<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY INVESTMENT TRUST
(formerly Kidder, Peabody Investment Trust)
and the series thereof
MITCHELL HUTCHINS/KIDDER, PEABODY GLOBAL EQUITY FUND
MITCHELL HUTCHINS/KIDDER, PEABODY GLOBAL FIXED INCOME FUND
MITCHELL HUTCHINS/KIDDER, PEABODY INTERMEDIATE
FIXED INCOME FUND
MITCHELL HUTCHINS/KIDDER, PEABODY ASSET ALLOCATION FUND
MITCHELL HUTCHINS/KIDDER, PEABODY ADJUSTABLE RATE
GOVERNMENT FUND
Supplement to Prospectuses dated December 29, 1994
The following information revises and supplements the information contained in
the Funds' Prospectuses dated December 29, 1994:
1. a. Trust Name. The name of Kidder, Peabody Investment Trust was changed to
"Mitchell Hutchins/Kidder, Peabody Investment Trust" ("Trust").
b. Fund Names. The names of the five series in the trust (each a "Fund") were
changed to: "Mitchell Hutchins/Kidder, Peabody Global Equity Fund," "Mitchell
Hutchins/Kidder, Peabody Global Fixed Income Fund," "Mitchell Hutchins/Kidder,
Peabody Intermediate Fixed Income Fund," "Mitchell Hutchins/Kidder, Peabody
Asset Allocation Fund" and "Mitchell Hutchins/Kidder, Peabody Adjustable Rate
Government Fund."
c. Investment Adviser and Sub-Adviser. At a special meeting of shareholders
that took place on April 13, 1995, shareholders approved a new investment
advisory and administration agreement with Mitchell Hutchins Asset Management
Inc. ("Mitchell Hutchins") and, for each Fund not sub-advised by Mitchell
Hutchins, a new sub-advisory agreement with the Fund's existing investment
adviser (each now referred to as a "Sub-Adviser"). Each Fund pays the same fee
for investment advisory and administration services to Mitchell Hutchins as
previously paid to Kidder Peabody Asset Management, Inc. ("KPAM") and, for each
sub-advised Fund, Mitchell Hutchins (not the Fund) pays the same fee for
sub-advisory services to the Sub-Adviser as previously paid by KPAM, as
described in each Fund's Prospectus. Mitchell Hutchins, or the Sub-Adviser in
the case of each sub-advised Fund, continues to manage each Fund in accordance
with each Fund's investment objective, policies and restrictions as stated in
each Prospectus.
Mitchell Hutchins is a wholly owned subsidiary of Paine Webber Incorporated
("PaineWebber"), which is in turn wholly owned by Paine Webber Group Inc., a
publicly owned financial services holding company. Mitchell Hutchins is located
at 1285 Avenue of the Americas, New York, New York 10019. As of March 31, 1995,
Mitchell Hutchins served as adviser or sub-adviser to 42 investment companies
with an aggregate of 77 separate portfolios and aggregate assets of
approximately $26 billion.
d. Other Services. Mitchell Hutchins also serves as each Fund's distributor.
All references in each Fund's Prospectus to Kidder, Peabody & Co. Incorporated
as each Fund's distributor are replaced with references to Mitchell Hutchins.
PFPC Inc. ("PFPC"), a subsidiary of PNC Bank, National Association, whose
principal address is 400 Bellevue Parkway, Wilmington, Delaware 19809 is each
Fund's transfer agent. All references in the Prospectus to IFTC as the Fund's
transfer agent are replaced with references to PFPC.
1
<PAGE>
The address for purchase, exchange and redemption transactions has been
changed to:
PFPC Inc.
P.O. Box 8950
Wilmington, DE 19899
Attn: Mitchell Hutchins/Kidder, Peabody Mutual Funds
800-647-1568
e. Volume Discounts and Rights of Accumulation. The terms of Letters of Intent
executed prior to February 14, 1995 will be observed, but new Letters of Intent
are no longer available.
Reduced sales charges are available through volume discounts and a right of
accumulation. If an investor or eligible group of related Fund investors, as
defined below, purchases Class A shares of a Fund concurrently with Class A
shares of other PaineWebber mutual funds or Mitchell Hutchins/Kidder, Peabody
mutual funds, the purchases may be combined to take advantage of the reduced
sales charges applicable to larger purchases. The right of accumulation permits
a Fund investor or eligible group of related Fund investors, as defined below,
to pay the lower sales charge applicable to larger purchases by basing the sales
charge on (1) the dollar amount of Class A shares then being purchased plus (2)
an amount equal to the then-current net asset value of the investor's or group's
combined holdings of Class A Fund shares and Class A shares of any other
PaineWebber mutual fund or Mitchell Hutchins/Kidder, Peabody mutual fund. The
purchaser must provide sufficient information to permit confirmation of his or
her holdings, and the acceptance of the purchase order is subject to that
confirmation. This right of accumulation may be amended or terminated at any
time.
An "eligible group of related Fund investors" can consist of any combination
of the following:
(a) an individual, that individual's spouse, parents and children;
(b) an individual and his or her Individual Retirement Account ("IRA");
(c) an individual (or eligible group of individuals) and any company
controlled by the individual(s) (a person, entity or group that holds 25% or
more of the outstanding voting securities of a corporation will be deemed to
control the corporation, and a partnership will be deemed to be controlled by
each of its general partners);
(d) an individual (or eligible group of individuals) and one or more employee
benefit plans of a company controlled by individual(s);
(e) an individual (or eligible group of individuals) and a trust created by
the individual(s), the beneficiaries of which are the individual and/or the
individual's spouse, parents or children;
(f) an individual and a Uniform Gifts to Minors Act/Uniform Transfers to
Minors Act account created by the individual or the individual's spouse; or
(g) an employer (or group of related employers) and one or more qualified
retirement plans of such employer or employers (an employer controlling,
controlled by or under common control with another employer is deemed related to
that other employer).
f. Stock Certificates. Stock certificates are no longer issued for shares of
each Fund.
g. Reinstatement Privilege. Shareholders who have redeemed Class A shares may
reinstate their Fund account without a sales charge up to the dollar amount
redeemed by purchasing Class A shares within 365 days after the redemption. To
take advantage of this reinstatement privilege, shareholders must notify their
investment executive at the time the privilege is exercised.
h. Redemption by Mail. Redemption requests received by PFPC by mail will be
processed by PFPC. PFPC will mail a check in the appropriate redemption amount
to the shareholder the next business day after receipt of a redemption request
in "good order" as specified in the Prospectuses.
i. Automatic Investment Plan. The Automatic Investment Plan no longer accepts
twice monthly orders, but will accept monthly, quarterly and semi-annual orders.
2
<PAGE>
j. Instances of a Reduced or Waived Sales Charge. The three paragraphs of the
section titled "PURCHASE OF SHARES-Instances of a Reduced or Waived Sales
Charge" are replaced with the following:
Sales Charge Waivers-Class A Shares. Class A shares may be purchased without a
sales charge by employees, directors and officers of PaineWebber or its
affiliates, directors or trustees and officers of any PaineWebber mutual funds,
their spouses, parents and children and advisory clients of Mitchell Hutchins.
Class A shares also may be purchased without a sales charge if the purchase is
made through a PaineWebber investment executive who formerly was employed as a
broker with another firm registered as a broker-dealer with the Securities and
Exchange Commission, provided (1) the purchaser was the investment executive's
client at the competing brokerage firm, (2) within 90 days of the purchase of
Class A shares the purchaser redeemed shares of one or more mutual funds for
which that competing firm or its affiliates was principal underwriter, provided
the purchaser either paid a sales charge to invest in those funds, paid a
contingent deferred sales charge upon redemption or held shares of those funds
for the period required not to pay the otherwise applicable contingent deferred
sales charge and (3) the total amount of shares of all PaineWebber mutual funds
of Mitchell Hutchins/Kidder, Peabody mutual funds purchased under this sales
charge waiver does not exceed the amount of the purchaser's redemption proceeds
from the competing firm's funds. To take advantage of this waiver, an investor
must provide satisfactory evidence that all the above-noted conditions are met.
Qualifying investors should contact their PaineWebber investment executives for
more information.
k. Other Redemption Policies. With respect to shareholder holdings that are
reduced by redemptions, and not by reason of market fluctuations, to a value of
$500 or less, for which involuntary redemptions by the Trust may be made, the
shareholder notice provision is modified to increase the time period to 60 days
in which shareholders will be given the opportunity to increase the account
balance to more than $500.
l. Systematic Withdrawal Plan. The paragraph under the section entitled
"Systematic Withdrawal Plan" is replaced with the following:
Shareholders who own shares of the Fund with a value of $5,000 or more may
have Mitchell Hutchins redeem a portion of their shares monthly, quarterly or
semi-annually under the systematic withdrawal plan. The minimum amount for all
withdrawals of shares is $100. Quarterly withdrawals are made in March, June,
September and December, and semi-annual withdrawals are made in June and
December. Shareholders who receive dividends or other distributions in cash may
not participate in the systematic withdrawal plan. Purchases of additional
shares of the Fund concurrently with withdrawals are ordinarily disadvantageous
to shareholders because of tax liabilities and any sales charges.
2. Exchange Privileges and Charges. Shares of the Funds may be exchanged for
shares of the corresponding class of PaineWebber Funds offered under the
PaineWebber Flexible Pricing SM System. Exchanges are no longer subject to the
payment of an amount equal to the difference between the sales charge previously
paid and the sales charge payable on the shares acquired in the exchange. In
addition, the exchange privilege of each Fund with former Kidder, Peabody money
market funds is eliminated. The first paragraph of the section titled "Exchange
Privilege" is replaced with the following:
Fund shares will continue to be exchangeable with the corresponding class of
Mitchell Hutchins/Kidder, Peabody Funds and additionally can be exchanged with
the corresponding class of shares of PaineWebber Funds offered under the
PaineWebber Flexible Pricing SM System (Class A shares for Class A shares of
PaineWebber Funds and Class B shares for Class D shares of PaineWebber Funds).
3. Purchases and Redemptions Through PaineWebber. The following information
revises and supplements the information appearing under the captions "Purchase
of Shares" and "Redemption of Shares" in each Fund's prospectus:
3
<PAGE>
Purchase of Shares-Purchase of Shares Through PaineWebber or Correspondent
Firms. The time by which payment for shares purchased is due at PaineWebber has
changed due to the implementation of "T+3" settlement procedures. Payment is due
on the third Business Day after the order is received in PaineWebber's New York
City offices. A "Business Day" is any day on which the New York Stock Exchange,
Inc. ("NYSE") is open for business.
Redemption of Shares-Redemption of Shares Through PaineWebber or Correspondent
Firms. The time by which redemption proceeds will be paid to the redeeming
shareholder has also changed due to the implementation of "T+3." Repurchase
proceeds will be paid within three Business Days after receipt of the request in
PaineWebber's New York City offices. "Business Day" is defined above.
5. Effective February 13, 1995 and Applicable Only to the Mitchell
Hutchins/Kidder, Peabody Asset Allocation Fund.
a. Portfolio Management. T. Kirkham Barneby is primarily responsible for
day-to-day portfolio management of the Fund. Mr. Barneby is a Managing Director
and Chief Investment Officer-Quantitative Investments of Mitchell Hutchins. Mr.
Barneby rejoined Mitchell Hutchins in 1994, after being with Vantage Global
Management for one year. During the eight years that Mr. Barneby was previously
with Mitchell Hutchins, he was a Senior Vice President responsible for
quantitative management and asset allocation models. Before joining Mitchell
Hutchins, Mr. Barneby served as Director of Pension Investment Strategy at the
Continental Group in Stanford, Connecticut and has held positions in the
Economics Department at both Citibank and Merrill Lynch.
b. Sales Charges. The Fund no longer imposes a contingent deferred sales
charge (CDSC) on Class B shares held less than one year.
6. Effective February 13, 1995 and Applicable Only to the Mitchell
Hutchins/Kidder, Peabody Adjustable Rate Government Fund.
a. Portfolio Management. Dennis L. McCauley and Nirmal Singh are jointly
responsible for the day-to-day management of the Fund. Mr. McCauley is a
Managing Director and Chief Investment Officer-Fixed Income of Mitchell Hutchins
responsible for overseeing all active fixed income investments, including
domestic and global taxable and tax-exempt mutual funds. Prior to joining
Mitchell Hutchins in 1994, Mr. McCauley worked for IBM Corporation where he was
Director of Fixed Income Investments responsible for developing and managing
investment strategy for all fixed income and cash management investments of
IBM's pension fund and self-insured medical funds. Mr. McCauley has also served
as Vice President of IBM Credit Corporation's mutual funds and as a member of
the Retirement Fund Investment Committee.
Nirmal Singh is a Vice President of Mitchell Hutchins responsible for
overseeing investments in the mortgage-backed securities section. Prior to
joining Mitchell Hutchins in 1993, Mr. Singh worked for Merrill Lynch Asset
Management where he was a member of the portfolio management team responsible
for several diversified funds, including mortgage-backed securities funds with
assets totalling $8 billion. Mr. Singh has also served as Senior Portfolio
Manager at Nomura Mortgage Funds Management and prior to Nomura, he worked as a
transactions strategist at Shearson Lehman Brothers and for two years at the
Federal National Mortgage Association.
7. Effective May 23, 1995 and applicable only to the Mitchell Hutchins/Kidder,
Peabody Global Fixed Income Fund:
The board of trustees of Mitchell Hutchins/Kidder, Peabody Investment Trust
("Trust") has approved a Plan of Reorganization and Termination
("Reorganization") for submission to the shareholders of its series, Mitchell
Hutchins/Kidder, Peabody Global Fixed Income Fund ("Fund"), at a special meeting
to be held August 25, 1995. If the proposed Reorganization is approved and
implemented, all the Fund's assets will be acquired and its liabilities assumed
by PaineWebber Global Income Fund ("Income Fund") in a tax-free
4
<PAGE>
reorganization. As a result of the Reorganization, the two funds' assets would
be combined and each Fund shareholder would, on the closing date of the
transaction, receive a number of full and fractional shares of the corresponding
Class of shares of Income Fund having an aggregate value equal to the value of
the shareholder's holdings in the Fund. Income Fund is a series of PaineWebber
Investment Series, an open-end management investment company organized as a
Massachusetts business trust. There can be no assurance that the Fund's
shareholders will approve the Reorganization.
The meeting of Fund shareholders to consider the proposed Reorganization will
be held on August 25, 1995. If the Reorganization is approved, sales of all
Classes of Fund shares will cease on September 22, 1995, so that Fund shares
will no longer be available for purchase or exchange starting on September 25,
1995 through the closing date of the Reorganization. Redemptions of Fund shares
and exchanges of Fund shares for shares of another PaineWebber or Mitchell
Hutchins/Kidder, Peabody mutual fund may be effected through the closing date of
the Reorganization.
8. Effective July 3, 1995 and Applicable Only to the Mitchell Hutchins/Kidder,
Peabody Global Equity Fund and Mitchell Hutchins/Kidder, Peabody Asset
Allocation Fund:
The sales load schedule for Class A shares appearing in the prospectus is
replaced with the schedule shown below, effective on July 3, 1995:
<TABLE>
<CAPTION>
Sales Charge as a
Percentage of Discount to
------------------------------ Selected
Net Amount Dealers as a
Invested Percentage
Amount of Purchase Offering (Net Asset of Offering
at offering Price Price Value) Price
- ------------------------- ------------ -------- ----------
<S> <C> <C> <C>
Less than $50,000 ........................................ 4.50% 4.71% 4.25%
$50,000 to $99,999 ........................................ 4.00 4.17 3.75
$100,000 to $249,999 ....................................... 3.50 3.63 3.25
$250,000 to $499,999 ....................................... 2.50 2.56 2.25
$500,000 to $999,999 ....................................... 1.75 1.78 1.50
$1,000,000 and over (1) .................................... None None 1.00
</TABLE>
- -------
(1) Mitchell Hutchins pays compensation to PaineWebber out of its own
resources.
Dated: June 22, 1995
This Supplement Replaces and Supersedes All Prior Supplements.
5
<PAGE>
PROSPECTUS DECEMBER 29, 1994
- --------------------------------------------------------------------------------
Kidder, Peabody Intermediate Fixed Income Fund
60 BROAD STREET NEW YORK, NEW YORK 10004-2350 (212) 656-1737
Kidder, Peabody Intermediate Fixed Income Fund (the 'Fund'), a series of Kidder,
Peabody Investment Trust (the 'Trust'), seeks maximum total return consisting
primarily of current income and secondarily of capital appreciation. The Fund
attempts to achieve this objective through an actively managed portfolio
consisting of a wide range of fixed income securities that are rated primarily
in the three highest categories by recognized rating agencies.
This Prospectus briefly sets forth certain information about the Fund, including
applicable operating expenses, that prospective investors should know before
investing. Investors are advised to read this Prospectus and retain it for
future reference.
Additional information about the Fund, contained in a Statement of Additional
Information dated the same date as this Prospectus, has been filed with the
Securities and Exchange Commission (the 'SEC') and is available to investors
upon request and without charge by calling or writing the Trust at the telephone
number or address listed above. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.
- --------------------------------------------------------------------------------
MANAGER
Kidder Peabody Asset Management, Inc.
INVESTMENT ADVISER
GE Investment Management Incorporated
DISTRIBUTOR
Kidder, Peabody & Co. Incorporated
[Logo]
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
- --------------------------------------------------------------------------------
FEE TABLE
The table below shows the costs and expenses that an investor would incur,
either directly or indirectly, as a shareholder of the Fund, based upon the
Fund's annual operating expenses.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases of Shares (as a percentage of
offering price)....................................................... 2.25% 0% 0%
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of
offering price)....................................................... 0% 0% 0%
Maximum Contingent Deferred Sales Charge (as a percentage of redemption
proceeds)............................................................. 0% 0% 0%
Redemption Fees (as a percentage of amount redeemed).................... 0% 0% 0%
Maximum Exchange Fee.................................................... 0% 0% 0%
Maximum Annual Investment Advisory Fee Payable by shareholders holding
Class C Shares through the INSIGHT Investment Advisory Program (as a
percentage of average daily value of shares held)..................... 0% 0% 1.50%
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees......................................................... .70% .70% .70%
Rule 12b-1 Fees......................................................... .25 .75 0
Other Expenses.......................................................... .51 .51 .51
------- ------- -------
Total Fund Operating Expenses....................................... 1.46% 1.96% 1.21%
------- ------- -------
------- ------- -------
</TABLE>
The nature of the services provided to, and the aggregate management fees
paid by, the Fund are described below under 'Management of the Fund.' The Fund
bears an annual Rule 12b-1 service fee of .25% of the value of the average daily
net assets of Class A shares and an annual Rule 12b-1 fee of .75% of the value
of the average daily net assets of Class B shares, consisting of a .25% service
fee and a .50% distribution fee. Long-term shareholders of Class B Shares may
pay more than the economic equivalent of the maximum front-end sales charge
currently permitted by the rules of the National Association of Securities
Dealers, Inc. governing investment company sales charges. See 'Distributor.'
The percentage of 'Other Expenses' in the table above is based on amounts
incurred during the Fund's most recent fiscal year; these expenses include fees
for shareholder services, custodial fees, legal and accounting fees, printing
costs and registration fees, the costs of regulatory compliance, a portion of
the costs associated with maintaining the Trust's legal existence and the costs
involved in communicating with the Fund's shareholders.
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical $1,000 investment in the Fund assuming (1) a 5% annual return,
(2) payment of the shareholder transaction expenses and annual Fund operating
expenses set forth in the table above and (3) complete redemption at the end of
the period.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Class A............................................ $37 $68 $100 $193
Class B ........................................... $20 $62 $106 $229
Class C............................................ $27 $84 $143 $304
</TABLE>
The above example is intended to assist an investor in understanding
various costs and expenses that the investor would bear upon becoming a
shareholder of the Fund. The example should not be considered to be a
representation of past or future expenses. Actual expenses of the Fund may be
greater or less than those shown above. The assumed 5% annual return shown in
the example is hypothetical and should not be considered to be a representation
of past or future annual return; the actual return of the Fund may be greater or
less than the assumed return.
2
<PAGE>
- --------------------------------------------------------------------------------
HIGHLIGHTS
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------------
The Trust
The Trust is an open-end management investment company. See 'General Information.'
- ---------------------------------------------------------------------------------------------------------------------------
The Fund
The Fund, one of several series of the Trust, is a diversified fund that seeks maximum total
return consisting primarily of current income and secondarily of capital appreciation. The Fund
seeks to achieve this objective through an actively managed portfolio consisting of a wide
variety of fixed income securities that are rated primarily in the three highest categories by
recognized rating agencies. See 'Investment Objective and Policies' and 'General Information.'
- ---------------------------------------------------------------------------------------------------------------------------
Benefits of
Investing
in the
Fund
Mutual funds, such as the Fund, are flexible investment tools that are increasingly
popular -- one of four American households now owns shares of at least one mutual fund -- for
very sound reasons. The Fund offers investors the following important benefits:
Active Fixed Income Investing
The Fund's investment strategy is designed to afford investors the opportunity to seek
maximum total return while limiting investment risk through investment in a portfolio
consisting of fixed income securities that are rated primarily in the three highest categories
by recognized rating agencies. See 'Investment Objective and Policies.'
Professional Management
By pooling the monies of many investors, the Fund enables shareholders to obtain the benefits
of full-time professional management and an array of investments that is typically beyond the
means of most investors. The Fund's investment adviser, GE Investment Management Incorporated
('GEIM'), reviews the fundamental characteristics of far more securities than can a typical
individual investor and may employ portfolio management techniques that frequently are not
used by individual or many institutional investors. See 'Management of the Fund.'
Transaction Savings
By investing in the Fund, an investor is able to acquire ownership in a portfolio of
securities without paying the higher transaction costs generally associated with a series of
small securities purchases.
Convenience
Fund shareholders are relieved of the administrative and recordkeeping burdens normally
associated with direct ownership of securities.
</TABLE>
3
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Liquidity
The Fund's convenient purchase and redemption procedures provide shareholders with ready
access to their money and reduce the delays frequently involved in the direct purchase and
sale of securities. See 'Purchase of Shares' and 'Redemption of Shares.'
Choice Pricing System
Under the Choice Pricing System'sm', the Fund presently offers three classes of shares
('Classes') that provide different methods of purchasing shares and allow investment
flexibility and a wider range of investment choices. See 'Purchase of Shares.'
Exchange Privilege
Shareholders of the Fund may exchange all or a portion of their shares for shares of the same
Class or the sole outstanding Class of specified funds in the Kidder Family of Funds. See
'Exchange Privilege.'
Total Portfolio Approach
The funds in the Kidder Family of Funds are designed to be strategically combined as part of
a total portfolio approach. This investment philosophy acknowledges the interplay of a
shareholder's many different investing needs and preferences and recognizes that every
investment move a shareholder makes alters the balance of his or her overall financial
profile. The Fund may be used in conjunction with other funds in the Kidder Family of Funds to
build a portfolio that maximizes the potential of available assets while meeting many
different -- and changing -- financial needs.
- ---------------------------------------------------------------------------------------------------------------------------
Purchase of
Shares
Kidder, Peabody & Co. Incorporated ('Kidder, Peabody'), a major full-line investment services
firm serving the United States and foreign securities markets, acts as the distributor of the
Fund's shares. The Fund presently offers three Classes of shares that differ principally in
terms of the sales charges and rate of expenses to which they are subject and are designed to
provide an investor with the flexibility of selecting an investment best suited to the
investor's needs. See 'Purchase of Shares' and 'Distributor.'
Class A Shares
The public offering price of Class A shares is the current net asset value per share next
determined after a purchase order is received, plus a maximum sales charge of 2.25% (2.33% of
the net amount invested). Investors purchasing $50,000 or more, certain employee benefit plans
and employees of Kidder, Peabody's affiliates are eligible for reduced sales charges. The Fund
pays Kidder, Peabody a service fee with respect to Class A shares at the annual rate of .25%
of the value of the average daily net assets attributable to this Class.
</TABLE>
4
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Class B Shares
The public offering price of Class B shares is the net asset value per share next determined
after a purchase order is received without imposition of a sales charge. The Fund pays Kidder,
Peabody a service fee at the annual rate of .25%, and a distribution fee at the annual rate of
.50%, of the average daily net assets attributable to this Class.
Class C Shares
The public offering price of Class C shares, which are available exclusively to employees of
Kidder, Peabody and their associated accounts, directors or trustees of any fund in the Kidder
Family of Funds, employee benefit plans of Kidder, Peabody and participants in the INSIGHT
Investment Advisory Program'sm' ('INSIGHT'), is the net asset value per share next determined
after a purchase offer is received without imposition of a sales charge. This Class bears no
service or distribution fees. Participation in INSIGHT is subject to payment of an advisory
fee at the maximum annual rate of 1.50% of assets held through INSIGHT, generally charged
quarterly in advance.
Investment Minimums
The minimum initial investment in the Fund is $1,000 and the minimum subsequent investment is
$50, except that for individual retirement accounts ('IRAs'), other tax qualified retirement
plans and accounts established pursuant to the Uniform Gifts to Minors Act, the minimum
initial investment is $250 and the minimum subsequent investment is $1.00. See 'Purchase of
Shares.'
- ---------------------------------------------------------------------------------------------------------------------------
Redemption
of Shares
Shares of the Fund may be redeemed at the Fund's next determined net asset value per share.
Redemptions are not subject to any contingent deferred sales charges or other charges. See
'Redemption of Shares.'
- ---------------------------------------------------------------------------------------------------------------------------
Management
Kidder Peabody Asset Management, Inc. ('KPAM'), a wholly-owned subsidiary of Kidder, Peabody,
serves as the Fund's manager and receives a fee, accrued daily and paid monthly, at the annual
rate of .70% of the Fund's average daily net assets. KPAM in turn employs GEIM, a subsidiary of
General Electric Company ('GE'), as the Fund's investment adviser, in which capacity GEIM
receives from KPAM a fee, accrued daily and paid monthly, at the annual rate of .50% of the
Fund's average daily net assets up to $200 million and .35% of the Fund's average daily net
assets equal to or in excess of $200 million. General Electric Capital Services, Inc., a
wholly-owned subsidiary of GE, owns all the outstanding stock of Kidder, Peabody Group Inc.
('Kidder Group'), the parent company of Kidder, Peabody. See 'Management of the Fund' and
'Distributor.'
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Risk Factors
and Special
Considera-
tions
No assurance can be given that the Fund will achieve its investment objective. The value of a
fixed income security is dependent on, among other things, the ability of its issuer to pay
interest and repay principal in accordance with the terms of the obligation. Although the
Fund's assets are invested primarily in fixed income securities rated in the three highest
categories by recognized rating agencies, up to 35% of the Fund's assets may be invested in
securities rated in the fourth category. While securities rated in the fourth highest category
are considered investment grade, these securities may also be considered to possess speculative
characteristics. The Fund may also be subject to certain risks in entering into transactions
involving lending portfolio securities, entering into repurchase agreements and using certain
investment techniques and strategies, such as entering into forward roll transactions, trading
futures contracts, options on futures contracts and purchasing securities on a when-issued or
delayed-delivery basis and engaging in short sales of securities. See 'Investment Objective and
Policies -- Risk Factors and Special Considerations' at page 15 of this Prospectus.
</TABLE>
6
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Trust with respect to
the Fund by Deloitte & Touche LLP. Financial statements for the fiscal year
ended August 31, 1994 and the report of independent auditors are included in the
Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
---------------------------------------------------------------------------------------
PERIOD PERIOD PERIOD
ENDED YEAR ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1992`D' 1993 1994 1993`D'`D' 1994 1993`D'`D' 1994
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of period................ $ 12.00 $12.56 $12.77 $12.63 $12.77 $12.63 $12.76
---------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income...... 0.39 0.74 0.57 0.19 0.51 0.22 0.60
Net realized and unrealized
gain (loss) on
investments.............. 0.56 0.30 (0.89) 0.14 (0.89) 0.13 (0.88)
---------------------------------------------------------------------------------------
Total from investment
operations............... 0.95 1.04 (0.32) 0.33 (0.38) 0.35 (0.28)
---------------------------------------------------------------------------------------
DISTRIBUTIONS TO
SHAREHOLDERS FROM
Net investment income...... (0.39) (0.74) (0.57) (0.19) (0.51) (0.22) (0.60)
Net realized capital
gains.................... -- (0.09) (0.22) -- (0.22) -- (0.22)
---------------------------------------------------------------------------------------
Total distributions........ (0.39) (0.83) (0.79) (0.19) (0.73) (0.22) (0.82)
---------------------------------------------------------------------------------------
Net asset value, end of
period................... $ 12.56 $12.77 $11.66 $12.77 $11.66 $12.76 $11.66
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Total return#.............. 17.02% 8.80% (2.62)% 8.53% 3.11% 9.04% (2.30)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(in thousands)........... $ 48,632 $57,402 $34,222 $1,698 $2,796 $1,136 $1,680
RATIOS TO AVERAGE NET
ASSETS
Expenses, excluding
distribution and service
fees, net of
reimbursement............ .16%* 0.83% 1.21% 0.83%* 1.21% 0.83%* 1.21%
Expenses, including
distribution and service
fees, net of
reimbursement............ .40%* 1.08% 1.46% 1.53%* 1.96% 0.83%* 1.21%
Expenses, before
reimbursement from
manager.................. 1.63%* 1.31% 1.46% 1.76%* 1.96% 1.06%* 1.21%
Net investment income...... 6.76%* 5.73% 4.69% 5.28%* 4.20% 5.98%* 4.94%
PORTFOLIO TURNOVER RATE.... 33.03% 148.92% 279.07% 148.92% 279.07% 148.92% 279.07%
</TABLE>
- ------------------
`D' From March 12, 1992 (Commencement of Operations) to August 31, 1992.
`D'`D' From May 10, 1993 (Commencement of Operations) to August 31, 1993.
# Total return does not reflect the effects of a sales charge, and is
calculated by giving effect to the reinvestment of dividends on the dividend
payment date.
* Annualized
7
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INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is maximum total return, consisting primarily of
current income and secondarily of capital appreciation. No assurance can be
given that the Fund will be able to achieve its investment objective, which may
be changed only with the approval of a majority of the Fund's outstanding voting
securities, which in turn is defined in the Investment Company Act of 1940, as
amended (the '1940 Act'), as the lesser of (1) 67% or more of the shares present
at a Fund meeting, if the holders of more than 50% of the outstanding shares of
the Fund are present or represented by proxy or (2) more than 50% of the
outstanding shares of the Fund.
The Fund's annual report for the fiscal year ended August 31, 1994 contains
information regarding relevant market conditions and investment strategies and
techniques pursued by KPAM during such fiscal year and is available to
shareholders without charge upon request made to the Fund at the address listed
on the front cover page of this Prospectus.
TYPES OF PORTFOLIO INVESTMENTS
DEBT INSTRUMENTS. In seeking to achieve its investment objective, the Fund
follows a strategy contemplating shifts (sometimes frequent) among a wide range
of investments. The Fund invests in the following classes of investments
selected by GEIM and monitored by KPAM: securities issued or guaranteed by the
U.S. Government or one of its agencies or instrumentalities ('Government
Securities'); corporate debt instruments, such as bonds, debentures, notes and
non-convertible preferred stock; mortgage related securities, including
adjustable rate mortgage related securities ('ARMs'), collateralized mortgage
obligations ('CMOs') and government stripped mortgage related securities;
asset-backed and receivable-backed securities; and money market instruments.
Certain of the features of these securities are described below. The Fund
generally invests in intermediate fixed income securities with the result that,
under normal market conditions, the average weighted maturity of the Fund's
portfolio will be between three and ten years, although the Fund may hold
instruments with remaining maturities of up to 30 years. Investors should be
aware that, depending on market conditions, the Fund's ability to achieve its
objective of maximum total return may be limited owing to the types and
remaining maturities of securities in which the Fund invests.
The Fund limits its purchases of debt securities to those that are
investment grade and at all times at least 65% of the Fund's total assets are
invested in securities rated in the three highest categories by Standard &
Poor's Corporation ('Standard & Poor's') or Moody's Investors Service, Inc.
('Moody's') or unrated securities deemed by GEIM to be of comparable quality.
Securities are deemed to be of investment grade if they are rated within the
four highest categories established by Standard & Poor's or Moody's or have
received an equivalent rating from another nationally recognized rating agency
or, if unrated, are deemed by GEIM to be of comparable quality. Securities rated
in the fourth highest category, that is, rated BBB by Standard & Poor's or Baa
by Moody's, are considered to possess speculative characteristics and adverse
changes in economic conditions are more likely to weaken the ability of issuers
of these debt securities to pay principal and interest. A description of
Standard and Poor's and Moody's ratings is set forth in the Appendix to the
Statement of Additional Information.
The Fund will typically purchase a debt security if GEIM believes that the
yield of the security is sufficiently attractive in light of the risks of
ownership of the security and its potential for capital appreciation. In
determining whether the Fund should invest in particular debt
8
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securities, GEIM considers factors including but not limited to: the price,
coupon and yield to maturity; GEIM's assessment of the credit quality of the
issuer; the yield in relation to historical norms and yields on other debt
instruments; and the terms of the debt securities, including the subordination,
default, sinking fund and early redemption provisions.
The Fund invests primarily in U.S. debt securities that are traded
over-the-counter or listed on securities exchanges. Although the Fund reserves
freedom of action to invest up to 35% of its total assets in securities of
foreign companies or governments that are listed on foreign securities exchanges
or traded in foreign over-the-counter markets, it is not anticipated that more
than 5% of its total assets will be invested in these securities in the
foreseeable future. Certain considerations associated with these securities and
with forward currency contracts and options on foreign currencies, which the
Fund may enter into in connection with investments in foreign securities, are
described in the Statement of Additional Information.
GOVERNMENT SECURITIES. Among the Government Securities that may be held by
the Fund are instruments that are supported by the full faith and credit of the
United States; instruments that are supported by the right of the issuer to
borrow from the U.S. Treasury; and instruments that are supported solely by the
credit of the instrumentality.
MORTGAGE RELATED SECURITIES. The mortgage related securities in which the
Fund invests represent pools of mortgage loans assembled for sale to investors
by various governmental agencies, such as the Government National Mortgage
Association ('GNMA'), by government related organizations, such as the Federal
National Mortgage Association ('FNMA') and the Federal Home Loan Mortgage
Corporation ('FHLMC'), as well as by private issuers, such as commercial banks,
savings and loan institutions, mortgage bankers and private mortgage insurance
companies. Under current market conditions, the Fund's holdings of mortgage
related securities may be expected to consist primarily of securities issued or
guaranteed by GNMA, FNMA and FHLMC. The composition of the portfolio's assets,
however, varies from time to time based upon the determination of GEIM of how
best to achieve the Fund's investment objective taking into account such factors
as the liquidity and yield of various mortgage related securities.
ARMs have interest rates that reset at periodic intervals, thereby allowing
the Fund to participate in increases in interest rates through periodic
adjustments in the coupons of the underlying mortgages, resulting in both higher
current yields and lower price fluctuation than would be the case with more
traditional long term debt securities. Furthermore, if prepayments of principal
are made on the underlying mortgages during periods of rising interest rates,
the Fund generally is able to reinvest these amounts in securities with a higher
current rate of return. The Fund, however, does not benefit from increases in
interest rates to the extent that interest rates rise to the point at which they
cause the current yield of adjustable rate mortgages to exceed the maximum
allowable annual or lifetime reset limits (or 'caps') for a particular mortgage.
In addition, fluctuations in interest rates above these caps could cause ARMs to
behave more like long-term fixed rate securities in response to extreme
movements in interest rates.
CMOs are obligations fully collateralized by a portfolio of mortgages or
mortgage related securities. Payments of principal and interest on the mortgages
are passed through to the holders of the CMOs on the same schedule as they are
received, although certain classes of CMOs have priority over others with
respect to the receipt of prepayments on the mortgages.
GOVERNMENT STRIPPED MORTGAGE RELATED SECURITIES. The Fund may invest in
government stripped mortgage related securities issued and guaranteed by GNMA,
FNMA or FHLMC. These
9
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securities represent beneficial ownership interests in either periodic principal
distributions ('principal-only') or interest distributions ('interest-only') on
mortgage related certificates issued by GNMA, FNMA or FHLMC, as the case may be.
The certificates underlying the government stripped mortgage related securities
represent all or part of the beneficial interest in pools of mortgage loans. The
Fund invests in government stripped mortgage related securities in order to
enhance yield or to benefit from anticipated appreciation in value of the
securities at times when GEIM believes that interest rates will remain stable or
increase. In periods of rising interest rates, the expected increase in the
value of government stripped mortgage related securities may offset all or a
portion of any decline in value of the securities held by the Fund.
ASSET-BACKED AND RECEIVABLE-BACKED SECURITIES. The Fund may invest in
asset-backed and receivable-backed securities. To date, several types of
asset-backed and receivable-backed securities have been offered to investors,
including 'Certificates for Automobile Receivables' ('CARs'sm'') and interests
in pools of credit card receivables. CARs'sm' represent undivided fractional
interests in a trust, the assets of which consist of a pool of motor vehicle
retail installment sales contracts and security interests in the vehicles
securing the contracts. Payments of principal and interest on CARs'sm' are
passed through monthly to certificate holders and are guaranteed up to certain
amounts and for a certain time period by a letter of credit issued by a
financial institution unaffiliated with the trustee or originator of the trust.
MONEY MARKET INSTRUMENTS. Pending the investment of funds resulting from
the sale of Fund shares or the liquidation of portfolio holdings in longer term
fixed income securities, or in order to shorten the Fund's average portfolio
maturity during temporary defensive periods in anticipation of a rise in
prevailing interest rates or in order to have available highly liquid assets to
meet anticipated redemptions of Fund shares or to pay the Fund's operating
expenses, the Fund may invest in the following types of money market
instruments: Government Securities; obligations issued or guaranteed by foreign
governments or by any of their political subdivisions, authorities, agencies or
instrumentalities that are rated AAA or AA by Standard & Poor's, Aaa or Aa by
Moody's, or that have received an equivalent rating from another nationally
recognized rating agency or, if unrated, are determined by GEIM to be of
equivalent quality; bank obligations (including certificates of deposit, time
deposits and bankers' acceptances of foreign or domestic banks, domestic savings
and loan associations and other banking institutions having total assets in
excess of $500 million); commercial paper rated no lower than A-1 by Standard &
Poor's or Prime-1 by Moody's, or the equivalent from another major rating
service, or, if unrated, of an issuer having an outstanding unsecured debt issue
then rated within the three highest rating categories; and repurchase agreements
meeting the conditions described below under 'Investment Techniques and
Strategies -- Repurchase Agreements.' At no time will the Fund's investments in
bank obligations, including time deposits, exceed 25% of the value of its
assets.
The Fund is authorized to invest in obligations of foreign banks or foreign
branches of domestic banks that are traded in the United States or outside the
United States, but that are denominated in U.S. dollars. These obligations
entail risks that are different from those of investments in obligations in
domestic banks, including foreign economic and political developments outside
the United States, foreign governmental restrictions that may adversely affect
payment of principal and interest on the obligations, foreign exchange controls
and foreign withholding or other taxes on income. Foreign branches of domestic
banks are not necessarily subject to the same or similar regulatory requirements
that apply to domestic banks, such as mandatory reserve requirements, loan
limitations and accounting, auditing and financial
10
<PAGE>
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recordkeeping requirements. In addition, less information may be publicly
available about a foreign branch of a domestic bank than about a domestic bank.
INVESTMENT TECHNIQUES AND STRATEGIES
The Fund, in seeking to meet its investment objective, is authorized to engage
in any one or more of the specialized investment techniques and strategies
described below:
OPTIONS. To hedge against adverse market shifts, the Fund may purchase put
and call options on securities held in its portfolio. In addition, the Fund may
seek to increase its income in an amount designed to meet operating expenses or
may hedge a portion of its portfolio investments through writing (that is,
selling) 'covered' call options. A put option provides its purchaser with the
right to compel the writer of the option to purchase from the option holder an
underlying security at a specified price at any time during or at the end of the
option period. In contrast, a call option gives the purchaser the right to buy
the underlying security covered by the option from the writer of the option at
the stated exercise price. A covered call option contemplates that, for so long
as the Fund is obligated as the writer of the option, it will own (1) the
underlying securities subject to the option or (2) securities convertible into,
or exchangeable without the payment of any consideration for, the securities
subject to the option. The value of the underlying securities on which covered
call options will be written at any one time by the Fund will not exceed 5% of
the Fund's total assets.
The Fund may purchase options on securities that are listed on national
securities exchanges or that are traded over-the-counter. As the holder of a put
option, the Fund has the right to sell the securities underlying the option and
as the holder of a call option, the Fund has the right to purchase the
securities underlying the option, in each case at the option's exercise price at
any time prior to, or on, the option's expiration date. The Fund may choose to
exercise the options it holds, permit them to expire or terminate them prior to
their expiration by entering into closing sale transactions. In entering into a
closing sale transaction, the Fund would sell an option of the same series as
the one it has purchased.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may trade
securities index, currency and interest rate futures contracts, and options on
those contracts, for a variety of risk reduction purposes such as hedging a
portion of the Fund's portfolio, providing an efficient means of regulating the
Fund's exposure to certain debt markets or hedging against changes in prevailing
levels of currency exchange rates. A securities index futures contract is an
agreement to take or make delivery of an amount of cash equal to the difference
between the value of the index at the beginning and at the end of the contract
period. A currency futures contract is a standardized contract for the future
delivery of a specified amount of currency at a future date at a price set at
the time of the contract and an interest rate futures contract is a similar
contract for the future delivery of a specific debt security. An option on a
futures contract, in contrast to a direct investment in the contract, gives the
purchaser the right, in return for the premium paid, to assume a position in the
underlying futures contract at a specified exercise price at any time on or
before the expiration date of the option.
The Fund may assume both 'long' and 'short' positions with respect to
futures contracts. A long position involves entering into a futures contract to
buy a commodity, whereas a short position involves entering into a futures
contract to sell a commodity. In entering into futures contracts, the Fund is
required to make initial 'margin' payments, which are payments in the nature of
performance bonds or good faith deposits, and to make 'variation' margin
payments from time to time as the values of the futures contracts fluctuate.
11
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The Fund will not (1) trade any futures contracts or options on futures
contracts if, immediately after the transactions, the aggregate of margin
deposits on all of the Fund's outstanding futures contracts and premiums paid on
its outstanding options on futures contracts would exceed 5% of the market value
of the total assets of the Fund after taking into account unrealized profits and
losses on any futures contracts or options on futures contracts or (2) enter
into any futures contracts or options on futures contracts if the aggregate of
the market value of the Fund's outstanding futures contracts and market value of
the currencies and futures contracts subject to outstanding options written by
the Fund would exceed 50% of the market value of the total assets of the Fund.
The Fund will enter into short positions in futures or options contracts for
bona fide hedging purposes only. As a result, the Fund will enter into a short
position in a futures or options contract in an effort to hedge against market
fluctuations that would otherwise impact the Fund's portfolio negatively. The
Fund will not use leverage when it enters into long futures or options
contracts; the Fund will place in a segregated account with its custodian, or
designated sub-custodian, with respect to each of its long positions, cash,
short-term Government Securities or other U.S. dollar-denominated, high-grade,
short-term money market instruments having a value equal to the underlying
commodity value of the contract.
LENDING PORTFOLIO SECURITIES. In seeking to achieve its investment
objective, the Fund may lend securities to well-known and recognized U.S. and
foreign brokers, dealers and banks. These loans, if and when made, may not
exceed 33 1/3% of the Fund's assets taken at value. The Fund's loans of
securities will be collateralized by cash, letters of credit or Government
Securities. The cash or instruments collateralizing the Fund's loans of
securities will be maintained at all times in a segregated account with the
Fund's custodian, or with a designated sub-custodian, in an amount at least
equal to the current market value of the loaned securities.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase agreement
transactions with respect to instruments in which the Fund is authorized to
invest. Although the amount of the Fund's assets that may be invested in
repurchase agreements terminable in less than seven days is not limited,
repurchase agreements maturing in more than seven days, together with other
illiquid securities, will not exceed 10% of the Fund's net assets. The Fund may
engage in repurchase agreement transactions with certain member banks of the
Federal Reserve System and with certain dealers listed on the Federal Reserve
Bank of New York's list of reporting dealers. Under the terms of a typical
repurchase agreement, the Fund would acquire an underlying debt obligation for a
relatively short period (usually not more than seven days) subject to an
obligation of the seller to repurchase, and the Fund to resell, the obligation
at an agreed-upon price and time, thereby determining the yield during the
Fund's holding period. This arrangement results in a fixed rate of return that
is not subject to market fluctuations during the Fund's holding period. The
value of the securities underlying a repurchase agreement of the Fund will be
monitored on an ongoing basis by GEIM or KPAM to ensure that the value is at
least equal at all times to the total amount of the repurchase obligation,
including interest. GEIM or KPAM will also monitor, on an ongoing basis to
evaluate potential risks, the creditworthiness of those banks and dealers with
which the Fund enters into repurchase agreements.
FORWARD ROLL TRANSACTIONS. In order to enhance current income, the Fund may
enter into forward roll transactions with respect to mortgage related securities
issued by GNMA, FNMA and FHLMC. In a forward roll transaction, the Fund sells a
mortgage related security to a financial institution, such as a bank or
broker-dealer, and simultaneously agrees to repurchase a similar security from
the institution at a later date at an agreed-upon price. The mortgage related
12
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securities that are repurchased bear the same interest rate as those sold, but
generally are collateralized by different pools of mortgages with different
prepayment histories than those sold. During the period between the sale and
repurchase, the Fund is not entitled to receive interest and principal payments
on the securities sold. Proceeds of the sale are invested in short-term
instruments, particularly repurchase agreements, and the income from these
investments, together with any additional fee income received on the sale,
generates income for the Fund exceeding the yield on the securities sold.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. To secure prices or yields
deemed advantageous at a particular time, the Fund may purchase securities on a
when-issued or delayed-delivery basis, in which case delivery of the securities
occurs beyond the normal settlement period; payment for or delivery of the
securities would be made prior to the reciprocal delivery or payment by the
other party to the transaction. The Fund enters into when-issued or
delayed-delivery transactions for the purpose of acquiring securities and not
for the purpose of leverage. When-issued securities purchased by the Fund may
include securities purchased on a 'when, as and if issued' basis under which the
issuance of the securities depends on the occurrence of a subsequent event, such
as approval of a merger, corporate reorganization or debt restructuring. The
Fund will establish with its custodian, or with a designated sub-custodian, a
segregated account consisting of cash, Government Securities or other liquid
high-grade debt obligations in an amount equal to the amount of its when-issued
or delayed-delivery purchase commitments.
SHORT SALES. The Fund may from time to time sell securities short. A short
sale is a transaction in which the Fund sells securities it does not own (but
has borrowed) in anticipation of a decline in the market price of the
securities. When the Fund makes a short sale, the proceeds it receives from the
sale are retained by a broker until the Fund replaces the borrowed securities.
To deliver the securities to the buyer, the Fund must arrange through a broker
to borrow the securities and, in so doing, the Fund becomes obligated to replace
the securities borrowed at their market price at the time of replacement,
whatever that price may be. The Fund may have to pay a premium to borrow the
securities and must pay any dividends or interest payable on the securities
until they are replaced.
The Fund's obligation to replace the securities borrowed in connection with
a short sale will be secured by collateral deposited with the broker that
consists of cash or Government Securities. In addition, the Fund will place in a
segregated account with its custodian an amount of cash or Government Securities
equal to the difference, if any, between (1) the market value of the securities
sold at the time they were sold short and (2) any cash or Government Securities
deposited as collateral with the broker in connection with the short sale (not
including the proceeds of the short sale). Until it replaces the borrowed
securities, the Fund will maintain the segregated account daily at a level so
that (1) the amount deposited in the account plus the amount deposited with the
broker (not including the proceeds from the short sale) will equal the current
market value of the securities sold short and (2) the amount deposited in the
account plus the amount deposited with the broker (not including the proceeds
from the short sale) will not be less than the market value of the securities at
the time they were sold short.
The Fund will not enter into a short sale of securities if, as a result of
the sale, the total market value of all securities sold short by the Fund would
exceed 25% of the value of the Fund's assets. In addition, the Fund may not (1)
sell short the securities of any single issuer listed on a national securities
exchange to the extent of more than 2% of the value of the Fund's net
13
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assets or (2) sell short the securities of any class of an issuer to the extent
of more than 2% of the outstanding securities of the class at the time of the
transaction. The extent to which the Fund may engage in short sales may be
further limited by the Fund's meeting the requirements for qualification as a
regulated investment company imposed under the Internal Revenue Code of 1986, as
amended (the 'Code'), which requirements are described below under 'Dividends,
Distributions and Taxes.' The Fund may make short sales 'against the box'
without complying with the limitations described above.
SHORT SALES AGAINST THE BOX. The Fund may sell securities 'short against
the box.' Whereas a short sale is the sale of a security the Fund does not own,
a short sale is 'against the box' if at all times during which the short
position is open, the Fund owns at least an equal amount of the securities or
securities convertible into, or exchangeable without further consideration for,
securities of the same issue as the securities sold short. Short sales against
the box are typically used by sophisticated investors to defer recognition of
capital gains or losses.
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental investment restrictions with respect
to the Fund that may not be changed without approval of a majority of the Fund's
outstanding voting securities (as defined in the 1940 Act). Included among those
fundamental restrictions are the following:
1. The Fund will not purchase securities (other than Government
Securities) of any issuer if, as a result of the purchase, more than 5% of
the value of the Fund's total assets would be invested in the securities of
the issuer, except that up to 25% of the value of the Fund's total assets
may be invested without regard to this 5% limitation.
2. The Fund will not purchase more than 10% of the voting securities
of any one issuer, or more than 10% of the securities of any class of any
one issuer, except that this limitation is not applicable to the Fund's
investments in Government Securities, and up to 25% of the Fund's assets
may be invested without regard to these 10% limitations.
3. The Fund will not borrow money, except that the Fund may enter into
forward roll transactions and borrow from banks for temporary or emergency
(not leveraging) purposes, including the meeting of redemption requests and
cash payments of dividends and distributions that might otherwise require
the untimely disposition of securities, in an amount not to exceed 20% of
the value of the Fund's total assets (including the amount borrowed) valued
at market less liabilities (not including the amount borrowed) at the time
the borrowing is made. Whenever borrowings, other than forward roll
transactions, exceed 5% of the value of the total assets of the Fund, the
Fund will not make any additional investments.
4. The Fund will not lend money to other persons, except through
purchasing debt obligations, lending portfolio securities in an amount not
to exceed 33 1/3% of the Fund's assets taken at value and entering into
repurchase agreements.
5. The Fund will invest no more than 25% of the value of its total
assets in securities of issuers in any one industry. For purposes of this
restriction, the term industry will be deemed to include (a) the government
of any country other than the United States, but not the United States
Government, and (b) any supranational organization.
Certain other investment restrictions adopted by the Trust with respect to
the Fund are described in the Statement of Additional Information.
14
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RISK FACTORS AND SPECIAL CONSIDERATIONS
Investing in the Fund involves risks and special considerations, such as those
described below:
MORTGAGE RELATED SECURITIES. The Fund may invest in mortgage related
securities without limit. There are several risks associated with mortgage
related securities generally. One is that the monthly cash inflow from the
underlying loans may not be sufficient to meet the monthly payment requirements
of the mortgage related security.
Prepayment of principal by mortgagors or mortgage foreclosures will shorten
the term of the underlying mortgage pool for a mortgage related security. Early
returns of principal will affect the average life of the mortgage related
securities remaining in the Fund. The occurrence of mortgage prepayments is
affected by various factors, including the level of interest rates, general
economic conditions, the location and age of the mortgage and other social and
demographic conditions. In periods of rising interest rates, the rate of
prepayment tends to decrease, thereby lengthening the average life of a pool of
mortgage related securities. Conversely, in periods of falling interest rates
the rate of prepayment tends to increase, thereby shortening the average life of
a pool. Reinvestment of prepayments may occur at higher or lower interest rates
than the original investment, thus affecting the yield of the Fund. Because
prepayments of principal generally occur when interest rates are declining, it
is likely that the Fund will have to reinvest the proceeds of prepayments at
lower interest rates than those at which the assets were previously invested. If
this occurs, the Fund's yield will correspondingly decline. Thus, mortgage
related securities may have less potential for capital appreciation in periods
of falling interest rates than other fixed income securities of comparable
maturity, although these securities may have a comparable risk of decline in
market value in periods of rising interest rates. To the extent that the Fund
purchases mortgage related securities at a premium, unscheduled prepayments,
which are made at par, will result in a loss equal to any unamortized premium.
As noted above, fluctuations in interest rates above caps could cause ARMs
to behave more like long term fixed rate securities in response to extreme
movements in interest rates. As a result, during periods of volatile interest
rates, the Fund's net asset value may fluctuate more than if it did not purchase
ARMs. In addition, during periods of rising interest rates, changes in the
coupon of the adjustable rate mortgages will slightly lag changes in market
rates, creating the potential for some principal loss for shareholders who
redeem their shares before the interest rates on the underlying mortgages are
adjusted to reflect current market rates.
As noted above, certain classes of CMOs have priority over others with
respect to the receipt of prepayments on the mortgages. Therefore, depending on
the type of CMOs in which the Fund invests, the investment may be subject to a
greater or lesser risk of prepayment than other types of mortgage related
securities.
Mortgage related securities may not be readily marketable. To the extent
any of these securities are not readily marketable in the judgment of GEIM, the
Fund will limit its investments in these securities, together with other
illiquid instruments, to not more than 10% of the value of its net assets.
GOVERNMENT STRIPPED MORTGAGE RELATED SECURITIES. The Fund may invest in
government stripped mortgage related securities issued and guaranteed by GNMA,
FNMA or FHLMC. Investing in government stripped mortgage related securities
involves the risks normally associated with investing in mortgage related
securities issued by government or government related entities. See 'Mortgage
Related Securities' above. In addition, the yields on government stripped
mortgage related securities are extremely sensitive to the prepayment experience
on the
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mortgage loans underlying the certificates collateralizing the securities. If a
decline in the level of prevailing interest rates results in a rate of principal
prepayments higher than anticipated, distributions of principal will be
accelerated, thereby reducing the yield to maturity on interest-only government
stripped mortgage related securities and increasing the yield to maturity on
principal-only government stripped mortgage related securities. Sufficiently
high prepayment rates could result in the Fund not fully recovering its initial
investment in an interest-only government stripped mortgage related security.
Under current market conditions, the Fund expects that investments in government
stripped mortgage related securities will consist primarily of interest-only
securities. Government stripped mortgage related securities are currently traded
in an over-the-counter market maintained by several large investment banking
firms. There can be no assurance that the Fund will be able to effect a trade of
a government stripped mortgage related security at a time when it wishes to do
so. The Fund will acquire government stripped mortgage related securities only
if a secondary market for the securities exists at the time of acquisition.
Except for government stripped mortgage related securities based on fixed rate
FNMA and FHLMC mortgage certificates that meet certain liquidity criteria
established by the Board of Trustees, the Fund will treat government stripped
mortgage related securities as illiquid and will limit its investments in these
securities, together with other illiquid investments, to not more than 10% of
its net assets.
ASSET-BACKED AND RECEIVABLE-BACKED SECURITIES. An investor's return on
CARs'sm' may be affected by early prepayment of principal on the underlying
vehicle sales contracts. If the letter of credit is exhausted, the Fund may be
prevented from realizing the full amount due on a sales contract because of
state law requirements and restrictions relating to foreclosure sales of
vehicles and the availability of deficiency judgments following these sales,
because of depreciation, damage or loss of a vehicle, because of the application
of federal and state bankruptcy and insolvency laws or other factors. As a
result, certificate holders may experience delays in payment if the letter of
credit is exhausted. Consistent with the Fund's investment objective and
policies and, subject to the review and approval of the Board of Trustees, the
Fund also may invest in other types of asset-backed and receivable-backed
securities.
FORWARD ROLL TRANSACTIONS. In order to enhance current income, The Fund may
enter into forward roll transactions with respect to mortgage related securities
issued by GNMA, FNMA and FHLMC. Forward roll transactions involve the risk that
the market value of the securities sold by the Fund may decline below the
repurchase price of those securities. At the time the Fund enters into a forward
roll transaction, it will place in a segregated account with its custodian, or
with a designated sub-custodian, cash, Government Securities or high quality
debt obligations having a value equal to the repurchase price (including accrued
interest) and will subsequently monitor the account to insure that the
equivalent value is maintained. Forward roll transactions are considered to be
borrowings by the Fund.
OPTIONS. The Fund receives a premium when it writes call options, which
increases the Fund's return on the underlying security in the event the option
expires unexercised or is closed out at a profit. By writing a call, the Fund
limits its opportunity to profit from an increase in the market value of the
underlying security above the exercise price of the option for as long as the
Fund's obligation as writer of the option continues. Thus, in some periods the
Fund receives less total return and in other periods greater total return from
its hedged positions than it would have received from its underlying securities
if unhedged.
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In purchasing a put option, the Fund seeks to benefit from a decline in the
market price of the underlying security, whereas in purchasing a call option,
the Fund seeks to benefit from an increase in the market price of the underlying
security. If an option purchased is not sold or exercised when it has remaining
value, or if the market price of the underlying security remains equal to or
greater than the exercise price, in the case of a put, or remains equal to or
below the exercise price, in the case of a call, during the life of the option,
the Fund will lose its investment in the option. For the purchase of an option
to be profitable, the market price of the underlying security must decline
sufficiently below the exercise price, in the case of a put, and must increase
sufficiently above the exercise price, in the case of a call, to cover the
premium and transaction costs. Because option premiums paid by the Fund are
small in relation to the market value of the investments underlying the options,
buying options can result in large amounts of leverage. The leverage offered by
trading in options could cause the Fund's net asset value to be subject to more
frequent and wider fluctuations than would be the case if the Fund did not
invest in options.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. In entering into
transactions involving futures contracts and options on those contracts, the
Fund is subject to a number of risks and special considerations. As suggested
above, securities that may be held by the Fund may be denominated in currencies
for which no, or only a highly illiquid, futures or option market exists, which
in turn restricts the Fund's ability to hedge against the risk of devaluation of
currencies in which the Fund holds a substantial quantity of securities. The
successful use of futures contracts and options on those contracts draws upon
GEIM's special skills and experience with respect to those instruments and
usually depends on GEIM's ability to forecast debt market, currency exchange
rate or interest rate movements correctly. Should debt markets, exchange rates
or interest rates move in an unexpected manner, the Fund may not achieve the
anticipated benefits of futures contracts or options on those contracts or may
realize losses and thus be in a less advantageous position than if those
strategies had not been used. Certain futures contracts and options on futures
contracts are subject to no daily price fluctuation limits so that adverse
market movements could continue with respect to those instruments to an
unlimited extent over a period of time. In addition, the correlation between
movements in the prices of those instruments and movements in the price of the
securities and currencies hedged or used for cover is not perfect.
The Fund's ability to dispose of its positions in futures contracts and
options on those contracts depends on the availability of active markets in
those instruments. Markets in options and futures with respect to a number of
securities and currencies are relatively new and still developing. GEIM cannot
now predict the amount of trading interest that may exist in the future in
various types of futures contracts and options. Futures and options may be
closed out only on the exchange on which the contract was entered (or a linked
exchange) so that no assurance can be given that the Fund will be able to
utilize these instruments effectively for the purposes described above. In
addition, although the Trust anticipates that the Fund's options and futures
transactions will not prevent the Fund from qualifying as a regulated investment
company for federal income tax purposes, the Fund's ability to engage in options
and futures transactions may be limited by this tax consideration. See
'Dividends, Distributions and Taxes -- Taxes.' In writing options, the Fund will
be subject to the risk of loss resulting from the difference between the premium
received for the option and the price of the futures contract underlying the
option that the Fund must purchase or deliver upon exercise of the option.
