As filed with the Securities and Exchange Commission on April 30, 1998
File Nos. 333-08045
811-07705
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. 3
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 3
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, 1998, 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.
Paul, Hastings, Janofsky & Walker, LLP
345 California Street, 29th Floor
San Francisco, California 94104
(415) 835-1600
<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, LLC ("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
generally having a total market capitalization of $1 billion or more.
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, 1998, 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. The SEC maintains an internet site
(http://www.sec.gov) that contains the Statement of Additional Information,
other material incorporated by reference and other information about companies
that filed electronically with the SEC.
Shares of the Fund are not bank deposits and are not federally insured by,
guaranteed by, obligations of or otherwise supported by the U.S. Government, the
Federal Deposit Insurance Coporation, the Federal Reserve Board or any other
governmental agency. Investment in a Fund involves investment risk, including
possible loss of the principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
Prospectus dated May 1, 1998
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............................................................8
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--0.75%*.
<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 0.43% 0.45% 0.45% 0.45% 0.25%
Total operating expenses after
expense reimbursement 1.18% 1.30%* 1.40%* 0.95%* 0.75%*
</TABLE>
*For the fiscal year ended December 31, 1997, the ratios of total operating
expenses to average net assets for each Fund before the Adviser's voluntary
reimbursement and expenses paid indirectly were as follows: Small-Mid Cap Rising
Dividends Fund--3.22%; International Rising Dividends Fund--3.41%; Intermediate
Total Return Bond Fund--2.23%; and Intermediate Tax-Free Bond Fund--2.29%. (Of
these total expense amounts, "other expenses" before reimbursement are as
follows: Small-Mid Cap Rising Dividends Fund--2.37%; International Rising
Dividends Fund--2.46%; Intermediate Total Return Bond Fund--1.73%; and
Intermediate Tax-Free Bond Fund--1.79%.) 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 and
expenses paid indirectly) 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.
1
<PAGE>
EXAMPLE
This table illustrates the expenses that would be incurred by an investment in
each Fund over different time periods assuming a $1,000 investment, a 5% annual
return, and redemption at the end of each period. The Funds charge no redemption
fees. The Example should not be considered a representation of past or future
expenses and actual expenses may be greater or less than those shown.
<TABLE>
<CAPTION>
Small-Mid International
Rising Cap Rising Rising Intermediate Intermediate
Dividends Dividends Dividends Total Return Tax-Free
Fund Fund Fund Bond Fund Bond Fund
<S> <C> <C> <C> <C> <C>
One Year $ 12 $ 13 $ 14 $ 10 $ 8
Three years $ 37 $ 41 $ 44 $ 30 $24
Five Years $ 65 $ 71 $ 77 $ 53 $42
Ten Years $143 $157 $168 $117 $93
</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
liability company. 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
$4.0 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
2
<PAGE>
redeemed, may be worth more or less than their original cost. Investors should
note that the Funds may invest in mortgage-backed securities (including CMOs and
REMICs), asset-backed securities and foreign securities. See "Risk
Considerations" for a further discussion of certain risks.
Minimum Purchase
The minimum initial investment in the Fund is $2,000. For retirement plan
investments and custodial accounts under the Uniform Gifts/Transfers to Minors
Act the minimum is $1,000. For Education IRA plan investments the minimum is
$500. 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 semi-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 table presents condensed financial information about each Fund.
The table presents historical information based upon a capital share outstanding
throughout each period. The information for the year ended December 31, 1997 has
been audited by Briggs, Bunting & Dougherty, LLP and all information for periods
ending prior to January 1, 1997 has been audited by Tait, Weller & Baker. This
financial information appears in the Fund's annual report to shareholders for
the year ended December 31, 1997 which is 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
number on the Prospectus cover page.
<TABLE>
<CAPTION>
International Rising
Small-Mid Cap Rising --------------------
-------------------- Dividends Fund
Rising Dividends Fund Dividends Fund --------------
--------------------- --------------
Year Year May 1, October 18, October 18,
Ended Ended 1995(1) to Year Ended 1996(1) to Year Ended 1996(1) to
December December December December December December December
31, 1997 31, 1996 31, 1995 31, 1997 31, 1996 31, 1997 31, 1996
-------- -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 14.32 $ 12.63 $ 10.65 $ 11.06 $ 10.65 $ 10.91 $ 10.65
-------- -------- -------- -------- -------- -------- --------
Income from investment
operations:
Net investment income 0.10 0.08 0.07 0.02 0.02 0.04 0.01
Net realized and unrealized
gain (loss) on investments 4.34 2.35 2.13 2.14 0.41 1.75 0.26
-------- -------- -------- -------- -------- -------- --------
Total income from investment
operations 4.44 2.43 2.20 2.16 0.43 1.79 0.27
-------- -------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from net
investment income (0.11) (0.08) (0.07) (0.05) (0.02) (0.05) (0.01)
Distributions from capital
gains (1.37) (0.66) (0.15) (0.05) 0.00 (0.04) 0.00
-------- -------- -------- -------- -------- -------- --------
Total Distributions (1.48) (0.74) (0.22) (0.10) (0.02) (0.09) (0.01)
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of period $ 17.28 $ 14.32 $ 12.63 $ 13.12 $ 11.06 $ 12.61 $ 10.91
======== ======== ======== ======== ======== ======== ========
Total Return 30.99% 19.09% 20.65%(2) 19.46% 4.00%(2) 16.42%(2) 2.56%(2)
Net assets, end of period (in
000's) $ 35,283 $ 26,118 $ 20,613 $ 6,494 $ 808 $ 7,012 $ 1,055
======== ======== ======== ======== ======== ======== ========
Ratio of expenses to average
net assets:
Before expense reimbursement -- -- -- 3.22% 18.91%(3) 3.41% 15.74%(3)
After expense reimbursement 1.18% 1.37% 1.31%(3) 1.30% 1.30%(3) 1.40% 1.40%(3)
After expense reimbursement
and expenses paid indirectly 1.18% 1.37% 1.31%(3) 1.30% 1.30%(3) 1.40% 1.40%(3)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of net investment income
to average net assets (net of
expense reimbursement) 0.55% 0.59% 0.94%(3) 0.45% 1.58%(3) 0.61% 1.14%(3)
Portfolio turnover rate 51% 23% 28% 47% -- 29% --
Average commission per share $ 0.0600 $ 0.0600 -- $ 0.0637 $ 0.0955 $ 0.0666 $ 0.0936
</TABLE>
<TABLE>
<CAPTION>
Intermediate Total Return Bond Fund Intermediate Tax-Free Bond Fund
----------------------------------- -------------------------------
Year Ended October 28, 1996(1) Year Ended October 28, 1996(1)
December 31, to December 31, December 31, to December 31,
------------ --------------- ------------ ---------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.59 $ 10.65 $ 10.64 $ 10.65
--------- --------- --------- ---------
Income from investment operations:
Net investment income 0.56 0.09 0.34 0.01
Net realized and unrealized gain (loss) on
investments 0.18 (0.07) 0.11 (0.01)
--------- --------- --------- ---------
Total income from investment operations
0.74 0.02 0.45 0.00
--------- --------- --------- ---------
Less Distributions:
Dividends from net investment income
(0.58) (0.08) (0.35) (0.01)
Distributions from capital gains
0.00 0.00 0.00 0.00
--------- --------- --------- ---------
Total Distributions (0.58) (0.08) (0.35) (0.01)
--------- --------- --------- ---------
Net asset value, end of period $ 10.75 $ 10.59 $ 10.74 $ 10.64
Total return 7.19% 0.20%(2) 4.26% 0.02%(2)
Net assets, end of period (in 000's) $ 6,261 $ 5,033 $ 6,015 $ 5,124
========= ========= ========= =========
Ratio of expenses to average net assets:
Before expense reimbursement 2.23% 2.10%(3) 2.29% 2.08%(3)
After expense reimbursement 0.95% 0.95%(3) 1.56% 1.81%(3)
After expense reimbursement and expenses
paid indirectly 0.95% 0.95%(3) 0.95% 0.95%(3)
Ratio of net investment income to average net
assets (net of expense reimbursement) 5.35% 4.72%(3) 2.58% 0.60%(3)
Portfolio turnover rate 27% -- 40% --
Average commission paid per share -- -- -- --
</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 generally having a total market
capitalization of $1 billion or more. 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 than $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. 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.
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.
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
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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 "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
the Fund may hold no more than 10% of the voting securities of such issuer.
These diversification limitations do not apply to U.S. Government securities.
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RISK CONSIDERATIONS
Price Fluctuation. Investments in equity securities in general are subject to
market risks that may cause their prices to fluctuate over time. The value of
debt securities changes as interest rates fluctuate. The value of securities,
such as warrants or convertible debt, exercisable for or convertible into equity
securities is also affected by prevailing interest rates, the credit quality of
the issuer and any call provisions. Fluctuations in the value of securities in
which a Fund invests will cause the net asset value of that Fund to fluctuate.
An investment in a Fund therefore may be more suitable for long-term investors
who can bear the risk of short-term principal fluctuations.
Small Companies. Smaller companies present greater opportunities for capital
appreciation, but also may involve greater risks than larger companies. Although
smaller companies can benefit from the development of new products and services,
they also may have limited product lines, markets or financial resources, and
their securities may trade less frequently and in more limited volume than the
securities of larger, more mature companies. As a result, the prices of the
securities of such smaller companies may fluctuate to a greater degree than the
prices of the securities of other issuers.
Debt Securities. Debt securities held by the Funds may be subject to several
types of investment risk. Market or interest rate risk relates to the change in
market value caused by fluctuations in prevailing interest rates, while credit
risk relates to the ability of the issuer to make timely interest payments and
to repay the principal upon maturity. Call or income risk relates to periods of
falling interest rates, and involves the possibility that securities with high
interest rates will be prepaid or "called" by the issuer prior to maturity. Such
an event would require a Fund to invest the resulting proceeds elsewhere, at
generally lower interest rates, which could cause fluctuations in a Fund's net
income. A Fund also may be exposed to event risk, which is the possibility that
corporate debt securities held by a Fund may suffer a substantial decline in
credit quality and market value due to a corporate restructuring.
The value of debt securities will normally increase in periods of falling
interest rates; conversely, the value of these instruments will normally decline
in periods of rising interest rates. Generally, the longer the remaining
maturity of a debt security, the greater the effect of interest rate changes on
its market value. In an effort to maximize income consistent with its investment
objective, the Intermediate Total Return Bond Fund and the Intermediate Tax-Free
Bond Fund may, at times, change the average maturity of their investment
portfolios. This can be done by investing a larger portion of assets in
relatively longer term obligations when periods of declining interest rates are
anticipated and, conversely, emphasizing shorter and intermediate term
maturities when a rise in interest rates is indicated. See "Portfolio Securities
and Investment Techniques."
Foreign Securities. The Rising Dividends, Small-Mid Cap Rising Dividends,
International Rising Dividends and Intermediate Total Return Bond Fund have the
right to purchase, and the International Rising Dividends Fund emphasizes,
securities in foreign countries. Accordingly, shareholders should consider
carefully the risks involved in investing in securities issued by companies and
governments of foreign nations, which are in addition to the usual risks
inherent in domestic investments.
These Funds also may invest in American 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 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
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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.
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
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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 issued by governmental, government-related
and private organizations. Asset-backed securities may be prepaid prior to
maturity and hence their actual life can vary considerably from the stated
maturity. 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."
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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 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.
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The Funds may purchase some mortgage-related securities through private
placements without right to registration under the Securities Act of 1933, as
amended. See "Illiquid and Restricted Securities."
When-Issued Securities. The Funds may purchase securities on a when-issued or
delayed-delivery basis, generally in connection with an underwriting or other
offering. When-issued and delayed-delivery transactions occur when securities
are bought with payment for and delivery of the securities scheduled to take
place at a future time, beyond normal settlement dates, generally from 15 to 45
days after the transaction. Each Fund will designate liquid assets 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.
Illiquid and Restricted Securities. No Fund may invest more than 10% of its net
assets in illiquid securities, including (1) securities for which there is no
readily available market; (2) securities which may be subject to legal
restrictions (so-called "restricted securities") other than Rule 144A securities
noted below; (3) repurchase agreements having more than seven days to maturity
and (4) fixed time deposits subject to withdrawal penalties (other than those
with a term of less than seven days). Restricted securities do not include those
which meet the requirements of Rule 144A under the Securities Act of 1933, as
amended, and which the Trustees have determined to be liquid based on the
applicable trading markets and the availability of reliable price information.
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[KAYNE ANDERSON LOGO]
Mutual Funds
New Account Application
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<S> <C>
Mail to:
Kayne Anderson Mutual Funds
c/o Investors Bank & Trust Company
P. O. Box 9130, MFD 23
Boston, Massachusetts 02117-9130
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.
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:
__________________________________________________________________________________________
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(For Uniform __________________________________________________________________________________________
/ / Transfers Custodian's Name (Only One Allowed)
/ / Gifts __________________________________________________________________________________________
to Minors Act Minor's Name (Only One Allowed) Minor's Social Security No.
Accounts) __________________________________________________________________________________________
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
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ADDRESS FOR __________________________________________________________________________________________
MAILINGS Number and Street
__________________________________________________________________________________________
Apartment, Floor or Room Number Telephone No. (Include Area Code)
__________________________________________________________________________________________
City State Zip Code
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INVESTMENT AMOUNT ($2,000 minimum, $200 for UGMA Accounts)
$____________ / / Kayne Anderson Rising Dividends Fund
$____________ / / Kayne Anderson Small-Mid Cap Rising Dividends Fund
$____________ / / Kayne Anderson International Rising Dividends Fund
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<PAGE>
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<S> <C> <C>
$____________ / / 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
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DISTRIBUTIONS
/ / U.S. Citizen / / Other: ____________________________ (Country of Residence)
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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
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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.
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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
PLAN business day 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
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<S> <C>
EXCHANGES & / / I would like to be able to place exchange instructions by telephone between the Fund(s) and the Money
REDEMPTIONS Market Fund.
BY TELEPHONE
/ / I would like to be able to place a redemption order by telephone and have the proceeds mailed or wired
directly to the bank account listed below.
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
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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
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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>
15
<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. See "Financial Highlights" for past
turnover rates of the Funds.
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.
16
<PAGE>
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 liability company. 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 $4.0 billion for such clients.
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 resources 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 15 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 12 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 10 years of experience in the securities business. He earned a BA from the
University of California at Los Angeles.
Expense Limitation. Each Fund is responsible for paying legal and auditing fees,
fees and expenses of its custodian, accounting
17
<PAGE>
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--0.75%. 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 . The
Trustees believe that the Funds in the future may be of a sufficient size to
permit the reimbursement of any such reductions or payments. A description of
any such reimbursements and the amounts paid will be set forth in financial
statements that are included in the Funds' annual and semi-annual reports to
shareholders.
Fund Transactions and Brokerage. The Adviser considers a number of factors in
determining which brokers or dealers to use for a Fund's portfolio transactions.
These factors include, but are not limited to, the reasonableness of
commissions, quality of services and execution, and the availability of research
which the Adviser may lawfully and appropriately use in its investment
management and advisory capacities. Provided a Fund receives prompt execution at
competitive prices, the Adviser also may consider the sale of Fund shares by
brokers as a factor in selecting those broker-dealers for the Fund's portfolio
transactions. For more information, please refer to the Statement of Additional
Information.
The Administrator. Investment Company Administration Corporation (the
"Administrator"), pursuant to an administration agreement with the Funds,
supervises the overall administration of the Trust and the Funds including,
among other responsibilities, the preparation and filing of all documents
required for compliance by the Trust or the Funds with applicable laws and
regulations, arranging for the maintenance of books and records of the Trust and
the Funds, and supervision of other organizations that provide services to the
Trust and the Funds. Certain officers of the Trust and the Funds may be provided
by the Administrator. The Trust has agreed to pay the Administrator an annual
fee equal to 0.075% of the first $40 million of the Trust's average daily net
assets, 0.05% of the next $40 million, 0.025% of the next $40 million, and 0.01%
thereafter, subject to a minimum annual fee of $30,000 per Fund.
The Distributor. First Fund Distributors, Inc. serves as the Distributor to the
Funds pursuant to a Distribution Agreement. The Distributor is an affiliate of
the Administrator. The Distributor receives no fee for its distribution
services.
PURCHASING SHARES
General. The Funds' shares are offered directly to the public at their
respective net asset values next determined after receipt of an order by the
Transfer Agent with complete information and meeting all the requirements
discussed in this Prospectus. There is no sales load or charge in connection
with the purchase of shares. The Funds' shares are offered for sale by the
Funds' Distributor, First Fund Distributors, Inc. Shares purchased through a
broker may be subject to a commission payable to that broker.
The minimum initial investment in each Fund is $2,000, with subsequent
investments of $250 or more ($1,000 and $200, respectively, for retirement plans
and custodial accounts under the Uniform Gifts/Transfers to Minors Act; $500 and
$200 for Education IRA Accounts). 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 (or earlier close of regular trading),
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 (or earlier close of regular
trading) will be purchased at the next determined net asset value determined the
business day following receipt of the order.
At the discretion of the Funds, investors may be permitted to purchase a Fund's
shares by transferring securities to the Fund that meet the Fund's investment
objectives and policies. Securities transferred to a Fund will be valued in
accordance with the same
18
<PAGE>
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, c/o Investors Bank & Trust Company, P.O. Box 9130, MFD 23, Boston,
MA 02117-9130.
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, c/o Investors Bank & Trust Company, P.O. Box 9130, MFD 23, Boston, MA
02117-9130. 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
For further credit to Kayne Anderson Mutual Funds
19
<PAGE>
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, c/o Investors Bank & Trust Company, P.O. Box 9130, MFD 23, Boston, MA
02117-9130. 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 (or earlier close of regular trading), 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 Kayne
Anderson Money Market Account in the TempCash portfolio (Dollar Shares), 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 (generally 4:00 p.m. New York time)
on any day that the NYSE is open for regular trading. Exchanges are subject to
the minimum initial investment requirement.
The exchange privilege is a convenient way to respond to changes in investment
goals or in market conditions. This privilege is not designed for frequent
trading in response to short-term market fluctuations. The telephone exchange
privilege may be difficult to implement during times of drastic economic or
market changes. The purchase of shares for any Fund through an exchange
transaction is accepted immediately. An exchange is treated as a redemption for
federal and state income tax purposes, which may result in taxable gain or loss,
and a new purchase, each at the net asset value of the appropriate Fund. The
Funds and the Transfer Agent reserve the right to limit, amend, impose charges
upon, terminate or otherwise modify the exchange privilege on 60-days' prior
written notice to shareholders.
20
<PAGE>
SELLING SHARES (REDEMPTIONS)
Shareholders may redeem shares of any Fund without charge on any business day
that the NYSE is open for business. Redemptions will be effective at the net
asset value per share next determined after the receipt by the Transfer Agent,
broker or financial intermediary of a redemption request meeting the
requirements described below. Each Fund normally sends redemption proceeds on
the next business day, but in any event redemption proceeds are sent within
seven calendar days of receipt of a redemption request in proper form. Payment
for redemption of recently purchased shares will be delayed until the Transfer
Agent has been advised that the purchase check has been honored, up to 12
calendar days from the time of receipt by the Transfer Agent. Payment may also
be made by wire directly to any bank previously designated by the shareholder on
a shareholder account application. There is a $7 charge for redemptions made by
wire. Please note that the shareholder's bank may also impose a fee for wire
service. There may be fees for redemptions made through brokers, financial
institutions and service organizations.
The Funds will satisfy redemption requests in cash to the fullest extent
feasible, so long as such payments would not, in the opinion of the Board of
Trustees, require a Fund to sell assets under disadvantageous conditions or to
the detriment of the remaining shareholders of the Fund.
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, c/o Investors Bank & trust Company,
P.O. Box 9130, MFD 23, Boston, MA 02117-9130. 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 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.
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<PAGE>
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 (or earlier close of regular NYSE trading) 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, Roth IRAs, 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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<PAGE>
SHARE PRICE CALCULATION
Share Price. Shares of a Fund are purchased at the net asset value after an
order in proper form is received by the Transfer Agent. An order in proper form
must include all correct and complete information, documents and signatures
required to process your purchase, as well as a check or bank wire payment
properly drawn and collectable. The net asset value per share is determined as
of the close of trading of the NYSE (generally 4:00 p.m.) on each day the
Exchange is open for trading. Orders received before the close of regular
trading 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 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 Stock Market 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
semi-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 ex-dividend 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 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
23
<PAGE>
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. Paul, Hastings,
Janofsky & Walker, LLP, 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, as amended, provides that matters submitted to shareholders be approved by
a majority of the outstanding securities of each series, unless it is clear that
the interests of each series in the matter are identical or the matter does not
affect a series. However, the rule exempts the selection of accountants and the
election of Trustees from the separate voting requirements.
Shareholder Meetings. The Trustees have undertaken to the SEC that they will
promptly call a meeting for the purpose of voting on the question of removal of
any Trustee when requested to do so by not less than 10% of the dollar-weighted
total votes of the respective Fund. In addition, subject to certain conditions,
shareholders of each Fund may apply to the Fund to communicate with other
shareholders to request a shareholders' meeting to vote on the removal of a
Trustee or Trustees.
24
<PAGE>
Year 2000. The advisory services provided to the Funds by the Adviser and the
Administrator and the services provided by the Distributor and Transfer Agent to
shareholders, depend on the smooth functioning of their computer systems. Many
computer software systems in use today cannot recognize the year 2000, but
revert to 1900 or 1980, because of the manner in which dates are encoded and
calculated. That failure could have a negative impact on the handling of
securities trades, pricing and account services. The Adviser, the Administrator,
the Distributor and the Transfer Agent have been actively working on necessary
changes to their own computer systems to address year 2000 problems and expect
that their systems will be adapted before that date without any material expense
to the Funds, but there can be no assurance that they will be successful or that
interaction with other noncomplying computer systems will not impair their
services at that time.
Shareholder Reports and Inquiries. Shareholders will receive annual financial
statements which are audited 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.
25
<PAGE>
Advisor:
Kayne Anderson Investment Management, LLC
1800 Avenue of the Stars, 2nd Floor
Los Angeles, California 90067
(800) 222-0380
Custodian and Transfer Agent:
Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02116
(800) 395-3807
Auditors:
Briggs, Bunting & Dougherty, LLP
Two Logan Square
Philadelphia, Pennsylvania 19103
Distributor:
First Fund Distributors, Inc.
4455 E. Camelback Road
Ste. 261-E
Phoenix, Arizona 85018
Legal Counsel:
Paul, Hastings, Janofsky & Walker, LLP
345 California Street
San Francisco, CA 94104
<PAGE>
[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, 1998
<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, 1998 (which may be revised from time to time),
and should be read in conjunction therewith. The Prospectus for the Funds may be
obtained by writing or calling the Funds at the above address and telephone
number. This Statement of Additional Information, although not in and of itself
a prospectus, is incorporated by reference into the Prospectus in its entirety.
TABLE OF CONTENTS
CAPTION PAGE
- ------- ----
Investment Objectives and Policies..........................................B-2
Risk Factors................................................................B-22
The Funds' Investment Limitations...........................................B-24
Management of the Funds.....................................................B-27
The Funds' Administrator....................................................B-35
The Funds' Distributor......................................................B-36
Transfer Agent and Custodian................................................B-36
How Net Asset Value is Determined...........................................B-37
Share Purchases and Redemptions.............................................B-38
Dividends, Distributions and Taxes..........................................B-39
How Performance is Determined...............................................B-43
Additional Information......................................................B-47
Financial Statements........................................................B-47
Appendix A..................................................................B-48
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, 1998, 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, 1998.
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Funds are managed by Kayne Anderson Investment Management, LLC
("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 prospects. 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.
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
B-2
<PAGE>
coverage, asset coverage, earnings prospects, and the experience and managerial
strength of the issuer.
Each Fund may choose, at its expense or in conjunction with others, to
pursue litigation or otherwise exercise its rights as a security holder to seek
to protect the interests of security holders if it determines this to be in the
best interest of Fund shareholders.
Depositary Receipts. The Rising Dividends, Small-Mid Cap Rising
Dividends, International Rising Dividends and the Intermediate Total Return Bond
Funds may hold securities of foreign issuers in the form of American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") and other similar
global instruments available in emerging markets or other securities convertible
into securities of eligible issuers. These securities may not necessarily be
denominated in the same currency as the securities for which they may be
exchanged. Generally, ADRs in registered form are designed for use in U.S.
securities markets, and EDRs and other similar global instruments in bearer form
are designed for use in European securities markets. For purposes of these
Funds' investment policies, these Funds' investments in ADRs, EDRs and similar
instruments will be deemed to be investments in the equity securities
representing the securities of foreign issuers into which they may be converted.
