-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VcIfI79Z591R/UYuDuOjrc5qzEGTl72Erzw5ArnUn7Z/PYo7gmQ2bytR2ij8xF1B 5nHbtzs+TZzxcE9bWmCYkw== 0000893750-99-000093.txt : 19990301 0000893750-99-000093.hdr.sgml : 19990301 ACCESSION NUMBER: 0000893750-99-000093 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19990226 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KAUFMANN FUND INC CENTRAL INDEX KEY: 0000054771 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 132605091 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485APOS SEC ACT: SEC FILE NUMBER: 002-28049 FILM NUMBER: 99551973 BUSINESS ADDRESS: STREET 1: 140 E 45TH ST 43RD FL STREET 2: STE 2624 CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2129220123 MAIL ADDRESS: STREET 1: 140 EAST 45TH ST STREET 2: 43RD FLOOR CITY: NEW YORK STATE: NY ZIP: 10017 FORMER COMPANY: FORMER CONFORMED NAME: PAW GROWTH FUND INC DATE OF NAME CHANGE: 19701022 FORMER COMPANY: FORMER CONFORMED NAME: PHILIPS APPEL & WALDEN FUND INC DATE OF NAME CHANGE: 19680711 485APOS 1 Simpson Thacher & Bartlett 425 Lexington Avenue New York, NY 10017 Tel: 212-455-2000 Fax: 212-455-2502 February 26, 1999 Re The Kaufmann Fund, Inc. (Registration Statement File Nos. 2-28049 and 811-1586) Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 Attn: Filing Desk Dear Sir or Madam: On behalf of The Kaufmann Fund, Inc. (the "Company"), and pursuant to Rule 485(a) of the Securities Act of 1933, as amended (the "Securities Act") and the Investment Company Act of 1940, as amended (the "Investment Company Act"), we hereby submit for filing by direct electronic transmission Post-Effective Amendment No. 49 under the Securities Act and Amendment No. 48 under the Investment Company Act to the Company's Registration Statement on Form N-1A (the "Post-Effective Amendment"). The purpose of the Post-Effective Amendment is to file a new prospectus and statement of additional information under revised Form N-1A. Please direct any comments concerning the filing to Nick Patnaik at 212-455-3193 of this firm. Very truly yours, /s/ Simpson Thacher & Bartlett SIMPSON THACHER & BARTLETT AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON 2/26/99 FILE NOS: 2-28049 811-1586 SECURITIES AND EXCHANGE COMMISSION ---------------------------------- Washington, D.C. 20549 FORM N-1A --------- REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X / Pre-Effective Amendment No. _______ / / Post-Effective Amendment No. 49 / X / and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY / X / ACT OF 1940 Amendment No. 48 (Check appropriate box or boxes.) THE KAUFMANN FUND, INC. ----------------------- (Exact name of Registrant as Specified in Charter) 140 E. 45TH STREET, 43RD FLOOR NEW YORK, NEW YORK 10017 ------------------------- (Address of Principal Executive Office) Registrant's Telephone Number, including Area Code: 212-922-0123 ------------ MARTIN V. MILLER, ESQUIRE, 140 E. 45TH STREET, 43RD FLOOR NEW YORK, NEW YORK 10017 - 212-922-0123 ------------------------------------- (Name and Address of Agent for Service) Approximate Date of Proposed Public Offering: As soon as practicable following effective date. -2- It is proposed that this filing will become effective (check appropriate box): / / immediately upon filing pursuant to paragraph (b) / / on (DATE) pursuant to paragraph (b) / / 60 days after filing pursuant to paragraph (a)(1) / X / on April 30, 1999 pursuant to paragraph (a)(1) / / 75 days after filing pursuant to paragraph (a)(2) / / on (date) pursuant to paragraph (a)(2) of rule 485 If appropriate, check the following box: / / this post-effective amendment designates a new effective date for a previously filed post-effective amendment. A Rule 24f-2 Notice for the year ended December 31, 1997 was filed on March 26, 1998. -3- FORM N-1A --------- CROSS REFERENCE SHEET --------------------- Form N-1A PART A - ---------------- ITEM # PROSPECTUS LOCATION ------ ------------------- 1. Cover Page Cover Page 2. Synopsis Summary and Fee Table 3. Condensed Financial Schedule of Selected per Share Data Information and Ratios, Financial Highlights 4. General Description of The Fund, Investment Objective and Registrant Policies, The Registrant Investment Policies Particularized, Investment Risks, Portfolio Turnover 5. Management of the Fund Management of the Fund 5A. Management Discussion of Management's Discussion of Fund Fund Performance Performance 6. Capital Stock and Other Capital Stock Securities 7. Purchase of Securities Purchase of Fund Shares, Account Being Offered Statements, Determination of Net Asset Value, Distribution Plan, Special Investor Services, Service Fees 8. Redemption or Repurchase Redemption of Shares 9. Pending Legal Proceedings N/A -4- FORM N-1A PART B ITEM # LOCATION IN STATEMENT OF ------ ADDITIONAL INFORMATION ------------------------- 10. Cover Page Cover Page 11. Table of Contents Table of Contents 12. General Information and See Item "The Fund" in Prospectus History 13. Investment Objectives and Investment Objective and Policies, Policies Investment Restrictions 14. Management of the Fund Management of the Fund 15. Control Persons and Principal Holders of Securities Principal Holders of Securities 16. Investment Advisory and Investment Advisory Services, Other Services Custodian, Auditor. See item "Transfer Agent and Custodian" in Prospectus 17. Brokerage Allocation and Brokerage Allocation Other Practices 18. Capital Stock and Other See item "Capital Stock" in Securities Prospectus 19. Purchase, Redemption and Purchase and Redemption of Shares, Pricing of Securities Being Special Investor Services, Offered Distribution Plan. See "Purchases of Fund Shares" and "Determination of Net Asset Value" in Prospectus 20. Tax Status Taxes, Dividends and Capital Gains, See same heading in Prospectus 21. Underwriters N/A -5- PART B (Continued) - ------------------- ITEM # LOCATION IN STATEMENT ------ OF ADDITIONAL INFORMATION ------------------------- 22. Calculations of Performance Additional Performance Data Information for the Fund 23. Financial Statements Financial Statements PART C ------ ITEM # LOCATION IN PART C ------ ------------------- 24. Financial Statements and Financial Statements and Exhibits Exhibits 25. Persons Controlled by or Under Persons Controlled by or Under Common Control with Registrant Common Control with Registrant 26. Number of Holders of Securities Number of Holders of Securities 27. Indemnification Indemnification 28. Business and Other Connections Business and Other Connections of Investment Advisor 29. Principal Underwriter Principal Underwriter 30. Location of Accounts and Location of Accounts and Records Records 31. Management Services Management Services 32. Undertakings Undertakings -6- Cover [Logo] Prospectus & Application May 1, 1999 The Kaufmann Fund, Inc. 140 East 45th Street, 43rd Floor New York, New York 10017 Investing in growth companies for the long term The Fund seeks capital appreciation by investing principally in common stocks. For Assistance in Completing an Application or Questions Concerning Shareholder Accounts (800) 261-0555 As with all mutual funds, the Securities and Exchange Commission does not guarantee that the information contained in this prospectus is accurate or complete nor has it approved or disapproved any securities offered in this prospectus. Anyone who tells you otherwise is committing a crime. Table of Contents Why You Should Read This Prospectus Reading the prospectus will help you to decide whether The Kaufmann Fund, Inc. is the right investment for you. It allows you to compare the Fund's objective, principal strategies, principal risks and performance with other mutual funds. Please keep it for future reference. Page Information About the Fund . . . . . . . . . . . . . . . . . . . . . . . 3 Objective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Hands On Approach . . . . . . . . . . . . . . . . . . . . . . . . . 3 Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Example Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Additional Investment Strategies . . . . . . . . . . . . . . . . . . . . 7 Account Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 Purchasing Shares . . . . . . . . . . . . . . . . . . . . . . . . . 9 Selling Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Special Investor Services . . . . . . . . . . . . . . . . . . . . . 13 Dividends and Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Dividends and Distributions . . . . . . . . . . . . . . . . . . . . 14 Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . 15 Managing the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Portfolio Management . . . . . . . . . . . . . . . . . . . . . . . 16 Portfolio Turnover . . . . . . . . . . . . . . . . . . . . . . . . 16 Year 2000 Readiness . . . . . . . . . . . . . . . . . . . . . . . . 16 Euro Conversion . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Distribution and Service Plans . . . . . . . . . . . . . . . . . . 17 Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . 18 The Fund is not a complete investment program, but may serve to diversify other types of investments in your portfolio. -2- INFORMATION ABOUT THE FUND Objective The Fund's investment objective is capital appreciation. The Fund invests principally in common stocks, convertible preferred stocks and bonds, including convertible bonds. Strategies To achieve its objective, the Fund invests primarily in the stocks of small and medium-sized companies that are traded on national security exchanges, NASDAQ and in the over-the-counter market. Up to 25% of the Fund's net assets may be invested in foreign securities. When deciding which securities to buy the Fund considers: - - the growth prospects of existing products and new product development - - the economic outlook of the industry - - the price of the security and its estimated fundamental value - - relevant market, economic and political environments. The Fund invests in individual companies for the long term. It buys the stocks of companies that it believes: - - are profitable and leaders in their industry - - have distinctive products and services which address substantial markets - - can grow annual earnings by at least 20% for the next three to five years - - have superior proven management and solid balance sheets. [CALLOUT] Hands On Approach Edgemont Asset Management Corporation, the Fund's investment advisor, uses a bottom up approach to portfolio management. There is an emphasis on individual stock selection rather than trying to time the highs and lows of the market or concentrating in certain industries or sectors. This hands on approach means that in addition to sophisticated computer analysis, Edgemont conducts in-depth meetings with management, industry analysts and consultants. Through this interaction with companies Edgemont seeks to -3- develop a thorough knowledge of the dynamics of the businesses the Fund invests in. Typically, the Fund sells an individual security when the company fails to meet expectations, there is a deterioration of underlying fundamentals or the intermediate and long-term prospects are poor. Risks The Fund cannot eliminate risk or assure achievement of its objective and you may lose money on your investment in the Fund. The Fund is subject to "management" and "market" risks. Management risk means that the Fund's strategy may not produce the expected results, causing losses. Market risk is when the price of a security moves down in response to general market and economic conditions or from the activities of an individual company. Since the Fund invests mostly in small companies its share price may fluctuate more than the share price of funds primarily invested in large companies. Small companies may pose greater risk due to narrow product lines, limited financial resources, less depth in management or a limited trading market for their stocks. In addition, there are risks associated with investing in foreign countries. Since foreign securities are usually denominated in foreign currencies, the value of the Fund's portfolio could be affected by currency exchange rates and exchange control regulations. Other risks include: - - seizure, expropriation or nationalization of a company's assets - - less publicly available information and differing regulations and standards - - the impact of political, social or economic instability, or diplomatic events - - securities are less liquid and harder to value than those of a U.S. issuer. As a result of these risks, the Fund may be more volatile than a fund investing in U.S. companies. These risks may be greater if the Fund invests in developing countries. Performance The information below shows the Fund's performance for the ten-year period through December 31, 1998. These returns include reinvestment of all dividends and capital gain distributions, and reflect Fund expenses. As with all mutual funds, past performance does not guarantee future results. -4- Year-by-year returns show how the Fund's performance has varied by illustrating its volatility for each full calendar year for the past ten years. These figures do not reflect the redemption fee. If the fee was included performance would be lower.
Year-By-Year Total Return As Of December 31, 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ 90% 80% 81.0% 70% 60% 50% 40% 46.9% 30% 36.9% 20% 20.9% 10% 11.3% 18.2% 12.6% 0% -6.1% 9.0% 0.7% - -10% Best Quarter: 28.1% (1st quarter 1991) Wort quarter: -18.7% (3rd quarter 1998)
