BENHAM INCOME & GROWTH FUND
BENHAM EQUITY GROWTH FUND
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 Funds 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 13 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 17 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 17 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 17 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 18 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 19 of the Prospectus, the following replaces the last two sentences
of the last paragraph under the sub-heading "OPEN ORDER SERVICE":
All orders and cancellation of orders received by one hour prior to the
close of the Exchange, usually 12 p.m. Pacific Time, will be considered to
be effective the same day. All orders and cancellation of orders not
received one hour prior to the close of the Exchange, usually 12 p.m.
Pacific Time, will be considered effective the following business day.
<PAGE>
BENHAM INCOME &
GROWTH FUND
BENHAM EQUITY
GROWTH FUND
Prospectus * February 24, 1995
[picture of the exterior of the
New York Stock Exchange building]
[company logo] The Benham Group
<PAGE>
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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.
- -------------------
BENHAM INCOME
& GROWTH FUND
BENHAM EQUITY
GROWTH FUND
Series of Benham Equity Funds
Prospectus * February 24, 1995
BENHAM INCOME & GROWTH FUND (BIGF) seeks dividend growth, current income, and
capital appreciation by investing in common stocks.
BENHAM EQUITY GROWTH FUND (BEGF) seeks capital appreciation by investing in
common stocks.
Each 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 Funds' 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
<PAGE>
SUMMARY OF FUND EXPENSES
The tables below illustrate the fees and expenses an investor in the
Funds would incur directly or indirectly. The figures shown for each Fund are
based on historical expenses, adjusted to reflect the expense limitation
agreement in effect as of February 24, 1995.
================================================================================
A. SHAREHOLDER TRANSACTION EXPENSES
For Each Fund Described in This Prospectus
- --------------------------------------------------------------------------------
Sales load imposed on purchases.............................. None
Sales load imposed on reinvested dividends................... None
Deferred sales load.......................................... None
Redemption fee............................................... None
Exchange fee................................................. None
================================================================================
B. ANNUAL FUND OPERATING EXPENSES As a
Percentage of Average Daily Net Assets
- --------------------------------------------------------------------------------
BIGF BEGF
Investment advisory fee (net of expense limitation) .32%* .32%*
12b-1 fee None None
Other expenses .41% .43%
TOTAL FUND OPERATING EXPENSES (net of expense limitation) .73%* .75%*
* Benham Management Corporation (BMC) has agreed under contract to limit each
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 a Fund during the preceding 11 months if, and to the extent that, for any
given month, the Fund's expenses were less than the expense limit in effect at
that time. The expense limit is up for annual renewal in June. As indicated
above, the Funds' actual expenses were at or below their respective contractual
expense limitations of .75% of their average daily net assets.
Each Fund pays BMC investment advisory fees equal to an annualized percentage of
Fund average daily net assets. Other expenses include administrative and
transfer agent fees paid to Benham Financial Services, Inc. (BFS).
3
<PAGE>
================================================================================
C. EXAMPLE OF EXPENSES
- --------------------------------------------------------------------------------
The following table illustrates the expenses a shareholder would pay on a $1,000
investment in each of the Funds over periods of one, three, five, and ten years.
The 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
Income & Growth Fund $7 $23 $41 $91
Equity Growth Fund 8 24 42 93
We include this table to help you understand the various costs and expenses that
you, as a shareholder, will bear either directly or indirectly. THIS EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR
PERFORMANCE; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN, AND THE
FUND MAY NOT REALIZE THE 5% HYPOTHETICAL RATE OF RETURN REQUIRED BY THE SEC FOR
THIS EXAMPLE.
FINANCIAL HIGHLIGHTS
The information presented on the following 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 Funds'
Annual Report, which is part of the Statement of Additional Information.
4
<PAGE>
<TABLE>
<CAPTION>
==========================================================================================================
Years ended December 31 (except as noted)
- ----------------------------------------------------------------------------------------------------------
Benham Income & Benham Equity
Growth Fund Growth Fund
1994 1993 1992 1991 1990+ 1994 1993 1992 1991+
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER-SHARE DATA
- --------------
NET ASSET VALUE (NAV)
AT BEGINNING OF PERIOD $15.08 14.11 13.53 10.12 10.00 12.12 11.68 11.57 10.00
INCOME (LOSSES) FROM
INVESTMENT OPERATIONS
Net Investment Income .4435 .4285 .4155 .4860 .0087 .2993 .2309 .2573 .3355
Net Realized and
Unrealized Gains
(Losses) on Investments (.5302) 1.1502 .6220 3.5602 .1200 (.3315) 1.0955 .2345 1.6542
----- ----- ----- ----- ----- ----- ----- ----- -----
Total Income (Losses) From
Investment Operations (.0867) 1.5787 1.0375 4.0462 .1287 (.0322) 1.3264 .4918 1.9897
LESS DISTRIBUTIONS
Dividends from Net
Investment Income (.4350) (.4246) (.4137) (.4726) (.0087) (.2990) (.2307) (.2309) (.2891)
Distributions from Net
Realized Capital Gains (.6383) (.1841) (.0438) (.1636) 0 (.2588) (.6557) (.1509) (.1306)
----- ----- ----- ----- ----- ----- ----- ----- -----
Total Distributions (1.0733) (.6087) (.4575) (.6362) (.0087) (.5578) (.8864) (.3818) (.4197)
NAV AT END OF PERIOD $13.92 15.08 14.11 13.53 10.12 11.53 12.12 11.68 11.57
===== ===== ===== ===== ===== ===== ===== ===== =====
TOTAL RETURN* (.55)% 11.31 7.86 39.08 1.29 (.23) 11.42 4.13 17.48
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period
(in millions of dollars) $224.9 230.2 141.2 59.3 1.0 97.4 96.3 73.6 39.0
Ratio of Expenses to
Average Daily Net Assets .73% .75 .75 .50 0 .75 .75 .75 .35**
Ratio of Expenses to
Average Daily Net Assets
Before Waiver .73% .81 1.05 1.63 0 .75 .83 1.05 1.56**
Ratio of Net Investment
Income to Average Daily
Net Assets 2.96% 2.90 3.16 4.03 2.09** 2.26 2.04 2.33 3.29**
Ratio of Net Investment
Income to Average Daily Net
Assets Before Waiver 2.96% 2.84 2.87 2.89 2.09** 2.26 1.95 2.03 2.09**
Portfolio Turnover Rate 67.96% 30.75 63.17 140.21 0 94.09 96.52 114.32 89.22
+ BIGF and BEGF commenced operations on December 17, 1990, and May 9, 1991, respectively.
* Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized.
** Annualized.
</TABLE>
5
<PAGE>
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[information in left margin of page]
BGIF is designed for income-oriented investors desiring long-term participation
in the stock market. BEGF is designed for investors whose financial goals
include long-term capital growth.
BMC uses a quantitative method to manage each Fund, including a technique known
as "portfolio optimization."
- -------------------
HOW THE FUNDS WORK
INVESTMENT OBJECTIVES
BENHAM INCOME & GROWTH FUND (BIGF). BIGF's investment objective is to provide
dividend growth, current income, and capital appreciation by investing in a
portfolio of common stocks.
BIGF is designed for income-oriented investors seeking a total return that
exceeds the total return of the Standard & Poor's 500 Composite Stock Price
Index (S&P 500) and a dividend yield that exceeds the S&P 500's dividend yield.
Of course, the Fund's total return and dividend yield may be higher or lower
than the S&P 500's return and dividend yield over any period of time.
BENHAM EQUITY GROWTH FUND (BEGF). BEGF's investment objective is to provide
capital appreciation by investing in a portfolio of common stocks. BEGF is
designed for investors whose financial goals include long-term capital growth.
BMC seeks a total return for the Fund that exceeds the total return of the S&P
500. Of course, the Fund's total return may be lower than the S&P 500's return
over any period of time.
There is no assurance that either Fund will achieve its investment objective.
Each Fund's investment objective and industry concentration and issuer
diversification policies 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
BMC uses quantitative management strategies in pursuit of each 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 middle ground between active
management, which allows the advisor to select a fund's investments 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.
6
<PAGE>
The primary management technique BMC uses is portfolio optimization. BMC
constructs the Funds' portfolios to match the risk characteristics of the S&P
500 and then optimizes each portfolio to achieve the desired balance of risk and
return potential. With respect to BIGF, this includes targeting a dividend yield
that exceeds that of the S&P 500.
The Funds' portfolio holdings are drawn primarily from equity securities of the
1,500 largest companies traded in the United States (ranked by market
capitalization). BEGF may also invest in small capitalization stocks of
companies that, in BMC's opinion, have growth potential consistent with the
Fund's investment objective.
Portfolio optimization may cause a Fund to be more heavily invested in some
industries than in others. However, neither Fund may invest more than 25% of its
assets in companies whose principal business activities are in the same
industry. In addition, each 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 to restrictions under the 1940 Act.
Each Fund may invest in securities or engage in transactions involving
instruments other than equity securities, as discussed in the section entitled
"Other Investment Policies and Techniques," which begins on page 10.
- -------------------
[information in right margin of page]
Neither Fund may invest more than 25% of its assets in a single industry.
- -------------------
7
<PAGE>
- -------------------
[information in left margin of page]
Both Funds offer investors stock market exposure and portfolio diversification
that would be costly to duplicate on an individual basis.
- -------------------
SUITABILITY
The Funds may be an appropriate component of a stock portfolio for investors
seeking total return through diversified investments in stocks, bonds, and
short-term instruments. The Funds invest primarily in stocks, which may enhance
inflation-adjusted returns. The chart below illustrates how stocks have
historically outpaced inflation and produced higher returns than bonds.
Depending on your age and investment horizon, one Fund may be more appropriate
for you. If you seek a steady stream of monthly investment income, BIGF may be
best for you. If you primarily seek capital appreciation, BEGF may be most
appropriate for you. Of course, no single mutual fund can provide a balanced
investment plan.
[mountain chart]
Chart 1 - Growth of Stocks, Bonds, & Inflation
Year S&P 500 Index 20 yr U.S. Treas. Bond Inflation (CPI)
1925 $1.00 $1.00 $1.00
1926 $1.12 $1.08 $0.99
1927 $1.53 $1.17 $0.96
1928 $2.20 $1.18 $0.96
1929 $2.02 $1.22 $0.96
1930 $1.52 $1.27 $0.90
1931 $0.86 $1.20 $0.81
1932 $0.79 $1.41 $0.73
1933 $1.21 $1.41 $0.73
1934 $1.20 $1.55 $0.75
1935 $1.77 $1.62 $0.77
1936 $2.37 $1.75 $0.78
1937 $1.54 $1.75 $0.80
1938 $2.02 $1.85 $0.78
1939 $2.01 $1.96 $0.78
1940 $1.81 $2.08 $0.79
1941 $1.60 $2.10 $0.86
1942 $1.93 $2.16 $0.94
1943 $2.43 $2.21 $0.97
1944 $2.91 $2.27 $0.99
1945 $3.96 $2.51 $1.01
1946 $3.49 $2.51 $1.20
1947 $3.49 $2.45 $1.31
1948 $3.47 $2.53 $1.34
1949 $3.83 $2.69 $1.32
1950 $4.66 $2.69 $1.39
1951 $5.43 $2.59 $1.48
1952 $6.07 $2.62 $1.49
1953 $5.67 $2.71 $1.50
1954 $8.22 $2.91 $1.49
1955 $10.39 $2.87 $1.50
1956 $10.66 $2.71 $1.54
1957 $9.13 $2.91 $1.59
1958 $12.61 $2.73 $1.62
1959 $13.68 $2.67 $1.64
1960 $13.27 $3.04 $1.66
1961 $16.34 $3.07 $1.68
1962 $14.41 $3.28 $1.70
1963 $17.13 $3.32 $1.72
1964 $19.53 $3.44 $1.75
1965 $21.96 $3.46 $1.78
1966 $19.76 $3.59 $1.84
1967 $24.48 $3.26 $1.90
1968 $27.18 $3.25 $1.99
1969 $24.90 $3.09 $2.11
1970 $25.87 $3.46 $2.22
1971 $29.55 $3.92 $2.30
1972 $35.15 $4.14 $2.37
1973 $29.99 $4.09 $2.59
1974 $22.10 $4.27 $2.90
1975 $30.31 $4.67 $3.10
1976 $37.53 $5.45 $3.26
1977 $34.83 $5.41 $3.48
1978 $37.10 $5.35 $3.79
1979 $43.95 $5.28 $4.29
1980 $58.21 $5.07 $4.82
1981 $55.37 $5.17 $5.25
1982 $67.27 $7.25 $5.46
1983 $82.38 $7.30 $5.66
1984 $87.50 $8.43 $5.89
1985 $115.19 $11.04 $6.11
1986 $136.64 $13.74 $6.19
1987 $143.72 $13.37 $6.46
1988 $167.42 $14.67 $6.75
1989 $220.31 $17.32 $7.06
1990 $213.45 $18.39 $7.50
1991 $278.20 $21.94 $7.72
1992 $299.37 $23.71 $7.95
1993 $329.41 $28.03 $8.17
1994 $333.88 $25.86 $8.39
Source: Ibbotson Associates, Stocks, Bonds, Bills and Inflation.
