As filed with the Securities and Exchange Commission on September __26, 1996
File Nos. 333-8045
811-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No. 2
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>
KAYNE ANDERSON MUTUAL FUNDS
Kayne Anderson Rising Dividends Fund
Kayne Anderson Small-Mid Cap Rising Dividends Fund
Kayne Anderson International Rising Dividends Fund
Kayne Anderson Intermediate Total Return Bond Fund
Kayne Anderson Intermediate Tax-Free Bond Fund
Kayne Anderson Mutual Funds (the "Trust") is an open-end investment company
consisting of separate diversified series, five of which are offered through
this prospectus (the "Funds"). Each Fund has its own objective, assets and
liabilities. Kayne Anderson Investment Management, L.P. ("Kayne Anderson" or the
"Adviser") serves as investment adviser to the Funds.
The Rising Dividends Fund seeks long-term capital appreciation, with dividend
income as a secondary consideration. This Fund invests primarily in equity
securities, usually common stocks, of companies of all sizes.
The Small-Mid Cap Rising Dividends Fund seeks long-term capital appreciation,
with dividend income as a secondary consideration. This Fund invests primarily
in equity securities, usually common stocks, of small and mid capitalization
domestic companies, which the Fund currently considers to be companies having
total market capitalizations of not more than $2.4 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 to obtain maximum total return,
primarily through 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 ______________, 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) 395-3807.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
Kayne Anderson Mutual Funds
1800 Avenue of the Stars, 2nd Floor
Los Angeles, California 90067
(800) ___________
Prospectus dated September __, 1996
<PAGE>
TABLE OF CONTENTS
SUMMARY OF EXPENSES AND EXAMPLE.................................1
PROSPECTUS SUMMARY..............................................2
FINANCIAL HIGHLIGHTS............................................4
INVESTMENT OBJECTIVES AND POLICIES..............................5
The Rising Dividends Fund.....................................5
The Small-Mid Cap Rising Dividends Fund.......................5
The International Rising Dividends Fund.......................5
The Intermediate Total Return Bond Fund.......................7
The Intermediate Tax-Free Bond Fund...........................7
Additional Investment Considerations..........................8
RISK CONSIDERATIONS.............................................9
PORTFOLIO SECURITIES AND
INVESTMENT TECHNIQUES...........................................1
ORGANIZATION AND MANAGEMENT.....................................7
PURCHASING SHARES...............................................9
EXCHANGE OF SHARES..............................................2
SELLING SHARES (REDEMPTIONS)....................................2
SHAREHOLDER SERVICES............................................5
SHARE PRICE CALCULATION.........................................5
DIVIDENDS, DISTRIBUTIONS AND TAX
STATUS..........................................................6
PERFORMANCE INFORMATION.........................................7
GENERAL INFORMATION.............................................8
<PAGE>
SUMMARY OF EXPENSES
This table is designed to help you understand the costs of investing in a Fund.
These are the estimated expenses of each Fund for the first full year of
operations. Although not required to do so, the Adviser has agreed to reimburse
each Fund in the current fiscal year to the extent necessary so that its ratio
of total operating expenses to average net assets will not exceed the following
levels: Rising Dividends Fund--1.20%*; Small-Mid Cap Rising Dividends
Fund--1.30%*; International Rising Dividends Fund--1.40%*; Intermediate Total
Return Bond Fund--0.95%*; and Intermediate Tax-Free Bond Fund--0.95%*.
<TABLE>
<CAPTION>
Small-Mid International
Rising Cap Rising Rising Intermediate Intermediate
Dividends Dividends Dividends Total Return Tax-Free
Fund Fund Fund Bond Fund Bond Fund
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses*
Maximum sales charge on purchases
(as a percentage of offering price) None None None None None
Sales charge on reinvested dividends None None None None None
Redemption fee+ None None None None None
Exchange fee None None None None None
Total Annual Fund Operating
Expenses*
(as a percentage of average net
assets)
Management fees 0.75% 0.85% 0.95% 0.50% 0.50%
12b-1 expenses None None None None None
Other expenses after
expense reimbursement 0.45% 0.45% 0.45% 0.45% 0.45%
---------------------------------------------------------------------------------
Total operating expenses after 1.20%* 1.30%* 1.40%* 0.95%* 0.95%*
expense reimbursement
</TABLE>
*The ratios of total operating expenses to average net assets for each Fund
before the Adviser's voluntary reimbursement are estimated as follows: Rising
Dividends Fund--1.38%; Small-Mid Cap Rising Dividends Fund--2.10%; International
Rising Dividends Fund--2.45%; Intermediate Total Return Bond Fund--1.75%; and
Intermediate Tax-Free Bond Fund--1.75%. Of these total expense amounts, "other
expenses" before reimbursement are estimated as follows: Rising Dividends
Fund--0.63%; Small-Mid Cap Rising Dividends Fund--1.25%; International Rising
Dividends Fund--1.50%; Intermediate Total Return Bond Fund--1.25%; and
Intermediate Tax-Free Bond Fund--1.25%. In subsequent years, overall operating
expenses for each Fund may not fall below the applicable percentage limitation
until the Adviser has been fully reimbursed for fees foregone or expenses paid
by it under the Management Agreement. Each Fund will reimburse the Adviser in
the three following years if operating expenses (before reimbursement) are less
than the applicable percentage limitation charged to the Fund.
+ Shareholders who effect redemptions via wire transfer will be charged a $7.00
fee and may be required to pay a third-party service provider charge that will
be directly deducted from redemption proceeds.
EXAMPLE
This table illustrates the expenses that would be incurred by an investment in
each Fund over different time periods assuming a $1,000 investment, a 5% annual
return, and redemption at the end of each period. The Funds charge no redemption
fees. The Example should not be considered a representation of past or future
expenses and actual expenses may be greater or less than those shown.
<TABLE>
<CAPTION>
Small-Mid International
Rising Cap Rising Rising Intermediate Intermediate
Dividends Dividends Dividends Total Return Tax-Free
Fund Fund Fund Bond Fund Bond Fund
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
One year................................ $12 $13 $14 $10 $10
Three years............................. $38 $41 $44 $30 $30
Five years.............................. N/A N/A N/A N/A N/A
Ten years............................... N/A N/A N/A N/A N/A
</TABLE>
The Example shown above assumes that the Adviser will limit the annual operating
expenses of each Fund to the totals shown. In addition, federal regulations
require the Example to assume a 5% annual return, but the Funds' actual returns
may be higher or lower. See "Organization and Management."
1
<PAGE>
PROSPECTUS SUMMARY
Investment Objectives and Policies
Each Fund has its own investment objective. See "Investment Objectives and
Policies" for a full discussion of the objectives of each Fund. The investment
objective of each Fund is fundamental and may not be changed without
shareholder approval.
The Investment Adviser
The Adviser is a registered investment adviser organized as a California limited
partnership. The Adviser's predecessor was founded in 1984
by Richard Kayne and John Anderson. The Adviser is in the business of
furnishing investment advice to institutional and private clients and, together
with its affiliated investment adviser, KAIM Non-Traditional, L.P., currently
manages approximately $2.3 billion for such clients.
Management Fee
For its services, the Adviser receives a fee, accrued daily and paid monthly, at
the following annual percentages of average daily net assets: Rising Dividends
Fund--0.75%; Small-Mid Cap Rising Dividends Fund--0.85%; International Rising
Dividends Fund--0.95%; Intermediate Total Return Bond Fund--0.50%; and
Intermediate Tax-Free Bond Fund--0.50%.
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.
Minimum Purchase
The minimum initial investment in the Fund is $2,000. For retirement plan
investments and custodial accounts under the Uniform Gifts/Transfers to Minors
Act the minimum is $1,000. The minimum for additional investments is $250. The
minimum for additional investments is reduced to $100 for purchases through the
Automatic Investment Plan or for purchases by retirement plans through payroll
deductions.
Offering Price and Redemptions
Shares are offered at their net asset value without a sales charge and may be
redeemed at their net asset value on any business day. See "Purchasing Shares"
and "Selling Shares (Redemptions)."
Dividends and Distributions
The Rising Dividends, Small-Mid Cap Rising Dividends and International Rising
Dividends Funds expect to pay dividends annually. The Intermediate Total Return
Bond and Intermediate Tax-Free Bond Funds expect to pay dividends monthly.
Distributions of net capital gains, if any, will be made at least annually. The
Board of Trustees may determine to declare dividends and make distributions more
or less frequently.
2
<PAGE>
Dividends and capital gain distributions (net of any required tax withholding)
are automatically reinvested in additional shares at the net asset value per
share on the reinvestment date unless the shareholder has previously requested
in writing to the Transfer Agent that payment be made in cash.
Any dividend or distribution paid by a Fund has the effect of reducing the net
asset value per share on the reinvestment date by the amount of the dividend or
distribution. Investors should note that a dividend or distribution paid on
shares purchased shortly before such dividend or distribution was declared will
be subject to income taxes as discussed below even though the dividend or
distribution represents, in substance, a partial return of capital to the
shareholder.
Organization
The Funds are organized as distinct series within the Trust, which is registered
as an open-end diversified management investment company. The Trust currently
consists of five separate diversified series, each of which has its own
objective, assets, liabilities and net assets.
Transfer Agent and Custodian:
Investors Bank & Trust Company
Auditors:
Tait, Weller & Baker
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>
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 investment techniques that are described under
the caption "Portfolio Securities and Investment Techniques." The value of the
Funds' investments will fluctuate with market and other economic conditions.
Rising Dividends Fund
Small-Mid Cap Rising Dividends Fund
International Rising Dividends Fund
The Rising Dividends Fund seeks long-term capital appreciation, with dividend
income as a secondary consideration. This Fund invests primarily in equity
securities, usually common stocks, of companies of all sizes. Investments are
diversified by company and industry group.
Under normal circumstances, this Fund invests at least 65% of its total assets
in consistently growing , highly profitable, low debt companies of all sizes
meeting its "rising dividends" criteria as discussed below under "Investment
Approach". The Adviser believes these companies are generally consistent growers
with records of above-average growth, strong balance sheets and responsible,
proven managements. The Adviser believes stocks of such companies tend to keep
pace in rising stock markets and generally outperform in declining stock
markets.
The 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. Under normal circumstances, this Fund invests at least 65%
of its total assets in small and mid capitalization companies meeting its
"rising dividends" criteria. The Fund currently considers mid capitalization
companies to be those having total market capitalizations of more than $1
billion but not more than $2.4 billion. The fund currently considers small
capitalization companies to be those having total market capitalizations of not
more than $1 billion, including those with extremely small capitalizations, but
typically more that $50 million. Stocks of smaller companies have outperformed
the S&P 500 Index from 1926 through 1995 according to Ibbotson Associates, but
have experienced greater stock market volatility and business and financial
risk.
The International Rising Dividends Fund seeks long-term capital appreciation,
with dividend income as a secondary consideration. This Fund invests primarily
in equity securities, usually common stocks, of companies outside the U.S.
having total market capitalizations of $1 billion or more. Under normal
circumstances, this Fund invests at least 65% of its total assets in companies
outside of the U.S. meeting its "rising dividends" criteria. This Fund also will
emphasize those companies outside of the U.S. that the Adviser believes have
global business or operations rather than localized companies. The Fund seeks to
maintain a broad international diversification. Under normal conditions, this
Fund invests in at least three different countries outside of the U.S., but
investments in any single country may not represent more than 40% of its total
assets. The Adviser attempts to invest in the securities of these companies when
it believes they
5
<PAGE>
temporarily are out of favor and selling at what it considers to be favorable
prices.
The three equity Funds' average and median market capitalizations will fluctuate
over time as a result of market valuation levels and the availability of
specific investment opportunities.
The three equity Funds' investment objective is long-term capital appreciation.
The Funds seek to achieve their objective by investing principally in common
stocks, and in normal market conditions, at least 80% of the value of each
Fund's total assets will be invested in common stocks. However, for temporary
defensive purposes, the Funds may seek to preserve capital by temporarily
investing part of their assets in short-term fixed-income securities or in cash
or cash equivalents that are rated "investment grade" at the time of purchase.
Investment grade debt securities are those rated within the four highest grades
by Standard & Poor's Corporation ("S&P") (AAA to BBB) or Moody's Investors
Services, Inc. ("Moody's") (Aaa to Baa) or Fitch Investor Services, Inc.
("Fitch") (AAA to BBB), or in unrated debt securities deemed to be of comparable
quality by the Adviser using guidelines approved by the Board of Trustees. For a
description of the ratings, see the Appendix in the Statement of Additional
Information. The Funds also may invest in preferred stocks, warrants,
convertible debt securities and other debt obligations that, in the Adviser's
opinion, offer the possibility of capital appreciation.
Investment Approach. In selecting securities for these Funds' portfolios, the
Adviser utilizes a "rising dividends" philosophy. The Adviser believes that this
investment discipline is an effective approach to identify well-managed growth
companies with defensive characteristics. The Funds' goal is to invest in
companies with strong rising dividends, significant reinvestment of cash flow
and low debt. To be considered for investment, companies will meet certain
growth and quality criteria established by the Adviser as set forth below. These
three Funds may invest from time to time in companies that do not meet all of
the rising dividends criteria. However, the Adviser believes these companies
still substantially meet the criteria of the rising dividends philosophy.
Consistent Dividend Increases. The three rising dividends Funds invest in
companies which have increased their dividend in at least seven of the past ten
years. Furthermore, each company should have increased dividends at least 100%
in the past ten years and not cut dividends during the period. The Adviser
believes that companies with consistent and rising dividends usually have
above-average earnings growth and have shown a willingness to share that growth
with stockholders.
Alternatively the Small-Mid Cap Rising Dividends and International Rising
Dividends Funds may also invest in companies which have raised dividends in at
least three of the past five years at a rate that would double dividends in ten
years, with no dividend cuts during the past five years.
High Reinvestment for Growth. A dividend payout maximum for portfolio companies
is set at 65% of current earnings. In the Adviser's view, a reinvestment rate of
at least 35% of earnings enables a company to sustain future growth primarily
from internal sources.
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.
6
<PAGE>
Companies that substantially meet these criteria are then researched and
analyzed internally by the Adviser to determine which are the most undervalued
and which are the most overvalued. Each company's relative position in its
industry and the industry cycle also are considered in the investment
decision-making process.
The Intermediate Total Return Bond Fund
The Intermediate Total Return Bond Fund seeks to obtain maximum total return,
primarily through current income with capital appreciation as a secondary
consideration. This Fund invests primarily in debt securities and seeks to
maintain an average maturity of 3 to 10 years under normal conditions. At least
90% of the value of the debt securities purchased by this Fund must be
"investment grade" quality at the time of purchase. Debt securities rated in the
lowest category of investment grade debt may have speculative characteristics;
changes in economic conditions or other circumstances are more likely to lead to
weakened capacity to make principal and interest payments than is the case with
higher grade bonds.
The Fund invests in domestic and foreign investment-grade debt securities and,
in normal market conditions, seeks to maintain a dollar-weighted average
portfolio maturity of 3 to 10 years. Estimates of the expected time for a
security's principal to be paid may be used to calculate the Fund's average
maturity. Such estimates can be substantially shorter than a security's actual
final maturity. In periods of bond market weakness, the Fund may establish a
defensive posture to preserve capital by temporarily investing part of its
assets in investment-grade money market or short-term debt instruments.
The Intermediate Tax-Free Bond Fund
The Intermediate Tax-Free Bond Fund seeks current income exempt from federal
income tax consistent with preservation of capital. The Fund seeks to achieve
its objective by investing primarily in debt securities, the interest from which
is, in the opinion of counsel to the issuer, exempt from federal income tax
("Municipal Securities"). As a fundamental policy that may not be changed
without shareholder approval, under normal conditions, the Fund's assets will be
invested such that 80% of the Fund's income will be exempt from federal personal
income tax and the federal alternative minimum tax. At least 90% of the value of
the debt securities purchased by this Fund must be rated at the time of purchase
within the four highest ratings of Municipal Securities (AAA to BBB) assigned by
S&P, (Aaa to Baa) or assigned by Moody's or (AAA to BBB) assigned by Fitch; or
have S&P's short-term municipal rating of SP-2 or higher, or a municipal
commercial paper rating of A-2 or higher; or Moody's short-term municipal
securities rating of MIG-2 or higher, or VMIG-2 or higher, or a municipal
commercial paper rating of P-2 or higher; or have Fitch's short-term municipal
securities rating of FIN-2 or higher, or a municipal commercial paper rating of
Fitch-2 or higher; or if unrated by S&P, Moody's or Fitch, deemed by the Adviser
to be of comparable quality, using guidelines approved by the Board (but not to
exceed 20% of the value of debt securities purchased). Debt securities rated in
the lowest category of investment grade debt may have speculative
characteristics; changes in economic conditions 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
7
<PAGE>
the Appendix in the Statement of Additional Information. See also "Risk
Considerations."
Under normal market conditions, the Fund seeks to maintain a dollar-weighted
average portfolio maturity of 3 to 10 years, although it may invest in
obligations of any maturity and maintain an average maturity of more than 10
years. Estimates of the expected time for a security's principal to be paid may
be used to calculate the Fund's average maturity. Such estimates can be
substantially shorter than a security's final maturity.
Municipal Securities are obligations issued by, or on behalf of, states,
territories and possessions of the U.S. and the District of Columbia, and their
political subdivisions, agencies, authorities and instrumentalities, including
industrial development bonds, as well as obligations of certain agencies and
instrumentalities of the U.S. Government. Municipal Securities are classified as
general obligation bonds, revenue bonds and notes. General obligation bonds are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. Revenue bonds are payable from revenue
derived from a particular facility, class of facilities or the proceeds of a
special excise or other specific revenue source but not from the issuer's
general taxing power. Private activity bonds and industrial revenue bonds, in
most cases, are revenue bonds that do not carry the pledge of the credit of the
issuing 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.
8
<PAGE>
RISK CONSIDERATIONS
Price Fluctuation. Investments in equity securities in general are subject to
market risks that may cause their prices to fluctuate over time. The value of
debt securities changes as interest rates fluctuate. The value of securities,
such as warrants or convertible debt, exercisable for or convertible into equity
securities is also affected by prevailing interest rates, the credit quality of
the issuer and any call provisions. Fluctuations in the value of securities in
which a Fund invests will cause the net asset value of that Fund to fluctuate.
An investment in a Fund therefore may be more suitable for long-term investors
who can bear the risk of short-term principal fluctuations.
Small Companies. Smaller companies present greater opportunities for capital
appreciation, but also may involve greater risks than larger companies. Although
smaller companies can benefit from the development of new products and services,
they also may have limited product lines, markets or financial resources, and
their securities may trade less frequently and in more limited volume than the
securities of larger, more mature companies. As a result, the prices of the
securities of such smaller companies may fluctuate to a greater degree than the
prices of the securities of other issuers.
Debt Securities. Debt securities held by the Funds may be subject to several
types of investment risk. Market or interest rate risk relates to the change in
market value caused by fluctuations in prevailing interest rates, while credit
risk relates to the ability of the issuer to make timely interest payments and
to repay the principal upon maturity. Call or income risk relates to periods of
falling interest rates, and involves the possibility that securities with high
interest rates will be prepaid or "called" by the issuer prior to maturity. Such
an event would require a Fund to invest the resulting proceeds elsewhere, at
generally lower interest rates, which could cause fluctuations in a Fund's net
income. A Fund also may be exposed to event risk, which is the possibility that
corporate debt securities held by a Fund may suffer a substantial decline in
credit quality and market value due to a corporate restructuring.
The value of debt securities will normally increase in periods of falling
interest rates; conversely, the value of these instruments will normally decline
in periods of rising interest rates. Generally, the longer the remaining
maturity of a debt security, the greater the effect of interest rate changes on
its market value. In an effort to maximize income consistent with its investment
objective, the Intermediate Total Return Bond Fund and the Intermediate Tax-Free
Bond Fund may, at times, change the average maturity of their investment
portfolios. This can be done by investing a larger portion of assets in
relatively longer term obligations when periods of declining interest rates are
anticipated and, conversely, emphasizing shorter and intermediate term
maturities when a rise in interest rates is indicated. See "Portfolio Securities
and Investment Techniques."
Foreign Securities. The Rising Dividends, Small-Mid Cap Rising Dividends,
International Rising Dividends and Intermediate Total Return Bond Fund have the
right to purchase, and the International Rising Dividends Fund emphasizes,
securities in foreign countries. Accordingly, shareholders should consider
carefully the risks involved in investing in securities issued by companies and
governments of foreign nations, which are in addition to the usual risks
inherent in domestic investments.
These Funds also may invest in American Depository Receipts ("ADRs") and
European
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Depository Receipts ("EDRs"). ADRs are receipts issued by a U.S. bank or trust
company evidencing ownership of underlying securities issued by a foreign
issuer. ADRs, in registered form, are designed for use in U.S. securities
markets. EDRs, sometimes called Continental Depository Receipts, are issued in
Europe, typically by foreign banks and trust companies and evidence ownership of
either foreign or domestic underlying securities.
The foreign companies in which the Funds invest are industry leaders and
consistent growers, with strong managements and clean balance sheets. However,
foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations, foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments), default in foreign government securities, and
political or social instability or diplomatic developments that could adversely
affect investments. In addition, there is often less publicly available
information about foreign issuers than those in the U.S. Foreign companies are
often not subject to uniform accounting, auditing and financial reporting
standards. Further, these Funds may encounter difficulties in pursuing legal
remedies or in obtaining judgments in foreign courts.
Brokerage commissions, fees for custodial services and other costs relating to
investments by these Funds in other countries are generally greater than in the
U.S. Foreign markets have different clearance and settlement procedures from
those in the U.S., and certain markets have experienced times when settlements
did not keep pace with the volume of securities transactions and resulted in
settlement difficulty. The inability of a Fund to make intended security
purchases because of settlement difficulties could cause it to miss attractive
investment opportunities. Inability to sell a portfolio security because of
settlement problems could result in loss to a Fund if the value of the portfolio
security declined or result in claims against the Fund if it had entered into a
contract to sell the security. In certain countries, there is less government
supervision and regulation of business and industry practices, stock exchanges,
brokers, and listed companies than in the U.S. The securities markets of many of
the countries in which these Funds may invest may also be smaller, less liquid,
and subject to greater price volatility than those in the U.S.
Because the securities owned by the Rising Dividends, Small-Mid Cap Rising
Dividends, International Rising Dividends and Intermediate Total Return Bond
Funds may be denominated in foreign currencies, the value of such securities
will be affected by changes in currency exchange rates and in exchange control
regulations, and costs will be incurred in connection with conversions between
currencies. A change in the value of a foreign currency against the U.S. dollar
results in a corresponding change in the U.S. dollar value of a Fund's
securities denominated in the currency. Such changes also affect a Fund's income
and distributions to shareholders. A Fund may be affected either favorably or
unfavorably by changes in the relative rates of exchange between the currencies
of different nations, and a Fund may therefore engage inforeign currency hedging
strategies. Such strategies, however, involve certain transaction costs and
investment risks, including dependence upon the Adviser's ability to predict
movements in exchange rates.
