As filed with the Securities and Exchange Commission on April 29, 1999
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
Post-Effective Amendment No. 6
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 8
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)
----------
As soon as practicable after the effective date hereof
(Approximate Date of Proposed Public Offering)
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b)
[X] on April 30, 1999, pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on _______________, pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on _______________, pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
----------
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
Part A Combined Prospectus for Kayne Anderson Mutual Funds
Kayne Anderson Rising Dividends Fund
Kayne Anderson Small Cap Rising Dividends Fund
Kayne Anderson International Rising Dividends Fund
Kayne Anderson High-Yield Bond 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 Cap Rising Dividends Fund
Kayne Anderson International Rising Dividends Fund
Kayne Anderson High-Yield Bond Fund
Kayne Anderson Intermediate Total Return Bond Fund
Kayne Anderson Intermediate Tax-Free Bond Fund
Part C Other Information
Signature Page
<PAGE>
--------------------------------------------------
PART A
COMBINED PROSPECTUS
Kayne Anderson Mutual Funds
Kayne Anderson Rising Dividends Fund
Kayne Anderson Small Cap Rising Dividends Fund
Kayne Anderson International Rising Dividends Fund
Kayne Anderson High-Yield Bond Fund
Kayne Anderson Intermediate Total Return Bond Fund
Kayne Anderson Intermediate Tax-Free Bond Fund
--------------------------------------------------
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
Prospectus
April 30, 1999
[KAYNE ANDERSON LOGO]
KAYNE ANDERSON RISING DIVIDENDS FUND
KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND
KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND
KAYNE ANDERSON HIGH-YIELD BOND FUND
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND
KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND
The SEC has not approved or disapproved these securities or passed upon the
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
<PAGE>
TABLE OF CONTENTS
Equity Funds
Kayne Anderson Rising Dividends Fund........................................3
Kayne Anderson Small Cap Rising Dividends Fund..............................5
Kayne Anderson International Rising Dividends Fund..........................7
Fixed-Income Funds
Kayne Anderson High-Yield Bond Fund.........................................9
Kayne Anderson Intermediate Total Return Bond Fund.........................11
Kayne Anderson Intermediate Tax-Free Bond Fund.............................13
Portfolio Management..........................................................15
Management Fees...............................................................15
Additional Investment Strategies and Related Risks............................16
Rising Dividends Philosophy................................................16
Concentration in a Small Number of Securities..............................16
Defensive Investments......................................................16
The Euro: Single European Currency.........................................16
The Year 2000..............................................................17
Additional Information on the Benchmarks for the Funds ....................17
Financial Highlights..........................................................18
Your Account Information......................................................21
How Fund Shares Are Priced.................................................21
Buying Shares..............................................................21
Exchanging Shares..........................................................22
Selling Shares (Redemptions)...............................................22
Other Policies.............................................................23
After You Invest...........................................................25
This prospectus contains important information about the investment objectives,
strategies and risks of Kayne Anderson Mutual Funds that you should know before
you invest. Please read it carefully and keep it on hand for future reference.
Please be aware that these Funds:
+ Are not bank deposits.
+ Are not guaranteed, endorsed or insured by any financial institution or
government entity such as the Federal Deposit Insurance Corporation (FDIC).
You should also know that you could lose money by investing in the Funds.
Kayne Anderson Investment Management, LLC, serves as the investment adviser to
the Funds and is referred to in this Prospectus as Kayne Anderson or the
Adviser.
2
<PAGE>
KAYNE ANDERSON RISING DIVIDENDS FUND
OBJECTIVE
Seeks long-term capital appreciation, with dividend income as a
secondary consideration, by investing in companies with consistent
rising dividends.
STRATEGY
The Fund uses a blended growth and value strategy to invest in
companies generally having a market capitalization of $1 billion or
more. At least 65% of the Fund's assets will be invested in
consistently growing, highly profitable, low-debt companies of all
sizes that meet the Fund's "rising dividends" criteria detailed below.
In normal market conditions, at least 80% of the Fund's assets will be
invested in common stocks.
In selecting securities the Adviser uses a rising dividends philosophy.
It will invest in companies with rising dividends, significant
reinvestment of cash flow and low debt. To be considered for
investment, a company must meet the following growth and quality
criteria:
>> CONSISTENT DIVIDEND INCREASES--It must have increased its dividend
in at least seven of the past ten years and not cut its dividends
once during that period. The company should have increased
dividends at least 100% in the past ten years.
>> HIGH REINVESTMENT FOR GROWTH--The company must pay no more than 65%
of current earnings towards dividends.
>> STRONG BALANCE SHEET--The company's long-term debt should be "A"
rated or not more than 35% of total capitalization.
If a company meets these criteria, the Adviser researches and analyzes
that company's relative position in the industry and the industry
cycle. The Adviser also considers whether the company's stock price is
currently under- or over-valued.
RISKS
By investing in stocks, the Fund may expose you to certain risks that
could cause you to lose money, such as a decline in the share price of
a holding or an overall decline in the stock market. As with any stock
fund, the value of your investment will fluctuate daily with movements
in the stock market, as well as in response to the activities of
individual companies. To the extent the Fund is overweighted in certain
market sectors compared to the Standard & Poor's 500 Composite Price
Index, the Fund may be more volatile that the S&P 500.
3
<PAGE>
PAST FUND PERFORMANCE
The chart below shows the risks of investing in the Fund and how the
Fund's total return has varied from year-to-year.
[bar chart]
1996 1997 1998
---- ---- ----
19.09% 30.99% 14.14%
During the three-year period shown above, the Fund's best quarter was
Q2 1997 (+16.43%) and its worst quarter was Q3 1998 (-13.90%). The
Fund's 1999 return through 3/31/99 was +3.76%.
The table below compares the Fund's performance to a commonly used
index for its market segment. Of course, past performance cannot
guarantee future results.
Average Annual Returns through 12/31/98
---------------------------------------
1 Year Since Inception (5/01/95)
------ -------------------------
Rising Dividends Fund 14.14% 23.16%
S&P 500 Index 28.58% 28.69%
FEES AND EXPENSES
The following table shows the fees and expenses you may pay if you buy
and hold shares of the Fund. The Fund does not impose any front-end or
deferred sales loads and does not charge shareholders for exchanging
shares or reinvesting dividends.
SHAREHOLDER FEES (fees paid directly from your investment)
Redemption Fee* 0.00%
* $7 will be deducted from redemption proceeds sent by wire or
overnight courier.
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from
Fund assets)
Management Fee 0.75%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.36%
----
TOTAL ANNUAL FUND OPERATING EXPENSES 1.11%
EXAMPLE OF FUND EXPENSES. This example is intended to help you compare
the cost of investing in the Fund with the cost of investing in other
mutual funds. The table below shows what you would pay in expenses over
time, whether or not you sold your shares at the end of each period. It
assumes a $10,000 initial investment, 5% total return each year and no
changes in expenses. This example is for comparison purposes only. It
does not necessarily represent the Fund's actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$113 $352 $610 $1,348
4
<PAGE>
KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND
OBJECTIVE
Seeks long-term capital appreciation, with dividend income as a
secondary consideration, by investing in small-cap companies with
consistent rising dividends.
STRATEGY
The Fund uses a blended growth and value strategy to invest in
companies generally having a market capitalization of up to $3 billion.
At least 65% of the Fund's assets will be invested in consistently
growing, highly profitable, low-debt companies with market
capitalizations of between $50 million and $3 billion and that meet the
Fund's "rising dividends" criteria. The Fund will seek to maintain a
simple (not-weighted) average market capitalization of approximately $1
billion for companies that it invests in. In normal market conditions,
at least 80% of the Fund's assets will be invested in common stocks.
In selecting securities the Adviser uses a rising dividends philosophy.
It will invest in companies with rising dividends, significant
reinvestment of cash flow and low debt. To be considered for
investment, a company must meet the following growth and quality
criteria:
>> CONSISTENT DIVIDEND INCREASES--It must have increased its dividend
in at least three of the past five years without cutting dividends
during that time. The company should have increased dividends at a
rate that would double them in ten years.
>> HIGH REINVESTMENT FOR GROWTH--The company must pay no more than 65%
of current earnings towards dividends.
>> STRONG BALANCE SHEET--The company's long-term debt should be "A"
rated or not more than 35% of total capitalization.
If a company meets these criteria, the Adviser researches and analyzes
that company's relative position in the industry and the industry
cycle. The Adviser also considers whether the company's stock price is
currently under- or over-valued.
RISKS
By investing in stocks, the Fund may expose you to certain risks that
could cause you to lose money, such as a decline in the share price of
a holding or an overall decline in the stock market. As with any stock
fund, the value of your investment will fluctuate daily with movements
in the stock market, as well as in response to the activities of
individual companies. To the extent the Fund is overweighted in certain
market sectors compared to the Russell 2000 Index, the Fund may be more
volatile that the Russell 2000.
The Fund's focus on small-cap stocks may expose shareholders to
additional risks. Smaller companies typically have more limited product
lines, markets and financial resources than larger companies, and their
securities may trade less frequently and in more limited volume than
those of larger, more mature companies. As a result, small-cap stocks,
and therefore the Fund, may fluctuate significantly more in value than
large-cap stocks and funds that focus on them.
5
<PAGE>
PAST FUND PERFORMANCE
The chart below shows the risks of investing in the Fund and how the
Fund's total return has varied from year-to-year.
[bar chart]
1997 1998
---- ----
19.46% 16.17%
During the two-year period shown above, the Fund's best quarter was Q4
1998 (+15.43%) and its worst quarter was Q3 1998 (-10.24%). The Fund's
1999 return through 3/31/99 was -4.12%.
The table below compares the Fund's performance to a commonly used
index for its market segment. Of course, past performance cannot
guarantee future results.
Average Annual Returns through 12/31/98
---------------------------------------
1 Year Since Inception (10/28/96)
------ --------------------------
Small Cap Rising
Dividends Fund 16.17% 18.12%
Russell 2000 Index (2.55%) 10.69%
FEES AND EXPENSES
The following table shows the fees and expenses you may pay if you buy
and hold shares of the Fund. The Fund does not impose any front-end or
deferred sales loads and does not charge shareholders for exchanging
shares or reinvesting dividends.
SHAREHOLDER FEES (fees paid directly from your investment)
Redemption Fee* 0.00%
* $7 will be deducted from redemption proceeds sent by wire or
overnight courier.
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted
from Fund assets)+
Management Fee 0.85%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.50%
----
TOTAL ANNUAL FUND OPERATING EXPENSES 1.35%
Fee Reduction and/or Expense Reimbursement 0.05%
----
NET EXPENSES 1.30%
+ Kayne Anderson has contractually agreed to reduce its fees and/or
absorb expenses to limit the Fund's total annual operating expenses
to 1.30%. This contract has a one-year term, renewable at the end
of each fiscal year.
EXAMPLE OF FUND EXPENSES. This example is intended to help you compare
the cost of investing in the Fund with the cost of investing in other
mutual funds. The table below shows what you would pay in expenses over
time, whether or not you sold your shares at the end of each period. It
assumes a $10,000 initial investment, 5% total return each year and no
changes in expenses. This example is for comparison purposes only. It
does not necessarily represent the Fund's actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$132 $422 $733 $1,614
6
<PAGE>
KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND
OBJECTIVE
Seeks long-term capital appreciation, with dividend income as a
secondary consideration, by investing in companies outside the U.S.
with consistent rising dividends.
STRATEGY
The Fund uses a blended growth and value strategy to invest in
companies generally having a market capitalization of $1 billion or
more. At least 65% of the Fund's assets will be invested in
consistently growing, highly profitable, low-debt companies that meet
the Fund's "rising dividends" criteria. The Fund will emphasize those
companies outside of the U.S. that the Adviser believes have global
businesses or operations rather than localized companies. In normal
market conditions, at least 80% of the Fund's assets will be invested
in common stocks. Under normal market conditions, assets will be
invested in at least three different countries outside of the U.S.,
with investments in no single country accounting for more than 40% of
the Fund's assets.
In selecting securities the Adviser uses a rising dividends philosophy.
It will invest in companies with rising dividends, significant
reinvestment of cash flow and low debt. To be considered for
investment, a company must meet the following growth and quality
criteria:
>> CONSISTENT DIVIDEND INCREASES--It must have increased its dividend
in at least three of the past five years without cutting dividends
during that time. The company should have increased dividends at a
rate that would double them in ten years.
>> HIGH REINVESTMENT FOR GROWTH--The company must pay no more than 65%
of current earnings towards dividends.
>> STRONG BALANCE SHEET--The company's long-term debt should be "A"
rated or not more than 35% of total capitalization.
If a company meets these criteria, the Adviser researches and analyzes
that company's relative position in the industry and the industry
cycle. The Adviser also considers whether the company's stock price is
currently under- or over-valued.
RISKS
By investing in stocks, the Fund may expose you to certain risks that
could cause you to lose money, such as a decline in the share price of
a holding or an overall decline in the stock market. As with any stock
fund, the value of your investment will fluctuate daily with movements
in the stock market, as well as in response to the activities of
individual companies.
In addition, foreign stock markets tend to be more volatile than the
U.S. market due to economic and political instability and regulatory
conditions in some countries. Most of the foreign securities in which
the Fund invests are denominated in foreign currencies, whose values
may decline against the U.S. dollar.
7
<PAGE>
PAST FUND PERFORMANCE
The chart below shows the risks of investing in the Fund and how the
Fund's total return has varied from year-to-year.
[bar chart]
1997 1998
---- ----
16.42% 26.47%
During the two-year period shown above, the Fund's best quarter was Q4
1998 (+21.18%) and its worst quarter was Q3 1998 (-11.44%). The Fund's
1999 return through 3/31/99 was +4.77%.
The table below compares the Fund's performance to the most commonly
used index for its market segment. Of course, past performance cannot
guarantee future results.
Average Annual Returns through 12/31/98
---------------------------------------
1 Year Since Inception (10/28/96)
------ --------------------------
International Rising
Dividends Fund 26.47% 20.58%
Morgan Stanley Capital
Int'l--Europe, Australasia
& Far East Index 20.33% 23.55%
FEES AND EXPENSES
The following table shows the fees and expenses you may pay if you buy
and hold shares of the Fund. The Fund does not impose any front-end or
deferred sales loads and does not charge shareholders for exchanging
shares or reinvesting dividends.
SHAREHOLDER FEES (fees paid directly from your investment)
Redemption Fee* 0.00%
* $7 will be deducted from redemption proceeds sent by wire or
overnight courier.
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from
Fund assets)+
Management Fee 0.95%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.50%
----
TOTAL ANNUAL FUND OPERATING EXPENSES 1.45%
Fee Reduction and/or Expense Reimbursement 0.05%
----
NET EXPENSES 1.40%
+ Kayne Anderson has contractually agreed to reduce its fees and/or
absorb expenses to limit the Fund's total annual operating expenses
to 1.40%. This contract has a one-year term, renewable at the end
of each fiscal year.
EXAMPLE OF FUND EXPENSES. This example is intended to help you compare
the cost of investing in the Fund with the cost of investing in other
mutual funds. The table below shows what you would pay in expenses over
time, whether or not you sold your shares at the end of each period. It
assumes a $10,000 initial investment, 5% total return each year and no
changes in expenses. This example is for comparison purposes only. It
does not necessarily represent the Fund's actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$142 $453 $786 $1,725
8
<PAGE>
KAYNE ANDERSON HIGH-YIELD BOND FUND
OBJECTIVE
Seeks high total return (consisting of both capital appreciation and
income) by investing primarily in bonds with an emphasis on lower
quality, higher-yielding debt securities.
STRATEGY
The Fund invests at least 65% of its assets in lower-rated debt
securities commonly referred to as "high-yield" or "junk" bonds.
High-yield bonds are those rated below investment grade (E.G., below
BBB or Baa by S&P or Moody's, respectively). In evaluating any
high-yield bond, the Adviser uses a "cream of the crop" approach,
investing primarily in bonds rated among the highest three debt rating
categories below investment grade (E.G., at least B3 by Moody's
Investor Services or B- by Standard & Poor's) that it believes are
selling at favorable prices. The Fund may also invest in preferred
stocks or convertible stocks that pay cash dividends and have
equivalent credit ratings, or are of equivalent credit quality, as
determined by the Adviser. The Adviser currently intends to maintain a
weighted-average credit quality of B1 under Moody's credit quality
rating system.
The Fund does not currently intend to invest in companies younger than
five years or that the Adviser believes are over-leveraged.
RISKS
By investing in bonds, the Fund may expose you to certain risks that
could cause you to lose money. As with most bond funds, the value of
shares in the Fund will fluctuate along with interest rates. When
interest rates rise, a bond's market price generally declines. When
interest rates fall, the bond's price usually increases. A fund such as
this one, which invests most of its assets in bonds, will behave in
largely the same way.
In addition, high-yield bonds have greater volatility and risk of loss
of principal due to a higher default rate than securities that are
rated investment grade. Changes by recognized ratings services in their
ratings of a bond, changes in the financial condition of a company, and
changes in general economic conditions may dramatically affect a
company's ability to make interest and principal payments, and this may
in turn affect the value of the company's high-yield bonds. For this
reason, the value of an investment in this Fund may be more volatile
than investments in other bond funds that do not emphasize high-yield
bonds. As a result, the Fund is not appropriate for investors whose
primary investment objective is stability of the value of their
investment.
9
<PAGE>
PAST FUND PERFORMANCE
The High-Yield Bond Fund commenced operations on April 30, 1999. Fund
performance results have not been provided because it has not been in
existence for a full calendar year.
FEES AND EXPENSES
The following table shows the fees and expenses you may pay if you buy
and hold shares of the Fund. The Fund does not impose any front-end or
deferred sales loads and does not charge shareholders for exchanging
shares or reinvesting dividends.
SHAREHOLDER FEES (fees paid directly from your investment)
Redemption Fee* 0.00%
* $7 will be deducted from redemption proceeds sent by wire or
overnight courier.
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from
Fund assets)+
Management Fee 0.60%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses* 1.90%
----
TOTAL ANNUAL FUND OPERATING EXPENSES 2.50%
Fee Reduction and/or Expense Reimbursement 1.60%
----
NET EXPENSES 0.90%
* Other expenses are estimated to be 1.90% for the Fund's first
fiscal year.
+ Kayne Anderson has contractually agreed to reduce its fees and/or
absorb expenses to limit the Fund's total annual operating expenses
to 0.90%. This contract has a one-year term, renewable at the end
of each fiscal year.
EXAMPLE OF FUND EXPENSES. This example is intended to help you compare
the cost of investing in the Fund with the cost of investing in other
mutual funds. The table below shows what you would pay in expenses over
time, whether or not you sold your shares at the end of each period. It
assumes a $10,000 initial investment, 5% total return each year and no
changes in expenses. This example is for comparison purposes only. It
does not necessarily represent the Fund's actual expenses or returns.
