As filed with the Securities and Exchange Commission on October 20, 1999
File No: 333-86947
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] PRE-EFFECTIVE AMENDMENT NO. 1
[ ] POST-EFFECTIVE AMENDMENT NO. __
KAYNE ANDERSON MUTUAL FUNDS
(Exact Name of Registrant as Specified in Charter)
(310) 556-2721
(Registrant's Telephone Number, Including Area Code)
1800 Avenue of the Stars, Second Floor
Los Angeles, California 90067
(Address of Principal Executive Offices)
David J. Shladovsky, Esq.
1800 Avenue of the Stars, Second Floor
Los Angeles, California 90067
(Name and Address of Agent for Service)
Copy to:
David A. Hearth, Esq.
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, California 94104
Approximate Date of Proposed Public Offering: As soon as practicable after this
Registration Statement becomes effective. The registrant hereby amends this
registration statement on such date or dates as may be necessary to delay its
effective date until the registrant shall file a further amendment which
specifically states that this registration statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933, as
amended, or until the registration statement shall become effective on such date
as the Commission, acting pursuant to said Section 8(a), may determine.
No filing fee is required under the Securities Act of 1933, as amended, because
an indefinite number of shares of beneficial interest, with par value $0.01 per
share, has previously been registered pursuant to Rule 24f-2 under the
Investment Company Act of 1940, as amended.
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CROSS REFERENCE SHEET
Form N-14 Part A, Item Location in Prospectus/Proxy Statement
- - - ---------------------- --------------------------------------
1 Front Cover; Cross Reference
2 Table of Contents
3 Introduction; Description of the Proposed
Reorganization; Comparison of the Funds; Risk
Factors
4 Introduction, The Proposal, Description of the
Proposed Reorganization
5, 6 Comparison of the Funds; Risk Factors; Further
Information About the Target Fund and the
Acquiring Fund
7 Shares and Voting; Vote Required
8 Not Applicable
9 Not Applicable
Form N-14 Part B, Item Location in Statement of Additional Information
- - - ---------------------- -----------------------------------------------
10 Cover Page
11 Table of Contents
12 Incorporation of Documents by Reference in
Statement of Additional Information
13 Not Applicable
14 Incorporation of Documents by Reference in
Statement of Additional Information
Form N-14 Part C
- - - ----------------
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of Form N-14.
2
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THE FOLLOWING ITEMS ARE HEREBY INCORPORATED BY REFERENCE:
From Post-Effective Amendment No. 7 of Kayne Anderson Mutual Funds, filed May 5,
1999 (SEC File No. 811-07705):
Combined Prospectus for Kayne Anderson Rising Dividends Fund, Kayne
Anderson Small Cap Rising Dividends Fund, Kayne Anderson Intermediate Total
Return Bond Fund and Kayne Anderson Intermediate Tax-Free Bond Fund (with
another fund of Kayne Anderson Mutual Funds), dated May 5, 1999.
Combined Statement of Additional Information for Kayne Anderson Rising
Dividends Fund, Kayne Anderson Small Cap Rising Dividends Fund, Kayne
Anderson Intermediate Total Return Bond Fund and Kayne Anderson
Intermediate Tax-Free Bond Fund (with another fund of Kayne Anderson Mutual
Funds), dated May 5, 1999.
From Post-Effective Amendment No. 8 of Sefton Funds Trust, filed April 29, 1999
(SEC File No. 811-8948):
Combined Prospectus for Sefton U.S. Government Fund, Sefton California
Tax-Free Fund, Sefton Equity Value Fund and Sefton Small Company Value
Fund, dated April 30, 1999.
Combined Statement of Additional Information for Sefton U.S. Government
Fund, Sefton California Tax-Free Fund, Sefton Equity Value Fund and Sefton
Small Company Value Fund, dated April 30, 1999.
As previously sent to shareholders of Kayne Anderson Rising Dividends Fund,
Kayne Anderson Small Cap Rising Dividends Fund, Kayne Anderson Intermediate
Total Return Bond Fund and Kayne Anderson Intermediate Tax-Free Bond Fund; and
to shareholders of Sefton U.S. Government Fund, Sefton California Tax-Free Fund,
Sefton Equity Value Fund and Sefton Small Company Value Fund, and as filed with
the SEC pursuant to Rule 30b2-1:
Annual Report for the Kayne Anderson Rising Dividends Fund, Kayne Anderson
Small Cap Rising Dividends Fund, Kayne Anderson Intermediate Total Return
Bond Fund and Kayne Anderson Intermediate Tax-Free Bond Fund (with another
fund of Kayne Anderson Mutual Funds), for the fiscal year ended December
31, 1998, as contained in the Annual Report for Kayne Anderson Mutual Funds
dated as of and for the periods ended December 31, 1998.
Annual Report for the Sefton U.S. Government Fund, Sefton California
Tax-Free Fund, Sefton Equity Value Fund and Sefton Small Company Value
Fund, for the fiscal year ended December 31, 1998, as contained in the
Annual Report for Sefton Funds Trust dated as of and for the periods ended
December 31, 1998.
Semi-Annual Report for the Kayne Anderson Rising Dividends Fund, Kayne
Anderson Small Cap Rising Dividends Fund, Kayne Anderson Intermediate Total
Return Bond Fund and Kayne Anderson Intermediate Tax-Free Bond Fund (with
another fund of Kayne Anderson Mutual Funds), for the period ended June 30,
1999, as contained in the Semi-Annual Report for Kayne Anderson Mutual
Funds dated as of and for the period ended June 30, 1999.
Semi-Annual Report for the Sefton U.S. Government Fund, Sefton California
Tax-Free Fund, Sefton Equity Value Fund and Sefton Small Company Value
Fund, for the period ended June 30, 1999, as contained in the Semi-Annual
Report for Sefton Funds Trust dated as of and for the period ended June 30,
1999.
3
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-----------------------------------------
PART A
COMBINED PROXY STATEMENT AND PROSPECTUS
FOR THE REORGANIZATION OF
SEFTON EQUITY VALUE FUND,
SEFTON SMALL COMPANY VALUE FUND,
SEFTON U.S. GOVERNMENT FUND, AND
SEFTON CALIFORNIA TAX-FREE FUND
INTO
KAYNE ANDERSON RISING DIVIDENDS FUNDS,
KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND, AND
KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND
-----------------------------------------
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SEFTON FUNDS TRUST
3435 Stelzer Road
Columbus, Ohio 43219
(800) 524-2276
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
OF
SEFTON EQUITY VALUE FUND
SEFTON SMALL COMPANY VALUE FUND
SEFTON U.S. GOVERNMENT FUND
SEFTON CALIFORNIA TAX-FREE FUND
TO BE HELD NOVEMBER __, 1999
To the Shareholders of Sefton Equity Value Fund, Sefton Small Company Value
Fund, Sefton U.S. Government Fund and Sefton California Tax-Free Fund,:
You are cordially invited to attend a special meeting of shareholders at
the offices of the administrator for the funds, BISYS Fund Services, 3435
Stelzer Road, Columbus, Ohio 43219, on November __, 1999, at 10:00 a.m., local
time. At the meeting, we will ask you to vote on:
1. A proposal to approve an Agreement and Plan of Reorganization (the
"Plan") for each Fund, and the transactions contemplated thereby,
which include (a) the transfer of all of the assets of Sefton Equity
Value Fund, Sefton Small Company Value Fund, Sefton U.S. Government
Fund, and Sefton California Tax-Free Fund (each, a "Target Fund") to
Kayne Anderson Rising Dividends Fund, Kayne Anderson Small Cap Rising
Dividends Fund and Kayne Anderson Intermediate Total Return Bond Fund
and Kayne Anderson Intermediate Tax-Free Bond Fund (each, an
"Acquiring Fund"), respectively, in exchange for shares of the
corresponding Acquiring Fund, and the assumption by each Acquiring
Fund of stated liabilities of the corresponding Target Fund, (b) the
distribution of shares of the corresponding Acquiring Fund to
shareholders of each Target Fund, and, for the Sefton Small Company
Value Fund shareholders only, (c) the immediate increase to $3 billion
as the maximum market capitalization of small cap companies in which
the Sefton Small Company Value Fund may invest.
2. Any other business that properly comes before the meeting.
SHAREHOLDERS OF EACH TARGET FUND WILL VOTE SEPARATELY ON THE PLAN FOR
THAT TARGET FUND. Only shareholders of record at the close of business
on October 14, 1999 (the Record Date), will be entitled to receive
this notice and to vote at the meeting.
<PAGE>
By Order of the Board of Trustees
Harley K. Sefton
Chairman of the Board
YOUR VOTE IS IMPORTANT REGARDLESS OF HOW MANY SHARES YOU OWNED ON THE
RECORD DATE.
-------------------
PLEASE VOTE ON THE ENCLOSED PROXY FORM, DATE AND SIGN IT, AND RETURN IT IN THE
PRE-ADDRESSED ENVELOPE PROVIDED. NO POSTAGE IS NECESSARY IF MAILED IN THE
UNITED STATES. IN ORDER TO AVOID THE ADDITIONAL EXPENSE AND DISRUPTION
OF FURTHER SOLICITATION, WE REQUEST YOUR COOPERATION IN VOTING PROMPTLY.
2
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SEFTON FUNDS TRUST
3435 Stelzer Road
Columbus, Ohio 43219
(800) 524-2276
"TARGET FUND" CORRESPONDING "ACQUIRING FUND"
- - - ------------- ------------------------------
SEFTON EQUITY VALUE FUND KAYNE ANDERSON RISING DIVIDENDS FUND
SEFTON SMALL COMPANY VALUE FUND KAYNE ANDERSON SMALL CAP RISING
DIVIDENDS FUND
SEFTON U.S. GOVERNMENT FUND KAYNE ANDERSON INTERMEDIATE TOTAL RETURN
BOND FUND
SEFTON CALIFORNIA TAX-FREE FUND KAYNE ANDERSON INTERMEDIATE TAX-FREE
BOND FUND
COMBINED PROXY STATEMENT AND PROSPECTUS
Dated: October __, 1999
WHAT IS THIS DOCUMENT AND WHY DID WE SEND IT TO YOU?
Sefton Capital Management ("Sefton") and Kayne Anderson Investment
Management, LLC ("Kayne Anderson") agreed to propose that the above-named mutual
funds in Sefton Funds Trust ("Sefton Trust") each reorganize into a
corresponding series of Kayne Anderson Mutual Funds ("KA Funds"). We sent this
document to you because the shareholders of each Sefton fund must approve its
reorganization into the corresponding KA Fund in order to proceed.
The Board of Trustees of Sefton Trust, and the Board of Trustees of KA
Funds, after a careful deliberation, approved a plan to (1) reorganize the
Sefton Equity Value Fund into the Kayne Anderson Rising Dividends Fund, (2)
reorganize the Sefton Small Company Value Fund into the Kayne Anderson Small Cap
Rising Dividends Fund, (3) reorganize the Sefton U.S. Government Fund into the
Kayne Anderson Intermediate Total Return Bond Fund, and (4) reorganize the
Sefton California Tax-Free Fund into the Kayne Anderson Intermediate Tax-Free
Bond Fund (each transaction is referred to as a "Reorganization" and are
collectively referred to as the "Reorganizations"). Each series of Sefton Trust
involved in a Reorganization is called an "Target Fund" and collectively are
called the "Target Funds." Similarly, each series of KA Funds involved in the
Reorganization is called an "Acquiring Fund" and collectively are called the
"Acquiring Funds." Shareholders of each Target Fund must approve the
Reorganization before the Reorganization for that Fund can be completed. The
shareholder meeting will be held on November __, 1999 (the "Shareholder
Meeting"). We are sending this document to you for your use in deciding whether
to approve the Reorganizations at the Shareholder Meeting.
As a technical matter, each Reorganization will have three steps:
3
<PAGE>
* the transfer of the assets and liabilities of a Target Fund to the
corresponding Acquiring Fund in exchange for shares of the Acquiring
Fund (the "Acquiring Fund Shares") of equivalent value to the net
assets transferred,
* the pro rata distribution of those Acquiring Fund Shares to
shareholders of record of each corresponding Target Fund as of the
effective date of the Reorganization (the "Effective Date") in full
redemption of those shareholders' shares in the corresponding Target
Fund, and
* the immediate liquidation and termination of each Target Fund.
In addition, if shareholders of the Sefton Small Company Value Fund approve
its Reorganization, that Fund may begin immediately investing up to all of (but
not less than 65%) its assets in stocks of companies having total market
capitalizations of up to $3 billion, to the extent appropriate to permit the
Fund to invest in the common stocks also held by the Kayne Anderson Small Cap
Rising Dividends Fund.
AS A RESULT OF THE REORGANIZATIONS, SHAREHOLDERS OF EACH TARGET FUND WOULD
INSTEAD HOLD ACQUIRING FUND SHARES HAVING THE SAME TOTAL VALUE AS THE SHARES OF
THE CORRESPONDING TARGET FUND HELD IMMEDIATELY BEFORE THE REORGANIZATIONS. Legal
counsel for the independent Trustees of the Sefton Trust will issue an opinion
to the effect that, for federal income tax purposes, the Reorganizations will be
treated as tax-free reorganizations that will not cause any Acquiring Fund's
shareholders to recognize a gain or loss for federal income tax purposes (other
than the tax effects that may be caused by certain special distributions that
will be further discussed below). Please see Section II.A.3 below.
The investment objective of each Target Fund is similar to that of each
corresponding Acquiring Fund. For a full comparison of the different investment
objectives and strategies, please see Section I.B. below.
This Combined Proxy Statement and Prospectus sets forth the basic
information that you should know before voting on the proposal. We encourage you
to read it and keep it for future reference.
WHAT OTHER IMPORTANT DOCUMENTS SHOULD I KNOW ABOUT?
Each Target Fund is a series of the Sefton Trust, an open-end management
investment company. Each Acquiring Fund is a series of KA Funds, also an
open-end management investment company. The following documents are on file with
the Securities and Exchange Commission (the "SEC") and are deemed to be legally
part of this document:
* Combined Prospectus for the Kayne Anderson Rising Dividends Fund,
Kayne Anderson Small Cap Rising Dividends Fund, Kayne Anderson
Intermediate Total Return Bond Fund and Kayne Anderson Intermediate
Tax-Free Bond Fund proposed to be changed to the Kayne Anderson
California Intermediate Tax-Free Bond Fund) (as well as the Kayne
Anderson International Rising Dividends Fund, which is not involved in
the Reorganizations) dated May 5, 1999
* A supplement to the Combined Prospectus relating to the Kayne Anderson
Intermediate Tax-Free Bond Fund dated November 20, 1999
4
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* Combined Statement of Additional Information relating to the Kayne
Anderson Rising Dividends Fund, Kayne Anderson Small Cap Rising
Dividends Fund, Kayne Anderson Intermediate Total Return Bond Fund and
Kayne Anderson Intermediate Tax-Free Bond Fund (as well as the Kayne
Anderson International Rising Dividends Fund, which is not involved in
the Reorganizations) dated May 5, 1999
* Combined Prospectus for the Sefton U.S. Government Fund, Sefton
California Tax-Free Fund, Sefton Equity Value Fund and Sefton Small
Company Value Fund dated April 30, 1999
* Combined Owner's Manual for the Sefton U.S. Government Fund, Sefton
California Tax-Free Fund, Sefton Equity Value Fund and Sefton Small
Company Value Fund dated April 30, 1999
* Combined Statement of Additional Information for the Sefton U.S.
Government Fund, Sefton California Tax-Free Fund, Sefton Equity Value
Fund and Sefton Small Company Value Fund dated April 30, 1999
* Statement of Additional Information relating to this Combined Proxy
Statement and Prospectus
Those documents are available without charge by writing to Sefton Funds
Trust at 3435 Stelzer Road, Columbus, Ohio 43219 or by calling Sefton Funds
Trust at (800) 524-2276; or by writing to Kayne Anderson Mutual Funds at 1800
Avenue of the Stars, Second Floor, Los Angeles, California 90067, or by calling
Kayne Anderson Mutual Funds at (800) 231-7414.
The Annual Report to Shareholders of each Target Fund for the year ended
December 31, 1998, containing audited financial statements of each Target Fund,
has been previously mailed to shareholders. If you do not have a copy,
additional copies of that Annual Report are available without charge by writing
or calling the Sefton Trust at its address and telephone number listed above.
The Annual Report to Shareholders of each Acquiring Fund for the year ended
December 31, 1998, containing audited financial statements of each Acquiring
Fund, has been previously mailed to shareholders. If you do not have a copy,
additional copies of that Annual Report to Shareholders are available without
charge by writing or calling the KA Funds at its address and telephone number
listed above.
It is expected that this Combined Proxy Statement and Prospectus will be
mailed to shareholders on or about October __, 1999.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR PASSED ON THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
5
<PAGE>
TABLE OF CONTENTS
PAGE
----
I. INTRODUCTION........................................................ 7
A. GENERAL............................................................. 7
B. THE PROPOSAL........................................................ 7
C. COMPARISON OF EXPENSES............................................. 9
D. SHARES AND VOTING.................................................. 12
II. THE PROPOSAL....................................................... 15
A. DESCRIPTION OF THE PROPOSED REORGANIZATIONS........................ 15
1. The Reorganizations................................................ 15
2. Effect of the Reorganizations...................................... 16
3. Federal Income Tax Consequences.................................... 16
4. Interest of Certain Persons in the Reorganizations................. 17
5. Description of the Acquiring Fund Shares........................... 18
6. Capitalization..................................................... 18
B. COMPARISON OF THE FUNDS............................................ 19
1. Investment Objectives and Policies................................. 19
2. Investment Restrictions............................................ 22
3. Comparative Performance Information................................ 24
4. Advisory Fees and Other Expenses................................... 29
5. Portfolio Managers................................................. 30
6. Distribution and Shareholder Services.............................. 31
7. Redemption and Exchange Procedures................................. 31
8. Income Dividends, Capital Gains Distributions and Taxes............ 32
9. Portfolio Transactions and Brokerage Commissions................... 32
10. Shareholders'Rights................................................ 33
C. RISK FACTORS....................................................... 33
D. RECOMMENDATION OF THE BOARD OF TRUSTEES............................ 36
E. DISSENTERS'RIGHTS OF APPRAISAL..................................... 36
F. FURTHER INFORMATION ABOUT THE TARGET FUND AND THE ACQUIRING FUND... 36
G. VOTE REQUIRED...................................................... 37
H. FINANCIAL HIGHLIGHTS............................................... 37
III. MISCELLANEOUS ISSUES............................................... 46
A. OTHER BUSINESS..................................................... 46
B. NEXT MEETING OF SHAREHOLDERS....................................... 46
C. LEGAL MATTERS...................................................... 46
D. EXPERTS............................................................ 46
6
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I. INTRODUCTION
A. GENERAL
The Board of Trustees of Sefton Funds Trust (as defined above, "Sefton
Trust") called this shareholder meeting to allow shareholders to consider and
vote on the proposed Reorganization of each Target Fund into the corresponding
Acquiring Fund. The Board of Trustees of Sefton Trust, including a majority of
the independent trustees (those trustees who are not "interested" persons under
the Investment Company Act of 1940 (the "Investment Company Act")), voted on
August 27, 1999, to approve the Reorganizations subject to the approval of
shareholders of each Target Fund. If shareholders of one or more Target Fund(s)
do not approve the proposal, the Board of Trustees of Sefton Trust may decide to
proceed with the Reorganizations of other Target Funds whose shareholders have
approved their Reorganizations. (In addition, the shareholders of the Kayne
Anderson Intermediate Tax-Free Fund must approve the change of that Fund's
fundamental investment objective to be consistent with that of a California
municipal bond fund before the Reorganization of the corresponding Target Fund
may occur.)
Sefton Capital Management ("Sefton") serves as the investment adviser for
each Target Fund. The independent Trustees of the Sefton Trust recommend that
you approve the Reorganizations because they believe the combination of assets
of the two fund groups would be beneficial to the shareholders of Sefton Funds.
If the proposed Reorganizations of each Target Fund into each Acquiring Fund are
approved and completed, each Acquiring Fund's asset size will increase, which
may create certain economies of scale; and each Target Fund will become part of
a fund with a similar investment objective as well as larger assets, which
should permit it to operate more efficiently in accordance with its investment
policies and objective.
Each Target Fund offers only one class of shares and sells its shares
directly to the public at net asset value, without any sales load or Rule 12b-1
fee. Each Acquiring Fund currently also offers only one class of shares directly
to the public at net asset value, without any sales load or Rule 12b-1 fee. If a
Reorganization is completed, all remaining shareholders of a Target Fund would
receive shares of the corresponding Acquiring Fund (I.E., shareholders of Sefton
U.S. Government Fund would receive shares of Kayne Anderson Intermediate Total
Return Bond Fund; shareholders of Sefton California Tax-Free Fund would receive
shares of Kayne Anderson Intermediate Tax-Free Bond Fund; shareholders of Sefton
Equity Value Fund would receive shares of Kayne Anderson Rising Dividends Fund;
shareholders of Sefton Small Company Value Fund would receive shares of Kayne
Anderson Small Cap Rising Dividends Fund).
B. THE PROPOSAL
At the Shareholder Meeting, the shareholders of each Target Fund will be
asked to approve a proposed Reorganization of that Target Fund into the
corresponding Acquiring Fund. Each Reorganization will include the transfer of
substantially all of the assets and liabilities of a Target Fund to the
corresponding Acquiring Fund. All remaining Target Fund shareholders will
receive corresponding Acquiring Fund Shares in exchange. Each Target Fund will
then be terminated and liquidated.
The primary purposes of each proposed Reorganization is to seek to achieve
future economies of scale and eliminate certain costs associated with operating
7
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the Target Funds and the Acquiring Funds separately. Each Target Fund and its
corresponding Acquiring Fund have a similar investment objective, as described
in detail below. The Reorganization will result in combining the assets of each
Acquiring Fund and its corresponding Target Fund and consolidating their
operations.
Combining the assets of the Target Funds and the Acquiring Funds is
intended to provide various benefits to shareholders of the Target Funds who
become shareholders of the Acquiring Funds (as well as to existing and future
investors in the Acquiring Funds). For example, higher asset levels should
enable the Acquiring Funds to spread fixed and relatively fixed costs, such as
accounting, legal and printing expenses, over a larger asset base, thereby
reducing per-share expense levels. Higher asset levels also should benefit
portfolio management by permitting larger individual portfolio investments (such
as "round-lots" or other quantities that may result in reduced transaction costs
and/or more favorable pricing) and by providing, when desired, the opportunity
for greater portfolio diversity. In addition, consolidating the operations of
the Target Funds and the Acquiring Funds should generally benefit the Target
Funds by promoting more efficient operations on a more cost-effective basis.
These benefits, in turn, should have a favorable effect on the relative
performance of the Acquiring Funds (although such improvement cannot be
guaranteed). Finally, shareholders of the Target Funds will generally benefit
from the lower total expense ratios (after fee waivers) of the Acquiring Funds
as compared with the Target Funds (other than the case of the Sefton U.S.
Government Fund where the Kayne Anderson Intermediate Total Return Bond Fund had
a net total expense ratio that was comparable to the expense ratio of the Sefton
U.S. Government Fund in the most recently completed fiscal year of the
respective Funds).
The completion of the Reorganization is subject to the satisfaction of a
number of conditions (such as approval by the Target Funds' shareholders), which
are summarized below under the "Description of the Proposed Reorganizations."
These conditions are stated in the Agreement and Plan of Reorganization (as
defined above, the "Plan"), which is attached as EXHIBIT B to this Combined
Prospectus/Proxy Statement. There can be no assurance that the benefits
described here can be achieved.
The investment objective of the Sefton Equity Value Fund is to seek to
provide investors with long-term capital appreciation. The investment objective
of the Kayne Anderson Rising Dividends Fund is to seek long-term capital
appreciation, with dividend income as a secondary consideration, by investing in
companies with consistent, rising dividends.
The investment objective of the Sefton Small Company Value Fund is to seek
to provide investors with long-term capital appreciation. The investment
objective of the Kayne Anderson Small Cap Rising Dividends Fund is to seek
long-term capital appreciation, with dividend income as a secondary
consideration, by investing in small-cap companies with consistent, rising
dividends.
The investment objective of the Sefton U.S. Government Fund is to seek to
provide investors with as high a level of current income as is consistent with
preservation of capital. The investment objective of the corresponding Kayne
Anderson Intermediate Total Return Bond Fund is to seek to maximize total return
(mainly through current income with capital appreciation as a secondary factor)
by investing primarily in investment-grade bonds. In comparison, the Sefton U.S.
Government Fund is required to invest at least 65% of its total assets in higher
quality U.S. government and agency obligations.
8
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The investment objective of the Sefton California Tax-Free Fund is to seek
to provide investors with as high a level of current income exempt from both
federal and California personal income taxes as is consistent with preservation
of capital. The investment objective of the corresponding Kayne Anderson
Intermediate Tax-Free Bond Fund is to seek current income exempt from federal
income tax by investing primarily in investment-grade municipal bonds. Even
though Kayne Anderson Intermediate Tax-Free Bond Fund currently is not required
to invest primarily in California municipal bonds as is the case of the Sefton
California Tax-Free Fund, the KA Trust is in the process of soliciting (and
anticipates) approval by shareholders of the Kayne Anderson Intermediate
Tax-Free Bond Fund to change the investment objective of that fund to one that
seeks current income exempt from both federal and California personal income
taxes by investing primarily in investment-grade California municipal bonds.
Investments in the Acquiring Funds and the Target Funds are subject to
substantially similar risks, except for the additional risks that may be
presented by the non-U.S. government and agency obligations held by the Kayne
Anderson Intermediate Total Return Bond Fund compared to the corresponding
Target Fund. Please see Section II.C. below. The purchase and redemption
arrangements of the Acquiring Funds and the Target Funds are similar. The
Acquiring Funds and the Target Funds also have similar distribution and exchange
arrangements, which are discussed in Section II.B. below.
Sefton, Kayne Anderson and the Board of Trustees of both the Sefton Trust
and KA Funds believe that the proposed Reorganizations are in the best interests
of each Target Fund, each Acquiring Fund, and their respective shareholders, and
that the interests of existing shareholders of the Target Funds and the
Acquiring Funds will not be diluted as a result of the proposed Reorganizations.
Please see Section II.D. below.
Kayne Anderson will pay the costs of the Reorganizations, the Shareholder
Meeting and solicitation of proxies, including the cost of copying, printing and
mailing proxy materials. In addition to solicitations by mail, Sefton and Kayne
Anderson also may solicit proxies, without special compensation, by telephone,
facsimile or otherwise.
C. COMPARISON OF EXPENSES
The following table shows the comparative fees and expenses you may pay if
you buy and hold shares of the Target Funds and the Acquiring Funds
(collectively, the "Funds"). The Funds do not impose any front-end or deferred
sales loads and they do not charge shareholders for exchanging shares or
reinvesting dividends.
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FEES AND EXPENSES OF THE FUNDS
Kayne
Kayne Anderson
Anderson Rising
Sefton Rising Dividends
Equity Dividends Fund
Value Fund Fund (Pro Forma)*
---------- --------- ------------
SHAREHOLDER FEES (fees paid directly
from your investment) None None None
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund
assets)
Management Fee 1.00% 0.75% 0.75%
Distribution/Service (12b-1) Fee 0.00% 0.00% 0.00%
Other Expenses 0.39% 0.36% 0.37%
----- ----- -----
TOTAL ANNUAL FUND OPERATING EXPENSES 1.39% 1.11% 1.12%
Fee Reduction and/or
Expense Reimbursement 0.00% 0.00% 0.00%
NET EXPENSES 1.39% 1.11% 1.12%
Kayne
Kayne Anderson
Anderson Small Cap
Sefton Small Cap Rising
Small Rising Dividends
Company Dividends Fund
Value Fund Fund (Pro Forma)*
---------- ---------- ------------
SHAREHOLDER FEES (fees paid directly
from your investment) None None None
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund
assets)
Management Fee 1.25% 0.85% 0.85%
Distribution/Service (12b-1) Fee 0.00% 0.00% 0.00%
Other Expenses 0.50% 0.50% 0.50%
----- ----- -----
TOTAL ANNUAL FUND OPERATING EXPENSES 1.75% 1.35% 1.35%
Fee Reduction and/or
Expense Reimbursement 0.20%(1) 0.05%(2) 0.05%(2)
----- ----- -----
NET EXPENSES 1.55%(1) 1.30%(2) 1.30%(2)
===== ===== =====
10
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Kayne
Kayne Anderson
Anderson Intermediate
Sefton U.S. Intermediate Total Return
Government Total Return Bond Fund
Fund Bond Fund (Pro Forma)*
----------- ------------ -------------
SHAREHOLDER FEES (fees paid directly
from your investment) None None None
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from
Fund assets)
Management Fee 0.60% 0.50% 0.50%
Distribution/Service (12b-1) Fee 0.00% 0.00% 0.00%
Other Expenses 0.44% 0.50% 0.46%
----- ----- -----
TOTAL ANNUAL FUND OPERATING EXPENSES 1.04% 1.00% 0.96%
Fee Reduction and/or
Expense Reimbursement 0.10%(1) 0.05%(2) 0.01%(2)
----- ----- -----
NET EXPENSES 0.94%(1) 0.95%(2) 0.95%(2)
===== ===== =====
Kayne Kayne
Anderson Anderson
Sefton Intermediate Intermediate
California Tax-Free Tax-Free
Tax-free Bond Bond Fund(3)
Fund Fund(3) (Pro Forma)*
---------- ------------ ------------
SHAREHOLDER FEES (fees paid directly
from your investment) None None None
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund
assets)
Management Fee 0.60% 0.50% 0.50%
Distribution/Service (12b-1) Fee 0.00% 0.00% 0.00%
Other Expenses 0.44% 1.73% 0.61%
----- ----- -----
TOTAL ANNUAL FUND OPERATING EXPENSES 1.04% 2.23% 1.11%
Fee Reduction and/or
Expense Reimbursement 0.15%(1) 1.48%(2) 0.36%(2)
----- ----- -----
NET EXPENSES 0.89%(1) 0.75%(2) 0.75%(2)
===== ===== =====
* Estimated by giving effect to the proposed Reorganizations.
(1) During the last fiscal year, Sefton has voluntarily agreed to reduce its
Management Fee so that the Net Expense of each Target Fund (other than
Sefton Equity Value Fund where no fee reduction applied) were as follows:
Sefton Small Company Value Fund (1.55%); Sefton U.S. Government Fund
(0.94%); and Sefton California Tax-Free Fund (0.89%).
(2) Kayne Anderson has contractually agreed to reduce its fees and/or absorb
expenses to limit each Acquiring Fund's (other than Kayne Anderson Rising
Dividends Fund's) total annual operating expenses (excluding interest and
tax expenses) to the following amount: Kayne Anderson Small Cap Rising
Dividend Fund (1.30%); Kayne Anderson Intermediate Total Return Bond Fund
(0.95%); and Kayne Anderson Intermediate Tax-Free Bond Fund (0.75%). This
contract has a one-year term, renewable at the end of each fiscal year.
Kayne Anderson expects to renew this contract.
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(3) Please note that the information is provided for the Kayne Anderson
Intermediate Tax-Free Bond Fund which, during the fiscal year ending
December 1998, did not have an investment objective of primarily investing
in California municipal securities. As described above, this Fund is in the
process of seeking shareholder approval to change its investment objective.
Therefore, the financial information shown here may not reflect accurately
the expense to be incurred after the Fund changes its investment objective.
EXAMPLE OF FUND EXPENSES: This table is intended to help you compare the cost of
investing in the Funds 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 the charges specified above. These
examples are for comparison purposes only. They do not necessarily represent a
Fund's actual expenses or returns.
FUND EXPENSES
EXPENSES
--------------------------------------
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- - - --------------------------------------------------------------------------------
Sefton Equity Value Fund $142 $440 $761 $1,669
Kayne Anderson Rising Dividends Fund $113 $352 $610 $1,348
Kayne Anderson Rising Dividends Fund
(pro forma) $114 $356 $617 $1,363
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- - - --------------------------------------------------------------------------------
Sefton Small Company Value Fund $178 $551 $949 $2,062
Kayne Anderson Small Cap Rising
Dividends Fund $132 $422 $733 $1,614
Kayne Anderson Small Cap Rising
Dividends Fund (pro forma) $132 $422 $733 $1,614
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- - - --------------------------------------------------------------------------------
Sefton U.S. Government Fund $106 $331 $574 $1,271
Kayne Anderson Intermediate Total
Return Bond Fund $ 97 $313 $547 $1,217
Kayne Anderson Intermediate Total
Return Bond Fund (pro forma) $ 97 $305 $530 $1,177
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- - - --------------------------------------------------------------------------------
Sefton California Tax-Free Fund $106 $331 $ 574 $1,271
Kayne Anderson Intermediate Tax-Free
Bond Fund $ 76 $553 $1,056 $2,438
Kayne Anderson California Intermediate
Tax-Free Bond Fund (pro forma) $ 76 $285 $ 509 $1,151
The figures in each example after the first year for each Fund assume that the
reduction in fees and expenses noted above is not extended beyond one year.
