NET ASSET VALUE

The net asset value per share of each Fund will be determined on each day when the New York Stock Exchange (the “Exchange”) is open for regular business, generally as of the close of regular session trading on the Exchange (usually 4:00 p.m., Eastern Time, the “Regular Closing Time”). When trading on the Exchange is unexpectedly closed prior to the Regular Closing Time, or an earlier scheduled close (such as on certain days around holidays when the Exchange is scheduled to close before 4:00 p.m.), and remains closed through the time of the Regular Closing Time (or an earlier scheduled close), the net asset value per share of each Fund may nonetheless be calculated as of the Regular Closing Time (or an earlier scheduled close) if, in the judgment of the Adviser, there is sufficient trading in other markets between the unexpected close and the Regular Closing Time (or an earlier scheduled close) for securities for which the Exchange is usually considered the primary market. The net asset value per share of each Fund will be computed by determining the aggregate market value of all assets of the Fund less its liabilities, and then dividing that number by the total number of shares of the Fund outstanding.  The determination of net asset value 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 time at which net asset value is determined on that day.  Shares of the Funds are sold at the public offering price which is determined once each day the Funds are open for business and is the net asset value per share.  Each Fund may change the time at which the price of its shares is determined if the Exchange closes at a different time or an emergency or other extraordinary situation exists.

Portfolio securities positions for which market quotations are readily available are stated at the last sale price reported by the principal exchange for each such security as of the exchange’s close of business, as applicable.  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.  Foreign market closing prices are translated into U.S. dollar values at the mean of the bid and asked prices for the particular foreign currency as quoted on the valuation date.  The value of a financial futures contract equals the unrealized gain or loss on the contract that is determined by marking it to the current settlement price for a like contract acquired on the day on which the commodity futures contract is being valued.  A settlement price may not be used if the market makes a limit move with respect to the financial futures contract.  In cases where securities are traded on more than one exchange, the securities are valued on the exchange designated by or under the authority of the Board of Directors of The Needham Funds, Inc. as the primary market.

  Short-term investments denominated in U.S. dollars that will mature in 60 days or less are stated at amortized cost; short-term investments denominated in foreign currencies are stated at amortized cost as determined in the foreign currency, translated to U.S. dollars at the current day’s exchange rate.  All other securities for which market prices are not “readily available” are valued at their fair value in accordance with Fair Value Procedures established by the Board of Directors. The Fund’s Fair Value Procedures are implemented and monitored by a Valuation Committee (the “Committee”) designated by the Board.  When a security is valued in accordance with the Fair Value Procedures, the Committee determines a value after taking into consideration any relevant information that is reasonably available to the Committee. Some of the more common reasons that may necessitate that a security be valued pursuant to these Fair Value Procedures include, but are not limited to: the security’s trading has been halted or suspended; the security has been de-listed from a national exchange; the security’s primary trading market is temporarily closed at a time when under normal conditions it would be open; or the security’s primary pricing source is not able or willing to provide a price.  The assets of each Fund may also be valued on the basis of valuations provided by pricing services approved by the Board of Directors of The Needham Funds, Inc.

Generally, trading in foreign securities and futures contracts, as well as corporate bonds, U.S. government securities and money market instruments, is substantially completed each day at various times prior to the close of the Exchange.  The values of such securities used in determining the net asset value of the shares of the Funds may be computed as of such times.  Foreign currency exchange rates are also generally determined prior to the close of the Exchange.  Occasionally, events affecting the value of such securities and such exchange rates may occur between such times and the close of the Exchange which will not be reflected in the computation of each Fund’s net asset value.  If events materially affecting the value of such securities occur during such period, then these securities will be valued at their fair market value as described in the preceding paragraph.

TAX-ADVANTAGED RETIREMENT PLANS

Certain tax-advantaged retirement plans are available through which shares may be purchased, including IRAs (and “rollovers” from existing retirement plans) for individuals and their spouses, 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.  Persons who wish to establish a tax-advantaged retirement plan should consult their own tax advisers or attorneys regarding their eligibility to do so and the laws applicable thereto, such as the fiduciary responsibility provisions and diversification requirements and the reporting and disclosure obligations under the Employee Retirement Income Security Act of 1974.  The Funds are not responsible for compliance with such laws.  Further information regarding the retirement plans, including applications and fee schedules, may be obtained upon request to the Funds.