1 Year 3 Years
------ -------
$91 $624
10
<PAGE>
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND
OBJECTIVE
Seeks to maximize total return (mainly through current income with
capital appreciation as a secondary factor) by investing primarily in
investment-grade bonds.
STRATEGY
The Fund invests primarily in investment-grade bonds, both foreign and
domestic. At least 90% of its total assets must be investment-grade at
the time of purchase. This includes U.S. government securities,
corporate bonds, mortgage-related securities, asset-backed securities,
and money market securities. Investment-grade bonds are those rated
within the four highest grades by rating agencies such as Standard &
Poor's, Moody's or Fitch. From time to time, the Fund may also invest
in unrated bonds that the Adviser believes are comparable to
investment-grade securities.
The Fund seeks to maintain a dollar-weighted average maturity of three
to ten years. Typically, a shorter maturity means that the bond or
portfolio has less sensitivity to interest rates. The Fund invests in
bonds that the Adviser believes offer attractive yields and are
undervalued relative to issues of similar quality and interest rate
sensitivity.
RISKS
By investing in bonds, the Fund may expose you to certain risks that
could cause you to lose money. As with most bond funds, the value of
shares in the Fund will fluctuate along with interest rates. When
interest rates rise, a bond's market price generally declines. When
interest rates fall, a bond's price usually increases. A fund such as
this one, which invests most of its assets in bonds, will behave in
largely the same way. As a result, the Fund is not appropriate for
investors whose primary investment objective is stability of the value
of their investment.
11
<PAGE>
PAST FUND PERFORMANCE
The chart below shows the risks of investing in the Fund and how its
total return has varied from year-to-year.
[bar chart]
1997 1998
---- ----
7.19% 7.61%
During the two-year period shown above, the Fund's best quarter was Q3
1998 (+4.20%) and its worst quarter was Q1 1997 (-0.73%). The Fund's
1999 return through 3/31/99 was -0.24%.
The table below compares the Fund's performance to a commonly used
index for its market segment. Of course, past performance cannot
guarantee future results.
Average Annual Returns through 12/31/98
---------------------------------------
1 Year Since Inception (10/28/96)
------ --------------------------
Intermediate Total Return
Bond Fund 7.61% 6.88%
Lehman Bros. Government/
Corporate Intermediate
Bond Index 8.42% 7.83%
FEES AND EXPENSES
The following table shows the fees and expenses you may pay if you buy
and hold shares of the Fund. The Fund does not impose any front-end or
deferred sales loads and does not charge shareholders for exchanging
shares or reinvesting dividends.
SHAREHOLDER FEES (fees paid directly from your investment)
Redemption Fee* 0.00%
* $7 will be deducted from redemption proceeds sent by wire or
overnight courier.
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from
Fund assets)+
Management Fee 0.50%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.50%
----
TOTAL ANNUAL FUND OPERATING EXPENSES 1.00%
Fee Reduction and/or Expense Reimbursement 0.06%
----
NET EXPENSES 0.94%
+ Kayne Anderson has contractually agreed to reduce its fees and/or
absorb expenses to limit the Fund's total annual operating expenses to
0.95%. This contract has a one-year term, renewable at the end of each
fiscal year.
EXAMPLE OF FUND EXPENSES. This example is intended to help you compare
the cost of investing in the Fund with the cost of investing in other
mutual funds. The table below shows what you would pay in expenses over
time, whether or not you sold your shares at the end of each period. It
assumes a $10,000 initial investment, 5% total return each year and no
changes in expenses. This example is for comparison purposes only. It
does not necessarily represent the Fund's actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$97 $313 $547 $1,217
12
<PAGE>
KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND
OBJECTIVE
Seeks current income exempt from federal income tax by investing
primarily in investment-grade municipal bonds.
STRATEGY
The Fund invests its assets in investment-grade municipal bonds and
notes. The assets will be invested such that at least 80% of the Fund's
assets will generate income exempt from federal income tax and the
federal alternative minimum tax. At least 90% of its assets must be
investment-grade at the time of purchase. Investment-grade bonds are
those rated within the four highest grades by rating agencies such as
Standard & Poor's, Moody's or Fitch. From time to time, the Fund may
also invest in unrated bonds that the Adviser believes are of
comparable quality to investment-grade securities.
The Fund seeks to maintain a dollar-weighted average maturity of three
to ten years. Typically, a shorter maturity means that the bond or
portfolio has less sensitivity to interest rates. The Fund invests in
bonds that the Adviser believes offer attractive yields and are
undervalued relative to issues of similar quality and interest rate
sensitivity.
RISKS
By investing in bonds, the Fund may expose you to certain risks that
could cause you to lose money. As with most bond funds, the value of
shares in the Fund will fluctuate along with interest rates. When
interest rates rise, a bond's market price generally declines. When
interest rates fall, the bond's price usually increases. A fund such as
this one, which invests most of its assets in bonds, will behave in
largely the same way. As a result, the Fund is not appropriate for
investors whose primary investment objective is stability of the value
of their investment.
Some of the municipal securities in which the Fund invests will be
insured against default. That insurance, however, does not mean that
the value of your investment in the Fund is protected against losses.
13
<PAGE>
PAST FUND PERFORMANCE
The chart below shows the risks of investing in the Fund and how the
Fund's total return has varied from year-to-year.
[bar chart]
1997 1998
---- ----
4.26% 4.30%
During the two-year period shown above, the Fund's best quarter was Q3
1998 (+1.78%)] and its worst quarter was Q1 1997 (-0.13%). The Fund's
1999 return through 3/31/99 was +0.92%.
The table below compares the Fund's performance to a commonly used
index for its market segment. Of course, past performance cannot
guarantee future results.
Average Annual Returns through 12/31/98
---------------------------------------
1 Year Since Inception (10/28/96)
------ --------------------------
Intermediate Tax-Free
Bond Fund 4.30% 3.94%
Lehman Bros. 5-Year
Municipal Bond Index 5.85% 6.17%
FEES AND EXPENSES
The following table shows the fees and expenses you may pay if you buy
and hold shares of the Fund. Kayne Anderson Mutual Funds does not
impose any front-end or deferred sales loads and does not charge
shareholders for exchanging shares or reinvesting dividends.
SHAREHOLDER FEES (fees paid directly from your investment)
Redemption Fee* 0.00%
* $7 will be deducted from redemption proceeds sent by wire or
overnight courier.
ANNUAL FUND OPERATING EXPENSES (expenses that are deducted from
Fund assets)+
Management Fee 0.50%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 1.73%
----
TOTAL ANNUAL FUND OPERATING EXPENSES 2.23%
Fee Reduction and/or Expense Reimbursement 1.48%
----
NET EXPENSES 0.75%
[CHECK ANNUAL REPORT TO SEE IF 1998 NET WAS 0.77%; CHECK W/DAVID TO SEE
IF WE SHOULD USE HIGHER OF CAP OR ACTUAL; REVIEW EXAMPLE NUMBERS]
+ Kayne Anderson has contractually agreed to reduce its fees and/or
absorb expenses to limit the Fund's total annual operating expenses to
0.75%. This contract has a one-year term, renewable at the end of each
fiscal year.
EXAMPLE OF FUND EXPENSES. This example is intended to help you compare
the cost of investing in the Fund with the cost of investing in other
mutual funds. The table below shows what you would pay in expenses over
time, whether or not you sold your shares at the end of each period. It
assumes a $10,000 initial investment, 5% total return each year and no
changes in expenses. This example is for comparison purposes only. It
does not necessarily represent the Fund's actual expenses or returns.
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$76 $553 $1,056 $2,438
14
<PAGE>
PORTFOLIO MANAGEMENT
The investment adviser to the Funds is Kayne Anderson Investment Management,
LLC. Kayne Anderson has furnished investment advice to institutional and private
clients since 1984. As of December 31, 1998, the Adviser and an affiliated
investment adviser, KAIM Non-Traditional, L.P., managed approximately $4.7
billion for their clients.
ALLAN RUDNICK is the Portfolio Manager for the Rising Dividends Fund and serves
as Chief Investment Officer of the Adviser. Before joining the Adviser as its
Chief Investment Officer 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 the Portfolio Manager for the Small Cap Rising
Dividends Fund. Before joining the Adviser as a Portfolio Manager 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 the Portfolio Manager for the International Rising
Dividends Fund. Prior to joining the Adviser as a Portfolio Manager 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.
ROBERT SINNOTT, is the Portfolio Manager for the High-Yield Bond Fund. Before
joining the Adviser as a Portfolio Manager in 1992, he was an investment banker
with Citicorp Securities Markets in New York and Los Angeles. Mr. Sinnott has
over 11 years of experience in the investment industry. He earned his BA degree
from the University of Virginia and his MBA from Harvard Business School.
MARK E. MILLER is the Portfolio Manager for the Intermediate Total Return and
Intermediate Tax-Free Bond Funds. Prior to joining the Adviser as a Portfolio
Manager 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.
MANAGEMENT FEES
The table below shows the annual management fee paid to the Adviser during the
past fiscal year. This fee is calculated based on the average daily net assets
of the corresponding Fund.
Rising Dividends Fund 0.75%
Small Cap Rising Dividends Fund 0.85%
International Rising Dividends Fund 0.95%
High-Yield Bond Fund 0.60%+
Intermediate Total Return Bond Fund 0.50%
Intermediate Tax-Free Bond Fund 0.50%
+ Contractual amount for the coming year.
15
<PAGE>
ADDITIONAL INVESTMENT STRATEGIES AND RELATED RISKS
RISING DIVIDENDS PHILOSOPHY
The Adviser believes that this equity investment discipline is an effective
approach to identify well-managed growth companies with defensive
characteristics. 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. 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. The Adviser also believes that
low debt levels indicate financial strength to support growth in good times and
to win market share in difficult times.
CONCENTRATION IN A SMALL NUMBER OF COMPANIES
Each of the rising dividends equity Funds will typically invest in the
securities of a small number of companies. The Rising Dividends, Small Cap
Rising Dividends and the International Rising Dividends Funds will typically
invest in fewer than 40, 30 and 30 companies, respectively. As a result, the
value of shares in these Funds may vary more than those of mutual funds
investing in a greater number of companies.
DEFENSIVE INVESTMENTS
At the discretion of its portfolio manager, each Fund may invest up to 100% of
its assets in cash for temporary defensive purposes. Such a stance may help a
Fund minimize or avoid losses during adverse market, economic or political
conditions. During such a period, a Fund may not achieve its investment
objective. For example, should the market advance during this period, a Fund may
not participate as much as it would have if it had been more fully invested.
PORTFOLIO TURNOVER
The Funds' portfolio managers will sell a security when they believe it is
appropriate to do so, regardless of how long a Fund has owned that security.
Buying and selling securities generally involves some expense to a Fund, such as
commission paid to brokers and other transaction costs. By selling a security, a
Fund may realize taxable capital gains that it will subsequently distribute to
shareholders. Generally speaking, the higher a Fund's annual portfolio turnover,
the greater its brokerage costs and the greater the likelihood that it will
realize taxable capital gains. Increased brokerage costs may adversely affect a
Fund's performance. Also, unless you are a tax-exempt investor or you purchase
shares through a tax-exempt investor or through a tax-deferred account, the
distribution of capital gains may affect your after-tax return. Annual portfolio
turnover of 100% or more is considered high. The High-Yield Bond Fund expects to
have an annual turnover of less than 100%. See "Financial Highlights" for each
other Fund's historical portfolio turnover.
THE EURO: SINGLE EUROPEAN CURRENCY
On January 1, 1999, the European Union (EU) introduced a single European
currency called the euro. Eleven of the fifteen EU members have begun to convert
their currencies to the euro including Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain
(leaving out Britain, Sweden, Denmark and Greece). For the first three years,
the euro will be a phantom currency (only an accounting entry). Euro notes and
coins will begin circulating in 2002. Although the introduction of the euro has
already occurred, the following uncertainties will continue to exist for some
time:
>> Whether the payment, valuation and operational systems of banks and
financial institutions can operate reliably.
>> The applicable conversion rate for contracts stated in the national
currency of an EU member.
>> The ability of clearing and settlement systems to process transactions
reliably.
>> The effects of the euro on European financial and commercial markets.
>> The effect of new legislation and regulations to address euro-related
issues.
16
<PAGE>
These and other factors could cause market disruptions and affect the value of
your shares in the International Rising Dividends Fund which invests in
companies conducting business in Europe. The Fund and its key service providers
have taken steps to address euro-related issues, but there can be no assurance
that these efforts will be sufficient.
THE YEAR 2000
The common past practice in computer programming of using just two digits to
identify a year has resulted in the Year 2000 challenge throughout the
information technology industry. If unchanged, many computer applications and
systems could misinterpret dates occurring after December 31, 1999, leading to
errors or failure. This failure could adversely affect a Fund's operations,
including pricing, securities trading, and the servicing of shareholder
accounts.
Kayne Anderson is dedicated to providing uninterrupted, high-quality performance
from our computer systems before, during, and after 2000. We are now renovating
and testing our internal systems and are working with external partners,
suppliers, vendors and other service providers, to assure that the systems with
which we interact will remain operational at all times.
In addition to taking reasonable steps to secure our internal systems and
external relationships, Kayne Anderson is further developing contingency plans
intended to assure that unexpected systems failures will not adversely affect
the Funds' operations. Kayne Anderson intends to monitor these processes through
the rollover of 1999 into 2000 and to quickly implement alternative solutions if
necessary.
However, despite Kayne Anderson's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on a Fund's business,
operations, or financial condition. Additionally, a Fund's performance could be
hurt if a computer-system failure at a company or governmental unit affects the
prices of securities the Fund owns. Issuers in countries outside of the U.S. may
not be required to make the same level of disclosure about Year 2000 readiness
as required in the U.S. The Adviser, of course, cannot audit any company and its
major suppliers to verify their Year 2000 readiness. Kayne Anderson understands
that many foreign countries and companies are well behind their U.S.
counterparts in preparing for 2000.
ADDITIONAL INFORMATION ON THE BENCHMARKS FOR THE FUNDS
>> STANDARD & POOR'S 500 COMPOSITE PRICE INDEX A market-value weighted index
of 500 blue-chip stocks, considered to be a benchmark of the overall stock
market.
>> RUSSELL 2000 INDEX A market-value weighted index measuring the performance
of the 2,000 smallest of the 3,000 largest U.S. companies (based on total
market capitalization) frequently used to measure the condition of the
market for small cap companies.
>> MORGAN STANLEY CAPITAL INT'L--EUROPE, AUSTRALASIA & FAR EAST INDEX A
market-value weighted index composed of 21 developed market countries in
Europe, Australasia and the Far East designed to measure the overall
condition of overseas markets.
>> LEHMAN BROS. GOVERNMENT/CORPORATE INTERMEDIATE BOND INDEX is an unmanaged
index of intermediate-term government and corporate bonds.
>> LEHMAN BROS. 5-YEAR MUNICIPAL BOND INDEX is an unmanaged index comprised of
a broad range of investment-grade municipal bonds
17
<PAGE>
FINANCIAL HIGHLIGHTS
The following selected per-share data and ratios for the period ended December
31, 1998, and December 31, 1997, have been audited by Briggs, Bunting &
Dougherty, LLP. Their January 22, 1999, report appears in the 1998 Annual Report
of the Funds. Audited financial information for prior periods was audited by
another firm whose report is not included.
<TABLE>
<CAPTION>
RISING DIVIDENDS FUND
------------------------------------------
<S> <C> <C> <C> <C>
Year or Period Ended December 31 1998 1997 1996 1995(a)
Net asset value, beginning of period $17.28 $14.32 $12.63 $10.65
Income from investment operations:
Net investment income 0.11 0.10 0.08 0.07
Net realized and unrealized gains on
investments 2.38 4.34 2.35 2.13
Total income from investment operations 2.49 4.44 2.43 2.20
Less distributions:
From net investment income (0.11) (0.11) (0.08) (0.07)
From net realized gains (2.63) (1.37) (0.66) (0.15)
From paid in capital 0.00 0.00 0.00 0.00
Total distributions (2.74) (1.48) (0.74) (0.22)
Net asset value, end of period $17.03 $17.28 $14.32 $12.63
Total return 14.14% 30.99% 19.09% 20.65%**
Net assets, end of period (in 000's) $48,581 $35,283 $26,118 $20,613
Ratio of expenses to average net assets:+
Before expense reimbursement -- -- -- --
After expense reimbursement 1.11% 1.18% 1.37% 1.31%+
After expense reimbursement and expenses
paid indirectly -- -- -- --
Ratio of net investment income to average
net assets:+ (net of expense
reimbursement/recoupment) 0.57% 0.55% 0.59% 0.94%+
Portfolio turnover rate 76% 51% 23% 28%
</TABLE>
* Commencement of operations.
** Not annualized.
+ Annualized
18
<PAGE>
<TABLE>
<CAPTION>
SMALL CAP RISING DIVIDENDS FUND INTERNATIONAL RISING DIVIDENDS FUND
------------------------------- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year or Period Ended December 31 1998 1997 1996(b) 1998 1997 1996(c)
Net asset value, beginning of period $13.12 $11.06 $10.65 $12.61 $10.91 $10.65
Income from investment operations:
Net investment income 0.05 0.02 0.02 0.08 0.04 0.01
Net realized and unrealized gains
on investments 2.07 2.14 0.41 3.25 1.75 0.26
Total income from investment operations 2.12 2.16 0.43 3.33 1.79 0.27
Less distributions:
From net investment income (0.05) (0.05) (0.02) (0.08) (0.05) (0.01)
From capital gains 0.00 (0.05) 0.00 (0.35) (0.04) 0.00
From paid in capital (0.15) 0.00 0.00 0.00 0.00 0.00
Total distributions (0.20) (0.10) (0.02) (0.43) (0.09) (0.01)
Net asset value, end of period $15.04 $13.12 $11.06 $15.51 $12.61 $10.91
Total return 16.17% 19.46% 4.00%* 26.47% 16.42% 2.56%*
Net assets, end of period (in 000's) $33,017 $6,494 $808 $35,436 $7,012 $1,055
Ratio of expenses to average net
assets: +
Before expense reimbursement 1.35% 3.22% 18.91%+ 1.45% 3.41% 15.74%+
After expense reimbursement 1.30% 1.30% 1.30%+ 1.38% 1.40% 1.40%+
After expense reimbursement and
expenses paid indirectly -- -- -- -- -- --
Ratio of net investment income to
average net assets: + (net of
expense reimbursement/recoupment) 0.38% 0.45% 1.58%+ 0.85% 0.61% 1.14%+
Portfolio turnover rate 28% 47% 0% 28% 29% 0%
</TABLE>
(a) The Rising Dividend Fund commenced operations on May 1, 1995.
(b) The Small-Cap Rising Dividends Fund commenced operations on October 18,
1996.
(c) The International Rising Dividends Fund commenced operations on October 18,
1996.