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PORTFOLIO SECURITIES AND INVESTMENT TECHNIQUES
Debt Securities. The Funds' investments in debt securities include all types of
domestic or U.S. dollar-denominated foreign debt securities in any proportion,
including bonds, notes, convertible bonds, mortgage-backed and asset- backed
securities, including collateralized mortgage obligations and real estate
mortgage investment conduits, U.S. Government and U.S. Government agency
securities, zero coupon bonds, and short-term obligations such as commercial
paper and notes, bank deposits and other financial obligations, and longer-term
repurchase agreements.
In determining whether or not to invest in a particular debt security, the
Adviser considers factors such as the price, coupon and yield to maturity, the
credit quality of the issuer, the issuer's cash flow and related coverage
ratios, the property, if any, securing the obligation and the terms of the debt
instrument, including subordination, default, sinking fund and early redemption
provisions.
After a purchase, the rating of a debt issue may be reduced below the minimum
rating acceptable for purchase by a Fund. A subsequent downgrade does not
require the sale of the security, but the Adviser will consider such an event in
determining whether to continue to hold the obligation. The Appendix in the
Statement of Additional Information contains a description of Moody's and S&P
ratings.
Interest Rates. The market value of debt securities that are sensitive to
prevailing interest rates is inversely related to actual changes in interest
rates. That is, an interest rate decline produces an increase in a security's
market value and an interest rate increase produces a decrease in value. The
longer the remaining maturity of a security, the greater the effect of interest
rate change. Changes in the ability of an issuer to make payments of interest
and principal and in the market's perception of its creditworthiness also affect
the market value of that issuer's debt securities.
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related securities
in a Fund's portfolio. Mortgage prepayments are affected by the level of
interest rates and other factors, including general economic conditions and the
underlying location and age of the mortgage. In periods of rising interest
rates, the prepayment rate tends to decrease, lengthening the average life of a
pool of mortgage-related securities. In periods of falling interest rates, the
prepayment rate tends to increase, shortening the average life of a pool.
Reinvestment of prepayments may occur at higher or lower interest rates than the
original investment, affecting a Fund's yield. Thus, mortgage-related securities
may have less potential for capital appreciation in periods of falling interest
rates than other fixed-income securities of comparable duration, although they
may have a comparable risk of decline in market value in periods of rising
interest rates.
Duration is one of the fundamental tools used by the Adviser in managing
interest rate risks including prepayment risks. Duration (not the same as
maturity) is a measure of how sensitive a security is to changes in interest
rates. For example, fixed-income securities with effective durations of three
years are more responsive to interest rate fluctuations than those with
effective durations of one year.
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Investing in Municipal Securities. Because the Intermediate Tax-Free Bond Fund
invests primarily in Municipal Securities, its performance may be especially
affected by factors pertaining to the economies of various states and other
factors specifically affecting the ability of issuers of Municipal Securities to
meet their obligations.
The ability of state, county or local governments to meet their obligations will
depend primarily on the availability of tax and other revenues to those
governments and on their fiscal conditions generally. The amount of tax and
other revenues available to governmental issuers of Municipal Securities may be
affected from time to time by economic, political, geographic and demographic
conditions. In addition, constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives may limit a
government's power to raise revenues or increase taxes and thus could adversely
affect the ability to meet financial obligations. The availability of federal,
state and local aid to issuers of Municipal Securities also may affect their
ability to meet their obligations.
Payments of principal and interest on limited obligation securities will depend
on the economic condition of the facility or specific revenue source from whose
revenues the payments will be made, which in turn could be affected by economic,
political, and demographic conditions in a given state. Any reduction in the
actual or perceived ability of an issuer of Municipal Securities to meet its
obligations (including a reduction in the rating of its outstanding securities)
would likely affect adversely the market value and marketability of its
obligations and could affect adversely the values of Municipal Securities as
well. For example, in recent years, certain state constitutional and statutory
amendments and initiatives have restricted the ability of those states' taxing
entities to increase real property and other tax revenues. Other initiative
measures approved by voters, through limiting various other taxes, have resulted
in a substantial reduction in certain state revenues. Decreased state revenues
may result in reductions in allocations of state revenues to local governments.
It is not possible to determine the impact of these measures on the ability of
specific issuers to pay interest or repay principal. In addition, from time to
time, federal legislative proposals have threatened the tax-exempt status or use
of Municipal Securities.
U.S. Government Securities. U.S. Government securities include direct
obligations issued by the United States Treasury, such as Treasury bills,
certificates of indebtedness, notes and bonds. U.S. Government agencies and
instrumentalities that issue or guarantee securities include, but are not
limited to, the Federal Home Loan Banks, the Federal National Mortgage
Association ("FNMA"), and the Student Loan Marketing Association. Except for
U.S. Treasury securities, obligations of U.S. Government agencies and
instrumentalities may or may not be supported by the full faith and credit of
the United States. Some, such as those of the Federal Home Loan Banks, are
backed by the right of the issuer to borrow from the Treasury, others by
discretionary authority of the U.S. Government to purchase the agencies'
obligations, while still others, such as the Student Loan Marketing Association,
are supported only by the credit of the instrumentality.
Asset-Backed Securities. Asset-backed securities represent undivided fractional
interests in a trust with assets consisting of a pool of domestic loans such as
motor vehicle
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retail installment sales contracts or credit card receivables. Asset-backed
securities generally are issued by governmental, government-related and private
organizations. Asset-backed securities may be prepaid prior to maturity and
hence their actual life cannot be accurately predicted. During periods of
falling interest rates, prepayments may accelerate, which would require a Fund
to reinvest the proceeds at a lower interest rate. In addition, like other debt
securities, the value of asset-backed securities will normally decline in
periods of rising interest rates. Although generally rated AAA, it is possible
that the securities could become illiquid or experience losses if guarantors or
insurers default. See "Risk Considerations -- Debt Securities."
Mortgage-Related Securities. Mortgage-related securities are interests in a pool
of mortgage loans. Most mortgage-related securities are pass-through securities,
which means that investors receive payments consisting of a pro rata share of
both principal and interest (less servicing and other fees), as well as
unscheduled prepayments, as mortgages in the underlying mortgage pool are paid
off by the borrowers. In the case of mortgage-related securities, including real
estate mortgage investment conduits and collateralized mortgage obligations,
prepayments of principal by mortgagors or mortgage foreclosures will affect the
average life of the mortgage-related securities remaining in a Fund's portfolio.
Mortgage prepayments are affected by the level of interest rates and by factors
including general economic conditions, the underlying location and age of the
mortgage and other social and demographic conditions. In periods of rising
interest rates, the rate of prepayments tends to decrease, thereby lengthening
the average life of a pool of mortgage-related securities. Conversely, in
periods of falling interest rates, the rate of prepayments tends to increase,
thereby shortening the average life of a pool of mortgages. Thus,
mortgage-related securities may have less potential for capital appreciation in
periods of falling interest rates than other fixed-income securities of
comparable duration, although these securities may have a comparable risk of
decline in market value in periods of rising interest rates. Unscheduled
prepayments, which are made at par, will result in a loss equal to any
unamortized premium. See also "Risk Considerations -- Debt Securities."
Agency Mortgage-Related Securities. The dominant issuers or guarantors of
mortgage-related securities are the Government National Mortgage Association
("GNMA"), FNMA and the Federal Home Loan Mortgage Corporation ("FHLMC"). GNMA
creates pass-through securities from pools of U.S. government guaranteed or
insured (Federal Housing Authority or Veterans Administration) mortgages
originated by mortgage bankers, commercial banks and savings associations. FNMA
and FHLMC issue pass-through securities from pools of conventional and federally
insured and/or guaranteed residential mortgages obtained from various entities,
including savings associations, savings banks, commercial banks, credit unions
and mortgage bankers.
The principal and interest on GNMA pass-through securities are guaranteed by
GNMA and backed by the full faith and credit of the U.S. Government. FNMA
guarantees full and timely payment of all interest and principal, while FHLMC
guarantees timely payment of interest and ultimate collection of principal of
its pass-through securities. Securities from FNMA and FHLMC are not backed by
the full faith and credit of the U.S. Government; however, they are generally
considered to present minimal credit risks. The yields
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provided by these mortgage-related securities historically have exceeded the
yields on other types of U.S. Government securities with comparable maturities
in large measure due to the risks associated with prepayment.
Adjustable rate mortgage securities ("ARMs") are a form of pass-through security
representing interests in pools of mortgage loans, the interest rates of which
are adjusted from time to time. The adjustments usually are determined in
accordance with a predetermined interest rate index and may be subject to
certain limits. The adjustment feature of ARMs tends to make their values less
sensitive to interest rate changes.
Collateralized mortgage obligations ("CMOs") are debt obligations issued by
finance subsidiaries or trusts that are secured by mortgage-backed certificates,
including, in many cases, certificates issued by government- related guarantors,
such as GNMA, FNMA and FHLMC, together with certain funds and other collateral.
Although payment of the principal of and interest on the mortgage-backed
certificates pledged to secure the CMOs may be guaranteed by a U.S. Government
agency or instrumentality, such as FHLMC, the CMOs represent obligations solely
of the CMO issuer and are not insured or guaranteed by a U.S. Government agency
or instrumentality. CMOs are sometimes referred to as "derivatives," and, as
discussed above, can be volatile under certain market conditions.
Privately Issued Mortgage-Related Securities. The Funds may invest in
mortgage-related securities offered by private issuers, including pass-through
securities for pools of conventional residential mortgage loans; mortgage pay-
through obligations and mortgage-backed bonds, which are considered to be
obligations of the institution issuing the bonds and are collateralized by
mortgage loans; and bonds and CMOs that are collateralized by mortgage-related
securities issued by GNMA, FNMA, FHLMC or by pools of conventional mortgages.
Mortgage-related securities created by private issuers generally offer a higher
rate of interest (and greater credit and interest rate risk) than U.S.
Government and agency mortgage-related securities because they offer no direct
or indirect governmental guarantees of payments. However, many issuers or
servicers of mortgage-related securities guarantee, or provide insurance for,
timely payment of interest and principal on such securities.
The Funds may purchase some mortgage- related securities through private
placements without right to registration under the Securities Act of 1933, as
amended. See "Illiquid and Restricted Securities."
When-Issued Securities. The Funds may purchase securities on a when-issued or
delayed-delivery basis, generally in connection with an underwriting or other
offering. When- issued and delayed-delivery transactions occur when securities
are bought with payment for and delivery of the securities scheduled to take
place at a future time, beyond normal settlement dates, generally from 15 to 45
days after the transaction. Each Fund will segregate cash, U.S. Government
securities or other liquid, high quality debt securities in an amount sufficient
to meet its payment obligations with respect to these transactions.
Repurchase Agreements. The Funds may use repurchase agreements, reverse
repurchase agreements and dollar roll transactions. A repurchase agreement
involves a sale to a Fund of a security that is held by a bank, broker-dealer or
other financial institution concurrently with an agreement by that other party
to
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repurchase the same security at an agreed-upon price and date. A reverse
repurchase agreement is the reverse of that transaction. Dollar roll
transactions involve a similar transaction where the agreement is to repurchase
a similar security rather than the same security originally sold. All repurchase
agreements, reverse repurchase agreements and dollar roll transactions will be
fully collateralized with cash or liquid securities. Because those transactions
depend on the performance of the other party, the Adviser will carefully assess
the creditworthiness of any bank or broker-dealer involved in these transactions
under procedures adopted by the Board of Trustees.
Possible Currency Hedging. The Funds that may invest in foreign securities do
not expect to engage actively in hedging practices. However, from time to time
when deemed appropriate by the Adviser, they may seek to protect against the
effect of adverse changes in currency exchange rates that are adverse to the
present or prospective position of a Fund by employing forward currency exchange
contracts or options (sometimes called "derivatives"). A forward currency
contract is individually negotiated and privately traded by currency traders and
their customers and creates an obligation to purchase or sell a specific
currency for an agreed-upon price at a future date.
The Funds generally enter into forward contracts only under two circumstances.
First, if a Fund enters into a contract for the purchase of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security by entering in a forward contract to buy the amount of a
foreign currency needed to settle the transaction. Second, if the Adviser
believes that the currency of a particular foreign country will substantially
rise or fall against the U.S. dollar, it may enter in a forward contract to buy
or sell the currency approximating the value of some or all of a Fund's
portfolio securities denominated in such currency. Although forward contracts
are used primarily to protect a Fund from adverse currency movements, they
involve the risk that currency movements will not be accurately anticipated.
A Fund also may purchase a put or call option on a currency in an effort to
hedge its current or prospective investments. A Fund will not enter into any
futures contracts or related options if the sum of initial margin deposits on
futures contracts, related options (including options on securities, securities
indices and currencies) and premiums paid for any such related options would
exceed 5% of the its total assets. There can be no assurance that hedging
transactions by a Fund, if employed, will be successful.
Investment Companies. Each Fund may invest up to 10% of its total assets in
shares of other investment companies. As a shareholder in another investment
company, a Fund would bear its ratable share of that investment company's
expenses, including its advisory and administration fees. In accordance with
applicable state regulatory provisions, the Adviser has agreed to waive its
management fee with respect to the portion of a Fund's assets invested in shares
of other open-end investment companies. In the case of a closed-end fund,
shareholders would bear the expenses of both a Fund and the fund in which that
Fund invests.
Illiquid and Restricted Securities. No Fund may invest more than 10% of its net
assets in illiquid securities, including (1) securities for which there is no
readily available market; (2) securities which may be subject to legal
restrictions (so-called "restricted securities") other than Rule 144A securities
noted below; (3) repurchase agreements having more than
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seven days to maturity and (4) fixed time deposits subject to withdrawal
penalties (other than those with a term of less than seven days). Restricted
securities do not include those which meet the requirements of Rule 144A under
the Securities Act of 1933, as amended, and which the Trustees have determined
to be liquid based on the applicable trading markets and the availability of
reliable price information.
These Rule 144A securities could have the effect of increasing a Fund's
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing these securities.
Fund Turnover. The Funds do not intend to engage in short-term trading. The
portfolio turnover rate for The Rising Dividends, Small- Mid Cap Rising
Dividends, International Rising Dividends and Intermediate Tax-Free Bond Funds
is generally expected to be less than 75%. The portfolio turnover rate for the
Intermediate Total Return Bond Fund is generally expected to approximate 100%.
However, the Adviser will not consider the rate of portfolio turnover to be a
limiting factor in determining when or whether to purchase or sell securities in
order to achieve a Fund's objective.
Securities Lending. Each Fund may lend its securities in an amount not exceeding
30% of its assets to financial institutions such as banks and brokers if the
loan is collateralized in accordance with applicable regulations. Under the
present regulatory requirements which govern loans of fund securities, the loan
collateral must, on each business day, at least equal the value of the loaned
securities and must consist of cash, letters of credit of domestic banks or
domestic branches of foreign banks, or securities of the U.S. Government or its
agencies. Borrowing. Each Fund may borrow money from banks in an aggregate
amount not to exceed one-third of the value of the Fund's total assets to meet
temporary or emergency purposes, and each Fund may pledge its assets in
connection with such borrowings. A Fund will not purchase any securities while
any such borrowings exceed 5% of that Fund's total assets (including reverse
repurchase agreements and dollar roll transactions that are accounted for as
borrowings).
Each Fund aggregates reverse repurchase agreements and dollar roll transactions
that are accounted for as financings with its bank borrowings for purposes of
limiting borrowings to one-third of the value of the Fund's total assets. See
the Statement of Additional Information for further information.
Leverage. Leveraging the Funds through various forms of borrowing creates an
opportunity for increased net income but, at the same time, creates special risk
considerations. For example, leveraging may exaggerate changes in the net asset
value of a Fund's shares and in the yield on a Fund's portfolio. Although the
principal of such borrowings will be fixed, a Fund's assets may change in value
during the time the borrowing is outstanding. Leveraging will create interest
expenses for a Fund that can exceed the income from the assets retained. To the
extent the income derived from securities purchased with borrowed funds exceeds
the interest a Fund will have to pay, that Fund's net income will be greater
than if leveraging were not used. Conversely, if the income from the assets
retained with borrowed funds is not sufficient to cover the cost of leveraging,
the net income of a Fund will be less than if leveraging were not used, and
therefore the amount available for distribution to shareholders as dividends
will be reduced.
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Pooled Fund. The initial shareholders of each Fund have approved a fundamental
policy authorizing each Fund, subject to authorization by the Board of Trustees,
and notwithstanding any other investment restriction, to invest all of its
assets in the securities of a single open-end investment company (a "pooled
fund"). If authorized by the Trustees, a Fund would seek to achieve its
investment objective by investing in a pooled fund which would invest in a
portfolio of securities that complies with the Fund's investment objective,
policies and restrictions. The Board currently does not intend to authorize
investing in pooled funds.
Other Investment Restrictions and Techniques. Each Fund has adopted certain
other investment restrictions and uses various other investment techniques,
which are described in the Statement of Additional Information. Like each Fund's
investment objective, certain of these restrictions are fundamental and may be
changed only by a majority vote of that Fund's outstanding shares.
ORGANIZATION AND MANAGEMENT
Organization. The Trust is registered as an open-end diversified management
investment company and was organized as a Delaware business trust on May 29,
1996. The Trust currently consists of five separate diversified series. The
Trust's Board of Trustees decides on matters of general policy for all series
and reviews the activities of the Adviser, Distributor and Administrator. The
Trust's officers conduct and supervise the daily business operations of the
Trust and each series.
The Adviser. The Adviser is a registered investment adviser organized as a
California limited partnership. The Adviser's predecessor was founded in 1984 by
Richard Kayne and John Anderson. The Adviser is in the business of furnishing
investment advice to institutional and private clients and, together with its
affiliated investment adviser, KAIM NonTraditional, L.P., currently manages
approximately $2.3 billion for such clients. The Adviser managed the predecessor
mutual fund to the Rising Dividends Fund.
Management Fee. Subject to the direction and control of the Trustees, the
Adviser formulates and implements an investment program for each Fund, including
determining which securities should be bought and sold. In addition to providing
certain administrative services, the Adviser also provides certain of the
officers of the Trust. For its services, the Adviser receives a fee, accrued
daily and paid monthly, at the following annual percentages of average daily net
assets: Rising Dividends Fund--0.75%; Small-Mid Cap Rising Dividends
Fund--0.85%; International Rising Dividends Fund--0.95%; Intermediate Total
Return Bond Fund--0.50%; and Intermediate Tax-Free Bond Fund--0.50%.
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
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to offer classes of shares exclusively to certain financial institutions,
including broker-dealers, investment advisers, banks, trust companies and other
financial institutions acting in an agency capacity on behalf of their customer
accounts, which have entered into distribution agreements or shareholder
servicing agreements with the Fund. These classes of shares ("New Shares") would
represent equal pro rata interests in the Funds with the Funds' existing shares
("Existing Shares") and would be identical to Existing Shares in all respects,
except that New Shares will bear service fees and will enjoy certain exclusive
voting rights on matters relating to those fees.
Management of the Funds. Mr. Allan Rudnick is principally responsible for the
management of the Rising Dividends Fund and serves as Chief Investment Officer
of the Adviser. Prior to joining the Adviser in 1989, he was President of
Pilgrim Asset Management and Chief Investment Officer for the Pilgrim Group of
Mutual Funds. Mr. Rudnick has over 25 years of experience in the investment
industry since earning a BA from Trinity College and an MBA from Harvard
Business School.
Robert Schwarzkopf, CFA is Portfolio Manager for the Small-Mid Cap Rising
Dividends Fund. Prior to joining the Adviser in 1991, he was a Portfolio Manager
for the Pilgrim Group of Mutual Funds. Mr. Schwarzkopf has 14 years of
experience in the investment industry. He earned BA and MS degrees from the
University of Miami.
Jean-Baptiste Nadal, CFA is Portfolio Manager for the International Rising
Dividends Fund. Prior to joining the Adviser in 1994, he managed international
equity portfolios for BearBull, a European investment management firm. Mr. Nadal
has 11 years of experience in the investment industry along with public
accounting and audit experience. He earned his degree in Finance and Business
Administration from SUP de CO, a leading French Business School.
Mark E. Miller is Portfolio Manager for the Intermediate Total Return Bond and
Intermediate Tax-Free Bond Funds. Prior to joining the Adviser in April, 1994,
Mark was responsible for more than $1 billion in individual and institutional
fixed income portfolios with Bank of America Capital Management. Mr. Miller has
over nine years of experience in the securities business. He earned a BA from
the University of California at Los Angeles.
Expense Limitation. Each Fund is responsible for paying legal and auditing fees,
fees and expenses of its custodian, accounting services and shareholder
servicing agents, trustees' fees, the cost of communicating with shareholders
and registration fees, as well as its other operating expenses. Although not
required to do so, the Adviser has agreed to reimburse each Fund to the extent
necessary so that its annual ratio of operating expenses to average net assets
will not exceed the following levels: Rising Dividends Fund--1.20%; Small-Mid
Cap Rising Dividends Fund--1.30%; International Rising Dividends Fund--1.40%;
Intermediate Total Return Bond Fund--0.95%; and Intermediate Tax-Free Bond
Fund--0.95%. The Adviser may terminate or reduce these reductions at any time.
Any reductions made by the Adviser in its fees and any payments or reimbursement
of expenses made by the Adviser which are a 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
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imposed by regulatory authorities. The Trustees believe that the Funds in the
future may be of a sufficient size to permit the reimbursement of any such
reductions or payments. A description of any such reimbursements and the amounts
paid will be set forth in financial statements that are included in the Funds'
annual and semi-annual reports to shareholders.
Fund Transactions and Brokerage. The Adviser considers a number of factors in
determining which brokers or dealers to use for a Fund's portfolio transactions.
These factors include, but are not limited to, the reasonableness of
commissions, quality of services and execution, and the availability of research
which the Adviser may lawfully and appropriately use in its investment
management and advisory capacities. Provided a Fund receives prompt execution at
competitive prices, the Adviser also may consider the sale of Fund shares by
brokers as a factor in selecting those broker-dealers for the Fund's portfolio
transactions. For more information, please refer to the Statement of Additional
Information.
The Administrator. Investment Company Administration Corporation (the
"Administrator"), pursuant to an administration agreement with the Funds,
supervises the overall administration of the Trust and the Funds including,
among other responsibilities, the preparation and filing of all documents
required for compliance by the Trust or the Funds with applicable laws and
regulations, arranging for the maintenance of books and records of the Trust and
the Funds, and supervision of other organizations that provide services to the
Trust and the Funds. Certain officers of the Trust and the Funds may be provided
by the Administrator. The Trust has agreed to pay the Administrator an annual
fee equal to 0.075% of the first $40 million of the Trust's average daily net
assets, 0.05% of the next $40 million, 0.025% of the next 40 million, and 0.01%
thereafter, subject to a minimum annual fee of $30,000 per Fund.
The Distributor. First Fund Distributors, Inc. serves as the Distributor to the
Funds pursuant to a Distribution Agreement. The Distributor is an affiliate of
the Administrator. The Distributor receives no fee for its distribution
services.