TAXES

 

Taxation of the Funds – In General

Each Fund intends to remain qualified each year as a “regulated investment company” under Subchapter M of the United States Internal Revenue Code of 1986, as amended (the “Code”), so long as doing so remains in the best interests of its shareholders.  To so qualify, each Fund, among other things, must (i) derive at least 90% of its gross income from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, or certain other income (including gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or currencies; and (ii) pursuant to Section 851(b)(3) of the Code (a) at the close of each quarter of the taxable year, have at least 50% of the value of the Fund’s assets represented by cash, U.S. government securities and other securities limited in respect of any one issuer to an amount not greater than 5% of the value of the Fund’s assets and 10% of the outstanding voting securities of such issuer, and (b) not have more than 25% of the value of its assets invested in the securities of any one issuer (other than U.S. government securities and the securities of other regulated investment companies).

In addition, each Fund must satisfy the distribution requirements of the Code, including the requirement that it distribute at least 90% of its “investment company taxable income” annually.  By qualifying as a regulated investment company, the Funds will not be subject to Federal income tax on their investment company taxable income and net capital gain that it distributes to shareholders.  However, if for any taxable year a Fund does not satisfy the requirements of Subchapter M of the Code, all of its taxable income will be subject to tax at regular corporate rates without any deduction for distributions to shareholders, and such distributions will be taxable to shareholders as ordinary dividend income to the extent of the Fund’s current or accumulated earnings or profits.

Each Fund will be liable for a non-deductible 4% excise tax on amounts not distributed on a timely basis in accordance with a calendar year distribution requirement.  To avoid the tax, during each calendar year each Fund must distribute (i) at least 98% of its ordinary income realized during such calendar year, (ii) at least 98.2% of its capital gain net income for the twelve month period ending on October 31 (or December 31, if the Fund so elects), and (iii) any income or gain from the prior year that was neither distributed to shareholders nor taxed to the Fund for such year.  The Funds intend to make sufficient distributions to avoid this 4% excise tax.

As long as each Fund qualifies as a regulated investment company for U.S. Federal income tax purposes and distributes all of its investment company taxable income and net capital gain, it will not be subject to any corporate tax in the State of Maryland and generally will also not be liable for New York State income taxes, other than a nominal corporation franchise tax (as adjusted by the applicable New York State surtaxes).

Capital Loss Carry-Forwards

A Fund is permitted to carry forward a net capital loss attributable to tax years that began before December 22, 2010 to offset its capital gains, if any, realized during the eight years following the year of the loss.  A Fund is permitted to carry forward indefinitely a net capital loss attributable to taxable years that began after December 22, 2010 to offset future capital gains of the Fund, and such loss retains its character as either short-term or long-term.  Pursuant to a new ordering rule, however, net capital losses incurred in taxable years of the Fund beginning before December 22, 2010 may not be used to offset the Fund’s future capital gains until all net capital losses incurred in taxable years of the Fund beginning after December 22, 2010 have been utilized.  As a result, certain net capital losses incurred in taxable years of the Fund beginning before December 22, 2010 may expire unutilized, even while future, unrestricted capital losses may be required to be utilized first against capital gains in future years.

 

If future capital gains are offset by carried forward capital losses, such future capital gains are not subject to Fund-level federal income taxation, regardless of whether they are distributed to shareholders.  Additionally, any future capital gains offset by carried forward capital losses would generally be treated as ordinary dividends (rather than capital gains dividends) to shareholders.  Accordingly, the Funds do not expect to distribute such capital gains.  The Funds cannot carry back or carry forward any net operating losses.

Any losses incurred in the taxable year subsequent to October 31 (“post-October capital loss”) will be deferred to the next taxable year and used to reduce subsequent year distributions.  None of the Funds had deferred post-October capital or currency losses, which would have been treated as arising on the first business day of the fiscal year ending December 31, 2016. As of December 31, 2016 the Funds did not have any accumulated capital loss carryovers.

Taxation of the Funds’ Investments

Ordinarily, gains and losses realized from portfolio transactions are treated as capital gains or losses.  However, all or a portion of the gain or loss from the disposition of non-U.S. dollar denominated securities (including debt instruments, certain financial forward, futures and option contracts, and certain preferred stock) may be treated as ordinary income or loss under Section 988 of the Code.  In addition, all or a portion of the gain realized from the disposition of market discount bonds is treated as ordinary income under Section 1276 of the Code.  Generally, a market discount bond is defined as any bond bought by a Fund after its original issuance at a price below its principal amount.  In addition, all or a portion of the gain realized from engaging in “conversion transactions” is treated as ordinary income under Section 1258 of the Code.  “Conversion transactions” are defined to include certain forward, futures, option and straddle transactions, transactions marketed or sold to produce capital gains, or transactions described in applicable Treasury regulations.  Also, gains or losses attributable to fluctuations in foreign currency exchange rates which occur between the time a Fund accrues income or other receivables or accrues expenses or other liabilities denominated in a foreign currency and the time a Fund actually collects such receivables or pays such liabilities generally are treated as ordinary income or ordinary loss.