8
<PAGE>
In contrast to bond investors, common stock investors forego the certainty of
coupon interest payments. However, they enjoy the potential for increased
dividend income if the issuing company prospers. As indicated below, Chart 2
compares the growth of dividends from S&P 500 stocks with the rate of inflation
over a 49-year period.
[mountain chart]
Chart 2 - Growth of Dividends vs. Inflation
Year S&P 500 Dividends Inflation
1946 $1.00 $1.00
1947 $1.18 $1.09
1948 $1.31 $1.12
1949 $1.61 $1.10
1950 $2.07 $1.16
1951 $1.99 $1.23
1952 $1.99 $1.24
1953 $2.04 $1.25
1954 $2.17 $1.25
1955 $2.31 $1.25
1956 $2.45 $1.29
1957 $2.52 $1.33
1958 $2.46 $1.35
1959 $2.58 $1.37
1960 $2.75 $1.39
1961 $2.85 $1.40
1962 $3.00 $1.41
1963 $3.21 $1.44
1964 $3.52 $1.46
1965 $3.83 $1.48
1966 $4.04 $1.53
1967 $4.11 $1.58
1968 $4.32 $1.66
1969 $4.45 $1.76
1970 $4.42 $1.85
1971 $4.32 $1.91
1972 $4.44 $1.98
1973 $4.76 $2.16
1974 $5.07 $2.42
1975 $5.18 $2.59
1976 $5.70 $2.72
1977 $6.58 $2.90
1978 $7.14 $3.16
1979 $7.96 $3.58
1980 $8.68 $4.02
1981 $9.34 $4.38
1982 $9.68 $4.55
1983 $9.99 $4.72
1984 $10.61 $4.91
1985 $11.13 $5.10
1986 $11.66 $5.16
1987 $12.41 $5.39
1988 $13.70 $5.62
1989 $15.56 $5.89
1990 $17.04 $6.25
1991 $17.18 $6.44
1992 $17.44 $6.63
1993 $17.72 $6.81
1994 $18.56 $6.99
Sources: Ibbotson Associates, Stocks, Bonds, Bills and Inflation and Standard
and Poor's Security Price Index Record.
Historical equity index returns suggest that stocks provide superior investment
returns over the long term. Over short periods of time, however, the prices of
individual stocks and the stock market as a whole can be very volatile. The
table below shows best and worst average annual total returns for the S&P 500
over time spans of one, five, ten, and twenty years between 1926 and 1994.
================================================================================
VARIABILITY OF S&P 500 RETURNS
- --------------------------------------------------------------------------------
1 YR 5 YRS 10 YRS 20 YRS
Best 53.99% 23.92% 20.06% 16.86%
Worst -43.34 -12.47 -0.89 3.11
Source: Ibbotson Associates, Stocks, Bonds, Bills and Inflation. This analysis
is based on historical annual total return figures for the S&P 500.
Notice that the difference between the best and worst return decreases as the
measure of time increases. Stock market investing may not make sense for you
unless you are prepared to ride out the markets' ups and downs.
- -------------------
[information in right margin of page]
The Funds may also provide a means to enhance the "real," or inflation-adjusted,
returns from your investment portfolio.
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9
<PAGE>
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[information in left margin of page]
Keep in mind that seeking increased total return causes higher volatility.
- -------------------
As indicated below, Chart 3 compares the historical risk vs. return
characteristics of stocks (represented by the S&P 500), bonds (represented by a
20-year U.S. Treasury bond), and Treasury bills. As you can see, historically,
stocks have provided higher returns at greater risk than Treasury bonds and
bills over the long term.
[mountain chart]
Chart 3 - Risk vs. Reward 1926-1994
T-Bill T-Bond S&P 500
Avg Ann Rtn 3.690% 4.827% 8.786%
Std Dev 3.291% 8.751% 20.039%
Source: Ibbotson Associates, Stocks, Bonds, Bills and Inflation.
The historical S&P 500 data presented here are not intended to suggest that an
investor would have achieved comparable results by investing in any one equity
security or in managed portfolios of equity securities, such as the Funds,
during the periods shown. 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 historical
conditions that gave rise to the patterns illustrated here may not be repeated.
Transaction costs and other expenses of managing a common stock portfolio are
not reflected in the figures shown. S&P 500 is a registered service mark of
Standard and Poor's Corporation.
OTHER INVESTMENT POLICIES AND TECHNIQUES
CONVERTIBLE SECURITIES. Although the Funds' equity investments consist primarily
of common stock, each Fund 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.
10
<PAGE>
SHORT-TERM INSTRUMENTS. For liquidity purposes, each 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, and bankers' acceptances.
Each 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 the
security 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.
Each 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.
FOREIGN SECURITIES. Each Fund may invest in securities of foreign issuers,
including 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.
SECURITIES LENDING. The Funds may lend their 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
delay in recovering the Funds' securities. Loans are limited to 33-1/3% of each
Fund's total assets.
- -------------------
[information in right margin of page]
Each Fund may invest in securities of foreign issuers that trade on domestic or
foreign securities exchanges in U.S. dollars or foreign currencies.
- -------------------
11
<PAGE>
- -------------------
[information in left margin of page]
Each Fund may use futures and options transactions to a limited extent.
- -------------------
FUTURES AND OPTIONS TRANSACTIONS. In order to manage each Fund's exposure to
changes in market conditions, such as movements in securities prices, interest
rates, and domestic and foreign economies, each 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 a Fund's value may be affected. Neither Fund
will utilize futures and options for speculative purposes.
