KAYNE ANDERSON MUTUAL FUNDS, 497, 2000-06-06

KAYNE ANDERSON MUTUAL FUNDS
497, 2000-06-06

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KAYNE ANDERSON

MUTUAL FUNDS
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PROSPECTUS

KAYNE ANDERSON LARGE CAP FUND

KAYNE ANDERSON SMALL CAP FUND

KAYNE ANDERSON INTERNATIONAL FUND

KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND

KAYNE ANDERSON CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND

THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR
PASSED UPON THE ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

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April 28, 2000
<PAGE>
TABLE OF CONTENTS

KAYNE ANDERSON LARGE CAP FUND ............................................. 1
KAYNE ANDERSON SMALL CAP FUND ............................................. 4
KAYNE ANDERSON INTERNATIONAL FUND ........................................ 7
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND ....................... 10
KAYNE ANDERSON CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND ............... 13
PORTFOLIO MANAGEMENT ..................................................... 16
MANAGEMENT FEES .......................................................... 16
ADDITIONAL INVESTMENT STRATEGIES AND RELATED RISKS ...................... 17
High Quality Philosophy ................................................ 17
Concentration in a Small Number of Companies ........................... 17
Defensive Investments .................................................. 17
Additional Information on the Benchmarks for the Funds .................. 17
FINANCIAL HIGHLIGHTS ...................................................... 19
YOUR ACCOUNT INFORMATION ................................................. 24
How Fund Shares Are Priced ............................................. 24
Buying Shares .......................................................... 24
Exchanging Shares ...................................................... 25
Selling Shares (Redemptions) ........................................... 26
Special Account Options ................................................ 26
After You Invest ....................................................... 28

This prospectus contains important information about the investment
objectives, strategies and risks of Kayne Anderson Mutual Funds that you should
know before you invest. Please read it carefully and keep it on hand for future
reference. Please be aware that these Funds:

* Are not bank deposits.

* Are not guaranteed, endorsed or insured by any financial institution
or government entity such as the Federal Deposit Insurance Corporation
(FDIC).

You should also know that you could lose money by investing in the Funds.

Kayne Anderson Investment Management, LLC, serves as the investment adviser
to the Funds and is referred to in this Prospectus as Kayne Anderson or the
Adviser.

For daily fund prices please call (800) 231-7414 x5520.
<PAGE>
KAYNE ANDERSON LARGE CAP FUND

OBJECTIVE

Seeks long-term capital appreciation, with dividend income as a secondary
consideration, by investing in high-quality large cap companies.

STRATEGY

In selecting securities, the Adviser uses a high-quality screening process. Our
quality criteria include strong consistent growth, an under-leveraged balance
sheet, strong profitability and free cash flows. If a company meets these
criteria, the Adviser researches and analyzes that company's strength of
management and relative competitive position in the industry. The Adviser places
emphasis on internally determining whether the company's stock price is
currently under- or over-valued.

RISKS

By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, such as a decline in the share price of a holding or an
overall decline in the stock market. As with any stock fund, the value of your
investment will fluctuate daily with movements in the stock market, as well as
in response to the activities of individual companies. To the extent the Fund is
overweighted in certain market sectors compared to the Standard & Poor's 500
Composite Price Index, the Fund may be more volatile that the S&P 500.

1
<PAGE>
KAYNE ANDERSON LARGE CAP FUND

PAST FUND PERFORMANCE FUND NAME

The chart below shows the risks of investing in the Fund and how the Fund's
total return has varied from year-to-year.

1996 1997 1998 1999
---- ---- ---- ----
19.09% 30.99% 14.14% 16.34%

During the four-year period shown above, the Fund's best quarter was Q2
1997 (+16.43%) and its worst quarter was Q3 1998 (-13.90%).

The table below compares the Fund's performance to a commonly used index
for its market segment. Of course, past performance cannot guarantee future
results.

AVERAGE ANNUAL RETURNS THROUGH 12/31/99

SINCE INCEPTION
1 YEAR (5/01/95)
------ ---------
Kayne Anderson Large Cap Fund 16.34% 21.66%
S&P 500 Index 21.04% 27.49%

2
<PAGE>
KAYNE ANDERSON LARGE CAP FUND

FEES AND EXPENSES FUND NAME

The following table shows the fees and expenses you may pay if you buy and
hold shares of the Fund. The Fund does not impose any front-end or deferred
sales loads and does not charge shareholders for exchanging shares or
reinvesting dividends.

SHAREHOLDER FEES
(fees paid directly from your investment)

Redemption Fee* .................................... 0.00%

----------
* $7 will be deducted from redemption proceeds sent by wire or overnight
courier.

ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
Management Fee .................................... 0.75%
Distribution/Service (12b-1) Fee ................ 0.00%
Other Expenses .................................... 0.28%
----
Total Annual Fund Operating Expenses .............. 1.03%
====

EXAMPLE OF FUND EXPENSES

This example is intended to help you compare the cost of investing in the
Fund with the cost of investing in other mutual funds. The table below shows
what you would pay in expenses over time, whether or not you sold your shares at
the end of each period. It assumes a $10,000 initial investment, 5% total return
each year and no changes in expenses. This example is for comparison purposes
only. It does not necessarily represent the Fund's actual expenses or returns.

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$105 $328 $569 $1,259

3
<PAGE>
KAYNE ANDERSON SMALL CAP FUND

OBJECTIVE

Seeks long-term capital appreciation, with dividend income as a secondary
consideration, by investing in high-quality small cap companies.

STRATEGY

The Fund uses a blended growth and value strategy. At least 65% of the Fund's
assets will be invested in consistently growing, highly profitable, low-debt
companies with rising cash flows, which the Adviser deems high-quality. The Fund
will seek to maintain a simple (not-weighted) average market capitalization in
line with that of popular small cap indices. In normal market conditions, at
least 80% of the Fund's assets will be invested in common stocks.

In selecting securities, the Adviser uses a screening process it believes
identifies high- quality companies. The quality criteria include strong
consistent growth, an under- leveraged balance sheet, strong profitability and
free cash flows. If a company meets these criteria, the Adviser researches and
analyzes that company's strength of management and relative competitive position
in the industry. The Adviser places emphasis on internally determining whether
the company's stock price is currently under- or over-valued.

RISKS

By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, such as a decline in the share price of a holding or an
overall decline in the stock market. As with any stock fund, the value of your
investment will fluctuate daily with movements in the stock market, as well as
in response to the activities of individual companies. To the extent the Fund is
overweighted in certain market sectors compared to the Russell 2000 Index, the
Fund may be more volatile that the Russell 2000.

The Fund's focus on small-cap stocks may expose shareholders to additional
risks. Smaller companies typically have more limited product lines, markets and
financial resources than larger companies, and their securities may trade less
frequently and in more limited volume than those of larger, more mature
companies. As a result, small- cap stocks, and therefore the Fund, may fluctuate
significantly more in value than large- cap stocks and funds that focus on them.

4
<PAGE>
KAYNE ANDERSON SMALL CAP FUND

PAST FUND PERFORMANCE

The chart below shows the risks of investing in the Fund and how the Fund's
total return has varied from year-to-year.

1997 1998 1999
---- ---- ----
19.46% 16.17% 3.64%

During the three-year period shown above, the Fund's best quarter was Q4
1998 (+15.43%) and its worst quarter was Q3 1998 (-10.24%).

The table below compares the Fund's performance to a commonly used index
for its market segment. Of course, past performance cannot guarantee future
results.

AVERAGE ANNUAL RETURNS THROUGH 12/31/99

SINCE INCEPTION
1 YEAR (10/18/96)
------ ----------
Kayne Anderson Small Cap Fund 3.64% 13.40%
Russell 2000 Index 21.26% 14.73%

5
<PAGE>
KAYNE ANDERSON SMALL CAP FUND

FEES AND EXPENSES

SHAREHOLDER FEES
(fees paid directly from your investment)

Redemption Fee* .................................... 0.00%

----------
* $7 will be deducted from redemption proceeds sent by wire or overnight
courier.

ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)+

Management Fee ..................................... 0.85%
Distribution/Service (12b-1) Fee ................... 0.00%
Other Expenses ..................................... 0.49%
----
Total Annual Fund Operating Expenses ............... 1.34%
Fee Reduction and/or Expense Reimbursement ......... 0.04%
----
Net Expenses ....................................... 1.30%
====

----------
+ Kayne Anderson has contractually agreed to reduce its fees and/or absorb
expenses to limit the Fund's total annual operating expenses (excluding
interest and tax expenses) to 1.30%. This contract has a one-year term,
renewable at the end of each fiscal year.

EXAMPLE OF FUND EXPENSES

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$132 $421 $730 $1,609

6
<PAGE>
KAYNE ANDERSON INTERNATIONAL FUND

OBJECTIVE

Seeks long-term capital appreciation, with dividend income as a secondary
consideration, by investing in companies outside the U.S. with consistent
rising cash flow.

STRATEGY

The Fund uses a blended growth and value strategy to invest in companies
generally having a market capitalization of $1 billion or more. At least 65% of
the Fund's assets will be invested in consistently growing, highly profitable,
low-debt companies with rising cash flows, which the Adviser deems high quality.
The Fund will emphasize those companies outside of the U.S. that the Adviser
believes have global businesses or operations rather than localized companies.
In normal market conditions, at least 80% of the Fund's assets will be invested
in common stocks, and the Fund's assets will be invested in at least three
different countries outside of the U.S., with investments in no single country
accounting for more than 40% of the Fund's assets.

