As filed with the Securities and Exchange Commission on April 30, 1997
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.
Post-Effective Amendment No. 2
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 2
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)
X on May 1, 1997, 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 has registered an indefinite number of securities under 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
<PAGE>
Kayne Anderson Mutual Funds
CONTENTS OF REGISTRATION STATEMENT
This registration statement contains the following documents:
Facing Sheet
Contents of Registration Statement
Cross - Reference Sheets for Kayne Anderson Mutual Funds
Part A - Combined Prospectus for Kayne Anderson Mutual Funds
Kayne Anderson Rising Dividends Fund
Kayne Anderson Small-Mid Cap Rising Dividends Fund
Kayne Anderson International Rising Dividends Fund
Kayne Anderson Intermediate Total Return Bond Fund
Kayne Anderson Intermediate Tax-Free Bond Fund
Part B - Combined Statement of Additional Information for Kayne
Anderson Mutual Funds
Kayne Anderson Rising Dividends Fund
Kayne Anderson Small-Mid Cap Rising Dividends Fund
Kayne Anderson International Rising Dividends Fund
Kayne Anderson Intermediate Total Return Bond Fund
Kayne Anderson Intermediate Tax-Free Bond Fund
Part C - Other Information
Signature Page
<PAGE>
Kayne Anderson Mutual Funds
CROSS REFERENCE SHEETS
FORM N-1A
Part A: Information Required in Prospectus
------------------------------------------
(Combined Prospectus for Kayne Anderson Mutual Funds)
Kayne Anderson Rising Dividends Fund
Kayne Anderson Small-Mid Cap Rising Dividends Fund
Kayne Anderson International Rising Dividends Fund
Kayne Anderson Intermediate Total Return Bond Fund
Kayne Anderson Intermediate Tax-Free Bond Fund
<TABLE>
<CAPTION>
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- ----------------------
<S> <C> <C>
1. Cover Page Cover Page
2. Synopsis "Prospectus Summary" and "Summary of Expenses
and Example"
3. Condensed Financial Not Applicable
Information
4. General Description Cover Page, "Prospectus Summary,"
of Registrant "Investment Objectives and Policies," "Risk
Considerations," "Portfolio Securities and Investment
Techniques" and "General Information"
5. Management of "Adviser Investment Returns," "Investment
the Fund Objectives and Policies," "Organization and
Management" and "Purchasing Shares"
5A. Management's Discussion Not Applicable
of Fund Performance
6. Capital Stock and "Organization and Management," "Dividends,
Other Securities Distributions and Tax Status" and "General
Information"
7. Purchase of Securities "Purchasing Shares," "Exchange of Shares," "Selling
Being Offered Shares (Redemptions)," "Shareholder Services" and
"Share Price Calculation"
8. Redemption or "Selling Shares (Redemptions)"
Repurchase and "General Information"
9. Pending Legal Not Applicable
Proceedings
</TABLE>
<PAGE>
PART B: Information Required in
Statement of Additional Information
-----------------------------------
(Combined Statement of Additional Information for Kayne Anderson Mutual Funds)
Kayne Anderson Rising Dividends Fund
Kayne Anderson Small-Mid Cap Rising Dividends Fund
Kayne Anderson International Rising Dividends Fund
Kayne Anderson Intermediate Total Return Bond Fund
Kayne Anderson Intermediate Tax-Free Bond Fund
<TABLE>
<CAPTION>
Location in the
N-1A Registration Statement
Item No. Item by Heading
- -------- ---- ----------------------
<S> <C> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information Cover Page and "Additional Information"
and History
13. Investment Objectives "Investment Objectives and Policies" and "The Funds'
Investment Limitations"
14. Management of the "Management of the Funds"
Registrant
15. Control Persons and "Management of the Funds" and "Additional
Principal Holders of Information"
Securities
16. Investment Advisory "Management of the Funds," "The Funds'
and Other Services Administrator," "The Funds' Distributor" and
"Transfer Agent and Custodian"
17. Brokerage Allocation "Management of the Funds"
18. Capital Stock and "Additional Information"
Other Securities
19. Purchase, Redemption "Share Purchases and Redemptions" and "How Net
and Pricing of Asset Value is Determined"
Securities Being
Offered
20. Tax Status "Dividends, Distributions and Taxes"
21. Underwriters "The Funds' Distributor"
22. Calculation of "How Performance is Determined"
Performance Data
23. Financial Statements Not Applicable
</TABLE>
<PAGE>
---------------------------------------------------------------------
PART A
COMBINED PROSPECTUS
Kayne Anderson Mutual Funds
Kayne Anderson Rising Dividends Fund
Kayne Anderson Small-Mid Cap Rising Dividends Fund
Kayne Anderson International Rising Dividends Fund
Kayne Anderson Intermediate Total Return Bond Fund
Kayne Anderson Intermediate Tax-Free Bond Fund
---------------------------------------------------------------------
<PAGE>
[Kayne Anderson Logo]
Mutual Funds
1800 Avenue of the Stars
Second Floor
Los Angeles, California 90067
(800) 222-0380
(Shareholder Inquiries (800)395-3807)
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 ("Kayne, Anderson" or the
"Adviser") serves as investment adviser to the Funds.
The Rising Dividends Fund seeks long-term capital appreciation, with
dividend income as a secondary consideration. This Fund invests
primarily in equity securities, usually common stocks, of companies of
all sizes.
The Small-Mid Cap Rising Dividends Fund seeks long-term capital
appreciation, with dividend income as a secondary consideration. This
Fund invests primarily in equity securities, usually common stocks, of
small and mid capitalization domestic companies, which the Fund
currently considers to be companies having total market capitalizations
of not more than $3 billion.
The International Rising Dividends Fund seeks long-term capital
appreciation, with dividend income as a secondary consideration. This
Fund invests primarily in equity securities, usually common stocks, of
companies outside the U.S.
generally having total market capitalizations of $1 billion or more.
The Intermediate Total Return Bond Fund seeks 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 May 1, 1997, 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 above 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>
Prospectus dated May 1, 1997
TABLE OF CONTENTS
SUMMARY OF EXPENSES AND EXAMPLE ...............................................1
PROSPECTUS SUMMARY ............................................................2
FINANCIAL HIGHLIGHTS ..........................................................4
INVESTMENT OBJECTIVES AND POLICIES ............................................6
The Rising Dividends Fund ...................................................6
The Small-Mid Cap Rising Dividends Fund .....................................6
The International Rising Dividends Fund .....................................6
The Intermediate Total Return Bond Fund .....................................7
The Intermediate Tax-Free Bond Fund .........................................8
Additional Investment Considerations ........................................8
RISK CONSIDERATIONS ...........................................................9
PORTFOLIO SECURITIES AND INVESTMENT TECHNIQUES ...............................10
ORGANIZATION AND MANAGEMENT ..................................................16
PURCHASING SHARES ............................................................17
EXCHANGE OF SHARES ...........................................................19
SELLING SHARES (REDEMPTIONS) .................................................20
SHAREHOLDER SERVICES .........................................................21
SHARE PRICE CALCULATION ......................................................22
DIVIDENDS, DISTRIBUTIONS AND TAX STATUS ......................................22
PERFORMANCE INFORMATION ......................................................23
GENERAL INFORMATION ..........................................................23
<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
expense reimbursement 1.20%* 1.30%* 1.40%* 0.95%* 0.95%*
</TABLE>
*For the fiscal year ended December 31, 1996, the ratios of total operating
expenses to average net assets for each Fund before the Adviser's voluntary
reimbursement were as follows: Rising Dividends Fund--1.37%; Small-Mid Cap
Rising Dividends Fund--18.91%; International Rising Dividends Fund--15.74%;
Intermediate Total Return Bond Fund--2.10%; and Intermediate Tax-Free Bond
Fund--2.08%. (Of these total expense amounts, "other expenses" before
reimbursement are as follows: Rising Dividends Fund--0.62%; Small-Mid Cap Rising
Dividends Fund--18.06%; International Rising Dividends Fund--14.79%;
Intermediate Total Return Bond Fund--1.60%; and Intermediate Tax-Free Bond
Fund--1.58%.) 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.
1
<PAGE>
<TABLE>
<CAPTION>
Small-Mid International
Rising Cap Rising Rising Intermediate Intermediate
Dividends Dividends Dividends Total Return Tax-Free
Fund Fund Fund Bond Fund Bond Fund
<S> <C> <C> <C> <C> <C>
One Year $12 $13 $14 $10 $10
Three years $38 $41 $44 $30 $30
Five Years $66 N/A N/A N/A N/A
Ten Years $145 N/A N/A N/A N/A
</TABLE>
The Example shown above assumes that the Adviser will limit the annual operating
expenses of each Fund to the totals shown. In addition, federal regulations
require the Example to assume a 5% annual return, but the Funds' actual returns
may be higher or lower. See "Organization and Management."
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 $2.7
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%
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.
2
<PAGE>
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 Fund expects to pay dividends monthly. The Intermediate Tax-Free Bond Fund
expects to declare dividends daily and pay monthly. Distributions of net capital
gains, if any, will be made at least annually. The Board of Trustees may
determine to declare dividends and make distributions more or less frequently.
