BENHAM UTILITIES INCOME FUND
A Series of Benham Equity Funds
Supplement Dated December 15, 1995
to the Prospectus and Statement of
Additional Information Dated February 24, 1995
1. On June 1, 1995, Benham Management International ("BMI") merged into
Twentieth Century Companies, Inc. ("TCC"). As a result of the merger, Benham
Management Corporation ("BMC"), Benham Financial Services, Inc. ("BFS") and
Benham Distributors, Inc. ("BDI"), the investment advisor, agent for transfer
and administrative services, and distributor, respectively, for all of the Funds
in The Benham Group, which had been subsidiaries of BMI, became subsidiaries of
TCC. TCC, through other subsidiaries, also provides investment advisory and
related services to the Twentieth Century family of funds.
New Investment Advisory Agreements with BMC as a subsidiary of TCC were
approved by the shareholders of each Fund at a meeting on May 31, 1995. A New
Administrative Services and Transfer Agency Agreement with BFS as a subsidiary
of TCC and a new Distribution Agreement with BDI as a subsidiary of TCC were
approved by the Board of Directors\Trustees for each Fund at a meeting on April
3, 1995.
The following individuals have been elected or appointed to the Board of
Directors of the Fund in addition to those listed in the current Prospectus:
ALBERT A. EISENSTAT, independent director (1995). Mr. Eisenstat is an
independent director of each of Commercial Metals Co. (1982), Sungard Data
Systems (1991) and Business Objects S/A (1994). Previously, he served as
vice president of corporate development and corporate secretary of Apple
Computer and served on its Board of Directors (1985 to 1993).
RONALD J. GILSON, independent director (1995). Mr. Gilson is the Charles J.
Meyers Professor of Law and Business at Stanford Law School (1979) and the
Mark and Eva Stern Professor of Law and Business at Columbia University
School of Law (1992). He is counsel to Marron, Ried & Sheehy (a San
Francisco law firm, 1984).
*JAMES E. STOWERS III, director (1995). Mr. Stowers is the president and
director of Twentieth Century Investors, Inc., TCI Portfolios, Inc.,
Twentieth Century World Investors, Inc., Twentieth Century Premium
Reserves, Inc., Twentieth Century Capital Portfolios, Inc., Twentieth
Century Institutional Portfolios, Inc., Twentieth Century Companies, Inc.,
Investors Research Corporation and Twentieth Century Services, Inc.
Mr. Kataoka has resigned from the Board of Directors for the Fund.
*MR. STOWERS IS AN "INTERESTED PERSON" OF THE FUNDS, AS DEFINED IN THE
INVESTMENT COMPANY ACT OF 1940, BY REASON OF HIS AFFILIATIONS WITH TCC AND
ITS SUBSIDIARIES.
2. On page 15 of the Prospectus, the discussion under the heading "SHARE
PRICE" is replaced with the following:
The price of your shares is the net asset value of the Fund next determined
after receipt of your instruction to purchase, convert or redeem. Net asset
value is determined by calculating the total value of a Fund's assets,
deducting total liabilities and dividing the result by the number of shares
outstanding. Net asset value ("NAV") is determined on each day that the New
York Stock Exchange (the "Exchange") is open.
Investments and requests to redeem shares will receive the share price next
determined after receipt by Benham of the investment or redemption request.
For example, investments and requests to redeem shares received by Benham
before the close of business of the Exchange are effective on, and will
receive the price determined on that day as of the close of the Exchange.
Investment and redemption requests received thereafter are effective on,
and receive the price determined as of the close of the Exchange on the
next day the Exchange is open.
Investments are considered received only when your check or wired funds are
received by Benham. Wired funds are considered received on the day they are
deposited in Benham's bank account if they are deposited before the close
of business on the Exchange, usually 1 p.m. Pacific Time.
Investment and transaction instructions received by Benham on any business
day by mail at its office prior to the close of business of the Exchange,
usually 1 p.m. Pacific Time, will receive that day's price. Investments and
instructions received after that time will receive the price determined on
the next business day.
All other remaining references in the Prospectus and Statement of
Additional Information to the net asset value being calculated at "12 p.m.
Pacific Time for Benham Target Maturities Trust and 1 p.m. Pacific Time for all
other Benham funds" are hereby changed to "the close of the Exchange, usually 12
p.m. Pacific Time for Benham Target Maturities Trust and 1 p.m. Pacific Time for
all other Benham funds."
3. On page 19 of the Prospectus under the sub-heading "PROCESSING YOUR
PURCHASE", the second and third sentences are replaced with the following:
An investment received and accepted before the close of business of the
Exchange, normally 1:00 p.m. Pacific Time, will be included in your account
balance the same day. If the investment is received after the close of
business of the Exchange, usually 1:00 p.m. Pacific Time, it will be
credited to your account the following business day.
4. On page 19 of the Prospectus, the following sentence is to be inserted
under the sub-heading "TELEPHONE TRANSACTIONS" after the last sentence of the
first paragraph:
ONCE YOUR TELEPHONE ORDER HAS BEEN PLACED, IT MAY NOT BE MODIFIED OR
CANCELLED.
5. On page 19 of the Prospectus, the following sentence is to be inserted
under the sub-heading "CONFIRMATION AND QUARTERLY STATEMENTS" after the second
sentence:
However, beginning September of 1996, Automatic Investment Services
transactions will not be confirmed immediately but rather will be confirmed
on your next consolidated quarterly statement.
6. On page 20 of the Prospectus, the following sentence replaces the last
sentence of the first paragraph under "SHAREHOLDER SERVICES-EXCHANGE PRIVILEGE":
An exchange request will be processed the same day if it is received before
the funds' NAVs are calculated which is one hour prior to the close of the
Exchange, usually 12 p.m. Pacific Time for Benham Target Maturities Trust;
and at the close of the Exchange, usually 1 p.m. Pacific Time for all other
Benham funds.
7. On page 21 of the Prospectus, the following replaces the last two
sentences of the last paragraph under the sub-heading "OPEN ORDER SERVICE":
All orders and cancellation of orders received by one hour prior to the
close of the Exchange, usually 12 p.m. Pacific Time, will be considered to
be effective the same day. All orders and cancellation of orders not
received one hour prior to the close of the Exchange, usually 12 p.m.
Pacific Time, will be considered effective the following business day.
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BENHAM UTILITIES
INCOME FUND
Prospectus * February 24, 1995
[picture of mountains and dam]
[company logo] The Benham Group
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[information in left margin of page]
THE BENHAM GROUP
1665 Charleston Road
Mountain View, California 94043
SHAREHOLDER RELATIONS
1-800-321-8321
1-415-965-4222
FUND INFORMATION
1-800-331-8331
1-415-965-4274
TDD SERVICE
1-800-624-6338
1-415-965-4764
BENHAM GROUP REPRESENTATIVES ARE AVAILABLE BY TELEPHONE WEEKDAYS FROM 5 A.M. TO
5 P.M. PACIFIC TIME.
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BENHAM UTILITIES
INCOME FUND
A Series of Benham Equity Funds
Prospectus * February 24, 1995
BENHAM UTILITIES INCOME FUND seeks current income and long-term growth of
capital and income. The Fund invests primarily in equity securities of companies
engaged in the utilities industry.
One feature that distinguishes the Fund from other utility funds is that it
attempts to provide investors with a consistent level of monthly dividend
income, although there is no guarantee that it will be able to do so. The Fund
is a diversified series of Benham Equity Funds (BEF), a no-load, open-end mutual
fund.
Please read this Prospectus carefully and retain it for future reference. It is
designed to help you decide if the Fund's goals match your own. A Statement of
Additional Information (also dated February 24, 1995) has been filed with the
Securities and Exchange Commission (SEC) and is incorporated herein by
reference. For a free copy, call or write The Benham Group.
Mutual fund shares are not insured by the FDIC, the Federal Reserve Board, or
any other agency. The value of the investment and its returns will fluctuate and
is not guaranteed.
AS WITH ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
2
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SUMMARY OF FUND EXPENSES
The tables below illustrate the fees and expenses an investor in the Fund would
incur directly or indirectly. The figures shown are based on historical
expenses, adjusted to reflect the expense limitation agreement in effect as of
February 24, 1995.
================================================================================
A. SHAREHOLDER TRANSACTION EXPENSES
- --------------------------------------------------------------------------------
Sales load imposed on purchases............................. None
Sales load imposed on reinvested dividends.................. None
Deferred sales load......................................... None
Redemption fee.............................................. None
Exchange fee................................................ None
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B. ANNUAL FUND OPERATING EXPENSES
As a Percentage of Average Daily Net Assets
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Investment advisory fee (net of expense limitation)......... .25%*
12b-1 fee................................................... None
Other expenses.............................................. .50%
TOTAL FUND OPERATING EXPENSES (net of expense limitation)... .75%*
* Benham Management Corporation (BMC) has agreed under contract to limit the
Fund's total operating expenses to .75% of average daily net assets through May
31, 1995. The contract provides that BMC may recover amounts absorbed on behalf
of the Fund during the preceding 11 months if, and to the extent that, for any
given month, the Fund's expenses were less than the expense limit in effect at
that time. The expense limit is up for annual renewal in June. If this expense
limitation agreement were not in effect, the Fund's investment advisory fee,
other expenses, and total operating expenses would be .32%, .50%, and .82%,
respectively.
The Fund pays BMC investment advisory fees equal to an annualized percentage of
Fund average daily net assets. Other expenses include administrative and
transfer agent fees paid to Benham Financial Services, Inc. (BFS).
3
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C. EXAMPLE OF EXPENSES
- --------------------------------------------------------------------------------
The following table illustrates the expenses a shareholder would pay on a $1,000
investment in the Fund over periods of one, three, five, and ten years. These
figures are based on the expenses shown in Table B and assume (i) a 5% annual
return and (ii) full redemption at the end of each time period.
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
$8 $24 $42 $93
We include this table to help you understand the various costs and expenses that
you, as a shareholder, will bear directly or indirectly. THIS EXAMPLE SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR PERFORMANCE; ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN, AND THE FUND MAY NOT REALIZE
THE 5% HYPOTHETICAL RATE OF RETURN REQUIRED BY THE SEC FOR THIS EXAMPLE.
FINANCIAL HIGHLIGHTS
The information presented on the following page has been audited by KPMG Peat
Marwick LLP, independent certified public accountants. Their unqualified report
on the financial statements and financial highlights is included in the Fund's
Annual Report, which is part of the Statement of Additional Information.
4
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================================================================================
Benham Equity Funds: Benham Utilities Income Fund
Years ended December 31 (except as noted)
- --------------------------------------------------------------------------------
1994 1993+
PER-SHARE DATA
- --------------
NET ASSET VALUE (NAV) AT BEGINNING OF PERIOD $10.24 10.00
INCOME (LOSSES) FROM INVESTMENT OPERATIONS
Net Investment Income .4375 .3626
Net Realized and Unrealized Gains
(Losses) on Investments (1.4515) .2979
------ ------
Total Income (Losses) From Investment Operations (1.0140) .6605
LESS DISTRIBUTIONS
Dividends from Net Investment Income (.4360) (.3577)
Distributions from Net Realized Capital Gains 0 (.0628)
------ ------
Total Distributions (.4360) (.4205)
NAV AT END OF PERIOD $8.79 10.24
====== ======
TOTAL RETURN* (10.03)% 6.60
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SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period
(in thousands of dollars) $152,570 194,314
Ratio of Expenses to Average Daily Net Assets .75% .50**
Ratio of Expenses to Average Daily Net Assets
Before Waiver .82% .94**
Ratio of Net Investment Income to Average
Daily Net Assets 4.67% 4.23**
Ratio of Net Investment Income to Average
Daily Net Assets Before Waiver 4.61% 3.80**
Portfolio Turnover Rate 61.42% 38.76
+ From March 1, 1993 (commencement of operations), through December 31, 1993.
* Total return figures assume reinvestment of dividends and capital gain
distributions and are not annualized.
** Annualized.
5
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[information in left margin of page]
Under normal market conditions, the Fund invests at least 75% of its total
assets in equity securities of companies engaged in the utilities industry.
Under normal market conditions, BMC expects to invest 10-20% of the Fund's total
assets in utility bonds.
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HOW THE FUND WORKS
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide investors with current income and
long-term growth of capital and income. There is no assurance that the Fund will
achieve its investment objective.
The Fund's investment objective, industry concentration policy, and issuer
diversification policy, described on the following pages, are fundamental and
may not be changed without shareholder approval. The other policies described in
this Prospectus are not fundamental and may be changed by BEF's board of
directors.
CORE INVESTMENT STRATEGIES
The Fund normally invests at least 75% of its total assets in equity securities
of companies engaged in the utilities industry. Such companies may include:
public utility companies, whose user rates are set by a government entity such
as a state utilities commission; companies with non-regulated utility
operations; or companies with a combination of regulated and non-regulated
utility operations. Within this 75% category, the Fund will not buy shares of a
company unless 50% or more of the company's revenues or net profits are derived
from the ownership or operation of facilities used to provide electricity,
natural gas, telecommunications services, pay television (e.g., cable), water,
or sanitary services to the public.
To enhance dividend income, increase portfolio diversification, or support share
price stability, the Fund may invest up to 25% of its total assets in
fixed-income securities (i.e., bonds issued by the U.S. government or its
agencies, bonds issued by companies engaged in the utilities industry (utility
bonds), or bonds issued by non-utility corporations).
BMC normally expects to invest 10-20% of the Fund's total assets in utility
bonds and may invest up to 5% of the Fund's total assets in non-utility
corporate bonds. The Fund's corporate debt holdings must be of investment-grade
quality.
6
<PAGE>
To be considered investment grade, a bond must be rated BBB/Baa or better by a
nationally recognized statistical rating organization (rating agency) or be
judged to be of comparable quality by BMC under the direction of the board of
directors. If a bond held by the Fund is downgraded by a rating agency, BMC will
not necessarily sell the bond unless it determines that the bond is no longer of
investment-grade quality.
For a brief description of the Fund's other permitted investments, see the
section entitled "Other Investment Policies and Techniques," which begins on
page 11.
