As filed with the Securities and Exchange Commission on July 12, 1996
File Nos. 33-
811-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. ___
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>
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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>
SUBJECT TO COMPLETION -- Dated July 12, 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 less than $2 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
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.
<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............................................................20
EXCHANGE OF SHARES...........................................................22
SELLING SHARES (REDEMPTIONS).................................................23
SHAREHOLDER SERVICES.........................................................25
SHARE PRICE CALCULATION......................................................26
DIVIDENDS, DISTRIBUTIONS AND TAX
STATUS.......................................................................27
PERFORMANCE INFORMATION......................................................28
GENERAL INFORMATION..........................................................29
<PAGE>
SUMMARY OF EXPENSES
This table is designed to help you understand the costs of investing in a Fund.
These are the expenses, including the estimated other 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 Intermediate
Rising Cap Rising Rising Total Intermediate
Dividends Dividends Dividends 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
expense reimbursement 1.20%* 1.30%* 1.40%* 0.95%* 0.95%*
</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 the Rising Dividends Fund,
Small-Mid Cap Rising Dividends Fund, International Rising Dividends Fund,
Intermediate Total Return Bond Fund and Intermediate Tax-Free Bond 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 is reduced to $100 for purchases through
the Automatic Investment Plan or for purchases by retirement plans through
payroll deductions. The minimum for additional investments is $250.
Offering Price
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.
2
<PAGE>
Any dividend or distribution paid by the 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 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 a Delaware business trust (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:
[_________________]
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 Funda
- ---------------------------------------------------------------------------------------
May 1, 1995b 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 make use of certain
types of investments and investing 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.
The Fund seeks investments in companies meeting its "rising dividends" criteria
as described below. These companies are generally proven companies with records
of above-average growth, strong balance sheets and responsible management. 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 or mid capitalization
domestic companies, which the Fund currently considers to be companies having
total market capitalizations of less than $2 billion. 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.
This Fund seeks investments in consistently growing, highly profitable, low debt
companies that meet its "rising dividends" criteria. The Adviser believes these
companies are consistent growers with proven managements, clean balance sheets
and rising dividends.
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. 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 conditions, this
Fund invests in at least three different countries outside of the U.S., but no
country may 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.
5
<PAGE>
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. 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 generally meet
certain growth and quality criteria established by the Adviser as set forth
below. The three rising dividends 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 substantially meet the Fund's rising dividends
philosophy.
Consistent Dividend Increases. The three rising dividends Funds generally 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 having 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.
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.
6
<PAGE>
The Intermediate Total Return Bond Fund
The Intermediate Total Return Bond Fund seeks current income with capital
appreciation as a secondary consideration. This Fund invests primarily in debt
securities and seeks to maintain an average maturity of three to ten years. 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 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 quality by the
Manager using guidelines approved by the Board of Trustees.
The Fund invests in domestic and foreign investment-grade debt securities and,
in normal market conditions, seeks to maintain a dollar-weighted average
maturity of three to ten 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 personal income
tax ("Municipal Securities"). 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 Manager 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 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 an average 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. Under normal market conditions, the Fund will invest at least
80% of its total assets
7
<PAGE>
in Municipal Securities, including bonds, notes, debentures and zero coupon
securities.
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 municipality but generally are guaranteed by 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
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addition to the usual risks inherent in domestic investments.
These Funds also may invest in American Depository Receipts ("ADRs") and
European 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 in foreign 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 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
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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.
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
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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 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 the actual life of the security 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 today 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
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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 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
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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 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 Segregable Assets. 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 by the International Rising Dividends Fund. This Fund
does not expect to engage actively in hedging practices. However, from time to
time when deemed appropriate by the Adviser, it 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 Fund generally enters into forward contracts only under two circumstances.
First, if the 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 the Fund's
portfolio securities denominated in such currency. Although forward contracts
are used primarily to protect the Fund from adverse currency movements, they
involve the risk that currency movements will not be accurately anticipated.
The Fund may purchase a put or call option on a currency also in an effort to
hedge its current or prospective investments. The Fund does 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 this 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
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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 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 financings).
The 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
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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.
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's 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
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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 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
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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 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 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 of [____]% of the value of the total net assets of the Trust, subject to a
minimum annual fee of $[________] 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.
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<PAGE>
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.
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 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 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 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
20
<PAGE>
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 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 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
------------------
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
21
<PAGE>
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 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 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.
22
<PAGE>
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 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.
The Funds 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 SEC Commission 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
Funds 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
23
<PAGE>
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 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.
24
<PAGE>
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 initial and subsequent investment pursuant to this plan is $200 per
month. An initial Fund account must be opened first with the $5,000 (or $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) _________.
25
<PAGE>
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 normal
trading. Orders received before 4:00 p.m. (Eastern time) on a day when the
Exchange is open for normal 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 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 your account and certificates are not
issued. This eliminates the costly problem of lost or destroyed certificates.
26
<PAGE>
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 the 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 or excise taxes based on net income. The
distributions made by the Fund will be taxable to shareholders whether received
in shares (through dividend reinvestment) or in cash. Distributions 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
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 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.
27
<PAGE>
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 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. Yield accounting methods differ from the
methods used for other accounting 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.
28
<PAGE>
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)__________.
29
<PAGE>
------------------------------------------------------------
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>
SUBJECT TO COMPLETION -- Dated July 12, 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-23
The Funds' Investment Limitations..........................................B-25
Management of the Funds....................................................B-28
The Funds' Administrator...................................................B-32
The Funds' Distributor.....................................................B-33
Transfer Agent and Custodian...............................................B-33
How Net Asset Value is Determined..........................................B-33
Share Purchases and Redemptions............................................B-35
Dividends, Distributions and Taxes.........................................B-36
How Performance is Determined..............................................B-40
Additional Information.....................................................B-42
Financial Statements.......................................................B-43
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
<PAGE>
MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND.
This Statement of Additional Information is dated September __, 1996.
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.
<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
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
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as interest or dividend 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
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 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
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payment terms of the mortgage loans; and (9) mortgage-backed serial notes.
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 ten and 30 years, substantially all of which are secured by first liens
on one-to- four-family residential properties or multifamily projects. Each
mortgage loan must include whole loans, participation interests in whole loans
and undivided interests in whole loans and 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.
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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 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.
These 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
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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.
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 Funds. 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
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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 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
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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 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 their participation interest in a Municipal Security, plus accrued
interest. As to these instruments, the 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
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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 one of these
Funds 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
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 15% 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 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
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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 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 owners 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.
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
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and 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. These 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.
These 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 these
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 within the
definition of bona fide hedging
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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%.
These 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 these Funds or
which they expect to purchase. These 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
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in 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, 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 options for
which there appears to be an active
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<PAGE>
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) 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 at least the value of
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 assets and renders them unavailable for investment. A Fund will not write
put options if the aggregate value of the
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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 currency forward 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 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
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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 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
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security in which it is authorized to invest. Any repurchase transaction in
which a Fund 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), 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.
At the time 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,
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or even a loss of rights in collateral supplied, should the borrower 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 the Funds may engage in loan transactions only under the following
conditions: (1) a 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, a Fund must be
able to terminate the loan at any time; (4) a 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) a 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,
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dividends, interest 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 at the time 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),
non-government stripped fixed-rate mortgage-backed securities, restricted
securities and government-stripped fixed-rate mortgage-backed securities
determined by the Adviser to be illiquid. 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, or
in a registered public offering. Where the 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
a 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
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the security, (4) 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 these 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 Boards of the Trust 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 these Funds 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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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 any 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;
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(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 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 Securities Act of 1933,
as amended, 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
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may obtain short-term credits necessary for the clearance of
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, 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, 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;
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(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
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
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
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.
[___________________________,] Trustee
[___________________________,] Trustee
[___________________________,] Trustee
- --------
* Denotes a Trustee who is an "interested person," as defined in the
Investment Company Act of 1940, as amended (the "1940 Act").
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The trustees of the Trust 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 officers 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.
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 for the Funds 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 the 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 appears that
the Fund will be able to effect such reimbursement. At such time as it appears
probable that the Fund is able to effect such reimbursement, the amount of
reimbursement
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that the Fund is able to effect will be accrued as an expense of the Fund for
that current period.
The Management Agreement for the Funds 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 (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 a Fund's
average daily net assets up to $30 million, 2.0% of average daily net assets
between $30 million and $100 million, and 1.5% of such net assets over $100
million.
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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 respective 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 rates. In accordance
with the rules of the National Association of Securities Dealers, Inc., the
Funds may also direct brokerage to broker-
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<PAGE>
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. 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 such additional
services as may be agreed upon by the Funds and the
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Administrator. For its services, the Administrator receives an annual fee equal
to the greater of [__]% of the first $100 million of the Trust's average daily
net assets, [__] % of the next $150 million, [__]% of the next $250 million and
[__]% thereafter, subject to a $______ ($______ for the first year) minimum.
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
[___________________] 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. [____________________] 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 4:15 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.
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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 is because such OTC securities
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 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.
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 service, in determining value, is expected to use information with
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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.
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.
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.
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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, 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 qualify, a Fund must meet certain requirements
with respect to the source of its income, diversification of its assets and
distributions to its shareholders. 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 a Fund's earnings and profits.
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
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net income for the one-year period ending on October 31 of such 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 Funds may write, purchase or sell certain option 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 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. (Legislation pending in Congress would eliminate this limitation,
however.) Accordingly, a Fund may be restricted in effecting closing
transactions within three months after entering into an option contract.
A Fund may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations.
The Funds also may invest in the stock of foreign companies that may be
treated as "passive foreign investment companies"
B-37
<PAGE>
("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 the Funds derive from PFIC stock may be subject to a
non-deductible federal income tax at the Fund level. In some cases, each of the
Funds 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.
Dividends of net investment income (including any net realized
short-term capital gains) 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 a
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.
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 redeemed shares. All or a portion of a loss realized upon the redemption
of shares may be disallowed to
B-38
<PAGE>
the extent shares are purchased (including shares acquired by means of
reinvested dividends) within 30 days before or after such redemption.
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.
Special tax treatment is accorded distributions from accounts
maintained as IRAs. For example, IRA distributions made to account holders who
are not at least 59 1/2 are subject to a special penalty tax.
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 federal, state, local, or foreign taxes. 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:
6
YIELD=2[(a-b +1) -1]
cd
B-39
<PAGE>
Where: a = dividends and interest earned during the period.
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 Funds. 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.
B-40
<PAGE>
Yields. The yields for the indicated periods ended September
__, 1995, were as follows:
Current Yield Tax-Equiv. Yield
Fund (30-day) (30-day)
- ---- ------------- ----------------
Kayne Anderson Intermediate NA NA
Total Return Bond Fund
Kayne Anderson Intermediate Tax- NA NA
Free Bond Fund
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:
n
P(1+T) = 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 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
B-41
<PAGE>
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 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.
B-42
<PAGE>
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.
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.
B-43
<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-44
<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-45
<PAGE>
----------------------------------------------------
PART C
OTHER INFORMATION
---------------------------------------------------
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
--------------
FORM N-1A
--------------
PART C
--------------
<TABLE>
<CAPTION>
<S> <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.
(2) By-Laws.
(3) Voting Trust Agreement - Not applicable.
(4) Specimen Share Certificate - Not applicable.
(5) Form of Investment Management Agreement.
(6) Form of Underwriting Agreement.*
(7) Benefit Plan(s) - Not applicable.
(8) Form of Custodian Agreement.*
(9) Administrative Services Agreement.*
(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.*
(14) Model Retirement Plan Documents - Not applicable.
(15) Rule 12b-1 Plan - Not Applicable.
(16) Performance Computation - Not Applicable.
(17) Financial Data Schedule
</TABLE>
- --------
* 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
<PAGE>
(b) The following information is furnished with respect to the
officers of First Fund Distributors, Inc.:
<TABLE>
<CAPTION>
Name and Principal Position and Offices with First Positions and Offices
Business Address* Fund Distributors, Inc. with Registrant
- ----------------- ----------------------- ---------------
<S> <C> <C>
Robert H. Wadsworth President and Treasurer None
Steven J. Paggioli Vice President and Secretary None
Eric M. Banhazl Vice President None
</TABLE>
* 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, ____________________________________, 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 Post-Effective Amendment to its 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 10th
day of July, 1996.
Kayne Anderson Mutual Funds
By: /s/ 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.
/s/ William T. Miller Principal Executive Officer, July 10, 1996
- --------------------- Principal Financial and
William T. Miller Accounting Officer, and
sole Trustee
<PAGE>
File Nos. _____________
_____________
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.
- ----------- -------- --------
(1) Agreement and Declaration of Trust _____
(2) By-Laws _____
(5) Form of Investment Management Agreement _____
(27) Financial Data Schedule _____
EXHIBIT 1
Agreement and Declaration of Trust
<PAGE>
AGREEMENT AND DECLARATION OF TRUST
==================================
of
KAYNE ANDERSON MUTUAL FUNDS
===========================
a Delaware Business Trust
Principal Place of Business:
Second Floor
1800 Avenue of the Stars
Los Angeles, California 90067
Formed:
May 24, 1996
<PAGE>
TABLE OF CONTENTS
-----------------
AGREEMENT AND DECLARATION OF TRUST
KAYNE ANDERSON MUTUAL FUNDS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I Name and Definitions...................................................................1
1. Name............................................................................................1
2. Definitions.....................................................................................1
(a) Trust..................................................................................1
(b) Trust Property.........................................................................1
(c) Trustees...............................................................................1
(d) Shares.................................................................................2
(e) Shareholder............................................................................2
(f) Person.................................................................................2
(g) Investment Company Act.................................................................2
(h) Commission and Principal Underwriter...................................................2
(i) Declaration of Trust...................................................................2
(j) By-Laws................................................................................2
(k) Interested Person......................................................................2
(l) Investment Adviser.....................................................................2
(m) Series.................................................................................2
(n) Class..................................................................................2
(o) Voting Interest........................................................................2
ARTICLE II Purpose of Trust.......................................................................3
ARTICLE III Shares.................................................................................3
1. Division of Beneficial Interest.................................................................3
2. Ownership of Shares.............................................................................4
3. Investments in the Trust........................................................................4
4. Status of Shares and Limitation of
Personal Liability............................................................................4
5. Power of Board of Trustees to Change
Provisions Relating to Shares.................................................................5
6. Establishment and Designation of Series and Classes.............................................5
(a) Assets With Respect to a Particular Series.............................................5
(b) Liabilities Held With Respect to a
Particular Series or Class...........................................................6
(c) Dividends, Distributions, Redemptions
and Repurchases......................................................................6
(d) Voting.................................................................................7
(e) Equality...............................................................................7
(f) Fractions..............................................................................7
(g) Exchange Privilege.....................................................................7
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(h) Combination of Series..................................................................8
(i) Elimination of Series..................................................................8
7. Indemnification of Shareholders.................................................................8
ARTICLE IV The Board of Trustees.........................................................8
1. Number, Election and Tenure............................................................8
2. Effect of Death, Resignation, etc.
of a Trustee.........................................................................9
3. Powers.................................................................................9
4. Payment of Expenses by the Trust......................................................12
5. Payment of Expenses by Shareholders...................................................13
6. Ownership of Assets of the Trust......................................................13
7. Service Contracts.....................................................................13
ARTICLE V Shareholders' Voting Powers and Meetings.....................................15
1. Voting Powers.........................................................................15
2. Voting Power and Meetings.............................................................15
3. Quorum and Required Vote..............................................................16
4. Action by Written Consent.............................................................16
5. Record Dates..........................................................................16
6. Additional Provisions.................................................................17
ARTICLE VI Net Asset Value, Distributions,
and Redemptions............................................................17
1. Determination of Net Asset Value, Net
Income and Distributions.....................................................17
2. Redemptions and Repurchases...........................................................17
3. Redemptions at the Option of the Trust................................................18
ARTICLE VII Compensation and Limitation of
Liability of Trustees......................................................18
1. Compensation..........................................................................18
2. Indemnification and Limitation of Liability...........................................18
3. Trustee's Good Faith Action, Expert
Advice, No Bond or Surety...........................................................19
4. Insurance.............................................................................19
ARTICLE VIII Miscellaneous................................................................19
1. Liability of Third Persons Dealing
with Trustees........................................................................19
2. Termination of Trust, Series or Class.................................................20
3. Merger and Consolidation..............................................................20
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4. Amendments............................................................................21
5. Filing of Copies, References, Headings................................................21
6. Applicable Law........................................................................21
7. Provisions in Conflict with Law or Regulations........................................21
8. Business Trust Only...................................................................22
9. Use of the Identifying Words "Kayne"
and "Anderson"........................................................................22
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AGREEMENT AND DECLARATION OF TRUST
==================================
OF
KAYNE ANDERSON MUTUAL FUNDS
===========================
WHEREAS, THIS AGREEMENT AND DECLARATION OF TRUST is made and
entered into as of the date set forth below by the Trustees named hereunder for
the purpose of forming a Delaware business trust in accordance with the
provisions hereinafter set forth,
NOW, THEREFORE, the Trustees hereby direct that a Certificate
of Trust be filed with Office of the Secretary of State of the State of Delaware
and do hereby declare that the Trustees will hold IN TRUST all cash, securities
and other assets which the Trust now possesses or may hereafter acquire from
time to time in any manner and manage and dispose of the same upon the following
terms and conditions for the pro rata benefit of the holders of Shares in this
Trust.
