief Investment Officer of Train, Smith Counsel, a registered investment advisory firm, from 1975 to 1999. Before that he co-founded National Journal, a weekly publication on the U.S. Government, and served as Special Assistant to the Undersecretary of State for Economic Affairs prior to founding Train, Smith Counsel.

 

Distribution Arrangements

 

Needham & Company, LLC, an affiliate of the Adviser, acts as a distributor for the Funds. Rule 12b-1  under the  1940 Act permits an investment company to directly or indirectly finance any activity associated with the sale and distribution of its shares and/or shareholder-related services in accordance with a plan adopted by the Board of Directors. Pursuant to this rule, the Directors of The Needham Funds, Inc. have approved, and The Needham Funds, Inc. has entered into, a Distribution and Services Agreement, as amended (the “Distribution Agreement”) with Needham & Company, LLC, under which each Fund may pay a services fee to Needham & Company, LLC or others at an annual rate of up to 0.25% of the aggregate average daily net assets of such Fund which are attributable to Needham & Company, LLC or the various other distributors or service providers. These fees are paid out of the Funds’ assets on an ongoing basis, and thus over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. In addition, the Adviser may pay amounts from its own resources, and not as an additional charge to the Funds, to certain financial institutions in connection with the sale and/or distribution of the Funds’ shares or the retention and/or servicing of the Funds’ shareholders. These payments, which may include payments for marketing support, are in addition to any distribution or servicing fees payable under the Funds’ Rule 12b-1 plan. Because these payments are not made by shareholders or the Funds, the Funds’ total expense ratio will not be affected by any such payments. These payments sometimes are referred to as “revenue sharing.” In some cases, such payments may create an incentive for the financial institution to recommend or make shares of the Funds available to its customers and may allow the Funds greater access to the financial institution’s customers.

 

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The Distribution Agreement provides that Needham & Company, LLC will use the services fee received from the Funds, in part, for payments (i) to compensate broker-dealers or other persons for providing distribution assistance, (ii) to otherwise promote the sale of shares of the Funds such as by paying for the preparation, printing and distribution of prospectuses for other than current shareholders and sales literature or other promotional activities, and (iii) to compensate banks and other qualified financial institutions for providing administrative, accounting and shareholder liaison services with respect to the Funds’ shareholders. Some payments under the Distribution Agreement or similar agreements are used to compensate broker-dealers based on assets maintained in the Funds by their customers. Distribution services fees are accrued daily, paid monthly and are charged as expenses of the Funds as accrued. Distribution services fees received from the Funds will not be used to pay any interest expenses, carrying charges or other financial costs. In adopting the Distribution Agreement, the Directors of The Needham Funds, Inc. determined that there was a reasonable likelihood that the Distribution Agreement would benefit the Funds and their shareholders.

 

The Needham Funds, Inc. and/or Needham & Company, LLC may enter into related servicing agreements appointing various firms, such as broker-dealers or banks, and others, including the Adviser or its affiliates, to provide all or any portion of the foregoing services for their customers or clients through the Funds.

 

The accounting and shareholder-related services provided by broker-dealers, banks and other qualified financial institutions may include, but are not limited to, establishing and maintaining shareholder accounts, sub-accounting, processing of purchase and redemption orders, sending confirmation of transactions, forwarding financial reports and other communications to shareholders, and responding to shareholder inquiries regarding the Funds. U.S. Bank, N.A. acts as custodian for the Funds.

Net Asset Value

 

The price of each Fund’s shares is the net asset value (“NAV”) of each Fund. Generally, the NAV per share of each Fund will be determined on each day when the New York Stock Exchange (the “Exchange”) is open for business at the close of the Exchange (usually 4:00 p.m. Eastern Time) and will be computed by determining the aggregate market value of all assets of each Fund less its liabilities, and then dividing that amount by the total number of its shares outstanding. On holidays or other days when the Exchange is closed, the NAV is not calculated, and the Funds do not transact purchase or redemption requests. The Exchange will not open in observance of the following holidays: New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. However, on those days, the value of the Funds’ assets may be affected to the extent that the Funds hold foreign securities that trade on foreign markets that are open. From time to time, the Funds may employ fair-value pricing to value securities for which market quotations are not readily available or for which market quotations are believed to be unrepresentative of fair market value. The determination of NAV for a particular day is applicable to all applications for the purchase of shares as well as all requests for the redemption of shares received before the close of trading on the Exchange on that day. Therefore, the price at which a purchase or redemption is effected is based on the next calculation of NAV after the order is placed. All purchase orders received before 4:00 p.m. (Eastern Time) will be processed on that same day. Purchase orders received after 4:00 p.m. (Eastern Time) will receive the next business day’s NAV per share. The Funds may change the time at which the price of each Fund’s shares is determined if the Exchange closes at a different time or an emergency or other extraordinary situation exists.