However, the KA Funds and Kayne Anderson currently expect to renew their expense
limitation agreement throughout the periods shown.
D. SHARES AND VOTING
Each of the Sefton Trust and the KA Funds is a Delaware business trust
registered with the SEC as an open-end management investment company. The Sefton
Trust currently has four operating series, or funds, which are the Target Funds.
The KA Funds currently has five operating series, four of which are involved
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<PAGE>
with the proposed Reorganizations as the Acquiring Funds. Each Target Fund and
each corresponding Acquiring Fund has its own investment objective and policies
and operates independently for purposes of investments, dividends, other
distributions and redemptions. Each Target Fund and each Acquiring Fund has only
one class of shares.
If the Reorganization is approved and completed, in exchange for their
shares, shareholders of Sefton U.S. Government Fund will receive shares of Kayne
Anderson Intermediate Total Return Bond Fund; shareholders of Sefton California
Tax-Free Fund will receive shares of Kayne Anderson Intermediate Tax-Free Bond
Fund (proposed to be changed to the Kayne Anderson California Intermediate
Tax-Free Bond Fund); shareholders of Sefton Equity Value Fund will receive
shares of Kayne Anderson Rising Dividends Fund; and shareholders of Sefton Small
Company Value Fund will receive shares of Kayne Anderson Small Cap Rising
Dividends Fund.
Each whole or fractional share of a Target Fund is entitled to one vote or
corresponding fraction at the Shareholder Meeting. At the close of business on
October 14, 1999, the record date for the determination of shareholders entitled
to vote at the Shareholder Meeting (the "Record Date"), the shareholders
ownership information for each Target Fund are as follows:
Sefton Equity Value Fund: 3,901,293 shares outstanding;
Sefton Small Company Value Fund: 1,520,852 shares outstanding;
Sefton U.S. Government Fund: 3,364,054 shares outstanding; and
Sefton California Tax-Free Fund: 3,280,694 shares outstanding.
In each instance, the number of record holders include omnibus accounts
representing multiple underlying beneficial owners such as those in the names of
brokers.
All shares represented by each properly signed proxy received before the
Shareholder Meeting will be voted at the Shareholder Meeting. If a shareholder
specifies how the proxy is to be voted on any business properly to come before
the Shareholder Meeting, it will be voted in accordance with the instruction
given. If no choice is indicated on the proxy, it will be voted FOR approval of
the Reorganization, as more fully described in this Combined Proxy Statement and
Prospectus. A proxy may be revoked by a shareholder at any time before its use
by written notice to the Sefton Trust, by submission of a later-dated proxy or
by voting in person at the Shareholder Meeting. If any other matters come before
the Shareholder Meeting, proxies will be voted by the persons named as proxies
in accordance with their best judgment.
THE PROPOSAL WILL BE VOTED ON SEPARATELY BY SHAREHOLDERS OF EACH TARGET
FUND. The presence in person or by proxy of shareholders entitled to cast at
least one-third of the votes entitled to be cast at the Shareholder Meeting will
constitute a quorum for each Target Fund. When a quorum is present for a Target
Fund, a "majority of the outstanding voting securities" shall decide the
proposal for that Target Fund. As defined by the Investment Company Act, a
"majority of the outstanding voting securities" means the vote of (i) 67% or
more of the Target Fund's outstanding shares present at the Shareholder Meeting,
if the holders of more than 50% of the outstanding shares of the Target Fund are
present or represented by proxy at the Special Meeting, or (ii) more than 50% of
the Target Fund's outstanding shares, whichever is less. Any proxy is properly
executed and received in time to be voted at the Shareholder Meeting will be
13
<PAGE>
counted in determining whether a quorum is present and will be voted in
accordance with the instructions given. In the absence of any instructions, that
proxy will be voted in favor of the approval of the Plan. If the Plan is
approved at the Shareholder Meeting, the effective date of the Reorganization
("Closing Date") is expected to be on or about November 19, 1999. Abstentions
and "broker non-votes" (I.E., proxies from brokers or nominees indicating that
those persons have not received instructions from the beneficial owners or other
persons entitled to vote shares as to a particular matter with respect to which
the brokers or nominees do not have discretionary power to vote) will not be
counted for or against any proxy to which they relate, but will be counted for
purposes of determining whether a quorum is present and will be counted as votes
present for purposes of determining a "majority of the outstanding voting
securities" present at the Shareholder Meeting. For this reason, abstentions and
broker non-votes will have the effect of a vote against the proposals.
The Shareholder Meeting may be adjourned from time to time by a majority of
the votes properly voting on the question of adjourning a meeting to another
date and time, whether or not a quorum is present, and the meeting may be held
as adjourned within a reasonable time after the date set for the original
meeting without further notice. The persons named in the proxy will vote those
shares that they are entitled to vote in favor of adjournment if adjournment is
necessary to obtain a quorum or to obtain a favorable vote on any proposal. In
addition, the persons named in the proxy may, in their discretion, decide to
adjourn the Shareholder Meeting for one or more series of the Sefton Trust but
to proceed with the Shareholder Meeting for other series of the Sefton Trust. If
the adjournment requires setting a new record date or the adjournment is for
more than 60 days from the date set for the original meeting (in which case the
Board of Trustees of Sefton Trust will set a new record date), the Sefton Trust
will give notice of the adjourned meeting to the shareholders. Business may be
conducted once a quorum is present and may continue until adjournment of the
Shareholder Meeting.
Proxies may be voted by mail or telephone. If voted by telephone, Sefton
Trust, or its agents, will use reasonable procedures (such as requiring an
identification number) to verify the authenticity of the vote cast. Each
shareholder who casts a telephonic vote also will be able to validate that his
or her vote was received correctly.
As of the Record Date, each Target Fund's and Acquiring Fund's shareholders
of record and (to the respective knowledge of the Sefton Trust and KA Funds)
beneficial owners who owned more than five percent of each Fund's shares are
those set forth in EXHIBIT A. Also, except as listed below, as of the Record
Date, the officers and trustees of the Sefton Trust and Sefton, as a group,
owned of record and beneficially less than one percent of the outstanding voting
securities of each Target Fund and the officers and trustees of KA Funds and
Kayne Anderson, as a group, owned of record and beneficially less than one
percent of the outstanding voting securities of each Acquiring Fund. Harley K.
Sefton, the Chief Executive Officer and controlling shareholder of Sefton and a
Trustee of the Sefton Trust, together with one or more trusts and other entities
or accounts for which Mr. Sefton and members of his immediate family are
beneficiaries, owned beneficially the following portion of the shares of each
series of the Sefton Trust:
NAME OF FUND SEFTON FAMILY OWNERSHIP
- - - ------------ -----------------------
Sefton U. S. Government Fund 12.75%
14
<PAGE>
II. THE PROPOSAL
A. DESCRIPTION OF THE PROPOSED REORGANIZATIONS
1. THE REORGANIZATIONS
If a Reorganization is approved, on the Effective Date an Acquiring Fund
will acquire substantially all of the assets and liabilities of the
corresponding Target Fund. At that time, an Acquiring Fund will issue to the
corresponding Target Fund the number of Acquiring Fund Shares determined by
dividing the value of the Target Fund's net assets so transferred by the net
asset value of one Acquiring Fund Share. The net asset value of an Acquiring
Fund and the net asset value of the corresponding Target Fund will be calculated
at the close of business on the date immediately preceding the Effective Date
(the "Valuation Date") in accordance with each Acquiring Funds' valuation
procedures described in the combined prospectus of the Acquiring Funds dated May
5, 1999.
At the same time as that asset transfer, each Target Fund will distribute
the corresponding Target Fund Shares it receives pro rata to each remaining
shareholder of the Target Fund based on the percentage of the outstanding shares
of each Target Fund held of record by that shareholder on the Valuation Date.
For example, on June 30, 1999, the value of the aggregate net assets of the
Sefton Equity Value Fund was approximately $65.6 million and each share of the
Sefton Equity Value Fund was valued at $15.59 per share. The net asset value of
each Kayne Anderson Rising Dividends Fund on that date was $18.98. Therefore, if
the Effective Date had been June 30, 1999, the Sefton Equity Value Fund would
then have redeemed each of its then outstanding shares in exchange for 0.821
Kayne Anderson Rising Dividends Fund Shares.
This distribution of Acquiring Fund Shares to the corresponding Target
Fund's shareholders will be accomplished by the establishment of accounts on
each Acquiring Fund's share records in the names of those shareholders,
representing the respective pro rata number of Acquiring Fund Shares deliverable
to them. Fractional shares will be carried to the third decimal place.
Certificates evidencing the Acquiring Fund Shares will not be issued to the
Target Fund's shareholders.
Immediately following each Target Fund's pro rata liquidating distribution
of the corresponding Acquiring Fund Shares to each Target Fund's shareholders,
each Target Fund will liquidate and terminate.
In addition, if shareholders of the Sefton Small Company Value Fund approve
its Reorganization, that Fund may begin immediately investing up to all (but not
less than 65%) of its assets in stocks of companies having total market
capitalizations of up to $3 billion. This Sefton Fund now requires that at least
65% of its total assets be invested in stocks of companies having total market
capitalizations of $1 billion or less. Sefton believes that this authority would
allow the more orderly alignment of the Target Fund's portfolio before the
Reorganization is completed. This alignment of the Target Fund's portfolio will
cause the Fund to incur substantially higher brokerage and other transaction
costs than if it were not undertaking such a realignment. Those transactions
would cause the recognition of losses for shareholders because the value of many
of the Fund's holdings have declined.
15
<PAGE>
Completion of each Reorganization is subject to approval by the
shareholders of that Target Fund. Each Reorganization may be abandoned at any
time before the Effective Date by a majority of either the Sefton Trust's or the
KA Funds' Board of Trustees. Furthermore, if shareholders of one or more Target
Funds fail to approve the Reorganization for that specific Target Fund(s), the
Board of the Sefton Trust and the KA Funds may determine to proceed with the
Reorganizations for those Target Funds whose shareholders have approved the
Reorganizations.
Kayne Anderson will pay all costs and expenses of the Reorganizations up to
certain limits, including those associated with the Shareholder Meeting, the
copying, printing and distribution of this Combined Proxy Statement and
Prospectus, and the solicitation of proxies for the Shareholder Meeting. None of
the Target Funds, the Acquiring Funds nor their respective shareholders will
bear those expenses. Certain expenses in excess of the limits agreed to by Kayne
Anderson will be paid by Sefton, as the advisor to the Target Funds.
The above is a summary of the Reorganizations. The summary is not a
complete description of the terms of the Reorganizations, which are set forth in
the Agreement and Plan of Reorganization attached as EXHIBIT B to this document.
2. EFFECT OF THE REORGANIZATIONS
If a Reorganization is approved by a Target Fund's shareholders and
completed, shareholders of a Target Fund as of the Effective Date will become
shareholders of the corresponding Acquiring Fund. The total net asset value of
the corresponding Acquiring Fund Shares held by each shareholder of a Target
Fund immediately after completion of a Reorganization will be equivalent to the
total net asset value of the Target Fund Shares held by that same shareholder
immediately before completion of a Reorganization.
On or before the Effective Date each Target Fund intends to distribute all
of its then-remaining net investment income and realized capital gains.
After the Reorganizations, various services previously provided to the
Target Funds will be provided by new service providers who already have
agreements in place to service the Acquiring Funds. Under the current
arrangements of the Acquiring Funds, Kayne Anderson serves as investment adviser
to each Acquiring Fund; First Fund Distributors, Inc., an affiliate of the
administrator for each Acquiring Fund, serves as distributor, and each Acquiring
Fund will continue to be managed in accordance with its existing investment
objective and policies.
3. FEDERAL INCOME TAX CONSEQUENCES
As a condition to closing the Reorganizations, each of Sefton Trust and KA
Funds, on behalf of each Fund involved in the Reorganizations, must have
received a favorable legal opinion from Ropes & Gray, legal counsel to the
independent Trustees of the Sefton Trust, substantially to the effect that, for
federal income tax purposes with respect to each Target Fund and the
corresponding Acquiring Fund:
(a) No gain or loss will be recognized by the Acquiring Fund upon the
receipt of the assets of the Target Fund in exchange for
Acquiring Fund Shares and the assumption by the Acquiring Fund of
the liabilities of the Target Fund.
16
<PAGE>
(b) The basis in the hands of the Acquiring Fund of the assets of the
Target Fund transferred to the Acquiring Fund in the
Reorganization will be the same as the basis of such assets in
the hands of the Target Fund immediately prior to the transfer;
(c) The holding periods of the assets of the Target Fund in the hands
of Acquiring Fund will include the periods during which such
assets were held by the Target Fund;
(d) No gain or loss will be recognized by the Target Fund upon the
transfer of the Target Fund's assets to the Acquiring Fund in
exchange for the Acquiring Fund Shares and the assumption by the
Acquiring Fund of the liabilities of the Target Fund, or upon the
distribution of the Acquiring Fund Shares by the Target Fund to
its shareholders in liquidation;
(e) No gain or loss will be recognized by the Target Fund
shareholders upon the exchange of their Target Fund Shares for
Acquiring Fund Shares;
(f) The aggregate basis of Acquiring Fund Shares a Target Fund
shareholder receives in connection with the Transaction will be
the same as the aggregate basis of his or her Target Fund Shares
exchanged therefor; and
(g) A Target Fund shareholder's holding period for his or her
Acquiring Fund Shares will be determined by including the period
for which he or she held the Target Fund Shares exchanged
therefor, provided that he or she held such the Target Shares as
capital assets.
Neither the Sefton Trust nor KA Funds intend to seek a private letter
ruling from the Internal Revenue Service with respect to the tax effects of the
Reorganizations, and one is not required.
Although each Reorganization is expected to be a tax-free transaction,
there may be certain tax consequences to the shareholders of each Target Fund
because of portfolio transactions before the Effective Date of the proposed
Reorganizations. A substantial portion of the equity securities held by each of
the Sefton Equity Value Fund and Sefton Small Company Value Fund is expected to
be sold before the proposed Reorganizations. Substantially all of the resulting
recognized gains, if any, will be distributed to the shareholders of those
Funds, and are expected to be taxable. The net effect of those
pre-Reorganization portfolio transactions by the Sefton Small Company Value Fund
would be net capital losses. Those loses, which could otherwise provide tax
benefits for certain shareholders of that Fund, will instead be shared
proportionately by all shareholders of the Kayne Anderson Small Cap Rising
Dividends Fund after its Reorganization, and be subject to various limitations
that otherwise would not apply.
4. INTEREST OF CERTAIN PERSONS IN THE REORGANIZATIONS
Kayne Anderson has agreed to engage Harley K. Sefton, the Chief Executive
Officer and controlling owner of Sefton and a Trustee of the Sefton Trust, as a
consultant if the Reorganizations are consummated. For those consulting
services, he will be paid a consulting fee equal to approximately 40% of net
advisory fees received by Kayne Anderson with respect to investments by Target
Fund shareholders transferred to the Acquiring Funds. Kayne Anderson also has
agreed to pay certain employee severance expenses expected to be incurred by
Sefton in connection with winding-up its business following the Reorganizations.
17
<PAGE>
5. DESCRIPTION OF THE ACQUIRING FUND SHARES
Each Acquiring Fund Share issued to corresponding Target Fund
shareholders pursuant to the Reorganizations will be duly authorized, validly
issued, fully paid and nonassessable when issued, will be transferable without
restriction and will have no preemptive or conversion rights. Each Acquiring
Fund Share will represent an equal interest in the assets of the Acquiring Fund.
The Acquiring Fund Shares will be sold and redeemed based upon the net asset
value of the Acquiring Fund next determined after receipt of the purchase or
redemption request, as described in the Target Fund's Prospectus.
6. CAPITALIZATION
The capitalization figures for the Funds as of June 30, 1999, and their pro
forma combined capitalization as of that date after giving effect to the
proposed Reorganizations, are as follows:
Pro Forma
Combined for
Kayne Anderson Kayne Anderson
Sefton Equity Rising Dividends Rising Dividends
Value Fund Fund Fund
------------- ---------------- ----------------
Aggregate net assets $65,571,594 $64,515,808 $130,087,402
Shares outstanding* 4,206,304 3,399,813 6,853,920
Net asset value per share $ 15.59 $ 18.98 $ 18.98
Pro Forma
Combined for
Sefton Small Kayne Anderson Kayne Anderson
Company Value Small Cap Rising Small Cap Rising
Fund Dividends Fund Dividends Fund
------------- ---------------- ----------------
Aggregate net assets $17,618,339 $33,009,884 $50,628,223
Shares outstanding* 1,621,443 2,021,500 3,100,320
Net asset value per share $ 10.87 $ 16.33 $ 16.33
Pro Forma
Combined for
Sefton U.S. Kayne Anderson Kayne Anderson
Company Value Intermediate Total Intermediate Total
Government Fund Return Bond Fund Return Bond Fund
--------------- ---------------- ------------------
Aggregate net assets $41,594,995 $11,700,905 $53,295,900
Shares outstanding* 3,380,718 1,103,094 5,023,176
Net asset value per share $ 12.30 $ 10.61 $ 10.61
18
<PAGE>
Pro Forma
Combined for
Sefton Kayne Anderson Kayne Anderson
California Intermediate Tax- Intermediate Tax-
------------- ----------------- -----------------
Aggregate net assets $39,521,516 $11,182,699 $50,704,215
Shares outstanding* 3,144,113 1,057,802 4,796,993
Net asset value per share $ 12.57 $ 10.57 $ 10.57
* Each Fund is authorized to issue an indefinite number of shares.
B. COMPARISON OF THE FUNDS
A brief comparison of each Acquiring Fund and the corresponding Target Fund
is set forth below. Please see Section II.F. for more information.
1. INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each Target Fund is substantially similar to
those of the corresponding Acquiring Fund, except to the extent noted below for
the Sefton U.S. Government Fund and for the Sefton California Tax-Free Fund. The
investment objective of each Fund is "fundamental," which means that it may not
be changed without the consent of a majority of the Fund's outstanding shares,
as defined in the Investment Company Act.
* SEFTON EQUITY VALUE FUND
* KAYNE ANDERSON RISING DIVIDENDS FUND
The Sefton Equity Value Fund's investment objective is to seek to provide
investors with long-term capital appreciation. The Kayne Anderson Rising
Dividends Fund's investment objective is to seek long-term capital appreciation,
with dividend income as a secondary consideration, by investing in companies
with consistent rising dividends.
The Sefton Equity Value Fund and The Kayne Anderson Rising Dividends Fund
both seek to achieve their investment objective by investing primarily in common
stocks. The Sefton Equity Value Fund seeks to achieve its investment objective
by investing primarily in common stocks of both domestic and foreign companies
with a range of capitalizations that Sefton believes are undervalued by the
market. The Sefton Equity Value Fund focuses on companies in the capitalization
range of $1 billion to $10 billion even though it may also invest in smaller
companies with market capitalizations of less than $1 billion if Sefton believes
the company is undervalued by the market.
19
<PAGE>
In contrast, the Kayne Anderson Rising Dividends Fund seek to achieve its
investment objective investment objective by using a blended growth and value
strategy to invest in companies generally having a market capitalization of $1
billion or more. At least 65% of the Fund's assets will be invested in
consistently growing, highly profitable, low-debt companies of all sizes that
meet the Fund's "rising dividends" criteria detailed below. In normal market
conditions, at least 80% of the Fund's assets will be invested in common stocks.
In selecting securities, Kayne Anderson 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 typically must
meet the following growth and quality criteria: (1) 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.); (2) high reinvestment
for growth-the company must pay no more than 65% of current earnings towards
dividends; and (3) 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, Kayne Anderson researches and analyzes that company's relative
position in the industry and the industry cycle. Kayne Anderson also considers
whether the company's stock price is currently under- or over-valued.
* SEFTON SMALL COMPANY VALUE FUND
* KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND
The Sefton Small Company Value Fund's investment objective is to seek to
provide investors with long-term capital appreciation. The Kayne Anderson Small
Cap Rising Dividends Fund's investment objective is to seek long-term capital
appreciation, with dividend income as a secondary consideration, by investing in
small-cap companies with consistent rising dividends.
Both Sefton Small Company Value Fund and Kayne Anderson Small-Cap Rising
Dividends Fund seek to achieve their respective investment objective by
investing primarily in common stocks. Sefton Small Company Value Fund seeks to
achieve its investment objective by investing primarily in common stocks of both
domestic and foreign companies with market capitalizations of $1 billion or less
and that Sefton believes are relatively undervalued. Shareholder approval of the
Reorganization for this Target Fund would also be deemed to authorize Sefton to
invest immediately in companies with the same capitalization range as is used by
the corresponding Acquiring Fund as described below.
In contrast, the Kayne Anderson Small Cap Rising Dividends Fund seeks to
achieve its investment objective by using 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 detailed below. The Fund will seek to maintain a simple (non-weighted)
average market capitalization of approximately $1 billion for companies in which
it invests. In normal market conditions, at least 80% of the Fund's assets will
be invested in common stocks. In selecting securities, Kayne Anderson 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: (1)
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); (2) High reinvestment for growth-the company must pay no more than 65%
20
<PAGE>
of current earnings towards dividends; and (3) 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, Kayne Anderson researches and
analyzes that company's relative position in the industry and the industry
cycle. Kayne Anderson also considers whether the company's stock price is
currently under- or over-valued.
* SEFTON U.S. GOVERNMENT FUND
* KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND
The Sefton U.S. Government Fund's investment objective is to seek to
provide investors with as high a level of current income as is consistent with
preservation of capital. Kayne Anderson Intermediate Total Return Bond Fund has
a substantially similar objective, which is to seek to maximize total return
(mainly through current income with capital appreciation as a secondary factor)
by investing primarily in investment-grade bonds.
The Sefton U.S. Government Fund pursues its investment objective by
investing at least 65% of its total assets in securities issued or guaranteed by
the U.S. Government and agency obligations. The Sefton U.S. Government Fund is
an intermediate-term bond fund and expects that its investments in U.S.
Government and agency obligations will have an average weighted maturity of five
to ten years. The Fund also may invest in certificates of deposit, bankers'
acceptances, and commercial paper rated in the two highest categories;
investment grade corporate debt securities; investment grade corporate debt
securities; investment grade mortgage and asset-backed securities; and similar
securities of foreign issuers.
Unlike the Sefton U.S. Government Fund, which must invest primarily in U.S.
Government and agency obligations backed by the full faith and credit of the
U.S. Government, the Kayne Anderson Intermediate Total Return Bond Fund seeks to
achieve its objective by investing in investment-grade bonds, both foreign and
domestic which are not necessarily guaranteed by the U.S. Government. However,
at least 90% of the Kayne Anderson Intermediate Total Return Bond Fund's 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 such as
Standard & Poor's, Moody's or Fitch. From time to time, the Fund may also invest
in unrated bonds that Kayne Anderson believes are comparable to investment-grade
securities. The Kayne Anderson Intermediate Total Return Bond Fund seeks to
maintain a dollar-weighted average maturity of three to ten years, which is
slightly shorter than the average maturity of the Sefton U.S. Government Fund.
Typically, a shorter maturity means that the bond or portfolio has less
sensitivity to interest rates. The Kayne Anderson Total Return Bond Fund invests
in bonds that Kayne Anderson believes offer attractive yields and are
undervalued relative to issues of similar quality and interest rate sensitivity.
* SEFTON CALIFORNIA TAX-FREE FUND
* KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND (PROPOSED TO BE CALLED KAYNE
ANDERSON CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND)
The Sefton California Tax-Free Fund's investment objective is to seek to
provide investors with as high a level of current income exempt from both
federal and California personal income taxes as is consistent with preservation
of capital. The Kayne Anderson Intermediate Tax-Free Bond Fund's current
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investment objective is to seek current income exempt from federal income tax by
investing primarily in investment-grade municipal bonds.
In anticipation of this proposed Reorganization and in order to provide a
vehicle whereby shareholders of Sefton California Tax-Free Fund may continue to
invest in a California municipal bond fund after the Reorganization, Kayne
Anderson has requested, and the Trustees of the KA Funds have approved, a change
of the name and investment objective of the Kayne Anderson Intermediate Tax-Free
Bond Fund so that it will be called Kayne Anderson California Intermediate
Tax-Free Bond Fund and that its investment objective will be changed to seek
current income exempt from both federal and California personal income taxes by
investing primarily in investment-grade California municipal bonds (instead of
just seeking current income exempt from federal personal income tax). After this
change becomes effective, the Kayne Anderson California Intermediate Tax-Free
Bond Fund would have an investment objective that is substantially identical to
that of the Sefton California Tax-Free Fund. An amendment to the KA Trust's
registration statement has been filed to propose that change and is currently
undergoing customary review by the SEC. Simultaneously, KA Funds are asking
shareholders of the Kayne Anderson Intermediate Tax-Free Bond Fund to approve
this change of investment objective. The KA Funds anticipate that approval.
The Sefton California Tax-Free Fund pursues its investment objective by
investing at least 80% of its net assets in federally tax-exempt securities
paying interest that is not subject to the federal alternative minimum tax; and
at least 65% of its total assets in municipal securities issued by California
and its local governments (California municipal securities). The Sefton
California Tax-Free Fund, which invests in investment-grade municipal
securities, expects that the average weighted maturity of its investments will
be ten or more years. After the proposed change of the investment objective of
the Kayne Anderson California Intermediate Tax-Free Bond Fund becomes effective,
it is anticipated that the Fund will invest at least 80% of its assets in
investment-grade California 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. Furthermore, 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 Kayne Anderson believes are of
comparable quality to investment-grade securities. The Fund seeks to maintain a
dollar-weighted average maturity of three to ten years. Typically, a shorter
maturity means that the bond or portfolio has less sensitivity to interest
rates. The Kayne Anderson Intermediate Tax-Free Bond Fund invests in bonds that
Kayne Anderson believes offer attractive yields and are undervalued relative to
issues of similar quality and interest rate sensitivity.
2. INVESTMENT RESTRICTIONS
The fundamental investment restrictions of each Acquiring Fund are
substantially similar to the corresponding Target Fund except for the following
differences (each investment restriction discussed below, unless stated
otherwise, is a fundamental policy of each Fund and cannot be changed without
shareholders' approval):
(1) No Acquiring Fund may change its status as a "diversified" mutual fund
under the Investment Company Act. A "diversified" mutual fund company is one
which, with respect to 75% of its total assets, (a) may not invest in the
securities of any one issuer (other than U.S. Government and its agencies and
instrumentalities) if immediately after and as a result of such investment more
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than 5% of the total assets of the Acquiring Fund would be invested in such
issuer (the remaining 25% of the Acquiring Fund's total assets may be invested
without restriction except to the extent other investment restrictions may be
applicable); and (b) may not purchase more than 10% of the outstanding voting
securities of any one issuer. Each Target Fund has also elected to be a
"diversified" investment company, other than the Sefton U.S. Government Fund and
the Sefton California Tax-Free Fund. Therefore, the Sefton U.S. Government Fund
and the Sefton California Tax-Free Fund do not need to meet the diversification
requirements set forth above and would be able to concentrate their investments
in a smaller number of securities. If the shareholders of the Kayne Anderson
Intermediate Tax-Free Fund approve the pending proposals to change it into a
California municipal bond fund, it also would become a non-diversified fund.
(2) Each Target Fund may invest up to 15% of the value of its net assets in
illiquid securities. Each Acquiring Fund, however, has a non-fundamental
investment restriction which provides that it may only invest up to 10% of the
value of it net assets in such securities.
(3) Each Target Fund may enter into reverse repurchase agreements or borrow
from banks up to 5% of the current value of its net assets for temporary or
emergency purposes and those borrowings may be secured by the pledge of not more
than 5% of the current value of its total net assets (but investment may not be
purchased by the Target Fund while such borrowings exist). The Acquiring Funds
may enter into similar arrangements except that each Acquiring Fund may also
engage in other permissible leveraging activities including dollar roll
transactions that are accounted for as financings. Furthermore, unlike the
Target Funds, which have a 5% limit on borrowings, each Acquiring Fund may
borrow in an amount not in excess of one-third of the value of the Acquiring
Fund's total assets (at the lesser of acquisition cost or current market value).
Also, unlike the Target Funds, which prohibit any investments be made by a
Target Fund so long as any borrowing exist, the Acquiring Funds restrict
additional investments for the Acquiring Funds if its borrowings exceed 10% of
total assets.
(4) Each Target Fund may loan portfolio securities up to one-third of its
net assets. Similarly, each Acquiring Fund, however, may make loans of portfolio
securities of no more than one-third of each Acquiring Fund's net assets.
(5) Each Target Fund may not invest more than 5% of the value of a Target
Fund's total assets in the securities of any one investment company; invest more
than 10% of the value of a Target Fund's total assets in the aggregate in
securities of investment companies as a group; or invest such that more than 3%
of the outstanding voting stock of any one investment company will be owned by
any Target Fund or by the Target Funds as a group. Each Acquiring Fund has a
non-fundamental investment restriction that provides that each may, subject to
disclosures in the prospectus and the provisions of the Investment Company Act,
invest more than 10% of its assets in other investment companies as a group.
Furthermore, each Acquiring Fund has also reserved 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 the Acquiring Fund, thereby converting the Acquiring Fund into a
feeder fund in a master-feeder structure.
(6) Each Target Fund may not sell securities short (other than short sales
"against the box") and may not purchase securities on margin, except that a
Target Fund may obtain such short-term credits as may be necessary for the
clearance of purchase and sale of securities. The Acquiring Funds have similar
restrictions. However, in the case of the Acquiring Funds, those are
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<PAGE>
non-fundamental investment restrictions and can therefore be changed by the
Board without shareholders' approval.
(7) Each Target Fund may not write, purchase or sell put or call options in
an amount more than 5% of its total assets for purposes other than bona fide
hedging. The Acquiring Funds do not have such a percentage limitation.
(8) Each Target Fund may not purchase or retain the securities of any
issuer, if the individual officers and Trustees of the Target Funds, Sefton or
BISYS Fund Services, each owning beneficially more than half of 1% of the
securities of such issuer, together own more than 5% of the securities of such
issuer. Similarly, the Acquiring Funds would be prohibited from buying
securities of any issuer that their officers, Trustees, Kayne Anderson or First
Fund Distributors, Inc. together own more than 5% of that issuer.
(9) Each Target Fund may not invest more than 5% of its net assets in
warrants that are unattached to securities, included within that amount (except
for the Sefton Small Company Value Fund), no more than 2% of the value of the
Target Fund's net assets may be warrants which are not listed on the New York or
American Stock Exchanges. The Acquiring Funds do not have any specific
restriction on their ability to invest in warrants.
(10) Each Target Fund may not invest more than 5% of the current value of
its total assets in the securities of companies which, including predecessors,
have a record of less than three years' continuous operation. The Acquiring
Funds do not have a similar restriction.
(11) Each Acquiring Fund has a non-fundamental investment restriction that
provides that it may not participate on a joint basis in any trading account in
securities, although Kayne Anderson may aggregate orders for the sale or
purchase of securities with other accounts it manages to reduce brokerage costs
or to average prices. The Target Funds do not have such restrictions.
(12) Each Acquiring Fund has a non-fundamental investment restriction that
provides that it may not invest more than 5% of its net assets in indexed
securities. The Target Funds do not have such restrictions.
In the above discussion, all percentage limitations apply immediately after
a purchase and, in most cases, 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.
3. COMPARATIVE PERFORMANCE INFORMATION
The chart below shows the risks of investing in each Fund and how each
Fund's total return has varied from year-to-year. The table compares each Fund's
performance to the most commonly used index for its market segment. Of course,
past performance is no guarantee of future results.
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<PAGE>
COMPARATIVE PERFORMANCE INFORMATION BETWEEN SEFTON EQUITY VALUE FUND AND KAYNE
ANDERSON RISING DIVIDENDS FUND
Kayne Anderson
Sefton Equity Value Fund* Rising Dividends Fund**
------------------------- ---------------------------
1996 1997 1998 1996 1997 1998
---- ---- ---- ---- ---- ----
30.70% 25.25% -9.40% 19.09% 30.99% 14.14%
* During the three-year period described above in the bar chart, the Sefton
Equity Value Fund's best quarter was Q2 1997 (+12.60%) and its worst
quarter was Q3 1998 (-15.73%). The Fund's 1999 return through September 30,
1999 was - 9.89%.
** During the three-year period described above in the bar chart, the Kayne
Anderson Rising Dividends Fund's best quarter was Q2 1997 (+16.43%) and its
worst quarter was Q3 1998 (-13.90%). The Fund's 1999 return through
September 30, 1999 was 5.76%.