MANAGEMENT APPROACH
In recent years, changes in the regulatory climate have allowed public utility
companies to provide products and services outside of their traditional
geographic areas. BMC seeks to maximize the benefits from both increased
competition and expanded growth prospects that are expected to arise from these
changes.
BMC uses quantitative management strategies in pursuit of the Fund's investment
objective. Quantitative investment management combines a disciplined management
approach with the flexibility to respond to events that may affect the value of
the Fund's investments. This approach is a compromise between active management,
which allows the advisor to select investments for a fund without reference to
an index or investment model, and indexing, in which the advisor tries to match
a fund's portfolio composition to that of a particular index.
The Fund is a "diversified" investment company as defined in the Investment
Company Act of 1940 (1940 Act). This means that investments in any single issuer
are limited by restrictions under the 1940 Act.
7
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[information in left margin of page]
Public utilities companies have historically provided above-average dividends,
which may make their stocks useful to long-term, income-oriented investors.
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SUITABILITY
The Fund may be appropriate for conservative investors seeking income and growth
potential through exposure to public utilities companies. These companies have
historically provided above-average dividends, which may make their stocks
appropriate for long-term, income-oriented investors. Historically, utility
stocks have generally been considered to be among the most conservative equity
securities despite their vulnerability to inflation and regulation. However,
increased competition and a trend toward deregulation have created opportunities
for growth, as well as greater price volatility, among utilities stocks. The
Fund, by itself, is not a balanced investment plan and works best for long-term
investors prepared to ride out the markets' ups and downs.
8
<PAGE>
DIVIDEND GROWTH, YIELD, AND HISTORICAL RISK/RETURN COMPARISONS
As indicated below, Chart 1 compares the rate of dividend growth for the
Standard & Poor's Utilities Index (S&P Utilities Index) with the rate of
inflation as measured by the Consumer Price Index (CPI) over a 49-year period.
[mountain graph]
Chart 1 - Growth of Utility Stock Dividends vs. Inflation
[graph data] S&P Utilities
Index Dividends Inflation (CPI)
1946 $1.00 $1.00
1947 $1.08 $1.09
1948 $1.10 $1.12
1949 $1.19 $1.10
1950 $1.27 $1.16
1951 $1.32 $1.23
1952 $1.32 $1.24
1953 $1.41 $1.25
1954 $1.48 $1.25
1955 $1.56 $1.25
1956 $1.69 $1.29
1957 $1.79 $1.33
1958 $1.84 $1.35
1959 $1.95 $1.37
1960 $2.04 $1.39
1961 $2.15 $1.40
1962 $2.25 $1.41
1963 $2.37 $1.44
1964 $2.55 $1.46
1965 $2.74 $1.48
1966 $2.96 $1.53
1967 $3.14 $1.58
1968 $3.29 $1.66
1969 $3.38 $1.76
1970 $3.48 $1.85
1971 $3.57 $1.91
1972 $3.64 $1.98
1973 $3.74 $2.16
1974 $3.80 $2.42
1975 $3.95 $2.59
1976 $4.13 $2.72
1977 $4.45 $2.90
1978 $4.76 $3.16
1979 $5.12 $3.58
1980 $5.45 $4.02
1981 $5.87 $4.38
1982 $6.29 $4.55
1983 $6.65 $4.72
1984 $7.11 $4.91
1985 $7.40 $5.10
1986 $7.73 $5.16
1987 $8.11 $5.39
1988 $8.37 $5.62
1989 $8.67 $5.89
1990 $9.11 $6.25
1991 $9.35 $6.44
1992 $9.40 $6.63
1993 $9.52 $6.81
1994 $9.74 $6.99
Sources: Standard & Poor's Security Price Index Record and U.S. Department of
Labor.
Historically, common stock dividend yields for public utility companies have
exceeded comparable figures for the broader market while offering investors
comparatively less share price volatility. As indicated below, Chart 2 compares
common stock dividend yields for the S&P Utilities Index with those of the
broader Standard & Poor's 500 Composite Stock Price Index (S&P 500) from 1946 to
1994.
[mountain chart]
Chart 2 - Stock Dividends Yields
S&P Utilities Index vs. S&P 500
[graph data] S&P Utilities
Index Yield S&P 500 Yield
1946 4.65% 4.64%
1947 6.02% 5.49%
1948 6.23% 6.12%
1949 5.42% 6.80%
1950 5.98% 7.20%
1951 5.52% 5.93%
1952 4.89% 5.31%
1953 5.10% 5.84%
1954 4.53% 4.28%
1955 4.48% 3.61%
1956 4.85% 3.73%
1957 5.07% 4.48%
1958 3.86% 3.17%
1959 3.96% 3.06%
1960 3.59% 3.36%
1961 3.02% 2.82%
1962 3.36% 3.38%
1963 3.25% 3.04%
1964 3.11% 2.95%
1965 3.30% 2.94%
1966 3.88% 3.57%
1967 4.33% 3.03%
1968 4.29% 2.96%
1969 5.49% 3.43%
1970 5.14% 3.41%
1971 5.43% 3.01%
1972 5.42% 2.67%
1973 7.25% 3.46%
1974 10.32% 5.25%
1975 8.08% 4.08%
1976 6.93% 3.77%
1977 7.40% 4.90%
1978 8.93% 5.28%
1979 9.28% 5.23%
1980 9.46% 4.54%
1981 10.08% 5.41%
1982 9.46% 4.88%
1983 9.14% 4.30%
1984 8.53% 4.50%
1985 7.22% 3.74%
1986 6.26% 3.42%
1987 7.23% 3.57%
1988 6.76% 3.50%
1989 5.05% 3.13%
1990 5.77% 3.66%
1991 5.48% 2.93%
1992 5.40% 2.84%
1993 5.02% 2.70%
1994 5.90% 2.87%
Source: Standard & Poor's Security Price Index Record.
9
<PAGE>
As indicated below, Chart 3 illustrates historical risk (or volatility) in the
utilities sector by comparing the historical risk and return characteristics of
the S&P Utilities Index with comparable figures for the S&P 500 and a U.S.
Treasury bond with a remaining maturity of 20 years.
Chart 3 - Risk vs. Reward (1946-1994)
T-Bond S&P 500 S&P Utilities
Risk - Standard Deviation 9.96% 15.84% 15.28%
Reward - Average Annual Total Returns 4.87% 9.47% 8.68%
Sources: Standard & Poor's Security Price Index Record and Ibbotson Associates,
Stocks, Bonds, Bills and Inflation. (S&P 500 is a registered service mark of
Standard & Poor's Corporation.)
Note that while the S&P Utilities Index was less
volatile than the S&P 500, it also produced lower returns than the S&P 500
during the period illustrated above. The S&P 500 is an unmanaged index
representing the performance of 500 major companies, most of which are listed on
the New York Stock Exchange. Investors cannot invest directly in the S&P 500.
The charts above and on the previous page show the characteristics of utilities
stocks that have attracted investors in the past. Regulatory and competitive
factors are changing the utilities industry considerably, and there is no
assurance that these historic trends will continue. Within any one market
sector, a period of above average performance may be followed by a period of
below average performance.
10
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OTHER INVESTMENT POLICIES AND TECHNIQUES
CONVERTIBLE SECURITIES. Although the Fund's equity investments consist primarily
of common stocks, it may buy securities convertible into common stock, such as
convertible bonds, convertible preferred stocks, or warrants. BMC may purchase
these securities if it believes that a company's convertible securities are
undervalued in the market.
WHEN-ISSUED SECURITIES AND FIRM-COMMITMENT AGREEMENTS. When-issued securities
and firm-commitment agreements fix a security's price and yield for future
payment and delivery. The market value of a security may change during this
period, or a party to the agreement may fail to pay for the security. Either of
these situations could affect the market value of the Fund's assets.
SHORT-TERM INSTRUMENTS. For liquidity purposes, the Fund may invest in
high-quality money market instruments with remaining maturities of one year or
less. Such instruments may include U.S. government securities, certificates of
deposit, commercial paper, or bankers' acceptances.
The Fund may also enter into repurchase agreements, collateralized by U.S.
government securities, with banks or broker-dealers that are deemed to present
minimal credit risk. Credit risk determinations are made by BMC pursuant to
guidelines established by the board of directors. A repurchase agreement
involves the purchase of a security and a simultaneous agreement to sell it back
to the seller at a higher price. At the direction of the board, BMC has
established procedures to minimize potential losses due to credit risk. Delays
or losses could result if the other party to the agreement defaults or becomes
bankrupt.
The Fund's fixed-income investments may be affected by changes in their issuers'
credit standings.
Bonds rated in the lowest investment-grade category (BBB/Baa) may have
speculative characteristics. Changes in economic conditions or other
circumstances may affect principal and interest payments.
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[information in right margin of page]
The Fund's fixed-income investments may be affected by changes in the credit
standing of their issuers and may decline in value if an issuer's
credit-worthiness deteriorates.
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11
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[information in left margin of page]
The Fund may use futures and options transactions to a limited extent.
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By investing in bonds, the Fund also incurs "call risk." If a bond held by the
Fund is called for redemption, the Fund will have cash to invest at prevailing
interest rates, which may be lower than the interest rate on the called bond.
The Fund may invest up to 5% of its total assets in any money market fund
advised by BMC, provided that the investment is consistent with the Fund's
policies and restrictions. For temporary, defensive purposes, the Fund may
invest up to 100% of its assets in short-term instruments.
FUTURES AND OPTIONS TRANSACTIONS. In order to manage the Fund's exposure to
changes in market conditions, such as movements in securities prices, interest
rates, and domestic and foreign economies, the Fund may invest up to 20% of its
assets in futures and options. As with many investments, futures and options can
be highly volatile. If BMC incorrectly judges market conditions in an attempt to
reduce risk or increase return or if certain markets pose liquidity
difficulties, losses may occur, and the Fund's value may be affected. The Fund
will not utilize futures and options for speculative purposes.
SECURITIES LENDING. The Fund may lend its portfolio securities to broker-dealers
to earn additional income. Securities loans are subject to guidelines prescribed
by the board of directors, which are set forth in the Statement of Additional
Information.
This practice could result in a loss or a delay in recovering the Fund's
securities. Loans are limited to 33-1/3% of the Fund's total assets.
12
<PAGE>
FOREIGN SECURITIES. The Fund may invest up to 10% of its assets in securities of
foreign utility companies. The Fund's foreign holdings may include instruments
that trade on domestic or foreign securities exchanges in U.S. dollars or
foreign currencies.
Securities of foreign issuers may be affected by the strength of foreign
currencies relative to the U.S. dollar or by political or economic developments
in foreign countries. Foreign companies may not be subject to accounting
standards or governmental regulations comparable to those that affect U.S.
companies, and there may be less public information about their operations.
ILLIQUID AND RESTRICTED SECURITIES AND PRIVATE PLACEMENTS. The Fund may acquire
some securities that are difficult to sell promptly at an acceptable price
(i.e., illiquid). Difficulty in selling securities may result in losses and
extra expenses to the Fund. Consequently, legal restrictions may apply to the
sale of these securities.
The Fund may invest up to 15% of its net assets in illiquid securities,
including restricted securities and private placements.
OTHER INVESTMENT MANAGEMENT TECHNIQUES. BMC may buy other types of securities or
employ other portfolio management techniques on behalf of the Fund. When
required by SEC guidelines, the Fund will set aside cash or appropriate liquid
assets in a segregated account to cover its portfolio obligations. See the
Statement of Additional Information for a more detailed discussion of these
investments and some of the risks associated with them.
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[information in right margin of page]
The Fund may invest up to 10% of its assets in securities of foreign utility
companies.
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13
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[information in left margin of page]
Performance data and a discussion of factors that affected performance during
the Fund's most recent reporting period are included in BEF's semiannual reports
to shareholders.
- -------------------
PORTFOLIO TRANSACTIONS
BMC selects brokerage firms solely on the basis of best net price and execution
and expects to engage in regular trading on behalf of the Fund. The Fund's
annual portfolio turnover rate is not expected to exceed 150% and may vary from
year to year. Higher portfolio turnover rates increase transaction costs and can
increase the incidence of short-term capital gains (or losses). Short-term
capital gains distributed to shareholders are treated as ordinary income.
PERFORMANCE
Mutual fund performance is commonly expressed in terms of historical yield or
total return and may be quoted in advertising and sales literature. Past
performance is no guarantee of future results.
YIELD calculations show the rate of income the Fund earns on its investments as
an annual percentage rate. The Fund's yield is calculated according to methods
that are standardized for all stock and bond funds.
TOTAL RETURN represents the Fund's changes over a specified time period,
assuming reinvestment of dividends and capital gains, if any. CUMULATIVE TOTAL
RETURN illustrates the Fund's actual performance over a stated period of time.
AVERAGE ANNUAL TOTAL RETURN is a hypothetical rate of return that illustrates
the annually compounded return that would have produced the same cumulative
total return if the Fund's performance had been constant over a entire period.
Average annual total returns smooth out variations in the Fund's performance;
they are not the same as year-by-year results.
Performance data and a discussion of factors that affected performance during
the Fund's most recent reporting period are included in the Fund's semiannual
reports to shareholders. These reports are routinely delivered to the Fund's
shareholders. For a free copy, call one of the Fund Information numbers on page
16.
14
<PAGE>
SHARE PRICE
BMC normally calculates the Fund's purchase and sale price per share (net asset
value, or NAV) at 1 p.m. Pacific Time each day the New York Stock Exchange is
open for business. NAV is calculated by adding the value of its assets,
deducting its liabilities, and then dividing the result by the number of shares
outstanding.
If market quotations are readily available, securities are valued
at their market value. If market quotations are not readily available,
securities are priced at fair market value as determined in good faith under the
direction of the board of directors. The valuations of foreign securities are
translated from their respective currencies into U.S. dollars using current
exchange rates.
- -------------------
[information in right margin of page]
Shares may be purchased and redeemed without any sales charge, commission,
redemption fee, 12b-1 fee, or contingent deferred sales load.
- -------------------
15
<PAGE>
- -------------------
[information in left margin of page]
Overnight and special delivery mail (e.g., Federal Express, Express Mail,
Priority Mail) should be sent to our street address: 1665 Charleston Rd.
Mountain View California 94043. Failure to do so may result in transaction
delays.