 

Portfolio securities for which market quotations are readily available are stated at the last sale price reported by the principal exchange for the security as of the exchange’s close of business. Securities 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 highest closing bid and lowest asked prices. Exchange traded options are valued at the last reported sale price on any exchange on which the option is principally traded. If no sales are reported on a particular day, the options will be valued at the mean between the highest closing bid and lowest asked prices across the exchanges where the option is traded. Non-exchange traded options will also be valued at the mean between the last bid and asked quotations. For options where market quotations are not readily available, value will be determined in accordance with the fair value procedures described below.

 

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Additional Information on Redemptions

The Board of Directors has adopted policies and procedures with respect to frequent purchases and redemptions of the Funds’ shares by the Funds’ shareholders. The Funds discourage, and do not accommodate, frequent purchases and redemptions of the Funds’ shares by the Funds’ shareholders. The Funds restrict or reject such trading or take other action if, in the judgment of the Adviser or the Funds’ Transfer Agent, such trading may interfere with the efficient management of the Funds’ portfolios, may materially increase the Funds’ transaction costs, administrative costs or taxes, or may otherwise be detrimental to the interests of the Funds and their shareholders. The steps the Funds utilize to discourage frequent transactions may include monitoring trading activity, imposing trading restrictions on certain accounts, and imposing short-term redemption fees, as set forth herein. Transactions placed in violation of the Funds’ market-timing trading policy may be cancelled or revoked by the Funds on the next business day following receipt by the Funds. While the Funds (directly and with the assistance of their service providers) identify and restrict frequent trading, there is no guarantee that the Funds will be able to detect frequent purchases and redemptions or the participants engaged in such activity, or, if it is detected, to prevent its recurrence. The Funds receive purchase and sale orders through financial intermediaries and cannot always detect frequent trading that may be facilitated by the use of such intermediaries or by the use of group or omnibus accounts maintained by those intermediaries. The Funds’ Transfer Agent is unable to track or assess short-term redemption fees on omnibus account shares redeemed through financial intermediaries. The Funds are dependent on financial intermediaries to track and assess short-term redemption fees due on omnibus account shares on the Funds’ behalf, and the Funds and the financial intermediaries have limited ability to effectively track, assess and collect short-term redemption fees on shares redeemed through the financial intermediaries. In situations in which the Funds become aware of possible market-timing activity, it will notify the financial intermediary in order to help facilitate the enforcement of its market-timing policies and procedures. These policies will be applied uniformly to all financial intermediaries. However, there is no assurance that the financial intermediary will investigate or stop any activity that proves to be inappropriate. There is a risk that the Funds’ and the financial intermediary’s policies and procedures will prove ineffective in whole or in part to detect or prevent frequent trading. Whether or not the Funds or the financial intermediaries detect it, if market-timing activity occurs, then you should anticipate that you will be subject to the disruptions and increased expenses discussed above.

 

As stated above, shares held 60 days or less are subject to a short-term redemption fee of 2.00% at the time of redemption. This fee does not apply to those retirement plans listed below under “ Shareholder Services ” which request that the Funds not charge this fee. In addition, each Fund will waive the 2.00% short-term redemption fee on shares acquired as a result of reinvested distributions, certain assets under advisory programs that are subject to periodic rebalancing strategies, and other types of accounts on a case-by-case basis in the Adviser’s sole discretion that are approved by the Funds’ Chief Compliance Officer .

 

If you hold Fund shares in non-certificate form, you may elect to have redemption proceeds of $1,000 or more wired to your brokerage account or a commercial bank account designated by you. The current fee for this service is $15.00.