Other Investment Companies. Each Fund may invest up to 10% of its total
assets in securities issued by other investment companies investing in
securities in which the Fund can invest provided that such investment companies
invest in portfolio securities in a manner consistent with the Fund's investment
objective and policies. Applicable provisions of the Investment Company Act of
1940, as amended (the "1940 Act") require that a Fund limit its investments so
that, as determined immediately after a securities purchase is made: (a) not
more than 10% of the value of a Fund's total assets will be invested in the
aggregate in securities of investment companies as a group; and (b) either (i) a
Fund and affiliated persons of that Fund not own together more than 3% of the
total outstanding shares of any one investment company at the time of purchase
(and that all shares of the investment company held by that Fund in excess of 1%
of the company's total outstanding shares be deemed illiquid), or (ii) a Fund
not invest more than 5% of its total assets in any one investment company and
the investment not represent more than 3% of the total outstanding voting stock
of the investment company at the time of purchase. As a shareholder of another
investment company, a Fund would bear, along with other shareholders, its pro
rata portion of the other investment company's expenses, including advisory
fees. These expenses would be in addition to the advisory and other expenses
that a Fund bears directly in connection with its own operations.
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
B-3
<PAGE>
of the U.S. Government, including the Federal Housing Administration ("FHA"),
Farmers Home Administration, Export-Import Bank of the United States, Small
Business Administration, Government National Mortgage Association ("GNMA"),
General Services Administration, Central Bank for Cooperatives, Federal Farm
Credit Bank, Farm Credit System Financial Assistance Corporation, Federal Home
Loan Banks, Federal Home Loan Mortgage Corporation ("FHLMC"), Federal
Intermediate Credit Banks, Federal Land Banks, Financing Corporation, Federal
Financing Bank, Federal National Mortgage Association ("FNMA"), Maritime
Administration, Tennessee Valley Authority, Resolution Funding Corporation,
Student Loan Marketing Association, and Washington Metropolitan Area Transit
Authority. Direct obligations of the U.S. Treasury include a variety of
securities that differ primarily in their interest rates, maturities and dates
of issuance. Because the U.S. Government is not obligated by law to provide
support to an instrumentality that it sponsors, a Fund will not invest in
obligations issued by an instrumentality of the U.S. Government unless the
Adviser determines that the instrumentality's credit risk makes its securities
suitable for investment by the Fund.
Mortgage-Related Securities: Government National Mortgage Association.
GNMA is a wholly owned corporate instrumentality of the U.S. Government within
the Department of Housing and Urban Development. The National Housing Act of
1934, as amended (the "Housing Act"), authorizes GNMA to guarantee the timely
payment of the principal of, and interest on, securities that are based on and
backed by a pool of specified mortgage loans. For these types of securities to
qualify for a GNMA guarantee, the underlying collateral must be mortgages
insured by the FHA under the Housing Act, or Title V of the Housing Act of 1949,
as amended ("VA Loans"), or be pools of other eligible mortgage loans. The
Housing Act provides that the full faith and credit of the U.S. Government is
pledged to the payment of all amounts that may be required to be paid under any
guarantee. In order to meet its obligations under a guarantee, GNMA is
authorized to borrow from the U.S. Treasury with no limitations as to amount.
GNMA pass-through securities may represent a proportionate interest in
one or more pools of the following types of mortgage loans: (1) fixed-rate level
payment mortgage loans; (2) fixed-rate graduated payment mortgage loans; (3)
fixed-rate growing equity mortgage loans; (4) fixed-rate mortgage loans secured
by manufactured (mobile) homes; (5) mortgage loans on multifamily residential
properties under construction; (6) mortgage loans on completed multifamily
projects; (7) fixed-rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the mortgage
loans ("buydown" mortgage loans); (8) mortgage loans that provide for
adjustments on payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (9) mortgage-backed serial notes.
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
B-4
<PAGE>
market. FNMA was transformed into a private sector corporation by legislation
enacted in 1968. FNMA provides funds to the mortgage market primarily by
purchasing home mortgage loans from local lenders, thereby providing them with
funds for additional lending. FNMA acquires funds to purchase loans from
investors that may not ordinarily invest in mortgage loans directly, thereby
expanding the total amount of funds available for housing.
Each FNMA pass-through security represents a proportionate interest in
one or more pools of FHA Loans, VA Loans or conventional mortgage loans (that
is, mortgage loans that are not insured or guaranteed by any U.S. Government
agency). The loans contained in those pools consist of one or more of the
following: (1) fixed-rate level payment mortgage loans; (2) fixed- rate growing
equity mortgage loans; (3) fixed-rate graduated payment mortgage loans; (4)
variable- rate mortgage loans; (5) other adjustable-rate mortgage loans; and (6)
fixed-rate mortgage loans secured by multifamily projects.
Mortgage-Related Securities: Federal Home Loan Mortgage Corporation.
FHLMC is a corporate instrumentality of the United States established by the
Emergency Home Finance Act of 1970, as amended. FHLMC was organized primarily
for the purpose of increasing the availability of mortgage credit to finance
needed housing. The operations of FHLMC currently consist primarily of the
purchase of first lien, conventional, residential mortgage loans and
participation interests in mortgage loans and the resale of the mortgage loans
in the form of mortgage-backed securities.
The mortgage loans underlying FHLMC securities typically consist of
fixed-rate or adjustable-rate mortgage loans with original terms to maturity of
between 10 and 30 years, substantially all of which are secured by first liens
on one-to-four-family residential properties or multifamily projects. Each
underlying mortgage loan must include whole loans, undivided participation
interests in whole loans or participation in another FHLMC security.
Privately Issued Mortgage-Related Securities. As set forth in the
Prospectus, the Funds may invest in mortgage-related securities offered by
private issuers, including pass-through securities comprised of pools of
conventional residential mortgage loans; mortgage-backed bonds which are
considered to be obligations of the institution issuing the bonds and are
collateralized by mortgage loans; and bonds and collateralized mortgage
obligations ("CMOs").
Each class of a CMO is issued at a specific fixed or floating coupon
rate and has a stated maturity or final distribution date. Principal prepayments
on the collateral pool may cause the various classes of a CMO to be retired
substantially earlier than their stated maturities or final distribution dates.
The principal of and interest on the collateral pool may be allocated among the
several 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
B-5
<PAGE>
at the time of issuance relative to prevailing market yields on mortgage-related
securities. Certain classes of CMOs may have priority over others with respect
to the receipt of prepayments on the mortgages.
The Funds may invest in, among other things, "parallel pay" CMOs and
Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured
to provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class which, like the other CMO
structures, must be retired by its stated maturity date or final distribution
date, but may be retired earlier. PAC Bonds are parallel pay CMOs that generally
require payments of a specified amount of principal on each payment date; the
required principal payment on PAC Bonds have the highest priority after interest
has been paid to all classes.
Adjustable-Rate Mortgage-Related Securities. Because the interest rates
on the mortgages underlying adjustable-rate mortgage-related securities ("ARMS")
reset periodically, yields of such portfolio securities will gradually align
themselves to reflect changes in market rates. Unlike fixed-rate mortgages,
which generally decline in value during periods of rising interest rates, ARMS
allow a Fund to participate in increases in interest rates through periodic
adjustments in the coupons of the underlying mortgages, resulting in both higher
current yields and low price fluctuations. Furthermore, if prepayments of
principal are made on the underlying mortgages during periods of rising interest
rates, a Fund may be able to reinvest such amounts in securities with a higher
current rate of return. During periods of declining interest rates, of course,
the coupon rates may readjust downward, resulting in lower yields to the Fund.
Further, because of this feature, the value of ARMS is unlikely to rise during
periods of declining interest rates to the same extent as fixed-rate
instruments. For further discussion of mortgage-related securities generally,
see "Portfolio Securities And Investment Techniques" in the Prospectus.
Variable Rate Demand Notes. Variable rate demand notes ("VRDNs") are
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 with a specified undivided
interest (up to 100%) of the underlying obligation and the right to demand
payment of the unpaid principal
B-6
<PAGE>
balance plus accrued interest on the Participating VRDNs from the institution
upon a specified number of days' notice, not to exceed seven. In addition, the
Participating VRDN is backed by an irrevocable letter of credit or guaranty of
the institution. A Fund has an undivided interest in the underlying obligation
and thus participates on the same basis as the institution in such obligation
except that the institution typically retains fees out of the interest paid on
the obligation for servicing the obligation, providing the letter of credit and
issuing the repurchase commitment.
Participating VRDNs may be unrated or rated, and their creditworthiness
may be a function of the creditworthiness of the issuer, the institution
furnishing the irrevocable letter of credit, or both. Accordingly, the Tax-Free
Bond Fund may invest in such VRDNs, the issuers or underlying institutions of
which the Adviser believes are creditworthy and satisfy the quality requirements
of the Tax-Free Bond Fund. The Adviser periodically monitors the
creditworthiness of the issuer of such securities and the underlying
institution.
During periods of high inflation and periods of economic slowdown,
together with the fiscal measures adopted by governmental authorities to attempt
to deal with them, interest rates have varied widely. While the value of the
underlying VRDN may change with changes in interest rates generally, the
variable rate nature of the underlying VRDN should minimize changes in the value
of the instruments. Accordingly, as interest rates decrease or increase, the
potential for capital appreciation and the risk of potential capital
depreciation is less than would be the case with a portfolio of fixed-income
securities. The Tax-Free Bond Fund may invest in VRDNs on which stated minimum
or maximum rates, or maximum rates set by state law, limit the degree to which
interest on such VRDNs may fluctuate; to the extent they do increases or
decreases in value may be somewhat greater than would be the case without such
limits. Because the adjustment of interest rates on the VRDNs is made in
relation to movements of various interest rate adjustment indices, the VRDNs are
not comparable to long-term fixed-rate securities. Accordingly, interest rates
on the VRDNs may be higher or lower than current market rates for fixed-rate
obligations of comparable quality with similar maturities.
Municipal Securities. Because the Tax-Free Bond Fund invests a
substantial portion of its total assets in obligations either issued by or on
behalf of states, territories and possessions of the United States and the
District of Columbia and their political subdivisions, agencies, authorities and
instrumentalities, including industrial development bonds, as well as
obligations of certain agencies and instrumentalities of the U.S. Government,
the interest from which is, in the opinion of bond counsel to the issuer, exempt
from federal 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.
B-7
<PAGE>
General Obligation Bonds. Issuers of general obligation bonds include
states, counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to the rate or amount of special assessments.
Revenue Bonds. A revenue bond is not secured by the full faith, credit
and taxing power of an issuer. Rather, the principal security for a revenue bond
is generally the net revenue derived from a particular facility, group of
facilities or, in some cases, the proceeds of a special excise or other specific
revenue source. Revenue bonds are issued to finance a wide variety of capital
projects, including electric, gas, water, and sewer systems; highways, bridges,
and tunnels; port and airport facilities; colleges and universities; and
hospitals. Although the principal security behind these bonds may vary, many
provide additional security in the form of a debt service reserve fund that may
be used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Some authorities
provide further security in the form of a governmental assurance (although
without obligation) to make up deficiencies in the debt service reserve fund.
Industrial Development Bonds. Industrial development bonds, which may
pay tax-exempt interest, are, in most cases, revenue bonds and are issued by or
on behalf of public authorities to raise money to finance various privately
operated facilities for business manufacturing, housing, sports, and pollution
control. These bonds also are used to finance public facilities, such as
airports, mass transit systems, ports and parking. The payment of the principal
and interest on such bonds is dependent solely on the ability of the facility's
user to meet its financial obligations and the pledge, if any, of the real and
personal property so financed as security for such payment. As a result of 1986
federal tax legislation, industrial revenue bonds may no longer be issued on a
tax-exempt basis for certain previously permissible purposes, including sports
and pollution control facilities.
Participation Interests. The Tax-Free Bond Fund may purchase from
financial institutions participation interests in Municipal Securities, such as
industrial development bonds and municipal lease/purchase agreements. A
participation interest gives a Fund an 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.
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For certain participation interests, the Tax-Free Bond Fund will have
the right to demand payment, on not more than seven days' notice, for all or any
part of its participation interest in a Municipal Security, plus accrued
interest. As to these instruments, the Tax-Free Bond Fund intends to exercise
its right to demand payment only upon a default under the terms of the Municipal
Securities, as needed to provide liquidity to meet redemptions, or to maintain
or improve the quality of their investment portfolios.
Some participation interests are subject to a "nonappropriation" or
"abatement" feature by which, under certain conditions, the issuer of the
underlying Municipal Security may, without penalty, terminate its obligation to
make payment. In such event, the holder of such security must look to the
underlying collateral, which is often a municipal facility used by the issuer.
Custodial Receipts. The Tax-Free Bond Fund may purchase custodial
receipts representing the right to receive certain future principal and interest
payments on Municipal Securities that underlie the custodial receipts. A number
of different arrangements are possible. In the most common custodial receipt
arrangement, an issuer or a third party owning the Municipal Securities deposits
such obligations with a custodian in exchange for two classes of custodial
receipts with different characteristics. In each case, however, payments on the
two classes are based on payments received on the underlying Municipal
Securities. One class has the characteristics of a typical auction-rate
security, having its interest rate adjusted at specified intervals, and its
ownership changes based on an auction mechanism. The interest rate of this class
generally is expected to be below the coupon rate of the underlying Municipal
Securities and generally is at a level comparable to that of a Municipal
Security of similar quality and having a maturity equal to the period between
interest rate adjustments. The second class bears interest at a rate that
exceeds the interest rate typically borne by a security of comparable quality
and maturity; this rate also is adjusted, although inversely to changes in the
rate of interest of the first class. If the interest rate on the first class
exceeds the coupon rate of the underlying Municipal Securities, its interest
rate will exceed the rate paid on the second class. In no event will the
aggregate interest paid with respect to the two classes exceed the interest paid
by the underlying Municipal Securities. The value of the second class and
similar securities should be expected to fluctuate more than the value of a
Municipal Security of comparable quality and maturity and their purchase by the
Tax-Free Bond Fund should increase the volatility of its net asset value and,
thus, its price per share. These custodial receipts are sold in private
placements and are 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-
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exempt rates, coupled with an agreement of a third party, such as a bank,
broker-dealer or other financial institution, granting the security holders the
option, at periodic intervals, to tender their securities to the institution and
receive their face value. As consideration for providing the option, the
financial institution receives periodic fees equal to the difference between the
Municipal Security's fixed coupon rate and the rate, as determined by a
remarketing or similar agent at or near the commencement of such period, that
would cause the securities, coupled with the tender option, to trade at par on
the date of such determination. Thus, after payment of this fee, the security
holder effectively holds a demand obligation that bears interest at the
prevailing short-term tax-exempt rate. The Adviser, on behalf of the Tax-Free
Bond Fund, considers on a periodic basis the creditworthiness of the issuer of
the underlying Municipal Security, of any custodian and of the third party
provider of the tender option. In certain instances and for certain tender
option bonds, the option may be terminable in the event of a default in payment
of principal or interest on the underlying Municipal Obligations and for other
reasons. The Tax-Free Bond Fund will not invest more than 10% of its net assets
in securities that are illiquid (including tender option bonds with a tender
feature that cannot be exercised on not more than seven days' notice if there is
no secondary market available for these obligations).
Obligations with Puts Attached. The Tax-Free Bond Fund may purchase
Municipal Securities together with the right to resell the securities to the
seller at an agreed-upon price or yield within a specified period prior to the
securities' maturity date. Although an obligation with a put attached is not a
put option in the usual sense, it is commonly known as a "put" and is also
referred to as a "stand-by commitment." The Tax-Free Bond Fund will use such
puts in accordance with regulations issued by the Securities and Exchange
Commission ("SEC"). In 1982, the Internal Revenue Service (the "IRS") issued a
revenue ruling to the effect that, under specified circumstances, a regulated
investment company would be the owner of tax-exempt municipal obligations
acquired with a put option. The IRS also has issued private letter rulings to
certain taxpayers (which do not serve as precedent for other taxpayers) to the
effect that tax-exempt interest received by a regulated investment company with
respect to such obligations will be tax-exempt in the hands of the company and
may be distributed to its shareholders as exempt-interest dividends. The last
such ruling was issued in 1983. The IRS subsequently announced that it will not
ordinarily issue advance ruling letters as to the identity of the true owner of
property in cases involving the sale of securities or participation interests
therein if the purchaser has the right to cause the securities, or the
participation interest therein, to be purchased by either the seller or a third
party. The Tax-Free Bond Fund intends to take the position that it is the owner
of any municipal obligations acquired subject to a stand-by commitment or a
similar put and that tax-exempt interest earned with respect to such municipal
obligations will be tax exempt in its hands. There is no assurance that stand-by
commitments will be available to the Tax-Free Bond Fund nor has it assumed that
such commitments would continue to be available under all market conditions.
There may be other types of municipal
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securities that become available and are similar to the foregoing described
Municipal Securities in which the Tax-Free Bond Fund may invest.
Zero Coupon Debt Securities. The Funds may invest in zero coupon
securities. Zero coupon debt securities do not make interest payments; instead,
they are sold at a discount from face value and are redeemed at face value when
they mature. Because zero coupon bonds do not pay current income, their prices
can be very volatile when interest rates change. In calculating its daily net
asset value, a Fund takes into account as income a portion of the difference
between a zero coupon bond's purchase price and its face value. The amount of
the discount on a zero coupon bond (other than a zero coupon Municipal Security)
acquired by a Fund from its issuer must be included in the Fund's income during
the period when the Fund holds the bond, even though the Fund does not receive
payments of interest on the bond. In order to qualify for favorable federal
income tax treatment, a Fund may have to increase its distributions to
shareholders to reflect the amount of the discount that the Fund includes in its
income, and may be required to borrow to meet its distribution requirements.
Hedging and Risk Management Practices
In order to hedge against foreign currency exchange rate risks, the
Rising Dividends, Small-Mid Cap Rising Dividends, International Rising Dividends
and Intermediate Total Return Bond Funds may enter into forward foreign currency
exchange contracts ("forward contracts") and foreign currency futures contracts,
as well as purchase put or call options on foreign currencies, as described
below. These Funds also may conduct their foreign currency exchange transactions
on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency
exchange market.
The Funds also may purchase other types of options and futures and may,
in the future, write covered options, as described below and in the Prospectus.
Forward Contracts. The Rising Dividends, Small-Mid Cap Rising
Dividends, International Rising Dividends and Intermediate Total Return Bond
Funds may enter into forward contracts to attempt to minimize the risk from
adverse changes in the relationship between the U.S. dollar and foreign
currencies. A forward contract, which is individually negotiated and privately
traded by currency traders and their customers, involves an obligation to
purchase or sell a specific currency for an agreed-upon price at a future date.
A Fund may enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency or is expecting a dividend or interest payment in order to "lock in"
the U.S. dollar price of a security, dividend or interest payment. When a Fund
believes that a foreign currency may suffer a substantial decline against the
U.S. dollar, it may enter into a forward contract to sell an amount of that
foreign currency approximating the value of some or all of the Fund's portfolio
securities denominated in such currency, or when a
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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 designated to
be used to pay for the commitments. Accordingly, a Fund always will have liquid
assets denominated in the appropriate currency available in an amount sufficient
to cover any commitments under these contracts. Designated assets used to cover
forward contracts will be marked to market on a daily basis. While not all of
these contracts are presently regulated by the Commodity Futures Trading
Commission ("CFTC"), the CFTC may in the future further regulate them, and the
ability of these Funds to utilize forward contracts may be restricted. Forward
contracts may limit potential gain from a positive change in the relationship
between the U.S. dollar and foreign currencies. Unanticipated changes in
currency prices may result in poorer overall performance by a Fund than if it
had not entered into such contracts. The Funds generally will not enter into a
forward foreign currency exchange contract with a term greater than one year.
Futures Contracts and Options on Futures Contracts. To hedge against
movements in interest rates, securities prices or currency exchange rates, the
Funds may purchase and sell various kinds of futures contracts and options on
futures contracts. The Funds also may enter into closing purchase and sale
transactions with respect to any such contracts and options. Futures contracts
may be based on various securities (such as U.S. Government securities),
securities indices, foreign currencies and other financial instruments and
indices.
The Funds have filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" with the CFTC and the National
Futures Association, which regulate trading in the futures markets, before
engaging in any purchases or sales of futures contracts or options on futures
contracts. Pursuant to Section 4.5 of the regulations under the Commodity
Exchange Act, the notice of eligibility included the representation that the
Funds will use futures contracts and related options for bona fide hedging
purposes within the meaning of CFTC regulations, provided that a Fund may hold
positions in futures contracts and related options that do not fall 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
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to protect against a decline in the price of securities or currencies and will
be purchased to protect a Fund against an increase in the price of securities it
intends to purchase (or the currencies in which they are denominated). All
futures contracts entered into by these Funds are traded on U.S. exchanges or
boards of trade licensed and regulated by the CFTC or on foreign exchanges.
Positions taken in the futures markets are not normally held to
maturity but are instead liquidated through offsetting or "closing" purchase or
sale transactions, which may result in a profit or a loss. While these Funds'
futures contracts on securities or currencies will usually be liquidated in this
manner, a Fund may make or take delivery of the underlying securities or
currencies whenever it appears economically advantageous. A clearing corporation
associated with the exchange on which futures on securities or currencies are
traded guarantees that, if still open, the sale or purchase will be performed on
the settlement date.
By using futures contracts to hedge their positions, these Funds seek
to establish more certainty than would otherwise be possible with respect to the
effective price, rate of return or currency exchange rate on portfolio
securities or securities that these Funds propose to acquire. For example, when
interest rates are rising or securities prices are falling, a Fund can seek,
through the sale of futures contracts, to offset a decline in the value of its
current portfolio securities. When rates are falling or prices are rising, a
Fund, through the purchase of futures contracts, can attempt to secure better
rates or prices than might later be available in the market with respect to
anticipated purchases. Similarly, a Fund can sell futures contracts on a
specified currency to protect against a decline in the value of such currency
and its portfolio securities which are denominated in such currency. A Fund can
purchase futures contracts on a foreign currency to fix the price in U.S.
dollars of a security denominated in such currency that such Fund has acquired
or expects to acquire.
As part of its hedging strategy, a Fund also may enter into other types
of financial futures contracts if, in the opinion of the Adviser, there is a
sufficient degree of correlation between price trends for the Fund's portfolio
securities and such futures contracts. Although under some circumstances prices
of securities in 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
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price, to sell or purchase the underlying futures contract at any time during
the option period. Purchasing an option on a futures contract gives a Fund the
benefit of the futures position if prices move in a favorable direction, and
limits its risk of loss, in the event of an unfavorable price movement, to the
loss of the premium and transaction costs.
A Fund may terminate its position in an option contract by selling an
offsetting option on the same series. There is no guarantee that such a closing
transaction can be effected. A Fund's ability to establish and close out
positions on such options is dependent upon a liquid market.
Loss from investing in futures transactions by these Funds is
potentially unlimited.
These Funds will engage in transactions in futures contracts and
related options only to the extent such transactions are consistent with the
requirements of the Internal Revenue Code of 1986, as amended (the "Code"), for
maintaining their qualification as a regulated investment company for federal
income tax purposes.
Options on Securities, Securities Indices and Currencies. These Funds
may purchase put and call options on securities in which they have invested, on
foreign currencies represented in their portfolios and on any securities index
based in whole or in part on securities in which these Funds may invest. These
Funds also may enter into closing sales transactions in order to realize gains
or minimize losses on options they have purchased.
A Fund normally will purchase call options in anticipation of an
increase in the market value of securities of the type in which it may invest or
a positive change in the currency in which such securities are denominated. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified securities or a specified amount of a foreign currency at
a specified price during the option period.
A Fund may purchase and sell options traded on U.S. and foreign
exchanges. Although these Funds will generally purchase only those 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
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or unforeseen circumstances which interrupt normal operations on an exchange;
(v) inadequate facilities of an exchange or the Options Clearing Corporation to
handle current trading volume at all times; or (vi) discontinuance in the future
by one or more exchanges for economic or other reasons, of trading of options
(or of a particular class or series of options), in which event the secondary
market on that exchange (or in that class or series of options) would cease to
exist, although outstanding options on that exchange that had been issued by the
Options Clearing Corporation as a result of trades on that exchange would
continue to be exercisable in accordance with their terms.