PURCHASING SHARES
General. The Funds' shares are offered directly to the public at their
respective net asset values next determined after receipt of an order by the
Transfer Agent with complete information and meeting all the requirements
discussed in this Prospectus. There is no sales load or charge in connection
with the purchase of shares. The Funds' shares are offered for sale by the
Funds' underwriter, First Fund Distributors, Inc. Shares purchased through a
broker may be subject to a commission payable to that broker.
The minimum initial investment in each Fund is $2,000, with subsequent
investments of $250 or more ($1,000 and $200, respectively, for retirement plans
and custodial accounts under the Uniform Gifts/Transfers to Minors Act). Each
Fund reserves the right to vary the initial
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and additional investment minimums. In addition, the Adviser may waive the
minimum initial investment requirement for any investor. The Funds reserve the
right to reject any purchase order and to suspend the offering of shares of any
Fund.
Purchase orders for shares of a Fund that are received by the Transfer Agent in
proper form by 4:00 p.m., New York time, on any day that the New York Stock
Exchange (the "NYSE") is open for trading, will be purchased at the Fund's next
determined net asset value. Orders for Fund shares received after 4:00 p.m. New
York time will be purchased at the next determined net asset value determined
the business day following receipt of the order.
At the discretion of the Funds, investors may be permitted to purchase a Fund's
shares by transferring securities to the Fund that meet the Fund's investment
objectives and policies. Securities transferred to a Fund will be valued in
accordance with the same procedures used to determine the Fund's net asset value
at the time of the next determination of net asset value after such acceptance.
Shares issued by a Fund in exchange for securities will be issued at net asset
value determined as of the same time. All dividends, interest, subscription, or
other rights pertaining to such securities shall become the property of the Fund
and must be delivered to the Fund by the investor upon receipt from the issuer.
Investors who are permitted to transfer such securities to a Fund in exchange
for shares of the Fund will be required to recognize a gain or loss on such
transfer and pay income tax thereon, if applicable, measured by the difference
between the fair market value of the securities and the investor's basis
therein. Securities will not be accepted in exchange for shares of a Fund
unless: (1) such securities are, at the time of the exchange, eligible to be
included in the Fund's portfolio and current market quotations are readily
available for such securities; (2) the investor represents and warrants that all
securities offered to be exchanged are not subject to any restrictions upon
their sale by the Fund under the Securities Act of 1933; and (3) the value of
any such security (except U.S. Government securities), being exchanged together
with other securities of the same issuer owned by the Fund, will not exceed 5%
of the Fund's net assets immediately after the transaction.
Each Fund may accept telephone orders from brokers, financial institutions or
service organizations which have been previously approved by that Fund. It is
the responsibility of such brokers, financial institutions or service
organizations to forward promptly purchase orders and payments to the Funds.
Shares of a Fund may be purchased through brokers, financial institutions,
service organizations, banks, and bank trust departments, each of which may
charge the investor a transaction fee or other fee for its services at the time
of purchase. Such fees would not otherwise be charged if the shares were
purchased directly from the Funds.
Shares or classes of shares of each Fund may, at some point, be available
through certain brokerage services that do not charge transaction fees to
investors. However, the Adviser, from its own resources, may pay service fees
charged by these brokers for distribution and subaccounting services with
respect to Fund shares held by such brokers. Typically these fees are based on a
percentage of the annual average value of these accounts.
Shareholders who invest through sponsored retirement plans should contact their
program administrators responsible for transmitting all orders for the purchase,
redemption or exchange of program-sponsored shares. The
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<PAGE>
availability of each Fund and the procedures for investing depend on the
provisions of the program and whether the program sponsor has contracted with
the Fund or its transfer agent for special processing services, including
subaccounting.
HOW TO BUY SHARES OF THE FUND
Purchases by Mail. Shares of each Fund may be purchased initially by completing
the application accompanying this Prospectus and mailing it to the Transfer
Agent, together with a check payable to the respective Fund: Kayne Anderson
Mutual Funds, P.O. Box _________, ________________________________.
Subsequent investments in an existing account in the Funds may be made at any
time by sending a check payable to the respective Fund to Kayne Anderson Mutual
Funds, P.O. Box _________, ______________________. Please enclose the stub of
the account statement and include the amount of the investment, the exact name
of the account for which the investment is to be made and the account number.
Purchases by Wire. Investors who wish to purchase shares of any of the Funds by
federal funds wire should first call the Transfer Agent at (800) __________ to
advise the Transfer Agent that an initial investment will be made by wire and to
receive an account number. Following notification to the Transfer Agent,
investors must request the originating bank to transmit immediately available
funds by wire to the Transfer Agent's affiliated bank as follows:
Kayne Anderson Mutual Funds
c/o Investors Bank & Trust Company
Attn: ____________________
ABA Routing Number ___________
For further credit to Kayne Anderson
[Name of Fund]
[Account Number]
[Name of Shareholder]
A completed application with signature(s) of the registrant(s) must be mailed to
the Transfer Agent immediately following the initial wire. Investors should be
aware that banks generally impose a wire service fee. The Funds will not be
responsible for the consequence of delays, including delays in the banking or
Federal Reserve wire systems.
Subsequent Investments. Once an account has been opened, subsequent purchases
may be made by mail, bank wire, exchange, direct deposit or automatic investing.
The minimum for subsequent investments is $250 ($200 for retirement plans and
certain custody accounts for minors) for all Funds.
When making additional investments by mail, simply return the remittance portion
of a previous confirmation with the investment in the envelope provided with
each confirmation statement. Checks should be made payable to the particular
Fund in which an investment is to be made and mailed to Kayne Anderson Mutual
Funds, P.O. Box ____, __________________________. Orders to purchase shares are
effective on the day the Transfer Agent receives the check or money order.
If an order, together with payment in proper form, is received by the Transfer
Agent or previously approved broker or financial institution by 4:00 p.m. New
York time, on any
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<PAGE>
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.
Shareholders may exchange shares of any Fund for the shares of the Money Market
Fund, which is not affiliated with the Trust or the Adviser, if such shares are
offered in your state of residence. Prior to making such an exchange, you should
carefully read the prospectus for the Money Market Fund. This exchange
priviledge does not constitute an offering or recommendation on the part of the
Trust or the Adviser of an investment in the Money Market Fund.
Shares may be exchanged by: (1) written request; or (2) telephone, if a special
authorization form has been completed and is on file with the Transfer Agent in
advance. Requests for telephone exchanges must be received by the Transfer Agent
by the close of regular trading on the NYSE (currently 4:00 p.m. New York time)
on any day that the NYSE is open for regular trading. Exchanges are subject to
the minimum initial investment requirement.
The exchange privilege is a convenient way to respond to changes in investment
goals or in market conditions. This privilege is not designed for frequent
trading in response to short-term market fluctuations. The telephone exchange
privilege may be difficult to implement during times of drastic economic or
market changes. The purchase of shares for any Fund through an exchange
transaction is accepted immediately. An exchange is treated as a redemption for
federal and state income tax purposes, which may result in taxable gain or loss,
and a new purchase, each at the net asset value of the appropriate Fund. The
Funds and the Transfer Agent reserve the right to limit, amend, impose charges
upon, terminate or otherwise modify the exchange privilege on 60- days' prior
written notice to shareholders.
SELLING SHARES (REDEMPTIONS)
Shareholders may redeem shares of any Fund without charge on any business day
that the NYSE is open for business. Redemptions will be effective at the net
asset value per share next determined after the receipt by the Transfer Agent,
broker or financial intermediary of a redemption request meeting the
requirements described below. Each Fund normally sends redemption proceeds on
the next business day, but in any event redemption proceeds are sent within
seven calendar days of receipt of a redemption request in proper form. Payment
for redemption of recently purchased shares will be delayed until the Transfer
Agent has been advised that the purchase check has been honored, up to 12
calendar days from the time 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
22
<PAGE>
impose a fee for wire service. There may be fees for redemptions made through
brokers, financial institutions and service organizations.
The Funds will satisfy redemption requests in cash to the fullest extent
feasible, so long as such payments would not, in the opinion of the Board of
Trustees, require a Fund to sell assets under disadvantageous conditions or to
the detriment of the remaining shareholders of the Fund.
A Fund may suspend the right of redemption or postpone the date of payment for
more than seven days during any period when (1) trading on the NYSE is
restricted or the NYSE is closed, other than customary weekend and holiday
closings; (2) the Securities and Exchange Commission (the "SEC") has by order
permitted such suspension; or (3) an emergency, as defined by rules of the SEC,
exists making disposal of portfolio investments or determination of the value of
the net assets of the Fund not reasonably practicable.
Minimum Balances. Due to the relatively high cost of maintaining smaller
accounts, each Fund reserves the right to make involuntary redemptions of all
shares in any account (other than the account of a shareholder who is a
participant in a qualified plan) for their then-current net asset value if at
any time the total investment does not have a value of at least $2,000 because
of redemptions. The shareholder will be notified that the value of the account
is less than the required minimum and will be allowed at least 60 days to bring
the value of the account up to at least $2,000 before the redemption is
processed.
Redemption by Mail. Shares may be redeemed by submitting a written request for
redemption to Kayne Anderson Mutual Funds, P.O. Box ____,
_________________________. A written request must be in good order, which means
that it must: (1) identify the shareholder's account name; (2) state the number
of shares or dollar amount to be redeemed; and (3) be signed by each registered
owner exactly as the shares are registered.
Signature Guarantee. To prevent fraudulent redemptions, a signature guarantee
for the signature of each person in whose name the account is registered is
required on all written redemption requests over $50,000. A guarantee may be
obtained from any commercial bank, trust company, savings and loan association,
federal savings bank, broker-dealer, or member firm of a national securities
exchange or other eligible financial institution. Credit unions must be
authorized to issue signature guarantees. Broker-dealers guaranteeing signatures
must be a member of a clearing corporation or maintain net capital of at least
$100,000. Notary public endorsements will not be accepted as a substitute for a
signature guarantee. The Transfer Agent may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees or guardians and retirement plans.
Redemption by Telephone. Shareholders who have so indicated on the application,
or have subsequently arranged in writing to do so, may redeem shares by
instructing the Transfer Agent by telephone. Shareholders may redeem shares by
calling the Transfer Agent at (800) _________ between the hours of 8:30 a.m. and
5:00 p.m. (Eastern time) on a day when the 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
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<PAGE>
signature guarantee at the address listed under "Redemption by Mail," above.
Special Factors Regarding Telephone Redemptions. Neither the Funds nor any of
their service contractors will be liable for any loss or expense in acting on
telephone instructions that are reasonably believed to be genuine. In attempting
to confirm that telephone instructions are genuine, the Funds will use
procedures that are considered reasonable, including requesting a shareholder to
correctly state the Fund account number, the name in which the account is
registered, the social security number, banking institution, bank account number
and the name in which the bank account is registered. To the extent that the
Funds fail to use reasonable procedures to verify the genuineness of telephone
instructions, they and/or their service contractors may be liable for any such
instructions that prove to be fraudulent or unauthorized.
The Funds reserve the right to refuse a wire or telephone redemption if it is
believed advisable to do so. Procedures for redeeming Fund shares by wire or
telephone may be modified or terminated at any time by any of the Funds after at
least 30-days' prior written notice to shareholders.
Shares of the Funds may be redeemed through certain brokers, financial
institutions or service organizations who may charge the investor a transaction
fee or other fee for their services at the time of redemption. Such fees would
not otherwise be charged if the shares were redeemed directly from the Funds.
Redemption by Automated Clearing House ("ACH"). A shareholder may elect to have
redemption proceeds, cash distributions or systematic cash withdrawal payments
transferred to a bank, savings and loan association or credit union that is an
on-line member of the ACH system. There are no fees associated with the use of
the ACH service.
ACH redemption requests must be received by the Funds' Transfer Agent before
4:00 p.m. New York time to receive that day's closing net asset value. ACH
redemptions will be sent by the Transfer Agent on the day following the
shareholder's request. The funds from the ACH redemption will be available to
the shareholder two days after the redemption has been processed.
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<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 subsequent investment pursuant to this plan is $100 per month. An
initial Fund account must be opened first with the $2,000 minimum prior to
participating in this plan.
Please complete the appropriate section on the New Account Application
indicating the amount of the automatic investment.
Retirement Plans. The Funds are available for investment by pension and profit
sharing plans, including IRAs, SEPs, Keoghs and Defined Contribution Plans
through which investors may purchase Fund shares. The Funds, however, do not
sponsor Defined Contribution Plans. For details concerning any of the retirement
plans, please call the Funds at (800) _________.
SHARE PRICE CALCULATION
Share Price. Shares of a Fund are purchased at the net asset value after an
order in proper form is received by the Transfer Agent. An order in proper form
must include all correct and complete information, documents and signatures
required to process your purchase, as well as a check or bank wire payment
properly drawn and collectable. The net asset value per share is determined as
of the close of trading of the NYSE on each day the Exchange is open for
trading. Orders received before 4:00 p.m. (Eastern time) on a day when the
Exchange is open for trading will be processed as of the close of trading on
that day. Otherwise, processing will occur on the next business day. The
Distributor reserves the right to reject any purchase order.
Net Asset Value. The net asset value of each Fund is determined as of the close
of trading (currently 4:00 p.m., New York time) on each day that the NYSE is
open for trading. The net asset value per share of each Fund is the value of the
Fund's assets, less its liabilities, divided by the number of outstanding shares
of the Fund. Each Fund values its investments on the
25
<PAGE>
basis of the market value of its securities. Portfolio securities that are
listed or admitted to trading on a U.S. exchange are valued at the last sale
price on the principal exchange on which the security is traded or, if there has
been no sale that day, at the mean between the closing bid and asked prices.
Securities admitted to trading on the NASDAQ National Market System and
securities traded only in the U.S. over-the-counter market are valued at the
last sale price or, if there has been no sale that day, at the mean between the
closing bid and asked prices. Securities and other assets for which market
prices are not readily available are valued at fair value as determined in good
faith by the Board of Trustees. Debt securities with remaining maturities of 60
days or less are normally valued at amortized cost, unless the Board of Trustees
determines that amortized cost does not represent fair value. Cash and
receivables will be valued at their face amounts. Interest will be recorded as
accrued, and dividends will be recorded on their ex- dividend date.
Share Certificates. Shares are credited to an investor's account and
certificates are not issued. This eliminates the costly problem of lost or
destroyed certificates.
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS
Dividends and Distributions. The Rising Dividends, Small-Mid Cap Rising
Dividends and International Rising Dividends Funds expect to pay dividends
annually. The Intermediate Total Return Bond and Intermediate Tax-Free Bond
Funds expect to pay dividends monthly. Each Fund makes distributions of its net
capital gains, if any, at least annually. The Board of Trustees may determine to
declare dividends and make distributions more or less often.
Dividends and capital gain distributions are automatically reinvested in
additional shares of the Fund at the net asset value per share on the
reinvestment date unless the shareholder has previously requested in writing to
the Transfer Agent that payment be made in cash.
Any dividend or distribution paid by a Fund reduces its net asset value per
share on the reinvestment date by the per share amount of the dividend or
distribution. Investors should note that a dividend or distribution paid on
shares purchased shortly before such dividend or distribution was declared will
be subject to income taxes as discussed below even though the dividend or
distribution represents, in substance, a partial return of capital to the
shareholder.
Tax Status. Each Fund intends to qualify and elect to be treated as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986 (the
"Code"). As long as a Fund continues to qualify, and as long as the Fund
distributes all of its income each year to the shareholders, the Fund will not
be subject to any federal income tax or excise taxes based on net income.
Distributions made by a Fund will be taxable to shareholders whether received in
shares (through dividend reinvestment) or in cash. Distributions (other than
exempt-interest dividends paid by the Tax-Free Bond Fund) derived from net
investment income, including net short-term capital gains, are taxable to
shareholders (other than tax-exempt shareholders who have not borrowed to
purchase or carry their shares) as ordinary income. A portion of these
distributions may
26
<PAGE>
qualify for the intercorporate dividends-received deduction. Distributions
designated as capital gains dividends are taxable as long-term capital gains
regardless of the length of time shares of the Fund have been held. Although
distributions are generally taxable when received, certain distributions made in
January are taxable as if received in the prior December. Shareholders will be
informed annually of the amount and nature of the Fund's distributions. A Fund
may be required to impose backup withholding at a current rate of 31% from
income dividends and capital gain distributions and upon payment of redemption
proceeds if provisions of the Code relating to the furnishing and certification
of taxpayer identification numbers and reporting of dividends are not complied
with by a shareholder. Any such accounts without a taxpayer identification
number may be liquidated and distributed to a shareholder, net of withholding,
after the 60th day of investment.
Additional information about taxes is set forth in the Statement of Additional
Information. Shareholders should consult their own advisers concerning federal,
state and local taxation of distributions from the Funds. Heller, Ehrman White &
McAuliffe, counsel to the Trust, has expressed no opinion in respect thereof.
PERFORMANCE INFORMATION
Total Return. From time to time, each Fund may publish its total return in
advertisements and communications to investors. Total return information will
include the Fund's average annual compounded rate of return over the four most
recent calendar quarters and over the period from the Fund's inception of
operations. Each Fund may also advertise aggregate and average total return
information over different periods of time. Each Fund's total return will be
based upon the value of the shares acquired through a hypothetical $1,000
investment (at the beginning of the specified period and the net asset value of
such shares at the end of the period, assuming reinvestment of all the
distributions) at the maximum public offering price. Total return figures will
reflect all recurring charges against Fund income. Investors should note that
the investment results of each Fund will fluctuate over time, and any
presentation of a Fund's total return for any prior period should not be
considered as a representation of what an investor's total return may be in any
future period.
Yield. The Intermediate Total Return Bond and Intermediate Tax-Free Bond Funds
also may refer in their advertising and promotional materials to their yield.
The Funds' yields show the rate of income that they earn on their investments,
expressed as a percentage of the net asset value of Fund shares. The Funds
calculate yield by determining the interest income they earned from their
portfolio investments for a specified 30-day period (net of expenses), dividing
such income by the average number of the Funds' shares outstanding, and
expressing the result as an annualized percentage based on the net asset value
at the end of that 30-day period. The Tax-Free Bond Fund may advertise a tax-
equivalent yield showing what an investor would have to earn before taxes to
equal a tax-free yield. Yield accounting methods differ from the methods used
for other accounting purposes; accordingly, the Funds' yields may not equal the
dividend income actually paid to investors or the income reported in the Funds'
financial statements.
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<PAGE>
In addition to standardized return, performance advertisements and sales
literature may also include other total return performance data
("non-standardized return"). Non-standardized return may be quoted for the same
or different periods as those for which standardized return is quoted and may
consist of aggregate or average annual percentage rate of return, actual
year-by-year rates or any combination thereof.
GENERAL INFORMATION
Voting Rights. Shareholders are entitled to one vote for each dollar of net
asset value per share of each series (and fractional votes for fractional dollar
amounts) and may vote in the election of Trustees and on other matters submitted
to meetings of shareholders. It is not contemplated that regular annual meetings
of shareholders will be held. Rule 18f-2 under the Investment Company Act of
1940, as amended, provides that matters submitted to shareholders be approved by
a majority of the outstanding securities of each series, unless it is clear that
the interests of each series in the matter are identical or the matter does not
affect a series. However, the rule exempts the selection of accountants and the
election of Trustees from the separate voting requirements. Upon commencement of
operations, all of the shares of the Small-Mid Cap Rising Dividends,
International Rising Dividends, Intermediate Total Return Bond and Intermediate
Tax-Free Bond Funds were owned beneficially by affiliates of the Adviser.
Shareholder Meetings. The Trustees have undertaken to the SEC that they will
promptly call a meeting for the purpose of voting on the question of removal of
any Trustee when requested to do so by not less than 10% of the dollar-weighted
total votes of the respective Fund. In addition, subject to certain conditions,
shareholders of each Fund may apply to the Fund to communicate with other
shareholders to request a shareholders' meeting to vote on the removal of a
Trustee or Trustees.
Shareholder Reports and Inquiries. Shareholders will receive annual financial
statements which are examined by the Funds' independent accounts, as well as
unaudited semi-annual financial statements. Unless otherwise requested, only one
copy of each shareholder report or other material sent to shareholders will be
sent to each household or address regardless of the number of shareholders or
accounts at that household or address. Shareholder inquiries should be addressed
to the Funds c/o Kayne Anderson Mutual Funds, 1800 Avenue of the Stars, 2nd
Floor, Los Angeles, California 90067, (800) _________.
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------------------------------------------------------------
PART B
COMBINED STATEMENT OF ADDITIONAL INFORMATION
Kayne Anderson Mutual Funds
Kayne Anderson Rising Dividends Fund
Kayne Anderson Small-Mid Cap Rising Dividends Fund
Kayne Anderson International Rising Dividends Fund
Kayne Anderson Intermediate Total Return Bond Fund
Kayne Anderson Intermediate Tax-Free Bond Fund
------------------------------------------------------------
<PAGE>
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
(310) 556-2721
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 30, 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 the Funds at the above address and
telephone number. This Statement of Additional Information, although not in and
of itself a prospectus, is incorporated by reference into the Prospectus in its
entirety.
TABLE OF CONTENTS
CAPTION PAGE
- ------- ----
Investment Objectives and Policies..........................................B-2
Risk Factors................................................................B-22
The Funds' Investment Limitations...........................................B-24
Management of the Funds.....................................................B-27
The Funds' Administrator....................................................B-33
The Funds' Distributor......................................................B-33
Transfer Agent and Custodian................................................B-34
How Net Asset Value is Determined...........................................B-34
Share Purchases and Redemptions.............................................B-36
Dividends, Distributions and Taxes..........................................B-36
How Performance is Determined...............................................B-41
Additional Information......................................................B-43
Financial Statements........................................................B-45
For ease of reference, the same section headings are used in both the
Prospectus and this Statement of Additional Information
<PAGE>
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 ____________, 1996, AS REVISED FROM TIME TO
TIME, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MAY NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND.
This Statement of Additional Information is dated ____________, 1996.
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Funds are managed by Kayne Anderson Investment Management, L.P. ("Kayne
Anderson" or the "Adviser"). The investment objectives and policies of the Funds
are described in detail in the Prospectus. The achievement of each Fund's
investment objective will depend on market conditions generally and on the
analytical and portfolio management skills of the Adviser. The following
discussion supplements the discussion in the Prospectus.
Portfolio Securities
Below Investment Grade Debt Securities. The Funds may purchase
lower-rated debt securities (e.g., those rated BB and B by Standard & Poor's
Corporation ("S&P") or Ba and B by Moody's Investors Service, Inc. ("Moody's")
that have poor protection of payment of principal and interest. See Appendix A
for a description of these ratings. These securities often are considered to be
speculative and involve greater risk of default or price changes due to changes
in the issuer's creditworthiness. Market prices of these securities may
fluctuate more than higher-rated debt securities and may decline significantly
in periods of general economic difficulty which may follow periods of rising
interest rates. While the market for high-yield corporate debt securities has
been in existence for many years and has weathered previous economic downturns,
the market in recent years has experienced a dramatic increase in the
large-scale use of such securities to fund highly leveraged corporate
acquisitions and restructurings. Accordingly, past experience may not provide an
accurate indication of future performance of the high-yield bond market,
especially during periods of economic recession.
