BENHAM U.S. TREASURY AND GOVERNMENT FUNDS
Supplement Dated December 15, 1995
to the Prospectus and Statement of
Additional Information Dated July 30, 1995
1. The following individual has been appointed to the Board of
Directors\Trustees of the Funds in addition to those listed in the current
Prospectus:
ALBERT A. EISENSTAT, independent trustee (1995). Mr. Eisenstat is an
independent director of each of Commercial Metals Co. (1982), Sungard Data
Systems (1991) and Business Objects S/A (1994). Previously, he served as
vice president of corporate development and corporate secretary of Apple
Computer and served on its Board of Directors (1985 to 1993).
2. On pages 28 of the Prospectus, the first paragraph under the heading "SHARE
PRICE" is replaced with the following:
The price of your shares is the net asset value of the Fund next determined
after receipt of your instruction to purchase, convert or redeem. Net asset
value is determined by calculating the total value of a Fund's assets,
deducting total liabilities and dividing the result by the number of shares
outstanding. Net asset value ("NAV") is determined on each day that the New
York Stock Exchange (the "Exchange") is open.
Investments and requests to redeem shares will receive the share price next
determined after receipt by Benham of the investment or redemption request.
For example, investments and requests to redeem shares received by Benham
before the close of business of the Exchange are effective on, and will
receive the price determined on that day as of the close of the Exchange.
Investment and redemption requests received thereafter are effective on,
and receive the price determined as of the close of the Exchange on the
next day the Exchange is open.
Investments are considered received only when your check or wired funds are
received by Benham. Wired funds are considered received on the day they are
deposited in Benham's bank account if they are deposited before the close
of business of the Exchange, usually 1 p.m. Pacific Time.
Investment and transaction instructions received by Benham on any business
day by mail at its office prior to the close of business of the Exchange,
usually 1 p.m. Pacific Time, will receive that day's price. Investments and
instructions received after that time will receive the price determined on
the next business day.
All other remaining references in the Prospectus and Statement of
Additional Information to the net asset value being calculated at "12 p.m.
Pacific Time for Benham Target Maturities Trust and 1 p.m. Pacific Time for all
other Benham funds" are hereby changed to "the close of the Exchange, usually 12
p.m. Pacific Time for Benham Target Maturities Trust and 1 p.m. Pacific Time for
all other Benham funds."
3. On page 33 of the Prospectus under the sub-heading "PROCESSING YOUR
PURCHASE", the second and third sentences are replaced with the following:
An investment received and accepted before the close of business of the
Exchange, normally 1:00 p.m. Pacific Time, will be included in your account
balance the same day. If the investment is received after the close of
business of the Exchange, usually 1:00 p.m. Pacific Time, it will be
credited to your account the following business day.
4. On page 33 of the Prospectus, the following sentence is to be inserted
under the sub-heading "TELEPHONE TRANSACTIONS" after the last sentence of the
first paragraph:
ONCE YOUR TELEPHONE ORDER HAS BEEN PLACED, IT MAY NOT BE MODIFIED OR
CANCELLED.
5. On page 33 of the Prospectus, the following sentence is to be inserted
under the sub-heading "CONFIRMATION AND QUARTERLY STATEMENTS" after the second
sentence:
However, beginning September of 1996, Automatic Investment Services
transactions will not be confirmed immediately but rather will be confirmed
on your next consolidated quarterly statement.
6. On page 34 of the Prospectus, the following sentence replaces the last
sentence of the first paragraph under "SHAREHOLDER SERVICES-EXCHANGE PRIVILEGE":
An exchange request will be processed the same day if it is received before
the funds' NAVs are calculated which is one hour prior to the close of the
Exchange, usually 12 p.m. Pacific Time for Benham Target Maturities Trust;
and at the close of the Exchange, usually 1 p.m. Pacific Time for all other
Benham funds.
7. On page 35 of the Prospectus, the following replaces the last two sentences
of the last paragraph under the sub-heading "OPEN ORDER SERVICE":
All orders and cancellation of orders received by one hour prior to the
close of the Exchange, usually 12 p.m. Pacific Time, will be considered to
be effective the same day. All orders and cancellation of orders not
received one hour prior to the close of the Exchange, usually 12 p.m.
Pacific Time, will be considered effective the following business day.
<PAGE>
BENHAM U.S. TREASURY
& GOVERNMENT FUNDS
[picture of the capitol building]
Capital Preservation Fund
Capital Preservation Fund II
Benham Government Agency Fund
Benham Short-Term Treasury and Agency Fund
Benham Treasury Note Fund
Benham Long-Term Treasury and Agency Fund
Benham Adjustable Rate Government Securities Fund
Benham GNMA Income Fund
Prospectus * July 30, 1995
[company logo] The Benham Group
<PAGE>
- -------------------
[information in left margin of page]
THE BENHAM GROUP
1665 Charleston Rd.
Mountain View
California 94043
Fund
Information
1-800-331-8331
1-415-965-4274
Shareholder
Relations
1-800-321-8321
1-415-965-4222
TDD Service
1-800-624-6338
1-415-965-4764
Benham Group
Representatives
are available
by telephone weekdays from
5 a.m. to 5 p.m. Pacific Time.
- -------------------
BENHAM U.S. TREASURY
& GOVERNMENT FUND
Prospectus * July 30, 1995
The BENHAM U.S. TREASURY AND GOVERNMENT FUNDS are eight diversified, no-load,
open-end mutual funds. They are members of The Benham Group of investment
companies, the oldest and largest mutual fund family specializing in U.S.
Treasury and government securities.
MONEY MARKET FUNDS
CAPITAL PRESERVATION FUND, INC., (CPF) invests exclusively in short-term U.S.
Treasury securities. Weighted average portfolio maturity: 60 days or less.
CAPITAL PRESERVATION FUND II, INC., (CPF II) invests primarily in repurchase
agreements collateralized by U.S. government securities. Weighted average
portfolio maturity: seven days or less.
BENHAM GOVERNMENT AGENCY FUND (Agency Fund) invests exclusively in obligations
of the U.S. government and its agencies and instrumentalities. Weighted average
portfolio maturity: 60 days or less.
Investments in the Money Market Funds listed above or in any other Benham Fund
are neither insured nor guaranteed by the U.S. government. There is no assurance
that the Money Market Funds will be able to maintain a $1.00 share price.
Mutual fund shares are not insured by the FDIC, the Federal Reserve Board, or
any other agency.
AS WITH ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
2
<PAGE>
U.S. TREASURY AND AGENCY FUNDS
BENHAM SHORT-TERM TREASURY AND AGENCY FUND (Short-Term Fund) invests exclusively
in securities issued or guaranteed by the U.S. Treasury and agencies and
instrumentalities of the U.S. government. Weighted average portfolio maturity:
13 months to 3 years.
BENHAM TREASURY NOTE FUND (Treasury Note Fund) invests exclusively in U.S.
Treasury securities and primarily in U.S. Treasury notes. Weighted average
portfolio maturity: 13 months to 10 years.
BENHAM LONG-TERM TREASURY AND AGENCY FUND (Long-Term Fund) invests exclusively
in securities issued or guaranteed by the U.S. Treasury and agencies and
instrumentalities of the U.S. government. Weighted average portfolio maturity:
20 to 30 years.
MORTGAGE SECURITIES FUNDS
BENHAM ADJUSTABLE RATE GOVERNMENT SECURITIES FUND (ARM Fund) invests primarily
in adjustable rate mortgage securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities.
BENHAM GNMA INCOME FUND (GNMA Fund) invests primarily in mortgage-backed GNMA
(Ginnie Mae) certificates.
The share prices of the U.S. Treasury and Agency Funds and the Mortgage
Securities Funds will fluctuate. These Funds are referred to collectively
as the "Variable-Price Funds."
Each Fund described in this Prospectus seeks the highest level of current income
consistent with its investment objective and policies as set forth on the
following pages. Each Fund (except CPF II, ARM Fund, and GNMA Fund) seeks
interest income exempt from state taxes. This tax exemption is passed through to
Fund shareholders in all states, so that the Funds' dividends are also state
tax-exempt.
- -------------------
[information in right margin of page]
Please read this Prospectus carefully and retain it for future reference. It is
designed to help you decide if the Funds' goals match your own.
- -------------------
3
<PAGE>
SUMMARY OF FUND EXPENSES
The tables below illustrate the fees and expenses an investor in the Funds would
incur directly or indirectly. The figures shown for each Fund are based on
historical expenses, adjusted to reflect the expense limitation agreement in
effect through May 31, 1995.
================================================================================
A. SHAREHOLDER TRANSACTION EXPENSES
For All Funds Described in This Prospectus
- --------------------------------------------------------------------------------
Sales load imposed on purchases .................................. None
Sales load imposed on reinvested dividends ....................... None
Deferred sales load .............................................. None
Redemption fee ................................................... None
Exchange fee ..................................................... None
================================================================================
B-1. ANNUAL FUND OPERATING EXPENSES
As a Percentage of Average Daily Net Assets
- --------------------------------------------------------------------------------
INVESTMENT 12B-1 OTHER TOTAL FUND
ADVISORY FEE EXPENSES OPERATING
FEE* EXPENSES*
(NET OF EXPENSE (NET OF EXPENSE
LIMITATION) LIMITATION)
CPF .27% None .23% .50%
CPF II .44 None .31 .75
Agency Fund .21 None .29 .50
Short-Term Fund .19 None .47 .66
Treasury Note Fund .28 None .25 .53
Long-Term Fund .13 None .53 .66
ARM Fund .27 None .30 .57
GNMA Fund .28 None .30 .58
* Benham Management Corporation (BMC) has agreed to limit each Fund's total
operating expenses to specified percentages of each Fund's average daily net
assets, as illustrated on page 5 (the 1994 expense limits were effective until
May 31, 1995, and the 1995 expense limits are effective through May 31, 1996).
The contract provides that BMC may recover amounts absorbed on behalf of a
Fund during the preceding 11 months if, and to the extent that, for any given
month, the Fund's expenses were less than the expense limit in effect at that
time. The expense limit is renewed annually in June. The Funds' advisory fees,
other expenses, and total operating expenses without the contractual expense
limitations are illustrated in Table B-2 on the next page.
4
<PAGE>
================================================================================
B-2. RESTATEMENT OF EXPENSES
Assuming No Expense Limitations or Recoupments
- --------------------------------------------------------------------------------
INVESTMENT TOTAL FUND
ADVISORY 12B-1 OTHER OPERATING
FEE FEE EXPENSES EXPENSES
CPF II .46% None .31% .77%
Agency Fund .28 None .29 .57
Short-Term Fund .28 None .47 .75
Long-Term Fund .28 None .53 .81
Each Fund pays BMC investment advisory fees equal to an annualized percentage of
Fund average daily net assets. Other expenses include administrative and
transfer agent fees paid to Benham Financial Services, Inc. (BFS).
================================================================================
CONTRACTUAL EXPENSE LIMITS
- --------------------------------------------------------------------------------
Each Fund's contractual expense limits for 1994 and 1995 (effective June 1,
1995) are indicated in the table below. Each limit is stated as a percentage of
the Fund's average daily net assets.
1995 1994
CPF .54% .57%
CPF II .75 .75
Agency Fund .50 .50
Short-Term Fund .65 .66
Treasury Note Fund .65 .66
Long-Term Fund .65 .66
ARM Fund .65 .60
GNMA Fund .65 .66
5
<PAGE>
================================================================================
C. EXAMPLE OF EXPENSES
- --------------------------------------------------------------------------------
The following table illustrates the expenses a shareholder would pay on a $1,000
investment in each of the Funds over periods of one, three, five, and ten years.
These figures are based on expenses shown in Table B-1 (on page 4) and assume
(i) a 5% annual return and (ii) full redemption at the end of each time period.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
CPF $5 $16 $28 $63
CPF II 8 24 42 93
Agency Fund 5 16 28 63
Short-Term Fund 7 21 37 82
Treasury Note Fund 5 17 30 66
Long-Term Fund 7 21 37 82
ARM Fund 6 18 32 71
GNMA Fund 6 19 32 73
We include this table to help you understand the various costs and expenses that
you, as a shareholder, will bear either directly or indirectly. THIS EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR
PERFORMANCE; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN, AND THE
FUND MAY NOT REALIZE THE 5% HYPOTHETICAL RATE OF RETURN REQUIRED BY THE SEC FOR
THIS EXAMPLE.
FINANCIAL HIGHLIGHTS
The information presented on the following pages has been audited by KPMG Peat
Marwick LLP, independent auditors. Their unqualified report on the financial
statements and financial highlights is included in the Funds' Annual Reports,
which are part of the Funds' respective Statements of Additional Information.
6
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================
CAPITAL PRESERVATION FUND, INC.
Years ended March 31 and September 30 (as noted)+
- -------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
PER-SHARE DATA
- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Income From
Investment Operations
Net Investment Income .0424 .0259 .0134 .0382 .0603 .0750 .0800 .0608 .0531 .0635
Less Distributions
Dividends from Net
Investment Income (.0424)(.0259)(.0134)(.0382)(.0603)(.0750)(.0800)(.0608)(.0531)(.0635)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE AT
END OF PERIOD $1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
===== ==== ==== ==== ==== ==== ==== ==== ==== ====
TOTAL RETURN* 4.31% 2.63 1.35 3.88 6.27 7.77 8.27 6.30 5.48 6.58
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at
End of Period
(in millions) $2,883 2,787 2,943 3,046 3,376 3,099 2,737 2,187 1,793 1,876
Ratio of Expenses
to Average Daily
Net Assets .50% .51 .50** .51 .52 .56 .57 .59 .63 .65
Ratio of Net Investment
Income to Average
Daily Net Assets 4.24% 2.59 2.68** 3.82 6.03 7.50 8.00 6.08 5.31 6.35
- --------------
+ The Fund's fiscal year-end was changed from September 30 to March 31 beginning with the
period ended March 31, 1993, resulting in a six-month period in 1993.
* Total return figures assume reinvestment of dividends and capital gain distributions and
are not annualized.
** Annualized.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
============================================================================================
CAPITAL PRESERVATION FUND II, INC.
Years ended March 31 and September 30 (as noted)+
- --------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
PER-SHARE DATA
- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Income From
Investment Operations
Net Investment Income .0406 .0237 .0120 .0341 .0591 .0764 .0834 .0626 .0553 .0637
Less Distributions
Dividends from Net
Investment Income (.0406)(.0237)(.0120)(.0341)(.0591)(.0764)(.0834)(.0626)(.0553)(.0637)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE AT
END OF PERIOD $1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
===== ==== ==== ==== ==== ==== ==== ==== ==== ====
TOTAL RETURN* 4.17% 2.40 1.21 3.42 6.07 7.91 8.64 6.46 5.68 6.58
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at
End of Period
(in millions) $262 283 314 340 475 618 708 538 465 409
Ratio of Expenses to
Average Daily
Net Assets .75% .75 .75** .74 .70 .69 .71 .73 .73 .74
Ratio of Net Investment
Income to Average
Daily Net Assets 4.06% 2.37 2.40** 3.41 5.91 7.64 8.34 6.26 5.53 6.37
- --------------
+ The Fund's fiscal year-end was changed from September 30 to March 31 beginning with the
period ended March 31, 1993, resulting in a six-month period in 1993.
* Total return figures assume reinvestment of dividends and capital gain distributions and
are not annualized.
** Annualized.
</TABLE>
8
<PAGE>
================================================================================
BENHAM GOVERNMENT AGENCY FUND
Years ended March 31 (except as noted)
- --------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990+
PER-SHARE DATA
- --------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $1.00 1.00 1.00 1.00 1.00 1.00
Income From
Investment Operations
Net Investment Income .0435 .0265 .0304 .0517 .0742 .0264
Less Distributions
Dividends from Net
Investment Income (.0435) (.0265) (.0304) (.0517) (.0742) (.0264)
----- ----- ----- ----- ----- -----
NET ASSET VALUE AT
END OF PERIOD $1.00 1.00 1.00 1.00 1.00 1.00
===== ==== ==== ==== ==== ====
TOTAL RETURN* 4.47% 2.69 3.07 5.29 7.97 2.65
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of
Period (in millions) $462 562 646 906 1,074 62
Ratio of Expenses to Average
Daily Net Assets .50% .50 .50 .30 0 0
Ratio of Net Investment Income
to Average Daily Net Assets 4.35% 2.65 3.04 5.17 7.42 8.25**
- --------------
+ From December 5, 1989 (commencement of operations), through March 31, 1990.
* Total return figures assume reinvestment of dividends and capital gain
distributions and are not annualized.
** Annualized.
9
<PAGE>
================================================================================
BENHAM SHORT-TERM TREASURY AND AGENCY FUND Years ended March 31 (except as
noted)
- --------------------------------------------------------------------------------
1995 1994 1993+
PER-SHARE DATA
- --------------
NET ASSET VALUE AT BEGINNING
OF PERIOD $9.86 10.04 10.00
Income From
Investment Operations
Net Investment Income .50 .36 .25
Net Realized and Unrealized Gains
(Losses) on Investments (.13) (.14) .04
----- ----- -----
Total Income From
Investment Operations .37 .22 .29
----- ----- -----
Less Distributions
Dividends from Net Investment Income (.50) (.36) (.25)
Distributions from Net Realized
Capital Gains 0 (.03) 0
Distributions in excess of
Net Realized Capital Gains 0 (.01) 0
----- ----- -----
Total Distributions (.50) (.40) (.25)
----- ----- -----
NET ASSET VALUE AT END OF PERIOD $9.73 9.86 10.04
===== ===== =====
TOTAL RETURN* 3.85% 2.16 2.79
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period
(in thousands) $56,090 24,929 14,889
Ratio of Expenses to Average
Daily Net Assets .67% .58 0
Ratio of Net Investment Income
to Average Daily Net Assets 5.22% 3.53 4.50**
Portfolio Turnover Rate 140.82% 261.61 157.79
- --------------
+ From September 8, 1992 (commencement of operations), through March 31, 1993.
* Total return figures assume reinvestment of dividends and capital gain
distributions and are not annualized.
** Annualized.
10
<PAGE>
<TABLE>
<CAPTION>
============================================================================================
BENHAM TREASURY NOTE FUND
Years ended March 31
- --------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
PER-SHARE DATA
- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $10.18 10.73 10.52 10.23 9.87 9.63 10.11 10.91 11.97 10.35
Income From
Investment Operations
Net Investment Income .53 .48 .56 .69 .75 .77 .76 .75 .71 .90
Net Realized and
Unrealized Gains
(Losses) on Investments (.19) (.27) .69 .29 .36 .24 (.49) (.60) (.08) 1.55
----- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total Income From
Investment Operations .34 .21 1.25 .98 1.11 1.01 .27 .15 .63 2.45
----- ---- ---- ---- ---- ---- ---- ---- ---- ----
Less Distributions
Dividends from Net
Investment Income (.53) (.48) (.56) (.69) (.75) (.77) (.75) (.92) (.89) (.83)
Distributions from Net
Realized Capital Gains 0 (.06) (.48) 0 0 0 0 (.03) (.80) 0
Distributions in excess
of Net Capital Gains 0 (.22) 0 0 0 0 0 0 0 0
----- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total Distributions (.53) (.76) (1.04) (.69) (.75) (.77) (.75) (.95) (1.69) (.83)
----- ---- ---- ---- ---- ---- ---- ---- ---- ----
NET ASSET VALUE AT
END OF PERIOD $9.99 10.18 10.73 10.52 10.23 9.87 9.63 10.11 10.91 11.97
===== ==== ==== ==== ==== ==== ==== ==== ==== ====
TOTAL RETURN+ 3.54% 1.85 12.36 9.92 11.59 10.61 2.78 1.60 6.60 26.67
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of
Period (in millions) $305 351 392 303 159 97 72 54 43 28
Ratio of Expenses
to Average Daily
Net Assets .53% .51 .53 .59 .73 .75 .75 .75 .93 1.00
Ratio of Net Investment
Income to Average
Daily Net Assets 5.35% 4.50 5.18 6.55 7.49 7.66 7.67 7.36 6.26 8.42
Portfolio Turnover
Rate 92.35%212.91 299.29 148.75 69.72 216.84 386.46 465.35 395.91 293.90
- --------------
+ Total return figures assume reinvestment of dividends and capital gain
distributions and are not annualized.
</TABLE>
11
<PAGE>
================================================================================
BENHAM LONG-TERM TREASURY AND AGENCY FUND
Years ended March 31 (except as noted)
- --------------------------------------------------------------------------------
1995 1994 1993+
PER-SHARE DATA
- --------------
NET ASSET VALUE AT BEGINNING
OF PERIOD $9.38 10.24 10.00
Income From
Investment Operations
Net Investment Income .60 .63 .39
Net Realized and Unrealized Gains
(Losses) on Investments (.33) (.27) .24
----- ----- -----
Total Income From
Investment Operations .27 .36 .63
----- ----- -----
Less Distributions
Dividends from Net Investment Income (.60) (.63) (.39)
Distributions from Net Realized
Capital Gains 0 (.45) 0
Distributions in excess of Net
Realized Capital Gains 0 (.14) 0
----- ----- -----
Total Distributions (.60) (1.22) (.39)
----- ----- -----
NET ASSET VALUE AT END OF PERIOD $9.05 9.38 10.24
===== ===== =====
TOTAL RETURN* 3.25% 2.87 6.48
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period
(in thousands) $34,906 18,003 20,975
Ratio of Expenses to Average
Daily Net Assets .67% .57 0
Ratio of Net Investment Income
to Average Daily Net Assets 6.84% 5.89 7.18**
Portfolio Turnover Rate 146.81% 200.34 56.97
- --------------
+ From September 8, 1992 (commencement of operations), through March 31, 1993.
* Total return figures assume reinvestment of dividends and capital gain
distributions and are not annualized.
** Annualized.
12
<PAGE>
================================================================================
BENHAM ADJUSTABLE RATE GOVERNMENT SECURITIES FUND
Years ended March 31 (except as noted)
- --------------------------------------------------------------------------------
1995 1994 1993 1992+
PER-SHARE DATA
- ------------------
NET ASSET VALUE AT
BEGINNING OF PERIOD $9.75 9.97 10.04 10.00
Income From
Investment Operations
Net Investment Income .49 .54 .57 .40
Net Realized and
Unrealized Gains
(Losses) on Investments (.33) (.22) (.07) .04
----- ----- ----- -----
Total Income From
Investment Operations .16 .32 .50 .44
----- ----- ----- -----
Less Distributions
Dividends from Net
Investment Income (.49) (.54) (.57) (.40)
Distributions from Net
Realized Capital Gains 0 0 0 0
----- ----- ----- -----
Total Distributions (.49) (.54) (.57) (.40)
----- ----- ----- -----
NET ASSET VALUE AT
END OF PERIOD $9.42 9.75 9.97 10.04
===== ===== ===== =====
TOTAL RETURN* 1.75% 3.27 5.13 4.55
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period
(in thousands) $397,391 936,539 1,495,164 886,012
Ratio of Expenses to Average
Daily Net Assets .57% .51 .45 0
Ratio of Net Investment Income
to Average Daily Net Assets 4.98% 5.47 5.66 7.02**
Portfolio Turnover Rate 60.29% 91.87 82.71 81.84
- --------------
+ From September 3, 1991 (commencement of operations), through March 31, 1992.
* Total return figures assume reinvestment of dividends and capital gain
distributions and are not annualized.
** Annualized.
13
<PAGE>
<TABLE>
<CAPTION>
=============================================================================================
BENHAM GNMA INCOME FUND
Years ended March 31 (except as noted)
- ---------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986+
PER-SHARE DATA
- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $10.35 10.88 10.52 10.21 9.85 9.56 9.96 10.42 10.42 10.00
Income From
Investment Operations
Net Investment Income .72 .66 .79 .86 .88 .90 .89 .89 .91 .55
Net Realized and
Unrealized Gains (Losses)
on Investments (.18) (.52) .36 .31 .36 .29 (.40) (.40) .02 .45
----- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total Income (Losses) from
Investment Operations .54 .14 1.15 1.17 1.24 1.19 .49 .49 .93 1.00
----- ---- ---- ---- ---- ---- ---- ---- ---- ----
Less Distributions
Dividends from Net
Investment Income (.71) (.66) (.79) (.86) (.88) (.90) (.89) (.95) (.93) (.58)
Distributions from Net
Realized Capital Gains 0 (.01) 0 0 0 0 0 0 0 0
----- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total Distributions (.71) (.67) (.79) (.86) (.88) (.90) (.89) (.95) (.93) (.58)
----- ---- ---- ---- ---- ---- ---- ---- ---- ----
NET ASSET VALUE AT
END OF PERIOD $10.18 10.35 10.88 10.52 10.21 9.85 9.56 9.96 10.42 10.42
===== ==== ==== ==== ==== ==== ==== ==== ==== ====
TOTAL RETURN* 5.53% 1.30 11.28 11.85 13.16 12.73 5.07 5.23 9.51 9.37
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of
Period (in millions) $980 1,129 1,160 724 409 290 253 259 393 170
Ratio of Expenses to
Average Daily
Net Assets .58% .54 .56 .62 .72 .75 .75 .73 .74 .29**
Ratio of Net Investment
Income to Average
Daily Net Assets 7.08% 6.12 7.31 8.18 8.85 9.04 9.11 8.94 8.79 10.52**
Portfolio Turnover
Rate 119.56% 48.61 70.57 97.33 206.60 432.93 496.52 497.16 566.27 264.03
- --------------
+ From September 23, 1985 (commencement of operations), through March 31, 1986.
* Total return figures assume reinvestment of dividends and capital gain
distributions and are not annualized.
** Annualized.
</TABLE>
14
<PAGE>
HOW THE FUNDS WORK
The following pages contain a discussion of each Fund's investment objective and
policies. See "About the Funds' Investments" beginning on page 22 for a more
detailed discussion of the types of securities the Funds may buy and the risks
associated with them.
Each Fund (except CPF II, ARM Fund, and GNMA Fund) seeks income exempt from
state taxes by investing exclusively in U.S. government securities whose
interest payments are state tax-exempt. All states allow for a pass-through of
this tax exemption; as a result the Funds' dividend distributions to the extent
comprised of interest exempt from state tax are also state tax-exempt. See pages
42 and 43 for more information on tax treatment of the Funds' distributions.
There is no guarantee that the Funds will achieve their investment objectives.
Each Fund's investment objectives are fundamental and may not be changed without
shareholder approval. Unless otherwise noted, the other policies described in
this Prospectus are not fundamental and may be changed by the Funds' directors
or trustees.
MONEY MARKET FUNDS
CAPITAL PRESERVATION FUND (CPF)
OBJECTIVES: CPF's primary investment objectives are maximum safety and
liquidity. Its secondary objective is to pay shareholders the highest rate of
return on their investment in the Fund consistent with safety and liquidity.
INVESTMENT POLICIES: CPF invests exclusively in short-term U.S. Treasury
securities guaranteed by the direct full faith and credit pledge of the
U.S. government. The Fund's dollar-weighted average portfolio maturity will
not exceed 60 days.
SUITABILITY: CPF seeks to maintain a $1.00 share price, although there is
no guarantee it will be able to do so. While the risks associated with
investing in short-term U.S. Treasury securities are very low, an
investment in CPF is not completely risk-free. The Fund's shares are
neither insured nor guaranteed by the U.S. government.
- -------------------
[information in right margin of page]
One feature all the Funds have in common is their susceptibility to changing
interest rates.
Each Fund (except CPF II, ARM Fund, and GNMA Fund) seeks income exempt from
state taxes.
- -------------------
15
<PAGE>
- -------------------
[information in left margin of page]
Interest rate changes can affect the Money Market Funds's distribution rates.
- -------------------
CAPITAL PRESERVATION FUND II (CPF II)
OBJECTIVES: CPF II's primary investment objectives are maximum safety and
liquidity. Its secondary objective is to pay its shareholders the highest rate
of return on their investment in the Fund consistent with safety and liquidity.
