As filed with the Securities and Exchange Commission on September 17, 1996
File Nos. 333-08045
811-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. 1
Post-Effective Amendment No. ___
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. ___
Kayne Anderson Mutual Funds
(Exact Name of Registrant as Specified in its Charter)
1800 Avenue of the Stars, 2nd Floor
Los Angeles, California 90067
(Address of Principal Executive Office)
(310) 556-2721
(Registrant's Telephone Number, Including Area Code)
William T. Miller
1800 Avenue of the Stars, 2nd Floor
Los Angeles, California 90067
(Name and Address of Agent for Service)
_________________________
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date hereof.
It is proposed that this filing will become effective:
___ immediately upon filing pursuant to Rule 485(b)
___ on _______________, pursuant to Rule 485(b)
___ 60 days after filing pursuant to Rule 485(a)
___ on _______________, pursuant to Rule 485(a)
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant is registering an indefinite number of securities under the
Securities Act of 1933.
The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until the
Registrant shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933.
__________
Please Send Copy of Communications to:
DAVID A. HEARTH, ESQ.
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, California 94104
(415) 772-6000
Total number of pages _____. Exhibit Index appears at _____.
<PAGE>
Kayne Anderson Mutual Funds
CONTENTS OF REGISTRATION STATEMENT
This registration statement contains the following documents:
Facing Sheet
Contents of Registration Statement
Cross - Reference Sheets for Kayne Anderson Mutual Funds
Part A - Combined Prospectus for Kayne Anderson Mutual Funds
Kayne Anderson Rising Dividends Fund
Kayne Anderson Small-Mid Cap Rising Dividends Fund
Kayne Anderson International Rising Dividends Fund
Kayne Anderson Intermediate Total Return Bond Fund
Kayne Anderson Intermediate Tax-Free Bond Fund
Part B - Combined Statement of Additional Information for Kayne
Anderson Mutual Funds
Kayne Anderson Rising Dividends Fund
Kayne Anderson Small-Mid Cap Rising Dividends Fund
Kayne Anderson International Rising Dividends Fund
Kayne Anderson Intermediate Total Return Bond Fund
Kayne Anderson Intermediate Tax-Free Bond Fund
Part C - Other Information
Signature Page
<PAGE>
Kayne Anderson Mutual Funds
CROSS REFERENCE SHEETS
FORM N-1A
Part A: Information Required in Prospectus
------------------------------------------
(Combined Prospectus for Kayne Anderson Mutual Funds)
Kayne Anderson Rising Dividends Fund
Kayne Anderson Small-Mid Cap Rising Dividends Fund
Kayne Anderson International Rising Dividends Fund
Kayne Anderson Intermediate Total Return Bond Fund
Kayne Anderson Intermediate Tax-Free Bond Fund
<TABLE>
<CAPTION>
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- ----------------------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis "Prospectus Summary" and "Summary of Expenses
and Example"
3. Condensed Financial Not Applicable
Information
4. General Description Cover Page, "Prospectus Summary,"
of Registrant "Investment Objectives and Policies," "Risk
Considerations," "Portfolio Securities and Investment
Techniques" and "General Information"
5. Management of "Adviser Investment Returns," "Investment
the Fund Objectives and Policies," "Organization and
Management" and "Purchasing Shares"
5A. Management's Discussion Not Applicable
of Fund Performance
6. Capital Stock and "Organization and Management," "Dividends,
Other Securities Distributions and Tax Status" and "General
Information"
7. Purchase of Securities "Purchasing Shares," "Exchange of Shares," "Selling
Being Offered Shares (Redemptions)," "Shareholder Services" and
"Share Price Calculation"
8. Redemption or "Selling Shares (Redemptions)"
Repurchase and "General Information"
9. Pending Legal Not Applicable
Proceedings
</TABLE>
<PAGE>
PART B: Information Required in
Statement of Additional Information
-----------------------------------
(Combined Statement of Additional Information for Kayne Anderson Mutual Funds)
Kayne Anderson Rising Dividends Fund
Kayne Anderson Small-Mid Cap Rising Dividends Fund
Kayne Anderson International Rising Dividends Fund
Kayne Anderson Intermediate Total Return Bond Fund
Kayne Anderson Intermediate Tax-Free Bond Fund
<TABLE>
<CAPTION>
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- ----------------------
<S> <C> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information Cover Page and "Additional Information"
and History
13. Investment Objectives "Investment Objectives and Policies" and "The Funds'
Investment Limitations"
14. Management of the "Management of the Funds"
Registrant
15. Control Persons and "Management of the Funds" and "Additional
Principal Holders of Information"
Securities
16. Investment Advisory "Management of the Funds," "The Funds'
and Other Services Administrator," "The Funds' Distributor" and
"Transfer Agent and Custodian"
17. Brokerage Allocation "Management of the Funds"
18. Capital Stock and "Additional Information"
Other Securities
19. Purchase, Redemption "Share Purchases and Redemptions" and "How Net
and Pricing of Asset Value is Determined"
Securities Being
Offered
20. Tax Status "Dividends, Distributions and Taxes"
21. Underwriters "The Funds' Distributor"
22. Calculation of "How Performance is Determined"
Performance Data
23. Financial Statements Not Applicable
</TABLE>
<PAGE>
---------------------------------------------------------------------
PART A
COMBINED PROSPECTUS
Kayne Anderson Mutual Funds
Kayne Anderson Rising Dividends Fund
Kayne Anderson Small-Mid Cap Rising Dividends Fund
Kayne Anderson International Rising Dividends Fund
Kayne Anderson Intermediate Total Return Bond Fund
Kayne Anderson Intermediate Tax-Free Bond Fund
---------------------------------------------------------------------
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY ANY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY STATE.
SUBJECT TO COMPLETION -- Dated September 17, 1996
KAYNE ANDERSON MUTUAL FUNDS
Kayne Anderson Rising Dividends Fund
Kayne Anderson Small-Mid Cap Rising Dividends Fund
Kayne Anderson International Rising Dividends Fund
Kayne Anderson Intermediate Total Return Bond Fund
Kayne Anderson Intermediate Tax-Free Bond Fund
Kayne Anderson Mutual Funds (the "Trust") is an open-end investment company
consisting of separate diversified series, five of which are offered through
this prospectus (the "Funds"). Each Fund has its own objective, assets and
liabilities. Kayne Anderson Investment Management, L.P. ("Kayne Anderson" or the
"Adviser") serves as investment adviser to the Funds.
The Rising Dividends Fund seeks long-term capital appreciation, with dividend
income as a secondary consideration. This Fund invests primarily in equity
securities, usually common stocks, of companies of all sizes.
The Small-Mid Cap Rising Dividends Fund seeks long-term capital appreciation,
with dividend income as a secondary consideration. This Fund invests primarily
in equity securities, usually common stocks, of small and mid capitalization
domestic companies, which the Fund currently considers to be companies having
total market capitalizations of not more than $3 billion.
The International Rising Dividends Fund seeks long-term capital appreciation,
with dividend income as a secondary consideration. This Fund invests primarily
in equity securities, usually common stocks, of companies outside the U.S.
generally having total market capitalizations of $1 billion or more.
The Intermediate Total Return Bond Fund seeks current income with capital
appreciation as a secondary consideration. This Fund invests primarily in
investment grade debt securities and seeks to maintain an average maturity of
three to ten years.
The Intermediate Tax-Free Bond Fund seeks current income exempt from federal
income tax consistent with preservation of capital. This Fund invests primarily
in investment grade debt securities and may maintain an average maturity of more
than ten years.
This prospectus sets forth the basic information that prospective investors
should know before investing in a Fund. Investors should read this prospectus
carefully and retain it for future reference. A Statement of Additional
Information dated September __, 1996, as may be amended from time to time, has
been filed with the Securities and Exchange Commission and is incorporated by
reference into this Prospectus. You may obtain that Statement of Additional
Information without charge by writing to the Funds at the address noted below or
by calling (800) __________.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
Kayne Anderson Mutual Funds
1800 Avenue of the Stars, 2nd Floor
Los Angeles, California 90067
(800) ___________
Prospectus dated September __, 1996
<PAGE>
TABLE OF CONTENTS
SUMMARY OF EXPENSES AND EXAMPLE............................................ 1
PROSPECTUS SUMMARY......................................................... 2
FINANCIAL HIGHLIGHTS....................................................... 4
INVESTMENT OBJECTIVES AND POLICIES......................................... 5
The Rising Dividends Fund................................................ 5
The Small-Mid Cap Rising Dividends Fund.................................. 5
The International Rising Dividends Fund.................................. 5
The Intermediate Total Return Bond Fund.................................. 7
The Intermediate Tax-Free Bond Fund...................................... 7
Additional Investment Considerations..................................... 8
RISK CONSIDERATIONS........................................................ 9
PORTFOLIO SECURITIES AND
INVESTMENT TECHNIQUES...................................................... 11
ORGANIZATION AND MANAGEMENT................................................ 17
PURCHASING SHARES.......................................................... 19
EXCHANGE OF SHARES......................................................... 22
SELLING SHARES (REDEMPTIONS)............................................... 22
SHAREHOLDER SERVICES....................................................... 25
SHARE PRICE CALCULATION.................................................... 25
DIVIDENDS, DISTRIBUTIONS AND TAX
STATUS..................................................................... 26
PERFORMANCE INFORMATION.................................................... 27
GENERAL INFORMATION........................................................ 28
<PAGE>
SUMMARY OF EXPENSES
This table is designed to help you understand the costs of investing in a Fund.
These are the estimated expenses of each Fund for the first full year of
operations. Although not required to do so, the Adviser has agreed to reimburse
each Fund in the current fiscal year to the extent necessary so that its ratio
of total operating expenses to average net assets will not exceed the following
levels: Rising Dividends Fund--1.20%*; Small-Mid Cap Rising Dividends
Fund--1.30%*; International Rising Dividends Fund--1.40%*; Intermediate Total
Return Bond Fund--0.95%*; and Intermediate Tax-Free Bond Fund--0.95%*.
<TABLE>
<CAPTION>
Small-Mid International
Rising Cap Rising Rising Intermediate Intermediate
Dividends Dividends Dividends Total Return Tax-Free
Fund Fund Fund Bond Fund Bond Fund
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses*
Maximum sales charge on purchases
(as a percentage of offering price) None None None None None
Sales charge on reinvested dividends None None None None None
Redemption fee+ None None None None None
Exchange fee None None None None None
Total Annual Fund Operating
Expenses*
(as a percentage of average net
assets)
Management fees 0.75% 0.85% 0.95% 0.50% 0.50%
12b-1 expenses None None None None None
Other expenses after
expense reimbursement 0.45% 0.45% 0.45% 0.45% 0.45%
-------------------------------------------------------------------------------------------
Total operating expenses after 1.20%* 1.30%* 1.40%* 0.95%* 0.95%*
expense reimbursement
</TABLE>
*The ratios of total operating expenses to average net assets for each Fund
before the Adviser's voluntary reimbursement are estimated as follows: Rising
Dividends Fund--1.38%; Small-Mid Cap Rising Dividends Fund--2.10%; International
Rising Dividends Fund--2.45%; Intermediate Total Return Bond Fund--1.75%; and
Intermediate Tax-Free Bond Fund--1.75%. Of these total expense amounts, "other
expenses" before reimbursement are estimated as follows: Rising Dividends
Fund--0.63%; Small-Mid Cap Rising Dividends Fund--1.25%; International Rising
Dividends Fund--1.50%; Intermediate Total Return Bond Fund--1.25%; and
Intermediate Tax-Free Bond Fund--1.25%. In subsequent years, overall operating
expenses for each Fund may not fall below the applicable percentage limitation
until the Adviser has been fully reimbursed for fees foregone or expenses paid
by it under the Management Agreement. Each Fund will reimburse the Adviser in
the three following years if operating expenses (before reimbursement) are less
than the applicable percentage limitation charged to the Fund.
+ Shareholders who effect redemptions via wire transfer will be charged a $7.00
fee and may be required to pay a third-party service provider charge that will
be directly deducted from redemption proceeds.
EXAMPLE
This table illustrates the expenses that would be incurred by an investment in
each Fund over different time periods assuming a $1,000 investment, a 5% annual
return, and redemption at the end of each period. The Funds charge no redemption
fees. The Example should not be considered a representation of past or future
expenses and actual expenses may be greater or less than those shown.
<TABLE>
<CAPTION>
Small-Mid International
Rising Cap Rising Rising Intermediate Intermediate
Dividends Dividends Dividends Total Return Tax-Free
Fund Fund Fund Bond Fund Bond Fund
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One year.................. $12 $13 $14 $10 $10
Three years............... $38 $41 $44 $30 $30
Five years................ $66 N/A N/A N/A N/A
Ten years................. $145 N/A N/A N/A N/A
</TABLE>
The Example shown above assumes that the Adviser will limit the annual operating
expenses of each Fund to the totals shown. In addition, federal regulations
require the Example to assume a 5% annual return, but the Funds' actual returns
may be higher or lower. See "Organization and Management."
1
<PAGE>
PROSPECTUS SUMMARY
Investment Objectives and Policies
Each Fund has its own investment objective. See "Investment Objectives and
Policies" for a full discussion of the objectives of each Fund. The investment
objective of each Fund is fundamental and may not be changed without
shareholder approval.
The Investment Adviser
The Adviser is a registered investment adviser organized as a California limited
partnership. The Adviser's predecessor was founded in 1984 by Richard Kayne and
John Anderson. The Adviser is in the business of furnishing investment advice to
institutional and private clients and, together with its affiliated investment
adviser, KAIM Non-Traditional, L.P., currently manages approximately $2.3
billion for such clients.
Management Fee
For its services, the Adviser receives a fee, accrued daily and paid monthly, at
the following annual percentages of average daily net assets: Rising Dividends
Fund--0.75%; Small-Mid Cap Rising Dividends Fund--0.85%; International Rising
Dividends Fund--0.95%; Intermediate Total Return Bond Fund--0.50%; and
Intermediate Tax-Free Bond Fund--0.50%.
Minimum Purchase
The minimum initial investment in the Fund is $2,000. For retirement plan
investments and custodial accounts under the Uniform Gifts/Transfers to Minors
Act the minimum is $1,000. The minimum for additional investments is $250. The
minimum for additional investments is reduced to $100 for purchases through the
Automatic Investment Plan or for purchases by retirement plans through payroll
deductions.
Offering Price and Redemptions
Shares are offered at their net asset value without a sales charge and may be
redeemed at their net asset value on any business day. See "Purchasing Shares"
and "Selling Shares (Redemptions)."
Dividends and Distributions
The Rising Dividends, Small-Mid Cap Rising Dividends and International Rising
Dividends Funds expect to pay dividends annually. The Intermediate Total Return
Bond and Intermediate Tax-Free Bond Funds expect to pay dividends monthly.
Distributions of net capital gains, if any, will be made at least annually. The
Board of Trustees may determine to declare dividends and make distributions more
or less frequently.
Dividends and capital gain distributions (net of any required tax withholding)
are automatically reinvested in additional shares at the net asset value per
share on the reinvestment date unless the shareholder has previously requested
in writing to the Transfer Agent that payment be made in cash.
Any dividend or distribution paid by a Fund has the effect of reducing the net
asset value per share on the reinvestment date by the amount of the dividend or
distribution. Investors should note that a dividend or distribution paid on
shares purchased shortly before such dividend or distribution was declared will
be subject to
2
<PAGE>
income taxes as discussed below even though the dividend or distribution
represents, in substance, a partial return of capital to the shareholder.
Risk Considerations
Like all investments, an investment in each Fund involves certain risks. The
equity and fixed income securities held by the Funds and the value of the Funds'
shares will fluctuate with market and other economic conditions, so that
investors' shares, when redeemed, may be worth more or less than their original
cost. Investors should note that the Funds may invest in mortgage-backed
securities (including CMOs and REMICs), asset-backed securities and foreign
securities. See "Risk Considerations" for a further discussion of certain risks.
Organization
The Funds are organized as distinct series within the Trust, which is registered
as an open-end diversified management investment company. The Trust currently
consists of five separate diversified series, each of which has its own
objective, assets, liabilities and net assets.
Transfer Agent and Custodian:
Investors Bank & Trust Company
Auditors:
[____________]
Distributor:
First Fund Distributors, Inc.
Legal Counsel:
Heller, Ehrman, White & McAuliffe
The above is qualified in its entirety by the detailed information appearing
elsewhere in this Prospectus and in the Statement of Additional Information.
3
<PAGE>
FINANCIAL HIGHLIGHTS
Selected Per Share Data and Ratios
The following financial information for the period May 1, 1995 through December
31, 1995 was audited by [_______________________], whose report, dated February
15, 1996, appears in the 1995 Annual Report of the Rising Dividends Fund.
<TABLE>
<CAPTION>
Rising Dividends Fund(a)
- ------------------------------------------------------------------------------------------------------
May 1, 1995(b) through
December 31, 1995
- ------------------------------------------------------------------------------------------------------
<S> <C>
Net asset value, beginning of period..................................... $10.65
- ------------------------------------------------------------------------------------------------------
Income from investment operations:
Net investment income............................................... .07
Net realized and unrealized gain on investments..................... 2.13
----
Total income from investment operations............................. 2.20
----
- ------------------------------------------------------------------------------------------------------
Less distributions:
Dividends from net investment income................................ (.07)
Distributions from net realized capital gains....................... (.15)
----
Total distributions................................................. (.22)
----
- ------------------------------------------------------------------------------------------------------
Net asset value, end of period........................................... $12.63
======================================================================================================
Total return............................................................. 20.65%
- ------------------------------------------------------------------------------------------------------
Ratios/supplemental data:
Net assets, end of year (millions)....................................... $20.60
Ratio of expenses to average net assets.................................. 1.31%(c)
Ratio of net investment income to average net assets..................... 0.94%(c)
Portfolio turnover rate.................................................. 28%
- ------------------------------------------------------------------------------------------------------
</TABLE>
_____________________
a This financial information relates to the Rising Dividends Fund while
it was a separate series of another registered investment company.
b Commencement of operations.
c Annualized.
4
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and policies of each Fund are described below. The
investment objective of each Fund is fundamental and may not be changed without
shareholder approval. In addition, each of the Funds may ma e use of certain
types of investments and investment techniques that are described under the
caption "Portfolio Securities and Investment Techniques." The value of the
Funds' investments will fluctuate with market and other economic conditions.
Rising Dividends Fund
Small-Mid Cap Rising Dividends Fund
International Rising Dividends Fund
The Rising Dividends Fund seeks long-term capital appreciation, with dividend
income as a secondary consideration. This Fund invests primarily in equity
securities, usually common stocks, of companies of all sizes. Investments are
diversified by company and industry group.
Under normal circumstances, this Fund invests at least 65% of its total assets
in consistently growing, highly profitable, low debt small and mid
capitalization companies meeting its "rising dividends" criteria as described
below under "Investment Approach." The Adviser believes these companies are
generally consistent growers with records of above-average growth, strong
balance sheets and responsible, proven managements. The Adviser believes stocks
of such companies tend to keep pace in rising stock markets and generally
outperform in declining stock markets.
The Rising Dividends Fund is the successor to the Kayne, Anderson Rising
Dividends Fund that was a series of another registered investment company,
Professionally Managed Portfolios. On September __, 1996, the shareholders of
the predecessor fund approved its reorganization into this Rising Dividends
Fund, effective September __, 1996.
The Small-Mid Cap Rising Dividends Fund seeks long-term capital appreciation,
with dividend income as a secondary consideration. This Fund invests primarily
in equity securities, usually common stocks of small and mid capitalization
domestic companies. The Fund currently considers mid capitalization companies to
be those having total market capitalizations of more than $1 billion but not
more than $3 billion. The fund currently considers small capitalization
companies to be those having total market capitalizations of not more than $1
billion, including those with extremely small capitalizations, but typically
more that $50 million. Stocks of smaller companies have outperformed the S&P 500
Index from 1926 through 1995 according to Ibbotson Associates, but have
experienced greater stock market volatility and business and financial risk.
The International Rising Dividends Fund seeks long-term capital appreciation,
with dividend income as a secondary consideration. This Fund invests primarily
in equity securities, usually common stocks, of companies outside the U.S.
having total market capitalizations of $1 billion or more. Under normal
circumstances, this Fund invests at least 65% of its total assets in companies
meeting its "rising dividends" criteria. This Fund also will emphasize those
companies outside of the U.S. that the Adviser believes have global business or
operations rather than localized companies. The Fund seeks to maintain a broad
international diversification. Under normal
5
<PAGE>
conditions, this Fund invests in at least three different countries outside of
the U.S., but investments in any single country may not represent more than 40%
of its total assets. The Adviser attempts to invest in the securities of these
companies when it believes they temporarily are out of favor and selling at what
it considers to be favorable prices.
The three equity Funds' average and median market capitalizations will fluctuate
over time as a result of market valuation levels and the availability of
specific investment opportunities.
The three equity Funds' investment objective is long-term capital appreciation.
The Funds seek to achieve their objective by investing principally in common
stocks, and in normal market conditions, at least 80% of the value of each
Fund's total assets will be invested in common stocks. However, for temporary
defensive purposes, the Funds may seek to preserve capital by temporarily
investing part of their assets in short-term fixed-income securities or in cash
or cash equivalents that are rated "investment grade" at the time of purchase.
Investment grade debt securities are those rated within the four highest grades
by Standard & Poor's Corporation ("S&P") (AAA to BBB) or Moody's Investors
Services, Inc. ("Moody's") (Aaa to Baa) or Fitch Investor Services, Inc.
("Fitch") (AAA to BBB), or in unrated debt securities deemed to be of comparable
qualify by the Adviser using guidelines approved by the Board of Trustees. For a
description of the ratings, see the Appendix in the Statement of Additional
Information. The Funds also may invest in preferred stocks, warrants,
convertible debt securities and other debt obligations that, in the Adviser's
opinion, offer the possibility of capital appreciation.
Investment Approach. In selecting securities for these Funds' portfolios, the
Adviser utilizes a "rising dividends" philosophy. The Adviser believes that this
investment discipline is an effective approach to identify well-managed growth
companies with defensive characteristics. The Funds' goal is to invest in
companies with strong rising dividends, significant reinvestment of cash flow
and low debt. To be considered for investment, companies will meet certain
growth and quality criteria established by the Adviser as set forth below. These
three Funds may invest from time to time in companies which do not meet all of
the rising dividends criteria. However, the Adviser believes these companies
meet these Funds' rising dividends philosophy.
Consistent Dividend Increases. The three rising dividends Funds invest in
companies which have increased their dividend in at least seven of the past ten
years. Furthermore, each company should have increased dividends at least 100%
in the past ten years and not cut dividends during the period. The Adviser
believes that companies with consistent and rising dividends usually have
above-average earnings growth and have shown a willingness to share that growth
with stockholders.
The Small-Mid Cap Rising Dividends and International Rising Dividends Funds may
also invest in companies which have raised dividends in at least three of the
past five years at a rate that would double dividends in ten years, with no
dividend cuts during the past five years.
High Reinvestment for Growth. A dividend payout maximum for portfolio companies
is set at 65% of current earnings. In the Adviser's view, a reinvestment rate of
at least 35% of earnings enables a company to sustain future growth primarily
from internal sources.
6
<PAGE>
Strong Balance Sheet. Long-term debt of portfolio companies should not be more
than 35% of total capitalization. The Adviser believes that low debt levels
indicate financial strength to support growth in good times and to win market
share in difficult times.
Companies that substantially meet these criteria are then researched and
analyzed internally by the Adviser to determine which are the most undervalued
and which are the most overvalued. Each company's relative position in its
industry and the industry cycle also are considered in the investment
decision-making process.
The Intermediate Total Return Bond Fund
The Intermediate Total Return Bond Fund seeks current to obtain maximum total
return, primarily through current income with capital appreciation as a
secondary consideration. This Fund invests primarily in debt securities and
seeks to maintain an average maturity of 3 to 10 years under normal conditions.
At least 90% of the value of the debt securities purchased by this Fund must be
"investment grade" quality at the time of purchase. Debt securities rated in the
lowest category of investment grade debt may have speculative characteristics;
changes in economic conditions or other circumstances are more likely to lead to
weakened capacity to make principal and interest payments than is the case with
higher grade bonds.
The Fund invests in domestic and foreign investment-grade debt securities and,
in normal market conditions, seeks to maintain a dollar-weighted average
portfolio maturity of 3 to 10 years. Estimates of the expected time for a
security's principal to be paid may be used to calculate the Fund's average
maturity. Such estimates can be substantially shorter than a security's actual
final maturity. In periods of bond market weakness, the Fund may establish a
defensive posture to preserve capital by temporarily investing part of its
assets in investment-grade money market or short-term debt instruments.
The Intermediate Tax-Free Bond Fund
The Intermediate Tax-Free Bond Fund seeks current income exempt from federal
income tax consistent with preservation of capital. The Fund seeks to achieve
its objective by investing primarily in debt securities, the interest from which
is, in the opinion of counsel to the issuer, exempt from federal income tax
("Municipal Securities"). As a fundamental policy that may not be changed
without shareholder approval, under normal conditions, either (1) the Fund will
invest at least 80% of its total assets in Municipal Securities or (2) the
Fund's assets will be invested such that 80% of the Fund's income will be exempt
from federal personal income tax. At least 90% of the value of the debt
securities purchased by this Fund must be rated at the time of purchase within
the four highest ratings of Municipal Securities (AAA to BBB) assigned by S&P,
(Aaa to Baa) or assigned by Moody's or (AAA to BBB) assigned by Fitch; or have
S&P's short-term municipal rating of SP-2 or higher, or a municipal commercial
paper rating of A-2 or higher; or Moody's short-term municipal securities rating
of MIG-2 or higher, or VMIG- 2 or higher, or a municipal commercial paper rating
of P-2 or higher; or have Fitch's short-term municipal securities rating of
FIN-2 or higher, or a municipal commercial paper rating of Fitch-2 or higher; or
if unrated by S&P, Moody's or Fitch, deemed by the Adviser to be of comparable
quality, using guidelines approved by the Board (but not to exceed 20% of the
value of debt securities purchased). Debt
securities rated in the lowest category of investment grade debt may have
speculative characteristics; changes in economic conditions
7
<PAGE>
or other circumstances are more likely to lead to weakened capacity to make
principal and interest payments than is the case with higher grade bonds.
However, there is no assurance that any municipal issuers will make full
payments of principal and interest or remain solvent. For a description of the
ratings, see the Appendix in the Statement of Additional Information. See also
"Risk Considerations."
Under normal market conditions, the Fund seeks to maintain a dollar-weighted
average portfolio maturity of 3 to 10 years, although it may invest in
obligations of any maturity and maintain an average maturity of more than 10
years. Estimates of the expected time for a security's principal to be paid may
be used to calculate the Fund's average maturity. Such estimates can be
substantially shorter than a security's final maturity.
Municipal Securities are obligations issued by, or on behalf of, states,
territories and possessions of the U.S. and the District of Columbia, and their
political subdivisions, agencies, authorities and instrumentalities, including
industrial development bonds, as well as obligations of certain agencies and
instrumentalities of the U.S. Government. Municipal Securities are classified as
general obligation bonds, revenue bonds and notes. General obligation bonds are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. Revenue bonds are payable from revenue
derived from a particular facility, class of facilities or the proceeds of a
special excise or other specific revenue source but not from the issuer's
general taxing power. Private activity bonds and industrial revenue bonds, in
most cases, are revenue bonds that do not carry the pledge of the credit of the
issuing the corporate entity on whose behalf they are issued.
Part of the income from this Fund also may be exempt from state income tax
depending on the state of the shareholder's residence. Each shareholder should
consult his or her tax adviser for more information.
Additional Investment Considerations
The Adviser supports its selection of individual securities through intensive
research and pursues qualitative and quantitative disciplines to determine when
securities should be purchased and sold. In unusual circumstances, economic,
monetary and other factors may cause the Adviser to assume a temporary,
defensive position during which a portion of each Fund's assets may be invested
in cash and short-term instruments. During the period following commencement of
operations, each Fund may have its assets invested substantially in cash and
cash equivalents rather than in the equity or debt securities identified in its
investment policies. The Funds also may lend securities, and use repurchase
agreements. For more information on these investments, see "Portfolio Securities
and Investment Techniques." Because prices of common stocks and other securities
fluctuate, the value of an investment in the Funds will vary, as the market
value of their investment portfolios change, and when shares are redeemed, they
may be worth more or less than their original cost. The Funds are diversified,
which under applicable federal law means that as to 75% of each Fund's total
assets, no more than 5% may be invested in the securities of a single issuer and
no more than 10% of the voting securities of such issuer. These diversification
limitations do not apply to U.S. Government securities.
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RISK CONSIDERATIONS
Price Fluctuation. Investments in equity securities in general are subject to
market risks that may cause their prices to fluctuate over time. The value of
debt securities changes as interest rates fluctuate. The value of securities,
such as warrants or convertible debt, exercisable for or convertible into equity
securities is also affected by prevailing interest rates, the credit quality of
the issuer and any call provisions. Fluctuations in the value of securities in
which a Fund invests will cause the net asset value of that Fund to fluctuate.
An investment in a Fund therefore may be more suitable for long-term investors
who can bear the risk of short-term principal fluctuations.
Small Companies. Smaller companies present greater opportunities for capital
appreciation, but also may involve greater risks than larger companies. Although
smaller companies can benefit from the development of new products and services,
they also may have limited product lines, markets or financial resources, and
their securities may trade less frequently and in more limited volume than the
securities of larger, more mature companies. As a result, the prices of the
securities of such smaller companies may fluctuate to a greater degree than the
prices of the securities of other issuers.
Debt Securities. Debt securities held by the Funds may be subject to several
types of investment risk. Market or interest rate risk relates to the change in
market value caused by fluctuations in prevailing interest rates, while credit
risk relates to the ability of the issuer to make timely interest payments and
to repay the principal upon maturity. Call or income risk relates to periods of
falling interest rates, and involves the possibility that securities with high
interest rates will be prepaid or "called" by the issuer prior to maturity. Such
an event would require a Fund to invest the resulting proceeds elsewhere, at
generally lower interest rates, which could cause fluctuations in a Fund's net
income. A Fund also may be exposed to event risk, which is the possibility that
corporate debt securities held by a Fund may suffer a substantial decline in
credit quality and market value due to a corporate restructuring.
The value of debt securities will normally increase in periods of falling
interest rates; conversely, the value of these instruments will normally decline
in periods of rising interest rates. Generally, the longer the remaining
maturity of a debt security, the greater the effect of interest rate changes on
its market value. In an effort to maximize income consistent with its investment
objective, the Intermediate Total Return Bond Fund and the Intermediate Tax-Free
Bond Fund may, at times, change the average maturity of their investment
portfolios. This can be done by investing a larger portion of assets in
relatively longer term obligations when periods of declining interest rates are
anticipated and, conversely, emphasizing shorter and intermediate term
maturities when a rise in interest rates is indicated. See "Portfolio Securities
and Investment Techniques."
Foreign Securities. The Rising Dividends, Small-Mid Cap Rising Dividends,
International Rising Dividends and Intermediate Total Return Bond Fund have the
right to purchase, and the International Rising Dividends Fund emphasizes,
securities in foreign countries. Accordingly, shareholders should consider
carefully the risks involved in investing in securities issued by companies and
governments of foreign nations, which are in addition to the usual risks
inherent in domestic investments.
These Funds also may invest in American Depository Receipts ("ADRs") and
European
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Depository Receipts ("EDRs"). ADRs are receipts issued by a U.S. bank or trust
company evidencing ownership of underlying securities issued by a foreign
issuer. ADRs, in registered form, are designed for use in U.S. securities
markets. EDRs, sometimes called Continental Depository Receipts, are issued in
Europe, typically by foreign banks and trust companies and evidence ownership of
either foreign or domestic underlying securities.
The foreign companies in which the Funds invest are industry leaders and
consistent growers, with strong managements and clean balance sheets. However,
foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations, foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments), default in foreign government securities, and
political or social instability or diplomatic developments that could adversely
affect investments. In addition, there is often less publicly available
information about foreign issuers than those in the U.S. Foreign companies are
often not subject to uniform accounting, auditing and financial reporting
standards. Further, these Funds may encounter difficulties in pursuing legal
remedies or in obtaining judgments in foreign courts.