Dividends and capital gain distributions (net of any required tax withholding)
are automatically reinvested in additional shares at the net asset value per
share on the reinvestment date unless the shareholder has previously requested
in writing to the Transfer Agent that payment be made in cash.
Any dividend or distribution paid by a Fund has the effect of reducing the net
asset value per share on the reinvestment date by the amount of the dividend or
distribution. Investors should note that a dividend or distribution paid on
shares purchased shortly before such dividend or distribution was declared will
be subject to 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.
3
<PAGE>
FINANCIAL HIGHLIGHTS
For a capital share outstanding throughout the period.
The following information has been audited by Tait, Weller & Baker, independent
accountants, whose unqualified report covering the period indicated below is
incorporated by reference herein and appears in the annual report to
shareholders. This information should be read in conjunction with the financial
statements and accompanying notes that appear in the annual report incorporated
by reference in the Statement of Additional Information. Further information
about the Fund's performance is contained in its annual report, which may be
obtained without charge by writing or calling the Investment Adviser at the
address or telephone on the Prospectus cover page.
<TABLE>
<CAPTION>
Intermediate
------------
Small-Mid Cap International Total Return Intermediate
------------- ------------- ------------ ------------
Rising Rising Bond Fund Tax-Free
------ ------ --------- --------
Rising Dividends Fund Dividends Fund Dividends Fund Bond Fund
--------------------- -------------- -------------- ---------
October 18, October 18, October 28, October 28,
Year Ended May 1, 1995(1) to 1996(1) to 1996(1) to 1996(1) to 1996(1) to
December 31, December 31, December 31, December 31, December 31, December 31,
1996 1995 1996 1996 1996 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $12.63 $10.65 $10.65 $10.65 $10.65 $10.65
------ ------ ------ ------ ------ ------
Income from investment
operations:
Net investment income 0.08 0.07 0.02 0.01 0.09 0.01
Net realized and unrealized
gain (loss) on investments 2.35 2.13 0.41 0.26 (0.07) (0.01)
------ ------ ------ ------ ------ ------
Total income from investment operations 2.43 2.20 0.43 0.27 0.02 0.00
------ ------ ------ ------ ------ ------
Less Distributions:
Dividends from net
investment income (0.08) (0.07) (0.02) (0.01) (0.08) (0.01)
Distributions from capital gains (0.66) (0.15) 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------ ------
Total Distributions (0.74) (0.22) (0.02) (0.01) (0.08) (0.01)
------ ------ ------ ------ ------ ------
Net asset value, end of period $14.32 $12.63 $11.06 $10.91 $10.59 $10.64
====== ====== ====== ====== ====== ======
Total return 19.09% 20.65%(2) 4.00%(2) 2.56%(2) 0.20%(2) 0.02%(2)
Net assets, end of period (in 000's) $26,118 $20,613 $808 $1,055 $5,033 $5,124
Ratio of expenses to average net assets:
Before expense reimbursement 1.37% 1.31%(3) 18.91%(3) 15.74%(3) 2.10%(3) 2.08%(3)
After expense reimbursement 1.37% 1.31%(3) 1.30%(3) 1.40%(3) 0.95%(3) 0.95%(3)
Ratio of net investment income
to average net assets (net of
expense reimbursement) 0.59% 0.94%(3) 1.58%(3) 1.14%(3) 4.72%(3) 0.60%(3)
Portfolio turnover rate 23% 28% -- -- -- --
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Average commission per share $0.0600 - $0.0955 $0.0936 -- --
</TABLE>
- -------------------------------
(1) Commencement of operations
(2) Not Annualized
(3) Annualized
5
<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 described below under "Investment
Approach." The Adviser believes these companies of all sizes 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 $3 billion. The fund currently considers small
capitalization companies to be those having total market capitalizations of not
more than $1 billion, including those with extremely small capitalizations, but
typically more that $50 million. Stocks of smaller companies have outperformed
the S&P 500 Index from 1926 through 1996 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 temporarily are out of favor and selling at what it considers
to be favorable prices.
6
<PAGE>
The three equity Funds' average and median market capitalizations will fluctuate
over time as a result of market valuation levels and the availability of
specific investment opportunities.
The three equity Funds' investment objective is long-term capital appreciation.
The Funds seek to achieve their objective by investing principally in common
stocks, and in normal market conditions, at least 80% of the value of each
Fund's total assets will be invested in common stocks. However, for temporary
defensive purposes, the Funds may seek to preserve capital by temporarily
investing part of their assets in short-term fixed-income securities or in cash
or cash equivalents 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.
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 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 be A rated or
not more than 35% of total capitalization. The Adviser believes that low debt
levels indicate financial strength to support growth in good times and to win
market share in difficult times.
Companies that substantially meet these criteria are then researched and
analyzed internally by the Adviser to determine each company's relative position
in its industry and the industry cycle. Under valuation and over valuation of
each company's stock is also assessed using proprietary valuation models.
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.
7
<PAGE>
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 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
8
<PAGE>
"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.
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 Depositary Receipts ("ADRs") and
European Depositary 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 Depositary 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
9
<PAGE>
imposed with respect to investments in foreign nations, foreign exchange
controls (which may include suspension of the ability to transfer currency from
a given country and repatriation of investments), default in foreign government
securities, and political or social instability or diplomatic developments that
could adversely affect investments. In addition, there is often less publicly
available information about foreign issuers than those in the U.S. Foreign
companies are often not subject to uniform accounting, auditing and financial
reporting standards. Further, these Funds may encounter difficulties in pursuing
legal remedies or in obtaining judgments in foreign courts.
Brokerage commissions, fees for custodial services and other costs relating to
investments by these Funds in other countries are generally greater than in the
U.S. Foreign markets have different clearance and settlement procedures from
those in the U.S., and certain markets have experienced times when settlements
did not keep pace with the volume of securities transactions and resulted in
settlement difficulty. The inability of a Fund to make intended security
purchases because of settlement difficulties could cause it to miss attractive
investment opportunities. Inability to sell a portfolio security because of
settlement problems could result in loss to a Fund if the value of the portfolio
security declined or result in claims against the Fund if it had entered into a
contract to sell the security. In certain countries, there is less government
supervision and regulation of business and industry practices, stock exchanges,
brokers, and listed companies than in the U.S. The securities markets of many of
the countries in which these Funds may invest may also be smaller, less liquid,
and subject to greater price volatility than those in the U.S.
Because the securities owned by the Rising Dividends, Small-Mid Cap Rising
Dividends, International Rising Dividends and Intermediate Total Return Bond
Funds may be denominated in foreign currencies, the value of such securities
will be affected by changes in currency exchange rates and in exchange control
regulations, and costs will be incurred in connection with conversions between
currencies. A change in the value of a foreign currency against the U.S. dollar
results in a corresponding change in the U.S. dollar value of a Fund's
securities denominated in the currency. Such changes also affect a Fund's income
and distributions to shareholders. A Fund may be affected either favorably or
unfavorably by changes in the relative rates of exchange between the currencies
of different nations, and a Fund may therefore engage in foreign currency
hedging strategies. Such strategies, however, involve certain transaction costs
and investment risks, including dependence upon the Adviser's ability to predict
movements in exchange rates.
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.
10
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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.
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 retail installment sales contracts or credit card receivables.
Asset-backed securities generally are
11
<PAGE>
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 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
12
<PAGE>
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. 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 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.
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Illiquid and Restricted Securities. No Fund may invest more than 10% of its net
assets in illiquid securities, including (1) securities for which there is no
readily available market; (2) securities which may be subject to legal
restrictions (so-called "restricted securities") other than Rule 144A securities
noted below; (3) repurchase agreements having more than seven days to maturity
and (4) fixed time deposits subject to withdrawal penalties (other than those
with a term of less than seven days). Restricted securities do not include those
which meet the requirements of Rule 144A under the Securities Act of 1933 and
which the Trustees have determined to be liquid based on the applicable trading
markets and the availability of reliable price information.
14
<PAGE>
[KAYNE ANDERSON LOGO]
Mutual Funds
New Account Application
Mail to:
Kayne Anderson Mutual Funds
P.O. Box 1537
Mailcode: MFD 23
Boston, Massachusetts 02205
<TABLE>
Use this form only for individual, custodial, trust, profit-sharing, pension or other plan accounts. Do NOT use this form for IRA's
(unless the IRA is a self-directed IRA with another trustee or custodian). A special form is available for IRA's; please call (800)
395- 3807 for information or assistance.
<S> <C> <C>
ACCOUNT (For Individual ___________________________________________________________________________________________
REGISTRATION or First Name Middle Name or Initial Last Name Social Security Number
Joint Owners) ___________________________________________________________________________________________
Joint Owner Social Security Number
Registration will be "Joint Tenants with Right of Survivorship" unless otherwise specified:
___________________________________________________________________________________________
___________________________________________________________________________________________________________________________________
(For Uniform
/ / Transfers ___________________________________________________________________________________________
/ / Gifts Custodian's Name (Only One Allowed)
to Minors Act ___________________________________________________________________________________________
Accounts) Minor's Name (Only One Allowed) Minor's Social Security No.