INVESTMENT POLICIES: CPF II invests primarily in repurchase agreements
collateralized by securities that are backed by the full faith and credit of the
U.S. government. Such collateral may include U.S. Treasury bills, notes, and
bonds or mortgage-backed Ginnie Mae certificates. Ginnie Mae certificates are
guaranteed by the Government National Mortgage Association (GNMA) and backed by
the full faith and credit of the U.S. government. Repurchase agreements held by
the Fund typically have maturities of seven days or less. The Fund may invest
directly in U.S. Treasury securities from time to time.
SUITABILITY: CPF II seeks to maintain a $1.00 share price, although there is no
guarantee it will be able to do so. The Fund restricts its average portfolio
maturity to seven days or less. Because of this restriction, its yield responds
more quickly to interest rate fluctuations than do yields on most other money
market funds and enhances portfolio liquidity. See page 25 for a discussion of
the market and credit risks associated with investing in repurchase agreements.
BENHAM GOVERNMENT AGENCY FUND (AGENCY FUND)
OBJECTIVE: Agency Fund seeks to provide the highest rate of current return on
its investments, consistent with safety of principal and maintenance of
liquidity, by investing exclusively in short-term obligations of the U.S.
government and its agencies and instrumentalities, the income from which is
exempt from state taxes.
INVESTMENT POLICIES: Under normal conditions, at least 65% of the Fund's
total assets are invested in securities issued by agencies and
instrumentalities of the U.S. government. Assets not invested in these
securities are invested in U.S. Treasury securities. For temporary
16
<PAGE>
defensive purposes, the Fund may invest up to 100% of its assets in U.S.
Treasury securities. The Fund's weighted average portfolio maturity will
not exceed 60 days.
SUITABILITY: The Fund seeks to maintain a $1.00 share price, although there
is no guarantee it will be able to do so. The U.S. government provides
varying levels of financial support to its agencies and instrumentalities.
U.S. TREASURY AND AGENCY FUNDS
The U.S. Treasury and Agency Funds are quite similar to one another but can be
differentiated by their dollar-weighted average maturities. The longer a Fund's
dollar-weighted average maturity, the more likely its share price will fluctuate
when interest rates change.
This pattern is due to the time value of money. A bond's worth is determined in
part by the present value of its future cash flows. Consequently, changing
interest rates have a greater effect on the present value of a long-term bond
than a short-term bond. Because of this interplay between market interest rates
and share price, Variable-Price Fund investors are encouraged to evaluate Fund
performance on the basis of total return. Total return calculations are
described on page 28.
BENHAM SHORT-TERM TREASURY AND AGENCY FUND
(SHORT-TERM FUND)
OBJECTIVE: Short-Term Fund seeks to earn and distribute the highest level of
current income exempt from state income taxes as is consistent with preservation
of capital.
INVESTMENT POLICIES: The Fund invests exclusively in securities issued or
guaranteed by the U.S. Treasury and agencies or instrumentalities of the
U.S. government.
Within this framework, the Fund invests primarily in securities with remaining
maturities of 3 years or less, and, under normal conditions, maintains a
weighted average portfolio maturity ranging from 13 months to 3 years.
- -------------------
In general, when interest rates rise, the Variable-Price Funds' share prices
decline, and when interest rates decline, their share prices rise.
Short-Term Fund offers investors the opportunity to limit share price volatility
while seeking current yields that typically are higher than those of funds
managed to maintain a $1.00 share price.
- -------------------
17
<PAGE>
The Fund invests exclusively in securities issued or guaranteed by the U.S.
Treasury and agencies of instrumentalities of the U.S. government. The Fund's
portfolio may consist of any combination of these securities consistent with
investment strategies employed by BMC.
SUITABILITY: The Fund may be appropriate for investors who are seeking higher
current yields than those available from money market funds and who can tolerate
some share price volatility.
BENHAM TREASURY NOTE FUND (TREASURY NOTE FUND)
OBJECTIVE: Treasury Note Fund seeks to earn and distribute the highest level of
current income consistent with the conservation of assets and the safety
provided by U.S. Treasury bills, notes, and bonds.
INVESTMENT POLICIES: The Fund invests primarily in U.S. Treasury notes,
which carry the direct full faith and credit pledge of the U.S. government.
The Fund may also invest in U.S. Treasury bills, bonds, and zero-coupon
securities, all of which are also backed by the direct full faith and
credit pledge of the U.S. government. The Fund's weighted average portfolio
maturity ranges from 13 months to 10 years.
SUITABILITY: BMC seeks a current yield for Treasury Note Fund higher than that
of Short-Term Fund, with correspondingly greater share price volatility.
BENHAM LONG-TERM TREASURY AND AGENCY FUND
(LONG-TERM FUND)
OBJECTIVE: Long-Term Fund seeks to provide a consistent and high level of
current income exempt from state taxes.
INVESTMENT POLICIES: The Fund invests exclusively in securities issued or
guaranteed by the U.S. Treasury and agencies or instrumentalities of the
U.S. government.
Within this framework, the Fund invests primarily in securities with maturities
of 10 or more years and, under normal conditions, maintains a weighted average
portfolio maturity ranging from 20 to 30 years.
18
<PAGE>
The Fund invests exclusively in securities issued or guaranteed by the U.S.
Treasury and agencies of instrumentalities of the U.S. government. The Fund's
portfolio may consist of any combination of these securities consistent with
investment strategies employed by BMC.
SUITABILITY: By maintaining an average portfolio maturity of 20 to 30 years,
Long-Term Fund offers investors the potential to earn higher current yields than
those typically available from bond funds (such as Short-Term and Treasury Note
Funds) that maintain shorter average maturities. The Fund may also offer greater
potential for capital appreciation. However, maintaining a relatively long
average maturity also means that the Fund's share price generally will be more
volatile than those of funds that maintain shorter average maturities (such as
Short-Term and Treasury Note Funds).
MORTGAGE SECURITIES FUNDS
BENHAM ADJUSTABLE RATE GOVERNMENT SECURITIES FUND (ARM FUND)
OBJECTIVE: ARM Fund seeks to provide investors with a high level of current
income, consistent with stability of principal.
INVESTMENT POLICIES: The Fund invests primarily in adjustable rate securities
issued or guaranteed by the U.S. government or its agencies or
instrumentalities. Under normal conditions, BMC invests at least 65% of the
Fund's total assets in adjustable rate mortgage securities (ARMs) and other
securities collateralized by or representing interests in mortgages
(collectively, "mortgage-backed securities"). These securities have interest
rates that are reset periodically and that are issued or guaranteed by the U.S.
government or its agencies or instrumentalities.
ARMs are pass-through certificates representing ownership interests in pools of
adjustable rate mortgages and in the cash flows from those mortgages. The ARMs
in which the Fund may invest are issued or guaranteed by
- -------------------
[information in right margin of page]
Factors such as prepayment risk can affect the way Mortgage Securities Funds'
share prices respond to fluctuating interest rates.
- -------------------
19
<PAGE>
- -------------------
[information in left margin of page]
ARMS are pass-through certificates representing ownership interests in pools of
adjustable rate mortgages and in the cash flows from those mortgages.
- -------------------
the Government National Mortgage Association (GNMA), the Federal National
Mortgage Association (FNMA), or the Federal Home Loan Mortgage Corporation
(FHLMC).
The Fund may also invest in collateralized mortgage obligations (CMOs),
including CMO floaters and inverse floaters; stripped mortgage-backed
securities, including interest-only (IO) and principal-only (PO) securities and
IO inverse floaters; and fixed-rate mortgage securities issued or guaranteed by
GNMA, FNMA, or FHLMC. All CMOs purchased by the Fund are either (i) issued by a
U.S. government agency or (ii) rated AAA by a nationally recognized statistical
rating organization commonly referred to as a rating agency.
Assets not invested in adjustable rate or mortgage-backed securities may be
invested in U.S. Treasury bills, notes, and bonds and in other securities issued
or guaranteed by the U.S. government or its agencies or instrumentalities. For
temporary defensive purposes, the Fund may invest up to 100% of its assets in
these securities.
SUITABILITY: By investing primarily in mortgage-backed securities that have
variable interest rates, the Fund seeks to maintain a more stable net asset
value than is characteristic of funds that invest in mortgage securities paying
a fixed rate of interest (such as GNMA Fund). ARM prices generally fluctuate
less than fixed-rate mortgage securities prices because their interest rates are
reset periodically to reflect current interest rates. There is always a lag
between market interest rate changes and ARM rate resets, however, and resets
may be limited by caps on the rates that can be charged to mortgage holders.
20
<PAGE>
GNMA INCOME FUND (GNMA FUND)
OBJECTIVE: GNMA Fund seeks to provide a high level of current income consistent
with safety of principal and maintenance of liquidity by investing primarily in
mortgage-backed Ginnie Mae certificates.
INVESTMENT POLICIES: Ginnie Mae certificates represent interests in pools of
mortgage loans and in the cash flows from those loans. These certificates are
guaranteed by GNMA and backed by the full faith and credit of the U.S.
government as to the timely payment of interest and repayment of principal,
which means that the Fund receives its share of interest and principal payments
owed on the underlying pool of mortgage loans, regardless of whether borrowers
make their scheduled mortgage payments.
Assets not invested in Ginnie Mae certificates are invested in other U.S.
government securities, such as U.S. Treasury bills, notes, and bonds, or
repurchase agreements collateralized by U.S. government securities. For
temporary defensive purposes, the Fund may invest 100% of its assets in these
securities.
SUITABILITY: A unique feature of Ginnie Mae certificates is that their principal
is scheduled to be paid back gradually for the duration of the loan rather than
in one lump sum at maturity. Investors (e.g., the Fund) receive scheduled
monthly payments of principal and interest, but they may also receive
unscheduled prepayments of principal on the underlying mortgages. See
"Mortgage-Backed Securities" on page 23 for a discussion of prepayment risk.
- -------------------
[information in right margin of page]
Principal on GNMA Certificates scheduled to be paid back gradually for the
duration of the loan rather than in one lump sum at maturity.
- -------------------
21
<PAGE>
- -------------------
[information in left margin of page]
Agency securities typically offer somewhat higher yields but may involve greater
risk of default than U.S. Treasury securities with similar maturities.
- -------------------
ABOUT THE FUNDS' INVESTMENTS
Government obligations differ from one another in their interest rates,
maturities, dates of issuance and interest payment schedules. Treasury bills
have initial maturities of one year or less, Treasury notes from two to ten
years, and Treasury bonds more than 10 years.
U.S. TREASURY SECURITIES
U.S. Treasury bills, notes, zero-coupon bonds, and other bonds are direct
obligations of the U.S. Treasury, which has never failed to pay interest and
repay principal when due. Although U.S. Treasury securities carry little
principal risk if held to maturity, the prices of these securities (like all
debt securities) change between issuance and maturity in response to fluctuating
market interest rates.
A number of U.S. government agencies and government-sponsored organizations
issue debt securities. These agencies generally are created by Congress to
fulfill a specific need, such as providing credit to home buyers or farmers.
Among these agencies are the Federal Home Loan Banks, the Federal Farm Credit
Banks, the Student Loan Marketing Association, and the Resolution Funding
Corporation.
Some agency securities are backed by the full faith and credit of the U.S.
government, and some are guaranteed only by the issuing agency. Agency
securities typically offer somewhat higher yields than U.S. Treasury securities
with similar maturities. However, these securities may involve greater risk of
default than securities backed by the U.S. Treasury.
Interest rates on agency securities may be fixed for the term of the investment
(fixed-rate agency securities) or tied to prevailing interest rates
(floating-rate agency securities). Interest rate resets on floating-rate agency
securities generally occur at intervals of one year or less, based on changes in
a predetermined interest rate index.
Floating-rate agency securities frequently have caps limiting the extent to
which coupon rates can be raised. The price of a floating-rate agency security
may decline if its capped coupon rate is lower than prevailing market interest
rates.
22
<PAGE>
Fixed- and floating-rate agency securities may be issued with a call date (which
permits redemption before the maturity date ). The exercise of a call may reduce
an obligation's yield to maturity.
CPF and CPF II may not invest in floating-rate agency securities.
MORTGAGE-BACKED SECURITIES
The Fund may purchase mortgage pass-through securities. These represent
interests in "pools" of mortgages in which payments of both interest and
principal on the securities are generally made monthly. These monthly mortgage
payments are, in effect "passed-through" to the security holder, (minus fees
paid to the security's issuer or guarantor). Although fixed-rate mortgages
typically have stated maturities of 30 or more years, most mortgage holders pay
off their mortgages before they mature which may make these subject to
prepayment risk.
PREPAYMENT RISK
Also, mortgage-backed securities, like other fixed income securities, generally
decrease in value as a result of increases in interest rates, but benefit less
than other fixed-income securities from declining interest rates because of the
risk of prepayment. On average, securities backed by 30-year mortgages return
principal within 7 to 10 years. As a result, these securities have historically
exhibited behavior comparable to 7- to 10-year Treasury notes, while offering
higher yields.
The primary issuers of mortgage securities are the Federal National Mortgage
Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC), and the
Government National Mortgage Association (GNMA). Payments of principal and
interest on GNMA securities are guaranteed by GNMA and backed by the full faith
and credit of the U.S. government. Because FNMA and FHLMC have a close
relationship with the U.S. government and even though their securities are not
backed by the full faith and credit of the U.S. government, they are
high-quality securities with minimal credit risks.
- -------------------
[information in right margin of page]
Most mortgage-backed securities are pass-through securities, which means that
they provide investors with payments consisting of both principal and interest
as mortgages in the underlying pool are paid off by borrowers.
- -------------------
23
<PAGE>
- -------------------
[information in left margin of page]
ARM and GNMA Funds invest in CMOs to enhance investment return.
- -------------------
ARMS are pass-through securities collateralized by mortgages with adjustable,
rather than fixed, interest rates. The interest rate payments and amortization
of principal on the underlying adjustable rate mortgages are tied to changes in
predetermined interest rate indexes. ARM rates are readjusted at intervals of
one year or less, subject to maximums (caps) and minimums (floors) on the rates
that can be charged to mortgage holders during a given period and during the
life of a mortgage. These periodic rate adjustments allow ARM Fund to
participate in market interest rate increases (to produce higher yields with
less share price volatility) but only to the extent that the current coupons on
the underlying mortgages remain at or below their specified caps.
ARM coupon rate resets should cause ARM Fund's share price to fluctuate less
dramatically than it would if the Fund were substantially invested in securities
backed by long-term, fixed-rate mortgages. This means that share price declines
are limited when interest rates rise. This downside protection also limits the
potential for share price appreciation is limited when interest rates decline.
If ARMs are purchased at a premium, mortgage foreclosures and unscheduled
principal prepayments will result in some loss of principal. On the other hand,
if ARMs are purchased at a discount, both scheduled and unscheduled payments of
principal will accelerate the recognition of income and thereby increase the
Fund's yield and total return.
The mortgages that collateralize ARMs issued by GNMA are fully guaranteed by the
Federal Housing Administration or the Department of Veterans Affairs, which are
divisions of the U.S. government. The mortgages that collateralize ARMs issued
by FNMA or FHLMC typically are conventional residential mortgages that conform
to standards prescribed by FNMA or FHLMC.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) are mortgage-backed securities issued
by government agencies; single-purpose, stand-alone financial subsidiaries;
trusts established by financial institutions; or similar institutions. ARM Fund
may buy CMOs that meet the following criteria:
24
<PAGE>
* Are collateralized by pools of mortgages in which payment of principal
and interest of each mortgage is guaranteed by an agency or
instrumentality of the U.S. government
* Are collateralized by pools of mortgages in which payment of principal
and interest are guaranteed by the issuer, and the guarantee is
collateralized by U.S. government securities
* Are securities in which the proceeds of the issue are invested in
mortgage securities and payments of principal and interest are supported
by the credit of an agency or instrumentality of the U.S. government
GNMA Fund may buy only Ginnie-Mae-backed CMOs.
STRIPPED MORTGAGE-BACKED SECURITIES (permitted investments for ARM Fund only)
are usually structured with two classes. One class will receive all of the
interest (the interest-only class, or "IO"), whereas the other class will
receive all of the principal (the principal-only class, or "PO"). Stripped
mortgage securities are likely to experience greater price volatility than other
types of mortgage securities in which ARM Fund invests. The yield to maturity on
the IO class is extremely sensitive, not only to changes in prevailing interest
rates but also to the rate of principal payments (including prepayments) on the
underlying mortgage assets. If prepayments accelerate, the Fund may not fully
recover its initial investment in these securities. ARM Fund's investments in
stripped mortgage securities along with investments in other illiquid securities
may not exceed 10% of net assets.
OTHER INVESTMENT PRACTICES
REPURCHASE AGREEMENTS
The Funds may enter into repurchase agreements, collateralized by U.S.
government securities, with banks or broker-dealers that are deemed to present
minimum credit risk. Credit risk determinations are made by BMC pursuant to
guidelines established by the board of trustees/directors. A repurchase
agreement involves the purchase of a security and a simultaneous agreement to
sell the security back to the seller at a higher price. Delays or losses could
result if the other party to the agreement defaults or becomes bankrupt.
25
<PAGE>
WHEN-ISSUED SECURITIES AND FORWARD-COMMITMENTS
When-issued securities and forward-commitments fix a security's price and yield
for future payment and delivery. The market value of a security may change
during this period, or a party to the agreement may fail to pay for the
security. Either of these situations could affect the market value of the Fund's
assets.
CASH MANAGEMENT (VARIABLE-PRICE FUNDS)
For cash management purposes, each of the Variable-Price Funds may invest up to
5% of its assets in any Benham money market fund, provided that the investment
is consistent with the Funds' investment policies and restrictions.
PORTFOLIO TRANSACTIONS
The Funds' portfolio securities are traded in the over-the-counter market
through broker-dealers. A broker-dealer is a securities firm or bank that makes
a market for securities by offering to buy at one price and sell at a slightly
higher price. The difference between the prices is known as a spread. Because
BMC trades U.S. government securities in large volumes, broker-dealers are
willing to work with the Funds on more favorable spreads than would be available
to most individual investors. Higher portfolio turnover rates can increase the
incidence of capital gains (or losses). Short-term capital gains distributed to
shareholders generally are treated as ordinary income.
OTHER INVESTMENT MANAGEMENT TECHNIQUES
BMC may buy other types of securities or employ other portfolio management
techniques on behalf of the Funds. When SEC guidelines require it to do so, a
Fund will set aside cash or appropriate liquid assets in a segregated account to
cover its portfolio obligations. See the Statements of Additional Information
for a more detailed discussion of these investments and some of the risks
associated with them.
PERFORMANCE
Mutual fund performance is commonly measured as yield or total return. It is
based on historical fund performance and may be quoted in advertising and sales
26
<PAGE>
literature. Past performance is no guarantee of future results.
FOR EACH OF THE MONEY MARKET FUNDS, YIELDS are calculated based on the income
generated by an investment in the Fund over a seven-day period, expressed as an
annual percentage rate. The Funds' EFFECTIVE YIELDS are calculated similarly,
although they will be slightly higher than the Funds' yields because they assume
that income earned from the Funds' investments is reinvested.
FOR EACH OF THE VARIABLE-PRICE FUNDS, YIELDS are a way of showing the rate of
income a Fund earns on its investments as a percentage of its share price. To
calculate yield, a Fund takes the interest it earned from its portfolio of
investments for a 30-day period (net of expenses), divides it by the average
number of shares entitled to receive dividends, and expresses the result as an
annualized percentage rate based on its share price at the end of the 30-day
period.
The Variable-Price Funds' yields are calculated according to methods that are
standardized for all stock and bond funds. Because these yield calculation
methods differ from the methods used for other accounting purposes, a
Variable-Price Fund's yield may not equal its distribution rate, the income paid
to a shareholder's account, or the income reported in the Fund's financial
statements.
Each Fund (except CPF II, ARM Fund, and GNMA Fund) may quote STATE
TAX-EQUIVALENT YIELDS, which show the state taxable yields an investor would
have to earn before taxes to equal the Fund's state tax-free yields. You can
calculate your state tax-equivalent yield for any state tax-free fund using the
following equation:
Fund's State Tax-Free Yield Your State
--------------------------- = Tax-Equivalent
100% - Your State Tax Rate Yield
For example, if your state tax rate was 11% and a fund's state tax-free yield
was 5%, your calculation would be as follows:
.05 A state tax-free yield
------- = .056 = 5.6% of 5% is equal to
1 - .11 a state taxable yield
of 5.6%.
- -------------------
[information in right margin of page]
State tax-equivalent yields show the state taxable yields an investor would have
to earn before taxes to equal a fund's state tax-free yield.
- -------------------
27
<PAGE>
- -------------------
[information in left margin of page]
Performance data and a discussion of factors that affected performance during
the Funds' most recent reporting period are included in the Funds' semiannual
and annual reports to shareholders.
- -------------------
In this example, your return would be higher from a state tax-free investment
yielding 5% if taxable yields (on investments with comparable quality and
maturity characteristics) were less than 5.6%. If only a portion of a Fund's
income were state tax exempt, only that portion would be adjusted in the
calculation.
TOTAL RETURN represents the Fund's changes over a specified time period,
assuming reinvestment of dividends and capital gains, if any. CUMULATIVE TOTAL
RETURN illustrates the Fund's actual performance over a stated period of time.
AVERAGE ANNUAL TOTAL RETURN is a hypothetical rate of return that illustrates
the annually compounded return that would have produced the same cumulative
total return if the Fund's performance had been constant over an entire period.
Average annual total returns smooth out variations in the Fund's performance;
they are not the same as year-by-year results.
Performance data and a discussion of factors that affected performance during
the Fund's most recent reporting period are included in the Fund's semiannual
and annual reports to shareholders. These reports are routinely delivered to the
Fund's shareholders. For a free copy, call one of the Fund Information numbers
on page 29.
SHARE PRICE
BMC normally calculates each Fund's purchase and sale price per share (net asset
value, or NAV) at 1:00 p.m. Pacific Time each day the New York Stock Exchange is
open for business. NAV is calculated by adding the value of the Fund's assets,
deducting its liabilities, and then dividing the result by the number of shares
outstanding. The Variable-Price Funds' NAVs are published daily in leading
newspapers.
SECURITIES HELD BY THE MONEY MARKET FUNDS are valued on the basis of amortized
cost. This method involves initially valuing a security at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium paid at the time of purchase, rather than determining the security's
market value from day to day.
28
<PAGE>
MOST SECURITIES HELD BY THE VARIABLE-PRICE FUNDS are priced at market value
using prices obtained daily from an independent pricing service. Other
securities are priced at fair market value as determined in good faith pursuant
to guidelines established by the Funds' board of trustees.
HOW TO INVEST
To open an account, you must complete and sign an application. If an application
is not enclosed with this Prospectus, you may request one by calling one of the
Fund Information numbers listed below. If you prefer, we will fill out your
application over the telephone and mail it to you for your signature. Separate
forms are required to establish Benham-Sponsored Retirement Plan accounts (see
pages 40-41).
Your investment will be credited to your account at the next NAV calculated
after The Benham Group or an authorized subtransfer agent receives and accepts
your order. Payment of redemption proceeds may be delayed until we have your
completed application on file and your investment matures (i.e., clears). See
page 37 for details.
Benham Group Representatives are available at the telephone numbers listed
below weekdays from 5:00 a.m. to 5:00 p.m. Pacific Time. For your
protection, Benham records all telephone conversations with its telephone
representatives.
FUND INFORMATION: for information about any Benham fund or other investment
product, call 1-800-331-8331 or 1-415-965-4274.
SHAREHOLDER RELATIONS: to open an account or make transactions in an
existing account, call 1-800-321-8321 or 1-415-965-4222.
Benham shareholders may make transactions and obtain prices, yields, and total
return information for all Benham funds with TeleServ, our 24-hour automated
telephone information service. Dial 1-800-321-8321 and press 1.
- -------------------
[information in right margin of page]
Overnight and special delivery mail (e.g., Federal Express, Express Mail,
Priority Mail) should be sent to our street address: 1665 Charleston Rd.
Mountain View, California 94043. Failure to do so may result in transaction
delays.
- -------------------
29
<PAGE>
HOW TO BUY SHARES (Retirement plan accounts have different investment minimums.
See pages 40 and 41).
================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
BY CHECK Minimum initial investment: $1,000
Minimum additional investment: $100
MAKE YOUR INVESTMENT CHECK PAYABLE TO THE BENHAM GROUP.
Mail the check with your completed application to
The Benham Group
P.O. Box 7730
San Francisco, CA 94120-9853
For ADDITIONAL INVESTMENTS, enclose an investment slip
preprinted with the account number to which your investment
should be credited. If the payee information provided on the
check does not agree with the information preprinted on the
investment slip, we will follow the instructions preprinted on
the slip.
If you do not have a preprinted investment slip, send your
check with separate written instructions indicating the fund
name and the account number. If the payee information provided
on the check does not agree with the written instructions, we
will follow the written instructions.
You may also invest your check in person at a Benham Investor
Center. One is located at 1665 Charleston Road in Mountain
View, California; the other is located at 2000 South Colorado
Boulevard, Suite 1000, in Denver, Colorado.
WE WILL NOT ACCEPT CASH INVESTMENTS OR THIRD-PARTY CHECKS. We
will, however, accept properly endorsed second-party checks
made payable to the investor(s) to whose account the investment
is to be credited.
We will also accept checks drawn on foreign banks or foreign
branches of domestic banks and checks that are not drawn in
U.S. dollars (U.S. $100 minimum). The cost of collecting
payment on such checks will be passed on to the investor. These
costs may be substantial, and settlement may involve
considerable delays.
Investors will be charged $5 for every investment check
returned unpaid.
30
<PAGE>
================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
BY BANK WIRE Minimum initial investment: $25,000
Minimum additional investment: $100
If you wish to open an account by bank wire, please call our
Shareholder Relations Department for more information and an
account number. Bank wire investments should be addressed as
follows:
For CPF, CPF II, AGENCY FUND, and TREASURY NOTE FUND
State Street Bank and Trust Company
Boston, Massachusetts
ABA Routing Number 011000028
Beneficiary = [Benham Fund Name]
AC_[State Street Fund Account Number]
FBO [Your Name, Your Benham Fund Account Number]
Benham Fund Names and State Street Fund Account Numbers:
Capital Preservation Fund.......................... 0505 924 1
Capital Preservation Fund II....................... 0505 925 8
Benham Government Agency Fund...................... 0505 916 7
Benham Treasury Note Fund.......................... 0505 926 6
FOR SHORT-TERM FUND, LONG-TERM FUND, ARM FUND and GNMA FUND
Morgan Guaranty Trust
New York, New York
ABA Routing Number 021000238
Beneficiary = Benham Government Income Trust: [Benham Fund
Name]
DDA Number [See below]
Reference: [Your Name, Your Benham Fund Account Number]
Benham Fund Names and Morgan Guaranty DDA Numbers:
Benham Short-Term Treasury and Agency Fund......... 001 48 702
Benham Long-Term Treasury and Agency Fund.......... 001 48 713
Benham Adjustable Rate Government
Securities Fund.............................. 001 33 060
Benham GNMA Income Fund............................ 000 03 986
31
<PAGE>
================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
BY EXCHANGE Minimum initial investment: $1,000
Minimum additional investment: $100
You may exchange your shares for shares of any other Benham
fund registered for sale in your state if you have received
and read the fund's prospectus. Exchanges may be made by
telephone (for identically registered accounts only), by
written request, or in person. Certain restrictions apply;
please see page 33 for details. You may open a new account
by exchange, provided that you meet the minimum initial
investment requirement.
- --------------------------------------------------------------------------------
AUTOMATIC Minimum: $25
INVESTMENT
SERVICES These services are offered with respect to additional
investments only. See details on page 35.
32
<PAGE>
PROCESSING YOUR PURCHASE
Shares will be purchased at the next NAV calculated after your investment is
received and accepted by Benham or an authorized subtransfer agent. Investments
received and accepted before 1:00 p.m. Pacific Time will be included in your
account balance the same day. After 1:00 p.m. Pacific Time, they will be
credited the following business day. The Funds reserve the right to refuse any
investment.
TELEPHONE TRANSACTIONS
Shareholders may order certain transactions (e.g., exchanges, wires, some types
of redemptions) by telephone. This privilege is granted to Benham fund
shareholders automatically; you need not specifically request this service, and
you may not specifically decline it.
