KAYNE ANDERSON MUTUAL FUNDS, 485APOS, 1999-09-21

KAYNE ANDERSON MUTUAL FUNDS
485APOS, 1999-09-21

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As filed with the Securities and Exchange Commission on September 21, 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. 8

and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 10

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)
[ ] on _______________, pursuant to paragraph (b)
[X] 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:

[ ] 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

Supplement dated November __, 1999 to Prospectus dated May 5, 1999

Kayne Anderson Rising Dividends Fund
Kayne Anderson Small Cap Rising Dividends Fund
Kayne Anderson International Rising Dividends Fund
Kayne Anderson Intermediate Total Return Bond Fund
Kayne Anderson Intermediate Tax-Free Bond Fund

Part B Combined Statement of Additional Information for Kayne
Anderson Mutual Funds

Part C Other Information

Signature Page
<PAGE>

------------------------------------------------------

PART A

Supplement dated November __, 1999 to Prospectus dated May 5, 1999

COMBINED PROSPECTUS

Kayne Anderson Mutual Funds

------------------------------------------------------
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS

Supplement dated November __, 1999
to Prospectus dated May 5, 1999

TO SHAREHOLDERS OF THE KAYNE ANDERSON CALIFORNIA TAX-FREE BOND FUND
(FORMERLY, THE KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND)

The shareholders of this Fund on October ___, 1999 approved a change to its
fundamental investment objective to seek current income exempt from both federal
and California personal income taxes by investing primarily in investment-grade
municipal bonds.

Instead of investing its assets in investment-grade municipal bonds and notes of
any state, the Fund invests primarily in investment-grade California municipal
bonds and notes. Even though the Fund will continue to invest its assets so that
at least 80% of its assets will generate income exempt from federal income tax
and the federal alternative minimum tax, it will in addition to that strategy
invest at least 65% of its total assets in California municipal securities. The
quality of the bonds and notes to be purchased, however, will not change. The
Fund will continue to invest at least 90% of its assets in investment-grade
securities.

You should purchase shares of a California municipal bond fund only if you are a
California resident or are otherwise subject to California income tax so that
you may fully benefit from the tax-free nature of the income.

Also, you should understand that the Fund's concentration in California
municipal bonds may expose shareholders to additional risks compared to a fund
that invests in municipal bonds from many states. In particular, the Fund will
be vulnerable to any development in California's economy that may weaken or
jeopardize the ability of California municipal-bond issuers to pay interest and
principal on their bonds. The Fund's objective is to provide income exempt from
federal and California state personal income taxes, but some of its income may
be subject to the alternative minimum tax.

Additional risks associated with the Fund's change of investment objective to a
California tax-free fund and its related change to a non-diversified mutual fund
include the following:

CREDIT RISK: Although the Fund invests primarily in investment-grade securities,
these securities may have some credit risk. Some issuers may not make payments
on the municipal or other debt securities held by the Fund. For example, Orange
County declared bankruptcy in December 1994. Or, an issuer may suffer
deterioration in its financial condition that could lower the credit quality of
a security, leading to greater volatility in the price of the security and in
<PAGE>
shares of the Fund. As further examples, several regions of California are
highly vulnerable to earthquakes, which could strike and create financial stress
for a municipality. California's economic dependence on trade with weakened
Asian countries could also result in municipal financial problems. A decrease in
the quality rating of a bond can affect the bond's liquidity and make it more
difficult for the Fund to sell the bond at what the Adviser believes is a fair
price.

POLITICAL RISK: There are special factors that may affect the value of municipal
securities and, as a result, the Fund's share price. These factors include
political or legislative changes, uncertainties related to the tax status of the
securities or the rights of investors in the securities. California has several
Constitutional and statutory limits on municipal taxing powers that can restrict
the ability of municipal authorities to generate revenue to pay interest due on
bonds.