ARTICLE I
Name and Definitions
Section 1. Name. This Trust shall be known as KAYNE ANDERSON
MUTUAL FUNDS, and the Trustees shall conduct the business of the Trust under
that name or any other name as they may from time to time determine.
Section 2. Definitions. Whenever used herein, unless otherwise
required by the context or specifically provided:
(a) The "Trust" refers to the Delaware business trust
established by this Agreement and Declaration of Trust, as amended from time to
time;
(b) The "Trust Property" means any and all property, real or
personal, tangible or intangible, which is owned or held by or for the account
of the Trust, including without limitation the rights referenced in Article
VIII, Section 9 hereof;
(c) "Trustees" refers to the persons who have signed this
Agreement and Declaration of Trust, so long as they continue in office in
accordance with the terms hereof, and all other persons who may from time to
time be duly elected or appointed to serve on the Board of Trustees in
accordance with the provisions hereof, and reference herein to a Trustee or the
Trustees shall
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refer to such person or persons in their capacity as trustees hereunder;
(d) "Shares" means the shares of beneficial interest into
which the beneficial interest in the Trust shall be divided from time to time
and includes fractions of Shares as well as whole Shares, and if the Shares of
any Series shall be divided into Classes, "Shares" means the Shares belonging to
a particular Class (as the context may require);
(e) "Shareholder" means a record owner of outstanding Shares;
(f) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures, estates and other entities,
whether or not legal entities, and governments and agencies and political
subdivisions thereof, whether domestic or foreign;
(g) The "Investment Company Act" refers to the Investment
Company Act of 1940 and the Rules and Regulations thereunder, all as amended
from time to time;
(h) The terms "Commission" and "Principal Underwriter" shall
have the meanings given them in the Investment Company Act;
(i) "Declaration of Trust" shall mean this Agreement and
Declaration of Trust, as amended or restated from time to time;
(i) "By-Laws" shall mean the By-Laws of the Trust as amended
from time to time and incorporated herein by reference;
(k) The term "Interested Person" has the meaning given it in
Section 2(a)(19) of the Investment Company Act;
(l) "Investment Adviser" or "Manager" means a party furnishing
services to the Trust pursuant to any contract described in Article IV, Section
7(a) hereof;
(m) "Series" refers to each Series of Shares established and
designated under or in accordance with the provisions of Article III;
(n) "Class" means a Class of Shares established and designated
under or in accordance with the provisions of Article III; and
(o) "Voting Interests" shall mean (i) the number of Shares
outstanding times net asset value per Share where two or more Series or Classes
of Shares of the Trust are voted in the
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aggregate or (ii) the number of Shares of each Series or Class where
Shareholders vote by separate Series or Classes.
ARTICLE II
Purpose of Trust
The purpose of the Trust is to conduct, operate and carry on
the business of a management investment company registered under the Investment
Company Act through one or more Series investing primarily in securities.
ARTICLE III
Shares
Section 1. Division of Beneficial Interest. The beneficial
interest in the Trust shall at all times be divided into an unlimited number of
Shares, with a par value of $.01 per Share. The Trustees may authorize the
division of Shares into separate Series and the division of Series into separate
Classes of Shares. The different Series and Classes shall be established and
designated, and the variations in the relative rights and preferences as between
the different Series and Classes shall be fixed and determined, by the Trustees.
If only one or no Series or Classes shall be established, the Shares shall have
the rights and preferences provided for herein and in Article III, Section 6
hereof to the extent relevant and not otherwise provided for herein, and all
references to Series (and Classes) shall be construed (as the context may
require) to refer to the Trust.
Subject to the provisions of Section 6 of this Article III,
each Share shall have voting rights as provided in Article V hereof, and holders
of the Shares of any Series shall be entitled to receive dividends when, if and
as declared with respect thereto in the manner provided in Article VI, Section 1
hereof. No Shares shall have any priority or preference over any other Share of
the same Series and Class with respect to dividends or distributions upon
termination of the Trust or of such Series or such Class made pursuant to
Article VIII, Section 4 hereof. All dividends and distributions shall be made
ratably among all Shareholders of a particular Class of a particular Series and,
if no Classes, of a particular Series from the assets held with respect to such
Series according to the number of Shares of such Class of such Series or of such
Series held of record by such Shareholder on the record date for any dividend or
distribution or on the date of termination, as the case may be. Shareholders
shall have no preemptive or other right to subscribe to any additional Shares or
other securities issued by the Trust or any Series, although the Trustees may
provide for the automatic conversion of one Class of Shares of a Series into
another Class
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of Shares of the same Series upon the occurrence of certain specific events. The
Trustees may from time to time divide or combine the Shares of any particular
Series or Class into a greater or lesser number of Shares of that Series or
Class without thereby materially changing the proportionate beneficial interest
of the Shares of that Series or Class in the assets held with respect to that
Series or materially affecting the rights of Shares of any other Series or
Class.
Section 2. Ownership of Shares. The ownership of Shares shall
be recorded on the books of the Trust or a transfer or similar agent for the
Trust, which books shall be maintained separately for the Shares of each Series
or Class of each Series. No certificates certifying the ownership of Shares
shall be issued except as the Board of Trustees may otherwise determine from
time to time. The Trustees may make such rules as they consider appropriate for
the transfer of Shares of each Series or Class of each Series and similar
matters. The record books of the Trust as kept by the Trust or any transfer or
similar agent, as the case may be, shall be conclusive as to the identity of the
Shareholders of each Series or Class of each Series and as to the number of
Shares of each Series or Class held from time to time by each.
Section 3. Investments in the Trust. Investments may be
accepted by the Trust from such Persons, at such times, on such terms, and for
such consideration as the Trustees from time to time may authorize.
Section 4. Status of Shares and Limitation of Personal
Liability. Shares shall be deemed to be personal property giving only the rights
provided in this instrument. Every Shareholder, by virtue of having become a
Shareholder, shall be held to have expressly assented and agreed to the terms
hereof and to have become a party hereto. The death of a Shareholder during the
existence of the Trust shall not operate to terminate the Trust, nor entitle the
representative of any deceased Shareholder to an accounting or to take any
action in court or elsewhere against the Trust or the Trustees, but entitles
such representative only to the rights of said deceased Shareholder under this
Trust. Ownership of Shares shall not entitle the Shareholder to any title in or
to the whole or any part of the Trust Property or right to call for a partition
or division of the same or for an accounting, nor shall the ownership of Shares
constitute the Shareholders as partners. Neither the Trust nor the Trustees, nor
any officer, employee or agent of the Trust shall have any power to bind
personally any Shareholder, nor, except as specifically provided herein, to call
upon any Shareholder for the payment of any sum of money or assessment
whatsoever other than such as the Shareholder may at any time personally agree
to pay.
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Section 5. Power of Board of Trustees to Change Provisions
Relating to Shares. Notwithstanding any other provision of this Declaration of
Trust and without limiting the power of the Board of Trustees to amend the
Declaration of Trust as provided elsewhere herein, the Board of Trustees shall
have the power to amend this Declaration of Trust, at any time and from time to
time, in such manner as the Board of Trustees may determine in their sole
discretion, without the need for Shareholder action, so as to add to, delete,
replace or otherwise modify any provisions relating to the Shares contained in
this Declaration of Trust, provided that before adopting any such amendment
without Shareholder approval the Board of Trustees shall determine that it is
consistent with the fair and equitable treatment of all Shareholders or that
Shareholder approval is not otherwise required by the Investment Company Act or
other applicable law. If Shares have been issued, Shareholder approval shall be
required to adopt any amendments to this Declaration of Trust that would
adversely affect to a material degree the rights and preferences of the Shares
of any Series or Class of any Series or to increase or decrease the par value of
the Shares of any Series or Class of any Series.
Subject to the foregoing Paragraph, the Board of Trustees may
amend the Declaration of Trust to amend any of the provisions set forth in
paragraphs (a) through (i) of Section 6 of this Article III.
Section 6. Establishment and Designation of Series and
Classes. The establishment and designation of any Series or Class of Shares
shall be effective upon the resolution by a majority of the then Trustees,
adopting a resolution that sets forth such establishment and designation and the
relative rights and preferences of such Series or Class. Each such resolution
shall be incorporated herein by reference upon adoption.
Shares of each Series or Class established pursuant to this
Section 6, unless otherwise provided in the resolution establishing such Series,
shall have the following relative rights and preferences:
(a) Assets Held with Respect to a Particular Series. All
consideration received by the Trust for the issue or sale of Shares of a
particular Series, together with all assets in which such consideration is
invested or reinvested, all income, earnings, profits, and proceeds thereof from
whatever source derived, including, without limitation, any proceeds derived
from the sale, exchange or liquidation of such assets, and any funds or payments
derived from any reinvestment of such proceeds in whatever form the same may be,
shall irrevocably be held with respect to that Series for all purposes, subject
only to the rights of creditors, and shall be so recorded upon the books of
account of the Trust. Such consideration, assets, income,
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earnings, profits and proceeds thereof, from whatever source derived, including,
without limitation, any proceeds derived from the sale, exchange or liquidation
of such assets, and any funds or payments derived from any reinvestment of such
proceeds, in whatever form the same may be, are herein referred to as "assets
held with respect to" that Series. In the event that there are any assets,
income, earnings, profits and proceeds thereof, funds or payments which are not
readily identifiable as assets held with respect to any particular Series
(collectively "General Assets"), the Trustees shall allocate such General Assets
to, between or among any one or more of the Series in such manner and on such
basis as the Trustees, in their sole discretion, deem fair and equitable, and
any General Asset so allocated to a particular Series shall be held with respect
to that Series. Each such allocation by the Trustees shall be conclusive and
binding upon the Shareholders of all Series for all purposes.
(b) Liabilities Held With Respect to a Particular Series or
Class. The assets of the Trust held with respect to each particular Series shall
be charged against the liabilities of the Trust held with respect to that Series
and all expenses, costs, charges and reserves attributable to that Series.
Specific Classes within each Series shall be charged with the liabilities,
expenses, costs, charges and reserves attributable to that Class. Any general
liabilities of the Trust which are not readily identifiable as being held with
respect to any particular Series, or within a Series, to any particular Class
shall be allocated and charged by the Trustees to and among any one or more of
the Series or Classes in such manner and on such basis as the Trustees in their
sole discretion deem fair and equitable. The liabilities, expenses, costs,
charges, and reserves so charged to a Series or Class are herein referred to as
"liabilities held with respect to" that Series or Class. Each allocation of
liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the holders of all Series and Classes for all
purposes. All Persons who have extended credit which has been allocated to a
particular Series, or who have a claim or contract which has been allocated to
any particular Series, shall look, and shall be required by contract to look
exclusively, to the assets of that particular Series for payment of such credit,
claim, or contract. In the absence of an express contractual agreement so
limiting the claims of such creditors, claimants and contract providers, each
creditor, claimant and contract provider will be deemed nevertheless to have
impliedly agreed to such limitation unless an express provision to the contrary
has been incorporated in the written contract or other document establishing the
claimant relationship.
(c) Dividends, Distributions, Redemptions and Repurchases.
Notwithstanding any other provisions of this Declaration of Trust, including,
without limitation, Article VI,
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no dividend or distribution including, without limitation, any distribution paid
upon termination of the Trust or of any Series or Class with respect to, nor any
redemption or repurchase of, the Shares of any Series or Class shall be effected
by the Trust other than from the assets held with respect to such Series, nor,
except as specifically provided in Section 7 of this Article III, shall any
Shareholder of any particular Series or Class within such Series otherwise have
any right or claim against the assets held with respect to any other Series
except to the extent that such Shareholder has such a right or claim hereunder
as a Shareholder of such other Series. The Trustees shall have full discretion,
to the extent not inconsistent with the Investment Company Act, to determine
which items shall be treated as income and which items as capital; and each such
determination and allocation shall be conclusive and binding upon the
Shareholders.
(d) Voting. All Shares of the Trust entitled to vote on a
matter shall vote separately by Series (and, if applicable, by Class): that is,
the Shareholders of each Series or Class shall have the right to approve or
disapprove matters affecting the Trust and each respective Series or Class as if
the Series or Classes were separate companies. There are, however, two
exceptions to voting by separate Series or Classes. First, if the Investment
Company Act requires all Shares of the Trust to be voted in the aggregate
without differentiation between the separate Series or Classes, then all the
Trust's Shares shall be entitled to vote based on the dollar value of their
Shares as described below in Article V, Section 1. Second, if any matter affects
only the interests of some but not all Series or Classes, then only the
Shareholders of such affected Series or Classes shall be entitled to vote on the
matter.
(e) Equality. All the Shares of each particular Series shall
represent an equal proportionate interest in the assets held with respect to
that Series (subject to the liabilities held with respect to particular Classes
within that Series and such rights and preferences as may have been established
and designated with respect to Classes of Shares within such Series), and,
except for rights and preference among Classes, each Share of any particular
Series shall be equal to each other Share of that Series.
(f) Fractions. Any fractional Share of a Series or Class shall
carry proportionately all the rights and obligations of a whole share of that
Series, including rights with respect to voting, receipt of dividends and
distributions, redemption of Shares and termination of the Trust.
(g) Exchange Privilege. The Trustees shall have the authority
to provide that the holders of Shares of any Series and Class shall have the
right to exchange said Shares for Shares of one or more other Series of Shares
or Classes of the same Series
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in accordance with such requirements and procedures as may be established by the
Trustees.