The market for lower-rated securities may be thinner and less active
than that for higher-rated securities, which can adversely affect the prices at
which these securities can be sold. If market quotations are not available,
these securities are valued in accordance with procedures established by the
Board of Trustees, including the use of outside pricing services. Judgment plays
a greater role in valuing high-yield corporate debt securities than is the case
for securities for which more external sources for quotations and last-sale
information are available. Adverse publicity and changing investor perceptions
may affect the ability of outside pricing services used by the Funds to value
their portfolio securities, and their ability to dispose of these lower-rated
debt securities.
B-2
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Because the risk of default is higher for lower-quality securities and
sometimes increases with the age of these securities, the Adviser's research and
credit analysis are an integral part of managing any securities of this type
held by the Funds. In considering investments for the Funds, the Adviser
attempts to identify those issuers of high-yielding securities whose financial
condition is adequate to meet future obligations, has improved, or is expected
to improve in the future. The Adviser's analysis focuses on relative values
based on such factors as interest or dividend coverage, asset coverage, earnings
prospects, and the experience and managerial strength of the issuer.
Each Fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise exercise its rights as a security holder to seek
to protect the interests of security holders if it determines this to be in the
best interest of Fund shareholders.
Depositary Receipts. The Rising Dividends, Small-Mid Cap Rising
Dividends, International Rising Dividends and the Intermediate Total Return Bond
Funds may hold securities of foreign issuers in the form of American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") and other similar
global instruments available in emerging markets, or other securities
convertible into securities of eligible issuers. These securities may not
necessarily be denominated in the same currency as the securities for which they
may be exchanged. Generally, ADRs in registered form are designed for use in
U.S. securities markets, and EDRs and other similar global instruments in bearer
form are designed for use in European securities markets. For purposes of these
Funds' investment policies, these Funds' investments in ADRs, EDRs and similar
instruments will be deemed to be investments in the equity securities
representing the securities of foreign issuers into which they may be converted.
Other Investment Companies. Each Fund may invest up to 10% of its total
assets in securities issued by other investment companies investing in
securities in which the Fund can invest provided that such investment companies
invest in portfolio securities in a manner consistent with the Fund's investment
objective and policies. Applicable provisions of the Investment Company Act of
1940, as amended (the "1940 Act") require that a Fund limit its investments so
that, as determined immediately after a securities purchase is made: (a) not
more than 10% of the value of a Fund's total assets will be invested in the
aggregate in securities of investment companies as a group; and (b) either (i) a
Fund and affiliated persons of that Fund
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not own together more than 3% of the total outstanding shares of any one
investment company at the time of purchase (and that all shares of the
investment company held by that Fund in excess of 1% of the company's total
outstanding shares be deemed illiquid), or (ii) a Fund not invest more than 5%
of its total assets in any one investment company and the investment not
represent more than 3% of the total outstanding voting stock of the investment
company at the time of purchase. As a shareholder of another investment company,
a Fund would bear, along with other shareholders, its pro rata portion of the
other investment company's expenses, including advisory fees. These expenses
would be in addition to the advisory and other expenses that a Fund bears
directly in connection with its own operations.
In accordance with applicable regulatory provisions of the State of
California, the Adviser has agreed to waive its management fee with respect to
assets of the Funds that are invested in other open-end investment companies.
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
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U.S. Government within the Department of Housing and Urban Development. The
National Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to
guarantee the timely payment of the principal of, and interest on, securities
that are based on and backed by a pool of specified mortgage loans. For these
types of securities to qualify for a GNMA guarantee, the underlying collateral
must be mortgages insured by the FHA under the Housing Act, or Title V of the
Housing Act of 1949, as amended ("VA Loans"), or be pools of other eligible
mortgage loans. The Housing Act provides that the full faith and credit of the
U.S. Government is pledged to the payment of all amounts that may be required to
be paid under any guarantee. In order to meet its obligations under a guarantee,
GNMA is authorized to borrow from the U.S. Treasury with no limitations as to
amount.
GNMA pass-through securities may represent a proportionate interest in
one or more pools of the following types of mortgage loans: (1) fixed-rate level
payment mortgage loans; (2) fixed-rate graduated payment mortgage loans; (3)
fixed-rate growing equity mortgage loans; (4) fixed-rate mortgage loans secured
by manufactured (mobile) homes; (5) mortgage loans on multifamily residential
properties under construction; (6) mortgage loans on completed multifamily
projects; (7) fixed-rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (8) mortgage loans that provide for
adjustments on payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (9) mortgage-backed serial notes.
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
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those pools consist of one or more of the following: (1) fixed-rate level
payment mortgage loans; (2) fixed- rate growing equity mortgage loans; (3)
fixed-rate graduated payment mortgage loans; (4) variable- rate mortgage loans;
(5) other adjustable-rate mortgage loans; and (6) fixed-rate mortgage loans
secured by multifamily projects.
Mortgage-Related Securities: Federal Home Loan Mortgage Corporation.
FHLMC is a corporate instrumentality of the United States established by the
Emergency Home Finance Act of 1970, as amended. FHLMC was organized primarily
for the purpose of increasing the availability of mortgage credit to finance
needed housing. The operations of FHLMC currently consist primarily of the
purchase of first lien, conventional, residential mortgage loans and
participation interests in mortgage loans and the resale of the mortgage loans
in the form of mortgage-backed securities.
The mortgage loans underlying FHLMC securities typically consist of
fixed-rate or adjustable-rate mortgage loans with original terms to maturity of
between 10 and 30 years, substantially all of which are secured by first liens
on one-to-four-family residential properties or multifamily projects. Each
underlying mortgage loan must include whole loans, undivided participation
interests in whole loans or participation in another FHLMC security.
Privately Issued Mortgage-Related Securities. As set forth in the
Prospectus, the Funds may invest in mortgage-related securities offered by
private issuers, including pass-through securities comprised of pools of
conventional residential mortgage loans; mortgage-backed bonds which are
considered to be obligations of the institution issuing the bonds and are
collateralized by mortgage loans; and bonds and collateralized mortgage
obligations ("CMOs").
Each class of a CMO is issued at a specific fixed or floating coupon
rate and has a stated maturity or final distribution date. Principal prepayments
on the collateral pool may cause the various classes of a CMO to be retired
substantially earlier than their stated maturities or final distribution dates.
The principal of and interest on the collateral pool may be allocated among the
several 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
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priority over others with respect to the receipt of prepayments on the
mortgages.
The Funds may invest in, among other things, "parallel pay" CMOs and
Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured
to provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class which, like the other CMO
structures, must be retired by its stated maturity date or final distribution
date, but may be retired earlier. PAC Bonds are parallel pay CMOs that generally
require payments of a specified amount of principal on each payment date; the
required principal payment on PAC Bonds have the highest priority after interest
has been paid to all classes.
Adjustable-Rate Mortgage-Related Securities. Because the interest rates
on the mortgages underlying adjustable-rate mortgage-related securities ("ARMS")
reset periodically, yields of such portfolio securities will gradually align
themselves to reflect changes in market rates. Unlike fixed-rate mortgages,
which generally decline in value during periods of rising interest rates, ARMS
allow a Fund to participate in increases in interest rates through periodic
adjustments in the coupons of the underlying mortgages, resulting in both higher
current yields and low price fluctuations. Furthermore, if prepayments of
principal are made on the underlying mortgages during periods of rising interest
rates, a Fund may be able to reinvest such amounts in securities with a higher
current rate of return. During periods of declining interest rates, of course,
the coupon rates may readjust downward, resulting in lower yields to the Fund.
Further, because of this feature, the value of ARMS is unlikely to rise during
periods of declining interest rates to the same extent as fixed-rate
instruments. For further discussion of mortgage-related securities generally,
see "Portfolio Securities And Investment Techniques" in the Prospectus.
Variable Rate Demand Notes. Variable rate demand notes ("VRDNs") are
tax-exempt obligations that contain a floating or variable interest rate
adjustment formula and an unconditional right of demand to receive payment of
the unpaid principal balance plus accrued interest upon a short notice period
prior to specified dates, generally at 30-, 60-, 90-, 180-, or 365-day
intervals. The interest rates are adjustable at intervals ranging from daily to
six months. Adjustment formulas are designed to maintain the market value of the
VRDN at approximately the par value of the VRDN upon the adjustment date. The
adjustments typically are based upon the prime rate of a bank or some other
appropriate interest rate adjustment index.
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The Tax-Free Bond Fund also may invest in VRDNs in the form of
participation interests ("Participating VRDNs") in variable rate tax-exempt
obligations held by a financial institution, typically a commercial bank
("institution"). Participating VRDNs provide a Fund with a specified undivided
interest (up to 100%) of the underlying obligation and the right to demand
payment of the unpaid principal balance plus accrued interest on the
Participating VRDNs from the institution upon a specified number of days'
notice, not to exceed seven. In addition, the Participating VRDN is backed by an
irrevocable letter of credit or guaranty of the institution. A Fund has an
undivided interest in the underlying obligation and thus participates on the
same basis as the institution in such obligation except that the institution
typically retains fees out of the interest paid on the obligation for servicing
the obligation, providing the letter of credit and issuing the repurchase
commitment.
Participating VRDNs may be unrated or rated, and their creditworthiness
may be a function of the creditworthiness of the issuer, the institution
furnishing the irrevocable letter of credit, or both. Accordingly, the Tax-Free
Bond Fund may invest in such VRDNs, the issuers or underlying institutions of
which the Adviser believes are creditworthy and satisfy the quality requirements
of the Tax-Free Bond Fund. The Adviser periodically monitors the
creditworthiness of the issuer of such securities and the underlying
institution.
During periods of high inflation and periods of economic slowdown,
together with the fiscal measures adopted by governmental authorities to attempt
to deal with them, interest rates have varied widely. While the value of the
underlying VRDN may change with changes in interest rates generally, the
variable rate nature of the underlying VRDN should minimize changes in the value
of the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed-income
securities. The Tax-Free Bond Fund may invest in VRDNs on which stated minimum
or maximum rates, or maximum rates set by state law, limit the degree to which
interest on such VRDNs may fluctuate; to the extent they do increases or
decreases in value may be somewhat greater than would be the case without such
limits. Because the adjustment of interest rates on the VRDNs is made in
relation to movements of various interest rate adjustment indices, the VRDNs are
not comparable to long-term fixed-rate securities. Accordingly, interest rates
on the VRDNs may be higher or lower than current market rates for fixed-rate
obligations of comparable quality with similar maturities.
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Municipal Securities. Because the Tax-Free Bond Fund invests a
substantial portion of its total assets in obligations either issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies, authorities and
instrumentalities, including industrial development bonds, as well as
obligations of certain agencies and instrumentalities of the U.S. Government,
the interest from which is, in the opinion of bond counsel to the issuer, exempt
from federal 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
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and are issued by or on behalf of public authorities to raise money to finance
various privately operated facilities for business manufacturing, housing,
sports, and pollution control. These bonds also are used to finance public
facilities, such as airports, mass transit systems, ports and parking. The
payment of the principal and interest on such bonds is dependent solely on the
ability of the facility's user to meet its financial obligations and the pledge,
if any, of the real and personal property so financed as security for such
payment. As a result of 1986 federal tax legislation, industrial revenue bonds
may no longer be issued on a tax-exempt basis for certain previously permissible
purposes, including sports and pollution control facilities.
Participation Interests. The Tax-Free Bond Fund may purchase from
financial institutions participation interests in Municipal Securities, such as
industrial development bonds and municipal lease/purchase agreements. A
participation interest gives a Fund an undivided interest in a Municipal
Security in the proportion that the Fund's participation interest bears to the
total principal amount of the Municipal Security. These instruments may have
fixed, floating or variable rates of interest. If the participation interest is
unrated, it will be backed by an irrevocable letter of credit or guarantee of a
bank that the Board of Trustees has approved as meeting the Board's standards,
or, alternatively, the payment obligation will be collateralized by U.S.
Government securities.
For certain participation interests, the Tax-Free Bond Fund will have
the right to demand payment, on not more than seven days' notice, for all or any
part of its participation interest in a Municipal Security, plus accrued
interest. As to these instruments, the Tax-Free Bond Fund intends to exercise
its right to demand payment only upon a default under the terms of the Municipal
Securities, as needed to provide liquidity to meet redemptions, or to maintain
or improve the quality of their investment portfolios.
Some participation interests are subject to a "nonappropriation" or
"abatement" feature by which, under certain conditions, the issuer of the
underlying Municipal Security may, without penalty, terminate its obligation to
make payment. In such event, the holder of such security must look to the
underlying collateral, which is often a municipal facility used by the issuer.
Custodial Receipts. The Tax-Free Bond Fund may purchase custodial
receipts representing the right to receive certain future principal and interest
payments on Municipal Securities that underlie the custodial receipts. A number
of different arrangements are
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possible. In the most common custodial receipt arrangement, an issuer or a third
party owning the Municipal Securities deposits such obligations with a custodian
in exchange for two classes of custodial receipts with different
characteristics. In each case, however, payments on the two classes are based on
payments received on the underlying Municipal Securities. One class has the
characteristics of a typical auction-rate security, having its interest rate
adjusted at specified intervals, and its ownership changes based on an auction
mechanism. The interest rate of this class generally is expected to be below the
coupon rate of the underlying Municipal Securities and generally is at a level
comparable to that of a Municipal Security of similar quality and having a
maturity equal to the period between interest rate adjustments. The second class
bears interest at a rate that exceeds the interest rate typically borne by a
security of comparable quality and maturity; this rate also is adjusted,
although inversely to changes in the rate of interest of the first class. If the
interest rate on the first class exceeds the coupon rate of the underlying
Municipal Securities, its interest rate will exceed the rate paid on the second
class. In no event will the aggregate interest paid with respect to the two
classes exceed the interest paid by the underlying Municipal Securities. The
value of the second class and similar securities should be expected to fluctuate
more than the value of a Municipal Security of comparable quality and maturity
and their purchase by the Tax-Free Bond Fund should increase the volatility of
its net asset value and, thus, its price per share. These custodial receipts are
sold in private placements and are 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,
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after payment of this fee, the security holder effectively holds a demand
obligation that bears interest at the prevailing short-term tax-exempt rate. The
Adviser, on behalf of the Tax-Free Bond Fund, considers on a periodic basis the
creditworthiness of the issuer of the underlying Municipal Security, of any
custodian and of the third party provider of the tender option. In certain
instances and for certain tender option bonds, the option may be terminable in
the event of a default in payment of principal or interest on the underlying
Municipal Obligations and for other reasons. The Tax-Free Bond Fund will not
invest more than 10% of its net assets in securities that are illiquid
(including tender option bonds with a tender feature that cannot be exercised on
not more than seven days' notice if there is no secondary market available for
these obligations).
Obligations with Puts Attached. The Tax-Free Bond Fund may purchase
Municipal Securities together with the right to resell the securities to the
seller at an agreed-upon price or yield within a specified period prior to the
securities' maturity date. Although an obligation with a put attached is not a
put option in the usual sense, it is commonly known as a "put" and is also
referred to as a "stand-by commitment." The Tax-Free Bond Fund will use such
puts in accordance with regulations issued by the Securities and Exchange
Commission ("SEC"). In 1982, the Internal Revenue Service (the "IRS") issued a
revenue ruling to the effect that, under specified circumstances, a regulated
investment company would be the owner of tax-exempt municipal obligations
acquired with a put option. The IRS also has issued private letter rulings to
certain taxpayers (which do not serve as precedent for other taxpayers) to the
effect that tax-exempt interest received by a regulated investment company with
respect to such obligations will be tax-exempt in the hands of the company and
may be distributed to its shareholders as exempt-interest dividends. The last
such ruling was issued in 1983. The IRS subsequently announced that it will not
ordinarily issue advance ruling letters as to the identity of the true owner of
property in cases involving the sale of securities or participation interests
therein if the purchaser has the right to cause the securities, or the
participation interest therein, to be purchased by either the seller or a third
party. The Tax-Free Bond Fund intends to take the position that it is the owner
of any municipal obligations acquired subject to a stand-by commitment or a
similar put and that tax-exempt interest earned with respect to such municipal
obligations will be tax exempt in its hands. There is no assurance that stand-by
commitments will be available to the Tax-Free Bond Fund nor has it assumed that
such commitments would continue to be available under all market conditions.
There may be other types of municipal
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securities that become available and are similar to the foregoing described
Municipal Securities in which the Tax-Free Bond Fund may invest.
Zero Coupon Debt Securities. The Funds may invest in zero coupon
securities. Zero coupon debt securities do not make interest payments; instead,
they are sold at a discount from face value and are redeemed at face value when
they mature. Because zero coupon bonds do not pay current income, their prices
can be very volatile when interest rates change. In calculating its daily net
asset value, a Fund takes into account as income a portion of the difference
between a zero coupon bond's purchase price and its face value. The amount of
the discount on a zero coupon bond (other than a zero coupon Municipal Security)
acquired by a Fund from its issuer must be included in the Fund's income during
the period when the Fund holds the bond, even though the Fund does not receive
payments of interest on the bond. In order to qualify for favorable federal
income tax treatment, a Fund may have to increase its distributions to
shareholders to reflect the amount of the discount that the Fund includes in its
income, and may be required to borrow to meet its distribution requirements.
Hedging and Risk Management Practices
In order to hedge against foreign currency exchange rate risks, the
Rising Dividends, Small-Mid Cap Rising Dividends, International Rising Dividends
and Intermediate Total Return Bond Funds may enter into forward foreign currency
exchange contracts ("forward contracts") and foreign currency futures contracts,
as well as purchase put or call options on foreign currencies, as described
below. These Funds also may conduct their foreign currency exchange transactions
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market.
The Funds also may purchase other types of options and futures and may,
in the future, write covered options, as described below and in the Prospectus.
Forward Contracts. The Rising Dividends, Small-Mid Cap Rising
Dividends, International Rising Dividends and Intermediate Total Return Bond
Funds may enter into forward contracts to attempt to minimize the risk from
adverse changes in the relationship between the U.S. dollar and foreign
currencies. A forward contract, which is individually negotiated and privately
traded by currency traders and their customers, involves an obligation to
purchase or sell a specific currency for an agreed-upon price at a future date.
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A Fund may enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency or is expecting a dividend or interest payment in order to "lock in"
the U.S. dollar price of a security, dividend or interest payment. When a Fund
believes that a foreign currency may suffer a substantial decline against the
U.S. dollar, it may enter into a forward contract to sell an amount of that
foreign currency approximating the value of some or all of the Fund's portfolio
securities denominated in such currency, or when a Fund believes that the U.S.
dollar may suffer a substantial decline against a foreign currency, it may enter
into a forward contract to buy that currency for a fixed dollar amount.
In connection with a Fund's forward contract transactions, an amount of
the Fund's assets equal to the amount of its commitments will be held aside or
segregated to be used to pay for the commitments. Accordingly, a Fund always
will have cash, cash equivalents or high-quality liquid debt securities
denominated in the appropriate currency available in an amount sufficient to
cover any commitments under these contracts. Segregated assets used to cover
forward contracts will be marked to market on a daily basis. While these
contracts are not presently regulated by the Commodity Futures Trading
Commission ("CFTC"), the CFTC may in the future regulate them, and the ability
of these Funds to utilize forward contracts may be restricted. Forward contracts
may limit potential gain from a positive change in the relationship between the
U.S. dollar and foreign currencies. Unanticipated changes in currency prices may
result in poorer overall performance by a Fund than if it had not entered into
such contracts. The Funds generally will not enter into a forward foreign
currency exchange contract with a term greater than one year.
Futures Contracts and Options on Futures Contracts. To hedge against
movements in interest rates, securities prices or currency exchange rates, the
Funds may purchase and sell various kinds of futures contracts and options on
futures contracts. The Funds also may enter into closing purchase and sale
transactions with respect to any such contracts and options. Futures contracts
may be based on various securities (such as U.S. Government securities),
securities indices, foreign currencies and other financial instruments and
indices.
The Funds have filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the CFTC and the National
Futures Association, which regulate trading in the futures markets, before
engaging in any purchases or sales of futures
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contracts or options on futures contracts. Pursuant to Section 4.5 of the
regulations under the Commodity Exchange Act, the notice of eligibility included
the representation that the Funds will use futures contracts and related options
for bona fide hedging purposes within the meaning of CFTC regulations, provided
that a Fund may hold positions in futures contracts and related options that do
not fall within the definition of bona fide hedging transactions if the
aggregate initial margin and premiums required to establish such positions will
not exceed 5% of that Fund's net assets (after taking into account unrealized
profits and unrealized losses on any such positions) and that in the case of an
option that is in-the-money at the time of purchase, the in-the-money amount may
be excluded from such 5%.
The Funds will attempt to determine whether the price fluctuations in
the futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Funds or
which they expect to purchase. The Funds' futures transactions generally will be
entered into only for traditional hedging purposes -- i.e., futures contracts
will be sold to protect against a decline in the price of securities or
currencies and will be purchased to protect a Fund against an increase in the
price of securities it intends to purchase (or the currencies in which they are
denominated). All futures contracts entered into by these Funds are traded on
U.S. exchanges or boards of trade licensed and regulated by the CFTC or on
foreign exchanges.
Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting or "closing" purchase or
sale transactions, which may result in a profit or a loss. While these Funds'
futures contracts on securities or currencies will usually be liquidated in this
manner, a Fund may make or take delivery of the underlying securities or
currencies whenever it appears economically advantageous. A clearing corporation
associated with the exchange on which futures on securities or currencies are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
By using futures contracts to hedge their positions, these Funds seek
to establish more certainty than would otherwise be possible with respect to the
effective price, rate of return or currency exchange rate on portfolio
securities or securities that these Funds propose to acquire. For example, when
interest rates are rising or securities prices are falling, a Fund can seek,
through the sale of futures contracts, to offset a decline in the value of its
current portfolio securities. When rates are falling or prices are rising,
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a Fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market with respect to
anticipated purchases. Similarly, a Fund can sell futures contracts on a
specified currency to protect against a decline in the value of such currency
and its portfolio securities which are denominated in such currency. A Fund can
purchase futures contracts on a foreign currency to fix the price in U.S.
dollars of a security denominated in such currency that such Fund has acquired
or expects to acquire.
As part of its hedging strategy, a Fund also may enter into other types
of financial futures contracts if, in the opinion of the Adviser, there is a
sufficient degree of correlation between price trends for the Fund's portfolio
securities and such futures contracts. Although under some circumstances prices
of securities in 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.
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These Funds will engage in transactions in futures contracts and
related options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended (the "Code"), for
maintaining their qualification as a regulated investment company for federal
income tax purposes.
Options on Securities, Securities Indices and Currencies. These Funds
may purchase put and call options on securities in which they have invested, on
foreign currencies represented in their portfolios and on any securities index
based in whole or in part on securities in which these Funds may invest. These
Funds also may enter into closing sales transactions in order to realize gains
or minimize losses on options they have purchased.