Brokerage commissions, fees for custodial services and other costs relating to
investments by these Funds in other countries are generally greater than in the
U.S. Foreign markets have different clearance and settlement procedures from
those in the U.S., and certain markets have experienced times when settlements
did not keep pace with the volume of securities transactions and resulted in
settlement difficulty. The inability of a Fund to make intended security
purchases because of settlement difficulties could cause it to miss attractive
investment opportunities. Inability to sell a portfolio security because of
settlement problems could result in loss to a Fund if the value of the portfolio
security declined or result in claims against the Fund if it had entered into a
contract to sell the security. In certain countries, there is less government
supervision and regulation of business and industry practices, stock exchanges,
brokers, and listed companies than in the U.S. The securities markets of many of
the countries in which these Funds may invest may also be smaller, less liquid,
and subject to greater price volatility than those in the U.S.
Because the securities owned by the Rising Dividends, Small-Mid Cap Rising
Dividends, International Rising Dividends and Intermediate Total Return Bond
Funds may be denominated in foreign currencies, the value of such securities
will be affected by changes in currency exchange rates and in exchange control
regulations, and costs will be incurred in connection with conversions between
currencies. A change in the value of a foreign currency against the U.S. dollar
results in a corresponding change in the U.S. dollar value of a Fund's
securities denominated in the currency. Such changes also affect a Fund's income
and distributions to shareholders. A Fund may be affected either favorably or
unfavorably by changes in the relative rates of exchange between the currencies
of different nations, and a Fund may therefore engage inforeign currency hedging
strategies. Such strategies, however, involve certain transaction costs and
investment risks, including dependence upon the Adviser's ability to predict
movements in exchange rates.
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PORTFOLIO SECURITIES AND INVESTMENT TECHNIQUES
Debt Securities. The Funds' investments in debt securities include all types of
domestic or U.S. dollar-denominated foreign debt securities in any proportion,
including bonds, notes, convertible bonds, mortgage-backed and asset- backed
securities, including collateralized mortgage obligations and real estate
mortgage investment conduits, U.S. Government and U.S. Government agency
securities, zero coupon bonds, and short-term obligations such as commercial
paper and notes, bank deposits and other financial obligations, and longer-term
repurchase agreements.
In determining whether or not to invest in a particular debt security, the
Adviser considers factors such as the price, coupon and yield to maturity, the
credit quality of the issuer, the issuer's cash flow and related coverage
ratios, the property, if any, securing the obligation and the terms of the debt
instrument, including subordination, default, sinking fund and early redemption
provisions.
After a purchase, the rating of a debt issue may be reduced below the minimum
rating acceptable for purchase by a Fund. A subsequent downgrade does not
require the sale of the security, but the Adviser will consider such an event in
determining whether to continue to hold the obligation. The Appendix in the
Statement of Additional Information contains a description of Moody's and S&P
ratings.
Interest Rates. The market value of debt securities that are sensitive to
prevailing interest rates is inversely related to actual changes in interest
rates. That is, an interest rate decline produces an increase in a security's
market value and an interest rate increase produces a decrease in value. The
longer the remaining maturity of a security, the greater the effect of interest
rate change. Changes in the ability of an issuer to make payments of interest
and principal and in the market's perception of its creditworthiness also affect
the market value of that issuer's debt securities.
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related securities
in a Fund's portfolio. Mortgage prepayments are affected by the level of
interest rates and other factors, including general economic conditions and the
underlying location and age of the mortgage. In periods of rising interest
rates, the prepayment rate tends to decrease, lengthening the average life of a
pool of mortgage-related securities. In periods of falling interest rates, the
prepayment rate tends to increase, shortening the average life of a pool.
Reinvestment of prepayments may occur at higher or lower interest rates than the
original investment, affecting a Fund's yield. Thus, mortgage-related securities
may have less potential for capital appreciation in periods of falling interest
rates than other fixed-income securities of comparable duration, although they
may have a comparable risk of decline in market value in periods of rising
interest rates.
Duration is one of the fundamental tools used by the Adviser in managing
interest rate risks including prepayment risks. Duration (not the same as
maturity) is a measure of how sensitive a security is to changes in interest
rates. For example, fixed-income securities with effective durations of three
years are more responsive to interest rate fluctuations than those with
effective durations of one year.
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Investing in Municipal Securities. Because the Intermediate Tax-Free Bond Fund
invests primarily in Municipal Securities, its performance may be especially
affected by factors pertaining to the economies of various states and other
factors specifically affecting the ability of issuers of Municipal Securities to
meet their obligations.
The ability of state, county or local governments to meet their obligations will
depend primarily on the availability of tax and other revenues to those
governments and on their fiscal conditions generally. The amount of tax and
other revenues available to governmental issuers of Municipal Securities may be
affected from time to time by economic, political, geographic and demographic
conditions. In addition, constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives may limit a
government's power to raise revenues or increase taxes and thus could adversely
affect the ability to meet financial obligations. The availability of federal,
state and local aid to issuers of Municipal Securities also may affect their
ability to meet their obligations.
Payments of principal and interest on limited obligation securities will depend
on the economic condition of the facility or specific revenue source from whose
revenues the payments will be made, which in turn could be affected by economic,
political, and demographic conditions in a given state. Any reduction in the
actual or perceived ability of an issuer of Municipal Securities to meet its
obligations (including a reduction in the rating of its outstanding securities)
would likely affect adversely the market value and marketability of its
obligations and could affect adversely the values of Municipal Securities as
well. For example, in recent years, certain state constitutional and statutory
amendments and initiatives have restricted the ability of those states' taxing
entities to increase real property and other tax revenues. Other initiative
measures approved by voters, through limiting various other taxes, have resulted
in a substantial reduction in certain state revenues. Decreased state revenues
may result in reductions in allocations of state revenues to local governments.
It is not possible to determine the impact of these measures on the ability of
specific issuers to pay interest or repay principal. In addition, from time to
time, federal legislative proposals have threatened the tax-exempt status or use
of Municipal Securities.
U.S. Government Securities. U.S. Government securities include direct
obligations issued by the United States Treasury, such as Treasury bills,
certificates of indebtedness, notes and bonds. U.S. Government agencies and
instrumentalities that issue or guarantee securities include, but are not
limited to, the Federal Home Loan Banks, the Federal National Mortgage
Association ("FNMA"), and the Student Loan Marketing Association. Except for
U.S. Treasury securities, obligations of U.S. Government agencies and
instrumentalities may or may not be supported by the full faith and credit of
the United States. Some, such as those of the Federal Home Loan Banks, are
backed by the right of the issuer to borrow from the Treasury, others by
discretionary authority of the U.S. Government to purchase the agencies'
obligations, while still others, such as the Student Loan Marketing Association,
are supported only by the credit of the instrumentality.
Asset-Backed Securities. Asset-backed securities represent undivided fractional
interests in a trust with assets consisting of a pool of domestic loans such as
motor vehicle
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retail installment sales contracts or credit card receivables. Asset-backed
securities generally are issued by governmental, government-related and private
organizations. Asset-backed securities may be prepaid prior to maturity and
hence their actual life cannot be accurately predicted. During periods of
falling interest rates, prepayments may accelerate, which would require a Fund
to reinvest the proceeds at a lower interest rate. In addition, like other debt
securities, the value of asset-backed securities will normally decline in
periods of rising interest rates. Although generally rated AAA, it is possible
that the securities could become illiquid or experience losses if guarantors or
insurers default. See "Risk Considerations -- Debt Securities."
Mortgage-Related Securities. Mortgage- related securities are interests in a
pool of mortgage loans. Most mortgage-related securities are pass-through
securities, which means that investors receive payments consisting of a pro rata
share of both principal and interest (less servicing and other fees), as well as
unscheduled prepayments, as mortgages in the underlying mortgage pool are paid
off by the borrowers. In the case of mortgage-related securities, including real
estate mortgage investment conduits and collateralized mortgage obligations,
prepayments of principal by mortgagors or mortgage foreclosures will affect the
average life of the mortgage-related securities remaining in a Fund's portfolio.
Mortgage prepayments are affected by the level of interest rates and by factors
including general economic conditions, the underlying location and age of the
mortgage and other social and demographic conditions. In periods of rising
interest rates, the rate of prepayments tends to decrease, thereby lengthening
the average life of a pool of mortgage-related securities. Conversely, in
periods of falling interest rates, the rate of prepayments tends to increase,
thereby shortening the average life of a pool of mortgages. Thus,
mortgage-related securities may have less potential for capital appreciation in
periods of falling interest rates than other fixed-income securities of
comparable duration, although these securities may have a comparable risk of
decline in market value in periods of rising interest rates. Unscheduled
prepayments, which are made at par, will result in a loss equal to any
unamortized premium. See also "Risk Considerations -- Debt Securities."
Agency Mortgage-Related Securities. The dominant issuers or guarantors of
mortgage-related securities are the Government National Mortgage Association
("GNMA"), FNMA and the Federal Home Loan Mortgage Corporation ("FHLMC"). GNMA
creates pass-through securities from pools of U.S. government guaranteed or
insured (Federal Housing Authority or Veterans Administration) mortgages
originated by mortgage bankers, commercial banks and savings associations. FNMA
and FHLMC issue pass-through securities from pools of conventional and federally
insured and/or guaranteed residential mortgages obtained from various entities,
including savings associations, savings banks, commercial banks, credit unions
and mortgage bankers.
The principal and interest on GNMA pass-through securities are guaranteed by
GNMA and backed by the full faith and credit of the U.S. Government. FNMA
guarantees full and timely payment of all interest and principal, while FHLMC
guarantees timely payment of interest and ultimate collection of principal of
its pass-through securities. Securities from FNMA and FHLMC are not backed by
the full faith and credit of the U.S. Government; however, they are generally
considered to present minimal credit risks. The yields
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provided by these mortgage-related securities historically have exceeded the
yields on other types of U.S. Government securities with comparable maturities
in large measure due to the risks associated with prepayment.
Adjustable rate mortgage securities ("ARMs") are a form of pass-through security
representing interests in pools of mortgage loans, the interest rates of which
are adjusted from time to time. The adjustments usually are determined in
accordance with a predetermined interest rate index and may be subject to
certain limits. The adjustment feature of ARMs tends to make their values less
sensitive to interest rate changes.
Collateralized mortgage obligations ("CMOs") are debt obligations issued by
finance subsidiaries or trusts that are secured by mortgage-backed certificates,
including, in many cases, certificates issued by government- related guarantors,
such as GNMA, FNMA and FHLMC, together with certain funds and other collateral.
Although payment of the principal of and interest on the mortgage-backed
certificates pledged to secure the CMOs may be guaranteed by a U.S. Government
agency or instrumentality, such as FHLMC, the CMOs represent obligations solely
of the CMO issuer and are not insured or guaranteed by a U.S. Government agency
or instrumentality. CMOs are sometimes referred to as "derivatives," and, as
discussed above, can be volatile under certain market conditions.
Privately Issued Mortgage-Related Securities. The Funds may invest in
mortgage-related securities offered by private issuers, including pass-through
securities for pools of conventional residential mortgage loans; mortgage pay-
through obligations and mortgage-backed bonds, which are considered to be
obligations of the institution issuing the bonds and are collateralized by
mortgage loans; and bonds and CMOs that are collateralized by mortgage-related
securities issued by GNMA, FNMA, FHLMC or by pools of conventional mortgages.
Mortgage-related securities created by private issuers generally offer a higher
rate of interest (and greater credit and interest rate risk) than U.S.
Government and agency mortgage-related securities because they offer no direct
or indirect governmental guarantees of payments. However, many issuers or
servicers of mortgage-related securities guarantee, or provide insurance for,
timely payment of interest and principal on such securities.
The Funds may purchase some mortgage- related securities through private
placements without right to registration under the Securities Act of 1933, as
amended. See "Illiquid and Restricted Securities."
When-Issued Securities. The Funds may purchase securities on a when-issued or
delayed-delivery basis, generally in connection with an underwriting or other
offering. When- issued and delayed-delivery transactions occur when securities
are bought with payment for and delivery of the securities scheduled to take
place at a future time, beyond normal settlement dates, generally from 15 to 45
days after the transaction. Each Fund will segregate cash, U.S. Government
securities or other liquid, high quality debt securities in an amount sufficient
to meet its payment obligations with respect to these transactions.
Repurchase Agreements. The Funds may use repurchase agreements, reverse
repurchase agreements and dollar roll transactions. A repurchase agreement
involves a sale to a Fund of a security that is held by a bank, broker-dealer or
other financial institution concurrently with an agreement by that other party
to
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repurchase the same security at an agreed-upon price and date. A reverse
repurchase agreement is the reverse of that transaction. Dollar roll
transactions involve a similar transaction where the agreement is to repurchase
a similar security rather than the same security originally sold. All repurchase
agreements, reverse repurchase agreements and dollar roll transactions will be
fully collateralized with cash or liquid securities. Because those transactions
depend on the performance of the other party, the Adviser will carefully assess
the creditworthiness of any bank or broker-dealer involved in these transactions
under procedures adopted by the Board of Trustees.
Possible Currency Hedging. The Funds that may invest in foreign securities do
not expect to engage actively in hedging practices. However, from time to time
when deemed appropriate by the Adviser, they may seek to protect against the
effect of adverse changes in currency exchange rates that are adverse to the
present or prospective position of a Fund by employing forward currency exchange
contracts or options (sometimes called "derivatives"). A forward currency
contract is individually negotiated and privately traded by currency traders and
their customers and creates an obligation to purchase or sell a specific
currency for an agreed-upon price at a future date.
The Funds generally enter into forward contracts only under two circumstances.
First, if a Fund enters into a contract for the purchase of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security by entering in a forward contract to buy the amount of a
foreign currency needed to settle the transaction. Second, if the Adviser
believes that the currency of a particular foreign country will substantially
rise or fall against the U.S. dollar, it may enter in a forward contract to buy
or sell the currency approximating the value of some or all of a Fund's
portfolio securities denominated in such currency. Although forward contracts
are used primarily to protect a Fund from adverse currency movements, they
involve the risk that currency movements will not be accurately anticipated.
A Fund also may purchase a put or call option on a currency in an effort to
hedge its current or prospective investments. A Fund will not enter into any
futures contracts or related options if the sum of initial margin deposits on
futures contracts, related options (including options on securities, securities
indices and currencies) and premiums paid for any such related options would
exceed 5% of the its total assets. There can be no assurance that hedging
transactions by a Fund, if employed, will be successful.
Investment Companies. Each Fund may invest up to 10% of its total assets in
shares of other investment companies. As a shareholder in another investment
company, a Fund would bear its ratable share of that investment company's
expenses, including its advisory and administration fees. In accordance with
applicable state regulatory provisions, the Adviser has agreed to waive its
management fee with respect to the portion of a Fund's assets invested in shares
of other open-end investment companies. In the case of a closed-end fund,
shareholders would bear the expenses of both a Fund and the fund in which that
Fund invests.
Illiquid and Restricted Securities. No Fund may invest more than 10% of its net
assets in illiquid securities, including (1) securities for which there is no
readily available market; (2) securities which may be subject to legal
restrictions (so-called "restricted securities") other than Rule 144A securities
noted below; (3) repurchase agreements having more than
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seven days to maturity and (4) fixed time deposits subject to withdrawal
penalties (other than those with a term of less than seven days). Restricted
securities do not include those which meet the requirements of Rule 144A under
the Securities Act of 1933, as amended, and which the Trustees have determined
to be liquid based on the applicable trading markets and the availability of
reliable price information.
These Rule 144A securities could have the effect of increasing a Fund's
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these securities.
Fund Turnover. The Funds do not intend to engage in short-term trading. The
portfolio turnover rate for The Rising Dividends, Small- Mid Cap Rising
Dividends, International Rising Dividends and Intermediate Tax-Free Bond Funds
is generally expected to be less than 75%. The portfolio turnover rate for the
Intermediate Total Return Bond Fund is generally expected to approximate 100%.
However, the Adviser will not consider the rate of portfolio turnover to be a
limiting factor in determining when or whether to purchase or sell securities in
order to achieve a Fund's objective.
Securities Lending. Each Fund may lend its securities in an amount not exceeding
30% of its assets to financial institutions such as banks and brokers if the
loan is collateralized in accordance with applicable regulations. Under the
present regulatory requirements which govern loans of fund securities, the loan
collateral must, on each business day, at least equal the value of the loaned
securities and must consist of cash, letters of credit of domestic banks or
domestic branches of foreign banks, or securities of the U.S. Government or its
agencies.
Borrowing. Each Fund may borrow money from banks in an aggregate amount not to
exceed one-third of the value of the Fund's total assets to meet temporary or
emergency purposes, and each Fund may pledge its assets in connection with such
borrowings. A Fund will not purchase any securities while any such borrowings
exceed 5% of that Fund's total assets (including reverse repurchase agreements
and dollar roll transactions that are accounted for as borrowings).
Each Fund aggregates reverse repurchase agreements and dollar roll transactions
that are accounted for as financings with its bank borrowings for purposes of
limiting borrowings to one-third of the value of the Fund's total assets. See
the Statement of Additional Information for further information.
Leverage. Leveraging the Funds through various forms of borrowing creates an
opportunity for increased net income but, at the same time, creates special risk
considerations. For example, leveraging may exaggerate changes in the net asset
value of a Fund's shares and in the yield on a Fund's portfolio. Although the
principal of such borrowings will be fixed, a Fund's assets may change in value
during the time the borrowing is outstanding. Leveraging will create interest
expenses for a Fund that can exceed the income from the assets retained. To the
extent the income derived from securities purchased with borrowed funds exceeds
the interest a Fund will have to pay, that Fund's net income will be greater
than if leveraging were not used. Conversely, if the income from the assets
retained with borrowed funds is not sufficient to cover the cost of leveraging,
the net income of a Fund will be less than if leveraging were not used, and
therefore the amount available for distribution to shareholders as dividends
will be reduced.
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Pooled Fund. The initial shareholders of each Fund have approved a fundamental
policy authorizing each Fund, subject to authorization by the Board of Trustees,
and notwithstanding any other investment restriction, to invest all of its
assets in the securities of a single open-end investment company (a "pooled
fund"). If authorized by the Trustees, a Fund would seek to achieve its
investment objective by investing in a pooled fund which would invest in a
portfolio of securities that complies with the Fund's investment objective,
policies and restrictions. The Board currently does not intend to authorize
investing in pooled funds.
Other Investment Restrictions and Techniques. Each Fund has adopted certain
other investment restrictions and uses various other investment techniques,
which are described in the Statement of Additional Information. Like each Fund's
investment objective, certain of these restrictions are fundamental and may be
changed only by a majority vote of that Fund's outstanding shares.
ORGANIZATION AND MANAGEMENT
Organization. The Trust is registered as an open-end diversified management
investment company and was organized as a Delaware business trust on May 29,
1996. The Trust currently consists of five separate diversified series. The
Trust's Board of Trustees decides on matters of general policy for all series
and reviews the activities of the Adviser, Distributor and Administrator. The
Trust's officers conduct and supervise the daily business operations of the
Trust and each series.
The Adviser. The Adviser is a registered investment adviser organized as a
California limited partnership. The Adviser's predecessor was founded in 1984 by
Richard Kayne and John Anderson. The Adviser is in the business of furnishing
investment advice to institutional and private clients and, together with its
affiliated investment adviser, KAIM NonTraditional, L.P., currently manages
approximately $2.3 billion for such clients. The Adviser managed the predecessor
mutual fund to the Rising Dividends Fund.
Management Fee. Subject to the direction and control of the Trustees, the
Adviser formulates and implements an investment program for each Fund, including
determining which securities should be bought and sold. In addition to providing
certain administrative services, the Adviser also provides certain of the
officers of the Trust. For its services, the Adviser receives a fee, accrued
daily and paid monthly, at the following annual percentages of average daily net
assets: Rising Dividends Fund--0.75%; Small-Mid Cap Rising Dividends
Fund--0.75%; International Rising Dividends Fund--0.75%; Intermediate Total
Return Bond Fund--0.60%; and Intermediate Tax-Free Bond Fund--0.60%.
Compensation of Other Parties. The Adviser may in its discretion and out of its
own funds
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compensate third parties for the sale and marketing of shares of the Funds.
Although the Funds do not have a present intention of doing so, each Fund is
authorized to offer classes of shares exclusively to certain financial
institutions, including broker-dealers, investment advisers, banks, trust
companies and other financial institutions acting in an agency capacity on
behalf of their customer accounts, which have entered into distribution
agreements or shareholder servicing agreements with the Fund. These classes of
shares ("New Shares") would represent equal pro rata interests in the Funds with
the Funds' existing shares ("Existing Shares") and would be identical to
Existing Shares in all respects, except that New Shares will bear service fees
and will enjoy certain exclusive voting rights on matters relating to those
fees.
Management of the Funds. Mr. Allan Rudnick is principally responsible for the
management of the Rising Dividends Fund and serves as Chief Investment Officer
of the Adviser. Prior to joining the Adviser in 1989, he was President of
Pilgrim Asset Management and Chief Investment Officer for the Pilgrim Group of
Mutual Funds. Mr. Rudnick has over 25 years of experience in the investment
industry since earning a BA from Trinity College and an MBA from Harvard
Business School.
Robert Schwarzkopf, CFA is Portfolio Manager for the Small-Mid Cap Rising
Dividends Fund. Prior to joining the Adviser in 1991, he was a Portfolio Manager
for the Pilgrim Group of Mutual Funds. Mr. Schwarzkopf has 14 years of
experience in the investment industry. He earned BA and MS degrees from the
University of Miami.
Jean-Baptiste Nadal, CFA is Portfolio Manager for the International Rising
Dividends Fund. Prior to joining the Adviser in 1994, he managed international
equity portfolios for BearBull, a European investment management firm. Mr. Nadal
has 11 years of experience in the investment industry along with public
accounting and audit experience. He earned his degree in Finance and Business
Administration from SUP de CO, a leading French Business School.
Mark E. Miller is Portfolio Manager for the Intermediate Total Return Bond and
Intermediate Tax-Free Bond Funds. Prior to joining the Adviser in April, 1994,
Mark was responsible for more than $1 billion in individual and institutional
fixed income portfolios with Bank of America Capital Management. Mr. Miller has
over nine years of experience in the securities business. He earned a BA from
the University of California at Los Angeles.
Expense Limitation. Each Fund is responsible for paying legal and auditing fees,
fees and expenses of its custodian, accounting services and shareholder
servicing agents, trustees' fees, the cost of communicating with shareholders
and registration fees, as well as its other operating expenses. Although not
required to do so, the Adviser has agreed to reimburse each Fund to the extent
necessary so that its annual ratio of operating expenses to average net assets
will not exceed the following levels: Rising Dividends Fund--1.20%; Small-Mid
Cap Rising Dividends Fund--1.30%; International Rising Dividends Fund--1.40%;
Intermediate Total Return Bond Fund--0.95%; and Intermediate Tax-Free Bond
Fund--0.95%. The Adviser may terminate or reduce these reductions at any time.
Any reductions made by the Adviser in its fees and any payments or reimbursement
of expenses made by the Adviser which are a
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Fund's obligation are subject to reimbursement within the following three years
by that Fund provided the Fund is able to effect such reimbursement and remain
in compliance with applicable expense limitations described in this Prospectus
and that may be imposed by regulatory authorities. The Trustees believe that the
Funds in the future may be of a sufficient size to permit the reimbursement of
any such reductions or payments. A description of any such reimbursements and
the amounts paid will be set forth in financial statements that are included in
the Funds' annual and semi-annual reports to shareholders.
Fund Transactions and Brokerage. The Adviser considers a number of factors in
determining which brokers or dealers to use for a Fund's portfolio transactions.
These factors include, but are not limited to, the reasonableness of
commissions, quality of services and execution, and the availability of research
which the Adviser may lawfully and appropriately use in its investment
management and advisory capacities. Provided a Fund receives prompt execution at
competitive prices, the Adviser also may consider the sale of Fund shares by
brokers as a factor in selecting those broker-dealers for the Fund's portfolio
transactions. For more information, please refer to the Statement of Additional
Information.
The Administrator. Investment Company Administration Corporation (the
"Administrator"), pursuant to an administration agreement with the Funds,
supervises the overall administration of the Trust and the Funds including,
among other responsibilities, the preparation and filing of all documents
required for compliance by the Trust or the Funds with applicable laws and
regulations, arranging for the maintenance of books and records of the Trust and
the Funds, and supervision of other organizations that provide services to the
Trust and the Funds. Certain officers of the Trust and the Funds may be provided
by the Administrator. The Trust has agreed to pay the Administrator an annual
fee equal to 0.075% of the first $40 million of the Trust's average daily net
assets, 0.05% of the next $40 million, 0.025% of the next 40 million, and 0.01%
thereafter, subject to a minimum annual fee of $30,000 per Fund.
The Distributor. First Fund Distributors, Inc. serves as the Distributor to the
Funds pursuant to a Distribution Agreement. The Distributor is an affiliate of
the Administrator. The Distributor receives no fee for its distribution
services.
PURCHASING SHARES
General. The Funds' shares are offered directly to the public at their
respective net asset values next determined after receipt of an order by the
Transfer Agent with complete information and meeting all the requirements
discussed in this Prospectus. There is no sales load or charge in connection
with the purchase of shares. The Funds' shares are offered for sale by the
Funds' underwriter, KA Associates, Inc. Shares purchased through a broker may be
subject to a commission payable to that broker.
The minimum initial investment in each Fund is $2,000, with subsequent
investments of $250 or more ($1,000 and $200, respectively, for retirement plans
and custodial accounts under
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the Uniform Gifts/Transfers to Minors Act). Each Fund reserves the right to vary
the initial and additional investment minimums. In addition, the Adviser may
waive the minimum initial investment requirement for any investor. The Funds
reserve the right to reject any purchase order and to suspend the offering of
shares of any Fund.
Purchase orders for shares of a Fund that are received by the Transfer Agent in
proper form by 4:00 p.m., New York time, on any day that the New York Stock
Exchange (the "NYSE") is open for trading, will be purchased at the Fund's next
determined net asset value. Orders for Fund shares received after 4:00 p.m. New
York time will be purchased at the next determined net asset value determined
the business day following receipt of the order.
At the discretion of the Funds, investors may be permitted to purchase a Fund's
shares by transferring securities to the Fund that meet the Fund's investment
objectives and policies. Securities transferred to a Fund will be valued in
accordance with the same procedures used to determine the Fund's net asset value
at the time of the next determination of net asset value after such acceptance.
Shares issued by a Fund in exchange for securities will be issued at net asset
value determined as of the same time. All dividends, interest, subscription, or
other rights pertaining to such securities shall become the property of the Fund
and must be delivered to the Fund by the investor upon receipt from the issuer.
Investors who are permitted to transfer such securities to a Fund in exchange
for shares of the Fund will be required to recognize a gain or loss on such
transfer and pay income tax thereon, if applicable, measured by the difference
between the fair market value of the securities and the investor's basis
therein. Securities will not be accepted in exchange for shares of a Fund
unless: (1) such securities are, at the time of the exchange, eligible to be
included in the Fund's portfolio and current market quotations are readily
available for such securities; (2) the investor represents and warrants that all
securities offered to be exchanged are not subject to any restrictions upon
their sale by the Fund under the Securities Act of 1933; and (3) the value of
any such security (except U.S. Government securities), being exchanged together
with other securities of the same issuer owned by the Fund, will not exceed 5%
of the Fund's net assets immediately after the transaction.
Each Fund may accept telephone orders from brokers, financial institutions or
service organizations which have been previously approved by that Fund. It is
the responsibility of such brokers, financial institutions or service
organizations to forward promptly purchase orders and payments to the Funds.
Shares of a Fund may be purchased through brokers, financial institutions,
service organizations, banks, and bank trust departments, each of which may
charge the investor a transaction fee or other fee for its services at the time
of purchase. Such fees would not otherwise be charged if the shares were
purchased directly from the Funds.
Shares or classes of shares of each Fund may, at some point, be available
through certain brokerage services that do not charge transaction fees to
investors. However, the Adviser, from its own resources, may pay service fees
charged by these brokers for distribution and subaccounting services with
respect to Fund shares held by such brokers. Typically these fees are based on a
percentage of the annual average value of these accounts.
Shareholders who invest through sponsored retirement plans should contact their
program administrators responsible for transmitting all
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<PAGE>
orders for the purchase, redemption or exchange of program-sponsored shares. The
availability of each Fund and the procedures for investing depend on the
provisions of the program and whether the program sponsor has contracted with
the Fund or its transfer agent for special processing services, including
subaccounting.
HOW TO BUY SHARES OF THE FUND
Purchases by Mail. Shares of each Fund may be purchased initially by completing
the application accompanying this Prospectus and mailing it to the Transfer
Agent, together with a check payable to the respective Fund: Kayne Anderson
Mutual Funds, P.O. Box _________, ________________________________.
Subsequent investments in an existing account in the Funds may be made at any
time by sending a check payable to the respective Fund to Kayne Anderson Mutual
Funds, P.O. Box _________, ______________________. Please enclose the stub of
the account statement and include the amount of the investment, the exact name
of the account for which the investment is to be made and the account number.
Purchases by Wire. Investors who wish to purchase shares of any of the Funds by
federal funds wire should first call the Transfer Agent at (800) __________ to
advise the Transfer Agent that an initial investment will be made by wire and to
receive an account number. Following notification to the Transfer Agent,
investors must request the originating bank to transmit immediately available
funds by wire to the Transfer Agent's affiliated bank as follows:
Kayne Anderson Mutual Funds
c/o Investors Bank & Trust Company
Attn: ____________________
ABA Routing Number ___________
For further credit to Kayne Anderson
[Name of Fund]
[Account Number]
[Name of Shareholder]
A completed application with signature(s) of the registrant(s) must be mailed to
the Transfer Agent immediately following the initial wire. Investors should be
aware that banks generally impose a wire service fee. The Funds will not be
responsible for the consequence of delays, including delays in the banking or
Federal Reserve wire systems.
Subsequent Investments. Once an account has been opened, subsequent purchases
may be made by mail, bank wire, exchange, direct deposit or automatic investing.
The minimum for subsequent investments is $250 ($200 for retirement plans and
certain custody accounts for minors) for all Funds.
When making additional investments by mail, simply return the remittance portion
of a previous confirmation with the investment in the envelope provided with
each confirmation statement. Checks should be made payable to the particular
Fund in which an investment is to be made and mailed to Kayne Anderson Mutual
Funds, P.O. Box ____, __________________________. Orders to purchase shares are
effective on the day the Transfer Agent receives the check or money order.
If an order, together with payment in proper form, is received by the Transfer
Agent or
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<PAGE>
previously approved broker or financial institution by 4:00 p.m. New York time,
on any day that the NYSE is open for trading, Fund shares will be purchased at
each Fund's next determined net asset value. Orders for Fund shares received
after 4:00 p.m. New York time will be purchased at the net asset value
determined on the business day following receipt of the order.
All cash purchases must be made in U.S. dollars and, to avoid fees and delays,
checks must be drawn only on banks located in the U.S. A charge (minimum of $20)
will be imposed if any check used for the purchase of shares is returned. The
Funds and the Transfer Agent each reserve the right to reject any purchase order
in whole or in part.
EXCHANGE OF SHARES
Shares of any of the Funds may be exchanged for shares of any other Fund,
provided such other shares may be sold legally in the state of the investor's
residence.
Shares may be exchanged by: (1) written request; or (2) telephone, if a special
authorization form has been completed and is on file with the Transfer Agent in
advance. Requests for telephone exchanges must be received by the Transfer Agent
by the close of regular trading on the NYSE (currently 4:00 p.m. New York time)
on any day that the NYSE is open for regular trading. Exchanges are subject to
the minimum initial investment requirement.
The exchange privilege is a convenient way to respond to changes in investment
goals or in market conditions. This privilege is not designed for frequent
trading in response to short-term market fluctuations. The telephone exchange
privilege may be difficult to implement during times of drastic economic or
market changes. The purchase of shares for any Fund through an exchange
transaction is accepted immediately. An exchange is treated as a redemption for
federal and state income tax purposes, which may result in taxable gain or loss,
and a new purchase, each at the net asset value of the appropriate Fund. The
Funds and the Transfer Agent reserve the right to limit, amend, impose charges
upon, terminate or otherwise modify the exchange privilege on 60- days' prior
written notice to shareholders.