 

If you have an IRA or other retirement plan, you must indicate on your redemption request whether or not to withhold Federal income tax. Redemption requests failing to indicate an election not to have Federal income tax withheld will be subject to withholding.

 

You may also redeem shares through broker-dealers holding such shares who have made arrangements with the Funds permitting redemptions by telephone or facsimile transmission. These broker-dealers may charge a fee for this service.

 

If your transactions in the Funds’ shares at any time reduce your account value to below $1,000, the Funds may choose to notify you that, unless your account is brought up to at least such minimum amount, the Funds may, within 90 days, redeem all your shares in the account and close it by making payment to you of the proceeds.

 

Your Fund account may be transferred to your state of residence if it fails to meet certain ownership or activity requirements as specified in your state’s abandoned property laws.

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Shareholder Services

Certain tax-sheltered retirement plans are available through which you may purchase shares, including IRAs (and “rollovers” from existing retirement plans) for you and your spouse, SEP-IRAs and Roth IRAs. Shares of the Funds may also be purchased by Qualified Retirement Plans such as profit-sharing and money purchase plans, 401(k) Plans and other Defined Contribution Plans, and by Defined Benefit Plans. These types of accounts may be established only upon receipt of a written application form. Should you have questions on the purchase of shares by retirement plans, please call 1-800-625-7071 for Shareholder Services.

Tax Status, Dividends and Distributions

Each Fund intends to make annual distributions to its shareholders of record of substantially all of its realized net capital gains (the excess of realized net long-term capital gains over realized net short-term capital losses), any realized net gains from foreign currency transactions, net investment income and the excess, if any, of realized net short-term capital gains over realized net long-term capital losses. The Funds may make additional distributions, if necessary, to avoid a 4% excise tax on certain undistributed ordinary income and capital gain net income. Certain distributions made to shareholders of record as of a date in October, November or December of a given year which are paid by the Funds in January of the immediately subsequent year will be taxable to shareholders as if received on December 31 of such given year.

 

Unless an investment in a Fund is through a tax-exempt account or plan, such as an IRA or qualified retirement plan, distributions are generally taxable to shareholders at different rates depending on the length of time the Fund holds its assets and the type of income that the Fund earns. Different tax rates apply to ordinary income, qualified dividend income and long-term capital gain distributions, regardless of the shareholder’s holding period for the shares. In general, under current law a non-corporate shareholder’s net capital gains in tax years ending after December 31, 2012 will be taxed at a maximum rate of 20% thereafter, for property held by a Fund for more than 12 months. Distributions of net investment income and net capital gains are taxable whether received in cash or reinvested in additional shares. In addition, recently enacted legislation imposes a new 3.8% Medicare tax on the “net investment income” of certain individuals, estates and trusts for taxable years beginning after December 31, 2012.  For this purpose, “net investment income” generally includes taxable dividends and redemption proceeds from investments in regulated investment companies such as the Fund.

 

Unless a shareholder elects to do otherwise, all dividends and capital gain distributions from the Funds will be automatically reinvested in additional full and fractional Fund shares. Shareholders who do not wish to have dividends and distributions automatically reinvested in Fund shares may choose the following options:

(1)	automatic reinvestment of capital gain distributions in Fund shares and payment of dividends in cash;

 

(2)	payment of all distributions and dividends in cash; or

(3)	payment of capital gains distributions in cash and automatic reinvestment of dividends in Fund shares.

 

If you elect to receive capital gains and/or distributions paid in cash, and the U.S. Postal Service cannot deliver the check, or if a check remains outstanding for six months, the Funds reserve the right to reinvest the distribution check in your account, at the respective Fund’s current net asset value, and to reinvest all subsequent distributions.

 

Shareholders may change this election at any time by notifying the Transfer Agent by telephone or in writing. If the account is maintained at an eligible broker-dealer or bank contact your account representative. Dividends and distributions will be reinvested at the respective Fund’s per share NAV on the reinvestment date established for the dividend or distribution.

 

The Funds are required to withhold as “backup withholding” 31%  of distributions and redemption proceeds payable to any individuals and certain other non-corporate shareholders who do not provide the Funds with a correct taxpayer identification number and certain required certifications or who are otherwise subject to backup withholding. Upon a redemption of Fund shares, a shareholder will ordinarily recognize a taxable gain or loss, subject to certain Federal tax rules.