___________________________________________________________________________________________
State of Residence
___________________________________________________________________________________________________________________
(For Corporate ___________________________________________________________________________________________
Trust or Other Name of Corporation, Trust, etc.
Fiduciary ___________________________________________________________________________________________
Accounts) Name and Date of Trust (Continued)
___________________________________________________________________________________________
Name(s) of Trustee(s), Beneficiary, etc. Tax ID Number
___________________________________________________________________________________________________________________________________
ADDRESS FOR
MAILINGS ___________________________________________________________________________________________
Number and Street
___________________________________________________________________________________________
Apartment, Floor or Room Number Telephone No. (Include Area Code)
___________________________________________________________________________________________
City State Zip Code
___________________________________________________________________________________________________________________________________
INVESTMENT AMOUNT ($2,000 minimum, $1,000 for UGMA Accounts)
$____________ / / Kayne Anderson Rising Dividends Fund
$____________ / / Kayne Anderson Small-Mid Cap Rising Dividends Fund
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
$____________ / / Kayne Anderson International Rising Dividends Fund
$____________ / / Kayne Anderson Intermediate Total Return Bond Fund
$____________ / / Kayne Anderson Intermediate Tax-Free Bond Fund
$____________ / / Money Market Fund
/ / By wire (Please call (800) 395-3807 for instructions)
/ / By check, payable to: Kayne Anderson Mutual Funds
/ / Existing account
/ / Exchange from (Fund name): __________________________
/ / Order previously placed with investment dealer
___________________________________________________________________________________________________________________________________
DISTRIBUTIONS
/ / U.S. Citizen / / Other: _________________________________ (Country of Residence)
Dividends and distributions will be reinvested unless a box is checked:
/ / Dividends in cash; capital gain distributions reinvested
/ / Dividends and capital gain distributions in cash
___________________________________________________________________________________________________________________________________
SYSTEMATIC
WITHDRAWAL / / Beginning on __________, I would like checks sent to me:
PROGRAM / / Monthly
/ / Quarterly
/ / Semi-Annually
/ / Annually
The amount of each check should be $___________(minimum $100). I understand that payments
will be made by redeeming shares from my account and that if the rate of redemption
exceeds the rate of growth of the Fund, my account may ultimately be depleted.
___________________________________________________________________________________________________________________________________
AUTOMATIC / / I authorize Kayne Anderson Mutual Funds to draw on my bank account
INVESTMENT monthly on the 10th 15th or 20th (circle one) of the month, or the first business day
PLAN ($100 MINIMUM) after that date and invest as follows:
$____________ / / 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
$____________ / / Money Market Fund
_______________________________________________________________________________________________________
Name of Bank Address of Bank
_______________________________________________________________________________________________________
Bank's ABA Number Account Number Name(s) on Account
_______________________________________________________________________________________________________
Signature of Owner, Trustee or Custodian Signature of Joint Owner Date
___________________________________________________________________________________________________________________________________
IMPORTANT: This form is continued on the reverse side
</TABLE>
<PAGE>
<TABLE>
<S> <C>
__________________________________________________________________________________________________________________________________
EXCHANGES & / / I would like to be able to place exchange instructions by telephone between the
REDEMPTIONS Fund(s) and the Money Market Fund.
BY TELEPHONE
/ / I would like to be able to place a redemption order by telephone and have the
proceeds wired directly to the bank account listed below or mailed to the address of
record for this account.
I understand that these procedures are offered as a convenience to me, and I agree that
if the identification procedures set forth in the prospectus are followed, neither the
Funds nor the Transfer Agent will be liable for any loss, expense or cost arising from
one of these transactions.
______________________________________________________________________________________
Name of Bank Address of Bank
______________________________________________________________________________________
Bank's ABA Number Account Number Name(s) on Account
___________________________________________________________________________________________________________________________________
CHECK WRITING / / I would like to establish check writing privileges on my Money Market Account.
(Money Market Fund Only)
I understand that there is a $500 minimum for any check written. Shares purchased by
check may not be redeemed with check writing for 12 days from the purchase date.
______________________________________________________________________________________
Signature of Owner, Trustee or Custodian Signature of Joint Owner Date
If a joint account, what signatures are required on checks? ____ Only One ____ Both
___________________________________________________________________________________________________________________________________
SIGNATURES: I represent that I am of legal age, have legal capacity to make this purchase and have received and read a prospectus
and understand the objectives and policies of each Fund I have selected.
I certify under penalty of perjury that: (1) the social security or other tax identification number stated above is correct and (2)
I am not subject to backup withholding because / / the IRS has not informed me that I am subject to backup withholding, or / / the
IRS has notified me that I am no longer subject to backup withholding. (Check appropriate box. If you are subject to backup
withholding, strike out section 2.)
The Internal Revenue Service does not require your consent to any provision of this document other than the certification required
to avoid backup withholding.
___________________________________________________________________________________________________________________________________
Signature of Owner, Trustee or Custodian Signature of Joint Owner Date
___________________________________________________________________________________________________________________________________
DEALER INFORMATION
___________________________________________________________________________________________________________________________________
Name of Dealer Name of Representative Rep ID No
___________________________________________________________________________________________________________________________________
Address of Reps Branch Branch ID No.
___________________________________________________________________________________________________________________________________
DUPLICATE MAILING INSTRUCTIONS (FOR USE TO HAVE A COPY OF YOUR STATEMENT SENT)
___________________________________________________________________________________________________________________________________
Name
___________________________________________________________________________________________________________________________________
Address
___________________________________________________________________________________________________________________________________
</TABLE>
<PAGE>
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.
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.
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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 Non-Traditional, L.P., currently manages
approximately $2.7 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 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. 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.
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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 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. 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 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
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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 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 1537, Mailcode: MFD 23, Boston, MA 02205.
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 1537, Mailcode: MFD 23, Boston, MA 02205. 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) 395-3807 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: Transfer Agent
ABA Routing Number 011001438
Account # 111213141
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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 1537, Mailcode: MFD 23, Boston, MA 02205. Orders to purchase
shares are effective on the day the Transfer Agent receives the check or money
order.
If an order, together with payment in proper form, is received by the Transfer
Agent or previously approved broker or financial institution by 4:00 p.m. New
York time, on any day that the NYSE is open for trading, Fund shares will be
purchased at each Fund's next determined net asset value. Orders for Fund shares
received after 4:00 p.m. New York time will be purchased at the net asset value
determined on the business day following receipt of the order.
All cash purchases must be made in U.S. dollars and, to avoid fees and delays,
checks must be drawn only on banks located in the U.S. A charge (minimum of $20)
will be imposed if any check used for the purchase of shares is returned. The
Funds and the Transfer Agent each reserve the right to reject any purchase order
in whole or in part.
EXCHANGE OF SHARES
Shares of any of the Funds may be exchanged for shares of any other Fund,
provided such other shares may be sold legally in the state of the investor's
residence.
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 privilege
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
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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 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 1537, Mailcode: MFD 23,
Boston, MA 02205. 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) 395-3807 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
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to receive redemption proceeds, a written request must be sent to the Transfer
Agent with a signature guarantee at the address listed under "Redemption by
Mail," above.
Special Factors Regarding Telephone Redemptions. Neither the Funds nor any of
their service contractors will be liable for any loss or expense in acting on
telephone instructions that are reasonably believed to be genuine. In attempting
to confirm that telephone instructions are genuine, the Funds will use
procedures that are considered reasonable, including requesting a shareholder to
correctly state the Fund account number, the name in which the account is
registered, the social security number, banking institution, bank account number
and the name in which the bank account is registered.
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.
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) 395-3807.
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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 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 unless specifically requested in writing. 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 Fund expects to pay dividends
monthly. The Intermediate Tax-Free Bond Fund expects to declare dividends daily
and pay 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 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
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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.
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 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
23
<PAGE>
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)395-3807.
24
<PAGE>
Advisor:
Kayne Anderson Investment Management
1800 Avenue of the Stars, 2nd Floor
Los Angeles, California 90067
(800) 222-0380
Custodian and Transfer Agent:
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
(800) 395-3807
Auditors:
Tait Weller & Baker
Two Penn Center Plaza
Philadelphia, Pennsylvania 19102
Distributor:
First Fund Distributors, Inc.
4455 E. Camelback Road
Ste. 261-E
Phoenix, Arizona 85018
Legal Counsel:
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, CA 94104
[KAYNE ANDERSON LOGO]
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
PROSPECTUS DATED MAY 1, 1997
<PAGE>
------------------------------------------------------------
PART B
COMBINED STATEMENT OF ADDITIONAL INFORMATION
Kayne Anderson Mutual Funds
Kayne Anderson Rising Dividends Fund
Kayne Anderson Small-Mid Cap Rising Dividends Fund
Kayne Anderson International Rising Dividends Fund
Kayne Anderson Intermediate Total Return Bond Fund
Kayne Anderson Intermediate Tax-Free Bond Fund
------------------------------------------------------------
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
KAYNE ANDERSON MUTUAL FUNDS
INVESTMENT ADVISER:
Kayne Anderson Investment Management
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 May 1, 1997 (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-3
Risk Factors................................................................B-28
The Funds' Investment Limitations...........................................B-30
Management of the Funds.....................................................B-34
The Funds' Administrator....................................................B-43
The Funds' Distributor......................................................B-43
Transfer Agent and Custodian................................................B-44
How Net Asset Value is Determined...........................................B-44
Share Purchases and Redemptions.............................................B-47
Dividends, Distributions and Taxes..........................................B-47
How Performance is Determined...............................................B-53
Additional Information......................................................B-57
Financial Statements........................................................B-57
Appendix A..................................................................B-59
<PAGE>
For ease of reference, the same section headings are used in both the
Prospectus and this Statement of Additional Information with respect to the same
subject matter, except for "Purchases and Redemptions" (see the sections in the
Prospectus "Purchasing Shares" and "Selling Shares (Redemptions))".
