BENHAM EUROPEAN GOVERNMENT BOND FUND
A Series of Benham International Funds
Supplement Dated December 15, 1995
to the Prospectus and Statement of
Additional Information Dated March 1, 1995
1. On June 1, 1995, Benham Management International ("BMI") merged into
Twentieth Century Companies, Inc. ("TCC"). As a result of the merger, Benham
Management Corporation ("BMC"), Benham Financial Services, Inc. ("BFS") and
Benham Distributors, Inc. ("BDI"), the investment advisor, agent for transfer
and administrative services, and distributor, respectively, for all of the Funds
in The Benham Group, which had been subsidiaries of BMI, became subsidiaries of
TCC. TCC, through other subsidiaries, also provides investment advisory and
related services to the Twentieth Century family of funds.
New Investment Advisory Agreements with BMC as a subsidiary of TCC were
approved by the shareholders of each Fund at a meeting on May 31, 1995. A New
Administrative Services and Transfer Agency Agreement with BFS as a subsidiary
of TCC and a new Distribution Agreement with BDI as a subsidiary of TCC were
approved by the Board of Directors\Trustees for each Fund at a meeting on April
3, 1995.
Shareholders of the Benham European Government Bond Fund also approved a
new Investment Sub-Advisory Agreement among Benham International Funds on behalf
of Benham European Government Bond Fund, BMC as a subsidiary of TCC, and J.P.
Morgan Investment Management, Inc.
The following individuals have been elected or appointed to the Board of
Trustees of the Fund in addition to those listed in the current Prospectus:
ALBERT A. EISENSTAT, independent trustee (1995). Mr. Eisenstat is an
independent director of each of Commercial Metals Co. (1982), Sungard Data
Systems (1991) and Business Objects S/A (1994). Previously, he served as
vice president of corporate development and corporate secretary of Apple
Computer and served on its Board of Directors (1985 to 1993).
RONALD J. GILSON, independent trustee (1995). Mr. Gilson is the Charles J.
Meyers Professor of Law and Business at Stanford Law School (1979) and the
Mark and Eva Stern Professor of Law and Business at Columbia University
School of Law (1992). He is counsel to Marron, Ried & Sheehy (a San
Francisco law firm, 1984).
*JAMES E. STOWERS, III, trustee (1995). Mr. Stowers is the president and
director of Twentieth Century Investors, Inc., TCI Portfolios, Inc.,
Twentieth Century World Investors, Inc., Twentieth Century Premium
Reserves, Inc., Twentieth Century Capital Portfolios, Inc., Twentieth
Century Institutional Portfolios, Inc., Twentieth Century Companies, Inc.,
Investors Research Corporation and Twentieth Century Services, Inc.
Mr. Kataoka has resigned from the Board of Trustees for the Fund.
*MR. STOWERS IS AN "INTERESTED PERSON" OF THE FUNDS, AS DEFINED IN THE
INVESTMENT COMPANY ACT OF 1940, BY REASON OF HIS AFFILIATIONS WITH TCC AND
ITS SUBSIDIARIES.
2. On page 13 of the Prospectus, the discussion under the heading "SHARE
PRICE" is replaced with the following:
The price of your shares is the net asset value of the Fund next determined
after receipt of your instruction to purchase, convert or redeem. Net asset
value is determined by calculating the total value of a Fund's assets,
deducting total liabilities and dividing the result by the number of shares
outstanding. Net asset value ("NAV") is determined on each day that the New
York Stock Exchange (the "Exchange") is open.
Investments and requests to redeem shares will receive the share price next
determined after receipt by Benham of the investment or redemption request.
For example, investments and requests to redeem shares received by Benham
before the close of business of the Exchange are effective on, and will
receive the price determined on that day as of the close of the Exchange.
Investment and redemption requests received thereafter are effective on,
and receive the price determined as of the close of the Exchange on the
next day the Exchange is open.
Investments are considered received only when your check or wired funds are
received by Benham. Wired funds are considered received on the day they are
deposited in Benham's bank account if they are deposited before the close
of business of the Exchange, usually 1 p.m. Pacific Time.
Investment and transaction instructions received by Benham on any business
day by mail at its office prior to the close of business of the Exchange,
usually 1 p.m. Pacific Time, will receive that day's price. Investments and
instructions received after that time will receive the price determined on
the next business day.
All other remaining references in the Prospectus and Statement of
Additional Information to the net asset value being calculated at "12 p.m.
Pacific Time for Benham Target Maturities Trust and 1 p.m. Pacific Time for all
other Benham funds" are hereby changed to "the close of the Exchange, usually 12
p.m. Pacific Time for Benham Target Maturities Trust and 1 p.m. Pacific Time for
all other Benham funds."
3. State Street Bank and Trust Company of Boston, Massachusetts has been
approved by the Board of Trustees as the Fund's new custodian. As of December 1,
1995, all references to the custodian will now be referring to State Street Bank
and Trust Company. The address for bank wire investments found on page 16 of the
Prospectus is hereby changed to:
STATE STREET BANK AND TRUST COMPANY
Boston, Massachusetts
ABA Routing #011000028
Beneficiary=Benham European Government Bond Fund Fund Account #0506-086-8
FBO {Your Name and Benham Fund Account Number}.
4. On page 17 of the Prospectus under the sub-heading "PROCESSING YOUR
PURCHASE", the second and third sentences are replaced with the following:
An investment received and accepted before the close of business of the
Exchange, normally 1:00 p.m. Pacific Time, will be included in your account
balance the same day. If the investment is received after the close of
business of the Exchange, usually 1:00 p.m. Pacific Time, it will be
credited to your account the following business day.
5. On page 17 of the Prospectus, the following sentence is to be inserted
under the sub-heading "TELEPHONE TRANSACTIONS" after the last sentence of the
first paragraph:
ONCE YOUR TELEPHONE ORDER HAS BEEN PLACED, IT MAY NOT BE MODIFIED OR
CANCELLED.
6. On page 17 of the Prospectus, the following sentence is to be inserted
under the sub-heading "CONFIRMATION AND QUARTERLY STATEMENTS" after the second
sentence:
However, beginning September of 1996, Automatic Investment Services
transactions will not be confirmed immediately but rather will be confirmed
on your next consolidated quarterly statement.
7. On page 18 of the Prospectus, the following sentence replaces the last
sentence of the first paragraph under "SHAREHOLDER SERVICES-EXCHANGE PRIVILEGE":
An exchange request will be processed the same day if it is received before
the funds' NAVs are calculated which is one hour prior to the close of the
Exchange, usually 12 p.m. Pacific Time for Benham Target Maturities Trust;
and at the close of the Exchange, usually 1 p.m. Pacific Time for all other
Benham funds.
8. On page 19 of the Prospectus, the following replaces the last two sentences
of the last paragraph under the sub-heading "OPEN ORDER SERVICE":
All orders and cancellation of orders received by one hour prior to the
close of the Exchange, usually 12 p.m. Pacific Time, will be considered to
be effective the same day. All orders and cancellation of orders not
received one hour prior to the close of the Exchange, usually 12 p.m.
Pacific Time, will be considered effective the following business day.
9. On page 3 of the Statement of Additional Information under the sub-heading
"REPURCHASE AGREEMENTS", number (5) should read:
(5)Investing no more than 5% of the Fund's total assets in repurchase
agreements that mature in more than seven days.
<PAGE>
BENHAM EUROPEAN
GOVERNMENT
BOND FUND
Prospectus * March 1, 1995
[picture of map of Europe]
[company logo] The Benham Group
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[information in left margin of page]
THE BENHAM GROUP
1665 Charleston Road
Mountain View, California 94043
SHAREHOLDER RELATIONS
1-800-321-8321
1-415-965-4222
FUND INFORMATION
1-800-331-8331
1-415-965-4274
TDD SERVICE
1-800-624-6338
1-415-965-4764
BENHAM GROUP REPRESENTATIVES ARE AVAILABLE BY TELEPHONE WEEKDAYS FROM 5 A.M. TO
5 P.M. PACIFIC TIME.
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BENHAM EUROPEAN
GOVERNMENT BOND
FUND
A Series of Benham International Funds
Prospectus * March 1, 1995
BENHAM EUROPEAN GOVERNMENT BOND FUND seeks over the long term as high a level of
total return as is consistent with investment in the highest-quality European
government debt securities. This no-load, open-end mutual fund is rated by a
nationally recognized statistical rating organization (rating agency) based on
analyses of portfolio credit quality and management.
Please read this Prospectus carefully and retain it for future reference. It is
designed to help you decide if the Fund's goals match your own. A Statement of
Additional Information (also dated March 1, 1995) has been filed with the
Securities and Exchange Commission (SEC) and is incorporated herein by
reference. For a free copy, call or write The Benham Group.
Mutual fund shares are not insured by the FDIC, the Federal Reserve Board, or
any other agency. The value of the investment and its return will fluctuate and
is not guaranteed.
AS WITH ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<PAGE>
SUMMARY OF FUND EXPENSES
The tables below illustrate the fees and expenses an investor in the Fund would
incur directly or indirectly. The figures shown are based on historical
expenses, adjusted to reflect the expense limitation agreement in effect as of
March 1, 1995.
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A. SHAREHOLDER TRANSACTION EXPENSES
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Sales load imposed on purchases.............................. None
Sales load imposed on reinvested dividends................... None
Deferred sales load.......................................... None
Redemption fee............................................... None
Exchange fee................................................. None
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B. ANNUAL FUND OPERATING EXPENSES
As a Percentage of Average Daily Net Assets
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Investment advisory fee (net of expense limitation).......... .45%*
12b-1 fee.................................................... None
Other expenses............................................... .41%
TOTAL FUND OPERATING EXPENSES (net of expense limitation).... .86%*
* Benham Management Corporation (BMC) has agreed under contract to limit the
Fund's expenses to .90% of average daily net assets through May 31, 1995. The
contract provides that BMC may recover expenses absorbed on behalf of the Fund
during the preceding 11 months if, and to the extent that, for any given month,
the Fund's expenses were less than the expense limit in effect at that time. The
expense limit is up for annual renewal in June. As indicated above, the Fund's
actual expenses were below its contractual expense limitation of .90% of average
daily net assets.
The Fund pays BMC investment advisory fees equal to an annualized percentage of
Fund average daily net assets. Other expenses include administrative and
transfer agent fees paid to Benham Financial Services, Inc. (BFS).
3
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C. EXAMPLE OF EXPENSES
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The following table illustrates the expenses a shareholder would pay on a $1,000
investment in the Fund over periods of one, three, five, and ten years. These
figures are based on the expenses shown in Table B and assume (i) a 5% annual
return and (ii) full redemption at the end of each time period, as follows:
One Year Three Years Five Years Ten Years
$9 $27 $48 $106
We include this table to help you understand the various costs and expenses that
you, as a shareholder, will bear either directly or indirectly. THIS EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR
PERFORMANCE; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN, AND THE
FUND MAY NOT REALIZE THE 5% HYPOTHETICAL RATE OF RETURN REQUIRED BY THE SEC FOR
THIS EXAMPLE.
FINANCIAL HIGHLIGHTS
The information presented on the following page has been audited by KPMG Peat
Marwick LLP, independent certified public accountants. Their unqualified report
on the financial statements and financial highlights is included in the Fund's
Annual Report, which is part of the Statement of Additional Information.
4
<PAGE>
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BIF: BENHAM EUROPEAN GOVERNMENT BOND FUND
Years ended December 31 (except as noted)
- --------------------------------------------------------------------------------
1994 1993 1992
PER-SHARE DATA
- --------------
NET ASSET VALUE (NAV) AT BEGINNING OF PERIOD $10.82 10.01 10.00
Income from Investment Operations
Net Investment Income .78 .69 .79
Net Realized and Unrealized Gains on
Investments and Foreign Currency
Contracts and Transactions (.63) .49 .38
------ ------ ------
Total Income from Investment Operations .15 1.18 1.17
Less Distributions
Dividends from Net Investment Income (.60) (.37) (.66)
Distributions from Net Realized Capital Gains (.01) 0 (.50)
------ ------ ------
Total Distributions (.61) (.37) (1.16)
NAV AT END OF PERIOD $10.36 10.82 10.01
====== ====== ======
TOTAL RETURN* 1.52% 11.79 7.08
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SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period
(in thousands of dollars) $194,301 355,615 337,043
Ratio of Expenses to Average Daily Net Assets .86% .85 .51**
Ratio of Expenses to Average Daily Net Assets
Before Waiver .86% .85 .97**
Ratio of Net Investment Income to
Average Daily Net Assets 6.09% 6.27 7.59**
Ratio of Net Investment Income to
Average Daily Net Assets
Before Waiver 6.09% 6.27 7.13**
Portfolio Turnover Rate 166% 310 252
+ From January 7, 1992 (commencement of operations), through December 31, 1992.
* Total return figures assume reinvestment of dividends and capital gain
distributions and are not annualized.
**Annualized.
5
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HOW THE FUND WORKS
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek over the long term as high a level of
total return as is consistent with investment in the highest-quality European
government debt securities. There is no assurance that the Fund will achieve its
investment objective.
CORE INVESTMENT POLICIES
ISSUER DIVERSIFICATION. The Fund invests primarily in bonds issued or guaranteed
by European governments and their political subdivisions. European governments
whose bonds are eligible for inclusion in the Fund's portfolio are Austria,
Belgium, Denmark, Finland, France, Germany, Italy, the Netherlands, Norway,
Spain, Sweden, Switzerland, and the United Kingdom. Political subdivisions
include states, provinces, and municipalities, as well as federal, regional,
state, and municipal agencies or instrumentalities. The Fund may also invest in
bonds issued by supranational organizations such as the World Bank or the
European Investment Bank.
Typically, the Fund invests more than 25% of its total assets in securities
issued by the German government or its political subdivisions. For temporary
defensive purposes, however, the Fund may invest less than 25% of its total
assets in these securities. The Fund does not expect to invest more than 25% of
its total assets in government debt securities of any one foreign country other
than Germany.
To provide a margin of liquidity for shareholder redemptions and exchanges, the
Fund may invest up to 5% of its assets in U.S. government securities held
directly or under a repurchase agreement. For temporary defensive purposes, the
Fund may invest more than 5% of its assets in U.S. government securities.
The Fund is a "non-diversified company" as defined in the Investment Company Act
of 1940 (1940 Act), which means that the proportion of the Fund's assets that
may be invested in the securities of a single issuer is not limited by the 1940
Act.
6
<PAGE>
To satisfy diversification requirements under the Code, the Fund may invest in
AAA-rated corporate bonds denominated in European currencies or European
Currency Units (ECUs).
The Fund's investment objective and concentration policy are fundamental and may
not be changed without shareholder approval. The other policies described in
this Prospectus are not fundamental and may be changed by the Fund's board of
trustees.