SELLING SHARES (REDEMPTIONS)
Shareholders may redeem shares of any Fund without charge on any business day
that the NYSE is open for business. Redemptions will be effective at the net
asset value per share next determined after the receipt by the Transfer Agent,
broker or financial intermediary of a redemption request meeting the
requirements described below. Each Fund normally sends redemption proceeds on
the next business day, but in any event redemption proceeds are sent within
seven calendar days of receipt of a redemption request in proper form. Payment
for redemption of recently purchased shares will be delayed until the Transfer
Agent has been advised that the purchase check has been honored, up to 12
calendar days from the time
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<PAGE>
of receipt by the Transfer Agent. Payment may also be made by wire directly to
any bank previously designated by the shareholder on a shareholder account
application. There is a $7 charge for redemptions made by wire. Please note that
the shareholder's bank may also impose a fee for wire service. There may be fees
for redemptions made through brokers, financial institutions and service
organizations.
The Funds will satisfy redemption requests in cash to the fullest extent
feasible, so long as such payments would not, in the opinion of the Board of
Trustees, require a Fund to sell assets under disadvantageous conditions or to
the detriment of the remaining shareholders of the Fund.
A Fund may suspend the right of redemption or postpone the date of payment for
more than seven days during any period when (1) trading on the NYSE is
restricted or the NYSE is closed, other than customary weekend and holiday
closings; (2) the Securities and Exchange Commission (the "SEC") has by order
permitted such suspension; or (3) an emergency, as defined by rules of the SEC,
exists making disposal of portfolio investments or determination of the value of
the net assets of the Fund not reasonably practicable.
Minimum Balances. Due to the relatively high cost of maintaining smaller
accounts, each Fund reserves the right to make involuntary redemptions of all
shares in any account (other than the account of a shareholder who is a
participant in a qualified plan) for their then-current net asset value if at
any time the total investment does not have a value of at least $2,000 because
of redemptions. The shareholder will be notified that the value of the account
is less than the required minimum and will be allowed at least 60 days to bring
the value of the account up to at least $2,000 before the redemption is
processed.
Redemption by Mail. Shares may be redeemed by submitting a written request for
redemption to Kayne Anderson Mutual Funds, P.O. Box ____,
_________________________. A written request must be in good order, which means
that it must: (1) identify the shareholder's account name; (2) state the number
of shares or dollar amount to be redeemed; and (3) be signed by each registered
owner exactly as the shares are registered.
Signature Guarantee. To prevent fraudulent redemptions, a signature guarantee
for the signature of each person in whose name the account is registered is
required on all written redemption requests over $50,000. A guarantee may be
obtained from any commercial bank, trust company, savings and loan association,
federal savings bank, broker-dealer, or member firm of a national securities
exchange or other eligible financial institution. Credit unions must be
authorized to issue signature guarantees. Broker-dealers guaranteeing signatures
must be a member of a clearing corporation or maintain net capital of at least
$100,000. Notary public endorsements will not be accepted as a substitute for a
signature guarantee. The Transfer Agent may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees or guardians and retirement plans.
Redemption by Telephone. Shareholders who have so indicated on the application,
or have subsequently arranged in writing to do so, may redeem shares by
instructing the Transfer Agent by telephone. Shareholders may redeem shares by
calling the Transfer Agent at (800) _________ between the hours of 8:30 a.m. and
5:00 p.m. (Eastern time) on a day when the
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NYSE is open for trading. Redemptions by telephone must be at least $1,000.
In order to arrange for redemption by wire or telephone after an account has
been opened, or to change the bank or account designated to receive redemption
proceeds, a written request must be sent to the Transfer Agent with a signature
guarantee at the address listed under "Redemption by Mail," above.
Special Factors Regarding Telephone Redemptions. Neither the Funds nor any of
their service contractors will be liable for any loss or expense in acting on
telephone instructions that are reasonably believed to be genuine. In attempting
to confirm that telephone instructions are genuine, the Funds will use
procedures that are considered reasonable, including requesting a shareholder to
correctly state the Fund account number, the name in which the account is
registered, the social security number, banking institution, bank account number
and the name in which the bank account is registered. To the extent that the
Funds fail to use reasonable procedures to verify the genuineness of telephone
instructions, they and/or their service contractors may be liable for any such
instructions that prove to be fraudulent or unauthorized.
The Funds reserve the right to refuse a wire or telephone redemption if it is
believed advisable to do so. Procedures for redeeming Fund shares by wire or
telephone may be modified or terminated at any time by any of the Funds after at
least 30-days' prior written notice to shareholders.
Shares of the Funds may be redeemed through certain brokers, financial
institutions or service organizations who may charge the investor a transaction
fee or other fee for their services at the time of redemption. Such fees would
not otherwise be charged if the shares were redeemed directly from the Funds.
Redemption by Automated Clearing House ("ACH"). A shareholder may elect to have
redemption proceeds, cash distributions or systematic cash withdrawal payments
transferred to a bank, savings and loan association or credit union that is an
on-line member of the ACH system. There are no fees associated with the use of
the ACH service.
ACH redemption requests must be received by the Funds' Transfer Agent before
4:00 p.m. New York time to receive that day's closing net asset value. ACH
redemptions will be sent by the Transfer Agent on the day following the
shareholder's request. The funds from the ACH redemption will be available to
the shareholder two days after the redemption has been processed.
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SHAREHOLDER SERVICES
The following special account options are available to individual shareholders
but not to participants in employer-sponsored retirement plans. There are no
charges for the programs noted below, and an investor may change or stop these
plans at any time by written notice to the Funds.
Systematic Withdrawal Plan. The Systematic Withdrawal Program is an option that
may be utilized by an investor who wishes to withdraw funds from an account on a
regular basis. To participate in this option, an investor must either own or
purchase shares having a value of $10,000 or more. Automatic payments by check
will be mailed to the investor on either a monthly, quarterly, semi-annual or
annual basis in amounts of $100 or more. All withdrawals are processed on the
last business day of the month or, if such day is not a business day, on the
next business day and paid promptly thereafter. Please complete the appropriate
section on the New Account Application indicating the amount of the distribution
and the desired frequency.
Automatic Investing. This service allows a shareholder to make regular
investments once an account is established. A shareholder simply authorizes the
automatic withdrawal of funds from a bank account into the specified Fund. The
minimum subsequent investment pursuant to this plan is $100 per month. An
initial Fund account must be opened first with the $2,000 minimum prior to
participating in this plan.
Please complete the appropriate section on the New Account Application
indicating the amount of the automatic investment.
Retirement Plans. The Funds are available for investment by pension and profit
sharing plans, including IRAs, SEPs, Keoghs and Defined Contribution Plans
through which investors may purchase Fund shares. The Funds, however, do not
sponsor Defined Contribution Plans. For details concerning any of the retirement
plans, please call the Funds at (800) _________.
SHARE PRICE CALCULATION
Share Price. Shares of a Fund are purchased at the net asset value after an
order in proper form is received by the Transfer Agent. An order in proper form
must include all correct and complete information, documents and signatures
required to process your purchase, as well as a check or bank wire payment
properly drawn and collectable. The net asset value per share is determined as
of the close of trading of the NYSE on each day the Exchange is open for
trading. Orders received before 4:00 p.m. (Eastern time) on a day when the
Exchange is open for trading will be processed as of the close of trading on
that day. Otherwise, processing will occur on the next business day. The
Distributor reserves the right to reject any purchase order.
Net Asset Value. The net asset value of each Fund is determined as of the close
of trading (currently 4:00 p.m., New York time) on each day that the NYSE is
open for trading. The net asset value per share of each Fund is the value of the
Fund's assets, less its liabilities, divided
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<PAGE>
by the number of outstanding shares of the Fund. Each Fund values its
investments on the basis of the market value of its securities. Portfolio
securities that are listed or admitted to trading on a U.S. exchange are valued
at the last sale price on the principal exchange on which the security is traded
or, if there has been no sale that day, at the mean between the closing bid and
asked prices. Securities admitted to trading on the NASDAQ National Market
System and securities traded only in the U.S. over-the-counter market are valued
at the last sale price or, if there has been no sale that day, at the mean
between the closing bid and asked prices. Securities and other assets for which
market prices are not readily available are valued at fair value as determined
in good faith by the Board of Trustees. Debt securities with remaining
maturities of 60 days or less are normally valued at amortized cost, unless the
Board of Trustees determines that amortized cost does not represent fair value.
Cash and receivables will be valued at their face amounts. Interest will be
recorded as accrued, and dividends will be recorded on their ex- dividend date.
Share Certificates. Shares are credited to an investor's account and
certificates are not issued. This eliminates the costly problem of lost or
destroyed certificates.
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
Dividends and Distributions. The Rising Dividends, Small-Mid Cap Rising
Dividends and International Rising Dividends Funds expect to pay dividends
annually. The Intermediate Total Return Bond and Intermediate Tax-Free Bond
Funds expect to pay dividends monthly. Each Fund makes distributions of its net
capital gains, if any, at least annually. The Board of Trustees may determine to
declare dividends and make distributions more or less often.
Dividends and capital gain distributions are automatically reinvested in
additional shares of the Fund at the net asset value per share on the
reinvestment date unless the shareholder has previously requested in writing to
the Transfer Agent that payment be made in cash.
Any dividend or distribution paid by a Fund reduces its net asset value per
share on the reinvestment date by the per share amount of the dividend or
distribution. Investors should note that a dividend or distribution paid on
shares purchased shortly before such dividend or distribution was declared will
be subject to income taxes as discussed below even though the dividend or
distribution represents, in substance, a partial return of capital to the
shareholder.
Tax Status. Each Fund intends to qualify and elect to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986 (the
"Code"). As long as a Fund continues to qualify, and as long as the Fund
distributes all of its income each year to the shareholders, the Fund will not
be subject to any federal income tax or excise taxes based on net income.
Distributions made by a Fund will be taxable to shareholders whether received in
shares (through dividend reinvestment) or in cash. Distributions (other than
exempt-interest dividends paid by the Tax-Free Bond Fund) derived from net
investment income, including net short-term capital gains, are taxable to
shareholders (other than tax-exempt shareholders who have not borrowed to
26
<PAGE>
purchase or carry their shares) as ordinary income. A portion of these
distributions may qualify for the intercorporate dividends-received deduction.
Distributions designated as capital gains dividends are taxable as long-term
capital gains regardless of the length of time shares of the Fund have been
held. Although distributions are generally taxable when received, certain
distributions made in January are taxable as if received in the prior December.
Shareholders will be informed annually of the amount and nature of the Fund's
distributions. A Fund may be required to impose backup withholding at a current
rate of 31% from income dividends and capital gain distributions and upon
payment of redemption proceeds if provisions of the Code relating to the
furnishing and certification of taxpayer identification numbers and reporting of
dividends are not complied with by a shareholder. Any such accounts without a
taxpayer identification number may be liquidated and distributed to a
shareholder, net of withholding, after the 60th day of investment.
Additional information about taxes is set forth in the Statement of Additional
Information. Shareholders should consult their own advisers concerning federal,
state and local taxation of distributions from the Funds. Heller, Ehrman White &
McAuliffe, counsel to the Trust, has expressed no opinion in respect thereof.
PERFORMANCE INFORMATION
Total Return. From time to time, each Fund may publish its total return in
advertisements and communications to investors. Total return information will
include the Fund's average annual compounded rate of return over the four most
recent calendar quarters and over the period from the Fund's inception of
operations. Each Fund may also advertise aggregate and average total return
information over different periods of time. Each Fund's total return will be
based upon the value of the shares acquired through a hypothetical $1,000
investment (at the beginning of the specified period and the net asset value of
such shares at the end of the period, assuming reinvestment of all the
distributions) at the maximum public offering price. Total return figures will
reflect all recurring charges against Fund income. Investors should note that
the investment results of each Fund will fluctuate over time, and any
presentation of a Fund's total return for any prior period should not be
considered as a representation of what an investor's total return may be in any
future period.
Yield. The Intermediate Total Return Bond and Intermediate Tax-Free Bond Funds
also may refer in their advertising and promotional materials to their yield.
The Funds' yields show the rate of income that they earn on their investments,
expressed as a percentage of the net asset value of Fund shares. The Funds
calculate yield by determining the interest income they earned from their
portfolio investments for a specified 30-day period (net of expenses), dividing
such income by the average number of the Funds' shares outstanding, and
expressing the result as an annualized percentage based on the net asset value
at the end of that 30-day period. The Tax-Free Bond Fund may advertise a tax-
equivalent yield showing what an investor would have to earn before taxes to
equal a tax-free yield. Yield accounting methods differ from the methods used
for other accounting
27
<PAGE>
purposes; accordingly, the Funds' yields may not equal the dividend income
actually paid to investors or the income reported in the Funds' financial
statements.
In addition to standardized return, performance advertisements and sales
literature may also include other total return performance data
("non-standardized return"). Non-standardized return may be quoted for the same
or different periods as those for which standardized return is quoted and may
consist of aggregate or average annual percentage rate of return, actual
year-by-year rates or any combination thereof.
GENERAL INFORMATION
Voting Rights. Shareholders are entitled to one vote for each dollar of net
asset value per share of each series (and fractional votes for fractional dollar
amounts) and may vote in the election of Trustees and on other matters submitted
to meetings of shareholders. It is not contemplated that regular annual meetings
of shareholders will be held. Rule 18f-2 under the Investment Company Act of
1940, as amended, provides that matters submitted to shareholders be approved by
a majority of the outstanding securities of each series, unless it is clear that
the interests of each series in the matter are identical or the matter does not
affect a series. However, the rule exempts the selection of accountants and the
election of Trustees from the separate voting requirements. Upon commencement of
operations, all of the shares of the Small-Mid Cap Rising Dividends,
International Rising Dividends, Intermediate Total Return Bond and Intermediate
Tax-Free Bond Funds were owned beneficially by affiliates of the Adviser.
Shareholder Meetings. The Trustees have undertaken to the SEC that they will
promptly call a meeting for the purpose of voting on the question of removal of
any Trustee when requested to do so by not less than 10% of the dollar-weighted
total votes of the respective Fund. In addition, subject to certain conditions,
shareholders of each Fund may apply to the Fund to communicate with other
shareholders to request a shareholders' meeting to vote on the removal of a
Trustee or Trustees.
Shareholder Reports and Inquiries. Shareholders will receive annual financial
statements which are examined by the Funds' independent accounts, as well as
unaudited semi-annual financial statements. Unless otherwise requested, only one
copy of each shareholder report or other material sent to shareholders will be
sent to each household or address regardless of the number of shareholders or
accounts at that household or address. Shareholder inquiries should be addressed
to the Funds c/o Kayne Anderson Mutual Funds, 1800 Avenue of the Stars, 2nd
Floor, Los Angeles, California 90067, (800)
_________.
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____________________________________________________________
PART B
COMBINED STATEMENT OF ADDITIONAL INFORMATION
Kayne Anderson Mutual Funds
Kayne Anderson Rising Dividends Fund
Kayne Anderson Small-Mid Cap Rising Dividends Fund
Kayne Anderson International Rising Dividends Fund
Kayne Anderson Intermediate Total Return Bond Fund
Kayne Anderson Intermediate Tax-Free Bond Fund
____________________________________________________________
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY ANY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A
PROSPECTUS.
SUBJECT TO COMPLETION -- Dated September 17, 1996
STATEMENT OF ADDITIONAL INFORMATION
KAYNE ANDERSON MUTUAL FUNDS
INVESTMENT ADVISER:
Kayne Anderson Investment Management, L.P.
1800 Avenue of the Stars, 2nd Floor
Los Angeles, CA 90067
(800) ___-____
This Statement of Additional Information pertains to Kayne Anderson
Rising Dividends Fund (the "Rising Dividends Fund") Kayne Anderson Small-Mid Cap
Rising Dividends Fund (the "Small-Mid Cap Rising Dividends Fund"), Kayne
Anderson International Rising Dividends Fund (the "International Rising
Dividends Fund"), Kayne Anderson Intermediate Total Return Bond Fund (the
"Intermediate Total Return Bond Fund") and Kayne Anderson Intermediate Tax-Free
Bond Fund (the "Tax-Free Bond Fund"), each a series of Kayne Anderson Mutual
Funds (the "Trust"). It supplements the information contained in the Funds'
current Prospectus dated September ___, 1996 (which may be revised from time to
time), and should be read in conjunction therewith. The Prospectus for the Funds
may be obtained by writing or calling First Fund Distributors, Inc. at (800)
___-____. This Statement of Additional Information, although not in and of
itself a prospectus, is incorporated by reference into the Prospectus in its
entirety.
TABLE OF CONTENTS
CAPTION PAGE
- ------- ----
Investment Objectives and Policies...................................... B-2
Risk Factors............................................................ B-22
The Funds' Investment Limitations....................................... B-24
Management of the Funds................................................. B-27
The Funds' Administrator................................................ B-33
The Funds' Distributor.................................................. B-33
Transfer Agent and Custodian............................................ B-34
How Net Asset Value is Determined....................................... B-34
Share Purchases and Redemptions......................................... B-36
Dividends, Distributions and Taxes...................................... B-36
How Performance is Determined........................................... B-41
Additional Information.................................................. B-43
Financial Statements.................................................... B-45
For ease of reference, the same section headings are used in both the
Prospectus and this Statement of Additional Information with respect to the same
subject matter, except for "Purchases and Redemptions" (see the sections in the
Prospectus "Purchasing Shares" and "Selling Shares (Redemptions))".
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS STATEMENT OF ADDITIONAL
INFORMATION AND THE PROSPECTUS DATED SEPTEMBER ___, 1996, AS REVISED FROM TIME
TO TIME, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND.
<PAGE>
This Statement of Additional Information is dated September __, 1996.
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Funds are managed by Kayne Anderson Investment Management, L.P. ("Kayne
Anderson" or the "Adviser"). The investment objectives and policies of the Funds
are described in detail in the Prospectus. The achievement of each Fund's
investment objective will depend on market conditions generally and on the
analytical and portfolio management skills of the Adviser. The following
discussion supplements the discussion in the Prospectus.
Portfolio Securities
Below Investment Grade Debt Securities. The Funds may purchase
lower-rated debt securities (e.g., those rated BB and B by Standard & Poor's
Corporation ("S&P") or Ba and B by Moody's Investors Service, Inc. ("Moody's")
that have poor protection of payment of principal and interest. See Appendix A
for a description of these ratings. These securities often are considered to be
speculative and involve greater risk of default or price changes due to changes
in the issuer's creditworthiness. Market prices of these securities may
fluctuate more than higher-rated debt securities and may decline significantly
in periods of general economic difficulty which may follow periods of rising
interest rates. While the market for high-yield corporate debt securities has
been in existence for many years and has weathered previous economic downturns,
the market in recent years has experienced a dramatic increase in the
large-scale use of such securities to fund highly leveraged corporate
acquisitions and restructurings. Accordingly, past experience may not provide an
accurate indication of future performance of the high-yield bond market,
especially during periods of economic recession.
The market for lower-rated securities may be thinner and less active
than that for higher-rated securities, which can adversely affect the prices at
which these securities can be sold. If market quotations are not available,
these securities are valued in accordance with procedures established by the
Board of Trustees, including the use of outside pricing services. Judgment plays
a greater role in valuing high-yield corporate debt securities than is the case
for securities for which more external sources for quotations and last-sale
information are available. Adverse publicity and changing investor perceptions
may affect the ability of outside pricing services used by the Funds to value
their portfolio securities, and their ability to dispose of these lower-rated
debt securities.
Because the risk of default is higher for lower-quality securities
and sometimes increases with the age of these securities, the Adviser's research
and credit analysis are an integral part of managing any securities of this type
held by the Funds. In considering investments for the Funds, the Adviser
attempts to identify those issuers of high-yielding securities whose financial
condition is adequate to meet future obligations, has improved, or is expected
to improve in the future. The Adviser's analysis focuses on relative values
based on such factors as interest or dividend
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coverage, asset coverage, earnings prospects, and the experience and managerial
strength of the issuer.
Each Fund may choose, at its expense or in conjunction with others,
to pursue litigation or otherwise exercise its rights as a security holder to
seek to protect the interests of security holders if it determines this to be in
the best interest of Fund shareholders.
Depositary Receipts. The Rising Dividends, Small-Mid Cap Rising
Dividends, International Rising Dividends and the Intermediate Total Return Bond
Funds may hold securities of foreign issuers in the form of American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") and other similar
global instruments available in emerging markets, or other securities
convertible into securities of eligible issuers. These securities may not
necessarily be denominated in the same currency as the securities for which they
may be exchanged. Generally, ADRs in registered form are designed for use in
U.S. securities markets, and EDRs and other similar global instruments in bearer
form are designed for use in European securities markets. For purposes of these
Funds' investment policies, these Funds' investments in ADRs, EDRs and similar
instruments will be deemed to be investments in the equity securities
representing the securities of foreign issuers into which they may be converted.
Other Investment Companies. Each Fund may invest up to 10% of its
total assets in securities issued by other investment companies investing in
securities in which the Fund can invest provided that such investment companies
invest in portfolio securities in a manner consistent with the Fund's investment
objective and policies. Applicable provisions of the Investment Company Act of
1940, as amended (the "1940 Act") require that a Fund limit its investments so
that, as determined immediately after a securities purchase is made: (a) not
more than 10% of the value of a Fund's total assets will be invested in the
aggregate in securities of investment companies as a group; and (b) either (i) a
Fund and affiliated persons of that Fund not own together more than 3% of the
total outstanding shares of any one investment company at the time of purchase
(and that all shares of the investment company held by that Fund in excess of 1%
of the company's total outstanding shares be deemed illiquid), or (ii) a Fund
not invest more than 5% of its total assets in any one investment company and
the investment not represent more than 3% of the total outstanding voting stock
of the investment company at the time of purchase. As a shareholder of another
investment company, a Fund would bear, along with other shareholders, its pro
rata portion of the other investment company's expenses, including advisory
fees. These expenses would be in addition to the advisory and other expenses
that a Fund bears directly in connection with its own operations.
In accordance with applicable regulatory provisions of the State of
California, the Adviser has agreed to waive its management fee with respect to
assets of the Funds that are invested in other open-end investment companies.
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U.S. Government Securities. Generally, the value of U.S. Government
securities held by the Funds will fluctuate inversely with interest rates. U.S.
Government securities in which the Funds may invest include debt obligations of
varying maturities issued by the U.S. Treasury or issued or guaranteed by an
agency or instrumentality of the U.S. Government, including the Federal Housing
Administration ("FHA"), Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association ("GNMA"), General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Bank, Farm Credit System Financial Assistance
Corporation, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation
("FHLMC"), Federal Intermediate Credit Banks, Federal Land Banks, Financing
Corporation, Federal Financing Bank, Federal National Mortgage Association
("FNMA"), Maritime Administration, Tennessee Valley Authority, Resolution
Funding Corporation, Student Loan Marketing Association, and Washington
Metropolitan Area Transit Authority. Direct obligations of the U.S. Treasury
include a variety of securities that differ primarily in their interest rates,
maturities and dates of issuance. Because the U.S. Government is not obligated
by law to provide support to an instrumentality that it sponsors, a Fund will
not invest in obligations issued by an instrumentality of the U.S. Government
unless the Adviser determines that the instrumentality's credit risk makes its
securities suitable for investment by the Fund.
Mortgage-Related Securities: Government National Mortgage
Association. GNMA is a wholly owned corporate instrumentality of the U.S.
Government within the Department of Housing and Urban Development. The National
Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to
guarantee the timely payment of the principal of, and interest on, securities
that are based on and backed by a pool of specified mortgage loans. For these
types of securities to qualify for a GNMA guarantee, the underlying collateral
must be mortgages insured by the FHA under the Housing Act, or Title V of the
Housing Act of 1949, as amended ("VA Loans"), or be pools of other eligible
mortgage loans. The Housing Act provides that the full faith and credit of the
U.S. Government is pledged to the payment of all amounts that may be required to
be paid under any guarantee. In order to meet its obligations under a guarantee,
GNMA is authorized to borrow from the U.S. Treasury with no limitations as to
amount.
GNMA pass-through securities may represent a proportionate interest
in one or more pools of the following types of mortgage loans: (1) fixed-rate
level payment mortgage loans; (2) fixed-rate graduated payment mortgage loans;
(3) fixed-rate growing equity mortgage loans; (4) fixed-rate mortgage loans
secured by manufactured (mobile) homes; (5) mortgage loans on multifamily
residential properties under construction; (6) mortgage loans on completed
multifamily projects; (7) fixed-rate mortgage loans as to which escrowed funds
are used to reduce the borrower's monthly payments during the early years of the
mortgage loans ("buydown" mortgage loans); (8) mortgage loans that provide for
adjustments on payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (9) mortgage-backed serial notes.
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Mortgage-Related Securities: Federal National Mortgage Association.
FNMA is a federally chartered and privately owned corporation established under
the Federal National Mortgage Association Charter Act. FNMA was originally
organized in 1938 as a U.S. Government agency to add greater liquidity to the
mortgage market. FNMA was transformed into a private sector corporation by
legislation enacted in 1968. FNMA provides funds to the mortgage market
primarily by purchasing home mortgage loans from local lenders, thereby
providing them with funds for additional lending. FNMA acquires funds to
purchase loans from investors that may not ordinarily invest in mortgage loans
directly, thereby expanding the total amount of funds available for housing.
Each FNMA pass-through security represents a proportionate interest
in one or more pools of FHA Loans, VA Loans or conventional mortgage loans (that
is, mortgage loans that are not insured or guaranteed by any U.S. Government
agency). The loans contained in those pools consist of one or more of the
following: (1) fixed-rate level payment mortgage loans; (2) fixed- rate growing
equity mortgage loans; (3) fixed-rate graduated payment mortgage loans; (4)
variable- rate mortgage loans; (5) other adjustable-rate mortgage loans; and (6)
fixed-rate mortgage loans secured by multifamily projects.
Mortgage-Related Securities: Federal Home Loan Mortgage Corporation.
FHLMC is a corporate instrumentality of the United States established by the
Emergency Home Finance Act of 1970, as amended. FHLMC was organized primarily
for the purpose of increasing the availability of mortgage credit to finance
needed housing. The operations of FHLMC currently consist primarily of the
purchase of first lien, conventional, residential mortgage loans and
participation interests in mortgage loans and the resale of the mortgage loans
in the form of mortgage-backed securities.
The mortgage loans underlying FHLMC securities typically consist of
fixed-rate or adjustable-rate mortgage loans with original terms to maturity of
between 10 and 30 years, substantially all of which are secured by first liens
on one-to-four-family residential properties or multifamily projects. Each
underlying mortgage loan must include whole loans, undivided participation
interests in whole loans or participation in another FHLMC security.
Privately Issued Mortgage-Related Securities. As set forth in the
Prospectus, the Funds may invest in mortgage-related securities offered by
private issuers, including pass-through securities comprised of pools of
conventional residential mortgage loans; mortgage-backed bonds which are
considered to be obligations of the institution issuing the bonds and are
collateralized by mortgage loans; and bonds and collateralized mortgage
obligations ("CMOs").
Each class of a CMO is issued at a specific fixed or floating coupon
rate and has a stated maturity or final distribution date. Principal prepayments
on the collateral pool may cause the various classes of a CMO to be retired
substantially earlier than their stated maturities or final distribution dates.
The principal of and interest on the collateral pool may be allocated among the
several
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classes of a CMO in a number of different ways. Generally, the purpose of the
allocation of the cash flow of a CMO to the various classes is to obtain a more
predictable cash flow to some of the individual tranches than exists with the
underlying collateral of the CMO. As a general rule, the more predictable the
cash flow is on a CMO tranche, the lower the anticipated yield will be on that
tranche at the time of issuance relative to prevailing market yields on
mortgage-related securities. Certain classes of CMOs may have priority over
others with respect to the receipt of prepayments on the mortgages.
The Funds may invest in, among other things, "parallel pay" CMOs and
Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured
to provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class which, like the other CMO
structures, must be retired by its stated maturity date or final distribution
date, but may be retired earlier. PAC Bonds are parallel pay CMOs that generally
require payments of a specified amount of principal on each payment date; the
required principal payment on PAC Bonds have the highest priority after interest
has been paid to all classes.
Adjustable-Rate Mortgage-Related Securities. Because the interest
rates on the mortgages underlying adjustable-rate mortgage-related securities
("ARMS") reset periodically, yields of such portfolio securities will gradually
align themselves to reflect changes in market rates. Unlike fixed-rate
mortgages, which generally decline in value during periods of rising interest
rates, ARMS allow a Fund to participate in increases in interest rates through
periodic adjustments in the coupons of the underlying mortgages, resulting in
both higher current yields and low price fluctuations. Furthermore, if
prepayments of principal are made on the underlying mortgages during periods of
rising interest rates, a Fund may be able to reinvest such amounts in securities
with a higher current rate of return. During periods of declining interest
rates, of course, the coupon rates may readjust downward, resulting in lower
yields to the Fund. Further, because of this feature, the value of ARMS is
unlikely to rise during periods of declining interest rates to the same extent
as fixed-rate instruments. For further discussion of mortgage-related securities
generally, see "Portfolio Securities And Investment Techniques" in the
Prospectus.
Variable Rate Demand Notes. Variable rate demand notes ("VRDNs") are
tax-exempt obligations that contain a floating or variable interest rate
adjustment formula and an unconditional right of demand to receive payment of
the unpaid principal balance plus accrued interest upon a short notice period
prior to specified dates, generally at 30-, 60-, 90-, 180-, or 365-day
intervals. The interest rates are adjustable at intervals ranging from daily to
six months. Adjustment formulas are designed to maintain the market value of the
VRDN at approximately the par value of the VRDN upon the adjustment date. The
adjustments typically are based upon the prime rate of a bank or some other
appropriate interest rate adjustment index.
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The Tax-Free Bond Fund also may invest in VRDNs in the form of
participation interests ("Participating VRDNs") in variable rate tax-exempt
obligations held by a financial institution, typically a commercial bank
("institution"). Participating VRDNs provide a Fund with a specified undivided
interest (up to 100%) of the underlying obligation and the right to demand
payment of the unpaid principal balance plus accrued interest on the
Participating VRDNs from the institution upon a specified number of days'
notice, not to exceed seven. In addition, the Participating VRDN is backed by an
irrevocable letter of credit or guaranty of the institution. A Fund has an
undivided interest in the underlying obligation and thus participates on the
same basis as the institution in such obligation except that the institution
typically retains fees out of the interest paid on the obligation for servicing
the obligation, providing the letter of credit and issuing the repurchase
commitment.
Participating VRDNs may be unrated or rated, and their
creditworthiness may be a function of the creditworthiness of the issuer, the
institution furnishing the irrevocable letter of credit, or both. Accordingly,
the Tax-Free Bond Fund may invest in such VRDNs, the issuers or underlying
institutions of which the Adviser believes are creditworthy and satisfy the
quality requirements of the Tax-Free Bond Fund. The Adviser periodically
monitors the creditworthiness of the issuer of such securities and the
underlying institution.
During periods of high inflation and periods of economic slowdown,
together with the fiscal measures adopted by governmental authorities to attempt
to deal with them, interest rates have varied widely. While the value of the
underlying VRDN may change with changes in interest rates generally, the
variable rate nature of the underlying VRDN should minimize changes in the value
of the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed-income
securities. The Tax-Free Bond Fund may invest in VRDNs on which stated minimum
or maximum rates, or maximum rates set by state law, limit the degree to which
interest on such VRDNs may fluctuate; to the extent they do increases or
decreases in value may be somewhat greater than would be the case without such
limits. Because the adjustment of interest rates on the VRDNs is made in
relation to movements of various interest rate adjustment indices, the VRDNs are
not comparable to long-term fixed-rate securities. Accordingly, interest rates
on the VRDNs may be higher or lower than current market rates for fixed-rate
obligations of comparable quality with similar maturities.
Municipal Securities. Because the Tax-Free Bond Fund invests a
substantial portion of its total assets in obligations either issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies, authorities and
instrumentalities, including industrial development bonds, as well as
obligations of certain agencies and instrumentalities of the U.S. Government,
the interest from which is, in the opinion of bond counsel to the issuer, exempt
from federal
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income tax ("Municipal Securities") the Fund generally will have a lower yield
than if it primarily purchased higher yielding taxable securities, commercial
paper or other securities with correspondingly greater risk. Generally, the
value of the Municipal Securities held by the Tax-Free Bond Fund will fluctuate
inversely with interest rates.