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS STATEMENT OF ADDITIONAL
INFORMATION AND THE PROSPECTUS DATED MAY 1, 1997, 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 May 1, 1997.
B-2
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Funds are managed by Kayne Anderson Mutual Funds ("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 payment of principal and interest protection. See Appendix A for
a description of these ratings. These securities often are considered to be
speculative and involve a 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 for lower- rated debt securities, 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.
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<PAGE>
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
B-4
<PAGE>
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.
U.S. Government Securities. Generally, the value of U.S. Government
Securities held by the Funds will fluctuate inversely with interest rates. U.S.
Government securities in which the Funds may invest include debt obligations of
varying maturities issued by the U.S. Treasury or issued or guaranteed by an
agency or instrumentality of the U.S. Government, including the Federal Housing
Administration ("FHA"), Farmers Home Administration, Export-Import Bank of the
United States, Small Business Administration, Government National Mortgage
Association ("GNMA"), General Services Administration, Central Bank for
Cooperatives, Federal Farm Credit Bank, Farm Credit System Financial Assistance
Corporation, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation
("FHLMC"), Federal Intermediate Credit Banks, Federal Land Banks, Financing
Corporation, Federal Financing Bank, Federal National Mortgage Association
("FNMA"), Maritime Administration, Tennessee Valley Authority, Resolution
Funding Corporation, Student Loan Marketing Association, and Washington
Metropolitan Area Transit Authority. Direct obligations of the U.S. Treasury
include a variety of securities that differ primarily in their interest rates,
maturities and dates of issuance. Because the U.S. Government is not obligated
by law to provide support to an instrumentality that it sponsors, a Fund will
not invest in obligations issued by an instrumentality of the U.S. Government
unless the Adviser determines that the instrumentality's credit risk makes its
securities suitable for investment by the Fund.
Mortgage-Related Securities: Government National Mortgage Association.
GNMA is a wholly owned corporate instrumentality of the U.S. Government within
the Department of Housing and Urban Development. The National Housing Act of
1934, as amended (the "Housing Act"), authorizes GNMA to guarantee the timely
payment of the principal of, and interest on, securities that are based on and
backed by a pool of specified mortgage loans. For these types of
B-5
<PAGE>
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 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.
B-6
<PAGE>
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 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
B-7
<PAGE>
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
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. These notes can
be tax-exempt obligations. 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.
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
B-8
<PAGE>
with a specified undivided interest (up to 100%) of the underlying obligation
and the right to demand payment of the unpaid principal balance plus accrued
interest on the Participating VRDNs from the institution upon a specified number
of days' notice, not to exceed seven. In addition, the Participating VRDN is
backed by an irrevocable letter of credit or guaranty of the institution. A Fund
has an undivided interest in the underlying obligation and thus participates on
the same basis as the institution in such obligation except that the institution
typically retains fees out of the interest paid on the obligation for servicing
the obligation, providing the letter of credit and issuing the repurchase
commitment.
Participating VRDNs may be unrated or rated, and their creditworthiness
may be a function of the creditworthiness of the issuer, the institution
furnishing the irrevocable letter of credit, or both. Accordingly, the Tax-Free
Bond Fund may invest in such VRDNs, the issuers or underlying institutions of
which the Adviser believes are creditworthy and satisfy the quality requirements
of the Tax-Free Bond Fund. The Adviser periodically monitors the
creditworthiness of the issuer of such securities and the underlying
institution.
During periods of high inflation and periods of economic slowdown,
together with the fiscal measures adopted by governmental authorities to attempt
to deal with them, interest rates have varied widely. While the value of the
underlying VRDN may change with changes in interest rates generally, the
variable rate nature of the underlying VRDN should minimize changes in the value
of the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed-income
securities. The Tax-Free Bond Fund may invest in VRDNs on which stated minimum
or maximum rates, or maximum rates set by state law, limit the degree to which
interest on such VRDNs may fluctuate; to the extent they do increases or
decreases in value may be somewhat greater than would be the case without such
limits. Because the adjustment of interest rates on the VRDNs is made in
relation to movements of various interest rate adjustment indices, the VRDNs are
not comparable to long-term fixed-rate securities. Accordingly, interest rates
on the VRDNs may be higher or lower than current market rates for fixed-rate
obligations of comparable quality with similar maturities.
Municipal Securities. Because the Tax-Free Bond Fund invests a
substantial portion of its total assets in obligations either issued by or on
behalf of states, territories and possessions of the United
B-9
<PAGE>
States and the District of Columbia and their political subdivisions, agencies,
authorities and instrumentalities, including industrial development bonds, as
well as obligations of certain agencies and instrumentalities of the U.S.
Government, the interest from which is, in the opinion of bond counsel to the
issuer, exempt from federal income tax ("Municipal Securities") the Fund
generally will have a lower yield than if it primarily purchased higher yielding
taxable securities, commercial paper or other securities with correspondingly
greater risk. Generally, the value of the Municipal Securities held by the
Tax-Free Bond Fund will fluctuate inversely with interest rates.
General Obligation Bonds. Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to the rate or amount of special assessments.
Revenue Bonds. A revenue bond is not secured by the full faith, credit
and taxing power of an issuer. Rather, the principal security for a revenue bond
is generally the net revenue derived from a particular facility, group of
facilities or, in some cases, the proceeds of a special excise or other specific
revenue source. Revenue bonds are issued to finance a wide variety of capital
projects, including electric, gas, water, and sewer systems; highways, bridges,
and tunnels; port and airport facilities; colleges and universities; and
hospitals. Although the principal security behind these bonds may vary, many
provide additional security in the form of a debt service reserve fund that may
be used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Some authorities
provide further security in the form of a governmental assurance (although
without obligation) to make up deficiencies in the debt service reserve fund.
Industrial Development Bonds. Industrial development bonds, which may
pay tax-exempt interest, are, in most cases, revenue bonds and are issued by or
on behalf of public authorities to raise money to finance various privately
operated facilities for business manufacturing, housing, sports, and pollution
control. These bonds
B-10
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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 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
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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, 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,
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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 securities that become available and are
similar to the foregoing described Municipal Securities in which the Tax-Free
Bond Fund may invest.
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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.
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
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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 or liquid assets denominated in the appropriate currency
available in an amount sufficient to cover any commitments under these
contracts. Segregated assets used to cover forward contracts will be marked to
market on a daily basis. While these contracts are not presently regulated by
the Commodity Futures Trading Commission ("CFTC"), the CFTC may in the future
regulate them, and the ability of these Funds to utilize forward contracts may
be restricted. Forward contracts may limit potential gain from a positive change
in the relationship between the U.S. dollar and foreign currencies.
Unanticipated changes in currency prices may result in poorer overall
performance by a Fund than if it had not entered into such contracts. The Funds
generally will not enter into a forward foreign currency exchange contract with
a term greater than one year.
Futures Contracts and Options on Futures Contracts. To hedge against
movements in interest rates, securities prices or currency exchange rates, the
Funds may purchase and sell various kinds of futures contracts and options on
futures contracts. The Funds also may enter into closing purchase and sale
transactions with respect to any such contracts and options. Futures contracts
may be based on various securities (such as U.S. Government securities),
securities indices, foreign currencies and other financial instruments and
indices.
The Funds have filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the CFTC and the National
Futures Association, which regulate trading in the futures markets, before
engaging in any purchases or sales of futures contracts or options on futures
contracts. Pursuant to Section 4.5 of the regulations under the Commodity
Exchange Act, the notice of eligibility included the representation that the
Funds will use futures contracts and related options for bona fide hedging
purposes
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<PAGE>
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, 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
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<PAGE>
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.
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
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<PAGE>
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 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
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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.
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Other Investment Practices
When-Issued and Forward Commitment Securities. The Funds may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" or "delayed-delivery" basis. The price of such securities
is fixed at the time the commitment to purchase or sell is made, but delivery
and payment for the securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by a Fund to the issuer.