- -------------------
HOW TO INVEST
To open an account, you must complete and sign an application. If an application
is not enclosed with this Prospectus, you may request one by calling one of the
Fund Information numbers listed below. If you prefer, we will fill out your
application over the telephone and mail it to you for your signature. Separate
forms are required to establish Benham-sponsored retirement plan accounts, as
discussed on pages 26 and 27.
Your investment will be credited to your account and begin earning interest at
the next NAV calculated after The Benham Group or an authorized subtransfer
agent receives and accepts your order. However, you may not redeem shares until
we have your completed application on file and your investment matures (i.e.,
clears). See page 23 for details.
Benham Group Representatives are available at the telephone numbers listed below
weekdays from 5:00 a.m. to 5:00 p.m. Pacific Time.
FUND INFORMATION: for information about any Benham fund or other investment
product, call 1-800-331-8331 or 1-415-965-4274.
SHAREHOLDER RELATIONS: to open an account or to inquire about or make
transactions in an existing account, call 1-800-321-8321 or 1-415-965-4222.
Benham shareholders may make transactions and obtain prices, yields, and total
return information for all Benham funds with TeleServ, our 24-hour automated
telephone information service. Dial 1-800-321-8321 and press 1.
16
<PAGE>
HOW TO BUY SHARES (Retirement plan accounts have different minimums.
See pages 26 and 27 for details.)
================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
BY CHECK Minimum initial investment: $1,000
Minimum additional investment: $100
MAKE YOUR INVESTMENT CHECK PAYABLE TO THE BENHAM GROUP. Mail the
check with your completed application to:
The Benham Group
P.O. Box 7730
San Francisco, CA 94120-9853
For ADDITIONAL INVESTMENTS, enclose an investment slip preprinted
with the account number to which your investment should be
credited. If the payee information provided on the check does not
agree with information preprinted on the investment slip, we will
follow the instructions preprinted on the investment slip.
If you do not have a preprinted investment slip, send your check
with written instructions indicating the fund name and the account
number. If the payee information provided on the check does not
agree with your written instructions, we will follow the written
instructions.
You may also invest your check in person at a Benham Investor
Center. One is located at 1665 Charleston Road in Mountain View,
California; the other is located at 2000 South Colorado Boulevard,
Suite 1000, in Denver, Colorado.
WE WILL NOT ACCEPT CASH INVESTMENTS OR THIRD-PARTY CHECKS. We
will, however, accept properly endorsed second-party checks made
payable to the investor(s) to whose account the investment should
be credited.
We will also accept checks drawn on foreign banks or foreign
branches of domestic banks and checks that are not drawn in U.S.
dollars (U.S. $100 minimum). The cost of collecting payment on
such checks will be passed on to the investor. These costs may be
substantial, and settlement may involve considerable delays.
Investors will be charged $5 for every investment check returned
unpaid.
17
<PAGE>
================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
BY BANK WIRE Minimum initial investment: $25,000
Minimum additional investment: $100
If you wish to open an account by bank wire, please call our
Shareholder Relations Department for more information and an
account number. Bank wire investments should be addressed as
follows:
State Street Bank and Trust Company
Boston, Massachusetts
ABA Routing Number 011000028
Beneficiary = Benham Equity Funds: Benham Utilities Income Fund
AC Number 0506 080 1
FBO [Your Name, Your Benham Fund Account Number]
- --------------------------------------------------------------------------------
BY EXCHANGE Minimum initial investment: $1,000
Minimum additional investment: $100
You may exchange your shares for shares of any other Benham fund
registered for sale in your state if you have received and read
the fund's prospectus. Exchanges may be made by telephone (for
identically registered accounts only), by written request, or in
person. Certain restrictions apply; please see page 20 for
details. You may open a new account by telephone exchange,
provided that you meet the minimum initial investment requirement.
- --------------------------------------------------------------------------------
AUTOMATIC Minimum: $25
INVESTMENT These services are offered with respect to additional investments
SERVICES only. See details on page 21.
18
<PAGE>
PROCESSING YOUR PURCHASE
Shares will be purchased at the next NAV calculated after your investment is
received and accepted by The Benham Group or an authorized subtransfer agent.
Investments received and accepted before 1:00 p.m. Pacific Time will be credited
to your account the same day. After 1:00 p.m. Pacific Time, they will be
credited to your account the following business day. The Fund reserves the right
to refuse any investment.
TELEPHONE TRANSACTIONS
Shareholders may order certain transactions (e.g., exchanges, wires, some types
of redemptions) by telephone. This privilege is granted to Benham fund
shareholders automatically; you need not specifically request this service, and
you may not specifically decline it.
The Benham Group will not be liable for losses resulting from unauthorized or
fraudulent instructions if it follows procedures designed to verify the caller's
identity. BMC will request personal identification, record telephone calls, and
send confirmation statements for every telephone transaction to the
shareholder's record address. The Fund reserves the right to revise or terminate
telephone transaction privileges at any time.
CONFIRMATION AND QUARTERLY STATEMENTS
All transactions are summarized on quarterly account statements. In addition,
for every transaction that you request, a confirmation statement will be mailed
to your record address. Please review these statements carefully. If you fail to
notify us of an error within 30 days of the confirmation statement date, you
will be deemed to have ratified the transaction.
19
<PAGE>
- -------------------
[information in left margin of page]
The free exchange privilege is a convenient way to buy shares in other Benham
funds when your investment goals change.
Benham Open Orders allow investors to utilize a "buy low, sell high" investment
strategy.
- -------------------
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE
You may exchange your shares for shares of equivalent value in any other Benham
fund registered for sale in your state. Such an exchange may generate a taxable
gain or loss. An exchange request will be processed the same day if it is
received before the funds' NAVs are calculated (12:00 p.m. Pacific Time for
Benham Target Maturities Trust, 1:00 p.m. Pacific Time for all other Benham
funds).
The Benham Group discourages trading in response to short-term market
fluctuations. Such activity may encumber BMC's ability to invest the funds'
assets in accordance with their respective investment objectives and policies
and may be disadvantageous to other shareholders. More than six exchanges per
calendar year out of a variable-price fund may be deemed an abuse of the
exchange privilege. For purposes of determining the number of exchanges made,
accounts under common ownership or control will be aggregated.
Each Benham fund reserves the right to modify or revoke the exchange privilege
of any shareholder or to limit or reject any exchange. Although each fund will
attempt to give shareholders prior notice whenever it is reasonably able to do
so, it may impose these restrictions at any time.
OPEN ORDER SERVICE
The Benham Group's Open Order Service allows you to designate a price at which
to exchange shares between a Benham variable-price fund and a Benham money
market fund. You must designate a purchase price equal to or lower, or a sale
price equal to or higher, than the variable-price fund's NAV at the time you
place your order. If the designated price is met within 90 calendar days, we
will execute your exchange order automatically at that price (or better).
20
<PAGE>
If the fund you have selected deducts a distribution from its share price, your
order price will be adjusted accordingly so that the distribution does not
inadvertently trigger an Open Order transaction on your behalf. If you close or
reregister the account from which shares are to be redeemed, your Open Order
will be canceled. Because of their time-sensitive nature, Open Order
transactions may be made only by telephone or in person and are subject to the
exchange limitations described in each fund's prospectus. All orders and
cancellations received before 12:00 p.m. Pacific Time are effective the same
day. After 12:00 p.m. Pacific Time, they are effective the following business
day.
AUTOMATIC INVESTMENT SERVICES (AIS)
TREASURY DIRECT allows you to deposit interest and principal payments from
Treasury securities directly into a Benham fund account.
PAYROLL DIRECT allows you to deposit any amount of your paycheck directly into a
Benham fund account.
GOVERNMENT DIRECT allows you to deposit your entire U.S. government payment
directly into a Benham fund account.
BANK DIRECT allows you to deposit a fixed amount from your bank account directly
into a Benham fund account on the 1st and/or the 15th of each month (or the next
business day).
DIRECTED DIVIDENDS allows you to invest all or part of your dividend earnings
from one Benham fund account into one or more other Benham fund accounts. You
may choose to receive a portion of your dividends in cash and to invest the
remainder in other Benham fund accounts.
SYSTEMATIC EXCHANGES allow you to exchange from one Benham fund account to
another Benham fund account on the 1st and/or the 15th of each month (or the
next business day).
For more information about any of these services, please call our Shareholder
Relations Department at 1-800-321-8321 or 1-415-965-4222.
- -------------------
[information in right margin of page]
Automatic Investment Services enable you to benefit from a dollar-cost averaging
investment strategy.
- -------------------
21
<PAGE>
- -------------------
[information in left margin of page]
Yo may redeem shares without charge.
- -------------------
BROKER-DEALER TRANSACTIONS
The Benham Group charges no sales commissions, or "loads," of any kind. However,
investors may purchase and sell shares through registered broker-dealers, who
may charge fees for their services.
The Benham Group will accept orders for the purchase of shares from authorized
broker-dealers who agree in writing to pay in full for such shares in
immediately available funds no later than 1:00 p.m. Pacific Time the following
business day.
TDD SERVICE FOR THE HEARING IMPAIRED
TDD users may contact The Benham Group at 1-800-624-6338 or 1-415-965-4764.
California residents may wish to contact us through the California Relay Service
(CRS) at 1-800-735-2929. Your transaction requests via CRS will be handled on a
recorded line. The Benham Group cannot accept responsibility for instructions
miscommunicated by CRS.
EMERGENCY SERVICES
The Benham Group has established an alternate operations site from which we can
access customer accounts and the mainframe computers used by the Benham funds in
the event of an emergency. Telephone lines and terminals are currently in place.
If our regular service is interrupted, the following numbers will automatically
connect you to this site.
From within the U.S., including Alaska and Hawaii, call 1-800-321-8321.
From all foreign countries, call collect, 1-303-759-9337 or 1-510-820-1409. The
operator will request your Benham fund account number before accepting the call.
22
<PAGE>
HOW TO REDEEM YOUR INVESTMENT
When you place an order to redeem shares, your shares will be redeemed at the
next NAV calculated after The Benham Group or an authorized subtransfer agent
has received and accepted your redemption request. The Fund's NAV is normally
calculated at 1:00 p.m. Pacific Time. See page 15 for further information.
Barring extraordinary circumstances prescribed by law, redemption proceeds are
mailed within seven calendar days. However, The Benham Group reserves the right
to withhold the proceeds until the investment has matured (i.e., your payment
has cleared); see maturity periods below.
================================================================================
DRAWN FROM A MATURITY PERIOD
METHOD OF PAYMENT CALIFORNIA BANK? (IN BUSINESS DAYS)
- --------------------------------------------------------------------------------
Checks, cashiers checks,
and bank money orders Yes 5 days
- --------------------------------------------------------------------------------
Same as above No 8 days
- --------------------------------------------------------------------------------
U.S. Treasury checks, Traveler's checks,
U.S. Postal money orders, Benham
checks, bank wires, and AIS Deposits* N/A 1 day
* Does not include bank direct deposits, which take 8 business days to mature.
================================================================================
If you hold shares in certificate form, redemption requests must be accompanied
by properly endorsed certificates.
If you want to keep your account open, please maintain a balance of shares worth
at least $1,000. If your account balance falls below $1,000 due to redemption,
your account may be closed, but not without at least 30 days' notice and an
opportunity to increase your account balance to the $1,000 minimum. Your shares
will be redeemed at the NAV calculated on the day your account is closed.
Proceeds will be mailed to the record address.
This policy also applies to Benham's Individual Retirement Accounts (IRAs),
excluding SEP-IRAs, except that shareholders will receive at least 120 days'
written notice and an opportunity to increase their account balance before their
accounts are closed. Investors wishing to open a Benham-sponsored retirement
account should see pages 26 and 27 for details.
UNCASHED CHECKS. We may reinvest at the Fund's then-current NAV any distribution
or redemption checks that remain uncashed for six months. Until we receive
instructions to the contrary, subsequent distributions will be reinvested in the
original account. Uncashed redemption checks may be reinvested in an identically
registered account.
23
<PAGE>
HOW TO REDEEM SHARES (Retirement investors, see pages 26 and 27.)
================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
BY TELEPHONE The Benham Group will accept telephoneredemption requests for any
amount if the proceeds are to be sent to your predesignated bank
account. Redemptions of $25,000 or less payable to the registered
account owner(s) may also be ordered by telephone. All other
redemption requests must be made in writing.
- --------------------------------------------------------------------------------
IN WRITING Send a letter of instruction to:
The Benham Group
Shareholder Relations Department
1665 Charleston Road
Mountain View, California 94043
Your letter of instruction should specify:
* Your name
* Your account number
* The name of the Fund from which you wish to redeem shares
* The dollar amount or number of shares you wish to redeem
For your protection, written redemption requests must be
accompanied by SIGNATURE GUARANTEES under the following
circumstances:
* Redemption proceeds go to a party other than the registered
account owner(s).
* Redemption proceeds go to an account other than your
predesignated bank account.
* Redemption proceeds go to the registered account owner(s), but
the amount exceeds $25,000.
If you have instructed The Benham Group to require more than one
signature on written redemption requests, each of the required
number of signers must have his or her signature guaranteed on
these redemption requests.
24
<PAGE>
================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
IN WRITING A signature guarantee may be provided by a bank, savings and loan
(continued) association, savings bank, credit union, stock brokerage firm, or
a Benham Investor Center. Shareholders must appear in person with
identification to obtain a signature guarantee. Notary public
certifications are not accepted in lieu of signature guarantees.
BFS may require written consent of all account owners prior to
acting on the written instructions of any account owner.
- --------------------------------------------------------------------------------
BY BANK WIRE If you included bank wire information on your account application
or made subsequent arrangements to accommodate bank wire
redemptions, you may wire funds to your bank by calling
1-800-321-8321 or 1-415-965-4222. The minimum amount for a bank
wire redemption is $1,000. Allow at least two business days for
redemption proceeds to be credited to your bank account.
- --------------------------------------------------------------------------------
BY EXCHANGE See details on pages 18 and 20.
- --------------------------------------------------------------------------------
AUTOMATIC DIRECTED PAYMENTS. You may arrange for periodic redemptions from
REDEMPTION your Benham fund account to your bank account or to another
SERVICES designated payee.
SYSTEMATIC EXCHANGES. You may arrange for periodic exchange
redemptions from one Benham fund account to another Benham fund
account.
