Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
Tel: 212-455-2000
Fax: 212-455-2502
April 30, 1999
Re The Kaufmann Fund, Inc. (Registration Statement File Nos. 2-28049
and 811-1586)
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Attn: Filing Desk
Dear Sir or Madam:
On behalf of The Kaufmann Fund, Inc. (the "Company"), and pursuant
to Rule 485(b) of the Securities Act of 1933, as amended (the "Securities
Act") and the Investment Company Act of 1940, as amended (the "Investment
Company Act"), we hereby submit for filing by direct electronic
transmission Post-Effective Amendment No. 50 under the Securities Act and
Amendment No. 49 under the Investment Company Act to the Company's
Registration Statement on Form N-1A (the "Post-Effective Amendment").
The Post-Effective Amendment does not contain disclosures which would
render it ineligible to become effective pursuant to Rule 485(b).
Please direct any comments concerning the filing to Nick Patnaik at
212-455-3193 of this firm.
Very truly yours,
/s/ Simpson Thacher & Bartlett
SIMPSON THACHER & BARTLETT
<PAGE>
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON 4/30/99
FILE NOS: 2-28049
811-1586
SECURITIES AND EXCHANGE COMMISSION
----------------------------------
Washington, D.C. 20549
FORM N-1A
---------
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X /
Pre-Effective Amendment No. _______ / /
Post-Effective Amendment No. 50 / X /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY / X /
ACT OF 1940
Amendment No. 49
(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
------------
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.
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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)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ X / on April 30, 1999 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, 1998
was filed on April 9, 1999.
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FORM N-1A
---------
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 Data
Information and Ratios, Financial Highlights
4. General Description of The Fund, Investment Objective and
Registrant Policies, The Registrant 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
Fund Performance Performance
6. Capital Stock and Other Capital Stock
Securities
7. Purchase of Securities Purchase of Fund Shares, Account
Being Offered 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
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<PAGE>
FORM N-1A PART B
ITEM # LOCATION IN STATEMENT OF
------ ADDITIONAL INFORMATION
-------------------------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and See Item "The Fund" in Prospectus
History
13. Investment Objectives and Investment Objective and Policies,
Policies Investment Restrictions
14. Management of the Fund Management of the Fund
15. Control Persons and Principal Holders of Securities
Principal Holders of
Securities
16. Investment Advisory and Investment Advisory Services,
Other Services Custodian, Auditor. See item
"Transfer Agent and Custodian" in
Prospectus
17. Brokerage Allocation and Brokerage Allocation
Other Practices
18. Capital Stock and Other See item "Capital Stock" in
Securities Prospectus
19. Purchase, Redemption and Purchase and Redemption of Shares,
Pricing of Securities Being Special Investor Services,
Offered Distribution Plan. See "Purchases
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
-5-
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PART B (Continued)
- -------------------
ITEM # LOCATION IN STATEMENT
------ OF ADDITIONAL INFORMATION
-------------------------
22. Calculations of Performance Additional Performance
Data Information for the Fund
23. Financial Statements Financial Statements
PART C
------
ITEM # LOCATION IN PART C
------ -------------------
24. Financial Statements and Financial Statements and
Exhibits Exhibits
25. Persons Controlled by or Under Persons Controlled by or Under
Common Control with Registrant Common Control with
Registrant
26. Number of Holders of Securities Number of Holders of
Securities
27. Indemnification Indemnification
28. Business and Other Connections Business and Other Connections
of Investment Advisor
29. Principal Underwriter Principal Underwriter
30. Location of Accounts and Location of Accounts and
Records Records
31. Management Services Management Services
32. Undertakings Undertakings
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Cover
[Logo]
Prospectus & Application
May 1, 1999
The Kaufmann Fund, Inc.
140 East 45th Street, 43rd Floor
New York, New York 10017
Investing in growth companies for the long term
The Fund seeks capital appreciation by investing principally in common
stocks.
For Assistance in Completing an Application or
Questions Concerning Shareholder Accounts
(800) 261-0555
As with all mutual funds, the Securities and Exchange Commission does not
determine if the information contained in this prospectus is truthful or
complete nor has it approved or disapproved any securities offered in this
prospectus. Anyone who tells you otherwise is committing a crime.
1<PAGE>
<PAGE>
Table of Contents
Why You Should Read This Prospectus
Reading the prospectus will help you to decide whether The Kaufmann Fund,
Inc. is the right investment for you. It allows you to compare the Fund's
objective, principal strategies, principal risks and performance with other
mutual funds. Please keep it for future reference.
Page
Information About the Fund
Objective
Principal Strategies
Principal Risks
Performance
Fees and Expenses
Additional Investment Strategies
Account Information
Determining Share Price
Purchasing Shares
Selling Shares
Special Investor Services
Dividends and Taxes
Dividends and Distributions
Tax Consequences
Managing the Fund
Portfolio Turnover
Year 2000 Readiness
Euro Conversion
Distribution and Service Fees
Financial Highlights
The Fund is not a complete investment program, but may serve to diversify
other types of investments in your portfolio.
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Information About the Fund
Objective
The Fund's investment objective is capital appreciation.
Principal Strategies
To achieve its objective, the Fund invests primarily in the stocks of small
and medium-sized companies that are traded on national security exchanges,
NASDAQ and on the over-the-counter market. Up to 25% of the Fund's net
assets may be invested in foreign securities. When deciding which securities
to buy the Fund considers:
the growth prospects of existing products and new product development
the economic outlook of the industry
the price of the security and its estimated fundamental value
relevant market, economic and political environments.
The Fund invests in individual companies for the long term. It buys the
stocks of companies that it believes:
are profitable and leaders in their industry
have distinct products and services which address substantial markets
can grow annual earnings by at least 20% for the next three to five years
have superior proven management and solid balance sheets.
[CALLOUT]
Hands-On-Approach
Edgemont Asset Management Corporation, the Fund's investment advisor, uses a
bottom up approach to portfolio management. There is an emphasis on
individual stock selection rather than trying to time the highs and lows of
the market or concentrating in certain industries or sectors. This hands-on-
approach means that in addition to sophisticated computer analysis, Edgemont
conducts in-depth meetings with management, industry analysts and
consultants. Through this interaction with companies Edgemont seeks to
develop a thorough knowledge of the dynamics of the businesses the Fund
invests in.
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Typically, the Fund sells an individual security when the company fails to
meet expectations, there is a deterioration of underlying fundamentals or the
intermediate and long-term prospects are poor.
Principal Risks
The Fund cannot eliminate risk or assure achievement of its objective and you
may lose money on your investment in the Fund.
The Fund is subject to "management" and "market" risks. Management risk
means that the Fund's strategy may not produce the expected results, causing
losses. Market risk is when the price of a security moves down in response
to general market and economic conditions or from the activities of an
individual company.
Since the Fund invests mostly in small and medium companies its share price
may fluctuate more than the share price of funds primarily invested in large
companies. These companies may pose greater risk due to narrow product
lines, limited financial resources, less depth in management or a limited
trading market for their stocks.
In addition, there are risks associated with investing in foreign countries.
Since foreign securities are usually denominated in foreign currencies, the
value of the Fund's portfolio could be affected by currency exchange rates
and exchange control regulations. Other risks include:
- - seizure, expropriation or nationalization of a company's assets
- - less publicly available information and differing regulations and
standards
- - the impact of political, social or economic instability, or diplomatic
events
- - securities are less liquid and harder to value than those of a U.S.
issuer.
As a result of these risks, the Fund may be more volatile than a fund
investing solely in U.S. companies. These risks may be greater if the Fund
invests in developing countries.
Performance
The information below shows the Fund's performance for the ten-year period
through December 31, 1998. Year-by-year returns show how the Fund's
performance has varied by illustrating its volatility for each full calendar
year for the past ten years. These returns include reinvestment of all
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<PAGE>
dividends and capital gain distributions, and reflect Fund expenses. As with
all mutual funds, past performance does not guarantee future results.
Year-By-Year Total Return As Of December 31,
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
--------- ----------- ----------- ----------- ---------- ----------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
80%
70% 78.65%
60%
50%
40% 46.85%
30% 36.84%
20% 20.85%
10% 11.32% 18.14% 12.59%
0% 6.13% 8.99% 0.07%
- -10%
Best quarter: 28.10% (1st quarter 1991
Worst quarter: -18.69% (3rd quarter 1998)
These figures do not reflect the redemption fee.
If the fee was included performance would be lower.
</TABLE>
Average annual total return measures Fund performance over time. The Fund's
average annual return is compared with the Russell 2000 Index. While the
Fund does not seek to match the returns of the Russell 2000, this Index is a
good indicator of small company stock performance. You may not invest in the
Russell 2000, and unlike the Fund, it does not incur fees or charges.
Performance figures reflect the redemption fee.
Average Annual Returns As Of December 31, 1998
1 Year 5 Years 10 Years
------ ------- --------
The Kaufmann Fund 0.72% 15.11% 20.65%
Russell 2000 -2.25% 11.87% 12.92%
-5-
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Fees and Expenses
This table describes the fees and expenses you may pay if you buy and hold
shares of the fund.
As a Fund Shareholder Fees
shareholder, you (fees paid directly from your investment)
do not pay any
sales charges or Redemption Fee 1 0.20%
exchange fees. (as % of redemption proceeds)
Annual expenses
can vary from Annual Fund Operating Expenses
year-to-year. (expenses that are deducted from Fund assets)
These fees are
for the fiscal Management fee 1.50%
year ended Distribution (12b-1) fee 2 0.43%
December 31, Other expenses 0.00%
1998.
Total Annual Fund Operating Expenses %
Fee Waiver 3 %
Net Expenses 1.96%
1. The Fund imposes a 0.20% fee on the redemption of any shares purchased
after February 1, 1985.
2. The maximum distribution fee that could be paid is 0.75%.
3. Under a written contract, Edgemont reimburses expenses when certain
annual operating expenses of the Fund exceed $650,000. This contract
may be terminated or amended at any time by Edgemont.
[CALLOUT]
Understanding Costs
Costs are an important consideration in choosing a mutual fund. That's
because you pay the costs of operating the Fund. These costs can erode a
substantial portion of the capital appreciation the Fund achieves. Even
seemingly small differences in expenses can, over time, have an effect on the
Fund's performance.
-6-
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<PAGE>
Example Costs
The following example allows you to compare the cost of investing in the Fund
to the cost of investing in other mutual funds by showing what your costs may
be over time. It uses the following assumptions:
- - $10,000 initial investment
- - 5% total return for each year
- - Total annual Fund operating expenses remain the same for each period
- - selling and holding shares at the end of each period.
Your actual costs may be higher or lower, so use this example for comparison
only. Based on this information your costs at the end of each period would
be:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
With redemption $220 $637 $1,080 $2,312
Without redemption $199 $615 $1,057 $2,285
-7-
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Additional Investment Strategies
In seeking to meet its investment objective, the Fund may invest in other
types of securities and employ certain investment practices These securities
and investment practices offer certain opportunities and carry various risks.
The Fund may use up to 10% of its net assets to purchase and sell put and
call options, and write covered call options to protect its assets. An
option is the right to buy or sell securities for an agreed upon price. The
successful use of options, which are a type of derivative, depends on
Edgemont's ability to correctly predict changes in the price of securities.
Options may be riskier than other types of investments.
The Fund may make short sales of securities listed on one or more national
exchange or on the NASDAQ. A short sale means selling a security the Fund
does not own to take advantage of an anticipated decline in the stock's
price. Once the Fund sells the security short, it has an obligation to
replace the borrowed security. If it can buy the security back at a lower
price, a profit results. In no event will the Fund engage in short sales
transactions if it would cause the market value of all the Fund's securities
sold short to exceed 25% of its net assets. Short sales may reduce returns
or increase volatility.