(h) Combination of Series. The Trustees shall have the
authority, without the approval of the Shareholders of any Series unless
otherwise required by applicable law, to combine the assets and liabilities held
with respect to any two or more Series or Classes into assets and liabilities
held with respect to a single Series or Class.
(i) Elimination of Series. At any time that there are no
Shares outstanding of any particular Series or Class previously established and
designated, the Trustees may by resolution of a majority of the then Trustees
abolish that Series or Class and rescind the establishment and designation
thereof.
Section 7. Indemnification of Shareholders. If any Shareholder
or former Shareholder shall be exposed to liability by reason of a claim or
demand relating to his or her being or having been a Shareholder, and not
because of his or her acts or omissions, the Shareholder or former Shareholder
(or his or her heirs, executors, administrators, or other legal representatives
or in the case of a corporation or other entity, its corporate or other general
successor) shall be entitled to be held harmless from and indemnified out of the
assets of the applicable Series of the Trust against all loss and expense
arising from such claim or demand.
ARTICLE IV
The Board of Trustees
Section 1. Number, Election and Tenure. The number of Trustees
constituting the Board of Trustees shall be fixed from time to time by a written
instrument signed, or by resolution approved at a duly constituted meeting, by a
majority of the Board of Trustees, provided, however, that the number of
Trustees shall in no event be fewer than one (1) nor more than fifteen (15). The
Board of Trustees, by action of a majority of the then Trustees at a duly
constituted meeting, may fill vacancies in the Board of Trustees or remove
Trustees with or without cause. Each Trustee shall serve during the continued
lifetime of the Trust until he or she dies, resigns, is declared bankrupt or
incompetent by a court of appropriate jurisdiction, or is removed, or, if
sooner, until the next meeting of Shareholders called for the purpose of
electing Trustees and until the election and qualification of his or her
successor. Any Trustee may resign at any time by written instrument signed by
him or her and delivered to any officer of the Trust or to a meeting of the
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Trustees. Such resignation shall be effective upon receipt unless specified to
be effective at some other time. Except to the extent expressly provided in a
written agreement with the Trust, no Trustee resigning and no Trustee removed
shall have any right to any compensation for any period following his or her
resignation or removal, or any right to damages on account of such removal. The
Shareholders may fix the number of Trustees and elect Trustees at any meeting of
Shareholders called by the Trustees for that purpose. Any Trustee may be removed
at any meeting of Shareholders by a vote of two-thirds of the Voting Interests
of the Trust as defined in Article I, Section 2(n). A meeting of Shareholders
for the purpose of electing or removing one or more Trustees may be called (i)
by the Trustees upon their own vote, or (ii) upon the demand of Shareholders
owning 10% or more of the Voting Interests of the Trust as defined in Article I,
Section 2(n).
Section 2. Effect of Death, Resignation, etc. of a Trustee.
The death, declination, resignation, retirement, removal, or incapacity of one
or more Trustees, or all of them, shall not operate to annul the Trust or to
revoke any existing agency created pursuant to the terms of this Declaration of
Trust. Whenever a vacancy in the Board of Trustees shall occur, until such
vacancy is filled as provided in Article IV, Section l, the Trustees in office,
regardless of their number, shall have all the powers granted to the Trustees
and shall discharge all the duties imposed upon the Trustees by this Declaration
of Trust. As conclusive evidence of such vacancy, a written instrument
certifying the existence of such vacancy may be executed by an officer of the
Trust or by a majority of the Board of Trustees. In the event of the death,
declination, resignation, retirement, removal, or incapacity of all the then
Trustees within a short period of time and without the opportunity for at least
one Trustee being able to appoint additional Trustees to fill vacancies, the
Trust's Investment Adviser(s) are empowered to appoint new Trustees subject to
the provisions of Section 16(a) of the Investment Company Act.
Section 3. Powers. Subject to the provisions of this
Declaration of Trust, the business of the Trust shall be managed by the Board of
Trustees, and such Board shall have all powers necessary or convenient to carry
out that responsibility, including the power to engage in securities
transactions of all kinds on behalf of the Trust. Without limiting the
foregoing, the Trustees may: adopt By-Laws not inconsistent with this
Declaration of Trust providing for the regulation and management of the affairs
of the Trust and may amend and repeal them to the extent that such By-Laws do
not reserve that right to the Shareholders; fill vacancies in or remove from
their number, and may elect and remove such officers and appoint and terminate
such agents as they consider appropriate; appoint from their own number and
establish and terminate one or more committees
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consisting of one or more Trustees, which may exercise the powers and authority
of the Board of Trustees to the extent that the Trustees determine; employ one
or more custodians of the assets of the Trust and may authorize such custodians
to employ subcustodians and to deposit all or any part of such assets in a
system or systems for the central handling of securities or with a Federal
Reserve Bank; retain an administrator and a portfolio adviser for each Series of
Shares; retain a transfer agent or a shareholder servicing agent, or both;
provide for the issuance and distribution of Shares by the Trust directly or
through one or more Principal Underwriters or otherwise; redeem, repurchase and
transfer Shares pursuant to applicable law; set record dates for the
determination of Shareholders with respect to various matters; declare and pay
dividends and distributions to Shareholders of each Series from the assets of
such Series; and, in general, delegate such authority as they consider desirable
to any officer of the Trust, to any committee of the Trustees and to any agent
or employee of the Trust or to any such custodian, transfer or shareholder
servicing agent, or Principal Underwriter. Any determination as to what is in
the interests of the Trust made by the Trustees in good faith shall be
conclusive. In construing the provisions of this Declaration of Trust, the
presumption shall be in favor of a grant of power to the Trustees. Unless
otherwise specified or required by law, any action by the Board of Trustees
shall be deemed effective if approved or taken by a majority of the Trustees
then in office.
Without limiting the foregoing, the Trust shall have power and
authority:
(a) To invest and reinvest cash, to hold cash uninvested, and
to subscribe for, invest in, reinvest in, purchase or otherwise acquire, own,
hold, pledge, sell, assign, transfer, exchange, distribute, write options on,
lend or otherwise deal in or dispose of contracts for the future acquisition or
delivery of fixed income or other securities, and securities of every nature and
kind, including, without limitation, all types of bonds, debentures, stocks,
negotiable or non-negotiable instruments, obligations, evidences of
indebtedness, certificates of deposit or indebtedness, commercial paper,
repurchase agreements, bankers' acceptances, and other securities of any kind,
issued, created, guaranteed, or sponsored by any and all Persons, including,
without limitation, states, territories, and possessions of the United States
and the District of Columbia and any political subdivision, agency, or
instrumentality thereof, any foreign government or any political subdivision of
the U.S. Government or any foreign government, or any international
instrumentality, or by any bank or savings institution, or by any corporation or
organization organized under the laws of the United States or of any state,
territory, or possession thereof, or by any corporation or organization
organized under any foreign law, or in "when issued" contracts
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for any such securities, to change the investments of the assets of the Trust;
and to exercise any and all rights, powers, and privileges of ownership or
interest in respect of any and all such investments of every kind and
description, including, without limitation, the right to consent and otherwise
act with respect thereto, with power to designate one or more Persons, to
exercise any of said rights, powers, and privileges in respect of any of said
instruments;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate,
lease, or write options with respect to or otherwise deal in any property rights
relating to any or all of the assets of the Trust or any Series;
(c) To vote or give assent, or exercise any rights of
ownership, with respect to stock or other securities or property; and to execute
and deliver proxies or powers of attorney to such person or persons as the
Trustees shall deem proper, granting to such person or persons such power and
discretion with relation to securities or property as the Trustees shall deem
proper;
(d) To exercise powers and right of subscription or otherwise
which in any manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating
any trust, whether in bearer, unregistered or other negotiable form, or in its
own name or in the name of a custodian or subcustodian or a nominee or nominees
or otherwise;
(f) To consent to or participate in any plan for the
reorganization, consolidation or merger of any corporation or issuer of any
security which is held in the Trust; to consent to any contract, lease,
mortgage, purchase or sale of property by such corporation or issuer; and to pay
calls or subscriptions with respect to any security held in the Trust;
(g) To join with other security holders in acting through a
committee, depositary, voting trustee or otherwise, and in that connection to
deposit any security with, or transfer any security to, any such committee,
depositary or trustee, and to delegate to them such power and authority with
relation to any security (whether or not so deposited or transferred) as the
Trustees shall deem proper, and to agree to pay, and to pay, such portion of the
expenses and compensation of such committee, depositary or trustee as the
Trustees shall deem proper;
(h) To compromise, arbitrate or otherwise adjust claims in
favor of or against the Trust or any matter in controversy, including but not
limited to claims for taxes;
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(i) To enter into joint ventures, general or limited
partnerships and any other combinations or associations;
(j) To borrow funds or other property in the name of the Trust
exclusively for Trust purposes;
(k) To endorse or guarantee the payment of any notes or other
obligations of any Person; to make contracts of guaranty or suretyship, or
otherwise assume liability for payment thereof;
(l) To purchase and pay for entirely out of Trust Property
such insurance as the Trustees may deem necessary or appropriate for the conduct
of the business, including, without limitation, insurance policies insuring the
assets of the Trust or payment of distributions and principal on its portfolio
investments, and insurance policies insuring the Shareholders, Trustees,
officers, employees, agents, investment advisers, principal underwriters, or
independent contractors of the Trust, individually against all claims and
liabilities of every nature arising by reason of holding Shares, holding, being
or having held any such office or position, or by reason of any action alleged
to have been taken or omitted by any such Person as Trustee, officer, employee,
agent, investment adviser, principal underwriter, or independent contractor,
including any action taken or omitted that may be determined to constitute
negligence, whether or not the Trust would have the power to indemnify such
Person against liability; and
(m) To adopt, establish and carry out pension, profit-sharing,
share bonus, share purchase, savings, thrift and other retirement, incentive and
benefit plans, trusts and provisions, including the purchasing of life insurance
and annuity contracts as a means of providing such retirement and other
benefits, for any or all of the Trustees, officers, employees and agents of the
Trust.
The Trust shall not be limited to investing in obligations
maturing before the possible termination of the Trust or one or more of its
Series. The Trust shall not in any way be bound or limited by any present or
future law or custom in regard to investment by fiduciaries. The Trust shall not
be required to obtain any court order to deal with any assets of the Trust or
take any other action hereunder.
Section 4. Payment of Expenses by the Trust. The Trustees are
authorized to pay or cause to be paid out of the principal or income of the
Trust, or partly out of the principal and partly out of income, as they deem
fair, all expenses, fees, charges, taxes and liabilities incurred or arising in
connection with the Trust, or in connection with the management thereof,
including, but not limited to, the Trustees' compensation and such expenses and
charges for the services of the Trust's
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<PAGE>
officers, employees, investment adviser or manager, principal underwriter,
auditors, counsel, custodian, transfer agent, Shareholder servicing agent, and
such other agents or independent contractors and such other expenses and charges
as the Trustees may deem necessary or proper to incur.
Section 5. Payment of Expenses by Shareholders. The Trustees
shall have the power, as frequently as they may determine, to cause each
Shareholder, or each Shareholder of any particular Series, to pay directly, in
advance or arrears, for charges of the Trust's custodian or transfer,
Shareholder servicing or similar agent, an amount fixed from time to time by the
Trustees, by setting off such charges due from such Shareholder from declared
but unpaid dividends owed such Shareholder and/or by reducing the number of
shares in the account of such Shareholder by that number of full and/or
fractional Shares which represents the outstanding amount of such charges due
from such Shareholder.
Section 6. Ownership of Assets of the Trust. Title to all of
the assets of the Trust shall at all times be considered as vested in the Trust,
except that the Trustees shall have power to cause legal title to any Trust
Property to be held by or in the name of one or more of the Trustees, or in the
name of the Trust, or in the name of any other Person as nominee, on such terms
as the Trustees may determine. The right, title and interest of the Trustees in
the Trust Property shall vest automatically in each Person who may hereafter
become a Trustee. Upon the resignation, removal or death of a Trustee, he or she
shall automatically cease to have any right, title or interest in any of the
Trust Property, and the right, title and interest of such Trustee in the Trust
Property shall vest automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective whether or not conveyancing documents has
been executed and delivered.
Section 7. Service Contracts.
(a) Subject to such requirements and restrictions as may be
set forth in the By-Laws, the Trustees may, at any time and from time to time,
contract for exclusive or nonexclusive advisory, management and/or
administrative services for the Trust or for any Series with any corporation,
trust, association or other organization; and any such contract may contain such
other terms as the Trustees may determine, including without limitation,
authority for the Investment Adviser or administrator to determine from time to
time without prior consultation with the Trustees what investments shall be
purchased, held, sold or exchanged and what portion, if any, of the assets of
the Trust shall be held uninvested and to make changes in the Trust's
investments, or such other activities as may specifically be delegated to such
party.
-13-
<PAGE>
(b) The Trustees may also, at any time and from time to time,
contract with any corporation, trust, association or other organization,
appointing it exclusive or nonexclusive distributor or Principal Underwriter for
the Shares of one or more of the Series or Classes or other securities to be
issued by the Trust. Every such contract shall comply with such requirements and
restrictions as may be set forth in the By-Laws; and any such contract may
contain such other terms as the Trustees may determine.
(c) The Trustees are also empowered, at any time and from time
to time, to contract with any corporations, trusts, associations or other
organizations, appointing it or them the custodian, transfer agent and/or
shareholder servicing agent for the Trust or one or more of its Series. Every
such contract shall comply with such requirements and restrictions as may be set
forth in the By-Laws or stipulated by resolution of the Trustees.
(d) The Trustees are further empowered, at any time and from
time to time, to contract with any entity to provide such other services to the
Trust or one or more of the Series, as the Trustees determine to be in the best
interests of the Trust and the applicable Series.
(e) The fact that:
(i) any of the Shareholders, Trustees, or officers of
the Trust is a shareholder, director, officer, partner,
trustee, employee, investment adviser, manager, principal
underwriter, distributor, or affiliate or agent of or for any
corporation, trust, association, or other organization, or for
any parent or affiliate of any organization with which an
advisory, management or administration contract, or principal
underwriter's or distributor's contract, or transfer,
shareholder servicing or other type of service contract may
have been or may hereafter be made, or that any such
organization, or any parent or affiliate thereof, is a
Shareholder or has an interest in the Trust, or
(ii) any corporation, trust, association or other
organization with which an advisory, management or
administration contract or principal underwriter's or
distributor's contract, or transfer, shareholder servicing or
other type of service contract may have been or may hereafter
be made also has an advisory, management or administration
contract, or principal underwriter's or distributor's
contract, or transfer, shareholder servicing or other service
contract with one or more other corporations, trusts,
associations,
-14-
<PAGE>
or other organizations, or has other business or interests,
shall not affect the validity of any such contract or disqualify any
Shareholder, Trustee or officer of the Trust from voting upon or executing the
same, or create any liability or accountability to the Trust or its
Shareholders, provided approval of each such contract is made pursuant to the
requirements of the Investment Company Act.
