BENHAM CAPITAL MANAGER FUND
A Series of Benham Manager Funds
Supplement Dated December 15, 1995 to the Prospectus and
Statement of Additional Information Dated February 24, 1995
1. On page 3 under the heading "SUMMARY OF FUND EXPENSES", the first sentence of
the footnote is replaced by the following:
Benham Management Corporation (BMC) has agreed under contract to continue
to limit the Fund's total operating expenses to 1.00% of its average daily
net assets through May 31, 1996.
2. The following table shows per-share data for the period December 1, 1994
(commencement of operations) through May 31, 1995. This information should be
considered in conjunction with the unaudited financial statements and related
notes provided in the May 31, 1995 Semianunual Report.
FINANCIAL HIGHLIGHTS:
Selected Data for a Share Outstanding Throughout the Period Indicated
(Unaudited):
PER-SHARE DATA
Net Asset Value at Beginning of Period.............................$ 10.00
Income From Investment Operations
Net Investment Income........................................ 0.24
Net Realized and Unrealized Gains On Investments and
Foreign Currency Contracts and Transactions.............. 1.03
----
Total Income From Investment Operations............ 1.27
----
Less Distributions
Dividends from Net Investment Income......................... (0.10)
Distributions from Net Realized Gains on Investments and
Foreign Currency Contracts and Transactions.............. 0.00
----
Total Distributions................................ (0.10)
----
Net Asset Value at End of Period....................................$ 11.17
=====
TOTAL RETURN* ................................................ 12.81%
SUPPLEMENTAL DATA AND RATIOS
Net Assets at End of Period (in thousands of dollars)...............$34,797
Ratio of Expenses to Average Daily Net Assets....................... 1.00%**
Ratio of Net Investment Income to Average Daily Net Assets.......... 4.62%**
Portfolio Turnover Rate............................................. 58.00%
* Total return figures assume reinvestment of dividends and capital gain
distribution and are not annualized.
**Annualized
3. On June 1, 1995, Benham Management International ("BMI") merged into
Twentieth Century Companies, Inc. ("TCC"). As a result of the merger, Benham
Management Corporation ("BMC"), Benham Financial Services, Inc. ("BFS") and
Benham Distributors, Inc. ("BDI"), the investment advisor, agent for transfer
and administrative services, and distributor, respectively, for all of the Funds
in The Benham Group, which had been subsidiaries of BMI, became subsidiaries of
TCC. TCC, through other subsidiaries, also provides investment advisory and
related services to the Twentieth Century family of funds.
New Investment Advisory Agreements with BMC as a subsidiary of TCC were
approved by the shareholders of each Fund at a meeting on May 31, 1995. A New
Administrative Services and Transfer Agency Agreement with BFS as a subsidiary
of TCC and a new Distribution Agreement with BDI as a subsidiary of TCC were
approved by the Board of Directors\Trustees for each Fund at a meeting on April
3, 1995.
The following individuals have been elected or appointed to the Board of
Directors of the Fund in addition to those listed in the current Prospectus:
ALBERT A. EISENSTAT, independent 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.
4. On page 19 of the Prospectus, the discussion under the heading "SHARE PRICE"
is replaced with the following:
The price of your shares is the net asset value of the Fund next determined
after receipt of your instruction to purchase, convert or redeem. Net asset
value is determined by calculating the total value of a Fund's assets,
deducting total liabilities and dividing the result by the number of shares
outstanding. Net asset value ("NAV") is determined on each day that the New
York Stock Exchange (the "Exchange") is open.
Investments and requests to redeem shares will receive the share price next
determined after receipt by Benham of the investment or redemption request.
For example, investments and requests to redeem shares received by Benham
before the close of business of the Exchange are effective on, and will
receive the price determined on that day as of the close of the Exchange.
Investment and redemption requests received thereafter are effective on,
and receive the price determined as of the close of the Exchange on the
next day the Exchange is open.
Investments are considered received only when your check or wired funds are
received by Benham. Wired funds are considered received on the day they are
deposited in Benham's bank account if they are deposited before the close
of business on the Exchange, usually 1 p.m. Pacific Time.
Investment and transaction instructions received by Benham on any business
day by mail at its office prior to the close of business of the Exchange,
usually 1 p.m. Pacific Time, will receive that day's price. Investments and
instructions received after that time will receive the price determined on
the next business day.
All other remaining references in the Prospectus and Statement of
Additional Information to the net asset value being calculated at "12 p.m.
Pacific Time for Benham Target Maturities Trust and 1 p.m. Pacific Time for all
other Benham funds" are hereby changed to "the close of the Exchange, usually 12
p.m. Pacific Time for Benham Target Maturities Trust and 1 p.m. Pacific Time for
all other Benham funds."
5. On page 23 of the Prospectus under the sub-heading "PROCESSING YOUR SHARE
PURCHASES", 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.
6. On page 23 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.
7. On page 23 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.
8. On page 24 of the Prospectus, the following 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.
9. On page 25 of the Prospectus, the following replaces the last two sentences
of the last paragraph under the sub-heading "OPEN ORDER SERVICE":
All orders and cancellation of orders received by one hour prior to the
close of the Exchange, usually 12 p.m. Pacific Time, will be considered to
be effective the same day. All orders and cancellation of orders not
received one hour prior to the close of the Exchange, usually 12 p.m.
Pacific Time, will be considered effective the following business day.
<PAGE>
BENHAM
CAPITAL MANAGER
FUND
Prospectus * February 24, 1995
[picture of pie slices representing
investments in the fund]
[company logo] The Benham Group
<PAGE>
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[information in left margin of page]
THE BENHAM GROUP
1665 Charleston Road
Mountain View, California 94043
FUND INFORMATION
1-800-331-8331
1-415-965-4274
SHAREHOLDER RELATIONS
1-800-321-8321
1-415-965-4222
TDD SERVICE
1-800-624-6338
1-415-965-4764
BENHAM GROUP REPRESENTATIVES ARE AVAILABLE BY TELEPHONE WEEKDAYS FROM 5 A.M. TO
5 P.M. PACIFIC TIME.
- -------------------
BENHAM CAPITAL
MANAGER FUND
A Series of Benham Manager Funds
Prospectus February 24, 1995
BENHAM CAPITAL MANAGER FUND (Fund) seeks to maximize total return (capital
appreciation plus dividend income) consistent with prudent investment risk. The
Fund seeks to achieve these objectives by allocating its assets among (i) U.S.
equity securities, (ii) U.S. fixed-income securities, (iii) money market
instruments, (iv) foreign equity and fixed-income securities, and (v) securities
of companies with substantial gold-related assets and natural resources linked
investments. The Fund is a diversified series of Benham Manager Funds, a
no-load, open-end mutual fund.
Please read this prospectus carefully and retain it for future reference. It is
designed to help you decide if the Fund's goals match your own. A Statement of
Additional Information (also dated February 24, 1995) has been filed with the
Securities and Exchange Commission (SEC) and is incorporated herein by
reference. For a free copy, call or write The Benham Group.
Mutual fund shares are not insured by the FDIC, the Federal Reserve Board, or
any other agency. The value of the investment and its returns will fluctuate and
is not guaranteed.
AS WITH ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
2
<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 the Fund's
anticipated expenses, adjusted to reflect the expense limitation agreement in
effect as of February 24, 1995.
================================================================================
A. Shareholder Transaction Expenses
- --------------------------------------------------------------------------------
Sales load imposed on purchases............................ None
Sales load imposed on reinvested dividends................. None
Deferred sales load........................................ None
Exchange fee............................................... None
================================================================================
B. Annual Fund Operating Expenses
As a Percentage of Average Daily Net Assets
- --------------------------------------------------------------------------------
Investment advisory fee (net of expense limitation)........ .38%*
12b-1 fee.................................................. None
Other expenses............................................. .62%
TOTAL FUND OPERATING EXPENSES (net of expense limitation).. 1.00%*
* Benham Management Corporation (BMC) has agreed under contract to limit the
Fund's total operating expenses to 1.00% of its average daily net assets through
May 31, 1995. The contract provides that BMC may recover amounts absorbed on
behalf of the Fund during the preceding 11 months if, and to the extent that,
for any given month, Fund expenses were less than the expense limit in effect at
that time. The expense limitation is subject to annual renewal in June. If the
expense limitation were not in effect, the Fund's advisory fee, other expenses,
and total operating expenses would have been .65%, .62%, and 1.27%,
respectively.
The Fund pays an investment advisory fee to Benham Management Corporation (BMC)
based on the average daily net assets of Benham Manager Funds. Other expenses
include administrative and transfer agent fees paid to Benham Financial
Services, Inc. (BFS).
3
<PAGE>
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[information in left margin of page]
The Fund's "flexible" investment approach allows it to take advantage of
performance opportunities when they occur.
- -------------------
================================================================================
C. EXAMPLE OF EXPENSES
- --------------------------------------------------------------------------------
The following table illustrates the expenses a shareholder would pay on a $1,000
investment in the Fund over periods of one and three years based on expenses
shown in the table above and assuming (i) a 5% annual return and (ii) full
redemption at the end of each time period.
One year $10
Three years $32
We include this table to help you understand the various costs and expenses that
you, as a shareholder, will bear directly or indirectly. THIS EXAMPLE SHOULD NOT
BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR PERFORMANCE; ACTUAL
EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN, AND THE FUND MAY NOT REALIZE
THE 5% HYPOTHETICAL RATE OF RETURN REQUIRED BY THE SEC FOR THIS EXAMPLE.
HOW THE FUND WORKS
INVESTMENT OBJECTIVE
The Fund's investment objective is to maximize total return (capital
appreciation plus dividend income) consistent with prudent investment risk. The
Fund seeks to achieve its objective by allocating its assets among (i) U.S.
equity securities, (ii) U.S. fixed-income securities, (iii) money market
instruments, (iv) foreign equity and fixed-income securities, and (v) securities
of companies with substantial gold-related assets and natural resources linked
investments. There is no guarantee that the Fund will achieve its investment
objective.
The Fund's investment objective is fundamental and may not be changed without
shareholder approval. Unless otherwise noted, all other investment policies are
nonfundamental and may be changed by the board of trustees.
4
<PAGE>
MANAGEMENT APPROACH
The Fund has a neutral mix that represents the way the
Fund's investments will be generally allocated over the long term. Working from
the neutral mix, BMC may gradually adjust the Fund's investments within their
operating ranges to reflect either growth-oriented or defensive strategies. The
Fund's neutral mix and operating range for each asset class are illustrated
below.
ASSET CLASS NEUTRAL MIX OPERATING RANGE
- --------------------------------------------------------------------------------
U.S. Equity Securities (Stocks) 35% 25-45%
- --------------------------------------------------------------------------------
U.S. Fixed-Income Securities (Bonds) 35% 25-45%
- --------------------------------------------------------------------------------
Money Market Securities (Short-Term Instruments) 15% 10-25%
- --------------------------------------------------------------------------------
Foreign Equity and Fixed-Income Securities
(International) 12% 5-25%
- --------------------------------------------------------------------------------
Gold Companies and Natural Resources Linked
Investments (Specialty) 3% 0-10%
- --------------------------------------------------------------------------------
Under extreme market conditions, the Fund may adopt broader ranges for its asset
classes as follows: 20-70% in stocks, 20-70% in bonds, 10-40% in short-term
instruments, 0-40% in international securities, and 0-10% in specialty
securities.
This "flexible" investment approach allows the Fund to take advantage of
performance opportunities as they occur. Fund performance may be affected by a
variety of factors, such as interest rate changes, market conditions, economic
events, and BMC's skill in allocating assets.
The composition of the asset classes in the neutral mix is designed to create a
diversified portfolio emphasizing total return. The Fund's diversification
reduces the potential risks of any one asset class. No single mutual fund,
however, can provide an appropriate balanced investment plan for all investors.