AVERAGE ANNUAL RETURNS THROUGH 12/31/98
Since Since
Inception of Inception of
Target Fund Acquiring Fund
1 Year (04/03/95) (05/01/95)
------ ------------ ---------------
Sefton Equity Value Fund -9.40% 15.60% N/A
Kayne Anderson Rising Dividends Fund 14.14% N/A 23.16%
S&P 500 Index 28.58% 29.59% 28.69%
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<PAGE>
COMPARATIVE PERFORMANCE INFORMATION BETWEEN SEFTON SMALL COMPANY VALUE FUND AND
KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND
Kayne Anderson
Sefton Small Company Value Fund* Small Cap Rising Dividends Fund**
-------------------------------- ---------------------------------
1998 1997 1998
---- ---- ----
-15.69% 19.46% 16.17%
* During the one-year period described above in the bar chart, the Sefton
Small Company Value Fund's best quarter was Q4 1998 (+5.15%) and its worst
quarter was Q3 1998 (-21.34%). The Fund's 1999 return through September 30,
1999 was -6.58%.
** During the two-year period described above in the bar chart, the Kayne
Anderson Small Cap Rising Dividends Fund's best quarter was Q4 1998
(+15.43%) and its worst quarter was Q3 1998 (-10.24%). The Fund's 1999
return through September 30, 1999 was -0.58%.
AVERAGE ANNUAL RETURNS THROUGH 12/31/98
Since Since
Inception of Inception of
Target Fund Acquiring Fund
1 Year (06/30/97) (10/28/96)
------ ------------ ---------------
Sefton Small Company Value Fund -15.69% -6.75% N/A
Kayne Anderson Small Cap Rising
Dividends Fund 16.17% 17.06% 18.12%
Russell 2000 Index -2.55% 5.40% 10.69%
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<PAGE>
COMPARATIVE PERFORMANCE INFORMATION BETWEEN SEFTON U.S. GOVERNMENT FUND AND
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND
Kayne Anderson Intermediate Total
Sefton U.S. Government Fund* Return Bond Fund**
---------------------------- ---------------------------------
1996 1997 1998 1997 1998
---- ---- ---- ---- ----
1.73% 8.41% 7.42% 7.19% 7.61%
* During the three-year period described above in the bar chart, the Sefton
U.S. Government Fund's best quarter was Q4 1996 (+3.01%) and its worst
quarter was Q1 1996 (-2.59%). The Fund's 1999 return through September 30,
1999 was -1.02%.
** During the two-year period described above in the bar chart, the Kayne
Anderson Intermediate Total Return Bond Fund's best quarter was Q3 1998
(+4.20%) and its worst quarter was Q1 1997 (-0.73%). The Fund's 1999 return
through September 30, 1999 was -0.33%.
AVERAGE ANNUAL RETURNS THROUGH 12/31/98
Since Since
Inception of Inception of
Target Fund Acquiring Fund
1 Year (04/03/95) (10/28/96)
------ ------------ ---------------
Sefton U.S. Government Fund 7.42% 7.82% 8.23%
Kayne Anderson Intermediate Total
Return Bond Fund 7.61% N/A 6.88%
Lehman Brothers Intermediate
Government/Corporate Bond Index 8.42% 8.21% 7.83%
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<PAGE>
COMPARATIVE PERFORMANCE INFORMATION BETWEEN SEFTON CALIFORNIA TAX-FREE FUND AND
KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND
Kayne Anderson
Sefton California Tax-free Fund* Intermediate Tax-free Bond Fund**
-------------------------------- ---------------------------------
1996 1997 1998 1997 1998
---- ---- ---- ---- ----
4.58% 8.45% 6.11% 4.26% 4.37%
* During the three-year period described above in the bar chart, the Sefton
California Tax-Free Fund's best quarter was Q4 1996 (+2.69%) and its worst
quarter was Q1 1996 (-1.48%). The Fund's 1999 return through September 30,
1999 was -1.48%.
** During the two-year period described above in the bar chart, the Kayne
Anderson Intermediate Tax-Free Bond Fund's best quarter was Q3 1998
(+1.78%) and its worst quarter was Q1 1997 (-0.13%). The Fund's 1999 return
through September 30, 1999 was 0.36%.
AVERAGE ANNUAL RETURNS THROUGH 12/31/98
Since Since
Inception of Inception of
Target Fund Acquiring Fund
1 Year (04/03/95) (10/28/96)
------ ------------ ---------------
Sefton California Tax-Free Fund 6.11% 7.30% 8.00%
Kayne Anderson Intermediate Tax-Free
Bond Fund 4.37% N/A 3.94%
Lehman Brothers 10-Year Municipal
Bond Index 6.76% 8.03% 8.12%
Lehman Brothers 5-Year Municipal
Bond Index 5.85% 6.34% 6.17%
4. ADVISORY FEES AND OTHER EXPENSES
Sefton serves as investment adviser to the Sefton U.S. Government Fund,
Sefton California Tax-Free Fund and Sefton Equity Value Fund pursuant to a
Master Investment Advisory Contract and Supplements thereto effective April 3,
1995. Sefton also serves as investment adviser to the Sefton Small Company Value
Fund pursuant to an Advisory Agreement effective on May 2, 1997. Kayne Anderson
serves as investment adviser to the Acquiring Funds pursuant to an Investment
Management Agreement dated September 30, 1996 with KA Funds on behalf of each
Acquiring Fund.
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<PAGE>
Each Target Fund has contractually agreed to pay Sefton an advisory fee
calculated based on the average daily net assets of each Target Fund as set
forth below:
Sefton Equity Value Fund 1.00%
Sefton Small Company Value Fund 1.25%
Sefton U.S. Government Fund 0.60%
Sefton California Tax-Free Fund 0.60%
Each Acquiring Fund has contractually agreed to pay Kayne Anderson an
investment advisory fee calculated based on the average daily net assets of each
Acquiring Fund as set forth below:
Rising Dividends Fund 0.75%
Small Cap Rising Dividends Fund 0.85%
Intermediate Total Return Bond Fund0.50%
Intermediate Tax-Free Bond Fund 0.50%
As can be seen from the above tables, the contractual management fee rate
for each Acquiring Fund is lower than that of the corresponding Target Fund. In
addition, other than for the case of the Sefton U.S. Government Fund, the actual
(after reductions) overall expenses of each Acquiring Fund is lower than the
actual (after reductions) overall expenses of the corresponding Target Fund. In
the case of the Sefton U.S. Government Fund, the net expenses of the Kayne
Anderson Intermediate Total Return Bond Fund was higher than the Sefton U.S.
Government Fund by only 0.01%.
Other than the Sefton U.S. Government Fund, the total annual expense
limitation of each Acquiring Fund currently is lower than that of the
corresponding Target Fund. Kayne Anderson agreed to those expense limitations
(excluding interest and taxes) under a contract with a one-year term, renewable
at the end of each fiscal year. Kayne Anderson expects to renew that contract.
An Acquiring Fund is required to reimburse Kayne Anderson for any reductions in
Kayne Anderson's fee or its payment of expenses only during the three years
following that reduction and only if such reimbursement can be achieved within
the agreed expense limits. Kayne Anderson generally seeks reimbursement for the
oldest reductions and waivers before payment for fees and expenses for the
current year.
For the fiscal year ended December 31, 1998, Kayne Anderson received
investment advisory fees of approximately $334,518 from the Kayne Anderson
Rising Dividends Fund; approximately $218,722 from the Kayne Anderson Small Cap
Rising Dividends Fund but reduced its fee and reimbursed expenses by a total of
$12,965; approximately $120,618 from the Kayne Anderson Intermediate Total
Return Bond Fund but reduced its fee and reimbursed expenses by a total of
$15,132; and approximately $34,150 from the Kayne Anderson Intermediate Tax-Free
Bond Fund but reduced its fee and reimbursed expenses by a total of $99,797.
5. PORTFOLIO MANAGERS
The investment adviser to each Acquiring Fund is Kayne Anderson Investment
Management, LLC (as defined above, "Kayne Anderson"). Kayne Anderson has
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<PAGE>
furnished investment advice to institutional and private clients since 1984. As
of December 31, 1998, Kayne Anderson 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 Kayne Anderson Rising Dividends
Fund and serves as Chief Investment Officer of Kayne Anderson. Before joining
Kayne Anderson 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 Kayne Anderson Small
Cap Rising Dividends Fund. Before joining Kayne Anderson 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.
MARK E. MILLER is the Portfolio Manager for the Kayne Anderson Intermediate
Total Return Bond Fund and the Kayne Anderson Intermediate Tax-Free Bond Funds.
Prior to joining Kayne Anderson 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.
6. DISTRIBUTION AND SHAREHOLDER SERVICES
Shares of the Target Funds are distributed by BISYS Fund Services Limited
Partnership ("BISYS"), a registered broker-dealer. BISYS, which serves as the
Target Funds' distributor and principal underwriter in a continuous public
offering of the Target Funds' shares, has its principal offices at 3435 Stelzer
Road, Columbus, Ohio 43219. The Distributor does not impose any sales charge on
purchases of shares of the Target Funds.
Shares of the Acquiring Funds are distributed by First Fund Distributors,
Inc., a registered broker-dealer with its principal offices at 4455 East
Camelback Road, Suit 261E, Phoenix, Arizona 85018. Similar to the case of BISYS,
First Fund Distributors, Inc. does not impose any sales charge on purchases of
shares of the Acquiring Funds. Furthermore, no sales charge is imposed by on
reinvestment of dividends or capital gains distributions.
The Target Funds generally require a minimum initial investment of $2,000,
and subsequent investments of $50 or more. The Acquiring Funds generally require
a minimum investment also of $2,000, and subsequent investments of $250 or more.
Both the Acquiring Funds and the Target Funds have automatic investment plans
under which selected amounts are electronically withdrawn from shareholders'
accounts with banks and are applied to purchase shares of the respective Funds.
7. REDEMPTION AND EXCHANGE PROCEDURES
Shareholders of each of the Target Funds and the Acquiring Funds may redeem
their shares at the net asset value next determined after receipt of a written
redemption request or a telephone redemption order without the imposition of any
fee or other charge.
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<PAGE>
Both the Target Funds and the Acquiring Funds may involuntarily redeem a
shareholder's shares if the combined aggregate net asset value of the shares in
a shareholder's account is less than $2,000 due to redemptions. If the
shareholder's account balance is not brought up to the minimum or the
shareholder does not send the Funds other instructions, the Funds will redeem
the shares and send the shareholder the proceeds.
Shareholders of a Target Fund currently may exchange their Target Fund
Shares into another Target Fund with the same shareholder account registration,
taxpayer identification number and address without the imposition of any sales
charges or exchange fees, subject to the new Target Fund's $2,000 minimum
investment requirement. The Acquiring Funds have similar requirements. If the
Reorganization of each Target Fund were approved by shareholders of the
respective Target Fund, then, after the closing of the Reorganization for a
Target Fund, shareholders of a Target Fund would be able to exchange into other
Acquiring Funds. An exchange is treated as a sale and may result in a realized
gain or loss for tax purposes. Furthermore, the Acquiring Funds may restrict or
refuse exchanges if the KA Funds receive, or anticipate receiving, simultaneous
orders affecting a large portion of an Acquiring Fund's assets or if the KA
Funds detect a pattern of exchanges that suggests a market-timing strategy. In
addition, the KA Funds reserve the right to refuse exchanges into an Acquiring
Fund by any person or group if, in the judgment of KA Funds, the affected
Acquiring 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.
Other restrictions may apply. Refer to the Combined Prospectus and the
Combined Statement of Additional Information for the Acquiring Funds for other
exchange policies.
8. INCOME DIVIDENDS, CAPITAL GAINS DISTRIBUTIONS AND TAXES
Each Acquiring Fund and each Target Fund distributes substantially all of
its net investment income and net capital gains to shareholders each year, if
any. Each Acquiring Fund and each Target Fund currently intends to make one or,
if necessary to avoid the imposition of tax on a Fund, more distributions during
each calendar year. A distribution may be made between November 1 and December
31 of each year with respect to any undistributed capital gains earned during
the one-year period ended October 31 of each calendar year. Another distribution
of any undistributed capital gains may also be made following the Fund's fiscal
year end (December 31 for both the Acquiring Funds and the Target Funds).
Each Acquiring Fund and each Target Fund has elected and qualified as a
separate "regulated investment company" under Subchapter M of the Code for
federal income tax purposes and meets all other requirements that are necessary
for it (but not its shareholders) to pay no federal taxes on income and capital
gains paid to shareholders in the form of dividends. In order to accomplish this
goal, each Fund must, among other things, distribute substantially all of its
ordinary income and net capital gains on a current basis and maintain a
portfolio of investments that satisfies certain diversification criteria.
9. PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
Subject to policies established by the Board of Trustees of KA Funds, Kayne
Anderson is primarily responsible for arranging the execution of the Acquiring
Funds' portfolio transactions and the allocation of brokerage activities. In
arranging these transactions, Kayne Anderson will seek to obtain the most
favorable price and execution for each Acquiring Fund, taking into account such
factors as price, size of order, difficulty of execution, operational facilities
31
<PAGE>
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 Kayne
Anderson generally seeks reasonably competitive commission rates, an Acquiring
Fund will not necessarily always receive the lowest commission available. In
fact, the Acquiring Funds may pay to those securities broker-dealers who provide
brokerage and research service to Kayne Anderson a higher commission than that
charged by other securities broker-dealers if Kayne Anderson determines in good
faith that the amount of the commission is reasonable in relation to the value
of those services in terms either of the particular transaction, or in terms of
the overall responsibility of Kayne Anderson and to any other accounts over
which Kayne Anderson exercises investment discretion. Kayne Anderson also may
buy and sell securities for the Acquiring Funds through its affiliated
broker-dealer, KA Associates, Inc. The Board of Trustees of KA Funds regularly
reviews those transactions to determine that any commissions paid are fair and
reasonable and meet relevant legal requirements.
10. SHAREHOLDERS' RIGHTS
Both the Sefton Trust and the KA Funds are Delaware business trusts.
Because each Target Fund is a series of Sefton Trust and each Acquiring Fund is
a series of KA Funds, their operations are governed by their respective Trust's
Declaration of Trust and By-laws and applicable Delaware law.
The Funds normally will not hold meetings of shareholders except as
required under the Investment Company Act and Delaware law. However,
shareholders holding 10% or more of the outstanding shares of either an
Acquiring Fund or a Target Fund may call meetings for their respective Trust for
the purpose of voting on the removal of one or more of the Trustees.
Shareholders of each Fund have no preemptive, conversion or subscription
rights. The shares of each Fund have non-cumulative voting rights, with each
shareholder of the Funds entitled to one vote for each full share of the Funds
(and a fractional vote for each fractional share) held in the shareholder's name
on the books of the Funds as of the record date for the action in question. On
any matter submitted to a vote of shareholders, shares of each Fund will be
voted by that Fund's shareholders individually when the matter affects the
specific interest of that Fund only, such as approval of that Fund's investment
management arrangements. The shares of all the Funds will be voted in the
aggregate on other matters, such as the election of trustees and ratification of
the Board of Trustees' selection of the Funds' independent accountants.
C. RISK FACTORS
The investment objective, policies, strategies and restrictions of each
Target Fund and its corresponding Acquiring Fund are substantially similar,
except for the focus on U.S. government and agency securities of the Sefton U.S.
Government Fund compared to the Kayne Anderson Intermediate Total Return Bond
Fund. Also, except for the comparatively greater risk noted below for the Kayne
Anderson Intermediate Total Return Bond Fund, the overall level of investment
risk should not materially change as a result of the Reorganization.
The following risk considerations that an investor should consider are
relevant to both the Target Fund and the corresponding Acquiring Fund. Although
Kayne Anderson will seek to achieve the investment objective of the each
Acquiring Fund, there is no assurance that it will be able to do so. In
addition, no single fund should be considered, by itself, to provide a complete
investment program for any investor.
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SPECIAL RISK FACTORS FOR KAYNE ANDERSON RISING DIVIDENDS FUND (for shareholders
of Sefton Equity Value Fund.)
Both the Kayne Anderson Rising Dividends Fund and the Sefton Equity Value
Fund invest in common stocks and other securities which are subject to stock
market risks. The value of the stocks that the Funds hold, like the broader
stock market, may decline over short or even extended periods.
However, the Kayne Anderson Rising Dividends Fund use a blended growth and
value strategy whereas Sefton Equity Value Fund uses a pure value approach.
Therefore, the Acquiring Fund is more likely to invest in higher price-earnings
multiple growth companies than the Target Fund. Those growth companies tend to
have more volatile stock prices and may, therefore, make the share price of the
Acquiring Fund more volatile than that of the Target Fund.
In addition, Sefton Equity Value Fund focuses on mid-cap companies whereas
Kayne Anderson Rising Dividends Fund focuses on large-cap companies. Even though
large capitalization companies tend in general to be more stable, in recent
years there has been a large increase in the price-earnings multiples of large
capitalization stocks, which has not been matched by mid-cap stocks. Therefore,
the stock holdings in the Kayne Anderson Rising Dividends Fund on average has a
higher price-earnings multiple than those in the Sefton Equity Value Fund. Thus,
the stocks held by the Kayne Anderson Rising Dividends Fund may be more
vulnerable to a market correction affecting growth stocks more than other types
of stocks.
SPECIAL RISK FACTORS FOR KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND (for
shareholders of Sefton Small Company Value Fund.)
Both the Kayne Anderson Small Cap Rising Dividends Fund and the Sefton
Small Company Value Fund invest in common stocks and other securities which are
subject to stock market risks. The value of the stocks that the Funds hold, like
the broader stock market, may decline over short or even extended periods.
However, the Kayne Anderson Small Cap Rising Dividends Fund use a blended
growth and value strategy whereas Sefton Equity Value Fund uses a pure value
fund approach. Therefore, the Acquiring Fund is more likely to invest in higher
price-earnings multiple growth companies than the Target Fund. Those growth
companies tend to have more volatile stock prices and may, therefore, make the
share price of the Acquiring Fund be more volatile than that of the Target Fund.
In addition, both the Target Fund and the Acquiring Funds focus on
small-cap stocks, which 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 Funds-may fluctuate significantly
more in value than larger-cap stocks and funds that focus on them.
In addition to the risks summarized above, there are additional risks with
investing in the Acquiring Funds. See the Combined Prospectus and Statement of
Additional Information for more information on the risks of each Acquiring Fund.
33
<PAGE>
SPECIAL RISK FACTORS FOR KAYNE ANDERSON Intermediate TOTAL RETURN BOND FUND (for
shareholders of Sefton U.S. Government Fund)
Unlike the Sefton U.S. Government Fund, which invests primarily in U.S.
Government securities backed by the full faith and credit of the U.S.
Government, the Kayne Anderson Intermediate Total Return Bond Fund invests
primarily in domestic and foreign investment-grade bonds that have greater
credit risk. Overall, this difference means that the value of an investment in
the Kayne Anderson Intermediate Total Return Bond Fund would be more volatile.
The Kayne Anderson Intermediate Total Return Bond Fund is a corporate bond fund
which invests primarily in corporate bonds (instead of investing primarily U.S.
Government bonds as in the case of Sefton U.S. Government Fund). Corporate bonds
are issued by private companies and are not backed by the full faith and credit
of the U.S. Government and therefore are subject to a credit risk-the risk that
the issuer may default or otherwise be unable to pay the principal and/or
interest of the debt when due. If this happens, you may lose a portion of your
principal. However, Kayne Anderson attempts to reduce that risk by investing
primarily in investment-grade bonds. In addition, the Kayne Anderson Total
Return Bond Fund may also invest in foreign bonds, which may be denominated in
foreign currencies. To the extent the exchange rates for those foreign
currencies fluctuate unfavorably against the US dollar, the Fund may suffer a
loss.
Both Funds are subject to interest rate risk. Generally, increases in
interest rates may cause the value of a Fund's investments to decline. The Kayne
Anderson Intermediate Total Return Bond Fund seeks to reduce the risk by
emphasizing total return (which includes both income and capital gains) instead
of Sefton U.S. Government Bond Fund's slightly narrower objective, which is to
seek maximum current income. Still, the risk of an investment in the Kayne
Anderson Intermediate Bond Fund would be higher. In the Acquiring Fund's case,
Kayne Anderson may decide to invest in a security that pays lower current income
in anticipation of a possibility of capital gain or in anticipation of a lesser
effect of a capital loss. To the extent Kayne Anderson's projections are
inaccurate, you may not be able to get as high a level of current income as you
otherwise would.
SPECIAL RISK FACTORS FOR KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND (for
shareholders of Sefton California Tax-Free Fund.)
As discussed above, the Sefton California Tax-Free Fund will be reorganized
into the Kayne Anderson Intermediate Tax-Free Bond Fund. Currently, the
investment objective of the Kayne Anderson Intermediate Tax-Free Bond Fund is to
seek current income exempt from federal income tax. Kayne Anderson, however, is
in the process of seeking shareholders' approval to change the objective of that
Fund to one that is substantially identical to the Sefton California Tax-Free
Fund. If shareholders of the Kayne Anderson Intermediate Tax-Free Bond Fund
approve the change, the name of the Acquiring Fund will become Kayne Anderson
California Intermediate Tax-Free Bond Fund and the objective of the Acquiring
Fund will be to seek current income exempt from both federal income tax and
California personal income tax by investing primarily in investment-grade
California municipal bonds.
Because the Kayne Anderson California Intermediate Tax-Free Bond Fund and
the Sefton California Tax-Free Fund both invest primarily in securities issued
by entities located in a single state, each fund is more susceptible to changes
in value due to political or economic changes affecting that state or its
subdivisions.
34
<PAGE>
D. RECOMMENDATION OF THE BOARD OF TRUSTEES
The Board of Trustees of the Sefton Trust and the KA Funds each (including
a majority of the independent Trustees each trust), after due consideration, has
unanimously determined that the Reorganization is in the best interests of the
shareholders of each Target Fund (in the case of the Sefton Trust Trustees) and
each Acquiring Fund (in the case of the KA Funds Trustees) and that the
interests of the existing shareholders of each Acquiring Fund and Target Fund,
as the case may be, would not be diluted thereby. The Boards specifically
considered the following factors:
(1) The favorable efficiencies that could occur if each Target Fund and the
corresponding Acquiring Fund's assets were combined.
(2) The expected absence of adverse effects on the Acquiring Fund by adding
the corresponding Target Fund's assets to it.
(3) The favorable experience and resources of Kayne Anderson and the other
service providers to the Acquiring Funds.
(4) The favorable comparative performance and current and expected expenses
of the Acquiring Funds compared to the Target Funds.
THE TRUSTEES OF THE SEFTON TRUST UNANIMOUSLY RECOMMEND THAT SHAREHOLDERS
OF EACH TARGET FUND VOTE FOR THE ADOPTION OF THE PROPOSAL.
E. DISSENTERS' RIGHTS OF APPRAISAL
Shareholders of a Target Fund who object to a proposed Reorganization will
not be entitled to any "dissenters' rights" under Delaware law. However, those
shareholders have the right at any time up to when the Reorganization occurs to
redeem shares of the Target Fund at net asset value or to exchange their shares
for shares of the other funds offered by the Sefton Trust without charge
(however, each other series of Sefton Trust are involved with the
Reorganization). After the Reorganizations, shareholders of a Target Fund will
hold shares of the corresponding Acquiring Fund, which may also be redeemed at
net asset value in accordance with the procedures described in the Acquiring
Funds' Prospectus dated May 5, 1999, subject to applicable redemption
procedures.
F. FURTHER INFORMATION ABOUT THE TARGET FUND AND THE ACQUIRING FUND
Further information about each Target Fund and each Acquiring Fund are
contained in the documents set forth at the beginning of this Combined Proxy
Statement and Prospectus under the heading "WHAT OTHER IMPORTANT DOCUMENTS
SHOULD I KNOW ABOUT?"
In addition, both the Sefton Trust and KA Funds are subject to the
informational requirements of the Securities Exchange Act of 1934 and the
Investment Company Act, and they file reports, proxy materials and other
information with the SEC. These reports, proxy materials and other information
can be inspected and copied at the Public Reference Room maintained by the SEC
at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional
offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 7
World Trade Center, Suite 1300, New York, New York 10048. Copies of these
35
<PAGE>
materials can be obtained at prescribed rates from the Public Reference Branch,
Office of Consumer Affairs and Information Services, of the SEC, Washington,
D.C. 20549, and on the SEC's web site (http://www.sec.gov).
G. VOTE REQUIRED
Approval of each proposed Reorganization requires the affirmative vote of
the holders of a majority of the shares of each Target Fund present or voting by
proxy at the Shareholder Meeting. If the shareholders of a Target Fund do not
approve the proposed Reorganization for that Target Fund, or if the
Reorganization is not consummated for any other reason, then Kayne Anderson
would have no further obligation to that Target Fund but would satisfy its prior
obligations described in this Combined Proxy Statement and Prospectus through
the date of that unfavorable shareholder vote or other termination event. The
Board of Trustees of Sefton Trust would then take any further action as it deems
to be in the best interest of the Target Fund concerned and its shareholders,
including liquidation, subject to approval by the shareholders of the Target
Fund if required by applicable law.
H. FINANCIAL HIGHLIGHTS
The financial highlights table for the Target Funds is intended to help you
understand the Target Funds' financial performance. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned or lost on an investment
in the Fund (assuming reinvestment of all dividends and distributions). The
Financial Highlights for the fiscal year ended December 31, 1998, period ended
December 31, 1997, fiscal year ended March 31, 1997 and the period from
commencement of investment operations (April 3, 1995) to March 31, 1996 have
been audited by PricewaterhouseCoopers LLP, independent accountants, whose
report thereon appears in the Sefton Trust's Annual Report and which is
incorporated by reference in its Statement of Additional Information ("SAI"). In
May 1997, each Target Fund changed its fiscal year-end from March 31 to December
31. This information should be read in conjunction with the financial statements
and notes thereto which are incorporated by reference in the SAI.
36
<PAGE>
SEFTON EQUITY VALUE FUND
<TABLE>
<CAPTION>
6 Months Year Period Year Period
Ended 6/30/99 Ended Ended Ended Ended
(unaudited) 12/31/98 12/31/97(4) 3/31/97 3/31/96(1)
----------- -------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .......... $ 15.33 $ 17.45 $ 16.42 $ 14.92 $ 12.00
------- ------- ------- ------- -------
Income from investment operations:
Net investment income ....................... 0.07 0.22 0.14 0.17 0.21
Net realized and unrealized gain (loss)
on investment transactions ................ 0.26 (1.87) 3.45 3.14 2.92
Total income from investment operations ....... 0.33 (1.65) 3.59 3.31 3.13
Dividends and distributions to shareholders:
Dividends from net investment income ........ (0.07) (0.21) (0.14) (0.17) (0.21)
Distributions from net realized gains
from investment transactions .............. -- (0.26) (2.42) (1.64) --
------- ------- ------- ------- -------
Total dividends and distributions ............. (0.07) (0.47) (2.56) (1.81) (0.21)
------- ------- ------- ------- -------
Net asset value-end of period ................. $ 15.59 $ 15.33 $ 17.45 $ 16.42 $ 14.92
Total return .................................. 2.20%(2) (9.40)% 22.13%(2) 23.15% 26.31%(2)
Ratios/Supplemental Data:
Net assets, end of period (000's) ........... $65,572 $75,153 $85,278 $86,316 $36,326
======= ======= ======= ======= =======
Ratio of net expenses to average net assets ... 1.42%(3) 1.39% 1.41%(3) 1.52% 1.55%(3)
Ratio of net investment income to average
net assets ................................... 0.93%(3) 1.35% 1.02%(3) 1.13% 1.68%(3)
Ratio of expenses to average net assets
without fee waivers .......................... 1.42%(3) 1.39% 1.43%(3) 1.56% 1.66%(3)
Portfolio turnover rate(5) .................... 89.05% 82.44% 42.10% 77.65% 62.76%
</TABLE>
- - - ----------
(1) Fund commenced investment operations April 3, 1995.
(2) Total return is not annualized.
(3) Annualized.
(4) For the period from April 1, 1997 through December 31, 1997. The Fund
changed its fiscal year end from March 31 to December 31.
(5) A portfolio turnover rate is the percentage computed by taking the lesser
of purchases or sales of portfolio securities (excluding securities with
maturity dates of one year or less at the time of acquisition) for the
period and dividing it by the monthly average of the market value of such
securities during the period.
See Notes to Financial Statements.
37
<PAGE>
SEFTON SMALL COMPANY VALUE FUND
<TABLE>
<CAPTION>
6 Months Ended Year Period
6/30/99 Ended Ended
(unaudited) 12/31/98 12/31/97(1)
----------- -------- -----------
<S> <C> <C> <C>
Net asset value, beginning of period .......... $ 10.66 $ 12.74 $ 12.00
------- ------- -------
Income from investment operations:
Net investment income ....................... 0.30(2) 0.11 0.07
Net realized and unrealized gain (loss)
on investment transactions ................. (0.07) (2.10) 0.74
Total income from investment operations ....... 0.23 (1.99) 0.81
Dividends and distributions to shareholders:
Dividends from net investment income ........ (0.02) (0.09) (0.07)
Total dividends and distributions ............. (0.02) (0.09) (0.07)
------- ------- -------
Net asset value-end of period ................. $ 10.87 $ 10.66 $ 12.74
Total return .................................. 2.20%(3) (15.69)% 6.76%(3)
Ratios/Supplemental Data:
Net assets, end of period (000's) ........... $17,618 $35,336 $29,680
======= ======= =======
Ratio of net expenses to average net assets.... 1.51%(4) 1.55% 1.59%(4)
Ratio of net investment income to average
net assets ................................... 0.57%(4) 0.95% 1.15%(4)
Ratio of expenses to average net assets
without fee waivers .......................... 1.88%(4) 1.75% 1.81%(4)
Portfolio turnover rate(5) .................... 50.09% 59.24% 14.81%
</TABLE>
- - - ----------
(1) Fund commenced investment operations June 30, 1997 (commencement of
operations) through December 31, 1997.
(2) Net investment income per share was calculated using the average shares
method.
(3) Total return is not annualized.
(4) Annualized.
(5) A portfolio turnover rate is the percentage computed by taking the lesser
of purchases or sales of portfolio securities (excluding securities with
maturity dates of one year or less at the time of acquisition) for the
period and dividing it by the monthly average of the market value of such
securities during the period.
See Notes to Financial Statements.
38
<PAGE>
SEFTON U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
6 Months Year Period Year Period
Ended 6/30/99 Ended Ended Ended Ended
(unaudited) 12/31/98 12/31/97(4) 3/31/97 3/31/96(1)
----------- -------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .......... $ 12.83 $ 12.62 $ 12.01 $ 12.35 $ 12.00
------- ------- ------- ------- -------
Income from investment operations:
Net investment income ....................... 0.34 0.69 0.52 0.69 0.71
Net realized and unrealized gain (loss)
on investment transactions ................ (0.53) 0.23 0.61 (0.29) 0.37
Total income from investment operations ....... (0.19) 0.92 1.13 0.40 1.08
Dividends and distributions to shareholders:
Dividends from net investment income ........ (0.34) (0.69) (0.52) (0.69) (0.71)
Distributions from net realized gains
from investment transactions .............. -- (0.02) -- (0.05) (0.02)
------- ------- ------- ------- -------
Total dividends and distributions ............. (0.34) (0.71) (0.52) (0.74) (0.73)
------- ------- ------- ------- -------
Net asset value-end of period ................. $ 12.30 $ 12.83 $ 12.62 $ 12.01 $ 12.35
Total return .................................. (1.54)%(2) 7.42% 9.59%(2) 3.31% 9.06%(2)
Ratios/Supplemental Data:
Net assets, end of period (000's) ........... $41,595 $36,626 $35,278 $30,062 $19,096
======= ======= ======= ======= =======
Ratio of net expenses to average net assets ... 1.00%(3) 0.94% 1.02%(3) 1.09% 1.02%(3)
Ratio of net investment income to average
net assets ................................... 5.38%(3) 5.40% 5.60%(3) 5.64% 5.68%(3)
Ratio of expenses to average net assets
without fee waivers .......................... 1.08%(3) 1.04% 1.17%(3) 1.39% 1.39%(3)
Portfolio turnover rate(5) .................... 3.00% 12.94% 5.49% 11.94% 45.41%
</TABLE>
- - - ----------
(1) Fund commenced investment operations April 3, 1995.
(2) Total return is not annualized.
(3) Annualized.
(4) For the period from April 1, 1997 through December 31, 1997. The Fund
changed its fiscal year end from March 31 to December 31.
(5) A portfolio turnover rate is the percentage computed by taking the lesser
of purchases or sales of portfolio securities (excluding securities with
maturity dates of one year or less at the time of acquisition) for the
period and dividing it by the monthly average of the market value of such
securities during the period.
See Notes to Financial Statements.