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LENDING PORTFOLIO SECURITIES. In lending securities to U.S. and foreign
brokers, dealers and banks, the Fund is subject to risks, which, like those
associated with other extensions of credit, include possible loss of rights in
the collateral should the borrower fail financially.
REPURCHASE AGREEMENTS. In entering into a repurchase agreement, the Fund
bears a risk of loss in the event that the other party to the transaction
defaults on its obligations and the Fund is delayed or prevented from exercising
its rights to dispose of the underlying securities, including the risk of a
possible decline in the value of the underlying securities during the period in
which the Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or a
part of the income from the agreement.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. Securities purchased on a
when-issued or delayed-delivery basis may expose the Fund to risk because the
securities may experience fluctuations in value prior to their actual delivery.
The Fund will not accrue income with respect to a when-issued or
delayed-delivery security prior to its stated delivery date. Purchasing
securities on a when-issued or delayed-delivery basis can involve the additional
risk that the yield available in the market when the delivery takes place may be
higher than that obtained in the transaction itself. Purchases of securities on
a when-issued basis when the Fund is substantially fully invested may result in
increased fluctuations in the Fund's net asset value per share.
SHORT SALES. Possible losses from short sales differ from losses that could
be incurred from purchases of securities, because losses from short sales may be
unlimited, whereas losses from purchases of securities can equal only the total
amount invested.
PORTFOLIO TURNOVER
The Fund's portfolio is actively managed. For the fiscal years ended August 31,
1994 and August 31, 1993, the Fund's portfolio turnover rates were 279.07% and
148.92%, respectively. The increase in the Fund's portfolio turnover rate for
the fiscal year ended August 31, 1994 primarily was due to two factors: the
significant decrease in the Fund's assets necessitated the sale of securities in
order to raise cash to meet redemption requests and increased market volatility
caused the need to reallocate the Fund's portfolio in order to maintain a
defensive position. An annual turnover rate of 100% would occur if all of the
securities held by the Fund are replaced once during a period of one year.
Short-term gains realized from portfolio transactions are taxable to
shareholders as ordinary income. In addition, higher portfolio turnover rates
can result in corresponding increases in portfolio transaction costs and may
make it more difficult for the Fund to qualify as a regulated investment company
for federal income tax purposes. See 'Dividends, Distributions and
Taxes -- Taxes.'
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Trustees, and the day-to-day operations of the Fund are conducted through or
under the direction of officers of the Trust. The Statement of Additional
Information contains general background information regarding each Trustee and
officer of the Trust.
MANAGER
KPAM, located at 60 Broad Street, New York, New York 10004-2350, serves as the
Fund's manager. A wholly-owned subsidiary of Kidder, Peabody, and a registered
investment adviser
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under the Investment Advisers Act of 1940, as amended (the 'Advisers Act'), KPAM
currently provides investment management, investment advisory and administrative
services to a wide variety of individual and institutional clients. The Kidder,
Peabody Asset Management Group of Companies (of which KPAM is the primary
entity) provides advisory and consulting services to more than $18 billion in
assets as of September 30, 1994. General Electric Capital Services, Inc., a
wholly-owned subsidiary of GE, owns all of the outstanding stock of Kidder
Group, the parent company of Kidder, Peabody.
Under an agreement dated October 17, 1994, GE and Kidder Group agreed to
sell to PaineWebber Group Inc. certain assets of Kidder Group and its
subsidiaries, including Kidder, Peabody and KPAM. The consummation of this
transaction, which is subject to a number of conditions and cannot be assured,
will result in the deemed assignment and automatic termination of the agreements
pursuant to which Kidder, Peabody serves as the principal underwriter of the
Fund's shares and KPAM serves as the Fund's manager. Institution of new
arrangements with Kidder, Peabody's and KPAM's successors following the
consummation of the transaction, anticipated to occur in the first quarter of
1995, have been approved by the Trustees and separately by a majority of the
Trustees who are not 'interested persons' of the Fund within the meaning of the
1940 Act. In addition, the Fund's new management arrangements will require
approval by the holders of a 'majority of the outstanding voting securities' of
the Fund, as defined in the 1940 Act. No assurance can be given that the
required shareholder approvals will be obtained and, if they are not, the
Trustees will take such action as they determine to be appropriate and in the
best interests of the Fund and its shareholders.
As the Fund's manager, KPAM, subject to the supervision and direction of
the Trustees, is generally responsible for furnishing or causing to be furnished
to the Fund, investment advisory and management services. Included among the
specific services provided by KPAM as manager are: the selection and
compensation of an investment adviser to the Fund; the review of all purchases
and sales of portfolio instruments made by the Fund to assess compliance with
its stated investment objective and policies; the monitoring of the selection of
brokers and dealers effecting transactions on behalf of the Fund; the
maintenance and furnishing of all required records or reports pertaining to the
Fund to the extent those records or reports are not maintained or furnished by
the Fund's transfer agent, custodian or other agents employed by the Fund; the
providing of general administrative services to the Fund not otherwise provided
by the Fund's transfer agent, custodian or other agents employed by the Fund;
and the payment of reasonable salaries and expenses of those of the Fund's
officers and employees, and the fees and expenses of those members of the Board
of Trustees, who are directors, officers or employees of KPAM.
The Trust has agreed to pay KPAM a fee for services provided to the Fund
that is accrued daily and paid monthly at the annual rate of .70% of the Fund's
average daily net assets. For the fiscal year ended August 31, 1994, Class A's,
Class B's and Class C's total expenses represented 1.46%, 1.96% and 1.21%,
respectively, of their average daily net assets. From time to time, KPAM in its
sole discretion may waive all or a portion of its fee and/or reimburse all or a
portion of the Fund's operating expenses.
INVESTMENT ADVISER
Under the terms of an investment advisory agreement among KPAM, the Trust and
GEIM, KPAM employs GEIM as the Fund's investment adviser. GEIM, located at 3003
Summer Street, P.O. Box 7900, Stamford, Connecticut 06904, is a wholly-owned
subsidiary of GE and a registered
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investment adviser under the Advisers Act. GEIM, which was formed under the laws
of Delaware in 1988, currently provides investment management services to
various institutional accounts with total assets, as of September 30, 1994, in
excess of $8.0 billion.
GEIM currently serves as the investment adviser to Kidder, Peabody Global
Equity Fund, another series of the Trust, and Kidder, Peabody Municipal Bond
Fund, a series of Kidder, Peabody Investment Trust II. GEIM also serves as
investment adviser and administrator of GE Funds, an open-end management
investment company. In addition, GEIM's principal officers and directors serve
in similar capacities with respect to General Electric Investment Corporation
('GEIC'), which like GEIM is a wholly-owned subsidiary of GE, and which
currently acts as the investment adviser of the Elfun group of funds, including
the Elfun Income Fund, an open-end management investment company registered
under the 1940 Act, that has an investment objective and policies substantially
similar to those of the Fund. Investment in the Elfun Income Fund is generally
limited to regular and senior members of the Elfun Society, whose regular
members are selected from active employees of GE and/or its majority-owned
subsidiaries, and whose senior members are former members who have retired from
those companies.
Robert W. Aufiero serves as Chief Investment Officer of the Fund and in
that capacity is the individual primarily responsible for the management of the
Fund's assets. Mr. Aufiero is a Senior Portfolio Manager and Vice President of
the Fixed Income Portfolio Department of GEIC and has been assigned to GEIM to
provide management services for the Fund. Prior to January 1993, Mr. Aufiero was
Vice President and Portfolio Manager/Trader at Shields Asset Management, Inc., a
registered investment adviser.
As the Fund's investment adviser, GEIM, subject to the supervision and
direction of the Trustees, and subject to review by KPAM, manages the Fund's
portfolio in accordance with the investment objective and stated policies of the
Fund, makes investment decisions for the Fund and places purchase and sale
orders for the Fund's portfolio transactions. GEIM also pays the salaries of all
officers and employees who are employed by both it and the Trust, provides the
Fund with investment officers who are authorized by the Trustees to execute
purchases and sales of securities on behalf of the Fund and employs a
professional staff of portfolio managers who draw upon a variety of sources for
research information for the Fund.
For the fiscal year ended August 31, 1994, KPAM paid GEIM a fee for
services provided by GEIM to the Fund that is accrued daily and paid monthly at
the annual rate of .50% of the Fund's average daily net assets. In February
1994, the shareholders of the Fund approved a new Investment Advisory Agreement
relating to the Fund under which the fee that KPAM pays to GEIM was changed to
.50% annually of the Fund's average daily net assets up to $200 million and .35%
annually of the Fund's average daily net assets equal to or in excess of $200
million. This fee is accrued daily and paid monthly. The Fund pays no direct fee
to GEIM. From time to time, GEIM in its sole discretion may waive all or a
portion of its fee.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by GEIM, investments of the type the Fund
may make may also be made by those other accounts. When the Fund and one or more
other accounts managed by GEIM are prepared to invest in, or desire to dispose
of, the same security, available investments or opportunities for sales are
allocated in a manner believed by GEIM to be equitable to each. In some cases,
this procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund.
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EXPENSES
Each Class bears its own expenses, which generally include all costs not
specifically borne by KPAM and GEIM. Included among a Class' expenses are costs
incurred in connection with the Class' and Fund's organization; management and
investment advisory fees; any distribution and/or shareholder servicing fees;
fees for necessary professional and brokerage services; fees for any pricing
service used in connection with the valuation of shares; the costs of regulatory
compliance; and a portion of the costs associated with maintaining the Trust's
legal existence and corresponding with shareholders of the Fund. The Trust's
agreement with KPAM provides that KPAM will reduce its fees to the Fund to the
extent required by applicable state laws for certain expenses that are described
in the Statement of Additional Information.
PURCHASE OF SHARES
GENERAL INFORMATION
Shares of the Fund must be purchased and maintained through a Kidder, Peabody
brokerage account (an 'Account'), so that an investor who wishes to purchase
shares but who has no existing Account must establish one. Kidder, Peabody
charges no maintenance fee in connection with an Account through which an
investor purchases or holds shares of the Fund.
Purchases are effected at the public offering price of the Fund's shares
next determined after a purchase order is received. Payment for shares purchased
by an investor is due at Kidder, Peabody on the 'settlement date,' which is
generally the fifth business day after the order for purchase is placed, unless
the investor has 'good funds' available in an existing Account that can be
applied to the purchase. 'Good funds' as used in this Prospectus means cash,
Federal funds or certified checks drawn on a U.S. bank. The Trust reserves the
right to reject any purchase order for shares of the Fund and to suspend the
offering for any period of time.
The minimum initial investment in the Fund is $1,000 and the minimum
subsequent investment is $50, except that for IRAs, other tax qualified
retirement plans and accounts established pursuant to the Uniform Gifts to
Minors Act, the minimum initial investment is $250 and the minimum subsequent
investment is $1.00. The Trust reserves the right to vary at any time the
minimum initial or subsequent investment amounts.
Purchase orders for shares of the Fund that are received prior to the close
of regular trading on the New York Stock Exchange (the 'NYSE') on a particular
day (currently 4:00 p.m., New York time) are priced according to the net asset
values determined on that day. Purchase orders received after the close of
regular trading on the NYSE are priced as of the time each Class' net asset
value per share is next determined. See 'Determination of Net Asset Value' below
for a description of the times at which each Class' net asset value per share is
determined.
The Trust offers Fund shareholders an Automatic Investment Plan under which
a shareholder may authorize Kidder, Peabody to place monthly, twice monthly or
quarterly, as selected by the shareholder, a purchase order for Fund shares in
an amount not less than $100. The purchase price is paid automatically from a
designated bank account of the shareholder. The Fund reserves the right to
terminate or change the provisions of the Automatic Investment Plan.
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Under the Choice Pricing System, the Fund presently offers three methods of
purchasing shares, enabling investors to choose the Class that best suits their
needs, given the amount of purchase and intended length of investment. Kidder,
Peabody Investment Executives and other persons remunerated on the basis of
sales of shares may receive different levels of compensation for selling one
Class of shares over another. When purchasing shares of the Fund, investors must
specify whether the purchase is for Class A shares, Class B shares or Class C
shares, as described below.
CLASS A SHARES
The public offering price of Class A shares is the net asset value per Class A
share next determined after a purchase order is received plus a sales charge, if
applicable. Class A shares are subject to a service fee at the annual rate of
.25% of the value of the Fund's average daily net assets attributable to this
Class. See 'Distributor.' The sales charge payable upon the purchase of Class A
shares will vary with the amount of purchase as set forth below.
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
-------------------------------------------
AMOUNT OF PURCHASE AS PERCENTAGE AS PERCENTAGE
AT OFFERING PRICE OF OFFERING PRICE OF NET AMOUNT INVESTED
---------------------- ----------------- ----------------------
<S> <C> <C>
Less than $50,000............................................. 2.25% 2.33%
$50,000 but less than $100,000................................ 1.75% 1.75%
$100,000 but less than $250,000............................... 1.50% 1.50%
$250,000 but less than $500,000............................... 1.00% 1.00%
$500,000 but less than $1,000,000............................. .75% .75%
$1,000,000 or more............................................ 0% 0%
</TABLE>
INSTANCES OF A REDUCED OR WAIVED SALES CHARGE. Class A shares are sold
subject to a reduction of 20% in the sales charges shown in the table above to:
(1) employees of GE and other affiliates of Kidder, Peabody, (2) IRAs for those
employees, (3) other employee benefit plans for those employees and (4) the
spouses and minor children of those employees when orders on their behalf are
placed by the employees.
Class A shares are sold without a sales charge to tax-exempt organizations
enumerated in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended
(the 'Code'), and retirement plans qualified under Section 403(b)(7) of the
Code, each having 1,000 or more participants ('Qualified Plans'). Employees
eligible to participate in Qualified Plans sponsored by the same organization or
its affiliates may be aggregated in determining the sales charge applicable to
an investment made by a Qualified Plan.
No sales charge is imposed on Class A shares purchased through reinvestment
of dividends or capital gains distributions. Clients of a newly-employed Kidder,
Peabody Investment Executive are eligible to purchase Class A shares subject to
no sales charge for a period of 90 days after the Investment Executive first
becomes employed by Kidder, Peabody, so long as the following conditions are
met: (1) the purchase is made within 30 days of, and with the proceeds from, a
redemption of shares of a mutual fund sponsored by the Investment Executive's
previous employer; (2) the Investment Executive served as the client's broker on
the purchase of the shares of the mutual fund; and (3) the shares of the mutual
fund sold were subject to a sales charge. Clients of a Kidder, Peabody
Investment Executive are also eligible to purchase Class A shares subject to no
sales charge so long as the following conditions are met: (1) the purchase is
made
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within 30 days of, and with the proceeds from, a redemption of shares of a
mutual fund that were purchased through Kidder, Peabody acting as a selected
dealer for the shares pursuant to an agreement between Kidder, Peabody and the
mutual fund's principal underwriter; (2) the fund invested primarily in
intermediate term fixed income securities; (3) the Investment Executive served
as the client's broker on the purchase of the shares of the mutual fund sold;
and (4) the shares of the mutual fund sold were subject to a sales charge. Class
A shares may also be offered without a sales charge to any investment company,
other than a company for which Kidder, Peabody serves as distributor, in
connection with the combination of the company with the Fund by merger,
acquisition of assets or otherwise.
VOLUME DISCOUNTS. Any investor meeting certain requirements, including the
signing of a Letter of Intent (a 'Letter'), is eligible to obtain a reduced
sales charge for purchasing Fund shares by combining purchases made over a
13-month period of Class A shares and shares of other mutual funds in the Kidder
Family of Funds with respect to which the investor previously paid, or is
subject to the payment of, a sales charge (collectively referred to as 'Eligible
Shares'). Purchases of Fund shares by eligible investors must aggregate at least
$50,000 and must include a minimum initial investment of at least $1,000 and
minimum subsequent investments of at least $50. For purposes of the procedure
contemplated by a Letter, Eligible Shares owned by an investor will be valued at
their original cost in determining the size of a purchase and the applicable
sales charge.
An investor's purchase of Eligible Shares not originally made pursuant to a
Letter may be included under a Letter subsequently executed within 90 days of
the purchase, so long as the investor informs Kidder, Peabody in writing within
the 90-day period of the investor's desired use of a Letter. The original cost
of an investor's Eligible Shares not purchased pursuant to a Letter may be
included under a Letter subsequently executed within 90 days of the purchase, so
long as the investor informs Kidder, Peabody in writing within the 90-day period
of the investor's desire for that treatment to be applicable. The original cost
of Eligible Shares not purchased pursuant to a Letter may be included as a
credit toward the fulfillment of the terms of the Letter; the reduced sales
charge contemplated by the Letter, however, will apply only to the purchases of
Eligible Shares made after the execution of the Letter, which purchases, as
noted above, must aggregate at least $50,000.
A Letter must provide for 5% of the dollar amount of the intended
investment to be held in escrow by Investors Fiduciary Trust Company ('IFTC') in
the form of Eligible Shares in an account registered in the name of the
shareholder. If the total amount of any Eligible Shares owned at the time a
Letter is signed plus all purchases made under the terms of the Letter less
redemptions (the 'investment') are at least equal to the intended investment,
the amount in escrow will be released to the shareholder. If the investment is
more than $50,000 but less than the intended investment, a remittance of the
difference in the dollar amount of sales charge paid and the sales charge that
would have been paid if the investment had been made at a single time will be
made upon request. If the remittance is not sent within 20 days after such a
request, IFTC will redeem an appropriate number of Eligible Shares held in
escrow in order to realize the difference. Amounts remaining in the escrow
account will be released to the shareholder's account. If the total investment
is more than the intended investment and the total is sufficient to qualify for
an additional sales charge reduction, a retroactive price adjustment will be
made for all purchases made under a Letter to reflect the sales charge
applicable to the aggregate amount
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of the purchases during the 13-month period. A Letter is not a binding
obligation to purchase the indicated amount, and Kidder, Peabody is not
obligated to sell the indicated amount. Reinvested dividends and capital gains
are not applied toward the completion of the purchases contemplated by a Letter.
RIGHT OF ACCUMULATION. Reduced sales charges on Class A shares are
available under a combined right of accumulation permitting an investor to
combine the value of Eligible Shares and the value of Fund shares being
purchased, to qualify for a reduced sales charge. Before a shareholder may take
advantage of the right of accumulation, the shareholder must provide Kidder,
Peabody at the time of purchase with sufficient information to permit Kidder,
Peabody to confirm that the shareholder is qualified for the right; acceptance
of the shareholder's purchase order is subject to that confirmation. The right
of accumulation may be amended or terminated at any time by the Trust.
DEFINITION OF PURCHASE. For purposes of the volume discounts and right of
accumulation described above, a 'purchase' refers to: a single purchase of
Eligible Shares by an individual; concurrent purchases by an individual, his or
her spouse and their children under the age of 21 years purchasing Eligible
Shares for his, her or their own account; and single purchases by a trustee or
other fiduciary purchasing Eligible Shares for a single trust estate or single
fiduciary account, including a pension, profit-sharing or other employee benefit
trust created pursuant to a plan qualified under Section 401 of the Code, even
though more than one beneficiary is involved. The term 'purchase' also includes
purchases by any 'company,' as that term is defined in the 1940 Act, but does
not include: purchases by any such company that has not been in existence for at
least six months or that has no purpose other than the purchase of Eligible
Shares or shares of other investment companies registered under the 1940 Act at
a discount; or purchases by any group of individuals whose participants are
related by virtue of being credit cardholders of a company, policyholders of an
insurance company, customers of either a bank or broker-dealer or clients of an
investment adviser. The term 'purchase' also includes purchases by employee
benefit plans not qualified under Section 401 of the Code, including purchases
by employees or by employers on behalf of employees by means of a payroll
deduction plan, or otherwise, of Eligible Shares. Purchases by such a company or
non-qualified employee benefit plan will qualify for the volume discounts
offered with respect to the Fund's shares only if the Trust and Kidder, Peabody
are able to realize economies of scale in sales efforts and sales-related
expenses by means of the company's, the employer's or the plan's making the
Prospectus available to individual investors or employees and forwarding
investments by those persons to the Trust, and by any such employer's or plan's
bearing the expense of any payroll deduction plan. The term 'purchase' also
includes any purchase of Eligible Shares by or on behalf of certain members of
the same family, including spouses, children (adult and minor), parents,
grandparents and siblings, provided, however, that the following conditions are
met: (1) following consummation of the purchase, the family has, in the
aggregate, (a) at least $5 million invested in Eligible Shares of one or more
funds within the Kidder Family of Funds or (b) at least $10 million in cash
and/or securities in Kidder, Peabody Accounts; and (2) the Trust and Kidder,
Peabody are able to realize economies of scale in sales effort and sales-related
expenses by means of dealing with a common decision-maker or otherwise being
able to treat the accounts as a single relationship.
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REINSTATEMENT PRIVILEGE. The Fund offers a reinstatement privilege under
which a shareholder that has redeemed Class A shares may reinvest the proceeds
from the redemption without imposition of a sales charge, provided the
reinvestment is made within 60 days of the redemption. The tax status of a gain
realized on a redemption will not be affected by exercise of the reinstatement
privilege but a loss will be nullified if the reinvestment is made within 30
days of the redemption. See the Statement of Additional Information for the tax
consequences when, within 90 days of a purchase of Class A shares, the shares
are redeemed and reinvested in the Fund or another mutual fund.
CLASS B SHARES
The public offering price of Class B shares is the net asset value per share
next determined after a purchase order is received without imposition of any
sales charge. Class B shares are subject to a service fee at the annual rate of
.25%, and a distribution fee at the annual rate of .50%, of the value of the
Fund's average daily net assets attributable to this Class. See 'Distributor.'
Kidder, Peabody has adopted guidelines, in view of the relative sales charges,
service fees and distribution fees, directing Investment Executives that all
purchases of shares should be for Class A shares when the purchase is for
$1,000,000 or more by an investor not eligible to purchase Class C shares.
Kidder, Peabody reserves the right to vary these guidelines at any time.
CLASS C SHARES
The public offering price of Class C shares is the net asset value per share
next determined after a purchase order is received without imposition of any
sales charge. Class C shares, which are not subject to any service fee or
distribution fee, are available exclusively to employees of Kidder, Peabody and
their associated accounts, directors or trustees of any fund in the Kidder
Family of Funds, employee benefit plans of Kidder, Peabody and participants in
Insight when shares are purchased through that program. Investors eligible to
purchase Class C shares may not purchase any other Class of shares.
INSIGHT. An investor purchasing $50,000 or more of shares of funds in the
Kidder Family of Funds may participate in INSIGHT, KPAM's total portfolio asset
allocation program, and receive Class C Shares. INSIGHT offers comprehensive
investment services, including a personalized asset allocation investment
strategy using an appropriate combination of funds in the Kidder Family of
Funds, professional investment advice regarding investment among the funds in
the Kidder Family of Funds by KPAM portfolio specialists, monitoring of
investment performance and comprehensive quarterly reports that cover market
trends, portfolio summaries and personalized account information. Participation
in INSIGHT is subject to payment of an advisory fee to KPAM at the maximum
annual rate of 1.5% of assets held through the program (generally charged
quarterly in advance), which covers all INSIGHT investment advisory services and
program administration fees. Employees of Kidder, Peabody are entitled to a 50%
reduction in the fee otherwise payable for participation in INSIGHT. INSIGHT
clients may elect to have their INSIGHT fees charged to their accounts (by the
automatic redemption of money market fund shares) or another of their Kidder,
Peabody accounts or, billed separately.
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REDEMPTION OF SHARES
A shareholder may redeem Fund shares on any day that the Fund's net asset values
are determined by following the procedures described below.
REDEMPTION THROUGH KIDDER, PEABODY
Shares may be redeemed through Kidder, Peabody, which provides the terms of any
redemption request properly received prior to 4:00 p.m., New York time, on a
given day, to the Fund's transfer agent. The trade date of a redemption so
received is considered to be that day, and the trade date of any redemption
request received at or after 4:00 p.m., New York time, is considered to be the
next business day. If shares to be redeemed were issued in certificate form, the
certificates for the shares to be redeemed must be submitted to the transfer
agent in accordance with the procedures described in items (1) through (4) under
'Redemption by Mail' below.
REDEMPTION BY MAIL
Shares may be redeemed by submitting a written request in 'good order' to the
Fund's transfer agent at the following address:
Kidder, Peabody Intermediate Fixed Income Fund
Class A, B or C (please specify)
c/o Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
The transfer agent transmits any redemption request that it receives to
Kidder, Peabody, and the request is then treated as if it had been made through
Kidder, Peabody. A redemption request is considered to have been received in
'good order' if the following conditions are satisfied:
(1) the request is in writing, states the Class and number or dollar
amount of shares to be redeemed and identifies the shareholder's Fund
account number;
(2) the request is signed by each registered owner exactly as the
shares are registered;
(3) if the shares to be redeemed were issued in certificate form, the
certificates are endorsed by the shareholder for transfer (or are
themselves accompanied by an endorsed stock power) and accompany the
redemption request, which should be sent by registered mail for the
protection of the shareholder; and
(4) the signatures on either the written redemption request or the
certificates (or the accompanying stock power) have been guaranteed by a
bank, broker-dealer, municipal securities broker, government securities
dealer or broker, credit union, a member firm of a national securities
exchange, registered securities association or clearing agency, and savings
association (the purpose of a signature guarantee being to protect Fund
shareholders against the possibility of fraud). The transfer agent may
reject redemption instructions if the guarantor is neither a member of nor
a participant in a signature guarantee program (currently known as
'STAMP'sm'').
Additional supporting documents may be required for redemptions of Fund
shares by corporations, executors, administrators, trustees and guardians.
OTHER REDEMPTION POLICIES
Signature guarantees are required in connection with (1) any redemption of Fund
shares made by mail and (2) share ownership transfer requests. These
requirements may be waived by the Trust in certain instances.
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Any redemption request made by a shareholder of the Fund will be effected
at the net asset value per share next determined after proper redemption
instructions are received. See 'Determination of Net Asset Value' below. The
proceeds of the redemption generally are credited to the shareholder's Account,
or sent to the shareholder, as applicable, on the fifth business day following
the date after the redemption request was received in good order, but in no
event later than seven days following that date. A shareholder who pays for Fund
shares by personal check will be credited with the proceeds of a redemption of
those shares only after the check used for the purchase has cleared, which may
take up to 15 days or more. If shares are purchased with good funds, no delay in
redemption will occur. The amount of redemption proceeds received by a Fund
shareholder will in no way be affected by any delay in the crediting of those
proceeds.
A Fund account with respect to a Class of shares that is reduced by
redemptions, and not by reason of market fluctuations, to a value of $500 or
less may be redeemed by the Trust, but only after the shareholder has been given
at least 30 days in which to increase the balance in the account to more than
$500. Proceeds of such a redemption will be mailed to the shareholder.
DISTRIBUTIONS IN KIND
If the Trustees determine that it would be detrimental to the best interests of
the Fund's shareholders to make a redemption payment wholly in cash, the Fund
may pay, in accordance with rules adopted by the SEC, any portion of a
redemption in excess of the lesser of $250,000 or 1% of the Fund's net assets by
a distribution in kind of readily marketable portfolio securities in lieu of
cash. Redemptions failing to meet this threshold must be made in cash.
Shareholders receiving distributions in kind of portfolio securities may incur
brokerage commissions when subsequently disposing of those securities.
SYSTEMATIC WITHDRAWAL PLAN
The Trust offers a systematic withdrawal plan (the 'Withdrawal Plan') under
which a shareholder of the Fund with $20,000 or more invested in a Class may
elect periodic redemption payments to the shareholder or a designated payee on a
monthly basis. Payments pursuant to the Withdrawal Plan normally are made within
the last ten days of the month. The minimum rate of withdrawal is $200 per month
and the maximum annual withdrawal is 12% of current account value in the Class
as of the commencement of participation in the Withdrawal Plan (less the amount
of any subsequent redemption outside the Withdrawal Plan). A shareholder
participating in the Withdrawal Plan must reinvest all income and capital gains
distributions, and may not continue to participate if the shareholder redeems
outside the Withdrawal Plan or exchanges to another fund an amount that would
cause the account value in the Class to fall below $20,000. The Trust may amend
or terminate the Withdrawal Plan, and a shareholder may terminate participation
in the Withdrawal Plan at any time.
DETERMINATION OF NET ASSET VALUE
Each Class' net asset value per share is calculated by State Street Bank and
Trust Company ('State Street'), the Fund's custodian, on each day, Monday
through Friday, except that net asset value is not computed on a day in which no
orders to purchase, sell, exchange or redeem Fund shares have been received, any
day on which there is not sufficient trading in the Fund's portfolio securities
that the Fund's net asset values per share might be materially affected by
changes in the value of such portfolio securities or on days on which the NYSE
is not open for trading. The NYSE is currently scheduled to be closed on New
Year's Day, Presidents' Day, Good
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Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas,
and on the preceding Friday when one of those holidays falls on a Saturday or on
the subsequent Monday when one of those holidays falls on a Sunday.
Net asset value per share of a Class is determined as of the close of
regular trading on the NYSE, and is computed by dividing the value of the Fund's
net assets attributable to that Class by the total number of shares outstanding
of that Class. Generally, the Fund's investments are valued at market value or,
in the absence of a market value, at fair value as determined by or under the
direction of the Trustees.
Investments in Government Securities and other securities traded
over-the-counter, other than short-term investments that mature in 60 days or
less, are valued at the average of the quoted bid and asked prices in the
over-the-counter market. Short-term investments that mature in 60 days or less
are valued on the basis of amortized cost (which involves valuing an investment
at its cost and, thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the effect of fluctuating interest rates on
the market value of the investment) when the Board of Trustees has determined
that amortized cost represents fair value. Securities that are primarily traded
on foreign exchanges are generally valued for purposes of calculating each
Class' net asset value at the preceding closing values of the securities on
their respective exchanges, except that, when an occurrence subsequent to the
time a value was so established is likely to have changed that value, the fair
market value of those securities will be determined by consideration of other
factors by or under the direction of the Board of Trustees. A security that is
primarily traded on a domestic or foreign stock exchange is valued at the last
sale price on that exchange or, if no sales occurred during the day, at the
current quoted bid price. An option that is written by the Fund is generally
valued at the last sale price or, in the absence of the last sale price, the
last offer price. An option that is purchased by the Fund is generally valued at
the last sale price or, in the absence of the last sale price, the last bid
price. The value of a futures contract is equal to the unrealized gain or loss
on the contract that is determined by marking the contract to the current
settlement price for a like contract on the valuation date of the futures
contract. A settlement price may not be used if the market makes a limit move
with respect to a particular futures contract or if the securities underlying
the futures contract experience significant price fluctuations after the
determination of the settlement price. When a settlement price cannot be used,
futures contracts will be valued at their fair market value as determined by or
under the direction of the Board of Trustees.
For purposes of calculating a Class' net asset value per share, assets and
liabilities initially expressed in foreign currency values are converted into
U.S. dollar values based on a formula prescribed by the Trust or, if the
information required by the formula is unavailable, as determined in good faith
by the Board of Trustees. In carrying out the Board's valuation policies, State
Street may consult with an independent pricing service retained by the Trust.
Further information regarding the Fund's valuation policies is contained in the
Statement of Additional Information.
EXCHANGE PRIVILEGE
Shares of each Class may be exchanged for shares of the same Class (or the sole
class offered) in certain funds in the Kidder Family of Funds, to the extent
shares are offered for sale in the shareholder's state of residence. For a list
and a description of the funds in the Kidder Family of Funds for which shares
may be exchanged, see 'Exchange Privilege' in the Statement of Additional
Information. Under the Choice Pricing System, an exchange of shares of the Fund
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with other funds' shares will be limited to shares of the same class or the sole
class (money market funds only) of shares of a fund from or to which the
exchange is to be effected. For example, if a holder of Class A shares of the
Fund exchanges his shares for shares of Kidder, Peabody Cash Reserve Fund, Inc.
('Cash Reserve Fund') (a money market fund) and thereafter wishes to exchange
those shares for shares of Kidder, Peabody Government Income Fund, Inc. he may
receive only Class A shares in the latter transaction. As another example, if a
holder of shares of Cash Reserve Fund acquired as result of an initial
investment and not from an exchange with shares of another fund wishes to
exchange his shares for shares of the Fund, he may receive Class A shares, Class
B shares or Class C shares (depending on his eligibility for Class C shares) in
the exchange transaction. Thereafter, any further exchanges would be subject to
the principal described above limiting subsequent exchanges to the same class or
the sole class of shares of other funds. If Class A shares acquired in an
exchange are subject to payment of a sales charge higher than the sales charge
paid on the shares relinquished in the exchange (or any predecessor of those
shares), the exchange will be subject to payment of an amount equal to the
difference, if any, between the sales charge previously paid and the sales
charge payable on the Class A shares acquired in the exchange.
Although the Fund currently imposes no limit on the number of times the
Exchange Privilege may be exercised by any shareholder, the Fund may impose such
limits in the future, in accordance with applicable provisions of the 1940 Act
and rules thereunder. In addition, the Exchange Privilege may be terminated or
revised at any time upon 60 days' prior written notice to Fund shareholders, and
is available only to residents of states in which exchanges are permitted under
state law. The exchange of shares of one fund for shares of another is treated
for federal income tax purposes as a sale of the shares given in exchange by the
shareholder, so that a shareholder may recognize a taxable gain or loss on an
exchange.
Upon receipt of proper instructions and all necessary supporting documents,
Fund shares submitted for exchange will be redeemed at their net asset value
next determined and simultaneously invested in shares of the fund being
acquired. Settlement of an exchange would occur one business day after the date
on which the request for exchange was received in proper form, unless the dollar
amount of the transaction exceeds 5% of the Fund's total net assets on any given
day, in which case settlement would occur within five business days after the
date on which the request for exchange was received in proper form. The proceeds
of a redemption of Fund shares made to facilitate the exchange of those shares
for shares of another fund must be equal to at least (1) the minimum initial
investment requirement imposed by the fund into which the exchange is being
sought if the shareholder seeking the exchange has not previously invested in
that fund or (2) the minimum subsequent investment requirement imposed by the
fund into which the exchange is being sought if the shareholder has previously
made an investment in that fund.
A shareholder of the Fund wishing to exercise the Exchange Privilege should
obtain from Kidder, Peabody a copy of the current prospectus of the fund into
which an exchange is being sought and review that prospectus carefully before
making the exchange. Kidder, Peabody reserves the right to reject any exchange
request at any time. Prior to or concurrently with the delivery of the
confirmation of a shareholder's exchange transaction, Kidder, Peabody will
deliver to that shareholder a copy of the prospectus of the fund into which the
exchange is being made.
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DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income of the Fund are declared daily and
distributed monthly and distributions of net realized capital gains of the Fund,
if any, will be distributed annually after the close of the fiscal year in which
they are earned. Unless a shareholder instructs the Fund that dividends and
capital gains distributions on shares of any Class should be paid in cash and
credited to the shareholder's Account, dividends and capital gains distributions
are reinvested automatically at net asset value in additional shares of the same
Class. The Fund is subject to a 4% nondeductible excise tax measured with
respect to certain undistributed amounts of net investment income and capital
gains. If necessary to avoid the imposition of this tax, and if in the best
interests of its shareholders, the Fund will declare and pay dividends of its
net investment income and distributions of its net capital gains more frequently
than stated above. The per share dividends and distributions on Class C shares
will be higher than those on Class A shares, which in turn will be higher than
those on Class B shares, as a result of the different service, distribution and
transfer agency fees applicable to the Classes. See 'Fee Table,' 'Purchase of
Shares,' 'Distributor' and 'General Information.'
Shares of the Fund begin earning dividends on the day on which the shares
are issued, the date of issuance customarily being the settlement date, which is
the date on which the Fund receives payment for the shares. Shares continue to
earn dividends until the day prior to the settlement date of a redemption.
TAXES
The Fund has qualified for the fiscal year ended August 31, 1994 to be treated
as a regulated investment company within the meaning of the Code and intends to
qualify for this treatment in each year. To qualify as a regulated investment
company for federal income tax purposes, the Fund limits its income and
investments so that (1) less than 30% of its gross income is derived from the
sale or disposition of stocks, other securities and certain financial
instruments (including certain forward contracts) that were held for less than
three months and (2) at the close of each quarter of the taxable year (a) not
more than 25% of the market value of the Fund's total assets is invested in the
securities (other than Government Securities) of a single issuer or of two or
more issuers controlled by the Fund that are engaged in the same or similar
trades or businesses or in related trades or businesses and (b) at least 50% of
the market value of the Fund's total assets is represented by (i) cash and cash
items, (ii) Government Securities and (iii) other securities limited in respect
of any one issuer to an amount not greater in value than 5% of the market value
of the Fund's total assets and to not more than 10% of the outstanding voting
securities of the issuer. The requirements for qualification may cause the Fund
to restrict the degree to which it sells or otherwise disposes of stocks, other
securities and certain financial instruments held for less than three months. If
the Fund qualifies as a regulated investment company and meets certain
distribution requirements, the Fund will not be subject to federal income tax on
its net investment income and net realized capital gains that it distributes to
its shareholders.
Dividends paid by the Fund out of net investment income and distributions
of net realized short-term capital gains are taxable to shareholders as ordinary
income, whether received in cash or reinvested in additional Fund shares.
Distributions of net realized long-term capital gains are taxable to
shareholders as long-term capital gain, regardless of how long shareholders have
held their shares and whether the distributions are received in cash or
reinvested in additional shares.
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Dividends and distributions paid by the Fund generally do not qualify for the
federal dividends received deduction for corporate shareholders.
Statements as to the tax status of each Fund shareholder's dividends and
distributions are mailed annually. Shareholders also receive, as appropriate,
various written notices after the close of the Fund's taxable year regarding the
tax status of certain dividends and distributions that were paid (or that are
treated as having been paid) by the Fund to its shareholders during the
preceding taxable year, including the amount of dividends that represent
interest derived from Government Securities.
Shareholders are urged to consult their tax advisors regarding the
application of federal, state, local and foreign tax laws to their specific
situations before investing in the Fund.
DISTRIBUTOR
Kidder, Peabody, a major full-line investment services firm serving foreign and
domestic securities markets, located at 10 Hanover Square, New York, New York
10005-3592, serves as the distributor of the Fund's shares and is paid monthly
fees by the Fund in connection with (1) the servicing of shareholder accounts in
Class A and Class B shares and (2) providing distribution related services in
respect of Class B shares. A monthly service fee, authorized pursuant to a
Shareholder Servicing and Distribution Plan (the 'Plan') adopted by the Trust
with respect to the Fund pursuant to Rule 12b-1 under the 1940 Act, is
calculated at the annual rate of .25% of the value of the average daily net
assets of the Fund attributable to each of Class A and Class B shares and is
used by Kidder, Peabody to provide compensation for ongoing servicing and/or
maintenance of shareholder accounts and an allocation of overhead and other
Kidder, Peabody branch office expenses related to servicing shareholder
accounts. Compensation is paid by Kidder, Peabody to persons, including Kidder,
Peabody employees, who respond to inquiries of shareholders of the Fund
regarding their ownership of shares or their accounts with the Fund or who
provide other similar services not otherwise required to be provided by the
Fund's manager, investment adviser or transfer agent.
In addition, pursuant to the Plan, the Fund pays to Kidder, Peabody a
monthly distribution fee at the annual rate of .50% of the Fund's average daily
net assets attributable to Class B shares. The distribution fee is used by
Kidder, Peabody to provide initial and ongoing sales compensation to its
Investment Executives in respect of sales of Class B shares; costs of printing
and distributing the Fund's Prospectus, Statement of Additional Information and
sales literature to prospective investors in Class B shares; costs associated
with any advertising relating to Class B shares; an allocation of overhead and
other Kidder, Peabody branch office expenses related to distribution of Class B
shares; and payments to, and expenses of, persons who provide support services
in connection with the distribution of Class B shares.
Payments under the Plan are not tied exclusively to the service and/or
distribution expenses actually incurred by Kidder, Peabody, and the payments may
exceed expenses actually incurred by Kidder, Peabody. The Trust's Board of
Trustees evaluates the appropriateness of the Plan and its payment terms on a
continuing basis and in doing so considers all relevant factors, including
expenses borne by Kidder, Peabody and amounts it receives under the Plan.
PERFORMANCE INFORMATION
From time to time, the Trust may advertise the 30-day 'yield' of the Fund for
each Class. The yield refers to the income generated by an investment in a Class
over the 30-day period identified in the advertisement and is computed by
dividing the net investment income per share
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earned by the Class during the period by the net asset value per share of the
Class on the last day of the period. This income is 'annualized' by assuming
that the amount of income is generated each month over a one-year period and is
compounded semi-annually. The annualized income is then shown as a percentage of
the net asset value.
From time to time, the Trust may advertise the Fund's 'average annual total
return' over various periods of time for each Class. Total return figures, which
are based on historical earnings and are not intended to indicate future
performance, show the average percentage change in value of an investment in the
Class from the beginning date of a measuring period to the end of that period.
These figures reflect changes in the price of shares and assume that any income
dividends and/or capital gains distributions made by the Fund during the period
were reinvested in shares of the same Class. Total return figures will be given
for the most recent one-and five-year periods, or for the life of the Class to
the extent that it has not been in existence for the full length of those
periods, and may be given for other periods as well, such as on a year-by-year
basis. The average annual total return for any one year in a period longer than
one year might be greater or less than the average for the entire period.
The Trust may quote 'aggregate total return' figures with respect to the
Fund for various periods, representing the cumulative change in value of an
investment for the specific period and reflecting changes in share prices and
assuming reinvestment of dividends and distributions. Aggregate total return may
be calculated either with or without the effect of the sales charge to which the
Class A shares are subject and may be shown by means of schedules, charts or
graphs, and may indicate subtotals of the various components of total return
(that is, changes in value of initial investment, income dividends and capital
gains distributions). Reflecting compounding over a longer period of time,
aggregate total return data generally will be higher than average annual total
return data.
The Trust may, in addition to quoting the Classes' average annual and
aggregate total returns, advertise actual annual and annualized total return
performance data for various periods of time. Actual annual and annualized total
returns may be calculated either with or without the effect of the sales charge
to which Class A shares are subject and may be shown by means of schedules,
charts or graphs. Actual annual or annualized total return data generally will
be lower than average annual total return data, which reflects compounding of
return.
In reports or other communications to Fund shareholders and in advertising
material, the Trust may compare the Classes' performance with (1) the
performance of other mutual funds (or classes thereof) listed in rankings
prepared by Lipper Analytical Services Inc., CDA Investment Technologies, Inc.
or similar investment services that monitor the performance of mutual funds or
as set out in the nationally recognized publications listed below, (2) the
Morgan Stanley Capital International EAFE Index, the Lehman Brothers Government
Bond Index, the Lehman Brothers Corporate Bond Index, the Lehman Brothers
Intermediate Government/Corporate Bond Index, the Salomon Brothers Non-U.S. Bond
Index and the Salomon Brothers Mortgage Securities Index, each of which is an
unmanaged index or (3) other appropriate indexes of investment securities or
with data developed by GEIM or KPAM derived from those indexes. The Trust may
also include in communications to Fund shareholders evaluations of the Fund
published by nationally recognized ranking services and by financial
publications that are nationally recognized, such as Barron's, Business Week,
Forbes, Institutional Investor, Investor's Daily, Kiplinger's Personal Finance
Magazine, Money, Morningstar Mutual Fund Values, The New York Times, USA Today
32
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and The Wall Street Journal. Any given performance comparison should not be
considered as representative of the Fund's performance for any future period.
GENERAL INFORMATION
ORGANIZATION OF THE TRUST
The Trust is registered under the 1940 Act as an open-end management investment
company and was formed as a business trust pursuant to a Declaration of Trust,
as amended from time to time (the 'Declaration'), under the laws of The
Commonwealth of Massachusetts on March 28, 1991. The Fund commenced operations
on March 12, 1992. The Declaration authorizes the Trust's Board of Trustees to
create separate series, and within each series separate Classes, of an unlimited
number of shares of beneficial interest, par value $.001 per share. As of the
date of this Prospectus, the Trustees have established several such series,
representing interests in the Fund described in this Prospectus and in several
other series. See 'Exchange Privilege' in the Statement of Additional
Information.
When issued, Fund shares will be fully paid and non-assessable. Shares are
freely transferable and have no pre-emptive, subscription or conversion rights.
Each Class represents an identical interest in the Fund's investment portfolio.
As a result, the Classes have the same rights, privileges and preferences,
except with respect to: (1) the designation of each Class; (2) the effect of the
respective sales charges, if any, for each Class; (3) the distribution and/or
service fees, if any, borne by each Class; (4) the expenses allocable
exclusively to each Class; (5) voting rights on matters exclusively affecting a
single Class; and (6) the exchange privilege of each Class. The Board of
Trustees does not anticipate that there will be any conflicts among the
interests of the holders of the different Classes. The Trustees, on an ongoing
basis, will consider whether any conflict exists and, if so, take appropriate
action. Certain aspects of the shares may be changed, upon notice to Fund
shareholders, to satisfy certain tax regulatory requirements, if the change is
deemed necessary by the Trust's Board of Trustees.
Shareholders of the Fund are entitled to one vote for each full share held
and fractional votes for fractional shares held. Voting rights are not
cumulative and, as a result, the holders of more than 50% of the aggregate
shares of the Trust may elect all of the Trustees. Generally, shares of the
Trust will be voted on a Trust-wide basis on all matters except those affecting
only the interests of one series, such as the Fund's investment advisory
agreement. In turn, shares of the Fund will be voted on a Fund-wide basis on all
matters except those affecting only the interests of one Class, such as the
terms of the Plan as it relates to a Class.
The Trust intends to hold no annual meetings of shareholders for the
purpose of electing Trustees unless, and until such time as, less than a
majority of the Trustees holding office have been elected by shareholders.
Shareholders of record of no less than two-thirds of the outstanding shares of
the Trust may remove a Trustee through a declaration in writing or by vote cast
in person or by proxy at a meeting called for that purpose. A meeting will be
called for the purpose of voting on the removal of a Trustee at the written
request of holders of 10% of the Trust's outstanding shares. Shareholders of the
Fund who satisfy certain criteria will be assisted by the Trust in communicating
with other shareholders in seeking the holding of the meeting.
REPORTS TO SHAREHOLDERS
The Trust sends Fund shareholders audited semi-annual and annual reports, each
of which includes a list of the investment securities held by the Fund as of the
end of the period covered by the report.
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CUSTODIAN AND RECORDKEEPING AGENT; TRANSFER AND DIVIDEND AGENT
State Street, located at One Monarch Drive, North Quincy, Massachusetts 02171,
serves as the Fund's custodian and recordkeeping agent. IFTC, located at 127
West 10th Street, Kansas City, Missouri 64105, serves as the Fund's transfer and
dividend agent.
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No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the
Statement of Additional Information incorporated into this
Prospectus by reference, in connection with the offering made by
this Prospectus and, if given or made, any such information or
representations must not be relied upon as having been authorized by
the Fund or its distributor. This Prospectus does not constitute an
offering by the Fund or by its distributor in any jurisdiction in
which the offering may not lawfully be made.
<TABLE>
<S> <C>
- --------------------------------------------------------
Contents
- --------------------------------------------------------
Fee Table 2
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Highlights 3
- --------------------------------------------------------
Financial Highlights 7
- --------------------------------------------------------
Investment Objective and Policies 8
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Management of the Fund 18
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Purchase of Shares 21
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Redemption of Shares 26
- --------------------------------------------------------
Determination of Net Asset Value 27
- --------------------------------------------------------
Exchange Privilege 28
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Dividends, Distributions and Taxes 30
- --------------------------------------------------------
Distributor 31
- --------------------------------------------------------
Performance Information 31
- --------------------------------------------------------
General Information 33
- --------------------------------------------------------
Custodian and Recordkeeping
Agent; Transfer and
Dividend Agent 34
- --------------------------------------------------------
</TABLE>
Kidder,
Peabody
Intermediate
Fixed
Income
Fund
Prospectus
December 29, 1994
In affiliation with
GE Investment Management
[LOGO]
<PAGE>
PROSPECTUS DECEMBER 29, 1994
- --------------------------------------------------------------------------------
Kidder, Peabody Asset Allocation Fund
60 BROAD STREET NEW YORK, NEW YORK 10004-2350 (212) 656-1737
Kidder, Peabody Asset Allocation Fund (the 'Fund'), a series of Kidder, Peabody
Investment Trust (the ' Trust'), seeks total return, consisting of long term
capital appreciation and current income. The Fund attempts to achieve its
objective by following a systematic investment strategy that actively allocates
the Fund's assets among common stocks, U.S. Treasury Notes and U.S. Treasury
Bills.
This Prospectus briefly sets forth certain information about the Fund, including
applicable operating expenses, that prospective investors should know before
investing. Investors are advised to read this Prospectus and retain it for
future reference.
Additional information about the Fund, contained in a Statement of Additional
Information dated the same date as this Prospectus, has been filed with the
Securities and Exchange Commission (the 'SEC') and is available to investors
upon request and without charge by calling or writing the Trust at the telephone
number or address listed above. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.
- --------------------------------------------------------------------------------
MANAGER AND INVESTMENT ADVISER
Kidder Peabody Asset Management, Inc.
DISTRIBUTOR
Kidder, Peabody & Co. Incorporated
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
- --------------------------------------------------------------------------------
FEE TABLE
The table appearing below shows the costs and expenses that an investor would
incur, either directly or indirectly, as a shareholder of the Fund, based upon
the Fund's annual operating expenses.
<TABLE>
<CAPTION>
CLASS CLASS CLASS
A B C
----- ----- -----
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases of Shares (as a percentage of
offering price).......................................................... 5.75% 0% 0%
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of
offering price).......................................................... 0% 0% 0%
Maximum Contingent Deferred Sales Charge (as a percentage of redemption
proceeds)................................................................ 0% 1% 0%
Maximum Exchange Fee....................................................... 0% 0% 0%
Maximum Annual Investment Advisory Fee Payable by Shareholders Holding
Class C Shares through the INSIGHT Investment Advisory Program (as a
percentage of average daily value of shares held)........................ 0% 0% 1.50%
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees............................................................ .50% .50% .50%
12b-1 Fees................................................................. .25 1.00 0
Other Expenses............................................................. .38 .38 .38
----- ----- -----
Total Fund Operating Expenses..................................... 1.13% 1.88% .88%
----- ----- -----
----- ----- -----
</TABLE>
The nature of the services provided to, and the aggregate management fees
paid by, the Fund are described below under 'Management of the Fund.' The Fund
bears an annual Rule 12b-1 service fee of .25% of the value of the average daily
net assets of Class A shares and an annual Rule 12b-1 fee of 1.00% of the value
of the average daily net assets of Class B shares, consisting of a .25% service
fee and a .75% distribution fee. Long-term shareholders of Class B Shares may
pay more than the economic equivalent of the maximum front-end sales charge
currently permitted by the rules of the National Association of Securities
Dealers, Inc. governing investment company sales charges. See 'Distributor.'
The percentage of 'Other Expenses' in the table above is based on amounts
incurred during the Fund's most recent fiscal year; these expenses include fees
for shareholder services, custodial fees, legal and accounting fees, printing
costs and registration fees, the costs of regulatory compliance, a portion of
the costs associated with maintaining the Trust's legal existence and the costs
involved in communicating with the Fund's shareholders.
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical $1,000 investment in the Fund assuming (1) a 5% annual return,
(2) payment of the shareholder transaction expenses and annual Fund operating
expenses set forth in the table above and (3) complete redemption at the end of
the period.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Class A...................................... $68 $91 $116 $187
Class B...................................... $29 $59 $102 $220
Class C...................................... $24 $74 $127 $272
</TABLE>
The above example is intended to assist an investor in understanding
various costs and expenses that the investor would bear upon becoming a
shareholder of the Fund. The example should not be considered to be a
representation of past or future expenses. Actual expenses of the Fund may be
greater or less than those shown above. The assumed 5% annual return shown in
the example is hypothetical and should not be considered to be a representation
of past or future annual return; the actual return of the Fund may be greater or
less than the assumed return.
2
<PAGE>
- --------------------------------------------------------------------------------
HIGHLIGHTS
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------------
The Trust
The Trust is an open-end management investment company. See 'General Information.'
- ---------------------------------------------------------------------------------------------------------------------------
The Fund
The Fund, which is a series of the Trust, is a diversified fund that seeks total return,
consisting of long term capital appreciation and current income. The Fund attempts to achieve
its objective by following a systematic investment strategy that actively allocates the Fund's
assets among common stocks, U.S. Treasury Notes and U.S. Treasury Bills.
- ---------------------------------------------------------------------------------------------------------------------------
Asset
Allocation
Strategy
The Fund follows an asset allocation strategy involving investing among the following asset
categories ('Segments'): (1) the common stocks primarily included in the Standard & Poor's 500
Composite Stock Price Index (the 'S&P 500 Index') and derivative instruments relating thereto
(the 'Stock Segment'), the performance of which, before deduction of operating expenses, is
intended to replicate as closely as possible the aggregate price and yield performance of the
S&P 500 Index; (2) 30-day U.S. Treasury Bills (the 'Cash Segment'); and (3) five-year U.S.
Treasury Notes and derivative instruments relating thereto (the 'Note Segment'). Asset
allocations are determined by the Fund's manager and investment adviser, Kidder Peabody Asset
Management, Inc. ('KPAM'), based on relative rates of return among the Segments. See
'Investment Objective and Policies.'
- ---------------------------------------------------------------------------------------------------------------------------
Benefits of
Investing
in the
Fund
Mutual funds, such as the Fund, are flexible investment tools that are increasingly
popular -- one of four American households now owns shares of at least one mutual fund -- for
very sound reasons. The Fund offers investors the following important benefits:
Allocation Model
The Fund's asset allocation strategy is designed to afford investors the opportunity to seek
total return during all economic and financial market cycles, with a degree of volatility
lower than that of the equity market, utilizing a systematic, cost effective asset allocation
strategy. The Fund allocates its assets among the Segments in accordance with the Kidder,
Peabody Fully Flexible Stock/Bond/Cash Asset Allocation Model 'sm' (the 'Allocation Model'),
an asset allocation model developed by the Quantitative Research Group of Kidder, Peabody &
Co. Incorporated ('Kidder, Peabody'), the Fund's distributor. See 'Investment Objective and
Policies -- Asset Allocation Strategy.'
Asset Allocation Investing With an Index Component
Many published asset allocation strategies use securities indices as one or
</TABLE>
3
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
more of the asset categories. The Fund provides individual investors with a means of dealing
with certain difficulties that generally preclude them from successfully pursuing asset
allocation investing with an index component, such as holding a large number of small
investment positions and the high transaction costs typically associated with those holdings.
See 'Investment Objective and Policies -- Asset Allocation Strategy.'
Professional Management
By pooling the monies of many investors, the Fund enables shareholders to obtain the benefits
of full-time professional management and an array of investments that is typically beyond the
means of most investors. KPAM also may employ portfolio management techniques that frequently
are not used by individual or many institutional investors. See 'Management of the Fund.'
Transaction Savings
By investing in the Fund, an investor is able to acquire ownership in a portfolio of
securities without paying the higher transaction costs generally associated with a series of
small securities purchases.
Convenience
Fund shareholders are relieved of the administrative and recordkeeping burdens normally
associated with direct ownership of securities.
Liquidity
The Fund's convenient purchase and redemption procedures provide shareholders with ready
access to their money and reduce the delays frequently involved in the direct purchase and
sale of securities. See 'Purchase of Shares' and 'Redemption of Shares.'
Choice Pricing System
Under the Choice Pricing System'SM', the Fund presently offers three classes of shares
('Classes') that provide different methods of purchasing shares and allow investment
flexibility and a wider range of investment choices. See 'Purchase of Shares.'
Exchange Privilege
Shareholders of the Fund may exchange all or a portion of their shares for shares of the same
Class or the sole outstanding Class of specified funds in the Kidder Family of Funds. Class B
shares held less than one year may not be exchanged. See 'Exchange Privilege.'
Total Portfolio Approach
The funds in the Kidder Family of Funds are designed to be strategically combined as part of
a total portfolio approach. This investment philosophy acknowledges the interplay of a
shareholder's many different investing needs and preferences and recognizes that every
investment move a shareholder
</TABLE>
4
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
makes alters the balance of his or her overall financial profile. The Fund may be used in
conjunction with other funds in the Kidder Family of Funds to build a portfolio that maximizes
the potential of available assets while meeting many different -- and changing -- financial
needs.
- ---------------------------------------------------------------------------------------------------------------------------
Purchase of
Shares
Kidder, Peabody, a major full-line investment services firm serving the United States and
foreign securities markets, acts as the distributor of the Fund's shares. The Fund presently
offers three Classes that differ principally in terms of the sales charges and rate of expenses
to which they are subject and are designed to provide an investor with the flexibility of
selecting an investment best suited to the investor's needs. See 'Purchase of Shares' and
'Distributor.'
Class A Shares
The public offering price of Class A shares is the net asset value per share next determined
after a purchase order is received, plus a maximum sales charge of 5.75% (6.08% of the net
amount invested). Investors purchasing $50,000 or more, certain employee benefit plans and
employees of Kidder, Peabody's affiliates are eligible for reduced sales charges. The Fund
pays Kidder, Peabody a service fee with respect to Class A shares at the annual rate of .25%
of the value of the average daily net assets attributable to this Class.
Class B Shares
The public offering price of Class B shares is the net asset value per share next determined
after a purchase order is received, without imposition of a sales charge. The Fund pays
Kidder, Peabody a service fee at the annual rate of .25%, and a distribution fee at the annual
rate of .75%, of the value of the average daily net assets attributable to this Class.
Class C Shares
The public offering price of Class C shares, which are available exclusively to employees of
Kidder, Peabody and their associated accounts, directors or trustees of any fund in the Kidder
Family of Funds, employee benefit plans of Kidder, Peabody and participants in the INSIGHT
Investment Advisory Program 'sm' ('INSIGHT'), is the net asset value per share next determined
after a purchase order is received without imposition of a sales charge. This Class bears no
service or distribution fees. Participation in INSIGHT is subject to payment of an advisory
fee at the maximum annual rate of 1.50% of assets held through INSIGHT, generally charged
quarterly in advance.
Investment Minimums
The minimum initial investment in the Fund is $1,000 and the minimum subsequent investment is
$50, except that for individual retirement accounts ('IRAs'), other tax qualified retirement
plans and accounts established pursuant to the Uniform Gifts to Minors Act, the minimum
initial investment is $250 and the minimum subsequent investment is $1.00.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Redemption
of Shares
Shares of the Fund may be redeemed at the Fund's next determined net asset value per share. In
order to realize the full benefits of the Fund, investors should plan to hold their shares
through several market cycles. In order to discourage short term investments in Class B shares,
the Fund imposes a contingent deferred sales charge ('CDSC') on Class B shares held less than
one year equal to 1% of the net asset value of the shares redeemed at the time of purchase or
the time of redemption, whichever is lower. Class B shares held one year or longer and Class B
shares acquired through reinvestment of dividends or distributions are not subject to the CDSC.
See 'Redemption of Shares.'