* Not annualized.
+ Annualized
19
<PAGE>
<TABLE>
<CAPTION>
INTERMEDIATE TOTAL RETURN BOND FUND INTERMEDIATE TAX-FREE BOND FUND
----------------------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year or Period Ended December 31 1998 1997 1996(a) 1998 1997 1996(b)
Net asset value, beginning of period $10.75 $10.59 $10.65 $10.74 $10.64 $10.65
Income from investment operations:
Net investment income 0.51 0.56 0.09 0.43 0.34 0.01
Net realized and unrealized gains
on investments 0.30 0.18 (0.07) 0.03 0.11 (0.01)
Total income from investment operations 0.81 0.74 0.02 0.46 0.45 0.00
Less distributions:
From net investment (0.51) (0.58) (0.08) (0.43) (0.35) (0.01)
From capital gains (0.04) 0.00 0.00 0.00 0.00 0.00
From paid in capital 0.00 0.00 0.00 0.00 0.00 0.00
Total distributions (0.55) (0.58) (0.08) (0.43) (0.35) (0.01)
Net asset value, end of period $11.01 $10.75 $10.59 $10.77 $10.74 $10.64
Total return 7.61% 7.19% 0.20%** 4.37% 4.26% 0.02%**
Net assets, end of period (in 000's) $28,330 $6,261 $5,033 $9,391 $6,015 $5,124
Ratio of expenses to average net
assets: +
Before expense reimbursement 1.00% 2.23% 2.10%+ 2.23% 2.29% 2.08%+
After expense reimbursement 0.94% 0.95% 0.95%+ 0.77% 1.56% 1.81%+
After expense reimbursement and
expenses paid indirectly -- -- -- -- 0.95% 0.95%+
Ratio of net investment income to
average net assets+ (net of expense
reimbursement, if applicable) 4.93% 5.35% 4.72%+ 3.88% 2.58% 0.60%+
Portfolio turnover rate 49% 27% 0% 47% 40% 0%
</TABLE>
(a) The Intermediate Total Return Bond Fund commenced operations on October 28,
1996.
(b) The Intermediate Tax-Free Bond Fund commenced operations on October 28,
1996.
* Commencement of operations.
** Not annualized.
+ Annualized
20
<PAGE>
YOUR ACCOUNT INFORMATION
HOW FUND SHARES ARE PRICED
How and when we calculate the Funds' price or net asset value (NAV) determines
the price at which you will buy or sell shares. We calculate a fund's NAV by
dividing the total net value of its assets by the number of outstanding shares.
We base the value of the Funds' investments on their market value, usually the
last price reported for each security before the close of the stock market that
day. A market price may not be available for securities that trade infrequently.
Occasionally, an event that affects a security's value may occur after the
market closes. This is more likely to happen for foreign securities traded in
foreign markets that have different time zones from the United States. Major
developments affecting the price of those securities may happen after the
foreign markets in which such securities trade have closed, but before the Fund
calculates its NAV. In this case, Kayne Anderson, subject to the supervision of
the Fund's Board of Trustees, will make a good-faith estimate of the security's
"fair value," which may be higher or lower than security's closing price in its
relevant market.
We calculate the net asset value (NAV) of each Fund after the close of trading
on the New York Stock Exchange (NYSE) every day the NYSE is open. We do not
calculate NAVs on the days on which the NYSE is closed for trading. The bond
Funds also do not calculate their NAVs on bank holidays. Certain exceptions
apply as described below. If we receive your order by the close of trading on
the NYSE, you can purchase shares at the price calculated for that day. The NYSE
usually closes at 4 P.M. on weekdays, except for holidays. If your order and
payment are received after the NYSE has closed, your shares will be priced at
the next NAV we determine after receipt of your order. More details about how we
calculate the Funds' NAV are in the Statement of Additional Information.
BUYING SHARES
You pay no sales charge to invest in the Kayne Anderson Mutual Funds. The
minimum initial investment for each Fund is $2,000. The minimum subsequent
investment is $250 ($1,000 and $200, respectively, for retirement plans and
custodial accounts; $500 and $200 for Education IRAs). Under certain conditions
we may waive these minimums. If you buy shares through a broker or investment
advisor, different requirements may apply. All investments must be made in U.S.
dollars.
WE MUST RECEIVE PAYMENT FROM YOU WITHIN THREE BUSINESS DAYS OF YOUR PURCHASE. In
addition, the Funds and the Distributor each reserve the right to reject all or
part of any purchase.
To open a new account:
BY MAIL. Send your completed application, with a check payable to the
appropriate fund, to:
Kayne Anderson Mutual Funds
c/o Investors Bank & Trust Company
P.O. Box 9130
MFD 23
Boston, MA 02117-9130
Your check must be in U.S. dollars and drawn only on a bank located in the
United States. WE DO NOT ACCEPT THIRD-PARTY CHECKS, "STARTER" CHECKS,
CREDIT-CARD CHECKS, INSTANT-LOAN CHECKS OR CASH INVESTMENTS. We may impose a
charge on checks that do not clear.
BY WIRE. Call us at (800) 395-3807 to let us know that you intend to make your
initial investment by wire. Tell us your name, the amount you want to invest and
the Fund(s) in which you want to invest. We will give you further instructions
and a fax number to which you should send your completed New Account
Application. To ensure that we handle your investment accurately, include
complete account information in all wire instructions. Then request your bank to
wire money from your account to the attention of:
21
<PAGE>
Kayne Anderson Mutual Funds
c/o Investors Bank & Trust Co.
Attn: Transfer Agent
ABA #011001438
Account #111213141
For further credit to Kayne Anderson Mutual Funds
Name of Fund: [FUND YOU WISH TO INVEST IN]
Account Number: [ACCOUNT NUMBER PROVIDED TO YOU OVER THE PHONE]
Name of Shareholder: [NAME ON THE NEW ACCOUNT APPLICATION]
Please note: Your bank may charge a wire transfer fee.
BUYING ADDITIONAL SHARES
BY MAIL. Mail a check made out to the appropriate fund with a signed letter
noting the name of the Fund in which you want to invest, your account number and
telephone number. We will mail you a confirmation of your investment. Please
enclose the stub from your account statement. Note that we may impose a charge
on checks that do not clear.
BY WIRE. There is no need to contact us when buying additional shares by wire.
Instruct your bank to wire funds to our affiliated bank using the above "By
Wire" purchase information.
EXCHANGING SHARES
You may exchange shares in one Fund for shares in another, in accounts with the
same registration, Taxpayer Identification number and address. Note that an
exchange may result in a realized gain or loss for tax purposes. You may
exchange shares by phone, at (800) 395-3807, if you complete and file with us an
authorization form, or by mail. Exchanges are subject to our minimum investment
requirement. Exchanges are subject to the following policies:
* We will process your exchange order at the next-calculated NAV.
* You may exchange shares only in Funds that are qualified for sale in your
state and that are offered in this prospectus.
* We may restrict or refuse your exchanges if we receive, or anticipate
receiving, simultaneous orders affecting a large portion of a Fund's assets
or if we detect a pattern of exchanges that suggests a market-timing
strategy.
* We reserve the right to refuse exchanges into a Fund by any person or group
if, in our judgment, the Fund would be unable to effectively invest the
money in accordance with its investment objective and policies, or might be
adversely affected in other ways.
* Shareholders may exchange shares of any Fund for shares of the Kayne
Anderson Money Market Account (which represents an investment in the
"TempCash Dollar Portfolio Shares" of the TempCash money market fund.) This
money market fund is not managed by Kayne Anderson and is not part of Kayne
Anderson Mutual Funds. You may invest in this money market fund only if its
shares are offered in your state of residence. You should carefully read
the prospectus for the money market fund before investing. This exchange
privilege does not mean that Kayne Anderson recommends that you invest in
the money market fund.
SELLING SHARES (REDEMPTIONS)
You may sell some or all of your fund shares on days that the New York Stock
Exchange is open for trading. Note that a redemption may result in a realized
gain or loss for tax purposes.
Your shares will be sold at the next NAV we calculate for the Fund after
receiving your order. We will promptly pay the proceeds to you, normally within
one business day of receiving your order and all necessary documents (including
a written redemption order with any required signature guarantee). We will mail
or wire you the proceeds, depending on your instructions. Shares purchased by
check may not be redeemed until 15 days after the purchase date.
Aside from any applicable redemption fees, we generally will not charge you any
fees when you sell your shares, although there are some minor exceptions:
22
<PAGE>
* Shareholders who want proceeds sent by wire or overnight courier will pay a
$7 fee that will be deducted directly from their proceeds.
In accordance with the rules of the Securities and Exchange Commission (SEC) we
reserve the right to suspend redemptions under extraordinary circumstances.
Shares can be sold in several ways:
* BY MAIL. Send us a letter including your name, account number, the Fund
from which you would like to sell shares and the dollar amount or number of
shares you want to sell. You must sign the letter the same way your account
is registered. If you have a joint account, all accountholders must sign
the letter.
If you want the proceeds to go to a party other than the account owner(s)
or your predesignated bank account, or if the dollar amount of your
redemption exceeds $50,000, you must obtain a signature guarantee (not a
notarization), available from many commercial banks, savings associations,
stock brokers and other NASD member firms.
* BY PHONE. You may accept or decline telephone redemption privileges on your
New Account Application. If you accept, you will be able to sell shares by
calling (800) 395-3807 between 8:30 A.M. and 5:00 P.M. (Eastern time) on a
day when the NYSE is open for trading.
* We may suspend your 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.
* REDEMPTION BY AUTOMATED CLEARING HOUSE (ACH). You may 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. We must receive ACH redemption requests before 4:00
P.M. New York time (or earlier close of regular NYSE trading) to receive
that day's closing net asset value. The funds from the ACH redemption will
be available two days after the redemption has been processed.
SPECIAL ACCOUNT OPTIONS
We offer the following special account options to individual shareholders but
not to participants in employer-sponsored retirement plans. There are no charges
for the programs noted below, and you may change or stop these plans at any time
by written notice to us.
SYSTEMATIC WITHDRAWAL PLAN. You may participate in the Systematic Withdrawal
Program if you wish to withdraw funds from an account on a regular basis. You
must either own or purchase shares having a value of $10,000 or more. We will
mail automatic payments by check to you 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 you to make regular investments once an
account is established. You simply authorize 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. You must open an account with the
$2,000 minimum before participating in this plan. To enroll, 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 you may purchase Fund shares. However, we do not sponsor
Defined Contribution Plans. For details concerning any of the retirement plans,
please call us at (800) 395-3807.
23
<PAGE>
TELEPHONE TRANSACTIONS. By buying or selling shares over the phone, you agree to
reimburse the Funds for any expenses or losses incurred in connection with
transfers of money from your account. This includes any losses or expenses
caused by your bank's failure to honor your debit or act in accordance with your
instructions. If your bank makes erroneous payments or fails to make payment
after you buy shares, we may cancel the purchase and immediately terminate your
telephone transaction privilege.
The shares you purchase by phone will be priced at the first net asset value we
determine after receiving your purchase. You will not actually own the shares,
however, until we receive your payment in full. If we do not receive your
payment within three business days of your request, we will cancel your
purchase. You may be responsible for any losses incurred by the Fund as a
result.
Please note that we cannot be held liable for following telephone instructions
that we reasonably believe to be genuine. We use several safeguards to ensure
that the instructions we receive are accurate and authentic, such as:
>> recording certain calls,
>> requiring a special authorization number or other personal information not
likely to be known by others, and
>> sending a transaction confirmation to the investor.
The Funds and our Transfer Agent may be held liable for any losses due to
unauthorized or fraudulent telephone transactions only if we have not followed
these reasonable procedures.
We reserve the right to revoke the telephone transaction privilege of any
shareholder at any time if he or she has used abusive language or misused the
phone privilege by making purchases and redemptions that appear to be part of a
systematic market-timing strategy.
If you notify us that your address has changed, we will temporarily suspend your
telephone redemption privileges until 30 days after your notification to protect
you and your account. We require all redemption requests made during this period
to be in writing with a signature guarantee.
Shareholders may experience delays in exercising telephone redemption privileges
during periods of volatile economic or market conditions. In these cases you may
want to transmit your redemption request:
>> by overnight courier
>> by telegram
OTHER POLICIES
PURCHASING SHARES THROUGH A BROKER. You may buy and sell shares of the Funds
through certain brokers (and their agents) that have made arrangements with the
Funds to sell Fund shares. When you place your order with such a broker or its
authorized agent, your order is treated as if you had placed it directly with
the Funds' transfer agent, and you will pay or receive the next price calculated
by the relevant Fund. The broker (or agent) holds your shares in an omnibus
account in the broker's (or agent's) name, and the broker (or agent) maintains
your individual ownership records. The Funds may pay the broker (or its agent)
for maintaining these records as well as providing other shareholder services.
The broker (or its agent) may charge you a fee for handling your (purchase and
sale) order. The broker (or agent) is responsible for processing your order
correctly and promptly, keeping you advised regarding the status of your
individual account, confirming your transactions and ensuring that you receive
copies of the Funds' prospectus.
MINIMUM ACCOUNT BALANCES. Due to the cost of maintaining small accounts, we
require a minimum account balance of $2,000. If your account balance falls below
that amount because of redemptions, we will ask you to add to your account. If
your account balance is not brought up to the minimum or you do not send us
other instructions within 60 days after we notify you of the deficiency, we will
redeem your shares and send you the proceeds. We believe that this policy is in
the best interests of all our shareholders.
TAX WITHHOLDING INFORMATION. Be sure to complete the Taxpayer Identification
number (TIN) section of the New Account Application. If you don't have a Social
Security Number or TIN, apply for one immediately by contacting your
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local office of the Social Security Administration or the Internal Revenue
Service (IRS). If you do not provide us with a TIN or a Social Security number,
federal tax law may require us to withhold 31% of your taxable dividends,
capital-gains distributions, and redemption and exchange proceeds (unless you
qualify as an exempt payee under certain rules).
Other rules about TINs apply for certain investors. For example, if you are
establishing an account for a minor under the Uniform Gifts to Minors Act, you
should furnish the minor's TIN. If the IRS has notified you that you are subject
to backup withholding because you failed to report all interest and dividend
income on your tax return, you must check the appropriate item on the New
Account Application. Foreign shareholders should note that any dividends the
Funds pay to them may be subject to up to 30% withholding instead of backup
withholding.
AFTER YOU INVEST
TAXES. IRS rules require that the Funds distribute all of their net investment
income and capital gains, if any, to shareholders. Capital gains may be taxable
at different rates depending upon the length of time a Fund holds its assets. We
will inform you about the source of any dividends and capital gains upon
payment. After the close of each calendar year, we will advise you of their tax
status. The Funds' distributions, whether received in cash or reinvested, may be
taxable. Any redemption of a Fund's shares or any exchange of a Fund's shares
for another Fund will be treated as a sale, and any gain on the transaction may
be taxable.
Additional information about tax issues relating to the Funds can be found in
our Statement of Additional Information, available free by calling (800)
395-3807. Consult your tax advisor about the potential tax consequences of
investing in the Funds.
DIVIDENDS AND DISTRIBUTIONS. As a shareholder you may receive income dividends
and capital gain distributions for which you will owe taxes (unless you invest
solely through a tax-advantaged account such as an IRA or a 401(k) plan).
If you would like to receive dividends and distributions in cash, indicate that
choice on your New Account Application. Otherwise, the distribution will be
reinvested in additional Fund shares.
INCOME DIVIDENDS CAPITAL GAINS
---------------- -------------
RISING DIVIDENDS Declared and paid semi-annually Declared and paid in the
EQUITY FUNDS last quarter of each
calendar year*
BOND FUNDS Declared and paid monthly Declared and paid in the
(the Tax-Free Bond Fund will last quarter of each
declare calendar year* dividends
daily and pay monthly)
* Following their fiscal year end (December 31), the Funds may make additional
distributions to avoid the imposition of a tax.
During the year, we will also send you the following communications:
* CONFIRMATION STATEMENTS. Mailed after each purchase or redemption of shares
* ACCOUNT STATEMENTS. Mailed after the close of each calendar quarter.
* ANNUAL AND SEMIANNUAL REPORTS. Mailed approximately 60 days after December
31 and June 30.
* 1099 TAX FORM. Sent by January 31.
* ANNUAL UPDATED PROSPECTUS. Mailed to existing shareholders in the spring.
To save shareholders' money, we will send only one copy of each shareholder
report or other mailing to your household if you hold accounts under common
ownership or at the same address (regardless of the number of shareholders or
accounts at that household or address), unless you request additional copies.
If you plan to purchase shares of a Fund, check if it is planning to make a
distribution in the near future. You should do this because, if you buy shares
of a Fund just before a distribution, you'll pay full price for the shares but
receive a portion of your purchase price back as a taxable distribution. This is
called "buying a dividend." Unless you hold the Fund in a tax-deferred account,
you will have to include the distribution in your gross income for tax purposes,
even though you may not have participated in the increase of the Fund's
appreciation.
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K a y n e A n d e r s o n
Mutual Funds
Kayne Anderson Investment Management, LLC
1800 Avenue of the Stars, 2nd Floor
Los Angeles, California 90067
(800) 222-0380
You can find more information about Kayne Anderson Mutual Funds' investment
policies in the Statement of Additional Information (SAI), incorporated by
reference in this prospectus, which is available free of charge.
To request a free copy of the SAI, call us at (800) 395-3807. You can review and
copy further information about Kayne Anderson Mutual Funds, including the SAI,
at the Securities and Exchange Commission's (SEC's) Public Reference Room in
Washington, D.C. To obtain information on the operation of the Public Reference
Room please call (800) SEC-0330. Reports and other information about Kayne
Anderson Mutual Funds are available at the SEC's Web site at WWW.SEC.GOV. You
can also obtain copies of this information, upon payment of a duplicating fee,
by writing the Public Reference Section of the SEC, Washington, D.C., 20549-6009
You can find further information about Kayne Anderson Mutual Funds in our annual
and semiannual shareholder reports, which discuss the market conditions and
investment strategies that significantly affected each Fund's performance during
its most recent fiscal period. To request a copy of the most recent annual or
semiannual report, please call us at (800) 395-3807
SEC File No.: Kayne Anderson Mutual Funds 811-07705
<PAGE>
------------------------------------------------------------
PART B
COMBINED STATEMENT OF ADDITIONAL INFORMATION
Kayne Anderson Mutual Funds
Kayne Anderson Rising Dividends Fund
Kayne Anderson Small Cap Rising Dividends Fund
Kayne Anderson International Rising Dividends Fund
Kayne Anderson High-Yield Bond Fund
Kayne Anderson Intermediate Total Return Bond Fund
Kayne Anderson Intermediate Tax-Free Bond Fund
------------------------------------------------------------
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
STATEMENT OF ADDITIONAL INFORMATION
APRIL 30, 1999
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 (SAI) pertains to the following funds:
+ Kayne Anderson Rising Dividends Fund (Rising Dividends Fund),
+ Kayne Anderson Small Cap Rising Dividends Fund (Small Cap Rising
Dividends Fund),
+ Kayne Anderson International Rising Dividends Fund (International
Rising Dividends Fund),
+ Kayne Anderson High-Yield Bond Fund (High-Yield Bond Fund),
+ Kayne Anderson Intermediate Total Return Bond Fund (Intermediate Total
Return Bond Fund), and
+ Kayne Anderson Intermediate Tax-Free Bond Fund (Tax-Free Bond Fund).