Under Section 1256 of the Code, any gain or loss a Fund realizes from certain futures or forward contracts and options transactions is treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss.  Absent an election to the contrary, gain or loss arises upon exercise or lapse of such contracts and options as well as from closing transactions.  In addition, any such contracts or options remaining unexercised at the end of the Fund’s taxable year are treated as sold for their then fair market value, resulting in additional gain or loss to the Fund characterized in the manner described above.

Offsetting positions held by a Fund involving certain financial forward, futures or options contracts (including certain foreign currency forward contracts or options) may constitute “straddles.” “Straddles” are defined to include “offsetting positions” in actively traded personal property.  The tax treatment of “straddles” is governed by Sections 1092 and 1258 of the Code, which, in certain circumstances, override or modify the provisions of Sections 1256 and 988 of the Code.  If a Fund was treated as entering into “straddles” by reason of its engaging in certain forward contracts or options transactions, such “straddles” generally would be characterized as “mixed straddles” if the forward contracts or options transactions comprising a part of such “straddles” were governed by Section 1256 of the Code.  However, a Fund may make one or more elections with respect to “mixed straddles.” Depending on which election is made, if any, the results to that Fund may differ.  If no election is made, to the extent the “straddle” rules apply to positions established by that Fund, losses realized by that Fund will be deferred to the extent of unrealized gain in the offsetting position.  Moreover, as a result of the “straddle” rules, short-term capital losses on “straddle” positions may be recharacterized as long-term capital losses, and long-term capital gains may be treated as short-term capital gains or ordinary income.

If a Fund makes a “constructive sale” of an “appreciated financial position,” the Fund will recognize gain but not loss as if the position were sold at fair market value on the date of such constructive sale.  Constructive sales include short sales of substantially identical property, offsetting notional principal contracts with respect to substantially identical property and futures and forward contracts to deliver substantially identical property.  However, transactions that otherwise would be treated as constructive sales are disregarded if closed within 30 days after the close of the taxable year and that Fund holds the position and does not hedge such position for 60 days thereafter.  In addition, to the extent provided in regulations (which have not yet been promulgated), a constructive sale also occurs if a taxpayer enters into one or more other transactions (or acquires one or more positions) that have “substantially the same effect” as the transactions described above.  Appreciated financial positions include positions with respect to stock, certain debt instruments or partnership interests if gain would be recognized on a disposition at fair market value.  If the constructive sale rules apply, adjustments are made to the basis and holding period of the affected financial position, and a Fund would recognize gain but would not have cash available to make distributions.  Accordingly, the gain realized under the constructive sale provisions would impact the amount of distributions required by that Fund so as to avoid the imposition of the 4% excise tax.

The Funds may invest in non-U.S. corporations that could be classified as “passive foreign investment companies” as defined for federal income tax purposes.  For federal income tax purposes, such an investment may, among other things, cause the Funds to recognize income or gain without a corresponding receipt of cash, to incur an interest charge on taxable income that is deemed to have been deferred and/or to recognize ordinary income that would otherwise have been treated as capital gain.

Taxation of the Shareholders

Distributions of net investment income and the excess of net short-term capital gain over net long-term capital loss generally are taxable as ordinary income to shareholders.  A Fund may also make distributions of net capital gain (the excess of net long-term capital gain over net short-term capital loss).  In general, a non-corporate shareholder’s net capital gains will be taxed at a maximum rate of 20%.  A Fund will provide information relating to the portions of any net capital gain distribution that may be treated by non-corporate shareholders as eligible for the maximum long-term capital gains rate.  Such treatment would apply regardless of the length of time the shares of that Fund have been held by such shareholders.  Distributions of net investment income and net capital gains are taxable as described above whether received in cash or reinvested in additional shares.

Under current law, “qualified dividend income” received by non-corporate shareholders from certain domestic and foreign corporations may be taxed at the same rates as long-term capital gains.  Because the Funds intend to invest in common stocks, a portion of the ordinary income dividends paid by the Funds should be eligible for this reduced rate, provided the Funds satisfy certain requirements including holding period limitations.  A shareholder would also have to satisfy a 61-day holding period with respect to any distribution of qualifying dividends in order to obtain the benefit of the lower rate.