CREDIT QUALITY. Like U.S. Treasury securities, direct obligations of a European
government are backed by the full faith and credit of that government. European
government agency debt may or may not be backed by federal government
guarantees.
Under normal market conditions, the Fund invests at least 65% of its total
assets in European government bonds rated AAA by a nationally recognized
statistical rating organization (rating agency) or considered by the rating
agency to be of comparable quality. If a rating agency downgraded a security
held by the Fund or judged a security to be less than AAA quality, the security
would be sold as quickly as possible without unnecessarily destabilizing the
Fund's share price or yield.
CURRENCY DIVERSIFICATION. Bonds eligible for inclusion in the Fund's portfolio
may be denominated in European currencies or ECUs. ECUs are a composite currency
consisting of fixed amounts of currency of European Economic Community member
countries. A government may issue bonds in domestic currency, ECUs, or the
currency of another sovereign government. In this regard, the Fund may buy
Australian or Canadian bonds issued in European currencies or ECUs. Under normal
market conditions, at least 30% of the Fund's assets are invested in securities
denominated in deutsche marks.
DOLLAR-WEIGHTED AVERAGE MATURITY. The Fund's dollar-weighted average portfolio
maturity ranges from two to ten years.
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[information in right margin of page]
Under normal conditions, at least 65% of the Fund's total assets are invested in
European government bonds rated AAA or judged to be of comparable quality by a
rating agency.
Under normal market conditions, at least 30% of the Fund's assets are invested
in securities denominated in deutsche marks.
- -------------------
7
<PAGE>
MANAGEMENT APPROACH
INTERNATIONAL SUBADVISOR
J.P. Morgan Investment Management Inc. (JPMIM) is the Fund's subadvisor and is
responsible for its day-to-day operations. JPMIM is headquartered in New York
and maintains offices in most of the world's financial centers, including London
and Frankfurt.
STRATEGY
JPMIM selects the Fund's investments by using a combination of fundamental
research and bond and currency valuation models. The following is a brief
summary of factors considered by JPMIM in selecting the Fund's investments:
* ECONOMIC/POLITICAL FUNDAMENTALS: JPMIM evaluates each country's economic
climate and political discipline for controlling deficits and inflation.
* EXPECTED RETURN: Using economic forecasts, JPMIM projects the expected return
for each country.
* RELATIVE VALUE: By contrasting expected risks and returns in each country,
JPMIM selects those countries expected to produce the best return at reasonable
risk.
CURRENCY MANAGEMENT
The rate of exchange between U.S. dollars and European currencies fluctuates,
which results in gains and losses to the Fund. Even if the Fund's foreign
security holdings perform well, an increase in the value of the dollar relative
to the currencies in which portfolio securities are denominated can offset
security gains.
8
<PAGE>
Because the Fund is designed for U.S. investors seeking currency and interest
rate diversification, JPMIM limits its use of hedging strategies intended to
minimize the effect of currency fluctuations. Although hedging strategies (if
they are successful) reduce exchange rate risk, they also reduce the potential
for share price appreciation when European currencies increase in value relative
to the U.S. dollar.
When JPMIM considers the U.S. dollar to be attractive relative to European
currencies, as much as 25% of the Fund's assets may be hedged into dollars. For
temporary defensive purposes and under extraordinary circumstances (such as
significant political events), more than 25% of the Fund's assets may be hedged
in this manner.
In managing the Fund's currency exposure, JPMIM will buy and sell foreign
currencies regularly, either in the spot (i.e., cash) market or the forward
market. Forward foreign currency exchange contracts (forward contracts) are
individually negotiated and privately traded between currency traders (usually
large commercial banks) and their customers. In most cases, there are no deposit
requirements, and the contracts are traded at a net price without commission.
These contracts involve an obligation to purchase or sell a specific currency at
an agreed-upon price on a future date. Most contracts expire in less than one
year.
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[information in right margin of page]
The Fund is designed for U.S. investors seeking currency and interest rate
diversification. Accordingly, JPMIM limits its use of currency hedging
strategies intended to minimize the effect of currency fluctuations.
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9
<PAGE>
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[information in left margin of page]
The Fund may be appropriate for U.S. investors who want to protect their income
against a decline in the purchasing power of the U.S. dollar relative to that of
foreign currencies.
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SUITABILITY
The Fund may be appropriate for U.S. investors who:
* Want to protect their income against a decline in the purchasing power of the
U.S. dollar relative to that of foreign currencies
* Want to diversify their investments beyond U.S. dollar-denominated securities
and interest rate exposure
As market conditions change (i.e., interest rate, political, and economic
changes occur), the Fund's value will vary. The Fund's performance will be
affected by currency values, foreign economies, and other foreign investment
factors.
The Fund itself is not a balanced investment plan and works best for investors
prepared to ride out the international markets' ups and downs.
OTHER INVESTMENT POLICIES AND TECHNIQUES
WHEN-ISSUED SECURITIES AND FIRM-COMMITMENT AGREEMENTS. When-issued securities
and firm-commitment agreements fix a security's price and yield for future
payment and delivery. The market value of a security may change during this
period, or a party to the agreement may fail to deliver or pay for the security.
Either of these situations could affect the market value of the Fund's assets.
SHORT-TERM INSTRUMENTS. For liquidity purposes, the Fund may invest in
high-quality money market instruments with remaining maturities of one year or
less. Such instruments may include European-currency-denominated obligations of
European governments, European government agencies, and supranational
organizations, as well as high-quality certificates of deposit.
The Fund may also enter into repurchase agreements, collateralized by U.S.
government securities, with banks or broker-dealers that are deemed to present
minimal credit risk. Credit risk determinations are made by BMC
10
<PAGE>
pursuant to guidelines established by the board of trustees. A repurchase
agreement involves the purchase of a security and a simultaneous agreement to
sell the security back to the seller at a higher price. Delays or losses could
result if the other party to the agreement defaults or becomes bankrupt.
The Fund may invest up to 5% of its total assets in any Benham money market fund
advised by BMC, provided that the investment is consistent with the Fund's
policies and restrictions.
FUTURES AND OPTIONS TRANSACTIONS. In order to manage the Fund's exposure to
changes in market conditions such as movements in securities prices, interest
rates, and domestic and foreign economies, the Fund may engage in buying and
selling futures and options. As with many investments, futures and options can
be highly volatile. If BMC incorrectly judges market conditions in an attempt to
reduce risk or increase return or if certain markets pose liquidity
difficulties, the Fund may incur losses or suffer from devaluation. The Fund
will not utilize futures and options for speculative purposes.
SECURITIES LENDING. The Fund may lend its portfolio securities to banks and
broker-dealers to earn additional income. Securities loans are subject to
guidelines prescribed by the board or trustees, which are set forth in the
Statement of Additional Information.
This practice could result in a loss or a delay in recovering the Fund's
securities. Loans are limited to 33-1/3% of the Fund's total assets.
OTHER PORTFOLIO MANAGEMENT TECHNIQUES. JPMIM may buy other types of securities
or employ other portfolio management techniques on behalf of the Fund. When
required by SEC guidelines, the Fund will set aside cash or appropriate liquid
assets in a segregated account to cover its portfolio obligations. See the
Statement of Additional Information for a more detailed discussion of these
investments and some of the risks associated with them.
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[information in right margin of page]
The Fund may engage in futures and options transactions, including currency
futures transactions.
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11
<PAGE>
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[information in left margin of page]
Performance data and a discussion of factors that affected performance during
the Fund's most recent reporting period are included in the Fund's semiannual
reports to shareholders.
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PORTFOLIO TRANSACTIONS
JPMIM will not trade portfolio securities in pursuit of short-term profits for
the Fund, although, when circumstances warrant, securities may be sold without
regard to their remaining maturities. The Fund's annual portfolio turnover rate
is expected to be approximately 250% and may vary from year to year. Higher
turnover rates increase transaction costs and may increase taxable capital gains
(or losses). Short-term capital gains distributed to shareholders are treated as
ordinary income. JPMIM carefully weighs the potential benefits of short-term
investing against these considerations.
Transaction costs are normally higher for foreign bonds than for U.S.
securities; therefore, the Fund's anticipated portfolio turnover rate may have a
larger negative impact on total return than it would if the Fund invested
primarily or exclusively in U.S. securities.
PERFORMANCE
Mutual fund performance is commonly expressed in terms of historical yield or
total return and may be quoted in advertising and sales literature. Past
performance is no guarantee of future results.
YIELD calculations show the rate of income the Fund earns on its investments as
an annual percentage rate. The Fund's yields are calculated according to methods
that are standardized for all stock and bond funds.
TOTAL RETURN represents the Fund's changes over a specified time period,
assuming reinvestment of dividends and capital gains, if any. CUMULATIVE TOTAL
RETURN illustrates the Fund's actual performance over a stated period of time.
AVERAGE ANNUAL TOTAL RETURN is a hypothetical rate of return that illustrates
the annually compounded return that would have produced the same cumulative
total return if the Fund's performance had been constant over a entire period.
Average annual total returns smooth out variations in the Fund's performance;
they are not the same as year-by-year results.
12
<PAGE>
Performance data and a discussion of factors that affected performance during
the Fund's most recent reporting period are included in the Fund's semiannual
reports to shareholders. These reports are routinely delivered to the Fund's
shareholders. For a free copy, call one of the Fund Information numbers on page
14.
SHARE PRICE
BMC normally calculates the Fund's purchase and sale price per share (net asset
value, or NAV) at 1:00 p.m. Pacific Time each day the New York Stock Exchange is
open for business. NAV is calculated by adding the value of the Fund's assets,
deducting its liabilities, and then dividing the result by the number of shares
outstanding.
If market quotations are readily available, securities are valued at their
market value. If market quotations are not readily available, securities are
priced at fair market value as determined in good faith under the direction of
the board of trustees. The valuations of foreign securities are translated from
their respective currencies into U.S. dollars using current exchange rates.
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[information in right margin of page]
Shares may be purchased and redeemed without any sales charge, commission,
redemption fee, 12b-1 fee, or contingent deferred sales load.
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13
<PAGE>
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[information in left margin of page]
Overnight and special delivery mail (e.g., Federal Express, Express Mail,
Priority Mail) should be sent to our street address: 1665 Charleston Rd.
Mountain View California 94043. Failure to do so may result in transaction
delays.
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HOW TO INVEST
To open an account, you must fill out and sign an application. If an
application is not enclosed with this Prospectus, you may request one by calling
one of the Fund Information numbers listed below. If you prefer, we will fill
out your application over the telephone and mail it to you for your signature.
Separate forms are required to establish Benham-sponsored retirement plan
accounts, as discussed on pages 24 and 25.
Your investment will be credited to your account and begin earning interest at
the next NAV calculated after The Benham Group or an authorized subtransfer
agent receives and accepts your order. However, you may not redeem shares until
we have your completed application on file and your investment matures (i.e.,
clears). See page 21 for details.
Benham Group Representatives are available at the telephone numbers listed below
weekdays from 5:00 a.m. to 5:00 p.m. Pacific Time.
FUND INFORMATION: for information about any Benham fund or other investment
product, call 1-800-331-8331 or 1-415-965-4274.
SHAREHOLDER RELATIONS: to open an account or make transactions in an existing
account, call 1-800-321-8321 or 1-415-965-4222.
Benham shareholders may make transactions and obtain prices, yields, and total
return information for all Benham funds with TeleServ, our 24-hour automated
telephone information service. Dial 1-800-321-8321 and press 1.
14
<PAGE>
HOW TO BUY SHARES (Retirement plan accounts have different minimums. See pages
24 and 25 for details.)
================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
BY CHECK Minimum initial investment: $1,000
Minimum additional investment: $100
MAKE YOUR INVESTMENT CHECK PAYABLE TO THE BENHAM GROUP. Mail the
check with your completed application to:
The Benham Group
P.O. Box 7730
San Francisco, CA 94120-9853
For ADDITIONAL INVESTMENTS, enclose an investment slip preprinted
with the account number to which your investment should be
credited. If the payee information provided on the check does not
agree with information preprinted on the investment slip, we will
follow the instructions preprinted on the investment slip.
If you do not have a preprinted investment slip, send your check
with written instructions indicating the fund name and the account
number. If the payee information provided on the check does not
agree with your written instructions, we will follow the written
instructions.
You may also invest your check in person at a Benham Investor
Center. One is located at 1665 Charleston Road in Mountain View,
California; the other is located at 2000 South Colorado Boulevard,
Suite 1000, in Denver, Colorado.
WE WILL NOT ACCEPT CASH INVESTMENTS OR THIRD-PARTY CHECKS. We
will, however, accept properly endorsed second-party checks made
payable to the investor(s) to whose account the investment is to
be credited.
We will also accept checks drawn on foreign banks or foreign
branches of domestic banks and checks that are not drawn in U.S.
dollars (U.S. $100 minimum). The cost of collecting payment on
such checks will be passed on to the investor. These costs may be
substantial, and settlement may involve considerable delays.
Investors will be charged $5 for every investment check returned
unpaid.
15
<PAGE>
================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
BY BANK WIRE Minimum initial investment: $25,000
Minimum additional investment: $100
If you wish to OPEN AN ACCOUNT BY BANK WIRE, please call our
Shareholder Relations Department for more information and an
account number. Bank wire investments should be addressed as
follows:
Morgan Guaranty Trust
New York, New York
ABA Routing Number 021000238
Beneficiary = Benham European Government Bond Fund
DDA Number 001-37-636
Reference: [Your Name and Benham Fund Account Number]
- --------------------------------------------------------------------------------
BY EXCHANGE Minimum initial investment: $1,000
Minimum additional investment: $100
You may exchange your shares for shares of any other Benham fund
registered for sale in your state if you have received and read
the fund's prospectus. Exchanges may be made by telephone (for
identically registered accounts only), by written request, or in
person. Certain restrictions apply; please see page 18 for
details. You may open a new account by telephone exchange,
provided that you meet the minimum initial investment requirement.
- --------------------------------------------------------------------------------
AUTOMATIC Minimum: $25
INVESTMENT These services are offered with respect to additional investments
SERVICES only. See details on page 19.
16
<PAGE>
PROCESSING YOUR PURCHASE
Shares will be purchased at the next NAV calculated after your investment is
received and accepted by The Benham Group or an authorized subtransfer agent.
Investments received and accepted before 1:00 p.m. Pacific Time will be credited
to your account the same day. After 1:00 p.m. Pacific Time, they will be
credited to your account the following business day. The Fund reserves the right
to refuse any investment.
TELEPHONE TRANSACTIONS
Shareholders may order certain transactions (e.g., exchanges, wires, some types
of redemptions) by telephone. This privilege is granted to Benham fund
shareholders automatically; you need not specifically request this service, and
you may not specifically decline it.