Average annual total return measures Fund performance over time. The Fund's average annual return is compared with the Russell 2000 Index. While the Fund does not seek to match the returns of the Russell 2000, this Index is a good indicator of small company stock performance. You may not invest in the Russell 2000 and, unlike the Fund, it does not incur fees or charges. Performance figures reflect the redemption fee. Average Annual Returns as of December 31, 1998 1 Year 5 Years 10 Years -------------- ---------------- --------------- The Kaufmann Fund 0.5% 15.2% 20.7% Russell 2000 -2.2% 11.9% 12.9% -5- Expenses As a Fund shareholder, Shareholder Fees you do not pay any sales (fees paid directly from your charges or exchange fees. investment) Annual expenses, other than management fees, Maximum redemption fee (1) 0.20% can vary from year-to-year. (as % of redemption proceeds) These fees are for the fiscal year ended Annual Fund Operating Expenses December 31, 1998. (expenses that are deducted directly from Fund Assets) Management fee 1.50% Distribution and service (12b-1) fees 0.43% Other expenses 0.00% Total Annual Fund Operating Expenses % Fee Waiver (2) % Net Operating Expenses 1.96% (1) The Fund imposes a 0.20% fee on the redemption of any shares purchased after February 1, 1985. (2) Under a written agreement, Edgemont reimburses expenses when certain annual operating expenses of the Fund exceed $650,000. This agreement may be terminated or amended at any time by a vote of the Fund's Directors. [CALLOUT] Understanding Costs Costs are an important consideration in choosing a mutual fund. That's because you pay the costs of operating the Fund. These costs can erode a substantial portion of the capital appreciation the Fund achieves. Even seemingly small differences in expenses can, over time, have an effect on the Fund's performance. Example Costs The following example allows you to compare the cost of investing in the Fund to the cost of investing in other mutual funds by showing what your costs may be over time. It uses the same assumptions that other funds use in their prospectuses: -6- - - $10,000 initial investment - - 5% total return for each year - - Fund operating expenses remain the same for each period - - redemption at the end of each period. Your actual costs may be higher or lower, so use this example for comparison only. The top line reflects the cost without redeeming shares. The second line assumes redemption at the end of each period. Based on this information your costs at the end of each period would be: One Year Three Years Five Years Ten Years -------- ----------- ---------- --------- $199 $615 $1,057 $2,285 $220/ $637 $1,080 $2,312 ADDITIONAL INVESTMENT STRATEGIES In seeking to meet its investment objective, the Fund may invest in other types of securities and employ certain investment practices These securities and investment practices offer certain opportunities and carry various risks. The Fund may use up to 10% of its net assets to purchase and sell put and call options, and write covered call options to protect its assets. The successful use of options, which are a type of derivative, depends on Edgemont's ability to correctly predict changes in the price of securities. Options may be riskier than other types of investments. The Fund may make short sales of securities listed on one or more national exchange or on the NASDAQ. A short sale means selling a security the Fund does not own to take advantage of an anticipated decline in the stock's price. Once the Fund sells the security short, it has an obligation to replace the borrowed security. If it can buy the security back at a lower price, a profit results. In no event will the Fund engage in short sales transactions if it would cause the market value of all the Fund's securities sold short to exceed 25% of its net assets. Short sales may reduce returns or increase volatility. Up to 10% of the Fund's net assets may be invested in illiquid securities, including those with legal or contractual restrictions and those without a readily available market. The Fund may also invest up to 10% of its total assets in other registered investment companies. Up to 5% of the Fund's net assets may be invested in warrants. A warrant is issued by a company and entitles the holder to buy the company's common stock at a set price during a stated period of time. The Fund may lose money on a warrant if the price of the underlying security declines or if the warrant expires before it is exercised. The Fund may borrow up to 33 1/3% of its net assets from banks for temporary or emergency purposes, clearing transactions or for investment purposes. -7- Borrowing for investment purposes is known as leveraging, which increases the effect of any change in the market value of the Fund's portfolio. Leveraging may expose the Fund to greater risk and increased costs. Interest paid on any borrowed securities may have the effect of lowering the Fund's return. In addition, the Fund may have to sell the securities when it would normally keep them in order to receive interest payments. The Fund has a securities lending program. The Fund may loan up to 30% of its total assets, in the form of its portfolio securities, to unaffiliated broker-dealers, banks or other recognized institutional borrowers. No loans are made without equivalent collateral. The Fund lends its portfolio securities to generate additional income. The primary risk in lending securities is the default of a borrower. If the borrower defaults there could be a deficiency in the collateral posted by the borrower. This risk is minimized by computing the value of the loaned securities each day. If the value of the security increases, additional collateral is provided by the borrower. [CALLOUT] Investing Defensively In response to unfavorable market, economic or political conditions, the Fund may temporarily invest 100% of its assets in cash, U.S. government securities, certificates of deposit or high grade debt securities for defensive purposes. For this purpose, high grade means major rating services like Standard & Poor's Ratings Group or Moody's Investors Service, Inc. have rated the securities within their two highest quality grades. Although the Fund would do this to avoid losses, these measures may hurt the Fund's efforts to achieve its objective. -8- ACCOUNT INFORMATION Determining Price The price at which you buy, sell or exchange Fund shares is the share price or net asset value (NAV). [CALLOUT] Calculating NAV The share price for the Fund is determined by adding the value of the investments, cash and other assets, deducting liabilities, and then dividing that value by the total number of shares outstanding. NAV is calculated at the close of regular trading of the New York Stock Exchange (normally 4:00 p.m. New York time) each day the Exchange is open. NAV is not calculated on days the Exchange is closed. For a purchase, redemption or exchange of Fund shares, your price is the next calculated NAV after your request is received in good order and accepted by the Fund. To receive a specific day's price, your request must be received before the close of the Exchange on that day. When the Fund calculates share price, it values its securities at market value. Sometimes market quotes for some securities are not available or are not representative of market value. Examples would be when events occur that materially affect the value of a security at a time when the security is not trading or when the securities are illiquid. In that case, securities may be valued in good faith at fair value, using consistently applied procedures adopted by the Directors. Foreign securities traded on foreign exchanges are valued at the last quoted sales price available before the Fund's assets are valued. These securities trade during hours and on days that the Exchange is closed and the Fund's NAV is not calculated. Although the Fund's NAV may be affected during these times, you will not be able to purchase or redeem shares on these days. Purchasing Shares You pay no sales charge to purchase shares of the Fund. Purchases are made at NAV. If the Fund or the Fund's transfer agent receives, in proper form, your check, wire or electronic transfer after 4:00 p.m. Eastern time, your purchase is effective on the next business day. Broker-dealers, financial planners, registered investment advisers, banks or other institutions, may impose investment minimums higher than those imposed by the Fund. They may also charge for their services. There are no charges if you purchase your shares directly from the Fund. -9- Minimum Minimum Type of Initial Additional Account Investment Investment - --------------------------- -------------------- -------------------- Regular Accounts By telephone N/A $1,000 By mail $1,500 $100 By Automatic Investment $500 $50 monthly IRAs By mail $500 N/A By Automatic Investment N/A $50 monthly Payroll Deductions $500 N/A By Automatic Investment N/A $50 monthly The Fund has the right to reject any purchase order, or limit or suspend the offering of its shares. Additionally, the Fund may discontinue the acceptance of telephone orders without notice and waive minimum purchase requirements at any time. [CALLOUT] Payment for Fund Shares Purchases must be made by check, Federal Reserve draft, or other negotiable bank draft, payable in U.S. dollars and drawn on U.S. banks. Third party checks will not be accepted for initial purchases or without special permission. A charge is imposed on any returned checks. -10- Opening an Account Adding to an Account By Mail - Complete and sign the - Make check payable to: application. The Kaufmann Fund, Inc. - Make your check payable - Include your account number to: on the check. The Kaufmann Fund, Inc. - Mail check with the stub from Mail application and check your shareholder statement to to: the address on the left. Boston Financial Data Services, Inc. 2 Heritage Drive North Quincy, MA 02171 By Telephone N/A - Make the election on the application. - Call (800) 261-0555 to place investment. - Additional investments may not exceed $10,000, or seven times your current account balance, whichever is less. Payment must be received within three days. By Wire Complete and sign the - Wire funds to: application. Mail your State Street Bank & Trust Co. application to the address ABA: 011000028 for credit to above. Call (800) 261-0555, BFDS Account #99050874 The or (617) 328-5000 if Kaufmann Fund, Inc. overseas, to obtain an [Your name and account account number. Wire funds number]. using the instructions at - Call (800) 261-0555 to advise the right. of wire. By Automatic - Call (800) 261-0555 to set N/A Investment up a purchase schedule. Program Through an - Contact your financial - Contact your financial Intermediary professional or broker- professional or broker- dealer. dealer. -11- Selling Shares You may sell shares of the Fund on any day it is open for business. Redemption requests received before 4:00 p.m. Eastern time will be made at that day's NAV. No redemption request will be processed until your shares have been paid for in full. If you pay for shares by check, payment may take up to 15 days to clear from the date of purchase. In times of drastic economic or market conditions, you may have difficulty selling shares by telephone. The telephone redemption privilege may be modified or discontinued without notice to shareholders. Selling Shares: By Telephone or * Make the election on the application. Overseas Cable * Call (800) 261-0555, or (617) 328-5000 from overseas. * Send a telegram or overseas cable to: Boston Financial Data Services, Inc. 2 Heritage Drive North Quincy, MA 02171 By Mail * Send a letter of instruction to Boston Financial Data Services, Inc at the address above. Include: - your account number - the dollar value or number of shares to be redeemed - signature guarantee if required, along with other supporting documents - share certificates, if applicable. * Sign the request exactly as the shares are registered. Through an Contact your financial professional or broker-dealer. Intermediary Redemption Proceeds Once your redemption request has been received in "proper form," shares will be redeemed at the next determined NAV. If your shares were purchased after February 1,1985, redemption proceeds are subject to a redemption fee of 0.20%. "Proper form" means that the Fund has received your account application, all shares are paid for, and all documentation along with any required signature guarantees and share certificates are included. Payment will be made by check to the address of record, or by wire transfer if you elected this on your account application, generally no later than the third business day after the valuation date. Signature Guarantees The Fund uses signature guarantees to protect you and the Fund from possible fraudulent requests for redeemed shares. Your redemption request must be accompanied by a signature guarantee if it exceeds $30,000. Signature -12- guarantees may be obtained from most broker-dealers, national or state banks, credit unions, federal savings and loan associations or other eligible institutions. Signature guarantees cannot be obtained from a notary public. If you have a question concerning signature guarantees, please call (800) 261-0555. [CALLOUT] Security Considerations You may give up some level of security in choosing to buy or sell shares by telephone rather than by mail. The Fund uses procedures designed to give reasonable assurance that telephone instructions are genuine, including recording the transactions, testing the identity of the shareholder placing the order, and sending prompt written confirmation of transactions to the shareholder of record. If these procedures are followed, the Fund and its service providers are not liable for acting upon instructions communicated by telephone that they believe to be genuine. Redemptions In-kind The Fund intends to redeem shares in cash, although in order to protect the interest of remaining shareholders, it retains the right to redeem its shares in-kind. In-kind payment means portfolio securities are received rather than cash. If this occurs, transaction costs will be incurred when selling the securities. Involuntary Redemption If your account falls below $500, the Fund may close your account by redeeming your shares and sending the proceeds minus any applicable redemption fee. You will receive notice to increase your balance 30 days before this happens. Your account will not be redeemed if the balance is below the minimum due to a reduction in the Fund's NAV. Involuntary