RISKS

By investing in stocks, the Fund may expose you to certain risks that could
cause you to lose money, such as a decline in the share price of a holding or an
overall decline in the stock market. As with any stock fund, the value of your
investment will fluctuate daily with movements in the stock market, as well as
in response to the activities of individual companies. In addition, foreign
stock markets tend to be more volatile than the U.S. market due to economic and
political instability and regulatory conditions in some countries. Most of the
foreign securities in which the Fund invests are denominated in foreign
currencies, whose values may decline against the U.S. dollar.

7
<PAGE>
KAYNE ANDERSON INTERNATIONAL FUND

PAST FUND PERFORMANCE

The chart below shows the risks of investing in the Fund and how the Fund's
total return has varied from year-to-year.

1997 1998 1999
---- ---- ----
16.42% 26.47% 31.06%

During the three-year period shown above, the Fund's best quarter was Q4
1998 (+21.18%) and its worst quarter was Q3 1998 (-11.44%).

The table below compares the Fund's performance to the most commonly used
index for its market segment. Of course, past performance cannot guarantee
future results.

AVERAGE ANNUAL RETURNS THROUGH 12/31/99

SINCE INCEPTION
1 YEAR (10/18/96)
------ ----------
Kayne Anderson International Fund 31.06% 23.76%
Morgan Stanley Capital Int'l--Europe,
Australasia & Far East Index 26.96% 15.81%

8
<PAGE>
KAYNE ANDERSON INTERNATIONAL FUND

FEES AND EXPENSES

SHAREHOLDER FEES
(fees paid directly from your investment)

Redemption Fee* .................................... 0.00%

----------
* $7 will be deducted from redemption proceeds sent by wire or overnight
courier.

ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)+

Management Fee ..................................... 0.95%
Distribution/Service (12b-1) Fee ................... 0.00%
Other Expenses ..................................... 0.52%

Total Annual Fund Operating Expenses ............... 1.47%
Fee Reduction and/or Expense Reimbursement ......... 0.07%

Net Expenses ....................................... 1.40%

----------
+ Kayne Anderson has contractually agreed to reduce its fees and/or absorb
expenses to limit the Fund's total annual operating expenses (excluding
interest and tax expenses) to 1.40%. This contract has a one-year term,
renewable at the end of each fiscal year.

EXAMPLE OF FUND EXPENSES

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$143 $458 $796 $1,751

9
<PAGE>
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND

OBJECTIVE

Seeks to maximize total return (mainly through current income with capital
appreciation as a secondary factor) by investing primarily in investment-grade
bonds.

STRATEGY

The Fund invests primarily in investment-grade bonds, both foreign and domestic.
At least 90% of its total assets must be investment-grade at the time of
purchase. This includes U.S. government securities, corporate bonds,
mortgage-related securities, asset- backed securities, and money market
securities. Investment-grade bonds are those rated within the four highest
grades by rating agencies such as Standard & Poor's, Moody's or Fitch. From time
to time, the Fund may also invest in unrated bonds that the Adviser believes are
comparable to investment-grade securities. The Fund seeks to maintain a
dollar-weighted average maturity of three to ten years. Typically, a shorter
maturity means that the bond or portfolio has less sensitivity to interest
rates. The Fund invests in bonds that the Adviser believes offer attractive
yields and are undervalued relative to issues of similar quality and
interest-rate sensitivity.

RISKS

By investing in bonds, the Fund may expose you to certain risks that could cause
you to lose money. As with most bond funds, the value of shares in the Fund will
fluctuate along with interest rates. When interest rates rise, a bond's market
price generally declines. When interest rates fall, a bond's price usually
increases. A fund, such as this one, which invests most of its assets in bonds
will behave in largely the same way. As a result, the Fund is not appropriate
for investors whose primary investment objective is stability of the value of
their investment.

10
<PAGE>
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND

PAST FUND PERFORMANCE

The chart below shows the risks of investing in the Fund and how its total
return has varied from year-to-year.

1997 1998 1999
---- ---- ----
7.19% 7.61% -0.65%

During the three-year period shown above, the Fund's best quarter was Q3
1998 (+4.20%) and its worst quarter was Q2 1999 (-1.02%).

The table below compares the Fund's performance to a commonly used index
for its market segment. Of course, past performance cannot guarantee future
results.

AVERAGE ANNUAL RETURNS THROUGH 12/31/99

SINCE INCEPTION
1 YEAR (10/28/96)
------ ----------
Kayne Anderson Intermediate Total
Return Bond Fund (0.65%) 4.45%
Lehman Bros. Government/Corporate
Intermediate Bond Index 0.39% 5.42%

11
<PAGE>
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND

FEES AND EXPENSES

SHAREHOLDER FEES
(fees paid directly from your investment)

Redemption Fee* .................................... 0.00%

----------
* $7 will be deducted from redemption proceeds sent by wire or overnight
courier.

ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)+

Management Fee ..................................... 0.50%
Distribution/Service (12b-1) Fee ................... 0.00%
Other Expenses ..................................... 0.73%
----
Total Annual Fund Operating Expenses ............... 1.23%
Fee Reduction and/or Expense Reimbursement ......... 0.28%
----
Net Expenses ....................................... 0.95%
====

----------
+ Kayne Anderson has contractually agreed to reduce its fees and/or absorb
expenses to limit the Fund's total annual operating expenses (excluding
interest and tax expenses) to 0.95%. This contract has a one-year term,
renewable at the end of each fiscal year.

EXAMPLE OF FUND EXPENSES

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$97 $363 $649 $1,464

12
<PAGE>
KAYNE ANDERSON CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND

OBJECTIVE

To provide income exempt from Federal and California State personal income
taxes, although some of its income may be subject to the alternative minimum
tax.

STRATEGY

The Fund invests primarily in investment-grade California municipal bonds and
notes.

The Fund will invest so that at least 80% of its assets will generate income
exempt from federal income tax and federal alternative minimum tax. In addition,
at least 65% of the Fund's assets will be invested in California municipal
securities.

The Fund will invest at least 90% of its assets in investment-grade securities
at 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.

RISKS

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.

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. 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 prices of municipal securities and other debt securities usually rise when
interest rates fall and fall when interest rates rise. Longer term bonds and
zero coupon bonds are generally more sensitive to (that is, their value is more
affected by) interest rate changes than shorter term bonds. Generally, the
longer the average maturity of the bonds in the Fund, the more the Fund's share
price will fluctuate in response to interest rate changes.

Some of the municipal securities in which the Fund invests will be insured
against default. That insurance, however, does not mean that the value of your
investment in the Fund is protected against losses.

13
<PAGE>
KAYNE ANDERSON CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND

PAST FUND PERFORMANCE

The chart below shows the risks of investing in the Fund and how the Fund's
total return has varied from year-to-year.

1997 1998 1999
---- ---- ----
4.26% 4.37% -0.44%

During the three-year period shown above, the Fund's best quarter was Q3
1998 (+1.78%)] and its worst quarter was Q2 1999 (-0.83%).

The table below compares the Fund's performance to a commonly used index
for its market segment. Of course, past performance cannot guarantee future
results.

AVERAGE ANNUAL RETURNS THROUGH 12/31/99

SINCE INCEPTION
1 YEAR (10/28/96)
------ ----------
Kayne Anderson California
Intermediate Tax-Free Bond Fund -0.44% 2.56%
Lehman Bros. 5-Year
Municipal Bond Index 0.39% 4.42%

14
<PAGE>
KAYNE ANDERSON CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND

FEES AND EXPENSES, Continued

The following table shows the fees and expenses you may pay if you buy and
hold shares of the Fund. Kayne Anderson Mutual Funds does not impose any
front-end or deferred sales loads and does not charge shareholders for
exchanging shares or reinvesting dividends.

SHAREHOLDER FEES
(fees paid directly from your investment)

Redemption Fee* .................................... 0.00%

----------
* $7 will be deducted from redemption proceeds sent by wire or overnight
courier.

ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)+

Management Fee ..................................... 0.50%
Distribution/Service (12b-1) Fee ................... 0.00%
Other Expenses ..................................... 0.87%
----
Total Annual Fund Operating Expenses ............... 1.37%
Fee Reduction and/or Expense Reimbursement ......... 0.62%
----
Net Expenses ....................................... 0.75%
====

----------
+ Kayne Anderson has contractually agreed to reduce its fees and/or absorb
expenses to limit the Fund's total annual operating expenses (excluding
interest and tax expenses) to 0.75%. This contract has a one-year term,
renewable at the end of each fiscal year.

EXAMPLE OF FUND EXPENSES

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$77 $373 $691 $1,592

15
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS

PORTFOLIO MANAGEMENT

The investment adviser to the Funds is Kayne Anderson Investment
Management, LLC. Kayne Anderson has furnished investment advice to
institutional and private clients since 1984. As of March 31, 2000, Kayne
Anderson and its affiliates managed approximately $6 billion for their clients.

ALLAN RUDNICK is the Co-Portfolio Manager for the Large Cap Fund and serves
as Chief Investment Officer of the Adviser. Before joining the Adviser as its
Chief Investment Officer in 1989, he was President of Pilgrim Asset Management
and Chief Investment Officer for the Pilgrim Group of Mutual Funds. Mr. Rudnick
has over 25 years of experience in the investment industry since earning a BA
from Trinity College and an MBA from Harvard Business School.

