AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON 4/30/98
FILE NOS: 2-28049
811-1586
SECURITIES AND EXCHANGE COMMISSION
----------------------------------
Washington, D.C. 20549
FORM N-1A
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REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X /
Pre-Effective Amendment No. _______ / /
Post-Effective Amendment No. 48 / X /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY / X /
ACT OF 1940
Amendment No. 48
(Check appropriate box or boxes.)
THE KAUFMANN FUND, INC.
-----------------------
(Exact name of Registrant as Specified in Charter)
140 E. 45TH STREET, 43RD FLOOR
NEW YORK, NEW YORK 10017
-------------------------
(Address of Principal Executive Office)
Registrant's Telephone Number, including Area Code:
212-922-0123
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MARTIN V. MILLER, ESQUIRE, 140 E. 45TH STREET, 43RD FLOOR
NEW YORK, NEW YORK 10017 - 212-922-0123
------------------------------------
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as
practicable following effective date.
It is proposed that this filing will become effective (check appropriate box):
/ X / immediately upon filing pursuant to paragraph (b)
/ / on (DATE) pursuant to paragraph (b)
<PAGE>
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
A Rule 24f-2 Notice for the year ended December 31, 1997
was filed on March 26, 1998.
TOTAL NUMBER OF PAGES ____
EXHIBIT INDEX BEGINS
ON PAGE ____
<PAGE>
FORM N-1A
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CROSS REFERENCE SHEET
---------------------
Form N-1A PART A
- ----------------
ITEM # PROSPECTUS LOCATION
- ------ -------------------
1. Cover Page.................... Cover Page
2. Synopsis...................... Summary and Fee Table
3. Condensed Financial Schedule of Selected per Share
Information................... Data and Ratios, Financial Highlights
4. General Description of The Fund, Investment Objective
Registrant.................... and Policies, The Investment
Policies Particularized,
Investment Risks, Portfolio
Turnover
5. Management of the Fund........ Management of the Fund
5A. Management Discussion of Management's Discussion of
Fund Performance.............. Fund Performance
6. Capital Stock and Other
Securities..................... Capital Stock
7. Purchase of Securities Purchase of Fund Shares,
Being Offered.................. Account Statements,
Determination of Net Asset
Value, Distribution Plan,
Special Investor Services,
Service Fees
8. Redemption or
Repurchase...................... Redemption of Shares
9. Pending Legal Proceedings....... N/A
<PAGE>
FORM N-1A PART B
- ----------------
LOCATION IN STATEMENT
ITEM # OF ADDITIONAL INFORMATION
- ------ -------------------------
10. Cover Page.............. Cover Page
11. Table of Contents....... Table of Contents
12. General Information See Item "The Fund" in
and History............. Prospectus
13. Investment Objectives Investment Objective and
and Policies............ Policies, Investment
Restrictions
14. Management of the Fund.. Management of the Fund
15. Control Persons and
Principal Holders of Principal Holders of
Securities.............. Securities
16. Investment Advisory Investment Advisory Services,
and Other Services...... Custodian, Auditor, See item
"Transfer Agent and Custodian"
in Prospectus
17. Brokerage Allocation and
Other Practices......... Brokerage Allocation
18. Capital Stock and See item "Capital Stock" in
Other Securities........ Prospectus
19. Purchase, Redemption and Purchase and Redemption of
Pricing of Securities Shares, Special Investor
Being Offered............ Services, Distribution Plan.
See "Purchase of Fund Shares" and
"Determination of Net Asset Value"
in Prospectus
20. Tax Status............... Taxes, Dividends and Capital
Gains, See same heading in Prospectus
21. Underwriters............. N/A
<PAGE>
FORM N-1A PART B (Continued)
- ----------------------------
LOCATION IN STATEMENT
ITEM # OF ADDITIONAL INFORMATION
- ------ -------------------------
22. Calculations of Performance Additional Performance Information
Data...................... for the Fund
23. Financial Statements...... Financial Statements
<PAGE>
FORM N-1A PART C
- ----------------
ITEM # LOCATION IN PART C
- ------ ------------------
24. Financial Statements Financial Statements and
and Exhibits........... Exhibits
25. Persons Controlled by
or Under Common Control Persons Controlled by or Under
with Registrant........ Common Control with Registrant
26. Number of Holders of Number of Holders of
Securities............. Securities
27. Indemnification........ Indemnification
28. Business and Other
Connections of Business and Other Connections
Investment Advisor..... of Investment Advisor
29. Principal Underwriter.. Principal Underwriter
30. Location of Accounts Location of Accounts and
and Records............ Records
31. Management Services.... Management Services
32. Undertakings........... Undertakings
<PAGE>
T H E K A U F M A N N F U N D, I N C.
P R O S P E C T U S
M A Y 1, 1 9 9 8
__________________________________________
<PAGE>
PART A
<PAGE>
PROSPECTUS MAY 1, 1998
THE KAUFMANN FUND, INC.
140 EAST 45TH STREET, 43RD FLOOR
NEW YORK, NEW YORK 10004
(212) 922-0123
FOR HELP IN COMPLETING QUESTIONS CONCERNING FOR CURRENT NET ASSET
YOUR APPLICATION: SHAREHOLDERS ACCOUNTS: VALUE PER SHARE:
1-800-261-0555 1-800-261-0555 (212) 661-4699
INVESTMENT OBJECTIVE - CAPITAL APPRECIATION
The Fund seeks capital appreciation by investing principally in common stocks.
SHARE SALES AT NET ASSET VALUE
Shares are sold at net asset value. The Fund has adopted a Rule 12b-1 plan
whereby up to .75% of the Fund's assets per year may be utilized currently for
distribution expenses. The Fund charges 0.2% in connection with each redemption
of Fund shares acquired after February 1, 1985.
MINIMUM INITIAL INVESTMENT
The minimum initial investment is $1,500 for regular accounts. For IRA accounts,
for Automatic Investment Plans and for Payroll Deduction Plans the minimum
initial investment is $500.
PLANS AVAILABLE
The Fund offers Automatic Investment Plans, Payroll Deduction Plans, Systematic
Withdrawal Accounts and The Kaufmann/Reserve Fund Money Market Switch Plan. The
Fund also offers Individual Retirement Accounts ("IRA"s), 401(k) and 403(b)
Plans. See "Special Investor Services," page ___.
The Prospectus sets forth concisely, the information about the Fund that a
prospective investor ought to know before investing. Investors are advised to
read and retain this prospectus for future reference. Additional information
about the Fund has been filed with the Securities and Exchange Commission and is
available upon request without charge. A Statement of Additional Information,
dated the date of this Prospectus, is hereby incorporated by reference into this
Prospectus and is available without charge upon request to the Fund at the
address or telephone number shown above. The SEC maintains a Web Site
(http://www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference and other information regarding registrants
that file electronically with the SEC.
<PAGE>
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.
<PAGE>
TABLE OF CONTENTS
Page(s)
SUMMARY . . . . . . . . . . .
FEE TABLE . . . . . . . . . . .
CONDENSED FINANCIAL INFORMATION . . . . . .
THE FUND . . . . . . . . . . .
INVESTMENT OBJECTIVES AND POLICIES . . . . . .
THE INVESTMENT POLICIES PARTICULARIZED . . . . .
INVESTMENT RISKS . . . . . . . . .
PORTFOLIO TURNOVER. . . . . . . . . .
MANAGEMENT OF THE FUND . . . . . . . . .
Investment Advisor . . . . . . . .
PURCHASE OF FUND SHARES . . . . . . . .
By Mail . . . . . . . . .
By Telephone . . . . . . . .
By Bank Wire . . . . . . . .
Through Broker-Dealers . . . . . .
General . . . . . . . . .
Account Statements . . . . . . . . .
REDEMPTION OF SHARES . . . . . . . .
General . . . . . . . . .
Good Order for Redemption Requests . . . .
By Mail . . . . . . . . .
By Telephone, Telegram or Overseas
Cable . . . . . . . . .
Accuracy of Investor Account Information . .
Redemption at the Option of the Fund . . .
Redemption in Kind . . . . . . .
TAXES, DIVIDENDS AND CAPITAL GAINS . . . . . .
CAPITAL STOCK . . . . . . . . . .
<PAGE>
Page(s)
DETERMINATION OF NET ASSET VALUE . . . . . .
SPECIAL INVESTOR SERVICES . . . . . . .
Money Market Switch Plan . . . . . . .
Automatic Investment and
Systematic Withdrawal Plans . . . . . .
Retirement Plans and IRA Accounts . . . . .
Shareholder Statements and Reports . . . . .
DISTRIBUTION PLAN . . . . . . . . .
SHAREHOLDER SERVICING AND TRANSFER AGENT
AND CUSTODIAN . . . . . . . . . .
APPLICATION . . . . . . . . . .
<PAGE>
SUMMARY
THE FUND
The Kaufmann Fund, Inc. (the "Fund") is an open-end, diversified management
investment company the investment objective of which is capital appreciation.
Production of income is incidental to this objective. The Fund seeks to achieve
its investment objective by investing in common stocks, convertible preferred
stocks and bonds including convertible bonds.
The Fund may also invest, subject to specific percentage limitations, in
warrants, options, restricted securities, the securities of foreign issuers and
in the securities of other investment companies. The Fund may also engage, again
subject to specific percentage limitations, in short selling and in leveraging.
These investment policies are deemed to be speculative. (See the text under the
caption "Investment Objective and Policies" pages ____ through ____ of the
Prospectus and under the caption "Investment Objective, Policies and
Restrictions", pages ____ through ____ of the Statement of Additional
Information, for detailed information.)
PURCHASE OF SHARES
Shares of the Fund are sold at net asset value. Shares of the Fund may be
purchased by mail, by bank wire or telephone, and through broker-dealers (see
"Purchase of Shares" at pages ______). The price at which Fund shares are
offered to the public will vary with fluctuations in the market value of
securities and other assets owned by the Fund.
The Fund has adopted a distribution plan pursuant to which the Fund may
currently incur distribution expenses of up to .75% per year of the Fund's
average daily net assets (see "Distribution Plan" at page ____).
The minimum initial investment is $1,500 ($500 for Individual Retirement
Accounts, Payroll Deduction Plans and Automatic Investment Plan accounts) and
$50 for 403(b) accounts. Subsequent investments may be made at any time in
amounts of $1,000 or more by telephone, (subject to certain restrictions), $100
or more by mail, or $50 or more through the Automatic Investment Plan or,
according to your tax situation, for IRA accounts.
The Fund has available for its investors the following specialized
accounts: a Systematic Withdrawal Plan, Automatic Investment Plan, Payroll
Deduction Plan, Individual Retirement Accounts ("IRAs"), 401(k) and 403(b) Plans
and The Kaufmann/Reserve Fund Money Market Switch Plan (see "Special Investor
Services" at page ___).
1
<PAGE>
SERVICE FEES
The Fund may pay service fees of up to .25% per annum of the Fund's average
daily net assets for personal services to customers by broker dealers and for
the maintenance of shareholder accounts.
REDEMPTION OF SHARES
Shares are redeemable at net asset value, as next determined after receipt
of a redemption request in proper form. The Fund will impose a redemption fee on
Fund shares acquired after February 1, 1985, equal, in the aggregate, to 2/10ths
of 1% of the value of the shares redeemed (see "Redemption of Shares" at pages
______).
INVESTMENT ADVISOR
Edgemont Asset Management Corporation serves as the Fund's investment
advisor.
2
<PAGE>
The Kaufmann Fund, Inc.
FEE TABLE
The following table summarizes your maximum transaction costs from
investing in the Fund and expenses incurred by the Fund based on its current
fiscal year which is a restatement of its most recent completed fiscal year. For
a description of these costs and expenses, see "Management of the Fund" at page
__, and "Distribution Plan" at page __ in this Prospectus. The examples show the
cumulative expenses attributable to a hypothetical $1,000 investment in the Fund
over specified periods.
SHAREHOLDER TRANSACTION EXPENSES:
Sales Load Imposed on Purchases ........................... None
Sales Load Imposed on Reinvested Dividends ................ None
Deferred Sales Load Imposed on Redemptions ................ None
Redemption Fees (As a Percentage of Amount Redeemed,
If Applicable) .......................................... 0.2%(a)
ANNUAL FUND OPERATING EXPENSES (As a Percentage of Average
Net Assets):
Management Fees ........................................... 1.50%
12b-1 Fees ................................................ 0.29%(b)(d)
Service Fees .............................................. 0.08%
Interest Expense .......................................... 0.01%
Other Expenses (after expense reimbursement)............... 0.01%(c)
----
Total Fund Operating Expenses ............................. 1.89%
(a) The Fund imposes a 2/10ths of 1% (0.2%) redemption fee on the redemption
price of the Fund's capital stock shares that are redeemed, if such shares
were purchased after February 1, 1985.
(b) Long-term shareholders may pay more than the economic equivalent of the
maximum permitted front-end sales charges.
(c) Edgemont Asset Management Corporation voluntarily agreed to assume certain
expenses of the Fund that exceeded 2 1/2% of the first $30 million; 2% of
the next $70 million and 1 1/2% of all in excess of $100 million. Absent
such waivers and/or reimbursements, Other Expenses would have been 0.13%
and Total Fund Operating Expenses would have been 2.01%. Edgemont Asset
Management Corporation may agree to assume such expenses in the current
year.
(d) Management has agreed to limit expenditures under the 12b-1 plan to .40% of
the Fund's net assets for its 1998 fiscal year.
EXAMPLES:
As an investor in the Fund, you would incur the following expenses on a
$1,000 investment, assuming (1) 5% annual return, (2) a redemption fee equal to
0.2%, and (3) redemption at the end of each period:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$21 $61 $104 $224
Your $1,000 investment would incur the following expenses, assuming 5%
annual return but no redemption:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$19 $59 $102 $221
The table is provided to assist you in understanding the costs and expenses
of investing in the Fund and your share of the operating expenses which the Fund
incurs. The table and examples are based on the operating expenses for the
Fund's current fiscal year which is a restatement of its last fiscal year. The
table and examples do not represent past or future expense levels, and actual
expenses may be greater or less than those shown. Federal regulations require
the examples to assume a 5% annual return, but actual annual return has varied.
<PAGE>
The Kaufmann Fund, Inc.
FINANCIAL HIGHLIGHTS
Selected Data For A Share Of Capital Stock Outstanding Throughout Each Year
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $5.34 $5.05 $3.76 $3.45 $2.95 $2.65 $1.53 $1.63 $1.11 $0.70
- ----------------------------------------------------------------------------------------------------------------------------------
Income From Investment
Operations:
Net Investment
Income (Loss) (0.060) (0.030) (0.060) (0.06) (0.049) (0.05) (0.05) (0.04) (0.03) -
Net Realized and
Unrealized Gain
(Loss) on Investments 0.795 1.083 1.445 0.37 0.584 0.35 1.25 (0.06) 0.55 0.41
-------- ---------- ---------- ---------- -------- -------- -------- ------- ------- ------
Total From Investment
Operations 0.735 1.053 1.385 0.310 0.535 0.30 1.20 (0.10) 0.52 0.41
- ----------------------------------------------------------------------------------------------------------------------------------
Less Distributions:
From Net Investment
Income 0.205 - - - - - - - - -
From Net Realized Gain - 0.263 0.095 - 0.035 - 0.08 - - -
-------- ---------- ---------- ---------- -------- -------- -------- ------- ------- ------
Total Distributions 0.205 0.263 0.095 0.00 0.035 0.00 0.08 0.00 0.00 0.00
- ----------------------------------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Year $6.37 $5.84 $5.05 $3.76 $3.45 $2.95 $2.65 $1.53 $1.63 $1.11
- ----------------------------------------------------------------------------------------------------------------------------------
Total Return 12.59% 20.91% 36.84% 8.99% 18.18% 11.32% 79.18% (6.14)% 46.85% 58.57%
- ----------------------------------------------------------------------------------------------------------------------------------
Ratios and
Supplemental Data:
Net Assets, End of
Year (In Thousands) $6,008,161 $5,341,311 $3,163,310 $1,592,551 $966,632 $314,371 $141,134 $39,711 $36,370 $5,731
Ratio of Expenses
(After Expense
Reimbursement)
to Average Net
Assets (%) 1.89% 1.93% 2.17% 2.29% 2.53% 2.94% 3.64% 3.45% 2.36% 2.00%
Ratio of Interest
Expense to Average
Net Assets (%) 0.01% 0.01% 0.01% 0.02% 0.03% 0.08% 0.52% - - -
-------- ---------- ---------- ---------- -------- -------- -------- ------- ------- ------
Ratio of Expenses
(After Expense
Reimbursement Less
Interest Expense)
to Average Net
Assets (%) 1.88% 1.92% 2.16% 2.27% 2.50% 2.86% 3.12% 3.45% 2.36% 2.00%
Ratio of Net
Investment Income
(Loss) to Average
Net Assets (%) 1.00% (0.82)% (1.24)% (1.58)% (1.34)% (1.74)% (1.96)% (2.56)% (1.41)% (0.23)%
Portfolio Turnover
Rate (%) 65% 72% 60% 47% 55% 51% 128% 195% 202% 343%
Average Commission Rate+ $0.07 $0.09 -- -- -- -- -- -- -- --
Shares Outstanding
at End of Year
(In Thousands) 942,699 914,522 626,600 424,108 280,157 106,469 53,225 25,980 22,268 5,171
- ------------------------------------------------------------------------------------------------------------------------------------
Borrowings:
Debt Outstanding at
End of Year - - - - $49,000,000 $4,015,965 $3,017,622 - - -
Average Debt
Outstanding
During the Year - - - $3,776,120 4,563,115 3,260,421 2,149,395 - - -
Average Number of
Shares Outstanding
During the Year
(In Thousands) - - - 333,175 182,699 79,977 32,294 - - -
Average Debt Per Share
During the Year - - - $0.01 $0.03 $0.04 $0.06 - - -
</TABLE>
+For fiscal years beginning on or after September 1, 1995, the Fund's average
commission rate per share for security trades on which commissions are charged
requires disclosure.
This information has been examined and reported on by Sanville & Company,
Independent Public Accountants, for the years ended December 31, 1997, 1996,
1995, 1994, 1993, 1992, 1991, 1990 and 1989, by Stavisky, Knittle, Isaacs &
Dichek, Independent Public Accountants, for the years ended December 31, 1988.
4
<PAGE>
THE FUND
The Kaufmann Fund, Inc. (the "Fund"), originally incorporated as a New York
corporation on September 11, 1967, became dormant over the years and did not
again become operational until 1985 when present management assumed control. In
February, 1993 the Fund was reorganized as a Maryland corporation with the same
investment management. The Fund's offices are at 140 E. 45th Street, 43rd Floor,
New York, NY 10017, and its telephone number is (212) 922-0123. The Fund is an
open-end, diversified, management investment company, as defined by the
Investment Company Act of 1940, as amended (the "1940 Act"). As an investment
company, it invests the monies received from the sale of its shares in a
portfolio of securities.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Fund is capital appreciation. Production of
income is incidental to this objective. There is no assurance that the Fund will
achieve its investment objective.
Among factors the Fund considers when selecting investments in companies
are (i) the growth prospects for a company's products, (ii) the economic outlook
for its industry, (iii) a company's new product development, (iv) its operating
management capabilities, (v) the relationship between the price of the security
and its estimated fundamental value, (vi) relevant market, economic and
political environments, and (vii) financial characteristics such as balance
sheet analysis and return on assets.
The Fund's principal investments are in common stocks, convertible
preferred stocks and bonds, including convertible bonds. The Fund may not invest
in real estate limited partnership interests but may invest in master limited
partnership interests that are traded on a national securities exchange. The
Fund may also invest up to 5% of net assets in warrants, up to 25% of the Fund's
net assets in the securities of issuers domiciled in foreign countries and
engage in the purchase and sale of put and call options in an amount of up to
10% of its net assets. The Fund may make short sales of securities in an
aggregate amount not greater than 25% of net assets, and may borrow up to
33-1/3% of net assets. For the leverage obtained by and the restrictions on
borrowing, including the risks thereof, see "Borrowing to Purchase Securities
(Leverage)" at page ____. For the risks involved in investing in foreign
securities, see "Foreign Securities" page ____. For the risks involved in
engaging in short sales and investing in warrants see the text under the
captions "Short Sales and Hedging Operations" page ____ and "Warrants" page
____. For the risks involved in investing in options, see the text under the
caption "Risks Relating to Options" page ____ in the Statement of Additional
Information. The Fund's investment policies concerning options, restricted
securities, short sales, warrants, foreign securities and short-term investing
may be changed without shareholder approval.
5
<PAGE>
The Fund invests primarily in the securities of small and medium-sized
companies (those with sales of less than $500 million) which fall outside of the
Standard & Poor's 500 Index of securities and which securities may be
speculative. The Fund acquires securities on national security exchanges, on
NASDAQ, and in the over-the-counter market, including new issues, and may invest
up to 10% of its net assets in restricted securities, i.e., securities which are
not readily marketable, and in repurchase agreements which mature in seven days
or more. The Fund may also invest up to 10% of its total assets in securities of
other registered investment companies. When the Investment Advisor so
determines, the Fund reserves the right to invest, from time to time,
temporarily for defensive purposes, an unlimited portion of its assets in
investment grade debt securities (rated AA by Standard & Poor's Corp. and Aa by
Moody's Investor Services, Inc.), United States Government securities and
certificates of deposit, and to hold cash. When the Fund invests for defensive
purposes, it may affect the attainment of the Fund's investment objective.
Reference is made to the Statement of Additional Information for additional
descriptions of the Fund's investment policies concerning investing in the
shares of other investment companies, investing in repurchase agreements, the
purchase and sale and the writing of put and covered call options.
THE INVESTMENT POLICIES PARTICULARIZED
DIVERSIFICATION
The Fund is a diversified investment company. A diversified company is one
which meets the following requirements: at least 75% of the value of its total
assets is represented by cash and cash items (including receivables), Government
securities, securities of other investment companies, and other securities for
the purposes of this calculation limited in respect of any one issuer to an
amount not greater in value than 5% of the value of the total assets of such
company and not more than 10% of the outstanding voting securities of such
issuer.
A company which meets these requirements shall not lose its status as a
diversified company because of any subsequent discrepancy between the value of
its various investments and the requirements, so long as any such discrepancy
existing immediately after its acquisition of any security or other property is
neither wholly nor partly the result of such acquisition.
CONCENTRATION
While the Fund will not concentrate its investments, it has reserved the
right to invest up to 25% of the value of its total assets in a particular
industry. This policy of concentration may not be changed without shareholder
approval.
6
<PAGE>
OPTIONS
The Fund may write, purchase and sell put and covered call options, and may
engage in strategies employing combinations thereof. Purchases by the Fund of
put and call option contracts will be conducted so that immediately after
purchase of any such contract the aggregate sum represented by premiums paid for
such option contracts then held by the Fund, after deducting the proceeds of
covered options sold, will not exceed 10% of the Fund's net assets.
A put option purchased by the Fund constitutes a hedge against a decline in
the price of a security owned by the Fund. A call option constitutes a hedge
against an increase in the price of a security which the Fund has sold short.
Gains and losses on investments in options depend on the portfolio manager's
ability to predict correctly the direction of stock prices, interest rates and
other economic factors. Options may fail as hedging techniques in cases where
the price movements of the securities underlying the options do not follow the
price movements of the portfolio securities subject to the hedge. The maximum
loss exposure involved in the purchase of an option is the cost of the option
contract.
See page ___ of Statement of Additional Information for further details.
BORROWING TO PURCHASE SECURITIES (LEVERAGE)
The Fund may employ "leverage" by borrowing money and using it to purchase
additional securities. Leverage increases both investment opportunity and
investment risk. If the investment gains on securities purchased with borrowed
money exceed the interest paid on the borrowing, the net asset value of the
Fund's shares will rise faster than would otherwise be the case. On the other
hand, if the investment gains fail to cover the cost (including interest on
borrowings), or if there are losses, the net asset value of the Fund's shares
will decrease faster than would otherwise be the case.
The Fund may borrow money only from banks and only if, immediately after
the borrowing, the value of its net assets (including borrowings), less its
liabilities (excluding borrowings but including securities borrowed in
connection with short sales) is at least 300% of the amount of the borrowing,
plus all other outstanding borrowings. The amount the Fund can borrow may also
be limited by applicable margin limitations of the Federal Reserve Board.
Briefly, these provide that banks subject to the Federal Reserve Act may not
make a loan for the purpose of buying or carrying "margin stocks" if the loan is
secured directly or indirectly by a margin stock, to the extent that the loan is
greater than the "maximum loan value" of the collateral securing the loan.
"Margin stock" includes, among other securities, stocks registered or having
unlisted trading privileges on a national securities exchange, any equity
security not traded on a national securities exchange which the Federal Reserve
Board has determined has the characteristics to warrant being traded on a
national securities exchange, options and
7
<PAGE>
warrants to acquire margin stock and debt convertible into a margin stock or
carrying a warrant or right to purchase a margin stock. A maximum loan value is
assigned by the Federal Reserve Board to specified types of collateral. Puts,
calls and combinations of puts and calls essentially have no loan value.
If, for any reason, (including adverse market conditions) the Fund fails to
meet this asset coverage test, it will be required to reduce borrowings within
three business days to the extent necessary to meet the test. This requirement
may make it necessary to sell a portion of the Fund's portfolio securities at a
time when it is disadvantageous to do so.
RESTRICTED SECURITIES
The Fund may invest up to 10% of the value of its net assets in restricted
securities (including repurchase agreements with maturities of over seven days)
or other illiquid assets. Restricted securities are securities which, at any
particular time, may not be readily and publicly marketable. In valuing such
securities for purposes of computing net asset value, the Board of Directors, or
a person or persons acting under the authority of the Board of Directors, will
be required to make a good faith determination of current value which, in all
cases, will be at a discount from the market value of the same type of
securities of the same company which are not subject to restrictions. The amount
of the discount is based upon the difference between the negotiated price paid
for such securities and the market value of the unrestricted securities at the
time the purchase is agreed upon, but may be increased or reduced, from time to
time, by the Board of Directors, or a person or persons acting under the
authority of the Board of Directors. It is often difficult to sell restricted
securities at a price approximating what is deemed to be their current value. In
addition, there is often a considerable time gap between the decision to sell
restricted securities and the actual sale, which time gap can adversely affect
the price obtainable.
If and when the Fund sells any restricted securities, it may be deemed an
"underwriter" within the meaning of the Securities Act of 1933 with respect
thereto, and registration under the Securities Act of 1933 may be required, in
which case, the Fund may have to bear the expenses of such registration if the
issuer or other person from whom the Fund acquired such securities has not
agreed to bear such expenses. Such expenses of registration may be substantial.
Other than as described, the Fund may not underwrite the securities of other
issuers.
The Fund may also invest in securities eligible for resale under Rule 144A
of the Securities Act of 1933 ("144A securities"). This Rule allows certain
qualified institutional buyers, such as the Fund, to trade in privately placed
securities despite the fact that such securities are not registered under the
Securities Act. The Fund's investment advisor, acting pursuant to procedures
adopted by the Board, will consider the
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<PAGE>
frequency of trades and quotes, the number of dealers and potential purchasers,
dealer undertakings to make a market, the nature of the securities and the
marketplace trades.
A Rule 144A security may become illiquid after purchase and the Fund's
Board of Directors will then determine what, if any action, is required.
SHORT SALES
The Fund may seek to realize additional gains through short sale
transactions in securities listed on one or more national securities exchanges,
or in unlisted securities. Short selling involves the sale of borrowed
securities. At the time a short sale is effected, the Fund incurs an obligation
to replace the security borrowed at whatever its price may be at the time the
Fund purchases it for delivery to the lender. When a short sale transaction is
closed out by delivery of the securities, any gain or loss on the transaction is
taxable as short term capital gain or loss.
Since short selling can result in profits when stock prices generally
decline, the Fund in this manner, can, to a certain extent, hedge the market
risk to the value of its other investments and protect its equity in a declining
market. However, the Fund could, at any given time, suffer both a loss on the
purchase or retention of one security, if that security should decline in value,
and a loss on a short sale of another security, if the security sold short
should increase in value. When a short position is closed out, it may result in
a short term capital gain or loss for federal income tax purposes. Moreover, to
the extent that in a generally rising market the Fund maintains short positions
in securities rising with the market, the net asset value of the Fund would be
expected to increase to a lesser extent than the net asset value of an
investment company that does not engage in short sales. Among the factors which
management may consider in making short sales are a decreasing demand for a
company's products, lower profit margins, lethargic management, and a belief
that a disparity exists between the price of the security and its underlying
assets or other values.
No short sale will be effected which will, at the time of making such short
sale transaction and giving effect thereto, cause the aggregate market value of
all securities sold short to exceed 25% of the value of the Fund's net assets.
The value of the securities of any one issuer that have been shorted by the Fund
is limited to the lesser of 2% of the value of the Fund's net assets or 2% of
the securities of any class of the issuer. In addition, to secure the Fund's
obligation to replace any borrowed security, it will place in a segregated
account, an amount of cash or U. S. Government securities equal to the
difference between the market value of the securities sold short at the time of
the short sale, and any cash or U. S. Government securities originally deposited
with the broker in connection with the short sale (excluding the proceeds of the
short sale). The Fund will thereafter maintain daily the segregated amount at
such a level that the amount deposited in it plus the amount originally
deposited with the broker as collateral will equal the greater of the current
market value of the securities sold short,
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<PAGE>
or the market value of the securities at the time they were sold short. The Fund
may make short sales "against the box", i.e., short sales made when the Fund
owns securities identical to those sold short. Short sales against the box are
not subject to the 25% limitation.
The Fund may only engage in short sale transactions in securities listed on
one or more national securities exchanges or on NASDAQ.