The Benham Group will not be liable for losses resulting from unauthorized or
fraudulent instructions if it follows procedures designed to verify the caller's
identity. BMC will request personal identification, record telephone calls, and
send confirmation statements for every telephone transaction to the
shareholder's record address. The Funds reserve the right to revise or terminate
telephone transaction privileges at any time.
CONFIRMATION AND QUARTERLY STATEMENTS
All transactions are summarized on quarterly account statements. In addition,
for every transaction that you request, a confirmation statement will be mailed
to your record address. Please review these statements carefully. If you fail to
notify us of an error within 30 days of the confirmation statement date, you
will be deemed to have ratified the transaction.
33
<PAGE>
- -------------------
[information in left margin of page]
The free exchange privilege is a convenient way to buy shares in other Benham
funds if your investment goals change.
- -------------------
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE
You may exchange your shares for shares of equivalent value in any other Benham
fund registered for sale in your state. An exchange out of a variable-price fund
may generate a taxable gain or loss. An exchange request will be processed the
same day if it is received before the funds' NAVs are calculated (12:00 p.m.
Pacific Time for Benham Target Maturities Trust; 1:00 p.m. Pacific Time for all
other Benham funds).
The Benham Group discourages trading in response to short-term market
fluctuations. Such activity may encumber BMC's ability to invest the funds'
assets in accordance with their respective investment objectives and policies
and may be disadvantageous to other shareholders. More than six exchanges per
calendar year out of a variable-price fund may be deemed an abuse of the
exchange privilege. For purposes of determining the number of exchanges made,
accounts under common ownership or control will be aggregated.
Currently, there are no restrictions on exchanges out of the Money Market Funds.
However, each Benham fund reserves the right to modify or revoke the exchange
privilege of any shareholder or to limit or reject any exchange. Although each
fund will attempt to give shareholders prior notice whenever it is reasonably
able to do so, it may impose these restrictions at any time.
OPEN ORDER SERVICE
The Benham Group's Open Order Service allows you to designate a price at which
to exchange shares between a Benham variable-price fund and a Benham money
market fund. You must designate a purchase price to or lower, or a sale price
equal to or higher, than the variable-price fund's NAV at the time you place
your order. If the designated price is met within 90 calendar days, we will
execute your exchange order automatically at that price (or better).
34
<PAGE>
If the fund you have selected deducts a distribution from its share price, your
order price will be adjusted accordingly so that the distribution does not
inadvertently trigger an Open Order transaction on your behalf. If you close or
reregister the account from which shares are to be redeemed, your Open Order
will be cancelled. Because of their time-sensitive nature, Open Order
transactions may be made by telephone or in person. These transactions are
subject to the exchange limitations described in each fund's prospectus, except
that all orders and cancellations received before 12:00 p.m. Pacific Time are
effective the same day. After 12:00 p.m. Pacific Time, they are effective the
following business day.
AUTOMATIC INVESTMENT SERVICES (AIS)
TREASURY DIRECT allows you to deposit interest and principal payments from
Treasury securities directly into a Benham fund account.
PAYROLL DIRECT allows you to deposit any amount of your paycheck directly into a
Benham fund account.
GOVERNMENT DIRECT allows you to deposit your entire U.S. government payment
directly into a Benham fund account.
BANK DIRECT allows you to deposit a fixed amount from your bank account directly
into a Benham fund account on the 1st and/or the 15th of each month (or the next
business day).
DIRECTED DIVIDENDS allow you to invest all or part of your dividend earnings
from one Benham fund account in one or more other Benham fund accounts. You may
choose to receive a portion of your dividends in cash and to invest the
remainder in another Benham fund account.
SYSTEMATIC EXCHANGES allow you to exchange from one Benham fund account to
another Benham fund account on the 1st and/or the 15th of each month (or the
next business day).
For more information about any of these services, please call our Shareholder
Relations Department at 1-800-321-8321 or 1-415-965-4222.
35
<PAGE>
BROKER-DEALER TRANSACTIONS
The Benham Group charges no sales commissions, or "loads," of any kind. However,
investors may purchase and sell shares through registered broker-dealers, who
may charge fees for their services.
The Benham Group will accept orders for the purchase of shares from authorized
broker-dealers who agree in writing to pay in full for such shares in
immediately available funds no later than 1:00 p.m. Pacific Time the following
business day.
TDD SERVICE FOR THE HEARING IMPAIRED
TDD users may contact The Benham Group at 1-800-624-6338 or 1-415-965-4764.
California residents may wish to contact us through the California Relay Service
(CRS) at 1-800-735-2929.
Your transaction requests via CRS will be handled on a recorded line. The Benham
Group cannot accept responsibility for instructions miscommunicated by CRS.
EMERGENCY SERVICES
The Benham Group has established an alternate operations site from which we can
access customer accounts and the mainframe computers used by the Benham funds in
the event of an emergency. Telephone lines and terminals are currently in place.
If our regular service is interrupted, the following numbers will automatically
connect you to this site.
From within the U.S., including Alaska and Hawaii: 1-800-321-8321.
From all foreign countries, call collect: 1-303-759-9337 or 1-510-820-1409. The
operator will request your Benham fund account number before accepting the call.
HOW TO REDEEM YOUR INVESTMENT
When you place an order to redeem shares, your shares will be redeemed at the
next NAV calculated after The Benham Group or an authorized subtransfer agent
has received your redemption request in good order. The Funds' NAVs are
calculated at 1:00 p.m. Pacific Time. See pages 28 and 29 for details.
36
<PAGE>
Barring extraordinary circumstances prescribed by law, redemption proceeds are
mailed within seven calendar days. However, The Benham Group reserves the right
to withhold the proceeds until the investment has matured (i.e., your payment
has cleared); see maturity periods below.
================================================================================
DRAWN FROM A MATURITY PERIOD
TYPE OF INVESTMENT CALIFORNIA BANK? (IN BUSINESS DAYS)
- --------------------------------------------------------------------------------
Checks, cashiers' checks,
and bank money orders Yes 5 days
- --------------------------------------------------------------------------------
Same as above No 8 days
- --------------------------------------------------------------------------------
U.S. Treasury checks,
Traveler's checks,
U.S. Postal money orders,
Benham checks, bank wires,
and AIS Deposits* N/A 1 day
*Does not include bank direct deposits, which take 8 business days to mature.
================================================================================
If you hold shares in certificate form, redemption requests must be accompanied
by properly endorsed certificates.
If you want to keep your account open, please maintain a balance of shares worth
at least $1,000. If your account balance falls to less than $1,000 due to
redemption, your account may be closed, but not without at least 30 days' notice
and an opportunity to increase your account balance to the $1,000 minimum. Your
shares will be redeemed at the NAV calculated on the day your account is closed.
Proceeds will be mailed to the record address.
This policy applies to Benham's Individual Retirement Accounts (IRAs), excluding
SEP-IRAs, except that shareholders will receive at least 120 days' written
notice and an opportunity to increase their account balance before their
accounts are closed. Investors wishing to open a Benham-sponsored retirement
account should see pages 40 and 41 for details.
UNCASHED CHECKS
We may reinvest at a Fund's current NAV any distribution or redemption check
that remains uncashed for six months. Until we receive instructions to the
contrary, subsequent distributions will be reinvested in the original account.
Uncashed redemption checks may be reinvested in an identically registered
account.
37
<PAGE>
HOW TO REDEEM SHARES (Retirement investors, see pages 40 and 41).
================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
BY TELEPHONE The Benham Group will accept telephone redemption requests
for any amount if the proceeds are to be sent to your
predesignated bank account. Redemptions of $25,000 or less
payable to the registered account owner(s) may also be
ordered by telephone. All other redemption requests must
be made in writing.
- --------------------------------------------------------------------------------
IN WRITING Send a letter of instruction to
The Benham Group
Shareholder Relations Department
1665 Charleston Road
Mountain View, California 94043
Your letter of instruction should specify
* Your name
* Your account number
* The name of the Fund from which you wish to redeem shares
* The dollar amount or number of shares you wish to redeem
For your protection, written redemption requests must be
accompanied by SIGNATURE GUARANTEES under the following
circumstances
* Redemption proceeds go to a party other than the
registered account owner(s)
* Redemption proceeds go to an account other than your
predesignated bank account
* Redemption proceeds go to the registered account
owner(s), but the amount exceeds $25,000
If you have instructed The Benham Group to require more than
one signature on written redemption requests, each of the
required number of signers must have his or her signature
guaranteed on these redemption requests. Signature guarantees
may be provided by banks, savings and loan associations,
savings banks, credit unions, stock brokerage firms, or a
Benham Investor Center.
38
<PAGE>
================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
IN WRITING Shareholders must appear in person with identification to
(continued) obtain a signature guarantee. Notary public certifications
are not accepted in lieu of signature guarantees.
BFS may require written consent of all account owners
prior to acting on the written instructions of any account
owner.
- --------------------------------------------------------------------------------
BY CHECK Nonretirement CPF, CPF II, and Agency Fund shareholders
automatically receive a free book of checks upon opening
an account in these Funds. Checks are available on request
to nonretirement ARM and GNMA Fund shareholders. Checks
may be drawn to the order of any payee in any amount of
$100 or more. There is no charge for additional checks,
and there are no per-check fees.
Each check must bear the signatures of those authorized to act
on the account. Check redemptions will be charged against your
account as of the date the check is received by First
Interstate Bank of California, the collecting bank.
Checks written against your account in ARM Fund or GNMA Fund
may generate taxable capital gains (or losses) and will be
reported to the IRS annually along with any other redemption
transactions. The check-writing option may be terminated or
modified by the board of directors or trustees. Checks may not
be used to close an account.
- --------------------------------------------------------------------------------
BY BANK WIRE If you included bank wire information on your account
application or made subsequent arrangements to accommodate
bank wire redemptions, you may wire funds to your bank by
calling 1-800-321-8321 or 1-415-965-4222. The minimum amount
for a bank wire redemption is $1,000. Allow at least two
business days for redemption proceeds to be credited to your
bank account.
- --------------------------------------------------------------------------------
BY EXCHANGE See details on pages 34 and 35.
- --------------------------------------------------------------------------------
AUTOMATIC DIRECTED PAYMENTS. You may arrange for periodic redemptions
REDEMPTION from your Benham fund account to your bank account or to
SERVICES another designated payee.
SYSTEMATIC EXCHANGES. You may arrange for periodic
exchange redemptions from one Benham fund
account to another Benham fund account.
39
<PAGE>
ABOUT BENHAM-SPONSORED RETIREMENT PLANS
Retirement plans offer investors a number of benefits, including the chance to
reduce current taxable income and to take advantage of tax-deferred compounding.
Retirement plan accounts require a special application; please let our
Shareholder Relations Department know if you want to establish this type of
account. We suggest that you consult your tax advisor before establishing a
retirement plan account. The minimum account balance for all Benham Individual
Retirement Accounts (IRAs), excluding SEP-IRAs, is $1,000. If your balance falls
below $1,000 per fund account (continued on the next page)
================================================================================
MAXIMUM ANNUAL CONTRIBUTION
PLAN TYPE AVAILABLE TO PER PARTICIPANT
- --------------------------------------------------------------------------------
CONTRIBUTORY An employed indi- $2,000 or 100% of compensation
IRA vidual underage 70 1/2. (whichever is less).
- --------------------------------------------------------------------------------
SPOUSAL IRA A nonworking spouse $2,250 (can be split between
(under age 70 1/2) of a Spousal and Contributory IRAs,
wage earner. provided that no IRA receives
more than a total of $2,000).
- --------------------------------------------------------------------------------
ROLLOVER IRA An individual with a None, as long as total amount
distribution from an is eligible.
employer's retirement
plan or a rollover IRA.
- --------------------------------------------------------------------------------
SEP-IRA A self-employed indi- $22,500 or 15% of compensation
vidual or a business. (whichever is less).*
- --------------------------------------------------------------------------------
MONEY Same as for SEP-IRA. $30,000 or 25% of compensation
PURCHASE PLAN (whichever is less). Annual
(KEOGH) contribution is mandatory.*
- --------------------------------------------------------------------------------
PROFIT Same as for SEP-IRA. $22,500 or 15% of compensation
SHARING PLAN (whichever is less). Annual
(KEOGH) contribution is optional.*
- --------------------------------------------------------------------------------
(table continued on next page)
*Self-employed individuals should consult IRS Publication 560 for their annual
contribution limits.
40
<PAGE>
(continued from previous page)
minimum, your account may be closed (see page 37 for details). This distribution
may result in a taxable event and a possible penalty for early withdrawal. The
minimum fund account balance for all other Benham-sponsored retirement plan
accounts is $100. Benham charges no fees for its IRAs but does charge low
maintenance fees for its Koeghs.
YOU MUST COMPLETE SPECIFIC FORMS TO TAKE DISTRIBUTIONS (I.E., REDEEM SHARES)
FROM A BENHAM-SPONSORED RETIREMENT PLAN ACCOUNT. PLEASE CALL OUR SHAREHOLDER
RELATIONS DEPARTMENT AT 1-800-321-8321 FOR ASSISTANCE.
(table continued from previous page)
================================================================================
DEADLINE FOR
OPENING ACCOUNT CONTRIBUTION DEADLINES
- --------------------------------------------------------------------------------
You may open an account anytime, Annual contributions can be made
but the deadline for establishing from January 1 through April 15 of
and funding an IRA for the prior the following tax year up to the year
tax year is April 15. you turn age 70 1/2.
- --------------------------------------------------------------------------------
Same as for Contributory IRA. Same as for Contributory IRA.
- --------------------------------------------------------------------------------
You may open a Rollover IRA Eligible rollover contributions must
account anytime. be made within 60 days of receiving
your distribution. There is no age
limit for rollover contributions.
- --------------------------------------------------------------------------------
You may open an account anytime, Must be made by employer's tax fil-
but the deadline for establishing and ing deadline (including extensions).
funding an account for the prior tax
year is the employer's tax deadline
(including extensions).
- --------------------------------------------------------------------------------
The end of the employer's plan Same as for SEP-IRA.
year, usually December 31.
- --------------------------------------------------------------------------------
The end of the employer's plan Same as for SEP-IRA.
year, usually December 31.
For all Benham-sponsored retirement plans, you may begin taking distributions at
age 59 1/2 . You must begin to take required distributions by April 1 of the
year after you turn age 70 1/2. You may take distributions from your IRA or
SEP-IRA before you reach age 59 1/2; however, a penalty may apply.
41
<PAGE>
- -------------------
[information in left margin of page]
Each January you will be informed of the tax status of dividends and capital
gain distributions for the previous year.
- -------------------
DISTRIBUTIONS AND TAXES
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
MONEY MARKET FUNDS. Dividends are declared and credited (i.e., available
for redemption) daily and distributed on the last business day of the month.
VARIABLE-PRICE FUNDS. Dividends are declared daily, accrued throughout the
month, and distributed on the last business day of the month.
ALL FUNDS. Net capital gains, if any, are declared and paid once a year in
December.
DISTRIBUTION OPTIONS. You may choose to receive dividends and capital gain
distributions in cash or to reinvest them in additional shares (see "Directed
Dividends" on page 35 for further information). Please indicate your choice on
your account application or contact our Shareholder Relations Department. See
page 37 for a description of our policy regarding uncashed distribution checks.
TAXES
Each Fund intends to qualify annually and to elect to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986
(Code), as amended, by distributing all, or substantially all, of its net
investment income and net realized capital gains to shareholders each year.
The Funds' dividends and capital gain distributions are subject to federal
income tax and applicable state and local taxes whether they are received in
cash or reinvested in additional shares. Distributions are generally taxable in
the year they are declared.
Dividends from net investment income (including net short-term capital gains, if
any) are taxable as ordinary income. Distributions from any net capital gains
(net long-term capital gains minus net short-term capital losses) are federally
taxable as long-term capital gains, regardless of how long you have held your
shares. Any distributions that are not from a Fund's investment company taxable
income or net capital gain may be characterized as a return of capital to
shareholders or, in some cases, capital gain.
42
<PAGE>
Dividend distributions attributable to interest earned on obligations of the
U.S. Government (including agencies and instrumentalities) from CPF, Agency
Fund, Short-Term Fund, Treasury Note Fund, and Long-Term Fund are exempt from
state income tax in all states. Short-term capital gains, although they are
treated as ordinary income for federal tax purposes, are not eligible for
tax-exempt pass-through at the state level. Some states and localities apply an
intangibles tax to shares owned (rather than taxing dividends received). Tax
laws vary from state to state; you may wish to consult your tax advisor or state
tax authorities regarding the tax status of distributions from the Funds.
You may realize a taxable gain or loss when you redeem (sell) or exchange shares
of a variable-price fund. For most types of accounts, the proceeds from your
redemption transactions will be reported to the IRS annually. However, because
the tax treatment depends on your purchase price and personal tax situation, you
should keep your regular account statements to use in determining your taxes.
BUYING A DIVIDEND. The timing of your investment could have undesirable tax
consequences. If you open a new account or buy more shares from your current
account just before the day a dividend or a distribution is reflected in your
Fund's share price, you will receive a portion of your investment back as a
taxable dividend distribution.
BACKUP WITHHOLDING. The Funds are required by federal law to withhold 31% of
reportable dividends and capital gain distributions (as well as redemptions from
Variable-Price Funds) payable to shareholders who have not complied with IRS
regulations. These regulations require you to certify on your account
application or on IRS Form W-9 that your social security or taxpayer
identification number (TIN) is correct and that you are not subject to backup
withholding from previous underreporting to the IRS, or that you are exempt from
backup withholding.
The Benham Group may refuse to sell shares to investors who have not complied
with this requirement, either before or at the time of purchase. Until we
receive your certified tax certification, we may redeem your shares in the Funds
at any time.
43
<PAGE>
- -------------------
[information in left margin of page]
The Benham Group serves more than 350,000 investors
- -------------------
MANAGEMENT INFORMATION
ABOUT THE FUNDS
Capital Preservation Fund, Inc. (CPF), Capital Preservation Fund II, Inc. (CPF
II), and Benham Government Income Trust (BGIT) are registered open-end
management investment companies. CPF and CPF II were established as California
corporations on October 28, 1971, and April 2, 1980, respectively. BGIT was
organized as a Massachusetts business trust on July 24, 1985. BGIT currently
consists of six series and may create additional series from time to time.
CPF and CPF II each have a board of directors; BGIT has a board of trustees.
These directors and trustees are responsible for overseeing the Funds'
activities and for protecting shareholders' interests. The majority of directors
and trustees are not otherwise affiliated with BMC.
The Funds are neither required nor expected to hold annual meetings, although
special meetings may be called for purposes such as electing or removing
directors or trustees or amending a Fund's advisory agreement or investment
policies. BGIT series vote separately on matters affecting individual series,
and voting rights are not cumulative. For BGIT shareholders, the number of votes
you are entitled to is based upon the dollar value of your investment. Under
California corporate law, shareholders of CPF and CPF II, respectively, have the
right to cumulate votes in the election (or removal) of directors. There is a
possibility that one Fund may become liable for any misstatement in this
Prospectus about another Fund.
THE BENHAM GROUP
Benham Management Corporation (BMC) is investment advisor to the funds in The
Benham Group, which currently constitute more than $11 billion in assets. BMC,
incorporated in California in 1971, became a wholly owned subsidiary of
Twentieth Century Companies, Inc. (TCC), a Delaware corporation, on June 1,
1995, upon the merger of Benham Management International, Inc., BMC's former
parent, into TCC. TCC is a holding company that owns the operating companies
that provide the investment management, transfer agency, share-
44
<PAGE>
holder service, and other services for the Twentieth Century family of funds,
which now includes the Benham Group. The combined company offers 62 mutual funds
and has combined assets of more than $41 billion.
Benham Management Corporation (BMC) supervises and manages the investment
portfolios of The Benham Group and directs the purchase and sale of its
investment securities. BMC utilizes teams of portfolio managers, assistant
portfolio managers and analysts acting together to manage the assets of the
funds. The teams meet regularly to review portfolio holdings and to discuss
purchase and sale activity. The teams adjust holdings in the funds' portfolios
as they deem appropriate in pursuit of the funds' investment objectives.
Individual portfolio manager members of the team may also adjust portfolio
holdings of the funds as necessary between team meetings.
Mr. Jeffrey R. Tyler co-manages the Benham GNMA Income Fund. He has primary
responsibility for the day-to-day operations of the Capital Manager Fund,
serves as vice president of The Benham Group's portfolio management team,
and oversees the portfolio manager's operation of the Benham European
Government Bond Fund. Mr. Tyler was an assistant vice president with
Citicorp Securities (1983 to 1987) and a lending officer with Crocker Bank
(1981 to 1987). Mr. Tyler supervises a team of other portfolio managers who
assist in the management of the various segments of the Fund.
Ms. Amy O'Donnell has primary responsibility for the day-to-day operations
of CPF and Benham Government Agency Fund. She also manages Benham Prime
Money Market Fund. Ms. O'Donnell joined BMC in 1987 and the Portfolio
Department in 1988. She was promoted to her current position in 1992.
Mr. Brian Howell co-manages the ARM Fund and assists with the management of
CPF and BGAF. Mr. Howell joined Benham in 1987 as a research assistant. He
assumed his current position in January 1994.
Ms. Denise Tobacco has primary responsibility for the day-to-day operations of
CPF II. She joined The Benham Group in 1988, the Portfolio Department in 1991
and assumed her current responsibilities in 1995.
- -------------------
[information in right margin of page]
Benham Management Corporation provides investment advice and portfolio
management services to the Funds.
- -------------------
45
<PAGE>
Mr. David Schroeder has primary responsibility for the day-to-day operations of
the Treasury Note, Short-Term, and Long-Term Funds. He also manages Benham
Target Maturities Trust. Before joining BMC in 1990, Mr. Schroeder was a vice
president and proprietary trader with Pacific Securities in San Francisco (1988
to 1990) and a vice president and fixed-income trader at Wells Fargo Bank.
Mr. Casey Colton co-manages the GNMA Income Fund.Mr. Colton joined BMC in
1990 as a Municipal Analyst. He was promoted to his current position in
1995. Mr. Colton is a Chartered Financial Analyst (CFA).
Mr. Newlin Rankin co-manages the ARM Fund. Before joining BMC in 1994, Mr.
Rankin was an assistant vice president at Wells Fargo Bank (1991 to 1993).
ADVISORY AND SERVICE FEES
For investment advice and portfolio management services, CPF and CPF II each pay
BMC a monthly investment advisory fee equal to the dollar amount derived from
applying the Fund's average daily net assets to an investment advisory fee
schedule. Each series of BGIT pays BMC a monthly investment advisory fee equal
to its pro rata share of the dollar amount derived from applying BGIT's average
daily net assets to an investment advisory fee schedule.
The investment advisory fee rate ranges from .50% to .19% of average daily net
assets, dropping as CPF's, CPF II's, and BGIT's respective assets increase.
The table on the next page illustrates investment advisory fees paid by the
Funds for the fiscal year ended March 31, 1995. For each Fund, the figures shown
represent investment advisory fees as a percentage of the Fund's average daily
net assets and as a dollar amount per $1,000 of the Fund's average daily net
assets.
46
<PAGE>
INVESTMENT ADVISORY FEES*
CPF .27%
CPF II .44
Agency Fund .21
Short-Term Fund .20
Treasury Note Fund .28
Long-Term Fund .14
ARM Fund .27
GNMA Fund .28
* Net of expense limitations, as described on pages 4, 5, and 48.
To avoid duplicative investment advisory fees, the variable-price funds do not
pay BMC investment advisory fees with respect to assets invested in shares of
Benham money market funds.
BFS, a wholly owned subsidiary of TCC, is the Funds' agent for transfer and
administrative services. For administrative services, each Fund pays BFS a
monthly fee equal to its pro rata share of the dollar amount derived from
applying the average daily net assets of all of the funds in The Benham Group.
The administrative fee rate ranges from .11% to .08% of average daily net
assets, dropping as The Benham Groups' assets increase. For transfer agent
services, each Fund pays BFS a monthly fee for each shareholder account
maintained and for each shareholder transaction executed during that month.
Each Fund pays certain operating expenses directly, including, but not limited
to: custodian, audit, and legal fees; fees of the independent directors or
trustees; costs of printing and mailing prospectuses, statements of additional
information, proxy statements, notices, and reports to shareholders; insurance
expenses; and costs of registering the Fund's shares for sale under federal and
state securities laws. See the Statement of Additional Information for a more
detailed discussion of independent director/trustee compensation.
- -------------------
[information in right margin of page]
Benham Financial Services, Inc. provides administrative and transfer agent
services to the Funds.
- -------------------
47
<PAGE>
EXPENSE LIMITATION AGREEMENTS
ALL FUNDS. An expense limitation agreement between BMC and the Funds is
described on pages 4 and 5.
The table below illustrates total operating expenses for each of the Funds for
the fiscal year ended March 31, 1995. For each Fund, the figures shown represent
total operating expenses as a percentage of the Fund's average daily net assets
and as a dollar amount per $1,000 of the Fund's average daily net assets.
TOTAL OPERATING EXPENSES*
CPF .50%
CPF II .75
Agency Fund .50
Short-Term Fund .67
Treasury Note Fund .53
Long-Term Fund .67
ARM Fund .57
GNMA Fund .58
* Net of expense limitations, as described on pages 4 and 5.
DISTRIBUTION OF SHARES
Benham Distributors, Inc. (BDI), and BMC distribute and market Benham
products and services. BMC pays all expenses for promoting sales of and
distributing the Funds' shares. The Funds do not pay commissions to, or
receive compensation from, broker-dealers.
BDI is a wholly owned subsidiary of TCC.
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INVESTMENT ADVISOR
BENHAM MANAGEMENT CORPORATION
1665 Charleston Road
Mountain View, California 94043
DISTRIBUTOR
BENHAM DISTRIBUTORS, INC.
1665 Charleston Road
Mountain View, California 94043
CUSTODIAN
STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, Massachusetts 02101
TRANSFER AGENT
BENHAM FINANCIAL SERVICES, INC.
1665 Charleston Road
Mountain View, California 94043
INDEPENDENT AUDITORS
KPMG PEAT MARWICK LLP
3 Embarcadero Center
San Francisco, California 94111
LEGAL COUNSEL
DECHERT PRICE & RHOADS
1500 K Street, N.W.
Suite 500
Washington, DC 20005
TRUSTEES
James M. Benham
Ronald J. Gilson
Myron S. Scholes
Kenneth E. Scott
Ezra Solomon
Isaac Stein
James E. Stowers III
Jeanne D. Wohlers
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THE BENHAM GROUP OF INVESTMENT COMPANIES
Capital Preservation Fund
Capital Preservation Fund II
Benham Government Agency Fund
Benham Prime Money Market Fund
Benham Short-Term Treasury and Agency Fund
Benham Treasury Note Fund
Benham Long-Term Treasury and Agency Fund
Benham Adjustable Rate Government Securities Fund
Benham GNMA Income Fund
Benham Target Maturities Trust
Benham California Tax-Free and Municipal Funds*
Benham National Tax-Free Money Market Fund
Benham National Tax-Free Intermediate-Term Fund
Benham National Tax-Free Long-Term Fund
Benham Florida Municipal Money Market Fund**
Benham Florida Municipal Intermediate-Term Fund**
Benham Arizona Municipal Intermediate-Term Fund***
Benham Gold Equities Index Fund
Benham Income & Growth Fund
Benham Equity Growth Fund
Benham Utilities Income Fund
Benham Global Natural Resources Index Fund
Benham European Government Bond Fund
Benham Capital Manager Fund
* Available only to residents of California, Arizona, Colorado, Hawaii,
Nevada, New Mexico, Oregon, Texas, Utah, and Washington.
** Available only to residents of Florida, California, Georgia, Illinois,
Michigan, New Jersey, New York, and Pennsylvania.
*** Available only to residents of Arizona, California, Colorado, Nevada,
Oregon, Washington, and Texas.