A Fund normally will purchase call options in anticipation of an
increase in the market value of securities of the type in which it may invest or
a positive change in the currency in which such securities are denominated. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified securities or a specified amount of a foreign currency at
a specified price during the option period.
A Fund may purchase and sell options traded on U.S. and foreign
exchanges. Although these Funds will generally purchase only those options for
which there appears to be an active secondary market, there can be no assurance
that a liquid secondary market on an exchange will exist for any particular
option or at any particular time. For some options, no secondary market on an
exchange may exist. In such event, it might not be possible to effect closing
transactions in particular options, with the result that a Fund would have to
exercise its options in order to realize any profit and would incur transaction
costs upon the purchase or sale of the underlying securities.
Secondary markets on an exchange may not exist or may not be liquid for
a variety of reasons including: (i) insufficient trading interest in certain
options; (ii) restrictions on opening transactions or closing transactions
imposed by an exchange; (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options; (iv)
unusual or unforeseen circumstances which interrupt normal operations on an
exchange; (v) inadequate facilities of an exchange or the Options Clearing
Corporation to handle current trading volume at all times; or (vi)
discontinuance in the future by one or more exchanges for economic or other
reasons, of trading of options (or of a particular class or series of options),
in which event the secondary market on
B-17
<PAGE>
that exchange (or in that class or series of options) would cease to exist,
although outstanding options on that exchange that had been issued by the
Options Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
Although these Funds do not currently intend to do so, they may, in the
future, write (i.e., sell) covered put and call options on securities,
securities indices and currencies in which they may invest. A covered call
option involves a Fund's giving another party, in return for a premium, the
right to buy specified securities owned by the Fund at a specified future date
and price set at the time of the contract. A covered call option serves as a
partial hedge against the price decline of the underlying security. However, by
writing a covered call option, a Fund gives up the opportunity, while the option
is in effect, to realize gain from any price increase (above the option exercise
price and premium) in the underlying security. In addition, a Fund's ability to
sell the underlying security is limited while the option is in effect unless the
Fund effects a closing purchase transaction.
These Funds also may write covered put options that give the holder of
the option the right to sell the underlying security to the Fund at the stated
exercise price. A Fund will receive a premium for writing a put option but will
be obligated for as long as the option is outstanding to purchase the underlying
security at a price that may be higher than the market value of that security at
the time of exercise. In order to "cover" put options it has written, a Fund
will cause its custodian to segregate cash, cash equivalents, U.S. Government
securities or other high-grade liquid debt securities with an aggregate value
equal to at least the exercise price of the put options. In segregating such
assets, the custodian either deposits such assets in a segregated account or
separately identifies such assets and renders them unavailable for investment. A
Fund will not write put options if the aggregate value of the obligations
underlying the put options exceeds 25% of the Fund's total assets.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Options Clearing Corporation inadequate, and result in the institution by an
exchange of special procedures that may interfere with the timely execution of
the Funds' orders.
Other Investment Practices
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<PAGE>
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.
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
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to as a "settlement hedge" or "transaction hedge." The Adviser expects to enter
into settlement hedges in the normal course of managing the Funds' foreign
investments. A Fund also could enter into forward contracts to purchase or sell
a foreign currency in anticipation of future purchases or sales of securities
denominated in foreign currency, even if the specific investments have not yet
been selected by the Adviser.
The Funds also may use forward contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. For example,
if a Fund owned securities denominated in Deutschemarks, it could enter into a
forward contract to sell Deutschemarks in return for U.S. dollars to hedge
against possible declines in the Deutschemark's value. Such a hedge (sometimes
referred to as a "position hedge") would tend to offset both positive and
negative currency fluctuations, but would not offset changes in security values
caused by other factors. A Fund also could hedge the position by selling another
currency expected to perform similarly to the Deutschemark -- for example, by
entering into a forward contract to sell Deutschemarks or European Currency
Units in return for U.S. dollars. This type of hedge, sometimes referred to as a
"proxy hedge," could offer advantages in terms of cost, yield, or efficiency,
but generally will not hedge currency exposure as effectively as a simple hedge
into U.S. dollars. Proxy hedges may result in losses if the currency used to
hedge does not perform similarly to the currency in which the hedge securities
are denominated.
SEC guidelines require mutual funds to segregate cash and appropriate
liquid assets to cover forward currency contracts that are deemed speculations.
The Funds are not required to segregate assets to cover forward contracts
entered into for hedging purposes, including settlement hedges, position hedges,
and proxy hedges.
A Fund will not enter into a forward contract if, as a result, it
would have more than one-third of its total assets committed to such contracts
(unless it owns the currency that it is obligated to deliver or has caused its
custodian to segregate cash or high-quality liquid assets having a value
sufficient to cover its obligations).
The successful use of forward currency contracts will depend on the
Adviser's skill in analyzing and predicting currency values. Forward contracts
may change a Fund's investment exposure to changes in currency exchange rates
substantially, and could result in losses to a Fund if exchange rates do not
perform as the Adviser anticipates. For example, if a currency's value rose at a
time when
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<PAGE>
the Adviser had hedged a Fund by selling currency in exchange for dollars, a
Fund would be unable to participate in the currency's appreciation. If the
Adviser hedges currency exposure through proxy hedges, a Fund could realize
currency losses from the hedge and the security position at the same time if the
two currencies do not move in tandem. Similarly, if the Adviser increases a
Fund's exposure to 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
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<PAGE>
issuers of indexed securities have included banks, corporations, and certain
U.S. Government agencies.
Repurchase Agreements. In a repurchase agreement, a Fund purchases a
security and simultaneously commits to resell that security to the seller at an
agreed upon price on an agreed upon date within a specified number of days
(usually not more than seven) from the date of purchase. The resale price
reflects the purchase price plus an agreed upon incremental amount which is
unrelated to the coupon rate or maturity of the purchased security. A repurchase
agreement involves the obligation of the seller to pay the agreed upon price,
which obligation is, in effect, secured by the value (at least equal to the
amount of the agreed upon resale price and marked to market daily) of the
underlying security. A Fund may engage in a repurchase agreement with respect to
any security in which it is authorized to invest. Any repurchase transaction in
which a Fund engages will require at least 100% collateralization of the
seller's obligation during the entire term of the repurchase agreement. Each
Fund may engage in straight repurchase agreements and tri-party repurchase
agreements. While it does not presently appear possible to eliminate all risks
from these transactions (particularly the possibility of a decline in the market
value of the underlying securities, as well as delays and costs to a Fund in
connection with bankruptcy proceedings involving a counterparty), it is each
Fund's current policy to limit repurchase agreement transactions to those
parties whose creditworthiness has been reviewed and deemed satisfactory by the
Adviser.
Reverse Repurchase Agreements. The Funds may engage in reverse
repurchase agreements. In a reverse repurchase agreement, a Fund sells a
portfolio instrument to another party, such as a bank, broker-dealer or other
financial institution, in return for cash, and agrees to repurchase the
instrument at a particular price and time. While a reverse repurchase agreement
is outstanding, a Fund generally will segregate cash and high quality liquid
assets to cover its obligation under the agreement. The Funds enter into reverse
repurchase agreements only with parties whose creditworthiness has been reviewed
and deemed satisfactory by the Adviser. A Fund's reverse repurchase agreements
and dollar roll transactions that are accounted for as financings will be
included among that Fund's borrowings for purposes of its investment policies
and limitations.
B-22
<PAGE>
Dollar Roll Transactions. The Funds may enter into dollar roll
transactions. A dollar roll transaction involves a sale by a Fund of a security
to a financial institution concurrently with an agreement by that Fund to
purchase a similar security from the institution at a later date at an
agreed-upon price. The securities that are repurchased will bear the same
interest rate as those sold, but generally will be collateralized by different
pools of mortgages with different prepayment histories than those sold. During
the period between the sale and repurchase, a Fund will not be entitled to
receive interest and principal payments on the securities sold. Proceeds of the
sale will be invested in additional portfolio securities of that Fund, and the
income from these investments, together with any additional fee income received
on the sale, may or may not generate income for that Fund exceeding the yield on
the securities sold.
When a Fund enters into a dollar roll transaction, it causes its
custodian to segregate liquid assets such as cash, U.S. Government securities or
other high-grade liquid debt securities having a value equal to the purchase
price for the similar security (including accrued interest) and subsequently
marks the assets to market daily to ensure that full collateralization is
maintained.
Securities Lending. The Funds may lend securities to parties such as
broker-dealers, banks, or institutional investors. Securities lending allows the
Funds to retain ownership of the securities loaned and, at the same time, to
earn additional income. Because there may be delays in the recovery of loaned
securities, or even a loss of rights in collateral supplied, should the borrower
fail financially, loans will be made only to parties whose creditworthiness has
been reviewed and deemed satisfactory by the Adviser. Furthermore, they will
only be made if, in the judgment of the Adviser, the consideration to be earned
from such loans would justify the risk.
The Adviser understands that it is the current view of the SEC staff
that a Fund may engage in loan transactions only under the following conditions:
(1) the Fund must receive 100% collateral in the form of cash, cash equivalents
(e.g., U.S. Treasury bills or notes) or other high-grade liquid debt instruments
from the borrower; (2) the borrower must increase the collateral whenever the
market value of the securities loaned (determined on a daily basis) rises above
the value of the collateral; (3) after giving notice, the Fund must be able to
terminate the loan at any time; (4) the Fund must receive reasonable interest on
the loan or a flat fee from the borrower, as well as amounts equivalent to any
dividends, interest,
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<PAGE>
or other distributions on the securities loaned and to any increase in market
value; (5) the Fund may pay only reasonable custodian fees in connection with
the loan; and (6) the Board of Trustees must be able to vote proxies on the
securities loaned, either by terminating the loan or by entering into an
alternative arrangement with the borrower.
Cash received through loan transactions may be invested in any security
in which the Funds are authorized to invest. Investing this cash subjects that
investment, as well as the security loaned, to market forces (i.e., capital
appreciation or depreciation).
Short Sales. The Funds currently have no intention to seek to hedge
investments or realize additional gains through short sales that are not covered
or "against the box," but may do so in the future. Short sales are transactions
in which a Fund sells a security it does not own, in anticipation of a decline
in the market value of that security. To complete such a transaction, a Fund
must borrow the security to make delivery to the buyer. A Fund then is obligated
to replace the security borrowed by purchasing it at the market price at or
prior to the time of replacement. The price at such time may be more or less
than the price at which the security was sold by a Fund. Until the security is
replaced, a Fund is required to repay the lender any dividends or interest that
accrue during the period of the loan. To borrow the security, a Fund also may be
required to pay a premium, which would increase the cost of the security sold.
The net proceeds of the short sale will be retained by the broker (or by the
Fund's custodian in a special custody account) to the extent necessary to meet
margin requirements until the short position is closed out. A Fund also will
incur transaction costs in effecting short sales.
A Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
a Fund replaces the borrowed security. A Fund will realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of the premium,
dividends, interest 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
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deposited with the broker in connection with the short sale (not including the
proceeds from the short sale). The segregated assets are marked-to-market daily,
provided that at no time will the amount segregated plus the amount deposited
with the broker be less than the market value of the securities when they were
sold short.
In addition, the Funds in the future also may make short sales "against
the box," i.e., when a security identical to one owned by a Fund is borrowed and
sold short. If a Fund enters into a short sale against the box, it is required
to segregate securities equivalent in kind and amount to the securities sold
short (or securities convertible or exchangeable into such securities), and is
required to hold such securities while the short sale is outstanding. A Fund
will incur transaction costs, including interest, in connection with opening,
maintaining, and closing short sales against the box.
Illiquid Investments. Illiquid investments are investments that cannot
be sold or disposed of in the ordinary course of business at approximately the
prices at which they are valued. Under the supervision of the Board of Trustees,
the Adviser determines the liquidity of the Funds' investments and, through
reports from the Adviser, the Board monitors trading activity in illiquid
investments. In determining the liquidity of the Funds' investments, the Adviser
may consider various factors, including (1) the frequency of trades and
quotations, (2) the number of dealers and prospective purchasers in the
marketplace, (3) dealer undertakings to make a market, (4) the nature of the
security (including any demand or tender features), (5) the nature of the
marketplace for trades (including the ability to assign or offset a Fund's
rights and obligations relating to the investment); and (6) in the case of
foreign currency-denominated securities, any restriction on currency conversion.
Investments currently considered by a Fund to be illiquid include repurchase
agreements not entitling the holder to payments of principal and interest within
seven days, over-the-counter options (and securities underlying such options),
certain mortgage-backed securities and restricted securities. In the absence of
market quotations, illiquid investments are priced at fair value as determined
in good faith by a committee appointed by the Board of Trustees. If through a
change in values, net assets, or other circumstances, a Fund were in a position
where more than 10% of its net assets were invested in illiquid securities, it
would seek to take appropriate steps to protect liquidity.
B-25
<PAGE>
Restricted Securities. Restricted securities, which are one type of
illiquid securities, generally can be sold in privately negotiated transactions,
pursuant to an exemption from registration under the Securities Act of 1933, as
amended (the "1933 Act"), or in a registered public offering. Where registration
is required, a Fund may be obligated to pay all or part of the registration
expense and a considerable period may elapse between the time it decides to seek
registration and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, a Fund might obtain a less favorable price than the
price that prevailed when it decided to seek registration of the security.
Currently, no Fund invests more than 10% of its assets in illiquid securities
which have legal or contractual restrictions on their resale unless there is an
actual dealer market for the particular issue and it has been determined to be a
liquid issue as described below.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including securities sold
in private placements, repurchase agreements, commercial paper, foreign
securities and corporate bonds and notes. These instruments are often restricted
securities because the securities are sold in transactions not requiring
registration. Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend either on an
efficient institutional market in which such unregistered securities can be
readily resold or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from the
registration requirements of the 1933 Act for resales of certain securities to
qualified institutional buyers. Institutional markets for restricted securities
sold pursuant to Rule 144A in many cases provide both readily ascertainable
values for restricted securities and the ability to liquidate an investment to
satisfy share redemption orders. Such markets might include automated systems
for the trading, clearance and settlement of unregistered securities of domestic
and foreign issuers, such as the PORTAL System sponsored by the National
Association of Securities Dealers, Inc. An insufficient number of qualified
buyers interested in purchasing Rule 144A- eligible restricted securities held
by a Fund, however, could affect adversely the marketability of such portfolio
securities and the Fund
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might be unable to dispose of such securities promptly or at favorable prices.
The Board of Trustees has delegated the function of making day-to-day
determinations of liquidity to the Adviser pursuant to guidelines approved by
the Board. The Adviser takes into account a number of factors in reaching
liquidity decisions, including but not limited to (1) the frequency of trades
for the security, (2) the number of dealers that make quotes for the security,
(3) the number of dealers that have undertaken to make a market in the security,
(4) 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)
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may be incurred, particularly when the Fund changes investments from one country
to another or when proceeds from the sale of shares in U.S. dollars are used for
the purchase of securities in foreign countries. Also, some countries may adopt
policies which would prevent the Fund from repatriating invested capital and
dividends, withhold portions of interest and dividends at the source, or impose
other taxes, with respect to the Fund's investments in securities of issuers of
that country. There also is the possibility of expropriation, nationalization,
confiscatory or other taxation, foreign exchange controls (which may include
suspension of the ability to transfer currency from a given country), default in
foreign government securities, political or social instability, or diplomatic
developments that could adversely affect investments in securities of issuers in
those nations.
The Fund may be affected either favorably or unfavorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, exchange control regulations and indigenous economic and
political developments.
The Board of Trustees considers at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions that would
affect the liquidity of the Funds' assets maintained with custodians in foreign
countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The Board also considers the
degree of risk attendant to holding portfolio securities in domestic and foreign
securities depositories.
Hedging Transactions. While transactions in forward contracts, options,
futures contracts and options on futures (i.e., "hedging positions") may reduce
certain risks, such transactions themselves entail certain other risks. Thus,
while a Fund may benefit from the use of hedging positions, unanticipated
changes in interest rates, securities prices or currency exchange rates may
result in a poorer overall performance for that Fund than if it had not entered
into any hedging positions. If the correlation between a hedging position and
portfolio position which is intended to be protected is imperfect, the desired
protection may not be obtained, and a Fund may be exposed to risk of financial
loss.
Perfect correlation between a Fund's hedging positions and portfolio
positions may be difficult to achieve because hedging instruments in many
foreign countries are not yet available. In addition, it is not possible to
hedge fully against currency fluctuations affecting the value of securities
denominated in foreign
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currencies because the value of such securities is likely to fluctuate as a
result of independent factors not related to currency fluctuations.
Municipal Securities. As discussed in the Prospectus, because the
Tax-Free Bond Fund invests primarily in Municipal Securities, its performance
may be especially affected by factors pertaining to the economies of various
states and other factors specifically affecting the ability of issuers of
Municipal Securities to meet their obligations.
Because the Tax-Free Bond Fund expects to invest substantially all of
its assets in Municipal Securities, it will be susceptible to a number of
complex factors affecting the issuers of Municipal Securities, including
national and local political, economic, social, environmental and regulatory
policies and conditions. The Fund cannot predict whether or to what extent such
factors or other factors may affect the issuers of Municipal Securities, the
market value or marketability of such securities or the ability of the
respective issuers of such securities acquired by the Fund to pay interest on,
or principal of, such securities. The creditworthiness of obligations issued by
local issuers may be unrelated to the creditworthiness of obligations issued by
a particular State, and there is no responsibility on the part of a particular
State to make payments on such local obligations.
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
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a Fund in the future. A Fund will not engage in any substantive new activity
without prior Board of Trustees' approval, notification to shareholders, and, in
the case of fundamental restrictions, shareholder approval. Unless otherwise
provided, all references to the value of a Fund's assets are in terms of current
market value at the time of calculation.
As a matter of fundamental restriction, a Fund may not:
(1) Change its status as a diversified series, which requires that
each Fund, with respect to 75% of its total assets, not invest
in the securities of any one issuer (other than the U.S.
Government and its agencies and instrumentalities) if
immediately after and as a result of such investment more than
5% of the total assets of the Fund would be invested in such
issuer (the remaining 25% of the Fund's total assets may be
invested without restriction except to the extent other
investment restrictions may be applicable);
(2) invest 25% or more of the value of the Fund's total assets in
the securities of companies engaged in any one industry
(except securities issued by the U.S. Government, its agencies
and instrumentalities or tax-exempt securities issued by state
governments or political subdivisions);
(3) borrow money, except each Fund may enter into bank loans for
temporary or emergency purposes or engage in otherwise
permissible leveraging activities (including reverse
repurchase agreements and dollar roll transactions that are
accounted for as financings) in an amount not in excess of
one-third of the value of the Fund's total assets (at the
lesser of acquisition cost or current market value). No
investments will be made by any Fund if its borrowings exceed
10% of total assets;
(4) issue senior securities, as defined in the 1940 Act, except
that this restriction shall not be deemed to prohibit the Fund
from making any otherwise permissible borrowings, mortgages or
pledges, or entering into permissible reverse repurchase
agreements and dollar roll transactions, and options and
futures transactions, or issuing shares of beneficial interest
in multiple classes;
(5) make loans of more than one-third of the Fund's net assets,
including loans of securities, except that the Fund may,
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subject to the other restrictions or policies stated herein,
purchase debt securities or enter into repurchase agreements
with banks or other institutions to the extent a repurchase
agreement is deemed to be a loan;
(6) purchase or sell commodities or commodity contracts, or
interests in oil, gas, or other mineral leases, or other
mineral exploration or development programs, except that the
Fund may invest in companies that engage in such businesses to
the extent otherwise permitted by the Fund's investment
policies and restrictions and by applicable law, and may
engage in otherwise permissible options and futures activities
as described in the Prospectus and this Statement of
Additional Information [currently none authorized];
(7) purchase or sell real estate, except that the Fund may invest
in securities secured by real estate or real estate interests,
or issued by companies, including real estate investment
trusts, that invest in real estate or real estate interests;
(8) underwrite securities of any other company, except that the
Fund may invest in companies that engage in such businesses,
and except to the extent that the Fund may be considered an
underwriter within the meaning of the 1933 Act in the
disposition of restricted securities; and
(9) notwithstanding any other fundamental investment restriction
or policy, each Fund reserves the right to invest all of its
assets in the securities of a single open-end investment
company with substantially the same fundamental investment
objectives, restrictions and policies as that Fund.
As a matter of additional investment restriction, implemented at the
discretion of the Board of Trustees, a Fund may not:
(10) purchase or write put, call, straddle or spread options or
engage in futures transactions except as described in the
Prospectus or Statement of Additional Information;
(11) make short sales (except covered or "against the box" short
sales) or purchases on margin, except that the Fund may obtain
short-term credits necessary for the clearance of
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<PAGE>
purchases and sales of its portfolio securities and, as
required in connection with permissible options, futures,
short selling and leveraging activities as described elsewhere
in the Prospectus and Statement of Additional Information;
(12) mortgage, hypothecate, or pledge any of its assets as security
for any of its obligations, except as required for otherwise
permissible borrowings (including reverse repurchase
agreements, dollar roll transactions, short sales, financial
options and other hedging activities);
(13) purchase the securities of any company for the purpose of
exercising management or control (but this restriction shall
not restrict the voting of any proxy);
(14) purchase more than 10% of the outstanding voting securities of
any one issuer;
(15) purchase the securities of other investment companies, except
as permitted by the 1940 Act and except as otherwise provided
in the Prospectus (each Fund reserves the right to invest all
of its assets in shares of another investment company);
(16) invest more than 5% of the value of its total assets in
securities of any issuer which has not had a record, together
with its predecessors, of at least three years of continuous
operations;
(17) except as required in connection with otherwise permissible
options and futures activities [none currently authorized],
invest more than 5% of the value of the Fund's total assets in
rights or warrants (other than those that have been acquired
in units or attached to other securities), or invest more than
2% of its total assets in rights or warrants that are not
listed on the New York or American Stock Exchanges;
(18) participate on a joint basis in any trading account in
securities, although the Adviser may aggregate orders for the
sale or purchase of securities with other accounts it manages
to reduce brokerage costs or to average prices;
(19) invest, in the aggregate, more than 10% of its net assets in
illiquid securities;
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(20) purchase or retain in the Fund's portfolio any security if any
officer, trustee or shareholder of the issuer is at the same
time an officer, trustee or employee of the Trust or the
Adviser and such person owns beneficially more than 1/2 of 1%
of the securities and all such persons owning more than 1/2 of
1% own in the aggregate more than 5% of the outstanding
securities of the issuer; and
(21) invest more than 5% of its net assets in indexed securities.
Except as otherwise noted, all percentage limitations set forth above
apply immediately after a purchase and a subsequent change in the applicable
percentage resulting from market fluctuations does not require elimination of
any security from the portfolio.
MANAGEMENT OF THE FUNDS
Trustees and Officers
Set forth below is certain information about the Trust's trustees and
executive officers:
*RICHARD ALAN KAYNE, Trustee and Chief Executive Officer (Age 51)
c/o Kayne Anderson Investment Management, L.P., 1800 Avenue of the
Stars, Los Angeles, CA 90067. Mr. Kayne has been an equity owner and
the President of the general partner of Kayne Anderson (and its
predecessor) since June 1984. Mr. Kayne has been a shareholder and
President of KA Associates, Inc., a registered broker-dealer, since
January 1993.