WARRANTS
The Fund also may invest up to 5% of its net assets in warrants. Included
within this amount, but not to exceed 2% of the value of the Fund's net assets
may be warrants which are not listed on the New York or American Stock
Exchanges. A reason for investing in warrants is to permit the Fund to
participate in an anticipated increase in the market value of a security without
having to purchase the security to which the warrants relate. Warrants convey no
rights to dividends or voting rights, but only an option to purchase equity
securities of the issuer at a fixed price. If such securities appreciate, the
warrants may be exercised and sold at a gain, but a loss will be incurred if
such securities decrease in value or the term of the warrant expires before it
is exercised. The 5% limitation does not include warrants acquired by the Fund
in units or attached to other securities.
FOREIGN SECURITIES
Investments will be made primarily in securities of companies domiciled in
the United States, but the Fund has authority to make investments in securities
of issuers domiciled in foreign countries. Such securities involve risks that
are different from those of domestic issuers, including the possibilities of (i)
different political and economic developments, (ii) imposition of governmental
restrictions, (iii) curtailment of dividends or principal through the use of
currency blockage at the source, and (iv) nationalization, expropriation of the
issuer or confiscatory taxation, (v) less regulation of business and industry
practices, and (vi) higher brokerage commissions. Such securities also involve
other considerations such as the then current exchange rate if such issuer does
not pay interest or dividends in U.S. dollars. In addition, it may be more
difficult to obtain and enforce a judgment against a foreign issuer, trading
volume may be substantially less and more volatile, there may be less publicly
available information about the foreign issuer, and foreign issuers generally
are not subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
issuers.
Not more than 25% of the Fund's net assets may be invested in the
securities of issuers domiciled in foreign countries.
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<PAGE>
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, the Fund may lend portfolio
securities constituting up to 30% of its total assets to unaffiliated
broker-dealers, banks or other recognized institutional borrowers of securities,
provided that the borrower at all times maintains cash or equivalent collateral
or provides an irrevocable letter of credit in favor of the Fund equal in value
to at least 100% of the value of the securities loaned. During the time
portfolio securities are on loan, the borrower pays the Fund an amount
equivalent to any dividends or interest paid on such securities, and the Fund
may receive an agreed-upon amount of interest income from the borrower who
delivered equivalent collateral or provided a letter of credit. Loans are
subject to termination at the option of the Fund or the borrower. The Fund may
pay reasonable administrative and custodial fees in connection with a loan of
portfolio securities and may pay a negotiated portion of the interest earned on
the cash or equivalent collateral to the borrower or placing broker. The Fund
does not have the right to vote securities on loan, but could terminate the loan
and regain the right to vote if that were considered important with respect to
the investment.
The primary risk in securities lending is a default by the borrower during
a sharp rise in price of the borrowed security resulting in a deficiency in the
collateral posted by the borrower. The Fund will seek to minimize this risk by
requiring that the value of the securities loaned be computed each day and
additional collateral be furnished each day if required.
The Fund will not lend its portfolio securities to Bowling Green
Securities, Inc., a broker-dealer affiliated with the Investment Advisor.
Other than as set forth above, the Fund will not make loans, except that
the Fund may purchase a portion of an issue of publicly distributed bonds,
debentures or other securities, whether or not the purchase was made upon the
original issue of the securities.
SHORT TERM INVESTMENTS
The Fund may make short term investments when it is deemed desirable to do
so. The Fund may, from time to time, sell a security without regard to the
length of time that it has been held in order to realize a profit or to avoid an
anticipated loss. Short term transactions produce higher portfolio turnover
rates than would otherwise be the case, resulting in the likelihood of larger
expenses (including brokerage commissions) than are incurred by mutual funds
which engage only in long term transactions.
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There is, of course, no assurance that the Fund will obtain any gains from its
short term investments.
INVESTMENT RISKS
The Fund is subject to certain types of risks. It is subject to the risks
of the securities markets in which the portfolio securities of the Fund are
traded. Securities markets are cyclical and the prices of the securities traded
in such markets rise and fall at various times. These cyclical periods may
extend over significant periods of time.
The Fund is also subject to the risk that the Manager will not be
successful in managing the Fund's portfolio. The Manager will make decisions on
buying, selling or holding portfolio securities based upon the skills of the
Manager in interpreting the available economic, financial and market data.
Investors should be aware that an investment in small cap companies may be
more volatile than investments in companies with greater capitalization. The
securities of small cap companies often trade less frequently and in more
limited volume, and may be subject to more abrupt or erratic price movements,
than securities of larger, more established companies. Such companies may have
limited product lines, markets or financial resources, or may depend on a
limited management group.
Investors should be aware that the investment techniques of the Fund will
entail greater than average risk to the extent such techniques are utilized.
Many of these techniques, such as short sales, borrowing money for investment,
the purchase and sale of put and call options, investment in restricted
securities and foreign securities, the lending of portfolio securities and
trading over a short term period are considered to be of a speculative nature
and to the extent put into effect, will result in greater turnover of the Fund's
portfolio securities and greater expense than is customary for most mutual
funds.
Because of the nature of the Fund, the Fund's shares should not be
considered as a complete investment program. When considering an investment in
the Fund, each investor should take into consideration his or her investment
objectives and present and future financial needs as the Fund assumes an above
average risk of loss. The value of the Fund's shares tends to fluctuate to a
greater degree than the shares of funds utilizing more conservative investment
techniques or those having as investment objectives, the conservation of capital
and/or the realization of current income. Accordingly, the Fund is not an
appropriate vehicle for a short term investor or for those investors having
immediate financial requirements. Rather, the Fund is designed for those
investors who invest for the long term and have the financial ability to
undertake greater risk.
Like other investment companies, financial and business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by Edgemont and the Fund's other service providers do not
properly process and calculate date-related information and data from and after
January 1, 2000. This is commonly known as the "Year 2000 Problem." Edgemont is
taking steps to address the Year 2000 Problem with respect to the computer
systems that it uses and to obtain assurances that comparable steps are being
taken by the Fund's other major service providers. At this time, however, there
can be no assurance that these steps will be sufficient to avoid any adverse
impact on the Fund.
PORTFOLIO TURNOVER
Because the Fund's investment approach stresses sensitivity to changes in
the current and projected earnings of the companies represented in its portfolio
and the effect of these changes in the market, the Fund's portfolio turnover
rates may vary significantly from year to year. Moreover, purchases and sales of
the Fund's shares may influence portfolio turnover rates.
The Fund's portfolio turnover rate may vary significantly from year to year
as well as within the year. A 100% turnover rate would occur, for example, if
all the
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<PAGE>
securities in the Fund's portfolio were replaced in a period of one year. A
greater portfolio turnover rate reflects a greater number of securities
transactions. The gain realized on a greater number of portfolio transactions
will be subject to tax. The Fund will be liable for the tax on such gains unless
distributed and, if distributed, shareholders may be proportionately liable (see
"Taxes, Dividends and Capital Gains", page ____). High portfolio turnover
involves correspondingly greater brokerage commission costs to the Fund.
Turnover can be expected to be higher than normal during periods when market
fluctuations are more pronounced. To the extent that the Fund's portfolio
transactions are effected through Bowling Green Securities, Inc. as broker, any
increase in portfolio activity may be beneficial to that firm (and its owner
Hans P. Utsch) because of brokerage commissions payable in connection therewith.
See "Brokerage Allocation" and "Taxes, Dividends and Capital Gains" on pages ___
and ___ of the Statement of Additional Information. For 1995, the Fund had a
portfolio turnover rate of 60%, for 1996 of 72% and for 1997 of 65%.
MANAGEMENT OF THE FUND
INVESTMENT ADVISOR
The Board of Directors has overall responsibility for the management of the
Fund. Edgemont Asset Management Corporation, 140 E. 45th Street, 43rd Floor, New
York, New York 10017 ("Edgemont"), is the Fund's investment advisor. Under the
terms of the Investment Advisory Agreement, Edgemont, for the fee described
below, provides investment management services to the Fund. Edgemont is
responsible for the overall management of the Fund's business affairs. Edgemont
has served as investment advisor to the Fund or its predecessor since 1986.
Mr. Hans P. Utsch is Chairman of the Board, a Director and Secretary and
Mr. Lawrence Auriana is a Director, President and Treasurer of Edgemont. Mr.
Utsch has been engaged in the securities business since 1962 as an analyst,
money manager and investment banker. Mr. Auriana has been engaged in the
securities business since 1965 as an analyst, broker and venture capitalist.
Messrs. Utsch and Auriana co-founded Edgemont in August, 1984, and they have
been responsible for managing the Fund's portfolio since March 15, 1985. Neither
of them acts as a portfolio manager of any other fund or investment company.
The Annual and Semi-Annual Reports of the Fund contain additional
performance information; a copy will be made available upon request and without
charge. They are also available on the Fund's Web site: www.kaufmann.com.
Edgemont (i) determines the composition of the Fund's portfolio, the nature
and timing of the changes therein, and the manner of implementing such changes,
and (ii) provides the Fund with such investment advisory, research and related
services as the Fund may, from time to time, reasonably require for the
investment of its funds.
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Edgemont performs such duties in accordance with any directions it may receive
from the Fund's Board of Directors.
The Fund has permitted Edgemont to use Bowling Green Securities, Inc.
("Bowling Green") as one of the Fund's principal brokers for exchange traded
securities transactions only. Mr. Utsch is the owner of Bowling Green; Mr.
Auriana serves as a registered representative of Bowling Green. Any use of
Bowling Green must be in compliance with Section 17(e) of the Investment Company
Act and the rules thereunder and in accordance with procedures laid down by the
Board of Directors.
Edgemont will receive a fee, payable monthly, for the performance of its
services at an annual rate of 1-1/2% of the average net assets of the Fund. The
fee will be accrued daily for the purpose of determining the offering and
redemption price of the Fund's shares. The advisory fee is higher than that
charged by most other management investment companies.
The Fund's total expenses for the year ending December 31, 1997, before
expense reimbursement were $113,805,469; the net expenses after reimbursement
were $107,216,137 or 1.89% of average net assets after expense reimbursement.
PURCHASE OF FUND SHARES
BY MAIL
ALL PURCHASES MADE BY CHECK SHOULD BE IN U. S. DOLLARS DRAWN ON A U. S.
BANK AND MADE PAYABLE TO THE KAUFMANN FUND, INC. OR IN THE CASE OF A RETIREMENT
ACCOUNT THE CUSTODIAN OR TRUSTEE. THIRD PARTY CHECKS (CHECKS MADE PAYABLE TO THE
INVESTOR AND ENDORSED BY THE INVESTOR TO THE FUND) WILL NOT BE ACCEPTED FOR AN
INITIAL PURCHASE OF FUND SHARES. ALSO THIRD PARTY CHECKS FOR SUBSEQUENT
INVESTMENTS WILL NOT BE ACCEPTED ABSENT SPECIAL PERMISSION.
Shares of the Fund may be purchased at the per share net asset value (see
p. ___) by sending a completed subscription Application (included in the
Prospectus or obtainable from the Fund) to the Transfer Agent, accompanied by a
check payable to The Kaufmann Fund, Inc. in payment for shares. SUBSCRIPTION
APPLICATIONS SHOULD NOT BE SENT TO THE FUND. SUBSCRIPTION APPLICATIONS SENT TO
THE FUND WILL BE FORWARDED TO THE TRANSFER AGENT, AND WILL NOT BE EFFECTIVE
UNTIL RECEIVED BY THE TRANSFER AGENT. The price at which the shares will be
purchased will be their net asset value as determined after receipt of such
subscription by the Transfer Agent. The minimum initial investment by a
shareholder is $1,500 ($500 for IRA Accounts, accounts opened under the
Automatic Investment Plan and Payroll Deduction Plans) or such lower amount as
the Board of Directors of the Fund may, from time to time, establish. Subsequent
purchases by mail (minimum of $100) may be made by sending to the Transfer Agent
the stub from the shareholder statement with the shareholder's full name and
account number along with a check payable to The Kaufmann Fund, Inc. The Fund
will not accept mail orders without payment enclosed, nor will the Fund accept a
conditional purchase order. THE FUND RESERVES THE RIGHT, IN ITS SOLE DISCRETION,
TO REJECT ANY SUBSCRIPTION.
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BY TELEPHONE (ONLY FOR INVESTORS WHO HAVE MADE A WRITTEN ELECTION TO DO SO - SEE
"GENERAL" BELOW)
Subsequent investments may be made by telephone by calling the Transfer
Agent at (800) 261-0555. Telephone purchase orders from existing shareholders
may be placed in an amount ($1,000 minimum or such lower amount as may be
established by the Board of Directors) not exceeding $10,000 or seven times the
shareholder's then current account balance, whichever is less. Telephone orders
will be taken in dollar amounts only, for full and fractional shares. Payment
for shares purchased must be received by the Transfer Agent by the third day. No
bill will be sent to the investor, and it will be the responsibility of the
investor to make payment within the time limitation described herein. If payment
is not received by the Transfer Agent, the shareholder's account will be charged
for the amount of the purchase.
For assistance, shareholders should call the Transfer Agent at (800) 261-0555.
When calling from overseas, please call 1-617-328-5000 and ask for a Kaufmann
Customer Representative.
Investors desiring to make purchases other than by mail or telephone, or to
purchase Fund shares in excess of the allowable limits for telephone purchase
orders may transmit payment for Fund shares by bank wire (see "By Bank Wire",
below).
ACCURACY OF INVESTOR ACCOUNT INFORMATION
The Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. Such procedures may include, among
others, requiring some form of personal identification prior to acting upon
telephonic instructions, providing written confirmations of all such
transactions, and/or tape recording of all telephonic instructions. ASSUMING
PROCEDURES SUCH AS THE ABOVE HAVE BEEN FOLLOWED, NEITHER BOSTON FINANCIAL DATA
SERVICES, INC., THE FUND'S TRANSFER AGENT, NOR THE FUND WILL BE LIABLE FOR ANY
LOSS, COST, OR EXPENSE FOR ACTING UPON AN INVESTOR'S TELEPHONE INSTRUCTIONS. WE
SHALL HAVE AUTHORITY, AS YOUR AGENT, TO REDEEM SHARES IN YOUR ACCOUNT TO COVER
ANY SUCH LOSS. As a result of this policy, the investor will bear the risk of
any loss unless the Fund has failed to follow procedures such as the above.
BY BANK WIRE
Shares of the Fund may be purchased by domestic or overseas bank wire. The
wire order must contain registration instructions (i.e., full names and
addresses of all investors, taxpayer identification number, and the account
number). Shareholders opening an account must telephone in advance to obtain a
new account number. The name of the Fund must appear on the wire for proper
credit. The investor must have the bank wire transmitted to State Street Bank &
Trust Co., ABA #011000028, for credit to Boston Financial Data Services, Inc.
A/C #99050874 further credit
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<PAGE>
(Kaufmann/Shareholder's A/C# and name). Wires received by the Bank will be
executed at the Fund's net asset value per share as next determined after
receipt of the wired funds.
For assistance the shareholder should call the Transfer Agent at (800)
261-0555.
THROUGH BROKER-DEALERS
Investors may, if they so desire, purchase Fund shares through registered
broker-dealers. Such broker-dealers may make a charge to the investor for their
services. Such fees and services may vary in amount among broker-dealers, who
may impose higher initial or subsequent investment requirements than those
established by the Fund. Jack White and Co., Inc. acts as broker-dealer for the
Fund in the state of Texas. In Nebraska, Fund shares are available through state
qualified broker-dealers.
GENERAL
After an initial investment, a shareholder may participate in the telephone
purchase and redemption service only by making a written election to do so. The
election may be on the initial application form or by writing to the Fund, with
the shareholder's signature guaranteed. A shareholder who wants to change any
telephone service option previously elected may do so by filing with the Fund a
letter with instructions with the shareholder's signature guaranteed. (For
guarantee instructions, see "Good Order for Redemption Requests" below.)
ORDER NUMBERS ARE ASSIGNED TO TELEPHONE PURCHASE ORDERS IN ORDER TO
DISTINGUISH PAYMENT FOR THOSE PURCHASE ORDERS FROM MAIL PURCHASE ORDERS. IF AN
INVESTOR WHO UTILIZES THE TELEPHONE PURCHASE ORDER SERVICE FAILS TO INCLUDE THE
ORDER NUMBER ON THE PAYMENT FOR SUCH PURCHASE ORDER, THE INVESTOR SHOULD BE
AWARE THAT THE FUND MAY TREAT THIS AS A SEPARATE AND ADDITIONAL PURCHASE ORDER.
IF SUCH AN EVENT OCCURS, RESULTING FROM THE INVESTOR'S FAILURE TO INCLUDE THE
ORDER NUMBER ASSIGNED TO THE PURCHASE ORDER, THE INVESTOR'S ACCOUNT WILL BE
CHARGED FOR ANY LOSS INCURRED FROM THE CANCELLATION OF THE PURCHASE ORDER. IN
THE EVENT THE SHAREHOLDER'S ACCOUNT BALANCE IS INSUFFICIENT TO COVER THE LOSS,
EDGEMONT ASSET MANAGEMENT CORPORATION WILL REIMBURSE THE FUND FOR THE
DIFFERENCE: CONVERSELY, IF THE CANCELLATION RESULTS IN A GAIN, EDGEMONT ASSET
MANAGEMENT CORPORATION WILL BE ENTITLED TO THE GAIN. SEE "ACCURACY OF INVESTOR
ACCOUNT INFORMATION" PAGE ____.
Neither the Fund nor the Transfer Agent will accept checks drawn on a
foreign bank unless provision is made for payment through a U. S. bank in U. S.
dollars.
If payment for any purchase order is not received by the Fund or the
Transfer Agent, as specified herein, or if the investor's check is not honored
upon presentment,
16
<PAGE>
the order is subject to cancellation by the Fund, and the purchaser's existing
account with the Fund will be immediately charged for any loss incurred.
While redemption proceeds will normally be paid within 3 days after
redemption, if an investor who has purchased Fund shares, either by the issuance
of a check or through an automatic investment plan, submits a request for
redemption, the Fund's agent will delay payment of the redemption proceeds until
it is satisfied that the purchaser's check has cleared, which may take up to 15
days from the date of share purchase.
In the event that a purchaser's check is returned unpaid for any reason,
including from an automatic investment plan, a $20 dishonored check charge will
be made against the purchaser's account.
Each subscriber will be sent a Confirmation Advice in lieu of a stock
certificate reflecting full and fractional shares purchased, unless a stock
certificate is specifically requested in writing by all registered owners of
such shares with their signatures guaranteed (see "Good Order for Redemption
Requests" p. ___ for information on signature guarantees). It is recommended to
all shareholders that a stock certificate not be requested unless needed for a
specific purpose. This eliminates the trouble and expense of safeguarding the
stock certificates and the cost of a lost instrument bond in the event of loss
or destruction.
The price for shares purchased will be their net asset value as next
determined after receipt of a subscription at the office of the Transfer Agent.
The net asset value of Fund shares is determined as of the close of trading on
the New York Stock Exchange (which currently is 4:00 P.M. Eastern time) on each
day that the Exchange is open for trading. Purchase orders, whether by mail or
by telephone or wire, which are received prior to the close of trading on the
New York Stock Exchange, will be executed at the net asset value per share as
determined as of the close of trading on the New York Stock Exchange on that
day. Purchase orders received after the close of trading, or on a day when the
New York Stock Exchange is not open for business, will be executed at the net
asset value per share next determined.
The Fund reserves the right to discontinue the acceptance of telephone
orders, without notice, and to waive minimum purchase requirements at its
discretion. The Fund may also decline to accept any purchase when, in its
judgment, acceptance would not be to the advantage or in the best interests of
existing shareholders and may, on a case-by-case basis, prohibit or restrict
purchase of its shares by an investor whose activity it deems excessive.
A new account application is included at the end of this Prospectus or can
be obtained by writing directly to the Fund.
NET ASSET VALUE
The Fund determines its net asset value per share by subtracting its
liabilities (including accrued expenses and dividends payable) from its total
assets (the market value of the securities the Fund holds plus cash and other
assets, including dividends and income earned but not yet received) and dividing
the result by the total number of outstanding shares in the Fund. For purposes
of determining the value of the Fund's portfolio securities, interest will be
recorded as accrued and dividends will be recorded on the ex-dividend date.
Foreign securities traded on foreign exchanges are ordinarily valued at the last
quoted sales price available before the time the Fund's assets are valued.
17
<PAGE>
The Fund's portfolio securities are valued primarily based on market
quotations, or, if quotations are not available or are deemed not to be
representative, then by methods that the Valuation Committee using criteria
established by the Board of Directors believes accurately reflects fair value. A
pricing service, bank or broker-dealer experienced in such matters may be used
to perform the above-described valuation functions.
ACCOUNT STATEMENTS
The Transfer Agent will send the shareholder a confirmation each time the
shareholder purchases or redeems shares. Automatic Investment Plan Accounts will
receive quarterly statements. The Transfer Agent will also send a statement
after the end of each fiscal (calendar) year, which will show all share
transactions including dividends and capital gains distributions for that year.
The Fund will advise the shareholder annually of how such dividends or
distributions are to be characterized for Federal income tax purposes.
REDEMPTION OF SHARES
GENERAL
Shares may ordinarily be redeemed by mail, telephone, telegram, or overseas
cable. The redemption price will be the net next asset value per share
calculated after receipt of a redemption request in Good Order by the Transfer
Agent (see "Determination of Net Asset Value", page ____), and may be subject to
a redemption fee of .02%.
GOOD ORDER FOR REDEMPTION REQUESTS
For a redemption request to be in Good Order it must include: (1) share
certificates, if any, endorsed by all registered shareholders for the account
exactly as the shares are registered and the signature(s) must be guaranteed, as
described below; (2) a "Letter of Instruction", which is a letter specifying the
name of the Fund, the number or dollar value of shares to be sold, the name(s)
in which the account is registered, and your account number - your Letter of
Instruction must be signed by all registered shareholders for the account using
the exact names in which the account is registered (IF SHARE CERTIFICATES ARE
NOT BEING TRANSMITTED, THEN THE SIGNATURE(S) ON THE LETTER OF INSTRUCTIONS MUST
BE GUARANTEED); and (3) other supporting legal documents, as may be necessary,
for redemption requests by corporations, estates, trusts, guardianships,
custodianships, partnerships, pension and profit sharing plans. SIGNATURE
GUARANTEES ARE NOT REQUIRED IF THE AMOUNT BEING REDEEMED IS $30,000 OR LESS. A
signature guarantee is a widely recognized way to protect you by guaranteeing
the signature on your request. Signature guarantees, when required, must include
guarantees for all registered shareholders for the accounts and must be
guaranteed by an eligible guarantor. An eligible guarantor is one that is a
participant in a STAMP Program (a Securities Transfer Agents Medallion Program).
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<PAGE>
Eligible guarantors include banks, securities brokers and dealers,
municipal securities dealers, credit unions (if authorized by state law),
national securities exchanges, registered securities associations, clearing
agencies and savings associations. A SIGNATURE GUARANTEE BY A NOTARY PUBLIC WILL
NOT BE ACCEPTED. Please call the Transfer Agent at (800) 261-0555 with questions
concerning eligible guarantors.
There are no special forms for redemption. Shareholders residing abroad may
obtain a signature verification from any U.S. Consulate under official seal.
A fee will be charged on the redemption of shares equal to 0.2% of the
redemption price of the shares being redeemed, if such shares were purchased
after February 1, 1985. The redemption fee is payable to the Fund out of the
redemption proceeds. Redemption fee proceeds will be applied to the Fund's
aggregate expenses allocable to providing redemption services, including
transfer agent fees, postage, printing, telephone costs and employment costs
relating to the handling and processing of redemptions. Any excess fee proceeds
will be added to the Fund's assets.
Payments for shares redeemed will be made no later than the third business
day after the valuation date unless otherwise expressly agreed by the parties at
the time of the transaction. However, redemption proceeds will not be
transmitted until the investor's personal or bank check for the purchase of Fund
shares has cleared. When share purchases are paid for by check or periodic
automatic investment, the Transfer Agent will delay payment of the redemption
proceeds until it is satisfied that the investor's check has cleared, which may
take up to 15 days from the date of share purchase (for telephone purchases, 15
days after the date payment is received). WHERE A SHAREHOLDER SIMULTANEOUSLY
REDEEMS SHARES FOR WHICH PAYMENT HAS CLEARED AND SHARES FOR WHICH PAYMENT HAS
NOT CLEARED, THE SHAREHOLDER AUTHORIZES THE FUND TO DELAY TRANSMITTAL OF ALL OF
THE REDEMPTION PROCEEDS UNTIL ALL PAYMENTS HAVE CLEARED. Where a shareholder
elects to have the redemption proceeds transmitted directly to the shareholder's
predesignated account at a domestic bank, the proceeds will be sent via
Automatic Clearing House ("ACH"). In the event your bank is not an ACH member,
the proceeds will be sent by wire. Redemptions of less than $1,000 will be sent
to your bank by check. The Transfer Agent will not honor any redemption request
that contains a restriction as to the time, date or share price at which the
redemption is to be effective.
BY MAIL
Shares of the Fund may be redeemed by mail by writing directly to the
Transfer Agent and enclosing the duly endorsed stock certificate, if one has
been issued or by Letter of Instruction, with signatures guaranteed. If the
value of the shares being redeemed is greater than $30,000, then the
signature(s) on the stock certificate (if one has been issued) or on the Letter
of Instruction must be guaranteed. See "Good Order for Redemption Requests"
above. There are no special forms for redemption. Shareholders residing abroad
may obtain a signature verification from any U.S. Consulate under official seal.
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BY TELEPHONE, TELEGRAM OR OVERSEAS CABLE
Shares of the Fund may be redeemed by calling (800) 261-0555, or by sending
a telegram or an overseas cable to the Transfer Agent. When overseas, please
call 1-617-328-5000 and ask for a Kaufmann Customer Representative. In order to
utilize the procedure for redemption by telephone, telegram or overseas cable, a
shareholder previously must have elected this procedure in writing, the
shareholder's account must have been opened previously by the shareholder and be
reflected as such in the computer records of the Transfer Agent, the stock
certificate for shares being redeemed must be held by the Transfer Agent, and
the redemption proceeds must be transmitted directly to the shareholder's
predesignated account at a domestic bank (see "Good Order for Redemption
Requests" above). A shareholder may elect at any time to use the telephone,
telegram or overseas cable redemption service. For assistance the shareholder
should call the Transfer Agent at (800) 261-0555. When utilizing the telephone,
telegram or overseas cable redemption service, the shareholder must give the
full name, number of shares to be redeemed and account number or the redemption
request will not be processed. See "Accuracy of Investor Account Information,"
p. ____ for information regarding redemptions by telephone.
With the telephone redemption option, shareholders may be giving up a
measure of security that they might otherwise have if they were to redeem their
shares in writing. In addition, interruptions in telephone service may mean that
a shareholder will be unable to effect a redemption by telephone when desired.
The Fund reserves the right to change without prior notice, any of the
procedures for or availability of, telephone service for redemption requests.
REDEMPTION AT THE OPTION OF THE FUND
If the value of the shares in a shareholder's account is less than $500,
the Fund may notify the shareholder that, unless the account is brought up to
$500 in value, it will redeem all the shareholder's shares and close the account
by paying the shareholder the redemption price (less the redemption fee, if any)
and dividends and distributions declared and unpaid at the date of redemption.
The Fund will give the shareholder thirty days after it sends the notice to
bring the account up to $500 before any action is taken. This minimum balance
requirement does not apply to IRAs and other tax-sheltered investment accounts.
This right of redemption shall not apply if the value of a shareholder's account
drops below $500 as the result of market action.
The Fund reserves the right to do this because of the expense of
maintaining small accounts.
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<PAGE>
REDEMPTION IN KIND
The Fund has filed a Notification under Rule 18f-1 under the Investment
Company Act, pursuant to which it has undertaken to pay in cash all requests for
redemption by any shareholder of record, limited in amount with respect to each
shareholder during any 90-day period to the lesser amount of (i) $250,000, or
(ii) 1% of the net asset value of the Fund at the beginning of such election
period. The Fund intends to also pay redemption proceeds in excess of such
lesser amount in cash, but reserves the right to pay such excess amount in kind,
if it is deemed to be in the best interest of the Fund to do so. In making a
redemption in kind, the Fund reserves the right to select from each portfolio
holding a number of shares which will reflect the portfolio make-up and the
value of which will approximate as closely as possible, the value of the Fund
shares being redeemed, or to select from one or more portfolio investments,
shares equal in value to the total value of the Fund shares being redeemed: any
shortfall will be made up in cash. Investors receiving an in kind distribution
are advised that they will likely incur a brokerage charge on the disposition of
such securities through a broker. The values of portfolio securities distributed
in kind will be the values used for the purpose of calculating the per share net
asset value used in valuing the Fund shares tendered for redemption.
TAXES, DIVIDENDS AND CAPITAL GAINS
The Fund intends to qualify as a "regulated investment company" under the
Internal Revenue Code, as amended, with the result that taxable income of the
Fund will be reduced by the amount of distributions to shareholders. The Fund
intends to distribute all of its net investment income and net capital gains, if
any, annually. If necessary to satisfy certain distribution requirements of the
Tax Reform Act of 1986, the Fund may declare special year-end dividend and
capital gains distributions during December. Such distributions, if received by
shareholders by January 31 are deemed to have been paid by the Fund and received
by shareholders on December 31st of the prior year. Such income dividends and
capital gains distributions, as may be paid, will be reinvested in shares of the
Fund at net asset value or, at the election of each shareholder, paid in cash.
Unless the shareholder specifically instructs otherwise, all such dividends and
distributions will be reinvested in additional shares of the Fund, at net asset
value. Dividends and distributions are taxable to the shareholder whether taken
in cash or reinvested in additional shares.
