-----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, HL6O2vSJbMxvR1ob+D6kHZ+1fjJdsmMJZCGQkgOB0xYs6G/4CwYGA7fUK1KmkXnk uIdxYe+SfBxEv6x0SIp6Hw== 0000950154-96-000122.txt : 19960312 0000950154-96-000122.hdr.sgml : 19960312 ACCESSION NUMBER: 0000950154-96-000122 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19960311 EFFECTIVENESS DATE: 19960311 SROS: NYSE 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: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-28049 FILM NUMBER: 96533527 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-01586 FILM NUMBER: 96533528 BUSINESS ADDRESS: STREET 1: 140 E 45TH ST 43RD FL 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 485BPOS 1 THE KAUFMANN FUND, INC. POST EFFECTIVE AMENDMENT AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON 3/11/96 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. 45 / X / and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY / X / ACT OF 1940 Amendment No. 45 (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. It is proposed that this filing will become effective (check appropriate box): / X / immediately upon filing pursuant to paragraph (b) / / on (DATE) pursuant to paragraph (b) / / 60 days after filing pursuant to paragraph (a)(1) / / on (date) 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, 1995 was filed on February 15, 1996 TOTAL NUMBER OF PAGES ____ EXHIBIT INDEX BEGINS ON PAGE ____ 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 Information................... Data and Ratios, Financial Highlights 4. General Description of The Fund, Investment Objective Registrant.................... and Policies, The 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 Performance.............. Fund Performance 6. Capital Stock and Other Securities..................... Capital Stock 7. Purchase of Securities Purchase of Fund Shares, Being Offered.................. Account 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 FORM N-1A PART B - ---------------- LOCATION IN STATEMENT ITEM # OF ADDITIONAL INFORMATION - ------ ------------------------- 10. Cover Page.............. Cover Page 11. Table of Contents....... Table of Contents 12. General Information See Item "The Fund" in and History............. Prospectus 13. Investment Objectives Investment Objective and and Policies............ Policies, Investment Restrictions 14. Management of the Fund.. Management of the Fund 15. Control Persons and Principal Holders of Principal Holders of Securities.............. Securities 16. Investment Advisory Investment Advisory Services, and Other Services...... Custodian, Auditor, See item "Transfer Agent and Custodian" in Prospectus 17. Brokerage Allocation and Other Practices......... Brokerage Allocation 18. Capital Stock and See item "Capital Stock" in Other Securities........ Prospectus 19. Purchase, Redemption and Purchase and Redemption of Pricing of Securities Shares, Special Investor Being Offered............ Services, Distribution Plan. See "Purchase 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 FORM N-1A PART B (Continued) - ---------------------------- LOCATION IN STATEMENT ITEM # OF ADDITIONAL INFORMATION - ------ ------------------------- 22. Calculations of Performance Additional Performance Information Data...................... for the Fund 23. Financial Statements...... Financial Statements FORM N-1A PART C - ---------------- ITEM # LOCATION IN PART C - ------ ------------------ 24. Financial Statements Financial Statements and and Exhibits........... Exhibits 25. Persons Controlled by or Under Common Control Persons Controlled by or Under with Registrant........ Common Control with Registrant 26. Number of Holders of Number of Holders of Securities............. Securities 27. Indemnification........ Indemnification 28. Business and Other Connections of Business and Other Connections Investment Advisor..... of Investment Advisor 29. Principal Underwriter.. Principal Underwriter 30. Location of Accounts Location of Accounts and and Records............ Records 31. Management Services.... Management Services 32. Undertakings........... Undertakings T H E K A U F M A N N F U N D, I N C. P R O S P E C T U S M A R C H 1 1, 1 9 9 6 __________________________________________ PART A PROSPECTUS & APPLICATION MARCH 11, 1996 THE KAUFMANN FUND, INC. 140 EAST 45TH STREET, 43RD FLOOR NEW YORK, NEW YORK 10004 (212) 922-0123 FOR HELP IN COMPLETING QUESTIONS CONCERNING FOR CURRENT NET ASSET YOUR APPLICATION: SHAREHOLDERS ACCOUNTS: VALUE PER SHARE: 1-800-261-0555 1-800-261-0555 (212) 661-4699 INVESTMENT OBJECTIVE - CAPITAL APPRECIATION The Fund seeks capital appreciation by investing principally in common stocks. SHARE SALES AT NET ASSET VALUE Shares are sold at net asset value. The Fund has adopted a Rule 12b-1 plan whereby up to .75% of the Fund's assets per year may be utilized currently for distribution expenses. The Fund charges 0.2% in connection with each redemption of Fund shares acquired after February 1, 1985. MINIMUM INITIAL INVESTMENT The minimum initial investment is $1,500 for regular accounts. For IRA accounts and for the Automatic Investment Plan the minimum initial investment is $500. PLANS AVAILABLE The Fund offers Automatic Investment Plans, Systematic Withdrawal Accounts and The Kaufmann/Reserve Fund Money Market Switch Plan. The Prospectus sets forth concisely, the information about the Fund that a prospective investor ought to know before investing. Investors are advised to read and retain this prospectus for future reference. Additional information about the Fund has been filed with the Securities and Exchange Commission and is available upon request without charge. A Statement of Additional Information, dated the date of this Prospectus, is hereby incorporated by reference into this Prospectus and is available without charge upon request to the Fund at the address or telephone number shown above. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. TABLE OF CONTENTS Page(s) SUMMARY . . . . . . . . . . . . FEE TABLE . . . . . . . . . . . CONDENSED FINANCIAL INFORMATION . . . . . . THE FUND . . . . . . . . . . . INVESTMENT OBJECTIVES AND POLICIES . . . . . . THE INVESTMENT POLICIES PARTICULARIZED . . . . . INVESTMENT RISKS . . . . . . . . . PORTFOLIO TURNOVER. . . . . . . . . . MANAGEMENT OF THE FUND . . . . . . . . . Investment Advisor . . . . . . . . PURCHASE OF FUND SHARES . . . . . . . . By Mail . . . . . . . . . By Telephone . . . . . . . . By Bank Wire . . . . . . . . Through Broker-Dealers . . . . . . General . . . . . . . . . Account Statements . . . . . . . . . REDEMPTION OF SHARES . . . . . . . . General . . . . . . . . . Good Order for Redemption Requests . . . . By Mail . . . . . . . . . By Telephone, Telegram or Overseas Cable . . . . . . . . . Accuracy of Investor Account Information . . Redemption at the Option of the Fund . . . Redemption in Kind . . . . . . . TAXES, DIVIDENDS AND CAPITAL GAINS . . . . . . CAPITAL STOCK . . . . . . . . . . Page(s) DETERMINATION OF NET ASSET VALUE . . . . . . SPECIAL INVESTOR SERVICES . . . . . . . Money Market Switch Plan . . . . . . . Automatic Investment and Systematic Withdrawal Plans . . . . . . Retirement Plans and IRA Accounts . . . . . Shareholder Statements and Reports . . . . . DISTRIBUTION PLAN . . . . . . . . . SHAREHOLDER SERVICING AND TRANSFER AGENT AND CUSTODIAN . . . . . . . . . . APPLICATION . . . . . . . . . . SUPPLEMENT TO PROSPECTUS DATED MARCH 11, 1996 FOR ARIZONA RESIDENTS ONLY - -------------------------- The Kaufmann Fund, Inc. (the "Fund") has adopted a distribution plan effective October 19, 1987 and subsequently amended pursuant to which the Fund may incur distribution expenses of up to .75% per annum of the Fund's average net assets. While these fees may exceed the industry norm, the Distribution Plan was approved by the vote of the majority of Fund shareholders. (See Distribution Plan, Page ___). If in any taxable year the Fund does not qualify as a regulated investment company under the Internal Revenue Code, all Fund distributions to shareholders would be taxed as ordinary dividends. (See Taxes, Dividends, and Capital Gains, Page ___). Investors in The Kaufmann Fund, Inc. should be aware that the aggressive investment techniques of the Fund entail greater than average risk to the extent such techniques are utilized. (See Investment Risks, Page ___). FOR IOWA RESIDENTS ONLY - ----------------------- The Kaufmann Fund, Inc. (the "Fund") entails greater than average risks for investors due to its aggressive investment policies. (See Investment Risks, Page ___). In addition, the positions of two officers and directors of the Fund (Messrs. Utsch and Auriana) create an inherent potential conflict of interest. (See Potential Conflicts, Page ___, in the Statement of Additional Information). FOR OHIO RESIDENTS ONLY - ----------------------- 1. This prospectus must be delivered to the investor prior to the consummation of sale. 2. Investment in this investment company may involve a higher degree of risk than investment in more traditional open-end, diversified investment companies because the company: May purchase up to 49% of the voting securities of any one issuer. May invest up to 50% of its assets in the securities of issuers with an operating history of less than three years continuous operation and up to 10% of the value of its net assets in restricted securities and other illiquid assets. May borrow, pledge, mortgage or hypothecate assets on behalf of the company up to 50% of the total company assets. May purchase the securities of other investment companies with no limitation. May borrow for leveraging purposes. Leveraging has advantages and disadvantages, both of which should be carefully evaluated by the investors. Leveraging is discussed in more detail on Page ___ of the prospectus. FOR MISSOURI AND SOUTH DAKOTA RESIDENTS ONLY - -------------------------------------------- The securities of The Kaufmann Fund, Inc. (the "Fund") may involve certain risks due to the Fund's investment policies such as (1) Leverage - - borrowing money for investment (see Leverage, Page ___); (2) Short sales - the sale of borrowed securities (see Short Sales, Page ___); (3) Short term operations - making short term investments (see Short Term Investments, Page ___); (4) Put and call options (see Investment Objectives and Policies, Page ___). These aggressive investment techniques will entail greater than average risks to the extent such strategies are utilized. (See Investment Risks, Page ___). FOR TEXAS RESIDENTS ONLY - ------------------------ Shares of the The Kaufmann Fund, Inc. (the "Fund") may also be purchased through registered broker dealers. There may be a charge for this service; see Page ___ of the Fund's prospectus for further information. Jack White and Co. Inc. acts as the broker-dealer for the Fund in the State of Texas. SUMMARY THE FUND The Kaufmann Fund, Inc. (the "Fund") is an open-end, diversified management investment company the investment objective of which is capital appreciation. Production of income is incidental to this objective. The Fund seeks to achieve its investment objective by investing in common stocks, convertible preferred stocks and bonds including convertible bonds. The Fund may also invest, subject to specific percentage limitations, in warrants, options, restricted securities, the securities of foreign issuers and in the securities of other investment companies. The Fund may also engage, again subject to specific percentage limitations, in short selling and in leveraging. These investment policies are deemed to be speculative. (See the text under the caption "Investment Objective and Policies" pages ____ through ____ of the Prospectus and under the caption "Investment Objective, Policies and Restrictions", pages ____ through ____ of the Statement of Additional Information, for detailed information.) PURCHASE OF SHARES Shares of the Fund are sold at net asset value. Shares of the Fund may be purchased by mail, by bank wire or telephone, and through broker-dealers (see "Purchase of Shares" at pages ______). The price at which Fund shares are offered to the public will vary with fluctuations in the market value of securities and other assets owned by the Fund. The Fund has adopted a distribution plan pursuant to which the Fund may currently incur distribution expenses of up to .75% per year of the Fund's average daily net assets (see "Distribution Plan" at page ____). The minimum initial investment is $1,500 ($500 for Individual Retirement Accounts and Automatic Investment Plan accounts). Subsequent investments may be made at any time in amounts of $1,000 or more by telephone, (subject to certain restrictions), $100 or more by mail, or $50 or more through the Automatic Investment Plan or, according to your tax situation, for IRA accounts. The Fund has available for its investors the following specialized accounts: a Systematic Withdrawal Plan, Automatic Investment Plan, Individual Retirement Accounts ("IRAs") and The Kaufmann/Reserve Fund Money Market Switch Plan (see "Special Investor Services" at pages ___). 1 SERVICE FEES The Fund may pay service fees of up to .25% per annum of the Fund's average daily net assets for personal services to customers by broker dealers and for the maintenance of shareholder accounts. REDEMPTION OF SHARES Shares are redeemable at net asset value, as next determined after receipt of a redemption request in proper form. The Fund will impose a redemption fee on Fund shares acquired after February 1, 1985, equal, in the aggregate, to 2/10ths of 1% of the value of the shares redeemed (see "Redemption of Shares" at pages ______). INVESTMENT ADVISOR Edgemont Asset Management Corporation serves as the Fund's investment advisor. 2 FEE TABLE The following table summarizes your maximum transaction costs from investing in the Fund and expenses incurred by the Fund based on its most recent fiscal year. For a description of these costs and expenses, see "Management of the Fund" at page ____, and "Distribution Plan" at page ____ in this Prospectus. The examples show the cumulative expenses attributable to a hypothetical $1,000 investment in the Fund over specified periods. SHAREHOLDER TRANSACTION EXPENSES Sales Load Imposed on Purchases .................. None Sales Load Imposed on Reinvested Dividends ........ None Deferred Sales Load Imposed on Redemptions ........ None Redemption Fee (as a percentage of amount redeemed, if applicable) ...................................... 0.2% (1) ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets) Management Fees ...................................... 1.50% 12b-1 ............................................... 0.53% (2) Service Fees ......................................... 0.08% (2) Interest Expense ..................................... 0.01% Other Expenses ....................................... 0.05% (3) TOTAL FUND OPERATING EXPENSES ........................ 2.17% - ------------------------------ 1 The Fund imposes a 2/10ths of 1% (0.2%) redemption fee on the redemption price of the Fund's capital stock shares that are redeemed, if such shares were purchased after February 1, 1985. 2 Long-term shareholders may pay more than the economic equivalent of the maximum permitted front-end sales charges. 3 Edgemont Asset Management Corporation has agreed to assume certain expenses of the Fund that exceed the limits prescribed by any state in which the Fund's shares are qualified for sale. For redemption by wire there is a $9.00 fee. THE KAUFMANN FUND, INC. FEE TABLE EXAMPLES: As an investor in the Fund, you would incur the following expenses on a $1,000 investment, assuming (1) 5% annual return, (2) a redemption fee equal to 0.2%, and (3) redemption at the end of each period: 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- $24 $70 $119 $254 Your $1,000 investment would incur the following expenses, assuming 5% annual return but no redemption: 1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- $22 $68 $117 $251 The table is provided to assist you in understanding the costs and expenses of investing in the Fund and your share of the operating expenses which the Fund incurs. The table and examples are based on the operating expenses for the Fund's last fiscal year. The table and examples do not represent past or future expense levels, and actual expenses may be greater or less than those shown. Federal regulations require the examples to assume a 5% annual return, but actual annual return has varied. 3
The Kaufmann Fund, Inc. FINANCIAL HIGHLIGHTS Selected Data For A Share Of Capital Stock Outstanding Throughout Each Year Year Ended December 31, ------------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 - ------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, Beginning of Year $3.76 $3.45 $2.95 $2.65 $1.53 $1.63 $1.11 $0.70 $1.13 $1.13 - ------------------------------------------------------------------------------------------------------------------------------- Income From Investment Operations: Net Investment Income (Loss) (0.060) (0.06) (0.049) (0.05) (0.05) (0.04) (0.03) - 0.01 0.02 Net Realized and Unrealized Gain (Loss) on Investments 1.445 0.37 0.584 0.35 1.25 (0.06) 0.55 0.41 (0.43) (0.02) ---------- ---------- -------- -------- -------- ------- ------- ------ ------ ------ Total From Investment Operations 1.385 0.310 0.535 0.30 1.20 (0.10) 0.52 0.41 (0.42) 0.00 - ------------------------------------------------------------------------------------------------------------------------------- Less Distributions: Dividends from Net Investment Income - - - - - - - - 0.01 - Distributions from Net Realized Gain 0.095 - 0.035 - 0.08 - - - - - ---------- ---------- -------- -------- -------- ------- ------- ------ ------ ------ Total Distributions 0.095 0.00 0.035 0.00 0.08 0.00 0.00 0.00 0.01 0.00 - ------------------------------------------------------------------------------------------------------------------------------- Net Asset Value, End of Year $5.05 $3.76 $3.45 $2.95 $2.65 $1.53 $1.63 $1.11 $0.70 $1.13 - ------------------------------------------------------------------------------------------------------------------------------- Total Return 36.84 % 8.99 % 18.18 % 11.32 % 79.18 % (6.14)% 46.85 % 58.57 % (37.16)% 0.00 % - ------------------------------------------------------------------------------------------------------------------------------- Ratios/Supplemental Data: Net Assets, End of Year (In Thousands) $3,163,310 $1,592,551 $966,632 $314,371 $141,134 $39,711 $36,370 $5,731 $1,888 $3,285 Ratio of Expenses (After Expense Reimbursement) to Average Net Assets (%) 2.17 % 2.29 % 2.53 % 2.94 % 3.64 % 3.45 % 2.36 % 2.00 % 2.00 % 1.48 % Ratio of Interest Expense to Average Net Assets (%) 0.01 % 0.02 % 0.03 % 0.08 % 0.52 % - - - - - ---------- ---------- -------- -------- -------- ------- ------- ------ ------ ------ Ratio of Expenses (After Expense Reimbursement Less Interest Expense) to Average Net Assets (%) 2.16 % 2.27 % 2.50 % 2.86 % 3.12 % 3.45 % 2.36 % 2.00 % 2.00 % 1.48 % Ratio of Net Investment Income (Loss) to Average Net Assets (%) (1.24)% (1.58)% (1.34)% (1.74)% (1.96)% (2.56)% (1.41)% (0.23)% 0.92 % 1.67 % Portfolio Turnover Rate (%) 60 % 47 % 55 % 51 % 128 % 195 % 202 % 343 % 228 % 125 % Shares Outstanding at End of Year (In Thousands) 626,600 424,108 280,157 106,469 53,225 25,980 22,268 5,171 2,685 2,908 - ------------------------------------------------------------------------------------------------------------------------------- Borrowings for the Year: Amount of Debt Outstanding at End of Year - - $49,000,000 $4,015,965 $3,017,622 - - - - - Average Amount of Debt Outstanding During the Year - $3,776,120 4,563,115 3,260,421 2,149,395 - - - - - Average Number of Shares Outstanding During the Year (In Thousands) - 333,175 182,699 79,977 32,294 - - - - - Average Amount of Debt Per Share During the Year - $0.01 $0.03 $0.04 $0.06 - - - - - Note A: In 1986, there was a change in the Fund's management, and shareholders approved extensive changes in the Fund's investment policies and restrictions. This information has been examined and reported on by Sanville & Company, Independent Public Accountants, for the years ended December 31, 1995, 1994, 1993, 1992, 1991, 1990 and 1989, by Stavisky, Knittle, Isaacs & Dichek, Independent Public Accountants, for the years ended December 31, 1988, 1987 and 1986. 4
THE FUND 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 1986 when present management assumed control. The Fund was actively managed until February, 1993, when the Fund was reorganized as a Maryland corporation with the same investment management. The Fund's offices are at 140 E. 45th Street, 43rd Floor, New York, NY 10017, and its telephone number is (212) 922-0123. The Fund is an open-end, diversified, management investment company, as defined by the Investment Company Act of 1940, as amended (the "1940 Act"). As an investment company, it invests the monies received from the sale of its shares in a portfolio of securities. INVESTMENT OBJECTIVES AND POLICIES The investment objective of the Fund is capital appreciation. Production of income is incidental to this objective. There is no assurance that the Fund will achieve its investment objective. Among factors the Fund considers when selecting investments in companies are (i) the growth prospects for a company's products, (ii) the economic outlook for its industry, (iii) a company's new product development, (iv) its operating management capabilities, (v) the relationship between the price of the security and its estimated fundamental value, (vi) relevant market, economic and political environments, and (vii) financial characteristics such as balance sheet analysis and return on assets. The Fund's principal investments are in common stocks, convertible preferred stocks and bonds, including convertible bonds. The Fund may not invest in real estate limited partnership interests but may invest in master limited partnership interests that are traded on a national securities exchange. The Fund may also invest up to 5% of net assets in warrants, up to 25% of the Fund's net assets in the securities of issuers domiciled in foreign countries and engage in the purchase and sale of put and call options in an amount of up to 10% of its net assets. The Fund may make short sales of securities in an aggregate amount not greater than 25% of net assets, and may borrow up to 33-1/3% of net assets. For the leverage obtained by and the restrictions on borrowing, including the risks thereof, see "Borrowing to Purchase Securities (Leverage)" at page ____. For the risks involved in investing in foreign securities, see "Foreign Securities" page ____. For the risks involved in engaging in short sales and investing in warrants see the text under the captions "Short Sales and Hedging Operations" page ____ and "Warrants" page ____. For the risks involved in investing in options, see the text under the caption "Risks Relating to Options" page ____ in the Statement of Additional Information. The Fund's investment policies concerning options, restricted securities, short sales, warrants, foreign securities and short-term investing may be changed without shareholder approval. 5 The Fund invests primarily in the securities of small and medium-sized companies (those with sales of less than $500 million) which fall outside of the Standard & Poor's 500 Index of securities and which securities may be speculative. The Fund acquires securities on national security exchanges, on NASDAQ, and in the over-the-counter market, including new issues, and may invest up to 10% of its net assets in restricted securities, i.e., securities which are not readily marketable, and in repurchase agreements which mature in seven days or more. The Fund may also invest up to 10% of its total assets in securities of other registered investment companies. When the Investment Advisor so determines, the Fund reserves the right to invest, from time to time, temporarily for defensive purposes, an unlimited portion of its assets in investment grade debt securities (rated AA by Standard & Poor's Corp. and Aa by Moody's Investor Services, Inc.), United States Government securities and certificates of deposit, and to hold cash. When the Fund invests for defensive purposes, it may affect the attainment of the Fund's investment objective. Reference is made to the Statement of Additional Information for additional descriptions of the Fund's investment policies concerning investing in the shares of other investment companies, investing in repurchase agreements, the purchase and sale and the writing of put and covered call options. THE INVESTMENT POLICIES PARTICULARIZED DIVERSIFICATION The Fund is a diversified investment company. A diversified company is one which meets the following requirements: at least 75% of the value of its total assets is represented by cash and cash items (including receivables), 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, so 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. CONCENTRATION 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. 6 OPTIONS The Fund may write, purchase and sell put and covered call options, and may engage in strategies employing combinations thereof. Purchases by the Fund of put and call option contracts will be conducted so that immediately after purchase of any such contract the aggregate sum represented by premiums paid for such option contracts then held by the Fund, after deducting the proceeds of covered options sold, will not exceed 10% of the Fund's net assets. A put option purchased by the Fund constitutes a hedge against a decline in the price of a security owned by the Fund. A call option 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. Options may fail as hedging techniques in cases where the price movements of the securities underlying the options do not follow the price movements of the portfolio securities subject to the hedge. The maximum loss exposure involved in the purchase of an option is the cost of the option contract. See page ___ of Statement of Additional Information for further details. 