OTHER PORTFOLIO MANAGEMENT TECHNIQUES. BMC may buy other types of securities or
employ other portfolio management techniques on behalf of the Funds. When
required by SEC guidelines, each 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.
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 Funds. An annual
portfolio turnover rate of 150% or more is considered high, and Fund expenses
may increase as a Fund's portfolio turnover rate increases. However, as
described on page 3, each Fund's total operating expenses are limited to .75% of
average daily net assets.
PERFORMANCE
Mutual fund performance is commonly measured as yield or total return. It is
based on historical fund performance and may be quoted in advertising and sales
literature. Past performance is no guarantee of future results.
YIELD calculations show the rate of income the Funds earn on their
investments as an annual percentage rate. The Funds' yields are calculated
according to methods that are standardized for all stock and bond funds.
12
<PAGE>
TOTAL RETURN represents the Funds' changes over a specified time period,
assuming reinvestment of dividends and capital gains, if any. CUMULATIVE TOTAL
RETURN illustrates the Funds' 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 Funds' performance had been constant over the entire period.
Average annual total returns smooth out variations in the Funds' performance;
they are not the same as year-by-year results.
Performance data and a discussion of factors that affected performance during
the Funds' most recent reporting period are included in the Funds' semiannual
reports to shareholders. These reports are routinely delivered to the Funds'
shareholders. For a free copy, call one of the Fund Information numbers on page
14.
SHARE PRICE
BMC normally calculates each Fund's purchase and sale price per share (net asset
value, or NAV) at 1:00 p.m. Pacific Time each day the New York Stock Exchange is
open for business. NAV is calculated by adding the value of 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 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]
Performance data and a discussion of factors that affected performance during
the Funds' most recent reporting period are included in BEF's semiannual reports
to shareholders.
Shares may be purchased and redeemed without any sales charge, commission,
redemption fee, 12b-1 fee, or contingent deferred sales load.
- -------------------
13
<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 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 24 and 25.
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 21 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.
14
<PAGE>
HOW TO BUY SHARES (Retirement plan accounts have different minimums. See pages
24 and 25.)
================================================================================
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.
15
<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: [Name of Fund]
AC - [State Street Fund Account Number]
FBO [Your Name, Your Benham Fund Account Number]
FUND NAMES AND STATE STREET FUND ACCOUNT NUMBERS:
Benham Income & Growth Fund 0505 928 2
Benham Equity Growth Fund 0505 927 4
- --------------------------------------------------------------------------------
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 18 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 19.
16
<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 Funds reserve the right
to refuse any investment.
TELEPHONE TRANSACTIONS
Shareholders may order certain transactions (e.g., exchanges, wires, some types
of redemptions) by telephone. This privilege is granted to Benham fund
shareholders automatically; you need not specifically request this service, and
you may not specifically decline it.
The Benham Group will not be liable for losses resulting from unauthorized or
fraudulent instructions if it follows procedures designed to verify the caller's
identity. BMC will request personal identification, record telephone calls, and
send confirmation statements for every telephone transaction to the
shareholder's record address. The 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.
17
<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).
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.
18
<PAGE>
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 into
a Benham fund account.
BANK DIRECT allows you to deposit a fixed amount from your bank account
into a Benham fund account on the 1st and/or the 15th of each month (or the next
business day).
DIRECTED DIVIDENDS allow you to invest all or part of your dividend earnings
from one Benham fund account 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.
- -------------------
19
<PAGE>
- -------------------
[information in left margin of page]
You may redeem shaes 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.
20
<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 Funds' NAVs are normally
calculated at 1:00 p.m. Pacific Time. See page 13 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 24 and 25 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.
21
<PAGE>
HOW TO REDEEM SHARES (Retirement investors, see pages 24 and25.)
================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
BY TELEPHONE The Benham Group will accept telephone redemption requests for any
amount if the proceeds are to be sent to your predesignated bank
account. Redemptions of $25,000 or less payable to the registered
account owner(s) may also be redeemed 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.
22
<PAGE>
================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
IN WRITING Signature guarantees may be provided by banks, savings and loan
(continued) associations, savings banks, credit unions, stock brokerage firms,
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 16 and 18.
- --------------------------------------------------------------------------------
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.
23
<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.
24
<PAGE>
(continued from previous page)
the $1,000 per fund account minimum, your account may be closed (see page 21 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.
25
<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
BIGF's dividends are declared daily, accrued throughout the month, and
distributed at the end of the month. BEGF's dividends are declared and paid
quarterly in March, June, September, and December. In December, each 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.
Long-term capital gains, if any, will be declared once a year, typically in
December. The directors may modify the Funds' 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 19 for further information.) Please indicate your choice on
your account application or contact our Shareholder Relations Department. See
page 21 for a discussion of our policy regarding uncashed distribution checks.
TAXES
Each 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 Funds' dividends and capital gain distributions are subject to federal
income tax and applicable state and local taxes whether they are received in
cash or reinvested. 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
Funds as capital gain dividends are taxable as long-term capital gains,
regardless of how
26
<PAGE>
long you have held your shares. Ordinary income distributions made by the Funds
to corporate shareholders may qualify for the dividends-received deduction
available to corporations. Shareholders will be notified each year of the
amount, if any, that qualifies for this deduction.
The Funds 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 taxable 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 your personal tax position,
you should keep your regular 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 your 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. Each 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 Fund shares at any time.
27
<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 Funds' activities and is responsible for
protecting shareholders' interests. The majority of directors are not otherwise
affiliated with BMC. BEF is neither required nor expected 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 operations of the Funds. Mr. Colton also manages Benham Utilities
Income 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).
28
<PAGE>
ADVISORY AND SERVICE FEES
For investment advice and portfolio management services, each 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 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.
In the following table, advisory fees paid by each Fund to BMC for the fiscal
year ended December 31, 1994, are expressed as a percentage of the Fund's
average daily net assets and as a dollar amount per $1,000 of the Fund's average
daily net assets.
INVESTMENT ADVISORY FEES
Income & Growth Fund .32% $3.20
Equity Growth Fund .32% $3.20
To avoid duplicative investment advisory fees, the Funds do 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, each Fund pays BFS a monthly fee equal to its pro rata share of the
dollar amount derived from applying the average daily net assets of all of the
funds in The Benham Group to an administrative fee 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, each Fund pays BFS a
monthly fee for each shareholder account maintained and for each shareholder
transaction executed during that month.