Distributions of income dividends and short-term capital gains are taxable
to the shareholders as ordinary income. Dividends (but not capital gains) paid
by the Fund qualify for the 70% dividends received deduction for corporations
unless derived from interest income or foreign source income. Distributions from
long-term capital gains, whether paid in cash or additional shares of the Fund,
are taxable to the shareholder for Federal income tax purposes as a long-term
capital gain, regardless of the length of time Fund shares have been held by the
shareholder.
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<PAGE>
If you purchase shares shortly before the record date for a dividend or a
capital gains distribution, a portion of your investment will be returned to you
as a taxable distribution, whether you elect to receive your dividends and
distributions in additional Fund shares or take them in cash.
Shareholders may be proportionately liable for taxes on income and gains of
the Fund, but shareholders not subject to tax on their income will not be
required to pay tax on amounts distributed to them.
Congress has mandated that if any shareholder fails to provide and certify
to the accuracy of his or her social security number or other taxpayer
identification number, the Fund will be required to withhold 31% of all
dividends, distributions and payments, including redemption proceeds, to such
shareholder as a backup withholding procedure. In addition, shareholders will be
subject to a fine payable to the Internal Revenue Service.
Accordingly, in the event a shareholder fails to furnish and certify a
taxpayer identification number, or the Internal Revenue Service notifies the
Fund that a shareholder's taxpayer identification number is incorrect, or that
withholding is otherwise required, the Fund will commence withholding on such
shareholder's account. Once withholding is established, all withheld amounts
will be paid to the Internal Revenue Service, from whom such shareholder should
seek any refund. If withholding is commenced with respect to any shareholder
account, the shareholder should consult with the shareholder's attorney or tax
advisor or contact the Internal Revenue Service directly.
Information as to the tax status of dividends and distributions paid to the
shareholders will be furnished annually by the Fund. Shareholders should consult
their own tax advisers with respect to any applicable state and local taxes on
such dividends and distributions.
CAPITAL STOCK
The Fund, a Maryland corporation, has an authorized capitalization of two
billion shares of capital stock, par value $0.10 per share. Shares of stock
issued by the Fund are all of one class, are designated capital stock, are
redeemable by the Fund at the option of the holder of the stock and have equal
dividend, liquidation and voting rights, each share being entitled to one vote.
There are no pre-emptive or other special rights outstanding or attached to any
of the Fund's shares, nor are there any restrictions on the right to freely
retain or dispose of such shares.
Maryland law does not require the holding of annual shareholders' meetings
unless otherwise required by law. However, 10% of the outstanding voting
securities
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of the Fund shall have the right to call a shareholders' meeting for purposes of
voting on the removal of a director.
The shares have non-cumulative voting rights, which means that the holders
of more than 50% of the shares voting for the election of Directors can elect
all of the Fund's Directors if they choose to do so, and, in such event, the
holders of the remaining less than 50% of the shares voting for the election of
Directors will not be able to elect anyone to the Board of Directors.
Shareholders having questions concerning the Fund or their accounts should
call the Transfer Agent at (800) 261-1700.
SPECIAL INVESTOR SERVICES
THE KAUFMANN/RESERVE FUND MONEY MARKET SWITCH PLAN ONLY REGULAR AND IRA ACCOUNTS
MAY PARTICIPATE
Shareholders may elect to participate in the Kaufmann/Reserve Fund Money
Market Switch Plan (the "Switch Plan" or "Plan"), and thereby have the proceeds
($1,000 minimum, unless lowered by the Fund's Board of Directors) from the
redemption of their Fund shares invested directly in shares of The Reserve Fund,
Inc. ("Reserve"), or have the proceeds from the redemption of the Reserve shares
reinvested directly in shares of the Fund. Investors may elect to participate by
completing the portion of the application form which refers to the Switch Plan.
The Fund and Reserve are not responsible to Switch Plan participants for
purchase or redemption delays under the plan as long as the Fund and Reserve
transmit the proceeds in accordance with written arrangements between the Fund
and Reserve in connection with the Plan.
For Shareholders who have elected to participate in the Plan, the "switch"
from Fund shares into Reserve shares may be made by calling the Transfer Agent
at (800) 261-1700. The proceeds, less the combined amount of 2/10th of 1% of
such redemption proceeds retained by the Fund and Transfer Agent charges, if
any, will be wired to Reserve on the seventh day following the "switch" request.
Reinvestment in Fund shares will not be possible until the eighth day after the
date of the "switch" from the Fund to Reserve.
For reinvestment in shares of The Kaufmann Fund, Inc., call the Transfer
Agent at (800) 261-0555 and instruct it to redeem your Reserve shares and
reinvest the proceeds in your open account with The Kaufmann Fund, Inc. The
limitation described on page ____ for telephone purchase orders does not apply
to these reinvestment requests, there being no maximums for reinvestments from
Reserve. However, any investor who deviates from the previously described
procedure for reinvestment will be, among other things, subject to the maximums
described on page ____ for telephone purchase orders. Any such reinvestment
request received by Fund's transfer agent
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<PAGE>
prior to 4:00 p.m. East Coast Time, will be processed at that day's closing net
asset value for Fund shares; requests received after 4:00 p.m. East Coast time
will be processed at the next day's net asset value. For Reserve yield
information, the number to call is (800) 637-1700.
For Federal income tax purposes, any such switch into Reserve will be
regarded as a sale of Fund shares and the purchase of the other. The Fund and
Reserve retain the right to limit the number of times the "switch" may be used
by any shareholder within a specified period of time, and the Plan may be
terminated at any time by either the Fund or Reserve.
In the case of IRA accounts, the custodianship will be automatically
transferred to the Trustee, Reserve Management Corp., Inc. ("RMCI"), if you
choose to exchange into Reserve. Additional forms will be required by RMCI and
will be mailed by Reserve at the time of the exchange. Subsequently, the trustee
of your account will automatically be switched from RMCI to the Fund's
custodian, State Street Bank and Trust Company, if you choose to reinvest in the
Kaufmann Fund. There will be a limit of two exchanges per year.
AUTOMATIC INVESTMENT PLAN
You can make regular investments in The Kaufmann Fund, Inc. with an
Automatic Investment Plan by completing the appropriate section of the account
application and attaching a voided personal check. Investments may be made
monthly by automatically deducting $50 or more from your bank checking or
savings account. You may change the amount of your monthly purchase at any time.
There is a $500 minimum initial investment requirement for automatic investment
plans. Shares will be purchased at the price next determined following receipt
of the order by the Transfer Agent. You may cancel the Automatic Investment Plan
at any time without payment of a cancellation fee. You will receive a
confirmation on a quarterly basis from the Transfer Agent for every transaction,
and a debit entry will appear on your bank statement. For further information,
call Boston Financial Data Services, Inc. at (800) 261-0555.
PAYROLL DEDUCTION PLAN
Regular investments in the Kaufmann Fund can be done through a Payroll
Deduction Plan with a minimum initial investment of $500. To establish such a
Plan, please complete the appropriate section of the account application found
at the back of this prospectus. These purchases need to be initiated by your
employer. Your employer will deduct from your paycheck the amount you wish to
invest (minimum $50 monthly) and forward it to the Kaufmann Fund. Shares will be
purchased at the price next determined after receipt of funds by the Transfer
Agent. This plan can be terminated at any time by instructing your employer to
discontinue the payments. For more information or application forms, please
contact the Transfer Agent at (800) 261-0555.
SYSTEMATIC WITHDRAWAL PLANS
If you own shares of The Kaufmann Fund, Inc. worth $5,000 or more, you may
periodically have proceed checks sent from your account to you, to a person
named by you, or to your bank checking account. Your Systematic Withdrawal
Program
24
<PAGE>
payments are drawn from share redemptions. If Systematic Withdrawal Program
redemptions exceed income dividends earned on your shares, your account
eventually may be exhausted. Shareholders considering this Plan should first
contact the Fund's Transfer Agent by calling (800) 261-0555 for details
concerning this Plan. An investor may initiate such a Plan by completing the
Systematic Withdrawal Plan Section of the Application which is contained at the
back of this Prospectus.
RETIREMENT PLANS AND IRA ACCOUNTS
Shares of the Fund may be purchased directly by existing retirement plans
which allow such investments.
In addition, qualified individuals may establish an Individual Retirement
Account ("IRA") or 403(b) Plan to be funded with shares of the Fund. State
Street Bank and Trust Company acts as custodian for any IRAs and 403(b) Plans
thus created.
For further information, an interested person should call Boston Financial
Data Services at (800) 261-0555.
25
<PAGE>
SHAREHOLDER STATEMENTS AND REPORTS
Each time you buy or sell shares or reinvest a dividend or capital gains
distribution in the Fund, you will receive a statement confirming such
transaction and listing your current share balance with the Fund. Automatic
Investment Plan Accounts will receive quarterly statements for the monthly
transactions. You will also receive annual and semi-annual reports and year-end
tax information about your account(s).
DISTRIBUTION PLAN
The Fund has adopted a distribution plan (the "Distribution Plan"),
pursuant to which the Fund may incur distribution expenses of up to .75% per
annum of the Fund's average daily net assets.
The Distribution Plan provides that the Fund may finance activities which
are primarily intended to result in the sale of the Fund's shares, including but
not limited to, advertising, printing and mailing of prospectuses and reports to
other than existing shareholders; printing and distribution of sales literature,
and the compensation of persons primarily engaged in the sale and marketing of
the Fund's shares.
SERVICE FEES
The Fund may also pay continuing service fees to broker dealers for
personal service and for the maintenance of shareholder accounts. Such payments
shall not exceed .25% per annum of the Fund's average daily net assets.
TRANSFER AGENT AND CUSTODIAN
Boston Financial Data Services, Inc., Post Office Box 8331, Boston, MA
02266-8331 acts as shareholder servicing and transfer agent for the Fund. State
Street Bank and Trust Company, 225 Franklin Street, Boston, MA 02110 serves as
custodian of the Fund's assets, including its portfolio securities. QUESTIONS
CONCERNING SHAREHOLDER ACCOUNTS SHOULD BE DIRECTED TO BOSTON FINANCIAL DATA
SERVICES, INC. BY CALLING (800) 261-0555.
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Management's Discussion of Fund Performance for 1997 including a graphical
representation and comparison of the Fund's performance is contained in the
Fund's Annual Report for 1997 and will be provided upon request and without
charge by calling Boston Financial Data Services, Inc. at 800-261-0555. The
Annual Report is also available on the Fund's Website: www.kaufmann.com.
27
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PART B
<PAGE>
THE KAUFMANN FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
___________________________________
This Statement of Additional Information (the "Statement"), which is not a
prospectus (but which is incorporated into the Prospectus), supplements and
should be read in conjunction with the current prospectus of The Kaufmann Fund,
Inc. (the "Fund"), dated May 1, 1998, as it may be revised from time to time. To
obtain a copy of the Fund's prospectus, please write to the Fund at 140 East
45th Street, 43rd Floor, New York, New York 10017 or call 212-922-0123.
Date of Statement of Additional Information: May 1, 1998.
<PAGE>
TABLE OF CONTENTS
Page
----
General Information and History . . . . . . 1
Investment Objective and Policies . . . . . . 1
Investment Restrictions . . . . . . . . 4
Management of the Fund . . . . . . . . 5
Principal Holders of Securities . . . . . . 7
Investment Advisory Services . . . . . . . 7
Brokerage Allocation . . . . . . . . 9
Potential Conflicts . . . . . . . . . 11
Distribution Plan . . . . . . . . . 11
Special Investor Services . . . . . . . 12
Purchase and Redemption of Shares . . . . . . 14
Taxes, Dividends and Capital Gains . . . . . 14
Custodian . . . . . . . . . . . 15
Auditor . . . . . . . . . . . 15
Financial Statements . . . . . . . . 15
Performance Information . . . . . . . . 15
Additional Performance Information for the Fund . . . 17
<PAGE>
GENERAL INFORMATION AND HISTORY
General information relating to the Fund and its history will be found on
p. ___ of the prospectus under the caption "The Fund."
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective and certain of its investment policies are
described on pages ___ through ___ of the Fund's Prospectus.
In addition to the objective and policies discussed in the Prospectus, the
Fund has adopted the following investment policies and techniques.
Securities of Other Investment Companies - The Fund may invest up to 10% of
the value of its total assets in the securities of other registered investment
companies (open end or closed end), provided that the Fund may not purchase (i)
more than 3% of the voting securities of any one investment company or (ii)
securities of any investment company having an aggregate value in excess of 5%
of the total value of the assets of the Fund. All such securities must be
acquired by the Fund in the open market, in transactions involving no
commissions or discounts to a sponsor or dealer other than customary brokerage
commissions. The Fund will not invest in any investment company having a
contingent deferred sales charge, but will not regard redemption fees of up to
2/10ths of 1% of the investment as such a charge.
Repurchase Agreements - Repurchase agreements are arrangements in which
banks, broker/dealers and other recognized financial institutions sell U.S.
government securities or certificates of deposit to the Fund and agree at the
time of sale to repurchase them at a mutually agreed upon time and price within
one year from the date of acquisition. The Fund's custodian will take possession
of the securities subject to repurchase agreements. To the extent that the
original seller does not repurchase the securities from the Fund, the Fund could
receive less than the repurchase price on a sale of such securities. In the
event that such a defaulting seller filed for bankruptcy or became insolvent,
disposition of such securities by the Fund might be delayed pending court
action. The Fund believes that under the regular procedures normally in effect
for custody of the Fund's portfolio securities subject to repurchase agreements,
a court would rule in favor of the Fund and allow it to retain or dispose of
such securities. The Fund will enter into repurchase agreements only with banks
and other recognized financial institutions such as broker/dealers which are
found by the Fund's investment adviser to be creditworthy. The Fund's investment
adviser monitors the creditworthiness of the other parties to repurchase
agreements.
Repurchase agreements usually are for short periods such as one week, but
could be longer. The Fund will not enter into repurchase agreements of more than
seven days duration if more than 10% of its net assets would be invested in such
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<PAGE>
repurchase agreements and in restricted securities. Repurchase agreements are
considered to be loans by the Fund under the Investment Company Act of 1940.
Options Contracts and Risks -
-----------------------------
(i) General
Puts and calls are relatively short-term option contracts (rarely for
periods longer than nine months) acquired at a cost or "premium" to the Fund or
written by the Fund in return for a premium, in each case whether or not the
option is exercised during its terms.
A call option gives the purchaser of the option the right to buy, and
the writer the obligation to sell, the underlying security at the exercise price
during the option period. Conversely, a put option gives the purchaser the right
to sell, and the writer the obligation to buy, the underlying security at the
exercise price during the option period.
A put purchased by the Fund constitutes a hedge against a decline in
the price of a security owned by the Fund, it may be sold at a profit or loss
depending upon changes in the price of the underlying security, it may be
exercised at a profit provided that the amount of the decline in the price of
the underlying security below the exercise price during the option period
exceeds the option premium, or it may expire without value. A call constitutes a
hedge against an increase in the price of a security which the Fund has sold
short, it may be sold at a profit or loss depending upon changes in the price of
the underlying security, it may be exercised at a profit provided that the
amount of the increase in the price of the underlying security over the exercise
price during the option period exceeds the option premium, or it may expire
without value. The maximum loss exposure involved in the purchase of an option
is the cost of the option contract.
(ii) Covered Option Writing
So long as the obligation of the writer of a put or call option
continues, he may be assigned an exercise notice by the broker-dealer through
whom such option was sold, requiring the writer to deliver, in the case of a
call, or take delivery of, in the case of a put, the underlying security against
payment of the exercise price. This obligation terminates upon expiration of the
option, or such earlier time at which the writer effects a closing purchase
transaction by repurchasing the option which he previously sold. Once a writer
has been assigned an exercise notice in respect to an option, he is thereafter
not allowed to repurchase that option. To secure his obligation to deliver the
underlying security in the case of a call option, or to pay for the underlying
security in the case of a put option, a writer is required to deposit with a
custodian in escrow the underlying security or other assets and to mark the
2
<PAGE>
same to market, all in accordance with the rules of the clearing corporations
and of the exchanges and securities laws.
The principal reason for writing call options on a securities
portfolio is to attempt to realize, through the receipt of premiums, a greater
return than would be realized on the securities alone. The covered call option
writer has, in return for the premium, given up the opportunity for profit from
a price increase in the underlying security above the exercise price so long as
the obligation as a writer continues, but has retained the risk of loss, should
the price of the security decline. Conversely, the put option writer has, in the
form of the premium, gained a profit as long as the price of the underlying
security remains above the exercise price, but has assumed an obligation to
purchase the underlying security from the buyer of the put option at the
exercise price, even though the security may fall below the exercise price, at
any time during the option period. The option writer has no control over when he
may be required to sell his securities in the case of a call option or to
purchase securities in the case of a put option, since he may be assigned an
exercise notice at any time prior to the termination of his obligation as a
writer. If an option expires, the writer realizes a gain in the amount of the
premium. Such a gain, of course, may in the case of a covered call option, be
offset by a decline in the market value of the underlying security during the
option period. If a call option is exercised, the writer realizes a gain or loss
from the sale of the underlying security. If a put option is exercised, the
writer must fulfill his obligation to purchase the underlying security at the
exercise price, which will usually exceed the then market value of the
underlying security.
(iii) Risks Relating to Options
An option position may be closed out only on an exchange which
provides a secondary market for an option of the same series. Although the Fund
will generally purchase or write only those options for which there appears to
be an active secondary market, there is no assurance that a liquid secondary
market on an exchange may exist. In such event, it might not be possible to
effect closing transactions in particular options, with the result that the Fund
would have to exercise its options in order to realize any profit and would
incur brokerage commissions upon the exercise of call options and upon the
subsequent disposition of underlying securities acquired through the exercise of
call options or upon the sale of underlying securities pursuant to the exercise
of put options. If the Fund, as a covered call option writer, is unable to
effect a closing purchase transaction in a secondary market, it will not be able
to sell the underlying security until the option expires or it delivers the
underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an exchange
include the following: (a) there may be insufficient trading interest in certain
options; (b) trading halts, suspensions, or other restrictions may be imposed
with respect to particular classes or series of options or underlying
securities; (c) unusual or
3
<PAGE>
unforeseen circumstances may interrupt normal operations on an exchange; (d) the
facilities of an exchange or a clearing corporation may not at all times be
adequate to handle current trading volume; or (e) one or more exchanges could,
for economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options),
in which event, the secondary market on that exchange (or in the class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by a clearing corporation as a result of trades on that
exchange would continue to be exercisable in accordance with their terms.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
any of the clearing corporations inadequate, and thereby result in the
institution, by an exchange, of special procedures which may interfere with the
timely execution of customers' orders.
The amount of the premiums which the Fund may pay or receive may be
adversely affected as new or existing institutions, including other investment
companies, engage in or increase their option purchasing and writing activities.
For additional information concerning options see p. ___ of the Fund's
prospectus.
INVESTMENT RESTRICTIONS
The Fund has also adopted the following investment restrictions, which
cannot be changed without the approval of the holders of a majority of its
shares. The term "majority" means the lesser of (1) 67% of the Fund's shares
present at a meeting if the holders of more than 50% of the outstanding shares
are present in person or by proxy, or (2) more than 50% of the Fund's
outstanding shares. These restrictions provide that the Fund shall not:
1. Purchase securities on margin from brokers.
2. Invest in commodities, commodity contracts or real estate, or limited
partnership interests in real estate, except that the Fund may invest in readily
marketable securities of real estate trusts or companies, and in master limited
partnership interests traded on a national securities exchange.
3. Borrow money, except from banks in an amount which will not cause the
Fund's net assets (including the amount borrowed) to be less than 300% of such
borrowed amount and then providing that (i) if the Fund's assets become less
than three times the amount of the Fund's bank borrowing, the Fund will, within
three days (not including Saturdays, Sundays or holidays) reduce its bank
borrowings to the
4
<PAGE>
extent required to restore such 300% coverage and (ii) such bank borrowing may
be collateralized by the deposit of portfolio securities with, or the
segregation of such securities for the account of, the lending bank, but in no
case will such bank borrowings exceed 50% of the net assets of the Fund or the
value of such pledged securities exceed 75% of the total assets of the Fund.
4. With respect to 50% of the value of its total assets, invest more than
5% of the value of its total assets in any one issuer, excluding United States
Government securities, or purchase more than 10% of the outstanding voting
securities of any one issuer.
5. Participate in a joint securities trading account.
6. Issue senior securities except to the extent of borrowings.
7. Underwrite the securities of other issuers.
8. Purchase the securities of an issuer, if any affiliate, (including the
Fund's officers and directors) who individually own more than 1/2 of 1% of the
securities of such issuer, together own more than 5% of the securities of such
issuer.
9. May not invest 20% or more of its net assets in securities of issuers
with an operating history of less than three year continuous operation.
10. Invest in oil, gas or mineral leases.
MANAGEMENT OF THE FUND
The Fund's Directors are responsible for the Fund's management, and they
have certain fiduciary duties and obligations to the Fund and its shareholders
under the laws of the State of Maryland and applicable federal securities laws.
The information provided below sets forth biographical information regarding
each Director. Directors who are "interested persons" of the Fund, as that term
is defined by Section 2(a)(19) of the Investment Company Act of 1940 are marked
by an asterisk. Generally speaking, the term "interested persons" includes
persons who have close family or substantial financial or professional
relationships with investment companies, their investment advisors, principal
underwriters, officers and employees. The address of the Directors who are
"interested persons" is 140 East 45th Street, 43rd Floor, New York, New York
10017.
Directors and Officers of the Fund
- ----------------------------------
*Hans P. Utsch; Director, President and Treasurer
140 East 45th Street, 43rd Floor, New York, New York 10017
5
<PAGE>
He is Chairman of Edgemont Asset Management Corporation, the Fund's
investment manager and has acted as such, since its founding in August,
1984. He is a co-portfolio manager of the Fund together with Mr. Auriana.
Mr. Utsch holds a BA from Amherst College and an MBA from Columbia
University. Mr. Utsch is the principal shareholder of Bowling Green
Securities, Inc., a registered broker/dealer. For over the last five years
he has managed that firm's investment port- folio. Age: 62.
*Lawrence Auriana; Chairman of the Board and Director, Vice President and
Secretary
140 East 45th Street, 43rd Floor, New York, New York 10017
Mr. Auriana is President of Edgemont Asset Management Corporation, the
Fund's investment manager, and has acted as such, since its founding in
August, 1984. He is co-portfolio manager of the Fund together with Mr.
Utsch. Mr. Auriana holds a BA from Fordham University and attended New York
University's Graduate School of Business. Age: 54.
Leon Lebensbaum; Director
3601 Hempstead Turnpike, Levittown, New York 11756
Mr. Lebensbaum, an attorney and a certified public accountant, has been in
private practice since 1970. He is currently a general partner in the
accounting firm of Lebensbaum and Russo, an accounting firm. Prior thereto
he was a Special Agent in the Intelligence Division of the Internal Revenue
Service. Age: 75.
Gerard M. Grosof; Director
31 Prospect Place, Brooklyn, New York 11217
Mr. Grosof is a high-technology venture capitalist. He is a Director of
Quantametrics, Inc. From 1982-1985 he was Vice President, Treasurer and a
Director of Memory Metals, Inc., a metal alloy firm. From 1980 to 1982 he
served as an officer of CG Technology Corporation, a contract research and
development firm. Age: 69.
6
<PAGE>
Pauline Gold, Esquire; Director
150 Bay Street, Staten Island, New York 10301
Mrs. Gold in an attorney and, since 1964, has been engaged in the private
practice of law. Age: 61.
Roger E. Clark; Director
116 Juniper Road, New Canaan, Connecticut 06840
Mr. Clark is President of Teleproducts Corporation Consulting, which is
involved in the business of telephone-computer interfacing. During the
period from 1980 to June 1987, he was a marketing executive for Xerox
Corporation. Age: 64.
Remuneration of Directors and Officers
- --------------------------------------
The Directors, other than Messrs. Utsch and Auriana, presently receive an
annual retainer of $25,000 plus $4,000 for each Board of Directors' Meeting and
$3,000 for each Committee Meeting attended, plus expenses. Directors fees for
the year ended December 31, 1997 totaled $210,900.
*Interested Persons
- -------------------
Hans P. Utsch, Fund President and Treasurer, and Lawrence Auriana, Fund
Vice President and Secretary, are also the Chairman of the Board and President,
respectively, of Edgemont Asset Management Corporation ("Edgemont") and are its
sole shareholders. As such, they are "interested persons" of the Fund.
PRINCIPAL HOLDERS OF SECURITIES
The Fund's records show that the only owners of more than 5% of the Fund's
outstanding shares at the close of business on December 31, 1997 were Charles
Schwab & Co. and National Financial Co. The shares are understood to be held by
them for undisclosed investors who are the beneficial owners.
INVESTMENT ADVISORY SERVICES
Edgemont Asset Management Corporation (hereafter sometimes "Edgemont"), a
New York corporation organized in August 1984, having its principal office at
140 E. 45th Street, 43rd Floor, New York, New York 10017, presently serves as
the Fund's investment advisor. Edgemont does not serve as investment advisor to
any other investment company. Messrs. Utsch and Auriana are control persons of
Edgemont.
7
<PAGE>
The Investment Advisory Agreement was approved for an additional one-year
term by a majority of the Fund's Board of Directors including a majority of
those Directors who are not interested persons (as that term is defined in the
Investment Company Act of 1940) at a meeting held on October 15, 1997 called for
the purpose of voting on such Agreement. It will continue in effect until
October 30, 1998 and thereafter for successive annual periods provided that such
continuance is specifically approved at least annually by (a) the Fund's Board
of Directors, provided, that the continuance is also approved by a majority of
those Directors who are not interested persons of the Fund or Edgemont, cast in
person at a meeting called for the purpose of voting on such approval, or (b)
the vote of a majority of the Fund's outstanding voting shares. The Investment
Advisory Agreement may be terminated at any time, without penalty, on sixty
days' prior written notice, by the vote of a majority of the Fund's outstanding
voting shares or by the vote of a majority of the Fund's Board of Directors or
by Edgemont, and will terminate automatically in the event of its assignment.
It is Edgemont's responsibility to arrange for the purchase and sale of the
Fund's portfolio securities.
Edgemont furnishes the Fund, at no cost, with the services of those of
Edgemont's officers and full-time employees who may be duly elected executive
officers or directors of the Fund.
The Fund shall be responsible for effecting sales and redemptions of its
shares, for determining the net asset value thereof and for all of its other
operations and shall pay all administrative and other costs and expenses
attributable to its operations and transactions, including, without limitation,
transfer agent and custodian fees; legal, administrative and clerical services;
rent not to exceed fair market value for its office space and facilities;
auditing; preparation, printing and distribution of its prospectuses, proxy
statements, stockholders reports and notices; cost of supplies and postage;
Federal and state registration fees; Federal, state and local taxes; the fees of
directors who are not interested persons; interest on its bank loans; and
brokerage commissions.
Edgemont received $35,051,628, $66,206,955 and $85,089,829 in management
fees for 1995, 1996, and 1997 respectively.
Formerly, Edgemont was required to agree, as a condition of qualifying its
shares for sale in certain jurisdictions, that if the Fund's annual expenses
exceeded a certain percentage of average net assets, Edgemont was required to
reduce its annual investment advisory fee to the percentage limitations imposed
on the Fund by the laws of the interested jurisdiction. California limited
expenses to 2-1/2% of the first $30 million of average net assets, 2% of the
next $70 million and 1-1/2% of all in excess of $100 million. Fees reimbursed to
the Fund for the year 1995 were $3,500,370.
While not required to do so for 1996 because of a change in the law,
Edgemont, nevertheless, voluntarily limited certain Fund expenses to the
California standard and rebated $5,243,247 to the Fund for 1996. It also limited
its expenses in accordance with the California standard for 1997 and rebated
$6,589,322. It may limit its expenses in the same way for 1998.
8
<PAGE>
BROKERAGE ALLOCATION
Hans P. Utsch and Lawrence Auriana, sole shareholders of Edgemont, the
Fund's investment advisor, are primarily responsible for placing the portfolio
brokerage business of the Fund.
In all brokerage orders, the Fund will seek the most favorable prices and
executions. The determination of what may constitute the most favorable price
and execution in a brokerage order involves a number of factors, including the
overall direct net economic result to the Fund (involving both price paid or
received, and any commissions or other costs paid), and the efficiency with
which the transaction is effected. The sale of Fund shares may be considered
when determining the firms which are to execute brokerage transactions for the
Fund. In addition to considering a broker's execution capacity and price,
Edgemont may consider the brokerage and research services (as those terms are
defined in Section 28(e) of the Securities Exchange Act of 1934) provided to the
Fund. Edgemont is authorized to pay to a broker-dealer who provides such
brokerage and research services a commission for executing a particular
transaction for the Fund which is in excess of the amount of commission another
broker- dealer would have charged for effecting the transaction if Edgemont
determines, in good faith, that such commission was reasonable in relation to
the value of the brokerage and research services provided by such broker-dealer,
viewed in terms of the particular transaction or in terms of the overall
responsibilities of Edgemont to the Fund.
For purposes of the above, a person provides brokerage and research
services insofar as it: (1) furnishes service, either directly or through
publications or writings, as to the value of the securities, the advisability of
investing in, purchasing or selling securities and the availability of
securities or purchasers or sellers of securities; (2) furnishes analyses and
reports concerning issuers, industries, securities, economic factors and tends,
portfolio strategy and the performance of accounts; (3) effects securities
transactions and performs functions incidental thereto (such as clearance,
settlement or custody) or required in connection therewith by rules of the
Securities and Exchange Commission or the NASD of which such person is a member
or is a person associated with an NASD member firm or in which such person is a
participant.