While the Funds reserve the right to sell when-issued or delayed delivery
securities prior to the settlement date, the Funds intend to purchase such
securities with the purpose of actually acquiring them unless a sale appears
desirable for investment reasons. At the time a Fund makes a commitment to
purchase a security on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the security in determining its net
asset value. The market value of the when-issued securities may be more or less
than the settlement price. The Funds do not believe that their net asset values
will be adversely affected by their purchase of securities on a when-issued or
delayed delivery basis. The Funds cause their custodian to segregate liquid
assets 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
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of the trade's settlement date. This technique is sometimes referred to as a
"settlement hedge" or "transaction hedge." The Adviser expects to enter into
settlement hedges in the normal course of managing the Funds' foreign
investments. A Fund also could enter into forward contracts to purchase or sell
a foreign currency in anticipation of future purchases or sales of securities
denominated in foreign currency, even if the specific investments have not yet
been selected by the Adviser.
The Funds also may use forward contracts to hedge against a decline in
the value of existing investments denominated in foreign currency. For example,
if a Fund owned securities denominated in Deutschemarks, it could enter into a
forward contract to sell Deutschemarks in return for U.S. dollars to hedge
against possible declines in the Deutschemark's value. Such a hedge (sometimes
referred to as a "position hedge") would tend to offset both positive and
negative currency fluctuations, but would not offset changes in security values
caused by other factors. A Fund also could hedge the position by selling another
currency expected to perform similarly to the Deutschemark -- for example, by
entering into a forward contract to sell Deutschemarks or European Currency
Units in return for U.S. dollars. This type of hedge, sometimes referred to as a
"proxy hedge," could offer advantages in terms of cost, yield, or efficiency,
but generally will not hedge currency exposure as effectively as a simple hedge
into U.S. dollars. Proxy hedges may result in losses if the currency used to
hedge does not perform similarly to the currency in which the hedge securities
are denominated.
SEC guidelines require mutual funds to segregate cash and appropriate
liquid assets to cover forward currency contracts that are deemed speculations.
The Funds are not required to segregate assets to cover forward contracts
entered into for hedging purposes, including settlement hedges, position hedges,
and proxy hedges.
A Fund will not enter into a forward contract if, as a result, it
would have more than one-third of its total assets committed to such contracts
(unless it owns the currency that it is obligated to deliver or has caused its
custodian to segregate cash or high-quality liquid assets having a value
sufficient to cover its obligations).
The successful use of forward currency contracts will depend on the
Adviser's skill in analyzing and predicting currency values. Forward contracts
may change a Fund's investment exposure to changes in currency exchange rates
substantially, and could result in losses to a Fund if exchange rates do not
perform as the Adviser
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anticipates. For example, if a currency's value rose at a time when the Adviser
had hedged a Fund by selling currency in exchange for dollars, a Fund would be
unable to participate in the currency's appreciation. If the Adviser hedges
currency exposure through proxy hedges, a Fund could realize currency losses
from the hedge and the security position at the same time if the two currencies
do not move in tandem. Similarly, if the Adviser increases a Fund's exposure to
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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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.
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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 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, or other distributions on the securities loaned and to any
increase
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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 liquid assets equal to the difference between (1) the market value of the
securities sold short at the time they were sold short and (2) any cash or U.S.
Government securities required to be deposited with the broker in connection
with the short sale (not including the proceeds from the short sale). The
segregated assets
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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-26
<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
B-27
<PAGE>
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)
B-28
<PAGE>
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
B-29
<PAGE>
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
B-30
<PAGE>
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,
B-31
<PAGE>
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, 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 (such as foreign currency hedging);
(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 purchases
and sales of its portfolio securities and, as required in
connection with permissible options, futures,
B-32
<PAGE>
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, 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);
(18) participate on a joint basis in any trading account in
securities, although the Adviser may aggregate orders for the
sale or purchase of securities with other accounts it manages
to reduce brokerage costs or to average prices;
(19) invest, in the aggregate, more than 10% of its net assets in
illiquid securities;
(20) purchase or retain in the Fund's portfolio any security if any
officer, trustee or shareholder of the issuer is at the same
time an officer, trustee or employee of the Trust or the
Adviser and such person owns beneficially more than 1/2
B-33
<PAGE>
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 52) c/o
Kayne Anderson Mutual Funds, 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 57) c/o Kayne
Anderson Mutual Funds, 1800 Avenue of the Stars, Los Angeles, CA 90067.
Mr. Rudnick has been an equity owner and the Chief Investment Officer
of the general partner of Kayne, Anderson(and its predecessor) since
August 1989.
*WILLIAM T. MILLER, Trustee, Chief Financial Officer and Treasurer (Age
34) c/o Kayne Anderson Mutual Funds, 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. From September 1992
until April 1994, Mr. Miller was the vice president of Accounting for
- --------
*Denotes a Trustee who is an "interested person," as defined in the 1940 Act.
B-34
<PAGE>
Pilgrim Distribution Corp., a mutual fund distributor in Los Angeles.
From October 1990 until September 1992, Mr. Miller was an Audit Manager
with Price Waterhouse in Los Angeles.
CARL D. COVITZ, Trustee (Age 58) c/o Landmark Capital, Inc., 9595
Wilshire Boulevard, Beverly Hills, 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 54) 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 57) 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.
WILLIAM H. WALDORF, Trustee (Age 59) c/o Landmark Distribution Group,
Inc., 100 Jericho Quad., Jericho, NY 11753. Mr. Waldorf is the Chairman
and Chief Executive Officer of Landmark Distribution Group, Inc. and
its affiliated companies. These companies are involved in the food
storage and distribution, real estate and financial investment
businesses. Mr. Waldorf has been a director of the NYSE-listed Griffon
Corporation for over 30 years and is a Trustee of Elmira College, The
Interchurch Center and The Warwick Center.
B-35
<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 a fee of $1,000 for each regular Board meeting attended and $250 for
each committee meeting attended, together with reasonable expenses. The
aggregate compensation paid by the Trust to each Trustee during the fiscal year
ended December 31, 1996 is set forth below.
<TABLE>
<CAPTION>
Pension or Total Compensation
Aggregate Retirement Benefits from the Trust and
Compensation from Accrued as Part of Fund Complex (no
Name of Trustee the Trust Fund Expenses* additional Trusts)
- --------------- ----------------- ------------------- ------------------
<S> <C> <C> <C>
Richard A. Kayne None -- None
Allan M. Rudnick None -- None
William T. Miller None -- None
Carl D. Covitz $1,000 -- $1,000
Arnold Brustin $1,000 -- $1,000
Gerald I. Isenberg $1,000 -- $1,000
William H. Waldorf $0 -- $0
</TABLE>
* The Trust does not maintain pension or retirement plans.
Control Persons and Share Ownership
For a substantial period of time after commencement of the operations
of the Trust, one or more officers and Trustees of the Trust may have a
controlling interest in each Fund.
As of March 31, 1997, the following persons held of record 5% or more
of the outstanding shares of the Rising Dividends Fund: Scudder Trust Company
ttee The Retirement Plan of Hancock and Estabrook LLP, 12.97%; 5 Industrial Way,
Salem, NH 03079; Nations Bank Trustee fbo Big B Inc. Profit Sharing 401(k)
Retirement Plan, 10.17%; 715 Peachtree Street, 5th Floor, Atlanta, GA 30060; and
Arletta N. Tronstein TR U/A dtd 12/11/96 Arletta Tronstein Living
B-36
<PAGE>
Trust, 5.66%; 1800 Avenue of the Stars, Suite 1400, Los Angeles, CA 90067.
As of March 31, 1997, the following persons held of record 5% or more
of the outstanding shares of the Small-Mid Cap Rising Dividends Fund: Bear
Stearns Securities Corporation, 13.24%; One Metrotech Center North, Brooklyn, NY
11201; Irwin E. Garfield and Brian Catalde trustees Paragon Homes Inc. 401(k)
Plan and Trust U/A dated 6/3/93, 12.62%; Post Office Box 2153, Santa Monica, CA
90407; Florence H. Kanofsky & Samuel Kanofsky TR U/A DTD 5/31/89 The Kanofsky
Living Trust, 7.40%; 235 Reeves Drive, #102, Beverly Hills, CA 90210; Mose J.
Firestone Living Trust DTD 10/13/93 Mose J. Fireston TTEE, 6.44%; 1409 Benedict
Canyon Drive, Beverly Hills, CA 90210; Investors Bank & Trust Co. Cust. fbo
Howard H. Zelikow IRA, c/o Kayne Anderson, 6.02%; 1800 Avenue of the Stars,
Second Floor, Los Angeles, CA 90067; Frank Living Trust dtd 4/3/86 Martin J.
Frank & Linda F. Frank TTEE, 5.97%; 614 North Sierra Drive, Beverly Hills, CA
90210; and William J. Mandel tr Cardiovascular Medical Group of Southern
California 401(k) Profit Sharing Plan dtd 1/1/89, 5.95%; 1201 Summit Drive,
Beverly Hills, CA 90210.
As of March 31, 1997, the following persons held of record 5% or more
of the outstanding shares of the International Rising Dividends Fund: Victor K.