Up to 10% of the Fund's net assets may be invested in illiquid securities,
including those with legal or contractual restrictions and those without a
readily available market. The Fund may also invest up to 10% of its total
assets in other registered investment companies.
Up to 5% of the Fund's net assets may be invested in warrants. A warrant is
issued by a company and entitles the holder to buy the company's common stock
at a set price during a stated period of time. The Fund may lose money on a
warrant if the price of the underlying security declines or if the warrant
expires before it is exercised.
The Fund may borrow up to 331/3% of its net assets from banks for temporary
or emergency purposes, clearing transactions or for investment purposes.
Borrowing for investment purposes is known as leveraging, which increases the
effect of any change in the market value of the Fund's portfolio. Leveraging
may expose the Fund to greater risk and increased costs. Interest paid on
any borrowed funds could have the effect of lowering the Fund's return. In
addition, the Fund may have to sell securities when it would normally keep
them in order to make interest payments.
-8-
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<PAGE>
The Fund has a securities lending program. The Fund may loan up to 30% of
its total assets, in the form of its portfolio securities, to unaffiliated
broker-dealers, banks or other recognized institutional borrowers. No loans
are made without equivalent collateral. The Fund lends its portfolio
securities to generate additional income. The primary risk in lending
securities is the default of a borrower. If the borrower defaults there
could be a deficiency in the collateral posted by the borrower. This risk is
minimized by computing the value of the loaned securities each day. If the
value of the security increases, additional collateral is provided by the
borrower.
[CALLOUT]
Investing Defensively
In response to unfavorable market, economic or political conditions, the Fund
may temporarily invest 100% of its assets in cash, U.S. government
securities, certificates of deposit or high grade debt securities for
defensive purposes. For this purpose, high grade means major rating services
like Standard & Poor's Ratings Group or Moody's Investors Service, Inc. have
rated the securities within their two highest quality grades. Although the
Fund would do this to avoid losses, these measures may hurt the Fund's
efforts to achieve its objective.
-9-
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<PAGE>
Account Information
Determining Share Price
The price at which you buy, sell or exchange Fund shares is the share price
or net asset value (NAV).
[CALLOUT]
Calculating NAV
The share price for the Fund is determined by adding the value of the
investments, cash and other assets, deducting liabilities, and then dividing
that value by the total number of shares outstanding.
NAV is calculated at the close of regular trading of the New York Stock
Exchange (normally 4:00 p.m. New York time) each day the Exchange is open.
NAV is not calculated on days the Exchange is closed. For a purchase,
redemption or exchange of Fund shares, your price is the next calculated NAV
after your request is received in good order and accepted by the Fund. To
receive a specific day's price, your request must be received before the
close of the Exchange on that day.
When the Fund calculates share price, it values its securities at market
value. Sometimes market quotes for some securities are not available or are
not representative of market value. Examples would be when events occur that
materially affect the value of a security at a time when the security is not
trading or when the securities are illiquid. In that case, securities may be
valued in good faith at fair value, using consistently applied procedures
adopted by the Directors.
Foreign securities traded on foreign exchanges are valued at the last quoted
sales price available before the Fund's assets are valued. These securities
trade during hours and on days that the Exchange is closed and the Fund's NAV
is not calculated. Although the Fund's NAV may be affected during these
times, you will not be able to purchase or redeem shares on these days.
Purchasing Shares
You pay no sales charge to purchase shares of the Fund. Purchases are made
at NAV. If the Fund or the Fund's transfer agent receives, in proper form,
your check, wire or electronic transfer after 4:00 p.m. Eastern time, your
transaction is not processed until the next business day.
Broker-dealers, financial planners, registered investment advisers, banks or
other institutions, may impose investment minimums higher than those imposed
-10-
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by the Fund. They may also charge for their services. There are no charges
if you purchase your shares directly from the Fund.
Minimum Minimum
Type of Initial Additional
Account Investment Investment
- ------- ---------- ----------
Regular Accounts
By telephone N/A $1,000
By mail $1,500 $ 100
By Automatic Investment $ 500 $ 50 monthly
IRAs
By mail $ 500 N/A
By Automatic Investment N/A $ 50 monthly
Payroll Deductions
By Automatic Investment $ 500 $ 50 monthly
The Fund has the right to reject any purchase order, or limit or suspend the
offering of its shares. Additionally, the Fund may discontinue the
acceptance of telephone orders without notice and waive minimum purchase
requirements at any time.
-11-
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<PAGE>
[CALLOUT]
Payment for Fund Shares
Purchases must be made by check, Federal Reserve draft, or other negotiable
bank draft, payable in U.S. dollars and drawn on U.S. banks. Third party
checks will not be accepted for initial purchases or without special
permission. A charge is imposed on any returned checks.
Opening an Account Adding to an Account
------------------ --------------------
By Mail |_| Complete and sign the |_| Make check payable
application. to:
|_| Make your check payable to: The Kaufmann Fund,
The Kaufmann Fund, Inc. Inc.
|_| Mail application and check |_| Include your
to: account number on
Boston Financial Data the check.
Services, Inc. |_| Mail check with the
2 Heritage Drive stub from your
North Quincy, MA 02171 shareholder
statement to the
address on the
left.
By Telephone N/A |_| Make the election on
the application.
|_| Call (800) 261-0555
to place investment.
|_| Additional
investments may not
exceed $10,000, or
seven times your
current account
balance, whichever
is less.
|_| Payment must be
received within
three days.
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By Wire |_| Complete and sign the |_| Wire funds to:
application. State Street Bank &
|_| Mail your application to the Trust Co.
address above. ABA: 011000028 for
|_| Call (800) 261-0555, or (617) credit to
483-5000 if overseas, to BFDS Account
obtain an account number. #99050874
|_| Wire funds using the The Kaufmann Fund,
instructions at the right. Inc.
[Your name and
account number].
|_| Call (800) 261-0555
to advise of wire.
By Automatic |_| Call (800) 261-0555 to set up N/A
Investment a purchase schedule.
Program
Through an |_| Contact your financial |_| Contact your
Intermediary professional or broker-dealer. financial
professional or
broker-dealer.
Selling Shares
You may sell shares of the Fund on any day it is open for business.
Redemption requests received before 4:00 p.m. Eastern time will be made at
that day's NAV. No redemption request will be processed until your shares
have been paid for in full. If you pay for shares by check, payment may take
up to 15 days to clear from the date of purchase. In times of drastic
economic or market conditions, you may have difficulty selling shares by
telephone. The telephone redemption privilege may be modified or
discontinued without notice to shareholders.
Selling Shares:
By Telephone |_| Make the election on the application.
or Overseas |_| Call (800) 261-0555, or (617) 483-5000 from overseas.
Cable |_| Send a telegram or overseas cable to:
Boston Financial Data Services, Inc.
2 Heritage Drive
North Quincy, MA 02171
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<PAGE>
By Mail |_| Send a letter of instruction to Boston Financial Data
Services, Inc at the address above. Include:
your account number
the dollar value or number of shares to be redeemed
- signature guarantee if required, along
with other supporting documents
- share certificates, if applicable.
|_| Sign the request exactly as the shares are registered.
Through an |_| Contact your financial professional or broker-dealer.
Intermediary
Redemption Proceeds
Once your redemption request has been received in "proper form," shares will
be redeemed at the next determined NAV. If your shares were purchased after
February 1, 1985, redemption proceeds are subject to a redemption fee of
0.20%.
"Proper form" means that the Fund has received your account application, all
shares are paid for, and all documentation along with any required signature
guarantees and share certificates are included. Payment will be made by
check to the address of record, or by wire transfer if you elected this on
your account application, generally no later than the third business day
after the valuation date.
Signature Guarantees
The Fund uses signature guarantees to protect you and the Fund from possible
fraudulent requests for redeemed shares. Your redemption request must be
accompanied by a signature guarantee if it exceeds $30,000. Signature
guarantees may be obtained from most broker-dealers, national or state banks,
credit unions, federal savings and loan associations or other eligible
institutions. Signature guarantees cannot be obtained from a notary public.
If you have a question concerning signature guarantees, please call (800)
261-0555.
[CALLOUT]
Security Considerations
You may give up some level of security in choosing to buy or sell shares by
telephone rather than by mail. The Fund uses procedures designed to give
reasonable assurance that telephone instructions are genuine, including
recording the transactions, testing the identity of the shareholder placing
the order, and sending prompt written confirmation of transactions to the
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<PAGE>
shareholder of record. If these procedures are followed, the Fund and its
service providers are not liable for acting upon instructions communicated by
telephone that they believe to be genuine.
Redemptions In-kind
The Fund intends to redeem shares in cash, although in order to protect the
interest of remaining shareholders, it retains the right to redeem its shares
in-kind. In-kind payment means portfolio securities are received rather than
cash. If this occurs, transaction costs will be incurred when selling the
securities.
Involuntary Redemption
If your account falls below $500, the Fund may close your account by
redeeming your shares and sending the proceeds minus any applicable
redemption fee. You will receive notice to increase your balance 30 days
before this happens. Your account will not be redeemed if the balance is
below the minimum due to a reduction in the Fund's NAV. Involuntary
redemptions do not apply to IRAs and other retirement accounts.
Special Investor Services
The Fund offers its shareholders special services, which you may elect at the
time you open your account or at a later date. If you want further
information on any of these services call (800) 261-0555.
The Kaufmann/Reserve Fund Money Market Switch Plan
The Fund and the Reserve Fund offer a Switch Plan which allows you to redeem
Fund shares to and from the Kaufmann Fund. The minimum amount that may be
switched is $1,000.
In order to participate in the Switch Plan, elect the option on the account
application. Call (800) 261-0555 to effect the switch. A transfer from the
Fund to the Reserve Fund will take at least four business days and is subject
to the applicable redemption fee of 0.20%. The Fund and the Reserve Fund
have the right to limit the number of switches made. Either the Fund or the
Reserve Fund may terminate the Switch Plan at any time. The Reserve Fund is
not affiliated with the Fund or its investment adviser. The Reserve Fund is
advised by Reserve Management Company, Inc. and distributed by Resrv Partners
Inc.
For federal income tax purposes, a switch into the Reserve Fund will be
regarded as a sale of Fund shares and the purchase of Reserve Fund shares.
-15-
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Automatic Investment Plan
Regular investments in the Fund can be made through the Automatic Investment
Plan Elect the option on the account application and attach a voided
personal check. The Automatic Investment Plan may be canceled at any time
without penalty.
Payroll Deduction Plan
Regular investments in the Fund may be made through a Payroll Deduction Plan
by electing the option on the account application. Your employer will deduct
the amount you wish to invest directly from your paycheck and forward it to
the Fund. The Payroll Deduction Plan may be canceled at any time without
penalty by notifying your employer. Please check with your employer for
availability of this service.
Systematic Withdrawal Plans
A Systematic Withdrawal Plan is available if you own more than $5,000 worth
of Fund shares. Under this plan, proceeds from redemption of Fund shares may
be sent to you, a person designated by you or to your bank account.
IRAs and 403(b) Accounts
Individual Retirement Account or 403(b) accounts are available.
Shareholder Confirmations and Statements
A confirmation will be sent each time you buy or sell Fund shares, or
reinvest dividends or capital gain distributions. The confirmation will list
the most recent transaction and the current share balance. Automatic
Investment Plan accounts receive quarterly statements. All accounts receive
an annual statement as well as year-end tax information.
Dividends and Taxes
Dividends and Distributions
Distributions will be reinvested automatically in Fund shares, unless elected
to be received in cash. The Fund generally makes two different kinds of
distributions:
Capital gains from the sale of portfolio securities. The Fund
distributes any net realized capital gains annually, normally in
November.