General Obligation Bonds. Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to the rate or amount of special assessments.
Revenue Bonds. A revenue bond is not secured by the full faith,
credit and taxing power of an issuer. Rather, the principal security for a
revenue bond is generally the net revenue derived from a particular facility,
group of facilities or, in some cases, the proceeds of a special excise or other
specific revenue source. Revenue bonds are issued to finance a wide variety of
capital projects, including electric, gas, water, and sewer systems; highways,
bridges, and tunnels; port and airport facilities; colleges and universities;
and hospitals. Although the principal security behind these bonds may vary, many
provide additional security in the form of a debt service reserve fund that may
be used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Some authorities
provide further security in the form of a governmental assurance (although
without obligation) to make up deficiencies in the debt service reserve fund.
Industrial Development Bonds. Industrial development bonds,
which may pay tax-exempt interest, are, in most cases, revenue bonds and are
issued by or on behalf of public authorities to raise money to finance various
privately operated facilities for business manufacturing, housing, sports, and
pollution control. These bonds also are used to finance public facilities, such
as airports, mass transit systems, ports and parking. The payment of the
principal and interest on such bonds is dependent solely on the ability of the
facility's user to meet its financial obligations and the pledge, if any, of the
real and personal property so financed as security for such payment. As a result
of 1986 federal tax legislation, industrial revenue bonds may no longer be
issued on a tax-exempt basis for certain previously permissible purposes,
including sports and pollution control facilities.
Participation Interests. The Tax-Free Bond Fund may purchase from
financial institutions participation interests in Municipal Securities, such as
industrial development bonds and municipal lease/purchase agreements. A
participation interest gives a Fund an
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undivided interest in a Municipal Security in the proportion that the Fund's
participation interest bears to the total principal amount of the Municipal
Security. These instruments may have fixed, floating or variable rates of
interest. If the participation interest is unrated, it will be backed by an
irrevocable letter of credit or guarantee of a bank that the Board of Trustees
has approved as meeting the Board's standards, or, alternatively, the payment
obligation will be collateralized by U.S. Government securities.
For certain participation interests, the Tax-Free Bond Fund will have
the right to demand payment, on not more than seven days' notice, for all or any
part of its participation interest in a Municipal Security, plus accrued
interest. As to these instruments, the Tax-Free Bond Fund intends to exercise
its right to demand payment only upon a default under the terms of the Municipal
Securities, as needed to provide liquidity to meet redemptions, or to maintain
or improve the quality of their investment portfolios.
Some participation interests are subject to a "nonappropriation" or
"abatement" feature by which, under certain conditions, the issuer of the
underlying Municipal Security may, without penalty, terminate its obligation to
make payment. In such event, the holder of such security must look to the
underlying collateral, which is often a municipal facility used by the issuer.
Custodial Receipts. The Tax-Free Bond Fund may purchase custodial
receipts representing the right to receive certain future principal and interest
payments on Municipal Securities that underlie the custodial receipts. A number
of different arrangements are possible. In the most common custodial receipt
arrangement, an issuer or a third party owning the Municipal Securities deposits
such obligations with a custodian in exchange for two classes of custodial
receipts with different characteristics. In each case, however, payments on the
two classes are based on payments received on the underlying Municipal
Securities. One class has the characteristics of a typical auction-rate
security, having its interest rate adjusted at specified intervals, and its
ownership changes based on an auction mechanism. The interest rate of this class
generally is expected to be below the coupon rate of the underlying Municipal
Securities and generally is at a level comparable to that of a Municipal
Security of similar quality and having a maturity equal to the period between
interest rate adjustments. The second class bears interest at a rate that
exceeds the interest rate typically borne by a security of comparable quality
and maturity; this rate also is adjusted, although inversely to changes in the
rate of interest of the first class. If the interest rate on the first class
exceeds the coupon rate of the underlying Municipal Securities, its interest
rate will exceed the rate paid on the second class. In no event will the
aggregate interest paid with respect to the two classes exceed the interest paid
by the underlying Municipal Securities. The value of the second class and
similar securities should be expected to fluctuate more than the value of a
Municipal Security of comparable quality and maturity and their purchase by the
Tax-Free Bond Fund should increase the volatility of its net asset value and,
thus, its price per share. These custodial receipts are sold in private
placements and are
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subject to the Tax-Free Bond Fund's limitation with respect to illiquid
investments. The Tax-Free Bond Fund also may purchase directly from issuers, and
not in a private placement, Municipal Securities having the same characteristics
as the custodial receipts.
Tender Option Bonds. The Tax-Free Bond Fund may purchase tender
option bonds and similar securities. A tender option bond is a Municipal
Security, generally held pursuant to a custodial arrangement, having a
relatively long maturity and bearing interest at a fixed rate substantially
higher than prevailing short-term tax-exempt rates, coupled with an agreement of
a third party, such as a bank, broker-dealer or other financial institution,
granting the security holders the option, at periodic intervals, to tender their
securities to the institution and receive their face value. As consideration for
providing the option, the financial institution receives periodic fees equal to
the difference between the Municipal Security's fixed coupon rate and the rate,
as determined by a remarketing or similar agent at or near the commencement of
such period, that would cause the securities, coupled with the tender option, to
trade at par on the date of such determination. Thus, after payment of this fee,
the security holder effectively holds a demand obligation that bears interest at
the prevailing short-term tax-exempt rate. The Adviser, on behalf of the
Tax-Free Bond Fund, considers on a periodic basis the creditworthiness of the
issuer of the underlying Municipal Security, of any custodian and of the third
party provider of the tender option. In certain instances and for certain tender
option bonds, the option may be terminable in the event of a default in payment
of principal or interest on the underlying Municipal Obligations and for other
reasons. The Tax-Free Bond Fund will not invest more than 10% of its total
assets in securities that are illiquid (including tender option bonds with a
tender feature that cannot be exercised on not more than seven days' notice if
there is no secondary market available for these obligations).
Obligations with Puts Attached. The Tax-Free Bond Fund may purchase
Municipal Securities together with the right to resell the securities to the
seller at an agreed-upon price or yield within a specified period prior to the
securities' maturity date. Although an obligation with a put attached is not a
put option in the usual sense, it is commonly known as a "put" and is also
referred to as a "stand-by commitment." The Tax-Free Bond Fund will use such
puts in accordance with regulations issued by the Securities and Exchange
Commission ("SEC"). In 1982, the Internal Revenue Service (the "IRS") issued a
revenue ruling to the effect that, under specified circumstances, a regulated
investment company would be the owner of tax-exempt municipal obligations
acquired with a put option. The IRS also has issued private letter rulings to
certain taxpayers (which do not serve as precedent for other taxpayers) to the
effect that tax-exempt interest received by a regulated investment company with
respect to such obligations will be tax-exempt in the hands of the company and
may be distributed to its shareholders as exempt-interest dividends. The last
such ruling was issued in 1983. The IRS subsequently announced that it will not
ordinarily issue advance ruling letters as to the identity of the true owner of
property in
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cases involving the sale of securities or participation interests therein if the
purchaser has the right to cause the securities, or the participation interest
therein, to be purchased by either the seller or a third party. The Tax-Free
Bond Fund intends to take the position that it is the owner of any municipal
obligations acquired subject to a stand-by commitment or a similar put and that
tax-exempt interest earned with respect to such municipal obligations will be
tax exempt in its hands. There is no assurance that stand-by commitments will be
available to the Tax-Free Bond Fund nor has it assumed that such commitments
would continue to be available under all market conditions. There may be other
types of municipal securities that become available and are similar to the
foregoing described Municipal Securities in which the Tax-Free Bond Fund may
invest.
Zero Coupon Debt Securities. The Funds may invest in zero coupon
securities. Zero coupon debt securities do not make interest payments; instead,
they are sold at a discount from face value and are redeemed at face value when
they mature. Because zero coupon bonds do not pay current income, their prices
can be very volatile when interest rates change. In calculating its daily net
asset value, a Fund takes into account as income a portion of the difference
between a zero coupon bond's purchase price and its face value. The amount of
the discount on a zero coupon bond (other than a zero coupon Municipal Security)
acquired by a Fund from its issuer must be included in the Fund's income during
the period when the Fund holds the bond, even though the Fund does not receive
payments of interest on the bond. In order to qualify for favorable federal
income tax treatment, a Fund may have to increase its distributions to
shareholders to reflect the amount of the discount that the Fund includes in its
income, and may be required to borrow to meet its distribution requirements.
Hedging and Risk Management Practices
In order to hedge against foreign currency exchange rate risks, the
Rising Dividends, Small-Mid Cap Rising Dividends, International Rising Dividends
and Intermediate Total Return Bond Funds may enter into forward foreign currency
exchange contracts ("forward contracts") and foreign currency futures contracts,
as well as purchase put or call options on foreign currencies, as described
below. These Funds also may conduct their foreign currency exchange transactions
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market.
The Funds also may purchase other types of options and futures and
may, in the future, write covered options, as described below and in the
Prospectus.
Forward Contracts. The Rising Dividends, Small-Mid Cap Rising
Dividends, International Rising Dividends and Intermediate Total Return Bond
Funds may enter into forward contracts to attempt to minimize the risk from
adverse changes in the relationship between the U.S. dollar and foreign
currencies. A forward contract, which is individually negotiated and privately
traded by currency traders and
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their customers, involves an obligation to purchase or sell a specific currency
for an agreed-upon price at a future date.
A Fund may enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency or is expecting a dividend or interest payment in order to "lock in"
the U.S. dollar price of a security, dividend or interest payment. When a Fund
believes that a foreign currency may suffer a substantial decline against the
U.S. dollar, it may enter into a forward contract to sell an amount of that
foreign currency approximating the value of some or all of the Fund's portfolio
securities denominated in such currency, or when a Fund believes that the U.S.
dollar may suffer a substantial decline against a foreign currency, it may enter
into a forward contract to buy that currency for a fixed dollar amount.
In connection with a Fund's forward contract transactions, an amount
of the Fund's assets equal to the amount of its commitments will be held aside
or segregated to be used to pay for the commitments. Accordingly, a Fund always
will have cash, cash equivalents or high-quality liquid debt securities
denominated in the appropriate currency available in an amount sufficient to
cover any commitments under these contracts. Segregated assets used to cover
forward contracts will be marked to market on a daily basis. While these
contracts are not presently regulated by the Commodity Futures Trading
Commission ("CFTC"), the CFTC may in the future regulate them, and the ability
of these Funds to utilize forward contracts may be restricted. Forward contracts
may limit potential gain from a positive change in the relationship between the
U.S. dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance by a Fund than if it had not entered into
such contracts. The Funds generally will not enter into a forward foreign
currency exchange contract with a term greater than one year.
Futures Contracts and Options on Futures Contracts. To hedge against
movements in interest rates, securities prices or currency exchange rates, the
Funds may purchase and sell various kinds of futures contracts and options on
futures contracts. The Funds also may enter into closing purchase and sale
transactions with respect to any such contracts and options. Futures contracts
may be based on various securities (such as U.S. Government securities),
securities indices, foreign currencies and other financial instruments and
indices.
The Funds have filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the CFTC and the National
Futures Association, which regulate trading in the futures markets, before
engaging in any purchases or sales of futures contracts or options on futures
contracts. Pursuant to Section 4.5 of the regulations under the Commodity
Exchange Act, the notice of eligibility included the representation that the
Funds will use futures contracts and related options for bona fide hedging
purposes within the meaning of CFTC regulations, provided that a Fund may hold
positions in futures contracts and related options that do not fall
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within the definition of bona fide hedging transactions if the aggregate initial
margin and premiums required to establish such positions will not exceed 5% of
that Fund's net assets (after taking into account unrealized profits and
unrealized losses on any such positions) and that in the case of an option that
is in-the-money at the time of purchase, the in-the-money amount may be excluded
from such 5%.
The Funds will attempt to determine whether the price fluctuations in
the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Funds or
which they expect to purchase. The Funds' futures transactions generally will be
entered into only for traditional hedging purposes -- i.e., futures contracts
will be sold to protect against a decline in the price of securities or
currencies and will be purchased to protect a Fund against an increase in the
price of securities it intends to purchase (or the currencies in which they are
denominated). All futures contracts entered into by these Funds are traded on
U.S. exchanges or boards of trade licensed and regulated by the CFTC or on
foreign exchanges.
Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting or "closing" purchase or
sale transactions, which may result in a profit or a loss. While these Funds'
futures contracts on securities or currencies will usually be liquidated in this
manner, a Fund may make or take delivery of the underlying securities or
currencies whenever it appears economically advantageous. A clearing corporation
associated with the exchange on which futures on securities or currencies are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
By using futures contracts to hedge their positions, these Funds seek
to establish more certainty than would otherwise be possible with respect to the
effective price, rate of return or currency exchange rate on portfolio
securities or securities that these Funds propose to acquire. For example, when
interest rates are rising or securities prices are falling, a Fund can seek,
through the sale of futures contracts, to offset a decline in the value of its
current portfolio securities. When rates are falling or prices are rising, a
Fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market with respect to
anticipated purchases. Similarly, a Fund can sell futures contracts on a
specified currency to protect against a decline in the value of such currency
and its portfolio securities which are denominated in such currency. A Fund can
purchase futures contracts on a foreign currency to fix the price in U.S.
dollars of a security denominated in such currency that such Fund has acquired
or expects to acquire.
As part of its hedging strategy, a Fund also may enter into other
types of financial futures contracts if, in the opinion of the Adviser, there is
a sufficient degree of correlation between price trends for the Fund's portfolio
securities and such futures contracts. Although under some circumstances prices
of securities in
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a Fund's portfolio may be more or less volatile than prices of such futures
contracts, the Adviser will attempt to estimate the extent of this difference in
volatility based on historical patterns and to compensate for it by having that
Fund enter into a greater or lesser number of futures contracts or by attempting
to achieve only a partial hedge against price changes affecting that Fund's
securities portfolio. When hedging of this character is successful, any
depreciation in the value of portfolio securities can be substantially offset by
appreciation in the value of the futures position. However, any unanticipated
appreciation in the value of a Fund's portfolio securities could be offset
substantially by a decline in the value of the futures position.
The acquisition of put and call options on futures contracts gives a
Fund the right (but not the obligation), for a specified price, to sell or
purchase the underlying futures contract at any time during the option period.
Purchasing an option on a futures contract gives a Fund the benefit of the
futures position if prices move in a favorable direction, and limits its risk of
loss, in the event of an unfavorable price movement, to the loss of the premium
and transaction costs.
A Fund may terminate its position in an option contract by selling an
offsetting option on the same series. There is no guarantee that such a closing
transaction can be effected. A Fund's ability to establish and close out
positions on such options is dependent upon a liquid market.
Loss from investing in futures transactions by these Funds is
potentially unlimited.
These Funds will engage in transactions in futures contracts and
related options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended (the "Code"), for
maintaining their qualification as a regulated investment company for federal
income tax purposes.
Options on Securities, Securities Indices and Currencies. These Funds
may purchase put and call options on securities in which they have invested, on
foreign currencies represented in their portfolios and on any securities index
based in whole or in part on securities in which these Funds may invest. These
Funds also may enter into closing sales transactions in order to realize gains
or minimize losses on options they have purchased.
A Fund normally will purchase call options in anticipation of an
increase in the market value of securities of the type in which it may invest or
a positive change in the currency in which such securities are denominated. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified securities or a specified amount of a foreign currency at
a specified price during the option period.
A Fund may purchase and sell options traded on U.S. and foreign
exchanges. Although these Funds will generally purchase only those
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options for which there appears to be an active secondary market, there can be
no assurance that a liquid secondary market on an exchange will exist for any
particular option or at any particular time. For some options, no 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 a Fund
would have to exercise its options in order to realize any profit and would
incur transaction costs upon the purchase or sale of the underlying securities.
Secondary markets on an exchange may not exist or may not be liquid
for a variety of reasons including: (i) insufficient trading interest in certain
options; (ii) restrictions on opening transactions or closing transactions
imposed by an exchange; (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options; (iv)
unusual or unforeseen circumstances which interrupt normal operations on an
exchange; (v) inadequate facilities of an exchange or the Options Clearing
Corporation to handle current trading volume at all times; or (vi)
discontinuance in the future by one or more exchanges for economic or other
reasons, of trading of options (or of a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.
Although these Funds do not currently intend to do so, they may, in
the future, write (i.e., sell) covered put and call options on securities,
securities indices and currencies in which they may invest. A covered call
option involves a Fund's giving another party, in return for a premium, the
right to buy specified securities owned by the Fund at a specified future date
and price set at the time of the contract. A covered call option serves as a
partial hedge against the price decline of the underlying security. However, by
writing a covered call option, a Fund gives up the opportunity, while the option
is in effect, to realize gain from any price increase (above the option exercise
price and premium) in the underlying security. In addition, a Fund's ability to
sell the underlying security is limited while the option is in effect unless the
Fund effects a closing purchase transaction.
These Funds also may write covered put options that give the holder
of the option the right to sell the underlying security to the Fund at the
stated exercise price. A Fund will receive a premium for writing a put option
but will be obligated for as long as the option is outstanding to purchase the
underlying security at a price that may be higher than the market value of that
security at the time of exercise. In order to "cover" put options it has
written, a Fund will cause its custodian to segregate cash, cash equivalents,
U.S. Government securities or other high-grade liquid debt securities with an
aggregate value equal to at least the exercise price of the put options. In
segregating such assets, the custodian either deposits such assets in a
segregated account or separately identifies such
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assets and renders them unavailable for investment. A Fund will not write put
options if the aggregate value of the obligations underlying the put options
exceeds 25% of the Fund's total assets.
There is no assurance that higher than anticipated trading activity
or other unforeseen events might not, at times, render certain of the facilities
of the Options Clearing Corporation inadequate, and result in the institution by
an exchange of special procedures that may interfere with the timely execution
of the Funds' orders.
Other Investment Practices
When-Issued and Forward Commitment Securities. The Funds may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" or "delayed-delivery" basis. The price of such securities
is fixed at the time the commitment to purchase or sell is made, but delivery
and payment for the securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by a Fund to the issuer.
While the Funds reserve the right to sell when-issued or delayed delivery
securities prior to the settlement date, the Funds intend to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time a Fund makes a commitment to
purchase a security on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the security in determining its net
asset value. The market value of the when-issued securities may be more or less
than the settlement price. The Funds do not believe that their net asset values
will be adversely affected by their purchase of securities on a when-issued or
delayed delivery basis. The Funds cause their custodian to segregate cash, U.S.
Government securities or other high-grade liquid debt securities with a value
equal in value to commitments for when- issued or delayed delivery securities.
The segregated securities either will mature or, if necessary, be sold on or
before the settlement date. To the extent that assets of a Fund are held in cash
pending the settlement of a purchase of securities, that Fund will earn no
income on these assets.
Foreign Currency Transactions. Because the Funds may invest in
foreign securities, the Funds may hold foreign currency deposits from time to
time, and may convert U.S. dollars and foreign currencies in the foreign
exchange markets. Currency conversion involves dealer spreads and other costs,
although commissions usually are not charged. Currencies may be exchanged on a
spot (i.e., cash) basis, or by entering into forward contracts to purchase or
sell foreign currencies at a future date and price. Forward contracts generally
are traded in an interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. The parties to a forward
contract may agree to offset or terminate the contract before its maturity, or
may hold the contract to maturity and complete the contemplated currency
exchange.
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In connection with purchases and sales of securities denominated in
foreign currencies, the Funds may enter into currency forward contracts to fix a
definite price for the purchase or sale in advance of the trade's settlement
date. This technique is sometimes referred to as a "settlement hedge" or
"transaction hedge." The Adviser expects to enter into settlement hedges in the
normal course of managing the Funds' foreign investments. A Fund also could
enter into forward contracts to purchase or sell a foreign currency in
anticipation of future purchases or sales of securities denominated in foreign
currency, even if the specific investments have not yet been selected by the
Adviser.
The Funds also may use forward contracts to hedge against a decline
in the value of existing investments denominated in foreign currency. For
example, if a Fund owned securities denominated in Deutschemarks, it could enter
into a forward contract to sell Deutschemarks in return for U.S. dollars to
hedge against possible declines in the Deutschemark's value. Such a hedge
(sometimes referred to as a "position hedge") would tend to offset both positive
and negative currency fluctuations, but would not offset changes in security
values caused by other factors. A Fund also could hedge the position by selling
another currency expected to perform similarly to the Deutschemark -- for
example, by entering into a forward contract to sell Deutschemarks or European
Currency Units in return for U.S. dollars. This type of hedge, sometimes
referred to as a "proxy hedge," could offer advantages in terms of cost, yield,
or efficiency, but generally will not hedge currency exposure as effectively as
a simple hedge into U.S. dollars. Proxy hedges may result in losses if the
currency used to hedge does not perform similarly to the currency in which the
hedge securities are denominated.
SEC guidelines require mutual funds to segregate cash and appropriate
liquid assets to cover forward currency contracts that are deemed speculations.
The Funds are not required to segregate assets to cover forward contracts
entered into for hedging purposes, including settlement hedges, position hedges,
and proxy hedges.
A Fund will not enter into a forward contract if, as a result, it
would have more than one-third of its total assets committed to such contracts
(unless it owns the currency that it is obligated to deliver or has caused its
custodian to segregate cash or high-quality liquid assets having a value
sufficient to cover its obligations).
The successful use of forward currency contracts will depend on the
Adviser's skill in analyzing and predicting currency values. Forward contracts
may change a Fund's investment exposure to changes in currency exchange rates
substantially, and could result in losses to a Fund if exchange rates do not
perform as the Adviser anticipates. For example, if a currency's value rose at a
time when the Adviser had hedged a Fund by selling currency in exchange for
dollars, a Fund would be unable to participate in the currency's appreciation.
If the Adviser hedges currency exposure through proxy hedges, a Fund could
realize currency losses from the hedge and the security position at the same
time if the two currencies do not move in tandem. Similarly, if the Adviser
increases a Fund's exposure to
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a foreign currency, and that currency's value declines, the Fund will realize a
loss. There is no assurance that the Adviser's use of forward currency contracts
will be advantageous to any Fund or that the Adviser will hedge at an
appropriate time. If the Adviser is not correct in its forecast of interest
rates, market values and other economic factors, a Fund would be better off
without a hedge. The policies described in this section are non-fundamental
policies of the Funds.
Indexed Securities. The Funds may purchase securities whose prices
are indexed to the prices of other securities, securities indices, currencies,
precious metals or other commodities, or other financial indicators. No Fund
will invest more than 5% of its net assets in indexed securities. Indexed
securities typically, but not always, are debt securities or deposits whose
value at maturity or coupon rate is determined by reference to a specific
instrument or statistic. Gold-indexed securities, for example, typically provide
for a maturity value that depends on the price of gold, resulting in a security
whose price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency- indexed
securities may be positively or negatively indexed; for example, their maturity
value may increase when the specified currency value increases, resulting in a
security whose price characteristics are similar to a call option on the
underlying currency. Currency-indexed securities also may have prices that
depend on the values of a number of different foreign currencies relative to
each other.
The performance of indexed securities depends to a great extent
on the performance of the security, currency, commodity or other instrument to
which they are indexed, and also may be influenced by interest rate changes in
the U.S. and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values may
decline substantially if the issuer's creditworthiness deteriorates. Recent
issuers of indexed securities have included banks, corporations, and certain
U.S. Government agencies.
Repurchase Agreements. In a repurchase agreement, a Fund purchases a
security and simultaneously commits to resell that security to the seller at an
agreed upon price on an agreed upon date within a specified number of days
(usually not more than seven) from the date of purchase. The resale price
reflects the purchase price plus an agreed upon incremental amount which is
unrelated to the coupon rate or maturity of the purchased security. A repurchase
agreement involves the obligation of the seller to pay the agreed upon price,
which obligation is, in effect, secured by the value (at least equal to the
amount of the agreed upon resale price and marked to market daily) of the
underlying security. A Fund may engage in a repurchase agreement with respect to
any security in which it is authorized to invest. Any repurchase transaction in
which a Fund
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engages will require at least 100% collateralization of the seller's obligation
during the entire term of the repurchase agreement. Each Fund may engage in
straight repurchase agreements and tri-party repurchase agreements. While it
does not presently appear possible to eliminate all risks from these
transactions (particularly the possibility of a decline in the market value of
the underlying securities, as well as delays and costs to a Fund in connection
with bankruptcy proceedings involving a counterparty), it is each Fund's current
policy to limit repurchase agreement transactions to those parties whose
creditworthiness has been reviewed and deemed satisfactory by the Adviser.
Reverse Repurchase Agreements. The Funds may engage in reverse
repurchase agreements. In a reverse repurchase agreement, a Fund sells a
portfolio instrument to another party, such as a bank, broker-dealer or other
financial institution, in return for cash, and agrees to repurchase the
instrument at a particular price and time. While a reverse repurchase agreement
is outstanding, a Fund generally will segregate cash and high quality liquid
assets to cover its obligation under the agreement. The Funds enter into reverse
repurchase agreements only with parties whose creditworthiness has been reviewed
and deemed satisfactory by the Adviser. A Fund's reverse repurchase agreements
and dollar roll transactions that are accounted for as financings will be
included among that Fund's borrowings for purposes of its investment policies
and limitations.
Dollar Roll Transactions. The Funds may enter into dollar roll
transactions. A dollar roll transaction involves a sale by a Fund of a security
to a financial institution concurrently with an agreement by that Fund to
purchase a similar security from the institution at a later date at an
agreed-upon price. The securities that are repurchased will bear the same
interest rate as those sold, but generally will be collateralized by different
pools of mortgages with different prepayment histories than those sold. During
the period between the sale and repurchase, a Fund will not be entitled to
receive interest and principal payments on the securities sold. Proceeds of the
sale will be invested in additional portfolio securities of that Fund, and the
income from these investments, together with any additional fee income received
on the sale, may or may not generate income for that Fund exceeding the yield on
the securities sold.
When a Fund enters into a dollar roll transaction, it causes its
custodian to segregate liquid assets such as cash, U.S. Government securities or
other high-grade liquid debt securities having a value equal to the purchase
price for the similar security (including accrued interest) and subsequently
marks the assets to market daily to ensure that full collateralization is
maintained.
Securities Lending. The Funds may lend securities to parties such as
broker-dealers, banks, or institutional investors. Securities lending allows the
Funds to retain ownership of the securities loaned and, at the same time, to
earn additional income. Because there may be delays in the recovery of loaned
securities, or even a loss of rights in collateral supplied, should the borrower
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fail financially, loans will be made only to parties whose creditworthiness has
been reviewed and deemed satisfactory by the Adviser. Furthermore, they will
only be made if, in the judgment of the Adviser, the consideration to be earned
from such loans would justify the risk.
The Adviser understands that it is the current view of the SEC staff
that a Fund may engage in loan transactions only under the following conditions:
(1) the Fund must receive 100% collateral in the form of cash, cash equivalents
(e.g., U.S. Treasury bills or notes) or other high-grade liquid debt instruments
from the borrower; (2) the borrower must increase the collateral whenever the
market value of the securities loaned (determined on a daily basis) rises above
the value of the collateral; (3) after giving notice, the Fund must be able to
terminate the loan at any time; (4) the Fund must receive reasonable interest on
the loan or a flat fee from the borrower, as well as amounts equivalent to any
dividends, interest, or other distributions on the securities loaned and to any
increase in market value; (5) the Fund may pay only reasonable custodian fees in
connection with the loan; and (6) the Board of Trustees must be able to vote
proxies on the securities loaned, either by terminating the loan or by entering
into an alternative arrangement with the borrower.
Cash received through loan transactions may be invested in any
security in which the Funds are authorized to invest. Investing this cash
subjects that investment, as well as the security loaned, to market forces
(i.e., capital appreciation or depreciation).
Short Sales. The Funds currently have no intention to seek to hedge
investments or realize additional gains through short sales that are not covered
or "against the box," but may do so in the future. Short sales are transactions
in which a 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, a Fund
must borrow the security to make delivery to the buyer. A Fund then is obligated
to replace the security borrowed by purchasing it at the market price at or
prior to the time of replacement. The price at such time may be more or less
than the price at which the security was sold by a Fund. Until the security is
replaced, a Fund is required to repay the lender any dividends or interest that
accrue during the period of the loan. To borrow the security, a Fund also may be
required to pay a premium, which would increase the cost of the security sold.
The net proceeds of the short sale will be retained by the broker (or by the
Fund's custodian in a special custody account) to the extent necessary to meet
margin requirements until the short position is closed out. A Fund also will
incur transaction costs in effecting short sales.
A Fund will incur a loss as a result of the short sale if the price
of the security increases between the date of the short sale and the date on
which a Fund replaces the borrowed security. A Fund will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of the premium,
dividends, interest
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or expenses a Fund may be required to pay in connection with a short sale.
When a Fund engages in short sales, its custodian segregates an
amount of cash or U.S. Government securities or other high-grade liquid debt
securities equal to the difference between (1) the market value of the
securities sold short at the time they were sold short and (2) any cash or U.S.
Government securities required to be deposited with the broker in connection
with the short sale (not including the proceeds from the short sale). The
segregated assets are marked-to-market daily, provided that at no time will the
amount segregated plus the amount deposited with the broker be less than the
market value of the securities when they were sold short.
In addition, the Funds in the future also may make short sales
"against the box," i.e., when a security identical to one owned by a Fund is
borrowed and sold short. If a Fund enters into a short sale against the box, it
is required to segregate securities equivalent in kind and amount to the
securities sold short (or securities convertible or exchangeable into such
securities), and is required to hold such securities while the short sale is
outstanding. A Fund will incur transaction costs, including interest, in
connection with opening, maintaining, and closing short sales against the box.
Illiquid Investments. Illiquid investments are investments that
cannot be sold or disposed of in the ordinary course of business at
approximately the prices at which they are valued. Under the supervision of the
Board of Trustees, the Adviser determines the liquidity of the Funds'
investments and, through reports from the Adviser, the Board monitors trading
activity in illiquid investments. In determining the liquidity of the Funds'
investments, the Adviser may consider various factors, including (1) the
frequency of trades and quotations, (2) the number of dealers and prospective
purchasers in the marketplace, (3) dealer undertakings to make a market, (4) the
nature of the security (including any demand or tender features), (5) the nature
of the marketplace for trades (including the ability to assign or offset a
Fund's rights and obligations relating to the investment); and (6) in the case
of foreign currency-denominated securities, any restriction on currency
conversion. Investments currently considered by a Fund to be illiquid include
repurchase agreements not entitling the holder to payments of principal and
interest within seven days, over-the-counter options (and securities underlying
such options), certain mortgage-backed securities and restricted securities. In
the absence of market quotations, illiquid investments are priced at fair value
as determined in good faith by a committee appointed by the Board of Trustees.
If through a change in values, net assets, or other circumstances, a Fund were
in a position where more than 10% of its net assets were invested in illiquid
securities, it would seek to take appropriate steps to protect liquidity.
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Restricted Securities. Restricted securities, which are one type of
illiquid securities, generally can be sold in privately negotiated transactions,
pursuant to an exemption from registration under the Securities Act of 1933, as
amended (the "1933 Act"), or in a registered public offering. Where registration
is required, a Fund may be obligated to pay all or part of the registration
expense and a considerable period may elapse between the time it decides to seek
registration and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, a Fund might obtain a less favorable price than the
price that prevailed when it decided to seek registration of the security.
Currently, no Fund invests more than 10% of its assets in illiquid securities
which have legal or contractual restrictions on their resale unless there is an
actual dealer market for the particular issue and it has been determined to be a
liquid issue as described below.
In recent years a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
securities sold in private placements, repurchase agreements, commercial paper,
foreign securities and corporate bonds and notes. These instruments are often
restricted securities because the securities are sold in transactions not
requiring registration. Institutional investors generally will not seek to sell
these instruments to the general public, but instead will often depend either on
an efficient institutional market in which such unregistered securities can be
readily resold or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
sold pursuant to Rule 144A in many cases provide both readily ascertainable
values for restricted securities and the ability to liquidate an investment to
satisfy share redemption orders. Such markets might include automated systems
for the trading, clearance and settlement of unregistered securities of domestic
and foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc. An insufficient number of qualified
buyers interested in purchasing Rule 144A- eligible restricted securities held
by a Fund, however, could affect adversely the marketability of such portfolio
securities and the Fund might be unable to dispose of such securities promptly
or at favorable prices.