39
<PAGE>
SEFTON CALIFORNIA TAX-FREE FUND
<TABLE>
<CAPTION>
6 Months Year Period Year Period
Ended 6/30/99 Ended Ended Ended Ended
(unaudited) 12/31/98 12/31/97(4) 3/31/97 3/31/96(1)
----------- -------- ----------- ------- ----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period ....... $ 12.99 $ 12.84 $ 12.26 $ 12.19 $ 12.00
------- ------- ------- ------- -------
Income from investment operations:
Net investment income .................... 0.28 0.55 0.43 0.59 0.58
Net realized and unrealized gain (loss)
on investment transactions ............. (0.42) 0.21 0.65 0.09 0.20
Total income from investment operations .... (0.14) 0.76 1.08 0.68 0.78
Dividends and distributions to shareholders:
Dividends from net investment income ..... (0.28) (0.55) (0.43) (0.59) (0.58)
Distributions from net realized gains
from investment transactions ........... -- (0.06) (0.07) (0.02) (0.01)
------- ------- ------- ------- -------
Total dividends and distributions .......... (0.28) (0.61) (0.50) (0.61) (0.59)
------- ------- ------- ------- -------
Net asset value-end of period .............. $ 12.57 $ 12.99 $ 12.84 $ 12.26 $ 12.19
Total return ............................... (1.13%)(2) 6.11% 8.93%(2) 5.69% 6.60%(2)
Ratios/Supplemental Data:
Net assets, end of period (000's) ........ $39,522 $40,564 $40,303 $35,504 $42,593
======= ======= ======= ======= =======
Ratio of net expenses to average net assets 0.93%(3) 0.89% 0.94%(3) 0.88% 0.83%(3)
Ratio of net investment income to average
net assets ................................ 4.33%(3) 4.28% 4.54%(3) 4.83% 4.83%(3)
Ratio of expenses to average net assets
without fee waivers ....................... 1.08%(3) 1.04% 1.12%(3) 1.17% 1.16%(3)
Portfolio turnover rate(5) ................. 1.39% 36.44% 12.97% 14.52% 93.90%
</TABLE>
- - - ----------
(1) Fund commenced investment operations April 3, 1995.
(2) Total return is not annualized.
(3) Annualized.
(4) For the period from April 1, 1997 through December 31, 1997. The Fund
changed its fiscal year end from March 31 to December 31.
(5) A portfolio turnover rate is the percentage computed by taking the lesser
of purchases or sales of portfolio securities (excluding securities with
maturity dates of one year or less at the time of acquisition) for the
period and dividing it by the monthly average of the market value of such
securities during the period.
See Notes to Financial Statements.
40
<PAGE>
The following selected per-share data and ratios for the Acquiring Funds
for the period ended December 31, 1998, and December 31, 1997, have been audited
by Briggs, Bunting & Dougherty, LLP. The total returns in the table represent
the rate that an investor would have earned or lost on an investment in the Fund
(assuming reinvestment of all dividends and distributions). 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. This information should be read in conjunction with the financial
statements and notes thereto which appear in the Annual Report for the Acquiring
Funds.
KAYNE ANDERSON MUTUAL FUNDS RISING DIVIDENDS FUND
<TABLE>
<CAPTION>
6 Months
Ended Year Year Year 05/01/95*
06/31/99 Ended Ended Ended to
(unaudited) 12/31/98 12/31/97 12/31/96 12/31/95
----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period .......... $ 17.03 $ 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 ............................. 2.20 2.38 4.34 2.35 2.13
------- ------- ------- ------- -------
Total income from investment operations ....... 2.20 2.49 4.44 2.43 2.20
------- ------- ------- ------- -------
Less Distributions:
From net investment income .................. (0.02) (0.11) (0.11) (0.08) (0.07)
From net realized gains ..................... (0.23) (2.63) (1.37) (0.66) (0.15)
From paid in capital ........................ -- -- -- -- --
------- ------- ------- ------- -------
Total distributions ........................... 0.25 (2.74) (1.48) (0.74) (0.22)
------- ------- ------- ------- -------
Net asset value, end of period ................ $ 18.98 $ 17.03 $ 17.28 $ 14.32 $ 12.63
======= ======= ======= ======= =======
Total return .................................. 11.45%** 14.14% 30.99% 19.09% 20.65%**
Net assets, end of period (in 000's) .......... $64,516 $48,581 $35,283 $26,118 $20,613
Ratio of expenses to average net assets:+
Before expense reimbursement ................ -- -- -- -- --
After expense reimbursement ................. 1.06%+ 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).... 0.29%+ 0.57% 0.55% 0.59% 0.94%+
Portfolio turnover rate ....................... 28%** 76% 51% 23% 28%
</TABLE>
- - - ----------
* Commencement of operations.
** Not annualized.
+ Annualized.
See accompanying Notes to Financial Statements.
41
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
SMALL CAP RISING DIVIDENDS FUND
<TABLE>
<CAPTION>
6 Months
Ended Year Year 10/18/96*
06/31/99 Ended Ended to
(unaudited) 12/31/98 12/31/97 12/31/96
----------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period .......... $ 15.04 $ 13.12 $11.06 $10.65
------- ------- ------ ------
Income from investment operations:
Net investment income ....................... -- 0.05 0.02 0.02
Net realized and unrealized gains
on investments ............................. 1.41 2.07 2.14 0.41
------- ------- ------ ------
Total income from investment operations ....... 1.41 2.12 2.16 0.43
------- ------- ------ ------
Less Distributions:
From net investment income .................. (0.04) (0.05) (0.05) (0.02)
From net realized gains ..................... (0.08) -- (0.05) --
From paid in capital ........................ -- (0.15) -- --
------- ------- ------ ------
Total distributions ........................... (0.12) (0.20) (0.10) (0.02)
------- ------- ------ ------
Net asset value, end of period ................ $ 16.33 $ 15.04 $13.12 $11.06
======= ======= ====== ======
Total return .................................. 8.58%** 16.17% 19.46% 4.00%**
Net assets, end of period (in 000's) .......... $33,010 $33,017 $6,494 $ 808
Ratio of expenses to average net assets:+
Before expense reimbursement ................ 1.25%+ 1.35% 3.22% 18.91%+
After expense reimbursement ................. 1.30%+ 1.30% 1.30% 1.30%+
After expense reimbursement and expenses
paid indirectly ............................ 1.30%+ -- -- --
Ratio of net investment income to average
net assets:+
(net of expense reimbursement/recoupment).... 0.45%+ 0.38% 0.45% 1.58%+
Portfolio turnover rate ....................... 33%** 28% 47% 0%
</TABLE>
- - - ----------
* Commencement of operations.
** Not annualized.
+ Annualized.
See accompanying Notes to Financial Statements.
42
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
INTERMEDIATE TOTAL RETURN BOND FUND
<TABLE>
<CAPTION>
6 Months
Ended Year Year 10/28/96*
06/31/99 Ended Ended to
(unaudited) 12/31/98 12/31/97 12/31/96
----------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period .......... $ 11.01 $ 10.75 $10.59 $10.65
------- ------- ------ ------
Income from investment operations:
Net investment income ....................... 0.22 0.51 0.56 0.09
Net realized and unrealized gains
on investments ............................. (0.36) 0.30 0.18 (0.07)
------- ------- ------ ------
Total income from investment operations ....... (0.14) 0.81 0.74 0.02
------- ------- ------ ------
Less Distributions:
From net investment income .................. (0.26) (0.51) (0.58) (0.08)
From net realized gains ..................... -- (0.04) -- --
From paid in capital ........................ -- -- -- --
------- ------- ------ ------
Total distributions ........................... (0.26) (0.55) (0.58) (0.08)
------- ------- ------ ------
Net asset value, end of period ................ $ 10.61 $ 11.01 $10.75 $10.59
======= ======= ====== ======
Total return .................................. (1.25%)** 7.61% 7.19% 0.20%**
Net assets, end of period (in 000's) .......... $11,701 $28,330 $6,261 $5,033
Ratio of expenses to average net assets:+
Before expense reimbursement ................ 1.08%+ 1.00% 2.23% 2.10%+
After expense reimbursement ................. 0.95%+ 0.94% 0.95% 0.95%+
After expense reimbursement and expenses
paid indirectly ............................ 0.95%+ -- -- --
Ratio of net investment income to average
net assets:+
(net of expense reimbursement/recoupment).... 4.72%+ 4.93% 5.35% 4.72%+
Portfolio turnover rate ....................... 28% 49% 27% 0%
</TABLE>
- - - ----------
* Commencement of operations.
** Not annualized.
+ Annualized.
See accompanying Notes to Financial Statements.
43
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
INTERMEDIATE TAX-FREE BOND FUND
<TABLE>
<CAPTION>
6 Months
Ended Year Year 10/28/96*
06/31/99 Ended Ended to
(unaudited) 12/31/98 12/31/97 12/31/96
----------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period .......... $ 10.77 $10.74 $10.64 $10.65
------- ------ ------ ------
Income from investment operations:
Net investment income ....................... (0.01) 0.43 0.34 0.01
Net realized and unrealized gains
on investments ............................. 0.01 0.03 0.11 (0.01)
------- ------ ------ ------
Total income from investment operations ....... -- 0.46 0.45 --
------- ------ ------ ------
Less Distributions:
From net investment income .................. (0.20) (0.43) (0.35) (0.01)
From net realized gains ..................... -- -- -- --
From paid in capital ........................ -- -- -- --
------- ------ ------ ------
Total distributions ........................... (0.20) (0.43) (0.35) (0.01)
------- ------ ------ ------
Net asset value, end of period ................ $ 10.57 $10.77 $10.74 $10.64
======= ====== ====== ======
Total return .................................. 0.03%** 4.37% 4.26% 0.02%**
Net assets, end of period (in 000's) .......... $11,183 $9,391 $6,015 $5,124
Ratio of expenses to average net assets:+
Before expense reimbursement ................ 1.53%+ 2.23% 2.29% 2.08%+
After expense reimbursement ................. 0.77%+ 0.77% 1.56% 1.81%+
After expense reimbursement and expenses
paid indirectly ............................ 0.75%+ -- 0.95% 0.95%+
Ratio of net investment income to average
net assets:+
(net of expense reimbursement/recoupment).... 3.68%+ 3.88% 2.58% 0.60%+
Portfolio turnover rate ....................... 9%** 47% 40% 0%
</TABLE>
- - - ----------
* Commencement of operations.
** Not annualized.
+ Annualized.
See accompanying Notes to Financial Statements.
44
<PAGE>
III. MISCELLANEOUS ISSUES
A. OTHER BUSINESS
The Board of Trustees of the Sefton Trust knows of no other business to be
brought before the Shareholder Meeting. If any other matters come before the
Shareholder Meeting, it is the Board's intention that proxies that do not
contain specific restrictions to the contrary will be voted on those matters in
accordance with the judgment of the persons named in the enclosed form of proxy.
B. NEXT MEETING OF SHAREHOLDERS
The Trust is not required and does not intend to hold annual or other
periodic meetings of shareholders except as required by the Investment Company
Act. If a Reorganization is not completed, the next meeting of the shareholders
of the remaining Fund will be held at such time as the Board of Trustees may
determine or at such time as may be legally required. Any shareholder proposal
intended to be presented at such meeting must be received by the Sefton Trust at
its office at a reasonable time before the meeting, as determined by the Board
of Trustees, to be included in the Sefton Trust's proxy statement and form of
proxy relating to that meeting, and must satisfy all other legal requirements.
C. LEGAL MATTERS
Certain legal matters in connection with the issuance of the Acquiring Fund
Shares will be passed upon by Paul, Hastings, Janofsky & Walker LLP.
D. EXPERTS
The financial statements of each Target Fund for the year ended December
31, 1998, contained in the Sefton Trust's 1998 Annual Report to Shareholders
have been audited by PricewaterhouseCoopers LLP, independent auditors, as stated
in its report, which is incorporated herein by reference, and has been so
incorporated in reliance upon the report of such firm given its authority as an
expert in accounting and auditing.
The financial statements of each Acquiring Fund for the year ended December
31, 1998, contained in the KA Funds' 1998 Annual Report to Shareholders have
been audited by Briggs, Bunting & Dougherty, LLP, independent auditors, as
stated in its report, which is incorporated herein by reference, and has been so
incorporated in reliance upon the report of such firm given its authority as an
expert in accounting and auditing.
PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN
THE ENCLOSED ENVELOPE.
45
<PAGE>
EXHIBIT A
LIST OF FIVE PERCENT SHAREHOLDERS
Number of Percentage of Fund's
Shareholder Shares Owned Outstanding Shares
- - - ----------- ------------ ------------------
SEFTON EQUITY VALUE FUND
BISYS Brokerage Service
1855 Gateway Blvd.
P.O. Box 4054
Concord, CA 94524 1,934,954.951 49.60%
SBT & Co.
SCM/MGD
P.O. Box 8469
La Jolla, CA 92038-8469 1,401,248.356 35.92%
SBT & Co
P.O. Box 8469
La Jolla, CA 92038-8469 259,843.856 6.66%
SEFTON SMALL COMPANY VALUE FUND
BISYS Brokerage Service
1855 Gateway Blvd.
P.O. Box 4054
Concord, CA 94524 969,987.139 63.78%
SBT & Co.
SCM/MGD
P.O. Box 8469
La Jolla, CA 92038-8469 244,569.863 16.08%
SBT & Co.
SCM/MGD
P.O. Box 8469
La Jolla, CA 92038-8469 156,029.886 10.26%
SBT & Co.
P.O. Box 8469
La Jolla, CA 92038-8469 100,228.038 6.59%
SEFTON U.S. GOVERNMENT FUND
SBT & Co.
SCM/MGD
P.O. Box 8469
La Jolla, CA 92038-8469 1,348,812.323 40.09%
46
<PAGE>
BISYS Brokerage Service
1855 Gateway Blvd.
P.O. Box 5054
Concord, CA 94524 655,908.424 19.50%
J. P. Morgan
William T. Stephens
Sefton Char Remainder Unitrust
333 S. Hope Street, 35th Floor
Los Angeles, CA 90017-1406 515,062.938 15.31%
J. P. Morgan
William T. Stephens
Thomas & Donna Sefton Chr Rem Trust
333 S. Hope Street, 35th Floor
Los Angeles, CA 90071-1406 428,980.853 12.75%
SBT & Co.
P.O. Box 8469
La Jolla, CA 92038-8469 249,294.291 7.41%
SEFTON CALIFORNIA TAX-FREE FUND
BISYS Brokeage Service
1855 Gateway Blvd.
P.O. Box 4054
Concord, CA 94524 1,915,564.182 58.39%
SBT & Co.
SCM/MGD
P.O. Box 8649
P.O. Box 92038-8469 857,186.187 26.13%
SBT & Co.
P.O. Box 8469
La Jolla, CA 92038-8469 203,777.147 6.21%
47
<PAGE>
KAYNE ANDERSON RISING DIVIDENDS FUND
Fidelity Investments Institutional
100 Magellan Way KW1C
Dovington, KY 41015 331,696 9.67%
HSBC Bank USA
The Hancock & Estabrock
Retirement Plan
P.O. Box 1329
Buffalo, NY 14240 294,967 8.60%
KAYNE ANDERSON SMALL CAP RISING
DIVIDEND FUND
Bear Stearns Securities Corp
1 Metrotech Center North
Brooklyn, NY 11201 570,588 27.77%
Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, CA 94104 128,272 6.24%
KAYNE ANDERSON INTERMEDIATE TOTAL
RETURN BOND FUND
Fidelity Investments Institutional
FBO 103-01748-23
100 Magellan Way KW1C
Dovington, KY 41015 323,110 26.06%
William N. Pennington Tr
FBO William N. Pennington
Separate Property Trust Dtd 1/1/91
441 West Plumb Lane
Reno, NV 89509 292,542 23.60%
Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, CA 94104 93,036 7.50%
KAYNE ANDERSON INTERMEDIATE TAX-FREE
BOND FUND
William N. Pennington Tr
FBO William N. Pennington
Separate Property Trust Dtd 1/1/91
441 West Plumb Lane
Reno, NV 89509 675,528 61.84%
Bear Stearns Securities Corp
FBO 402-90409-14
1 Metrotech Center North
Brooklyn, NY 11201 67,009 6.13%
Bear Stearns Securities Corp
FBO 402-90413-18
1 Metrotech Center North
Brooklyn, NY 11201 57,298 5.24%
48
<PAGE>
EXHIBIT B
AGREEMENT AND PLAN OF REORGANIZATION
This AGREEMENT AND PLAN OF REORGANIZATION (this "AGREEMENT") is made as of
this __th day of September, 1999, by and between SEFTON FUNDS TRUST ("SEFTON
TRUST"), a Delaware business trust, for itself and on behalf of Sefton Equity
Value Fund, Sefton Small Company Value Fund, Sefton U.S. Government Fund and
Sefton California Tax-Free Fund (each, an "ACQUIRED FUND" and, collectively, the
"ACQUIRED FUNDS"), each a series of the Sefton Trust, and KAYNE ANDERSON MUTUAL
FUNDS ("KA FUNDS"), a Delaware business trust, for itself and on behalf of Kayne
Anderson Rising Dividends Fund, Kayne Anderson Small Cap Rising Dividends Fund,
Kayne Anderson Intermediate Total Return Bond Fund and Kayne Anderson
Intermediate Tax-Free Bond Fund (each, an "ACQUIRING FUND" and, collectively,
the "ACQUIRING FUNDS"), each a series of KA Funds. Other than the Acquiring
Funds and the Acquired Funds, no other series of Sefton Trust or KA Funds is a
party to this Agreement.
In accordance with the terms and conditions set forth in this Agreement,
the parties desire that all of the assets of each Acquired Fund be transferred
to the Acquiring Fund corresponding thereto, as set forth in the table attached
hereto as Schedule A, in exchange for shares of beneficial interest of the
corresponding Acquiring Fund ("ACQUIRING FUND SHARES") and the assumption by
such Acquiring Fund of the Stated Liabilities (as defined in paragraph 1.3) of
the Acquired Fund, and that such Acquiring Fund Shares be distributed
immediately after the Closing, as defined in this Agreement, by the Acquired
Fund to its shareholders in liquidation of the Acquired Fund. This Agreement is
intended to be and is adopted as a plan of reorganization within the meaning of
Section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the "CODE").
In consideration of the premises and of the covenants and agreements
hereinafter set forth, the parties hereto, intending to be legally bound hereby,
covenant and agree as follows:
1. REORGANIZATION OF ACQUIRED FUND
1.1 Subject to the terms and conditions herein set forth, and on the basis
of the representations and warranties contained herein, each Acquired Fund shall
assign, deliver and otherwise transfer its assets as set forth in paragraph 1.2
(the "FUND ASSETS") to its corresponding Acquiring Fund identified in Schedule
A, and the corresponding Acquiring Fund shall, as consideration therefor, on the
Closing Date (as defined in paragraph 3.1), (i) deliver to such Acquired Fund
full and fractional Acquiring Fund Shares, the corresponding class and number of
which shall be determined by dividing:
(a) that portion of the value of the Fund Assets, net of the Acquired
Fund's Stated Liabilities, computed in the manner and as of the time and date
set forth in paragraph 2.1, representative of the shares of beneficial interest
of the Acquired Fund, by
(b) the net asset value of one share of the Acquiring Fund's class of
shares identified in Schedule A, computed in the manner and as of the time and
date set forth in paragraph 2.2, and (ii) assume the Acquired Fund's Stated
Liabilities. Such transfer, delivery and assumption shall take place at the
closing(s) provided for in paragraph 3.1 (hereinafter sometimes referred to as
the "CLOSING(S)"). Promptly after the Closing(s), each Acquired Fund shall
distribute the corresponding Acquiring Fund Shares to the shareholders of the
Acquired Fund in liquidation of the Acquired Fund as provided in paragraph 1.4
hereof. Such transaction(s) are hereinafter sometimes collectively referred to
as the "REORGANIZATION(S)."
<PAGE>
1.2 (a) With respect to each Acquired Fund, the Fund Assets shall consist
of all property and assets of any nature whatsoever, including, without
limitation, all cash, cash equivalents, securities, claims and receivables
(including dividend and interest receivables) owned by the Acquired Fund, and
any prepaid expenses shown as an asset on the Acquired Fund's books on the
Closing Date.
(b) At least fifteen (15) business days before the Closing Date, each
Acquired Fund will provide the corresponding Acquiring Fund with a schedule of
its securities and other assets and its known liabilities, and such Acquiring
Fund will provide such Acquired Fund with a copy of the current investment
objective and policies applicable to the Acquiring Fund. Each Acquired Fund
reserves the right to sell any of the securities or other assets shown on the
list of the Fund Assets before the Closing Date but will not, without the prior
approval of the corresponding Acquiring Fund, acquire any additional securities
other than securities that the Acquiring Fund is permitted to purchase in
accordance with its stated investment objective and policies. At least ten (10)
business days before the Closing Date, each Acquiring Fund will advise the
corresponding Acquired Fund of any investments of such Acquired Fund shown on
such schedule that the Acquiring Fund would not be permitted to hold, pursuant
to its stated investment objective and policies or otherwise. If an Acquired
Fund holds any investments that its corresponding Acquiring Fund would not be
permitted to hold under its stated investment objective or policies, the
Acquired Fund, if requested by the Acquiring Fund, will dispose of such
securities before the Closing Date to the extent practicable. In addition, if it
is determined that the portfolios of the Acquired Fund and the corresponding
Acquiring Fund, when aggregated, would contain investments exceeding certain
percentage limitations to which any Acquiring Fund is or will be subject with
respect to such investments, the Acquired Fund, if requested by the
corresponding Acquiring Fund, will dispose of and/or reinvest a sufficient
amount of such investments as may be necessary to avoid violating such
limitations as of the Closing Date.
1.3 Each Acquired Fund will endeavor to discharge all of its known
liabilities and obligations before the Closing Date. Each Acquiring Fund will
assume all liabilities and obligations reflected on an unaudited statement of
assets and liabilities of the corresponding Acquired Fund prepared by or on
behalf of Sefton Trust as of the Applicable Valuation Date (as defined in
paragraph 2.1), in accordance with generally accepted accounting principles
consistently applied from the prior audited period ("STATED LIABILITIES"). The
Acquiring Fund shall assume only the Stated Liabilities of its corresponding
Acquired Fund, and no other liabilities or obligations, whether absolute or
contingent, known or unknown, accrued or unaccrued.
1.4 Promptly after the Closing with respect to each Acquired Fund, the
Acquired Fund will distribute the Acquiring Fund Shares received by the Acquired
Fund pursuant to paragraph 1.1 pro rata to its shareholders of record determined
as of the close of business on the Closing Date ("ACQUIRED FUND INVESTORS") in
complete liquidation of the Acquired Fund. Such distribution will be
accomplished by an instruction, signed by an appropriate officer of Sefton
Trust, to transfer the Acquiring Fund Shares then credited to the Acquired
Fund's account on the books of the Acquiring Fund to open accounts on the books
of the Acquiring Fund established and maintained by the Acquiring Fund's
transfer agent in the names of record of the Acquired Fund Investors and
representing the respective pro rata number of shares of the Acquiring Fund due
such Acquired Fund Investor. In exchange for Acquiring shares distributed, all
2
<PAGE>
issued and outstanding shares of beneficial interest of the Acquired Fund will
be redeemed and canceled simultaneously therewith on the Acquired Fund's books;
any outstanding share certificates representing interests in the Acquired Fund
will represent the right to receive such number of Acquiring Fund Shares after
the Closing as determined in accordance with paragraph 1.1.
1.5 If any request shall be made for a change of the registration of shares
of the Acquiring Fund to another person from the account of the shareholder in
which name the shares are registered in the records of the Acquired Fund it
shall be a condition of such registration of shares that there be furnished the
Acquiring Fund an instrument of transfer properly endorsed, accompanied by
appropriate signature guarantees and otherwise in proper form for transfer and,
if any of such shares are outstanding in certificated form, the certificates
representing such shares, and that the person requesting such registration shall
pay to the Acquiring Fund any transfer or other taxes required by reason of such
registration or establish to the reasonable satisfaction of the Acquiring Fund
that such tax has been paid or is not applicable.
1.6 Following the transfer of assets by each Acquired Fund to the
corresponding Acquiring Fund, the assumption of such Acquired Fund's Stated
Liabilities by the Acquiring Fund, and the distribution by the Acquired Fund of
the Acquiring Fund Shares received by it pursuant to paragraph 1.4, Sefton Trust
shall terminate the qualification, classification and registration of such
Acquired Fund at all appropriate federal and state agencies. Any reporting or
other responsibility of Sefton Trust is and shall remain the responsibility of
Sefton Trust up to and including the date on which the particular Acquired Fund
is terminated and deregistered, subject to any reporting or other obligations
described in paragraph 4.9.
1.7 The failure of an Acquired Fund to consummate the transactions
contemplated hereby shall not affect the consummation or validity of a
Reorganization with respect to any other Acquired Fund, and each provision of
this Agreement shall be construed to effect this intent, including, without
limitation, as the context requires, construing the terms "ACQUIRING FUND" and
"ACQUIRED FUND" as meaning only those series of KA Funds and Sefton Trust,
respectively, that are involved in a Reorganization as of a Closing Date.
2. VALUATION
2.1 With respect to each Acquired Fund, the value of the Fund Assets shall
be the value of such assets computed as of the time at which its net asset value
is calculated pursuant to the valuation procedures set forth in the Acquiring
Fund's then-current Prospectus and Statement of Additional Information on the
Closing Date, or at such time on such earlier or later date as may mutually be
agreed upon in writing between the parties hereto (such time and date being
herein called the "APPLICABLE VALUATION DATE").
2.2 The net asset value of each share of a class of shares of an Acquiring
Fund shall be the net asset value per share of such class computed on the
Applicable Valuation Date, using the market valuation procedures set forth in
each Acquiring Fund's then-current Prospectus and Statement of Additional
Information.
2.3 All computations of value contemplated by this Article 2 shall be made
by the respective Acquiring Fund's administrator, Investment Company
Administration, L.L.C., in accordance with its regular practice as pricing agent
and reviewed by its independent accountants. Each Acquiring Fund shall cause its
administrator to deliver a copy of its valuation report, reviewed by its
independent accountants to Sefton Trust and each Acquired Fund at the Closing.
3
<PAGE>
3. CLOSING(S) AND CLOSING DATE
3.1 The Closing(s) for the Reorganization(s) shall occur on Friday,
November __, 1999, and/or on such other date(s) as may be mutually agreed upon
in writing by the parties hereto (each, a "CLOSING DATE"). The Closing(s) shall
be held at the offices of the KA Funds, 1800 Avenue of the Stars, Second Floor,
Los Angeles, California 90067, or at such other location as is mutually
agreeable to the parties hereto. All acts taking place at the Closing(s) shall
be deemed to take place simultaneously as of 4:00 p.m. Eastern Time on the
Closing Date unless otherwise provided.
3.2 The Acquiring Funds' custodian shall deliver at the Closing a
certificate of an authorized officer stating that:
(a) each Acquired Fund's portfolio securities, cash and any other
assets have been delivered in proper form to the corresponding Acquiring Fund on
the Closing Date and
(b) all necessary taxes including all applicable federal and state
stock transfer stamps, if any, have been paid, or provision for payment shall
have been made, by such Acquired Fund in conjunction with the delivery of
portfolio securities. Proper delivery of cash shall be by wire to the Acquiring
Funds' custodian, pursuant to instruction to be delivered before the Closing.
3.3 Notwithstanding anything herein to the contrary, if on the Applicable
Valuation Date:
(a) the New York Stock Exchange shall be closed to trading or trading
thereon shall be restricted or
(b) trading or the reporting of trading on such exchange or elsewhere
shall be disrupted so that, in the judgment of KA Funds and Sefton Trust,
accurate appraisal of the value of the net assets of an Acquiring Fund or an
Acquired Fund is impracticable, the Applicable Valuation Date shall be postponed
until the first business day after the day when trading shall have been fully
resumed without restriction or disruption and reporting shall have been
restored.
3.4 With respect to each Acquired Fund, Sefton Trust shall provide KA Funds
and its transfer agent with immediate access from and after the Closing Date to:
(a) the computer, electronic or such other forms of records containing
the names, addresses and taxpayer identification numbers of all of the Acquired
Fund Investors and the number and percentage ownership of outstanding Acquired
Fund shares owned by each such Acquired Fund Investor, all as of the Applicable
Valuation Date, and
(b) all original documentation (including all applicable Internal
Revenue Service forms, certificates, certifications and correspondence) relating
to the Acquired Fund Investors' taxpayer identification numbers and their
liability for or exemption from back-up withholding. The corresponding Acquiring
Fund shall issue and deliver to the Secretary or Assistant Secretary of Sefton
4
<PAGE>
Trust, acting on behalf of the Acquired Fund, a confirmation evidencing the
Acquiring Fund Shares credited on the Closing Date or shall provide evidence
satisfactory to the Acquired Fund that such Acquiring Fund Shares have been
credited to the Acquired Fund's account on the books of the Acquiring Fund. At
the Closing(s), each party shall deliver to the other such bills of sale,
checks, assignments, share certificates, if any, receipts or other documents of
transfer, assignment or conveyance as such other party or its counsel may
reasonably request.
3.5 Within thirty (30) days after the Closing Date, each Acquired Fund
shall deliver, in accordance with Article 1 hereof, to the corresponding
Acquiring Fund a statement of the Fund Assets and Stated Liabilities, together
with a list of such Acquired Fund's portfolio securities and other assets
showing the respective adjusted basis and holding periods thereof for income tax
purposes, as of the Closing Date, certified by an appropriate officer of Sefton
Trust.
4. COVENANTS WITH RESPECT TO EACH OF THE ACQUIRING FUNDS AND THE ACQUIRED FUNDS
4.1 With respect to each Acquired Fund, Sefton Trust has called or will
call a meeting of Acquired Fund shareholders to consider and act upon this
Agreement and to take all other actions reasonably necessary to obtain the
approval of the transactions contemplated herein, including approval for each
Acquired Fund's liquidating distribution of the Acquiring Fund Shares
contemplated hereby, and for Sefton Trust to terminate each Acquired Fund's
qualification, classification and registration if requisite approvals are
obtained with respect to each Acquired Fund. KA Funds and Sefton Trust have
jointly prepared the notice of meeting, form of proxy and proxy statement
(collectively, "PROXY MATERIALS") to be used in connection with such meeting;
provided that KA Funds has furnished or will furnish Sefton Trust with a
current, effective prospectus, including any supplements, relating to the class
of shares of each Acquiring Fund corresponding to the shares of each Acquired
Fund then outstanding for incorporation within and/or distribution with the
Proxy Materials, and with such other information relating to the Acquiring Funds
as is reasonably necessary for the preparation of the Proxy Materials.
4.2 Sefton Trust, on behalf of each Acquired Fund, covenants that the
corresponding Acquiring Fund Shares to be issued hereunder are not being
acquired for the purpose of making any distribution thereof, other than in
accordance with the terms of this Agreement.
4.3 Sefton Trust, on behalf of each Acquired Fund, will assist each
corresponding Acquiring Fund in obtaining such information as the Acquiring Fund
reasonably requests concerning the beneficial ownership of shares of each class
of each Acquired Fund.
4.4 Subject to the provisions hereof, KA Funds, on its own behalf and on
behalf of each Acquiring Fund; and Sefton Trust, on its own behalf and on behalf
of each Acquired Fund, will take, or cause to be taken, all actions, and do, or
cause to be done, all things reasonably necessary, proper or advisable to
consummate and make effective the transactions contemplated herein.
4.5 Sefton Trust, on behalf of each Acquired Fund, shall furnish to its
corresponding Acquiring Fund on the Closing Date, a final statement of the total
amount of the Acquired Fund's assets and liabilities as of the Closing Date,
which statement shall be certified by an appropriate officer of Sefton Trust as
5
<PAGE>
being determined in accordance with generally accepted accounting principles
consistently applied and as being valued in accordance with paragraph 2.1
hereof. As promptly as practicable, but in any case within sixty (60) days after
the Closing Date, Sefton Trust, on behalf of each Acquired Fund, shall furnish
its corresponding Acquiring Fund, in such form as is reasonably satisfactory to
KA Funds, on behalf of the Acquiring Fund, a statement certified by an officer
of Sefton Trust of such Acquired Fund's income and gains or losses for federal
income tax purposes that will be carried over to the Acquiring Fund pursuant to
Section 381 of the Code.
4.6 KA Funds, on behalf of each Acquiring Fund, has prepared and filed, or
will prepare and file with the Securities and Exchange Commission (the "SEC") a
registration statement on Form N-14 under the Securities Act of 1933, as amended
(the "1933 ACT"), relating to the Acquiring Fund Shares (the "REGISTRATION
STATEMENT"). Sefton Trust, on behalf of each Acquired Fund, has provided or will
provide the corresponding Acquiring Fund with the Proxy Materials for inclusion
in the Registration Statement, prepared in accordance with paragraph 4.1, and
with such other information and documents relating to each Acquired Fund as are
requested by the corresponding Acquiring Fund and as are reasonably necessary
for the preparation of the Registration Statement.
4.7 KA Funds, on behalf of the Kayne Anderson Intermediate Tax-Free Bond
Fund (the "KA TAX-FREE FUND"):
(a) has called or will call a meeting of the shareholders of the KA
Tax-Free Fund to consider and act upon a change of its investment objective and
strategy to become consistent with the exclusive focus on income exempt from
California and federal income tax of the Sefton California Tax-Free Fund;
(b) will prepare appropriate proxy materials for mailing to the
shareholders of that fund and complete the required filing of preliminary and
definitive versions of those proxy materials with the SEC; and
(c) will prepare and file an amendment to the KA Tax-Free Fund's
Prospectus and Statement of Additional Information to reflect that proposed and
final change to the investment objective and strategy.