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, among 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 7 warrants to acquire margin stock and debt convertible into a margin stock or carrying a warrant or right to purchase a 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 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 8 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 become illiquid after purchase and the Fund's Board of Directors will then determine what, if any action, is required. SHORT SALES 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 whatever its price may be at the time the Fund purchases it for delivery to the lender. When a short sale transaction is closed out by delivery of the securities, any gain or loss on the transaction is taxable as 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 that 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 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, 9 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. 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. FOREIGN SECURITIES Investments will be made primarily in securities of companies domiciled in the United States, but the Fund has authority to make investments in securities of issuers domiciled in foreign countries. Such securities involve risks that are different from those of domestic issuers, including the possibilities of (i) different political and economic developments, (ii) imposition of governmental restrictions, (iii) curtailment of dividends or principal through the use of currency blockage at the source, and (iv) nationalization, expropriation of the issuer or confiscatory taxation, (v) less regulation of business and industry practices, and (vi) higher brokerage commissions. Such securities also involve other considerations such as the then current exchange rate if such issuer does not pay interest or dividends in U.S. dollars. In addition, it may be more difficult to obtain and enforce a judgment against a foreign issuer, trading volume may be substantially less and more volatile, there may be less publicly available information about the foreign issuer, and foreign issuers generally are not subject to uniform accounting, auditing and financial reporting standards, practices and requirements comparable to those applicable to domestic issuers. Not more than 25% of the Fund's net assets may be invested in the securities of issuers domiciled in foreign countries. 10 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 or 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. 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. If gains from short term trading exceed 30% of the Fund's gross income during any year, the Fund will not qualify for tax treatment as a regulated investment 11 company for such year. See "Taxes, Dividends, and Capital Gains", page ____. There is, of course, no assurance that the Fund will obtain any gains from its short term investments. INVESTMENT RISKS The Fund is subject to certain types of risks. It is subject to the risks of the securities markets in which the portfolio securities of the Fund are traded. Securities markets are cyclical and the prices of the securities traded in such markets rise and fall at various times. These cyclical periods may extend over significant periods of time. The Fund is also subject to the risk that the Manager will not be successful in managing the Fund's portfolio. The Manager will make decisions on buying, selling or holding portfolio securities based upon the skills of the Manager in interpreting the available economic, financial and market data. 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. Because of the nature of the Fund, the Fund's shares should not be considered as a complete investment program. When considering an investment in the Fund, each investor should take into consideration his or her investment objectives and present and future financial needs as the Fund assumes an above average risk of loss. 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 for those investors 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 in exchange for the opportunity of realizing greater financial gains in the future. PORTFOLIO TURNOVER Because the Fund's investment approach stresses sensitivity to changes in the current and projected earnings of the companies represented in its portfolio and the effect of these changes in the market, the Fund's portfolio turnover rates may vary significantly from year to year. Moreover, purchases and sales of the Fund's shares may influence portfolio turnover rates. The Fund's portfolio turnover rate may vary significantly from year to year as well as within the year. A 100% turnover rate would occur, for example, if all the 12 securities in the Fund's portfolio were replaced in a period of one year. A greater portfolio turnover rate reflects a greater number of securities transactions. The gain realized on a greater number of portfolio transactions will be subject to tax. The Fund will be liable for the tax on such gains unless distributed and, if distributed, shareholders may be proportionately liable (see "Taxes, Dividends and Capital Gains", page ____). High portfolio turnover involves correspondingly greater brokerage commission costs to the Fund. Turnover can be expected to be higher than normal during periods when market fluctuations are more pronounced. To the extent that the Fund's portfolio transactions are effected through Bowling Green Securities, Inc. as broker, any increase in portfolio activity may be beneficial to that firm (and its owner Hans P. Utsch) because of brokerage commissions payable in connection therewith. See "Brokerage Allocation" and "Taxes, Dividends and Capital Gains" on pages ___ and ___ of the Statement of Additional Information. For 1993, the Fund had a portfolio turnover rate of 55%, for 1994 of 47% and for 1995 of 60%. MANAGEMENT OF THE FUND INVESTMENT ADVISOR The Board of Directors has overall responsibility for the management of the Fund. Edgemont Asset Management Corporation, 140 E. 45th Street, 43rd Floor, New York, New York 10017 ("Edgemont"), is the Fund's investment advisor. Under the terms of the Investment Advisory Agreement, Edgemont, for the fee described below, provides investment management services to the Fund. Edgemont is responsible for the overall management of the Fund's business affairs. Edgemont has served as investment advisor to the Fund or its predecessor since 1985. Mr. Hans T. Utsch is Chairman of the Board, a Director and Secretary and Mr. Lawrence Auriana is a Director, President and Treasurer of Edgemont. Mr. Utsch has been engaged in the securities business since 1962 as an analyst, money manager and investment banker. Mr. Auriana has been engaged in the securities business since 1965 as an analyst, broker and venture capitalist. Messrs. Utsch and Auriana co-founded Edgemont in August, 1984, and they have been responsible for managing the Fund's portfolio since March 15, 1985. Neither of them acts as a portfolio manager of any other fund or investment company. The Annual Report of the Fund contains additional performance information; a copy will be made available upon request and without charge. 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. 13 Edgemont performs such duties in accordance with any directions it may receive from the Fund's Board of Directors. The Fund has permitted Edgemont to use Bowling Green Securities, Inc. ("Bowling Green") as one of the Fund's principal brokers for exchange traded securities transactions only. Mr. Utsch is the owner of Bowling Green; Mr. Auriana serves as a registered representative of Bowling Green. Any use of Bowling Green must be in compliance with Section 17(e) of the Investment Company Act and the rules thereunder. Edgemont will receive a fee, payable monthly, for the performance of its services at an annual rate of 1-1/2% of the average net assets of the Fund. The fee will be accrued daily for the purpose of determining the offering and redemption price of the Fund's shares. The advisory fee is higher than that charged by most other management investment companies. The Fund's total expenses for the year ending December 31, 1995, before expense reimbursement were $54,141,619; the net expenses after reimbursement were $50,641,249 or 2.17% of average net assets after expense reimbursement. PURCHASE OF FUND SHARES BY MAIL ALL PURCHASES MADE BY CHECK SHOULD BE IN U. S. DOLLARS AND MADE PAYABLE TO THE KAUFMANN FUND, INC. OR IN THE CASE OF A RETIREMENT ACCOUNT THE CUSTODIAN. THIRD PARTY CHECKS EXCEPT THOSE PAYABLE TO AN EXISTING SHAREHOLDER WHO IS A NATURAL PERSON (AS OPPOSED TO A CORPORATION OR PARTNERSHIP) AND CHECKS DRAWN ON CREDIT CARD ACCOUNT WILL NOT BE ACCEPTED. Shares of the Fund may be purchased at the per share net asset value (see p. ___) by sending a completed subscription Application (included in the Prospectus or obtainable from the Fund) to the Transfer Agent, accompanied by a check payable to The Kaufmann Fund, Inc. in payment for shares. Subscription Applications sent to the Fund will be forwarded to the Transfer Agent, and will not be effective until received by the Transfer Agent. The price at which the shares will be purchased will be their net asset value as determined after receipt of such subscription by the Transfer Agent. The minimum initial investment by a shareholder is $1,500 ($500 for IRA Accounts and accounts opened under the Automatic Investment Plan) or such lower amount as the Board of Directors of the Fund may, time to time, establish. Subsequent purchases by mail (minimum of $100) may be made by sending to the Transfer Agent the stub from the shareholder statement with the shareholder's full name and account number along with a check payable to The Kaufmann Fund, Inc. The Fund will not accept mail orders without payment enclosed, nor will the Fund accept a conditional purchase order. THE FUND RESERVES THE RIGHT, IN ITS SOLE DISCRETION, TO REJECT ANY SUBSCRIPTION. 14 BY TELEPHONE (ONLY FOR INVESTORS WHO HAVE MADE A WRITTEN ELECTION TO DO SO - SEE "GENERAL" BELOW) Subsequent investments may be made by telephone by calling the Transfer Agent at (800) 261-0555. Telephone purchase orders from existing shareholders may be placed in an amount ($1,000 minimum or such lower amount as may be established by the Board of Directors) not exceeding $10,000 or seven times the shareholder's then current account balance, whichever is less. Telephone orders will be taken in dollar amounts only, for full and fractional shares. Payment for shares purchased must be received by the Transfer Agent by the seventh day. No bill will be sent to the investor, and it will be the responsibility of the investor to make payment within the time limitation described herein. If payment is not received by the Transfer Agent, the shareholder's account will be charged for the amount of the purchase. For assistance, shareholders should call the Transfer Agent at (800) 261-0555. Investors desiring to make purchases other than by mail or telephone, or to purchase Fund shares in excess of the allowable limits for telephone purchase orders may transmit payment for Fund shares by bank wire (see "By Bank Wire", below). ACCURACY OF INVESTOR ACCOUNT INFORMATION The Fund will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. Such procedures may include, among others, requiring some form of personal identification prior to acting upon telephonic instructions, providing written confirmations of all such transactions, and/or tape recording of all telephonic instructions. ASSUMING PROCEDURES SUCH AS THE ABOVE HAVE BEEN FOLLOWED, NEITHER BOSTON FINANCIAL DATA SERVICES, INC., THE FUND'S TRANSFER AGENT, NOR THE FUND WILL BE LIABLE FOR ANY LOSS, COST, OR EXPENSE FOR ACTING UPON AN INVESTOR'S TELEPHONE INSTRUCTIONS. WE SHALL HAVE AUTHORITY, AS YOUR AGENT, TO REDEEM SHARES IN YOUR ACCOUNT TO COVER ANY SUCH LOSS. As a result of this policy, the investor will bear the risk of any loss unless the Fund has failed to follow procedures such as the above. BY BANK WIRE Shares of the Fund may be purchased by domestic or overseas bank wire. The wire order must contain registration instructions (i.e., full names and addresses of all investors, taxpayer identification number, and the account number). Shareholders opening an account must telephone in advance to obtain a new account number. The name of the Fund must appear on the wire for proper credit. The investor must have the bank wire transmitted to State Street Bank & Trust Co., ABA #011000028, for credit to Boston Financial Data Services, Inc. A/C #99050874 further credit 15 (Kaufmann/Shareholder's A/C# and name). Wires received by the Bank will be executed at the Fund's net asset value per share as next determined after receipt of the wired funds. For assistance the shareholder should call the Transfer Agent at (800) 261-0555. THROUGH BROKER-DEALERS Investors may, if they so desire, purchase Fund shares through registered broker-dealers. Such broker-dealers may make a charge to the investor for their services. Such fees and services may vary in amount among broker-dealers, who may impose higher initial or subsequent investment requirements than those established by the Fund. GENERAL After an initial investment, a shareholder may participate in the telephone purchase and redemption service only by making a written election to do so. The election may be on the initial application form or by writing to the Fund, with the shareholder's signature guaranteed. A shareholder who wants to change any telephone service option previously elected may do so by filing with the Fund a letter with instructions with the shareholder's signature guaranteed. (For guarantee instructions, see "Good Order for Redemption Requests" below.) ORDER NUMBERS ARE ASSIGNED TO TELEPHONE PURCHASE ORDERS IN ORDER TO DISTINGUISH PAYMENT FOR THOSE PURCHASE ORDERS FROM MAIL PURCHASE ORDERS. IF AN INVESTOR WHO UTILIZES THE TELEPHONE PURCHASE ORDER SERVICE FAILS TO INCLUDE THE ORDER NUMBER ON THE PAYMENT FOR SUCH PURCHASE ORDER, THE INVESTOR SHOULD BE AWARE THAT THE FUND MAY TREAT THIS AS A SEPARATE AND ADDITIONAL PURCHASE ORDER. IF SUCH AN EVENT OCCURS, RESULTING FROM THE INVESTOR'S FAILURE TO INCLUDE THE ORDER NUMBER ASSIGNED TO THE PURCHASE ORDER, THE INVESTOR'S ACCOUNT WILL BE CHARGED FOR ANY LOSS INCURRED FROM THE CANCELLATION OF THE PURCHASE ORDER. IN THE EVENT THE SHAREHOLDER'S ACCOUNT BALANCE IS INSUFFICIENT TO COVER THE LOSS, EDGEMONT ASSET MANAGEMENT CORPORATION WILL REIMBURSE THE FUND FOR THE DIFFERENCE: CONVERSELY, IF THE CANCELLATION RESULTS IN A GAIN, EDGEMONT ASSET MANAGEMENT CORPORATION WILL BE ENTITLED TO THE GAIN. SEE "ACCURACY OF INVESTOR ACCOUNT INFORMATION" PAGE ____. All checks should be made payable to The Kaufmann Fund, Inc. and should be drawn on a U. S. bank. Neither the Fund nor the Transfer Agent will accept checks drawn on a foreign bank unless provision is made for payment through a U. S. bank in U. S. dollars. If payment for any purchase order is not received by the Fund or the Transfer Agent, as specified herein, or if the investor's check is not honored upon presentment, 16 the order is subject to cancellation by the Fund, and the purchaser's existing account with the Fund immediately will be charged for any loss incurred. Each subscriber will be sent a Confirmation Advice in lieu of a stock certificate reflecting full and fractional shares purchased, unless a stock certificate is specifically requested in writing by all registered owners of such shares with their signatures guaranteed (see "Good Order for Redemption Requests" p. ___ for information on signature guarantees). It is recommended to all shareholders that a stock certificate not be requested unless needed for a specific purpose. This eliminates the trouble and expense of safeguarding the stock certificates and the cost of a lost instrument bond in the event of loss or destruction. The price for shares purchased will be their net asset value as next determined after receipt of a subscription at the office of the Transfer Agent. The net asset value of Fund shares is determined as of the close of trading on the New York Stock Exchange (which currently is 4:00 P.M. Eastern time) on each day that the Exchange is open for trading. Purchase orders, whether by mail or by telephone or wire, which are received prior to the close of trading on the New York Stock Exchange, will be executed at the net asset value per share as determined as of the close of trading on the New York Stock Exchange on that day. Purchase orders received after the close of trading, or on a day when the New York Stock Exchange is not open for business, will be executed at the net asset value per share next determined. The Fund reserves the right to discontinue the acceptance of telephone orders, without notice, and to waive minimum purchase requirements at its discretion. The Fund may also decline to accept any purchase when, in its judgment, acceptance would not be to the advantage or in the best interests of existing shareholders and may, on a case-by-case basis, prohibit or restrict purchase of its shares by an investor whose activity it deems excessive. A new account application is included at the end of this Prospectus or can be obtained by writing directly to the Fund. NET ASSET VALUE The Fund determines its net asset value per share by subtracting its liabilities (including accrued expenses and dividends payable) from its total assets (the market value of the securities the Fund holds plus cash and other assets, including dividends and income earned but not yet received) and dividing the result by the total number of outstanding shares in the Fund. For purposes of determining the value of the Fund's portfolio securities, interest will be recorded as accrued and dividends will be recorded on the ex-dividend date. Foreign securities traded on foreign exchanges are ordinarily valued at the last quoted sales price available before the time the Fund's assets are valued. 17 The Fund's portfolio securities are valued primarily based on market quotations, or, if quotations are not available, by a method that the Board of Directors believes accurately reflects fair value. In accordance with procedures approved by the Board of Directors, a pricing service, bank or broker-dealer experienced in such matters may be used to perform the above-described valuation functions. ACCOUNT STATEMENTS The Transfer Agent will send the shareholder a confirmation each time the shareholder purchases or redeems shares. The Transfer Agent will also send a statement after the end of each fiscal (calendar) year, which will show all share transactions including dividends and capital gains distributions for that year. The Fund will advise the shareholder annually of how such dividends or distributions are to be characterized for Federal income tax purposes. REDEMPTION OF SHARES GENERAL Shares may ordinarily be redeemed by mail, telephone, telegram, or overseas cable. The redemption price will be the net asset value per share as next determined after receipt of a redemption request in Good Order by the Transfer Agent (see "Determination of Net Asset Value", page ____), and may be subject to a redemption fee of 2/10th of 1%. GOOD ORDER FOR REDEMPTION REQUESTS Good Order means the request for redemption must include: (1) your share certificates, if any, endorsed by all registered shareholders for the account exactly as the shares are registered and the signature(s) must be guaranteed, as described below; (2) a "letter of instruction", which is a letter specifying the name of the Fund, the number of shares to be sold, the name(s) in which the account is registered, and your account number - your letter of instruction must be signed by all registered shareholders for the account using the exact names in which the account is registered (IF SHARE CERTIFICATES ARE NOT BEING TRANSMITTED, THEN THE SIGNATURE(S) ON THE LETTER OF INSTRUCTIONS MUST BE GUARANTEED); and (3) other supporting legal documents, as may be necessary, for redemption requests by corporations, estates, trusts, guardianships, custodianships, partnerships, pension and profit sharing plans. Signature guarantees, when required, must include guarantees for all registered shareholders for the accounts and must be guaranteed by an eligible guarantor. An eligible guarantor is one that is a participant in a STAMP Program (a Securities Transfer Agents Medallion Program). Please call the Transfer Agent at (800) 261-0555 with questions concerning eligible guarantors. 18 A signature guarantee is a widely recognized way to protect you by guaranteeing the signature on your request. Signature guarantee(s) will be accepted from banks, brokers, dealers, municipal securities dealers, credit unions (if authorized by state law), national securities exchanges, registered securities associations, clearing agencies and savings associations. A SIGNATURE GUARANTEE BY A NOTARY PUBLIC WILL NOT BE ACCEPTED. A fee will be charged on the redemption of shares equal to 2/10th of 1% of the redemption price of the shares of capital stock of the Fund being redeemed, if such shares were purchased after February 1, 1985. The redemption fee is payable to the Fund out of the redemption price otherwise payable to such shareholders. No such fee may be imposed on the shares of the Fund purchased on or before February 1, 1985. Redemption fee proceeds will be applied to the Fund's aggregate expenses allocable to providing redemption services, including transfer agent fees, postage, printing, telephone costs and employment costs relating to the handling and processing of redemptions. Any excess fee proceeds will be added to the Fund's assets. Payments for shares redeemed will be made no later than the third business day after the valuation date unless otherwise expressly agreed by the parties at the time of the transaction. However, redemption proceeds will not be transmitted until the investor's personal or bank check for the purchase of Fund shares has cleared. When share purchases are paid for by check or periodic automatic investment, redemptions will not be allowed unless the investment being redeemed has been in the account for 15 business days. WHERE A SHAREHOLDER SIMULTANEOUSLY REDEEMS SHARES FOR WHICH PAYMENT HAS CLEARED AND SHARES FOR WHICH PAYMENT HAS NOT CLEARED, THE SHAREHOLDER AUTHORIZES THE FUND TO DELAY TRANSMITTAL OF ALL OF THE REDEMPTION PROCEEDS UNTIL ALL PAYMENTS HAVE CLEARED. Where a shareholder elects to have the redemption proceeds transmitted directly to the shareholder's predesignated account at a domestic bank, the proceeds will be sent via ACH. In the event your bank is not an ACH member, the proceeds will be sent by wire. Redemptions of less than $1,000 will be sent to your bank by check. The Transfer Agent will not honor any redemption request that contains a restriction as to the time, date or share price at which the redemption is to be effective. BY MAIL Shares of the Fund may be redeemed by mail by writing directly to the Transfer Agent and enclosing the duly endorsed stock certificate, if one has been issued, with signatures guaranteed. See "Good Order for Redemption Requests" above. There are no special forms for redemption. Shareholders residing abroad may obtain a signature verification from any U.S. Consulate under official seal. 19 BY TELEPHONE, TELEGRAM OR OVERSEAS CABLE Shares of the Fund may be redeemed by calling (800) 261-0555, or by sending a telegram to the Transfer Agent, or an overseas cable. In order to utilize the procedure for redemption by telephone, telegram or overseas cable, a shareholder previously must have elected this procedure in writing, the shareholder's account must have been opened previously by the shareholder and be reflected as such in the computer records of the Transfer Agent, the stock certificate for shares being redeemed must be held by the Transfer Agent, and the redemption proceeds must be transmitted directly to the shareholder's predesignated account at a domestic bank (see "Good Order for Redemption Requests" above). A shareholder may elect at any time to use the telephone, telegram or overseas cable redemption service. For assistance the shareholder should call the Transfer Agent at (800) 261-0555. When utilizing the telephone, telegram or overseas cable redemption service, the shareholder must give the full name, number of shares to be redeemed and account number or the redemption request will not be processed. See "Accuracy of Investor Account Information," p. ____ for information regarding redemptions by telephone. Shareholders should understand that with the telephone redemption option, they may be giving up a measure of security that they might otherwise have if they were to redeem their shares in writing. In addition, interruptions in telephone service may mean that a shareholder will be unable to effect a redemption by telephone when desired. The Fund reserves the right to change or discontinue without prior notice, the procedures for or availability of, telephone service for redemption requests. REDEMPTION AT THE OPTION OF THE FUND If the value of the shares in a shareholder's account is less than $500, the Fund may notify the shareholder that, unless the account is brought up to $500 in value, it will redeem all the shareholder's shares and close the account by paying the shareholder the redemption price (less the redemption fee, if any) and dividends and distributions declared and unpaid at the date of redemption. The Fund will give the shareholder thirty days after it sends the notice to bring the account up to $500 before any action is taken. This minimum balance requirement does not apply to IRAs and other tax-sheltered investment accounts. This right of redemption shall not apply if the value of a shareholder's account drops below $500 as the result of market action. The Fund reserves the right to do this because of the expense to the Fund, in relation to the size of the investment, of maintaining small accounts. 