LACK OF DIVERSIFICATION: The Fund is not diversified, which means it may invest
a relatively high percentage of its assets in the obligations of a limited
number of issuers. As a result, the Fund may be more susceptible to any single
economic, political or regulatory occurrence. The Fund is also particularly
susceptible to events affecting issuers in California. In particular, the Fund
will be vulnerable to any development in California's economy that may weaken or
jeopardize the ability of California municipal-bond issuers to pay interest and
principal on their bonds. As a result, the Fund's shares may fluctuate more
widely in value than those of a fund investing in municipal bonds from a number
of different states. You should consider the greater risk of investing in a
single state fund compared to more diversified mutual funds.
<PAGE>
KAYNE ANDERSON
MUTUAL FUNDS

Prospectus
May 5, 1999

[KAYNE ANDERSON LOGO]

KAYNE ANDERSON RISING DIVIDENDS FUND
KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND
KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS 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

KAYNE ANDERSON RISING DIVIDENDS FUND.........................................3
KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND...............................5
KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND...........................7
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND...........................9
KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND..............................11
PORTFOLIO MANAGEMENT........................................................13
MANAGEMENT FEES.............................................................13
ADDITIONAL INVESTMENT STRATEGIES AND RELATED RISKS..........................14
Rising Dividends Philosophy...............................................14
Concentration in a Small Number of Companies..............................14
Defensive Investments.....................................................14
The Euro: Single European Currency........................................14
The Year 2000.............................................................15
Additional Information on the Benchmarks for the Funds....................15
FINANCIAL HIGHLIGHTS........................................................16
YOUR ACCOUNT INFORMATION....................................................19
How Fund Shares Are Priced................................................19
Buying Shares.............................................................19
Exchanging Shares.........................................................20
Selling Shares (Redemptions)..............................................20
Special Account Options...................................................21
After You Invest..........................................................23

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

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.

>> 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.

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

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 (excluding interest and tax 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

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 (excluding interest and tax 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 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.

9
<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 (excluding interest and tax 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

10
<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.

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.

11
<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 0.77%

+ Kayne Anderson has contractually agreed to reduce its fees and/or
absorb expenses to limit the Fund's total annual operating
expenses (excluding interest and tax 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
------ ------- ------- --------
$78 $555 $1,058 $2,439

12
<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.

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%
Intermediate Total Return Bond Fund 0.50%
Intermediate Tax-Free Bond Fund 0.50%

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.

13
<PAGE>
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. 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.

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. This 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.

14
<PAGE>
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 a 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

15
<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

Year or Period Ended December 31 1998 1997 1996 1995(a)
- -------------------------------- ---- ---- ---- -------
<S> <C> <C> <C> <C>
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

16
<PAGE>
<TABLE>
<CAPTION>
SMALL CAP RISING DIVIDENDS FUND INTERNATIONAL RISING DIVIDENDS FUND
------------------------------- -----------------------------------
Year or Period Ended December 31 1998 1997 1996(b) 1998 1997 1996(c)
- -------------------------------- ---- ---- ------- ---- ---- -------
<S> <C> <C> <C> <C> <C> <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

17
<PAGE>
<TABLE>
<CAPTION>
INTERMEDIATE TOTAL RETURN BOND FUND INTERMEDIATE TAX-FREE BOND FUND
----------------------------------- -------------------------------
Year or Period Ended December 31 1998 1997 1996(a) 1998 1997 1996(b)
- -------------------------------- ---- ---- ------- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
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

18
<PAGE>
YOUR ACCOUNT INFORMATION

HOW FUND SHARES ARE PRICED

How and when we calculate a 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 a Fund's investments on its 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 a Fund
calculates its NAV. In this case, Kayne Anderson, subject to the supervision of
the 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 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:

19
<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, that 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 a 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:

20
<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 a 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.