The essence of the Fund's diversification strategy is to produce competitive
returns and limit volatility by owning assets that have historically responded
differently under similar market conditions. As opportunities arise or market
conditions warrant, BMC may alter the Fund's investment mix and particular
securities within each asset class. BMC makes investment decisions for the Fund
in a two-tiered process: (i) determining how the Fund's assets should be
distributed among asset classes and (ii) deciding which securities should be
purchased within each asset class.
5
<PAGE>
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[information in left margin of page]
The essence of the Fund's diversification strategy is to produce competitive
returns and limit volatility by owning assets that respond differently under
similar market conditions.
Our portfolio manager draws on the experience and skills of the entire Benham
portfolio management team.
- -------------------
BMC begins the decision making process by using a quantitative asset allocation
model and a market scenario analysis to determine how the Fund's investments
should be distributed among its five asset classes, without regard to specific
securities. This analysis includes consideration of the relative opportunity for
capital appreciation of stocks and bonds, dividend yields, and the level of
interest rates paid on debt securities of various maturities.
In determining the allocation of assets among U.S. and foreign capital markets,
BMC also utilizes several analytical techniques, including historical analyses
and projections for economies and markets worldwide.
In selecting securities denominated in foreign currencies, BMC will consider,
among other factors, the impact of foreign exchange rates relative to the U.S.
dollar value of such securities. BMC may use forward exchange currency contracts
or other hedging techniques to seek to minimize foreign exchange rate risks. See
"Currency Risk" on page 12.
Periodically, or under extraordinary circumstances, the Fund's manager
recommends an asset allocation strategy to a committee of senior BMC officers
and portfolio managers. Subsequently, the Fund's manager works with the Benham
portfolio management team within their respective areas of expertise to
implement changes to the asset allocation and portfolio holdings.
6
<PAGE>
INVESTMENT CATEGORIES
The types of securities the Fund may buy within each asset class and
their strategic use in pursuing the Fund's objective are illustrated in the
table below and are described more fully on the following pages. Risks related
to each asset class and specific types of investments are discussed under "Risk
Factors" on page 10. See the Statement of Additional Information for a more
detailed discussion of the Fund's investment techniques.
================================================================================
ASSET CLASS TYPE OF SECURITY STRATEGIC USE
- --------------------------------------------------------------------------------
Stocks Large, medium, and small capitalization Growth;Growth
stocks traded on U.S. exchanges. of Income
- --------------------------------------------------------------------------------
Bonds Investment grade corporate and Income
U.S. government debt obligations.
- --------------------------------------------------------------------------------
Short-Term High-grade, short-term government Preservation of
and corporate debt instruments. Capital; Income;
No derivatives. Liquidity
- --------------------------------------------------------------------------------
Int'l Stocks: Primarily EAFE Index countries Growth; Currency
(Europe, Australia, and the Far East). Hedge; International
Bonds: Investment-grade corporate Diversification
and government debt obligations.
- --------------------------------------------------------------------------------
Specialty Natural resources (including gold) stocks; Inflation Hedge;
stocks; commodity-linked index securities. Growth
U.S. EQUITY SECURITIES. The Fund will generally invest 25-45% of its assets in
common stocks, preferred stocks, convertible securities, and warrants. These
investments may include stocks of large, middle, and small capitalization
companies located in the United States. In selecting both U.S. and foreign
equity securities, BMC considers a variety of factors relating to dividend and
cash flow valuation, earnings growth, and the likelihood that earnings will
exceed analysts' estimates.
Convertible securities are bonds, preferred stocks, and other securities that
may be exchanged or converted into shares of the issuer's underlying common
stock at a specific price for a specific time period. The value of convertible
securities is linked to the price of the underlying stock and is sensitive to
interest rate changes and the credit quality of the issuer.
The Fund may buy convertible securities rated, at the time of investment, within
the top four rating categories (i.e., investment-grade quality) by a nationally
recognized statistical rating organization (rating agency) or, if unrated,
judged by BMC under the supervision of the board of trustees to be of comparable
quality.
7
<PAGE>
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[information in left margin of page]
Because U.S. stocks and bonds tend to move together, the Fund will invest in
money market and international securities to enhance the benefits of
diversification.
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U.S. FIXED-INCOME SECURITIES. The Fund will generally invest 25-45% of its
assets in securities issued or guaranteed by the U.S. government and its
agencies or instrumentalities and in debt obligations issued by U.S.
corporations. The Fund may also invest in instruments described under
"Mortgage-Related and Other Asset-Backed Securities" on page 13.
The Fund may buy debt securities rated, at the time of investment,
investment-grade quality by a rating agency or, if unrated, judged by BMC, under
the supervision of the board of trustees, to be of comparable quality. The
maturities of securities included in this portion of the Fund's portfolio will
generally range from 2 to 30 years and may be adjusted depending upon BMC's
perception of market and economic conditions.
MONEY MARKET SECURITIES. The Fund will normally invest 10-25% of its assets in
high-quality money market instruments with remaining maturities of 13 months or
less. Such instruments may include obligations of U.S. or foreign governments,
government agencies, and supranational organizations; commercial paper;
short-term corporate debt obligations; and high-quality certificates of deposit
(including non-U.S. dollar deposits).
The Fund may also enter into repurchase agreements, collateralized by U.S.
government securities, with banks or broker-dealers that are deemed to present
minimal credit risk. Credit risk determinations are made by BMC pursuant to
guidelines established by the board of 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 money market fund
advised by BMC provided that the investment is consistent with the Fund's
investment policies and restrictions. For temporary defensive purposes, the Fund
may invest up to 100% of its assets in short-term instruments.
8
<PAGE>
FOREIGN EQUITY AND FIXED-INCOME SECURITIES. The foreign securities segment may
consist of equity securities of foreign issuers (including common stocks,
preferred stocks, warrants, and securities convertible into common stocks) as
well as debt securities of foreign issuers (including bonds, notes and other
debt securities, and obligations of foreign governments and their political
subdivisions). The Fund's foreign equity securities are generally issued by
developed countries in Europe, Australia, and the Far East. These countries'
stock markets are represented in the Morgan Stanley Capital International's EAFE
Index (EAFE Index).
The Fund may buy debt securities deemed by a rating agency, at the time of
investment, to be of investment-grade quality or, if unrated, judged by BMC
under the supervision of the board of trustees to be of comparable quality.
The Fund does not intend to invest more than 5% of its net assets in securities
of issuers located in developing countries. The Fund may also invest in other
investment companies as described under "Investment Companies" on page 14. The
Fund will not invest more than 25% of its total assets in securities of issuers
located in any one foreign country. The maturities of foreign fixed-income
securities included in the Fund's portfolio will range from 2 to 30 years.
The Fund may also invest in sponsored or unsponsored American Depositary
Receipts (ADRs), European Depositary Receipts (EDRs), Global Depositary Receipts
(GDRs), International Depositary Receipts (IDRs), or other similar securities
convertible into securities of foreign issuers.
GOLD COMPANIES AND NATURAL RESOURCES LINKED INVESTMENTS. The Fund will generally
invest 0-10% of its portfolio in stocks of domestic and foreign companies that
are engaged in exploring for, mining, processing, fabricating, or otherwise
dealing in gold and other precious metals (such as silver and platinum) or other
natural resources. Stocks included in this category must be issued by a company
that derives fifty percent or more of its revenue or net profits from one or
more of these activities. This segment may also include structured notes, which
are described on page 17.
9
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[information in left margin of page]
Risk exposure to any one asset class is limited by the allocation of the Fund's
assets among various investment categories.
A diversified Fund may produce competitive returns with less risk than a Fund
concentrated in just one or two types of investments.
- -------------------
RISK FACTORS
The Fund is a convenient way to diversify while seeking total return. Risk
exposure to any one asset class is limited by the allocation of the Fund's
assets among various investment categories. The Fund may be appropriate for
investors seeking one-stop diversification across various investment categories,
both in the U.S. and abroad. The Fund works best for long-term investors
prepared to ride out the markets' ups and downs.
The Fund cannot assure that the techniques it uses will be successful.
Diversification among asset classes will not necessarily protect the Fund from
loss; it is possible that several of the Fund's asset classes will experience
losses simultaneously under certain market conditions. See "Other Investment
Policies and Techniques" on page 13 for additional information about the Fund's
investments and their risks.
EQUITY SECURITIES are subject to the risks of stock market investing, including
the possibility of sudden or prolonged market declines as well as the risks
associated with individual companies. The Fund may invest in stocks of companies
of large, medium, or small capitalization. Investing in smaller, less seasoned
companies may present greater opportunities for growth but also may involve
greater risks than are customarily associated with more established companies.
FIXED-INCOME SECURITIES are affected primarily by changes in interest rates. The
prices of these securities tend to rise when interest rates fall, and conversely
fall when interest rates rise. Interest rate changes will have a greater effect
on the Fund if it is heavily invested in long-term or zero-coupon bonds.
Fixed-income securities may also be affected by changes in the credit quality of
their issuers.
Securities rated in the lowest investment-grade category may have
speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case for higher grade bonds. In the event that
an existing holding is downgraded below
10
<PAGE>
investment grade, the Fund will seek to dispose of the security, but its ability
to do so may be limited by its intention to qualify as a regulated investment
company for federal tax purposes.
The Fund may purchase zero-coupon bonds (zeros), which are debt obligations that
do not pay interest periodically. Zeros are issued at a substantial discount
from their maturity value, and this discount is amortized over the life of the
security. Because interest on zeros is not distributed on a current basis but
is, in effect, compounded, zeros tend to be subject to greater market risk than
interest-paying securities with similar maturities.
FOREIGN SECURITIES may present unique investment opportunities; however,
overseas investing involves risks not associated with domestic investing.
Foreign securities markets are not always as efficient as those in the U.S. and
are often less liquid and more volatile.
Other risks involved in investing in the securities of foreign issuers
include differences in accounting, auditing and financial reporting standards;
generally higher commission rates on foreign portfolio transactions; political
instability, which could affect U.S. investments in foreign countries; and
potential restrictions on the flow of capital.
The extent of the support of foreign government obligations varies. Some foreign
government obligations are direct obligations of the foreign government. The
payment of principal and interest is unconditionally guaranteed on certain other
foreign government securities. Other foreign government obligations are neither
direct obligations of, nor guaranteed by, a foreign government but involve
government sponsorship in one way or another, such as specific collateralization
or support by the credit of the issuing government agency or instrumentality.
Foreign taxes can also affect the Fund's performance; see "Taxes" on page 32 and
the Statement of Additional Information for further details.
11
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Foreign investments may enhance the purchasing power of U.S. investors when the
U.S. dollar declines against the currencies of major trading partners.
Gold and natural resources investments typically seek to hedge against
inflation.
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CURRENCY RISK will affect the value of foreign-currency-denominated securities
when foreign exchange rates fluctuate. Currency risks are generally higher in
lesser developed markets. The Fund may, however, engage in foreign currency
transactions to protect its portfolio against fluctuations in currency exchange
rates in relation to the U.S. dollar. Such foreign currency transactions may
include forward foreign currency contracts, currency exchange transactions on a
spot (i.e., cash) basis, put and call options on foreign currencies, and foreign
exchange futures contracts.
GOLD COMPANIES AND NATURAL RESOURCES LINKED INVESTMENTS. When the economy is
threatened by inflation, the Fund may increase its holdings in gold stocks to
benefit from rising commodities prices and offset bond market declines. Based
upon historical experience, during periods of economic or financial instability,
the prices of securities of companies included in this segment reflect the price
volatility of gold and other natural resources. Instability of prices may affect
earnings of such companies and may adversely affect the financial condition of
such companies. In addition, some companies involved in natural resources
businesses may also be subject to the risks generally associated with extraction
of natural resources, such as oil spills, as well as be vulnerable to natural
disasters including, but not limited to, fire, flood, and drought.