redemptions do not apply to IRAs and other retirement accounts. Special Investor Services The Fund offers its shareholders special services, which you may elect at the time you open your account or at a later date. If you want further information on any of these services please call (800) 261-0555. The Kaufmann/Reserve Fund Money Market Switch Plan The Fund and the Reserve Fund offer a switch plan which allows you to redeem Fund shares to and from the Kaufmann Fund. The minimum amount that may be switched is $1,000. In order to participate in the Switch Plan elect the option on the account application. Call (800) 261-0555 to effect the switch. A transfer from the Fund to the Reserve Fund will take at least four business days and is subject -13- to the applicable redemption fee of 0.20%. The Fund and the Reserve Fund have the right to limit the number of switches made. Either the Fund or the Reserve Fund may terminate the Switch Plan at any time. For federal income tax purposes, a switch into the Reserve Fund will be regarded as a sale of Fund shares and the purchase of Reserve Fund shares. Automatic Investment Plan Regular investments in the Fund can be made through the Automatic Investment Plan Elect the option on the account application and attach a voided personal check. The Automatic Investment Plan may be canceled at any time without penalty. Payroll Deduction Plan Regular investments in the Fund may be made through a Payroll Deduction Plan by electing the option on the account application. Your employer will deduct the amount you wish to invest directly from your paycheck and forward it to the Fund. The Payroll Deduction Plan may be canceled at any time without penalty by notifying your employer. Please check with your employer for availability of this service. Systematic Withdrawal Plans A Systematic Withdrawal Plan is available if you own more than $5,000 worth of Fund shares. Under this plan, proceeds from redemption of Fund shares may be sent to you, a person designated by you or to your bank account. IRAs and 403(b) Accounts Individual Retirement Account or 403(b) accounts are available. Shareholder Confirmations and Statements A confirmation will be sent each time you buy or sell Fund shares, or reinvest dividends or capital gain distributions. The confirmation will list the most recent transaction and the current share balance. Automatic Investment Plan accounts receive quarterly statements. All accounts receive an annual statement as well as year-end tax information. DIVIDENDS AND TAXES Dividends and Distributions Distributions will be reinvested automatically in Fund shares, unless elected to be received in cash. The Fund generally makes two different kinds of distributions: -14- - - Capital gains from the sale of portfolio securities. The Fund distributes any net realized capital gains annually, normally in November. - - Net investment income from interest or dividends received. The Fund distributes its investment income annually. Most of the Fund's distributions are expected to be from capital gains. [CALLOUT] Tax Considerations Unless your investment is in a tax-deferred account you may want to avoid: - Investing in the Fund near the end of its fiscal year. If the Fund makes a capital gains distribution you will receive some of your investment back as a taxable distribution - Selling shares at a loss for tax purposes and then making an identical investment within 30 days. This results in a "wash sale" and you will not be allowed to claim a tax loss. Tax Consequences The buying, selling, holding or exchanging of mutual fund shares may result in a gain or a loss and is a taxable event. The taxation of your distributions will be the same whether you receive them in cash or reinvest them in additional shares. Short- and long-term holding periods are based on how long the Fund has held a security and not on how long you have owned your shares. Transaction Tax Status ------------------------- --------------- Income dividends Ordinary income Short-term capital gains Ordinary income Long-term capital gains Capital gains The Fund may be subject to foreign withholding or other taxes on some of its foreign investments. This will reduce the yield or total return on those investments. Your investment in the Fund could have additional tax consequences. Please consult your tax advisor on state, local or other applicable tax laws. -15- MANAGING THE FUND Edgemont, the Fund's investment advisor, is responsible for the business affairs of the Fund. Edgemont is located at 140 East 45th Street, New York, New York 10017. For its services, Edgemont receives an annual fee of 1.50% of the Fund's average daily net assets. This advisory fee may be higher than the fee charged by other mutual funds. [CALLOUT] Portfolio Management The day to day investment operations of the Fund are handled by Mr. Hans P. Utsch, Chairman of the Board and Secretary of Edgemont, and Mr. Lawrence Auriana, President and Treasurer of Edgemont. Mr. Utsch has been engaged in the securities business since 1962, while Mr. Auriana has been in the securities business since 1965. Messrs. Utsch and Auriana co-founded Edgemont in August, 1984 and have managed the Fund since March, 1985. Portfolio Turnover Portfolio changes may be made without regard to the length of time the Fund has held a security. It is not the intention of the Fund to engage in trading for short-term profits. However, the Fund's portfolio turnover may vary significantly from year to year. It has exceeded 100% in the past, and may do so again. A turnover rate of 100% means the securities owned by the Fund were replaced once during the year. Higher turnover rates may result in higher brokerage costs to the Fund and in higher net taxable gains for the investor. Year 2000 Readiness Mutual funds, securities markets and businesses around the world could be adversely affected if computers do not properly process date-related information with respect to the Year 2000. Edgemont is addressing this issue and is getting reasonable assurances from the Fund's major service providers that they are also addressing these issues to preserve the smooth functioning of the Fund's trading, pricing, custodial and other operations. There is no guarantee that all problems will be avoided. These computer problems could also adversely affect the Fund's investments. Improperly functioning computers may disrupt securities markets or result in overall economic uncertainty. Individual companies may also be adversely affected by the cost of fixing their computers, which could be substantial. -16- Euro Conversion Certain European countries have adopted the Euro as their common currency. National currencies of these countries will be sub-currencies of the Euro until July 1, 2002, at which time they will cease to exist. The introduction of the Euro presents some possible risks, which could adversely affect the value of securities held by the Fund, as well as possible adverse tax consequences. The outcome could have unpredictable effects on trade and commerce, resulting in increased volatility for all financial markets. Distribution and Service Plans The Fund has adopted a 12b-1 plan permitting it to pay an annual fee in connection with the distribution of its shares of up to 0.75% of the average daily net assets. Since this fee is paid on an ongoing basis, it may cost more than other types of sales charges over time. The Fund has also adopted a service plan. This plan allows the Fund to reimburse broker-dealers for providing personal services and the maintenance of shareholder accounts. This annual service fee cannot exceed 0.25% of the Fund's average daily net assets. -17- FINANCIAL HIGHLIGHTS The financial highlights will help you understand the Fund's financial performance for the past five years. Certain information reflects financial results for a single Fund share. Total return shows how much your investment in the Fund increased or decreased during each period, assuming you reinvested all dividends and distributions. Sanville & Company, independent auditors, audited this information. Their report is included in the Fund's annual report, which is available upon request. -18- Selected Data For A Share Outstanding Throughout Each Year
Year Ended December 31, ---------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------- ------------- ------------- ------------- ------------- Net Asset Value, Beginning of Year $ 6.37 $ 5.84 $ 5.05 $ 3.76 $ 3.45 - ---------------------------------------------------------------------------------------------------------------------------------- Income from Investment Operations: Net Investment Income (Loss) (0.040) (0.060) (0.030) (0.060) (0.06) Net Realized and Unrealized Gain (Loss) on 0.017 0.795 1.083 1.445 0.37 Investments ---------- ---------- ---------- ---------- ---------- Total From Investment Operations (0.023) 0.735 1.053 1.385 0.310 - ---------------------------------------------------------------------------------------------------------------------------------- Less Distributions: From Net Investment Income -- -- -- -- -- From Net Realized Gain 0.667 0.205 0.263 0.095 -- ---------- ---------- ---------- ---------- ---------- Total Distributions 0.667 0.205 0.263 0.095 0.00 - ---------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Year $ 5.68 $ 6.37 $ 5.84 $ 5.05 $ 3.76 - ---------------------------------------------------------------------------------------------------------------------------------- Total Return (a) 0.72% 12.59% 20.91% 36.84% 8.99% - ---------------------------------------------------------------------------------------------------------------------------------- Ratios and Supplemental Data: Net Assets, End of Year (in thousands) $4,621,018 $6,008,161 $5,341,311 $3,163,310 $1,592,551 Ratio of Expenses (after expense reimbursement) 1.96% 1.89% 1.93% 2.17 2.29% to Average Net Assets (%) Ratio of Interest Expense to Average Net Assets (%) 0.01% 0.01% 0.01% 0.01% 0.02% ---------- ---------- ---------- ---------- ---------- Ratio of Expenses (after expense reimbursement 1.95% 1.88% 1.92% 2.16% 2.27% less interest expense) to Average Net Assets (%) Ratio of Net Investment Income (Loss) to Average (0.66)% (1.00)% (0.82)% (1.24)% (1.58)% Net Assets (%) Portfolio Turnover Rate (%) 59% 65% 72% 60% 47% - ---------------------------------------------------------------------------------------------------------------------------------- Borrowings: Debt Outstanding at End of Year -- -- -- -- -- Average Debt Outstanding During the Year -- -- -- -- $3,776,120 Average Number of Shares Outstanding During the 333,175 Year (in thousands) Average Debt per Share During the Year -- -- -- -- $ 0.01 ____________________ (a) The total returns would have been lower had certain expenses not been reduced during the years shown.
-19- [BACK COVER] [LOGO] The Kaufmann Fund, Inc. 140 East 45th Street, 43rd Floor New York, New York, 10017 (212) 922-0123 For More Information Additional information about the Fund's investments is available in the Fund's semi-annual and annual reports to shareholders. The Fund's annual report contains a discussion of the market conditions and investment strategies that affected the Fund's performance over the past year. You may wish to read the Statement of Additional Information (SAI) for more information on the Fund and the securities it invests in. The SAI is incorporated into this prospectus by reference, which means that it is considered to be part of the prospectus. You can get free copies of the annual and semi-annual reports and the SAI, request other information or get answers to your questions about the Fund by writing the Fund at: The Kaufmann Fund, Inc. Boston Financial Data Services, Inc. 2 Heritage Drive North Quincy, MA 02171 Call: (800) 261-0555 (617) 328-5000 from overseas or visit our website www.kaufmann.com Text-only versions of Fund documents can be viewed online or downloaded from the SEC's web site at www.sec.gov. You can also obtain copies by visiting the SEC's Public Reference Room in Washington DC. For information on the operation of the Public Reference Room, call (800) SEC-0330. Copies of documents may also be obtained by sending your request and the appropriate fee to the SEC's Public Reference Section, Washington, DC 20549-6009. Investment Company Act File Number: The Kaufmann Fund, Inc. 811-1586 -20- THE KAUFMANN FUND, INC. STATEMENT OF ADDITIONAL INFORMATION Dated: May 1, 1999 ______________________ This Statement of Additional Information (the "Statement"), which is not a prospectus (but which is incorporated into the Prospectus), supplements and should be read in conjunction with the current prospectus of The Kaufmann Fund, Inc. (the "Fund"), dated May 1, 1999 as it may be revised from time to time. To obtain a copy of the Fund's prospectus, please write to the Fund at 140 East 45th Street, 43rd Floor, New York, New York 10017 or call 212-922-0123. TABLE OF CONTENTS Page General Information And History . . . . . . . . . . . . . . . . . . . . . . 3 Investment Objective and Policies . . . . . . . . . . . . . . . . . . . . . 3 Investment Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Management of the Fund . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Principal Holders of Securities . . . . . . . . . . . . . . . . . . . . . . 14 Investment Advisory Services . . . . . . . . . . . . . . . . . . . . . . . 15 Brokerage Allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Potential Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Distribution Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Special Investor Services . . . . . . . . . . . . . . . . . . . . . . . . . 20 Purchase and Redemption of Shares . . . . . . . . . . . . . . . . . . . . . 21 Taxes, Dividends and Capital Gains . . . . . . . . . . . . . . . . . . . . 22 Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Custodian . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Auditor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Performance Information . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Additional Performance Information for the Fund . . . . . . . . . . . . . . 26 -2- GENERAL INFORMATION AND HISTORY The Kaufmann Fund, Inc. (the "Fund"), originally incorporated as a New York corporation on September 11, 1967, became dormant over the years and did not again become fully operational until 1985 when present management assumed control. In February 1993, the Fund was reorganized as a Maryland corporation with the same investment management. The Fund is an open-end, diversified, management investment company, as defined by the Investment Company Act of 1940, as amended (the "1940 Act"); whose investment objective is capital appreciation. As a diversified company, the Fund meets the following requirements: (i) as least 75% of the value of its total assets is represented by cash and cash items (including receivables) and (ii) Government securities, securities of other investment companies, and other securities for the purposes of this calculation limited in respect of any one issuer to an amount not greater in value than 5% of the value of the total assets of such company and not more than 10% of the outstanding voting securities of such issuer. A company which meets these requirements shall not lose its status as a diversified company because of any subsequent discrepancy between the value of its various investments and the requirements, as long as any such discrepancy existing immediately after its acquisition of any security or other property is neither wholly nor partly the result of such acquisition. As an investment company, the Fund invests the monies received from the sale of its shares in a portfolio of securities. While the Fund will not concentrate its investments, it has reserved the right to invest up to 25% of the value of its total assets in a particular industry. This policy of concentration may not be changed without shareholder approval. INVESTMENT OBJECTIVE AND POLICIES The Fund's investment objective and certain of its investment policies are described in the Fund's Prospectus. In addition to the objective and policies discussed in the Prospectus, the Fund has adopted the following investment policies and techniques. Securities of Other Investment Companies - The Fund may invest up to 10% of the value of its total assets in the securities of other registered investment companies (open end or closed end), provided the Fund does not purchase (i) more than 3% of the voting securities of any one investment company or (ii) securities of any investment company having an aggregate value in excess of 5% of the total value of the assets of the Fund. All such -3- securities must be acquired by the Fund in the open market, in transactions involving no commissions or discounts to a sponsor or dealer other than customary brokerage commissions. The Fund will not invest in any investment company having a contingent deferred sales charge, but will not regard a redemption fee of up to 2/10ths of 1% of the investment as such a charge. Repurchase Agreements - Repurchase agreements are arrangements in which banks, broker/dealers and other recognized financial institutions sell U.S. government securities or certificates of deposit to the Fund and agree at the time of sale to repurchase them at a mutually agreed upon time and price within one year from the date of acquisition. The Fund's custodian will take possession of the securities subject to repurchase agreements. To the extent that the original seller does not repurchase the securities from the Fund, the Fund could receive less than the repurchase price on a sale of such securities. In the event that such a defaulting seller filed for bankruptcy or became insolvent, disposition of such securities by the Fund might be delayed pending court action. The Fund believes that under the regular procedures normally in effect for custody of the Fund's portfolio securities subject to repurchase agreements, a court would rule in favor of the Fund and allow it to retain or dispose of such securities. The Fund will enter into repurchase agreements only with banks and other recognized financial institutions such as broker/dealers, which are found by the Fund's investment advisor to be creditworthy. The Fund's investment advisor monitors the creditworthiness of the other parties to repurchase agreements. Repurchase agreements usually are for short periods such as one week, but could be longer. The Fund will not enter into repurchase agreements of more than seven days duration if more than 10% of its net assets would be invested in such repurchase agreements and in restricted securities. Repurchase agreements are considered to be loans by the Fund under the Investment Company Act of 1940. Option Contracts and Risks (i) General Puts and calls are relatively short-term option contracts (rarely for periods longer than nine months) acquired at a cost or "premium" to the Fund or written by the Fund in return for a premium, in each case whether or not the option is exercised during its term. A call option gives the purchaser of the option the right to buy, and the writer the obligation to sell, the underlying security at the exercise price during the option period. Conversely, a put option gives the purchaser the right to sell, and the writer the obligation to buy, the underlying security at the exercise price during the option period. A put purchased by the Fund constitutes a hedge against a decline in the price of a security owned by the Fund. It may be sold at a profit or loss depending upon changes in the price of the underlying security, it may be exercised at a profit provided that the amount of the decline in the price of the underlying security below the exercise price during the option period exceeds the option premium, or it may expire without value. -4- A call constitutes a hedge against an increase in the price of a security, which the Fund has sold short. Gains and losses on investments in options depend on the portfolio manager's ability to predict correctly the direction of stock prices, interest rates and other economic factors. A security may be sold at a profit or loss depending upon changes in the price of the underlying security, it may be exercised at a profit provided that the amount of the increase in the price of the underlying security over the exercise price during the option period exceeds the option premium, or it may expire without value. The maximum loss exposure involved in the purchase of an option is the cost of the option contract. (ii) Covered Option Writing So long as the obligation of the writer of a put or call option continues, he may be assigned an exercise notice by the broker-dealer through whom such option was sold, requiring the writer to deliver, in the case of a call, or take delivery of, in the case of a put, the underlying security against payment of the exercise price. This obligation terminates upon expiration of the option, or such earlier time at which the writer effects a closing purchase transaction by repurchasing the option which he previously sold. Once a writer has been assigned an exercise notice in respect to an option, he is thereafter not allowed to repurchase that option. To secure his obligation to deliver the underlying security in the case of a call option, or to pay for the underlying security in the case of a put option, a writer is required to deposit with a custodian in escrow the underlying security or other assets and to mark the same to market, all in accordance with the rules of the clearing corporations and of the exchanges and securities laws. The principal reason for writing call options on a securities portfolio is to attempt to realize, through the receipt of premiums, a greater return than would be realized on the securities alone. The covered call option writer has, in return for the premium, given up the opportunity for profit from a price increase in the underlying security above the exercise price so long as the obligation as a writer continues, but has retained the risk of loss, should the price of the security decline. Conversely, the put option writer has, in the form of the premium, gained a profit as long as the price of the underlying security remains above the exercise price, but has assumed an obligation to purchase the underlying security from the buyer of the put option at the exercise price, even though the security may fall below the exercise price, at any time during the option period. The option writer has no control over when he may be required to sell his securities in the case of a call option or to purchase securities in the case of a put option, since he may be assigned an exercise notice at any time prior to the termination of his obligation as a writer. If an option expires, the writer realizes a gain in the amount of the premium. Such a gain, of course, may in the case of a covered call option, be offset by a -5- decline in the market value of the underlying security during the option period. If a call option is exercised, the writer realizes a gain or loss from the sale of the underlying security. If a put option is exercised, the writer must fulfill his obligation to purchase the underlying security at the exercise price, which will usually exceed the then market value of the underlying security. (iii) Risks Relating to Options An option position may be closed out only on an exchange which provides a secondary market for an option of the same series. Although the Fund will generally purchase or write only those options for which there appears to be an active secondary market, there is no assurance that a liquid secondary market on an exchange may exist. In such event, it might not be possible to effect closing transactions in particular options, with the result that the Fund would have to exercise its options in order to realize any profit and would incur brokerage commissions upon the exercise of call options and upon the subsequent disposition of underlying securities acquired through the exercise of call options or upon the sale of underlying securities pursuant to the exercise of put options. If the Fund, as a covered call option writer, is unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying security until the option expires or it delivers the underlying security upon exercise. Reasons for the absence of liquid secondary market on an exchange include the following: (a) there may be insufficient trading interest in certain options; (b) trading halts, suspensions, or other restrictions may be imposed with respect to particular classes or series of options or underlying securities; (c) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (d) the facilities of an exchange or a clearing corporation may not at all times be adequate to handle current trading volume; or (e) one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event, the secondary market on that exchange (or in the class or series of options) would cease to exist, although outstanding options on that exchange that had been issued by a clearing corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms. There is no assurance that higher than anticipated trading activity or other unforeseen events might not, at times, render certain of the facilities of any of the clearing corporations inadequate, and thereby result in the institution, by an exchange, of special procedures which may interfere with the timely execution of customers' orders. -6- The amount of the premiums, which the Fund may pay or receive, may be adversely affected as new or existing institutions, including other investment companies, engage in or increase their option purchasing and writing activities. For additional information concerning options see p. 6 of the Fund's Prospectus. Borrowing to Purchase Securities (Leverage) The Fund may employ "leverage" by borrowing money and using it to purchase additional securities. Leverage increases both investment opportunity and investment risk. If the investment gains on securities purchased with borrowed money exceed the interest paid on the borrowing, the net asset value of the Fund's shares will rise faster than would otherwise be the case. On the other hand, if the investment gains fail to cover the cost (including interest on borrowings), or if there are losses, the net asset value of the Fund's shares will decrease faster than would otherwise be the case. The Fund may borrow money only from banks and only if, immediately after the borrowing, the value of its net assets (including borrowings), less its liabilities (excluding borrowings but including securities borrowed in connection with short sales) is at least 300% of the amount of the borrowing, plus all other outstanding borrowings. The amount the Fund can borrow may also be limited by applicable margin limitations of the Federal Reserve Board. Briefly, these provide that banks subject to the Federal Reserve Act may not make a loan for the purpose of buying or carrying "margin stocks" if the loan is secured directly or indirectly by a margin stock, to the extent that the loan is greater than the "maximum loan value" of the collateral securing the loan. "Margin stock" includes, amount other securities, stocks registered or having unlisted trading privileges on a national securities exchange, any equity security not traded on a national securities exchange which the Federal Reserve Board has determined has the characteristics to warrant being traded on a national securities exchange, options and warrants to acquire margin stock. A maximum loan value is assigned by the Federal Reserve Board to specified types of collateral. Puts, calls and combinations of puts and calls essentially have no loan value. If, for any reason (including adverse market conditions), the Fund fails to meet this asset coverage test, it will be required to reduce borrowings within three business days to the extent necessary to meet the test. This requirement may make it necessary to sell a portion of the Fund's portfolio securities at a time when it is disadvantageous