Each is a series of Kayne Anderson Mutual Funds (the "Trust"). This SAI is not a
prospectus and should be read in conjunction with the Prospectus for the Funds
dated April 30, 1999, as may be revised from time to time. The Prospectus may be
obtained by writing or calling the Funds at the above address and telephone
number.
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TABLE OF CONTENTS
CAPTION PAGE
Investment Objectives and Policies...........................................B-2
Risk Factors................................................................B-21
Distributions and Tax Information...........................................B-28
Management of the Funds.....................................................B-32
The Funds'Administrator.....................................................B-39
The Funds'Distributor.......................................................B-40
How Net Asset Value Is Determined...........................................B-41
Share Purchases and Redemptions.............................................B-42
How Performance Is Determined...............................................B-43
Additional Information......................................................B-45
Financial Statements........................................................B-46
Appendix A: Description of Securities Ratings..............................B-47
The Trust is an open-end, diversified management investment company organized as
a Delaware business trust on May 29, 1996. It is registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). The Trust
currently offers shares of beneficial interest $0.01 par value per share, in six
series. This Statement of Additional Information pertains to the following
series of Trust:
>> Kayne Anderson Rising Dividends Fund (Rising Dividends Fund)
>> Kayne Anderson Small Cap Rising Dividends Fund (Small Cap Rising Dividends
Fund)
>> Kayne Anderson International Rising Dividends Fund (International Rising
Dividends Fund)
>> Kayne Anderson High-Yield Bond Fund (High-Yield Bond Fund)
>> Kayne Anderson Intermediate Total Return Bond Fund (Intermediate Total
Return Bond Fund)
>> Kayne Anderson Intermediate Tax-Free Bond Fund (Tax-Free Bond Fund)
================================================================================
INVESTMENT OBJECTIVES AND POLICIES
================================================================================
The Funds are managed by Kayne Anderson Investment Management, LLC (Adviser).
The investment objectives and policies of the Funds are described in detail in
the Prospectus. Whether each Fund achieves its 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
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 (1940 Act), require a Fund to limit its investments so that, as
determined immediately after a securities purchase is made: (a) not more than
10% of the value of that Fund's total assets will be invested in the aggregate
in securities of investment companies as a group, and (b) either (i) that
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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.
DEPOSITARY RECEIPTS. The Rising Dividends, Small Cap Rising Dividends,
International Rising Dividends, the High-Yield Bond Fund 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.
DEBT SECURITIES. Each Fund may invest in debt securities including 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 contains
a description of bond ratings from major ratings agencies.
ASSET-BACKED SECURITIES. Each Fund may invest in asset-backed securities which
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.
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Although generally rated AAA, it is possible that the securities could become
illiquid or experience losses if guarantors or insurers default.
BELOW INVESTMENT GRADE DEBT SECURITIES. Each Fund may purchase, and the
High-Yield Fund emphasizes, 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 reduced prospects for payment of
principal and interest. See Appendix A for a description of these ratings.
Lower-rated debt securities are considered to be speculative and have 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 can
increase 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
sound enough to meet future obligations, has improved, or is expected to improve
in the future. The Adviser's analysis focuses on relative values based on such
factors as interest or dividend coverage, asset coverage, earnings prospects,
and the experience and managerial strength of the issuer.
Each Fund may choose, at its expense or in conjunction with others, to pursue
litigation or otherwise exercise its rights as a security holder to seek to
protect the interests of security holders if it determines this is in the best
interest of its shareholders.
U.S. GOVERNMENT SECURITIES. Generally, U.S. Government Securities held by the
Funds will increase in value when interest rates decrease and will decrease in
value when interest rates increase. U.S. Government securities in which the
Funds may invest include debt obligations of varying maturities issued by the
U.S. Treasury or issued or guaranteed by an agency or instrumentality of the
U.S. Government, including the Federal Housing Administration (FHA), Farmers
Home Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association (GNMA), General
Services Administration, Central Bank for Cooperatives, Federal Farm Credit
Bank, Farm Credit System Financial Assistance Corporation, Federal Home Loan
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<PAGE>
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, among others.
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. 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.
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 (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;
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(6) mortgage loans on completed multifamily projects;
(7) fixed-rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the
mortgage loans ("buydown" mortgage loans);
(8) mortgage loans that provide for adjustments on payments based on
periodic changes in interest rates or in other payment terms of the
mortgage loans; and
(9) mortgage-backed serial notes.
MORTGAGE-RELATED SECURITIES: FEDERAL NATIONAL MORTGAGE ASSOCIATION. FNMA is a
federally chartered and privately-owned corporation established under the
Federal National Mortgage Association Charter Act. FNMA was originally organized
in 1938 as a U.S. Government agency to add greater liquidity to the mortgage
market. FNMA was transformed into a private sector corporation by legislation
enacted in 1968. FNMA provides funds to the mortgage market primarily by
purchasing home mortgage loans from local lenders, thereby providing them with
funds for additional lending. FNMA acquires funds to purchase loans from
investors that may not ordinarily invest in mortgage loans directly, thereby
expanding the total amount of funds available for housing.
Each FNMA pass-through security represents a proportionate interest in one or
more pools of FHA Loans, VA Loans or conventional mortgage loans (that is,
mortgage loans that are not insured or guaranteed by any U.S. Government
agency). The loans contained in those pools consist of one or more of the
following:
(1) fixed-rate level payment mortgage loans;
(2) fixed-rate growing equity mortgage loans;
(3) fixed-rate graduated payment mortgage loans;
(4) variable-rate mortgage loans;
(5) other adjustable-rate mortgage loans; and
(6) fixed-rate mortgage loans secured by multifamily projects.
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. 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).
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Each class of a CMO is issued at a specific fixed or floating coupon rate and
has a stated maturity or final distribution date. Principal prepayments on the
collateral pool may cause the various classes of a CMO to be retired
substantially earlier than their stated maturities or final distribution dates.
The principal of and interest on the collateral pool may be allocated among the
several classes of a CMO in a number of different ways. Generally, the purpose
of the allocation of the cash flow of a CMO to the various classes is to obtain
a more predictable cash flow to some of the individual tranches than exists with
the underlying collateral of the CMO. As a general rule, the more predictable
the cash flow is on a CMO tranche, the lower the anticipated yield will be on
that tranche at the time of issuance relative to prevailing market yields on
mortgage-related securities. Certain classes of CMOs may have priority over
others with respect to the receipt of prepayments on the mortgages.
The Funds may invest in, among other things, "parallel pay" CMOs and Planned
Amortization Class CMOs (PAC Bonds). Parallel pay CMOs are structured to provide
payments of principal on each payment date 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 (Institution), typically a commercial bank.
Participating VRDNs provide a Fund with a specified undivided interest (up to
100%) of the underlying obligation and the right to demand payment of the unpaid
principal balance plus accrued interest on the Participating VRDNs from the
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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, provides a letter
of credit, and issues a 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.
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
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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.
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
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two classes are based on payments received on the underlying Municipal
Securities. One class has the characteristics of a typical auction-rate
security, having its interest rate adjusted at specified intervals, and its
ownership changes based on an auction mechanism. The interest rate of this class
generally is expected to be below the coupon rate of the underlying Municipal
Securities and generally is at a level comparable to that of a Municipal
Security of similar quality and having a maturity equal to the period between
interest rate adjustments. The second class bears interest at a rate that
exceeds the interest rate typically borne by a security of comparable quality
and maturity; this rate also is adjusted, although inversely to changes in the
rate of interest of the first class. If the interest rate on the first class
exceeds the coupon rate of the underlying Municipal Securities, its interest
rate will exceed the rate paid on the second class. In no event will the
aggregate interest paid with respect to the two classes exceed the interest paid
by the underlying Municipal Securities. The value of the second class and
similar securities should be expected to fluctuate more than the value of a
Municipal Security of comparable quality and maturity and their purchase by the
Tax-Free Bond Fund should increase the volatility of its net asset value and,
thus, its price per share. These custodial receipts are sold in private
placements and are subject to the Tax-Free Bond Fund's limitation with respect
to illiquid investments. The Tax-Free Bond Fund also may purchase directly from
issuers, and not in a private placement, Municipal Securities having the same
characteristics as the custodial receipts.
TENDER OPTION BONDS. The Tax-Free Bond Fund may purchase tender option bonds and
similar securities. A tender option bond is a Municipal Security, generally held
pursuant to a custodial arrangement, having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing short-term
tax-exempt rates, coupled with an agreement of a third party, such as a bank,
broker-dealer or other financial institution, granting the security holders the
option, at periodic intervals, to tender their securities to the institution and
receive their face value. As consideration for providing the option, the
financial institution receives periodic fees equal to the difference between the
Municipal Security's fixed coupon rate and the rate, as determined by a
remarketing or similar agent at or near the commencement of such period, that
would cause the securities, coupled with the tender option, to trade at par on
the date of such determination. Thus, after payment of this fee, the security
holder effectively holds a demand obligation that bears interest at the
prevailing short-term tax-exempt rate. The Adviser, on behalf of the Tax-Free
Bond Fund, 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
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received by a regulated investment company with respect to such obligations will
be tax-exempt in the hands of the company and may be distributed to its
shareholders as exempt-interest dividends. The last such ruling was issued in
1983. The IRS subsequently announced that it will not ordinarily issue advance
ruling letters as to the identity of the true owner of property in cases
involving the sale of securities or participation interests therein if the
purchaser has the right to cause the securities, or the participation interest
therein, to be purchased by either the seller or a third party. The Tax-Free
Bond Fund intends to take the position that it is the owner of any municipal
obligations acquired subject to a stand-by commitment or a similar put and that
tax-exempt interest earned with respect to such municipal obligations will be
tax exempt in its hands. There is no assurance that stand-by commitments will be
available to the Tax-Free Bond Fund nor has it assumed that such commitments
would continue to be available under all market conditions. There may be other
types of municipal securities that become available and are similar to the
foregoing described Municipal Securities in which the Tax-Free Bond Fund may
invest.
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.
CURRENCY HEDGING AND RISK MANAGEMENT PRACTICES. 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
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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.
Despite their limited use, the Funds may enter into hedging transactions when,
in fact, it is inopportune to do so and, conversely, when it is more opportune
to enter into hedging transactions the Funds might not enter into such
transactions. Such inopportune timing of utilization of hedging practices could
result in substantial losses to the Funds.
FORWARD CONTRACTS. The Rising Dividends, Small Cap Rising Dividends,
International Rising Dividends, High-Yield Bond Fund 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 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.
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Pursuant to Section 4.5 of the regulations under the Commodity Exchange Act, the
notice of eligibility included the representation that the Funds will use
futures contracts and related options for bona fide hedging purposes within the
meaning of CFTC regulations, provided that a Fund may hold positions in futures
contracts and related options that do not fall within the definition of bona
fide hedging transactions if the aggregate initial margin and premiums required
to establish such positions will not exceed 5% of that Fund's net assets (after
taking into account unrealized profits and unrealized losses on any such
positions) and that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded from such 5%.
The Funds will attempt to determine whether the price fluctuations in the
futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Funds or
which they expect to purchase. The Funds' futures transactions generally will be
entered into only for traditional hedging purposes -- I.E., futures contracts
will be sold to protect against a decline in the price of securities or
currencies and will be purchased to protect a Fund against an increase in the
price of securities it intends to purchase (or the currencies in which they are
denominated). All futures contracts entered into by these Funds are traded on
U.S. exchanges or boards of trade licensed and regulated by the CFTC or on
foreign exchanges.
Positions taken in the futures markets are not normally held to maturity but are
instead liquidated through offsetting or "closing" purchase or sale
transactions, which may result in a profit or a loss. While these Funds' futures
contracts on securities or currencies will usually be liquidated in this manner,
a Fund may make or take delivery of the underlying securities or currencies
whenever it appears economically advantageous. A clearing corporation associated
with the exchange on which futures on securities or currencies are traded
guarantees that, if still open, the sale or purchase will be performed on the
settlement date.
By using futures contracts to hedge their positions, these Funds seek to
establish more certainty than would otherwise be possible with respect to the
effective price, rate of return or currency exchange rate on portfolio
securities or securities that these Funds propose to acquire. For example, when
interest rates are rising or securities prices are falling, a Fund can seek,
through the sale of futures contracts, to offset a decline in the value of its
current portfolio securities. When rates are falling or prices are rising, 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
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offset by appreciation in the value of the futures position. However, any
unanticipated appreciation in the value of a Fund's portfolio securities could
be offset substantially by a decline in the value of the futures position.
The acquisition of put and call options on futures contracts gives a Fund the
right (but not the obligation), for a specified price, to sell or purchase the
underlying futures contract at any time during the option period. Purchasing an
option on a futures contract gives a Fund the benefit of the futures position if
prices move in a favorable direction, and limits its risk of loss, in the event
of an unfavorable price movement, to the loss of the premium and transaction
costs.
A Fund may terminate its position in an option contract by selling an offsetting
option on the same series. There is no guarantee that such a closing transaction
can be effected. A Fund's ability to establish and close out positions on such
options is dependent upon a liquid market.
Loss from investing in futures transactions by these Funds is potentially
unlimited.
These Funds will engage in transactions in futures contracts and related options
only to the extent such transactions are consistent with the requirements of the
Internal Revenue Code of 1986, as amended (the "Code"), for maintaining their
qualification as a regulated investment company for federal income tax purposes.
OPTIONS ON SECURITIES, SECURITIES INDICES AND CURRENCIES. These Funds may
purchase put and call options on securities in which they have invested, on
foreign currencies represented in their portfolios and on any securities index
based in whole or in part on securities in which these Funds may invest. These
Funds also may enter into closing sales transactions in order to realize gains
or minimize losses on options they have purchased.
A Fund normally will purchase call options in anticipation of an increase in the
market value of securities of the type in which it may invest or a positive
change in the currency in which such securities are denominated. The purchase of
a call option would entitle a Fund, in return for the premium paid, to purchase
specified securities or a specified amount of a foreign currency at a specified
price during the option period.
A Fund may purchase and sell options traded on U.S. and foreign exchanges.
Although these Funds will generally purchase only those options for which there
appears to be an active secondary market, there can be no assurance that a
liquid secondary market on an exchange will exist for any particular option or
at any particular time. For some options, no secondary market on an exchange may
exist. In such event, it might not be possible to effect closing transactions in
particular options, with the result that a Fund would have to exercise its
options in order to realize any profit and would incur transaction costs upon
the purchase or sale of the underlying securities.
Secondary markets on an exchange may not exist or may not be liquid for a
variety of reasons including: (i) insufficient trading interest in certain
options; (ii) restrictions on opening transactions or closing transactions
imposed by an exchange; (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options; (iv)
unusual or unforeseen circumstances which interrupt normal operations on an
exchange; (v) inadequate facilities of an exchange or the Options Clearing
Corporation to handle current trading volume at all times; or (vi)
discontinuance in the future by one or more exchanges for economic or other
reasons, of trading of options (or of a particular class or series of options),
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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 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 designated
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.
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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 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 designated 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.
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If the Adviser hedges currency exposure through proxy hedges, a Fund could
realize currency losses from the hedge and the security position at the same
time if the two currencies do not move in tandem. Similarly, if the Adviser
increases a Fund's exposure to a foreign currency, and that currency's value
declines, the Fund will realize a loss. There is no assurance that the Adviser's
use of forward currency contracts will be advantageous to any Fund or that the
Adviser will hedge at an appropriate time. If the Adviser is not correct in its
forecast of interest rates, market values and other economic factors, a Fund
would be better off without a hedge. The policies described in this section are
non-fundamental policies of the Funds.
INDEXED SECURITIES. The Funds may purchase securities whose prices are indexed
to the prices of other securities, securities indices, currencies, precious
metals or other commodities, or other financial indicators. No Fund will invest
more than 5% of its net assets in indexed securities. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument or
statistic. Gold-indexed securities, for example, typically provide for a
maturity value that depends on the price of gold, resulting in a security whose
price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; for example, their maturity value may
increase when the specified currency value increases, resulting in a security
whose price characteristics are similar to a call option on the underlying
currency. Currency-indexed securities also may have prices that depend on the
values of a number of different foreign currencies relative to each other.
The performance of indexed securities depends to a great extent on the
performance of the security, currency, commodity or other instrument to which
they are indexed, and also may be influenced by interest rate changes in the
U.S. and abroad. At the same time, indexed securities are subject to the credit
risks associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent 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.
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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 designate cash and high quality liquid assets to cover its
obligation under the agreement. The Funds enter into reverse repurchase
agreements only with parties whose creditworthiness has been reviewed and deemed
satisfactory by the Adviser. A Fund's reverse repurchase agreements and dollar
roll transactions that are accounted for as financings will be included among
that Fund's borrowings for purposes of its investment policies and limitations.
DOLLAR ROLL TRANSACTIONS. The Funds may enter into dollar roll transactions. A
dollar roll transaction involves a sale by a Fund of a security to a financial
institution concurrently with an agreement by that Fund to purchase a similar
security from the institution at a later date at an agreed-upon price. The
securities that are repurchased will bear the same interest rate as those sold,
but generally will be collateralized by different pools of mortgages with
different prepayment histories than those sold. During the period between the
sale and repurchase, a Fund will not be entitled to receive interest and
principal payments on the securities sold. Proceeds of the sale will be invested
in additional portfolio securities of that Fund, and the income from these
investments, together with any additional fee income received on the sale, may
or may not generate income for that Fund exceeding the yield on the securities
sold. When a Fund enters into a dollar roll transaction, it 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. Each Fund may lend its securities in an amount not exceeding
30% of its assets to parties such as broker-dealers, banks, or institutional
investors if the loan is collateralized in accordance with applicable
regulations. 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.
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).
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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 10% 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.
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
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from the Adviser, the Board monitors trading activity in illiquid investments.
In determining the liquidity of the Funds' investments, the Adviser may consider
various factors, including:
(1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace,
(3) dealer undertakings to make a market,
(4) the nature of the security (including any demand or tender features),
(5) the nature of the marketplace for trades (including the ability to
assign or offset a Fund's rights and obligations relating to the
investment); and
(6) in the case of foreign currency-denominated securities, any
restriction on currency conversion.