- ---------------------------------------------------------------------------------------------------------------------------
Management
KPAM, a wholly-owned subsidiary of Kidder, Peabody, serves as the Fund's manager and investment
adviser and receives a fee, accrued daily and paid monthly, at the annual rate of .50% of the
Fund's average daily net assets on assets up to but not including $250 million and .45%
thereafter. Kidder, Peabody is a major full-line investment services firm serving foreign and
domestic securities markets. General Electric Capital Services, Inc., a wholly-owned subsidiary
of General Electric Company ('GE'), owns all the outstanding stock of Kidder, Peabody Group
Inc. ('Kidder Group'), the parent company of Kidder, Peabody. See 'Management of the Fund' and
'Distributor.'
- ---------------------------------------------------------------------------------------------------------------------------
Risk Factors
and Special
Considera-
tions
Although the Fund will seek long term total return consisting of both capital appreciation and
current income, the Fund may not achieve as high a level of either capital appreciation or
current income as a fund that has only one of those objectives as its primary objective.
Because the benefits of the Allocation Model, on which the Fund's investment decisions are
based, are expected to be realized only if the recommendations are followed over several market
cycles, the Fund is intended to be a long term investment vehicle and is not designed to
provide investors with a means of speculating on short term market movements. The investment
results of the Fund (and the Stock Segment) at any time may be greater or less than those of
the S&P 500 Index. Deviations from the performance of the S&P 500 Index may result from the
proportion of assets then allocated to the Stock Segment in accordance with the Allocation
Model, purchases and redemptions of shares of the Fund that occur daily, as well as from
brokerage and other expenses borne by the Fund. Thus, no assurance can be given that the Fund's
investment objective will be achieved. The Fund may also be subject to certain risks in using
investment techniques and strategies such as entering into futures contracts and options on
futures contracts, entering into transactions involving options on stock indexes, purchasing
securities on a when-issued or delayed delivery basis and entering into repurchase agreements.
See 'Investment Objective and Policies -- Risk Factors and Special Considerations' at page 14
of this Prospectus.
</TABLE>
6
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Trust with respect to
the Fund by Deloitte & Touche LLP. Financial statements for the fiscal year
ended August 31, 1994 and the report of independent auditors are included in the
Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------------------------------------------------------------
PERIOD YEAR PERIOD YEAR YEAR PERIOD YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1993(a) 1994 1992(b) 1993 1994 1993(a) 1994
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period........ $12.90 $13.50 $12.00 $12.12 $13.49 $12.90 $13.52
------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income....................... 0.08 0.24 0.03 0.18 0.13 0.09 0.25
Net realized and unrealized gain on
investments............................... 0.59 0.32 0.09 1.34 0.33 0.60 0.33
------------------------------------------------------------------------------
Total from investment operations............ 0.67 0.56 0.12 1.52 0.46 0.69 0.58
------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income....................... (0.07) (0.24) -- (0.15) (0.13) (0.07) (0.27)
Net realized capital gains.................. -- (0.04)(d) -- -- (c) (0.04)(d) -- (0.04)(d)
------------------------------------------------------------------------------
Total distributions......................... (0.07) (0.28) -- (0.15) (0.17) (0.07) (0.31)
------------------------------------------------------------------------------
Net asset value, end of period.............. $13.50 $13.78 $12.12 $13.49 $13.78 $13.52 $13.79
------------------------------------------------------------------------------
------------------------------------------------------------------------------
Total return(e)............................. 5.17% 4.21% 0.98% 12.61% 3.46% 5.30% 4.41%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands).... $3,007 $1,801 $ 50,222 $107,761 $62,970 $3,379 $3,880
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution and service
fees...................................... 0.81%* 0.88% 1.04%* 0.81% 0.88% 0.81%* 0.88%
Expenses, including distribution and service
fees...................................... 1.06%* 1.13% 1.75%* 1.73% 1.88% 0.81%* 0.88%
Expenses, before reimbursement from
manager................................... 1.06%* 1.13% 2.11%* 1.73% 1.88% 0.81%* 0.88%
Net investment income....................... 1.71%* 1.64% 2.42%* 1.04% 0.89% 1.96%* 1.90%
Portfolio turnover rate..................... 0.42% 4.17% -- 0.42% 4.17% 0.42% 4.17%
</TABLE>
(a) From May 10, 1993 (Commencement of Operations) to August 31, 1993.
(b) From July 22, 1992 (Commencement of Operations) to August 31, 1992.
(c) Long-term capital gain distribution represented $.002 per share.
(d) Short-term capital gain distribution represented $.04 per share, long-term
capital gain distribution represented $.004 per share.
(e) Total return does not reflect the effects of a sales charge, and is
calculated by giving effect to the reinvestment of dividends on the
dividend payment date.
* Annualized
7
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is total return, consisting of long term capital
appreciation and current income. No assurance can be given that the Fund will be
able to achieve its investment objective, which may be changed only with the
approval of a majority of the Fund's outstanding voting securities, which in
turn is defined in the Investment Company Act of 1940, as amended (the '1940
Act'), as the lesser of (1) 67% or more of the shares present at a Fund meeting,
if the holders of more than 50% of the outstanding shares of the Fund are
present or represented by proxy or (2) more than 50% of the outstanding shares
of the Fund.
The Fund's annual report for the fiscal year ended August 31, 1994 contains
information regarding relevant market conditions and investment strategies and
techniques pursued by KPAM during such fiscal year and is available to
shareholders without charge upon request made to the Fund at the address listed
on the front cover page of this Prospectus.
ASSET ALLOCATION STRATEGY
The Fund is designed for investors seeking total return during all economic and
financial market cycles, with a degree of volatility lower than that of the
equity market, utilizing a systematic, cost-effective approach to allocating
assets among market segments. At the same time, the Fund provides individual
investors a means of dealing with the difficulties often associated with asset
allocation investing with an index component.
In seeking total return, the Fund follows an asset allocation strategy
contemplating shifts (sometimes frequent) among the following Segments: (i) the
Stock Segment, consisting primarily of the common stocks included in the S&P 500
Index and derivative instruments relating thereto, the performance of which,
before deduction of operating expenses, is intended to replicate as closely as
possible that of the S&P 500 Index; (ii) the Cash Segment, consisting of 30-day
U.S. Treasury Bills; and (iii) the Note Segment, consisting of five-year U.S.
Treasury Notes and derivative instruments relating thereto.
The Fund allocates its assets among the Segments in accordance with the
Allocation Model, an asset allocation model developed by Kidder, Peabody's
Quantitative Research Group. The emphasis of the Allocation Model is to avoid or
lower exposure to the market in down economic cycles and to perform close to the
broad market in periods of strongly positive market performance. The asset
allocation mix for the Fund will be determined by KPAM at any given time on the
basis of the recommendations of the Allocation Model, except as described below,
which are determined in light of a quantitative assessment of the expected
performance of the Segments. The Fund is not managed as a balanced portfolio,
however, and may not maintain a portion of its investments in each of the
Segments at all times. Except for limited amounts always held in the Cash
Segment as described below, the Fund does not commit its assets simultaneously
to the Cash Segment and the Note Segment. Thus, during the course of a business
cycle, for example, the Fund may invest in the Stock Segment and the Cash
Segment, in the Stock Segment and the Note Segment, solely in the Stock Segment,
solely in the Cash Segment or solely in the Note Segment.
8
<PAGE>
- --------------------------------------------------------------------------------
The Fund's assets are reallocated among the Segments at such times as are
mandated by the Allocation Model based on changes in projected rates of return.
If no reallocation is mandated, on the first business day of each month, any
material amounts in each Segment in excess of the amount mandated by the
Allocation Model resulting from appreciation or receipt of dividends,
distributions, interest payments and proceeds from securities maturing are
reallocated (or 'rebalanced') to the extent practicable among the Segments so as
to reestablish the recommended allocation among the Segments.
Cash inflows to the Fund during a month are invested in, and cash outflows
from the Fund during a month are derived from dispositions of assets in, each
Segment on a pro rata basis. In order to manage the Fund's portfolio most
effectively, cash flows into and out of the Stock Segment are managed to the
extent practicable through the use of stock index options, stock index futures
contracts and options on stock index futures contracts, as described below.
Similarly, cash flows into and out of the Note Segment are managed to the extent
practicable through the use of five-year U.S. Treasury Note futures contracts
and options thereon. See 'Investment Strategies and Techniques -- Derivative
Instruments' below.
The Fund deviates from the published recommendations of the Allocation
Model only to the extent necessary (1) to maintain a limited amount of assets
(not expected to exceed 2.00% of its total assets) in the Cash Segment in order
to have highly liquid short-term securities available to pay Fund operating
expenses and dividends and distributions on its shares and to meet anticipated
redemptions of its shares and (2) to qualify as a regulated investment company
for Federal income tax purposes. With regard to the latter, investors should be
aware that in order to so qualify, the Fund must, among other things, derive
less than 30% of its gross income from the sale or disposition of stocks, other
securities and certain financial instruments held for less than three months.
Thus, this requirement may preclude the Fund from reallocating its assets when
otherwise mandated by the Allocation Model. In such event, the Fund would
reallocate its assets in accordance with the then current recommendations of the
Allocation Model as soon as the reallocation could be accomplished without
jeopardizing the Fund's qualification as a regulated investment company.
TYPES OF PORTFOLIO INVESTMENTS
CASH SEGMENT. Assets committed to the Cash Segment are invested to the
extent practicable in U.S. Treasury Bills having remaining maturities of 30 days
or, if no such instruments are then available for purchase at favorable prices,
these assets will be invested in U.S. Treasury Bills having remaining maturities
as close as possible to 30 days. U.S. Treasury Bills are entitled to the full
faith and credit of the U.S. Government as to payment of interest and principal.
NOTE SEGMENT. Assets committed to the Note Segment are invested to the
extent practicable in (1) U.S. Treasury Notes having five years remaining to
maturity at the beginning of the then current calendar year or, if no such
instruments are then available for purchase at favorable prices, these assets
will be invested in U.S. Treasury Notes having remaining maturities as close as
possible to five years at the beginning of the then current calendar year; and
(2) five-year U.S. Treasury Note futures contracts and options thereon. U.S.
Treasury Notes are entitled to the full faith and credit of the U.S. Government
as to payment of interest and principal.
9
<PAGE>
- --------------------------------------------------------------------------------
STOCK SEGMENT. With respect to assets committed to the Stock Segment, the
Fund attempts to duplicate, before deduction of operating expenses, the
investment results of the S&P 500 Index. The S&P 500 Index is an index compiled
by Standard & Poor's Corporation ('S&P') that emphasizes large-capitalization
companies. The Stock Segment is not managed according to traditional methods of
'active' investment management, which involve the buying and selling of
securities based on economic, financial and market analysis and investment
judgment. Instead, utilizing a 'passive' or 'indexing' investment approach, the
Fund attempts in the Stock Segment to duplicate the investment performance of
the S&P 500 Index through statistical procedures that involve holding
substantially all 500 stocks in approximately the same relative proportions as
they are represented in the S&P 500 Index, except as described below.
The S&P 500 Index is composed of 500 common stocks that are chosen by S&P
on a statistical basis. The composition of the S&P 500 Index is determined by
S&P based on such factors as the market capitalization and trading activity of
each stock and its adequacy as a representative of stocks in a particular
industry group, and may be changed from time to time. Each stock in the S&P 500
Index is weighted by its market capitalization, which is the market price per
share of the stock multiplied by the number of shares outstanding. While most of
the stocks in the S&P 500 Index are issued by companies that are among the 500
largest companies in terms of market capitalization, some stocks are included
for diversification and are not among the 500 largest market capitalization
stocks. The inclusion of a stock in the S&P 500 Index in no way implies that S&P
believes the stock to be an attractive investment.
As of December 1, 1994, the 500 stocks in the S&P 500 Index, most of which
trade on the New York Stock Exchange (the 'NYSE'), represented approximately 62%
of the market capitalization of all equity securities listed on exchanges in the
United States. Typically, companies included in the S&P 500 Index are the
largest and most dominant firms in their respective industries. As of December
1, 1994, the five largest companies in the S&P 500 Index were: GE (2.5%), AT&T
(2.3%), Exxon (2.3%), Coca Cola (2.0%) and Royal Dutch Petroleum (1.7%). The
leading sectors in the S&P 500 Index as of December 1, 1994 were:
oil -- international (7.2%), telephone (5.1%), electric companies (4.0%),
healthcare (3.7%) and electrical (3.5%). The largest composite sectors as of
December 1, 1994 were: consumer non-durables (13.6%), utilities (13.1%),
technology (11.1%), financial service (11.0%) and energy (10.3%).
While there can be no guarantee that the Stock Segment's investment results
will precisely match those of the S&P 500 Index, KPAM believes that, before
deduction of operating expenses, there will be a very high correlation between
the returns generated by the Stock Segment and the S&P 500 Index. The Fund
attempts to achieve a correlation between the performance of the Stock Segment
and that of its benchmark index of at least 0.95, before deduction of operating
expenses. A correlation of 1.00 would indicate perfect correlation, which would
be achieved when the Stock Segment's net asset value, including the value of its
dividend and capital gains distributions, increases or decreases in exact
proportion to changes in the S&P 500 Index. The Fund's ability to correlate the
performance of the Stock Segment with the S&P 500 Index may be affected by,
among other things, changes in securities markets, the manner in which the S&P
500 Index is calculated by S&P and the timing of purchases and redemptions. See
'Risk Factors and Special Considerations -- Index Investing and Open-End
Investment Companies' below. KPAM monitors the correlation of the performance of
the Stock Segment in relation to that of the S&P
10
<PAGE>
- --------------------------------------------------------------------------------
500 Index under the supervision of the Board of Trustees. In the unlikely event
that a high correlation is not achieved, the Board of Trustees will take
appropriate steps based on the reasons for the lower than expected correlation.
S&P is neither a sponsor of nor affiliated with the Fund.
INVESTMENT TECHNIQUES AND STRATEGIES
The Fund is authorized to engage in any one or more of the specialized
investment techniques and strategies described below:
DERIVATIVE INSTRUMENTS. The Fund anticipates that the Note Segment and the
Stock Segment will remain invested in five-year U.S. Treasury Notes or common
stocks, respectively, to the degree mandated by the Allocation Model. The Fund
may also invest its assets in stock index options, stock index futures contracts
and options on stock index futures contracts (with respect to the Stock Segment)
and five-year U.S. Treasury Note futures contracts and options thereon (with
respect to the Note Segment) in order to invest temporarily uncommitted cash
balances, to maintain liquidity to meet shareholder redemptions or, in the case
of stock index options, to minimize trading costs. When the Fund has cash from
net new sales of Fund shares or holds a disproportionate amount of its assets in
the Cash Segment, it may enter into stock index futures or options thereon or
five-year U.S. Treasury Note futures contracts or options thereon to attempt to
increase its exposure to the appropriate asset class prior to purchasing
securities to the degree mandated by the Allocation Model. Strategies the Fund
could use to accomplish this include entering into long futures contracts,
writing put options and purchasing call options. When the Fund wishes to sell
securities, because of shareholder redemptions or otherwise, it may use futures
contracts or options to hedge against market risk until the sale can be
completed. These strategies could include entering into short futures contracts,
writing call options and purchasing put options. It is anticipated that the Fund
will continue to close out positions in these instruments on at least a
quarterly basis and reconstitute its portfolio with direct purchases or sales of
securities in accordance with the then current recommendations of the Allocation
Model. The Fund does not enter into futures contracts or options as part of a
temporary defensive strategy, such as lowering the Stock Segment's investment in
common stocks to protect against potential stock market declines, as this would
be inconsistent with the Allocation Model. See 'Stock Index Options' and
'Futures Contracts and Options on Futures Contracts' below.
STOCK INDEX OPTIONS. The Fund may purchase and write put and call options
on stock indexes listed on domestic securities exchanges (which indexes include
securities held in the Fund's portfolio) as a means of pursuing the Stock
Segment's exposure in equity markets without making direct purchases of equity
securities.
A stock index measures the movement of a certain group of stocks by
assigning relative values to the common stocks included in the index. Options on
stock indexes are generally similar to options on specific securities. Unlike
those on securities, however, options on stock indexes do not involve the
delivery of an underlying security; the option in the case of an option on a
stock index represents the holder's right to obtain from the writer in cash a
fixed multiple of the amount by which the exercise price exceeds (in the case of
a put) or is less than (in the case of a call) the closing value of the
underlying stock index on the exercise date.
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When the Fund writes an option on a stock index, it establishes a
segregated account with its custodian in which the Fund deposits cash or cash
equivalents or a combination of both in an amount equal to the market value of
the option and maintains the account while the option is open. If the Fund has
written a stock index option, it may terminate its obligation by effecting a
closing purchase transaction, which is accomplished by purchasing an option of
the same series as the option previously written.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may enter into
stock index futures contracts, and options on those contracts, as a means of
temporarily increasing or decreasing the Stock Segment's exposure to equity
markets in anticipation of purchases or sales of common stocks. Similarly, the
Fund may enter into five-year U.S. Treasury Note futures contracts, and options
on those contracts, as a means of temporarily increasing or decreasing the Note
Segment's exposure to five-year U.S. Treasury Notes in anticipation of purchase
or sales of these notes. A futures contract is an agreement to take or make
delivery of an amount of cash equal to the difference between the value of the
index or security at the beginning and at the end of the contract period. An
option on a futures contract, in contrast to a direct investment in the
contract, gives the purchaser the right, in return for the premium paid, to
assume a position in the underlying futures contract at a specified exercise
price at any time on or before the expiration date of the option.
The Fund may assume both 'long' and 'short' positions with respect to
futures contracts. A long position involves entering into a futures contract to
buy a commodity, whereas a short position involves entering into a futures
contract to sell a commodity. In entering into futures contracts, the Fund is
required to make initial 'margin' payments, which are payments in the nature of
performance bonds or good faith deposits, and to make 'variation' margin
payments from time to time as the values of the futures contracts fluctuate.
The Fund does not (1) enter into any futures contracts or options on
futures contracts if, immediately after the transactions, the aggregate of
margin deposits on all of the Fund's outstanding futures contracts and premiums
paid on its outstanding options on futures contracts would exceed 5% of the
market value of the total assets of the Fund after taking into account
unrealized profits and losses on any futures contracts or options on futures
contracts or (2) enter into any futures contracts or options on futures
contracts if the aggregate of the market value of the Fund's outstanding futures
contracts and market value of the currencies and futures contracts subject to
outstanding options written by the Fund would exceed 50% of the market value of
the total assets of the Fund. Each short position in a futures or options
contract entered into by the Fund is secured by the Fund's ownership of
underlying securities. The Fund does not use leverage when it enters into long
futures or options contracts; the Fund places in a segregated account with its
custodian, or designated sub-custodian, with respect to each of its long
positions cash or short-term U.S. Treasury Bills having a value equal to the
underlying commodity value of the contract.
REPURCHASE AGREEMENTS. In order to manage cash flows resulting from the
continuous sale and redemption of the Fund's shares, the Fund may engage in
repurchase agreement transactions collateralized by U.S. Treasury obligations.
Although the amount of the Fund's assets that may be invested in repurchase
agreements terminable in less than seven days is not limited, repurchase
agreements maturing in more than seven days, together with other illiquid
securities,
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may not exceed 10% of the Fund's net assets. The Fund may engage in repurchase
agreement transactions with certain member banks of the Federal Reserve System
and with certain dealers listed on the Federal Reserve Bank of New York's list
of reporting dealers. Under the terms of a typical repurchase agreement, the
Fund would acquire an underlying debt obligation for a relatively short period
(usually not more than seven days) subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the securities
underlying a repurchase agreement of the Fund is monitored on an ongoing basis
by KPAM to ensure that the value is at least equal at all times to the total
amount of the repurchase obligation, including interest. KPAM also monitors, on
an ongoing basis to evaluate potential risks, the creditworthiness of those
banks and dealers with which the Fund enters into repurchase agreements.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. To secure prices or yields
deemed advantageous at a particular time, the Fund may purchase securities on a
when-issued or delayed-delivery basis, in which case delivery of the securities
occurs beyond the normal settlement period; payment for or delivery of the
securities would be made prior to the reciprocal delivery or payment by the
other party to the transaction. The Fund enters into when-issued or
delayed-delivery transactions for the purpose of acquiring securities and not
for the purpose of leverage. When-issued securities purchased by the Fund may
include securities purchased on a 'when, as and if issued' basis under which the
issuance of the securities depends on the occurrence of a subsequent event, such
as approval of a merger, corporate reorganization or debt restructuring. The
Fund will establish with its custodian, or with a designated sub-custodian, a
segregated account consisting of cash, securities issued or guaranteed by the
U.S. Government, its agencies, authorities or instrumentalities ('Government
Securities') or other liquid high-grade debt obligations in an amount equal to
the amount of its when-issued or delayed-delivery purchase commitments.
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental investment restrictions with respect
to the Fund that may not be changed without approval of a majority of the Fund's
outstanding voting securities (as defined in the 1940 Act). Included among those
fundamental restrictions are the following:
1. The Fund will not purchase securities (other than Government
Securities) of any issuer if, as a result of the purchase, more than 5% of
the value of the Fund's total assets would be invested in the securities of
the issuer, except that up to 25% of the value of the Fund's total assets
may be invested without regard to this 5% limitation.
2. The Fund will not purchase more than 10% of the voting securities
of any one issuer, or more than 10% of the securities of any class of any
one issuer, except that this limitation is not applicable to the Fund's
investments in Government Securities, and up to 25% of the Fund's assets
may be invested without regard to these 10% limitations.
3. The Fund will not borrow money, except that the Fund may borrow
from banks for temporary or emergency (not leveraging) purposes, including
the meeting of redemption
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requests and cash payments of dividends and distributions that might
otherwise require the untimely disposition of securities, in an amount not
to exceed 20% of the value of the Fund's total assets (including the amount
borrowed) valued at market less liabilities (not including the amount
borrowed) at the time the borrowing is made. Whenever borrowings exceed 5%
of the value of the total assets of the Fund, the Fund will not make any
additional investments.
4. The Fund will not lend money to other persons, except through
purchasing debt obligations, lending portfolio securities in an amount not
to exceed 30% of the Fund's assets taken at value and entering into
repurchase agreements.
5. The Fund will invest no more than 25% of the value of its total
assets in securities of issuers in any one industry, the term industry
being deemed not to include the U.S. Government.
Certain other investment restrictions adopted by the Trust with respect to
the Fund are described in the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investing in the Fund involves risks and special considerations, such as those
described below:
LIMITS OF ASSET ALLOCATION STRATEGY. Although it seeks total return,
consisting of both capital appreciation and current income, in following its
asset allocation strategy, the Fund may not achieve as high a level of either
capital appreciation or current income as a fund that has only one of those
objectives as its primary objective. In addition, qualification as a regulated
investment company for federal income tax purposes may limit the Fund's ability
to adhere rigidly to the recommendations of the Allocation Model. See 'Asset
Allocation Strategy' above.
INVESTMENT IN COMMON STOCKS. Although the Allocation Model is designed to
reduce the volatility inherent in a common stock portfolio, to the extent the
Fund's assets are committed to the Stock Segement, the share price of the Fund
can be expected to be volatile and investors should be able to tolerate sudden,
sometimes substantial fluctuations in the value of their investment. Because of
the risks associated with common stock investments, the Fund is intended to be a
long term investment vehicle and is not designed to provide investors with a
means of speculating on short-term stock market movements.
INDEX INVESTING AND OPEN-END INVESTMENT COMPANIES. While the Fund through
the Stock Segment attempts to replicate, before deduction of operating expenses,
the investment results of the S&P 500 Index, the investment results of the Stock
Segment generally are not identical to those of the designated index. Deviations
from the performance of the S&P 500 Index may result from shareholder purchases
and redemptions of shares of the Fund that occur daily, as well as from the
expenses borne by the Fund. Shareholder purchases and redemptions result in
daily net cash inflows to or outflows from the Fund. To the extent that a cash
reserve is held to meet expected redemptions or pending investment in portfolio
securities, to the extent that portfolio securities must be sold to meet
redemption requests (with resulting brokerage costs), and to the extent that
purchases and sales of portfolio securities are made to conform the Stock
Segment's holdings more closely to the relative weightings of stocks in the S&P
500 Index in response to cash inflows or outflows and associated brokerage costs
are incurred, these daily inflows or
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outflows of cash may increase the deviation between the Stock Segment's
investment results and the price and yield performance of the S&P 500 Index.
INVESTMENT IN FOREIGN SECURITIES. Since the S&P 500 Index includes common
stocks of foreign issuers, to the extent that Fund assets are committed to the
Stock Segment, the Fund is subject to considerations and potential risks not
typically associated with investing in securities issued exclusively by domestic
corporations. The values of foreign investments are affected by changes in
currency exchange rates or exchange control regulations, restrictions or
prohibitions on the repatriation of foreign currencies, application of foreign
tax laws, including withholding taxes, changes in governmental administration or
economic or monetary policy (in the United States or abroad) or changed
circumstances in dealings between nations. Investments in foreign companies
could be affected by other factors not present in the United States, including
expropriation, confiscatory taxation, lack of uniform accounting and auditing
standards and potential difficulties in enforcing contractual obligations.
STOCK INDEX OPTIONS. Stock index options are subject to position and
exercise limits and other regulations imposed by the exchange on which they are
traded. If the Fund writes a stock index option, it may terminate its obligation
by effecting a closing purchase transaction, which is accomplished by purchasing
an option of the same series as the option previously written. The ability of
the Fund to engage in closing purchase transactions with respect to stock index
options depends on the existence of a liquid secondary market. Although the Fund
generally purchases or writes stock index options only if a liquid secondary
market for the options purchased or sold appears to exist, no such secondary
market may exist, or the market may cease to exist at some future date, for some
options. No assurance can be given that a closing purchase transaction can be
effected when the Fund desires to engage in such a transaction.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. In entering into
transactions involving futures contracts and options on those contracts, the
Fund is subject to a number of risks and special considerations. The successful
use of futures contracts and options on those contracts draws upon KPAM's
special skills and experience with respect to those instruments. Should markets
move in an unexpected manner, the Fund may not achieve the anticipated benefits
of futures contracts or options on those contracts and thus be in a less
advantageous position than if those strategies had not been used. For a number
of reasons, the price of futures may not correlate perfectly with the movement
in the underlying index or security owing to certain market distortions. First,
all participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions that would distort the normal relationship between the underlying
index or security and the futures markets. Second, from the point of view of
speculators, the deposit requirements in the futures market are less onerous
than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market also may cause temporary
price distortions. Owing to the possibility of price distortions in the futures
market and because of the imperfect correlation between movements in the
underlying index or security and movements in the price of futures contracts,
even a correct forecast of general market trends may not result in a successful
hedging transaction.
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Certain futures contracts and options on futures contracts are subject to
no daily price fluctuation limits so that adverse market movements could
continue with respect to those instruments to an unlimited extent over a period
of time.
The Fund's ability to dispose of its positions in futures contracts and
options on those contracts depends on the availability of active markets in
those instruments. Markets in options and futures with respect to a number of
securities are relatively new and still developing. KPAM cannot now predict the
amount of trading interest that may exist in the future in various types of
futures contracts and options. Futures and options may be closed out only on the
exchange on which the contract was entered (or a linked exchange) so that no
assurance can be given that the Fund will be able to utilize these instruments
effectively for the purposes described above. In addition, although the Fund
anticipates that its options and futures transactions does not prevent the Fund
from qualifying as a regulated investment company for federal income tax
purposes, the Fund's ability to engage in options and futures transactions may
be limited by this tax consideration. See 'Dividends, Distributions and
Taxes -- Taxes.' In writing options, the Fund is subject to the risk of loss
resulting from the difference between the premium received for the option and
the price of the futures contract underlying the option that the Fund must
purchase or deliver upon exercise of the option.
REPURCHASE AGREEMENTS. In entering into a repurchase agreement, the Fund
bears a risk of loss in the event that the other party to the transaction
defaults on its obligations and the Fund is delayed or prevented from exercising
its rights to dispose of the underlying securities, including the risk of a
possible decline in the value of the underlying securities during the period in
which the Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or a
part of the income from the agreement.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. Securities purchased on a
when-issued or delayed-delivery basis may expose the Fund to risk because the
securities may experience fluctuations in value prior to their actual delivery.
The Fund does not accrue income with respect to a when-issued or
delayed-delivery security prior to its stated delivery date. Purchasing
securities on a when-issued or delayed-delivery basis can involve the additional
risk that the yield available in the market when the delivery takes place may be
higher than that obtained in the transaction itself. Purchases of securities on
a when-issued basis when the Fund is substantially fully invested may result in
increased fluctuations in the Fund's net asset value per share.
PORTFOLIO TRANSACTIONS AND TURNOVER
The Board of Trustees of the Trust has determined that, to the extent consistent
with applicable provisions of the 1940 Act and rules and exemptions thereunder,
transactions for the Fund may be executed through Kidder, Peabody if, in the
judgment of KPAM, the use of Kidder, Peabody is likely to result in price and
execution at least as favorable to the Fund as those obtainable through other
qualified broker-dealers, and if, in the transaction, Kidder, Peabody charges
the Fund a fair and reasonable rate consistent with that charged to comparable
unaffiliated customers in similar transactions. Under rules adopted by the SEC,
Kidder, Peabody may not execute transactions for the Fund on the floor of any
national securities exchange, but may effect transactions by transmitting orders
for execution, providing for clearance and settlement and
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arranging for the performance of those functions by members of the exchange not
associated with Kidder, Peabody. Kidder, Peabody is required to pay fees charged
by those persons performing the floor brokerage elements out of the brokerage
compensation that it receives from the Fund.
The Fund retains the right to sell securities in accordance with
recommendations generated by the Allocation Model irrespective of how long they
have been held. For the fiscal years ended August 31, 1994 and August 31, 1993,
the Fund's portfolio turnover rates were 4.17% and .42%, respectively. An annual
turnover rate of 100% would occur if all of the securities held by the Fund are
replaced once during a period of one year. Higher portfolio turnover rates can
result in corresponding increases in transaction costs, may make it more
difficult for the Fund to qualify as a regulated investment company for federal
income tax purposes and may cause shareholders of the Fund to recognize gains
for federal income tax purposes. See 'Dividends, Distributions and
Taxes -- Taxes.'
Assuming that the Allocation Model does not recommend a reallocation of
assets among the Segments, securities are sold from the Stock Segment only to
reflect certain administrative changes in the S&P 500 Index (including mergers
or changes in the composition of the S&P 500 Index) or to accommodate cash flows
into and out of the Fund while maintaining the similarity of the Stock Segment
to its benchmark. Similarly, assets are purchased or sold for each Segment
monthly, as described above, in order to accommodate cash flows and to rebalance
assets among the Segments.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Trust's Board of Trustees, and the day-to-day operations of the Fund are
conducted through or under the direction of officers of the Trust. The Statement
of Additional Information contains general background information regarding each
Trustee and officer of the Trust.
MANAGER AND INVESTMENT ADVISER
KPAM, located at 60 Broad Street, New York, New York 10004-2350, serves as the
Fund's manager and investment adviser. A wholly-owned subsidiary of Kidder,
Peabody, and a registered investment adviser under the Investment Advisers Act
of 1940, as amended, KPAM currently provides investment management, investment
advisory and administrative services to a wide variety of individual and
institutional clients. The Kidder, Peabody Asset Management Group of Companies
(of which KPAM is the primary entity) provides advisory and consulting services
to more than $18 billion in assets as of September 30, 1994. General Electric
Capital Services, Inc., a wholly-owned subsidiary of GE, owns all of the
outstanding stock of Kidder Group, the parent company of Kidder, Peabody.
Under an agreement dated October 17, 1994, GE and Kidder Group agreed to
sell to PaineWebber Group Inc. certain assets of Kidder Group and its
subsidiaries, including Kidder, Peabody and KPAM. The consummation of this
transaction, which is subject to a number of
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conditions and cannot be assured, will result in the deemed assignment and
automatic termination of the agreements pursuant to which Kidder, Peabody serves
as the principal underwriter of the Fund's shares and KPAM serves as the Fund's
manager and investment adviser. Institution of new arrangements with Kidder,
Peabody's and KPAM's successors following the consummation of the transaction,
anticipated to occur in the first quarter of 1995, have been approved by the
Trustees and separately by a majority of the Trustees who are not 'interested
persons' of the Fund within the meaning of the 1940 Act. In addition, the Fund's
new management arrangements will require approval by the holders of a 'majority
of the outstanding voting securities' of the Fund, as defined in the 1940 Act.
No assurance can be given that the required shareholder approvals will be
obtained and, if they are not, the Trustees will take such action as they
determine to be appropriate and in the best interests of the Fund and its
shareholders.
As the Fund's manager, KPAM, subject to the supervision and direction of
the Trust's Board of Trustees, is generally responsible for furnishing, or
causing to be furnished to the Fund, investment advisory and management
services. Included among the specific services provided by KPAM as manager are:
the maintenance and furnishing of all required records or reports pertaining to
the Fund to the extent those records or reports are not maintained or furnished
by the Fund's transfer agent, custodian or other agents employed by the Fund;
the providing of general administrative services to the Fund not otherwise
provided by the Fund's transfer agent, custodian or other agents employed by the
Fund; and the payment of reasonable salaries and expenses of those of the Fund's
officers and employees, and the fees and expenses of those members of the
Trust's Board of Trustees, who are directors, officers or employees of KPAM.
As the Fund's investment adviser, KPAM, subject to the supervision and
direction of the Trust's Board of Trustees, manages the Fund's portfolio in
accordance with the investment objective and stated policies of the Fund, makes
investment decisions for the Fund and places purchase and sale orders for the
Fund's portfolio transactions. KPAM also provides the Fund with investment
officers who are authorized by the Board of Trustees to execute purchases and
sales of securities on behalf of the Fund and employs a professional staff of
portfolio managers who draw upon a variety of sources for research information
for the Fund.
Robert B. Jones serves as Chief Investment Officer of the Fund and in that
capacity is the individual primarily responsible for the management of the
Fund's assets. He is Senior Vice President of Kidder, Peabody and director and
Senior Vice President of KPAM.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by KPAM, investments of the type the Fund
may make may also be made by those other accounts. When the Fund and one or more
other accounts managed by KPAM are prepared to invest in, or desire to dispose
of, the same security, available investments or opportunities for sales will be
allocated in a manner believed by KPAM to be equitable to each. In some cases,
this procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund.
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EXPENSES
The Trust pays KPAM a fee for its services as manager and investment adviser to
the Fund that is accrued daily and paid monthly at the annual rate of .50% of
the Fund's average daily net assets up to but not including $250 million and
.45% thereafter. For the fiscal year ended August 31, 1994, KPAM's fee
represented .50% of the Fund's average daily net assets, and Class A's, Class
B's and Class C's total expenses represented 1.13%, 1.88% and .88% of their
average daily net assets, respectively. From time to time, KPAM in its sole
discretion may waive all or a portion of its fee and/or reimburse all or a
portion of the Fund's operating expenses.
Each Class bears its own expenses, which generally include all costs not
specifically borne by KPAM. Included among a Class' expenses are costs incurred
in connection with the Class' and Fund's organization; investment advisory and
management fees; any service and/or distribution fees; fees for necessary
professional and brokerage services; fees for any pricing service used in
connection with the valuation of shares; the costs of regulatory compliance; and
a portion of the costs associated with maintaining the Trust's legal existence
and corresponding with shareholders of the Fund. The Trust's agreement with KPAM
provides that KPAM will reduce its fees to the Fund to the extent required by
applicable state laws for certain expenses that are described in the Statement
of Additional Information.
PURCHASE OF SHARES
GENERAL INFORMATION
Shares of the Fund must be purchased and maintained through a Kidder, Peabody
brokerage account (an 'Account'), so that an investor who wishes to purchase
shares but who has no existing Account must establish one. Kidder, Peabody
charges no maintenance fee in connection with an Account through which an
investor purchases or holds shares of the Fund.
Purchases are effected at the public offering price of the Fund's shares
next determined after a purchase order is received. Payment for shares purchased
by an investor is due at Kidder, Peabody on the 'settlement date,' which is
generally the fifth business day after the order for purchase is placed, unless
the investor has 'good funds' available in an existing Account that can be
applied to the purchase. 'Good funds' as used in this Prospectus means cash,
Federal funds or certified checks drawn on a U.S. bank. The Trust reserves the
right to reject any purchase order for shares of the Fund and to suspend the
offering for any period of time.
The minimum initial investment in the Fund is $1,000 and the minimum
subsequent investment is $50, except that for IRAs, other tax qualified
retirement plans and accounts established pursuant to the Uniform Gifts to
Minors Act, the minimum initial investment is $250 and the minimum subsequent
investment is $1.00. The Trust reserves the right to vary the minimum initial or
subsequent investment amounts.
Purchase orders for shares of the Fund that are received prior to the close
of regular trading on the NYSE on a particular day (currently 4:00 p.m., New
York time) are priced according to the net asset values determined on that day.
Purchase orders received after the close of regular trading on the NYSE are
priced as of the time each Class' net asset value per share is next
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determined. See 'Determination of Net Asset Value' below for a description of
the times at which each Class' net asset value per share is determined.
The Trust offers Fund shareholders an Automatic Investment Plan under which
a shareholder may authorize Kidder, Peabody to place monthly, twice monthly or
quarterly, as selected by the shareholder, a purchase order for Fund shares in
an amount not less than $100. The purchase price is paid automatically from a
designated bank account of the shareholder. The Trust reserves the right to
terminate or change the provisions of the Automatic Investment Plan.
Under the Choice Pricing System, the Fund presently offers three methods of
purchasing shares, enabling investors to choose the Class that best suits their
needs, given the amount of purchase and intended length of investment. Kidder,
Peabody Investment Executives and other persons remunerated on the basis of
sales of shares may receive different levels of compensation for selling one
Class of shares over another. When purchasing shares of the Fund, investors must
specify whether the purchase is for Class A shares, Class B shares or Class C
shares, as described below.
CLASS A SHARES
The public offering price of Class A shares is the net asset value per Class A
share next determined after a purchase order is received plus a sales charge, if
applicable. Class A shares are subject to a service fee at the annual rate of
.25% of the value of the Fund's average daily net assets attributable to this
Class. See 'Distributor.' The sales charge payable upon the purchase of Class A
shares will vary with the amount of purchase as set forth below.
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
----------------------------------------
AMOUNT OF PURCHASE AS PERCENTAGE AS PERCENTAGE OF
AT OFFERING PRICE OF OFFERING PRICE NET AMOUNT INVESTED
---------------------- ----------------- -------------------
<S> <C> <C>
Less than $50,000........................................................ 5.75% 6.08%
$50,000 but less than $100,000........................................... 4.50% 4.75%
$100,000 but less than $250,000.......................................... 3.50% 3.67%
$250,000 but less than $500,000.......................................... 2.50% 2.58%
$500,000 but less than $1,000,000........................................ 2.00% 2.02%
$1,000,000 or more....................................................... .00% .00%
</TABLE>
INSTANCES OF A REDUCED OR WAIVED SALES CHARGE. Class A shares are sold
subject to a reduction of 20% in the sales charges shown in the table above to:
(1) employees of GE and other affiliates of Kidder, Peabody, (2) IRAs for those
employees, (3) other employee benefit plans for those employees and (4) the
spouses and minor children of those employees when orders on their behalf are
placed by the employees.
Class A shares are sold without a sales charge to tax exempt organizations
enumerated in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended
(the 'Code'), and retirement plans qualified under Section 403(b)(7) of the
Code, each having 1,000 or more participants ('Qualified Plans'). Employees
eligible to participate in Qualified Plans sponsored by the same organization or
its affiliates may be aggregated in determining the sales charge applicable to
an investment made by a Qualified Plan.
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No sales charge is imposed on Class A shares purchased through reinvestment
of dividends or capital gains distributions. Clients of a newly-employed Kidder,
Peabody Investment Executive are eligible to purchase Class A shares subject to
no sales charge for a period of 90 days after the Investment Executive first
becomes employed by Kidder, Peabody, so long as the following conditions are
met: (1) the purchase is made within 30 days of, and with the proceeds from, a
redemption of shares of a mutual fund sponsored by the Investment Executive's
previous employer; (2) the Investment Executive served as the client's broker on
the purchase of the shares of the mutual fund; and (3) the shares of the mutual
fund sold were subject to a sales charge. Clients of a Kidder, Peabody
Investment Executive are also eligible to purchase Class A shares subject to no
sales charge so long as the following conditions are met: (1) the purchase is
made within 30 days of, and with the proceeds from, a redemption of shares of a
mutual fund that were purchased through Kidder, Peabody acting as a selected
dealer for the shares pursuant to an agreement between Kidder, Peabody and the
mutual fund's principal underwriter; (2) the fund invested primarily in common
stocks, U.S. Treasury Notes and U.S. Treasury Bills; (3) the Investment
Executive served as the client's broker on the purchase of the shares of the
mutual fund sold; and (4) the shares of the mutual fund sold were subject to a
sales charge. Class A shares may also be offered without a sales charge to any
investment company, other than a company for which Kidder, Peabody serves as
distributor, in connection with the combination of the company with the Fund by
merger, acquisition of assets or otherwise.
VOLUME DISCOUNTS. Any investor meeting certain requirements, including the
signing of a Letter of Intent (a 'Letter'), is eligible to obtain a reduced
sales charge for purchasing Fund shares by combining purchases made over a
13-month period of Class A shares and shares of other mutual funds in the Kidder
Family of Funds with respect to which the investor previously paid, or is
subject to the payment of, a sales charge (collectively referred to as 'Eligible
Shares'). Purchases of Fund shares by eligible investors must aggregate at least
$50,000 and must include a minimum initial investment of at least $1,000 and
minimum subsequent investments of at least $50. For purposes of the procedure
contemplated by a Letter, Eligible Shares owned by an investor will be valued at
their original cost in determining the size of a purchase and the applicable
sales charge.
An investor's purchase of Eligible Shares not originally made pursuant to a
Letter may be included under a Letter subsequently executed within 90 days of
the purchase, so long as the investor informs Kidder, Peabody in writing within
the 90-day period of the investor's desired use of a Letter. The original cost
of an investor's Eligible Shares not purchased pursuant to a Letter may be
included under a Letter subsequently executed within 90 days of the purchase, so
long as the investor informs Kidder, Peabody in writing within the 90-day period
of the investor's desire for that treatment to be applicable. The original cost
of Eligible Shares not purchased pursuant to a Letter may be included as a
credit toward the fulfillment of the terms of the Letter; the reduced sales
charge contemplated by the Letter, however, will apply only to the purchases of
Eligible Shares made after the execution of the Letter, which purchases, as
noted above, must aggregate at least $50,000.
A Letter must provide for 5% of the dollar amount of the intended
investment to be held in escrow by Investors Fiduciary Trust Company ('IFTC') in
the form of Eligible Shares in an account registered in the name of the
shareholder. If the total amount of any Eligible Shares
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owned at the time a Letter is signed plus all purchases made under the terms of
the Letter less redemptions (the 'investment') are at least equal to the
intended investment, the amount in escrow will be released to the shareholder.
If the investment is more than $50,000 but less than the intended investment a
remittance of the difference in the dollar amount of sales charge paid and the
sales charge that would have been paid if the investment had been made at a
single time will be made upon request. If the remittance is not sent within 20
days after such a request, IFTC will redeem an appropriate number of Eligible
Shares held in escrow in order to realize the difference. Amounts remaining in
the escrow account will be released to the shareholder's account. If the total
investment is more than the intended investment and the total is sufficient to
qualify for an additional sales charge reduction, a retroactive price adjustment
will be made for all purchases made under a Letter to reflect the sales charge
applicable to the aggregate amount of the purchases during the 13-month period.
A Letter is not a binding obligation to purchase the indicated amount, and
Kidder, Peabody is not obligated to sell the indicated amount. Reinvested
dividends and capital gains are not applied toward the completion of the
purchases contemplated by a Letter.
RIGHT OF ACCUMULATION. Reduced sales charges on Class A shares are
available under a combined right of accumulation permitting an investor to
combine the value of Eligible Shares and the value of Fund shares being
purchased, to qualify for a reduced sales charge. Before a shareholder may take
advantage of the right of accumulation, the shareholder must provide Kidder,
Peabody at the time of purchase with sufficient information to permit Kidder,
Peabody to confirm that the shareholder is qualified for the right; acceptance
of the shareholder's purchase order is subject to that confirmation. The right
of accumulation may be amended or terminated at any time by the Trust.
DEFINITION OF PURCHASE. For purposes of the volume discounts and right of
accumulation described above, a 'purchase' refers to: a single purchase of
Eligible Shares by an individual; concurrent purchases by an individual, his or
her spouse and their children under the age of 21 years purchasing Eligible
Shares for his, her or their own account; and single purchases by a trustee or
other fiduciary purchasing Eligible Shares for a single trust estate or single
fiduciary account, including a pension, profit-sharing or other employee benefit
trust created pursuant to a plan qualified under Section 401 of the Code, even
though more than one beneficiary is involved. The term 'purchase' also includes
purchases by any 'company,' as that term is defined in the 1940 Act, but does
not include: purchases by any such company that has not been in existence for at
least six months or that has no purpose other than the purchase of Eligible
Shares or shares of other investment companies registered under the 1940 Act at
a discount; or purchases by any group of individuals whose participants are
related by virtue of being credit cardholders of a company, policyholders of an
insurance company, customers of either a bank or broker-dealer or clients of an
investment adviser. The term 'purchase' also includes purchases by employee
benefit plans not qualified under Section 401 of the Code, including purchases
by employees or by employers on behalf of employees by means of a payroll
deduction plan, or otherwise, of Eligible Shares. Purchases by such a company or
non-qualified employee benefit plan will qualify for the volume discounts
offered with respect to the Fund's shares only if the Trust and Kidder, Peabody
are able to realize economies of scale in sales efforts and sales-related
expenses by means of the company's, the employer's or the plan's making the
Prospectus available to individual investors or employees and forwarding
investments by those persons to the Trust,
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and by any such employer's or plan's bearing the expense of any payroll
deduction plan. The term 'purchase' also includes any purchase of Eligible
Shares by or on behalf of certain members of the same family, including spouses,
children (adult and minor), parents, grandparents and siblings, provided,
however, that the following conditions are met: (1) following consummation of
the purchase, the family has, in the aggregate, (a) at least $5 million invested
in Eligible Shares of one or more funds within the Kidder Family of Funds or (b)
at least $10 million in cash and/or securities in Kidder, Peabody Accounts; and
(2) the Trust and Kidder, Peabody are able to realize economies of scale in
sales effort and sales-related expenses by means of dealing with a common
decision-maker or otherwise being able to treat the accounts as a single
relationship.
REINSTATEMENT PRIVILEGE. The Fund offers a reinstatement privilege under
which a shareholder that has redeemed Class A shares may reinvest the proceeds
from the redemption without imposition of a sales charge, provided the
reinvestment is made within 60 days of the redemption. The tax status of a gain
realized on a redemption will not be affected by exercise of the reinstatement
privilege but a loss will be nullified if the reinvestment is made within 30
days of the redemption. See the Statement of Additional Information for the tax
consequences when, within 90 days of a purchase of Class A shares, the shares
are redeemed and reinvested in the Fund or another mutual fund.
CLASS B SHARES
The public offering price of Class B shares is the net asset value per share
next determined after a purchase order is received without imposition of any
sales charge. Class B shares are subject to a service fee at the annual rate of
.25%, and a distribution fee at the annual rate of .75%, of the value of the
Fund's average daily net assets attributable to this Class. See 'Distributor.'
Kidder, Peabody has adopted guidelines, in view of the relative sales charges,
service fees and distribution fees, directing Investment Executives that all
purchases of shares should be for Class A shares when the purchase is for
$1,000,000 or more by an investor not eligible to purchase Class C shares.
Kidder, Peabody reserves the right to vary these guidelines at any time.
CLASS C SHARES
The public offering price of Class C shares is the net asset value per share
next determined after a purchase order is received without imposition of any
sales charge. Class C shares, which are not subject to any service fee or
distribution fee, are available exclusively to employees of Kidder, Peabody and
their associated accounts, directors or trustees of any fund in the Kidder
Family of Funds, employee benefit plans of Kidder, Peabody and participants in
Insight. Investors eligible to purchase Class C shares may not purchase any
other Class of shares.
INSIGHT. An investor purchasing $50,000 or more of shares of funds in the
Kidder Family of Funds may participate in INSIGHT, KPAM's total portfolio asset
allocation program, and receive Class C Shares. INSIGHT offers comprehensive
investment services, including a personalized asset allocation investment
strategy using an appropriate combination of funds in the Kidder Family of
Funds, professional investment advice regarding investment among the funds in
the Kidder Family of Funds by KPAM portfolio specialists, monitoring of
investment
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performance and comprehensive quarterly reports that cover market trends,
portfolio summaries and personalized account information. Participation in
INSIGHT is subject to payment of an advisory fee to KPAM at the maximum annual
rate of 1.5% of assets held through the program (generally charged quarterly in
advance), which covers all INSIGHT investment advisory services and program
administration fees. Employees of Kidder, Peabody are entitled to a 50%
reduction in the fee otherwise payable for participation in INSIGHT. INSIGHT
clients may elect to have their INSIGHT fees charged to their accounts (by the
automatic redemption of money market fund shares) or another of their Kidder,
Peabody accounts or, billed separately.
REDEMPTION OF SHARES
A shareholder may redeem Fund shares on any day that the Fund's net asset value
is determined by following the procedures described below.
REDEMPTION THROUGH KIDDER, PEABODY
Shares may be redeemed through Kidder, Peabody, which provides the terms of any
redemption request properly received prior to 4:00 p.m., New York time, on a
given day, to the Fund's transfer agent. The trade date of a redemption so
received is considered to be that day, and the trade date of any redemption
request received at or after 4:00 p.m., New York time, is considered to be the
next business day. If shares to be redeemed were issued in certificate form, the
certificates for the shares to be redeemed must be submitted to the transfer
agent in accordance with the procedures described in items (1) through (4) under
'Redemption by Mail' below.
REDEMPTION BY MAIL
Shares may be redeemed by submitting a written request in 'good order' to the
Fund's transfer agent at the following address:
Kidder, Peabody Asset Allocation Fund
Class A, B or C (please specify)
c/o Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
The transfer agent transmits any redemption request that it receives to
Kidder, Peabody, and the request is then treated as if it had been made through
Kidder, Peabody. A redemption request is considered to have been received in
'good order' if the following conditions are satisfied:
(1) the request is in writing, states the Class and number or dollar
amount of shares to be redeemed and identifies the shareholder's Fund
account number;
(2) the request is signed by each registered owner exactly as the
shares are registered;
(3) if the shares to be redeemed were issued in certificate form, the
certificates are endorsed by the shareholder for transfer (or are
themselves accompanied by an endorsed stock power) and accompany the
redemption request, which should be sent by registered mail for the
protection of the shareholder; and
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(4) the signatures on either the written redemption request or the
certificates (or the accompanying stock power) have been guaranteed by a
bank, broker-dealer, municipal securities broker, government securities
broker or dealer, credit union, a member firm of a national securities
exchange, registered securities association or clearing agency or savings
association (the purpose of a signature guarantee being to protect Fund
shareholders against the possibility of fraud). The transfer agent may
reject redemption instructions if the guarantor is neither a member of nor
a participant in a signature guarantee program (currently known as
'STAMP'sm'').
Additional supporting documents may be required for redemptions of Fund
shares by corporations, executors, administrators, trustees and guardians.
CONTINGENT DEFERRED SALES CHARGE -- CLASS B SHARES
In order to discourage short term investments in Class B shares, the Fund
imposes a CDSC on Class B shares held less than one year equal to 1% of the net
asset value of such shares redeemed at the time of purchase or the time of
redemption, whichever is lower. Class B shares held one year or longer and Class
B shares acquired through reinvestment of dividends or distributions are not
subject to the CDSC. Certain procedures are applicable in determining whether
the CDSC will apply to a redemption of Class B shares. The Fund will redeem
shares in the following order: first, Class B shares acquired through
reinvestment of dividends and distributions; second, Class B shares purchased
and held for at least one year; and third, Class B shares purchased and held
less than one year. If the redemption involves Class B shares held less than one
year and the Class B shares were purchased at different times, the Class B
shares held for the longest period of time will be redeemed first. The CDSC, if
any, will be waived in the case of (1) redemptions of Class B shares held at the
time a shareholder dies or becomes disabled, including the Class B shares of a
shareholder who owns the shares with his or her spouse as joint tenants with
right of survivorship, provided that the redemption is requested within one year
of the death or initial determination of disability and (2) redemptions in
connection with the following retirement plan distributions: (a) lump-sum or
other distributions from a qualified retirement plan following retirement; (b)
distributions from an IRA, Keogh plan or custodial account under Section
403(b)(7) of the Code following attainment of age 59 1/2; and (c) a tax-free
return of an excess contribution to an IRA. Proceeds of the CDSC will be payable
to Kidder, Peabody. For the fiscal year ended August 31, 1994, Kidder, Peabody
received $223,746 in CDSCs.
OTHER REDEMPTION POLICIES
Signature guarantees are required in connection with (1) any redemption of Fund
shares made by mail and (2) share ownership transfer requests. These
requirements may be waived by the Trust in certain instances.
Any redemption request made by a shareholder of the Fund is effected at the
net asset value per share next determined after proper redemption instructions
are received. See 'Determination of Net Asset Value' below. The proceeds of the
redemption generally are credited to the shareholder's Account, or sent to the
shareholder, as applicable, on the fifth business day following the date after
the redemption request was received in good order, but in no event later than
seven days following that date. A shareholder who pays for Fund shares by
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personal check will be credited with the proceeds of a redemption of those
shares only after the check used for the purchase has cleared, which may take up
to 15 days or more. If shares are purchased with good funds, no delay in
redemption will occur. The amount of redemption proceeds received by a Fund
shareholder will in no way be affected by any delay in the crediting of those
proceeds.
A Fund account with respect to a Class of shares that is reduced by
redemptions, and not by reason of market fluctuations, to a value of $500 or
less may be redeemed by the Trust, but only after the shareholder has been given
at least 30 days in which to increase the balance in the account to more than
$500. Proceeds of such a redemption will be mailed to the shareholder.
DISTRIBUTIONS IN KIND
If the Trust's Board of Trustees determines that it would be detrimental to the
best interests of the Fund's shareholders to make a redemption payment wholly in
cash, the Fund may pay, in accordance with rules adopted by the SEC, any portion
of a redemption in excess of the lesser of $250,000 or 1% of the Fund's net
assets by a distribution in kind of readily marketable portfolio securities in
lieu of cash. Redemptions failing to meet this threshold must be made in cash.
Shareholders receiving distributions in kind of portfolio securities may incur
brokerage commissions when subsequently disposing of those securities.
SYSTEMATIC WITHDRAWAL PLAN
The Trust offers a Systematic Withdrawal Plan (the 'Withdrawal Plan') under
which a shareholder of the Fund with $20,000 or more invested in a Class, and
whose shares have been held for one year or longer, may elect periodic
redemption payments to the shareholder or a designated payee on a monthly basis.
Payments pursuant to the Withdrawal Plan normally are made within the last ten
days of the month. The minimum rate of withdrawal is $200 per month and the
maximum annual withdrawal is 12% of current account value in the Class as of the
commencement of participation in the Withdrawal Plan (less the amount of any
subsequent redemption outside the Withdrawal Plan). A shareholder participating
in the Withdrawal Plan must reinvest all income and capital gains distributions,
and may not continue to participate if the shareholder redeems outside the
Withdrawal Plan or exchanges to another fund an amount that would cause the
account value in the Class to fall below $20,000. The Trust may amend or
terminate the Withdrawal Plan, and a shareholder may terminate participation in
the Withdrawal Plan at any time.
DETERMINATION OF NET ASSET VALUE
Each Class' net asset value per share is calculated by IFTC, the Fund's
custodian, on each day, Monday through Friday, except that net asset value is
not computed on a day in which no orders to purchase, sell, exchange or redeem
Fund shares have been received, any day on which there is not sufficient trading
in the Fund's portfolio securities that the Fund's net asset values per share
might be materially affected by changes in the value of such portfolio
securities or on days on which the NYSE is not open for trading. The NYSE is
currently scheduled to be closed on New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day,
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Thanksgiving and Christmas, and on the preceding Friday when one of those
holidays falls on a Saturday or on the subsequent Monday when one of those
holidays falls on a Sunday.
Net asset value per share of a Class is determined as of the close of
regular trading on the NYSE, and is computed by dividing the value of the Fund's
net assets attributable to that Class by the total number of shares outstanding
of that Class. Generally, the Fund's investments are valued at market value or,
in the absence of a market value, at fair value as determined by or under the
direction of the Trustees.
A security that is primarily traded on a stock exchange is valued at the
last sale price on that exchange or, if no sales occurred during the day, at the
current quoted bid price. Short-term investments that mature in 60 days or less
are valued on the basis of amortized cost (which involves valuing an investment
at its cost and, thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the effect of fluctuating interest rates on
the market value of the investment) when the Board of Trustees has determined
that amortized cost represents fair value. An option that is written by the Fund
is generally valued at the last sale price or, in the absence of the last sale
price, the last offer price. An option that is purchased by the Fund is
generally valued at the last sale price or, in the absence of the last sale
price, the last bid price. The value of a futures contract is equal to the
unrealized gain or loss on the contract that is determined by marking the
contract to the current settlement price for a like contract on the valuation
date of the futures contract. A settlement price may not be used if the market
makes a limit move with respect to a particular futures contract or if the
securities underlying the futures contract experience significant price
fluctuations after the determination of the settlement price. When a settlement
price cannot be used, futures contracts will be valued at their fair market
value as determined by or under the direction of the Board of Trustees.
EXCHANGE PRIVILEGE
Shares of each Class may be exchanged for shares of the same Class (or the sole
class offered) in certain funds in the Kidder Family of Funds, to the extent
shares are offered for sale in the shareholder's state of residence. Class B
shares held less than one year may not be exchanged. For a list and a
description of the funds in the Kidder Family of Funds for which shares may be
exchanged, please see 'Exchange Privilege' in the Statement of Additional
Information. Under the Choice Pricing System, an exchange of shares of the Fund
with other funds' shares will be limited to shares of the same class or the sole
class (money market funds only) of shares of a fund from or to which the
exchange is to be effected. For example, if a holder of Class A shares of
Kidder, Peabody Global Equity Fund ('Global Equity Fund') exchanges his shares
for shares of Kidder, Peabody Cash Reserve Fund, Inc. ('Cash Reserve Fund') (a
money market fund) and thereafter wishes to exchange those shares for shares of
the Fund, he may receive only Class A shares in the latter transaction. As
another example, if a holder of shares of Cash Reserve Fund acquired as a result
of an initial investment and not from an exchange with shares of another fund
wishes to exchange his shares for shares of Global Equity Fund, he may receive
Class A shares, Class B shares or Class C shares (depending on his eligibility
for Class C shares) in the exchange transaction. Thereafter, any further
exchanges would be subject to the principal described above limiting subsequent
exchanges to the same class or the sole class of shares of other funds. If Class
A shares acquired in an exchange are subject to payment of a sales charge
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higher than the sales charge paid on the shares relinquished in the exchange (or
any predecessor of those shares), the exchange will be subject to payment of an
amount equal to the difference, if any, between the sales charge previously paid
and the sales charge payable on the Class A shares acquired in the exchange.
Although the Fund currently imposes no limit on the number of times the
Exchange Privilege may be exercised by any shareholder, the Fund may impose such
limits in the future, in accordance with applicable provisions of the 1940 Act
and rules thereunder. In addition, the Exchange Privilege may be terminated or
revised at any time upon 60 days' prior written notice to Fund shareholders, and
is available only to residents of states in which exchanges are permitted under
state law. The exchange of shares of one fund for shares of another is treated
for federal income tax purposes as a sale of the shares given in exchange by the
shareholder, so that a shareholder may recognize a taxable gain or loss on an
exchange.