to do so. Restricted Securities The Fund may invest up to 10% of the value of its net assets in restricted securities (including repurchase agreements (discussed on page -7- ____hereof) with maturities of over seven days) or other illiquid assets. Restricted securities are securities which, at any particular time may not be readily and publicly marketable. In valuing such securities for purposes of computing net asset value, the Board of Directors or a person or persons acting under the authority of the Board of Directors, will be required to make a good faith determination of current value which, in all cases, will be at a discount from the market value of the same type of securities of the same company which are not subject to restrictions. The amount of the discount is based upon the difference between the negotiated price paid for such securities and the market value of the unrestricted securities at the time the purchase is agreed upon, but may be increased or reduced, from time to time, by the Board of Directors, or a person or persons acting under the authority of the Board of Directors. It is often difficult to sell restricted securities at a price approximating what is deemed to be their current value. In addition, there is often a considerable time gap between the decision to sell restricted securities and the actual sale, which time gap can adversely affect the price obtainable. If and when the Fund sells any restricted securities, it may be deemed an "underwriter" within the meaning of the Securities Act of 1933 with respect thereto, and registration under the Securities Act of 1933 may be required, in which case, the Fund may have to bear the expenses of such registration if the issuer or other person from whom the Fund acquired such securities has not agreed to bear such expenses. Such expenses of registration may be substantial. Other than as described, the Fund may not underwrite the securities of other issuers. The Fund may also invest in securities eligible for resale under Rule 144A of the Securities Act of 1933 ("144A securities"). This Rule allows certain qualified institutional buyers, such as the Fund, to trade in privately placed securities despite the fact that such securities are not registered under the Securities Act. The Fund's investment advisor, acting pursuant to procedures adopted by the Board, will consider the frequency of trades and quotes, the number of dealers and potential purchasers, dealer undertakings to make a market, the nature of the securities and the marketplace trades. A Rule 144A security may be illiquid after purchase and the Fund's Board of Directors will then determine what, if any, action is required. Short Sales and Hedging Operations The Fund may seek to realize additional gains through short sale transactions in securities listed on one or more national securities exchanges, or in unlisted securities. Short selling involves the sale of borrowed securities. At the time a short sale is effected, the Fund incurs an obligation to replace the security borrowed at what ever its price may be -8- at the time the Fund purchases it for delivery to the lender. When a short sale transaction is closed our by delivery of the securities, any gain or loss on the transaction is taxable as a short-term capital gain or loss. Since short selling can result in profits when stock prices generally decline, the Fund in this manner can to a certain extent, hedge the market risk to the value of its other investments and protect its equity in a declining market. However, the Fund could, at any given time, suffer both a loss on the purchase or retention of one security, if the security should decline in value, and a loss on a short sale of another security, if the security sold short should increase in value. When a short position is closed out, it may result in a short-term capital gain or loss for federal income tax purposes. Moreover, to the extent that in a generally rising market the Fund maintains short positions in securities rising with the market, the net asset value of the Fund would be expected to increase to a lesser extent than the net asset value of an investment company that does not engage in short sales. Among the factors which management may consider in making short sales. Among the factors which management may consider in making short sales are a decreasing demand for a company's products, lower profit margins, lethargic management, and a belief that a disparity exists between the price of the security and its underlying assets or other values. No short sale will be effected which will, at the time of making such short sale transaction and giving effect thereto, cause the aggregate market value of all securities sold short to exceed 25% of the value of the Fund's net assets. The value of the securities of any one issuer that have been shorted by the Fund is limited to the lesser of 2% of the value of the Fund's net assets or 2% of the securities of any class of the issuer. In addition, to secure the Fund's obligation to replace any borrowed security, it will place in a segregated account an amount of cash or U.S. Government securities equal to the difference between the market value of the securities sold short at the time of the short sale, and any cash or U.S. Government securities originally deposited with the broker in connection with the short sale (excluding the proceeds of the short sale). The Fund will thereafter maintain daily the segregated amount at such a level that the amount deposited in it plus the amount originally deposited with the broker as collateral will equal the greater of the current market value of the securities sold short, or the market value of the securities at the time they were sold short. The Fund may make short sales "against the box", i.e., short sales made when the Fund owns securities identical to those sold short. Short sales against the box are not subject to the 25% limitation. The Fund may only engage in short sale transactions in securities listed on one or more national securities exchanges or on NASDAQ. -9- Warrants The Fund also may invest up to 5% of its net assets in warrants. Included within this amount, but not to exceed 2% of the value of the Fund's net assets may be warrants which are not listed on the New York or American Stock Exchanges. A reason for investing in warrants is to permit the Fund to participate in an anticipated increase in the market value of a security without having to purchase the security to which the warrants relate. Warrants convey no rights to dividends or voting rights, but only an option to purchase equity securities of the issuer at a fixed price. If such securities appreciate, the warrants may be exercised and sold at a gain, but a loss will be incurred if such securities decrease in value or the term of the warrant expires before it is exercised. The 5% limitation does not include warrants acquired by the Fund in units or attached to other securities. Lending of Portfolio Securities In order to generate additional income, the Fund may lend portfolio securities constituting up to 30% of its total assets to unaffiliated broker-dealers, banks or other recognized institutional borrowers of securities, provided that the borrower at all times maintains cash or equivalent collateral or provides an irrevocable letter of credit in favor of the Fund equal in value to at least 100% of the value of the securities loaned. During the time portfolio securities are on loan, the borrower pays the Fund an amount equivalent to any dividends or interest paid on such securities, and the Fund may receive an agreed-upon amount of interest income from the borrower who delivered equivalent collateral or provided a letter of credit. Loans are subject to termination at the option of the Fund or the borrower. The Fund may pay reasonable administrative and custodial fees in connection with a loan of portfolio securities and may pay a negotiated portion of the interest earned on the cash or equivalent collateral to the borrower of placing broker. The Fund does not have the right to vote securities on loan, but could terminate the loan and regain the right to vote if that were considered important with respect to the investment. The primary risk in securities lending is a default by the borrower during a sharp rise in price of the borrowed security resulting in a deficiency in the collateral posted by the borrower. The Fund will seek to minimize this risk by requiring that the value of the securities loaned be computed each day and additional collateral be furnished each day if required. The Fund will not lend its portfolio securities to Bowling Green Securities, Inc., a broker-dealer affiliated with the Investment Advisor. -10- Other than as set forth above, the Fund will not make loans, except that the Fund may purchase a portion of an issue of publicly distributed bonds, debentures or other securities, whether or not the purchase was made upon the original issue of the securities. Short-Term Investments The Fund may make short-term investments when it is deemed desirable to do so. The Fund may, from time to time, sell a security without regard to the length of time that it has been held in order to realize a profit or to avoid an anticipated loss. Short-term transactions produce higher portfolio turnover rates than would otherwise be the case, resulting in the likelihood of larger expenses (including brokerage commissions) than are incurred by mutual funds which engage only in long-term transactions. There is, of course, no assurance that the Fund will obtain any gains from its short-term investments. INVESTMENT RISKS Investors should be aware that the investment techniques of the Fund will entail greater than average risk to the extent such techniques are utilized. Many of these techniques, such as short sales, borrowing money for investment, the purchase and sale of put and call options, investment in restricted securities and foreign securities, the lending of portfolio securities and trading over a short-term period are considered to be of a speculative nature and to the extent put into effect, will result in greater turnover of the Fund's portfolio securities and greater expense than is customary for most mutual funds. The value of the Fund's shares tends to fluctuate to a greater degree than the shares of funds utilizing more conservative investment techniques or those having as investment objectives, the conservation of capital and/or the realization of current income. Accordingly, the Fund is not an appropriate vehicle for a short-term investor or having immediate financial requirements. Rather, the Fund is designed for those investors who invest for the long term and have the financial ability to undertake greater risk. INVESTMENT RESTRICTIONS The Fund has also adopted the following investment restrictions, which cannot be changed without the approval of the holders of a majority of its shares. The term "majority" means the lesser of (1) 67% of the Fund's shares present at a meeting if the holders of more than 50% of the outstanding shares are present in person or by proxy, or (2) more than 50% of -11- the Fund's outstanding shares. These restrictions provide that the Fund shall not: 1. Purchase securities on margin from brokers. 2. Invest in commodities, commodity contracts or real estate, or limited partnership interests in real estate, except that the Fund may invest in readily marketable securities of real estate trusts or companies, and in master limited partnership interests traded on a national securities exchange. 3. Borrow money, except from banks in an amount which will not cause the Fund's net assets (including the amount borrowed) to be less than 300% of such borrowed amount and then providing that (i) if the Fund's assets become less than three times the amount of the Fund's bank borrowing, the Fund will, within three days (not including Saturdays, Sundays or holidays) reduce its bank borrowings to the extent required to restore such 300% coverage and (ii) such bank borrowing may be collateralized by the deposit of portfolio securities with, or the segregation of such securities for the account of, the lending bank, but in no case will such bank borrowings exceed 50% of the net assets of the Fund or the value of such pledged securities exceed 75% of the total assets of the Fund. 4. With respect to 50% of the value of its total assets, invest more than 5% of the value of its total assets in any one issuer, excluding United States Government securities, or purchase more than 10% of the outstanding voting securities of any one issuer. 5. Participate in a joint securities trading account. 6. Issue senior securities except to the extent of borrowings. 7. Underwrite the securities of other issuers. 8. Purchase the securities of an issuer, if any affiliate, (including the Fund's officers and directors) who individually own more than 1/2 of 1% of the securities of such issuer, together own more than 5% of the securities of such issuer. 9. May not invest 20% or more of its net assets in securities of issuers with an operating history of less than three years continuous operation. 