21
<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 a 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 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

22
<PAGE>
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.
<TABLE>
<CAPTION>
INCOME DIVIDENDS CAPITAL GAINS
---------------- -------------
<S> <C> <C>
RISING DIVIDENDS EQUITY FUNDS Declared and paid semi-annually Declared and paid in the last
quarter of each calendar year*

BOND FUNDS Declared and paid monthly Declared and paid in the last
(the Tax-Free Bond Fund will quarter of each calendar year*
declare dividends daily and
pay monthly)
</TABLE>

* 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 a 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 that Fund's
appreciation.

23
<PAGE>
KAYNE ANDERSON
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

------------------------------------------------------
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS

STATEMENT OF ADDITIONAL INFORMATION
MAY 5, 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 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 May 5, 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.

B-1
<PAGE>
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 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 Fund
and affiliated persons of that Fund not own together more than 3% of the total

B-2
<PAGE>
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 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. Although generally rated AAA, it is possible that the securities could
become illiquid or experience losses if guarantors or insurers default.

B-3
<PAGE>
BELOW INVESTMENT GRADE DEBT SECURITIES. Each Fund may purchase lower-rated debt
securities, (E.G., those rated "BB" and "B" by Standard & Poor's Corporation
(S&P) or "Ba" and "B" by Moody's Investors Service, Inc. (Moody's)) that have
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
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

B-4
<PAGE>
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;
(6) mortgage loans on completed multifamily projects;

B-5
<PAGE>
(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).

B-6
<PAGE>
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
Institution upon a specified number of days' notice, not to exceed seven. In

B-7
<PAGE>
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.

B-8
<PAGE>
REVENUE BONDS. A revenue bond is not secured by the full faith, credit and
taxing power of an issuer. Rather, the principal security for a revenue bond is
generally the net revenue derived from a particular facility, group of
facilities or, in some cases, the proceeds of a special excise or other specific
revenue source. Revenue bonds are issued to finance a wide variety of capital
projects, including electric, gas, water, and sewer systems; highways, bridges,
and tunnels; port and airport facilities; colleges and universities; and
hospitals. Although the principal security behind these bonds may vary, many
provide additional security in the form of a debt service reserve fund that may
be used to make principal and interest payments on the issuer's obligations.
Housing finance authorities have a wide range of security, including partially
or fully insured mortgages, rent subsidized and/or collateralized mortgages,
and/or the net revenues from housing or other public projects. Some authorities
provide further security in the form of a governmental assurance (although
without obligation) to make up deficiencies in the debt service reserve fund.

INDUSTRIAL DEVELOPMENT BONDS. Industrial development bonds, which may pay
tax-exempt interest, are, in most cases, revenue bonds and are issued by or on
behalf of public authorities to raise money to finance various privately
operated facilities for business manufacturing, housing, sports, and pollution
control. These bonds also are used to finance public facilities, such as
airports, mass transit systems, ports and parking. The payment of the principal
and interest on such bonds is dependent solely on the ability of the facility's
user to meet its financial obligations and the pledge, if any, of the real and
personal property so financed as security for such payment. As a result of 1986
federal tax legislation, industrial revenue bonds may no longer be issued on a
tax-exempt basis for certain previously permissible purposes, including sports
and pollution control facilities.

PARTICIPATION INTERESTS. The Tax-Free Bond Fund may purchase from financial
institutions participation interests in Municipal Securities, such as industrial
development bonds and municipal lease/purchase agreements. A participation
interest gives a Fund an undivided interest in a Municipal Security in the
proportion that the Fund's participation interest bears to the total principal
amount of the Municipal Security. These instruments may have fixed, floating or
variable rates of interest. If the participation interest is unrated, it will be
backed by an irrevocable letter of credit or guarantee of a bank that the Board
of Trustees has approved as meeting the Board's standards, or, alternatively,
the payment obligation will be collateralized by U.S. Government securities.