25
<PAGE>
ABOUT BENHAM-SPONSORED RETIREMENT PLANS
Retirement plans offer investors a number of benefits, including the chance to
reduce current taxable income and to take advantage of tax-deferred compounding.
Retirement plan accounts require a special application; please let our
Shareholder Relations Department know if you want to establish this type of
account. We suggest that you consult your tax advisor before establishing a
retirement plan account.
The minimum account balance for all Benham Individual Retirement Accounts
(IRAs), excluding SEP-IRAs, is $1,000. If your balance falls below (continued on
the next page)
================================================================================
BENHAM MAXIMUM ANNUAL CONTRIBUTION
PLAN TYPE AVAILABLE TO PER PARTICIPANT
- --------------------------------------------------------------------------------
CONTRIBUTORY An employed indi- $2,000 or 100% of compensation
IRA vidual underage 70 1/2. (whichever is less).
- --------------------------------------------------------------------------------
SPOUSAL IRA A nonworking spouse $2,250 (can be split between
(under age 70 1/2) of a Spousal and Contributory IRAs,
wage earner. provided that no IRA receives
more than a total of $2,000).
- --------------------------------------------------------------------------------
ROLLOVER IRA An individual with a None, as long as total amount
distribution from an is eligible.
employer's retirement
plan or a rollover IRA.
- --------------------------------------------------------------------------------
SEP-IRA A self-employed indi- $22,500 or 15% of compensation
vidual or a business. (whichever is less).
- --------------------------------------------------------------------------------
MONEY Same as for SEP-IRA. $30,000 or 25% of compensation
PURCHASE PLAN (whichever is less). Annual
(KEOGH) contribution is mandatory.
- --------------------------------------------------------------------------------
PROFIT Same as for SEP-IRA. $22,500 or 15% of compensation
SHARING PLAN (whichever is less). Annual
(KEOGH) contribution is optional.
(table continued on next page)
For all Benham-sponsored retirement plans, you may begin taking distributions at
age 59 1/2 . You must begin to take required distributions by April 1 of the
year after you turn age 70 1/2. You may take distributions from your IRA or
SEP-IRA before you reach age 59 1/2; however, a penalty may apply.
26
<PAGE>
(continued from previous page)
the $1,000 per fund account minimum, your account may be closed (see page 23 for
details). This distribution may result in a taxable event and a possible penalty
for early withdrawal. The minimum fund account balance for all other
Benham-sponsored retirement plan accounts is $100. Benham charges no fees for
its IRAs but does charge low maintenance fees for its Koeghs.
YOU MUST COMPLETE SPECIFIC FORMS TO TAKE DISTRIBUTIONS (I.E., REDEEM SHARES)
FROM A BENHAM-SPONSORED RETIREMENT PLAN ACCOUNT. PLEASE CALL OUR SHAREHOLDER
RELATIONS DEPARTMENT AT 1-800-321-8321 FOR ASSISTANCE.
(table continued from previous page)
================================================================================
DEADLINE FOR OPENING ACCOUNT CONTRIBUTION DEADLINES
- --------------------------------------------------------------------------------
You may open an account anytime, Annual contributions can be made
but the deadline for establishing from January 1 through April 15 of
and funding an IRA for the prior the following tax year up to the year
tax year is April 15. you turn age 70 1/2.
- --------------------------------------------------------------------------------
Same as for Contributory IRA. Same as for Contributory IRA.
- --------------------------------------------------------------------------------
You may open a Rollover IRA Eligible rollover contributions must
account anytime. be made within 60 days of receiving
your distribution. There is no age
limit for rollover contributions.
- --------------------------------------------------------------------------------
You may open an account anytime, Must be made by employer's tax fil-
but the deadline for establishing and ing deadline (including extensions).
funding an account for the prior tax
year is the employer's tax deadline
(including extensions).
- --------------------------------------------------------------------------------
The end of the employer's plan Same as for SEP-IRA.
year, usually December 31.
- --------------------------------------------------------------------------------
The end of the employer's plan Same as for SEP-IRA.
year, usually December 31.
27
<PAGE>
- -------------------
[information in left margin of page]
Each January, you will be informed of the tax status of the dividends and
capital gain distributions for the previous year.
- -------------------
DISTRIBUTIONS AND TAXES
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
The Fund's dividends are declared daily, accrued throughout the month, and
distributed at the end of the month. In December, the Fund may distribute an
additional ordinary income dividend (consisting of net short-term capital gains
and undistributed income) in order to preserve its status as a regulated
investment company (mutual fund) under the Internal Revenue Code. Net long-term
capital gains, if any, are also declared and distributed in December. The
directors may modify the Fund's distribution policies at any time.
DISTRIBUTION OPTIONS. You may choose to receive dividends and capital gain
distributions in cash or to reinvest them in additional shares. (See "Directed
Dividends" on page 21 for further information.) Please indicate your choice on
your account application or contact our Shareholder Relations Department. See
page 23 for a description of our policy regarding uncashed distribution checks.
TAXES
The Fund intends to qualify as a regulated investment company under Subchapter M
of the Internal Revenue Code of 1986, as amended, by distributing all or
substantially all, of its net investment income and net realized capital gains
to shareholders each year.
The Fund's dividends and capital gain distributions are subject to federal
income tax and applicable state and local taxes whether they are received in
cash or reinvested. Distributions are generally taxable in the year they are
declared.
Dividends from net investment income (including net short-term capital gains, if
any) are taxable as ordinary income. Distributions of any net capital gains (net
long-term capital gains minus net short-term capital losses) designated by the
Fund as capital gain dividends are taxable as long-term capital gains,
regardless of how long you have held your shares. Ordinary income distribu-
28
<PAGE>
tions made by the Fund to corporate shareholders may qualify for the
dividends-received deduction available to corporations. Shareholders will be
notified each year of the amount, if any, which qualifies for this deduction.
The Fund will send you a tax statement (Form 1099) by January 31 showing the tax
status of distributions you received in the previous year and will file a copy
with the IRS. You may realize a capital gain or loss when you redeem (sell) or
exchange shares. For most types of accounts, the proceeds from your redemption
transactions will be reported to the IRS annually. However, because the tax
treatment depends on your purchase price and personal tax situation, you should
keep your regular account statements to use in determining your taxes.
"BUYING A DIVIDEND." The timing of your investment could have undesirable tax
consequences. If you buy shares on or just before the day the Fund declares a
dividend, you will pay full price for the shares and may receive a portion of
your investment back as a taxable distribution.
BACKUP WITHHOLDING. The Fund is required by federal law to withhold 31% of
reportable dividends, capital gain distributions, or redemptions payable to
shareholders who have not complied with IRS regulations. To avoid this
withholding requirement, you must certify on your account application or on IRS
Form W-9 that your social security or taxpayer identification number (TIN) is
correct and that you are not subject to backup withholding.
The Benham Group may refuse to sell shares to investors who have not complied
with this requirement, either before or at the time of purchase. Until we
receive your certified TIN, we may redeem your shares in the Fund at any time.
29
<PAGE>
- -------------------
[information in left margin of page]
The Benham Group serves more than 350,000 investors.
- -------------------
MANAGEMENT INFORMATION
ABOUT BENHAM EQUITY FUNDS
Benham Equity Funds (BEF) is a registered open-end management investment company
that was organized as a California corporation on December 31, 1987. BEF
currently consists of five series.
A board of directors oversees the Fund's activities and is responsible for
protecting shareholders' interests. The majority of directors are not otherwise
affiliated with BMC. BEF is not required to hold annual meetings, although
special meetings may be called for purposes such as electing or removing
directors or amending a series' advisory agreement or investment policies.
Shareholders are entitled to one vote for each share owned. Each Fund votes
separately on matters that pertain to it exclusively. Under California corporate
law, BEF shareholders have the right to cumulate votes in the election (or
removal) of directors.
THE BENHAM GROUP
Benham Management Corporation (BMC) is investment advisor to the funds in The
Benham Group, which currently constitute $10 billion in assets. BMC,
incorporated in California in 1971, is a wholly owned subsidiary of Benham
Management International, Inc. (BMI), which is also a California corporation.
BMI's primary business is to provide financial services to the general public.
Mr. Steven Colton, Portfolio Manager, has primary responsibility for the
day-to-day operation of the Fund. Mr. Colton also manages Benham Income & Growth
Fund and Benham Equity Growth Fund. Prior to joining BMC in 1987, Mr. Colton was
an Associate Engineer with Lockheed Missiles and Space Company (1986) and a
Stockbroker with Dean Witter Reynolds (1984 to 1986).
30
<PAGE>
ADVISORY AND SERVICE FEES
For investment advice and portfolio management services, the Fund pays BMC a
monthly investment advisory fee equal to its pro rata share of the dollar amount
derived from applying BEF's average daily net assets to an investment advisory
fee schedule. The investment advisory fee rate ranges from .50% to .19% of BEF's
average daily net assets, dropping as BEF's assets increase.
Advisory fees paid by the Fund to BMC for the fiscal year ended December 31,
1994, were equal to .25% of the Fund's average daily net assets and $2.50 per
$1,000 of the Fund's average daily net assets. These figures are net of expense
limitations.
To avoid duplicative investment advisory fees, the Fund does not pay BMC
investment advisory fees with respect to assets invested in shares of Benham
money market funds.
Benham Financial Services, Inc. (BFS), a wholly owned subsidiary of BMI, is
BEF's agent for transfer and administrative services. For administrative
services, the Fund pays BFS a monthly fee equal to its pro rata share of the
dollar amount derived from applying the average daily net assets of all of the
funds in The Benham Group to an administrative fee rate schedule. The
administrative fee rate ranges from .11% to .08% of average daily net assets,
dropping as Benham Group assets increase. For transfer agent services, the Fund
pays BFS monthly fees for each shareholder account maintained and for each
shareholder transaction executed during that month.
The Fund pays certain operating expenses directly, including, but not limited
to, custodian, audit, and legal fees; fees of the independent directors; costs
of printing and mailing prospectuses, statements of additional information,
proxy statements, notices, and reports to shareholders; insurance expenses; and
costs of registering the Fund's shares for sale under federal and state
securities laws. See the Statement of Additional Information for a more detailed
discussion of independent director compensation.
- -------------------
[information in right margin of page]
Benham Management Corporation provides investment advice and portfolio
management services to the Fund.
Benham Financial Services, Inc. provides administrative and transfer agent
services to the Fund.
- -------------------
31
<PAGE>
EXPENSE LIMITATION AGREEMENT
An expense limitation agreement between BMC and the Fund is described on page 3.
The Fund's total operating expenses for the fiscal year ended December 31, 1994,
were equal to .75% of the Fund's average daily net assets, or $7.50 per $1,000
of the Fund's average daily net assets. These figures are net of expense
limitations.
DISTRIBUTION OF SHARES
Benham Distributors Inc. (BDI) and BMC distribute and market Benham products and
services. BMC pays all expenses for promoting sales of and distributing the
Fund's shares. The Fund does not pay commissions to, or receive compensation
from, broker-dealers.
BDI is a wholly-owned subsidiary of BMI.
32
<PAGE>
INVESTMENT ADVISOR
BENHAM MANAGEMENT CORPORATION
1665 Charleston Road
Mountain View, California 94043
DISTRIBUTOR
BENHAM DISTRIBUTORS, INC.
1665 Charleston Road
Mountain View, California 94043
CUSTODIAN
STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, Massachusetts 02101
TRANSFER AGENT
BENHAM FINANCIAL SERVICES, INC.
1665 Charleston Road
Mountain View, California 94043
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
KPMG PEAT MARWICK LLP
3 Embarcadero Center
San Francisco, California 94111
LEGAL COUNSEL
DECHERT PRICE & RHOADS
1500 K Street, N.W. Suite 500
Washington, DC 20005
DIRECTORS
James M. Benham
John T. Kataoka
Myron S. Scholes
Kenneth E. Scott
Ezra Solomon
Isaac Stein
Jeanne D. Wohlers
33
<PAGE>
THE BENHAM GROUP OF INVESTMENT COMPANIES
Capital Preservation Fund
Capital Preservation Fund II
Benham Prime Money Market Fund
Benham Government Agency Fund
Benham Short-Term Treasury and Agency Fund
Benham Treasury Note Fund
Benham Long-Term Treasury and Agency Fund
Benham Adjustable Rate Government Securities Fund
Benham GNMA Income Fund
Benham Target Maturities Trust
Benham California Tax-Free and Municipal Funds*
Benham National Tax-Free Money Market Fund
Benham National Tax-Free Intermediate-Term Fund
Benham National Tax-Free Long-Term Fund
Benham Florida Municipal Money Market Fund**
Benham Florida Municipal Intermediate-Term Fund**
Benham Arizona Municipal Intermediate-Term Fund***
Benham Gold Equities Index Fund
Benham Income & Growth Fund
Benham Equity Growth Fund
Benham Utilities Income Fund
Benham Global Natural Resources Index Fund
Benham European Government Bond Fund
Benham Capital Manager Fund
* Available only to residents of California, Arizona, Colorado, Hawaii, Nevada,
New Mexico, Oregon, Texas, Utah, and Washington.
** Available only to residents of Florida, California, Georgia, Illinois,
Michigan, New Jersey, New York, and Pennsylvania.
***Available only to residents of Arizona, California, Colorado, Nevada, Oregon,
Washington, and Texas.
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NOTES:
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CONTENTS
Summary of Fund Expenses ............... 3
Financial Highlights ................... 4
How the Fund Works ..................... 6
Suitability ............................ 8
Other Investment Policies and Techniques 11
Portfolio Transactions ................. 14
Performance ............................ 14
Share Price ............................ 15
How to Invest .......................... 16
Shareholder Services ................... 20
Exchange Privilege ............ 20
Open Order Service ............ 20
Automatic Investment Services . 21
Broker-Dealer Transactions..... 22
TDD Service ................... 22
Emergency Services ............ 22
How to Redeem Your Investment .......... 23
About Benham-Sponsored Retirement Plans 26
Distributions and Taxes ................ 28
Management Information ................. 30
About Benham Equity Funds ..... 30
The Benham Group .............. 30
Advisory and Service Fees ..... 31
Expense Limitation Agreement .. 32
Distribution of Shares ........ 32
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BENHAM UTILITIES INCOME FUND
A SERIES OF BENHAM EQUITY FUNDS
THE BENHAM GROUP
1665 Charleston Road
Mountain View, CA 94043
Shareholder Relations: 1-800-321-8321 or 1-415-965-4222
Fund Information: 1-800-331-8331 or 1-415-965-4274
STATEMENT OF ADDITIONAL INFORMATION
February 24, 1995
This Statement is not a prospectus but should be read in conjunction with the
Fund's current Prospectus dated February 24, 1995. The Fund's Annual Report for
the fiscal year ended December 31, 1994, is included in this Statement of
Additional Information. To obtain a copy of the Prospectus, call or write The
Benham Group.