- -------------------
[information in right margin of page]
Benham Management Corporation provides investment advice and portfolio
management services to the Funds.
Benham Financial Services, Inc. provides administrative and transfer agent
services to the Funds.
- -------------------
29
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Each 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.
EXPENSE LIMITATION AGREEMENT
An expense limitation agreement between BMC and the Funds is described on page
3.
In the following table, each Fund's total operating expenses for the fiscal year
ended December 31, 1994, are expressed as a percentage of the Fund's average
daily net assets and as a dollar amount per $1,000 of the Fund's average daily
net assets.
TOTAL FUND OPERATING EXPENSES
Income & Growth Fund .73% $7.30
Equity Growth Fund .75% $7.50
DISTRIBUTION OF SHARES
Benham Distributors, Inc. (BDI) and BMC distribute and market Benham products
and services. BMC pays all expenses for promoting and distributing the Funds'
shares. Neither Fund pays commissions to or receives compensation from
broker-dealers.
BDI is a wholly owned subsidiary of BMI.
30
<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
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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.
32
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NOTES:
33
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NOTES:
34
<PAGE>
NOTES:
35
<PAGE>
CONTENTS
Summary of Fund Expenses ............... 3
Financial Highlights ................... 4
How the Funds Work ..................... 6
Investment Objectives ......... 6
Core Investment Strategies .... 6
Suitability ............................ 8
Other Investment Policies and Techniques 10
Portfolio Transactions ................. 12
Performance ............................ 12
Share Price ............................ 13
How to Invest .......................... 14
Shareholder Services ................... 18
Exchange Privilege ............ 18
Open Order Service ............ 18
Automatic Investment Services . 19
Broker-Dealer Transactions .... 20
TDD Service ................... 20
Emergency Services ............ 20
How to Redeem Your Investment .......... 21
About Benham-Sponsored Retirement Plans 24
Distributions and Taxes ................ 26
Management Information ................. 28
About Benham Equity Funds ..... 28
The Benham Group .............. 28
Advisory and Service Fees ..... 29
Expense Limitation Agreement .. 30
Distribution of Shares ........ 30
<PAGE>
BENHAM INCOME & GROWTH FUND
BENHAM EQUITY GROWTH FUND
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
Funds' current Prospectus dated February 24, 1995. The Funds' 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
Portfolio Transactions 13
Valuation of Portfolio Securities 13
Performance 14
Taxes 16
About Benham Equity Funds 17
Directors and Officers 18
Investment Advisory Services 20
Administrative and Transfer Agent Services 21
Direct Fund Expenses 22
Expense Limitation Agreement 22
Additional Purchase and Redemption Information 23
Appendix 24
Financial Statements 25
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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 Funds 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 supported 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.
REPURCHASE AGREEMENTS
In a repurchase agreement (repo), a 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.
Benham Management Corporation (BMC), the Funds' investment advisor, attempts to
minimize the risks associated with repurchase agreements by adhering to the
following criteria:
(1) Limiting the securities acquired and held by a Fund under repurchase
agreement 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 Funds' board of directors;
(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 5% of a Fund's total assets in repurchase agreements
that mature in more than seven days (together with any other illiquid security
the Fund holds); and
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<PAGE>
(6) Taking delivery of all securities subject to repurchase agreement and
holding them in an account at the Funds' custodian bank.
The Funds have 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 its investment advisor, Benham
Management Corporation (BMC). Pooled repos are expected to increase the income
the Funds can earn from repo transactions without increasing the risks
associated with these transactions.
WHEN-ISSUED AND FORWARD-COMMITMENT AGREEMENTS
Each 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, a Fund
assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. While a 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, a 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, each Fund will not commit more 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 a Fund's assets to be committed under
when-issued or forward-commitment agreements, BMC 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 at least 35%. In addition, as an operating policy, each Fund will
not enter into when-issued or firm-commitment transactions with settlement dates
exceeding 120 days.
CONVERTIBLE SECURITIES
Each Fund may buy securities that are convertible into common stock. Listed
below is a brief description of the various types of convertible securities the
Funds 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 the option to convert to common shares becomes
more valuable.
3
<PAGE>
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 its underlying stock. Warrants are
issued with expiration dates. Once a warrant expires, it has no value in the
market.
FOREIGN SECURITIES
Although the Funds may buy securities of foreign issuers in foreign markets,
most of their foreign securities investments are made by purchasing American
Depositary Receipts (ADRs), "ordinary shares," or "New York Shares" in the U.S.
The Funds may invest in foreign-currency-denominated securities that trade in
foreign markets if BMC believes that such investments will be advantageous to
the Funds.
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.
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 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
4
<PAGE>
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, a 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,
BMC can protect a 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 a 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
increases.
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.
BMC uses forward contracts for currency hedging purposes only and not for
speculative purposes. The Funds are not required to enter into forward contracts
with regard to their foreign holdings and will not do so unless it is deemed
appropriate by the advisor.
Each 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.
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.
5
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RESTRICTED SECURITIES
Restricted securities held by the Funds 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, a 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
Each 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.
(3) The borrower must agree that the Fund will receive all dividends, interest,
or other distributions on the 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 from
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.
SHORT SALES AND PUT OPTIONS ON INDIVIDUAL SECURITIES
Each Fund may buy puts and enter into short sales with respect to stocks
underlying its convertible security holdings. For example, if BMC anticipates a
decline in the price of the stock underlying a convertible security a 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 a 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 Funds will incur
transaction costs, including interest expenses, in connection with opening,
maintaining, and closing short sales.
6
<PAGE>
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, a 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 an 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 Funds' 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 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
a Fund's exposure to market fluctuations, the use of futures contracts may be a
more effective means of hedging this exposure. While the Funds pay 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, a 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. A 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
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<PAGE>
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 a 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
before it is exercised 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 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 remain the same over time, it is likely that the writer will also profit
by being able to close out the option at a lower price. If security prices fall,
the put writer would 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 a 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. A 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,
a 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
8
<PAGE>
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 a 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, a 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 a Fund to make margin payments unless the
option is exercised.