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Net investment income from interest or dividends received. The Fund
distributes its investment income annually.
Most of the Fund's distributions are expected to be from capital gains.
[CALLOUT]
Tax Considerations
Unless your investment is in a tax-deferred account you may want to avoid:
Investing in the Fund before the Fund declares a capital gain
distribution, as it results in you receiving some of your investment
back as a taxable distribution.
Selling shares at a loss for tax purposes and then making an
identical investment within 30 days. This results in a "wash sale"
and you will not be allowed to claim a tax loss.
-17-
<PAGE>
<PAGE>
Tax Consequences
The buying, selling, holding or exchanging of mutual fund shares may result
in a gain or a loss and is a taxable event. The taxation of your
distributions will be the same whether you receive them in cash or reinvest
them in additional shares. Short- and long-term holding periods are based on
how long the Fund has held a security and not on how long you have owned your
shares.
-18-
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<PAGE>
Transaction Tax Status
- ----------- ----------
Income dividends Ordinary income
Short-term capital gains Ordinary income
Long-term capital gains Capital gains
The Fund may be subject to foreign withholding or other taxes on some of its
foreign investments. This will reduce the yield or total return on those
investments.
Your investment in the Fund could have additional tax consequences. Please
consult your tax advisor on state, local or other applicable tax laws.
Managing the Fund
Edgemont provides advisory services solely to the Fund and is responsible for
its business affairs. Edgemont is located at 140 East 45th Street, New York,
New York 10017. Edgemont was founded in 1984. For its services, Edgemont
received an annual fee of 1.50% of the Fund's average daily net assets for
the year ended December 31, 1998. This advisory fee may be higher than the
fee charged by other mutual funds.
[CALLOUT]
Portfolio Management
The day to day investment operations of the Fund are handled by Mr. Hans P.
Utsch, Chairman of the Board and Secretary of Edgemont, and Mr. Lawrence
Auriana, President and Treasurer of Edgemont. Mr. Utsch has been engaged in
the securities business since 1962, while Mr. Auriana has been in the
securities business since 1965. Messrs. Utsch and Auriana co-founded
Edgemont in August, 1984 and have managed the Fund since March, 1985.
Portfolio Turnover
Portfolio changes may be made without regard to the length of time the Fund
has held a security. It is not the intention of the Fund to engage in
trading for short-term profits. However, the Fund's portfolio turnover may
vary significantly from year to year. It has exceeded 100% in the past, and
may do so again. A turnover rate of 100% means the securities owned by the
Fund were replaced once during the year. Higher turnover rates may result in
higher brokerage costs to the Fund and in higher net taxable gains for the
investor.
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<PAGE>
<PAGE>
Year 2000 Readiness
Mutual funds, securities markets and businesses around the world could be
adversely affected if computers do not properly process date-related
information with respect to the Year 2000. Edgemont is addressing this issue
and is getting reasonable assurances from the Fund's major service providers
that they are also addressing these issues to preserve the smooth functioning
of the Fund's trading, pricing, custodial and other operations. There is no
guarantee that all problems will be avoided.
These computer problems could also adversely affect the Fund's investments.
Improperly functioning computers may disrupt securities markets or result in
overall economic uncertainty. Individual companies may also be adversely
affected by the cost of fixing their computers, which could be substantial.
Euro Conversion
Certain European countries have adopted the Euro as their common currency.
National currencies of these countries will be sub-currencies of the Euro
until July 1, 2002, at which time they will cease to exist. The introduction
of the Euro presents some possible risks, which could adversely affect the
value of securities held by the Fund, as well as possible adverse tax
consequences. The outcome could have unpredictable effects on trade and
commerce, resulting in increased volatility for all financial markets.
Distribution and Service Plans
The Fund has adopted a 12b-1 plan permitting it to pay an annual fee in
connection with the sale and distribution of its shares of up to 0.75% of the
average daily net assets. Since this fee is paid on an ongoing basis, it may
cost more than other types of sales charges over time.
The Fund has also adopted a service plan. This plan allows the Fund to
reimburse broker-dealers for providing personal services and the maintenance
of shareholder accounts. This annual service fee cannot exceed 0.25% of the
Fund's average daily net assets.
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<PAGE>
Financial Highlights
The financial highlights will help you understand the Fund's financial
performance for the past five years. Certain information reflects financial
results for a single Fund share. Total return shows how much your investment
in the Fund increased or decreased during each period, assuming you
reinvested all dividends and distributions. Sanville & Company, independent
auditors, audited this information. Their report is included in the Fund's
annual report, which is available upon request.
Selected Data For A Share Outstanding Throughout Each Year
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year . . $6.37 $5.84 $5.05 $3.76 $3.45
Income from Investment Operations:
Net Investment Income (Loss) . . . . . (0.040) (0.060) (0.030) (0.060) (0.06)
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . 0.017 0.795 1.083 1.445 0.37
---------- ---------- ---------- ---------- ----------
Total From Investment Operations . . . (0.023) 0.735 1.053 1.385 0.310
Less Distributions:
From Net Investment Income . . . . . . -- -- -- -- --
From Net Realized Gain . . . . . . . . 0.667 0.205 0.263 0.095 --
---------- ---------- ---------- ---------- ----------
Total Distributions . . . . . . . . . . 0.667 0.205 0.263 0.095 0.00
Net Asset Value, End of Year . . . . . $5.68 $6.37 $5.84 $5.05 $3.76
Total Return (a) . . . . . . . . . . . 0.72% 12.59% 20.91% 36.84% 8.99%
Ratios and Supplemental Data:
Net Assets, End of Year (in thousands) $4,621,018 $6,008,161 $5,341,311 $3,163,310 $1,592,551
Ratio of Expenses (after expense
reimbursement) to Average Net
Assets (%) . . . . . . . . . . . . . 1.96 1.89 1.93 2.17 2.29
Ratio of Interest Expense to Average
Net Assets (%) . . . . . . . . . . . 0.01 0.01 0.01 0.01 0.02
Ratio of Expenses (after expense
reimbursement less interest expense)
to Average Net Assets (%) . . . . . . 1.95 1.88 1.92 2.16 2.27
Ratio of Net Investment Income (Loss)
to Average Net Assets (%) . . . . . . (0.66) (1.00) (0.82) (1.24) (1.58)
Portfolio Turnover Rate (%) . . . . . . 59 65 72 60 47
Borrowings:
Debt Outstanding at End of Year . . . . -- -- -- -- --
Average Debt Outstanding During the Year -- -- -- -- $3,776,120
Average Number of Shares Outstanding
During the Year (in thousands) . . .
Average Debt per Share During the Year -- -- -- -- $0.01
(a) The total returns would have been lower had certain expenses not
been reduced.
</TABLE>
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<PAGE>
<PAGE>
[BACK COVER]
[LOGO]
The Kaufmann Fund, Inc.
140 East 45th Street, 43rd Floor
New York, New York, 10017
(212) 922-0123
For More Information
Additional information about the Fund's investments is available in the
Fund's semi-annual and annual reports to shareholders. The Fund's annual
report contains a discussion of the market conditions and investment
strategies that affected the Fund's performance over the past year.
You may wish to read the Statement of Additional Information (SAI) for more
information on the Fund and the securities it invests in. The SAI is
incorporated into this prospectus by reference, which means that it is
considered to be part of the prospectus.
You can get free copies of the annual and semi-annual reports and the SAI,
request other information or get answers to your questions about the Fund by
writing the Fund at:
The Kaufmann Fund, Inc.
Boston Financial Data Services, Inc.
2 Heritage Drive
North Quincy, MA 02171
Call:
(800) 261-0555
(617) 483-5000 from overseas
or visit our website www.kaufmann.com
Text-only versions of Fund documents can be viewed online or downloaded from
the SEC's web site at www.sec.gov.
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington DC. For information on the operation of the Public Reference
Room, call 1-800-SEC-0330. Copies of documents may also be obtained by
sending your request and the appropriate fee to the SEC's Public Reference
Section, Washington, DC 20549-6009.
Investment Company Act File Number:
The Kaufmann Fund, Inc. 811-1586
-22-
<PAGE>
<PAGE>
THE KAUFMANN FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
Dated: May 1, 1999
________________________
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, 1999. 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 1-800-261-0555.
<PAGE>
<PAGE>
TABLE OF CONTENTS
Page
General Information and History . . . . . . . . . . . . . . . . . . . . . 3
Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . 3
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . 11
Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . 13
Principal Holders of Securities . . . . . . . . . . . . . . . . . . . . . 15
Investment Advisory Services . . . . . . . . . . . . . . . . . . . . . . 15
Brokerage Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Potential Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Distribution Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Special Investor Services . . . . . . . . . . . . . . . . . . . . . . . . 22
Purchase and Redemption of Shares . . . . . . . . . . . . . . . . . . . . 23
Taxes, Dividends and Capital Gains . . . . . . . . . . . . . . . . . . . 23
Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Transfer Agent and Custodian . . . . . . . . . . . . . . . . . . . . . . 25
Auditor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . 26
Additional Performance Information for the Fund . . . . . . . . . . . . . 27
-2-
<PAGE>
<PAGE>
GENERAL INFORMATION AND HISTORY
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
become operational again until 1984 when present management assumed control.
In February 1993, the Fund was reorganized as a Maryland corporation with the
same investment management. The Fund is an open-end, diversified, management
investment company, as defined by the Investment Company Act of 1940, as
amended (the "1940 Act"); whose investment objective is capital appreciation.
As a diversified company, the Fund meets the following requirements: (i) as
least 75% of the value of its total assets is represented by cash and cash
items (including receivables) and (ii) 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, as 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.
As an investment company, the Fund invests the monies received from the sale
of its shares in a portfolio of securities. 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.
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective and its investment policies are described in
the Fund's Prospectus.
In addition to the objective and policies discussed in the Prospectus, the
Fund has adopted the following investment policies and strategies.
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 the Fund does 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
-3-
<PAGE>
<PAGE>
company having a contingent deferred sales charge, but will not regard a
redemption fee 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 advisor to be creditworthy. The Fund's
investment advisor 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 repurchase agreements and in
restricted securities. Repurchase agreements are considered to be loans by
the Fund under the Investment Company Act of 1940.
Option 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 term.
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
-4-
<PAGE>
<PAGE>
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. 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. A security 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 he 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
As 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 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 as 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
-5-
<PAGE>
<PAGE>
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 market value of the underlying security.
(iii) Risks Relating to Options
An option position may be closed out only on an exchange that 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 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 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.
-6-
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<PAGE>
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. 6
of the Fund's Prospectus.
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, amount 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 warrants
to acquire 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.
-7-
<PAGE>
<PAGE>
Restricted Securities
The Fund may invest up to 10% of the value of its net assets in restricted
securities (including repurchase agreements, discussed on page 4 hereof, with
maturities of over seven days) or other illiquid assets. Restricted
securities are securities that, at any particular time may not be readily and
publicly marketable. In valuing such securities for the purpose 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 most 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 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 be illiquid after purchase and the Fund's Board of
Directors will then determine what, if any, action is required.
-8-
<PAGE>
<PAGE>
Short Sales and Hedging Operations
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 what ever 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 a 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 the 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, 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.
-9-
<PAGE>
<PAGE>
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 that 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.
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 of 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 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., an affiliated broker-dealer.
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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 that engage only in long-term transactions. There is, of
course, no assurance that the Fund will obtain any gains from its short-term
investments.
INVESTMENT RISKS
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.
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 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.
INVESTMENT RESTRICTIONS
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.
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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 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.