TABLE OF CONTENTS
Page
Investment Policies and Techniques 2
Investment Restrictions 11
Risk Factors 13
Portfolio Transactions 14
Valuation of Portfolio Securities 15
Performance 15
Taxes 17
About Benham Equity Funds 18
Directors and Officers 19
Investment Advisory Services 21
Administrative and Transfer Agent Services 23
Direct Fund Expenses 24
Expense Limitation Agreement 24
Additional Purchase and Redemption Information 25
Appendix 25
Financial Statements 26
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INVESTMENT POLICIES AND TECHNIQUES
The following paragraphs provide a more detailed description of the securities
and investment practices identified in the Prospectus. Unless otherwise noted,
the policies described in this Statement of Additional Information are not
fundamental and may be changed by the board of directors.
U.S. GOVERNMENT SECURITIES
The Fund may invest in U.S. government securities, including bills, notes, and
bonds issued by the U.S. Treasury and securities issued or guaranteed by
agencies or instrumentalities of the U.S. government. Some U.S. government
securities are backed by the direct "full faith and credit" pledge of the U.S.
government; others are supported by the right of the issuer to borrow from the
U.S. Treasury; others, such as securities issued by the Federal National
Mortgage Association, are supported by the discretionary authority of the U.S.
government to purchase the agencies' obligations; and others are supported only
by the credit of the issuing or guaranteeing instrumentality. There is no
assurance that the U.S. government will provide financial support to an
instrumentality it sponsors when it is not obligated by law to do so.
WHEN-ISSUED AND FORWARD-COMMITMENT AGREEMENTS
The Fund may engage in securities transactions on a when-issued or
forward-commitment basis, in which the transaction price and yield are each
fixed at the time the commitment is made, but payment and delivery occur at a
future date (typically 15 to 45 days later).
When purchasing securities on a when-issued or forward-commitment basis, the
Fund assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. While the Fund will make commitments to purchase or sell
securities on a when-issued or forward-commitment basis with the intention of
actually receiving or delivering them, it may nevertheless sell the securities
before the settlement date if it is deemed advisable as a matter of investment
strategy.
In purchasing securities on a when-issued or forward-commitment basis, the Fund
will establish and maintain until the settlement date a segregated account
consisting of cash, cash equivalents, or high-quality securities in an amount
sufficient to meet the purchase price. When the time comes to pay for
when-issued securities, the Fund will meet its obligations with available cash,
through the sale of securities, or, although it would not normally expect to do
so, through sales of the when-issued securities themselves (which may have a
market value greater or less than the Fund's payment obligation). Selling
securities to meet when-issued or forward-commitment obligations may generate
capital gains or losses.
As an operating policy, the Fund will not commit greater than 35% of its assets
to when-issued or forward-commitment agreements. If fluctuations in the value of
securities held cause more than 35% of the Fund's assets to be committed under
when-issued or forward-commitment agreements, the advisor need not sell such
commitments, but it will be restricted from entering into further agreements on
behalf of the Fund until the percentage of assets committed to such agreements
is reduced to 35%. In addition, as an operating policy, the
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Fund will not enter into when-issued or firm-commitment transactions with
settlement dates exceeding 120 days.
CONVERTIBLE SECURITIES
The Fund may buy securities that are convertible into common stock shares of
utility companies. Listed below is a brief description of the various types of
convertible securities the Fund may buy.
CONVERTIBLE BONDS are issued with lower coupons than nonconvertible bonds of the
same quality and maturity, but they give holders the option to exchange their
bonds for a specific number of shares of the company's common stock at a
predetermined price. This structure allows the convertible bond holder to
participate in share price movements in the company's common stock. The actual
return on a convertible bond may exceed its stated yield if the company's common
stock appreciates in value and if the option to convert to common shares becomes
more valuable.
CONVERTIBLE PREFERRED STOCKS are nonvoting equity securities that pay a fixed
dividend. These securities have a convertible feature similar to convertible
bonds; however, they do not have a maturity date. Due to their fixed-income
features, convertible issues typically are more sensitive to interest rate
changes than the underlying common stock. In the event of liquidation,
bondholders would have claims on company assets senior to those of stockholders;
preferred stockholders would have claims senior to those of common stockholders.
WARRANTS entitle the holder to buy the issuer's stock at a specific price for a
specific period of time. The price of a warrant tends to be more volatile than,
and does not always track, the price of the underlying stock. Warrants are
issued with expiration dates. Once a warrant expires, it has no value in the
market.
REPURCHASE AGREEMENTS
In a repurchase agreement (repo), the Fund buys a security at one price and
simultaneously agrees to sell it back to the seller at an agreed upon price on a
specified date (usually within seven days from the date of purchase) or on
demand. The repurchase price exceeds the purchase price by an amount that
reflects an agreed-upon rate of return and that is unrelated to the interest
rate on the underlying security.
The advisor attempts to minimize the risks associated with repurchase agreements
by adhering to the following criteria:
(1) Limiting the securities acquired and held by the Fund under repurchase
agreements to U.S. government securities;
(2) Entering into repurchase agreements only with primary dealers in U.S.
government securities (including bank affiliates) who are deemed to be
creditworthy under guidelines established by a nationally recognized statistical
rating organization and approved by the Fund's board of directors;
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(3) Monitoring the creditworthiness of all firms involved in repurchase
agreement transactions;
(4) Requiring the seller to establish and maintain collateral equal to 102% of
the agreed-upon resale price, provided, however, that the board of directors may
determine that a broker-dealer's credit standing is sufficient to allow
collateral to fall to as low as 101% of the agreed-upon resale price before the
broker-dealer deposits additional securities with the Fund's custodian or
sub-custodian;
(5) Investing no more than 15% of the Fund's total assets in repurchase
agreements that mature in more than seven days (together with any other illiquid
securities the Fund holds); and
(6) Taking delivery of securities subject to repurchase agreement and holding
them in a segregated account at the Fund's custodian bank.
The Fund has received permission from the Securities and Exchange Commission to
participate in pooled repurchase agreements collateralized by U.S. government
securities with other mutual funds advised by Benham Management Corporation
(BMC), the Fund's investment advisor. Pooled repos are expected to increase the
income the Fund can earn from repo transactions without increasing the risks
associated with these transactions.
FOREIGN SECURITIES
Although the Fund may buy securities of foreign issuers in foreign markets, most
of its foreign securities investments are made by purchasing American Depositary
Receipts (ADRs), "ordinary shares," or "New York shares." The Fund may invest in
foreign-currency-denominated debt or equity securities of companies engaged in
the utilities industry if BMC believes that such investments will be
advantageous to the Fund.
ADRs are dollar-denominated receipts representing interests in the securities of
a foreign issuer. They are issued by U.S. banks and traded on exchanges or over
the counter in the U.S. Ordinary shares are shares of foreign issuers that are
traded abroad and on a U.S. exchange. New York shares are shares that a foreign
issuer has allocated for trading in the U.S. ADRs, ordinary shares, and New York
shares all may be purchased with and sold for U.S. dollars, which protects the
Fund from the foreign settlement risks described below.
Investing in foreign companies may involve risks not typically associated with
investing in U.S. companies. The value of securities denominated in foreign
currencies and of dividends from such securities can change significantly when
foreign currencies strengthen or weaken relative to the U.S. dollar. Foreign
securities markets generally have less trading volume and less liquidity than
U.S. markets, and prices in some foreign markets can be very volatile.
Many foreign countries lack uniform accounting and disclosure standards
comparable to those that apply to U.S. companies, and it may be more difficult
to obtain reliable information regarding a foreign issuer's financial condition
and operations. In addition, the costs of foreign investing, including
withholding taxes, brokerage commissions, and custodial fees, are generally
higher than for U.S. investments.
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Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
governmental supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.
Investing abroad carries political and economic risks distinct from those
associated with investing in the U.S. Foreign investments may be affected by
actions of foreign governments that are adverse to the interests of U.S.
investors, including the possibility of expropriation or nationalization of
assets, confiscatory taxation, restrictions on U.S. investment, or restrictions
on the ability to repatriate assets or to convert currency into U.S. dollars.
There may be a greater possibility of default by foreign governments or
foreign-government-sponsored enterprises. Investments in foreign countries also
involve a risk of local political, economic, or social instability, military
action or unrest, or adverse diplomatic developments.
To offset the currency risks associated with investing in securities of foreign
issuers, the Fund may hold foreign currency deposits and may convert dollars and
foreign currencies in the foreign exchange markets. Currency conversion involves
dealer spreads and other costs, although commissions usually are not charged.
Currencies may be exchanged on a spot (i.e., cash) basis or by entering into
forward contracts to purchase or sell foreign currencies at a future date and
price. By entering into a forward contract to buy or sell the amount of foreign
currency involved in a security transaction for a fixed amount of U.S. dollars,
the advisor can protect the Fund against losses resulting from adverse changes
in the relationship between the U.S._dollar and the foreign currency during the
period between the date the security is purchased or sold and the date on which
payment is made or received. However, it should be noted that using forward
contracts to protect the Fund's foreign investments from currency fluctuations
does not eliminate fluctuations in the prices of the underlying securities
themselves. Forward contracts simply establish a rate of exchange that can be
achieved at some future point in time. Additionally, although forward contracts
tend to minimize the risk of loss due to a decline in the value of the hedged
currency, they also limit any gain that might result if the hedged currency's
value were to increase.
Foreign exchange dealers do not charge fees for currency conversions. Instead,
they realize a profit based on the difference (the spread) between the prices at
which they are buying and selling various currencies. A dealer may offer to sell
a foreign currency at one rate while simultaneously offering a lesser rate of
exchange on the purchase of that currency.
The advisor uses forward contracts for currency hedging purposes only and not
for speculative purposes. The Fund is not required to enter into forward
contracts with regard to its foreign holdings and will not do so unless this
procedure is deemed appropriate by the advisor.
The Fund's assets are valued daily in U.S. dollars, although foreign currency
holdings are not physically converted into U.S. dollars on a daily basis.
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DEPOSITARY RECEIPTS
American Depositary Receipts and European Depositary Receipts (ADRs and EDRs)
are receipts representing ownership of shares of a foreign-based issuer held in
trust by a bank or similar financial institution. These are designed for U.S.
and European securities markets as alternatives to purchasing underlying
securities in their corresponding national markets and currencies. ADRs and EDRs
can be sponsored or unsponsored.
Sponsored ADRs and EDRs are certificates in which a bank or financial
institution participates with a custodian. Issuers of unsponsored ADRs and EDRS
are not contractually obligated to disclose material information in the United
States. Therefore, there may not be a correlation between such information and
the market value of the unsponsored ADR or EDR.
RESTRICTED SECURITIES
Restricted securities held by the Fund generally can be sold in privately
negotiated transactions, pursuant to an exemption from registration under the
Securities Act of 1933, or in a registered public offering. Where registration
is required, the Fund may be required to pay all or a part of the registration
expense, and a considerable period may elapse between the time it decides to
seek registration of the securities and the time it is permitted to sell them
under an effective registration statement. If, during this period, adverse
market conditions were to develop, the Fund might obtain a less favorable price
than prevailed when it decided to try to register the securities.
SECURITIES LENDING
The Fund may lend its portfolio securities to earn additional income, subject to
the following guidelines prescribed by the board of directors:
(1) The borrower must provide and maintain collateral consisting of cash or full
faith and credit U.S. government securities equal to at least 102% of the value
of the securities loaned;
(2) The Fund must have the option to terminate the loan and recover its
securities within the normal settlement period for the types of securities
loaned; and
(3) The borrower must agree that the Fund will receive all dividends, interest,
or other distributions on loaned securities and that the Fund will be paid a
reasonable return on such loans, either in the form of a loan fee premium or by
allowing the Fund to retain part or all of the earnings or profits realized by
investing the cash collateral in full faith and credit U.S. government
securities.
If a borrower fails financially, there may be delays in recovering loaned
securities and loss in the value of collateral. However, loans will only be made
to parties that meet the guidelines prescribed by the board of directors.
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SHORT SALES AND PUT OPTIONS ON INDIVIDUAL SECURITIES
The Fund may buy puts and enter into short sales with respect to stocks
underlying its convertible security holdings. For example, if the advisor
anticipates a decline in the price of the stock underlying a convertible
security the Fund holds, it may purchase a put option on the stock or sell the
stock short. If the stock price subsequently declines, the proceeds of the short
sale or an increase in the value of the put option could be expected to offset
all or a portion of the effect of the stock's decline on the value of the
convertible security.
When the Fund enters into a short sale, it will be required to set aside
securities equivalent in kind and amount to those sold short (or securities
convertible or exchangeable into such securities) and will be required to
continue to hold them while the short sale is outstanding. The Fund will incur
transaction costs, including interest expenses, in connection with opening,
maintaining, and closing short sales.
FUTURES AND OPTIONS TRANSACTIONS
FUTURES CONTRACTS provide for the sale by one party and purchase by another
party of a specific security at a specified future time and price. Futures
contracts are traded on national futures exchanges. Futures exchanges and
trading are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission (CFTC), a U.S. government agency.
Although futures contracts, by their terms, call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date. Closing out a futures position is done by taking
an opposite position in an identical contract (i.e., buying a contract that has
previously been sold, or selling a contract that has previously been bought).
To initiate and maintain open positions in futures contracts, the Fund is
required to make a good faith margin deposit in cash or government securities
with a broker or custodian. A margin deposit is intended to assure completion of
the contract (delivery or acceptance of the underlying security) if it is not
terminated prior to the specified delivery date. Minimum initial margin
requirements are established by the futures exchanges and may be revised. In
addition, brokers may establish deposit requirements that are higher than the
exchange minimums.