4.8 As soon after the Closing Date as is reasonably practicable, Sefton
Trust, on behalf of each Acquired Fund:
(a) shall prepare and file all federal and other tax returns and
reports of the Acquired Fund required by law to be filed with respect to all
periods ending on or before the Closing Date but not previously filed and
(b) shall pay all federal and other taxes shown as due thereon and/or
all federal and other taxes that were unpaid as of the Closing Date.
4.9 With respect to each Acquiring Fund, KA Funds agrees to use all
reasonable efforts to operate in accordance with its then-current Prospectus and
Statement of Additional Information prepared in accordance with Form N-1A,
including qualifying as a regulated investment company under Subchapter M of the
Code for fiscal years after the Closing Date.
6
<PAGE>
4.10 Following the transfer of assets by each Acquired Fund to the
corresponding Acquiring Fund in exchange for Acquiring Fund Shares and the
assumption of the Stated Liabilities of the Acquired Fund as contemplated
herein, Sefton Trust will file any final regulatory reports, including but not
limited to any Form N-SAR and Rule 24f-2 filings with respect to such Acquired
Fund(s), promptly after the Closing Date and also will take all other steps as
are necessary and proper to effect the termination or declassification of such
Acquired Funds of Sefton Trust in accordance with the laws of State of Delaware
and other applicable requirements.
5. REPRESENTATIONS AND WARRANTIES
5.1 KA Funds, on behalf of itself and each Acquiring Fund, represents and
warrants to the Sefton Trust as follows:
(a) KA Funds was duly created pursuant to its Agreement and
Declaration of Trust by its Trustees for the purpose of acting as a management
investment company under the Investment Company Act of 1940 (the "1940 ACT") and
is validly existing under the laws of the State of Delaware, and the Declaration
of Trust directs those Trustees to manage the affairs of KA Funds and grants
them all powers necessary or desirable to carry out such responsibility,
including supervision of KA Funds' business as currently conducted by KA Funds
and as described in the current Prospectus of KA Funds; KA Funds is registered
as an investment company classified as an open-end management company under the
1940 Act and its registration with the SEC as an investment company is in full
force and effect;
(b) The Registration Statement and the current Prospectus and
Statement of Additional Information of each Acquiring Fund conform or will
conform, at all times up to and including the Closing Date, in all material
respects to the applicable requirements of the 1933 Act and the 1940 Act and the
regulations thereunder and do not include or will not include any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(c) No Acquiring Fund is in violation of, and the execution, delivery
and performance of this Agreement by KA Funds for itself and on behalf of each
Acquiring Fund will not violate KA Funds' Agreement and Declaration of Trust or
By-Laws, and that execution, delivery and performance will not result in a
breach or violation of, or constitute a default under, any material agreement or
material instrument to which KA Funds is a party or by which its properties or
assets are bound;
(d) No litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or, to KA Funds'
knowledge, threatened against KA Funds or its business, the Acquiring Funds or
any of their properties or assets, which, if adversely determined, would
materially and adversely affect KA Funds or an Acquiring Fund's financial
condition or the conduct of its business, and KA Funds knows of no facts that
might form the basis for the institution of any such proceeding or
investigation, and no Acquiring Fund is a party to or subject to the provisions
of any order, decree or judgment of any court or governmental body which
materially and adversely affects, or is reasonably likely to materially and
adversely affect, its business or its ability to consummate the transactions
contemplated herein;
7
<PAGE>
(e) All issued and outstanding shares, including Acquiring Fund
Shares, of each Acquiring Fund will, as of the Closing Date, be duly authorized
and validly issued and outstanding, fully paid and non-assessable and no
Acquiring Fund has outstanding any option, warrants or other rights to subscribe
for or purchase any of its shares;
(f) The execution, delivery and performance of this Agreement on
behalf of each Acquiring Fund will have been duly authorized before the Closing
Date by all necessary action on the part of KA Funds, its Trustees and each
Acquiring Fund, and this Agreement will constitute a valid and binding
obligation of KA Funds and each Acquiring Fund enforceable in accordance with
its terms, subject as to enforcement, to bankruptcy, insolvency, reorganization,
arrangement, moratorium and other similar laws of general applicability relating
to or affecting creditors' rights and to general equity principles;
(g) The Acquiring Fund Shares to be issued and delivered to the
corresponding Acquired Fund for the account of the Acquired Fund Investors,
pursuant to the terms hereof, will have been duly authorized as of the Closing
Date and, when so issued and delivered, will be duly and validly issued, fully
paid and non-assessable, and the shares of each class of each Acquiring Fund
issued and outstanding before the Closing Date were offered and sold in
compliance with the applicable registration requirements, or exemptions
therefrom, of the 1933 Act, and all applicable state securities laws, and the
regulations thereunder;
(h) On the effective date of the Registration Statement, at the time
of the meeting of the Acquired Fund shareholders and on the Closing Date, any
written information furnished by KA Funds with respect to an Acquiring Fund for
use in the Proxy Materials, the Registration Statement or any other materials
provided in connection with the Reorganization does not and will not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the information provided not misleading;
(i) No governmental consents, approvals, authorizations or filings are
required under the 1933 Act, the Securities Exchange Act of 1934 (the "1934
ACT"), the 1940 Act or Delaware law for the execution of this Agreement by KA
Funds, for itself and on behalf of each Acquiring Fund, or the performance of
the Agreement by KA Funds, for itself and on behalf of each Acquiring Fund,
except for such consents, approvals, authorizations and filings as have been
made or received or expressly specified in this Agreement, and except for such
consents, approvals, authorizations and filings as may be required only after
the Closing Date;
(j) The Statement of Assets and Liabilities, Statement of Operations
and Statement of Changes in Net Assets of each Acquiring Fund as of and for the
year ended December 31, 1998, audited by Briggs, Bunting & Dougherty, LLP
(copies of which have been or will be furnished to the corresponding Acquired
Fund) fairly present, in all material respects, each Acquiring Fund's financial
condition as of such date and its results of operations for such period in
accordance with generally accepted accounting principles consistently applied
and as of such dates there were no liabilities of any Acquiring Fund (contingent
or otherwise) known to KA Funds that were not disclosed therein but that would
be required to be disclosed therein in accordance with generally accepted
accounting principles;
(k) Since the date of the most recent audited financial statements,
there has not been any material adverse change in any Acquiring Fund's financial
condition, assets, liabilities or business, other than changes occurring in the
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ordinary course of business or changes reflected in unaudited financial
statements as of and for the period ended June 30, 1999 (for the purposes of
this subparagraph (k), a decline in an Acquiring Fund's net asset value shall
not be deemed to constitute a material adverse change);
(l) For each full and partial taxable year from its inception through
the Closing Date, each Acquiring Fund has qualified as a separate regulated
investment company under Subchapter M of the Code and has taken all necessary
and required actions to maintain such status; and
(m) All federal and other tax returns and reports of KA Funds and each
Acquiring Fund required by law to be filed on or before the Closing Date have
been or will be filed, and all federal and other taxes owed by KA Funds on
behalf of the Acquiring Funds have been or will be paid so far as due, and to
the best of KA Funds' knowledge, no such return is currently under audit and no
assessment has been asserted with respect to any such return.
5.2 Sefton Trust, on behalf of itself and each Acquired Fund, represents
and warrants to KA Funds as follows:
(a) Sefton Trust was duly created pursuant to its Agreement and
Declaration of Trust by its Trustees for the purpose of acting as a management
investment company under the 1940 Act and is validly existing under the laws of
the State of Delaware, and the Agreement and Declaration of Trust directs those
Trustees to manage the affairs of Sefton Trust and grants them all powers
necessary or desirable to carry out such responsibility, including supervision
of Sefton Trust's business as currently conducted by Sefton Trust and as
described in the current Prospectus of Sefton Trust; Sefton Trust is registered
as an investment company classified as an open-end management company under the
1940 Act and its registration with the SEC as an investment company is in full
force and effect;
(b) All of the issued and outstanding shares representing units of
beneficial interest of each Acquired Fund have been offered and sold in
compliance in all material respects with applicable registration requirements of
the 1933 Act and state securities laws;
(c) No Acquired Fund is in violation of, and the execution and the
performance of the Agreement by Sefton Trust for itself and on behalf of each
Acquired Fund will not violate Sefton Trust's Agreement and Declaration of Trust
or By-Laws, and that execution, delivery and performance will not result in a
breach or violation of, or constitute a default under, any term of any material
agreement or material instrument to which Sefton Trust is a party or by which
its properties or assets are bound;
(d) No litigation or administrative proceeding or investigation of or
before any court or governmental body is presently pending or, to Sefton Trust's
knowledge, threatened against Sefton Trust or its business, the Acquired Funds
or any of their properties or assets, which, if adversely determined, would
materially and adversely affect Sefton Trust or an Acquired Fund's financial
condition or the conduct of its business, and Sefton Trust knows of no facts
that might form the basis for the institution of any such proceeding or
investigation, and no Acquired Fund is a party to or subject to the provisions
of any order, decree or judgment of any court or governmental body that
materially and adversely affects, or is reasonably likely to materially and
adversely affect, its business or its ability to consummate the transactions
contemplated herein;
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(e) The Statement of Assets and Liabilities, Statement of Operations
and Statement of Changes in Net Assets of each Acquired Fund as of and for the
year ended December 31, 1998, audited by PricewaterhouseCoopers LLP (copies of
which have been or will be furnished to each Acquiring Fund) fairly present, in
all material respects, each Acquired Fund's financial condition as of such date
and its results of operations for such period in accordance with generally
accepted accounting principles consistently applied, and as of such date there
were no liabilities of any Acquired Fund (contingent or otherwise) known to
Sefton Trust that were not disclosed therein but that would be required to be
disclosed therein in accordance with generally accepted accounting principles;
(f) Since the date of the most recent audited financial statements,
there has not been any material adverse change in any Acquired Fund's financial
condition, assets, liabilities or business, other than changes occurring in the
ordinary course of business or changes reflected in unaudited financial
statements as of and for the period ended June 30, 1999, or any incurrence by an
Acquired Fund of indebtedness maturing more than one year from the date such
indebtedness was incurred, except as otherwise disclosed in writing to and
accepted by the corresponding Acquiring Fund before the Closing Date (for the
purposes of this subparagraph (f), a decline in an Acquired Fund's net asset
value per share shall not be deemed to constitute a material adverse change);
(g) SCHEDULE 5.2 attached to this Agreement contains a complete list
of all liabilities of each Acquired Fund as of a date within 30 days of the date
hereof (except for non-material liabilities incurred in the ordinary course of
business).
(h) All federal and other tax returns and reports of Sefton Trust and
each Acquired Fund required by law have been or will be filed, and all federal
and other taxes owed by Sefton Trust or the Acquired Fund shall, with respect to
all period ending on or before the Closing Date, have been or will be paid so
far as due, and to the best of Sefton Trust's knowledge, no such return is
currently under audit and no assessment has been asserted with respect to any
such return;
(i) For each full and partial taxable year from its inception through
the Closing Date, each Acquired Fund has qualified as a separate regulated
investment company under Subchapter M of the Code and has taken all necessary
and required actions to maintain such status;
(j) All issued and outstanding shares of each Acquired Fund are, and
on the Closing Date will be, duly authorized and validly issued and outstanding,
and fully paid and non-assessable, and all such shares will, at the time of the
Closing, be held by the persons and in the amounts set forth in the list of
Acquired Fund Investors provided to the corresponding Acquiring Fund, pursuant
to paragraph 3.4, and no Acquired Fund has outstanding any options, warrants or
other rights to subscribe for or purchase any of its shares, nor is there
outstanding any security convertible into any of its shares;
(k) At the Closing Date, each Acquired Fund will have good and
marketable title to its Fund Assets and full right, power and authority to
assign, deliver and otherwise transfer such Fund Assets hereunder, and upon
delivery and payment for such Fund Assets as contemplated herein, the
corresponding Acquiring Fund will acquire good and marketable title thereto,
subject to no restrictions on the ownership or transfer thereof other than such
restrictions as might arise under the 1933 Act;
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(l) The execution, delivery and performance of this Agreement on
behalf of each Acquired Fund will have been duly authorized before the Closing
Date by all necessary action on the part of Sefton Trust, its Trustees and each
Acquired Fund, and this Agreement will constitute a valid and binding obligation
of Sefton Trust and each Acquired Fund enforceable in accordance with its terms,
subject as to enforcement, to bankruptcy, insolvency, reorganization,
arrangement, moratorium and other similar laws of general applicability relating
to or affecting creditors' rights and to general equity principles;
(m) From the effective date of the Registration Statement, through the
time of the meeting of the Acquired Fund Investors, and on the Closing Date, the
Proxy Materials: (i) comply in all material respects with the applicable
provisions of the 1933 Act, the 1934 Act and the 1940 Act and the regulations
thereunder and (ii) do not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and as of such dates and times, any
written information furnished by Sefton Trust, on behalf of the Acquired Funds,
for use in the Registration Statement or in any other manner that may be
necessary in connection with the transactions contemplated hereby does not
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the information provided not misleading; and
(n) No governmental consents, approvals, authorizations or filings are
required under the 1933 Act, the 1934 Act, the 1940 Act or Delaware law for the
execution of this Agreement by Sefton Trust, for itself and on behalf of each
Acquired Fund, or the performance of the Agreement by Sefton Trust for itself
and on behalf of each Acquired Fund, except for such consents, approvals,
authorizations and filings as have been made or received or expressly specified
in this Agreement, and except for such consents, approvals, authorizations and
filings as may be required only after the Closing Date.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF ACQUIRED FUNDS
The obligations of Sefton Trust to consummate the Reorganization with
respect to each Acquired Fund shall be subject to the performance by KA Funds,
for itself and on behalf of each Acquiring Fund, of all the obligations to be
performed by it hereunder on or before the Closing Date and, in addition
thereto, the following conditions:
6.1 All representations and warranties of KA Funds with respect to the
Acquiring Funds contained herein shall be true and correct in all material
respects as of the date hereof and, except as they may be affected by the
transactions contemplated herein, as of the Closing Date with the same force and
effect as if made on and as of the Closing Date.
6.2 KA Funds, on behalf of each Acquiring Fund, shall have delivered to
Sefton Trust at the Closing a certificate executed on behalf of the
corresponding Acquiring Fund by KA Funds' President, Treasurer or Secretary, in
a form reasonably satisfactory to the Sefton Trust and dated as of the Closing
Date, to the effect that the representations and warranties of KA Funds with
respect to each Acquiring Fund made herein are true and correct at and as of the
Closing Date, except as they may be affected by the transactions contemplated
herein.
6.3 Sefton Trust shall have received at the Closing a favorable opinion of
Paul, Hastings, Janofsky & Walker, LLP, counsel to KA Funds (based upon or
subject to such representations, assumptions and limitations as such counsel may
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<PAGE>
deem appropriate or necessary), dated as of the Closing Date, in a form
(including the representations, assumptions and limitations or opinions of local
counsel upon which it is based or to which it is subject) reasonably
satisfactory to Sefton Trust, substantially to the effect that:
(a) KA Funds is a duly registered, open-end, management investment
company, and its registration with the SEC as an investment company under the
1940 Act is in full force and effect;
(b) each Acquiring Fund is a duly designated series of KA Funds, which
is a business trust created pursuant to its Certificate of Trust and/or
Agreement and Declaration of Trust, is legally existing and in good standing
under the laws of the State of Delaware, and the Agreement and Declaration of
Trust directs the Trustees to manage the affairs of KA Funds and grants them all
powers necessary or desirable to carry out such responsibility, including
supervising KA Funds' business as described in the current Prospectuses of KA
Funds;
(c) this Agreement has been duly authorized, executed and delivered on
behalf of KA Funds and each Acquiring Fund and, assuming due authorization,
execution and delivery of this Agreement on behalf of the Acquired Funds, is a
valid and binding obligation of KA Funds enforceable against KA Funds in
accordance with its terms, subject as to enforcement, to bankruptcy, insolvency,
reorganization, arrangement, moratorium and other similar laws of general
applicability relating to or affecting creditors' rights and to general equity
principles;
(d) the Acquiring Fund Shares to be issued to the Acquired Funds
Investors pursuant to this Agreement are duly registered under the 1933 Act on
the appropriate form, and are duly authorized and upon such issuance will be
validly issued and outstanding and fully paid and non-assessable, and no
shareholder of an Acquiring Fund has any preemptive rights to subscription or
purchase in respect thereof;
(e) the Registration Statement has become effective with the SEC and,
to the best of such counsel's knowledge, no stop order suspending the
effectiveness thereof has been issued and no proceedings for that purpose have
been instituted or are pending or threatened;
(f) no consent, approval, authorization, filing or order of any court
or governmental authority of the United States or any state is required for the
consummation by KA Funds of the Reorganization with respect to each Acquiring
Fund, except for such consents, approvals, authorizations and filings as have
been made or received, and except for such consents, approvals, authorizations
and filings as may be required after the Closing Date; and
(g) to the best knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to KA Funds or an
Acquiring Fund or any of their properties or assets and neither KA Funds nor any
Acquiring Fund is a party to or subject to the provisions of any order, decree
or judgment of any court or governmental body that materially and adversely
affects its business.
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<PAGE>
6.4 As of the Closing Date with respect to the Reorganization of each
Acquired Fund, there shall have been no material change in the investment
objective, policies and restrictions nor any material change in the investment
management fees, other fees payable for services provided to the Acquiring
Funds, fee reduction or expense reimbursement undertakings, or sales loads of
the Acquiring Funds from those fee amounts, undertakings and sales load amounts
described in the Prospectus of each Acquiring Fund delivered to the
corresponding Acquired Fund pursuant to paragraph 4.1 and in the Proxy
Materials.
6.5 With respect to each Acquiring Fund, the Board of Trustees of KA Funds
shall have determined that the Reorganization is in the best interests of the
Acquiring Fund and that the interests of the existing shareholders of the
Acquiring Fund would not be diluted as a result of the Reorganization.
6.6 The shareholders of the KA Tax-Free Fund shall have approved the change
of its objective and strategy specified in subparagraph 4.7(a).
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF ACQUIRING FUNDS
The obligations of KA Funds to consummate the Reorganization with respect
to each Acquiring Fund shall be subject to the performance by Sefton Trust for
itself and on behalf of each Acquired Fund, of all the obligations to be
performed by it hereunder on or before the Closing Date and, in addition
thereto, the following conditions:
7.1 All representations and warranties of Sefton Trust with respect to the
Acquired Funds contained herein shall be true and correct in all material
respects as of the date hereof and, except as they may be affected by the
transactions contemplated by this Agreement, as of the Closing Date, with the
same force and effect as if made on and as of the Closing Date.
7.2 Sefton Trust, on behalf of each Acquired Fund, shall have delivered to
KA Funds at the Closing a certificate executed on behalf of each Acquired Fund,
by Sefton Trust's President, Treasurer or Secretary, in a form satisfactory to
KA Funds and dated as of the Closing Date, to the effect that the
representations and warranties of Sefton Funds with respect to each Acquired
Fund made herein is true and correct at and as of the Closing Date, except as
they may be affected by the transactions contemplated herein.
7.3 KA Funds shall have received at the Closing a favorable opinion of
Ropes & Gray, counsel to the disinterested Trustees of Sefton Trust (based upon
or subject to such representations, assumptions, limitations and supporting
certificates from officers of Sefton Trust as such counsel may deem appropriate
or necessary), dated as of the Closing Date, in a form (including the
representations, assumptions, limitations and certificates upon which it is
based or to which it is subject) reasonably satisfactory to KA Funds,
substantially to the effect that:
(a) Sefton Trust is a duly registered, open-end investment company,
and its registration with the SEC as an investment company under the 1940 Act is
in full force and effect;
(b) each Acquired Fund is a duly designated series of Sefton Trust,
which is a business trust created pursuant to its Certificate of Trust and/or
Agreement and Declaration of Trust, is legally existing and in good standing
under the laws of the State of Delaware, and the Agreement and Declaration of
Trust directs the Trustees to manage the affairs of Sefton Trust and grants them
13
<PAGE>
all powers necessary or desirable to carry out such responsibility, including
supervising Sefton Trust's business as described in the current Prospectuses of
Sefton Trust;
(c) this Agreement has been duly authorized, executed and delivered by
Sefton Trust on behalf of each Acquired Fund and, assuming due authorization,
execution and delivery of this Agreement on behalf of the Acquiring Funds, is a
valid and binding obligation of Sefton Trust, enforceable against Sefton Trust
in accordance with its terms, subject as to enforcement, to bankruptcy,
insolvency, reorganization, arrangement, moratorium and other similar laws of
general applicability relating to or affecting creditors' rights and to general
equity principles;
(d) no consent, approval, authorization, filing or order of any court
or governmental authority of the United States or any state is required for the
consummation of the Reorganization with respect to each Acquired Fund, except
for such consents, approvals, authorizations and filings as have been made or
received, and except for such consents, approvals, authorizations and filings as
may be required after the Closing Date; and
(e) to the best knowledge of such counsel, no litigation or
administrative proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to Sefton Trust or an
Acquired Fund or any of their properties or assets and neither Sefton Trust nor
an Acquired Fund is a party to or subject to the provisions of any order, decree
or judgment of any court or governmental body that materially and adversely
effects its business.
7.4 KA Funds, on behalf of each Acquiring Fund, shall have received from
PricewaterhouseCoopers LLP, a letter addressed to KA Funds, on behalf of each
Acquiring Fund, and dated as of the Closing Date with respect to the Acquired
Funds, in form and substance satisfactory to KA Funds, to the effect that:
(a) they are independent accountants with respect to Sefton Trust and
each Acquired Fund within the meaning of the 1933 Act and the applicable
regulations thereunder;
(b) in their opinion, the audited financial statements and the Per
Share Data provided in accordance with Item 9 in new Form N-1A (the "PER SHARE
DATA") of each Acquired Fund included or incorporated by reference in the
Registration Statement and Proxy Statement and previously reported on by them
comply as to form in all material aspects with the applicable accounting
requirements of the 1933 Act and the published rules and regulations thereunder;
(c) on the basis of limited procedures agreed upon by KA Funds, on
behalf of the Acquiring Funds and Sefton Trust, on behalf of the Acquired Funds,
and described in such letter (but not an examination in accordance with
generally accepted auditing standards), the information relating to the Acquired
Funds appearing in the Registration Statement and Proxy Statement that is
expressed in dollars or percentages of dollars (with the exception of
performance comparisons) has been obtained from the accounting records of the
Acquired Funds or from schedules prepared by officers of Sefton Trust having
responsibility for financial and reporting matters and such information is in
agreement with such records, schedules or computations made therefrom.
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<PAGE>
7.5 Sefton Trust shall have delivered to the Acquiring Funds, pursuant to
paragraph 5.2(e), copies of financial statements of each Acquired Fund as of and
for the period ended December 31, 1998, audited by PricewaterhouseCoopers LLP.
7.6 With respect to each Acquired Fund, the Board of Trustees of Sefton
Trust shall have determined that the Reorganization is in the best interests of
the Acquired Fund and that the interests of the existing investors in the
Acquired Fund would not be diluted as a result of the Reorganization.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUNDS AND
THE ACQUIRED FUNDS
The obligations of each Acquiring Fund and of the corresponding Acquired
Fund herein are each subject to the further conditions that on or before the
Closing Date with respect to each Acquiring Fund and the corresponding Acquired
Fund:
8.1 This Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of
beneficial interest in the Acquired Fund in accordance with the provisions of
Sefton Trust's Agreement and Declaration of Trust and the requirements of the
1940 Act, and certified copies of the resolutions evidencing such approval shall
have been delivered to KA Funds.
8.2 On the Closing Date, no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with, this
Agreement or any of the transactions contemplated herein.
8.3 All consents of other parties and all other consents, orders, approvals
and permits of federal, state and local regulatory authorities (including,
without limitation, those of the SEC and of state securities authorities) deemed
necessary by KA Funds, on behalf of the Acquiring Funds, or by Sefton Trust, on
behalf of the Acquired Funds, to permit consummation, in all material respects,
of the transactions contemplated herein shall have been obtained, except where
failure to obtain any such consent, order or permit would not, in the opinion of
the party asserting that the condition to closing has not been satisfied,
involve a risk of a material adverse effect on the assets or properties of any
of an Acquiring Fund or its corresponding Acquired Fund.
8.4 The Registration Statement shall have become effective under the 1933
Act, no stop orders suspending the effectiveness thereof shall have been issued
and, to the best knowledge of the parties hereto, no investigation or proceeding
for that purpose shall have been instituted or be pending, threatened or
contemplated under the 1933 Act.
8.5 Each Acquired Fund shall have declared a dividend or dividends which,
together with all previous such dividends, shall have the effect of distributing
to the Acquired Fund's shareholders substantially all of the Acquired Fund's
investment company taxable income for all taxable years ending on or before the
Closing Date (computed without regard to any deduction for dividends paid) and
substantially all of its net capital gain for all taxable years ending on or
before the Closing Date (after reduction for any capital loss carry forward).
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8.6 The Acquiring Funds and the Acquired Funds shall have received from
Briggs, Bunting & Dougherty, LLP a letter dated as of the Closing Date, in form
and substance satisfactory to KA Funds and to Sefton Trust, to the effect that
on the basis of limited procedures agreed upon by KA Funds, on behalf of the
Acquiring Funds, and Sefton Trust, on behalf of the Acquired Funds (but not an
examination in accordance with generally accepted auditing standards): (i) the
data utilized in the calculations of the projected expense ratio appearing in
the Registration Statement and Proxy Materials agree with underlying accounting
records of the Acquiring Funds and the Acquired Funds and were found to be
mathematically correct; and (ii) the calculation of net asset value per share of
each Acquired Fund as of the Valuation Date was determined in accordance with
generally accepted accounting practices and the corresponding portfolio
valuation practices of the Acquiring Fund.
8.7 KA Funds and the Sefton Trust shall have received the opinions of Ropes
& Gray, addressed to both the Acquiring Funds and the Acquired Funds
substantially to the effect that, for federal income tax purposes with respect
to each Acquired Fund and the corresponding Acquiring Fund:
(a) No gain or loss will be recognized by the Acquiring Fund upon the
receipt of the assets of the Acquired Fund in exchange for Acquiring Fund Shares
and the assumption by the Acquiring Fund of the liabilities of the Acquired
Fund.
(b) The basis in the hands of the Acquiring Fund of the assets of the
Acquired Fund transferred to the Acquiring Fund in the Reorganization will be
the same as the basis of such assets in the hands of the Acquired Fund
immediately prior to the transfer;
(c) The holding periods of the assets of the Acquired Fund in the
hands of Acquiring Fund will include the periods during which such assets were
held by the Acquired Fund;
(d) No gain or loss will be recognized by the Acquired Fund upon the
transfer of the Acquired Fund's assets to the Acquiring Fund in exchange for the
Acquiring Fund Shares and the assumption by the Acquiring Fund of the
liabilities of the Acquired Fund, or upon the distribution of the Acquiring Fund
Shares by the Acquired Fund to its shareholders in liquidation;
(e) No gain or loss will be recognized by the Acquired Fund
shareholders upon the exchange of their Acquired Fund Shares for Acquiring Fund
Shares;
(f) The aggregate basis of Acquiring Fund Shares an Acquired Fund
shareholder receives in connection with the Transaction will be the same as the
aggregate basis of his or her Acquired Fund Shares exchanged therefor; and
(g) An Acquired Fund shareholder's holding period for his or her
Acquiring Fund Shares will be determined by including the period for which he or
she held the Acquired Fund Shares exchanged therefor, provided that he or she
held such the Acquired Shares as capital assets.
Notwithstanding anything herein to the contrary, neither an Acquiring Fund nor
its corresponding Acquired Fund may waive the condition set forth in this
paragraph 8.7.
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9. BROKERAGE FEES AND EXPENSES
9.1 KA Funds, for itself and on behalf of the Acquiring Funds, and Sefton
Trust, on behalf of itself and on behalf of the Acquired Funds, represent and
warrant that there are no brokers or finders entitled to receive any payments in
connection with the transactions provided for herein.
9.2 Except as may be otherwise provided herein, each Acquired Fund and each
Acquiring Fund shall be liable for their respective expenses incurred in
connection with entering into and carrying out the provisions of this Agreement,
whether or not the transactions contemplated hereby are consummated. The
expenses payable by each Acquired Fund hereunder shall include (i) fees and
expenses of its counsel, counsel to its independent Trustees and independent
accountants incurred in connection with the Reorganization; (ii) all fees and
expenses related to its liquidation and related withdrawals of registration and
notices and the preparation of required reports, and the preparation and filing
of tax returns for each Acquired Fund; (iii) fees and expenses of the Acquired
Fund's custodian, administrative, accounting and transfer agents incurred until
the Reorganization; and (iv) any special pricing fees associated with the
valuation of an Acquired Fund's portfolio on the Applicable Valuation Date. The
expenses payable by each Acquiring Fund hereunder shall include (v) fees and
expenses of its counsel and independent accountants incurred in connection with
the Reorganization; (vi) expenses associated with preparing this Agreement and
preparing and filing the Registration Statement under the 1933 Act covering the
Acquiring Fund Shares to be issued in the Reorganization; (vii) fees and
expenses of preparing and filing such forms, if any, as are necessary under
applicable state securities laws to qualify the Acquiring Fund Shares to be
issued in connection with the Reorganization; (viii) any fees and expenses of
the Acquiring Fund's custodian and transfer agent(s) incurred in connection with
the Reorganization; and (ix) any special pricing fees associated with the
valuation of an Acquiring Fund's portfolio on an Applicable Valuation Date.
Kayne Anderson Investment Management, LLC ("KAIM"), the investment manager for
the Acquiring Funds, agrees to reimburse the Acquiring Funds for the expenses
otherwise payable by the Acquiring Funds under subparagraphs (v), (vi), and
(viii). KAIM also agrees to reimburse the Acquired Funds for the reasonable fees
and expenses described in subparagraphs (i) and (ii) above and the reasonable
printing and postage costs incurred by the Acquired Funds to print and mail the
Proxy Materials to shareholders of the Acquired Funds. Sefton Capital Management
agrees to reimburse the Acquired Funds for the expenses otherwise payable by the
Acquired Funds for fees and expenses described in subparagraphs (i) and (ii)
above that are not required to be reimbursed by KAIM.
10. ENTIRE AGREEMENT; SURVIVAL OF REPRESENTATIONS AND WARRANTIES
10.1 This Agreement constitutes the entire agreement between the parties
and supersedes any prior or contemporaneous understanding or arrangement with
respect to the subject matter hereof.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall not survive the consummation of the transactions contemplated herein
except to the extent expressly provided in paragraph 14.7.
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11. TERMINATION
11.1 This Agreement may be terminated and the transactions contemplated
hereby may be abandoned at any time before the Closing:
(a) by the mutual written consent of KA Funds and Sefton Trust;
(b) by either KA Funds or Sefton Trust by notice to the other, without
liability to the terminating party on account of such termination (provided any
such termination shall not excuse the terminating party from any liability
arising out of a default or breach of this Agreement by such terminating party)
if such Closing shall not have occurred on or before December 31, 1999; or
(c) by either KA Funds or Sefton Trust, without liability to the
terminating party on account of such termination (provided any such termination
shall not excuse the terminating party from any liability arising out of a
material default or breach of this Agreement by such terminating party), if (i)
the other party shall fail to perform in any material respect its agreements
contained herein required to be performed before the Closing Date, (ii) the
other party materially breaches or shall have breached any of its
representations, warranties or covenants contained herein, or (iii) any other
express condition precedent to the obligations of the terminating party has not
been met and it reasonably appears that it will not or cannot be met.
11.2 Termination of this Agreement pursuant to paragraphs 11.1(a) or (b)
shall terminate all obligations of the parties hereunder with respect to each
Acquired Fund and Acquiring Fund affected by such termination, or with respect
to KA Funds and Sefton Trust, as the case may be, and there shall be no
liability for damages on the part of KA Funds or Sefton Trust or the trustees or
officers of KA Funds or Sefton Trust, to any other party or its trustees or
officers on account of termination pursuant to paragraphs 11.1(a) or (b);
provided, however, that notwithstanding any termination of this Agreement
pursuant to paragraph 11.1, such termination shall not relieve either party of
its respective obligations pursuant to Section 9.2 hereof.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the authorized officers of KA Funds,
acting on behalf of each Acquiring Fund, and the authorized officers of Sefton
Trust, acting on behalf of each Acquired Fund; provided, however, that following
the meeting of the shareholders of the Acquired Funds, no such amendment may
have the effect of changing the provisions for determining the number of shares
of the corresponding Acquiring Funds to be issued to the Acquired Fund Investors
under this Agreement to the detriment of such Acquired Fund Investors, or
otherwise materially and adversely affecting such Acquired Fund, without the
Acquired Fund's obtaining the Acquired Fund Investors' further approval except
that nothing in this paragraph 12 shall be construed to prohibit any Acquiring
Fund and the corresponding Acquired Fund from amending this Agreement to change
the Closing Date or Applicable Valuation Date by mutual agreement.