12
<PAGE>
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 pay for the
security. Either of these situations could affect the market value of the Fund's
assets. The Fund will not commit more than 35% of its assets to these
agreements.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
The Fund may purchase mortgage pass-through securities, subject to the Fund's
limits on investments in U.S. fixed-income securities. Mortgage pass-through
securities represent interests in "pools" of mortgages in which payments of both
interest and principal on the securities are generally made monthly. These
monthly mortgage payments are in effect "passed through" to the security holder
(minus fees paid to the security's issuer or guarantor). These securities may be
subject to prepayment risk.
The primary issuers of mortgage securities are the Federal National Mortgage
Association (FNMA), the Federal Home Loan Mortgage Corporation (FHLMC), and the
Government National Mortgage Association (GNMA). Payments of principal and
interest on GNMA securities are guaranteed by GNMA and backed by the full faith
and credit of the U.S. government. Because FNMA and FHLMC have a close
relationship with the U.S. government, even though their securities are not
backed by the full faith and credit of the U.S. government, they are
high-quality securities with minimal credit risks.
The Fund may also invest in collateralized mortgage obligations. See
"Derivatives" on page 15 for details.
BORROWING
The Fund may borrow money
only for temporary or emergency purposes. Borrowings are not expected to exceed
5% of the Fund's total assets.
13
<PAGE>
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 of 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.
ILLIQUID AND RESTRICTED SECURITIES AND PRIVATE PLACEMENTS
The Fund may acquire some securities that are difficult to sell promptly at an
acceptable price (i.e., illiquid). Difficulty in selling securities may result
in losses and extra expenses to the Fund. Consequently, legal restrictions may
apply to the sale of these securities.
The Fund may invest up to 15% of its net assets in illiquid securities,
including restricted securities and private placements.
INVESTMENT COMPANIES
The Fund is seeking an exemptive order from the SEC to permit it to invest a
portion of its assets in Benham European Government Bond Fund (BEGBF), a series
of Benham International Funds, and any future international funds established
and managed by BMC. There is, however, no assurance that the Fund will be able
to receive the necessary exemptive order.
BMC believes that by investing in foreign securities through investment in
Benham International Funds, the Fund may achieve economies of scale resulting in
lower fees paid to managers skilled in international investing; lower custodial,
brokerage, and other transactional costs; and enhanced diversification of the
Fund's assets.
BEGBF'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. To avoid paying duplicative fees, the Fund will not
pay BMC advisory fees for any portion of its assets invested in any fund advised
by BMC.
14
<PAGE>
DERIVATIVES
The Fund may invest in various instruments that are commonly known
as derivatives. Generally, a derivative is a financial arrangement that bases,
or "derives," its value from a traditional security, asset, or market index.
Some derivatives such as mortgage-related and other asset-backed securities are
in many respects like any other investment, although they may be more volatile
or less liquid than more traditional debt securities.
There are, in fact, many different types of derivatives and many different ways
to use them. There is a range of risks associated with those uses, which are
discussed on the following pages. Some derivatives are used for leverage, which
tends to magnify the effects of an instrument's price changes as market
conditions change. Leveraging involves utilizing small amounts of money to
control significant financial assets and can, in some circumstances, lead to
significant losses. In contrast, the Fund may use derivatives to enhance return
and for hedging purposes. A description of the derivatives that the Fund may use
and some of their associated risks follows.
FUTURES AND OPTIONS. 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, losses may
occur and the Fund's value may be affected. The Fund will not utilize futures
and options for speculative purposes.
FORWARD CURRENCY CONTRACTS. The Fund may enter into forward foreign currency
exchange contracts for hedging purposes to offer limited protection against
uncertainty of future foreign exchange rates or in conjunction with the purchase
of a when-issued security or firm-commitment agreement. The Fund may not enter
into such contracts for speculative purposes. The Fund's use of forward currency
contracts is subject to the Fund's limits on investment in foreign equity and
fixed-income securities.
15
<PAGE>
A forward foreign currency exchange contract is an obligation that sets a future
date and price at which to purchase or sell a specific currency. These contracts
may be bought or sold to protect the Fund to a limited extent against the
possible weakening of a particular currency; however, they do not eliminate
fluctuations in the underlying prices of the securities. They also tend to limit
any potential gain that might be realized if the value of the hedged currency
were to increase.
Successful use of forward contracts depends on BMC's skill in analyzing and
predicting relative currency values. Forward contracts alter the Fund's exposure
to currency exchange rate activity and could result in losses to the Fund if
currencies do not perform as BMC anticipates. The Fund may incur significant
costs when converting assets from one currency to another.
WARRANTS are instruments issued by a corporation that give the holder the right
to subscribe to a specific amount of the corporation's capital stock at a set
price for a specified period of time. The Fund may invest up to 5% of its net
assets in warrants, except that this limitation does not apply to warrants
acquired in units or attached to securities.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOs) are hybrid instruments
with characteristics of both mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, interest and principal on a CMO are paid monthly,
quarterly, or semiannually. CMOs may be collateralized by whole mortgage loans
but are more typically collateralized by portfolios of mortgage pass-through
securities guaranteed by GNMA, FHLMC, or FNMA.
CMOs are categorized in multiple classes, or "tranches," with each class bearing
a different stated maturity. Monthly payments of principal, including
prepayments, are returned to investors in ascending order of the maturity class
they hold.
Floating-rate CMO tranches (floaters) pay a variable rate of interest that is
usually tied to the London Interbank Offered Rate (LIBOR). "Super floaters"
(which float a certain percentage above LIBOR) and "inverse floaters" (which
float inversely to LIBOR) are variations on the floater structure with highly
variable cash flows. The yield of any floater is sensitive to the rate of
prepayments as well as to the level of the applicable index. Low levels of the
index will reduce a floater's yield, while an interest rate cap on the floater
will limit the floater's yield when the level of the index is high. Because the
rate of interest paid on an inverse floater often varies inversely with a
multiple of the index, any change in the index may have an exaggerated effect on
the yield of the inverse floater.
STRUCTURED NOTES. The Fund may invest up to 5% of its assets in structured notes
whose coupons or principal value is linked to the performance of a particular
commodity or index price. Structured notes may have return characteristics
similar to direct investments in the underlying instrument or to one or more
options on the underlying instrument. Structured notes may be more volatile than
the underlying instrument itself and present many of the same risks as investing
in futures and options. Structured notes are also subject to credit risks
associated with the issuer of the security. The Fund's investment in structured
notes is subject to the limits of the Fund's investment in gold companies and
natural resources linked investments as well as to considerations relating to
the Fund's tax status.
OTHER PORTFOLIO MANAGEMENT TECHNIQUES
BMC may 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 including
leveraging resulting from structured notes. See the Statement of Additional
Information for a more detailed discussion of these investments and some of the
risks associated with them.
17
<PAGE>
PORTFOLIO TURNOVER
BMC will not trade portfolio securities in pursuit of short-term profits for the
Fund. However, when circumstances warrant, securities may be sold without regard
to their remaining maturities. Under normal conditions, the annual portfolio
turnover rate for the Fund's fixed-income investments is expected to be
approximately 250% and approximately 150% for the Fund's equity investments.
These turnover rates may vary from year to year. Higher portfolio turnover rates
increase transaction costs and can increase the incidence of capital gains (or
losses). Short-term capital gains distributed to shareholders are treated as
ordinary income.
PERFORMANCE
Mutual fund performance is commonly measured as yield or total return. It is
based on historical fund performance and may be quoted in advertising and sales
literature. Past performance is no guarantee of future results.
YIELD calculations show the rate of income the Fund earns on its investments as
an annual percentage rate. The Fund's yield is calculated according to methods
that are standardized for all stock and bond funds.
TOTAL RETURN represents the Fund's changes over a specified time period,
assuming reinvestment of dividends and capital gains, if any. CUMULATIVE TOTAL
RETURN illustrates the Fund's actual performance over a stated period of time.
AVERAGE ANNUAL TOTAL RETURN is a hypothetical rate of return that illustrates
the annually compounded return that would have produced the same cumulative
total return if the Fund's performance had been constant over the entire period.
Average annual total returns smooth out variations in the Fund's performance;
they are not the same as year-by-year results.
Performance data and a discussion of factors that affected performance during
the Fund's most recent reporting period are included in the Fund's semiannual
reports to shareholders. These reports are routinely delivered to the Fund's
shareholders. For a free copy, call one of the Fund Information numbers on page
20.
18
<PAGE>
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.
- -------------------
[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.
19
<PAGE>
- -------------------
[information in left margin of page]
Overnight and special delivery mail (e.g., Federal Express, Express Mail,
Priority Mail) should be sent to our street address: 1665 Charleston Road,
Mountain View, California 94043. Failure to do so may result in transaction
delays.
- -------------------
HOW TO INVEST
To open an account, you must complete and sign an application. If an application
is not enclosed with this Prospectus, you may request one by calling one of the
Fund Information numbers listed below. If you prefer, we will fill out your
application over the telephone and mail it to you for your signature. Separate
forms are required to establish Benham-sponsored retirement plan accounts, as
discussed on pages 30 and 31.
Your investment will be credited to your account 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 27 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.
20
<PAGE>
HOW TO BUY SHARES (Retirement plan accounts have different investment minimums.
See pages 30 and 31 for details.)
================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
BY CHECK Minimum initial investment: $2,500
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.
21
<PAGE>
================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
BY BANK WIRE Minimum initial investment: $25,000
Minimum additional investment: $100
If you wish to OPEN AN ACCOUNT BY BANK WIRE, please call our
Shareholder Relations Department for more information and an
account number. Bank wire investments should be addressed as
follows:
State Street Bank and Trust Company
Boston, Massachusetts
ABA Routing Number 011000028
Beneficiary = Benham Manager Funds: Benham Capital Manager Fund
Fund Account Number 0505 885 4
FBO [Your Name, Your Benham Fund Account Number]
- --------------------------------------------------------------------------------
BY EXCHANGE Minimum initial investment: $2,500
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 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 24 for details. You
may open a new account by exchange provided that you meet the
minimum initial investment requirement.
- --------------------------------------------------------------------------------
AUTOMATIC Minimum: $25
INVESTMENT These services are offered with respect to additional
SERVICES investments only. See details on page 25.
22
<PAGE>
PROCESSING YOUR SHARE PURCHASES
Shares will be purchased at the next NAV calculated after your investment is
received and accepted by The Benham Group or an authorized subtransfer agent.
Investments received and accepted before 1:00 p.m. Pacific Time will be credited
to your account the same day. After 1:00 p.m. Pacific Time, they will be
credited to your account the following business day. The Fund reserves the right
to refuse any investment.
TELEPHONE TRANSACTIONS
Shareholders may order certain transactions (e.g., exchanges, wires, some types
of redemptions) by telephone. This privilege is granted to Benham fund
shareholders automatically; you need not specifically request this service, and
you may not specifically decline it.
The Benham Group will not be liable for losses resulting from unauthorized or
fraudulent instructions if it follows procedures designed to verify the caller's
identity. BMC will request personal identification, record telephone calls, and
send confirmation statements for every telephone transaction to the
shareholder's record address. The Fund reserves the right to revise or terminate
telephone transaction privileges at any time.
CONFIRMATION AND QUARTERLY STATEMENTS
All transactions are summarized on quarterly account statements. In addition,
for every transaction that you request, a confirmation statement will be mailed
to your record address. Please review these statements carefully. If you fail to
notify us of an error within 30 days of the confirmation statement date, you
will be deemed to have ratified the transaction.