Upon receipt of proper instructions and all necessary supporting documents,
Fund shares submitted for exchange will be redeemed at their net asset value
next determined and simultaneously invested in shares of the fund being
acquired. Settlement of an exchange would occur one business day after the date
on which the request for exchange was received in proper form, unless the dollar
amount of the transaction exceeds 5% of the Fund's total net assets on any given
day, in which case settlement would occur within five business days after the
date on which the request for exchange was received in proper form. The proceeds
of a redemption of Fund shares made to facilitate the exchange of those shares
for shares of another fund must be equal to at least (1) the minimum initial
investment requirement imposed by the fund into which the exchange is being
sought if the shareholder seeking the exchange has not previously invested in
that fund or (2) the minimum subsequent investment requirement imposed by the
fund into which the exchange is being sought if the shareholder has previously
made an investment in that fund.
A shareholder of the Fund wishing to exercise the Exchange Privilege should
obtain from Kidder, Peabody a copy of the current prospectus of the fund into
which an exchange is being sought and review that prospectus carefully before
making the exchange. Kidder, Peabody reserves the right to reject any exchange
request at any time. Prior to or concurrently with the delivery of a
confirmation of a shareholder's exchange transaction, Kidder, Peabody will
deliver to that shareholder a copy of the prospectus of the fund into which the
exchange is being made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income of the Fund are distributed quarterly and
net realized capital gains of the Fund, if any, are distributed annually after
the close of the fiscal year in which they are earned. Unless a shareholder
instructs the Fund that dividends and capital gains distributions on shares of
any Class should be paid in cash and credited to the shareholder's Account,
dividends and capital gains distributions will be reinvested automatically at
net asset value in additional shares of the same Class. The Fund is subject to a
4% nondeductible excise tax measured with respect to certain undistributed
amounts of net investment income and capital gains. If necessary to avoid the
imposition of this tax, and if in the best interests of its
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shareholders, the Fund will declare and pay dividends of its net investment
income and distributions of its net capital gains more frequently than stated
above. The per share dividends and distributions on Class C shares will be
higher than those on Class A shares, which in turn will be higher than those on
Class B shares, as a result of the different service, distribution and transfer
agency fees applicable to the Classes. See 'Fee Table,' 'Purchase of Shares,'
'Distributor' and 'General Information.'
TAXES
The Fund has qualified for the fiscal year ended August 31, 1994 to be treated
as a regulated investment company within the meaning of the Code and intends to
qualify for this treatment for each year. To qualify as a regulated investment
company for federal income tax purposes, the Fund limits its income and
investments so that (1) less than 30% of its gross income is derived from the
sale or disposition of stocks, other securities and certain financial
instruments (including certain forward contracts) that were held for less than
three months and (2) at the close of each quarter of the taxable year (a) not
more than 25% of the market value of the Fund's total assets is invested in the
securities (other than Government Securities) of a single issuer or of two or
more issuers controlled by the Fund that are engaged in the same or similar
trades or businesses or in related trades or businesses and (b) at least 50% of
the market value of the Fund's total assets is represented by (i) cash and cash
items, (ii) Government Securities and (iii) other securities limited in respect
of any one issuer to an amount not greater in value than 5% of the market value
of the Fund's total assets and to not more than 10% of the outstanding voting
securities of the issuer. The requirements for qualification may cause the Fund
to restrict the degree to which it sells or otherwise disposes of stocks, other
securities and certain financial instruments held for less than three months. If
the Fund qualifies as a regulated investment company and meets certain
distribution requirements, the Fund will not be subject to federal income tax on
its net investment income and net realized capital gains that it distributes to
its shareholders.
Dividends paid by the Fund out of net investment income and distributions
of net realized short-term capital gains are taxable to shareholders as ordinary
income, whether received in cash or reinvested in additional Fund shares.
Distributions of net realized long-term capital gains are taxable to
shareholders as long-term capital gain, regardless of how long shareholders have
held their shares and whether the distributions are received in cash or
reinvested in additional shares. Dividends and distributions paid by the Fund
generally do not qualify for the federal dividends received deduction for
corporate shareholders.
Statements as to the tax status of each Fund shareholder's dividends and
distributions are mailed annually. Shareholders also receive, as appropriate,
various written notices after the close of the Fund's taxable year regarding the
tax status of certain dividends and distributions that were paid (or that are
treated as having been paid) by the Fund to its shareholders during the
preceding taxable year, including the amount of dividends that represent
interest derived from Government Securities.
Shareholders are urged to consult their tax advisors regarding the
application of federal, state, local and foreign tax laws to their specific
situations before investing in the Fund.
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DISTRIBUTOR
Kidder, Peabody, a major full-line investment services firm serving foreign and
domestic securities markets, located at 10 Hanover Square, New York, New York
10005-3592, serves as the distributor of the Fund's shares and is paid monthly
fees by the Fund in connection with (1) the servicing of shareholder accounts in
Class A and Class B shares and (2) providing distribution related services in
respect of Class B shares. A monthly service fee, authorized pursuant to a
Shareholder Servicing and Distribution Plan (the 'Plan') adopted by the Trust
with respect to the Fund pursuant to Rule 12b-1 under the 1940 Act, is
calculated at the annual rate of .25% of the value of the average daily net
assets of the Fund attributable to each of Class A and Class B shares and is
used by Kidder, Peabody to provide compensation for ongoing servicing and/or
maintenance of shareholder accounts and an allocation of overhead and other
Kidder, Peabody branch office expenses related to servicing shareholder
accounts. Compensation is paid by Kidder, Peabody to persons, including Kidder,
Peabody employees, who respond to inquiries of shareholders of the Fund
regarding their ownership of shares or their accounts with the Fund or who
provide other similar services not otherwise required to be provided by the
Fund's manager, investment adviser or transfer agent.
In addition, pursuant to the Plan, the Fund pays to Kidder, Peabody a
monthly distribution fee at the annual rate of .75% of the Fund's average daily
net assets attributable to Class B shares. The distribution fee is used by
Kidder, Peabody to provide initial and ongoing sales compensation to its
investment executives in respect of sales of Class B shares; costs of printing
and distributing the Fund's Prospectus, Statement of Additional Information and
sales literature to prospective investors in Class B shares; costs associated
with any advertising relating to Class B shares; an allocation of overhead and
other Kidder, Peabody branch office expenses related to the distribution of
Class B shares; and payments to, and expenses of, persons who provide support
services in connection with the distribution of Class B shares.
Payments under the Plan are not tied exclusively to the service and/or
distribution expenses actually incurred by Kidder, Peabody, and the payments may
exceed expenses actually incurred by Kidder, Peabody. The Trustees evaluate the
appropriateness of the Plan and its payment terms on a continuing basis and in
doing so consider all relevant factors, including expenses borne by Kidder,
Peabody and amounts it receives under the Plan.
PERFORMANCE INFORMATION
From time to time, the Trust advertises the Fund's 'average annual total return'
over various periods of time for each Class. Total return figures, which are
based on historical earnings and are not intended to indicate future
performance, show the average percentage change in value of an investment in the
Class from the beginning date of a measuring period to the end of that period.
These figures reflect changes in the price of shares and assume that any income
dividends and/or capital gains distributions made by the Fund during the period
were reinvested in shares of the same Class. Total return figures are given for
the most recent one and five-year periods, or for the life of the Class to the
extent that it has not been in existence for the full length of those periods,
and may be given for other periods as well, such as on a year-by-year basis. The
average annual total return for any one year in a period longer than one year
might be greater or less than the average for the entire period.
30
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- --------------------------------------------------------------------------------
The Trust may quote 'aggregate total return' figures with respect to the
Fund for various periods, representing the cumulative change in value of an
investment for the specific period and reflecting changes in share prices and
assuming reinvestment of dividends and distributions. Aggregate total return may
be calculated either with or without the effect of the sales charge to which
Class A shares are subject and may be shown by means of schedules, charts or
graphs, and may indicate subtotals of the various components of total return
(that is, changes in value of initial investment, income dividends and capital
gains distributions). Reflecting compounding over a longer period of time,
aggregate total return data generally will be higher than average annual total
return data.
The Trust may, in addition to quoting the Classes' average annual and
aggregate total returns, advertise the actual annual and annualized total return
performance data for various periods of time. Actual annual and annualized total
returns may be calculated either with or without the effect of the sales charge
or redemption fee to which certain Classes of the Fund's shares may be subject,
depending upon the period for which performance is shown, and may be shown by
means of schedules, charts or graphs. Actual annual or annualized total return
data generally is lower than average annual total return data, which reflects
compounding of return.
In reports or other communications to Fund shareholders and in advertising
material, the Trust may compare the Classes' performance with (1) the
performance of other mutual funds (or classes thereof) as listed in rankings
prepared by Lipper Analytical Services Inc., CDA Investment Technologies, Inc.
or similar investment services that monitor the performance of mutual funds or
as set out in the nationally recognized publications listed below, (2) the S&P
500 Index or (3) other appropriate indexes of investment securities or with data
developed by KPAM derived from those indexes. The Trust may also include in
communications to Fund shareholders evaluations of the Fund published by
nationally recognized ranking services and by financial publications that are
nationally recognized, such as Barron's, Business Week, Forbes, Institutional
Investor, Investor's Daily, Kiplinger's Personal Finance Magazine, Money,
Morningstar Mutual Fund Values, The New York Times, USA Today and The Wall
Street Journal. Any given performance comparison should not be considered as
representative of the Fund's performance for any future period.
GENERAL INFORMATION
ORGANIZATION OF THE TRUST
The Trust was formed as a business trust pursuant to a Declaration of Trust, as
amended from time to time (the 'Declaration'), under the laws of The
Commonwealth of Massachusetts on March 28, 1991. The Fund commenced operations
on July 22, 1992. The Declaration authorizes the Trust's Board of Trustees to
create separate series, and within each series separate Classes, of an unlimited
number of shares of beneficial interest, par value $.001 per share. As of the
date of this Prospectus, the Trustees have established several such series,
representing interests in the Fund described in this Prospectus and in several
other series. See 'Exchange Privilege' in the Statement of Additional
Information.
When issued, Fund shares will be fully paid and non-assessable. Shares are
freely transferable and have no pre-emptive, subscription or conversion rights.
Each Class represents
31
<PAGE>
- --------------------------------------------------------------------------------
an identical interest in the Fund's investment portfolio. As a result, the
Classes have the same rights, privileges and preferences, except with respect
to: (1) the designation of each Class; (2) the effect of the respective sales
charges, if any, for each Class; (3) the distribution and/or service fees, if
any, borne by each Class; (4) the expenses allocable exclusively to each Class;
(5) voting rights on matters exclusively affecting a single Class; and (6) the
exchange privilege of each Class. The Board of Trustees does not anticipate that
there will be any conflicts among the interests of the holders of the different
Classes. The Trustees, on an ongoing basis, will consider whether any conflict
exists and, if so, take appropriate action. Certain aspects of the shares may be
changed, upon notice to Fund shareholders, to satisfy certain tax regulatory
requirements, if the change is deemed necessary by the Trustees.
Shareholders of the Fund are entitled to one vote for each full share held
and fractional votes for fractional shares held. Voting rights are not
cumulative and, as a result, the holders of more than 50% of the aggregate
shares of the Trust may elect all of the Trustees. Generally, shares of the
Trust will be voted on a Trust-wide basis on all matters except those affecting
only the interests of one series, such as the Fund's management and investment
advisory agreement. In turn, shares of the Fund will be voted on a Fund-wide
basis on all matters except those affecting only the interests of one Class,
such as the terms of the Plan as it relates to a Class.
The Trust intends to hold no annual meetings of shareholders for the
purpose of electing Trustees unless, and until such time as, less than a
majority of the Trustees holding office have been elected by shareholders.
Shareholders of record of no less than two-thirds of the outstanding shares of
the Trust may remove a Trustee through a declaration in writing or by vote cast
in person or by proxy at a meeting called for that purpose. A meeting will be
called for the purpose of voting on the removal of a Trustee at the written
request of holders of 10% of the Trust's outstanding shares. Shareholders of the
Fund who satisfy certain criteria will be assisted by the Trust in communicating
with other shareholders in seeking the holding of the meeting.
REPORTS TO SHAREHOLDERS
The Trust sends Fund shareholders audited semi-annual and annual reports, each
of which includes a list of the investment securities held by the Fund as of the
end of the period covered by the report.
CUSTODIAN AND TRANSFER, DIVIDEND AND RECORDKEEPING AGENT
IFTC, located at 127 West 10th Street, Kansas City, Missouri 64105, serves as
the Fund's custodian and transfer, dividend and recordkeeping agent.
32
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<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the
Statement of Additional Information incorporated into this
Prospectus by reference, in connection with the offering made by
this Prospectus and, if given or made, any such information or
representations must not be relied upon as having been authorized by
the Fund or its distributor. This Prospectus does not constitute an
offering by the Fund or by its distributor in any jurisdiction in
which the offering may not lawfully be made.
<TABLE>
<S> <C>
- ------------------------------------
Contents
- ------------------------------------
Fee Table 2
- ------------------------------------
Highlights 3
- ------------------------------------
Financial Highlights 7
- ------------------------------------
Investment Objective and Policies 8
- ------------------------------------
Management of the Fund 17
- ------------------------------------
Purchase of Shares 19
- ------------------------------------
Redemption of Shares 24
- ------------------------------------
Determination of Net Asset Value 26
- ------------------------------------
Exchange Privilege 27
- ------------------------------------
Dividends, Distributions and Taxes 28
- ------------------------------------
Distributor 30
- ------------------------------------
Performance Information 30
- ------------------------------------
General Information 31
- ------------------------------------
Custodian and Transfer, Dividend
and Recordkeeping Agent 32
- ------------------------------------
</TABLE>
Kidder,
Peabody
Asset
Allocation
Fund
Prospectus
December 29, 1994
[LOGO]
<PAGE>
PROSPECTUS DECEMBER 29, 1994
- --------------------------------------------------------------------------------
Kidder, Peabody Global Fixed Income Fund
60 BROAD STREET NEW YORK, NEW YORK 10004-2350 (212) 656-1737
Kidder, Peabody Global Fixed Income Fund (the 'Fund'), a series of Kidder,
Peabody Investment Trust (the 'Trust'), is designed for investors seeking to
expand their investment horizon beyond the United States. The Fund is a
non-diversified fund that seeks total return consisting of current income and
capital appreciation. The Fund attempts to achieve this objective through an
actively managed portfolio consisting of a wide range of fixed income securities
issued primarily by governmental authorities, foreign government related issuers
and supranational organizations. The Fund's investments consist primarily of
securities rated in the two highest categories of recognized rating agencies.
This Prospectus briefly sets forth certain information about the Fund, including
applicable operating expenses, that prospective investors should know before
investing. Investors are advised to read this Prospectus and retain it for
future reference.
Additional information about the Fund, contained in a Statement of Additional
Information dated the same date as this Prospectus, has been filed with the
Securities and Exchange Commission (the 'SEC') and is available to investors
upon request and without charge by calling or writing the Trust at the telephone
number or address listed above. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.
- --------------------------------------------------------------------------------
MANAGER
Kidder Peabody Asset Management, Inc.
INVESTMENT ADVISER
Strategic Fixed Income, L.P.
DISTRIBUTOR
Kidder, Peabody & Co. Incorporated
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
- --------------------------------------------------------------------------------
FEE TABLE
The table below shows the costs and expenses that an investor would incur,
either directly or indirectly, as a shareholder of the Fund, based upon the
Fund's annual operating expenses.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases of Shares (as a percentage of
offering price)....................................................... 2.25% 0% 0%
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of
offering price)....................................................... 0% 0% 0%
Maximum Contingent Deferred Sales Charge (as a percentage of redemption
proceeds)............................................................. 0% 0% 0%
Redemption Fees (as a percentage of amount redeemed).................... 0% 0% 0%
Maximum Exchange Fee.................................................... 0% 0% 0%
Maximum Annual Investment Advisory Fee Payable by Shareholders Holding
Class C Shares through the INSIGHT Investment Advisory Program (as a
percentage of average daily value of shares held)..................... 0% 0% 1.50%
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees......................................................... .70% .70% .70%
Rule 12b-1 Fees......................................................... .25 .75 0
Other Expenses.......................................................... .24 .23 .24
---- ---- ----
Total Fund Operating Expenses.................................. 1.19% 1.68% .94%
---- ---- ----
---- ---- ----
</TABLE>
The nature of the services provided to, and the aggregate management fees
paid by, the Fund are described below under 'Management of the Fund.' The Fund
bears an annual Rule 12b-1 service fee of .25% of the value of the average daily
net assets of Class A shares and an annual Rule 12b -1 fee of .75% of the value
of the average daily net assets of Class B shares, consisting of a .25% service
fee and a .50% distribution fee. Long-term shareholders of Class B Shares may
pay more than the economic equivalent of the maximum front-end sales charge
currently permitted by the rules of the National Association of Securities
Dealers, Inc. governing investment company sales charges. See 'Distributor.'
The percentage of 'Other Expenses' in the table above is based on amounts
incurred during the Fund's most recent fiscal year; these expenses include fees
for shareholder services, custodial fees, legal and accounting fees, printing
costs and registration fees, the costs of regulatory compliance, a portion of
the costs associated with maintaining the Trust's legal existence and the costs
involved in communicating with the Fund's shareholders.
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical $1,000 investment in the Fund assuming (1) a 5% annual return,
(2) payment of the shareholder transaction expenses and annual Fund operating
expenses set forth in the table above and (3) complete redemption at the end of
the period.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Class A................................ $34 $59 $86 $164
Class B................................ $17 $53 $91 $199
Class C................................ $25 $76 $130 $278
</TABLE>
The above example is intended to assist an investor in understanding
various costs and expenses that the investor would bear upon becoming a
shareholder of the Fund. The example should not be considered to be a
representation of past or future expenses. Actual expenses of the Fund may be
greater or less than those shown above. The assumed 5% annual return shown in
the example is hypothetical and should not be considered to be a representation
of past or future annual return; the actual return of the Fund may be greater or
less than the assumed return.
2
<PAGE>
- --------------------------------------------------------------------------------
HIGHLIGHTS
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------------
The Trust
The Trust is an open-end management investment company. See 'General Information.'
- ---------------------------------------------------------------------------------------------------------------------------
The Fund
The Fund, one of several series of the Trust, is a non-diversified fund that seeks total
return, consisting of current income and capital appreciation. The Fund seeks to achieve this
objective through an actively managed portfolio consisting of a wide variety of fixed income
securities issued primarily by governmental authorities, foreign government related issuers and
supranational organizations. See 'Investment Objective and Policies' and 'General Information.'
- ---------------------------------------------------------------------------------------------------------------------------
Benefits of
Investing
in the
Fund
Mutual funds, such as the Fund, are flexible investment tools that are increasingly
popular -- one of four American households now owns shares of at least one mutual fund -- for
very sound reasons. The Fund offers investors the following important benefits:
Global Investing
The Fund offers investors the opportunity to participate in a number of markets for a wide
range of fixed income securities issued by governmental authorities, foreign government
related issuers and supranational organizations. In the view of Strategic Fixed Income, L.P.,
the Fund's investment adviser (the 'Adviser'), based on historical data, these markets have in
the recent past significantly outperformed the market for U.S. Government obligations. The
Adviser believes that a prudent weighting of both U.S. and non-U.S. obligations has
historically outperformed U.S. obligations with a degree of return volatility lower than that
of the U.S. market. The risk reduction potential of foreign obligations derives from the lack
of perfect correlation among returns in individual foreign markets and those in the United
States, so that inclusion of foreign obligations with U.S. assets should lower overall
portfolio risk. Thus, the Fund provides investors the ability to expand their investment
portfolios beyond investments solely in U.S. securities and, as a result, to help to reduce
the volatility of those portfolios. The Fund also provides individual investors with a means
of dealing with certain difficulties generally involved in international investing such as
limited access to foreign markets and typically high transaction costs. See 'Design of the
Fund.'
Actively Managed Income Investing
The Fund's investment strategy is designed to afford investors the opportunity to seek total
return while limiting investment risk through investment in a portfolio consisting of fixed
income securities that are rated primarily in the two highest categories by recognized rating
agencies. See 'Investment Objective and Policies.'
</TABLE>
3
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Professional Management
By pooling the monies of many investors, the Fund enables shareholders to obtain the benefits
of full-time professional management and an array of investments that are typically beyond the
means of most investors. The Adviser reviews the fundamental characteristics of far more
securities than can a typical individual investor and may employ portfolio management tech-
niques that frequently are not used by individual or many institutional investors. See
'Management of the Fund.'
Transaction Savings
By investing in the Fund, an investor is able to acquire ownership in a portfolio of
securities without paying the higher transaction costs generally associated with a series of
small securities purchases.
Convenience
Fund shareholders are relieved of the administrative and recordkeeping burdens normally
associated with direct ownership of securities.
Liquidity
The Fund's convenient purchase and redemption procedures provide share-holders with ready
access to their money and reduce the delays frequently involved in the direct purchase and
sale of securities. See 'Purchase of Shares' and 'Redemption of Shares.'
Choice Pricing System
Under the Choice Pricing System'sm', the Fund presently offers three classes of shares
('Classes') that provide different methods of purchasing shares and allow investment
flexibility and a wider range of investment choices. See 'Purchase of Shares.'
Exchange Privilege
Shareholders of the Fund may exchange all or a portion of their shares for shares of the same
Class or the sole outstanding Class of specified funds in the Kidder Family of Funds. See
'Exchange Privilege.'
Total Portfolio Approach
The funds in the Kidder Family of Funds are designed to be strategically combined as part of
a total portfolio approach. This investment philosophy acknowledges the interplay of a
shareholder's many different investing needs and preferences and recognizes that every
investment move a shareholder makes alters the balance of his or her overall financial
profile. The Fund may be used in conjunction with other funds in the Kidder Family of Funds to
build a portfolio that maximizes the potential of available assets while meeting many
different -- and changing -- financial needs.
- ---------------------------------------------------------------------------------------------------------------------------
Purchase
of Shares
Kidder, Peabody & Co. Incorporated ('Kidder, Peabody'), a major full-line investment services
firm serving the United States and foreign securities markets, acts as the distributor of the
Fund's shares. The Fund presently offers three Classes of shares that differ principally in
terms of the sales charges and rate of expenses to which they are subject and are designed to
provide an
</TABLE>
4
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
investor with the flexibility of selecting an investment best suited to the investor's needs.
See 'Purchase of Shares' and 'Distributor.'
Class A Shares
The public offering price of Class A shares is the net asset value per share next determined
after a purchase order is received, plus a maximum sales charge of 2.25% (2.33% of the net
amount invested). Investors purchasing $50,000 or more, certain employee benefit plans and
employees of Kidder, Peabody's affiliates are eligible for reduced sales charges. The Fund
pays Kidder, Peabody a service fee with respect to Class A shares at the annual rate of .25%
of the value of the average daily net assets attributable to this Class.
Class B Shares
The public offering price of Class B shares is the net asset value per share next determined
after a purchase order is received without imposition of a sales charge. The Fund pays Kidder,
Peabody a service fee at the annual rate of .25%, and a distribution fee at the annual rate of
.50%, of the average daily net assets attributable to this Class.
Class C Shares
The public offering price of Class C shares, which are available exclusively to employees of
Kidder, Peabody and their associated accounts, directors or trustees of any fund in the Kidder
Family of Funds, employee benefit plans of Kidder, Peabody and participants in the INSIGHT
Investment Advisory ProgramSM ('INSIGHT'), is the net asset value per share next determined
after a purchase order is received without imposition of a sales charge. This Class bears no
service or distribution fees. Participation in INSIGHT is subject to payment of an advisory
fee at the maximum annual rate of 1.50% of assets held through INSIGHT, generally charged
quarterly in advance.
Investment Minimums
The minimum initial investment in the Fund is $1,000 and the minimum subsequent investment is
$50, except that for individual retirement accounts ('IRAs'), other tax qualified retirement
plans and accounts established pursuant to the Uniform Gifts to Minors Act, the minimum
initial investment is $250 and the minimum subsequent investment is $1.00. See 'Purchase of
Shares.'
- ---------------------------------------------------------------------------------------------------------------------------
Redemption
of Shares
Shares of the Fund may be redeemed at the Fund's next determined net asset value per share.
Redemptions are not subject to any contingent deferred sales charges or other charges. See
'Redemption of Shares.'
- ---------------------------------------------------------------------------------------------------------------------------
Management
Kidder Peabody Asset Management, Inc. ('KPAM'), a wholly-owned subsidiary of Kidder, Peabody,
serves as the Fund's manager and receives a fee, accrued daily and paid monthly, at the annual
rate of .70% of the Fund's average daily net assets. KPAM in turn employs the Adviser, as the
Fund's investment adviser, in which capacity the Adviser receives from KPAM a fee, accrued
daily and paid monthly, at the annual rate of .35% of the Fund's average daily net assets.
Kidder, Peabody is a major full-line investment services firm serving foreign and domestic
securities markets. General Electric Capital Services, Inc., a wholly-
</TABLE>
5
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
owned subsidiary of General Electric Company ('GE'), owns all the outstanding stock of Kidder,
Peabody Group Inc. ('Kidder Group'), the parent company of Kidder, Peabody. The Adviser is a
limited partnership organized under the laws of the State of Delaware. The Adviser concentrates
its investment advisory activities in the area of multi-currency fixed income instruments. See
'Management of the Fund' and 'Distributor.'
- ---------------------------------------------------------------------------------------------------------------------------
Risk Factors
and Special
Considera-
tions
No assurance can be given that the Fund will achieve its investment objective. The value of a
fixed income security is dependent on, among other things, the ability of its issuer to pay
interest and repay principal in accordance with the terms of the obligation. Because the Fund
limits its investments to fixed income securities, it may not realize as high a level of total
return as other mutual funds that also invest in equity securities. The Fund invests at least
65% of its net assets in securities rated in the two highest rating categories, may invest up
to 35% of its net assets in securities rated in the third highest rating category and may
invest up to 10% of its net assets in securities rated in fourth highest rating category, of
recognized rating agencies. While securities rated in the fourth highest category are
considered investment grade, these securities may also be considered to possess speculative
characteristics. Investing in an investment company that invests in securities of governments
of foreign countries, foreign government related issuers and supranational organizations
involves risks that go beyond the usual risks inherent in an investment company limiting its
holdings to domestic investments; and foreign securities markets may be less liquid, more
volatile and less subject to governmental supervision than in the United States. A portion of
the Fund's assets may be held in securities denominated in one or more foreign currencies,
which will result in the Fund's bearing the risk that those currencies may lose value in
relation to the U.S. dollar. In addition, as a non-diversified fund, the Fund may concentrate
investments in individual issuers to a greater degree than a diversified fund and an investment
in the Fund may under certain circumstances present greater risk to an investor than an
investment in a diversified fund. The Fund may also be subject to certain risks in entering
into transactions involving foreign currencies, lending portfolio securities, entering into
repurchase agreements and using certain investment techniques and strategies, such as forward
currency contracts, trading futures contracts, options on futures contracts and purchasing
securities on a when-issued or delayed-delivery basis and engaging in short sales of
securities. See 'Investment Objective and Policies -- Risk Factors and Special Considerations'
at page 17 of this Prospectus.
</TABLE>
6
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Trust with respect to
the Fund by Deloitte & Touche LLP. Financial statements for the year ended
August 31, 1994 and the report of independent auditors are included in the
Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
----------------------------------------------------------------------
PERIOD YEAR PERIOD YEAR PERIOD YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1993`D' 1994 1993`D'`D' 1994 1993`D'`D' 1994
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period....... $12.00 $13.10 $12.77 $13.09 $12.77 $13.10
----------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
Net investment income...................... 0.45 0.43 0.17 0.49 0.20 0.57
Net realized and unrealized gains (losses)
on investments........................... 1.18 (0.56) 0.32 (0.67) 0.33 (0.66)
----------------------------------------------------------------------
Total increase (decrease) from investment
operations............................... 1.63 (0.13) 0.49 (0.18) 0.53 (0.09)
----------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income...................... (0.53) (0.63) (0.17) (0.57) (0.20) (0.66)
Net realized capital gains................. -- (0.41) -- (0.41) -- (0.41)
----------------------------------------------------------------------
Total distributions........................ (0.53) (1.04) (0.17) (0.98) (0.20) (1.07)
----------------------------------------------------------------------
Net asset value, end of period............. $13.10 $11.93 $13.09 $11.93 $13.10 $11.94
----------------------------------------------------------------------
----------------------------------------------------------------------
Total return#.............................. 13.79% (1.10)% 3.84% (1.51)% 4.17% (0.71)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in thousands)... $180,686 $155,575 $11,555 $26,866 $21,226 $20,474
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution and
service fees, net of reimbursement....... 0.89%* 0.94% 0.89%* 0.94% 0.89%* 0.94%
Expenses, including distribution and
service fees, net of reimbursement....... 1.14%* 1.19% 1.58%* 1.68% 0.89%* 0.94%
Expenses, before reimbursement from
manager.................................. 1.22%* 1.19% 1.66%* 1.68% 0.97%* 0.94%
Net investment income...................... 4.44%* 4.22% 4.00%* 3.73% 4.69%* 4.50%
PORTFOLIO TURNOVER RATE.................... 130.43% 534.84% 130.43% 534.84% 130.43% 534.84%
</TABLE>
`D' December 24, 1992 (Commencement of Operations) to August 31, 1993.
`D'`D' May 10, 1993 (Commencement of Operations) to August 31, 1993.
# Total return does not reflect the effects of a sales charge, and is
calculated by giving effect to the reinvestment of dividends on the dividend
payment date.
* Annualized.
7
<PAGE>
- --------------------------------------------------------------------------------
DESIGN OF THE FUND
The Fund is designed for investors seeking the opportunity to expand their
investment horizon beyond the United States through an actively managed
portfolio including fixed income securities of governmental, government related
and supranational issuers located throughout the world. At the same time, the
Fund provides individual investors a means of dealing with the difficulties
often associated with international investing.
INVESTMENT OPPORTUNITIES WITH DEMONSTRATED PERFORMANCE
By having the flexibility of investing in the securities of issuers located
throughout the world, the Fund is designed to benefit from emerging investment
opportunities existing outside of the United States. Historical data
demonstrates that a number of foreign government fixed income markets have
significantly outperformed the U.S. government fixed income markets over the
recent past, and the Adviser believes that foreign markets could continue to
offer attractive investment opportunities in the future. There can be no
assurance that similar returns will be obtained in the future in those markets
generally. Further, because the Fund's portfolio is actively managed and does
not include securities in those markets at all times, there can be no assurance
that there will be any correlation between the performance of those markets and
that of the Fund.
POTENTIALLY REDUCED VOLATILITY
The Adviser believes that a prudent weighting of both U.S. and non-U.S.
obligations has historically outperformed U.S. obligations with a degree of
return volatility lower than that of the U.S. market. The risk reduction
potential of foreign obligations derives from the lack of perfect correlation
among returns in individual foreign markets and those in the United States so
that inclusion of foreign obligations with U.S. assets should lower overall
portfolio risk. Thus, the Fund's investing in multiple securities markets
located throughout the world that often act independently of each other should
help to reduce the volatility of the Fund's portfolio.
BENEFITS OF INVESTING THROUGH THE FUND
Individual investors undertaking foreign investments often encounter
complications and extra costs. They have found it difficult, for example: to
make purchases and sales of securities; to deal with clearance and settlement
procedures that may differ markedly from those applicable in the United States;
to obtain current information about foreign issuers; to hold securities in
safekeeping; and to convert the value of their investments from foreign
currencies into U.S. dollars. The Fund attempts to solve these problems for an
investor by providing the investor with a global investment portfolio that is
managed actively by experienced professionals.
8
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is total return, consisting of current income
and capital appreciation. No assurance can be given that the Fund will be able
to achieve its investment objective, which may be changed only with the approval
of a majority of the Fund's outstanding voting securities, which in turn is
defined in the Investment Company Act of 1940, as amended (the '1940 Act'), as
the lesser of (1) 67% or more of the shares present at a Fund meeting, if the
holders of more than 50% of the outstanding shares of the Fund are present or
represented by proxy or (2) more than 50% of the outstanding shares of the Fund.
The Fund's annual report for the fiscal year ended August 31, 1994 contains
information regarding relevant market conditions and investment strategies and
techniques pursued by KPAM during such fiscal year and is available to
shareholders without charge upon request made to the Fund at the address listed
on the front cover page of this Prospectus.
GLOBAL INVESTING
The Fund invests in a portfolio of securities issued by governmental
authorities, foreign government related issuers and supranational organizations
located in developed and developing countries throughout the world. Although the
Fund is subject to no prescribed limits on geographic asset distribution, under
normal circumstances, at least 65% of the Fund's assets are invested in no fewer
than three different countries. Although the Adviser may pursue investment
opportunities throughout the world, the Adviser emphasizes investments in
developed countries, with the result that at all times at least 80% of the
Fund's assets will be invested in those countries.
TYPES OF PORTFOLIO INVESTMENTS
The Fund, under normal conditions, invests at least 65% of its total assets in
fixed income obligations (including debentures, bonds, notes and paper) issued
or guaranteed by (1) governments, including the U.S. Government, or by any of
their political subdivisions, authorities, agencies or instrumentalities, (2)
foreign government related issuers and (3) supranational organizations. The Fund
may, under normal market conditions, invest up to 35% of its assets in corporate
debt obligations, such as debentures, bonds and notes, and in the money market
instruments described below. Because the market value of debt securities can be
expected to vary inversely with changes in prevailing interest rates, investing
in debt securities may provide an opportunity for capital appreciation when
interest rates are expected to decline.
The Fund invests at least 65% of its net assets in securities rated in the
two highest rating categories of recognized rating agencies, may invest up to
35% of its net assets in securities rated in the third highest rating category
and may invest up to 10% of its net assets in securities rated in the fourth
highest rating category (in each case including securities determined to be of
comparable quality by the Adviser). Securities rated in the fourth highest
category are considered to possess speculative characteristics. In addition,
adverse changes in economic conditions are more likely to weaken the ability of
issuers of these debt securities to pay
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principal and interest. A description of the rating categories of recognized
rating agencies is set forth in the Appendix to the Statement of Additional
Information.
Up to 15% of the value of the Fund's net assets may be invested in illiquid
securities, which are securities lacking readily available markets. From time to
time, the Fund invests in the following types of illiquid securities: (1)
options purchased by the Fund over-the-counter and the assets used by the Fund
to collateralize options written by the Fund over-the-counter, (2) repurchase
agreements not maturing within seven days and (3) time deposits with maturities
in excess of seven days. Securities that are restricted but nonetheless liquid
may be purchased without limitation.
When the Adviser determines that unstable market, economic, political or
currency conditions abroad warrant adoption of a temporary defensive posture,
the Fund may without limitation hold cash and invest in money market
instruments. To the extent that it holds cash or invests in money market
instruments, the Fund may not achieve its investment objective.
The Fund is subject to no restriction on the maturities of the obligations
it holds; those maturities may range from overnight to 30 years or more. The
Fund generally invests in intermediate fixed income securities with the result
that, under normal market conditions, the weighted average life of the Fund's
portfolio will be between three and ten years. Investors should be aware that,
depending on market conditions, the Fund's ability to achieve its objective of
maximum total return may be limited owing to the types and remaining maturities
of securities in which the Fund invests.
The Fund will typically purchase a debt security if the Adviser believes
that the yield of the security is sufficiently attractive in light of the risks
of ownership of the security and its potential for capital appreciation. In
determining whether the Fund should invest in particular debt securities, the
Adviser considers factors including but not limited to: the price, coupon and
yield to maturity; the Adviser's assessment of the credit quality of the issuer;
the yield in relation to historical norms and yields on other debt instruments;
and the terms of the debt securities, including the subordination, default,
sinking fund and early redemption provisions.
The Fund invests in securities of foreign governments, government related
issuers and supranational organizations that are listed primarily on foreign
securities exchanges or traded in foreign over-the-counter markets.
FOREIGN GOVERNMENT RELATED ISSUERS. The Fund may invest in securities of
foreign government related issuers, which are issuers that, while not formal
foreign governmental authorities, agencies, instrumentalities or political
subdivisions, enjoy a relationship with or support from the related government
that, in the opinion of the Adviser, makes their obligations comparable in
quality to those of the related government. This relationship may arise from
governmental ownership, control or sponsorship of the issuer or the issuer's
central role in the economic life of the country involved. These issuers may
include nominally private entities that operate effectively as a country's
central bank, that provide public utility services, such as telecommunication
services or electrical power generation, that engage in activities involving
natural resources or national defense and entities organized and operated for
the purpose of restructuring the investment characteristics of securities issued
by the foregoing entities. Although the securities of these entities may be
supported by an explicit governmental guarantee of the entity's obligations, in
many cases these securities will be purchased on the basis of the
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Adviser's judgment that a governmental authority would provide support to the
entity in the event of financial difficulty. No assurance can be given that a
governmental authority would support a foreign government related issuer if it
is not legally obligated to do so.
SUPRANATIONAL ORGANIZATIONS. The Fund may invest in fixed income securities
issued by supranational organizations, which are entities designated or
supported by a government or governmental entity to promote economic development
and include, among others, the Asian Development Bank, the European Coal and
Steel Community, the European Economic Community and the World Bank. These
organizations have no taxing authority and are dependent upon their members for
payments of interest and principal. Moreover, the lending activities of
supranational entities are limited to a percentage of their total capital
(including 'callable capital' contributed by members at an entity's call),
reserves and net income.
MONEY MARKET INSTRUMENTS. Pending the investment of funds resulting from
the sale of Fund shares or the liquidation of portfolio holdings in longer term
fixed income securities, or in order to shorten the Fund's average portfolio
maturity during temporary defensive periods or in order to have available highly
liquid assets to meet anticipated redemptions of Fund shares or to pay the
Fund's operating expenses, the Fund may invest in the following types of money
market instruments: securities issued or guaranteed by the U.S. Government or
one of its agencies or instrumentalities ('Government Securities'); bank
obligations (including certificates of deposit, time deposits and bankers'
acceptances of foreign or domestic banks and other banking institutions having
total assets in excess of $500 million); commercial paper, including variable
and floating rate notes, rated no lower than A-1 by Standard & Poor's
Corporation or Prime-1 by Moody's Investors Service, Inc., or the equivalent
rating from another major rating service, or, if unrated, of an issuer having an
outstanding unsecured debt issue then rated within the three highest rating
categories; and repurchase agreements meeting the conditions described below
under 'Investment Techniques and Strategies -- Repurchase Agreements.' Except
during temporary defensive periods, the Fund will not invest more than 35% of
its assets in money market instruments. At no time will the Fund's investments
in bank obligations, including time deposits, exceed 25% of the value of its
assets.
The Fund is authorized to invest in obligations of foreign banks or foreign
branches of domestic banks that are traded in the United States or outside the
United States, but that are denominated in U.S. dollars. These obligations
entail risks that are different from those of investments in obligations in
domestic banks, including foreign economic and political developments outside
the United States, foreign governmental restrictions that may adversely affect
payment of principal and interest on the obligations, foreign exchange controls
and foreign withholding or other taxes on income. Foreign branches of domestic
banks are not necessarily subject to the same or similar regulatory requirements
that apply to domestic banks, such as mandatory reserve requirements, loan
limitations and accounting, auditing and financial recordkeeping requirements.
In addition, less information may be publicly available about a foreign branch
of a domestic bank than about a domestic bank.
GOVERNMENT SECURITIES. Among the Government Securities that may be held by
the Fund are instruments that are supported by the full faith and credit of the
United States; instruments that are supported by the right of the issuer to
borrow from the U.S. Treasury; and instruments that are supported solely by the
credit of the instrumentality.
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INVESTMENT TECHNIQUES AND STRATEGIES
The Fund, in seeking to meet its investment objective, is authorized to engage
in any one or more of the specialized investment techniques and strategies
described below:
OPTIONS. To hedge against adverse market shifts, the Fund may purchase put
and call options on securities held in its portfolio. In addition, the Fund may
seek to hedge a portion of its portfolio investments through writing (that is,
selling) 'covered' call options. A put option provides its purchaser with the
right to compel the writer of the option to purchase from the option holder an
underlying security at a specified price at any time during or at the end of the
option period. In contrast, a call option gives the purchaser the right to buy
the underlying security covered by the option from the writer of the option at
the stated exercise price. A covered call option contemplates that, for so long
as the Fund is obligated as the writer of the option, it will own (1) the
underlying securities subject to the option or (2) securities convertible into,
or exchangeable without the payment of any consideration for, the securities
subject to the option. The value of the underlying securities on which covered
call options are written at any one time by the Fund will not exceed 5% of the
Fund's total assets.
The Fund may purchase options on securities that are listed on national
securities exchanges or that are traded over-the-counter. As the holder of a put
option, the Fund has the right to sell the securities underlying the option and
as the holder of a call option, the Fund has the right to purchase the
securities underlying the option, in each case at the option's exercise price at
any time prior to, or on, the option's expiration date. The Fund may choose to
exercise the options it holds, permit them to expire or terminate them prior to
their expiration by entering into closing sale transactions. In entering into a
closing sale transaction, the Fund would sell an option of the same series as
the one it has purchased.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may trade
securities index, currency and interest rate futures contracts, and options on
those contracts, for a variety of risk reduction purposes such as hedging a
portion of the Fund's portfolio, providing an efficient means of regulating the
Fund's exposure to certain debt markets or hedging against changes in prevailing
levels of currency exchange rates. A securities index futures contract is an
agreement to take or make delivery of an amount of cash equal to the difference
between the value of the index at the beginning and at the end of the contract
period. A currency futures contract is a standardized contract for the future
delivery of a specified amount of currency at a future date at a price set at
the time of the contract and an interest rate futures contract is a similar
contract for the future delivery of a specific debt security. An option on a
futures contract, in contrast to a direct investment in the contract, gives the
purchaser the right, in return for the premium paid, to assume a position in the
underlying futures contract at a specified exercise price at any time on or
before the expiration date of the option.
The Fund may assume both 'long' and 'short' positions with respect to
futures contracts. A long position involves entering into a futures contract to
buy a commodity, whereas a short position involves entering into a futures
contract to sell a commodity. In entering into futures contracts, the Fund is
required to make initial 'margin' payments, which are payments in the nature of
performance bonds or good faith deposits, and to make 'variation' margin
payments from time to time as the values of the futures contracts fluctuate.
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The Fund will not (1) trade any futures contracts or options on futures
contracts if, immediately after the transactions, the aggregate of margin
deposits on all of the Fund's outstanding futures contracts and premiums paid on
its outstanding options on futures contracts would exceed 5% of the market value
of the total assets of the Fund after taking into account unrealized profits and
losses on any futures contracts or options on futures contracts or (2) enter
into any futures contracts or options on futures contracts if the aggregate of
the market value of the Fund's outstanding futures contracts and market value of
the currencies and futures contracts subject to outstanding options written by
the Fund would exceed 50% of the market value of the total assets of the Fund.
The Fund enters into short positions in futures or options contracts for bona
fide hedging purposes only. As a result, the Fund enters into a short position
in a futures or options contract in an effort to hedge against market
fluctuations that would otherwise impact the Fund's portfolio negatively. The
Fund does not use leverage when it enters into long futures or options
contracts; the Fund places in a segregated account with its custodian, or
designated sub-custodian, with respect to each of its long positions, cash,
short-term Government Securities or other U.S. dollar-denominated, high-grade,
short-term money market instruments having a value equal to the underlying
commodity value of the contract.
FORWARD CURRENCY TRANSACTIONS. The Fund may hold currencies to meet
settlement requirements for foreign securities and may engage in currency
exchange transactions to protect against uncertainty in the level of future
exchange rates between a particular foreign currency and the U.S. dollar or
between foreign currencies in which the Fund's securities are or may be
denominated. Forward currency contracts are agreements to exchange one currency
for another at a future date. The date (which may be any agreed-upon fixed
number of days in the future), the amount of currency to be exchanged and the
price at which the exchange takes place will be negotiated and fixed for the
term of the contract at the time that the Fund enters into the contract. Forward
currency contracts (1) are traded in a market conducted directly between
currency traders (typically, commercial banks or other financial institutions)
and their customers, (2) generally have no deposit requirements and (3) are
typically consummated without payment of any commissions. The Fund, however, may
enter into forward currency contracts requiring deposits or involving the
payment of commissions. To assure that the Fund's forward currency contracts are
not used to achieve investment leverage, the Fund will segregate cash or readily
marketable securities with its custodian, or a designated sub-custodian, in an
amount at all times equal to or exceeding the Fund's commitment with respect to
the contracts.
Upon maturity of a forward currency contract, the Fund may (1) pay for and
receive the underlying currency, (2) negotiate with the dealer to rollover the
contract into a new forward currency contract with a new future settlement date
or (3) negotiate with the dealer to terminate the forward contract by entering
into an offset with the currency trader providing for the Fund's paying or
receiving the difference between the exchange rate fixed in the contract and the
then current exchange rate. The Fund may also be able to negotiate such an
offset prior to maturity of the original forward contract. No assurance can be
given that new forward contracts or offsets will always be available to the
Fund.
The Fund's dealings in forward foreign exchange is limited to hedging
involving either specific transactions or portfolio positions. Transaction
hedging is the purchase or sale of one forward foreign currency for another
currency with respect to specific receivables or payables of the Fund accruing
in connection with the purchase and sale of its portfolio securities, the sale
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and redemption of shares of the Fund or the payment of dividends and
distributions by the Fund. Position hedging is the purchase or sale of one
forward foreign currency for another currency with respect to portfolio security
positions denominated or quoted in the foreign currency to offset the effect of
an anticipated substantial appreciation or depreciation, respectively, in the
value of the currency relative to the U.S. dollar. In this situation, the Fund
also may, for example, enter into a forward contract to sell or purchase a
different foreign currency for a fixed U.S. dollar amount where it is believed
that the U.S. dollar value of the currency to be sold or bought pursuant to the
forward contract will fall or rise, as the case may be, whenever there is a
decline or increase, respectively, in the U.S. dollar value of the currency in
which portfolio securities of the Fund are denominated (this practice being
referred to as a 'cross-hedge').
In hedging a specific transaction, the Fund may enter into a forward
contract with respect to either the currency in which the transaction is
denominated or another currency deemed appropriate by the Adviser. The amount
the Fund may invest in forward currency contracts is limited to the amount of
the Fund's aggregate investments in foreign currencies. See the Statement of
Additional Information for a further discussion of forward currency contracts.
OPTIONS ON FOREIGN CURRENCIES. The Fund may purchase and write put and call
options on foreign currencies for the purpose of hedging against declines in the
U.S. dollar value of foreign currency-denominated securities and against
increases in the U.S. dollar cost of securities to be acquired by the Fund. Like
the writing of other kinds of options, the writing of an option on a foreign
currency constitutes only a partial hedge, up to the amount of the premium
received; the Fund could also be required, with respect to any option it has
written, to purchase or sell foreign currencies at disadvantageous exchange
rates, thereby incurring losses. The purchase of an option on a foreign currency
may constitute an effective hedge against fluctuations in exchange rates,
although in the event of rate movements adverse to the Fund's position, the Fund
may forfeit the entire amount of the premium plus related transaction costs.
Options on foreign currencies written or purchased by the Fund are traded on
U.S. exchanges or over-the-counter. The Fund limits the premiums paid on options
on foreign currencies to 5% of the value of its total assets. See the Statement
of Additional Information for a further discussion of the use, risks and costs
of options on foreign currencies.
LENDING PORTFOLIO SECURITIES. In seeking to achieve its investment
objective, the Fund may lend securities to well-known and recognized U.S. and
foreign brokers, dealers and banks. These loans, if and when made, may not
exceed 33- 1/3% of the Fund's assets taken at value. The Fund's loans of
securities will be collateralized by cash, letters of credit or Government
Securities. The cash or instruments collateralizing the Fund's loans of
securities will be maintained at all times in a segregated account with the
Fund's custodian, or with a designated sub-custodian, in an amount at least
equal to the current market value of the loaned securities.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase agreement
transactions with respect to instruments in which the Fund is authorized to
invest. Although the amount of the Fund's assets that may be invested in
repurchase agreements terminable in less than seven days is not limited,
repurchase agreements maturing in more than seven days, together with other
illiquid securities, may not exceed 15% of the Fund's net assets. The Fund may
engage in repurchase agreement transactions with certain member banks of the
Federal Reserve System and with certain dealers listed on the Federal Reserve
Bank of New York's list of reporting
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dealers. Under the terms of a typical repurchase agreement, the Fund would
acquire an underlying debt obligation for a relatively short period (usually not
more than seven days) subject to an obligation of the seller to repurchase, and
the Fund to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Fund's holding period. Thus, repurchase
agreements are considered to be collateralized loans. This arrangement results
in a fixed rate of return that is not subject to market fluctuations during the
Fund's holding period. The value of the securities underlying a repurchase
agreement of the Fund will be monitored on an ongoing basis by the Adviser or
KPAM to ensure that the value is at least equal at all times to the total amount
of the repurchase obligation, including interest. The Adviser or KPAM will also
monitor, on an ongoing basis to evaluate potential risks, the creditworthiness
of those banks and dealers with which the Fund enters into repurchase
agreements.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. To secure prices or yields
deemed advantageous at a particular time, the Fund may purchase securities on a
when-issued or delayed-delivery basis, in which case delivery of the securities
occurs beyond the normal settlement period; payment for or delivery of the
securities would be made prior to the reciprocal delivery or payment by the
other party to the transaction. The Fund enters into when-issued or
delayed-delivery transactions for the purpose of acquiring securities and not
for the purpose of leverage. When-issued securities purchased by the Fund may
include securities purchased on a 'when, as and if issued' basis under which the
issuance of the securities depends on the occurrence of a subsequent event, such
as approval of a merger, corporate reorganization or debt restructuring. The
Fund will establish with its custodian, or with a designated sub-custodian, a
segregated account consisting of cash, Government Securities or other liquid
high-grade debt obligations in an amount equal to the amount of its when-issued
or delayed-delivery purchase commitments.
SHORT SALES. The Fund may from time to time sell securities short. A short
sale is a transaction in which the Fund sells securities it does not own (but
has borrowed) in anticipation of a decline in the market price of the
securities. When the Fund makes a short sale, the proceeds it receives from the
sale are retained by a broker until the Fund replaces the borrowed securities.
To deliver the securities to the buyer, the Fund must arrange through a broker
to borrow the securities and, in so doing, the Fund becomes obligated to replace
the securities borrowed at their market price at the time of replacement,
whatever that price may be. The Fund may have to pay a premium to borrow the
securities and must pay any dividends or interest payable on the securities
until they are replaced.
The Fund's obligation to replace the securities borrowed in connection with
a short sale will be secured by collateral deposited with the broker that
consists of cash or Government Securities. In addition, the Fund places in a
segregated account with its custodian an amount of cash or Government Securities
equal to the difference, if any, between (1) the market value of the securities
sold at the time they were sold short and (2) any cash or Government Securities
deposited as collateral with the broker in connection with the short sale (not
including the proceeds of the short sale). Until it replaces the borrowed
securities, the Fund will maintain the segregated account daily at a level so
that (1) the amount deposited in the account plus the amount deposited with the
broker (not including the proceeds from the short sale) will equal the current
market value of the securities sold short and (2) the amount deposited in the
account
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plus the amount deposited with the broker (not including the proceeds from the
short sale) will not be less than the market value of the securities at the time
they were sold short.
The Fund will not enter into a short sale of securities if, as a result of
the sale, the total market value of all securities sold short by the Fund would
exceed 25% of the value of the Fund's assets. In addition, the Fund may not (1)
sell short the securities of any single issuer listed on a national securities
exchange to the extent of more than 2% of the value of the Fund's net assets or
(2) sell short the securities of any class of an issuer to the extent of more
than 2% of the outstanding securities of the class at the time of the
transaction. The extent to which the Fund may engage in short sales may be
further limited by the Fund's meeting the requirements for qualification as a
regulated investment company imposed under the Internal Revenue Code of 1986, as
amended (the 'Code'), which requirements are described below under 'Dividends,
Distributions and Taxes.' The Fund may make short sales 'against the box'
without complying with the limitations described above.
SHORT SALES AGAINST THE BOX. The Fund may sell securities 'short against
the box.' Whereas a short sale is the sale of a security the Fund does not own,
a short sale is 'against the box' if at all times during which the short
position is open, the Fund owns at least an equal amount of the securities or
securities convertible into, or exchangeable without further consideration for,
securities of the same issue as the securities sold short.
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental investment restrictions with respect
to the Fund that may not be changed without approval of a majority of the Fund's
outstanding voting securities (as defined in the 1940 Act). Included among those
fundamental restrictions are the following:
1. The Fund will not borrow money, except that the Fund may enter into
forward roll transactions and borrow from banks for temporary or emergency
(not leveraging) purposes, including the meeting of redemption requests and
cash payments of dividends and distributions that might otherwise require
the untimely disposition of securities, in an amount not to exceed 20% of
the value of the Fund's total assets (including the amount borrowed) valued
at market less liabilities (not including the amount borrowed) at the time
the borrowing is made. Whenever borrowings, other than forward roll
transactions, exceed 5% of the value of the total assets of the Fund, the
Fund will not make any additional investments.
2. The Fund will not lend money to other persons, except through
purchasing debt obligations, lending portfolio securities in an amount not
to exceed 33- 1/3% of the value of the Fund's total assets and entering
into repurchase agreements.
3. The Fund will invest no more than 25% of the value of its total
assets in securities of issuers in any one industry. For purposes of this
restriction, the term industry will be deemed to include (a) the government
of any country other than the United States, but not the United States
Government, and (b) all supranational organizations.
Certain other investment restrictions adopted by the Trust with respect to
the Fund are described in the Statement of Additional Information.
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RISK FACTORS AND SPECIAL CONSIDERATIONS
Investing in the Fund involves risks and special considerations, such as those
described below:
NON-DIVERSIFICATION. The Fund is classified as a 'non-diversified'
investment company under the 1940 Act, which means the Fund is not limited by
the 1940 Act in the proportion of its assets that may be invested in the
securities of a single issuer. However, the Fund intends to conduct its
operations so as to qualify as a 'regulated investment company' for purposes of
the Code which will relieve the Fund of any liability for federal income tax to
the extent its earnings are distributed to shareholders. See 'Dividends,
Distributions and Taxes -- Taxes.' To so qualify, among other requirements, the
Fund limits its investments so that, at the close of each quarter of the taxable
year, (1) not more than 25% of the market value of the Fund's total assets will
be invested in the securities of a single issuer, and (2) with respect to 50% of
the market value of its total assets, not more than 5% of the market value of
its total assets will be invested in the securities of a single issuer and the
Fund will not own more than 10% of the outstanding voting securities of a single
issuer. The Fund's investments in Government Securities are not subject to these
limitations. Because the Fund, as a non-diversified investment company, may
concentrate investments in individual issuers to a greater degree than a
diversified investment company, an investment in the Fund may, under certain
circumstances, present greater risk to an investor than an investment in a
diversified company.
INVESTING IN DEVELOPING COUNTRIES. Investing in securities issued by
developing countries involves exposure to economic structures that are generally
less diverse and mature than, and to political systems that can be expected to
have less stability than, those of developed countries. Other characteristics of
developing countries that may affect investment in their markets include certain
national policies that may restrict investment by foreigners and the absence of
developed legal structures governing private and foreign investments and private
property. The typically small size of the markets for securities issued by
issuers located in developing countries and the possibility of a low or
nonexistent volume of trading in those securities may also result in a lack of
liquidity and in price volatility of those securities. The Fund has no present
intention of investing in securities issued by communist countries or countries
formally comprising the Warsaw Pact.
NON-PUBLICLY TRADED SECURITIES. Non-publicly traded securities may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales could
be less than those originally paid by the Fund. In addition, companies whose
securities are not publicly traded are not subject to their disclosure and other
investor protection requirements that may be applicable if their securities were
publicly traded.
OPTIONS. The Fund receives a premium when it writes call options, which
increases the Fund's return on the underlying security in the event the option
expires unexercised or is closed out at a profit. By writing a call, the Fund
limits its opportunity to profit from an increase in the market value of the
underlying security above the exercise price of the option for as long as the
Fund's obligation as writer of the option continues. Thus, in some periods the
Fund receives less total return and in other periods greater total return from
its hedged positions than it would have received from its underlying securities
if unhedged.
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In purchasing a put option, the Fund seeks to benefit from a decline in the
market price of the underlying security, whereas in purchasing a call option,
the Fund seeks to benefit from an increase in the market price of the underlying
security. If an option purchased is not sold or exercised when it has remaining
value, or if the market price of the underlying security remains equal to or
greater than the exercise price, in the case of a put, or remains equal to or
below the exercise price, in the case of a call, during the life of the option,
the Fund will lose its investment in the option. For the purchase of an option
to be profitable, the market price of the underlying security must decline
sufficiently below the exercise price, in the case of a put, and must increase
sufficiently above the exercise price, in the case of a call, to cover the
premium and transaction costs. Because option premiums paid by the Fund are
small in relation to the market value of the investments underlying the options,
buying options can result in large amounts of leverage. The leverage offered by
trading in options could cause the Fund's net asset value to be subject to more
frequent and wider fluctuations than would be the case if the Fund did not
invest in options.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. In entering into
transactions involving futures contracts and options on those contracts, the
Fund is subject to a number of risks and special considerations. As suggested
above, securities that may be held by the Fund may be denominated in currencies
for which no, or only a highly illiquid, futures or option market exists, which
will in turn restrict the Fund's ability to hedge against the risk of
devaluation of currencies in which the Fund holds a substantial quantity of
securities. The successful use of futures contracts and options on those
contracts draws upon the Adviser's special skills and experience with respect to
those instruments and usually depends on the Adviser's ability to forecast debt
market, currency exchange rate or interest rate movements correctly. Should debt
markets, exchange rates or interest rates move in an unexpected manner, the Fund
may not achieve the anticipated benefits of futures contracts or options on
those contracts or may realize losses and thus be in a less advantageous
position than if those strategies had not been used. Certain futures contracts
and options on futures contracts are subject to no daily price fluctuation
limits so that adverse market movements could continue with respect to those
instruments to an unlimited extent over a period of time. In addition, the
correlation between movements in the prices of those instruments and movements
in the price of the securities and currencies hedged or used for cover will not
be perfect.
The Fund's ability to dispose of its positions in futures contracts and
options on those contracts depends on the availability of active markets in
those instruments. Markets in options and futures with respect to a number of
securities and currencies are relatively new and still developing. The Adviser
cannot now predict the amount of trading interest that may exist in the future
in various types of futures contracts and options. Futures and options may be
closed out only on the exchange on which the contract was entered (or a linked
exchange) so that no assurance can be given that the Fund will be able to
utilize these instruments effectively for the purposes described above. In
addition, although the Trust anticipates that the Fund's options and futures
transactions will not prevent the Fund from qualifying as a regulated investment
company for federal income tax purposes, the Fund's ability to engage in options
and futures transactions may be limited by this tax consideration. See
'Dividends, Distributions and Taxes -- Taxes.' In writing options, the Fund is
subject to the risk of loss resulting from the difference
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between the premium received for the option and the price of the futures
contract underlying the option that the Fund must purchase or deliver upon
exercise of the option.