Knutzen & Helen A. Knutzen tr U/A dtd 12/15/92 Knutzen Family Trust, 14.12%; 946
Marsh Avenue, Reno, NV 89509; Irwin E. Garfield and Brian Catalde trustees
Paragon Homes Inc. 401(k) Plan and Trust U/A dated 6/3/93, 11.69%; Post Office
Box 2153, Santa Monica, CA 90407; William J. Mandel tr Cardiovascular Medical
Group of Southern California 401(k) Profit Sharing Plan dtd 1/1/89, 11.21%; 1201
Summit Drive, Beverly Hills, CA 90210; Florence H. Kanofsky & Samuel Kanofsky TR
U/A DTD 5/31/89 The Kanofsky Living Trust, 6.88%; 235 Reeves Drive, #102,
Beverly Hills, CA 90210; Mose J. Firestone Living Trust DTD 10/13/93 Mose J.
Fireston TTEE, 6.20%; 1409 Benedict Canyon Drive, Beverly Hills, CA 90210;
Investors Bank & Trust Co. Cust. fbo Howard H. Zelikow IRA, c/o Kayne Anderson,
5.63%; 1800 Avenue of the Stars, Second Floor, Los Angeles, CA 90067;
Interfiducia Trust Reg U/A dtd 9/26/88 HEK Trust, 5.42%; Aeulestrasse 76,
FL-9490 Vaduz, Lichtenstein; Bear Stearns Securities Corporation, 5.36%; One
Metrotech Center North, Brooklyn, NY 11201; and Charles Schwab & Co. Inc.
Special Custody Account for Benefit of Customers, 5.29%; attn: Mutual Funds, 101
Montgomery Street, San Francisco, CA 94104.
As of March 31, 1997, the following persons held of record 5% or more
of the outstanding shares of the Intermediate Total Return Bond Fund: William N.
Pennington tr fbo William N. Pennington
B-37
<PAGE>
Separate Property Trust dtd 1/1/91, 96.58%; 441 West Plumb Lane, Reno, NV 89509.
As of March 31, 1997, the following persons held of record 5% or more
of the outstanding shares of the Intermediate Tax-Free Bond Fund: William N.
Pennington tr fbo William N. Pennington Separate Property Trust dtd 1/1/91,
97.55%; 441 West Plumb Lane, Reno, NV 89509.
As of March 31, 1997, the Directors and Officers of the Trust as a
whole owned less than 1% of the outstanding shares of the Rising Dividends Fund,
Small-Mid Cap Rising Dividends Fund, International Rising Dividends Fund,
Intermediate Total Return Bond Fund, Intermediate Tax-Free Bond Fund.
The Adviser
As set forth in the Prospectus, Kayne, Anderson is the Adviser for the
Funds. Pursuant to an Investment Management Agreement (the "Management
Agreement"), the Adviser determines the composition of the Funds' portfolios,
the nature and timing of the changes to the Funds' portfolios and the manner of
implementing such changes. The Adviser also (a) provides the Funds with
investment advice, research and related services for the investment of their
assets, subject to such directions as it may receive from the Board of Trustees;
(b) pays all of the Trust's executive officers' salaries and executive expenses
(if any); (c) pays all expenses incurred in performing its investment advisory
duties under the Management Agreement; and (d) furnishes the Funds with office
space and certain administrative services. The services of the Adviser to the
Funds are not deemed to be exclusive, and the Adviser or any affiliate thereof
may provide similar services to other series of the Trust, other investment
companies and other clients, and may engage in other activities. The Funds may
reimburse the Adviser (on a cost recovery basis only) for any services performed
for a Fund by the Adviser outside its duties under the Management Agreement.
Kayne Anderson is a registered investment adviser organized as a
California limited partnership. The Adviser's predecessor was founded in 1984,
by Richard Kayne and John Anderson. The Adviser is in the business of furnishing
investment advice to institutional and private clients and, together with its
affiliated investment
B-38
<PAGE>
adviser, KAIM Non-Traditional, L.P., currently manages approximately $2.7
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.
Management fees paid by each fund, net of reimbursement are as follows:
International
-------------
Rising Small-Mid Cap Rising Intermediate Intermediate
------ ------------- ------ ------------ ------------
Dividends Rising Dividends Total Return Tax-Free
--------- ------ --------- ------------ --------
Fund Dividends Fund Fund Bond Fund Bond Fund
---- -------------- ---- --------- ---------
1995 $90,944 - - - -
1996 $180,502 $0 $0 $0 $0
The Rising Dividends Fund commenced operations on May 1, 1995. The
Small-Mid Cap Rising Dividends Fund and the International Rising Dividends Fund
commenced operations on October 18, 1996. The Intermediate Total Return Bond
Fund and the Intermediate Tax- Free Bond Fund commenced operations on October
28, 1996.
Additional management fees payable under the Management Agreement may
have instead been waived by the Adviser, but are subject to recapture as
discussed below.
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.
B-39
<PAGE>
Expenses
Each Fund will pay all expenses related to its operation which are not
borne by the Adviser or the Distributor. These expenses include, among others:
legal and auditing expenses; interest; taxes; governmental fees; fees, voluntary
assessments and other expenses incurred in connection with membership in
investment company organizations; brokerage commissions or charges; fees of
custodians, transfer agents, registrars or other agents; distribution plan fees;
expenses relating to the redemption or repurchase of a Fund's shares; expenses
of registering and qualifying Fund shares for sale under applicable federal and
state laws and maintaining such registrations and qualifications; expenses of
preparing, printing and distributing to Fund shareholders prospectuses, proxy
statements, reports, notices and dividends; cost of stationery; costs of
shareholders' and other meetings of a Fund; fees paid to members of the Board of
Trustees (other than members who are affiliated persons of the Adviser or
Distributor); a Fund's pro rata portion of premiums of any fidelity bond and
other insurance covering a Fund and the Trust's officers and trustees or other
expenses of the Trust; and expenses including prorated portions of overhead
expenses (in each case on cost recovery basis only) of services for a Fund
performed by the Adviser outside of its investment advisory duties under the
Management Agreement. A Fund also is liable for such nonrecurring expenses as
may arise, including litigation to which a Fund may be a party. Each Fund has
agreed to indemnify its trustees and officers with respect to any such
litigation. Each Fund also paid its own organizational expenses, which are being
amortized over five years.
As noted in the Prospectus, the Adviser has agreed to reduce its fee to
each Fund by the amount, if any, necessary to keep the Fund's annual operating
expenses (expressed as a percentage of its average daily net assets), at or
below the lesser of the following levels: Rising Dividends Fund -- 1.20%;
Small-Mid Cap Rising Dividends Fund -- 1.30%; International Rising Dividends
Fund -- 1.40%; Intermediate Total Return Bond Fund -- .95%; and Tax-Free Bond
Fund -- .95% and/or the maximum expense ratio allowed by any state in which such
Fund's shares are then qualified for sale. The Adviser also may at its
discretion from time to time pay for other Fund expenses from its own assets, or
reduce the management fee of a Fund in excess of that required. For the fiscal
year ended December 31, 1996, Kayne Anderson reimbursed the funds the following
amounts: Small-Mid Cap Rising Dividends Fund - $16,314, International Rising
Dividends Fund - $17,888, Intermediate Total
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Return Bond Fund - $10,845 and Intermediate Tax-Free Bond Fund - $2,918.
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 broker-
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<PAGE>
dealers who facilitate sales of the Funds' shares, subject to also obtaining
best execution as described above from such broker-dealer.
A portion of the securities in which the Funds may invest are traded in
the over-the-counter markets, and each Fund intends to deal directly with the
dealers who make markets in the securities involved, except as limited by
applicable law and in certain circumstances where better prices and execution
are available elsewhere. Securities traded through market makers may include
markups or markdowns, which are generally not determinable. Under the 1940 Act,
persons affiliated with a Fund are prohibited from dealing with that Fund as
principal in the purchase and sale of securities except after application for
and receipt of an exemptive order 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. For the period May 1, 1995 (commencement
of operations) through December 31, 1995 the Rising Dividends Fund paid $21,458
in commissions. The Rising Dividends Fund commenced operations on May 1,1995.
For the year ended December 31, 1996 the Rising Dividends Fund paid $4,649 in
commissions, the Small-Mid Cap Rising Dividends Fund paid $1,995 in commissions,
the International Rising Dividends Fund paid $3,021 in commissions. The
Intermediate Total Return Bond Fund and the Intermediate Tax-Free Fund paid no
commissions. The Small-Mid Cap Rising Dividends Fund and the International
Rising Dividends Fund each commenced operations on October 18, 1996 and the
Intermediate Total Return Bond Fund and the Intermediate Tax-Free Fund commenced
operations on October 28, 1996. For the period October 18, 1996 (commencement of
operations)through December 31, 1996 the Small-Mid Cap Rising Dividends Fund and
the International Rising Dividends Fund executed
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all of their trades through KA Associates, an affiliated broker of the
Investment Adviser.