In addition, a 3.8% Medicare tax is imposed on the “net investment income” of certain U.S. individuals, estates and trusts.  For this purpose, “net investment income” generally includes taxable dividends and redemption proceeds from investments in regulated investment companies such as the Funds.

 

Dividends from domestic corporations may comprise some portion of a Fund’s gross income.  To the extent that such dividends constitute a portion of a Fund’s gross income, a portion of the income distributions received by corporations from a Fund may be eligible for the 70% deduction for dividends received.  Taxable corporate shareholders will be informed of the portion of dividends which so qualify.  Receipt of dividends that qualify for the dividends-received deduction may result in the reduction of a corporate shareholder’s tax basis in its shares by the untaxed portion of such dividends if they are treated as “extraordinary dividends” under Section 1059 of the Code.  The dividends-received deduction is reduced to the extent the shares of a Fund with respect to which the dividends are received are treated as debt-financed under Federal income tax law and is eliminated if the shares are deemed to have been held for less than 46 days (91 days for preferred stock) during the 90-day period (180-day period for preferred stock) beginning on the date which is 45 days (90 days for preferred stock) before the ex-dividend date (for this purpose, holding periods are reduced for periods where the risk of loss with respect to shares is diminished).  The same restrictions apply to a Fund with respect to its ownership of the dividend-paying stock.  In addition, the deducted amount is included in the calculation of the Federal alternative minimum tax, if any, applicable to such corporate shareholders.  In contrast, distributions of net capital gains are not eligible for the dividends-received deduction for corporate shareholders.

Distributions by a Fund result in a reduction in the net asset value of that Fund’s shares.  Should a distribution reduce the net asset value below a shareholder’s tax basis, such distribution nevertheless is taxable to the shareholder as ordinary income or long-term capital gain as described above, even though, from an investment standpoint, it may constitute a partial return of capital.  In particular, investors should be careful to consider the tax implications of buying shares just prior to a distribution.  The price of shares purchased at that time includes the amount of any forthcoming distribution.  Those investors purchasing shares just prior to a distribution receive a return of investment upon such distribution which is nevertheless taxable to them.

A redemption of Fund shares by a shareholder generally will result in the recognition of taxable gain or loss depending upon the difference between the amount realized and his tax basis in his Fund shares.  Generally, such gain or loss is treated as a capital gain or loss if the shares are held as capital assets.  In the case of a non-corporate shareholder, if such shares were held for more than one year at the time of disposition, such gain will be long-term capital gain and if such shares were held for one year or less at the time of disposition, such gain will be short-term capital gain and will be taxed at the applicable ordinary income tax rate.  In addition, as noted above, for U.S. individuals, estates and trusts, any capital gains recognized from a redemption of Fund shares generally will be included in the calculation of “net investment income” subject to the 3.8% Medicare tax.  Any loss realized upon a taxable disposition of shares within six months from the date of their purchase is treated as a long-term capital loss to the extent of long-term capital gain distributions received from a Fund during such six-month period.  Finally, all or a portion of any loss realized upon a taxable disposition of a Fund’s shares may be disallowed if other shares of the same Fund are purchased (including a purchase by automatic reinvestment) within 30 days before or after such disposition.  In such a case, the tax basis of the shares acquired is adjusted to reflect the disallowed loss.

 

Taxation of a shareholder who, as to the U.S., is a nonresident alien individual, foreign trust or estate, foreign corporation or foreign partnership (a “Foreign Shareholder”), as defined in the Code, depends, in part, on whether the Foreign Shareholder’s income from a Fund is “effectively connected” with a U.S. trade or business carried on by such shareholder.

If the income from a Fund is not effectively connected with a U.S. trade or business carried on by the Foreign Shareholder, Fund distributions other than net capital gain distributions and distributions not out of earnings and profits generally are subject to a 30% (or lower treaty rate) U.S. withholding tax.  Net capital gain distributions to, and capital gains realized by, such a Foreign Shareholder upon the sale of shares or receipt of distributions which are in excess of its tax basis and not made from earnings and profits are not subject to U.S. federal income tax unless (i) such capital gains are effectively connected with a U.S. trade or business carried on by such shareholder or (ii) the Foreign Shareholder is an individual and is present in the U.S. for 183 days or more during the taxable year in which the gain was realized, and certain other conditions are satisfied.  A Foreign Shareholder will be required to satisfy certification requirements in order to claim treaty benefits or otherwise claim a reduction of or exemption from withholding under the foregoing rules.  These requirements will require identification of the Foreign Shareholder and must be made under penalties of perjury. A Foreign Shareholder that is eligible for a reduced rate of U.S. withholding tax pursuant to a tax treaty may obtain a refund of any excess amounts withheld by filing an appropriate claim for refund with the IRS.

