KAYNE ANDERSON MUTUAL FUNDS
Supplement dated November 8, 1999
to Prospectus dated May 5, 1999
TO SHAREHOLDERS OF THE KAYNE ANDERSON CALIFORNIA TAX-FREE BOND FUND
(FORMERLY, THE KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND)
On November 4, 1999, the shareholders of this Fund approved a change to its
fundamental investment objective to seek current income exempt from both federal
and California personal income taxes by investing primarily in investment-grade
municipal bonds.
Instead of investing its assets in investment-grade municipal bonds and notes of
any state, the Fund invests primarily in investment-grade California municipal
bonds and notes. Even though the Fund will continue to invest its assets so that
at least 80% of its assets will generate income exempt from federal income tax
and the federal alternative minimum tax, it will in addition to that strategy
invest at least 65% of its total assets in California municipal securities. The
quality of the bonds and notes to be purchased, however, will not change. The
Fund will continue to invest at least 90% of its assets in investment-grade
securities.
You should purchase shares of a California municipal bond fund only if you are a
California resident or are otherwise subject to California income tax so that
you may fully benefit from the tax-free nature of the income.
Also, you should understand that the Fund's concentration in California
municipal bonds may expose shareholders to additional risks compared to a fund
that invests in municipal bonds from many states. In particular, the Fund will
be vulnerable to any development in California's economy that may weaken or
jeopardize the ability of California municipal-bond issuers to pay interest and
principal on their bonds. The Fund's objective is to provide income exempt from
federal and California State personal income taxes, but some of its income may
be subject to the alternative minimum tax.
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Additional risks associated with the Fund's change of investment objective to a
California tax-free fund and its related change to a non-diversified mutual fund
include the following:
CREDIT RISK: Although the Fund invests primarily in investment-grade securities,
these securities may have some credit risk. Some issuers may not make payments
on the municipal or other debt securities held by the Fund. For example, Orange
County declared bankruptcy in December 1994. Or, an issuer may suffer
deterioration in its financial condition that could lower the credit quality of
a security, leading to greater volatility in the price of the security and in
shares of the Fund. As further examples, several regions of California are
highly vulnerable to earthquakes, which could strike and create financial stress
for a municipality. California's economic dependence on trade with weakened
Asian countries could also result in municipal financial problems. A decrease in
the quality rating of a bond can affect the bond's liquidity and make it more
difficult for the Fund to sell the bond at what the Adviser believes is a fair
price.
POLITICAL RISK: There are special factors that may affect the value of municipal
securities and, as a result, the Fund's share price. These factors include
political or legislative changes, uncertainties related to the tax status of the
securities or the rights of investors in the securities. California has several
Constitutional and statutory limits on municipal taxing powers that can restrict
the ability of municipal authorities to generate revenue to pay interest due on
bonds.
LACK OF DIVERSIFICATION: The Fund is not diversified, which means it may invest
a relatively high percentage of its assets in the obligations of a limited
number of issuers. As a result, the Fund may be more susceptible to any single
economic, political or regulatory occurrence. The Fund is also particularly
susceptible to events affecting issuers in California. In particular, the Fund
will be vulnerable to any development in California's economy that may weaken or
jeopardize the ability of California municipal-bond issuers to pay interest and
principal on their bonds. As a result, the Fund's shares may fluctuate more
widely in value than those of a fund investing in municipal bonds from a number
of different states. You should consider the greater risk of investing in a
single state fund compared to more diversified mutual funds.
The Fund will not be available for sale in the following states: Connecticut,
Montana, North Dakota, Nebraska and Rhode Island.