Investments currently considered by a Fund to be illiquid include repurchase
agreements not entitling the holder to payments of principal and interest within
seven days, over-the-counter options (and securities underlying such options),
certain mortgage-backed securities and restricted securities. In the absence of
market quotations, illiquid investments are priced at fair value as determined
in good faith by a committee appointed by the Board of Trustees. If through a
change in values, net assets, or other circumstances, a Fund were in a position
where more than 10% of its net assets were invested in illiquid securities, it
would seek to take appropriate steps to protect liquidity.
RESTRICTED SECURITIES. Restricted securities, which are one type of illiquid
securities, generally can be sold in privately negotiated transactions, pursuant
to an exemption from registration under the Securities Act of 1933, as amended
(the "1933 Act"), or in a registered public offering. Where registration is
required, a Fund may be obligated to pay all or part of the registration expense
and a considerable period may elapse between the time it decides to seek
registration and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, a Fund might obtain a less favorable price than the
price that prevailed when it decided to seek registration of the security.
Currently, no Fund invests more than 10% of its assets in illiquid securities
which have legal or contractual restrictions on their resale unless there is an
actual dealer market for the particular issue and it has been determined to be a
liquid issue as described below.
In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including securities sold
in private placements, repurchase agreements, commercial paper, foreign
securities and corporate bonds and notes. These instruments are often restricted
securities because the securities are sold in transactions not requiring
registration. Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend either on an
efficient institutional market in which such unregistered securities can be
readily resold or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.
Rule 144A under the 1933 Act establishes a safe harbor from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. Institutional markets for restricted securities sold
pursuant to Rule 144A in many cases provide both readily ascertainable values
for restricted securities and the ability to liquidate an investment to satisfy
share redemption orders. Such markets might include automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
B-20
<PAGE>
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.
DEFENSIVE INVESTMENTS. 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."
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.
================================================================================
RISK FACTORS
================================================================================
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.
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
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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 High-Yield Bond Fund, 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.
SMALL COMPANIES. Investors in Funds that invest in smaller companies should
consider carefully the special risks involved. Such smaller companies may
present greater opportunities for capital appreciation but may involve greater
risk than larger, more mature issuers. Such smaller companies may have limited
product lines, markets or financial resources, and their securities may trade
less frequently and in more limited volume than those of larger, more mature
companies. As a result, the prices of their securities may fluctuate more than
those of larger issuers.
FOREIGN SECURITIES. The Rising Dividends, Small Cap Rising Dividends,
International Rising Dividends, High-Yield Bond and Intermediate Total Return
Bond Funds 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.
The foreign companies in which the Funds invest are industry leaders and
consistent growers, with strong management and clean balance sheets. However,
foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations, foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments), default in foreign government securities, and
political or social instability or diplomatic developments that could adversely
affect investments. In addition, there is often less publicly available
information about foreign issuers than those in the U.S. Foreign companies are
often not subject to uniform accounting, auditing and financial reporting
standards. Further, these Funds may encounter difficulties in pursuing legal
remedies or in obtaining judgments in foreign courts.
Brokerage commissions, fees for custodial services and other costs relating to
investments by these Funds in other countries are generally greater than in the
U.S. Foreign markets have different clearance and settlement procedures from
those in the U.S., and certain markets have experienced times when settlements
did not keep pace with the volume of securities transactions and resulted in
settlement difficulty. The inability of a Fund to make intended security
B-22
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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 Cap Rising
Dividends, International Rising Dividends, High-Yield Bond 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.
EXCHANGE RATES AND POLICIES. The International Rising Dividends Fund endeavors
to buy and sell foreign currencies on favorable terms. Some price spreads on
currency exchange (to cover service charges) may be incurred, particularly when
the Fund changes investments from one country to another or when proceeds from
the sale of shares in U.S. dollars are used for the purchase of securities in
foreign countries. Also, some countries may adopt policies which would prevent
the Fund from repatriating invested capital and dividends, withhold portions of
interest and dividends at the source, or impose other taxes, with respect to the
Fund's investments in securities of issuers of that country. There also is the
possibility of expropriation, nationalization, confiscatory or other taxation,
foreign exchange controls (which may include suspension of the ability to
transfer currency from a given country), default in foreign government
securities, political or social instability, or diplomatic developments that
could adversely affect investments in securities of issuers in those nations.
The Fund may be affected either favorably or unfavorably by fluctuations in the
relative rates of exchange between the currencies of different nations, exchange
control regulations and indigenous economic and political developments.
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
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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.
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, social, environmental and regulatory policies and conditions in a
given state. 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.
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.
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<PAGE>
INTEREST RATES. The market value of debt securities that are interest rate
sensitive is inversely related to 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 changes. 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.
Because prepayments of principal generally occur when interest rates are
declining, it is likely that a Fund, to the extent that it retains the same
percentage of debt securities, may have to reinvest the proceeds of prepayments
at lower interest rates than those of its previous investments. If this occurs,
that Fund's yield will correspondingly decline. 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. To the extent that a Fund purchases
mortgage-related securities at a premium, unscheduled prepayments, which are
made at par, result in a loss equal to any unamortized premium.
Duration is one of the fundamental tools used by the Manager in managing
interest rate risks including prepayment risks. Traditionally, a debt security's
"term to maturity" characterizes a security's sensitivity to changes in interest
rates "Term to maturity," however, measures only the time until a debt security
provides its final payment, taking no account of prematurity payments. Most debt
securities provide interest ("coupon") payments in addition to a final ("par")
payment at maturity, and some securities have call provisions allowing the
issuer to repay the instrument in full before maturity date, each of which
affect the security's response to interest rate changes. "Duration" is
considered a more precise measure of interest rate risk than "term to maturity."
Determining duration may involve the Adviser's estimates of future economic
parameters, which may vary from actual future values. Fixed-income securities
with effective durations of three years are more responsive to interest rate
fluctuations than those with effective durations of one year. For example, if
interest rates rise by 1%, the value of securities having an effective duration
of three years will generally decrease by approximately 3%.
LEVERAGE. Leveraging the Funds through various forms of borrowing creates an
opportunity for increased net income but, at the same time, creates special risk
considerations. For example, leveraging may exaggerate changes in the net asset
value of a Fund's shares and in the yield on a Fund's portfolio. Although the
principal of such borrowings will be fixed, a Fund's assets may change in value
during the time the borrowing is outstanding. Leveraging will create interest
expenses for a Fund that can exceed the income from the assets retained. To the
extent the income derived from securities purchased with borrowed funds exceeds
the interest a Fund will have to pay, that Fund's net income will be greater
than if leveraging were not used. Conversely, if the income from the assets
retained with borrowed funds is not sufficient to cover the cost of leveraging,
the net income of a Fund will be less than if leveraging were not used, and
therefore the amount available for distribution to shareholders as dividends
will be reduced.
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THE FUNDS' INVESTMENT LIMITATIONS
================================================================================
The following policies and investment restrictions have been adopted by each
Fund and (unless otherwise noted) are fundamental and cannot be changed without
the affirmative vote of a majority of a Fund's outstanding voting securities as
defined in the Investment Company Act. Each Fund MAY NOT:
(1) Change its status as a diversified series, which requires that each Fund,
with respect to 75% of its total assets, not invest in the securities of
any one issuer (other than the U.S. Government and its agencies and
instrumentalities) if immediately after and as a result of such investment
more than 5% of the total assets of the Fund would be invested in such
issuer (the remaining 25% of the Fund's total assets may be invested
without restriction except to the extent other investment restrictions may
be applicable);
(2) invest 25% or more of the value of the Fund's total assets in the
securities of companies engaged in any one industry (except securities
issued by the U.S. Government, its agencies and instrumentalities or
tax-exempt securities issued by state governments or political
subdivisions);
(3) borrow money, except each Fund may enter into bank loans for temporary or
emergency purposes or engage in otherwise permissible leveraging activities
(including reverse repurchase agreements and dollar roll transactions that
are accounted for as financings) in an amount not in excess of one-third of
the value of the Fund's total assets (at the lesser of acquisition cost or
current market value). No investments will be made by any Fund if its
borrowings exceed 10% of total assets;
(4) issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from making any
otherwise permissible borrowings, mortgages or pledges, or entering into
permissible reverse repurchase agreements and dollar roll transactions, and
options and futures transactions, or issuing shares of beneficial interest
in multiple classes;
(5) make loans of more than one-third of the Fund's net assets, including loans
of securities, except that the Fund may, 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;
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(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.
The Board of Trustees, as a matter of policy or in response to specific state
and/or federal legal requirements, has adopted the following additional
investment restrictions which may be changed at the Board's discretion
(consistent with any applicable legal requirements).
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.
B-27
<PAGE>
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.
To the extent these restrictions reflect matters of operating policy which may
be changed without shareholder vote, these restrictions may be amended upon
approval by the appropriate Board and notice to shareholders.
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.
================================================================================
DISTRIBUTIONS AND TAX INFORMATION
================================================================================
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.
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.
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 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
B-28
<PAGE>
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 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.
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
B-29
<PAGE>
capital losses), if any, by a Fund are taxable as long-term capital gains,
whether such distributions are taken in cash or reinvested in additional shares,
and regardless of how long shares of the Fund have been held. Fund distributions
also will be included in individual and corporate shareholders' income on which
the alternative minimum tax may be imposed. Tax-exempt shareholders will not be
required to pay taxes on amounts distributed to them, unless they have borrowed
to purchase or carry their shares of a Fund. Statements as to the tax status of
distributions to shareholders will be mailed annually.
Provided that, as anticipated, the Tax-Free Bond Fund qualifies as a regulated
investment company under the Code, and, at the close of each quarter of its
taxable year at least 50% of the value of the total assets of that Fund consists
of obligations the interest on which is exempt from federal income tax, that
Fund will be qualified to pay exempt-interest dividends to its shareholders
that, to the extent attributable to interest received by that Fund on such
obligations, are exempt from federal income tax. The total amount of
exempt-interest dividends paid by the Tax-Free Bond Fund to its shareholders
with respect to any taxable year cannot exceed the amount of interest received
by the Fund during such year on tax-exempt obligations less any expenses
attributable to such interest. Income from other transactions engaged in by the
Tax-Free Bond Fund, such as income from options and repurchase agreements, will
be taxable distributions to its shareholders.
The Code may subject interest received on otherwise tax-exempt securities to an
alternative minimum tax. In addition, certain corporations which are subject to
the alternative minimum tax may have to include a portion of exempt-interest
dividends in calculating their alternative minimum taxable income.
Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Tax-Free Bond Fund is not deductible for federal income tax
purposes. Under regulations prescribed by the IRS for determining when borrowed
funds are considered used for the purposes of purchasing or carrying particular
assets, the purchase of shares may be considered to have been made with borrowed
funds even though the borrowed funds are not directly traceable to the purchase
of shares of this Fund.
Up to 85% of social security or railroad retirement benefits may be included in
federal taxable income of recipients whose adjusted gross income (including
income from tax-exempt sources such as tax-exempt bonds and exempt-interest
dividends) plus 50% of their benefits exceed certain base amounts. Income from
the Tax-Free Bond Fund is included in the calculation of whether a recipient's
income exceeds these base amounts, but is not taxable directly.
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
B-30
<PAGE>
capital, nevertheless will be taxable as described above. Investors should be
careful to consider the tax implications of buying shares just prior to a
distribution. The price of shares purchased at that time may include the amount
of the forthcoming distribution. Those investors purchasing shares just prior to
a distribution will then receive a partial return of their investment upon such
distribution, which will nevertheless be taxable to them.
Any gain or loss realized upon an exchange or redemption of shares in a Fund by
a shareholder who holds the shares as a capital asset will be treated as a
long-term capital gain or loss if the shares have been held for more than one
year, and otherwise as a short-term capital gain or loss. However, any loss
realized by a shareholder upon an exchange or redemption of shares of a Fund
held (or treated as held) for six months or less will be treated as a long-term
capital loss to the extent of any long-term capital gain distribution received
on the shares.
All or a portion of a loss realized upon the exchange or redemption of shares
may be disallowed to the extent shares are purchased (including shares acquired
by means of reinvested dividends) within 30 days before or after such
redemption. In addition, with respect to the Tax-Free Bond Fund, any loss
realized upon the exchange or redemption of shares of the Fund held (or treated
as held) for six months or less will be disallowed to the extent that of any
exempt-interest dividends received on the shares.
Dividends paid by a Fund will be eligible for the 70% dividends received
deduction for corporate shareholders, to the extent that a Fund's income is
derived from certain qualifying dividends received from domestic corporations.
Availability of the deduction is subject to certain holding period and
debt-financing limitations. Capital gains distributions are not eligible for the
70% dividends received deduction.
A Fund may be subject to foreign withholding taxes on dividends and interest
earned with respect to securities of foreign corporations. If more than 50% in
value of the total assets of a Fund at the end of its fiscal year is invested in
stock or securities 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
B-31
<PAGE>
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.
================================================================================
MANAGEMENT OF THE FUNDS
================================================================================
TRUSTEES AND OFFICERS
The Trustees are responsible for the overall management of the Fund, including
establishing the Fund's policies, general supervision and review of their
investment activities. The officers who administer the Fund's daily operations,
are appointed by the Board of Trustees. The current Trustees and officers of the
Trust performing a policy-making function and their affiliations and principal
occupations for the past five years are set forth below:
B-32
<PAGE>
<TABLE>
<CAPTION>
POSITION(S) HELD OTHER PRINCIPAL OCCUPATIONS(S)
NAME, ADDRESS AND AGE WITH TRUST DURING PAST FIVE YEARS
- --------------------- ---------- ----------------------
<S> <C> <C>
Richard Alan Kayne(1) (Age 54) Trustee, Equity owner and the President of the
c/o Kayne Anderson Mutual Funds Chief Executive general partner of Kayne Anderson (and
1800 Avenue of the Stars, Ste 200 Officer its predecessor) 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) (Age 59) Trustee and President Equity owner and the general
Chief Investment Officer of the partner of Kayne Anderson (and its
c/o Kayne Anderson Mutual Funds predecessor) since August 1989.
1800 Avenue of the Stars, Ste 200
Los Angeles, CA 90067
William T. Miller(1) (Age 36) Trustee, Equity Owner and Chief Financial Officer
c/o Kayne Anderson Mutual Funds Treasurer, and of the general partner of Kayne Anderson
1800 Avenue of the Stars, Ste 200 Chief Financial (and its predecessor) since June 1994.
Los Angeles, CA 90067 Officer Shareholder and Financial Vice 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 (Age 60) Trustee President and owner of Landmark Capital
c/o Landmark Capital, Inc. since 1973 (except for various periods
9595 Wilshire Boulevard of government service). Landmark Capital
Beverly Hills, CA 90212 is a national real estate development
and investment firm with activities as
diverse as construction, financing,
management and food distributions.
Secretary of the California Business,
Transportation and Housing Agency, and a
member of the Governor's Cabinet, from
1990 to 1993. Undersecretary of the U.S.
Department of Housing and Urban
Development (HUD) and a member of
President Ronald Reagan's Cabinet.
Arnold Brustin (Age 56) Trustee President of Vision Investments, a firm
c/o Vision Investments Inc. involved in the entertainment industry,
601 North Saltair Avenue since 1982. Prior to that, Senior Vice
Los Angeles, CA 90049 President - Business Affairs for
Tri-Star Television and has worked in
various legal and executive capacities
with CBS, Inc.
Gerald I. Isenberg (Age 59) Trustee Professor at the School of
1637 East Valley Road Cinema-Television at the University of
Montecito, CA 93108 Southern 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 (Age 61) Trustee Chairman and Chief Executive Officer of
c/o Landmark Distrib. Group, Inc. Landmark Distribution Group, Inc., and
100 Jericho Quadrangle its affiliated companies. These
Jericho, NY 11753 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>
- ----------
(1) Denotes a Trustee who is an "interested person," as defines in the 1940 act.
B-33
<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, 1998 is set forth below.
PENSION OR TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS FROM THE TRUST
COMPENSATION ACCRUED AS PART OF AND FUND COMPLEX
NAME OF TRUSTEE FROM THE TRUST FUND EXPENSES* (NO ADDITIONAL TRUSTS)
- --------------- -------------- -------------- ----------------------
Richard A. Kayne None None None
Allan M. Rudnick None None None
William T. Miller None None None
Carl D. Covitz $4,250 None $4,250
Arnold Brustin $4,250 None $4,250
Gerald I. Isenberg $4,250 None $4,250
William H. Waldorf $4,250 None $4,250
* The Trust does not maintain pension or retirement plans.
CONTROL PERSONS AND SHARE OWNERSHIP
As of March 31, 1999, the following persons held of record 5% or more of the
outstanding shares of the Funds:
<TABLE>
<CAPTION>
FUND SHAREHOLDER NAME & ADDRESS PERCENTAGE HELD
- ---- -------------------------- ---------------
<S> <C> <C>
Rising Dividends Bear Stearns Securities Corporation(1) 27.66%
Fund One Metrotech Center North
Brooklyn, NY 11201
Scudder Trust Company TTEE 11.53%
The Retirement Plan of Hancock and Estabrook LLP
11 Northeastern Boulevard
Salem, OR 03079
</TABLE>
B-34
<PAGE>
<TABLE>
<CAPTION>
FUND SHAREHOLDER NAME & ADDRESS PERCENTAGE HELD
- ---- -------------------------- ---------------
<S> <C> <C>
Small Cap Rising Dividends Bear Stearns Securities Corporation(1) 83.68%
Fund One Metrotech Center North
Brooklyn, NY 11201
International Rising Bear Stearns Securities Corporation(1) 81.07%
Dividends Fund One Metrotech Center North
Brooklyn, NY 11201
Intermediate Total Return Bear Stearns Securities Corporation(1) 82.65%
Bond Fund One Metrotech Center North
Brooklyn, NY 11201
William N. Pennington TR 12.07%
fbo William N. Pennington Separate Property Trust
441 West Plumb Lane
Reno, NV 89509
Intermediate Tax-Free Bond William N. Pennington TR 77.47%
Fund fbo William N. Pennington Separate Property Trust
441 West Plumb Lane
Reno, NV 89509
Bear Stearns Securities Corporation(1) 11.73%
One Metrotech Center North
Brooklyn, NY 11201
Charles Schwab & Co. Inc.(1) 7.41%
Special Custody Account for Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
</TABLE>
- ----------
(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 the underlying individual accounts thereof.
As of March 31, 1999, the Trustees 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, High Yield Bond Fund, Intermediate Total
Return Bond Fund and Intermediate Tax-Free Bond Fund. Also, as of that date, the
Directors and Officers of the Trust owned 1.5% of the outstanding shares of the
Small Cap Rising Dividends Fund.
B-35
<PAGE>
THE ADVISER
As set forth in the Prospectus, Kayne Anderson is the Adviser for the Funds.