10. Invest in oil, gas or mineral leases. -12- MANAGEMENT OF THE FUND The Fund's Directors are responsible for the Fund's management, and they have certain fiduciary duties and obligations to the Fund and its shareholders under the laws of the State of Maryland and applicable federal securities laws. The information provided below sets forth biographical information regarding each Director. Directors who are "interested persons" of the Fund, as that term is defined by Section 2(a)(19) of the Investment Company Act of 1940 are marked by an asterisk. Generally speaking, the term "interested persons" includes persons who have close family or substantial financial or professional relationships with investment companies, their investment advisors, principal underwriters, officers and employees. The address of the Directors who are "interested persons" is 140 East 45th Street, 43rd Floor, New York, New York 10017. Directors and Officers of the Fund *Hans P. Utsch; Director, President and Treasurer 140 East 45th Street, 43rd Floor, New York, New York 10017 Mr. Utsch is Chairman of Edgemont Asset Management Corporation, the Fund's investment manager, and has acted as such, since its founding in August 1984. He is a co-portfolio manager of the Fund together with Mr. Auriana. Mr. Utsch holds a BA from Amherst College and an MBA from Columbia University. Mr. Utsch is the principal shareholder of Bowling Green Securities, Inc., a registered broker/dealer. For over the last five years he has managed that firm's investment portfolio. Age: 62. *Lawrence Auriana; Chairman of the Board and Director, Vice President and Secretary 140 East 45th Street, 43rd Floor, New York, New York 10017 Mr. Auriana is President of Edgemont Asset Management Corporation, the Fund's investment manager, and has acted as such, since its founding in August 1984. He is co-portfolio manager of the Fund together with Mr. Utsch. Mr. Auriana holds a BA from Fordham University and attended New York University's Graduate School of Business. Age: 54. Leon Lebensbaum; Director 3601 Hempstead Turnpike, Levittown, New York 11756 Mr. Lebensbaum, an attorney and certified public accountant, has been in private practice since 1970. He is currently a general partner in the accounting firm of Lebensbaum and Russo. Prior thereto he was a Special Agent in the Intelligence Division of the Internal Revenue Service. Age: 75. -13- Gerard M. Grosof; Director 31 Prospect Place, Brooklyn, New York 11217 Mr. Grosof is a high-technology venture capitalist. He is a Director of Quantametrics, Inc. From 1982-1985 he was Vice President, Treasurer and a Director of Memory Metals, Inc., a metal alloy firm. From 1980 to 1982 he served as an officer of CG Technology Corporation, a contract research and development firm. Age: 69. Pauline Gold, Esquire; Director 120 Stuyvesant Place, Staten Island, New York 10301 Mrs. Gold is an attorney and has been engaged in the private practice since 1964. Age: 61. Roger E. Clark; Director 1 Hatfield Mews, 330 Elm Street, New Canaan, Connecticut 06840 Mr. Clark is President of Teleproducts Corporation Consulting, which is involved in the business of telephone-computer interfacing. During the period from 1980 to June 1987, he was a marketing executive for Xerox Corporation. Age: 64. Remuneration of Directors and Officers The Directors, other than Messrs. Utsch and Auriana, presently receive an annual retainer of $25,000 plus $5,000 for each Board of Directors' Meeting or $3,000 for each Committee Meeting attended, plus expenses. Director fees for the year ended December 31, 1998 totaled __________. *Interested Persons Hans P. Utsch, Fund President and Treasurer, and Lawrence Auriana, Fund Vice President and Secretary are also the Chairman of the Board and President, respectively, of Edgemont Asset Management Corporation ("Edgemont") and are its sole shareholders. As such, they are "interested persons" of the Fund. PRINCIPAL HOLDERS OF SECURITIES The Fund's records show that the only owner of more than 5% of the Fund's outstanding shares at the close of business on December 31, 1998 was Charles Schwab & Co., Inc and National Financial Co. It is understood that the shares are held by them for undisclosed investors who are the beneficial owners. -14- INVESTMENT ADVISORY SERVICES Edgemont Asset Management Corporation (hereafter sometimes "Edgemont"), a New York corporation organized in August 1984, having its principal office at 140 E.45th Street, 43rd Floor, New York, New York 10017, presently serves as the Fund's investment advisor. Edgemont does not serve as investment advisor to any other investment company. Messrs. Utsch and Auriana are control persons of Edgemont. The Investment Advisory Agreement was approved for an additional one-year term by a majority of the Fund's Board of Directors including a majority of those directors who are not interested persons (as that term is defined in the Investment Company Act of 1940) at a meeting held on October 15, 1997 called for the purpose of voting on such Agreement. It will continue in effect until October 30, 1999 and thereafter for successive annual periods provided that such continuance is specifically approved at least annually by (a) the Fund's Board of Directors, provided, that the continuance is also approved by a majority of those Directors who are not interested persons of the Fund or Edgemont, cast in person at a meeting called for the purpose of voting on such approval, or (b) the vote of a majority of the Fund's outstanding voting shares. The Investment Advisory Agreement may be terminated at any time, without penalty, on sixty days' prior written notice, by the vote of a majority of the Fund's outstanding voting shares or by the vote of a majority of the Fund's Board of Directors or by Edgemont, and will terminate automatically in the event of its assignment. Edgemont (i) determines the composition of the Fund's portfolio, the nature and timing of the changes therein, and the manner of implementing such changes, and (ii) provides the Fund with such investment advisory, research and related services as the Fund may, from time to time, reasonably require for the investment of its funds. The advisor performs such duties in accordance with any directions it may receive form the Fund's Board of Directors. Edgemont furnishes the Fund, at no cost, with the services of those of Edgemont officers and full-time employees who may be duly elected executive officers or directors of the Fund. The Fund shall be responsible for effecting sales and redemptions of its shares, for determining the net asset value thereof and for all of its other operations and shall pay all administrative and other costs and expenses attributable to its operations and transactions, including, without limitation, transfer agent and custodian fees; legal, administrative and clerical services; rent not to exceed fair market value for its office space and facilities; auditing; preparation, printing and distribution of its prospectuses, proxy statements, stockholders reports and notices; cost of -15- supplies and postage; Federal and state registration fees; Federal, state and local taxes; the fees of directors who are not interested persons; interest on its bank loans; and brokerage commissions. Edgemont received $66,206,955 and $85,089,829 and $___________in management fees, 1996, 1997 and 1998, respectively. Formerly, Edgemont was required to agree, as a condition of qualifying its shares for sale in certain jurisdictions, that if the Fund's annual expenses exceeded a certain percentage of average net assets, Edgemont was required to reduce its annual investment advisory fee to the percentage limitations imposed on the Fund by the laws of the interested jurisdiction. California limited expenses to 2 1/2% of the first $30 million of average net assets, 2% of the next $70 million and 1 1/2% of all in excess of $100 million. Fees reimbursed to the Fund for the year 1995 were $3,500,370. While not required to do so, Edgemont, nevertheless, voluntarily limited Fund expenses to the California standard and rebated $5,243,247 to the Fund for 1996, $6,589,322 for 1997 and for 1998.. It may limit its expenses in the same way for 1999. For example, the Fund's total expenses for the year ending December 13, 1997, before expense reimbursement were $113,805,469; the net expenses after reimbursement were $107,216,137 or 1.89% of average net assets after expense reimbursement. BROKERAGE ALLOCATION Hans P. Utsch and Lawrence Auriana, sole shareholders of Edgemont, the Fund's investment advisor, are primarily responsible for placing the portfolio brokerage business of the Fund. In all brokerage orders, the Fund will seek the most favorable prices and executions. The determination of what may constitute the most favorable price and execution in a brokerage order involves a number of factors, including the overall direct net economic result to the Fund (involving both price paid or received, and any commissions or other costs paid), and the efficiency with which the transaction is effected. The sale of Fund shares may be considered when determining the firms that are to execute brokerage transactions for the Fund. In addition to considering a broker's execution capacity and price, Edgemont may consider the brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act of 1934) provided to the Fund. Edgemont is authorized to pay to a broker-dealer who provides such brokerage and research services a commission for executing a particular transaction for the Fund which is in excess of the amount of commission another broker-dealer would have charged for effecting the transaction if Edgemont determines, in good faith, that such commission was reasonable in relation to the value of the -16- brokerage and research services provide by such broker-dealer, viewed in terms of the particular transaction or in terms of the overall responsibilities of Edgemont to the Fund. For purposes of the above, a person provides brokerage and research services insofar as it: (1) furnishes service, either directly or through publications or writings, as to the value of the securities, the advisability of investing in, purchasing or selling securities and the availability of securities or purchasers or sellers of securities; (2) furnishes analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts; (3) effects securities transactions and performs functions incidental thereto (such as clearance, settlement or custody) or required in connection therewith by rules of the Securities and Exchange Commission or the NASD of which such person is a member or is a person associated with an NASD member firm or in which such person is a participant. Since July 1, 1992, the Fund has permitted Edgemont to use Bowling Green Securities, Inc. ("Bowling Green Securities") as one of the Fund's principal brokers for exchange traded securities transactions only. Hans P. Utsch is the owner of Bowling Green Securities; Lawrence Auriana is affiliated with Bowling Green Securities as a registered representative. Any such use must be in compliance with Section 17(e) of the Investment Company Act and Rule 17e-1 thereunder and of the Rules thereunder. In accordance with Section 17(e) of the Investment Company Act and Rule 17e-1 thereunder and the Rules thereunder, Bowling Green Securities may act as a broker in connection with the sale of various exchange traded securities to or by the Fund. In placing orders with Bowling Green Securities for brokerage transactions for the Fund, pursuant to standards adopted by the Board of Directors of the Fund, Edgemont must ascertain that any commissions, fees or other remuneration paid to Bowling Green Securities are reasonable and fair compared to the commissions, fees or other remuneration paid to other brokers in connection with comparable transactions involving similar securities being purchased or sold on a securities exchange during a comparable period of time. Bowling Green Securities is required to provide regular brokerage services to the Fund at competitive rates that will demonstrably be proper under the circumstances and in accordance with Section 11(a) of the Securities Exchange Act of 1934. Bowling Green Securities is not a member of a national securities exchange, and thus is not, at present, subject to any limitations under Section 11(a). However, that Section authorizes the Securities and Exchange Commission to regulate or prohibit broker-dealers such as Bowling Green Securities in or from effecting transactions in securities owned by an account such as the Fund, over which the principals of Bowling Green Securities have investment discretion. To date, the Commission has not seen fit to do so. Bowling Green Securities cannot buy or sell portfolio securities as principal from or to the Fund. -17- To the extent that portfolio transactions are effected through Bowling Green Securities as broker, any increase of portfolio activity will be beneficial to that firm (and its owner and principal employee, respectively, Messrs. Utsch and Auriana), because of brokerage commissions payable in connection therewith. The Fund is also permitted to purchase underwritten securities during the existence of an underwriting syndicate of which Bowling Green Securities is a member, subject to restrictions of applicable law and the Fund's policies. During 1996 and 1997, the Fund paid $8,946,721 and $10,106,929, respectively, in brokerage commissions. Of these amounts $66,520 in 1996 were paid to Bowling Green Securities. During 1998, total brokerage commissions in the amount of __________ were paid on total transactions of _________. Of the total amount of commissions paid, .