9
<PAGE>
Since July 1, 1992, the Fund has permitted Edgemont to use Bowling Green
Securities, Inc. ("Bowling Green Securities") as one of the Fund's principal
brokers for exchange traded securities transactions only. Hans P. Utsch is the
owner of Bowling Green Securities; Lawrence Auriana is affiliated with Bowling
Green Securities as a registered representative. Any such use must be in
compliance with Section 17(e) of the Investment Company Act and Rule 17e-1
thereunder and of the Rules thereunder.
In accordance with Section 17(e) of the Investment Company Act and Rule
17e-1 thereunder and the Rules thereunder, Bowling Green Securities may act as a
broker in connection with the sale of various exchange traded securities to or
by the Fund. In placing orders with Bowling Green Securities for brokerage
transactions for the Fund, pursuant to standards adopted by the Board of
Directors of the Fund, Edgemont must ascertain that any commissions, fees or
other remuneration paid to Bowling Green Securities are reasonable and fair
compared to the commissions, fees or other remuneration paid to other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on a securities exchange during a comparable period of time.
Bowling Green Securities is required to provide regular brokerage services
to the Fund at competitive rates that will demonstrably be proper under the
circumstances and in accordance with Section 11(a) of the Securities Exchange
Act of 1934. Bowling Green Securities is not a member of a national securities
exchange, and thus is not, at present, subject to any limitations under Section
11(a). However, that Section authorizes the Securities and Exchange Commission
to regulate or prohibit broker-dealers such as Bowling Green Securities in or
from effecting transactions in securities owned by an account such as the Fund,
over which the principals of Bowling Green Securities have investment
discretion. To date, the Commission has not seen fit to do so. Bowling Green
Securities cannot buy or sell portfolio securities as principal from or to the
Fund.
To the extent that portfolio transactions are effected through Bowling
Green Securities as broker, any increase of portfolio activity will be
beneficial to that firm (and its owner and principal employee, respectively,
Messrs. Utsch and Auriana), because of brokerage commissions payable in
connection therewith.
The Fund is also permitted to purchase underwritten securities during the
existence of an underwriting syndicate of which Bowling Green Securities is a
member, subject to restrictions of applicable law and the Fund's policies.
During 1995 and 1996, the Fund paid $4,530,898 and $8,946,721,
respectively, in brokerage commissions. Of these amounts $51,020 in 1995 and
$66,520 in 1996 were paid to Bowling Green Securities. During 1997, total
brokerage commissions in the amount of $10,106,929 were paid on total
transactions of
10
<PAGE>
$3,124,758,744. Of the total amount of commissions paid, .45% was paid to
Bowling Green Securities on .50% of the total portfolio transactions effected.
Of the $45,000 in commissions paid to Bowling Green Securities, $5,900. was paid
to Herzog Heine Geduld, the clearing broker for Bowling Green Securities.
The Fund's Board of Directors has established Rule 17e-1 conditions and
procedures (see above) for the use of Bowling Green Securities. The Board also
determined that the Fund's independent public accountants should review the
exchange trades executed by Bowling Green Securities at the end of each quarter
and report the results of the survey to the Board at its next succeeding
meeting. The Board continues to review the appropriateness of the conditions and
procedures no less frequently than annually.
POTENTIAL CONFLICTS
Hans P. Utsch and Lawrence Auriana each is (1) Director and Officer of the
Fund; (2) a Director and Officer of Edgemont, the Fund's investment advisor; (3)
an employee (and in Mr. Utsch's case, the owner) of the broker-dealer to whom a
portion of the Fund's brokerage is being directed; (4) a controlling principal
in the Fund's investment decision making process.
These affiliations of Messrs. Utsch and Auriana create for each of them an
inherent potential conflict of interest. The Fund's Directors who are not
interested persons are aware of these potential conflicts but do not presently
perceive them as detrimental to the Fund.
DISTRIBUTION PLAN
The Fund has adopted a distribution plan (the "Distribution Plan"), under
the terms of which the Fund may incur distribution expenses of up to .75% per
annum of the Fund's average daily net assets.
The Distribution Plan has been approved by the Fund's Board of Directors,
including by all of the "Rule 12b-1 Directors" ("Rule 12b-1 Directors" are those
directors who are not "interested" persons of the Fund as defined in the
Investment Company Act of 1940, and who have no direct or indirect financial
interest in the Distribution Plan or any related agreement). The Distribution
Plan has been approved for an additional term ending October 18, 1998, unless
earlier terminated by a vote of a majority of the Rule 12b-1 Directors, or by
vote of a majority of the Fund's outstanding shares.
The Distribution Plan provides that the Fund may finance activities which
are primarily intended to result in the sale of the Fund's shares, including but
not limited to, advertising, printing and mailing of prospectuses and
11
<PAGE>
reports for other than existing shareholders, printing and distribution of sales
literature, and the compensation of persons primarily engaged in the sale and
marketing of the Fund's shares.
The Distribution Plan may not be amended to increase materially the amount
to be spent by the Fund under the Distribution Plan without shareholder
approval, and all material amendments to the provisions of the Distribution Plan
must be approved by a vote of the Board of Directors, including a majority of
the Rule 12b-1 Directors, cast in person at a meeting called for the purpose of
such a vote. During the continuance of the Distribution Plan a report, in
writing, will be given to the Fund's Board of Directors, quarterly, showing the
amounts and purposes of such payments for services rendered pursuant to the
Distribution Plan. Further, during the term of the Distribution Plan, the
selection and nomination of those Directors who are not interested persons of
the Fund must be and has been committed to the discretion of the Rule 12b-1
Directors.
During 1997, the following sums were spent for the following purposes.
Advertising - Print Media $5,379,370
Advertising - Broadcast Media 2,390,287
Advertising - Internet 1,482,237
Printing and stationery 2,073,363
Postage 1,297,674
Services rendered 1,206,205
List rentals 582,852
Broker dealer fees 1,061,204
Employee compensation and benefits 560,903
Telephone 76,012
Professional fees 11,245
Other 8,075
Travel 19,508
Subscriptions 1,065
SPECIAL INVESTOR SERVICES
A shareholder may make arrangements for an Automatic Investing Plan. There
is a one time set-up charge of $5. The Automatic Investing Plan may be changed
or canceled at any time upon receipt by the Fund's Transfer Agent of written
instructions or an amended application from the shareholder with signatures
12
<PAGE>
guaranteed. It will be terminated automatically whenever a check is returned as
being uncollected for any reason.
Since the Fund's shares are subject to fluctuations in both income and
market value, an investor contemplating making periodic investments in shares of
the Fund should consider his financial ability to continue such investments
through periods of low price levels, and should understand that such a program
cannot protect him against loss of value in a declining market.
Individual Retirement Accounts (IRAs)
- -------------------------------------
The individual investor can select the shares of the Fund to fund either an
IRA, Rollover IRA or a non-working spousal IRA. To establish an IRA with the
Fund, you must complete an IRA Account Registration Form. If the assets are
being moved from an existing IRA to the Fund, you must also complete the IRA
Rollover/Transfer Form.
Many investors are eligible to deduct from federal income tax all or a
portion of their IRA investment. All dividends and capital gains on IRA
investments grow tax deferred until withdrawal. Investors may make contributions
to their IRAs until the tax year prior to reaching age 70 1/2. Mandatory
withdrawals must begin the year after an investor reaches 70 1/2. Investors
should consult their tax advisers for details on eligibility and tax
implications.
A Simplified Employee Pension Plan (SEP-IRA) may also be established.
Persons eligible may establish a SEP-IRA with their employer to invest in shares
of the Fund. Contact the Transfer Agent at (800) 637-1700 for details on
eligibility and other information.
In connection with the creation of an IRA account, please read the IRA
Disclosure Statement and Custodial Agreement which contains further information
regarding services and fees.
Investors should consult with their own tax advisers before establishing an
IRA account.
Qualified Retirement Plans
- --------------------------
The Fund has model Section 401(k) plans, Section 403(b)(7) plans and Money
Purchase and Profit Sharing Plans available. Contact the transfer agent at (800)
637-1700 for details on eligibility and other information.
13
<PAGE>
Systematic Withdrawal Plan
- --------------------------
Shares are redeemed to make the requested payment on the 25th day of each
month in which a withdrawal is to be made and payments are mailed within five
business days following the redemption. Each redemption of shares may result in
a gain or loss, which the investor must report on his income tax return.
Consequently, the investor should keep an accurate record of any gain or loss on
each withdrawal.
PURCHASE AND REDEMPTION OF SHARES
Information relating to the procedure for the purchase and redemption of
the Fund's shares at net asset value is contained on pages ___ through ___ of
the Fund's Prospectus.
A description of the procedure for the determination of the net asset value
of the Fund's shares is contained on page ___ of the Fund's Prospectus.
TAXES, DIVIDENDS AND CAPITAL GAINS
It is the intention of the Fund to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended. At
least 90% of gross income must be derived from dividends, interest, payments
with respect to securities loans and gains from the sale of securities.
If, in any taxable year, the Fund should not qualify as a "regulated
investment company" under the Code: (i) the Fund would be taxed at normal
corporate rates on the entire amount of its taxable income without deduction for
dividends or other distributions to its shareholders, and (ii) the Fund's
distributions to the extent made out of the Fund's current or accumulated
earnings and profits would be taxable to its shareholders as ordinary dividends
(regardless of whether they would otherwise have been considered capital gain
dividends), and may qualify for the 70% deduction for dividends received by
corporations.
The term "regulated investment company" does not imply the supervision of
the investment practices or policies of the Fund by any government agency.
14
<PAGE>
Qualification as a "regulated investment company" relieves the Fund from
any liability for Federal income taxes to the extent its net investment income
and capital gains are distributed.
The Fund does not intend to make distributions of profits realized on the
sale of securities unless available capital loss carryovers, if any, have been
utilized or have expired.
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston, MA 02110
is custodian of the securities and cash owned by the Fund. The Custodian is
responsible for holding all securities and cash of the Fund, receiving and
paying for securities purchased, delivering securities sold against payment,
receiving and collecting income from investments, making all payments covering
expenses of the Fund, and performing other administrative duties, all as
directed by persons authorized by the Fund. The Custodian does not exercise any
supervisory function in such matters as the purchase and sale of portfolio
securities, payment of dividends, or payment of expenses of the Fund. Portfolio
securities of the Fund purchased in the United States are maintained in the
custody of the Custodian, and may be entered in the Federal Reserve Book Entry
System, or the security depository systems of The Depository Trust Company.
AUDITOR
Sanville & Company, 1514 Old York Road, Abington, Pennsylvania 19001, will
serve as the Fund's independent public accountants and will audit the Fund's
records and prepare financial statements based thereon.
FINANCIAL STATEMENTS
The latest financial highlights of the Fund appear in the Prospectus: other
financial statements of the Fund as at 12/31/97 appear in the 1997 Annual Report
of the Fund and they are incorporated by reference.
PERFORMANCE INFORMATION
The performance of The Kaufmann Fund, Inc. may be compared to the record of
the Standard & Poor's Corporation 500 Stock Index ("S&P 500 Stock Index"), the
NASDAQ Composite Index, the Russell 2000 Index, the Wilshire 5000 Equity Index
and returns quoted by Ibbotson Associates. The S&P 500 Stock Index is a well
known measure of the price performance of 500 leading larger domestic stocks
which represents approximately 80% of the market capitalization of the United
States equity market. In comparison, the NASDAQ National Market System is
comprised of all
15
<PAGE>
stocks on NASDAQ's National Market System, as well as other NASDAQ domestic
equity securities. The NASDAQ Composite Index has typically included smaller,
less mature companies representing 10% to 15% of the capitalization of the
entire domestic equity market. Both indices are unmanaged and capitalization
weighted. In general, the securities comprising the NASDAQ Composite Index are
more growth oriented and have a somewhat higher "beta" and P/E ratio than those
in the S&P 500 Stock Index. The Russell 2000 Index is a capitalization weighted
index which measures total return (and includes in such calculation dividend
income and price appreciation). The Russell 2000 is generally regarded as a
measure of small capitalization performance. It is a subset of the Russell 3000
Index. The Russell 3000 is comprised of the 3000 largest U.S. companies. The
Russell 2000 is comprised of the smallest 2000 companies in the Russell 3000
Index. The Wilshire 5000 Index is a broad measure of market performance and
represents the total dollar value of all common stocks in the United States for
which daily pricing information is available. This index is also capitalization
weighted and captures total return. The small company stock returns quoted by
Ibbotson Associates are based upon the smallest quintile of the New York Stock
Exchange, as well as similar capitalization stocks on the American Stock
Exchange and NASDAQ. This data base is also unmanaged and capitalization
weighted.
The total returns for all indices used show the changes in prices for the stocks
in each index. However, only the performance data for the S&P 500 Stock Index
and the Ibbotson Associates performance data assume reinvestment of all capital
gains distributions and dividends paid by the stocks in each data base. Tax
consequences are not included in such illustrations, nor are brokerage or other
fees or expenses reflected in the NASDAQ Composite or S&P 500 Stock figures. In
addition, the Fund's total return or performance may be compared to the
performance of other funds or other groups of funds that are followed by
Morningstar, Inc. a widely used independent research firm which ranks funds by
overall performance, investment objectives and asset size. Morningstar
proprietary ratings reflect risk-adjusted performance. The ratings are subject
to change every month. Morningstar's ratings are calculated from a fund's
three-year and five-year average annual returns with appropriate sales charge
adjustments and a risk factor that reflects fund performance relative to
three-month Treasury bill monthly returns. Ten percent of the funds in an asset
class receive a five star rating. The Fund's total return or performance may
also be compared to the performance of other funds or groups of funds by other
financial or business publications, such as Business Week, Investors Daily,
Mutual Fund Forecaster, Money Magazine, Wall Street Journal, New York Times,
Baron's, and Lipper Analytical Services. The Fund's performance may also be
compared, from time to time, to (a) indices of stocks comparable to those in
which the Fund invests; (b) the Consumer Price Index (measure for inflation) may
be used to assess the real rate of return from an investment in the Fund.
Certain government statistics, such as the Gross National Product, may be used
to illustrate the investment attributes of the Fund or the general economic
business, investment or financial environment in which the Fund operates.
Finally, the effect of tax-deferred compounding on the Fund's investment
returns, or
16
<PAGE>
on returns in general, may be illustrated by graphs or charts where such graphs
or charts would compare, at various points in time, the return from an
investment in the Fund (or returns in general) on a tax-deferred basis (assuming
reinvestment of capital gains and dividends and assuming one or more tax rates)
with the return on a taxable basis.
ADDITIONAL PERFORMANCE INFORMATION FOR THE FUND
The Fund may reflect its total return in advertisements and shareholder
reports. Total investment return is one recognized method of measuring mutual
fund investment performance. Quotations of average annual total return will be
shown in terms of the average annual compounded rate of return on a hypothetical
investment in the Fund over a period of 1 year, 5 years and 10 years. This
method of calculating total return is based on the following assumptions: (1)
all dividends and distributions by the Fund are reinvested in shares of the Fund
at net asset value; (2) all recurring fees are included for applicable periods;
and (3) the redemption fee of .2% on redemption of Fund shares acquired after
February 1, 1985 is taken into consideration. Total return may also be expressed
in terms of the cumulative value of an investment in the Fund at the end of a
defined period of time. Total returns for the one, five and ten year periods
ending 12/31/97 were 12.56%, 139.96% (annualized 19.13%) and 946.12% (annualized
26.46%), respectively.
17
<PAGE>
PART C
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
---------------------------------
(a) Financial Statements
--------------------
The following financial statements for the calendar year ending December 31,
1996 appear in the Fund's Prospectus or in the Statement of Additional
Information.
In Prospectus
-------------
Per Share Income and Capital Changes -
Ten Years - December 31, 1988-1997
In Statement of Additional Information
--------------------------------------
The Registrant's Annual Report for the calendar year
ending 12/31/97 is incorporated by reference.
Pursuant to the requirements of Rule 303(b) of
Regulation ST, the following financial statements
appearing in the Registrant's 12/31/97 Annual Report,
filed in electronic format, are included as exhibits
to this filing.
(1) Statement of Assets and Liabilities - December 31, 1997
(2) Statement of Operations - December 31, 1997
(3) Statement of Changes in Net Assets - December 31, 1996
and December 31, 1997
(4) Notes to Financial Statements - December 31, 1997
(5) Opinion of Sanville and Company dated March 23, 1998
(6) Schedule of Investments - December 31, 1997
(7) Schedule of Securities Sold Short - December 31, 1997
<PAGE>
(b) Exhibits
--------
Exhibit No.
-----------
(1) Copies of the Certificate of
Incorporation as now in effect;
Certificate of Incorporation,
as amended (i)***
(2) Copies of the existing By-Laws
or instruments corresponding
thereto;
Copy of By-Laws (ii)***
(3) Copies of any voting Trust None
Agreement with respect to
more than 5% of any class
of equity securities of
the Registrant.
(4) Specimens of copies of each
security issued by the
Registrant, including copies
of all constituent instruments,
defining the rights of the
holders of such securities and
copies of each security being
registered;
The Kaufmann Fund, Inc. 4*
Certificate of Common Stock
(5) Copies of all investment
advisory contracts relating to
the management of the Assets
of the Registrant;
Copy of Investment Management 5***
Agreement between The Kaufmann
Fund, Inc. and Edgemont Asset
Management Corporation, as amended.
2
<PAGE>
(6) Copies of each underwriting or None
distribution contract between
the Registrant and a principal
underwriter, and specimens of
copies of all agreements between
principal underwriters and dealers.
(7) Copies of all bonus, profit None
sharing, pension or other similar
arrangements wholly or partly for
the benefit of Directors or
Officers of the Registrant in
their capacity as such; any such
plan that is not set forth in a
formal document, furnish a
reasonably detailed description thereof.
(8) Copies of all custodian
agreements and depository
contracts under Section 17(f)
of the 1940 Act with respect
to securities and similar
investments.
Custodian Agreement 8(a)
between and The Kaufmann Fund,
Inc. and State Street Bank and
Trust Company.
Special Custody Account Agreement 8(b)
between The Kaufmann Fund, Inc., State
Street Bank and Trust Company, and
Morgan Stanley Prime Brokerage
(9) Copies of all material contracts
not made in the ordinary course
of business which are to be
performed in whole or in part at
or after the date of the filing of
the Registration Statement;
Transfer Agency and 9(a)
and Service Agreement between
The Kaufmann Fund, Inc. and Boston
Financial Data Services, Inc.
3
<PAGE>
Copy of Authorization Agreement 9(b)
for payment of Service Fees
(10) An opinion and consent of counsel
as to the legality of the securities
being registered, indicating whether
they will, when sold, be legally
issued, fully paid and non-assessable;
Opinion of Martin V. Miller, Esq. 10
and consent dated 4/20/98
(11) Copies of any other opinions,
appraisals or rulings and consents
to the use thereof relied on in the
preparation of this Registration
Statement and required by Section 7
of the 1933 Act.
(a) Opinion of Sanville
Company - Certified Public
Accountants included in Annual
Report for year ending 12/31/97
which is incorporated by reference
in the Fund's 1997 Annual Report.
(b) Consent of Sanville & 11(b)
Company
(12) All financial statements None
omitted from Item 23;
(13) Copies of any agreements or None
understandings made in
consideration for providing the
initial capital between and among
the Registrant, the Underwriter,
adviser, promoter, or initial
stockholders that their purchases
were made for investment purposes
without any present intention of
redeeming or reselling.
4
<PAGE>
(14) Copies of model plan used in the
establishment of any retirement plan
in conjunction with which Registrant
offers its securities, any instructions
thereto, and any other documents making
up the model plan. Such form(s) should
disclose the costs and fees charged in
connection therewith.
Copy of State Street Bank and Trust 14(a)**
Company Individual Retirement
Custodial Account.
Copy of Disclosure Statement. 14(b)**
(15) Copies of any plan entered into
by Registrant pursuant to Rule 12b-1
under the 1940 Act, which describes
all material aspects of the
financing of distribution or
Registrant's shares, and
any agreements with any person
relating to implementation of such
Plan.
Plan of Distribution adopted 15(a)(1)
by The Kaufmann Fund, Inc.
Amendment No. 1 dated 7/1/93 15(a)(2)
Agreement Pursuant to Plan of 15(b)(1)
Distribution between The
Kaufmann Fund, Inc. and Edgemont
Asset Management Corporation
Amendment No. 1 dated 7/1/93 15(b)(2)
Form of Distribution Agreement 15(c)
(16) Schedule for computation
of each performance quotation
provided in the Registration
Statement in response to Item 22
(which need not be audited).
Computation of a $1,000 16
Hypothetical Investment in
the Fund, as set forth in
Prospectus Fee Table
(17) A Financial Data Schedule meeting 17
the requirements of Rule 483 under
the Securities Act of 1933.
(18) Copies of any plan entered into N/A
pursuant to Rule 18f-3 under the
1940 Act.
5
<PAGE>
* An Exhibit to Post-Effective Amendment No. 37 which was filed on December
11, 1993.
** An Exhibit to Post-Effective Amendment No. 43 which was filed on March 15,
1995.
*** An Exhibit to Post-Effective Amendment No. 45 filed electronically on
March 11, 1996.
All Exhibits except those filed with this Post-Effective Amendment are hereby
incorporated by reference.
<PAGE>
Item 25. Persons Controlled by or Under Common Control With Registrant
-------------------------------------------------------------
There are no persons controlled by or under common control with
Registrant.
Item 26. Number of Holders of Securities
-------------------------------
(a) Title of Class
--------------
Common Capital Stock, $.10 par value
(b) Number of Record Holders
------------------------
As of December 31, 1997 - 273,233
Item 27. Indemnification
---------------
(a) General. The Articles of Incorporation (the "Articles") of the
Fund provide that to the fullest extent permitted by Maryland or
federal law, no director or officer of the Fund shall be
personally liable to the Fund or its shareholders for money
damages and each director and officer shall be indemnified by the
Fund. The By-Laws of the Fund provide that the Fund shall
indemnify any individual who is a present or former director or
officer of the Fund and who, by reason of his position was, is or
is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (hereinafter collectively
referred to as a "Proceeding") against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by
such director or officer in connection with such Proceeding, to
the fullest extent that such indemnification may be lawful under
Maryland law.
6
<PAGE>
(b) Disabling Conduct. Both the Articles and the By-Laws provide,
however, that nothing therein shall be deemed to protect any
director or officer against any liability to the Fund or its
shareholders to which such director or officer would otherwise be
subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his or her office (such conduct hereinafter referred
to as "Disabling Conduct").
The By-Laws provide that no indemnification of a director or
officer may be made unless: (1) there is a final decision on the
merits by a court or other body before whom the Proceeding was
brought that the director or officer to be indemnified was not
liable by reason of Disabling Conduct; or (2) in the absence of
such a decision, there is a reasonable determination, based upon
a review of the facts, that the director or officer to be
indemnified was not liable by reason of Disabling Conduct, which
determination shall be made by: (i) the vote of a majority of a
quorum of directors who are neither "interested persons" of the
Fund as defined in Section 2(a)(19) of the 1940 Act, nor parties
to the Proceeding; or (ii) an independent legal counsel in a
written opinion.
(c) Standard of Conduct. Under Maryland law, the Fund may not
indemnify any director if it is proved that: (1) the act or
omission of the director was material to the cause of action
adjudicated in the Proceeding and (i) was committed in bad faith
or (ii) was the result of active and deliberate dishonesty; or
(2) the director actually received an improper personal benefit;
or (3) in the case of a criminal proceeding, the director had
reasonable cause to believe that the act or omission was
unlawful. No indemnification may be made under Maryland law
unless authorized for a specific proceeding after a
determination, in accordance with Maryland law, has been made
that indemnification is permissible in the circumstances because
the requisite standard of conduct has been met.
(d) Required Indemnification. Maryland law requires that a director
or officer who is successful, on the merits or otherwise, in the
defense of any Proceeding shall be indemnified against reasonable
expenses incurred by the director or officer in connection with
the Proceeding. In addition, under Maryland law, a court of
appropriate jurisdiction may order indemnification under certain
circumstances.
7
<PAGE>
(e) Advance Payment. The By-Laws provide that the Fund may pay any
reasonable expenses so incurred by any director or officer in
defending a Proceeding in advance of the final disposition
thereof to the fullest extent permissible under Maryland law. In
accordance with the By-Laws, such advance payment of expenses
shall be made only upon the undertaking by such director or
officer to repay the advance unless it is ultimately determined
that such director or officer is entitled to indemnification, and
only if one of the following conditions is met: (1) the director
or officer to be indemnified provides a security for his
undertaking; (2) the Fund shall be insured against losses arising
by reason of any lawful advances; or (3) there is a
determination, based on a review of readily available facts, that
there is reason to believe that the director or officer to be
indemnified ultimately will be entitled to indemnification, which
determination shall be made by: (i) a majority of a quorum of
directors who are neither "interested persons" of the Fund, as
defined in Section 2(a)(19) of the 1940 Act, nor parties to the
Proceeding; or (ii) an independent legal counsel in a written
opinion.
(f) Insurance. The By-Laws provide that, to the fullest extent
permitted by Maryland law and Section 17(h) of the 1940 Act, the
Fund may purchase and maintain insurance on behalf of any officer
or director of the Fund, against any liability asserted against
him or her and incurred by him or her in and arising out of his
or her position, whether or not the Fund would have the power to
indemnify him or her against such liability.
Item 28. Business and Other Connections of Investment Advisor
----------------------------------------------------
Bowling Green Securities, Inc., 140 East 45th Street, 43rd Floor, New York,
New York 10017, is wholly owned by Hans P. Utsch. Mr. Utsch is the Chairman of
the Board and owner of 50% of the outstanding voting securities of Edgemont
Asset Management Corporation. Mr. Lawrence Auriana is a registered
representative of Bowling Green Securities, Inc. and is a director and president
of Edgemont Asset Management Corporation and owns 50% of the outstanding voting
securities of such company.
Item 29. Principal Underwriter
---------------------
The Fund does not have a principal underwriter
8
<PAGE>
Item 30. Location of Accounts and Records
--------------------------------
The books and records of the Fund, other than the accounting and
transfer agency (including dividend disbursing) records, are
maintained by the Fund at 140 East 45th Street, 43rd Floor, New York,
New York 10017; the Fund's accounting and transfer agency records are
maintained at Boston Financial Data Services, Inc., Two Heritage
Drive, Quincy, MA 02171.
Item 31. Management Services
-------------------
There are no management service contracts not described in Part A or
Part B of Form N-1A
Item 32. Undertakings
------------
a) The Fund undertakes to provide a copy of its most recent Annual
Report without charge to any recipient of its currently effective
prospectus who requests the information.
b) The Fund agrees that the Directors of the Fund will promptly call
a meeting of shareholders for the purpose of acting upon
questions of removal of a director or directors when requested in
writing to do so by the record holder of not less than 10% of the
outstanding shares.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and the Registrant has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
hereunto duly authorized in the City of New York and State of New York, on the
29th day of April, 1998.
THE KAUFMANN FUND, INC.
/s/ Hans P. Utsch
By: ___________________________
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
NAME TITLE DATE
/s/ Hans P. Utsch April 29, 1998
______________________ Director, _________________
HANS P. UTSCH President and
Treasurer
/s/ Lawrence Auriana April 29, 1998
______________________ Chairman of Board, _________________
LAWRENCE AURIANA Director,
Vice President
and Secretary
/s/ Leon Lebensbaum April 29, 1998
______________________ Director _________________
LEON LEBENSBAUM
/s/ Gerard M. Grosof April 29, 1998
______________________ Director _________________
GERARD M. GROSOF
/s/ Pauline Gold April 29, 1998
______________________ Director _________________
PAULINE GOLD
/s/ Roger E. Clark April 29, 1998
______________________ Director _________________
ROGER E. CLARK
I participated in the preparation of Post Effective Amendment No. 48 to the
Registration Statement on Form N-1A of the Kaufmann Fund, Inc. It does not
contain disclosure which would render it ineligible to become effective pursuant
to paragraph (b) of Rule 485 under the Securities Act of 1933, as amended.
/s/ Martin V. Miller
--------------------------------
Martin V. Miller
CUSTODIAN CONTRACT
Between
THE KAUFMANN FUND, INC.