The Board of Trustees has delegated the function of making day-to-day
determinations of liquidity to the Adviser pursuant to guidelines approved by
the Board. The Adviser takes into account a number of factors in reaching
liquidity decisions, including but not limited to (1) the frequency of trades
for the security, (2) the number of dealers that make quotes for the security,
(3) the number of dealers that have undertaken to make a market in the security,
(4)
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the number of other potential purchasers and (5) the nature of the security and
how trading is effected (e.g., the time needed to sell the security, how bids
are solicited and the mechanics of transfer). The Adviser monitors the liquidity
of restricted securities in the Fund's portfolio and reports periodically on
such decisions to the Board of Trustees.
RISK FACTORS
Foreign Securities. Investors in the International Rising Dividends
Fund should consider carefully the substantial risks involved in securities of
companies located or doing business in, and governments of, foreign nations,
which are in addition to the usual risks inherent in domestic investments. There
may be less publicly available information about foreign companies comparable to
the reports and ratings published regarding companies in the U.S. Foreign
companies are often not subject to uniform accounting, auditing and financial
reporting standards, and auditing practices and requirements often may not be
comparable to those applicable to U.S. companies. Many foreign markets have
substantially less volume than either the established domestic securities
exchanges or the OTC markets. Securities of some foreign companies are less
liquid and more volatile than securities of comparable U.S. companies.
Commission rates in foreign countries, which may be fixed rather than subject to
negotiation as in the U.S., are likely to be higher. In many foreign countries
there is less government supervision and regulation of securities exchanges,
brokers and listed companies than in the U.S., and capital requirements for
brokerage firms are generally lower. Settlement of transactions in foreign
securities may, in some instances, be subject to delays and related
administrative uncertainties.
Exchange Rates and Policies. The International Rising Dividends
Fund endeavors to buy and sell foreign currencies on favorable terms. Some price
spreads on currency exchange (to cover service charges) may be incurred,
particularly when the Fund changes investments from one country to another or
when proceeds from the sale of shares in U.S. dollars are used for the purchase
of securities in foreign countries. Also, some countries may adopt policies
which would prevent the Fund from repatriating invested capital and dividends,
withhold portions of interest and dividends at the source, or impose other
taxes, with respect to the Fund's investments in securities of issuers of that
country. There also is the possibility of expropriation, nationalization,
confiscatory or other taxation, foreign exchange controls (which may include
suspension of the ability to transfer currency from a given country), default in
foreign government securities, political or social instability, or diplomatic
developments that could adversely affect investments in securities of issuers in
those nations.
The Fund may be affected either favorably or unfavorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, exchange control regulations and indigenous economic and
political developments.
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The Board of Trustees considers at least annually the likelihood of
the imposition by any foreign government of exchange control restrictions that
would affect the liquidity of the Funds' assets maintained with custodians in
foreign countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The Board also considers the
degree of risk attendant to holding portfolio securities in domestic and foreign
securities depositories.
Hedging Transactions. While transactions in forward contracts,
options, futures contracts and options on futures (i.e., "hedging positions")
may reduce certain risks, such transactions themselves entail certain other
risks. Thus, while a Fund may benefit from the use of hedging positions,
unanticipated changes in interest rates, securities prices or currency exchange
rates may result in a poorer overall performance for that Fund than if it had
not entered into any hedging positions. If the correlation between a hedging
position and portfolio position which is intended to be protected is imperfect,
the desired protection may not be obtained, and a Fund may be exposed to risk of
financial loss.
Perfect correlation between a Fund's hedging positions and portfolio
positions may be difficult to achieve because hedging instruments in many
foreign countries are not yet available. In addition, it is not possible to
hedge fully against currency fluctuations affecting the value of securities
denominated in foreign currencies because the value of such securities is likely
to fluctuate as a result of independent factors not related to currency
fluctuations.
Municipal Securities. As discussed in the Prospectus, because the
Tax-Free Bond Fund invests primarily in Municipal Securities, its performance
may be especially affected by factors pertaining to the economies of various
states and other factors specifically affecting the ability of issuers of
Municipal Securities to meet their obligations.
Because the Tax-Free Bond Fund expects to invest substantially all of
its assets in Municipal Securities, it will be susceptible to a number of
complex factors affecting the issuers of Municipal Securities, including
national and local political, economic, social, environmental and regulatory
policies and conditions. The Fund cannot predict whether or to what extent such
factors or other factors may affect the issuers of Municipal Securities, the
market value or marketability of such securities or the ability of the
respective issuers of such securities acquired by the Fund to pay interest on,
or principal of, such securities. The creditworthiness of obligations issued by
local issuers may be unrelated to the creditworthiness of obligations issued by
a particular State, and there is no responsibility on the part of a particular
State to make payments on such local obligations.
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<PAGE>
THE FUNDS' INVESTMENT LIMITATIONS
As stated in the Prospectus and as set forth in greater detail below,
various restrictions apply to each Fund's investments. In particular, each Fund
has adopted certain fundamental investment limitations. Those fundamental
restrictions cannot be changed in any material fashion without the approval of
the holders of the majority of a Fund's outstanding shares, which, for this
purpose, means the lesser of (1) more than 50% of a Fund's outstanding shares,
or (2) 67% of the shares represented at a meeting where more than 50% of a
Fund's shares are represented. The Board of Trustees, as a matter of policy or
in response to specific state and/or federal legal requirements, has adopted
certain additional investment restrictions which may be changed at the Board's
discretion (consistent with any applicable legal requirements).
These restrictions (both fundamental and discretionary) may make
reference to certain activities -- such as futures and options -- in which the
Funds currently do not engage, but which might be used by a Fund in the future.
A Fund will not engage in any substantive new activity without prior Board of
Trustees' approval, notification to shareholders, and, in the case of
fundamental restrictions, shareholder approval. Unless otherwise provided, all
references to the value of a Fund's assets are in terms of current market value
at the time of calculation.
As a matter of fundamental restriction, a Fund may not:
(1) Change its status as a diversified series, which requires
that each Fund, with respect to 75% of its total assets,
not invest in the securities of any one issuer (other than
the U.S. Government and its agencies and instrumentalities)
if immediately after and as a result of such investment
more than 5% of the total assets of the Fund would be
invested in such issuer (the remaining 25% of the Fund's
total assets may be invested without restriction except to
the extent other investment restrictions may be
applicable);
(2) invest 25% or more of the value of the Fund's total assets
in the securities of companies engaged in any one industry
(except securities issued by the U.S. Government, its
agencies and instrumentalities or tax-exempt securities
issued by state governments or political subdivisions);
(3) borrow money, except each Fund may enter into bank loans
for temporary or emergency purposes or engage in otherwise
permissible leveraging activities (including reverse
repurchase agreements and dollar roll transactions that are
accounted for as financings) in an amount not in excess of
one-third of the value of the Fund's total assets (at the
lesser of acquisition cost or current market value). No
investments will be made by any Fund if its borrowings
exceed 10% of total assets;
B-25
<PAGE>
(4) issue senior securities, as defined in the 1940 Act, except
that this restriction shall not be deemed to prohibit the
Fund from making any otherwise permissible borrowings,
mortgages or pledges, or entering into permissible reverse
repurchase agreements and dollar roll transactions, and
options and futures transactions, or issuing shares of
beneficial interest in multiple classes;
(5) make loans of more than one-third of the Fund's net assets,
including loans of securities, except that the Fund may,
subject to the other restrictions or policies stated
herein, purchase debt securities or enter into repurchase
agreements with banks or other institutions to the extent a
repurchase agreement is deemed to be a loan;
(6) purchase or sell commodities or commodity contracts, or
interests in oil, gas, or other mineral leases, or other
mineral exploration or development programs, except that
the Fund may invest in companies that engage in such
businesses to the extent otherwise permitted by the Fund's
investment policies and restrictions and by applicable law,
and may engage in otherwise permissible options and futures
activities as described in the Prospectus and this
Statement of Additional Information [currently none
authorized];
(7) purchase or sell real estate, except that the Fund may
invest in securities secured by real estate or real estate
interests, or issued by companies, including real estate
investment trusts, that invest in real estate or real
estate interests;
(8) underwrite securities of any other company, except that the
Fund may invest in companies that engage in such
businesses, and except to the extent that the Fund may be
considered an underwriter within the meaning of the 1933
Act in the disposition of restricted securities; and
(9) notwithstanding any other fundamental investment
restriction or policy, each Fund reserves the right to
invest all of its assets in the securities of a single
open-end investment company with substantially the same
fundamental investment objectives, restrictions and
policies as that Fund.
As a matter of additional investment restriction, implemented at the
discretion of the Board of Trustees, a Fund may not:
(10) purchase or write put, call, straddle or spread options or
engage in futures transactions except as described in the
Prospectus or Statement of Additional Information;
(11) make short sales (except covered or "against the box" short
sales) or purchases on margin, except that the Fund may
obtain short-term credits necessary for the clearance of
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<PAGE>
purchases and sales of its portfolio securities and, as
required in connection with permissible options, futures,
short selling and leveraging activities as described
elsewhere in the Prospectus and Statement of Additional
Information;
(12) mortgage, hypothecate, or pledge any of its assets as
security for any of its obligations, except as required for
otherwise permissible borrowings (including reverse
repurchase agreements, dollar roll transactions, short
sales, financial options and other hedging activities);
(13) purchase the securities of any company for the purpose of
exercising management or control (but this restriction
shall not restrict the voting of any proxy);
(14) purchase more than 10% of the outstanding voting securities
of any one issuer;
(15) purchase the securities of other investment companies,
except as permitted by the 1940 Act and except as otherwise
provided in the Prospectus (each Fund reserves the right to
invest all of its assets in shares of another investment
company);
(16) invest more than 5% of the value of its total assets in
securities of any issuer which has not had a record,
together with its predecessors, of at least three years of
continuous operations;
(17) except as required in connection with otherwise permissible
options and futures activities [none currently authorized],
invest more than 5% of the value of the Fund's total assets
in rights or warrants (other than those that have been
acquired in units or attached to other securities), or
invest more than 2% of its total assets in rights or
warrants that are not listed on the New York or American
Stock Exchanges;
(18) participate on a joint basis in any trading account in
securities, although the Adviser may aggregate orders for
the sale or purchase of securities with other accounts it
manages to reduce brokerage costs or to average prices;
(19) invest, in the aggregate, more than 10% of its net assets
in illiquid securities;
(20) purchase or retain in the Fund's portfolio any security if
any officer, trustee or shareholder of the issuer is at the
same time an officer, trustee or employee of the Trust or
the Adviser and such person owns beneficially more than 1/2
of 1% of the securities and all such persons owning more
than 1/2 of 1% own in the aggregate more than 5% of the
outstanding securities of the issuer; and
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<PAGE>
(21) invest more than 5% of its net assets in indexed
securities.
Except as otherwise noted, all percentage limitations set forth above
apply immediately after a purchase and a subsequent change in the applicable
percentage resulting from market fluctuations does not require elimination of
any security from the portfolio.
MANAGEMENT OF THE FUNDS
Trustees and Officers
Set forth below is certain information about the Trust's trustees and
executive officers:
*RICHARD ALAN KAYNE, Trustee and Chief Executive Officer (Age 51)
c/o Kayne Anderson Investment Management, L.P., 1800 Avenue of
the Stars, Los Angeles, CA 90067. Mr. Kayne has been an equity
owner and the President of the general partner of Kayne Anderson
(and its predecessor) since June 1984. Mr. Kayne has been a
shareholder and President of KA Associates, Inc., a registered
broker-dealer, since January 1993.
*ALLAN MICHAEL RUDNICK, Trustee and President (Age 56)
c/o Kayne Anderson Investment Management, L.P., 1800 Avenue of
the Stars, Los Angeles, CA 90067. Mr. Rudnick has been an
equity owner and the Chief Investment Officer of the general
partner of Kayne Anderson (and its predecessor) since
August 1989.
*WILLIAM THOMAS MILLER, Trustee, Chief Financial Officer and
Treasurer (Age 33)
c/o Kayne Anderson Investment Management, L.P., 1800 Avenue of the
Stars, Los Angeles, CA 90067. Mr. Miller has been a Financial Vice
President and Treasurer of KA Associates, Inc. since April 1994. Mr.
Miller has been the Chief Financial Officer of the general partner of
Kayne Anderson (and its predecessor) since June 1994.
______________________
Denotes a Trustee who is an "interested person," as defined in the 1940
Act.
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<PAGE>
The officers of the Trust, and the Trustees who are considered
"interested persons" of the Trust, receive no compensation directly from it for
performing the duties of their offices. However, those officers and Trustees of
the Trust who are officers or partners of the Adviser or the Distributor may
receive remuneration indirectly because the Adviser receives a management fee
from the Fund.
The Trustees who are not affiliated with the Adviser or the
Distributor receive an annual retainer of $_____ and fees and expenses for each
regular Board meeting attended. The aggregate compensation expected to be paid
by the Trust to each of the Trustees during the fiscal year ended December 31,
1996 is set forth below.
<TABLE>
<CAPTION>
Pension or Total Compensation
Aggregate Retirement Benefits from the Trust and
Compensation from Accrued as Part of Fund Complex (no
Name of Trustee the Trust Fund Expenses* additional Trusts)
- --------------- ----------------- ------------------- ------------------
<S> <C> <C> <C>
Richard A. Kayne None -- None
</TABLE>
B-29
<PAGE>
<TABLE>
<S> <C> <C> <C>
Alan M. Rudnick None -- None
William T. Miller None -- None
</TABLE>
* The Trust does not maintain pension or retirement plans.
Control Persons and Share Ownership
For a substantial period of time after commencement of the operations
of the Trust, one or more officers and Trustees of the Trust may have a
controlling interest in each Fund.
The Adviser
As set forth in the Prospectus, Kayne Anderson is the Adviser for the
Funds. Pursuant to an Investment Management Agreement (the "Management
Agreement"), the Adviser determines the composition of the Funds' portfolios,
the nature and timing of the changes to the Funds' portfolios and the manner of
implementing such changes. The Adviser also (a) provides the Funds with
investment advice, research and related services for the investment of their
assets, subject to such directions as it may receive from the Board of Trustees;
(b) pays all of the Trust's executive officers' salaries and executive expenses
(if any); (c) pays all expenses incurred in performing its investment advisory
duties under the Management Agreement; and (d) furnishes the Funds with office
space and certain administrative services. The services of the Adviser to the
Funds are not deemed to be exclusive, and the Adviser or any affiliate thereof
may provide similar services to other series of the Trust, other investment
companies and other clients, and may engage in other activities. The Funds may
reimburse the Adviser (on a cost recovery basis only) for any services performed
for a Fund by the Adviser outside its duties under the Management Agreement.
Kayne Anderson is a registered investment adviser organized as a
California limited partnership. The Adviser's predecessor was founded in 1984,
by Richard Kayne and John Anderson. The Adviser is in the business of furnishing
investment advice to institutional and private clients and, together with its
affiliated investment adviser, KAIM Non-Traditional, L.P., currently manages
approximately $2.3 billion for such clients.
The Management Agreement permits the Adviser to seek reimbursement of
any reductions made to its management fee within the three-year period following
such reduction, subject to a Fund's ability to effect such reimbursement and
remain in compliance with applicable expense limitations. Any such management
fee reimbursement will be accounted for on the financial statements of a Fund as
a contingent liability of the Fund, and will appear as a footnote to the Fund's
financial statements until such time as it
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<PAGE>
appears that the Fund will be able to effect such reimbursement. At such time as
it appears probable that a Fund is able to effect such reimbursement, the amount
of reimbursement that the Fund is able to effect will be accrued as an expense
of the Fund for that current period.
The Management Agreement was approved by the Trust's Board of
Trustees on September ___, 1996 and each Fund's initial shareholder on September
___, 1996. The Management Agreement may be terminated by the Adviser or the
Trust, without penalty, on 60-days' written notice to the other and will
terminate automatically in the event of its assignment.
Expenses
Each Fund will pay all expenses related to its operation which are
not borne by the Adviser or the Distributor. These expenses include, among
others: legal and auditing expenses; interest; taxes; governmental fees; fees,
voluntary assessments and other expenses incurred in connection with membership
in investment company organizations; brokerage commissions or charges; fees of
custodians, transfer agents, registrars or other agents; distribution plan fees;
expenses relating to the redemption or repurchase of a Fund's shares; expenses
of registering and qualifying Fund shares for sale under applicable federal and
state laws and maintaining such registrations and qualifications; expenses of
preparing, printing and distributing to Fund shareholders prospectuses, proxy
statements, reports, notices and dividends; cost of stationery; costs of
shareholders' and other meetings of a Fund; fees paid to members of the Board of
Trustees (other than members who are affiliated persons of the Adviser or
Distributor); a Fund's pro rata portion of premiums of any fidelity bond and
other insurance covering a Fund and the Trust's officers and trustees or other
expenses of the Trust; and expenses including prorated portions of overhead
expenses (in each case on cost recovery basis only) of services for a Fund
performed by the Adviser outside of its investment advisory duties under the
Management Agreement. A Fund also is liable for such nonrecurring expenses as
may arise, including litigation to which a Fund may be a party. Each Fund has
agreed to indemnify its trustees and officers with respect to any such
litigation. Each Fund also paid its own organizational expenses, which are being
amortized over five years.
Total operating expenses of a Fund are subject to applicable
limitations under rules and regulations of the states in which that Fund is
authorized to sell its shares; therefore, operating expenses are effectively
subject to the most restrictive of such expense limitations as the same may be
amended from time to time. The most restrictive expense limitation currently
requires that the Adviser make arrangements (including reduction of management
fees otherwise payable) to limit certain expenses of a Fund, including the
management fees paid to the Adviser under the Management Agreement (but
excluding interest, taxes, brokerage fees and commissions, and certain
extraordinary charges), in any fiscal year in which a Fund's expenses exceed
2.5% of the Fund's average daily net assets up to $30
B-31
<PAGE>
million, 2.0% of average daily net assets between $30 million and $100 million,
and 1.5% of such net assets over $100 million.
As noted in the Prospectus, the Adviser has agreed to reduce its fee
to each Fund by the amount, if any, necessary to keep the Fund's annual
operating expenses (expressed as a percentage of its average daily net assets),
at or below the lesser of the following levels: Rising Dividends Fund -- 1.20%;
Small-Mid Cap Rising Dividends Fund - - 1.30%; International Rising Dividends
Fund -- 1.40%; Intermediate Total Return Bond Fund -- .95%; and Tax-Free Bond
Fund -- .95% and/or the maximum expense ratio allowed by any state in which such
Fund's shares are then qualified for sale. The Adviser also may at its
discretion from time to time pay for other Fund expenses from its own assets, or
reduce the management fee of a Fund in excess of that required.
Portfolio Transactions and Brokerage
Subject to policies established by the Board of Trustees, the Adviser
is primarily responsible for arranging the execution of the Funds' portfolio
transactions and the allocation of brokerage activities. In arranging such
transactions, the Adviser will seek to obtain the best execution for each Fund,
taking into account such factors as price, size of order, difficulty of
execution, operational facilities of the firm involved, the firm's risk in
positioning a block of securities, and research, market and statistical
information provided by such firm. While the Adviser generally seeks reasonably
competitive commission rates, a Fund will not necessarily always receive the
lowest commission available.
The Funds have no obligation to deal with any broker or group of
brokers in executing transactions in portfolio securities. Brokers who provide
supplemental research, market and statistical information to the Adviser may
receive orders for transactions by a Fund. The term "research, market and
statistical information" includes advice as to the value of securities, the
advisability of purchasing or selling securities, the availability of securities
or purchasers or sellers of securities, and furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts. Information so received
will be in addition to and not in lieu of the services required to be performed
by the Adviser under the Management Agreement and the expenses of the Adviser
will not necessarily be reduced as a result of the receipt of such supplemental
information. Such information may be useful to the Adviser in providing services
to clients other than the Funds, and not all such information may be used by the
Adviser in connection with a Fund. Conversely, such information provided to the
Adviser by brokers and dealers through whom other clients of the Adviser in the
future may effect securities transactions may be useful to the Adviser in
providing services to a Fund. To the extent the Adviser receives valuable
research, market and statistical information from a broker-dealer, the Adviser
intends to direct orders for Fund transactions to that broker-dealer, subject to
the foregoing policies, regulatory constraints, and the ability of that
broker-dealer to provide competitive prices and commission
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<PAGE>
rates. In accordance with the rules of the National Association of Securities
Dealers, Inc., the Adviser also may direct brokerage to broker-dealers who
facilitate sales of the Funds' shares, subject to also obtaining best execution
as described above from such broker-dealer.
A portion of the securities in which the Funds may invest are traded
in the over-the-counter markets, and each Fund intends to deal directly with the
dealers who make markets in the securities involved, except as limited by
applicable law and in certain circumstances where better prices and execution
are available elsewhere. Securities traded through market makers may include
markups or markdowns, which are generally not determinable. Under the 1940 Act,
persons affiliated with a Fund are prohibited from dealing with that Fund as
principal in the purchase and sale of securities except after application for
and receipt of an exemptive order from the SEC. The 1940 Act restricts
transactions involving a Fund and its "affiliates," including, among others, the
Trust's trustees, officers, and employees and the Adviser, and any affiliates of
such affiliates. Affiliated persons of a Fund are permitted to serve as its
broker in over-the-counter transactions conducted on an agency basis only.
Investment decisions for each Fund are made independently from those
of accounts advised by the Adviser or its affiliates. However, the same security
may be held in the portfolios of more than one account. When two or more
accounts advised by the Adviser simultaneously engage in the purchase or sale of
the same security, the prices and amounts will be equitably allocated among each
account. In some cases, this procedure may adversely affect the price or
quantity of the security available to a particular account. In other cases,
however, an account's ability to participate in large volume transactions may
produce better executions and prices.
THE FUNDS' ADMINISTRATOR
The Funds have an Administration Agreement with Investment Company
Administration Corporation (the "Administrator"), with offices at 2025 East
Financial Way, Suite 101, Glendora, CA 91741. The Administration Agreement
provides that the Administrator will prepare and coordinate reports and other
materials supplied to the Trustees; prepare and/or supervise the preparation and
filing of all securities filings, periodic financial reports, prospectuses,
statements of additional information, marketing materials, tax returns,
shareholder reports and other regulatory reports or filings required of the
Funds; prepare all required filings necessary to maintain the Funds'
qualifications and/or registrations to sell shares in all states where each Fund
currently does, or intends to do, business; coordinate the preparation, printing
and mailing of all materials (e.g., Annual Reports) required to be sent to
shareholders; coordinate the preparation and payment of Fund-related expenses;
monitor and oversee the activities of the Funds' servicing agents (i.e.,
transfer agent, custodian, fund accountants, etc.); review and adjust as
necessary each Fund's daily expense accruals; and perform
B-33
<PAGE>
such additional services as may be agreed upon by the Funds and the
Administrator. For its services, the Administrator receives the fees described
in the Prospectus.
THE FUNDS' DISTRIBUTOR
First Fund Distributors, Inc. (the "Distributor"), a broker-dealer
affiliated with the Administrator, acts as each Fund's principal underwriter in
a continuous public offering of the Fund's shares. The Distribution Agreement
between the Funds and the Distributor continues in effect for periods not
exceeding one year if approved at least annually by (i) the Board of Trustees or
the vote of a majority of the outstanding shares of each Fund (as defined in the
1940 Act) and (ii) a majority of the Trustees who are not interested persons of
any such party, in each case cast in person at a meeting called for the purpose
of voting on such approval. The Distribution Agreement may be terminated without
penalty by the parties thereto upon 60-days' written notice, and is
automatically terminated in the event of its assignment as defined in the 1940
Act.
TRANSFER AGENT AND CUSTODIAN
Investors Bank & Trust Company, Boston, Massachusetts, serves as the
Funds' Transfer Agent. As Transfer Agent, it maintains records of shareholder
accounts, processes purchases and redemptions of shares, acts as dividend and
distribution disbursing agent and performs other related shareholder functions.
Investors Bank & Trust Company, Boston, Massachusetts also serves as the Funds'
Custodian. As Custodian, it and subcustodians designated by the Board of
Trustees hold the securities in the Funds' portfolio and other assets for
safekeeping. The Transfer Agent and Custodian do not and will not participate in
making investment decisions for the Funds.
HOW NET ASSET VALUE IS DETERMINED
The net asset values of the Funds' shares are calculated once daily,
as of 4:00 p.m. New York time (the "Portfolio Valuation Time"), on each day that
the New York Stock Exchange (the "NYSE") is open for trading by dividing each
Fund's net assets (assets less liabilities) by the total number of shares
outstanding and adjusting to the nearest cent per share. The NYSE is closed on
Saturdays, Sundays, New Year's Day, Presidents Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving, and Christmas Day. The Funds do not
expect to determine the net asset value of their shares on any day when the NYSE
is not open for trading even if there is sufficient trading in their portfolio
securities on such days to materially affect the net asset value per share.
Because of the difference between the bid and asked prices of the
over-the-counter securities in which a Fund may invest, there may be an
immediate reduction in the net asset value of the shares of a Fund after a Fund
has completed a purchase of such securities. This
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<PAGE>
is because such OTC securities generally will be valued at the last sale price
(which is generally below the asked price), but usually are purchased at or near
the asked price.
Each Fund's (other than the Tax-Free Bond Fund) portfolio is expected
to include foreign securities listed on foreign stock exchanges and debt
securities of foreign governments and corporations. Generally, trading in and
valuation of foreign securities is substantially completed each day at various
times prior to the Portfolio Valuation Time. In addition, trading in and
valuation of foreign securities may not take place on every day that the NYSE is
open for trading. Furthermore, trading takes place in various foreign markets on
days on which the NYSE is not open for trading and on which the Funds' net asset
values are not calculated. Foreign securities quoted in foreign currencies are
translated into U.S. dollars using the latest available exchange rates. As a
result, fluctuations in the value of such currencies in relation to the U.S.
dollar will affect the net asset value of a Fund's shares even though there has
not been any change in the market values of such securities. Any changes in the
value of foreign currency forward contracts due to exchange rate fluctuations
are included in determination of net asset value.
Generally, each Fund's investments are valued at market value or, in
the absence of a market value, at fair value as determined in good faith by the
Adviser and the Board of Trustees. Portfolio securities that are listed or
admitted to trading on a U.S. exchange are valued at the last sale price on the
principal exchange on which the security is traded, or, if there has been no
sale that day, at the mean between the closing bid and asked prices. Securities
admitted to trading on the NASDAQ National Market System and securities traded
only in the U.S. over-the-counter market are valued at the last sale price, or,
if there has been no sale that day, at the mean between the closing bid and
asked prices. Foreign securities are valued at the last sale price in the
principal market where they are traded, or if the last sale price is
unavailable, at the mean between the last bid and asked prices available
reasonably prior to the time the Funds' net asset values are determined.
Securities and assets for which market quotations are not readily available
(including restricted securities which are subject to limitations as to their
sale) are valued at fair value as determined in good faith by or under the
direction of the Board of Trustees.
Short-term debt obligations with remaining maturities in excess of 60
days are valued at current market prices, as discussed above. Short-term
securities with 60 days or less remaining to maturity are, unless conditions
indicate otherwise, amortized to maturity based on their cost to a Fund if
acquired within 60 days of maturity or, if already held by a Fund on the 60th
day, based on the value determined on the 61st day.
Corporate and government debt securities held by the Funds are valued
on the basis of valuations provided by dealers in those instruments, by an
independent pricing service approved by the Board of Trustees, or at fair value
as determined in good faith by procedures approved by the Board of Trustees. Any
such pricing
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<PAGE>
service, in determining value, is expected to use information with respect to
transactions in the securities being valued, quotations from dealers, market
transactions in comparable securities, analyses and evaluations of various
relationships between securities and yield to maturity information.
If any securities held by a Fund are restricted as to resale or do
not have readily available market quotations, the Adviser and the Board of
Trustees determine their fair value. The Trustees periodically review such
valuations and valuation procedures. The fair value of such securities is
generally determined as the amount which a Fund could reasonably expect to
realize from an orderly disposition of such securities over a reasonable period
of time. The valuation procedures applied in any specific instance are likely to
vary from case to case. However, consideration is generally given to the
financial position of the issuer and other fundamental analytical data relating
to the investment and to the nature of the restrictions on disposition of the
securities (including any registration expenses that might be borne by a Fund in
connection with such disposition). In addition, specific factors are also
generally considered, such as the cost of the investment, the market value of
any unrestricted securities of the same class (both at the time of purchase and
at the time of valuation), the size of the holding relative to current average
trading volume, the prices of any recent transactions or offers with respect to
such securities and any available analysts' reports regarding the issuer.
All other assets of the Funds are valued in such manner as the Board
of Trustees in good faith deems appropriate to reflect their fair value.
SHARE PURCHASES AND REDEMPTIONS
Information concerning the purchase and redemption of the Funds'
shares is contained in the Prospectus under "Purchasing Shares" and "Selling
Shares (Redemptions)."
The Trust reserves the right in its sole discretion (i) to suspend
the continued offering of each Fund's shares, (ii) to reject purchase orders in
whole or in part when in the judgment of the Adviser or the Distributor such
rejection is in the best interest of a Fund, and (iii) to reduce or waive the
minimum for initial and subsequent investments for certain fiduciary accounts or
under circumstances where certain economies can be achieved in sales of a Fund's
shares.
During any 90-day period, the Trust is committed to pay in cash all
requests to redeem shares by any one shareholder, up to the lesser of $250,000
or 1% of the value of the Trust's net assets at the beginning of the period.
Should redemptions by any individual shareholder (excluding street name or
omnibus accounts maintained by financial intermediaries) exceed this limitation,
the Trust reserves the right to redeem the excess amount in whole or in part in
securities or other assets. If shares are redeemed in this manner,
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<PAGE>
the redeeming shareholder usually will incur additional brokerage costs in
converting the securities to cash.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Each Fund intends to distribute substantially all of its net
investment income and net capital gains, if any. In determining amounts of
capital gains to be distributed, any capital loss carryovers from prior years
will be offset against capital gains of the current year. Unless a shareholder
elects cash distributions on the Account Application form or submits a written
request to a Fund at least 10 full business days before the record date for a
distribution in which the shareholder elects to receive such distribution in
cash, distributions will be credited to the shareholder's account in additional
shares of a Fund based on the net asset value per share at the close of business
on the day following the record date for such distribution.
Each Fund has qualified and elected, or intends to qualify and elect,
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), and intends to maintain
such qualification. In order to so qualify, a Fund must meet certain
requirements with respect to the source of its income, diversification of its
assets and distributions to its shareholders. Dividends declared by a Fund in
October, November, or December of any calendar year to shareholders of record as
of a record date in such a month will be treated for federal income tax purposes
as having been received by shareholders on December 31 of that year if they are
paid during January of the following year.
Under Subchapter M, a Fund will not be subject to federal income
taxes on the net investment income and capital gains it distributes to
shareholders, provided that at least 90% of its investment company taxable
income for the taxable year is so distributed. A Fund will generally be subject
to federal income taxes on its undistributed net investment income and capital
gains. A nondeductible 4% excise tax also is imposed on each regulated
investment company to the extent that it does not distribute to investors in
each calendar year an amount equal to 98% of its ordinary income for such
calendar year plus 98% of its capital gain net income for the one-year period
ending on October 31 of such calendar year plus 100% of any undistributed
ordinary or capital gain net income for the prior period. Each Fund intends to
declare and pay dividends and capital gain distributions in a manner to avoid
imposition of the excise tax.
The Trustees reserve the right not to maintain the qualification of a
Fund as a regulated investment company if they determine such course of action
to be more beneficial to the shareholders. In such case, a Fund will be subject
to federal and state corporate income taxes on its income and gains, and all
dividends and distributions to shareholders will be ordinary dividend income to
the extent of the Fund's earnings and profits.
B-37
<PAGE>
The Funds may write, purchase or sell certain option and foreign
currency contracts. Such transactions are subject to special tax rules that may
affect the amount, timing and character of distributions to shareholders. Unless
the Funds are eligible to make and make a special election, such option and
foreign currency contracts that are "Section 1256 contracts" will be "marked-to-
market" for federal income tax purposes at the end of each taxable year, i.e.,
each option contract will be treated as sold for its fair market value on the
last day of the taxable year. In general, unless the special election referred
to in the previous sentence is made, gain or loss from transactions in such
option contracts will be 60% long-term and 40% short-term capital gain or loss.