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NOTES:
51
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CONTENTS
Summary of Fund Expenses .............. 4
Financial Highlights .................. 6
How the Funds Work .................... 15
Money Market Funds .................... 15
U.S. Treasury and Agency Funds ........ 17
Mortgage Securities Funds ............. 19
About the Funds' Investments .......... 22
Mortgage-Backed Securities ............ 23
Other Investment Practices ............ 25
Performance ........................... 26
Share Price ........................... 28
How to Invest ......................... 29
Shareholder Services .................. 34
Exchange Privilege ................. 34
Open Order Service ................. 34
Automatic Investment Services ...... 35
Broker-Dealer Transactions ......... 36
TDD Service ........................ 36
Emergency Services ................. 36
How to Redeem Your Investment ......... 36
About Benham-Sponsored Retirement Plans 40
Distributions and Taxes ............... 42
Management Information ................ 44
About the Funds .................... 44
The Benham Group ................... 44
Advisory and Service Fees .......... 46
Expense Limitation Agreements ...... 47
Distribution of Shares ............. 48
Q018
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BENHAM GOVERNMENT INCOME TRUST
BENHAM GOVERNMENT AGENCY FUND (AGENCY FUND)
BENHAM SHORT-TERM TREASURY AND AGENCY FUND (SHORT-TERM FUND)
BENHAM TREASURY NOTE FUND (TREASURY NOTE FUND)
BENHAM LONG-TERM TREASURY AND AGENCY FUND (LONG-TERM FUND)
BENHAM ADJUSTABLE RATE GOVERNMENT SECURITIES FUND (ARM FUND)
BENHAM GNMA INCOME FUND (GNMA FUND)
THE BENHAM GROUP(R)
1665 Charleston Road
Mountain View, California 94043
Shareholder Relations: 1-800-321-8321 or 1-415-965-4222
Fund Information: 1-800-331-8331 or 1-415-965-4274
STATEMENT OF ADDITIONAL INFORMATION
JULY 30, 1995
This Statement is not a prospectus but should be read in conjunction with the
Funds' current Prospectus dated July 30, 1995. To obtain a copy of the
Prospectus, call or write The Benham Group.
TABLE OF CONTENTS
PAGE
----
Investment Policies and Techniques 2
Investment Restrictions 9
Portfolio Transactions 16
Valuation of Portfolio Securities 17
Performance 18
Taxes 20
About the Trust 21
Trustees and Officers 22
Investment Advisory Services 25
Administrative and Transfer Agent Services 26
Direct Fund Expenses 27
Expense Limitation Agreements 27
Additional Purchase and Redemption Information 28
Other Information 29
Financial Statements 30
NOTE: Throughout this document, Short-Term Fund, Treasury Note Fund, Long-Term
Fund, ARM Fund, and GNMA Fund are referred to collectively as the
"Variable-Price Funds."
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INVESTMENT POLICIES AND TECHNIQUES
The following pages provide a more detailed description of the securities and
investment practices identified in the Prospectus. Unless otherwise noted, the
policies described in this Statement of Additional Information are not
fundamental and may be changed by the board of trustees.
REPURCHASE AGREEMENTS (ARM FUND AND GNMA FUND)
The Funds may engage in repurchase agreements collateralized by U.S. Treasury
bills, notes, and bonds, or by mortgage-backed GNMA certificates, which are
guaranteed by the Government National Mortgage Association and backed by the
full faith and credit of the U.S. government.
In a repurchase agreement (repo), a Fund buys a security at one price and
simultaneously agrees to sell it back to the seller at a slightly higher price
on a specified date (usually within seven days) or on demand. The repurchase
price exceeds the purchase price by an amount that reflects an agreed-upon rate
of return and that is unrelated to the interest rate on the underlying security.
Repos may involve risks not associated with direct investments in U.S.
government debt securities. If the seller fails to complete the terms of the
agreement, the Fund may experience delays in recovering its cash or incur costs
in the disposal of securities it has purchased under the agreement. The Fund
could also suffer a loss if the securities decline in value before they can be
sold in the open market.
To minimize any risks associated with repurchase agreements, each Fund
(1) Invests no more than 10% of its total assets in repos of more than seven
days' duration (although the underlying securities usually will have longer
maturities).
(2) Purchases only securities issued by the U.S. government or its agencies,
backed by the full faith and credit of the U.S. government, under repurchase
agreements.
(3) Routinely takes delivery of securities subject to repurchase agreements.
(4) Transacts only with banks and primary non-bank U.S. government securities
dealers with whom the Federal Reserve transacts directly and whose stability
and credit are acceptable to the Fund.
(5) Requires the seller to establish and maintain collateral equal to 102% of
the agreed-upon resale price, provided, however, that the board of directors
may determine that a broker-dealer's credit standing is sufficient to allow
collateral to fall as low as 101% of the agreed-upon resale price before the
broker-dealer deposits additional securities with the Fund's custodian.
Under the Investment Company Act of 1940, repos are considered to be loans.
WHEN-ISSUED PURCHASES AND FORWARD-COMMITMENTS (ALL FUNDS)
The Funds may engage in securities transactions on a when-issued or
forward-commitment basis, in which the transaction price and yield are each
fixed at the time the commitment is made, but payment and delivery occur at a
future date (typically 15 to 45 days later).
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When purchasing securities on a when-issued or forward-commitment basis, each
Fund assumes the rights and risks of ownership, including the risk of price and
yield fluctuations. While a Fund will make commitments to purchase or sell
securities with the intention of actually receiving or delivering them, it may
nevertheless sell the securities before the settlement date if deemed advisable
as a matter of investment strategy.
In purchasing securities on a when-issued or forward-commitment basis, a Fund
will establish and maintain until the settlement date a segregated account
consisting of cash, U.S. government securities, or other high-quality liquid
debt securities in an amount sufficient to meet the purchase price. When the
time comes to pay for when-issued securities, the Fund will meet its obligations
with available cash, through the sale of securities, or, although it would not
normally expect to do so, through sales of when-issued securities themselves
(which may have a market value greater or less than the Fund's payment
obligation). Selling securities to meet when-issued or forward-commitment
obligations may generate taxable capital gains or losses.
ROLL TRANSACTIONS
A Fund may sell a security and at the same time make a commitment to purchase
the same or a comparable security at a future date and specified price.
Conversely, a Fund may purchase a security and at the same time make a
commitment to sell the same or a comparable security at a future date and
specified price. These types of transactions are executed simultaneously in what
are known as "dollar-roll" or "cash-and-carry" transactions. For example, a
broker-dealer may seek to purchase a particular security that a Fund owns. The
Fund will sell that security to the broker-dealer and simultaneously enter into
a forward-commitment agreement to buy it back at a future date. This type of
transaction generates income for the Fund if the dealer is willing to execute
the transaction at a favorable price in order to acquire a specific security. As
an operating policy, BMC limits forward-commitment transactions (including roll
transactions) to 35% and will not enter into when-issued or forward-commitment
transactions with settlement dates that exceed 120 days.
In engaging in roll transactions, the Fund will maintain until the settlement
date a segregated account consisting of cash, cash equivalents, or high-quality
liquid securities in an amount sufficient to meet the purchase price, as
described above.
INTEREST RATE RESETS ON FLOATING-RATE U.S. GOVERNMENT AGENCY SECURITIES
Interest rate resets on floating-rate U.S. government agency securities
generally occur at intervals of one year or less in response to changes in a
predetermined interest rate index. There are two main categories of indexes,
those based on U.S. Treasury securities and those derived from a calculated
measure, such as a cost of funds index. Commonly used indexes include the
three-month, six-month, and one-year Treasury bill rate; the two-year Treasury
note yield; the Eleventh District Federal Home Loan Bank Cost of Funds Index
(EDCOFI); and the London Interbank Offered Rate (LIBOR). Fluctuations in the
prices of floating-rate U.S. government agency securities are typically
attributed to differences between the coupon rates on these securities and
prevailing market interest rates between interest rate reset dates.
MASTER DEMAND NOTES (AGENCY FUND ONLY)
Agency Fund may acquire variable-rate master demand notes issued by U.S.
government agencies such as the Student Loan Marketing Association. Master
demand notes allow the Fund to lend
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money at varying rates of interest under direct agreements with borrowers. The
Fund may adjust the amount of money loaned under a master demand note daily or
weekly up to the full amount specified in the agreement, and the borrower may
prepay up to the full amount of the loan without penalty. Master demand notes
may or may not be backed by bank letters of credit. Although, as direct
agreements between lenders and borrowers, there is no secondary market for
master demand notes, these instruments are redeemable (immediately repayable by
the borrower) at par plus accrued interest at any time.
SECURITIES LENDING (ALL FUNDS EXCEPT TREASURY NOTE FUND)
The advisor may seek approval from the board of trustees to engage in securities
lending on behalf of the Funds. Such loans would be made with the intention of
allowing the Funds to earn additional income. If a borrower defaulted on a
securities loan, the lending Fund could experience delays in recovering the
securities it loaned; if the value of the loaned securities increased in the
meantime, the Fund could suffer a loss. A vote by the board of trustees to
authorize securities lending would most likely be made in conjunction with their
approval of the following guidelines:
(1) TYPE AND AMOUNT OF COLLATERAL. At the time a loan is made, the Fund must
receive, from or on behalf of a borrower, collateral consisting of any
combination of cash and full faith and credit U.S. government securities
equal to not less than 102% of the market value of the securities loaned.
Cash collateral received by a Fund in connection with loans of portfolio
securities may be commingled by the Fund's custodian with other cash and
marketable securities, provided that the loan agreement expressly allows
such commingling.
(2) ADDITIONS TO COLLATERAL. Collateral must be marked to market daily, and the
borrower must agree to add collateral to the extent necessary to maintain
the 102% level specified in (1) above. The borrower must deposit additional
collateral no later than the business day following the business day on
which a collateral deficiency occurs or collateral appears to be
inadequate.
(3) TERMINATION OF LOAN. The Fund must have the ability to terminate a loan of
portfolio securities at any time. The borrower must be obligated to
redeliver the borrowed securities within the normal settlement period
following receipt of the termination notice. The normal settlement period
for U.S. government securities is typically two trading days.
(4) REASONABLE RETURN ON LOAN. The borrower must agree that the Fund (a) will
receive all dividends, interest, or other distributions on loaned
securities and (b) will be paid a reasonable return on such loans either in
the form of a loan fee or premium or from the retention by the Fund of part
or all of the earnings and profits realized from the investment of cash
collateral in full faith and credit U.S. government securities.
(5) LIMITATIONS ON PERCENTAGE OF FUND ASSETS ON LOAN. A Fund's loans may not
exceed 331/3% of its total assets.
(6) CREDIT ANALYSIS. As part of the regular monitoring procedures BMC follows
to evaluate banks and broker-dealers in connection with, for example,
repurchase agreements and municipal securities credit issues, BMC will
analyze and monitor the creditworthiness of all borrowers with which
portfolio lending arrangements are contemplated or entered into.
4
<PAGE>
MORTGAGE-BACKED SECURITIES (ARM FUND AND GNMA FUND)
BACKGROUND. A mortgage-backed security represents an ownership interest in a
pool of mortgage loans. The loans are made by financial institutions to finance
home and other real estate purchases. As the loans are repaid, investors receive
payments of both interest and principal.
Like fixed-income securities such as U.S. Treasury bonds, mortgage-backed
securities pay a stated rate of interest over the life of the security. However,
unlike a bond, which returns principal to the investor in one lump sum at
maturity, mortgage-backed securities return principal to the investor in
increments over the life of the security.
Because the timing and speed of principal repayments vary, the cash flow on
mortgage securities is irregular. If mortgage holders sell their homes,
refinance their loans, prepay their mortgages, or default on their loans, the
principal is distributed pro rata to investors.
As with other fixed-income securities, the prices of mortgage securities
fluctuate in response to changing interest rates; when interest rates fall, the
prices of mortgage securities rise, and vice versa. Changing interest rates have
additional significance for mortgage-backed securities investors, however,
because they influence prepayment rates (the rates at which mortgage holders
prepay their mortgages), which in turn affect the yields on mortgage-backed
securities. When interest rates decline, prepayment rates generally increase.
Mortgage holders take advantage of the opportunity to refinance their mortgages
at lower rates with lower monthly payments. When interest rates rise, mortgage
holders are less inclined to refinance their mortgages. The effect of prepayment
activity on yield depends on whether the mortgage-backed security was purchased
at a premium or at a discount.
A Fund may get back principal sooner than it expected because of accelerated
prepayments. Under these circumstances, the Fund might have to reinvest returned
principal at rates lower than it would have earned if principal payments were
made on schedule. Conversely, a mortgage-backed security may exceed its
anticipated life if prepayment rates decelerate unexpectedly. Under these
circumstances, a Fund might miss an opportunity to earn interest at higher
prevailing rates.
GINNIE MAE CERTIFICATES. The Government National Mortgage Association (GNMA or
Ginnie Mae) is a wholly owned corporate instrumentality of the United States
within the Department of Housing and Urban Development. The National Housing Act
of 1934 (Housing Act), as amended, authorizes Ginnie Mae to guarantee the timely
payment of interest and repayment of principal on certificates that are backed
by a pool of mortgage loans insured by the Federal Housing Administration under
the Housing Act, or by Title V of the Housing Act of 1949 (FHA Loans), or
guaranteed by the Veterans' Administration under the Servicemen's Readjustment
Act of 1944 (VA Loans), as amended, or by pools of other eligible mortgage
loans. The Housing Act provides that the full faith and credit of the U.S.
government is pledged to the payment of all amounts that may be required to be
paid under any guarantee. Ginnie Mae has unlimited authority to borrow from the
U.S. Treasury in order to meet its obligations under this guarantee.
Ginnie Mae certificates represent a pro rata interest in one or more pools of
the following types of mortgage loans: (i) fixed-rate level payment mortgage
loans; (ii) fixed-rate graduated payment mortgage loans (GPMs); (iii) fixed-rate
growing equity mortgage loans (GEMs); (iv) fixed-rate mortgage loans secured by
manufactured (mobile) homes (MHs); (v) mortgage loans on multifamily residential
properties under construction (CLCs); (vi) mortgage loans on completed
multifamily
5
<PAGE>
projects (PLCs); (vii) fixed-rate mortgage loans that use escrowed funds to
reduce the borrower's monthly payments during the early years of the mortgage
loans (buydown mortgage loans); and (viii) mortgage loans that provide for
payment adjustments based on periodic changes in interest rates or in other
payment terms of the mortgage loans.
FANNIE MAE CERTIFICATES. The Federal National Mortgage Association (FNMA or
Fannie Mae) is a federally chartered and privately owned corporation established
under the Federal National Mortgage Association Charter Act. Fannie Mae was
originally established in 1938 as a U.S. government agency designed to provide
supplemental liquidity to the mortgage market and was reorganized as a
stockholder-owned and privately managed corporation by legislation enacted in
1968. Fannie Mae acquires capital from investors who would not ordinarily invest
in mortgage loans directly and thereby expands the total amount of funds
available for housing. This money is used to buy home mortgage loans from local
lenders, replenishing the supply of capital available for mortgage lending.
Fannie Mae certificates represent a pro rata interest in one or more pools of
FHA Loans, VA Loans, or, most commonly, conventional mortgage loans (i.e.,
mortgage loans that are not insured or guaranteed by a governmental agency) of
the following types: (i) fixed-rate level payment mortgage loans; (ii)
fixed-rate growing equity mortgage loans; (iii) fixed-rate graduated payment
mortgage loans; (iv) adjustable-rate mortgage loans; and (v) fixed-rate mortgage
loans secured by multifamily projects.
Fannie Mae certificates entitle the registered holder to receive amounts
representing a pro rata interest in scheduled principal and interest payments
(at the certificate's pass-through rate, which is net of any servicing and
guarantee fees on the underlying mortgage loans), any principal prepayments, and
a proportionate interest in the full principal amount of any foreclosed or
otherwise liquidated mortgage loan. The full and timely payment of interest and
repayment of principal on each Fannie Mae certificate is guaranteed by Fannie
Mae; this guarantee is not backed by the full faith and credit of the U.S.
government.
FREDDIE MAC CERTIFICATES. The Federal Home Loan Mortgage Corporation (FHLMC or
Freddie Mac) is a corporate instrumentality of the United States created
pursuant to the Emergency Home Finance Act of 1970 (FHLMC Act), as amended.
Freddie Mac was established primarily for the purpose of increasing the
availability of mortgage credit. Its principal activity consists of purchasing
first-lien conventional residential mortgage loans (and participation interests
in such mortgage loans) and reselling these loans in the form of mortgage-backed
securities, primarily Freddie Mac certificates.
Freddie Mac certificates represent a pro rata interest in a group of mortgage
loans (a Freddie Mac certificate group) purchased by Freddie Mac. The mortgage
loans underlying Freddie Mac certificates consist of fixed- or adjustable-rate
mortgage loans with original terms to maturity of between ten and thirty years,
substantially all of which are secured by first-liens on one- to four-family
residential properties or multifamily projects. Each mortgage loan must meet
standards set forth in the FHLMC Act. A Freddie Mac certificate group may
include whole loans, participation interests in whole loans, undivided interests
in whole loans, and participations composing another Freddie Mac certificate
group.
Freddie Mac guarantees to each registered holder of a Freddie Mac certificate
the timely payment of interest at the rate provided for by the certificate.
Freddie Mac also guarantees ultimate collection of all principal on the related
mortgage loans, without any offset or deduction, but generally does not
guarantee the timely repayment of principal. Freddie Mac may remit principal at
any time after
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default on an underlying mortgage loan, but no later than 30 days following (i)
foreclosure sale, (ii) payment of a claim by any mortgage insurer, or (iii) the
expiration of any right of redemption, whichever occurs later, and in any event
no later than one year after demand has been made upon the mortgager for
accelerated payment of principal. Obligations guaranteed by Freddie Mac are not
backed by the full faith and credit of the U.S. government.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). A CMO is a multiclass bond backed by
a pool of mortgage pass-through certificates or mortgage loans. CMO's may be
collateralized by (i) Ginnie Mae, Fannie Mae, or Freddie Mac pass-through
certificates, (ii) unsecuritized mortgage loans insured by the Federal Housing
Administration or guaranteed by the Department of Veterans' Affairs, (iii)
unsecuritized conventional mortgages, or (iv) any combination thereof.
In structuring a CMO, an issuer distributes cash flow from the underlying
collateral over a series of classes called "tranches". Each CMO is a set of two
or more tranches, with average lives and cash flow patterns designed to meet
specific investment objectives. The average life expectancies of the different
tranches in a four-part deal, for example, might be two, five, seven, and twenty
years.
As payments on the underlying mortgage loans are collected, the CMO issuer pays
the coupon rate of interest to the bondholders in each tranche. At the outset,
scheduled and unscheduled principal payments go to investors in the first
tranches. Investors in later tranches do not begin receiving principal payments
until the prior tranches are paid off. This basic type of CMO is known as a
"sequential pay" or "plain vanilla" CMO.
Some CMOs are structured so that the prepayment or market risks are transferred
from one tranche to another. Prepayment stability is improved in some tranches
if other tranches absorb more prepayment variability.
The final tranche of a CMO often takes the form of a Z-bond, also known as an
"accrual bond" or "accretion bond." Holders of these securities receive no cash
until the earlier tranches are paid in full. During the period that the other
tranches are outstanding, periodic interest payments are added to the initial
face amount of the Z-bond but are not paid to investors. When the prior tranches
are retired, the Z-bond receives coupon payments on its higher principal balance
plus any principal prepayments from the underlying mortgage loans. The existence
of a Z-bond tranche helps stabilize cash flow patterns in the other tranches. In
a changing interest rate environment, however, the value of the Z-bond tends to
be more volatile.
As CMOs have evolved, some classes of CMO bonds have become more prevalent. The
planned amortization class (PAC) and targeted amortization class (TAC), for
example, were designed to reduce prepayment risk by establishing a sinking-fund
structure. PAC and TAC bonds assure to varying degrees that investors will
receive payments over a predetermined period under various prepayment scenarios.
Although PAC and TAC bonds are similar, PAC bonds are better able to provide
stable cash flows under various prepayment scenarios than TAC bonds because of
the order in which these tranches are paid.
The existence of a PAC or TAC tranche can create higher levels of risk for other
tranches in the CMO because the stability of the PAC or TAC tranche is achieved
by creating at least one other tranche-known as a companion bond, support, or
non-PAC bond--that absorbs the variability of principal cash flows. Because
companion bonds have a high degree of average life variability, they generally
pay a higher yield. A TAC bond can have some of the prepayment variability of a
companion bond if there is also a PAC bond in the CMO issue.
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Floating-rate CMO tranches (floaters) pay a variable rate of interest that is
usually tied to the London Interbank Offered Rate (LIBOR). Institutional
investors with short-term liabilities, such as commercial banks, often find
floating-rate CMOs attractive investments. "Super floaters" (which float a
certain percentage above LIBOR) and "inverse floaters" (which float inversely to
LIBOR) are variations on the floater structure that have highly variable cash
flows.
STRIPPED MORTGAGE-BACKED SECURITIES (ARM FUND ONLY). Stripped mortgage
securities are created by segregating the cash flows from underlying mortgage
loans or mortgage securities to create two or more new securities, each with a
specified percentage of the underlying security's principal or interest
payments. Mortgage securities may be partially stripped so that each investor
class receives some interest and some principal. When securities are completely
stripped, however, all of the interest is distributed to holders of one type of
security, known as an interest-only security, or IO, and all of the principal is
distributed to holders of another type of security known as a principal-only
security, or PO. Strips can be created in a pass-through structure or as
tranches of a CMO.
The market values of IOs and POs are very sensitive to interest rate and
prepayment rate fluctuations. POs, for example, increase (or decrease) in value
as interest rates decline (or rise). The price behavior of these securities also
depends on whether the mortgage collateral was purchased at a premium or
discount to its par value. Prepayments on discount coupon POs generally are much
lower than prepayments on premium coupon POs. IOs may be used to hedge a Fund's
other investments because prepayments cause the value of an IO strip to move in
the opposite direction from other mortgage-backed securities.
ADJUSTABLE-RATE MORTGAGE LOANS (ARMS). ARMs eligible for inclusion in a mortgage
pool will generally provide for a fixed initial mortgage interest rate for a
specified period of time, generally for either the first three, six, twelve,
thirteen, thirty-six, or sixty scheduled monthly payments. Thereafter, the
interest rates are subject to periodic adjustment based on changes in an index.
ARMs have minimum and maximum rates beyond which the mortgage interest rate may
not vary over the lifetime of the loan. Certain ARMs provide for additional
limitations on the maximum amount by which the mortgage interest rate may adjust
for any single adjustment period. Negatively amortizing ARMs may provide
limitations on changes in the required monthly payment. Limitations on monthly
payments can result in monthly payments that are greater or less than the amount
necessary to amortize a negatively amortizing ARM by its maturity at the
interest rate in effect during any particular month.
There are two types of indexes that provide the basis for ARM rate adjustments:
those based on market rates and those based on a calculated measure, such as a
cost of funds index or a moving average of mortgage rates. Commonly utilized
indexes include the one-year, three-year, and five-year constant maturity U.S.
Treasury rates (as reported by the Federal Reserve Board); the three-month
Treasury bill rate; the 180-day Treasury bill rate; rates on longer-term
Treasury securities; the Eleventh District Federal Home Loan Bank Cost of Funds
Index (EDCOFI); the National Median Cost of Funds Index; the one-month,
three-month, six-month, or one-year London Interbank Offered Rate (LIBOR); or
six-month CD rates. Some indexes, such as the one-year constant maturity
Treasury rate or three-month LIBOR, are highly correlated with changes in market
interest rates. Other indexes, such as the EDCOFI, tend to lag behind changes in
market rates and be somewhat less volatile over short periods of time.
The EDCOFI reflects the monthly weighted average cost of funds of savings and
loan associations and savings banks whose home offices are located in Arizona,
California, and Nevada (the Federal
8
<PAGE>
Home Loan Bank Eleventh District) and who are member institutions of the Federal
Home Loan Bank of San Francisco (the FHLB of San Francisco), as computed from
statistics tabulated and published by the FHLB of San Francisco. The FHLB of San
Francisco normally announces the Cost of Funds Index on the last working day of
the month following the month in which the cost of funds was incurred.
One-year and three-year Constant Maturity Treasury (CMT) rates are calculated by
the Federal Reserve Bank of New York, based on daily closing bid yields on
actively traded Treasury securities submitted by five leading broker-dealers.
The median bid yields are used to construct a daily yield curve.
The National Median Cost of Funds Index, similar to the EDCOFI, is calculated
monthly by the Federal Home Loan Bank Board (FHLBB) and represents the average
monthly interest expenses on liabilities of member institutions. A median,
rather than an arithmetic mean, is used to reduce the effect of extreme numbers.
The London Interbank Offered Rate Index (LIBOR) is the rate at which banks in
London offer Eurodollars in trades between banks. LIBOR has become a key rate in
the U.S. domestic money market because it is perceived to reflect the true
global cost of money.
BMC may invest in ARMs whose periodic interest rate adjustments are based on new
indexes as these indexes become available.
ZERO-COUPON SECURITIES (TREASURY NOTE FUND)
Zero-coupon U.S. Treasury securities are the unmatured interest coupons and
underlying principal portions of U.S. Treasury notes and bonds. Originally,
these securities were created by broker-dealers who bought Treasury notes and
bonds and deposited these securities with a custodian bank. The broker-dealers
then sold receipts representing ownership interests in the coupons or principal
portions of the notes and bonds. Some examples of zero-coupon securities sold
through custodial receipt programs are CATS (Certificates of Accrual on Treasury
Securities), TIGRs (Treasury Investment Growth Receipts), and generic TRs
(Treasury Receipts).
The U.S. Treasury subsequently introduced a program called Separate Trading of
Registered Interest and Principal of Securities (STRIPS). In this program,
eligible securities may be presented to the U.S. Treasury and exchanged for
their component parts, which are then traded in book-entry form. (Book-entry
trading eliminated the bank credit risks associated with broker-dealer sponsored
custodial receipt programs.) STRIPS are direct obligations of the U.S.
government and have the same credit risks as other U.S. Treasury securities.
Principal and interest on bonds issued by the Resolution Funding Corporation
(REFCORP) have also been separated and issued as stripped securities. The U.S.
government and its agencies may issue securities in zero-coupon form. These
securities are referred to as "original issue zero-coupon securities."
INVESTMENT RESTRICTIONS
The Funds' investment restrictions set forth below are fundamental and may not
be changed without approval of "a majority of the outstanding voting securities"
of the Fund, as defined in the Investment Company Act of 1940.
9
<PAGE>
BENHAM GOVERNMENT AGENCY FUND MAY NOT
(1) Borrow money in excess of 331/3% of the market value of its total assets.
The Fund may borrow from a bank as a temporary measure to satisfy
redemption requests or for extraordinary or emergency purposes, provided
that immediately after any such borrowing there is an asset coverage of at
least 300 per centum for all such borrowings. To secure any such borrowing,
the Fund may pledge or hypothecate not in excess of 331/3% of the value of
its total assets. The Fund will not purchase any security while borrowings
representing more than 5% of its total assets are outstanding. The Fund may
also borrow money for temporary or emergency purposes from other funds or
portfolios for which Benham Management Corporation is the investment
advisor, or from a joint account of such funds or portfolios, as permitted
by federal regulatory agencies.
(2) Act as an underwriter of securities issued by others.
(3) Purchase, sell, or invest in real estate, commodities, commodity contracts,
foreign exchange, or interests in oil, gas, or other mineral exploration or
development programs, provided that this limitation shall not prohibit the
purchase of U.S. government securities and other debt securities secured by
real estate or interests therein.
(4) Engage in any short-selling operations.
(5) Make loans to others, except for the lending of portfolio securities
pursuant to guidelines established by the board of trustees or for the
purchase of debt securities in accordance with the Fund's investment
objective and policies.
(6) Purchase any equity securities in any companies, including warrants or
bonds with warrants attached, or any preferred stocks, convertible bonds,
or convertible debentures.
(7) Engage in margin transactions or in transactions involving puts, calls,
straddles, or spreads.