20 REDEMPTION 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 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. The Fund intends to also pay redemption proceeds in excess of such lesser amount in cash, but reserves the right to pay such excess amount in kind, if it is deemed to be in the best interest of the Fund to do so. 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. Investors receiving an in kind distribution are advised that they will likely incur a brokerage charge on the disposition of such securities through a broker. 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. TAXES, DIVIDENDS AND CAPITAL GAINS The Fund intends to qualify as a "regulated investment company" under the Internal Revenue Code, as amended, with the result that taxable income of the Fund will be reduced by the amount of distributions to shareholders. The Fund intends to distribute all of its net investment income and net capital gains, if any, annually. If necessary to satisfy certain distribution requirements of the Tax Reform Act of 1986, the Fund may declare special year-end dividend and capital gains distributions during December. Such distributions, if received by shareholders by January 31 are deemed to have been paid by the Fund and received by shareholders on December 31st of the prior year. Such income dividends and capital gains distributions, as may be paid, will be reinvested in shares of the Fund at net asset value or, at the election of each shareholder, paid in cash. Unless the shareholder specifically instructs otherwise, all such dividends and distributions will be reinvested in additional shares of the Fund, at net asset value. Dividends and distributions are taxable to the shareholder whether taken in cash or reinvested in additional shares. Distributions of income dividends and short-term capital gains are taxable to the shareholders as ordinary income. Dividends (but not capital gains) paid by the Fund qualify for the 70% dividends received deduction for corporations unless derived from interest income or foreign source income. Distributions from long-term capital gains, whether paid in cash or additional shares of the Fund, are taxable to the shareholder for Federal income tax purposes as a long-term capital gain, regardless of the length of time Fund shares have been held by the shareholder. 21 If you purchase shares shortly before the record date for a dividend or a capital gains distribution, a portion of your investment will be returned to you as a taxable distribution, whether you elect to receive your dividends and distributions in additional Fund shares or take them in cash. Shareholders may be proportionately liable for taxes on income and gains of the Fund, but shareholders not subject to tax on their income will not be required to pay tax on amounts distributed to them. 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 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. Information as to the tax status of dividends and distributions paid to the shareholders will be furnished annually by the Fund. Shareholders should consult their own tax advisers with respect to any applicable state and local taxes on such dividends and distributions. CAPITAL STOCK The Fund, a Maryland corporation, has an authorized capitalization of one 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 22 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 Directors will not be able to elect anyone to the Board of Directors. Shareholders having questions concerning the Fund or their accounts should call the Transfer Agent at (800) 261-1700. SPECIAL INVESTOR SERVICES THE KAUFMANN/RESERVE FUND MONEY MARKET SWITCH PLAN ONLY REGULAR AND IRA ACCOUNTS MAY PARTICIPATE Shareholders may elect to participate in the Kaufmann/Reserve Fund Money Market Switch Plan (the "Switch Plan" or "Plan"), and thereby have the proceeds ($1,000 minimum, unless lowered by the Fund's Board of Directors) from the redemption of their Fund shares invested directly in shares of The Reserve Fund, Inc. ("Reserve"), or have the proceeds from the redemption of the Reserve shares reinvested directly in shares of the Fund. Investors may elect to participate by completing the portion of the application form which refers to the Switch Plan. The Fund and Reserve are not responsible to Switch Plan participants for purchase or redemption delays under the plan as long as the Fund and Reserve transmit the proceeds in accordance with written arrangements between the Fund and Reserve in connection with the Plan. For Shareholders who have elected to participate in the Plan, the "switch" from Fund shares into Reserve shares may be made by calling the Transfer Agent at (800) 261-1700. The proceeds, less the combined amount of 2/10th of 1% of such redemption proceeds retained by the Fund and Transfer Agent charges, if any, will be wired to Reserve on the seventh day following the "switch" request. Reinvestment in Fund shares will not be possible until the eighth day after the date of the "switch" from the Fund to Reserve. For reinvestment in shares of The Kaufmann Fund, Inc., call the Transfer Agent at (800) 261-0555 and instruct it to redeem your Reserve shares and reinvest the proceeds in your open account with The Kaufmann Fund, Inc. The limitation described on page ____ for telephone purchase orders does not apply to these reinvestment requests, there being no maximums for reinvestments from Reserve. However, any investor who deviates from the previously described procedure for reinvestment will be, among other things, subject to the maximums described on page ____ for telephone purchase orders. Any such reinvestment request received by Fund's transfer agent 23 prior to 4:00 p.m. East Coast Time, will be processed at that day's closing net asset value for Fund shares; requests received after 4:00 p.m. East Coast time will be processed at the next day's net asset value. For Reserve yield information, the number to call is (800) 637-1700. For Federal income tax purposes, any such switch into Reserve will be regarded as a sale of Fund shares and the purchase of the other. The Fund and Reserve retain the right to limit the number of times the "switch" may be used by any shareholder within a specified period of time, and the Plan may be terminated at any time by either the Fund or Reserve. AUTOMATIC INVESTMENT PLAN You can make regular investments in The Kaufmann Fund, Inc. with an Automatic Investment Plan by completing the appropriate section of the account application and attaching a voided personal check. Investments may be made monthly by automatically deducting $50 or more from your bank checking account. You may change the amount of your monthly purchase at any time. There is a $500 minimum initial investment requirement for automatic investment plans. Shares will be purchased at the price next determined following receipt of the order by the Transfer Agent. You may cancel the Automatic Investment Plan at any time without payment of a cancellation fee. You will receive a confirmation from the Transfer Agent for every transaction, and a debit entry will appear on your bank statement reflecting a charge to your bank account. Upon completion of the necessary authorization form which is at the back of this prospectus or which may be obtained from the Transfer Agent by calling (800) 261-0555 and the forwarding of such form to the Transfer Agent, the shareholder's bank account will be debited for each investment being made to purchase Fund shares at net asset value. Shares may be redeemed by telephone if the Shareholder elects that option on the Account Application. The Shareholder may have the proceeds deposited directly in a checking or savings account previously designated on the Account Application. Under most circumstances, payments will be transmitted on the third business day following receipt of a valid request for redemptions. ACH redemption requests may be made by Shareholder by calling Boston Financial Data Services, Inc. at (800) 261-0555. Shareholders may close their accounts by telephone. SYSTEMATIC WITHDRAWAL PLANS If you own shares of The Kaufmann Fund, Inc. worth $5,000 or more, you may periodically have proceed checks sent from your account to you, to a person named by you, or to your bank checking account. Your Systematic Withdrawal Program 24 payments are drawn from share redemptions. If Systematic Withdrawal Program redemptions exceed income dividends earned on your shares, your account eventually may be exhausted. Shareholders considering this Plan should first contact the Fund's Transfer Agent by calling (800) 261-0555 for details concerning this Plan. An investor may initiate such a Plan by completing the Systematic Withdrawal Plan Section of the Application which is contained at the back of this Prospectus. RETIREMENT PLANS AND IRA ACCOUNTS Shares of the Fund may be purchased directly by existing retirement plans which allow such investments. In addition, qualified individuals may establish an Individual Retirement Account ("IRA") to be funded with shares of the Fund. State Street Bank and Trust Company acts as custodian for any IRAs thus created. For further information, an interested person should call Boston Financial Data Services at (800) 261-0555. 25 SHAREHOLDER STATEMENTS AND REPORTS Each time you buy or sell shares or reinvest a dividend or capital gains distribution in the Fund, you will receive a statement confirming such transaction and listing your current share balance with the Fund. You will also receive annual and semi-annual reports and year-end tax information about your account(s). DISTRIBUTION PLAN The Fund has adopted a distribution plan (the "Distribution Plan"), pursuant to which the Fund may incur distribution expenses of up to .75% per annum of the Fund's average daily net assets. 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 to 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. SERVICE FEES The Fund may also pay continuing service fees to broker dealers for personal service and for the maintenance of shareholder accounts. Such payments shall not exceed .25% per annum of the Fund's average daily net assets. TRANSFER AGENT AND CUSTODIAN Boston Financial Data Services, Inc., Post Office Box 8331, Boston, MA 02266-8331 acts as shareholder servicing and transfer agent for the Fund. State Street Bank and Trust Company, 225 Franklin Street, Boston, MA 02110 serves as custodian of the Fund's assets, including its portfolio securities. QUESTIONS CONCERNING SHAREHOLDER ACCOUNTS SHOULD BE DIRECTED TO BOSTON FINANCIAL DATA SERVICES, INC. BY CALLING (800) 261-0555. 26 MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE FOR 1995 The Fund's performance last year reflected the same investment strategy that we have pursued since we started managing the Fund's portfolio in 1986. We seek out companies with rapidly growing sales and earnings, that have positions of leadership in expanding markets, with proprietary products or know-how, proven management and strong balance sheets. We invest in such true growth companies for the long-term, frequently establishing an initial position as a result of an IPO (Initial Public Offering) and adding to it as we gain more confidence in the company's management and strategy. During 1994, the Fund achieved substantial gains in many of its core holdings, including Altera (programmable logic integrated circuits), Breed Technology (auto crash sensors & airbag systems), Exide (lead-acid batteries), Infosoft (software tools for text management), MediSense (self-administered blood glucose monitoring systems), Microchip Technology (field programmable 8-bit microcontrollers), Nukote Holdings (office printing cartridges) and Sun Healthcare (nursing homes, subacute care and rehab therapy). We took advantage of market weakness in the Spring and early Summer to add to these positions, and were rewarded for our timing when prices rebounded in the latter half of the year. The advantage of investing in small growth companies is clear to us. Historically, they have generated higher returns than large companies. What is important is selecting the right companies. In our view, there is no substitute for personally meeting with the management of companies, comparing them to their competitors, and carefully analyzing the fundamentals of their business. As the managers of the Kaufmann Fund, this is what we do every working day, with the sole aim of continuing to provide you, the individual investor, with superior rates of return over the long-term. 27 DESCRIPTION OF GRAPHIC MATERIAL Graphic material in the form of a comparison of the S&P 500 Index, the NASDAQ Index and the Kaufmann Fund has been included in the paper copy of Post-Effective Amendment No. 45. In accordance with the provisions of Regulation 304, here follows a fair and accurate narrative description of the graphic material.
ANNUAL TOTAL RETURN 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- KAUFMANN 36.89 8.99 18.18 11.32 79.18 -6.14 46.85 58.57 -37.16 1.80 S&P 37.53 1.31 10.06 7.61 30.40 -3.11 31.63 16.56 5.25 9.80 NASDAQ 39.92 -3.20 14.75 15.45 56.84 -17.80 19.26 15.41 -5.26 -2.98
The annual total return figures for the Kaufmann Fund, Inc., for the NASDAQ Index and for the S&P 500 Index are presented graphically on an index scale ranging from 0 to 500 and a year scale for the years ending 12/31/85 (equals zero) through 12/31/95. The performance of the S&P Index commences at 100 on 12/31/85. Whereas the performance of the NASDAQ Index and the Fund commences 12/31/86. As of 12/31/95 the S&P Index is shown at 370, the NASDAQ Index at 250 and the Fund at 500. PART B THE KAUFMANN FUND, INC. STATEMENT OF ADDITIONAL INFORMATION ___________________________________ 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 March 11, 1996, 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. Date of Statement of Additional Information: March 11, 1996. TABLE OF CONTENTS Page ---- General Information and History . . . . . . 1 Investment Objective and Policies . . . . . . 1 Investment Restrictions . . . . . . . . 4 Management of the Fund . . . . . . . . 5 Principal Holders of Securities . . . . . . 7 Investment Advisory Services . . . . . . . 7 Brokerage Allocation . . . . . . . . 9 Potential Conflicts . . . . . . . . . 11 Distribution Plan . . . . . . . . . 11 Special Investor Services . . . . . . . 12 Purchase and Redemption of Shares . . . . . . 14 Taxes, Dividends and Capital Gains . . . . . 14 Custodian . . . . . . . . . . . 15 Auditor . . . . . . . . . . . 15 Financial Statements . . . . . . . . 15 Performance Information . . . . . . . . 15 Additional Performance Information for the Fund . . . 17 GENERAL INFORMATION AND HISTORY General information relating to the Fund and its history will be found on p. ___ of the prospectus under the caption "The Fund." INVESTMENT OBJECTIVE AND POLICIES The Fund's investment objective and certain of its investment policies are described on pages ___ through ___ of 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 that the Fund may 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 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 redemption fees 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 adviser to be creditworthy. The Fund's investment adviser 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 1 repurchase agreements and in restricted securities. Repurchase agreements are considered to be loans by the Fund under the Investment Company Act of 1940. Options 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 terms. 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. A call constitutes a hedge against an increase in the price of a security which the Fund has sold short, 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 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 2 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 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 a 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 3 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. 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. ___ of the Fund's prospectus. 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 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 4 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 year continuous operation. 10. Invest in oil, gas or mineral leases. 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 5 He 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 port- folio. Age: 59. *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: 52. Leon Lebensbaum; Director 3601 Hempstead Turnpike, Levittown, New York 11756 Mr. Lebensbaum, an attorney and a certified public accountant, has been in private practice since 1970. He is currently a general partner in the accounting firm of Lebensbaum and Russo, an accounting firm. Prior thereto he was a Special Agent in the Intelligence Division of the Internal Revenue Service. Age: 72. 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: 65. 6 Pauline Gold, Esquire; Director 150 Bay Street, Staten Island, New York 10301 Mrs. Gold in an attorney and, since 1964, has been engaged in the private practice of law. Age: 57. Roger E. Clark; Director 116 Juniper Road, 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: 61. Remuneration of Directors and Officers - -------------------------------------- The Directors, other than Messrs. Utsch and Auriana, presently receive an annual retainer of $15,000 plus $2,000 for each Board of Directors' Meeting or Committee Meeting attended, plus expenses. Directors fees for the year ended December 31, 1995 totalled $101,500. *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 At the close of business on December 31, 1995, no person was known by the Fund to own, of record or beneficially, more than 5% of the Fund's outstanding shares. No person controls the Fund. 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. 7 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 6, 1995 called for the purpose of voting on such Agreement. It will continue in effect until October 30, 1996 and thereafter for successive annual periods provided that such continuance is specifically approved at least annually by (a) the Fund's Board of Directors, or (b) the vote of a majority of the Fund's outstanding voting shares; provided, that in either event, 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. 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. It is Edgemont's responsibility to arrange for the purchase and sale of the Fund's portfolio securities. Edgemont furnishes the Fund, at no cost, with the services of those of Edgemont's 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 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 $10,119,921 and $18,927,894 and $35,051,628 in management fees for 1993, 1994, and 1995 respectively. Edgemont has agreed that if, in any fiscal year, the Fund shall qualify its shares for sale in any jurisdiction, the applicable statutes or regulations of which expressly limit the amount of the Fund's total annual expenses, Edgemont shall reduce its annual investment advisory fee to the extent that the Fund's total annual expenses as a percentage of average net assets (other than brokerage commissions and other capital items, interest, taxes, extraordinary items and other excludable items, charges, costs and expenses) exceed the percentage limitations imposed on the Fund by the most 8 stringent regulations of any such jurisdiction, so long as the Fund remains so qualified in such jurisdiction. California presently limits expenses to 2-1/2% of the first $30 million of the average net assets of the Fund, 2% of the next $70 million and 1-1/2% of all in excess of $100 million. California law permits the amount of the distribution and service fees payable by the Fund to be excluded from total annual expenses. Fees reimbursed to the Fund for the year 1993 were $1,106,791, for 1994 were $1,990,108, and for 1995 were $3,500,370. 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 which 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 brokerage and research services provided 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 tends, 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. 9 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. 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 1993 and 1994, the Fund paid $3,337,777 and $3,370,645, respectively, in brokerage commissions. Of these amounts $73,216 in 1993 and $173,360 in 1994 were paid to Bowling Green Securities. During 1995, total brokerage commissions in the amount of $4,530,898 were paid on total transactions of 10 $1,137,807,812. Of the total amount of commissions paid, 1.13% was paid to Bowling Green Securities on .89% of the total portfolio transactions effected. Of the $51,020 in commissions paid to Bowling Green Securities, $15,850 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) 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. 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. 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 30, 1996, 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 11 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 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 1995, the following sums were spent for the following purposes. Advertising: Print, Radio & TV $6,588,659.00 Printing and Mailing: Sales literature & Prospectuses to other than current shareholders 2,783,253.00 Compensation to Dealers 11,370.00 Compensation to Sales Personnel 191,031.00 Other: Postage 1,856,922.00 Telephone 32,922.00 Professional Fees and Wages 845,368.00 Miscellaneous 86,233.00 SPECIAL INVESTOR SERVICES A shareholder may make arrangements for an Automatic Investing Plan. There is a one time set-up charge of $5. The Automatic Investing Plan may be changed or canceled at any time upon receipt by the Fund's Transfer Agent of written instructions or an amended application from the shareholder with signatures 12 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. 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. In connection with the creation of an IRA account, 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 - -------------------------- Fund shares are available for Simplified Employee Pension Plans (SEP-IRAs). Contact the Transfer Agent at (800) 637-1700 for details on eligibility and other information. 13 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. The redemption of shares, in order to make payments under this plan, will reduce and may eventually exhaust the account. 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 on pages ___ through ___ of the Fund's Prospectus. A description of the procedure for the determination of the net asset value of the Fund's shares is contained on page ___ of the Fund's Prospectus. 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. Among the requirements for such qualification is that less than 30% of the Fund's income must be derived from gains from the sale or other disposition of securities held for less than three months. Accordingly, the Fund may be restricted in the writing of options on securities which have been held for less than three months, in the writing of options which expire in less than three months, and in effecting closing purchase transactions. In addition, 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 gain 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. 14 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. 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. 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 late financial statements of the Fund appear at the end of this Statement of Additional Information. 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 represents approximately 80% of the market capitalization of the United States equity market. In comparison, the NASDAQ National Market System is comprised of all 15 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 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 weighted. 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, Baron'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 invests; (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 16 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 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. 