Although these Funds do not currently intend to do so, they may, in the
future, write (i.e., sell) covered put and call options on securities,
securities indices and currencies in which they may invest. A covered call
option involves a Fund's giving another party, in return for a premium, the
right to buy specified securities owned by the Fund at a specified future date
and price set at the time of the contract. A covered call option serves as a
partial hedge against the price decline of the underlying security. However, by
writing a covered call option, a Fund gives up the opportunity, while the option
is in effect, to realize gain from any price increase (above the option exercise
price and premium) in the underlying security. In addition, a Fund's ability to
sell the underlying security is limited while the option is in effect unless the
Fund effects a closing purchase transaction.
These Funds also may write covered put options that give the holder of
the option the right to sell the underlying security to the Fund at the stated
exercise price. A Fund will receive a premium for writing a put option but will
be obligated for as long as the option is outstanding to purchase the underlying
security at a price that may be higher than the market value of that security at
the time of exercise. In order to "cover" put options it has written, a Fund
will designate liquid assets with an aggregate value equal to at least the
exercise price of the put options. A Fund will not write put options if the
aggregate value of the obligations underlying the put options exceeds 25% of the
Fund's total assets.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not, at times, render certain of the facilities of
the Options Clearing Corporation inadequate, and result in the institution by an
exchange of special procedures that may interfere with the timely execution of
the Funds' orders.
Other Investment Practices
When-Issued and Forward Commitment Securities. The Funds may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" or "delayed-delivery" basis. The price of such securities
is fixed at the time the commitment to purchase or sell is made, but delivery
and payment for the securities take place at a later date. Normally, the
settlement date occurs within one month of the purchase; during the period
between purchase and settlement, no payment is made by a Fund to the issuer.
While
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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 will designate 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 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
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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 designate appropriate liquid
assets to cover forward currency contracts that are deemed speculations. The
Funds are not required to designate assets to cover forward contracts entered
into for hedging purposes, including settlement hedges, position hedges, and
proxy hedges.
A Fund will not enter into a forward contract if, as a result, it
would have more than one-third of its total assets committed to such contracts
(unless it owns the currency that it is obligated to deliver or has caused its
custodian to segregate cash or high-quality liquid assets having a value
sufficient to cover its obligations).
The successful use of forward currency contracts will depend on the
Adviser's skill in analyzing and predicting currency values. Forward contracts
may change a Fund's investment exposure to changes in currency exchange rates
substantially, and could result in losses to a Fund if exchange rates do not
perform as the Adviser anticipates. For example, if a currency's value rose at a
time when the Adviser had hedged a Fund by selling currency in exchange for
dollars, a Fund would be unable to participate in the currency's appreciation.
If the Adviser hedges currency exposure through proxy hedges, a Fund could
realize currency losses from the hedge and the security position at the same
time if the two currencies do not move in tandem. Similarly, if the Adviser
increases a Fund's exposure to 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.
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dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; for example, their maturity value may
increase when the specified currency value increases, resulting in a security
whose price characteristics are similar to a call option on the underlying
currency. Currency-indexed securities also may have prices that depend on the
values of a number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, commodity or other instrument to which
they are indexed, and also may be influenced by interest rate changes in the
U.S. and abroad. At the same time, indexed securities are subject to the credit
risks associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
Government agencies.
Repurchase Agreements. In a repurchase agreement, a Fund purchases a
security and simultaneously commits to resell that security to the seller at an
agreed upon price on an agreed upon date within a specified number of days
(usually not more than seven) from the date of purchase. The resale price
reflects the purchase price plus an agreed upon incremental amount which is
unrelated to the coupon rate or maturity of the purchased security. A repurchase
agreement involves the obligation of the seller to pay the agreed upon price,
which obligation is, in effect, secured by the value (at least equal to the
amount of the agreed upon resale price and marked to market daily) of the
underlying security. A Fund may engage in a repurchase agreement with respect to
any security in which it is authorized to invest. Any repurchase transaction in
which a Fund 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
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accounted for as financings will be included among that Fund's borrowings for
purposes of its investment policies and limitations.
Dollar Roll Transactions. The Funds may enter into dollar roll
transactions. A dollar roll transaction involves a sale by a Fund of a security
to a financial institution concurrently with an agreement by that Fund to
purchase a similar security from the institution at a later date at an
agreed-upon price. The securities that are repurchased will bear the same
interest rate as those sold, but generally will be collateralized by different
pools of mortgages with different prepayment histories than those sold. During
the period between the sale and repurchase, a Fund will not be entitled to
receive interest and principal payments on the securities sold. Proceeds of the
sale will be invested in additional portfolio securities of that Fund, and the
income from these investments, together with any additional fee income received
on the sale, may or may not generate income for that Fund exceeding the yield on
the securities sold.
When a Fund enters into a dollar roll transaction, it will designate
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 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.
B-19
<PAGE>
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 may engage in short sales of securities. In a
short sale, the Fund sells stock that it does not own, making delivery with
securities "borrowed" from a broker. The Fund is then obligated to replace the
security borrowed by purchasing it at the market price at the time of
replacement. This price may or may not be less then the price at which the
security was sold by the Fund. Until the security is replaced, the Fund is
required to pay to the lender any dividends or interest which accrue during the
period of the loan. In order to borrow the security, the Fund may also have to
pay a premium which would increase the cost of the security sold. The proceeds
of the short sale will be retained by the broker, to the extent necessary to
meet margin requirements, until the short position is closed out.
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 designates 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 (or later market value)
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 designated assets are marked-to- market daily, provided that at
no time will the amount designated plus the amount deposited with the broker be
less than the market value of the securities when they were sold short (or later
market value).
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 designate 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. A short sale against the
box also will constitute a constructive sale of the security and recognition of
any applicable gain or loss.
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
B-20
<PAGE>
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.
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
B-21
<PAGE>
securities to qualified institutional buyers. Institutional markets for
restricted securities sold pursuant to Rule 144A in many cases provide both
readily ascertainable values for restricted securities and the ability to
liquidate an investment to satisfy share redemption orders. Such markets might
include automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc. An
insufficient number of qualified buyers interested in purchasing Rule 144A-
eligible restricted securities held by a Fund, however, could affect adversely
the marketability of such portfolio securities and the Fund might be unable to
dispose of such securities promptly or at favorable prices.
The Board of Trustees has delegated the function of making day-to-day
determinations of liquidity to the Adviser pursuant to guidelines approved by
the Board. The Adviser takes into account a number of factors in reaching
liquidity decisions, including but not limited to (1) the frequency of trades
for the security, (2) the number of dealers that make quotes for the security,
(3) the number of dealers that have undertaken to make a market in the security,
(4) 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-22
<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 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.
B-23
<PAGE>
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 a Fund in the future.
A Fund will not engage in any substantive new activity without prior Board of
Trustees' approval 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
B-24
<PAGE>
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,
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.
B-25
<PAGE>
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, 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) 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;
(17) invest, in the aggregate, more than 10% of its net assets in
illiquid securities;
(18) 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.
B-26
<PAGE>
MANAGEMENT OF THE FUNDS
Trustees and Officers
Set forth below is certain information about the Trust's trustees and
executive officers:
B-27
<PAGE>
<TABLE>
<CAPTION>
Other Principal
Position(s) Occupations(s) During Past
Name and Address Held with Trust Five Years
---------------- --------------- ----------
<S> <C> <C>
RICHARD ALAN KAYNE(1) Trustee and Equity owner and the
(Age 53) Chief Executive President of the general
c/o Kayne Anderson Mutual Funds Officer partner of Kayne Anderson
1800 Avenue of the (and its predecessor)
Stars, Suite 200 since June 1984.
Los Angeles, CA 90067 Shareholder and President
of KA Associates, Inc., a
registered broker-dealer,
since January 1993.
ALLAN MICHAEL RUDNICK(1) Trustee and Equity owner and the Chief
(Age 58) President Investment Officer of the
c/o Kayne Anderson Mutual Funds general partner of Kayne
1800 Avenue of the Anderson (and its
Stars, Suite 200 predecessor) since August
Los Angeles, CA 90067 1989.
WILLIAM T. MILLER(1) Trustee, Chief Equity Owner and Chief
(Age 35) Financial Financial Officer of the
c/o Kayne Anderson Mutual Funds Officer and general partner of Kayne
1800 Avenue of the Treasurer Anderson (and its
Stars, Suite 200 predecessor) since June
Los Angeles, CA 90067 1994. Shareholder and
Financial Vice President
and Treasurer of KA
Associates, Inc. since
April 1994.From September
1992 until April 1994,
Vice President of
Accounting for Pilgrim
Distribution Corp., a
mutual fund distributor in
Los Angeles. From October
1990 until September 1992,
Audit Manager with Price
Waterhouse in Los Angeles.
CARL D. COVITZ Trustee President and owner of
(Age 59) Landmark Capital since
c/o Landmark Capital, Inc. 1973 (except for various
595 Wilshire Boulevard periods of government
Beverly Hills, CA 90212 service). Landmark
Capital is a national real
estate development and
investment firm with
activities as diverse as
construction, financing,
management and food
distribution. Secretary
of the California
Business, Transportation
and Housing Agency, and a
member of the Governor's
Cabinet, from 1990 to
1993. Under Secretary of
the U.S. Department of
Housing and Urban
Development (HUD) and a
member of President
Ronald Reagan's Cabinet.
ARNOLD BRUSTIN (Age 55) Trustee President of Vision
c/o Vision Investments Inc. Investments, a firm involved
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Denotes a Trustee who is an "interested person," as defined in the
1940 act.
B-28
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
601 North Saltair Avenue in the entertainment industry,
Los Angeles, CA 90049 since 1982. Prior to that,
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 Professor at the School of
(Age 58) Cinema-Television at the
1637 East Valley Road University of Southern
Montecito, CA 93108 California in Los As
Angeles. Chief Operating
Officer of Hearst
Entertainment, a
subsidiary of the Hearst
Corporation, which
produces and distributes
television entertainment,
from 1989 to 1994.
WILLIAM H. WALDORF Trustee Chairman and Chief
(Age 60) Executive Officer of
c/o Landmark Landmark Distribution
Distribution Group, Inc. Group, Inc. and its
100 Jericho Quadrangle affiliated companies.
Jericho, NY 11753 These companies are
involved in the food
storage and distribution,
real estate and financial
investment businesses.
Director of the NYSE-
listed Griffon Corporation
for over 30 years and is a
Trustee of Hope College,
Elmira College, and The
Interchurch Center.
</TABLE>
B-29
<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, 1997 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 $4,250 -- $4,250
Arnold Brustin $4,250 -- $4,250
Gerald I. Isenberg $4,250 -- $4,250
William H. Waldorf $4,250 -- $4,250
</TABLE>
* The Trust does not maintain pension or retirement plans.
Control Persons and Share Ownership
As of March 31, 1998, the following persons held of record 5% or more
of the outstanding shares of the Funds:
Percentage
Fund Shareholder Name & Address Held
---- -------------------------- ----
Kayne Anderson Bear Stearns Securities 19.78%
Rising Corporation(1)
Dividends Fund One Metrotech Center North
Brooklyn, NY 11201
Scudder Trust Company ttee 12.49%
The Retirement Plan of Hancock
and Estabrook LLP
5 Industrial Way
Salem, NH 03079
Kayne Anderson Bear Stearns Securities 84.02%
Small-Mid Cap Corporation(1)
Rising One Metrotech Center North
Dividends Fund Brooklyn, NY 11201
B-30
<PAGE>
Kayne Anderson Bear Stearns Securities 82.63%
International Corporation(1)
Rising One Metrotech Center North
Dividends Fund Brooklyn, NY 11201
Kayne Anderson Bear Stearns Securities 78.43%
Intermediate Corporation(1)
Total Return One Metrotech Center North
Bond Fund Brooklyn, NY 11201
William N. 20.00%
Pennington tr fbo
William N. Pennington
Separate Property Trust
dtd 1/1/91
441 West Plumb Lane
Reno, NV 89509
Kayne Anderson Bear Stearns Securities 85.87%
Intermediate Corporation(1)
Tax-Free Bond One Metrotech Center North
Fund Brooklyn, NY 11201
Charles Schwab & Co. Inc.(1) Special 9.18%
Custody Account for Benefit of
Customers
attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
- ---------------------------------
(1) Bear Stearns Securities Corporation and Charles Schwab & Co. Inc.
are the nominee accounts for many individual shareholder accounts; the Funds are
not aware of the size or identity of any individual accounts.
As of March 31, 1998, the Directors and Officers of the Trust as a
whole owned less than 1% of the outstanding shares of the Rising Dividends Fund,
International Rising Dividends Fund, Intermediate Total Return Bond Fund and
Intermediate Tax-Free Bond Fund. The Directors and Officers of the Trust own
1.16% of the outstanding shares of the Small-Mid Cap Rising Dividends 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
B-31
<PAGE>
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 liability company. 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 $4.0 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 accrued by each fund, are as follows:
<TABLE>
<CAPTION>
International
-------------
Rising Small-Mid Cap Rising Intermediate Intermediate
------ ------------- ------ ------------ ------------
Dividends Rising Dividends Total Return Tax-Free
--------- ------ --------- ------------ --------
Fund Dividends Fund Fund Bond Fund Bond Fund
---- -------------- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
1995 $90,944 - - - -
1996 $180,502 $736 $1,292 $4,343 $4,355
1997 $271,652 $34,033 $39,034 $27,332 $27,588
</TABLE>
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.
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-32
<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 -- . 75%. 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.
Kayne Anderson reimbursed the funds the following amounts:
<TABLE>
<CAPTION>
International
-------------
Rising Small-Mid Cap Rising Intermediate Intermediate
------ ------------- ------ ------------ ------------
Dividends Rising Dividends Total Return Tax-Free
--------- ------ --------- ------------ --------
Fund Dividends Fund Fund Bond Fund Bond Fund
---- -------------- ---- --------- ---------
<S> <C> <C> <C> <C> <C>
1995 - - - - -
1996 - $16,314 $17,888 $10,845 $2,918
1997 - $77,861 $83,125 $70,713 $40,123
</TABLE>
B-33
<PAGE>
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-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
B-34
<PAGE>
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. For the year ended December 31, 1996 and 1997 the Rising
Dividends Fund paid $4,649 and $42,597 , respectively, in commissions. For the
period October 18, 1996 through December 31, 1997 the Small-Mid Cap Rising
Dividends Fund paid $1,995 in commissions and the International Rising Dividends
Fund paid $3,021 in commissions. For the year ended December 31, 1997 the
Small-Mid Cap Rising Dividends Fund and the International Rising Dividends Fund
pad $16,065 and $18,035, respectively, in commissions. The Small-Mid Cap Rising
Dividends Fund and the International Rising Dividends Fund each commenced
operations on October 18, 1996. For the period October 28, 1996 through December
31, 1996 and for the year ended December 31, 1997 the Intermediate Total Return
Bond Fund and the Intermediate Tax-Free Fund paid no commissions. 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 and for the year ended December 31, 1997
the Small-Mid Cap Rising Dividends Fund and the International Rising Dividends
Fund executed a majority of their trades through KA Associates, an affiliated
broker of the Investment Adviser. Commissions paid by the Funds to this
affiliate during the period October 18, 1996 (commencement of operations)
through December 31, 1996 and the year ended December 31, 1997 were as follows:
Kayne Anderson Small-Mid Cap Rising Dividends Fund $1,995 $8,439
Kayne Anderson International Rising Dividends Fund $3,021 $9,627
THE FUNDS' ADMINISTRATOR
The Funds have an Administration Agreement with Investment Company
Administration Corporation (the "Administrator"), with offices at 2020 East
Financial Way, Suite 100, 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
B-35
<PAGE>
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. For the year
ended December 31, 1997, 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 paid $19,943, $17,980,
$17,980, $17,718 and $17,718, in Administration fees respectively.
THE FUNDS' DISTRIBUTOR
First Fund Distributors, Inc. (the "Distributor"), a broker-dealer
affiliated with the Administrator, acts as each Fund's principal underwriter in
a continuous public offering of the Fund's shares. The Distribution Agreement
between the Funds and the Distributor continues in effect for periods not
exceeding one year if approved at least annually by (i) the Board of Trustees or
the vote of a majority of the outstanding shares of each Fund (as defined in the
1940 Act) and (ii) a majority of the Trustees who are not interested persons of
any such party, in each case cast in person at a meeting called for the purpose
of voting on such approval. The Distribution Agreement may be terminated without
penalty by the parties thereto upon 60-days' written notice, and is
automatically terminated in the event of its assignment as defined in the 1940
Act.
TRANSFER AGENT AND CUSTODIAN
Investors Bank & Trust Company, Boston, Massachusetts ("IB & T"),
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. IB & T 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
B-36
<PAGE>
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 as of the close of the New York Stock Exchange (the "NYSE") (the "Portfolio
Valuation Time"), on each day that 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, Dr. Martin Luther King, Jr.'s Birthday,
Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas Day. The Funds do not expect to determine the net
asset value of their shares on any day when the NYSE is not open for trading
even if there is sufficient trading in their portfolio securities on such days
to materially affect the net asset value per share.
Because of the difference between the bid and asked prices of the
over-the-counter securities in which a Fund may invest, there may be an
immediate reduction in the net asset value of the shares of a Fund after a Fund
has completed a purchase of such securities. This is because such OTC securities
generally will be valued at the last sale price (which is generally below the
asked price), but usually are purchased at or near the asked price.
Each Fund's (other than the Tax-Free Bond Fund) portfolio is expected
to include foreign securities listed on foreign stock exchanges and debt
securities of foreign governments and corporations. Generally, trading in and
valuation of foreign securities is substantially completed each day at various
times prior to the Portfolio Valuation Time. In addition, trading in and
valuation of foreign securities may not take place on every day that the NYSE is
open for trading. Furthermore, trading takes place in various foreign markets on
days on which the NYSE is not open for trading and on which the Funds' net asset
values are not calculated. Foreign securities quoted in foreign currencies are
translated into U.S. dollars using the latest available exchange rates. As a
result, fluctuations in the value of such currencies in relation to the U.S.
dollar will affect the net asset value of a Fund's shares even though there has
not been any change in the market values of such securities. Any changes in the
value of foreign currency forward contracts due to exchange rate fluctuations
are included in determination of net asset value.
Generally, each Fund's investments are valued at market value or, in
the absence of a market value, at fair value as determined in good faith by the
Adviser and the Board of Trustees. Portfolio securities that are listed or
admitted to trading on a U.S. exchange 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
B-37
<PAGE>
the mean between the closing bid and asked prices. Foreign securities are valued
at the last sale price in the principal market where they are traded, or if the
last sale price is unavailable, at the mean between the last bid and asked
prices available reasonably prior to the time the Funds' net asset values are
determined. Securities and assets for which market quotations are not readily
available (including restricted securities which are subject to limitations as
to their sale) are valued at fair value as determined in good faith by or under
the direction of the Board of Trustees.
Short-term debt obligations with remaining maturities in excess of 60
days are valued at current market prices, as discussed above. Short-term
securities with 60 days or less remaining to maturity are, unless conditions
indicate otherwise, amortized to maturity based on their cost to a Fund if
acquired within 60 days of maturity or, if already held by a Fund on the 60th
day, based on the value determined on the 61st day.
Corporate and government debt securities held by the Funds are valued
on the basis of valuations provided by dealers in those instruments, by an
independent pricing service approved by the Board of Trustees, or at fair value
as determined in good faith by procedures approved by the Board of Trustees. Any
such pricing service, in determining value, is expected to use information with
respect to transactions in the securities being valued, quotations from dealers,
market transactions in comparable securities, analyses and evaluations of
various relationships between securities and yield to maturity information.
If any securities held by a Fund are restricted as to resale or do not
have readily available market quotations, the Adviser and the Board of Trustees
determine their fair value. The Trustees periodically review such valuations and
valuation procedures. The fair value of such securities is generally determined
as the amount which a Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by a Fund in connection with such
disposition). In addition, specific factors are also generally considered, such
as the cost of the investment, the market value of any unrestricted securities
of the same class (both at the time of purchase and at the time of valuation),
the size of the holding relative to current average trading volume, the prices
of any recent transactions or offers with respect to such securities and any
available analysts' reports regarding the issuer.
All other assets of the Funds are valued in such manner as the Board of
Trustees in good faith deems appropriate to reflect their fair value.
B-38
<PAGE>
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 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 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
B-39
<PAGE>
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-
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.
B-40
<PAGE>
The Funds also may invest in the stock of foreign companies that may be
treated as "passive foreign investment companies" ("PFICs") under the Code.
Certain other foreign corporations, not operated as investment companies, may
nevertheless satisfy the PFIC definition. A portion of the income and gains that
a Fund derives from PFIC stock may be subject to a non-deductible federal income
tax at the Fund level. In some cases, a Fund may be able to avoid this tax by
electing to be taxed currently on its share of the PFIC's income, whether or not
such income is actually distributed by the PFIC. The Funds will endeavor to
limit their exposure to the PFIC tax by investing in PFICs only where the
election to be taxed currently will be made. Since it is not always possible to
identify a foreign issuer as a PFIC in advance of making the investment, these
Funds may incur the PFIC tax in some instances.
Dividends of net investment income (including any net realized
short-term capital gains other than exempt-interest dividends described below)
paid by a Fund are taxable to shareholders of the Fund as ordinary income,
whether such distributions are taken in cash or reinvested in additional shares.
Distributions of net capital gain (i.e., the excess of net long-term capital
gains over net short-term capital losses), if any, by a Fund are taxable as
long-term capital gains, whether such distributions are taken in cash or
reinvested in additional shares, and regardless of how long shares of the Fund
have been held. Fund distributions also will be included in individual and
corporate shareholders' income on which the alternative minimum tax may be
imposed. Tax-exempt shareholders will not be required to pay taxes on amounts
distributed to them, unless they have borrowed to purchase or carry their shares
of a Fund. Statements as to the tax status of distributions to shareholders will
be mailed annually.
Provided that, as anticipated, the Tax-Free Bond Fund qualifies as a
regulated investment company under the Code, and, at the close of each quarter
of its taxable year at least 50% of the value of the total assets of that Fund
consists of obligations the interest on which is exempt from federal income tax,
that Fund will be qualified to pay exempt-interest dividends to its shareholders
that, to the extent attributable to interest received by that Fund on such
obligations, are exempt from federal income tax. The total amount of
exempt-interest dividends paid by the Tax-Free Bond Fund to its shareholders
with respect to any taxable year cannot exceed the amount of interest received
by the Fund during such year on tax-exempt obligations less any expenses
attributable to such interest. Income from other transactions engaged in by the
Tax-Free Bond Fund, such as income from options and repurchase agreements, will
be taxable distributions to its shareholders.
The Code may subject interest received on otherwise tax-exempt
securities to an alternative minimum tax. In addition, certain corporations
which are subject to the alternative minimum tax may have to include a portion
of exempt-interest dividends in calculating their alternative minimum taxable
income.
Interest on indebtedness incurred or continued by a shareholder to
purchase or carry shares of the Tax-Free Bond Fund is not
B-41
<PAGE>
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 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
B-42
<PAGE>
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 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. Paul, Hastings, Janofsky & Walker, LLP has
expressed no opinion in respect thereof.
B-43
<PAGE>
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.
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
B-44
<PAGE>
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 Total Return. The average annual total return included
with any presentation of a Fund's performance data will be calculated according
to the following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1,000 payment (made at the beginning of the
1-, 5-, or 10-year periods) at the end of
the 1-, 5-, or 10-year periods (or
fractional portion thereof).
The Funds impose no sales load on initial purchases or on reinvested
dividends. Accordingly, no sales charges are deducted for purposes of this
calculation. The calculation of total return assumes that all dividends, if any,
and distributions paid by a Fund would be reinvested at the net asset value on
the day of payment.
For the one year ended December 31, 1997 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
---- -------------- ---- --------- ----
30.99% 19.46% 16.42% 7.19% 4.26%
For the period May 1, 1995 (commencement of operations) through
December 31, 1997 for the Rising Dividends Fund, October 18, 1996 (commencement
of operations) through December 31, 1997 for the Small- Mid Cap Rising Dividends
Fund and the International Rising Dividends Fund and October 28, 1996
(commencement of operations) through December 31, 1997, the average annual total
returns are 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
---- -------------- ---- --------- ----
26.71% 19.78% 15.89% 6.27% 3.63%
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
B-45
<PAGE>
return measure the absolute change in net asset value resulting from all Fund
operations including reinvestment of a distribution paid by the Fund for the
period specified.