If dividends or distributions from a Fund are effectively connected with a U.S. trade or business carried on by the Foreign Shareholder, then Fund distributions and any gains realized with respect to the shares are subject to U.S. federal income tax at the rates applicable to U.S. citizens or residents or domestic corporations, as appropriate.  Foreign Shareholders that are corporations may also be subject to an additional “branch profits tax” with respect to income from a Fund that is effectively connected with a U.S. trade or business.  The value of shares held by an individual Foreign Shareholder, even though he is a nonresident at his death, is includible in his gross estate for U.S. Federal estate tax purposes.

The tax consequences to a Foreign Shareholder entitled to claim the benefits of an applicable tax treaty may be different from those described above. Such shareholders may be required to provide appropriate documentation to establish their entitlement to the benefits of such a treaty. Foreign Shareholders are advised to consult their own tax advisers with respect to (i) whether their income from a Fund is or is not effectively connected with a U.S. trade or business carried on by them, (ii) whether they may claim the benefits of an applicable tax treaty, and (iii) any other tax consequences to them of an investment in that Fund.

Federal regulations generally require a Fund to withhold (“backup withholding”) and remit to the U.S. Treasury 28% of dividends, distributions from net realized securities gains and the proceeds of any redemption paid to shareholders, regardless of the extent to which gain or loss may be realized, if (i) the shareholder fails to furnish the Funds with the shareholder’s correct taxpayer identification number or social security number, (ii) the IRS notifies the shareholder or the Funds that the shareholder has failed to report properly certain interest and dividend income to the IRS and to respond to notices to that effect, or (iii) when required to do so, the shareholder fails to certify that he or she is not subject to backup withholding.  Any amounts withheld may be credited against the shareholder’s federal income tax liability.  The Funds must also report annually to the IRS and to each shareholder (other than a Foreign Shareholder) the amount of ordinary income dividends, capital gain dividends or redemption proceeds paid to such shareholder and the amount, if any, of tax withheld pursuant to the backup withholding rules with respect to such amounts.  In the case of a Foreign Shareholder, the Funds must report to the IRS and such shareholder the amount of ordinary income dividends, capital gain dividends or redemption proceeds paid that are subject to withholding (including backup withholding, if any) and the amount of tax withheld with respect to such amounts.  This information may also be made available to the tax authorities in the Foreign Shareholder’s country of residence.

Pursuant to legislation passed by Congress in 2008, the Funds are 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 Hiring Incentives to Restore Employment Act

Under the Foreign Account Tax Compliance Act provisions enacted as part of The Hiring Incentives to Restore Employment Act, P.L. 111-147 (the “HIRE Act”), a 30% withholding tax will be imposed on dividends paid by a Fund , and on long-term capital gain dividends and redemption proceeds paid after December 31, 2016, to: (i) a foreign financial institution (as that term is defined in Section 1471(d)(4) of the Code) unless that foreign financial institution enters into an agreement with the U.S. Treasury Department to collect and disclose information regarding U.S. account holders of that foreign financial institution (including certain account holders that are foreign entities that have U.S. owners) and satisfies other requirements; and (ii) specified other foreign entities unless such entity certifies that it does not have any substantial U.S. owners or provides the name, address and taxpayer identification number of each substantial U.S. owner and such entity satisfies other specified requirements. To comply with these requirements, a Fund may, in appropriate circumstances, require shareholders to provide information and tax documentation regarding their direct and indirect owners, and direct and indirect owners of certain entity shareholders may be required to waive the application of any non-U.S. laws which, but for such waiver, would prevent such entity from reporting information in respect of U.S. accounts in accordance with the applicable provisions of the HIRE Act or any agreement described in Section 1471(b) of the Code.  The HIRE Act also imposes information reporting requirements on individuals (and, to the extent provided in future regulations, certain domestic entities) that hold any interest in a "specified foreign financial asset" if the aggregate value of all such assets held by such individual exceeds $50,000.  Significant penalties can apply upon a failure to make the required disclosure and in respect of understatements of tax attributable to undisclosed foreign financial assets.  The scope of this reporting requirement is not entirely clear and all shareholders should consult their own tax advisors as to whether reporting may be required in respect of their indirect interests in certain investments of a Fund. Foreign Shareholders should consult their own tax advisors regarding the application of this legislation to them.