For certain participation interests, the Tax-Free Bond Fund will have the right
to demand payment, on not more than seven days' notice, for all or any part of
its participation interest in a Municipal Security, plus accrued interest. As to
these instruments, the Tax-Free Bond Fund intends to exercise its right to
demand payment only upon a default under the terms of the Municipal Securities,
as needed to provide liquidity to meet redemptions, or to maintain or improve
the quality of their investment portfolios.

Some participation interests are subject to a "nonappropriation" or "abatement"
feature by which, under certain conditions, the issuer of the underlying
Municipal Security may, without penalty, terminate its obligation to make
payment. In such event, the holder of such security must look to the underlying
collateral, which is often a municipal facility used by the issuer.

CUSTODIAL RECEIPTS. The Tax-Free Bond Fund may purchase custodial receipts
representing the right to receive certain future principal and interest payments
on Municipal Securities that underlie the custodial receipts. A number of
different arrangements are possible. In the most common custodial receipt
arrangement, an issuer or a third party owning the Municipal Securities deposits
such obligations with a custodian in exchange for two classes of custodial
receipts with different characteristics. In each case, however, payments on the
two classes are based on payments received on the underlying Municipal

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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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<PAGE>
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

B-11
<PAGE>
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 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

B-12
<PAGE>
any purchases or sales of futures contracts or options on futures contracts.
Pursuant to Section 4.5 of the regulations under the Commodity Exchange Act, the
notice of eligibility included the representation that the Funds will use
futures contracts and related options for bona fide hedging purposes within the
meaning of CFTC regulations, provided that a Fund may hold positions in futures
contracts and related options that do not fall within the definition of bona
fide hedging transactions if the aggregate initial margin and premiums required
to establish such positions will not exceed 5% of that Fund's net assets (after
taking into account unrealized profits and unrealized losses on any such
positions) and that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded from such 5%.

The Funds will attempt to determine whether the price fluctuations in the
futures contracts and options on futures used for hedging purposes are
substantially related to price fluctuations in securities held by the Funds or
which they expect to purchase. The Funds' futures transactions generally will be
entered into only for traditional hedging purposes -- I.E., futures contracts
will be sold 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,

B-13
<PAGE>
any depreciation in the value of portfolio securities can be substantially
offset by appreciation in the value of the futures position. However, any
unanticipated appreciation in the value of a Fund's portfolio securities could
be offset substantially by a decline in the value of the futures position.

The acquisition of put and call options on futures contracts gives a Fund the
right (but not the obligation), for a specified price, to sell or purchase the
underlying futures contract at any time during the option period. Purchasing an
option on a futures contract gives a Fund the benefit of the futures position if
prices move in a favorable direction, and limits its risk of loss, in the event
of an unfavorable price movement, to the loss of the premium and transaction
costs.

A Fund may terminate its position in an option contract by selling an offsetting
option on the same series. There is no guarantee that such a closing transaction
can be effected. A Fund's ability to establish and close out positions on such
options is dependent upon a liquid market.

Loss from investing in futures transactions by these Funds is potentially
unlimited.

These Funds will engage in transactions in futures contracts and related options
only to the extent such transactions are consistent with the requirements of the
Internal Revenue Code of 1986, as amended (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),

B-14
<PAGE>
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.

B-15
<PAGE>
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.
If the Adviser hedges currency exposure through proxy hedges, a Fund could

B-16
<PAGE>
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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<PAGE>
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).

B-18
<PAGE>
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
from the Adviser, the Board monitors trading activity in illiquid investments.

B-19
<PAGE>
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
foreign issuers, such as the PORTAL System sponsored by the National Association

B-20
<PAGE>
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
falling interest rates, and involves the possibility that securities with high

B-21
<PAGE>
interest rates will be prepaid or "called" by the issuer prior to maturity. Such
an event would require a Fund to invest the resulting proceeds elsewhere, at
generally lower interest rates, which could cause fluctuations in a Fund's net
income. A Fund also may be exposed to event risk, which is the possibility that
corporate debt securities held by a Fund may suffer a substantial decline in
credit quality and market value due to a corporate restructuring.