CORRELATION OF PRICE CHANGES. Price changes of a Fund's futures and options
positions may not be well correlated with price changes of its other
investments. This may be because of differences between the underlying indexes
and the types of securities the Fund invests in. For example, if a Fund sold a
broad-based index futures contract to hedge against a stock market decline while
completing sales of specific securities in its investment portfolio, the prices
of the securities could move in a different direction than the broad market
index represented by the index futures contract. In the case of an S&P 500
futures contract purchased by a Fund, either in anticipation of stock purchases
or in an effort to be fully invested, failure of the contract to track the Index
accurately could hinder the Fund from achieving its investment objective.
Options and futures prices can also diverge from the prices of their underlying
instruments even if the underlying instruments match the Fund's investments.
Options and futures prices are affected by factors such as current and
anticipated short-term interest rates, changes in volatility of the underlying
instrument, and the time remaining until expiration of the contract; these
factors may not affect security prices 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. A 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 a 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 moves upward or
9
<PAGE>
downward 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 a 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 value. Under these circumstances, the Fund's access to assets held to cover
its futures and options positions also could be impaired.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS.
The Funds have 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 Funds
intend to comply with Section 4.5 of the regulations under the Commodity
Exchange Act, which limits the extent to which the Funds can commit assets to
initial margin deposits and options premiums.
Each 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, a 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, each Fund will set aside cash and appropriate liquid assets in
a segregated account to cover its obligations related to futures contracts and
options.
The Funds intend 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 Funds' investments in
such instruments.
FUTURES AND OPTIONS RELATING TO FOREIGN CURRENCIES. Each Fund may purchase and
sell currency futures and purchase and write currency options to increase or
decrease its exposure to different foreign currencies. Each 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 option values can be expected to correlate with exchange
rates, but may not reflect other factors that affect the value of a 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
10
<PAGE>
against a price decline resulting from a deterioration in the issuer's
creditworthiness. Because the value of a 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 foreign investments over time.
INVESTMENT RESTRICTIONS
The Funds' 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) Each 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, more than 5% of its total assets would be invested in
securities of that issuer.
(2) Each Fund may not purchase the securities of any one issuer if
immediately after such purchase the Fund would hold more than 10% of
the outstanding voting securities of that issuer.
(3) Each Fund may not borrow money except from a bank as a temporary
measure to satisfy redemption requests or for extraordinary or
emergency purposes and then only in an amount not exceeding 33-1/3% of
the market value of the Fund's total assets so that immediately after
any such borrowing asset coverage of at least 300% for all such
borrowings exists. To secure any such borrowing, the Fund may not
mortgage, pledge, or hypothecate in excess of 33-1/3% of the value of
its total assets. The Fund will not purchase any security while
borrowings representing more than 5% of its total assets are
outstanding. The Fund may also borrow money for temporary or emergency
purposes from other funds or portfolios for which Benham Management
Corporation is the investment advisor, or from a joint account of such
funds or portfolios, as permitted by federal regulatory agencies.
(4) Each Fund may not act as an underwriter of securities issued by others.
(5) Each Fund may not purchase real estate, real estate mortgage loans,
interests in real estate limited partnerships, or interests in oil, gas
or mineral exploration or development programs or leases, provided that
this limitation shall not prohibit (i) the purchase of U.S._Government
securities and other debt securities secured by real estate or
interests therein; (ii) the purchase of marketable securities issued by
companies or investment trusts that deal in real estate or interests
therein; or (iii) purchase of marketable securities issued by companies
or other entities or investment vehicles that engage in businesses
relating to the development, exploration, mining, processing or
distributing of oil, gas, or minerals.
(6) Each Fund may not engage in any short-selling operations (except by
selling futures contracts).
11
<PAGE>
(7) Each Fund may not make loans to others, except for the lending of
portfolio securities pursuant to guidelines established by the board of
directors or in connection with purchase of debt securities in
accordance with the Fund's investment objective and policies. The Fund
may also lend money to other funds or portfolios for which BMC is the
investment advisor, as permitted under investment restriction (3)
above.
(8) Each Fund may not purchase warrants, valued at the lower of cost or
market, in excess of 5% of the value of the Fund's net assets. Included
within that amount, but not to exceed 2% of the value of the Fund's net
assets, may be warrants which are not listed on the New York or
American Stock Exchanges. Warrants acquired by the Fund at any time in
units or attached to securities are not subject to this restriction.
(9) Each Fund may not purchase securities on margin, except for such
short-term credits as may be necessary for the clearance of
transactions, provided that the Fund may make initial and variation
margin payments in connection with purchases or sales of futures
contracts or options on futures contracts.
(10) Each Fund may not invest in securities that are not readily marketable
or the disposition of which is restricted under federal securities laws
(collectively "illiquid securities") if, as a result, more than 5% of
the Fund's net assets would be invested in illiquid securities.
(11) Each Fund may not issue or sell any class of senior security as defined
in the Investment Company Act of 1940 except for notes or other
evidences of indebtedness permitted under investment restriction (3)
above and except to the extent that notes evidencing temporary
borrowings or the purchase of securities on a when-issued or delayed
delivery basis might be deemed such.
(12) Each Fund may not, except in connection with a merger, consolidation,
acquisition, or reorganization, invest in the securities of other
investment companies, including investment companies advised by BMC,
if, immediately after such purchase or acquisition, more than 10% of
the value of the Fund's total assets would be invested in such
securities in the aggregate or more than 5% in any one such security.
(13) Each Fund may not purchase or retain securities of any issuer if, to
the knowledge of the Fund's management, those officers and directors of
the Fund and of its investment advisor who each own beneficially more
than 0.5% of the outstanding securities of such issuer, together own
beneficially more than 5% of such securities.
(14) Each Fund may not invest in securities of an issuer that, together with
any predecessor, has been in operation for less than three years if, as
a result, more than 5% of the total assets of the Fund would then be
invested in such securities.
(15) Each Fund may not invest in the securities of any one issuer if,
immediately after such purchase, more than 25% of the Fund's total
assets would be invested in the securities of issuers having their
principal business activities in the same industry.