*ALLAN MICHAEL RUDNICK, Trustee and President (Age 56)
c/o Kayne Anderson Investment Management, L.P., 1800 Avenue of the
Stars, Los Angeles, CA 90067. Mr. Rudnick has been an equity owner and
the Chief Investment Officer of the general partner of Kayne Anderson
(and its predecessor) since August 1989.
- --------
Denotes a Trustee who is an "interested person," as defined in the 1940 Act.
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<PAGE>
*WILLIAM THOMAS MILLER, Trustee, Chief Financial Officer and Treasurer
(Age 33)
c/o Kayne Anderson Investment Management, L.P., 1800 Avenue of the
Stars, Los Angeles, CA 90067. Mr. Miller has been a Financial Vice
President and Treasurer of KA Associates, Inc. since April 1994. Mr.
Miller has been the Chief Financial Officer of the general partner of
Kayne Anderson (and its predecessor) since June 1994.
CARL D. COVITZ, Trustee (Age 57)
c/o Landmark Capital, Inc., 9595 Wilshire Boulevard, Beverly Hill, CA
90212. Mr. Covitz has been the President and owner of Landmark Capital
since 1973 (except for various periods of government service). Landmark
Capital is a national real estate development and investment firm with
activities as diverse as construction, financing, management and food
distribution.
Mr. Covitz was the Secretary of the California Business, Transportation
and Housing Agency, and a member of the Governor's Cabinet, from 1990
to 1993.
From 1987 to 1989, Mr. Covitz was the Under Secretary of the U.S.
Department of Housing and Urban Development (HUD) and a member of
President Ronald Reagan's Cabinet.
ARNOLD BRUSTIN, Trustee (Age 53)
c/o Vision Investments Inc., 601 North Saltair Avenue, Los Angeles, CA
90049. Mr. Brustin has been the President of Vision Investments since
1982, a seminar production firm. Before then he was the Senior Vice
President-Business Affairs for Tri-Star Television and has worked
in various legal and executive capacities with CBS, Inc.
GERALD I. ISENBERG, Trustee (Age 56)
1637 East Valley Road, Montecito, CA 93108. Since January 1995, Mr.
Isenberg has been a Professor at the School of Cinema- Television at
the University of Southern California in Los Angeles. From 1989 to
1994, he was the Chief Operating Officer of Hearst Entertainment, a
subsidiary of the Hearst Corporation, which produces and distributes
television entertainment.
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<PAGE>
The officers of the Trust, and the Trustees who are considered
"interested persons" of the Trust, receive no compensation directly from it for
performing the duties of their offices. However, those officers and Trustees of
the Trust who are officers or partners of the Adviser or the Distributor may
receive remuneration indirectly because the Adviser receives a management fee
from the Fund.
The Trustees who are not affiliated with the Adviser or the Distributor
receive $1,000 and expenses for each regular Board meeting attended. The
aggregate compensation expected to be paid by the Trust to each of the Trustees
during the fiscal year ended December 31, 1996 is set forth below.
Pension or Total Compensation
Aggregate Retirement Benefits from the Trust and
Compensation from Accrued as Part of Fund Complex (no
Name of Trustee the Trust Fund Expenses* additional Trusts)
- --------------- --------- ------------------- ------------------
Richard A. Kayne None -- None
Alan M. Rudnick None -- None
William T. Miller None -- None
Carl D. Covitz $ -- $
Arnold Brustin $ -- $
Gerald I. Isenberg $ -- $
* The Trust does not maintain pension or retirement plans.
Control Persons and Share Ownership
For a substantial period of time after commencement of the operations
of the Trust, one or more officers and Trustees of the Trust may have a
controlling interest in each Fund.
The Adviser
As set forth in the Prospectus, Kayne Anderson is the Adviser for the
Funds. Pursuant to an Investment Management Agreement (the "Management
Agreement"), the Adviser determines the composition of the Funds' portfolios,
the nature and timing of the changes to the Funds' portfolios and the manner of
implementing such changes. The Adviser also (a) provides the Funds with
investment advice, research and related services for the investment of their
assets, subject to such directions as it may receive from the Board of Trustees;
(b) pays all of the Trust's executive officers' salaries and executive
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<PAGE>
expenses (if any); (c) pays all expenses incurred in performing its investment
advisory duties under the Management Agreement; and (d) furnishes the Funds with
office space and certain administrative services. The services of the Adviser to
the Funds are not deemed to be exclusive, and the Adviser or any affiliate
thereof may provide similar services to other series of the Trust, other
investment companies and other clients, and may engage in other activities. The
Funds may reimburse the Adviser (on a cost recovery basis only) for any services
performed for a Fund by the Adviser outside its duties under the Management
Agreement.
Kayne Anderson is a registered investment adviser organized as a
California limited partnership. The Adviser's predecessor was founded in 1984,
by Richard Kayne and John Anderson. The Adviser is in the business of furnishing
investment advice to institutional and private clients and, together with its
affiliated investment adviser, KAIM Non-Traditional, L.P., currently manages
approximately $2.3 billion for such clients.
The Management Agreement permits the Adviser to seek reimbursement of
any reductions made to its management fee within the three-year period following
such reduction, subject to a Fund's ability to effect such reimbursement and
remain in compliance with applicable expense limitations. Any such management
fee reimbursement will be accounted for on the financial statements of a Fund as
a contingent liability of the Fund, and will appear as a footnote to the Fund's
financial statements until such time as it appears that the Fund will be able to
effect such reimbursement. At such time as it appears probable that a Fund is
able to effect such reimbursement, the amount of reimbursement that the Fund is
able to effect will be accrued as an expense of the Fund for that current
period.
The Management Agreement was approved by the Trust's Board of Trustees
on September 30, 1996 and each Fund's initial shareholder on September 30, 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
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<PAGE>
incurred in connection with membership in investment company organizations;
brokerage commissions or charges; fees of custodians, transfer agents,
registrars or other agents; distribution plan fees; expenses relating to the
redemption or repurchase of a Fund's shares; expenses of registering and
qualifying Fund shares for sale under applicable federal and state laws and
maintaining such registrations and qualifications; expenses of preparing,
printing and distributing to Fund shareholders prospectuses, proxy statements,
reports, notices and dividends; cost of stationery; costs of shareholders' and
other meetings of a Fund; fees paid to members of the Board of Trustees (other
than members who are affiliated persons of the Adviser or Distributor); a Fund's
pro rata portion of premiums of any fidelity bond and other insurance covering a
Fund and the Trust's officers and trustees or other expenses of the Trust; and
expenses including prorated portions of overhead expenses (in each case on cost
recovery basis only) of services for a Fund performed by the Adviser outside of
its investment advisory duties under the Management Agreement. A Fund also is
liable for such nonrecurring expenses as may arise, including litigation to
which a Fund may be a party. Each Fund has agreed to indemnify its trustees and
officers with respect to any such litigation. Each Fund also paid its own
organizational expenses, which are being amortized over five years.
Total operating expenses of a Fund are subject to applicable
limitations under rules and regulations of the states in which that Fund is
authorized to sell its shares; therefore, operating expenses are effectively
subject to the most restrictive of such expense limitations as the same may be
amended from time to time. The most restrictive expense limitation currently
requires that the Adviser make arrangements (including reduction of management
fees otherwise payable) to limit certain expenses of a Fund, including the
management fees paid to the Adviser under the Management Agreement (but
excluding interest, taxes, brokerage fees and commissions, and certain
extraordinary charges), in any fiscal year in which a Fund's expenses exceed
2.5% of the Fund's average daily net assets up to $30 million, 2.0% of average
daily net assets between $30 million and $100 million, and 1.5% of such net
assets over $100 million.
As noted in the Prospectus, the Adviser has agreed to reduce its fee to
each Fund by the amount, if any, necessary to keep the Fund's annual operating
expenses (expressed as a percentage of its average daily net assets), at or
below the lesser of the following levels: Rising Dividends Fund -- 1.20%;
Small-Mid Cap Rising Dividends Fund - - 1.30%; International Rising Dividends
Fund -- 1.40%; Intermediate Total Return Bond Fund -- .95%; and Tax-Free Bond
Fund -- .95% and/or the maximum expense ratio allowed by any state in which such
Fund's
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<PAGE>
shares are then qualified for sale. The Adviser also may at its discretion from
time to time pay for other Fund expenses from its own assets, or reduce the
management fee of a Fund in excess of that required.
Portfolio Transactions and Brokerage
Subject to policies established by the Board of Trustees, the Adviser
is primarily responsible for arranging the execution of the Funds' portfolio
transactions and the allocation of brokerage activities. In arranging such
transactions, the Adviser will seek to obtain the best execution for each Fund,
taking into account such factors as price, size of order, difficulty of
execution, operational facilities of the firm involved, the firm's risk in
positioning a block of securities, and research, market and statistical
information provided by such firm. While the Adviser generally seeks reasonably
competitive commission rates, a Fund will not necessarily always receive the
lowest commission available.
The Funds have no obligation to deal with any broker or group of
brokers in executing transactions in portfolio securities. Brokers who provide
supplemental research, market and statistical information to the Adviser may
receive orders for transactions by a Fund. The term "research, market and
statistical information" includes advice as to the value of securities, the
advisability of purchasing or selling securities, the availability of securities
or purchasers or sellers of securities, and furnishing analyses and reports
concerning issuers, industries, securities, economic factors and trends,
portfolio strategy, and the performance of accounts. Information so received
will be in addition to and not in lieu of the services required to be performed
by the Adviser under the Management Agreement and the expenses of the Adviser
will not necessarily be reduced as a result of the receipt of such supplemental
information. Such information may be useful to the Adviser in providing services
to clients other than the Funds, and not all such information may be used by the
Adviser in connection with a Fund. Conversely, such information provided to the
Adviser by brokers and dealers through whom other clients of the Adviser in the
future may effect securities transactions may be useful to the Adviser in
providing services to a Fund. To the extent the Adviser receives valuable
research, market and statistical information from a broker-dealer, the Adviser
intends to direct orders for Fund transactions to that broker-dealer, subject to
the foregoing policies, regulatory constraints, and the ability of that
broker-dealer to provide competitive prices and commission rates. In accordance
with the rules of the National Association of Securities Dealers, Inc., the
Adviser also may direct brokerage to
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<PAGE>
broker-dealers who facilitate sales of the Funds' shares, subject to also
obtaining best execution as described above from such broker-dealer.
A portion of the securities in which the Funds may invest are traded in
the over-the-counter markets, and each Fund intends to deal directly with the
dealers who make markets in the securities involved, except as limited by
applicable law and in certain circumstances where better prices and execution
are available elsewhere. Securities traded through market makers may include
markups or markdowns, which are generally not determinable. Under the 1940 Act,
persons affiliated with a Fund are prohibited from dealing with that Fund as
principal in the purchase and sale of securities except after application for
and receipt of an exemptive order from the SEC. The 1940 Act restricts
transactions involving a Fund and its "affiliates," including, among others, the
Trust's trustees, officers, and employees and the Adviser, and any affiliates of
such affiliates. Affiliated persons of a Fund are permitted to serve as its
broker in over-the-counter transactions conducted on an agency basis only.
Investment decisions for each Fund are made independently from those of
accounts advised by the Adviser or its affiliates. However, the same security
may be held in the portfolios of more than one account. When two or more
accounts advised by the Adviser simultaneously engage in the purchase or sale of
the same security, the prices and amounts will be equitably allocated among each
account. In some cases, this procedure may adversely affect the price or
quantity of the security available to a particular account. In other cases,
however, an account's ability to participate in large volume transactions may
produce better executions and prices.
THE FUNDS' ADMINISTRATOR
The Funds have an Administration Agreement with Investment Company
Administration Corporation (the "Administrator"), with offices at 2025 East
Financial Way, Suite 101, Glendora, CA 91741. The Administration Agreement
provides that the Administrator will prepare and coordinate reports and other
materials supplied to the Trustees; prepare and/or supervise the preparation and
filing of all securities filings, periodic financial reports, prospectuses,
statements of additional information, marketing materials, tax returns,
shareholder reports and other regulatory reports or filings required of the
Funds; prepare all required filings necessary to maintain the Funds'
qualifications and/or registrations to sell
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<PAGE>
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
Administrator. For its services, the Administrator receives the fees described
in the Prospectus.
THE FUNDS' DISTRIBUTOR
First Fund Distributors, Inc. (the "Distributor"), a broker-dealer
affiliated with the Administrator, acts as each Fund's principal underwriter in
a continuous public offering of the Fund's shares. The Distribution Agreement
between the Funds and the Distributor continues in effect for periods not
exceeding one year if approved at least annually by (i) the Board of Trustees or
the vote of a majority of the outstanding shares of each Fund (as defined in the
1940 Act) and (ii) a majority of the Trustees who are not interested persons of
any such party, in each case cast in person at a meeting called for the purpose
of voting on such approval. The Distribution Agreement may be terminated without
penalty by the parties thereto upon 60-days' written notice, and is
automatically terminated in the event of its assignment as defined in the 1940
Act.
TRANSFER AGENT AND CUSTODIAN
Investors Bank & Trust Company, Boston, Massachusetts, serves as the
Funds' Transfer Agent. As Transfer Agent, it maintains records of shareholder
accounts, processes purchases and redemptions of shares, acts as dividend and
distribution disbursing agent and performs other related shareholder functions.
Investors Bank & Trust Company, Boston, Massachusetts also serves as the Funds'
Custodian. As Custodian, it and subcustodians designated by the Board of
Trustees hold the securities in the Funds' portfolio and other assets for
safekeeping. The Transfer Agent and Custodian do not and will not participate in
making investment decisions for the Funds.
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<PAGE>
HOW NET ASSET VALUE IS DETERMINED
The net asset values of the Funds' shares are calculated once daily, as
of 4:00 p.m. New York time (the "Portfolio Valuation Time"), on each day that
the New York Stock Exchange (the "NYSE") is open for trading by dividing each
Fund's net assets (assets less liabilities) by the total number of shares
outstanding and adjusting to the nearest cent per share. The NYSE is closed on
Saturdays, Sundays, New Year's Day, Presidents Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving, and Christmas Day. The Funds do not
expect to determine the net asset value of their shares on any day when the NYSE
is not open for trading even if there is sufficient trading in their portfolio
securities on such days to materially affect the net asset value per share.
Because of the difference between the bid and asked prices of the
over-the-counter securities in which a Fund may invest, there may be an
immediate reduction in the net asset value of the shares of a Fund after a Fund
has completed a purchase of such securities. This is because such OTC securities
generally will be valued at the last sale price (which is generally below the
asked price), but usually are purchased at or near the asked price.
Each Fund's (other than the Tax-Free Bond Fund) portfolio is expected
to include foreign securities listed on foreign stock exchanges and debt
securities of foreign governments and corporations. Generally, trading in and
valuation of foreign securities is substantially completed each day at various
times prior to the Portfolio Valuation Time. In addition, trading in and
valuation of foreign securities may not take place on every day that the NYSE is
open for trading. Furthermore, trading takes place in various foreign markets on
days on which the NYSE is not open for
trading and on which the Funds' net asset values are not calculated. Foreign
securities quoted in foreign currencies are translated into U.S. dollars using
the latest available exchange rates. As a result, fluctuations in the value of
such currencies in relation to the U.S. dollar will affect the net asset value
of a Fund's shares even though there has not been any change in the market
values of such securities. Any changes in the value of foreign currency forward
contracts due to exchange rate fluctuations are included in determination of net
asset value.
Generally, each Fund's investments are valued at market value or, in
the absence of a market value, at fair value as determined in good faith by the
Adviser and the Board of Trustees. Portfolio securities that are listed or
admitted to trading on a U.S. exchange
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<PAGE>
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
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
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on disposition of the securities (including any registration expenses that might
be borne by a Fund in connection with such disposition). In addition, specific
factors are also generally considered, such as the cost of the investment, the
market value of any unrestricted securities of the same class (both at the time
of purchase and at the time of valuation), the size of the holding relative to
current average trading volume, the prices of any recent transactions or offers
with respect to such securities and any available analysts' reports regarding
the issuer.
All other assets of the Funds are valued in such manner as the Board of
Trustees in good faith deems appropriate to reflect their fair value.
SHARE PURCHASES AND REDEMPTIONS
Information concerning the purchase and redemption of the Funds' shares
is contained in the Prospectus under "Purchasing Shares" and "Selling Shares
(Redemptions)."
The Trust reserves the right in its sole discretion (i) to suspend the
continued offering of each Fund's shares, (ii) to reject purchase orders in
whole or in part when in the judgment of the Adviser or the Distributor such
rejection is in the best interest of a Fund, and (iii) to reduce or waive the
minimum for initial and subsequent investments for certain fiduciary accounts or
under circumstances where certain economies can be achieved in sales of a Fund's
shares.
During any 90-day period, the Trust is committed to pay in cash all
requests to redeem shares by any one shareholder, up to the lesser of $250,000
or 1% of the value of the Trust's net assets at the beginning of the period.
Should redemptions by any individual shareholder (excluding street name or
omnibus accounts maintained by financial intermediaries) exceed this limitation,
the Trust reserves the right to redeem the excess amount in whole or in part in
securities or other assets. If shares are redeemed in this manner, 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
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amounts of capital gains to be distributed, any capital loss carryovers from
prior years will be offset against capital gains of the current year. Unless a
shareholder elects cash distributions on the Account Application form or submits
a written request to a Fund at least 10 full business days before the record
date for a distribution in which the shareholder elects to receive such
distribution in cash, distributions will be credited to the shareholder's
account in additional shares of a Fund based on the net asset value per share at
the close of business on the day following the record date for such
distribution.
Each Fund has qualified and elected, or intends to qualify and elect,
to be treated as a regulated investment company under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"), and intends to maintain
such qualification. In order to so qualify, a Fund must meet certain
requirements with respect to the source of its income, diversification of its
assets and distributions to its shareholders. Dividends declared by a Fund in
October, November, or December of any calendar year to shareholders of record as
of a record date in such a month will be treated for federal income tax purposes
as having been received by shareholders on December 31 of that year if they are
paid during January of the following year.
Under Subchapter M, a Fund will not be subject to federal income taxes
on the net investment income and capital gains it distributes to shareholders,
provided that at least 90% of its investment company taxable income for the
taxable year is so distributed. A Fund will generally be subject to federal
income taxes on its undistributed net investment income and capital gains. A
nondeductible 4% excise tax also is imposed on each regulated investment company
to the extent that it does not distribute to investors in each calendar year an
amount equal to 98% of its ordinary income for such calendar year plus 98% of
its capital gain net income for the one-year period ending on October 31 of such
calendar year plus 100% of any undistributed ordinary or capital gain net income
for the prior period. Each Fund intends to declare and pay dividends and capital
gain distributions in a manner to avoid imposition of the excise tax.
The Trustees reserve the right not to maintain the qualification of a
Fund as a regulated investment company if they determine such course of action
to be more beneficial to the shareholders. In such case, a Fund will be subject
to federal and state corporate income taxes on its income and gains, and all
dividends and distributions to shareholders will be ordinary dividend income to
the extent of the Fund's earnings and profits.
B-44
<PAGE>
The Funds may write, purchase or sell certain option and foreign
currency contracts. Such transactions are subject to special tax rules that may
affect the amount, timing and character of distributions to shareholders. Unless
the Funds are eligible to make and make a special election, such option and
foreign currency contracts that are "Section 1256 contracts" will be "marked-to-
market" for federal income tax purposes at the end of each taxable year, i.e.,
each option contract will be treated as sold for its fair market value on the
last day of the taxable year. In general, unless the special election referred
to in the previous sentence is made, gain or loss from transactions in such
option contracts will be 60% long-term and 40% short-term capital gain or loss.
Section 1092 of the Code, which applies to certain "straddles," may
affect the taxation of the Funds' transactions in option contracts. Under
Section 1092, the Funds may be required to postpone recognition for tax purposes
of losses incurred in certain closing transactions in options.
Section 988 of the Code contains special tax rules applicable to
certain foreign currency transactions that may affect the amount, timing, and
character of income, gain or loss recognized by a Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency-denominated payables and receivables, and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60%-40% rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of a Fund's gain or loss on the sale or other disposition of shares of a foreign
corporation may, because of changes in foreign currency exchange rates, be
treated as ordinary income or loss under Section 988 of the Code, rather than as
capital gain or loss.
One of the requirements for qualification as a regulated investment
company is that less than 30% of a Fund's gross income must be derived from
gains from the sale or other disposition of securities held for less than three
months. Accordingly, a Fund may be restricted in effecting closing transactions
within three months after entering into an option contract.
The Funds also may invest in the stock of foreign companies that may be
treated as "passive foreign investment companies" ("PFICs") under the Code.
Certain other foreign corporations, not operated as investment companies, may
nevertheless satisfy the PFIC definition. A portion of the income and gains that
a Fund derives from PFIC stock
B-45
<PAGE>
may be subject to a non-deductible federal income tax at the Fund level. In some
cases, a Fund may be able to avoid this tax by electing to be taxed currently on
its share of the PFIC's income, whether or not such income is actually
distributed by the PFIC. The Funds will endeavor to limit their exposure to the
PFIC tax by investing in PFICs only where the election to be taxed currently
will be made. Since it is not always possible to identify a foreign issuer as a
PFIC in advance of making the investment, these Funds may incur the PFIC tax in
some instances.
Dividends of net investment income (including any net realized
short-term capital gains other than exempt-interest dividends described below)
paid by a Fund are taxable to shareholders of the Fund as ordinary income,
whether such distributions are taken in cash or reinvested in additional shares.
Distributions of net capital gain (i.e., the excess of net long-term capital
gains over net short-term capital losses), if any, by a Fund are taxable as
long-term capital gains, whether such distributions are taken in cash or
reinvested in additional shares, and regardless of how long shares of the Fund
have been held. Fund distributions also will be included in individual and
corporate shareholders' income on which the alternative minimum tax may be
imposed. Tax-exempt shareholders will not be required to pay taxes on amounts
distributed to them, unless they have borrowed to purchase or carry their shares
of a Fund. Statements as to the tax status of distributions to shareholders will
be mailed annually.
Provided that, as anticipated, the Tax-Free Bond Fund qualifies as a
regulated investment company under the Code, and, at the close of each quarter
of its taxable year at least 50% of the value of the total assets of that Fund
consists of obligations the interest on which is exempt from federal income tax,
that Fund will be qualified to pay exempt-interest dividends to its shareholders
that, to the extent attributable to interest received by that Fund on such
obligations, are exempt from federal income tax. The total amount of
exempt-interest dividends paid by the Tax-Free Bond Fund to its shareholders
with respect to any taxable year cannot exceed the amount of interest received
by the Fund during such year on tax-exempt obligations less any expenses
attributable to such interest. Income from other transactions engaged in by the
Tax-Free Bond Fund, such as income from options and repurchase agreements, will
be taxable distributions to its shareholders.