Pursuant to an Investment Management Agreement (the "Management Agreement"), the
Adviser determines the composition of the Funds' portfolios, the nature and
timing of the changes to the Funds' portfolios and the manner of implementing
such changes. The Adviser also (a) provides the Funds with investment advice,
research and related services for the investment of their assets, subject to
such directions as it may receive from the Board of Trustees; (b) pays all of
the Trust's executive officers' salaries and executive expenses (if any); (c)
pays all expenses incurred in performing its investment advisory duties under
the Management Agreement; and (d) furnishes the Funds with office space and
certain administrative services. The services of the Adviser to the Funds are
not deemed to be exclusive, and the Adviser or any affiliate thereof may provide
similar services to other series of the Trust, other investment companies and
other clients, and may engage in other activities. The Funds may reimburse the
Adviser (on a cost recovery basis only) for any services performed for a Fund by
the Adviser outside its duties under the Management Agreement.
Kayne Anderson Investment Management LLC 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., managed, as of December 31, 1998, approximately $4.7 billion for such
clients.
The Management Agreement permits the Adviser to seek reimbursement of any
reductions made to its management fee within the three-year period following
such reduction, subject to a Fund's ability to effect such reimbursement and
remain in compliance with applicable expense limitations. Any such management
fee reimbursement will be accounted for on the financial statements of a Fund as
a contingent liability of the Fund, and will appear as a footnote to the Fund's
financial statements until such time as it appears that the Fund will be able to
effect such reimbursement. At such time as it appears probable that a Fund is
able to effect such reimbursement, the amount of reimbursement that the Fund is
able to effect will be accrued as an expense of the Fund for that current
period.
Management fees accrued by each fund, are as follows:
<TABLE>
<CAPTION>
RISING SMALL CAP RISING INTERNATIONAL RISING INTERMEDIATE TOTAL INTERMEDIATE
DIVIDENDS FUND DIVIDENDS FUND DIVIDENDS FUND RETURN BOND FUND TAX-FREE BOND FUND
-------------- -------------- -------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
1996 $180,502 $ 736 $ 1,292 $ 4,343 $ 4,355
1997 $271,652 $ 34,033 $ 39,034 $ 27,332 $27,588
1998 $334,518 $218,722 $256,701 $120,618 $34,150
</TABLE>
The Rising Dividends Fund commenced operations on May 1, 1995. The Small 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
High Yield Bond Fund commenced operations on April 30, 1999.
B-36
<PAGE>
MANAGEMENT AGREEMENT FOR THE NEW FUND. The Management Agreement may be
terminated by the Adviser or the Trust, without penalty, on 60-days' written
notice to the other and will terminate automatically in the event of its
assignment.
EXPENSES
Each Fund will pay all expenses related to its operation which are not borne by
the Adviser or the Distributor. These expenses include, among others: legal and
auditing expenses; interest; taxes; governmental fees; fees, voluntary
assessments and other expenses incurred in connection with membership in
investment company organizations; brokerage commissions or charges; fees of
custodians, transfer agents, registrars or other agents; distribution plan fees;
expenses relating to the redemption or repurchase of a Fund's shares; expenses
of registering and qualifying Fund shares for sale under applicable federal and
state laws and maintaining such registrations and qualifications; expenses of
preparing, printing and distributing to Fund shareholders prospectuses, proxy
statements, reports, notices and dividends; cost of stationery; costs of
shareholders' and other meetings of a Fund; fees paid to members of the Board of
Trustees (other than members who are affiliated persons of the Adviser or
Distributor); a Fund's pro rata portion of premiums of any fidelity bond and
other insurance covering a Fund and the Trust's officers and trustees or other
expenses of the Trust; and expenses including prorated portions of overhead
expenses (in each case on cost recovery basis only) of services for a Fund
performed by the Adviser outside of its investment advisory duties under the
Management Agreement. A Fund also is liable for such nonrecurring expenses as
may arise, including litigation to which a Fund may be a party. Each Fund has
agreed to indemnify its trustees and officers with respect to any such
litigation. Each Fund also paid its own organizational expenses, which are being
amortized over five years.
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
Cap Rising Dividends Fund, 1.30%; International Rising Dividends Fund, 1.40%;
High-Yield Bond Fund, 0.90%; Intermediate Total Return Bond Fund, 0.95%; 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.
During the past three years Kayne Anderson reimbursed the Funds the following
amounts:
<TABLE>
<CAPTION>
SMALL CAP INTERNATIONAL INTERMEDIATE INTERMEDIATE
RISING RISING RISING DIVIDENDS HIGH YIELD TOTAL RETURN TAX-FREE BOND
DIVIDENDS FUND DIVIDENDS FUND FUND BOND FUND BOND FUND FUND
-------------- -------------- ---- --------- --------- ----
<S> <C> <C> <C> <C>
1996 -- $16,314 $17,888 -- $10,845 $ 2,918
1997 -- $77,861 $83,125 -- $70,713 $40,123
1998 -- $12,965 $18,889 -- $15,132 $99,797
</TABLE>
B-37
<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 the Adviser believes better
prices and execution are available elsewhere. Securities traded through market
makers may include markups or markdowns, which are generally not determinable.
Under the 1940 Act, persons affiliated with a Fund are prohibited from dealing
with that Fund as principal in the purchase and sale of securities except after
application for and receipt of an exemptive order from the SEC. The 1940 Act
restricts transactions involving a Fund and its "affiliates," including, among
others, the Trust's trustees, officers, and employees and the Adviser, and any
affiliates of such affiliates. Affiliated persons of a Fund are permitted to
serve as its broker in over-the-counter transactions conducted on an agency
basis only.
Investment decisions for each Fund are made independently from those of other
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
B-38
<PAGE>
account. In some cases, this procedure may adversely affect the price or
quantity of the security available to a particular account. In other cases,
however, an account's ability to participate in large volume transactions may
produce better executions and prices. The following Funds paid the listed
commissions during the periods indicated.
Year Ended Year Ended Year Ended
12/31/96 12/31/97 12/31/98
-------- -------- --------
Rising Dividends Fund $4,649 $42,598 $79,037
Small Cap Rising Dividends Fund $1,995* $16,065 $69,339
International Rising Dividends Fund $3,021* $18,035 $73,886
*For the period from October 18, 1996, through December 31, 1996.
For the period October 18, 1996, (commencement of operations) through December
31, 1996, and for the years ended December 31, 1997 and 1998, the Small Cap
Rising Dividends Fund and the International Rising Dividends Fund executed a
majority of their trades through KA Associates, an affiliated broker of the
Adviser. Commissions paid by the Funds to this affiliate during period October
18, 1996, (commencement of operations) through December 31, 1996, and the years
ended December 31, 1997, and 1998 were as follows:
10/18/96 through Year Ended Year Ended
12/13/96 12/31/97 12/31/98
-------- -------- --------
Small Cap Rising Dividends Fund $1,995 $8,439 $48,597
International Rising Dividends Fund $3,021 $9,627 $5,749
================================================================================
THE FUNDS' ADMINISTRATOR
================================================================================
The Funds have an Administration Agreement with Investment Company
Administration LLC (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 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.
B-39
<PAGE>
The following table sets forth Administration Fees paid by the respective Funds.
Year Ended Year Ended Year Ended
12/31/96 12/31/97 12/31/98
-------- -------- --------
Rising Dividends Fund $44,164 $19,943 $30,783
Small Cap Rising Dividends Fund $ 1,973 $17,980 $26,052
International Rising Dividends Fund $ 1,973 $17,980 $26,052
Intermediate Total Return Bond Fund $ 1,973 $17,718 $26,052
Intermediate Tax-Free Bond Fund $ 1,973 $17,718 $20,873
================================================================================
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. Its address is: 4455 E.
Camelback Road, Suite 261-E, Phoenix, Arizona 85018. 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. There are no underwriting commissions paid with respect to sales of the
Fund's shares.
================================================================================
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 Custodian do not and
will not participate in making investment decisions for the Funds.
B-40
<PAGE>
================================================================================
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, and certain holidays, generally including: 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's) portfolio is expected to
include foreign securities listed on foreign stock exchanges and debt securities
of foreign governments and corporations. Generally, trading in and valuation of
foreign securities is substantially completed each day at various times prior to
the Portfolio Valuation Time. In addition, trading in and valuation of foreign
securities may not take place on every day that the NYSE is open for trading.
Furthermore, trading takes place in various foreign markets on days on which the
NYSE is not open for trading and on which the Funds' net asset values are not
calculated. Foreign securities quoted in foreign currencies are translated into
U.S. dollars using the latest available exchange rates. As a result,
fluctuations in the value of such currencies in relation to the U.S. dollar will
affect the net asset value of a Fund's shares even though there has not been any
change in the market values of such securities. Any changes in the value of
foreign currency forward contracts due to exchange rate fluctuations are
included in determination of net asset value.
Generally, each Fund's investments are valued at market value or, in the absence
of a market value, at fair value as determined in good faith by the Adviser and
the Board of Trustees. Portfolio securities that are listed or admitted to
trading on a U.S. exchange are valued at the last sale price on the principal
exchange on which the security is traded, or, if there has been no sale that
day, at the mean between the closing bid and asked prices. Securities admitted
to trading on the NASDAQ National Market System and securities traded only in
the U.S. over-the-counter market are valued at the last sale price, or, if there
has been no sale that day, at the mean between the closing bid and asked prices.
Foreign securities are valued at the last sale price in the principal market
where they are traded, or if the last sale price is unavailable, at the mean
between the last bid and asked prices available reasonably prior to the time the
Funds' net asset values are determined. Securities and assets for which market
quotations are not readily available (including restricted securities which are
subject to limitations as to their sale) are valued at fair value as determined
in good faith by or under the direction of the Board of Trustees.
Short-term debt obligations with remaining maturities in excess of 60 days are
valued at current market prices, as discussed above. Short-term securities with
60 days or less remaining to maturity
B-41
<PAGE>
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.
================================================================================
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
B-42
<PAGE>
shares are redeemed in this manner, the redeeming shareholder usually will incur
additional brokerage costs in converting the securities to cash.
================================================================================
HOW PERFORMANCE IS DETERMINED
================================================================================
STANDARDIZED PERFORMANCE INFORMATION
THE INTERMEDIATE TOTAL RETURN BOND FUND AND TAX-FREE BOND FUND. These Funds'
30-day yield figure described in the Prospectus is calculated according to a
formula prescribed by the SEC, expressed as follows:
YIELD=2[(a-b +1)6-1]
---
cd
Where: a = dividends and interest earned during the period.
b = 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, investments of new deposits or
reinvestments of a Fund's existing assets 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. During periods of rising
interest rates, the opposite result can be expected to occur.
THE TAX-FREE BOND FUND. A tax equivalent yield demonstrates the taxable yield
necessary to produce an after-tax yield equivalent to that of a fund that
invests in tax-exempt obligations. The tax equivalent yield for the Tax-Free
Bond Fund is computed by dividing that portion of the current yield (or
effective yield) of the Tax-Free Bond Fund (computed for the Fund as indicated
above) that is tax exempt by one minus a stated income tax rate and adding the
quotient to that portion (if any) of the yield of the Fund that is not tax
exempt. In calculating tax equivalent yields for the Tax-Free Bond Fund, this
Fund assumes an effective tax rate (using the top federal marginal tax rate) of
39.6%. The effective rate used in determining such yield does not reflect the
tax costs resulting from the loss of the benefit of personal exemptions and
itemized deductions that may result from the receipt of additional taxable
income by taxpayers with adjusted gross incomes exceeding certain levels. The
tax equivalent yield may be higher than the rate stated for taxpayers subject to
the loss of these benefits.
B-43
<PAGE>
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 period ended December 31, 1998, the total return for each Fund
is as follows:
<TABLE>
<CAPTION>
SMALL CAP RISING INTERNATIONAL RISING INTERMEDIATE TOTAL INTERMEDIATE TAX-FREE
RISING DIVIDENDS FUND DIVIDENDS FUND DIVIDENDS FUND RETURN BOND FUND BOND FUND
- --------------------- -------------- -------------- ---------------- ---------
<S> <C> <C> <C> <C>
14.14% 16.17% 26.47% 7.61% 4.37%
</TABLE>
For the period May 1, 1995 (commencement of operations), through December 31,
1998, for the Rising Dividends Fund, October 18, 1996 (commencement of
operations), through December 31, 1998, for the Small Cap Rising Dividends Fund
and the International Rising Dividends Fund and October 28, 1996 (commencement
of operations), through December 31, 1998, for the Intermediate Total Return
Bond Fund and the Tax Free Bond Fund, the average annual total returns are as
follows:
<TABLE>
<CAPTION>
SMALL CAP RISING INTERNATIONAL RISING INTERMEDIATE TOTAL INTERMEDIATE TAX-FREE
RISING DIVIDENDS FUND DIVIDENDS FUND DIVIDENDS FUND RETURN BOND FUND BOND FUND
- --------------------- -------------- -------------- ---------------- ---------
<S> <C> <C> <C> <C>
23.16% 18.12% 20.58% 6.88% 3.94%
</TABLE>
NON-STANDARDIZED TOTAL RETURN INFORMATION
From time to time, a Fund may present non-standardized total return information,
in addition to standardized performance information, which may include such
results as the growth of a hypothetical $10,000 investment in a Fund, and
cumulative total return. The results of a $10,000 investment in the Fund and
cumulative total return measure the absolute change in net asset value resulting
from all Fund operations including reinvestment of a distribution paid by the
Fund for the period specified.
B-44
<PAGE>
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 (Russell 2500), the Morgan Stanley Capital
International Europe, Australia and Far East Index (MSCI EAFE) and the Lehman
Corporate Government Intermediate Index (Lehman Index), or other unmanaged
indices so that investors may compare the Fund's results with those of a group
of unmanaged securities. The S&P 500, the S&P 400, the NASDAQ Industrial Index,
the NASDAQ Composite Index, the Russell 2500, MSCI EAFE and the Lehman Index are
unmanaged groups of common stocks and debt securities traded principally on
national or foreign securities exchanges and the over the counter market. A Fund
also may, from time to time, compare its performance to other mutual funds with
similar investment objectives and to the industry as a whole, as quoted by
rating services and publications, such as Lipper Analytical Services, Inc.,
Morningstar Mutual Funds, Forbes, Money and Business Week.
In addition, one or more portfolio managers or other employees of the Adviser
may be interviewed by print media, such as THE WALL STREET JOURNAL or BUSINESS
WEEK, or electronic news media, and such interviews may be reprinted or
excerpted for the purpose of advertising regarding the Fund.
================================================================================
ADDITIONAL INFORMATION
================================================================================
LEGAL OPINION
The validity of the shares offered by the Prospectus has been 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, Two Logan Square, Suite 2121, Philadelphia, Pennsylvania 19103,
independent public accountants for the Funds.
B-45
<PAGE>
LICENSE TO USE NAME
Kayne Anderson has granted the Trust and each Fund the right to use the
designation "Kayne Anderson" in its name, and has reserved the right to withdraw
its consent to the use of such designation under certain conditions, including
the termination of the Adviser as the Funds' investment adviser. Kayne Anderson
Investment Management, LLC 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, 1996, 1997 and
1998 for the Rising Dividends Fund, the Small 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, 1998 (the "Report") are
incorporated herein by reference to the Report. The Report may be obtained free
of charge by writing or calling the Funds at 1800 Avenue of the Stars, 2nd
Floor, Los Angeles, California 90067, (800) 395-3807.
B-46
<PAGE>
================================================================================
APPENDIX A: DESCRIPTION OF SECURITIES RATINGS
================================================================================
This Appendix describes ratings applied to corporate bonds by Standard & Poor's
Corporation ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch
Investors Service, L.P. ("Fitch") and Duff & Phelps Credit Rating Co. ("Duff &
Phelps").
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 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.
B-47
<PAGE>
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.
FITCH'S RATINGS
The ratings represent Fitch's assessment of the issuer's ability to
meet the obligations of a specific debt issue or class of debt. The
ratings take into consideration special features of the issue, its
relationship to other obligations of the issuer, the current financial
condition and operative performance of the issuer and of any guarantor,
as well as the political and economic environment that might affect the
issuer's future financial strength and credit quality.
B-48
<PAGE>
AAA Bonds rated AAA are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
AA Bonds rated AA are considered to be investment grade and of
very high credit quality. The obligor's ability to pay
interest and repay principal is very strong, although not
quite as strong as bonds rated AAA. Because bonds rated in the
AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated F-1+.
A Bonds rated A are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and
repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay
interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances,
however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood
that the ratings of these bonds will fall below investment
grade is higher than for bonds with higher ratings.
BB Bonds rated BB are considered speculative. The obligor's
ability to pay interest and repay principal may be affected
over time by adverse economic changes. However, business and
financial alternatives can be identified which could assist
the obligor in satisfying its debt service requirements.
B Bonds rated B are considered highly speculative. While bonds
in this class are currently meeting debt service requirements,
the probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue.
CCC Bonds rated CCC have certain identifiable characteristics,
which, if not remedied, may lead to default. The ability to
meet obligations requires an advantageous business and
economic environment.
CC Bonds rated CC are minimally protected. Default in payment of
interest and/or principal seems probable over time.
C Bonds rated C are in imminent default in payment of interest
or principal.
DDD, DD Bonds rated DDD, DD and D are in actual default of
AND D interest and/or principal payments. Such bonds are extremely
speculative and should be valued on the basis of their
ultimate recovery value in liquidation or reorganization of
the obligor. DDD represents the highest potential for recovery
on these bonds and D represents the lowest potential for
recovery.
B-49
<PAGE>
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category covering 12-36
months.
DUFF & PHELPS' RATINGS
AAA Bonds rated AAA are considered highest credit quality. The
risk factors are negligible, being only slightly more than for
risk-free U.S. Treasury debt.
AA Bonds rated AA are considered high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from
time to time because of economic conditions.
A Bonds rated A have protection factors which are average but
adequate. However, risk factors are more variable and greater
in periods of economic stress.
BBB Bonds rated BBB are considered to have below average
protection factors but still considered sufficient for prudent
investment. There may be considerable variability in risk for
bonds in this category during economic cycles.
BB Bonds rated BB are below investment grade but are deemed by
Duff as likely to meet obligations when due. Present or
prospective financial protection factors fluctuate according
to industry conditions or company fortunes. Overall quality
may move up or down frequently within the category.
B Bonds rated B are below investment grade and possess the risk
that obligations will not be met when due. Financial
protection factors will fluctuate widely according to economic
cycles, industry conditions and/or company fortunes. Potential
exists for frequent changes in quality rating within this
category or into a higher or lower quality rating grade.
CCC Bonds rated CCC are well below investment grade securities.
Such bonds may be in default or have considerable uncertainty
as to timely payment of interest, preferred dividends and/or
principal. Protection factors are narrow and risk can be
substantial with unfavorable economic or industry conditions
and/or with unfavorable company developments.
DD Defaulted debt obligations. Issuer has failed to meet
scheduled principal and/or interest payments.
Plus (+) and minus (-) signs are used with a rating symbol (except AAA)
to indicate the relative position of a credit within the rating
category.