 

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Pursuant to legislation passed by Congress in 2008, the Funds will be required to report their shareholders’ cost basis, gain or loss, and holding period to the Internal Revenue Service on the Consolidated Form 1099 provided to the shareholders of the Funds when “covered” shares of the Funds are redeemed. Covered shares are any shares acquired (including shares acquired through reinvestment of the Funds’ distributions) on or after January 1, 2012. Each of the Funds has chosen the “average cost” method as its default tax method. The Funds will use this method for purposes of reporting a shareholder’s cost basis unless a shareholder instructs the relevant Fund in writing to use a different calculation method. A shareholder may choose a method different from the default method chosen by the Funds at the time of purchase or sale of covered shares. Shareholders should consult their tax advisors with regard to their particular circumstances.

 

The foregoing is only a summary of some of the important Federal tax considerations generally affecting the Funds and shareholders. In addition to those considerations, there may be other Federal, state, local or foreign tax considerations applicable to a particular investor. Prospective shareholders are therefore urged to consult their tax advisers with respect to the effects of the investment on their own tax situations.

Administrator, Shareholder Servicing Agent and Transfer Agent

The Funds employ U.S. Bancorp Fund Services, LLC as administrator pursuant to a Fund Administration Servicing Agreement (the “Agreement”), to provide administrative services to the Funds. The services provided by the Administrator under the Agreement are subject to the supervision of the officers and Directors of The Needham Funds, Inc., and include day-to-day administration of matters related to the corporate existence of the Funds, maintenance of records and preparation of reports.

 

USBFS also provides various shareholder services made available to each shareholder, including performance of transfer agency and registrar functions and as dividend paying agent.  USBFS acts as the Funds’ shareholder servicing agent and fund accountant. Its principal business address is 615 East Michigan Street, Milwaukee, Wisconsin 53202.

Custodian

U.S. Bank, N.A. acts as custodian for the Funds.  Its principal business address is 777 East Wisconsin Avenue, Milwaukee, Wisconsin 53202.

Additional Information

Independent Registered Public Accounting Firm

 

KPMG LLP, 345 Park Avenue, New York, New York 10154 serves as the Funds’ independent registered public accounting firm.

 

Counsel

 

Stroock & Stroock & Lavan LLP, 180 Maiden Lane, New York, New York 10038, serves as the Funds’ legal counsel.

Index Descriptions

 

A direct investment in the following indices is not possible.

 

S&P 500 Index

 

The S&P 500 Index focuses on the large-cap sector of the market; however, since it includes a significant portion of the total value of the market, it also represents the market. Companies in the S&P 500 are considered leading companies in leading industries.

 

NASDAQ Composite Index

 

The NASDAQ Composite Index measures all NASDAQ domestic and international based common type stocks listed on The NASDAQ Stock Market.

 

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Russell 2000 Index

 

The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Russell 2000 Index is a subset of the Russell 3000 ® Index representing approximately 8% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership.

 

S&P MidCap 400 Index

 

The S&P MidCap 400 Index provides investors with a benchmark for mid-sized companies. The index seeks to remain an accurate measure of mid-sized companies, reflecting the risk and return characteristics of the broader mid-cap universe on an on-going basis.

 

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Financial Highlights

The financial highlights table is intended to help you understand the Needham Funds’ financial performance for the past five years. Certain information reflects financial results for a single share. The total returns in the table represent the rate that an investor would have earned (or lost) on an investment in the Fund (assuming reinvestment of all dividends and distributions). The information below is excerpted from the Needham Funds’ financial statements for the fiscal year ended December 31, 2012 which has been audited by KPMG LLP, whose report for each such period, along with Needham Funds’ financial statements and related notes, is included in Needham Funds’ Annual Report for such periods. The 2012 Annual Report is available upon request and without charge by calling 1-800-625-7071. The information for the fiscal years prior to 2011 was audited by  the Funds’ previous independent registered public accounting firm.