(8) Invest in securities which are not readily marketable or the disposition of
which is restricted under federal securities laws (collectively, "illiquid
securities") if, as a result, more than 10% of the Fund's net assets would
be invested in illiquid securities.
(9) Issue or sell any class of senior security as defined in the Investment
Company Act of 1940 except to the extent that notes evidencing temporary
borrowings or the purchase of securities on a when-issued or
delayed-delivery basis might be deemed such.
(10) Purchase or retain securities of any issuer if, to the knowledge of the
Trust's management, those officers and trustees of the Trust and of its
investment advisor, who each own beneficially more than 0.5% of the
outstanding securities of such issuer, together own beneficially more than
5% of such securities.
(11) As an operating policy, invest in oil, gas, or other mineral leases.
BENHAM SHORT-TERM TREASURY AND AGENCY FUND MAY NOT
(1) With respect to 75% of its total assets, purchase the securities of any
issuer (other than securities issued or guaranteed by the U.S. government
or any of its agencies or instrumentalities) if, as a
10
<PAGE>
result, (a) more than 5% of the Fund's total assets would be invested in
the securities of that issuer, or (b) the Fund would hold more than 10% of
the outstanding voting securities of that issuer.
(2) Issue senior securities, except as permitted under the Investment Company
Act of 1940 and except to the extent that notes evidencing temporary
borrowings or the purchase of securities on a when-issued or
delayed-delivery basis might be deemed such.
(3) As an operating policy, engage in any short-selling operations, provided
that transactions in futures and options will not constitute selling
securities short.
(4) As an operating policy, purchase securities on margin, except that the Fund
may obtain such short-term credits as are necessary for the clearance of
transactions, and provided that margin payments in connection with futures
contracts and options on futures contracts will not constitute purchasing
securities on margin.
(5) Borrow money, except for temporary or emergency purposes, and then only
from a bank. Such borrowings may not exceed 331/3% of the Fund's total
assets. As an operating policy, the Fund will not purchase any security
while borrowings representing more than 5% of its total assets are
outstanding.
(6) Underwrite securities issued by others, except to the extent that the Fund
may be considered an underwriter within the meaning of the Securities Act
of 1933 in disposing of restricted securities (As an operating policy, the
Fund will not purchase restricted securities).
(7) As an operating policy, invest in securities that are not readily
marketable or the disposition of which is restricted under federal
securities laws (collectively, "illiquid securities") if, as a result, more
than 10% of the Fund's net assets would be invested in illiquid securities.
(8) Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, more than 25% of the Fund's total
assets would be invested in the securities of companies whose principal
business activities are in the same industry.
(9) Purchase or sell real estate unless acquired as result of ownership of
securities or other instruments, provided that this limitation will not
prohibit the Fund from purchasing U.S. government securities secured by
real estate or interests therein.
(10) Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments, provided that this limitation
will not prohibit the Fund from purchasing and selling options and futures
contracts or from investing in securities or other instruments backed by
physical commodities.
(11) As an operating policy, purchase or sell futures contracts or put or call
options, provided that this restriction will not apply to options attached
to, or acquired or traded together with, their underlying securities; nor
will it apply to securities that incorporate features similar to options or
futures contracts.
(12) Make loans, other than loans of portfolio securities pursuant to guidelines
established by the board of trustees, provided that this restriction will
not prohibit the Fund from purchasing debt
11
<PAGE>
securities in accordance with its investment objectives and policies.
Loans, in the aggregate, will be limited to 331/3% of the Fund's total
assets.
(13) As an operating policy, purchase the securities of other investment
companies except in the open market where no commission except the ordinary
broker's commission is paid or purchase securities issued by other open-end
investment companies, provided that this restriction will not apply to
securities received as dividends, through offers of exchange, or as a
result of a reorganization, consolidation, or merger.
(14) As an operating policy, purchase any equity securities, including warrants
or bonds with warrants attached, or any preferred stocks, convertible
bonds, or convertible debentures.
(15) As an operating policy, invest in oil, gas, or other mineral exploration or
development programs or leases.
(16) As an operating policy, purchase securities of any issuer if, to the
knowledge of the Fund's investment advisor, those trustees and officers of
the Trust and those directors and officers of the investment advisor who
individually own more than 0.5% of the outstanding securities of such
issuer, together own beneficially more than 5% of such issuer's securities.
BENHAM TREASURY NOTE FUND MAY NOT
(1) Purchase the securities of any issuer other than the U.S. Treasury. This
restriction shall not apply to repurchase agreements consisting of U.S.
government securities or to purchases by the Fund of shares of other
investment companies, provided that not more than 3% of such investment
company's outstanding shares would be held by the Fund, not more than 5% of
the value of the Fund's assets would be invested in shares of such company,
and not more than 10% of the value of the Fund's assets would be invested
in shares of investment companies in the aggregate
(2) Engage in any short-selling operations.
(3) Engage in margin transactions or in transactions involving puts, calls,
straddles, or spreads.
(4) Purchase or sell real estate, commodities, or commodity contracts, or buy
and sell foreign exchange.
(5) Purchase securities for which the Fund might be liable for further payment
or liability.
(6) Invest in portfolio securities that the Fund may not be free to sell to the
public without registration under the Securities Act of 1933 or the taking
of similar actions under other securities laws relating to the sale of
securities.
(7) Issue or sell any class of senior security, except to the extent that notes
evidencing temporary borrowing might be deemed such.
(8) Lend money other than through the purchase of debt securities in accordance
with its investment policy (this restriction does not apply to repurchase
agreements).
(9) Borrow money except from a bank as a temporary measure to satisfy
redemption requests, or for extraordinary or emergency purposes and then
only in an amount not exceeding 33 1/3% of
12
<PAGE>
the market value of the Fund's total assets, so that immediately after any
such borrowing there is an asset coverage of at least 300 per centum for
all such borrowings. To secure any such borrowing, the Fund may not pledge
or hypothecate in excess of 331/3% of the value of its total assets. The
Fund will not purchase any security while borrowings representing more than
5% of its total assets are outstanding.
BENHAM LONG-TERM TREASURY AND AGENCY FUND MAY NOT
(1) With respect to 75% of its total assets, purchase the securities of any
issuer (other than securities issued or guaranteed by the U.S. government
or any of its agencies or instrumentalities) if, as a result (a) more than
5% of the Fund's total assets would be invested in the securities of that
issuer, or (b) the Fund would hold more than 10% of the outstanding voting
securities of that issuer.
(2) Issue senior securities, except as permitted under the Investment Company
Act of 1940 and except to the extent that notes evidencing temporary
borrowings or the purchase of securities on a when-issued or
delayed-delivery basis might be deemed such.
(3) As an operating policy, engage in any short-selling operations, provided
that transactions in futures and options will not constitute selling
securities short.
(4) As an operating policy, purchase securities on margin, except that the Fund
may obtain such short-term credits as are necessary for the clearance of
transactions, and provided that margin payments in connection with futures
contracts and options on futures contracts will not constitute purchasing
securities on margin.
(5) Borrow money, except for temporary or emergency purposes, and then only
from a bank. Such borrowings may not exceed 331/3% of the Fund's total
assets. As an operating policy, the Fund will not purchase any security
while borrowings representing more than 5% of its total assets are
outstanding.
(6) Underwrite securities issued by others, except to the extent that the Fund
may be considered an underwriter within the meaning of the Securities Act
of 1933 in disposing of restricted securities (As an operating policy, the
Fund will not purchase restricted securities).
(7) As an operating policy, invest in securities that are not readily
marketable or the disposition of which is restricted under federal
securities laws (collectively, "illiquid securities") if, as a result, more
than 10% of the Fund's net assets would be invested in illiquid securities.
(8) Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, more than 25% of the Fund's total
assets would be invested in the securities of companies whose principal
business activities are in the same industry.
(9) Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments, provided that this limitation will not
prohibit the Fund from purchasing U.S. government securities secured by
real estate or interests therein.
(10) Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments, provided that this limitation
will not prohibit the Fund from purchasing and
13
<PAGE>
selling options and futures contracts or from investing in securities or
other instruments backed by physical commodities.
(11) As an operating policy, purchase or sell futures contracts or put or call
options, provided that this restriction will not apply to options attached
to, or acquired or traded together with, their underlying securities; nor
will it apply to securities that incorporate features similar to options or
futures contracts.
(12) Make loans, other than loans of portfolio securities pursuant to guidelines
established by the board of trustees, provided that this restriction will
not prohibit the Fund from purchasing debt securities in accordance with
its investment objectives and policies. Loans, in the aggregate, will be
limited to 331/3% of the Fund's total assets.
(13) As an operating policy, purchase the securities of other investment
companies except in the open market where no commission except the ordinary
broker's commission is paid or purchase securities issued by other open-end
investment companies, provided that this restriction will not apply to
securities received as dividends, through offers of exchange, or as a
result of a reorganization, consolidation, or merger.
(14) As an operating policy, purchase any equity securities, including warrants
or bonds with warrants attached, or any preferred stocks, convertible
bonds, or convertible debentures.
(15) As an operating policy, invest in oil, gas, or other mineral exploration or
development programs or leases.
(16) As an operating policy, purchase securities of any issuer if, to the
knowledge of the Fund's investment advisor, those trustees and officers of
the Trust, and those directors and officers of the investment advisor who
individually own more than 0.5% of the outstanding securities of such
issuer, together own beneficially more than 5% of such issuer's securities.
BENHAM ADJUSTABLE RATE GOVERNMENT SECURITIES FUND MAY NOT
(1) Borrow money in excess of 331/3% of the market value of its total assets,
and then only from a bank and as a temporary measure to satisfy redemption
requests or for extraordinary or emergency purposes, and provided that
immediately after any such borrowing there is an asset coverage of at least
300 per centum for all such borrowings. To secure any such borrowing, the
Fund may pledge or hypothecate not in excess of 331/3% of the value of its
total assets. The Fund will not purchase any security while borrowings
representing more than 5% of its total assets are outstanding.
(2) Act as an underwriter of securities issued by others.
(3) Purchase, sell, or invest in real estate, commodities, commodity contracts,
foreign exchange, or interests in oil, gas, or other mineral exploration or
development programs, provided that this limitation shall not prohibit the
purchase of U.S. government securities and other debt securities secured by
real estate or interests therein.
(4) Engage in any short-selling operations.
14
<PAGE>
(5) Make loans to others, except for the lending of portfolio securities
pursuant to guidelines established by the board of trustees or for the
purchase of debt securities in accordance with the Fund's investment
objective and policies.
(6) Purchase any equity securities in any companies, including warrants or
bonds with warrants attached, or any preferred stocks, convertible bonds,
or convertible debentures.
(7) Engage in margin transactions or in transactions involving puts, calls,
straddles, or spreads.
(8) Invest in securities that are not readily marketable or the disposition of
which is restricted under federal securities laws (collectively, "illiquid
securities") if, as a result, more than 10% of the Fund's net assets would
be invested in illiquid securities.
(9) Issue or sell any class of senior security as defined in the Investment
Company Act of 1940 except to the extent that notes evidencing temporary
borrowings or the purchase of securities on a when-issued or
delayed-delivery basis might be deemed such.
(10) Acquire or retain the securities of any other investment company if, as a
result, more than 3% of such investment company's outstanding shares would
be held by the Fund, more than 5% of the value of the Fund's assets would
be invested in shares of such investment company, or more than 10% of the
value of the Fund's assets would be invested in shares of investment
companies in the aggregate, or except in connection with a merger,
consolidation, acquisition, or reorganization.
(11) Purchase or retain securities of any issuer if, to the knowledge of the
Trust's management, those officers and trustees of the Trust and of its
investment advisor who each own beneficially more than 0.5% of the
outstanding securities of such issuer together own beneficially more than
5% of such securities.
(12) As an operating policy, invest in oil, gas, or other mineral leases.
BENHAM GNMA INCOME FUND MAY NOT
(1) Borrow money in excess of 331/3% of the market value of its total assets,
and then only from a bank and as a temporary measure to satisfy redemption
requests or for extraordinary or emergency purposes, and provided that
immediately after any such borrowing there is an asset coverage of at least
300 per centum for all such borrowings. To secure any such borrowing, the
Fund may pledge or hypothecate not in excess of 331/3% of the value of its
total assets. The Fund will not purchase any security while borrowings
representing more than 5% of its total assets are outstanding.
(2) Act as an underwriter of securities issued by others.
(3) Purchase, sell, or invest in real estate, commodities, commodity contracts,
foreign exchange, or interests in oil, gas, or other mineral exploration or
development programs, provided that this limitation shall not prohibit the
purchase of U.S. government securities and other debt securities secured by
real estate or interests therein.
(4) Engage in any short-selling operations.
15
<PAGE>
(5) Make loans to others, except for the lending of portfolio securities
pursuant to guidelines established by the board of trustees or for the
purchase of debt securities in accordance with the Fund's investment
objective and policies.
(6) Purchase any equity securities in any companies, including warrants or
bonds with warrants attached, or any preferred stocks, convertible bonds,
or convertible debentures.
(7) Engage in margin transactions or in transactions involving puts, calls,
straddles, or spreads.
(8) Invest in securities that are not readily marketable or the disposition of
which is restricted under federal securities laws (collectively, "illiquid
securities") if, as a result, more than 10% of the Fund's net assets would
be invested in illiquid securities.
(9) Issue or sell any class of senior security as defined in the Investment
Company Act of 1940 except to the extent that notes evidencing temporary
borrowings or the purchase of securities on a when-issued or
delayed-delivery basis might be deemed such.
(10) Acquire or retain the securities of any other investment company except in
connection with a merger, consolidation, acquisition, or reorganization.
(11) Purchase or retain securities of any issuer if, to the knowledge of the
Trust's management, those officers and trustees of the Trust and of its
investment advisor who each own beneficially more than 0.5% of the
outstanding securities of such issuer together own beneficially more than
5% of such securities.
PORTFOLIO TRANSACTIONS
Each Fund's assets are invested by BMC in a manner consistent with the Fund's
investment objectives, policies, and restrictions, and with any instructions
from the board of trustees that may be issued from time to time. Within this
framework, BMC is responsible for making all determinations as to the purchase
and sale of portfolio securities and for taking all steps necessary to implement
securities transactions on behalf of the Funds.
In placing orders for the purchase and sale of portfolio securities, BMC will
use its best possible price and execution and will otherwise place orders with
broker-dealers subject to and in accordance with any instructions from the board
of trustees that may be issued from time to time. BMC will select broker-dealers
to execute portfolio transactions on behalf of the Funds solely on the basis of
best price and execution.
U.S. government securities generally are traded in the over-the-counter market
through broker-dealers. A broker-dealer is a securities firm or bank that makes
a market for securities by offering to buy at one price and sell at a slightly
higher price. The difference between the prices is known as a spread.
On behalf of the Funds, BMC transacts in round lots ($100,000 to $10 million or
more) whenever possible. Since commissions are not charged for round-lot
transactions of U.S. Treasury securities, the Funds' transaction costs consist
solely of custodian charges and dealer mark-ups. Each Fund may hold its
portfolio securities to maturity or sell or swap them for others, depending upon
the level and slope of, and anticipated changes in, the yield curve. The Funds
paid no brokerage commissions during the fiscal year ended March 31, 1995.
16
<PAGE>
The following table illustrates the portfolio turnover rates for each Fund
(except Agency Fund) for the fiscal years ended March 31, 1995, and 1994.
PORTFOLIO TURNOVER RATES
FISCAL YEAR FISCAL YEAR
FUND 1995 1994
Short-Term Fund 140.82% 261.61%
Treasury Note Fund 92.35 212.91
Long-Term Fund 146.81 200.34
ARM Fund 60.29 91.87
GNMA Fund 119.56 48.61
VALUATION OF PORTFOLIO SECURITIES
Each Fund's net asset value per share (NAV) is determined by Benham Financial
Services, Inc. (BFS) at 1:00 p.m. Pacific Time each day the New York Stock
Exchange (NYSE) is open for business. The NYSE has designated the following
holiday closings for 1995: New Year's Day (observed), Washington's Birthday,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day (observed). Although BFS expects the same holiday schedule to be
observed in the future, the NYSE may modify its holiday schedule at any time.
BMC typically completes its trading on behalf of each Fund in various markets
before the NYSE closes for the day. Each Fund's share price is calculated by
adding the value of all portfolio securities and other assets, deducting
liabilities, and dividing the result by the number of shares outstanding.
Expenses and interest on portfolio securities are accrued daily.
Securities held by BENHAM GOVERNMENT AGENCY FUND are valued on the basis of
amortized cost. This method involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium paid at the time of purchase. While this method provides certainty in
valuation, it disregards the effect of fluctuating interest rates on an
instrument's market value. Consequently, the instrument's amortized cost value
may be higher or lower than its market value, and this discrepancy may be
reflected in the Fund's yield. During periods of declining interest rates, for
example, the daily yield on Fund shares computed as described above may be
higher than that of a fund with identical investments priced at market value.
The converse would apply in a period of rising interest rates.
The amortized cost valuation method is permitted in accordance with Rule 2a-7
under the Investment Company Act of 1940. Under the Rule, a fund such as Agency
Fund, holding itself out as a money market fund, must adhere to certain quality
and maturity criteria which are described in the Prospectus.
The trustees have established procedures designed to stabilize, to the extent
reasonably possible, Agency Fund's NAV at $1.00 per share. These procedures
require the Fund's chief financial officer to notify the trustees immediately
if, at any time, the Fund's weighted average maturity exceeds 60 days, or its
NAV, as determined by using available market quotations, deviates from its
amortized cost per share by .25% or more. If such deviation exceeds .40%, a
meeting of the board of trustees' audit committee will be called to consider
what action, if any, should be taken. If such deviation exceeds .50%, the Fund's
chief financial officer is instructed to adjust daily dividend distributions
immediately to the extent necessary to reduce the deviation to .50% or lower and
to call a meeting of the board of trustees to consider further action.
17
<PAGE>
Actions the board may consider under these circumstances include (i) selling
portfolio securities prior to maturity, (ii) withholding dividends or
distributions from capital, (iii) authorizing a one-time dividend adjustment,
(iv) discounting share purchases and initiating redemptions in kind, or (v)
valuing portfolio securities at market for purposes of calculating NAV.
Most securities held by THE VARIABLE-PRICE FUNDS are valued at current market
value as provided by an independent pricing service. Other securities are priced
at fair value as determined in good faith pursuant to guidelines established by
the Fund's board of trustees.
PERFORMANCE
The Fund may quote performance in various ways. Historical performance
information will be used in advertising and sales literature and is not
indicative of future results. The Fund's share price, yield and return will vary
with changing market conditions.
For AGENCY FUND, yield quotations are based on the change in the value of a
hypothetical investment (excluding realized gains and losses from the sale of
securities and unrealized appreciation and depreciation of securities) over a
seven-day period (base period) and stated as a percentage of the investment at
the start of the base period (base-period return). The base-period return is
then annualized by multiplying it by 365/7, with the resulting yield figure
carried to at least the nearest hundredth of one percent.
Calculations of effective yield begin with the same base-period return used to
calculate yield, but the return is then annualized to reflect weekly compounding
according to the following formula:
365/7
Effective Yield = [(Base-Period Return + 1) ] - 1
For the seven-day period ended March 31, 1995, Agency Fund's yield was 6.68%,
and its effective yield was 5.74%.
For THE VARIABLE-PRICE FUNDS, yield quotations are based on the investment
income per share earned during a particular 30-day period, less expenses accrued
during the period (net investment income), and are computed by dividing the
Fund's net investment income by its share price on the last day of the period,
according to the following formula:
6
YIELD = 2 [(a - b + 1) - 1]
-----
cd
where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of reimbursements), c = the average daily number of shares
outstanding during the period that were entitled to receive dividends, and d =
the maximum offering price per share on the last day of the period.
Each Variable-Price Fund's yield for the 30-day period ended March 31, 1995, is
indicated in the following table.
FUND 30-DAY YIELD
Agency Fund 5.58%
Short-Term Fund 6.16
18
<PAGE>
FUND (CONTINUED) 30-DAY YIELD
Treasury Note Fund 6.43
Long-Term Fund 7.00
ARM Fund 5.59
GNMA Fund 7.62
Total returns quoted in advertising and sales literature reflect all aspects of
a Fund's return, including the effect of reinvesting dividends and capital gain
distributions and any change in the Fund's NAV during the period.
Average annual total returns are calculated by determining the growth or decline
in value of a hypothetical historical investment in a Fund over a stated period
and then calculating the annually compounded percentage rate that would have
produced the same result if the rate of growth or decline in value had been
constant throughout the period. For example, a cumulative return of 100% over
ten years would produce an average annual total return of 7.18%, which is the
steady annual rate that would equal 100% growth on a compounded basis in ten
years. While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that the Funds' performance is
not constant over time, but changes from year to year, and that average annual
returns represent averaged figures as opposed to actual year-to-year
performance.
The Funds' average annual returns for the one-year, five-year, ten-year, and
life-of-fund periods ended March 31, 1995, are indicated in the following table.
AVERAGE ANNUAL TOTAL RETURNS
FUND ONE YEAR FIVE YEARS TEN YEARS LIFE OF FUND
Agency Fund 4.47% 4.68% N/A 4.91%
Short-Term Fund 3.85 N/A N/A 3.44(1)
Treasury Note Fund 3.54 7.76 8.53 9.03(2)
Long-Term Fund 3.25 N/A N/A 4.93(1)
ARM Fund 1.75 N/A N/A 4.11(3)
GNMA Fund 5.53 8.53 N/A 8.88(4)
1 Short-Term Fund and Long-Term Fund commenced operations on September 8, 1992.
2 Treasury Note Fund commenced operations on May 16, 1980.
3 ARM Fund commenced operations on September 3, 1991.
4 GNMA Fund commenced operations on September 23, 1985.
In addition to average annual total returns, each Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be quoted
as a percentage or as a dollar amount and may be calculated for a single
investment, a series of investments, or a series of redemptions over any time
period. Total returns may be broken down into their components of income and
capital (including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return. Performance information may be quoted numerically or in a table, graph,
or similar illustration.
The Funds' performance may be compared with the performance of other mutual
funds tracked by mutual fund rating services or with other indexes of market
performance. This may include comparisons with funds that, unlike Benham funds,
are sold with a sales charge or deferred sales charge. Sources of economic data
that may be used for such comparisons may include, but are not
19
<PAGE>
limited to, U.S. Treasury bill, note, and bond yields, money market fund yields,
U.S. government debt and percentage held by foreigners, the U.S. money supply,
net free reserves, and yields on current-coupon GNMAs (source: Board of
Governors of the Federal Reserve System); the federal funds and discount rates
(source: Federal Reserve Bank of New York); yield curves for U.S. Treasury
securities and AA/AAA-rated corporate securities (source: Bloomberg Financial
Markets); yield curves for AAA-rated tax-free municipal securities (source:
Telerate); yield curves for foreign government securities (sources: Bloomberg
Financial Markets and Data Resources, Inc.); total returns on foreign bonds
(source: J.P. Morgan Securities Inc.); various U.S. and foreign government
reports; the junk bond market (source: Data Resources, Inc.); the CRB Futures
Index (source: Commodity Index Report); the price of gold (sources: London
a.m./p.m. fixing and New York Comex Spot Price); rankings of any mutual fund or
mutual fund category tracked by Lipper Analytical Services, Inc. or Morningstar,
Inc.; mutual fund rankings published in major nationally distributed
periodicals; data provided by the Investment Company Institute; Ibbotson
Associates, Stocks, Bonds, Bills, and Inflation; major indexes of stock market
performance; and indexes and historical data supplied by major securities
brokerage or investment advisory firms. The Funds may also utilize reprints from
newspapers and magazines furnished by third parties to illustrate historical
performance.
The Fund's shares are sold without a sales charge (load). No-load funds offer an
advantage to investors when compared to load funds with comparable investment
objectives and strategies. If an investor pays $10,000 to buy shares of a load
fund with an 8.5% sales charge, $850 of that $10,000 is paid as a commission to
a salesperson, leaving only $9,150 to put to work for the investor. Over time,
the difference between paying a sales load and not paying one can have a
significant effect on an investor's total return. The Mutual Fund Education
Alliance provides a comparison of $10,000 invested in each of two mutual funds,
one with an 8.5% sales load and one without a sales load. Assuming a compounded
annual growth rate of 10% for both investments, the no-load fund investment is
worth $25,937 after ten years, and the load fund investment is worth only
$23,732.
The Benham Group has distinguished itself as an innovative provider of low-cost
true no-load mutual funds. Among other innovations, The Benham Group established
the first no-load fund investing primarily in zero-coupon U.S. Treasury
securities; the first no-load double tax-free California money market and
short-term bond funds; the first no-load adjustable rate government securities
fund; and the first no-load utilities fund designed to pay monthly dividends.
TAXES
Each Fund intends to qualify annually as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986 (the code), as amended. By so
qualifying, each Fund will not incur federal income taxes on its net investment
income and on net realized capital gains to the extent distributed to
shareholders.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax at the
Fund level. To avoid the tax, a Fund must distribute during each calendar year
an amount equal to the sum of (1) at least 98% if its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) at
least 98% of its capital gains in excess of capital losses (adjusted for certain
ordinary losses) for a one-year period generally ending on October 31 of the
calendar year, and (3) all ordinary income and capital gains for previous years
that were not distributed during such years.
20
<PAGE>
Under the Code, dividends derived from interest, and any short-term capital
gains, are federally taxable to shareholders as ordinary income, regardless of
whether such dividends are taken in cash or reinvested in additional shares.
Distributions made from a Fund's net realized long-term capital gains and
designated as capital gain dividends are taxable to shareholders as long-term
capital gains, regardless of the length of time shares are held. Corporate
investors are not eligible for the dividends-received deduction with respect to
distributions from the Funds. A distribution will be treated as paid on December
31 of a calendar year if its is declared by a Fund in October, November or
December of the year with a record date in such a month and paid by the Fund
during January of the following year. Such distributions will be taxable to
shareholders in the calendar year the distributions are declared, rather than
the calendar year in which the distributions are received.
Upon redeeming, selling, or exchanging shares of a Variable-Price Fund, a
shareholder will realize a taxable gain or loss depending upon his or her basis
in the shares liquidated. The gain or loss generally will be long-term or
short-term depending on the length of time the shares were held. However, a loss
recognized by a shareholder in the disposition of shares on which capital gain
dividends were paid (or deemed paid) before the shareholder had held his or her
shares for more than six months would be treated as a long-term capital loss for
tax purposes to the extent of capital gain dividends paid (or deemed paid).
As of March 31, 1995, capital loss carryovers were as follows: $408,754
(Short-Term), $7,230,117 (Treasury Note), $2,563,482 (Long-Term), $23,798,896
(GNMA). As of March 31, 1995, ARM Fund had a capital loss carryover of
$54,978,670. All capital loss carryovers, with the exception of the ARM Fund,
will expire during the period March 31, 2001 through March 31, 2003. A Fund will
not make capital gain distributions to its shareholders until all of its capital
loss carryovers have been offset or have expired.
The Funds may invest in obligations issued at a discount. In that case, a
portion of the discount element generally is included in the Fund's investment
company taxable income in each taxable period in which the obligation is held.
Such amounts are subject to the Fund's tax-related distribution requirements
even if not received by the Fund in cash in that period.
Dividends paid by Agency Fund, Short-Term Fund, Treasury Note Fund, and
Long-Term Fund are exempt from state personal income taxes in all states to the
extent these Funds derive their income from debt securities of the U.S.
government, whose interest payments are state tax-exempt.
The information above is only a summary of some of the tax considerations
generally affecting the Funds and their shareholders. No attempt has been made
to discuss individual tax consequences. The Funds' distributions may also be
subject to state, local, or foreign taxes. To determine whether a Fund is a
suitable investment based on his or her tax situation, a prospective investor
may wish to consult a tax advisor.
ABOUT THE TRUST
Benham Government Income Trust was organized as a Massachusetts business trust
on July 24, 1985. Currently, there are six series of the Trust as follows:
Benham Government Agency Fund, Benham Short-Term Treasury and Agency Fund,
Benham Treasury Note Fund, Benham Long-Term Treasury and Agency Fund, Benham
Adjustable Rate Government Securities Fund, and Benham GNMA Income Fund. The
board of trustees may create additional series from time to time.