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
1. Employment of Custodian and Property to be
Held By It............................................................1
2. Duties of the Custodian with Respect to Property of
the Fund Held by the Custodian in the United States...................1
2.1 Holding Securities...........................................1
2.2 Delivery of Securities.......................................2
2.3 Registration of Securities...................................4
2.4 Bank Accounts................................................5
2.5 Availability of Federal Funds................................5
2.6 Collection of Income.........................................5
2.7 Payment of Fund Monies ......................................6
2.8 Liability for Payment in Advance of
Receipt of Securities Purchased..............................7
2.9 Appointment of Agents........................................7
2.10 Deposit of Securities in Securities System...................7
2.11 Fund Assets Held in the Custodian's Direct
Paper System.................................................9
2.12 Segregated Account...........................................9
2.13 Ownership Certificates for Tax Purposes.....................10
2.14 Proxies.....................................................10
2.15 Communications Relating to Fund
Portfolio Securities........................................10
2.16 Reports to Fund by Independent Public
Accountants.................................................11
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States...........................11
3.1 Appointment of Foreign Sub-Custodians.......................11
3.2 Assets to be Held...........................................11
3.3 Foreign Securities Depositories.............................12
3.4 Agreements with Foreign Banking Institutions................12
3.5 Access of Independent Accountants of the Fund...............12
3.6 Reports by Custodian........................................12
3.7 Transactions in Foreign Custody Account.....................13
3.8 Liability of Foreign Sub-Custodians.........................13
3.9 Liability of Custodian......................................13
3.10 Reimbursement for Advances..................................14
3.11 Monitoring Responsibilities.................................14
3.12 Branches of U.S. Banks......................................14
3.13 Tax Law.....................................................15
4. Payments for Repurchases or Redemptions and Sales
of Shares of the Fund................................................15
5. Proper Instructions..................................................16
<PAGE>
6. Actions Permitted Without Express Authority..........................16
7. Evidence of Authority................................................17
8. Duties of Custodian with Respect to the Books of
Account and Calculations of Net Asset Value and
Net Income...........................................................17
9. Records..............................................................17
10. Opinion of Fund's Independent Accountant.............................18
11. Compensation of Custodian............................................18
12. Responsibility of Custodian..........................................18
13. Effective Period, Termination and Amendment..........................19
14. Successor Custodian..................................................20
15. Interpretive and Additional Provisions...............................21
16. Massachusetts Law to Apply...........................................21
17. Prior Contracts......................................................22
18. Shareholder Communications Election..................................22
<PAGE>
CUSTODIAN CONTRACT
------------------
This Contract between The Kaufmann Fund, Inc., a corporation organized and
existing under the laws of the State of Maryland, having its principal place of
business at 140 East 45th Street, New York, New York 10017, hereinafter called
the "Fund", and State Street Bank and Trust Company, a Massachusetts trust
company, having its principal place of business at 225 Franklin Street, Boston,
Massachusetts, 02110, hereinafter called the "Custodian",
WITNESSETH: That in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
-----------------------------------------------------
The Fund hereby employs the Custodian as the custodian of its assets,
including securities it desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities"). The Fund agrees to deliver to the Custodian all
securities and cash owned by it, and all payments of income, payments of
principal or capital distributions received by it with respect to all securities
owned by the Fund from time to time, and the cash consideration received by it
for such new or treasury shares of capital stock, $0.10 par value, ("Shares") of
the Fund as may be issued or sold from time to time. The Custodian shall not be
responsible for any property of the Fund held or received by the Fund and not
delivered to the Custodian.
Upon receipt of "Proper Instructions" (within the meaning of Article 5),
the Custodian shall from time to time employ one or more sub-custodians located
in the United States, but only in accordance with an applicable vote by the
Board of Directors of the Fund, and provided that the Custodian shall have no
more or less responsibility or liability to the Fund on account of any actions
or omissions of any sub-custodian employed at the Fund's request than any such
sub-custodian has to the Custodian. The Fund shall have the right to approve the
terms and conditions of any agreement between State Street and any such
sub-custodian. The Custodian may employ as sub-custodians for the Fund's
securities and other assets the foreign banking institutions and foreign
securities depositories designated in Schedule "A" hereto but only in accordance
with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By the
---------------------------------------------------------------------------
Custodian in the United States
------------------------------
2.1 Holding Securities. The Custodian shall hold and physically segregate for
the account of the Fund all non-cash property, to be held by it in the
United States, including all domestic securities owned by the Fund, other
than (a) securities which are maintained pursuant to Section 2.10 in a
clearing agency which acts as a securities depository or in a book-entry
system authorized by the U.S. Department of the Treasury, collectively
referred to herein as "Securities System" and (b) commercial paper of an
issuer for which State Street Bank and Trust Company acts as issuing and
paying agent ("Direct Paper") which is deposited and/or maintained in the
Direct Paper System of the Custodian pursuant to Section 2.11.
2.2 Delivery of Securities. The Custodian shall release and deliver domestic
securities owned by the Fund held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper
book-entry system account ("Direct Paper System Account") only upon receipt
of Proper Instructions, which may be continuing instructions when deemed
appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund and receipt
of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other similar
offers for portfolio securities of the Fund;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or otherwise become payable; provided that, in any
such case, the cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of the
Fund or into the name of any nominee or nominees of the Custodian or
into the name or nominee name of any agent appointed pursuant to
Section 2.9 or into the name or nominee name of any sub-custodian
appointed pursuant to Article 1; or for exchange for a different
number of bonds, certificates or other evidence representing the same
aggregate face amount or number of units; provided that, in any such
case, the new securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the
2
<PAGE>
Fund, to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom; provided that
in any such case, the Custodian shall have no responsibility or
liability for any loss arising from the delivery of such securities
prior to receiving payment for such securities except as may arise
from the Custodian's own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of the
securities of the issuer of such securities, or pursuant to provisions
for conversion contained in such securities, or pursuant to any
deposit agreement; provided that, in any such case, the new securities
and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar securities
or the surrender of interim receipts or temporary securities for
definitive securities; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
10) For delivery in connection with any loans of securities made by the
Fund, but only against receipt of adequate collateral as agreed upon
from time to time by the Custodian and the Fund, which may be in the
form of cash or obligations issued by the United States government,
its agencies or instrumentalities, except that in connection with any
loans for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S. Department of
the Treasury, the Custodian will not be held liable or responsible for
the delivery of securities owned by the Fund prior to the receipt of
such collateral;
11) For delivery as security in connection with any borrowings by the Fund
requiring a pledge of assets by the Fund, but only against receipt of
amounts borrowed;
12) For delivery in accordance with the provisions of any agreement among
the Fund, the Custodian and a broker-dealer registered under the
Securities Exchange Act of 1934 (the "Exchange Act") and a member of
The National Association of Securities Dealers, Inc. ("NASD"),
relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange, or of
any similar organization or organizations, regarding escrow or other
3
<PAGE>
arrangements in connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any agreement among
the Fund, the Custodian, and a Futures Commission Merchant registered
under the Commodity Exchange Act, relating to compliance with the
rules of the Commodity Futures Trading Commission and/or any Contract
Market, or any similar organization or organizations, regarding
account deposits in connection with transactions by the Fund;
14) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Fund, for delivery to such Transfer Agent or to the
holders of shares in connection with distributions in kind, as may be
described from time to time in the Fund's currently effective
prospectus and statement of additional information ("prospectus"), in
satisfaction of requests by holders of Shares for repurchase or
redemption; and
15) For any other proper corporate purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a resolution of
the Board of Directors or of the Executive Committee signed by an
officer of the Fund and certified by the Secretary or an Assistant
Secretary, specifying the securities to be delivered, setting forth
the purpose for which such delivery is to be made, declaring such
purpose to be a proper corporate purpose, and naming the person or
persons to whom delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the Fund
or in the name of any nominee of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund, unless
the Fund has authorized in writing the appointment of a nominee to be used
in common with other registered investment companies having the same
investment adviser as the Fund, or in the name or nominee name of any agent
appointed pursuant to Section 2.9 or in the name or nominee name of any
sub-custodian appointed pursuant to Article 1. All securities accepted by
the Custodian on behalf of the Fund under the terms of this Contract shall
be in "street name" or other good delivery form. If, however, the Fund
directs the Custodian to maintain securities in "street name", the
Custodian shall utilize its best efforts only to timely collect income due
the Fund on such securities and to notify the Fund on a best efforts basis
only of relevant corporate actions including, without limitation, pendency
of calls, maturities, tender or exchange offers.
4
<PAGE>
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in the name of the Fund, subject
only to draft or order by the Custodian acting pursuant to the terms of
this Contract, and shall hold in such account or accounts, subject to the
provisions hereof, all cash received by it from or for the account of the
Fund, other than cash maintained by the Fund in a bank account established
and used in accordance with Rule 17f-3 under the Investment Company Act of
1940. Funds held by the Custodian for the Fund may be deposited by it to
its credit as Custodian in the Banking Department of the Custodian or in
such other banks or trust companies as it may in its discretion deem
necessary or desirable; provided, however, that every such bank or trust
company shall be qualified to act as a custodian under the Investment
Company Act of 1940 and that each such bank or trust company and the funds
to be deposited with each such bank or trust company shall be approved by
vote of a majority of the Board of Directors of the Fund. Such funds shall
be deposited by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund and
the Custodian, the Custodian shall, upon the receipt of Proper
Instructions, make federal funds available to the Fund as of specified
times agreed upon from time to time by the Fund and the Custodian in the
amount of checks received in payment for Shares of the Fund which are
deposited into the Fund's account.
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to United States registered securities held hereunder to which
the Fund shall be entitled either by law or pursuant to custom in the
securities business, and shall collect on a timely basis all income and
other payments with respect to United States bearer securities if, on the
date of payment by the issuer, such securities are held by the Custodian or
its agent thereof and shall credit such income, as collected, to the Fund's
custodian account. Without limiting the generality of the foregoing, the
Custodian shall detach and present for payment all coupons and other income
items requiring presentation as and when they become due and shall collect
interest when due on securities held hereunder. Income due the Fund on
United States securities loaned pursuant to the provisions of Section 2.2
(10) shall be the responsibility of the Fund. The Custodian will have no
duty or responsibility in connection therewith, other than to provide the
Fund with such information or data as may be necessary to assist the Fund
in arranging for the timely delivery to the Custodian of the income to
which the Fund is properly entitled.
5
<PAGE>
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions, which may be
continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out monies of the Fund in the following cases only:
1) Upon the purchase of domestic securities, options, futures contracts
or options on futures contracts for the account of the Fund but only
(a) against the delivery of such securities, or evidence of title to
such options, futures contracts or options on futures contracts, to
the Custodian (or any bank, banking firm or trust company doing
business in the United States or abroad which is qualified under the
Investment Company Act of 1940, as amended, to act as a custodian and
has been designated by the Custodian as its agent for this purpose)
registered in the name of the Fund or in the name of a nominee of the
Custodian referred to in Section 2.3 hereof or in proper form for
transfer; (b) in the case of a purchase effected through a Securities
System, in accordance with the conditions set forth in Section 2.10
hereof; (c) in the case of a purchase involving the Direct Paper
System, in accordance with the conditions set forth in Section 2.11;
(d) in the case of repurchase agreements entered into between the Fund
and the Custodian, or another bank, or a broker-dealer which is a
member of NASD, (i) against delivery of the securities either in
certificate form or through an entry crediting the Custodian's account
at the Federal Reserve Bank with such securities or (ii) against
delivery of the receipt evidencing purchase by the Fund of securities
owned by the Custodian along with written evidence of the agreement by
the Custodian to repurchase such securities from the Fund or (e) for
transfer to a time deposit account of the Fund in any bank, whether
domestic or foreign; such transfer may be effected prior to receipt of
a confirmation from a broker and/or the applicable bank pursuant to
Proper Instructions from the Fund as defined in Article 5;
2) In connection with conversion, exchange or surrender of securities
owned by the Fund as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by the Fund as set
forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the Fund,
including but not limited to the following payments for the account of
the Fund: interest, taxes, management, accounting, transfer agent and
legal fees, and operating expenses of the Fund whether or not such
expenses are to be in whole or part capitalized or treated as deferred
expenses;
6
<PAGE>
5) For the payment of any dividends declared pursuant to the governing
documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in addition to
Proper Instructions, a certified copy of a resolution of the Board of
Directors or of the Executive Committee of the Fund signed by an
officer of the Fund and certified by its Secretary or an Assistant
Secretary, specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring such purpose
to be a proper purpose, and naming the person or persons to whom such
payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased. Except
as specifically stated otherwise in this Contract, in any and every case
where payment for purchase of domestic securities for the account of the
Fund is made by the Custodian in advance of receipt of the securities
purchased in the absence of specific written instructions from the Fund to
so pay in advance, the Custodian shall be absolutely liable to the Fund for
such securities to the same extent as if the securities had been received
by the Custodian.
2.9 Appointment of Agents. The Custodian may, with the prior approval of the
Board of Directors of the Fund, appoint (and may at any time remove) any
other bank or trust company which is itself qualified under the Investment
Company Act of 1940, as amended, to act as a custodian, as its agent to
carry out such of the provisions of this Article 2 as the Custodian may
from time to time direct; provided, however, that the appointment of any
agent shall not relieve the Custodian of its responsibilities or
liabilities hereunder.
2.10 Deposit of Securities in Securities Systems. The Custodian may deposit
and/or maintain domestic securities owned by the Fund in a clearing agency
registered with the Securities and Exchange Commission under Section 17A of
the Securities Exchange Act of 1934, which acts as a securities depository,
or in the book-entry system authorized by the U.S. Department of the
Treasury and certain federal agencies, collectively referred to herein as
"Securities System" in accordance with applicable Federal Reserve Board and
Securities and Exchange Commission rules and regulations, if any, and
subject to the following provisions:
1) The Custodian may keep domestic securities of the Fund in a Securities
System provided that such securities are represented in an account
("Account") of the Custodian in the Securities System which shall not
include any assets
7
<PAGE>
of the Custodian other than assets held as a fiduciary, custodian or
otherwise for customers;
2) The records of the Custodian with respect to domestic securities of
the Fund which are maintained in a Securities System shall identify by
book-entry those securities belonging to the Fund;
3) The Custodian shall pay for domestic securities purchased for the
account of the Fund upon (i) receipt of advice from the Securities
System that such securities have been transferred to the Account, and
(ii) the making of an entry on the records of the Custodian to reflect
such payment and transfer for the account of the Fund. The Custodian
shall transfer domestic securities sold for the account of the Fund
upon (i) receipt of advice from the Securities System that payment for
such securities has been transferred to the Account, and (ii) the
making of an entry on the records of the Custodian to reflect such
transfer and payment for the account of the Fund. Copies of all
advices from the Securities System of transfers of domestic securities
for the account of the Fund shall identify the Fund, be maintained for
the Fund by the Custodian and be provided to the Fund at its request.
Upon request, the Custodian shall furnish the Fund confirmation of
each transfer to or from the account of the Fund in the form of a
written advice or notice and shall furnish to the Fund copies of daily
transaction sheets reflecting each day's transactions in the
Securities System for the account of the Fund.
4) The Custodian shall provide the Fund with any report obtained by the
Custodian on the Securities System's accounting system, internal
accounting control and procedures for safeguarding domestic securities
deposited in the Securities System;
5) The Custodian shall have received the initial certificate required by
Article 13 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to the
Fund resulting from use of the Securities System by reason of any
negligence, misfeasance or misconduct of the Custodian or any of its
agents or of any of its or their employees or from failure of the
Custodian or any such agent to enforce effectively such rights as it
may have against the Securities System; at the election of the Fund,
it shall be entitled to be subrogated to the rights of the Custodian
with respect to any claim against the Securities System or any other
person which the Custodian
8
<PAGE>
may have as a consequence of any such loss or damage if and to the
extent that the Fund has not been made whole for any such loss or
damage.
2.11 Fund Assets Held in the Custodian's Direct Paper System. The Custodian may
deposit and/or maintain securities owned by the Fund in the Direct Paper
System of the Custodian subject to the following provisions:
1) No transaction relating to securities in the Direct Paper System will
be effected in the absence of Proper Instructions;
2) The Custodian may keep securities of the Fund in the Direct Paper
System only if such securities are represented in an account
("Account") of the Custodian in the Direct Paper System which shall
not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
3) The records of the Custodian with respect to securities of the Fund
which are maintained in the Direct Paper System shall identify by
book-entry those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased for the account of
the Fund upon the making of an entry on the records of the Custodian
to reflect such payment and transfer of securities to the account of
the Fund. The Custodian shall transfer securities sold for the account
of the Fund upon the making of an entry on the records of the
Custodian to reflect such transfer and receipt of payment for the
account of the Fund;
5) The Custodian shall furnish the Fund confirmation of each transfer to
or from the account of the Fund, in the form of a written advice or
notice, of Direct Paper on the next business day following such
transfer and shall furnish to the Fund copies of daily transaction
sheets reflecting each day's transaction in the Securities System for
the account of the Fund;
6) The Custodian shall provide the Fund with any report on its system of
internal accounting control as the Fund may reasonably request from
time to time;
2.12 Segregated Account. The Custodian shall upon receipt of Proper Instructions
establish and maintain a segregated account or accounts for and on behalf
of the Fund, into which account or accounts may be transferred cash and/or
securities, including securities maintained in an account by the Custodian
pursuant to Section 2.10 hereof, (i) in accordance with the
9
<PAGE>
provisions of any agreement among the Fund, the Custodian and a
broker-dealer registered under the Exchange Act and a member of the NASD
(or any futures commission merchant registered under the Commodity Exchange
Act), relating to compliance with the rules of The Options Clearing
Corporation and of any registered national securities exchange (or the
Commodity Futures Trading Commission or any registered contract market), or
of any similar organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund, (ii) for purposes
of segregating cash or government securities in connection with options
purchased, sold or written by the Fund or commodity futures contracts or
options thereon purchased or sold by the Fund, (iii) for the purposes of
compliance by the Fund with the procedures required by Investment Company
Act Release No. 10666, or any subsequent release or releases of the
Securities and Exchange Commission relating to the maintenance of
segregated accounts by registered investment companies and (iv) for other
proper corporate purposes, but only, in the case of clause (iv), upon
receipt of, in addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors or of the Executive Committee signed
by an officer of the Fund and certified by the Secretary or an Assistant
Secretary, setting forth the purpose or purposes of such segregated account
and declaring such purposes to be proper corporate purposes.
2.13 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to domestic securities of the Fund held by it and in connection
with transfers of such securities.
2.14 Proxies. The Custodian shall, with respect to the domestic securities held
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of
the Fund or a nominee of the Fund, all proxies, without indication of the
manner in which such proxies are to be voted, and shall promptly deliver to
the Fund such proxies, all proxy soliciting materials and all notices
relating to such securities.
2.15 Communications Relating to Fund Portfolio Securities. Subject to the
provisions of Section 2.3, the Custodian shall transmit promptly to the
Fund all written information (including, without limitation, pendency of
calls and maturities of domestic securities and expirations of rights in
connection therewith and notices of exercise of call and put options
written by the Fund and the maturity of futures contracts purchased or sold
by the Fund) received by the Custodian from issuers of the domestic
securities being held for the Fund.
10
<PAGE>
With respect to tender or exchange offers, the Custodian shall transmit
promptly to the Fund all written information received by the Custodian from
issuers of the domestic securities whose tender or exchange is sought and
from the party (or his agents) making the tender or exchange offer. If the
Fund desires to take action with respect to any tender offer, exchange
offer or any other similar transaction, the Fund shall notify the Custodian
at least three business days prior to the date on which the Custodian is to
take such action.
2.16 Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for
safeguarding securities, futures contracts and options on futures
contracts, including domestic securities deposited and/or maintained in a
Securities System, relating to the services provided by the Custodian under
this Contract; such reports shall be of sufficient scope and in sufficient
detail, as may reasonably be required by the Fund to provide reasonable
assurance that any material inadequacies would be disclosed by such
examination, and, if there are no such inadequacies, the reports shall so
state.
3. Duties of the Custodian with Respect to Property of the Fund Held Outside
---------------------------------------------------------------------------
of the United States
--------------------
3.1 Appointment of Foreign Sub-Custodians. The Fund hereby authorizes and
instructs the Custodian to employ as sub-custodians for the Fund's
securities and other assets maintained outside the United States the
foreign banking institutions and foreign securities depositories designated
on Schedule A hereto ("foreign sub-custodians"). Upon receipt of "Proper
Instructions", as defined in Section 5 of this Contract, together with a
certified resolution of the Fund's Board of Directors, the Custodian and
the Fund may agree to amend Schedule A hereto from time to time to
designate additional foreign banking institutions and foreign securities
depositories to act as sub-custodian. Upon receipt of Proper Instructions,
the Fund may instruct the Custodian to cease the employment of any one or
more such sub-custodians for maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities", as defined in paragraph (c)(1) of Rule 17f-5 under
the Investment Company Act of 1940, and (b) cash and cash equivalents in
such amounts as the Custodian or the Fund may determine to be reasonably
necessary to effect the Fund's foreign securities
11
<PAGE>
transactions. The Custodian shall identify on its books as belonging to the
Fund, the foreign securities of the Fund held by each foreign
sub-custodian.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of the Fund shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as sub-custodians
pursuant to the terms hereof. Where possible, such arrangements shall
include entry into agreements containing the provisions set forth in
Section 3.4 hereof.
3.4 Agreements with Foreign Banking Institutions. Each agreement with a foreign
banking institution shall be substantially in the form set forth in Exhibit
1 hereto and shall provide that: (a) the Fund's assets will not be subject
to any right, charge, security interest, lien or claim of any kind in favor
of the foreign banking institution or its creditors or agent, except a
claim of payment for their safe custody or administration; (b) beneficial
ownership of the Fund's assets will be freely transferable without the
payment of money or value other than for custody or administration; (c)
adequate records will be maintained identifying the assets as belonging to
the Fund; (d) officers of or auditors employed by, or other representatives
of the Custodian, including to the extent permitted under applicable law
the independent public accountants for the Fund, will be given access to
the books and records of the foreign banking institution relating to its
actions under its agreement with the Custodian; and (e) assets of the Fund
held by the foreign sub-custodian will be subject only to the instructions
of the Custodian or its agents.
3.5 Access of Independent Accountants of the Fund. Upon request of the Fund,
the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of
any foreign banking institution employed as a foreign sub-custodian insofar
as such books and records relate to the performance of such foreign banking
institution under its agreement with the Custodian.
3.6 Reports by Custodian. The Custodian will supply to the Fund from time to
time, as mutually agreed upon, statements in respect of the securities and
other assets of the Fund held by foreign sub-custodians, including but not
limited to an identification of entities having possession of the Fund's
securities and other assets and advices or notifications of any transfers
of securities to or from each custodial account maintained by a foreign
banking institution for the Custodian on behalf of the Fund indicating, as
to securities acquired for the Fund, the identity of the entity having
physical
12
<PAGE>
possession of such securities.
3.7 Transactions in Foreign Custody Account. (a) Except as otherwise provided
in paragraph (b) of this Section 3.7, the provision of Sections 2.2 and 2.7
of this Contract shall apply, mutatis mutandis to the foreign securities of
the Fund held outside the United States by foreign sub-custodians. (b)
Notwithstanding any provision of this Contract to the contrary, settlement
and payment for securities received for the account of the Fund and
delivery of securities maintained for the account of the Fund may be
effected in accordance with the customary established securities trading or
securities processing practices and procedures in the jurisdiction or
market in which the transaction occurs, including, without limitation,
delivering securities to the purchaser thereof or to a dealer therefor (or
an agent for such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities from such
purchaser or dealer. (c) Securities maintained in the custody of a foreign
sub-custodian may be maintained in the name of such entity's nominee to the
same extent as set forth in Section 2.3 of this Contract, and the Fund
agrees to hold any such nominee harmless from any liability as a holder of
record of such securities.
3.8 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the
Custodian employs a foreign banking institution as a foreign sub-custodian
shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the
Custodian and each Fund from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the institution's
performance of such obligations. At the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with respect to
any claims against a foreign banking institution as a consequence of any
such loss, damage, cost, expense, liability or claim if and to the extent
that the Fund has not been made whole for any such loss, damage, cost,
expense, liability or claim.
3.9 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians generally in this Contract and, regardless
of whether assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S. bank as
contemplated by paragraph 3.12 hereof, the Custodian shall not be liable
for any loss, damage, cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of war or
terrorism or any loss where the sub-custodian has otherwise exercised
reasonable care. Notwithstanding the foregoing provisions of this paragraph
13
<PAGE>
3.9, in delegating custody duties to State Street London Ltd., the
Custodian shall not be relieved of any responsibility to the Fund for any
loss due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization, insurrection,
civil strife or armed hostilities) or (b) other losses (excluding a
bankruptcy or insolvency of State Street London Ltd. not caused by
political risk) due to Acts of God, nuclear incident or other losses under
circumstances where the Custodian and State Street London Ltd. have
exercised reasonable care.
3.10 Reimbursement for Advances. If the Fund requires the Custodian to advance
cash or securities for any purpose including the purchase or sale of
foreign exchange or of contracts for foreign exchange, or in the event that
the Custodian or its nominee shall incur or be assessed any taxes, charges,
expenses, assessments, claims or liabilities in connection with the
performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund shall
be security therefor and should the Fund fail to repay the Custodian
promptly, the Custodian shall be entitled to utilize available cash and to
dispose of the Fund assets to the extent necessary to obtain reimbursement.
3.11 Monitoring Responsibilities. The Custodian shall furnish annually to the
Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be similar
in kind and scope to that furnished to the Fund in connection with the
initial approval of this Contract. In addition, the Custodian will promptly
inform the Fund in the event that the Custodian learns of a material
adverse change in the financial condition of a foreign sub-custodian or any
material loss of the assets of the Fund or in the case of any foreign
sub-custodian not the subject of an exemptive order from the Securities and
Exchange Commission is notified by such foreign sub-custodian that there
appears to be a substantial likelihood that its shareholders' equity will
decline below $200 million (U.S. dollars or the equivalent thereof) or that
its shareholders' equity has declined below $200 million (in each case
computed in accordance with generally accepted U.S. accounting principles).
3.12 Branches of U.S. Banks. (a) Except as otherwise set forth in this Contract,
the provisions hereof shall not apply where the custody of the Fund assets
are maintained in a foreign branch of a banking institution which is a
"bank" as defined by Section 2(a)(5) of the Investment Company Act of 1940
meeting the qualification set forth in Section 26(a) of said Act. The
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<PAGE>
appointment of any such branch as a sub-custodian shall be governed by
paragraph 1 of this Contract. (b) Cash held for the Fund in the United
Kingdom shall be maintained in an interest bearing account established for
the Fund with the Custodian's London branch, which account shall be subject
to the direction of the Custodian, State Street London Ltd. or both.
3.13 Tax Law. The Custodian shall have no responsibility or liability for any
obligations now or hereafter imposed on the Fund or the Custodian as
custodian of the Fund by the tax law of the United States of America or any
state or political subdivision thereof. It shall be the responsibility of
the Fund to notify the Custodian of the obligations imposed on the Fund or
the Custodian as custodian of the Fund by the tax law of jurisdictions
other than those mentioned in the above sentence, including responsibility
for withholding and other taxes, assessments or other governmental charges,
certifications and governmental reporting. The sole responsibility of the
Custodian with regard to such tax law shall be to use reasonable efforts to
assist the Fund with respect to any claim for exemption or refund under the
tax law of jurisdictions for which the Fund has provided such information.
4. Payments for Repurchases or Redemptions and Sales of Shares of the Fund
-----------------------------------------------------------------------
From such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation and any applicable votes of the
Board of Directors of the Fund pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a request
for redemption or repurchase of their Shares. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian shall honor checks drawn on
the Custodian by a holder of Shares, which checks have been furnished by the
Fund to the holder of Shares, when presented to the Custodian in accordance with
such procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.
The Custodian shall receive from the distributor for the Fund's Shares or
from the Transfer Agent of the Fund and deposit into the Fund's account such
payments as are received for Shares of the Fund issued or sold from time to time
by the Fund. The Custodian will provide timely notification to the Fund and the
15
<PAGE>
Transfer Agent of any receipt by it of payments for Shares of the Fund.
5. Proper Instructions
-------------------
Proper Instructions as used herein means a writing signed or initialed by
one or more person or persons as the Board of Directors shall have from time to
time authorized. Each such writing shall set forth the specific transaction or
type of transaction involved, including a specific statement of the purpose for
which such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in writing.
Upon receipt of a certificate of the Secretary or an Assistant Secretary as to
the authorization by the Board of Directors of the Fund accompanied by a
detailed description of procedures approved by the Board of Directors, Proper
Instructions may include communications effected directly between
electro-mechanical or electronic devices provided that the Board of Directors
and the Custodian are satisfied that such procedures afford adequate safeguards
for the Fund's assets. For purposes of this Section, Proper Instructions shall
include instructions received by the Custodian pursuant to any three-party
agreement which requires a segregated asset account in accordance with Section
2.12.
6. Actions Permitted without Express Authority
-------------------------------------------
The Custodian may in its discretion, without express authority from the
Fund:
1) make payments to itself or others for minor expenses of handling
securities such as stamp taxes, stock transfer fees or other similar items
relating to its duties under this Contract, provided that no such payment for
any one such item shall exceed $100.00 and all such payments shall be accounted
for to the Fund;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Fund, checks, drafts and
other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other dealings with the
securities and property of the Fund except as otherwise directed by the Board of
Directors of the Fund.
16
<PAGE>
7. Evidence of Authority
---------------------
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of a vote of the Board of
Directors of the Fund as conclusive evidence (a) of the authority of any person
to act in accordance with such vote or (b) of any determination or of any action
by the Board of Directors pursuant to the Articles of Incorporation as described
in such vote, and such vote may be considered as in full force and effect until
receipt by the Custodian of written notice to the contrary.
8. Duties of Custodian with Respect to the Books of Account and Calculation of
---------------------------------------------------------------------------
Net Asset Value and Net Income
------------------------------
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Directors of the Fund to keep the
books of account of the Fund and/or compute the net asset value per share of the
outstanding shares of the Fund or, if directed in writing to do so by the Fund,
shall itself keep such books of account and/or compute such net asset value per
share. If so directed, the Custodian shall also calculate daily the net income
of the Fund as described in the Fund's currently effective prospectus and shall
advise the Fund and the Transfer Agent daily of the total amounts of such net
income and, if instructed in writing by an officer of the Fund to do so, shall
advise the Transfer Agent periodically of the division of such net income among
its various components. The calculations of the net asset value per share and
the daily income of the Fund shall be made at the time or times described from
time to time in the Fund's currently effective prospectus.
9. Records
-------
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to Section 31 thereof and Rules 31a-1 and 31a-2 thereunder.
All such records shall be the property of the Fund and shall at all times during
the regular business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents of the Fund and employees and agents of
the Securities and Exchange Commission. The Custodian shall, at the Fund's
request, supply the Fund with a tabulation of securities owned by the Fund and
held by the Custodian and shall, when requested to do so by the Fund and for
such compensation as shall be agreed upon between the Fund and the Custodian,
include certificate numbers in such tabulations.