The Code may subject interest received on otherwise tax-exempt
securities to an alternative minimum tax. In addition, certain corporations
which are subject to the alternative minimum tax may
B-46
<PAGE>
have to include a portion of exempt-interest dividends in calculating their
alternative minimum taxable income.
Interest on indebtedness incurred or continued by a shareholder to
purchase or carry shares of the Tax-Free Bond Fund is not deductible for federal
income tax purposes. Under regulations prescribed by the IRS for determining
when borrowed funds are considered used for the purposes of purchasing or
carrying particular assets, the purchase of shares may be considered to have
been made with borrowed funds even though the borrowed funds are not directly
traceable to the purchase of shares of this Fund.
Up to 85% of social security or railroad retirement benefits may be
included in federal taxable income of recipients whose adjusted gross income
(including income from tax-exempt sources such as tax-exempt bonds and
exempt-interest dividends) plus 50% of their benefits exceed certain base
amounts. Income from the Tax-Free Bond Fund is included in the calculation of
whether a recipient's income exceeds these base amounts, but is not taxable
directly.
From time to time, proposals have been introduced in Congress to
restrict or eliminate the federal income tax exemption for interest on Municipal
Securities. It can be expected that similar proposals may be introduced in the
future. If such proposals were enacted, the availability of Municipal Securities
for investment by the Tax-Free Bond Fund and the value of that Fund's portfolio
would be affected. In such event, that Fund would reevaluate its investment
objectives and policies.
Any dividend from net investment income or distribution of long-term
capital gains received by a shareholder will have the effect of reducing the net
asset value of a Fund's shares held by such shareholder by the amount of the
dividend or distribution. If the net asset value of the shares should be reduced
below a shareholder's cost as a result of the dividend of net investment income
or a long-term capital gains distribution, such dividend or distribution,
although constituting a return of capital, nevertheless will be taxable as
described above. Investors should be careful to consider the tax implications of
buying shares just prior to a distribution. The price of shares purchased at
that time may include the amount of the forthcoming distribution. Those
investors purchasing shares just prior to a distribution will then receive a
partial return of their investment upon such distribution, which will
nevertheless be taxable to them.
B-47
<PAGE>
Any gain or loss realized upon an exchange or redemption of shares in a
Fund by a shareholder who holds the shares as a capital asset will be treated as
a long-term capital gain or loss if the shares have been held for more than one
year, and otherwise as a short-term capital gain or loss. However, any loss
realized by a shareholder upon an exchange or redemption of shares of a Fund
held (or treated as held) for six months or less will be treated as a long-term
capital loss to the extent of any long-term capital gain distribution received
on the shares.
All or a portion of a loss realized upon the exchange or redemption of
shares may be disallowed to the extent shares are purchased (including shares
acquired by means of reinvested dividends) within 30 days before or after such
redemption. In addition, with respect to the Tax-Free Bond Fund, any loss
realized upon the exchange or redemption of shares of the Fund held (or treated
as held) for six months or less will be disallowed to the extent that of any
exempt-interest dividends received on the shares.
Dividends paid by a Fund will be eligible for the 70% dividends
received deduction for corporate shareholders, to the extent that a Fund's
income is derived from certain qualifying dividends received from domestic
corporations. Availability of the deduction is subject to certain holding period
and debt-financing limitations. Capital gains distributions are not eligible for
the 70% dividends received deduction.
A Fund may be subject to foreign withholding taxes on dividends and
interest earned with respect to securities of foreign corporations. If more than
50% in value of the total assets of a Fund at the end of its fiscal year is
invested in stock or securities of foreign corporations, the Fund may elect to
pass through to its shareholders their pro rata share of all foreign income
taxes paid by the Fund. If this election is made by a Fund, shareholders will be
(i) required to include in their gross income their pro rata share of the Fund's
foreign source income (including any foreign income taxes paid by the Fund), and
(ii) entitled either to deduct their share of such foreign taxes in computing
their taxable income or to claim a credit for such taxes against their U.S.
income tax, subject to certain limitations under the Code. If a Fund does not
qualify to, or does not, make the election, the Fund will deduct the foreign
income taxes it pays. The International Rising Dividends Fund may qualify to
make this election.
Each Fund is required to withhold 31% of reportable payments (including
dividends, capital gain distributions and redemption
B-48
<PAGE>
proceeds) paid to individuals and other nonexempt shareholders who have not
complied with applicable regulations. In order to avoid this backup withholding
requirement, each shareholder must provide a social security number or other
taxpayer identification number and certify that the number provided is correct
and that the shareholder is not currently subject to backup withholding, or the
shareholder should indicate that it is exempt from backup withholding. Even
though all certifications have been made on the Application, a Fund may be
required to impose backup withholding if it is notified by the IRS or a broker
that such withholding is required for previous under- reporting of interest or
dividend income or use of an incorrect taxpayer identification number.
Nonresident aliens, foreign corporations, and other foreign entities may be
subject to withholding of up to 30% on certain payments received from a Fund.
The foregoing discussion and related discussion in the Prospectus do
not purport to be a complete description of all tax implications of an
investment in a Fund. A shareholder should consult his or her own tax adviser
for more information about the application of federal, state, local, or foreign
taxes to an investment in the Fund. Heller, Ehrman, White & McAuliffe has
expressed no opinion in respect thereof.
HOW PERFORMANCE IS DETERMINED
Standardized Performance Information
The Intermediate Total Return Bond Fund and Tax-Free Bond
Fund. These Funds' 30-day yield figure described in the Prospectus is calculated
according to a formula prescribed by the SEC, expressed as follows:
6
YIELD=2[(a-b +1) -1]
cd
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.
B-49
<PAGE>
d = the maximum offering price per share on the last
day of the period.
For the purpose of determining the interest earned (variable "a" in the
formula) on debt obligations that were purchased by these Funds at a discount or
premium, the formula generally calls for amortization of the discount or
premium; the amortization schedule will be adjusted monthly to reflect changes
in the market values of the debt obligations.
Investors should recognize that, in periods of declining interest
rates, these Funds' yields will tend to be somewhat higher than prevailing
market rates and, in periods of rising interest rates, will tend to be somewhat
lower. In addition, when interest rates are falling, monies received by these
Funds from the continuous sale of their shares will likely be invested in
instruments producing lower yields than the balance of their portfolio of
securities, thereby reducing the current yield of these Funds. In periods of
rising interest rates, the opposite result can be expected to occur.
The Tax-Free Bond Fund. A tax equivalent yield demonstrates the taxable
yield necessary to produce an after-tax yield equivalent to that of a fund that
invests in tax-exempt obligations. The tax equivalent yield for the Tax-Free
Bond Fund is computed by dividing that portion of the current yield (or
effective yield) of the Tax-Free Bond Fund (computed for the Fund as indicated
above) that is tax exempt by one minus a stated income tax rate and adding the
quotient to that portion (if any) of the yield of the Fund that is not tax
exempt. In calculating tax equivalent yields for the Tax-Free Bond Fund, this
Fund assumes an effective tax rate (using the top federal marginal tax rate) of
39.6%. The effective rate used in determining such yield does not reflect the
tax costs resulting from the loss of the benefit of personal exemptions and
itemized deductions that may result from the receipt of additional taxable
income by taxpayers with adjusted gross incomes exceeding certain levels. The
tax equivalent yield may be higher than the rate stated for taxpayers subject to
the loss of these benefits.
Average Annual Return. The average annual total return included with
any presentation of a Fund's performance data will be calculated according to
the following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
B-50
<PAGE>
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 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
B-51
<PAGE>
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 Tait,
Weller & Baker, Two Penn Center Plaza, Philadelphia, Pennsylvania 19102,
independent public accountant for the Funds.
B-52
<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
Attached to this Statement of Additional Information are the
Independent Auditor's Report for the Kayne Anderson Small-Mid Cap Rising
Dividends Fund, the Kayne Anderson International Rising Dividends Fund, the
Kayne Anderson Intermediate Total Return Bond Fund, and the Kayne Anderson
Intermediate Tax-Free Bond Fund, dated as of September 24, 1996, the
accompanying Statement of Assets and Liabilities as of September 24, 1996 and
the Notes to Financial Statements.
B-53
<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.
B-54
<PAGE>
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 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.
B-55
<PAGE>
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-56
<PAGE>
Kayne Anderson Mutual Funds
Statement of Assets and Liabilities
September 24, 1996
<TABLE>
<CAPTION>
Small-Mid International Intermediate Intermediate
Cap Rising Rising Total Return Tax-Free
Dividends Dividends Bond Bond
Fund Fund Fund Fund
<S> <C> <C> <C> <C>
ASSETS:
Cash $25,000 $25,000 $25,000 $25,000
Prepaid registration fees 15,013 15,013 15,013 15,013
Deferred organization expense 21,250 21,250 21,250 21,250
--------- --------- --------- ---------
Total 61,263 61,263 61,263 61,263
LIABILITIES:
Payable for organization and
registration expenses 36,263 36,263 36,263 36,263
NET ASSET $25,000 $25,000 $25,000 $25,000
========= ========= ========= =========
Shares of beneficial interest outstanding
($.01 par value); unlimited number of
shares authorized 2,347 2,347 2,347 2,347
Net asset value, offering and redemption
Price per share $10.65 $10.65 $10.65 $10.65
========= ========== ========= =========
</TABLE>
At September 24, 1996 the net assets of each series consisted entirely paid-in
capital.
See Notes to Financial Statement.
<PAGE>
Kayne Anderson Mutual Funds
Notes of Financial Statement
September 24, 1996
Note 1. Kayne Anderson Mutual Funds (the "Trust") was organized on May
29, 1996 as a Delaware business trust and is authorized to
issue an unlimited number of shares of beneficial interest,
$.01 par value. The Trust is register under the Investment
Company Act of 1940 as an open-end management investment
company comprised of five diversified series; the Kayne
Anderson Rising Dividends Fund (not currently being offered
for sale), the Kayne Anderson Small-Mid Cap Rising Dividends
Fund, the Kayne Anderson International Rising Dividends Fund,
the Kayne Anderson Intermediate Total Return Bond Fund, and
the Kayne Anderson Intermediate Tax-Free Bond Fund. The Trust
has had no operations to date other than those relating to its
organization and the sale of 2,347 shares of beneficial
interest in each of the series currently offered at $10.65 per
share to Kayne Anderson Investment Management ("the Investment
Adviser").
Note 2. Investment Management and Other Agreements The funds have
entered into an investment management agreement with the
Investment Advisor. Under the terms of the agreement, the
Funds will pay a fee equal to the following annual percentages
of average net assets:
Small-Mid Cap Rising Dividends Fund 0.85%
International Rising Dividends Fund 0.95%
Intermediate Total Return Bond Fund 0.50%
Intermediate Tax-Free Bond Fund 0.50%
Although not required to do so, the Investment Advisor has
agreed to reimburse each Fund to the extent necessary so that
is ratio of operating expenses to average net assets will not
exceed the following levels. Overall operating expense for
each Fund will not fall below the applicable percentage
limitation until the Investment Advisor has been fully
reimbursed for fee foregone and expenses paid by the
Investment Advisor under this agreement:
Small-Mid Cap Rising Dividends Fund 1.30%
International Rising Dividends Fund 1.40%
Intermediate Total Return Bond Fund 0.95%
Intermediate Tax-Free Bond Fund 0.95%
These percentages are based on the average net assets of the
Funds, exclusive of interest, taxes, brokerage commissions,
extraordinary expenses and sales charges.
<PAGE>
Investment Company Administration Corporation serves as the
Administrator to the Funds pursuant to a Administration
Agreement. The Trust has agreed to pay the Administrator an
annual fee equal to 0.075% of the first $40 million of The
Trust's average daily net assets, 0.05% of the next $40
million, 0.025% of the next 40 million, and 0.01% thereafter,
subject to a minimum annual fee of $30,000 per fund.
First Fund Distributors, Inc. serves as the Distributor to the
Funds pursuant to a Distribution Agreement. The Distributor
receives no fee for its distribution services.
Certain officers of the Adviser, Administrator and Distributor
are also officers and/or Trustees of the Trust.
Note 3. Organizational expenses of the Trust aggregating $85,000 will
be allocated to each of the series currently offered for sale
and will be amortized by each series using the straight line
method over a five year period from commencement of
operations. During the amortization period the proceeds of any
redemption of initial shares by any holder thereof will be
reduced by a pro rata portion of any then unamortized
organization expense, based on the ratio of shares redeemed to
the total initial shares outstanding immediately prior to the
redemption. The portion of the aggregate organization expenses
allocated to each of the Funds amounted to $21,250.
Prepaid registration fees will be amortized over the period of
benefit but not to exceed two years from commencement of
operations.
<PAGE>
Report of Independent Certified Public Accountants
To the Trustees and Shareholders of
Kayne Anderson Mutual Funds
Los Angeles, California
We have audited the accompanying statement of assets and liabilities of
the Kayne Anderson Small-Mid Cap Rising Dividends Fund, Kayne Anderson
International Rising Dividends Fund, Kayne Anderson Intermediate Total Return
Bond Fund, and Kayne Anderson Intermediate Tax-Free Bond Fund, each a series of
shares of Kayne Anderson Mutual Funds, as of September 24, 1996. This financial
statement is the responsibility of the Fund's management. Our responsibility is
to express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents
fairly, in all material respects, the financial position of the Kayne Anderson
Small-Mid Cap Rising Dividends Fund, Kayne Anderson International Rising
Dividends Fund, Kayne Anderson Intermediate Total Return Bond Fund, and Kayne
Anderson Intermediate Tax-Free Bond Fund, as of September 24,
1996, in conformity with generally accepted accounting principles.
Philadelphia, PA TAIT, WELLER & BAKER
September 24 , 1996
<PAGE>
----------------------------------------------------
PART C
OTHER INFORMATION
---------------------------------------------------
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
--------------
FORM N-1A
--------------
PART C
--------------
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) To be filed Independent Auditor's Report dated as of
September 24, 1996, Statement of Assets and Liabilities
as of September 24, 1996; and Notes to Financial
Statements, for the Kayne Anderson Small-Mid Cap Rising
Dividends Fund, Kayne Anderson International Rising
Dividends Fund, Kayne Anderson Intermediate Total Return
Bond Fund, and Kayne Anderson Intermediate Tax-Free Bond
Fund incorporated by pre-effective amendment referenced
to the Part B Statement of Additional Information under
"Financial Statements."
(b) Exhibits:
(1) Agreement and Declaration of Trust.(1)
(2) By-Laws.(1)
(3) Voting Trust Agreement - Not applicable.
(4) Specimen Share Certificate - Not applicable.
(5) Form of Investment Management Agreement.(1)
(6) Form of Underwriting Agreement.
(7) Benefit Plan(s) - Not applicable.
(8) Form of Custodian Agreement.(2)
(9) AdministrativeForm of Administration Services Agreement.
(10) Consent and Opinion of Counsel as to legality of shares.(2)
- --------
1 Incorporated by reference to the Form N-1A Registration Statement filed on
July 12, 1996.
2 Incorporated by reference to Pre-Effective Amendment No. 1 to the Form N-1A
Registration Statement filed on September 18, 1996.
<PAGE>
(11) Consent of Independent Public Accountants.
(12) Financial Statements omitted from Item 23 - Not applicable.
(13) Subscription Agreement.
(14) Model Retirement Plan Documents - Not applicable.
(14) Model Retirement Plan Documents - Not applicable.
(15) Rule 12b-1 Plan - Not Applicable.
(16) Performance Computation - Not Applicable.
(17) Financial Data Schedule - Not Applicable
<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 ___25, 1996, Kayne Anderson Investment Management,
L.P., the manager of each series of the Registrant, is the sole shareholder of
each series of the Registrant with outstanding shares.
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.
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."
<PAGE>
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
- Osterweis Fund
- ProConscience Women's Equity Mutual Fund
- Academy Value Fund
- Kayne, Anderson Rising Dividends Fund
- Trent Equity Fund
- Leonetti Balanced Fund
- Lighthouse Growth Fund
- U.S. Global Leaders Growth Fund
- Boston Managed Growth Fund
- Harris Bretall Sullivan & Smith Growth Fund
- Insightful Investor Growth Fund
- Hodges Fund
- Penza Growth Fund
- Titan Investment Fund
Rainier Investment Management Mutual Funds
(b) The following information is furnished with respect to the
officers of First Fund Distributors, Inc.:
Name and Principal Position and Offices with First Positions and Offices
Business Address* Fund Distributors, Inc. with Registrant
- ------------------ ------------------------------- ---------------------
Robert H. Wadsworth President and Treasurer None
Steven J. Paggioli Vice President and Secretary None
Eric M. Banhazl Vice President None
* The principal business address of persons and entities listed is 479
West 22nd Street, New York, New York 10011.
<PAGE>
Item 30. Location of Accounts and Records.
The accounts, books, or other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 will be kept by the
Registrant's Transfer Agent, Investors Bank & Trust Company, 89 South Street,
Boston, Massachusetts 02111, except those records relating to portfolio
transactions and the basic organizational and Trust documents of the Registrant
(see Subsections (2)(iii), (4), (5), (6), (7), (9), (10) and (11) of Rule
31a-1(b)), which will be kept by the Registrant at 1800 Avenue of the Stars, 2nd
Floor, Los Angeles, California 90067
Item 31. Management Services.
There are no management-related service contracts not discussed in
Parts A and B.
Item 32. Undertakings.
(a) Registrant hereby undertakes to file a post-effective
amendment including financial statements of each series of the Registrant, which
need not be certified, within four to six months from the effective date of
Registrant's 1933 Act Registration Statement with respect to shares of each of
them.
(b) Registrant has undertaken to comply with Section 16(a) of
the Investment Company Act of 1940, as amended, which requires the prompt
convening of a meeting of shareholders to elect trustees to fill existing
vacancies in the Registrant's Board of Trustees in the event that less than a
majority of the trustees have been elected to such position by shareholders.
Registrant has also undertaken promptly to call a meeting of shareholders for
the purpose of voting upon the question of removal of any Trustee or Trustees
when requested in writing to do so by the record holders of not less than 10
percent of the Registrant's outstanding shares and to assist its shareholders in
communicating with other shareholders in accordance with the requirements of
Section 16(c) of the Investment Company Act of 1940, as amended.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, and State of California on the 16th25th
day of September, 1996.
Kayne Anderson Mutual Funds
By: William T. Miller*
-----------------------------
William T. Miller
Principal Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following person in the capacities and on
the date indicated.
William T. Miller* Principal Executive Officer, September 25, 1996
- ----------------------- Principal Financial and
William T. Miller Accounting Officer, and
sole Trustee
* By: /s/ Eric M. Banhazl
----------------------------
Eric M. Banhazl, pursuant
to a Power of Attorney as filed
with Pre-effective Amendment No. 1
<PAGE>
File Nos. 333-8045
811-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
EXHIBITS
to
FORM N-1A
REGISTRATION STATEMENT
under
THE SECURITIES ACT OF 1933
and
under
THE INVESTMENT COMPANY ACT OF 1940
-------------------------
Kayne Anderson Mutual Funds
(Exact Name of Registrant as Specified in its Charter)
<PAGE>
Exhibit(s) Index
Exhibit No. Document Page No.
- ----------- -------- --------
(6) Form of Underwriting Agreement _____
(9) Form of Administrative Services Agreement _____
(11) Consent of Independent Public Accountants _____
(13) Subscription Agreement _____
EXHIBIT 6
DISTRIBUTION AGREEMENT
This Agreement made this day of , 1996 by and between KAYNE ANDERSON
MUTUAL FUNDS, a Delaware business trust (the "Trust"), and FIRST FUND
DISTRIBUTORS, INC., a Delaware corporation (the "Distributor").
W I T N E S S E T H:
WHEREAS, the Trust is registered as an open-end management investment
company under the Investment Company Act of 1940 (the "1940 Act"), with shares
of common stock organized into separate series as set forth on Schedule A hereto
("series" or "portfolios"), and it is in the interest of the Trust to offer the
shares of common stock of the series for sale continuously; and
WHEREAS, the Distributor is registered as a broker-dealer under the
Securities Exchange Act of 1934 (the "1934 Act") and is a member in good
standing of the National Association of Securities Dealers, Inc. (the "NASD");
and
WHEREAS, the Trust and the Distributor wish to enter into an agreement
with each other with respect to the continuous offering of the shares of common
stock of each series of the Trust (the "Shares");
NOW, THEREFORE, the parties agree as follows:
1. Appointment of Distributor. The Trust hereby appoints the
Distributor as exclusive agent to sell and to arrange for the sale of the
Shares, on the terms and for the period set forth in this Agreement, and the
Distributor hereby accepts such appointment and agrees to act hereunder directly
and/or through the Trust's transfer agent in the manner set forth in the
Prospectuses (as defined below). It is understood and agreed that the services
of the Distributor hereunder are not exclusive, and the Distributor may act as
principal underwriter for the shares of any other registered investment company.
2. Services and Duties of the Distributor.
(a) The Distributor agrees to sell the Shares, as agent for
the Trust, from time to time during the term of this Agreement upon the terms
described in a Prospectus. As used in this Agreement, the term "Prospectus"
shall mean a prospectus and statement of additional information included as part
of the Trust's Registration Statement, as such prospectus and statement of
additional information may be amended or supplemented from time to time, and the
term "Registration Statement" shall mean the Registration Statement most
recently filed from time to time by the Trust with the Securities and Exchange
Commission ("SEC") and effective under the Securities Act of 1933 (the "1933
Act") and the 1940 Act, as such Registration Statement is amended by any
amendments thereto at the time in effect. The Distributor shall not be obligated
to sell any certain number of Shares.
<PAGE>
(b) Upon commencement of operations of the series, the
Distributor will hold itself available to receive orders, satisfactory to the
Distributor, for the purchase of the Shares and will accept such orders and will
transmit such orders and funds received by it in payment for such Shares as are
so accepted to the Trust's transfer agent or custodian, as appropriate, as
promptly as practicable. Purchase orders shall be deemed accepted and shall be
effective at the time and in the manner set forth in the series' Prospectuses.
The Distributor shall not make any short sales of Shares.
(c) The offering price of the Shares shall be the net asset
value per share of the Shares, plus the sales charge, if any, (determined as set
forth in the Prospectuses). The Trust shall furnish the Distributor, with all
possible promptness, an advice of each computation of net asset value and
offering price.
(d) The Distributor shall have the right to enter into
selected dealer agreements with securities dealers of its choice ("selected
dealers") for the sale of Shares. Shares sold to selected dealers shall be for
resale by such dealers only at the offering price of the Shares as set forth in
the Prospectuses. The Distributor shall offer and sell Shares only to such
selected dealers as are members in good standing of the NASD.
3. Duties of the Trust.
(a) Maintenance of Federal Registration. The Trust shall, at
its expense, take, from time to time, all necessary action and such steps,
including payment of the related filing fees, as may be necessary to register
and maintain registration of a sufficient number of Shares under the 1933 Act.
The Trust agrees to file from time to time such amendments, reports and other
documents as may be necessary in order that there may be no untrue statement of
a material fact in a Registration Statement or Prospectus, or necessary in order
that there may be no omission to state a material fact in the Registration
Statement or Prospectus which omission would make the statements therein
misleading.