21
<PAGE>
The Declaration of Trust permits the trustees to issue an unlimited number of
full and fractional shares of beneficial interest without par value, which may
be issued in series (funds). Shares issued are fully paid and nonassessable and
have no preemptive, conversion, or similar rights.
Each series votes separately on matters affecting that series exclusively.
Voting rights are not cumulative, so that investors holding more than 50% of the
Trust's (i.e., all series') outstanding shares may elect a board of trustees.
The Trust has instituted dollar-based voting, meaning that the number of votes
you are entitled to is based upon the dollar value of your investment. The
election of trustees is determined by the votes received from all Trust
shareholders, without regard to whether a majority of shareholders of any one
series voted in favor of a particular nominee or all nominees as a group. Shares
of each series have equal rights as to dividends and distributions declared by
the series and in the net assets of such series upon its liquidation or
dissolution.
The shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable for its obligations. However, the
Declaration of Trust contains an express disclaimer of shareholder liability for
acts or obligations of the Trust. The Declaration of Trust also provides for
indemnification and reimbursement of expenses of any shareholder held personally
liable for obligations of the Trust. The Declaration of Trust provides that the
Trust will, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust and satisfy any judgment
thereon. The Declaration of Trust further provides that the Trust may maintain
appropriate insurance (for example, fidelity, bonding, and errors and omissions
insurance) for the protection of the Trust, its shareholders, trustees,
officers, employees, and agents to cover possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss because of shareholder
liability is limited to circumstances in which both inadequate insurance exists
and the Trust is unable to meet its obligations.
CUSTODIAN BANKS: Morgan Guaranty Trust Company of New York, 23 Wall Street, New
York, New York 10015, is custodian of the assets of Short-Term Fund, Long-Term
Fund, ARM Fund, and GNMA Fund. State Street Bank and Trust Company, 225 Franklin
Street, Boston, Massachusetts 02101, is custodian of the assets of Agency Fund
and Treasury Note Fund. Services provided by the custodian banks include (i)
settling portfolio purchases and sales, (ii) reporting failed trades, (iii)
identifying and collecting portfolio income, and (iv) providing safekeeping of
securities. The custodian takes no part in determining the Fund's investment
policies or in determining which securities are sold or purchased by the Fund.
INDEPENDENT AUDITORS: KPMG Peat Marwick LLP, 3 Embarcadero Center, San
Francisco, CA 94111, serves as the Trust's independent auditors. KPMG audits the
annual report and provides tax and other services.
TRUSTEES AND OFFICERS
The Trust's activities are overseen by a board of trustees, including five
independent trustees. The individuals listed below whose names are marked by an
asterisk (*) are "interested persons" of the Trust (as defined in the Investment
Company Act of 1940) by virtue of, among other considerations, their affiliation
with either the Trust; the Trust's investment advisor, Benham Management
Corporation (BMC); the Trust's agent for transfer and administrative services,
Benham Financial Services, Inc. (BFS); the Trust's distribution agent, Benham
Distributors, Inc. (BDI); the parent corporation, Twentieth Century Companies,
Inc. (TCC) or TCC's subsidiaries; or other funds advised by BMC. Each trustee
listed below serves as a trustee or director of other funds in The Benham Group.
Unless otherwise noted, dates in parentheses indicate the dates the trustee or
officer began his or her
22
<PAGE>
service in a particular capacity. The trustees' and officers' address is 1665
Charleston Road, Mountain View, California 94043 and 4500 Main Street, Kansas
City, Missouri 64111.
*JAMES M. BENHAM, chairman of the board of trustees (1985). Mr. Benham is also
chairman of the boards of BFS (1985), BMC (1971), and BDI (1988); president of
BMC (1971), and BDI (1988); and a member of the board of governors of the
Investment Company Institute (1988) and the Mutual Fund Education Alliance
(formerly the No-Load Mutual Fund Association, 1974). Mr. Benham has been in the
securities business since 1963, and he frequently comments through the media on
economic conditions, investment strategies, and the securities markets.
RONALD J. GILSON, independent trustee (1995); Charles J. Meyers Professor of Law
and Business at Stanford Law School (1979) and the Mark and Eva Stern Professor
of Law and Business at Columbia University School of Law (1992); counsel to
Marron, Reid & Sheehy (a San Francisco law firm, 1984).
MYRON S. SCHOLES, independent trustee (1985). Mr. Scholes is a principal of
Long-Term Capital Management (1993). He is also Frank E. Buck Professor of
Finance at the Stanford Graduate School of Business (1983) and a director of
Dimensional Fund Advisors (1982) and the Smith Breeden Family of Funds (1992).
From August 1991 to June 1993, Mr. Scholes was a managing director of Salomon
Brothers Inc. (securities brokerage).
KENNETH E. SCOTT, independent trustee (1985). Mr. Scott is Ralph M. Parsons
Professor of Law and Business at Stanford Law School (1972) and a director of
RCM Capital Funds, Inc. (June 1994).
EZRA SOLOMON, independent trustee (1985). Mr. Solomon is Dean Witter Professor
of Finance Emeritus at the Stanford Graduate School of Business, where he served
as Dean Witter Professor of Finance from 1965 to 1990, and a director of
Encyclopedia Britannica.
ISAAC STEIN, independent trustee (1992). Mr. Stein is former chairman of the
board (1990 to 1992) and chief executive officer (1991 to 1992) of Esprit de
Corp. (clothing manufacturer). He is a member of the board of Raychem
Corporation (electrical equipment, 1993), president of Waverley Associates, Inc.
(private investment firm, 1983), and a director of ALZA Corporation
(pharmaceuticals, 1987). He is also a trustee of Stanford University (1994) and
chairman of Stanford Health Services (hospital, 1994).
*JAMES E. STOWERS III, trustee (1995); president and director, Twentieth Century
Investors, Inc.; president and director, TCI Portfolios, Inc., Twentieth Century
World Investors, Inc., Twentieth Century Premium Reserves, Inc., Twentieth
Century Capital Portfolios, Inc., Twentieth Century Companies, Inc., Investors
Research Corporation and Twentieth Century Services, Inc.
JEANNE D. WOHLERS, independent trustee (1985). Ms. Wohlers is a private investor
and an independent director and partner of Windy Hill Productions, LP.
Previously, she served as vice president and chief financial officer of Sybase,
Inc. (software company, 1988 to 1992).
*BRUCE R. FITZPATRICK, vice president, chief financial officer, and treasurer
(1985).
*JOHN T. KATAOKA, president, and chief executive officer (1984).
*DOUGLAS A. PAUL, secretary (1988), vice president (1990), and general counsel
(1990).
*ANN N. MCCOID, controller (1987).
23
<PAGE>
The table below summarizes the compensation that the trustees of the Funds
received for the Fund's fiscal year ended March 31, 1995, as well as the
compensation received for serving as a director or trustee of all other Benham
funds.
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION FOR THE FISCAL YEAR ENDED
MARCH 31, 1995
- -------------------------------------------------------------------------------------------------------------------
NAME OF AGGREGATE PENSION OR ESTIMATED TOTAL
TRUSTEE COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS COMPENSATION
FROM ACCRUED AS PART OF UPON RETIREMENT FROM FUND AND
EACH FUND FUND EXPENSES FUND COMPLEX*
PAID TO TRUSTEES
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ronald J. Gilson+ $0 Not Applicable Not Applicable $0
- -------------------------------------------------------------------------------------------------------------------
Myron S. Scholes $1,670 (Agency Fund) Not Applicable Not Applicable $61,375
1,041 (S-T Fund)
1,444 (T-Note Fund)
1,036 (L-T Fund)
1,833 (ARM Fund)
2,428 (GNMA Fund)
- -------------------------------------------------------------------------------------------------------------------
Kenneth E. Scott $1,897 (Agency Fund) Not Applicable Not Applicable $67,375
1,125 (S-T Fund)
1,464 (T-Note Fund)
1,043 (L-T Fund)
2,020 (ARM Fund)
2,496 (GNMA Fund)
- -------------------------------------------------------------------------------------------------------------------
Ezra Solomon $2,036 (Agency Fund) Not Applicable Not Applicable $71,875
1,059 (S-T Fund)
1,585 (T-Note Fund)
1,053 (L-T Fund)
2,254 (ARM Fund)
3,187 (GNMA Fund)
- -------------------------------------------------------------------------------------------------------------------
Isaac Stein $1,958 (Agency Fund) Not Applicable Not Applicable $65,875
1,127 (S-T Fund)
1,504 (T-Note Fund)
1,046 (L-T Fund)
2,073 (ARM Fund)
2,625 (GNMA Fund)
- -------------------------------------------------------------------------------------------------------------------
Jeanne D. Wohlers $1,972 (Agency Fund) Not Applicable Not Applicable $68,625
1,063 (S-T Fund)
1,646 (T-Note Fund)
1,050 (L-T Fund)
2,194 (ARM Fund)
3,054 (GNMA Fund)
- -------------------------------------------------------------------------------------------------------------------
+ Nominated on April 3, 1995
* The Benham Group fund complex currently consists of 41 investment companies.
As of April 30, 1995, the Trust's officers and trustees, as a group, owned less than 1% of the outstanding shares
of each Fund.
</TABLE>
24
<PAGE>
INVESTMENT ADVISORY SERVICES
The Funds have an investment advisory agreement with Benham Management
Corporation (BMC) dated May 31, 1995, that was approved by shareholders on that
date.
BMC is a California corporation and a wholly owned subsidiary of Twentieth
Century Companies (TCC), a Delaware corporation. BMC, as well as BFS and BDI,
became wholly owned subsidiaries of TCC on June 1, 1995, upon the merger of
Benham Management International (BMI), the former parent of BMC, BFS and BDI,
into TCC. BMC has served as investment advisor to the Fund since the Fund's
inception. TCC is a holding company that owns all of the stock of the operating
companies that provide the investment management, transfer agency, shareholder
service, and other services for the Twentieth Century family of funds. James E.
Stowers, Jr., controls TCC by virtue of his ownership of a majority of its
common stock. BMC has been a registered investment advisor since 1971 and is
investment advisor to other funds in The Benham Group.
Each Fund's agreement with BMC continues for an initial period of two years and
thereafter from year to year provided that, after the initial two year period,
it is approved at least annually by vote of a majority of the Fund's
shareholders or by vote of a majority of the Trust's trustees, including a
majority of those trustees who are neither parties to the agreement nor
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval.
Each Fund's agreement is terminable on sixty days' written notice, either by the
Fund or by BMC, to the other party, and terminates automatically in the event of
its assignment.
Pursuant to the investment advisory agreement, BMC provides the Fund with
investment advice and portfolio management services in accordance with the
Fund's investment objectives, policies, and restrictions. BMC determines what
securities will be purchased and sold by the Fund and assist the Trust's
officers in carrying out decisions made by the board of trustees.
For these services, each Fund pays BMC a monthly investment advisory fee based
on a percentage of the Trust's average daily net assets to the following
investment advisory fee schedule:
.50% of the first $100 million
.45% of the next $100 million
.40% of the next $100 million
.35% of the next $100 million
.30% of the next $100 million
.25% of the next 1 billion
.24% of the next 1 billion
.23% of the next 1 billion
.22% of the next 1 billion
.21% of the next 1 billion
.20% of the next 1 billion
.19% of average daily net assets over $6.5 billion
Investment advisory fees paid by each Fund to BMC for the fiscal years ended
March 31, 1995, 1994 and 1993, are indicated in the following table. Fee amounts
are net of reimbursements as described on the next page.
25
<PAGE>
INVESTMENT ADVISORY FEES
FISCAL FISCAL FISCAL
FUND 1995 1994 1993
Agency Fund $1,014,951 $1,073,248 $1,518,462
Short-Term Fund 60,440 11,846 0(1)
Treasury Note Fund 875,087 1,020,441 932,941
Long-Term Fund 33,915 7,598 0(1)
ARM Fund 1,646,614 3,282,058 2,539,896
GNMA Fund 2,807,230 3,322,727 2,450,076
(1) From September 8, 1992 (commencement of operations), through March 31, 1993.
ADMINISTRATIVE AND TRANSFER AGENT SERVICES
BFS, a wholly owned subsidiary of TCC, is the Trust's agent for transfer and
administrative services. For administrative services, each Fund pays BFS a
monthly fee based on its pro rata share of the dollar amount derived from
applying the aggregate average daily net assets of all of the funds in The
Benham Group to the following administrative fee rate schedule:
GROUP ASSETS ADMINISTRATIVE FEE RATE
up to $4.5 billion .11%
up to $6 billion .10
up to $9 billion .09
over $9 billion .08
For transfer agent services, each Fund pays BFS a monthly fee of $1.3958 for
each shareholder account maintained and $1.35 for each shareholder transaction
executed during that month.
Administrative service and transfer agent fees paid by each Fund to BFS for the
fiscal years ended March 31, 1995, 1994, and 1993, are indicated in the
following tables. Fee amounts are net of reimbursements as described on the next
page.
ADMINISTRATIVE FEES
FISCAL FISCAL FISCAL
FUND 1995 1994 1993
Agency Fund $478,410 $564,901 $674,501
Short-Term Fund 30,662 21,286 0(1)
Treasury Note Fund 312,814 378,294 312,966
Long-Term Fund 23,884 19,336 0(1)
ARM Fund 595,079 1,215,816 1,198,441
GNMA Fund 1,003,636 1,232,514 821,946
26
<PAGE>
TRANSFER AGENT FEES
FISCAL FISCAL FISCAL
FUND 1995 1994 1993
Agency Fund $636,462 $863,944 $1,082,217
Short-Term Fund 36,254 29,973 0(1)
Treasury Note Fund 317,653 356,584 350,021
Long-Term Fund 37,365 26,909 0(1)
ARM Fund 684,702 1,141,251 1,349,285
GNMA Fund 1,178,768 1,348,081 1,023,105
(1) From September 8, 1992 (commencement of operations), through March 31, 1993.
DIRECT FUND EXPENSES
Each Fund pays certain operating expenses that are not assumed by BMC or BFS.
These include fees and expenses of the independent trustees; custodian, audit,
and pricing fees; fees of outside counsel and counsel employed directly by the
Trust; costs of printing and mailing prospectuses, statements of additional
information, notices, confirmations, and reports to shareholders; fees for
registering the Fund's shares under federal and state securities laws; brokerage
fees and commissions; trade association dues; costs of fidelity and liability
insurance policies covering the Fund; costs for incoming WATS lines maintained
to receive and handle shareholder inquiries; and organizational costs.
EXPENSE LIMITATION AGREEMENTS
BMC has agreed to limit each Fund's expenses to a specified percentage of its
average daily net assets during the year ending May 31, 1996, as follows:
Agency Fund .50%
Short-Term Fund .65%
Treasury Note Fund .65%
Long-Term Fund .65%
ARM Fund .65%
GNMA Fund .65%
BMC may recover amounts absorbed on behalf of the Funds during the preceding 11
months if, and to the extent that, for any given month, a Fund's expenses were
less than the expense limit in effect at that time. Each Fund's expense limit
for the year ending May 31, 1995, as a percentage of average daily net assets,
is listed below:
1995
Agency Fund .50%
Short-Term Fund .66%
Treasury Note Fund .66%
Long-Term Fund .66%
ARM Fund .60%
GNMA Fund .66%
Net amounts absorbed or recouped for the fiscal years ended March 31, 1995,
1994, and 1993, are indicated in the table on the next page.
27
<PAGE>
NET EXPENSE LIMITATIONS/RECOUPMENTS BY BMC AND BFS
FISCAL FISCAL FISCAL
FUND 1995 1994 1993
Agency Fund $323,152 $451,622 $492,900
Short-Term Fund 25,537 45,651 59,482(1)
Treasury Note Fund 0 0 0
Long-Term Fund 33,125 44,468 63,912(1)
ARM Fund 11,331 0 1,032,291
GNMA Fund 0 0 0
(1) From September 8, 1992 (commencement of operations), through March 31, 1993.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Funds' shares are continuously offered at net asset value. Share
certificates are issued (without charge) only when requested in writing.
Certificates are not issued for fractional shares. Dividend and voting rights
are not affected by the issuance of certificates.
The Benham Group may reject or limit the amount of an investment to prevent any
one shareholder or affiliated group from controlling the Trust or one of its
series; to avoid jeopardizing a Fund's tax status; or whenever, in management's
opinion, such rejection is in the Trust's or a Fund's best interest.
As of June 30, 1995, the shareholders listed in the chart below and on the next
page were record holders of greater than 5% of the outstanding shares of the
individual Funds.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
FUND SHAREHOLDER # OF SHARES HELD % OF TOTAL
NAME AND ADDRESS SHARES OUTSTANDING
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-Term Fund Charles Schwab & Co. 781,359.533 20.47
101 Montgomery Street
San Francisco, CA 94104
J. Harris Morgan 311,870.707 8.17
P.O. Box 556
Greenville, TX 75401
- --------------------------------------------------------------------------------------------------
Treasury Note Fund Charles Schwab & Co. 2,810,423.515 9.26
101 Montgomery Street
San Francisco, CA 94104
- --------------------------------------------------------------------------------------------------
Long-Term Fund Charles Schwab & Co. 1,916,825.445 43.15
101 Montgomery Street
San Francisco, CA 94104
Natl. Fincl. Svcs. Corp. 537,201.577 12.09
200 Liberty Street
New York, NY 10281
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
FUND SHAREHOLDER # OF SHARES HELD % OF TOTAL
(CONTINUED) NAME AND ADDRESS SHARES OUTSTANDING
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ARM Fund Charles Schwab & Co. 2,612,486.559 67.26
101 Montgomery Street
San Francisco, CA 94104
- --------------------------------------------------------------------------------------------------
GNMA Fund Charles Schwab & Co. 11,626,622.576 11.92
101 Montgomery Street
San Francisco, CA 94104
</TABLE>
As of June 30, 1995, no other shareholder was the record holder or beneficial
owner of 5% or more of a Fund's total outstanding shares.
The Benham Group charges neither fees nor commissions on the purchase and sale
of Benham fund shares. However, BFS may charge fees for special services
requested by a shareholder or necessitated by acts or omissions of a
shareholder. For example, BFS may charge a fee for processing dishonored
investment checks or stop-payment requests. BFS charges $10 per hour for account
research requested by investors. This charge will be assessed, for example, when
a shareholder request requires more than one hour of research on historical
account records. The fees charged are based on the estimated costs of performing
shareholder-requested services and are not intended to increase income to BFS.
Share purchases and redemptions are governed by California law.
OTHER INFORMATION
The Fund's investment advisor , Benham Management Corporation (BMC), has been
continuously registered with the Securities and Exchange Commission (SEC) under
the Investment Advisers Act of 1940 since December 14, 1971. The Trust has filed
a registration statement under the Securities Act of 1933 and the Investment
Company Act of 1940 with respect to the shares offered. Such registrations do
not imply approval or supervision of the Trust or the advisor by the SEC.
For further information, refer to registration statement and exhibits on file
with the SEC in Washington, D.C. These documents are available upon payment of a
reproduction fee. Statements in the Prospectus and in this Statement of
Additional Information concerning the contents of contracts or other documents,
copies of which are filed as exhibits to the registration statement, are
qualified by reference to such contracts or documents.
29
<PAGE>
CAPITAL PRESERVATION FUND
THE BENHAM GROUP(R)
1665 Charleston Road
Mountain View, California 94043
Shareholder Relations: 1-800-321-8321 or 1-415-965-4222
Fund Information: 1-800-331-8331 or 1-415-965-4274
STATEMENT OF ADDITIONAL INFORMATION
JULY 30, 1995
This Statement is not a prospectus but should be read in conjunction with the
Fund's current Prospectus dated July 30, 1995. The Fund's Annual Report for the
fiscal year ended March 31, 1995, is included in this Statement of Additional
Information. To obtain a copy of the Prospectus, call or write The Benham Group.
TABLE OF CONTENTS
PAGE
----
Investment Policies and Techniques 2
Investment Restrictions 2
Portfolio Transactions 4
Valuation of Portfolio Securities 4
Performance 5
Taxes 7
About the Fund 8
Directors and Officers 8
Investment Advisory Services 10
Administrative and Transfer Agent Services 11
Direct Fund Expenses 12
Expense Limitation Agreements 12
Additional Purchase and Redemption Information 12
Other Information 13
Financial Statements 14
1
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
The following paragraphs provide a more detailed description of the securities
and investment practices identified in the Prospectus. Unless otherwise noted,
the policies described in this Statement of Additional Information are not
fundamental and may be changed by the board of directors.
WHEN-ISSUED SECURITIES AND FORWARD-COMMITMENT AGREEMENTS
The Fund may engage in securities transactions on a when-issued or
forward-commitment basis in which the transaction price and yield are each fixed
at the time the commitment is made, but payment and delivery occur at a future
date (typically 15 to 45 days later).
When purchasing securities on a when-issued or forward-commitment basis, the
Fund assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. While the Fund will make commitments on a when-issued or
forward-commitment basis to purchase or sell securities, it may nevertheless
sell the securities before the settlement date if doing so is deemed advisable
as a matter of investment strategy.
In purchasing securities on a when-issued or forward-commitment basis, the Fund
will establish and maintain until the settlement date a segregated account
consisting of cash, U.S. government securities, and other high-quality liquid
debt securities in an amount sufficient to meet the purchase price. When the
time comes to pay for when-issued securities, the Fund will meet its obligations
with available cash, through the sale of securities, or, although it would not
normally expect to do so, through sales of the when-issued securities themselves
(which may have a market value greater or less than the Fund's payment
obligation). Selling securities to meet when-issued or forward-commitment
obligations may generate capital gains or losses.
ROLL TRANSACTIONS
The Fund may sell a security and at the same time make a commitment to purchase
the same or a comparable security at a future date and specified price.
Conversely, the Fund may purchase a security and at the same time make a
commitment to sell the same or a comparable security at a future date and
specified price. These types of transactions are executed simultaneously in what
are known as "dollar-roll" or "cash and carry" transactions. For example, a
broker-dealer may seek to purchase a particular security that the Fund owns. The
Fund will sell that security to the broker-dealer and simultaneously enter into
a forward-commitment agreement to buy it back at a future date. This type of
transaction generates income for the Fund if the dealer is willing to execute
the transaction at a favorable price in order to acquire a specific security. As
an operating policy, the Fund will limit roll transactions to 30% of net assets.
In engaging in roll transactions, the Fund will maintain until the settlement
date a segregated account consisting of cash, cash equivalents, or high-quality
liquid securities in an amount sufficient to meet the purchase price, as
described above.
INVESTMENT RESTRICTIONS
The Fund's investment restrictions are set forth below. Except for those
designated as operating policies, these restrictions are fundamental and may not
be changed without the approval of "a majority of the outstanding voting
securities" of the Fund as defined in the Investment Company
2
<PAGE>
Act of 1940. Unless otherwise indicated, percentage limitations included in the
restrictions apply at the time the Fund enters into a transaction.
The Fund may not
(1) Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities) if,
as a result (a) more than 5% of its total assets would be invested in the
securities of that issuer, or (b) the Fund would hold more than 10% of the
outstanding voting securities of that issuer.
(2) Borrow amounts in excess of 10% of the cost or 5% of the market value of
its total assets, whichever is less, and then only from a bank and as a
temporary measure for extraordinary or emergency purposes. To secure any
such borrowing, the Fund may pledge or hypothecate not in excess of 15% of
the value of its total assets. Although the Fund has the right to pledge,
mortgage, or hypothecate in excess of 10% of its assets at market value, as
a matter of operating policy and in order to comply with certain state
statutes and investment restrictions, it will not do so.
(3) Act as an underwriter of securities issued by others.
(4) Invest more than 25% of its assets in any one industry (this restriction
does not apply to securities of the U.S. government or its
instrumentalities or agencies or to certificates of deposit or bankers'
acceptances of U.S.
commercial banks having assets over $10 billion).
(5) Purchase or sell real estate, commodities, or commodity contracts, or buy
or sell foreign exchange.
(6) Engage in any short-selling operations.
(7) Lend money other than through the purchase of debt securities in accordance
with its investment policies (management considers that this restriction
precludes purchase of other than publicly held debt securities).
(8) Purchase any equity securities in any companies, including warrants or
bonds with warrants attached, or any preferred stocks, convertible bonds,
or convertible debentures.
(9) Purchase any debt securities that are not rated AA or AAA, or the
equivalent thereof, by either of the major statistical rating services
(Moody's or Standard & Poor's) or that, in the Fund's opinion, are the
equivalent thereof.
(10) Engage in margin transactions or in transactions involving puts, calls,
straddles, or spreads.
(11) Purchase securities for which the Fund might be liable for further payment
or liability.
(12) Invest in portfolio securities that the Fund may not be free to sell to the
public without registering under the Securities Act of 1933 or taking
similar action under other securities laws.
(13) Issue or sell any class of senior security, except to the extent that notes
evidencing temporary borrowing might be deemed such.
3
<PAGE>
(14) Acquire or retain the securities of any other investment company.
(15) Purchase securities of companies in which directors or management personnel
of the Fund or its advisor have a substantial interest. (The Fund may not
purchase or retain securities of any company in which an officer or
director of the Fund or its advisor is an officer, director, or security
holder if such officers and directors who individually own beneficially
more than one-half of one percent (0.5%) of the shares or securities of
such company together own beneficially more than 5% of the shares or
securities of such company. Portfolio securities of the Fund may not be
purchased from or sold to the Fund's advisor or its directors, officers, or
employees.)
(16) As a matter of operating policy, acquire securities for the purpose of
exercising control over management.
PORTFOLIO TRANSACTIONS
The Fund's assets are invested by BMC in a manner consistent with the Fund's
investment objectives, policies, and restrictions and with any instructions the
board of directors may issue from time to time. Within this framework, BMC is
responsible for making all determinations as to the purchase and sale of
portfolio securities and for taking all steps necessary to implement securities
transactions on behalf of the Fund.
In placing orders for the purchase and sale of portfolio securities, BMC will
use its best possible price and execution and will otherwise place orders with
broker-dealers subject to and in accordance with any instructions that the board
of directors may issue from time to time. BMC will select broker-dealers to
execute portfolio transactions on behalf of the Fund solely on the basis of best
price and execution.
U.S. government securities generally are traded in the over-the-counter market
through broker-dealers. A broker-dealer is a securities firm or bank that makes
a market for securities by offering to buy at one price and sell at a slightly
higher price. The difference between the prices is known as a spread.
On behalf of the Fund, BMC transacts in round lots ($100,000 to $10 million or
more) whenever possible. Since commissions are not charged for round-lot
transactions of U.S. Treasury securities, the Fund's transaction costs consist
solely of custodian charges and dealer mark-ups. The Fund may hold its portfolio
securities to maturity or sell or swap them for others, depending upon the level
and slope of, and anticipated changes in, the yield curve. The Fund paid no
brokerage commissions during the fiscal year ended March 31, 1995.
VALUATION OF PORTFOLIO SECURITIES
The Fund's net asset value per share (NAV) is determined by Benham Financial
Services, Inc. (BFS) at 1:00 p.m. Pacific Time each day the New York Stock
Exchange (NYSE) is open for business. The NYSE has designated the following
holiday closings for 1995: New Year's Day (observed), Washington's Birthday,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day (observed). Although BFS expects the same holiday schedule to be
observed in the future, the NYSE may modify its holiday schedule at any time.
The Fund declares as daily dividends substantially all of its net income, plus
or minus any recognizable gains or losses. Net income equals the return on the
Fund's investment portfolio minus
4
<PAGE>
Fund expenses. Income and expenses are accrued daily. If, on any business day,
net income is less than recognized losses, shares will be redeemed pro rata to
offset the difference and to maintain the Fund's $1.00 share price.
Securities held by the Fund are valued on the basis of amortized cost. This
method involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium paid at the time of
purchase. Although this method provides certainty in valuation, it generally
disregards the effect of fluctuating interest rates on an instrument's market
value. Consequently, the instrument's amortized cost value may be higher or
lower than its market value, and this discrepancy may be reflected in the Fund's
yield. During periods of declining interest rates, for example, the daily yield
on Fund shares computed as described above may be higher than that of a fund
with identical investments priced at market value. The converse would apply in
periods of rising interest rates.