17
<PAGE>
10. Opinion of Fund's Independent Accountant
----------------------------------------
The Custodian shall take all reasonable action, as the Fund may from time
to time request, to obtain from year to year favorable opinions from the Fund's
independent accountants with respect to its activities hereunder in connection
with the preparation of the Fund's Form N-1A, and Form N-SAR or other annual
reports to the Securities and Exchange Commission and with respect to any other
requirements of such Commission.
11. Compensation of Custodian
-------------------------
The Custodian shall be entitled to reasonable compensation for its services
and expenses as Custodian, as agreed upon from time to time between the Fund and
the Custodian.
12. Responsibility of Custodian
---------------------------
So long as and to the extent that it is in the exercise of reasonable care,
the Custodian shall not be responsible for the title, validity or genuineness of
any property or evidence of title thereto received by it or delivered by it
pursuant to this Contract and shall be held harmless in acting upon any notice,
request, consent, certificate or other instrument reasonably believed by it to
be genuine and to be signed by the proper party or parties, including any
futures commission merchant acting pursuant to the terms of a three-party
futures or options agreement. The Custodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Contract, but shall be
kept indemnified by and shall be without liability to the Fund for any action
taken or omitted by it in good faith without negligence. It shall be entitled to
rely on and may act upon advice of counsel (who may be counsel for the Fund) on
all matters, and shall be without liability for any action reasonably taken or
omitted pursuant to such advice. Any legal expenses relating to any advice
obtained as contemplated in the preceding sentence shall be borne by the
Custodian.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States (except as specifically provided in Article 3.9)
and, regardless of whether assets are maintained in the custody of a foreign
banking institution, a foreign securities depository or a branch of a U.S. bank
as contemplated by paragraph 3.12 hereof, the Custodian shall not be liable for
any loss, damage, cost, expense, liability or claim resulting from, or caused
by, the direction of or authorization by the Fund to maintain custody or any
securities or cash of the Fund in a foreign country including, but not limited
18
<PAGE>
to, losses resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian, its affiliates, subsidiaries or agents,
to advance cash or securities for any purpose (including but not limited to
securities settlements, foreign exchange contracts and assumed settlement) or in
the event that the Custodian or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful misconduct,
any property at any time held for the account of the Fund shall be security
therefor and should the Fund fail to repay the Custodian promptly, the Custodian
shall be entitled to utilize available cash and to dispose of the Fund assets to
the extent necessary to obtain reimbursement.
13. Effective Period, Termination and Amendment
-------------------------------------------
This Contract shall become effective as of its execution, shall continue in
full force and effect until terminated as hereinafter provided, may be amended
at any time by mutual agreement of the parties hereto and may be terminated by
either party by an instrument in writing delivered or mailed, postage prepaid to
the other party, such termination to take effect not sooner than one hundred and
twenty days (120) days after the date of such delivery or mailing; provided,
however that the Custodian shall not act under Section 2.10 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary that the Board of Directors of the Fund has approved the initial use
of a particular Securities System, as required by Rule 17f-4 under the
Investment Company Act of 1940, as amended and that the Custodian shall not act
under Section 2.11 hereof in the absence of receipt of an initial certificate of
the Secretary or an Assistant Secretary that the Board of Directors has approved
the initial use of the Direct Paper System; provided further, however, that the
Fund shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Articles of
Incorporation, and further provided, that the Fund may at any time by action of
its Board of Directors (i) substitute another bank or trust company for the
Custodian by giving notice as described above to the Custodian, or
19
<PAGE>
(ii) immediately terminate this Contract in the event of the appointment of a
conservator or receiver for the Custodian by the Comptroller of the Currency or
upon the happening of a like event at the direction of an appropriate regulatory
agency or court of competent jurisdiction.
Upon termination of this Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its costs, expenses and disbursements in connection
with the transfer of the Fund's assets to a successor custodian; provided (i)
that the aggregate amount of costs, expenses and disbursements payable by the
Fund in connection with the termination of this Contract (exclusive of any
accrued but unpaid custody fees and expenses) shall not exceed $100,000 and (ii)
that the Custodian shall prepare and deliver to the Fund itemized invoices for
such costs, expenses and disbursements not less than ten (10) days prior to the
effective date of the termination for the Fund's review and verbal authorization
before charging the custody account. Unless the Fund disputes such invoices
within five (5) days of receipt, the Custodian may assume the invoices are
acceptable and accordingly, debit the Fund's custody account. The invoices will
be sent to the Fund after the Fund's custody account has been debited with the
notation that the invoices have been paid. In the event that the Fund disputes
one or more invoices within the five (5) day period, the Custodian and the Fund
shall negotiate in good faith any disputed invoices. If they are unable to reach
agreement, except with respect to controversies totaling less than $2,500, the
total of any such disputed amounts shall be placed in an interest-bearing escrow
account and the matter settled by arbitration in accordance with the Rules of
the American Arbitration Association and judgement upon the award rendered by
the arbitrators may be entered in any court having jurisdiction thereof.
14. Successor Custodian
-------------------
If a successor custodian shall be appointed by the Board of Directors of
the Fund, the Custodian shall, upon termination, deliver to such successor
custodian at the office of the Custodian, duly endorsed and in the form for
transfer, all securities then held by it hereunder and shall transfer to an
account of the successor custodian all of the Fund's securities held in a
Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of
Directors of the Fund, deliver at the office of the Custodian and transfer such
securities, funds and other properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors shall have been delivered to
the Custodian on or before the date when such termination shall become
effective, then the Custodian shall have the right to deliver to a bank or trust
company, which is a "bank" as defined in the Investment Company Act of 1940,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract and to
transfer to an account of such successor custodian all of the Fund's securities
held in any Securities System. Thereafter, such bank or trust company shall be
the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors to appoint a successor custodian, the Custodian shall be
entitled to fair compensation for its services during such period as the
Custodian retains possession of such securities, funds and other
20
<PAGE>
properties and the provisions of this Contract relating to the duties and
obligations of the Custodian shall remain in full force and effect.
15. Interpretive and Additional Provisions
--------------------------------------
In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation of the Fund. No interpretive or additional
provisions made as provided in the preceding sentence shall be deemed to be an
amendment of this Contract.
16. Massachusetts Law to Apply
--------------------------
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of the Commonwealth of Massachusetts.
17. Prior Contracts
---------------
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund and the Custodian relating to the custody of the
Fund's assets.
18. Shareholder Communications Election
-----------------------------------
Securities and Exchange Commission Rule 14b-2 requires banks which hold
securities for the account of customers to respond to requests by issuers of
securities for the names, addresses and holdings of beneficial owners of
securities of that issuer held by the bank unless the beneficial owner has
expressly objected to disclosure of this information. In order to comply with
the rule, the Custodian needs the Fund to indicate whether it authorizes the
Custodian to provide the Fund's name, address, and share position to requesting
companies whose securities the Fund owns. If the Fund tells the Custodian "no",
the Custodian will not provide this information to requesting companies. If the
Fund tells the Custodian "yes" or does not check either "yes" or "no" below, the
Custodian is required by the rule to treat the Fund as consenting to disclosure
of this information for all securities owned by the Fund or any funds or
accounts established by the Fund. For the Fund's protection, the Rule prohibits
the requesting company from
21
<PAGE>
using the Fund's name and address for any purpose other than corporate
communications. Please indicate below whether the Fund consents or objects by
checking one of the alternatives below.
YES [ ] The Custodian is authorized to release the Fund's name,
address, and share positions.
NO [X] The Custodian is not authorized to release the Fund's name,
address, and share positions.
22
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the 10th day of June, 1995.
ATTEST THE KAUFMANN FUND, INC.
/s/ Olga Mendez By /s/ Hans P. Utsch
- ---------------------------------- ---------------------------------
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ Illegible By /s/ Illegible
- ---------------------------------- ---------------------------------
Executive Vice President
23
<PAGE>
EXHIBIT I
SUBCUSTODIAN AGREEMENT
----------------------
AGREEMENT made this day of , 19 , between State
Street Bank and Trust Company, a Massachusetts Trust Company (hereinafter
referred to as the "Custodian"), having its principal place of business at 225
Franklin Street, Boston, MA, and
(hereinafter referred to as the "Subcustodian"), a organized
under the laws of having an office at .
WHEREAS, Custodian has been appointed to act as Trustee, Custodian or
Subcustodian of securities and monies on behalf of certain of its customers
including, without limitation, collective investment undertakings, investment
companies subject to the U.S. Investment Company Act of 1940, as amended, and
employee benefit plans subject to the U.S. Employee Retirement Income Security
Act of 1974, as amended;
WHEREAS, Custodian wishes to establish Account (the "Account") with the
Subcustodian to hold and maintain certain property for which Custodian is
responsible as custodian; and
WHEREAS, Subcustodian agrees to establish the Account and to hold and
maintain all Property in the Account in accordance with the terms and conditions
herein set forth.
NOW THEREFORE, in consideration of the mutual convenants and agreements
hereinafter contained, the Custodian and the Subcustodian agree as follows:
I. The Account
-----------
A. Establishment of the Account. Custodian hereby requests that
Subcustodian establish for each client of the Custodian an Account which shall
be composed of:
1. A Custody Account for any and all Securities (as hereinafter
defined) from time to time received by Subcustodian therefor, and
2. A Deposit Account for any and all Cash (as hereinafter defined)
from time to time received by Subcustodian therefor.
B. Use of the Account. The Account shall be used exclusively to hold,
acquire, transfer or otherwise care for, on behalf of Custodian as custodian and
the customers of Custodian and not for Custodian's own interest, Securities and
such Cash or cash equivalents as are transferred to Subcustodian or as are
received in payment of any transfer of, or as payment on, or interest on, or
dividend from, any such Securities (herein collectively called "Cash").
C. Transfer of Property in the Account. Beneficial ownership of the
Securities and Cash in the Account shall be freely transferable without payment
of money or value other than for safe custody and administration.
D. Ownership and Segregation of Property in the Account. The ownership of
the property in the Account, whether Securities, Cash or both, and whether any
such property is held by Subcustodian in an Eligible Depository, shall be
clearly recorded on Subcustodian's books as belonging to Custodian on behalf of
Custodian's customers, and not for Custodian's own interest and, to the extent
that Securities are physically held in the Account, such Securities shall also
be physically segregated from the general assets of Subcustodian, the assets of
Custodian in its individual capacity and the assets of Subcustodian's other
1
<PAGE>
customers. In addition, Subcustodian shall maintain such other records as may be
necessary to identify the property hereunder as belonging to each Account.
E. Registration of Securities in the Account. Securities which are eligible
for deposit in a depository as provided for in Paragraph III may be maintained
with the depository in an account for Subcustodian's customers. Securities which
are not held in a depository and that are ordinarily held in registered form
will be registered in the name of Subcustodian or in the name of Subcustodian's
nominee, unless alternate Instructions are furnished by Custodian.
II. Services to Be Provided By the Subcustodian
-------------------------------------------
The services Subcustodian will provide to Custodian and the manner in which
such services will be performed will be as set forth below in this Agreement.
A. Services Performed Pursuant to Instructions. All transactions involving
the Securities and Cash in the Account shall be executed solely in accordance
with Custodian's Instructions as that term is defined in Paragraph IV hereof,
except those described in paragraph B below.
B. Services to Be Performed Without Instructions. Subcustodian will, unless
it receives Instructions from Custodian to the contrary:
1. Collect Cash. Promptly collect and receive all dividends, income,
principal, proceeds from transfer and other payments with respect to property
held in the Account, and present for payment all Securities held in the Account
which are called, redeemed or retired or otherwise become payable and all
coupons and other income items which call for payment upon presentation, and
credit Cash receipts therefrom to the Deposit Account.
2. Exchange Securities. Promptly exchange Securities where the
exchange is purely ministerial including, without limitation, the exchange of
temporary Securities for those is definitive form and the exchange of warrants,
or other documents of entitlement to Securities, for the Securities themselves.
3. Sale of Rights and Fractional Interests. Whenever notification of a
rights entitlement or a fractional interest resulting from a rights issue, stock
dividend or stock split is received for the Account and such rights entitlement
or fractional interest bears an expiration date, Subcustodian will promptly
endeavor to obtain Custodian's Instructions, but should these not be received in
time for Subcustodian to take timely action, Subcustodian is authorized to sell
such rights entitlement or fractional interest and to credit the Account.
4. Execute Certificates. Execute in Custodian's name for the Account,
whenever Subcustodian deems it appropriate, such ownership and other
certificates as may be required to obtain the payment of income from the
Securities held in the account.
5. Pay Taxes and Receive Refunds. To pay or cause to be paid from the
Account any and all taxes and levies in the nature of taxes imposed on the
property in the Account by and governmental authority, and to take all steps
necessary to obtain all tax exemptions, privileges or other benefits, including
reclaiming and recovering any foreign withholding tax, relating to the Account
and to execute any declaration, affidavits, or certificates of ownership which
may be necessary in connection therewith.
6. Prevent Losses. Take such steps as may be reasonably necessary to
secure or otherwise prevent the loss of, entitlements attached to or otherwise
relating to property held in the Account.
2
<PAGE>
C. Additional Services.
1. Transmission of Notices of Corporate Action. By such means as will
permit Custodian to take timely action with respect thereto, Subcustodian will
promptly notify Custodian upon receiving notices or reports, or otherwise
becoming aware, of corporate action affecting Securities held in the Account
(including, but not limited to, calls for redemption, mergers, consolidations,
reorganizations, recapitalizations, tender offers, rights offerings, exchanges,
subscriptions and other offerings) and dividend, interest and other income
payments relating to such Securities.
2. Communications Regarding the Exercise of Entitlements. Upon request
by Custodian, Subcustodian will promptly deliver, or cause any Eligible
Depository authorized and acting hereunder to deliver, to Custodian all notices,
proxies, proxy soliciting materials and other communications that call for
voting or the exercise of rights or other specific action (including material
relative to legal proceedings intended to be transmitted to security holders)
relating to Securities held in the Account to the extent received by
Subcustodian or said Eligible Depository, such proxies or any voting instruments
to be executed by the registered holder of the Securities, but without
indicating the manner in which such Securities are to be voted.
3. Monitor Financial Service. In furtherance of its obligations under
this Agreement, Subcustodian will monitor a leading financial service with
respect to announcements and other information respecting property held in the
Account, including announcements and other information with respect to corporate
actions and dividend, interest and other income payments.
III. Use of Securities Depository
----------------------------
Subcustodian may, with the prior written approval of Custodian, maintain all or
any part of the Securities in the Account with a securities depository or
clearing agency which is incorporated or organized under the laws of a country
other than the United States of America and is supervised or regulated by a
government agency or regulatory authority in the foreign jurisdiction having
authority over such depositories or agencies, and which operates (a) the central
system for handling of designated securities or equivalent book entries in
, or (b) a transnational system for the central handling of
securities or equivalent book entries (herein called "Eligible Depository"),
provided however, that, while so maintained, such Securities shall be subject
only to the directions of Subcustodian, and that Subcustodian duties,
obligations and responsibilities with regard to such Securities shall be the
same as if such Securities were held by Subcustodian on its premises.
IV. Claims Against Property in the Account
--------------------------------------
The property in the account shall not be subject to any right, charge, security
interest, lien or claim of any kind (collectively "Charges") in favor of
Subcustodian or any Eligible Depository or any creditor of Subcustodian or of
any Eligible Depository except a claim for payment for such property's safe
custody or administration in accordance with the terms of this Agreement.
Subcustodian will immediately notify Custodian of any attempt by any party to
assert any Charge against the property held in the Account and shall take all
lawful actions to protect such property from such Charges until Custodian has
had a reasonable time to respond to such notice.
V. Subcustodian's Warranty
-----------------------
Subcustodian represents and warrants that:
(A) It is a branch of a "qualified U.S. bank" or an "eligible foreign
custodian" as those terms are defined in Rule 17f-5 of the Investment Company
Act
3
<PAGE>
of 1940, a copy of which is attached hereto as Attachment A (the "Rule"), and
Subcustodian shall immediately notify Custodian, in writing or by other
authorized means, in the event that there appears to be a substantial likelihood
that Subcustodian will cease to qualify under the Rule as currently in effect or
as hereafter amended, or
(B) It is the subject of an exemptive order issued by the United States
Securities and Exchange Commission which order permits Custodian to employ the
terms of the Rule, and Subcustodian shall immediately notify Custodian, in
writing or by other authorized means, if for any reason it is no longer covered
by such exemptive order.
Upon receipt of any such notification required under (A) or (B) of this section,
Custodian may terminate this Agreement immediately without prior notice to
Subcustodian.
VI. Definitions
-----------
A. Instructions. The term "Instructions" means:
1. instruction in writing signed by authorized individuals designated
as such by Custodian;
2. telex or tested telex instructions of Custodian.
3. other forms of instruction in computer readable form as shall
customarily be used for the transmission of like information, and
4. such other forms of communication as from time to time may be
agreed upon by Custodian and Subcustodian, which Subcustodian believes in good
faith to have been given by Custodian or which are transmitted with proper
testing or authentication pursuant to terms and conditions which Custodian may
specify.
Unless otherwise expressly provided, all Instructions shall continue in full
force and effect until canceled or superseded. Subcustodian shall act in
accordance with Instructions and shall not be liable for any act or omission in
respect of any Instruction except in the case of willful default, negligence,
fraud, bad faith, willful misconduct, or reckless disregard of duties on the
part of Subcustodian. Subcustodian in executing all Instructions will take
relevant action in accordance with accepted industry practice and local
settlement practice.
B. Account. The term "Account" means collectively the Custody Account, and
the Deposit Account.
C. Securities. The term "Securities" includes, without limitation, stocks,
shares, bonds, debentures, debt securities (convertible or non-convertible),
notes, or other obligations or securities and any certificates, receipts,
futures contracts, foreign exchange contracts, options, warrants, scrip or other
instruments representing rights to receive, purchase or subscribe for the same,
or evidencing or representing any other rights or interests therein, or in any
property or assets.
VII. Miscellaneous Provisions
------------------------
A. Statements Regarding the Account, Subcustodian will supply Custodian
with such statements regarding the Account as Custodian may request, including
the identity and location of any Eligible Depository authorized and acting
hereunder. In addition, Subcustodian will supply Custodian an advice or
notification of any transfers of Securities to or from the Account indicating,
4
<PAGE>
as to Securities for the Account, if applicable, the Eligible Depository having
physical possession of such Securities.
B. Examination of Books and Records. Subcustodian agrees that its books and
records relating to the Account and Subcustodian's actions under this Agreement
shall be open to the physical, on-premises inspection and audit at reasonable
times by officers of, auditors employed by or other representatives of Custodian
including (to the extent permitted under the law of )
the independent public accountants for any customer of Custodian whose property
is being held hereunder and such books and records shall be retained for such
period as shall be agreed upon by Custodian and Subcustodian.
As Custodian may reasonably request from time to time, Subcustodian will furnish
its auditor's reports on its system of internal controls, and Subcustodian will
use its best efforts to obtain and furnish similar reports of any Eligible
Depository authorized and acting hereunder.
C. Standard of Care. In holding, maintaining, servicing and disposing of
Property under this Agreement, and in fulfilling any other obligations
hereunder, Subcustodian shall exercise the same standard of care that it
exercises over its own assets, provided that Subcustodian shall exercise at
least the degree of care and maintain adequate insurance as expected of a
prudent professional Subcustodian for hire and shall assume the burden of
proving that it has exercised such care in its maintenance of Property held by
Subcustodian in its Account. The maintenance of the Property in an Eligible
Depository shall not affect Subcustodian's standard of care, and Subcustodian
will remain as fully responsible for any loss or damage to such securities as if
it had itself retained physical possession of them. Subcustodian shall also
indemnify and hold harmless Custodian and each of Custodian's customers from and
against any loss, damage, cost, expense, liability or claim (including
reasonable attorney's fees) arising out of or in connection with the improper or
negligent performance or the nonperformance of the duties of Subcustodian.
Subcustodian shall be responsible for complying with all provisions of the law
of , or any other law, applicable to Subcustodian
in connection with its duties hereunder, including (but not limited to) the
payment of all transfer taxes or other taxes and compliance with any currency
restrictions and securities laws in connection with its duties as Subcustodian.
D. Loss of Cash or Securities. Subcustodian agrees that, in the event of
any loss of Securities or Cash in the Account, Subcustodian will use its best
efforts to ascertain the circumstances relating to such loss and will promptly
report the same to Custodian and shall use every legal means available to it to
effect the quickest possible recovery.
E. Compensation of Subcustodian. Custodian agrees to pay to Subcustodian
from time to time such compensation for its services and such out-of-pocket or
incidental expenses of Subcustodian pursuant to this Agreement as may be
mutually agreed upon in writing from time to time.
F. Operating Requirements. The Subcustodian agrees to follow such Operating
Requirements as the Custodian may establish from time to time. A copy of the
current Operating Requirements is attached as Attachment B to this Agreement.
G. Termination. This Agreement may be terminated by Subcustodian or
Custodian on 60 days' written notice to the other party, sent by registered
mail, provided that any such notice, whether given by Subcustodian or Custodian,
shall be followed within 60 days by Instructions specifying the names of the
persons to whom Subcustodian shall deliver the Securities in the Account and to
whom the Cash in the account shall be paid. If within 60 days following the
giving of such notice of termination, Subcustodian does not receive such
Instructions,
5
Subcustodian shall continue to hold such Securities in Cash subject to this
Agreement until such Instructions are given. The obligations of the parties
under this Agreement shall survive the termination of this Agreement.
G. Notices. Unless otherwise specified in this Agreement, all notices and
communications with respect to matters contemplated by this Agreement shall be
in writing, and delivered by mail, postage prepaid, telex, SWIFT, or other
mutually agreed telecommunication methods to the following addresses (or to such
other address as either party hereto may from time to time designate by notice
duly given in accordance with this paragraph):
To Subcustodian:
To Custodian: State Street Bank and Trust Company
Securities Operations/
Network Administration
P.O. Box 1631
Boston, MA 02105
H. Confidentiality. Subcustodian and Custodian shall each use its best
efforts to maintain the confidentiality of the property in the Account and the
beneficial owners thereof, subject, however, to the provisions of any laws,
requiring disclosure. In addition, Subcustodian shall safeguard any test keys,
identification codes or other security devices which Custodian shall make
available to it. The Subcustodian further agrees it will not disclose the
existence of this Agreement or any current business relationship unless
compelled by applicable law or regulation or unless it has secured the
Custodian's written consent.
I. Assignment. This Agreement shall not be assignable by either party but
shall bind any successor in interest of Custodian and Subcustodian respectively.
J. Governing Law. This Agreement shall be governed by and construed in
accordance of the laws of . To the extent inconsistent
with this Agreement or Custodian's Operating Requirements as attached hereto,
accounts specifically shall not apply.
CUSTODIAN: STATE STREET BANK AND TRUST COMPANY
By:
--------------------------------
Date:
------------------------------
AGREED TO BY SUBCUSTODIAN
- --------------------------------
By:
--------------------------------
Date:
------------------------------
6
SPECIAL CUSTODY ACCOUNT AGREEMENT
(Short Sales)
AGREEMENT, dated as of January 11, 1995, by and among State Street Bank and
Trust Company, in its capacity as custodian hereunder State Street Bank & Trust
(the "Bank"), (the Kaufmann Fund, Inc. "Customer")
Morgan Stanley Prime Brokerage and (the "Broker").
WHEREAS, Broker is a securities broker-dealer and is a member of several
national securities exchanges; and
WHEREAS, Customer desires from time to time to sell securities "short"
through Broker, such short sales being permitted by Customer's investment
policies, and for that purpose has executed a margin agreement (the "Margin
Agreement"); and
WHEREAS, to facilitate Customer's transactions in short sales of
securities, Customer and Broker desire to establish procedures for the
compliance by Broker with the provisions of Regulation T of the Board of
Governors of the Federal Reserve System and other applicable law ("Margin
Rules"); and
WHEREAS, to assist Broker and Customer's in complying with the Margin
Rules, Bank is prepared to act as custodian to hold Collateral as defined below.
NOW, THEREFORE, be it agreed as follows:
1. DEFINITIONS
-----------
As used herein, the following terms have the following meanings:
(a) "Adequate Margin" in respect of short sales shall mean such Collateral
as is adequate in Broker's reasonable judgment under the Margin Rules
and the internal policies of Broker.
(b) "Advice from Broker" or "Advice" means a written notice sent to
Customer and Bank or transmitted by a facsimile sending device, except
that Advices for initial or additional Collateral or with respect to
Broker's ability to effect a short sale for Customer may be given
orally. With respect to any short sale or
-1-
<PAGE>
Closing Transaction, the Advice from Broker shall mean a standard
confirmation in use by Broker and sent or transmitted to Customer and
Bank. With respect to substitutions or releases of Collateral, Advice
from Broker means a written notice signed by Broker and sent or
transmitted to Customer and Bank. An authorized agent of Broker will
certify to Customer and Bank the names and signatures of those
employees who are authorized to sign Advices from Broker, which
certification may be amended from time to time. When used herein, the
term "Advice" means the act of sending an Advice from Broker.
(c) "Closing Transaction" is a transaction in which Customer purchases
securities which have been sold short.
(d) "Collateral" shall mean cash or U.S. Government securities or other
securities acceptable to Broker.
(e) "Insolvency" means that (A) an order, judgment or decree has been
entered under the bankruptcy, reorganization, compromise, arrangement,
insolvency, readjustment of debt, dissolution or liquidation or
similar law (herein called the "Bankruptcy Law") of any jurisdiction
adjudicating the Customer insolvent; or (B) the Customer has
petitioned or applied to any tribunal for or consented to the
appointment of, or taking possession by, a trustee, receiver,
liquidator or similar official, of the Customer, or commenced a
voluntary case under the Bankruptcy Law of the United States or any
proceedings relating to the Customer under the Bankruptcy Law of any
other jurisdiction, whether now or hereinafter in effect; or (C) any
such petition or application has been filed, or any such proceedings
commenced, against the Customer and the Customer by any act has
indicated its approval thereof, consent thereto or acquiescence
therein, or an order for relief has been entered in an involuntary
case under the Bankruptcy Law of the United States, as now or
hereinafter constituted, or any order, judgment or decree has been
entered appointing any such trust, receiver, liquidator or similar
official, or approving the petition in any such proceedings, and such
order, judgment or decree remains unstayed and in effect for more that
60 days.
-2-
<PAGE>
(f) "Instructions from Customer" or "Instructions" means a request,
direction or certification in writing signed by Customer and delivered
to Bank and Broker or transmitted by a facsimile sending device. An
officer of Customer will certify to Bank and Broker the names and
signatures of those persons authorized to sign the instructions, which
certification may be amended from time to time. When used herein, the
term "Instruct" shall mean the act of sending an Instruction from
Customer.
(g) "Receipt of Payment" means receipt by Bank of (1) a certified or
official bank check or wire transfer to Bank; (2) a written or
telegraphic advice from a registered clearing agency that funds have
been or will be credited to the account of Bank, or (3) a transfer of
funds from any of Broker's accounts maintained at Bank.
(h) "Receipt of Securities" means receipt by Bank, of (1) securities in
proper form for transfer or (2) a written or telegraphic advice from a
registered clearing agency that securities have been credited to the
account of Bank for the Special Custody Account.
(i) "Special Custody Account" shall have the meaning assigned to that term
in Section 2 hereof.
2. SPECIAL CUSTODY ACCOUNT
-----------------------
(a) Bank shall open an account on its books entitled "Special Custody
Account for [Broker] as Pledgee of [Name of Customer]" ("Special
Custody Account") and shall hold therein all securities and similar
property as shall be received and accepted by it therein pursuant to
this Agreement. Customer agrees to instruct Bank in Instructions from
Customer as to cash and specific securities which Bank is to identify
on its books and records as pledged to Broker as Collateral in the
Special Custody Account. Customer agrees that the value of such cash
and securities shall be at least equal in value to what Broker shall
initially and from time to time advise Customer in an Advice from
Broker is necessary to constitute Adequate Margin. Such collateral (i)
will be held by Bank for Broker as agent of Broker, (ii) may be
released only in accordance with the terms of this Agreement and (iii)
except as required to be released hereunder to Broker,
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<PAGE>
shall not be made available to Broker or to any other person claiming
through Broker, including the creditors of the Broker.
(b) Customer hereby grants a continuing security interest to Broker in the
Collateral in the Special Custody Account. To perfect Broker's
security interest, Bank will hold the Collateral in the Special
Custody Account, subject to the interest therein of Broker as the
pledgee and secured party thereof in accordance with the terms of this
Agreement. Such security interest will terminate at such time as
Collateral is released as provided herein. Bank shall have no
responsibility for the validity or enforceability of such security
interest.
(c) Bank will confirm in writing to Broker and Customer all pledges,
releases or substitutions of Collateral and will supply Broker and
Customer with a monthly statement of Collateral and transaction in the
Special Custody Account for such month. Bank will also advise Broker
upon request of the kind and amount of Collateral pledged to Broker.
(d) Upon the request of Customer, Broker shall advise Bank and Customer of
any excess of Collateral in the Special Custody Account. Such excess
shall at Customer's request be transferred therefrom upon Advice from
Broker. Customer represents and warrants to Broker that securities
included at any time in the Collateral shall be in good deliverable
form (or Bank shall have the unrestricted power to put such securities
into good deliverable form) in accordance with the requirements of
such exchanges as may be the primary market or markets for such
securities.
(e) Bank will maintain accounts and records for the Collateral in the
Special Custody Account as more fully described in subparagraph 5(a)
below. The Collateral shall at all times remain the property of the
Customer subject only to the extent of the interest and rights therein
of Broker as the pledgee thereof.