 

Needham Growth Fund
		Year Ended December 31
		2012				2011				2010				2009				2008
Net Asset Value, Beginning of Period		$	32.78			$	39.11			$	29.77			$	20.27			$	36.05
Investment Operations
Net Investment Loss			(0.24	)			(0.58	)			(0.60	)			(0.43	)			(0.45	)
Net Realized and Unrealized Gain
(Loss) on Investments			4.31				(3.79	)			9.94				9.93				(14.10	)
Total from Investment Operations			4.07				(4.37	)			9.34				9.50				(14.55	)
Less Distributions
Net Investment Income			—				—				—				—				—
Net Realized Gains			(3.19	)			(1.97	)			—				—				(1.23	)
Total Distributions			(3.19	)			(1.97	)			—				—				(1.23	)
Capital Contributions
Redemption Fees			—	(a)			0.01				—	(a)			—	(a)			—
Total Capital Contributions			—	(a)			0.01				—	(a)			—	(a)			—
Net Asset Value, End of Period		$	33.66			$	32.78			$	39.11			$	29.77			$	20.27
Total Return			12.80	%			(10.94	)%			31.37	%			46.87	%			(40.41	)%
Net Assets, End of Period (000’s)		$	113,561			$	125,966			$	159,805			$	119,175			$	92,818
Ratios/Supplemental Data
Ratio of Total Expenses to Average Net Assets			1.94	%			1.81	%			2.11	%			2.03	%			2.04	%
Ratio of Total Expenses to Average Net Assets
(before interest and dividend expense)			1.82	%			1.78	%			2.00	%			2.00	%			2.03	%
Ratio of Total Expenses to Average Net Assets
(before waiver and reimbursement of expenses)			1.94	%			1.81	%			2.11	%			2.08	%			2.04	%
Ratio of Net Investment Income
(Loss) to Average Net Assets			(0.65	)%			(1.41	)%			(1.85	)%			(1.71	)%			(1.37	)%
Ratio of Net Investment Income (Loss) to
Average Net Assets (before waivers and reimbursements of expenses)			(0.65	)%			(1.41	)%			(1.85	)%			(1.76	)%			(1.37	)%
Portfolio Turnover Rate			17	%			29	%			62	%			29%				41	%

(a) Value is less than $0.005 per share.

 

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Needham Aggressive Growth Fund
		Year Ended December 31
		2012				2011				2010				2009				2008
Net Asset Value, Beginning of Period		$	14.52			$	17.14			$	12.38			$	9.45			$	14.14
Investment Operations
Net Investment Loss			(0.29	)			(0.34	)			(0.11	)			(0.19	)			(0.26	)
Net Realized and Unrealized Gain
(Loss) on Investments			2.41				(2.04	)			4.98				3.13				(3.65	)
Total From Investment Operations			2.12				(2.38	)			4.87				2.94				(3.91	)
Less Distributions
Net Realized Gains			(0.01	)			(0.25	)			(0.11	)			(0.02	)			(0.78	)
Total Distributions			(0.01	)			(0.25	)			(0.11	)			(0.02	)			(0.78	)
Capital Contributions
Redemption Fees			—	(a)			0.01				—	(a)			0.01				—
Total Capital Contributions			—	(a)			0.01				—	(a)			0.01				—
Net Asset Value, End of Period		$	16.63			$	14.52			$	17.14			$	12.38			$	9.45
Total Return			14.61	%			(13.77	)%			39.42	%			31.18	%			(27.60	)%
Net Assets, End of Period (000’s)		$	66,746			$	90,170			$	106,551			$	22,819			$	10,202
Ratios/Supplemental Data
Ratio of Total Expenses to Average Net Assets			2.06	%			1.83	%			2.09	%			2.50	%			2.51	%
Ratio of Total Expenses to Average Net Assets
(before interest and dividend expense)			1.89	%			1.80	%			2.05	%			2.49	%			2.50	%
Ratio of Total Expenses to Average Net Assets			2.06	%			1.83	%			2.09	%			2.50	%			2.63	%
(before waivers and reimbursement of expenses)
Ratio of Net Investment Loss to Average Net Assets			(1.40	)%			(1.62	)%			(1.77	)%			(2.39	)%			(2.04	)%
Ratio of Net Investment Loss to Average Net Assets			(1.40	)%			(1.62	)%			(1.77	)%			(2.39	)%			(2.15	)%
(before waivers and reimbursements of expenses)
Portfolio Turnover Rate			15	%			45	%			55	%			70	%			45	%

(a) Value is less than $0.005 per share.