Section 1092 of the Code, which applies to certain "straddles," may
affect the taxation of the Funds' transactions in option contracts. Under
Section 1092, the Funds may be required to postpone recognition for tax purposes
of losses incurred in certain closing transactions in options.
Section 988 of the Code contains special tax rules applicable to
certain foreign currency transactions that may affect the amount, timing, and
character of income, gain or loss recognized by a Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency-denominated payables and receivables, and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60%-40% rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of a Fund's gain or loss on the sale or other disposition of shares of a foreign
corporation may, because of changes in foreign currency exchange rates, be
treated as ordinary income or loss under Section 988 of the Code, rather than as
capital gain or loss.
One of the requirements for qualification as a regulated investment
company is that less than 30% of a Fund's gross income must be derived from
gains from the sale or other disposition of securities held for less than three
months. Accordingly, a Fund may be restricted in effecting closing transactions
within three months after entering into an option contract.
The Funds also may invest in the stock of foreign companies that may
be treated as "passive foreign investment companies" ("PFICs") under the Code.
Certain other foreign corporations, not operated as investment companies, may
nevertheless satisfy the PFIC definition. A portion of the income and gains that
a Fund derives from PFIC stock may be subject to a non-deductible federal income
tax at the Fund level. In some cases, a Fund may be able to avoid this tax by
electing to be taxed currently on its share of the PFIC's income, whether or not
such income is actually distributed by the PFIC. The Funds will endeavor to
limit their exposure to the PFIC tax by investing in PFICs only where the
election to be taxed currently will be made. Since it is not always possible to
identify a foreign issuer as a PFIC in advance of making the investment, these
Funds may incur the PFIC tax in some instances.
B-38
<PAGE>
Dividends of net investment income (including any net realized
short-term capital gains other than exempt-interest dividends described below)
paid by a Fund are taxable to shareholders of the Fund as ordinary income,
whether such distributions are taken in cash or reinvested in additional shares.
Distributions of net capital gain (i.e., the excess of net long-term capital
gains over net short-term capital losses), if any, by a Fund are taxable as
long-term capital gains, whether such distributions are taken in cash or
reinvested in additional shares, and regardless of how long shares of the Fund
have been held. Fund distributions also will be included in individual and
corporate shareholders' income on which the alternative minimum tax may be
imposed. Tax-exempt shareholders will not be required to pay taxes on amounts
distributed to them, unless they have borrowed to purchase or carry their shares
of a Fund. Statements as to the tax status of distributions to shareholders will
be mailed annually.
Provided that, as anticipated, the Tax-Free Bond Fund qualifies as a
regulated investment company under the Code, and, at the close of each quarter
of its taxable year at least 50% of the value of the total assets of that Fund
consists of obligations the interest on which is exempt from federal income tax,
that Fund will be qualified to pay exempt-interest dividends to its shareholders
that, to the extent attributable to interest received by that Fund on such
obligations, are exempt from federal income tax. The total amount of
exempt-interest dividends paid by the Tax-Free Bond Fund to its shareholders
with respect to any taxable year cannot exceed the amount of interest received
by the Fund during such year on tax-exempt obligations less any expenses
attributable to such interest. Income from other transactions engaged in by the
Tax-Free Bond Fund, such as income from options and repurchase agreements, will
be taxable distributions to its shareholders.
The Code may subject interest received on otherwise tax-exempt
securities to an alternative minimum tax. In addition, certain corporations
which are subject to the alternative minimum tax may have to include a portion
of exempt-interest dividends in calculating their alternative minimum taxable
income.
Interest on indebtedness incurred or continued by a shareholder to
purchase or carry shares of the Tax-Free Bond Fund is not deductible for federal
income tax purposes. Under regulations prescribed by the IRS for determining
when borrowed funds are considered used for the purposes of purchasing or
carrying particular assets, the purchase of shares may be considered to have
been made with borrowed funds even though the borrowed funds are not directly
traceable to the purchase of shares of this Fund.
Up to 85% of social security or railroad retirement benefits may be
included in federal taxable income of recipients whose adjusted gross income
(including income from tax-exempt sources such as tax-exempt bonds and
exempt-interest dividends) plus 50% of their benefits exceed certain base
amounts. Income from the Tax-Free Bond Fund is included in the calculation of
whether a recipient's income exceeds these base amounts, but is not taxable
directly.
B-39
<PAGE>
From time to time, proposals have been introduced in Congress to
restrict or eliminate the federal income tax exemption for interest on Municipal
Securities. It can be expected that similar proposals may be introduced in the
future. If such proposals were enacted, the availability of Municipal Securities
for investment by the Tax-Free Bond Fund and the value of that Fund's portfolio
would be affected. In such event, that Fund would reevaluate its investment
objectives and policies.
Any dividend from net investment income or distribution of long-term
capital gains received by a shareholder will have the effect of reducing the net
asset value of a Fund's shares held by such shareholder by the amount of the
dividend or distribution. If the net asset value of the shares should be reduced
below a shareholder's cost as a result of the dividend of net investment income
or a long-term capital gains distribution, such dividend or distribution,
although constituting a return of capital, nevertheless will be taxable as
described above. Investors should be careful to consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased at
that time may include the amount of the forthcoming distribution. Those
investors purchasing shares just prior to a distribution will then receive a
partial return of their investment upon such distribution, which will
nevertheless be taxable to them.
Any gain or loss realized upon an exchange or redemption of shares in
a Fund by a shareholder who holds the shares as a capital asset will be treated
as a long-term capital gain or loss if the shares have been held for more than
one year, and otherwise as a short-term capital gain or loss. However, any loss
realized by a shareholder upon an exchange or redemption of shares of a Fund
held (or treated as held) for six months or less will be treated as a long-term
capital loss to the extent of any long-term capital gain distribution received
on the shares.
All or a portion of a loss realized upon the exchange or redemption
of shares may be disallowed to the extent shares are purchased (including shares
acquired by means of reinvested dividends) within 30 days before or after such
redemption. In addition, with respect to the Tax-Free Bond Fund, any loss
realized upon the exchange or redemption of shares of the Fund held (or treated
as held) for six months or less will be disallowed to the extent that of any
exempt-interest dividends received on the shares.
Dividends paid by a Fund will be eligible for the 70% dividends
received deduction for corporate shareholders, to the extent that a Fund's
income is derived from certain qualifying dividends received from domestic
corporations. Availability of the deduction is subject to certain holding period
and debt-financing limitations. Capital gains distributions are not eligible for
the 70% dividends received deduction.
A Fund may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations. If more than
50% in value of the total assets of a Fund at the end of its fiscal year is
invested in stock or securities
B-40
<PAGE>
of foreign corporations, the Fund may elect to pass through to its shareholders
their pro rata share of all foreign income taxes paid by the Fund. If this
election is made by a Fund, shareholders will be (i) required to include in
their gross income their pro rata share of the Fund's foreign source income
(including any foreign income taxes paid by the Fund), and (ii) entitled either
to deduct their share of such foreign taxes in computing their taxable income or
to claim a credit for such taxes against their U.S. income tax, subject to
certain limitations under the Code. If a Fund does not qualify to, or does not,
make the election, the Fund will deduct the foreign income taxes it pays. The
International Rising Dividends Fund may qualify to make this election.
Each Fund is required to withhold 31% of reportable payments
(including dividends, capital gain distributions and redemption proceeds) paid
to individuals and other nonexempt shareholders who have not complied with
applicable regulations. In order to avoid this backup withholding requirement,
each shareholder must provide a social security number or other taxpayer
identification number and certify that the number provided is correct and that
the shareholder is not currently subject to backup withholding, or the
shareholder should indicate that it is exempt from backup withholding. Even
though all certifications have been made on the Application, a Fund may be
required to impose backup withholding if it is notified by the IRS or a broker
that such withholding is required for previous under- reporting of interest or
dividend income or use of an incorrect taxpayer identification number.
Nonresident aliens, foreign corporations, and other foreign entities may be
subject to withholding of up to 30% on certain payments received from a Fund.
The foregoing discussion and related discussion in the Prospectus do
not purport to be a complete description of all tax implications of an
investment in a Fund. A shareholder should consult his or her own tax adviser
for more information about the application of federal, state, local, or foreign
taxes to an investment in the Fund. Heller, Ehrman, White & McAuliffe has
expressed no opinion in respect thereof.
HOW PERFORMANCE IS DETERMINED
Standardized Performance Information
The Intermediate Total Return Bond Fund and Tax-Free Bond
Fund. These Funds' 30-day yield figure described in the Prospectus
is calculated according to a formula prescribed by the SEC, expressed
as follows:
YIELD=2[(a-b +1)6-1]
cd
Where: a = dividends and interest
earned during the period.
B-41
<PAGE>
b = expenses accrued for the
period (net of
reimbursement).
c = the average daily number of
shares outstanding during
the period that were
entitled to receive
dividends.
d = the maximum offering price
per share on the last day of
the period.
For the purpose of determining the interest earned
(variable "a" in the formula) on debt obligations that were purchased by these
Funds at a discount or premium, the formula generally calls for amortization of
the discount or premium; the amortization schedule will be adjusted monthly to
reflect changes in the market values of the debt obligations.
Investors should recognize that, in periods of declining
interest rates, these Funds' yields will tend to be somewhat higher than
prevailing market rates and, in periods of rising interest rates, will tend to
be somewhat lower. In addition, when interest rates are falling, monies received
by these Funds from the continuous sale of their shares will likely be invested
in instruments producing lower yields than the balance of their portfolio of
securities, thereby reducing the current yield of these Funds. In periods of
rising interest rates, the opposite result can be expected to occur.
The Tax-Free Bond Fund. A tax equivalent yield
demonstrates the taxable yield necessary to produce an after-tax yield
equivalent to that of a fund that invests in tax-exempt obligations. The tax
equivalent yield for the Tax-Free Bond Fund is computed by dividing that portion
of the current yield (or effective yield) of the Tax-Free Bond Fund (computed
for the Fund as indicated above) that is tax exempt by one minus a stated income
tax rate and adding the quotient to that portion (if any) of the yield of the
Fund that is not tax exempt. In calculating tax equivalent yields for the
Tax-Free Bond Fund, this Fund assumes an effective tax rate (using the top
federal marginal tax rate) of 39.6%. The effective rate used in determining such
yield does not reflect the tax costs resulting from the loss of the benefit of
personal exemptions and itemized deductions that may result from the receipt of
additional taxable income by taxpayers with adjusted gross incomes exceeding
certain levels. The tax equivalent yield may be higher than the rate stated for
taxpayers subject to the loss of these benefits.
Average Annual Return. The average annual total return included with
any presentation of a Fund's performance data will be calculated according to
the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial
payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of
a hypothetical $1,000
payment (made at the
beginning of
B-42
<PAGE>
the 1-, 5-, or 10-year
periods) at the end of the
1-, 5-, or 10-year
periods (or fractional
portion thereof).
The Funds impose no sales load on initial purchases or on reinvested
dividends. Accordingly, no sales charges are deducted for purposes of this
calculation. The calculation of total return assumes that all dividends, if any,
and distributions paid by a Fund would be reinvested at the net asset value on
the day of payment.
Non-Standardized Total Return Information
From time to time, a Fund may present non-standardized total return
information, in addition to standardized performance information, which may
include such results as the growth of a hypothetical $10,000 investment in a
Fund, and cumulative total return. The results of a $10,000 investment in the
Fund and cumulative total return measure the absolute change in net asset value
resulting from all Fund operations including reinvestment of a distribution paid
by the Fund for the period specified.
The aggregate total return is calculated in a similar manner to
average annual total return, except that the results are not annualized. Each
calculation assumes that all dividends and distributions are reinvested at net
asset value on the reinvestment dates during the period.
Investment Philosophy
From time to time the Funds may publish or distribute information and
reasons why the Adviser believes investors should invest in the Funds. For
example, the Funds may refer to the Adviser's "rising dividends philosophy",
which is founded on the principles of value and growth. The Funds may state that
the Adviser's investment professionals actively research quality companies that
are not only undervalued based on their current earnings, but also offer
significant potential for future growth. The Funds also may state that the
Adviser uses a practical approach to investing that emphasizes sound business
judgment and common sense.
Indices and Publications
In the same shareholder communications, sales literature, and
advertising, a Fund may compare its performance with that of appropriate indices
such as the Standard & Poor's Composite Index of 500 stocks ("S&P 500"),
Standard & Poor's MidCap 400 Index ("S&P 400"), the NASDAQ Industrial Index, the
NASDAQ Composite Index, the Russell 2500 Stock Index (the "Russell 2500"), the
Morgan Stanley Capital International Europe, Australia and Far East Index ("MSCI
EAFE") and the Lehman Corporate Government Intermediate Index ("Lehman Index"),
or other unmanaged indices so that investors may compare the Fund's results with
those of a group of unmanaged securities. The S&P 500, the S&P 400, the NASDAQ
Industrial Index, the NASDAQ Composite Index, the Russell 2500, MSCI EAFE and
the
B-43
<PAGE>
Lehman Index are unmanaged groups of common stocks and debt securities traded
principally on national or foreign securities exchanges and the over the counter
market. A Fund also may, from time to time, compare its performance to other
mutual funds with similar investment objectives and to the industry as a whole,
as quoted by rating services and publications, such as Lipper Analytical
Services, Inc., Morningstar Mutual Funds, Forbes, Money and Business Week.
In addition, one or more portfolio managers or other employees of the
Adviser may be interviewed by print media, such as The Wall Street Journal or
Business Week, or electronic news media, and such interviews may be reprinted or
excerpted for the purpose of advertising regarding the Fund.
ADDITIONAL INFORMATION
Legal Opinion
The validity of the shares offered by the Prospectus will be passed
upon by Heller, Ehrman, White & McAuliffe, 333 Bush Street, San Francisco,
California 94104.
Auditors
The annual financial statements of the Funds will be audited by
[____________________] independent public accountant for the Funds.
License to Use Name
Kayne Anderson Investment Management, L.P. has granted the Trust and
each Fund the right to use the designation "Kayne Anderson" in its name, and has
reserved the right to withdraw its consent to the use of such designation under
certain conditions, including the termination of the Adviser as the Funds'
investment adviser. Kayne Anderson Investment Management, L.P. also has reserved
the right to license others to use this designation, including any other
investment company.
Other Information
The Prospectus and this Statement of Additional Information,
together, do not contain all of the information set forth in the Registration
Statement of Kayne Anderson Mutual Funds filed with the Securities and Exchange
Commission. Certain information is omitted in accordance with rules and
regulations of the Commission. The Registration Statement may be inspected at
the Public Reference Room of the Commission at Room 1024, 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549, and copies thereof may be
obtained from the Commission at prescribed rates.
B-44
<PAGE>
FINANCIAL STATEMENTS
Audited financial statements for the period ended December 31, 1995
for the Rising Dividends Fund, as contained in the Annual Report to Shareholders
of the Fund for the year ended December 31, 1995 (the "Report") are incorporated
herein by reference to the Report. The Report may be obtained free of charge by
calling or writing to the Funds at 1800 Avenue of the Stars, 2nd Floor, Los
Angeles, California 90067, (800)-__-____.
B-45
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
This Appendix describes ratings applied to corporate bonds by Standard & Poor's
Corporation ("S&P") and Moody's Investors Service, Inc. ("Moody's").
S&P's Ratings
AAA: Bonds rated AAA have the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A: Bonds rated A has a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
BB: Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B: Bonds rated B have a greater vulnerability to default but currently have the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
The B rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BB-rating.
The ratings from AA to B may be modified by the addition of a plus or minus to
show relative standing within the major rating categories.
Moody's Ratings
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally
B-46
<PAGE>
referred to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of these issues.
Aa: Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A: Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered as medium-grade obligations, i.e, they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba: Bonds rated Ba are judged to have speculative elements. Their future cannot
be considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or maintenance of other terms of
the contract over any long period of time may be small.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
B-47
<PAGE>
----------------------------------------------------
PART C
OTHER INFORMATION
---------------------------------------------------
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
--------------
FORM N-1A
--------------
PART C
--------------
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) To be filed by pre-effective amendment.
(b) Exhibits:
(1) Agreement and Declaration of Trust.(1)
(2) By-Laws.1
(3) Voting Trust Agreement - Not applicable.
(4) Specimen Share Certificate - Not applicable.
(5) Form of Investment Management Agreement.(1)
(6) Form of Underwriting Agreement.(2)
(7) Benefit Plan(s) - Not applicable.
(8) Form of Custodian Agreement.
(9) Administrative Services Agreement.(2)
(10) Consent and Opinion of Counsel as to legality of
shares.
(11) Consent of Independent Public Accountants - Not
Applicable.
(12) Financial Statements omitted from Item 23 - Not
applicable.
(13) Subscription Agreement.(2)
(14) Model Retirement Plan Documents - Not applicable.
(15) Rule 12b-1 Plan - Not Applicable.
(16) Performance Computation - Not Applicable.
(17) Financial Data Schedule - Not Applicable
- ------------------
1 Incorporated by reference to the Form N-1A Registration Statement
filed on July 12, 1996.
2 To be filed by pre-effective amendment.
<PAGE>
Item 25. Persons Controlled by or Under Common Control with Registrant.
Kayne Anderson Investment Management, L.P., a California
limited partnership, is the manager of each series of the Registrant. KAIM
Traditional, LLC, a California limited liability company, is its general
partner. Richard A. Kayne and Allan M. Rudnick are managers of KAIM Traditional,
LLC and John Edward Anderson is a member. Collectively, Messrs. Kayne, Rudnick
and Anderson own 98% of the equity interests in KAIM Traditional, LLC.
Messrs. Kayne and Anderson also are the sole shareholders
and directors of Kayne, Anderson Investment Management, Inc., a California
corporation, the general partner of KAIM NonTraditional, L.P., a California
limited partnership and a registered investment adviser. As the sole
shareholders of Kayne, Anderson Investment Management, Inc., Messrs. Kayne and
Anderson together indirectly own 91% of the partnership interests in KAIM
Non-Traditional, L.P.
Messrs. Kayne and Anderson together hold 94% of the
outstanding voting stock of KA Associates, Inc., a California corporation and a
registered broker-dealer.
Item 26. Number of Holders of Securities
As of September ___, 1996, Kayne Anderson Investment
Management, L.P., the manager of each series of the Registrant, is the sole
shareholder of each series.
Item 27. Indemnification
Article VII of the Agreement and Declaration of Trust
empowers the Trustees of the Trust, to the full extent permitted by law, to
purchase with Trust assets insurance for indemnification from liability and to
pay for all expenses reasonably incurred or paid or expected to be paid by a
Trustee or officer in connection with any claim, action, suit or proceeding in
which he or she becomes involved by virtue of his or her capacity or former
capacity with the Trust.
Article VI of the By-Laws of the Trust provides that the
Trust shall indemnify any person who was or is a party or is threatened to be
made a party to any proceeding by reason of the fact that such person is and
other amounts or was an agent of the Trust, against expenses, judgments, fines,
settlement and other amounts actually and reasonable incurred in connection with
such proceeding if that person acted in good faith and reasonably believed his
or her conduct to be in the best interests of the Trust. Indemnification will
not be provided in certain circumstances, however, including instances of
willful misfeasance, bad faith, gross negligence, and reckless disregard of the
duties involved in the conduct of the particular office involved.
Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to the Trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable in the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such Trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
<PAGE>
Item 28. Business and Other Connections of Investment Adviser.
Information about Richard A. Kayne, Allan M. Rudnick, and
William T. Miller is set forth in Part B under "Management of the Funds."
John Edward Anderson is a member of KAIM Traditional, LLC,
the general partner of Kayne Anderson Investment Management, L.P. and a
shareholder and director of Kayne, Anderson Investment Management, Inc., the
general partner of KAIM Non-Traditional, L.P. Mr. Anderson has been involved
with these organizations (or their predecessors) as an equity owner and director
since 1984. Since May, 1992, Mr. Anderson has been the Chief Executive Officer
and President of Topa Equities, Ltd., a holding company for a thrift
institution.
Alvin J. Portnoy has been the Chief Operating Officer for
the general partners of Kayne Anderson Investment Management, L.P. and KAIM
Non-Traditional, L.P. (and their predecessors) since December 1986. He also has
been the Secretary of KA Associates, Inc. since January 1993.
Item 29. Principal Underwriter.
(a) First Fund Distributors, Inc. is the principal underwriter
for the following investment companies or series thereof:
Jurika & Voyles Fund Group
RNC Liquid Assets Fund, Inc.
PIC Investment Trust
Hotchkis and Wiley Funds
Professionally Managed Portfolios
- Avondale Total Return Fund
- Perkins Opportunity Fund
- Crescent Fund
- Osterweis Fund
- ProConscience Women's Equity
Mutual Fund
- Academy Value Fund
- Kayne, Anderson Rising
Dividends Fund
- Trent Equity Fund
- Matrix Growth Fund
- Matrix Emerging Growth Fund
- Leonetti Balanced Fund
- Lighthouse Growth Fund
- U.S. Global Leaders Growth
Fund
- Boston Managed Growth Fund
- Harris Bretall Sullivan &
Smith Growth Fund
- Insightful Investor Growth
Fund
- Hodges Fund
- Penza Growth Fund
- Titan Investment Fund
Rainier Investment Management Mutual Funds
(b) The following information is furnished with respect to the
officers of First Fund Distributors, Inc.:
Name and Principal Position and Offices with First Positions and Offices
Business Address* Fund Distributors, Inc. with Registrant
- ------------------ ------------------------------- ---------------------
Robert H. Wadsworth President and Treasurer None
Steven J. Paggioli Vice President and Secretary None
Eric M. Banhazl Vice President None
<PAGE>
* The principal business address of persons and entities listed is 479
West 22nd Street, New York, New York 10011.
Item 30. Location of Accounts and Records.
The accounts, books, or other documents required to be
maintained by Section 31(a) of the Investment Company Act of 1940 will be kept
by the Registrant's Transfer Agent, Investors Bank & Trust Company, 89 South
Street, Boston, Massachusetts 02111, except those records relating to portfolio
transactions and the basic organizational and Trust documents of the Registrant
(see Subsections (2)(iii), (4), (5), (6), (7), (9), (10) and (11) of Rule
31a-1(b)), which will be kept by the Registrant at 1800 Avenue of the Stars, 2nd
Floor, Los Angeles, California 90067
Item 31. Management Services.
There are no management-related service contracts not
discussed in Parts A and B.
Item 32. Undertakings.
(a) Registrant hereby undertakes to file a post-effective
amendment including financial statements of each series of the Registrant, which
need not be certified, within four to six months from the effective date of
Registrant's 1933 Act Registration Statement with respect to shares of each of
them.
(b) Registrant has undertaken to comply with Section 16(a)
of the Investment Company Act of 1940, as amended, which requires the prompt
convening of a meeting of shareholders to elect trustees to fill existing
vacancies in the Registrant's Board of Trustees in the event that less than a
majority of the trustees have been elected to such position by shareholders.
Registrant has also undertaken promptly to call a meeting of shareholders for
the purpose of voting upon the question of removal of any Trustee or Trustees
when requested in writing to do so by the record holders of not less than 10
percent of the Registrant's outstanding shares and to assist its shareholders in
communicating with other shareholders in accordance with the requirements of
Section 16(c) of the Investment Company Act of 1940, as amended.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933
and the Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Los Angeles, and State of California on the 16th
day of September, 1996.
Kayne Anderson Mutual Funds
By: William T. Miller*
--------------------------
William T. Miller
Principal Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following person in the capacities and on
the date indicated.
<TABLE>
<S> <C> <C>
William T. Miller* Principal Executive Officer, September 16, 1996
- ----------------------------------- ============
William T. Miller Principal Financial and
Accounting Officer, and
sole Trustee
</TABLE>
* By: /s/ Eric M. Banhazl
Eric M. Banhazl, pursuant
to a Power of Attorney filed
herewith
<PAGE>
POWER OF ATTORNEY
FOR
SECURITIES AND EXCHANGE COMMISSION
AND RELATED FILINGS
----------------------------------
The undersigned Officer and Trustee of KAYNE ANDERSON
MUTUAL FUNDS (the "Trust") hereby appoints JULIE ALLECTA, MICHAEL R. FABER,
MITCHELL E. NICHTER and ERIC M. BANHAZL (with full power to each of them to act
alone), his attorneys-in-fact and agents, in all capacities, to execute and to
file any documents relating to the Registration Statement on Forms N-8A, N-1A
and N-14 under the Investment Company Act of 1940, under the Securities Act of
1933 of the Trust and under the laws of all states and other domestic and
foreign jurisdictions, including any and all amendments thereto, covering the
registration and the sale of shares by the Trust, including all exhibits and any
and all documents required to be filed with respect thereto with any regulatory
authority, including applications for exemptive orders, rulings or filings of
proxy materials. The undersigned grant to each of said attorneys full authority
to do every act necessary to be done in order to effectuate the same as fully,
to all intents and purposes, as they could do if personally present, thereby
ratifying all that said attorneys-in-fact and agents may lawfully do or cause to
be done by virtue hereof.
The undersigned Officer and Trustee hereby executes
this Power of Attorney as of this 1st day of July 1996.
/s/ William T. Miller
----------------------------
William T. Miller,
Principal Executive Officer,
Principal Financial and
Accounting Officer, and
sole Trustee
<PAGE>
File Nos. 333-8045
811-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
EXHIBITS
to
FORM N-1A
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
and
under
THE INVESTMENT COMPANY ACT OF 1940
-------------------------
Kayne Anderson Mutual Funds
(Exact Name of Registrant as Specified in its Charter)
<PAGE>
Exhibit(s) Index
Exhibit No. Document Page No.
- ----------- -------- --------
(8) Form of Custodian Agreement _____
(10) Consent and Opinion of Counsel _____
EXHIBIT 8
Form of Custodian Agreement
<PAGE>
IBT draft 8/28/96
Form Agreement
Full Custody/Foreign Securities
(Yield Calculation)
Company Form (Series)
CUSTODIAN AGREEMENT
BETWEEN
[ ]
and
INVESTORS BANK & TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
1. Bank Appointed Custodian...................................................................... 1
2. Definitions .................................................................................. 1
2.1 Authorized Person................................................................... 1
2.2 Board............................................................................... 1
2.3 Security............................................................................ 1
2.4 Portfolio Security ................................................................. 1
2.5 Officers' Certificate .............................................................. 1
2.6 Book-Entry System .................................................................. 2
2.7 Depository ......................................................................... 2
2.8 Proper Instructions ................................................................ 2
3. Separate Accounts ............................................................................ 2
4. Certification as to Authorized Persons ....................................................... 2
5. Custody of Cash............................................................................... 3
5.1 Purchase of Securities.............................................................. 3
5.2 Redemptions......................................................................... 3
5.3 Distributions and Expenses of Fund.................................................. 3
5.4 Payment in Respect of Securities.................................................... 3
5.5 Repayment of Loans.................................................................. 3
5.6 Repayment of Cash................................................................... 3
5.7 Foreign Exchange Transactions....................................................... 4
5.8 Other Authorized Payments........................................................... 4
5.9 Termination ........................................................................ 4
6. Securities ................................................................................... 4
6.1 Segregation and Registration ....................................................... 4
6.2 Voting and Proxies ................................................................. 5
6.3 Corporate Action ................................................................... 5
6.4 Book-Entry System .................................................................. 6
6.5 Use of a Depository ................................................................ 6
6.6 Use of Book-Entry System for Commercial Paper ...................................... 7
6.7 Use of Immobilization Programs ..................................................... 8
6.8 Eurodollar CDs...................................................................... 8
6.9 Options and Futures Transactions ................................................... 8
(a) Puts and Calls Traded on Securities Exchanges,
NASDAQ or Over-the-Counter .............................................. 8
(b) Puts, Calls, and Futures Traded
on Commodities Exchanges ................................................. 9
6.10 Segregated Account.................................................................. 9
6.1 Interest Bearing Call or Time Deposits............................................. 10
6.12 Transfer of Securities ............................................................ 10
7. Redemptions.................................................................................. 12
8. Merger, Dissolution, etc. of Fund............................................................ 12
</TABLE>
-2-
<PAGE>
<TABLE>
<S> <C> <C>
9. Actions of Bank Without Prior Authorization.................................................. 12
10. Collection and Defaults ..................................................................... 13
11. Maintenance of Records and Accounting Services .............................................. 13
12. Fund Evaluation and Yield Calculation ....................................................... 13
12.1 Fund Evaluation ................................................................... 13
12.2 Yield Calculation ................................................................. 14
13. Additional Services.......................................................................... 15
14. Duties of the Bank........................................................................... 15
14.1 Performance of Duties and
Standard of Care .................................................................. 15
14.2 Agents and Subcustodians with Respect to Property
of the Fund Held in the United States ............................................. 15
14.3 Duties of the Bank with Respect to Property
Held Outside of the United States ................................................. 16
14.4 Insurance ......................................................................... 18
14.5 Fees and Expenses of Bank ......................................................... 18
14.6 Advances by Bank .................................................................. 18
15. Limitation of Liability ..................................................................... 19
16. Termination ................................................................................. 20
17. Confidentiality ............................................................................. 21
18. Notices...................................................................................... 21
19. Amendments .................................................................................. 21
20. Parties...................................................................................... 21
21. Governing Law................................................................................ 22
22. Counterparts ................................................................................ 22
23. Entire Agreement ............................................................................ 22
</TABLE>
-3-
<PAGE>
APPENDICES
Appendix A .........................................................Fee Schedule
Appendix B ..............................................Wire Transfer Agreement
Appendix C ..................................................Additional Services
Appendix D ........................................Select Foreign Sub-Custodians
Appendix E ..............................................................Reports
-4-
<PAGE>
CUSTODIAN AGREEMENT
AGREEMENT made as of this [ ] day of [ ], 1996, between [ ] a company
organized under the laws of [ ] (the "Fund") and INVESTORS BANK & TRUST COMPANY
(the "Bank").
The Fund, an open-end management investment company, desires to place
and maintain all of its portfolio securities and cash in the custody of the
Bank. The Bank has at least the minimum qualifications required by Section
17(f)(1 ) of the Investment Company Act of 1940 (the " 1940 Act") to act as
custodian of the portfolio securities and cash of the Fund, and has indicated
its willingness to so act, subject to the terms and conditions of this
Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements contained herein, the parties hereto agree as follows:
1. Bank Appointed Custodian. The Fund hereby appoints the Bank as
custodian of its portfolio securities and cash delivered to the Bank as
hereinafter described and the Bank agrees to act as such upon the terms and
conditions hereinafter set forth. For the services rendered pursuant to this
Agreement the Fund agrees to pay to the Bank the fees set forth on Appendix A
hereto.
2. Definitions. Whenever used herein, the terms listed below will
have the following meaning:
2.1 Authorized Person. Authorized Person will mean any of
the persons duly authorized to give Proper Instructions or otherwise act on
behalf of the Fund by appropriate resolution of its Board, and set forth in a
certificate as required by Section 4 hereof.
2.2 Board. Board will mean the Board of Directors or the
Board of Trustees of the Fund, as the case may be.
2.3 Security. The term security as used herein will have
the same meaning assigned to such term in the Securities Act of 1933, as
amended, including, without limitation, any note, stock, treasury stock, bond,
debenture, evidence of indebtedness, certificate of interest or participation in
any profit sharing agreement, collateral-trust certificate, preorganization
certificate or subscription, transferable share, investment contract,
voting-trust certificate, certificate of deposit for a security, fractional
undivided interest in oil, gas, or other mineral rights, any put, call,
straddle, option, or privilege on any security, certificate of deposit, or group
or index of securities (including any interest therein or based on the value
thereof), or any put, call, straddle, option, or privilege entered into on a
national securities exchange relating to a foreign currency, or, in general, any
interest or instrument commonly known as a "security", or any certificate of
interest or participation in, temporary or interim certificate for, receipt for,
guarantee of, or warrant or right to subscribe to, or option contract to
purchase or sell any of the foregoing, and futures, forward contracts and
options thereon.
2.4 Portfolio Security. Portfolio Security will mean any
security owned by the Fund.
2.5 Officers' Certificate. Officers' Certificate will mean,
unless otherwise indicated, any request, direction, instruction, or
certification in writing signed by any two Authorized Persons of the Fund.