The Benham Group will not be liable for losses resulting from unauthorized or
fraudulent instructions if it follows procedures designed to verify the caller's
identity. BMC will request personal identification, record telephone calls, and
send confirmation statements for every telephone transaction to the
shareholder's record address. The Fund reserves the right to refuse or terminate
telephone transactions at any time.
CONFIRMATION AND QUARTERLY STATEMENTS
All transactions are summarized on quarterly account statements. In addition,
for every transaction that you request, a confirmation statement will be mailed
to your record address. Please review these statements carefully. If you fail to
notify us of an error within 30 days of the confirmation statement date, you
will be deemed to have ratified the transaction.
17
<PAGE>
- -------------------
[information in left margin of page]
The free exchange privilege is a convenient way to buy shares in other Benham
funds if your investment goals change.
Benham Open Orders allow investors to utilize a "buy low, sell high" investment
strategy.
- -------------------
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE
You may exchange your shares for shares of equivalent value in any other Benham
fund registered for sale in your state. Such an exchange may generate a taxable
gain or loss. An exchange request will be processed the same day if it is
received before the funds' NAVs are calculated (12:00 p.m. Pacific Time for
Benham Target Maturities Trust, 1:00 p.m. Pacific Time for all other Benham
funds).
The Benham Group discourages trading in response to short-term market
fluctuations. Such activity may encumber BMC's ability to invest the funds'
assets in accordance with their respective investment objectives and policies
and may be disadvantageous to other shareholders. More than six exchanges per
calendar year out of a variable-price fund may be deemed an abuse of the
exchange privilege. For purposes of determining the number of exchanges made,
accounts under common ownership or control will be aggregated.
Each Benham fund reserves the right to modify or revoke the exchange privilege
of any shareholder or to limit or reject any exchange. Although each fund will
attempt to give shareholders prior notice whenever it is reasonably able to do
so, it may impose these restrictions at any time.
OPEN ORDER SERVICE
The Benham Group's Open Order Service allows you to designate a price at which
to exchange shares between a Benham variable-price fund and a Benham money
market fund. You must designate a purchase price equal to or lower, or a sale
price equal to or higher, than the variable-price fund's NAV at the time you
place your order. If the designated price is met within 90 calendar days, we
will execute your exchange order automatically at that price (or better).
If the fund you have selected deducts a distribution from its share price, your
order price will be adjusted accordingly so that the distribution does not
inadvertently trigger an Open Order transaction on your behalf.
18
<PAGE>
If you close or reregister the account from which shares are to be redeemed,
your Open Order will be canceled. Because of their time-sensitive nature, Open
Order transactions may be made only by telephone or in person and are subject to
the exchange limitations described in each fund's prospectus. All orders and
cancellations received before 12:00 p.m. Pacific Time are effective the same
day. After 12:00 p.m. Pacific Time, they are effective the following business
day.
AUTOMATIC INVESTMENT SERVICES (AIS)
TREASURY DIRECT allows you to deposit interest and principal payments from
Treasury securities directly into a Benham fund account.
PAYROLL DIRECT allows you to deposit any amount of your paycheck directly into a
Benham fund account.
GOVERNMENT DIRECT allows you to deposit your entire U.S. government payment
directly into a Benham fund account.
BANK DIRECT allows you to deposit a fixed amount from your bank account directly
into a Benham fund account on the 1st and/or the 15th of each month (or the next
business day).
DIRECTED DIVIDENDS allow you to invest all or part of your dividend earnings
from one Benham fund account in one or more other Benham fund accounts. You may
choose to receive a portion of your dividends in cash and to invest the
remainder in other Benham fund accounts.
SYSTEMATIC EXCHANGES allow you to exchange from one Benham fund account to
another Benham fund account on the 1st and/or the 15th of each month (or the
next business day).
For more information about any of these services, please call our Shareholder
Relations Department at 1-800-321-8321 or 1-415-965-4222.
- -------------------
[information in right margin of page]
Automatic Investment Services enable you to benefit from a dollar-cost averaging
investment strategy.
- -------------------
19
<PAGE>
- -------------------
[information in left margin of page]
You may redeem shares without charge.
- -------------------
BROKER-DEALER TRANSACTIONS
The Benham Group charges no sales commissions, or "loads," of any kind. However,
investors may purchase and sell shares through registered broker-dealers, who
may charge fees for their services.
The Benham Group will accept orders for the purchase of shares from authorized
broker-dealers who agree in writing to pay in full for such shares in
immediately available funds no later than 1:00 p.m. Pacific Time the following
business day.
TDD SERVICE FOR THE HEARING IMPAIRED
TDD users may contact The Benham Group at 1-800-624-6338 or 1-415-965-4764.
California residents may wish to contact us through the California Relay Service
(CRS) at 1-800-735-2929. Your transaction requests via CRS will be handled on a
recorded line. The Benham Group cannot accept responsibility for instructions
miscommunicated by CRS.
EMERGENCY SERVICES
The Benham Group has established an alternate operations site from which we can
access customer accounts and the mainframe computers used by the Benham funds in
the event of an emergency. Telephone lines and terminals are already in place.
If our regular service is interrupted, the following numbers will automatically
connect you to this site.
From within the U.S., including Alaska and Hawaii, call 1-800-321-8321.
From all foreign countries, call collect, 1-303-759-9337 or 1-510-820-1409. The
operator will request your Benham fund account number before accepting the call.
20
<PAGE>
HOW TO REDEEM YOUR INVESTMENT
When you place an order to redeem shares, your shares will be redeemed at the
next NAV calculated after The Benham Group has received and accepted your
redemption request. The Fund's NAV is normally calculated at 1:00 p.m. Pacific
Time. See page 13 for further information.
Barring extraordinary circumstances prescribed by law, redemption proceeds are
mailed within seven calendar days. However, if the shares to be redeemed were
purchased by check, The Benham Group reserves the right to withhold the proceeds
until the investment has matured (i.e., your payment has cleared); see maturity
periods below.
================================================================================
Drawn from a Maturity Period
Method of Payment California Bank? (in business days)
- --------------------------------------------------------------------------------
Checks, cashiers checks,
and bank money orders Yes 5 days
- --------------------------------------------------------------------------------
Same as above No 8 days
- --------------------------------------------------------------------------------
U.S. Treasury checks, Traveler's checks,
U.S. Postal money orders, Benham
checks, bank wires, and AIS Deposits* N/A 1 day
* Does not include bank direct deposits, which take 8 business days to mature.
================================================================================
If you hold shares in certificate form, redemption requests must be accompanied
by properly endorsed certificates.
If you want to keep your account open, please maintain a balance of shares worth
at least $1,000. If your account balance falls below $1,000 due to redemption,
your account may be closed, but not without at least 30 days' notice and an
opportunity to increase your account balance to the $1,000 minimum. Your shares
will be redeemed at the NAV calculated on the day your account is closed.
Proceeds will be mailed to the record address.
This policy also applies to Benham's Individual Retirement Accounts (IRAs),
excluding SEP-IRAs, except that shareholders will receive at least 120 days'
written notice and an opportunity to increase their account balance before their
accounts are closed. Investors wishing to open a Benham-sponsored retirement
account should see pages 24 and 25 for details.
UNCASHED CHECKS. We may reinvest at the Fund's then-current NAV any distribution
or redemption checks that remain uncashed for six months. Until we receive
instructions to the contrary, subsequent distributions will be reinvested in the
original account. Uncashed redemption checks may be reinvested in an identically
registered account.
21
<PAGE>
HOW TO REDEEM SHARES (Retirement investors, see pages 24 and 25.)
================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
BY TELEPHONE The Benham Group will accept telephone redemption requests for any
amount if the proceeds are to be sent to your predesignated bank
account. Redemptions of $25,000 or less payable to the
registered account owner(s) may also be ordered by telephone. All
other redemption requests must be made in writing.
- --------------------------------------------------------------------------------
IN WRITING Send a letter of instruction to:
The Benham Group
Shareholder Relations Department
1665 Charleston Road
Mountain View, California 94043
Your letter of instruction should specify:
* Your name
* Your account number
* The name of the Fund from which you wish to redeem shares
* The dollar amount or number of shares you wish to redeem
For your protection, written redemption requests must be
accompanied by SIGNATURE GUARANTEES under the following
circumstances:
* Redemption proceeds go to a party other than the registered
account owner(s)
* Redemption proceeds go to an account other than your
predesignated bank account
* Redemption proceeds go to the registered account owner(s), but
the amount exceeds $25,000
If you have instructed The Benham Group to require more than one
signature on written redemption requests, each of the required
number of signers must have his or her signature guaranteed on
these redemption requests.
22
<PAGE>
================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
IN WRITING Signature guarantees may be provided by banks, savings and loan
(continued) associations, savings banks, credit unions, stock brokerage firms,
or a Benham Investor Center. Shareholders must appear in person
with identification to obtain a signature guarantee. Notary public
certifications are not accepted in lieu of signature guarantees.
BFS may require written consent of all account owners prior to
acting on the written instructions of any account owner.
- --------------------------------------------------------------------------------
BY BANK WIRE If you included bank wire information on your account application
or made subsequent arrangements to accommodate bank wire
redemptions, you may wire funds to your bank by calling
1-800-321-8321 or 1-415-965-4222. The minimum amount for a bank
wire redemption is $1,000. Allow at least two business days for
redemption proceeds to be credited to your bank account.
- --------------------------------------------------------------------------------
BY EXCHANGE See details on pages 16 and 18.
- --------------------------------------------------------------------------------
AUTOMATIC DIRECTED PAYMENTS. You may arrange for periodic redemptions from
REDEMPTION your Benham fund account to your bank account or to another
SERVICES designated payee.
SYSTEMATIC EXCHANGES. You may arrange for periodic exchange
redemptions from one Benham fund account to another Benham fund
account.
23
<PAGE>
ABOUT BENHAM-SPONSORED RETIREMENT PLANS
Retirement plans offer investors a number of benefits, including the chance to
reduce current taxable income and to take advantage of tax-deferred compounding.
Retirement plan accounts require a special application; please let our
Shareholder Relations Department know if you want to establish this type of
account. We suggest that you consult your tax advisor before establishing a
retirement plan account.
The minimum account balance for all Benham Individual Retirement Accounts
(IRAs), excluding SEP-IRAs, is $1,000. If your balance falls below (continued
on the next page)
================================================================================
BENHAM AVAILABLE TO MAXIMUM ANNUAL CONTRIBUTION
PLAN TYPE PER PARTICIPANT
- --------------------------------------------------------------------------------
Contributory An employed indi- $2,000 or 100% of compensation
IRA vidual under age 70 1/2. (whichever is less).
- --------------------------------------------------------------------------------
Spousal IRA A nonworking spouse $2,250 (can be split between
(under age 70 1/2) of a Spousal and Contributory IRAs,
wage earner. provided that no IRA receives
more than a total of $2,000).
- --------------------------------------------------------------------------------
Rollover IRA An individual with a None, as long as total amount is
distribution from an eligible.
employer's retirement
plan or a rollover IRA.
- --------------------------------------------------------------------------------
SEP-IRA A self-employed indi- $22,500 or 15% of compensation
vidual or a business. (whichever is less).
- --------------------------------------------------------------------------------
Money Same as for SEP-IRA. $30,000 or 25% of compensation
Purchase Plan (whichever is less). Annual
(Keogh) contribution is mandatory.
- --------------------------------------------------------------------------------
Profit Same as for SEP-IRA. $22,500 or 15% of compensation
Sharing Plan (whichever is less). Annual
(Keogh) contribution is optional.
- --------------------------------------------------------------------------------
For all Benham-sponsored retirement plans, you may begin taking distributions
at age 59 1/2. You must begin to take required distributions by April 1 of the
year after you turn age 70 1/2. You may take distributions from your IRA or
SEP-IRA before you reach age 59 1/2; however, a penalty may apply.
24
<PAGE>
(continued from the previous page)
the $1,000 per fund account minimum, your account may be closed (see page 21 for
details). This distribution may result in a taxable event and a possible penalty
for early withdrawal. The minimum fund account balance for all other
Benham-sponsored retirement plan accounts is $100. Benham charges no fees for
its IRAs but does charge low maintenance fees for its Keoghs.
YOU MUST COMPLETE SPECIFIC FORMS TO TAKE DISTRIBUTIONS (I.E., REDEEM SHARES)
FROM A BENHAM-SPONSORED RETIREMENT PLAN ACCOUNT. PLEASE CALL OUR SHAREHOLDER
RELATIONS DEPARTMENT AT 1-800-321-8321 FOR ASSISTANCE.
================================================================================
DEADLINE FOR
OPENING ACCOUNT CONTRIBUTION DEADLINES
- --------------------------------------------------------------------------------
You may open an account anytime, Annual contributions can be made
but the deadline for establishing from January 1 through April 15 of
and funding an IRA for the prior the following tax year up to the
tax year is April 15. year you turn age 70 1/2.
- --------------------------------------------------------------------------------
Same as for Contributory IRA. Same as for Contributory IRA.
- --------------------------------------------------------------------------------
You may open a Rollover IRA Eligible rollover contributions must
account anytime. be made within 60 days of receiv-
ing your distribution. There is no
age limit on rollover contributions.
- --------------------------------------------------------------------------------
You may open an account anytime, Must be made by employer's tax
but the deadline for establishing and filing deadline (including
funding an account for the prior tax extensions).
year is the employer's tax deadline
(including extensions).
- --------------------------------------------------------------------------------
The end of the employer's plan Same as for SEP-IRA.
year, usually December 31.
- --------------------------------------------------------------------------------
The end of the employer's plan Same as for SEP-IRA.
year, usually December 31.
- --------------------------------------------------------------------------------
25
<PAGE>
- -------------------
[information in left margin of page]
Each January you will be informed of the tax status of the dividends and capital
gain distributions for the previous year.
- -------------------
DISTRIBUTIONS AND TAXES
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
The Fund expects to pay dividends from net investment income quarterly (in
March, June, September, and December), although it may elect not to do so in any
given quarter. The Fund may forego a dividend if, for example, net foreign
currency losses exceed investment income. Net capital gains and net foreign
currency gains, if any, are distributed annually in December. The trustees may
modify the Fund's distribution policies at any time.
DISTRIBUTION OPTIONS. You may choose to receive dividends and capital gain
distributions in cash or to reinvest them in additional shares. (See "Directed
Dividends" on page 19 for further information.) Please indicate your choice on
your account application or contact our Shareholder Relations Department. See
page 21 for a discussion of our policy regarding uncashed distribution checks.
TAXES
The Fund intends to qualify annually as a regulated investment company under
Subchapter M of the Code by distributing all or substantially all of its net
investment income and net realized capital gains to shareholders each year.