The aggregate total return is calculated in a similar manner to average
annual total return, except that the results are not annualized. Each
calculation assumes that all dividends and distributions are reinvested at net
asset value on the reinvestment dates during the period.
Investment Philosophy
From time to time the Funds may publish or distribute information and
reasons why the Adviser believes investors should invest in the Funds. For
example, the Funds may refer to the Adviser's "rising dividends philosophy",
which is founded on the principles of value and growth. The Funds may state that
the Adviser's investment professionals actively research quality companies that
are not only undervalued based on their current earnings, but also offer
significant potential for future growth. The Funds also may state that the
Adviser uses a practical approach to investing that emphasizes sound business
judgment and common sense.
Indices and Publications
In the same shareholder communications, sales literature, and
advertising, a Fund may compare its performance with that of appropriate indices
such as the Standard & Poor's Composite Index of 500 stocks ("S&P 500"),
Standard & Poor's MidCap 400 Index ("S&P 400"), the NASDAQ Industrial Index, the
NASDAQ Composite Index, the Russell 2500 Stock Index (the "Russell 2500"), the
Morgan Stanley Capital International Europe, Australia and Far East Index ("MSCI
EAFE") and the Lehman Corporate Government Intermediate Index ("Lehman Index"),
or other unmanaged indices so that investors may compare the Fund's results with
those of a group of unmanaged securities. The S&P 500, the S&P 400, the NASDAQ
Industrial Index, the NASDAQ Composite Index, the Russell 2500, MSCI EAFE and
the Lehman Index are unmanaged groups of common stocks and debt securities
traded principally on national or foreign securities exchanges and the over the
counter market. A Fund also may, from time to time, compare its performance to
other mutual funds with similar investment objectives and to the industry as a
whole, as quoted by rating services and publications, such as Lipper Analytical
Services, Inc., Morningstar Mutual Funds, Forbes, Money and Business Week.
In addition, one or more portfolio managers or other employees of the
Adviser may be interviewed by print media, such as The Wall Street Journal or
Business Week, or electronic news media, and such interviews may be reprinted or
excerpted for the purpose of advertising regarding the Fund.
B-46
<PAGE>
ADDITIONAL INFORMATION
Legal Opinion
The validity of the shares offered by the Prospectus will be passed
upon by Paul, Hastings, Janofsky & Walker, LLP, 345 California Street, San
Francisco, California 94104.
Auditors
The annual financial statements of the Funds will be audited by Briggs,
Bunting & Dougherty, LLP, Two Logan Square, Philadelphia, Pennsylvania 19103,
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
Audited financial statements for the years ended December 31, 1997 and
1996 for the Rising Dividends Fund , 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, 1997 (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-47
<PAGE>
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
This Appendix describes ratings applied to corporate bonds by Standard & Poor's
Corporation ("S&P") and Moody's Investors Service, Inc. ("Moody's").
S&P's Ratings
AAA: Bonds rated AAA have the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A: Bonds rated A has a strong capacity to pay interest and repay principal,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than bonds in higher rated categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than in higher rated categories.
BB: Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments.
B: Bonds rated B have a greater vulnerability to default but currently have the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal.
The B rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BB-rating.
The ratings from AA to B may be modified by the addition of a plus or minus to
show relative standing within the major rating categories.
Moody's Ratings
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt edge."
Interest payments are protected by a
B-48
<PAGE>
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of
these issues.
Aa: Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally known as high grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than in Aaa securities.
A: Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered as medium-grade obligations, i.e, they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba: Bonds rated Ba are judged to have speculative elements. Their future cannot
be considered as well assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position characterizes bonds in
this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or maintenance of other terms of
the contract over any long period of time may be small.
Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
B-49
<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 January 27,
1998, Statement of Assets and Liabilities as of
December 31, 1997, Statements of Operations 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, 1997.
(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.
(11a) Consent of Tait, Weller & Baker
(11b) Consent of Briggs, Bunting & Dougherty, LLP
(12) Financial Statements omitted from Item 23 - Not
applicable.
(13) Subscription Agreement.(3)
(14) Model Retirement Plan Documents - Filed Herewith
(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, LLC, a California
limited liability company, is the manager of each series of the Registrant.
Richard A. Kayne and Allan M. Rudnick are managers of Kayne Anderson Investment
Management, LLC and John Edward Anderson is a member. Collectively, Messrs.
Kayne, Rudnick and Anderson own 89.5% of the equity interests in Kayne Anderson
Investment Management, 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 84.9% of the partnership interests in KAIM
Non-Traditional, L.P.
Messrs. Kayne and Anderson together hold 86.3% 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, 1998 there were 236 shareholders in the Rising
Dividends Fund, 72 shareholders in the Small-Mid Cap Rising Dividends Fund, 75
shareholders in the International Rising Dividends Fund, 6 shareholders in the
Intermediate Total Return Bond Fund and 8 shareholders in 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 Kayne Anderson Investment
Management, LLC 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
Fleming Funds, Inc.
Fremont Mutual Funds, Inc.
Jurika & Voyles Fund Group
Masters Select Investment Trust
O'Shaughnessy Funds, Inc.
PIC Investment Trust
Professionally Managed Portfolios -
- Academy Value Fund
- Avondale Total Return Fund
- Boston Balanced Fund
- Osterweis Fund
- Perkins Discovery Fund
- Perkins Opportunity Fund
- ProConscience Womens Equity Fund
- Trent Equity Fund
- Leonetti Balanced Fund
- Lighthouse Growth Fund
- U.S. Global Leaders Growth Fund
- Harris, Bretall, Sullivan & Smith
Growth Equity Fund
- Pzena Focused Value Fund
- Titan Financial Services Fund
- PGP Korea Growth Fund
- PGP Asia Growth Fund
The Purisima Funds
Rainier Investment Management Mutual Funds
RNC Mutual Fund Group, Inc.
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
<PAGE>
* The principal business address of persons and entities listed is 4455
East Camelback Road, Suite 261E, Phoenix, AZ 85018.
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, 200
Clarendon Street, Boston, Massachusetts 02116, 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 28th day
of April, 1998.
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.
<TABLE>
<S> <C> <C>
/s/Richard Alan Kayne Chairman of the Board of April 28, 1998
- ----------------------- Trustees
Richard Alan Kayne
/s/Allan M. Rudnick President, Principal Executive April 28, 1998
- ----------------------- Officer and Trustee
Allan M. Rudnick
/s/William T. Miller Principal Financial and April 28, 1998
- ----------------------- Accounting Officer, and
William T. Miller Trustee
/s/Carl D. Covitz Trustee April 28, 1998
- -----------------------
Carl D. Covitz
/s/ Arnold Brustin Trustee April 28, 1998
- -----------------------
Arnold Brustin
/s/ Gerald I. Isenberg Trustee April 28, 1998
- -----------------------
Gerald I. Isenberg
/s/ William H. Waldorf Trustee April 28, 1998
- -----------------------
William H. Waldorf
* By: /s/ Eric M. Banhazl
-------------------------
Eric M. Banhazl, pursuant
to a Power of Attorney as filed
with post-effective Amendment No. 3
</TABLE>
<PAGE>
LIMITED POWER OF ATTORNEY
-------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Eric M. Banhazl his true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to the
Registration Statement on Form N-1A of Kayne Anderson Mutual Funds under the
Securities Act of 1933 and the Investment Company Act of 1940, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
DATED: April 28, 1998
/s/ Allan M. Rudnick
------------------------
Allan M. Rudnick
<PAGE>
LIMITED POWER OF ATTORNEY
-------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Eric M. Banhazl his true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to the
Registration Statement on Form N-1A of Kayne Anderson Mutual Funds under the
Securities Act of 1933 and the Investment Company Act of 1940, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
DATED: April 28, 1998
/s/ Richard Alan Kayne
------------------------
Richard Alan Kayne
<PAGE>
LIMITED POWER OF ATTORNEY
-------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Eric M. Banhazl his true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to the
Registration Statement on Form N-1A of Kayne Anderson Mutual Funds under the
Securities Act of 1933 and the Investment Company Act of 1940, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
DATED: April 28, 1998
/s/ William T. Miller
------------------------
William T. Miller
<PAGE>
LIMITED POWER OF ATTORNEY
-------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Eric M. Banhazl his true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to the
Registration Statement on Form N-1A of Kayne Anderson Mutual Funds under the
Securities Act of 1933 and the Investment Company Act of 1940, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
DATED: April 28, 1998
/s/ Carl D. Covitz
------------------------
Carl D. Covitz
<PAGE>
LIMITED POWER OF ATTORNEY
-------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Eric M. Banhazl his true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to the
Registration Statement on Form N-1A of Kayne Anderson Mutual Funds under the
Securities Act of 1933 and the Investment Company Act of 1940, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
DATED: April 28, 1998
/s/ Arnold Brustin
------------------------
Arnold Brustin
<PAGE>
LIMITED POWER OF ATTORNEY
-------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Eric M. Banhazl his true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to the
Registration Statement on Form N-1A of Kayne Anderson Mutual Funds under the
Securities Act of 1933 and the Investment Company Act of 1940, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
DATED: April 28, 1998
/s/ Gerald I. Isenberg
------------------------
Gerald I. Isenberg
<PAGE>
LIMITED POWER OF ATTORNEY
-------------------------
KNOW ALL MEN BY THESE PRESENTS, that the undersigned hereby constitutes
and appoints Eric M. Banhazl his true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to the
Registration Statement on Form N-1A of Kayne Anderson Mutual Funds under the
Securities Act of 1933 and the Investment Company Act of 1940, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorney-in-fact and agent may lawfully do or cause to be
done by virtue hereof.
DATED: April 28, 1998
/s/ William H. Waldorf
------------------------
William H. Waldorf
<PAGE>
File Nos. 333-08045
811-07705
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
<TABLE>
<CAPTION>
Exhibit No. Document Page No.
- ----------- -------- --------
<S> <C> <C>
(11a) Consent of Tait, Weller & Baker, Independent Public
Accountants ________
(11b) Consent of Briggs, Bunting & Dougherty, LLP, Independent
Public Accountants ________
(14) Model Retirement Plan Documents ________
(16) Performance Computation ________
(27) Financial Data Schedules ________
</TABLE>
EXHIBIT 11(a)
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. 3 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 28 1998
EXHIBIT 11(b)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 27, 1998 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. 3 to this Registration Statement and
Prospectus. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus.
/s/ Briggs, Bunting & Dougherty, LLP
BRIGGS, BUNTING & DOUGHERTY, LLP
Philadelphia, Pennsylvania
April 25, 1998
Kayne Anderson
Mutual Funds
Self-Directed Individual
Retirement Account
UNIVERSAL PACKAGE
REGULAR IRAs
ROTH IRAs
APPLICATION FORMS
and
DISCLOSURE STATEMENT
(Effective: January 1, 1998)
<PAGE>
Instructions for establishing an IRA:
1. If you are not transferring money from another IRA, you will not need the
IRA Transfer Form. You may separate this sheet from the Application Form
and dispose of it.
2. Complete the IRA Application Form.
3. If you are transferring money from another IRA, fill out the IRA Transfer
Form.
4. Mail the Form(s) to:
Kayne Anderson Mutual Funds
c/o Investors Bank & Trust Company
P.O. Box 9130, MFD 23
Boston, MA 02117-9130
If you are sending the Forms via an overnight delivery service (such as
Federal Express), the service cannot deliver to a post office box, so you
should use the following address:
Kayne Anderson Mutual Funds
c/o Investors Bank & Trust Company
200 Clarendon Street - MFD 23
Boston, MA 02116
5. Don't forget to enclose a check, if you are making an investment or
establishing a rollover account. (If you are making a transfer from another
IRA, no check is necessary, because the IRA Custodian will arrange for the
transfer of money.)
It is not necessary to use certified mail when sending an IRA Application,
but if you are concerned about having proof of receipt, you may wish to use
certified mail, return receipt requested. If you have questions, please
call the IRA Custodian at (800) 395-3807.
Thank you for investing.
<PAGE>
SELF-DIRECTED REGULAR IRA OR ROTH IRA DISCLOSURE STATEMENT
You should review the following information along with the Investors Bank &
Trust Universal IRA Custodial Account Agreement (the "Terms and Conditions"),
the Universal IRA Application (the "Application") and the current prospectus for
any Fund you are investing in.
This Disclosure Statement provides information about Regular IRAs and Roth IRAs
and is divided into three sections. Section 1: The first section is the
Disclosure Statement for Regular IRAs (pages 4 - 10). Tax deductible
contributions or rollovers from another Regular IRA or an employer's qualified
retirement plan may be made to a Regular IRA. The earnings and interest in your
account accrue on a tax-free basis. However, any amounts not taxed when
contributed are taxed, along with any earnings, when they are withdrawn from the
Regular IRA. In the Disclosure Statement for Regular IRAs section you will find
a general overview of the basic features of your Regular IRA, along with the
rules under which the Regular IRA will be operated.
(Note: In this booklet all IRAs, except for Roth IRAs (see below), are
considered to be Regular IRAs.)
Section 2: The second section of this booklet, Disclosure Statement for Roth
IRAs (pages 10 - 15), explains in detail how Roth IRAs work and who is eligible
to contribute to them, along with the other basic rules and features of a Roth
IRA. Roth IRAs were created in 1997 by Congress and are available after January
1, 1998. In Roth IRAs, non-deductible contributions accrue earnings and interest
tax-free. In addition, withdrawals meeting certain requirements are also made
tax-free. Individuals (and their spouses) whose annual gross income on their tax
return is less than $100,000 per year may convert or roll over amounts from
their existing Regular IRAs to Roth IRAs.
Section 3: The final section, Disclosure Statement for All IRAs (pages 15 - 17),
explains tax and other matters applicable to all Investors Bank & Trust IRAs and
should be read in conjunction with either of the first two sections.
WARNING ON IRA CONTRIBUTIONS FOR 1997
This Disclosure Statement covers the rules applicable to individual retirement
custodial accounts effective January 1, 1998. Contributions to a Regular IRA for
1997 may be made during 1998 as long as such contributions are made no later
than April 15, 1998 and are designated as contributions for 1997. However, the
old rules apply to contributions for 1997 even if they are made during the
period January 1 to April 15, 1998. Under the old rules, the limits on deducting
Regular IRA contributions apply if either spouse in a married couple is an
active participant in an employer-sponsored plan. Also, if the active
participant rules apply, the adjusted gross income ("AGI") levels for making
partially deductible or non-deductible Regular IRA contributions are lower for
1997. (For example, for single taxpayers who are active participants, the
ability to make a deductible contribution phases out at AGI levels from $25,000
to $35,000; for married taxpayers filing jointly, where one or both spouses are
active participants, deductions phase out at AGI levels of $40,000 to $50,000.)
Note: Because Roth IRAs are not available until 1998, contributions to
a Roth IRA in 1998 may not be made for 1997.
SIMPLE IRAs
Under the Small Business Job Protection Act of 1996, a new type of IRA called a
SIMPLE IRA was created. SIMPLE IRAs operate in connection with a SIMPLE IRA plan
maintained by an eligible employer. Each participating employee has a SIMPLE IRA
to receive contributions under the plan.
A Regular IRA or a Roth IRA is NOT suitable for use with a SIMPLE IRA plan. A
separate IRA, using a different form for the IRA Application and Adoption
Agreement and a different Individual Retirement Custodial Account document, is
available to establish a SIMPLE IRA.
IMPORTANT -- REVOCATION OF YOUR IRA
If you do not receive this statement at least seven days before you establish
your Regular or Roth Individual Retirement Account, you have the right to revoke
your account within seven days after it is established and to receive a return
of the entire amount of your investment in the account. If this right to revoke
applies to you and if you should desire to exercise your right to revoke your
Regular or Roth Individual Retirement Custodial Account, you should mail or
deliver a written notice of revocation to the Service Company, the name and
address of which appear on the Universal Application Form. Mailed notice will be
<PAGE>
deemed given on the date it is postmarked (or, if sent by certified or
registered mail, on the date of certification or registration by the post
office). The Service Company has the right under the Universal Custodial Account
Agreement to hold your initial contribution uninvested until the period when you
may revoke your account has expired.
Disclosure Statement for Regular IRAs
1. ELIGIBILITY
You are eligible to set up an IRA if you are younger than age 70 1/2 and if, at
any time during the year, you are an employee or are self-employed and receive
compensation or earned income that is includible in your gross income.
Also, you may contribute to a different IRA, established by your spouse and
called a "spousal IRA," out of your compensation or earned income for any year
before the year in which your spouse reaches age 70 1/2. To contribute to a
spousal IRA, you and your spouse must file a joint tax return for the taxable
year. Your spouse must establish a separate spousal IRA to receive the
contributions.
Additionally, regardless of your age, you may also transfer funds from another
IRA or certain qualified plan distributions to a "Rollover IRA", which is
described in paragraph 9 of this statement.
2. LIMIT ON ANNUAL CONTRIBUTIONS
(a) You can make annual contributions to an individual Regular IRA of up to
$2,000, or 100% of your compensation or earned income, whichever is less.
(b) If you and your spouse both work and have compensation that is includible in
your gross income, each of you can annually contribute to a separate Regular IRA
up to the lesser of $2,000 or 100% of compensation of earned income. If each
spouse has at least $2,000 in compensation or earned income, each may make the
maximum contribution to his or her individual Regular IRA, a total of up to
$4,000 in IRA contributions for the couple. However, if one spouse has under
$2,000 in compensation or earned income, but both spouses together have $4,000
or more in compensation or earned income, it may be advantageous to use spousal
Regular IRAs to maximize contributions (see paragraph (c) below).
(c) If each spouse in a couple meets the eligibility requirements for
contributions to that spouse's Regular IRA, and the total compensation and
earned income shown on the couple's joint income tax return is at least $4,000,
each spouse may contribute up to $2,000 to his or her spousal Regular IRA. If
the combined compensation or earned income shown on the couple's joint income
tax return is under $4,000, contributions to both spousal Regular IRAs may not
exceed the total compensation or earned income, and may be divided between the
spousal Regular IRAs as desired (as long as the contribution to either spousal
Regular IRA does not exceed $2,000).
(d) If you are a divorced spouse, all taxable alimony received by you under a
decree of divorce or separate maintenance will be treated as compensation for
purposes of the Regular IRA contribution limit and the rules for contributing to
a Regular IRA will apply. Accordingly, you can make annual contributions of up
to the lesser of $2,000, or 100% of compensation or earned income (including
taxable alimony).
(e) If you (or your spouse) establish a new Roth IRA (described in the
Disclosure Statement for Roth IRAs) and make contributions to both your Regular
IRA and a Roth IRA, the limit on contributions to both Regular and Roth IRAs for
a single calendar year for you may not exceed $2,000 (or $4,000 for you and your
spouse).
3. DEDUCTIBILITY OF CONTRIBUTIONS
(a) You may deduct the full amount of your Regular IRA contribution up to the
annual maximum limit if you are not an "active participant" in an
employer-sponsored retirement plan (including qualified 401(k), profit sharing
or retirement plans maintained by your employer, Simplified Employee Pension
(SEP) plans, SIMPLE IRA or SIMPLE 401(k) plans, tax-sheltered annuity plans, and
certain governmental plans) for any part of such year. (New rule: If you are
married, you will not be treated as an active participant in an
employer-sponsored retirement plan solely because your spouse is an active
participant in such a plan if you are not an active participant yourself.
However, the deductibility of contributions for the non-active spouse phases out
for married couples with adjusted gross income ("AGI") between $150,000 and
$160,000, and is lost entirely after AGI reaches $160,000.
Your AGI is determined on your Form 1040.)
Individuals are considered to be "active participants" for a year if at any time
during the year they are covered by any employer plan under which contributions
are made to their account (including a required or voluntary employee
contribution by the individual) or under which they are eligible to earn pension
benefit credits. Individuals are considered to be active participants even if
they are not vested under
<PAGE>
the plan. Form W-2 for the year should indicate participation status. Consult
your employer or your own tax or financial advisor if you should have any
further questions concerning active participant status. If you are an active
participant in such a plan, your contributions will be either be fully
deductible, partly deductible or not deductible, depending on your tax filing
status and your AGI. The following table shows phase out ranges for
deductibility of contributions, based on AGI and filing status, for 1998:
ACTIVE PARTICIPANTS
Deductibility of Contributions
at Specified Levels of AGI
(1998 Table)
<TABLE>
<CAPTION>
Filing Fully Partly Not
Status Deductible Deductible Deductible
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Single $30,000 or less At least $30,000 but
less than $40,000 $40,000 or more
- -------------------------------------------------------------------------------------------------------
Married Filing $50,000 or less At least $50,000 but $60,000 or more
Jointly less than $60,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
In the years following 1998, phase out levels will be increased, until they
top-out in 2005 for single filers and in 2007 for married joint filers. The
following table shows the phase out levels for years after 1998. AGI shown is
for married filing jointly. If you are married filing separately, your
contribution deductibility is phased out for AGI from $0 - $10,000, and is lost
entirely with AGI above $10,000.
DEDUCTIBILITY PHASE OUT LEVELS - FUTURE YEARS
<TABLE>
<CAPTION>
Fully Partly Not
Deductible Deductible Deductible
(any AGI amount up to) (AGI amounts between) (AGI amounts over)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Single $31,000 $31,000 - $41,000 $41,000
1999 Married $51,000 $51,000 - $61,000 $61,000
- -------------------------------------------------------------------------------------------------------
Single $32,000 $32,000 - $42,000 $42,000
2000 Married $52,000 $52,000 - $62,000 $62,000
- -------------------------------------------------------------------------------------------------------
Single $33,000 $33,000 - $43,000 $43,000
2001 Married $53,000 $53,000 - $63,000 $63,000
- -------------------------------------------------------------------------------------------------------
Single $34,000 $34,000 - $44,000 $44,000
2002 Married $54,000 $54,000 - $64,000 $64,000
- -------------------------------------------------------------------------------------------------------
Single $40,000 $40,000 - $50,000 $50,000
2003 Married $60,000 $60,000 - $70,000 $70,000
- -------------------------------------------------------------------------------------------------------
Single $45,000 $45,000 - $55,000 $55,000
2004 Married $65,000 $65,000 - $75,000 $75,000
- -------------------------------------------------------------------------------------------------------
Single $50,000 $50,000 - $60,000 $60,000
2005 Married $70,000 $70,000 -$80,000 $80,000
- -------------------------------------------------------------------------------------------------------
Single $50,000 $50,000 - $60,000 $60,000
2006 Married $75,000 $75,000 - $85,000 $85,000
- -------------------------------------------------------------------------------------------------------
2007 Single $50,000 $50,000 - $60,000 $60,000
and later Married $80,000 $80,000 - $100,000 $100,000
- -------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
In general, the Regular IRA deduction is phased out at a rate of $200 per $1,000
of adjusted gross income in excess of the phase out threshold (the AGI level at
which contributions by active participants go from fully deductible to partly
deductible). Also, note that, starting in the year 2007 for married taxpayers
filing jointly, the deduction is phased out at the rate of $100 per $1,000 of
adjusted gross income in excess of the phase out threshold.
When calculating your reduced Regular IRA deduction limit, you always round down
to the next lowest $10. Therefore, your deduction limit is always a multiple of
$10. In addition, if your adjusted gross income is within the phase-out range
and your reduced deduction limit is more than $0 but less than $200, you are
permitted to deduct up to $200 of your Regular IRA contributions.
If adjusted gross income exceeds the Not Deductible levels specified above
($40,000 in 1998 for single filers, $60,000 in 1998 for married joint filers)
and you are an active participant in an employer-sponsored retirement plan, then
you may not deduct any portion of your Regular IRA contribution.
(b) Even if you will not be able to deduct the full amount of your Regular IRA
contribution under the rules described above, you can still contribute up to
your annual maximum amount with all or part of the contribution being a
non-tax-deductible contribution. Of course, the combined total of deductible and
non-deductible contributions must not exceed your annual maximum contribution
limit amount. Any earnings on all your Regular IRA contributions (deductible and
nondeductible) accumulate tax-free until you withdraw them.
4. CONTRIBUTIONS WHICH CAN NEVER BE DEDUCTED
You may not make any contribution (other than a rollover contribution) to your
Regular IRA with respect to the tax year in which you reach age 70 1/2 or any
subsequent year. However, you may continue to make contributions to a spousal
Regular IRA and deduct the deductible portion of such payments until the year in
which your spouse reaches age 70 1/2.