23
<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).
24
<PAGE>
If the fund you have selected deducts a distribution from its share price, your
order price will be adjusted accordingly so that the distribution does not
inadvertently trigger an Open Order transaction on your behalf. If you close or
reregister the account from which shares are to be redeemed, your Open Order
will be canceled. Because of their time-sensitive nature, Open Order
instructions are accepted only by telephone or in person and are subject to the
exchange limitations described in each fund's prospectus, except that
(regardless of which funds are involved in the transaction) 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.
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.
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.
- -------------------
25
<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 currently in place. If our regular service is
interrupted, the following numbers will automatically connect you to this site.
From within the U.S., including Alaska and Hawaii, call 1-800-321-8321.
From all foreign countries, call collect, 1-303-759-9337 or 1-510-820-1409. The
operator will request your Benham fund account number before accepting the call.
26
<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 your redemption request
in good order. The Fund's NAV is normally calculated at 1:00 p.m. Pacific Time.
See page 19 for details.
Barring extraordinary circumstances prescribed by law, redemption proceeds are
mailed within seven calendar days. However, The Benham Group reserves the right
to withhold the proceeds until the investment has matured (i.e., your method of
payment has cleared). Listed below are maturity periods for various investment
types.
================================================================================
DRAWN FROM A MATURITY PERIOD
TYPE OF INVESTMENT 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 $2,500. If your account balance falls below $2,500 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 $2,500 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.
A $1,000 minimum policy 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 30 and 31 for details.
UNCASHED CHECKS. We may reinvest at the Fund's then-current NAV any distribution
or redemption check that remains 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.
27
<PAGE>
HOW TO REDEEM SHARES (Retirement investors, see pages 30 and 31.)
================================================================================
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 Portfolio 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.
28
<PAGE>
================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
IN WRITING A signature guarantee may be provided by a bank, savings
(continued) and loan association, savings bank, credit union, stock brokerage
firm, or a Benham Investor Center. Shareholders must appear in
person with identification to obtain a signature guarantee. Notary
public certifications are not accepted in lieu of signature
guarantees.
BFS may require written consent of all account owners prior to
acting on the written instructions of any account owner.
- --------------------------------------------------------------------------------
BY BANK WIRE If you included bank wire information on your account application
or made subsequent arrangements to accommodate bank wire
redemptions, you may wire funds to your bank by calling
1-800-321-8321 or 1-415-965-4222. The minimum amount for a bank
wire redemption is $1,000. Allow at least two business days for
redemption proceeds to be credited to your bank account.
- --------------------------------------------------------------------------------
BY EXCHANGE See details on pages 22 and 24.
- --------------------------------------------------------------------------------
AUTOMATIC DIRECTED PAYMENTS. You may arrange for periodic redemptions
REDEMPTION from 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.
29
<PAGE>
ABOUT BENHAM-SPONSORED RETIREMENT PLANS
Retirement plans offer investors a number of benefits, including the chance to
reduce current taxable income and to take advantage of tax-deferred compounding.
Retirement plan accounts require a special application; please let our
Shareholder Relations Department know if you want to establish this type of
account. We suggest that you consult your tax advisor before establishing a
retirement plan account.
The minimum account balance for all Benham Individual Retirement Accounts
(IRAs), excluding SEP-IRAs, is $1,000. If your balance falls below (continued on
the next page)
================================================================================
BENHAM MAXIMUM ANNUAL CONTRIBUTION
PLAN TYPE AVAILABLE TO PER PARTICIPANT
- --------------------------------------------------------------------------------
CONTRIBUTORY An employed indi- $2,000 or 100% of compensation
IRA vidual underage 70 1/2. (whichever is less).
- --------------------------------------------------------------------------------
SPOUSAL IRA A nonworking spouse $2,250 (can be split between
(under age 70 1/2) of a Spousal and Contributory IRAs,
wage earner. provided that no IRA receives
more than a total of $2,000).
- --------------------------------------------------------------------------------
ROLLOVER IRA An individual with a None, as long as total amount
distribution from an is eligible.
employer's retirement
plan or a rollover IRA.
- --------------------------------------------------------------------------------
SEP-IRA A self-employed indi- $22,500 or 15% of compensation
vidual or a business. (whichever is less).
- --------------------------------------------------------------------------------
MONEY Same as for SEP-IRA. $30,000 or 25% of compensation
PURCHASE PLAN (whichever is less). Annual
(KEOGH) contribution is mandatory.
- --------------------------------------------------------------------------------
PROFIT Same as for SEP-IRA. $22,500 or 15% of compensation
SHARING PLAN (whichever is less). Annual
(KEOGH) contribution is optional.
(table continued on next page)
For all Benham-sponsored retirement plans, you may begin taking distributions at
age 59 1/2 . You must begin to take required distributions by April 1 of the
year after you turn age 70 1/2. You may take distributions from your IRA or
SEP-IRA before you reach age 59 1/2; however, a penalty may apply.
30
<PAGE>
(continued from previous page)
the $1,000 per fund account minimum, your account may be closed (see page 27 for
details). This distribution may result in a taxable event and a possible penalty
for early withdrawal. The minimum fund account balance for all other
Benham-sponsored retirement plan accounts is $100. Benham charges no fees for
its IRAs but does charge low maintenance fees for its Koeghs.
YOU MUST COMPLETE SPECIFIC FORMS TO TAKE DISTRIBUTIONS (I.E., REDEEM SHARES)
FROM A BENHAM-SPONSORED RETIREMENT PLAN ACCOUNT. PLEASE CALL OUR SHAREHOLDER
RELATIONS DEPARTMENT AT 1-800-321-8321 FOR ASSISTANCE.
(table continued from previous page)
================================================================================
DEADLINE FOR OPENING ACCOUNT CONTRIBUTION DEADLINES
- --------------------------------------------------------------------------------
You may open an account anytime, Annual contributions can be made
but the deadline for establishing from January 1 through April 15 of
and funding an IRA for the prior the following tax year up to the year
tax year is April 15. you turn age 70 1/2.
- --------------------------------------------------------------------------------
Same as for Contributory IRA. Same as for Contributory IRA.
- --------------------------------------------------------------------------------
You may open a Rollover IRA Eligible rollover contributions must
account anytime. be made within 60 days of receiving
your distribution. There is no age
limit for rollover contributions.
- --------------------------------------------------------------------------------
You may open an account anytime, Must be made by employer's tax fil-
but the deadline for establishing and ing deadline (including extensions).
funding an account for the prior tax
year is the employer's tax deadline
(including extensions).
- --------------------------------------------------------------------------------
The end of the employer's plan Same as for SEP-IRA.
year, usually December 31.
- --------------------------------------------------------------------------------
The end of the employer's plan Same as for SEP-IRA.
year, usually December 31.
31
<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 although
it may elect not to do so in any given quarter. The Fund expects to distribute
net capital gains and net foreign currency gains, if any, in December but may
distribute short term capital gains and net foreign currency gains more
frequently. 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 25 for further information.) Please indicate your choice on
your account application or contact our Shareholder Relations Department. See
page 27 for a description of our policy regarding uncashed distribution checks.
TAXES
The Fund intends to elect to be treated and to qualify annually as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (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.
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, which qualifies for this deduction.
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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 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.
FOREIGN TAXES. Income received by the Fund from sources within foreign countries
may be subject to withholding and other income or similar taxes imposed by such
countries.
"BUYING A DIVIDEND." The timing of your investment could have undesirable tax
consequences. If you buy shares on or just before the day the Fund declares a
dividend, you will pay the full price for the shares and may receive a portion
of your investment back as a taxable distribution.
33
<PAGE>
BACKUP WITHHOLDING. The Fund is required by federal law to withhold 31% of
reportable dividends, capital gain distributions, or redemptions payable to
shareholders who have not complied with IRS regulations. To avoid this
withholding requirement, you must certify on your account application or on IRS
Form W-9 that your social security or taxpayer identification number (TIN) is
correct and that you are not subject to backup withholding.
The Benham Group may refuse to sell shares to investors who have
not complied with the certification requirements described above, either before
or at the time of purchase. Until we receive your certified TIN, we may redeem
your Fund shares at any time.
34
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MANAGEMENT INFORMATION
ABOUT BENHAM MANAGER FUNDS
Benham Manager Funds (Trust) is a registered open-end management investment
company that was organized as a Massachusetts business trust on July 12, 1994.
Benham Capital Manager Fund is currently the sole series of the Trust.
A board of trustees oversees the Trust's activities and is responsible for
protecting shareholders' interests. The majority of the trustees are not
otherwise affiliated with Benham. The Trust is neither required nor expected to
hold annual meetings, although special meetings may be called for purposes such
as electing or removing trustees or amending the Fund's advisory agreement or
investment policies. Shareholders receive one vote for each share owned.
THE BENHAM GROUP BENHAM
Management Corporation (BMC) is investment advisor to the funds in The Benham
Group, which currently constitute $10 billion in assets. BMC, incorporated in
California in 1971, is a wholly owned subsidiary of Benham Management
International, Inc. (BMI), which is also a California corporation. BMI's primary
business is to provide financial services to the general public.
Mr. Jeffrey R. Tyler has primary responsibility for the day-to-day operations of
the Fund. He is a vice president of The Benham Group's portfolio management
team. He is also co-manager of Benham GNMA Income Fund and oversees the
portfolio manager's operation of the Benham European Government Bond Fund. Mr.
Tyler was an assistant vice president with Citicorp Securities (1983 to 1987)
and a lending officer with Crocker Bank (1981 to 1983). Mr. Tyler supervises a
team of other portfolio managers who assist in the management of the various
segments of the Fund.
- -------------------
[information in right margin of page]
The Benham Group serves more than 350,000 investors.
35
<PAGE>
- -------------------
[information in left margin of page]
Benham Management Corporation provides investment advice and portfolio
management services to the Fund.
Benham Financial Services, Inc., provides administrative and transfer agent
services to the Fund.
- -------------------
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 average daily net assets of the Trust to an advisory fee rate schedule. The
fee rate ranges from .65% to .27% of average daily net assets, dropping as the
Trust's assets increase.
To avoid duplicative investment advisory fees, the Funds do not pay BMC
investment advisory fees with respect to assets invested in shares of other
funds advised by BMC.
Benham Financial Services, Inc. (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 equal to its pro rata share of the
dollar amount derived from applying the average daily net assets of all of the
funds in The Benham Group to an administrative fee schedule. The administrative
fee rate ranges from .11% to .08% of average daily net assets, dropping as
Benham Group assets increase. For transfer agent services, the Fund pays BFS a
monthly fee for each shareholder account maintained and for each shareholder
transaction executed during that month.
The Fund pays certain operating expenses directly, including, but not limited
to, custodian, audit, and legal fees; fees of the independent trustees; costs of
printing and mailing prospectuses, statements of additional information, proxy
statements, notices, and reports to shareholders; insurance expenses; and costs
of registering shares for sale under federal and state securities laws. See the
Statement of Additional Information for a more detailed discussion of
independent trustee compensation.
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EXPENSE LIMITATION AGREEMENT
An expense limitation agreement between BMC and the Fund is described on page 3.
DISTRIBUTION OF SHARES
Benham Distributors, Inc. (BDI) and BMC distribute and market Benham products
and services. BMC pays all expenses for promoting sales of and distributing the
Fund's shares. The Fund does not pay commissions to, or receive compensation
from, broker-dealers.
BDI is a wholly owned subsidiary of BMI.
37
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INVESTMENT ADVISOR
BENHAM MANAGEMENT CORPORATION
1665 Charleston Road
Mountain View, California 94043
DISTRIBUTOR
BENHAM DISTRIBUTORS, INC.