The Fund's dividends and capital gain distributions are subject to federal
income tax and applicable state and local taxes whether they are received in
cash or reinvested. Distributions are generally taxable in the year they are
declared.
26
<PAGE>
Dividends from net investment income (including net short-term capital gains, if
any) are taxable as ordinary income. Distributions of any net capital gains (net
long-term capital gains minus net short-term capital losses) designated by the
Fund as capital gain dividends are taxable as long-term capital gains,
regardless of how long you have held your shares. Ordinary income distributions
made by the Fund to corporate shareholders may qualify for the
dividends-received deduction available to corporations. Shareholders will be
notified each year of the amount, if any, that qualifies for this deduction.
The Fund will send you a tax statement (Form 1099) by January 31 showing the tax
status of distributions you received in the previous year and will file a copy
with the IRS. You may realize a taxable gain or loss when you redeem (sell) or
exchange shares. For most types of accounts, the proceeds from your redemption
transactions will be reported to the IRS annually. However, because the tax
treatment depends on your purchase price and your personal tax position, you
should keep your regular statements to use in determining your taxes.
RETURN OF CAPITAL. If, during a given year, the Fund pays dividends that exceed
the value of income earned on investments, a portion of your dividends may be
reclassified as a "return of capital." This reclassification of dividends paid
has at least two tax implications for shareholders:
(1) The amount of taxable dividends (as reported on your 1099-DIV from the Fund)
will be less than the amount of dividends you actually received during the tax
year.
(2) The return of capital reduces your cost basis in the shares you own, so that
when you redeem shares (and calculate your gain or loss), you must reduce your
investment cost by the amount of dividends that were reclassified as a return of
capital. For example, if you invest $10,000 in the Fund, and $100 worth of
dividends are reclassified as a return of capital, you must adjust your cost
from $10,000 to $9,900 to determine the amount of gain or loss on your
investment.
27
<PAGE>
FOREIGN TAX WITHHOLDING. The income the Fund receives from foreign stocks may be
subject to withholding taxes. If more than 50% of the Fund's total assets at the
end of any tax year consist of foreign securities, the Fund will treat any
foreign taxes it pays as taxes paid directly by shareholders. Under such
circumstances, a shareholder would be required to include as "income" his or her
proportionate share of foreign taxes paid by the Fund and might be able to claim
either a credit or a deduction for this amount. You will receive notice from the
Fund each year indicating (i) whether it made the election and (ii) the amount
of foreign taxes, if any, that will be treated as though they were paid by you.
You may wish to consult the Statement of Additional Information and your tax
advisor for more information regarding the tax consequences of an investment in
the Fund.
"BUYING A DIVIDEND." The timing of your investment could have undesirable tax
consequences. If you buy shares on or just before the day your Fund declares a
dividend, you will pay full price for the shares and may receive a portion of
your investment back as a taxable distribution.
28
<PAGE>
BACKUP WITHHOLDING. The Fund is required by federal law to withhold 31% of
reportable dividends, capital gain distributions, or redemptions paid to
shareholders who have not complied with IRS regulations. To avoid this
withholding requirement, you must certify on your account application or on IRS
Form W-9 that your social security or taxpayer identification number (TIN) is
correct and that you are not subject to backup withholding.
The Benham Group may refuse to sell shares to investors who have not complied
with this requirement, either before or at the time of purchase. Until we
receive your certified TIN or social security number, we may redeem your shares
in the Fund at any time.
29
<PAGE>
- -------------------
[information in left margin of page]
The Benham Group serves more than 350,000 investors.
- -------------------
MANAGEMENT INFORMATION
ABOUT BENHAM INTERNATIONAL FUNDS
Benham International Funds (BIF) is a registered open-end management investment
company that was organized as a Massachusetts business trust on August 28, 1991.
BIF currently consists of five series.
A board of trustees oversees BIF's activities and is responsible for protecting
shareholders' interests. The majority of trustees are not otherwise affiliated
with BMC. BIF is not required to hold annual meetings, although special meetings
may be called for purposes such as electing trustees or amending the Fund's
advisory agreement or investment policies. As a shareholder, you receive one
vote for each share you own.
THE BENHAM GROUP
BMC is the investment advisor to the funds in The Benham Group, which currently
constitute $10 billion in assets. BMC, incorporated in California in 1971, is a
wholly owned subsidiary of Benham Management International, Inc. (BMI), which is
also a California corporation. BMI's primary business is to provide financial
services to the general public.
Mr. Robert P. Browne, Portfolio Manager, has primary responsibility for the
day-to-day operations of the Fund. Mr. Browne transferred to the Fixed-Income
Group in London in 1994. He was previously located in the Tokyo office and
managed domestic and foreign fixed income as well as overall currency exposure
for J.P. Morgan Trust Bank's international portfolios. Mr. Browne joined JPMIM
in 1989. He holds a B.A. in Economics from Holy Cross College and a Masters of
International Business Studies from the University of South Carolina.
Mr. Jeffrey R. Tyler oversees the portfolio manager's operation of the Fund. He
is a vice president of The Benham Group's portfolio management team. He is also
manager of Benham Capital Manager Fund and co-manager of Benham GNMA Income
Fund. Mr. Tyler was an assistant vice president with Citicorp Securities (1983
to 1987) and a lending officer with Crocker Bank (1981 to 1983).
30
<PAGE>
ADVISORY AND SERVICE FEES
For investment advice and portfolio management services, the Fund pays BMC a
monthly investment advisory fee based on the dollar amount derived from applying
the Fund's average daily net assets to an investment advisory fee rate schedule.
The investment advisory fee rate ranges from .45% to .29% of average daily net
assets, dropping as the Fund's assets increase.
Investment advisory fees paid by the Fund to BMC for the fiscal year ended
December 31, 1994, were equal to .45% of average daily net assets or $4.50 per
$1,000 of average daily net assets.
To avoid duplicative investment advisory fees, the Fund does not pay BMC
investment advisory fees with respect to assets invested in shares of Benham
money market funds.
JPMIM is the Fund's investment subadvisor. JPMIM is a leading manager of pension
funds, institutional accounts, and private accounts, with approximately $112
billion in assets under management. JPMIM makes investment decisions for the
Fund in accordance with the Fund's investment objective, policies, and
restrictions under the supervision of BMC and the board of trustees.
JPMIM is a wholly owned subsidiary of J.P. Morgan & Co. Incorporated. The Fund's
custodian, Morgan Guaranty Trust Company of New York, is also a wholly owned
subsidiary of J.P. Morgan & Co. Incorporated.
For subadvisory services, BMC pays JPMIM a monthly fee at the annual rate of
.20% of average daily net assets up to $200 million and .15% of average daily
net assets in excess of $200 million. For the fiscal year ended December 31,
1994, BMC paid JPMIM subadvisory fees equal to .19% of the Fund's average daily
net assets.
- -------------------
[information in right margin of page]
Subadvisory fees are paid by BMC, not by the Fund.
- -------------------
31
<PAGE>
- -------------------
[information in left margin of page]
Benham Financial Services, Inc. provides administrative and transfer agent
services to the Fund.
- -------------------
Benham Financial Services, Inc. (BFS), a wholly owned subsidiary of BMI, is
BIF's agent for transfer and administrative services. For administrative
services, the Fund pays BFS a monthly fee equal to its pro rata share of the
dollar amount derived from applying the average daily net assets of all the
funds in The Benham Group to an administrative fee rate schedule. The
administrative fee rate applied to Benham Group assets ranges from .11% to .08%
of average daily net assets, dropping as Benham Group assets increase. For
transfer agent services, the Fund pays BFS monthly fees for each shareholder
account maintained and for each shareholder transaction executed during that
month.
The Fund pays certain operating expenses directly, including, but not limited
to, the following: custodian, audit, and legal fees; fees of the independent
trustees; costs of printing and mailing prospectuses, statements of additional
information, proxy statements, notices, and reports to shareholders; insurance
expenses; and costs of registering the Fund's shares for sale under federal and
state securities laws. See the Statement of Additional Information for a more
detailed discussion of independent trustee compensation.
EXPENSE LIMITATION AGREEMENT
A contractual expense limitation agreement between BMC and the Fund is described
on page 3.
The Fund's total operating expenses for the fiscal year ended December 31, 1994,
were equal to .86% of average daily net assets or $8.60 per $1,000 of average
daily net assets.
DISTRIBUTION OF SHARES
Benham Distributors, Inc. (BDI) and BMC distribute and market Benham products
and services. BMC pays all expenses for promoting and distributing the Fund's
shares. The Fund does not pay commissions to or receive compensation from
broker-dealers.
BDI is a wholly owned subsidiary of BMI.
32
<PAGE>
INVESTMENT ADVISOR
BENHAM MANAGEMENT CORPORATION
1665 Charleston Road
Mountain View, California 94043
INVESTMENT SUBADVISOR
J.P. MORGAN INVESTMENT MANAGEMENT INC.
522 Fifth Avenue
New York, New York 10036
DISTRIBUTOR
BENHAM DISTRIBUTORS, INC.
1665 Charleston Road
Mountain View, California 94043
CUSTODIAN
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
23 Wall Street
New York, New York 10015
TRANSFER AGENT
BENHAM FINANCIAL SERVICES, INC.
1665 Charleston Road
Mountain View, California 94043
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
KPMG PEAT MARWICK LLP
3 Embarcadero Center
San Francisco, California 94111
LEGAL COUNSEL
DECHERT PRICE & RHOADS
1500 K Street, N.W., Suite 500
Washington, DC 20005
TRUSTEES
James M.Benham
John T. Kataoka
Myron S. Scholes
Kenneth E. Scott
Ezra Solomon
Isaac Stein
Jeanne D. Wohlers
33
<PAGE>
THE BENHAM GROUP OF INVESTMENT COMPANIES
Capital Preservation Fund
Capital Preservation Fund II
Benham Government Agency Fund
Benham Prime Money Market Fund
Benham Short-Term Treasury and Agency Fund
Benham Treasury Note Fund
Benham Long-Term Treasury and Agency Fund
Benham Adjustable Rate Government Securities Fund
Benham GNMA Income Fund
Benham Target Maturities Trust
Benham California Tax-Free and Municipal Funds*
Benham National Tax-Free Money Market Fund
Benham National Tax-Free Intermediate-Term Fund
Benham National Tax-Free Long-Term Fund
Benham Florida Municipal Money Market Fund**
Benham Florida Municipal Intermediate-Term Fund**
Benham Arizona Municipal Intermediate-Term Fund***
Benham Gold Equities Index Fund
Benham Income & Growth Fund
Benham Equity Growth Fund
Benham Utilities Income Fund
Benham Global Natural Resources Index Fund
Benham European Government Bond Fund
Benham Capital Manager Fund
* Available only to residents of California, Arizona, Colorado, Hawaii, Nevada,
New Mexico, Oregon, Texas, Utah, and Washington.
** Available only to residents of Florida, California, Georgia, Illinois,
Michigan, New Jersey, New York, and Pennsylvania.
***Available only to residents of Arizona, California, Colorado, Nevada, Oregon,
Washington, and Texas.
34
<PAGE>
NOTES:
35
<PAGE>
CONTENTS
Summary of Fund Expenses ................ 3
Financial Highlights .................... 4
How The Fund Works ...................... 6
Investment Objective ........... 6
Core Investment Policies ....... 6
Management Approach ..................... 8
Suitability ............................. 10
Other Investment Policies and Techniques 10
Portfolio Transactions .................. 12
Performance ............................. 12
Share Price ............................. 13
How to Invest ........................... 14
Shareholder Services .................... 18
Exchange Privilege ............. 18
Open Order Service ............. 18
Automatic Investment Services .. 19
Broker-Dealer Transactions ..... 20
TDD Service .................... 20
Emergency Services ............. 20
How to Redeem Your Investment ........... 21
About Benham-Sponsored Retirement Plans . 24
Distributions and Taxes ................. 26
Management Information .................. 30
About Benham International Funds 30
The Benham Group ............... 30
Advisory and Service Fees ...... 31
Expense Limitation Agreement ... 32
Distribution of Shares ......... 32
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BENHAM EUROPEAN GOVERNMENT BOND FUND
A SERIES OF BENHAM INTERNATIONAL FUNDS
THE BENHAM GROUP
1665 Charleston Road
Mountain View, CA 94043
Shareholder Relations: 1-800-321-8321 or 1-415-965-4222
Fund Information: 1-800-331-8331 or 1-415-965-4274
STATEMENT OF ADDITIONAL INFORMATION
March 1, 1995
This Statement is not a prospectus but should be read in conjunction with the
Fund's current Prospectus dated March 1, 1995. The Fund's Annual Report for the
fiscal year ended December 31, 1994, is included in this Statement of Additional
Information. To obtain a copy of the Prospectus, call or write The Benham Group.
TABLE OF CONTENTS
Page
----
Investment Policies and Techniques 2
Investment Restrictions 10
Portfolio Transactions 12
Valuation of Portfolio Securities 13
Performance 14
Taxes 16
About Benham International Funds 18
Trustees and Officers 19
Investment Advisory Services 21
Administrative and Transfer Agent Services 23
Direct Fund Expenses 23
Expense Limitation Agreements 24
Additional Purchase and Redemption Information 24
Appendix 25
Financial Statements 26
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INVESTMENT POLICIES AND TECHNIQUES
The following paragraphs provide a more detailed description of securities and
investment practices identified in the Prospectus. Unless otherwise noted, the
policies described in this Statement of Additional Information are not
fundamental and may be changed by the board of trustees.
EUROPEAN GOVERNMENT BONDS
The Fund invests primarily in European government bonds. The market for these
bonds is active; however, there are risks associated with investing in the
European government bond market distinct from those typically associated with
investing in U.S. government bonds. The following is a brief list of the primary
risks you should consider.
TAX RISK-Interest income from European government bonds may be taxed by foreign
governments at significantly higher rates than interest income from domestic
investments. As has happened in the past, the U.S. government or European
governments may adopt tax policies that discourage overseas investing.
CURRENCY EXCHANGE RATE RISK-Currencies in which the Fund's investments are
denominated may decline significantly relative to the U.S. dollar.
SETTLEMENT RISK-J.P. Morgan Investment Management, Inc. (JPMIM) may encounter
difficulties resulting from delays in settling transactions with European
broker-dealers. Settlement delays may encumber portfolio management efforts by
tying up Fund assets at times when JPMIM perceives market opportunities.
Under normal conditions, more than 25% of the Fund's assets are invested in
securities issued by the German government or its political subdivisions. This
policy is currently viewed by the Securities and Exchange Commission (SEC) staff
as a concentration policy. Under Section 13 of the Investment Company Act of
1940, a Fund may not change its concentration policy without shareholder
approval.