ARTICLE V
Shareholders' Voting Powers and Meetings
Section 1. Voting Powers. Subject to the provisions of Article
III, Section 6(d), the Shareholders shall have power to vote only (i) for the
election or removal of Trustees as provided in Article IV, Section 1, and (ii)
with respect to such additional matters relating to the Trust as may be required
by this Declaration of Trust, the By-Laws or any registration of the Trust with
the Commission (or any successor agency) or any state, or as the Trustees may
consider necessary or desirable. As appropriate, voting may be by Series or
Class. A Shareholder of each Series shall be entitled to one vote for each
dollar of net asset value (number of Shares owned times net asset value per
Share) per Share of such Series, on any matter on which such Shareholder is
entitled to vote and each fractional dollar amount shall be entitled to a
proportionate fractional vote. There shall be no cumulative voting in the
election of Trustees. Shares may be voted in person or by proxy. A proxy with
respect to Shares held in the name of two or more persons shall be valid if
executed by any one of them unless at or prior to exercise of the proxy the
Trust receives a specific written notice to the contrary from any one of them. A
proxy purporting to be executed by or on behalf of a Shareholder shall be deemed
valid unless challenged at or prior to its exercise and the burden of proving
invalidity shall rest on the challenger.
Section 2. Voting Power and Meetings. Meetings of the
Shareholders may be called by the Trustees for the purpose of electing Trustees
as provided in Article IV, Section l and for such other purposes as may be
prescribed by law, by this Declaration of Trust or by the By-Laws. Meetings of
the Shareholders may also be called by the Trustees from time to time for the
purpose of taking action upon any other matter deemed by the Trustees to be
necessary or desirable. A meeting of Shareholders may be held at any place
designated by the Trustees. Written notice of any meeting of Shareholders shall
be given or caused to be given by the Trustees by mailing such notice at least
seven (7) days before such meeting, postage prepaid, stating the time and place
of the meeting, to each Shareholder at
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<PAGE>
the Shareholder's address as it appears on the records of the Trust. Whenever
notice of a meeting is required to be given to a Shareholder under this
Declaration of Trust or the By-Laws, a written waiver thereof, executed before
or after the meeting by such Shareholder or his or her attorney thereunto
authorized and filed with the records of the meeting, shall be deemed equivalent
to such notice.
Section 3. Quorum and Required Vote. Except when a larger
quorum is required by applicable law, by the By-Laws or by this Declaration of
Trust, forty percent (40%) of the Voting Interests, as defined in Article I,
Section 2(o), entitled to vote shall constitute a quorum at a Shareholders'
meeting. When any one or more Series or Classes is to vote as a single Class
separate from any other Shares, forty percent (40%) of the Shares of each such
Series or Class entitled to vote shall constitute a quorum at a Shareholder's
meeting of that Series. Any meeting of Shareholders may be adjourned from time
to time by a majority of the Voting Interests, as defined in Article I, Section
2(o), properly cast upon the question of adjourning a meeting to another date
and time, whether or not a quorum is present, and the meeting may be held as
adjourned within a reasonable time after the date set for the original meeting
without further notice. Subject to the provisions of Article III, Section 6(d),
when a quorum is present at any meeting, a majority of the Voting Interests, as
defined in Article I, Section 2(o), voted shall decide any questions and a
plurality shall elect a Trustee, except when a larger vote is required by any
provision of this Declaration of Trust or the By-Laws or by applicable law.
Section 4. Action by Written Consent. Any action taken by
shareholders may be taken without a meeting if Shareholders holding a majority
of the Voting Interests, as defined in Article I, Section 2(o), entitled to vote
on the matter (or such larger proportion thereof as shall be required by any
express provision of this Declaration of Trust or by the ByLaws or by applicable
law) and holding a majority (or such larger proportion as aforesaid) of the
Shares of any Series or Class entitled to vote separately on the matter consent
to the action in writing and such written consents are filed with the records of
the meetings of Shareholders. Such consent shall be treated for all purposes as
a vote taken at a meeting of Shareholders.
Section 5. Record Dates. For the purpose of determining the
Shareholders of any Series or Class who are entitled to vote or act at any
meeting or any adjournment thereof, the Trustees may from time to time fix a
time, which shall be not more than ninety (90) days before the date of any
meeting of Shareholders, as the record date for determining the Shareholders of
such Series or Class having the right to notice of and to vote at such meeting
and any adjournment thereof, and in such case only Shareholders of record on
such record date
-16-
<PAGE>
shall have such right, notwithstanding any transfer of shares on the books of
the Trust after the record date. For the purpose of determining the Shareholders
of any Series or Class who are entitled to receive payment of any dividend or of
any other distribution, the Trustees may from time to time fix a date, which
shall be before the date for the payment of such dividend or such other payment,
as the record date for determining the Shareholders of such Series or Class
having the right to receive such dividend or distribution. Without fixing a
record date the Trustees may for voting and/or distribution purposes close the
register or transfer books for one or more Series for all or any part of the
period between a record date and a meeting of Shareholders or the payment of a
distribution. Nothing in this Section shall be construed as precluding the
Trustees from setting different record dates for different Series or Classes.
Section 6. Additional Provisions. The By-Laws may include
further provisions for Shareholders' votes and meetings and related matters.
ARTICLE VI
Net Asset Value, Distributions and Redemptions
Section 1. Determination of Net Asset Value, Net Income and
Distributions. Subject to Article III, Section 6 hereof, the Trustees, in their
absolute discretion, may prescribe and shall set forth in the By-laws or in a
duly adopted vote of the Trustees such bases and time for determining the
per-Share net asset value of the Shares of any Series and Class or net income
attributable to the Shares of any Series and Class, or the declaration and
payment of dividends and distributions on the Shares of any Series and Class, as
they may deem necessary or desirable.
Section 2. Redemptions and Repurchases. The Trust shall
purchase such Shares as are offered by any Shareholder for redemption, upon the
presentation of a proper instrument of transfer together with a request directed
to the Trust or a Person designated by the Trust that the Trust purchase such
Shares or in accordance with such other procedures for redemption as the
Trustees may from time to time authorize; and the Trust will pay therefor the
net asset value thereof, in accordance with the By-Laws and applicable law.
Payment for said Shares shall be made by the Trust to the Shareholder within
seven days after the date on which the request is made in proper form. The
obligation set forth in this Section 2 is subject to the provision that in the
event that any time the New York Stock Exchange (the "Exchange") is closed for
other than weekends or holidays, or if permitted by the Rules of the Commission
during periods when trading on the Exchange is restricted or during any
emergency
-17-
<PAGE>
which makes it impracticable for the Trust to dispose of the investments of the
applicable Series or to determine fairly the value of the net assets held with
respect to such Series or during any other period permitted by order of the
Commission for the protection of investors, such obligations may be suspended or
postponed by the Trustees.
The redemption price may in any case or cases be paid wholly
or partly in kind if the Trustees determine that such payment is advisable in
the interest of the remaining Shareholders of the Series for which the Shares
are being redeemed. Subject to the foregoing, the fair value, selection and
quantity of securities or other property so paid or delivered as all or part of
the redemption price may be determined by or under authority of the Trustees. In
no case shall the Trust be liable for any delay of any corporation or other
Person in transferring securities selected for delivery as all or part of any
payment in kind.
Section 3. Redemptions at the Option of the Trust. The Trust
shall have the right, at its option and at any time, to redeem Shares of any
Shareholder at the net asset value thereof as described in Section 1 of this
Article VI: (i) if at such time such Shareholder owns Shares of any Series
having an aggregate net asset value of less than an amount determined from time
to time by the Trustees prior to the acquisition of said Shares; or (ii) to the
extent that such Shareholder owns Shares of a particular Series equal to or in
excess of a percentage of the outstanding Shares of that Series determined from
time to time by the Trustees; or (iii) to the extent that such Shareholder owns
Shares equal to or in excess of a percentage, determined from time to time by
the Trustees, of the outstanding Shares of the Trust or of any Series.
ARTICLE VII
Compensation and Limitation of Liability of Trustees
Section 1. Compensation. The Trustees as such shall be
entitled to reasonable compensation from the Trust, and they may fix the amount
of such compensation. Nothing herein shall in any way prevent the employment of
any Trustee for advisory, management, legal, accounting, investment banking or
other services and payment for the same by the Trust.
Section 2. Indemnification and Limitation of Liability. The
Trustees shall not be responsible or liable in any event for any neglect or
wrong-doing of any officer, agent, employee, Investment Adviser or principal
underwriter of the Trust, nor shall any Trustee be responsible for the act or
omission of any other Trustee, and the Trust out of its assets
-18-
<PAGE>
shall indemnify and hold harmless each and every Trustee from and against any
and all claims and demands whatsoever arising out of or related to each
Trustee's performance of his or her duties as a Trustee of the Trust; provided
that nothing herein contained shall indemnify, hold harmless or protect any
Trustee from or against any liability to the Trust or any Shareholder to which
he or she would otherwise be subject by reason of wilful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his or her office.
Every note, bond, contract, instrument, certificate or
undertaking and every other act or thing whatsoever issued, executed or done by
or on behalf of the Trust or the Trustees or any of them in connection with the
Trust shall be conclusively deemed to have been issued, executed or done only in
or with respect to their or his or her capacity as Trustees or Trustee, and such
Trustees or Trustee shall not be personally liable thereon.
Section 3. Trustee's Good Faith Action, Expert Advice, No Bond
or Surety. The exercise by the Trustees of their powers and discretion hereunder
shall be binding upon everyone interested. A Trustee shall be liable to the
Trust and to any Shareholder solely for his or her own wilful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee, and shall not be liable for errors of judgment
or mistakes of fact or law. The Trustees may take advice of counsel or other
experts with respect to the meaning and operation of this Declaration of Trust,
and shall be under no liability for any act or omission in accordance with such
advice nor for failing to follow such advice. The Trustees shall not be required
to give any bond as such, nor any surety if a bond is required.
Section 4. Insurance. The Trustees shall be entitled and
empowered to the fullest extent permitted by law to purchase with Trust assets
insurance for liability and 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 VIII
Miscellaneous
Section 1. Liability of Third Persons Dealing with Trustees.
No Person dealing with the Trustees shall be bound to make any inquiry
concerning the validity of any transaction made or to be made by the Trustees or
to see to the application of any
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<PAGE>
payments made or property transferred to the Trust or upon its order.
Section 2. Termination of Trust, Series or Class. Unless
terminated as provided herein, the Trust shall continue without limitation of
time. The Trust may be terminated at any time by vote of a majority of the
Shares of each Series entitled to vote, voting separately by Series, or by the
Trustees by written notice to the Shareholders. Any Series or Class (in the case
of a proposed termination of a Class) may be terminated at any time by vote of a
majority of the Shares of that Series or by the Trustees by written notice to
the Shareholders of that Series or Class.
Upon termination of the Trust (or any Series or Class, as the
case may be), after paying or otherwise providing for all charges, taxes,
expenses and liabilities held, severally, with respect to each Series and Class
(or the applicable Series or Class, as the case may be), whether due or accrued
or anticipated as may be determined by the Trustees, the Trust shall, in
accordance with such procedures as the Trustees consider appropriate, reduce the
remaining assets held, severally, with respect to each Series and Class (or the
applicable Series or Class, as the case may be), to distributable form in cash
or shares or other securities, or any combination thereof, and distribute the
proceeds held with respect to each Series and Class (or the applicable Series or
Class, as the case may be), to the Shareholders of that Series or Class, as a
Series or Class, ratably according to the number of Shares of that Series or
Class held by the several Shareholders on the date of termination.
Section 3. Merger and Consolidation. The Trustees may cause
(i) the Trust or one or more of its Series or Classes to the extent consistent
with applicable law to be merged into or consolidated with another trust or
company, (ii) the Shares of the Trust or any Series to be converted into
beneficial interests in another business trust (or series thereof) created
pursuant to this Section 3 of Article VIII, or (iii) the Shares to be exchanged
under or pursuant to any state or federal statute to the extent permitted by
law. Such merger or consolidation, Share conversion or Share exchange must be
authorized by vote of a majority of the Voting Interests of the Trust, as
defined in Article I, Section 2(o), as a whole, or any affected Series, as may
be applicable; provided that in all respects not governed by statute or
applicable law, the Trustees shall have the power to prescribe the procedure
necessary or appropriate to accomplish a sale of assets, merger or consolidation
including the power to create one or more separate business trusts to which all
or any part of the assets, liabilities, profits or losses of the Trust may be
transferred and to provide for the conversion of Shares of the Trust or any
Series into beneficial interests in such separate business trust or trusts (or
series thereof).
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<PAGE>
Section 4. Amendments. This Declaration of Trust may be
restated and/or amended at any time by an instrument in writing signed by a
majority of the then Trustees and, if required, by approval of such amendment by
Shareholders in accordance with Article V, Section 3 hereof. Any such
restatement and/or amendment hereto shall be effective immediately upon
execution and approval. The Certificate of Trust of the Trust may be restated
and/or amended by a similar procedure, and any such restatement and/or amendment
shall be effective immediately upon filing with the Office of the Secretary of
State of the State of Delaware or upon such future date as may be stated
therein.
Section 5. Filing of Copies, References, Headings. The
original or a copy of this instrument and of each restatement and/or amendment
hereto shall be kept at the office of the Trust where it may be inspected by any
Shareholder. Anyone dealing with the Trust may rely on a certificate by an
officer of the Trust as to whether or not any such restatements and/or
amendments have been made and as to any matters in connection with the Trust
hereunder; and, with the same effect as if it were the original, may rely on a
copy certified by an officer of the Trust to be a copy of this instrument or of
any such restatements and/or amendments. In this instrument and in any such
restatements and/or amendment, references to this instrument, and all
expressions like "herein," "hereof" and "hereunder," shall be deemed to refer to
this instrument as amended or affected by any such restatements and/or
amendments. Headings are placed herein for convenience of reference only and
shall not be taken as a part hereof or control or affect the meaning,
construction or effect of this instrument. Whenever the singular number is used
herein, the same shall include the plural; and the neuter, masculine and
feminine genders shall include each other, as applicable. This instrument may be
executed in any number of counterparts each of which shall be deemed an
original.
Section 6. Applicable Law. This Agreement and Declaration of
Trust is created under and is to be governed by and construed and administered
according to the laws of the State of Delaware and the Delaware Business Trust
Act, as amended from time to time (the "Act"). The Trust shall be a Delaware
business trust pursuant to such Act, and without limiting the provisions hereof,
the Trust may exercise all powers which are ordinarily exercised by such a
business trust.
Section 7. Provisions in Conflict with Law or
Regulations.
(a) The provisions of the Declaration of Trust are
severable, and if the Trustees shall determine, with the advice of counsel, that
any of such provisions is in conflict with the Investment Company Act, the
regulated investment company
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<PAGE>
provisions of the Internal Revenue Code or with other applicable laws and
regulations, the conflicting provision shall be deemed never to have constituted
a part of the Declaration of Trust; provided, however, that such determination
shall not affect any of the remaining provisions of the Declaration of Trust or
render invalid or improper any action taken or omitted prior to such
determination.
(b) If any provision of the Declaration of Trust
shall be held invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision in such jurisdiction and
shall not in any manner affect such provision in any other jurisdiction or any
other provision of the Declaration of Trust in any jurisdiction.
Section 8. Business Trust Only. It is the intention of the
Trustees to create a business trust pursuant to the Delaware Business Trust Act,
as amended from time to time (the "Act"), and thereby to create only the
relationship of trustee and beneficial owners within the meaning of such Act
between the Trustees and each Shareholder. It is not the intention of the
Trustees to create a general partnership, limited partnership, joint stock
association, corporation, bailment, or any form of legal relationship other than
a business trust pursuant to such Act. Nothing in this Declaration of Trust
shall be construed to make the Shareholders, either by themselves or with the
Trustees, partners or members of a joint stock association.