1665 Charleston Road
Mountain View, California 94043
CUSTODIAN
STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, Massachusetts 02101
TRANSFER AGENT
BENHAM FINANCIAL SERVICES, INC.
1665 Charleston Road
Mountain View, California 94043
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
KPMG PEAT MARWICK LLP
3 Embarcadero Center
San Francisco, California 94111
LEGAL COUNSEL
DECHERT PRICE & RHOADS
1500 K Street, N.W. Suite 500
Washington, DC 20005
TRUSTEES
James M. Benham
John T. Kataoka
Myron S. Scholes
Kenneth E. Scott
Ezra Solomon
Isaac Stein
Jeanne D. Wohlers
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<PAGE>
THE BENHAM GROUP OF INVESTMENT COMPANIES
Capital Preservation Fund
Capital Preservation Fund II
Benham Prime Money Market Fund
Benham Government Agency Fund
Benham Short-Term Treasury and Agency Fund
Benham Treasury Note Fund
Benham Long-Term Treasury and Agency Fund
Benham Adjustable Rate Government Securities Fund
Benham GNMA Income Fund
Benham Target Maturities Trust
Benham California Tax-Free and Municipal Funds*
Benham National Tax-Free Money Market Fund
Benham National Tax-Free Intermediate-Term Fund
Benham National Tax-Free Long-Term Fund
Benham Florida Municipal Money Market Fund**
Benham Florida Municipal Intermediate-Term Fund**
Benham Arizona Municipal Intermediate-Term Fund***
Benham Gold Equities Index Fund
Benham Income & Growth Fund
Benham Equity Growth Fund
Benham Utilities Income Fund
Benham Global Natural Resources Index Fund
Benham European Government Bond Fund
Benham Capital Manager Fund
* Available only to residents of California, Arizona, Colorado, Hawaii, Nevada,
New Mexico, Oregon, Texas, Utah, and Washington.
** Available only to residents of Florida, California, Georgia, Illinois,
Michigan, New Jersey, New York, and Pennsylvania.
***Available only to residents of Arizona, California, Colorado, Nevada, Oregon,
Washington, and Texas.
39
<PAGE>
CONTENTS
Summary of Fund Expenses ............... 3
How the Fund Works ..................... 4
Investment Objective .......... 4
Management Approach ........... 5
Investment Categories ......... 7
Risk Factors .................. 10
Other Investment Policies and Techniques 13
Portfolio Turnover ..................... 18
Performance ............................ 18
Share Price ............................ 19
How to Invest .......................... 20
Shareholder Services ................... 24
Exchange Privilege ............ 24
Open Order Service ............ 24
Automatic Investment Services . 25
Broker-Dealer Transactions..... 26
TDD Service ................... 26
Emergency Services ............ 26
How to Redeem Your Investment .......... 27
About Benham-Sponsored Retirement Plans 30
Distributions and Taxes ................ 32
Management Information ................. 35
About Benham Manager Funds..... 35
The Benham Group .............. 35
Advisory and Service Fees ..... 36
Expense Limitation Agreement .. 37
Distribution of Shares ........ 37
<PAGE>
BENHAM CAPITAL MANAGER FUND
A SERIES OF BENHAM MANAGER FUNDS
THE BENHAM GROUP
1665 Charleston Road
Mountain View, CA 94043
Shareholder Relations: 1-800-321-8321 or 1-415-965-4222
Fund Information: 1-800-331-8331 or 1-415-965-4274
STATEMENT OF ADDITIONAL INFORMATION
FEBRUARY 24, 1995
This Statement is not a Prospectus, but should be read in conjunction with the
Fund's current Prospectus dated February 24, 1995. To obtain a copy of the
Prospectus, call or write The Benham Group.
TABLE OF CONTENTS
Page
Investment Policies and Techniques.................................... 2
Investment Restrictions...............................................15
Portfolio Transactions................................................17
Valuation of Portfolio Securities.....................................17
Performance...........................................................18
Taxes.................................................................20
About Benham Manager Funds ...........................................22
Trustees and Officers.................................................23
Investment Advisory Services..........................................25
Administrative and Transfer Agent Services............................26
Direct Fund Expenses..................................................27
Additional Purchase and Redemption Information........................27
Financial Statements..................................................27
Appendix..............................................................28
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INVESTMENT POLICIES AND TECHNIQUES
The following paragraphs provide a more detailed description of the securities
and investment practices identified in the Prospectus. Unless otherwise noted,
the policies described in this Statement of Additional Information are not
fundamental and may be changed by the board of trustees.
U.S. GOVERNMENT SECURITIES
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, 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 (or repo), the Fund buys a security at one price and
simultaneously agrees to resell it to the seller at an agreed upon price on a
specified date (usually within seven days from the date of purchase) or on
demand. The repurchase price exceeds the purchase price by an amount that
reflects an agreed-upon rate of return and that is unrelated to the interest
rate on the underlying security.
The advisor attempts to minimize the risks associated with repurchase agreements
by adhering to the following criteria:
(1) Limiting the securities acquired and held by the Fund under repurchase
agreements to U.S. government securities;
(2) Entering into repurchase agreements only with primary dealers in U.S.
government securities (including bank affiliates) who are deemed to be
creditworthy under guidelines established by a nationally recognized
statistical rating organization and approved by the Fund's board of
directors;
(3) Monitoring the creditworthiness of all firms involved in repurchase
agreement transactions;
(4) Requiring the seller to establish and maintain collateral equal to 102%
of the agreed-upon resale price, provided, however, that the board of
directors may determine that a broker-dealer's credit standing is
sufficient to allow collateral to fall to as low as 101% of the
agreed-upon resale price before the broker-dealer deposits additional
securities with the Fund's custodian or subcustodian;
2
<PAGE>
(5) Investing no more than 15% of the Fund's total assets in repurchase
agreements that mature in more than seven days (together with any other
illiquid security the Fund holds); and
(6) Taking delivery of all securities subject to repurchase agreement and
holding them in an account at the Fund's custodian bank.
The Fund has received permission from the Securities and Exchange Commission to
participate in pooled repurchase agreements collateralized by U.S. government
securities with other mutual funds advised by the Fund's 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 FORWARD-COMMITMENT AGREEMENTS
The Fund may engage in securities transactions on a when-issued or
forward-commitment basis, in which the transaction price and yield are each
fixed at the time the commitment is made, but payment and delivery occur at a
future date (typically 15 to 45 days later).
When purchasing securities on a when-issued or forward-commitment basis, the
Fund assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. While the Fund will make commitments to purchase or sell
securities on a when-issued or forward-commitment basis with the intention of
actually receiving or delivering them, it may nevertheless sell the securities
before the settlement date if it is deemed advisable as a matter of investment
strategy.
In purchasing securities on a when-issued or forward-commitment basis, the Fund
will establish and maintain until the settlement date a segregated account
consisting of cash, U.S. government securities, and other liquid high-quality
debt securities in an amount sufficient to meet the purchase price. When the
time comes to pay for when-issued securities, the Fund will meet its obligations
with available cash, through the sale of securities, or, although it would not
normally expect to do so, through sales of the when-issued securities themselves
(which may have a market value greater or less than the Fund's payment
obligation). Selling securities to meet when-issued or forward-commitment
obligations may generate taxable gains or losses.
As an operating policy, the Fund will not commit more than 35% of its assets to
when-issued or forward-commitment agreements. If fluctuations in the value of
securities held cause more than 35% of the Fund's assets to be committed under
when-issued or forward-commitment agreements, the advisor (BMC) 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%. However,
BMC need not sell such commitments. In addition, as an operating policy, the
Fund will not enter into when-issued or firm-commitment transactions with
settlement dates exceeding 120 days.
3
<PAGE>
MORTGAGE-BACKED SECURITIES
GENERAL. A mortgage-backed security represents an ownership interest in a pool
of mortgage loans. The loans are made by financial institutions to finance home
and other real estate purchases. As the loans are repaid, investors receive
payments of both interest and principal.
Like fixed-income securities, such as U.S. Treasury bonds, mortgage-backed
securities pay a stated rate of interest over the life of the security. However,
unlike a bond, which returns principal to the investor in one lump sum at
maturity, mortgage-backed securities return principal to the investor in
increments over the life of the security.
Because the timing and speed of principal repayments vary, the cash flow on
mortgage securities is irregular. If mortgage holders sell their homes,
refinance their loans, prepay their mortgages, or default on their loans, the
principal is distributed pro rata to investors.
As with other fixed-income securities, the prices of mortgage securities
fluctuate in response to changing interest rates; when interest rates fall, the
prices of mortgage securities rise, and vice versa. Changing interest rates have
additional significance for mortgage-backed securities investors, however,
because they influence prepayment rates (the rates at which mortgage holders
prepay their mortgages), which in turn affect the yields on mortgage-backed
securities. When interest rates decline, prepayment rates generally increase.
Mortgage holders take advantage of the opportunity to refinance their mortgages
at lower rates with lower monthly payments. When interest rates rise, mortgage
holders are less inclined to refinance their mortgages. The effect of prepayment
activity on yield depends on whether the mortgage-backed security was purchased
at a premium or at a discount.
The Fund may get back principal sooner than it expected because of accelerated
prepayments. Under these circumstances, the Fund might have to reinvest returned
principal at rates lower than it would have earned if principal payments were
made on schedule. Conversely, a mortgage-backed security may exceed its
anticipated life if prepayment rates decelerate unexpectedly. Under these
circumstances, the Fund might miss an opportunity to earn interest at higher
prevailing rates.
GINNIE MAE CERTIFICATES. The Government National Mortgage Association (GNMA or
Ginnie Mae) is a wholly owned corporate instrumentality of the United States
within the Department of Housing and Urban Development. The National Housing Act
of 1934 (Housing Act), as amended, authorizes Ginnie Mae to guarantee the timely
payment of interest and repayment of principal on certificates that are backed
by a pool of mortgage loans insured by the Federal Housing Administration under
the Housing Act, or by Title V of the Housing Act of 1949 (FHA Loans), or
guaranteed by the Veterans' Administration under the Servicemen's Readjustment
Act of 1944 (VA Loans), as amended, or by pools of other eligible mortgage
loans. The Housing Act provides that the full faith and credit of the U.S.
government is pledged to the payment of all amounts that may be required to be
paid under any guarantee. Ginnie Mae has unlimited authority to borrow from the
U.S. Treasury in order to meet its obligations under this guarantee.
Ginnie Mae certificates represent a pro rata interest in one or more pools of
the following types of mortgage loans: (i) fixed-rate level payment mortgage
loans; (ii) fixed-rate graduated payment mortgage loans (GPMs); (iii) fixed-rate
growing equity mortgage loans (GEMs); (iv)
4
<PAGE>
fixed-rate mortgage loans secured by manufactured (mobile) homes (MHs); (v)
mortgage loans on multifamily residential properties under construction (CLCs);
(vi) mortgage loans on completed multifamily projects (PLCs); (vii) fixed-rate
mortgage loans that use escrowed funds to reduce the borrower's monthly payments
during the early years of the mortgage loans (buydown mortgage loans); and
(viii) mortgage loans that provide for payment adjustments based on periodic
changes in interest rates or in other payment terms of the mortgage loans.
FANNIE MAE CERTIFICATES. The Federal National Mortgage Association (FNMA or
Fannie Mae) is a federally chartered and privately owned corporation organized
and existing under the Federal National Mortgage Association Charter Act. Fannie
Mae was originally established in 1938 as a U.S. government agency to provide
supplemental liquidity to the mortgage market and was reorganized as a
stockholder-owned and privately managed corporation by legislation enacted in
1968. Fannie Mae acquires capital from investors who would not ordinarily invest
in mortgage loans directly and thereby expands the total amount of funds
available for housing. This money is used to buy home mortgage loans from local
lenders, which replenishes the supply of capital for additional mortgage
lending.