EUROPEAN CORPORATE BONDS
If necessary to satisfy diversification requirements under the Internal Revenue
Code (Code), the Fund may invest a portion of its assets in AAA-rated European
corporate bonds. The risks of investing in European corporate bonds are somewhat
greater than the risks associated with investing in European government bonds.
In addition to the risks outlined above with respect to European government
bonds, JPMIM may encounter difficulty obtaining adequate public information
about corporate bond issuers. Investment decisions may be encumbered by the lack
of uniform accounting, audit, or financial reporting standards among European
issuers or nations. The Fund may encounter greater volatility and less liquidity
in foreign corporate bond markets than it would in U.S. bond markets and less
government regulation of foreign exchanges and broker-dealers than is typical in
the U.S.
The Fund's European investments (government or corporate) may be affected by
political or economic developments within or among European nations, or between
European nations and the U.S.
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U.S. GOVERNMENT SECURITIES
To accommodate shareholder redemptions and exchanges, up to 5% of the Fund's
assets may be invested in U.S. government securities held directly or under
repurchase agreement. U.S. government securities include bills, notes, and bonds
issued by the U.S. Treasury and securities issued or guaranteed by agencies or
instrumentalities of the U.S. government.
Some U.S. government securities are supported by the direct "full faith and
credit" pledge of the U.S. government; others are supported by the right of the
issuer to borrow from the U.S. Treasury; others, such as securities issued by
the Federal National Mortgage Association (FNMA), are supported by the
discretionary authority of the U.S. government to purchase the agencies'
obligations; and others are supported only by the credit of the issuing or
guaranteeing instrumentality. There is no assurance that the U.S. government
will provide financial support to an instrumentality it sponsors when it is not
obligated by law to do so.
REPURCHASE AGREEMENTS
In a repurchase agreement (repo), the Fund buys a security at one price and
simultaneously agrees to sell it back to the seller at an agreed upon price on a
specified date (usually within seven days from the date of purchase) or on
demand. The repurchase price exceeds the purchase price by an amount that
reflects an agreed upon rate of return and that is unrelated to the interest
rate on the underlying security.
The advisor attempts to minimize the risks associated with repurchase agreements
by adhering to the following criteria:
(1) Limiting the securities acquired and held by the Fund under repurchase
agreements to U.S. government securities
(2) Entering into repurchase agreements only with primary dealers in U.S.
government securities (including bank affiliates) that are deemed to be
creditworthy under guidelines established by a nationally recognized
statistical rating organization and approved by the Fund's board of
trustees
(3) Monitoring the creditworthiness of all firms involved in repurchase
agreement transactions
(4) Requiring the seller to establish and maintain collateral equal to 102%
of the agreed upon resale price, provided that the board of trustees may
determine that a broker-dealer's credit standing is sufficient to allow
collateral to fall to as low as 101% of the agreed upon resale price
before the broker-dealer deposits additional securities with the Fund's
custodian or sub-custodian
(5) Investing no more than 5% of the Fund's total assets in repurchase
agreements that mature in more than seven days (with any other illiquid
security the Fund holds)
(6) Taking delivery of securities subject to repurchase agreement and holding
them in an account at the Fund's custodian bank
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The Fund has received permission from the SEC to participate in pooled
repurchase agreements collateralized by U.S. government securities with other
mutual funds advised by its investment advisor, Benham Management Corporation
(BMC). Pooled repos are expected to increase the income the Fund can earn from
repo transactions without increasing the risks associated with these
transactions.
WHEN-ISSUED AND FIRM-COMMITMENT AGREEMENTS
The Fund may engage in securities transactions on a when-issued or
firm-commitment basis, in which the transaction price and yield are each fixed
at the time the commitment is made, but payment and delivery occur at a future
date (typically 15 to 45 days later).
When purchasing securities on a when-issued or firm-commitment basis, the Fund
assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. Although the Fund will make commitments to purchase or sell
securities on a when-issued or firm-commitment basis with the intention of
actually receiving or delivering them, it may sell the securities before the
settlement date if it is deemed advisable as a matter of investment strategy.
In purchasing securities on a when-issued or firm-commitment basis, the Fund
will establish and maintain a segregated account consisting of cash, cash
equivalents, or high-quality securities in an amount sufficient to meet the
purchase price until the settlement date. When the time comes to pay for
when-issued securities, the Fund will meet its obligations with available cash,
through the sale of securities, or, although it would not normally expect to do
so, through sales of the when-issued securities themselves (which may have a
market value greater or less than the Fund's payment obligation). Selling
securities to meet when-issued or firm-commitment obligations may generate
capital gains or losses.
As an operating policy, the Fund will not commit more than 35% of its assets to
when-issued or firm-commitment agreements. If fluctuations in the value of
securities held cause more than 35% of the Fund's assets to be committed under
when-issued or firm-commitment agreements, JPMIM does not need to sell such
agreements, but it will be restricted from entering into further agreements on
behalf of the Fund until the percentage of assets committed to such agreements
is reduced to 35%. In addition, as an operating policy, the Fund will not enter
into when-issued or firm-commitment transactions with settlement dates exceeding
120 days.
SECURITIES LENDING
The Fund may lend its portfolio securities to earn additional income. If a
borrower defaulted on a securities loan, the Fund could experience delays in
recovering the securities it loaned; if the value of the loaned securities
increased in the meantime, the Fund could suffer a loss.
To minimize the risk of default on securities loans, BMC adheres to the
following guidelines prescribed by the board of trustees:
(1) TYPE AND AMOUNT OF COLLATERAL. At the time a loan is made, the Fund must
receive, from or on behalf of the borrower, collateral consisting of any
combination of cash and full faith and credit U.S. government securities equal
to not less than 102% of the market value of the securities loaned. Cash
collateral received by the Fund in connection with loans of portfolio securities
may be commingled by the Fund's custodian with other cash and marketable
securities, provided that
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the loan agreement expressly allows such commingling. The loan must not reduce
the risk of loss or opportunity for gain in the securities loaned.
(2) ADDITIONS TO COLLATERAL. Collateral must be marked to market daily, and the
borrower must agree to add collateral to the extent necessary to maintain the
102% level specified in guideline (1). The borrower must deposit additional
collateral no later than the business day following the business day on which a
collateral deficiency occurs or collateral appears to be inadequate.
(3) TERMINATION OF LOAN. The Fund must have the ability to terminate any loan of
portfolio securities at any time. The borrower must be obligated to redeliver
the borrowed securities within the normal settlement period following receipt of
the termination notice.
(4) REASONABLE RETURN ON LOAN. The borrower must agree that the Fund (a) will
receive all dividends, interest, or other distributions on loaned securities and
(b)_will be paid a reasonable return on such loans either in the form of a loan
fee or premium or from the retention by the Fund of part or all of the earnings
and profits realized from the investment of cash collateral in full faith and
credit U.S government securities.
(5) LIMITATIONS ON PERCENTAGE OF PORTFOLIO SECURITIES ON LOAN. The Fund's
loans may not exceed 33-1/3% of its total assets.
(6) CREDIT ANALYSIS. As part of the regular monitoring procedures BMC follows to
evaluate banks and broker-dealers in connection with, for example, repurchase
agreements and municipal securities credit issues, BMC will analyze and monitor
the creditworthiness of all borrowers with which portfolio lending arrangements
are contemplated or entered into.
If a borrower fails financially, there may be delays in recovering loaned
securities and a lost in the value of collateral. However, loans will only be
made to parties that meet the guidelines prescribed by the board of trustees.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS
JPMIM may engage in foreign currency exchange transactions on behalf of the Fund
to manage currency risk. Foreign currencies will be purchased and sold
regularly, either in the spot (i.e., cash) market or in the forward market
(through forward foreign currency exchange contracts or forward contracts).
When the Fund agrees to buy or sell a security denominated in a foreign
currency, it may enter into a forward contract to "lock in" the U.S. dollar
price of the security. By entering into a forward contract for the purchase or
sale, for a fixed amount of U.S. dollars, of the amount of foreign currency
involved in the underlying securities transaction, JPMIM can protect the Fund
against a possible loss resulting from an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date the security is purchased or sold and the date payment is made
or received. This type of transaction is sometimes referred to as a "position
hedge."
In addition to position hedges, JPMIM may engage in "cross-hedging" transactions
on behalf of the Fund. Cross hedging involves entering into a forward contract
to sell one foreign currency and buy another. JPMIM may employ a cross-hedging
strategy on behalf of the Fund if it
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believes that one foreign currency (in which a portion of the Fund's foreign
currency holdings are denominated) will change in value relative to the U.S.
dollar differently than another foreign currency.
Successful use of forward contracts depends on JPMIM's skill in analyzing and
predicting currency values. Forward contracts may substantially change the
Fund's investment exposure to changes in currency exchange rates and could
result in losses to the Fund if currencies do not perform as anticipated.
The currency management techniques previously discussed are limited by various
constraints, including the intention to protect the U.S. tax status of the Fund
as a regulated investment company.
FUTURES AND OPTIONS TRANSACTIONS
FUTURES TRANSACTIONS. The Fund may engage in futures transactions. Such
transactions may be used to maintain cash reserves while remaining fully
invested, to facilitate trading, to reduce transaction costs, or to pursue
higher investment returns when a futures contract is priced more attractively
than its underlying security or index.
Futures contracts provide for the sale by one party and purchase by another
party of a security at a specified future time and price. Although futures
contracts, by their terms, call for actual delivery or acceptance of the
underlying securities, in most cases the contracts are closed out before the
settlement date. The Fund can close out a futures position by taking an opposite
position in an identical contract (i.e., buying a contract that has previously
been sold or selling a contract that has previously been bought).
To initiate and maintain open positions in futures contracts, the Fund is
required to make a good faith margin deposit in cash or government securities
with a broker or custodian. A margin deposit is intended to assure completion of
the contract (delivery or acceptance of the underlying security) if it is not
terminated prior to the specified delivery date. Minimum initial margin
requirements are established by the futures exchanges and may be revised. In
addition, brokers may establish deposit requirements that are higher than the
exchange minimums.
Once a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy margin requirements, the contract holder is
required to pay additional "variation" margin. Conversely, changes in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to or
from the futures broker as long as the contract remains open and do not
constitute margin transactions for purposes of the Fund's investment
restrictions.
Although techniques other than trading futures contracts can be used to control
the Fund's exposure to market fluctuations, the use of futures contracts may be
a more effective means of hedging this exposure. While the Fund pays brokerage
commissions in connection with opening and closing out futures positions, these
costs are lower than the transaction costs incurred in the purchase and sale of
the underlying securities.
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PURCHASING PUT AND CALL OPTIONS. By purchasing a put option, the Fund obtains
the right (but not the obligation) to sell the option's underlying instrument at
a fixed strike price. In return for this right, the Fund pays the current market
price for the option (known as the option premium). Options have various types
of underlying instruments, including specific securities, indexes of securities
prices, and futures contracts. The Fund may terminate its position in a put
option it has purchased by allowing it to expire or by exercising the option. If
the option is allowed to expire, the Fund will lose the entire premium it paid.
If the Fund exercises the option, it completes the sale of the underlying
instrument at the strike price. The Fund may also terminate a put option
position by closing it out in the secondary market at its current price if a
liquid secondary market exists.
The buyer of a typical put option can expect to realize a gain if security
prices fall substantially. However, if the underlying instrument's price does
not fall enough to offset the cost of purchasing the option, a put buyer can
expect to suffer a loss (limited to the amount of the premium paid, plus related
transaction costs).
The features of call options are essentially the same as those of put options,
except that the purchaser of a call option obtains the right to purchase, rather
than sell, the underlying instrument at the option's strike price. A call buyer
typically attempts to participate in potential price increases of the underlying
instrument with risk limited to the cost of the option if security prices fall.
At the same time, the buyer can expect to suffer a loss if security prices do
not rise sufficiently to offset the cost of the option.
WRITING PUT AND CALL OPTIONS. If the Fund writes a put option, it takes the
opposite side of the transaction from the option's purchaser. In return for
receipt of the premium, the Fund assumes the obligation to pay the strike price
for the option's underlying instrument if the other party chooses to exercise
the option. When writing an option on a futures contract, the Fund will be
required to make margin payments to a broker or custodian as described above for
futures contracts. The Fund may seek to terminate its position in a put option
it writes before exercise by closing out the option in the secondary market at
its current price. However, if the secondary market is not liquid for a put
option the Fund has written, the Fund must continue to be prepared to pay the
strike price while the option is outstanding, regardless of price changes, and
must continue to set aside assets to cover its position.
If security prices rise, a put writer would generally expect to profit, although
the gain would be limited to the amount of the premium received. If security
prices remain the same over time, it is likely that the writer will also profit
by being able to close out the option at a lower price. If security prices fall,
the put writer would expect to suffer a loss. This loss should be less than the
loss from purchasing the underlying instrument directly, however, because the
premium received for writing the option should mitigate the effects of the
decline.
Writing a call option obligates the Fund to sell or deliver the option's
underlying instrument in return for the strike price upon exercise of the
option. The characteristics of writing call options are similar to those of
writing put options, except that writing calls generally is a profitable
strategy if prices remain the same or fall. Through receipt of the option
premium, a call writer mitigates the effects of a price decline. At the same
time, because a call writer must be prepared to deliver the underlying
instrument in return for the strike price even if its current value is greater,
a call writer gives up some ability to participate in security price increases.
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COMBINED POSITIONS. The Fund may purchase and write options in combination with
one another, or in combination with futures or forward contracts, to adjust the
risk and return characteristics of the overall position. For example, the Fund
may purchase a put option and write a call option on the same underlying
instrument to construct a combined position whose risk and return
characteristics are similar to selling a futures contract. Another possible
combined position would involve writing a call option at one strike price and
buying a call option at a lower price to reduce the risk of the written call
option in the event of a substantial price increase. Because combined options
positions involve multiple trades, they result in higher transaction costs and
may be more difficult to open and close out.
OTC OPTIONS. Unlike exchange-traded options, which are standardized with respect
to the underlying instrument, expiration date, contract size, and strike price,
the terms of over-the-counter options (options not traded on exchanges)
generally are established through negotiation with the other party to the option
contract. While this type of arrangement allows the Fund greater flexibility to
tailor an option to its needs, OTC options generally involve greater credit risk
than exchange-traded options, which are guaranteed by the clearing organizations
of the exchanges where they are traded. The risk of illiquidity is also greater
with OTC options because these options generally can be closed out only by
negotiation with the other party to the option.
OPTIONS ON FUTURES. By purchasing an option on a futures contract, the Fund
obtains the right, but not the obligation, to sell the futures contract (a put
option) or to buy the contract (a call option) at a fixed "strike" price. The
Fund can terminate its position in a put option by allowing it to expire or by
exercising the option. If the option is exercised, the Fund completes the sale
of the underlying security at the strike price. Purchasing an option on a
futures contract does not require the Fund to make margin payments unless the
option is exercised.