INVESTMENT IN FOREIGN SECURITIES. Investing in securities issued by foreign
governments and foreign government related issuers involves considerations and
potential risks not typically associated with investing in obligations issued by
the U.S. Government or other domestic issuers. Less information may be available
about foreign issuers than about domestic issuers and foreign governments
generally are not subject to uniform accounting, auditing and financial
reporting standards or to other regulatory practices and requirements comparable
to those applicable to domestic issuers. The values of foreign investments are
affected by changes in currency rates or exchange control regulations,
restrictions or prohibitions on the repatriation of foreign currencies,
application of foreign tax laws, including withholding taxes, changes in
governmental administration or economic or monetary policy (in the United States
or abroad) or changed circumstances in dealings between nations. Costs are also
incurred in connection with conversions between various currencies. In addition,
foreign brokerage commissions are generally higher than those charged in the
United States and foreign securities markets may be less liquid, more volatile
and less subject to governmental supervision than in the United States.
Investments in foreign countries could be affected by other factors not present
in the United States, including expropriation, confiscatory taxation, lack of
uniform accounting and auditing standards and potential difficulties in
enforcing contractual obligations and could be subject to extended clearance and
settlement periods.
CURRENCY EXCHANGE RATES. The Fund's share value may change significantly
when the currencies, other than the U.S. dollar, in which the Fund's portfolio
investments are denominated strengthen or weaken against the U.S. dollar.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries as seen from an international perspective. Currency exchange
rates can also be affected unpredictably by: the intervention of the U.S.
government, foreign governments or central banks, the imposition of currency
controls or other political developments in the United States or abroad.
FORWARD CURRENCY CONTRACTS. In entering into foreign currency contracts,
the Fund is subject to a number of risks and special considerations. The market
for forward currency contracts, for example, may be limited with respect to
certain currencies. The existence of a limited market may in turn restrict the
Fund's ability to hedge against the risk of devaluation of currencies in which
the Fund holds a substantial quantity of securities. The successful use of
forward currency contracts as a hedging technique draws upon the Adviser's
special skills and experience with respect to those instruments and usually
depends on the Adviser's ability to forecast interest rate and currency exchange
rate movements correctly. Should interest or exchange rates move in an
unexpected manner, the Fund may not achieve the anticipated benefits of forward
currency contracts or may realize losses and thus be in a less advantageous
position than if those strategies had not been used. Many forward currency
contracts are subject to no daily price fluctuation limits so that adverse
market movements could continue with respect to those contracts to an unlimited
extent over a period of time. In addition, the correlation between movements in
the prices of those contracts and movements in the prices of the currencies
hedged or used for cover will not be perfect.
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The Fund's ability to dispose of its positions in forward currency
contracts depends on the availability of active markets in those instruments and
the Adviser cannot now predict the amount of trading interest that may exist in
the future in forward currency contracts. Forward currency contracts may be
closed out only by the parties entering into an offsetting contract. As a
result, no assurance can be given that the Fund will be able to utilize these
contracts effectively for the purposes described above.
LENDING PORTFOLIO SECURITIES. In lending securities to U.S. and foreign
brokers, dealers and banks, the Fund is subject to risks, which, like those
associated with other extensions of credit, include possible loss of rights in
the collateral should the borrower fail financially.
REPURCHASE AGREEMENTS. In entering into a repurchase agreement, the Fund
bears a risk of loss in the event that the other party to the transaction
defaults on its obligations and the Fund is delayed or prevented from exercising
its rights to dispose of the underlying securities, including the risk of a
possible decline in the value of the underlying securities during the period in
which the Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or a
part of the income from the agreement.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. Securities purchased on a
when-issued or delayed-delivery basis may expose the Fund to risk because the
securities may experience fluctuations in value prior to their actual delivery.
The Fund does not accrue income with respect to a when-issued or
delayed-delivery security prior to its stated delivery date. Purchasing
securities on a when-issued or delayed-delivery basis can involve the additional
risk that the yield available in the market when the delivery takes place may be
higher than that obtained in the transaction itself.
SHORT SALES. Possible losses from short sales differ from losses that could
be incurred from purchases of securities, because losses from short sales may be
unlimited, whereas losses from purchases of securities can equal only the total
amount invested.
PORTFOLIO TURNOVER
The Fund's portfolio is actively managed. For the fiscal year ended August 31,
1994 and for the period from December 24, 1992 (commencement of operations) to
August 31, 1993, the Fund's portfolio turnover rate was 534.84% and 130.45%,
respectively. The high portfolio turnover rate for the fiscal year ended August
31, 1994 was due to the active trading of the forward foreign exchange contracts
and bonds in the Fund's portfolio. An annual turnover rate of 100% would occur
if all of the securities held by the Fund are replaced once during a period of
one year. Short-term gains realized from portfolio transactions are taxable to
shareholders as ordinary income. In addition, higher portfolio turnover rates
can result in corresponding increases in portfolio transaction costs and may
make it more difficult for the Fund to qualify as a regulated investment company
for federal income tax purposes. See 'Dividends, Distributions and Taxes --
Taxes.'
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MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Trust's Board of Trustees, and the day-to-day operations of the Fund are
conducted through or under the direction of officers of the Trust. The Statement
of Additional Information contains general background information regarding each
Trustee and officer of the Trust.
MANAGER
KPAM, located at 60 Broad Street, New York, New York 10004-2350, serves as the
Fund's manager. A wholly-owned subsidiary of Kidder, Peabody, and a registered
investment adviser under the Investment Advisers Act of 1940, as amended (the
'Advisers Act'), KPAM currently provides investment management, investment
advisory and administrative services to a wide variety of individual and
institutional clients. The Kidder, Peabody Asset Management Group of Companies
(of which KPAM is the primary entity) provides advisory and consulting services
to more than $18 billion in assets as of September 30, 1994. General Electric
Capital Services, Inc., a wholly-owned subsidiary of GE, owns all of the
outstanding stock of Kidder Group, the parent company of Kidder, Peabody.
Under an agreement dated October 17, 1994, GE and Kidder Group agreed to
sell to PaineWebber Group Inc. certain assets of Kidder Group and its
subsidiaries, including Kidder, Peabody and KPAM. The consummation of this
transaction, which is subject to a number of conditions and cannot be assured,
will result in the deemed assignment and automatic termination of the agreements
pursuant to which Kidder, Peabody serves as the principal underwriter of the
Fund's shares and KPAM serves as the Fund's manager and investment adviser.
Institution of new arrangements with Kidder, Peabody's and KPAM's successors
following the consummation of the transaction, anticipated to occur in the first
quarter of 1995, have been approved by the Trustees and separately by a majority
of the Trustees who are not 'interested persons' of the Fund within the meaning
of the 1940 Act. In addition, the Fund's new management arrangements will
require approval by the holders of a 'majority of the outstanding voting
securities' of the Fund, as defined in the 1940 Act. No assurance can be given
that the required shareholder approvals will be obtained and, if they are not,
the Trustees will take such action as they determine to be appropriate and in
the best interests of the Fund and its shareholders.
As the Fund's manager, KPAM, subject to the supervision and direction of
the Trust's Board of Trustees, is generally responsible for furnishing, or
causing to be furnished to the Fund, investment advisory and management
services. Included among the specific services provided by KPAM as manager are:
the selection and compensation of an investment adviser to the Fund; the review
of all purchases and sales of portfolio instruments made by the Fund to assess
compliance with its stated investment objective and policies; the monitoring of
the selection of brokers and dealers effecting transactions on behalf of the
Fund; the maintenance and furnishing of all required records or reports
pertaining to the Fund to the extent those records or reports are not maintained
or furnished by the Fund's transfer agent, custodian or other agents employed by
the Fund; the providing of general administrative services to the Fund not
otherwise provided by the Fund's transfer agent, custodian or other agents
employed by the Fund; and the payment
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of reasonable salaries and expenses of those of the Fund's officers and
employees, and the fees and expenses of those members of the Trust's Board of
Trustees, who are directors, officers or employees of KPAM.
The Trust pays KPAM a fee for services provided to the Fund that is accrued
daily and paid monthly at the annual rate of .70% of the Fund's average daily
net assets. From time to time, KPAM in its sole discretion may waive all or a
portion of its fee and/or reimburse all or a portion of the Fund's operating
expenses.
For the fiscal year ended August 31, 1994, Class A's, Class B's and Class
C's total expenses represented 1.19%, 1.68% and .94%, respectively, of their
average daily net assets.
INVESTMENT ADVISER
Under the terms of an investment advisory agreement among KPAM, the Trust and
the Adviser, KPAM employs the Adviser as the Fund's investment adviser. The
Adviser, located at 1001 19th Street, North, Suite 1600, Arlington, Virginia
22209, is a registered investment adviser under the Adviser's Act and
concentrates its investment advisory activities in the area of multi-currency
fixed income instruments. The Adviser provides investment advisory services to a
variety of clients having total assets under management as of September 30,
1994, exceeding $2.9 billion. The Adviser is a limited partnership organized
under the laws of the State of Delaware, the general partner of which is Gobi
Investment, Inc., which is wholly-owned by Kenneth A. Windheim. The Adviser has
not previously served as investment adviser to a registered investment company.
As the Fund's investment adviser, the Adviser, subject to the supervision
and direction of the Trust's Board of Trustees, and subject to review by KPAM,
manages the Fund's portfolio in accordance with the investment objective and
stated policies of the Fund, makes investment decisions for the Fund and places
purchase and sale orders for the Fund's portfolio transactions. The Adviser also
pays the salaries of all officers and employees who are employed by both it and
the Trust, provides the Fund with investment officers who are authorized by the
Board of Trustees to execute purchases and sales of securities on behalf of the
Fund and employs a professional staff of portfolio managers who draw upon a
variety of sources for research information for the Fund. KPAM pays the Adviser
a fee for services provided by the Adviser to the Fund that is accrued daily and
paid monthly at the annual rate of .35% of the value of the Fund's average daily
net assets. The Fund pays no direct fee to the Adviser. From time to time, the
Adviser in its sole discretion may waive all or a portion of its fee.
Kenneth A. Windheim serves as Chief Investment Officer of the Fund and in
that capacity is the individual primarily responsible for the management of the
Fund's assets. He is President of the Adviser and President of Gobi Investment,
Inc., the general partner of the Adviser. Prior to May 1991, he was Managing
Director of the International Fixed Income Department of Global Fixed Income
Advisers.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the Adviser, investments of the type the
Fund may make may also be made by those other accounts. When the Fund and one or
more other accounts managed by the Adviser are prepared to invest in, or desire
to dispose of, the same security, available investments or opportunities for
sales are allocated in a manner believed by the Adviser to be equitable to
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each. In some cases, this procedure may adversely affect the price paid or
received by the Fund or the size of the position obtained or disposed of by the
Fund.
EXPENSES
Each Class bears its own expenses, which generally include all costs not
specifically borne by KPAM and the Adviser. Included among a Class' expenses are
costs incurred in connection with the Class' and Fund's organization; management
and investment advisory fees; any distribution and/or service fees; fees for
necessary professional and brokerage services; fees for any pricing service used
in connection with the valuation of shares; costs of regulatory compliance; and
a portion of the costs associated with maintaining the Trust's legal existence
and corresponding with shareholders of the Fund. The Trust's agreement with KPAM
provides that KPAM will reduce its fees to the Fund to the extent required by
applicable state laws for certain expenses that are described in the Statement
of Additional Information.
PURCHASE OF SHARES
GENERAL INFORMATION
Shares of the Fund must be purchased and maintained through a Kidder, Peabody
brokerage account (an 'Account'), so that an investor who wishes to purchase
shares but who has no existing Account must establish one. Kidder, Peabody
charges no maintenance fee in connection with an Account through which an
investor purchases or holds shares of the Fund.
Purchases are effected at the public offering price of the Fund's shares
next determined after a purchase order is received. Payment for shares purchased
by an investor is due at Kidder, Peabody on the 'settlement date,' which is
generally the fifth business day after the order for purchase is placed, unless
the investor has 'good funds' available in an existing Account that can be
applied to the purchase. 'Good funds' as used in this Prospectus means cash,
Federal funds, or certified checks drawn on a U.S. bank. The Trust reserves the
right to reject any purchase order for shares of the Fund and to suspend the
offering for any period of time.
The minimum initial investment in the Fund is $1,000 and the minimum
subsequent investment is $50, except that for IRAs, other tax qualified
retirement plans and accounts established pursuant to the Uniform Gifts to
Minors Act, the minimum initial investment is $250 and the minimum subsequent
investment is $1.00. The Trust reserves the right to vary at any time the
minimum initial or subsequent investment amounts.
Purchase orders for shares of the Fund that are received prior to the close
of regular trading on the New York Stock Exchange (the 'NYSE') on a particular
day (currently 4:00 p.m., New York time) are priced according to the net asset
values determined on that day. Purchase orders received after the close of
regular trading on the NYSE are priced as of the time each Class' net asset
value per share is next determined. See 'Determination of Net Asset Value' below
for a description of the times at which each Class' net asset value per share is
determined.
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The Trust offers Fund shareholders an Automatic Investment Plan under which
a shareholder may authorize Kidder, Peabody to place monthly, twice monthly or
quarterly, as selected by the shareholder, a purchase order for Fund shares in
an amount not less than $100. The purchase price is paid automatically from a
designated bank account of the shareholder. The Fund reserves the right to
terminate or change the provisions of the Automatic Investment Plan.
Under the Choice Pricing System, the Fund presently offers three methods of
purchasing shares, enabling investors to choose the Class that best suits their
needs, given the amount of purchase and intended length of investment. Kidder,
Peabody Investment Executives and other persons remunerated on the basis of
sales of shares may receive different levels of compensation for selling one
Class of shares over another. When purchasing shares of the Fund, investors must
specify whether the purchase is for Class A shares, Class B shares or Class C
shares, as described below.
CLASS A SHARES
The public offering price of Class A shares is the net asset value per Class A
share next determined after a purchase order is received plus a sales charge, if
applicable. Class A shares are subject to a service fee at the annual rate of
.25% of the value of the Fund's average daily net assets attributable to this
Class. See 'Distributor.' The sales charge payable upon the purchase of Class A
shares will vary with the amount of purchase as set forth below.
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
-----------------------------------------------
AMOUNT OF PURCHASE AS PERCENTAGE AS PERCENTAGE
AT OFFERING PRICE OF OFFERING PRICE OF NET AMOUNT INVESTED
---------------------- --------------------- ----------------------
<S> <C> <C>
Less than $50,000........................................ 2.25% 2.33%
$50,000 but less than $100,000........................... 1.75 1.75
$100,000 but less than $250,000.......................... 1.50 1.50
$250,000 but less than $500,000.......................... 1.00 1.00
$500,000 but less than $1,000,000........................ .75 .75
$1,000,000 or more....................................... 0 0
</TABLE>
INSTANCES OF A REDUCED OR WAIVED SALES CHARGE. Class A shares are sold
subject to a reduction of 20% in the sales charges shown in the table above to:
(1) employees of GE and other affiliates of Kidder, Peabody, (2) IRAs for those
employees, (3) other employee benefit plans for those employees and (4) the
spouses and minor children of those employees when orders on their behalf are
placed by the employees.
Class A shares are sold without a sales charge to tax exempt organizations
enumerated in Section 501(c)(3) of the Code and retirement plans qualified under
Section 403(b)(7) of the Code, each having 1,000 or more participants
('Qualified Plans'). Employees eligible to participate in Qualified Plans
sponsored by the same organization or its affiliates may be aggregated in
determining the sales charge applicable to an investment made by a Qualified
Plan.
No sales charge is imposed on Class A shares purchased through reinvestment
of dividends or capital gains distributions. Clients of a newly-employed Kidder,
Peabody Investment
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Executive are eligible to purchase Class A shares subject to no sales charge for
a period of 90 days after the Investment Executive first becomes employed by
Kidder, Peabody, so long as the following conditions are met: (1) the purchase
is made within 30 days of, and with the proceeds from, a redemption of shares of
a mutual fund sponsored by the Investment Executive's previous employer; (2) the
Investment Executive served as the client's broker on the purchase of the shares
of the mutual fund; and (3) the shares of the mutual fund sold were subject to a
sales charge. Clients of a Kidder, Peabody Investment Executive are also
eligible to purchase Class A shares subject to no sales charge so long as the
following conditions are met: (1) the purchase is made within 30 days of, and
with the proceeds from, a redemption of shares of a mutual fund that were
purchased through Kidder, Peabody acting as a selected dealer for the shares
pursuant to an agreement between Kidder, Peabody and the mutual fund's principal
underwriter; (2) the mutual fund invested primarily in foreign debt securities;
(3) the Investment Executive served as the client's broker on the purchase of
the shares of the mutual fund sold; and (4) the shares of the mutual fund sold
were subject to a sales charge. Class A shares may also be offered without a
sales charge to any investment company, other than a company for which Kidder,
Peabody serves as distributor, in connection with the combination of the company
with the Fund by merger, acquisition of assets or otherwise.
VOLUME DISCOUNTS. Any investor meeting certain requirements, including the
signing of a Letter of Intent (a 'Letter'), is eligible to obtain a reduced
sales charge for purchasing Fund shares by combining purchases made over a
13-month period of Class A shares and shares of other mutual funds in the Kidder
Family of Funds with respect to which the investor previously paid, or is
subject to the payment of, a sales charge (collectively referred to as 'Eligible
Shares'). Purchases of Fund shares by eligible investors must aggregate at least
$50,000 and must include a minimum initial investment of at least $1,000 and
minimum subsequent investments of at least $50. For purposes of the procedure
contemplated by a Letter, Eligible Shares owned by an investor will be valued at
their original cost in determining the size of a purchase and the applicable
sales charge.
An investor's purchase of Eligible Shares not originally made pursuant to a
Letter may be included under a Letter subsequently executed within 90 days of
the purchase, so long as the investor informs Kidder, Peabody in writing within
the 90-day period of the investor's desired use of a Letter. The original cost
of an investor's Eligible Shares not purchased pursuant to a Letter may be
included under a Letter subsequently executed within 90 days of the purchase, so
long as the investor informs Kidder, Peabody in writing within the 90-day period
of the investor's desire for that treatment to be applicable. The original cost
of Eligible Shares not purchased pursuant to a Letter may be included as a
credit toward the fulfillment of the terms of the Letter; the reduced sales
charge contemplated by the Letter, however, will apply only to the purchases of
Eligible Shares made after the execution of the Letter, which purchases, as
noted above, must aggregate at least $50,000.
A Letter must provide for 5% of the dollar amount of the intended
investment to be held in escrow by Investors Fiduciary Trust Company ('IFTC') in
the form of Eligible Shares in an account registered in the name of the
shareholder. If the total amount of any Eligible Shares owned at the time a
Letter is signed plus all purchases made under the terms of the Letter less
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redemptions (the 'investment') are at least equal to the intended investment,
the amount in escrow will be released to the shareholder. If the investment is
more than $50,000 but less than the intended investment, a remittance of the
difference in the dollar amount of sales charge paid and the sales charge that
would have been paid if the investment had been made at a single time will be
made upon request. If the remittance is not sent within 20 days after such a
request, IFTC will redeem an appropriate number of Eligible Shares held in
escrow in order to realize the difference. Amounts remaining in the escrow
account will be released to the shareholder's account. If the total investment
is more than the intended investment and the total is sufficient to qualify for
an additional sales charge reduction, a retroactive price adjustment will be
made for all purchases made under a Letter to reflect the sales charge
applicable to the aggregate amount of the purchases during the 13-month period.
A Letter is not a binding obligation to purchase the indicated amount, and
Kidder, Peabody is not obligated to sell the indicated amount. Reinvested
dividends and capital gains are not applied toward the completion of the
purchases contemplated by a Letter.
RIGHT OF ACCUMULATION. Reduced sales charges on Class A shares are
available under a combined right of accumulation permitting an investor to
combine the value of Eligible Shares and the value of Fund shares being
purchased,to qualify for a reduced sales charge. Before a shareholder may take
advantage of the right of accumulation, the shareholder must provide Kidder,
Peabody at the time of purchase with sufficient information to permit Kidder,
Peabody to confirm that the shareholder is qualified for the right; acceptance
of the shareholder's purchase order is subject to that confirmation. The right
of accumulation may be amended or terminated at any time by the Trust.
DEFINITION OF PURCHASE. For purposes of the volume discounts and right of
accumulation described above, a 'purchase' refers to: a single purchase of
Eligible Shares by an individual; concurrent purchases by an individual, his or
her spouse and their children under the age of 21 years purchasing Eligible
Shares for his, her or their own account; and single purchases by a trustee or
other fiduciary purchasing Eligible Shares for a single trust estate or single
fiduciary account, including a pension, profit-sharing or other employee benefit
trust created pursuant to a plan qualified under Section 401 of the Code, even
though more than one beneficiary is involved. The term 'purchase' also includes
purchases by any 'company,' as that term is defined in the 1940 Act, but does
not include: purchases by any such company that has not been in existence for at
least six months or that has no purpose other than the purchase of Eligible
Shares or shares of other investment companies registered under the 1940 Act at
a discount; or purchases by any group of individuals whose participants are
related by virtue of being credit cardholders of a company, policyholders of an
insurance company, customers of either a bank or broker-dealer or clients of an
investment adviser. The term 'purchase' also includes purchases by employee
benefit plans not qualified under Section 401 of the Code, including purchases
by employees or by employers on behalf of employees by means of a payroll
deduction plan, or otherwise, of Eligible Shares. Purchases by such a company or
non-qualified employee benefit plan will qualify for the volume discounts
offered with respect to the Fund's shares only if the Trust and Kidder, Peabody
are able to realize economies of scale in sales efforts and sales-related
expenses by means of the company's, the employer's or the plan's making the
Prospectus available to individual investors or employees and forwarding
investments by those persons to the Trust,
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and by any such employer's or plan's bearing the expense of any payroll
deduction plan. The term 'purchase' also includes any purchase of Eligible
Shares by or on behalf of certain members of the same family, including spouses,
children (adult and minor), parents, grandparents and siblings, provided,
however, that the following conditions are met: (1) following consummation of
the purchase, the family has, in the aggregate, (a) at least $5 million invested
in Eligible Shares of one or more funds within the Kidder Family of Funds or (b)
at least $10 million in cash and/or securities in Kidder, Peabody Accounts; and
(2) the Trust and Kidder, Peabody are able to realize economies of scale in
sales effort and sales-related expenses by means of dealing with a common
decision-maker or otherwise being able to treat the accounts as a single
relationship.
REINSTATEMENT PRIVILEGE. The Fund offers a reinstatement privilege under
which a shareholder that has redeemed Class A shares may reinvest the proceeds
from the redemption without imposition of a sales charge, provided the
reinvestment is made within 60 days of the redemption. The tax status of a gain
realized on a redemption will not be affected by exercise of the reinstatement
privilege but a loss will be nullified if the reinvestment is made within 30
days of the redemption. See the Statement of Additional Information for the tax
consequences when, within 90 days of a purchase of Class A shares, the shares
are redeemed and reinvested in the Fund or another mutual fund.
CLASS B SHARES
The public offering price of Class B shares is the net asset value per share
next determined after a purchase order is received without imposition of any
sales charge. Class B shares are subject to a service fee at the annual rate of
.25%, and a distribution fee at the annual rate of .50%, of the value of the
Fund's average daily net assets attributable to this Class. See 'Distributor.'
Kidder, Peabody has adopted guidelines, in view of the relative sales charges,
service fees and distribution fees, directing Investment Executives that all
purchases of shares should be for Class A shares when the purchase is for
$1,000,000 or more by an investor not eligible to purchase Class C shares.
Kidder, Peabody reserves the right to vary these guidelines at any time.
CLASS C SHARES
The public offering price of Class C shares is the net asset value per share
next determined after a purchase order is received without imposition of any
sales charge. Class C shares, which are not subject to any service fee or
distribution fee, are available exclusively to employees of Kidder, Peabody and
their associated accounts, directors or trustees of any fund in the Kidder
Family of Funds, employee benefit plans of Kidder, Peabody and participants in
Insight when shares are purchased through that program. Investors eligible to
purchase Class C shares may not purchase any other Class of shares.
INSIGHT. An investor purchasing $50,000 or more of shares of funds in the
Kidder Family of Funds may participate in INSIGHT, KPAM's total portfolio asset
allocation program, and receive Class C Shares. INSIGHT offers comprehensive
investment services, including a
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personalized asset allocation investment strategy using an appropriate
combination of funds in the Kidder Family of Funds, professional investment
advice regarding investment among the funds in the Kidder Family of Funds by
KPAM portfolio specialists, monitoring of investment performance and
comprehensive quarterly reports that cover market trends, portfolio summaries
and personalized account information. Participation in INSIGHT is subject to
payment of an advisory fee to KPAM at the maximum annual rate of 1.5% of assets
held through the program (generally charged quarterly in advance), which covers
all INSIGHT investment advisory services and program administration fees.
Employees of Kidder, Peabody are entitled to a 50% reduction in the fee
otherwise payable for participation in INSIGHT. INSIGHT clients may elect to
have their INSIGHT fees charged to their accounts (by the automatic redemption
of money market fund shares) or another of their Kidder, Peabody accounts or,
billed separately.
REDEMPTION OF SHARES
A shareholder may redeem Fund shares on any day that the Fund's net asset value
is determined by following the procedures described below.
REDEMPTION THROUGH KIDDER, PEABODY
Shares may be redeemed through Kidder, Peabody, which provides the terms of any
redemption request properly received prior to 4:00 p.m., New York time, on a
given day, to the Fund's transfer agent. The trade date of a redemption so
received is considered to be that day, and the trade date of any redemption
request received at or after 4:00 p.m., New York time, is considered to be the
next business day. If shares to be redeemed were issued in certificate form, the
certificates for the shares to be redeemed must be submitted to the transfer
agent in accordance with the procedures described in items (1) through (4) under
'Redemption by Mail' below.
REDEMPTION BY MAIL
Shares may be redeemed by submitting a written request in 'good order' to the
Fund's transfer agent at the following address:
Kidder, Peabody Global Fixed Income Fund
Class A, B or C (please specify)
c/o Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
The transfer agent transmits any redemption request that it receives to
Kidder, Peabody, and the request is then treated as if it had been made through
Kidder, Peabody. A redemption request is considered to have been received in
'good order' if the following conditions are satisfied:
(1) the request is in writing, states the Class and number or dollar
amount of shares to be redeemed and identifies the shareholder's Fund
account number;
(2) the request is signed by each registered owner exactly as the
shares are registered;
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(3) if the shares to be redeemed were issued in certificate form, the
certificates are endorsed by the shareholder for transfer (or are
themselves accompanied by an endorsed stock power) and accompany the
redemption request, which should be sent by registered mail for the
protection of the shareholder; and
(4) the signatures on either the written redemption request or the
certificates (or the accompanying stock power) have been guaranteed by a
bank, broker-dealer, municipal securities broker and dealer, government
securities dealer and broker, credit union, a member firm of a national
securities exchange, registered securities association or clearing agency,
and savings association (the purpose of a signature guarantee is to protect
shareholders against the possibility of fraud). The transfer agent may
reject redemption instructions if the guarantor is neither a member of nor
a participant in a signature guarantee program (currently known as
'STAMP''sm').
Additional supporting documents may be required for redemptions of Fund
shares by corporations, executors, administrators, trustees and guardians.
OTHER REDEMPTION POLICIES
Signature guarantees are required in connection with (1) any redemption of Fund
shares made by mail and (2) share ownership transfer requests. These
requirements may be waived by the Trust in certain instances.
Any redemption request made by a shareholder of the Fund will be effected
at the net asset value per share next determined after proper redemption
instructions are received. See 'Determination of Net Asset Value' below. The
proceeds of the redemption generally are credited to the shareholder's Account,
or sent to the shareholder, as applicable, on the fifth business day following
the date after the redemption request was received in good order, but in no
event later than seven days following that date. A shareholder who pays for Fund
shares by personal check will be credited with the proceeds of a redemption of
those shares only after the check used for the purchase has cleared, which may
take up to 15 days or more. If shares are purchased with good funds, no delay in
redemption will occur. The amount of redemption proceeds received by a Fund
shareholder will in no way be affected by any delay in the crediting of those
proceeds.
A Fund account with respect to a Class of shares that is reduced by
redemptions, and not by reason of market fluctuations, to a value of $500 or
less may be redeemed by the Trust, but only after the shareholder has been given
at least 30 days in which to increase the balance in the account to more than
$500. Proceeds of such a redemption will be mailed to the shareholder.
DISTRIBUTIONS IN KIND
If the Trust's Board of Trustees determines that it would be detrimental to the
best interests of the Fund's shareholders to make a redemption payment wholly in
cash, the Fund may pay, in accordance with rules adopted by the SEC, any portion
of a redemption in excess of the lesser of $250,000 or 1% of the Fund's net
assets by a distribution in kind of readily marketable portfolio securities in
lieu of cash. Redemptions failing to meet this threshold must be made in cash.
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Shareholders receiving distributions in kind of portfolio securities may incur
brokerage commissions when subsequently disposing of those securities.
SYSTEMATIC WITHDRAWAL PLAN
The Trust offers a systematic withdrawal plan (the 'Withdrawal Plan') under
which a shareholder of the Fund with $20,000 or more invested in a Class may
elect periodic redemption payments to the shareholder or a designated payee on a
monthly basis. Payments pursuant to the Withdrawal Plan normally are made within
the last ten days of the month. The minimum rate of withdrawal is $200 per month
and the maximum annual withdrawal is 12% of current account value in the Class
as of the commencement of participation in the Withdrawal Plan (less the amount
of any subsequent redemption outside the Withdrawal Plan). A shareholder
participating in the Withdrawal Plan must reinvest all income and capital gains
distributions, and may not continue to participate if the shareholder redeems
outside the Withdrawal Plan or exchanges to another fund an amount that would
cause the account value in the Class to fall below $20,000. The Trust may amend
or terminate the Withdrawal Plan, and a shareholder may terminate participation
in the Withdrawal Plan at any time.
DETERMINATION OF NET ASSET VALUE
Each Class' net asset value per share is calculated by IFTC, the Fund's
custodian, on each day, Monday through Friday, except that net asset value is
not computed on a day in which no orders to purchase, sell, exchange or redeem
Fund shares have been received, any day on which there is not sufficient trading
in the Fund's portfolio securities that the Fund's net asset values per share
might be materially affected by changes in the value of such portfolio
securities or on days on which the NYSE is not open for trading. The NYSE is
currently scheduled to be closed on New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas,
and on the preceding Friday when one of those holidays falls on a Saturday or on
the subsequent Monday when one of those holidays falls on a Sunday.
Net asset value per share of a Class is determined as of the close of
regular trading on the NYSE, and is computed by dividing the value of the Fund's
net assets attributable to that Class by the total number of shares outstanding
of that Class. Generally, the Fund's investments are valued at market value or,
in the absence of a market value, at fair value as determined by or under the
direction of the Trust's Board of Trustees.
Investments in Government Securities and other securities traded
over-the-counter, other than short-term investments that mature in 60 days or
less, are valued at the average of the quoted bid and asked prices in the
over-the-counter market. Short-term investments that mature in 60 days or less
are valued on the basis of amortized cost (which involves valuing an investment
at its cost and, thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the effect of fluctuating interest rates on
the market value of the investment) when the Board of Trustees has determined
that amortized cost represents fair value. Securities that are primarily traded
on foreign exchanges are generally valued for purposes of calculating each
Class' net asset value at the preceding closing values of the securities on
their respective exchanges, except that, when an occurrence subsequent to the
time a value was so established is likely to have changed that value, the fair
market value of those
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securities will be determined by consideration of other factors by or under the
direction of the Board of Trustees. A security that is primarily traded on a
domestic stock exchange is valued at the last sale price on that exchange or, if
no sales occurred during the day, at the current quoted bid price. An option
that is written by the Fund is generally valued at the last sale price or, in
the absence of the last sale price, the last offer price. An option that is
purchased by the Fund is generally valued at the last sale price or, in the
absence of the last sale price, the last bid price. The value of a futures
contract is equal to the unrealized gain or loss on the contract that is
determined by marking the contract to the current settlement price for a like
contract on the valuation date of the futures contract. A settlement price may
not be used if the market makes a limit move with respect to a particular
futures contract or if the securities underlying the futures contract experience
significant price fluctuations after the determination of the settlement price.
When a settlement price cannot be used, futures contracts will be valued at
their fair market value as determined by or under the direction of the Board of
Trustees.
For purposes of calculating a Class' net asset value per share, assets and
liabilities initially expressed in foreign currency values will be converted
into U.S. dollar values based on a formula prescribed by the Trust or, if the
information required by the formula is unavailable, as determined in good faith
by the Board of Trustees. In carrying out the Board's valuation policies, IFTC
may consult with an independent pricing service retained by the Trust. Further
information regarding the Fund's valuation policies is contained in the
Statement of Additional Information.
EXCHANGE PRIVILEGE
Shares of each Class may be exchanged for shares of the same Class (or the sole
Class offered) in certain funds in the Kidder Family of Funds, to the extent
shares are offered for sale in the shareholder's state of residence. For a list
and a description of the funds in the Kidder Family of Funds for which shares
may be exchanged, see 'Exchange Privilege' in the Statement of Additional
Information. Under the Choice Pricing System, an exchange of shares of the Fund
with other funds' shares will be limited to shares of the same class or the sole
class (money market funds only) of shares of a fund from or to which the
exchange is to be effected. For example, if a holder of Class A shares of the
Fund exchanges his shares for shares of Kidder, Peabody Cash Reserve Fund, Inc.
('Cash Reserve Fund') (a money market fund) and thereafter wishes to exchange
those shares for shares of Kidder, Peabody Government Income Fund, Inc. he may
receive only Class A shares in the latter transaction. As another example, if a
holder of shares of Cash Reserve Fund acquired as a result of an initial
investment and not from an exchange with shares of another fund wishes to
exchange his shares for shares of the Fund, he may receive Class A shares, Class
B shares or Class C shares (depending on his eligibility for Class C shares) in
the exchange transaction. Thereafter, any further exchanges would be subject to
the principal described above limiting subsequent exchanges to the same class or
the sole class of shares of other funds. If Class A shares acquired in an
exchange are subject to payment of a sales charge higher than the sales charge
paid on the shares relinquished in the exchange (or any predecessor of those
shares), the exchange will be subject to payment of an amount equal to the
difference, if any, between the sales charge previously paid and the sales
charge payable on the Class A shares acquired in the exchange.
Although the Fund currently imposes no limit on the number of times the
Exchange Privilege may be exercised by any shareholder, the Fund may impose such
limits in the future, in
31
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accordance with applicable provisions of the 1940 Act and rules thereunder. In
addition, the Exchange Privilege may be terminated or revised at any time upon
60 days' prior written notice to Fund shareholders, and is available only to
residents of states in which exchanges are permitted under state law. The
exchange of shares of one fund for shares of another is treated for federal
income tax purposes as a sale of the shares given in exchange by the
shareholder, so that a shareholder may recognize a taxable gain or loss on an
exchange.
Upon receipt of proper instructions and all necessary supporting documents,
Fund shares submitted for exchange will be redeemed at their net asset value
next determined and simultaneously invested in shares of the fund being
acquired. Settlement of an exchange would occur one business day after the date
on which the request for exchange was received in proper form, unless the dollar
amount of the transaction exceeds 5% of the Fund's total net assets on any given
day, in which case settlement would occur within five business days after the
date on which the request for exchange was received in proper form. The proceeds
of a redemption of Fund shares made to facilitate the exchange of those shares
for shares of another fund must be equal to at least (1) the minimum initial
investment requirement imposed by the fund into which the exchange is being
sought if the shareholder seeking the exchange has not previously invested in
that fund or (2) the minimum subsequent investment requirement imposed by the
fund into which the exchange is being sought if the shareholder has previously
made an investment in that fund.
A shareholder of the Fund wishing to exercise the Exchange Privilege should
obtain from Kidder, Peabody a copy of the current prospectus of the fund into
which an exchange is being sought and review that prospectus carefully before
making the exchange. Kidder, Peabody reserves the right to reject any exchange
request at any time. Prior to or concurrently with the delivery of a
confirmation a shareholder's exchange transaction, Kidder, Peabody will deliver
to that shareholder a copy of the prospectus of the fund into which the exchange
is being made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income of the Fund are declared daily and
distributed monthly and distributions of net realized capital gains of the Fund,
if any, are distributed annually after the close of the fiscal year in which
they are earned. Unless a shareholder instructs the Fund that dividends and
capital gains distributions on shares of any Class should be paid in cash and
credited to the shareholder's Account, dividends and capital gains distributions
are reinvested automatically at net asset value in additional shares of the same
Class. The Fund is subject to a 4% nondeductible excise tax measured with
respect to certain undistributed amounts of net investment income and capital
gains. If necessary to avoid the imposition of this tax, and if in the best
interests of its shareholders, the Fund will declare and pay dividends of its
net investment income and distributions of its net capital gains more frequently
than stated above. The per share dividends and distributions on Class C shares
will be higher than those on Class A shares, which in turn will be higher than
those on Class B shares, as a result of the different service, distribution and
transfer agency fees applicable to the Classes. See 'Fee Table,' 'Purchase of
Shares,' 'Distributor' and 'General Information.'
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Shares of the Fund begin earning dividends on the day on which the shares
are issued, the date of issuance customarily being the settlement date, which is
the date on which the Fund receives payment for the shares. Shares continue to
earn dividends until the day prior to the settlement date of a redemption.
TAXES
The Fund has qualified for the fiscal period ended August 31, 1994 to be treated
as a regulated investment company within the meaning of the Code and intends to
qualify for this treatment in each year. To qualify as a regulated investment
company for federal income tax purposes, the Fund limits its income and
investments so that (1) less than 30% of its gross income is derived from the
sale or disposition of stocks, other securities and certain financial
instruments (including certain forward contracts) that were held for less than
three months and (2) at the close of each quarter of the taxable year (a) not
more than 25% of the market value of the Fund's total assets is invested in the
securities (other than Government Securities) of a single issuer or of two or
more issuers controlled by the Fund that are engaged in the same or similar
trades or businesses or in related trades or businesses and (b) at least 50% of
the market value of the Fund's total assets is represented by (i) cash and cash
items, (ii) Government Securities and (iii) other securities limited in respect
of any one issuer to an amount not greater in value than 5% of the market value
of the Fund's total assets and to not more than 10% of the outstanding voting
securities of the issuer. The requirements for qualification may cause the Fund
to restrict the degree to which it sells or otherwise disposes of stocks, other
securities and certain financial instruments held for less than three months. If
the Fund qualifies as a regulated investment company and meets certain
distribution requirements, the Fund will not be subject to federal income tax on
its net investment income and net realized capital gains that it distributes to
its shareholders.
Dividends paid by the Fund out of net investment income and distributions
of net realized short-term capital gains are taxable to shareholders as ordinary
income, whether received in cash or reinvested in additional Fund shares.
Distributions of net realized long-term capital gains are taxable to
shareholders as long-term capital gain, regardless of how long shareholders have
held their shares and whether the distributions are received in cash or
reinvested in additional shares. Dividends and distributions paid by the Fund
will generally not qualify for the federal dividends received deduction for
corporate shareholders.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other foreign taxes. The payment of these taxes will
reduce the amount of dividends and distributions paid to the Fund's
shareholders. So long as the Fund qualifies as a regulated investment company,
certain distribution requirements are satisfied, and more than 50% of the value
of the Fund's total assets at the close of any taxable year consists of stocks
or securities of foreign corporations, the Fund may elect, for federal income
tax purposes, to treat certain foreign income taxes it pays as having been paid
by its shareholders. If the Fund makes the election, the amount of foreign
income taxes paid by the Fund would be included in the income of its
shareholders and the shareholders would be entitled to either credit their
portions of these amounts against their federal income tax due, if any, or to
deduct these portions from their federal taxable income, if any. No deduction
for foreign taxes may be claimed by a
33
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shareholder who does not itemize deductions. In addition, certain limitations
will be imposed on the extent to which the credit (but not the deduction) for
foreign taxes may be claimed.
Statements as to the tax status of each Fund shareholder's dividends and
distributions are mailed annually. Shareholders also receive, as appropriate,
various written notices after the close of the Fund's taxable year regarding the
tax status of certain dividends and distributions that were paid (or that are
treated as having been paid) by the Fund to its shareholders during the
preceding taxable year, including the amount of dividends that represent
interest derived from Government Securities.
Shareholders are urged to consult their tax advisors regarding the
application of federal, state, local and foreign tax laws to their specific
situations before investing in the Fund.
DISTRIBUTOR
Kidder, Peabody, a major full-line investment services firm serving foreign and
domestic securities markets, located at 10 Hanover Square, New York, New York
10005-3592, serves as the distributor of the Fund's shares and is paid monthly
fees by the Fund in connection with (1) the servicing of shareholder accounts in
Class A and Class B shares and (2) providing distribution related services in
respect of Class B shares. A monthly service fee, authorized pursuant to a
Shareholder Servicing and Distribution Plan (the 'Plan') adopted by the Trust
with respect to the Fund pursuant to Rule 12b-1 under the 1940 Act, is
calculated at the annual rate of .25% of the value of the average daily net
assets of the Fund attributable to each of Class A and Class B shares and is
used by Kidder, Peabody to provide compensation for ongoing servicing and/or
maintenance of shareholder accounts and an allocation of overhead and other
Kidder, Peabody branch office expenses related to servicing shareholder
accounts. Compensation is paid by Kidder, Peabody to persons, including Kidder,
Peabody employees, who respond to inquiries of shareholders of the Fund
regarding their ownership of shares or their accounts with the Fund or who
provide other similar services not otherwise required to be provided by the
Fund's manager, investment adviser or transfer agent.
In addition, pursuant to the Plan, the Fund pays to Kidder, Peabody a
monthly distribution fee at the annual rate of .50% of the Fund's average daily
net assets attributable to Class B shares. The distribution fee is used by
Kidder, Peabody to provide initial and ongoing sales compensation to its
Investment Executives in respect of sales of Class B shares; costs of printing
and distributing the Fund's Prospectus, Statement of Additional Information and
sales literature to prospective investors in Class B shares; costs associated
with any advertising relating to Class B shares; an allocation of overhead and
other Kidder, Peabody branch office expenses related to distribution of Class B
shares; and payments to, and expenses of, persons who provide support services
in connection with the distribution of Class B shares.
Payments under the Plan are not tied exclusively to the service and/or
distribution expenses actually incurred by Kidder, Peabody, and the payments may
exceed expenses actually incurred by Kidder, Peabody. The Trust's Board of
Trustees evaluates the appropriateness of the Plan and its payment terms on a
continuing basis and in doing so considers all relevant factors, including
expenses borne by Kidder, Peabody and amounts it receives under the Plan.
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PERFORMANCE INFORMATION
From time to time, the Trust may advertise the 30-day 'yield' of the Fund for
each Class. The yield refers to the income generated by an investment in a Class
over the 30-day period identified in the advertisement and is computed by
dividing the net investment income per share earned by the Class during the
period by the net asset value per share of the Class on the last day of the
period. This income is 'annualized' by assuming that the amount of income is
generated each month over a one-year period and is compounded semi-annually. The
annualized income is then shown as a percentage of the net asset value.
From time to time, the Trust may advertise the Fund's 'average annual total
return' over various periods of time for each Class. Total return figures, which
are based on historical earnings and are not intended to indicate future
performance, show the average percentage change in value of an investment in the
Class from the beginning date of a measuring period to the end of that period.
These figures reflect changes in the price of shares and assume that any income
dividends and/or capital gains distributions made by the Fund during the period
were reinvested in shares of the same Class. Total return figures will be given
for the most recent one-and five-year periods, or for the life of the Class to
the extent that it has not been in existence for the full length of those
periods, and may be given for other periods as well, such as on a year-by-year
basis. The average annual total return for any one year in a period longer than
one year might be greater or less than the average for the entire period.
The Trust may quote 'aggregate total return' figures with respect to the
Fund for various periods, representing the cumulative change in value of an
investment for the specific period and reflecting changes in share prices and
assuming reinvestment of dividends and distributions. Aggregate total return may
be calculated either with or without the effect of the sales charge to which
Class A shares are subject and may be shown by means of schedules, charts or
graphs, and may indicate subtotals of the various components of total return
(that is, changes in value of initial investment, income dividends and capital
gains distributions). Reflecting compounding over a longer period of time,
aggregate total return data generally will be higher than average annual total
return data.
The Trust may, in addition to quoting the Classes' average annual and
aggregate total returns, advertise actual annual and annualized total return
performance data for various periods of time. Actual annual and annualized total
returns may be calculated either with or without the effect of the sales charge
to which Class A shares are subject and may be shown by means of schedules,
charts or graphs. Actual annual or annualized total return data generally will
be lower than average annual total return data, which reflects compounding of
return.
In reports or other communications to Fund shareholders and in advertising
material, the Trust may compare the Classes' performance with (1) the
performance of other mutual funds (or classes thereof) as listed in rankings
prepared by Lipper Analytical Services Inc., CDA Investment Technologies, Inc.
or similar investment services that monitor the performance of mutual funds or
as set out in the nationally recognized publications listed below, (2) the
Lehman Brothers Government Bond Index, the J.P. Morgan Government Bond Index,
the Salomon Brothers Non-U.S. Bond Index and the Salomon Brothers World
Government Bond Index, the Salomon Brothers World Bond Index, each of which is
an unmanaged index, or (3) other appropriate indexes of investment securities or
with data developed by the Adviser or KPAM
35
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derived from those indexes. The Trust may also include in communications to Fund
shareholders evaluations of the Fund published by nationally recognized ranking
services and by financial publications that are nationally recognized, such as
Barron's, Business Week, Forbes, Institutional Investor, Investor's Daily,
Kiplinger's Personal Finance Magazine, Money, Morningstar Mutual Fund Values,
The New York Times, USA Today and The Wall Street Journal. Any given performance
comparison should not be considered as representative of the Fund's performance
for any future period.
GENERAL INFORMATION
ORGANIZATION OF THE TRUST
The Trust is registered under the 1940 Act as an open-end management investment
company and was formed as a business trust pursuant to a Declaration of Trust,
as amended from time to time (the 'Declaration'), under the laws of The
Commonwealth of Massachusetts on March 28, 1991. The Fund commenced operations
on December 24, 1992. The Declaration authorizes the Trust's Board of Trustees
to create separate series, and within each series separate Classes, of an
unlimited number of shares of beneficial interest, par value $.001 per share. As
of the date of this Prospectus, the Trustees have established several such
series, representing interests in the Fund described in this Prospectus and in
several other series. See 'Exchange Privilege' in the Statement of Additional
Information.
When issued, Fund shares will be fully paid and non-assessable. Shares are
freely transferable and have no pre-emptive, subscription or conversion rights.
Each Class represents an identical interest in the Fund's investment portfolio.
As a result, the Classes have the same rights, privileges and preferences,
except with respect to: (1) the designation of each Class; (2) the effect of the
respective sales charges, if any, for each Class; (3) the distribution and/or
service fees, if any, borne by each Class; (4) the expenses allocable
exclusively to each Class; (5) voting rights on matters exclusively affecting a
single Class; and (6) the exchange privilege of each Class. The Board of
Trustees does not anticipate that there will be any conflicts among the
interests of the holders of the different Classes. The Trustees, on an ongoing
basis, will consider whether any conflict exists and, if so, take appropriate
action. Certain aspects of the shares may be changed, upon notice to Fund
shareholders, to satisfy certain tax regulatory requirements, if the change is
deemed necessary by the Trust's Board of Trustees.
Shareholders of the Fund are entitled to one vote for each full share held
and fractional votes for fractional shares held. Voting rights are not
cumulative and, as a result, the holders of more than 50% of the aggregate
shares of the Trust may elect all of the Trustees. Generally, shares of the
Trust will be voted on a Trust-wide basis on all matters except those affecting
only the interests of one series, such as the Fund's investment advisory
agreement. In turn, shares of the Fund will be voted on a Fund-wide basis on all
matters except those affecting only the interests of one Class, such as the
terms of the Plan as it relates to a Class.
The Trust intends to hold no annual meetings of shareholders for the
purpose of electing Trustees unless, and until such time as, less than a
majority of the Trustees holding office have been elected by shareholders.
Shareholders of record of no less than two-thirds of the outstanding shares of
the Trust may remove a Trustee through a declaration in writing or by vote cast
in person or by proxy at a meeting called for that purpose. A meeting will be
called for the
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purpose of voting on the removal of a Trustee at the written request of holders
of 10% of the Trust's outstanding shares. Shareholders of the Fund who satisfy
certain criteria will be assisted by the Trust in communicating with other
shareholders in seeking the holding of the meeting.
REPORTS TO SHAREHOLDERS
The Trust sends Fund shareholders audited semi-annual and annual reports, each
of which includes a list of the investment securities held by the Fund as of the
end of the period covered by the report.
CUSTODIAN AND TRANSFER, DIVIDEND AND RECORDKEEPING AGENT
IFTC, located at 127 West 10th Street, Kansas City, Missouri 64105, serves as
the Fund's custodian and transfer, dividend and recordkeeping agent.
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<PAGE>
No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the
Statement of Additional Information incorporated into this
Prospectus by reference, in connection with the offering made by
this Prospectus and, if given or made, any such information or
representations must not be relied upon as having been authorized by
the Fund or its distributor. This Prospectus does not constitute an
offering by the Fund or by its distributor in any jurisdiction in
which the offering may not lawfully be made.
<TABLE>
<S> <C>
- --------------------------------------------------------
Contents
- --------------------------------------------------------
Fee Table 2
- --------------------------------------------------------
Highlights 3
- --------------------------------------------------------
Financial Highlights 7
- --------------------------------------------------------
Design of the Fund 8
- --------------------------------------------------------
Investment Objective and Policies 9
- --------------------------------------------------------
Management of the Fund 21
- --------------------------------------------------------
Purchase of Shares 23
- --------------------------------------------------------
Redemption of Shares 28
- --------------------------------------------------------
Determination of Net Asset Value 30
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Exchange Privilege 31
- --------------------------------------------------------
Dividends, Distributions and Taxes 32
- --------------------------------------------------------
Distributor 34
- --------------------------------------------------------
Performance Information 35
- --------------------------------------------------------
General Information 36
- --------------------------------------------------------
Custodian and Transfer, Dividend and
Recordkeeping Agent 37
- --------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
Kidder,
Peabody
Global
Fixed
Income
Fund
Prospectus
December 29, 1994
</TABLE>
[LOGO]
<PAGE>
PROSPECTUS DECEMBER 29, 1994
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Kidder, Peabody Global Equity Fund
60 BROAD STREET NEW YORK, NEW YORK 10004-2350 (800) 528-7778
Kidder, Peabody Global Equity Fund (the 'Fund'), a series of Kidder, Peabody
Investment Trust (the 'Trust'), is designed for investors seeking to expand
their investment horizon beyond the United States by investing their assets
internationally. The Fund's investment objective is long-term growth of capital,
which the Fund attempts to achieve by investing principally in foreign equity
securities.
This Prospectus briefly sets forth certain information about the Fund, including
applicable operating expenses, that prospective investors should know before
investing. Investors are advised to read this Prospectus and retain it for
future reference.
Additional information about the Fund, contained in a Statement of Additional
Information dated December 29, 1994, has been filed with the Securities and
Exchange Commission (the 'SEC') and is available to investors upon request and
without charge by calling (800) 854-2505. The Statement of Additional
Information is incorporated in its entirety by reference into this Prospectus.
- --------------------------------------------------------------------------------
MANAGER
Kidder Peabody Asset Management, Inc.
INVESTMENT ADVISER
GE Investment Management Incorporated
DISTRIBUTOR
Kidder, Peabody & Co. Incorporated
[Logo]
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
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FEE TABLE
The table appearing below shows the costs and expenses that an investor would
incur, either directly or indirectly, as a shareholder of the Fund, based upon
the Fund's annual operating expenses.
<TABLE>
<CAPTION>
Class Class Class
A B C
------- ------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases of Shares (as a percentage of
offering price)........................................................... 5.75% 0% 0%
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of
offering price)........................................................... 0% 0% 0%
Maximum Contingent Deferred Sales Charge (as a percentage of redemption
proceeds)................................................................. 0% 0% 0%
Redemption Fees (as a percentage of amount redeemed)........................ 0% 0% 0%
Maximum Exchange Fee........................................................ 0% 0% 0%
Maximum Annual Investment Advisory Fee Payable by Shareholders Holding Class
C Shares through the INSIGHT Investment Advisory Program (as a percentage
of average daily value of shares held).................................... 0% 0% 1.50%
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees............................................................. 1.00% 1.00% 1.00%
Rule 12b-1 Fees............................................................. .25 1.00 0
Other Expenses.............................................................. .33 .33 .33
------- ------- -------
Total Fund Operating Expenses........................................... 1.58% 2.33% 1.33%
------- ------- -------
------- ------- -------
</TABLE>
The nature of the services provided to, and the aggregate management fees
paid by, the Fund are described below under 'Management of the Fund.' The Fund
bears an annual Rule 12b-1 service fee of .25% of the value of the average daily
net assets of Class A shares and an annual Rule 12b-1 fee of 1.00% of the value
of the average daily net assets of Class B shares, consisting of a .25% service
fee and a .75% distribution fee. Long-term shareholders of Class B Shares may
pay more than the economic equivalent of the maximum front-end sales charge
currently permitted by the rules of the National Association of Securities
Dealers, Inc. governing investment company sales charges. See 'Distributor.'
The percentage of 'Other Expenses' in the table above is based on amounts
incurred during the Fund's most recent fiscal year; these expenses include fees
for shareholder services, custodial fees, legal and accounting fees, printing
costs and registration fees, the costs of regulatory compliance, a portion of
the costs associated with maintaining the Trust's legal existence and the costs
involved in communicating with the Fund's shareholders.
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical $1,000 investment in the Fund assuming (1) a 5% annual return,
(2) payment of the shareholder transaction expenses and annual Fund operating
expenses set forth in the table above and (3) complete redemption at the end of
the period.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------- -------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Class A................................ $73 $105 $139 $235
Class B................................ $24 $ 73 $125 $267
Class C................................ $29 $ 88 $149 $316
</TABLE>
The above example is intended to assist an investor in understanding
various costs and expenses that the investor would bear upon becoming a
shareholder of the Fund. The example should not be considered to be a
representation of past or future expenses. Actual expenses of the Fund may be
greater or less than those shown above. The assumed 5% annual return shown in
the example is hypothetical and should not be considered to be a representation
of past or future annual return; the actual return of the Fund may be greater or
less than the assumed return.
2
<PAGE>
- --------------------------------------------------------------------------------
HIGHLIGHTS
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------------
The Trust The Trust is an open-end management investment company. See 'General Information.'
- ---------------------------------------------------------------------------------------------------------------------------
The Fund The Fund, which is a series of the Trust, is a diversified fund that seeks long-term growth of
capital by investing principally in foreign equity securities. See 'Design of the Fund' and
'Investment Objective and Policies.'
- ---------------------------------------------------------------------------------------------------------------------------
Benefits of Mutual funds, such as the Fund, are flexible investment tools that are increasingly
Investing popular -- one of four American households now owns shares of at least one mutual fund -- for
in the very sound reasons. The Fund offers investors the following important benefits:
Fund International Investing
The Fund offers investors the opportunity to participate in a number of international equity
markets that, in the view of GE Investment Management Incorporated ('GEIM'), the Fund's
investment adviser, have in the recent past significantly outperformed the U.S. equity
markets. At the same time, the Fund provides investors the ability to expand their investment
portfolios beyond investments solely in U.S. securities and, as a result, to help to reduce
the volatility of those portfolios. The Fund also provides individual investors with a means
of dealing with certain difficulties generally involved in international investing such as
limited access to foreign markets and typically high transaction costs. See 'Design of the
Fund.'
Professional Management
By pooling the monies of many investors, the Fund enables shareholders to obtain the benefits
of full-time professional management and an array of investments that is typically beyond the
means of most investors. GEIM reviews the fundamental characteristics of far more securities
than can a typical individual investor and may employ portfolio management techniques that
frequently are not used by individual or many institutional investors. See 'Design of the
Fund -- Benefits of Investing through the Fund.'
Transaction Savings
By investing in the Fund, an investor is able to acquire ownership in a portfolio of
international securities without paying the higher transaction costs generally associated with
a series of small securities purchases. See 'Design of the Fund -- Benefits of Investing
through the Fund.'
Convenience
Fund shareholders are relieved of the administrative and recordkeeping burdens normally
associated with direct ownership of securities. See 'Design of the Fund -- Benefits of
Investing through the Fund.'
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Liquidity
The Fund's convenient purchase and redemption procedures provide shareholders with ready
access to their money and reduce the delays frequently involved in the direct purchase and
sale of securities. See 'Purchase of Shares' and 'Redemption of Shares.'
Choice Pricing System
Under the Choice Pricing System'sm', the Fund presently offers three classes of shares
('Classes') that provide different methods of purchasing shares and allow investment
flexibility and a wider range of investment choices. See 'Purchase of Shares.'
Exchange Privilege
Shareholders of the Fund may exchange all or a portion of their shares for shares of the same
Class or the sole outstanding Class of specified funds in the Kidder Family of Funds. See
'Exchange Privilege.'
Total Portfolio Approach
The funds in the Kidder Family of Funds are designed to be strategically combined as part of
a total portfolio approach. This investment philosophy acknowledges the interplay of a
shareholder's many different investing needs and preferences and recognizes that every
investment move a shareholder makes alters the balance of his or her overall financial
profile. The Fund may be used in conjunction with other funds in the Kidder Family of Funds to
build a portfolio that maximizes the potential of available assets while meeting many
different -- and changing -- financial needs.
- ---------------------------------------------------------------------------------------------------------------------------
Purchase of Kidder, Peabody & Co. Incorporated ('Kidder, Peabody'), a major full-line investment services
Shares firm serving the United States and foreign securities markets, acts as the distributor of the
Fund's shares. The Fund presently offers three Classes of shares that differ principally in
terms of the sales charges and rate of expenses to which they are subject and are designed to
provide an investor with the flexibility of selecting an investment best suited to the
investor's needs. See 'Purchase of Shares' and 'Distributor.'
Class A Shares
The public offering price of Class A shares is the net asset value per share next determined
after a purchase order is received, plus a maximum sales charge of 5.75% (6.08% of the net
amount invested). Investors purchasing $50,000 or more, certain employee benefit plans and
employees of Kidder, Peabody's affiliates are eligible for reduced sales charges. The Fund
pays Kidder, Peabody a service fee with respect to Class A shares at the annual rate of .25%
of the value of the average daily net assets attributable to this Class.
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Class B Shares
The public offering price of Class B Shares is the net asset value per share next determined
after a purchase order is received without imposition of a sales charge. The Fund pays Kidder,
Peabody a service fee at the annual rate of .25%, and a distribution fee at the annual rate of
.75%, of the average daily net assets attributable to this Class.
Class C Shares
The public offering price of Class C shares, which are available exclusively to employees of
Kidder, Peabody and their associated accounts, directors or trustees of any fund in the Kidder
Family of Funds, employee benefit plans of Kidder, Peabody and participants in the INSIGHT
Investment Advisory Program 'sm' ('INSIGHT'), is the net asset value per share next
determined after a purchase order is received without imposition of a sales charge. This Class
bears no service or distribution fees. Participation in INSIGHT is subject to payment of an
advisory fee at the maximum annual rate of 1.50% of assets held through INSIGHT, generally
charged quarterly in advance.
Investment Minimums
The minimum initial investment in the Fund is $1,000 and the minimum subsequent investment is
$50, except that for individual retirement accounts ('IRAs'), other tax qualified retirement
plans and accounts established pursuant to the Uniform Gifts to Minors Act, the minimum
initial investment is $250 and the minimum subsequent investment is $1.00. See 'Purchase of
Shares.'