PAUL WAYNE, CFA is Co-Portfolio Manager for the Large Cap Fund and serves
as Director of Research for the Adviser. Mr. Wayne joined the Adviser in 1992 as
Vice President of Research. Prior thereto, he served as Director of Research and
Securities Analyst for Crowell, Weedon & Co. since 1985. Mr. Wayne has over 15
years of investment experience. He earned BS and MS degrees from the University
of California, Long Beach.

ROBERT SCHWARZKOPF, CFA is the Co-Portfolio Manager for the Small Cap Fund.
Before joining the Adviser as a Portfolio Manager in 1991, he was a Portfolio
Manager for the Pilgrim Group of Mutual Funds. Mr. Schwarzkopf has 15 years of
experience in the investment industry. He earned BA and MS degrees from the
University of Miami.

SANDRA L. GLEASON, CFA is Co-Portfolio Manager for the Small Cap Fund. Ms.
Gleason joined the Adviser as a Research Analyst in 1993. Prior thereto, she
was a Senior Consultant for Peterson Consulting, Limited Partnership, a busi-
ness consulting firm. Ms. Gleason has over seven years of experience in the
investment industry. She earned a BS degree from the University of Arizona.

JEAN-BAPTISTE NADAL, CFA is the Portfolio Manager for the International
Fund. Prior to joining the Adviser as a Portfolio Manager in 1994, he managed
international equity portfolios for BearBull, a European investment management
firm. Mr. Nadal has 12 years of experience in the investment industry along with
public accounting and audit experience. He earned his degree in Finance and
Business Administration from SUP de CO, a leading French Business School.

MARK E. MILLER is the Co-Portfolio Manager for the Intermediate Total
Return and California Intermediate Tax-Free Bond Funds. Prior to joining the
Adviser as a Portfolio Manager in 1994, Mr. Miller 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.

KIMBERLY A. FRIEDRICKS is Co-Portfolio Manager for the Intermediate Total
Return and California Intermediate Tax- Free Bond Funds. Prior to joining the
Adviser as a Fixed-Income Specialist in 1998, Ms. Friedricks served in a similar
role for Joel R. Mogy Investment Counsel, Inc. Ms. Friedricks has over 12 years
of fixed-income investment experience.

MANAGEMENT FEES

The table below shows the annual management fee paid to the Adviser during
the past fiscal year. This fee is calculated based on the average daily net
assets of the corresponding Fund.

Large Cap Fund ..................................... 0.75%
Small Cap Fund ..................................... 0.85%
International Fund ................................. 0.95%
Intermediate Total Return Bond Fund ................ 0.50%
California Intermediate Tax-Free Bond Fund ......... 0.50%

16
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS

ADDITIONAL INVESTMENT STRATEGIES AND RELATED RISKS

HIGH-QUALITY PHILOSOPHY

The Adviser believes that its equity investment discipline is an effective
approach to identify well-managed growth companies with defensive
characteristics. The Adviser believes that companies with certain high-quality
characteristics are most likely to be able to sustain favorable performance.
These characteristics include strong consistent growth, relatively low debt
levels, strong profit margins, rising free cash flow, a proven management team
and a leading competitive position. The Adviser also believes that an important
feature of high-quality companies is the deployment of free cash flows to cash
dividends and stock repurchases. In addition, the Adviser's view, a reinvestment
rate of at least 35% of earnings enables a company to sustain future growth
primarily from internal sources. The Adviser also believes that low debt levels
indicate financial strength to support growth in good times and to win market
share in difficult times.

CONCENTRATION IN A SMALL NUMBER OF COMPANIES

Each of the equity Funds will typically invest in the securities of a small
number of companies. The Large Cap, Small Cap and the International Funds will
each typically invest in fewer than 40 companies. As a result, the value of
shares in these Funds may vary more than those of mutual funds investing in a
greater number of companies.

DEFENSIVE INVESTMENTS

At the discretion of its portfolio manager, each Fund may invest up to 100%
of its assets in cash for temporary defensive purposes. Such a stance may help
a Fund minimize or avoid losses during adverse market, economic or political
conditions. During such a period, a Fund may not achieve its investment
objective. For example, should the market advance during this period, a Fund may
not participate as much as it would have if it had been more fully invested.

PORTFOLIO TURNOVER

The Funds' portfolio managers will sell a security when they believe it is
appropriate to do so, regardless of how long a Fund has owned that security.
Buying and selling securities generally involves some expense to a Fund, such as
commission paid to brokers and other transaction costs. By selling a security,
a Fund may realize taxable capital gains that it will subsequently distribute to
shareholders. Generally speaking, the higher a Fund's annual portfolio turnover,
the greater its brokerage costs and the greater the likelihood that it will
realize taxable capital gains. Increased brokerage costs may adversely affect
a Fund's performance. Also, unless you are a tax-exempt investor or you purchase
shares through a tax-exempt investor or through a tax-deferred account, the
distribution of capital gains may affect your after-tax return. Annual portfolio
turnover of 100% or more is considered high. See "Financial Highlights" for each
other Fund's historical portfolio turnover.

ADDITIONAL INFORMATION ON THE BENCHMARKS FOR THE FUNDS

* STANDARD & POOR'S 500 COMPOSITE PRICE INDEX A market-value weighted
index of 500 blue-chip stocks, considered to be a benchmark of the
overall stock market.

* RUSSELL 2000 INDEX A market-value weighted index measuring the
performance of the 2,000 smallest of the 3,000 largest U.S. companies
(based on total market capitalization) frequently used to measure the
condition of the market for small cap companies.

* MORGAN STANLEY CAPITAL INT'L--EUROPE, AUSTRALASIA & FAR EAST INDEX A
market-value weighted index composed of 21 developed market countries
in Europe, Australasia and the Far East designed to measure the
overall condition of overseas markets.

17
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS

ADDITIONAL INVESTMENT STRATEGIES AND RELATED RISKS, Continued

* LEHMAN BROS. GOVERNMENT/CORPORATE INTERMEDIATE BOND INDEX is an
unmanaged index of intermediate-term government and corporate bonds.

* LEHMAN BROS. 5-YEAR MUNICIPAL BOND INDEX is an unmanaged index
comprised of a broad range of investmentgrade municipal bonds.

18
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS

FINANCIAL HIGHLIGHTS

The following selected per-share data and ratios for the years ended
December 31, 1999, 1998, and 1997, have been audited by Briggs, Bunting &
Dougherty, LLP. Their January 28, 2000, report appears in the 1999 Annual Report
of the Funds. Audited financial information for prior periods was audited by
another firm whose report is not included.

<TABLE>
<CAPTION>
LARGE CAP FUND
YEAR OR PERIOD ENDED DECEMBER 31
----------------------------------------------------------
1999 1998 1997 1996 1995(a)
--------- -------- -------- --------- --------
<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 0.04 0.11 0.10 0.08 0.07
Net realized and unrealized gains
on investments 2.71 2.38 4.34 2.35 2.13
--------- -------- -------- --------- --------
Total income from investment operations 2.75 2.49 4.44 2.43 2.20
--------- -------- -------- --------- --------
LESS DISTRIBUTIONS:
From net investment income (0.04) (0.11) (0.11) (0.08) (0.07)
From net realized gains (1.07) (2.63) (1.37) (0.66) (0.15)
From paid in capital 0.00 0.00 0.00 0.00 0.00
--------- -------- -------- --------- --------
Total distributions (1.11) (2.74) (1.48) (0.74) (0.22)
--------- -------- -------- --------- --------
Net asset value, end of period $ 18.67 $ 17.03 $ 17.28 $ 14.32 $ 12.63
--------- -------- -------- --------- --------
Total return 16.34% 14.14% 30.99% 19.09% 20.65%*
========= ======== ======== ========= ========
Net assets, end of period (in 000's) $ 123,505 $ 48,581 $ 35,283 $ 26,118 $ 20,613

RATIO OF EXPENSES TO AVERAGE NET ASSETS:+
Before expense reimbursement -- -- -- -- --
After expense reimbursement 1.03% 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) 0.28% 0.57% 0.55% 0.59% 0.94%+
Portfolio turnover rate 33% 76% 51% 23% 28%
</TABLE>

----------
(a) The Large Cap Fund commenced operations on May 1, 1995.
* Not annualized.
+ Annualized

19
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS

FINANCIAL HIGHLIGHTS, Continued

<TABLE>
<CAPTION>
SMALL CAP FUND
YEAR OR PERIOD ENDED DECEMBER 31
------------------------------------------------------
1999 1998 1997 1996(a)
---------- ---------- ---------- ----------
<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 0.07 0.05 0.02 0.02
Net realized and unrealized gains
on investments 0.47 2.07 2.14 0.41
---------- ---------- ---------- ----------
Total income from investment operations 0.54 2.12 2.16 0.43
---------- ---------- ---------- ----------
LESS DISTRIBUTIONS:
From net investment income (0.07) (0.05) (0.05) (0.02)
From capital gains (0.69) 0.00 (0.05) 0.00
From paid in capital 0.00 (0.15) 0.00 0.00
---------- ---------- ---------- ----------
Total distributions (0.76) (0.20) (0.10) (0.02)
---------- ---------- ---------- ----------
Net asset value, end of period $ 14.82 $ 15.04 $ 13.12 $ 11.06
---------- ---------- ---------- ----------
Total return 3.64% 16.17% 19.46% 4.00%*
========== ========== ========== ==========
Net assets, end of period (in 000's) $ 46,997 $ 33,017 $ 6,494 $ 808