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9. May not invest 20% or more of its net assets in securities of
issuers with an operating history of less than three years 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 set forth biographical information on
each Director. Directors who are "interested persons" of the Fund, as that
term is defined by Section 2(a)(19) of the 1940 Act 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.
Directors and Officers of the Fund
*Hans P. Utsch: Director, President and Treasurer
140 East 45th Street, 43rd Floor, New York, New York 10017
Mr. Utsch 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 graduated from Amherst College, and received his MBA from Columbia
University. His career began as a trainee for Berliner Handels/Frankfurter
Bank in Germany and J. Henry Schroder Wagg in London, England. In 1962, he
joined Goodbody & Co. as an analyst and associate in corporate finance.
There, he shared primary responsibility for the earliest recommendations and
financing for such companies as Leasco Data Processing (now Reliance
Insurance) and Kentucky Fried Chicken. In the late 1960's, together with, the
former director of research at Goodbody, he assumed control of Hans Utsch &
Company (known now as Bowling Green Securities, Inc.), a registered
broker-dealer founded in 1933 by his father. Mr. Utsch is the principal
shareholder of Bowling Green Securities, Inc. Age: 63.
*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
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graduated Fordham University with a Bachelors degree in economics. He
attended New York University Graduate School of Business, and is a senior
member of the New York Society of Security Analysts. Mr. Auriana began his
career in 1965 as an investment analyst for General Reinsurance Corporation.
In 1975 he became associated with Hans Utsch & Co. to provide special
situations research to institutional clients, with an emphasis on small
growth companies. He also became active as a venture capitalist,
particularly in the areas of radio paging, oil exploration and computer
software. Mr. Auriana is Chairman of Mediware Information Systems, a company
that provides computer-based management information systems for use in
clinical departments of hospitals. Age: 54
Leon Lebensbaum: Director
3601 Hempstead Turnpike, Levittown, New York 11756
Mr. Lebensbaum joined the Kaufmann Fund Board of Directors in 1984 and is a
member of the Board's Audit Committee. Mr. Lebensbaum became an attorney in
1954 and a certified public accountant in 1955. He has been a general partner
in private practice at his accounting firm Lebensbaum and Russo since 1970.
Prior thereto he was a Special Agent in the Intelligence Division of the
Internal Revenue Service. Mr. Lebensbaum is a member of the American and New
York Bar Associations, National Association of Certified Fraud Examiners, New
York Society of Certified Public Accountants, American Institute of
Certified Public Accountants-Tax Law Committee, American Accounting
Association, National Association of Accounts, and The National Conference of
CPA Practitioners. Age: 75.
Gerard M. Grosof: Director
48-23 42nd Street, Long Island, New York 11104
Mr. Grosof joined the Kaufmann Fund Board of Directors in 1984. 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.
Pauline Gold: Director
120 Stuyvesant Place, Staten Island, New York 10301
Mrs. Gold has been a member of the Kaufmann Fund Board of Directors since
1984. Mrs. Gold received her BA at Rutgers University in 1959 with a major
in Mathematics and Political Science. She continued her post graduate
education at New York Law school where she received here L.L.B in 1961. Mrs.
Gold has been engaged in the private practice since 1979. She was a partner
in the law firm of McMahon & Lyons from 1964 to 1979 and served as General
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Counsel to the Borough President of the County of Richmond, City of New York.
Age: 61.
Roger E. Clark: Director
1 Hatfield Mews, 330 Elm Street, New Canaan, Connecticut 06840
Mr. Clark joined the Kaufmann Fund Board of Directors in 1984 and is a member
of the Board's Audit Committee. Mr. Clark is currently self-employed as a PC
Consultant/Programmer. Mr. Clark served as President of Teleproducts
Corporation Consulting, which is involved in the business of
telephone-computer interfacing. From 1980 to 1987, he was a marketing
executive for Xerox Corporation. Prior to his employment with Xerox, Mr.
Clark owned and operated a retail computer store, and held various management
positions in the fields of marketing and advertising. Age: 64.
Remuneration of Directors and Officers
The Directors, other than Messrs. Utsch and Auriana, presently receive an
annual retainer of $25,000 plus $5,000 for each Board of Directors' Meeting
and $3,000 for each Committee Meeting attended, plus expenses. Director fees
for the year ended December 31, 1998 totaled 250,000.
*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, the funds investment
advisor. As such, they are "interested persons" of the Fund.
PRINCIPAL HOLDERS OF SECURITIES
The Fund's records show that the only owner of more than 5% of the Fund's
outstanding shares at the close of business on December 31, 1998 was Charles
Schwab & Co., Inc and National Financial Co. It is understood that the
shares are held by them for undisclosed investors who are the beneficial
owners.
INVESTMENT ADVISORY SERVICES
Edgemont Asset Management Corporation ("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 sole shareholders
and control persons of Edgemont.
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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 1940 Act, at a meeting held on October 13, 1998 called for the purpose of
voting on such Agreement. It will continue in effect until October 30, 1999
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.
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. The advisor performs such duties in
accordance with any directions it may receive form the Fund's Board of
Directors.
Edgemont furnishes the Fund, at no cost, services of Edgemont's officers and
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 $66,206,955, $85,089,829 and $79,655,324 in management
fees, for the years ended 1996, 1997 and 1998, 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
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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.
While no longer required to do so, Edgemont, nevertheless, voluntarily
limited Fund expenses to the California standard and rebated $5,243,247 to
the Fund for 1996, $6,589,322 for 1997 and $5,697,251 for 1998. It may
limit its expenses in the same way for 1999.
As such, the Fund's total expenses for the year ending December 31, 1998,
before expense reimbursement were $109,845,152; the net expenses after
reimbursement were $104,147,901 or 1.96% of average net assets after expense
reimbursement.
BROKERAGE ALLOCATION
Hans P. Utsch and Lawrence Auriana 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 that 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 provide 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 trends,
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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.
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.
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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.
For 1996, 1997 and 1998, the Fund paid $8,946,721, $10,106,929, and
$12,669,343 respectively, in brokerage commissions. Of these amounts
$66,520, $45,000 and $27,000 respectively, were paid to 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) a 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. Management of the Fund has
agreed to limit expenditure under the Rule 12b-1 plan to .33% of the Fund's
net assets for its 1998 fiscal year.
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 30,
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1999, 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 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.
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For the year ended December 31, 1998, the following sums were spent for the
following purposes.
Advertising - Print Media . . . . . . . . . . . . . . . 5,310,350
Advertising - Broadcast Media . . . . . . . . . . . . . 3,082,126
Printing and Stationary . . . . . . . . . . . . . . . . 2,586,592
Postage . . . . . . . . . . . . . . . . . . . . . . . . 2,548,668
Advertising -Internet . . . . . . . . . . . . . . . . . 1,712,234
Broker-dealer fees . . . . . . . . . . . . . . . . . . 1,099,965
Services rendered . . . . . . . . . . . . . . . . . . . 602,883
Employee compensation . . . . . . . . . . . . . . . . . 471,627
List Rentals . . . . . . . . . . . . . . . . . . . . . 176,605
Telephone . . . . . . . . . . . . . . . . . . . . . . . 44,883
Travel and entertainment . . . . . . . . . . . . . . . 25,295
Professional Fees . . . . . . . . . . . . . . . . . . . 13,279
Other . . . . . . . . . . . . . . . . . . . . . . . . . 41,828
----------
Total 17,716,335
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SPECIAL INVESTOR SERVICES
The Kaufmann/Reserve Fund Money Market Switch Plan
In the case of IRA accounts, the custodianship will be automatically
transferred to the trustee, RMCI (Reserve Management Corp., Inc.) if you
choose to exchange into the Reserve Fund, Inc.("Reserve"). Additional forms
will be required by RMCI and will be mailed by the Reserve at the time of the
exchange. Subsequently, the trustee on your account will automatically be
switched from RMCI to the Fund's custodian, State Street Bank and Trust, if
you choose to reinvest in the Kaufmann Fund. There will be a limit of two
exchanges per year.
Automatic Investment Plan
A shareholder may make arrangements for an Automatic Investing Plan. There is
a one-time set-up charge of $5. The Automatic Investment Plan may be changed
or cancelled at any time upon receipt by the Fund's Transfer Agent of written
instructions or an amended application from the shareholder with signatures
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 Fund offers Traditional, Roth, Education and SEP IRAs . To establish or
rollover an existing IRA to the Fund, you must complete an IRA Account
Application.
To determine eligibility and deductibility of an IRA contribution, read the
IRA Disclosure Statement and Custodial Agreement or contact the Transfer
Agent at (800) 261-0555. Investors should consult their 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) 261-0555 for details on eligibility and other information.
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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 in the Fund's Prospectus.
A description of the procedure for the determination of the net asset value
of the Fund's shares is contained in the Fund's Prospectus.
In the case of Redemptions In-Kind, the Fund has filed a Notification under
Rule 18f-1 under the 1940 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.
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.
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.
The Fund reserves the right to change or discontinue, without prior notice,
any of the procedures available for redemption requests.
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
with the result that taxable income of the Fund will be reduced by the amount
of distributions to shareholders. At least 90% of gross income must be
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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 gains 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.
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.
With respect to withholding, 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 to 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.
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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 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 Director will not be able to elect anyone to the Board of Directors.
TRANSFER AGENT AND CUSTODIAN
Boston Financial Data Services, Inc., 2 Heritage Drive, North Quincy, MA
02171 acts as shareholder servicing, dividend paying 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. Neither the transfer agent nor the custodian exercises any
supervisory functions 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, is the
Fund's independent public accountant and audits the Fund's records and
financial statements.
-25-
<PAGE>
<PAGE>
FINANCIAL STATEMENTS
The latest financial highlights of the Fund appear in the Prospectus; other
financial statements of the Fund as of December 31, 1998 appear in the 1998
Annual Report of the Fund and are included in this SAI.
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 represent approximately 80% of the market capitalization of the
United States equity market. In comparison, the NASDAQ National Market
System is comprised of all 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 weight.
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
-26-
<PAGE>
<PAGE>
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, Barron'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
invest; (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 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
over the life of the Fund. 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 ended December 31, 1998
were 0.7%, 15.4% and 20.9% respectively.
-27-
<PAGE>
<PAGE>
The Kaufmann Fund, Inc.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net Asset Value, Beginning of Year . . . . . . . . $ 6.37 $ 5.84 $ 5.05 $ 3.76 $ 3.45
Income from Investment Operations:
Net Investment Income (Loss) . . . . . . . . . . . (0.040) (0.060) (0.030) (0.060) (0.060)
Net Realized and Unrealized Gain (Loss) on
Investments . . . . . . . . . . . . . . . . . . . 0.017 0.795 1.083 1.445 0.370
------ ------ ------ ------ ------
Total From Investment Operations . . . . . . . . . (0.023) 0.735 1.053 1.385 0.310
Less Distributions:
From Net Investment Income . . . . . . . . . . . . -- -- -- -- --
From Net Realized Gain . . . . . . . . . . . . . . 0.667 0.205 0.263 0.095 --
------ ------ ------ ------ ------
Total Distributions . . . . . . . . . . . . . . . . 0.667 0.205 0.263 0.095 0.000
Net Asset Value, End of Year . . . . . . . . . . . $ 5.68 $ 6.37 $ 5.84 $ 5.05 $ 3.76
Total Return (a) . . . . . . . . . . . . . . . . . 0.72% 12.59% 20.91% 36.89% 8.99%
Ratios and Supplemental Data:
Net Assets, End of Year (in millions) . . . . . . . $4,621 $6,008 $5,341 $3,163 $1,593
Ratio of Expenses (after Expense Reimbursement)
to Average Net Assets (%) . . . . . . . . . . . . 1.96% 1.89% 1.93% 2.17% 2.29%
Ratio of Interest Expense to Average Net
Assets (%) . . . . . . . . . . . . . . . . . . . 0.01% 0.01% 0.01% 0.01% 0.02%
------ ------ ------ ------ ------
Ratio of Expenses (after Expense Reimbursement
less Interest Expense) to Average Net Assets (%) . 1.95% 1.88% 1.92% 2.16% 2.27%
Ratio of Net Investment Income (Loss) to Average
Net Assets (%) . . . . . . . . . . . . . . . . . (0.66%) (1.00%) (0.82%) (1.24%) (1.58%)
Portfolio Turnover Rate (%) . . . . . . . . . . . . 59% 65% 72% 60% 47%
Debt Outstanding at End of Year (in thousands) . . $ -- $ -- $ -- $ -- $ --
Average Debt Outstanding during the Year
(in thousands) . . . . . . . . . . . . . . . . . $ -- $ -- $ -- $ -- $ --
Average Number of Shares Outstanding during
the Year (in thousands) . . . . . . . . . . . . . -- -- -- -- 333,175
Average Debt Per Share during the Year . . . . . . $ -- $ -- $ -- $ -- $ 0.01
___________________
(a) The total returns would have been lower had certain expenses not been reduced
during the years shown (see Note 3 of Notes to Financial Statements).