17 The Kaufmann Fund, Inc. ----------------------- STATEMENT OF ASSETS AND LIABILITIES ----------------------------------- December 31, 1995 ----------------- ASSETS Investments in securities, at current market value (Identified cost $2,024,659,437) (Notes 1, 5 and 7) $ 2,991,004,816 Temporary investments in short-term securities (Note 6) 90,391,799 Cash 18,841 Deposit with custodian bank for securities sold short 64,500,000 Receivable from brokers for securities sold short 140,144,348 Proceeds receivable from investment securities sold 20,218,514 Receivable for fund shares subscribed 9,295,105 Dividends and interest receivable 2,201,754 Due from Investment Advisor (Note 2) 259,598 Receivable, other 22,827 -------------- Total assets 3,318,057,602 -------------- LIABILITIES Securities sold short, at current market value (Proceeds $119,446,071) (Notes 1 and 5) 120,700,803 Payable for investment securities purchased 29,308,651 Payable for fund shares redeemed 3,588,333 Payable, other 1,149,809 -------------- Total liabilities 154,747,596 -------------- NET ASSETS $ 3,163,310,006 ============== NET ASSETS CONSIST OF: Capital paid-in $ 2,173,000,880 Accumulated net realized gain on investments 89,474,125 Net unrealized appreciation of investments 965,090,647 Accumulated net investment loss ( 64,255,646) -------------- Total net assets $ 3,163,310,006 ============== Net asset value per share (based on 626,599,560 shares outstanding - 1,000,000,000 shares authorized with $.10 per share par value) $5.05 ===== The accompanying notes are an integral part of these financial statements. The Kaufmann Fund, Inc. ----------------------- STATEMENT OF OPERATIONS ----------------------- Year ended December 31, 1995 ---------------------------- INVESTMENT INCOME Income: Dividends, net of $82,217 of foreign taxes withheld (including $3,413,397 received from affiliated issuers) $ 9,602,797 Interest 12,469,881 ------------ Total income 22,072,678 ------------ Expenses: Investment advisory fee (Note 2) 35,051,628 Distribution fee (Note 2) 12,395,758 Shareholder servicing costs 2,280,259 Service fees (Note 3) 1,815,499 Custodian fees 347,340 Printing and office expense 457,765 Registration fees 265,845 Accounting and auditing 299,828 Administrative costs 120,426 Dividends on securities sold short 292,234 Legal 137,440 Directors' fees 101,500 Loan commitment fees (Note 8) 194,792 Other 381,305 ------------ Total expenses 54,141,619 Expense reimbursement by Investment Advisor (Note 2) ( 3,500,370) ------------ Net expenses 50,641,249 Net investment loss ( 28,568,571) ------------ REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain on investments 118,808,032 Change in net unrealized appreciation of investments 634,381,187 ------------ Net realized and unrealized gain on investments 753,189,219 ------------ Net increase in net assets resulting from operations $ 724,620,648 ============ The accompanying notes are an integral part of these financial statements. The Kaufmann Fund, Inc. ----------------------- STATEMENT OF CHANGES IN NET ASSETS ---------------------------------- Years ended December 31, 1995 and 1994 -------------------------------------- 1995 1994 -------------- -------------- INCREASE (DECREASE) IN NET ASSETS Operations: Net investment loss $( 28,568,571) $( 20,047,015) Net realized gain on investments 118,808,032 7,398,695 Change in net unrealized apprecia- tion of investments 634,381,187 134,778,328 -------------- -------------- Net increase in net assets resulting from operations 724,620,648 122,130,008 Distributions (Note 4): Dividends from net investment income - - Distributions from net realized gain ( 56,050,609) - Capital share transactions (Note 4) 902,189,313 503,789,076 -------------- -------------- Total increase in net assets 1,570,759,352 625,919,084 Net assets: Beginning of year 1,592,550,654 966,631,570 -------------- -------------- End of year $ 3,163,310,006 $ 1,592,550,654 ============== ============== The accompanying notes are an integral part of these financial statements. The Kaufmann Fund, Inc. ----------------------- NOTES TO FINANCIAL STATEMENTS ----------------------------- December 31, 1995 ----------------- 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Organization ------------ The Kaufmann Fund, Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended, as a diversified open-end management investment company. The Fund was incorporated in the State of New York on September 11, 1967 and, upon approval of its shareholders, was reincorporated in Maryland on February 9, 1993 pursuant to a Plan of Merger. The investment objectives, policies and limitations of the Fund remain identical. The reincorporation of the Fund was a tax- free reorganization within the meaning of Section 368(a)(1) of the Internal Revenue Code and no gain or loss was recognized by the Fund or its shareholders. In 1986, there was a change in the Fund's management. The significant accounting policies following are in accordance with accounting policies generally accepted in the investment company industry. Security Valuation ------------------ Investments in securities traded on a national securities exchange and the NASDAQ National Market are valued at the last reported sales price as of the Fund's close of business on the date when the assets are valued. Over-the-counter securities which are not traded on the NASDAQ National Market and listed securities for which no sale was reported on the date when assets are valued are stated at the last available bid quotation. Foreign securities traded on foreign exchanges are ordinarily valued at the last quoted sales price available before the time the Fund's investments are valued. Securities for which quotations are not readily available, including restricted securities, are valued at fair value as determined by the Board of Directors. Security Transactions and Related Investment Income --------------------------------------------------- Security transactions are recorded on the trade date basis, which is the date the order to buy or sell is executed. Interest income and expenses are accrued on a daily basis. Dividend income and distributions to shareholders are recorded on the ex-dividend date. Realized gains and losses on sales of investment securities are determined on the identified cost basis. Foreign Currency Translation ---------------------------- The accounting records of the Fund are maintained in U.S. dollars. Investment securities and all other assets and liabilities of the Fund denominated in a foreign currency are translated into U.S. dollars at the exchange rate each day. Purchases and sales of securities, income receipts and expense payments are translated into U.S. dollars at the exchange rate in effect on the dates of the respective transactions. The Kaufmann Fund, Inc. ----------------------- NOTES TO FINANCIAL STATEMENTS (Continued) ----------------------------------------- December 31, 1995 ----------------- 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (Continued) The Fund does not isolate the portion of the fluctuations on investment resulting from changes in foreign currency exchange rates from the fluctuations in market prices of investments held. Such fluctuations are included with the net realized and unrealized gain or loss from investments. Federal Income Taxes -------------------- The Fund intends to distribute to shareholders its taxable investment income and net realized gains under provisions of the Internal Revenue Code applicable to regulated investment companies. Accordingly, no provision for Federal income taxes is required in the accompanying financial statements. 2. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES Edgemont Asset Management Corporation ("Edgemont") is the investment advisor to the Fund. Under the terms of the investment advisory agreement, Edgemont's investment advisory fee is calculated on an annual basis at 1.5% of the Fund's average net assets. The fee is payable monthly. For the year ended December 31, 1995, Edgemont received $35,051,628 for investment advisory services. The agreement provides for an expense reimbursement from Edgemont, to the extent of the investment advisory fee, if the Fund's annual expenses, other than brokerage commissions and other capital items, interest, taxes, extraordinary items and other excludible items, exceed any jurisdictional prescribed limitation. A reimbursement of $3,500,370 was required for the year ended December 31, 1995. The Fund has adopted a Plan pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended, whereby the Fund or Edgemont may finance activities which are primarily intended to result in the sale of the Fund's shares, including, but not limited to, advertising, printing of prospectuses and reports for other than existing shareholders, preparation and distribution of advertising materials and sales literature, and payments to dealers and shareholder servicing agents who enter into agreements with the Fund or Edgemont. The Fund or Edgemont may incur such distribution expenses at the rate of .75% per annum on the Fund's average net assets. For the year ended December 31, 1995, $12,395,758 of distribution expenses were incurred by the Fund, equivalent to .53% per annum of the Fund's average net assets. The Kaufmann Fund, Inc. ----------------------- NOTES TO FINANCIAL STATEMENTS (Continued) ----------------------------------------- December 31, 1995 ----------------- 2. INVESTMENT ADVISORY FEE AND OTHER TRANSACTIONS WITH AFFILIATES (Continued) The Fund imposes a 2/10ths of 1% (.2%) redemption fee on the redemption price of the Fund's capital stock shares that are redeemed, if such shares were purchased after February 1, 1985. The redemption fee is intended to be applied to the Fund's aggregate expenses allocable to providing redemption services, including, but not limited to, transfer agent fees, postage, printing, telephone costs and employment costs related to the handling and processing of redemptions. For the year ended December 31, 1995, $830,042 of redemption fees were charged by the Fund and $762,101 were allocated to cover the cost of redemptions. During 1995, the Fund placed a portion of its portfolio transactions through Bowling Green Securities, Inc., for which brokerage commissions of $51,020 were paid. Certain of the officers and directors of the Fund are affiliated with Edgemont and Bowling Green Securities, Inc. 3. SERVICE FEES The Fund has adopted an Authorization Agreement for the payment of a service fee not to exceed .25% per annum of the Fund's average net assets to broker dealers that provide liaison services to investors, including, but not limited to, responding to customer inquiries and providing information on their investments. For the year ended December 31, 1995, $1,815,499 of service fees were incurred by the Fund. 4. CAPITAL SHARE TRANSACTIONS On September 8, 1994, upon approval of the Board of Directors, the Fund increased its authorized shares of capital stock from 500,000,000 to 1,000,000,000. At December 31, 1995, there were 1,000,000,000 shares of $.10 par value capital stock authorized and capital paid-in aggregated $2,173,000,880. For the years ended December 31, 1995 and 1994, capital stock transactions were as follows: The Kaufmann Fund, Inc. ----------------------- NOTES TO FINANCIAL STATEMENTS (Continued) ----------------------------------------- December 31, 1995 ----------------- 4. CAPITAL SHARE TRANSACTIONS (Continued) Shares Amount -------------------------- ---------------------------- 1995 1994 1995 1994 ------------ ------------ -------------- ------------ Shares sold 290,667,544 219,627,230 $ 1,280,126,225 $ 768,434,031 Shares issued in reinvestment of distribution 10,762,711 - 53,274,117 - ------------ ------------ -------------- ------------ 301,430,255 219,627,230 1,333,400,342 768,434,031 Shares redeemed ( 98,938,557) ( 76,067,410) ( 431,211,029) (264,644,955) ------------ ------------ -------------- ------------ Net increase 202,491,698 143,559,820 $ 902,189,313 $ 503,789,076 ============ ============ ============== ============ 5. INVESTMENTS Portfolio Turnover Rate ----------------------- The portfolio turnover rate, which is calculated based on the lesser of the cost of investments purchased or the proceeds from investments sold (excluding securities sold short and short-term investments) measured as a percentage of the Fund's average monthly portfolio, for the year ended December 31, 1995, was 60%. Tax Basis of Investments ------------------------ At December 31, 1995, the cost of investments in securities and proceeds of securities sold short for Federal income tax purposes were $2,024,659,437 and $119,446,071, respectively. Accumulated net unrealized appreciation of securities was $965,090,647, consisting of gross unrealized appreciation and depreciation of $1,088,442,730 and $123,352,083 respectively. Investment Purchases and Sales ------------------------------ Purchases and sales of investment securities (excluding securities sold short and short-term investments) for the year ended December 31, 1995 were $2,000,356,100 and $1,286,785,578, respectively. The Kaufmann Fund, Inc. ----------------------- NOTES TO FINANCIAL STATEMENTS (Continued) ----------------------------------------- December 31, 1995 ----------------- 5. INVESTMENTS (Continued) Short Sales ----------- Short sales are transactions in which the Fund sells a security it does not own, in anticipation of a decline in the market value of that security. To complete such a transaction, the Fund must borrow the security to deliver to the buyer upon the short sale; the Fund then is obligated to replace the security borrowed by purchasing it in the open market at some later date. The Fund will incur a loss if the market price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund will realize a gain if the security declines in value between those dates. All short sales must be fully collateralized. The Fund maintains the collateral in a segregated account consisting of cash sufficient to collateralize the market value of its short positions. The Fund may also sell short "against the box" (i.e. the Fund enters into a short sale as described above, while holding an offsetting long position in the security which is sold short). If the Fund enters into a short sale against the box, it will segregate an equivalent amount of securities owned by the Fund as collateral while the short sale is outstanding. At December 31, 1995, the market value of securities separately segregated to cover short positions was $53,888,725. For the year ended December 31, 1995, the cost of securities purchased to cover short sales and the proceeds from securities sold short were $220,744,721 and $192,926,437 respectively. Securities sold short at December 31, 1995 and their related market values are set forth in the Schedule of Securities Sold Short. Restricted Securities --------------------- A restricted security is a security which has been purchased through a private offering and cannot be resold to the general public without prior registration under the Securities Act of 1933. Disposal of these securities may involve time-consuming negotiations and expense, and prompt sale at an acceptable price may be difficult. At December 31, 1995, the Fund held restricted securities with an aggregate value of $6,876,980, which represented 0.2% of the Fund's total net assets. Restricted securities are valued at fair value as determined by the Board of Directors. The Kaufmann Fund, Inc. ----------------------- NOTES TO FINANCIAL STATEMENTS (Continued) ----------------------------------------- December 31, 1995 ----------------- 6. TEMPORARY INVESTMENTS IN SHORT-TERM SECURITIES The temporary investments in short-term securities at December 31, 1995 were: 1) repurchase agreements with the Fund's custodian, State Street Bank and Trust Company and 2) shares of institutional money market funds. Following is a summary of the temporary investments at December 31, 1995: Repurchase Agreements $ 25,000,000 - 5.68%, dated 12/26/95, due 01/02/96, maturity value $25,027,611 (collateralized by $25,620,000 par value U.S. Treasury Notes, 4.75%, due 09/30/98, market value $25,500,968) 15,000,000 - 5.52%, dated 12/28/95, due 01/04/96, maturity value $15,016,000 (collateralized by $15,675,000 par value U.S. Treasury Bills, due 05/16/96, market value $15,302,249) 17,267,000 5.6%, dated 12/29/95, due 01/02/96, maturity value $17,277,744 (collateralized by $15,815,000 par value U.S. Treasury Notes, 7.5%, due 05/15/02, market value $17,614,011) ----------- $ 57,267,000 Total repurchase agreements =========== Money Market Funds $ 33,124,608 - Landmark Institutional Liquid Reserves 191 - Seven Seas Series ---------- 33,124,799 - Total money market funds ---------- $ 90,391,799 - Total temporary investments in short- ========== term securities The Fund's custodian takes possession, through the Federal Reserve Book Entry System, of the collateral pledged for investments in repurchase agreements. The underlying collateral is valued daily on a mark-to-market basis to ensure that the value, including accrued interest, is at least equal to the repurchase price. In the event of default of the obligation to repurchase, liquidation and/or retention of the collateral may be subject to legal proceeding. The Kaufmann Fund, Inc. ----------------------- NOTES TO FINANCIAL STATEMENTS (Continued) ----------------------------------------- December 31, 1995 ----------------- 7. TRANSACTIONS WITH AFFILIATED COMPANIES An affiliated company is a company in which the Fund has ownership of at least 5% of the voting securities. Transactions with companies which are or were affiliates are as follows: DOLLAR AMOUNTS IN THOUSANDS
PURCHASES SALES DIVIDEND MARKET AFFILIATES COST COST INCOME VALUE Access Health Marketing, Inc.* $ 422 $ 2,068 $ - $ 35,400 Action Performance Cos. Inc.* - - - 1,719 Advantage Health Corp.* 2,812 - - 30,058 Affiliated Computer Services Inc. - CLA* - - - 24,649 AHI Healthcare Systems Inc.* - - - 5,434 Alpha Industries Inc.* - - - 5,721 AMBAR, Inc.* - - - 2,439 Ambassadors International Inc.* - - - 3,851 Anika Research, Inc.* - 374 - 581 APPS Dental Inc.* 7,006 - - 0 Autotote Corp. - Class A* 27,311 7,853 - 5,875 Barrett Business Services, Inc. * 1,579 221 - 4,425 Bellwether Exploration Co.* 1,094 - - 3,594 Blyth Industries Inc.* 4,738 5,100 - 41,300 Cameron Ashley Inc.* 2,291 - - 5,637 CFI ProServices, Inc.* 1,389 2,004 - 6,805 Cincinnati Microwave Inc.* 9,996 4,381 - 0 Compdent Corp.* 5,468 3,564 - 20,958 Cort Business Services Corp.* 7,689 - - 9,537 C.P. Clare Corp.* 5,944 - - 10,250 CYRK, Inc. * 15,771 1,862 - 12,870 DonnKenny, Inc. * 12,942 1,106 - 23,925 Duff & Phelps Credit Rating Co. 2,563 - 51 6,885 Easel Corp.* - 1,262 - 0 Exide Corp. 5,166 11,161 64 32,112 FelCor Suite Hotels Inc. 5,150 2,850 966 16,650 FinishMaster Inc.* 481 - - 4,745 Great Lakes Aviation, Ltd.* 284 - - 2,134 Harvey's Casino Resorts, Inc. - 469 79 8,550 Health Management Systems, Inc.* - 4,447 - 11,700 Information Storage Devices Inc. 8,529 14,156 - 556 Inkeepers USA Trust 2,343 1,035 265 3,194 INSO Corp. * 1,738 14,587 - 15,937 Integrated Micro Products PLC ACR* - - - 4,625
The Kaufmann Fund, Inc. ----------------------- NOTES TO FINANCIAL STATEMENTS (Continued) ----------------------------------------- December 31, 1995 ----------------- 7. TRANSACTIONS WITH AFFILIATED COMPANIES (Continued) DOLLAR AMOUNTS IN THOUSANDS
PURCHASES SALES DIVIDEND MARKET AFFILIATES COST COST INCOME VALUE Isomedix Inc.* $ 705 $ - $ - $ 10,494 Kronos Inc.* - 3,745 - 11,875 Learmonth & Burchette Mgmt. Systems PLC* 2,837 - - 9,206 Level One Communications, Inc.* 558 13,490 - 0 Life Partners Group, Inc. 464 - 158 19,756 Lincare Holdings, Inc.* 6,739 - - 39,312 Manufactured Home Communities, Inc. 1,408 - 1,594 23,643 Maxim Group Inc., The* 6,076 - - 6,750 McAfee Associates Inc.* 2,200 10,741 - 23,034 MedChem Products, Inc.* 315 14,710 - 0 MediSence, Inc.* 8,145 8,440 - 34,471 Microchip Technology, Inc.* 12,627 8,021 - 60,955 Minntech Corp. 4,524 - 69 13,720 Monro Muffler Brake, Inc.* 706 406 - 7,631 National Dentex Corp.* 376 - - 5,806 National Gaming Corp.* 2,851 47 - 7,155 Nu-Kote Holdings Inc. - Class A* 1,321 1,520 - 39,950 O'Reilly Automotive, Inc.* 7,422 7,367 - 11,310 Orthofix International N.V.* - 2,513 - 2,950 Pacific Physician Services, Inc.* 1,532 11,010 - 0 Pediatric Services of America Inc.* 6,118 - - 5,867 Pet Practice Inc., The* 7,175 - - 5,125 Phamis Inc.* 1,084 3,966 - 2,975 Philadelphia Consolidated Holding Corp.* 1,921 - - 6,500 Physician Sales & Service, Inc.* 2,125 1,530 - 26,647 Physicians Resource Group Inc.* - 586 - 5,366 Pyxis Corp.* 11,205 - - 27,312 QuickResponse Services, Inc.* - 5,412 - 15,711 Rational Software Corp.* 11,098 301 - 21,928 Raytel Medical Corp.* 3,211 - - 3,400 Richey Electronics Inc.* 1,570 81 - 4,109 RTW Inc.* 2,190 - - 10,500 Shared Technologies, Inc.* 190 - - 1,734 Sheridan Healthcare Inc.* 5,200 - - 4,850 Software Artistry Inc.* 2,858 437 - 1,950 Sterling House Corp.* 3,650 - - 2,907 Summa Four, Inc.* 1,366 4,389 - 5,611 Sun Healthcare Group Inc.* 1,404 18,867 - 0
The Kaufmann Fund, Inc. ----------------------- NOTES TO FINANCIAL STATEMENTS (Continued) ----------------------------------------- December 31, 1995 ----------------- 7. TRANSACTIONS WITH AFFILIATED COMPANIES (Continued) DOLLAR AMOUNTS IN THOUSANDS
PURCHASES SALES DIVIDEND MARKET AFFILIATES COST COST INCOME VALUE Sylvan Learning Systems* $ 10,179 $ 216 $ - $ 23,800 Systemsoft Corporation* 224 7,246 - 0 Team Rent Group Inc.* 2,316 - - 1,866 Tekelec Inc.* 5,216 - - 6,405 Tele-Matic Corp.* 2,454 - - 0 Teltrend Inc.* 6,403 - - 16,363 Uniphase Corp.* 4,627 - - 9,295 Universal Standard Medical Labs, Inc.* 1,617 - - 2,975 Veritas Software Co.* 367 5,453 - 5,700 Wandal & Goltermann Technologies, Inc.* 765 3,845 - 0 Wolverine World Wide, Inc. 4,786 2,169 167 39,375 Zoll Medical Corp.* 3,994 1,213 - 9,788 ------- ------- ----- ------- $298,825 $216,221 $3,413 $958,193 ======= ======= ===== =======
* Non-income producing during the year 8. LINE OF CREDIT The Fund has a $100,000,000 commited secured leverage line of credit with its custodian bank. 75% of the total assets of the Fund are pledged as collateral against the line. Borrowings under the line are charged interest at 0.75% over the current Overnight Federal Funds Rate. The Fund incurs a commitment fee of 0.25% per annum on the unused portion of the line of credit, payable quarterly. There were no borrowings under the line of credit during the year ending December 31, 1995. The Kaufmann Fund, Inc. ----------------------- FINANCIAL HIGHLIGHTS -------------------- Selected Data For A Share Of Capital Stock Outstanding Throughout Each Year --------------------------------------------------------------------------- 1995 - ----------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF YEAR $ 3.76 - ----------------------------------------------------------------- INCOME FROM INVESTMENT OPERATIONS: Net Investment Income (Loss) (0.060) Net Realized and Unrealized Gain (Loss) on Investments 1.445 ------ TOTAL FROM INVESTMENT OPERATIONS 1.385 - ----------------------------------------------------------------- LESS DISTRIBUTIONS: Dividends from Net Investment Income - Distributions from Net Realized Gain 0.095 ------ TOTAL DISTRIBUTIONS 0.095 - ----------------------------------------------------------------- NET ASSET VALUE, END OF YEAR $ 5.05 - ----------------------------------------------------------------- TOTAL RETURN 36.84% - ----------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA: Net Assets, End of Year (In Thousands) $3,163,310 Ratio of Expenses (After Expense Reimbursement) to Average Net Assets (%) 2.17% Ratio of Interest Expense to Average Net Assets (%) .01% ------ Ratio of Expenses (After Expense Reimbursement Less Interest Expense) to Average Net Assets (%) 2.16% Ratio of Net Investment Income (Loss) to Average Net Assets (%) (1.24%) Portfolio Turnover Rate (%) 60% - ----------------------------------------------------------------- BORROWINGS FOR THE YEAR: Amount of Debt Outstanding at End of Year $ - Average Amount of Debt Outstanding During the Year $ - Average Number of Shares Outstanding During the Year (In Thousands) 626,600 Average Amount of Debt Per Share During the Year $ - The accompanying notes are an integral part of these financial statements. Year Ended December 31, ----------------------------------------------------------------- 1994 1993 1992 1991 ----------------------------------------------------------------- $ 3.45 $ 2.95 $ 2.65 $ 1.53 ----------------------------------------------------------------- (0.06) (0.049) (0.05) (0.05) 0.37 0.584 0.35 1.25 ------ ------ ------ ------ 0.31 0.535 0.30 1.20 ----------------------------------------------------------------- - - - - - 0.035 - 0.08 ------ ------ ------ ------ 0.00 0.035 0.00 0.08 ----------------------------------------------------------------- $ 3.76 $ 3.45 $ 2.95 $ 2.65 ----------------------------------------------------------------- 8.99% 18.18% 11.32% 79.18% ----------------------------------------------------------------- $1,592,551 $ 966,632 $ 314,371 $ 141,134 2.29% 2.53% 2.94% 3.64% .02% .03% .08% .52% ------ ------ ------ ------ 2.27% 2.50% 2.86% 3.12% (1.58%) (1.34%) (1.74%) (1.96%) 47% 55% 51% 128% ----------------------------------------------------------------- $ - $49,000,000 $4,015,968 $3,017,622 $3,776,120 $ 4,563,115 $3,260,421 $2,149,395 333,175 182,699 79,977 32,294 $ .01 $ .03 $ .04 $ .06 The Kaufmann Fund, Inc. ----------------------- SCHEDULE OF INVESTMENTS ----------------------- December 31, 1995 ----------------- Market STOCKS - 99.7% Shares Value - ------ ----------- ------------- COMPUTER HARDWARE & ACCESSORIES - 1.3% - -------------------------------------- Applied Magnetics Corp. * 440,000 $ 8,195,000 Diamond Multimedia Systems Inc. * 100,000 3,587,500 Integrated Micro Products PLC ADR + * 250,000 4,625,000 Komag Inc. * 150,000 6,918,750 Kronos Inc. + * 250,000 11,875,000 Network Appliance Corp. * 35,000 1,404,375 Read-Rite Corp. * 100,000 2,325,000 ------------- 38,930,625 ------------- COMPUTER SERVICES - 4.0% - ----------------- Affiliated Computer Services Inc. - Class A + * 657,300 24,648,750 Alternative Resources Corp. * 150,400 4,549,600 Black Box Corp. * 200,000 3,275,000 Concord EFS Inc. * 400,000 16,900,000 DST Systems Inc. * 1,000,000 28,500,000 Gartner Group Inc. - Class A * 50,000 2,393,750 Information Resources Inc. * 1,150,000 14,231,250 Meta Group, Inc. * 30,000 918,750 Pomeroy Computer Resources Inc. * 22,000 297,000 QuickResponse Services, Inc. + * 855,000 15,710,625 Uunet Technologies, Inc. * 123,440 7,776,720 ------------- 119,201,445 ------------- COMPUTER SOFTWARE - 8.2% - ----------------- Applied Microsystems Corp. * 50,000 450,000 Astea International Inc. * 95,000 2,173,125 Business Objects S.A. * 100,000 4,837,500 CBT Group Publishing Ltd. * 225,000 11,925,000 Cellular Technical Services, Inc. * 150,000 3,487,500 