Section 9. Use of the Identifying Words "Kayne" and
"Anderson." The identifying words "Kayne" and "Anderson" and all rights to the
use of such identifying words belong to Kayne Anderson Investment Management,
L.P., the proposed Investment Adviser for the Trust. Kayne Anderson Investment
Management, L.P. has licensed the Trust to use the identifying words "Kayne
Anderson" in the Trust's name and to use the identifying words "Kayne Anderson"
in the name of any series of the Trust. If Kayne Anderson Investment Management,
L.P. or an affiliate of Kayne Anderson Investment Management, L.P. is not
appointed or ceases to be the Investment Adviser for the Trust, the
non-exclusive license may be revoked by Kayne Anderson Investment Management,
L.P., and the Trust and any series thereof shall respectively cease using the
identifying words "Kayne" and "Anderson," unless otherwise consented to by Kayne
Anderson Investment Management, L.P. or any successor to Kayne Anderson
Investment Management, L.P.'s interest.
[REMAINDER OF PAGE LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, the initial Trustee named below does hereby make
and enter into this Declaration of Trust as of the 24th day of May 1996.
/s/ Eric M. Banhazl
--------------------------
Eric M. Banhazl
Suite 101
2025 East Financial Way
Glendora, California 91741
THE PRINCIPAL PLACE OF BUSINESS OF THE TRUST IS 1800 AVENUE OF THE STARS, SECOND
FLOOR, LOS ANGELES, CALIFORNIA, 90067.
EXHIBIT 2
BY-LAWS
<PAGE>
BY-LAWS
-------
for the regulation, except as
otherwise provided by statute or in
the Agreement and Declaration of Trust,
OF
KAYNE ANDERSON MUTUAL FUNDS
A Delaware Business Trust
(as of May 24, 1996)
<PAGE>
TABLE OF CONTENTS
-----------------
BY-LAWS
KAYNE ANDERSON MUTUAL FUNDS
Page
----
ARTICLE I OFFICES.................................-1-
Section 1. PRINCIPAL OFFICE..............................-1-
Section 2. DELAWARE OFFICE...............................-1-
Section 3. OTHER OFFICES.................................-1-
ARTICLE II MEETINGS OF SHAREHOLDERS.........................-1-
Section 1. PLACE OF MEETINGS.............................-1-
Section 2. CALL OF MEETING...............................-1-
Section 3. NOTICE OF SHAREHOLDERS' MEETING...............-1-
Section 4. MANNER OF GIVING NOTICE; AFFIDAVIT OF
NOTICE..................................-2-
Section 5. ADJOURNED MEETING; NOTICE.....................-2-
Section 6. VOTING........................................-3-
Section 7. WAIVER OF NOTICE BY CONSENT OF ABSENT
SHAREHOLDERS............................-3-
Section 8. SHAREHOLDER ACTION BY WRITTEN CONSENT
WITHOUT A MEETING.......................-4-
Section 9. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING
AND GIVING CONSENTS.....................-4-
Section 10. PROXIES......................................-5-
Section 11. INSPECTORS OF ELECTION.......................-5-
ARTICLE III TRUSTEES.........................................-6-
Section 1. POWERS........................................-6-
Section 2. NUMBER OF TRUSTEES............................-6-
Section 3. VACANCIES.....................................-6-
Section 4. PLACE OF MEETINGS AND MEETINGS BY
TELEPHONE...............................-7-
Section 5. REGULAR MEETINGS..............................-7-
Section 6. SPECIAL MEETINGS..............................-7-
Section 7. QUORUM........................................-8-
Section 8. WAIVER OF NOTICE..............................-8-
Section 9. ADJOURNMENT...................................-8-
Section 10. NOTICE OF ADJOURNMENT.........................-8-
Section 11. ACTION WITHOUT A MEETING......................-8-
Section 12. FEES AND COMPENSATION OF TRUSTEES.............-8-
Section 13. DELEGATION OF POWER TO OTHER TRUSTEES.........-9-
ARTICLE IV COMMITTEES.......................................-9-
Section 1. COMMITTEES OF TRUSTEES........................-9-
Section 2. MEETINGS AND ACTION OF COMMITTEES............-10-
ARTICLE V OFFICERS...............................-10-
Section 1. OFFICERS.....................................-10-
-i-
<PAGE>
TABLE OF CONTENTS
-----------------
(continued)
Page
----
Section 2. ELECTION OF OFFICERS.........................-10-
Section 3. SUBORDINATE OFFICERS.........................-10-
Section 4. REMOVAL AND RESIGNATION OF OFFICERS..........-11-
Section 5. VACANCIES IN OFFICES.........................-11-
Section 6. CHAIRMAN OF THE BOARD........................-11-
Section 7. PRESIDENT....................................-11-
Section 8. VICE PRESIDENTS..............................-12-
Section 9. SECRETARY....................................-12-
Section 10. TREASURER....................................-12-
ARTICLE VI INDEMNIFICATION OF TRUSTEES OFFICERS,
EMPLOYEES AND OTHER AGENTS......................-13-
Section 1. AGENTS, PROCEEDINGS AND EXPENSES.............-13-
Section 2. ACTIONS OTHER THAN BY TRUST..................-13-
Section 3. ACTIONS BY THE TRUST.........................-14-
Section 4. EXCLUSION OF INDEMNIFICATION.................-14-
Section 5. SUCCESSFUL DEFENSE BY AGENT..................-15-
Section 6. REQUIRED APPROVAL............................-15-
Section 7. ADVANCE OF EXPENSES..........................-15-
Section 8. OTHER CONTRACTUAL RIGHTS.....................-15-
Section 9. LIMITATIONS..................................-16-
Section 10. INSURANCE....................................-16-
Section 11. FIDUCIARIES OF EMPLOYEE BENEFIT PLAN.........-16-
ARTICLE VII RECORDS AND REPORTS.............................-16-
Section 1. MAINTENANCE AND INSPECTION OF SHARE
REGISTER...............................-16-
Section 2. MAINTENANCE AND INSPECTION OF BY-LAWS........-17-
Section 3. MAINTENANCE AND INSPECTION OF OTHER
RECORDS................................-17-
Section 4. INSPECTION BY TRUSTEES.......................-17-
Section 5. FINANCIAL STATEMENTS.........................-17-
ARTICLE VIII GENERAL MATTERS.................................-18-
Section 1. CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS.....-18-
Section 2. CONTRACTS AND INSTRUMENTS; HOW EXECUTED......-18-
Section 3. CERTIFICATES FOR SHARES......................-18-
Section 4. LOST CERTIFICATES............................-18-
Section 5. REPRESENTATION OF SHARES OF OTHER ENTITIES
HELD BY TRUST..........................-19-
Section 6. FISCAL YEAR..................................-19-
ARTICLE IX AMENDMENTS......................................-19-
Section l. AMENDMENT BY SHAREHOLDERS....................-19-
Section 2. AMENDMENT BY TRUSTEES........................-19-
Section 3. INCORPORATION BY REFERENCE INTO AGREEMENT
AND DECLARATION OF TRUST OF THE TRUST...........-19-
-ii-
<PAGE>
BY-LAWS
OF
KAYNE ANDERSON MUTUAL FUNDS
---------------------------
A Delaware Business Truse
ARTICLE I
OFFICES
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Section 1. PRINCIPAL OFFICE. The Board of Trustees shall fix and, from
time to time, may change the location of the principal executive office of the
KAYNE ANDERSON MUTUAL FUNDS (the "Trust") at any place within or outside the
State of Delaware.
Section 2. DELAWARE OFFICE. The Board of Trustees shall establish a
registered office in the State of Delaware and shall appoint as the Trust's
registered agent for service of process in the State of Delaware an individual
resident of the State of Delaware or a Delaware corporation or a corporation
authorized to transact business in the State of Delaware; in each case the
business office of such registered agent for service of process shall be
identical with the registered Delaware office of the Trust.
Section 3. OTHER OFFICES. The Board of Trustees may at any time
establish branch or subordinate offices at any place or places where the Trust
intends to do business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
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Section 1. PLACE OF MEETINGS. Meetings of shareholders shall be held at
any place designated by the Board of Trustees. In the absence of any such
designation, shareholders' meetings shall be held at the principal executive
office of the Trust.
Section 2. CALL OF MEETING. A meeting of the shareholders may be called
at any time by the Board of Trustees or by the Chairman of the Board or by the
President.
Section 3. NOTICE OF SHAREHOLDERS' MEETING. All notices of meetings of
shareholders shall be sent or otherwise given in accordance with Section 4 of
this Article II not less than seven (7) nor more than seventy-five (75) days
before the date of the meeting. The notice shall specify (i) the place, date and
hour of the meeting, and (ii) the general nature of the business to be
transacted. The notice of any meeting at which Trustees are to be elected also
shall include the name of any nominee or nominees
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whom at the time of the notice are intended to be presented for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a Trustee has a direct or indirect financial
interest, (ii) an amendment of the Trust's Agreement and Declaration of Trust,
(iii) a reorganization of the Trust, or (iv) a voluntary dissolution of the
Trust, the notice shall also state the general nature of that proposal.
Section 4. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any
meeting of shareholders shall be given either personally or by first-class mail
or telegraphic or other written communication, charges prepaid, addressed to the
shareholder at the address of that shareholder appearing on the books of the
Trust or its transfer agent or given by the shareholder to the Trust for the
purpose of notice. If no such address appears on the Trust's books or is given,
notice shall be deemed to have been given if sent to that shareholder by
first-class mail or telegraphic or other written communication to the Trust's
principal executive office, or if published at least once in a newspaper of
general circulation in the county where that office is located. Notice shall be
deemed to have been given at the time when delivered personally or deposited in
the mail or sent by telegram or other means of written communication.
If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the Trust is returned to the Trust by the
United States Postal Service marked to indicate that the Postal Service is
unable to deliver the notice to the shareholder at that address, all future
notices or reports shall be deemed to have been duly given without further
mailing if these shall be available to the shareholder on written demand of the
shareholder at the principal executive office of the Trust for a period of one
year from the date of the giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholder's meeting shall be executed by the Secretary, Assistant Secretary or
any transfer agent of the Trust giving the notice and shall be filed and
maintained in the minute book of the Trust.
Section 5. ADJOURNED MEETING; NOTICE. Any shareholder's meeting,
whether or not a quorum is present, may be adjourned from time to time by the
vote of the majority of the Voting Interests, as defined in Article I, Section
2(n) of the Agreement and Declaration of Trust of the Trust, represented at that
meeting, either in person or by proxy.
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When any meeting of shareholders is adjourned to another time or place,
notice need not be given of the adjourned meeting at which the adjournment is
taken, unless a new record date of the adjourned meeting is fixed or unless the
adjournment is for more than sixty (60) days from the date set for the original
meeting, in which case the Board of Trustees shall set a new record date. Notice
of any such adjourned meeting shall be given to each shareholder of record
entitled to vote at the adjourned meeting in accordance with the provisions of
Sections 3 and 4 of this Article II. At any adjourned meeting, the Trust may
transact any business which might have been transacted at the original meeting.
Section 6. VOTING. The shareholders entitled to vote at any meeting of
shareholders shall be determined in accordance with the provisions of the
Agreement and Declaration of Trust of the Trust, as in effect at such time. The
shareholders' vote may be by voice vote or by ballot, provided, however, that
any election for Trustees must be by ballot if demanded by any shareholder
before the voting has begun. On any matter other than elections of Trustees, any
shareholder may vote part of the shares in favor of the proposal and refrain
from voting the remaining shares or vote them against the proposal, but if the
shareholder fails to specify the number of shares which the shareholder is
voting affirmatively, it will be conclusively presumed that the shareholder's
approving vote is with respect to the total shares that the shareholder is
entitled to vote on such proposal.
Section 7. WAIVER OF NOTICE BY CONSENT OF ABSENT SHAREHOLDERS. The
transactions of the meeting of shareholders, however called and noticed and
wherever held, shall be as valid as though had at a meeting duly held after
regular call and notice if a quorum be present either in person or by proxy and
if either before or after the meeting, each person entitled to vote who was not
present in person or by proxy signs a written waiver of notice or a consent to a
holding of the meeting or an approval of the minutes. The waiver of notice or
consent need not specify either the business to be transacted or the purpose of
any meeting of shareholders.
Attendance by a person at a meeting shall also constitute a waiver of
notice of that meeting, except when the person objects at the beginning of the
meeting to the transaction of any business because the meeting is not lawfully
called or convened and except that attendance at a meeting is not a waiver of
any right to object to the consideration of matters not included in the notice
of the meeting if that objection is expressly made at the beginning of the
meeting.
Section 8. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any
action which may be taken at any meeting of
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shareholders may be taken without a meeting and without prior notice if a
consent in writing setting forth the action so taken is signed by the holders of
the Voting Interests, as defined in Article I, Section 2(n) in the Agreement and
Declaration of Trust of the Trust, having not less than the minimum number of
votes that would be necessary to authorize or take that action at a meeting at
which all shares entitled to vote on that action were present and voted. All
such consents shall be filed with the Secretary of the Trust and shall be
maintained in the Trust's records. Any shareholder giving a written consent or
the shareholder's proxy holder or a transferee of the shares or a personal
representative of the shareholder or their respective proxy holders may revoke
the consent by a writing received by the Secretary of the Trust before written
consents of the number of shares required to authorize the proposed action have
been filed with the Secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing and if the unanimous written consent of all such
shareholders shall not have been received, the Secretary shall give prompt
notice of the action approved by the shareholders without a meeting. This notice
shall be given in the manner specified in Section 4 of this Article II. In the
case of approval of (i) contracts or transactions in which a Trustee has a
direct or indirect financial interest, (ii) indemnification of agents of the
Trust, and (iii) a reorganization of the Trust, the notice shall be given at
least ten (10) days before the consummation of any action authorized by that
approval.
Section 9. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING AND GIVING
CONSENTS. For purposes of determining the shareholders entitled to notice of any
meeting or to vote or entitled to give consent to action without a meeting, the
Board of Trustees may fix in advance a record date which shall not be more than
ninety (90) days nor less than seven (7) days before the date of any such
meeting as provided in the Agreement and Declaration of Trust of the Trust.
If the Board of Trustees does not so fix a record date:
(a) The record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at
the close of business on the business day next preceding the
day on which notice is given or if notice is waived, at the
close of business on the business day next preceding the day
on which the meeting is held.
(b) The record date for determining shareholders entitled to give
consent to action in writing without a meeting, (i) when no
prior action by the Board of Trustees has
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been taken, shall be the day on which the first written
consent is given, or (ii) when prior action of the Board of
Trustees has been taken, shall be at the close of business on
the day on which the Board of Trustees adopt the resolution
relating to that action or the seventy-fifth day before the
date of such other action, whichever is later.
Section 10. PROXIES. Every person entitled to vote for Trustees or on
any other matter shall have the right to do so either in person or by one or
more agents authorized by a written proxy signed by the person and filed with
the Secretary of the Trust. A proxy shall be deemed signed if the shareholder's
name is placed on the proxy (whether by manual signature, typewriting,
telegraphic transmission or otherwise) by the shareholder or the shareholder's
attorney-in-fact. A validly executed proxy which does not state that it is
irrevocable shall continue in full force and effect unless (i) revoked by the
person executing it before the vote pursuant to that proxy by a writing
delivered to the Trust stating that the proxy is revoked or by a subsequent
proxy executed by or attendance at the meeting and voting in person by the
person executing that proxy; or (ii) written notice of the death or incapacity
of the maker of that proxy is received by the Trust before the vote pursuant to
that proxy is counted; provided however, that no proxy shall be valid after the
expiration of eleven (11) months from the date of the proxy unless otherwise
provided in the proxy.