After a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy margin requirements, the contract holder is
required to pay additional "variation" margin. Conversely, changes in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to or
from the futures broker as long as the contract remains open and do not
constitute margin transactions for purposes of the Fund's investment
restrictions.
Those who trade futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities they hold or expect to acquire
for investment purposes. Speculators are
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less likely to own the securities underlying the futures contracts they trade
and are more likely to use futures contracts with the expectation of realizing
profits from fluctuations in the prices of the underlying securities.
Although techniques other than trading futures contracts can be used to control
the Fund's exposure to market fluctuations, the use of futures contracts may be
a more effective means of hedging this exposure. While the Fund pays brokerage
commissions in connection with opening and closing out futures positions, these
costs are lower than the transaction costs incurred in the purchase and sale of
the underlying securities.
PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the Fund obtains
the right (but not the obligation) to sell the option's underlying instrument at
a fixed "strike" price. In return for this right, the Fund pays the current
market price for the option (known as the option premium). Options have various
types of underlying instruments, including specific securities, indexes of
securities prices, and futures contracts. The Fund may terminate its position in
a put option it has purchased by allowing it to expire or by exercising the
option. If the option is allowed to expire, the Fund will lose the entire
premium it paid. If the Fund exercises the option, it completes the sale of the
underlying instrument at the strike price. The Fund may also terminate a put
option position by closing it out in the secondary market at its current price
if a liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the option, a put buyer can
expect to suffer a loss (limited to the amount of the premium paid plus related
transaction costs).
The features of call options are essentially the same as those of put options,
except that the purchaser of a call option obtains the right to purchase, rather
than sell, the underlying instrument at the option's strike price. A call buyer
typically attempts to participate in potential price increases of the underlying
instrument with risk limited to the cost of the option if security prices fall.
At the same time, the buyer can expect to suffer a loss if security prices do
not rise sufficiently to offset the cost of the option.
WRITING PUT AND CALL OPTIONS. If the Fund writes a put option, it takes the
opposite side of the transaction from the option's purchaser. In return for
receipt of the premium, the Fund assumes the obligation to pay the strike price
for the option's underlying instrument if the other party chooses to exercise
the option. When writing an option on a futures contract, the Fund will be
required to make margin payments to a broker or custodian as described above for
futures contracts. The Fund may seek to terminate its position in a put option
it writes before exercise by closing out the option in the secondary market at
its current price. If the secondary market is not liquid for a put option the
Fund has written, however, the Fund must continue to be prepared to pay the
strike price while the option is outstanding, regardless of price changes, and
must continue to set aside assets to cover its position.
If security prices were to rise, a put writer would generally expect to profit,
although the gain would be limited to the amount of the premium received. If
security prices were to remain the same over time, it would be likely that the
writer would also profit by being able to close out the option at a lower price.
If security prices were to fall, the put writer would
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expect to suffer a loss. This loss should be less than the loss from purchasing
the underlying instrument directly, however, because the premium received for
writing the option should mitigate the effects of the decline.
Writing a call option obligates the Fund to sell or deliver the option's
underlying instrument, in return for the strike price, upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
COMBINED POSITIONS. The Fund may purchase and write options in combination with
one another, or in combination with futures or forward contracts, in order to
adjust the risk and return characteristics of the overall position. For example,
the Fund may purchase a put option and write a call option on the same
underlying instrument in order to construct a combined position whose risk and
return characteristics are similar to a futures contract. Another possible
combined position would involve writing a call option at one strike price and
buying a call option at a lower price, in order to reduce the risk of the
written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
OTC OPTIONS. Unlike exchange-traded options, which are standardized with respect
to the underlying instrument, expiration date, contract size, and strike price,
the terms of over-the-counter options (options not traded on exchanges)
generally are established through negotiation with the other party to the option
contract. While this type of arrangement allows the Fund greater flexibility in
tailoring an option to its needs, OTC options generally involve greater credit
risk than exchange-traded options, which are guaranteed by the clearing
organizations of the exchanges where they are traded. The risk of illiquidity is
also greater with OTC options, because these options generally can be closed out
only by negotiation with the other party to the option.
OPTIONS ON FUTURES. By purchasing an option on a futures contract, the Fund
obtains the right, but not the obligation, to sell the futures contract (a put
option) or to buy the contract (a call option) at a fixed strike price. The Fund
can terminate its position in a put option by allowing it to expire or by
exercising the option. If the option is exercised, the Fund completes the sale
of the underlying security at the strike price. Purchasing an option on a
futures contract does not require the Fund to make margin payments unless the
option is exercised.
CORRELATION OF PRICE CHANGES. Because there are a limited number of types of
exchange-traded options and futures contracts, it is likely that the
standardized contracts available will not match the Fund's current or
anticipated investments exactly. The Fund may invest in options and futures
contracts based on securities with issuers, maturities, or other characteristics
different from those of the securities in which it typically invests for
example, it may hedge intermediate-term securities with a futures contract based
on an index of long-
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term bond prices or hedge stock holdings with futures contracts on a broad-based
stock index such as the Standard & Poor's 500 Composite Stock Price Index (S&P
500) which involves a risk that the options or futures position will not track
the performance of the Fund's other investments.
Options and futures prices can also diverge from the prices of their underlying
instruments, even if the underlying instruments are well correlated with the
Fund's investments. Options and futures prices are affected by factors such as
current and anticipated short-term interest rates, changes in the volatility of
the underlying instrument, and the time remaining until expiration of the
contract; these factors may not affect security prices in the same way.
Imperfect correlation may also result from differing levels of demand in the
options and futures markets and the securities markets, from structural
differences in how options and futures and securities are traded, or from the
imposition of daily price fluctuation limits or trading halts. The Fund may
purchase or sell options and futures contracts with a greater or lesser value
than the securities it wishes to hedge or intends to purchase in an effort to
compensate for differences in volatility between the contract and the
securities, although this strategy may not be successful in all cases. If price
changes in the Fund's options or futures positions are poorly correlated with
its other investments, the positions may fail to produce anticipated gains or
result in losses that are not offset by gains in other investments.
LIQUIDITY OF FUTURES CONTRACTS AND OPTIONS. There is no assurance a liquid
secondary market will exist for any particular futures contract or option at any
particular time. Options may have relatively low trading volume and liquidity if
their strike prices are not close to the underlying instrument's current price.
In addition, exchanges may establish daily price fluctuation limits for futures
contracts and options and may halt trading if a contract's price increases or
decreases more than the limit in a given day. On volatile trading days when the
price fluctuation limit is reached or a trading halt is imposed, it may be
impossible for the Fund to enter into new positions or close out existing
positions. If the secondary market for a contract were not liquid, because of
price fluctuation limits or otherwise, prompt liquidation of unfavorable
positions could be difficult or impossible, and the Fund could be required to
continue holding a position until delivery or expiration regardless of changes
in its value. Under these circumstances, the Fund's access to assets held to
cover its future and options positions also could be impaired.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS. The Fund has filed a
notice of eligibility for exclusion as a "commodity pool operator" with the
Commodity Futures Trading Commission (CFTC) and the National Futures Association
which regulates trading in the futures markets. The Fund intends to comply with
Section 4.5 of the regulations under the extent to which the Fund can commit
assets to initial margin deposits and options premiums.
The Fund may enter into futures contracts, options, or options on futures
contracts, provided that such obligations represent no more than 20% of the
Fund's net assets. Under the Commodity Exchange Act, the Fund may enter into
futures and options transactions for hedging purposes without regard to the
percentage of assets committed to initial margin and option premiums and for
other than hedging purposes, provided that assets committed to initial margin
and option premiums do not exceed 5% of the Fund's net assets. To the extent
required by law, the Fund will set aside cash and appropriate liquid assets in a
segregated account to cover its obligations related to futures contracts and
options.
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The Fund intends to comply with tax rules applicable to regulated investment
companies, including a requirement that capital gains from the sale of
securities held less than three months constitute less than 30% of a Fund's
gross income for each fiscal year. Gains on some futures contracts and options
are included in this 30% calculation, which may limit the Fund's investments in
such instruments.
FUTURES AND OPTIONS RELATING TO FOREIGN CURRENCIES. The Fund may purchase and
sell currency futures and purchase and write currency options to increase or
decrease its exposure to different foreign currencies. The Fund may also
purchase and write currency options in conjunction with each other or with
currency futures or forward contracts.
Currency futures contracts are similar to forward currency exchange contracts,
except that they are traded on exchanges (and have margin requirements) and have
standard contract sizes and delivery dates. Most currency futures contracts call
for payment or delivery in U.S. dollars. The underlying instrument of a currency
option may be a foreign currency, which generally is purchased or delivered in
exchange for U.S. dollars, although it may be a futures contract. The purchaser
of a currency call obtains the right to purchase the underlying currency, and
the purchaser of a currency put obtains the right to sell the underlying
currency.
The uses and risks of currency futures and options are similar to those of
futures and options relating to securities or indexes, as described above.
Currency futures and options values can be expected to correlate with exchange
rates but may not reflect other factors that affect the value of the Fund's
investments. A currency hedge, for example, should protect a
deutsche-mark-denominated security from a decline in the deutsche mark, but it
will not protect the Fund against a price decline resulting from a deterioration
in the issuer's creditworthiness. Because the value of the Fund's
foreign-currency-denominated investments will change in response to many factors
other than exchange rates, it may not be possible to match the amount of
currency options and futures to the value of the Fund's investments over time.
INVESTMENT RESTRICTIONS
The Fund's investment restrictions are set forth below. Except for those
designated as operating policies, these restrictions are fundamental and may not
be changed without approval of "a majority of the outstanding voting securities"
of the Fund as defined in the Investment Company Act of 1940. Unless otherwise
indicated, percentage limitations included in the restrictions apply at the time
transactions are entered into. Accordingly, any later increase or decrease
beyond the specified limitation resulting from a change in the Fund's net assets
will not be considered in determining whether it has complied with its
investment restrictions.
(1) The Fund may not, with respect to 75% of its total assets, purchase the
securities of any issuer (other than securities issued or guaranteed by
the U.S. government or its agencies or instrumentalities) if, as a
result, (a) more than 5% of its total assets would be invested in
securities of that issuer, or (b) the Fund would hold more than 10% of
the outstanding voting securities of that issuer.
11
<PAGE>
(2) The Fund may not issue senior securities, except as permitted under the
Investment Company Act of 1940.
(3) As an operating policy, the Fund may not sell securities short, unless
it owns or has the right to obtain securities equivalent in kind and
amount to the securities sold short and provided that transactions in
futures contracts and options are not deemed to constitute selling
securities short.
(4) As an operating policy, the Fund may not purchase securities on margin,
except that the Fund may obtain such short-term credits as are
necessary for the clearance of transactions and provided that margin
payments in connection with futures contracts and options on futures
contracts will not constitute purchasing securities on margin.
(5) The Fund may not borrow money except for temporary or emergency
purposes (not for leveraging or investment) in an amount exceeding
33-1/3% of its total assets (including the amount borrowed) less
liabilities (other than borrowings). Any borrowings that exceed this
amount will be reduced within three days (not including Sundays and
holidays) to the extent necessary to comply with the 33-1/3%
limitation. As an operating policy, the Fund may not purchase any
security when borrowings representing more than 5% of its total assets
are outstanding.
(6) The Fund may not underwrite securities issued by others, except to the
extent that the Fund may be considered an underwriter within the
meaning of the Securities Act of 1933 in the disposition of restricted
securities.
(7) As an operating policy, the Fund may not purchase any security if, as a
result, more than 15% of its net assets would be invested in securities
that are illiquid by virtue of legal or contractual restrictions on
resale or the absence of a readily available market.
(8) The Fund may not purchase or sell real estate unless acquired as a
result of ownership of securities or other instruments (but this will
not prevent the Fund from investing in securities or other instruments
backed by real estate or the securities of companies engaged in the
real estate business). As an operating policy, the Fund may not invest
in securities of real estate investment trusts that are not readily
marketable or invest in securities of real estate limited partnerships
that are not listed on the New York Stock Exchange or the American
Stock Exchange or traded on the NASDAQ National Market System.
(9) The Fund may not purchase or sell physical commodities unless acquired
as a result of ownership of securities or other instruments (but this
will not prevent the Fund from purchasing or selling options and
futures contracts or from investing in securities or other instruments
backed by physical commodities).
(10) The Fund may not lend any security or make any other loan if, as a
result, more than 33-1/3% of its total assets would be lent to other
parties, provided that this restriction does not apply to purchases of
debt securities or to repurchase agreements.
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<PAGE>
(11) As an operating policy, the Fund may not (a) purchase securities of
other investment companies, except in the open market where no
commission except the ordinary broker's commission is paid or (b)
purchase or retain securities issued by other open-end investment
companies. Restrictions (a) and (b) do not apply to securities received
as dividends, through offers of exchange, or as a result of a
reorganization, consolidation, or merger.
(12) As an operating policy, the Fund may not purchase securities of any
issuer (other than securities issued or guaranteed by domestic or
foreign governments or political subdivisions thereof) if, as a result,
more than 5% of its total assets would be invested in the securities of
business enterprises that, including predecessors, have a record of
less than three years of continuous operation.
(13) As an operating policy, the Fund may not purchase warrants, valued at
the lower of cost or market, in excess of 5% of the Fund's net assets.
Included in that amount, but not to exceed 2% of the Fund's net assets,
may be warrants that are not listed on the New York Stock Exchange or
the American Stock Exchange. Warrants acquired by the Fund in units or
attached to securities are not subject to these restrictions.
(14) As an operating policy, the Fund may not invest in oil, gas, or other
mineral exploration or development programs or leases.
(15) As an operating policy, the Fund may not purchase the securities of any
issuer if those officers and directors of BEF and those officers and
directors of BMC who individually own more than 1/2 of 1% of the
securities of such issuer together own more than 5% of such issuer's
securities.
RISK FACTORS
Because the Fund concentrates its assets in the utilities industry, its
performance depends in part on how favorably investors perceive this sector of
the market relative to other sectors (such as transportation or technology). Of
course, investor perceptions of the utilities industry are driven not only by
comparisons with other market sectors but by trends and events within the
utilities industry. The following is a brief outline of risk factors associated
with investment in the utilities industry.