18
<PAGE>
13. NOTICES
Any notice, report, statement or demand required or permitted by any
provision of this Agreement shall be in writing and shall be given by prepaid
telegraph, telecopy, certified mail or overnight express courier addressed to:
For KA Funds, on behalf of itself and the Acquiring Funds:
David J. Shladovsky, Esq.
Kayne Anderson Investment Management, LLC
1800 Avenue of the Stars, 2nd Floor
Los Angeles, California 90067
With copies to:
David A. Hearth, Esq.
Paul, Hastings, Janofsky & Walker, LLP
345 California Street. 29th Floor
San Francisco, California 94104
For Sefton Trust, on behalf of itself and the Acquired Funds:
Harley K. Sefton
Sefton Capital Management
2550 Fifth Avenue, Suite 808
San Diego, Califorina 92103
With copies to:
Martin E. Lybecker, Esq.
Ropes & Gray
One Franklin Square
Suite 800 East
1301 K Street, N.W.
Washington, D.C. 20005-3900
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT; LIMITATION OF LIABILITY
14.1 The article and paragraph headings contained herein are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement. All references herein to Articles, paragraphs, subparagraphs or
Schedules shall be construed as referring to Articles, paragraphs or
subparagraphs hereof or Schedules hereto, respectively. Whenever the terms
hereto, hereunder, herein or hereof are used in this Agreement, they shall be
construed as referring to this entire Agreement, rather than to any individual
Article, paragraph, subparagraph or sentence.
14.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware.
19
<PAGE>
14.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the written consent of the other parties. Nothing herein expressed
or implied is intended or shall be construed to confer upon or give any person,
firm or corporation, other than the parties hereto and their respective
successors and assigns, any rights or remedies under or by reason of this
Agreement.
14.5 It is expressly agreed that the obligations of KA Funds hereunder
shall not be binding upon any of the Trustees, shareholders, nominees, officers,
agents, or employees of KA Funds personally, but shall bind only the assets and
the property of the respective Acquiring Fund of KA Funds, as provided in its
Agreement and Declaration of Trust. The execution and delivery by such officers
shall not be deemed to have been made by any of them individually or to impose
any liability on any of them personally, but shall bind only the assets and the
property of the respective Acquiring Fund of KA Funds as provided in its
Agreement and Declaration of Trust.
14.6 Except to the extent expressly provided in paragraph 14.7 below with
respect to Sefton Capital Management, it is expressly agreed that the
obligations of Sefton Trust hereunder shall not be binding upon any of the
Trustees, shareholders, nominees, officers, agents, or employees of Sefton Trust
personally, but shall bind only the assets and the property of the respective
Acquired Fund of Sefton Trust, as provided in its Agreement and Declaration of
Trust. The execution and delivery by such officers shall not be deemed to have
been made by any of them individually or to impose any liability on any of them
individually or to impose any liability on any of them personally, but shall
bind only the assets and the property of the respective Acquired Fund of Sefton
Trust as provided in its Agreement and Declaration of Trust.
14.7 Sefton Capital Management shall indemnify and hold harmless KA Funds,
each Acquiring Fund and KAIM and all their respective affiliates, directors,
trustees, officers, employees and agents (collectively, the "KA Group") from and
against any and all claims, losses, judgments, liabilities, settlements, fines,
penalties, interest costs and expenses (including all reasonable attorneys' fees
and disbursements whether incurred in resolving indemnification issues between
or among parties to this Agreement or in defending third-party claims, and
collectively with such claims, etc., "LOSSES") that result from, arise out of or
are connected with any breach or alleged breach of any representation or
warranty set forth in paragraph 5.2 of this Agreement or any breach of any
covenant set forth in Article 4 and required to be performed by the Sefton Trust
or an Acquired Fund. Any member of the KA Group with an indemnification claim
for Losses under this paragraph 14.7 shall notify Harley K. Sefton in writing of
those Losses, together with a reasonably detailed description, within 30
calendar days after having formed a reasonable basis for those Losses. KAIM, on
behalf of the member of the KA Group with that indemnification claim, may offset
any amounts otherwise payable to Sefton Capital Management or Harley K. Sefton
in satisfaction of those Losses and may pursue any and all other appropriate
legal remedies. The representations and warranties set forth in paragraph 5.2
shall remain effective until the third anniversary of the Closing Date, but
shall not relate to any period after the Closing Date. The covenants set forth
in Article 4 and required to be performed by the Sefton Trust or an Acquired
Fund shall survive until fully performed or discharged.
14.8 KA Funds shall indemnify and hold harmless the Sefton Trust, each
Acquired Fund and Sefton Capital Management and all their respective affiliates,
directors, trustees, officers, employees and agents (collectively, the "SEFTON
GROUP") from and against any and all claims, losses, judgments, liabilities,
20
<PAGE>
settlements, fines, penalties, interest costs and expenses (including all
reasonable attorneys' fees and disbursements whether incurred in resolving
indemnification issues between or among parties to this Agreement or in
defending third-party claims, and collectively with such claims, etc., "LOSSES")
that result from, arise out of or are connected with any breach or alleged
breach of any representation or warranty set forth in paragraph 5.1 of this
Agreement or any breach of any covenant set forth in Article 4 and required to
be performed by the KA Funds or an Acquiring Fund. Any member of the Sefton
Group with an indemnification claim for Losses under this paragraph 14.8 shall
notify David J. Shladovsky in writing of those Losses, together with a
reasonably detailed description, within 30 calendar days after having formed a
reasonable basis for those Losses. Harley K. Sefton, on behalf of the member of
the Sefton Group with that indemnification claim, may pursue any and all
appropriate legal remedies. The representations and warranties set forth in
paragraph 5.1 shall remain effective until the third anniversary of the Closing
Date, but shall not relate to any period after the Closing Date. The covenants
set forth in Article 4 and required to be performed by the KA Trust or an
Acquiring Fund shall survive until fully performed or discharged.
21
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be duly executed by its authorized officer.
KAYNE ANDERSON MUTUAL FUNDS, for itself and on
behalf of each Acquiring Fund
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
SEFTON TRUST, for itself and on behalf of each
Acquired Fund
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
SEFTON CAPITAL MANAGEMENT, for the purpose of
paragraphs 9.2 and 14.7 only
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
22
<PAGE>
SCHEDULE A
Acquiring Fund Acquired Fund
- - - -------------- -------------
Kayne Anderson Rising Dividends Sefton Equity Value Fund
Fund
Kayne Anderson Small Cap Rising Dividend Sefton Small Company Value Fund
Fund
Kayne Anderson Intermediate Total Return Sefton U.S. Government Fund
Bond Fund
Kayne Anderson Intermediate Tax-Free Sefton California Tax-Free Fund
Bond Fund
23
<PAGE>
APPENDIX A
FORM OF PROXY
SEFTON FUNDS TRUST
SPECIAL MEETING OF SHAREHOLDERS
NOVEMBER __, 1999
SOLICITED ON BEHALF OF
THE BOARD OF TRUSTEES OF
SEFTON FUNDS TRUST
The undersigned hereby appoints Harley K. Sefton and ______________, and
each of them, as proxies of the undersigned, each with the power to appoint his
substitute, for the Special Meeting of Shareholders of the Fund noted below (the
"Fund"), a separate series of Sefton Funds Trust (the "Trust"), to be held on
November __, 1999 at the offices of the administrator for the Fund, BISYS Fund
Services, 3435 Stelzer Road, Columbus Ohio 43219, and at any and all
adjournments thereof (the "Meeting"), to vote, as designated below, all shares
of the Fund, held by the undersigned at the close of business on October 14,
1999. Capitalized terms used without definition have the meanings given to them
in the accompanying Combined Prospectus and Proxy Statement.
A signed proxy will be voted in favor of the Proposal listed below unless
you have specified otherwise. Please sign, date and return this proxy promptly.
You may vote only if you held shares in the Fund at the close of business on
October 14, 1999. Your signature authorizes the proxies to vote in their
discretion on such other business as may properly come before the Meeting
including, without limitation, all matters incident to the conduct of the
Meeting.
Please vote by filling in the boxes below.
3. A proposal to approve an Agreement and Plan of Reorganization (the
"Plan") for each Fund, and the transactions contemplated thereby,
which include (a) the transfer of all of the assets of Sefton U.S.
Government Fund, Sefton California Tax-Free Fund, Sefton Equity Value
Fund, and Sefton Small Company Value Fund (the "Target Funds") to
Kayne Anderson Intermediate Total Return Bond Fund, Kayne Anderson
Intermediate Tax-Free Bond Fund, Kayne Anderson Rising Dividends Fund
and Kayne Anderson Small Cap Rising Dividends Fund (the "Acquiring
Funds"), respectively, in exchange for shares of the corresponding
Acquiring Fund, and the assumption by each Acquiring Fund of stated
liabilities of the corresponding Target Fund (b) the distribution of
shares of the corresponding Acquiring Fund to shareholders of each
Target Fund, and, for the Sefton Small Company Value Fund shareholders
only, (c) the immediate increase to $3 billion as the maximum market
capitalization of small cap companies in which the Sefton Small
Company Value Fund may invest.
SHAREHOLDERS OF EACH TARGET FUND MUST VOTE SEPARATELY ON THE PROPOSAL FOR
THAT TARGET FUND.
<PAGE>
FOR [ ] AGAINST [ ] ABSTAIN [ ]
NOTE: ABSTENTIONS WILL HAVE THE EFFECT OF A VOTE AGAINST THE PROPOSAL.
Dated: ______________, 1999
- - - ------------------------ ---------------------------
Signature of Shareholder Signature of Shareholder
(if held jointly)
Name of Shareholder: ____________________
Title (if applicable): ____________________
[Address]
[Address]
[Fund Name]
[Shares Held]
Please sign exactly as name or names appear on your shareholder account
statement. When signing as attorney, trustee, executor, administrator,
custodian, guardian or corporate officer, please give full title. If shares are
held jointly, each shareholder should sign.
This proxy is solicited on behalf of the Board of Trustees and will be voted as
you direct on this form. If no direction is given, this proxy will be voted for
the proposal.
You may use this proxy only to vote shares of the above-named Fund. If you own
shares of more than one Fund in the Sefton family of mutual funds, you will
receive a separate Proxy for each Fund. You may not use this proxy to vote for
another Fund, or to vote shares of more than one Fund.
<PAGE>
-----------------------------------------
PART B
STATEMENT OF ADDITIONAL INFORMATION
FOR THE REORGANIZATION OF
SEFTON EQUITY VALUE FUND,
SEFTON SMALL COMPANY VALUE FUND
SEFTON U.S. GOVERNMENT FUND, AND
SEFTON CALIFORNIA TAX-FREE FUND
INTO
KAYNE ANDERSON RISING DIVIDENDS FUNDS,
KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND, AND
KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND
-----------------------------------------
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
------------------------------
1800 Avenue of the Stars, Second Floor
Los Angeles, California 90067
1-800-231-7414
------------------------------
STATEMENT OF ADDITIONAL INFORMATION
DATED OCTOBER __, 1999
FOR REGISTRATION STATEMENT ON FORM N-14
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Combined Proxy Statement and Prospectus dated
October __, 1999, which has been filed by Kayne Anderson Mutual Funds (the
"Trust") in connection with a Special Meeting of Shareholders of Sefton Equity
Value Fund, Sefton Small Company Value Fund, Sefton U.S. Government Fund and
Sefton California Tax-Free Fund, of Sefton Funds Trust that has been called to
vote on an Agreement and Plan of Reorganization (and the transactions
contemplated thereby). Copies of the Combined Proxy Statement and Prospectus may
be obtained at no charge by writing to Sefton Funds Trust at 3435 Stelzer Road,
Columbus, Ohio 43219 or by calling Sefton Funds Trust at (800) 524-2276; or by
writing to Kayne Anderson Mutual Funds at 1800 Avenue of the Starts, Second
Floor, Los Angeles, California 90067, or by calling Kayne Anderson Mutual Funds
at (800) 231-7414.
Unless otherwise indicated, capitalized terms used herein and not otherwise
defined have the same meanings as are given to them in the Combined Proxy
Statement and Prospectus.
Further information about the Kayne Anderson Rising Dividends Fund, Kayne
Anderson Small Cap Rising Dividends Fund, Kayne Anderson Intermediate Total
Return Bond Fund and Kayne Anderson Intermediate Tax-Free Bond Fund (each, an
"Acquiring Fund" and, together, the "Acquiring Funds") is contained in the
Acquiring Funds' Combined Prospectus dated May 5, 1999, the Annual Report of the
Acquiring Funds for the fiscal year ended December 31, 1998 and the Semi-Annual
Report for the period ended June 30, 1999. The Acquiring Funds' Statement of
Additional Information, dated May 5, 1999, is incorporated by reference in this
Statement of Additional Information and is available without charge by calling
the Kayne Anderson Mutual Funds at (800) 231-7414.
Further information about the Sefton Equity Value Fund, Sefton Small
Company Value Fund, Sefton U.S. Government Fund and Sefton California Tax-Free
Fund (each, a "Target Fund", and, together, the "Target Funds") is contained in
the Target Funds' Combined Prospectus dated April 30, 1999, and the Annual
Report of the Target Funds for the fiscal year ended December 31, 1998 and the
Semi-Annual Report for the period ended June 30, 1999. The Target Funds'
Statement of Additional Information, dated April 30, 1999, is incorporated by
reference in this Statement of Additional Information and is available without
charge by calling the Sefton Funds Trust at (800) 524-2276.
Pro-forma financial statements are attached hereto as Exhibit A.
TABLE OF CONTENTS
Page
----
General Information......................................................... B-2
Exhibit A................................................................... B-3
B-1
<PAGE>
GENERAL INFORMATION
The shareholders of Sefton Equity Value Fund, Sefton Small Company Value
Fund, Sefton U.S. Government Fund and Sefton California Tax-Free Fund (each, an
"Target Fund" and collectively the "Target Funds") are being asked to approve a
form of Agreement and Plan of Reorganization (the "Plan") combining each Target
Fund into, respectively, Kayne Anderson Rising Dividends Fund, Kayne Anderson
Small Cap Rising Dividends Fund, Kayne Anderson Intermediate Total Return Bond
Fund and Kayne Anderson Intermediate Tax-Free Bond Fund (each, an "Acquiring
Fund" and collectively, the "Acquiring Funds") (and the transactions
contemplated thereby). The Plan contemplates the transfer of all substantially
all of the assets and liabilities of each Target Fund as of the Effective Date
to the corresponding Acquiring Fund, and the assumption by the corresponding
Acquiring Fund of the liabilities of the Target Fund, in exchange for shares of
the corresponding Acquiring Fund. Immediately after the Effective Date, each
Target Fund will distribute to its shareholders of record as of the close of
business on the Effective Date the shares of the corresponding Acquiring Fund
received. The shares of the Acquiring Fund that will be issued for distribution
to the Target Fund's shareholders will have an aggregate net asset value equal
to the aggregate net asset value of the shares of the Target Fund held as of the
Closing Date. The Sefton Funds Trust will then take all necessary steps to
terminate the qualification, registration and classification of each Target
Fund. All issued and outstanding shares of a Target Fund will be canceled on the
Target Fund's books. Shares of the corresponding Acquiring Fund will be
represented only by book entries; no share certificates will be issued.
A Special Meeting of each Target Fund's shareholders to consider the
transactions will be held at the offices of the administrator for the Target
Funds, BISYS Fund Services, 3435 Stelzer Road, Columbus, Ohio 43219 on November
__, 1999, at 10:00 a.m., local time.
For further information about the transaction, see the Combined Proxy
Statement and Prospectus. For further information about the Sefton Funds Trust,
Kayne Anderson Mutual Funds, each Target Fund and each Acquiring Fund, see (1)
the Combined Statement of Additional Information relating to the Kayne Anderson
Rising Dividends Fund, Kayne Anderson Small Cap Rising Dividends Fund, Kayne
Anderson Intermediate Total Return Bond Fund and Kayne Anderson Intermediate
Tax-Free Bond Fund (as well as the Kayne Anderson International Rising Dividends
Fund, which is not involved in the Reorganizations) dated May 5, 1999, and (2)
Combined Statement of Additional Information for the Sefton Equity Value Fund,
Sefton Small Company Value Fund, Sefton U.S. Government Fund and Sefton
California Tax-Free Fund, dated April 30, 1999, which are available without
charge by calling the Kayne Anderson Mutual Funds at (800) 231-7414) or Sefton
Funds Trust at (800) 524-2276.
B-2
<PAGE>
Exhibit A
[Pro Forma Financial Statements]
KAYNE ANDERSON RISING DIVIDENDS FUND
SEFTON EQUITY VALUE FUND
PRO FORMA COMBINING PORTFOLIO OF INVESTMENTS
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES/PAR VALUE VALUE
- - - ------------------------------------- --------------------------------------------------------
KAYNE KAYNE
KAYNE ANDERSON KAYNE ANDERSON
ANDERSON SEFTON PRO FORMA ANDERSON SEFTON PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) COMBINED (HISTORICAL) (HISTORICAL) ADJUST COMBINED
- - - ------------------------------------- --------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
COMMON STOCKS
AUTOMOTIVE
0 15,000 15,000 Borg-Warner Automotive, Inc. $ 0 $ 825,000 * $ 825,000
--------------------------------------------------------
BANKING
0 20,000 20,000 Bank of America Corp. 0 1,466,249 * 1,466,249
0 18,000 18,000 Bank One Corp. 0 1,072,125 1,072,125
0 10,000 10,000 Chase Manhattan Corp. 0 866,250 866,250
0 11,900 11,900 KeyCorp 0 382,288 * 382,288
0 20,000 20,000 PNC Bank Corp. 0 1,152,500 * 1,152,500
--------------------------------------------------------
0 4,939,412 4,939,412
--------------------------------------------------------
BASIC MATERIALS/CHEMICALS
0 24,000 24,000 Fort James Corp. 0 908,999 * 908,999
0 23,000 23,000 Owens-Illinois, Inc. 0 751,813 751,813
40,130 13,000 53,130 PPG Industries, Inc. 2,370,178 767,813 3,137,991
--------------------------------------------------------
2,370,178 2,428,625 4,798,803
--------------------------------------------------------
BEVERAGES
0 16,000 16,000 Adolph Coors Co. 0 792,000 * 792,000
--------------------------------------------------------
BUSINESS SERVICES
0 14,000 14,000 Computer Services Corp. 0 968,625 * 968,625
0 31,000 31,000 Reynolds & Reynolds Co. 0 722,688 * 722,688
0 21,000 21,000 Sterling Software, Inc. 0 560,438 * 560,438
0 17,000 17,000 Xerox Crop. 0 1,004,062 * 1,004,062
--------------------------------------------------------
0 3,255,813 3,255,813
--------------------------------------------------------
CAPITAL GOODS/ELECTRICAL EQUIPMENT
38,450 0 38,450 Emerson Electric Company 2,417,543 0 2,417,543
19,300 0 19,300 General Electric Company 2,180,900 0 2,180,900
--------------------------------------------------------
4,598,443 0 4,598,443
--------------------------------------------------------
</TABLE>
B-3
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
CONSUMER CYCLICALS
0 39,000 39,000 BJ's Wholesale Club, Inc. 0 1,172,438 * 1,172,438
0 25,000 25,000 Dillards, Inc. 0 878,125 878,125
54,020 0 54,020 McDonald's Corporation 2,231,701 0 2,231,701
74,290 0 74,290 The Walt Disney Company 2,289,060 0 2,289,060
0 34,000 34,000 Warnaco Group, Inc. 0 909,500 * 909,500
--------------------------------------------------------
4,520,761 2,960,063 7,480,824
--------------------------------------------------------
CONSUMER STAPLES/BEVERAGES
19,970 0 19,970 Coca-Cola Co. 1,248,125 0 1,248,125
--------------------------------------------------------
CONSUMER STAPLES/CONSUMER PRODUCTS
60,610 0 60,610 Gillette Company 2,485,010 0 2,485,010
25,160 0 25,160 Procter & Gamble Company 2,245,530 0 2,245,530
--------------------------------------------------------
4,730,540 0 4,730,540
--------------------------------------------------------
CONSUMER STAPLES/FOODS
48,430 0 48,430 BestFoods 2,397,285 0 2,397,285
22,040 0 22,040 Hershey Foods Corporation 1,308,625 0 1,308,625
12,060 0 12,060 Wm. Wrigley, Jr., Company 1,085,400 0 1,085,400
--------------------------------------------------------
4,791,310 0 4,791,310
--------------------------------------------------------
CAPITAL GOODS/MANUFACTURING
(DIVERSIFIED)
30,940 0 30,940 Illinois Tool Works Inc. 2,537,080 0 2,537,080
--------------------------------------------------------
DIVERSIFIED MANUFACTURING
0 10,000 10,000 FMC Corp. 0 683,125 * 683,125
--------------------------------------------------------
ELECTRICAL & ELECTRONIC
0 50,000 50,000 Arrow Electronics, Inc. 0 950,000 * 950,000
0 15,000 15,000 Emerson Electric Co. 0 943,125 943,125
0 10,000 10,000 Hubbell, Inc. Class A 0 398,750 * 398,750
0 10,000 10,000 Hubbell, Inc. Class B 0 453,750 * 453,750
0 20,000 20,000 Thomas & Betts Corp. 0 945,000 * 945,000
--------------------------------------------------------
0 3,690,625 3,690,625
--------------------------------------------------------
ENERGY/ PETROLEUM - INTERNATIONAL
30,430 0 30,430 Exxon Corporation 2,346,913 0 2,346,913
0 40,000 40,000 MCN Energy Group, Inc. 0 830,000 * 830,000
--------------------------------------------------------
2,346,913 830,000 3,176,913
--------------------------------------------------------
ENTERTAINMENT
0 61,000 61,000 Harrah's Entertainment, Inc. 0 1,342,000 * 1,342,000
0 23,000 23,000 Royal Caribbean Cruises Ltd. 0 1,006,250 * 1,006,250
--------------------------------------------------------
0 2,348,250
--------------------------------------------------------
FINANCIAL/BANKING
60,720 0 60,720 Wells Fargo & Company 2,595,780 0 2,595,780
--------------------------------------------------------
</TABLE>
B-4
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
FINANCIAL/FINANCIAL SERVICES
0 15,000 15,000 Astoria Financial Corp. 0 659,063 * 659,063
0 18,000 18,000 Fannie Mae 0 1,230,749 1,230,749
39,780 0 39,780 Federal National Mortgage
Association 2,719,958 0 2,719,958
0 15,000 15,000 Fleet Financial Group, Inc. 0 665,625 * 665,625
0 32,000 32,000 Heller Financial, Inc. 0 890,000 * 890,000
0 20,000 20,000 Household International, Inc. 0 947,500 * 947,500
32,440 0 32,440 State Street Boston Corporation 2,769,565 0 2,769,565
0 25,000 25,000 Washington Mutual, Inc. 0 884,375 * 884,375
--------------------------------------------------------
5,489,523 5,277,312 10,766,835
--------------------------------------------------------
FINANCIAL/INSURANCE
32,610 0 32,610 Marsh & McLennan Companies Inc. 2,462,055 0 2,462,055
--------------------------------------------------------
FOOD PRODUCTS & SERVICES
0 43,000 43,000 Sara Lee Corp. 0 975,563 * 975,563
0 24,700 24,700 Suiza Foods Corp. 0 1,034,312 * 1,034,312
--------------------------------------------------------
0 2,009,875 2,009,875
--------------------------------------------------------
HEALTH CARE/DRUGS &
HOSPITAL SUPPLIES
53,770 30,000 83,770 Abbott Laboratories 2,446,535 1,365,000 3,811,535
0 15,000 15,000 Baxter International, Inc. 0 909,375 * 909,375
26,980 0 26,980 Johnson & Johnson 2,644,041 0 2,644,041
36,280 16,000 52,280 Merck & Co., Inc. 2,684,720 1,184,000 3,868,720
0 16,000 16,000 Pharmacia & Upjohn, Inc. 0 909,000 * 909,000
--------------------------------------------------------
7,775,296 4,367,375 12,142,671
--------------------------------------------------------
HEALTH CARE/MEDICAL DEVICES
35,170 0 35,170 Medtronics, Inc. 2,738,863 0 2,738,863
--------------------------------------------------------
LIFE & HEALTH INSURANCE
0 30,000 30,000 Allstate Corp. 0 1,076,250 * 1,076,250
0 8,000 8,000 Cigna Corp. 0 712,000 * 712,000
0 22,000 22,000 Nationwide Financial Services, Inc. 0 995,500 * 995,500
--------------------------------------------------------
0 2,783,750 2,783,750
--------------------------------------------------------
MANUFACTURING
0 24,000 24,000 Dana Corp. 0 1,105,500 * 1,105,500
--------------------------------------------------------
OIL COMPANIES - INTEGRATED
0 12,100 12,100 Amerada Hess Corp. 0 719,950 719,950
0 25,000 25,000 Conoco, Inc. 0 696,875 * 696,875
0 18,000 18,000 Exxon Corp. 0 1,388,250 1,388,250
0 32,000 32,000 Shell Transport & Trading ADR 0 1,483,999 * 1,483,999
0 20,000 20,000 Texaco, Inc. 0 1,250,000 * 1,250,000
0 23,000 23,000 USX - Marathon Group, Inc. 0 748,938 * 748,938
--------------------------------------------------------
0 6,288,012 6,288,012
--------------------------------------------------------
</TABLE>
B-5
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
PRINTING & PUBLISHING
0 16,000 16,000 Knight-Ridder, Inc. 0 879,000 * 879,000
0 30,000 30,000 New York Times Co. 0 1,104,375 * 1,104,375
--------------------------------------------------------
0 1,983,375 1,983,375
--------------------------------------------------------
RETAIL STORES
0 15,000 15,000 Albertsons, Inc. 0 773,438 * 773,438
0 80,000 80,000 Food Lion, Inc. 0 925,000 * 925,000
0 20,000 20,000 May Department Stores Co. 0 817,500 * 817,500
--------------------------------------------------------
0 2,515,938 2,515,938
--------------------------------------------------------
TECHNOLOGY/COMPUTERS &
OFFICE EQUIPMENT
26,900 11,000 37,900 Hewlett-Packard Company 2,703,451 1,105,500 3,808,951
28,220 14,000 42,220 International Business Machine 3,647,436 1,809,500 5,456,936
--------------------------------------------------------
6,350,887 2,915,000 9,265,887
--------------------------------------------------------
TECHNOLOGY/DATA SERVICES
58,360 0 58,360 Automatic Data Processing Inc. 2,567,840 0 2,567,840
44,490 0 44,490 Electronic Data Systems Corporation 2,516,466 0 2,516,466
--------------------------------------------------------
5,084,306 0 5,084,306
--------------------------------------------------------
TECHNOLOGY/SEMICONDUCTORS
43,920 18,000 61,920 Intel Corporation 2,613,240 1,071,000 3,684,240
--------------------------------------------------------
TELECOMMUNICATION
22,900 25,000 47,900 AT&T Corporation 1,278,106 1,395,313 2,673,419
0 26,000 26,000 Bell Atlantic Corp. 0 1,699,749 * 1,699,749
0 23,000 23,000 US West, Inc. 0 1,351,250 * 1,351,250
--------------------------------------------------------
1,278,106 4,446,312 5,724,418
--------------------------------------------------------
TOBACCO
0 15,000 15,000 Philip Morris Cos., Inc. 0 602,813 * 602,813
--------------------------------------------------------
TRANSPORTATION
0 28,000 28,000 Burlington Northern Santa Fe 0 868,000 * 868,000
0 20,000 20,000 Ryder Systems, Inc. 0 520,000 520,000
--------------------------------------------------------
0 1,388,000 1,388,000
--------------------------------------------------------
UTILITIES/REITS
0 35,700 35,700 Carramerica Realty Corp. 0 892,500 * 892,500
0 40,000 40,000 FirstEnergy Corp. 0 1,239,999 * 1,239,999
0 24,000 24,000 General Public Utility, Inc. 0 1,012,500 1,012,500
0 25,000 25,000 Highwoods Properties, Inc. 0 685,938 685,938
--------------------------------------------------------
0 3,830,937 3,830,937
--------------------------------------------------------
</TABLE>
B-6
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
WASTE DISPOSAL
0 16,000 16,000 Waste Management, Inc. 0 860,000 860,000
--------------------------------------------------------
TOTAL COMMON STOCKS 63,531,406 64,198,112 125,381,268
--------------------------------------------------------
REPURCHASE AGREEMENT AND OTHER
$ 0 $250,000 $250,000 Union Bank of California, 5.25%,
dated 6/30/99 due 7/1/99 with a
maturity value of $250,036,
collaterized by $259,937, Freddie
Mac, 6.25% due 12/15/07 with a
value of $250,951 0 250,000 250,000
0 976 976 Union Bank of California -
Cash Sweep 0 976 976
--------------------------------------------------------
0 250,976 0 250,976
--------------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(Cost $49,492,341, $56,987,958
and $106,480,299, respectively)* 63,531,406 64,449,088 125,632,244
OTHER ASSETS LESS LIABILITIES 984,402 1,122,505 (6,298) 2,100,609
--------------------------------------------------------
NET ASSETS $64,515,808 $65,571,593 $ (6,298) $127,732,853
========================================================
* Cost for Federal income tax
purposes is the same.
Net unrealized appreciation
consists of:
Gross unrealized appreciation $14,724,181 $ 8,123,515 $ 22,847,696
Gross unrealized depreciation (685,116) (662,385) (1,347,501)
--------------------------------------------------------
Net unrealized appreciation $14,039,065 $ 7,461,130 $ 21,500,195
========================================================
</TABLE>
* Indicates securities which Sefton Capital Management, investment adviser to
the Acquired Funds, in consultation with Kayne Anderson Investment
Management, LLC, investment adviser to the Acquiring Funds, anticipates
will be sold prior to the effective date of the reorganization. The
proceeds from the sale of such securities, whose value at June 30, 1999 was
$44,571,161, will be reinvested in accordance with the investment
objectives of the Acquiring Fund prior to the effective date of the
reorganization. Net gains realized upon such sales will be distributed to
the shareholders of the Acquired Fund prior to the consummation of the
reorganization and are expected to be taxable.
See accompanying notes to pro forma combining financial statements.
B-7
<PAGE>
KAYNE ANDERSON RISING DIVIDENDS FUND
SEFTON EQUITY VALUE FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
KAYNE
KAYNE ANDERSON
ANDERSON SEFTON PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUST COMBINED
-----------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at market
(cost of $49,492,341, $56,987,958
and $106,480,299, respectively) $ 63,531,406 $ 64,449,088 $127,980,494
Cash 623,309 224,848 848,157
Receivable for:
Investment securities sold 1,594,280 962,758 2,557,038
Dividends and interest 65,120 72,768 137,888
Prepaid expenses 12,681 7,185 19,866
Deferred organization costs, net 5,846 6,298 (6,298) 5,846
-----------------------------------------------------
Total assets 65,832,642 65,722,945 (6,298) 131,549,289
-----------------------------------------------------
LIABILITIES
Payables:
Investment securities purchased 1,255,896 0 1,255,896
Capital shares redeemed 0 64,654 64,654
Due to investment advisor 42,218 53,971 96,189
Other accrued expenses 18,720 32,727 51,447
-----------------------------------------------------
Total liabilities 1,316,834 151,352 0 1,468,186
-----------------------------------------------------
NET ASSETS $ 64,515,808 $ 65,571,593 $ (6,298) $130,081,103
=====================================================
Number of shares issued and
outstanding (unlimited shares
authorized without par value) 3,399,813 4,206,304 (751,863) 6,854,254
=====================================================
sNet asset value, offering and redemption
price per share $ 18.98 $ 15.59 $ 18.98
=====================================================
</TABLE>
See accompanying noates to pro forma combining financial statements.
B-8
<PAGE>
KAYNE ANDERSON RISING DIVIDENDS FUND
SEFTON EQUITY VALUE FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
KAYNE
KAYNE ANDERSON
ANDERSON SEFTON PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUST COMBINED
--------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Income:
Dividend income $ 361,700 $ 719,372 $ 1,081,072
Interest income 11,134 55,942 67,076
--------------------------------------------------
Total income 372,834 775,314 0 1,148,148
--------------------------------------------------
Expenses:
Investment advisory fees 208,079 328,388 (82,097) 454,370
Custodian fees 7,439 3,349 10,788
Administration fees 18,831 49,574 68,405
Fund accounting fees 16,336 15,798 32,134
Transfer agent fees 11,136 11,556 22,692
Shareholder servicing fees 0 14,747 (14,747) 0
Professional fees 12,406 19,182 31,588
Insurance expense 643 0 643
Miscellaneous expenses 1,736 26,846 28,582
Reports to shareholders 2,736 0 2,736
Registration fees 8,688 0 8,688
Trustees' fees 1,933 0 1,933
Amortization of deferred
organization expenses 3,531 0 3,531
--------------------------------------------------
Total expenses 293,494 469,440 (96,844) 666,090
Less: Expenses reimbursed 0 0 0
--------------------------------------------------
Net expenses 293,494 469,440 (96,844) 666,090
--------------------------------------------------
NET INVESTMENT INCOME 79,340 305,874 96,844 482,058
--------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments 4,663,814 (3,476,788) 1,187,026
Net change in unrealized appreciation
(depreciation) of investments 2,264,819 4,316,526 6,581,345
--------------------------------------------------
Net gain (loss) on investments 6,928,633 839,738 0 7,768,371
--------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 7,007,973 $ 1,145,612 $96,844 $ 8,250,429
==================================================
</TABLE>
See accompanying notes to pro forma combining financial statements.