(b) Maintenance of "Blue Sky" Qualifications. The Trust shall,
at its expense, use its best efforts to qualify and maintain the qualification
of an appropriate number of Shares for sale under the securities laws of such
states as the Distributor and the Trust may approve, and, if necessary or
appropriate in connection therewith, to qualify and maintain the qualification
of the Trust or the series as a broker or dealer in such states; provided that
the Trust shall not be required to amend its Declaration of Trust or By-Laws to
comply with the laws of any state, to maintain an office in any state, to change
the terms of the offering of the Shares in any state, to change the terms of the
offering of the Shares in any state from the terms set forth in Prospectuses, to
qualify as a foreign Trust in any state or to consent to service of process in
any state other than with respect to claims arising out of the offering and sale
of the Shares. The Distributor shall furnish such information and other material
relating to its affairs and activities as may be required by the Trust or its
series in connection with such qualifications.
(c) Copies of Reports and Prospectuses. The Trust shall, at
its expense, keep the
2
<PAGE>
Distributor fully informed with regard to its affairs and in connection
therewith shall furnish to the Distributor copies of all information, financial
statements and other papers which the Distributor may reasonably request for use
in connection with the distribution of Shares, including such reasonable number
of copies of Prospectuses and annual and interim reports as the Distributor may
request and shall cooperate fully in the efforts of the Distributor to sell and
arrange for the sale of the Shares and in the performance of the Distributor
under this Agreement.
4. Conformity with Applicable Law and Rules. The Distributor agrees
that in selling Shares hereunder it shall conform in all respects with the laws
of the United States and of any state in which Shares may be offered, and with
applicable rules and regulations of the NASD.
5. Independent Contractor. In performing its duties hereunder, the
Distributor shall be an independent contractor and neither the Distributor, nor
any of its officers, directors, employees, or representatives is or shall be an
employee of the Trust in the performance of the Distributor's duties hereunder.
The Distributor shall be responsible for its own conduct and the employment,
control, and conduct of its agents and employees and for injury to such agents
or employees or to others through its agents or employees. The Distributor
assumes full responsibility for its agents and employees under applicable
statutes and agrees to pay all employee taxes thereunder.
6. Indemnification.
(a) Indemnification of Trust. The Distributor agrees to
indemnify and hold harmless the Trust and each of its present or former
Trustees, officers, employees, representatives and each person, if any, who
controls or previously controlled the Trust within the meaning of Section 15 of
the 1933 Act against any and all losses, liabilities, damages, claims or
expenses (including the reasonable costs of investigating or defending any
alleged loss, liability, damage, claims or expense and reasonable legal counsel
fees incurred in connection therewith) to which the Trust or any such person may
become subject under the 1933 Act, under any other statute, at common law, or
otherwise, arising out of the acquisition of any Shares by any person which (i)
may be based upon any wrongful act by the Distributor or any of the
Distributor's directors, officers, employees or representatives, or (ii) may be
based upon any untrue statement or alleged untrue statement of a material fact
contained in a Registration Statement, Prospectus, shareholder report or other
information covering Shares filed or made public by the Trust or any amendment
thereof or supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading if such statement or omission was made in
reliance upon and in conformity with information furnished to the Trust by the
Distributor. In no case (i) is the Distributor's indemnity in favor of the
Trust, or any person indemnified to be deemed to protect the Trust or such
indemnified person against any liability to which the Trust or such person would
otherwise be subject by reason of willful misfeasance, bad faith, or gross
negligence in the performance of the Trust's or such person's duties or by
reason of reckless disregard of the Trust's or such person's obligations and
duties under this Agreement or (ii) is the Distributor to be liable under its
indemnity agreement contained in this Paragraph with respect to any claim made
against the Trust or any person indemnified unless the Trust or such person, as
3
<PAGE>
the case may be, shall have notified the Distributor in writing of the claim
within a reasonable time after the summons or other first written notification
giving information of the nature of the claim shall have been served upon the
Trust or upon such person (or after the Trust or such person shall have received
notice of such service on any designated agent). However, failure to notify the
Distributor of any such claim shall not relieve the Distributor from any
liability which the Distributor may have to the Trust or any person against whom
such action is brought otherwise than on account of the Distributor's indemnity
agreement contained in this Paragraph.
The Distributor shall be entitled to participate, at its own expense,
in the defense, or, if the Distributor so elects, to assume the defense of any
suit brought to enforce any such claim, but, if the Distributor elects to assume
the defense, such defense shall be conducted by legal counsel chosen by the
Distributor and satisfactory to the Trust, and to the persons indemnified as
defendant or defendants, in the suit. In the event that the Distributor elects
to assume the defense of any such suit and retain such legal counsel, the Trust,
and the persons indemnified as defendant or defendants in the suit, shall bear
the fees and expenses of any additional legal counsel retained by them. If the
Distributor does not elect to assume the defense of any such suit, the
Distributor will reimburse the Trust and the persons indemnified as defendant or
defendants in such suit for the reasonable fees and expenses of any legal
counsel retained by them. The Distributor agrees to promptly notify the Trust of
the commencement of any litigation of proceedings against it or any of its
officers, employees or representatives in connection with the issue or sale of
any Shares.
(b) Indemnification of the Distributor. The Trust agrees to
indemnify and hold harmless the Distributor and each of its present or former
directors, officers, employees, representatives and each person, if any, who
controls or previously controlled the Distributor within the meaning of Section
15 of the 1933 Act against any and all losses, liabilities, damages, claims or
expenses (including the reasonable costs of investigating or defending any
alleged loss, liability, damage, claim or expense and reasonable legal counsel
fees incurred in connection therewith) to which the Distributor or any such
person may become subject under the 1933 Act, under any other statute, at common
law, or otherwise, arising out of the acquisition of any Shares by any person
which (i) may be based upon any wrongful act by the Trust or any of the Trust's
Trustees, officers, employees or representatives, or (ii) may be based upon any
untrue statement or alleged untrue statement of a material fact contained in a
Registration Statement, Prospectus, shareholder report or other information
covering Shares filed or made public by the Trust or any amendment thereof or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading unless such statement or omission was made in reliance
upon and in conformity with information furnished to the Trust by the
Distributor. In no case (i) is the Trust's indemnity in favor of the
Distributor, or any person indemnified to be deemed to protect the Distributor
or such indemnified person against any liability to which the Distributor or
such person would otherwise be subject by reason of willful misfeasance, bad
faith, or gross negligence in the performance of such person's duties or by
reason of reckless disregard of such person's obligations and duties under this
Agreement or (ii) is the Trust to be liable under their indemnity agreement
contained in this Paragraph with respect to any claim made against Distributor,
or person indemnified unless the Distributor, or such person, as the case may
be, shall
4
<PAGE>
have notified the Trust in writing of the claim within a reasonable time after
the summons or other first written notification giving information of the nature
of the claim shall have been served upon the Distributor or upon such person (or
after the Distributor or such person shall have received notice of such service
on any designated agent). However, failure to notify the Trust of any such claim
shall not relieve the Trust from any liability which the Trust may have to the
Distributor or any person against whom such action is brought otherwise than on
account of the Trust's indemnity agreement contained in this Paragraph.
The Trust shall be entitled to participate, at its own expense, in the
defense, or, if the Trust so elects, to assume the defense of any suit brought
to enforce any such claim, but if the Trust elects to assume the defense, such
defense shall be conducted by legal counsel chosen by the Trust and satisfactory
to the Distributor and to the persons indemnified as defendant or defendants, in
the suit. In the event that the Trust elects to assume the defense of any such
suit and retain such legal counsel, the Distributor, the persons indemnified as
defendant or defendants in the suit, shall bear the fees and expenses of any
additional legal counsel retained by them. If the Trust does not elect to assume
the defense of any such suit, the Trust will reimburse the Distributor and the
persons indemnified as defendant or defendants in such suit for the reasonable
fees and expenses of any legal counsel retained by them. The Trust agrees to
promptly notify the Distributor of the commencement of any litigation or
proceedings against it or any of its Trustees, officers, employees or
representatives in connection with the issue or sale of any Shares.
7. Authorized Representations. The Distributor is not authorized by the
Trust to give on behalf of the Trust any information or to make any
representations in connection with the sale of Shares other than the information
and representations contained in a Registration Statement or Prospectus filed
with the SEC under the 1933 Act and/or the 1940 Act, covering Shares, as such
Registration Statement and Prospectus may be amended or supplemented from time
to time, or contained in shareholder reports or other material that may be
prepared by or on behalf of the Trust for the Distributor's use. This shall not
be construed to prevent the Distributor from preparing and distributing
tombstone ads and sales literature or other material as it may deem appropriate.
No person other than the Distributor is authorized to act as principal
underwriter (as such term is defined in the 1940 Act) for the Trust.
8. Term of Agreement. The term of this Agreement shall begin on the
date first above written, and unless sooner terminated as hereinafter provided,
this Agreement shall remain in effect for a period of two years from the date
first above written. Thereafter, this Agreement shall continue in effect from
year to year, subject to the termination provisions and all other terms and
conditions thereof, so long as such continuation shall be specifically approved
at least annually by (i) the Board of Trustees or by vote of a majority of the
outstanding voting securities of each investment portfolio of the Trust and,
(ii) by the vote, cast in person at a meeting called for the purpose of voting
on such approval, of a majority of the Trustees of the Trust who are not parties
to this Agreement or interested persons of any such party. The Distributor shall
furnish to the Trust, promptly upon its request, such information as may
reasonably be necessary to evaluate the terms of this Agreement or any
extension, renewal or amendment hereof.
5
<PAGE>
9. Amendment or Assignment of Agreement. This Agreement may not be
amended or assigned except as permitted by the 1940 Act, and this Agreement
shall automatically and immediately terminate in the event of its assignment.
10. Termination of Agreement. This Agreement may be terminated by
either party hereto, without the payment of any penalty, on not more than upon
60 days' nor less than 30 days' prior notice in writing to the other party;
provided, that in the case of termination by the Trust such action shall have
been authorized by resolution of a majority of the Trustees of the Trust who are
not parties to this Agreement or interested persons of any such party, or by
vote of a majority of the outstanding voting securities of each series of the
Trust.
11. Miscellaneous. The captions in this Agreement are included for
convenience of reference only and in no way define or delineate any of the
provisions hereof or otherwise affect their construction or effect.
This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Nothing herein contained shall be deemed to require the Trust
to take any action contrary to its Declaration of Trust or By-Laws, or any
applicable statutory or regulatory requirement to which it is subject or by
which it is bound, or to relieve or deprive the Board of Trustees of the Trust
of responsibility for and control of the conduct of the affairs of the Trust.
12. Definition of Terms. Any question of interpretation of any term or
provision of this Agreement having a counterpart in or otherwise derived from a
term or provision of the 1940 Act shall be resolved by reference to such term or
provision of the 1940 Act and to interpretation thereof, if any, by the United
States courts or, in the absence of any controlling decision of any such court,
by rules, regulations or orders of the SEC validly issued pursuant to the 1940
Act. Specifically, the terms "vote of a majority of the outstanding voting
securities", "interested persons," "assignment," and "affiliated person," as
used in Paragraphs 8, 9 and 10 hereof, shall have the meanings assigned to them
by Section 2(a) of the 1940 Act. In addition, where the effect of a requirement
of the 1940 Act reflected in any provision of this Agreement is relaxed by a
rule, regulation or order of the SEC, whether of special or of general
application, such provision shall be deemed to incorporate the effect of such
rule, regulation or order.
13. Compliance with Securities Laws. The Trust represents that it is
registered as an open-end management investment company under the 1940 Act, and
agrees that it will comply with all the provisions of the 1940 Act and of the
rules and regulations thereunder. The Trust and the Distributor each agree to
comply with all of the applicable terms and provisions of the 1940 Act, the 1933
Act and, subject to the provisions of Section 4(d), all applicable "Blue Sky"
laws. The
6
<PAGE>
Distributor agrees to comply with all of the applicable terms and provisions of
the 1934 Act.
14. Notices. Any notice required to be given pursuant to this Agreement
shall be deemed duly given if delivered or mailed by registered mail, postage
prepaid, to the Distributor at 4455 E. Camelback Road., Suite 261E, Phoenix, AZ
85018 or to the Trust at 1800 Avenue of the Stars, Los Angeles, CA 90067.
15. Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of California
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the date first written above.
KAYNE ANDERSON MUTUAL FUNDS
By:____________________________
Name:
Title:
FIRST FUND DISTRIBUTORS, INC.
By:____________________________
Name:
Title:
7
<PAGE>
Schedule A
Series or Portfolios of KAYNE ANDERSON MUTUAL FUNDS
Rising Dividend Fund
Small-Mid Cap Rising Dividends Fund
International Rising Dividends Fund
Intermediate Total Return Bond Fund
Intermediate Tax-Free Bond Fund
EXHIBIT 9
Form of Administration Services Agreement
<PAGE>
ADMINISTRATION AGREEMENT
AGREEMENT made this day of , 1996 by and between KAYNE
ANDERSON MUTUAL FUNDS, a Delaware business trust (the "Trust"), and INVESTMENT
COMPANY ADMINISTRATION CORPORATION, a Delaware Corporation (the
"Administrator").
W I T N E S S E T H
-------------------
WHEREAS, the Trust is registered as an open-end management
investment company under the Investment Company Act of 1940 (the "1940 Act"),
with shares of common stock organized into separate series as set forth on
Schedule A hereto ("series" or "portfolios"); and
WHEREAS, the Trust wishes to retain the Administrator to
provide certain administrative services in connection with the management of the
operations of the various portfolios of the Trust and the Administrator is
willing to furnish such services:
NOW THEREFORE, in consideration of the premises and mutual
covenants herein contained, it is agreed between the parties hereto as follows:
1. Appointment. The Trust hereby appoints the Administrator to
provide certain administrative services, hereinafter enumerated, in connection
with the management of the portfolios' operations for the period and on the
terms set forth in this Agreement. The Administrator agrees to comply with all
relevant provisions of the 1940 Act, applicable rules and regulations
thereunder, and other applicable law.
2. Services on a Continuing Basis. The Administrator will
perform the following services on a regular basis which would be daily, weekly
or as otherwise appropriate:
(A) prepare and coordinate reports and other
materials to be supplied to the Board of Trustees of the Trust;
(B) 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 Trust and the portfolios.
(C) prepare all required filings necessary to
maintain the Trust's and portfolios' qualification and/or registration
to sell shares in all states where the Trust and portfolios currently
do, or intend to do business;
(D) coordinate the preparation, printing and mailing
of all materials (e.g., Annual Reports) required to be sent to
shareholders;
(E) coordinate the preparation and payment of Trust
and portfolio related expenses;
1
<PAGE>
(F) conduct relations with, and monitor and oversee
the activities of the Trust's and the portfolios' servicing agents
(i.e., transfer agent, custodian, fund accounting agent, attorneys,
underwriters, brokers and dealers, corporate fiduciaries, banks and
such other persons in any such other capacity deemed to be necessary or
desirable;
(G) review and adjust as necessary the portfolios'
daily expense accruals;
(H) maintain and keep such books and records of the
Trust as required by law or for the proper operation of the Trust and
its portfolios other than those maintained and kept by the Trust's
Investment Adviser and servicing agents;
(I) provide the Trust with (i) the services of
persons competent to perform the administrative and clerical functions
described herein, and (ii) personnel to serve as officers of the Trust;
(J) provide the portfolios with office space as well
as administrative offices and such data processing facilities as are
necessary for the performance of its duties under this Agreement.
(K) monitor each portfolio's compliance with
investment policies and restrictions as set forth in the portfolio's
currently effective Prospectus and Statement of Additional Information
under the Securities Act of 1933.
(L) perform such additional services as may be agreed
upon by the Trust and the Administrator.
3. Responsibility of the Administrator. The Administrator
shall be under no duty to take any action on behalf of the Trust or the
portfolios except as set forth herein or as may be agreed to by the
Administrator in writing. In the performance of its duties hereunder, the
Administrator shall be obligated to exercise reasonable care and diligence and
to act in good faith and to use its best efforts. Without limiting the
generality of the foregoing or any other provision of this Agreement, the
Administrator shall not be liable for delays or errors or loss of data occurring
by reason of circumstances beyond the Administrator's control.
4. Reliance Upon Instructions. The Trust agrees that the
Administrator shall be entitled to rely upon any instructions, oral or written,
actually received by the Administrator from the Board of Trustees of the Trust
and shall incur no liability to the Trust or the investment adviser to any
portfolio in acting upon such oral or written instructions, provided such
instructions reasonably appear to have been received from a person duly
authorized by the Board of Trustees of the Trust to give oral or written
instructions on behalf of the Trust or any portfolio.
5. Confidentiality. The Administrator agrees on behalf of
itself and its employees to treat confidentially all records and other
information relative to the Trust and portfolios and all prior, present or
potential shareholders of any and all portfolios, except after prior
notification to, and approval of release of information in writing by, the
Trust, which approval shall not be unreasonably
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withheld where the Administrator may be exposed to civil or criminal contempt
proceedings for failure to comply, when requested to divulge such information by
duly constituted authorities, or when so requested by the Trust or by a
portfolio.
6. Equipment Failures. In the event of equipment failures or
the occurrence of events beyond the Administrator's control which render the
performance of the Administrator's functions under this Agreement impossible,
the Administrator shall take reasonable steps to minimize service interruptions
and is authorized to engage the services of third parties to prevent or remedy
such service interruptions.
7. Compensation. As compensation for services rendered by the
Administrator during the term of this Agreement, each portfolio of the Trust set
forth in Schedule A will pay to the Administrator a monthly fee at the annual
rate of 0.__% of the first $___ million of average daily net assets, 0.__% of
the next $___ million of such net assets, and 0.__% of such net assets over $___
million, with a minimum fee of $_______ annually per portfolio.
8. Indemnification. The Trust and portfolios agree to
indemnify and hold harmless the Administrator from all taxes, filing fees,
charges, expenses, assessments, claims and liabilities (including without
limitation, liabilities arising under the Securities Act of 1933, the Securities
Exchange Act of 1934, the 1940 Act, and any state and foreign securities laws,
all as amended from time to time) and expenses, including (without limitation)
reasonable attorneys fees and disbursements, reasonably arising directly or
indirectly from any action or thing which the Administrator takes or does or
omits to take or do at the request of or in reliance upon the advice of the
Board of Trustees of the Trust, provided that the Administrator will not be
indemnified against any liability to a portfolio or to shareholders (or any
expenses incident to such liability) arising out of the Administrator's own
willful misfeasance, bad faith, negligence or reckless disregard of its duties
and obligations under this Agreement. The Administrator agrees to indemnify and
hold harmless the Trust and each of its Trustees from all claims and liabilities
(including without limitation, liabilities under the Securities Act of 1933, the
Securities Exchange Act of 1934, the 1940 Act, and any state and foreign
securities laws, all as amended from time to time) and expenses, including
(without limitation) reasonable attorneys fees and disbursements, arising
directly or indirectly from any action or thing which the Administrator takes or
does or omits to take or do which is in violation of this Agreement or not in
accordance with instructions properly given to the Administrator, or arising out
of the Administrator's own willful misfeasance, bad faith, gross negligence or
reckless disregard of its duties and obligations under this Agreement.
9. Duration and termination. This Agreement shall continue
until termination by the Trust on behalf of any portfolio (by resolution of the
Board of Trustees) or the Administrator on 60 days' written notice to the other
party. All notices and other communications hereunder shall be in writing.
10. Amendments. This Agreement or any part hereof may be
changed or waived only by instrument in writing signed by the party against
which enforcement of such change or waiver is sought, provided such amendment is
specifically approved by the Board of Trustees of the Trust.
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11. Miscellaneous. This Agreement embodies the entire
agreement and understanding between the parties thereto with respect to the
services to be performed hereunder, and supersedes all prior agreements and
understandings, relating to the subject matter hereof. 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. This Agreement shall be deemed to be a contract made in California and
governed by California law. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement will not be affected thereby. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their respective
successors.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their officers designated below on the date first
written above.
KAYNE ANDERSON MUTUAL FUNDS
By:_________________________________
Name:
Title:
INVESTMENT COMPANY ADMINISTRATION
CORPORATION
By:_________________________________
Name:
Title:
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Schedule A
Series or Portfolios of KAYNE ANDERSON MUTUAL FUNDS
Rising Dividends Fund
Small-Mid Cap Rising Dividends Fund
International Rising Dividends Fund
Intermediate Total Return Bond Fund
Intermediate Tax-Free Bond Fund
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EXHIBIT 11
Consent of Independent
Public Accountants
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use of our report dated September 24, 1996, on
the financial statement of Kayne Anderson Small-Mid Cap Rising Dividends Fund,
Kayne Anderson International Rising Dividends Fund, Kayne Anderson Intermediate
Total Return Bond Fund, and Kayne Anderson Intermediate Tax-Free Bond Fund, each
a series of shares of Kayne Anderson Mutual Funds referred to therein, in
Pre-Effective Amendment No. 2 to the Registration Statement on Form N-1A, File
No. 333-8045 as filed with the Securities and Exchange Commission.
We also consent to the reference to our Firm in the Statement of
Additional Information under the Caption "Auditors."
Philadelphia, PA TAIT, WELLER & BAKER
September 25, 1996
EXHIBIT 13
Subscription Agreement
<PAGE>
Kayne Anderson Mutual Funds
1800 Avenue of the Stars, 2nd Floor
Los Angeles, California 90067
Ladies and Gentlemen:
The undersigned hereby subscribes for the purchase of _____ shares of beneficial
interest (the "Shares") of Kayne Anderson Intermediate Total Return Bond Fund
(the "Fund"), a separate series of Kayne Anderson Mutual Funds (the "Trust"), at
$_____ per share for a total investment of $100,000. In connection with said
subscription, the undersigned hereby represents that:
1. There is no present reason to anticipate any change in circumstances
or any other occasion or event that would cause the undersigned to sell or
redeem the Shares shortly after the purchase thereof.
2. There are no agreements or arrangements between the undersigned and
the Trust, or any of its officers, trustees, employees or the investment manager
of the Fund, or any affiliated persons thereof with respect to the resale,
future distribution or redemption of the Shares.
3. The sale of the shares by the undersigned will be made only by
redemption to the Fund and not by a transfer to any third party, without the
consent of the Trust.
4. The undersigned is aware that in issuing and selling these Shares,
the Fund and the Trust are relying upon the aforementioned representations.
5. The undersigned is fully aware that the organizational expenses of
the Fund, including the costs and expenses of registration of the Shares, are
being charged to the operations of the Fund over a period of five years, and
that in the event the undersigned redeems any portion of these Shares before the
end of said amortization period, the undersigned will reimburse the Fund for the
pro rata share of the unamortized organizational expenses (by a reduction of the
redemption proceeds) in the same proportion as the number of Shares being
redeemed bears to the total number of remaining initial Shares acquired by the
undersigned hereunder.
KAYNE ANDERSON INVESTMENT MANAGMENT, L.P.
By: KAIM Traditional, LLC,
its general partner
Dated: September _____, 1996 By________________________________
Its_______________________________