Fannie Mae certificates represent a pro rata interest in one or more pools of
FHA Loans, VA Loans, or, most commonly, conventional mortgage loans (i.e.,
mortgage loans that are not insured or guaranteed by a governmental agency) of
the following types: (i) fixed-rate level payment mortgage loans; (ii)
fixed-rate growing equity mortgage loans; (iii) fixed-rate graduated-payment
mortgage loans; (iv) adjustable-rate mortgage loans; and (v) fixed-rate mortgage
loans secured by multifamily projects.
Fannie Mae certificates entitle the registered holder to receive amounts
representing a pro rata interest in scheduled principal and interest payments
(at the certificate's pass-through rate, which is net of any servicing and
guarantee fees on the underlying mortgage loans), any principal prepayments, and
a proportionate interest in the full principal amount of any foreclosed or
otherwise liquidated mortgage loan. The full and timely payment of interest and
repayment of principal on each Fannie Mae certificate is guaranteed by Fannie
Mae; this guarantee is not backed by the full faith and credit of the U.S.
government.
FREDDIE MAC CERTIFICATES. The Federal Home Loan Mortgage Corporation (FHLMC or
Freddie Mac) is a corporate instrumentality of the United States created
pursuant to the Emergency Home Finance Act of 1970 (FHLMC Act), as amended.
Freddie Mac was established primarily for the purpose of increasing the
availability of mortgage credit. Its principal activity consists of purchasing
first-lien conventional residential mortgage loans (and participation interest
in such mortgage loans) and reselling these loans in the form of mortgage-backed
securities, primarily Freddie Mac certificates.
Freddie Mac certificates represent a pro rata interest in a group of mortgage
loans (a Freddie Mac certificate group) purchased by Freddie Mac. The mortgage
loans underlying Freddie Mac certificates consist of fixed- or adjustable-rate
mortgage loans with original terms to maturity of ten to thirty years,
substantially all of which are secured by first liens on one- to four-family
residential properties or multifamily projects. Each mortgage loan must meet
standards set forth in the FHLMC Act. A Freddie Mac certificate group may
include whole loans, participation interests in whole loans, undivided interests
in whole loans, and participations constituting another Freddie Mac certificate
group.
5
<PAGE>
Freddie Mac guarantees to each registered holder of a Freddie Mac certificate
the timely payment of interest at the rate provided for by the certificate.
Freddie Mac also guarantees ultimate collection of all principal on the related
mortgage loans, without any offset or deduction, but generally does not
guarantee the timely repayment of principal. Freddie Mac may remit principal at
any time after default on any underlying mortgage loan, but no later than 30
days following: (i) foreclosure sale, (ii) payment of a claim by any mortgage
insurer, or (iii) the expiration of any right of redemption, whichever occurs
later, and in any event no later than one year after demand has been made upon
the mortgager for accelerated payment of principal. Obligations guaranteed by
Freddie Mac are not backed by the full faith and credit of the U.S. government.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). A CMO is a multiclass bond backed by
a pool of mortgage pass-through certificates or mortgage loans. CMO's may be
collateralized by (i) Ginnie Mae, Fannie Mae, or Freddie Mac pass-through
certificates, (ii) unsecuritized mortgage loans insured by the Federal Housing
Administration or guaranteed by the Department of Veterans' Affairs, (iii)
unsecuritized conventional mortgages, or (iv) any combination thereof.
In structuring a CMO, an issuer distributes cash flow from the underlying
collateral over a series of classes called "tranches." Each CMO is a set of two
or more tranches with average lives and cash flow patterns designed to meet
specific investment objectives. The average life expectancies of the different
tranches in a four-part deal, for example, might be two, five, seven, and twenty
years.
As payments on the underlying mortgage loans are collected, the CMO issuer pays
the coupon rate of interest to the bondholders in each tranche. At the outset,
scheduled and unscheduled principal payments go to investors in the first
tranches. Investors in later tranches do not begin receiving principal payments
until the prior tranches are paid off. This basic type of CMO is known as a
"sequential pay" or "plain vanilla" CMO.
Some CMOs are structured so that the prepayment or market risks are transferred
from one tranche to another. Prepayment stability is improved in some tranches
if other tranches absorb more prepayment variability.
The final tranches of a CMO often take the form of a Z-bond, also known as an
"accrual bond" or "accretion bond." Holders of these securities receive no cash
until the earlier tranches are paid in full. During the period that the other
tranches are outstanding, periodic interest payments are added to the initial
face amount of the Z-bond but are not paid to investors. When the prior tranches
are retired, the Z-bond receives coupon payments on its higher principal
balance, plus any principal prepayments from the underlying mortgage loans. The
existence of a Z-bond tranche helps stabilize cash flow patterns in the other
tranches. In a changing interest rate environment, however, the value of the
Z-bond tends to be more volatile.
As CMOs have evolved, some classes of CMO bonds have become more prevalent. The
planned amortization class (PAC) and targeted amortization class (TAC), for
example, were designed to reduce prepayment risk by establishing a sinking-fund
structure. PAC and TAC bonds assure to varying degrees that investors will
receive payments over a predetermined period under various prepayment scenarios.
Although PAC and TAC bonds are similar,
6
<PAGE>
PAC bonds are better able to provide stable cash flows under various prepayment
scenarios than TAC bonds because of the order in which these tranches are paid.
The existence of a PAC or TAC tranche can create higher levels of risk for other
tranches in the CMO because the stability of the PAC or TAC tranche is achieved
by creating at least one other tranche known as a companion bond, support, or
non-PAC bond that absorbs the variability of principal cash flows. Because
companion bonds have a high degree of average life variability, they generally
pay a higher yield. A TAC bond can have some of the prepayment variability of a
companion bond if there is also a PAC bond in the CMO issue.
Floating-rate CMO tranches (floaters) pay a variable rate of interest that is
usually tied to the London Interbank Offered Rate (LIBOR). Institutional
investors with short-term liabilities, such as commercial banks, often find
floating-rate CMOs attractive investments. "Super floaters" (which float a
certain percentage above LIBOR) and "inverse floaters" (which float inversely to
LIBOR) are variations on the floater structure with highly variable cash flows.
CONVERTIBLE SECURITIES
The Fund may buy securities that are convertible into common stock. Listed below
are brief descriptions of the various types of convertible securities the Fund
may buy.
CONVERTIBLE BONDS are issued with lower coupons than nonconvertible bonds of the
same quality and maturity, but they give holders the option to exchange their
bonds for a specific number of shares of the company's common stock at a
predetermined price. This structure allows the convertible bond holder to
participate in share price movements in the company's common stock. The actual
return on a convertible bond may exceed its stated yield if the company's common
stock appreciates in value, and the option to convert to common shares becomes
more valuable.
CONVERTIBLE PREFERRED STOCKS are nonvoting equity securities that pay a fixed
dividend. These securities have a convertible feature similar to convertible
bonds; however, they do not have a maturity date. Due to their fixed-income
features, convertible issues typically are more sensitive to interest rate
changes than the underlying common stock. In the event of liquidation,
bondholders would have claims on company assets senior to those of stockholders;
preferred stockholders would have claims senior to those of common stockholders.
WARRANTS entitle the holder to buy the issuer's stock at a specific price for a
specific period of time. The price of a warrant tends to be more volatile than,
and does not always track, the price of its underlying stock. Warrants are
issued with expiration dates. Once a warrant expires, it has no value in the
market.
FOREIGN SECURITIES
The Fund's investments in securities of foreign issuers may subject the Fund to
additional investment risks.
Investing in foreign companies may involve risks not typically associated with
investing in U.S. companies. The value of securities denominated in foreign
currencies, and of dividends
7
<PAGE>
from such securities, can change significantly when foreign currencies
strengthen or weaken relative to the U.S. dollar. Foreign securities markets
generally have less trading volume and less liquidity than U.S. markets, and
prices in some foreign markets can be very volatile.
Many foreign countries lack uniform accounting and disclosure standards
comparable to those that apply to U.S. companies, and it may be more difficult
to obtain reliable information regarding a foreign issuer's financial condition
and operations. In addition, the costs of foreign investing, including
withholding or other taxes, brokerage commissions, and custodial fees, are
generally higher than for U.S. investments.
Foreign markets may offer less protection to investors than U.S. markets.
Foreign issuers, brokers, and securities markets may be subject to less
governmental supervision. Foreign security trading practices, including those
involving the release of assets in advance of payment, may involve increased
risks in the event of a failed trade or the insolvency of a broker-dealer and
may involve substantial delays. It may also be difficult to enforce legal rights
in foreign countries.
Investing abroad carries political and economic risks distinct from those
associated with investing in the U.S. Foreign investments may be affected by
actions of foreign governments adverse to the interests of U.S. investors,
including the possibility of expropriation or nationalization of assets,
confiscatory taxation, restrictions on U.S. investment, or restrictions on the
ability to repatriate assets or to convert currency into U.S. dollars. There may
be a greater possibility of default by foreign governments or
foreign-government-sponsored enterprises. Investments in foreign countries also
involve a risk of local political, economic, or social instability, military
action or unrest, or adverse diplomatic developments.
To offset the currency risks associated with investing in securities of foreign
issuers, the Fund may hold foreign currency deposits and may convert dollars and
foreign currencies in the foreign exchange markets. Currency conversion involves
dealer spreads and other costs, although commissions usually are not charged.
DEPOSITARY RECEIPTS
American Depositary Receipts and European Depositary Receipts (ADRs and EDRs)
are receipts representing ownership of shares of a foreign-based issuer held in
trust by a bank or similar financial institution. These are designed for U.S.
and European securities markets as alternatives to purchasing underlying
securities in their corresponding national markets and currencies. ADRs and EDRs
can be sponsored or unsponsored.
Sponsored ADRs and EDRs are certificates in which a bank or financial
institution participates with a custodian. Issuers of unsponsored ADRs and EDRS
are not contractually obligated to disclose material information in the United
States. Therefore, there may not be a correlation between such information and
the market value of the unsponsored ADR or EDR.
RESTRICTED SECURITIES
Restricted securities held by the Fund generally can be sold in privately
negotiated transactions, pursuant to an exemption from registration under the
Securities Act of 1933, or in a registered public offering. Where registration
is required, the Fund may be required to
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pay all or a part of the registration expense, and a considerable period may
elapse between the time it decides to seek registration of the securities and
the time it is permitted to sell them under an effective registration statement.
If, during this period, adverse market conditions were to develop, the Fund
might obtain a less favorable price than prevailed when it decided to try to
register the securities initially.
SECURITIES LENDING
The Fund may lend its portfolio securities to earn additional income, subject to
the requirements of the Internal Revenue Code and the following guidelines
prescribed by the board of trustees.
(1) The borrower must provide and maintain collateral consisting of cash or
full faith and credit U.S. government securities equal to at least 102% of the
value of the securities loaned.
(2) The Fund must have the option to terminate the loan and recover its
securities within the normal settlement period for the types of securities
loaned.
(3) The borrower must agree that the Fund will receive all dividends,
interest, or other distributions on the loaned securities and that the Fund will
be paid a reasonable return on such loans, either in the form of a loan fee
premium or by allowing the Fund to retain part or all of the earnings or profits
realized from investing the cash collateral in full faith and credit U.S.
government securities.
If a borrower fails financially, there may be delays in recovering loaned
securities and a loss 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
BMC may engage in foreign currency exchange transactions on behalf of the Fund
to manage currency risk. Foreign currencies may 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"). Foreign exchange
dealers do not charge fees for currency conversions. Instead, they realize a
profit based on the difference (the spread) between the prices at which they are
buying and selling various currencies. A dealer may offer to sell a foreign
currency at one rate while simultaneously offering a lesser rate of exchange on
the purchase of that currency.