RATIO OF EXPENSES TO AVERAGE NET ASSETS:+
Before expense reimbursement 1.34% 1.35% 3.22% 18.91%+
After expense reimbursement 1.30% 1.30% 1.30% 1.30%+
After expense reimbursement and expenses
paid indirectly -- -- -- --
Ratio of net investment income to average
net assets:+ (net of expense
reimbursement/recoupment) 0.53% 0.38% 0.45% 1.58%+
Portfolio turnover rate 50% 28% 47% 0%
</TABLE>

----------
(a) The Small Cap Fund commenced operations on October 18, 1996.
* Not annualized.
+ Annualized

20
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS

FINANCIAL HIGHLIGHTS, Continued

<TABLE>
<CAPTION>
INTERNATIONAL FUND
YEAR OR PERIOD ENDED DECEMBER 31
------------------------------------------------------
1999 1998 1997 1996(a)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 15.51 $ 12.61 $ 10.91 $ 10.65
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.12 0.08 0.04 0.01
Net realized and unrealized gains
on investments 4.68 3.25 1.75 0.26
---------- ---------- ---------- ----------
Total income from investment operations 4.80 3.33 1.79 0.27
---------- ---------- ---------- ----------
LESS DISTRIBUTIONS:
From net investment income (0.12) (0.08) (0.05) (0.01)
From capital gains (1.72) (0.35) (0.04) 0.00
From paid in capital 0.00 0.00 0.00 0.00
---------- ---------- ---------- ----------
Total distributions (1.84) (0.43) (0.09) (0.01)
---------- ---------- ---------- ----------
Net asset value, end of period $ 18.47 $ 15.51 $ 12.61 $ 10.91
---------- ---------- ---------- ----------
Total return 31.06% 26.47% 16.42% 2.56%*
========== ========== ========== ==========
Net assets, end of period (in 000's) $ 40,590 $ 35,436 $ 7,012 $ 1,055
RATIO OF EXPENSES TO AVERAGE NET ASSETS:+
Before expense reimbursement 1.47% 1.45% 3.41% 15.74%+
After expense reimbursement 1.40% 1.38% 1.40% 1.40%+
After expense reimbursement and expenses
paid indirectly -- -- -- --
Ratio of net investment income to average
net assets:+ (net of expense
reimbursement/recoupment) 0.63% 0.85% 0.61% 1.14%+
Portfolio turnover rate 57% 28% 29% 0%
</TABLE>

----------
(a) The International Fund commenced operations on October 18, 1996.
* Not annualized.
+ Annualized

21
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS

FINANCIAL HIGHLIGHTS, Continued

<TABLE>
<CAPTION>
INTERMEDIATE TOTAL RETURN BOND FUND
YEAR OR PERIOD ENDED DECEMBER 31
------------------------------------------------------
1999 1998 1997 1996(a)
---------- ---------- ---------- ----------
<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 0.50 0.51 0.56 0.09
Net realized and unrealized gains
on investments (0.57) 0.30 0.18 (0.07)
---------- ---------- ---------- ----------
Total income from investment operations (0.07) 0.81 0.74 0.02
---------- ---------- ---------- ----------
LESS DISTRIBUTIONS:
From net investment (0.49) (0.51) (0.58) (0.08)
From capital gains (0.01) (0.04) 0.00 0.00
From paid in capital 0.00 0.00 0.00 0.00
---------- ---------- ---------- ----------
Total distributions (0.50) (0.55) (0.58) (0.08)
---------- ---------- ---------- ----------
Net asset value, end of period $ 10.44 $ 11.01 $ 10.75 $ 10.59
---------- ---------- ---------- ----------
Total return (0.65)% 7.61% 7.19% 0.20%*
========== ========== ========== ==========
Net assets, end of period (in 000's) $ 53,404 $ 28,330 $ 6,261 $ 5,033
RATIO OF EXPENSES TO AVERAGE NET ASSETS:+
Before expense reimbursement 1.23% 1.00% 2.23% 2.10%+
After expense reimbursement 0.94% 0.94% 0.95% 0.95%+
After expense reimbursement and expenses
paid indirectly -- -- -- --
Ratio of net investment income to average
net assets+ (net of expense reimbursement,
if applicable) 4.94% 4.93% 5.35% 4.72%+
Portfolio turnover rate 64% 49% 27% 0%
</TABLE>

----------
(a) The Intermediate Total Return Bond Fund commenced operations on October 28,
1996.
* Not annualized.
+ Annualized

22
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS

FINANCIAL HIGHLIGHTS, Continued

<TABLE>
<CAPTION>
CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
YEAR OR PERIOD ENDED DECEMBER 31
-----------------------------------------------------
1999 1998 1997 1996(a)
---------- ---------- ---------- ----------
<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 0.44 0.43 0.34 0.01
Net realized and unrealized gains
on investments (0.48) 0.03 0.11 (0.01)
---------- ---------- ---------- ----------
Total income from investment operations (0.04) 0.46 0.45 0.00
---------- ---------- ---------- ----------
LESS DISTRIBUTIONS:
From net investment (0.44) (0.43) (0.35) (0.01)
From capital gains 0.00 0.00 0.00 0.00
From paid in capital 0.00 0.00 0.00 0.00
---------- ---------- ---------- ----------
Total distributions (0.44) (0.43) (0.35) (0.01)
---------- ---------- ---------- ----------
Net asset value, end of period $ 10.29 $ 10.77 $ 10.74 $ 10.64
---------- ---------- ---------- ----------
Total return (0.44)% 4.37% 4.26% 0.02%*
========== ========== ========== ==========
Net assets, end of period (in 000's) $ 41,862 $ 9,391 $ 6,015 $ 5,124
RATIO OF EXPENSES TO AVERAGE NET ASSETS:+
Before expense reimbursement 1.37% 2.23% 2.29% 2.08%+
After expense reimbursement 0.75% 0.77% 1.56% 1.81%+
After expense reimbursement and expenses
paid indirectly 0.71% -- 0.95% 0.95%+
Ratio of net investment income to average
net assets+ (net of expense reimbursement,
if applicable) 4.14% 3.88% 2.58% 0.60%+
Portfolio turnover rate 65% 47% 40% 0%
</TABLE>

----------
(a) The California Intermediate Tax-Free Bond Fund commenced operations on
October 28, 1996.
* Not annualized.
+ Annualized

23
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS

YOUR ACCOUNT INFORMATION

HOW FUND SHARES ARE PRICED

How and when we calculate a Fund's price or net asset value (NAV)
determines the price at which you will buy or sell shares. We calculate a Fund's
NAV by dividing the total net value of its assets by the number of outstanding
shares. We base the value of a Fund's investments on its market value, usually
the last price reported for each security before the close of the stock market
or bond that day. A market price may not be available for securities that trade
infrequently. Occasionally, an event that affects a security's value may occur
after the market closes. This is more likely to happen for foreign securities
traded in foreign markets that have different time zones from the United States.
Major developments affecting the price of those securities may happen after the
foreign markets in which such securities trade have closed, but before a Fund
calculates its NAV. In this case, Kayne Anderson, subject to the supervision of
the Board of Trustees, will make a good-faith estimate of the security's "fair
value," which may be higher or lower than security's closing price in its
relevant market.

We calculate the net asset value (NAV) of each Fund after the close of
trading on the New York Stock Exchange (NYSE) every day the NYSE is open. We do
not calculate NAVs on the days on which the NYSE is closed for trading. The bond
Funds also do not calculate their NAVs on bank holidays. Certain exceptions
apply as described below. If we receive your order by the close of trading on
the NYSE, you can purchase shares at the price calculated for that day. The NYSE
usually closes at 4:00 P.M. (Eastern time) on weekdays, except for holidays. If
your order and payment are received after the NYSE has closed, your shares will
be priced at the next NAV we determine after receipt of your order. More de-
tails about how we calculate the Funds' NAV are in the Statement of Additional
Information.

BUYING SHARES

You pay no sales charge to invest in the Kayne Anderson Mutual Funds. The
minimum initial investment for each Fund is $2,000. The minimum subsequent
investment is $250 ($1,000 and $200, respectively, for retirement plans and
custodial accounts; $500 and $200 for Education IRAs). Under certain conditions
we may waive these minimums. If you buy shares through a broker or investment
advisor, different requirements may apply. All investments must be made in U.S.
dollars. In addition, the funds and the distributor each reserve the right to
reject all or part of any purchase.

To open a new account:

BY MAIL. Send your completed application, with a check payable to the
appropriate Fund, to:

Kayne Anderson Mutual Funds
c/o Investors Bank & Trust Company
P.O. Box 9130
MFD 23
Boston, MA 02117-9130

Your check must be in U.S. dollars and drawn only on a bank located in the
United States. WE DO NOT ACCEPT THIRD-PARTY CHECKS, "STARTER" CHECKS,
CREDIT-CARD CHECKS, INSTANT-LOAN CHECKS OR CASH INVESTMENTS. We may impose a
charge on checks that do not clear.