B-50
<PAGE>
----------------------------------------------------
PART C
OTHER INFORMATION
---------------------------------------------------
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
--------------
ITEM 23.
(a) Agreement and Declaration of Trust.(1) (b) By-Laws.(1) (c)
Instruments Defining Rights of Security Holders - Not
applicable.
(d) Investment Advisory Contracts for:
(1) Kayne Anderson Rising Dividends Fund(1)
(2) Kayne Anderson Small Cap Rising Dividends Fund(1)
(3) Kayne Anderson International Rising Dividends Fund(1)
(4) Kayne Anderson High-Yield Bond Fund(4)
(5) Kayne Anderson Intermediate Total Return Bond Fund(1)
(6) Kayne Anderson Intermediate Tax-Free Bond Fund(1)
(7) Operating Expense Agreement(4)
(e) Underwriting Contracts.(3)
(f) Bonus or Profit Sharing Contracts - Not Applicable.
(g) Custodian Agreements.(2)
(h) Other Material Contracts. - Administration Agreement. (3)
(i) Legal Opinion.
(1) Kayne Anderson Rising Dividends Fund (2)
(2) Kayne Anderson Small Cap Rising Dividends Fund (2)
(3) Kayne Anderson International Rising Dividends Fund(2)
(4) Kayne Anderson High-Yield Bond Fund(4)
(5) Kayne Anderson Intermediate Total Return Bond Fund(2)
(6) Kayne Anderson Intermediate Tax-Free Bond Fund(2)
(j) Other Opinions--Not applicable.(2)
(k) Omitted Financial Statements--Not applicable.
(l) Initial Capital Agreements.(3)
(m) Rule 12b-1 Plan--Not applicable.
(n) Consent of Briggs, Bunting & Dougherty, LLP.(4)
(o) Financial Data Schedule.(4)
(p) Rule 18f-3 Plan--Not applicable.
----------
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.
4 Filed herewith.
<PAGE>
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND.
Kayne Anderson Investment Management, LLC, a California limited
liability company, is the manager of each series of the Registrant
other than the Kayne Anderson High-Yield Bond Fund. 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 Non-Traditional, 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., the investment
adviser for the Kayne Anderson High-Yield Bond Fund.
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 25. INDEMNIFICATION
Article VII of the Agreement and Declaration of Trust empowers the
Trustees of the Trust, to the full extent permitted by law, to
purchase, with Trust assets, insurance for indemnification from
liability and to pay for all expenses reasonably incurred or paid or
expected to be paid by a Trustee or officer in connection with any
claim, action, suit or proceeding in which he or she becomes involved
by virtue of his or her capacity or former capacity with the Trust.
Article VI of the By-Laws of the Trust provides that the Trust shall
indemnify any person who was or is a party or is threatened to be made
a party to any proceeding by reason of the fact that such person is and
other amounts or was an agent of the Trust, against expenses,
judgments, fines, settlement and other amounts actually and reasonable
incurred in connection with such proceeding if that person acted in
good faith and reasonably believed his or her conduct to be in the best
interests of the Trust. Indemnification will not be provided in certain
circumstances, however, including instances of willful misfeasance, bad
faith, gross negligence, and reckless disregard of the duties involved
in the conduct of the particular office involved.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to the Trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against
public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable in the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of
expenses incurred or paid by a Trustee, officer or controlling person
of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such Trustee, officer or controlling person
in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed
by the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE 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)
<PAGE>
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 27. PRINCIPAL UNDERWRITER.
(a) First Fund Distributors, Inc. is the principal underwriter for
the following investment companies or series thereof:
Advisors Series Trust
Brandes Investment Trust
Guinness Flight Investment Funds
Fleming Capital Mutual Fund Group
Fremont Mutual Funds, Inc.
Jurika & Voyles Mutual Funds
Kayne Anderson Mutual Funds
Masters' Select Funds Trust
O'Shaughnessy Funds, Inc.
PIC Investment Trust
The Purisima Funds
Professionally Managed Portfolios
Rainier Investment Management Mutual Funds
RNC Mutual Fund Group, Inc.
(b) The following information is furnished with respect to the
officers of First Fund Distributors, Inc.:
NAME AND PRINCIPAL POSITION AND OFFICES POSITIONS AND
BUSINESS ADDRESS WITH UNDERWRITER OFFICES WITH FUND
- ---------------- ---------------- -----------------
Robert H. Wadsworth President, Treasurer Assistant Secretary
4455 East Camelback Road, and Director
Suite 261E
Phoenix, AZ 85018
Steven J. Paggioli Vice President, None
915 Broadway, Suite 1605 Secretary and
New York, NY 10010 Director
Eric M. Banhazl Vice President and Assistant Treasurer
2020 East Financial Way, Director
Suite 100
Glendora, CA 91741
ITEM 28. 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
Fund'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 Fund (see Subsections (2)(iii), (4), (5), (6), (7), (9), (10)
and (11) of Rule 31a-1(b)), which will be kept by the Fund at 1800
Avenue of the Stars, 2nd Floor, Los Angeles, California 90067
ITEM 29. MANAGEMENT SERVICES.
There are no management-related service contracts not discussed in
Parts A and B.
ITEM 30. UNDERTAKINGS.
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, and the Investment
Company Act, the Fund has duly caused this Amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Angeles, the State of California on the 29th day
of April, 1999.
Kayne Anderson Mutual Funds
By: Allan M. Rudnick*
---------------------------
Allan M. Rudnick
Principal Executive Officer
Pursuant to the requirements of the Securities Act, this Amendment to the
Registration Statement has been signed below by the following person in the
capacities and on the date indicated.
/s/Richard Alan Kayne* Chairman of the Board of April 29, 1999
- ---------------------- Trustees
Richard Alan Kayne
/s/Allan M. Rudnick* President, Principal Executive April 29, 1999
- -------------------- Officer and Trustee
Allan M. Rudnick
/s/William T. Miller* Principal Financial and April 29, 1999
- --------------------- Accounting Officer, and Trustee
William T. Miller
/s/Carl D. Covitz* Trustee April 29, 1999
- ------------------
Carl D. Covitz
/s/ Arnold Brustin* Trustee April 29, 1999
- -----------------------
Arnold Brustin
/s/ Gerald I. Isenberg* Trustee April 29, 1999
- -----------------------
Gerald I. Isenberg
/s/ William H. Waldorf* Trustee April 29, 1999
- -----------------------
William H. Waldorf
* By: /s/ William T. Miller
-----------------------------------
William T. Miller, pursuant
to a Power of Attorney as filed
with pre-effective Amendment No. 1
<PAGE>
Exhibit(s) Index
EXHIBIT NO. DOCUMENT
- ----------- --------
(23(d)(4)) Investment Advisory Contract for the Kayne Anderson
High-Yield Fund
(23(d)(7)) Operating Expense Agreement
(23(i)(4) Legal Opinion for the Kayne Anderson High-Yield
Bond Fund
(23(n)) Independent Auditors' Consent
(23(0)) Financial Data Schedule
INVESTMENT MANAGEMENT AGREEMENT
THIS INVESTMENT MANAGEMENT AGREEMENT made as of the 30th day of April,
1999, by and between KAYNE ANDERSON MUTUAL FUNDS, a Delaware business trust
(hereinafter called the "Trust"), on behalf of each series of the Trust listed
in Appendix A hereto, as such may be amended from time to time (hereinafter
referred to individually as a "Fund" and collectively as the "Funds"), and KAIM
NON-TRADITIONAL, L.P., a California limited partnership (hereinafter called the
"Manager") .
WITNESSETH:
WHEREAS, the Trust is an open-end management investment company, registered
as such under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Manager is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended, and is engaged in the business of
supplying investment advice, investment management and administrative services,
as an independent contractor; and
WHEREAS, the Trust desires to retain the Manager to render advice and
services to the Funds pursuant to the terms and provisions of this Agreement,
and the Manager is interested in furnishing said advice and services;
NOW, THEREFORE, in consideration of the covenants and the mutual promises
hereinafter set forth, the parties hereto, intending to be legally bound hereby,
mutually agree as follows:
1. APPOINTMENT OF MANAGER. The Trust hereby employs the Manager and the
Manager hereby accepts such employment, to render investment advice and
management services with respect to the assets of the Funds for the period and
on the terms set forth in this Agreement, subject to the supervision and
direction of the Trust's Board of Trustees.
2. DUTIES OF MANAGER.
(a) GENERAL DUTIES. The Manager shall act as investment manager to the
Funds and shall supervise investments of the Funds on behalf of the Funds in
accordance with the investment objectives, programs and restrictions of the
Funds as provided in the Trust's governing documents, including, without
limitation, the Trust's Agreement and Declaration of Trust and By-Laws, or
otherwise and such other limitations as the Trustees may impose from
1
<PAGE>
time to time in writing to the Manager. Without limiting the generality of the
foregoing, the Manager shall: (i) furnish the Funds with advice and
recommendations with respect to the investment of each Fund's assets and the
purchase and sale of portfolio securities for the Funds, including the taking of
such other steps as may be necessary to implement such advice and
recommendations; (ii) furnish the Funds with reports, statements and other data
on securities, economic conditions and other pertinent subjects which the
Trust's Board of Trustees may reasonably request; (iii) manage the investments
of the Funds, subject to the ultimate supervision and direction of the Trust's
Board of Trustees; (iv) provide persons satisfactory to the Trust's Board of
Trustees to act as officers and employees of the Trust and the Funds (such
officers and employees, as well as certain trustees, may be trustees, directors,
officers, partners, or employees of the Manager or its affiliates) but not
including personnel to provide limited administrative services to the Fund not
typically provided by the Fund's administrator under separate agreement; and (v)
render to the Trust's Board of Trustees such periodic and special reports with
respect to each Fund's investment activities as the Board may reasonably
request.
(b) BROKERAGE. The Manager shall place orders for the purchase and sale of
securities either directly with the issuer or with a broker or dealer selected
by the Manager. In placing each Fund's securities trades, it is recognized that
the Manager will give primary consideration to securing the most favorable price
and efficient execution, so that each Fund's total cost or proceeds in each
transaction will be the most favorable under all the circumstances. Within the
framework of this policy, the Manager may consider the financial responsibility,
research and investment information, and other services provided by brokers or
dealers who may effect or be a party to any such transaction or other
transactions to which other clients of the Manager may be a party.
It is also understood that it is desirable for the Funds that the Manager
have access to investment and market research and securities and economic
analyses provided by brokers and others. It is also understood that brokers
providing such services may execute brokerage transactions at a higher cost to
the Funds than might result from the allocation of brokerage to other brokers on
the basis of seeking the most favorable price and efficient execution.
Therefore, the purchase and sale of securities for the Funds may be made with
brokers who provide such research and analysis, subject to review by the Trust's
Board of Trustees from time to time with respect to the extent and continuation
of this practice to determine whether each Fund benefits, directly or
indirectly, from such practice. It is understood by both parties that the
Manager may select broker-dealers for the execution of the Funds' portfolio
transactions who provide research and analysis as the Manager may lawfully and
appropriately use in its investment management and advisory capacities, whether
or not such research and analysis may also be useful to the Manager in
connection with its services to other clients.
On occasions when the Manager deems the purchase or sale of a security to
be in the best interest of one or more of the Funds as well as of other clients,
the Manager, to the extent permitted by applicable laws and regulations, may
aggregate the securities to be so purchased or
2
<PAGE>
sold in order to obtain the most favorable price or lower brokerage commissions
and the most efficient execution. In such event, allocation of the securities so
purchased or sold, as well as the expenses incurred in the transaction, will be
made by the Manager in the manner it considers to be the most equitable and
consistent with its fiduciary obligations to the Funds and to such other
clients.
(c) ADMINISTRATIVE SERVICES. The Manager shall oversee the administration
of the Funds' business and affairs although the provision of administrative
services, to the extent not covered by subparagraphs (a) or (b) above, is not
the obligation of the Manager under this Agreement. Notwithstanding any other
provisions of this Agreement, the Manager shall be entitled to reimbursement
from the Funds for all or a portion of the reasonable costs and expenses,
including salary, associated with the provision by Manager of personnel to
render administrative services to the Funds.
3. BEST EFFORTS AND JUDGMENT. The Manager shall use its best judgment and
efforts in rendering the advice and services to the Funds as contemplated by
this Agreement.
4. INDEPENDENT CONTRACTOR. The Manager shall, for all purposes herein, be
deemed to be an independent contractor, and shall, unless otherwise expressly
provided and authorized to do so, have no authority to act for or represent the
Trust or the Funds in any way, or in any way be deemed an agent for the Trust or
for the Funds. It is expressly understood and agreed that the services to be
rendered by the Manager to the Funds under the provisions of this Agreement are
not to be deemed exclusive, and the Manager shall be free to render similar or
different services to others so long as its ability to render the services
provided for in this Agreement shall not be impaired thereby.
5. MANAGER'S PERSONNEL. The Manager shall, at its own expense, maintain
such staff and employ or retain such personnel and consult with such other
persons as it shall from time to time determine to be necessary to the
performance of its obligations under this Agreement. Without limiting the
generality of the foregoing, the staff and personnel of the Manager shall be
deemed to include persons employed or retained by the Manager to furnish
statistical information, research, and other factual information, advice
regarding economic factors and trends, information with respect to technical and
scientific developments, and such other information, advice and assistance as
the Manager or the Trust's Board of Trustees may desire and reasonably request.
6. REPORTS BY FUNDS TO MANAGER. Each Fund will from time to time furnish to
the Manager detailed statements of its investments and assets, and information
as to its investment objective and needs, and will make available to the Manager
such financial reports, proxy statements, legal and other information relating
to each Fund's investments as may be in its possession or available to it,
together with such other information as the Manager may reasonably request.
3
<PAGE>
7. EXPENSES.
(a) With respect to the operation of each Fund, the Manager is responsible
for (i) the compensation of any of the Trust's trustees, officers, and employees
who are affiliates of the Manager (but not the compensation of employees
performing services in connection with expenses which are the Fund's
responsibility under Subparagraph 7(b) below), (ii) the expenses of printing and
distributing the Funds' prospectuses, statements of additional information, and
sales and advertising materials (but not the legal, auditing or accounting fees
attendant thereto) to prospective investors (but not to existing shareholders),
and (iii) providing office space and equipment reasonably necessary for the
operation of the Funds.
(b) Each Fund is responsible for and has assumed the obligation for payment
of all of its expenses, other than as stated in Subparagraph 7(a) above,
including but not limited to: fees and expenses incurred in connection with the
issuance, registration and transfer of its shares; brokerage and commission
expenses; all expenses of transfer, receipt, safekeeping, servicing and
accounting for the cash, securities and other property of the Trust for the
benefit of the Funds including all fees and expenses of its custodian,
shareholder services agent and accounting services agent; interest charges on
any borrowings; costs and expenses of pricing and calculating its daily net
asset value and of maintaining its books of account required under the 1940 Act;
taxes, if any; expenditures in connection with meetings of each Fund's
shareholders and Board of Trustees that are properly payable by the Fund;
salaries and expenses of officers and fees and expenses of members of the
Trust's Board of Trustees or members of any advisory board or committee who are
not members of, affiliated with or interested persons of the Manager; insurance
premiums on property or personnel of each Fund which inure to its benefit,
including liability and fidelity bond insurance; the cost of preparing and
printing reports, proxy statements, prospectuses and statements of additional
information of the Fund or other communications for distribution to existing
shareholders; legal, auditing and accounting fees; trade association dues; fees
and expenses (including legal fees) of registering and maintaining registration
of its shares for sale under federal and applicable state and foreign securities
laws; all expenses of maintaining and servicing shareholder accounts, including
all charges for transfer, shareholder recordkeeping, dividend disbursing,
redemption, and other agents for the benefit of the Funds, if any; and all other
charges and costs of its operation plus any extraordinary and non-recurring
expenses, except as herein otherwise prescribed.
(c) To the extent the Manager incurs any costs by assuming expenses which
are an obligation of a Fund as set forth herein, such Fund shall promptly
reimburse the Manager for such costs and expenses, except to the extent the
Manager has otherwise agreed to bear such expenses. To the extent the services
for which a Fund is obligated to pay are performed by the Manager, the Manager
shall be entitled to recover from such Fund to the extent of the Manager's
actual costs for providing such services.
4
<PAGE>
8. INVESTMENT ADVISORY AND MANAGEMENT FEE.
(a) Each Fund shall pay to the Manager, and the Manager agrees to accept,
as full compensation for all administrative and investment management and
advisory services furnished or provided to such Fund pursuant to this Agreement,
a management fee at the annual rate set forth in the Fee Schedule attached
hereto as Appendix A, as may be amended in writing from time to time by the
Trust and the Manager.
(b) The management fee shall be accrued daily by each Fund and paid to the
Manager on the first business day of the succeeding month.
(c) The initial fee under this Agreement shall be payable on the first
business day of the first month following the effective date of this Agreement
and shall be prorated as set forth below. If this Agreement is terminated before
the end of any month, the fee to the Manager shall be prorated for the portion
of any month in which this Agreement is in effect which is not a complete month
according to the proportion which the number of calendar days in the month
during which the Agreement is in effect bears to the number of calendar days in
the month, and shall be payable within ten (10) days after the date of
termination.
(d) The Manager may reduce any portion of the compensation or reimbursement
of expenses due to it pursuant to this Agreement and may agree to make payments
to limit the expenses which are the responsibility of a Fund under this
Agreement. Any such reduction or payment shall be applicable only to such
specific reduction or payment and shall not constitute an agreement to reduce
any future compensation or reimbursement due to the Manager hereunder or to
continue future payments. Any such reduction will be agreed to prior to accrual
of the related expense or fee and will be estimated daily and reconciled and
paid on a monthly basis. Any fee withheld pursuant to this paragraph from the
Manager shall be reimbursed by the appropriate Fund to the Manager in the first,
second or third (or any combination thereof) fiscal year next succeeding the
fiscal year of the withholding to the extent permitted by the applicable state
law if the aggregate expenses for the next succeeding fiscal year, second
succeeding fiscal year or third succeeding fiscal year do not exceed the
applicable state limitation or any more restrictive limitation to which the
Manager has agreed. The Manager may elect to seek reimbursement for the oldest
reductions and waivers before payment by a Fund of fees or expenses for the
current year.
(e) The Manager may agree not to require payment of any portion of the
compensation or reimbursement of expenses otherwise due to it pursuant to this
Agreement prior to the time such compensation or reimbursement has accrued as a
liability of the Fund. Any such agreement shall be applicable only with respect
to the specific items covered thereby and shall not constitute an agreement not
to require payment of any future compensation or reimbursement due to the
Manager hereunder.