______ was paid to Bowling Green Securities on ____ of the total portfolio transactions effected. Of the ______ in commissions paid to Bowling Green Securities, ______ was paid to Herzog Heine Geduld, the clearing broker for Bowling Green Securities. The Fund's Board of Directors has established Rule 17e-1 conditions and procedures (see above) for the use of Bowling Green Securities. The Board also determined that the Fund's independent public accountants should review the exchange trades executed by Bowling Green Securities at the end of each quarter and report the results of the survey to the Board at its next succeeding meeting. The Board continues to review the appropriateness of the conditions and procedures no less frequently than annually. POTENTIAL CONFLICTS Hans P. Utsch and Lawrence Auriana each is (1) a Director and Officer of the Fund; (2) a Director and Officer of Edgemont, the Fund's investment advisor; (3) an employee (and in Mr. Utsch's case, the owner) of the broker-dealer to whom a portion of the Fund's brokerage is being directed; (4) a controlling principal in the Fund's investment decision making process. These affiliations of Messrs. Utsch and Auriana create for each of them an inherent potential conflict of interest. The Fund's Directors who are not interested persons are aware of these potential conflicts but do not presently perceive them as detrimental to the Fund. -18- DISTRIBUTION PLAN The Fund has adopted a distribution plan (the "Distribution Plan"), under the terms of which the Fund may incur distribution expenses of up to .75% per annum of the Fund's average daily net assets. Management of the Fund has agreed to limit expenditure under the Rule 12b-1 plan to .40% of the Fund's net assets for its 1998 fiscal year. The Distribution Plan has been approved by the Fund's Board of Directors, including by all of the "Rule 12b-1 Directors" ("Rule 12b-1 Directors" are those directors who are not "interested" persons of the Fund as defined in the Investment Company Act of 1940, and who have no direct or indirect financial interest in the Distribution Plan or any related agreement). The Distribution Plan has been approved for an additional term ending October 18, 1999, unless earlier terminated by a vote of a majority of the Rule 12b-1 Directors, or by vote of a majority of the Fund's outstanding shares. The Distribution Plan provides that the Fund may finance activities which are primarily intended to result in the sale of the Fund's shares, including but not limited to, advertising, printing and mailing of prospectuses and reports for other than existing shareholders, printing and distribution of sales literature, and the compensation of persons primarily engaged in the sale and marketing of the Fund's shares. The Distribution Plan may not be amended to increase materially the amount to be spent by the Fund under the Distribution Plan without shareholder approval, and all material amendments to the provisions of the Distribution Plan must be approved by a vote of the Board of Directors, including a majority of the Rule 12b-1 Directors, cast in person at a meeting called for the purpose of such a vote. During the continuance of the Distribution Plan a report, in writing, will be given to the Fund's Board of Directors, quarterly, showing the amounts and purposes of such payments for services rendered pursuant to the distribution Plan. Further, during the term of the Distribution Plan, the selection and nomination of those Directors who are not interested persons of the Fund must be and has been committed to the discretion of the Rule 12b-1 Directors. During 1998, the following sums were spent for the following purposes. Advertising - Print Media Advertising - Broadcast Media Advertising -Internet Printing and Stationary Postage Services Rendered -19- List Rentals Broker dealer fees Employee Compensation and benefits Telephone Professional Fees Other Travel Subscriptions SPECIAL INVESTOR SERVICES The Kaufmann/Reserve Fund Money Market Switch Plan In the case of IRA accounts, the custodianship will be automatically transferred to the trustee, RMCI (Reserve Management Corp., Inc.) if you choose to exchange into the Reserve. Additional forms will be required by RMCI and will be mailed by the Reserve at the time of the exchange. Subsequently, the trustee on your account will automatically be switched from RMCI to the Fund's custodian, State Street Bank and Trust, if you choose to reinvest in the Kaufmann Fund. There will be a limit of two exchanges per year. Automatic Investment Plan A shareholder may make arrangements for an Automatic Investing Plan. There is a one-time set-up charge of $5. The Automatic Investment Plan may be changed or cancelled at any time upon receipt by the Fund's Transfer Agent of written instructions or an amended application from the shareholder with signatures guaranteed. It will be terminated automatically whenever a check is returned as being uncollected for any reason. Since the Fund's shares are subject to fluctuations in both income and market value, an investor contemplating making periodic investments in shares of the Fund should consider his financial ability to continue such investments through periods of low price levels, and should understand that such a program cannot protect him against loss of value in a declining market. Individual Retirement Accounts (IRAs) The individual investor can select the shares of the Fund to fund either an IRA, Rollover IRA or a non-working Spousal IRA. To establish an IRA with the Fund, you must complete an IRA Account Registration Form. If the assets are being moved from an existing IRA to the Fund, you must also complete the IRA Rollover/Transfer Form. -20- Many investors are eligible to deduct from federal income tax all or a portion of their IRA investment. All dividends and capital gains on IRA investments grow tax deferred until withdrawal. Investors may make contributions to their IRAs until the tax year prior to reaching age 70 1/2. Mandatory withdrawals must begin the year after an investor reaches 70 1/2. Investors should consult their tax advisers for details on eligibility and tax implications. A Simplified Employee Pension Plan (SEP-IRA) may also be established. Persons eligible may establish a SEP-IRA with their employer to invest in shares of the Fund. Contact the Transfer Agent at (800) 261-0555 for details on eligibility and other information. Please read the IRA Disclosure Statement and Custodial Agreement which contains further information regarding services and fees. Investors should consult with their own tax advisers before establishing an IRA account. Qualified Retirement Plans The Fund has model Section 401(k) plans, Section 403(b)(7) plans and money purchase and profit sharing plans available. Contact the Transfer Agent at (800) 261-0555 for details on eligibility and other information. Systematic Withdrawal Plan Shares are redeemed to make the requested payment on the 25th day of each month in which a withdrawal is to be made and payments are mailed within five business days following the redemption. Each redemption of shares may result in a gain or loss, which the investor must report on his income tax return. Consequently, the investor should keep an accurate record of any gain or loss on each withdrawal. PURCHASE AND REDEMPTION OF SHARES Information relating to the procedure for the purchase and redemption of the Fund's shares at net asset value is contained in the Fund's Prospectus. A description of the procedure for the determination of the net asset value of the Fund's shares is contained in the Fund's Prospectus. In the case of Redemptions In-kind, the Fund has filed a Notification under Rule 18f-1 under the Investment Company Act, pursuant to which it has undertaken to pay in cash all requests for redemption by any shareholder of record, limited in amount with respect to each shareholder -21- during any 90-day period to the lesser amount of (i) $250,000, or (ii) 1% of the net asset value of the Fund at the beginning of such election period. In making a redemption in-kind, the Fund reserves the right to select from each portfolio holding a number of shares which will reflect the portfolio make-up and the value of which will approximate as closely as possible, the value of the Fund shares being redeemed, or to select from one or more portfolio Investments, shares equal in value to the total value of the Fund shares being redeemed. Any shortfall will be made up in cash. The values of portfolio securities distributed in-kind will be the values used for the purpose of calculating the per share net asset value used in valuing the Fund shares tendered for redemption. The Fund reserves the right to change or discontinue, without prior notice, any of the procedures available for redemption requests. TAXES, DIVIDENDS AND CAPITAL GAINS It is the intention of the Fund to qualify as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended with the result that taxable income of the Fund will be reduced by the amount of distributions to shareholders. At least 90% of gross income must be derived from dividends, interest, payments with respect to securities loans and gains from the sale of securities. If, in any taxable year, the Fund should not qualify as a "regulated investment company" under the Code: (i) the Fund would be taxed at normal corporate rates on the entire amount of its taxable income without deduction for dividends or other distributions to its shareholders, and (ii) the Fund's distributions to the extent made out of the Fund's current or accumulated earnings and profits would be taxable to its shareholders as ordinary dividends (regardless of whether they would otherwise have been considered capital gains dividends), and may qualify for the 70% deduction for dividends received by corporations. The term "Regulated Investment Company" does not imply the supervision of the investment practices or policies of the Fund by any government agency. Qualification as a "Regulated Investment Company" relieves the Fund from any liability for federal income taxes to the extent its net investment income and capital gains are distributed. -22- The Fund does not intend to make distributions of profits realized on the sale of securities unless available capital loss carryovers, if any, have been utilized or have expired. With respect to withholding, Congress has mandated that if any shareholder fails to provide and certify to the accuracy of his or her social security number or other taxpayer identification number, the Fund will be required to withhold 31% of all dividends, distributions and payments, including redemption proceeds, to such shareholder as a backup withholding procedure. In addition, shareholders will be subject to a fine payable to the Internal Revenue Service. Accordingly, in the event a shareholder fails to furnish and certify to a taxpayer identification number or the Internal Revenue Service notifies the Fund that a shareholder's taxpayer identification number is incorrect, or that withholding is otherwise required, the Fund will commence withholding on such shareholder's account. Once withholding is established, all withheld amounts will be paid to the Internal Revenue Service, from whom such shareholder should seek any refund. If withholding is commenced with respect to any shareholder account, the shareholder should consult with the shareholder's attorney or tax advisor or contact the Internal Revenue Service directly. CAPITAL STOCK The Fund, a Maryland corporation, has an authorized capitalization of two billion shares of capital stock, par value $0.10 per share. Shares of stock issued by the Fund are all of one class, are designated capital stock, are redeemable by the Fund at the option of the holder of the stock and have equal dividend, liquidation and voting rights, each share being entitled to one vote. There are no pre-emptive or other special rights outstanding or attached to any of the Fund's shares, nor are there any restrictions on the right to freely retain or dispose of such shares. Maryland law does not require the holding of annual shareholders' meetings unless otherwise required by law. However, 10% of the outstanding voting securities of the Fund shall have the right to call a shareholders' meeting for purposes of voting on the removal of a director. The shares have non-cumulative voting rights, which means that the holders of more than 50% of the shares voting for the election of Directors can elect all of the Fund's Directors if they choose to do so, and, in such event, the holders of the remaining less than 50% of the shares voting for the election of Director will not be able to elect anyone to the Board of Directors. -23- CUSTODIAN State Street Bank and Trust Company, 225 Franklin Street, Boston, MA 02110 is custodian of the securities and cash owned by the Fund. The Custodian is responsible for holding all securities and cash of the Fund, receiving and paying for securities purchased, delivering securities sold against payment, receiving and collecting income from investments, making all payments covering expenses of the Fund, and performing other administrative duties, all as directed by persons authorized by the Fund. The Custodian does not exercise any supervisory function in such matters as the purchase and sale of portfolio securities, payment of dividends, or payment of expenses of the Fund. Portfolio securities of the Fund purchased in the United States are maintained in the custody of the Custodian, and may be entered in the Federal Reserve Book Entry System, or the security depository systems of The Depository Trust Company. AUDITOR Sanville & Company, 1514 Old York Road, Abington, Pennsylvania 19001, will serve as the Fund's independent public accountants and will audit the Fund's records and prepare financial statements based thereon. FINANCIAL STATEMENTS The latest financial highlights of the Fund appear in the Prospectus; other financial statements of the Fund as of December 31, 1997 appear in the 1997 Annual Report of the Fund and they are incorporated by reference. PERFORMANCE INFORMATION The performance of The Kaufmann Fund, Inc. may be compared to the record of the Standard & Poor's Corporation 500 Stock Index ("S&P 500 Stock Index"), the NASDAQ Composite Index, the Russell 2000 Index, the Wilshire 5000 Equity Index and returns quoted by Ibbotson Associates. The S&P 500 Stock Index is a well known measure of the price performance of 500 leading larger domestic stocks which represent approximately 80% of the market capitalization of the United States equity market. In comparison, the NASDAQ National Market System is comprised of all stocks on NASDAQ's National Market System, as well as other NASDAQ domestic equity securities. The NASDAQ Composite Index has typically included smaller, less mature companies representing 10% to 15% of the capitalization of the entire domestic equity market. Both indices are unmanaged and capitalization weighted. In general, the securities comprising the NASDAQ Composite Index are more growth oriented -24- and have a somewhat higher "beta" and P/E ratio than those in the S&P 500 Stock Index. The Russell 2000 Index is a capitalization weighted index which measures total