You may not deduct any portion of Regular IRA contributions allocable to the
cost of life insurance. For this reason, life insurance is not offered as an
investment for your Regular IRA.
5. DEADLINE FOR ANNUAL CONTRIBUTIONS
Contributions to your Regular IRA for a tax year must be made in cash on or
before the due date (not including extensions) for your Federal income tax
return for that tax year (April 15 for most individuals). If you intend to
report contributions made between January 1 and April 15 as contributions for
your prior tax year, you should clearly indicate that such contributions have
been made on account of such prior tax year. Otherwise, the Custodian will treat
the contribution as a contribution for the current tax year.
6. EXCESS CONTRIBUTIONS
If you contribute to your Regular IRA more than the maximum contribution limit
allowed in any year, the excess contribution could be subject to a 6%
nondeductible excise tax. The excess is taxed in the year the excess
contribution is made and each year that the excess remains in your Regular IRA
at the end of the year. (Remember, the excess contribution excise tax is based
on contributions above the maximum contribution limit, not the maximum deduction
limit.)
If, by accident, you should contribute more than the maximum amount allowed, you
can eliminate the excess contribution as follows:
(a) You can avoid the 6% excise tax by withdrawing the excess contribution and
the net earnings attributable to it before the due date (including any
extensions) for filing your Federal income tax return for the year for which the
excess contribution was made. Upon removing an excess contribution in this
manner, the net earnings attributable to it are includible in your income for
the tax year in which the excess contribution was made, and you may also have to
pay an additional 10% premature distribution tax on the amount of such net
earnings (see paragraph 7(a)). However, the excess contribution itself will not
be included in your taxable income and will not be subject to the 10% premature
distribution tax.
(b) If you elect not to withdraw an excess contribution, you can eliminate the
excess by contributing less than the maximum amount allowed to your Regular IRA
in a later year. This is known as a "make-up" contribution and is allowed only
to the extent that you "under-contribute" in the later year. Further, to the
extent that you have not contributed your full deductible amount for that later
year, the amount of the excess so eliminated may be deductible as a "make-up"
deduction, depending on your active participant status and adjusted gross income
for the year. The 6% excise tax will, however, be imposed in the year you make
the excess contribution and each subsequent year until eliminated.
(c) If you do not withdraw an excess contribution on or before the due date for
filing your Federal income
<PAGE>
tax return and your contribution did not exceed $2,000, you can withdraw the
excess at any time as long as you have not deducted it on your Federal tax
return. The amount of the excess which you withdraw will not be included in your
gross income and will not be subject to regular Federal income tax. However, the
6% excise tax will be imposed for the year in which you make the excess
contribution and each subsequent year, until the year of withdrawal.
(d) If you do not withdraw an excess contribution on or before the due date for
filing your Federal income tax return and your contribution exceeded $2,000, you
must include in your gross income any excess amount which you withdraw even if
you have not deducted it on your Federal income tax return. You may also have to
pay a 10% premature distribution tax on the amount you withdraw (See paragraph 7
(a)). Additionally, the 6% excise tax will be imposed for the year in which you
make the excess contribution and each subsequent year, until the year of
withdrawal.
7. PAYMENTS FROM YOUR REGULAR IRA DURING YOUR LIFE
(a) You can make withdrawals from your Regular IRA at any time. However, if you
withdraw any of the funds in your Regular IRA before age 59 1/2, the amount
includible in your gross income is subject to a 10% non-deductible premature
distribution tax unless:
(i) the withdrawal is made because of your death or permanent
disability;
(ii) the withdrawal is an exempt withdrawal of an excess contribution;
(iii) the withdrawal does not exceed the amount of your deductible
medical expenses for the year in which you made the withdrawal; generally,
medical expenses paid during a year are deductible if they exceed 7 1/2% of
your adjusted gross income for that year;
(iv) the withdrawal does not exceed the premiums you paid for medical
insurance for yourself, your spouse and your dependents during the year;
however, you must have been unemployed and received Federal or state
unemployment compensation payments for at least 12 weeks, and you must make
the withdrawal during the year in which you received the unemployment
compensation payments or during the following year, but not after you have
been reemployed for at least 60 days;
(v) the withdrawal is validly rolled over into another qualified plan
or Regular IRA within 60 days;
(vi) the withdrawal does not exceed certain eligible higher education
expenses for yourself, your spouse, your child or grandchild. Eligible
expenses include tuition, fees, books, supplies and equipment necessary for
attending a qualified higher education institution. Room and board expenses
may be eligible if the individual is attending at least half time; or
(vii) the withdrawal does not exceed qualified first-time homebuyer
expenses incurred by you or your spouse, or a child, grandchild, parent or
grandparent of you or your spouse. Qualified expenses include cost of
acquisition or construction, including normal financing or closing costs.
You are considered a "first-time homebuyer" if you (and your spouse if you
are married) had no ownership interest in a principal residence during the
two years before the withdrawal in question. There is a lifetime limit
($10,000) on qualified first-time homebuyer expenses for any one
individual.
You are considered "disabled" for purposes of clause (i) if you are unable to
engage in any substantial gainful activity because of a physical or mental
impairment which can be expected to result in death or to be of long-lasting or
indefinite duration.
You can also withdraw funds held in your Regular IRA without any tax penalty
before you reach age 59 1/2 if you choose to receive systematic payments in
substantially equal amounts over a period that does not exceed your life
expectancy or the life expectancy of you and your designated beneficiary. You
should be aware, however, that the 10% premature distribution tax will be
applied retroactively (with interest) to all systematic payments if you change
to a method of distribution that does not qualify for the exception either
before you attain age 59 1/2 or during the first five years of the
distributions.
The 10% premature distribution tax discussed above does not apply to the portion
of your Regular IRA distribution which is not includible in your gross income
(for example, amounts treated as a return of non-deductible contributions you
made to your Regular IRA).
The exceptions to the 10% premature withdrawal penalty tax have a number of
special rules and definitions; consult your tax advisor or the IRS for further
details.
(b) When you reach age 70 1/2, you must elect to receive distributions in either
(a) systematic payments (monthly, quarterly or annually), or (b) one lump sum
<PAGE>
distribution of all the funds held in your Regular IRA. The law requires that
you begin to receive distributions from your Regular IRA no later than the April
1 following the year in which you reach age 70 1/2 (the "Required Distribution
Date"). (Note: The tax law rule allowing employees who are participants in an
employer plan and who continue working for the employer after age 70 1/2 to
postpone distributions until after they retire from the employer does not apply
to Regular IRAs.)
If you elect systematic payments, there is a minimum amount which you must
withdraw by the Required Distribution Date and by each December 31 thereafter.
This could result in two minimum distributions in one calendar year. This
minimum amount is determined by your life expectancy or the joint life and last
survivor expectancy of you and your designated beneficiary, subject to the
minimum distribution incidental death benefit rule found in IRS regulations.
Your life expectancy (and your spouse's life expectancy if your spouse is your
designated beneficiary) may be recalculated each year. If you and your spouse
established spousal Regular IRAs, the minimum required annual distribution from
each spousal Regular IRA is determined using the life expectancy of the spouse
who established the Regular IRA (or that spouse and/or his designated
beneficiary).
You should consult your own tax or financial advisor with regard to the
calculation of the amount of your minimum distribution each year because it is
your responsibility to make sure that this requirement is met. The Custodian is
not required to advise you in this matter and will only make distributions to
you from your Regular IRA in accordance with your specific instructions.
You may receive installment payments larger than the minimum amount. However, if
the amount distributed during a taxable year is less than the minimum amount
required to be distributed, the Internal Revenue Service may impose a tax equal
to 50% of the deficiency, unless it is satisfied that the deficiency was due to
reasonable error and that responsible steps are being taken to remedy the
deficiency.
(c) Amounts paid to you from your Regular IRA are taxable as ordinary income,
except that you recover your nondeductible Regular IRA contributions tax free.
The special tax rules which permit recipients of certain lump sum distributions
from other tax-qualified retirement plans to get certain tax advantages (such as
capital gains treatment and five or ten-year averaging) do not apply to
distributions from Regular IRAs.
(d) If you withdraw an amount from a Regular IRA during a taxable year and you
have previously made non-deductible contributions, then part of the amount
withdrawn is excludable from ordinary income and not subject to taxation. The
amount excludable for the taxable year is determined by multiplying the amount
withdrawn by a fraction, the numerator of which is your aggregate non-deductible
Regular IRA contributions remaining in all your Regular IRAs and the denominator
of which is the aggregate balance of all your Regular IRAs at the end of the
year plus the amount withdrawn during the year. For example, in 1998 an
individual withdraws $1,000 from a Regular IRA to which both deductible and
non-deductible contributions were made. At the end of 1998, the account balance
of all his Regular IRAs is $4,000 of which $2,500 is non-deductible
contributions. The amount excludable from income is $500 ($2,500/$5,000 x
$1,000). It should also be pointed out that in the event you receive a
distribution from your Regular IRA within the last 60 days of the calendar year,
if you do not roll this amount into another Regular IRA by December 31 but you
do so after December 31 and before the 60th day after the distribution, this
amount must be added to the denominator of the fraction discussed above.
8. PAYMENTS FROM YOUR REGULAR IRA AFTER YOUR DEATH
If you die before all the funds held in your Regular IRA have been distributed,
the remaining funds in the account will be distributed to your designated
beneficiary either outright or periodically, as selected by such beneficiary.
The Custodian will make distributions to your beneficiary in accordance with his
or her specific instructions.
Your beneficiary should be aware that he or she is subject to minimum
distribution rules and it is his or her responsibility to make sure that the
rules are met. Under the post-death minimum distribution rules, if you die after
your Required Distribution Date, the funds remaining in your Regular IRA must
continue to be distributed to your designated beneficiary at least as rapidly as
under the method of distribution in effect prior to your death. If you die prior
to your Required Distribution Date, all the funds in your Regular IRA must be
completely distributed to your designated beneficiary by December 31 of the year
containing the fifth anniversary of your death unless your designated
beneficiary elects, no later than December 31 of the year following the year of
your death, to receive funds from your Regular IRA over a fixed period that is
no longer than his or her life expectancy. If your
<PAGE>
beneficiary is your surviving spouse, distribution of funds from your Regular
IRA can be made to him or her over a fixed period that is no longer than his or
her life expectancy and commencing at any date prior to December 31 of the year
in which you would have attained age 70 1/2. In all instances, your spousal
beneficiary may also elect to roll over the funds in your Regular IRA into his
or her own account or treat your Regular IRA as his or her own by making
contributions to it. In this case, he or she is not required to make withdrawals
from the Regular IRA until April 1 following the year in which he or she reaches
age 70 1/2.
The designation of a beneficiary to receive funds from your Regular IRA at your
death is not considered a transfer subject to Federal gift taxes. However, any
funds remaining in your Regular IRA at your death would be includible in your
Federal gross estate.
Be sure to keep your designation of beneficiary up-to-date as your personal or
financial circumstances change. You may file a new designation of beneficiary
form at any time with the Custodian. If no designation of beneficiary is in
effect at your death, or if all designated beneficiaries have predeceased you,
the balance in your account will be paid to your estate.
Selecting a beneficiary or beneficiaries can have important tax and financial
planning implications. Consult a qualified professional for advice if needed.
Also, be sure to consult a qualified professional if you live in a community or
marital property state to be sure that your designation of beneficiary complies
with legal requirements in those states.
9. TAX-FREE ROLLOVERS
(a) General Rules. Under certain circumstances, you can receive a distribution
from a Regular IRA, or from a qualified plan, or a tax-sheltered annuity or
other arrangement under Section 403(b) of the Code, and transfer the amount
received to another Regular IRA without including the distribution in your
income for Federal income tax purposes. Such a "tax-free rollover" must be
completed within 60 days after you receive the distribution. A transfer from a
qualified plan or 403(b) arrangement directly to a Regular IRA is a way to avoid
the required 20% income tax withholding requirements. Most distributions from
qualified plans or 403(b) accounts are subject to 20% withholding unless
transferred directly to another plan or 403(b) or to a Regular IRA (this is
called a "direct rollover").
There are complex, specific rules for each kind of transfer, so you should
consult your tax advisor or the IRS if you have questions about the rules.
Rollover contributions are not subject to the limits on annual contributions to
a Regular IRA. However, all amounts in your Regular IRA, including rollover
contributions, are subject to the rules discussed above concerning the time and
method of withdrawal.
(b) Regular IRA-to-Regular IRA Rollover. If you have a Regular IRA, you can
withdraw all or part of the amount in that account and transfer all or part of
the amount withdrawn to another Regular IRA. The amount transferred will not be
subject to federal income tax (or the 10% premature withdrawal penalty) if you
complete the transfer within 60 days after the withdrawal. After a Regular
IRA-to-Regular IRA tax-free rollover, you must wait at least a year before
making another Regular IRA-to-Regular IRA rollover.
(c) Direct Transfer. As an alternative to a rollover, arrangements may be made
for a direct transfer from one Regular IRA custodian or trustee to another. The
one-year waiting period does not apply to direct transfers from one Regular IRA
custodian or trustee to another.
(d) Rollovers from Qualified Plan or 403(b) Arrangement to Regular IRA. Most
distributions from a qualified plan or 403(b) arrangement are now eligible for
rollover to a Regular IRA. The main exceptions are:
o payments over the lifetime or life expectancy of the participant (or
participant and a designated beneficiary),
o installment payments for a period of 10 years or more,
o required distributions under the age 70 1/2 rules, and
o payments that are a return of after-tax amounts previously contributed by
the individual.
If you will receive an eligible distribution from a qualified plan or 403(b) or
a distribution upon termination of such a plan, you can defer paying taxes by
requesting the plan administrator or 403(b) sponsor to transfer the distribution
amount (except after - tax amounts previously contributed by you) directly to a
Regular IRA in a direct rollover. Or, you may receive the distribution and roll
it over to a Regular IRA within 60 days after you receive the distribution.
However, unless you elect a direct rollover of your distribution, the person
making payment MUST WITHHOLD 20% OF YOUR DISTRIBUTION for Federal income taxes.
Your plan or 403(b) sponsor will provide you with a notice concerning direct
rollovers, regular 60-day rollovers and withholding taxes before you receive
your distribution.
<PAGE>
If you already have one Regular IRA, you should establish a separate Regular IRA
to receive any rollover contribution from a qualified plan. You can later
transfer the separate Regular IRA holding your rollover into a different
employer plan if you desire and the plan permits such transfers.
(e) Rollovers by a Surviving Spouse. If a surviving spouse receives a
distribution from a qualified plan or 403(b) because of the employee-spouse's
death, the surviving spouse may be able to defer income taxes by having all or a
part of the distribution (other than employee contributions to the plan)
transferred directly to a Regular IRA.
(f) Rollover/Conversion to a Roth IRA. Starting in 1998, you may convert an
existing Regular IRA into a Roth IRA if your AGI on your income tax return for
the year of the conversion is $100,000 or less. (This limit applies to both
married and single taxpayers, and the limit is not indexed for cost of living
increases.) This can be done by completing the proper elections to convert your
present Regular IRA with the Custodian to a Roth IRA, or by making a rollover to
a Roth IRA with another custodian. A married taxpayer is eligible to convert or
roll over a Regular IRA to a Roth IRA only if a joint Federal income tax return
is filed; married taxpayers who file separately are not eligible to convert or
rollover from a Regular IRA to a Roth IRA. The amount converted or rolled over
is treated as taxable income to you in the year of the conversion. (For more
information on converting or rolling over into a Roth IRA, see the Disclosure
Statement for Roth IRAs on page 14 below.)
(g) Rules Applicable to All Rollovers. The following general rules apply to all
rollovers: (i) rollovers or transfers cannot include any amount you are required
to receive for the year from a qualified plan or Regular IRA under the required
minimum distribution rules; (ii) the Regular IRA you set up to receive
"rollover" amounts should be separate from a Regular IRA you set up to receive
annual contributions; (iii) rollover amounts you receive may not be deposited in
your spouse's Regular IRA or deducted on your Federal income tax return; (iv) if
you establish a "Rollover" Regular IRA during the year in which you reach age 70
1/2, you must be receiving distributions from such Regular IRA no later than
April 1 of such following year; (v) if you establish a "Rollover" Regular IRA
after the year in which you reach age 70 1/2, you must begin receiving
distributions from such Regular IRA immediately; and (vi) strict limitations
apply to rollovers, and a variety of tax and financial planning issues should be
considered in determining whether to make a rollover contribution. You should
consult your own tax or financial advisor regarding these matters.
Important: Please see Disclosure Statement for All IRAs, on page 15 below, for
important information applicable to all Investors Bank IRAs.
Disclosure Statement for Roth IRAs
Caution: The tax law creating Roth IRAs is a new law, and the rules governing
establishment and maintenance of Roth IRAs and for converting, contributing to
or withdrawing from a Roth IRA have not been finalized and are subject to
change. Also, legislation currently pending in Congress, which has not yet been
enacted, would change some of the tax requirements described in this Disclosure
Statement. You should be aware that the description of Roth IRA requirements in
this Disclosure Statement could be affected by such legislation or by IRS
regulations or rulings. Therefore, be sure to consult your own tax lawyer or
advisor for the latest developments or for advice on how establishing or
maintaining a Roth IRA (including converting a Regular IRA to a Roth IRA, or
making contributions to or withdrawals from a Roth IRA) will affect your
personal tax and financial circumstances.
Introduction: As part of the Taxpayer Relief Act of 1997, Congress created the
Roth IRA, which will be available for use by taxpayers beginning January 1,
1998. A Roth IRA is a trust or custodial account established for you (and your
beneficiaries) in which the amounts contributed are not deductible on your
Federal income tax return, but earnings accumulate tax free. If certain
conditions are satisfied, withdrawals made from a Roth IRA may also be made tax
free. (Note: State tax treatment of your Roth IRA earnings and withdrawals may
differ from Federal treatment. You should consult your tax advisor for
information regarding tax laws applicable in your state.)
In addition to the requirements found in the Disclosure Statement for All IRAs,
current law requires that your Roth IRA agreement be in writing and be
designated as a Roth IRA. Your contributions must be in cash, and, for any
taxable year, cannot exceed the lesser of 100% of your compensation or $2,000,
unless the contribution is a rollover or conversion from a Regular IRA or
another Roth IRA. (See Limit on Annual Contributions below for more information
about contributions to your Roth IRA.)
<PAGE>
Unless you are a taxpayer with a very high adjusted gross income ("AGI"), you
are also able to convert a Regular IRA into a Roth IRA. The total amount
converted will be taxed as income in the year in which it is converted, but the
earnings will accumulate, and qualified withdrawals may be made, tax free. (See
Rollovers below for more information about converting your Regular IRA to a Roth
IRA.)
1. ELIGIBILITY
You are eligible to make annual contributions to a Roth IRA if you receive
compensation from employment, earnings from self-employment, or alimony.
Also, you may contribute to a different Roth IRA, established by your spouse and
called a "spousal Roth IRA," out of your compensation or earned income for any
year. To contribute to a spousal Roth IRA, you and your spouse must file a joint
tax return for the taxable year. Your spouse must establish a separate spousal
Roth IRA to receive the contributions.
Unlike Regular IRAs, you may continue (or open and begin) to make contributions
to your Roth IRA (or a spousal Roth IRA) even after you (or your spouse) reach
age 70 1/2.
Additionally, you may transfer funds from another Roth IRA or a Regular IRA to a
"Rollover Roth IRA," described in paragraph 7 below.
2. LIMIT ON ANNUAL CONTRIBUTIONS
(a) You can make annual contributions to your Roth IRA of up to $2,000, or 100%
of your compensation or earned income, whichever is less, subject to the
limitations on contributions (see (f) below).
(b) If each spouse has at least $2,000 in compensation or earned income, each
may make the maximum contribution to his or her individual Roth IRA, a total of
up to $4,000 in Roth IRA contributions for the couple (subject to the
limitations discussed in (f) below). However, if one spouse has under $2,000 in
compensation or earned income, but spouses together have $4,000 or more in
compensation or earned income, it may be advantageous to use spousal Roth IRAs
to maximize contributions (see (c) below).
(c) You may also contribute up to $2,000 per year or 100% of joint compensation
or earned income, whichever is less, to a spousal Roth IRA. (Amounts contributed
can be divided between the two Roth IRAs as you choose, as long as no more than
$2,000 is contributed to either Roth IRA.)
If the combined annual compensation for you and your spouse for a year is less
than $4,000, the spouse with the greater annual income may contribute up to
his/her compensation amount, or $2,000 whichever is less. The other spouse may
contribute up to his/her compensation limit, plus the difference between the
other spouse's compensation and contribution, if any.
(d) The maximum amount that can be contributed to all IRAs (Roth and Regular) in
a year is $2,000 for an individual and $4,000 for a married couple. The amount
that may be contributed to your Roth IRA is always reduced by any amount that
you have contributed to your Regular IRAs for the year.
(e) You may make annual contributions to your Roth IRA (or establish a new Roth
IRA) and/or spousal Roth IRA anytime during a year, up to and including the due
date (not including extensions) for filing your Federal income tax return for
that year. Note: Because Roth IRAs are not available until January 1, 1998,
contributions to a Roth IRA on or before April 15, 1998 may not be treated as a
contribution for 1997.
Starting with 1999, if you intend to report contributions made to your Roth IRA
between January 1 and April 15 as contributions for your prior tax year, you
should clearly indicate that such contributions have been made on account of
such prior tax year. Otherwise, the Custodian will treat the contribution as a
contribution for the current tax year.
(f) The amount you or your spouse may contribute to a Roth IRA is limited, based
on your tax filing status and your (and your spouse's) AGI. (AGI is based on
your Form 1040, but for purposes of determining Roth IRA contribution limits, do
not include in your AGI (i) any deductible amount contributed to a Regular IRA
or (ii) any amount converted or rolled over from a Regular IRA to a Roth IRA.)
Contribution limits to Roth IRAs are based on AGI levels, as listed below.
(g) You must establish a separate Roth IRA account in which your annual
contributions are deposited. Under IRS rules, only annual contributions, and not
any amounts converted, transferred or rolled over, may be deposited into an
annual contribution Roth IRA account.
In general, your ability to contribute to your Roth IRA is phased out at a rate
of $133 per $1,000 of AGI for single individuals (and married filing
separately), and $200 per $1,000 of AGI for married joint filers, in excess of
the phase out threshold (the AGI level at which the contribution limit goes from
Full Contribution to Partial Contribution in the table below).
When calculating your reduced Roth IRA contribution limit, you always round down
to the next lowest $10. Therefore, your contribution limit is always a multiple
<PAGE>
ROTH IRA CONTRIBUTION LIMITS
<TABLE>
<CAPTION>
Full Partial No
Filing Status Contribution Contribution Contribution
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Single Up to $95,000 but less
$95,000 than $110,000 $110,000 or more
- ------------------------------------------------------------------------------------------------------
Married* Up to $150,000 but less
$150,000 than $160,000 $160,000 or more
- ------------------------------------------------------------------------------------------------------
</TABLE>
*Note: Figures are for married filing jointly only. If you are married filing
separately, your ability to contribute to a Roth IRA phases out at AGI levels
between $0 and $15,000, and is lost entirely with AGI above $15,000. (Pending
legislation may reduce this amount to $10,000. Consult your tax advisor or the
IRS for the latest developments.)
- --------------------------------------------------------------------------------
of $10. In addition, if your adjusted gross income is within the Partial
Contribution range and your reduced contribution limit is more than $0 but less
than $200, you are permitted to contribute up to $200.
If adjusted gross income exceeds the No Contribution levels specified above
($110,00 for single filers, $160,000 for married joint filers) for a year, then
you may not contribute to a Roth IRA for that year.
The Roth IRA contribution limit of $2,000 is reduced by any contributions for
the same year to a Regular IRA. If you fall in the Partial Contribution Range,
the reduction formula applies to the Roth IRA contribution limit left after
subtracting your contribution for the year to a Regular IRA.
3. Deductibility of Contributions
Unlike a Regular IRA, contributions to your Roth IRA are not deductible.
4. EXCESS CONTRIBUTIONS
(a) The maximum contribution you can make to a Roth IRA generally is $2,000 or
100% of compensation or earned income, whichever is less, reduced by the amount
of any contribution to a Regular IRA for the same year. (This may be further
reduced if you have high AGI, as discussed above.) Any amount, excluding
conversion and rollover amounts, contributed to the Roth IRA above the maximum
is an "excess contribution."