CFI ProServices, Inc. + * 457,500 6,805,312 Checkfree Corp. * 100,000 2,150,000 Cheyenne Software, Inc. * 1,050,000 27,431,250 Continuum Co., Inc. * 700,000 27,650,000 The accompanying notes are an integral part of these financial statements. The Kaufmann Fund, Inc. ----------------------- SCHEDULE OF INVESTMENTS ----------------------- December 31, 1995 ----------------- Market Shares Value ---------- ------------- COMPUTER SOFTWARE (Continued) - 8.2% - ----------------- Dendrite International Inc. * 100,000 1,800,000 Discreet Logic Inc. * 20,000 500,000 HNC Software Inc. * 5,000 238,750 HPR Inc. * 26,500 798,312 Hummingbird Communications Ltd. * 255,000 10,327,500 INSO Corp. + * 375,000 15,937,500 Insignia Solutions PLC ADR * 300,000 3,525,000 JBA Holdings PLC * 800,000 4,808,200 Learmonth & Burchette Mgmt. Systems PLC + * 2,080,000 9,206,399 Learmonth & Burchette * 50,000 443,750 Learning Tree International, Inc. * 200,000 3,125,000 Legato Systems Inc. * 50,000 1,550,000 Logic Works Inc. * 100,000 1,250,000 McAfee Associates Inc. + * 525,000 23,034,375 Mercury Interactive Corp. * 165,000 3,011,250 Meta-Software Inc. * 20,000 335,000 Objective Systems Integrators, Inc. * 55,000 3,011,250 On Technology Corp. * 120,000 1,560,000 Ovid Technologies Inc. * 200,000 1,450,000 Phamis Inc. + * 100,000 2,975,000 Phoenix Technology Ltd. * 417,000 6,567,750 Premenos Technology Corp. * 100,000 2,637,500 PRI Automation Inc. * 40,000 1,405,000 Pure Software Inc. * 50,000 1,612,500 Rational Software Corp. + * 980,000 21,927,500 Reynolds & Reynolds Co. 50,000 1,943,750 Scanvec Co. * 50,000 356,250 Scopus Technology Inc. * 27,000 681,750 Seer Technologies Inc. * 75,000 937,500 Software Artistry Inc. + * 130,000 1,950,000 SQA, Inc. * 15,000 288,750 Synopsys Inc. * 250,000 9,500,000 Transaction System Architects Inc. - Class A * 325,000 10,968,750 Veritas Software Co. + * 150,000 5,700,000 Verity Inc. * 50,000 2,212,500 Visio Corp. * 31,000 875,750 ------------- 245,362,223 ------------- The accompanying notes are an integral part of these financial statements. The Kaufmann Fund, Inc. ----------------------- SCHEDULE OF INVESTMENTS ----------------------- December 31, 1995 ----------------- Market Shares Value ---------- ------------- CONSUMER - DURABLES - 2.1% - ------------------- Breed Technologies Inc. 400,000 7,400,000 Exide Corp. + 700,000 32,112,500 FinishMaster Inc. + * 365,000 4,745,000 GT Bicycles Inc. * 340,000 3,145,000 Industrie Natuzzi S.p.A. ADR 200,000 9,075,000 Lifetime Hoan Corp. * 165,000 1,526,250 Masland Corp. 400,000 5,600,000 ------------- 63,603,750 ------------- CONSUMER - NONDURABLES - 4.7% - ---------------------- Action Performance Cos. Inc. + * 125,000 1,718,750 Blyth Industries Inc. + * 1,400,000 41,300,000 Central Garden & Pet Co. * 434,500 4,127,750 Cutter & Buck Inc. * 17,500 148,750 DonnKenny, Inc. + * 1,320,000 23,925,000 Family Golf Centers, Inc. * 247,000 4,507,750 Hart Brewing Company * 40,000 610,000 Jones Apparel Group, Inc. * 200,000 7,875,000 OPTA Food Ingredients Inc. * 25,000 321,875 Oakley Inc. * 400,000 13,600,000 Pete's Brewing Co. * 50,000 700,000 Quiksilver Inc. * 21,500 735,031 Wolverine World Wide, Inc. + 1,250,000 39,375,000 ------------- 138,944,906 ------------- ELECTRONIC COMPONENTS - 2.6% - --------------------- Advanced Energy Industries Inc. * 250,000 2,250,000 AVX Corp. 500,000 13,250,000 Gemstar International Group Ltd. * 811,000 23,012,125 Information Storage Devices Inc. + * 50,000 556,250 Lecroy Corp. * 143,300 2,651,050 Nice-Systems Ltd. * 8,776 94,852 Nimbus CD International Inc. * 750,000 6,093,750 The accompanying notes are an integral part of these financial statements. The Kaufmann Fund, Inc. ----------------------- SCHEDULE OF INVESTMENTS ----------------------- December 31, 1995 ----------------- Market Shares Value ---------- ------------- ELECTRONIC COMPONENTS (Continued) - 2.6% - --------------------- Photon Dynamics Inc. * 200,000 1,600,000 Planar Systems, Inc. * 503,000 9,619,875 PSC Inc. * 400,000 3,700,000 Radisys Corp. * 135,000 1,586,250 Richey Electronics Inc. + * 316,100 4,109,300 Smartflex Systems Inc. * 101,000 1,792,750 Stanlite Pacific Ltd. 2,048,048 943,801 Vicor Corp. * 343,000 6,860,000 ------------- 78,120,003 ------------- ENVIRONMENTAL - .3% - ------------- Culligan Water Technologies Inc. * 400,000 9,700,000 Ensys Environmental Products Inc. * 100,000 162,500 ------------- 9,862,500 ------------- FINANCIAL - DOMESTIC - 2.6% - -------------------- Duff & Phelps Credit Rating Co. + 478,966 6,885,136 First Investors Financial Svcs. Group Inc. * 200,000 1,625,000 Insignia Financial Group, Inc. * 100,000 3,850,000 Interpool, Inc. 300,000 5,362,500 Kaye Group Inc. 236,600 1,892,800 Life Partners Group, Inc. + 1,450,000 19,756,250 MBNA Corp. 600,000 22,125,000 Mercury Finance Co. 314,550 4,167,787 Philadelphia Consolidated Holding Corp. + * 400,000 6,500,000 Phoenix Duff & Phelps Corp. 600,000 4,125,000 Phoenix Duff & Phelps Corp. - Pfd. Conv. Ser. A 60,000 1,515,000 ------------- 77,804,473 ------------- The accompanying notes are an integral part of these financial statements. The Kaufmann Fund, Inc. ----------------------- SCHEDULE OF INVESTMENTS ----------------------- December 31, 1995 ----------------- Market Shares Value ---------- ------------- FINANCIAL - FOREIGN - .1% - ------------------- Central European Growth Fund # 1,975,000 1,180,890 Central European Growth Fund - Warrants # * 400,000 31,061 Min Xin Holdings 3,450,000 490,786 Min Xin Holdings - Warrants # * 690,000 20,695 ------------- 1,723,432 ------------- GAMING - 2.2% - ------ Ameristar Casinos, Inc. * 225,000 1,462,500 Autotote Corp. - Class A + * 2,000,000 5,875,000 Casino Data Systems, Inc. * 325,000 8,125,000 Grand Casinos, Inc. * 150,000 3,487,500 Harvey's Casino Resorts, Inc. + 475,000 8,550,000 Hollywood Casino Corp. - Class A * 180,000 765,000 National Gaming Corp. + * 602,500 7,154,687 Players International Inc. * 1,000,000 10,687,500 President Casinos, Inc. * 90,000 157,500 Primadonna Resorts, Inc. * 350,000 5,162,500 Station Casinos, Inc. * 1,027,500 15,027,187 ------------- 66,454,374 ------------- INDUSTRIAL - .6% - ---------- Cameron Ashley Inc. + * 550,000 5,637,500 Computational Systems Inc. * 60,000 930,000 International UNP Holdings Ltd. # * 2,420,000 815,233 Liberty Technologies, Inc. * 110,000 550,000 NN Ball & Roller Inc. 202,500 3,543,750 Nuco2, Inc. * 150,000 1,950,000 Simpson Manufacturing Co. * 290,000 3,915,000 Treadco, Inc. 195,000 1,121,250 ------------- 18,462,733 ------------- The accompanying notes are an integral part of these financial statements. The Kaufmann Fund, Inc. ----------------------- SCHEDULE OF INVESTMENTS ----------------------- December 31, 1995 ----------------- Market Shares Value ---------- ------------- LODGING - 6.2% - ------- HFS Inc. * 1,700,000 138,975,000 La Quinta Inns Inc. 200,000 5,475,000 Prime Hospitality Corp. * 600,000 6,000,000 Red Lion Hotels Inc. * 100,000 1,750,000 Renaissance Hotel Group N.V. * 1,000,000 25,500,000 Studio Plus America Inc. * 180,000 4,635,000 Supertel Hospitality Inc. * 197,500 1,975,000 ------------- 184,310,000 ------------- MEDIA & COMMUNICATIONS - .4% - ---------------------- American Radio Systems Corp. - Class A * 80,000 2,240,000 Blonder Tongue Labs, Inc. * 100,000 975,000 Central European Media Enterprises Ltd. * 100,000 2,050,000 Cinar Films Inc. - Class B * 200,000 3,025,000 Consolidated Graphics Inc. * 100,000 2,600,000 Lodgenet Entertainment Corp. * 50,000 475,000 Matav Cable System * 15,000 143,911 Metrovision North America - Com. # * 50,976 0 Metrovision North America - Pfd. # * 24,588 0 Shared Technologies, Inc. + * 440,324 1,733,776 ------------- 13,242,687 ------------- MEDICAL EQUIPMENT & SUPPLIES - 7.3% - ---------------------------- Arrow International Inc. 210,000 8,347,500 Combact Diagnostics # * 22,500 1,000,000 Conmed Corp. * 292,500 7,312,500 Endosonics Corp. * 100,000 1,512,500 Exogen Inc. * 100,000 1,925,000 Haemonetics Corp. * 590,000 10,472,500 Heart Technology Inc. * 100,000 3,287,500 Hemasure Inc. * 200,000 2,550,000 Instent Inc. * 85,000 1,275,000 Kensey Nash Corp. * 150,000 1,875,000 Lifeline Systems Inc. * 200,000 2,425,000 The accompanying notes are an integral part of these financial statements. The Kaufmann Fund, Inc. ----------------------- SCHEDULE OF INVESTMENTS ----------------------- December 31, 1995 ----------------- Market Shares Value ---------- ------------- MEDICAL EQUIPMENT & SUPPLIES (Continued) - 7.3% - ---------------------------- MediSense, Inc. + * 1,090,000 34,471,250 Medstone International, Inc. * 100,000 1,050,000 Minntech Corp. + 696,900 13,720,219 Molecular Devices Corp. * 90,000 945,000 Neopath Inc. * 290,000 6,742,500 Orthofix International N.V. + * 400,000 2,950,000 Physician Sales & Service, Inc. + * 935,000 26,647,500 Physio Control International Corp. * 700,000 12,512,500 PLC Systems Inc. * 300,000 4,987,500 Pyxis Corp. + * 1,867,500 27,312,187 Quantech Ltd. # * 600,000 125,000 Steris Corp. * 500,000 16,125,000 Sunrise Technologies Inc. - Warrants # * 11,500 0 Technol Medical Products Inc. * 485,500 8,739,000 Trex Medical Corp. # * 20,000 205,000 Vivus Inc. * 280,000 8,750,000 Zoll Medical Corp. + * 1,087,500 9,787,500 ------------- 217,052,656 ------------- MEDICAL SERVICES - 14.2% - ---------------- ABR Information Services, Inc. * 150,000 6,600,000 AHI Healthcare Systems Inc. + * 945,000 5,433,750 ARV Assisted Living Inc. * 300,000 3,525,000 Access Health Marketing, Inc. + * 800,000 35,400,000 Advantage Health Corp. + * 689,000 30,057,625 American Medical Response, Inc. * 380,000 12,350,000 American Oncology Resources Inc. * 200,000 9,725,000 Amisys Managed Care Systems Inc. * 100,000 1,900,000 Apogee Inc. * 235,000 2,173,750 Arbor Heatlh Care Co. * 177,500 3,106,250 Avecor Cardiovascular Inc. * 90,000 1,597,500 Bard (C.R.) Inc. 616,495 19,881,964 Boston Scientific Corp. * 80,000 3,920,000 Community Health Systems, Inc. * 368,900 13,142,062 Compdent Corp. + * 505,000 20,957,500 CRA Managed Care Inc. * 200,000 4,375,000 Cryolife Inc. * 30,000 465,000 De Rigo S.P.A. ADR * 200,000 4,550,000 The accompanying notes are an integral part of these financial statements. The Kaufmann Fund, Inc. ----------------------- SCHEDULE OF INVESTMENTS ----------------------- December 31, 1995 ----------------- Market Shares Value ---------- ------------- MEDICAL SERVICES (Continued) - 14.2% - ---------------- Diagnostic Products Corp. 500,000 18,937,500 GMIS Inc. * 100,000 1,300,000 Healthdyne Technologies Inc. * 300,000 3,450,000 Health Management Systems, Inc. + * 300,000 11,700,000 Healthplan Services Corp. * 101,000 2,525,000 Healthsouth Corp. * 350,000 10,193,750 Horizon Healthcare Corp. * 250,000 6,312,500 ICU Medical Inc. * 102,500 1,742,500 Inphynet Medical Management Inc. * 400,000 9,600,000 Isomedix Inc. + * 730,000 10,493,750 Lincare Holdings, Inc. + * 1,572,500 39,312,500 Lunar Corp. * 82,500 2,268,750 Mecon, Inc. * 100,000 1,587,500 Myriad Genetics Inc. * 50,000 1,631,250 National Dentex Corp. + * 237,000 5,806,500 National Surgery Centers Inc. * 200,000 4,600,000 Orthodontic Centers of America, Inc. * 235,000 11,338,750 Pediatric Services of America Inc. + * 372,500 5,866,875 Pet Practice Inc., The + * 500,000 5,125,000 Physician Reliance Network Inc. * 400,000 15,900,000 Physicians Resource Group Inc. + * 270,000 5,366,250 Quorum Health Group Inc. * 360,000 7,920,000 Raytel Medical Corp. + * 400,000 3,400,000 Serologicals Corp. * 200,000 3,300,000 Sheridan Healthcare Inc. + * 400,000 4,850,000 Sola International Inc. * 300,000 7,575,000 Spine-Tech Inc. * 50,000 1,162,500 Sterling House Corp. + * 302,000 2,906,750 Summit Medical Systems Inc. * 150,000 3,225,000 Total Renal Care Holdings Inc. * 110,000 3,245,000 United Dental Care Inc. * 200,000 8,250,000 Universal Standard Medical Labs, Inc.+ * 700,000 2,975,000 Uromed Corp. * 55,000 708,125 Vencor, Inc. * 200,000 6,500,000 Veterinary Centers of America Inc. * 50,000 843,750 Waters Corp. * 800,000 14,600,000 Xenometrix Inc. - Pfd. # * 50,000 0 ------------- 425,679,901 ------------- The accompanying notes are an integral part of these financial statements. The Kaufmann Fund, Inc. ----------------------- SCHEDULE OF INVESTMENTS ----------------------- December 31, 1995 ----------------- Market Shares Value ---------- ------------- MISCELLANEOUS - .9% - ------------- Buckeye Cellulose Corp. * 700,000 15,400,000 C.P. Pokphand Co. 9,998,000 4,008,251 Concepts Direct Inc. # * 8,500 0 Kumagai Gumi Ltd. 1,086,000 786,499 Storage USA, Inc. 200,000 6,525,000 Techniche Limited * 225,100 527,029 Trinity Biotech PLC # * 48,131 0 ------------- 27,246,779 ------------- NETWORKING - 1.4% - ---------- 3Com Corp. * 10,000 466,250 Bay Networks Inc. * 195,000 8,019,375 Cisco Systems Inc. * 100,000 7,462,500 Desktop Data Inc. * 1,000 24,500 Fore Systems Inc. * 160,000 9,520,000 Network Computing Devices Inc. * 280,800 2,000,700 Olicom A/S * 275,000 4,193,750 Proteon Inc. * 200,000 1,325,000 Teklogix International Inc. * 100,000 970,341 Tellabs Inc. * 100,000 3,700,000 Unison Software Inc. * 215,000 3,708,750 ------------- 41,391,166 ------------- OFFICE & BUSINESS EQUIPMENT - 3.3% - --------------------------- Alco Standard Corp. 100,000 4,562,500 Checkmate Electronics Inc. * 20,000 295,000 Danka Business Systems PLC ADR 1,300,000 48,100,000 Data Documents Inc. * 94,300 813,337 International Imaging Materials, Inc. * 145,000 3,661,250 Nu-Kote Holdings Inc. - Class A + * 2,350,000 39,950,000 ------------- 97,382,087 ------------- The accompanying notes are an integral part of these financial statements. The Kaufmann Fund, Inc. ----------------------- SCHEDULE OF INVESTMENTS ----------------------- December 31, 1995 ----------------- Market Shares Value ---------- ------------- OIL & GAS - .9% AMBAR , Inc. + * 282,800 2,439,150 Arakis Energy Corp. * 409,300 1,227,900 Bellwether Exploration Co. + * 625,000 3,593,750 Benton Oil & Gas Co. * 393,300 5,899,500 Coda Group PLC * 1,105,000 3,672,465 Hardman Resoures AUD # * 562,500 0 Harken Energy Corp. * 238,100 416,675 NUMAR Corp. * 200,000 2,225,000 St. Mary Land & Exploration Co. 190,400 2,665,600 Snyder Oil Corp. 100,000 1,212,500 Tide West Oil Co. * 295,000 3,945,625 ------------- 27,298,165 ------------- PHARMACEUTICAL - .4% - -------------- Akorn Inc. * 317,000 812,312 Anika Research, Inc. + * 150,000 581,250 Biokine Technology Ltd. # * 125 0 Cygnus Inc. * 10,000 223,750 Ergo Science Corp. * 10,000 142,500 Incyte Pharmaceuticals Inc. * 90,000 2,250,000 Matrix Pharmaceutical Inc. * 100,000 1,875,000 Neose Pharmaceuticals, Inc. - Pfd. # * 16,667 0 Parexel International Corp. * 100,000 3,325,000 Pharmacyclics Inc. * 300,000 4,200,000 Titan Pharmaceuticals Inc. - Pfd. # * 46,131 0 ------------- 13,409,812 ------------- REITS - 2.3% - ----- Equity Inns Inc. 150,000 1,725,000 Equity Residential Properties Trust 400,000 12,250,000 Felcor Suite Hotels Inc. + 600,000 16,650,000 First Commonwealth Inc. * 50,000 1,300,000 Innkeepers USA Trust + 350,000 3,193,750 Manufactured Home Communities, Inc. + 1,351,000 23,642,500 RFS Hotel Investors, Inc. 325,000 4,996,875 Starwood Lodging Trust SBI Paired CTF. 200,000 5,950,000 ------------- 69,708,125 ------------- The accompanying notes are an integral part of these financial statements. The Kaufmann Fund, Inc. ----------------------- SCHEDULE OF INVESTMENTS ----------------------- December 31, 1995 ----------------- Market Shares Value ---------- ------------- RESTAURANTS - .2% Cheesecake Factory Inc., The * 180,000 3,870,000 Starbucks Corp. * 100,000 2,100,000 ------------- 5,970,000 ------------- RETAIL - 12.4% - ------ Amway Asia Pacific Ltd. 400,000 14,250,000 Autozone, Inc. * 600,000 17,325,000 Baby Superstore, Inc. * 450,000 25,650,000 Bed, Bath & Beyond, Inc. * 100,000 3,881,250 Borders Group Inc. * 500,000 9,250,000 Carrefour S.A. * 15,000 9,100,470 Cash America International, Inc. * 100,000 550,000 CUC International Inc. * 200,000 6,825,000 Compucom Systems Inc. * 400,000 3,800,000 Dave & Buster's Inc. * 225,000 2,728,125 Department 56, Inc. * 425,000 16,309,375 Dollar Tree Stores Inc. * 250,000 6,187,500 Gadzooks Inc. * 200,000 5,050,000 Garden Ridge Corp. * 180,500 6,994,375 Global DirectMail Corp. * 400,000 11,000,000 Gymboree Corp. * 100,000 2,062,500 Heilig-Meyers Co. 150,000 2,756,250 Hollywood Entertainment Corp. * 175,000 1,465,625 Home Depot, Inc. 200,000 9,575,000 Kohl's Corp. * 500,000 26,250,000 Lone Star Steakhouse & Saloon Inc. * 130,000 4,988,750 Maxim Group Inc., The + * 500,000 6,750,000 Monro Muffler Brake, Inc. + * 550,000 7,631,250 MSC Indl Direct, Inc. * 401,000 11,027,500 Office Depot Inc. * 500,000 9,875,000 O'Reilly Automotive, Inc. + * 390,000 11,310,000 PETsMART, Inc. * 550,000 17,050,000 Regis Corp. 250,000 6,000,000 Schein (Henry) Inc. * 320,000 9,440,000 Sonic Corp. * 250,000 4,750,000 Staples Inc. * 230,000 5,606,250 Sunglass Hut International, Inc. * 900,000 21,375,000 Tiffany & Co. 32,500 1,637,188 Viking Office Products, Inc. * 1,200,000 55,800,000 Wetherspoon (J.D.) Corp. 1,542,427 15,450,620 ------------- 369,702,028 ------------- The accompanying notes are an integral part of these financial statements. The Kaufmann Fund, Inc. ----------------------- SCHEDULE OF INVESTMENTS ----------------------- December 31, 1995 ----------------- Market Shares Value ---------- ------------- SEMICONDUCTOR & EQUIPMENT - 12.3% - ------------------------- Advanced Technology Materials Inc. * 132,500 1,325,000 Alpha Industries Inc. + * 405,000 5,720,625 Altera Corp. * 1,852,000 92,137,000 Applied Materials, Inc. * 800,000 31,500,000 ASM Lithography Holdings NV * 470,000 15,627,500 Burr-Brown Corp. * 200,000 5,100,000 C.P. Clare Corp. + * 500,000 10,250,000 Cypress Semiconductor Corp. * 150,000 1,912,500 ESS Technology Inc. * 400,000 9,200,000 ETEC Systems Inc. * 103,000 1,158,750 EXAR Corp. * 145,000 2,138,750 FSI International Inc. * 94,000 1,903,500 Fusion Systems Corp. * 70,000 1,960,000 GaSonics International Corp. * 146,250 1,974,375 Integrated Device Technology Inc. * 125,000 1,609,375 Intel Corp. 10,000 567,500 International Rectifier Corp. * 800,000 20,000,000 LSI Logic Corp. * 550,000 18,012,500 MEMC Electronic Materials Inc. * 700,000 22,837,500 Microchip Technology, Inc. + * 1,670,000 60,955,000 Micron Technology Inc. 150,000 5,943,750 Oak Technology Inc. * 500,000 21,125,000 Ontrak Systems Inc. * 15,000 217,500 Supertex, Inc. * 100,000 1,037,500 Telcom Semiconductor Inc. - Class A * 199,000 1,442,750 Teradyne Inc. * 200,000 5,000,000 Tower Semiconductor Ltd. * 205,000 4,535,625 Uniphase Corp. + * 260,000 9,295,000 Vitesse Semiconductor Corp. * 500,000 6,375,000 Xilinx, Inc. * 225,000 6,862,500 Zoran Corp. * 10,000 207,500 ------------- 367,932,000 ------------- SERVICE - 4.7% - ------- Ambassadors International Inc. + * 395,000 3,851,250 AMRE Inc. * 100,000 1,462,500 APAC Teleservices Inc. * 100,000 3,337,500 Apollo Group, Inc. * 900,001 35,212,539 Barrett Business Services, Inc. + * 300,000 4,425,000 Consolidated Delivery Logistics Inc. * 300,000 3,300,000 Cort Business Services Corp. + * 578,000 9,537,000 The accompanying notes are an integral part of these financial statements. The Kaufmann Fund, Inc. ----------------------- SCHEDULE OF INVESTMENTS ----------------------- December 31, 1995 ----------------- Market Shares Value ---------- ------------- SERVICE (Continued) - 4.7% CYRK, Inc. + * 1,320,000 12,870,000 Employee Solutions Inc. * 145,000 4,930,000 Equity Corporation International Inc. * 250,000 5,937,500 Healthsource Inc. * 100,000 3,600,000 Rentokil Group PLC * 925,000 4,812,471 RTW Inc. + * 400,000 10,500,000 SITEL Corp. * 221,000 6,768,125 SOS Staffing Services Inc. * 140,000 1,312,500 Sylvan Learning Systems, Inc. + * 800,000 23,800,000 U.S. Delivery Systems, Inc. * 199,259 5,778,511 ------------- 141,434,896 ------------- TELECOMMUNICATIONS - 2.7% - ------------------ Alantec Corp. * 3,000 174,750 AML Communications, Inc. * 175,000 1,837,500 Celcore, Inc. # * 85,000 510,000 CIDCO, Inc. * 285,000 7,267,500 Comverse Technology Inc. * 200,000 4,000,000 Davox Corp. * 10,000 118,750 DSC Communications Corp. * 355,000 13,090,625 ECI Telecom Ltd. * 20,000 456,250 Interdigital Communication Corp. * 50,000 368,750 Mastec, Inc. * 400,000 5,300,000 Network Equipment Technologies, Inc. * 85,900 2,351,512 Proxim Inc. * 307,000 5,449,250 Summa Four, Inc. + * 419,500 5,610,812 Tekelec Inc. + * 610,000 6,405,000 Tele-Communications International Inc. * 100,000 2,275,000 Teltrend Inc. + * 350,000 16,362,500 T-Netix Inc. * 60,000 600,000 Transaction Network Services Inc. * 180,000 4,500,000 Wegener Corp. # * 393,000 2,999,101 ------------- 79,677,300 ------------- The accompanying notes are an integral part of these financial statements. The Kaufmann Fund, Inc. ----------------------- SCHEDULE OF INVESTMENTS ----------------------- December 31, 1995 ----------------- Market Shares Value ---------- ------------- TRANSPORTATION - AIR - 1.4% - -------------------- Atlas Air Inc. * 325,000 5,443,750 Eagle USA Airfreight, Inc. * 365,000 9,581,250 Expeditors International of Washington, Inc. 140,000 3,657,500 Fritz Companies, Inc. * 200,000 8,300,000 Great Lakes Aviation, Ltd. + * 569,000 2,133,750 Mark VII Inc. * 100,000 1,550,000 OMI Corp. * 550,000 3,575,000 Team Rent Group Inc. + * 219,500 1,865,750 United Transnet, Inc. * 300,000 4,612,500 ------------- 40,719,500 ------------- TOTAL STOCKS (Cost $2,014,008,155) $2,980,627,566 ============= The accompanying notes are an integral part of these financial statements. The Kaufmann Fund, Inc. ----------------------- SCHEDULE OF INVESTMENTS ----------------------- December 31, 1995 ----------------- Face Market CONVERTIBLE BONDS - .3% Amount Value - ----------------- ----------- ------------- Baby Superstore Inc. 4.875% 10/01/2000 $ 4,000,000 4,590,000 Exide Corp. 2.9% 12/15/2005 5,000,000 3,600,000 Future Healthcare, Inc. 5.5% 07/01/2003 500,000 250,000 Kumagai Gumi Ltd. 4.875% 12/08/1998 500,000 441,250 Sales Dynamics, Inc. 8% 01/01/1997 # 1,000,000 500,000 Shangri-La Asia Ltd. 2.875% 12/16/2000 1,200,000 996,000 ----------- TOTAL CONVERTIBLE BONDS (Cost $10,651,282) $ 10,377,250 =========== TOTAL INVESTMENTS - 100% $2,991,004,816 (Cost $2,024,659,437) ============= Legend % Represents percentage of total portfolio owned * Non-income producing during the year + Affiliated company (See Note 7 of Notes to Financial Statements) # Restricted securities - investment in securities not registered under the Securities Act of 1933 (see Notes 1 and 5 of Notes to Financial Statements) The accompanying notes are an integral part of these financial statements. The Kaufmann Fund, Inc. ----------------------- SCHEDULE OF SECURITIES SOLD SHORT --------------------------------- December 31, 1995 ----------------- Market STOCKS Shares Value - ------ ---------- ------------- Able Telcom Holding Corp. 15,000 $ 108,750 American Oncology Resources Inc. 100,000 4,862,500 American Online Inc. 80,000 3,000,000 American Power Conversion Corp. 250,000 2,379,750 Appollo Group, Inc. 35,000 1,369,375 BMC Software Inc. 40,000 1,710,000 BroadBand Technologies Inc. 20,000 325,000 CBT Group Publishing Ltd. 155,000 8,215,000 Cerner Corp. 210,000 410,000 Chantal Pharmaceutical Corp. 74,700 2,035,575 Cisco Systems Inc. 20,000 1,492,500 Detroit Diesel Corp. 150,000 2,793,750 Diametrics Medical Inc. 100,000 487,500 EMPI Inc. 30,000 765,000 EPIC Design Technology Inc. 145,200 3,049,200 Gemstar Group Ltd. 187,500 5,320,313 Gibson Greetings Inc. 50,000 800,000 Grand Casinos Inc. 150,000 3,487,500 HNC Software Inc. 10,000 477,500 Hummingbird Communications Ltd. 43,000 1,741,500 ICC Technologies Inc. 60,500 665,500 Immunex Corp. (New) 85,000 1,402,500 INSO Corp. 110,000 4,675,000 Integrated Silicon Solution, Inc. 50,000 757,500 Isolyser Inc. 44,200 618,800 I-STAT Corp. 55,000 1,787,500 Lone Star Steakhouse & Saloon Inc. 130,000 4,988,750 Mercury Finance Co. 314,550 4,167,787 METATEC Corp. 200 2,200 Micron Technology Inc. 150,000 5,943,750 Navistar International Corp. 200,000 2,100,000 Netscape Communications Co. 15,000 2,085,000 North American Vaccine Inc. 448,600 6,336,475 Occidental Petroleum Corp. 350,000 7,481,250 Organogenesis Inc. 476,375 8,753,391 Panda Project, Inc., The 17,200 374,100 Peoplesoft Inc. 15,000 645,000 Physicians Computer Network, Inc. 150,000 1,350,000 Premenos Technology Corp. 100,000 2,637,500 Presstek, Inc. 20,600 1,946,700 Roadmaster Industries Inc. 36,900 87,637 Roadway Services Inc. 50,000 2,443,750 The accompanying notes are an integral part of these financial statements. The Kaufmann Fund, Inc. ----------------------- SCHEDULE OF SECURITIES SOLD SHORT --------------------------------- December 31, 1995 ----------------- Market STOCKS (Continued) Shares Value - ------------------ ---------- ------------- SAFECO Corp. 20,000 690,000 Sequent Computer Systems Inc. 50,000 725,000 Stratacom Inc. 25,000 1,837,500 Summit Medical Systems Inc. 150,000 3,225,000 Summit Technology, Inc. 75,000 2,531,250 Trinquint Semiconductor Inc. 12,500 168,750 Union Carbide Corp. 20,000 750,000 Uunet Technologies Inc. 10,000 630,000 Verity Inc. 50,000 2,212,500 Williams-Sonoma Inc. 100,000 1,850,000 ----------- TOTAL SECURITIES SOLD SHORT $120,700,803 =========== The accompanying notes are an integral part of these financial statements. PART C PART C OTHER INFORMATION Item 24. Financial Statements and Exhibits --------------------------------- (a) Financial Statements -------------------- The following financial statements for the calendar year ending December 31, 1995 appear in the Fund's Prospectus or in the Statement of Additional Information. In Prospectus ------------- (1) Per Share Income and Capital Changes - Ten Years - December 31, 1986-1995 In Statement of Additional Information -------------------------------------- (2) Statement of Assets and Liabilities - December 31, 1995 (3) Statement of Operations - December 31, 1995 (4) Statement of Changes in Net Assets - December 31, 1994 and December 31, 1995 (5) Notes to Financial Statements - December 31, 1995 (6) Financial Highlights - Five Years - December 31, 1991-1995 (7) Schedule of Investments - December 31, 1995 (8) Schedule of Securities Sold Short - December 31, 1995 (b) Exhibits -------- Exhibit No. ----------- (1) Copies of the Certificate of Incorporation as now in effect; Certificate of Incorporation, as amended 1 (2) Copies of the existing By-Laws or instruments corresponding thereto; Copy of By-Laws 2 (3) Copies of any voting Trust None Agreement with respect to more than 5% of any class of equity securities of the Registrant. (4) Specimens of copies of each security issued by the Registrant, including copies of all constituent instruments, defining the rights of the holders of such securities and copies of each security being registered; The Kaufmann Fund, Inc. 4* Certificate of Common Stock (5) Copies of all investment advisory contracts relating to the management of the Assets of the Registrant; Copy of Investment Management 5 Agreement between The Kaufmann Fund, Inc. and Edgemont Asset Management Corporation as amended. 