5
<PAGE>
9. FUND SHARE ACTIVITIES OF MANAGER'S OFFICERS AND EMPLOYEES. The Manager
agrees that neither it nor any of its officers or employees shall take any short
position in the shares of the Funds. This prohibition shall not prevent the
purchase of such shares by any of the officers or bona fide employees of the
Manager or any trust, pension, profit-sharing or other benefit plan for such
persons or affiliates thereof, at a price not less than the net asset value
thereof at the time of purchase, as allowed pursuant to rules promulgated under
the 1940 Act.
10. CONFLICTS WITH TRUST'S GOVERNING DOCUMENTS AND APPLICABLE LAWS. Nothing
herein contained shall be deemed to require the Trust or the Funds to take any
action contrary to the Trust's Agreement and Declaration of Trust, By-Laws, or
any applicable statute or regulation, or to relieve or deprive the Board of
Trustees of the Trust of its responsibility for and control of the conduct of
the affairs of the Trust and Funds.
11. MANAGER'S LIABILITIES.
(a) In the absence of willful misfeasance, bad faith, gross negligence, or
reckless disregard of the obligations or duties hereunder on the part of the
Manager, the Manager shall not be subject to liability to the Trust or the Funds
or to any shareholder of the Funds for any act or omission in the course of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of any security by the Funds.
(b) The Funds shall indemnify and hold harmless the Manager and the
partners, members, officers and employees of the Manager and its general partner
(any such person, an "Indemnified Party") against any loss, liability, claim,
damage or expense (including the reasonable cost of investigating and defending
any alleged loss, liability, claim, damage or expenses and reasonable counsel
fees incurred in connection therewith) arising out of the Indemnified Party's
performance or nonperformance of any duties under this Agreement provided,
however, that nothing herein shall be deemed to protect any Indemnified Party
against any liability to which such Indemnified Party would otherwise be subject
by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties hereunder or by reason of reckless disregard of
obligations and duties under this Agreement.
(c) No provision of this Agreement shall be construed to protect any
Trustee or officer of the Trust, or officer of the Manager (or its general
partner), from liability in violation of Sections 17(h) and (i) of the 1940 Act.
12. NON-EXCLUSIVITY. The Trust's employment of the Manager is not an
exclusive arrangement, and the Trust may from time to time employ other
individuals or entities to furnish it with the services provided for herein. If
this Agreement is terminated with respect to any Fund, this Agreement shall
remain in full force and effect with respect to all other Funds listed on
Appendix A hereto, as the same may be amended.
6
<PAGE>
13. TERM. This Agreement shall become effective at the time the Trust's
initial Registration Statement under the Securities Act of 1933 with respect to
the shares of the Funds becomes effective and shall remain in effect for a
period of two (2) years, unless sooner terminated as hereinafter provided. This
Agreement shall continue in effect thereafter for additional periods not
exceeding one (1) year so long as such continuation is approved for each Fund at
least annually by (i) the Board of Trustees of the Trust or by the vote of a
majority of the outstanding voting securities of each Fund and (ii) the vote of
a majority of the Trustees of the Trust who are not parties to this Agreement
nor interested persons thereof, cast in person at a meeting called for the
purpose of voting on such approval.
14. TERMINATION. This Agreement may be terminated by the Trust on behalf of
any one or more of the Funds at any time without payment of any penalty, by the
Board of Trustees of the Trust or by vote of a majority of the outstanding
voting securities of a Fund, upon sixty (60) days' written notice to the
Manager, and by the Manager upon sixty (60) days' written notice to a Fund.
15. TERMINATION BY ASSIGNMENT. This Agreement shall terminate automatically
in the event of any transfer or assignment thereof, as defined in the 1940 Act.
16. TRANSFER, ASSIGNMENT. This Agreement may not be transferred, assigned,
sold or in any manner hypothecated or pledged without the affirmative vote or
written consent of the holders of a majority of the outstanding voting
securities of each Fund.
17. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision, statute or rule, or shall be otherwise rendered
invalid, the remainder of this Agreement shall not be affected thereby.
18. DEFINITIONS. The terms "majority of the outstanding voting securities"
and "interested persons" shall have the meanings as set forth in the 1940 Act.
19. NOTICE OF DECLARATION OF TRUST. The Manager agrees that the Trust's
obligations under this Agreement shall be limited to the Funds and to their
assets, and that the Manager shall not seek satisfaction of any such obligation
from the shareholders of the Funds nor from any trustee, officer, employee or
agent of the Trust or the Funds.
20. CAPTIONS. The captions in this Agreement are included for convenience
of reference only and in no way define or limit any of the provisions hereof or
otherwise affect their construction or effect.
21. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California without giving effect to
the conflict of laws principles thereof; provided that nothing herein shall be
construed to preempt, or to be
7
<PAGE>
inconsistent with, any federal law, regulation or rule, including the 1940 Act
and the Investment Advisers Act of 1940 and any rules and regulations
promulgated thereunder.
[balance of page intentionally left blank]
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested by their duly authorized officers, all on the day and
year first above written.
KAYNE ANDERSON MUTUAL FUNDS KAIM NON-TRADITIONAL, L.P.
By: _______________________________,
its general partner
By: _____________________________ By: ____________________________
Title: __________________________ Title: _________________________
9
<PAGE>
APPENDIX A to
Investment Management
Agreement
FEE SCHEDULE
NAME OF FUND APPLICABLE FEE
------------ --------------
Kayne Anderson High-Yield Bond Fund 0.60%
This Fee Schedule is effective as of this 30th day of April, 1999.
KAYNE ANDERSON MUTUAL FUNDS KAIM NON-TRADITIONAL, L.P.
By: _______________________________,
its general partner
By: ____________________________ By: ____________________________
Title: __________________________ Title: _________________________
10
KAYNE ANDERSON MUTUAL FUNDS
OPERATING EXPENSES AGREEMENT
THIS OPERATING EXPENSES AGREEMENT (the "Agreement") is effective as of
January 1, 1999, by and between KAYNE ANDERSON MUTUAL FUNDS, a Delaware Business
Trust (the "Group"), on behalf of each series of the Group listed in Appendix A,
as may be amended from time to time (each a "Fund" and collectively the
"Funds"), and the Manager of each of the Funds, KAYNE ANDERSON INVESTMENT
MANAGEMENT, LLC, a limited liability company organized and existing under the
laws of the State of California (hereinafter called the "Manager").
WITNESSETH:
WHEREAS, the Manager renders advice and services to the Funds pursuant to
the terms and provisions of an Investment Management Agreement between the Group
and the Manager dated September 30, 1996 (the "Investment Management
Agreement"); and
WHEREAS, the Funds are responsible for, and have assumed the obligation
for, payment of certain expenses pursuant to Subparagraph 7(b) of the Investment
Management Agreement that have not been assumed by the Manager; and
WHEREAS, the Manager desires to limit the Funds' respective Operating
Expenses (as that term is defined in Paragraph 2 of this Agreement) pursuant to
the terms and provisions of this Agreement, and the Group (on behalf of the
Funds) desires to allow the Manager to implement those limits;
NOW THEREFORE, in consideration of the covenants and the mutual promises
hereinafter set forth, the parties, intending to be legally bound hereby,
mutually agree as follows:
1
<PAGE>
1. Limit on Operating Expenses. The Manager hereby agrees to limit each
Fund's Operating Expenses to the respective annual rate of total Operating
Expenses specified for that Fund in Appendix A of this Agreement.
2. Definition. For purposes of this Agreement, the term "Operating
Expenses" with respect to a Fund is defined to include all expenses necessary or
appropriate for the operation of the Fund including the Manager's investment
advisory or management fee under Paragraph 8 of the Investment Management
Agreement, and other expenses described in Paragraph 7 of the Investment
Management Agreement, but does not include any Rule 12b-1 fees, front-end or
contingent deferred loads, taxes, interest, brokerage commissions, expenses
incurred in connection with any merger or reorganization or extraordinary
expenses such as litigation.
3. Reimbursement of Fees and Expenses. The Manager, under Subparagraph 8(d)
of the Investment Management Agreement, retains its right to receive
reimbursement of reductions of its investment management fee and Operating
Expenses paid by it that are not its responsibility under Paragraph 7 of the
Investment Management Agreement.
4. Term. This Agreement shall become effective on the date specified herein
and shall remain in effect for a period of one (1) year, unless sooner
terminated as provided in Paragraph 5 of this Agreement. This Agreement shall
continue in effect thereafter for additional periods not exceeding one (1) year
so long as such continuation is approved for each Fund
2
<PAGE>
at least annually by the Board of Directors of the Group (and separately by the
disinterested Directors of the Group).
5. Termination. This Agreement may be terminated by the Group on behalf of
any one or more of the Funds at any time without payment of any penalty or by
the Board of Directors of the Group, upon sixty (60) days' written notice to the
Manager. The Manager may decline to renew this Agreement by written notice to
the Group at least thirty (30) days before its annual expiration date.
6. Assignment. This Agreement and all rights and obligations hereunder may
not be assigned without the written consent of the other party.
7. Severability. If any provision of this Agreement shall be held or made
invalid by a court decision, statute or rule, or shall be otherwise rendered
invalid, the remainder of this Agreement shall not be affected thereby.
8. Captions. The captions in this Agreement are included for convenience of
reference only and in no way define or limit any of the provisions hereof or
otherwise affect their construction of effect.
9. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California without giving effect to
the conflict of laws principles thereof; provided that nothing herein shall be
construed to preempt, or to be inconsistent with, any federal law, regulation or
rule, including the Investment Company Act of 1940, as amended and the
Investment Advisers Act of 1940, as amended and any rules and regulations
promulgated thereunder.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested by their duly authorized officers, all on the day and
year first above written.
KAYNE ANDERSON MUTUAL FUNDS KAYNE ANDERSON INVESTMENT
MANAGEMENT, LLC
By: ___________________________ By: ______________________________
Title: ________________________ Title: ___________________________
4
<PAGE>
APPENDIX A
Fund Operating Expense Limit
- ---- -----------------------
o Kayne Anderson Rising Dividends Fund 1.20%
o Kayne Anderson Small Cap Rising Dividends Fund 1.30%
o Kayne Anderson International Rising Dividends Fund 1.40%
o Kayne Anderson Intermediate Total Return Bond Fund 0.95%
o Kayne Anderson Intermediate Tax-Free Bond Fund 0.75%
5
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
OPERATING EXPENSES AGREEMENT
THIS OPERATING EXPENSES AGREEMENT (the "Agreement") is effective as of
January 1, 1999, by and between KAYNE ANDERSON MUTUAL FUNDS, a Delaware Business
Trust (the "Group"), on behalf of each series of the Group listed in Appendix A,
as may be amended from time to time (each a "Fund" and collectively the
"Funds"), and the Manager of each of the Funds, KAIM Non-Traditional, L.P., a
limited partnership organized and existing under the laws of the State of
California (hereinafter called the "Manager").
WITNESSETH:
WHEREAS, the Manager renders advice and services to the Funds pursuant to
the terms and provisions of an Investment Management Agreement between the Group
and the Manager dated April 30, 1999 (the "Investment Management Agreement");
and
WHEREAS, the Funds are responsible for, and have assumed the obligation
for, payment of certain expenses pursuant to Subparagraph 7(b) of the Investment
Management Agreement that have not been assumed by the Manager; and
WHEREAS, the Manager desires to limit the Funds' respective Operating
Expenses (as that term is defined in Paragraph 2 of this Agreement) pursuant to
the terms and provisions of this Agreement, and the Group (on behalf of the
Funds) desires to allow the Manager to implement those limits;
NOW THEREFORE, in consideration of the covenants and the mutual promises
hereinafter set forth, the parties, intending to be legally bound hereby,
mutually agree as follows:
1
<PAGE>
1. LIMIT ON OPERATING EXPENSES. The Manager hereby agrees to limit each
Fund's Operating Expenses to the respective annual rate of total Operating
Expenses specified for that Fund in Appendix A of this Agreement.
2. DEFINITION. For purposes of this Agreement, the term "Operating
Expenses" with respect to a Fund is defined to include all expenses necessary or
appropriate for the operation of the Fund including the Manager's investment
advisory or management fee under Paragraph 8 of the Investment Management
Agreement, and other expenses described in Paragraph 7 of the Investment
Management Agreement, but does not include any Rule 12b-1 fees, front-end or
contingent deferred loads, taxes, interest, brokerage commissions, expenses
incurred in connection with any merger or reorganization or extraordinary
expenses such as litigation.
3. REIMBURSEMENT OF FEES AND EXPENSES. The Manager, under Subparagraph 8(d)
of the Investment Management Agreement, retains its right to receive
reimbursement of reductions of its investment management fee and Operating
Expenses paid by it that are not its responsibility under Paragraph 7 of the
Investment Management Agreement.
4. TERM. This Agreement shall become effective on the date specified herein
and shall remain in effect for a period of one (1) year, unless sooner
terminated as provided in Paragraph 5 of this Agreement. This Agreement shall
continue in effect thereafter for additional periods not exceeding one (1) year
so long as such continuation is approved for each Fund at least annually by the
Board of Directors of the Group (and separately by the disinterested Directors
of the Group).
2
<PAGE>
5. TERMINATION. This Agreement may be terminated by the Group on behalf of
any one or more of the Funds at any time without payment of any penalty or by
the Board of Directors of the Group, upon sixty (60) days' written notice to the
Manager. The Manager may decline to renew this Agreement by written notice to
the Group at least thirty (30) days before its annual expiration date.
6. ASSIGNMENT. This Agreement and all rights and obligations hereunder may
not be assigned without the written consent of the other party.
7. SEVERABILITY. If any provision of this Agreement shall be held or made
invalid by a court decision, statute or rule, or shall be otherwise rendered
invalid, the remainder of this Agreement shall not be affected thereby.
8. CAPTIONS. The captions in this Agreement are included for convenience of
reference only and in no way define or limit any of the provisions hereof or
otherwise affect their construction of effect.
9. GOVERNING LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of California without giving effect to
the conflict of laws principles thereof; provided that nothing herein shall be
construed to preempt, or to be inconsistent with, any federal law, regulation or
rule, including the Investment Company Act of 1940, as amended and the
Investment Advisers Act of 1940, as amended and any rules and regulations
promulgated thereunder.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested by their duly authorized officers, all on the day and
year first above written.
KAYNE ANDERSON MUTUAL FUNDS KAYNE ANDERSON INVESTMENT
MANAGEMENT, LLC
By: ___________________________ By: ______________________________
Title: ________________________ Title: ___________________________
4
<PAGE>
APPENDIX A
Fund Operating Expense Limit
- ---- -----------------------
o Kayne Anderson High-Yield Bond Fund 0.90%
Paul, Hastings, Janofsky & Walker LLP
345 California St.
San Francisco, CA 94104
Telephone (415) 835-1600
Fax: (415) 217-5333
Internet: www.phjw.com
April 19, 1999
Kayne Anderson Mutual Funds
1800 Avenue of the Stars, 2nd Floor
Los Angeles, CA 90067
Re: Kayne Anderson High-Yield Bond Fund
Ladies and Gentlemen:
We have acted as counsel to Kayne Anderson Mutual Funds, a Delaware
business trust (the "Trust"), in connection with the Post-Effective Amendment to
the Trust's Registration Statement on Form N-1A filed on February 12, 1999, with
the Securities and Exchange Commission (the "Post-Effective Amendment"),
relating to the issuance by the Trust of an indefinite number of $0.01
(one-cent) par value shares of beneficial interest (the "Shares") by a series of
the Trust, the Kayne Anderson High-Yield Bond Fund (the "Fund").
In connection with this opinion, we have assumed the authenticity of
all records, documents and instruments submitted to us as originals, the
genuineness of all signatures, the legal capacity of all natural persons, and
the conformity to the originals of all records, documents, and instruments
submitted to us as copies. We have based our opinion on the following:
(a) the Trust's Agreement and Declaration of Trust dated May 24,
1996 (the "Declaration of Trust"); and the Trust's Certificate
of Trust (as filed with the Delaware Secretary of State on May
29, 1996), as certified to us by an officer of the Trust as
being true and complete and in effect on the date hereof;
(b) the Bylaws of the Trust dated May 24, 1996, certified to us by
an officer of the Trust as being true and complete and in
effect on the date hereof;
<PAGE>
(c) resolutions of the Trustees of the Trust adopted at the
January 26, 1999, meeting of the Trust, authorizing the
establishment of the Fund and the issuance of the Shares;
(d) the Post-Effective Amendment; and
(e) a certificate of an officer of the Trust as to certain factual
matters relevant to this opinion.
Our opinion below is limited to the federal law of the United States of
America and the business trust law of the State of Delaware. We are not licensed
to practice law in the State of Delaware, and we have based our opinion below
solely on our review of Chapter 38 of Title 12 of the Delaware Code and the case
law interpreting such Chapter as reported in Delaware Laws Annotated (Aspen Law
& Business, supp. 1998) as updated on Lexis through April 6, 1999. We have not
undertaken a review of other Delaware law or of any administrative or court
decisions in connection with rendering this opinion. We disclaim any opinion as
to any law other than that of the United States of America and the business
trust law of the State of Delaware as described above, and we disclaim any
opinion as to any statute, rule, regulation, ordinance, order or other
promulgation of any regional or local governmental authority.
Based on the foregoing and our examination of such questions of law as
we have deemed necessary and appropriate for the purpose of this opinion, and
assuming that (i) all of the Shares will be issued and sold for cash at the
per-share public offering price on the date of their issuance in accordance with
statements in the Fund's Prospectus included in the Post-Effective Amendment,
and in accordance with the Declaration of Trust, (ii) all consideration for the
Shares will be actually received by the Trust, and (iii) all applicable
securities laws will be complied with, it is our opinion that, when issued and
sold by the Trust, the Shares will be legally issued, fully paid and
nonassessable.
This opinion is rendered to you in connection with the Post-Effective
Amendment and is solely for your benefit. This opinion may not be relied upon by
you for any other purpose or relied upon by any other person, firm, corporation
or other entity for any purpose, without our prior written consent. We disclaim
any obligation to advise you of any developments in areas covered by this
opinion that occur after the date of this opinion.
We hereby consent to (i) the reference to our firm as Legal Counsel in
the Prospectus and Statement of Additional Information included in the
Post-Effective Amendment, and (ii) the filing of this opinion as an exhibit to
the Post-Effective Amendment.
Sincerely yours,
/s/ Paul, Hastings, Janofsky & Walker LLP
2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 22, 1999, accompanying the December 31,
1998 financial statements of Kayne Anderson Mutual Funds (comprising,
respectively, the Rising Dividends Fund, the Small Cap Rising Dividends Fund,
the International Rising Dividends Fund, the Intermediate Total Return Bond
Fund, and the Intermediate Tax-Free Bond Fund) which are incorporated by
reference in Part B of the Post-Effective Amendment to this Registration
Statement and Prospectus. We consent to the use of the aforementioned report in
the Registration Statement and Prospectus.
BRIGGS, BUNTING & DOUGHERTY, LLP
PHILADELPHIA, PENNSYLVANIA
APRIL 27, 1999
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</TABLE>