BMC typically completes its trading on behalf of the Fund in various markets
before the NYSE closes for the day. The amortized cost valuation method is
permitted in accordance with Rule 2a-7 under the Investment Company Act of 1940.
Under the Rule, a fund such as CPF, holding itself out as a money market fund,
must adhere to certain quality and maturity criteria. In particular, such a fund
must limit its investments to U.S. dollar-denominated instruments that are
determined by its board of directors or trustees to present minimal credit risks
and that are (i) high-grade obligations rated in accordance with applicable
rules in one of the two highest rating categories for short-term obligations by
at least two rating agencies (or by one if only one has rated the obligation),
or (ii) unrated obligations judged by the advisor, under the direction of the
fund's board of directors or trustees, to be of comparable quality. Further,
pursuant to Rule 2a-7, a money market fund must maintain a dollar-weighted
average portfolio maturity of 90 days or less and may not purchase instruments
with remaining maturities in excess of 397 days. As an operating policy, the
Fund maintains a dollar-weighted average maturity of 60 days or less.
The directors have established procedures designed to stabilize the Fund's NAV
at $1.00 per share to the extent reasonably possible. These procedures require
the Fund's chief financial officer to notify the directors immediately if, at
any time, the Fund's weighted average maturity exceeds 60 days or its NAV, as
determined by using available market quotations, deviates from its amortized
cost per share by .25% or more. If such deviation exceeds .40%, a meeting of the
board of directors' audit committee will be called to consider what actions, if
any, should be taken. If such deviation exceeds .50%, the Fund's chief financial
officer is instructed to adjust daily dividend distributions immediately to the
extent necessary to reduce the deviation to .50% or lower and to call a meeting
of the board of directors to consider further action.
Actions the board may consider under these circumstances include but are not
limited to (i) selling portfolio securities prior to maturity; (ii) withholding
dividends or distributions from capital; (iii) authorizing a one-time dividend
adjustment; (iv) discounting share purchases and initiating redemptions in kind;
or (v) valuing portfolio securities at market value for purposes of calculating
NAV.
PERFORMANCE
The Fund's yields and total returns may be quoted in advertising and sales
literature. Yields and total returns will vary, and past performance should not
be considered an indication of future results.
5
<PAGE>
Yield quotations for the Fund are based on the change in the value of a
hypothetical investment (excluding realized gains and losses from the sale of
securities and unrealized appreciation and depreciation of securities) over a
seven-day period (base period) and stated as a percentage of the investment at
the start of the base period (base-period return). The base-period return is
then annualized by multiplying it by 365/7, with the resulting yield figure
carried to at least the nearest hundredth of one percent.
Calculations of effective yield begin with the same base-period return used to
calculate yield, but the return is then annualized to reflect weekly compounding
according to the following formula:
365/7
Effective Yield = [(Base-Period Return + 1) ] - 1
For the seven-day period ended March 31, 1995, the Fund's yield was 5.40%, and
its effective yield was 5.54%.
Total returns quoted in advertising and sales literature reflect all aspects of
the Fund's return, including the effect of reinvesting dividends and capital
gain distributions and any change in the Fund's net asset value during the
period.
Average annual total returns are calculated by determining the growth or decline
in value of a hypothetical historical investment in the Fund over a stated
period and then calculating the annually compounded percentage rate that would
have produced the same result if the rate of growth or decline in value had been
constant throughout the period. For example, a cumulative total return of 100%
over ten years would produce an average annual total return of 7.18%, which is
the steady annual rate that would equal 100% growth on a compounded basis in ten
years. While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that the Fund's performance is
not constant over time, but changes from year to year, and that average annual
total returns represent averaged figures as opposed to actual year-to-year
performance.
In addition to average annual total returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be quoted
as a percentage or as a dollar amount and may be calculated for a single
investment, a series of investments, or a series of redemptions over any time
period. Performance information may be quoted numerically or in a table, graph,
or similar illustration.
The Fund's performance may be compared with the performance of other mutual
funds tracked by mutual fund rating services or with other indexes of market
performance. This may include comparisons with funds that, unlike Benham funds,
are sold with a sales charge or deferred sales charge. Sources of economic data
that may be used for such comparisons may include, but are not limited to, U.S.
Treasury bill, note, and bond yields, money market fund yields, U.S. government
debt and percentage held by foreigners, the U.S. money supply, net free
reserves, and yields on current-coupon GNMAs (source: Board of Governors of the
Federal Reserve System); the federal funds and discount rates (source: Federal
Reserve Bank of New York); yield curves for U.S. Treasury securities and
AA/AAA-rated corporate securities (source: Bloomberg Financial Markets); yield
curves for AAA-rated tax-free municipal securities (source: Telerate); yield
curves for foreign government securities (sources: Bloomberg Financial Markets
and Data Resources, Inc.); total returns on foreign bonds (source: J.P. Morgan
Securities Inc.); various U.S. and foreign government
6
<PAGE>
reports; the junk bond market (source: Data Resources, Inc.); the CRB Futures
Index (source: Commodity Index Report); the price of gold (sources: London
a.m./p.m. fixing and New York Comex Spot Price); rankings of any mutual fund or
mutual fund category tracked by Lipper Analytical Services, Inc. or Morningstar,
Inc.; mutual fund rankings published in major nationally distributed
periodicals; data provided by the Investment Company Institute; Ibbotson
Associates, Stocks, Bonds, Bills, and Inflation; major indexes of stock market
performance; and indexes and historical data supplied by major securities
brokerage or investment advisory firms. The Fund may also utilize reprints from
newspapers and magazines furnished by third parties to illustrate historical
performance.
The Fund may quote performance in various ways. Historical performance
information will be used in advertising and sales literature and is not
indicative of future results. The Fund's share price, yield and return will vary
with changing market conditions.
The Benham Group has distinguished itself as an innovative provider of low-cost
true no-load mutual funds. Among other innovations, The Benham Group established
the first no-load fund investing primarily in zero-coupon U.S. Treasury
securities, the first no-load double tax-free California money market and
short-term bond funds, the first no-load adjustable rate government securities
fund, and the first no-load utilities fund designed to pay monthly dividends.
CPF was the first (Treasury-bill-only) money market fund.
TAXES
The Fund intends to qualify annually as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986 (the Code) as amended. By so
qualifying, the Fund will not incur federal income or state taxes on its net
investment income and on net realized capital gains to the extent distributed to
shareholders.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax at the
Fund level. To avoid the tax, the Fund must distribute during each calendar year
an amount equal to the sum of (1) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) at
least 98% of its capital gains in excess of capital losses (adjusted for certain
ordinary losses) for a one-year period generally ending on October 31 of the
calendar year, and (3) all ordinary income and capital gains for previous years
that were not distributed during such years.
Under the Code, dividends derived from interest, and any short-term capital
gains, are taxable to shareholders as ordinary income for federal and state tax
purposes, regardless of whether such dividends are taken in cash or reinvested
in additional shares. Distributions made from the Fund's net realized long-term
capital gains (if any) and designated as capital gain dividends are taxable to
shareholders as long-term capital gains, regardless of the length of time shares
are held. Corporate investors are not eligible for the dividends-received
deduction with respect to distributions from the Fund. A distribution will be
treated as paid on December 31 of a calendar year if it is declared by the Fund
in October, November or December of the year with a record date in such a month
and paid by the Fund during January of the following year. Such distributions
will be taxable to shareholders in the calendar year the distributions are
declared, rather than the calendar year in which the distributions are received.
7
<PAGE>
In most states, dividends paid by the Fund are exempt from state personal income
taxes to the extent that the Fund derives its income from debt securities of the
U.S. government, which generate interest payments that are state tax-exempt.
The information above is only a summary of some of the tax considerations
affecting the Fund and its shareholders. No attempt has been made to discuss
individual tax consequences. To determine whether the Fund is a suitable
investment based on his or her tax situation, a prospective investor may wish to
consult a tax advisor.
ABOUT THE FUND
Capital Preservation Fund was organized as a California corporation on October
28, 1971. The Fund is authorized to issue ten billion (10,000,000,000) shares of
common stock, which may be issued in two or more series. Of the ten billion
shares, five billion (5,000,000,000) are designated "Series A Common Stock." The
remaining five billion shares may be designated and classified as additional
series from time to time at the discretion of the board of directors.
Each share of Series A Common Stock is entitled to one vote and to equal
participation in dividends and distributions. Fund shares are fully paid and
nonassessable when issued and have no preemptive, conversion, exchange, or
similar rights. Fund shares are transferable without restriction.
Each shareholder is entitled to cast one vote for each share held in his or her
name as of the record date for a shareholder meeting. Under California
Corporations Code, Section 708, shareholders have the right to cumulate votes in
the election (or removal) of directors. For example, if six directors are
proposed for election, a shareholder may cast six votes for a single candidate,
or three votes for each of two candidates, etc.
CUSTODIAN BANK: State Street Bank and Trust Company, 225 Franklin Street,
Boston, MA 02101, is custodian of the Fund's assets. Services provided by the
custodian bank include (i) settling portfolio purchases and sales, (ii)
reporting failed trades, (iii) identifying and collecting portfolio income, and
(iv) providing safekeeping of securities. The custodian takes no part in
determining the Fund's investment policies or in determining which securities
are sold or purchased by the Fund.
INDEPENDENT AUDITORS: KPMG Peat Marwick LLP, 3 Embarcadero Center, San
Francisco, California 94111, serve as the Fund's independent auditors. KPMG
audits the annual report and provides tax and other services.
DIRECTORS AND OFFICERS
The Fund's activities are overseen by a board of directors, including five
independent directors. The individuals listed below whose names are marked by an
asterisk (*) are "interested persons" of the Fund (as defined in the Investment
Company Act of 1940) by virtue of, among other things, their affiliation with
either the Fund; the Fund's investment advisor, Benham Management Corporation
(BMC); the Fund's agent for transfer and administrative services, Benham
Financial Services, Inc. (BFS); the Fund's distribution agent, Benham
Distributors, Inc. (BDI); the parent corporation, Twentieth Century Companies,
Inc. (TCC) or TCC's subsidiaries; or other funds advised by BMC. Each director
listed below serves as a trustee or director of other funds in The Benham Group.
Unless otherwise noted, a date in parentheses indicates the date the director or
officer began his or her service in a particular capacity. The directors and
officers' address is 1665 Charleston Road, Mountain View, California 94043 and
4500 Main Street, Kansas City, Missouri 64111.
8
<PAGE>
*JAMES M. BENHAM, chairman of the board of directors (1971). Mr. Benham is also
chairman of the boards of BFS (1985), BMC (1971), and BDI (1988); president of
BMC (1971), and BDI (1988); and a member of the board of governors of the
Investment Company Institute (1988) and the Mutual Fund Education Alliance
(formerly the No-Load Mutual Fund Association, 1974). Mr. Benham has been in the
securities business since 1963, and he frequently comments through the media on
economic conditions, investment strategies, and the securities markets.
RONALD J. GILSON, independent director (1995); Charles J. Meyers Professor of
Law and Business at Stanford Law School (1979) and the Mark and Eva Stern
Professor of Law and Business at Columbia University School of Law (1992);
counsel to Marron, Reid & Sheehy (a San Francisco law firm, 1984).
MYRON S. SCHOLES, independent director (1981). Mr. Scholes is a principal of
Long-Term Capital Management (1993). He is also Frank E. Buck Professor of
Finance at the Stanford Graduate School of Business (1983) and a director of
Dimensional Fund Advisors (1982) and the Smith Breeden Family of Funds (1992).
From August 1991 to June 1993, Mr. Scholes was a managing director of Salomon
Brothers Inc. (securities brokerage).
KENNETH E. SCOTT, independent director (1971). Mr. Scott is Ralph M. Parsons
Professor of Law and Business at Stanford Law School (1972) and a director of
RCM Capital Funds, Inc. (June 1994).
EZRA SOLOMON, independent director (1978). Mr. Solomon is Dean Witter Professor
of Finance Emeritus at the Stanford Graduate School of Business, where he served
as Dean Witter Professor of Finance from 1965 to 1990, and a director of
Encyclopedia Britannica.
ISAAC STEIN, independent director (1992). Mr. Stein is former chairman of the
board (1990 to 1992) and chief executive officer (1991 to 1992) of Esprit de
Corp. (clothing manufacturer). He is a member of the board of Raychem
Corporation (electrical equipment, 1993), president of Waverley Associates, Inc.
(private investment firm, 1983), and a director of ALZA Corporation
(pharmaceuticals, 1987). He is also a trustee of Stanford University (1994) and
chairman of Stanford Health Services (hospital, 1994).
*JAMES E. STOWERS III, director (1995); president and director, Twentieth
Century Investors, Inc.; president and director, TCI Portfolios, Inc., Twentieth
Century World Investors, Inc., Twentieth Century Premium Reserves, Inc.,
Twentieth Century Capital Portfolios, Inc., Twentieth Century Companies, Inc.,
Investors Research Corporation and Twentieth Century Services, Inc.
JEANNE D. WOHLERS, independent director (1989). Ms. Wohlers is a private
investor and an independent director and partner of Windy Hill Productions, LP.
Previously, she served as vice president and chief financial officer of Sybase,
Inc. (software company, 1988 to 1992).
*BRUCE R. FITZPATRICK, vice president, chief financial officer, and treasurer
(1984).
*JOHN T. KATAOKA, president, and chief executive officer (1984).
*DOUGLAS A. PAUL, secretary (1988), vice president (1990), and general counsel
(1990).
*ANN N. MCCOID, controller (1987).
9
<PAGE>
The table below summarizes the compensation that the directors of Capital
Preservation Fund received from the Fund for the Fund's fiscal year ended March
31, 1995, as well as the compensation received for serving as a director or
trustee of all other Benham funds.
<TABLE>
<CAPTION>
DIRECTOR COMPENSATION FOR THE FISCAL YEAR ENDED
MARCH 31, 1995
- ---------------------------------------------------------------------------------------------------------------------
NAME OF AGGREGATE PENSION OR ESTIMATED TOTAL
DIRECTOR COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS COMPENSATION
FROM ACCRUED AS PART OF UPON RETIREMENT FROM FUND AND
THE FUND FUND EXPENSES FUND COMPLEX*
PAID TO DIRECTORS
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ronald J. Gilson+ $0 Not Applicable Not Applicable $0
- ---------------------------------------------------------------------------------------------------------------------
Myron S. Scholes $9,776 Not Applicable Not Applicable $61,375
- ---------------------------------------------------------------------------------------------------------------------
Kenneth E. Scott $11,587 Not Applicable Not Applicable $67,375
- ---------------------------------------------------------------------------------------------------------------------
Ezra Solomon $13,356 Not Applicable Not Applicable $71,875
- ---------------------------------------------------------------------------------------------------------------------
Isaac Stein $10,975 Not Applicable Not Applicable $65,875
- ---------------------------------------------------------------------------------------------------------------------
Jeanne D. Wohlers $11,718 Not Applicable Not Applicable $68,625
- ---------------------------------------------------------------------------------------------------------------------
+ Nominated on April 3, 1995.
* The Benham Group fund complex currently consists of 41 investment companies.
</TABLE>
As of June 30, 1995, the Fund's officers and directors, as a group, owned less
than 1% of the outstanding shares of the Fund.
INVESTMENT ADVISORY SERVICES
The Fund has an investment advisory agreement with Benham Management Corporation
(BMC) dated June 1, 1995, that was approved by shareholders on May 31, 1995.
BMC is a California corporation and a wholly owned subsidiary of Twentieth
Century Companies (TCC), a Delaware corporation. BMC, as well as BFS and BDI,
became wholly owned subsidiaries of TCC on June 1, 1995, upon the merger of
Benham Management International (BMI), the former parent of BMC, BFS and BDI,
into TCC. BMC has served as investment advisor to the Fund since the Fund's
inception. TCC is a holding company that owns all of the stock of the operating
companies that provide the investment management, transfer agency, shareholder
service, and other services for the Twentieth Century family of funds. James E.
Stowers, Jr., controls TCC by virtue of his ownership of a majority of its
common stock. BMC has been a registered investment advisor since 1971 and is
investment advisor to other funds in The Benham Group.
The Fund's agreement with BMC continues for an initial period of two years and
thereafter from year to year provided that, after the initial two-year period,
it is approved at least annually by vote of a majority of the Fund's outstanding
shares or by vote of a majority of the Fund's directors, including a majority of
those directors who are neither parties to the agreement nor interested persons
of any such party, cast in person at a meeting called for the purpose of voting
on such approval.
The agreement is terminable on sixty days' written notice, either by the Fund or
by BMC, to the other party, and terminates automatically in the event of its
assignment.
10
<PAGE>
Pursuant to the investment advisory agreement, BMC provides the Fund with
investment advice and portfolio management services in accordance with the
Fund's investment objectives, policies, and restrictions. BMC determines what
securities will be purchased and sold by the Fund and assists the Fund's
officers in carrying out decisions made by the board of directors.
For these services, the Fund pays BMC a monthly investment advisory fee based on
its pro rata share of the dollar amount derived from applying the Fund's average
daily net assets to the following investment advisory fee rate schedule:
.50% of the first $100 million
.45% of the next $100 million
.40% of the next $100 million
.35% of the next $100 million
.30% of the next $100 million
.25% of the next $1 billion
.24% of the next $1 billion
.23% of the next $1 billion
.22% of the next $1 billion
.21% of the next $1 billion
.20% of the next $1 billion
.19% of average daily net assets over $6.5 billion
Investment advisory fees paid by the Fund to BMC for the fiscal periods ended
March 31, 1995, 1994, and 1993, are indicated in the following table.
FISCAL PERIOD INVESTMENT ADVISORY FEES
Year ended 3/31/95 $7,631,805
Year ended 3/31/94 7,677,592
Six months ended 3/31/93* 4,048,770
* The Fund's fiscal year-end was changed from September 30 to March 31 in 1993.
ADMINISTRATIVE AND TRANSFER AGENT SERVICES
BFS, a wholly owned subsidiary of TCC, is the Fund's agent for transfer and
administrative services. For administrative services, the Fund pays BFS a
monthly fee based on its pro rata share of the dollar amount derived from
applying the average daily net assets of all of the funds in The Benham Group to
the following administrative fee rate schedule:
GROUP ASSETS ADMINISTRATIVE FEE RATE
up to $4.5 billion .11%
up to $6 billion .10
up to $9 billion .09
over $9 billion .08
For transfer agent services, the Fund pays BFS a monthly fee of $1.4375 for each
shareholder account maintained and $1.35 for each shareholder transaction
executed during that month.
11
<PAGE>
Administrative service and transfer agent fees paid by the Fund to BFS for the
fiscal periods ended March 31, 1995, 1994, and 1993*, are indicated in the
following table.
FISCAL PERIOD ADMINISTRATIVE FEES TRANSFER AGENCY FEES
Year ended 3/31/95 $2,781,843 $2,582,343
Year ended 3/31/94 2,759,738 2,728,965
Six months ended 3/31/93* 1,325,267 1,453,811
* The Fund's fiscal year-end was changed from September 30 to March 31 in 1993.
DIRECT FUND EXPENSES
The Fund pays certain operating expenses that are not assumed by BMC or BFS.
These include fees and expenses of the independent directors; custodian, audit,
and pricing fees; fees of outside counsel and counsel employed directly by the
Fund; costs of printing and mailing prospectuses, statements of additional
information, proxy statements, notices, confirmations, and reports to
shareholders; fees for registering the Fund's shares under federal and state
securities laws; brokerage fees and commissions; trade association dues; costs
of fidelity and liability insurance policies covering the Fund; costs for
incoming WATS lines maintained to receive and handle shareholder inquiries; and
organizational costs.
EXPENSE LIMITATION AGREEMENTS
BMC has agreed to limit the Fund's expenses to .54% of the Fund's average daily
net assets during the year ending March 31, 1996.
BMC may recover amounts absorbed on behalf of the Fund during the preceding 11
months if, and to the extent that, for any given month, the Fund's expenses were
less than the expense limit in effect at that time.
The Fund's contractual expense limit is subject to annual renewal. The expense
limit for the year ended May 31, 1995, was .57% of average daily net assets
The former and current contractual expense limitation agreements described above
did not and do not apply to extraordinary expenses such as brokerage commissions
and taxes.
For the fiscal periods ended March 31, 1995, 1994, and 1993, and September 30,
1992, BMC and BFS paid no reimbursements to the Fund and recouped no
reimbursements previously paid to the Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Fund's shares are continuously offered at net asset value. Share
certificates are issued (without charge) only when requested in writing.
Certificates are not issued for fractional shares. Dividend and voting rights
are not affected by the issuance of certificates.
The Benham Group may reject or limit the amount of an investment to prevent any
one shareholder or affiliated group from controlling the Fund or one of its
portfolios; to avoid jeopardizing the Fund's tax status; or whenever, in
management's opinion, such rejection is in the Fund's best interest.
12
<PAGE>
As of April 30, 1995, to the knowledge of the Fund, no shareholder was the
record holder or beneficial owner of 5% or more of the Fund's total shares
outstanding.
The Benham Group charges neither fees nor commissions on the purchase and sale
of Benham fund shares. However, BFS may charge fees for special services
requested by a shareholder or necessitated by acts or omissions of a
shareholder. For example, BFS may charge a fee for processing dishonored
investment checks or stop-payment requests. BFS charges $10 per hour for account
research requested by investors. This charge will be assessed, for example, when
a shareholder request requires more than one hour of research on historical
account records. The fees charged are based on the estimated costs of performing
shareholder-requested services and are not intended to increase income.
Share purchases and redemptions are governed by California law.
OTHER INFORMATION
The Fund's investment advisor, Benham Management Corporation (BMC), has been
continuously registered with the Securities Exchange Commission (SEC) under the
Investment Advisers Act of 1940 since December 14, 1971. The Fund has filed a
registration statement under the Securities Act of 1933 and the Investment
Company Act of 1940 with respect to the shares offered. Such registrations do
not imply approval or supervision of the Fund or the advisor by the SEC.
For further information, refer to the registration statement and exhibits on
file with the SEC in Washington, D.C. These documents are available upon payment
of a reproduction fee. Statements in the Prospectus and in this Statement of
Additional Information concerning the contents of contracts or other documents,
copies of which are filed as exhibits to the registration statement, are
qualified by reference to such contracts or documents.
13
<PAGE>
CAPITAL PRESERVATION FUND II
THE BENHAM GROUP
1665 Charleston Road
Mountain View, California 94043
Shareholder Relations: 1-800-321-8321 or 1-415-965-4222
Fund Information: 1-800-331-8331 or 1-415-965-4274
STATEMENT OF ADDITIONAL INFORMATION
JULY 30, 1995
This Statement is not a prospectus but should be read in conjunction with the
Fund's current Prospectus dated July 30, 1995. The Fund's Annual Report for the
fiscal year ended March 31, 1995, is included in this Statement of Additional
Information. To obtain a copy of the Prospectus, call or write The Benham Group.
TABLE OF CONTENTS
PAGE
----
Investment Policies and Techniques 2
Investment Restrictions 3
Portfolio Transactions 5
Valuation of Portfolio Securities 5
Performance 6
Taxes 8
About the Fund 9
Directors and Officers 9
Investment Advisory Services 11
Administrative and Transfer Agent Services 12
Direct Fund Expenses 13
Expense Limitation Agreements 13
Additional Purchase and Redemption Information 14
Other Information 14
Financial Statements 15
1
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
The following paragraphs provide a more detailed description of the securities
and investment practices identified in the Prospectus. Unless otherwise noted,
the policies described in this Statement of Additional Information are not
fundamental and may be changed by the board of directors.
REPURCHASE AGREEMENTS
In a repurchase agreement (repo), the Fund buys a security at one price and
simultaneously agrees to sell it back to the seller at a slightly higher price
on a specified date (usually within seven days) or on demand. The repurchase
price exceeds the purchase price by an amount that reflects an agreed-upon rate
of return and that is unrelated to the interest rate on the underlying security.
Repurchase agreements may involve risks not associated with direct investments
in U.S. government debt securities. If the seller fails to complete the terms of
the agreement, the Fund may experience delays in recovering its cash or incur
costs in the disposal of securities it has purchased under the agreement. The
Fund could also suffer a loss if the securities decline in value before they can
be sold in the open market.
To minimize any risks associated with repurchase agreements, the Fund
(1) Invests no more than 10% of its total assets in repurchase agreements of
more than seven days' duration (although the underlying securities usually
will have longer maturities).
(2) Purchases only securities issued by the U.S. government or its agencies,
which are backed by the full faith and credit of the U.S. government, under
repurchase agreements.
(3) Routinely takes delivery of securities subject to repurchase agreements.
(4) Transacts only with banks and primary non-bank U.S. government securities
dealers with whom the Federal Reserve transacts directly and whose
stability and credit are acceptable to the Fund.
(5) Requires the seller to establish and maintain collateral equal to 102% of
the agreed-upon resale price, provided, however, that the board of
directors may determine that a broker-dealer's credit standing is
sufficient to allow collateral to fall as low as 101% of the agreed-upon
resale price before the broker-dealer deposits additional securities with
the Fund's custodian.
Under the Investment Company Act of 1940, repurchase agreements are considered
to be loans.
WHEN-ISSUED SECURITIES AND FORWARD-COMMITMENT AGREEMENTS
The Fund may engage in securities transactions on a when-issued or
forward-commitment basis in which the transaction price and yield are each fixed
at the time the commitment is made, but payment and delivery occur at a future
date (typically 15 to 45 days later).
When purchasing securities on a when-issued or forward-commitment basis, the
Fund assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. While the Fund
2
<PAGE>
will make commitments on a when-issued or forward-commitment basis to purchase
or sell securities, it may nevertheless sell the securities before the
settlement date if doing so is deemed advisable as a matter of investment
strategy.
In purchasing securities on a when-issued or forward-commitment basis, the Fund
will establish and maintain until the settlement date a segregated account
consisting of cash, U.S. government securities, and other high-quality liquid
debt securities in an amount sufficient to meet the purchase price. When the
time comes to pay for when-issued securities, the Fund will meet its obligations
with available cash, through the sale of securities, or, although it would not
normally expect to do so, through sales of the when-issued securities themselves
(which may have a market value greater or less than the Fund's payment
obligation). Selling securities to meet when-issued or forward-commitment
obligations may generate capital gains or losses.
There is a risk that the party with whom the Fund enters into a
forward-commitment agreement will not uphold its commitment, which could cause
the Fund to miss a favorable price or yield opportunity or to suffer a loss. To
minimize this risk, the Fund enters into when-issued or forward-commitment
transactions only with banks and broker-dealers who are recognized by the Board
of Governors of the Federal Reserve System as primary dealers in U.S. government
securities.
The advisor limits when-issued and forward-commitment transactions to 20% of the
Fund's net assets. No more than 10% of the Fund's net assets may be committed to
transactions in which the settlement date occurs more than 30 days after the
trade date.
ROLL TRANSACTIONS
The Fund may sell a security and at the same time make a commitment to purchase
the same or a comparable security at a future date and specified price.
Conversely, the Fund may purchase a security and at the same time make a
commitment to sell the same or a comparable security at a future date and
specified price. These types of transactions are executed simultaneously in what
are known as "dollar-roll" or "cash and carry" transactions. For example, a
broker-dealer may seek to purchase a particular security that the Fund owns. The
Fund will sell that security to the broker-dealer and simultaneously enter into
a forward-commitment agreement to buy it back at a future date. This type of
transaction generates income for the Fund if the dealer is willing to execute
the transaction at a favorable price in order to acquire a specific security. As
an operating policy, the Fund will limit roll transactions to 30% of net assets.
In engaging in roll transactions, the Fund will maintain until the settlement
date a segregated account consisting of cash, cash equivalents, or high-quality
liquid securities in an amount sufficient to meet the purchase price, as
described above.