The value of debt securities will normally increase in periods of falling
interest rates; conversely, the value of these instruments will normally decline
in periods of rising interest rates. Generally, the longer the remaining
maturity of a debt security, the greater the effect of interest rate changes on
its market value. In an effort to maximize income consistent with its investment
objective, the Intermediate Total Return Bond Fund and the Intermediate Tax-Free
Bond Fund may, at times, change the average maturity of their investment
portfolios. This can be done by investing a larger portion of assets in
relatively longer term obligations when periods of declining interest rates are
anticipated and, conversely, emphasizing shorter and intermediate term
maturities when a rise in interest rates is indicated.

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 and 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
purchases because of settlement difficulties could cause it to miss attractive
investment opportunities. Inability to sell a portfolio security because of

B-22
<PAGE>
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 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
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

B-23
<PAGE>
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.

B-24
<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.

B-25
<PAGE>
================================================================================
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;

B-26
<PAGE>
(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

B-29
<PAGE>
gains over net short-term capital losses), if any, by a Fund are taxable as
long-term capital gains, whether such distributions are taken in cash or
reinvested in additional shares, and regardless of how long shares of the Fund
have been held. Fund distributions also will be included in individual and
corporate shareholders' income on which the alternative minimum tax may be
imposed. Tax-exempt shareholders will not be required to pay taxes on amounts
distributed to them, unless they have borrowed to purchase or carry their shares
of a Fund. Statements as to the tax status of distributions to shareholders will
be mailed annually.

Provided that, as anticipated, the Tax-Free Bond Fund qualifies as a regulated
investment company under the Code, and, at the close of each quarter of its
taxable year at least 50% of the value of the total assets of that Fund consists
of obligations the interest on which is exempt from federal income tax, that
Fund will be qualified to pay exempt-interest dividends to its shareholders
that, to the extent attributable to interest received by that Fund on such
obligations, are exempt from federal income tax. The total amount of
exempt-interest dividends paid by the Tax-Free Bond Fund to its shareholders
with respect to any taxable year cannot exceed the amount of interest received
by the Fund during such year on tax-exempt obligations less any expenses
attributable to such interest. Income from other transactions engaged in by the
Tax-Free Bond Fund, such as income from options and repurchase agreements, will
be taxable distributions to its shareholders.

The Code may subject interest received on otherwise tax-exempt securities to an
alternative minimum tax. In addition, certain corporations which are subject to
the alternative minimum tax may have to include a portion of exempt-interest
dividends in calculating their alternative minimum taxable income.

Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the Tax-Free Bond Fund is not 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

B-30
<PAGE>
constituting a return of capital, nevertheless will be taxable as described
above. Investors should be careful to consider the tax implications of buying
shares just prior to a distribution. The price of shares purchased at that time
may include the amount of the forthcoming distribution. Those investors
purchasing shares just prior to a distribution will then receive a partial
return of their investment upon such distribution, which will nevertheless be
taxable to them.

Any gain or loss realized upon an exchange or redemption of shares in a Fund by
a shareholder who holds the shares as a capital asset will be treated as a
long-term capital gain or loss if the shares have been held for more than one
year, and otherwise as a short-term capital gain or loss. However, any loss
realized by a shareholder upon an exchange or redemption of shares of a Fund
held (or treated as held) for six months or less will be treated as a long-term
capital loss to the extent of any long-term capital gain distribution received
on the shares.

All or a portion of a loss realized upon the exchange or redemption of shares
may be disallowed to the extent shares are purchased (including shares acquired
by means of reinvested dividends) within 30 days before or after such
redemption. In addition, with respect to the Tax-Free Bond Fund, any loss
realized upon the exchange or redemption of shares of the Fund held (or 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

B-31
<PAGE>
dividend income or use of an incorrect taxpayer identification number.
Nonresident aliens, foreign corporations, and other foreign entities may be
subject to withholding of up to 30% on certain payments received from a Fund.