BY WIRE. Call us at (800) 395-3807 to let us know that you intend to make
your initial investment by wire. Tell us your name, the amount you want to
invest and the Fund in which you want to invest. We will give you further
instructions and a fax number to which you should send your completed New
Account Application. To ensure that we handle

24
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS

YOUR ACCOUNT INFORMATION, Continued

your investment accurately, include complete account information in all wire
instructions. Then request your bank to wire money from your account to the
attention of:

Kayne Anderson Mutual Funds
c/o Investors Bank & Trust Co.
Attn: Transfer Agent
ABA #011001438
Account #111213141
For further credit to Kayne Anderson Mutual Funds
Name of Fund: [FUND YOU WISH TO INVEST IN]
Account Number: [ACCOUNT NUMBER PROVIDED TO YOU OVER THE PHONE]
Name of Shareholder: [NAME ON THE NEW ACCOUNT APPLICATION]
Please note: Your bank may charge a wire transfer fee.
BUYING ADDITIONAL SHARES

BY MAIL. Mail a check made out to the appropriate Fund with a signed letter
noting the name of the Fund in which you want to invest, your account number and
telephone number. We will mail you a confirmation of your investment. Please
enclose the stub from your account statement. Note that we may impose a charge
on checks that do not clear.

BY WIRE. There is no need to contact us when buying additional shares by
wire. Instruct your bank to wire funds to our affiliated bank using the above
"By Wire" purchase information.

EXCHANGING SHARES

You may exchange shares in one Fund for shares in another, in accounts with
the same registration, Taxpayer Identification number and address. Note that
an exchange may result in a realized gain or loss for tax purposes. You may ex-
change shares by phone, at (800) 395-3807, if you complete and file with us an
authorization form, or by mail. Exchanges are subject to our minimum investment
requirement. Exchanges are subject to the following policies:

* We will process your exchange order at the next-calculated NAV. o You
may exchange shares only in Funds that are qualified for sale in your
state and that are offered in this prospectus.

* We may restrict or refuse your exchanges if we receive, or anticipate
receiving, simultaneous orders affecting a large portion of a Fund's
assets or if we detect a pattern of exchanges that suggests a
market-timing strategy.

* We reserve the right to refuse exchanges into a Fund by any person or
group if, in our judgment, that Fund would be unable to effectively
invest the money in accordance with its investment objective and
policies, or might be adversely affected in other ways.

* Shareholders may exchange shares of any Fund for shares of the Kayne
Anderson Money Market Account (which represents an investment in the
"TempCash Dollar Portfolio Shares" of the TempCash money market fund.)
This money market fund is not managed by Kayne Anderson and is not
part of Kayne Anderson Mutual Funds. You may invest in this money
market fund only if its shares are offered in your state of residence.
You should carefully read the prospectus for the money market fund
before investing. This exchange privilege does not mean that Kayne
Anderson recommends that you invest in the money market fund.

25
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS

YOUR ACCOUNT INFORMATION, Continued

SELLING SHARES (REDEMPTIONS)

You may sell some or all of your Fund shares on days that the New York
Stock Exchange is open for trading. Note that a redemption may result in a
realized gain or loss for tax purposes.

Your shares will be sold at the next NAV we calculate for a Fund after
receiving your order. We will promptly pay the proceeds to you, normally within
one business day of receiving your order and all necessary documents (including
a written redemption order with any required signature guarantee). We will
mail or wire you the proceeds, depending on your instructions. Shares purchased
by check may not be redeemed until 15 days after the purchase date.

Aside from any applicable redemption fees, we generally will not charge you
any fees when you sell your shares, although there are some minor exceptions:

* Shareholders who want proceeds sent by wire or overnight courier will
pay a $7 fee that will be deducted directly from their proceeds.

In accordance with the rules of the Securities and Exchange Commission (the
"SEC"), we reserve the right to suspend redemptions under extraordinary
circumstances.

Shares can be sold in several ways:

* BY MAIL. Send us a letter including your name, account number, the
Fund from which you would like to sell shares and the dollar amount or
number of shares you want to sell. You must sign the letter the same
way your account is registered. If you have a joint account, all
accountholders must sign the letter. If you want the proceeds to go to
a party other than the account owner(s) or your predesignated bank
account, or if the dollar amount of your redemption exceeds $50,000,
you must obtain a signature guarantee (not a notarization), available
from many commercial banks, savings associations, stock brokers and
other NASD member firms.

* BY PHONE. You may accept or decline telephone redemption privileges on
your New Account Application. If you accept, you will be able to sell
shares by calling (800) 395-3807 between 8:30A.M. and 5:00P.M.
(Eastern time) on a day when the NYSE is open for trading.

* We may suspend your right of redemption or postpone the date of
payment for more than seven days during any period when (1) trading
on the NYSE is restricted or the NYSE is closed, other than customary
weekend and holiday closings; (2) the SEC has by order permitted such
suspension; or (3) an emergency, as defined by rules of the SEC,
exists making disposal of portfolio investments or determination of
the value of the net assets of a Fund not reasonably practicable.

* REDEMPTION BY AUTOMATED CLEARING HOUSE (ACH). You may have redemption
proceeds, cash distributions or systematic cash withdrawal payments
transferred to a bank, savings and loan association or credit union
that is an online member of the ACH system. There are no fees
associated with the use of the ACH service. We must receive ACH
redemption requests before 4:00P.M. Eastern time (or earlier close of
regular NYSE trading) to receive that day's closing net asset value.
The funds from the ACH redemption will be available two days after the
redemption has been processed.

SPECIAL ACCOUNT OPTIONS

We offer the following special account options to individual shareholders
but not to participants in employer-sponsored retirement plans. There are no
charges for the programs noted below, and you may change or stop these plans at
any time by written notice to us.

26
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS

YOUR ACCOUNT INFORMATION, Continued

SYSTEMATIC WITHDRAWAL PLAN. You may participate in the Systematic
Withdrawal Program if you wish to withdraw funds from an account on a regular
basis. You must either own or purchase shares having a value of $10,000 or more.
We will mail automatic payments by check to you on either a monthly, quarterly,
semi-annual or annual basis in amounts of $100 or more. All withdrawals are
processed on the last business day of the month or, if such day is not a
business day, on the next business day and paid promptly thereafter. Please
complete the appropriate section on the New Account Application indicating the
amount of the distribution and the desired frequency.

AUTOMATIC INVESTING. This service allows you to make regular investments
once an account is established. You simply authorize the automatic withdrawal of
funds from a bank account into the specified Fund. The minimum subsequent in-
vestment pursuant to this plan is $100 per month. You must open an account with
the $2,000 minimum before participating in this plan. To enroll, complete the
appropriate section on the New Account Application indicating the amount of the
automatic investment.

RETIREMENT PLANS. The Funds are available for investment by pension and
profit sharing plans, including IRAs, SEPs, Roth IRAs, Keoghs and Defined
Contribution Plans through which you may purchase Fund shares. However, we do
not sponsor Defined Contribution Plans. For details concerning any of the
retirement plans, please call us at (800) 395-3807.

TELEPHONE TRANSACTIONS. By buying or selling shares over the phone, you
agree to reimburse the Funds for any expenses or losses incurred in connection
with transfers of money from your account. This includes any losses or expenses
caused by your bank's failure to honor your debit or act in accordance with your
instructions. If your bank makes erroneous payments or fails to make payment
after you buy shares, we may cancel the purchase and immediately terminate your
telephone transaction privilege.

The shares you purchase by phone will be priced at the first net asset
value we determine after receiving your purchase. You will not actually own the
shares, however, until we receive your payment in full. If we do not receive
your payment within three business days of your request, we will cancel your
purchase. You may be responsible for any losses incurred by a Fund as a result.

Please note that we cannot be held liable for following telephone
instructions that we reasonably believe to be genuine. We use several
safeguards to ensure that the instructions we receive are accurate and
authentic, such as:

* recording certain calls,

* requiring a special authorization number or other personal information
not likely to be known by others, and

* sending a transaction confirmation to the investor. The Funds and
their Transfer Agent may be held liable for any losses due to
unauthorized or fraudulent telephone transactions only if we have not
followed these reasonable procedures.

We reserve the right to revoke the telephone transaction privilege of any
shareholder at any time if he or she has used abusive language or misused the
phone privilege by making purchases and redemptions that appear to be part of a
systematic market-timing strategy.

If you notify us that your address has changed, we will temporarily suspend
your telephone redemption privileges until 30 days after your notification to
protect you and your account. We require all redemption requests made during
this period to be in writing with a signature guarantee.

27
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS

YOUR ACCOUNT INFORMATION, Continued

Shareholders may experience delays in exercising telephone redemption
privileges during periods of volatile economic or market conditions. In these
cases you may want to transmit your redemption request:

* by overnight courier
* by telegram

OTHER POLICIES

PURCHASING SHARES THROUGH A BROKER. You may buy and sell shares of the
Funds through certain brokers (and their agents) that have made arrangements
with the Funds to sell Fund shares. When you place your order with such a broker
or its authorized agent, your order is treated as if you had placed it directly
with the Funds' transfer agent, and you will pay or receive the next price
calculated by the relevant Fund. The broker (or agent) holds your shares in an
omnibus account in the broker's (or agent's) name, and the broker (or agent)
maintains your individual ownership records. The Funds may pay the broker (or
its agent) for maintaining these records as well as providing other shareholder
services. The broker (or its agent) may charge you a fee for handling your
(purchase and sale) order. The broker (or agent) is responsible for processing
your order correctly and promptly, keeping you advised regarding the status of
your individual account, confirming your transactions and ensuring that you
receive copies of the Funds' prospectus.

MINIMUM ACCOUNT BALANCES. Due to the cost of maintaining small accounts, we
require a minimum account balance of $2,000. If your account balance falls below
that amount because of redemptions, we will ask you to add to your account. If
your account balance is not brought up to the minimum or you do not send us
other instructions within 60 days after we notify you of the deficiency, we will
redeem your shares and send you the proceeds. We believe that this policy is in
the best interests of all our shareholders.