2.6 Book-Entry System. Book-Entry System shall mean the
Federal Reserve-Treasury Department Book Entry System for United States
government, instrumentality and agency securities operated by the Federal
Reserve Bank, its successor or successors and its nominee or nominees.
2.7 Depository. Depository shall mean The Depository Trust
Company ("DTC"), a clearing agency registered with the Securities and Exchange
Commission under Section 1 7A of the Securities Exchange Act of 1934 ("Exchange
Act"), its successor or successors and its nominee or nominees. The term
"Depository" shall further mean and include any other person authorized to act
as a depository under the 1940 Act, its successor
-5-
<PAGE>
or successors and its nominee or nominees, specifically identified in a
certified copy of a resolution of the Board.
2.8 Proper Instructions. Proper Instructions shall mean (i)
instructions regarding the purchase or sale of Portfolio Securities, and
payments and deliveries in connection therewith, given by an Authorized Person,
such instructions to be given in such form and manner as the Bank and the Fund
shall agree upon from time to time, and (ii) instructions (which may be
continuing instructions) regarding other matters signed or initialed by an
Authorized Person. Oral instructions will be considered Proper Instructions if
the Bank reasonably believes them to have been given by an Authorized Person.
The Fund shall cause all oral instructions to be promptly confirmed in writing.
The Bank shall act upon and comply with any subsequent Proper Instruction which
modifies a prior instruction and the sole obligation of the Bank with respect to
any follow-up or confirmatory instruction shall be to make reasonable efforts to
detect any discrepancy between the original instruction and such confirmation
and to report such discrepancy to the Fund The Fund shall be responsible, at the
Fund's expense, for taking any action, including any reprocessing, necessary to
correct any such discrepancy or error, and to the extent such action requires
the Bank to act, the Fund shall give the Bank specific Proper Instructions as to
the action required. Upon receipt by the Bank of an Officers' Certificate as to
the authorization by the Board accompanied by a detailed description of
procedures approved by the Fund, Proper Instructions may include communication
effected directly between electro-mechanical or electronic devices provided that
the Board and the Bank agree in writing that such procedures afford adequate
safeguards for the Fund's assets.
3. Separate Accounts. If the Fund has more than one series or
portfolio, the Bank will segregate the assets of each series or portfolio to
which this Agreement relates into a separate account for each such series or
portfolio containing the assets of such series or portfolio (and all investment
earnings thereon). Unless the context otherwise requires, any reference in this
Agreement to any actions to be taken by the Fund shall be deemed to refer to the
Fund acting on behalf of one or more of its series, any reference in this
Agreement to any assets of the Fund, including, without limitation, any
portfolio securities and cash and earnings thereon, shall be deemed to refer
only to assets of the applicable series, any duty or obligation of the Bank
hereunder to the Fund shall be deemed to refer to duties and obligations with
respect to such individual series and any obligation or liability of the Fund
hereunder shall be binding only with respect to such individual series, and
shall be discharged only out of the assets of such series.
4. Certification as to Authorized Persons. The Secretary or Assistant
Secretary of the Fund will at all times maintain on file with the Bank his or
her certification to the Bank, in such form as may be acceptable to the Bank, of
(i) the names and signatures of the Authorized Persons and (ii) the names of the
members of the Board, it being understood that upon the occurrence of any change
in the information set forth in the most recent certification on file (including
without limitation any person named in the most recent certification who is no
longer an Authorized Person as designated therein), the Secretary or Assistant
Secretary of the Fund will sign a new or amended certification setting forth the
change and the new, additional or omitted names or signatures. The Bank will be
entitled to rely and act upon any Officers' Certificate given to it by the Fund
which has been signed by Authorized Persons named in the most recent
certification received by the Bank.
5. Custody of Cash. As custodian for the Fund, the Bank will open and
maintain a separate account or accounts in the name of the Fund or in the name
of the Bank, as Custodian of the Fund, and will deposit to the account of the
Fund all of the cash of the Fund, except for cash held by a subcustodian
appointed pursuant to Sections 14.2 or 14.3 hereof, including borrowed funds,
delivered to the Bank, subject only to draft or order by the Bank acting
pursuant to the terms of this Agreement. Pursuant to the Bank's internal
policies regarding the management of cash accounts, the Bank may segregate
certain portions of the cash of the Fund into a separate savings deposit account
upon which the Bank reserves the right to require seven (7) days notice prior to
withdrawal of cash from such an account. Upon receipt by the Bank of Proper
Instructions (which may be continuing instructions) or in the case of payments
for redemptions and repurchases of outstanding shares of common stock of the
Fund, notification from the Fund's transfer agent as provided in Section 7,
requesting such payment, designating the payee or the account or accounts to
which the Bank will release funds for deposit, and stating that it is for a
purpose permitted under the terms of this Section 5, specifying the applicable
subsection, the Bank will make payments of cash held for the accounts of the
Fund, insofar as funds are available for that purpose, only as permitted in
subsections 5.1-5.9 below.
-6-
<PAGE>
5.1 Purchase of Securities. Upon the purchase of securities
for the Fund, against contemporaneous receipt of such securities by the Bank or
against delivery of such securities to the Bank in accordance with generally
accepted settlement practices and customs in the jurisdiction or market in which
the transaction occurs registered in the name of the Fund or in the name of, or
properly endorsed and in form for transfer to, the Bank, or a nominee of the
Bank, or receipt for the account of the Bank pursuant to the provisions of
Section 6 below, each such payment to be made at the purchase price shown on a
broker's confirmation (or transaction report in the case of Book Entry Paper (as
that term is defined in Section 6.6 hereof)) of purchase of the securities
received by the Bank before such payment is made, as confirmed in the Proper
Instructions received by the Bank before such payment is made.
5.2 Redemptions. In such amount as may be necessary for the
repurchase or redemption of common shares of the Fund offered for repurchase or
redemption in accordance with Section 7 of this Agreement.
5.3 Distributions and Expenses of Fund. For the payment on
the account of the Fund of dividends or other distributions to shareholders as
may from time to time be declared by the Board, interest, taxes, management or
supervisory fees, distribution fees, fees of the Bank for its services hereunder
and reimbursement of the expenses and liabilities of the Bank as provided
hereunder, fees of any transfer agent, fees for legal, accounting, and auditing
services, or other operating expenses of the Fund.
5.4 Payment in Respect of Securities. For payments in
connection with the conversion, exchange or surrender of Portfolio Securities or
securities subscribed to by the Fund held by or to be delivered to the Bank.
5.5 Repayment of Loans. To repay loans of money made to the
Fund, but, in the case of final payment, only upon redelivery to the Bank of any
Portfolio Securities pledged or hypothecated therefor and upon surrender of
documents evidencing the loan;
5.6 Repayment of Cash. To repay the cash delivered to the
Fund for the purpose of collateralizing the obligation to return to the Fund
certificates borrowed from the Fund representing Portfolio Securities, but only
upon redelivery to the Bank of such borrowed certificates.
5.7 Foreign Exchange Transactions.
(a) For payments in connection with foreign
exchange contracts or options to purchase and sell foreign currencies for spot
and future delivery (collectively, "Foreign Exchange Agreements")which may be
entered into by the Bank on behalf of the Fund upon the receipt of Proper
Instructions, such Proper Instructions to specify the currency broker or banking
institution (which may be the Bank, or any other subcustodian or agent
hereunder, acting as principal) with which the contract or option is made, and
the Bank shall have no duty with respect to the selection of such currency
brokers or banking institutions with which the Fund deals or for their failure
to comply with the terms of any contract or option.
(b) In order to secure any payments in connection
with Foreign Exchange Agreements which may be entered into by the Bank pursuant
to Proper Instructions, the Fund agrees that the Bank shall have a continuing
lien and security interest, to the extent of any payment due under any Foreign
Exchange Agreement, in and to any property at any time held by the Bank for the
Fund's benefit or in which the Fund has an interest and which is then in the
Bank's possession or control (or in the possession or control of any third party
acting on the Bank's behalf). The Fund authorizes the Bank, in the Bank's sole
discretion, at any time to charge any such payment due under any Foreign
Exchange Agreement against any balance of account standing to the credit of the
Fund on the Bank's books.
5.8 Other Authorized Payments. For other authorized
transactions of the Fund, or other obligations of the Fund incurred for proper
Fund purposes, provided that before making any such payment the Bank will also
receive a certified copy of a resolution of the Board signed by an Authorized
Person (other than the
-7-
<PAGE>
Person certifying such resolution) and certified by its Secretary or Assistant
Secretary, naming the person or persons to whom such payment is to be made, and
either describing the transaction for which payment is to be made and declaring
it to be an authorized transaction of the Fund, or specifying the amount of the
obligation for which payment is to be made, sewing forth the purpose for which
such obligation was incurred and declaring such purpose to be a proper corporate
purpose.
5.9 Termination: Upon the termination of this Agreement as
hereinafter set forth pursuant to Section 8 and Section 16 of this Agreement.
In connection with transfers or orders made by the Bank
pursuant to this Section 5, and otherwise under this Agreement, the Fund and the
Bank shall enter into a Wire Transfer Agreement substantially in the form
attached as Appendix B hereto.
6. Securities.
6.1 Segregation and Registration. Except as otherwise
provided herein, and except for securities to be delivered to any subcustodian
appointed pursuant to Sections 14.2 or 14.3 hereof, the Bank as custodian will
receive and hold pursuant to the provisions hereof, in a separate account or
accounts and physically segregated at all times from those of other persons, any
and all Portfolio Securities which may now or hereafter be delivered to it by or
for the account of the Fund. All such Portfolio Securities will be held or
disposed of by the Bank for, and subject at all times to, the instructions of
the Fund pursuant to the terms of this Agreement. Subject to the specific
provisions herein relating to Portfolio Securities that are not physically held
by the Bank, the Bank will register all Portfolio Securities (unless otherwise
directed by Proper Instructions or an Officers' Certificate), in the name of a
registered nominee of the Bank as defined in the Internal Revenue Code and any
Regulations of the Treasury Department issued thereunder, and will execute and
deliver all such certificates in connection therewith as may be required by such
laws or regulations or under the laws of any state.
The Fund will from time to time furnish to the
Bank appropriate instruments to enable it to hold or deliver in proper form for
transfer, or to register in the name of its registered nominee, any Portfolio
Securities which may from time to time be registered in the name of the Fund.
6.2 Voting and Proxies. Neither the Bank nor any nominee of
the Bank will vote any of the Portfolio Securities held hereunder, except in
accordance with Proper Instructions or an Officers' Certificate. The Bank will
execute and deliver, or cause to be executed and delivered, to the Fund all
notices, proxies and proxy soliciting materials delivered to the Bank with
respect to such Securities, such proxies to be executed by the registered holder
of such Securities (if registered otherwise than in the name of the Fund), but
without indicating the manner in which such proxies are to be voted.
6.3 Corporate Action. If at any time the Bank is notified
that an issuer of any Portfolio Security has taken or intends to take a
corporate action (a "Corporate Action") that affects the rights, privileges,
powers, preferences, qualifications or ownership of a Portfolio Security,
including without limitation, liquidation, consolidation, merger,
recapitalization, reorganization, reclassification, subdivision, combination,
stock split or stock dividend, which Corporate Action requires an affirmative
response or action on the part of the holder of such Portfolio Security (a
"Response"), the Bank shall notify the Fund promptly of the Corporate Action,
the Response required in connection with the Corporate Action and the Bank's
deadline for receipt from the Fund of Proper Instructions regarding the Response
(the "Response Deadline"). The Bank shall forward to the Fund via telecopier
and/or overnight courier all notices, information statements or other materials
relating to the Corporate Action within twenty-four (24) hours of receipt of
such materials by the Bank.
(a) The Bank shall act upon a required Response
only after receipt by the Bank of Proper Instructions from the Fund no later
than 5:00 p.m. on the date specified as the Response Deadline and only if the
Bank (or its agent or subcustodian hereunder) has actual possession of all
necessary Securities, consents and other materials no later than 5:00 p.m. on
the date specified as the Response Deadline.
-8-
<PAGE>
(b) The Bank shall have no duty to act upon a
required Response if Proper Instructions relating to such Response and all
necessary Securities, consents and other materials are not received by and in
the possession of the Bank no later than 5:00 p.m. on the date specified as the
Response Deadline. Notwithstanding, the Bank may, in its sole discretion, use
its best efforts to act upon a Response for which Proper Instructions and/or
necessary Securities, consents or other materials are received by the Bank after
5:00 p.m. on the date specified as the Response Deadline, it being acknowledged
and agreed by the parties that any undertaking by the Bank to use its best
efforts in such circumstances shall in no way create any duty upon the Bank to
complete such Response prior to its expiration.
(c) In the event that the Fund notifies the Bank
of a Corporate Action requiring a Response and the Bank has received no other
notice of such Corporate Action, the Response Deadline shall be 48 hours prior
to the Response expiration time set by the depository processing such Corporate
Action.
(d) Section 14.3(g) of this Agreement shall
govern any Corporate Action involving Foreign Portfolio Securities held by a
Selected Foreign Sub-Custodian.
6.4 Book-Entry System. Provided (i) the Bank has received a
certified copy of a resolution of the Board specifically approving deposits of
Fund assets in the Book-Entry System, and (ii) for any subsequent changes to
such arrangements following such approval, the Board has reviewed and approved
the arrangement and has not delivered an Officer's Certificate to the Bank
indicating that the Board has withdrawn its approval:
(a) The Bank may keep Portfolio Securities in the
Book-Entry System provided that such Portfolio Securities are represented in an
account ("Account") of the Bank (or its agent) in such System which shall not
include any assets of the Bank (or such agent) other than assets held as a
fiduciary, custodian, or otherwise for customers;
(b) The records of the Bank (and any such agent)
with respect to the Fund's participation in the Book-Entry System through the
Bank (or any such agent) will identify by book entry the Portfolio Securities
which are included with other securities deposited in the Account and shall at
all times during the regular business hours of the Bank (or such agent) be open
for inspection by duly authorized officers, employees or agents of the Fund.
Where securities are transferred to the Fund's account, the Bank shall also, by
book entry or otherwise, identify as belonging to the Fund a quantity of
securities in a fungible bulk of securities (i) registered in the name of the
Bank or its nominee, or (ii) shown on the Bank's account on the books of the
Federal Reserve Bank;
(c) The Bank (or its agent) shall pay for
securities purchased for the account of the Fund or shall pay cash collateral
against the return of Portfolio Securities loaned by the Fund upon (i) receipt
of advice from the Book-Entry System that such Securities have been transferred
to the Account, and (ii) the making of an entry on the records of the Bank (or
its agent) to reflect such payment and transfer for the account of the Fund. The
Bank (or its agent) shall transfer securities sold or loaned for the account of
the Fund upon
(i) receipt of advice from the
Book-Entry System that payment for securities sold or payment of the initial
cash collateral against the delivery of securities loaned by the Fund has been
transferred to the Account; and
(ii) the making of an entry on the
records of the Bank (or its agent) to reflect such transfer and payment for the
account of the Fund. Copies of all advices from the Book-Entry System of
transfers of securities for the account of the Fund shall identify the Fund, be
maintained for the Fund by the Bank and shall be provided to the Fund at its
request. The Bank shall send the Fund a confirmation, as defined by Rule 1 7f-4
of the 1940 Act, of any transfers to or from the account of the Fund;
(d) The Bank will promptly provide the Fund with
any report obtained by the Bank or its agent on the Book-Entry System's
accounting system, internal accounting control and procedures for
-9-
<PAGE>
safeguarding securities deposited in the Book-Entry System;
6.5 Use of a Depository. Provided (i) the Bank has received
a certified copy of a resolution of the Board specifically approving deposits in
DTC or other such Depository and (ii) for any subsequent changes to such
arrangements following such approval, the Board has reviewed and approved the
arrangement and has not delivered an Officer's Certificate to the Bank
indicating that the Board has withdrawn its approval:
(a) The Bank may use a Depository to hold,
receive, exchange, release, lend, deliver and otherwise deal with Portfolio
Securities including stock dividends, rights and other items of like nature, and
to receive and remit to the Bank on behalf of the Fund all income and other
payments thereon and to take all steps necessary and proper in connection with
the collection thereof;
(b) Registration of Portfolio Securities may be
made in the name of any nominee or nominees used by such Depository;
(c) Payment for securities purchased and sold may
be made through the clearing medium employed by such Depository for transactions
of participants acting through it. Upon any purchase of Portfolio Securities,
payment will be made only upon delivery of the securities to or for the account
of the Fund and the Fund shall pay cash collateral against the return of
Portfolio Securities loaned by the Fund only upon delivery of the Securities to
or for the account of the Fund; and upon any sale of Portfolio Securities,
delivery of the Securities will be made only against payment therefor or, in the
event Portfolio Securities are loaned, delivery of Securities will be made only
against receipt of the initial cash collateral to or for the account of the
Fund; and
(d) The Bank shall use its best efforts to
provide that:
(i) The Depository obtains replacement
of any certificated Portfolio Security deposited with it in the event such
Security is lost, destroyed, wrongfully taken or otherwise not available to be
returned to the Bank upon its request;
(ii) Proxy materials received by a
Depository with respect to Portfolio Securities deposited with such Depository
are forwarded immediately to the Bank for prompt transmittal to the Fund;
(iii) Such Depository promptly
forwards to the Bank confirmation of any purchase or sale of Portfolio
Securities and of the appropriate book entry made by such Depository to the
Fund's account;
(iv) Such Depository prepares and
delivers to the Bank such records with respect to the performance of the Bank's
obligations and duties hereunder as may be necessary for the Fund to comply with
the recordkeeping requirements of Section 31 (a) of the 1940 Act and Rule 3 l(a)
thereunder; and
(v) Such Depository delivers to the
Bank all internal accounting control reports, whether or not audited by an
independent public accountant, as well as such other reports as the Fund may
reasonably request in order to verify the Portfolio Securities held by such
Depository.
6.6 Use of Book-Entry System for Commercial Paper. Provided
(i) the Bank has received a certified copy of a resolution of the Board
specifically approving participation in a system maintained by the Bank for the
holding of commercial paper in book-entry form ("Book-Entry Paper") and (ii) for
each year following such approval the Board has received and approved the
arrangements, upon receipt of Proper Instructions and upon receipt of
confirmation from an Issuer (as defined below) that the Fund has purchased such
Issuer's Book-Entry Paper, the Bank shall issue and hold in book-entry form, on
behalf of the Fund, commercial paper issued by issuers with whom the Bank has
entered into a book-entry agreement (the "Issuers"). In maintaining procedures
for Book-Entry Paper, the Bank agrees that:
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(a) The Bank will maintain all Book-Entry Paper
held by the Fund in an account of the Bank that includes only assets held by it
for customers;
(b) The records of the Bank with respect to the
Fund's purchase of Book-Entry Paper through the Bank will identify, by
book-entry, commercial paper belonging to the Fund which is included in the
Book-Entry System and shall at all times during the regular business hours of
the Bank be open for inspection by duly authorized officers, employees or agents
of the Fund;
(c) The Bank shall pay for Book-Entry Paper
purchased for the account of the Fund upon contemporaneous (i) receipt of advice
from the Issuer that such sale of Book-Entry Paper has been effected, and (ii)
the making of an entry on the records of the Bank to reflect such payment and
transfer for the account of the Fund;
(d) The Bank shall cancel such Book-Entry Paper
obligation upon the maturity thereof upon contemporaneous (i) receipt of advice
that payment for such Book-Entry Paper has been transferred to the Fund, and
(ii) the making of an entry on the records of the Bank to reflect such payment
for the account of the Fund; and
(e) The Bank will send to the Fund such reports
on its system of internal accounting control with respect to the Book-Entry
Paper as the Fund may reasonably request from time to time.
6.7 Use of Immobilization Programs. Provided (i) the Bank
has received a certified copy of a resolution of the Board specifically
approving the maintenance of Portfolio Securities in an immobilization program
operated by a bank which meets the requirements of Section 26(a)( 1 ) of the
1940 Act, and (ii) for each year following such approval the Board has reviewed
and approved the arrangement and has not delivered an Officer's Certificate to
the Bank indicating that the Board has withdrawn its approval, the Bank shall
enter into such immobilization program with such bank acting as a subcustodian
hereunder.
6.8 Eurodollar CDs. Any Portfolio Securities which are
Eurodollar CDs may be physically held by the European branch of the U.S. banking
institution that is the issuer of such Eurodollar CD (a "European Branch"),
provided that such Portfolio Securities are identified on the books of the Bank
as belonging to the Fund and that the books of the Bank identify the European
Branch holding such Portfolio Securities. Notwithstanding any other provision of
this Agreement to the contrary, except as stated in the first sentence of this
subsection 6.8, the Bank shall be under no other duty with respect to such
Eurodollar CDs belonging to the Fund.
6.9 Options and Futures Transactions.
(a) Puts and Calls Traded on Securities
Exchanges, NASDAQ or Over-the-Counter.
(i) The Bank shall take action as to
put options ("puts") and call options ("calls") purchased or sold (written) by
the Fund regarding escrow or other arrangements (i) in accordance with the
provisions of any agreement entered into upon receipt of Proper Instructions
among the Bank, any broker-dealer registered with the National Association of
Securities Dealers, Inc. (the "NASD"), and, if necessary, the Fund, relating to
the compliance with the rules of the Options Clearing Corporation and of any
registered national securities exchange, or of any similar organization or
organizations.
(ii) Unless another agreement requires
it to do so, the Bank shall be under no duty or obligation to see that the Fund
has deposited or is maintaining adequate margin, if required, with any broker in
connection with any option, nor shall the Bank be under duty or obligation to
present such option to the broker for exercise unless it receives Proper
Instructions from the Fund. The Bank shall have no responsibility for the
legality of any put or call purchased or sold on behalf of the Fund, the
propriety of any such purchase or sale, or the adequacy of any collateral
delivered to a broker in connection with an option or deposited to or withdrawn
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from a Segregated Account (as defined in subsection 6.10 below). The Bank
specifically, but not by way of limitation, shall not be under any duty or
obligation to: (i) periodically check or notify the Fund that the amount of such
collateral held by a broker or held in a Segregated Account is sufficient to
protect such broker or the Fund against any loss; (ii) effect the return of any
collateral delivered to a broker; or (iii) advise the Fund that any option it
holds, has or is about to expire. Such duties or obligations shall be the sole
responsibility of the Fund.
(b) Puts, Calls and Futures Traded on Commodities
Exchanges
(i) The Bank shall take action as to
puts, calls and futures contracts ("Futures") purchased or sold by the Fund in
accordance with the provisions of any agreement entered into upon the receipt of
Proper Instructions among the Fund, the Bank and a Futures Commission Merchant
registered under the Commodity Exchange Act, relating to compliance with the
rules of the Commodity Futures Trading Commission and/or any Contract Market, or
any similar organization or organizations, regarding account deposits in
connection with transactions by the Fund.
(ii) The responsibilities of the Bank
as to futures, puts and calls traded on commodities exchanges, any Futures
Commission Merchant account and the Segregated Account shall be limited as set
forth in subparagraph (a)l2) of this Section 6.8 as if such subparagraph
referred to Futures Commission Merchants rather than brokers, and Futures and
puts and calls thereon instead of options.
6.10 Segregated Account. The Bank shall upon receipt of
Proper Instructions establish and maintain a Segregated Account or Accounts for
and on behalf of the Fund.
(a) Cash and/or Portfolio Securities may be
transferred into a Segregated Account upon receipt of Proper Instructions in the
following circumstances:
(i) in accordance with the provisions
of any agreement among the Fund, the Bank and a broker-dealer registered under
the Exchange Act and a member of the NASD or any Futures Commission Merchant
registered under the Commodity Exchange Act, relating to compliance with the
rules of the Options Clearing Corporation and of any registered national
securities exchange or the Commodity Futures Trading Commission or any
registered Contract Market, or of any similar organizations regarding escrow or
other arrangements in connection with transactions by the Fund;
(ii) for the purpose of segregating
cash or securities in connection with options purchased or written by the Fund
or commodity futures purchased or written by the Fund;
(iii) for the deposit of liquid
assets, such as cash, U.S. Government securities or other high grade debt
obligations, having a market value (marked to market on a daily basis) at all
times equal to not less than the aggregate purchase price due on the settlement
dates of all the Fund's then outstanding forward commitment or "when-issued"
agreements relating to the purchase of Portfolio Securities and all the Fund's
then outstanding commitments under reverse repurchase agreements entered into
with broker-dealer firms;
(iv) for the purposes of compliance by
the Fund with the procedures required by Investment Company Act Release No.
10666, or any subsequent release or releases of the Securities and Exchange
Commission relating to the maintenance of Segregated Accounts by registered
investment companies;
(v) for other proper corporate
purposes, but only, in the case of this clause (e), upon receipt of, in addition
to Proper Instructions, a certified copy of a resolution of the Board, or of the
executive committee of the Board signed by an of fleer of the Fund and certified
by the Secretary or an Assistant Secretary, setting forth the purpose or
purposes of such Segregated Account and declaring such purposes to be proper
corporate purposes.
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(b) Cash and/or Portfolio Securities may be
withdrawn from a Segregated Account pursuant to Proper Instructions in the
following circumstances:
(i) with respect to assets deposited
in accordance with the provisions of any agreements referenced in (a)(i) or
(a)(ii) above, in accordance with the provisions of such agreements;
(ii) with respect to assets deposited
pursuant to (a)(iii) or (a)(iv) above, for sale or delivery to meet the Fund's
obligations under outstanding forward commitment or when-issued agreements for
the purchase of Portfolio Securities and under reverse repurchase agreements;
(iii) for exchange for other liquid
assets of equal or greater value deposited in the Segregated Account;
(iv) to the extent that the Fund's
outstanding forward commitment or when issued agreements for the purchase of
portfolio securities or reverse repurchase agreements are sold to other parties
or the Fund's obligations thereunder are met from assets of the Fund other than
those in the Segregated Account;
(v) for delivery upon settlement of a
forward commitment or when-issued agreement for the sale of Portfolio
Securities; or
(vi) with respect to assets deposited
pursuant to (e) above, in accordance with the purposes of such account as set
forth in Proper Instructions.
6.11 Interest Bearing Call or Time Deposits. The Bank
shall, upon receipt of Proper Instructions relating to the purchase by the Fund
of interest-bearing fixed-term and call deposits, transfer cash, by wire or
otherwise, in such amounts and to such bank or banks as shall be indicated in
such Proper Instructions. The Bank shall include in its records with respect to
the assets of the Fund appropriate notation as to the amount of each such
deposit, the banking institution with which such deposit is made (the "Deposit
Bank"), and shall retain such forms of advice or receipt evidencing the deposit,
if any, as may be forwarded to the Bank by the Deposit Bank. Such deposits shall
be deemed Portfolio Securities of the Fund and the responsibility of the Bank
therefore shall be the same as and no greater than the Bank's responsibility in
respect of other Portfolio Securities of the Fund.
6.12 Transfer of Securities. The Bank will transfer,
exchange, deliver or release Portfolio Securities held by it hereunder, insofar
as such Securities are available for such purpose, provided that before making
any transfer, exchange, delivery or release under this Section only upon receipt
of Proper Instructions. The Proper Instructions shall state that such transfer,
exchange or delivery is for a purpose permitted under the terms of this Section
6.11, and shall specify the applicable subsection, or describe the purpose of
the transaction with sufficient particularity to permit the Bank to ascertain
the applicable subsection. After receipt of such Proper Instructions, the Bank
will transfer, exchange, deliver or release Portfolio Securities only in the
following circumstances:
(a) Upon sales of Portfolio Securities for the
account of the Fund, against contemporaneous receipt by the Bank of payment
therefor in full, or against payment to the Bank in accordance with generally
accepted settlement practices and customs in the jurisdiction or market in which
the transaction occurs, each such payment to be in the amount of the sale price
shown in a broker's confirmation of sale received by the Bank before such
payment is made, as confirmed in the Proper Instructions received by the Bank
before such payment is made;
(b) In exchange for or upon conversion into other
securities alone or other securities and cash pursuant to any plan of merger,
consolidation, reorganization, share split-up, change in par value,
recapitalization or readjustment or otherwise, upon exercise of subscription,
purchase or sale or other
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<PAGE>
similar rights represented by such Portfolio Securities, or for the purpose of
tendering shares in the event of a tender offer therefor, provided, however,
that in the event of an offer of exchange, tender offer, or other exercise of
rights requiring the physical tender or delivery of Portfolio Securities, the
Bank shall have no liability for failure to so tender in a timely manner unless
such Proper Instructions are received by the Bank at least two business days
prior to the date required for tender, and unless the Bank (or its agent or
subcustodian hereunder) has actual possession of such Security at least two
business days prior to the date of tender;
(c) Upon conversion of Portfolio Securities
pursuant to their terms into other securities;
(d) For the purpose of redeeming in-kind shares
of the Fund upon authorization from the Fund;
(e) In the case of option contracts owned by the
Fund, for presentation to the endorsing broker;
(f) When such Portfolio Securities are called,
redeemed or retired or otherwise become payable;
(g) For the purpose of effectuating the pledge of
Portfolio Securities held by the Bank in order to collateralize loans made to
the Fund by any bank, including the Bank; provided, however, that such Portfolio
Securities will be released only upon payment to the Bank for the account of the
Fund of the moneys borrowed, provided further, however, that in cases where
additional collateral is required to secure a borrowing already made, and such
fact is made to appear in the Proper Instructions, Portfolio Securities may be
released for that purpose without any such payment. In the event that any
pledged Portfolio Securities are held by the Bank, they will be so held for the
account of the lender, and after notice to the Fund from the lender in
accordance with the normal procedures of the lender and any loan agreement
between the fund and the lender that an event of deficiency or default on the
loan has occurred, the Bank may deliver such pledged Portfolio Securities to or
for the account of the lender;
(h) for the purpose of releasing certificates
representing Portfolio Securities, against contemporaneous receipt by the Bank
of the fair market value of such security, as set forth in the Proper
Instructions received by the Bank before such payment is made;
(i) for the purpose of delivering securities lent
by the Fund to a bank or broker dealer, but only against receipt in accordance
with street delivery custom except as otherwise provided herein, of adequate
collateral as agreed upon from time to time by the Fund and the Bank, and upon
receipt of payment in connection with any repurchase agreement relating to such
securities entered into by the Fund;
(j) for other authorized transactions of the Fund
or for other proper corporate purposes; provided that before making such
transfer, the Bank will also receive a certified copy of resolutions of the
Board, signed by an authorized of fleer of the Fund (other than the officer
certifying such resolution) and certified by its Secretary or Assistant
Secretary, specifying the Portfolio Securities to be delivered, setting forth
the transaction in or purpose for which such delivery is to be made, declaring
such transaction to be an authorized transaction of the Fund or such purpose to
be a proper corporate purpose, and naming the person or persons to whom delivery
of such securities shall be made; and
(k) upon termination of this Agreement as
hereinafter set forth pursuant to Section 8 and Section 16 of this Agreement.
As to any deliveries made by the Bank pursuant to
this Section 6.12, securities or cash receivable in exchange therefor shall be
delivered to the Bank.
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<PAGE>
7. Redemptions. In the case of payment of assets of the Fund held by
the Bank in connection with redemptions and repurchases by the Fund of
outstanding common shares, the Bank will rely on notification by the Fund's
transfer agent of receipt of a request for redemption and certificates, if
issued, in proper form for redemption before such payment is made. Payment shall
be made in accordance with the Articles of Incorporation or Declaration of Trust
and By-laws of the Fund (the "Articles"), from assets available for said
purpose.
8. Merger, Dissolution, etc. of Fund. In the case of the following
transactions, not in the ordinary course of business, namely, the merger of the
Fund into or the consolidation of the Fund with another investment company, the
sale by the Fund of all, or substantially all, of its assets to another
investment company, or the liquidation or dissolution of the Fund and
distribution of its assets, the Bank will deliver the Portfolio Securities held
by it under this Agreement and disburse cash only upon the order of the Fund set
forth in an Officers' Certificate, accompanied by a certified copy of a
resolution of the Board authorizing any of the foregoing transactions. Upon
completion of such delivery and disbursement and the payment of the fees,
disbursements and expenses of the Bank, this Agreement will terminate and the
Bank shall be released from any and all obligations hereunder.