return (and includes in such calculation dividend income and price appreciation). The Russell 2000 is generally regarded as a measure of small capitalization performance. It is a subset of the Russell 3000 Index. The Russell 3000 is comprised of the 3000 largest U.S. companies. The Russell 2000 is comprised of the smallest 2000 companies in the Russell 3000 Index. The Wilshire 5000 Index is a broad measure of market performance and represents the total dollar value of all common stocks in the United States for which daily pricing information is available. This index is also capitalization weighted and captures total return. The small company stock returns quoted by Ibbotson Associates are based upon the smallest quintile of the New York Stock Exchange, as well as similar capitalization stocks on the American Stock Exchange and NASDAQ. This data base is also unmanaged and capitalization weight. The total returns for all indices used show the changes in prices for the stocks in each index. However, only the performance data for the S&P 500 Stock Index and the Ibbotson Associates performance data assume reinvestment of all capital gains distributions and dividends paid by the stocks in each data base. Tax consequences are not included in such illustrations, nor are brokerage or other fees or expenses reflected in the NASDAQ Composite or S&P 500 Stock figures. In addition, the Fund's total return or performance may be compared to the performance of other funds or other groups of funds that are followed by Morningstar, Inc., a widely used independent research firm which ranks funds by overall performance, investment objectives and asset size. Morningstar proprietary ratings reflect risk-adjusted performance. The ratings are subject to change every month. Morningstar's ratings are calculated from a fund's three-year and five-year average annual returns with appropriate sales charge adjustments and a risk factor that reflects fund performance relative to three-month Treasury bill monthly returns. Ten percent of the funds in an asset class receive a five star rating. The Fund's total return or performance may also be compared to the performance of other funds or groups of funds by other financial or business publications, such as Business Week, Investors Daily, Mutual Fund Forecaster, Money Magazine, Wall Street Journal, New York Times, Barron's, and Lipper Analytical Services. The Fund's performance may also be compared, from time to time, to (a) indices of stocks comparable to those in which the Fund invest; (b) the Consumer Price Index (measure for inflation) may be used to assess the real rate of return from an investment in the Fund. Certain government statistics, such as the Gross National Product, may be used to illustrate the investment attributes of the Fund or the general economic business, investment or financial environment in which the Fund operates. Finally, the effect of tax-deferred compounding on the Fund's investment returns, or on returns in general, may be illustrated by graphs or charts where such graphs or charts would compare, at various points in time, the return from an investment in the Fund (or returns in general) on a -25- tax-deferred basis (assuming reinvestment of capital gains and dividends and assuming one or more tax rates) with the return on a taxable basis. ADDITIONAL PERFORMANCE INFORMATION FOR THE FUND The Fund may reflect its total return in advertisements and shareholder reports. Total investment return is one recognized method of measuring mutual fund investment performance. Quotations of average annual total return will be shown in terms of the average annual compounded rate of return on a hypothetical investment in the Fund over a period of 1 year, 5 years and over the life of the Fund. This method of calculating total return is based on the following assumptions: (1) all dividends and distributions by the Fund are reinvested in shares of the Fund at net asset value; (2) all recurring fees are included for applicable periods; and (3) the redemption fee of .2% on redemption of Fund shares acquired after February 1, 1985 is taken into consideration. Total return may also be expressed in terms of the cumulative value of an investment in the Fund at the end of a defined period of time. Total Returns for the one, five and ten year periods ending December 31, 1998 were ______, ________ (Annualized ____) and _______ (Annualized ______), respectively. -26- PART C OTHER INFORMATION Item 23. Exhibits Exhibit No. (1) Certificate of Incorporation, as amended (2) Copy of By-Laws (3) None (4) Copy of Investment Management Agreement between The Kaufmann Fund, Inc. and Edgemont Asset Management Corporation, as amended. (5) Agreement Pursuant to Plan of Distribution between The Kaufmann Fund, Inc. and Edgemont Asset Management Corporation Amendment No. 1 dated 7/1/93 (6) None (7) Custodian Agreement between and The Kaufmann Fund, Inc. and State Street Bank and Trust Company. Special Custody Account Agreement between The Kaufmann Fund, Inc., State Street Bank and Trust Company, and Morgan Stanley Prime Brokerage (8) Transfer Agency and and Service Agreement between The Kaufmann Fund, Inc. and Boston Financial Data Services, Inc. Copy of Authorization Agreement for payment of Service Fees (9) Opinion of Martin V. Miller, Esq. and consent dated 4/20/98 (10) Opinion of Sanville Company - Certified Public Accountants included in Annual Report for the year ending 12/31/97 which is incorporated by reference in the Fund's 1997 Annual Report. Consent of Sanville & Company (11) In Part B: The Registrant's Annual Report for the calendar year ending 12/31/97 is incorporated by reference. Pursuant to the requirements of Rule 303(b) of Regulation ST, the following financial statements appearing in the Registrant's 12/31/97 Annual Report, filed in electronic format, are included as exhibits to this filing. (12) None (13) Plan of Distribution adopted by The Kaufmann Fund, Inc. -1- Amendment No. 1 dated 7/1/93 (14) Financial Data Schedule (15) None [FN] An Exhibit to Post-Effective Amendment No. 37 which was filed on December 11, 1993. An Exhibit to Post-Effective Amendment No. 43 which was filed on March 15, 1995. An Exhibit toPost-Effective Amendment No. 45 filed electronically on March 11, 1996. An Exhibit toPost-Effective Amendment No. 48 filed electronically on April 30, 1998. Item 24. Persons Controlled by or Under Common Control With Registrant There are no persons controlled by or under common control with Registrant. Item 25. Indemnification - ------------------------- (a) General. The Articles of Incorporation (the "Articles") of the Fund provide that to the fullest extent permitted by Maryland or federal law, no director or officer of the Fund shall be personally liable to the Fund or its shareholders for money damages and each director and officer shall be indemnified by the Fund. The By-Laws of the Fund provide that the Fund shall indemnify any individual who is a present or former director or officer of the Fund and who, by reason of his position was, is or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter collectively referred to as a "Proceeding") against judgments, penalties, fines, settlements and reasonable expenses actually incurred by such director or officer in connection withsuch Proceeding, to the fullest extent that such indemnification may be lawful under Maryland law. (b) Disabling Conduct. Both the Articles and the By-Laws provide, however, that nothing therein shall be deemed to protect any director or officer against any liability to the Fund or its shareholders to which such director or officer would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office (such conduct hereinafter referred to as "Disabling Conduct"). The By-Laws provide that no indemnification of a director or officer may be made unless: (1) there is a final decision on the merits by a court or other body before whom the Proceeding was brought that the director or -2- officer to be indemnified was not liable by reason of Disabling Conduct; or (2) in the absence of such a decision, there is a reasonable determination, based upon a review of the facts, that the director or officer to be indemnified was not liable by reason of Disabling Conduct, which determination shall be made by: (i) the vote of a majority of a quorum of directors who are neither "interested persons" of the Fund as defined in Section 2(a)(19) of the 1940 Act, nor parties to the Proceeding; or (ii) an independent legal counsel in a written opinion. (c) Standard of Conduct. Under Maryland law, the Fund may not indemnify any director if it is proved that: (1) the act or omission of the director was material to the cause of action adjudicated in the Proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty; or (2) the director actually received an improper personal benefit; or (3) in the case of a criminal proceeding, the director had reasonable cause to believe that the act or omission was unlawful. No indemnification may be made under Maryland law unless authorized for a specific proceeding after a determination, in accordance with Maryland law, has been made that indemnification is permissible in the circumstances because the requisite standard of conduct has been met. (d) Required Indemnification. Maryland law requires that a director or officer who is successful, on the merits or otherwise, in the defense of any Proceeding shall be indemnified against reasonable expenses incurred by the director or officer in connection with the Proceeding. In addition, under Maryland law, a court of appropriate jurisdiction may order indemnification under certain circumstances. (e) Advance Payment. The By-Laws provide that the Fund may pay any reasonable expenses so incurred by any director or officer in defending a Proceeding in advance of the final disposition thereof to the fullest extent permissible under Maryland law. In accordance with the By-Laws, such advance payment of expenses shall be made only upon the undertaking by such director or officer to repay the advance unless it is ultimately determined that such director or officer is entitled to indemnification, and only if one of the following conditions is met: (1) the director or officer to be indemnified provides a security for his undertaking; (2) the Fund shall be insured against losses arising by reason of any lawful advances; or (3) there is a determination, based on a review of readily available facts, that there is reason to believe that the director or officer to be indemnified ultimately will be entitled to indemnification, which determination shall be made by: (i) a majority of a quorum of directors who are neither "interested persons" of the Fund, as defined in Section 2(a)(19) of the 1940 Act, nor parties to the Proceeding; or (ii) an independent legal counsel in a written opinion. (f) Insurance. The By-Laws provide that, to the fullest extent permitted by Maryland law and Section 17(h) of the 1940 Act, the Fund may purchase and maintain insurance on behalf of any officer or director of the Fund, against any liability asserted against him or her and incurred by him or her in and arising out of his or her position, whether or not -3- the Fund would have the power to indemnify him or her against such liability. Item 26. Business and Other Connections of Investment Advisor Bowling Green Securities, Inc., 140 East 45th Street, 43rd Floor, New York, New York 10017, is wholly owned by Hans P. Utsch. Mr. Utsch is the Chairman of the Board and owner of 50% of the outstanding voting securities of Edgemont Asset Management Corporation. Mr. Lawrence Auriana is a registered representative of Bowling Green Securities, Inc.and is a director and president of Edgemont Asset Management Corporation and owns 50% of the outstanding voting securities of such company. Item 27. Principal Underwriter The Fund does not have a principal underwriter Item 28. Location of Accounts and Records The books and records of the Fund, other than the accounting and transfer agency (including dividend disbursing) records, are maintained by the Fund at 140 East 45th Street, 43rd Floor, New York, New York 10017; the Fund's accounting and transfer agency records are maintained at Boston Financial Data Services, Inc., Two Heritage Drive, Quincy, MA 02171. Item 29. Management Services There are no management service contracts not described in Part A or Part B of Form N-1A Item 30. Undertakings a) The Fund undertakes to provide a copy of its most recent Annual Report without charge to any recipient of its currently effective prospectus who requests the information. b) The Fund agrees that the Directors of the Fund will promptly call a meeting of shareholders for the purpose of acting upon questions of removal of a director or directors when requested in writing to do so by the record holder of not less than 10% of the outstanding shares. -4- SIGNATURES Pursuant to the requirements of the Securities Actof 1933 and the Investment Company Act of 1940, the Registrant certifies that it has duly caused this Registration Statement to be signed on its behalf by the undersigned, hereunto duly authorized in the City of New York and State of New York, on the 25th day of February, 1999. THE KAUFMANN FUND, INC. By: /s/ Hans P. Utsch ----------------------------- President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated: NAME TITLE DATE /s/ Hans P. Utsch Director, President February 25, 1999 - ------------------------ and Treasurer HANS P. UTSCH /s/ Lawrence Auriana Chairman of Board, February 25, 1999 - ------------------------ Director, Vice LAWRENCE AURIANA President and Secretary /s/ Leon Lebensbaum Director February 25, 1999 - ------------------------ LEON LEBENSBAUM /s/ Gerard M. Grosof Director February 25, 1999 - ------------------------ GERARD M. GROSOF /s/ Pauline Gold Director February 25, 1999 - ------------------------ PAULINE GOLD /s/ Roger E. Clark Director February 25, 1999 - ------------------------ ROGER E. CLARK -5- -----END PRIVACY-ENHANCED MESSAGE-----