The foregoing discussion and related discussion in the Prospectus do not purport
to be a complete description of all tax implications of an investment in a Fund.
A shareholder should consult his or her own tax adviser for more information
about the application of federal, state, local, or foreign taxes to an
investment in the Fund. Paul, Hastings, Janofsky & Walker, LLP has expressed no
opinion in respect thereof.

================================================================================
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 Kayne1 (Age 54) Trustee, Equity owner and the President of the general
c/o Kayne Anderson Mutual Funds Chief Executive Officer partner of Kayne Anderson (and its
1800 Avenue of the Stars, Ste 200 predecessor) since June 1984. Shareholder and
Los Angeles, CA 90067 President of KA Associates, Inc., a
registered broker-dealer, since January 1993.

Allan Michael Rudnick1 (Age 59) Trustee and President Equity owner and the Chief Investment Officer
c/o Kayne Anderson Mutual Funds of the general partner of Kayne Anderson (and
1800 Avenue of the Stars, Ste 200 its predecessor) since August 1989.
Los Angeles, CA 90067

William T. Miller1 (Age 36) Trustee, Equity Owner and Chief Financial Officer of
c/o Kayne Anderson Mutual Funds Treasurer, and the general partner of Kayne Anderson (and
1800 Avenue of the Stars, Ste 200 Chief Financial Officer its predecessor) since June 1994. Shareholder
Los Angeles, CA 90067 and Financial Vice President and Treasurer of
KA Associates, Inc., since April 1994. From
September 1992 until April 1994, Vice
President of Accounting for Pilgrim
Distribution Corp., a mutual fund distributor
in Los Angeles. From October 1990 until
September 1992, Audit Manager with Price
Waterhouse in Los Angeles.

Carl D. Covitz (Age 60) Trustee President and owner of Landmark Capital since
c/o Landmark Capital, Inc. 1973 (except for various periods of
9595 Wilshire Boulevard government service). Landmark Capital is a
Beverly Hills, CA 90212 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, since
601 North Saltair Avenue 1982. Prior to that, Senior Vice President -
Los Angeles, CA 90049 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 Cinema-Television
1637 East Valley Road at the University of Southern California in
Montecito, CA 93108 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 its
100 Jericho Quadrangle affiliated companies. These companies are
Jericho, NY 11753 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 defined 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.
<TABLE>
<CAPTION>
PENSION OR RETIREMENT TOTAL COMPENSATION FROM THE
AGGREGATE COMPENSATION BENEFITS ACCRUED AS PART OF TRUST AND FUND COMPLEX
NAME OF TRUSTEE FROM THE TRUST FUND EXPENSES* (NO ADDITIONAL TRUSTS)
- --------------- -------------- -------------- ----------------------
<S> <C> <C> <C>
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
</TABLE>

* 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 Bear Stearns Securities Corporation (1) 83.68%
Dividends 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 Bear Stearns Securities Corporation (1) 82.65%
Return 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- William N. Pennington TR 77.47%
Free Bond 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, 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.

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.