The accompanying notes are an integral part of these financial statements.
</TABLE>
-28-
<PAGE>
The Kaufmann Fund, Inc.
SCHEDULE OF INVESTMENTS
December 31, 1998
Value
Shares (000s)
------ ------
STOCKS - 90.7%
CONSUMER (GROUP) - 1.7%
CONSUMER - DURABLES - 0.1%
- --------------------------
Compass East Industry Pcl (THB) 28,600 $ 170
Creative Master International,
Inc. * 50,000 300
---------
470
---------
CONSUMER - NONDURABLES - 1.6%
- -----------------------------
Blyth Industries, Inc. + * 2,137,000 66,781
Department 56, Inc. * 50,400 1,893
Maxwell Shoe Company Inc. * 87,500 957
---------
69,631
---------
TOTAL CONSUMER (GROUP) 70,101
---------
-29-
<PAGE>
<PAGE>
Value
Shares (000s)
------ ------
FINANCIAL (GROUP) - 2.4%
FINANCIAL - DOMESTIC - 2.3%
- ---------------------------
Allied Capital Corporation 500,000 8,656
Federal Agricultural Mortgage
Corporation * 145,000 5,383
GreenPoint Financial Corp. 79,000 2,775
Headlands Mortgage Company + * 1,800,000 37,688
Heller Financial, Inc. 550,000 16,156
Philadelphia Consolidated
Holding Corp. + * 1,088,700 24,632
---------
95,290
---------
FINANCIAL - FOREIGN - 0.1%
- --------------------------
ABN Amro Asia Securities Pcl
(THB) * 245,400 140
Adkinson Securities (THB) * 319,100 279
Capital Nomura Securities Pcl
(THB) 366,700 635
Central European Growth Fund Pcl
Wts. (GBP) # * 400,000 2
National Finance Pcl (THB) * 1,000,000 316
Thai Reinsurance Pcl (THB) 50,000 117
---------
1,489
---------
TOTAL FINANCIAL (GROUP) 96,779
-30-
<PAGE>
<PAGE>
Value
Shares (000s)
------ ------
MEDICAL (GROUP) - 32.5%
MEDICAL EQUIPMENT & SUPPLIES - 10.5%
- ------------------------------------
Arrow International, Inc. 166,200 5,214
Bionx Implants, Inc. + * 960,500 7,984
Combact Diagnostics Sys. Ltd.-
Series B Pfd. (ILS) # * 22,502 1,000
Combact Diagnostics Sys. Ltd.-
Series C Pfd. (ILS) # * 3,522 0
Combact Diagnostics Sys. Ltd.-
Ordinary Shares (ILS) # 666 0
DENTSPLY International Inc. 300,000 7,725
Diagnostic Products Corporation + 768,400 23,917
ENDOcare, Inc. + # * 2,000,000 4,000
ENDOcare, Inc. + * 499,300 983
Haemonetics Corporation * 500,000 11,375
Hanger Orthopedic Group, Inc. * 500,000 11,250
Medstone International, Inc. + * 500,500 3,285
NeoPath, Inc. * 250,000 1,484
Ocular Sciences, Inc. * 659,900 17,652
Orthofix International N.V. + * 1,000,000 14,000
PSS World Medical, Inc. + * 5,000,000 115,000
STERIS Corporation + * 5,900,000 167,781
Sunrise Technologies
International, Inc. - Warrants # * 11,500 0
SurModics, Inc. * 200,000 3,100
ThermoGenesis Corp. # * 576,000 3,600
ThermoGenesis Corp. # * 800,000 1,200
ThermoGenesis Corp. - Warrants # * 80,000 0
-31-
<PAGE>
<PAGE>
Value
Shares (000s)
------ ------
MEDICAL EQUIPMENT & SUPPLIES (Continued) - 10.5%
- ------------------------------------------------
Trex Medical Corporation # * 22,000 237
Ventana Medical Systems, Inc. * 289,000 6,250
Xomed Surgical Products, Inc. * 450,000 14,400
Young Innovations, Inc. + * 200,000 2,625
Zoll Medical Corporation + * 980,600 8,703
---------
432,765
---------
MEDICAL SERVICES - 17.5%
- ------------------------
ABR Information Services, Inc. * 10,000 196
AmeriPath, Inc. + * 1,000,400 8,941
Cardinal Health, Inc. 1,200,000 91,050
Coast Dental Services, Inc. + * 800,000 8,300
CompDent Corporation + * 1,158,300 12,017
Eclipsys Corporation 175,000 5,075
HBO & Company 6,166,125 176,891
Healthcare Recoveries, Inc. + * 2,000,500 34,008
Health Management Systems, Inc. + * 900,000 7,087
HEALTHSOUTH Corporation * 50,000 772
Health Systems Design
Corporation * 118,900 802
IDX Systems Corporation * 240,000 10,560
Latin Healthcare Fund, L.P. # * 1,000,000 2,080
Lincare Holdings, Inc. + * 5,144,300 208,665
MedPartners, Inc. * 6,100,000 32,025
Omnicare, Inc. 398,000 13,830
Orthodontic Centers of America,
Inc. * 500,000 9,719
Pacific Health Laboratories,
Inc. # * 140,000 525
PAREXEL International
Corporation * 460,000 11,500
-32-
<PAGE>
<PAGE>
Value
Shares (000s)
------ ------
Physician Reliance Network, Inc. + * 4,104,900 53,877
RTW, Inc. + * 1,312,000 8,364
Shared Medical Systems
Corporation 100,000 4,988
Sheridan Healthcare, Inc. + * 900,000 7,538
Sterile Recoveries, Inc. + * 630,700 7,411
Transition Systems, Inc. * 100,000 1,500
Universal Standard Healthcare,
Inc. + * 700,000 438
Universal Standard Healthcare,
Inc. + # * 500,000 500
---------
718,659
---------
PHARMACEUTICAL & BIOTECH - 4.5%
- -------------------------------
Aastrom Biosciences, Inc. + * 1,892,598 5,441
Aastrom Biosciences, Inc. + # * 135,062 0
Alexion Pharmaceuticals, Inc. + * 837,300 11,199
Alkermes, Inc. * 305,500 6,778
Aradigm Corporation * 377,500 4,719
ArQule, Inc. + * 2,339,300 11,550
Aurora Biosciences Corporation + * 3,002,000 19,325
Aviron * 544,300 14,084
Dura Pharmaceuticals, Inc. * 1,200,000 18,225
ENZON, Inc. * 504,000 6,709
EPIX Medical, Inc. * 377,500 3,516
IntraBiotics Pharmaceuticals,
Inc.-Series G Pfd. # * 1,500,000 4,502
Millenium Pharmaceuticals, Inc. * 50,000 1,294
Neurogen Corporation * 78,400 1,372
NeXstar Pharmaceuticals, Inc. * 50,000 462
Peptech Limited (AUD) # * 31,250 0
PharmaPrint Inc. * 200,000 2,625
Protein Design Labs, Inc. * 500,000 11,563
QLT PhotoTherapeutics Inc. (CAD) * 528,000 12,228
-33-
<PAGE>
<PAGE>
Value
Shares (000s)
------ ------
Serologicals Corporation * 845,100 25,353
Sepracor Inc. * 50,700 4,468
Syncor International Corporation 10,000 273
Titan Pharmaceuticals, Inc. -
Pfd. # * 46,131 0
Transkaryotic Therapies, Inc. * 56,100 1,424
Triangle Pharmaceuticals, Inc. # * 1,000,000 13,625
UroGen Corp. # * 66,500 0
ViroPharma Incorporated + * 583,000 5,429
Visible Genetics Inc. # * 101,266 1,002
Xenometrix, Inc. # * 6,619 0
---------
187,166
---------
1,338,590
TOTAL MEDICAL (GROUP)
---------
RETAIL (GROUP) - 15.3%
MAIL ORDER COMMERCIAL/INDUSTRIAL - 2.7%
- ---------------------------------------
Barnett Inc. + * 949,600 13,057
Global DirectMail Corp + * 2,500,000 58,438
Micro Warehouse, Inc. * 1,120,900 37,900
---------
109,395
---------
-34-
<PAGE>
<PAGE>
Value
Shares (000s)
------ ------
RESTAURANTS - 1.9%
- ------------------
J.D. Wetherspoon plc (GBP) + 15,952,065 47,440
PizzaExpress PLC (GBP) 1,500,000 19,987
PizzaExpress PLC (GBP) # 950,000 12,658
---------
80,085
---------
RETAIL - 10.7%
- --------------
BJ's Wholesale Club, Inc. * 200,000 9,262
Borders Group, Inc. * 1,100,000 27,431
Carrefour SA (FRF) 1,000 755
Circuit City Stores - Circuit
City Group 300,000 14,981
Family Dollar Stores, Inc. 850,000 18,700
Finish Line, Inc., The * 200,000 1,600
General Nutrition Companies,
Inc. * 1,584,600 25,750
Hastings Entertainment, Inc. + * 597,200 8,361
Kohl's Corporation * 100,000 6,144
Lowe's Companies, Inc. 500,000 25,594
Office Depot, Inc. + * 4,500,000 166,219
PETsMART, INC. + * 5,863,800 64,502
ShopKo Stores, Inc. * 800,000 26,600
Staples, Inc. * 1,000,000 43,687
Western Growth Capital Partners
I, L.L.L.P. # * 52,500 130
Xoom.com Inc. * 20,000 660
---------
440,376
---------
TOTAL RETAIL (GROUP) 629,856
---------
-35-
<PAGE>
<PAGE>
Value
Shares (000s)
------ ------
TECHNOLOGY (GROUP) - 20.1%
COMMUNICATIONS EQUIPMENT - 1.2%
- -------------------------------
Asia Pacific Wire & Cable
Corporation Limited * 205,600 822
E-Tek Dynamics, Inc. * 70,000 1,873
JDS Fitel Inc. (CAD) * 329,200 8,184
Powerwave Technologies, Inc. * 542,500 10,104
Tellabs, Inc. * 20,100 1,378
Uniphase Corporation * 400,000 27,750
---------
50,111
---------
COMPUTER HARDWARE & ACCESSORIES - 0.5%
- --------------------------------------
Micron Electronics, Inc. * 500,000 8,656
PixTech, Inc. + * 678,169 1,632
PixTech, Inc. + # * 1,000,000 2,000
PixTech, Inc. + # * 266,297 6,000
---------
18,288
---------
COMPUTER SERVICES - 6.1%
- ------------------------
Affiliated Computer Services,
Inc. * 1,600,000 72,000
Concord EFS, Inc. * 1,200,000 50,850
CSG Systems International, Inc. * 500,000 39,500
Galileo International, Inc. 1,000,000 43,500
INSpire Insurance Solutions,
Inc. * 500,000 9,188
International Telecommunication
Data Systems, Inc. + * 1,000,000 14,750
QRS Corporation + * 400,000 19,200
Realty Information Group, Inc. 85,000 1,073
-36-
<PAGE>
<PAGE>
Value
Shares (000s)
------ ------
Ticketmaster Online-CitySearch,
Inc.- Class B * 50,000 2,800
---------
252,861
---------
COMPUTER SOFTWARE - 7.0%
- ------------------------
Amdocs Limited * 3,950,000 67,644
BMC Software Inc. * 250,000 11,141
Check Point Software
Technologies Ltd. * 217,500 9,964
Compuware Corporation * 150,000 11,719
GreenField Technology Ventures
Fund I # 1 75
Image Business Systems
Corporation - Wts. # * 32,000 0
MAPICS, Inc. + * 1,100,000 18,150
MEMCO Software Ltd. * 166,500 2,539
Network Associates, Inc. * 500,000 33,125
New Era of Networks, Inc. + * 500,000 22,000
PLATINUM technology, inc. * 299,999 5,738
Puma Technology, Inc. 91,900 310
SensAble Technologies, Inc. # * 1,333,334 2,064
Siebel System, Inc. * 345,000 11,708
Sterling Commerce, Inc. * 350,000 15,750
Sterling Software, Inc. * 650,000 17,591
Synopsys, Inc. * 500,000 27,125
Transaction System Architects,
Inc. - Class A * 600,000 30,000
---------
286,643
---------
-37-
<PAGE>
<PAGE>
Value
Shares (000s)
------ ------
ELECTRONIC COMPONENTS - 0.8%
- ----------------------------
Aavid Thermal Technologies, Inc. + * 350,000 5,906
Flextronics International Ltd. * 200,000 17,125
Stanlite Pacific Ltd. (AUD) # * 1,998,048 0
Vicor Corporation + * 1,000,000 9,000
---------
32,031
---------
SEMICONDUCTOR & EQUIPMENT - 2.7%
- --------------------------------
Alpha Industries, Inc. * 260,000 9,360