TAX WITHHOLDING INFORMATION. Be sure to complete the Taxpayer
Identification number (TIN) section of the New Account Application. If you don't
have a Social Security Number or TIN, apply for one immediately by contacting
your local office of the Social Security Administration or the Internal Revenue
Service (IRS). If you do not provide us with a TIN or a Social Security number,
federal tax law may require us to withhold 31% of your taxable dividends,
capital-gains distributions, and redemption and exchange proceeds (unless you
qualify as an exempt payee under certain rules).

Other rules about TINs apply for certain investors. For example, if you are
establishing an account for a minor under the Uniform Gifts to Minors Act, you
should furnish the minor's TIN. If the IRS has notified you that you are subject
to backup withholding because you failed to report all interest and dividend
income on your tax return, you must check the appropriate item on the New
Account Application. Foreign shareholders should note that any dividends the
Funds pay to them may be subject to up to 30% withholding instead of backup
withholding.

AFTER YOU INVEST

TAXES. IRS rules require that the Funds distribute all of their net
investment income and capital gains, if any, to shareholders. Capital gains
may be taxable at different rates depending upon the length of time a Fund holds
its assets. We will inform you about the source of any dividends and capital
gains upon payment. After the close of each calendar year, we will advise you of
their tax status. The Funds' distributions, whether received in cash or
reinvested, may be taxable. Any redemption of a Fund's shares or any exchange of
a Fund's shares for another Fund will be treated as a sale, and any gain on the
transaction may be taxable.

28
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS

YOUR ACCOUNT INFORMATION, Continued

Additional information about tax issues relating to the Funds can be found
in our Statement of Additional Information, available free by calling (800)
395-3807. Consult your tax advisor about the potential tax consequences of
investing in the Funds.

DIVIDENDS AND DISTRIBUTIONS. As a shareholder you may receive income
dividends and capital gain distributions for which you will owe taxes (unless
you invest solely through a tax-advantaged account such as an IRA or a 401(k)
plan).
If you would like to receive dividends and distributions in cash, indicate

that choice on your New Account Application. Otherwise, the distribution will
be reinvested in additional Fund shares.

INCOME DIVIDENDS CAPITAL GAINS
---------------- -------------
EQUITY FUNDS Declared and paid semi-annually Declared and paid in the
last quarter of
each calendar year*

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

----------
* Following their fiscal year end (December 31), the Funds may make
additional distributions to avoid the imposition of a tax.

During the year, we will also send you the following communications:

* CONFIRMATION STATEMENTS. Mailed after each purchase or redemption of
shares

* ACCOUNT STATEMENTS. Mailed after the close of each calendar quarter.

* ANNUAL AND SEMIANNUAL REPORTS. Mailed approximately 60 days after
December 31 and June 30, respectively.

* 1099 TAX FORM. Sent by January 31.

* ANNUAL UPDATED PROSPECTUS. Mailed to existing shareholders in the
spring.

To save shareholders' money, we will send only one copy of each shareholder
report or other mailing to your household if you hold accounts under common
ownership or at the same address (regardless of the number of shareholders or
accounts at that household or address), unless you request additional copies.

If you plan to purchase shares of a Fund, check if it is planning to make a
distribution in the near future. You should do this because, if you buy shares
of a Fund just before a distribution, you will pay full price for the shares but
receive a portion of your purchase price back as a taxable distribution. This
is called "buying a dividend." Unless you hold a Fund in a tax-deferred account,
you will have to include the distribution in your gross income for tax purposes,
even though you may not have participated in the increase of that Fund's
appreciation.

29
<PAGE>
--------------------------------------------------------------------------------

KAYNE ANDERSON MUTUAL FUNDS

Kayne Anderson Investment Management, LLC
1800 Avenue of the Stars, 2nd Floor
Los Angeles, California 90067
(800) 222-0380

You can find more information about Kayne Anderson Mutual Funds' investment
policies in the Statement of Additional Information (SAI), incorporated by
reference in this prospectus, which is available free of charge.

To request a free copy of the SAI, call us at (800) 395-3807. You can review and
copy further information about Kayne Anderson Mutual Funds, including the SAI,
at the Securities and Exchange Commission's (SEC's) Public Reference Room in
Washington, D.C. To obtain information on the operation of the Public Reference
Room please call (202) 942-8090. Reports and other information about Kayne
Anderson Mutual Funds are available at the SEC's Web site at WWW.SEC.GOV. You
can also obtain copies of this information, upon payment of a duplicating fee,
by writing the Public Reference Section of the SEC, Washington, D.C., 20549-6009
or by electronic request at the following e-mail address: [email protected].

You can find further information about Kayne Anderson Mutual Funds in our annual
and semiannual shareholder reports, which discuss the market conditions and
investment strategies that significantly affected each Fund's performance during
its most recent fiscal period. To request a copy of the most recent annual or
semiannual report, please call us at (800) 395-3807

--------------------------------------------------------------------------------
SEC File No.: Kayne Anderson Mutual Funds 811-07705

<PAGE>
KAYNE ANDERSON MUTUAL FUNDS

STATEMENT OF ADDITIONAL INFORMATION
APRIL 28, 2000

Investment Adviser:
Kayne Anderson Investment Management, LLC
1800 Avenue of the Stars, 2nd Floor
Los Angeles, CA 90067
(310) 556-2721

This Statement of Additional Information (SAI) pertains to the following funds:

* Kayne Anderson Large Cap Fund (Large Cap Fund),

* Kayne Anderson Small Cap Fund (Small Cap Fund),

* Kayne Anderson International Fund (International Fund),

* Kayne Anderson Intermediate Total Return Bond Fund (Intermediate Total
Return Bond Fund), and

* Kayne Anderson California Intermediate Tax-Free Bond Fund (California
Intermediate Tax-Free Bond Fund).

Each is a series of Kayne Anderson Mutual Funds (the "Trust"). This SAI is not a
prospectus and should be read in conjunction with the Prospectus for the Funds
dated April 28, 2000, as may be revised from time to time. The Prospectus may be
obtained by writing or calling the Funds at the above address and telephone
number.

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TABLE OF CONTENTS

CAPTION PAGE
------- ----

Investment Objectives and Policies........................................ B-2
Risk Factors.............................................................. B-17
The Fund's Investment Limitations ........................................ B-21
Distributions and Tax Information......................................... B-24
Management of the Funds................................................... B-28
The Funds' Administrator.................................................. B-35
The Funds' Distributor.................................................... B-36
Transfer Agent .......................................................... B-36
How Net Asset Value Is Determined......................................... B-37
Share Purchases and Redemptions........................................... B-38
How Performance Is Determined............................................. B-39
Additional Information.................................................... B-42
Financial Statements...................................................... B-42
Appendix A: Description of Securities Ratings............................ B-43

The Trust is an open-end, diversified management investment company organized as
a Delaware business trust on May 29, 1996. It is registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). The Trust
currently offers shares of beneficial interest $0.01 par value per share, in
five series. This Statement of Additional Information pertains to the following
series of Trust:

* Kayne Anderson Large Cap Fund (formerly named, Kayne Anderson Rising
Dividends Fund)

* Kayne Anderson Small Cap Fund (formerly named, Kayne Anderson Small Cap
Rising Dividends Fund)

* Kayne Anderson International Fund (formerly named, Kayne Anderson
International Rising Dividends Fund)

* Kayne Anderson Intermediate Total Return Bond Fund

* Kayne Anderson California Intermediate Tax-Free Bond Fund (formerly named,
Kayne Anderson Intermediate Tax-Free Bond Fund)

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INVESTMENT OBJECTIVES AND POLICIES
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The Funds are managed by Kayne Anderson Investment Management, LLC (the
"Adviser"). The investment objectives and policies of the Funds are described in
detail in the Prospectus. Whether each Fund achieves its investment objective
will depend on market conditions generally and on the analytical and portfolio
management skills of the Adviser. The following discussion supplements the
discussion in the Prospectus.

PORTFOLIO SECURITIES

OTHER INVESTMENT COMPANIES. Each Fund may invest up to 10% of its total assets
in securities issued by other investment companies investing in securities in
which the Fund can invest provided that such investment companies invest in

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portfolio securities in a manner consistent with the Fund's investment objective
and policies. Applicable provisions of the Investment Company Act of 1940, as
amended (the "1940 Act"), require a Fund to limit its investments so that, as
determined immediately after a securities purchase is made: (a) not more than
10% of the value of that Fund's total assets will be invested in the aggregate
in securities of investment companies as a group, and (b) either (i) that Fund
and affiliated persons of that Fund not own together more than 3% of the total
outstanding shares of any one investment company at the time of purchase (and
that all shares of the investment company held by that Fund in excess of 1% of
the company's total outstanding shares be deemed illiquid), or (ii) a Fund not
invest more than 5% of its total assets in any one investment company and the
investment not represent more than 3% of the total outstanding voting stock of
the investment company at the time of purchase. As a shareholder of another
investment company, a Fund would bear, along with other shareholders, its pro
rata portion of the other investment company's expenses, including advisory
fees. These expenses would be in addition to the advisory and other expenses
that a Fund bears directly in connection with its own operations.