Section 11. INSPECTORS OF ELECTION. Before any meeting of shareholders,
the Board of Trustees may appoint any persons other than nominees for office to
act as inspectors of election at the meeting or its adjournment. If no
inspectors of election are so appointed, the chairman of the meeting may and on
the request of any shareholder or a shareholder's proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one (1) or three (3). If inspectors are appointed at a meeting on the request of
one or more shareholders or proxies, the holders of a majority of shares or
their proxies present at the meeting shall determine whether one (1) or three
(3) inspectors are to be appointed. If any person appointed as inspector fails
to appear or fails or refuses to act, the Chairman of the meeting may and on the
request of any shareholder or a shareholder's proxy, shall appoint a person to
fill the vacancy.
These inspectors shall:
(a) Determine the number of shares outstanding and the voting
power of each, the shares represented at the meeting, the
existence of a quorum and the authenticity, validity and
effect of proxies;
(b) Receive votes, ballots or consents;
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(c) Hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) Count and tabulate all votes or consents;
(e) Determine when the polls shall close;
(f) Determine the result; and
(g) Do any other acts that may be proper to conduct the
election or vote with fairness to all shareholders.
ARTICLE III
TRUSTEES
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Section 1. POWERS. Subject to the applicable provisions of the
Agreement and Declaration of Trust of the Trust and these ByLaws relating to
action required to be approved by the shareholders or by the outstanding shares,
the business and affairs of the Trust shall be managed and all powers shall be
exercised by or under the direction of the Board of Trustees.
Section 2. NUMBER OF TRUSTEES. The exact number of Trustees within the
limits specified in the Agreement and Declaration of Trust of the Trust shall be
fixed from time to time by a written instrument signed or a resolution approved
at a duly constituted meeting by a majority of the Board of Trustees.
Section 3. VACANCIES. Vacancies in the Board of Trustees may be filled
by a majority of the remaining Trustees, though less than a quorum, or by a sole
remaining Trustee, unless the Board of Trustees calls a meeting of shareholders
for the purposes of electing Trustees. In the event that at any time less than a
majority of the Trustees holding office at that time were so elected by the
holders of the Voting Interests of the Trust as defined in Article I, Section
2(n) of the Agreement and Declaration of Trust of the Trust, the Board of
Trustees shall forthwith cause to be held as promptly as possible, and in any
event within sixty (60) days, a meeting of such holders for the purpose of
electing Trustees to fill any existing vacancies in the Board of Trustees,
unless such period is extended by order of the United States Securities and
Exchange Commission.
Notwithstanding the above, whenever and for so long as the Trust is a
participant in or otherwise has in effect a Plan under which the Trust may be
deemed to bear expenses of distributing its shares as that practice is described
in Rule 12b-1 under the Investment Company Act of 1940, then the selection and
nomination of the Trustees who are not interested persons of the Trust (as that
term is defined in the Investment Company Act of 1940) shall be, and is,
committed to the discretion of such disinterested Trustees.
Section 4. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. All meetings of
the Board of Trustees may be held at any place
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that has been designated from time to time by resolution of the Board. In the
absence of such a designation, regular meetings shall be held at the principal
executive office of the Trust. With the exception of meetings at which an
Investment Management Agreement, Portfolio Advisory Agreement or any
Distribution Plan adopted pursuant to Rule 12b-1 is approved by the Board, any
meeting, regular or special, may be held by conference telephone or similar
communication equipment, so long as all Trustees participating in the meeting
can hear one another and all such Trustees shall be deemed to be present in
person at the meeting.
Section 5. REGULAR MEETINGS. Regular meetings of the Board of Trustees
shall be held without call at such time as shall from time to time be fixed by
the Board of Trustees. Such regular meetings may be held without notice.
Section 6. SPECIAL MEETINGS. Special meetings of the Board of Trustees
for any purpose or purposes may be called at any time by the Chairman of the
Board or the President or any Vice President or the Secretary or any two (2)
Trustees.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each Trustee or sent by first-class mail or
telegram, charges prepaid, addressed to each Trustee at that Trustee's address
as it is shown on the records of the Trust. In case the notice is mailed, it
shall be deposited in the United States mail at least seven (7) calendar days
before the time of the holding of the meeting. In case the notice is delivered
personally or by telephone or to the telegraph company or by express mail or
similar service, it shall be given at least forty-eight (48) hours before the
time of the holding of the meeting. Any oral notice given personally or by
telephone may be communicated either to the Trustee or to a person at the office
of the Trustee whom the person giving the notice has reason to believe will
promptly communicate it to the Trustee. The notice need not specify the purpose
of the meeting or the place if the meeting is to be held at the principal
executive office of the Trust.
Section 7. QUORUM. A majority of the authorized number of Trustees
shall constitute a quorum for the transaction of business, except to adjourn as
provided in Section 10 of this Article III. Every act or decision done or made
by a majority of the Trustees present at a meeting duly held at which a quorum
is present shall be regarded as the act of the Board of Trustees, subject to the
provisions of the Trust's Agreement and Declaration of Trust. A meeting at which
a quorum is initially present may continue to transact business notwithstanding
the withdrawal of Trustees if any action taken is approved by a least a majority
of the required quorum for that meeting.
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Section 8. WAIVER OF NOTICE. Notice of any meeting need not be given to
any Trustee who either before or after the meeting signs a written waiver of
notice, a consent to holding the meeting, or an approval of the minutes. The
waiver of notice or consent need not specify the purpose of the meeting. All
such waivers, consents, and approvals shall be filed with the records of the
Trust or made a part of the minutes of the meeting. Notice of a meeting shall
also be deemed given to any Trustee who attends the meeting without protesting
before or at its commencement the lack of notice to that Trustee.
Section 9. ADJOURNMENT. A majority of the Trustees present, whether or
not constituting a quorum, may adjourn any meeting to another time and place.
Section 10. NOTICE OF ADJOURNMENT. Notice of the time and place of
holding an adjourned meeting need not be given unless the meeting is adjourned
for more than forty-eight (48) hours, in which case notice of the time and place
shall be given before the time of the adjourned meeting in the manner specified
in Section 7 of this Article III to the Trustees who were present at the time of
the adjournment.
Section 11. ACTION WITHOUT A MEETING. With the exception of the
approval of an investment management agreement, portfolio advisory agreement, or
any distribution plan adopted pursuant to Rule 12b-1, any action required or
permitted to be taken by the Board of Trustees may be taken without a meeting if
a majority of the members of the Board of Trustees shall individually or
collectively consent in writing to that action. Such action by written consent
shall have the same force and effect as a majority vote of the Board of
Trustees. Such written consent or consents shall be filed with the minutes of
the proceedings of the Board of Trustees.
Section 12. FEES AND COMPENSATION OF TRUSTEES. Trustees and members of
committees may receive such compensation, if any, for their services and such
reimbursement of expenses as may be fixed or determined by resolution of the
Board of Trustees. This Section 12 shall not be construed to preclude any
Trustee from serving the Trust in any other capacity as an officer, agent,
employee or otherwise and receiving compensation for those services.
Section 13. DELEGATION OF POWER TO OTHER TRUSTEES. Any Trustee may, by
power of attorney, delegate his or her power for a period not exceeding six (6)
months at any one time to any other Trustee or Trustees; provided that in no
case shall fewer than two (2) Trustees personally exercise the powers granted to
the Trustees under the Trust's Agreement and Declaration of Trust except as
otherwise expressly provided herein or by resolution of the Board of Trustees.
Except where applicable law may require a
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Trustee to be present in person, a Trustee represented by another Trustee
pursuant to such power of attorney shall be deemed to be present for purposes of
establishing a quorum and satisfying the required majority vote.
ARTICLE IV
COMMITTEES
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Section 1. COMMITTEES OF TRUSTEES. The Board of Trustees may by
resolution adopted by a majority of the authorized number of Trustees designate
one or more committees, each consisting of one (1) or more Trustees, to serve at
the pleasure of the Board. The Board may designate one or more Trustees as
alternate members of any committee who may replace any absent member at any
meeting of the committee. Any committee to the extent provided in the resolution
of the Board, shall have the authority of the Board, except with respect to:
(a) the approval of any action which under applicable law also
requires shareholders' approval or approval of the outstanding
shares, or requires approval by a majority of the entire Board
or certain members of said Board;
(b) the filling of vacancies on the Board of Trustees or in any
committee;
(c) the fixing of compensation of the Trustees for serving on
the Board of Trustees or on any committee;
(d) the amendment or repeal of the Trust's Agreement and
Declaration of Trust or of the By-Laws or the adoption of new
By-Laws;
(e) the amendment or repeal of any resolution of the Board of
Trustees which by its express terms is not so amendable or
repealable;
(f) a distribution to the shareholders of the Trust, except at
a rate or in a periodic amount or within a designated range
determined by the Board of Trustees; or
(g) the appointment of any other committees of the Board of
Trustees or the members of these committees.
Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of
committees shall be governed by and held and taken in accordance with the
provisions of Article III of these By-Laws, with such changes in the context
thereof as are necessary to substitute the committee and its members for the
Board of Trustees and its members, except that the time of regular
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meetings of committees may be determined either by resolution of the Board of
Trustees or by resolution of the committee. Special meetings of committees may
also be called by resolution of the Board of Trustees. Alternate members shall
be given notice of meetings of committees and shall have the right to attend all
meetings of committees. The Board of Trustees may adopt rules for the government
of any committee not inconsistent with the provisions of these By-Laws.
ARTICLE V
OFFICERS
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Section 1. OFFICERS. The officers of the Trust shall be a President, a
Secretary and a Treasurer. The Trust may also have, at the discretion of the
Board of Trustees, a Chairman of the Board, one or more Vice Presidents, one or
more Assistant Secretaries, one or more Assistant Treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 3 of
this Article V. Any number of offices may be held by the same person.
Section 2. ELECTION OF OFFICERS. The officers of the Trust, except such
officers as may appointed in accordance with the provisions of Section 3 or
Sections of this Article V, shall be chosen by the Board of Trustees, and each
shall serve at the pleasure of the Board of Trustees, subject to the rights, if
any, of an officer under any contract of employment.
Section 3. SUBORDINATE OFFICERS. The Board of Trustees may appoint and
may empower the President to appoint such other officers as the business of the
Trust may require, each of whom shall hold office for such period, have such
authority and perform such duties as are provided in these By-Laws or as the
Board of Trustees may from time to time determine.
Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights,
if any, of an officer under any contract of employment, any officer may be
removed, either with or without cause, by the Board of Trustees at any regular
or special meeting of the Board of Trustees or by the principal executive
officer or by such other officer upon whom such power of removal may be
conferred by the Board of Trustees.
Any officer may resign at any time by giving written notice to the
Trust. Any resignation shall take effect at the date of the receipt of that
notice or at any later time specified in that notice; and unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the Trust under any contract to which the officer is a party.
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Section 5. VACANCIES IN OFFICES. A vacancy in any office because of
death, resignation, removal, disqualification or other cause shall be filled in
the manner prescribed in these By-Laws for regular appointment to that office.
The President may make temporary appointments to a vacant office pending action
by the Board of Trustees.
Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if such an
Officer is elected, shall, if present, preside at meetings of the Board of
Trustees, subject to the control of the Board of Trustees, have general
supervision, direction and control of the business and the Officers of the Trust
and exercise and perform such other powers and duties as may be from time to
time assigned to him or her by the Board of Trustees or prescribed by the
By-Laws. The Chairman of the Board shall serve as chief executive officer in the
chief executive officer's absence.
Section 7. PRESIDENT. Subject to such supervisory powers, if any, as
may be given by the Board of Trustees to the Chairman of the Board, if there be
such an officer, the President shall, subject to the control of the Board of
Trustees and the Chairman, have general supervision, direction and control of
the business and the officers of the Trust. He or she shall preside at all
meetings of the shareholders and, in the absence of the Chairman of the Board or
if there be none, at all meetings of the Board of Trustees. He or she shall have
the general powers and duties of management usually vested in the offices of
president, chief executive officer and chief operating officer of a corporation
and shall have such other powers and duties as may be prescribed by the Board of
Trustees or these By-Laws.
Section 8. VICE PRESIDENTS. In the absence or disability of the
President, the Vice Presidents, if any, in order of their rank as fixed by the
Board of Trustees or if not ranked, the Executive Vice President (who shall be
considered first ranked) and such other Vice Presidents as shall be designated
by the Board of Trustees, shall perform all the duties of the President and,
when so acting, shall have all powers of and be subject to all the restrictions
upon the President. The Vice Presidents shall have such other powers and perform
such other duties as from time to time may be prescribed for them respectively
by the Board of Trustees or the President or the Chairman of the Board or by
these By-Laws.
Section 9. SECRETARY. The Secretary shall keep or cause to be kept at
the principal executive office of the Trust or such other place as the Board of
Trustees may direct a book of minutes of all meetings and actions of Trustees,
committees of Trustees and shareholders with the time and place of holding,
whether regular or special, and if special, how authorized, the notice given,
the names of those present at Trustees' meetings or
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committee meetings, the number of shares present or represented at shareholders'
meetings, and the proceedings.
The Secretary shall keep or cause to be kept at the principal executive
office of the Trust or at the office of the Trust's transfer agent or registrar,
a share register or a duplicate share register showing the names of all
shareholders and their addresses, the number and classes of shares held by each,
the number and date of certificates issued for the same and the number and date
of cancellation of every certificate surrendered for cancellation.
The Secretary shall give or cause to be given notice of all meetings of
the shareholders and of the Board of Trustees required to be given by these
By-Laws or by applicable law and shall have such other powers and perform such
other duties as may be prescribed by the Board of Trustees or by these By-Laws.
Section 10. TREASURER. The Treasurer shall be the chief financial
officer and chief accounting officer of the Trust and shall keep and maintain or
cause to be kept and maintained adequate and correct books and records of
accounts of the properties and business transactions of the Trust, including
accounts of its assets, liabilities, receipts, disbursements, gains, losses,
capital, retained earnings and shares. The books of account shall at all
reasonable times be open to inspection by any Trustee.
The Treasurer shall deposit all monies and other valuables in the name
and to the credit of the Trust with such depositaries as may be designated by
the Board of Trustees. The Treasurer shall disburse the funds of the Trust as
may be ordered by the Board of Trustees, shall render to the President and
Trustees, whenever they request it, an account of all of his or her transactions
as chief financial officer and of the financial condition of the Trust and shall
have other powers and perform such other duties as may be prescribed by the
Board of Trustees or these By-Laws.
ARTICLE VI
INDEMNIFICATION OF TRUSTEES OFFICERS
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EMPLOYEES AND OTHER AGENTS
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Section 1. AGENTS, PROCEEDINGS AND EXPENSES. For the purpose of this
Article, "agent" means any person who is or was a Trustee, officer, employee or
other agent of this Trust or is or was serving at the request of this Trust as a
Trustee, director, officer, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise or was a
Trustee, director, officer, employee or agent of a foreign or domestic
corporation that was a predecessor of another enterprise at the request of such
predecessor entity;
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"proceeding" means any threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative; and "expenses"
includes, without limitation, attorney's fees and any expenses of establishing a
right to indemnification under this Article.