Altera Corporation * 500,000 30,438
DSP Communications, Inc. * 155,900 2,387
Intel Corporation 170,000 20,155
Peak Trends Trust 1,000,000 9,625
Vitesse Semiconductor
Corporation * 900,000 41,063
---------
113,028
---------
TELECOMMUNICATION SERVICES - 1.8%
- ---------------------------------
Advanced Info Service Pcl (THB) 42,300 251
Billing Concepts Corp. + * 2,423,300 26,656
Illuminet Holdings, Inc. # * 20,100 358
SkyTel Communications Inc. * 700,000 15,488
Transaction Network Services,
Inc. + * 1,645,400 33,011
---------
75,764
---------
TOTAL TECHNOLOGY (GROUP) 828,726
-38-
<PAGE>
<PAGE>
Value
Shares (000s)
------ ------
OTHER (GROUP) - 18.7%
DISTRIBUTION - 1.0%
- -------------------
Central Garden & Pet Company + * 1,500,000 21,563
Keystone Automotive Industries,
Inc. * 200,000 4,187
Wilmar Industries, Inc. + * 900,000 18,281
---------
44,031
---------
GOLD MINING - 0.7%
- ------------------
Barrick Gold Corporation 350,000 6,825
Euro-Nevada Mining Corporation
(CAD) 150,000 2,453
Getchell Gold Corporation * 205,700 5,605
Homestake Mining Company 350,000 3,216
Newmont Mining Corporation 350,000 6,322
Placer Dome Inc. 250,000 2,875
---------
27,296
---------
-39-
<PAGE>
<PAGE>
Value
Shares (000s)
------ ------
INDUSTRIAL - 0.9%
- -----------------
Asia Pulp & Paper Company Ltd. * 250,000 2,047
Buckeye Technologies Inc. * 900,000 13,444
Cogeneration Pcl (THB) * 139,600 108
JLM Industries, Inc. + * 400,000 2,050
Nuco2 Inc. + * 500,000 3,156
Owens Corning 121,200 4,295
Phoenix Pulp & Paper Pcl (THB) * 201,100 0
Simpson Manufacturing Co., Inc. * 300,000 11,231
Tipco Asphalt Pcl (THB) * 80,000 116
---------
36,447
---------
MEDIA & ENTERTAINMENT - 4.6%
- ----------------------------
Championship Auto Racing Teams,
Inc. * 312,800 9,267
Cinar Corporation - Class B + * 1,000,000 25,375
Citadel Communications
Corporation * 300,000 7,762
Clear Channel Communications,
Inc. * 904,000 49,268
Cunningham Graphics
International, Inc. + * 350,400 5,344
Infinity Broadcasting Corp.-
Class A * 750,000 20,531
Lamar Advertising Company * 730,000 27,193
Loews Cineplex Entertainment
Corporation * 800,000 8,100
Outdoor Systems, Inc. * 800,000 24,000
-40-
<PAGE>
<PAGE>
Value
Shares (000s)
------ ------
MEDIA & ENTERTAINMENT (Continued) - 4.6%
- ----------------------------------------
Panavision Inc. # * 46,363 0
Realm Production and
Entertainment, Inc. # * 172,000 301
TMP Worldwide Inc. * 300,000 12,600
---------
189,741
---------
OIL & GAS - 0.6%
- ----------------
Hardman Resources NL (AUD) # * 562,500 0
Oceaneering International, Inc. * 95,300 1,430
PTT Exploration and Production
Pcl (THB) * 3,300 23
Snyder Oil Corporation 1,075,000 14,311
St. Mary Land & Exploration
Company 400,000 7,400
Virginia Gas Company + 400,000 1,350
---------
24,514
---------
REAL ESTATE - 0.1%
- ------------------
IRSA Inversiones y
Representaciones S.A. 101,781 2,831
---------
2,831
---------
-41-
<PAGE>
<PAGE>
Value
Shares (000s)
------ ------
SERVICE - 10.4%
- ---------------
Ambassadors International, Inc. + * 940,000 13,865
Boron, LePore & Associates, Inc. * 100,000 3,450
Cendant Corporation * 17,300,000 329,781
Charles River Associates
Incorporated * 202,500 4,430
CORT Business Services
Corporation + * 500,000 12,125
Electricity Generating Authority
of Thailand (THB) * 10,000 17
Kroll-O'Gara Company, The * 200,000 7,888
Marquee Group, Inc., The + * 3,219,500 14,488
Rentokil Initial PLC (GBP) 5,500,000 41,577
---------
427,621
---------
TRANSPORTATION - 0.4%
- ---------------------
Bangkok Expressway Plc (THB) * 101,700 84
Carey International, Inc. + * 557,500 9,756
Dispatch Management Services
Corp. + * 1,175,700 4,776
Eagle USA Airfreight, Inc. + * 100,000 2,450
---------
17,066
---------
TOTAL OTHER (GROUP) 769,547
---------
TOTAL STOCKS (Cost $2,302,015) $ 3,733,599
=========
204,212,998
The accompanying notes are an integral part of these financial statements.
-42-
<PAGE>
<PAGE>
The Kaufmann Fund, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
1. SIGNIFICANT ACCOUNTING POLICIES
The Kaufmann Fund, Inc. (the "Fund") is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end
management investment company. The Fund is incorporated in Maryland.
The financial statements have been prepared in conformity with generally
accepted accounting principles which permit management to make certain
estimates and assumptions. The following summarizes the significant
accounting policies of the Fund:
Security Valuation
Securities for which exchange quotations are readily available are
valued at the last sale price, or if no sale price, at the closing bid
price. Securities, including restricted securities, for which exchange
quotations are not readily available, are valued primarily using
dealer-supplied valuations or at fair value, as determined in good faith
under consistently applied procedures established by the Board of
Directors. Short-term securities with remaining maturities of sixty
days or less, for which quotations are not readily available, are valued
at amortized cost or original cost plus interest, which both approximate
current value.
Foreign Currency Translation
The accounting records of the Fund are maintained in U.S. dollars.
Investment securities and other assets and liabilities denominated in a
foreign currency are translated into U.S. dollars at the prevailing
rates of exchange at period end. Income receipts and expense payments
are translated into U.S. dollars at the prevailing exchange rate on the
respective dates of the transactions. Purchases and sales of securities
are translated into U.S. dollars at the contractual currency exchange
rates established at the time of each trade.
Net realized gains and losses on foreign currency transactions represent
net gains and losses from sales and maturities of forward currency
contracts, dispositions of foreign currencies, and the difference
between the amount of net investment income accrued and the U.S. dollar
amount actually received. The effects of changes in foreign currency
-43-
<PAGE>
<PAGE>
exchange rates on investments in securities are included with the net
realized and unrealized gain or loss on investment securities.
Income Taxes
As a qualified regulated investment company under Subchapter M of the
Internal Revenue Code, the Fund is not subject to income taxes to the
extent that it distributes substantially all of its taxable income for
its fiscal year. Accordingly, no provision for Federal income taxes is
required.
Investment Income
Dividend income is recorded on ex-dividend date. Non-cash dividends
included in dividend income, if any, are recorded at the fair market
value of the securities received. Interest income is accrued as earned.
Investment income is recorded net of foreign taxes withheld when
recovery of such taxes is uncertain.
Security Transactions
Security transactions are recorded on trade date, which is the date the
order to buy or sell is executed. Gains and losses on securities sold
are determined on the basis of identified cost.
Distributions to Shareholders
Distributions are recorded on ex-dividend date.
Income and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted
accounting principles.
Permanent book and tax differences relating to shareholder distributions
may result in reclassifications to paid-in capital and may affect the
per-share allocation between net investment income and realized and
unrealized gain/loss. Undistributed net investment income and
accumulated undistributed net realized gain/loss on investments and
foreign currency transactions may include temporary book and tax
differences which reverse in subsequent periods. Any taxable income or
gain remaining at fiscal year end is distributed in the following year.
-44-
<PAGE>
<PAGE>
2. OPERATING POLICIES
Foreign Currency Contracts
The Fund uses foreign currency contracts to facilitate transactions in
foreign securities. Losses may arise from changes in the value of the
foreign currency, or if counter parties do not perform under the
contract terms. The U.S. dollar value of foreign currency contracts is
determined using contractual currency exchange rates established at the
time of each trade. The cost of the foreign currency contracts is
included in the cost basis of the associated investment.
2. OPERATING POLICIES (Continued)
Repurchase Agreements
The Fund, through its custodian, takes possession, through the Federal
Reserve Book Entry System, of the collateral pledged for investments in
repurchase agreements. The underlying U.S. Treasury or Federal Agency
Securities are valued daily on a mark-to-market basis to ensure that the
value, including accrued interest, is at least equal to the repurchase
price. In the event of default of the obligation to repurchase,
liquidation and/or retention of the collateral may be subject to legal
proceeding.
Short Sales
Short sales are transactions in which the Fund sells a security it does
not own, in anticipation of a decline in the market value of that
security. To complete such a transaction, the Fund must borrow the
security to deliver to the buyer upon the short sale; the Fund is then
obligated to replace the security borrowed by purchasing it in the open
market at some later date. The Fund will incur a loss if the market
price of the security increases between the date of the short sale and
the date on which the borrowed security is replaced. The Fund will
realize a gain if the security declines in value between those dates.