- ---------------------------------------------------------------------------------------------------------------------------
Redemption of Shares of the Fund may be redeemed at the Fund's next determined net asset value per share.
Shares Redemptions are not subject to any contingent deferred sales charges or other charges. See
'Redemption of Shares.'
- ---------------------------------------------------------------------------------------------------------------------------
Management
Kidder Peabody Asset Management, Inc. ('KPAM'), a wholly-owned subsidiary of Kidder, Peabody,
serves as the Fund's manager and receives a fee, accrued daily and paid monthly, at the annual
rate of 1.00% of the Fund's average daily net assets. KPAM in turn employs GEIM, a wholly-owned
subsidiary of General Electric Company ('GE'), as the Fund's investment adviser, in which
capacity GEIM receives from KPAM a fee, accrued daily and paid monthly, at the annual rate of
.70% of the Fund's average daily net assets up to $200 million and .50% of the Fund's average
daily net assets equal to or in excess of $200 million. The rate of fee paid by the Fund for
investment management services, which is higher than the rate of management fees paid by most
other registered investment companies, reflects the need to devote additional time and incur
added expense in developing the specialized resources contemplated by international investing.
General Electric Capital Services, Inc., a wholly-owned subsidiary of GE, owns all the
outstanding stock of Kidder, Peabody Group Inc. ('Kidder Group'), the parent company of Kidder,
Peabody. See 'Management of the Fund' and 'Distributor.'
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Risk Factors No assurance can be given that the Fund will achieve its investment objective. Investing in an
and Special investment company that invests in securities of companies and governments of foreign
Considerations countries, particularly developing countries, involves risks that go beyond the usual risks
inherent in an investment company limiting its holdings to domestic investments; foreign
brokerage commissions, for example, are generally higher than those charged in the United
States, and foreign securities markets may be less liquid, more volatile and subject to less
governmental supervision than in the United States. A substantial portion of the Fund's assets
may be held in securities denominated in one or more foreign currencies, which will result in
the Fund's bearing the risk that those currencies may lose value in relation to the U.S.
dollar. In investing in non-publicly traded securities and in other investment companies, the
Fund is subject to a number of risks. The Fund may also be subject to certain risks in using
certain investment techniques and strategies such as entering into forward currency contracts,
trading futures contracts and options on futures contracts, entering into transactions
involving options on foreign currencies, stock indexes and securities, lending portfolio
securities, entering into repurchase agreements and purchasing securities on a when-issued or
delayed-delivery basis. See 'Investment Objective and Policies -- Risk Factors and Special
Considerations' at page 16 of this Prospectus.
</TABLE>
6
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Trust with respect to
the Fund by Deloitte & Touche LLP. Financial statements for the fiscal year
ended August 31, 1994 and the report of independent auditors are included in the
Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
-------------------------------------------------------------------------------------------
PERIOD PERIOD YEAR PERIOD YEAR
ENDED ENDED ENDED ENDED ENDED
AUGUST 31, YEAR ENDED AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
-------------------------------------------------------------------------------------------
1992`D' 1993 1994 1993`D'`D' 1994 1993`D'`D' 1994
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period..................... $12.00 $12.87 $14.55 $13.80 $14.52 $13.80 $14.56
-------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income/(loss).............. 0.09 0.03 0.01 (0.02) (0.07) 0.02 0.05
Net realized and unrealized
gains on investments....... 0.78 1.89 2.63 0.74 2.57 0.74 2.63
-------------------------------------------------------------------------------------------
Total from investment
operations................. 0.87 1.92 2.64 0.72 2.50 0.76 2.68
-------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM
Net investment income........ -- (0.08) -- -- -- -- --
Net realized capital gains... -- (0.16) (0.21) -- (0.21) -- (0.21)
-------------------------------------------------------------------------------------------
Total distributions.......... -- (0.24) (0.21) -- (0.21) -- (0.21)
-------------------------------------------------------------------------------------------
Net asset value, end of
period..................... $12.87 $14.55 $16.98 $14.52 $16.81 $14.56 $17.03
-------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------
Total return#................ 7.25% 15.24% 18.23% 5.22% 17.29% 5.51% 18.49%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in
thousands)................. $113,070 $156,451 $185,493 $10,807 $31,837 $19,098 $28,390
RATIOS TO AVERAGE NET ASSETS
Expenses, excluding
distribution and service
fees....................... 1.43%* 1.28% 1.33% 1.28%* 1.33% 1.28%* 1.33%
Expenses, including
distribution and service
fees....................... 1.68%* 1.53% 1.58% 2.28%* 2.33% 1.28%* 1.33%
Net investment income........ 0.93%* 0.22% 0.07% (0.53)%* (0.68)% 0.47%* 0.32%
PORTFOLIO TURNOVER RATE...... 30.32% 56.35% 50.73% 56.35% 50.73% 56.35% 50.73%
</TABLE>
`D' From November 14, 1991 (Commencement of Operations), to August 31, 1992.
`D'`D' From May 10, 1993 (Commencement of Class Operations) to August 31, 1993.
# Total return does not reflect the effects of a sales load, and is calculated
by giving effect to the reinvestment of dividends on the dividend payment date.
* Annualized
7
<PAGE>
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DESIGN OF THE FUND
The Fund is designed for investors seeking the opportunity to expand their
investment horizon beyond the United States through an actively managed
portfolio principally composed of foreign equity securities. At the same time,
the Fund provides individual investors a means of dealing with the difficulties
often associated with international investing.
ATTRACTIVE INVESTMENT OPPORTUNITIES
By having the flexibility of investing in the securities of issuers located
throughout the world, the Fund is designed to benefit from emerging investment
opportunities existing outside of the United States. A number of international
equity markets have significantly outperformed the U.S. equity markets over the
recent past, and GEIM believes that foreign markets could continue to offer
attractive investment opportunities in the future. In Western Europe, for
example, market deregulation, privatization and lowered barriers to
international investment and trade have already created new investment
opportunities, and economic and political developments in Eastern Europe could
open previously inaccessible markets and provide low-cost labor, which could in
turn further stimulate European economies.
Like many European countries, the newly industrialized countries of Asia
and the Pacific Rim may offer significant opportunities in the future. The
relaxation of trade barriers and the freer movement of capital are increasing
the flow of commerce and promoting economic independence within many countries
in Asia and the Pacific Rim, and the relatively low-cost work force available in
those countries is attracting foreign capital and fueling the growth of
manufacturing industries there.
POTENTIALLY REDUCED VOLATILITY
The Fund's investing in multiple securities markets located throughout the world
that often act independently of each other should help to reduce the volatility
of the Fund's portfolio.
BENEFITS OF INVESTING THROUGH THE FUND
Individual investors undertaking foreign investments often encounter
complications and extra costs. They have found it difficult, for example: to
make purchases and sales of securities; to deal with clearance and settlement
procedures that may differ markedly from those applicable in the United States;
to obtain current information about foreign companies; to hold securities in
safekeeping; and to convert the value of their investments from foreign
currencies into U.S. dollars. The Fund attempts to solve these problems for an
investor by providing the investor with an international investment portfolio
that is managed actively by experienced professionals.
8
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is long-term growth of capital, which the Fund
attempts to achieve by investing principally in foreign equity securities. No
assurance can be given that the Fund will be able to achieve its investment
objective, which may be changed only with the approval of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act
of 1940, as amended (the '1940 Act'), as the lesser of (1) 67% or more of the
shares present at a Fund meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy or (2) more
than 50% of the outstanding shares of the Fund.
The Fund's annual report for the fiscal year ended August 31, 1994 contains
information regarding relevant market conditions and investment strategies and
techniques pursued by KPAM during such fiscal year and is available to
shareholders without charge upon request made to the Fund at the address listed
on the front cover page of this Prospectus.
INTERNATIONAL INVESTING
The Fund invests in a portfolio of securities issued by companies located in
developed and developing countries throughout the world. Although the Fund is
subject to no prescribed limits on geographic asset distribution, under normal
circumstances, at least 65% of the Fund's assets will be invested in no fewer
than three different countries. In addition, under normal circumstances, at
least 80% of the Fund's total assets will at any one time be invested in
companies or governments of countries represented in the Morgan Stanley Capital
International World Index, a well-known index reflecting developed and
developing markets throughout the world. Although, under normal circumstances,
the Fund invests principally in foreign securities, under unstable market,
economic, political or currency conditions abroad, the Fund may restrict the
securities markets in which its assets are invested and invest all or a
significant portion of its assets in securities of U.S. or Canadian issuers.
TYPES OF PORTFOLIO INVESTMENTS
The Fund does, under normal conditions, invest at least 65% of its assets in
common stocks, preferred stocks, convertible bonds, convertible debentures,
convertible notes, convertible preferred stocks and common stock purchase
warrants or rights, issued by established foreign and domestic companies. The
equity securities in which the Fund invests will in most cases be traded on
foreign or domestic securities exchanges.
In selecting investments on behalf of the Fund, GEIM seeks companies that
are expected to grow faster than relevant markets and whose securities are
available at a price that does not fully reflect the potential growth of those
companies. GEIM typically focuses on companies that possess one or more of a
variety of characteristics, including strong earnings growth relative to price
to earnings ratio, low price to book value, strong cash flow, presence in an
industry experiencing strong growth and high quality management.
9
<PAGE>
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The Fund may invest up to 35% of its total assets in bonds, notes and
debentures of short-to medium-term maturity (that is, no longer than seven years
in maturity) issued by corporate or governmental entities when GEIM believes
that investing in those kinds of debt securities is consistent with the Fund's
investment objective of long-term growth of capital. Because the market value of
debt securities can be expected to vary inversely with changes in prevailing
interest rates, investing in debt securities may provide an opportunity for
capital appreciation when interest rates are expected to decline.
The Fund limits its purchases of debt securities to those that are
investment grade. Securities will be deemed to be of investment grade if they
are rated within the four highest categories established by Standard & Poor's
Corporation ('Standard & Poor's') or Moody's Investors Service, Inc. ('Moody's')
or, if unrated, deemed by GEIM to be of comparable quality. Securities rated in
the fourth highest category, that is, rated BBB by Standard & Poor's or Baa by
Moody's, are considered to possess speculative characteristics. In addition,
adverse changes in economic conditions are more likely to weaken the ability of
issuers of these debt securities to pay principal and interest.
Up to 5% of the value of the Fund's total assets may be invested in
restricted securities, which are securities that may be sold only in a privately
negotiated transaction or in a public offering with respect to which a
registration statement is in effect under the Securities Act of 1933, as
amended. In addition, up to 10% of the value of the Fund's net assets may be
invested in restricted securities, illiquid securities, which are securities
lacking readily available markets, and securities of companies (including
predecessors) that have been in continuous operation for fewer than three years.
From time to time, the Fund invests in the following types of illiquid
securities: (1) venture capital investments (that is, investments in new and
early-stage companies whose securities are not publicly traded), (2) joint
venture participations, (3) options purchased by the Fund over-the-counter and
the assets used by the Fund to collateralize options written by the Fund
over-the-counter, (4) repurchase agreements not maturing within seven days and
(5) time deposits with maturities in excess of seven days. The Fund typically
invests through a joint venture participation when direct investment by
foreigners in certain entities is restricted by local law or custom. If the Fund
participates in such a joint venture, it anticipates doing so through a
specially-created subsidiary or other special arrangement designed to protect
the Fund to the maximum extent feasible from potential liability.
The Fund may invest in investment funds that invest principally in
securities in which the Fund is authorized to invest. Under the 1940 Act, the
Fund may invest a maximum of 10% of its total assets in the securities of other
investment companies. In addition, under the 1940 Act, not more than 5% of the
Fund's total assets may be invested in the securities of any one investment
company, and the Fund may not own more than 3% of the securities of any
investment company.
The Fund may invest in securities of foreign issuers in the form of
American Depositary Receipts ('ADRs'), which are U.S. dollar-denominated
receipts typically issued by domestic banks or trust companies, and which
represent the deposit with those entities of securities of a foreign issuer.
ADRs are publicly traded on exchanges or over-the-counter in the United States
and are issued through 'sponsored' or 'unsponsored' arrangements. In a sponsored
ADR arrangement, the foreign issuer assumes the obligation to pay some or all of
the depositary's
10
<PAGE>
- --------------------------------------------------------------------------------
transaction fees, whereas under an unsponsored arrangement, the foreign issuer
assumes no obligations and the depositary's transaction fees are paid directly
by the ADR holders. The Fund may invest in ADRs through both sponsored and
unsponsored arrangements.
The Fund, in addition to investing in foreign securities in the form of
ADRs, may purchase European Depositary Receipts ('EDRs'), which are sometimes
referred to as Continental Depositary Receipts ('CDRs'). EDRs and CDRs are
generally issued by foreign banks and evidence ownership of either foreign or
domestic securities.
Under unstable market, economic, political or currency conditions abroad,
the Fund may assume a temporary defensive posture and without limitation hold
cash and invest in money market instruments. To the extent that it holds cash or
invests in money market instruments, the Fund will not achieve its investment
objective of long-term growth of capital.
The Fund may invest in the following types of money market instruments:
securities issued or guaranteed by the United States Government or one of its
agencies or instrumentalities ('Government Securities'); obligations issued or
guaranteed by foreign governments or by any of their political subdivisions,
authorities, agencies or instrumentalities that are rated AAA or AA by Standard
& Poor's, Aaa or Aa by Moody's, or that have received an equivalent rating from
another nationally recognized rating agency, or if unrated, deemed by GEIM to be
of equivalent quality; bank obligations (including certificates of deposit, time
deposits and bankers' acceptances of foreign or domestic banks, domestic savings
and loan associations and other banking institutions having total assets in
excess of $500 million); commercial paper rated no lower than A-1 by Standard &
Poor's or Prime-1 by Moody's, or the equivalent from another major rating
service, or, if unrated, of an issuer having an outstanding unsecured debt issue
then rated within the three highest rating categories; and repurchase agreements
meeting the conditions described below under 'Investment Techniques and
Strategies -- Repurchase Agreements.' At no time will the Fund's investments in
bank obligations, including time deposits, exceed 25% of the value of its
assets.
Government Securities in which the Fund may invest include: direct
obligations of the United States Treasury, and obligations issued or guaranteed
by the United States Government or one of its agencies or instrumentalities.
Among the Government Securities that may be held by the Fund are instruments
that are supported by the full faith and credit of the United States;
instruments that are supported by the right of the issuer to borrow from the
United States Treasury; and instruments that are supported solely by the credit
of the instrumentality.
The Fund is authorized to invest in obligations of foreign banks or foreign
branches of domestic banks that are traded in the United States or outside the
United States, but that are denominated in U.S. dollars. These obligations
entail risks that are different from those of investments in obligations of
domestic banks, including foreign economic and political developments outside
the United States, foreign governmental restrictions that may adversely affect
payment of principal and interest on the obligations, foreign exchange controls
and foreign withholding or other taxes on income. Foreign branches of domestic
banks are not necessarily subject to the same or similar regulatory requirements
that apply to foreign banks, such as mandatory reserve requirements, loan
limitations and accounting, auditing and financial
11
<PAGE>
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recordkeeping requirements. In addition, less information may be publicly
available about a foreign branch of a domestic bank than about a domestic bank.
INVESTMENT TECHNIQUES AND STRATEGIES
The Fund is authorized to engage in any one or more of the specialized
investment techniques and strategies described below:
FORWARD CURRENCY TRANSACTIONS. The Fund may hold currencies to meet
settlement requirements for foreign securities and may engage in currency
exchange transactions to protect against uncertainty in the level of future
exchange rates between a particular foreign currency and the U.S. dollar or
between foreign currencies in which the Fund's securities are or may be
denominated. Forward currency contracts are agreements to exchange one currency
for another at a future date. The date (which may be any agreed-upon fixed
number of days in the future), the amount of currency to be exchanged and the
price at which the exchange will take place will be negotiated and fixed for the
term of the contract at the time that the Fund enters into the contract. Forward
currency contracts (1) are traded in a market conducted directly between
currency traders (typically, commercial banks or other financial institutions)
and their customers, (2) generally have no deposit requirements and (3) are
typically consummated without payment of any commissions. The Fund, however, may
enter into forward currency contracts requiring deposits or involving the
payment of commissions. To assure that the Fund's forward currency contracts are
not used to achieve investment leverage, the Fund segregates cash or readily
marketable securities with its custodian, or a designated sub-custodian, in an
amount at all times equal to or exceeding the Fund's commitment with respect to
the contracts.
Upon maturity of a forward currency contract, the Fund may (1) pay for and
receive the underlying currency, (2) negotiate with the dealer to roll over the
contract into a new forward currency contract with a new future settlement date
or (3) negotiate with the dealer to terminate the forward contract by entering
into an offset with the currency trader providing for the Fund's paying or
receiving the difference between the exchange rate fixed in the contract and the
then current exchange rate. The Fund may also be able to negotiate such an
offset prior to maturity of the original forward contract. No assurance can be
given that new forward contracts or offsets will always be available to the
Fund.
In hedging a specific portfolio position, the Fund may enter into a forward
contract with respect to either the currency in which the position is
denominated or another currency deemed appropriate by GEIM. The amount the Fund
may invest in forward currency contracts is limited to the amount of the Fund's
aggregate investments in foreign currencies. See the Statement of Additional
Information for a further discussion of forward currency contracts.
OPTIONS ON FOREIGN CURRENCIES. The Fund may purchase and write put and call
options on foreign currencies for the purpose of hedging against declines in the
U.S. dollar value of foreign currency-denominated securities and against
increases in the U.S. dollar cost of securities to be acquired by the Fund. Like
the writing of other kinds of options, the writing of an option on a foreign
currency constitutes only a partial hedge, up to the amount of the premium
received; the Fund could also be required, with respect to any option it has
written, to purchase or sell foreign
12
<PAGE>
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currencies at disadvantageous exchange rates, thereby incurring losses. The
purchase of an option on a foreign currency may constitute an effective hedge
against fluctuations in exchange rates, although in the event of rate movements
adverse to the Fund's position, the Fund may forfeit the entire amount of the
premium plus related transaction costs. Options on foreign currencies to be
written or purchased by the Fund are traded on U.S. exchanges or over-the-
counter. The Fund limits the premiums paid on options on foreign currencies to
5% of the value of its total assets. See the Statement of Additional Information
for a further discussion of the use, risks and costs of options on foreign
currencies.
STOCK OPTIONS. To hedge against adverse market shifts, the Fund may
purchase put and call options on securities held in its portfolio. In addition,
the Fund may seek to increase its income in an amount designed to meet operating
expenses or may hedge a portion of its portfolio investments through writing
(that is, selling) 'covered' call options. A put option provides its purchaser
with the right to compel the writer of the option to purchase from the option
holder an underlying security at a specified price at any time during or at the
end of the option period. In contrast, a call option gives the purchaser the
right to buy the underlying security covered by the option from the writer of
the option at the stated exercise price. A covered call option contemplates
that, for so long as the Fund is obligated as the writer of the option, it will
own (1) the underlying securities subject to the option or (2) securities
convertible into, or exchangeable without the payment of any consideration for,
the securities subject to the option. The value of the underlying securities on
which covered call options will be written at any one time by the Fund will not
exceed 5% of the Fund's total assets.
The Fund may purchase options on securities that are listed on securities
exchanges or that are traded over-the-counter. As the holder of a put option,
the Fund has the right to sell the securities underlying the option and as the
holder of a call option, the Fund has the right to purchase the securities
underlying the option, in each case at the option's exercise price at any time
prior to, or on, the option's expiration date. The Fund may choose to exercise
the options it holds, permit them to expire or terminate them prior to their
expiration by entering into closing sale transactions. In entering into a
closing sale transaction, the Fund would sell an option of the same series as
the one it has purchased.
STOCK INDEX OPTIONS. In seeking to hedge all or a portion of its
investments, the Fund may purchase and write put and call options on stock
indexes listed on foreign or domestic securities exchanges, which indexes
include securities held in the Fund's portfolio. The Fund may also use stock
index options as a means of participating in a foreign equity market without
making direct purchases of equity securities.
A stock index measures the movement of a certain group of stocks by
assigning relative values to the common stocks included in the index. Options on
stock indexes are generally similar to options on specific securities. Unlike
those on securities, however, options on stock indexes do not involve the
delivery of an underlying security; the option in the case of an option on a
stock index represents the holder's right to obtain from the writer in cash a
fixed multiple of the amount by which the exercise price exceeds (in the case of
a put) or is less than (in the case of a call) the closing value of the
underlying stock index on the exercise date.
When the Fund writes an option on a stock index, it will establish a
segregated account with its custodian, or a designated sub-custodian, in which
the Fund will deposit cash or cash
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equivalents or a combination of both in an amount equal to the market value of
the option, and will maintain the account while the option is open. If the Fund
has written a stock index option, it may terminate its obligation by effecting a
closing purchase transaction, which is accomplished by purchasing an option of
the same series as the option previously written.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may trade
stock index, currency and interest rate futures contracts, and options on those
contracts, for a variety of risk reduction purposes such as hedging a portion of
the Fund's portfolio, providing an efficient means of regulating the Fund's
exposure to certain equity markets or hedging against changes in prevailing
levels of currency exchange rates. A stock index futures contract is an
agreement to take or make delivery of an amount of cash equal to the difference
between the value of the index at the beginning and at the end of the contract
period. A currency futures contract is a standardized contract for the future
delivery of a specified amount of currency at a future date at a price set at
the time of the contract, and an interest rate futures contract is a similar
contract for the future delivery of a specific debt security. An option on a
futures contract, in contrast to a direct investment in the contract, gives the
purchaser the right, in return for the premium paid, to assume a position in the
underlying futures contract at a specified exercise price at any time on or
before the expiration date of the option.
The Fund may assume both 'long' and 'short' positions with respect to
futures contracts. A long position involves entering into a futures contract to
buy a commodity, whereas a short position involves entering into a futures
contract to sell a commodity. In entering into futures contracts, the Fund is
required to make initial 'margin' payments, which are payments in the nature of
performance bonds or good faith deposits, and to make 'variation' margin
payments from time to time as the values of the futures contracts fluctuate.
The Fund does not (1) trade any futures contracts or options on futures
contracts if, immediately after the transactions, the aggregate of margin
deposits on all of the Fund's outstanding futures contracts and premiums paid on
its outstanding options on futures contracts would exceed 5% of the market value
of the total assets of the Fund after taking into account unrealized profits and
losses on any futures contracts or options on futures contracts or (2) enter
into any futures contracts or options on futures contracts if the aggregate of
the market value of the Fund's outstanding futures contracts and market value of
the currencies and futures contracts subject to outstanding options written by
the Fund would exceed 50% of the market value of the total assets of the Fund.
Each short position in a futures or options contract entered into by the Fund is
secured by the Fund's ownership of underlying securities. The Fund does not use
leverage when it enters into long futures or options contracts; the Fund places
in a segregated account with its custodian, or designated sub-custodian, with
respect to each of its long positions, cash, short-term Government Securities or
other U.S. dollar-denominated, high-grade, short-term money market instruments,
having a value equal to the underlying commodity value of the contract.
LENDING PORTFOLIO SECURITIES. To generate income for the purpose of helping
to meet its operating expenses, the Fund may lend securities to well-known and
recognized U.S. and foreign brokers, dealers and banks. These loans, if and when
made, may not exceed 30% of the Fund's assets taken at market value. The Fund's
loans of securities will be collateralized by cash, letters of credit or
Government Securities. The cash or instruments collateralizing the Fund's loans
of
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securities are maintained at all times in a segregated account with the Fund's
custodian, or with a designated sub-custodian, in an amount at least equal to
the current market value of the loaned securities.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase agreement
transactions with respect to instruments in which the Fund is authorized to
invest. Although the amount of the Fund's assets that may be invested in
repurchase agreements terminable in less than seven days is not limited,
repurchase agreements maturing in more than seven days, together with other
illiquid securities, will not exceed 10% of the Fund's net assets. The Fund may
engage in repurchase agreement transactions with certain member banks of the
Federal Reserve System and with certain dealers listed on the Federal Reserve
Bank of New York's list of reporting dealers. Under the terms of a typical
repurchase agreement, the Fund would acquire an underlying debt obligation for a
relatively short period (usually not more than seven days) subject to an
obligation of the seller to repurchase, and the Fund to resell, the obligation
at an agreed-upon price and time, thereby determining the yield during the
Fund's holding period. This arrangement results in a fixed rate of return that
is not subject to market fluctuations during the Fund's holding period. The
value of the securities underlying a repurchase agreement of the Fund is
monitored on an ongoing basis by GEIM or KPAM to ensure that the value is at
least equal at all times to the total amount of the repurchase obligation,
including interest. GEIM or KPAM also monitors, on an ongoing basis to evaluate
potential risks, the creditworthiness of those banks and dealers with which the
Fund enters into repurchase agreements.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. To secure prices deemed
advantageous at a particular time, the Fund may purchase securities on a
when-issued or delayed-delivery basis, in which case delivery of the securities
occurs beyond the normal settlement period; payment for or delivery of the
securities would be made prior to the reciprocal delivery or payment by the
other party to the transaction. The Fund enters into when-issued or
delayed-delivery transactions for the purpose of acquiring securities and not
for the purpose of leverage. When-issued securities purchased by the Fund may
include securities purchased on a 'when, as and if issued' basis under which the
issuance of the securities depends on the occurrence of a subsequent event, such
as approval of a merger, corporate reorganization or debt restructuring. The
Fund will establish with its custodian, or with a designated sub-custodian, a
segregated account consisting of cash, Government Securities or other liquid
high-grade debt obligations in an amount equal to the amount of its when-issued
or delayed-delivery purchase commitments.
SHORT SALES AGAINST THE BOX. The Fund may sell securities 'short against
the box.' Whereas a short sale is the sale of a security the Fund does not own,
a short sale is 'against the box' if at all times during which the short
position is open, the Fund owns at least an equal amount of the securities or
securities convertible into, or exchangeable without further consideration for,
securities of the same issue as the securities sold short. Short sales against
the box are typically used by sophisticated investors to defer recognition of
capital gains or losses.
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INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental investment restrictions with respect
to the Fund that may not be changed without approval of a majority of the Fund's
outstanding voting securities (as defined in the 1940 Act). Included among those
fundamental restrictions are the following:
1. The Fund will not purchase securities (other than Government
Securities) of any issuer if, as a result of the purchase, more than 5% of
the value of the Fund's total assets would be invested in the securities of
the issuer, except that up to 25% of the value of the Fund's total assets
may be invested without regard to this 5% limitation.
2. The Fund will not purchase more than 10% of the voting securities
of any one issuer, or more than 10% of the securities of any class of any
one issuer, except that this limitation is not applicable to the Fund's
investments in Government Securities, and up to 25% of the Fund's assets
may be invested without regard to these 10% limitations.
3. The Fund will not borrow money, except that the Fund may borrow
from banks for temporary or emergency (not leveraging) purposes, including
the meeting of redemption requests and cash payments of dividends and
distributions that might otherwise require the untimely disposition of
securities, in an amount not to exceed 20% of the value of the Fund's total
assets (including the amount borrowed) valued at market less liabilities
(not including the amount borrowed) at the time the borrowing is made.
Whenever borrowings exceed 5% of the value of the total assets of the Fund,
the Fund will not make any additional investments.
4. The Fund will not lend money to other persons, except through
purchasing debt obligations, lending portfolio securities in an amount not
to exceed 30% of the Fund's assets taken at value and entering into
repurchase agreements.
5. The Fund will invest no more than 25% of the value of its total
assets in securities of issuers in any one industry. For purposes of this
restriction, the term industry will be deemed to include (a) the government
of any country other than the United States, but not the United States
Government and (b) any supranational organization.
Certain other investment restrictions adopted by the Trust with respect to
the Fund are described in the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investing in the Fund involves risks and special considerations, such as those
described below:
INVESTMENT IN FOREIGN SECURITIES. Investing in securities issued by foreign
companies and governments involves considerations and potential risks not
typically associated with investing in obligations issued by the United States
Government and domestic corporations. Less information may be available about
foreign companies than about domestic companies, and foreign companies generally
are not subject to uniform accounting, auditing and financial reporting
standards or to other regulatory practices and requirements comparable to those
applicable to domestic companies. The values of foreign investments are affected
by changes in currency rates or exchange control regulations, restrictions or
prohibitions on the repatriation of
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foreign currencies, application of foreign tax laws, including withholding
taxes, changes in governmental administration or economic or monetary policy (in
the United States or abroad) or changed circumstances in dealings between
nations. Costs are also incurred in connection with conversions between various
currencies. In addition, foreign brokerage commissions are generally higher than
those charged in the United States, and foreign securities markets may be less
liquid, more volatile and subject to less governmental supervision than in the
United States. Investments in foreign countries could be affected by other
factors not present in the United States, including expropriation, confiscatory
taxation, lack of uniform accounting and auditing standards and potential
difficulties in enforcing contractual obligations, and could be subject to
extended clearance and settlement periods.
CURRENCY EXCHANGE RATES. The Fund's share value may change significantly
when the currencies, other than the U.S. dollar, in which the Fund's portfolio
investments are denominated strengthen or weaken against the U.S. dollar.
Currency exchange rates generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries as seen from an international perspective. Currency exchange
rates can also be affected unpredictably by: the intervention of the U.S.
government, foreign governments or central banks, the imposition of currency
controls or other political developments in the United States or abroad.
INVESTING IN DEVELOPING COUNTRIES. Investing in securities issued by
companies located in developing countries involves exposure to economic
structures that are generally less diverse and mature than, and to political
systems that can be expected to have less stability than, those of developed
countries. Other characteristics of developing countries that may affect
investment in their markets include certain national policies that may restrict
investment by foreigners in issuers or industries deemed sensitive to relevant
national interests and the absence of developed legal structures governing
private and foreign investments and private property. The typically small size
of the markets for securities issued by companies located in developing
countries and the possibility of a low or nonexistent volume of trading in those
securities may also result in a lack of liquidity and in price volatility of
those securities.
NON-PUBLICLY TRADED SECURITIES. Non-publicly traded securities may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales could
be less than those originally paid by the Fund. In addition, companies whose
securities are not publicly traded are not subject to the disclosure and other
investor protection requirements that may be applicable if their securities were
publicly traded.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. To the extent the Fund invests
in other investment companies, the Fund's shareholders incur certain duplicative
fees and expenses, including investment advisory fees.
FORWARD CURRENCY CONTRACTS. In entering into foreign currency contracts,
the Fund is subject to a number of risks and special considerations. The market
for forward currency contracts, for example, may be limited with respect to
certain currencies. The existence of a limited market may in turn restrict the
Fund's ability to hedge against the risk of devaluation of currencies in which
the Fund holds a substantial quantity of securities. The successful use of
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forward currency contracts as a hedging technique draws upon GEIM's special
skills and experience with respect to those instruments and usually depends on
GEIM's ability to forecast interest rate and currency exchange rate movements
correctly. Should interest or exchange rates move in an unexpected manner, the
Fund may not achieve the anticipated benefits of forward currency contracts or
may realize losses and thus be in a less advantageous position than if those
strategies had not been used. Many forward currency contracts are subject to no
daily price fluctuation limits so that adverse market movements could continue
with respect to those contracts to an unlimited extent over a period of time. In
addition, the correlation between movements in the prices of those contracts and
movements in the prices of the currencies hedged or used for cover will not be
perfect.
The Fund's ability to dispose of its positions in forward currency
contracts depends on the availability of active markets in those instruments,
and GEIM cannot now predict the amount of trading interest that may exist in the
future in forward currency contracts. Forward currency contracts may be closed
out only by the parties entering into an offsetting contract. As a result, no
assurance can be given that the Fund will be able to utilize these contracts
effectively for the purposes described above.
STOCK OPTIONS. The Fund receives a premium when it writes call options,
which increases the Fund's return on the underlying security in the event the
option expires unexercised or is closed out at a profit. By writing a call, the
Fund limits its opportunity to profit from an increase in the market value of
the underlying security above the exercise price of the option for as long as
the Fund's obligation as writer of the option continues. Thus, in some periods,
the Fund will receive less total return and in other periods greater total
return from its hedged positions than it would have received from its underlying
securities if unhedged.
In purchasing a put option, the Fund seeks to benefit from a decline in the
market price of the underlying security, whereas in purchasing a call option,
the Fund seeks to benefit from an increase in the market price of the underlying
security. If an option purchased is not sold or exercised when it has remaining
value, or if the market price of the underlying security remains equal to or
greater than the exercise price, in the case of a put, or remains equal to or
below the exercise price, in the case of a call, during the life of the option,
the Fund will lose its investment in the option. For the purchase of an option
to be profitable, the market price of the underlying security must decline
sufficiently below the exercise price, in the case of a put, and must increase
sufficiently above the exercise price, in the case of a call, to cover the
premium and transaction costs. Because option premiums paid by the Fund are
small in relation to the market value of the investments underlying the options,
buying options can result in large amounts of leverage. The leverage offered by
trading in options could cause the Fund's net asset value to be subject to more
frequent and wider fluctuations than would be the case if the Fund did not
invest in options.
STOCK INDEX OPTIONS. Stock index options are subject to position and
exercise limits and other regulations imposed by the exchange on which they are
traded. If the Fund writes a stock index option, it may terminate its obligation
by effecting a closing purchase transaction, which is accomplished by purchasing
an option of the same series as the option previously written. The ability of
the Fund to engage in closing purchase transactions with respect to stock index
options depends on the existence of a liquid secondary market. Although the Fund
generally purchases
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or writes stock index options only if a liquid secondary market for the options
purchased or sold appears to exist, no such secondary market may exist, or the
market may cease to exist at some future date, for some options. No assurance
can be given that a closing purchase transaction can be effected when the Fund
desires to engage in such a transaction.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. In entering into
transactions involving futures contracts and options on those contracts, the
Fund is subject to a number of risks and special considerations. As suggested
above, many of the securities that may be held by the Fund are denominated in
currencies for which no, or only a highly illiquid, futures or option market
exists, which in turn restricts the Fund's ability to hedge against the risk of
devaluation of currencies in which the Fund holds a substantial quantity of
securities. The successful use of futures contracts and options on those
contracts draws upon GEIM's special skills and experience with respect to those
instruments and usually depends on GEIM's ability to forecast stock market,
currency exchange rate or interest rate movements correctly. Should stock
markets, exchange rates or interest rates move in an unexpected manner, the Fund
may not achieve the anticipated benefits of futures contracts or options on
those contracts or may realize losses and thus be in a less advantageous
position than if those strategies had not been used. Certain futures contracts
and options on futures contracts are subject to no daily price fluctuation
limits so that adverse market movements could continue with respect to those
instruments to an unlimited extent over a period of time. In addition, the
correlation between movements in the prices of those instruments and movements
in the price of the securities and currencies hedged or used for cover are not
perfect.
The Fund's ability to dispose of its positions in futures contracts and
options on those contracts depends on the availability of active markets in
those instruments. Markets in options and futures with respect to a number of
securities and currencies are relatively new and still developing. GEIM cannot
now predict the amount of trading interest that may exist in the future in
various types of futures contracts and options. Futures and options may be
closed out only on the exchange on which the contract was entered (or a linked
exchange) so that no assurance can be given that the Fund will be able to
utilize these instruments effectively for the purposes described above. In
addition, although the Trust anticipates that the Fund's options and futures
transactions will not prevent the Fund from qualifying as a regulated investment
company for federal income tax purposes, the Fund's ability to engage in options
and futures transactions may be limited by this tax consideration. See
'Dividends, Distributions and Taxes -- Taxes.' In writing options, the Fund is
subject to the risk of loss resulting from the difference between the premium
received for the option and the price of the futures contract underlying the
option that the Fund must purchase or deliver upon exercise of the option.
LENDING PORTFOLIO SECURITIES. In lending securities to U.S. and foreign
brokers, dealers and banks, the Fund is subject to risks, which, like those
associated with other extensions of credit, include possible loss of rights in
the collateral should the borrower fail financially.
REPURCHASE AGREEMENTS. In entering into a repurchase agreement, the Fund
bears a risk of loss in the event that the other party to the transaction
defaults on its obligations and the Fund is delayed or prevented from exercising
its rights to dispose of the underlying securities, including the risk of a
possible decline in the value of the underlying securities during the period in
which
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the Fund seeks to assert its rights to them, the risk of incurring expenses
associated with asserting those rights and the risk of losing all or a part of
the income from the agreement.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. Securities purchased on a
when-issued or delayed-delivery basis may expose the Fund to risk because the
securities may experience fluctuations in value prior to their actual delivery.
The Fund will not accrue income with respect to a when-issued or
delayed-delivery security prior to its stated delivery date. Purchasing
securities on a when-issued or delayed-delivery basis can involve the additional
risk that the yield available in the market when the delivery takes place may be
higher than that obtained in the transaction itself.
PORTFOLIO TRANSACTIONS AND TURNOVER
The Trustees have determined that, to the extent consistent with applicable
provisions of the 1940 Act and rules and exemptions adopted by the SEC under the
1940 Act, transactions for the Fund may be executed through Kidder, Peabody if,
in the judgment of GEIM, the use of Kidder, Peabody is likely to result in price
and execution at least as favorable to the Fund as those obtainable through
other qualified broker-dealers, and if, in the transaction, Kidder, Peabody
charges the Fund a fair and reasonable rate consistent with that charged to
comparable unaffiliated customers in similar transactions.
For the fiscal years ended August 31, 1994 and August 31, 1993, the Fund's
portfolio turnover rates were 50.7% and 56.4%, respectively. An annual turnover
rate of 100% would occur if all of the securities held by the Fund are replaced
once during a period of one year.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Trust's Board of Trustees, and the day-to-day operations of the Fund are
conducted through or under the direction of officers of the Trust. The Statement
of Additional Information contains general background information regarding each
Trustee and officer of the Trust.
MANAGER
KPAM, located at 60 Broad Street, New York, New York 10004-2350, serves as the
Fund's manager. A wholly-owned subsidiary of Kidder, Peabody, and a registered
investment adviser under the Investment Advisers Act of 1940, as amended (the
'Advisers Act'), KPAM currently provides investment management, investment
advisory and administrative services to a wide variety of individual and
institutional clients. The Kidder, Peabody Asset Management Group of Companies
(of which KPAM is the primary entity) provides advisory and consulting services
to more than $18 billion in assets as of September 30, 1994. General Electric
Capital Services, Inc., a wholly-owned subsidiary of GE, owns all of the
outstanding stock of Kidder Group, the parent company of Kidder, Peabody.
Under an agreement dated October 17, 1994, GE and Kidder Group agreed to
sell to PaineWebber Group Inc. certain assets of Kidder Group and its
subsidiaries, including Kidder,
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Peabody and KPAM. The consummation of this transaction, which is subject to a
number of conditions and cannot be assured, will result in the deemed assignment
and automatic termination of the agreements pursuant to which Kidder, Peabody
serves as the principal underwriter of the Fund's shares and KPAM serves as the
Fund's manager. Institution of new arrangements with Kidder, Peabody's and
KPAM's successors following the consummation of the transaction, anticipated to
occur in the first quarter of 1995, have been approved by the Trustees and
separately by a majority of the Trustees who are not 'interested persons' of the
Fund within the meaning of the 1940 Act. In addition, the Fund's new management
arrangements will require approval by the holders of a 'majority of the
outstanding voting securities' of the Fund, as defined in the 1940 Act. No
assurance can be given that the required shareholder approvals will be obtained
and, if they are not, the Trustees will take such action as they determine to be
appropriate and in the best interests of the Fund and its shareholders.
As the Fund's manager, KPAM, subject to the supervision and direction of
the Trustees, is generally responsible for furnishing, or causing to be
furnished to the Fund, investment advisory and management services. Included
among the specific services provided by KPAM as manager are: the selection and
compensation of an investment adviser to the Fund; the review of all purchases
and sales of portfolio instruments made by the Fund to assess compliance with
its stated investment objective and policies; the monitoring of the selection of
brokers and dealers effecting transactions on behalf of the Fund; the
maintenance and furnishing of all required records or reports pertaining to the
Fund to the extent those records or reports are not maintained or furnished by
the Fund's transfer agent, custodian or other agents employed by the Fund; the
providing of general administrative services to the Fund not otherwise provided
by the Fund's transfer agent, custodian or other agents employed by the Fund;
and the payment of reasonable salaries and expenses of those of the Fund's
officers and employees, and the fees and expenses of those Trustees, who are
directors, officers or employees of KPAM. From time to time, KPAM in its sole
discretion may waive all or a portion of its fee and/or reimburse all or a
portion of the Fund's operating expenses.
For the fiscal year ended August 31, 1994, the Trust paid KPAM a fee for
services provided to the Fund that is accrued daily and paid monthly at the
annual rate of 1.00% of the Fund's average daily net assets. The rate of fee
paid to KPAM, which is higher than the rate of management fees paid by most
other investment companies registered under the 1940 Act, reflects the need to
devote additional time and incur added expense in developing the specialized
resources contemplated by international investing. For the fiscal year ended
August 31, 1994, Class A's, Class B's and Class C's total expenses represented
1.58%, 2.33% and 1.33% of their average daily net assets, respectively.
INVESTMENT ADVISER
Under the terms of an investment advisory agreement among KPAM, the Trust and
GEIM, KPAM employs GEIM as the Fund's investment adviser. GEIM, located at 3003
Summer Street, P.O. Box 7900, Stamford, Connecticut 06904, is a wholly-owned
subsidiary of GE and a registered investment adviser under the Advisers Act.
GEIM, which was formed under the laws of Delaware in 1988, currently provides
investment management services to various institutional accounts with total
assets, as of September 30, 1994, in excess of $8.0 billion.
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GEIM also serves as the investment adviser to Kidder, Peabody Intermediate
Fixed Income Fund, another series of the Trust, and Kidder, Peabody Municipal
Bond Fund, a series of Kidder, Peabody Investment Trust II. GEIM also serves as
investment adviser and administrator of GE Funds, an open-end management
investment company. In addition, GEIM's principal officers and directors serve
in similar capacities with respect to General Electric Investment Corporation
('GEIC'), which like GEIM is a wholly-owned subsidiary of GE, and which
currently acts as the investment adviser of the Elfun group of funds, including
the Elfun Global Fund, an open-end management investment company registered
under the 1940 Act, that has an investment objective and policies substantially
similar to those of the Fund. Investment in the Elfun Global Fund is generally
limited to regular and senior members of the Elfun Society, whose regular
members are selected from active employees of GE and/or its majority-owned
subsidiaries, and whose senior members are former members who have retired from
those companies.
Ralph R. Layman serves as Chief Investment Officer of the Fund and in that
capacity is the individual primarily responsible for the management of the
Fund's assets. Mr. Layman is an Executive Vice President of GEIM and GEIC, an
affiliate of GEIM and a registered investment adviser. Prior to July 1991, Mr.
Layman served as Executive Vice President, partner and portfolio manager of
Northern Capital Management Co.
As the Fund's investment adviser, GEIM, subject to the supervision and
direction of the Trustees, and subject to review by KPAM, manages the Fund's
portfolio in accordance with the investment objective and stated policies of the
Fund, makes investment decisions for the Fund and places purchase and sale
orders for the Fund's portfolio transactions. GEIM also pays the salaries of all
officers and employees who are employed by both it and the Trust, provides the
Fund with investment officers who are authorized by the Board of Trustees to
execute purchases and sales of securities on behalf of the Fund and employs a
professional staff of portfolio managers who draw upon a variety of sources for
research information for the Fund.
For the fiscal year ended August 31, 1994, KPAM paid GEIM a fee for
services provided by GEIM to the Fund that was accrued daily and paid monthly at
the annual rate of .70% of the value of the Fund's average daily net assets. In
February 1994, the shareholders of the Fund approved a new Investment Advisory
Agreement relating to the Fund under which the fee that KPAM pays to GEIM was
changed to .70% annually of the Fund's average daily net assets up to $200
million and .50% annually of the Fund's average daily net assets equal to or in
excess of $200 million. This fee is accrued daily and paid monthly. The Fund
pays no direct fee to GEIM. From time to time, GEIM in its sole discretion may
waive all or a portion of its fee.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by GEIM, investments of the type the Fund
may make may also be made by those other accounts. When the Fund and one or more
other accounts managed by GEIM are prepared to invest in, or desire to dispose
of, the same security, available investments or opportunities for sales are
allocated in a manner believed by GEIM to be equitable to each. In some cases,
this procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund.
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EXPENSES
Each Class bears its own expenses, which generally include all costs not
specifically borne by KPAM and GEIM. Included among a Class' expenses are costs
incurred in connection with the Class' and Fund's organization; management and
investment advisory fees; any distribution and/or servicing fees; fees for
necessary professional and brokerage services; fees for any pricing service used
in connection with the valuation of shares; the costs of regulatory compliance;
and a portion of the costs associated with maintaining the Trust's legal
existence and corresponding with shareholders of the Fund. The Trust's agreement
with KPAM provides that KPAM will reduce its fees to the Fund to the extent
required by applicable state laws for certain expenses that are described in the
Statement of Additional Information.
PURCHASE OF SHARES
GENERAL INFORMATION
Shares of the Fund must be purchased and maintained through a Kidder, Peabody
brokerage account (an 'Account'), so that an investor who wishes to purchase
shares but who has no existing Account must establish one. Kidder, Peabody
charges no maintenance fee in connection with an Account through which an
investor purchases or holds shares of the Fund.
Purchases are effected at the public offering price of the Fund's shares
next determined after a purchase order is received. Payment for shares purchased
by an investor is due at Kidder, Peabody on the 'settlement date,' which is
generally the fifth business day after the order for purchase is placed, unless
the investor has 'good funds' available in an existing Account that can be
applied to the purchase. 'Good funds' as used in this Prospectus means cash,
Federal funds or certified checks drawn on a U.S. bank. The Trust reserves the
right to reject any purchase order for shares of the Fund and to suspend the
offering for any period of time.
The minimum initial investment in the Fund is $1,000 and the minimum
subsequent investment is $50, except that for IRAs, other tax qualified
retirement plans and accounts established pursuant to the Uniform Gifts to
Minors Act, the minimum initial investment is $250 and the minimum subsequent
investment is $1.00. The Trust reserves the right to vary the minimum initial or
subsequent investment amounts.
Purchase orders for shares of the Fund that are received prior to the close
of regular trading on the New York Stock Exchange (the 'NYSE') on a particular
day (currently 4:00 p.m., New York time) are priced according to the net asset
values determined on that day. Purchase orders received after the close of
regular trading on the NYSE are priced as of the time each Class' net asset
value per share is next determined. See 'Determination of Net Asset Value' below
for a description of the times at which each Class' net asset value per share is
determined.
The Trust offers Fund shareholders an Automatic Investment Plan under which
a shareholder may authorize Kidder, Peabody to place monthly, twice monthly or
quarterly, as selected by the shareholder, a purchase order for Fund shares in
an amount not less than $100.
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The purchase price is paid automatically from a designated bank account of the
shareholder. The Fund reserves the right to terminate or change the provisions
of the Automatic Investment Plan.
Under the Choice Pricing System, the Fund presently offers three methods of
purchasing shares, enabling investors to choose the Class that best suits their
needs, given the amount of purchase and intended length of investment. Kidder,
Peabody Investment Executives and other persons remunerated on the basis of
sales of shares may receive different levels of compensation for selling one
Class of shares over another. When purchasing shares of the Fund, investors must
specify whether the purchase is for Class A shares, Class B shares or Class C
shares, as described below.
CLASS A SHARES
The public offering price of Class A shares is the net asset value per Class A
share next determined after a purchase order is received plus a sales charge, if
applicable. Class A shares are subject to a service fee at the annual rate of
.25% of the value of the Fund's average daily net assets attributable to this
Class. See 'Distributor.' The sales charge payable upon the purchase of Class A
shares will vary with the amount of purchase as set forth below:
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
-------------------------------------------
AMOUNT OF PURCHASE AS PERCENTAGE AS PERCENTAGE
AT OFFERING PRICE OF OFFERING PRICE OF NET AMOUNT INVESTED
---------------------- ----------------- ----------------------
<S> <C> <C>
Less than $50,000............................................. 5.75% 6.08%
$50,000 but less than $100,000................................ 4.50% 4.75%
$100,000 but less than $250,000............................... 3.50% 3.67%
$250,000 but less than $500,000............................... 2.50% 2.58%
$500,000 but less than $1,000,000............................. 2.00% 2.02%
$1,000,000 or more............................................ 0% 0%
</TABLE>
INSTANCES OF A REDUCED OR WAIVED SALES CHARGE. Class A shares are sold
subject to a reduction of 20% in the sales charges shown in the table above to:
(1) employees of GE and other affiliates of Kidder, Peabody, (2) IRAs for those
employees, (3) other employee benefit plans for those employees and (4) the
spouses and minor children of those employees when orders on their behalf are
placed by the employees.
Class A shares are sold without a sales charge to tax exempt organizations
enumerated in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended
(the 'Code'), and retirement plans qualified under Section 403(b)(7) of the
Code, each having 1,000 or more participants ('Qualified Plans'). Employees
eligible to participate in Qualified Plans sponsored by the same organization or
its affiliates may be aggregated in determining the sales charge applicable to
an investment made by a Qualified Plan.
No sales charge is imposed on Class A shares purchased through reinvestment
of dividends or capital gains distributions. Clients of a newly-employed Kidder,
Peabody Investment Executive are eligible to purchase Class A shares subject to
no sales charge for a period of 90 days after the Investment Executive first
becomes employed by Kidder, Peabody, so long as the following conditions are
met: (1) the purchase is made within 30 days of, and with the proceeds
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from, a redemption of shares of a mutual fund sponsored by the Investment
Executive's previous employer; (2) the Investment Executive served as the
client's broker on the purchase of the shares of the mutual fund; and (3) the
shares of the mutual fund sold were subject to a sales charge. Clients of a
Kidder, Peabody Investment Executive are also eligible to purchase Class A
shares subject to no sales charge so long as the following conditions are met:
(1) the purchase is made within 30 days of, and with the proceeds from, a
redemption of shares of a mutual fund that were purchased through Kidder,
Peabody acting as a selected dealer for the shares pursuant to an agreement
between Kidder, Peabody and the mutual fund's principal underwriter; (2) the
fund invested primarily in global or international equity securities; (3) the
Investment Executive served as the client's broker on the purchase of the shares
of the mutual fund sold; and (4) the shares of the mutual fund sold were subject
to a sales charge. Class A shares may also be offered without a sales charge to
any investment company, other than a company for which Kidder, Peabody serves as
distributor, in connection with the combination of the company with the Fund by
merger, acquisition of assets or otherwise.
VOLUME DISCOUNTS. Any investor meeting certain requirements, including the
signing of a Letter of Intent (a 'Letter'), is eligible to obtain a reduced
sales charge for purchasing Fund shares by combining purchases made over a
13-month period of Class A shares and shares of other mutual funds in the Kidder
Family of Funds with respect to which the investor previously paid, or is
subject to the payment of, a sales charge (collectively referred to as 'Eligible
Shares'). Purchases of Fund shares by eligible investors must aggregate at least
$50,000 and must include a minimum initial investment of at least $5,000 and
minimum subsequent investments of at least $100. For purposes of the procedure
contemplated by a Letter, Eligible Shares owned by an investor will be valued at
their original cost in determining the size of a purchase and the applicable
sales charge.
An investor's purchase of Eligible Shares not originally made pursuant to a
Letter may be included under a Letter subsequently executed within 90 days of
the purchase, so long as the investor informs Kidder, Peabody in writing within
the 90-day period of the investor's desired use of a Letter. The original cost
of an investor's Eligible Shares not purchased pursuant to a Letter may be
included under a Letter subsequently executed within 90 days of the purchase, so
long as the investor informs Kidder, Peabody in writing within the 90-day period
of the investor's desire for that treatment to be applicable. The original cost
of Eligible Shares not purchased pursuant to a Letter may be included as a
credit toward the fulfillment of the terms of the Letter; the reduced sales
charge contemplated by the Letter, however, will apply only to the purchases of
Eligible Shares made after the execution of the Letter, which purchases, as
noted above, must aggregate at least $50,000.
A Letter must provide for 5% of the dollar amount of the intended
investment to be held in escrow by Investors Fiduciary Trust Company ('IFTC') in
the form of Eligible Shares in an account registered in the name of the
shareholder. If the total amount of any Eligible Shares owned at the time a
Letter is signed plus all purchases made under the terms of the Letter less
redemptions (the 'investment') are at least equal to the intended investment,
the amount in escrow will be released to the shareholder. If the investment is
more than $50,000 but less than the intended investment a remittance of the
difference in the dollar amount of sales charge paid and the sales charge that
would have been paid if the investment had been made at a single time
25
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will be made upon request. If the remittance is not sent within 20 days after
such a request, IFTC will redeem an appropriate number of Eligible Shares held
in escrow in order to realize the difference. Amounts remaining in the escrow
account will be released to the shareholder's account. If the total investment
is more than the intended investment and the total is sufficient to qualify for
an additional sales charge reduction, a retroactive price adjustment will be
made for all purchases made under a Letter to reflect the sales charge
applicable to the aggregate amount of the purchases during the 13-month period.
A Letter is not a binding obligation to purchase the indicated amount, and
Kidder, Peabody is not obligated to sell the indicated amount. Reinvested
dividends and capital gains are not applied toward the completion of the
purchases contemplated by a Letter.
RIGHT OF ACCUMULATION. Reduced sales charges on Class A shares are
available under a combined right of accumulation permitting an investor to
combine the value of Eligible Shares and the value of Fund shares being
purchased, to qualify for a reduced sales charge. Before a shareholder may take
advantage of the right of accumulation, the shareholder must provide Kidder,
Peabody at the time of purchase with sufficient information to permit Kidder,
Peabody to confirm that the shareholder is qualified for the right; acceptance
of the shareholder's purchase order is subject to that confirmation. The right
of accumulation may be amended or terminated at any time by the Trust.
DEFINITION OF PURCHASE. For purposes of the volume discounts and right of
accumulation described above, a 'purchase' refers to: a single purchase of
Eligible Shares by an individual; concurrent purchases by an individual, his or
her spouse and their children under the age of 21 years purchasing Eligible
Shares for his, her or their own account; and single purchases by a trustee or
other fiduciary purchasing Eligible Shares for a single trust estate or single
fiduciary account, including a pension, profit-sharing or other employee benefit
trust created pursuant to a plan qualified under Section 401 of the Code, even
though more than one beneficiary is involved. The term 'purchase' also includes
purchases by any 'company,' as that term is defined in the 1940 Act, but does
not include: purchases by any such company that has not been in existence for at
least six months or that has no purpose other than the purchase of Eligible
Shares or shares of other investment companies registered under the 1940 Act at
a discount; or purchases by any group of individuals whose participants are
related by virtue of being credit cardholders of a company, policyholders of an
insurance company, customers of either a bank or broker-dealer or clients of an
investment adviser. The term 'purchase' also includes purchases by employee
benefit plans not qualified under Section 401 of the Code, including purchases
by employees or by employers on behalf of employees by means of a payroll
deduction plan, or otherwise, of Eligible Shares. Purchases by such a company or
non-qualified employee benefit plan will qualify for the volume discounts
offered with respect to the Fund's shares only if the Trust and Kidder, Peabody
are able to realize economies of scale in sales efforts and sales-related
expenses by means of the company's, the employer's or the plan's making the
Prospectus available to individual investors or employees and forwarding
investments by those persons to the Trust, and by any such employer's or plan's
bearing the expense of any payroll deduction plan. The term 'purchase' also
includes any purchase of Eligible Shares by or on behalf of certain members of
the same family, including spouses, children (adult and minor), grandparents and
siblings, provided, however, that the following conditions are met: (1)
following consummation of the purchase, the family has, in the aggregate, (a) at
least $5 million invested in Eligible Shares
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of one or more funds within the Kidder Family of Funds or (b) at least $10
million in cash and/or securities in Kidder, Peabody Accounts; and (2) the Trust
and Kidder, Peabody are able to realize economies of scale in sales effort and
sales-related expenses by means of dealing with a common decision-maker or
otherwise being able to treat the accounts as a single relationship.
REINSTATEMENT PRIVILEGE. The Fund offers a reinstatement privilege under
which a shareholder that has redeemed Class A shares may reinvest the proceeds
from the redemption without imposition of a sales charge, provided the
reinvestment is made within 60 days of the redemption. The tax status of a gain
realized on a redemption will not be affected by exercise of the reinstatement
privilege but a loss will be nullified if the reinvestment is made within 30
days of the redemption. See the Statement of Additional Information for the tax
consequences when, within 90 days of a purchase of Class A shares, the shares
are redeemed and reinvested in the Fund or another mutual fund.
CLASS B SHARES
The public offering price of Class B shares is the net asset value per share
next determined after a purchase order is received without imposition of any
sales charge. Class B shares are subject to a service fee at the annual rate of
.25%, and a distribution fee at the annual rate of .75%, of the value of the
Fund's average daily net assets attributable to this Class. See 'Distributor.'
Kidder, Peabody has adopted guidelines, in view of the relative sales charges,
service fees and distribution fees, directing Investment Executives that all
purchases of shares should be for Class A shares when the purchase is for
$1,000,000 or more by an investor not eligible to purchase Class C shares.
Kidder, Peabody reserves the right to vary these guidelines at any time.
CLASS C SHARES
The public offering price of Class C shares is the net asset value per share
next determined after a purchase order is received without imposition of any
sales charge. Class C shares, which are not subject to any service fee or
distribution fee, are available exclusively to employees of Kidder, Peabody and
their associated accounts, directors or trustees of any fund in the Kidder
Family of Funds, employee benefit plans of Kidder, Peabody and participants in
Insight when shares are purchased through that program. Investors eligible to
purchase Class C shares may not purchase any other Class of shares.
INSIGHT. An investor purchasing $50,000 or more of shares of funds in the
Kidder Family of Funds may participate in INSIGHT, KPAM's total portfolio asset
allocation program, and receive Class C Shares. INSIGHT offers comprehensive
investment services, including a personalized asset allocation investment
strategy using an appropriate combination of funds in the Kidder Family of
Funds, professional investment advice regarding investment among the funds in
the Kidder Family of Funds by KPAM portfolio specialists, monitoring of
investment performance and comprehensive quarterly reports that cover market
trends, portfolio summaries and personalized account information. Participation
in INSIGHT is subject to payment of an advisory fee to KPAM at the maximum
annual rate of 1.5% of assets held through the program (generally charged
quarterly in advance), which covers all INSIGHT investment advisory services and
program administration fees. Employees of Kidder, Peabody are entitled to a 50%
reduction in the fee otherwise payable for participation in INSIGHT. INSIGHT
clients may elect
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to have their INSIGHT fees charged to their accounts (by the automatic
redemption of money market fund shares) or another of their Kidder, Peabody
accounts or, billed separately.
REDEMPTION OF SHARES
A shareholder may redeem Fund shares on any day that the Fund's net asset values
are determined by following the procedures described below.
REDEMPTION THROUGH KIDDER, PEABODY
Shares may be redeemed through Kidder, Peabody, which provides the terms of any
redemption request properly received prior to 4:00 p.m., New York time, on a
given day, to the Fund's transfer agent. The trade date of a redemption so
received is considered to be that day, and the trade date of any redemption
request received at or after 4:00 p.m., New York time, is considered to be the
next business day. If shares to be redeemed were issued in certificate form, the
certificates for the shares to be redeemed must be submitted to the transfer
agent in accordance with the procedures described in items (1) through (4) under
'Redemption by Mail' below.