DEPOSITARY RECEIPTS. The Large Cap, Small Cap, International, and Intermediate
Total Return Bond Funds may hold securities of foreign issuers in the form of
American Depositary Receipts ("ADRs"), European Depositary Receipts ("EDRs") and
other similar global instruments available in emerging markets or other
securities convertible into securities of eligible issuers. These securities may
not necessarily be denominated in the same currency as the securities for which
they may be exchanged. Generally, ADRs in registered form are designed for use
in U.S. securities markets, and EDRs and other similar global instruments in
bearer form are designed for use in European securities markets. For purposes of
these Funds' investment policies, these Funds' investments in ADRs, EDRs and
similar instruments will be deemed to be investments in the equity securities
representing the securities of foreign issuers into which they may be converted.

DEBT SECURITIES. Each Fund may invest in debt securities including all types of
domestic or U.S. dollar-denominated foreign debt securities in any proportion,
including bonds, notes, convertible bonds, mortgage-backed and asset-backed
securities, including collateralized mortgage obligations and real estate
mortgage investment conduits, U.S. Government and U.S. Government agency
securities, zero coupon bonds, and short-term obligations such as commercial
paper and notes, bank deposits and other financial obligations, and longer-term
repurchase agreements.

In determining whether or not to invest in a particular debt security, the
Adviser considers factors such as the price, coupon and yield to maturity, the
credit quality of the issuer, the issuer's cash flow and related coverage
ratios, the property, if any, securing the obligation and the terms of the debt
instrument, including subordination, default, sinking fund and early redemption
provisions.

After a purchase, the rating of a debt issue may be reduced below the minimum
rating acceptable for purchase by a Fund. A subsequent downgrade does not
require the sale of the security, but the Adviser will consider such an event in
determining whether to continue to hold the obligation. Appendix "A" contains a
description of bond ratings from major ratings agencies.

ASSET-BACKED SECURITIES. Each Fund may invest in asset-backed securities which
represent undivided fractional interests in a trust with assets consisting of a
pool of domestic loans such as motor vehicle retail installment sales contracts
or credit card receivables. Asset-backed securities generally are issued by
governmental, government-related and private organizations. Asset-backed

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securities may be prepaid prior to maturity and hence their actual life can vary
considerably from the stated maturity. During periods of falling interest rates,
prepayments may accelerate, which would require a Fund to reinvest the proceeds
at a lower interest rate. In addition, like other debt securities, the value of
asset-backed securities will normally decline in periods of rising interest
rates. Although generally rated AAA, it is possible that the securities could
become illiquid or experience losses if guarantors or insurers default.

BELOW INVESTMENT GRADE DEBT SECURITIES. Each Fund may purchase lower-rated debt
securities, (E.G., those rated "BB" and "B" by Standard & Poor's Corporation
("S&P") or "Ba" and "B" by Moody's Investors Service, Inc. ("Moody's")) that
have reduced prospects for payment of principal and interest. See Appendix A for
a description of these ratings. Lower-rated debt securities are considered to be
speculative and have a greater risk of default or price changes due to changes
in the issuer's creditworthiness. Market prices of these securities may
fluctuate more than higher-rated debt securities and may decline significantly
in periods of general economic difficulty, which may follow periods of rising
interest rates. While the market for high-yield corporate debt securities has
been in existence for many years and has weathered previous economic downturns,
the market for lower-rated debt securities, in recent years, has experienced a
dramatic increase in the large-scale use of such securities to fund highly
leveraged corporate acquisitions and restructurings. Accordingly, past
experience may not provide an accurate indication of future performance of the
high-yield bond market, especially during periods of economic recession.

The market for lower-rated securities may be thinner and less active than that
for higher-rated securities, which can adversely affect the prices at which
these securities can be sold. If market quotations are not available, these
securities are valued in accordance with procedures established by the Board of
Trustees, including the use of outside pricing services. Judgment plays a
greater role in valuing high-yield corporate debt securities than is the case
for securities for which more external sources for quotations and last-sale
information are available. Adverse publicity and changing investor perceptions
may affect the ability of outside pricing services used by the Funds to value
their portfolio securities, and their ability to dispose of these lower-rated
debt securities.

Because the risk of default is higher for lower-quality securities and can
increase with the age of these securities, the Adviser's research and credit
analysis are an integral part of managing any securities of this type held by
the Funds. In considering investments for the Funds, the Adviser attempts to
identify those issuers of high-yielding securities whose financial condition is
sound enough to meet future obligations, has improved, or is expected to improve
in the future. The Adviser's analysis focuses on relative values based on such
factors as interest or dividend coverage, asset coverage, earnings prospects,
and the experience and managerial strength of the issuer.

Each Fund may choose, at its expense or in conjunction with others, to pursue
litigation or otherwise exercise its rights as a security holder to seek to
protect the interests of security holders if it determines this is in the best
interest of its shareholders.

U.S. GOVERNMENT SECURITIES. Generally, U.S. Government Securities held by the
Funds will increase in value when interest rates decrease and will decrease in
value when interest rates increase. U.S. Government securities in which the
Funds may invest include debt obligations of varying maturities issued by the
U.S. Treasury or issued or guaranteed by an agency or instrumentality of the
U.S. Government, including the Federal Housing Administration ("FHA"), Farmers
Home Administration, Export-Import Bank of the United States, Small Business

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Administration, Government National Mortgage Association ("GNMA"), General
Services Administration, Central Bank for Cooperatives, Federal Farm Credit
Bank, Farm Credit System Financial Assistance Corporation, Federal Home Loan
Banks, Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Intermediate
Credit Banks, Federal Land Banks, Financing Corporation, Federal Financing Bank,
Federal National Mortgage Association ("FNMA"), Maritime Administration,
Tennessee Valley Authority, Resolution Funding Corporation, Student Loan
Marketing Association, and Washington Metropolitan Area Transit Authority, among
others. Direct obligations of the U.S. Treasury include a variety of securities
that differ primarily in their interest rates, maturities and dates of issuance.
Because the U.S. Government is not obligated by law to provide support to an
instrumentality that it sponsors, a Fund will not invest in obligations issued
by an instrumentality of the U.S. Government unless the Adviser determines that
the instrumentality's credit risk makes its securities suitable for investment
by the Fund.

MORTGAGE-RELATED SECURITIES. Mortgage-related securities are interests in a pool
of mortgage loans. Most mortgage-related securities are pass-through securities,
which means that investors receive payments consisting of a pro rata share of
both principal and interest (less servicing and other fees), as well as
unscheduled prepayments, as mortgages in the underlying mortgage pool are paid
off by the borrowers. In the case of mortgage-related securities, including real
estate mortgage investment conduits and collateralized mortgage obligations,
prepayments of principal by mortgagors or mortgage foreclosures will affect the
average life of the mortgage-related securities remaining in a Fund's portfolio.
Mortgage prepayments are affected by the level of interest rates and by factors
including general economic conditions, the underlying location and age of the
mortgage and other social and demographic conditions. In periods of rising
interest rates, the rate of prepayments tends to decrease, thereby lengthening
the average life of a pool of mortgage-related securities. Conversely, in
periods of falling interest rates, the rate of prepayments tends to increase,
thereby shortening the average life of a pool of mortgages. Thus,
mortgage-related securities may have less potential for capital appreciation in
periods of falling interest rates than other fixed-income securities of
comparable duration, although these securities may have a comparable risk of
decline in market value in periods of rising interest rates. Unscheduled
prepayments, which are made at par, will result in a loss equal to any
unamortized premium.

MORTGAGE-RELATED SECURITIES: GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. GNMA is a
wholly owned corporate instrumentality of the U.S. Government within the
Department of Housing and Urban Development. The National Housing Act of 1934,
as amended (the "Housing Act"), authorizes GNMA to guarantee the timely payment
of the principal of, and interest on, securities that are based on and backed by
a pool of specified mortgage loans. For these types of securities to qualify for
a GNMA guarantee, the underlying collateral must be mortgages insured by the FHA
under the Housing Act, or Title V of the Housing Act of 1949, as amended ("VA
Loans"), or be pools of other eligible mortgage loans. The Housing Act provides
that the full faith and credit of the U.S. Government is pledged to the payment
of all amounts that may be required to be paid under any guarantee. In order to
meet its obligations under a guarantee, GNMA is authorized to borrow from the
U.S. Treasury with no limitations as to amount.

GNMA pass-through securities may represent a proportionate interest in one or
more pools of the following types of mortgage loans:

(1) fixed-rate level payment mortgage loans;
(2) fixed-rate graduated payment mortgage loans;
(3) fixed-rate growing equity mortgage loans;
(4) fixed-rate mortgage loans secured by manufactured (mobile) homes;

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(5) mortgage loans on multifamily residential properties under
construction;
(6) mortgage loans on completed multifamily projects;
(7) fixed-rate mortgage loans as to which escrowed funds are used to
reduce the borrower's monthly payments during the early years of the
mortgage loans ("buydown" mortgage loans);
(8) mortgage loans that provide for adjustments on payments based on
periodic changes in interest rates or in other payment terms of the
mortgage loans; and
(9) mortgage-backed serial notes.

MORTGAGE-RELATED SECURITIES: FEDERAL NATIONAL MORTGAGE ASSOCIATION. FNMA is a
federally chartered and privately-owned corporation established under the
Federal National Mortgage Association Charter Act. FNMA was originally organized
in 1938 as a U.S. Government agency to add greater liquidity to the mortgage
market. FNMA was transformed into a private sector corporation by legislation
enacted in 1968. FNMA provides funds to the mortgage market primarily by
purchasing home mortgage loans from local lenders, thereby providing them with
funds for additional lending. FNMA acquires funds to purchase loans from
investors that may not ordinarily invest in mortgage loans directly, thereby
expanding the total amount of funds available for housing.