All short sales must be fully collateralized. The Fund maintains the
collateral in a segregated account with its custodian, consisting of
cash sufficient to collateralize the market value of its short
positions. At December 31, 1998, the cost of securities purchased to
cover short sales and the proceeds from securities sold short were
$578,436,613 and $406,784,822, respectively. Securities sold short at
December 31, 1998 and their related values are set forth in the
Schedule of Securities Sold Short.
-45-
<PAGE>
<PAGE>
3. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES
Investment Advisory Fee
Edgemont Asset Management Corporation ("Edgemont") is the investment
advisor to the Fund. Certain officers and directors of the Fund are
affiliated with Edgemont. Edgemont's investment advisory fee is
calculated on an annual basis at 1.5% of the Fund's average net assets
and is payable monthly. For the year ended December 31, 1998, the Fund
incurred investment advisory fees of $79,655,324. Edgemont has
voluntarily agreed to reimburse the Fund for expenses, to the extent of
the investment advisory fee, if the Fund's annual expenses (other than
brokerage commissions, other capital items, interest, taxes,
extraordinary items and other excludable items) are in excess of
$650,000. A reimbursement of $5,697,251 was made for the year ended
December 31, 1998. Edgemont has voluntarily agreed to continue to
provide this reimbursement in the future.
Distribution Fee
The Fund has adopted a Plan pursuant to Rule 12b-1 under the 1940 Act
whereby the Fund or Edgemont may finance activities which are primarily
intended to result in the sale of the Fund's shares, including, but not
limited to: advertising, printing of prospectuses and reports for
prospective shareholders, preparation and distribution of advertising
materials and sales literature, and payments to dealers and shareholder
servicing agents who enter into agreements with the Fund or Edgemont.
The Fund or Edgemont may incur such distribution expenses at the rate of
0.75% per annum on the Fund's average net assets. For the year ended
December 31, 1998, distribution expenses of $17,716,335 were incurred by
the Fund, equivalent to 0.33% per annum of the Fund's average net
assets.
Redemption Fee
The Fund imposes a redemption fee of 0.2% on the redemption price of the
Fund's capital stock shares redeemed, if such shares were purchased
after February 1, 1985. The redemption fee is intended to be applied to
the Fund's aggregate expenses allocable to providing redemption
services, including, but not limited to: transfer agent fees, postage,
printing, telephone and related employment costs. Any excess fee
proceeds are added to the Fund's assets. For the year ended
December 31, 1998, redemption fees of $3,745,225 were charged by the
Fund of which $1,089,053 were allocated to cover the cost of
redemptions. Excess fee proceeds of $2,609,048 were added to the Fund's
assets.
-46-
<PAGE>
<PAGE>
Brokerage Commissions
During 1998, the Fund placed a portion of its portfolio transactions
with Bowling Green Securities, Inc. ("Bowling Green"), for which
brokerage commissions of $27,000 were paid. Certain officers and
directors of the Fund are affiliated with Bowling Green.
4. SERVICE FEES
The Fund has an Authorization Agreement for the payment of a service
fee, not to exceed 0.25% per annum of the Fund's average net assets, to
broker-dealers that provide liaison services to investors, such as
responding to client inquiries and providing information on investments.
For the year ended December 31, 1998, service fees of $4,571,072 were
incurred by the Fund.
5. INVESTMENTS
Purchases and Sales of Investments
Purchases and sales of securities (excluding short-term investments and
securities sold short) aggregated $2,751,580,945 and $4,311,586,744,
respectively.
Portfolio Turnover Rate
Portfolio turnover rate, which is calculated on the lesser of the costs
of investments purchased or the proceeds from investments sold
(excluding short-term investments and securities sold short), measured
as a percentage of the Fund's average monthly portfolio was 59% for the
year ended December 31, 1998.
Tax Basis of Investments
As of December 31, 1998, the aggregate cost, for Federal income tax
purposes, of investment securities and proceeds of securities sold short
was $2,451,844,331 and $237,965,112, respectively. Accumulated net
unrealized appreciation aggregated $1,339,666,460, of which
$1,590,389,624 related to appreciated investment securities and
$250,723,164 related to depreciated investment securities.
6. SECURITY LENDING
The Fund loaned securities to certain brokers who paid the Fund
negotiated lenders' fees. These fees, less costs to administer the
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<PAGE>
<PAGE>
program, are included in interest income and amounted to $1,070,642 for
the year ended December 31, 1998. The Fund receives U.S. Treasury
obligations and/or cash as collateral against the loaned securities in
an amount at least equal to 102% of the market value of the loaned
securities at the inception of each loan. This collateral must be
maintained at not less than 100% of the market value of the loaned
securities during the period of the loan. At December 31, 1998, the
value of the securities loaned and the value of collateral was
$480,311,087 and $485,948,363, respectively.
7. TRANSACTIONS WITH AFFILIATED COMPANIES
An affiliated company is a company in which the Fund has ownership of
at least 5% of the voting shares. Transactions with companies which are
or were affiliates are as follows:
-48-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Amounts in Thousands
--------------------------------
Purchases Sales Dividend
Affiliates Cost Cost Income Value
- ---------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Aastrom Biosciences, Inc. * $ -- $ 3,335 $ -- $ 5,441
Aastrom Biosciences, Inc. (restricted) * -- -- -- --
Aavid Thermal Technologies, Inc. * 16,085 3,776 -- 5,906
Access Health, Inc. * 15,662 8,167 -- --
Alexion Pharmaceuticals Inc. * 8,947 -- -- 11,199
Ambassadors International, Inc. * 1,924 3,261 -- 13,865
AmeriPath, Inc. * 5,290 1,075 -- 8,941
Anika Therapeutics, Inc. * -- 3,992 -- --
ArQule, Inc. * 13,442 -- -- 11,550
Aurora Biosciences Corporation * 28,336 28 -- 19,325
Barnett, Inc. * 4,603 582 -- 13,057
Billing Concepts Corp. * 13,874 6,328 -- 26,656
Bionx Implants, Inc. * 2,983 3,804 -- 7,984
Blyth Industries, Inc. * -- 18,031 -- 66,781
Cameron Ashley Building Products * 13 6,606 -- --
Carey International, Inc. * -- 9,230 -- 9,756
CCC Information Svcs Group * 14,392 23,918 -- --
Central Garden and Pet Company * 1,160 14,138 -- 21,563
Children's Comprehensive Services, Inc. * -- 4,465 -- --
Cholestech Corporation * -- 5,622 -- --
Cinar Corporation - Class B * -- 16,135 -- 25,375
CN Biosciences, Inc. * -- 9,120 -- --
Coast Dental Services, Inc. * 4,265 2,677 -- 8,300
CompDent Corporation * -- 5,275 -- 12,017
Computer Motion, Inc. * -- 4,854 -- --
CompX International Inc. * -- 11,625 -- --
CORT Business Services Corporation * 1,572 13,003 -- 12,125
Cost Plus, Inc. * 3,544 14,144 -- --
CSK Auto Corporation * -- 19,255 -- --
Cunningham Graphics International, Inc. * 7,902 1,644 -- 5,344
Diagnostic Products Corporation -- -- 184 23,917
Dispatch Management Services Corp. * 30,135 14,402 -- 4,776
Donnelley Enterprise Solutions Inc. * 114 15,345 -- --
Duff & Phelps Credit Rating Company -- 15,677 18 --
Eagle USA Airfreight, Inc. * 4,843 22,479 -- 2,450
ENDOcare, Inc. * 591 -- -- 983
ENDOcare, Inc. (restricted) * 3,504 -- -- 4,000
FinishMaster, Inc. * -- 3,361 -- --
Global DirectMail Corp * 18,958 8,625 -- 58,438
Hastings Entertainment, Inc. * 9,280 2,587 -- 8,361
Headlands Mortgage Company * -- 8,413 -- 37,688
Health Management Systems, Inc. * 1,241 2,915 -- 7,087
-49-
<PAGE>
<PAGE>
Amounts in Thousands
--------------------------------
Purchases Sales Dividend
Affiliates Cost Cost Income Value
- ---------- -------------- -------------- -------------- --------------
Healthcare Recoveries, Inc. * 5,307 -- -- 34,008
Information Storage Devices, Inc. * 290 5,558 -- --
International Telecommunication Data Sys. Inc. * 20,450 5 -- 14,750
J.D. Wetherspoon plc -- 3,430 552 47,440
JLK Direct Distribution Inc. * -- 11,090 -- --
JLM Industries, Inc. * 488 646 -- 2,050
Learmonth & Burchette Mgmt. Systems Plc * -- 2,590 -- --
Liberty Technologies, Inc. * -- 816 -- --
LifeCell Corporation * -- 5,264 -- --
Lincare Holdings, Inc. * 50,860 12,582 -- 208,665
MAPICS, Inc. * 1,588 124 -- 18,150
Marquee Group Inc., The * -- 1,410 -- 14,488
Medstone International, Inc. * 4 -- -- 3,285
Microchip Technology, Inc. * 7,924 89,818 -- --
Minntech Corporation -- 7,767 18 --
Monarch Dental Corporation * -- 6,955 -- --
MoneyGram Payment Systems, Inc. * -- 13,999 -- --
Monro Muffler Brake, Inc. * -- 5,244 -- --
National Research Corporation * 3,165 1,850 -- --
New Era of Networks, Inc. * 3,000 21,093 -- 22,000
Nielsen Media Research * -- 1,719 -- --
Nu Skin Asia Pacific, Inc. * -- 6,424 -- --
Nuco2 Inc. * 1,954 -- -- 3,156
Office Depot, Inc. * 1,289 3,818 -- 166,219
Orthofix International N.V. * 450 -- -- 14,000
Pameco Corporation * -- 6,570 -- --
Panavision Inc. * -- 25,721 -- --
PETsMART, Inc. * 45,742 -- -- 64,502
Philadelphia Consolidated Holding Corp. * 1,658 -- -- 24,632
Physician Reliance Network, Inc. * -- -- -- 53,877
Pixtech, Inc. * -- -- -- 1,632
Pixtech, Inc. (restricted) * -- -- -- 2,000
Pixtech, Inc. (restricted) * 6,000 -- -- 6,000
PJ America Inc. * -- 9,871 -- --
Professional Staff PLC * 7,455 5,790 -- --
Promis Systems Corporation Ltd. * -- 1,390 -- --
ProSource, Inc. * -- 14,198 -- --
PSS World Medical, Inc. * 29,800 24,698 -- 115,000
QRS Corporation * 5,054 11,556 -- 19,200
Qualix Group Inc. * 595 1,151 -- --
RTW, Inc. * 366 232 -- 8,364
Rush Enterprises, Inc. * 698 6,763 -- --
Sabratek Corporation * -- 19,837 -- --
SCP Pool Corp. * -- 9,225 -- --
Sheridan Healthcare, Inc. * -- -- -- 7,538
-50-
<PAGE>
<PAGE>
Amounts in Thousands
--------------------------------
Purchases Sales Dividend
Affiliates Cost Cost Income Value
- ---------- -------------- -------------- -------------- --------------
Sterile Recoveries, Inc. * 653 1,017 -- 7,411
STERIS Corporation * 13,263 45,616 -- 167,781
TransAct Technologies Incorporated * 71 4,289 -- --
Transaction Network Services, Inc. * 14,070 25,740 -- 33,011
Trend-Lines, Inc. * 26 2,777 -- --
Universal Standard Healthcare, Inc. * -- -- -- 438
Universal Standard Healthcare, Inc.(restricted) * 1,250 -- -- 500
Vicor Corporation * -- 30,411 -- 9,000
Viking Office Products, Inc. * 145 31,021 -- --
Virginia Gas Co. 1,400 -- 25 1,350
ViroPharma Incorporated * 5,838 -- -- 5,429
Wilmar Industries, Inc. * -- -- -- 18,281
Young Innovations, Inc. * 2,314 1,907 -- 2,625
Zoll Medical Corporation * 489 -- -- 8,703
-------- -------- ------ ----------
$ 446,316 $789,876 $ 797 $1,538,370
======== ======== ====== ==========
* Non-income producing during the year.