3. ORIGINAL AND VARIATION MARGIN ON SHORT SALES
--------------------------------------------
(a) From time to time, Customer may place orders with Broker for the short
sale of securities. Prior to the acceptance of such orders Broker will
advise Customer
-4-
<PAGE>
of Broker's ability to borrow such securities or other properties and
acceptance of short sale orders will be contingent upon same.
(b) Broker shall, on the last business day of each week, compute the
aggregate net credit or debit balance on Customer's open short sales
and advise Customer by 11:00 A.M. New York time of the amount of the
net credit or debit, as the case may be. If a net debit balance exists
on such day, Customer will cause an amount equal to such net debit
balance to be paid to Broker by the close of business on such day. If
a net credit balance exists on such day, Broker will pay such credit
balance to Customer by the close of business on such day. As
Customer's open short positions are marked-to-market each week,
payments will by made by or to Customer to reflect changes (if any) in
the credit or debit balances. Broker will charge interest on debit
balances, and Broker will pay interest on credit balances. Balances
will be appropriately adjusted when short sales are closed out.
4. PLACING ORDER
-------------
It is understood and agreed that Customer, when placing with Broker any
order to sell short for Customer's account, will designate the order as such and
hereby authorizes Broker to mark such order as being "short", and when placing
with Broker any order to sell long for Customer's account, will designate the
order as such and hereby authorizes Broker to mark such order as being "long".
Any sell order which Customer shall designate as being for long account as above
provided is for securities then owned by Customer and, if such securities are
not then deliverable by Broker from any account of Customer, the placing of such
order shall constitute a representation by Customer that it is impracticable for
Customer then to deliver such securities to Broker but that Customer shall
deliver them by the settlement date or as soon as possible thereafter.
5. RIGHTS AND DUTIES OF THE BANK
-----------------------------
(a) Generally. The Bank shall receive and hold in the Special Custody
Account, as custodian upon the terms of this Agreement, all Collateral
deposited and maintained pursuant to the terms of this Agreement and,
except as provided in subparagraph 5(b) below, shall receive and hold
all monies and other property paid, distributed or substituted in
respect of such Collateral or realized
-5-
<PAGE>
on the sale or other disposition of such Collateral; provided,
however, that the Bank shall have no duty to require any money or
securities to be delivered to it or to determine that the amount and
form of assets delivered to it comply with any applicable
requirements. Collateral held in the Special Custody Account shall be
released only in accordance with this Agreement or as required by
applicable law. The Customer warrants its authority to deposit in such
accounts any money, securities and other property received by the
Bank.
The Bank may hold the securities in the Special Custody Account
in bearer, nominee, book entry, or other form and in depository or
clearing corporation, with or without indicating that the securities
are held hereunder; provided, however, that all securities held in the
Special Custody Account shall be identifies on the Bank's records as
subject to this Agreement and shall be in a form that permits transfer
without additional authorization or consent of the Customer. The
Customer and Broker hereby agree to hold the Bank and its nominees
harmless from any liability as holder of record.
(b) Dividends and Interest. Any dividends or interest paid with respect to
the Collateral held in the Special Custody Account shall be paid by
the Bank to the Customer when collected unless the Bank has received
contrary instructions from the Customer.
(c) Reports. The Bank shall, as promptly as practical, provide Broker and
the Customer with written confirmation of each transfer into and out
of the Special Custody Account. The Bank also shall render to the
Customer and Broker a monthly statement of the Collateral held in the
Special Custody Account. In addition, the Bank will advise the
Customer or Broker upon request at any time of the type and amount of
Collateral held in the account; provided, however, that the Bank shall
have no responsibility for making any determination as to the value of
such Collateral.
(d) Limitation of Bank's Liability. The Bank's duties and responsibilities
are as set forth in this Agreement. The Bank shall act only upon
receipt of Advice from Broker regarding release of Collateral. The
Bank shall not be liable or responsible for anything done, or
-6-
<PAGE>
omitted to be done by it in good faith and in the absence of
negligence and may rely and shall be protected in acting upon any
notice, instruction or other communication which it reasonably
believes to be genuine and authorized. As between Customer and the
Bank, the terms of the Custodian Agreement shall apply with respect to
any losses or liabilities of such parties arising out of matters
covered by this Agreement. As between the Bank and Broker, Broker
shall indemnify and hold the Bank harmless with regard to any losses
or liabilities of the Bank (including counsel fees) imposed on or
incurred by the Bank arising out of any action or omission of the Bank
in accordance with any notice or instruction of Broker under this
Agreement. In matters concerning or relating to this Agreement, the
Bank shall not be responsible for compliance with any statute or
regulation regarding the establishment or maintenance of margin
credit, including but not limited to Regulations T or X of the Board
of Governors of the Federal Reserve System, or with any rules or
regulations of the OCC. The Bank shall not be liable to any party for
any acts or omissions of the other parties to this Agreement.
(e) Bank shall be paid as compensation for its services pursuant to this
Agreement such compensation as may from time to time be agreed upon in
writing between Customer and Bank.
6. DEFAULT
-------
In the event of a default by Customer of its obligations (i) to maintain
Adequate Margin as herein provided, (ii) to timely comply with any obligation on
Customer's part to be performed or observed under this Agreement or in the
Margin Agreement, (iii) to pay on demand by Broker any losses sustained by
Broker as may occur under circumstances contemplated in paragraph 3 above; or
(iv) in the event of Customer's Insolvency, Broker has the right to give notice
(which notice may be by telegraph, facsimile transmission or hand delivery) to
Customer specifying such default and Broker may, no sooner than 2:00 P.M., New
York time on the next business day after giving such notice to Customer, if
Customer continues to be in default or insolvent at the end of such period,
effect a Closing Transaction or buy-in of any securities of which Customer's
account may be short. In the event of a default specified in subparagraphs (i),
(ii), or (iii) above, Broker shall also have the right, upon like notice and
-7-
<PAGE>
grace period, to sell any and all Collateral in the Special Custody Account and
to give Advice to Bank to deliver such Collateral free of payment to Broker,
which Advice shall state that, pursuant to this Agreement, the condition
precedent to Broker's right to receive such Collateral free of payment has
occurred. The Bank will provide prompt telephone notice to Customer of any
receipt by Bank of Advice from Broker to deliver Collateral free of payment, and
shall effect delivery of Collateral to Broker. Such sale or purchase may be made
according to Broker's judgment and may be made at Broker's discretion, on the
principal exchange or other market for such securities, or in the event such
principal market is closed, in a manner commercially reasonable for such
securities.
7. LIMITATION OF BROKER LIABILITY
------------------------------
Broker shall not be liable for any losses, costs, damages, liabilities or
expenses suffered or incurred by Customer as a result of any transaction
executed hereunder, or any other action taken or not taken by Broker hereunder
for Customer's account at Customer's direction or otherwise, except to the
extent that such loss, cost, damage, liability or expense is the result of
Broker's own recklessness, willful misconduct or bad faith.
8. CUSTOMER REPRESENTATION
-----------------------
Customer represents and warrants that the Collateral will not be subject to
any other liens or encumbrances.
9. TERMINATION
-----------
Any of the parties hereto may terminate this Agreement by notice in writing
to the other parties hereto; provided, however, that the status of any short
sales, and of Collateral held at the time of such notice to margin such short
sales shall not be affected by such termination until the release of such
Collateral pursuant to applicable rules of such national securities exchanges of
which Broker may be a member. In the event of the release of Collateral, the
Collateral shall be transferred to Customer.
10. NOTICE
------
Written communications hereunder shall be telegraphed, sent by facsimile
transmission or hand delivered as required herein, when another method of
delivery is not specified, may be mailed first class postage prepaid, except
that written notice of
-8-
<PAGE>
termination shall be sent by certified mail, addressed:
(a) if to Bank, to:
State Street Bank and Trust Company
1776 Heritage Drive
North Quincy, Massachusetts 02171
Attn:
-------------------------------
Telephone:
--------------------------
Telecopy:
---------------------------
(b) if to Customer, to:
The Kaufmann Fund, Inc.
140 East 45th Street 43rd Floor
New York, New York 10017
Attn: Mr. Lawrence Auriana
------------------------------
Telephone:
--------------------------
Telecopy:
---------------------------
(c) if to Broker, to:
Morgan Stanley Prime Brokerage
------------------------------------
1 Pierpont Plaza 10th Floor
------------------------------------
Brooklyn, New York 11201-2776
------------------------------------
Attn: Mr. Aaron Kaplanski
------------------------------
Telephone:
--------------------------
Telecopy:
---------------------------
-9-
<PAGE>
11. CONTROLLING LAW
---------------
The construction and enforcement of this Agreement shall be subject to and
governed by the laws of the Commonwealth of Massachusetts.
Executed as of the date first above written.
STATE STREET BANK AND TRUST COMPANY
By:
-------------------------------------------
Title:
----------------------------------------
CUSTOMER
By:
-------------------------------------------
Title:
----------------------------------------
BROKER
By:
-------------------------------------------
Title:
----------------------------------------
TRANSFER AGENCY AND SERVICE AGREEMENT
between
THE KAUFMANN FUND, INC.
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 3rd day of May, 1995, by and between THE KAUFMANN
FUND, INC., a corporation, having its principal office and place of business at
140 East 45th Street, New York NY, 10017, (the "Fund"), and STATE STREET BANK
AND TRUST COMPANY, a Massachusetts trust company having its principal office and
place of business at 225 Franklin Street, Boston, Massachusetts 02110 (the
"Bank").
WHEREAS, the Fund desires to appoint the Bank as its transfer agent,
dividend disbursing agent, custodian of certain retirement plans and agent in
connection with certain other activities, and the Bank desires to accept such
appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
Article 1 Terms of Appointment. Duties of the Bank
----------------------------------------
1.01 Subject to the terms and conditions set forth in this Agreement,
the Fund hereby employs and appoints the Bank to act as, and the Bank agrees to
act as its transfer agent for the Fund's authorized and issued shares of its
common stock, $ .1O par value, ("Shares"), dividend disbursing agent, custodian
of certain retirement plans and agent in connection with any accumulation,
open-account or similar plans provided to the shareholders of the Fund
("Shareholders") and set out in the currently effective prospectus and statement
of additional information ("prospectus") of the Fund, including without
limitation any periodic investment plan or periodic withdrawal program.
1.02 The Bank agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund and the Bank, the Bank shall:
(i) Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation thereof to
the Custodian of
<PAGE>
the Fund authorized pursuant to the Articles of Incorporation of
the Fund (the "Custodian");
(ii) Pursuant to purchase orders, issue the appropriate number of
Shares and hold such Shares in the appropriate Shareholder
account;
(iii) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation thereof to
the Custodian;
(iv) In respect to the transactions in items (i), (ii) and (iii)
above, the Bank shall execute transactions directly with
broker-dealers authorized by the Fund who shall thereby be deemed
to be acting on behalf of the Fund;
(v) At the appropriate time as and when it receives monies paid to it
by the Custodian with respect to any redemption, pay over or
cause to be paid over in the appropriate manner such monies as
instructed by the redeeming Shareholders;
(vi) Effect transfers of Shares by the registered owners thereof upon
receipt of appropriate instructions;
(vii) Prepare and transmit payments for dividends and distributions
declared by the Fund;
(viii) Issue replacement certificates for those certificates alleged to
have been lost, stolen or destroyed upon receipt by the Bank of
indemnification satisfactory to the Bank and protecting the Bank
and the Fund, and the Bank at its option, may issue replacement
certificates in place of mutilated stock certificates upon
presentation thereof and without such indemnity;
(ix) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
(x) Record the issuance of shares of the Fund and maintain pursuant
to SEC Rule 17Ad-10(e) a record of the total number of shares
of the Fund which are authorized, based upon data provided to it
by the Fund, and issued and
2
<PAGE>
outstanding. The Bank shall also provide the Fund on a regular
basis with the total number of shares which are authorized and
issued and outstanding and shall have no obligation, when
recording the issuance of shares, to monitor the issuance of such
shares or to take cognizance of any laws relating to the issue or
sale of such shares, which functions shall be the sole
responsibility of the Fund.
(b) In addition to and neither in lieu nor in contravention of the
services set forth in the above paragraph (a), the Bank shall: (i) perform the
customary services of a transfer agent, dividend disbursing agent, custodian of
certain retirement plans and, as relevant, agent in connection with
accumulation, open-account or similar plans (including without limitation any
periodic investment plan or periodic withdrawal program), including but not
limited to: maintaining all Shareholder accounts, preparing Shareholder meeting
lists, mailing proxies, mailing Shareholder reports and prospectuses to current
Shareholders, withholding taxes on U.S. resident and non-resident alien
accounts, preparing and filing U.S. Treasury Department Forms 1099 and other
appropriate forms required with respect to dividends and distributions by
federal authorities for all Shareholders, preparing and mailing confirmation
forms and statements of account to Shareholders for all purchases and
redemptions of Shares and other confirmable transactions in Shareholder
accounts, preparing and mailing activity statements for Shareholders, and
providing Shareholder account information and (ii) provide a system which will
enable the Fund to monitor the total number of Shares sold in each State.
(c) In addition, the Fund shall (i) identify to the Bank in writing
those transactions and assets to be treated as exempt from blue sky reporting
for each State and (ii) verify the establishment of transactions for each State
on the system prior to activation and thereafter monitor the daily activity for
each State. The responsibility of the Bank for the Fund's blue sky State
registration status is solely limited to the initial establishment of
transactions subject to blue sky compliance by the Fund and the reporting of
such transactions to the Fund as provided above.
(d) Procedures as to who shall provide certain of these services in
Article I may be established from time to time by agreement between the Fund and
the Bank per the attached
3
<PAGE>
service responsibility schedule. The Bank may at times perform only a portion of
these services and the Fund or its agent may perform these services on the
Fund's behalf.
(e) The Bank shall provide additional services on behalf of the Fund
(i.e., escheatment services) which may be agreed upon in writing between the
Fund and the Bank.
Article 2 Fees and Expenses
-----------------
2.01 For the performance by the Bank pursuant to this Agreement, the
Fund agrees to pay the Bank an annual maintenance fee for each Shareholder
account as set out in the initial fee schedule attached hereto. Such fees and
out-of-pocket expenses and advances identified under Section 2.02 below may be
changed from time to time subject to mutual written agreement between the Fund
and the Bank.
2.02 in addition to the fee paid under Section 2.01 above, the Fund
agrees to reimburse the Bank for out-of-pocket expenses, including but not
limited to confirmation production, postage, forms, telephone, microfilm,
microfiche, tabulating proxies, records storage, or advances incurred by the
Bank for the items set out in the fee schedule attached hereto. In addition, any
other expenses incurred by the Bank at the request or with the consent of the
Fund, will be reimbursed by the Fund.
2.03 The Fund agrees to pay all fees and reimbursable expenses within
five days following the receipt of the respective billing notice.
Article 3 Representations and Warranties of the Bank
------------------------------------------
The Bank represents and warrants to the Fund that:
3.01 It is a trust company duly organized and existing and in good
standing under the laws of the Commonwealth of Massachusetts.
3.02 It is duly qualified to carry on its business in the Commonwealth
of Massachusetts.
3.03 It is empowered under applicable laws and by its Charter and
By-Laws to enter into and perform this Agreement.
4
<PAGE>
3.04 All requisite corporate proceedings have been taken to authorize
it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
Article 4 Representations and Warranties of the Fund
------------------------------------------
The Fund represents and warrants to the Bank that:
4.01 It is a corporation duly organized and existing and in good
standing under the laws of Maryland.
4.02 It is empowered under applicable laws and by its Articles of
Incorporation and By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Articles of
Incorporation and By-Laws have been taken to authorize it to enter into and
perform this Agreement.
4.04 It is an open-end and diversified management investment company
registered under the Investment Company Act of 1940, as amended.
4.05 A registration statement under the Securities Act of 1933, as
amended is currently effective and will remain effective, and appropriate state
securities law filings have been made and will continue to be made, with respect
to all Shares of the Fund being offered for sale.
Article 5 Data Access and Proprietary Information
---------------------------------------
5.01 The Fund acknowledges that the data bases, computer programs,
screen formats, report formats, interactive design techniques, and documentation
manuals furnished to the Fund by the Bank as part of the Fund's ability to
access certain Fund-related data ("Customer Data") maintained by the Bank on
data bases under the control and ownership of the Bank or other third party
("Data Access Services") constitute copyrighted, trade secret, or other
proprietary information (collectively, "Proprietary Information") of substantial
value to the Bank or other third party. In no event shall Proprietary
Information be deemed Customer Data. The Fund agrees to treat all Proprietary
Information as proprietary to the Bank and further agrees that it shall not
divulge any
5
<PAGE>
Proprietary Information to any person or organization except as may be provided
hereunder. Without limiting the foregoing, the Fund agrees for itself and its
employees and agents:
(a) to access Customer Data solely from locations as may be
designated in writing by the Bank and solely in accordance with
the Bank's applicable user documentation;
(b) to refrain from copying or duplicating in any way the Proprietary
Information;
(c) to refrain from obtaining unauthorized access to any portion of
the Proprietary Information, and if such access is inadvertently
obtained, to inform in a timely manner of such fact and dispose
of such information in accordance with the Bank's instructions;
(d) to refrain from causing or allowing third-party data acquired
hereunder from being retransmitted to any other computer facility
or other location, except with the prior written consent of the
Bank;
(e) that the Fund shall have access only to those authorized
transactions agreed upon by the parties;
(f) to honor all reasonable written requests made by the Bank to
protect at the Bank's expense the rights of the Bank in
Proprietary Information at common law, under federal copyright
law and under other federal or state law.
Each party shall take reasonable efforts to advise its employees of
their obligations pursuant to this Article 5. The obligations of this Article
shall survive any earlier termination of this Agreement.
5.02 If the Fund notifies the Bank that any of the Data Access
Services do not operate in material compliance with the most recently issued
user documentation for such services, the Bank shall endeavor in a timely manner
to correct such failure. Organizations from which the Bank may obtain certain
data included in the Data Access Services are solely responsible for the
6
<PAGE>
contents of such data and the Fund agrees to make no claim against the Bank
arising out of the contents of such third-party data, including, but not limited
to, the accuracy thereof. DATA ACCESS SERVICES AND ALL COMPUTER PROGRAMS AND
SOFTWARE SPECIFICATIONS USED IN CONNECTION THEREWITH ARE PROVIDED ON AN AS IS,
AS AVAILABLE BASIS. THE BANK EXPRESSLY DISCLAIMS ALL WARRANTIES EXCEPT THOSE
EXPRESSLY STATED HEREIN INCLUDING, BUT NOT LIMITED TO, THE IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
5.03 If the transactions available to the Fund include the ability to
originate electronic instructions to the Bank in order to (i) effect the
transfer or movement of cash or Shares or (ii) transmit Shareholder information
or other information, then in such event the Bank shall be entitled to rely on
the validity and authenticity of such instruction without undertaking any
further inquiry as long as such instruction is undertaken in conformity with
security procedures established by the Bank from time to time.
Article 6 Indemnification
---------------
6.01 The Bank shall not be responsible for, and the Fund shall
indemnify and hold the Bank harmless from and against, any and all losses,
damages, costs, charges, counsel fees, payments, expenses and liability arising
out of or attributable to:
(a) All actions of the Bank or its agent or subcontractors required to
be taken pursuant to this Agreement, provided that such actions are taken in
good faith and without negligence or willful misconduct.
(b) The Fund's lack of good faith, negligence or willful misconduct
which arise out of the breach of any representation or warranty of the Fund
hereunder.
(c) The reliance on or use by the Bank or its agents or subcontractors
of information, records, documents or services which (i) are received by the
Bank or its agents or subcontractors, and (ii) have been prepared, maintained or
performed by the Fund or any other
7
<PAGE>
person or firm on behalf of the Fund including but not limited to any previous
transfer agent or registrar.
(d) The reliance on, or the carrying out by the Bank or its agents or
subcontractors of any instructions or requests of the Fund.
(e) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the securities laws or regulations
of any state that such Shares be registered in such state or in violation of any
stop order or other determination or ruling by any federal agency or any state
with respect to the offer or sale of such Shares in such state.
6.02 At any time the Bank may apply to any officer of the Fund for
instructions, and may consult with legal counsel with respect to any matter
arising in connection with the services to be performed by the Bank under this
Agreement, and the Bank and its agents or subcontractors shall not be liable
and shall be indemnified by the Fund for any action taken or omitted by it in
reliance upon such instructions or upon the opinion of such counsel. The Bank,
its agents and subcontractors shall be protected and indemnified in acting upon
any paper or document furnished by or on behalf of the Fund, reasonably believed
to be genuine and to have been signed by the proper person or persons, or upon
any instruction, information, data, records or documents provided the Bank or
its agents or subcontractors by machine readable input, telex, CRT data entry or
other similar means authorized by the Fund, and shall not be held to have notice
of any change of authority of any person, until receipt of written notice
thereof from the Fund. The Bank, its agents and subcontractors shall also be
protected and indemnified in recognizing stock certificates which are reasonably
believed to bear the proper manual or facsimile signatures of the officers of
the Fund, and the proper countersignature of any former transfer agent or former
registrar, or of a co-transfer agent or co-registrar.
6.03 In order that the indemnification provisions contained in this
Article 6 shall apply, upon the assertion of a claim for which the Fund may be
required to indemnify the Bank, the Bank shall promptly notify the Fund of such
assertion, and shall keep the Fund advised with respect to all developments
concerning such claim. The Fund shall have the option to participate with the
8
<PAGE>
Bank in the defense of such claim or to defend against said claim in its own
name or in the name of the Bank. The Bank shall in no case confess any claim or
make any compromise in any case in which the Fund may be required to indemnify
the Bank except with the Fund's prior written consent.
Article 7 Standard of Care
----------------
7.01 The Bank shall indemnify and hold the Fund harmless from and
against any and all losses, costs, charges, counsel fees, payments, expenses and
liability arising out of or attributable to any action or failure or omission to
act by the Bank as a result of the Bank's lack of good faith, negligence or
willful misconduct.
Article 8 Covenants of the Fund and the Bank
----------------------------------
8.01 The Fund shall promptly furnish to the Bank the following:
(a) A certified copy of the resolution of the Board of Directors of
the Fund authorizing the appointment of the Bank and the execution and delivery
of this Agreement.
(b) A copy of the Articles of Incorporation and By-Laws of the Fund
and all amendments thereto.
8.02 The Bank hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of stock
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
8.03 The Bank shall keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable, in
compliance with the recordkeeping requirements of the applicable federal and
state securities laws and rules and regulations thereunder. To the extent
required by Section 31 of the Investment Company Act of 1940, as amended, and
the Rules thereunder, the Bank agrees that all such records prepared or
maintained by the Bank relating to the services to be performed by the Bank
hereunder are the property of the Fund and will be preserved, maintained and
made available in accordance with such Section and Rules, and will be
surrendered promptly to the Fund on and in accordance with its request.
9
<PAGE>
8.04 The Bank and the Fund agree that all books, records, information
and data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential, and shall not be voluntarily disclosed to any other person,
except as may be required by law.
8.05 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, the Bank will endeavor to notify the Fund and
to secure instructions from an authorized officer of the Fund as to such
inspection. The Bank reserves the right, however, to exhibit the Shareholder
records to any person whenever it is advised by its counsel that it may be held
liable for the failure to exhibit the Shareholder records to such person.
Article 9 Termination of Agreement
------------------------
9.01 This Agreement shall continue for a term of three years (the
"Initial Term").
9.02 After the Initial Term this Agreement may be terminated by either
party upon ninety (90) days written notice to the other.
9.03 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and material will
be borne by the Fund. Additionally, the Bank reserves the right to charge for
any other reasonable expenses associated with such termination and/or a charge
equivalent to the average of three (3) months' fees.
Article 10 Assignment
----------
10.01 Except as provided in Section 10.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
10.02 This Agreement shall inure to the benefit of and be binding upon
the parties and their respective permitted successors and assigns.
10.03 The Bank may, without further consent on the part of the Fund,
subcontract for the performance hereof with (i) Boston Financial Data Services,
Inc., a Massachusetts corporation ("BFDS") which is duly registered as a
transfer agent pursuant to Section 17A(c)(2) of the Securities Exchange Act of
1934, as amended ("Section 17A(c)(2)"), (ii) a BFDS subsidiary duly
10
<PAGE>
registered as a transfer agent pursuant to Section 17A(c)(2) or (iii) a BFDS
affiliate; provided, however, that the Bank shall be as fully responsible to the
Fund for the acts and omissions of any subcontractor as it is for its own acts
and omissions.
Article 11 Amendment
---------
11.01 This Agreement may be amended or modified by a written agreement
executed by both parties and authorized or approved by a resolution of the Board
of Directors of the Fund.
Article 12 Massachusetts Law to Apply
--------------------------
12.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
Article 13 Force Majeure
-------------
13.01 In the event either party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.
Article 14 Consequential Damages
---------------------
14.01 Neither party to this Agreement shall be liable to the other
party for consequential damages under any provision of this Agreement or for any
consequential damages arising out of any act or failure to act hereunder.
Article 15 Merger of Agreement
-------------------
15.01 This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
matter hereof whether oral or written.
11
<PAGE>
Article 16 Counterparts
------------
16.01 This Agreement may be executed by the parties hereto on any
number of counterparts, and all of said counterparts taken together shall be
deemed to constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in their names and on their behalf by and through their duly
authorized officers, as of the day and year first above written.
THE KAUFMANN FUND, INC.
BY: /s/ Hans P. Utsch
---------------------------------
ATTEST:
/s/ Olga Mendez
- ----------------------------------
STATE STREET BANK AND TRUST COMPANY
BY: /s/ Illegible
---------------------------------
Executive Vice President
ATTEST:
/s/ Illegible
- -----------------------------------
12
<PAGE>
STATE STREET BANK & TRUST COMPANY
FUND SERVICE RESPONSIBILITIES
Service Performed Responsibility
- ----------------- --------------
Bank Fund
---- ----
1. Receives orders for the purchase x
of Shares.
2. Issue Shares and hold Shares in x
Shareholders accounts.
3. Receive redemption requests. x
4. Effect transactions 1-3 above x
directly with broker-dealers.
5. Pay over monies to redeeming x
Shareholders.
6. Effect transfers of Shares. x
7. Prepare and transmit dividends x
and distributions.
8. Issue Replacement Certificates. x
9. Reporting of abandoned property. x x
10. Maintain records of account. x
11. Maintain and keep a current and x
accurate control book for each
issue of securities.
12. Mail proxies. x x
13. Mail Shareholder reports. x x
14. Mail prospectuses to current x x
Shareholders.
15. Withhold taxes on U.S. resident x
and non-resident alien accounts.
<PAGE>
Service Performed Responsibility
- ----------------- --------------
Bank Fund
---- ----
16. Prepare and file U.S. Treasury x
Department forms.
17. Prepare and mail account and x
confirmation statements for
Shareholders.
18. Provide Shareholder account x
information.
19. Blue sky reporting. x
* Such services are more fully described in Article 1.02(a), (b) and (c) of
the Agreement.
THE KAUFMANN FUND, INC.
BY: /s/ Hans P. Utsch
--------------------------------
ATTEST:
- ----------------------------------
STATE STREET BANK AND TRUST COMPANY
BY: /s/ Illegible
--------------------------------
ATTEST:
/s/ Illegible
- ----------------------------------
<PAGE>
AUTHORIZATION AGREEMENT
WHEREAS, Subsection (d)(5) of Article III of Section 26 of the Fair
Practice Rules of the National Association of Securities Dealers, Inc.
authorizes the payment of a Service fee not to exceed .25% per annum of the
average net assets of a fund, and
WHEREAS, Kaufmann Fund, Inc. ("Kaufmann Fund") wishes to be able to pay
broker dealers for providing services to Kaufmann Fund investors;
NOW, THEREFORE, The Kaufmann Fund is authorized as follows:
1. To pay up to .25% per annum of its average net assets to broker dealers
that provide liaison services to investors, including but not limited to,
responding to customer inquiries and providing information on their investments.
2. No broker dealer shall receive more than .25% of the average annual net
asset value of shares sold. The term shares sold shall include dividend and
capital gains reinvested.
3. In calculating service fees, Kaufmann Fund shall use the daily net asset
value of the shares sold by the broker dealers and pay such fee on a monthly or
such other periodic basis as may be agreed upon.
IN WITNESS WHEREOF, The Kaufmann Fund has executed the Authorization
Agreement this 7th day of October, 1993.
THE KAUFMANN FUND, INC.
BY: /s/ Lawrence Auriana
--------------------------------
Law Offices of
MARTIN V. MILLER
P.O. Box 2512
Doylestown, PA 18901
TELEPHONE FAX/ MODEM
(215) 345-7110 (215) 345-7377
April 20, 1998
The Kaufmann Fund, Inc.
140 E. 45th Street - 43rd Floor
New York, NY 10017
Gentlemen:
PREFACE
On January 30, 1992, the Board of Directors of The Kaufmann Fund, Inc., a
New York corporation ("Kaufmann NY"), authorized the reorganization of Kaufmann
NY as a Maryland corporation by means of a merger of Kaufmann NY into a Maryland
corporation to be formed for the purpose. On July 1, 1992, the shareholders of
Kaufmann NY approved the reorganization. Articles of merger were filed on
February 9, 1992 with the Secretary of State of New York and with the Department
of Assessments and Taxation of the State of Maryland to complete the merger and
the merger was completed on that date.
On January 14, 1993, the Board of Directors of The Kaufmann Fund, Inc., a
Maryland corporation, ("Kaufmann NY") adopted the Investment Company Act of 1940
registration statement of Kaufmann NY and on February 9, 1993, Post-Effective
Amendment No. 37 to the registration statement of Kaufmann NY became effective
which was filed pursuant to Rule 414 under the Securities Act of 1933 in order
that the registration statement of Kaufmann NY should be deemed the registration
statement of its successor, Kaufmann NY, in order that the securities offering
might be continued.