CORRELATION OF PRICE CHANGES. Because there are a limited number of types of
exchange-traded futures and options contracts, it is likely that the
standardized contracts available will not match the Fund's current or
anticipated investments exactly. The Fund may invest in futures and options
contracts based on securities with different issuers, maturities, or other
characteristics from the securities in which it typically invests (for example,
by hedging intermediate-term securities with a futures contract based on an
index of long-term bond prices); this involves a risk that the futures position
will not track the performance of the Fund's other investments.
Options and futures prices can diverge from the prices of their underlying
instruments even if the underlying instruments correlate well with the Fund's
investments. Options and futures prices are affected by factors such as current
and anticipated short-term interest rates, changes in volatility of the
underlying instrument, and the time remaining until expiration of the contract,
which may not affect security prices the same way. Imperfect correlation may
also result from differing levels of demand in the options and futures markets
and securities markets, from structural differences in how options and futures
and securities are traded, or from the imposition of daily price fluctuation
limits or trading halts. The Fund may purchase or sell options and futures
contracts with a greater or lesser value than the securities it wishes to hedge
or intends to purchase in an effort to compensate for differences in volatility
between the contract and the securities, although this may not be successful in
all cases. If price changes in the Fund's options or futures positions are
poorly correlated with its other investments, the positions may fail to produce
anticipated gains or result in losses that are not offset by gains in other
investments.
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FUTURES AND OPTIONS CONTRACTS RELATING TO FOREIGN CURRENCIES. The Fund may
purchase and sell currency futures and purchase and write currency options to
increase or decrease its exposure to different foreign currencies. A Fund may
also purchase and write currency options in connection with currency futures or
forward contracts.
Currency futures contracts are similar to forward currency exchange contracts,
except that they are traded on exchanges and have standard contract sizes and
delivery dates. Most currency futures contracts call for payment or delivery in
U.S. dollars.
The uses and risks of currency futures are similar to those of futures relating
to securities or indexes, as previously described. Currency futures values can
be expected to correlate with exchange rates, but may not reflect other factors
that affect the value of the Fund's investments. A currency hedge, for example,
should protect a deutsche-mark-denominated security from a decline in the
deutsche mark, but it will not protect the Fund against a price decline
resulting from a deterioration in the issuer's creditworthiness.
LIQUIDITY OF FUTURES CONTRACTS AND OPTIONS. There is no assurance that a liquid
secondary market will exist for any particular futures contract or option at any
particular time. Options may have relatively low trading volume and liquidity if
their strike prices are not close to the underlying instrument's current price.
In addition, exchanges may establish daily price fluctuation limits for futures
contracts and options and may halt trading if a contract's price moves upward or
downward more than the limit on a given day. On volatile trading days when the
price fluctuation limit is reached or a trading halt is imposed, it may be
impossible for the Fund to enter into new positions or close out existing
positions. If the secondary market for a contract was not liquid, because of
price fluctuation limits or otherwise, prompt liquidation of unfavorable
positions could be difficult or impossible, and the Fund could be required to
continue holding a position until delivery or expiration regardless of changes
in its value. Under these circumstances, the Fund's access to assets held to
cover its future positions could also be impaired.
Futures and options trading on foreign exchanges may not be regulated as
effectively as similar transactions in the U.S. and may not involve clearing
mechanisms or guarantees similar to those available in the U.S. The value of a
futures contract or option traded on a foreign exchange may be adversely
affected by the imposition of different exercise and settlement terms, trading
procedures, and margin requirements, and lesser trading volume.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS. The Fund has filed a
notice of eligibility for exclusion as a "commodity pool operator" with the
Commodity Futures Trading Commission (CFTC) and the National Futures
Association, which regulates trading in the futures markets. The Fund intends to
comply with Section 4.5 of the regulations under the Commodity Exchange Act,
which limits the extent to which the Fund can commit assets to initial margin
deposits and options premiums.
The Fund may enter into futures transactions (including related options) for
hedging purposes without regard to the percentage of assets committed to initial
margin and for other than hedging purposes provided that assets committed to
initial margin deposits on such instruments, plus premiums paid for open futures
options positions, less the amount by which any such positions are
"in-the-money," do not exceed 5% of the Fund's total assets. To the extent
required by law,
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the Fund will set aside cash and appropriate liquid assets in a segregated
account to cover its obligations related to futures contracts and options.
Financial futures or options purchased or sold by the Fund will be standardized
and traded through the facilities of a U.S. or foreign securities association or
listed on a U.S. or foreign securities or commodities exchange, board of trade,
or similar entity, or quoted on an automatic quotation system, except that the
Fund may effect transactions in over-the-counter options with primary U.S.
government securities dealers recognized by the Federal Reserve Bank of New
York. In addition, the Fund has undertaken to limit aggregate premiums paid on
all options purchased by the Fund to no more than 20% of the Fund's total net
asset value.
The Fund intends to comply with tax rules applicable to regulated investment
companies, including a requirement that capital gains from the sale of
securities held less than three months constitute less than 30% of a Fund's
gross income for each fiscal year. Gains on some futures contracts and options
are included in this 30% calculation, which may limit the Fund's investments in
these instruments.
INVESTMENT RESTRICTIONS
The Fund's investment restrictions, set forth in the following paragraphs, are
fundamental and may not be changed without approval of "a majority of the
outstanding voting securities" of the Fund as defined in the Investment Company
Act of 1940.
(1) The Fund may not borrow money except from a bank as a temporary
measure to satisfy redemption requests or for extraordinary or
emergency purposes provided that the Fund maintains asset coverage of
at least 300% for all such borrowings. The Fund may borrow money for
temporary or emergency purposes from other funds or portfolios for
which BMC is the investment advisor or from a joint account of such
funds or portfolios, as permitted by federal regulatory agencies.
(2) The Fund may not act as an underwriter of securities issued by others,
except to the extent that the Fund may be considered an underwriter
within the meaning of the Securities Act of 1933 in the disposition of
restricted securities.
(3) The Fund may not purchase or sell real estate, unless acquired as a
result of ownership of securities or other instruments (but this shall
not prevent the Fund from investing in securities or other instruments
backed by real estate or securities engaged in the real estate
business); physical commodities; contracts relating to physical
commodities; or interests in oil, gas and/or mineral exploration
development programs or leases. This restriction shall not be deemed
to prohibit the Fund from purchasing or selling currencies; entering
into futures contracts on securities, currencies, or on indexes of
such securities or currencies, or any other financial instruments; and
purchasing and selling options on such futures contracts.
(4) The Fund may not make loans to others, except for the lending of
portfolio securities pursuant to guidelines established by the board
of trustees or for the purchase of debt securities in accordance with
the Fund's investment objective and policies.
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(5) The Fund may not issue senior securities, except as permitted under
the Investment Company Act of 1940.
The Fund is also subject to the following restrictions that are not fundamental
and may therefore be changed by the board of trustees without shareholder
approval:
(a) As an operating policy, the Fund may not purchase any equity
securities in any companies, including warrants or bonds with warrants
attached, or any preferred stocks, convertible bonds, or convertible
debentures.
(b) As an operating policy, the Fund may not sell securities short, unless
it owns or has the right to obtain securities equivalent in kind and
amount to the securities sold short, and provided that transactions in
options and futures contracts are not deemed to constitute short sales
of securities.
(c) As an operating policy, the Fund may not purchase warrants, valued at
the lower of cost or market, in excess of 10% of the Fund's net
assets. Included within that amount, but not to exceed 2% of the
Fund's net assets, are warrants whose underlying securities are not
traded on principal domestic or foreign exchanges. Warrants acquired
by the Fund in units or attached to securities are not subject to
these restrictions.
(d) As an operating policy, the Fund may not purchase securities on
margin, except that the Fund may obtain such short-term credits as are
necessary for the clearance of transactions and provided that margin
payments in connection with futures contracts and options on futures
contracts shall not constitute the purchase of securities on margin.
(e) As an operating policy, the Fund may not invest in securities that are
not readily marketable or the disposition of which is restricted under
federal securities laws (collectively, "illiquid securities"), if, as
a result, more than 10% of the Fund's net assets would be invested in
illiquid securities. The Fund may not invest more than 10% of its net
assets in repurchase agreements providing for settlement in more than
seven days, or in options that are traded in the over-the-counter
market and in investments hedged by such options.
(f) As an operating policy, the Fund may not acquire or retain the
securities of any other investment company if, as a result, more than
3% of such investment company's outstanding shares would be held by
the Fund, more than 5% of the value of the Fund's assets would be
invested in shares of such investment company or more than 10% of the
value of the Fund's assets would be invested in shares of investment
companies in the aggregate, or except in connection with a merger,
consolidation, acquisition, or reorganization.
(g) As an operating policy, the Fund may not invest in securities of an
issuer that, with any predecessor, has been in operation for less than
three years if, as a result, more than 5% of the total assets of the
Fund would then be invested in such securities.
Unless otherwise indicated, percentage limitations included in the
restrictions apply at the time transactions are entered into. Accordingly, any
later increase or decrease beyond the
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specified limitation resulting from a change in the Fund's net assets will not
be considered in determining whether it has complied with its investment
restrictions.
PORTFOLIO TRANSACTIONS
In selecting broker-dealers to execute transactions on behalf of the Fund, JPMIM
seeks the best net price and execution available. In assessing the best net
price and execution available for any Fund transaction, JPMIM will consider all
factors it deems relevant including, but not limited to, (i) the breadth of the
market for the security, (ii) the price of the security, (iii) the financial
condition and execution capability of the broker-dealer, and (iv) the
reasonableness of any commission for the specific transaction. When the
execution and price offered by two or more broker-dealers are comparable, JPMIM
may, with discretion, in recognition of the value of brokerage or research
services provided by the broker-dealer, purchase and sell portfolio securities
to and from broker-dealers who provide the Fund with research and other services
provided, however, that in all instances best net price and execution shall be
the controlling factor, and in no event may JPMIM pay to a broker-dealer a
commission in excess of that which another broker-dealer would have charged for
effecting the same transaction.
When JPMIM deems the purchase or sale of a security to be in the best interest
of the Fund as well as its other clients, it may, to the extent permitted by
applicable law, aggregate the securities to be sold or purchased with those of
its other clients. In such an event, the allocation of securities so purchased
or sold will be made by JPMIM in a manner it considers to be the most equitable
and consistent with its fiduciary obligations to the Fund and its other clients.
JPMIM is authorized to execute such documents as may be required to affect
forward foreign currency exchange contracts on behalf of the Fund. In selecting
counterparties for such contracts, JPMIM seeks the best overall terms available
and executes or directs the execution of all such transactions as permitted by
law and consistent with the best interest of the Fund.
For the fiscal years ended December 31, 1994, and 1993, the Fund's portfolio
turnover rates were 166% and 310%, respectively.
TRANSACTIONS WITH JPMIM AFFILIATES
As described in further detail on pages 21 and 22, JPMIM is subadvisor to the
Fund pursuant to an agreement with Benham Management Corporation.
JPMIM, Morgan Guaranty Trust Company of New York ("Morgan Guaranty," the Fund's
custodian), J.P. Morgan Securities Inc., and J.P. Morgan Securities Limited are
wholly owned subsidiaries of J.P. Morgan & Co. Incorporated, hereafter referred
to collectively as "Morgan affiliates."
J. P. Morgan Securities Inc. is a broker-dealer registered with the Securities
and Exchange Commission and is a member of the National Association of
Securities Dealers. It is active as a dealer in U.S. government securities and
an underwriter of and dealer in U.S. government agency securities and money
market instruments.
J.P. Morgan Securities Limited underwrites, distributes, and trades
international securities, including Eurobonds, commercial paper, and foreign
government bonds. J.P. Morgan & Co.
12
<PAGE>
Incorporated issues commercial paper and long-term debt securities. Morgan
Guaranty and some of its affiliates issue certificates of deposit and create
bankers' acceptances.
To the extent that the Fund invests a portion of its assets in such obligations,
it will not invest in securities issued or created by Morgan affiliates.
Certain activities of Morgan affiliates may affect the Fund's portfolio or the
markets for securities in which the Fund invests. In particular, activities of
Morgan affiliates may affect the prices of securities held by the Fund and the
supply of issues available for purchase by the Fund. Where a Morgan affiliate
holds a large portion of a given issue, the price at which that issue is traded
may influence the price of similar securities the Fund holds or is considering
purchasing.
The Fund will not purchase securities directly from Morgan affiliates, and the
size of Morgan affiliates' holdings may limit the selection of available
securities in a particular maturity, yield, or price range. The Fund will not
execute any transactions with Morgan affiliates and will use only unaffiliated
broker-dealers. In addition, the Fund will not purchase any securities of U.S.
government agencies during the existence of an underwriting or selling group of
which a Morgan affiliate is a member, except to the extent permitted by law.
The Fund's ability to engage in transactions with Morgan affiliates is
restricted by the SEC and the Federal Reserve Board. In JPMIM's opinion, these
limitations should not significantly impair the Fund's ability to pursue its
investment objectives. However, there may be circumstances in which the Fund is
disadvantaged by these limitations compared to other funds with similar
investment objectives that are not subject to these limitations.
In acting for its fiduciary accounts, including the Fund, JPMIM will not discuss
its investment decisions or positions with the personnel of any Morgan
affiliate. JPMIM has informed the Fund that, in making investment decisions, it
will not obtain or use material, non-public information in the possession of any
division or department of JPMIM or other Morgan affiliates.
The commercial banking divisions of Morgan Guaranty and its affiliates may have
deposit, loan, and other commercial banking relationships with issuers of
securities the Fund purchases, including loans that may be repaid in whole or in
part with the proceeds of securities purchased by the Fund. Except as may be
permitted by applicable law, the Fund will not purchase securities in any
primary public offering when the prospectus discloses that the proceeds will be
used to repay a loan from Morgan Guaranty. JPMIM will not cause the Fund to make
investments for the direct purpose of benefitting other commercial interests of
Morgan affiliates at the Fund's expense.
VALUATION OF PORTFOLIO SECURITIES
The Fund's net asset value per share (NAV) is determined by Benham Financial
Services, Inc. (BFS) at 1:00 p.m. Pacific Time each day the New York Stock
Exchange (NYSE) is open for business. The NYSE has designated the following
holiday closings for 1995: New Year's Day (observed), Washington's Birthday,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day. Although BFS expects the same holiday schedule to be observed in
the future, the NYSE may modify its holiday schedule at any time.
13
<PAGE>
JPMIM typically completes its trading on behalf of the Fund in various markets
before the NYSE closes for the day, and the value of portfolio securities is
determined when the primary market for those securities closes for the day.