 

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Needham Small Cap Growth Fund
		Year Ended December 31
		2012				2011				2010				2009				2008
Net Asset Value, Beginning of Period		$	11.26			$	14.21			$	10.73			$	7.61			$	11.29
Investment Operations
Net Investment Loss			(0.15	)			(0.27	)			(0.08	)			(0.20	)			(0.19	)
Net Realized and Unrealized Gain
(Loss) on Investments			1.11				(2.04	)			3.99				3.33				(2.49	)
Total From Investment Operations			0.96				(2.31	)			3.91				3.13				(2.68	)
Less Distributions
Net Realized Gains			—				(0.62	)			(0.43	)			(0.01	)			(0.82	)
Return of Capital			—				(0.02	)			—				—				(0.18	)
Total Distributions			—				(0.64	)			(0.43	)			(0.01	)			(1.00	)
Capital Contributions
Redemption Fees			—	(a)			—	(a)			—	(a)			—	(a)			—
Total Capital Contributions			—	(a)			—	(a)			—	(a)			—	(a)			—
Net Asset Value, End of Period		$	12.22			$	11.26			$	14.21			$	10.73			$	7.61
Total Return			8.53	%			(16.10	)%			36.89	%			41.18	%			(23.42	)%
Net Assets, End of Period (000’s)		$	60,614			$	82,675			$	98,911			$	11,303			$	5,309
Ratios/Supplemental Data
Ratio of Total Expenses to Average Net Assets			2.04	%			1.84	%			2.16	%			2.57	%			2.51	%
Ratio of Total Expenses to Average Net Assets
(before interest and dividend expense)			1.92	%			1.81	%			2.08	%			2.50	%			2.50	%
Ratio of Total Expenses to Average Net Assets
(before waivers and reimbursement of expenses)			2.04	%			1.84	%			2.16	%			3.02	%			3.57	%
Ratio of Net Investment Loss to Average Net Assets			(1.02	)%			(1.57	)%			(1.88	)%			(2.50	)%			(2.02	)%
Ratio of Net Investment Loss to Average Net Assets
(before waivers and reimbursements of expenses)			(1.02	)%			(1.57	)%			(1.88	)%			(2.95	)%			(3.09	)%
Portfolio Turnover Rate			72	%			105	%			65	%			154	%			219	%

(a) Value is less than $0.005 per share.

 

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Needham Growth Fund

Needham Aggressive Growth Fund

Needham Small Cap Growth Fund

Prospectus

May 1, 2013

For investors who want more information about the Funds, the following documents are available upon request:

 

Annual/Semi-Annual Reports: Additional information about the Funds’ investments is available in the Funds’ annual and semi-annual reports to shareholders. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds’ performance during the last fiscal year.

 

Statement of Additional Information: The Funds’ Statement of Additional Information (“SAI”) provides more detailed information about the Funds and is incorporated into this Prospectus by reference, making it legally part of this Prospectus.

 

The Funds’ Annual Report, Semi-Annual Report and SAI are available, without charge, upon request by contacting the Funds’ Transfer Agent, U.S. Bancorp Fund Services, LLC, at 1-800-625-7071. Shareholder inquiries should be directed to The Needham Funds, Inc., P.O. Box 701, Milwaukee, WI 53201-0701.

 

Correspondence sent by overnight courier should be sent to The Needham Funds, Inc., c/o U.S. Bancorp Fund Services, LLC, 615 E. Michigan Street, 3 rd Floor, Milwaukee, WI 53202. Shareholders may also make inquiries regarding the Funds by telephone by calling 1-800-625-7071. The Funds make available the SAI and annual and semi-annual reports, free of charge, on the Funds’ Web site at www.needhamfunds.com. The SAI, annual and semi-annual reports, and other information are available by e-mail request by sending an e-mail to webmail@needhamco.com.

 

You also can review the Funds’ Annual Report, Semi-Annual Report and SAI at the Securities and Exchange Commission’s Public Reference Room. Text-only copies can be obtained from the SEC for a fee by writing to the Public Reference Section of the SEC, Washington, D.C. 20549-1520, 202-551-8090 or by electronic request at publicinfo@sec.gov. Copies also can be obtained free of charge from the SEC’s Web site at www.sec.gov.

Investment Company Act

File No. 811-9114

 

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