</TABLE>
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<PAGE>
<PAGE>
8. RESTRICTED SECURITIES
The Fund may not invest more than 10% of its net assets in securities
which are subject to legal or contractual restrictions on resale. At
December 31, 1998, the Fund owned the following restricted securities
(constituting 1.2% of net assets) which may not be publicly sold without
registration under the Securities Act of 1933 (the "1933 Act"). The
Fund does not have the right to demand that such securities be
registered. The value of these securities is determined by valuations
supplied by pricing services or brokers, or if not available, in good
faith by or at the direction of the Board of Directors. Certain of
these securities may be offered and sold to "qualified institutional
buyers" under Rule 144A of the 1933 Act.
<TABLE>
<CAPTION>
Amounts in Thousands
--------------------------------
Date(s) of
Description Acquisition Share/Par Amount Cost Value
- ----------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Aastrom Biosciences Inc. 02/17/98 6,457 $ -- $ --
04/15/98 26,316 -- --
10/02/98 102,289 -- --
--------- -------- --------
135,062 -- --
Central European Growth Fund PLC - Wts. (GBP) 02/24/95 400,000 -- 2
Combact Diagnostics Systems Ltd. (ILS) 11/02/95 22,502 1,000 1,000
Combact Diagnostics Systems Ltd.-Ser.C Pfd. (ILS) 10/16/98 3,522 -- --
Combact Diagnostics Systems Ltd.-Ord. Shrs. (ILS) 10/16/98 666 -- --
ENDOcare, Inc. 01/24/97 1,000,000 3,500 2,000
04/16/98 750,000 2,625 1,500
04/24/98 250,000 879 500
--------- -------- --------
2,000,000 7,004 4,000
GreenField Technology Ventures Fund I 06/15/98 1 75 75
-52-
<PAGE>
<PAGE>
Amounts in Thousands
--------------------------------
Date(s) of
Description Acquisition Share/Par Amount Cost Value
- ----------- -------------- -------------- -------------- --------------
Hardman Resources NL (AUD) 04/08/93 100,000 34 --
04/13/93 100,000 35 --
04/15/93 50,000 19 --
04/23/93 100,000 34 --
08/11/93 100,000 31 --
02/06/95 112,500 4 --
--------- -------- --------
562,500 157 --
Illuminet Holdings, Inc. 02/04/98 20,100 358 358
Image Business Systems Corporation - Wts. 04/22/93 32,000 -- --
IntraBiotics Pharmaceuticals, Inc. - Series G. Pfd. 11/23/98 1,500,000 4,502 4,502
Latin Healthcare Fund, L.P. 07/15/97 1,000,000 2,080 2,080
Pacific Health Laboratories, Inc. 08/09/96 140,000 525 525
Panavision Inc. 06/05/98 46,363 767 --
Peptech Limited (AUD) 07/19/93 31,250 76 --
Pixtech Inc. 03/31/98 1,000,000 4,020 2,000
Pixtech Inc. 12/24/98 266,297 6,000 6,000
PizzaExpress PLC (GBP) 04/18/96 550,000 2,706 7,328
10/16/96 400,000 3,011 5,330
--------- -------- --------
950,000 5,717 12,658
Realm Production and Entertainment, Inc. 03/24/97 172,000 301 301
SensAble Technologies, Inc. 12/23/97 1,333,334 2,064 2,064
Stanlite Pacific Ltd. (AUD) 12/04/97 1,998,048 -- --
Sunrise Technologies International, Inc. - Wts. 09/01/92 5,250 -- --
09/28/92 6,250 -- --
--------- -------- --------
11,500 -- --
-53-
<PAGE>
<PAGE>
Amounts in Thousands
--------------------------------
Date(s) of
Description Acquisition Share/Par Amount Cost Value
- ----------- -------------- -------------- -------------- --------------
ThermoGenesis Corp. 12/31/97 800,000 2,000 1,200
ThermoGenesis Corp. - Wts. 01/27/98 80,000 -- --
ThermoGenesis Corp. - Series A Convertible 12/29/98 576,000 3,600 3,600
Titan Pharmaceuticals, Inc. - Pfd. 03/28/95 46,131 100 --
Trex Medical Corporation 11/15/95 20,000 205 215
06/24/96 2,000 28 22
--------- -------- --------
22,000 233 237
Triangle Pharmaceuticals, Inc. 12/30/98 1,000,000 10,000 13,625
Universal Standard Healthcare, Inc. 06/08/98 500,000 1,265 500
UroGen Corp. 12/27/95 66,500 3 --
Western Growth Capital Partners I, L.L.L.P. 12/31/97 52,500 130 130
Visible Genetics Inc. 11/19/98 101,266 1,002 1,002
Xenometrix, Inc. 07/10/92 6,619 50 --
$ 53,029 $ 55,859
======== ========
</TABLE>
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<PAGE>
<PAGE>
9. LINE OF CREDIT
The Fund has a $400,000,000 committed secured leverage line of credit
with its custodian bank. The Fund pledges 75% of its assets as
collateral against the line. Borrowings are charged interest at 0.50%,
over the current overnight Federal Funds Rate. The Fund incurs a
commitment fee of 0.075% per annum on the unused portion of the line of
credit, payable quarterly. There were no borrowings under the line of
credit during the year ended December 31, 1998.
10. FORWARD EXCHANGE CURRENCY CONTRACTS
The Fund enters into forward exchange currency contracts in order to
hedge certain firm purchase and sale commitments denominated in foreign
currencies. A forward exchange currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated
forward rate. The gain or loss arising from the difference between the
original contract and the closing of the contract is included in net
realized gain or loss on foreign currency transactions.
Fluctuations in the net value of forward exchange currency contracts are
recorded for financial reporting purposes as unrealized gains or losses
by the Fund.
Risks may arise from the potential inability of a counterparty to meet
the terms of a contract and from unanticipated movements in the value of
foreign currencies relative to the U.S. dollar. The face or contract
amount, in U.S. dollars, as reflected in the following table, reflects
the total exposure the Fund has in that particular currency contract.
At December 31, 1998 the Fund had outstanding forward exchange currency
contracts as follows:
<TABLE>
<CAPTION>
Contract
Foreign Currency Origination Value on Current U.S.$ Unrealized
Sale Contracts Amount Date Value Depreciation
- ---------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Canadian Dollar expiring 01/05/99 $ 1,637,129 $1,637,129 $1,662,102 $(24,937)
Thai Baht expiring 01/04/99 264 264 267 (3)
</TABLE>
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<PAGE>
<PAGE>
INVESTMENT ADVISOR:
Edgemont Asset Management Corporation
140 East 45th Street, 43rd Floor
New York, New York 10017
(212) 661-2443
CUSTODIAN:
State Street Bank and Trust Company
P.O. Box 1713
Boston, Massachusetts 02105
TRANSFER AGENT:
Boston Financial Data Services Inc.
P.O. Box 8331
Boston, Massachusetts 02266
(800) 261-0555
LEGAL COUNSEL:
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
INDEPENDENT AUDITORS:
Sanville & Company
1514 Old York Road
Abington, Pennsylvania 19001
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<PAGE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and
Board of Directors of
The Kaufmann Fund, Inc.
We have audited the accompanying statement of assets and
liabilities of The Kaufmann Fund, Inc., including the schedules of
investments and securities sold short, as of December 31, 1998, and the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1998, by correspondence
with the custodian and brokers. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of The Kaufmann Fund, Inc. as of December 31, 1998, the results of
its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended, and the financial highlights
for each of the five years in the period then ended, in conformity with
generally accepted accounting principles.
Abington, Pennsylvania SANVILLE & COMPANY
January 22, 1999 Certified Public Accountants
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<PAGE>
<PAGE>
PART C
OTHER INFORMATION
Item 23. Exhibits
Exhibit No.
(1) Certificate of Incorporation, as amended<F3>
(2) Copy of By-Laws<F3>
(3) None
(4) Copy of Investment Management Agreement between The Kaufmann
Fund, Inc. and Edgemont Asset Management Corporation, as
amended.<F3>
(5) Agreement Pursuant to Plan of Distribution between The
Kaufmann Fund, Inc. and Edgemont Asset Management
Corporation<F4>
Amendment No. 1 dated 7/1/93<F4>
(6) None
(7) Custodian Agreement between and The Kaufmann Fund, Inc. and
State Street Bank and Trust Company.<F4>
Special Custody Account Agreement between The Kaufmann Fund,
Inc., State Street Bank and Trust Company, and Morgan Stanley
Prime Brokerage<F4>
(8) Transfer Agency and Service Agreement between The Kaufmann
Fund, Inc. and Boston Financial Data Services, Inc.<F4>
Copy of Authorization Agreement for payment of Service
Fees<F4>
(9) Opinion of Martin V. Miller, Esq. and consent dated
4/20/98<F4>
(10) Opinion of Sanville Company - Certified Public Accountants
included in Annual Report for the year ending 12/31/98 which
is incorporated by reference in the Fund's 1998 Annual
Report.<F4>
Consent of Sanville & Company
(11) In Part B: The Registrant's Annual Report for the calendar
year ending 12/31/98 is incorporated by reference. Pursuant
to the requirements of Rule 303(b) of Regulation ST, the
financial statements appearing in the Registrant's
12/31/98 Annual Report, filed in electronic format, are
included in this filing.<F4>
(12) None
(13) Plan of Distribution adopted by The Kaufmann Fund, Inc.<F4>
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<PAGE>
<PAGE>
Amendment No. 1 dated 7/1/93<F4>
(14) Financial Data Schedule
(15) None
[FN]
<F1> An Exhibit to Post-Effective Amendment No. 37 which was filed on
December 11, 1993.
<F2> An Exhibit to Post-Effective Amendment No. 43 which was filed on
March 15, 1995.
<F3> An Exhibit to Post-Effective Amendment No. 45 filed electronically
on March 11, 1996.
<F4> An Exhibit to Post-Effective Amendment No. 48 filed electronically
on April 30, 1998.
Item 24. Persons Controlled by or Under Common Control With Registrant
There are no persons controlled by or under common control with
Registrant.
Item 25. 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.
(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
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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.
(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
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the Fund would have the power to indemnify him or her against such
liability.
Item 26. 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 27. Principal Underwriter
The Fund does not have a principal underwriter
Item 28. 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 29. Management Services
There are no management service contracts not described in Part A or Part
B of Form N-1A
Item 30. 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.
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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 the
requirements for effectiveness of the Registration Statement pursuant to Rule
485(6) under the Securities Act of 1933, as amended and that it 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, 1999.
THE KAUFMANN FUND, INC.
By: /s/ Hans P. Utsch
-----------------------------
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 Director, President April 29, 1999
- ------------------------ and Treasurer
HANS P. UTSCH
/s/ Lawrence Auriana Chairman of Board, April 29, 1999
- ------------------------ Director, Vice
LAWRENCE AURIANA President and
Secretary
/s/ Leon Lebensbaum Director April 29, 1999
- ------------------------
LEON LEBENSBAUM
/s/ Gerard M. Grosof Director April 29, 1999
- ------------------------
GERARD M. GROSOF
/s/ Pauline Gold Director April 29, 1999
- ------------------------
PAULINE GOLD
/s/ Roger E. Clark Director April 29, 1999
- ------------------------
ROGER E. CLARK
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