(b) A 6% excise tax will be imposed on any excess contributions made to your
Roth IRA. This tax applies for each year in which the contribution remains in
your Roth IRA.
(c) You can correct the excess without paying the 6% penalty by withdrawing the
excess and any earnings on the excess before the due date (including extensions)
for filing your Federal income tax return for the year for which you made the
excess contribution. Upon removing the excess contribution in this manner, the
net earnings must be included in your income for the tax year for which the
contribution was made and may be subject to a 10% premature withdrawal tax if
you have not reached age 59 1/2 (unless an exception to the 10% penalty tax
applies). However, the excess contribution itself will not be included in your
taxable income and will not be subject to the 10% premature withdrawal tax.
(d) Any excess contribution not withdrawn by the tax return due date (including
any extensions) for the year for which the contribution was made will be subject
to the 6% excise tax. There will be an additional 6% excise tax for each
subsequent year the excess remains in your account. In subsequent years, you may
reduce the excess contributions in your account by simply making a withdrawal
equal to the excess. Earnings need not be withdrawn. To the extent that no
earnings are withdrawn, the withdrawal will not be subject to income taxes or
possible penalties for premature withdrawals before age 59 1/2.
(e) Excess contributions may also be corrected in a subsequent year if you
contribute less than your Roth IRA contribution limit for that subsequent year.
This is known as a "make-up" contribution and is allowed only to the extent that
you "under-contribute" in the later year. As the prior excess contribution is
reduced or eliminated, the 6% excise tax will become correspondingly reduced or
eliminated for subsequent tax years.
5. TAX ON WITHDRAWALS FROM YOUR ROTH IRA
(a) Qualified (Tax-Free) Withdrawals. You can make withdrawals from your Roth
IRA at any time and the principal amounts that you contribute are always
available to be withdrawn by you tax-free. Withdrawals of amounts considered
earnings or growth will also be tax-free if the following requirements are met:
(i) the withdrawal must be made
<PAGE>
from a Roth IRA account that has been open for at least 5 years, and (ii) either
you must be 59 1/2 or older or one of the following must be true:
(i) the withdrawal is made because of your death or permanent
disability;
(ii) the withdrawal does not exceed qualified first-time homebuyer
expenses incurred by you or your spouse, or a child, grandchild, parent or
grandparent of you or your spouse. Qualified expenses include cost of
acquisition or construction, including normal financing or closing costs.
You are considered a "first-time homebuyer" if you (and your spouse if you
are married) had no ownership interest in a principal residence during the
two years before the withdrawal in question. There is a lifetime limit
($10,000) on qualified first-time homebuyer expenses for any one
individual.
You are considered "disabled" for purposes of clause (i) if you are unable to
engage in any substantial gainful activity because of a physical or mental
impairment which can be expected to result in death or to be of long-lasting or
indefinite duration.
Timing of Five-Year Period: For a Roth IRA that you opened and made a normal
annual contribution to, the five-year period for a tax-free withdrawal starts
with the year for which you made the initial contribution. If the withdrawal is
made from a Roth IRA that you started with amounts you converted from a Regular
IRA or rolled over from a Regular IRA, the five-year period for tax-free
withdrawals begins with the year when you made the conversion or rollover.
(Note: This rule would be affected by pending tax legislation -- see above.)
(b) Non-qualified (Taxable) Withdrawals. If the requirements for a tax-free
withdrawal are not met, a withdrawal consisting of your own prior contribution
amounts to your Roth IRA will not be considered taxable income in the year you
receive it, nor will the 10% penalty apply. A non-qualified withdrawal that is
considered dividends or gains on your contributions while in your Roth IRA is
includable in your gross income in the taxable year you receive it, and may be
subject to the 10% withdrawal penalty.
Withdrawals from your Roth IRA are considered withdrawals of your contributions
until you have withdrawn the entire amount you have contributed. After that, all
amounts withdrawn are considered taxable withdrawals of dividends and gains.
Note that, under current law, for purposes of determining what portion of any
distribution is includible in income, all of your Roth IRA accounts are
considered as one single account. Amounts withdrawn from any one Roth IRA
account are deemed to be withdrawn from contributions first. Since all your Roth
IRAs are considered to be one account for this purpose, withdrawals from Roth
IRA accounts are not considered to be from earnings or interest until an amount
equal to all contributions made to all of an individual's Roth IRA accounts is
withdrawn. However, legislation pending in Congress would, if passed, change the
rules described in this paragraph. The changed rules would require you to treat
all annual contribution Roth IRA accounts as one account and to treat Roth IRA
accounts established with conversions, transfers or rollovers from Regular IRAs
in different years as separate accounts for this purpose.
Taxable withdrawals of dividends and gains from a Roth IRA are taxed as ordinary
income. Withdrawals of taxable amounts from a Roth IRA are not eligible for
averaging treatment currently available to certain lump sum distributions from
qualified employer-sponsored retirement plans, nor are such withdrawals eligible
for taxable gains tax treatment.
Your receipt of any taxable withdrawal from your Roth IRA before you attain age
59 1/2 generally will be considered a premature withdrawal and subject to a 10%
penalty tax. The 10% penalty tax will not apply if any of the following
exceptions applies:
(i) the withdrawal was a result of your death or permanent disability;
(ii) the withdrawal is an exempt withdrawal of an excess contribution;
(iii) the withdrawal does not exceed the amount of your deductible
medical expenses for the year in which you made the withdrawal; generally,
medical expenses paid during a year are deductible if they exceed 7 1/2% of
your adjusted gross income for that year;
(iv) the withdrawal does not exceed the premiums you paid for medical
insurance for yourself, your spouse and your dependents during the year;
however, you must have been unemployed and received Federal or state
unemployment compensation payments for at least 12 weeks, and you must make
the withdrawal during the year in which you received the unemployment
compensation payments or during the following year, but not after you have
been reemployed for at least 60 days; or
(v) the withdrawal is rolled over into another Roth IRA;
<PAGE>
(vi) the withdrawal does not exceed certain eligible higher education
expenses for yourself, your spouse, your child or grandchild. Eligible
expenses include tuition, fees, books, supplies and equipment necessary for
attending a qualified higher education institution. Room and board expenses
may be eligible if the individual is attending at least half time; or
(vii) the withdrawal does not exceed qualified first-time homebuyer
expenses incurred by you or your spouse, or a child, grandchild, parent or
grandparent of you or your spouse. Qualified expenses include cost of
acquisition or construction, including normal financing or closing costs.
You are considered a "first-time homebuyer" if you (and your spouse if you
are married) had no ownership interest in a principal residence during the
two years before the withdrawal in question. There is a lifetime limit
($10,000) on qualified first-time homebuyer expenses for any one
individual.
The 10% premature distribution tax discussed above does not apply to the portion
of your Roth IRA distribution which is not includible in your gross income.
6. REQUIRED PAYMENTS FROM YOUR ROTH IRA
(a) During your Lifetime. Unlike a Regular IRA, the minimum distribution rules
do not apply to Roth IRAs, so you are not required to begin receiving
distributions from your Roth IRA account when you reach age 70 1/2.
(b) After your Death. If you die before all the funds held in your Roth IRA have
been withdrawn, the entire remaining interest must at your election, or, if you
have not so elected, at the election of your beneficiary or beneficiaries,
either:
(i) Be withdrawn by your beneficiary by the December 31 of the year
containing the fifth anniversary of your death, or
(ii) Be withdrawn by your designated beneficiary in equal or
substantially equal payments over the life expectancy of the designated
beneficiary or beneficiaries starting by December 31 of the year following
the year of your death. If, however, the beneficiary is your surviving
spouse, then withdrawals are not required to begin before December 31 of
the year in which you would have turned age 70 1/2.
If you die before your entire account has been withdrawn and if the beneficiary
is other than your surviving spouse, no additional cash contributions or
rollover contributions may be accepted in the account.
The designation of a beneficiary to receive funds from your Roth IRA at your
death is not considered a transfer subject to Federal gift taxes. However, any
funds remaining in your Roth IRA at your death would be includable in your
Federal gross estate.
Be sure to keep your designation of beneficiary up-to-date as your personal or
financial circumstances change. You may file a new designation of beneficiary
form at any time with the Custodian. If no designation of beneficiary is in
effect at your death, or if all designated beneficiaries have predeceased you,
the balance in your account will be paid to your estate.
Selecting a beneficiary or beneficiaries can have important tax and financial
planning implications. Consult a qualified professional for advice if needed.
Also, be sure to consult a qualified professional if you live in a community or
marital property state to be sure that your designation of beneficiary complies
with legal requirements in those states.
7. ROLLOVERS AND CONVERSIONS
(a) General Rules. You may roll over any amount from an existing Roth IRA to
another Roth IRA. Under certain circumstances, you may also convert an existing
Regular IRA to a Roth IRA.
There are complex, specific rules governing rollovers and conversions, so you
should consult your tax advisor or the IRS if you have questions about the
rules.
Rollover contributions are not subject to the limits on annual contributions to
a Roth IRA. However, all amounts in your Roth IRA, including rollover amounts,
are subject to the rules discussed above concerning withdrawals.
(b) Roth IRA-to-Roth IRA Rollover. If you have a Roth IRA, you can withdraw all
or part of the amount in that account and transfer all or part of the amount
withdrawn to another Roth IRA. The amount transferred will not be subject to
Federal income tax (or the 10% premature withdrawal penalty) if you complete the
transfer within 60 days after the withdrawal. After a Roth IRA-to-Roth IRA
tax-free rollover, you must wait at least a year before making another Roth
IRA-to-Roth IRA rollover.
(c) Direct Transfer. As an alternative to a rollover, arrangements may be made
for a direct transfer from one Roth IRA custodian or trustee to another. The
one-year waiting period does not apply to direct transfers from one Roth IRA
custodian or trustee to another.
<PAGE>
<TABLE>
<S> <C>
Universal IRA Application
and Adoption Agreement
Kayne Anderson Mail to:
Mutual Funds Kayne Anderson Mutual Funds
c/o Investors Bank & Trust Company
P.O. Box 9130, MFD 23
Boston, Massachusetts 02117-9130
The undersigned individual (hereinafter the "Depositor") hereby establishes a Regular Individual Retirement Custodial Account or a
Roth Individual Retirement Custodial Account, as indicated below (hereinafter the "Custodial Account"), and agrees to the
applicable terms and conditions of the Custodial Agreement. The combined instrument is hereinafter referred to as the "Agreement."
The Custodial Account hereby established shall become effective immediately, subject to its acceptance by Investors Bank & Trust
Company (hereinafter the "Custodian").
- ----------------------------------------------------------------------------------------------------------------------------------
NAME
AND ADDRESS _______________________________________________________________________________________________________
First Name Middle Name or Initial Last Name Social Security Number
_______________________________________________________________________________________________________
Number and Street Telephone No. (Include Area Code)
_______________________________________________________________________________________________________
City State Zip Code
_______________________________________________________________________________________________________
Date of Birth
- ----------------------------------------------------------------------------------------------------------------------------------
TYPE OF IRA REGULAR [ ] Individual IRA (Annual contributions limited to $2,000.)
(Check one only [ ] Spousal IRA
Regular or Roth) [ ] IRA Transfer or [ ] IRA Rollover
[ ] Qualified Plan or 403(b) Arrangement or Conduit IRA
[ ] Regular IRA (with amounts originating only from direct annual
contributions.)
[ ] SEP IRA (Attach copy of employer's Form 5305-SEP.)
-----------------------------------------------------------------------------------------------------------------
ROTH [ ] Individual IRA (Annual contributions limited to $2,000.)
[ ] Spousal Roth IRA
[ ] IRA Transfer or [ ] IRA Rollover
[ ] Existing Regular IRA
[ ] Existing Roth IRA (See below.)
If Funds being rolled over or transferred from one Roth IRA to another
were ever a part of a Regular IRA account, on what date was the existing
Roth IRA originally opened?_____________________________________
Caution: Under IRS rules, you must open separate Roth IRAs to hold annual
contributions and/or amounts converted from Regular IRAs in different calendar years.
Note: If you are making a Transfer of funds to a Regular IRA or to a Roth IRA,
complete the separate Universal IRA Transfer Form.
- ----------------------------------------------------------------------------------------------------------------------------------
TYPE OF REGULAR Amount
CONTRIBUTION $_____________ [ ] Cash Contribution for (year_______)+
(Check one only $_____________ [ ] Rollover
Regular or Roth) $_____________ [ ] Direct Rollover
$_____________ [ ] Transfer of Assets
[ ] 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
[ ] Money Market Fund
-----------------------------------------------------------------------------------------------------------------
IMPORTANT: This form is continued on the reverse side.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TYPE OF ROTH Amount
CONTRIBUTION, $_____________ [ ] Cash Contribution for (year_______)+
continued $_____________ [ ] Rollover*
(Check one only $_____________ [ ] Transfer of Assets*
Regular or Roth) [ ] 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
[ ] Money Market Fund
$_____________ Total
+ Indicate the tax year for which the contribution is being made. Annual contribution limits apply.
Contribution for a year must be received no later than April 15 of the following year. A Roth IRA
contribution may not be made for 1997. See Disclosure Statement for details.
* Taxpayers (and their spouses, if married) with annual adjusted gross income of $100,000 or more may
not rollover or transfer from a Regular IRA to a Roth IRA.
Total Amount Enclosed $________________
- ----------------------------------------------------------------------------------------------------------------------------------
BENEFICIARIES I hereby designate the following to be my primary beneficiary(ies) to receive my interest in the
Custodial Account in case of my death. (You may name one or more persons as your primary beneficiary.)
Unless otherwise designated, beneficiaries will share equally. If some but less than all the primary
beneficiaries (or, if applicable, contingent beneficiaries) predecease the Participant, the share of
the predeceased beneficiary(ies) will be paid to the surviving beneficiaries in proportion to the
shares that they would otherwise receive.
_______________________________________________________________________________________________________
Name % of Distribution
Primary _______________________________________________________________________________________________________
Beneficiary: Address
_______________________________________________________________________________________________________
Relationship Date of Birth Social Security Number
If none of the above primary beneficiaries is living on the date of my death, I hereby designate the
following to be my contingent beneficiary(ies) to receive my interest in the Account in case of my
death. (You may name one or more persons as your contingent beneficiary.
_______________________________________________________________________________________________________
Contingent Name % of Distribution
Beneficiary(ies): _______________________________________________________________________________________________________
Address
_______________________________________________________________________________________________________
Relationship Date of Birth Social Security Number
Note: In the absence of a proper designation of beneficiary, or if none of your designated beneficiaries
survives you, the amount remaining in your Custodial Account will be paid to your estate. If you live in
community or marital property state, consult your lawyer for requirements.
- ----------------------------------------------------------------------------------------------------------------------------------
Certification of Depositor: I agree to pay the fees and compensation of the Custodian and of the Depository Bank as set forth in
the Disclosure Statement. I understand that the Custodian and the Service Company or Kayne Anderson each reserves the right to
change its fees and compensation on a stated date which shall be at least thirty (30) days after the mailing of written notice to
the Depositor. I have received and read a prospectus and understand the objectives and policies of each Fund I have selected. I
have received and read the Disclosure Statement relating to the Custodial Account, and the Agreement under which the Custodial
Account is maintained. If a Regular IRA is selected, I hereby elect to open a Regular IRA operating under Internal Revenue Code
Section 408(a) and adopt the applicable provisions of the Custodial Agreement, incorporated herein by reference. If a Roth IRA is
selected, I hereby elect a Roth IRA operating under Internal Revenue Code Section 408A and adopt the applicable provisions of the
Custodial Agreement, incorporated herein by reference. If I make a rollover contribution, I make the Certifications printed on the
below. I certify that I am of legal age, and I certify under penalties of perjury that my Social Security number above is correct
and that I have not been notified by the Secretary of the Treasury that I am subject to back-up withholding.
__________________________________________________________________________________________________________________________________
Signature of Depositor Date
- ----------------------------------------------------------------------------------------------------------------------------------
Acceptance by Custodian: The foregoing Application is hereby accepted by Investors Bank & Trust Company
__________________________________________________________________________________________________________________________________
By (Authorized Signature) Date
IMPORTANT: This form is continued on next page.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Certifications. In connection with any rollover or transfer into this Custodial Account, I make the following certifications and
acknowledgements (whichever ones are applicable to the particular type of rollover or transfer I am making):
A. Regular IRA to Regular IRA Rollover. If this is a rollover of funds that originated in a Regular IRA, I certify that the cash
and/or securities which I am transferring as a rollover contribution to my Regular IRA Custodial Account meet(s) the following
qualifications:
o These funds were distributed to me from another Individual Retirement Account under Code Section 408.
o This rollover contribution is being made within 60 days of my receipt of the amount from the other IRA.
o I have not rolled over all or part of any other distribution from another IRA during the 12-month period ending on the
date I received the distribution that I am rolling over now.
o No part of this rollover contribution is a required minimum distribution.
- ----------------------------------------------------------------------------------------------------------------------------------
B. Qualified Plan to Regular IRA Rollover. If this is a rollover of funds that originated in a qualified plan or 403(b)
arrangement, I certify that the cash and/or securities which I am transferring as a rollover contribution to my Regular IRA
Custodial Account meet(s) the following qualifications.
o The rollover contribution represents a portion of or the entire amount distributed to me (except for amounts representing
my own non-deductible contributions) from: (a) A Qualified Corporate Pension or Profit Sharing Plan; (b) A Self-Employed
(Keogh) Retirement Plan; or (c) An Annuity or Custodial Account under Section 403(b) of the Internal Revenue Code.
o The funds distributed to me were not part of a series of payments over 10 or more years, or over my life or life expectancy,
or over the lives or life expectancies of my beneficiary and me.
o No part of the rollover amount is attributable to a hardship distribution from a 401(k) plan or a 403(b) arrangement.
o This rollover contribution is being made within 60 days of my receipt of the amount.
o No part of this rollover contribution is a required minimum distribution.
- ----------------------------------------------------------------------------------------------------------------------------------
C. Qualified Plan to Regular IRA Rollover or Direct Rollover- Waiver. If this is a rollover that originated in a qualified plan or
403(b) arrangement, I understand that, in order to preserve the right in the future to roll this amount back to another qualified
plan or 403(b) arrangement, I must set up a separate Regular IRA to receive it and hold only those funds rolled over from the
qualified plan or 403(b) arrangement. My annual Regular IRA contributions should be made to a different IRA.
o I understand that if I commingle the distribution from a qualified plan or 403(b) arrangement with Regular IRA annual
contributions, I will never be able to roll this amount back to another qualified plan or 403(b) arrangement. I understand
the implications of my actions and I have knowingly and intentionally decided to establish only one Regular IRA to hold
both this distribution and the Regular IRA annual contributions.
o I hereby agree to hold harmless Investors Bank & Trust Company as Trustee or Custodian, and the Service Company or Kayne
Anderson (and their affiliates) from any liability for any loss, damage, or injury which I may sustain as a result of my
election not to establish two separate Regular IRAs.
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D. Regular IRA to Roth IRA Rollover, Transfer or Conversion. If this is a rollover or transfer or conversion from a Regular IRA to
a Roth IRA, I certify the following:
o These funds were distributed to me from a Regular IRA maintained under Code Section 408 and are not a direct rollover from
a qualified employer sponsored plan or 403(b) arrangement.
o If this is a rollover, I have not rolled over all or part of any distribution from that Regular IRA during the 12-month
period ending on the date I received the distribution that I am rolling over now.
o This rollover is being made within 60 days of my receipt of the amount.
o No part of this rollover contribution is a required minimum distribution.
o My (and my spouse's combined) adjusted gross income for the year of the rollover does not exceed $100,000.
o I acknowledge that the amount converted from a Regular IRA to a Roth IRA (except for prior non-deductible contributions
held in the Regular IRA) will be treated as taxable income for federal income tax purposes and that I must pay federal (and
any state or local) income taxes due.
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E. Roth IRA to Roth IRA Rollover. If this is a rollover from a Roth IRA to a Roth IRA, I certify the following:
o These funds were distributed to me from a Roth IRA maintained under Code Section 408A of the Internal Revenue Code.
o I have accurately indicated on the IRA Application: (i) the date the existing Roth IRA was originally opened, and (ii) the
date of the most recent conversion or transfer.
o This rollover is being made within 60 days of my receipt of the amount .
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</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Universal IRA Transfer Form
Kayne Anderson Mail to:
Mutual Funds Kayne Anderson Mutual Funds
c/o Investors Bank & Trust Company
P.O. Box 9130, MFD 23
Boston, Massachusetts 02117-9130
This form should be used in connection with a transfer of IRA assets from another IRA to the Kayne Anderson Mutual Funds IRA. A
transfer cannot take place if your IRA assets have been distributed to you; in that case, you will be making a "rollover." Please
call (800) 395-3807 for information or assistance.
- ----------------------------------------------------------------------------------------------------------------------------------
NAME _______________________________________________________________________________________________________
AND ADDRESS First Name Middle Name or Initial Last Name
_______________________________________________________________________________________________________
Number and Street Daytime Telephone No. (Include Area Code)
_______________________________________________________________________________________________________
Apartment, Floor or Room Number
_______________________________________________________________________________________________________
City State Zip Code
_______________________________________________________________________________________________________
Date of Birth
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INSTRUCTIONS _______________________________________________________________________________________________________
TO CURRENT Name of Current IRA Custodian
IRA CUSTODIAN _______________________________________________________________________________________________________
Address
_______________________________________________________________________________________________________
City State Zip Code
_______________________________________________________________________________________________________
Your IRA Account Number with the Current Custodian
Current IRA Type: [ ] Regular IRA [ ] Roth IRA
[ ] SEP IRA [ ] SIMPLE IRA
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT [ ] Invest in my existing Kayne Anderson Mutual Funds IRA Account No._______
INSTRUCTIONS [ ] Open a new Kayne Anderson Mutual Funds IRA Account. Attached is my completed IRA Application.
$_____________ [ ] 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
$_____________ Total
I have established an IRA with Kayne Anderson Mutual Funds. Please transfer the assets from the above
account to Kayne Anderson Mutual Funds in cash.
[ ] Please transfer all of my IRA assets.
[ ] Please transfer $______________ of my IRA assets.
Current IRA Type: [ ] Regular IRA [ ] Roth IRA
[ ] SEP IRA [ ] SIMPLE IRA
Please make the check payable to Investors Bank & Trust Company, Custodian
FBO______________________________________, IRA and mail to:
Your Name
Kayne Anderson Mutual Funds
c/o Investor Bank & Trust Company
P.O. Box 9130, MFD 23
Boston, Massachusetts 02117-9130
IMPORTANT: Please provide your signature on the reverse side.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
AUTHORIZATION I have received and read the prospectus for the fund(s) in which I am making my investment. If I am age
70 1/2 or older, I attest that none of the amount to be transferred will include my required minimum
distribution for the current year. I understand that if this transaction is a TRUSTEE-TO-TRUSTEE
TRANSFER OF ASSETS between a Regular IRA and another Regular IRA, SEP IRA or SIMPLE IRA, it is not to
be reported as a taxable distribution. Transfers between a Regular IRA and a Roth IRA are to be
reported as a taxable distribution.
_______________________________________________________________________________________________________
Your Signature Date
- ----------------------------------------------------------------------------------------------------------------------------------
SIGNATURE GUARANTEE Please check with your Custodian to determine if a signature guarantee is required to process this
transfer. The lack of the signature guarantee may delay the transfer.
Name of Bank of Firm providing the Signature Guarantee
_______________________________________________________________________________________________________
Signature of Officer Title
- ----------------------------------------------------------------------------------------------------------------------------------
CUSTODIAN ACCEPTANCE Investors Bank & Trust Company hereby represents that it has established an IRA for the above named
individual and will accept the transfer of IRA assets. Investors Bank & Trust Company will apply the
proceeds of the transfer to the IRA.
_______________________________________________________________________________________________________
Authorization Signature Investors Bank & Trust Date
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Universal IRA Designation
of Beneficiary
Kayne Anderson Mail to:
Mutual Funds Kayne Anderson Mutual Funds
c/o Investors Bank & Trust Company
P.O. Box 9130, MFD 23
Boston, Massachusetts 02117-9130
- ----------------------------------------------------------------------------------------------------------------------------------
NAME AND
ADDRESS _______________________________________________________________________________________________________
First Name Middle Name or Initial Last Name Social Security Number
_______________________________________________________________________________________________________
Number and Street Daytime Telephone No. (Include Area Code)
_______________________________________________________________________________________________________
Apartment, Floor or Room Number
_______________________________________________________________________________________________________
City State Zip Code
_______________________________________________________________________________________________________
Date of Birth Occupation
- ----------------------------------------------------------------------------------------------------------------------------------
CURRENT [_] Regular IRA [_] SEP IRA
IRA TYPE [_] Roth IRA [_] SIMPLE IRA
- ----------------------------------------------------------------------------------------------------------------------------------
BENEFICIARIES I hereby designate the following to be my primary beneficiary(ies) to receive my interest in the
Custodial Account in case of my death. (You may name one or more persons as your primary beneficiary.)