Foreign currency exchange rates are also determined prior to the close of the
NYSE. However, if extraordinary events occur that are expected to affect the
value of a portfolio security after the close of the primary exchange on which
it is traded, the security will be valued at fair market value as determined in
good faith under the direction of the board of trustees.
PERFORMANCE
The Fund's yields and total returns may be quoted in advertising and sales
literature. These figures, as well as the Fund's share price, will vary. Past
performance should not be considered an indication of future results.
Yield quotations for the Fund are based on the investment income per share
earned during a particular 30-day period, less expenses accrued during the
period (net investment income), and are computed by dividing the Fund's net
investment income by its share price on the last day of the period, according to
the following formula:
6
YIELD = 2 [(a - b + 1) - 1]
-----
cd
where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of reimbursements), c = the average daily number of shares
outstanding during the period that were entitled to receive dividends, and d =
the maximum offering price per share on the last day of the period.
For the 30-day period ended December 31, 1994, the Fund's yield was 7.60%.
Total returns quoted in advertising and sales literature reflect all aspects of
the Fund's return, including the effect of reinvesting dividends and capital
gain distributions and any change in the Fund's NAV during the period.
Average annual total returns are calculated by determining the growth or decline
in value of a hypothetical historical investment in the Fund over a stated
period, and then calculating the annually compounded percentage rate that would
have produced the same result if the rate of growth or decline in value had been
constant throughout the period. For example, a cumulative total return of 100%
over 10 years would produce an average annual return of 7.18%, which is the
steady annual rate that would equal 100% growth on a compounded basis in 10
years. Whereas average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that the Fund's performance is
not constant over time, but changes from year to year, and that average annual
returns represent averaged figures as opposed to actual year-to-year
performance.
In addition to average annual total returns, the Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be quoted
as a percentage or as a dollar amount and may be calculated for a single
investment, a series of investments, or a series of redemptions over any time
period. Total returns may be broken down into their components of income and
capital
14
<PAGE>
(including capital gains and changes in share price) to illustrate the
relationship of these factors and their contributions to total return. The
Fund's one year and life of fund average annual total return through December
31, 1994 are 1.52% and 6.76%, respectively. The Fund commenced operations on
January 7, 1992. Performance information may be quoted numerically or in a
table, graph, or similar illustration.
The Fund's performance may be compared with the performance of other mutual
funds tracked by mutual fund rating services or with other indexes of market
performance. This may include comparisons with funds that, unlike Benham funds,
are sold with a sales charge or deferred sales charge. Economic sources that may
be used for such comparisons may include, but are not limited to, U.S. Treasury
bill, note, and bond yields, money market fund yields, U.S. government debt and
percentage held by foreigners, the U.S. money supply, net free reserves, and
current-coupon GNMAs (source: Board of Governors of the Federal Reserve System);
the federal funds and discount rates (source: Federal Reserve Bank of New York);
yield curves for U.S. Treasury securities and AA/AAA-rated corporate securities
(source: Bloomberg Financial Markets); yield curves for AAA-rated tax-free
municipal securities (source: Telerate); yield curves for foreign government
securities (sources: Bloomberg Financial Markets and Data Resources, Inc.);
total returns on foreign bonds (source: J.P. Morgan Securities Inc.); various
U.S. and foreign government reports; the junk bond market (source: Data
Resources, Inc.); the CRB Futures Index (source: Commodity Index Report); the
price of gold (sources: London a.m./p.m. fixing and New York Comex Spot Price);
rankings of any mutual fund or mutual fund category tracked by Lipper Analytical
Services, Inc. or Morningstar, Inc.; mutual fund rankings published in major,
nationally distributed periodicals; data provided by the Investment Company
Institute; Ibbotson Associates, Stocks, Bonds, Bills, and Inflation; major
indexes of stock market performance; and indexes and historical data supplied by
major securities brokerage or investment advisory firms. The Fund may also
utilize reprints from newspapers and magazines furnished by third parties to
illustrate historical performance.
The Fund's shares are sold without a sales charge (or "load"). No-load funds
offer an advantage to investors when compared to load funds with comparable
investment objectives and strategies. For example, if you invest $10,000 in a
no-load fund, 100% of your investment is used to buy shares. If you invest
$10,000 in a fund with a 5.5% load, only $9,450 ($10,000 minus $550) is used to
buy shares. Over time, this difference can have a significant effect on total
return. Assuming a compounded annual growth rate of 10% for both investments,
the no-load fund investment would be worth $25,937 after ten years, while the
load fund investment would be worth only $24,511.
The Benham Group has distinguished itself as an innovative provider of low-cost
true no-load mutual funds. Among other innovations, The Benham Group established
the first no-load fund investing primarily in zero-coupon U.S. Treasury
securities; the first no-load double tax-free California money market and
short-term bond funds; the first no-load adjustable rate government securities
fund; the first AAA-rated European government bond fund; and the first no-load
utilities fund designed to pay monthly dividends.
The advisor may obtain ratings on the safety of Fund shares from one or more
nationally recognized statistical fiscal rating organizations (rating agencies)
and may publish such ratings in advertisements and sales literature.
15
<PAGE>
TAXES
The Fund will be treated as a separate corporation for federal income tax
purposes and intends to qualify annually as a "regulated investment company"
under Subchapter M of the Code. By so qualifying, the Fund will be exempt from
federal income taxes to the extent that substantially all of its net investment
income and net realized capital gains are distributed to shareholders.
The Fund may be subject to a 4% excise tax on a portion of its undistributed
income. To avoid the tax, the Fund must distribute annually at least 98% of its
ordinary income (not taking into account any capital gains or losses) for the
calendar year and at least 98% of its net capital gain income for the 12-month
period ending, as a general rule, on October 31 of the calendar year. Any
dividend declared by the Fund in October, November, or December of any year and
payable to shareholders of record on a specified date in such a month shall be
deemed to have been received by each shareholder on December 31 of such year and
to have been paid by the Fund not later than December 31 of such year, provided
that such dividend is actually paid by the Fund during January of the following
year.
As of December 31, 1994, the Fund had a capital loss carryover of $6,713,445
that will expire on December 31, 2002. No capital gain distributions will be
made by the Fund until its capital loss carryovers have been offset or have
expired.
The Fund's transactions in foreign currencies, forward contracts, options and
futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses realized by the Fund (i.e.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Fund, defer Fund losses, and affect the
determination of whether capital gains and losses are characterized as long-term
or short-term capital gains or losses. These rules could therefore affect the
character, amount and timing of distributions to shareholders. These provisions
also may require the Fund to mark to market certain types of the positions in
its portfolio (i.e., treat them as if they were closed out), which may cause the
Fund to recognize income without receiving cash with which to make distributions
in amounts necessary to satisfy the 90% and 98% distribution requirements for
relief from income and excise taxes. The Fund will monitor its transactions and
may make such tax elections as Fund management deems appropriate with respect to
foreign currency, options, futures contracts, forward contracts, or hedged
investments. The Fund's status as a regulated investment company may limit its
transactions involving foreign currency, futures, options and forward contracts.
Under the Code, gains or losses attributable to fluctuations in exchange rates
that occur between the time the Fund accrues income or other receivables or
accrues expenses or other liabilities denominated in a foreign currency and the
time the Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or loss. Similarly, in disposing of
debt securities denominated in foreign currencies, certain forward currency
contracts, or other instruments, gains or losses attributable to fluctuations in
the value of a foreign currency between the date the security, contract, or
other instrument is acquired and the date it is disposed of are also usually
treated as ordinary income or loss. Under Section 988 of the Code, these gains
or losses may increase or decrease the amount of the Fund's investment company
taxable income distributed to shareholders as ordinary income.
16
<PAGE>
Earnings derived by the Fund from sources outside the U.S. may be subject to
non-U.S. withholding and possibly other taxes. Such taxes may be reduced or
eliminated under the terms of a U.S. income tax treaty, and the Fund intends to
undertake any procedural steps required to claim the benefits of such a treaty.
With respect to any non-U.S. taxes actually paid by the Fund, if more than 50%
in value of the Fund's total assets at the close of any taxable year consists of
securities of foreign corporations, the Fund will elect to treat any non-U.S.
income and similar taxes it pays as though the taxes were paid by its
shareholders.
Some of the debt securities that may be acquired by the Fund may be treated as
debt securities originally issued at a discount. Generally, the amount of the
original issue discount (OID) is treated as interest income and is included in
income over the term of the debt security even though payment of that amount is
not received until a later time, usually when the debt security matures.
Some of the debt securities may be purchased by the Fund at a discount that
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes.
The gain realized on the disposition of any taxable debt security having market
discount will be treated as ordinary income to the extent it does not exceed the
accrued market discount on such debt security. Generally, market discount
accrues on a daily basis for each day the debt security is held by the Fund at a
constant rate over the time remaining to the debt security's maturity or, at the
election of the Fund, at a constant yield to maturity that takes into account
the semiannual compounding of interest.
Exchange control regulations that may restrict repatriation of investment
income, capital, or the proceeds of securities sales by foreign investors may
limit the Fund's ability to make sufficient distributions to satisfy the 90% and
calendar-year distribution requirements.
Ordinarily, the Fund will declare and pay dividends of net investment income
quarterly and make distributions of net realized capital gains, if any, at least
annually. To avoid the dilution of dividends payable to existing shareholders,
the Fund will adhere to an accounting practice known as "equalization." In
adhering to this practice, the portion of the Fund's NAV attributable to
undistributed income will be allocated as a credit to undistributed income in
connection with share purchases or as a debit to undistributed income in
connection with share redemptions. Use of equalization accounting may affect the
amount, timing, and character of distributions to shareholders for tax purposes.
TAXATION OF U.S. SHAREHOLDERS
Upon redeeming, selling, or exchanging shares of the Fund, a shareholder will
realize a taxable gain or loss depending upon his or her basis in the shares
liquidated. The gain or loss generally will be a capital gain or loss, if the
shares are capital assets in the shareholder's hands, and will be long-term or
short-term depending on the length of time the shares were held. However, a loss
recognized by a shareholder in the disposition of shares on which capital gain
dividends were paid (or deemed paid) before the shareholder had held his or her
shares for more than six months would be treated as a long-term capital loss for
tax purposes.
A gain realized on the redemption, sale, or exchange of shares would not be
affected by the reacquisition of shares. A loss realized on a redemption, sale,
or exchange of shares would be disallowed to the extent that the shares disposed
of were replaced (whether through reinvestment
17
<PAGE>
of distributions or otherwise) within a period of 61 days beginning 30 days
before and ending 30 days after the date on which the shares were disposed.
Under such circumstances, the basis of the shares acquired would be adjusted to
reflect the disallowed loss.
TAXATION OF NON-U.S. SHAREHOLDERS
U.S. taxation of a shareholder who is a non-resident alien or a non-U.S.
corporation, partnership, trust, or estate depends on whether the payments
received from a Fund are "effectively connected" with a U.S. trade or business
carried on by such a shareholder. Ordinarily, income from the Fund will not be
treated as "effectively connected."
If the payments received from the Fund are effectively connected with a U.S.
trade or business of the shareholder, then all distributions of net investment
income and net capital gains of the Fund and gains realized upon the redemption,
exchange, or other taxable disposition of shares will be subject to U.S. federal
income tax at the graduated rates applicable to U.S. citizens, residents, or
domestic entities, although the tax may be eliminated under the terms of an
applicable U.S. income tax treaty. Non-U.S. corporate shareholders also may be
subject to a branch profits tax with respect to payments from the Fund.
If the shareholder is not engaged in a U.S. trade or business, or the payments
received from the Fund are not effectively connected with the conduct of such a
trade or business, the shareholder will generally be subject to U.S. tax
withholding at the rate of 30% (or a lower rate under an applicable U.S. income
tax treaty) on distributions of net investment income and net realized
short-term capital received. Non-U.S. shareholders not engaged in a U.S. trade
or business, or having no effectively connected income, may also be subject to
U.S. tax at the rate of 30% (or a lower treaty rate) on additional distributions
resulting from the Fund's election to treat any non-U.S. taxes it pays as though
the taxes were paid by its shareholders.
Distributions of net realized long-term capital gains to non-U.S. shareholders
and any capital gains realized by them upon the redemption or other taxable
disposition of shares generally will not be subject to U.S. tax. In the case of
individuals and other non-exempt, non-U.S. shareholders who fail to furnish the
Fund with required certifications regarding their foreign status on IRS Form W-8
or an appropriate substitute, the Fund may be required to impose backup
withholding of U.S. tax at the rate of 31% on distributions of net realized
capital gains and proceeds of redemptions and exchanges.
The information above is only a summary of some of the tax considerations
affecting the Fund and its shareholders; no attempt has been made to discuss
individual tax consequences. The Fund and the Fund's distributions may also be
subject to state, local, or foreign taxes. A prospective investor may wish to
consult a tax advisor to determine whether the Fund is a suitable investment
based on his or her tax situation.
ABOUT BENHAM INTERNATIONAL FUNDS
Benham International Funds was organized as a Massachusetts business trust on
August 28, 1991. Currently, there are five series of the Trust; one of which is
described herein. The board of trustees may create additional series from time
to time.
18
<PAGE>
The Declaration of Trust permits the trustees to issue an unlimited number of
full and fractional shares of beneficial interest without par value, which may
be issued in series (funds). Shares issued will be fully paid and nonassessable
and will have no preemptive, conversion, or similar rights.
Shares of the Fund have equal voting rights, and voting rights are not
cumulative. In the election of trustees, each nominee may receive only one vote
from each shareholder, and, because the election requires only a simple
majority, more than 50% of the shares voting in an election can elect all of the
trustees. Shares of the Fund have equal rights as to dividends and distributions
declared by the Fund and in the net assets of the Fund upon its liquidation or
dissolution.
The shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust contains an express disclaimer of shareholder
liability for acts or obligations of the Trust. The Declaration of Trust also
provides for indemnification and reimbursement of expenses of any shareholder
held personally liable for obligations of the Trust. The Declaration of Trust
provides that the Trust will, upon request, assume the defense of any claim made
against any shareholder for any act or obligation of the Trust and satisfy any
judgment thereon. The Declaration of Trust further provides that the Trust may
maintain appropriate insurance (for example, fidelity, bonding, and errors and
omissions insurance) for the protection of the Trust, its shareholders,
trustees, officers, employees, and agents to cover possible tort and other
liabilities. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which both inadequate
insurance exists and the Trust is unable to meet its obligations.
CUSTODIAN BANK: Morgan Guaranty Trust Company of New York, 23 Wall Street, New
York, New York 10015, is custodian of the Fund's assets. Services provided by
the custodian bank include (i) settling portfolio purchases and sales, (ii)
reporting failed trades, (iii) identifying and collecting portfolio income, and
(iv) providing safekeeping of securities. The custodian takes no part in
determining the Fund's investment policies or in determining which securities
are sold or purchased by the Fund.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS: KPMG Peat Marwick LLP, 3 Embarcadero
Center, San Francisco, California 94111, serves as the Trust's independent
certified public accountants and provides services including (i) audit of annual
financial statements and (ii) preparation of annual federal income tax returns
filed on behalf of the Fund.