REGULATORY RISKS. Regulators (primarily at the state level) monitor and control
public utility company revenues and costs. Regulators can limit profits and
dividends paid to investors; they may also restrict a company's access to new
markets. Some analysts observe that state regulators have become increasingly
active in developing and promoting energy policy through the regulatory process.
NATURAL RESOURCE RISKS. Swift and unpredictable changes in the price and supply
of natural resources can hamper utility company profitability. These changes may
be caused by political events, energy conservation programs, the success of
exploration projects, or tax and other regulatory policies of various
governments.
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<PAGE>
ENVIRONMENTAL RISKS. There are considerable costs associated with environmental
compliance, nuclear waste cleanup, and safety regulation. For example,
coal-burning utilities are under pressure to curtail sulfur emissions, and
utilities in general increasingly are called upon by regulators to bear
environmental costs, which may not be easily recovered through rate increases or
business growth.
Changing weather patterns and natural disasters affect consumer demand for
utility services (e.g., electricity, heat, and air conditioning), which, in
turn, affects utility revenues.
TECHNOLOGY AND COMPETITIVE RISKS. The introduction and phase-in of new
technologies can affect a utility company's competitive strength. The race by
long-distance telephone providers to incorporate fiber optic technology is one
example of competitive risk within the utilities industry.
The increasing role of independent power producers (IPPs) in the natural gas and
electric utility segments of the utilities industry is another example of
competitive risk. Typically, IPPs wholesale power to established local
providers, but there is a trend toward letting them sell power directly to
industrial consumers. Co-generation facilities, such as those of landfill
operators that produce methane gas as a byproduct of their core business, pose
another competitive challenge to gas and electric utilities. In addition to
offering a less expensive source of power, these companies may receive more
favorable regulatory treatment than utilities seeking to expand facilities that
consume nonrenewable energy sources.
INTEREST RATE RISKS. Utility companies usually finance capital expenditures
(e.g., new plant construction) by issuing long-term debt. Rising long-term
interest rates increase interest expenses and reduce company earnings.
PORTFOLIO TRANSACTIONS
The Fund's assets are invested by BMC in a manner consistent with the Fund's
investment objectives, policies, and restrictions and with any instructions from
the board of directors that may be issued from time to time. Within this
framework, BMC is responsible for making all determinations as to the purchase
and sale of portfolio securities and for taking all steps necessary to implement
securities transactions on behalf of the Fund. In placing orders for the
purchase and sale of portfolio securities, BMC will use its best efforts to
obtain the best possible price and execution and otherwise will place orders
with broker-dealers subject to and in accordance with any instructions from the
board of directors. BMC will select broker-dealers to execute portfolio
transactions on behalf of the Fund solely on the basis of best price and
execution.
The Fund's annual portfolio turnover rate is not expected to exceed 150%.
Because a higher turnover rate increases transaction costs and may increase
taxable capital gains, BMC carefully weighs the potential benefits of short-term
investing against these considerations.
The Fund's portfolio turnover rates for the fiscal years ended December 31, 1994
and December 31, 1993 were 61.42% and 38.76%, respectively. For the fiscal years
ended December 31, 1994 and December 31, 1993, the Fund paid brokerage
commissions of $180,145 and $266,365, respectively.
14
<PAGE>
VALUATION OF PORTFOLIO SECURITIES
The Fund's net asset value per share (NAV) is determined by Benham Financial
Services, Inc. (BFS) at 1:00 p.m. Pacific Time each day the New York Stock
Exchange (NYSE) is open for business. The NYSE has designated the following
holiday closings for 1995: New Year's Day (observed), Washington's Birthday,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day. Although BFS expects the same holiday schedule to be observed in
the future, the NYSE may modify its holiday schedule at any time.
BMC typically completes its trading on behalf of the Fund in various markets
before the NYSE closes for the day. Securities are valued at market, depending
upon the market or exchange on which they trade. Price quotations for
exchange-listed securities are taken from the primary exchanges on which these
securities trade. Stocks traded on exchanges or over-the-counter are valued
according to last sale prices, if such prices are available, or at the current
bid price. Fixed-income securities are priced at market value on the basis of
market quotations supplied by independent pricing services. Foreign currency
exchange rates are also determined prior to the close of the NYSE. Trading of
securities in foreign markets may not take place on every day the NYSE is open,
and trading takes place in various foreign markets on days on which the NYSE and
the Funds' offices are not open and the Funds' net asset values are not
calculated. The Fund's net asset value may be significantly affected on days
when shareholders have no access to the Funds. Securities for which market
quotations are not readily available, or which may change in value due to events
occurring after their primary exchange has closed for the day, are valued at
fair market value as determined in good faith under the direction of the board
of directors.
PERFORMANCE
The Fund's yields and total returns may be quoted in advertising and sales
literature. These figures, as well as the Fund's share price, will vary. Past
performance should not be considered an indication of future results.
Yield quotations are based on the investment income per share earned during a
particular 30-day period, less expenses accrued during the period (net
investment income), and are computed by dividing the Fund's net investment
income by its share price on the last day of the period, according to the
following formula:
YIELD = 2 [(a - b + 1)6 - 1]
-----
cd
where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of reimbursements), c = the average daily number of shares
outstanding during the period that were entitled to receive dividends, and d =
the maximum offering price per share on the last day of the period.
For the 30-day period ended December 31, 1994, the Fund's yield was 4.95%.
15
<PAGE>
Total returns quoted in advertising and sales literature reflect all aspects of
the Fund's return, including the effect of reinvesting dividends and capital
gain distributions and any change in the Fund's net asset value per share during
the period.
Average annual returns are calculated by determining the growth or decline in
value of a hypothetical historical investment in the Fund over a stated period
and then calculating the annually compounded percentage rate that would have
produced the same result if the rate of growth or decline in value had been
constant throughout the period. For example, a cumulative total return of 100%
over ten years would produce an average annual return of 7.18%, which is the
steady annual rate that would equal 100% growth on a compounded basis in ten
years. While average annual returns are a convenient means of comparing
investment alternatives, investors should realize that the Fund's performance is
not constant over time but changes from year to year and that average annual
returns represent averaged figures as opposed to actual year-to-year
performance.
Average annual returns for periods of less than one year are calculated by
determining the Fund's total return for the period, extending that return for a
full year (assuming that performance remains constant throughout the year), and
quoting the result as an annual return. Because the Fund's return may not remain
constant over the course of a year, these performance figures should be viewed
as strictly hypothetical.
In addition to average annual returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be quoted
as a percentage or as a dollar amount and may be calculated for a single
investment, a series of investments, or a series of redemptions over any time
period. Total returns may be broken down into their components of income and
capital (including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return. The Fund's average annual total return for the fiscal year ended
December 31, 1994 was -10.03%; its average annual total return from March 1,
1993 (commencement of operations), through December 31, 1994, was -2.26%.
Performance information may be quoted numerically or in a table, graph, or
similar illustration.
The Fund's performance may be compared with the performance of other mutual
funds tracked by mutual fund rating services or with other indexes of market
performance. This may include comparisons with funds that, unlike Benham funds,
are sold with a sales charge or deferred sales charge. Sources of economic data
that may be used for such comparisons may include, but are not limited to: U.S.
Treasury bill, note, and bond yields, money market fund yields, U.S. government
debt and percentage held by foreigners, the U.S. money supply, net free
reserves, and yields on current-coupon GNMAs (source: Board of Governors of the
Federal Reserve System); the federal funds and discount rates (source: Federal
Reserve Bank of New York); yield curves for U.S. Treasury securities and
AA/AAA-rated corporate securities (source: Bloomberg Financial Markets); yield
curves for AAA-rated tax-free municipal securities (source: Telerate); yield
curves for foreign government securities (sources: Bloomberg Financial Markets
and Data Resources, Inc.); total returns on foreign bonds (source: J.P. Morgan
Securities Inc.); various U.S. and foreign government reports; the junk bond
market (source: Data Resources, Inc.); the CRB Futures Index (source: Commodity
Index Report); the price of gold (sources: London a.m./p.m. fixing and New York
Comex
16
<PAGE>
Spot Price); rankings of any mutual fund or mutual fund category tracked
by Lipper Analytical Services, Inc. or Morningstar, Inc.; mutual fund rankings
published in major, nationally distributed periodicals; data provided by the
Investment Company Institute; Ibbotson Associates, Stocks, Bonds, Bills, and
Inflation; major indexes of stock market performance; and indexes and historical
data supplied by major securities brokerage or investment advisory firms. The
Fund may also utilize reprints from newspapers and magazines furnished by third
parties to illustrate historical performance.
Indexes may assume reinvestment of dividends, but generally they do not reflect
administrative and management costs such as those incurred by a mutual fund.
Occasionally, statistics may be used to illustrate Fund volatility or risk.
Measures of volatility or risk are generally used to compare the Fund's net
asset value or performance to a market index. One measure of volatility is
"beta." Beta expresses Fund volatility relative to the total market as
represented by the S&P 500. A beta of more than 1.00 indicates volatility
greater than the market, and a beta of less than 1.00 indicates volatility less
than the market. Another measure of volatility or risk is "standard deviation."
Standard deviation is used to measure the variability of net asset value or
total return relative to an average over a specified period of time. The premise
is that greater volatility connotes greater risk undertaken to achieve a desired
performance.
The Fund's shares are sold without a sales charge (or "load"). No-load funds
offer an advantage to investors when compared to load funds with comparable
investment objectives and strategies. For example, if you invest $10,000 in a
no-load fund, 100% of your investment is used to buy shares. If you invest
$10,000 in a fund with a 5.5% load, only $9,450 ($10,000 minus $550) is used to
buy shares. Over time, this difference can have a significant effect on total
return. Assuming a compounded annual growth rate of 10% for both investments,
the no-load fund investment would be worth $25,937 after ten years, while the
load fund investment would be worth only $24,511.
The Benham Group has distinguished itself as an innovative provider of low-cost,
true no-load mutual funds. Among other innovations, The Benham Group established
the first no-load fund that invests primarily in zero-coupon U.S. Treasury
securities; the first no-load double tax-free California short-term bond fund;
the first no-load adjustable rate government securities fund; the first no-load
AAA-rated European government bond fund; and the first no-load utilities fund
designed to pay monthly dividends.
The advisor may obtain ratings on the safety of Fund shares from one or more
nationally recognized statistical rating organizations (rating agencies) and may
publish such ratings in advertisements and sales literature.
TAXES
The Fund intends to qualify each year as a "regulated investment company" under
Subchapter M of the Internal Revenue Code. By so qualifying, the Fund will be
exempt from federal and California income taxes to the extent that substantially
all of its net investment income and net realized capital gains are distributed
to shareholders.
17
<PAGE>
Distributions from the Fund are taxable to shareholders regardless of whether
they are taken in cash or reinvested in additional shares. For federal income
tax purposes, shareholders receiving distributions in the form of additional
shares will have a basis in each such share equal to the Fund's net asset value
per share on the reinvestment date.
Distributions of net investment income and net short-term capital gains are
taxable to shareholders as ordinary income. To the extent that the Fund's
dividends consist of dividend income from domestic corporations, such dividends
may be eligible for the dividends-received deduction available to corporations.
Shareholders will be notified annually of the federal tax status of
distributions.
As of December 31, 1994, the Fund had a capital loss carryover of $7,035,543
that will expire on December 31, 2002. No capital gain distributions will be
made by the Fund until its capital loss carryovers have been offset or have
expired.
Upon redeeming, selling, or exchanging shares of the Fund, a shareholder will
realize a taxable gain or loss depending upon his or her basis in the shares
liquidated. The gain or loss generally will be long-term or short-term,
depending on the length of time the shares were held. However, a loss recognized
by a shareholder in the disposition of shares on which capital gain dividends
were paid (or deemed paid) before the shareholder had held his or her shares for
more than six months would be treated as a long-term capital loss for tax
purposes. A gain realized on the redemption, sale, or exchange of shares would
not be affected by the reacquisition of shares. A loss realized on the
redemption, sale, or exchange of shares would be disallowed to the extent that
the shares disposed of were replaced (whether through reinvestment of
distributions or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the date shares were disposed of. Under such
circumstances, the basis of the shares acquired would be adjusted to reflect the
disallowed loss.
The information above is only a summary of some of the tax considerations
affecting the Fund and its shareholders; no attempt has been made to discuss
individual tax consequences. Shareholders who are neither citizens nor residents
of the U.S. may be subject to a nonresident alien withholding tax of 30% or a
lower treaty rate, depending on the country in which they reside. The Fund's
distributions also may be subject to state, local, or foreign taxes. A
prospective investor may wish to consult a tax advisor to determine whether the
Fund is a suitable investment based on the investor's tax situation.
ABOUT BENHAM EQUITY FUNDS
Benham Equity Funds (BEF) was organized as a California corporation on December
31, 1987, under the name "Benham Equities, Inc." The corporation was renamed
Benham Equity Funds on September 2, 1988. BEF is authorized to issue ten classes
of shares and to issue two billion (2,000,000,000) shares of each such class.
Within each class, the directors may issue an unlimited number of series.
Currently, there are four classes of shares: Benham Gold Equities Index Fund,
Benham Income & Growth Fund, Benham Equity Growth Fund, and Benham Utilities
Income Fund. With respect to each class, shares issued are fully paid and
nonassessable and have no preemptive, conversion, or similar rights. All
consideration
18
<PAGE>
received by BEF for shares of any class, and all assets, income, and gains (or
losses) earned thereon, belong to that class exclusively and are subject to
related liabilities.
Shares of each class have equal voting rights, provided that each class votes
separately on matters that pertain to it exclusively. Each shareholder is
entitled to cast one vote for each share held in his or her name as of the
record date for a shareholder meeting. Under California Corporations Code
Section 708, shareholders have the right to cumulate votes in the election (or
removal) of directors. For example, if six directors are proposed for election,
a shareholder may cast six votes for a single candidate, three votes for each of
two candidates, etc.