B-36
<PAGE>
EXPENSES

Each Fund will pay all expenses related to its operation which are not borne by
the Adviser or the Distributor. These expenses include, among others: legal and
auditing expenses; interest; taxes; governmental fees; fees, voluntary
assessments and other expenses incurred in connection with membership in
investment company organizations; brokerage commissions or charges; fees of
custodians, transfer agents, registrars or other agents; distribution plan fees;
expenses relating to the redemption or repurchase of a Fund's shares; expenses
of registering and qualifying Fund shares for sale under applicable federal and
state laws and maintaining such registrations and qualifications; expenses of
preparing, printing and distributing to Fund shareholders prospectuses, proxy
statements, reports, notices and dividends; cost of stationery; costs of
shareholders' and other meetings of a Fund; fees paid to members of the Board of
Trustees (other than members who are affiliated persons of the Adviser or
Distributor); a Fund's pro rata portion of premiums of any fidelity bond and
other insurance covering a Fund and the Trust's officers and trustees or other
expenses of the Trust; and expenses including prorated portions of overhead
expenses (in each case on cost recovery basis only) of services for a Fund
performed by the Adviser outside of its investment advisory duties under the
Management Agreement. A Fund also is liable for such nonrecurring expenses as
may arise, including litigation to which a Fund may be a party. Each Fund has
agreed to indemnify its trustees and officers with respect to any such
litigation. Each Fund also paid its own organizational expenses, which are being
amortized over five years.

As noted in the Prospectus, the Adviser has agreed to reduce its fee to each
Fund by the amount, if any, necessary to keep the Fund's annual operating
expenses (expressed as a percentage of its average daily net assets), at or
below the lesser of the following levels: Rising Dividends Fund, 1.20%; Small
Cap Rising Dividends Fund, 1.30%; International Rising Dividends Fund, 1.40%;
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>
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 -- $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>

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

B-37
<PAGE>
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
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.

B-38
<PAGE>
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.

B-41
<PAGE>
Short-term debt obligations with remaining maturities in excess of 60 days are
valued at current market prices, as discussed above. Short-term securities with
60 days or less remaining to maturity are, unless conditions indicate otherwise,
amortized to maturity based on their cost to a Fund if acquired within 60 days
of maturity or, if already held by a Fund on the 60th day, based on the value
determined on the 61st day.

Corporate and government debt securities held by the Funds are valued on the
basis of valuations provided by dealers in those instruments, by an independent
pricing service approved by the Board of Trustees, or at fair value as
determined in good faith by procedures approved by the Board of Trustees. Any
such pricing service, in determining value, is expected to use information with
respect to transactions in the securities being valued, quotations from dealers,
market transactions in comparable securities, analyses and evaluations of
various relationships between securities and yield to maturity information.

If any securities held by a Fund are restricted as to resale or do not have
readily available market quotations, the Adviser and the Board of Trustees
determine their fair value. The Trustees periodically review such valuations and
valuation procedures. The fair value of such securities is generally determined
as the amount which a Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration is generally given to the financial position of the
issuer and other fundamental analytical data relating to the investment and to
the nature of the restrictions on disposition of the securities (including any
registration expenses that might be borne by a Fund in connection with such
disposition). In addition, specific factors are also generally considered, such
as the cost of the investment, the market value of any unrestricted securities
of the same class (both at the time of purchase and at the time of valuation),
the size of the holding relative to current average trading volume, the prices
of any recent transactions or offers with respect to such securities and any
available analysts' reports regarding the issuer.

All other assets of the Funds are valued in such manner as the Board of Trustees
in good faith deems appropriate to reflect their fair value.

================================================================================
SHARE PURCHASES AND REDEMPTIONS
================================================================================

Information concerning the purchase and redemption of the Funds' shares is
contained in the Prospectus under "Purchasing Shares" and "Selling Shares
(Redemptions)."

The Trust reserves the right in its sole discretion (i) to suspend the continued
offering of each Fund's shares, (ii) to reject purchase orders in whole or in
part when in the judgment of the Adviser or the Distributor such rejection is in
the best interest of a Fund, and (iii) to reduce or waive the minimum for
initial and subsequent investments for certain fiduciary accounts or under
circumstances where certain economies can be achieved in sales of a Fund's
shares.

During any 90-day period, the Trust is committed to pay in cash all requests to
redeem shares by any one shareholder, up to the lesser of $250,000 or 1% of the
value of the Trust's net assets at the beginning of the period. Should
redemptions by any individual shareholder (excluding street name or omnibus
accounts maintained by financial intermediaries) exceed this limitation, the
Trust reserves the right to redeem the excess amount in whole or in part in
securities or other assets. If shares are redeemed in this manner, the redeeming
shareholder usually will incur additional brokerage costs in converting the
securities to cash.