TRUSTEES AND OFFICERS
The Trust's activities are overseen by a board of trustees, including five
independent trustees. The individuals listed below whose names are marked by an
asterisk (*) are "interested persons" of the Trust (as defined in the Investment
Company Act of 1940) by virtue of their affiliation with either the Trust; the
Trust's investment advisor, Benham Management Corporation (BMC); the Trust's
agent for transfer and administrative services, Benham Financial Services, Inc.
(BFS); the Trust's distribution agent, Benham Distributors, Inc. (BDI); the
parent corporation, Benham Management International, Inc. (BMI); or other funds
advised by BMC. Each trustee listed below also serves as a trustee or director
of other funds in The Benham Group. Unless otherwise noted, dates in parentheses
indicate the dates the trustee or officer began his or her service in a
particular capacity. The trustees' and officers' address is 1665 Charleston
Road, Mountain View, California 94043.
19
<PAGE>
*JAMES M. BENHAM, chairman of the board of trustees (1991). Mr. Benham is also
chairman of the boards of BFS (1985), BMC (1971), BMI (1982), and BDI (1988);
president of BMC (1971), BMI (1982), and BDI (1988); and a member of the board
of governors of the Investment Company Institute (1989) and the Mutual Fund
Education Alliance (formerly the No-Load Mutual Fund Association, 1974). Mr.
Benham has been in the securities business since 1963, and he frequently
comments through the media on economic conditions, investment strategies, and
the securities markets.
*JOHN T. KATAOKA, trustee, president, and chief executive officer (1991). Mr.
Kataoka is also a director and president of BFS (1985); director and executive
vice president of BMC and BMI (1984); and executive vice president and chief
operating officer of BDI (1988).
MYRON S. SCHOLES, independent trustee (1991). Mr. Scholes is a principal of
Long-Term Capital Management (1993). He is also Frank E. Buck Professor of
Finance at the Stanford Graduate School of Business (1983), a director of
Dimensional Fund Advisors (1982) and the Smith Breeden Family of Funds (1992).
From August 1991 to June 1993, Mr. Scholes was a managing director of Salomon
Brothers Inc. (securities brokerage).
KENNETH E. SCOTT, independent trustee (1991). Mr. Scott is Ralph M. Parsons
Professor of Law and Business at Stanford Law School (1972) and a director of
RCM Capital Management (June 1994).
EZRA SOLOMON, independent trustee (1991). Mr. Solomon is Dean Witter Professor
of Finance Emeritus at the Stanford Graduate School of Business, where he served
as Dean Witter Professor of Finance from 1965 to 1990, and a director of
Encyclopedia Britannica.
ISAAC STEIN, independent trustee (1992). Mr. Stein is former chairman of the
board (1990 to 1992) and chief executive officer (1991 to 1992) of Esprit de
Corp. (clothing manufacturer). He is a member of the board of Raychem
Corporation (electrical equipment, 1993), president of Waverley Associates, Inc.
(private investment firm, 1983), and a director of ALZA Corporation
(pharmaceuticals, 1987). He is also a trustee of Stanford University (1994) and
chairman of Stanford Health Services (hospital, 1994).
JEANNE D. WOHLERS, independent trustee (1991). Ms. Wohlers is a private investor
and an independent director and partner of Windy Hill Productions, LP.
Previously, she served as vice president and chief financial officer of Sybase,
Inc. (software company, 1988 to 1992).
*BRUCE R. FITZPATRICK, vice president, chief financial officer, and treasurer
(1991).
*DOUGLAS A. PAUL, secretary, vice president, and general counsel (1991).
*ANN N. MCCOID, controller (1991).
As of January 31, 1995, the trustees and officers, as a group, owned less than
1% of the Fund's outstanding shares.
The table on the following page summarizes the compensation that the trustees of
the Fund received for the Fund's fiscal year ended December 31, 1994, as well as
the compensation received for serving as director or trustee of all other Benham
funds.
20
<PAGE>
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1994
===============================================================================================================
NAME OF TRUSTEE AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL TOTAL COMPENSATION
COMPENSATION FROM BENEFITS ACCRUED AS BENEFITS UPON FROM FUND AND FUND
FUND* PART OF FUND EXPENSES RETIREMENT COMPLEX** PAID TO
TRUSTEES
<S> <C> <C> <C> <C>
===============================================================================================================
James M. Benham $0 Not Applicable Not Applicable $0
- ---------------------------------------------------------------------------------------------------------------
John T. Kataoka $0 Not Applicable Not Applicable $0
- ---------------------------------------------------------------------------------------------------------------
Myron S. Scholes $9,360 Not Applicable Not Applicable $62,000
- ---------------------------------------------------------------------------------------------------------------
Kenneth E. Scott $9,428 Not Applicable Not Applicable $72,250
- ---------------------------------------------------------------------------------------------------------------
Ezra Solomon $9,374 Not Applicable Not Applicable $74,750
- ---------------------------------------------------------------------------------------------------------------
Isaac Stein $9,237 Not Applicable Not Applicable $68,750
- ---------------------------------------------------------------------------------------------------------------
Jeanne D. Wohlers $9,360 Not Applicable Not Applicable $71,000
===============================================================================================================
* The Fund did not commence operations until January 7, 1992.
** The Benham Group fund complex currently consists of 41 investment companies.
</TABLE>
INVESTMENT ADVISORY SERVICES
The Fund has an investment advisory agreement with Benham Management Corporation
(BMC), dated June 1, 1994, that was approved by the Fund's shareholders on April
20, 1994. The fee schedules for both agreements are illustrated on the next
page.
BMC is a California corporation and a wholly owned subsidiary of Benham
Management International, Inc. (BMI). BMI is a California corporation owned by
Mr. Benham, the BMI Employee Stock Bonus Plan, and a group of private investors.
As owner of 100% of BMI's voting stock, Mr. Benham controls both BMI and BMC.
BMC has been a registered investment advisor since 1971 and is investment
advisor to other funds in The Benham Group.
James M. Benham and John T. Kataoka are directors and officers of BMC. Messrs.
Benham and Kataoka also serve as trustees, and Mr. Kataoka serves as president,
of the Trust.
BIF's agreement with BMC continues from year to year provided that it is
approved at least annually by vote of a majority of the Fund's outstanding
shares or by vote of a majority of the Fund's trustees, including a majority of
those trustees who are neither parties to the agreement
21
<PAGE>
nor interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval.
The agreement is terminable on 60 days' written notice, either by BIF or by BMC,
to the other party, and terminates automatically in the event of its assignment.
The investment advisory agreement stipulates that BMC will provide the Fund with
investment advice and portfolio management services in accordance with the
Fund's investment objective, policies, and restrictions. The agreement also
provides that BMC will determine what securities will be purchased and sold by
the Fund and assist the Fund's officers in carrying out decisions made by the
board of trustees.
Under the current agreement, the Fund pays BMC a monthly investment advisory fee
based on the dollar amount derived from applying the Fund's average daily net
assets to the following investment advisory fee rate schedule:
.45% of the first $200 million
.40% of the next $300 million
.35% of the next $1 billion
.34% of the next $1 billion
.33% of the next $1 billion
.32% of the next $1 billion
.31% of the next $1 billion
.30% of the next $1 billion
.29% of net assets of more than $6.5 billion
Prior to June 1, 1994, the Fund's advisory fee schedule ranged from .50% to .19%
of the Fund's average daily net assets, dropping as the Fund's assets increased.
For the fiscal years ended December 31, 1994 and 1993, the Fund paid $1,122,995
and $1,740,333 in investment advisory fees (including recoupments described
below) to BMC.
The investment advisory agreement provides that BMC may delegate certain
responsibilities under the agreement to a subadvisor. Currently, JPMIM serves as
subadvisor to the Fund under a subadvisory agreement between BMC and JPMIM dated
June 1, 1994, that was approved by shareholders on April 20, 1994. This
superseded a subadvisory agreement dated December 31, 1991. The subadvisory
agreement is subject to annual renewal by vote of a majority of the Fund's
outstanding shares or by vote of a majority of the Fund's trustees, including a
majority of those trustees who are neither parties to the agreement nor
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval. The subadvisory agreement is subject to
termination without penalty on 60 days' written notice by BMC, the board of
trustees, or a majority of the Fund's outstanding shares or 12 months' written
notice by JPMIM and will terminate automatically in the event of (i) its
assignment or (ii) termination of the investment advisory agreement between BIF
and BMC.
The subadvisory agreement provides that JPMIM will make investment decisions for
the Fund in accordance with the Fund's investment objective, policies, and
restrictions, and whatever additional written guidelines it may receive from BMC
from time to time. For these services, BMC pays JPMIM a monthly fee at an annual
rate of .20% of the first $200 million of average
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daily net assets and .15% of average daily net assets of more than $200 million.
Under the 1991 subadvisory agreement, BMC paid JPMIM a monthly fee at an annual
rate of .25% of average daily net assets up to $200 million, and .05% of average
daily net assets in excess of $200 million, with a minimum annual fee of
$250,000.
For the fiscal years ended December 31, 1994 and 1993, BMC paid JPMIM
subadvisory fees of $480,751 and $580,770, respectively.
ADMINISTRATIVE AND TRANSFER AGENT SERVICES
BFS, a wholly owned subsidiary of BMI, is the Trust's agent for transfer and
administrative services. For administrative services, the Fund pays BFS a
monthly fee based on its pro rata share of the dollar amount derived from
applying the average daily net assets of all the funds in The Benham Group to
the following administrative fee rate schedule:
GROUP ASSETS ADMINISTRATIVE FEE RATE
up to $4.5 billion .11%
up to $6 billion .10
up to $9 billion .09
more than $9 billion .08
This fee rate schedule was approved by the trustees on April 14, 1993, and
became effective on May 1, 1993.
Prior to May 1, 1993, the administrative fee rate was determined by applying the
aggregate average daily net assets of all the funds in The Benham Group to a fee
rate schedule that ranged from .10% for assets up to $4.5 billion to a marginal
rate of .07% for assets more than $7.5 billion.
For transfer agent services, the Fund pays BFS monthly fees of $1.00 for each
shareholder account maintained and $1.35 for each shareholder transaction
executed during the month.
For the fiscal years ended December 31, 1994 and 1993, the Fund paid BFS
$249,272 and $342,531 for administrative services and $275,941 and $339,134 for
transfer agent services, respectively.
DIRECT FUND EXPENSES
The Fund pays certain operating expenses that are not assumed by BMC or BFS.
These include fees and expenses of the independent trustees; custodian, audit,
and pricing fees; fees of outside counsel and counsel employed directly by the
Trust; costs of printing and mailing prospectuses, statements of additional
information, proxy statements, notices, confirmations, and reports to
shareholders; fees for registering the Fund's shares under federal and state
securities laws; brokerage fees and commissions; trade association dues; costs
of fidelity and liability insurance policies covering the Fund; costs for
incoming WATS lines maintained to receive and handle shareholder inquiries; and
organizational costs.
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EXPENSE LIMITATION AGREEMENTS
On June 1, 1992, the trustees established a reimbursement and expense allocation
agreement (R&EA Agreement) among the Trust, BMC, and BFS, pursuant to which BMC
and BFS would limit the Fund's expenses to .90% of average daily net assets.
Under this agreement, amounts absorbed on behalf of the Fund were apportioned to
BMC and BFS based on the income each had received from the Fund. The R&EA
Agreement provided further that BMC and BFS could recover amounts absorbed on
behalf of the Fund during the preceding 11 months if, and to the extent that,
for any given month, the Fund's expenses were less than the expense limitation
in effect at that time.
On April 14, 1993, the trustees approved an Expense Reimbursement Agreement that
superseded the R&EA Agreement on June 1, 1993. Similar to the R&EA Agreement,
the Expense Reimbursement Agreement limited Fund expenses to .90% of average
daily net assets. However, unlike the R&EA Agreement, the Expense Reimbursement
Agreement placed sole responsibility for expense limitations with BMC. The
Expense Reimbursement Agreement provides that BMC may recover amounts absorbed
on behalf of the Fund during the preceding 11 months if, and to the extent that,
for any given month, the Fund's expenses were less than the expense limitation
in effect at that time. For up to 11 months following effectiveness of the
Expense Reimbursement Agreement, BFS recovered amounts absorbed on behalf of the
Fund under the R&EA Agreement, subject to the conditions described above for
recoupments by BMC.
For the fiscal year ended December 31, 1994, BMC recouped $1,215.00 of the
Fund's expenses. BMC paid no reimbursements to the Fund for the fiscal year
ended December 31, 1993.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Fund's shares are continuously offered at NAV. Share certificates are issued
(without charge) only when requested in writing. Certificates are not issued for
fractional shares. Dividend and voting rights are not affected by the issuance
of certificates.
The Benham Group may reject or limit the amount of an investment to prevent any
one shareholder or affiliated group from controlling the Trust or one of its
series; to avoid jeopardizing a series' tax status; or whenever, in management's
opinion, such rejection is in the Trust's or a series' best interest. As of
January 31, 1995, Charles Schwab & Co., 101 Montgomery Street, San Francisco,
California 94104, was the record holder of 21.87% of the outstanding shares of
the Fund. As of that date, no other shareholder was the record holder or
beneficial owner of 5% or more of the Fund's total shares outstanding.
The Benham Group charges neither fees nor commissions on the purchase and sale
of Benham fund shares. BFS may, however, charge fees for special services
requested by a shareholder or necessitated by acts or omissions of a
shareholder. For example, BFS may charge a fee for processing dishonored
investment checks or stop-payment requests. BFS charges $10 per hour for account
research requested by investors. This charge will be assessed, for example, when
a shareholder request requires more than one hour of research on historical
account records. The fees charged are based on the estimated costs of performing
shareholder-requested services and are not intended to increase income.
Share purchases and redemptions are governed by California law.
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APPENDIX
The Trust's investment advisor has been continuously registered with the SEC
under the Investment Advisers Act of 1940 since December 14, 1971. The Trust has
filed a registration statement under the Securities Act of 1933 and the
Investment Company Act of 1940 with respect to the shares offered. These
registrations do not imply approval or supervision of the Trust or the advisor
by the SEC.
For further information, refer to the registration statement and exhibits on
file with the SEC in Washington, D.C. These documents are available upon payment
of a reproduction fee. Statements in the Prospectus and in this Statement of
Additional Information concerning the contents of contracts or other documents,
copies of which are filed as exhibits to the registration statement, are
qualified by reference to such contracts or documents.
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