Transfer on Death Registration

The Funds generally permit transfer on death (“TOD”), registration of shares, so that on the death of the shareholder the shares are transferred to a designated beneficiary or beneficiaries. If you wish to register your account in the name of one or more beneficiaries for the purpose of transferring the account upon your death, you may do so by completing a TOD Agreement and Beneficiary Designation. To obtain a TOD Agreement and Beneficiary Designation, please contact Shareholder Services at 1-800-625-7071 or you may download a copy at www.needhamfunds.com. With the TOD Agreement and Beneficiary Designation you will receive a copy of the Rules Governing TOD Registration which specify how the registration becomes effective and operates. By registering your account, you agree to be bound by these rules.

The foregoing discussion is a general summary of certain of the current federal income tax laws affecting the Funds and investors in the shares.  This summary is based on the provisions of the Code, final, temporary and proposed U.S. Treasury Regulations promulgated thereunder, and administrative and judicial interpretations thereof, all as in effect on the date hereof, and all of which are subject to change, possibly with retroactive effect.  Accordingly, shareholders should consult their tax advisers about the application of the provisions of tax law described in this Statement of Additional Information in light of their particular tax situations, as well as the effects of state, local and foreign tax law.  Foreign Shareholders should also consult their tax advisers with respect to the applicability of a 30% withholding tax (which may be reduced or eliminated under certain income tax treaties) upon Fund distributions of ordinary income.

ORGANIZATION AND CAPITALIZATION

General

The Needham Funds, Inc. was incorporated in Maryland on October 12, 1995 and is registered with the Securities and Exchange Commission under the 1940 Act as an open-end management investment company.  The business and affairs of The Needham Funds, Inc. are managed under the direction of its Board of Directors.  The Needham Funds, Inc. is an affiliate of Needham & Company, LLC, which is wholly-owned by Needham Holdings, LLC (which in turn is wholly-owned by the parent holding company, The Needham Group, Inc.).

The authorized capital stock of The Needham Funds, Inc. consists of one billion shares of common stock having a par value of one-tenth of one cent ($0.001) per share.  The Board of Directors of The Needham Funds, Inc. is authorized to divide the unissued shares into separate classes and series of stock, each series representing a separate, additional investment portfolio.  The Needham Funds, Inc. is currently comprised of three portfolios, Needham Growth Fund, Needham Aggressive Growth Fund and Needham Small Cap Growth Fund, each of which is designated as a separate series of stock. On November 3, 2016, the shares of each Fund were designated as Retail Class shares. On December 29, 2016, each Fund began offering Institutional Class shares.   Each share of any class or series of shares when issued has equal dividend, distribution, and liquidation rights within the series for which it was issued.  Each share of a Fund is entitled to such dividends and distributions out of the income earned on the assets belonging to that Fund as are declared in the discretion of the Board.

There are no preemptive or, except as described in the Prospectus, conversion rights in connection with any shares of the Funds, and the shares are freely transferable.  All shares, when issued and paid for in accordance with the terms of the offering, will be fully paid and non-assessable.  Shares are redeemable at net asset value, at the option of the investor.  In the event of liquidation of a particular series, the shareholders of the series being liquidated shall be entitled to receive the excess of the assets belonging to that series over the liabilities belonging to that series.  The holders of any shares of any series shall not be entitled thereby to any distribution upon liquidation of any other series.

Each share of the Funds shall have equal voting rights with every other share of every other series of The Needham Funds, Inc. and all shares of all such series shall vote as a single group except where a separate vote of any class or series is required by the 1940 Act, the laws of the State of Maryland, the Articles of Incorporation of The Needham Funds, Inc. or as the Board of Directors of The Needham Funds, Inc. may determine in its sole discretion. Fractional shares shall be entitled to fractional votes.

Maryland law does not require annual meetings of shareholders, except under certain specified circumstances, and it is anticipated that shareholder meetings will be held only when required by Federal or Maryland law.  Shareholders do have the right under the Articles of Incorporation to call a vote for the removal of directors.  The Needham Funds, Inc. will be required to call a special meeting of shareholders in accordance with the requirements of the 1940 Act.