B-9
<PAGE>
KAYNE ANDERSON RISING DIVIDENDS FUND
SEFTON EQUITY VALUE FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
KAYNE
KAYNE ANDERSON
ANDERSON SEFTON PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUST COMBINED
-------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Income:
Dividend income $ 696,723 $ 2,229,632 $ 2,926,355
Interest income 57,488 0 57,488
-------------------------------------------------------
Total income 754,211 2,229,632 0 2,983,843
-------------------------------------------------------
Expenses:
Investment advisory fees 334,518 813,278 (203,320) 944,477
Custodian fees 14,080 7,060 21,140
Administration fees 30,783 121,991 152,774
Fund accounting fees 34,739 32,672 67,411
Transfer agent fees 23,398 28,811 52,209
Shareholder servicing fees 0 14,721 (14,721) 0
Professional fees 22,757 52,643 75,400
Insurance expense 1,647 0 1,647
Miscellaneous expenses 4,038 57,338 61,376
Reports to shareholders 3,001 0 3,001
Registration fees 17,961 0 17,961
Trustees' fees 4,701 0 4,701
Amortization of deferred
organization expenses 6,081 0 0 6,081
-------------------------------------------------------
Total expenses 497,704 1,128,514 (218,041) 1,408,178
Less: Expenses reimbursed/waived 0 0 0
-------------------------------------------------------
Net expenses 497,704 1,128,514 (218,041) 1,408,178
-------------------------------------------------------
NET INVESTMENT INCOME 256,507 1,101,118 218,041 1,575,666
-------------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments 5,326,022 2,418,491 7,744,513
Net change in unrealized appreciation
(depreciation) of investments (98,265) (10,739,830) (10,838,095)
-------------------------------------------------------
Net gain (loss) on investments 5,227,757 (8,321,339) 0 (3,093,582)
-------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 5,484,264 $ (7,220,221) $218,041 $ (1,517,917)
=======================================================
</TABLE>
See accompanying notes to pro forma combining financial statements.
B-10
<PAGE>
KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND
SEFTON SMALL COMPANY VALUE FUND
PRO FORMA COMBINING PORTFOLIO OF INVESTMENTS
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES/PAR VALUE VALUE
- - - ------------------------------------- ---------------------------------------------------
KAYNE KAYNE
KAYNE ANDERSON KAYNE ANDERSON
ANDERSON SEFTON PRO FORMA ANDERSON SEFTON PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) COMBINED (HISTORICAL) (HISTORICAL) ADJUST COMBINED
- - - ------------------------------------- ---------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
COMMON STOCKS
AEROSPACE/DEFENSE
0 15,000 15,000 Primex Technologies, Inc. $ 0 $ 323,438 * $ 323,438
---------------------------------------------------
AUTOMOTIVE
0 12,000 12,000 Superior Industries International, Inc. 0 327,750 * 327,750
---------------------------------------------------
BANKING
0 9,600 9,600 Alabama National Bancorporation 0 240,000 * 240,000
0 12,700 12,700 Bank of the Ozarks, Inc. 0 230,188 * 230,188
0 8,400 8,400 F.N.B. Corp. 0 226,800 * 226,800
0 27,100 27,100 First Essex Bancorp Inc. 0 440,375 * 440,375
0 13,000 13,000 Independent Bank Corp. 0 225,875 * 225,875
0 9,000 9,000 Merchants Bancshares, Inc. 0 204,750 * 204,750
71,107 0 0 National Commerce Bancorp 1,555,466 0 1,555,466
0 16,100 16,100 Trico Bancshares 0 297,850 * 297,850
61,092 0 0 Washington Federal, Inc. 1,370,752 0 1,370,752
---------------------------------------------------
2,926,218 1,865,838 4,792,056
---------------------------------------------------
BASIC INDUSTRY
0 6,200 6,200 Synthetic Industries, Inc. 0 182,900 * 182,900
---------------------------------------------------
BASIC MATERIALS/PACKAGING
40,427 0 40,427 Bemis Company 1,606,973 0 1,606,973
25,749 0 25,749 Liqui-Box Corporation 1,384,008 0 1,384,008
---------------------------------------------------
2,990,981 0 2,990,981
---------------------------------------------------
BASIC MATERIALS/PAINTS AND COATING
15,118 0 15,118 Benjamin Moore & Co. 1,420,147 0 1,420,147
---------------------------------------------------
BUILDING PRODUCTS
0 37,500 37,500 Cameron Ashley Building Products, Inc. 0 391,406 * 391,406
0 14,000 14,000 Drew Industries, Inc. 0 172,375 * 172,375
0 16,000 16,000 Hussmann International, Inc. 0 265,000 * 265,000
---------------------------------------------------
0 828,781 828,781
---------------------------------------------------
</TABLE>
B-11
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
BUSINESS SERVICES
0 12,000 12,000 Advo, Inc. 0 249,000 * 249,000
0 10,000 10,000 Analytical Surveys, Inc. 0 248,750 * 248,750
0 14,000 14,000 World Color Press, Inc. 0 385,000 * 385,000
---------------------------------------------------
0 882,750 882,750
---------------------------------------------------
CAPITAL GOODS/MACHINERY EQUIPMENT
60,427 0 60,427 Federal Signal Corporation 1,280,297 0 1,280,297
24,894 0 24,894 Nordson Corporation 1,524,757 0 1,524,757
---------------------------------------------------
2,805,054 0 2,805,054
---------------------------------------------------
CHEMICALS
0 15,000 15,000 A. Schulman, Inc. 0 257,813 * 257,813
0 3,500 3,500 Ferro Corp. 0 96,250 * 96,250
---------------------------------------------------
0 354,063 354,063
---------------------------------------------------
CONSUMER CYCLICALS
0 20,000 20,000 Burlington Coat Factory Warehouse Corp. 0 386,250 * 386,250
60,130 0 60,130 Claire's Stores Inc. 1,540,831 0 1,540,831
76,952 0 76,952 LA-Z Boy Chair Company 1,769,896 0 1,769,896
0 10,000 10,000 Libbey, Inc. 0 290,000 * 290,000
0 25,000 25,000 Pier One Imports, Inc. 0 281,250 * 281,250
59,552 0 59,552 Strayer Education Inc. 1,827,502 0 1,827,502
0 8,000 8,000 Tropical Sportswear International Corp. 0 255,000 * 255,000
---------------------------------------------------
5,138,229 1,212,500 6,350,729
---------------------------------------------------
CONSUMER STAPLES/FOOD
0 9,200 9,200 Great Atlantic & Pacific Tea Co. 0 311,075 * 311,075
39,157 0 39,157 Tootsie Roll Industries, Inc. 1,512,439 0 1,512,439
---------------------------------------------------
1,512,439 311,075 1,823,514
---------------------------------------------------
DISTRIBUTORS/WHOLESALE
0 25,000 25,000 Merkert American Corp. 0 237,500 * 237,500
0 7,500 7,500 SCP Pool Corp. 0 194,063 * 194,063
---------------------------------------------------
0 431,563 431,563
---------------------------------------------------
</TABLE>
B-12
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
ELECTRICAL & ELECTRONICS
0 35,000 35,000 Pioneer Standard Electonics, Inc. 0 420,000 * 420,000
---------------------------------------------------
ENERGY/OIL & GAS PRODUCTION
0 24,000 24,000 Avista Corp. 0 390,000 * 390,000
0 11,000 11,000 Cleco Corp. 0 334,125 * 334,125
32,494 0 32,494 Devon Energy Corporation 1,161,661 0 1,161,661
0 25,000 25,000 Midcoast Energy Resources, Inc. 0 403,125 * 403,125
---------------------------------------------------
1,161,661 1,127,250 2,288,911
---------------------------------------------------
FINANCE/INSURANCE
57,834 0 57,834 American Heritage Life Insurance
Corporation 1,416,934 0 1,416,934
0 10,000 10,000 Harleysville Group, Inc. 0 205,000 * 205,000
0 15,000 15,000 Liberty Financial Companies, Inc. 0 436,875 * 436,875
0 13,000 13,000 Litchfield Financial Corp. 0 220,188 * 220,188
34,253 0 34,253 Mutual Risk Management Ltd. 1,143,193 0 1,143,193
---------------------------------------------------
2,560,127 862,063 3,422,190
---------------------------------------------------
FINANCE/FINANCIAL SERVICES
70,442 0 70,442 Eaton Vance Corporation 2,425,846 0 2,425,846
11,430 0 11,430 Fiduciary Trust Company 545,809 0 545,809
---------------------------------------------------
2,971,655 0 2,971,655
---------------------------------------------------
HEALTH CARE
0 20,000 20,000 AmeriPath, Inc. 0 172,500 * 172,500
0 5,000 5,000 Barr Laboratories, Inc. 0 199,375 * 199,375
70,450 0 70,450 Hooper Holmes Inc. 1,435,419 0 1,435,419
53,900 0 53,900 Landauer Inc. 1,590,051 0 1,590,051
0 12,500 12,500 Maxxim Medical, Inc. 0 291,406 * 291,406
0 14,000 14,000 National Dentex Corp. 0 241,500 * 241,500
---------------------------------------------------
3,025,470 904,781 3,930,251
---------------------------------------------------
</TABLE>
B-13
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
LOTTERY SERVICES
0 12,000 12,000 Grech Holdings Corp. 0 282,750 * 282,750
---------------------------------------------------
MANUFACTURING
0 25,800 25,800 Citation Corp. 0 414,412 * 414,412
0 20,000 20,000 Mark IV Industries, Inc. 0 422,499 * 422,499
0 17,000 17,000 Masotech, Inc. 0 287,938 * 287,938
0 15,000 15,000 Meade Instruments Corp. 0 258,750 * 258,750
0 14,900 14,900 Standard Products Co. 0 381,812 * 381,812
0 29,150 29,150 Supreme Industries, Inc. 0 282,391 * 282,391
---------------------------------------------------
0 2,047,802 2,047,802
---------------------------------------------------
OIL & GAS PRODUCTS & SERVICES
0 18,000 18,000 Energen Corp. 0 335,250 * 335,250
0 12,000 12,000 Nui Corp. 0 300,000 * 300,000
0 27,900 27,900 World Fuel Services Corp. 0 411,525 * 411,525
---------------------------------------------------
0 1,046,775 1,046,775
---------------------------------------------------
RESTAURANTS
0 7,700 7,700 Benihana, Inc. 0 111,650 * 111,650
0 11,000 11,000 Garden Fresh Restaurant Corp. 0 206,250 * 206,250
---------------------------------------------------
0 317,900 317,900
---------------------------------------------------
TECHNOLOGY/COMPUTER &
OFFICE EQUIPMENT
76,462 0 76,462 Reynolds & Reynolds Inc., Class A 1,782,520 0 1,782,520
0 10,000 10,000 Smart Modular Technologies 0 173,750 * 173,750
---------------------------------------------------
1,782,520 173,750 1,956,270
---------------------------------------------------
TECHNOLOGY/SOFTWARE & SERVICE
113,005 0 113,005 Timberline Software Corporation 1,779,828 0 1,779,828
---------------------------------------------------
TRANSPORT - EQUIPMENT & LEASING
0 31,100 31,100 Rollins Truck Leasing Corp. 0 345,988 * 345,988
0 14,500 14,500 Willis Lease Finance Corp. 0 236,531 * 236,531
---------------------------------------------------
0 582,519 582,519
---------------------------------------------------
</TABLE>
B-14
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
TRANSPORTATION/AIR TRANSPORT
73,216 0 73,216 Air Express International Corporation 1,857,857 0 1,857,857
0 25,000 25,000 Railtex, Inc. 0 346,875 * 346,875
---------------------------------------------------
1,857,857 346,875 2,204,732
---------------------------------------------------
UTILITIES/REITS
0 20,000 20,000 Bedford Property Investors, Inc. 0 357,500 * 357,500
0 7,400 7,400 Central Hudson Gas & Electric Corp. 0 310,800 * 310,800
0 21,000 21,000 EastGroup Property Investors, Inc. 0 421,312 * 421,312
0 13,000 13,000 J.P. Realty, Inc. 0 267,313 * 267,313
0 10,000 10,000 Pacific Gulf Properties, Inc. 0 226,250 * 226,250
0 10,000 10,000 Pan Pacific Retail Properties, Inc. 0 194,375 * 194,375
0 20,000 20,000 RFS Hotel Investors, Inc. 0 251,250 * 251,250
0 16,000 16,000 Tri Net Corporate Realty Trust, Inc. 0 442,999 * 442,999
---------------------------------------------------
0 2,471,799 2,471,799
---------------------------------------------------
TOTAL COMMON STOCKS 31,932,186 17,304,922 49,237,108
---------------------------------------------------
REPURCHASE AGREEMENT AND OTHER
$ 0 $ 28,000 $ 28,000 Union Bank of California, 5.25%
dated 6/30/99 due 7/1/99 with a
maturity value of $28,004, collaterized
by $29,113, Freddie Mac, 6.25% due
12/15/07 with a value of $28,106 0 28,000 28,000
0 684 684 Union Bank of California - Cash Sweep 0 684 684
---------------------------------------------------
0 28,684 28,684
---------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(Cost $28,608,593, $15,797,578
and $44,406,171, respectively)* 31,932,186 17,333,606 49,265,792
OTHER ASSETS LESS LIABILITIES 1,077,698 284,733 (14,756) 1,347,675
---------------------------------------------------
NET ASSETS $33,009,884 $17,618,339 $(14,756) $50,613,467
===================================================
* Cost for Federal income tax purpose
is the same.
Net unrealized appreciation
consists of:
Gross unrealized appreciation $ 3,837,377 $ 2,064,047 $ 5,901,424
Gross unrealized depreciation (513,784) (528,019) (1,041,803)
---------------------------------------------------
Net unrealized appreciation $ 3,323,593 $ 1,536,028 $ 4,859,621
===================================================
</TABLE>
* Indicates securities which Sefton Capital Management, investment adviser to
the Acquired Funds, in consultation with Kayne Anderson Investment
Management, LLC, investment adviser to the Acquiring Funds, anticipates
will be sold prior to the effective date of the reorganization. The
proceeds from the sale of such securities, whose value at June 30, 1999 was
$17,304,922, will be reinvested in accordance with the investment
objectives of the Acquiring Fund prior to the effective date of the
reorganization. Net losses realized upon such sales will be available to
reduce capital gains realized by the Acquiring Fund after the consummation
of the reorganization subject to certain limitations (See Note 3).
See accompanyng notes to pro forma combining financial statements.
B-15
<PAGE>
KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND
SEFTON SMALL COMPANY VALUE FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
KAYNE
KAYNE ANDERSON
ANDERSON SEFTON PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUST COMBINED
--------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at market
(cost of $28,608,593, $15,797,578
and $44,406,171, respectively) $31,932,186 $17,333,606 $49,265,792
Cash 2,596,754 40,499 2,637,253
Receivable for:
Investment securitites sold 0 659,727 659,727
Dividends and interest 50,472 0 50,472
Prepaid expenses 18,166 3,969 22,135
Deferred organization costs, net 9,847 14,756 (14,756) 9,847
--------------------------------------------------
Total assets 34,607,425 18,052,557 (14,756) 52,645,226
--------------------------------------------------
LIABILITIES
Payables:
Investment securities purchased 1,574,859 408,377 1,983,236
Due to investment advisor 21,495 8,823 30,318
Other accrued expenses 1,187 17,018 18,205
--------------------------------------------------
Total liabilities 1,597,541 434,218 0 2,031,759
--------------------------------------------------
NET ASSETS $33,009,884 $17,618,339 $(14,756) $50,613,467
==================================================
Number of shares issued and
outstanding (unlimited shares
authorized without par value) 2,021,500 1,621,443 (543,453) 3,099,490
==================================================
Net asset value, offering and redemption
price per share $ 16.33 $ 10.87 $ 16.33
==================================================
</TABLE>
See accompanying noates to pro forma combining financial statements.
B-16
<PAGE>
KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND
SEFTON SMALL COMPANY VALUE FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
KAYNE
KAYNE ANDERSON
ANDERSON SEFTON PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUST COMBINED
---------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Income:
Dividend income $ 271,345 $ 218,981 $ 490,326
Interest income 16,578 25,504 42,082
---------------------------------------------------
Total income 287,923 244,485 0 532,408
---------------------------------------------------
Expenses:
Investment advisory fees 140,274 146,852 (46,993) 240,133
Custodian fees 5,455 1,258 6,713
Administration fees 12,377 17,622 29,999
Fund accounting fees 16,364 15,750 32,114
Transfer agent fees 7,636 5,871 13,507
Shareholder servicing fees 0 5,509 (5,509) 0
Professional fees 9,216 13,833 23,049
Insurance expense 45 0 45
Miscellaneous expenses 1,240 13,941 15,181
Reports to shareholders 744 0 744
Registration fees 8,296 0 8,296
Trustees' fees 2,933 0 2,933
Amortization of deferred
organization expenses 2,107 0 2,107
---------------------------------------------------
Total expenses 206,687 220,636 (52,502) 374,821
Less: Expenses reimbursed (recouped) 7,593 (42,963) 27,792 (7,578)
---------------------------------------------------
Net expenses 214,280 177,673 (24,710) 367,243
---------------------------------------------------
NET INVESTMENT INCOME 73,643 66,812 24,710 165,165
---------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments 2,682,777 (7,422,560) (4,739,783)
Net change in unrealized appreciation
(depreciation) of investments (125,197) 5,842,765 5,717,568
---------------------------------------------------
Net gain (loss) on investments 2,557,580 (1,579,795) 0 977,785
---------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ 2,631,223 $(1,512,983) $24,710 $ 1,142,950
===================================================
</TABLE>
See accompanying notes to pro forma combining financial statements.
B-17
<PAGE>
KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND
SEFTON SMALL COMPANY VALUE FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
KAYNE
KAYNE ANDERSON
ANDERSON SEFTON PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUST COMBINED
----------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Income:
Dividend income $ 399,531 $ 834,496 $ 1,234,027
Interest income 31,685 0 31,685
----------------------------------------------------
Total income 431,216 834,496 0 1,265,712
----------------------------------------------------
Expenses:
Investment advisory fees 218,722 417,794 (133,694) 502,822
Custodian fees 9,966 3,607 13,573
Administration fees 26,052 50,135 76,187
Fund accounting fees 30,570 32,584 63,154
Transfer agent fees 21,456 10,398 31,854
Shareholder servicing fees 0 32 (32) 0
Professional fees 7,849 35,839 43,688
Insurance expense 91 0 91
Miscellaneous expenses 3,846 34,814 38,660
Reports to shareholders 2,688 0 2,688
Registration fees 16,577 0 16,577
Trustees' fees 4,734 0 4,734
Amortization of deferred
organization expenses 4,249 0 0 4,249
----------------------------------------------------
Total expenses 346,800 585,203 (133,726) 798,277
Less: Expenses reimbursed/waived (12,965) (66,847) 61,637 (18,175)
----------------------------------------------------
Net expenses 333,835 518,356 (72,089) 780,102
----------------------------------------------------
NET INVESTMENT INCOME 97,381 316,140 72,089 485,610
----------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments (168,179) 60,757 (107,422)
Net change in unrealized appreciation
(depreciation) of investments 3,090,369 (6,191,721) (3,101,352)
----------------------------------------------------
Net gain (loss) on investments 2,922,190 (6,130,964) 0 (3,208,774)
----------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 3,019,571 $(5,814,824) $ 72,089 $(2,723,164)
====================================================
</TABLE>
See accompanying notes to pro forma combining financial statements.
B-18
<PAGE>
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND
SEFTON U.S. GOVERNMENT FUND
PRO FORMA COMBINING PORTFOLIO OF INVESTMENTS
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PAR VALUE VALUE
- - - ------------------------------------- --------------------------------------------------
KAYNE KAYNE
KAYNE ANDERSON KAYNE ANDERSON
ANDERSON SEFTON PRO FORMA ANDERSON SEFTON PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) COMBINED (HISTORICAL) (HISTORICAL) ADJUST COMBINED
- - - ------------------------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
DEBT SECURITIES
U.S. TREASURY OBLIGATIONS
U.S. Treasury Notes/Bonds
$ 376,000 $ 0 $ 376,000 6.875% due 08/31/1999 $ 377,292 $ 0 $ 377,292
0 1,000,000 1,000,000 7.750% due 02/15/2001 0 1,034,688 1,034,688
875,000 1,500,000 2,375,000 6.250% due 10/31/2001 887,578 1,521,563 2,409,141
0 2,000,000 2,000,000 7.500% due 05/15/2002 0 2,097,500 2,097,500
0 2,200,000 2,200,000 6.250% due 02/15/2003 0 2,237,813 2,237,813
0 1,000,000 1,000,000 5.750% due 08/15/2003 0 1,000,313 1,000,313
2,050,000 0 2,050,000 11.875% due 11/15/2003 2,520,860 0 2,520,860
1,330,000 2,000,000 3,330,000 7.250% due 08/15/2004 1,413,125 2,125,000 3,538,125
0 2,000,000 2,000,000 7.880% due 11/15/2004 0 2,184,375 2,184,375
0 2,000,000 2,000,000 7.500% due 02/15/2005 0 2,154,376 2,154,376
551,000 0 551,000 5.875% due 11/15/2005 550,828 0 550,828
0 1,500,000 1,500,000 6.500% due 10/15/2006 0 1,548,282 1,548,282
0 2,000,000 2,000,000 6.250% due 02/15/2007 0 2,038,126 2,038,126
507,000 0 507,000 5.625% due 05/15/2008 496,701 0 496,701
0 1,000,000 1,000,000 7.250% due 05/15/2016 0 1,097,813 1,097,813
0 1,000,000 1,000,000 6.130% due 11/15/2027 0 990,938 990,938
--------------------------------------------------
Total U.S. Treasury Obligations 6,246,384 20,030,787 26,277,171
--------------------------------------------------
U.S. Treasury Strip
0 4,000,000 4,000,000 Due 08/15/2020 0 1,063,612 1,063,612
--------------------------------------------------
U.S. AGENCY OBLIGATIONS
Federal Home Loan Bank
0 1,000,000 1,000,000 5.930% due 04/09/2008 0 963,842 963,842
--------------------------------------------------
Federal Home Loan Mortgage Corp.
0 875,000 875,000 8.530% due 02/02/2005 0 889,798 889,798
0 348,261 348,261 7.500% due 07/01/2009, Pool #E00326 0 354,665 354,665
0 749,107 749,107 7.500% due 04/01/2014, Pool #C90060 0 763,925 763,925
0 529,149 529,149 7.000% due 04/01/2016, Pool #C90133 0 529,170 529,170
0 856,062 856,062 6.100% due 11/15/2016, Series 1501
Class F 0 856,785 856,785
--------------------------------------------------
0 3,394,343 3,394,343
--------------------------------------------------
</TABLE>
B-19
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Federal National Mortgage Association
420,000 0 420,000 6.100% due 02/10/2000 421,565 0 421,565
600,000 0 600,000 5.625% due 05/14/2004 586,150 0 586,150
350,000 0 350,000 7.700% due 08/10/2004 350,762 0 350,762
87,000 0 87,000 6.950% due 11/13/2006 87,161 0 87,161
0 6.000% due 08/22/2009, Series 1994-34
0 1,400,000 1,400,000 Class C 0 1,376,739 1,376,739
0 512,967 512,967 7.000% due 05/01/2014, Pool #190783 0 510,883 510,883
0 267,864 267,864 8.000% due 01/01/2015, Pool #250232 0 274,891 274,891
0 1,503,568 1,503,568 6.500% due 06/01/2016, Pool #368930 0 1,474,732 1,474,732
0 1,000,000 1,000,000 6.500% due 04/25/2023, Series 1993-210 0 976,472 976,472
0 1,000,000 1,000,000 6.500% due 09/25/2023, Series 1994-51 0 972,945 972,945
--------------------------------------------------
1,445,638 5,586,662 7,032,300
--------------------------------------------------
Total U.S. Agency Obligations 1,445,638 9,944,847 11,390,485
--------------------------------------------------
MORTGAGE-BACKED/PASS-THROUGH SECURITIES
Government National Mortgage Association
0 866,862 866,862 7.000% due 07/20/2013, Pool #2626 0 867,290 867,290
11,206 0 11,206 8.000% due 11/15/2021 11,533 0 11,533
17,815 0 17,815 8.500% due 12/15/2022 18,677 0 18,677
228,772 0 228,772 8.000% due 07/15/2023 235,442 0 235,442
162,915 0 162,915 8.500% due 08/15/2025 170,799 0 170,799
53,582 0 53,582 8.500% due 06/15/2026 56,175 0 56,175
139,196 0 139,196 8.000% due 09/15/2026 143,254 0 143,254
59,125 0 59,125 8.000% due 11/15/2026 60,848 0 60,848
--------------------------------------------------
Total Mortgage-Backed/Pass-
Through Securities 696,728 867,290 1,564,018
--------------------------------------------------
ASSET-BACKED RECEIVABLES
210,000 0 210,000 WFS Financial Owner Trust
6.800% due 12/20/2003 211,342 0 211,342
--------------------------------------------------
CORPORATE BONDS
AUTO RENTALS
175,000 0 175,000 Ryder System Inc.
7.480% due 05/15/2000 176,477 0 176,477
--------------------------------------------------
BEVERAGES
70,000 0 70,000 Anheuser Busch Companies
6.750% due 11/01/2006 68,797 0 68,797
236,000 0 236,000 Coca-Cola Enterprises
6.375% due 08/01/2001 237,026 0 237,026
--------------------------------------------------
305,823 0 305,823
--------------------------------------------------
</TABLE>
B-20
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
COMMUNICATION SERVICES
175,000 0 175,000 TCI Communications Inc.
6.375% due 05/01/2003 174,162 0 174,162
--------------------------------------------------
DEPARTMENT STORES
70,000 0 70,000 Sears Roebuck Company
9.450% due 07/25/2001 73,511 0 73,511
--------------------------------------------------
FINANCE
280,000 0 280,000 AT & T Capital Corporation
7.500% due 11/15/2000 281,759 0 281,759
175,000 0 175,000 Bear Stearns Company
6.625% due 10/01/2004 172,912 0 172,912
70,000 0 70,000 Beneficial Corporation
6.600% due 09/26/2001 70,258 0 70,258
0 1,000,000 1,000,000 Countrywide Home Loan
7.450% due 09/16/2003 0 1,021,767 1,021,767
175,000 0 175,000 Finova Capital Corporation
6.450% due 06/01/2000 175,426 0 175,426
255,000 0 255,000 Ford Motor Credit Corporation
6.250% due 11/08/2000 255,599 0 255,599
192,000 0 192,000 General Motors Acceptance Corportation
7.125% due 05/01/2003 193,681 0 193,681
70,000 0 70,000 Household Finance Company
8.000% due 08/15/2004 70,211 0 70,211
Lehman Brothers Holdings
175,000 0 175,000 8.875% due 03/01/2002 183,084 0 183,084
0 500,000 500,000 8.750% due 05/15/2002 0 522,405 522,405
0 1,000,000 1,000,000 7.250% due 10/15/2003 0 1,004,997 1,004,997
0 500,000 500,000 Salomon, Inc.
9.250% due 05/01/2001 0 525,783 525,783
--------------------------------------------------
1,402,930 3,074,952 4,477,882
--------------------------------------------------
INDUSTRIAL
70,000 0 70,000 Allied Signal Inc.
9.200% due 02/15/2003 75,377 0 75,377
Boise Cascade Co.
0 1,000,000 1,000,000 7.700% due 01/30/2003 0 998,766 998,766
0 500,000 500,000 7.900% due 12/15/2003 0 501,530 501,530
0 500,000 500,000 Bowater, Inc.
8.250% due 10/15/1999 0 502,620 502,620
175,000 0 175,000 Catepillar Inc.
8.440% due 11/26/2003 185,876 0 185,876
0 1,500,000 1,500,000 Coca Cola Bottling Co., Consolidated
6.850% due 11/01/2007 0 1,465,202 1,465,202
Royal Caribbean Cruises Ltd.
0 500,000 500,000 8.250% due 04/01/2005 0 520,034 520,034
0 1,000,000 1,000,000 7.000% due 10/15/2007 0 959,215 959,215
--------------------------------------------------
261,253 4,947,367 5,208,620
--------------------------------------------------
</TABLE>
B-21
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
MOTION PICTURE PRODUCTION &
OTHER SERVICES
278,000 0 278,000 The Walt Disney Company
6.375% due 03/30/2001 279,592 0 279,592
--------------------------------------------------
YANKEEEURO
175,000 0 175,000 Cable & Wireless
6.375% due 03/06/2003 172,240 0 172,240
--------------------------------------------------
Total Corporate Bonds 2,845,988 8,022,319 10,868,307
--------------------------------------------------
REPURCHASE AGREEMENT AND OTHER
0 1,307,000 1,307,000 Union Bank of California, 5.250%, dated
6/30/99 due 7/1/99 at maturity value
$1,307,191, collaterized by $1,358,950,
Freddie Mac, 6.250%, due 12/15/07
with a fair value of $1,311,969 0 1,307,000 1,307,000
0 432 432 Union Bank of California-Cash Sweep 0 432 432
--------------------------------------------------
0 1,307,432 1,307,432
--------------------------------------------------
TOTAL DEBT SECURITIES 11,446,080 41,236,287 52,682,367
--------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(Cost $11,597,669, $40,948,693
and $52,546,362, respectively)* 11,446,080 41,236,287 52,682,367
OTHER ASSETS LESS LIABILITIES 254,825 358,708 (6,298) 607,235
--------------------------------------------------
NET ASSETS $11,700,905 $41,594,995 $ (6,298) $53,289,602
==================================================
* Cost for Federal income tax
purposes is the same.
Net unrealized appreciation
(depreciation) consists of:
Gross unrealized appreciation $ 8,385 $ 812,525 $ 820,910
Gross unrealized depreciation (159,974) (524,931) (684,905)
--------------------------------------------------
Net unrealized appreciation
(depreciation) $ (151,589) $ 287,594 $ 136,005
==================================================
</TABLE>
See accompanying notes to pro forma combining financial statements.
B-22
<PAGE>
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND
SEFTON U.S. GOVERNMENT FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
KAYNE
KAYNE ANDERSON
ANDERSON SEFTON PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUST COMBINED
--------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at market
(cost of $11,597,669, $40,948,693
and $52,546,362, respectively) $11,446,080 $41,236,287 $52,682,367
Cash 86,558 0 86,558
Interest receivable 168,705 596,625 765,330
Prepaid expenses 20,382 3,650 24,032
Due from investment advisor 3,544 0 3,544
Deferred organization costs, net 9,847 6,298 (6,298) 9,847
--------------------------------------------------
Total assets 11,735,116 41,842,860 (6,298) 53,571,678
--------------------------------------------------
LIABILITIES
Payables:
Capital shares redeemed 0 30,731 30,731
Distributions to shareholders 33,093 184,317 217,410
Due to investment advisor 0 18,813 18,813
Other accrued expenses 1,118 14,004 15,122
--------------------------------------------------
Total liabilities 34,211 247,865 0 282,076
--------------------------------------------------
NET ASSETS $11,700,905 $41,594,995 $(6,298) $53,289,602
==================================================
Number of shares issued and
outstanding (unlimited shares
authorized without par value) 1,103,094 3,380,718 539,046 5,022,858
==================================================
Net asset value, offering and redemption
price per share $ 10.61 $ 12.30 $ 10.61
==================================================
</TABLE>
See accompanying noates to pro forma combining financial statements.
B-23
<PAGE>
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND
SEFTON U.S. GOVERNMENT FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
KAYNE
KAYNE ANDERSON
ANDERSON SEFTON PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUST COMBINED
-------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Income:
Interest income $ 571,490 $ 1,277,715 $ 1,849,205
-------------------------------------------------
Total income 571,490 1,277,715 0 1,849,205
-------------------------------------------------
Expenses:
Investment advisory fees 50,597 120,133 (20,022) 150,708
Custodian fees 4,472 1,858 6,330
Administration fees 7,589 30,033 37,622
Fund accounting fees 17,356 16,847 34,203
Transfer agent fees 7,636 4,425 12,061
Shareholder servicing fees 0 10,542 (10,542) 0
Professional fees 5,116 15,189 20,305
Insurance expense 92 0 92
Miscellaneous expenses 1,240 16,900 18,140
Reports to shareholders 744 0 744
Registration fees 8,348 0 8,348
Trustees' fees 3,933 0 3,933
Amortization of deferred
organization expenses 2,107 0 2,107
-------------------------------------------------
Total expenses 109,230 215,927 (30,564) 294,593
Less: Expenses reimbursed (13,534) (14,756) 20,506 (7,784)
-------------------------------------------------
Net expenses 95,696 201,171 (10,058) 286,809
-------------------------------------------------
NET INVESTMENT INCOME 475,794 1,076,544 10,058 1,562,396
-------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 91,140 5,409 96,549
Net change in unrealized appreciation
(depreciation) of investments (711,227) (1,709,716) (2,420,943)
-------------------------------------------------
Net gain (loss) on investments (620,087) (1,704,307) 0 (2,324,394)
-------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $(144,293) $ (627,763) $10,058 $ (761,998)
=================================================
</TABLE>
See accompanying notes to pro forma combining financial statements.