B-42
<PAGE>
================================================================================
HOW PERFORMANCE IS DETERMINED
================================================================================

STANDARDIZED PERFORMANCE INFORMATION

The Intermediate Total Return Bond Fund and Tax-Free Bond Fund. These Funds'
30-day yield figure described in the Prospectus is calculated according to a
formula prescribed by the SEC, expressed as follows:

6
YIELD=2[(a-b +1) -1]
---
cd

Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.

For the purpose of determining the interest earned (variable "a" in the formula)
on debt obligations that were purchased by these Funds at a discount or premium,
the formula generally calls for amortization of the discount or premium; the
amortization schedule will be adjusted monthly to reflect changes in the market
values of the debt obligations.

Investors should recognize that, in periods of declining interest rates, these
Funds' yields will tend to be somewhat higher than prevailing market rates and,
in periods of rising interest rates, will tend to be somewhat lower. In
addition, when interest rates are falling, 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>
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>
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>
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>
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 interest and/or
AND D 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 (5)
(5) Kayne Anderson Intermediate Total Return Bond Fund(1)
(6) Kayne Anderson Intermediate Tax-Free Bond Fund(1)
(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(5)
(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) Financial Data Schedule.(4)
(o) 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 Incorporated by reference to Form NSAR-A filed on August 20, 1998.
5 Incorporated by reference to Post-Effective Amendment No. 6 to the Form
N-1A Registration Statement filed on April 29, 1999.

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 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 Kayne Anderson High-Yield
Bond Fund
<PAGE>
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, as amended (the "33 Act") 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 33 Act 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 33 Act
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) 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.
<PAGE>
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 Funds
Fleming Capital Mutual Fund Group
Fremont Mutual Funds, Inc.
Guinness Flight Investment Funds, Inc.
Jurika & Voyles Mutual Funds
Kayne Anderson Mutual Funds
Masters' Select Funds Trust
O'Shaughnessy Funds, Inc.
PIC Investment Trust
Professionally Managed Portfolios
Puget Sound Alternative Investment Series Trust
The Purisima Funds
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.:
<TABLE>
<CAPTION>
NAME AND PRINCIPAL POSITION AND OFFICES POSITIONS AND
BUSINESS ADDRESS* WITH UNDERWRITER OFFICES WITH FUND
----------------- ---------------- -----------------
<S> <C> <C> <C>
Robert H. Wadsworth
4455 E. Camelback Rd., Suite 261E President, Treasurer Assistant Secretary
Phoenix, AZ 85018 and Director

Steven J. Paggioli
915 Broadway, Suite 1605 Vice President, Secretary
New York, NY 10010 and Director None

Eric M. Banhazl
2020 E. Financial Way, Suite 100
Glendora, CA 91741 Vice President and Director Assistant Treasurer
</TABLE>

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, as amended (the "40
Act") 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 33 Act and the 40 Act, the
Registrant 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 21st day of September 1999.

Kayne Anderson Mutual Funds

By: /s/ 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.

Richard Alan Kayne* Chairman of the Board of September 21, 1999
- ------------------------ Trustees
Richard Alan Kayne

Allan M. Rudnick* President, Principal Executive September 21, 1999
- ------------------------ Officer and Trustee
Allan M. Rudnick

William T. Miller* Principal Financial and September 21, 1999
- ------------------------ Accounting Officer, and Trustee
William T. Miller

Carl D. Covitz* Trustee September 21, 1999
- ------------------------
Carl D. Covitz

Arnold Brustin* Trustee September 21, 1999
- ------------------------
Arnold Brustin

Gerald I. Isenberg* Trustee September 21, 1999
- ------------------------
Gerald I. Isenberg

William H. Waldorf* Trustee September 21, 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