<PAGE>
MITCHELL HUTCHINS/KIDDER, PEABODY INTERMEDIATE FIXED INCOME FUND
SUPPLEMENT TO PROSPECTUS DATED DECEMBER 29, 1994
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 Intermediate Fixed Income Fund ('Fund'), at a special
meeting to be held October 16, 1995. If the proposed Reorganization is approved
and implemented, all the Fund's assets will be acquired and its liabilities
assumed by PaineWebber U.S. Government Income Fund ('PW Fund') in a tax-free
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 PW Fund having an aggregate value equal to the value of the
shareholder's holdings in the Fund. PW Fund is a series of PaineWebber Managed
Investments Trust, 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 October 16, 1995. If the Reorganization is approved, sales of
all Classes of Fund shares will cease on October 16, 1995, so that Fund shares
will no longer be available for purchase or exchange starting on October 17,
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.
Supplement Dated: August 15, 1995
THIS SUPPLEMENT DOES NOT SUPERSEDE ANY PREVIOUS SUPPLEMENTS TO THE PROSPECTUS.
<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 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
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 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 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 ProgramSM ('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 Shares of the Fund may be redeemed at the Fund's next determined net asset value per share.
of 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 .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 No assurance can be given that the Fund will achieve its investment objective. The value of a
and Special fixed income security is dependent on, among other things, the ability of its issuer to pay
Considera- interest and repay principal in accordance with the terms of the obligation. Although the
tions 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.
[CAPTION]
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C> <C> <C> <C> <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
<PAGE>
--------------------------------------------------------------------------------
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
<PAGE>
--------------------------------------------------------------------------------
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
<PAGE>
--------------------------------------------------------------------------------
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>
--------------------------------------------------------------------------------
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
<PAGE>
--------------------------------------------------------------------------------
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
<PAGE>
--------------------------------------------------------------------------------
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
<PAGE>
--------------------------------------------------------------------------------
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
<PAGE>
--------------------------------------------------------------------------------
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
15
<PAGE>
--------------------------------------------------------------------------------
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.
16
<PAGE>
--------------------------------------------------------------------------------
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.
17
<PAGE>
--------------------------------------------------------------------------------
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
18
<PAGE>
--------------------------------------------------------------------------------
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
19
<PAGE>
--------------------------------------------------------------------------------
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.
20
<PAGE>
--------------------------------------------------------------------------------
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.
21
<PAGE>
--------------------------------------------------------------------------------
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
22
<PAGE>
--------------------------------------------------------------------------------
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
23
<PAGE>
--------------------------------------------------------------------------------
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.
24
<PAGE>
--------------------------------------------------------------------------------
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.
25
<PAGE>
--------------------------------------------------------------------------------
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.
26
<PAGE>
--------------------------------------------------------------------------------
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
27
<PAGE>
--------------------------------------------------------------------------------
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
28
<PAGE>
--------------------------------------------------------------------------------
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.
29
<PAGE>
--------------------------------------------------------------------------------
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.
30
<PAGE>
--------------------------------------------------------------------------------
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
31
<PAGE>
--------------------------------------------------------------------------------
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
<PAGE>
--------------------------------------------------------------------------------
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.
33
<PAGE>
--------------------------------------------------------------------------------
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.
34
<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 18
--------------------------------------------------------
Purchase of Shares 21
--------------------------------------------------------
Redemption of Shares 26
--------------------------------------------------------
Determination of Net Asset Value 27
--------------------------------------------------------
Exchange Privilege 28
--------------------------------------------------------
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]
STATEMENT OF DIFFERENCES
<TABLE>
<S> <C>
The service mark shall be expressed as...................... 'SM'
The dagger footnote symbol shall be expressed as............ 'D'
</TABLE>