Unless otherwise designated, beneficiaries will share equally. If some but less than all the primary
beneficiaries (or, if applicable, contingent beneficiaries) predecease the Participant, the share of
the predeceased beneficiary(ies) will be paid to the surviving beneficiaries in proportion to the
shares that they would otherwise receive.
_______________________________________________________________________________________________________
Primary Name Social Security Number
Beneficiary: _______________________________________________________________________________________________________
Address
_______________________________________________________________________________________________________
Relationship Date of Birth % of Distribution
If none of the above primary beneficiaries is living on the date of my death, I hereby designate the
following to be my contingent beneficiary(ies) to receive my interest in the Account in case of my
death. (You may name one or more persons as your contingent beneficiary.
_______________________________________________________________________________________________________
Contingent Name Social Security Number
Beneficiary(ies): ______________________________________________________________________________________________________
Address
_______________________________________________________________________________________________________
Relationship Date of Birth % of Distribution
Note: In the absence of a proper designation of beneficiary, or if none of your designated
beneficiaries survives you, the amount remaining in your Custodial Account will be paid to your estate.
__________________________________________________________________________________________________________________________________
Signature of Depositor Date
- ----------------------------------------------------------------------------------------------------------------------------------
Accepted by Investors Bank & Trust Company
__________________________________________________________________________________________________________________________________
By Date
</TABLE>
<PAGE>
(d) Rollovers from Qualified Plan or 403(b) Arrangement to Regular IRA. Direct
rollovers from a qualified plan or 403(b) arrangement to a Roth IRA are not
allowed.
(e) Rollover/Conversion from Regular IRA to a Roth IRA. Starting in 1998, you
may convert an existing Regular IRA into a Roth IRA if your AGI on your income
tax return for the year of the conversion is $100,000 or less. (This limit
applies to both married and single taxpayers, and the limit is not indexed for
cost of living increases.) A married taxpayer is eligible to convert or roll
over a Regular IRA to a Roth IRA only if a joint tax return is filed; married
taxpayers who file separately are not eligible to convert or roll over from a
Regular IRA to a Roth IRA. You may convert an existing Regular IRA with the
Custodian to a Roth IRA by completing and filing the appropriate documents (a
new Application and Adoption Agreement designating the new IRA as a Roth IRA).
This will not involve a change of investments. If you have a Regular IRA with
another custodian or trustee, you may complete an Application and Adoption
Agreement establishing a Roth IRA with the Custodian, and you may either
withdraw the amount in the other Regular IRA and roll it over to your new Roth
IRA with the Custodian within 60 days or you may complete a Transfer
Authorization/Letter of Acceptance directing your current Regular IRA custodian
or trustee to transfer the desired amount to your new Roth IRA with the
Custodian.
Regardless of which method you use to accomplish this, the taxable amount you
convert or roll over from a Regular IRA to a Roth IRA is considered taxable
income for the year in which the transaction occurred. However, you may be able
to spread the income tax liability related to a conversion or rollover out over
the four year period running from 1998-2001, if you complete the conversion or
rollover before December 31, 1998. This opportunity to spread the income
realized by converting applies only for conversions during 1998.
Note: You may roll over or convert to a Roth IRA funds from as many Regular IRAs
as you wish. However, only those amounts converted or rolled over during the
same tax year may be accepted in any one Roth IRA conversion account.
Additionally, annual contributions may never be deposited into a Roth IRA
conversion account. These are IRS rules.
Caution: You may convert a Regular IRA to a Roth IRA only in a year in which
your AGI is below $100,000. Although a bill currently pending in Congress would
permit you to transfer amounts back to your Regular IRA if your AGI exceeds
$100,000, under current rules, if you have already converted during a year and
your AGI ends up exceeding $100,000, you may suffer adverse tax results. Consult
your tax advisor or the IRS for the latest developments.
Important: Please see Disclosure Statement for All IRAs, below, for important
information applicable to all Investors Bank IRAs.
Disclosure Statement for All IRAs
1. GENERAL INFORMATION
All IRAs must meet certain requirements. Contributions generally must be made in
cash. The IRA trustee or custodian must be a bank or other person who has been
approved by the Secretary of the Treasury. Your contributions may not be
invested in life insurance or collectibles or be commingled with other property
except in a common trust or investment fund. Your interest in the account must
be nonforfeitable at all times. You may obtain further information on IRAs from
any district office of the Internal Revenue Service.
2. RIGHT TO REVOKE
You have the right to revoke your Regular IRA or Roth IRA within seven (7) days
of your signing the Application. You may revoke your Regular IRA or Roth IRA by
mail or by delivery of written notice to the Service Company, the name and
address of which appear on the IRA Application. If you revoke your Regular IRA
or Roth IRA, you are entitled to a full return of the contribution without any
adjustment for sales charges, administrative expenses or market fluctuations. If
you have any questions concerning your right of revocation, please call your
Service Company during regular business hours.
3. FEDERAL TAX CONCERNS
(a) Deductible and non-deductible contributions to your Regular IRA or Roth IRA
are reported on IRS Form 1040 or Form 1040A. You may choose to file your Federal
income tax return before it is due (without extensions) and report your Regular
IRA or Roth IRA contributions before they are made. You must, however, make the
contributions by the due date (without extensions) of such return. To the extent
that your contribution to your Regular IRA is deductible, you may claim a
deduction on your tax return. (Note: Contributions to a Roth IRA are never
deductible.) To the extent your contribution to your Regular IRA is not
deductible, you must designate it on Form 8606.
<PAGE>
There is a $100 penalty each time you overstate the amount of your
non-deductible contributions unless you can prove that the overstatement was due
to reasonable cause. You will also be required to give additional information on
Form 8606 in years you make a withdrawal from your Regular IRA. If you fail to
file a required Form 8606, there is a $50 penalty for each such failure unless
you can prove the failure was due to reasonable cause. (Note: The IRS may adopt
similar reporting requirements for Roth IRA contributions. Check with the IRS or
your tax advisor, or check the instructions with your IRS Form 1040 or Form
1040A.)
(Special Note: This Disclosure Statement discusses the effect and requirements
of the Federal tax laws. You should check with your tax advisor with regard to
the applicable tax laws of your state.)
(b) IRS Form 5329 is required as an attachment to Form 1040 (or separately if
you do not file a Form 1040) for any year that contribution limits are exceeded,
a premature distribution takes place, less than the required minimum amount is
distributed from a Regular IRA, or a prohibited transaction (described below)
takes place.
4. PROHIBITED TRANSACTIONS
(a) If you engage in a so-called "prohibited transaction" as defined in the
Internal Revenue Code, your Regular IRA or Roth IRA will be disqualified and the
entire taxable balance in your Regular IRA account, and the amount of earnings
or gains in your Roth IRA, will be taxed as ordinary income during the year in
which such transaction occurs. You may also have to pay the 10% penalty tax on
premature distributions. A "prohibited transaction" includes:
(i) the sale, exchange, or leasing of any property between your Regular
IRA or Roth IRA account and you;
(ii) the lending of money or other extension of credit between your
Regular IRA or Roth IRA account and you;
(iii) the furnishing of goods, services, or facilities between your
Regular IRA or Roth IRA account and you; or
(iv) the transfer of assets of your Regular IRA or Roth IRA account for
your use or for your benefit.
(b) If you pledge all or part of your Regular IRA or Roth IRA as security for a
loan, or invest your Regular IRA or Roth IRA in "collectibles" such as art,
antiques, coins (other than certain United States gold and silver coins or coins
issued by a state government and certain precious metal bullion) or gems, the
amount so pledged or invested is considered by the Internal Revenue Service to
have been distributed to you and will be taxed as ordinary income during the
year in which you make such pledge or investment. You may also have to pay the
10% premature distribution tax.
(c) Amounts withdrawn from your Regular IRA or Roth IRA are subject to
withholding of Federal income tax unless you direct no withholding. Form W-4P
provides a space to elect against withholding, and contains additional
information on withholding. To make a withdrawal or to establish a program of
installment withdrawals, simply complete the Withdrawal Form and the W-4P Form
and send both forms to the Service Company which invests your funds.
(d) For Regular IRAs, be sure to start withdrawals no later than the required
starting date to avoid penalties for insufficient withdrawals. Also, remember
that the minimum amount required to be withdrawn may change from year to year
because of earnings or changes in the value of your account or because you
recalculated your life expectancy. Therefore, if you have established a program
of installment withdrawals, you should submit a new Withdrawal Form each year if
you need (or want) to adjust the amount of each installment.
(e) If tax, or estate or financial planning considerations affect the timing of
your Regular IRA or Roth IRA withdrawals, be sure to consult a qualified
professional.
5. CUSTODIAN
The Custodian of your Regular IRA or Roth IRA is Investors Bank & Trust Company.
The Custodian, through the Service Company, will invest your contributions and
earnings in accordance with your instructions in any of the investment vehicles
permitted under the Individual Retirement Custodian Account Agreement. You will
receive periodic reports describing each transaction in your account, and
proxies on securities will be sent to you to vote as you wish. Since the
investment of your account is at your discretion and return of the permissible
investment vehicles is generally not guaranteed, growth in the value of your
account cannot be projected or guaranteed.
For information concerning the custodial charges and service charges which will
be assessed against your
<PAGE>
account by Investors Bank & Trust Company, or by the Service Company, be sure to
read the schedule of charges attached to this Statement. Custodial and service
charges may be changed or adjusted on thirty days' notice to you. In addition,
you will incur normal brokerage commissions on the purchases and sales of
securities. Before making any decision whatsoever to establish an IRA, you
should carefully review all applicable commissions with your Service Company
representative. In addition, there may be sales charges or management or other
fees assessed against securities held in your IRA, including mutual fund shares.
Be sure to read carefully the prospectus describing any securities, including
mutual fund shares, you are considering as an investment for your IRA for a
description of the investment objectives and policies plus a description of
applicable fees and charges. Read the prospectus carefully before investing.
6. ADDITIONAL INFORMATION
(a) Your Regular IRA or Roth IRA will help build your retirement income. Your
Regular IRA or Roth IRA funds are non-forfeitable. They are always yours
(subject to investment fluctuations), and will be invested according to your
agreement with the Custodian. Your Regular IRA or Roth IRA will be clearly
identified as your property and will not be commingled with property of any
other depositor.
(b) Articles I through VII of the Terms and Conditions for Regular IRAs use the
precise language of Form 5305-A, currently provided by the Internal Revenue
Service, and has therefore been approved as a form to use as a qualified Regular
Individual Retirement Account. The IRS approval of the form does not represent a
determination as to the merits of the account. It simply means that the form of
the printed Terms and Conditions for Regular IRAs document satisfies the
requirements of the IRS. However, if you adopt and maintain your Regular IRA
within the stated guidelines, you may assume that you are properly meeting all
requirements for a bona fide individual retirement plan under Federal income tax
law.
(c) Articles I through VII of the Terms and Conditions for Roth IRAs use the
precise language of Form 5305-RA, currently provided by the Internal Revenue
Service and has therefore been approved as a form to use as a qualified Roth
Individual Retirement Custodial Account. The IRS approval of the form does not
represent a determination as to the merits of the account. It simply means that
the form of the printed Terms and Conditions for Roth IRAs document satisfies
the requirements of the IRS. However, if you adopt and maintain your Roth IRA
within the stated guidelines, you may assume that you are properly meeting all
requirements for a bona fide Roth IRA under Federal income tax law.
(d) Further information concerning your Regular IRA or Roth IRA can be obtained
from any district office of the Internal Revenue Service.
(e) You should consult with your tax or financial advisor to determine whether
this Individual Retirement Custodial Account is the right investment for you,
since we cannot offer legal, tax or financial advice.
(f) This Disclosure Statement provides a non-technical explanation of the terms
and conditions of your Regular IRA or Roth IRA account. However, the provisions
of the Terms and Conditions and the Application and prospectus govern in any
instance where the Disclosure Statement is incomplete or appears to conflict.
This Disclosure Statement reflects the provisions of the Internal Revenue Code
in effect as of the date the Disclosure Statement was prepared. Please consult
your tax advisor for more complete information and to review any applicable tax
law changes and refer to IRS Publication 590.
Schedule of Charges
Investors Bank & Trust Company:
$10 per year, per fund,
per IRA account annually.
<PAGE>
<TABLE>
<S> <C> <C>
Form 5305-A Individual Retirement Custodial Account DO NOT File
(Rev. January 1998) (Under Section 408(a) of the Internal Revenue Code) with the
Department of Treasury Internal
Internal Revenue Service Revenue Service
- -------------------------------------------------------------------------------------------------------
</TABLE>
Terms and Conditions for Regular IRAs
The Terms and Conditions for Regular IRAs apply to Regular IRAs operating under
section 408(a) of the Internal Revenue Code only. Articles I through VII of
these Terms and Conditions for Regular IRAs are in the form promulgated by the
Internal Revenue Service in Form 5305-A (Rev. January, 1998) for use in
establishing an individual retirement Custodian Account. Please see Terms and
Conditions for All IRAs (page 20 below) for additional provisions applicable to
your Regular IRA.
The Depositor whose name appears on the Application is establishing an
individual retirement account (under section 408(a) of the Internal Revenue
Code) to provide for his or her retirement and for the support of his or her
beneficiaries after death.
The Custodian, Investors Bank & Trust Company, has through its agent given the
Depositor the disclosure statement required under the Income Tax Regulations
under section 408(i) of the Code.
The Depositor has made a cash deposit with the Custodian as indicated on the
Application.
The Depositor and the Custodian make the following agreement:
ARTICLE I
The Custodian may accept additional cash contributions on behalf of the
Depositor for a tax year of the Depositor. The total cash contributions are
limited to $2,000 for the tax year unless the contribution is a rollover
contribution described in section 402(c), 403(a)(4), 403(b)(8), 408(d)(3), or an
employer contribution to a simplified employee pension plan as described in
section 408(k).
ARTICLE II
The Depositor's interest in the balance in the custodial account is
nonforfeitable.
ARTICLE III
1. No part of the custodial funds may be invested in life insurance contracts,
nor may the assets of the custodial account be commingled with other property
except in a common trust fund or common investment fund (within the meaning of
section 408(a)(5)).
2. No part of the custodial funds may be invested in collectibles (within the
meaning of section 408(m)) except as otherwise permitted by section 408(m)(3)
which provides an exception for certain gold and silver coins and coins issued
under the laws of any state.
ARTICLE IV
1. Notwithstanding any provision of this agreement to the contrary, the
distribution of the Depositor's interest in the custodial account shall be made
in accordance with the following requirements and shall otherwise comply with
section 408(a)(6) and Proposed Regulations section 1.408-8, including the
incidental death benefit provisions of Proposed Regulations section
1.401(a)(9)-2, the provisions of which are incorporated by reference.
2. Unless otherwise elected by the time distributions are required to begin to
the Depositor under paragraph 3, or to the surviving spouse under paragraph 4,
other than in the case of a life annuity, life expectancies shall be
recalculated annually. Such election shall be irrevocable as to the Depositor
and the surviving spouse and shall apply to all subsequent years. The life
expectancy of a nonspouse beneficiary may not be recalculated.
3. The Depositor's entire interest in the custodial account must be or begin to
be, distributed by the Depositor's required beginning date (April 1 following
the calendar year end in which the Depositor reaches age 70 1/2). By that date,
the Depositor may elect, in a manner acceptable to the Custodian, to have the
balance in the custodial account distributed in:
(a) A single sum payment.
(b) An annuity contract that provides equal or substantially equal monthly,
quarterly, or annual payments over the life of the Depositor.
(c) An annuity contract that provides equal or substantially equal monthly,
quarterly, or annual payments over the joint and last survivor lives of the
Depositor and his or her designated beneficiary.
(d) Equal or substantially equal annual payments over a specified period that
may not be longer than the Depositor's life expectancy.
(e) Equal or substantially equal annual payments over a specified period that
may not be longer than the joint life and last survivor expectancy of the
Depositor and his or her designated beneficiary.
4. If the Depositor dies before his or her entire interest is distributed to him
or her, the entire remaining interest will be distributed as follows:
(a) If the Depositor dies on or after distribution of his or her interest has
begun, distribution must continue to be made in accordance with paragraph 3.
(b) If the Depositor dies before distribution of his or her interest has
begun, the entire remaining interest will, at the election of the Depositor
or, if the Depositor has not so elected, at the election of the beneficiary
or beneficiaries, either
(i) Be distributed by the December 31 of the year containing the fifth
anniversary of the Depositor's death, or
(ii) Be distributed in equal or substantially equal payments over the life
or life expectancy of the designated beneficiary or beneficiaries starting
by December 31 of the year following the year of the Depositor's death. If,
however, the beneficiary is the Depositor's surviving spouse, then this
distribution is not required to begin before December 31 of the year in
which the Depositor would have turned age 70 1/2.
(c) Except where distribution in the form of an annuity meeting the
requirements of section 408(b)(3) and its related regulations has irrevocably
commenced, distributions are treated as having begun on the Depositor's
required beginning date, even though payments may actually have been made
before that date.
(d) If the Depositor dies before his or her entire interest has been
distributed and if the beneficiary is other than the surviving spouse, no
additional cash contributions or rollover contributions may be accepted in
the account.
5. In the case of distribution over life expectancy in equal or substantially
equal annual payments, to determine the minimum annual payment for each year,
divide the Depositor's entire interest in the custodial account as of the close
of business on December 31 of the preceding year by the life expectancy of the
Depositor (or the joint life and last survivor expectancy of the Depositor and
the Depositor's designated beneficiary, or the life expectancy of the designated
beneficiary, whichever applies). In the case of distributions under paragraph 3,
determine the initial life expectancy (or joint life and last survivor
expectancy) using the attained ages of the Depositor and designated beneficiary
as of their birthdays in the year the Depositor reaches age 70 1/2. In the case
of distribution in accordance with paragraph 4(b)(ii), determine life expectancy
using the attained age of the designated beneficiary as of the beneficiary's
birthday in the year distributions are required to commence.
6. The owner of two or more individual retirement accounts may use the
"alternative method" described in Notice 88-38, 1988-1 C B. 524, to satisfy the
minimum distribution requirements described above. This method permits an
individual to
<PAGE>
satisfy these requirements by taking from one individual retirement account the
amount required to satisfy the requirement for another.
ARTICLE V
1. The Depositor agrees to provide the Custodian with information necessary for
the Custodian to prepare any reports required under section 408(i) and
Regulations sections 1.408-5 and 1.408-6.
2. The Custodian agrees to submit reports to the Internal Revenue Service and
the Depositor prescribed by the Internal Revenue Service.
ARTICLE VI
Notwithstanding any other articles which may be added or incorporated, the
provisions of Articles I through III and this sentence will be controlling. Any
additional articles that are not consistent with section 408(a) and related
regulations will be invalid.
ARTICLE VII
This agreement will be amended from time to time to comply with the provisions
of the Code and related regulations. Other amendments may be made with the
consent of the persons whose signatures appear below.
ARTICLE VIII
See reference on page 20.
<PAGE>
<TABLE>
<S> <C> <C>
Form 5305-RA Roth Individual Retirement Custodial Account DO NOT File
(January 1998) (Under Section 408(a) of the Internal Revenue Code) with the
Department of Treasury Internal
Internal Revenue Service Revenue Service
- --------------------------------------------------------------------------------------------------------
</TABLE>
Terms and Conditions for Roth IRAs
The Terms and Conditions for Roth IRAs apply to Roth IRAs operating under
section 408A of the Internal Revenue Code only. Articles I through VII of these
Terms and Conditions for Roth IRAs are in the form promulgated by the Internal
Revenue Service in Form 5305-RA for use in establishing a Roth Individual
Retirement Custodial Account. Please see Terms and Conditions for All IRAs
(below) for additional provisions applicable to your Roth IRA.
The Depositor whose name appears on the Application is establishing a Roth
individual retirement account (under section 408A of the Internal Revenue Code)
to provide for his or her retirement and for the support of his or her
beneficiaries after death.
The Custodian, Investors Bank & Trust Company, has through its agent, given the
Depositor the disclosure statement required under the Income Tax Regulations
under section 408(i) of the Code.
The Depositor has made a cash deposit with the Custodian as indicated on the
Application.
The Depositor and the Custodian make the following agreement:
ARTICLE I
1. If this Roth IRA is not designated as a Roth Conversion IRA, then, except in
the case of a rollover contribution described in Section 408A(e), the Custodian
will accept only cash contributions and only up to a maximum amount of $2,000
for any tax year of the Depositor.
2. If this Roth IRA is designated as a Roth Conversion IRA, no contributions
other than IRA Conversion Contributions made during the same tax year will be
accepted.
ARTICLE IA
The $2,000 limit described in Article I is gradually reduced to $0 between
certain levels of adjusted gross income (AGI). For a single Depositor, the
$2,000 annual contribution is phased out between AGI of $95,000 and $110,000;
for a married Depositor who files jointly, between AGI of $150,000 and $160,000;
and for a married Depositor who files separately, between $0 and $10,000. In
case of a conversion, the Custodian will not accept IRA Conversion Contributions
in a tax year if the Depositor's AGI for that tax year exceeds $100,000 or if
the Depositor is married and files a separate return. Adjusted gross income is
defined in Section 408A(c)(3) and does not include IRA Conversion Contributions.
ARTICLE II
The Depositor's interest in the balance in the Custodial Account is
nonforfeitable.
ARTICLE III
1. No part of the custodial funds may be invested in life insurance contracts,
nor may the assets of the Custodial Account be commingled with other property
except in a common trust fund or common investment fund (within the meaning of
Section 408(a)(5)).
2. No part of the custodial funds may be invested in collectibles (within the
meaning of Section 408(m)) except as otherwise permitted by Section 408(m)(3),
which provides an exception for certain gold, silver, and platinum coins, coins
issued under the laws of any state, and certain bullion.
ARTICLE IV
1. If the Depositor dies before his or her entire interest is distributed to him
or her and the Depositor's surviving spouse is not the sole beneficiary, the
entire remaining interest will, at the election of the Depositor or, if the
Depositor has not so elected, at the election of the beneficiary or
beneficiaries, either:
(a) Be distributed by the December 31 of the year containing the fifth
anniversary of the Depositor's death, or
(b) Be distributed over the life expectancy of the designated beneficiary
starting no later than December 31 of the year following the year of the
Depositor's death.
If distributions do not begin by the date described in (b), distribution method
(a) will apply.
2. In the case of distribution method 1(b) above, to determine the minimum
annual payment for each year, divide the Depositor's entire interest in the
Custodial Account as of the close of business on December 31 of the preceding
year by the life expectancy of the designated beneficiary. Determine that
initial life expectancy using the attained age of the designated beneficiary as
of such beneficiary's birthday in the year distributions are required to
commence and subtract one for each subsequent year.
3. If the Depositor's spouse is the sole beneficiary on the Depositor's date of
death, such spouse will then be treated as the Depositor.
ARTICLE V
1. The Depositor agrees to provide the Custodian with information necessary for
the Custodian to prepare any reports required under Section 408(i) and Section
408A(d)(3)(E) and Regulations Section 1.408-5 and 1.408-6, and under guidance
published by the Internal Revenue Service.
2. The Custodian agrees to submit reports to the Internal Revenue Service and
the Depositor as prescribed by the Internal Revenue Service.
ARTICLE VI
Notwithstanding any other articles which may be added or incorporated, the
provisions of Articles I through IV and this sentence will be controlling. Any
additional articles that are not consistent with Section 408A, the related
regulations, and other published guidance will be invalid.
ARTICLE VII
This agreement will be amended from time to time to comply with the provisions
of the Code, related regulations, and other published guidance. Other amendments
may be made with the consent of the persons whose signatures appear below.