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 to buy or sell the
amount of foreign currency involved in the underlying securities transaction for
a fixed amount of U.S. dollars, BMC can protect the Fund against a possible loss
resulting from an adverse change in the relationship between the U.S. dollar and
the foreign currency between the security's purchase or sale date and its
payment date. This type of transaction is sometimes referred to as a "position
hedge."
In addition to position hedges, BMC may engage in "cross-hedging" transactions
on behalf of the Fund. Cross hedging involves entering into a forward contract
to sell one foreign
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<PAGE>
currency and buy another. BMC may employ a cross-hedging strategy on behalf of
the Fund if it 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.
Using forward contracts does not eliminate fluctuations in the prices of the
underlying securities themselves; forward contracts simply establish a future
rate of exchange. Additionally, although forward contracts tend to minimize the
risk of loss due to a decline in the value of the hedged currency, they also
limit any gain that might result if the hedged currency's value were to
increase. Successful use of forward contracts depends on BMC's skill in
analyzing and predicting currency values. Forward contracts could result in
losses to the Fund if currencies do not perform as anticipated. The advisor uses
forward contracts for currency hedging purposes only. The adviser does not use
forward contracts for speculative purposes. The Fund is not required to enter
into forward contracts with regard to its foreign holdings and will not do so
unless it is deemed appropriate by the advisor.
The Fund's assets are valued daily in U.S. dollars, although foreign currency
holdings are not physically converted into U.S. dollars on a daily basis.
The currency management techniques discussed above are limited by various
constraints, including the intention to protect the U.S. tax status of the Fund
as a regulated investment company.
SHORT SALES AND PUT OPTIONS ON INDIVIDUAL SECURITIES
The Fund may buy puts and enter into short sales with respect to stocks
underlying its convertible security holdings. For example, if BMC anticipates a
decline in the price of the stock underlying a convertible security the Fund
holds, it may purchase a put option on the stock or sell the stock short. If the
stock price subsequently declines, the proceeds of the short sale or an increase
in the value of the put option could be expected to offset all or a portion of
the effect of the stock's decline on the value of the convertible security.
When a Fund enters into a short sale, it will be required to set aside cash or
appropriate liquid assets in kind and amount to those sold short (or securities
convertible or exchangeable into such securities) and will be required to
continue to hold them while the short sale is outstanding. The Fund will incur
transaction costs, including interest expenses, in connection with opening,
maintaining, and closing short sales.
FUTURES AND OPTIONS TRANSACTIONS
FUTURES 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, generally 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
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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.
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.
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<PAGE>
WRITING PUT AND CALL OPTIONS. If the Fund writes a put option, it takes the
opposite side of the transaction from the option's purchaser. In return for
receipt of the premium, the Fund assumes the obligation to pay the strike price
for the option's underlying instrument if the other party chooses to exercise
the option. When writing an option on a futures contract, the Fund will be
required to make margin payments to a broker or custodian as described above for
futures contracts. The Fund may seek to terminate its position in a put option
it writes before exercise by closing out the option in the secondary market at
its current price. If the secondary market is not liquid for a put option the
Fund has written, however, the Fund must continue to be prepared to pay the
strike price while the option is outstanding, regardless of price changes, and
must continue to set aside assets to cover its position.
If security prices were to rise, a put writer would generally expect to profit,
although the gain would be limited to the amount of the premium received. If
security prices were to remain the same over time, the writer would likely also
profit by being able to close out the option at a lower price. If security
prices were to 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.
COMBINED POSITIONS. The Fund may purchase and write options in combination with
other options or in combination with futures or forward contracts in order to
adjust the risk and return characteristics of the overall position. For example,
the Fund may purchase a put option and write a call option on the same
underlying instrument in order to construct a combined position whose risk and
return characteristics are similar to 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 in order to reduce the risk of
the written call option in the event of a substantial price increase. Because
combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
OTC OPTIONS. Unlike exchange-traded options, which are standardized with respect
to the underlying instrument, expiration date, contract size, and strike price,
the terms of over-the-counter options (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.
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<PAGE>
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 than the securities in which they typically invest (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 the securities markets, from structural differences in how options and
futures and securities are traded, or from the imposition of daily price
fluctuation limits or trading halts. The Fund may purchase or sell options and
futures contracts with a greater or lesser value than the securities it wishes
to hedge or intends to purchase in an effort to compensate for differences in
volatility between the contract and the securities, although this 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.
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. The Fund may
also purchase and write currency options in conjunction 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 and
options relating to securities or indexes, as described above. Currency futures
and options values can be expected to correlate with exchange rates but may not
reflect other factors that affect the value of the Fund's investments. A
currency hedge, for example, should protect a deutsche-mark-denominated security
from a decline in the deutsche mark, but it will not protect the Fund against a
price decline resulting from a deterioration in the issuer's creditworthiness.
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<PAGE>
LIQUIDITY OF FUTURES CONTRACTS AND OPTIONS. There is no assurance a liquid
secondary market will exist for any particular futures contract or option at any
particular time. Options may have relatively low trading volume and liquidity if
their strike prices are not close to the underlying instrument's current price.
In addition, exchanges may establish daily price fluctuation limits for futures
contracts and options and may halt trading if a contract's price moves upward or
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 were not liquid, because of
price fluctuation limits or otherwise, prompt liquidation of unfavorable
positions could be difficult or impossible, and the Fund could be required to
continue holding a position until delivery or expiration regardless of changes
in its value. Under these circumstances, the Fund's access to assets held to
cover its future 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, 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 gains from the sale of securities and
certain other assets held less than three months constitute less than 30% of the
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.
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INVESTMENT RESTRICTIONS
The Fund's investment restrictions set forth below 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.
The Fund may not:
(1) Purchase the securities of any issuer (other than securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities)
if, as a result, at the time of such investment, (a) more than 5% of
its total assets would be invested in the securities of that issuer, or
(b) the Fund would hold more than 10% of the outstanding voting
securities of that issuer.
(2) 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 will not purchase any security while borrowings
representing more than 5% of its total assets are outstanding. 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, and provided it has received any necessary exemptive order
from the Securities and Exchange Commission.
(3) 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.
(4) Purchase or sell real estate or real estate limited partnerships,
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 readily
marketable securities of issuers 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.
(5) Make loans to others, except for the lending of portfolio securities
pursuant to guidelines established by the board of directors and except
as otherwise in accordance with the Fund's investment objective and
policies.
(6) Issue senior securities, except as permitted under the Investment
Company Act of 1940.
(7) Purchase any security if, as a result, 25% or more of the Fund's total
assets would be invested in the securities of issuers having their
principal business activities in the
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<PAGE>
same industry. However, this limitation does not apply to securities
issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities.
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.
The Fund may not:
(a) 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.
(b) 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.
(c) 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.
(d) Invest in securities that are not readily marketable, or that are
illiquid because they are subject to legal or contractual restrictions
on resale (collectively, "illiquid securities") if, as a result, more
than 15% of the Fund's net assets would be invested in illiquid
securities.
(e) 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, except in connection with a
merger, consolidation, acquisition, or reorganization or as otherwise
permitted by applicable law.
(f) Invest in securities of an issuer that, together with any predecessor
or unconditional guarantor, 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, except obligations issued or
guaranteed by the U.S.
government or its agencies.
Unless otherwise indicated, percentage limitations included in the restrictions
apply at the time transactions are entered into. Accordingly, any later increase
or decrease beyond the specified limitation resulting from a change in the
Fund's net assets will not be considered in determining whether it has complied
with its investment restrictions.
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PORTFOLIO TRANSACTIONS
The Fund's assets are invested by BMC in a manner consistent with the Fund's
investment objectives, policies and restrictions, and with any instructions from
the board of directors that may be issued from time to time. Within this
framework, BMC is responsible for making all determinations as to the purchase
and sale of portfolio securities and for taking all steps necessary to implement
securities transactions on behalf of the Fund. In placing orders for the
purchase and sale of portfolio securities, BMC will use its best efforts to
obtain the best possible price and execution and will otherwise place orders
with broker-dealers subject to and in accordance with any instructions from the
board of trustees that may be issued from time to time. BMC will select
broker-dealers to execute portfolio transactions on behalf of the Fund solely on
the basis of best price and execution.
The Fund's annual portfolio turnover rate for the fixed-income portion of its
portfolio is not expected to exceed 250%; the equity portion of its portfolio is
not expected to exceed 150%. These turnover rates may vary from year to year.
Because a higher turnover rate increases transaction costs and may increase
taxable gains, the advisor carefully weighs the potential benefits of short-term
investing against these considerations.
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 (observed). Although BFS expects the same holiday schedule to be
observed in the future, the NYSE may modify its holiday schedule at any time.
BMC typically completes its trading on behalf of the Fund in various markets
before the NYSE closes for the day. Securities are valued at market, depending
upon the market or exchange on which they trade. Price quotations for
exchange-listed securities are taken from the primary exchanges on which these
securities trade. Stocks traded on exchanges or over-the-counter are valued
according to last sale prices, if such prices are available, or at the current
bid price. Fixed-income securities are priced at market value on the basis of
market quotations supplied by independent pricing services. Foreign currency
exchange rates are also determined prior to the close of the NYSE. Trading of
securities in foreign markets may not take place on every day the NYSE is open,
and trading takes place in various foreign markets on days on which the NYSE and
the Fund's offices are not open and the Fund's net asset value is not
calculated. The Fund's net asset value may be significantly affected on days
when shareholders have no access to the Fund. Securities for which market
quotations are not readily available, or which may change in value due to events
occurring after their primary exchange has closed for the day, are valued at
fair market value as determined in good faith under the direction of the board
of trustees.
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PERFORMANCE
The Fund may quote performance in various ways. Historical performance
information will be used in advertising and sales literature and is not
indicative of future results. The Fund's share price, yield and return will vary
with changing market conditions.
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:
YIELD = 2 [(a - b + 1)6 - 1]
-----
cd
where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of reimbursements), c = the average daily number of shares
outstanding during the period that were entitled to receive dividends, and d =
the maximum offering price per share on the last day of the period.
Total returns quoted in advertising and sales literature reflect all aspects of
the Fund's return, including the effect of reinvesting dividends and capital
gain distributions and any change in the Fund's net asset value 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 ten years would produce an average annual return of 7.18%, which is the
steady annual rate that would equal 100% growth on a compounded basis in ten
years. While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that the Fund's performance is
not constant over time, but changes from year to year, and 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 (including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return. Performance information may be quoted numerically or in a table, graph,
or similar illustration.
The Fund's performance may be compared with the performance of other mutual
funds tracked by mutual fund rating services or with other indexes of market
performance. This may include comparisons with funds that, unlike Benham funds,
are sold with a sales charge or deferred sales charge. Sources of economic data
that may be used for such comparisons may include, but are not limited to, U.S.
Treasury bill, note, and bond yields, money market fund yields, U.S. government
debt and percentage held by foreigners, the U.S. money supply,
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net free reserves, and yields on current-coupon GNMAs (source: Board of
Governors of the Federal Reserve System); the federal funds and discount rates
(source: Federal Reserve Bank of New York); yield curves for U.S. Treasury
securities and AA/AAA-rated corporate securities (source: Bloomberg Financial
Markets); yield curves for AAA-rated tax-free municipal securities (source:
Telerate); yield curves for foreign government securities (sources: Bloomberg
Financial Markets and Data Resources, Inc.); total returns on foreign bonds
(source: J.P. Morgan Securities Inc.); various U.S. and foreign government
reports; the junk bond market (source: Data Resources, Inc.); the CRB Futures
Index (source: Commodity Index Report); the price of gold (sources: London
a.m./p.m. fixing and New York Comex Spot Price); rankings of any mutual fund or
mutual fund category tracked by Lipper Analytical Services, Inc. or Morningstar,
Inc.; mutual fund rankings published in major nationally distributed
periodicals; data provided by the Investment Company Institute; Ibbotson
Associates, Stocks, Bonds, Bills, and Inflation; major indexes of stock market
performance; and indexes and historical data supplied by major securities
brokerage or investment advisory firms. The Fund may also utilize reprints from
newspapers and magazines furnished by third parties to illustrate historical
performance.