9. Actions of Bank Without Prior Authorization. Notwithstanding
anything herein to the contrary, unless and until the Bank receives an Officers'
Certificate to the contrary, the Bank will take the following actions without
prior authorization or instruction of the Fund or the transfer agent:
9.1 Endorse for collection and collect on behalf of and in
the name of the Fund all checks, drafts, or other negotiable or transferable
instruments or other orders for the payment of money received by it for the
account of the Fund and hold for the account of the Fund all income, dividends,
interest and other payments or distributions of cash with respect to the
Portfolio Securities held thereunder;
9.2 Present for payment all coupons and other income items
held by it for the account of the Fund which call for payment upon presentation
and hold the cash received by it upon such payment for the account of the Fund;
9.3 Receive and hold for the account of the Fund all
securities received as a distribution on Portfolio Securities as a result of a
stock dividend, share split-up, reorganization, recapitalization, merger,
consolidation, readjustment, distribution of rights and similar securities
issued with respect to any Portfolio Securities held by it hereunder.
9.4 Execute as agent on behalf of the Fund all necessary
ownership and other certificates and affidavits required by the Internal Revenue
Code or the regulations of the Treasury Department issued thereunder, or by the
laws of any state, now or hereafter in effect, inserting the Fund's name on such
certificates as the owner of the securities covered thereby, to the extent it
may lawfully do so and as may be required to obtain payment in respect thereof.
The Bank will execute and deliver such certificates in connection with Portfolio
Securities delivered to it or by it under this Agreement as may be required
under the provisions of the Internal Revenue Code and any Regulations of the
Treasury Department issued thereunder, or under the laws of any State;
9.5 Present for payment all Portfolio Securities which are
called, redeemed, retired or otherwise become payable, and hold cash received by
it upon payment for the account of the Fund; and
9.6 Exchange interim receipts or temporary securities for
definitive securities.
10. Collections and Defaults. The Bank will use reasonable efforts to
collect any funds which may to its knowledge become collectible arising from
Portfolio Securities, including dividends, interest and other income, and to
transmit to the Fund notice actually received by it of any call for redemption,
offer of exchange, right of subscription, reorganization or other proceedings
affecting such Securities. If Portfolio Securities upon which such income is
payable are in default or payment is refused after due demand or presentation,
the Bank will notify the Fund in writing of any default or refusal to pay within
two business days from the day on which it receives
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<PAGE>
knowledge of such default or refusal.
11. Maintenance of Records and Accounting Services. The Bank will
maintain records with respect to transactions for which the Bank is responsible
pursuant to the terms and conditions of this Agreement, and in compliance with
the applicable rules and regulations of the 1940 Act. The Bank will furnish to
the Fund such reports at such times as are set forth on Appendix E hereto. The
books and records of the Bank pertaining to its actions under this Agreement and
reports by the Bank or its independent accountants concerning its accounting
system, procedures for safeguarding securities and internal accounting controls
will be open to inspection and audit at reasonable times by officers of or
auditors employed by the Fund and will be preserved by the Bank in the manner
and in accordance with the applicable rules and regulations under the 1940 Act.
The Bank shall perform fund accounting and shall keep the
books of account and render statements or copies from time to time as reasonably
requested by the Treasurer or any executive officer of the Fund.
The Bank shall assist generally in the preparation of
reports to shareholders and others, audits of accounts, and other ministerial
matters of like nature.
12. Fund Evaluation and Yield Calculation.
12.1 Fund Evaluation. The Bank shall compute and, unless
otherwise directed by the Board, determine as of the close of regular trading on
the New York Stock Exchange on each day on which said Exchange is open for
unrestricted trading and as of such other days, or hours, if any, as may be
authorized by the Board, the net asset value and the public offering price of a
share of capital stock of the Fund, such determination to be made in accordance
with the provisions of the Articles and By-laws of the Fund and Prospectus and
Statement of Additional Information relating to the Fund, as they may from time
to time be amended, and any applicable resolutions of the Board at the time in
force and applicable; and promptly to notify the Fund, the proper exchange and
the NASD or such other persons as the Fund may request of the results of such
computation and determination. In computing the net asset value hereunder, the
Bank may rely in good faith upon information furnished to it by any Authorized
Person in respect of (i) the manner of accrual of the liabilities of the Fund
and in respect of liabilities of the Fund not appearing on its books of account
kept by the Bank, (ii) reserves, if any, authorized by the Board or that no such
reserves have been authorized, (iii) the source of the quotations to be used in
computing the net asset value, (iv) the value to be assigned to any security for
which no price quotations are available, and (v) the method of computation of
the public offering price on the basis of the net asset value of the shares, and
the Bank shall not be responsible for any loss occasioned by such reliance or
for any good faith reliance on any quotations received from a source pursuant to
(iii) above.
12.2. Yield Calculation. The Bank will compute the
performance results of the Fund (the "Yield Calculation") in accordance with the
provisions of Release No. 33-6753 and Release No. IC16245 (February 2, 1988)
(the "Releases") promulgated by the Securities and Exchange Commission, and any
subsequent amendments to, published interpretations of or general conventions
accepted by the staff of the Securities and Exchange Commission with respect to
such releases or the subject matter thereof ("Subsequent Staff Positions"),
subject to the terms set forth below:
(a) The Bank shall compute the Yield Calculation
for the Fund for the stated periods of time as shall be mutually agreed upon,
and communicate in a timely manner the result of such computation to the Fund.
(b) In performing the Yield Calculation, the Bank
will derive the items of data necessary for the computation from the records it
generates and maintains for the Fund pursuant Section 11 hereof. The Bank shall
have no responsibility to review, confirm, or otherwise assume any duty or
liability with respect to the accuracy or correctness of any such data supplied
to it by the Fund, any of the Fund's designated agents or any of the Fund's
designated third party providers.
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<PAGE>
(c) At the request of the Bank, the Fund shall
provide, and the Bank shall be entitled to rely on, written standards and
guidelines to be followed by the Bank in interpreting and applying the
computation methods set forth in the Releases or any Subsequent Staff Positions
as they specifically apply to the Fund. In the event that the computation
methods in the Releases or the Subsequent Staff Positions or the application to
the Fund of a standard or guideline is not free from doubt or in the event there
is any question of interpretation as to the characterization of a particular
security or any aspect of a security or a payment with respect thereto (e.g.,
original issue discount, participating debt security, income or return of
capital, etc.) or otherwise or as to any other element of the computation which
is pertinent to the Fund, the Fund or its designated agent shall have the full
responsibility for making the determination of how the security or payment is to
be treated for purposes of the computation and how the computation is to be made
and shall inform the Bank thereof on a timely basis. The Bank shall have no
responsibility to make independent determinations with respect to any item which
is covered by this Section, and shall not be responsible for its computations
made in accordance with such determinations so long as such computations are
mathematically correct.
(d) The Fund shall keep the Bank informed of all
publicly available information and of any non-public advice, or information
obtained by the Fund from its independent auditors or by its personnel or the
personnel of its investment adviser, or Subsequent Staff Positions related to
the computations to be undertaken by the Bank pursuant to this Agreement and the
Bank shall not be deemed to have knowledge of such information (except as
contained in the Releases) unless it has been furnished to the Bank in writing.
13. Additional Services. The Bank shall perform the additional
services for the Fund as are set forth on Appendix C hereto. Appendix C may be
amended from time to time upon agreement of the parties to include further
additional services to be provided by the Bank to the Fund, at which time the
fees set forth in Appendix A shall be appropriately increased.
14. Duties of the Bank.
14.1 Performance of Duties and Standard of Care. In
performing its duties hereunder and any other duties listed on any Schedule
hereto, if any, the Bank will be entitled to receive and act upon the advice of
independent counsel of its own selection, which may be counsel for the Fund, and
will be without liability for any action taken or thing done or omitted to be
done in accordance with this Agreement in good faith in conformity with such
advice.
The Bank will be under no duty or obligation to
inquire into and will not be liable for:
(a) the validity of the issue of any Portfolio
Securities purchased by or for the Fund, the legality of the purchases thereof
or the propriety of the price incurred therefor;
(b) the legality of any sale of any Portfolio
Securities by or for the Fund or the propriety of the amount for which the same
are sold;
(c) the legality of an issue or sale of any
common shares of the Fund or the sufficiency of the amount to be received
therefor;
(d) the legality of the repurchase of any common
shares of the Fund or the propriety of the amount to be paid therefor;
(e) the legality of the declaration of any
dividend by the Fund or the legality of the distribution of any Portfolio
Securities as payment in kind of such dividend; and
(f) any property or moneys of the Fund unless and
until received by it, and any such property or moneys delivered or paid by it
pursuant to the terms hereof.
Moreover, the Bank will not be under any duty or obligation
to ascertain whether any Portfolio
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Securities at any time delivered to or held by it for the account of the Fund
are such as may properly be held by the Fund under the provisions of its
Articles, By-laws, any federal or state statutes or any rule or regulation of
any governmental agency.
14.2 Agents and Subcustodians with Respect to Property of
the Fund Held in the United States. The Bank may employ agents in the
performance of its duties hereunder and shall be responsible for the acts and
omissions of such agents as if performed by the Bank hereunder. Without limiting
the foregoing, certain duties of the Bank hereunder may be performed by one or
more affiliates of the Bank.
Upon receipt of Proper Instructions, the Bank may employ
subcustodians, provided that any such subcustodian meets at least the minimum
qualifications required by Section 17(f)(1) of the 1940 Act to act as a
custodian of the Fund's assets with respect to property of the Fund held in the
United States. The Bank shall have no liability to the Fund or any other person
by reason of any act or omission of any subcustodian and the Fund shall
indemnify the Bank and hold it harmless from and against any and all actions,
suits and claims, arising directly or indirectly out of the performance of any
subcustodian. Upon request of the Bank, the Fund shall assume the entire defense
of any action, suit, or claim subject to the foregoing indemnity. The Fund shall
pay all fees and expenses of any subcustodian.
14.3 Duties of the Bank with Respect to Property of the
Fund Held Outside of the United States.
(a) Appointment of Foreign Sub-Custodians. The
Fund hereby authorizes and instructs the Bank to employ as sub-custodians for
the Fund's Portfolio Securities and other assets maintained outside the United
States the foreign banking institutions and foreign securities depositories
designated on the Schedule attached hereto (each, a "Selected Foreign
Sub-Custodian"). Upon receipt of Proper Instructions, together with a certified
resolution of the Fund's Board of Trustees, the Bank and the Fund may agree to
designate additional foreign banking institutions and foreign securities
depositories to act as Selected Foreign Sub-Custodians hereunder. Upon receipt
of Proper Instructions, the Fund may instruct the Bank to cease the employment
of any one or more such Selected Foreign Sub-Custodians for maintaining custody
of the Fund's assets, and the Bank shall so cease to employ such sub-custodian
as soon as alternate custodial arrangements have been implemented.
(b) Foreign Securities Depositories. Except as
may otherwise be agreed upon in writing by the Bank and the Fund, assets of the
Fund shall be maintained in foreign securities depositories only through
arrangements implemented by the foreign banking institutions serving as Selected
Foreign Sub-Custodians pursuant to the terms hereof. Where possible, such
arrangements shall include entry into agreements containing the provisions set
forth in subparagraph (d) hereof. Notwithstanding the foregoing, except as may
otherwise be agreed upon in writing by the Bank and the Fund, the Fund
authorizes the deposit in Euro-clear, the securities clearance and depository
facilities operated by Morgan Guaranty Trust Company of New York in Brussels,
Belgium, of Foreign Portfolio Securities eligible for deposit therein and the
use of Euro-clear in connection with settlements of purchases and sales of
securities and deliveries and returns of securities, until notified to the
contrary pursuant to subparagraph (a) hereunder.
(c) Segregation of Securities. The Bank shall
identify on its books as belonging to the Fund the Foreign Portfolio Securities
held by each Selected Foreign Sub-Custodian. Each agreement pursuant to which
the Bank employs a foreign banking institution shall require that such
institution establish a custody account for the Bank and hold in that account
Foreign Portfolio Securities and other assets of the Fund, and, in the event
that such institution deposits Foreign Portfolio Securities in a foreign
securities depository, that it shall identify on its books as belonging to the
Bank the securities so deposited.
(d) Agreements with Foreign Banking Institutions.
Each of the agreements pursuant to which a foreign banking institution holds
assets of the Fund (each, a "Foreign Sub-Custodian Agreement") shall be
substantially in the form attached as Appendix D hereto and shall provide that:
(a) the
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Fund's assets will not be subject to any right, charge, security interest, lien
or claim of any kind in favor of the foreign banking institution or its
creditors or agent, except a claim of payment for their safe custody or
administration (including, without limitation, any fees or taxes payable upon
transfers or reregistration of securities); (b) beneficial ownership of the
Fund's assets will be freely transferable without the payment of money or value
other than for custody or administration (including, without limitation, any
fees or taxes payable upon transfers or reregistration of securities); (c)
adequate records will be maintained identifying the assets as belonging to the
Bank; (d) officers of or auditors employed by, or other representatives of the
Bank, including to the extent permitted under applicable law, the independent
public accountants for the Fund, will be given access to the books and records
of the foreign banking institution relating to its actions under its agreement
with the Bank; and (e) assets of the Fund held by the Selected Foreign
Sub-Custodian will be subject only to the instructions of the Bank or its
agents.
(e) Access of Independent Accountants of the
Fund. Upon request of the Fund, the Bank will use its best efforts to arrange
for the independent accountants of the Fund to be afforded access to the books
and records of any foreign banking institution employed as a Selected Foreign
SubCustodian insofar as such books and records relate to the performance of such
foreign banking institution under its Foreign Sub-Custodian Agreement.
(f) Reports by Bank. The Bank will supply to the
Fund from time to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Fund held by Selected Foreign Sub-Custodians,
including but not limited to an identification of entities having possession of
the Foreign Portfolio Securities and other assets of the Fund.
(g) Transactions in Foreign Custody Account.
Transactions with respect to the assets of the Fund held by a Selected Foreign
Sub-Custodian shall be effected pursuant to Proper Instructions from the Fund to
the Bank and shall be effected in accordance with the applicable Foreign
Sub-Custodian Agreement. If at any time any Foreign Portfolio Securities shall
be registered in the name of the nominee of the Selected Foreign Sub-Custodian,
the Fund agrees to hold any such nominee harmless from any liability by reason
of the registration of such securities in the name of such nominee.
Notwithstanding any provision of this
Agreement to the contrary, settlement and payment for Foreign Portfolio
Securities received for the account of the Fund and delivery of Foreign
Portfolio Securities maintained for the account of the Fund may be effected in
accordance with the customary established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivering securities to the
purchaser thereof or to a dealer therefor (or an agent for such purchaser or
dealer) against a receipt with the expectation of receiving later payment for
such securities from such purchaser or dealer.
In connection with any action to be
taken with respect to the Foreign Portfolio Securities held hereunder,
including, without limitation, the exercise of any voting rights, subscription
rights, redemption rights, exchange rights, conversion rights or tender rights,
or any other action in connection with any other right, interest or privilege
with respect to such Securities (collectively, the "Rights"), the Bank shall
promptly transmit to the Fund such information in connection therewith as is
made available to the Bank by the Foreign Sub-Custodian, and shall promptly
forward to the applicable Foreign Sub-Custodian any instructions, forms or
certifications with respect to such Rights, and any instructions relating to the
actions to be taken in connection therewith, as the Bank shall receive from the
Fund pursuant to Proper Instructions. Notwithstanding the foregoing, the Bank
shall have no further duty or obligation with respect to such Rights, including,
without limitation, the determination of whether the Fund is entitled to
participate in such Rights under applicable U.S. and foreign laws, or the
determination of whether any action proposed to be taken with respect to such
Rights by the Fund or by the applicable Foreign Sub-Custodian will comply with
all applicable terms and conditions of any such Rights or any applicable laws or
regulations, or market practices within the market in which such action is to be
taken or omitted.
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(h) Liability of Selected Foreign Sub-Custodians.
Each Foreign Sub-Custodian Agreement with a foreign banking institution shall
require the institution to exercise reasonable care in the performance of its
duties and to indemnify, and hold harmless, the Bank and each Fund from and
against certain losses, damages, costs, expenses, liabilities or claims arising
out of or in connection with the institution's performance of such obligations,
all as set forth in the applicable Foreign Sub-Custodian Agreement. The Fund
acknowledges that the Bank, as a participant in Euro-clear, is subject to the
Terms and Conditions Governing the Euro-Clear System, a copy of which has been
made available to the Fund. The Fund acknowledges that pursuant to such Terms
and Conditions, Morgan Guaranty Brussels shall have the sole right to exercise
or assert any and all rights or claims in respect of actions or omissions of, or
the bankruptcy or insolvency of, any other depository, clearance system or
custodian utilized by Euroclear in connection with the Fund's securities and
other assets.
(i) Monitoring Responsibilities. The Bank shall
furnish annually to the Fund information concerning the Selected Foreign
Sub-Custodians employed hereunder for use by the Fund in evaluating such
Selected Foreign Sub-Custodians to ensure compliance with the requirements of
Rule 17f-5 of the Act. In addition, the Bank will promptly inform the Fund in
the event that the Bank is notified by a Selected Foreign Sub-Custodian that
there appears to be a substantial likelihood that its shareholders' equity will
decline below US$200 million (or the equivalent thereof) or that its
shareholders' equity has declined below US$200 million (in each case computed in
accordance with generally accepted U.S. accounting principles) or any other
capital adequacy test applicable to it by exemptive order, or if the Bank has
actual knowledge of any material loss of the assets of the Fund held by a
Foreign Sub-Custodian.
(j) Tax Law. The Bank shall have no
responsibility or liability for any obligations now or hereafter imposed on the
Fund or the Bank as custodian of the Fund by the tax laws of any jurisdiction,
and it shall be the responsibility of the Fund to notify the Bank of the
obligations imposed on the Fund or the Bank as the custodian of the Fund by the
tax law of any non-U.S. jurisdiction, including responsibility for withholding
and other taxes, assessments or other governmental charges, certifications and
governmental reporting. The sole responsibility of the Selected Foreign
Sub-custodian with regard to such tax law shall be to use reasonable efforts to
assist the Fund with respect to any claim for exemption or refund under the tax
law of jurisdictions for which the Fund has provided such information.
14.4 Insurance. The Bank shall use the same care with
respect to the safekeeping of Portfolio Securities and cash of the Fund held by
it as it uses in respect of its own similar property but it need not maintain
any special insurance for the benefit of the Fund.
14.5. Fees and Expenses of the Bank. The Fund will pay or
reimburse the Bank from time to time for any transfer taxes payable upon
transfer of Portfolio Securities made hereunder, and for all necessary proper
disbursements, expenses and charges made or incurred by the Bank in the
performance of this Agreement (including any duties listed on any Schedule
hereto, if any) including any indemnities for any loss, liabilities or expense
to the Bank as provided above. For the services rendered by the Bank hereunder,
the Fund will pay to the Bank such compensation or fees at such rate and at such
times as shall be agreed upon in writing by the parties from time to time. The
Bank will also be entitled to reimbursement by the Fund for all reasonable
expenses incurred in conjunction with termination of this Agreement.
14.6 Advances by the Bank. The Bank may, in its sole
discretion, advance funds on behalf of the Fund to make any payment permitted by
this Agreement upon receipt of any proper authorization required by this
Agreement for such payments by the Fund. Should such a payment or payments, with
advanced funds, result in an overdraft (due to insufficiencies of the Fund's
account with the Bank, or for any other reason) this Agreement deems any such
overdraft or related indebtedness a loan made by the Bank to the Fund payable on
demand. Such overdraft shall bear interest at the current rate charged by the
Bank for such loans unless the Fund shall provide the Bank with agreed upon
compensating balances. The Fund agrees that the Bank shall have a continuing
lien and security interest to the extent of any overdraft or indebtedness, in
and to any property at any time held by it for the Fund's benefit or in which
the Fund has an interest and which is then in the Bank's possession or control
(or in the possession or control of any third party acting on the Bank's
behalf). The Fund
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authorizes the Bank, in the Bank's sole discretion, at any time to charge any
overdraft or indebtedness, together with interest due thereon, against any
balance of account standing to the credit of the Fund on the Bank's books.
15. Limitation of Liability.
15.1 Notwithstanding anything in this Agreement to the
contrary, in no event shall the Bank or any of its officers, directors,
employees or agents (collectively, the "Indemnified Parties") be liable to the
Fund or any third party, and the Fund shall indemnify and hold the Bank and the
Indemnified Parties harmless from and against any and all loss, damage,
liability, actions, suits, claims, costs and expenses, including legal fees, (a
"Claim") arising as a result of any act or omission of the Bank or any
Indemnified Party under this Agreement, except for any Claim resulting solely
from the gross negligence, willful misfeasance or bad faith of the Bank or any
Indemnified Party. Without limiting the foregoing, neither the Bank nor the
Indemnified Parties shall be liable for, and the Bank and the Indemnified
Parties shall be indemnified against, any Claim arising as a result of:
(a) Any act or omission by the Bank or any
Indemnified Party in good faith reliance upon the terms of this Agreement, any
Officer's Certificate, Proper Instructions, resolution of the Board, telegram,
telecopier, notice, request, certificate or other instrument reasonably believed
by the Bank to genuine; (b) Any act or omission of any subcustodian selected by
or at the direction of the Fund;
(c) Any act or omission of a Selected Foreign
Sub-Custodian for to the extent which such Selected Foreign Sub-Custodian is not
liable to the Bank;
(d) Any Corporate Action requiring a Response for
which the Bank has not received Proper Instructions or obtained actual
possession of all necessary Securities, consents or other materials by 5:00 p.m.
on the date specified as the Response Deadline;
(e) Any act or omission of any European Branch of
a U.S. banking institution that is the issuer of Eurodollar CDs in connection
with any Eurodollar CDs held by such European Branch;
(f) Information relied on in good faith by the
Bank and supplied by any Authorized Person in connection with the calculation of
(i) the net asset value and public offering price of the shares of capital stock
of the Fund or (ii) the Yield Calculation; or
(g) Any acts of God, earthquakes, fires, floods,
storms or other disturbances of nature, epidemics, strikes, riots,
nationalization, expropriation, currency restrictions, acts of war, civil war or
terrorism, insurrection, nuclear fusion, fission or radiation, the interruption,
loss or malfunction of utilities, transportation or computers (hardware or
software) and computer facilities, the unavailability of energy sources and
other similar happenings or events.
15.2 Notwithstanding anything to the contrary in this
Agreement, in no event shall the total liability of the Bank and the Indemnified
Parties under this Agreement exceed in general money damages a total cumulative
maximum amount of one hundred percent of the amounts actually paid by the Fund
to the Bank under this Agreement. The existence of more than one Claim will not
enlarge or extend this limit.
15.3 Notwithstanding anything to the contrary in this
Agreement, in no event shall the Bank or the Indemnified Parties be liable to
the Fund or any third party for lost profits or lost revenues or any special,
consequential, punitive or incidental damages of any kind whatsoever in
connection with this Agreement or any activities hereunder.
16. Termination.
16.1 The term of this Agreement shall be three years
commencing upon [If fund is
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<PAGE>
preexisting: the date of conversion of the Fund's assets to the Bank] [If new
fund: the effective date of the Fund's registration statement] (the "Initial
Term"), unless earlier terminated as provided herein. After the expiration of
the Initial Term, the term of this Agreement shall automatically renew for
successive one-year terms (each a "Renewal Term") unless notice of non-renewal
is delivered by the non-renewing party to the other party no later than sixty
days prior to the expiration of the Initial Term or any Renewal Term, as the
case may be.
(a) Either party hereto may terminate this
Agreement prior to the expiration of the Initial Term in the event the other
party violates any material provision of this Agreement, provided that the
non-violating party gives written notice of such violation to the violating
party and the violating party does not cure such violation within 90 days of
receipt of such notice.
(b) Either party may terminate this Agreement
during any Renewal Term upon sixty days written notice to the other party. Any
termination pursuant to this paragraph 16.1(b) shall be effective upon
expiration of such sixty days, provided, however, that the effective date of
such termination may be postponed to a date not more than ninety days after
delivery of the written notice: (i) at the request of the Bank, in order to
prepare for the transfer by the Bank of all of the assets of the Fund held
hereunder; or (ii) at the request of the Fund, in order to give the Fund an
opportunity to make suitable arrangements for a successor custodian.
16.2 In the event of the termination of this Agreement, the
Bank will immediately upon receipt or transmittal, as the case may be, of notice
of termination, commence and prosecute diligently to completion the transfer of
all cash and the delivery of all Portfolio Securities duly endorsed and all
records maintained under Section 11 to the successor custodian when appointed by
the Fund. The obligation of the Bank to deliver and transfer over the assets of
the Fund held by it directly to such successor custodian will commence as soon
as such successor is appointed and will continue until completed as aforesaid.
If the Fund does not select a successor custodian within ninety (90) days from
the date of delivery of notice of termination the Bank may, subject to the
provisions of subsection (16.3), deliver the Portfolio Securities and cash of
the Fund held by the Bank to a bank or trust company of the Bank's own selection
which meets the requirements of Section 17(f)(1) of the 1940 Act and has a
reported capital, surplus and undivided profits aggregating not less than
$2,000,000, to be held as the property of the Fund under terms similar to those
on which they were held by the Bank, whereupon such bank or trust company so
selected by the Bank will become the successor custodian of such assets of the
Fund with the same effect as though selected by the Board. Thereafter, the Bank
shall be released from any and all obligations under this Agreement.
16.3 Prior to the expiration of ninety (90) days after
notice of termination has been given, the Fund may furnish the Bank with an
order of the Fund advising that a successor custodian cannot be found willing
and able to act upon reasonable and customary terms and that there has been
submitted to the shareholders of the Fund the question of whether the Fund will
be liquidated or will function without a custodian for the assets of the Fund
held by the Bank. In that event the Bank will deliver the Portfolio Securities
and cash of the Fund held by it, subject as aforesaid, in accordance with one of
such alternatives which may be approved by the requisite vote of shareholders,
upon receipt by the Bank of a copy of the minutes of the meeting of shareholders
at which action was taken, certified by the Fund's Secretary and an opinion of
counsel to the Fund in form and content satisfactory to the Bank. Thereafter,
the Bank shall be released from any and all obligations under this Agreement.
16.4 The Fund shall reimburse the Bank for any reasonable
expenses incurred by the Bank in connection with the termination of this
Agreement.
16.5 At any time after the termination of this Agreement,
the Fund may, upon written request, have reasonable access to the records of the
Bank relating to its performance of its duties as custodian.
17. Confidentiality. parties hereto agree than any non-public
information obtained hereunder concerning the other party is confidential and
may not be disclosed without the consent of the other party, except as may be
required by applicable law or at the request of a governmental agency. The
parties further agree that a
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<PAGE>
breach of this provision would irreparably damage the other party and
accordingly agree that each of them is entitled, in addition to all other
remedies at low or in equal to an injunction or injunctions without bond or
other security to prevent breaches of this provision.
18. Notices. Any notice or other instrument in writing authorized or
required by this Agreement to be given to either party hereto will be
sufficiently given if addressed to such party and delivered via (I) United
States Postal Service registered mail, (ii) telecopier with written
confirmation, (iii) had delivery with signature to such party at its office at
the address set forth below, namely:
(a) In the case of notices sent to the Fund to:
[ ]
(b) In the case of notices sent to the Bank to:
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
Attention: [ ]
or at such other place as such party may from
time to time designate in writing.
19. Amendments. This Agreement may not be altered or amended, except
by an instrument in writing, executed by both parties.
20. Parties. This Agreement will be binding upon and shall inure to
the benefit of the parties hereto and their respective successors and assigns;
provided, however, that this Agreement will not be assignable by the Fund
without the written consent of the Bank or by the Bank without the written
consent of the Fund, authorized and approved by its Board; and provided further
that termination proceedings pursuant to Section 16 hereof will not be deemed to
be an assignment within the meaning of this provision.
21. Governing Law. This Agreement and all performance hereunder will
be governed by the laws of the Commonwealth of Massachusetts, without regard to
conflict of laws provisions.
22. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but such
counterparts shall, together, constitute only one instrument.
23. Entire Agreement. This Agreement, together with its Appendices,
constitutes the sole and entire agreement between the parties relating to the
subject matter herein and does not operate as an acceptance of any conflicting
terms or provisions of any other instrument and terminates and supersedes any
and all prior agreements and undertakings between the parties relating to the
subject matter herein.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers "hereunto duly authorized as of the day
and year first written above.
[ ]
By: ___________________________
Name:
Title:
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<PAGE>
Investors Bank & Trust Company
By: ___________________________
Name:
Title:
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EXHIBIT 10
Consent and Opinion of Counsel
<PAGE>
September 16, 1996
22769-0001
Kayne Anderson Mutual Funds
1800 Avenue of the Stars, 2nd Floor
Los Angeles, California 90067
Registration Statement on Form N-1A
Ladies and Gentlemen:
We have acted as counsel to Kayne Anderson Mutual
Funds, a Delaware business trust (the "Trust"), in connection with the Trust's
Registration Statement on Form N-1A filed with the Securities and Exchange
Commission on July 12, 1996 (the "Registration Statement") and relating to the
issuance by the Trust of an indefinite number of $0.01 par value shares of
beneficial interest of five series of the Trust, Kayne Anderson Rising Dividends
Fund, Kayne Anderson Small-Mid Cap Rising Dividends Fund, Kayne Anderson
International Rising Dividends Fund, Kayne Anderson Intermediate Total Return
Bond Fund and Kayne Anderson Intermediate Tax-Free Bond Fund (collectively, the
"Shares") pursuant to Rule 24f-2 under the Investment Company Act of 1940, as
amended (the "Act").
In connection with this opinion, we have assumed the
authenticity of all records, documents and instruments submitted to us as
originals, the genuineness of all signatures, the legal capacity of all natural
persons and the conformity to the originals of all records, documents and
instruments submitted to us as copies. We have based our opinion on the
following:
(a) the Trust's Agreement and Declaration of Trust
dated as of May 24, 1996 (the "Declaration of
Trust") and the Trust's Certificate of Trust as
filed with the Secretary of State of Delaware on
May 29, 1996;
(b) the By-laws of the Trust;
<PAGE>
Kayne Anderson Mutual Funds
September 16, 1996 Page 2
(c) resolutions of the sole Trustee of the Trust
adopted by written consent dated August 23, 1996
authorizing the issuance of the Shares;
(d) the Registration Statement; and
(e) a certificate of the sole Trustee of the Trust as
to certain factual matters relevant to this
opinion.
Our opinion below is limited to the federal law of the
United States of America and the business trust law of the State of Delaware. We
are not licensed to practice law in the State of Delaware, and we have based our
opinion below solely on our review of Chapter 38 of Title 12 of the Delaware
Code and the case law interpreting such Chapter as reported in Delaware Code
Annotated (Michie Co. 1995). We have not undertaken a review of other Delaware
law or of any administrative or court decisions in connection with rendering
this opinion. We disclaim any opinion as to any law other than that of the
United States of America and the business trust law of the State of Delaware as
described above, and we disclaim any opinion as to any statute, rule,
regulation, ordinance, order or other promulgation of any regional or local
governmental authority.
Based on the foregoing and our examination of such
questions of law as we have deemed necessary and appropriate for the purpose of
this opinion, and assuming that (i) all of the Shares will be issued and sold
for cash at the per-share public offering price on the date of their issuance in
accordance with statements in the Trust's Prospectus included in the
Registration Statement and in accordance with the Declaration of Trust, (ii) all
consideration for the Shares will be actually received by the Trust, (iii) such
consideration will be at least equal in value to the par value of the Shares,
and (iv) all applicable securities laws will be complied with, it is our opinion
that, when issued and sold by the Trust, the Shares will be legally issued,
fully paid and nonassessable.
This opinion is rendered to you in connection with the
Registration Statement and is solely for your benefit. This opinion may not be
relied upon by you for any other purpose or relied upon by any other person,
firm, corporation or other entity for any purpose, without our prior written
consent. We disclaim any obligation to advise you of any developments in areas
covered by this opinion that occur after the date of this opinion.
<PAGE>
Kayne Anderson Mutual Funds
September 16, 1996 Page 3
We hereby consent to (i) the reference to our firm
under the caption "Legal Counsel" in the Prospectus of the Trust included in the
Registration Statement, and (ii) the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ HELLER, EHRMAN, WHITE
& McAULIFFE