INVESTMENT RESTRICTIONS
The Fund's investment restrictions are set forth below. Except for those
designated as operating policies, these restrictions are fundamental and may not
be changed without the approval of "a majority of the outstanding voting
securities" of the Fund as defined in the Investment Company Act of 1940. Unless
otherwise indicated, percentage limitations included in the restrictions apply
at the time the Fund enters into a transaction.
3
<PAGE>
The Fund may not
(1) Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities) if,
as a result (a) more than 5% of its total assets would be invested in the
securities of that issuer, or (b) the Fund would hold more than 10% of the
outstanding voting securities of that issuer.
(2) Borrow amounts in excess of 33-1/3% of the market value of its total
assets, and then only from a bank and as a temporary measure to satisfy
redemption requests or for extraordinary or emergency purposes, and
provided that immediately after any such borrowing there is an asset
coverage of at least 300 per centum for all such borrowings. To secure any
such borrowing, the Fund may pledge or hypothecate not in excess of 33-1/3%
of the value of its total assets. The Fund will not purchase any security
while borrowings representing more than 5% of its total assets are
outstanding.
(3) Act as an underwriter of securities issued by others.
(4) Invest more than 25% of its assets in any one industry (this restriction
does not apply to securities of the U.S. government or its corporate
instrumentalities or agencies or to certificates of deposit or bankers'
acceptances of U.S. commercial banks having assets over $10 billion).
(5) Purchase or sell real estate, commodities, or commodity contracts, or buy
or sell foreign exchange.
(6) Engage in any short-selling operations.
(7) Lend money other than through the purchase of debt securities in accordance
with its investment policies (management considers that this restriction
precludes purchase of other than publicly held debt securities).
(8) Purchase any equity securities in any companies, including warrants or
bonds with warrants attached, or any preferred stocks, convertible bonds,
or convertible debentures.
(9) Purchase any debt securities that are not rated AA or AAA, or the
equivalent thereof, by either of the major statistical rating services
(Moody's or Standard & Poor's) or that, in the Fund's opinion, are the
equivalent thereof.
(10) Engage in margin transactions or in transactions involving puts, calls,
straddles, or spreads.
(11) Purchase securities for which the Fund might be liable for further payment
or liability.
(12) Invest in portfolio securities that the Fund may not be free to sell to the
public without registering under the Securities Act of 1933 or taking
similar action under other securities laws.
(13) Issue or sell any class of senior security, except to the extent that notes
evidencing temporary borrowings might be deemed such.
(14) Acquire or retain the securities of any other investment company.
4
<PAGE>
(15) Purchase securities of companies in which directors or management personnel
of the Fund or its advisor have a substantial interest. (The Fund may not
purchase or retain securities of any company of which an officer or
director of the Fund or its advisor is an officer, director, or security
holder if such officers and directors, who individually own beneficially
more than one-half of one percent (0.5%) of the shares or securities of
such company, together own beneficially more than 5% of the shares or
securities of such company. Portfolio securities of the Fund may not be
purchased from or sold to the Fund's advisor or its directors, officers, or
employees.)
(16) As a matter of operating policy, acquire securities for the purpose of
exercising control over management.
PORTFOLIO TRANSACTIONS
The Fund's assets are invested by BMC in a manner consistent with the Fund's
investment objectives, policies, and restrictions, and with any instructions the
board of directors may issue from time to time. Within this framework, BMC is
responsible for making all determinations as to the purchase and sale of
portfolio securities and for taking all steps necessary to implement securities
transactions on behalf of the Fund.
In placing orders for the purchase and sale of portfolio securities, BMC will
use its best possible price and execution and will otherwise place orders with
broker-dealers subject to and in accordance with any instructions that the board
of directors may issue from time to time. BMC will select broker-dealers to
execute portfolio transactions on behalf of the Fund solely on the basis of best
price and execution.
U.S. government securities generally are traded in the over-the-counter market
through broker-dealers. A broker-dealer is a securities firm or bank that makes
a market for securities by offering to buy at one price and sell at a slightly
higher price. The difference between the prices is known as a spread.
VALUATION OF PORTFOLIO SECURITIES
The Fund's net asset value per share (NAV) is determined by Benham Financial
Services, Inc. (BFS) at 1:00 p.m. Pacific Time each day the New York Stock
Exchange (NYSE) is open for business. The NYSE has designated the following
holiday closings for 1995: New Year's Day (observed), Washington's Birthday,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day (observed). Although BFS expects the same holiday schedule to be
observed in the future, the NYSE may modify its holiday schedule at any time.
The Fund declares as daily dividends substantially all of its net income, plus
or minus any recognizable gains or losses. Net income equals the return on the
Fund's investment portfolio minus Fund expenses. Income and expenses are accrued
daily. If, on any business day, net income is less than recognized losses,
shares will be redeemed pro rata to offset the difference and to maintain the
Fund's share price at $1.00.
Securities held by the Fund are valued on the basis of amortized cost. This
method involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium paid at the time of
purchase. Although this method provides certainty in valuation, it generally
disregards the effect of fluctuating interest rates on an instrument's market
5
<PAGE>
value. Consequently, the instrument's amortized cost value may be higher or
lower than its market value, and this discrepancy may be reflected in the Fund's
yield. During periods of declining interest rates, for example, the daily yield
on Fund shares computed as described above may be higher than that of a fund
with identical investments priced at market value. The converse would apply in
periods of rising interest rates.
BMC typically completes its trading on behalf of the Fund in various markets
before the NYSE closes for the day. The amortized cost valuation method is
permitted in accordance with Rule 2a-7 under the Investment Company Act of 1940.
Under the Rule, a fund such as CPF II, holding itself out as a money market
fund, must adhere to certain quality and maturity criteria. In particular, such
a fund must limit its investments to U.S. dollar-denominated instruments
determined by its board of directors or trustees to present minimal credit risks
and that are (i) high-grade obligations rated in accordance with applicable
rules in one of the two highest rating categories for short-term obligations by
at least two rating agencies (or by one if only one has rated the obligation),
or (ii) unrated obligations judged by the advisor, under the direction of the
fund's board of directors or trustees, to be of comparable quality. Further,
pursuant to Rule 2a-7, a money market fund must maintain a dollar-weighted
average portfolio maturity of 90 days or less and may not purchase instruments
with remaining maturities in excess of 397 days. As an operating policy, the
Fund maintains a dollar-weighted average maturity of seven days or less.
The directors have established procedures designed to stabilize the Fund's NAV,
to the extent reasonably possible, at $1.00 per share. These procedures require
the Fund's chief financial officer to notify the directors immediately if, at
any time, the Fund's NAV, as determined by using available market quotations,
deviates from its amortized cost per share by .25% or more. If such deviation
exceeds .40%, a meeting of the board of directors' audit committee will be
called to consider what actions, if any, should be taken. If such deviation
exceeds .50%, the Fund's chief financial officer is instructed to adjust daily
dividend distributions immediately to the extent necessary to reduce the
deviation to .50% or lower and to call a meeting of the board of directors to
consider further action.
Actions the board may consider under these circumstances include but are not
limited to (i) selling portfolio securities prior to maturity; (ii) withholding
dividends or distributions from capital; (iii) authorizing a one-time dividend
adjustment; (iv) discounting share purchases and initiating redemptions in kind;
or (v) valuing portfolio securities at market value for purposes of calculating
NAV.
PERFORMANCE
The Fund's yields and total returns may be quoted in advertising and sales
literature. Yields and total returns will vary, and past performance should not
be considered an indication of future results.
Yield quotations for the Fund are based on the change in the value of a
hypothetical investment (excluding realized gains and losses from the sale of
securities and unrealized appreciation and depreciation of securities) over a
seven-day period (base period) and stated as a percentage of the investment at
the start of the base period (base-period return). The base-period return is
then annualized by multiplying it by 365/7, with the resulting yield figure
carried to at least the nearest hundredth of one percent.
Calculations of effective yield begin with the same base-period return used to
calculate yield, but the return is then annualized to reflect weekly compounding
according to the following formula:
6
<PAGE>
365/7
Effective Yield = [(Base-Period Return + 1) ] - 1
For the seven-day period ended March 31, 1995, the Fund's yield was 5.28%, and
its effective yield was 5.42%.
Total returns quoted in advertising and sales literature reflect all aspects of
the Fund's return, including the effect of reinvesting dividends and capital
gain distributions and any change in the Fund's net asset value during the
period.
Average annual total returns are calculated by determining the growth or decline
in value of a hypothetical historical investment in the Fund over a stated
period, and then calculating the annually compounded percentage rate that would
have produced the same result if the rate of growth or decline in value had been
constant throughout the period. For example, a cumulative total return of 100%
over ten years would produce an average annual total return of 7.18%, which is
the steady annual rate that would equal 100% growth on a compounded basis in ten
years. While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that the Fund's performance is
not constant over time but changes from year to year, and that average annual
total returns represent averaged figures as opposed to actual year-to-year
performance.
In addition to average annual total returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be quoted
as a percentage or as a dollar amount and may be calculated for a single
investment, a series of investments, or a series of redemptions over any time
period. Performance information may be quoted numerically or in a table, graph,
or similar illustration.
The Fund's performance may be compared with the performance of other mutual
funds tracked by mutual fund rating services or with other indexes of market
performance. This may include comparisons with funds that, unlike Benham funds,
are sold with a sales charge or deferred sales charge. Sources of economic data
that may be used for making such comparisons may include, but are not limited
to, U.S. Treasury bill, note, and bond yields, money market fund yields, U.S.
government debt and percentage held by foreigners, the U.S. money supply, net
free reserves, and yields on current-coupon GNMAs (source: Board of Governors of
the Federal Reserve System); the federal funds and discount rates (source:
Federal Reserve Bank of New York); yield curves for U.S. Treasury securities and
AA/AAA-rated corporate securities (source: Bloomberg Financial Markets); yield
curves for AAA-rated tax-free municipal securities (source: Telerate); yield
curves for foreign government securities (sources: Bloomberg Financial Markets
and Data Resources, Inc.); total returns on foreign bonds (source: J.P. Morgan
Securities Inc.); various U.S. and foreign government reports; the junk bond
market (source: Data Resources, Inc.); the CRB Futures Index (source: Commodity
Index Report); the price of gold (sources: London a.m./p.m. fixing and New York
Comex Spot Price); rankings of any mutual fund or mutual fund category tracked
by Lipper Analytical Services, Inc. or Morningstar, Inc.; mutual fund rankings
published in major nationally distributed periodicals; data provided by the
Investment Company Institute; Ibbotson Associates, Stocks, Bonds, Bills, and
Inflation; major indexes of stock market performance; and indexes and historical
data supplied by major securities brokerage or investment advisory firms. The
Fund may also utilize reprints from newspapers and magazines furnished by third
parties to illustrate historical performance.
7
<PAGE>
The Fund's shares are sold without a sales charge (load). No-load funds offer an
advantage to investors when compared to load funds with comparable investment
objectives and strategies. If an investor pays $10,000 to buy shares of a load
fund with an 8.5% sales charge, $850 of that $10,000 is paid as a commission to
a salesperson, leaving only $9,150 to put to work for the investor. Over time,
the difference between paying a sales load and not paying one can have a
significant effect on an investor's total return. The Mutual Fund Education
Alliance provides a comparison of $10,000 invested in each of two mutual funds,
one with an 8.5% sales load and one without a sales load. Assuming a compounded
annual growth rate of 10% for both investments, the no-load fund investment is
worth $25,937 after ten years, and the load fund investment is worth only
$23,732.
The Benham Group has distinguished itself as an innovative provider of low-cost
true no-load mutual funds. Among other innovations, The Benham Group established
the first no-load fund investing primarily in zero-coupon U.S. Treasury
securities, the first no-load double tax-free California money market and
short-term bond funds, the first no-load adjustable rate government securities
fund, and the first no-load utilities fund designed to pay monthly dividends.
TAXES
The Fund intends to qualify annually as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986 (the Code) as amended. By so
qualifying, the Fund will not incur federal income taxes on its net investment
income and on net realized capital gains to the extent distributed to
shareholders.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax at the
Fund level. To avoid the tax, the Fund must distribute during each calendar year
an amount equal to the sum of (1) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) at
least 98% of its capital gains in excess of capital losses (adjusted for certain
ordinary losses) for a one-year period generally ending on October 31 of the
calendar year, and (3) all ordinary income and capital gains for previous years
that were not distributed during such years.
Under the Code, dividends derived from interest, and any short-term capital
gains, are taxable to shareholders as ordinary income for federal and state tax
purposes, regardless of whether such dividends are taken in cash or reinvested
in additional shares. Distributions made from the Fund's net realized long-term
capital gains (if any) and designated as capital gain dividends are taxable to
shareholders as long-term capital gains, regardless of the length of time shares
are held. Corporate investors are not eligible for the dividends-received
deduction with respect to distributions from the Fund. A distribution will be
treated as paid on December 31 of a calendar year if it is declared by the Fund
in October, November or December of the year with a record date in such a month
and paid by the Fund during January of the following year. Such distributions
will be taxable to shareholders in the calendar year the distributions are
declared, rather than the calendar year in which the distributions are received.
The information above is only a summary of some of the tax considerations
affecting the Fund and its shareholders. No attempt has been made to discuss
individual tax consequences. To determine whether the Fund is a suitable
investment based on his or her situation, a prospective investor may wish to
consult a tax advisor.
8
<PAGE>
ABOUT THE FUND
Capital Preservation Fund II, Inc. was organized as a California corporation on
April 2, 1980. The Fund is authorized to issue ten billion (10,000,000,000)
shares of common stock, which may be issued in two or more series. Of the ten
billion shares, five billion (5,000,000,000) are designated "Series A Common
Stock." The remaining five billion shares may be designated and classified as
additional series from time to time at the discretion of the board of directors.
Each share of Series A Common Stock is entitled to one vote and to equal
participation in dividends and distributions. Fund shares are fully paid and
nonassessable when issued and have no preemptive, conversion, exchange, or
similar rights. Fund shares are transferable without restriction.
Each shareholder is entitled to cast one vote for each share held in his or her
name as of the record date for a shareholder meeting. Under California
Corporations Code Section 708, shareholders have the right to cumulate votes in
the election (or removal) of directors. For example, if six directors are
proposed for election, a shareholder may cast six votes for a single candidate,
or three votes for each of two candidates, etc.
CUSTODIAN BANK: State Street Bank and Trust Company, 225 Franklin Street,
Boston, MA 02101, is custodian of the Fund's assets. Services provided by the
custodian bank include (i) settling portfolio purchases and sales, (ii)
reporting failed trades, (iii) identifying and collecting portfolio income, and
(iv) providing safekeeping of securities. The custodian takes no part in
determining the Fund's investment policies or in determining which securities
are sold or purchased by the Fund.
INDEPENDENT AUDITORS: KPMG Peat Marwick LLP, 3 Embarcadero Center, San
Francisco, California 94111, serve as the Fund's independent auditors. KPMG
audits the annual report and provides tax and other services.
DIRECTORS AND OFFICERS
The Fund's activities are overseen by a board of directors, including five
independent directors. The individuals listed below whose names are marked by an
asterisk (*) are "interested persons" of the Fund (as defined in the Investment
Company Act of 1940) by virtue of, among other considerations, their affiliation
with either the Fund; the Fund's investment advisor, Benham Management
Corporation (BMC); the Fund's agent for transfer and administrative services,
Benham Financial Services, Inc. (BFS); the Fund's distribution agent, Benham
Distributors, Inc. (BDI); the parent corporation, Twentieth Century Companies,
Inc. (TCC) or TCC's subsidiaries; or other funds advised by BMC. Each director
listed below serves as a trustee or director of other funds in The Benham Group.
Unless otherwise noted, dates in parentheses indicate the dates the director or
officer began his or her service in a particular capacity. The directors and
officers' address is 1665 Charleston Road, Mountain View, California 94043 and
4500 Main Street, Kansas City, Missouri 64111.
*JAMES M. BENHAM, chairman of the board of directors (1980). Mr. Benham is also
chairman of the boards of BFS (1985), BMC (1971), and BDI (1988); president of
BMC (1971), and BDI (1988); and a member of the board of governors of the
Investment Company Institute (1988) and the Mutual Fund Education Alliance
(formerly the No-Load Mutual Fund Association, 1974). Mr. Benham has been in the
securities business since 1963, and he frequently comments through the media on
economic conditions, investment strategies, and the securities markets.
9
<PAGE>
RONALD J. GILSON, independent director (1995); Charles J. Meyers Professor of
Law and Business at Stanford Law School (1979) and the Mark and Eva Stern
Professor of Law and Business at Columbia University School of Law (1992);
counsel to Marron, Reid & Sheehy (a San Francisco law firm, 1984).
MYRON S. SCHOLES, independent director (1980). Mr. Scholes is a principal of
Long-Term Capital Management (1993). He is also Frank E. Buck Professor of
Finance at the Stanford Graduate School of Business (1983) and a director of
Dimensional Fund Advisors (1982) and the Smith Breeden Family of Funds (1992).
From August 1991 to June 1993, Mr. Scholes was a managing director of Salomon
Brothers Inc. (securities brokerage).
KENNETH E. SCOTT, independent director (1980). Mr. Scott is Ralph M. Parsons
Professor of Law and Business at Stanford Law School (1972) and a director of
RCM Capital Funds, Inc. (June 1994).
EZRA SOLOMON, independent director (1980). Mr. Solomon is Dean Witter Professor
of Finance Emeritus at the Stanford Graduate School of Business, where he served
as Dean Witter Professor of Finance from 1965 to 1990, and a director of
Encyclopedia Britannica.
ISAAC STEIN, independent director (1992). Mr. Stein is former chairman of the
board (1990 to 1992) and chief executive officer (1991 to 1992) of Esprit de
Corp. (clothing manufacturer). He is a member of the board of Raychem
Corporation (electrical equipment, 1993), president of Waverley Associates, Inc.
(private investment firm, 1983), and a director of ALZA Corporation
(pharmaceuticals, 1987). He is also a trustee of Stanford University (1994) and
chairman of Stanford Health Services (hospital, 1994).
*JAMES E. STOWERS III, director (1995); president and director, Twentieth
Century Investors, Inc.; president and director, TCI Portfolios, Inc., Twentieth
Century World Investors, Inc., Twentieth Century Premium Reserves, Inc.,
Twentieth Century Capital Portfolios, Inc., Twentieth Century Companies, Inc.,
Investors Research Corporation and Twentieth Century Services, Inc.
JEANNE D. WOHLERS, independent director (1984). Ms. Wohlers is a private
investor and an independent director and partner of Windy Hill Productions, LP.
Previously, she served as vice president and chief financial officer of Sybase,
Inc. (software company, 1988 to 1992).
*BRUCE R. FITZPATRICK, vice president, chief financial officer, and treasurer
(1984).
*JOHN T. KATAOKA, president, and chief executive officer (1984).
*DOUGLAS A. PAUL, secretary (1988), vice president (1990), and general counsel
(1990).
*ANN N. MCCOID, controller (1987).
The table on the next page summarizes the compensation that the directors of
Capital Preservation Fund II received from the Fund for the Fund's fiscal year
ended March 31, 1995, as well as the compensation received for serving as a
director or trustee of all other Benham funds.
10
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<TABLE>
<CAPTION>
DIRECTOR COMPENSATION FOR THE FISCAL YEAR ENDED
MARCH 31, 1995
- --------------------------------------------------------------------------------------------------------------------
NAME OF AGGREGATE PENSION OR ESTIMATED TOTAL
DIRECTOR COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS COMPENSATION
FROM ACCRUED AS PART OF UPON RETIREMENT FROM FUND AND
THE FUND FUND EXPENSES FUND COMPLEX*
PAID TO DIRECTORS
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ronald J. Gilson+ $0 Not Applicable Not Applicable $0
- --------------------------------------------------------------------------------------------------------------------
Myron S. Scholes $2,379 Not Applicable Not Applicable $61,375
- --------------------------------------------------------------------------------------------------------------------
Kenneth E. Scott $2,946 Not Applicable Not Applicable $67,375
- --------------------------------------------------------------------------------------------------------------------
Ezra Solomon $2,589 Not Applicable Not Applicable $71,875
- --------------------------------------------------------------------------------------------------------------------
Isaac Stein $2,483 Not Applicable Not Applicable $65,875
- --------------------------------------------------------------------------------------------------------------------
Jeanne D. Wohlers $2,552 Not Applicable Not Applicable $68,625
- --------------------------------------------------------------------------------------------------------------------
+ Nominated on April 3, 1995.
* The Benham Group fund complex currently consists of 41 investment companies.
</TABLE>
As of June 30, 1995, the Fund's officers and directors, as a group, owned less
than 1% of the outstanding shares of each Fund.
INVESTMENT ADVISORY SERVICES
The Fund has an investment advisory agreement with Benham Management Corporation
(BMC) dated June 1, 1995, that was approved by shareholders on May 31, 1995.
BMC is a California corporation and a wholly owned subsidiary of Twentieth
Century Companies (TCC), a Delaware corporation. BMC, as well as BFS and BDI,
became wholly owned subsidiaries of TCC on June 1, 1995, upon the merger of
Benham Management International (BMI), the former parent of BMC, BFS and BDI,
into TCC. BMC has served as investment advisor to the Fund since the Fund's
inception. TCC is a holding company that owns all of the stock of the operating
companies that provide the investment management, transfer agency, shareholder
service, and other services for the Twentieth Century family of funds. James E.
Stowers, Jr., controls TCC by virtue of his ownership of a majority of its
common stock. BMC has been a registered investment advisor since 1971 and is
investment advisor to other funds in The Benham Group.
The Fund's agreement with BMC continues for an initial period of two years and
thereafter from year to year provided that, after the initial two-year period,
it is approved at least annually by vote of a majority of the Fund's outstanding
shares or by vote of a majority of the Fund's directors, including a majority of
those directors who are neither parties to the agreement nor interested persons
of any such party, cast in person at a meeting called for the purpose of voting
on such approval. The agreement is terminable on sixty days' written notice,
either by the Fund or by BMC, to the other party, and terminates automatically
in the event of its assignment.
Pursuant to the investment advisory agreement, BMC provides the Fund with
investment advice and portfolio management services in accordance with the
Fund's investment objectives, policies, and restrictions. BMC determines what
securities will be purchased and sold by the Fund and assists the Fund's
officers in carrying out decisions made by the board of directors.
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For these services, the Fund pays BMC a monthly investment advisory fee based on
a percentage of the Fund's average daily net assets to the following investment
advisory fee rate schedule:
.50% of the first $100 million
.45% of the next $100 million
.40% of the next $100 million
.35% of the next $100 million
.30% of the next $100 million
.25% of the next $1 billion
.24% of the next $1 billion
.23% of the next $1 billion
.22% of the next $1 billion
.21% of the next $1 billion
.20% of the next $1 billion
.19% of average daily net assets over $6.5 billion
Investment advisory fees paid by the Fund to BMC for the fiscal periods ended
March 31, 1995, 1994, and 1993, are indicated in the following table. Fee
amounts are net of reimbursements as described below.
FISCAL PERIOD 1995 INVESTMENT ADVISORY FEES
Year ended 3/31/95 $1,202,074
Year ended 3/31/94 1,253,912
Six months ended 3/31/93* 680,688
* The Fund's fiscal year-end was changed from September 30 to March 31 in 1993.
ADMINISTRATIVE AND TRANSFER AGENT SERVICES
BFS, a wholly owned subsidiary of TCC, is the Fund's agent for transfer and
administrative services. For administrative services, the Fund pays BFS a
monthly fee based on its pro rata share of the dollar amount derived from
applying the average daily net assets of all of the funds in The Benham Group to
the following administrative fee rate schedule:
GROUP ASSETS ADMINISTRATIVE FEE RATE
up to $4.5 billion .11%
up to $6 billion .10
up to $9 billion .09
over $9 billion .08
This fee rate schedule was approved by the board of directors on April 14, 1993,
and became effective on May 1, 1993. Prior to May 1, 1993, the administrative
fee rate schedule ranged from .10% for assets up to $4.5 billion to .07% for
assets over $7.5 billion.
For transfer agent services, the Fund pays BFS a monthly fee of $1.4375 for each
shareholder account maintained and $1.35 for each shareholder transaction
executed during the month.
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Administrative service and transfer agent fees paid by the Fund to BFS for the
fiscal periods ended March 31, 1995, 1994, and 1993, are indicated in the
following table. Fee amounts are net of reimbursements as described below.
FISCAL PERIOD ADMINISTRATIVE FEES TRANSFER AGENCY FEES
Year ended 3/31/95 $270,400 $354,585
Year ended 3/31/94 289,344 421,194
Six months ended 3/31/93* 142,707 222,517
* The Fund's fiscal year-end was changed from September 30 to March 31 in 1993.
DIRECT FUND EXPENSES
The Fund pays certain operating expenses that are not assumed by BMC or BFS.
These include fees and expenses of the independent directors; custodian, audit,
tax preparation, and pricing fees; fees of outside counsel and counsel employed
directly by the Fund; costs of printing and mailing prospectuses, statements of
additional information, proxy statements, notices, confirmations, and reports to
shareholders; fees for registering the Fund's shares under federal and state
securities laws; brokerage fees and commissions; trade association dues; costs
of fidelity and liability insurance policies covering the Fund; costs for
incoming WATS lines maintained to receive and handle shareholder inquiries; and
organizational costs.
EXPENSE LIMITATION AGREEMENTS
BMC has agreed to limit the Fund's expenses to .75% of the Fund's average daily
net assets during the year ending May 31, 1996.
BMC may recover amounts absorbed on behalf of the Fund during the preceding 11
months if, and to the extent that, for any given month, the Fund's expenses were
less than the expense limit in effect at that time.
The expense limit for the year ended May 31, 1995 was .75% of average daily net
assets.
The former and current expense limitation agreements did not and do not apply to
extraordinary expenses, such as brokerage commissions and taxes.
Net amounts absorbed or recouped for the fiscal periods ended March 31, 1995,
1994, and 1993, are indicated in the table below.
FISCAL PERIOD NET AMOUNTS ABSORBED (RECOUPED)
BY BMC OR BFS
Year ended 3/31/95 $43,426
Year ended 3/31/94 85,055
Six months ended 3/31/93* 38,373
* The Fund's fiscal year-end was changed from September 30 to March 31 in 1993.
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ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Fund's shares are continuously offered at net asset value. Share
certificates are issued (without charge) only when requested in writing.
Certificates are not issued for fractional shares. Dividend and voting rights
are not affected by the issuance of certificates.
The Benham Group may reject or limit the amount of an investment to prevent any
one shareholder or affiliated group from controlling the Fund or one of its
portfolios; to avoid jeopardizing the Fund's tax status; or whenever, in
management's opinion, such rejection or limitation is in the Fund's best
interest.
As of June 30, 1995, to the knowledge of the Fund, no shareholder was the record
holder or beneficial owner of 5% or more of the Fund's total shares outstanding.
The Benham Group charges neither fees nor commissions on the purchase and sale
of Benham fund shares. However, BFS may charge fees for special services
requested by a shareholder or necessitated by acts or omissions of a
shareholder. For example, BFS may charge a fee for processing dishonored
investment checks or stop-payment requests. BFS charges $10 per hour for account
research requested by investors. This charge will be assessed, for example, when
a shareholder request requires more than one hour of research on historical
account records. The fees charged are based on the estimated costs of performing
shareholder-requested services and are not intended to increase income.
Share purchases and redemptions are governed by California law.
OTHER INFORMATION
The Fund's investment advisor, Benham Management Corporation (BMC), has been
continuously registered with the Securities and Exchange Commission (SEC) under
the Investment Advisers Act of 1940 since December 14, 1971. The Fund has filed
a registration statement under the Securities Act of 1933 and the Investment
Company Act of 1940 with respect to the shares offered. Such registrations do
not imply approval or supervision of the Fund or the advisor by the SEC.
For further information, refer to the registration statement and exhibits on
file with the SEC in Washington, D.C. These documents are available upon payment
of a reproduction fee. Statements in the Prospectus and in this Statement of
Additional Information concerning the contents of contracts or other documents,
copies of which are filed as exhibits to the registration statement, are
qualified by reference to such contracts or documents.
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