Indexes may assume reinvestment of dividends, but, generally, they do not
reflect administrative and management costs such as those incurred by a mutual
fund.
Occasionally statistics may be used to illustrate Fund volatility or risk.
Measures of volatility or risk generally are used to compare the Fund's net
asset value or performance to a market index. One measure of volatility is
"beta." Beta expresses Fund volatility relative to the total market as
represented by the S&P 500. A beta of more than 1.00 indicates volatility
greater than that of the market, and a beta of less than 1.00 indicates
volatility less than that of the market. Another measure of volatility or risk
is "standard deviation." Standard deviation is used to measure variability of
net asset value or total return relative to an average over a specified period
of time. The premise is that greater volatility connotes greater risk undertaken
to achieve desired performance.
The 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.
BMC may obtain ratings on the safety of Fund shares from one or more nationally
recognized statistical rating organizations (rating agencies) and may publish
such ratings in advertisements and sales literature.
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<PAGE>
TAXES
The Fund intends to qualify annually as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986 (the Code), as amended. By so
qualifying, the Fund will not incur federal income or state taxes on its net
investment income and net realized capital gains 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 timely 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 capital gain net 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
provided that such dividend is actually paid by the Fund during January of the
following year.
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 a 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. The Fund's intention to qualify annual as a regulated investment
company may limits its elections with respect to PFIC shares.
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 and certain forward currency
contracts, gains or losses attributable to fluctuations in the value of a
foreign currency between the date the security or contract 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 to be distributed to
shareholders as ordinary income and correspondingly decrease or increase
distributions of capital gains.
The Fund may invest in shares of foreign corporations that may be classified
under the Code as passive foreign investment companies (PFICs). In general, a
foreign corporation is
20
<PAGE>
classified as a PFIC if at least one-half of its assets constitute passive
investment-type assets or 75% or more of its gross income is passive
investment-type income. Certain distributions from a PFIC and gains from the
sale of PFIC shares are treated as excess distributions. These excess
distributions and gains may subject the Fund to federal income tax. Interest
charges may also be imposed on the fund with respect to deferred taxes arising
from such excess distributions or gains.
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 intention to
qualify annually as a regulated investment company may limit its elections with
respect to PFIC shares.
Because the application of the PFIC rules may affect, among other things, the
character of gains, the amount of gain or loss, and the timing of the
recognition of income with respect to PFIC shares, as well as subject the Fund
itself to tax on excess distributions from PFIC shares, the amount that must be
distributed to shareholders, which will be taxed to shareholders as ordinary
income or long-term capital gain, may be increased or decreased substantially
compared to a fund that did not invest in PFIC shares.
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 generally
intends to undertake any procedural steps required to claim the benefits of such
a treaty. Generally, such taxes will reduce the Fund's income distributable to
shareholders.
Some of the debt securities that may be acquired by the Fund may be treated as
debt securities that are 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. Therefore, distribution of this income may be required even though the
Fund would not have received the cash with which to make the distribution.
Some of the debt securities may be purchased in the secondary market 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.
Generally, the Fund will be required to distribute to shareholders dividends
representing the accretion of discounts on debt securities that are currently
includable in income, even if cash representing such income has not been
received by the Fund. Cash to pay such dividends may be obtained from proceeds
of sales of securities held by the Fund.
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
21
<PAGE>
sufficient distributions to satisfy the 90% income tax and 98% excise tax
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.
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. The deduction of 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 of
distributions or otherwise) within a period of 61 days beginning 30 days before
and ending 30 days after the disposal date. Under such circumstances, the basis
of the shares acquired would be adjusted to reflect the disallowed loss.
The information above is only a summary of some of the tax considerations
generally affecting the Fund and its shareholders. No attempt has been made to
discuss individual tax consequences. The Fund's distributions may also be
subject to state, local, or foreign taxes. U.S. tax rules applicable to foreign
investors may differ significantly from those outlined above. To determine
whether the Fund is a suitable investment based on his or her tax situation
prospective investor may wish to consult a tax advisor.
ABOUT BENHAM MANAGER FUNDS
Benham Manager Funds (the Trust) was organized as a Massachusetts business trust
on July 12, 1994. The Fund is currently the sole series of the Trust. The board
of trustees may create additional series from time to time.
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 portfolios. 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, although on matters affecting the
Fund exclusively, the Fund will vote separately from any other series of the
Trust created in the future. 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 of the Trust voting in an election can elect all of the trustees. Each
shareholder has rights to dividends and distributions declared by the Fund and
in the net assets of the Fund upon its liquidation or dissolution proportionate
to his or her share ownership interest in the Fund.
22
<PAGE>
The shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable 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 itself is unable to meet its obligations.
CUSTODIAN BANK: State Street Bank and Trust Company, 225 Franklin Street,
Boston, MA 02101, is custodian of the Fund's assets. Services provided by the
custodian bank include (i) settling portfolio purchases and sales, (ii)
reporting failed trades, (iii) identifying and collecting portfolio income, and
(iv) providing safekeeping of securities. The custodian takes no part in
determining the Fund's investment policies or in determining which securities
are sold or purchased by the Fund.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS: KPMG Peat Marwick LLP, 3 Embarcadero
Center, San Francisco, California 94111, serves as the Trust's independent
certified public accountants. KPMG audits the annual report and provides tax and
other services.
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 with
an asterisk (*) are "interested persons" of the Trust (as defined in the
Investment Company Act of 1940) by virtue of, among other things, 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 date 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.
*JAMES M. BENHAM, chairman of the board of trustees (1994). 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.
23
<PAGE>
*JOHN T. KATAOKA, trustee, president, and chief executive officer (1994). 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 (1994). 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 (1994). 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 (1994). 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 (1994). 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 (1994). Ms. Wohlers is a private
investor, and an independent director and partner, 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
(1994).
*DOUGLAS A. PAUL, secretary (1994), vice president (1994), and general counsel
(1994).
*ANN N. MCCOID, controller (1994).
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<PAGE>
The following table summarizes the compensation that the trustees of the Fund
received for the Fund's fiscal year ended November 30, 1994, as well as the
compensation received for serving as director or trustee of all other Benham
funds.
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION FOR THE FISCAL YEAR ENDED
NOVEMBER 30, 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 $0 Not Applicable Not Applicable $62,000
- ------------------------------------------------------------------------------------------------------
Kenneth E. Scott $0 Not Applicable Not Applicable $72,250
- ------------------------------------------------------------------------------------------------------
Ezra Solomon $0 Not Applicable Not Applicable $74,750
- ------------------------------------------------------------------------------------------------------
Isaac Stein $0 Not Applicable Not Applicable $68,750
- ------------------------------------------------------------------------------------------------------
Jeanne D. Wohlers $0 Not Applicable Not Applicable $71,000
======================================================================================================
* The Fund did not commence operations until December 1, 1994.
** 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, dated August 30, 1994, that was approved by the Fund's sole
shareholder on November 23, 1994.
BMC is a California corporation and a wholly owned subsidiary of Benham
Management International, Inc. BMI is a California corporation owned by Mr.
Benham and a group of private investors. As owner of 100% of BMI's voting stock,
Mr. Benham controls both BMI and BMC. BMC has been a registered investment
advisor since 1971 and is investment advisor to other funds in The Benham Group.
James M. Benham and John T. Kataoka are directors and officers of BMC. Messrs.
Benham and Kataoka also serve as trustees, and Mr. Kataoka serves as president,
of the Trust.
25
<PAGE>
The Fund's agreement with BMC continues from year to year provided that it is
approved at least annually by vote of a majority of the Fund's shareholders or
by vote of a majority of the Fund's 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 agreement is terminable on sixty days' written notice, either by the Fund or
by BMC, to the other party, and terminates automatically in the event of its
assignment.
Pursuant to the investment advisory agreement, BMC provides the Fund with
investment advice and portfolio management services in accordance with the
Fund's investment objective, policies, and restrictions. BMC determines what
securities will be purchased and sold by the Fund and assists the Trust's
officers in carrying out decisions made by the board of trustees.
For these services, the Fund pays BMC a monthly investment advisory fee based on
its pro rata share of the dollar amount derived from applying the Trust's
average daily net assets to the following investment advisory fee rate schedule:
0.65% of the first $100 million
0.60% of the next $100 million
0.55% of the next $100 million
0.50% of the next $100 million
0.45% of the next $100 million
0.37% of the next $1 billion
0.34% of the next $1 billion
0.31% of the next $1 billion
0.30% of the next $1 billion
0.29% of the next $1 billion
0.28% of the next $1 billion
0.27% of the net assets over $6.5 billion
ADMINISTRATIVE AND TRANSFER AGENT SERVICES
Benham Financial Services, Inc., a wholly owned subsidiary of BMI, is the
Trust's agent for transfer and administrative services. For administrative
services, the Fund pays the Trust a monthly fee based on its pro rata share of
the dollar amount derived from applying the aggregate average daily net assets
of all of the funds in The Benham Group to the following administrative fee rate
schedule:
GROUP ASSETS ADMINISTRATIVE FEE RATE
up to $4.5 billion .11%
up to $6 billion .10%
up to $9 billion .09%
balance over $9 billion .08%
This fee rate schedule was approved by the trustees with respect to the Fund on
June 28, 1994.
26
<PAGE>
For transfer agent services, the Fund pays BFS a monthly fee of $1.1875 for each
shareholder account maintained and $1.35 for each shareholder transaction
executed during that month.
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, 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.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Fund's shares are continuously offered at net asset value. Share
certificates are issued (without charge) only when requested in writing.
Certificates are not issued for fractional shares. Dividend and voting rights
are not affected by the issuance of certificates.
The Benham Group may reject or limit the amount of an investment to prevent any
one shareholder or affiliated group from controlling the Trust or one of its
portfolios; to avoid jeopardizing a portfolio's tax status; or whenever, in
management's opinion, such rejection is in the Trust's or a portfolio's best
interest.
As of January 31, 1995, to BMF's knowledge, no shareholder was the record holder
or beneficial owner of 5% or more of the Fund's total shares outstanding.
The Benham Group charges neither fees nor commissions on the purchase and sale
of Benham fund shares. However, BFS may charge fees for special services
requested by a shareholder or necessitated by acts or omissions of a
shareholder. For example, BFS may charge a fee for processing dishonored
investment checks or stop-payment requests. BFS charges $10 per hour for account
research requested by investors. This charge will be assessed, for example, when
a shareholder request requires more than one hour of research on historical
account records. The fees charged are based on the estimated costs of performing
shareholder-requested services and are not intended to increase income.
Share purchases and redemptions are governed by California law.
FINANCIAL STATEMENTS
An Audited Statement of Assets and Liabilities of the Fund dated October 7,
1994, is attached.
27
<PAGE>
APPENDIX
The Trust's investment advisor has been continuously registered with the
Securities and Exchange Commission 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. Such registrations do not imply approval or supervision of
the Trust or the advisor by the Securities and Exchange Commission.
For further information, refer to the registration statement and exhibits on
file with the Securities and Exchange Commission in Washington, D.C. These
documents are available upon payment of a reproduction fee. Statements in the
Prospectus and 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.
28