INQUIRY
I have examined the Articles of Incorporation, as amended, of Kaufmann MD;
the ByLaws, as amended, of Kaufmann MD; documents evidencing various pertinent
corporate
<PAGE>
The Kaufmann Fund, Inc.
April 20,1998
Page 2
proceedings and such other items considered to be material, including the merger
documents referred to above.
I have examined the Securities Act Registration Statement of Kaufmann NY,
as amended, from time to time, to increase the number of registered shares and,
in particular, Post-Effective Amendment No. 31 to Kaufmann NY's Securities Act
Registration Statement, which became effective on May 9, 1988.
In Post-Effective Amendment No. 31, Kaufmann NY elected, pursuant to the
provisions of Rule 24f-2 under Section 24(f) of the Investment Company Act of
1940 (the "1940 Act"), to register an indefinite number of shares by amending
its Securities Act Registration Statement to declare that to the number or
amount of the same class or series presently registered was added an indefinite
number or amount of such securities. This election is still in effect; the most
recent Rule 24f-2 Notice having been filed with the Securities and Exchange
Commission ("SEC") on February 14, 1996.
I have examined Post-Effective Amendment No. 37 to the Registration
Statement of Kaufmann NY which was prepared and filed with the SEC for the
purpose of adoption by Kaufmann MD of the Securities Act of 1933 Registration
Statement of Kaufmann NY pursuant to the provisions of Rule 414 under the
Securities Act of 1933. The registration statement of the predecessor fund is
deemed the registration statement of the successor fund in a transaction
described in Rule 414 per Rule 24f-2(b)(3)(i).
OPINION
Based upon my examination, it is my opinion that Kaufmann MD is a validly
organized and subsisting corporation of the State of Maryland and that it is
legally authorized to issue shares of its $.10 cent par value common capital
stock at prices determined as described in Kaufmann MD's currently effective
prospectus and statement of additional information and upon satisfaction of
applicable state securities laws and upon payment of the full purchase price,
any shares so issued will be legally issued, fully paid and non-assessable stock
of Kaufmann MD.
I consent to the inclusion of this opinion as an Exhibit to Post Effective
Amendment No. 48 to the Registration Statement of Kaufmann MD on Form N-1A.
Very truly yours,
/s/ Martin V. Miller
MVM:bp Martin V. Miller
Exhibit 11(b)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the use of our report, dated February 6, 1998, on the annual
financial statements and financial highlights of The Kaufmann Fund, Inc., which
is included in Part A and to the incorporation by reference of the annual
financial statements contained in the Fund's Annual Report for the period ending
December 31, 1997 in Part B in Post Effective Amendment No. 48 to the
Registration Statement under the Securities Act of 1933 and included in the
Prospectus and Statement of Additional Information, as specified, and to the
reference made to us under the caption "Independent Auditors" in the Statement
of Additional Information.
Abington, Pennsylvania /s/ SANVILLE & COMPANY
March 23, 1998 Certified Public Accountants
THE KAUFMANN FUND, INC.
DISTRIBUTION PLAN
------------------------
This plan (the "Plan") is the distribution plan of The Kaufmann Fund, Inc.
(the "Fund").
WHEREAS, the Fund intends to act as the distributor of its shares as
provided under the Investment Company Act of 1940 (the "Act") and the Rules and
Regulations thereunder; and
WHEREAS, Rule 12b-1 under the Act provides that a regulated investment
company may bear expenses associated with the distribution of its shares, but
only pursuant to a written plan which has been approved in compliance with the
provisions of Rule 12b-1; and
WHEREAS, the Board of Directors of the Fund has determined that there is a
reasonable likelihood that the adoption of this Plan will benefit the Fund and
its shareholder;
NOW THEREFORE, the Fund adopts this Plan in accordance with the provisions
of Rule 12b-1 under the Act according to the following terms and conditions:
SECTION I. AUTHORIZATION OF PAYMENTS
1.1 The Fund may finance those services described in paragraph 2.1 below,
which are primarily intended to result in the sale of its shares (the
"Services"). Payments made by the Fund under this Plan to finance the Services
("Distribution Payments") shall not in the aggregate exceed one percent (1%) of
the Fund's average daily net asset per annum (the "Limitation").
1.2 So long as the Distribution Payments do not in the aggregate exceed the
Limitation, the Fund may reimburse the Investment Advisor for monies paid by the
Investment Advisor to provide any of the Services for the Fund's benefit,
provided that any such amount reimbursed to the Investment Advisor will be
characterized as a Distribution Payment for the purpose of calculating amounts
permitted to be paid under the Limitation.
SECTION II. THE SERVICES
2.1 The Services shall be defined as any activities which are primarily
intended to result in the sale of the Fund's shares, including but not limited
to:
<PAGE>
(a) advertising
(b) compensation of personnel primarily engaged in the sale and marketing
of the Fund's shares;
(c) the printing and mailing of prospectuses and reports to other than
current shareholders; and
(d) the printing and mailing of sales literature.
SECTION III. APPROVAL OF PLAN
3.1 This Plan shall take effect upon its approval by:
(a) a vote of at lease a majority (as defined in the Act) of the
outstanding voting shares of the Fund, and
(b) vote of both a majority of (i) those Directors of the Fund who are not
"Interested persons" of the Fund (as defined in the Act) and have no direct or
indirect financial interest in the operation of this Plan or any agreement
related to it (the "Rule 12b-1 Directors") and (ii) all of the Directors then in
office, cast in person at a meeting (or meetings) called for the purpose of
voting on this Plan and any such related agreements.
3.2 The Plan shall continue in effect for so long as such continuance is
specifically approved at least annually in the manner provided for approval of
this Plan in clause (b) of paragraph 3.1.
SECTION IV. REPORTS
4.1 The persons authorized to direct the payment of monies by the Fund
pursuant to this Plan or any related agreement shall be the President or any
Vice President of the Fund. Such persons shall provide or arrange for the
provision to the Fund's Directors and the Directors shall review, at least
quarterly, a written report of the amounts so expended and the purposes for
which such expenditures were made.
SECTION V. AMENDMENT AND TERMINATION
5.1 This Plan may not be amended to increase the Limitation provided in
paragraph 1.1 hereof unless such amendment is approved in the manner provided
for initial approval in clause (a) of paragraph 3.1 hereof, and no material
amendment to the Plan shall be made unless approved in the manner provided for
approval and annual renewal in clause (b) of paragraph 3.1 hereof.
2
<PAGE>
5.2 This Plan may be terminated at any time by a vote of a majority of the
Rule 12b-1 Directors or by a vote of a majority of the outstanding voting shares
of the Fund.
SECTION VI. DIRECTORS
6.1 While this Plan is in effect, the selection and nomination of Directors
who are not interested persons (as defined in the Act) of the Fund shall be
committed to the discretion of the Directors who are not interested persons as
defined in the Act.
SECTION VII. AGREEMENTS RELATING TO THE PLAN
7.1 Any agreements with any person relating to implementation of this Plan
shall be in writing, and any agreement related to this Plan shall provide that
such agreement:
(a) shall take effect upon its approval in the manner provided for approval
of the Plan under clause (b) of paragraph 3.1 hereof:
(b) may be terminated at any time, without the payment of a penalty, by
vote of a majority of the Rule 12b-1 Directors or by vote of a majority of the
Fund's outstanding voting shares, on not more than 60 days' written notice to
any other party to the agreement; and
(c) shall terminate automatically in the event of its assignment.
SECTION VII. AVAILABILITY OF PLAN, AGREEMENTS AND REPORTS
8.1 The Fund shall preserve copies of this Plan and any related agreements
and all reports made pursuant to paragraph 4.1 hereof, for a period of not less
than six years from the date of this Plan or of the agreements or of such
report, as the case may be, the first two years in an easily accessible place.
IN WITNESS WHEREOF, the Fund has executed this Plan on this 4th day of
December, 1992.
THE KAUFMANN FUND, INC.
By: /s/ Hans P. Utsch
--------------------------
HANS P. UTSCH
President
3
AMENDMENT NUMBER ONE TO
THE KAUFMANN FUND, INC. DISTRIBUTION PLAN
-----------------------------------------
WHEREAS, Article III, Section 26 of the Rules of Fair Practice of the
National Association of Securities Dealers ("NASD") has been amended to provide
in subsection (d)(2)(E) that members of the NASD are prohibited from offering or
selling the shares of a fund that has an asset-based sales charge in excess of
.75% of its average annual net assets and
WHEREAS, Rule 12b-1 fees have been defined by the NASD as "asset-based
sales charges,"
NOW, THEREFORE, The Kaufmann Fund, Inc. Distribution Plan is hereby amended
as follows:
1. Paragraph 1.1 of Section 1 is hereby amended by deleting the reference
to one percent (1%) therein and substituting therefore seventy five hundredths
of one percent (.75%).
2. In all other respects the Distribution Plan is hereby confirmed,
ratified and republished.
IN WITNESS WHEREOF, The Kaufmann Fund has executed this Amendment Number
One to the Distribution Plan on this 1st day of July, 1993.
THE KAUFMANN FUND, INC.
BY: /s/ Hans P. Utsch
---------------------------
HANS P. UTSCH
President
THE KAUFMANN FUND, INC.
AGREEMENT PURSUANT TO
RULE 12b-1 PLAN OF DISTRIBUTION
-------------------------------
WHEREAS, The Kaufmann Fund, Inc. (the "Fund"), a fund which charges neither
an initial sales charge nor a deferred sales charge, has adopted a Rule 12b-1
Plan of Distribution, as amended, which provides for the utilization of Fund
assets to finance certain activities which are primarily intended to result in
the distribution of the Fund's shares; and
WHEREAS, the Fund wishes to engage the services of Edgemont Asset
Management Corporation, from time to time, to provide or arrange for the
provision of the activities described in paragraph 2.1 of the Rule 12b-1 Plan
(hereafter the "Services");
WHEREAS, Edgemont Asset Management Corporation has agreed to provide or
arrange for the provision of the Services, as requested, from time to time, by
the Fund.
NOW, THEREFORE, THIS AGREEMENT WITNESSETH:
1. The Fund hereby agrees that it will finance the Services which are
primarily intended to result in the sale of the Fund's shares which shall
include but not be limited to (a) advertising, (b) compensation of persons
engaged in the offer and sale of the Fund's shares and/or administering the
accounts and providing information to shareholders, (c) the printing and mailing
of prospectuses and reports to other than current Fund shareholders, and (d) the
printing and mailing of sales literature.
<PAGE>
Edgemont Asset Management Corporation agrees that it will provide or arrange for
the provision of the Services.
2. Payments made by the Fund under the terms of this Agreement for the
Services shall not exceed, in the aggregate, one percent (1%) of the Fund's
average daily net asset value, per annum.
3. Edgemont Asset Management Corporation shall provide to the Fund, at
least quarterly, a written report concerning the disposition of monies, paid or
payable by the Fund, pursuant to this Agreement, the amounts so expended and the
purposes for which such expenditures were made.
4. This Agreement shall not take effect until it has been approved by the
vote of both a majority of (a) those Directors of the Fund who are not
interested persons of the Fund and have no direct or indirect financial interest
in the operation of the Plan or this Agreement ( the "Rule 12b-1 Directors");
and (b) all of the Directors then in office cast at a meeting called for the
purpose of voting on this Agreement. This Agreement may be terminated at any
time without payment of a penalty by a vote of a majority of the Rule 12b-1
Directors or by vote of a majority of the Fund's outstanding voting securities,
on not more than sixty days prior written notice to the other party to the
Agreement, and shall terminate automatically in the event of its assignment.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, the
4th day of December, 1992.
2
<PAGE>
THE KAUFMANN FUND, INC.
Attest:
/s/ Olga Mendez By: /s/ Hans P. Utsch
- ---------------------------------- -------------------------
OLGA MENDEZ HANS P. UTSCH
Assistant Secretary President
EDGEMONT ASSET MANAGEMENT
CORPORATION
Attest:
/s/ Olga Mendez By: /s/ Lawrence Auriana
- ---------------------------------- -------------------------
OLGA MENDEZ LAWRENCE AURIANA
Assistant Secretary President
3
AMENDMENT NUMBER ONE TO
THE KAUFMANN FUND, INC.
AGREEMENT PURSUANT TO PLAN OF DISTRIBUTION
------------------------------------------
WHEREAS, Article III, Section 26 of the Rules of Fair Practice of the
National Association of Securities Dealers has been amended to provide in
subsection (d)(2)(E) that members of the National Association of Securities
Dealers are prohibited from offering or selling the shares of a mutual fund that
has an asset-based sales charge in excess of .75% of its average annual net
assets and
WHEREAS, Rule 12b-1 fees have been defined by the NASD as "asset-based
sales charges,"
NOW, THEREFORE, the Agreement Pursuant to The Kaufmann Fund, Inc. Plan of
Distribution is hereby amended as follows:
1. Paragraph 2 is hereby amended by deleting the reference to one percent
(1%) therein and substituting therefore seventy five hundredths of one percent
(.75%).
2. In all other respects the Agreement Pursuant to The Kaufmann Fund, Inc.
Plan of Distribution is hereby confirmed, ratified and republished.
IN WITNESS WHEREOF, The Kaufmann Fund has executed this Amendment One to
the Agreement Pursuant to The Kaufmann Fund, Inc. Plan of Distribution on this
1st day of July, 1993.
THE KAUFMANN FUND, INC.
BY: /s/ Hans P. Utsch
-----------------------------
HANS P. UTSCH
President
THE KAUFMANN FUND, INC.
AGREEMENT PURSUANT TO
PLAN OF DISTRIBUTION
The Kaufmann Fund, Inc. (the "Fund"), a Maryland corporation, is registered
with the United States Securities and Exchange Commission as an open-end,
diversified, management investment company under the Investment Company Act of
1940 and its securities are registered under the Securities Act of 1933. Its
shares are also registered or qualified for sale in each of the United States,
the District of Columbia and the Commonwealth of Puerto Rico. The Fund acts as
the distributor of its own shares pursuant to a Rule 12b-1 Distribution Plan
which authorizes the financing of services which are primarily intended to
result in the sale of the Fund's shares including the compensation of persons
engaged in the offer and sale of the Fund's shares and/or administering the
accounts of and providing information to shareholders. The Fund is also
authorized to pay a service fee for personal service and the maintenance of
shareholder accounts.
(" ") is a broker-dealer in securities and is registered as such
with the United States Securities and Exchange Commission and is a member of the
National Association of Securities Dealers, Inc. agrees to
maintain such membership in good standing. wishes to offer
and sell the shares of the Fund.
The Fund agrees to sell to shares of its common stock (the
"Shares"), subject to any limitations imposed by the Fund and to confirmation by
the Fund in each instance of such sales. Securities thus purchased shall be only
(1) for the purpose of covering purchase orders previously received or (2) for
own investment.
By your acceptance hereof, you agree to all of the following terms and
conditions:
1. Offering Price and Fees. The public offering price at which the Shares
will be sold to you is the net asset value thereof, as computed from time to
time. You will be furnished, upon request, with the public offering price of the
Shares computed as described in the then current prospectus of the Fund. Your
attention is directed to the fact that each sale is made subject to confirmation
by the Fund at the public offering price next computed after receipt and
acceptance of the order by the Fund. As compensation you shall receive a
distribution fee as set forth on Schedule A attached.
2. Manner of Offering, Selling and Purchasing Shares. The Fund has
delivered to you a copy of the Fund's current prospectus and will provide you
with such number of copies of the Fund's prospectus, statement of additional
information,
1
<PAGE>
shareholder reports and of supplementary sales materials prepared by, or on
behalf of, the Fund as you may reasonably request. Shares will be offered and
sold only in accordance with the terms and conditions of the current prospectus
and statement of additional information of the Fund. Neither you nor any other
person is authorized to give any information or to make any representation,
whether written or oral, other than information and representations contained in
the prospectus, statement of additional information, shareholder reports or in
supplementary sales materials. You agree that you will not use any other
offering materials for the Fund without the Fund's written consent.
You will distribute prospectuses and reports to your customers in
accordance with applicable requirements, except to the extent that we expressly
undertake to do so on your behalf.
You hereby agree (i) to be responsible for the proper instruction and
training of all sales personnel that you employ; (ii) to exercise your best
efforts to find purchasers for the Shares of the Fund and to place Shares sold
by you on an investment basis; (iii) to furnish to each person to whom any sale
is made a copy of the then current prospectus of the Fund; (iv) to transmit to
the Fund promptly, upon receipt, any and all orders received by you; and (v) not
to withhold placing customers' orders with the Fund in order thereby to make a
profit for yourself.
You also agree to pay to the Fund the offering price, within three (3)
business days after the date of the Fund's acceptance of your order, or such
shorter time as may be required by law. All orders must be accompanied by
payment in U.S. dollars. Checks issued in payment of orders must be drawn on a
U.S. bank. If such payment is not received within said time period, the Fund
reserves the right, without prior notice, to cancel the sale and to redeem the
Shares. In the latter case the Fund shall have the right to hold you responsible
for any loss resulting to the Fund. Should payment be made by check, a request
for liquidation of Shares may be delayed pending clearance of the check. You
shall make all sales subject to the Fund's confirmation. You also agree to issue
confirmations promptly for all accepted purchase orders for accounts held in
street name. All orders are subject to acceptance or rejection by the Fund, in
its sole discretion. The procedure stated herein relating to the pricing and
handling of orders shall be subject to instructions which may be forwarded to
you, from time to time.
You agree to maintain records of all sales and redemptions of Shares made
through you and to furnish us with copies of such records on request.
We will not accept from you any conditional orders for Shares of the Fund.
Delivery of certificates for Shares purchased shall be made by the Fund only
against receipt of the purchase price. No certificates will be issued unless
specifically requested.
In connection with orders, by mail, order or wire, for the purchase of
Shares on behalf of an Individual Retirement Account, Self- Employed Retirement
Plan or other retirement account, you shall act as agent for the custodian or
trustee of such plans.
2
<PAGE>
(solely with respect to the time of receipt of the application and payment) and
shall not place such order until you have received from your customer payment
for such purchase and, if such purchase represents the first contribution to
such a plan, the completed documents necessary to establish the plan. You agree
to indemnify us as applicable for any claim, loss, or liability resulting from
incorrect investment instructions which cause a tax liability or other tax
penalty.
It is the Fund's policy to market its shares to investors and not to
purchasers whose investment policy is to time the market or who are short term
investors. The Fund asks that you keep this policy in mind in marketing its
shares. Additionally, you agree to notify Ms. Olga Mendez at the Fund of any
purchase or redemption order in an amount of $250,000 or more immediately upon
receipt of such an order.
3. Fund's Relationship with You. Under this Agreement, you shall be acting
as principal and nothing herein shall be construed to constitute you or any of
your agents, employees or representatives as an agent, partner or employee of
the Fund. To the extent that you are involved in any of your customer's purchase
of Shares of the Fund, such involvement will be as agent of such customer only.
The Fund shall have full authority to take such action, as it may deem
advisable, in respect of all matters pertaining to the distribution of its
Shares. The Fund shall not be under any obligation to you, except for
obligations expressly assumed by the Fund in this Agreement or for liability
arising as a result of the Fund's lack of good faith.
4. Redemptions within Seven Days. If any Shares purchased are redeemed by
the Fund or are tendered for redemption within seven business days after
confirmation by the Fund of the original purchase order for such Shares, the
value of the Shares redeemed will not be taken into consideration in calculating
the amount of the distribution fee to which you are entitled. Notice will be
given to you of any such redemption within ten days of the date on which the
redemption request is received and, if applicable, Share certificates are
received by the Fund.
If, upon a redemption that is instituted by you, instructions received are
not in proper form (including the receipt of outstanding share certificates)
within the time customary, the redemption may be canceled by us without
liability on our part or the part of the Fund. At our option, we may buy the
Fund Shares and hold you responsible for any loss to the Fund or ourselves
resulting from your failure to complete the redemption satisfactorily.
5. Compliance with Law. You hereby represent that you are licensed and
qualified as a broker-dealer or otherwise authorized to offer and sell the
Shares under the laws of each jurisdiction in which the Shares will be offered
and sold by you.
You agree that in the selling Shares you will comply with all laws, rules
and regulations applicable to underwriters and dealers in the securities of
open-end investment companies, including the applicable provisions of the
Securities Act of 1933, the
3
<PAGE>
applicable rules and regulations of the National Association of Securities
Dealers, Inc., in particular Section 26 of Article III of the Association's
Rules of Fair Practice, and the applicable rules and regulations of any
jurisdiction in which you sell, directly or indirectly, any Shares. You agree
not to offer for sale or sell the Shares in any jurisdiction in which the Shares
are not qualified for sale or in which you are not qualified as a broker-dealer.
We shall have no responsibility for the qualification of, manner of sale,
or status of persons selling Shares of the Fund under the laws regulating the
sale of securities in any jurisdiction. If it is necessary to register or
qualify the Shares in any foreign jurisdictions in which you intend to offer the
Shares, it will be your responsibility to arrange for and to pay the costs of
such registration or qualification. Prior to any such registration or
qualification, you will notify us of your intent and of any limitations that
might be imposed on the Fund and you agree not to proceed with such registration
or qualification without the written consent of the Fund.
6. Indemnification. You shall indemnify, defend and protect the Fund and
each director, officer, employee and agent of the Fund and shall hold the Fund
and each such director, officer, employee and agent harmless from and against
any and all claims, demands, actions, losses, damages, liabilities, costs,
charges, reasonable counsel fees and expenses of any nature the Fund or they
incur ("Losses") to the extent such Losses rise out of (i) your dissemination of
information regarding the Fund that is materially incorrect and that is not
provided to you or approved by the Fund, or (ii) your willful misconduct or
negligence in the performance of, or failure to perform your obligations under
this Agreement except to the extent such Losses result from the Fund's breach of
this Agreement or the Fund's willful misconduct or negligence.
Fund shall indemnify, defend and protect you and each of your directors,
officers, employees and agents and hold you and each such director, officer,
employee and agent harmless from and against any and all Losses arising out of
(i) any inaccuracy or omission in any prospectus, registration statement,
annual report or proxy statement, of the Fund or any accuracy or omission in any
advertising or promotional material generated by the Fund or which is accurately
based by you on information published or provided by the Fund, (ii) any breach
by the Fund of any representation contained in this Agreement, and (iii) any
action taken or omitted to be taken by you pursuant to this Agreement, except
to the extent such Losses result from your breach of this Agreement, willful
misconduct, or negligence.
7. Status. It is agreed that the services that you are to perform hereunder
are not the services of an underwriter or principal underwriter of the Fund,
within the meaning of the Securities Act of 1933 or the Investment Company Act
of 1940. This Agreement does not grant you any right to purchase Shares from the
Fund (although it does not preclude you from purchasing any such Shares).
4
<PAGE>
8. Confidentiality of Information. You and the Fund acknowledge that the
identities of the other party's customers or shareholders, information
maintained by such other party regarding those customers or shareholders, and
all computer programs and procedures developed by such other party or such other
party's affiliates or agents in connection with such other party's performance
of its duties hereunder constitute the valuable property of such other party.
Each party agrees that should it come into possession of any list or compilation
of the identities of or other information about the other party's customers or
shareholders, or any other property of such party, pursuant to this Agreement,
the party who acquired such information or property in confidence and refrain
from using, disclosing, or distributing any of such information or other
property except (i) with the other party's prior written consent, or (ii) as
required by law or judicial process.
9. Termination and Amendment. Either party hereto may terminate this
Agreement, without cause, upon ten days' written notice to the other party. The
Fund may terminate this Agreement for cause upon the violation by you of any of
the provisions hereof, such termination to become effective on the date notice
of such termination is mailed to you. The Fund reserves the right to cancel this
Agreement at any time without notice if any Shares shall be offered for sale by
you at less than the then current public offering price determined by or for the
Fund except as may arise as the result of a surrender of part or all of the
distribution fee.
This Agreement will terminate immediately as to the payment of the fee
described in Schedule A attached in the event that the Fund's Rule 12b-1 Plan is
terminated. Fund agrees to give prompt notice of any such termination.
This Agreement shall terminate immediately upon the appointment of a
Trustee under the Securities Investor Protection Act or any other act of
insolvency by you.
The termination of this Agreement shall have no effect upon transactions
entered into prior to the effective date of termination. A trade placed by you
subsequent to your voluntary termination of the Agreement will not serve to
reinstate the Agreement. Reinstatement will only be effective upon written
notification by us.
This Agreement may be amended by us at any time by written notice to you
and your placing of an order after the effective date and after receipt of
notice of any such Amendment shall constitute your acceptance thereof.
10. No Assignment. This Agreement is not assignable or transferable, except
that the Fund may assign or transfer this Agreement to any successor which
becomes the general distributor of the Fund's Shares.
11. Governing Law. This Agreement and the rights and obligations of the
parties hereunder shall be governed by and construed under the laws of the State
of New York.
5
<PAGE>
12. "As Of " Transactions. If for any reason, a Fund share purchase order
or redemption order is not transmitted to the Fund's Transfer Agent on the
business day on which such order is placed by the investor, and you request that
such order be placed " as of" the date on which it was received by you, you will
reimburse the Fund for any loss that it sustains if the value of the shares
purchased or redeemed on the date of your request is more than ( for
redemptions) or less than ( for purchases) the value thereof on the " as of"
date.
13. Notices. All notices required by this Agreement shall be in writing and
delivered personally or sent by certified mail--return receipt requested. All
notices and other communications concerning this Agreement will be deemed to
have been received as of the earlier of actual physical receipt or three days
after the date of receipt of the certified mail as evidenced by the return
receipt. All such notices and other communications shall be made:
If to Fund, to:
The Kaufmann Fund, Inc.
140 E. 45th Street, 43rd Floor
New York, NY 10017
Attention: Ms. Olga Mendez
If to you, to the address given below in the signature block.
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us both copies of the enclosed Agreement for
counter-signature thereof, whereupon it will become a binding agreement between
us in accordance with its terms. One executed copy will be returned to you for
your files.
THE KAUFMANN FUND, INC.
BY:
------------------------------
Vice President
6
<PAGE>
We hereby confirm and accept the foregoing Agreement and acknowledge
receipt of the prospectus referred to in Section 2 thereof, all as of the date
set forth below.
BY:
------------------------------
(Authorized Signature/Title)
------------------------------
(Address)
------------------------------
------------------------------
(Telephone Number)
DATED:
------------------------
7
<PAGE>
Schedule A
THE KAUFMANN FUND, INC.
AGREEMENT PURSUANT TO
PLAN OF DISTRIBUTION
Distribution And A distribution and service fee calculated at an
Service Fee: annual rate of 0.25% of the average monthly
market value of Fund shares sold by , shall
be paid to . Such fee will be payable
within thirty (30) days following the end of
each calendar quarter during the duration of the
Agreement.
Minimum Payments: Quarterly payments of fees of less than $1,000
will be accrued and paid within thirty (30) days
following the end of each calendar quarter in
which such payments cumulatively equal or
exceed $1,000.
8
Ex-99.16
The Kaufmann Fund, Inc.
Expense Calculations For Fee Table Examples
Assumptions: $1,000 investment, 5% no-load annual return, 1.93% expenses
5% - 1.93% = 3.07%
Cumula- Redemp- Redemp- Cumula-
tive tion tion tive
Year Amounts Average Expense % Expenses Expenses Fee % Fee Expenses
- --------------------------------------------------------------------------------
1 1,000 1,016 1.89% 19 19 0.2% 2 21
1,031
2 1,031 1,047 1.89% 20
1,063
3 1,063 1,080 1.89% 20 59 0.2% 2 61
1,096
4 1,096 1,113 1.89% 21
1,130
5 1,130 1,148 1.89% 22 102 0.2% 2 104
1,165
6 1,165 1,183 1.89% 22
1,201
7 1,201 1,220 1.89% 23
1,238
8 1,238 1,258 1.89% 24
1,277
9 1,277 1,297 1.89% 25
1,317
10 1,317 1,338 1.89% 25 221 0.2% 3 224
1,358
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000054771
<NAME> THE KAUFMANN FUND, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 3,960,495
<INVESTMENTS-AT-VALUE> 5,895,614
<RECEIVABLES> 288,388
<ASSETS-OTHER> 310,544
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,494,524
<PAYABLE-FOR-SECURITIES> 115,440
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 370,923
<TOTAL-LIABILITIES> 486,363
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,007,716
<SHARES-COMMON-STOCK> 942,699
<SHARES-COMMON-PRIOR> 914,522
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (20,253)
<ACCUMULATED-NET-GAINS> 106,830
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,913,867
<NET-ASSETS> 6,008,161
<DIVIDEND-INCOME> 6,965
<INTEREST-INCOME> 41,632
<OTHER-INCOME> 2,025
<EXPENSES-NET> 107,216
<NET-INVESTMENT-INCOME> (56,595)
<REALIZED-GAINS-CURRENT> 299,348
<APPREC-INCREASE-CURRENT> 433,053
<NET-CHANGE-FROM-OPS> 675,806
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 188,600
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 212,036
<NUMBER-OF-SHARES-REDEEMED> 212,336
<SHARES-REINVESTED> 28,478
<NET-CHANGE-IN-ASSETS> 666,849
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 48,575
<OVERDISTRIB-NII-PRIOR> (16,152)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 85,090
<INTEREST-EXPENSE> 395
<GROSS-EXPENSE> 113,805
<AVERAGE-NET-ASSETS> 5,655,928
<PER-SHARE-NAV-BEGIN> 5.84
<PER-SHARE-NII> (0.06)
<PER-SHARE-GAIN-APPREC> 0.795
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0.205
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 6.37
<EXPENSE-RATIO> 1.89
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