REDEMPTION BY MAIL
Shares may be redeemed by submitting a written request in 'good order' to the
Fund's transfer agent at the following address:
Kidder, Peabody Global Equity Fund
Class A, B or C (please specify)
c/o Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
The transfer agent transmits any redemption request that it receives to
Kidder, Peabody, and the request is then treated as if it had been made through
Kidder, Peabody. A redemption request is considered to have been received in
'good order' if the following conditions are satisfied:
(1) the request is in writing, states the Class and number or dollar
amount of shares to be redeemed and identifies the shareholder's Fund
account number;
(2) the request is signed by each registered owner exactly as the
shares are registered;
(3) if the shares to be redeemed were issued in certificate form, the
certificates are endorsed by the shareholder for transfer (or are
themselves accompanied by an endorsed stock power) and accompany the
redemption request, which should be sent by registered mail for the
protection of the shareholder; and
(4) the signatures on either the written redemption request or the
certificates (or the accompanying stock power) have been guaranteed by a
bank, broker-dealer, municipal securities broker, government securities
dealer or broker, credit union, a member firm of a national securities
exchange, registered securities association or clearing agency, and savings
association (the purpose of a signature guarantee being to protect Fund
shareholders against the possibility of fraud). The transfer agent may
reject redemption instructions if the
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guarantor is neither a member of nor a participant in a signature guarantee
program (currently known as 'STAMP''sm').
Additional supporting documents may be required for redemptions of Fund
shares by corporations, executors, administrators, trustees and guardians.
OTHER REDEMPTION POLICIES
Signature guarantees are required in connection with (1) any redemption of Fund
shares made by mail and (2) share ownership transfer requests. These
requirements may be waived by the Trust in certain instances.
Any redemption request made by a shareholder of the Fund will be effected
at the net asset value per share next determined after proper redemption
instructions are received. See 'Determination of Net Asset Value' below. The
proceeds of the redemption generally are credited to the shareholder's Account,
or sent to the shareholder, as applicable, on the fifth business day following
the date after the redemption request was received in good order, but in no
event later than seven days following that date. A shareholder who pays for Fund
shares by personal check will be credited with the proceeds of a redemption of
those shares only after the check used for the purchase has cleared, which may
take up to 15 days or more. If shares are purchased with good funds, no delay in
redemption will occur. The amount of redemption proceeds received by a Fund
shareholder will in no way be affected by any delay in the crediting of those
proceeds.
A Fund account with respect to a Class of shares that is reduced by
redemptions, and not by reason of market fluctuations, to a value of $500 or
less may be redeemed by the Trust, but only after the shareholder has been given
at least 30 days in which to increase the balance in the account to more than
$500. Proceeds of such a redemption will be mailed to the shareholder.
DISTRIBUTIONS IN KIND
If the Trustees determine that it would be detrimental to the best interests of
the Fund's shareholders to make a redemption payment wholly in cash, the Fund
may pay, in accordance with rules adopted by the SEC, any portion of a
redemption in excess of the lesser of $250,000 or 1% of the Fund's net assets by
a distribution in kind of readily marketable portfolio securities in lieu of
cash. Redemptions failing to meet this threshold must be made in cash.
Shareholders receiving distributions in kind of portfolio securities may incur
brokerage commissions when subsequently disposing of those securities.
SYSTEMATIC WITHDRAWAL PLAN
The Trust offers a Systematic Withdrawal Plan (the 'Withdrawal Plan') under
which a shareholder of the Fund with $20,000 or more invested in a Class may
elect periodic redemption payments to the shareholder, or a designated payee on
a monthly basis. Payments pursuant to the Withdrawal Plan normally are made
within the last ten days of the month. The minimum rate of withdrawal is $200
per month and the maximum annual withdrawal is 12% of current
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account value in the Class as of the commencement of participation in the
Withdrawal Plan (less the amount of any subsequent redemption outside the
Withdrawal Plan). A shareholder participating in the Withdrawal Plan must
reinvest all income and capital gains distributions, and may not continue to
participate if the shareholder redeems outside the Withdrawal Plan or exchanges
to another fund an amount that would cause the account value in the Class to
fall below $20,000. The Trust may amend or terminate the Withdrawal Plan, and a
shareholder may terminate participation in the Withdrawal Plan at any time.
DETERMINATION OF NET ASSET VALUE
Each Class' net asset value per share is calculated by State Street Bank and
Trust Company ('State Street'), the Fund's custodian, on each day, Monday
through Friday, except that net asset value is not computed on a day in which no
orders to purchase, sell, exchange or redeem Fund shares have been received, any
day on which there is not sufficient trading in the Fund's portfolio securities
that the Fund's net asset values per share might be materially affected by
changes in the value of such portfolio securities or on days on which the NYSE
is not open for trading. The NYSE is currently scheduled to be closed on New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving and Christmas, and on the preceding Friday when one of those
holidays falls on a Saturday or on the subsequent Monday when one of those
holidays falls on a Sunday.
Net asset value per share of a Class is determined as of the close of
regular trading on the NYSE, and is computed by dividing the value of the Fund's
net assets attributable to that Class by the total number of shares outstanding
of that Class. Generally, the Fund's investments are valued at market value or,
in the absence of a market value, at fair value as determined by or under the
direction of the Trustees.
Securities that are primarily traded on foreign exchanges are generally
valued for purposes of calculating each Class' net asset value at the preceding
closing values of the securities on their respective exchanges, except that,
when an occurrence subsequent to the time a value was so established is likely
to have changed that value, the fair market value of those securities will be
determined by consideration of other factors by or under the direction of the
Trustees. A security that is primarily traded on a domestic or foreign stock
exchange is valued at the last sale price on that exchange or, if no sales
occurred during the day, at the current quoted bid price. Short-term investments
that mature in 60 days or less are valued on the basis of amortized cost (which
involves valuing an investment at its cost and, thereafter, assuming a constant
amortization to maturity of any discount or premium, regardless of the effect of
fluctuating interest rates on the market value of the investment) when the
Trustees have determined that amortized cost represents fair value. An option
that is written by the Fund is generally valued at the last sale price or, in
the absence of the last sale price, the last offer price. An option that is
purchased by the Fund is generally valued at the last sale price or, in the
absence of the last sale price, the last bid price. The value of a futures
contract is equal to the unrealized gain or loss on the contract that is
determined by marking the contract to the current settlement price for a like
contract on the valuation date of the futures contract. A settlement price may
not be used if the market makes a limit move with respect to a particular
futures contract or if the securities underlying the
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futures contract experience significant price fluctuations after the
determination of the settlement price. When a settlement price cannot be used,
futures contracts are valued at their fair market value as determined by or
under the direction of the Trustees.
For purposes of calculating a Class' net asset value per share, assets and
liabilities initially expressed in foreign currency values are converted into
U.S. dollar values based on a formula prescribed by the Trust or, if the
information required by the formula is unavailable, as determined in good faith
by the Board of Trustees. In carrying out the Board's valuation policies, State
Street may consult with an independent pricing service retained by the Trust.
Further information regarding the Fund's valuation policies is contained in the
Statement of Additional Information.
EXCHANGE PRIVILEGE
Shares of each Class may be exchanged for shares of the same Class (or the sole
class offered) in certain funds in the Kidder Family of Funds, to the extent
shares are offered for sale in the shareholder's state of residence. For a list
and a description of the funds in the Kidder Family of Funds for which shares
may be exchanged, see 'Exchange Privilege' in the Statement of Additional
Information. Under the Choice Pricing System, an exchange of shares of the Fund
with other funds' shares will be limited to shares of the same class or the sole
class (money market funds only) of shares of a fund from or to which the
exchange is to be effected. For example, if a holder of Class A shares of the
Fund exchanges his shares for shares of Kidder, Peabody Cash Reserve Fund, Inc.
('Cash Reserve Fund') (a money market fund) and thereafter wishes to exchange
those shares for shares of Kidder, Peabody Government Income Fund, Inc. he may
receive only Class A shares in the latter transaction. As another example, if a
holder of shares of Cash Reserve Fund acquired as a result of an initial
investment and not from an exchange with shares of another fund wishes to
exchange his shares for shares of the Fund, he may receive Class A shares, Class
B shares or Class C shares (depending on his eligibility for Class C shares) in
the exchange transaction. Thereafter, any further exchanges would be subject to
the principal described above limiting subsequent exchanges to the same class or
the sole class of shares of other funds. If Class A shares acquired in an
exchange are subject to payment of a sales charge higher than the sales charge
paid on the shares relinquished in the exchange (or any predecessor of those
shares), the exchange will be subject to payment of an amount equal to the
difference, if any, between the sales charge previously paid and the sales
charge payable on the Class A shares acquired in the exchange.
Although the Fund currently imposes no limit on the number of times the
Exchange Privilege may be exercised by any shareholder, the Fund may impose such
limits in the future, in accordance with applicable provisions of the 1940 Act
and rules thereunder. In addition, the Exchange Privilege may be terminated or
revised at any time upon 60 days' prior written notice to Fund shareholders, and
is available only to residents of states in which exchanges are permitted under
state law. The exchange of shares of one fund for shares of another is treated
for federal income tax purposes as a sale of the shares given in exchange by the
shareholder, so that a shareholder may recognize a taxable gain or loss on an
exchange.
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Upon receipt of proper instructions and all necessary supporting documents,
Fund shares submitted for exchange will be redeemed at their net asset value
next determined and simultaneously invested in shares of the fund being
acquired. Settlement of an exchange would occur one business day after the date
on which the request for exchange was received in proper form, unless the dollar
amount of the transaction exceeds 5% of the Fund's total net assets on any given
day, in which case settlement would occur within five business days after the
date on which the request for exchange was received in proper form. The proceeds
of a redemption of Fund shares made to facilitate the exchange of those shares
for shares of another fund must be equal to at least (1) the minimum initial
investment requirement imposed by the fund into which the exchange is being
sought if the shareholder seeking the exchange has not previously invested in
that fund or (2) the minimum subsequent investment requirement imposed by the
fund into which the exchange is being sought if the shareholder has previously
made an investment in that fund.
A shareholder of the Fund wishing to exercise the Exchange Privilege should
obtain from Kidder, Peabody a copy of the current prospectus of the fund into
which an exchange is being sought and review that prospectus carefully before
making the exchange. Kidder, Peabody reserves the right to reject any exchange
request at any time.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income of the Fund and distributions of net
realized capital gains of the Fund, if any, are distributed annually after the
close of the fiscal year in which they are earned. Unless a shareholder
instructs the Fund that dividends and capital gains distributions on shares of
any Class should be paid in cash and credited to the shareholder's Account,
dividends and capital gains distributions are reinvested automatically at net
asset value in additional shares of the same Class. The Fund is subject to a 4%
nondeductible excise tax measured with respect to certain undistributed amounts
of net investment income and capital gains. If necessary to avoid the imposition
of this tax, and if in the best interests of its shareholders, the Fund will
declare and pay dividends of its net investment income and distributions of its
net capital gains more frequently than stated above. The per share dividends and
distributions on Class C shares will be higher than those on Class A shares,
which in turn will be higher than those on Class B shares, as a result of the
different service, distribution and transfer agency fees applicable to the
Classes. See 'Fee Table,' 'Purchase of Shares,' 'Distributor' and 'General
Information.'
TAXES
The Fund has qualified for the fiscal year ended August 31, 1994 to be treated
as a regulated investment company within the meaning of the Code and intends to
qualify for this treatment in each year. To qualify as a regulated investment
company for federal income tax purposes, the Fund limits its income and
investments so that (1) less than 30% of its gross income is derived from the
sale or disposition of stocks, other securities and certain financial
instruments
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(including certain forward contracts) that were held for less than three months
and (2) at the close of each quarter of the taxable year (a) not more than 25%
of the market value of the Fund's total assets is invested in the securities
(other than Government Securities) of a single issuer or of two or more issuers
controlled by the Fund that are engaged in the same or similar trades or
businesses or in related trades or businesses and (b) at least 50% of the market
value of the Fund's total assets is represented by (i) cash and cash items, (ii)
Government Securities and (iii) other securities limited in respect of any one
issuer to an amount not greater in value than 5% of the market value of the
Fund's total assets and to not more than 10% of the outstanding voting
securities of the issuer. The requirements for qualification may cause the Fund
to restrict the degree to which it sells or otherwise disposes of stocks, other
securities and certain financial instruments held for less than three months. If
the Fund qualifies as a regulated investment company and meets certain
distribution requirements, the Fund will not be subject to federal income tax on
its net investment income and net realized capital gains that it distributes to
its shareholders.
Dividends paid by the Fund out of net investment income and distributions
of net realized short-term capital gains are taxable to shareholders as ordinary
income, whether received in cash or reinvested in additional Fund shares.
Distributions of net realized long-term capital gains are taxable to
shareholders as long-term capital gain, regardless of how long shareholders have
held their shares and whether the distributions are received in cash or
reinvested in additional shares. Dividends and distributions paid by the Fund
generally do not qualify for the federal dividends received deduction for
corporate shareholders.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other foreign taxes. The payment of these taxes
reduces the amount of dividends and distributions paid to the Fund's
shareholders. So long as the Fund qualifies as a regulated investment company,
certain distribution requirements are satisfied, and more than 50% of the value
of the Fund's total assets at the close of any taxable year consists of stocks
or securities of foreign corporations, the Fund may elect, for federal income
tax purposes, to treat certain foreign income taxes it pays as having been paid
by its shareholders. If the Fund makes the election, the amount of foreign
income taxes paid by the Fund would be included in the income of its
shareholders and the shareholders would be entitled to either credit their
portions of these amounts against their federal income tax due, if any, or to
deduct these portions from their federal taxable income, if any. No deduction
for foreign taxes may be claimed by a shareholder who does not itemize
deductions. In addition, certain limitations will be imposed on the extent to
which the credit (but not the deduction) for foreign taxes may be claimed.
Statements as to the tax status of each Fund shareholder's dividends and
distributions are mailed annually. Shareholders also receive, as appropriate,
various written notices after the close of the Fund's taxable year regarding the
tax status of certain dividends and distributions that were paid (or that are
treated as having been paid) by the Fund to its shareholders during the
preceding taxable year, including the amount of dividends that represent
interest derived from Government Securities.
Shareholders are urged to consult their tax advisors regarding the
application of federal, state, local and foreign tax laws to their specific
situations before investing in the Fund.
33
<PAGE>
- --------------------------------------------------------------------------------
DISTRIBUTOR
Kidder, Peabody, a major full-line investment services firm serving foreign and
domestic securities markets, located at 10 Hanover Square, New York, New York
10005-3592, serves as the distributor of the Fund's shares and is paid monthly
fees by the Fund in connection with (1) the servicing of shareholder accounts in
Class A and Class B shares and (2) providing distribution related services in
respect of Class B shares. A monthly service fee, authorized pursuant to a
Shareholder Servicing and Distribution Plan (the 'Plan') adopted by the Trust
with respect to the Fund pursuant to Rule 12b-1 under the 1940 Act, is
calculated at the annual rate of .25% of the value of the average daily net
assets of the Fund attributable to each of Class A and Class B shares and is
used by Kidder, Peabody to provide compensation for ongoing servicing and/or
maintenance of shareholder accounts and an allocation of overhead and other
Kidder, Peabody branch office expenses related to servicing shareholder
accounts. Compensation is paid by Kidder, Peabody to persons, including Kidder,
Peabody employees, who respond to inquiries of shareholders of the Fund
regarding their ownership of shares or their accounts with the Fund or who
provide other similar services not otherwise required to be provided by the
Fund's manager, investment adviser or transfer agent.
In addition, pursuant to the Plan, the Fund pays to Kidder, Peabody a
monthly distribution fee at the annual rate of .75% of the Fund's average daily
net assets attributable to Class B shares. The distribution fee is used by
Kidder, Peabody to provide initial and ongoing sales compensation to its
Investment Executives in respect of sales of Class B shares; costs of printing
and distributing the Fund's Prospectus, Statement of Additional Information and
sales literature to prospective investors in Class B shares; costs associated
with any advertising relating to Class B shares; an allocation of overhead and
other Kidder, Peabody branch office expenses related to distribution of Class B
shares; and payments to, and expenses of, persons who provide support services
in connection with the distribution of Class B shares.
Payments under the Plan are not tied exclusively to the shareholder
servicing and/or distribution expenses actually incurred by Kidder, Peabody, and
the payments may exceed expenses actually incurred by Kidder, Peabody. The
Trustees evaluate the appropriateness of the Plan and its payment terms on a
continuing basis and in doing so will consider all relevant factors, including
expenses borne by Kidder, Peabody and amounts it receives under the Plan.
PERFORMANCE INFORMATION
From time to time, the Trust may advertise the Fund's 'average annual total
return' over various periods of time for each Class. Total return figures, which
are based on historical earnings and are not intended to indicate future
performance, show the average percentage change in value of an investment in the
Class from the beginning date of a measuring period to the end of that period.
These figures reflect changes in the price of shares and assume that any income
dividends and/or capital gains distributions made by the Fund during the period
were reinvested in shares of the same Class. Total return figures will be given
for the most recent one-and five-year periods, or for the life of the Class to
the extent that it has not been in existence for the full length of those
periods, and may be given for other periods as well, such as on a year-by-
34
<PAGE>
- --------------------------------------------------------------------------------
year basis. The average annual total return for any one year in a period longer
than one year might be greater or less than the average for the entire period.
The Trust may quote 'aggregate total return' figures with respect to the
Fund for various periods, representing the cumulative change in value of an
investment for the specific period and reflecting changes in share prices and
assuming reinvestment of dividends and distributions. Aggregate total return may
be calculated either with or without the effect of the sales charge to which
Class A shares are subject and may be shown by means of schedules, charts or
graphs, and may indicate subtotals of the various components of total return
(that is, changes in value of initial investment, income dividends and capital
gains distributions). Reflecting compounding over a longer period of time,
aggregate total return data generally will be higher than average annual total
return data.
The Trust may, in addition to quoting the Classes' average annual and
aggregate total returns, advertise the actual annual and annualized total return
performance data for various periods of time. Actual annual and annualized total
returns may be calculated either with or without the effect of the sales charge
to which Class A shares are subject and may be shown by means of schedules,
charts or graphs. Actual annual or annualized total return data generally will
be lower than average annual total return data, which reflects compounding of
return.
In reports or other communications to Fund shareholders and in advertising
material, the Trust may compare the Classes' performance with (1) the
performance of other mutual funds (or classes thereof) as listed in rankings
prepared by Lipper Analytical Services Inc., CDA Investment Technologies, Inc.
or similar investment services that monitor the performance of mutual funds or
as set out in the nationally recognized publications listed below, (2) the
Morgan Stanley Capital International EAFE Index, the Salomon Russell Global
Equity Index, the FT-Actuaries World Indices, the Standard & Poor's Index of 500
Stocks, and the Dow Jones Industrial Average, each of which is an unmanaged
index of common stocks or (3) other appropriate indexes of investment securities
or with data developed by GEIM or KPAM derived from those indexes. The Trust may
also include in communications to Fund shareholders evaluations of the Fund
published by nationally recognized ranking services and by financial
publications that are nationally recognized, such as Barron's, Business Week,
Forbes, Institutional Investor, Investor's Daily, Kiplinger's Personal Finance
Magazine, Money, Morningstar Mutual Fund Values, The New York Times, USA Today
and The Wall Street Journal. Any given performance comparison should not be
considered as representative of the Fund's performance for any future period.
GENERAL INFORMATION
ORGANIZATION OF THE TRUST
The Trust was formed as a business trust pursuant to a Declaration of Trust, as
amended from time to time (the 'Declaration'), under the laws of The
Commonwealth of Massachusetts on March 28, 1991. The Fund commenced operations
on November 14, 1991. The Declaration authorizes the Trustees to create separate
series, and within each series separate Classes, of an unlimited number of
shares of beneficial interest, par value $.001 per share. As of the date of this
Prospectus, the Trustees have established several such series, representing
interests in the Fund
35
<PAGE>
- --------------------------------------------------------------------------------
as described in this Prospectus and in several other series. See 'Exchange
Privilege' in the Statement of Additional Information.
When issued, Fund shares will be fully paid and non-assessable. Shares are
freely transferable and have no pre-emptive, subscription or conversion rights.
Each Class represents an identical interest in the Fund's investment portfolio.
As a result, the Classes have the same rights, privileges and preferences,
except with respect to: (1) the designation of each Class; ( 2) the effect of
the respective sales charges, if any, for each Class; (3) the distribution
and/or service fees, if any, borne by each Class; (4) the expenses allocable
exclusively to each Class; ( 5) voting rights on matters exclusively affecting a
single Class; and (6) the exchange privilege of each Class. The Board of
Trustees does not anticipate that there will be any conflicts among the
interests of the holders of the different Classes. The Trustees, on an ongoing
basis, will consider whether any conflict exists and, if so, take appropriate
action. Certain aspects of the shares may be changed, upon notice to Fund
shareholders, to satisfy certain tax regulatory requirements, if the change is
deemed necessary by the Trustees.
Shareholders of the Fund are entitled to one vote for each full share held
and fractional votes for fractional shares held. Voting rights are not
cumulative and, as a result, the holders of more than 50% of the aggregate
shares of the Fund may elect all of the Trustees. Generally shares of the Trust
will be voted on a Trust-wide basis on all matters except those affecting only
the interests of one series, such as the Fund's investment advisory agreement.
In turn, shares of the Fund will be voted on a Fund-wide basis on all matters
except those affecting only the interests of one Class, such as the terms of the
Plan as it relates to a Class.
The Trust intends to hold no annual meetings of shareholders for the
purpose of electing Trustees unless, and until such time as, less than a
majority of the Trustees holding office have been elected by shareholders.
Shareholders of record of no less than two-thirds of the outstanding shares of
the Trust may remove a Trustee through a declaration in writing or by vote cast
in person or by proxy at a meeting called for that purpose. A meeting will be
called for the purpose of voting on the removal of a Trustee at the written
request of holders of 10% of the Trust's outstanding shares. Shareholders of the
Fund who satisfy certain criteria will be assisted by the Trust in communicating
with other shareholders in seeking the holding of the meeting.
REPORTS TO SHAREHOLDERS
The Trust sends Fund shareholders audited semi-annual and annual reports, each
of which includes a list of the investment securities held by the Fund as of the
end of the period covered by the report.
CUSTODIAN AND RECORDKEEPING AGENT;
TRANSFER AND DIVIDEND AGENT
State Street, located at One Monarch Drive, North Quincy, Massachusetts 02171,
serves as the Fund's custodian and recordkeeping agent. Investors Fiduciary
Trust Company, located at 127 West 10th Street, Kansas City, Missouri 64105,
serves as the Fund's transfer and dividend agent.
36
<PAGE>
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<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
No person has been authorized to give any informa-
tion or to make any representations not contained in this
Prospectus, or in the Statement of Additional Information
incorporated into this Prospectus by reference, in connection with
the offering made by this Prospectus and, if given or made, any such
information or representations must not be relied upon as having
been authorized by the Fund or its distributor. This Prospectus does
not constitute an offering by the Fund or by its distributor in any
jurisdiction in which the offering may not lawfully be made.
<TABLE>
<S> <C>
- --------------------------------------------------------
Contents
- --------------------------------------------------------
Fee Table 2
- --------------------------------------------------------
Highlights 3
- --------------------------------------------------------
Financial Highlights 7
- --------------------------------------------------------
Design of the Fund 8
- --------------------------------------------------------
Investment Objective and Policies 9
- --------------------------------------------------------
Management of the Fund 20
- --------------------------------------------------------
Purchase of Shares 23
- --------------------------------------------------------
Redemption of Shares 28
- --------------------------------------------------------
Determination of Net Asset Value 30
- --------------------------------------------------------
Exchange Privilege 31
- --------------------------------------------------------
Dividends, Distributions and Taxes 32
- --------------------------------------------------------
Distributor 34
- --------------------------------------------------------
Performance Information 34
- --------------------------------------------------------
General Information 35
- --------------------------------------------------------
Custodian and Recordkeeping Agent; Transfer
and Dividend Agent 36
- --------------------------------------------------------
</TABLE>
KPGE-1
Kidder,
Peabody
Global
Equity
Fund
Prospectus
December 29, 1994
In Affiliation With
GE Investment Management [logo]
Incorporated
<PAGE>
PROSPECTUS DECEMBER 29, 1994
- --------------------------------------------------------------------------------
Kidder, Peabody Adjustable Rate Government Fund
60 BROAD STREET NEW YORK, NEW YORK 10004-2350 (212) 656-1737
Kidder, Peabody Adjustable Rate Government Fund (the 'Fund'), a series of
Kidder, Peabody Investment Trust (the 'Trust'), seeks to provide high current
income while limiting the degree of fluctuation of its net asset value resulting
from movements in interest rates. The Fund seeks to achieve this objective by
investing primarily in adjustable rate securities ('Adjustable Rate Securities')
and securities that are issued or guaranteed by the U.S. Government, its
agencies or instrumentalities ('Government Securities'). Although the Fund's
portfolio may be expected to experience low volatility due to the unique
characteristics of Adjustable Rate Securities, the Fund is not a money market
fund that attempts to maintain a constant net asset value and the Fund's
investment portfolio can be expected to experience greater volatility than that
of a money market fund.
This Prospectus briefly sets forth certain information about the Fund, including
applicable operating expenses, that prospective investors should know before
investing. Investors are advised to read this Prospectus and retain it for
future reference.
Additional information about the Fund, contained in a Statement of Additional
Information dated the same date as this Prospectus, has been filed with the
Securities and Exchange Commission (the 'SEC') and is available to investors
upon request and without charge by calling or writing the Trust at the telephone
number or address listed above. The Statement of Additional Information is
incorporated in its entirety by reference into this Prospectus.
- --------------------------------------------------------------------------------
MANAGER AND INVESTMENT ADVISER
Kidder Peabody Asset Management, Inc.
DISTRIBUTOR
Kidder, Peabody & Co. Incorporated
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
- --------------------------------------------------------------------------------
FEE TABLE
The table below shows the costs and expenses that an investor would incur,
either directly or indirectly, as a shareholder of the Fund, based upon an
estimate of the Fund's projected annual operating expenses.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------- ------- -------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on Purchases of Shares (as a percentage of
offering price)........................................................... 2.25% 0% 0%
Maximum Sales Charge Imposed on Reinvested Dividends (as a percentage of
offering price)........................................................... 0% 0% 0%
Maximum Contingent Deferred Sales Charge (as a percentage of redemption
proceeds)................................................................. 0% 0% 0%
Redemption Fees (as a percentage of amount redeemed)........................ 0%
Maximum Exchange Fee........................................................ 0% 0% 0%
Maximum Annual Investment Advisory Fee Payable by Shareholders Holding Class
C Shares through the INSIGHT Investment Advisory Program (as a percentage
of average daily value of shares held).................................... 0% 0% 1.50%
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees............................................................. .50% .50% .50%
Rule 12b-1 Fees............................................................. .25 .75 0
Other Expenses.............................................................. .33 .33 .33
------- ------- -------
Total Fund Operating Expenses........................................... 1.08% 1.58% .83%
------- ------- -------
------- ------- -------
</TABLE>
The nature of the services provided to, and the aggregate management fees
paid by, the Fund are described below under 'Management of the Fund.' The Fund
bears an annual Rule 12b-1 service fee of .25% of the value of the average daily
net assets of Class A shares and an annual Rule 12b-1 fee of .75% of the value
of the average daily net assets of Class B shares, consisting of a .25% service
fee and a .50% distribution fee. Long-term shareholders of Class B shares may
pay more than the economic equivalent of the maximum front-end sales charge
currently permitted by the rules of the National Association of Securities
Dealers, Inc. governing investment company sales charges. See 'Distributor.'
The percentage of 'Other Expenses' in the table above is based on amounts
incurred during the Fund's most recent fiscal year; these expenses include fees
for shareholder services, custodial fees, legal and accounting fees, printing
costs and registration fees, the costs of regulatory compliance, a portion of
the costs associated with maintaining the Trust's legal existence and the costs
involved in communicating with the Fund's shareholders.
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical $1,000 investment in the Fund assuming (1) a 5% annual return,
(2) payment of the shareholder transaction expenses and annual Fund operating
expenses set forth in the table above and (3) complete redemption at the end of
the period.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------ ------ ------- ------- --------
<S> <C> <C> <C> <C>
Class A........................................................... $ 33 $56 $ 81 $151
Class B........................................................... $ 16 $50 $ 86 $188
Class C........................................................... $ 24 $73 $ 125 $267
</TABLE>
The above example is intended to assist an investor in understanding
various costs and expenses that the investor would bear upon becoming a
shareholder of the Fund. The example should not be considered to be a
representation of past or future expenses. Actual expenses of the Fund may be
greater or less than those shown above. The assumed 5% annual return shown in
the example is hypothetical and should not be considered to be a representation
of past or future annual return; the actual return of the Fund may be greater or
less than the assumed return.
2
<PAGE>
- --------------------------------------------------------------------------------
HIGHLIGHTS
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------------
The Trust
The Trust is an open-end management investment company. See 'General Information.'
- ---------------------------------------------------------------------------------------------------------------------------
The Fund
The Fund, one of several series of the Trust currently offering interests to the public, is a
diversified fund that seeks to provide high current income while limiting the degree of
fluctuation of its net asset values resulting from movements in interest rates. See 'Investment
Objective and Policies' and 'General Information.'
- ---------------------------------------------------------------------------------------------------------------------------
Benefits of
Investing
in the
Fund
Mutual funds, such as the Fund, are flexible investment tools that are increasingly
popular -- one of four American households now owns shares of at least one mutual fund -- for
very sound reasons. The Fund offers investors the following important benefits:
Attractive Investment Alternative
The Fund is designed for investors who desire (1) a higher yield than is generally available
from traditional fixed income investments that seek to maintain stable principal values, such
as bank money market deposit accounts, money market mutual funds or certificates of deposit,
(2) less fluctuation in net asset value than longer term fixed income funds, and (3) the
credit safety of a portfolio comprised of Government Securities and securities rated in the
highest rating category by recognized rating agencies. During a period of declining interest
rates, however, the Fund's total return may be lower than that of a fund investing in fixed
rate longer term instruments such as U.S. Treasury bonds. In addition, the Fund's net asset
values can be expected to experience greater volatility than the value of a bank money market
deposit account, money market mutual fund or certificate of deposit. See 'Investment Objective
and Policies.'
Adjustable Rate Securities
The Fund invests at least 65% of its net assets in Adjustable Rate Securities, many of which
will also be Government Securities. Unlike fixed rate securities, Adjustable Rate Securities
adjust their rate of interest to general market interest rate conditions, subject in some
instances to certain limitations typically referred to as 'caps' and 'floors.' Because their
rates of interest adjust at regular intervals, Adjustable Rate Securities can be expected to
experience less volatility of principal than is generally inherent in securities with similar
or longer terms that have fixed rates of interest.
High Quality Securities
The Fund also invests at least 65% of its net assets in Government Securities, many of which
will also be Adjustable Rate Securities. The Fund's assets not invested in Government
Securities will be rated in the highest rating category of recognized rating agencies.
</TABLE>
3
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Professional Management
By pooling the monies of many investors, the Fund enables shareholders to obtain the benefits
of full-time professional management and an array of investments that is typically beyond the
means of most investors. The Fund's investment adviser reviews the fundamental characteristics
of far more securities than can a typical individual investor and may employ portfolio
management techniques that frequently are not used by individual or many institutional
investors. See 'Management of the Fund.'
Transaction Savings
By investing in the Fund, an investor is able to acquire ownership in a portfolio of
securities without paying the higher transaction costs generally associated with a series of
small securities purchases.
Convenience
Fund shareholders are relieved of the administrative and recordkeeping burdens normally
associated with direct ownership of securities.
Liquidity
The Fund's convenient purchase and redemption procedures provide shareholders with ready
access to their money and reduce the delays frequently involved in the direct purchase and
sale of securities. See 'Purchase of Shares' and 'Redemption of Shares.'
Choice Pricing System
Under the Choice Pricing System'sm', the Fund presently offers three classes of shares
('Classes') that provide different methods of purchasing shares and allow investment
flexibility and a wider range of investment choices. See 'Purchase of Shares.'
Exchange Privilege
Shareholders of the Fund may exchange all or a portion of their shares for shares of the same
Class or the sole outstanding Class of specified funds in the Kidder Family of Funds. See
'Exchange Privilege.'
Total Portfolio Approach
The funds in the Kidder Family of Funds are designed to be strategically combined as part of
a total portfolio approach. This investment philosophy acknowledges the interplay of a
shareholder's many different investing needs and preferences and recognizes that every
investment move a shareholder makes alters the balance of his or her overall financial
profile. The Fund may be used in conjunction with other funds in the Kidder Family of Funds to
build a portfolio that maximizes the potential of available assets while meeting many
different -- and changing -- financial needs.
- ---------------------------------------------------------------------------------------------------------------------------
Purchase
of Shares
Kidder, Peabody & Co. Incorporated ('Kidder, Peabody'), a major full-line investment services
firm serving the United States and foreign securities
</TABLE>
4
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
markets, acts as the distributor of the Fund's shares. The Fund presently offers three Classes
of shares that differ principally in terms of the sales charges and rate of expenses to which
they are subject and are designed to provide an investor with the flexibility of selecting an
investment best suited to the investor's needs. See 'Purchase of Shares' and 'Distributor.'
Class A Shares
The public offering price of Class A shares is the net asset value per share next determined
after a purchase order is received, plus a maximum sales charge of 2.25% (2.33% of the net
amount invested). Investors purchasing $50,000 or more, certain employee benefit plans and
employees of Kidder, Peabody's affiliates are eligible for reduced sales charges. The Fund
pays Kidder, Peabody a service fee with respect to Class A shares at the annual rate of .25%
of the value of the average daily net assets attributable to this Class.
Class B Shares
The public offering price of Class B shares is the net asset value per share next determined
after a purchase order is received without imposition of a sales charge. The Fund pays Kidder,
Peabody a service fee at the annual rate of .25%, and a distribution fee at the annual rate of
.50%, of the average daily net assets attributable to this Class.
Class C Shares
The public offering price of Class C shares, which are available to employees of Kidder,
Peabody and their associated accounts, directors or trustees of any fund in the Kidder Family
of Funds, employee benefit plans of Kidder, Peabody and participants in the INSIGHT Investment
Advisory Program'sm' ('INSIGHT'), is the net asset value per share next determined after a
purchase order is received without imposition of a sales charge. Class C shares also are
available for purchase by a single account purchasing and maintaining at least a $10 million
investment in the Fund, as well as concurrent purchases in amounts of at least $1 million each
by accounts under common discretionary authority aggregating at least $10 million as to which
Kidder, Peabody may communicate with a single common decision-maker. This Class bears no
service or distribution fees. Participation in INSIGHT is subject to payment of an advisory
fee at the maximum annual rate of 1.50% of assets held through INSIGHT, generally charged
quarterly in advance.
Investment Minimums
The minimum initial investment in the Fund is $1,000 and the minimum subsequent investment is
$50, except that for individual retirement accounts ('IRAs'), other tax qualified retirement
plans and accounts established pursuant to the Uniform Gifts to Minors Act, the minimum
initial investment is $250 and the minimum subsequent investment is $1.00. See 'Purchase of
Shares.'
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Redemption
of Shares
Shares of the Fund may be redeemed at the Fund's next determined net asset value per share.
Redemptions are not subject to any contingent deferred sales charges or other charges. See
'Redemption of Shares.'
- ---------------------------------------------------------------------------------------------------------------------------
Management
Kidder Peabody Asset Management, Inc. ('KPAM'), a wholly-owned subsidiary of Kidder, Peabody,
serves as the Fund's manager and investment adviser and receives a fee, accrued daily and paid
monthly, at the annual rate of .50% of the Fund's average daily net assets. Kidder, Peabody is
a major full-line investment services firm serving foreign and domestic securities markets.
General Electric Capital Services, Inc., a wholly-owned subsidiary of General Electric Company
('GE'), owns all the outstanding stock of Kidder, Peabody Group Inc. ('Kidder Group'), the
parent company of Kidder, Peabody. See 'Management of the Fund' and 'Distributor.'
- ---------------------------------------------------------------------------------------------------------------------------
Risk Factors
and Special
Considera-
tions
No assurance can be given that the Fund will achieve its investment objective. Changes in
interest rates generally will result in increases or decreases in the market value of the
obligations held by the Fund and, unlike that of a money market fund, the Fund's net asset
values per share will fluctuate. The Fund's net asset values will be subject to greater
fluctuation to the extent, if any, that the Fund invests in zero coupon U.S. Treasury
securities. Certain of the instruments held by the Fund, and certain of the investment
techniques that the Fund may employ, might expose the Fund to certain risks. The instruments
presenting the Fund with risks are mortgage-backed securities ('MBSs') (which include
adjustable rate mortgage securities and collateralized mortgage obligations), asset-backed
securities ('ABSs') and zero coupon securities. MBSs and ABSs are subject to prepayment or
early payout risks, which are affected by changes in prevailing interest rates and numerous
economic, geographic, social and other factors. In addition, the Fund may invest to a limited
degree in stripped MBSs, which may experience greater volatility than MBSs generally. See
'Investment Objective and Policies -- Other Investments of the Fund -- Stripped MBSs.' The
investment techniques presenting the Fund with risks are entering into repurchase agreements,
reverse repurchase agreements and dollar rolls, engaging in short sales, lending portfolio
securities and entering into securities transactions on a when-issued or delayed delivery
basis. See 'Investment Objective and Policies -- Risk Factors and Special Considerations' at
page 18 of this Prospectus.
</TABLE>
6
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in conjunction
with the annual audits of the financial statements of the Trust with respect to
the Fund by Deloitte & Touche LLP. Financial statements for the fiscal year
ended August 31, 1994 and the report of independent auditors are included in the
Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
--------------------------------------------------------------------------------
<CAPTION>
PERIOD YEAR PERIOD YEAR PERIOD YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1993`D' 1994 1993`D'`D' 1994 1993`D'`D' 1994
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period................................. $12.00 $12.11 $12.07 $12.11 $12.07 $12.11
--------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income.................... 0.42 0.44 0.13 0.40 0.16 0.30
Net realized and unrealized gains
(losses) on investments................ 0.11 (0.25) 0.04 (0.27) 0.04 (0.07)
--------------------------------------------------------------------------------
Total from investment operations......... 0.53 0.19 0.17 0.13 0.20 0.23
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income.................... (0.42) (0.48) (0.13) (0.42) (0.16) (0.51)
--------------------------------------------------------------------------------
Net asset value, end of period........... $12.11 $11.82 $12.11 $11.82 $12.11 $11.83
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Total return#............................ 4.45% 1.60% 1.40% 1.09% 1.64% 1.94%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in
thousands)............................. $ 218,405 $ 64,419 $5,906 $7,746 $2,622 $1,632
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding distribution fees,
net of reimbursement................... 0.29%* 0.63% 0.29%* 0.63% 0.29%* 0.63%
Expenses, including distribution fees,
net of reimbursement................... 0.53%* 0.88% 0.99%* 1.38% 0.29%* 0.63%
Expenses, before reimbursement from
manager................................ 0.92%* 1.08% 1.35%* 1.58% 0.65%* 0.83%
Net investment income.................... 4.00%* 3.88% 3.54%* 3.38% 4.24%* 4.13%
Portfolio turnover rate.................. 14.03% 25.90% 14.03% 25.90% 14.03% 25.90%
</TABLE>
`D' From November 10, 1992 (Commencement of Operations) to August 31, 1993.
`D'`D' From May 10, 1993 (Commencement of Class Operations) to August 31, 1993.
# Total return does not reflect the effects of a sales charge, and is
calculated by giving effect to the reinvestment of dividends on the dividend
payment date.
* Annualized
7
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is to provide high current income while limiting
the degree of fluctuation of its net asset values resulting from movements in
interest rates. No assurance can be given that the Fund will be able to achieve
its investment objective, which may be changed only with the approval of a
majority of the Fund's outstanding voting securities, which in turn is defined
in the Investment Company Act of 1940, as amended (the '1940 Act'), as the
lesser of (1) 67% or more of the shares present at a Fund meeting, if the
holders of more than 50% of the outstanding shares of the Fund are present or
represented by proxy or (2) more than 50% of the outstanding shares of the Fund.
The Fund's annual report for the fiscal year ended August 31, 1994 contains
information regarding relevant market conditions and investment strategies and
techniques pursued by KPAM during such fiscal period and is available to
shareholders without charge upon request made to the Fund at the address listed
on the front cover page of this Prospectus.
TYPES OF PORTFOLIO INVESTMENTS
Under normal market conditions, the Fund invests at least 65% of its net assets
in Government Securities and at least 65% of its net assets in Adjustable Rate
Securities, many of which will also be Government Securities. The Fund may
invest up to 35% of its net assets in securities that are not Adjustable Rate
Securities and/or Government Securities. The Fund's assets will consist of fixed
rate and adjustable rate MBSs and ABSs rated Aaa by Moody's Investors Service,
Inc. ('Moody's') or AAA by Standard & Poor's Corporation ('Standard & Poor's')
and money market instruments of a comparable short-term rating. The Fund will
not purchase unrated securities and will not retain securities that, subsequent
to their purchase, are assigned lower ratings or cease to be rated.
The Fund may engage in various hedging strategies to increase investment
return and/or protect against interest rate changes in an effort to maintain the
stability of its net asset values. See 'Investment Techniques and Strategies'
below.
The Fund seeks to achieve low volatility of net asset value by investing in
a diversified portfolio of securities that KPAM believes, in the aggregate, is
resistant to significant fluctuations in market value. In selecting securities
for the Fund, KPAM takes into account various factors that will affect the
volatility of the Fund's assets, such as the time to the next coupon reset date
for the securities, the payment characteristics of the securities and the dollar
weighted average life of the securities.
ADJUSTABLE RATE SECURITIES
Adjustable Rate Securities are instruments that bear interest at rates that
adjust at periodic intervals at a fixed amount (typically referred to as a
'spread') over the market levels of interest rates as reflected in specified
indexes. The Adjustable Rate Securities in which the Fund invests will consist
primarily of MBSs and ABSs. MBSs are securities that directly or indirectly
represent
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an interest in, or are backed by and are payable from, mortgage loans secured by
real property. ABSs are generally similar to MBSs, except that the underlying
asset pools consist of credit card, automobile or other types of receivables, or
of commercial loans. MBSs and ABSs are issued in structured financings through
which a sponsor securitizes the underlying mortgage loans or financial assets to
liquify the underlying assets or to achieve certain other financial goals.
The interest paid on Adjustable Rate Securities and, therefore, the current
income earned by the Fund by investing in them, will be a function primarily of
the indexes upon which adjustments are based and the applicable spread relating
to the securities. Examples of indexes that may be used are (1) one-, three- and
five-year U.S. Treasury securities adjusted to a constant maturity index, (2)
U.S. Treasury bills of three or six months, (3) the daily Bank Prime Loan Rate
made available by the Federal Reserve Board, (4) the cost of funds of member
institutions for the Federal Home Loan Bank of San Francisco and (5) the offered
quotations to leading banks in the London interbank market for Eurodollar
deposits of a specified duration ('LIBOR').
The interest rates paid on Adjustable Rate Securities are generally
readjusted periodically to an increment over the chosen interest rate index.
Readjustments occur at intervals ranging from one to 60 months. The degree of
volatility in the market value of the Adjustable Rate Securities in the Fund's
portfolio is a function of the frequency of the adjustment period, the
applicable index and the degree of volatility in the applicable index. It is
also a function of the maximum increase or decrease of the interest rate
adjustment on any one adjustment date, in any one year and over the life of the
securities. These maximum increases and decreases are typically referred to as
'caps' and 'floors,' respectively. The Fund does not seek to maintain an overall
average cap or floor, although KPAM considers caps or floors in selecting
Adjustable Rate Securities for the Fund.
The adjustable interest rate feature underlying the Adjustable Rate
Securities in which the Fund invests generally acts as a buffer to reduce sharp
changes in the Fund's net asset value in response to normal interest rate
fluctuations. As the interest rates on the mortgages underlying the Fund's MBSs
are reset periodically, yields of portfolio securities gradually align
themselves to reflect changes in market rates and should cause the net asset
value of the Fund to fluctuate less dramatically than it would if the Fund
invested in more traditional long-term, fixed rate debt securities. During
periods of rapidly rising interest rates, however, changes in the coupon rate
may temporarily lag behind changes in the market rate, possibly resulting in a
lower net asset value until the coupon resets to market rates. Thus, investors
could suffer some principal loss if they sell their shares of the Fund before
the interest rates on the underlying mortgages are adjusted to reflect current
market rates.
Unlike fixed rate mortgages, which generally decline in value during
periods of rising interest rates, the Fund's adjustable rate MBSs allow the Fund
to participate in increases in interest rates through periodic adjustments in
the coupons of the underlying mortgages, resulting in both higher current yields
and lower price fluctuations. In addition, if prepayments of principal are made
on the underlying mortgages during periods of rising interest rates, the Fund
generally is able to reinvest those amounts in securities with a higher current
rate of return. The Fund does not benefit from increases in interest rates to
the extent that interest rates rise to the point at which they cause the current
coupon of Adjustable Rate Securities to exceed the
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maximum allowable caps. The Fund's net asset values could vary to the extent
that current yields on Adjustable Rate Securities are different from market
yields during interim periods between the coupon reset dates.
MBSS. Three basic types of MBSs are currently available for investments:
(1) those issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities, primarily consisting of securities either guaranteed by the
Government National Mortgage Association ('GNMA') or issued by the Federal
National Mortgage Association ('FNMA') or the Federal Home Loan Mortgage
Corporation ('FHLMC'); (2) those issued by private issuers that represent an
interest in or are collateralized by MBSs issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities; and (3) those issued by
private issuers that represent an interest in or are collateralized by whole
mortgage loans or MBSs without a U.S. Government guarantee but usually having
some form of private credit enhancement.
GNMA, FNMA and FHLMC are agencies or instrumentalities of the U.S.
Government and MBSs issued or guaranteed by them are generally considered to be
of comparable quality to, or higher than, privately issued securities rated Aaa
by Moody's or AAA by Standard & Poor's. GNMA MBSs are guaranteed by GNMA and
consist of pass-through interests in pools of mortgage loans guaranteed or
insured by agencies or instrumentalities of the United States. FNMA and FHLMC
MBSs are issued by FNMA and FHLMC, respectively, and most often represent
pass-through interests in pools of similarly insured or guaranteed mortgage
loans or pools of conventional mortgage loans or participations in the pools.
GNMA, FNMA and FHLMC 'pass-through' MBSs are so-named because they represent
undivided interests in the underlying mortgage pools and a proportionate share
of both regular interest and principal payments (net of fees assessed by GNMA,
FNMA and FHLMC and any applicable loan servicing fees), as well as unscheduled
early prepayments on the underlying mortgage pool, are passed through monthly to
the holder of the MBSs.
Timely payment of principal and interest on GNMA MBSs is guaranteed by
GNMA, a wholly owned corporate instrumentality of the U.S. Government within the
Department of Housing and Urban Development, which guarantee is backed by the
full faith and credit of the U.S. Government. FNMA, a federally chartered and
privately owned corporation organized and existing under the Federal National
Mortgage Association Charter Act, guarantees timely payment of principal and
interest on FNMA MBSs. FHLMC, a corporate instrumentality of the U.S.
Government, guarantees (1) the timely payment of interest on all FHLMC MBSs, (2)
the ultimate collection of principal with respect to some FHLMC MBSs and (3) the
timely payment of principal with respect to other FHLMC MBSs. Neither the
obligations of FNMA nor those of FHLMC are backed by the full faith and credit
of the United States. Nevertheless, because of the relationship of each of these
entities to the United States, MBSs issued by them are generally considered to
be high quality securities with minimal credit risk.
Certain of the MBSs, as well as certain of the ABSs, in which the Fund may
invest are issued by private issuers. Privately issued MBSs and ABSs may take a
form similar to pass-through MBSs issued by agencies or instrumentalities of the
United States, described above, or may be structured in a manner similar to
other types of MBSs or ABSs, described below. Private issuers include
originators of or investors in mortgage loans and receivables such as savings
and loan
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associations, savings banks, commercial banks, investment banks, finance
companies and special purpose finance subsidiaries of these types of
institutions.
The credit enhancement provided for certain privately issued MBSs and ABSs
typically takes one of two forms: (1) liquidity protection and (2) protection
against losses resulting from ultimate default by an obligor on the underlying
assets. Liquidity protection refers to the provision of advances, generally by
the entity administering the pool of assets, to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection against
losses resulting from default ensures ultimate payment of the obligations on at
least a portion of the assets in the pool. This protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transaction (such as the issuance of two or more classes of securities
representing interests in the same underlying assets, with one of the classes'
being senior to the others) or through a combination of these approaches. The
degree of credit support provided for each issue is generally based on
historical information with respect to the level of credit risk associated with
the underlying assets. Delinquencies or losses in excess of those anticipated
could adversely affect the return on an investment in a security. The Fund will
not pay any additional fees for credit support, although the existence of credit
support may increase the price of a security. KPAM will monitor, on an ongoing
basis, the creditworthiness of the providers of credit enhancement for privately
issued MBSs and ABSs held by the Fund.
Among the specific types of MBSs in which the Fund may invest are
adjustable rate mortgages ('ARMs'), which are pass-through mortgage securities
collateralized by mortgages with adjustable rather than fixed rates. ARMs
eligible for inclusion in a mortgage pool generally provide for a fixed initial
mortgage interest rate for either the first three, six, 12, 13, 36 or 60
scheduled monthly payments. Thereafter, the interest rates are subject to
periodic adjustment based on changes to a designated benchmark index.
A second type of MBSs in which the Fund may invest are collateralized
mortgage obligations ('CMOs'), which are debt obligations collateralized by
mortgage loans or mortgage pass-through securities. Typically, CMOs are
collateralized by GNMA, FNMA or FHLMC certificates, but also may be
collateralized by whole loans or private mortgage pass-through securities (this
collateral being referred to collectively in this Prospectus as 'Mortgage
Assets'). Multi-class pass-through securities are equity interests in a trust
composed of Mortgage Assets. Payments of principal of and interest on the
Mortgage Assets, and any reinvestment income on the Mortgage Assets, provide the
funds to pay debt service on the CMOs or make scheduled distributions on the
multi-class pass-through securities. CMOs may be issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans, including depository institutions, mortgage banks,
investment banks and special purpose subsidiaries of these types of
institutions. The issuer of a series of CMOs may elect to be treated as a Real
Estate Mortgage Investment Conduit.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a 'tranch,' is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
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dates. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a CMO series in a number of
different ways. Generally, the purpose of the allocation of the cash flow of a
CMO to the various classes is to obtain a more predictable cash flow to the
individual tranches than exists with the underlying collateral of the CMO. As a
general rule, the more predictable the cash flow is on a CMO tranche, the lower
the anticipated yield will be on that tranche at the time of issuance relative
to prevailing market yields on MBSs.
The Fund may invest in, among other things, parallel pay CMOs and Planned
Amortization Class CMOs ('PAC Bonds'). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, like other CMO structures,
must be retired by its stated maturity date or final distribution date but may
be retired earlier. PAC Bonds are parallel pay CMOs that generally require
payments of a specified amount of principal on each payment date; the required
principal payment on PAC Bonds have the highest priority after interest has been
paid to all classes.
ABSS. The Fund invests in various types of Adjustable Rate Securities in
the form of ABSs. The securitization techniques used in the context of ABSs are
similar to those used for MBSs; through the use of trusts and special purpose
corporations, various types of receivables, primarily home equity loans and
automobile and credit card receivables, are securitized in pass-through
structures similar to the mortgage pass-through structures described above or in
a pay-through structure similar to the CMO structure. ABSs are typically bought
or sold from or to the same entities that act as primary dealers in Government
Securities.
In general, the collateral supporting ABSs is of shorter maturity than
mortgage loans and may be less likely to experience substantial prepayments.
Like MBSs, ABSs are often backed by a pool of assets representing the
obligations of a number of different parties. Currently, pass-through securities
collateralized by Small Business Administration guaranteed loans and home equity
loans are the most prevalent ABSs that are Adjustable Rate Securities.
ABSs are relatively new and untested instruments and may be subject to
greater risk of default during periods of economic downturn than other
securities, including MBSs, satisfying the quality standards of the Fund, which
characteristics of ABSs could result in possible losses to the Fund. In
addition, the secondary market for ABS may not be as liquid as the market for
other securities, including MBSs, which may result in the Fund experiencing
difficulty in valuing ABSs.
OTHER INVESTMENTS OF THE FUND
FIXED RATE MBSS. Fixed rate MBSs in which the Fund may invest consist
primarily of fixed rate pass-through securities and fixed rate CMOs. Like
Adjustable Rate Securities, these fixed rate securities may be issued either by
agencies or instrumentalities of the U.S. Government or by the types of private
issuers described above. Similarly, the basic structures with respect to fixed
rate MBSs are the same as those described above with respect to Adjustable Rate
Securities. The principal difference between fixed rate securities and
Adjustable Rate Securities is that the interest rate on the former type of
securities is set at a predetermined amount and does not vary
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according to changes in any index. Like Adjustable Rate Securities, fixed rate
ABSs generally reflect the same structures as fixed rate MBSs.
STRIPPED MBSS. The Fund may invest up to 10% of its net assets in stripped
MBSs ('SMBSs'), which are derivative multi-class mortgage-backed securities
typically issued by the same types of issuers that issue MBSs. Unlike MBSs, SMBS
arrangements commonly involve two classes of securities that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common variety of SMBS contemplates one class (the principal-only or
'PO' class) receiving some of the interest and most of the principal from the
underlying assets, and the other class (the interest-only or 'IO' class)
receiving most of the interest and the remainder of the principal. In the most
extreme case, the IO class receives all of the interest, while the PO class
receives all of the principal. Although the Fund may purchase securities of a PO
class, it is more likely to purchase the securities of an IO class.
Although IO class SMBSs individually have greater market volatility than
Adjustable Rate Securities, the Fund seeks to combine investments in IOs with
other investments that have offsetting price patterns. The value of IOs varies
with a direct correlation to changes in interest rates, whereas the value of
fixed rate MBSs, like that of other fixed rate debt securities, varies inversely
with interest rate fluctuations. Therefore, active management of IOs in
combination with fixed rate MBSs is intended to add incremental yield from
changes in market rates while not materially increasing the volatility of the
Fund's net asset value.
The yield to maturity of an IO class is extremely sensitive to the rate of
principal payments (including prepayments) on the related underlying assets, and
a rapid rate of principal payments in excess of that considered in pricing the
securities will have a material adverse effect on an IO security's yield to
maturity. If the underlying mortgage assets experience greater than anticipated
payments of principal, the Fund may fail to recoup fully its initial investment
in IOs. The sensitivity of an IO that represents the interest portion of a
particular class as opposed to the interest portion of an entire pool to
interest rate fluctuations may be increased because of the characteristics of
the principal portion to which they relate.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in the
aggregate in securities subject to legal or contractual restrictions on resale
and securities for which no readily available market exists or other illiquid
securities, including repurchase agreements having maturities of more than seven
days, interest rate swaps and ABSs that cannot be disposed of promptly within
seven days and in the usual course of business without the Fund's receiving a
reduced price. The Fund will also treat POs and IOs as illiquid securities
except for POs and IOs issued by U.S. Government agencies and instrumentalities,
whose liquidity is monitored by KPAM subject to the general supervision of the
Board of Trustees.
GOVERNMENT SECURITIES. The Fund may invest in, in addition to Government
Securities guaranteed by GNMA and issued by FNMA and FHLMC described above,
other Government Securities such as bills, certificates of indebtedness and
notes and bonds issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Among the Government Securities that may be held by the Fund
are instruments that are supported by the full faith and credit of the U.S.
Government; instruments that are supported by the right of the issuer to borrow
from the U.S. Treasury; and instruments that are supported solely by the credit
of the instrumentality.
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MONEY MARKET INSTRUMENTS. Pending the investment of funds resulting from
the sale of Fund shares or the liquidation of portfolio holdings in longer term
securities, in order to shorten the Fund's average portfolio maturity during
temporary defensive periods or in order to have available highly liquid assets
to meet anticipated redemptions of Fund shares or to pay the Fund's operating
expenses, the Fund may invest in the following types of money market
instruments: Government Securities; bank obligations (including certificates of
deposit, time deposits and bankers' acceptances) of foreign or domestic banks,
domestic savings and loan associations and other banking institutions whose
unsecured commercial paper (or, in the case of the principal bank in a bank
holding company, the unsecured commercial paper of the bank holding company) is
rated A-1+; commercial paper rated A-1+ by Standard & Poor's; and repurchase
agreements meeting the conditions described below under 'Investment Techniques
and Strategies -- Repurchase Agreements.' At no time will the Fund's investments
in bank obligations, including time deposits, exceed 25% of the value of its
assets.
The Fund is authorized to invest in obligations of foreign banks or foreign
branches of domestic banks that are traded in the United States or outside the
United States, but that are denominated in U.S. dollars, subject to the same
quality criteria described above. These obligations entail risks that are
different from those of investments in obligations in domestic banks, including
foreign economic and political developments outside the United States, foreign
governmental restrictions that may adversely affect payment of principal and
interest on the obligations, foreign exchange controls and foreign withholding
or other taxes on income. Foreign branches of domestic banks are not necessarily
subject to the same or similar regulatory requirements that apply to domestic
banks, such as mandatory reserve requirements, loan limitations and accounting,
auditing and financial recordkeeping requirements. In addition, less information
may be publicly available about a foreign branch of a domestic bank than about a
domestic bank.
INVESTMENT TECHNIQUES AND STRATEGIES
The Fund, in seeking to meet its investment objectives, is authorized to engage
in any one or more of the specialized investment techniques and strategies
described below:
INTEREST RATE TRANSACTIONS. The Fund may enter into interest rate swaps and
the purchase and sale of interest rate caps and floors. The Fund expects to
enter into these transactions primarily to preserve a return or spread on a
particular investment or a portion of its portfolio as a duration management
technique or to protect against any increase in the price of securities that the
Fund anticipates purchasing at a later date. The Fund intends to use these
transactions as a hedge and not as a speculative investment. The Fund does not
sell interest rate caps or floors that it does not own.
Interest rate swaps involve the exchange by the Fund with another party of
their respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments with respect to a notional amount
of principal. The purchase of an interest rate cap entitles the purchaser, to
the extent that a specified index exceeds a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling the interest rate cap. The opposite is true in the case of an interest
rate floor; the purchase of an interest rate
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floor entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest on a notional
principal amount from the party selling the interest rate floor.
The Fund may enter into interest rate swaps, caps and floors on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities, and usually enters into interest rate swaps on a net
basis, i.e., the two payment streams are netted out, with the Fund receiving or
paying, as the case may be, only the net amount of the two payments on the
payment dates. Inasmuch as these transactions are entered into for good faith
hedging purposes, the KPAM and the Trust believe that the Fund's obligations
should not be deemed to constitute senior securities and, accordingly, the Fund
does not treat them as being subject to its borrowing restrictions.
The Fund enters into interest rate swap transactions on a net basis; that
is, the two payment streams are netted out, with the Fund receiving or paying
only the net amount of the two payments. The net amount of the excess, if any,
of the Fund's obligations over its entitlements with respect to each interest
rate swap will be accrued daily and an amount of cash, Government Securities or
other liquid high grade debt obligations having an aggregate net asset value at
least equal to the accrued excess will be maintained by the Fund in a segregated
account with its custodian or a designated sub-custodian.