CUSTODIAN BANK: State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02101, is custodian of the Fund's assets. Services
provided by the custodian bank include (i) settling portfolio purchases and
sales, (ii) reporting failed trades, (iii) identifying and collecting portfolio
income, and (iv) providing safekeeping of securities. The custodian takes no
part in determining the Fund's investment policies or in determining which
securities are sold or purchased by the Fund.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT: KPMG Peat Marwick LLP, 3 Embarcadero
Center, San Francisco, California 94111, serves as BEF's independent certified
public accountant and provides services including (i) audit of annual financial
statements and (ii) preparation of annual federal income tax returns filed on
behalf of each series of BEF.
DIRECTORS AND OFFICERS
BEF's activities are overseen by a board of directors, including five
independent directors. The individuals listed below whose names are marked with
an asterisk (*) are "interested persons" of BEF (as defined in the Investment
Company Act of 1940) by virtue of, among other things, their affiliation with
either BEF; BEF's investment advisor, Benham Management Corporation (BMC); BEF's
agent for transfer and administrative services, Benham Financial Services, Inc.
(BFS); BEF's distribution agent, Benham Distributors, Inc. (BDI); the parent
corporation, Benham Management International, Inc. (BMI); or other funds advised
by BMC. Each director listed below also serves as a trustee or director of other
funds in The Benham Group. Unless otherwise noted, dates in parentheses indicate
the dates the director or officer began his or her service in a particular
capacity. The directors' and officers' address is 1665 Charleston Road, Mountain
View, California 94043.
*JAMES M. BENHAM, chairman of the board of directors (1988). Mr. Benham is also
chairman of the boards of BFS (1985), BMC (1971), BMI (1982), and BDI (1988);
president of BMC (1971), BMI (1982), and BDI (1988); and a member of the board
of governors of the Investment Company Institute (1989) and the Mutual Fund
Education Alliance (formerly the No-Load Mutual Fund Association, 1974). Mr.
Benham has been in the securities business since 1963, and he frequently
comments through the media on economic conditions, investment strategies, and
the securities markets.
*JOHN T. KATAOKA, director, president, and chief executive officer (1988). Mr.
Kataoka is also a director and president of BFS (1985); director and executive
vice president of BMC and BMI (1984); and executive vice president and chief
operating officer of BDI (1988).
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<PAGE>
MYRON S. SCHOLES, independent director (1988). Mr. Scholes is a principal of
Long-Term Capital Management (1993). He is also Frank E. Buck Professor of
Finance at the Stanford Graduate School of Business (1983), a director of
Dimensional Fund Advisors (1982) and the Smith Breeden Family of Funds (1992).
From August 1991 to June 1993, Mr. Scholes was a managing director of Salomon
Brothers Inc. (securities brokerage).
KENNETH E. SCOTT, independent director (1988). Mr. Scott is Ralph M. Parsons
Professor of Law and Business at Stanford Law School (1972) and a director of
RCM Capital Management (June 1994).
EZRA SOLOMON, independent director (1988). Mr. Solomon is Dean Witter Professor
of Finance Emeritus at the Stanford Graduate School of Business, where he served
as Dean Witter Professor of Finance from 1965 to 1990, and a director of
Encyclopedia Britannica.
ISAAC STEIN, independent director (1992). Mr. Stein is former chairman of the
board (1990 to 1992) and chief executive officer (1991 to 1992) of Esprit de
Corp. (clothing manufacturer). He is a member of the board of Raychem
Corporation (electrical equipment, 1993), president of Waverley Associates, Inc.
(private investment firm, 1983), and a director of ALZA Corporation
(pharmaceuticals, 1987). He is also a trustee of Stanford University (1994) and
chairman of Stanford Health Services (hospital, 1994).
JEANNE D. WOHLERS, independent director (1988). Ms. Wohlers is a private
investor and an independent director and partner of Windy Hill Productions, LP.
Previously, she served as vice president and chief financial officer of Sybase,
Inc. (software company, 1988 to 1992).
*BRUCE R. FITZPATRICK, vice president, chief financial officer, and treasurer
(1988).
*DOUGLAS A. PAUL, secretary (1988), vice president (1990), and general counsel
(1990).
*ANN N. MCCOID, controller (1988).
As of January 31, 1995, the Fund's directors and officers as a group owned less
than 1% of the Fund's outstanding shares.
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<PAGE>
The following table summarizes the compensation that the directors of the Fund
received for the Fund's fiscal year ended December 31, 1994, as well as the
compensation received for serving as director or trustee of all other Benham
funds.
<TABLE>
<CAPTION>
DIRECTOR COMPENSATION FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1994
=============================================================================================================
NAME OF DIRECTOR AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL TOTAL COMPENSATION
COMPENSATION FROM BENEFITS ACCRUED AS BENEFITS UPON FROM FUND AND FUND
EACH FUND* PART OF FUND EXPENSES RETIREMENT COMPLEX** PAID TO
DIRECTORS
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
James M. Benham $0 Not Applicable Not Applicable $0
- -------------------------------------------------------------------------------------------------------------
John T. Kataoka $0 Not Applicable Not Applicable $0
- -------------------------------------------------------------------------------------------------------------
Myron S. Scholes $1,972 Not Applicable Not Applicable $62,000
- -------------------------------------------------------------------------------------------------------------
Kenneth E. Scott $2,000 Not Applicable Not Applicable $72,250
- -------------------------------------------------------------------------------------------------------------
Ezra Solomon $1,970 Not Applicable Not Applicable $74,750
- -------------------------------------------------------------------------------------------------------------
Isaac Stein $1,894 Not Applicable Not Applicable $68,750
- -------------------------------------------------------------------------------------------------------------
Jeanne D. Wohlers $1,962 Not Applicable Not Applicable $71,000
=============================================================================================================
</TABLE>
* Utilities Income Fund commenced operations on March 1, 1993.
** The Benham Group fund complex currently consists of 41 investment companies.
INVESTMENT ADVISORY SERVICES
The Fund has an investment advisory agreement with Benham Management Corporation
(BMC), dated December 18, 1992, that was approved by BMC as sole shareholder on
February 26, 1993.
BMC is a California corporation and a wholly owned subsidiary of Benham
Management International, Inc. (BMI). BMI is a California corporation owned by
Mr. Benham and a group of private investors. As owner of 100% of BMI's voting
stock, Mr. Benham controls both BMI and BMC. BMC has been a registered
investment advisor since 1971 and is investment advisor to other funds in The
Benham Group.
James M. Benham and John T. Kataoka are directors and officers of BMC. Messrs.
Benham and Kataoka also serve as directors, and Mr. Kataoka serves as president,
of BEF.
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<PAGE>
The Fund's agreement with BMC continues from year to year provided that it is
approved at least annually by vote of a majority of the Fund's shareholders or
by vote of a majority of the Fund's directors, including a majority of those
directors who are neither parties to the agreement nor interested persons of any
such party, cast in person at a meeting called for the purpose of voting on such
approval.
The investment advisory agreement is terminable on sixty days' written notice,
either by the Fund or by BMC, to the other party and terminates automatically in
the event of its assignment.
Pursuant to the investment advisory agreement, BMC provides the Fund with
investment advice and portfolio management services in accordance with the
Fund's investment objectives, policies, and restrictions. BMC determines which
securities will be purchased and sold by the Fund. It also assists the Fund's
officers in carrying out decisions made by the board of directors.
Under the investment advisory agreement, the Fund pays BMC a monthly investment
advisory fee based on its pro rata share of the dollar amount derived from
applying BEF's average daily net assets to the following investment advisory fee
rate schedule:
.50% of the first $100 million
.45% of the next $100 million
.40% of the next $100 million
.35% of the next $100 million
.30% of the next $100 million
.25% of the next $1 billion
.24% of the next $1 billion
.23% of the next $1 billion
.22% of the next $1 billion
.21% of the next $1 billion
.20% of the next $1 billion
.19% of net assets over $6.5 billion
For the fiscal year ending December 31, 1994, the Fund paid $415,129 in
investment advisory fees to BMC. The Fund paid no investment advisory fees to
BMC for the fiscal period March 1, 1993 (commencement of operations), through
December 31, 1993.
22
<PAGE>
ADMINISTRATIVE AND TRANSFER AGENT SERVICES
Benham Financial Services, Inc. (BFS), a wholly owned subsidiary of BMI, is
BEF's agent for transfer and administrative services. For administrative
services, the Fund pays BFS a monthly fee based on its pro rata share of the
dollar amount derived from applying the aggregate average daily net assets of
all of the funds in The Benham Group to the following administrative fee rate
schedule:
GROUP ASSETS ADMINISTRATIVE FEE RATE
up to $4.5 billion .11%
up to $6 billion .10
up to $9 billion .09
over $9 billion .08
Prior to May 1, 1993, the administrative fee rate schedule ranged from .10% for
assets up to $4.5 billion to .07% for assets over $7.5 billion. This fee rate
schedule was adopted by BFS on a voluntary basis effective January 1, 1991, and
then formalized under a revised Administrative Services and Transfer Agency
Agreement that became effective on June 1, 1992.
For transfer agent services, the Fund pays BFS monthly fees of $1.3958 for each
shareholder account maintained and $1.35 for each shareholder transaction
executed during the month.
Administrative service and transfer agent fees paid by the Fund to BFS for the
fiscal years ended December 31, 1994, and 1993 are indicated in the tables
below. Fee amounts are net of expense limitations as described on the next page.
ADMINISTRATIVE FEES
FISCAL FISCAL
1994 1993*
$163,339 $113,358
TRANSFER AGENT FEES
FISCAL FISCAL
1994 1993*
$447,668 $184,307
*For the fiscal period March 1, 1993 (commencement of operations), through
December 31, 1993.
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<PAGE>
DIRECT FUND EXPENSES
The Fund pays certain operating expenses that are not assumed by BMC or BFS.
These include fees and expenses of the independent directors; custodian, audit,
and pricing fees; fees of outside counsel and counsel employed directly by BEF;
costs of printing and mailing prospectuses, statements of additional
information, notices, confirmations, and reports to shareholders; fees for
registering the Fund's shares under federal and state securities laws; brokerage
fees and commissions; trade association dues; costs of fidelity and liability
insurance policies covering the Fund; costs for incoming WATS lines maintained
to receive and handle shareholder inquiries; and organizational costs.
EXPENSE LIMITATION AGREEMENT
On June 1, 1992, the directors established a Reimbursement and Expense
Allocation Agreement (R&EA Agreement) between BEF, BMC, and BFS, pursuant to
which BMC and BFS would limit the Fund's expenses to .75% of the Fund's average
daily net assets. Amounts absorbed on behalf of the Fund were apportioned to BMC
and BFS based on the income each had received from the Fund. The R&EA Agreement
provided further that BMC and BFS could recover amounts absorbed on behalf of
the Fund during the preceding 11 months, if, and to the extent that, for any
given month, the Fund's expenses were less than the expense limit in effect at
that time.
The R&EA Agreement was superseded by an Expense Reimbursement Agreement on June
1, 1993. The Expense Reimbursement Agreement placed sole responsibility for
expense limitations with BMC, and, like the preceding agreements, provided that
BMC could recover amounts absorbed on behalf of the Fund during the preceding 11
months if, and to the extent that, for any given month, the Fund's expenses were
less than .75% of average daily net assets. The Expense Reimbursement Agreement
included a provision giving BFS the ability to recover amounts absorbed on
behalf of the Fund under the R&EA Agreement for up to 11 months following June
1, 1993, subject to the conditions described for recoupments by BMC. On October
16, 1993, the board of directors approved an amended Expense Reimbursement
Agreement that contained no material revisions with respect to the Fund.
VOLUNTARY EXPENSE LIMITATION. BMC voluntarily agreed to absorb all the Fund's
expenses through May 31, 1993. On June 1, 1993, the Fund began absorbing
expenses equal to .15% of average daily net assets. This expense cap was raised
by .15% of average daily net assets as of the first day of each subsequent month
until the .75% contractual cap was reached on October 1, 1993. BMC's voluntary
expense limitations are not eligible for recoupment (as described above with
respect to the contractual expense limitation agreement).
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<PAGE>
NET AMOUNTS ABSORBED (RECOUPED) BY BMC AND BFS
FISCAL FISCAL
1994 1993*
$112,324 $515,240
*For the fiscal period March 1, 1993 (commencement of operations), through
December 31, 1993.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Fund's shares are continuously offered at net asset value. Share
certificates are issued (without charge) only when requested in writing.
Certificates are not issued for fractional shares. Dividend and voting rights
are not affected by the issuance of certificates.
The Benham Group may reject or limit the amount of an investment to prevent any
one shareholder or affiliated group from controlling BEF or one of its series;
to avoid jeopardizing a series' tax status; or whenever, in management's
opinion, such rejection is in BEF's or a series' best interest. As of January
31, 1995, Charles Schwab & Company, 101 Montgomery Street, San Francisco,
California 94104, was the record holder of 21.83% of the Fund's total
outstanding shares. As of January 31, 1995, to BEF's knowledge, no other
shareholder was the record holder or beneficial owner of 5% or more of the
Fund's total shares outstanding.
The Benham Group charges neither fees nor commissions on the purchase and sale
of Benham fund shares. However, BFS may charge fees for special services
requested by a shareholder or necessitated by acts or omissions of a
shareholder. For example, BFS may charge a fee for processing dishonored
investment checks or stop-payment requests. BFS charges $10 per hour for account
research requested by investors. This charge will be assessed, for example, when
a shareholder request requires more than one hour of research on historical
account records. The fees charged are based on the estimated cost of performing
shareholder-requested services and are not intended to increase income. Share
purchases and redemptions are governed by California law.
APPENDIX
BEF's investment advisor has been continuously registered with the Securities
and Exchange Commission under the Investment Advisers Act of 1940 since December
14, 1971. BEF has filed a registration statement under the Securities Act of
1933 and the Investment Company Act of 1940 with respect to the shares offered.
These registrations do not imply approval or supervision of BEF or the advisor
by the Securities and Exchange Commission.
For further information, refer to the registration statement and exhibits on
file with the Securities and Exchange Commission in Washington, D.C. These
documents are available upon payment of a reproduction fee. Statements in the
Prospectus and this Statement of Additional Information concerning the contents
of contracts or other documents, copies of which are filed as exhibits to the
registration statement, are qualified by reference to such contracts or
documents.
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