Terms and Conditions for All IRAs
ARTICLE VIII
1. Except as otherwise permitted in Paragraph 5(a) below, all contributions made
under this Agreement shall be deposited in the form of cash. All such
contributions shall be credited to a Custodial Account for the account of the
Depositor. Any contribution so made with respect to a tax year of the Depositor
shall be made prior to the due date of the Depositor's tax return (not including
extensions). Unless otherwise indicated in writing by the Depositor,
contributions shall be credited to the tax year in which they are received by
the Custodian. Subject to the limitations set forth in the Application, all
funds in the Custodial Account (including contributions, dividends, interest,
proceeds from the sale or other disposition of investments and any other cash
receipts) shall be invested and reinvested in:
(a) any marketable securities obtainable through the service company which is
designated by the Depositor on the Application (the "Service Company") either
"over the counter" or on a recognized exchange (excluding securities issued
by the Custodian or the Service Company);
<PAGE>
(b) any interest-bearing deposits in any bank (including the Custodian, the
Service Company if it is a bank, or any bank affiliated with the Service
Company) approved by the Custodian;
(c) any shares of open-end regulated investment companies designated by the
Service Company; and
(d) any other investment, but only if, in the sole judgment of the Custodian,
such investment will not impose upon it an administrative burden greater than
that normally incident to investments described in (a) above (such judgment
by the Custodian not to be construed in any respect as a judgment concerning
the prudence or advisability of such an investment).
Such investments shall be made in such specific securities and other
investments, in such proportions and in such amounts as the Depositor may direct
from time to time by notice to the Service Company (in such form as may be
acceptable to the Service Company). However, the Custodian or the Service
Company may establish minimum amounts for any type of investment.
The Service Company shall be responsible for the execution of such orders. The
Custodian shall maintain or cause to be maintained adequate records thereof
(provided that the Custodian may retain the Service Company as its agent or
recordkeeper to maintain adequate records of transactions on behalf of the
Custodian). However, if any such orders are not received as required or, if
received, are unclear or incomplete in the opinion of the Service Company, all
or a portion of the assets of the Custodial Account may be held uninvested
without liability for loss of income or appreciation, and without liability for
interest, pending receipt of complete orders or clarification; or such assets
may be invested in an interest-bearing account described in (b) above or in a
money-market type open-end investment company designated by the Service Company.
2. Any brokerage account maintained in connection herewith shall be in the name
of the Custodian for the benefit of the Depositor. All assets of the Custodial
Account shall be registered in the name of the Custodian or of a suitable
nominee (and the same nominee may be used with respect to assets of other
investors whether or not held under agreements similar to this one or in any
capacity whatsoever); provided, however, that the Custodian may hold any
security in bearer form or by or through the Service Company, or by or through a
central clearing corporation maintained by institutions active in the national
securities markets; provided further, however, that (a) the books and records of
the Custodian (or the Service Company acting as the agent or recordkeeper for
the Custodian) shall show that all such investments are part of the Custodial
Account; (b) each Custodial Account shall be separate and distinct; (c) a
separate account thereof shall be maintained by the party having actual custody
of such assets; and (d) the assets thereof shall be held in individual or bulk
segregation in such party's vaults or in depositories approved by the Securities
and Exchange Commission under the Securities Exchange Act of 1934.
3. Neither the Custodian, the Service Company nor any other party providing
services to the Custodial Account assumes any responsibility for rendering
advice with respect to the investment or reinvestment of the Depositor's
Custodial Account and shall not be liable for any loss which results from
Depositor's exercise of control over his or her Custodial Account. Depositor
shall have and exercise exclusive responsibility for and control over the
investment of the assets of his or her Custodial Account in accordance with the
terms of this Agreement, and neither the Custodian, the Service Company nor any
other such party shall have any duty to question his or her directions in that
regard or to advise him or her regarding purchase, retention, or sale of such
assets.
4. The Depositor shall have the right by written notice to the Custodian to
designate (or to change) one or more beneficiaries to receive any amount
remaining in the Custodial Account in the event of his or her death prior to the
complete distribution of all assets in the Custodial Account. Any such
designation (or change of designation) of beneficiary may be on a form provided
by the Custodian or the Service Company or on a written instrument acceptable to
the Custodian, signed by the Depositor and filed with the Custodian. Any
designation or change of designation shall be effective upon receipt by the
Custodian. Any change of designation received by the Custodian will revoke all
prior designations previously filed with the Custodian. If no such designation
is in effect on a Depositor's death, or if all designated beneficiaries have
predeceased the Depositor, the Depositor's estate shall be deemed to be the
beneficiary.
5. (a) The Custodian shall have the right to receive rollover contributions as
described in Article I of this Agreement and amounts transferred from another
individual retirement account or individual retirement annuity. Any property
so transferred to it in a form other than cash shall be sold by the Custodian
and reinvested as provided in paragraph 1 of this Article VIII. The Custodian
reserves the right to refuse to accept any property which is not in the form
of cash.
(b) The Custodian, upon written direction of the Depositor, shall transfer
the assets held under this Agreement (reduced by (i) any amounts referred to
in paragraph 7 of this Article VIII and (ii) any amounts required to be
distributed during the calendar year of transfer to the Depositor under
Section 408(a)(6) or 408(b)(3) of the Code) to a successor individual
retirement account or individual retirement annuity for the Depositor's
benefit.
(c) Any amounts received or transferred by the Custodian under this paragraph
5 shall be accompanied by such instructions, records and other documents as
the Custodian deems necessary.
6. The Depositor hereby delegates to the Custodian the power to amend at any
time and from time to time the terms and provisions of this Agreement and hereby
consents to all such amendments, provided that an amendment is not contrary to
any applicable provision of the Internal Revenue Code, the regulations
thereunder, or any other applicable law, regulation or ruling. Any such
amendments shall be effective when the notice of such amendments is mailed to
the address of the Depositor indicated by the Custodian's records.
7. Any income taxes or other taxes of any kind whatsoever which may be levied or
assessed upon or in respect of the assets of the Custodial Account, or the
income arising therefrom, any transfer taxes incurred, any expenses incurred by
the Custodian in the performance of its duties including fees for legal services
rendered to the Custodian, and the Custodian's and the Service Company's
compensation as set forth in the Disclosure Statement may be paid by the
Depositor and, unless and until so paid, within such time period as the
Custodian may establish, may be paid from the assets of the Custodial Account.
The Custodian and the Service Company shall be empowered to take any action
necessary to effectuate the provisions of this paragraph and shall have no
liability to the Depositor therefor. The Custodian and the Service Company shall
each have the right to change or adjust its fees and compensation upon thirty
(30) days' notice to the Depositor, and may reduce or waive fees with respect to
any class or group of Depositors.
8. Amounts in the Custodial Account and the benefits provided hereunder shall
not be subject to alienation, assignment, garnishment, attachment, execution or
levy of any kind, and any attempt to cause such benefits to be so subjected
shall not be recognized, except to such extent as may be required by law.
9. Any pledging of assets in the Custodial Account by the Depositor as security
for a loan, or any loan or other extension of credit from the Custodial Account
to the Depositor, shall be prohibited.
10. In taking or refraining from any action or determining any fact or question
which may arise under this Custodial Agreement, the Custodian may rely upon any
statement by the Depositor or the Service Company with respect thereto. The
Depositor hereby agrees that the Custodian will not be liable for any loss or
expense resulting from taking or not taking such action or determination taken
in reliance on any such statement.
11. The Custodian may resign at any time upon ninety (90) days' written notice
to the Depositor and may be removed by the Depositor at any time upon ninety
(90) days' written notice to the Custodian. Upon the resignation or removal of
the Custodian, a successor Custodian shall be appointed by the Depositor within
ninety (90) days of such resignation or removal and in the absence of such
appointment,
<PAGE>
the Custodian may designate a successor unless this Agreement is sooner
terminated. Any successor custodian shall be a bank (as defined in section
408(n) of the Code) or another person found qualified to act as a custodian
under an individual retirement account plan by the Secretary of the Treasury, or
his delegate, pursuant to section 408(a)(2) of the Code. The appointment of a
successor custodian shall be effective upon receipt by Custodian of such
successor's written acceptance which shall be submitted to the Custodian and to
the Depositor. As soon as reasonably practicable after the effective date of a
successor custodian's appointment, the Custodian shall transfer and deliver to
the successor custodian applicable account records and assets of the Custodial
Account (reduced by any unpaid amounts referred to in paragraph 7 of this
Article VIII). The successor custodian shall be subject to the provisions of
this Agreement (or any successor thereto) on the effective date of its
appointment.
12. The Custodian shall, from time to time, in accordance with instructions in
writing from the Depositor, make distributions out of the Custodial Account to
the Depositor in the manner and amounts as may be specified in such
instructions. Notwithstanding the provisions of Article IV above, the Custodian
assumes (and shall have) no responsibility to make any distribution to the
Depositor (or the Depositor's beneficiary if the Depositor is deceased) unless
and until such written instructions specify the occasion for such distribution,
the elected manner of distribution, and any other information that may be
required. If the Depositor (or, following the Depositor's death, the
beneficiary) does not direct the Custodian to make distributions from the
Custodial Account by the time that such distributions are required to begin in
accordance with the preceding Articles, the Custodian and the Service Company
may assume that the Depositor (or the beneficiary) is meeting the minimum
distribution requirements from another individual retirement arrangement
maintained by the Depositor and the Custodian and the Service Company shall be
fully protected in so doing.
Prior to making any such distribution from the Custodial Account, the Custodian
shall be furnished with any and all applications, certificates, tax waivers,
signature guarantees, and other guarantees, and other documents (including proof
of any legal representative's authority) deemed necessary or advisable by the
Custodian, but the Custodian shall not be liable for complying with written
instructions which appear on their face to be genuine, or for refusing to comply
if not satisfied such instructions are genuine, and assumes no duty of further
inquiry. Upon receipt of proper written instructions as required above, the
Custodian shall cause the assets of the Custodial Account to be distributed in
cash and/or in kind, as specified in such written order.
13. Distribution of the assets of the Custodial Account shall (subject to the
first paragraph of paragraph 12 of this Article VIII) be made in accordance with
the provisions of Article IV as the Depositor (or the Depositor's beneficiary if
the Depositor is deceased) shall elect by written instructions to the Custodian;
subject, however, to the provisions of Sections 401(a)(9), 408(a)(6) and
408(b)(3) of the Code, the regulations promulgated thereunder, and the
following:
(i) No distribution from the Custodial Account shall be made in the form of
an annuity contract.
(ii) The recalculation of life expectancy of the Depositor and/or the
Depositor's spouse shall only be made at the written election of the
Depositor. The recalculation of life expectancy of the surviving spouse
shall only be made at the written election of the surviving spouse. By
establishing the Custodial Account, the Depositor (for himself and his
surviving spouse, if any) elects not to recalculate life expectancies
unless the Depositor (or surviving spouse) specifically elects the
recalculation of life expectancies approach in accordance with the
following sentence. Any such election may be made in such form as the
Depositor (or the surviving spouse) provides for (including instructions to
such effect to the Custodian, or the calculation of minimum distribution
amounts in accordance with a method that provides for recalculation of life
expectancy and instructions to the Custodian to make distributions in
accordance with such method).
(iii) If the Depositor dies before his/her entire interest in the Custodial
Account has been distributed, and if the designated beneficiary of the
Depositor is the Depositor's surviving spouse, the spouse may treat the
Custodial Account as the spouse's own individual retirement arrangement.
This election will be deemed to have been made if the surviving spouse
makes an accumulation IRA contribution to the Custodial Account, makes a
rollover to or from such Custodial Account, or fails to receive a payment
from the Custodial Account within the appropriate time period applicable to
the deceased Depositor under Section 401(a)(9)(B) of the Code.
(iv) If the Depositor's designated beneficiary is not his/her spouse, then
distributions to the Depositor and his/her beneficiary, commencing with the
Depositor's required beginning date, shall comply with the minimum
distribution incidental benefit requirement (if applicable).
14. If the Depositor is disabled, as that term is defined in Section 72(m) of
the Code, he or she may give notice to the Custodian of such disability and
request that up to the balance of the Custodial Account be distributed. The
Custodian, with a reasonable time after submission of satisfactory proof of such
disability, shall order the distribution of the balance of the Custodial Account
to the Depositor or such portion as the Depositor requested.
15. This Agreement shall terminate and be of no further force or effect (except
for paragraphs 11 and 16 of this Article VIII which shall survive such
termination of the Custodial Account and this Agreement) coincident with the
complete distribution of the assets of the Custodial Account, and the Custodian
shall have no further duties or responsibilities with respect to the Custodial
Account after its termination.
16. The Depositor hereby agrees to indemnify and hold harmless the Custodian
from and against any and all claims, loss, damages, costs or expenses (including
reasonable attorney's fees) which the Custodian may incur or pay out by reason
of any alleged or actual act, or failure to act, on the part of the Depositor,
the Service Company, or any other person. The preceding sentence will survive
the termination of the Agreement.
17. Any notice herein required or permitted to be given to the Custodian shall
be sufficiently given if mailed to the Custodian by first class mail, care of
Investors Bank & Trust Company, P.O. Box 9130, MFD 23, Boston, MA 02117-9130,
(Attn: Kayne Anderson Mutual Funds), or to such other address as the Custodian
shall provide the Depositor from time to time in writing, stating that such
other address shall be used for purposes of this Agreement. Any notice herein
required or permitted to be given to the Depositor shall be sufficiently given
if mailed to the Depositor at the Depositor's address appearing on the
Application, or at such other address as the Depositor shall have provided the
Custodian from time to time in writing, which writing shall state that such
other address is to be used for purposes of this Agreement.
18. The Custodian and the Service Company shall keep or cause to be kept
adequate records of the transactions they are required to perform hereunder. In
addition to any reports required by the Code or the regulations thereunder, the
Custodian shall cause to be mailed to the Depositor in respect of each tax year
an account of all transactions affecting the Custodial Account during such year
and a statement showing the Custodial Account as of the end of such year. If,
within sixty (60) days after such mailing, the Depositor has not given the
Custodian or the Service Company written notice of any exception or objection
thereto, the annual accounting shall be deemed to have been approved, and in
such case, or upon the written approval of the Depositor, the Custodian and the
Service Company shall be released, relieved and discharged with respect to all
matters and statements set forth in such accounting as though the account had
been settled by judgment or decree of a court of competent jurisdiction.
The Service Company shall deliver, or cause to be executed and delivered, to the
Depositor all notices, prospectuses, financial statements, proxies and proxy
soliciting materials relating to securities or other investments credited to the
Custodial Account. No shares of stock shall be voted, and no other action shall
be taken pursuant to such documents except upon receipt of adequate written
instructions from the Depositor.
19. The Custodian and the Service Company shall be agents for the Depositor to
perform the duties conferred on them, respectively, hereunder, as directed by
the Depositor. The parties do not intend to confer any fiduciary duties on
<PAGE>
the Custodian and the Service Company and none shall be implied. Neither shall
be liable (nor assumes any responsibility for) the collection of contributions,
the deductibility of any contribution or the propriety of or the amount or
timing or tax treatment of any contributions under this Agreement, the selection
of any investments for the Custodial Account, or the purpose or propriety or tax
treatment of any distribution ordered in accordance with Article IV or paragraph
12, 13 or 14 of Article VIII, which matters are the sole responsibility of the
Depositor or the Depositor's beneficiary, as the case may be.
20. The Custodian and Service Company shall each be responsible solely for
performance of those duties expressly assigned to it in this Agreement, and
neither assumes any responsibility as to duties assigned to anyone else
hereunder or by operation of law.
21. When accepted by the Custodian, this Agreement is accepted in and shall be
construed and administered in accordance with the laws of the state where the
principal offices of the Custodian are located. Any action involving the
Custodian brought by any other party must be brought in a state or federal court
in such state.
If in the Application and Adoption Agreement, Depositor designates that the
Custodial Account is a Regular IRA, this Agreement is intended to qualify under
Code Section 408(a) as an individual retirement Custodial Account and to entitle
Depositor to the retirement savings deduction under Code Section 219 if
available. If in the Application and Adoption Agreement, Depositor designates
that the Custodial Account is a Roth IRA, this Agreement is intended to qualify
under Code Section 408A as a Roth individual retirement Custodial Account and to
entitle Depositor to the tax-free withdrawal of amounts from the Custodial
Account to the extent permitted in such Code section.
If any provision hereof is subject to more than one interpretation or any term
used herein is subject to more than one construction, such ambiguity shall be
resolved in favor of that interpretation or construction which is consistent
with the intent expressed in whichever of the two preceding sentences is
applicable.
However, the Custodian shall not be responsible for whether or not such
intentions are achieved through use of this Agreement, and Depositor is referred
to Depositor's attorney for any such assurances.
22. Depositor should seek advice from Depositor's attorney regarding the legal
consequences (including but not limited to federal and state tax matters) of
entering into this Agreement, contributing to the Custodial Account, and
ordering Custodian to make distributions from the Account. Depositor
acknowledges that all such matters are the sole responsibility of the Depositor
and that Custodian is prohibited by law from rendering such advice.
23. Notwithstanding anything in the foregoing to the contrary, any provision
which is inconsistent with sections 219, 408 or 408A of the Code (where
applicable) shall be disregarded and the regulations promulgated under said
sections of the Code shall be incorporated by reference and this Agreement shall
be administered in accordance with said regulations.
24. The Depositor may revoke the Custodial Account established under this
Agreement by written notice to the Custodian received by the Custodian within 7
calendar days after the Depositor establishes the Custodial Account. Upon
revocation, the amount of the Depositor's initial deposit or contribution will
be returned to him, without adjustment for interest, earnings, investment
fluctuations or fees or expenses. The Custodian or the Service Company may
retain the Depositor's initial contribution for a period of up to 10 days after
the receipt thereof, without investing such amount in accordance with the
Depositor's instructions, and may invest such amount after the expiration of
such period if the Depositor has not revoked the Custodial Account.
25. The legal documents governing the Custodial Account are as follows:
(a) If in the Application the Depositor designated the Custodial Account as a
Regular IRA under Code Section 408(a), the provisions of The Terms and
Conditions for Regular IRAs and The Terms and Conditions for All IRAs of this
Agreement and the provisions of the Application are the legal documents
governing the Depositor's Custodial Account.
(b) If in the Application the Depositor designated the Custodial Account as a
Roth IRA under Code Section 408A, the provisions of The Terms and Condition
for Roth IRAs and The Terms and Conditions for All IRAs of this Agreement and
the provisions of the Application are the legal documents governing the
Depositor's Custodial Account.
(c) The Depositor must designate in the Application that the Custodial
Account is a Regular IRA under Code Section 408(a) or a Roth IRA under Code
Section 408A, and a separate account will be established for a Regular IRA or
a Roth IRA, whichever is designated. One Custodial Account may not be used
for assets of a Regular IRA and a Roth IRA (through the use of subaccounts or
otherwise).
26. Articles I through VII of The Terms and Conditions for Regular IRAs of this
Agreement are in the form promulgated by the Internal Revenue Service as Form
5305-A. It is anticipated that, if and when the Internal Revenue Service
promulgates changes to Form 5305-A, the Custodian will amend this Agreement
correspondingly.
Articles I through VII of The Terms and Conditions for Roth IRAs of this
Agreement are in the form promulgated by the Internal Revenue Service as Form
5305-RA. It is anticipated that, if and when the Internal Revenue Service
promulgates changes to Form 5305-RA, the Custodian will amend this Agreement
correspondingly.
The Internal Revenue Service has endorsed the use of IRA documents permitting a
Depositor to establish either a Regular IRA or a Roth IRA (but not both) using a
single Application or a single Custodial Account, and the Application and the
provisions of this Agreement comply with the requirements of the Internal
Revenue Service guidance on such use. If the Internal Revenue Service
subsequently issues a ruling or regulation that such documentation is not
permissible, or that the Application or this Agreement do not establish a
Regular IRA or a Roth IRA (as the case may be), the Custodian will furnish the
Depositor with replacement documents and the Depositor will, if necessary, sign
such replacement documents. Depositor acknowledges and agrees to such procedures
and to cooperate with Custodian to preserve the intended tax treatment of the
Account.
27. If the Depositor maintains an Individual Retirement Account under Code
section 408(a), Depositor may convert or transfer such other IRA to a Roth IRA
under Code section 408A using the terms of this Agreement and the Application by
completing and executing the Application and giving suitable directions to the
Custodian and the custodian or trustee of such other IRA.
28. The Depositor acknowledges that he or she has received and read the
Disclosure Statement relating to the Custodial Account. The Depositor further
acknowledges that he or she has received and read the current prospectus for
each Fund in which his or her Account is invested and the Individual Retirement
Account Disclosure Statement related to the Account. The Depositor represents
under penalties of perjury that his or her Social Security number (or other
Taxpayer Identification Number) as stated in the Application is correct.
<PAGE>
General Instructions
Purpose. This model custodial account may be used by an individual who wishes to
adopt a Regular Individual Retirement Account under Code Section 408(a) or a
Roth Individual Retirement Account under Code Section 408A. When fully executed
by the Depositor and the Custodian not later than the time prescribed by law for
filing the federal income tax return for the Depositor's tax year (not including
any extensions thereof), an individual will have a Regular Individual Retirement
Account (Regular IRA) custodial account which meets the requirements of Section
408(a), or a Roth Individual Retirement Account (Roth IRA) custodial account
which meet the requirements of Code Section 408A, whichever is applicable. This
account must be created in the United States for the exclusive benefit of the
Depositor or his/her beneficiaries.
DEFINITIONS
Custodian. The Custodian must be a bank or savings and loan association, as
defined in section 408(n), or other person who has the approval of the Internal
Revenue Service to act as custodian. The Custodian in this plan is Investors
Bank & Trust Company.
Depositor The Depositor is the person who establishes the custodial account.
REGULAR OR ROTH IRA FOR NON-WORKING SPOUSE
Contributions to a Regular IRA or Roth IRA custodial account for a
non-working spouse must be made to a separate Regular IRA or Roth IRA custodial
account established by the non-working spouse.
This agreement may be used to establish the Regular IRA or Roth IRA
custodial account for the non-working spouse.
An employee's social security number will serve as the identification
number of his or her individual retirement account. An employer identification
number is only required for each individual retirement account that needs to
file an unrelated business income tax return. An employer identification number
is also required for a common fund created for individual retirement accounts.
For more information, get a copy of the required disclosure statement from
your Custodian or get Publication 590, Individual Retirement Arrangements
(IRAs).
SPECIFIC INSTRUCTIONS
Article IV. Distributions made under this Article for a Regular IRA or Roth IRA
may be made in a single sum, periodic payments, or a combination of both. If the
Depositor is opening a Regular IRA, the distribution option should be reviewed
in the year the Depositor reaches age 70 1/2 to make sure the requirements of
section 408(a)(6) have been met.
Article VIII. This Article and any that follow it may incorporate additional
provisions that are agreed upon by the Depositor and Custodian to complete the
agreement. These may include, for example: definitions, investment powers,
voting rights, exculpatory provisions, amendment and termination, removal of
custodian, custodian's fees, State law requirements, beginning date of
distributions, accepting only cash, treatment of excess contributions,
prohibited transactions with the depositor, etc. Use additional pages if
necessary and attach them to this form.
<PAGE>
NOTES
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, 1997:
1
$1,000(1+T) = $1,309.90 or an annual compounded
rate of 30.99%
For the period from May 1, 1995 (inception) to December 31, 1997:
2.67
$1,000(1+T) = $1,882.10 or an average annual compounded
rate of 26.71%
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 1 year period ended December 31, 1997:
1
$1,000(1+T) = $1,194.60 or an annual compounded
rate of 19.46%
For the period from October 18, 1996 (inception) to December 31, 1997:
1.20
$1,000(1+T) = $1,242.42 or an average annual compounded
rate of 19.78%
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 1 year period ended December 31, 1997:
1
$1,000(1+T) = $1,164.20 or an annual compounded
rate of 16.42%
For the period from October 18, 1996 (inception) to December 31, 1997:
1.20
$1,000(1+T) = $1,194.03 or an average annual compounded
rate of 15.89%
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 1 year period ended December 31, 1997:
1
$1,000(1+T) = $1,071.90 or an annual compounded
rate of 7.19%
For the period from October 28, 1996 (inception) to December 31, 1997:
1.18
$1,000(1+T) = $1,074.08 or an average annual compounded
rate of 6.27%
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 1 year period ended December 31, 1997:
1
$1,000(1+T) = $1,042.60 or an annual compounded
rate of 4.26%
For the period from October 28, 1996 (inception) to December 31, 1997:
1.18
$1,000(1+T) = $1,042.84 or an average annual compounded
rate of 3.63%
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<NUMBER-OF-SHARES-SOLD> 656347
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