Section 2. ACTIONS OTHER THAN BY TRUST. This Trust shall indemnify any
person who was or is a party or is threatened to be made a party to any
proceeding (other than an action by or in the right of this Trust) by reason of
the fact that such person is or was an agent of this Trust, against expenses,
judgments, fines, settlements and other amounts actually and reasonably incurred
in connection with such proceeding, if it is determined that person acted in
good faith and reasonably believed: (a) in the case of conduct in his or her
official capacity as a Trustee of the Trust, that his or her conduct was in the
Trust's best interests and (b), in all other cases, that his or her conduct was
at least not opposed to the Trust's best interests and (c) in the case of a
criminal proceeding, that he or she had no reasonable cause to believe the
conduct of that person was unlawful. The termination of any proceeding by
judgment, order, settlement, conviction or upon a plea of nolo contendere or its
equivalent shall not of itself create a presumption that the person did not act
in good faith and in a manner which the person reasonably believed to be in the
best interests of this Trust or that the person had reasonable cause to believe
that the person's conduct was unlawful.
Section 3. ACTIONS BY THE TRUST. This Trust shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action by or in the right of this Trust to procure a
judgment in its favor by reason of the fact that that person is or was an agent
of this Trust, against expenses actually and reasonably incurred by that person
in connection with the defense or settlement of that action if that person acted
in good faith, in a manner that person believed to be in the best interests of
this Trust and with such care, including reasonable inquiry, as an ordinarily
prudent person in a like position would use under similar circumstances.
Section 4. EXCLUSION OF INDEMNIFICATION. Notwithstanding any provision
to the contrary contained herein, there shall be no right to indemnification for
any liability arising by reason of willful misfeasance, bad faith, gross
negligence, or the reckless disregard of the duties involved in the conduct of
the agent's office with this Trust.
No indemnification shall be made under Sections 2 or 3 of this Article:
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(a) In respect of any claim, issue or matter as to which that
person shall have been adjudged to be liable on the basis that
personal benefit was improperly received by him or her,
whether or not the benefit resulted from an action taken in
the person's official capacity; or
(b) In respect of any claim, issue or matter as to which that
person shall have been adjudged to be liable in the
performance of that person's duty to this Trust, unless and
only to the extent that the court in which that action was
brought shall determine upon application that in view of all
the circumstances of the case, that person was not liable by
reason of the disabling conduct set forth in the preceding
paragraph and is fairly and reasonably entitled to indemnity
for the expenses which the court shall determine; or
(c) Of amounts paid in settling or otherwise disposing of a
threatened or pending action, with or without court approval,
or of expenses incurred in defending a threatened or pending
action that is settled or otherwise disposed of without court
approval, unless the required approval set forth in Section 6
of this Article is obtained.
Section 5. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent of
this Trust has been successful on the merits in defense of any proceeding
referred to in Sections 2 or 3 of this Article or in defense of any claim, issue
or matter therein, before the court or other body before whom the proceeding was
brought, the agent shall be indemnified against expenses actually and reasonably
incurred by the agent in connection therewith, provided that the Board of
Trustees, including a majority who are disinterested, non-party Trustees, also
determines that, based upon a review of the facts, the agent was not liable by
reason of the disabling conduct referred to in Section 4 of this Article.
Section 6. REQUIRED APPROVAL. Except as provided in Section 5 of this
Article, any indemnification under this Article shall be made by this Trust only
if authorized in the specific case on a determination that indemnification of
the agent is proper in the circumstances because the agent has met the
applicable standard of conduct set forth in Sections 2 or 3 of this Article and
is not prohibited from indemnification because of the disabling conduct set
forth in Section 4 of this Article, by:
(a) a majority vote of a quorum consisting of Trustees who are
not parties to the proceeding and are not interested persons
of the Trust (as defined in the Investment Company Act of
1940); or
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(b) a written opinion by an independent legal counsel.
Section 7. ADVANCE OF EXPENSES. Expenses incurred in defending any
proceeding may be advanced by this Trust before the final disposition of the
proceeding upon a written undertaking by or on behalf of the agent, to repay the
amount of the advance if it is ultimately determined that he or she is not
entitled to indemnification, together with at least one of the following as a
condition to the advance: (i) security for the undertaking; or (ii) the
existence of insurance protecting the Trust against losses arising by reason of
any lawful advances; or (iii) a determination by a majority of a quorum of
Trustees who are not parties to the proceeding and are not interested persons of
the Trust, or by an independent legal counsel in a written opinion, based on a
review of readily available facts, that there is reason to believe that the
agent ultimately will be found entitled to indemnification. Determinations and
authorizations of payments under this Section must conform to the standards set
forth in Section 6 of this Article for determining that the indemnification is
permissible.
Section 8. OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article
shall affect any right to indemnification to which persons other than Trustees
and officers of this Trust or any subsidiary hereof may be entitled by contract
or otherwise.
Section 9. LIMITATIONS. No indemnification or advance shall be made
under this Article, except as provided in Sections 5 or 6 in any circumstances
where it appears:
(a) that it would be inconsistent with a provision of the
Trust's Agreement and Declaration of Trust, a resolution of
the shareholders of the Trust, or an agreement in effect at
the time of accrual of the alleged cause of action asserted in
the proceeding in which the expenses were incurred or other
amounts were paid which prohibits or otherwise limits
indemnification; or
(b) that it would be inconsistent with any condition expressly
imposed by a court in approving a settlement.
Section 10. INSURANCE. Upon and in the event of a determination by the
Board of Trustees of this Trust to purchase such insurance, this Trust shall
purchase and maintain insurance on behalf of any agent of this Trust against any
liability asserted against or incurred by the agent in such capacity or arising
out of the agent's status as such, but only to the extent that this Trust would
have the power to indemnify the agent against that liability under the
provisions of this Article and the Trust's Agreement and Declaration of Trust.
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Section 11. FIDUCIARIES OF EMPLOYEE BENEFIT PLAN. This Article VI does
not apply to any proceeding against any Trustee, investment manager or other
fiduciary of an employee benefit plan in that person's capacity as such, even
though that person may also be an agent of this Trust as defined in Section l of
this Article VI. Nothing contained in this Article VI shall limit any right to
indemnification to which such a Trustee, investment manager, or other fiduciary
may be entitled by contractor, otherwise which shall be enforceable to the
extent permitted by applicable law other than this Article VI.
ARTICLE VII
RECORDS AND REPORTS
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Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. This Trust
shall keep at its principal executive office or at the office of its transfer
agent or registrar, if either be appointed and as determined by resolution of
the Board of Trustees, a record of its shareholders, giving the names and
addresses of all shareholders and the number, series and, where applicable,
class of shares held by each shareholder.
Section 2. MAINTENANCE AND INSPECTION OF BY-LAWS. The Trust shall keep
at its principal executive office the original or a copy of these By-Laws as
amended from time to time, which shall be open to inspection by the shareholders
at all reasonable times during office hours.
Section 3. MAINTENANCE AND INSPECTION OF OTHER RECORDS. The accounting
books and records and minutes of proceedings of the shareholders and the Board
of Trustees and any committee or committees of the Board of Trustees shall be
kept at such place or places designated by the Board of Trustees or in the
absence of such designation, at the principal executive office of the Trust. The
minutes shall be kept in written form, and the accounting books and records
shall be kept either in written form or in any other form capable of being
converted into written form. The minutes and accounting books and records shall
be open to inspection upon the written demand of any shareholder or holder of a
voting trust certificate at any reasonable time during usual business hours of
the Trust for a purpose reasonably related to the holder's interests as a
shareholder or as the holder of a voting trust certificate. The inspection may
be made in person or by an agent or attorney and shall include the right to copy
and make extracts.
Section 4. INSPECTION BY TRUSTEES. Every Trustee shall have the
absolute right at any reasonable time to inspect all books, records and
documents of every kind as well as the physical properties of the Trust. This
inspection by a Trustee may be made in person or by an agent or attorney, and
the right
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of inspection includes the right to copy and make extracts of documents.
Section 5. FINANCIAL STATEMENTS. A copy of any financial statements and
any income statement of the Trust for each quarterly period of each fiscal year
and accompanying balance sheet of the Trust as of the end of each such period
that has been prepared by the Trust shall be kept on file in the principal
executive office of the Trust for at least twelve (12) months, and each such
statement shall be exhibited at all reasonable times to any shareholder
demanding an examination of any such statement or a copy shall be mailed to any
such shareholder.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the Trust or the certificate of an authorized officer of
the Trust that the financial statements were prepared without audit from the
books and records of the Trust.
ARTICLE VIII
GENERAL MATTERS
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Section 1. CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS. All checks, drafts
or other orders for payment of money, notes or other evidences of indebtedness
issued in the name of or payable to the Trust shall be signed or endorsed in
such manner and by such person or persons as shall be designated from time to
time in accordance with the resolution of the Board of Trustees.
Section 2. CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board of
Trustees, except as otherwise provided in these By-Laws, may authorize any
officer or officers, agent or agents, to enter into any contract or execute any
instrument in the name of and on behalf of the Trust and this authority may be
general or confined to specific instances; and unless so authorized or ratified
by the Board of Trustees or within the agency power of an officer, no officer,
agent or employee shall have any power or authority to bind the Trust by any
contract or engagement, to pledge its credit or to render it liable for any
purpose or for any amount.
Section 3. CERTIFICATES FOR SHARES. A certificate or certificates for
shares of beneficial interest in any series of the Trust may be issued to a
shareholder upon the shareholder's request when such shares are fully paid. All
certificates shall be signed in the name of the Trust by the Chairman of the
Board or the President or Vice President and by the Treasurer or an Assistant
Treasurer or the Secretary or any Assistant Secretary, certifying the number of
shares and the series of shares owned by the shareholders. Any or all of the
signatures on the certificate may be facsimile. In case any officer, transfer
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agent or registrar who has signed or whose facsimile signature has been placed
on a certificate shall have ceased to be that officer, transfer agent or
registrar before that certificate is issued, it may be issued by the Trust with
the same effect as if that person were an officer, transfer agent or registrar
at the date of issue. Notwithstanding the foregoing, the Trust may adopt and use
a system of issuance, recordation and transfer of its shares by electronic or
other means.
Section 4. LOST CERTIFICATES. Except as provided in this Section 4, no
new certificate for shares shall be issued to replace an old certificate unless
the latter is surrendered to the Trust and cancelled at the same time. The Board
of Trustees may in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of a replacement
certificate on such terms and conditions as the Board of Trustees may require,
including a provision for indemnification of the Trust secured by a bond or
other adequate security sufficient to protect the Trust against any claim that
may be made against it, including any expense or liability on account of the
alleged loss, theft or destruction of the certificate or the issuance of the
replacement certificate.
Section 5. REPRESENTATION OF SHARES OF OTHER ENTITIES HELD BY TRUST.
The Chairman of the Board, the President, any Vice President or any other person
authorized by resolution of the Board of Trustees or by any of the foregoing
designated officers, is authorized to vote or represent on behalf of the Trust
any and all shares of any corporation, partnership, trusts or other entities,
foreign or domestic, standing in the name of the Trust. The authority granted
may be exercised in person or by a proxy duly executed by such designated
person.
Section 6. FISCAL YEAR. The fiscal year of the Trust shall be fixed and
refixed or changed from time to time by resolution of the Trustees. The fiscal
year of the Trust shall be the taxable year of each Series of the Trust.
ARTICLE IX
AMENDMENTS
----------
Section l. AMENDMENT BY SHAREHOLDERS. These By-Laws may be amended or
repealed by the affirmative vote or written consent of a majority of the Voting
Interests, as defined in Article I, Section 2(n) of the Agreement and
Declaration of Trust of the Trust, entitled to vote, except as otherwise
provided by applicable law or by the Trust's Agreement and Declaration of Trust
or these By-Laws.
Section 2. AMENDMENT BY TRUSTEES. Subject to the right of shareholders
as provided in Section l of this Article IX to
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adopt, amend or repeal By-Laws, and except as otherwise provided by applicable
law or by the Trust's Agreement and Declaration of Trust, these By-Laws may be
adopted, amended or repealed by the Board of Trustees.
Section 3. INCORPORATION BY REFERENCE INTO AGREEMENT AND DECLARATION OF
TRUST OF THE TRUST. These By-Laws and any amendments thereto shall be
incorporated by reference to the Trust's Agreement and Declaration of Trust.
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FORM OF INVESTMENT
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MANAGEMENT AGREEMENT
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INVESTMENT MANAGEMENT AGREEMENT
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THIS INVESTMENT MANAGEMENT AGREEMENT made as of the __th day
of September, 1996, by and between KAYNE ANDERSON MUTUAL FUNDS, a Delaware
business trust (hereinafter called the "Trust"), on behalf of each series of the
Trust listed in Appendix A hereto, as such may be amended from time to time
(hereinafter referred to individually as a "Fund" and collectively as the
"Funds") and KAYNE ANDERSON INVESTMENT MANAGEMENT, L.P., a California limited
partnership (hereinafter called the "Manager").
WITNESSETH:
WHEREAS, the Trust is an open-end management investment
company, registered as such under the Investment Company Act of 1940, as amended
(the "1940 Act"); and
WHEREAS, the Manager is registered as an investment adviser
under the Investment Advisers Act of 1940, as amended, and is engaged in the
business of supplying investment advice, investment management and
administrative services, as an independent contractor; and
WHEREAS, the Trust desires to retain the Manager to render
advice and services to the Funds pursuant to the terms and provisions of this
Agreement, and the Manager is interested in furnishing said advice and services;
NOW, THEREFORE, in consideration of the covenants and the
mutual promises hereinafter set forth, the parties hereto, intending to be
legally bound hereby, mutually agree as follows:
1. Appointment of Manager. The Trust hereby employs the
Manager and the Manager hereby accepts such employment, to render investment
advice and management services with respect to the assets of the Funds for the
period and on the terms set forth in this Agreement, subject to the supervision
and direction of the Trust's Board of Trustees.
2. Duties of Manager.
(a) General Duties. The Manager shall act as
investment manager to the Funds and shall supervise investments of the Funds on
behalf of the Funds in accordance with the investment objectives, programs and
restrictions of the Funds as provided in the Trust's governing documents,
including, without limitation, the Trust's Agreement and Declaration of Trust
and By-Laws, or otherwise and such other limitations as the Trustees may impose
from time to time in writing to the Manager. Without
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limiting the generality of the foregoing, the Manager shall: (i) furnish the
Funds with advice and recommendations with respect to the investment of each
Fund's assets and the purchase and sale of portfolio securities for the Funds,
including the taking of such other steps as may be necessary to implement such
advice and recommendations; (ii) furnish the Funds with reports, statements and
other data on securities, economic conditions and other pertinent subjects which
the Trust's Board of Trustees may reasonably request; (iii) manage the
investments of the Funds, subject to the ultimate supervision and direction of
the Trust's Board of Trustees; (iv) provide persons satisfactory to the Trust's
Board of Trustees to act as officers and employees of the Trust and the Funds
(such officers and employees, as well as certain trustees, may be trustees,
directors, officers, partners, or employees of the Manager or its affiliates)
but not including personnel to provide administrative services to the Fund; and
(v) render to the Trust's Board of Trustees such periodic and special reports
with respect to each Fund's investment activities as the Board may reasonably
request.
(b) Brokerage. The Manager shall place orders for the
purchase and sale of securities either directly with the issuer or with a broker
or dealer selected by the Manager. In placing each Fund's securities trades, it
is recognized that the Manager will give primary consideration to securing the
most favorable price and efficient execution, so that each Fund's total cost or
proceeds in each transaction will be the most favorable under all the
circumstances. Within the framework of this policy, the Manager may consider the
financial responsibility, research and investment information, and other
services provided by brokers or dealers who may effect or be a party to any such
transaction or other transactions to which other clients of the Manager may be a
party.