REPURCHASE AGREEMENTS. The Fund may engage in repurchase agreement
transactions with respect to instruments in which the Fund is authorized to
invest. Although the amount of the Fund's assets that may be invested in
repurchase agreements terminable in less than seven days is not limited,
repurchase agreements maturing in more than seven days, together with other
illiquid securities, will not exceed 15% of the Fund's net assets and in no
event will the Fund invest in repurchase agreements with a duration of greater
than one year. The Fund may engage in repurchase agreement transactions with
certain member banks of the Federal Reserve System and with certain dealers
listed on the Federal Reserve Bank of New York's list of reporting dealers whose
unsecured commercial paper is rated A-1+ by Standard & Poor's. Under the terms
of a typical repurchase agreement, the Fund would acquire an underlying debt
obligation for a relatively short period (usually not more than seven days)
subject to an obligation of the seller to repurchase, and the Fund to resell,
the obligation at an agreed-upon price and time, thereby determining the yield
during the Fund's holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Fund's holding
period. The value of the securities underlying a repurchase agreement of the
Fund will be monitored on an ongoing basis by KPAM to ensure that the value is
at least equal at all times to the total amount of the repurchase obligation,
including interest. KPAM will also monitor, on an ongoing basis to evaluate
potential risks, the creditworthiness of those banks and dealers with which the
Fund enters into repurchase agreements.
REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreement transactions with certain member banks of the Federal Reserve System
and with certain dealers listed on the Federal Reserve Bank of New York's list
of reporting dealers. A reverse repurchase agreement, which is considered a
borrowing by the Fund, involves a sale by the Fund of securities that it holds
concurrently with an agreement by the Fund to repurchase the same
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securities at an agreed upon price and date. The Fund typically invests the
proceeds of a reverse repurchase agreement in money market instruments or
repurchase agreements maturing not later than the expiration of the reverse
repurchase agreement. This use of the proceeds is known as leverage. The Fund
enters into a reverse repurchase agreement for leverage purposes only when the
interest income to be earned from the investment of the proceeds is greater than
the interest expense of the transaction. The Fund may also use the proceeds of
reverse repurchase agreements to provide liquidity to meet redemption requests
when the sale of the Fund's securities is considered to be disadvantageous. The
Fund will establish a segregated account with its custodian, or a designated
sub-custodian, in which the Fund will maintain cash, Government Securities or
other liquid high grade debt obligations equal in value to its obligations with
respect to reverse repurchase agreements.
DOLLAR ROLL TRANSACTIONS. To take advantage of attractive financing
opportunities in the mortgage market and to enhance current income, the Fund may
enter into dollar roll transactions. A dollar roll transaction, which is
considered a borrowing by the Fund, involves a sale by the Fund of a security to
a financial institution, such as a bank or broker-dealer, concurrently with an
agreement by the Fund to repurchase a similar security from the institution at a
later date at an agreed-upon price. The securities that are repurchased will
bear the same interest rate as those sold, but generally will be collateralized
by different pools of mortgages with different prepayment histories than those
sold. During the period between the sale and repurchase, the Fund will not be
entitled to receive interest and principal payments on the securities sold.
Proceeds of the sale will be invested in additional instruments for the Fund.
The Fund is compensated by the difference between the current sales price and
the forward price for the future purchase (often referred to as the 'drop') as
well as by the interest earned on the cash proceeds of the initial sale. Dollar
roll transactions involve the risk that the market value of the securities sold
by the Fund may decline below the repurchase price of those securities. At the
time that the Fund enters into a dollar roll transaction, it will place in a
segregated account maintained with its custodian or a designated sub-custodian
cash, Government Securities or other liquid high grade debt obligations having a
value equal to the repurchase price (including accrued interest) and will
subsequently monitor the account to insure that its value is maintained.
SHORT SALES. The Fund may make short sales of securities. A short sale is a
transaction in which the Fund sells a security it does not own in anticipation
that the market price of that security will decline. The Fund expects to make
short sales both as a form of hedging to offset potential declines in securities
positions it holds in similar securities and in order to maintain portfolio
flexibility.
To complete a short sale, the Fund must arrange through a broker to borrow
the securities to be delivered to the buyer. The proceeds received by the Fund
from the short sale are retained by the broker until the Fund replaces the
borrowed securities. In borrowing the securities to be delivered to the buyer,
the Fund becomes obligated to replace the securities borrowed at their market
price at the time of replacement, whatever that price may be. The Fund may have
to pay a premium to borrow the securities and must pay any dividends or interest
payable on the securities until they are replaced.
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The Fund's obligation to replace the securities borrowed in connection with
a short sale will be secured by collateral deposited with the broker, which
collateral consists of cash or Government Securities. In addition, the Fund will
place in a segregated account with its custodian or a designated sub-custodian
an amount of cash, Government Securities or other liquid high grade debt
obligations equal to the difference, if any, between (1) the market value of the
securities sold at the time they were sold short and (2) any cash or Government
Securities deposited as collateral with the broker in connection with the short
sale (not including the proceeds of the short sale). Until it replaces the
borrowed securities, the Fund will maintain the segregated account daily at a
level such that the amount deposited in the account plus the amount deposited
with the broker (not including the proceeds from the short sale) will equal the
current market value of the securities sold short and will not be less than the
market value of the securities at the time they were sold short.
The Fund will not enter into a short sale of securities if, as a result of
the sale, the total market value of all securities sold short by the Fund would
exceed 25% of the value of the Fund's assets. In addition, the Fund may not (1)
sell short the securities of any single issuer listed on a national securities
exchange to the extent of more than 2% of the value of the Fund's net assets or
(2) sell short the securities of any class of an issuer to the extent of more
than 2% of the outstanding securities of the class at the time of the
transaction. The extent to which the Fund may engage in short sales may be
further limited by the Fund's meeting the requirements for qualification as a
regulated investment company imposed under the Internal Revenue Code of 1986, as
amended (the 'Code'), which requirements are described below under 'Dividends,
Distributions and Taxes.'
The Fund may make short sales 'against the box' without complying with the
limitations described above. In a short sale against the box transaction, the
Fund, at the time of the sale, owns or has the immediate and unconditional right
to acquire at no additional cost the identical security sold.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. To secure prices or yields
deemed advantageous at a particular time, the Fund may purchase securities on a
when-issued or delayed-delivery basis, in which case delivery of and payment for
the securities occurs beyond the normal settlement period. The Fund enters into
when-issued or delayed-delivery transactions for the purpose of acquiring
securities and not for the purpose of leverage. When-issued securities purchased
by the Fund may include securities purchased on a 'when, as and if issued' basis
under which the issuance of the securities depends on the occurrence of a
subsequent event, such as approval of a merger, corporate reorganization or debt
restructuring. The Fund will establish with its custodian, or with a designated
sub-custodian, a segregated account consisting of cash, Government Securities or
other liquid high-grade debt obligations in an amount equal to the amount of its
when-issued or delayed-delivery purchase commitments.
LENDING PORTFOLIO SECURITIES. In seeking to achieve its investment
objective, the Fund may lend securities to well-known and recognized U.S. and
foreign brokers, dealers and banks. These loans, if and when made, may not
exceed 33 1/3% of the Fund's assets taken at value. The Fund's loans of
securities will be collateralized by cash, letters of credit or Government
Securities. The cash or instruments collateralizing the Fund's loans of
securities will be maintained at all times
17
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in a segregated account with the Fund's custodian, or with a designated
sub-custodian, in an amount at least equal to the current market value of the
loaned securities.
INVESTMENT RESTRICTIONS
The Trust has adopted certain fundamental investment restrictions with respect
to the Fund that may not be changed without approval of a majority of the Fund's
outstanding voting securities (as defined in the 1940 Act). Included among those
fundamental restrictions are the following:
1. The Fund will not purchase securities (other than Government
Securities) of any issuer if, as a result of the purchase, more than 5% of
the value of the Fund's total assets would be invested in the securities of
the issuer, except that up to 25% of the value of the Fund's total assets
may be invested without regard to this 5% limitation.
2. The Fund will not purchase more than 10% of the voting securities
of any one issuer, except that this limitation is not applicable to the
Fund's investments in Government Securities, and up to 25% of the value of
the Fund's total assets may be invested without regard to this 10%
limitation.
3. The Fund will not issue senior securities or borrow money, except
that the Fund may enter into interest rate transactions, reverse repurchase
agreements or dollar rolls and may borrow from banks for temporary,
extraordinary or emergency purposes.
4. The Fund will not lend money to other persons, except through
purchasing debt obligations, lending portfolio securities in an amount not
to exceed 33 1/3% of the value of the Fund's total assets and entering into
repurchase agreements.
5. The Fund will invest no more than 25% of the value of its total
assets in securities of issuers in any one industry except that this
limitation is not applicable to the Fund's investments in Government
Securities, Adjustable Rate Securities, MBSs and ABSs.
Certain other investment restrictions adopted by the Trust with respect to
the Fund are described in the Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investing in the Fund involves risks and special considerations, such as those
described below:
INTEREST RATE RISK. The Fund's portfolio is affected by general changes in
interest rates that will result in increases or decreases in the market value of
the obligations held by the Fund. The market value of the obligations in the
Fund's portfolio can be expected to vary inversely to changes in prevailing
interest rates. Investors should also recognize that, in periods of declining
interest rates, the Fund's yields tend to be somewhat higher than prevailing
market rates, and in periods of rising interest rates, the Fund's yields tend to
be somewhat lower. In addition, when interest rates are falling, money received
by the Fund from the continuous sale of its shares normally is invested in
portfolio instruments producing lower yields than the balance of its portfolio,
thereby reducing the Fund's current yields. In periods of rising interest rates,
the opposite result can be expected to occur.
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ADJUSTABLE RATE SECURITIES. The types of securities in which the Fund
invests have certain unique attributes that warrant special consideration or
that present risks that may not exist in other types of mutual fund investments.
Some of these risks and special considerations are peculiar to Adjustable Rate
Securities whereas others, most notably the risk of prepayments, pertain to the
characteristics of MBSs or ABSs generally.
Payments of principal of and interest on MBSs and ABSs are made more
frequently than are payments on conventional debt securities. In addition,
holders of MBSs and of certain ABSs (such as ABSs backed by home equity loans)
may receive unscheduled payments of principal at any time representing
prepayments on the underlying mortgage loans or financial assets. These
prepayments may usually be made by the related obligor without penalty.
Prepayment rates are affected by changes in prevailing interest rates and
numerous other economic, geographic, social and other factors. (ABSs backed by
other than home equity loans do not generally prepay in response to changes in
interest rates, but may be subject to prepayments in response to other factors.)
Changes in the rate of prepayments will generally affect the yield to maturity
of the security. Moreover, when the holder of the security attempts to reinvest
prepayments or even the scheduled payments of principal and interest, it may
receive a rate of interest that is higher or lower than the rate on the MBS or
ABS originally held. To the extent that MBSs or ABSs are purchased by the Fund
at a premium, mortgage foreclosures and principal prepayments may result in loss
to the extent of premium paid. If MBSs or ABSs are bought at a discount,
however, both scheduled payments of principal and unscheduled prepayments will
increase current and total returns and will accelerate the recognition of income
which, when distributed to shareholders, will be taxable as ordinary income.
KPAM will consider remaining maturities or estimated average lives of MBSs and
ABSs in selecting them for the Fund.
ABSs may present certain risks not relevant to MBSs. Although ABSs are a
growing sector of the financial markets, they are relatively new instruments and
may be subject to a greater risk of default during periods of economic downturn
than MBSs. Primarily, these securities do not have the benefit of the same
security interest in the related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give debtors the right
to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of ABSs backed by automobile receivables permit the
servicers of the receivables to retain possession of the underlying obligations.
If the servicer were to sell these obligations to another party, there is a risk
that the purchaser would acquire an interest superior to that of the holders of
the related ABSs. In addition, because of the large number of vehicles involved
in a typical issuance and technical requirements under state laws, the trustee
for the holders of ABSs backed by automobile receivables may not have a proper
security interest in all of the obligations backing the receivables. Therefore,
there is the possibility that recoveries on repossessed collateral may not, in
some cases, be available to support payments on these securities. Finally, the
market for ABSs may not be as liquid as that for MBSs.
The interest rate reset features of Adjustable Rate Securities held by the
Fund reduces the effect on the net asset value of each Class' shares caused by
changes in market interest rates. The market value of Adjustable Rate Securities
and, therefore, each Class' net asset value, however, may vary to the extent
that the current interest rates on the securities differs from market interest
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rates during periods between interest reset dates. These variations in value
occur inversely to changes in market interest rates. As a result, if market
interest rates rise above the current rate on the securities, the value of the
securities will decrease; conversely, if market interest rates fall below the
current rate on the securities, the value of the securities will rise. If
investors in the Fund sold their shares during periods of rising rates before an
adjustment occurred, those investors may suffer some loss. The longer the
adjustment intervals on Adjustable Rate Securities held by the Fund, the greater
the potential for fluctuations in each Class' net asset value.
Fund shareholders receive increased income as a result of upward
adjustments of the interest rates on Adjustable Rate Securities held by the Fund
in response to market interest rates. The Fund and its shareholders do not
benefit, however, from increases in market interest rates once those rates rise
to the point at which they cause the rates on the Adjustable Rate Securities to
reach their maximum adjustment rate, annual or lifetime caps. Because of their
interest rate adjustment feature, Adjustable Rate Securities are not an
effective means of 'locking-in' attractive rates for periods in excess of the
adjustment period. In addition, mortgagors on loans underlying MBSs with respect
to which the underlying mortgage assets carry no agency or instrumentality
guarantee are often qualified for the loans on the basis of the original payment
amounts; the mortgagor's income may not be sufficient to enable it to continue
making its loan payments as the payments increase, resulting in a greater
likelihood of default.
Any benefits to the Fund and its shareholders from an increase in the
Fund's net asset values caused by declining market interest rates is reduced by
the potential for increased prepayments and a decline in the interest rates paid
on Adjustable Rate Securities held by the Fund. When market rates decline
significantly, the prepayment rate on Adjustable Rate Securities is likely to
increase as borrowers refinance with fixed rate mortgage loans, thereby
decreasing the capital appreciation potential of Adjustable Rate Securities. As
a result, the Fund should not be viewed as consistent with any objectives of
seeking capital appreciation.
REPURCHASE AGREEMENTS. In entering into a repurchase agreement, the Fund
bears a risk of loss in the event that the other party to the transaction
defaults on its obligations and the Fund is delayed or prevented from exercising
its rights to dispose of the underlying securities, including the risk of a
possible decline in the value of the underlying securities during the period in
which the Fund seeks to assert its rights to them, the risk of incurring
expenses associated with asserting those rights and the risk of losing all or a
part of the income from the agreement.
REVERSE REPURCHASE AGREEMENTS. A reverse repurchase agreement involves the
risk that the market value of the securities retained by the Fund may decline
below the price of the securities the Fund has sold but is obligated to
repurchase under the agreement. In the event the buyer of securities under a
reverse repurchase agreement files for bankruptcy or becomes insolvent, the
Fund's use of the proceeds of the agreement may be restricted pending a
determination by the party, or its trustee or receiver, whether to enforce the
Fund's obligation to repurchase the securities.
SHORT SALES. Possible losses from short sales differ from losses that could
be incurred from purchases of securities, because losses from short sales may be
unlimited, whereas losses from purchases of securities can equal only the total
amount invested.
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WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. Securities purchased on a
when-issued or delayed-delivery basis may expose the Fund to risk because the
securities may experience fluctuations in value prior to their actual delivery.
The Fund will not accrue income with respect to a when-issued or
delayed-delivery security prior to its stated delivery date. Purchasing
securities on a when-issued or delayed-delivery basis can involve the additional
risk that the yield available in the market when the delivery takes place may be
higher than that obtained in the transaction itself.
LENDING PORTFOLIO SECURITIES. In lending securities to U.S. and foreign
brokers, dealers and banks, the Fund will be subject to risks, which, like those
associated with other extensions of credit, include possible loss of rights in
the collateral should the borrower fail financially.
PORTFOLIO TURNOVER
The Fund's portfolio is actively managed. For the fiscal year ended August 31,
1994 and for the period from November 10, 1992 (commencement of operations) to
August 31, 1993, the Fund's portfolio turnover rates were 25.90% and 14.03%,
respectively. An annual turnover rate of 100% would occur if all of the
securities held by the Fund are replaced once during a period of one year.
Short-term gains realized from portfolio transactions are taxable to
shareholders as ordinary income. In addition, higher portfolio turnover rates
can result in corresponding increases in portfolio transaction costs and may
make it more difficult for the Fund to qualify as a regulated investment company
for federal income tax purposes. See 'Dividends, Distributions and Taxes --
Taxes.'
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Trust's Board of Trustees, and the day-to-day operations of the Fund are
conducted through or under the direction of officers of the Trust. The Statement
of Additional Information contains general background information regarding each
Trustee and officer of the Trust.
MANAGER AND INVESTMENT ADVISER
KPAM, located at 60 Broad Street, New York, New York 10004-2350, serves as the
Fund's manager and investment adviser. A wholly-owned subsidiary of Kidder,
Peabody, and a registered investment adviser under the Investment Advisers Act
of 1940, as amended, KPAM currently provides investment management, investment
advisory and administrative services to a wide variety of individual and
institutional clients. The Kidder, Peabody Asset Management Group of Companies
(of which KPAM is the primary entity) provides advisory and consulting services
to more than $18 billion in assets as of September 30, 1994. General Electric
Capital Services, Inc., a wholly-owned subsidiary of GE, owns all of the
outstanding stock of Kidder Group, the parent company of Kidder, Peabody.
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Under an agreement dated October 17, 1994, GE and Kidder Group agreed to
sell to PaineWebber Group Inc. certain assets of Kidder Group and its
subsidiaries, including Kidder, Peabody and KPAM. The consummation of this
transaction, which is subject to a number of conditions and cannot be assured,
will result in the deemed assignment and automatic termination of the agreements
pursuant to which Kidder, Peabody serves as the principal underwriter of the
Fund's shares and KPAM serves as the Fund's manager and investment adviser.
Institution of new arrangements with Kidder, Peabody's and KPAM's successors
following the consummation of the transaction, anticipated to occur in the first
quarter of 1995, have been approved by the Trustees and separately by a majority
of the Trustees who are not 'interested persons' of the Fund within the meaning
of the 1940 Act. In addition, the Fund's new management arrangements will
require approval by the holders of a 'majority of the outstanding voting
securities' of the Fund, as defined in the 1940 Act. No assurance can be given
that the required shareholder approvals will be obtained and, if they are not,
the Trustees will take such action as they determine to be appropriate and in
the best interests of the Fund and its shareholders.
As the Fund's manager, KPAM, subject to the supervision and direction of
the Trust's Board of Trustees, is generally responsible for furnishing, or
causing to be furnished to the Fund, investment advisory and management
services. Included among the specific services provided by KPAM as manager are:
the maintenance and furnishing of all required records or reports pertaining to
the Fund to the extent those records or reports are not maintained or furnished
by the Fund's transfer agent, custodian or other agents employed by the Fund;
the providing of general administrative services to the Fund not otherwise
provided by the Fund's transfer agent, custodian or other agents employed by the
Fund; and the payment of reasonable salaries and expenses of those of the Fund's
officers and employees, and the fees and expenses of those members of the
Trust's Board of Trustees, who are directors, officers or employees of KPAM.
As the Fund's investment adviser, KPAM, subject to the supervision and
direction of the Trust's Board of Trustees, manages the Fund's portfolio in
accordance with the investment objective and stated policies of the Fund, makes
investment decisions for the Fund and places purchase and sale orders for the
Fund's portfolio transactions.
John F. Green, Jr. serves as Chief Investment Officer of the Fund and in
that capacity is the individual primarily responsible for the management of the
Fund's assets. He is Senior Vice President of Kidder, Peabody and KPAM. Prior to
June 1992, he was Senior Vice President and director of Nomura Mortgage Fund
Management Corp.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by KPAM, investments of the type the Fund
may make may also be made by those other accounts. When the Fund and one or more
other accounts managed by KPAM are prepared to invest in, or desire to dispose
of, the same security, available investments or opportunities for sales are
allocated in a manner believed by KPAM to be equitable to each. In some cases,
this procedure may adversely affect the price paid or received by the Fund or
the size of the position obtained or disposed of by the Fund.
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EXPENSES
The Trust pays KPAM for its services as manager and investment adviser to the
Fund a fee that is accrued daily and paid monthly at the annual rate of .50% of
the Fund's average daily net assets. From time to time, KPAM in its sole
descretion may waive all or a portion of its fee and/or reimburse all or a
portion of the Fund's operating expenses.
For the fiscal year ended August 31, 1994, Class A's, Class B's and Class
C's total expenses represented .88%, 1.38% and .63% of their average daily net
assets, respectively. However, during such periods, had KPAM not reimbursed the
Classes for a portion of their operating expenses, Class A's, Class B's and
Class C's total expenses would have represented 1.08%, 1.58% and .83% of their
average daily net assets, respectively.
Each Class bears its own expenses, which generally include all costs not
specifically borne by KPAM. Included among a Class' expenses are costs incurred
in connection with the Class' and Fund's organization; management and investment
advisory fees; any distribution and/or service fees; fees for necessary
professional and brokerage services; fees for any pricing service used in
connection with the valuation of shares; costs of regulatory compliance; and a
portion of the costs associated with maintaining the Trust's legal existence and
corresponding with shareholders of the Fund. The Trust's agreement with KPAM
provides that KPAM will reduce its fees to the Fund to the extent required by
applicable state laws for certain expenses that are described in the Statement
of Additional Information.
PURCHASE OF SHARES
GENERAL INFORMATION
Shares of the Fund must be purchased and maintained through a Kidder, Peabody
brokerage account (an 'Account'), so that an investor who wishes to purchase
shares but who has no existing Account must establish one. Kidder, Peabody
charges no maintenance fee in connection with an Account through which an
investor purchases or holds shares of the Fund.
Purchases are effected at the public offering price of the Fund's shares
next determined after a purchase order is received. Payment for shares purchased
by an investor is due at Kidder, Peabody on the 'settlement date,' which is
generally the fifth business day after the order for purchase is placed, unless
the investor has 'good funds' available in an existing Account that can be
applied to the purchase. Alternatively, the settlement date for purchases of $1
million or more may, at the election of the investor, be the business day
following the placement of a purchase order, provided that good funds are
available in the account on that day. 'Good funds' as used in this Prospectus
means cash, Federal funds, or certified checks drawn on a U.S. bank. The Trust
reserves the right to reject any purchase order for shares of the Fund and to
suspend the offering for any period of time.
The minimum initial investment in the Fund is $1,000 and the minimum
subsequent investment is $50, except that for IRAs, other tax qualified
retirement plans and accounts
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established pursuant to the Uniform Gifts to Minors Act, the minimum initial
investment is $250 and the minimum subsequent investment is $1.00. The Trust
reserves the right to vary at any time the minimum initial or subsequent
investment amounts.
Purchase orders for shares of the Fund that are received prior to the close
of regular trading on the New York Stock Exchange (the 'NYSE') on a particular
day (currently 4:00 p.m., New York time) are priced according to the net asset
values determined on that day. Purchase orders received after the close of
regular trading on the NYSE are priced as of the time each Class' net asset
value per share is next determined. See 'Determination of Net Asset Value' below
for a description of the times at which each Class' net asset value per share is
determined.
The Trust offers Fund shareholders an Automatic Investment Plan under which
a shareholder may authorize Kidder, Peabody to place monthly, twice monthly or
quarterly, as selected by the shareholder, a purchase order for Fund shares in
an amount not less than $100. The purchase price is paid automatically from a
designated bank account of the shareholder. The Fund reserves the right to
terminate or change the provisions of the Automatic Investment Plan.
Under the Choice Pricing System, the Fund presently offers three methods of
purchasing shares, enabling investors to choose the Class that best suits their
needs, given the amount of purchase and intended length of investment. Kidder,
Peabody Investment Executives and other persons remunerated on the basis of
sales of shares may receive different levels of compensation for selling one
Class of shares over another. When purchasing shares of the Fund, investors must
specify whether the purchase is for Class A shares, Class B shares or Class C
shares, as described below.
CLASS A SHARES
The public offering price of Class A shares is the net asset value per Class A
share next determined after a purchase order is received plus a sales charge, if
applicable. Class A shares are subject to a service fee at the annual rate of
.25% of the value of the Fund's average daily net assets attributable to this
Class. See 'Distributor.' The sales charge payable upon the purchase of Class A
shares will vary with the amount of purchase as set forth below.
<TABLE>
<CAPTION>
TOTAL SALES CHARGE
-------------------------------------------
AMOUNT OF PURCHASE AS PERCENTAGE AS PERCENTAGE
AT OFFERING PRICE OF OFFERING PRICE OF NET AMOUNT INVESTED
----------------------- ----------------- ----------------------
<S> <C> <C>
Less than $50,000........................................... 2.25% 2.33%
$50,000 but less than $100,000.............................. 1.75% 1.75%
$100,000 but less than $250,000............................. 1.50% 1.50%
$250,000 or more............................................ 0% 0%
</TABLE>
INSTANCES OF A REDUCED OR WAIVED SALES CHARGE. Class A shares are sold
subject to a reduction of 20% in the sales charges shown in the table above to:
(1) employees of GE and other affiliates of Kidder, Peabody, (2) IRAs for those
employees, (3) other employee benefit plans for
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those employees and (4) the spouses and minor children of those employees when
orders on their behalf are placed by the employees.
Class A shares are sold without a sales charge to tax exempt organizations
enumerated in Section 501(c)(3) of the Code, and retirement plans qualified
under Section 403(b)(7) of the Code, each having 1,000 or more participants
('Qualified Plans'). Employees eligible to participate in Qualified Plans
sponsored by the same organization or its affiliates may be aggregated in
determining the sales charge applicable to an investment made by a Qualified
Plan.
No sales charge is imposed on Class A shares purchased through reinvestment
of dividends or capital gains distributions. Clients of a newly-employed Kidder,
Peabody Investment Executive are eligible to purchase Class A shares subject to
no sales charge for a period of 90 days after the Investment Executive first
becomes employed by Kidder, Peabody, so long as the following conditions are
met: (1) the purchase is made within 30 days of, and with the proceeds from, a
redemption of shares of a mutual fund sponsored by the Investment Executive's
previous employer; (2) the Investment Executive served as the client's broker on
the purchase of the shares of the mutual fund; and (3) the shares of the mutual
fund sold were subject to a sales charge. Clients of a Kidder, Peabody
Investment Executive are also eligible to purchase Class A shares subject to no
sales charge so long as the following conditions are met: (1) the purchase is
made within 30 days of, and with the proceeds from, a redemption of shares of a
mutual fund that were purchased through Kidder, Peabody acting as a selected
dealer for the shares pursuant to an agreement between Kidder, Peabody and the
mutual fund's principal underwriter; (2) the mutual fund invested primarily in
Adjustable Rate Securities; (3) the Investment Executive served as the client's
broker on the purchase of the shares of the mutual fund sold; and (4) the shares
of the mutual fund sold were subject to a sales charge. Class A shares may also
be offered without a sales charge to any investment company, other than a
company for which Kidder, Peabody serves as distributor, in connection with the
combination of the company with the Fund by merger, acquisition of assets or
otherwise.
VOLUME DISCOUNTS. Any investor meeting certain requirements, including the
signing of a Letter of Intent (a 'Letter'), is eligible to obtain a reduced
sales charge for purchasing Fund shares by combining purchases made over a
13-month period of Class A shares and shares of other mutual funds in the Kidder
Family of Funds with respect to which the investor previously paid, or is
subject to the payment of, a sales charge (collectively referred to as 'Eligible
Shares'). Purchases of Fund shares by eligible investors must aggregate at least
$50,000 and must include a minimum initial investment of at least $1,000 and
minimum subsequent investments of at least $50. For purposes of the procedure
contemplated by a Letter, Eligible Shares owned by an investor will be valued at
their original cost in determining the size of a purchase and the applicable
sales charge.
An investor's purchase of Eligible Shares not originally made pursuant to a
Letter may be included under a Letter subsequently executed within 90 days of
the purchase, so long as the investor informs Kidder, Peabody in writing within
the 90-day period of the investor's desired use of a Letter. The original cost
of an investor's Eligible Shares not purchased pursuant to a
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Letter may be included under a Letter subsequently executed within 90 days of
the purchase, so long as the investor informs Kidder, Peabody in writing within
the 90-day period of the investor's desire for that treatment to be applicable.
The original cost of Eligible Shares not purchased pursuant to a Letter may be
included as a credit toward the fulfillment of the terms of the Letter; the
reduced sales charge contemplated by the Letter, however, will apply only to the
purchases of Eligible Shares made after the execution of the Letter, which
purchases, as noted above, must aggregate at least $50,000.
A Letter must provide for 5% of the dollar amount of the intended
investment to be held in escrow by Investors Fiduciary Trust Company ('IFTC') in
the form of Eligible Shares in an account registered in the name of the
shareholder. If the total amount of any Eligible Shares owned at the time a
Letter is signed plus all purchases made under the terms of the Letter less
redemptions (the 'investment') are at least equal to the intended investment,
the amount in escrow will be released to the shareholder. If the investment is
more than $50,000 but less than the intended investment, a remittance of the
difference in the dollar amount of sales charge paid and the sales charge that
would have been paid if the investment had been made at a single time will be
made upon request. If the remittance is not sent within 20 days after such a
request, IFTC will redeem an appropriate number of Eligible Shares held in
escrow in order to realize the difference. Amounts remaining in the escrow
account will be released to the shareholder's account. If the total investment
is more than the intended investment and the total is sufficient to qualify for
an additional sales charge reduction, a retroactive price adjustment will be
made for all purchases made under a Letter to reflect the sales charge
applicable to the aggregate amount of the purchases during the 13-month period.
A Letter is not a binding obligation to purchase the indicated amount, and
Kidder, Peabody is not obligated to sell the indicated amount. Reinvested
dividends and capital gains are not applied toward the completion of the
purchases contemplated by a Letter.
RIGHT OF ACCUMULATION. Reduced sales charges on Class A shares are
available under a combined right of accumulation permitting an investor to
combine the value of Eligible Shares and the value of Fund shares being
purchased, to qualify for a reduced sales charge. Before a shareholder may take
advantage of the right of accumulation, the shareholder must provide Kidder,
Peabody at the time of purchase with sufficient information to permit Kidder,
Peabody to confirm that the shareholder is qualified for the right; acceptance
of the shareholder's purchase order is subject to that confirmation. The right
of accumulation may be amended or terminated at any time by the Trust.
DEFINITION OF PURCHASE. For purposes of the volume discounts and right of
accumulation described above, a 'purchase' refers to: a single purchase of
Eligible Shares by an individual; concurrent purchases by an individual, his or
her spouse and their children under the age of 21 years purchasing Eligible
Shares for his, her or their own account; and single purchases by a trustee or
other fiduciary purchasing Eligible Shares for a single trust estate or single
fiduciary account, including a pension, profit-sharing or other employee benefit
trust created pursuant to a plan qualified under Section 401 of the Code, even
though more than one beneficiary is involved. The term 'purchase' also includes
purchases by any 'company,' as that term is defined in the
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1940 Act, but does not include: purchases by any such company that has not been
in existence for at least six months or that has no purpose other than the
purchase of Eligible Shares or shares of other investment companies registered
under the 1940 Act at a discount; or purchases by any group of individuals whose
participants are related by virtue of being credit card holders of a company,
policyholders of an insurance company, customers of either a bank or
broker-dealer or clients of an investment adviser. The term 'purchase' also
includes purchases by employee benefit plans not qualified under Section 401 of
the Code, including purchases by employees or by employers on behalf of
employees by means of a payroll deduction plan, or otherwise, of Eligible
Shares. Purchases by such a company or non-qualified employee benefit plan will
qualify for the volume discounts offered with respect to the Fund's shares only
if the Trust and Kidder, Peabody are able to realize economies of scale in sales
efforts and sales-related expenses by means of the company's, the employer's or
the plan's making the Prospectus available to individual investors or employees
and forwarding investments by those persons to the Trust, and by any such
employer's or plan's bearing the expense of any payroll deduction plan. The term
'purchase' also includes any purchase of Eligible Shares by or on behalf of
certain members of the same family, including spouses, children (adult and
minor), parents, grandparents and siblings, provided, however, that the
following conditions are met: (1) following consummation of the purchase, the
family has, in the aggregate, (a) at least $5 million invested in Eligible
Shares of one or more funds within the Kidder Family of Funds or (b) at least
$10 million in cash and/or securities in Kidder, Peabody Accounts; and (2) the
Trust and Kidder, Peabody are able to realize economies of scale in sales effort
and sales-related expenses by means of dealing with a common decision-maker or
otherwise being able to treat the accounts as a single relationship.
REINSTATEMENT PRIVILEGE. The Fund offers a reinstatement privilege under
which a shareholder that has redeemed Class A shares may reinvest the proceeds
from the redemption without imposition of a sales charge, provided the
reinvestment is made within 60 days of the redemption. The tax status of a gain
realized on a redemption will not be affected by exercise of the reinstatement
privilege but a loss will be nullified if the reinvestment is made within 30
days of the redemption. See the Statement of Additional Information for the tax
consequences when, within 90 days of a purchase of Class A shares, the shares
are redeemed and reinvested in the Fund or another mutual fund.
CLASS B SHARES
The public offering price of Class B shares is the net asset value per share
next determined after a purchase order is received without imposition of any
sales charge. Class B shares are subject to a service fee at the annual rate of
.25%, and a distribution fee at the annual rate of .50%, of the value of the
Fund's average daily net assets attributable to this Class. See 'Distributor.'
Kidder, Peabody has adopted guidelines, in view of the relative sales charges,
service fees and distribution fees, directing Investment Executives that all
purchases of shares should be for Class A shares when the purchase is for
$250,000 or more by an investor not eligible to purchase Class C shares. Kidder,
Peabody reserves the right to vary these guidelines at any time.
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CLASS C SHARES
The public offering price of Class C shares is the net asset value per share
next determined after a purchase order is received without imposition of any
sales charge. Class C shares, which are not subject to any service fee or
distribution fee, are available exclusively to employees of Kidder, Peabody and
their associated accounts, directors or trustees of any fund in the Kidder
Family of Funds, employee benefit plans of Kidder, Peabody and participants in
Insight when shares are purchased through that program. Class C shares also are
available for purchase by a single account purchasing and maintaining at least a
$10 million investment in the Fund, as well as concurrent purchases in amounts
of at least $1 million each by accounts under common discretionary authority
aggregating at least $10 million as to which Kidder, Peabody may communicate
with a single common decision-maker and thereby realize economies of scale in
its sales effort. In the latter case, eligibility for purchases of Class C
shares must be established by providing documentation satisfactory to Kidder,
Peabody demonstrating common discretionary authority. If the value of an account
in Class C shares contemplated by the above is reduced to an amount less than
$10 million by reason other than market fluctuation, a subsequent purchase order
will not be eligible for Class C shares unless that order restores the account
value to an amount of at least $10 million. Investors eligible to purchase Class
C shares may not purchase any other Class of shares.
INSIGHT. An investor purchasing $50,000 or more of shares of funds in the
Kidder Family of Funds may participate in INSIGHT, KPAM's total portfolio asset
allocation program, and receive Class C Shares. INSIGHT offers comprehensive
investment services, including a personalized asset allocation investment
strategy using an appropriate combination of funds in the Kidder Family of
Funds, professional investment advice regarding investment among the funds in
the Kidder Family of Funds by KPAM portfolio specialists, monitoring of
investment performance and comprehensive quarterly reports that cover market
trends, portfolio summaries and personalized account information. Participation
in INSIGHT is subject to payment of an advisory fee to KPAM at the maximum
annual rate of 1.5% of assets held through the program (generally charged
quarterly in advance), which covers all INSIGHT investment advisory services and
program administration fees. Employees of Kidder, Peabody are entitled to a 50%
reduction in the fee otherwise payable for participation in INSIGHT. INSIGHT
clients may elect to have their INSIGHT fees charged to their accounts (by the
automatic redemption of money market fund shares) or another of their Kidder,
Peabody accounts or, billed separately.
REDEMPTION OF SHARES
A shareholder may redeem Fund shares on any day that the Fund's net asset value
is determined by following the procedures described below.
REDEMPTION THROUGH KIDDER, PEABODY
Shares may be redeemed through Kidder, Peabody, which provides the terms of any
redemption request properly received prior to 4:00 p.m., New York time, on a
given day, to the Fund's transfer agent. The trade date of a redemption so
received is considered to be that day, and the trade date of any redemption
request received at or after 4:00 p.m., New York time, is considered to be the
next business day. If shares to be redeemed were issued in certificate form, the
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certificates for the shares to be redeemed must be submitted to the transfer
agent in accordance with the procedures described in items (1) through (4) under
'Redemption by Mail' below.
REDEMPTION BY MAIL
Shares may be redeemed by submitting a written request in 'good order' to the
Fund's transfer agent at the following address:
Kidder, Peabody Adjustable Rate Government Fund
Class A, B or C (please specify)
c/o Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, Missouri 64105
The transfer agent transmits any redemption request that it receives to
Kidder, Peabody, and the request is then treated as if it had been made through
Kidder, Peabody. A redemption request is considered to have been received in
'good order' if the following conditions are satisfied:
(1) the request is in writing, states the Class and number or dollar
amount of shares to be redeemed and identifies the shareholder's Fund
account number;
(2) the request is signed by each registered owner exactly as the
shares are registered;
(3) if the shares to be redeemed were issued in certificate form, the
certificates are endorsed by the shareholder for transfer (or are
themselves accompanied by an endorsed stock power) and accompany the
redemption request, which should be sent by registered mail for the
protection of the shareholder; and
(4) the signatures on either the written redemption request or the
certificates (or the accompanying stock power) have been guaranteed by a
bank, broker-dealer, municipal securities broker and dealer, government
securities dealer and broker, credit union, a member firm of a national
securities exchange, registered securities association or clearing agency,
and savings association (the purpose of a signature guarantee is to protect
shareholders against the possibility of fraud). The transfer agent may
reject redemption instructions if the guarantor is neither a member of nor
a participant in a signature guarantee program (currently known as
'STAMP''sm').
Additional supporting documents may be required for redemptions of Fund
shares by corporations, executors, administrators, trustees and guardians.
OTHER REDEMPTION POLICIES
Signature guarantees are required in connection with (1) any redemption of Fund
shares made by mail and (2) share ownership transfer requests. These
requirements may be waived by the Trust in certain instances.
Any redemption request made by a shareholder of the Fund will be effected
at the net asset value per share next determined after proper redemption
instructions are received. See 'Determination of Net Asset Value' below. The
proceeds of the redemption generally are credited to the shareholder's Account,
or sent to the shareholder, as applicable, on the fifth
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business day following the date after the redemption request was received in
good order (or, alternatively, on the first business day following that date for
redemptions of $1 million or more if the shareholder so elects), but in no event
later than seven days following that date. A shareholder who pays for Fund
shares by personal check will be credited with the proceeds of a redemption of
those shares only after the check used for the purchase has cleared, which may
take up to 15 days or more. If shares are purchased with good funds, no delay in
redemption will occur. The amount of redemption proceeds received by a Fund
shareholder will in no way be affected by any delay in the crediting of those
proceeds.
A Fund account with respect to a Class of shares that is reduced by
redemptions, and not by reason of market fluctuations, to a value of $500 or
less may be redeemed by the Trust, but only after the shareholder has been given
at least 30 days in which to increase the balance in the account to more than
$500. Proceeds of such a redemption will be mailed to the shareholder.
DISTRIBUTIONS IN KIND
If the Trustees determine that it would be detrimental to the best interests of
the Fund's shareholders to make a redemption payment wholly in cash, the Fund
may pay, in accordance with rules adopted by the SEC, any portion of a
redemption in excess of the lesser of $250,000 or 1% of the Fund's net assets by
a distribution in kind of readily marketable portfolio securities in lieu of
cash. Redemptions failing to meet this threshold must be made in cash.
Shareholders receiving distributions in kind of portfolio securities may incur
brokerage commissions when subsequently disposing of those securities.
SYSTEMATIC WITHDRAWAL PLAN
The Trust offers a systematic withdrawal plan (the 'Withdrawal Plan') under
which a shareholder of the Fund with $20,000 or more invested in a Class may
elect periodic redemption payments to the shareholder or a designated payee on a
monthly basis. Payments pursuant to the Withdrawal Plan normally are made within
the last ten days of the month. The minimum rate of withdrawal is $200 per month
and the maximum annual withdrawal is 12% of current account value in the Class
as of the commencement of participation in the Withdrawal Plan (less the amount
of any subsequent redemption outside the Withdrawal Plan). A shareholder
participating in the Withdrawal Plan must reinvest all income and capital gains
distributions, and may not continue to participate if the shareholder redeems
outside the Withdrawal Plan or exchanges to another fund an amount that would
cause the account value in the Class to fall below $20,000. The Trust may amend
or terminate the Withdrawal Plan, and a shareholder may terminate participation
in the Withdrawal Plan at any time.
DETERMINATION OF NET ASSET VALUE
Each Class' net asset value per share is calculated by IFTC, the Fund's
custodian, on each day, Monday through Friday, except that net asset value is
not computed on a day in which no orders to purchase, sell, exchange or redeem
Fund shares have been received, any day on which there is not sufficient trading
in the Fund's portfolio securities that the Fund's net asset values per share
might be materially affected by changes in the value of such portfolio
securities or on days on
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which the NYSE is not open for trading. The NYSE is currently scheduled to be
closed on New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving and Christmas, and on the preceding
Friday when one of those holidays falls on a Saturday or on the subsequent
Monday when one of those holidays falls on a Sunday.
Net asset value per share of a Class is determined as of the close of
regular trading on the NYSE, and is computed by dividing the value of the Fund's
net assets attributable to that Class by the total number of shares outstanding
of that Class. Generally, the Fund's investments are valued at market value or,
in the absence of a market value, at fair value as determined by or under the
direction of the Trust's Board of Trustees.
Investments in Government Securities and other securities traded
over-the-counter, other than short-term investments that mature in 60 days or
less, are valued at the average of the quoted bid and asked prices in the
over-the-counter market. Short-term investments that mature in 60 days or less
are valued on the basis of amortized cost (which involves valuing an investment
at its cost and, thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the effect of fluctuating interest rates on
the market value of the investment) when the Board of Trustees has determined
that amortized cost represents fair value. A security that is primarily traded
on a stock exchange is valued at the last sale price on that exchange or, if no
sales occurred during the day, at the current quoted bid price.
In carrying out the Board's valuation policies, IFTC may consult with an
independent pricing service retained by the Trust. Further information regarding
the Fund's valuation policies is contained in the Statement of Additional
Information.
EXCHANGE PRIVILEGE
Shares of each Class may be exchanged for shares of the same Class (or the sole
class offered) in certain funds in the Kidder Family of Funds, to the extent
shares are offered for sale in the shareholder's state of residence. For a list
and a description of the funds in the Kidder Family of Funds for which shares
may be exchanged, see 'Exchange Privilege' in the Statement of Additional
Information. Under the Choice Pricing System, an exchange of shares of the Fund
with other funds' shares will be limited to shares of the same class or the sole
class (money market funds only) of shares of a fund from or to which the
exchange is to be effected. For example, if a holder of Class A shares of
Kidder, Peabody Global Equity Fund ('Global Equity Fund') exchanges his shares
for shares of Kidder, Peabody Cash Reserve Fund, Inc. ('Cash Reserve Fund') (a
money market fund) and thereafter wishes to exchange those shares for shares of
the Fund, he may receive only Class A shares in the latter transaction. As
another example, if a holder of shares of Cash Reserve Fund acquired as a result
of an initial investment and not from an exchange with shares of another fund
wishes to exchange his shares for shares of Global Equity Fund, he may receive
Class A shares, Class B shares or Class C shares (depending on his eligibility
for Class C shares) in the exchange transaction. Thereafter, any further
exchanges would be subject to the principal described above limiting subsequent
exchanges to the same class or the sole class of shares of other funds. If
shares acquired in an exchange are subject to payment of a sales charge higher
than the sales charge paid on the shares relinquished in the exchange (or any
predecessor of those shares), the exchange will be subject to payment of an
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amount equal to the difference, if any, between the sales charge previously paid
and the sales charge payable on the shares acquired in the exchange.
Although the Fund currently imposes no limit on the number of times the
Exchange Privilege may be exercised by any shareholder, the Fund may impose such
limits in the future, in accordance with applicable provisions of the 1940 Act
and rules thereunder. In addition, the Exchange Privilege may be terminated or
revised at any time upon 60 days' prior written notice to Fund shareholders, and
is available only to residents of states in which exchanges are permitted under
state law. The exchange of shares of one fund for shares of another is treated
for federal income tax purposes as a sale of the shares given in exchange by the
shareholder, so that a shareholder may recognize a taxable gain or loss on an
exchange.
Upon receipt of proper instructions and all necessary supporting documents,
Fund shares submitted for exchange will be redeemed at their net asset value
next determined and simultaneously invested in shares of the fund being
acquired. Settlement of an exchange would occur one business day after the date
on which the request for exchange was received in proper form, unless the dollar
amount of the transaction exceeds 5% of the Fund's total net assets on any given
day, in which case settlement would occur within five business days after the
date on which the request for exchange was received in proper form. The proceeds
of a redemption of Fund shares made to facilitate the exchange of those shares
for shares of another fund must be equal to at least (1) the minimum initial
investment requirement imposed by the fund into which the exchange is being
sought if the shareholder seeking the exchange has not previously invested in
that fund or (2) the minimum subsequent investment requirement imposed by the
fund into which the exchange is being sought if the shareholder has previously
made an investment in that fund.
A shareholder of the Fund wishing to exercise the Exchange Privilege should
obtain from Kidder, Peabody a copy of the current prospectus of the fund into
which an exchange is being sought and review that prospectus carefully before
making the exchange. Kidder, Peabody reserves the right to reject any exchange
request at any time. Prior to or concurrently with the delivery of a
confirmation a shareholder's exchange transaction, Kidder, Peabody will deliver
to that shareholder a copy of the prospectus of the fund into which the exchange
is being made.
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income of the Fund are declared daily and
distributed monthly and distributions of net realized capital gains of the Fund,
if any, are declared and distributed annually after the close of the fiscal year
in which they are earned. Unless a shareholder instructs the Fund that dividends
and capital gains distributions on shares of any Class should be paid in cash
and credited to the shareholder's Account, dividends and capital gains
distributions are reinvested automatically at net asset value in additional
shares of the same Class. The Fund is subject to a 4% nondeductible excise tax
measured with respect to certain undistributed amounts of net investment income
and capital gains. If necessary to avoid the imposition of this tax, and if in
the best interests of its shareholders, the Fund will declare and pay dividends
of its net
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investment income and distributions of its net capital gains more frequently
than stated above. The per share dividends and distributions on Class C shares
will be higher than those on Class A shares, which in turn will be higher than
those on Class B shares, as a result of the different service, distribution and
transfer agency fees applicable to the Classes. See 'Fee Table,' 'Purchase of
Shares,' 'Distributor' and 'General Information.'
Shares of the Fund begin earning dividends on the day on which the shares
are issued, the date of issuance customarily being the settlement date, which is
the date on which the Fund receives payment for the shares. Shares continue to
earn dividends until the day prior to the settlement date of a redemption.
TAXES
The Fund qualified for the fiscal year ended August 31, 1994 as a regulated
investment company within the meaning of the Code and intends to qualify for
this treatment in each year. To qualify as a regulated investment company for
federal income tax purposes, the Fund limits its income and investments so that
(1) less than 30% of its gross income is derived from the sale or disposition of
stocks, other securities and certain financial instruments (including certain
forward contracts) that were held for less than three months and (2) at the
close of each quarter of the taxable year (a) not more than 25% of the market
value of the Fund's total assets is invested in the securities (other than
Government Securities) of a single issuer or of two or more issuers controlled
by the Fund that are engaged in the same or similar trades or businesses or in
related trades or businesses and (b) at least 50% of the market value of the
Fund's total assets is represented by (i) cash and cash items, (ii) Government
Securities and (iii) other securities limited in respect of any one issuer to an
amount not greater in value than 5% of the market value of the Fund's total
assets and to not more than 10% of the outstanding voting securities of the
issuer. The requirements for qualification may cause the Fund to restrict the
degree to which it sells or otherwise disposes of securities and certain
financial instruments held for less than three months. If the Fund qualifies as
a regulated investment company and meets certain distribution requirements, the
Fund will not be subject to federal income tax on its net investment income and
net realized capital gains that it distributes to its shareholders.
Legislation currently pending before the U.S. Congress would repeal the
requirement that a regulated investment company must derive less than 30% of its
gross income from the sale or other disposition of assets described above that
are held for less than three months. However, it is impossible to predict
whether this legislation will become law and, if it is so enacted, what form it
will eventually take.
Dividends paid by the Fund out of net investment income and distributions
of net realized short-term capital gains are taxable to shareholders as ordinary
income, whether received in cash or reinvested in additional Fund shares.
Distributions of net realized long-term capital gains are taxable to
shareholders as long-term capital gain, regardless of how long shareholders have
held their shares and whether the distributions are received in cash or
reinvested in additional shares. Dividends and distributions paid by the Fund
will generally not qualify for the federal dividends received deduction for
corporate shareholders.
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Statements as to the tax status of each Fund shareholder's dividends and
distributions are mailed annually. Shareholders will also receive, as
appropriate, various written notices after the close of the Fund's taxable year
regarding the tax status of certain dividends and distributions that were paid
(or that are treated as having been paid) by the Fund to its shareholders during
the preceding taxable year, including the amount of dividends that represent
interest derived from Government Securities.
Shareholders are urged to consult their tax advisors regarding the
application of federal, state, local and foreign tax laws to their specific
situations before investing in the Fund.
DISTRIBUTOR
Kidder, Peabody, a major full-line investment services firm serving foreign and
domestic securities markets, located at 10 Hanover Square, New York, New York
10005-3592, serves as the distributor of the Fund's shares and is paid monthly
fees by the Fund in connection with (1) the servicing of shareholder accounts in
Class A shares and Class B shares and (2) providing distribution related
services in respect of Class B shares. A monthly service fee, authorized
pursuant to a Shareholder Servicing and Distribution Plan (the 'Plan') adopted
by the Trust with respect to the Fund pursuant to Rule 12b-1 under the 1940 Act,
is calculated at the annual rate of .25% of the value of the average daily net
assets of the Fund attributable to each of Class A and Class B shares and is
used by Kidder, Peabody to provide compensation for ongoing servicing and/or
maintenance of shareholder accounts and an allocation of overhead and other
Kidder, Peabody branch office expenses related to servicing shareholder
accounts. Compensation is paid by Kidder, Peabody to persons, including Kidder,
Peabody employees, who respond to inquiries of shareholders of the Fund
regarding their ownership of shares or their accounts with the Fund or who
provide other similar services not otherwise required to be provided by the
Fund's manager, investment adviser or transfer agent.
In addition, pursuant to the Plan, the Fund pays to Kidder, Peabody a
monthly distribution fee at the annual rate of .50% of the Fund's average daily
net assets attributable to Class B shares. The distribution fee is used by
Kidder, Peabody to provide initial and ongoing sales compensation to its
Investment Executives in respect of sales of Class B shares; costs of printing
and distributing the Fund's Prospectus, Statement of Additional Information and
sales literature to prospective investors in Class B shares; costs associated
with any advertising relating to the Fund and directed to prospective investors
in Class B shares; an allocation of overhead and other Kidder, Peabody branch
office expenses related to distribution of Class B shares; and payments to, and
expenses of, persons who provide support services in connection with the
distribution of Class B shares.
Payments under the Plan are not tied exclusively to the service and/or
distribution expenses actually incurred by Kidder, Peabody, and the payments may
exceed expenses actually incurred by Kidder, Peabody. The Trust's Board of
Trustees evaluates the appropriateness of the Plan and its payment terms on a
continuing basis and in doing so considers all relevant factors, including
expenses borne by Kidder, Peabody and amounts it receives under the Plan.
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PERFORMANCE INFORMATION
From time to time, the Trust may advertise the 30-day 'yield' of the Fund for
each Class. The yield refers to the income generated by an investment in a Class
over the 30-day period identified in the advertisement and is computed by
dividing the net investment income per share earned by the Class during the
period by the net asset value per share of the Class on the last day of the
period. This income is 'annualized' by assuming that the amount of income is
generated each month over a one-year period and is compounded semi-annually. The
annualized income is then shown as a percentage of the net asset value.
From time to time, the Trust may advertise the Fund's 'average annual total
return' over various periods of time for each Class. Total return figures, which
are based on historical earnings and are not intended to indicate future
performance, show the average percentage change in value of an investment in the
Class from the beginning date of a measuring period to the end of that period.
These figures reflect changes in the price of shares and assume that any income
dividends and/or capital gains distributions made by the Fund during the period
were reinvested in shares of the same Class. Total return figures will be given
for the most recent one-and five-year periods, or for the life of the Class to
the extent that it has not been in existence for the full length of those
periods, and may be given for other periods as well, such as on a year-by-year
basis. The average annual total return for any one year in a period longer than
one year might be greater or less than the average for the entire period.
The Trust may quote 'aggregate total return' figures with respect to the
Fund for various periods, representing the cumulative change in value of an
investment for the specific period and reflecting changes in share prices and
assuming reinvestment of dividends and distributions. Aggregate total return may
be calculated either with or without the effect of the sales charge to which
Class A shares are subject and may be shown by means of schedules, charts or
graphs, and may indicate subtotals of the various components of total return
(that is, changes in value of initial investment, income dividends and capital
gains distributions). Reflecting compounding over a longer period of time,
aggregate total return data generally will be higher than average annual total
return data.
The Trust may, in addition to quoting the Classes' average annual and
aggregate total returns, advertise actual annual and annualized total return
performance data for various periods of time. Actual annual and annualized total
returns may be calculated either with or without the effect of the sales charge
to which Class A shares are subject and may be shown by means of schedules,
charts or graphs. Actual annual or annualized total return data generally will
be lower than average annual total return data, which reflects compounding of
return.
In reports or other communications to Fund shareholders and in advertising
material, the Trust may compare the Classes' performance with the performance of
other mutual funds (or classes thereof) as listed in rankings prepared by Lipper
Analytical Services Inc., CDA Investment Technologies, Inc. or similar
investment services that monitor the performance of mutual funds or as set out
in the nationally recognized publications listed below. The Trust may also
include in communications to Fund shareholders evaluations of the Fund published
by nationally recognized ranking services and by financial publications that are
nationally recognized, such as Barron's, Business Week, Forbes, Institutional
Investor, Investor's Daily, Kiplinger's
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Personal Finance Magazine, Money, Morningstar Mutual Fund Values, The New York
Times, USA Today and The Wall Street Journal. Any given performance comparison
should not be considered as representative of the Fund's performance for any
future period.
GENERAL INFORMATION
ORGANIZATION OF THE TRUST
The Trust is registered under the 1940 Act as an open-end management investment
company and was formed as a business trust pursuant to a Declaration of Trust,
as amended from time to time (the 'Declaration'), under the laws of The
Commonwealth of Massachusetts on March 28, 1991. The Fund commenced operations
on November 10, 1992. The Declaration authorizes the Trust's Board of Trustees
to create separate series, and within each series separate Classes, of an
unlimited number of shares of beneficial interest, par value $.001 per share. As
of the date of this Prospectus, the Trustees have established several such
series, representing interests in the Fund described in this Prospectus and in
several other series. See 'Exchange Privilege' in the Statement of Additional
Information.
When issued, Fund shares will be fully paid and non-assessable. Shares are
freely transferable and have no pre-emptive, subscription or conversion rights.
Each Class represents an identical interest in the Fund's investment portfolio.
As a result, the Classes have the same rights, privileges and preferences,
except with respect to: (1) the designation of each Class; (2) the effect of the
respective sales charges, if any, for each Class; (3) the distribution and/or
service fees, if any, borne by each Class; (4) the expenses allocable
exclusively to each Class; (5) voting rights on matters exclusively affecting a
single Class; and (6) the exchange privilege of each Class. The Board of
Trustees does not anticipate that there will be any conflicts among the
interests of the holders of the different Classes. The Trustees, on an ongoing
basis, consider whether any conflict exists and, if so, take appropriate action.
Certain aspects of the shares may be changed, upon notice to Fund shareholders,
to satisfy certain tax regulatory requirements, if the change is deemed
necessary by the Trust's Board of Trustees.
Shareholders of the Fund are entitled to one vote for each full share held
and fractional votes for fractional shares held. Voting rights are not
cumulative and, as a result, the holders of more than 50% of the aggregate
shares of the Trust may elect all of the Trustees. Generally, shares of the
Trust are voted on a Trust-wide basis on all matters except those affecting only
the interests of one series, such as the Fund's investment advisory agreement.
In turn, shares of the Fund are voted on a Fund-wide basis on all matters except
those affecting only the interests of one Class, such as the terms of the Plan
as it relates to a Class.
The Trust intends to hold no annual meetings of shareholders for the
purpose of electing Trustees unless, and until such time as, less than a
majority of the Trustees holding office have been elected by shareholders.
Shareholders of record of no less than two-thirds of the outstanding shares of
the Trust may remove a Trustee through a declaration in writing or by vote cast
in person or by proxy at a meeting called for that purpose. A meeting will be
called for the purpose of voting on the removal of a Trustee at the written
request of holders of 10% of the
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Trust's outstanding shares. Shareholders of the Fund who satisfy certain
criteria will be assisted by the Trust in communicating with other shareholders
in seeking the holding of the meeting.
REPORTS TO SHAREHOLDERS
The Trust sends Fund shareholders audited semi-annual and annual reports, each
of which includes a list of the investment securities held by the Fund as of the
end of the period covered by the report.
CUSTODIAN, AND TRANSFER, DIVIDEND
AND RECORDKEEPING AGENT
IFTC, located at 127 West 10th Street, Kansas City, Missouri 64105, serves as
the Fund's custodian, and transfer, dividend and recordkeeping agent.
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<PAGE>
No person has been authorized to give any information or to make any
representations not contained in this Prospectus, or in the Statement
of Additional Information incorporated into this Prospectus by
reference, in connection with the offering made by this Prospectus
and, if given or made, any such information or representations must
not be relied upon as having been authorized by the Fund or its
distributor. This Prospectus does not constitute an offering by the
Fund or by its distributor in any jurisdiction in which the offering
may not lawfully be made.
<TABLE>
<S> <C>
- --------------------------------------------------------
CONTENTS
- --------------------------------------------------------
Fee Table 2
- --------------------------------------------------------
Highlights 3
- --------------------------------------------------------
Financial Highlights 7
- --------------------------------------------------------
Investment Objective and Policies 8
- --------------------------------------------------------
Management of the Fund 21
- --------------------------------------------------------
Purchase of Shares 23
- --------------------------------------------------------
Redemption of Shares 28
- --------------------------------------------------------
Determination of Net Asset Value 30
- --------------------------------------------------------
Exchange Privilege 31
- --------------------------------------------------------
Dividends, Distributions and Taxes 32
- --------------------------------------------------------
Distributor 34
- --------------------------------------------------------
Performance Information 35
- --------------------------------------------------------
General Information 36
- --------------------------------------------------------
Custodian, and Transfer, Dividend and
Recordkeeping Agent 37
- --------------------------------------------------------
</TABLE>
KIDDER,
PEABODY
ADJUSTABLE
RATE
GOVERNMENT
FUND
PROSPECTUS
DECEMBER 29, 1994 [LOGO]
STATEMENT OF DIFFERENCES
<TABLE>
<S> <C>
The service mark shall be expressed as ......................... 'sm'
The dagger footnote symbol shall be expressed as ............... 'D'
The superscript numbers shall be expressed as .................. 'pp'
</TABLE>