12
<PAGE>
PORTFOLIO TRANSACTIONS
Each Fund's assets are invested by BMC in a manner consistent with the Fund's
investment objectives, policies, and restrictions and with any instructions from
the board of 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 Funds. 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 will otherwise place orders
with broker-dealers subject to and in accordance with any instructions from the
board of directors that may be issued from time to time. BMC will select
broker-dealers to execute portfolio transactions on behalf of the Funds solely
on the basis of best price and execution.
The Funds' annual portfolio turnover rates are not expected to exceed 150%.
Because a higher turnover rate increases transaction costs and may increase
taxable capital gains, the advisor carefully weighs the potential benefits of
short-term investing against these considerations.
The following table illustrates the Funds' portfolio turnover rates for the
fiscal years ended December 31, 1994 and 1993.
PORTFOLIO TURNOVER RATES
FISCAL FISCAL
FUND 1994 1993
Income & Growth Fund 67.96% 30.75%
Equity Growth Fund 94.09 96.52
Brokerage commissions paid by each Fund during the fiscal years ended December
31, 1994, 1993, and 1992, are indicated in the following table.
BROKERAGE COMMISSIONS
FISCAL FISCAL FISCAL
FUND 1994 1993 1992
Income & Growth Fund $236,642 $214,496 $217,123
Equity Growth Fund 178,344 134,712 132,467
VALUATION OF PORTFOLIO SECURITIES
Each Fund's net asset value per share (NAV) is determined by Benham Financial
Services, Inc. (BFS) at 1:00 p.m. Pacific Time each day the New York Stock
Exchange (NYSE) is open for business. The NYSE has designated the following
holiday closings for 1995: New Year's Day (observed), Washington's Birthday,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day. Although BFS expects the same holiday schedule to be observed in
the future, the NYSE may modify its holiday schedule at any time.
13
<PAGE>
BMC typically completes its trading on behalf of the Funds 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 Funds' net asset values 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 Funds' yields and total returns may be quoted in advertising and sales
literature. These figures, as well as the Funds' share prices, will vary. Past
performance should not be considered an indication of future results.
Yield quotations for each Fund 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, Income & Growth Fund's yield was
3.13%.
Total returns quoted in advertising and sales literature reflect all aspects of
a Fund's return, including the effect of reinvesting dividends and capital gain
distributions and any change in the Fund's net asset value during the period.
Average annual total returns are calculated by determining the growth or decline
in value of a hypothetical historical investment in a Fund over a stated period
and then calculating the annually compounded percentage rate that would have
produced the same result if the rate of growth or decline in value had been
constant throughout the period. For example, a cumulative 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 total returns are a convenient means of comparing
investment alternatives, investors should realize that a Fund's performance is
not constant over time but changes from
14
<PAGE>
year to year, and that average annual returns represent averaged figures as
opposed to actual year-to-year performance.
The Funds' average annual total returns for the one-year and life-of-fund
periods ended December 31, 1994, are indicated in the following table.
AVERAGE ANNUAL TOTAL RETURNS
LIFE OF
FUND ONE YEAR FUND*
Income & Growth Fund -.55% 13.74%
Equity Growth Fund -.23 8.79
* Income & Growth Fund commenced operations on December 17, 1990. Equity
Growth Fund commenced operations on May 9, 1991.
In addition to average annual total returns, each Fund may quote unaveraged or
cumulative total returns, which reflect the simple change in value of an
investment over a stated period. Average annual and cumulative total returns may
be quoted as a percentage or as a dollar amount and may be calculated for a
single investment, a series of investments, or a series of redemptions over any
time period. Total returns may be broken down into their components of income
and capital (including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return. Performance information may be quoted numerically or in a table, graph,
or similar illustration.
The Funds' performance may be compared with the performance of other mutual
funds tracked by mutual fund rating services or with other indexes of market
performance. This may include comparisons with funds that, unlike Benham funds,
are sold with a sales charge or deferred sales charge. 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 am/pm fixing and New York Comex Spot
Price); rankings of any mutual fund or mutual fund category tracked by Lipper
Analytical Services, Inc. or Morningstar, Inc.; mutual fund rankings published
in major, nationally distributed periodicals; data provided by the Investment
Company Institute; Ibbotson Associates, Stocks, Bonds, Bills, and Inflation;
major indexes of stock market performance; and indexes and historical data
supplied by major securities brokerage or investment advisory firms. The funds
may also utilize reprints from newspapers and magazines furnished by third
parties to illustrate historical performance.
15
<PAGE>
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 generally are used to compare a 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 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 desired
performance.
The Funds' shares are sold without a sales charge (load). No-load funds offer an
advantage to investors when compared to load funds with comparable investment
objectives and strategies. 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.
BMC 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
Each 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 it
distributes substantially all of its net investment income and net realized
capital gains distributed to shareholders.
Distributions from the Funds 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 a 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.
16
<PAGE>
Upon redeeming, selling, or exchanging shares, 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 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 Funds and their 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 Funds'
distributions also may be subject to state, local, or foreign taxes. A
prospective investor may wish to consult a tax advisor to determine whether
either Fund is a suitable investment based on his or her 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 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 the liabilities related thereto.
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 name as of the record date
for a shareholder meeting. Under California Corporations Code Section 708,
shareholders have the right to cumulate votes in the election (or removal) of
directors. For example, if six directors are proposed for election, a
shareholder may cast six votes for a single candidate, or three votes for each
of two candidates, etc.
CUSTODIAN BANK: State Street Bank and Trust Company, 225 Franklin Street,
Boston, MA 02101, is custodian of each 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 Funds' investment policies or in determining which securities
are sold or purchased by the Funds.
17
<PAGE>
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).
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
18
<PAGE>
(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).
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 $2,128 (BIGF)
$1,760 (BEGF) Not Applicable Not Applicable $62,000
- ---------------------------------------------------------------------------------------------------------
Kenneth E. Scott $2,166 (BIGF)
$1,773 (BEGF) Not Applicable Not Applicable $72,250
- ---------------------------------------------------------------------------------------------------------
Ezra Solomon $2,108 (BIGF)
$1,752 (BEGF) Not Applicable Not Applicable $74,750
- ---------------------------------------------------------------------------------------------------------
Isaac Stein $2,018 (BIGF)
$1,714 (BEGF) Not Applicable Not Applicable $68,750
- ---------------------------------------------------------------------------------------------------------
Jeanne D. Wohlers $2,104 (BIGF)
$1,749 (BEGF) Not Applicable Not Applicable $71,000
=========================================================================================================
</TABLE>
* BIGF and BEGF commenced operations on December 17, 1990 and May 9, 1991,
respectively.