2 (6) Copies of each underwriting or None distribution contract between the Registrant and a principal underwriter, and specimens of copies of all agreements between principal underwriters and dealers. (7) Copies of all bonus, profit None sharing, pension or other similar arrangements wholly or partly for the benefit of Directors or Officers of the Registrant in their capacity as such; any such plan that is not set forth in a formal document, furnish a reasonably detailed description thereof. (8) Copies of all custodian agreements and depository contracts under Section 17(f) of the 1940 Act with respect to securities and similar investments. Form of Custodian Agreement 8** between and The Kaufmann Fund, Inc. and State Street Bank and Trust Company. (9) Copies of all material contracts not made in the ordinary course of business which are to be performed in whole or in part at or after the date of the filing of the Registration Statement; (a) Form of Transfer Agency 9(a)** and Service Agreement between The Kaufmann Fund, Inc. and Boston Financial Data Services, Inc. 3 (b) Copy of Accounting Services 9(b)** Agreement between The Kaufmann Fund, Inc. and Boston Financial Data Services, Inc. (c) Copy of Authorization Agreement 9(c)** for payment of Service Fees (10) An opinion and consent of counsel as to the legality of the securities being registered, indicating whether they will, when sold, be legally issued, fully paid and non-assessable; Opinion of counsel and consent filed on February 15, 1996 as part of Rule 24f-2 Notice for securities transactions in 1995. (11) Copies of any other opinions, appraisals or rulings and consents to the use thereof relied on in the preparation of this Registration Statement and required by Section 7 of the 1933 Act. (a) Opinion of Sanville 11(a) Company - Certified Public Accountants (b) Consent of Sanville & 11(b) Company (12) All financial statements None omitted from Item 23; (13) Copies of any agreements or None understandings made in consideration for providing the initial capital between and among the Registrant, the Underwriter, adviser, promoter, or initial stockholders that their purchases were made for investment purposes without any present intention of redeeming or reselling. 4 (14) Copies of model plan used in the establishment of any retirement plan in conjunction with which Registrant offers its securities, any instructions thereto, and any other documents making up the model plan. Such form(s) should disclose the costs and fees charged in connection therewith. Copy of State Street Bank and Trust 14(a)** Company Individual Retirement Custodial Account. Copy of Disclosure Statement. 14(b)** (15) Copies of any plan entered into by Registrant pursuant to Rule 12b-1 under the 1940 Act, which describes all material aspects of the financing of distribution or Registrant's shares, and any agreements with any person relating to implementation of such Plan. Plan of Distribution adopted 15(a)* by The Kaufmann Fund, Inc. Agreement Pursuant to Plan of 15(b)* Distribution between The Kaufmann Fund, Inc. and Edgemont Asset Management Corporation (16) Schedule for computation of each performance quotation provided in the Registration Statement in response to Item 22 (which need not be audited). 5 Computation of a $1,000 16 Hypothetical Investment in the Fund, as set forth in Prospectus Fee Table * 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. All Exhibits except those filed with this Post-Effective Amendment are hereby incorporated by reference. Item 25. Persons Controlled by or Under Common Control With Registrant ------------------------------------------------------------- There are no persons controlled by or under common control with Registrant. Item 26. Number of Holders of Securities ------------------------------- (a) Title of Class -------------- Common Capital Stock, $.10 par value (b) Number of Record Holders ------------------------ As of December 31, 1995 - 191,498 Item 27. 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 with such Proceeding, to the fullest extent that such indemnification may be lawful under Maryland law. 6 (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 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. 7 (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 the Fund would have the power to indemnify him or her against such liability. Item 28. 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 29. Principal Underwriter --------------------- The Fund does not have a principal underwriter 8 Item 30. 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 31. Management Services ------------------- There are no management service contracts not described in Part A or Part B of Form N-1A Item 32. 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. 9 COUNSEL'S REPRESENTATION Post-Effective Amendment No. 45 to the Registration Statement on Form N-1A of The Kaufmann Fund, Inc. does not contain disclosures which would render it ineligible to become effective pursuant to paragraph (b) of Rule 485 under the Securities Act of 1933, as amended. /s/ Martin V. Miller _________________________ MARTIN V. MILLER, Counsel for The Kaufmann Fund, Inc. EX-1 2 ARTICLES OF INCORPORATION Exhibit 1 ARTICLES OF INCORPORATION OF THE KAUFMANN FUND, INC. WE, THE UNDERSIGNED, Timothy F. O'Connell, whose post-office address is 1635 Market Street, Philadelphia, PA 19103, and Janice C. Naulty, whose post-office address is 1635 Market Street, Philadelphia, PA 19103, each being at least eighteen years of age, do, under and by virtue of the General Laws of the State of Maryland authorizing the formation of corporations, associate ourselves as incorporators with the intention of forming a corporation. FIRST: The name of the corporation is THE KAUFMANN FUND, INC. SECOND: The purposes for which the corporation is formed are: To engage in business as an investment company, and to engage in any or all lawful business for which corporations may be organized under the Maryland General Corporation Law. THIRD: The post-office address of the principal office of the corporation in this State is c/o The Corporation Trust Incorporated, 32 South Street, Baltimore, Maryland 21202. The name of the resident agent of the corporation in this State is The Corporation Trust Incorporated, a corporation of this State, and the post-office address of the resident agent is 32 South Street, Baltimore, Maryland 21202. FOURTH: The total number of shares of stock which the corporation shall have authority to issue is Five Hundred Million (500,000,000) shares, all of one class, of the par value of One Cent ($0.01) each and of the aggregate par value of Five Million Dollars ($5,000,000.00). FIFTH: The number of directors of the corporation shall be Six (6), which may be changed in accordance with the by-laws of the corporation. The names of the directors who shall act until the first annual meeting or until their successors are duly chosen and qualify are: Hans P. Utsch, Lawrence Auriana, Leon Lebensbaum, Gerard M. Grosof, Pauline Gold and Roger E. Clark. SIXTH: No holder of shares of stock of any class shall be entitled as a matter of right to subscribe for or purchase or receive any part of any new or additional issue of shares of stock of any class or of securities convertible into shares of stock of any class, whether now or hereafter authorized or whether issued for money, for a consideration other than money or by way of dividend. No holder of shares of any class shall be entitled to the right of cumulative voting in any election of directors. The corporation reserves the right from time to time to make any amendment of its charter, now or hereafter authorized by law, including any amendment which alters the contract rights, as expressly set forth in its charter, of any outstanding stock. SEVENTH: The duration of the corporation shall be perpetual. IN WITNESS WHEREOF, the undersigned incorporators of THE KAUFMANN FUND, INC. who executed the foregoing Articles of Incorporation hereby acknowledge the same to be their act and further acknowledge that, to the best of their knowledge the matters and facts set forth therein are true in all material respects under the penalties of perjury. Dated the 25th day of February, 1992. /s/ Timothy F. O'Connell ----------------------------- /s/ Janice C. Naulty ----------------------------- ----------------------------- THE KAUFMANN FUND, INC. ARTICLES OF AMENDMENT The Kaufmann Fund, Inc., a Maryland Corporation having its principal office in Baltimore City, Maryland hereby certifies to the State Department of Assessments and Taxation of Maryland, that: FIRST: The charter of the Corporation is hereby amended by striking out Article Third of the Articles of Incorporation and inserting in lieu thereof the following: THIRD: The total number of shares of stock which the corporation shall have authority to issue is Five Hundred Million (500,000,000) shares, all of one class, of the par value of Ten Cents ($.10) each and of the aggregate par value of Fifty Million Dollars ($50,000,000). By adding to the Articles of Incorporation a new Article Eighth which shall be as follows: To the fullest extent permitted by Maryland and federal statutory and decisional law, as amended or interpreted, no director or officer of this Corporation shall be personally liable to the Corporation or the holders of Shares for money damages and each director and officer shall be indemnified by the Corporation; provided, however, that nothing herein shall be deemed to protect any director or officer of the Corporation against any liability to the Corporation or the holders of Shares 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. Any determination made in good faith and, so far as accounting matters are involved, in accordance with generally accepted accounting principles by or pursuant to the direction of the Board of Directors, shall be final and conclusive, and shall be binding upon the Corporation and all holders of Shares, past, present and future, and Shares are issued and sold on the condition and undertaking, evidenced by acceptance of certificates for such Shares by, or confirmation of such Shares held for the account of, any holder, that any and all such determinations shall be binding as aforesaid. Nothing contained herein shall be construed to protect any director or officer of the Corporation against any liability to the Corporation or the holders of Shares 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. SECOND: The board of directors of the Corporation by unanimous written consent pursuant to Section 2-408 of Corporations and Associations Article of the Annotated Code of Maryland, duly adopted a resolution in which was set forth the foregoing amendment to the charter, declaring that the said amendment of the charter as proposed was advisable and directing that it be submitted for action thereon by the stockholders of the Corporation. THIRD: That the said amendment has been consented to and authorized by the holders of all the issued and outstanding stock, entitled to vote, by a written consent given in accordance with the provisions of Section 2-505 of Corporations and Associations Article of the Annotated Code of Maryland, and filed with the records of stockholders meetings. FOURTH: The amendment of the charter of the Corporation as hereinabove set forth has been duly advised by the board of directors and approved by the stockholders of the Corporation. FIFTH: (a) The total number of shares of stock which the Corporation was heretofore authorized to issue is Five Hundred Million (500,000,000) shares, all of one class, of the par value of One Cent ($.01) each and of the aggregate par value of Five Million Dollars ($5,000,000.00). (b) The par value of shares of stock is increased by this amendment to Five Hundred Million (500,000,000) shares all of one class, of the par value of Ten Cents ($.10), and of the aggregate par value of Fifty Million Dollars ($50,000,000.00). IN WITNESS WHEREOF, The Kaufmann Fund, Inc. has caused these presents to be signed in its name and on its behalf by its President and witnessed by its Secretary on December 4th, 1992. The Kaufmann Fund, Inc. --------------------------------------- By /s/ Hans P. Utsch ------------------------------------ Hans P. Utsch, President Witness: (Attest) /s/ Lawrence Auriana - -------------------------------------- Lawrence Auriana, Secretary THE UNDERSIGNED, President of The Kaufmann Fund, Inc., who executed on behalf of said corporation the foregoing Articles of Amendment, of which this certificate is made a part, hereby acknowledges, in the name and on behalf of said corporation, the foregoing Articles of Amendment to the corporate act of said corporation and further certifies that, to the best of his knowledge, information and belief, the matters and facts set forth therein with respect to the approval thereof are true in all material respects, under the penalties of perjury. /s/ Hans P. Utsch --------------------------------------- Hans P. Utsch, President THE KAUFMANN FUND, INC. ARTICLES OF AMENDMENT The Kaufmann Fund, Inc., a Maryland Corporation having its principal office in Baltimore City, Maryland hereby certifies to the State Department of Assessments and Taxation of Maryland, that: FIRST: The charter of the Corporation is hereby amended by adding to the Articles of Incorporation a new Article Fourth (g) which shall be as follows: (g) The corporation shall have the right to redeem securities of which it is the issuer in assets other than cash and if the Board of Directors deems it to be not in the best interests of the remaining shareholders of the corporation to make payment on redemption wholly in cash, the corporation may pay the redemption proceeds, in whole or in part, by a distribution in kind of securities from the portfolio of the corporation in lieu of cash. SECOND: The board of directors of the Corporation by unanimous written consent pursuant to Section 2-408 of Corporations and Associations Article of the Annotated Code of Maryland, on February 4, 1993, duly adopted a resolution in which was Set forth the foregoing amendment to the charter, declaring that the said amendment of the charter as proposed was advisable and directing that it be submitted for action thereon by the stockholders of the Corporation. THIRD: That the said amendment has been consented to and authorized by the holders of all the issued and outstanding stock, entitled to vote, by a written consent given in accordance with the provisions of Section 2-505 of Corporations and Associations Article of the Annotated Code of Maryland, and filed with the records of stockholders meetings. FOURTH: The amendment of the charter of the Corporation as hereinabove set forth has been duly advised by the board of directors and approved by the stockholders of the Corporation. IN WITNESS WHEREOF, The Kaufmann Fund, Inc. has caused these presents to be signed in its name and on its behalf by its President and witnessed by its Secretary on February 4, 1993. The Kaufmann Fund, Inc. -------------------------------------- By /s/ Hans P. Utsch ----------------------------------- Hans P. Utsch, President Witness: (Attest) /s/ Olga Mendez - --------------------------------------- Olga Mendez, Ass't. Secretary THE UNDERSIGNED, Hans P. Utsch, President of The Kaufmann Fund, Inc., who executed on behalf of said corporation the foregoing Articles of Amendment, of which this certificate is made a part, hereby acknowledges, in the name and on behalf of said corporation, the foregoing Articles of Amendment to the corporate act of said corporation and further certifies that, to the best of his knowledge, information and belief, the matters and facts set forth therein with respect to the approval thereof are true in all material respects, under the penalties of perjury. /s/ Hans P. Utsch -------------------------------------- Hans P. Utsch, President The Kaufmann Fund, Inc. ARTICLES OF AMENDMENT The Kaufmann Fund, Inc., a Maryland Corporation that is registered with the U.S. Securities & Exchange Commission as an open-end, diversified management investment company and has its principal office in Baltimore City, Maryland (hereinafter called the Corporation), hereby certifies to the State Department of Assessments and Taxation of Maryland, that: FIRST: The charter of the Corporation is hereby amended by striking out Article Third of the Articles of Incorporation as heretofore amended, and inserting in lieu thereof the following: THIRD: The total number of shares of stock which the corporation shall have authority to issue is One Billion (1,000,000,000) shares, all of one class, of the par value of One cent ($.01) each and of the aggregate par value of Ten Million Dollars ($10,000,000.00). SECOND: The board of directors of the Corporation, in accordance with the provisions of Section S2-105(c) of the Corporations and Associations Article of the Annotated Code of Maryland, duly adopted a resolution in which was set forth the foregoing amendment to the charter, declaring that the said amendment of the charter as proposed was advisable. THIRD: (a) The total number of shares of stock which the Corporation was heretofore authorized to issue is Five Hundred Million (500,000,000) shares, all of one class, of the par value of One cent ($.01) each and of the aggregate par value of Five Million Dollars ($5,000,000.00). (b) The total number of shares of all classes of stock is increased by this amendment to One Billion (1,000,000,000) shares of the par value of One cent ($.01) each and of the aggregate par value of Ten Million Dollars ($10,000,000.00), all of one class. The Kaufmann Fund, Inc. By /s/ Hans P. Utsch ----------------------------------- HANS P. UTSCH, President Witness: (Attest) /s/ Lawrence Auriana - --------------------------------------- LAWRENCE AURIANA, Secretary THE UNDERSIGNED, President of the Kaufmann Fund, Inc., who executed on behalf of said corporation the foregoing Articles of Amendment, of which this certificate is made a part, hereby acknowledges, in the name and on behalf of said corporation, the foregoing Articles of Amendment to be the corporate act of said corporation and further certifies that, to the best of his knowledge, information and belief, the matters and facts set forth therein with respect to the approval thereof are true in all material respects, under the penalties of perjury. /s/ Hans P. Utsch -------------------------------------- HANS P. UTSCH, President EX-2 3 BY-LAWS Exhibit 2 THE KAUFMANN FUND, INC. (A MARYLAND CORPORATION) ---------------------------------- B Y - L A W S ---------------------------------- ARTICLE I OFFICES Section 1.1. PRINCIPAL OFFICE. The principal office of the corporation in the State of Maryland shall be located at the address where the corporation's resident agent maintains its principal place of business in said State. Section 1.2. ADDITIONAL OFFICES. The corporation may have additional offices at such places within or without the State of Maryland as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS Section 2.1. DEFINITIONS OF STOCK AND STOCKHOLDER. As used in these By-Laws, unless otherwise specified or the context otherwise requires, the term "stock" shall mean stock of the corporation of any class or classes, and the term "stockholder" or "stockholders" shall mean a holder or the holders of stock of the corporation of any class or classes. Section 2.2. TIME AND PLACE. All meetings of stockholders shall be held at such time and at such place within the United States as the Board of Directors may from time to time determine in accordance with any applicable provisions of law, the Articles of Incorporation and these By-Laws. Section 2.3. ANNUAL MEETING. So long as the corporation is registered as an investment company under the Investment Company Act of 1940 (the "1940 Act," such term to include the rules and regulations promulgated under the 1940 Act, unless otherwise specified or the context otherwise requires), annual meetings of the stockholders shall not be held, except when required to be held by the 1940 Act or by the Maryland General Corporation Law or when called by the Board of Directors or by an officer or officers authorized to take such action by the Board of Directors. If in any calendar year the corporation is required or elects to hold an annual meeting, the meeting shall be held on such day, not a Saturday, Sunday or legal holiday, as the Board of Directors or the officer or officers calling the meeting may prescribe. At each such annual meeting, the stockholders shall elect a Board of Directors and transact - 2 - such other business as may properly come before the meeting. The provisions of these By-Laws which contemplate the holding of an annual meeting of stockholders shall be suspended during any calendar year in which no annual meeting of stockholders is held. Section 2.4. SPECIAL MEETINGS. Special meetings of the stockholders, for any purpose or purposes, may be called by the Board of Directors, the Chairman of the Board and any other officer or officers authorized to take such action by the Board. Special meetings of the stockholders shall also be called by the Secretary upon the written request of the holders of shares entitled to cast not less than 25% of all the votes entitled to be cast at such meeting. In the case of a meeting called upon the request of stockholders, the request of stockholders for such meeting shall state the purpose of such meeting and the matters proposed to be acted on at such meeting and the Secretary shall inform the stockholders who made the request of the reasonably estimated cost of preparing and mailing a notice of the meeting. On payment of such costs to the corporation, the Secretary shall give notice to each stockholder entitled to notice of the meeting. Unless requested by stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting, a special meeting need not be called to consider any matter which is substantially the same as a matter voted on at any special - 3 - meeting of the stockholders held during the preceding twelve months. Section 2.5. NOTICE OF MEETINGS. Not less than ten (10) nor more than ninety (90) days before each meeting of stockholders, the Secretary shall give to each stockholder entitled to vote at such meeting or entitled to notice of such meeting written or printed notice stating the time and place of the meeting and, in the case of a special meeting or as otherwise may be required by statute, the purpose for which the meeting is called, either by mail or by presenting it to such stockholder personally or by leaving it at his residence or usual place of business. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the stockholder at his post office address as it appears on the records of the corporation, with postage thereon prepaid. Section 2.6. SCOPE OF NOTICE. No business shall be transacted at a special meeting of stockholders except that specifically designated in the notice or in a duly executed waiver of notice of such meeting. Any business of the corporation may be transacted at any annual meeting of stockholders without being specifically designated in the notice of such meeting, except such business as is required by law to be stated in such notice. - 4 - Section 2.7. QUORUM; ADJOURNMENTS. Subject to any higher quorum requirement imposed by applicable law or the Articles of Incorporation or By-Laws, at any meeting of stockholders, the presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at such meeting shall constitute a quorum; provided, however, that the Board of Directors shall have the authority to decrease the number of votes required to constitute a quorum to not less than one-third of all the votes entitled to be cast at such meeting; and provided further, that this section shall not affect any applicable requirement of law or the Articles of Incorporation for the vote necessary for the adoption of any measure. In the absence of a quorum, the holders of a majority of the shares present in person or represented by proxy and entitled to vote at such meeting shall have power to adjourn the meeting from time to time without notice other than announcement at the meeting until such quorum shall be present; and at any meeting at which a quorum shall be present, the holders of a majority of the shares present or represented by proxy shall have the power to adjourn the meeting from time to time without notice other than announcement at such meeting; provided, however, that written notice shall be given as required by Section 2.4 if such meeting is adjourned to a date more than 120 days after the record date originally scheduled with respect to such meeting. - 5 - At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted had a quorum been present at the time originally fixed for the meeting. Section 2.8. VOTING. At any meeting of stockholders at which a quorum is present, any election of a director or directors shall be determined by a plurality of the votes cast and a majority of the votes cast shall be sufficient to approve any other matter which may properly come before the meeting, unless more than a majority of the votes cast is required by law or the Articles of Incorporation for the approval of such matter. Except as otherwise required by law or provided for in the Articles of Incorporation, if two or more classes of stock are entitled to vote separately on any matter, the matter shall be approved by a majority of the votes cast by each class. Fractional shares of stock shall be entitled to fractional votes. Section 2.9. PROXIES. A stockholder may vote the shares of stock owned of record by him, either in person or by proxy executed in writing by the stockholder or by his duly authorized attorney in fact. Such proxy shall be filed with the secretary of the corporation before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. - 6 - Section 2.10. INSPECTORS. At any meeting of stockholders, the chairman of the meeting may appoint one or more persons as inspectors for such meeting. Such inspectors shall ascertain and report the number of shares represented at the meeting, including those stockholders represented by proxy based upon the inspectors' determination of the validity and effect of proxies, count all votes, report the results and perform such other acts as are proper to conduct the election and voting. Each report of an inspector shall be in writing and signed by him or by a majority of them if there be more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be prima facie evidence thereof. Section 2.11. INFORMAL ACTION BY STOCKHOLDERS. Any action required or permitted to be taken at a meeting of stockholders may be taken without a meeting if a consent in writing, setting forth such action, is signed by each stockholder entitled to vote on the matter, and such consent is filed with the minutes of proceedings of the stockholders. - 7 - Section 2.12. VOTING BY BALLOT. Voting on any question or in any election shall be by ballot if requested by any stockholder entitled to vote, but, unless such a request is made, may be conducted in any manner determined by the chairman of the meeting. ARTICLE III DIRECTORS Section 3.1. FUNCTION AND POWERS. The business and affairs of the corporation shall be managed under the direction of its Board of Directors. All powers of the corporation may be exercised by or under authority of the Board of Directors, except as conferred on or reserved to any specified group of directors or to the stockholders by law or by the Articles of Incorporation or these By-Laws. Section 3.2. NUMBER, ELECTION AND TENURE. The first Board of Directors shall consist of the number of directors named in the Articles of Incorporation. Thereafter, the number of directors constituting the entire Board of Directors shall be fixed from time to time by a majority of the entire Board but shall not be less than the minimum number required by the provisions of the General Corporation Law of the State of Maryland, or any successor statute thereto, nor more than fifteen (15). No decrease in such number of directors shall shorten the - 8 - tenure of office of any incumbent director. Each director named in the Articles of Incorporation or elected at an annual meeting of stockholders held pursuant to Section 2.3 or as provided in Sections 3.3 or 3.5 shall hold office until his successor is duly elected and qualifies or until his earlier displacement from office by resignation, removal or otherwise. Section 3.3. VACANCIES. Unless otherwise required by law, any vacancy on the Board of Directors for any cause other than an increase in the number of directors may be filled by vote of a majority of the remaining directors, although such majority is less than a quorum. Any vacancy on the Board of Directors by reason of an increase in the number of directors may be filled by vote of a majority of the entire Board of Directors. The stockholders may fill any vacancy resulting from the removal by stockholders of any director in the manner provided in Section 3.4. Section 3.4. RESIGNATION AND REMOVAL OF DIRECTORS. Any director may resign at any time by written notice to the corporation. The stockholders may, at any time, remove any director, with or without cause, by the affirmative vote of a majority of all the votes entitled to be cast for the election of directors and may elect a successor to fill any resulting vacancy for the balance of the tenure of office of the removed director. - 9 - Section 3.5. COMPENSATION. The Board of Directors shall determine and from time to time fix the compensation payable to directors for their services to the corporation in that capacity, subject, however, to such limitations with respect thereto as may be determined from time to time by the stockholders. Such compensation may consist of a fixed annual fee or a fixed fee for attendance at meetings of the Board of Directors or of any committee of the Board of which the directors receiving such fees are members, or a combination of a fixed annual fee and a fixed fee for attendance. In addition, the Board of Directors may authorize the reimbursement of directors for their expenses for attendance at meetings of the Board or of any committee of the Board of which they are members. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Section 3.6. ANNUAL MEETINGS. The directors shall hold an annual meeting for the purposes of electing officers, appointing committees and transacting such other business as may properly come before the meeting. Each annual meeting of directors shall be held at such place within or without the State of Maryland, as the Board of Directors shall prescribe in advance of such annual meeting, and no other notice shall be necessary in - 10 - order lawfully to convene and conduct such annual meeting of directors, provided a quorum shall be present. Section 3.7. REGULAR MEETINGS. The Board of Directors may hold regular meetings at such time and place, within or without the State of Maryland, as shall from time to time be fixed in advance by the Board, and no other notice of such meetings shall be required. Section 3.8. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or at the request of the Chairman of the Board or a majority of the directors then in office. The person or persons by whom or at whose request a special meeting is called may fix the time and place, within or without the State of Maryland, for holding such meeting. Section 3.9. NOTICE. Notice of any special meeting shall be given by written notice delivered personally, telegraphed or mailed to each director at his business or residence address. Notices personally delivered or given by telegram shall be given at least 24 hours prior to the meeting. Notice by mail shall be given at least two (2) days prior to the meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail properly addressed, with postage thereon prepaid. If notice be given by telegram, such - 11 - notice shall be deemed to be given when the telegram is delivered to the telegraph company. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Board of Directors need be stated in the notice, unless specifically required by law, the Articles of Incorporation or these By-Laws. Section 3.10. QUORUM; ADJOURNMENTS. A majority of the number of directors constituting the entire Board of Directors shall constitute a quorum for transaction of business at any meeting of the Board, provided, that, if less than a majority of such number of directors is present at any such meeting, a majority of the directors present or the sole director present may adjourn the meeting from time to time without further notice until a quorum is present, and provided further, that if one or more directors present at the time that any meeting of the Board of Directors is convened shall subsequently withdraw from the meeting before the transaction of any item or items of business specified in the notice of meeting or in a waiver of notice thereof duly executed by such withdrawing director or directors, then except as otherwise provided by applicable law or in the Articles of Incorporation, the quorum required to transact such item or items of business shall be reduced to one-third of the entire Board. - 12 - Section 3.11. VOTING. The action of the majority of the directors present at a meeting at which a quorum is present shall be the action of the Board of Directors, unless the concurrence of a great proportion or of any specified group of directors is required for such action by law, the Articles of Incorporation or these By-Laws. Section 3.12. PARTICIPATION IN MEETINGS BY TELEPHONE. Members of the Board of Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting for all purposes except compliance with provisions of the 1940 Act or of rules thereunder requiring that votes of directors be cast in person at a meeting. Section 3.13. INFORMAL ACTION BY DIRECTORS. Except as otherwise prescribed by or under the 1940 Act, any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if a consent in writing to such action is signed by each director and such written consent is filed with the minutes of proceedings of the Board of Directors. - 13 - ARTICLE IV COMMITTEES AND ADVISORY BOARD Section 4.1. EXECUTIVE AND OTHER COMMITTEES. The Board of Directors may appoint from among its members one or more committees, each consisting of two (2) or more directors and having such title as the Board may consider to be properly descriptive of its function, except that not more than one committee shall be designated as the Executive Committee. Each such committee shall serve at the pleasure of the Board of Directors. Section 4.2. POWERS; MINUTES; PROCEDURES. The Board of Directors may delegate to any of the committees appointed under Section 4.1 any of the powers of the Board of Directors, except the power to: (1) declare dividends or distributions on stock; (2) issue stock except pursuant to a general formula or method specified by the Board of Directors by resolution or by adoption of a stock option or other plan; (3) recommend to the stockholders any action which requires stockholder approval; (4) amend the By-Laws; or (5) approve any merger or share exchange which does not require stockholder approval. Each committee shall keep minutes or other appropriate written evidence of its meetings or proceedings and shall report the same to the Board of Directors as and when requested by the Board, and shall observe - 14 - such other procedures with respect to its meetings and proceedings as are prescribed in these By-Laws, or, to the extent not prescribed herein, as may be fixed by the Board of Directors or by such committee under authority granted by the Board. Section 4.3. ALTERNATE MEMBERS OF COMMITTEES. In the absence of any member of any such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint a director to act in the place of such absent member. Section 4.4. PARTICIPATION IN MEETINGS BY TELEPHONE. Members of a committee of the Board of Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting for all purposes except compliance with provisions of the 1940 Act or of rules thereunder requiring that votes of directors be cast in person at a meeting. Section 4.5. INFORMAL ACTION BY COMMITTEES. Except as otherwise prescribed by or under the 1940 Act, any action required or permitted to be taken at any meeting of a committee of the Board of Directors may be taken without a meeting, if a consent in writing to such action is signed by each member of the - 15 - committee and such written consent is filed with the minutes of proceedings of such committee. ARTICLE V WAIVER OF NOTICE Whenever any notice is required to be given pursuant to law, the Articles of Incorporation or these By-Laws, a waiver thereof in writing, signed by the person or persons entitled to such notice, or, in the case of any waiver of notice of any meeting of stockholders, signed by the proxy for a person entitled to notice thereof, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at nor the purpose of any meeting need be set forth in the waiver of notice, unless specifically required by law, the Articles of Incorporation or these By-Laws. The attendance of any person at any meeting in person, or, in the case of a meeting of stockholders, by proxy, shall constitute a waiver of notice of such meeting. ARTICLE VI OFFICERS Section 6.1. EXECUTIVE OFFICERS. The executive officers of the corporation shall be a Chairman of the Board, a - 16 - President, a Secretary and a Treasurer. If the Board of Directors shall elect one or more Vice-Presidents, each such Vice-President shall be an executive officer. The Chairman of the Board shall be elected from among the directors, but no other executive officer need be a member of the Board of Directors. Any two or more executive offices, except those of President and Vice-President, may be held by the same person. A person holding more than one office may not act in more than one capacity to execute, acknowledge or verify on behalf of the corporation an instrument required by law to be executed, acknowledged or verified by more than one officer. The executive officers of the corporation shall be elected by the Board of Directors at the annual meeting of the Board. Section 6.2. OTHER OFFICERS AND AGENTS. The Board of Directors may also elect or may delegate to the Chairman of the Board authority to appoint, remove, or fix the duties, compensation or terms of office of one or more assistant vice-presidents, assistant secretaries and assistant treasurers, and such other officers and agents as the Board shall at any time and from time to time deem to be advisable. Section 6.3. TENURE, RESIGNATION AND REMOVAL. Each officer of the corporation shall hold office until his successor is elected or appointed or until his earlier displacement from - 17 - office by resignation, removal or otherwise; provided that if the term of office of any officer elected or appointed pursuant to Section 6.2 shall have been fixed by the Board of Directors or by the Chairman of the Board acting under authority delegated by the Board, such officer shall cease to hold such office no later than the date of expiration of such term, regardless of whether any other person shall have been elected or appointed to succeed him. Any officer of the corporation may resign at any time by written notice to the corporation. Any officer or agent of the corporation may be removed at any time by the Board of Directors or by the Chairman of the Board acting under authority delegated by the Board pursuant to Section 6.2 if in its or his judgment the best interests of the corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights between the corporation and such officer or agent. Section 6.4. VACANCIES. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors or by the Chairman of the Board acting under authority delegated by the Board pursuant to Section 6.2. Each officer elected or appointed to fill a vacancy shall hold office - 18 - for the balance of the term for which his predecessor was elected or appointed. Section 6.5. COMPENSATION. The compensation, if any, of all officers of the corporation shall be fixed by the Board of Directors or by the Chairman of the Board acting under authority delegated by the Board pursuant to Section 6.2. Section 6.6. AUTHORITY AND DUTIES. All officers as between themselves and the corporation shall have such powers, perform such duties and be subject to such restrictions, if any, in the management of the corporation as may be provided in these By-Laws, or, to the extent not so provided, as may be prescribed by the Board of Directors or by the Chairman of the Board acting under authority delegated by the Board pursuant to Section 6.2. Section 6.7. CHAIRMAN OF THE BOARD. The Chairman of the Board shall be the chief executive officer of the corporation. He shall have general and active management of the business of the corporation, shall see to it that all orders, policies and resolutions of the Board of Directors are carried into effect, and in connection therewith shall be authorized to delegate to any Vice-President of the corporation such of his powers and duties as Chairman of the Board and at such times and in such manner as he shall deem advisable. In the absence or - 19 - disability of the President, the Chairman of the Board shall preside at all meetings of the stockholders and of the Board of Directors; and he shall have such other powers and perform such other duties as are incident to the office of Chairman of the Board and as the Board of Directors may from time to time prescribe. Section 6.8. PRESIDENT. The President shall preside at meetings of the stockholders and of the Board of Directors, and shall have such other powers and duties as may be prescribed by the Board. The President shall in the absence or disability of the Chairman of the Board exercise the powers and perform the duties of the Chairman of the Board. Section 6.9. VICE-PRESIDENTS. The Vice-President, if any, or, if there be more than one, the Vice-Presidents, shall assist the President in the management of the business of the corporation and the implementation of orders, policies and resolutions of the Board of Directors at such times and in such manner as the President may deem to be advisable. If there be more than one Vice-President, the Board of Directors may designate one as the executive Vice-President, in which case he shall be first in order of seniority, and the Board may also grant to other Vice-Presidents such titles as shall be descriptive of their respective functions or indicative of their - 20 - relative seniority. In the absence or disability of both the Chairman of the Board and the President, the Vice-President, or, if there be more than one, the Vice-Presidents in the order of their relative seniority, shall exercise the powers and perform the duties of those officers; and the Vice-President or Vice-Presidents shall have such other powers and perform such other duties as from time to time may be prescribed by the Chairman of the Board or by the Board of Directors. Section 6.10. ASSISTANT VICE-PRESIDENT. The assistant vice-president, if any, or if there be more than one, the assistant vice-presidents, shall perform such duties as may from time to time be prescribed by the Board of Directors or by the Chairman of the Board acting under authority delegated by the Board pursuant to Section 6.2. Section 6.11. SECRETARY. The Secretary shall (a) keep the minutes of the meetings and proceedings and any written consents evidencing actions of the stockholders, the Board of Directors and any committees of the Board in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these By-Laws or as required by law; (c) be custodian of the corporate records and of the seal of the corporation, and, when authorized by the Board of Directors, cause the corporate seal to be affixed to any document - 21 - requiring it, and when so affixed attested by his signature as Secretary or by the signature of an assistant secretary; and (d) in general, perform such other duties as from time to time may be assigned to him by the Board of Directors or by the Chairman of the Board. Section 6.12. ASSISTANT SECRETARIES. The assistant secretary, if any, or, if there be more than one, the assistant secretaries in the order determined by the Board of Directors or by the Chairman of the Board, shall in the absence or disability of the Secretary exercise the powers and perform the duties of the Secretary, and he or they shall perform such other duties as the Board of Directors, the Chairman of the Board or the Secretary may from time to time prescribe. Section 6.13. TREASURER. The Treasurer shall be the chief financial officer of the corporation. The Treasurer shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation, shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board of Directors, and shall render to the Board of Directors and the Chairman of the Board, at the regular meetings of the Board or whenever they may require it, an account of all his - 22 - transactions as Treasurer and of the financial condition of the corporation. If required by the Board of Directors, the Treasurer shall give the corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. Section 6.14. ASSISTANT TREASURERS. The assistant treasurer, if any, or, if there be more than one, the assistant treasurers in the order determined by the Board of Directors or by the Chairman of the Board, shall in the absence or disability of the Treasurer exercise the powers and perform the duties of the Treasurer, and he or they shall perform such other duties as the Board of Directors, the Chairman of the Board or the Treasurer may from time to time prescribe. - 23 - ARTICLE VII CONTRACTS, CHECKS, DEPOSITS AND REPORTS Section 7.1. CONTRACTS. The Board of Directors may authorize any officer or agent to enter into any contract or to execute and deliver any instrument in the name and on behalf of the corporation, and such authority may be general or confined to specific instances. Section 7.2. CHECKS AND DRAFTS. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation shall be signed by such officer or officers, agent or agents of the corporation and in such manner as shall from time to time be determined by the Board of Directors. Section 7.3. ANNUAL REPORT. The Chairman of the Board or another executive officer of the corporation designated by the Board of Directors shall prepare or cause to be prepared annually a full and correct statement of the affairs of the corporation, including a balance sheet and a statement of the results of operations for the preceding fiscal year, which shall be submitted at the annual meeting of the stockholders and filed within 20 days thereafter at the principal office of the corporation in the State of Maryland. - 24 - ARTICLE VIII SHARES OF STOCK Section 8.1. CERTIFICATES OF STOCK. Each stockholder shall be entitled to a certificate or certificates which shall represent and certify the number of full shares of each class of stock held by him in the corporation; provided, however, that the corporation need not issue a certificate to any stockholder until and unless demand for a certificate or certificates shall be made upon the corporation or its transfer agent and shall not be required to issue certificates representing fractional shares, and provided further, that a stock certificate shall not be issued until the stock represented by it is fully paid. Each certificate shall be signed by the Chairman of the Board, President or a Vice-President and countersigned by the Secretary or an assistant secretary or the Treasurer or an assistant treasurer and may be sealed with the corporate seal and shall contain such recitals as may be required by statute. The signatures on a certificate may be either manual or facsimile. A certificate is valid and may be issued whether or not an officer who signed it is still an officer when it is issued. A full record of the issuance of each certificate and the identifying number assigned thereto shall be made on the - 25 - books of the corporation usually kept for that purpose or required by statute. Section 8.2. TRANSFERS OF STOCK. Upon surrender to the corporation or the transfer agent of the corporation of a stock certificate duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, the corporation shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Shares of stock of the corporation not represented by certificate shall be transferred by recording the transaction on the books of the corporation by the transfer agent of the corporation upon presentation of proper evidence of succession, assignment or authority to transfer. The corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Maryland. Section 8.3. LOST CERTIFICATES. The Board of Directors may establish procedures pursuant to which a new stock - 26 - certificate or certificates may be issued in place of any certificate or certificates theretofore issued by the corporation which have been mutilated or which are alleged to have been lost, stolen or destroyed. The Board of Directors, in its discretion and as a condition precedent to the issuance of any new certificate, may include among such procedures a requirement that the owner of any certificate alleged to have been lost, stolen or destroyed, or his legal representative, furnish the corporation with a bond, in such sum and with such surety or sureties as it may direct, as indemnity against any claim that may be made against the corporation in respect of such lost, stolen or destroyed certificate. Section 8.4. FIXING OF RECORD DATE. The Board of Directors may set a record date for the purpose of determining stockholders entitled to notice of, or to vote at, any meeting of stockholders or at any adjournment thereof in respect of which a new record date is not fixed, or stockholders entitled to receive payment of any dividend or the allotment of any other rights, or to exercise any rights in respect of any change, conversion or exchange of stock, or in order to make a determination of stockholders for any other proper purpose. Such date may not be prior to the close of business on the day such date is fixed. Such date, in any case, shall be not more than ninety (90) days, and in case of a meeting of stockholders not less than ten (10) - 27 - days, before the date on which the meeting or particular action requiring such determination of stockholders is to be held or taken. If no record date is fixed (a) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be the later of: (i) the close of business on the day on which the notice of meeting is first mailed to any stockholder; or (ii) the 30th day before the meeting; and (b) the record date for the determination of stockholders entitled to receive payment of a dividend or an allotment of any other rights shall be at the close of business on the day on which the resolution of the Board of Directors, declaring the dividend or allotment of rights, is adopted. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof, subject to any applicable requirement of Section 2.6 for additional notice of the adjourned meeting. Section 8.5. STOCK LEDGER. The corporation shall maintain at its principal office or at the office of its counsel, accountants or transfer agent, an original or duplicate stock ledger containing the name and address of each stockholder and the number of shares of stock of each class held by such stockholder. Such stock ledger may be in written form or in any - 28 - other form which can be converted within a reasonable time into written form for visual inspection. ARTICLE IX FISCAL YEAR The Board of Directors shall have the power, from time to time, to fix the fiscal year of the corporation, provided that if the Board shall not have taken action to fix a different fiscal year, the fiscal year of the corporation shall end on December 31 of each year. ARTICLE X DIVIDENDS Dividends upon the shares of stock of the corporation may be declared by the Board of Directors, subject to the provisions of law and the Articles of Incorporation. Dividends may be paid in cash, property or stock of the corporation, subject to the provisions of law, the Articles of Incorporation and these By-Laws. - 29 - ARTICLE XI CORPORATE SEAL The Board of Directors may provide for a suitable corporate seal, in such form and bearing such inscriptions as it may determine. Whenever the corporation is required to affix its corporate seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a corporate seal to place the word "(seal)" adjacent to the signature of the authorized officer. ARTICLE XII INDEMNIFICATION AND INSURANCE Section 12.1. The corporation shall indemnify any individual who is a present or former director or officer of the corporation 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 with such Proceeding, to the fullest extent that such indemnification may be lawful under Section 2-418 of the General Corporation Law of Maryland or any - 30 - provision enacted as a successor thereto (hereinafter called the "applicable Maryland statutory provision"). The corporation 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 that such advance payment may be lawful under the applicable Maryland statutory provision. Any payment of indemnification or advance payment of expenses shall be made subject to and in accordance with the procedures set forth in the applicable Maryland statutory provision. However, nothing contained in this Section 12.1 shall protect or purport to protect any director or officer of the corporation against any liability to which he 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 office (any such conduct being hereinafter called "Disabling Conduct"). Section 12.2. Anything in Section 12.1 to the contrary notwithstanding, no indemnification shall be made by the corporation to any director or officer unless: (a) there is a final decision on the merits by a court or other body before whom the Proceeding was brought that the director or officer to be indemnified was not liable by reason of Disabling Conduct; or - 31 - (b) 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 corporation as defined in section 2(a)(19) of the 1940 Act, nor parties to the Proceeding; or (ii) an independent legal counsel in written opinion. Section 12.3. Anything in Section 12.1 to the contrary notwithstanding, any advance payment of expenses by the corporation to any director or officer of the corporation shall be made only upon the undertaking by such director or officer to repay the advance unless it is ultimately determined that he is entitled to indemnification as above provided, and only if one of the following conditions is met: (a) the director or officer to be indemnified provides a security for his undertaking; or (b) the corporation shall be insured against losses arising by reason of any lawful advances; or - 32 - (c) 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 corporation, 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. Section 12.4. To the fullest extent permitted by the applicable Maryland statutory provision and Section 17(h) of the 1940 Act, the corporation may purchase and maintain insurance on behalf of any officer or director of the corporation, against any liability asserted against him and incurred by him in and arising out of his position, whether or not the corporation would have the power to indemnify him against such liability. - 33 - ARTICLE XIII FEDERAL SUPREMACY If at a time when the corporation is registered as an investment company under the 1940 Act, any of the foregoing provisions of these By-Laws or the General Corporation Law of Maryland shall conflict or be inconsistent with any applicable provision of the 1940 Act or of any order thereunder, the applicable provision of the 1940 Act or any order thereunder shall be controlling and the corporation shall not take any action thereunder which is in conflict or inconsistent therewith. Without limiting the generality of the foregoing, if any applicable provision of the 1940 Act or any order thereunder requires, with respect to any matter requiring action by the stockholders, the Board of Directors, a committee of the Board, or a specified group of directors of the corporation, the affirmative vote of a greater number of shares or directors than would otherwise be required under the General Corporation Law of Maryland, the Articles of Incorporation of the corporation or these By-Laws, then that provision of the 1940 Act or order thereunder shall be controlling. - 34 - ARTICLE XIV INVESTMENT RESTRICTIONS The Corporation shall not: (a) Purchase securities on margin from brokers; (b) Issue senior securities except to the extent of borrowing; (c) Concentrate more than 25% of the value of its total assets in a particular industry; (d) Purchase the securities of other investment companies, except in connection with a merger, consolidation, reorganization or acquisition of assets, unless immediately after a purchase, (i) the Corporation holds 3% or less of the total outstanding voting stock of the acquired investment company; (ii) the acquired stock has an aggregate value equal to 5% or less of the value of the total assets of the Corporation and (iii) the aggregate value of the acquired stock and the stock of all other investment companies held by the Corporation has a value of 10% or less of the total assets of the Corporation; all such securities must be acquired by the Corporation in the open market in transactions involving no commissions or discounts to a - 35 - sponsor or dealer other than customary brokerage commissions; (e) Lend its portfolio securities, unless the borrower is an unaffiliated broker, dealer or financial institution that pledges and maintains cash or equivalent collateral (such as Government securities) or an irrevocable letter of credit in favor of the Corporation equal in value at all times to at least 100% of the value of the securities loaned, provided that the aggregate amount of such loans shall not exceed 30% of the Corporation's total net assets; (f) Make short sales (except for short sales "against the box," which are short sales made when the Corporation owns securities identical to those sold short) 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 Corporation's net assets; (g) Write, purchase or sell put and covered call options or combinations thereof unless immediately after purchase of any such contract the aggregate sum represented by - 36 - premiums paid for such option contracts then held by the Corporation does not exceed 10% of the Corporation's net assets; (h) Invest more than 5% of its net assets in warrants; warrants not listed on the New York or American Stock Exchanges may not exceed 2% of the Fund's net assets; (i) Invest more than 25% of its net assets in the securities of issuers domiciled in foreign countries; (j) Act as an underwriter of securities of other issuers, except that the Corporation may invest no more than 10% of the value of its assets (at time of investment) in securities which are not readily marketable, including repurchase agreements with maturities over seven days, and restricted securities which the Corporation may not be free to sell without being deemed an underwriter for purposes of the Securities Act of 1933 and without registration of such securities under such Act, in which case the Corporation might be obliged to pay all or a part of the expenses of such registration; (k) Invest in commodities, commodity contracts or real estate, - 37 - except that the Corporation may invest in readily marketable securities of real estate trusts or companies and in master limited partnership interests traded on a National Securities Exchange; (l) Borrow money, except from banks in an amount which will not cause the Corporation's net assets (including the amount borrowed) less its liabilities (excluding borrowings but including securities borrowed in connection with short sales) to be less than 300% of the amount of the borrowing, and then providing that (i) if the Corporation's assets become less than 3 times the amount of the Corporation's bank borrowing, the corporation will within 3 days (not including Saturdays, Sundays or holidays) reduce its bank borrowing to the extent required to restore such 300% coverage and (ii) such bank borrowing may be collateralized by the deposit of portfolio securities, 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 Corporation or the value of such pledged securities exceed 75% of the Corporation's total assets; (m) With respect to 50% of the value of its assets, invest more - 38 - than 5% of the value of its assets in any one issuer, excluding United States Government securities, or purchase more than 10% of the outstanding securities of any one issuer; (n) Participate in a joint securities trading account; (o) Purchase the securities of an issuer, if any affiliate (including the Corporation'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; (p) Invest 20% or more of the Corporation's net assets in securities of issuers with an operating history of less than 3 years continuous operation; (q) Invest in oil, gas or mineral leases; (r) Make loans except through the purchase of bonds, debentures or similar obligations (including repurchase agreements subject to the limitation described in (j) above) which are either publicly distributed or customarily purchased by institutional investors. - 39 - ARTICLE XIV AMENDMENT OF BY-LAWS These By-Laws may be amended or repealed, and new By-Laws may be adopted, by vote of the stockholders or by the Board of Directors; provided, however, that any By-Law or amendment to the By-Laws so adopted by the Board of Directors may be amended or repealed, and any By-Law so repealed by the Board may be reinstated by vote of the stockholders in which case the Board shall not thereafter take action with respect to the By-Laws which is inconsistent with the action so taken by such stockholders; and provided further, that the Board of Directors shall not have power to amend or repeal any existing By-Law or to adopt any new By-Law containing provisions inconsistent with any existing By-Law, which by its terms may be amended or repealed only by the stockholders. - 40 - EX-5 4 INVESTMENT ADVISORY AGREEMENT Exhibit 5 INVESTMENT ADVISORY AGREEMENT BETWEEN THE KAUFMANN FUND, INC. AND EDGEMONT ASSET MANAGEMENT CORPORATION ------------------------------------- AGREEMENT made this 14th day of January, 1993, by and between THE KAUFMANN FUND, INC., a Maryland corporation (hereinafter called the "Fund"), and EDGEMONT ASSET MANAGEMENT CORPORATION, a New York corporation (hereinafter called the "Advisor"). The Fund and the Advisor hereby agree as follows: 1. Duties of the Advisor. The Advisor shall, during the term and subject to the provisions of this Agreement, (i) determine the composition of the Fund's portfolio, the nature and timing of the changes therein and the manner of implementing such changes and (ii) provide 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 shall perform such duties in accordance with the applicable provisions of the Fund's Certificate of Incorporation, By-laws and current prospectus and current statement of additional information, and any directions it may receive from the Fund's Board of Directors. 2. Expenses Payable by the Fund. Except as otherwise provided in Paragraphs 1 and 3 hereof, 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 supplies and postage; Federal and state registration fees; Federal, state and local taxes; non-affiliated directors' fees; interest on its bank loans; and brokerage commissions. 3. Expenses Payable by the Advisor. The Advisor shall furnish, without expense to the Fund, the services of those of the Advisor's officers and full-time employees who may be duly elected executive officers or directors of the Fund, subject to their individual consent to serve and to any limitations imposed by Law, and shall pay all of the salaries and expenses of the Fund's executive officers. For purposes of this Agreement, only the President, any Vice President and the Treasurer of the Fund shall be deemed to be executive officers of the Fund. The Advisor shall also pay (a) any expenses incurred by the Fund in connection with its promoting the sale of its shares, including advertising, compensation of sales personnel, the printing and mailing of prospectuses to other than current stockholders and the printing and mailing of sales literature, except to the extent provided under the Fund's Distribution Plan pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended, and (b) all expenses which it may incur in performing its duties under Paragraph 1 hereof, and shall reimburse the Fund for any space leased by the Fund and occupied by the Advisor. In the event the Fund shall qualify its shares for sale in any jurisdiction the applicable statutes or regulations of which expressly limit the amount of the Fund's total annual expenses, the Advisor shall reduce its annual investment advisory fee to the extent that the Fund's total annual expenses (other than brokerage commissions and other capital items, interest, taxes, extraordinary items and other excludable items, charges, costs and expenses) exceed the regulations of any such jurisdiction, so long as the Fund remains so qualified in such jurisdiction. 4. Compensation of the Advisor. The Fund shall pay to the Advisor and the Advisor shall accept as compensation for the services which it provides by the Advisor hereunder, a fee equal to 1-1/2% per annum of the Fund's average total net assets at the close of business on each day that the value of its net assets is computed during each fiscal year. Such compensation shall be accrued on the Fund's books at the close of business on each day that the value of the Fund's net assets is computed during each year and shall be payable to the Advisor monthly, on the last day of each month, and adjusted as of year-end if required. 5. Brokerage Commissions. The Advisor is hereby authorized, to the fullest extent now or hereafter permitted by law, to cause the Fund to pay a member of a national securities exchange, broker or dealer an amount of commission for effecting a securities transaction in excess of the amount of commission another member of such exchange, broker or dealer would have charged for effecting that transaction, if the Advisor determines in good faith that such amount of commission is reasonable in relation to the value of the brokerage and research services provided by such member, broker or dealer, viewed in terms of either that particular transaction or the Advisor's overall responsibilities with respect to the Fund. 6. Limitations on the Employment of the Advisor. The services of the Advisor to the Fund shall not be deemed exclusive, and the Advisor may engage in any other business or render similar or different services to others so long as its services to the Fund hereunder are not impaired thereby, and nothing in this Agreement shall limit or restrict the right of any director, officer or employee of the Advisor to engage in any other business or to devote his time and attention in part to any other business, whether of a similar or dissimilar nature. So long as this Agreement or any extension, renewal or amendment remains in effect, the Advisor shall be the only investment adviser to the Fund, subject to the Advisor's right to enter into sub-advisory agreements. The Advisor assumes no responsibility under this Agreement other than to render the services called for hereunder, and shall not be responsible for any action 2 of or direction by the Fund's Board of Directors, or any committee thereof, or any omission by any of them, unless such action or omission has been caused by the Advisor's gross negligence, willful malfeasance, bad faith or reckless disregard of its obligations and duties under this Agreement. 7. Responsibility of Dual Directors, Officers and/or Employees. If any person who is a director, officer or employee of the Advisor is or becomes a director, officer and/or employee of the Fund and acts as such in any business of the Fund pursuant to this Agreement, then such director, officer and/or employee of the Advisor shall be deemed to be acting in such capacity solely for the Fund, and not as a director, officer or employee of the Advisor or under the control or direction of the Advisor, although paid by the Advisor. 8. Protection of the Advisor. The Advisor shall not be liable to the Fund for any action taken or omitted to be taken by the Advisor in connection with the performance of any of its duties or obligations under this Agreement or otherwise as an investment adviser of the Fund, and the Fund shall indemnify the Advisor and hold it harmless from and against all damages, liabilities, costs and expenses (including reasonable attorneys' fees and amounts reasonably paid in settlement) incurred by the Advisor in or by reason of any pending, threatened or completed action, suit, investigation or other proceeding (including an action or suit by or in the right of the Fund or its security holders) arising out of or otherwise based upon any action actually or allegedly taken or omitted to be taken by the Advisor in connection with the performance of any of its duties or obligations under this Agreement or otherwise as an investment adviser of the Fund. Notwithstanding the provisions of the preceding sentence of this Paragraph 8, nothing contained herein shall protect or be deemed to protect the Advisor against, or entitle or be deemed to entitle the Advisor to indemnification in respect of, any liability to the Fund or its security holders to which the Advisor would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement. Determination of whether and the extent to which the Advisor is entitled to indemnification hereunder shall be made by reasonable and fair means, including (a) a final decision on the merits by a court or other body before whom the action, suit or other proceeding was brought that the Advisor was not liable by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of its duties or (b) in the absence of such a decision, a reasonable determination, based upon a review of the facts, that the Advisor was not liable by reason of such misconduct by (i) the vote of a majority of a quorum of the directors of the Fund who are neither "interested persons" of the Fund (as defined in Section 2(a)(19) of the Investment Company Act of 1940) nor parties to the action, suit or other proceedings or (ii) an independent legal counsel in a written opinion. 3 9. Effectiveness, Duration and Termination of Agreement. This Agreement was approved by the Fund's Board of Directors, including by a majority of the disinterested Directors, and by the Fund's sole shareholder on January 14, 1993. This Agreement shall become effective on the first day following the effective date of the merger by and between The Kaufmann Fund, Inc., a New York corporation and the Fund, as survivor of the merger. This Agreement shall remain in effect until October 30, 1993, and thereafter shall continue automatically for successive annual periods, provided that such continuance is specifically approved at least annually by (a) the vote of the Fund's Board of Directors, or (b) the vote of a majority of the Fund's outstanding voting shares, provided that in either event the continuance is also approved by a majority of such directors who are not parties to this Agreement or "interested persons" (as such term is defined in the Investment Company Act of 1940) of any such party, cast in person at a meeting called for the purpose of voting on such approval. This Agreement may be terminated at any time, without the payment of any penalty, on 60 days written notice by the vote of a majority of the Fund's outstanding voting securities or by the vote of a majority of the Fund's Board of Directors or by the Advisor, and will automatically terminate in the event of its "assignment" (as such term is defined in the Investment Company Act of 1940); provided, however, that the provisions of Paragraph 8 of this Agreement shall remain in full force and effect, and the Advisor shall remain entitled to the benefits thereof, notwithstanding any such termination. Any notice under this Agreement shall be given in writing, addressed and delivered or mailed, postage prepaid, to the other party at its principal office. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. THE KAUFMANN FUND, INC. Attest: /s/ Lawrence Auriana By /s/ Hans P. Utsch - ------------------------------------- ----------------------------------- Lawrence Auriana, Secretary Hans P. Utsch, President EDGEMONT ASSET MANAGEMENT CORPORATION Attest: /s/ Olga Mendez By /s/ Lawrence Auriana - ------------------------------------- ----------------------------------- Olga Mendez, Secretary Lawrence Auriana, President EX-11.1 5 INDEPENDENT AUDITOR'S REPORT INDEPENDENT AUDITOR'S REPORT To the Shareholders and Board of Directors of The Kaufmann Fund, Inc. We have audited the accompanying statement of assets and liabilities of The Kaufmann Fund, Inc., including the schedules of investments and securities sold short, as of December 31, 1995, and the related statement of operations for the year then ended, the statement of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1995, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of The Kaufmann Fund, Inc. as of December 31, 1995, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended, in conformity with generally accepted accounting principles. Abington, Pennsylvania SANVILLE & COMPANY January 31, 1996 Certified Public Accountants EX-11.2 6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the use of our report, dated January 31, 1996, on the annual financial statements and financial highlights of The Kaufmann Fund, Inc., which is included in Part A and Part B in Post Effective Amendment No. 45 to the Registration Statement under the Securities Act of 1933 and included in the Prospectus and Statement of Additional Information, as specified, and to the reference made to us under the caption "Independent Auditors" in the Statement of Additional Information. Abington, Pennsylvania SANVILLE & COMPANY February 8, 1996 Certified Public Accountants EX-16 7 EXPENSE CALCULATIONS FOR FEE TABLE EXAMPLES The Kaufmann Fund, Inc. Expense Calculations For Fee Table Examples December 31, 1995 Assumptions: $1,000 investment, 5% no-load annual return, 2.17% expenses 5% - 2.17% = 2.83% Cumula- Redemp- Redemp- Cumula- tive tion tion tive Year Amounts Average Expense % Expenses Expenses Fee % Fee Expenses - ------------------------------------------------------------------------------- 1 1,000 1,014 2.17% 22 22 0.2% 2 24 1,028 2 1,028 1,043 2.17% 23 1,057 3 1,057 1,072 2.17% 23 68 0.2% 2 70 1,087 4 1,087 1,103 2.17% 24 1,118 5 1,118 1,134 2.17% 25 117 0.2% 2 119 1,150 6 1,150 1,167 2.17% 25 1,183 7 1,183 1,200 2.17% 26 1,216 8 1,216 1,233 2.17% 27 1,250 9 1,250 1,268 2.17% 28 1,285 10 1,285 1,303 2.17% 28 251 0.2% 3 254 1,321 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and 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 ________ day of March, 1996. THE KAUFMANN FUND, INC. /s/ Hans P. Utsch By: ___________________________ 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 March 11, 1996 ______________________ Director, _________________ HANS P. UTSCH President and Treasurer /s/ Lawrence Auriana March 11, 1996 ______________________ Chairman of Board, _________________ LAWRENCE AURIANA Director, Vice President and Secretary /s/ Leon Lebensbaum March 11, 1996 ______________________ Director _________________ LEON LEBENSBAUM /s/ Gerard M. Grosof March 11, 1996 ______________________ Director _________________ GERARD M. GROSOF NAME TITLE DATE /s/ Pauline Gold March 11, 1996 ______________________ Director _________________ PAULINE GOLD /s/ Roger E. Clark March 11, 1996 ______________________ Director _________________ ROGER E. CLARK COUNSEL'S REPRESENTATION Post-Effective Amendment No. 45 to the Registration Statement on Form N-1A of The Kaufmann Fund, Inc. does not contain disclosures which would render it ineligible to become effective pursuant to paragraph (b) of Rule 485 under the Securities Act of 1933, as amended. /s/ Martin V. Miller -------------------------------- MARTIN V. MILLER, Counsel for The Kaufmann Fund, Inc. -----END PRIVACY-ENHANCED MESSAGE-----