THE FUNDS' ADMINISTRATOR
The Funds have an Administration Agreement with Investment Company
Administration Corporation (the "Administrator"), with offices at 2025 East
Financial Way, Suite 101, Glendora, CA 91741. The Administration Agreement
provides that the Administrator will prepare and coordinate reports and other
materials supplied to the Trustees; prepare and/or supervise the preparation and
filing of all securities filings, periodic financial reports, prospectuses,
statements of additional information, marketing materials, tax returns,
shareholder reports and other regulatory reports or filings required of the
Funds; prepare all required filings necessary to maintain the Funds'
qualifications and/or registrations to sell shares in all states where each Fund
currently does, or intends to do, business; coordinate the preparation, printing
and mailing of all materials (e.g., Annual Reports) required to be sent to
shareholders; coordinate the preparation and payment of Fund-related expenses;
monitor and oversee the activities of the Funds' servicing agents (i.e.,
transfer agent, custodian, fund accountants, etc.); review and adjust as
necessary each Fund's daily expense accruals; and perform such additional
services as may be agreed upon by the Funds and the Administrator. For its
services, the Administrator receives the fees described in the Prospectus. For
the period May 1, 1995 (commencement of Operations) to December 31, 1995 and for
the year ended December 31, 1996 the Rising Dividends Fund paid $30,244 and
$44,164 respectively in Administration Fees. For the period October 18, 1996
(commencement of operations) through December 31, 1996 the Small-Mid Cap Rising
Dividends Fund and the International Rising Dividends Fund paid $1,973 and
$1,973 in Administration Fees respectively. From October 28, 1996 (commencement
of operations) to December 31, 1996 the Intermediate Total Return Bond Fund and
the Intermediate Tax-Free Bond Fund paid $1,739 and $1,739 in Administration
fees respectively.
THE FUNDS' DISTRIBUTOR
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<PAGE>
First Fund Distributors, Inc. (the "Distributor"), a broker-dealer
affiliated with the Administrator, acts as each Fund's principal underwriter in
a continuous public offering of the Fund's shares. The Distribution Agreement
between the Funds and the Distributor continues in effect for periods not
exceeding one year if approved at least annually by (i) the Board of Trustees or
the vote of a majority of the outstanding shares of each Fund (as defined in the
1940 Act) and (ii) a majority of the Trustees who are not interested persons of
any such party, in each case cast in person at a meeting called for the purpose
of voting on such approval. The Distribution Agreement may be terminated without
penalty by the parties thereto upon 60-days' written notice, and is
automatically terminated in the event of its assignment as defined in the 1940
Act.
TRANSFER AGENT AND CUSTODIAN
Investors Bank & Trust Company, Boston, Massachusetts, serves as the
Funds' Transfer Agent. As Transfer Agent, it maintains records of shareholder
accounts, processes purchases and redemptions of shares, acts as dividend and
distribution disbursing agent and performs other related shareholder functions.
Investors Bank & Trust Company, Boston, Massachusetts also serves as the Funds'
Custodian. As Custodian, it and subcustodians designated by the Board of
Trustees hold the securities in the Funds' portfolio and other assets for
safekeeping. The Transfer Agent and Custodian do not and will not participate in
making investment decisions for the Funds.
HOW NET ASSET VALUE IS DETERMINED
The net asset values of the Funds' shares are calculated once daily, as
of 4:00 p.m. New York time (the "Portfolio Valuation Time"), on each day that
the New York Stock Exchange (the "NYSE") is open for trading by dividing each
Fund's net assets (assets less liabilities) by the total number of shares
outstanding and adjusting to the nearest cent per share. The NYSE is closed on
Saturdays, Sundays, New Year's Day, Presidents Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving, and Christmas Day. The Funds do not
expect to determine the net asset value of their shares on any day when the NYSE
is not open for trading even if there is sufficient trading in their portfolio
securities on such days to materially affect the net asset value per share.
B-44
<PAGE>
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 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
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<PAGE>
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 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.
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<PAGE>
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 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
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<PAGE>
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.
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-
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<PAGE>
market" for federal income tax purposes at the end of each taxable year, i.e.,
each option contract will be treated as sold for its fair market value on the
last day of the taxable year. In general, unless the special election referred
to in the previous sentence is made, gain or loss from transactions in such
option contracts will be 60% long-term and 40% short-term capital gain or loss.
Section 1092 of the Code, which applies to certain "straddles," may
affect the taxation of the Funds' transactions in option contracts. Under
Section 1092, the Funds may be required to postpone recognition for tax purposes
of losses incurred in certain closing transactions in options.
Section 988 of the Code contains special tax rules applicable to
certain foreign currency transactions that may affect the amount, timing, and
character of income, gain or loss recognized by a Fund. Under these rules,
foreign exchange gain or loss realized with respect to foreign
currency-denominated debt instruments, foreign currency forward contracts,
foreign currency-denominated payables and receivables, and foreign currency
options and futures contracts (other than options and futures contracts that are
governed by the mark-to-market and 60%-40% rules of Section 1256 of the Code and
for which no election is made) is treated as ordinary income or loss. Some part
of a Fund's gain or loss on the sale or other disposition of shares of a foreign
corporation may, because of changes in foreign currency exchange rates, be
treated as ordinary income or loss under Section 988 of the Code, rather than as
capital gain or loss.
One of the requirements for qualification as a regulated investment
company is that less than 30% of a Fund's gross income must be derived from
gains from the sale or other disposition of securities held for less than three
months. Accordingly, a Fund may be restricted in effecting closing transactions
within three months after entering into an option contract.
The Funds also may invest in the stock of foreign companies that may be
treated as "passive foreign investment companies" ("PFICs") under the Code.
Certain other foreign corporations, not operated as investment companies, may
nevertheless satisfy the PFIC definition. A portion of the income and gains that
a Fund derives from PFIC stock may be subject to a non-deductible federal income
tax at the Fund level. In some cases, a Fund may be able to avoid this tax by
electing to be taxed currently on its share of the PFIC's income, whether or not
such income is actually distributed by the PFIC. The Funds will endeavor to
limit their exposure to
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<PAGE>
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 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
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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.
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
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<PAGE>
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 proceeds) paid to
individuals and other nonexempt shareholders who have not complied with
applicable regulations. In order to avoid
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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.
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<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
B-54
<PAGE>
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment (made at the beginning of
the 1-, 5-, or 10-year periods) at the end
of the 1-, 5-, or 10-year periods (or
fractional portion thereof).
The Funds impose no sales load on initial purchases or on reinvested
dividends. Accordingly, no sales charges are deducted for purposes of this
calculation. The calculation of total return assumes that all dividends, if any,
and distributions paid by a Fund would be reinvested at the net asset value on
the day of payment.
For the year ended December 31, 1996 for the Rising Dividends Fund and
for the period October 18, 1996 (commencement of operations) through December
31, 1996 for the Small-Mid Cap Rising Dividends Fund and the International
Rising Dividends Fund and for the period October 28, 1996 (commencement of
operations) through December 31, 1996 for the Intermediate Total Return Bond
Fund and the Intermediate Tax-Free Bond Fund, the total return for each fund is
as follows:
Rising Small-Mid Cap International Intermediate Intermediate
------ ------------- ------------- ------------ ------------
Dividends Rising Rising Dividends Total Return Tax-Free Bond
- --------- ------ ---------------- ------------ -------------
Fund Dividends Fund Fund Bond Fund Fund
---- -------------- ---- --------- ----
19.09% 4.00% 2.56% 0.20% 0.02%
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
B-53
<PAGE>
distributions are reinvested at net asset value on the reinvestment dates during
the period.
Investment Philosophy
From time to time the Funds may publish or distribute information and
reasons why the Adviser believes investors should invest in the Funds. For
example, the Funds may refer to the Adviser's "rising dividends philosophy",
which is founded on the principles of value and growth. The Funds may state that
the Adviser's investment professionals actively research quality companies that
are not only undervalued based on their current earnings, but also offer
significant potential for future growth. The Funds also may state that the
Adviser uses a practical approach to investing that emphasizes sound business
judgment and common sense.
Indices and Publications
In the same shareholder communications, sales literature, and
advertising, a Fund may compare its performance with that of appropriate indices
such as the Standard & Poor's Composite Index of 500 stocks ("S&P 500"),
Standard & Poor's MidCap 400 Index ("S&P 400"), the NASDAQ Industrial Index, the
NASDAQ Composite Index, the Russell 2500 Stock Index (the "Russell 2500"), the
Morgan Stanley Capital International Europe, Australia and Far East Index ("MSCI
EAFE") and the Lehman Corporate Government Intermediate Index ("Lehman Index"),
or other unmanaged indices so that investors may compare the Fund's results with
those of a group of unmanaged securities. The S&P 500, the S&P 400, the NASDAQ
Industrial Index, the NASDAQ Composite Index, the Russell 2500, MSCI EAFE and
the 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
B-54
<PAGE>
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.
License to Use Name
Kayne Anderson Mutual Funds 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 Mutual Funds 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
B-55
<PAGE>
Audited financial statements for the years ended December 31, 1996 and
1995 for the Rising Dividends Fund and for the respective periods from inception
to December 31, 1996 for the Small-Mid Cap Rising Dividends Fund, International
Rising Dividends Fund, Intermediate Total Return Bond Fund and Intermediate
Tax-Free Bond Fund, as contained in the Annual Report to Shareholders of the
Fund for the year ended December 31, 1996 (the "Report") are incorporated herein
by reference to the Report. The Report may be obtained free of charge by calling
or writing to the Funds at 1800 Avenue of the Stars, 2nd Floor, Los Angeles,
California 90067, (800)-395-3807.