** The Benham Group fund complex currently consists of 41 investment companies.
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<PAGE>
As of January 31, 1995, the officers and directors, as a group, owned less than
1% of the outstanding shares of each Fund.
INVESTMENT ADVISORY SERVICES
Benham Income & Growth Fund and Benham Equity Growth Fund each have an
investment advisory agreement with Benham Management Corporation (BMC), dated
August 4, 1992, that was approved by the Fund's shareholders on that date.
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.
Each 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.
Each Fund's agreement is terminable on sixty days' written notice, either by the
Fund or by BMC, to the other party and terminates automatically in the event of
its assignment.
Pursuant to the investment advisory agreements, BMC provides each Fund with
investment advice and portfolio management services in accordance with the
Fund's investment objectives, policies, and restrictions. BMC determines what
securities will be purchased and sold by the Funds and assists the Funds'
officers in carrying out decisions made by the board of directors.
Under the investment advisory agreements, each 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 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
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Investment advisory fees paid by each Fund to BMC for the fiscal years ended
December 31, 1994, 1993, and 1992, are indicated in the following table. Fee
amounts are net of reimbursements as described below.
INVESTMENT ADVISORY FEES
FISCAL FISCAL FISCAL
FUND 1994 1993 1992
Income & Growth Fund $778,787 $538,545 $148,888
Equity Growth Fund 303,587 222,347 83,598
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, each Fund pays BFS a monthly fee based on its pro rata share of the
dollar amount derived from applying the aggregate average daily net assets of
all of the funds in The Benham Group to the following administrative fee rate
schedule:
GROUP ASSETS ADMINISTRATIVE FEE RATE
up to $4.5 billion .11%
up to $6 billion .10
up to $9 billion .09
over $9 billion .08
For transfer agent services, each Fund pays BFS a monthly fee of $1.3958 (Income
& Growth Fund) or $1.1875 (Equity Growth Fund) for each shareholder account
maintained and $1.35 (both Funds) for each shareholder transaction executed
during that month.
Administrative service and transfer agent fees paid by each Fund to BFS for the
fiscal years ended December 31, 1994, 1993, and 1992, are indicated in the
following tables. Fee amounts are net of expense limitations as described on the
next page.
ADMINISTRATIVE FEES
FISCAL FISCAL FISCAL
FUND 1994 1993 1992
Income & Growth Fund $229,311 $174,067 $87,822
Equity Growth Fund 86,954 76,262 50,389
TRANSFER AGENT FEES
FISCAL FISCAL FISCAL
FUND 1994 1993 1992
Income & Growth Fund $476,007 $408,480 $274,277
Equity Growth Fund 207,987 167,147 136,075
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DIRECT FUND EXPENSES
Each Fund pays certain operating expenses that are not assumed by BMC or BFS.
These include fees and expenses of the independent 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
As part of the administrative services and transfer agency agreement between BEF
and BFS in effect through May 31, 1992, the directors set an expense limitation,
pursuant to which BFS limited each Fund's expenses to .75% of the Fund's average
daily net assets. The agreement provided that BFS could recover amounts absorbed
on behalf of each 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 the Fund's
average daily net assets.
On June 1, 1992, the directors established a separate Reimbursement and Expense
Allocation Agreement (R&EA Agreement) between BEF, BMC, and BFS, pursuant to
which BMC and BFS limited each Fund's expenses to .75% of the Fund's average
daily net assets. Amounts absorbed on behalf of each 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 either Fund during the preceding 11 months if, and to the extent that,
for any given month, the Fund's expenses were less than the specified limit.
The R&EA Agreement was superseded by an Expense Reimbursement Agreement on June
1, 1993. The Expense Reimbursement Agreement placed sole responsibility for
expense limitation with BMC and, like the preceding agreements, provided that
BMC could recover amounts absorbed on behalf of a Fund during the preceding 11
months if, and to the extent that, for any given month, the Fund's expenses were
less than .75% of average daily net assets. The Expense Reimbursement Agreement
included a provision giving BFS the ability to recover amounts absorbed on
behalf of a 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. The Fund's contractual expense cap (.75% of average daily net assets), as
set forth in the amended Expense Reimbursement Agreement, is subject to annual
renewal.
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VOLUNTARY BMC EXPENSE LIMITATION. BMC voluntarily absorbed all expenses for
Benham Income & Growth Fund and Benham Equity Growth Fund through September 30,
1991, and October 31, 1991, respectively.
Net amounts absorbed and recouped for the fiscal years ended December 31, 1994,
1993, and 1992, are indicated in the table below.
NET AMOUNTS ABSORBED (RECOUPED) BY BMC AND BFS
FISCAL FISCAL FISCAL
FUND 1994 1993 1992
Income & Growth Fund ($38,345) $114,063 $292,693
Equity Growth Fund 2,871 66,494 169,981
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Funds' shares are continuously offered at net asset value. Share
certificates are issued (without charge) only when requested in writing.
Certificates are not issued for fractional shares. Dividend and voting rights
are not affected by the issuance of certificates.
The Benham Group may reject or limit the amount of an investment to prevent any
one shareholder or affiliated group from controlling 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 5.16% of the total outstanding shares
of Benham Income & Growth Fund. As of January 31, 1995, to BEF's knowledge, no
other shareholder was the record holder or beneficial owner of 5% or more of
either Fund's total shares outstanding.
The Benham Group charges neither fees nor commissions on the purchase and sale
of Benham fund shares. However, BFS may charge fees for special services
requested by a shareholder or necessitated by acts or omissions of a
shareholder. For example, BFS may charge a fee for processing dishonored
investment checks or stop-payment requests. BFS charges $10 per hour for account
research requested by investors. This charge will be assessed, for example, when
a shareholder request requires more than one hour of research on historical
account records. The fees charged are based on the estimated costs of performing
shareholder-requested services and are not intended to increase income.
Share purchases and redemptions are governed by California law.
APPENDIX
BMC 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 BMC by the Securities and Exchange
Commission.
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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 in this Statement of Additional Information concerning the
contents of contracts or other documents, copies of which are filed as exhibits
to the registration statement, are qualified by reference to such contracts or
documents.
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