B-24
<PAGE>
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND
SEFTON U.S. GOVERNMENT FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
KAYNE
KAYNE ANDERSON
ANDERSON SEFTON PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUST COMBINED
---------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Income:
Dividend income $ 0 $ 37 $ 37
Interest income 1,411,875 2,383,315 3,795,190
---------------------------------------------------
Total income 1,411,875 2,383,352 0 3,795,227
---------------------------------------------------
Expenses:
Investment advisory fees 120,618 225,370 (37,562) 308,426
Custodian fees 5,429 98 5,527
Administration fees 26,052 56,342 82,394
Fund accounting fees 32,258 34,971 67,229
Transfer agent fees 20,322 9,643 29,965
Shareholder servicing fees 0 4,847 (4,847) 0
Professional fees 8,092 33,299 41,391
Insurance expense 70 0 70
Miscellaneous expenses 2,263 27,842 30,105
Reports to shareholders 1,000 0 1,000
Registration fees 16,487 0 16,487
Trustees' fees 4,438 0 4,438
Amortization of deferred
organization expenses 4,249 0 4,249
---------------------------------------------------
Total expenses 241,278 392,412 (42,409) 591,281
Less: Expenses reimbursed/waived (15,132) (37,561) 24,666 (28,027)
---------------------------------------------------
Net expenses 226,146 354,851 (17,743) 563,254
---------------------------------------------------
NET INVESTMENT INCOME 1,185,729 2,028,501 17,743 3,231,973
---------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments 131,606 104,888 236,494
Net change in unrealized appreciation
(depreciation) of investments 490,291 545,227 1,035,518
---------------------------------------------------
Net gain (loss) on investments 621,897 650,115 0 1,272,012
---------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 1,807,626 $ 2,678,616 $17,743 $ 4,503,985
===================================================
</TABLE>
See accompanying notes to pro forma combining financial statements.
B-25
<PAGE>
KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND
SEFTON CALIFORNIA TAX-FREE FUND
PRO FORMA COMBINING PORTFOLIO OF INVESTMENTS
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
PAR VALUE VALUE
- - - -------------------------------------- --------------------------------------------------
KAYNE KAYNE
KAYNE ANDERSON KAYNE ANDERSON
ANDERSON SEFTON PRO FORMA ANDERSON SEFTON PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) COMBINED (HISTORICAL) (HISTORICAL) ADJUST COMBINED
- - - -------------------------------------- --------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
MUNICIPAL DEBT
CERTIFICATE OF PARTICIPATION
$ 0 $1,500,000 $1,500,000 West Covina, California Hospital,
Certificate of Participation, 6.500%
due 08/15/2014,
Prerefunded 08/15/2004 @ 102 $ 0 $ 1,672,530 $ 1,672,530
--------------------------------------------------
FLOATING RATE NOTES
California Pollution Control Finance
Authority
0 100,000 100,000 Series A, 3.350% due 02/28/2008 (b) 0 100,000 100,000
0 100,000 100,000 Series B, 3.350% due 02/28/2008 (b) 0 100,000 100,000
0 100,000 100,000 Series C, 3.350% due 02/28/2008 (b) 0 100,000 100,000
--------------------------------------------------
0 300,000 300,000
--------------------------------------------------
GENERAL OBLIGATION
100,000 0 100,000 California State
6.500% dated 03/01/1998 due 03/01/2002 106,000 0 106,000
175,000 0 175,000 California State
5.250% dated 04/01/1998 due 10/01/2005 183,093 0 183,093
250,000 0 250,000 California State
5.25% dated 02/01/1999 due 02/01/2006 260,625 0 260,625
250,000 0 250,000 California State
5.375% dated 03/01/1994 due 03/01/2006 262,500 0 262,500
0 1,325,000 1,325,000 California State
6.250% due 04/01/2008 0 1,468,365 1,468,365
65,000 0 65,000 California State
5.250% dated 11/01/1996 due 06/01/2011 66,300 0 66,300
250,000 0 250,000 California State
5.250% dated 11/01/1996 due 06/01/2016 249,375 0 249,375
100,000 0 100,000 California State Veterans Bonds
6.250% dated 03/01/1995 due 02/01/2014 101,070 0 101,070
200,000 0 200,000 California State Veterans Bond
6.375% dated 03/01/1995 due 02/01/2027 202,234 0 202,234
0 1,895,000 1,895,000 California State Veterans General
Obligation 5.15% due 12/1/14, Callable
12/1/08 @ 101 0 1,896,421 1,896,421
200,000 0 200,000 Hawaii State
5.250% dated 03/01/1997 due 03/01/2000 202,294 0 202,294
</TABLE>
B-26
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
195,000 0 195,000 Indiana Bond Bank
6.600% dated 02/01/1991 due 01/01/2003 205,237 0 205,237
200,000 0 200,000 Los Angeles County California Public
Works 5.000% 11/01/1997 due 10/01/2016 194,000 0 194,000
250,000 0 250,000 Massachusetts State
5.000% dated 08/01/1997 due 08/01/2000 253,397 0 253,397
100,000 0 100,000 Nevada State
5.600% dated 07/01/1996 due 05/15/2009 104,750 0 104,750
0 1,000,000 1,000,000 Oakland California, Series B 5.88%
due 6/15/19, Callable 6/15/05 @ 102 0 1,041,850 1,041,850
60,000 0 60,000 Puerto Rico Public Buildings Authority
5.750% dated 06/01/1993 due 07/01/2015 61,725 0 61,725
150,000 0 150,000 Salt Lake City Utah Redevelopment
Agency 5.500% dated 08/01/1997 due
10/01/2008 154,312 0 154,312
250,000 0 250,000 Washoe County Nevada
6.750% dated 03/15/1991 due 03/15/2000 257,677 0 257,677
--------------------------------------------------
2,864,589 4,406,636 7,271,225
--------------------------------------------------
EDUCATION
0 1,690,000 1,690,000 California Educational Facilities
Authority, Pomona College, 6.13%,
2/15/08, Callable 02/15/2002 @ 102 0 1,794,611 1,794,611
0 1,500,000 1,500,000 California Educational Facilities
Authority, Santa Clara University,
6.25%, 2/1/16, Prerefunded 02/01/2002
@ 102 0 1,604,625 1,604,625
200,000 0 200,000 Pinal County Arizona School District
6.000% dated 10/01/1992 due 07/01/2004 210,250 0 210,250
200,000 0 200,000 University of California Revenues
5.250% dated 08/15/1993 due 09/01/2011 204,000 0 204,000
0 1,500,000 1,500,000 University of California Revenues
Series B 6.30%, 9/1/15, Prerefunded
9/1/03 @ 102 0 1,644,750 1,644,750
--------------------------------------------------
414,250 5,043,986 5,458,236
--------------------------------------------------
ELECTRIC
200,000 0 200,000 Colorado Springs Utilities
6.750% dated 04/15/1991 due 11/15/2005 213,500 0 213,500
100,000 0 100,000 HillsBorough Florida Utilities
7.000% dated 09/01/1991 due 08/01/2114 107,000 0 107,000
400,000 0 400,000 Knoxville Tennessee Electric Revenue
5.000% dated 11/01/1998 due 07/01/1998 375,500 0 375,500
100,000 0 100,000 Lower Colorado River Texas Authority
5.250% dated 05/01/1993 due 01/01/2015 99,125 0 99,125
75,000 0 75,000 Massachusetts State Power
5.875% dated 08/01/1992 due 07/01/2003 78,187 0 78,187
85,000 0 85,000 Piedmont Municipal Power Agency
6.550% dated 09/01/1996 due 01/01/2016 85,513 0 85,513
200,000 0 200,000 Puerto Rico Electric Power Authority
6.000% dated 08/15/1995 due 07/01/2000 205,000 0 205,000
</TABLE>
B-27
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
200,000 0 200,000 Sacramento California Municipal
Utilities Dist. 5.700% dated 04/01/1993
due 05/15/2012 208,750 0 208,750
200,000 0 200,000 Tacoma Washington Electric System
Revenue 5.900% dated 09/01/1992 due
01/01/2005 209,750 0 209,750
100,000 0 100,000 Washington Public Power Supply Systems
4.750% dated 05/01/1993 due 07/01/1999 100,000 0 100,000
--------------------------------------------------
1,682,325 0 1,682,325
--------------------------------------------------
HEALTH
0 1,000,000 1,000,000 California Health Facilities
Authorities Revenue 5.000% due
11/15/2013 0 983,340 983,340
0 1,500,000 1,500,000 California Health Facilities Finance
Authorities 6.25% due 10/1/13, Callable
10/1/01 @ 102 0 1,586,640 1,586,640
0 1,000,000 1,000,000 Stockton, California Health Facilities,
Dameron Hospital Assoc., Series A 5.35%
due 12/1/09, Callable 12/1/07 @ 102 0 1,012,310 1,012,310
0 500,000 500,000 Stockton, California Health Facilities,
Dameron Hospital Assoc., Series A 5.45%
due 12/1/10, Callable 12/1/07 @ 102 0 503,650 503,650
--------------------------------------------------
0 4,085,940 4,085,940
--------------------------------------------------
HOSPITAL
200,000 0 200,000 Dade County Health Facilities Authority
6.600% dated 03/01/1987 due 08/15/2002 202,380 0 202,380
300,000 0 300,000 New Jersey Health Facility Financing
Authority 6.800% dated 04/01/192 due
07/01/2011 319,500 0 319,500
200,000 0 200,000 New York Dormatory Authority
5.000% dated 03/01/1997 due 08/15/2000 202,500 0 202,500
200,000 0 200,000 New York State Dormatory Authority
5.500% dated 02/01/1998 due 02/15/2003 205,750 0 205,750
--------------------------------------------------
930,130 0 930,130
--------------------------------------------------
HOUSING
260,000 0 260,000 California Housing Finance Agency
4.350% dated 12/01/1998 due 08/01/2008 249,925 0 249,925
0 1,460,000 1,460,000 California Housing Finance Agency,
Series F 5.95% due 8/1/14, Callable
8/1/05 @ 102 0 1,534,402 1,534,402
0 800,000 800,000 California Housing Finance Agency,
Series L 5.90% due 8/1/17, Callable
2/1/06 @ 102 0 837,784 837,784
200,000 0 200,000 New York Urban Development
6.000% dated 01/01/1995 due 01/01/2001 204,750 0 204,750
250,000 0 250,000 Santa Clara County California Housing
4.250% dated 11/01/1998 due 11/01/2007 245,938 0 245,938
--------------------------------------------------
700,613 2,372,186 3,072,799
--------------------------------------------------
</TABLE>
B-28
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
IDR/PCR
200,000 0 200,000 California Pollution Control Financing
Authority 7.150% dated 02/01/1991 due
02/01/2011 211,250 0 211,250
200,000 0 200,000 California Pollution Control Financing
Authority 5.850% dated 11/01/1993 due
12/01/2023 204,000 0 204,000
250,000 0 250,000 Gallup, New Mexico Pollution Control
Revenue 6.650% dated 04/15/1992 due
08/15/2017 257,188 0 257,188
75,000 0 75,000 Mercer County, North Dakota Pollution
Control 5.850% 06/01/1993 due
06/01/2023 77,156 0 77,156
180,000 0 180,000 Jefferson County
5.300% dated 08/17/1994 due 08/01/1999 180,095 0 180,095
--------------------------------------------------
929,689 0 929,689
--------------------------------------------------
POWER
0 1,500,000 1,500,000 M-S-R Public Power Agency, California
San Juan Project, Series F
6.00% due 7/1/20, Callable 7/1/03 @ 102 0 1,574,985 1,574,985
0 1,000,000 1,000,000 Northern California Power Agency
Revenue 5.00% due 7/1/15, Callable
7/1/08 @ 101 0 975,800 975,800
--------------------------------------------------
0 2,550,785 2,550,785
--------------------------------------------------
PRISONS
0 1,000,000 1,000,000 California State Public Works Board
University 5.250% due 12/01/2008, AMBAC 0 1,044,920 1,044,920
--------------------------------------------------
REVENUE
0 1,000,000 1,000,000 Mountain View California Shoreline
Regional Park, Series A, 5.500%
due 8/1/21, Callable 8/1/06 @ 102 0 1,010,990 1,010,990
0 1,000,000 1,000,000 Port of Oakland
5.60% due 11/1/19, Callable
11/1/07 @ 102 0 1,023,320 1,023,320
0 1,500,000 1,500,000 San Francisco Port Commission
5.90% due 7/1/09, Callable 7/1/04 @ 102 0 1,589,925 1,589,925
--------------------------------------------------
0 3,624,235 3,624,235
--------------------------------------------------
TRANSPORTATION
105,000 0 105,000 Colorado Springs Colorado Airport
6.900% dated 09/15/1992 due 01/01/2012 113,400 0 113,400
200,000 0 200,000 Denver Colorado City & County Airport
8.100% dated 05/01/1990 due 11/15/2000 210,000 0 210,000
250,000 0 250,000 Hawaii State Airports System
7.500% dated 10/01/1990 due 07/01/2005 261,816 0 261,816
100,000 0 100,000 Hawaii State Airports Revenue
5.750% dated 04/01/1994 due 07/01/2009 105,000 0 105,000
200,000 0 200,000 New Jersey State Turnpike Authority
5.900% dated 01/01/1992 due 01/01/2003 208,500 0 208,500
200,000 0 200,000 Orange County Airport
5.500% dated 04/02/1997 due 07/01/2002 207,000 0 207,000
</TABLE>
B-29
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
0 1,500,000 1,500,000 San Diego Regional Transportation
Comm., California Sales Tax, Series A
5.000% due 04/01/2007, FGIC 0 1,543,080 1,543,080
0 1,800,000 1,800,000 San Francisco Airport, California
City/County 5.38% due 5/1/17, Callable
5/1/06 @ 102 0 1,812,438 1,812,438
0 1,500,000 1,500,000 San Francisco Bay Area Rapid Transit,
Sales Tax Revenue, 5.500% due
07/01/2015, Callable 07/01/2005 @ 101 0 1,526,565 1,526,565
250,000 0 250,000 San Francisco California City
5.500% dated 05/01/1999 due 05/01/2005 261,562 0 261,562
--------------------------------------------------
1,367,278 4,882,083 6,249,361
--------------------------------------------------
PREREFUNDED
200,000 0 200,000 California Health Facility Financing
Authority 6.750% dated 10/01/1989 due
10/01/2019 205,609 0 205,609
185,000 0 185,000 California State
5.250% dated 11/01/1996 due 06/01/2011 194,018 0 194,018
150,000 0 150,000 Los Angeles Convention & Exhibit Center
9.000% dated 12/01/1985 due 12/01/2020 187,687 0 187,687
100,000 0 100,000 Orange County CA Local Transporation
Auth. 5.750% dated 09/01/1992 due
02/15/2005 105,750 0 105,750
200,000 0 200,000 Washington Public Power Supply Systems
7.625% dated 10/15/1990 due 07/01/2010 213,751 0 213,751
275,000 0 275,000 Webb County Partnership
5.250% dated 10/01/1997 due 10/01/2022 283,251 0 283,251
--------------------------------------------------
1,190,066 0 1,190,066
--------------------------------------------------
WATER & SEWER
275,000 0 275,000 Contra Costa California Water District
5.250% dated 07/01/1993 due 10/01/2016 276,375 0 276,375
0 1,200,000 1,200,000 Los Angeles California Waste Water
Revenue 5.00% due 6/1/14, Callable
6/1/08 @ 101 0 1,183,212 1,183,212
200,000 0 200,000 Los Angeles California Wastewater
System 5.700% dated 04/01/1993 due
06/01/2020 207,251 0 207,251
0 1,700,000 1,700,000 Marin California Municipal Water
District 5.55% due 7/1/13, Callable
7/1/03 @ 102 0 1,739,916 1,739,916
0 1,000,000 1,000,000 Rancho California Water District
Financing Authority, Series A
5.88% due 11/1/10, Callable
11/1/05 @ 102 0 1,068,460 1,068,460
0 1,500,000 1,500,000 San Francisco California City/County
Public Utility Commission Water, Series
A 6.00% due 11/1/15, Callable 11/1/02
@ 100 0 1,562,970 1,562,970
0 1,500,000 1,500,000 San Jose - Santa Clara Water Dist. Fin.
5.38% due 11/15/15, Callable 11/15/05
@ 101 0 1,516,020 1,516,020
0 1,000,000 1,000,000 South County California Regional
Wastewater 4.75% due 8/1/17, Callable
8/1/09 @ 102 0 931,520 931,520
0 1,000,000 1,000,000 Tulare California Sewer Revenue, 5.70%
due 11/15/15, Callable 11/15/06 @ 102 0 1,045,040 1,045,040
--------------------------------------------------
483,626 9,047,138 9,530,764
--------------------------------------------------
TOTAL MUNICIPAL DEBT 10,562,566 39,030,439 49,593,005
--------------------------------------------------
</TABLE>
B-30
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
VARIABLE RATE MUNICIPAL DEBT
400,000 0 400,000 California State Economic Development
0.000%** dated 5/15/1998 due 4/1/08 400,000 0 400,000
--------------------------------------------------
TOTAL INVESTMENTS IN SECURITIES
(Cost $11,085,362, $37,371,769
and $48,457,131, respectively)* 10,962,566 39,030,439 49,993,005
OTHER ASSETS LESS LIABILITIES 220,133 491,077 (6,298) 704,912
--------------------------------------------------
NET ASSETS $11,182,699 $39,521,516 $ (6,298) $50,697,917
==================================================
* Cost for Federal income tax purpose
is the same.
Net unrealized appreciation
(depreciation) consists of:
Gross unrealized appreciation $ 26,917 $ 1,763,161 $ 1,790,078
Gross unrealized depreciation (149,713) (104,491) (254,204)
--------------------------------------------------
Net unrealized appreciation
(depreciation) $ (122,796) $ 1,658,670 $ 1,535,874
==================================================
</TABLE>
See accompanying notes to pro forma combining financial statements.
B-31
<PAGE>
KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND
SEFTON CALIFORNIA TAX-FREE FUND
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
KAYNE
KAYNE ANDERSON
ANDERSON SEFTON PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUST COMBINED
--------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at market
(cost of $11,085,362, $37,371,769
and $48,457,131, respectively) $10,962,566 $39,030,439 $49,993,005
Cash 143,113 54,688 197,801
Interest receivable 204,729 596,593 801,322
Prepaid expenses 16,733 3,783 20,516
Due from investment advisor 2,262 0 2,262
Deferred organization costs, net 9,847 6,298 (6,298) 9,847
--------------------------------------------------
Total assets 11,339,250 39,691,801 (6,298) 51,024,753
--------------------------------------------------
LIABILITIES
Payables:
Investment securitites purchased 108,199 0 108,199
Distributions payable 35,868 143,015 178,883
Due to investment advisor 0 14,717 14,717
Other accrued expenses 12,484 12,553 25,037
--------------------------------------------------
Total liabilities 156,551 170,285 0 326,836
--------------------------------------------------
NET ASSETS $11,182,699 $39,521,516 $(6,298) $50,697,917
==================================================
Number of shares issued and
outstanding (unlimited shares
authorized without par value) 1,057,802 3,144,113 594,318 4,796,233
==================================================
Net asset value, offering and redemption
price per share $ 10.57 $ 12.57 $ 10.57
==================================================
</TABLE>
See accompanying noates to pro forma combining financial statements.
B-32
<PAGE>
KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND
SEFTON CALIFORNIA TAX-FREE FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
KAYNE
KAYNE ANDERSON
ANDERSON SEFTON PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUST COMBINED
-------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Income:
Interest income $ 232,564 $ 1,063,422 $ 1,295,986
-------------------------------------------------
Total income 232,564 1,063,422 0 1,295,986
-------------------------------------------------
Expenses:
Investment advisory fees 26,217 121,285 (20,214) 127,288
Custodian fees 1,439 1,866 3,305
Administration fees 9,919 30,321 40,240
Fund accounting fees 18,236 17,507 35,743
Transfer agent fees 8,636 4,235 12,871
Shareholder servicing fees 0 9,026 (9,026) 0
Professional fees 3,017 15,125 18,142
Insurance expense 92 0 92
Miscellaneous expenses 744 18,142 18,886
Reports to shareholders 248 0 248
Registration fees 7,615 0 7,615
Trustees' fees 1,933 0 1,933
Amortization of deferred
organization expenses 2,107 0 2,107
-------------------------------------------------
Total expenses 80,203 217,507 (29,240) 268,470
Less: Expenses reimbursed (39,581) (30,321) (6,989) (76,891)
Less: Expenses paid indirectly (1,264) 0 (1,264)
-------------------------------------------------
Net expenses 39,358 187,186 (36,229) 190,315
-------------------------------------------------
NET INVESTMENT INCOME 193,206 876,236 36,229 1,105,671
-------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments (212) 39,961 39,749
Net change in unrealized appreciation
(depreciation) of investments (199,160) (1,378,810) (1,577,970)
-------------------------------------------------
Net gain (loss) on investments (199,372) (1,338,849) 0 (1,538,221)
-------------------------------------------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM OPERATIONS $ (6,166) $ (462,613) $36,229 $ (432,550)
=================================================
</TABLE>
See accompanying notes to pro forma combining financial statements.
B-33
<PAGE>
KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND
SEFTON CALIFORNIA TAX-FREE FUND
PRO FORMA COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
KAYNE
KAYNE ANDERSON
ANDERSON SEFTON PRO FORMA PRO FORMA
(HISTORICAL) (HISTORICAL) ADJUST COMBINED
-------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Income:
Interest income $ 318,389 $ 2,186,750 $ 2,505,139
-------------------------------------------------
Total income 318,389 2,186,750 0 2,505,139
-------------------------------------------------
Expenses:
Investment advisory fees 34,150 253,518 (42,253) 245,415
Custodian fees 2,518 1,380 3,898
Administration fees 20,873 63,379 84,252
Fund accounting fees 37,318 36,740 74,058
Transfer agent fees 22,877 9,450 32,327
Shareholder servicing fees 0 4,226 (4,226) 0
Professional fees 6,650 35,635 42,285
Insurance expense 70 0 70
Miscellaneous expenses 2,000 35,736 37,736
Reports to shareholders 1,000 0 1,000
Registration fees 16,487 0 16,487
Trustees' fees 4,438 0 4,438
Amortization of deferred
organization expenses 4,249 0 0 4,249
-------------------------------------------------
Total expenses 152,630 440,064 (46,479) 546,215
Less: Expenses reimbursed/waived (99,797) (63,379) (26,428) (189,604)
-------------------------------------------------
Net expenses 52,833 376,685 (72,907) 356,611
-------------------------------------------------
NET INVESTMENT INCOME 265,556 1,810,065 72,907 2,148,528
-------------------------------------------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments 5,204 195,883 201,087
Net change in unrealized appreciation
(depreciation) of investments 23,836 521,090 544,926
-------------------------------------------------
Net gain (loss) on investments 29,040 716,973 0 746,013
-------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 294,596 $ 2,527,038 $72,907 $ 2,894,541
=================================================
</TABLE>
See accompanying notes to pro forma combining financial statements.
B-34
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
SEFTON FUNDS TRUST
NOTES TO PRO FORMA COMBINING FINANCIAL STATEMENT
- - - --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRO FORMA PRESENTATION
The pro forma combining financial statements and the accompanying pro forma
schedules of investments give effect to the proposed Agreements and Plans of
Reorganization pursuant to which the Sefton Equity Value Fund, Sefton Small
Company Value Fund, Sefton U.S. Government Fund and Sefton California Tax-Free
Fund (each a series of Sefton Funds Trust, collectively the "Acquired Funds")
will transfer all of their assets and liabilities to the Kayne Anderson Rising
Dividends Fund, Kayne Anderson Small Cap Rising Dividends Fund, Kayne Anderson
Intermediate Total Return Bond Fund and Kayne Anderson Intermediate Tax-Free
Bond Fund (each a series of shares of Kayne Anderson Mutual Funds, collectively
the "Acquiring Funds"), respectively, in exchange for shares of the
corresponding Acquiring Fund. Each of the respective Kayne Anderson Funds will
be the legal and accounting survivor of the reorganizations. It is contemplated
that each of the reorganizations will be accounted for as a tax-free
reorganization of investment companies.
NOTE 2 - PRO FORMA ADJUSTMENTS
Kayne Anderson Investment Management, LLC ("Kayne Anderson"), the adviser to the
Acquiring Funds, will pay all costs and expenses of the reorganizations up to
certain limits, including those associated with the shareholder meeting, the
copying, printing and distribution of the combined proxy statement and
prospectus, and the solicitation of proxies for the shareholder meeting. Sefton
Capital Management, the advisor to the Acquired Funds, will pay all costs and
expenses incurred in connection with the reorganization in excess of those paid
by Kayne Anderson. None of the Acquired Funds, the Acquiring Funds, nor any of
their respective shareholders will bear these expenses.
Pro forma adjustments have been made to give effect to each of the following as
if the reorganizations had occurred as of the beginning of each period
presented:
A - Adjust investment advisory fees to conform with the contractual rates of the
Acquiring Funds
B - Eliminate shareholder servicing fees of the Acquired Funds
C - Adjust expense waiver/reimbursements to conform with the Acquiring Funds
contractual arrangements
B-35
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
SEFTON FUNDS TRUST
NOTES TO PRO FORMA COMBINING FINANCIAL STATEMENT (CONTINUED)
- - - --------------------------------------------------------------------------------
NOTE 3 - INCOME TAXES
At June 30, 1999 the Sefton Equity Value Fund ("Equity Value") and the Sefton
Small Company Value Fund ("Small Company") had accumulated net realized losses
of $1,056,084 and $7,745,088, respectively, which will be carried forward for
Federal income tax purposes and offset against future realized taxable gains. In
connection with the reorganizations, it is anticipated that there will be a
substantive change in ownership of Equity Value and Small Company that, pursuant
to income tax regulations, will place certain annual limitations of the
respective Acquiring Fund's ability to utilize these capital loss carryforwards
after the reorganizations. Equity Value's capital loss carryforward at June 30,
1999 is less than the applicable annual limitation and such losses can be
utilized without limitation at any time prior to its expiration in 2007. The
utilization of Small Company's capital loss carryforward at June 30, 1999 will
be limited to approximately $854,000 annually and will expire $58,935 in 2005
and $7,686,153 in 2007, if not utilized in earlier years.
B-36
<PAGE>
-----------------------------------------
PART C
KAYNE ANDERSON MUTUAL FUNDS
OTHER INFORMATION
-----------------------------------------
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
-------------------------------
FORM N-14
-------------------------------
PART C
-------------------------------
ITEM 15. 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.
C-1
<PAGE>
ITEM 16. EXHIBITS
(1) Agreement and Declaration of Trust. (a)
(2) By-Laws. (a)
(3) Voting Trust Agreement - Not Applicable.
(4) Form of Agreement and Plan of Reorganization is included in Part A.
(5) Specimen Share Certificate - Not Applicable.
(6) Investment Advisory Contracts for:
(1) Kayne Anderson Rising Dividends Fund (a)
(2) Kayne Anderson Small Cap Rising Dividends Fund (a)
(3) Kayne Anderson Intermediate Total Return Bond Fund (a)
(4) Kayne Anderson Intermediate Tax-Free Bond Fund (a)
(7) Underwriting Contracts. (c)
(8) Bonus or Profit Sharing Contracts--Not Applicable.
(9) Custodian Agreement. (b)
(10) Rule 12b-1 plan and Rule 18f-3 plan - Not applicable.
(11) Consent and Opinion of Counsel as to legality of shares. (b)
(12) Opinion and Consent as to Tax Matters. (d)
(13) Other Material Contracts - Administration Agreement. (c)
(14) (1) Independent Auditors' Consent - Briggs, Bunting & Doughtery, LLP
(2) Independent Auditors' Consent - PricewaterhouseCoopers LLP
(15) Not Applicable.
(16) Power of Attorney (a)
(17) Not Applicable.
- - - ----------
(a) Incorporated by reference to the Form N-1A Registration Statement filed on
July 12, 1996.
(b) Incorporated by reference to Pre-Effective Amendment No. 1 to the Form N-1A
Registration Statement filed on September 18, 1996.
(c) Incorporated by reference to Pre-Effective Amendment No. 2 to the Form N1-A
Registration Statement filed on September 26, 1996.
(d) Incorporated by reference to the Registration Statement on Form N-14 filed
on September 10, 1999.
ITEM 17. UNDERTAKINGS.
(1) Registrant agrees that, prior to any public reoffering of the
securities registered through the use of a prospectus which is part of
this registration statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act
of 1933, the reoffering prospectus will contain the information called
for by the applicable registration form for the reofferings by persons
who may be deemed underwriters, in addition to the information called
for by the other items of the applicable.
(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (a) above will be filed as part of an amendment to the
Registration Statement and will not be used until the amendment is
effective, and that, in determining any liability under the Securities
Act of 1933, each post-effective amendment shall be deemed to be a new
registration statement for the securities offered therein, and the
offering of the securities at that time shall be deemed to be the
initial bona fide offering of them.
C-2
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this amendment to the
registration statement has been signed on behalf of the Registrant, in the City
of Los Angeles and State of California, on the 19th day of October, 1999.
KAYNE ANDERSON MUTUAL FUNDS
/s/ Allan M. Rudnick*
----------------------------------------
Allan M. Rudnick, President
and Principal Executive Officer
As required by the Securities Act of 1933, this amendment to the registration
statement has been signed by the following persons in the capacities and on the
dates indicated:
SIGNATURE TITLE DATE
- - - --------- ----- ----
Richard Alan Kayne* Chairman of the Board of October 19, 1999
- - - ------------------------ Trustees
Richard Alan Kayne
Allan M. Rudnick* President, Principal Executive October 19, 1999
- - - ------------------------ Officer and Trustee
Allan M. Rudnick
William T. Miller* Principal Financial and October 19, 1999
- - - ------------------------ Accounting Officer, and Trustee
William T. Miller
Carl D. Covitz* Trustee October 19, 1999
- - - ------------------------
Carl D. Covitz
Arnold Brustin* Trustee October 19, 1999
- - - ------------------------
Arnold Brustin
Gerald I. Isenberg* Trustee October 19, 1999
- - - ------------------------
Gerald I. Isenberg
William H. Waldorf* Trustee October 19, 1999
- - - ------------------------
William H. Waldorf
*By: /s/ William T. Miller
- - - ------------------------
William T. Miller, pursuant
to a Power of Attorney
previously filed
C-3
<PAGE>
SEC File No. 333-86947
KAYNE ANDERSON MUTUAL FUNDS
FORM N-14
EXHIBIT INDEX
Number Exhibit
- - - ------ -------
14 (1) Independent Auditors' Consent - Briggs, Bunting & Doughtery, LLP
(2) Independent Auditors' Consent - PricewaterhouseCoopers LLP
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 22, 1999, accompanying the December 31,
1998 financial statements of Kayne Anderson Mutual Funds (comprising,
respectively, the Rising Dividends Fund, the Small Cap Rising Dividends Fund,
the International Rising Dividends Fund, the Intermediate Total Return Bond
Fund, and the Intermediate Tax-Free Bond Fund) which are incorporated by
reference in Part B of the Post-Effective Amendment to the Fund's Registration
Statement and Prospectus on Form N-1A which is incorporated by reference in this
Combined Proxy Statement and Prospectus on Form N-14. We consent to the use of
the aforementioned report in the Combined Proxy Statement and Prospectus. We
also consent to the reference to our firm under the caption "Experts" in the
Combined Proxy Statement and Prospectus.
BRIGGS, BUNTING & DOUGHERTY, LLP
PHILADELPHIA, PENNSYLVANIA
OCTOBER 19, 1999
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Pre-Effective
Amendment No. 1 to Form N-14 Registration Statement (File No. 333-86947) of the
Kayne Anderson Mutuals Funds, of our report dated February 18, 1999 on our
audits of the financial statements and financial highlights of the Sefton U.S.
Government Fund, the Sefton California Tax-Free Fund, the Sefton Equity Value
Fund and the Sefton Small Company Value Fund (constituting Sefton Funds Trust)
which report is included in the Annual Report to Shareholders for the year ended
December 31, 1998. We also consent to the references to our Firm under the
captions "Financial Highlights" and "Experts" relating to Sefton Funds Trust in
this Pre-Effective Amendment No. 1 to Form N-14 Registration Statement (File No.
333-86947) of the Kayne Anderson Mutual Funds.
PricewaterhouseCoopers LLP
Chicago, Illinois
October 19, 1999