B-56
<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-57
<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
B-58
<PAGE>
maintenance of other terms of the contract over any long period of time may be
small.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
B-59
<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) Independent Auditor's Report dated as of February 4,
1997, Statement of Assets and Liabilities as of
December 31, 1996, Statements of Operations for the
period October 18, 1996 to December 31, 1996, for the
Kayne Anderson Small-Mid Cap Rising Dividends Fund
and the Kayne Anderson International Rising Dividends
Fund and for the period October 28, 1996 to December
31, 1996 for the Kayne Anderson Intermediate Total
Return Bond Fund and the Kayne Anderson Intermediate
Tax-Free Fund and Notes to Financial Statements for
the Kayne Anderson Mutual Funds are incorporated in
Part B by reference to Registrant's Annual Report to
Shareholders for the fiscal year ended December 31,
1996.
(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.3
(7) Benefit Plan(s) - Not applicable.
(8) Form of Custodian Agreement.2
(9) Form of Administration Services Agreement.3
(10) Consent and Opinion of Counsel as to legality of
shares.2
(11) Consent of Independent Public Accountants.
(12) Financial Statements omitted from Item 23 - Not
applicable.
(13) Subscription Agreement.3
(14) Model Retirement Plan Documents - Not applicable.
(15) Rule 12b-1 Plan - Not Applicable.
(16) Performance Computation.
(27) Financial Data Schedule.
<PAGE>
- ----------
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.
3 Incorporated by reference to Pre-Effective Amendment No. 2 to the Form N1-A
Registration Statement filed on September 26, 1996.
<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 March 31, 1997 there were 189 shareholders in the Rising
Dividends Fund, 37 shareholders in the Small-Mid Cap Rising Dividends Fund, 38
shareholders in the International Rising Dividends Fund and 3 shareholders in
each of the Intermediate Total Return Bond Fund and the Intermediate Tax-Free
Bond Fund.
Item 27. Indemnification
Article VII of the Agreement and Declaration of Trust empowers
the Trustees of the Trust, to the full extent permitted by law, to purchase with
Trust assets insurance for indemnification from liability and to pay for all
expenses reasonably incurred or paid or expected to be paid by a Trustee or
officer in connection with any claim, action, suit or proceeding in which he or
she becomes involved by virtue of his or her capacity or former capacity with
the Trust.
Article VI of the By-Laws of the Trust provides that the Trust
shall indemnify any person who was or is a party or is threatened to be made a
party to any proceeding by reason of the fact that such person is and other
amounts or was an agent of the Trust, against expenses, judgments, fines,
settlement and other amounts actually and reasonable incurred in connection with
such proceeding if that person acted in good faith and reasonably believed his
or her conduct to be in the best interests of the Trust. Indemnification will
not be provided in certain circumstances, however, including instances of
willful misfeasance, bad faith, gross negligence, and reckless disregard of the
duties involved in the conduct of the particular office involved.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to the Trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable in the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a Trustee, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such Trustee, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
<PAGE>
Item 28. Business and Other Connections of Investment Adviser.
Information about Richard A. Kayne, Allan M. Rudnick, and
William T. Miller is set forth in Part B under "Management of the Funds."
John Edward Anderson is a member of KAIM Traditional, LLC, the
general partner of Kayne Anderson Investment Management, L.P. and a shareholder
and director of Kayne, Anderson Investment Management, Inc., the general partner
of KAIM Non-Traditional, L.P. Mr. Anderson has been involved with these
organizations (or their predecessors) as an equity owner and director since
1984. Since May, 1992, Mr. Anderson has been the Chief Executive Officer and
President of Topa Equities, Ltd., a holding company for a thrift institution.
Item 29. Principal Underwriter.
(a) First Fund Distributors, Inc. is the principal underwriter for
the following investment companies or series thereof:
Advisors Series Trust
Guinness Flight Investment Funds
Jurika & Voyles Fund Group
RNC Mutual Fund Group, Inc.
PIC Investment Trust
Hotchkis and Wiley Funds
Masters Select Equity Fund
Professionally Managed Portfolios
- Avondale Total Return Fund
- Perkins Opportunity Fund
- Osterweis Fund
- ProConscience Women's Equity Mutual Fund
- Academy Value 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
- Pzena Growth Fund
- Titan Financial Services Fund
O'Shaughnessy Funds, Inc.
Rainier Investment Management Mutual Funds
UBS Private Investor 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 Assistant Secretary
Steven J. Paggioli Vice President and Secretary None
Eric M. Banhazl Vice President Assistant Treasurer
* The principal business address of persons and entities listed is 4455
East Camelback Road, Suite 261E, Phoenix, AZ 85018.
<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 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 certifies that it meets the
requirements for effetiveness of the Amendment under Rule 485(b) under the
Securities Act of 1933 and that 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 day of
April 30, 1997.
Kayne Anderson Mutual Funds
By: Allan M. Rudnick*
------------------------------
Allan M. Rudnick
Principal Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
the Registration Statement has been signed below by the following person in the
capacities and on the date indicated.
/s/Richard Alan Kayne* Chairman of the Board of April 30, 1997
- ---------------------- Trustees
Richard Alan Kayne
/s/Allan M. Rudnick* President, Principal Executive April 30, 1997
- -------------------- Officer and Trustee
Allan M. Rudnick
/s/William T. Miller* Principal Financial and April 30, 1997
- --------------------- Accounting Officer, and
William T. Miller Trustee
/s/Carl D. Covitz* Trustee April 30, 1997
- ------------------
Carl D. Covitz
/s/ Arnold Brustin* Trustee April 30, 1997
- -------------------
Arnold Brustin
/s/ Gerald I. Isenberg* Trustee April 30, 1997
- -----------------------
Gerald I. Isenberg
/s/ William H. Waldorf* Trustee April 30, 1997
- -----------------------
William H. Waldorf
* By: /s/ Eric M. Banhazl
-----------------------------
Eric M. Banhazl, pursuant
to a Power of Attorney as filed
with post-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.
(11) Consent of Independent Public Accountants ________
(16) Performance Computation ________
(27) Financial Data Schedules ________
EXHIBIT 11
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 4, 1997 accompanying the financial
statements of Kayne Anderson Mutual Funds (comprising, respectively, the Rising
Dividends Fund, the Small-Mid Cap Rising Dividends Fund, the International
Rising Dividends Fund, the Intermediate Total Return Bond Fund, and the
Intermediate Tax Free Bond Fund) which is incorporated by reference in Part B of
Post-Effective Amendment No. 2 to this Registration Statement and Prospectus. We
consent to the use of the aforementioned report in the Registration Statement
and Prospectus.
\s\Tait, Weller & Baker
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
April 25, 1997
EXHIBIT 16.1
SCHEDULE FOR COMPUTATION OF
PERFORMANCE QUOTATIONS OF THE
KAYNE ANDERSON RISING DIVIDENDS FUND
TOTAL RETURN FORMULA
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year periods at the end of each
such period (or fractional portion thereof)
For the 1 year period ended December 31, 1996:
1
$1,000(1+T) = $1,190.89 or an annual compounded
rate of 19.09%
For the period from May 1, 1995 (inception) to December 31, 1996:
1.67
$1,000(1+T) = $1,436.78 or an average annual compounded
rate of 24.22%
EXHIBIT 16.2
SCHEDULE FOR COMPUTATION OF
PERFORMANCE QUOTATIONS OF THE
KAYNE ANDERSON SMALL-MID CAP RISING DIVIDENDS FUND
TOTAL RETURN FORMULA
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1,5 or 10 year periods at the end of each
such period (or fractional portion thereof)
For the period from October 18, 1996 (inception) to December 31, 1996:
0.20
$1,000(1+T) = $1,040.01 or a total return of 4.00%
EXHIBIT 16.3
SCHEDULE FOR COMPUTATION OF
PERFORMANCE QUOTATIONS OF THE
KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND
TOTAL RETURN FORMULA
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year periods at the end of each
such period (or fractional portion thereof)
For the period from October 18, 1996 (inception) to December 31, 1996:
0.20
$1,000(1+T) = $1,025.64 or a total return of 2.56%
EXHIBIT 16.4
SCHEDULE FOR COMPUTATION OF
PERFORMANCE QUOTATIONS OF THE
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND
TOTAL RETURN FORMULA
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1,5 or 10 year periods at the end of each
such period (or fractional portion thereof)
For the period from October 28, 1996 (inception) to December 31, 1996:
0.18
$1,000(1+T) = $1,002.03 or a total return of 0.20%
EXHIBIT 16.5
SCHEDULE FOR COMPUTATION OF
PERFORMANCE QUOTATIONS OF THE
KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND
TOTAL RETURN FORMULA
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1,5 or 10 year periods at the end of each
such period (or fractional portion thereof)
For the period from October 28, 1996 (inception) to December 31, 1996:
0.18
$1,000(1+T) = $1,000.21 or a total return of 0.02%
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<NAME> Kayne Anderson Mutual Funds
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<NAME> International Rising Dividends Fund
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<NAME> Kayne Anderson Mutual Funds
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<NAME> Intermediate Total Return Bond Fund
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<NAME> Kayne Anderson Mutual Funds
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<NAME> Intermediate Tax Free Bond Fund
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