It is also understood that it is desirable for the Funds that
the Manager have access to investment and market research and securities and
economic analyses provided by brokers and others. It is also understood that
brokers providing such services may execute brokerage transactions at a higher
cost to the Funds than might result from the allocation of brokerage to other
brokers on the basis of seeking the most favorable price and efficient
execution. Therefore, the purchase and sale of securities for the Funds may be
made with brokers who provide such research and analysis, subject to review by
the Trust's Board of Trustees from time to time with respect to the extent and
continuation of this practice to determine whether each Fund benefits, directly
or indirectly, from such practice. It is understood by both parties that the
Manager may select broker-dealers for the execution of the Funds' portfolio
transactions who provide research and analysis as the Manager may lawfully and
appropriately use in its investment management and advisory capacities, whether
or not such research and analysis may also be
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MANAGEMENT AGREEMENT
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useful to the Manager in connection with its services to other clients.
On occasions when the Manager deems the purchase or sale of a
security to be in the best interest of one or more of the Funds as well as of
other clients, the Manager, to the extent permitted by applicable laws and
regulations, may aggregate the securities to be so purchased or sold in order to
obtain the most favorable price or lower brokerage commissions and the most
efficient execution. In such event, allocation of the securities so purchased or
sold, as well as the expenses incurred in the transaction, will be made by the
Manager in the manner it considers to be the most equitable and consistent with
its fiduciary obligations to the Funds and to such other clients.
(c) Administrative Services. The Manager shall
oversee the administration of the Funds' business and affairs although the
provision of administrative services, to the extent not covered by subparagraphs
(a) or (b) above, is not the obligation of the Manager under this Agreement.
Notwithstanding any other provisions of this Agreement, the Manager shall be
entitled to reimbursement from the Funds for all or a portion of the reasonable
costs and expenses, including salary, associated with the provision by Manager
of personnel to render administrative services to the Funds.
3. Best Efforts and Judgment. The Manager shall use its best
judgment and efforts in rendering the advice and services to the Funds as
contemplated by this Agreement.
4. Independent Contractor. The Manager shall, for all purposes
herein, be deemed to be an independent contractor, and shall, unless otherwise
expressly provided and authorized to do so, have no authority to act for or
represent the Trust or the Funds in any way, or in any way be deemed an agent
for the Trust or for the Funds. It is expressly understood and agreed that the
services to be rendered by the Manager to the Funds under the provisions of this
Agreement are not to be deemed exclusive, and the Manager shall be free to
render similar or different services to others so long as its ability to render
the services provided for in this Agreement shall not be impaired thereby.
5. Manager's Personnel. The Manager shall, at its own expense,
maintain such staff and employ or retain such personnel and consult with such
other persons as it shall from time to time determine to be necessary to the
performance of its obligations under this Agreement. Without limiting the
generality of the foregoing, the staff and personnel of the Manager shall be
deemed to include persons employed or retained by the Manager to furnish
statistical information, research, and other factual information, advice
regarding economic factors and trends, information with respect to technical and
scientific
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MANAGEMENT AGREEMENT
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developments, and such other information, advice and assistance as the Manager
or the Trust's Board of Trustees may desire and reasonably request.
6. Reports by Funds to Manager. Each Fund will from time to
time furnish to the Manager detailed statements of its investments and assets,
and information as to its investment objective and needs, and will make
available to the Manager such financial reports, proxy statements, legal and
other information relating to each Fund's investments as may be in its
possession or available to it, together with such other information as the
Manager may reasonably request.
7. Expenses.
(a) With respect to the operation of each Fund, the
Manager is responsible for (i) the compensation of any of the Trust's trustees,
officers, and employees who are affiliates of the Manager (but not the
compensation of employees performing services in connection with expenses which
are the Fund's responsibility under Subparagraph 7(b) below), (ii) the expenses
of printing and distributing the Funds' prospectuses, statements of additional
information, and sales and advertising materials (but not the legal, auditing or
accounting fees attendant thereto) to prospective investors (but not to existing
shareholders), and (iii) providing office space and equipment reasonably
necessary for the operation of the Funds.
(b) Each Fund is responsible for and has assumed the
obligation for payment of all of its expenses, other than as stated in
Subparagraph 7(a) above, including but not limited to: fees and expenses
incurred in connection with the issuance, registration and transfer of its
shares; brokerage and commission expenses; all expenses of transfer, receipt,
safekeeping, servicing and accounting for the cash, securities and other
property of the Trust for the benefit of the Funds including all fees and
expenses of its custodian, shareholder services agent and accounting services
agent; interest charges on any borrowings; costs and expenses of pricing and
calculating its daily net asset value and of maintaining its books of account
required under the 1940 Act; taxes, if any; expenditures in connection with
meetings of each Fund's Shareholders and Board of Trustees that are properly
payable by the Fund; salaries and expenses of officers and fees and expenses of
members of the Trust's Board of Trustees or members of any advisory board or
committee who are not members of, affiliated with or interested persons of the
Manager; insurance premiums on property or personnel of each Fund which inure to
its benefit, including liability and fidelity bond insurance; the cost of
preparing and printing reports, proxy statements, prospectuses and statements of
additional information of the Fund or other communications for distribution to
existing shareholders; legal, auditing and
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MANAGEMENT AGREEMENT
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accounting fees; trade association dues; fees and expenses (including legal
fees) of registering and maintaining registration of its shares for sale under
federal and applicable state and foreign securities laws; all expenses of
maintaining and servicing shareholder accounts, including all charges for
transfer, shareholder recordkeeping, dividend disbursing, redemption, and other
agents for the benefit of the Funds, if any; and all other charges and costs of
its operation plus any extraordinary and non-recurring expenses, except as
herein otherwise prescribed.
(c) To the extent the Manager incurs any costs by
assuming expenses which are an obligation of a Fund as set forth herein, such
Fund shall promptly reimburse the Manager for such costs and expenses, except to
the extent the Manager has otherwise agreed to bear such expenses. To the extent
the services for which a Fund is obligated to pay are performed by the Manager,
the Manager shall be entitled to recover from such Fund to the extent of the
Manager's actual costs for providing such services.
8. Investment Advisory and Management Fee.
(a) Each Fund shall pay to the Manager, and the
Manager agrees to accept, as full compensation for all administrative and
investment management and advisory services furnished or provided to such Fund
pursuant to this Agreement, a management fee at the annual rate set forth in the
Fee Schedule attached hereto as Appendix A, as may be amended in writing from
time to time by the Trust and the Manager.
(b) The management fee shall be accrued daily by each
Fund and paid to the Manager on the first business day of the succeeding month.
(c) The initial fee under this Agreement shall be
payable on the first business day of the first month following the effective
date of this Agreement and shall be prorated as set forth below. If this
Agreement is terminated before the end of any month, the fee to the Manager
shall be prorated for the portion of any month in which this Agreement is in
effect which is not a complete month according to the proportion which the
number of calendar days in the month during which the Agreement is in effect
bears to the number of calendar days in the month, and shall be payable within
ten (10) days after the date of termination.
(d) The fees payable to the Manager under this
Agreement will be reduced to the extent required under the most stringent
expense limitation applicable to a Fund imposed by any state in which shares of
the Funds are qualified for sale. The Manager may reduce any portion of the
compensation or
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MANAGEMENT AGREEMENT
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reimbursement of expenses due to it pursuant to this Agreement and may agree to
make payments to limit the expenses which are the responsibility of a Fund under
this Agreement. Any such reduction or payment shall be applicable only to such
specific reduction or payment and shall not constitute an agreement to reduce
any future compensation or reimbursement due to the Manager hereunder or to
continue future payments. Any such reduction will be agreed to prior to accrual
of the related expense or fee and will be estimated daily and reconciled and
paid on a monthly basis. Any fee withheld pursuant to this paragraph from the
Manager shall be reimbursed by the appropriate Fund to the Manager in the first,
second or third (or any combination thereof) fiscal year next succeeding the
fiscal year of the withholding to the extent permitted by the applicable state
law if the aggregate expenses for the next succeeding fiscal year, second
succeeding fiscal year or third succeeding fiscal year do not exceed the
applicable state limitation or any more restrictive limitation to which the
Manager has agreed. The Manager may elect to seek reimbursement for the oldest
reductions and waivers before payment by a Fund of fees or expenses for the
current year.
(e) The Manager may agree not to require payment of
any portion of the compensation or reimbursement of expenses otherwise due to it
pursuant to this Agreement prior to the time such compensation or reimbursement
has accrued as a liability of the Fund. Any such agreement shall be applicable
only with respect to the specific items covered thereby and shall not constitute
an agreement not to require payment of any future compensation or reimbursement
due to the Manager hereunder.
9. Fund Share Activities of Manager's Officers and Employees.
The Manager agrees that neither it nor any of its officers or employees shall
take any short position in the shares of the Funds. This prohibition shall not
prevent the purchase of such shares by any of the officers or bona fide
employees of the Manager or any trust, pension, profit-sharing or other benefit
plan for such persons or affiliates thereof, at a price not less than the net
asset value thereof at the time of purchase, as allowed pursuant to rules
promulgated under the 1940 Act.
10. Conflicts with Trust's Governing Documents and Applicable
Laws. Nothing herein contained shall be deemed to require the Trust or the Funds
to take any action contrary to the Trust's Agreement and Declaration of Trust,
By-Laws, or any applicable statute or regulation, or to relieve or deprive the
Board of Trustees of the Trust of its responsibility for and control of the
conduct of the affairs of the Trust and Funds.
11. Manager's Liabilities.
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(a) In the absence of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the obligations or duties hereunder
on the part of the Manager, the Manager shall not be subject to liability to the
Trust or the Funds or to any shareholder of the Funds for any act or omission in
the course of, or connected with, rendering services hereunder or for any losses
that may be sustained in the purchase, holding or sale of any security by the
Funds.
(b) The Funds shall indemnify and hold harmless the
Manager and the partners, members, officers and employees of the Manager and its
general partner (any such person, an "Indemnified Party") against any loss,
liability, claim, damage or expense (including the reasonable cost of
investigating and defending any alleged loss, liability, claim, damage or
expenses and reasonable counsel fees incurred in connection therewith) arising
out of the Indemnified Party's performance or non-performance of any duties
under this Agreement provided, however, that nothing herein shall be deemed to
protect any Indemnified Party against any liability to which such Indemnified
Party would otherwise be subject by reason of willful misfeasance, bad faith or
gross negligence in the performance of duties hereunder or by reason of reckless
disregard of obligations and duties under this Agreement.
(c) No provision of this Agreement shall be construed
to protect any Trustee or officer of the Trust, or officer of the Manager (or
its general partner), from liability in violation of Sections 17(h) and (i) of
the 1940 Act.
12. Non-Exclusivity. The Trust's employment of the Manager is
not an exclusive arrangement, and the Trust may from time to time employ other
individuals or entities to furnish it with the services provided for herein. If
this Agreement is terminated with respect to any Fund, this Agreement shall
remain in full force and effect with respect to all other Funds listed on
Appendix A hereto, as the same may be amended.
13. Term. This Agreement shall become effective at the time
the Trust's initial Registration Statement under the Securities Act of 1933 with
respect to the shares of the Trust is declared effective by the Securities and
Exchange Commission and shall remain in effect for a period of two (2) years,
unless sooner terminated as hereinafter provided. This Agreement shall continue
in effect thereafter for additional periods not exceeding one (l) year so long
as such continuation is approved for each Fund at least annually by (i) the
Board of Trustees of the Trust or by the vote of a majority of the outstanding
voting securities of each Fund and (ii) the vote of a majority of the Trustees
of the Trust who are not parties to this Agreement nor interested persons
thereof, cast in person at a meeting called for the purpose of voting on such
approval.
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14. Termination. This Agreement may be terminated by the Trust
on behalf of any one or more of the Funds at any time without payment of any
penalty, by the Board of Trustees of the Trust or by vote of a majority of the
outstanding voting securities of a Fund, upon sixty (60) days' written notice to
the Manager, and by the Manager upon sixty (60) days' written notice to a Fund.
15. Termination by Assignment. This Agreement shall terminate
automatically in the event of any transfer or assignment thereof, as defined in
the 1940 Act.
16. Transfer, Assignment. This Agreement may not be
transferred, assigned, sold or in any manner hypothecated or pledged without the
affirmative vote or written consent of the holders of a majority of the
outstanding voting securities of each Fund.
17. Severability. If any provision of this Agreement shall be
held or made invalid by a court decision, statute or rule, or shall be otherwise
rendered invalid, the remainder of this Agreement shall not be affected thereby.
18. Definitions. The terms "majority of the outstanding voting
securities" and "interested persons" shall have the meanings as set forth in the
1940 Act.
19. Notice of Declaration of Trust. The Manager agrees that
the Trust's obligations under this Agreement shall be limited to the Funds and
to their assets, and that the Manager shall not seek satisfaction of any such
obligation from the shareholders of the Funds nor from any trustee, officer,
employee or agent of the Trust or the Funds.
20. Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect.
21. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of California without giving
effect to the conflict of laws principles thereof; provided that nothing herein
shall be construed to preempt, or to be inconsistent with, any federal law,
regulation or rule, including the 1940 Act and the Investment Advisors Act of
1940 and any rules and regulations promulgated thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and attested by their duly authorized officers,
all on the day and year first above written.
-8-
<PAGE>
FORM OF INVESTMENT
------------------
MANAGEMENT AGREEMENT
--------------------
KAYNE ANDERSON MUTUAL FUNDS KAYNE ANDERSON INVESTMENT
MANAGEMENT, L.P.
By: KAIM Traditional, LLC,
its general partner
By: _______________________ By:__________________________
Title: ____________________ Title: ______________________
-9-
<PAGE>
FORM OF INVESTMENT
------------------
MANAGEMENT AGREEMENT
--------------------
Appendix A to
Investment Management
Agreement
FEE SCHEDULE
------------
Name of Fund Applicable Fee
- ------------ --------------
Kayne Anderson Rising Dividends Fund 0.75%
Kayne Anderson Small-Mid Cap
Rising Dividends Fund 0.85%
Kayne Anderson International
Rising Dividends Fund 0.95
Kayne Anderson Intermediate
Total Return Bond Fund 0.50%
Kayne Anderson Intermediate
Tax-Free Bond Fund 0.50%
This Fee Schedule is effective as of this _____ day of September, 1996.
KAYNE ANDERSON MUTUAL FUNDS KAYNE ANDERSON INVESTMENT
MANAGEMENT, L.P.
By: KAIM Traditional, LLC,
its general partner
By: _______________________ By:__________________________
Title: ____________________ Title: ______________________
-10-
<TABLE> <S> <C>
<ARTICLE> 6
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<NUMBER> 1
<NAME> Kayne, Anderson Rising Dividends Fund
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
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<INVESTMENTS-AT-VALUE> 20,571,445
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<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 37,033
<TOTAL-ASSETS> 20,644,971
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<NET-CHANGE-FROM-OPS> 3,407,914
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 118,762
<DISTRIBUTIONS-OF-GAINS> 232,704
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<AVERAGE-NET-ASSETS> 18,147,782
<PER-SHARE-NAV-BEGIN> 10.65
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<PER-SHARE-GAIN-APPREC> 2.13
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</TABLE>