Each FNMA pass-through security represents a proportionate interest in one or
more pools of FHA Loans, VA Loans or conventional mortgage loans (that is,
mortgage loans that are not insured or guaranteed by any U.S. Government
agency). The loans contained in those pools consist of one or more of the
following:

(1) fixed-rate level payment mortgage loans;
(2) fixed-rate growing equity mortgage loans;
(3) fixed-rate graduated payment mortgage loans;
(4) variable-rate mortgage loans;
(5) other adjustable-rate mortgage loans; and
(6) fixed-rate mortgage loans secured by multifamily projects.

MORTGAGE-RELATED SECURITIES: FEDERAL HOME LOAN MORTGAGE CORPORATION. FHLMC is a
corporate instrumentality of the United States established by the Emergency Home
Finance Act of 1970, as amended. FHLMC was organized primarily for the purpose
of increasing the availability of mortgage credit to finance needed housing. The
operations of FHLMC currently consist primarily of the purchase of first lien,
conventional, residential mortgage loans and participation interests in mortgage
loans and the resale of the mortgage loans in the form of mortgage-backed
securities.

The mortgage loans underlying FHLMC securities typically consist of fixed-rate
or adjustable-rate mortgage loans with original terms to maturity of between 10
and 30 years, substantially all of which are secured by first liens on
one-to-four-family residential properties or multifamily projects. Each
underlying mortgage loan must include whole loans, undivided participation
interests in whole loans or participation in another FHLMC security.

PRIVATELY ISSUED MORTGAGE-RELATED SECURITIES. The Funds may invest in
mortgage-related securities offered by private issuers, including pass-through
securities comprised of pools of conventional residential mortgage loans,
mortgage-backed bonds which are considered to be obligations of the institution
issuing the bonds and are collateralized by mortgage loans, and bonds and
collateralized mortgage obligations ("CMOs").

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Each class of a CMO is issued at a specific fixed or floating coupon rate and
has a stated maturity or final distribution date. Principal prepayments on the
collateral pool may cause the various classes of a CMO to be retired
substantially earlier than their stated maturities or final distribution dates.
The principal of and interest on the collateral pool may be allocated among the
several classes of a CMO in a number of different ways. Generally, the purpose
of the allocation of the cash flow of a CMO to the various classes is to obtain
a more predictable cash flow to some of the individual tranches than exists with
the underlying collateral of the CMO. As a general rule, the more predictable
the cash flow is on a CMO tranche, the lower the anticipated yield will be on
that tranche at the time of issuance relative to prevailing market yields on
mortgage-related securities. Certain classes of CMOs may have priority over
others with respect to the receipt of prepayments on the mortgages.

The Funds may invest in, among other things, "parallel pay" CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class which, like the other CMO
structures, must be retired by its stated maturity date or final distribution
date, but may be retired earlier. PAC Bonds are parallel pay CMOs that generally
require payments of a specified amount of principal on each payment date; the
required principal payment on PAC Bonds have the highest priority after interest
has been paid to all classes.

ADJUSTABLE-RATE MORTGAGE-RELATED SECURITIES. Because the interest rates on the
mortgages underlying adjustable-rate mortgage-related securities ("ARMS") reset
periodically, yields of such portfolio securities will gradually align
themselves to reflect changes in market rates. Unlike fixed-rate mortgages,
which generally decline in value during periods of rising interest rates, ARMS
allow a Fund to participate in increases in interest rates through periodic
adjustments in the coupons of the underlying mortgages, resulting in both higher
current yields and low price fluctuations. Furthermore, if prepayments of
principal are made on the underlying mortgages during periods of rising interest
rates, a Fund may be able to reinvest such amounts in securities with a higher
current rate of return. During periods of declining interest rates, of course,
the coupon rates may readjust downward, resulting in lower yields to the Fund.
Further, because of this feature, the value of ARMS is unlikely to rise during
periods of declining interest rates to the same extent as fixed-rate
instruments. For further discussion of mortgage-related securities generally,
see "Portfolio Securities And Investment Techniques" in the Prospectus.

VARIABLE RATE DEMAND NOTES. Variable rate demand notes ("VRDNs") are obligations
that contain a floating or variable interest rate adjustment formula and an
unconditional right of demand to receive payment of the unpaid principal balance
plus accrued interest upon a short notice period prior to specified dates,
generally at 30-, 60-, 90-, 180-, or 365-day intervals. These notes can be
tax-exempt obligations. The interest rates are adjustable at intervals ranging
from daily to six months. Adjustment formulas are designed to maintain the
market value of the VRDN at approximately the par value of the VRDN upon the
adjustment date. The adjustments typically are based upon the prime rate of a
bank or some other appropriate interest rate adjustment index.

The California Intermediate Tax-Free Bond Fund also may invest in VRDNs in the
form of participation interests ("Participating VRDNs") in variable rate
tax-exempt obligations held by a financial institution ("Institution"),

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typically a commercial bank. Participating VRDNs provide a Fund with a specified
undivided interest (up to 100%) of the underlying obligation and the right to
demand payment of the unpaid principal balance plus accrued interest on the
Participating VRDNs from the Institution upon a specified number of days'
notice, not to exceed seven. In addition, the Participating VRDN is backed by an
irrevocable letter of credit or guaranty of the Institution. A Fund has an
undivided interest in the underlying obligation, and thus participates on the
same basis as the institution in such obligation, except that the institution
typically retains fees out of the interest paid on the obligation for servicing
the obligation, provides a letter of credit, and issues a repurchase commitment.

Participating VRDNs may be unrated or rated, and their creditworthiness may be a
function of the creditworthiness of the issuer, the institution furnishing the
irrevocable letter of credit, or both. Accordingly, the California Intermediate
Tax-Free Bond Fund may invest in such VRDNs, the issuers or underlying
institutions of which the Adviser believes are creditworthy and satisfy the
quality requirements of the California Intermediate Tax-Free Bond Fund. The
Adviser periodically monitors the creditworthiness of the issuer of such
securities and the underlying institution.

During periods of high inflation and periods of economic slowdown, together with
the fiscal measures adopted by governmental authorities to attempt to deal with
them, interest rates have varied widely. While the value of the underlying VRDN
may change with changes in interest rates generally, the variable rate nature of
the underlying VRDN should minimize changes in the value of the instruments.
Accordingly, as interest rates decrease or increase, the potential for capital
appreciation and the risk of potential capital depreciation is less than would
be the case with a portfolio of fixed-income securities. The California
Intermediate Tax-Free Bond Fund may invest in VRDNs on which stated minimum or
maximum rates, or maximum rates set by state law, limit the degree to which
interest on such VRDNs may fluctuate; to the extent they do increases or
decreases in value may be somewhat greater than would be the case without such
limits. Because the adjustment of interest rates on the VRDNs is made in
relation to movements of various interest rate adjustment indices, the VRDNs are
not comparable to long-term fixed-rate securities. Accordingly, interest rates
on the VRDNs may be higher or lower than current market rates for fixed-rate
obligations of comparable quality with similar maturities.

MUNICIPAL SECURITIES. Because the California Intermediate Tax-Free Bond Fund
invests a substantial portion of its total assets in obligations either issued
by or on behalf of states, territories and possessions of the United States and
the District of Columbia and their political subdivisions, agencies, authorities
and instrumentalities, including industrial development bonds, as well as
obligations of certain agencies and instrumentalities of the U.S. Government,
the interest from which is, in the opinion of bond counsel to the issuer, exempt
from federal income tax ("Municipal Securities"), the Fund generally will have a
lower yield than if it primarily purchased higher yielding taxable securities,
commercial paper or other securities with correspondingly greater risk.
Generally, the value of Municipal Securities held by the California Intermediate
Tax-Free Bond Fund will fluctuate inversely with interest rates.

GENERAL OBLIGATION BONDS. Issuers of general obligation bonds include states,
counties, cities, towns and regional districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, highways and roads, and water and sewer
systems. The basic security behind general obligation bonds is the issuer's
pledge of its full faith, credit and taxing power for the payment of principal

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and interest. The taxes that can be levied for the payment of debt service may
be limited or unlimited as to the rate or amount of special assessments.

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

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

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

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

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

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CUSTODIAL RECEIPTS. The California Intermediate Tax-Free Bond Fund may purchase
custodial receipts representing the right to receive certain future principal
and interest payments on Municipal Securities that underlie the custodial
receipts. A number of different arrangements are possible. In the most common
custodial receipt arrangement, an issuer or a third party owning the Municipal
Securities deposits such obligations with a custodian in exchange for two
classes of custodial receipts with different characteristics. In each case,
however, payments on the two classes are based on payments received on the
underlying Municipal Securities. One class has the characteristics of a typical
auction-rate security, having its interest rate adjusted at specified intervals,
and its ownership changes based on an auction mechanism. The interest rate of
this class generally is expected to be below the coupon rate of the underlying
Municipal Securities and generally is at a level comparable to that of a
Municipal Security of similar quality and having a maturity equal to the period
between interest rate adjustments. The second class bears interest at a rate
that exceeds the interest rate typically borne by a security of comparable
quality and maturity; this rate also is adjusted, although inversely to changes
in the rate of interest of the first class. If the interest rate on the first
class exceeds the coupon rate of the underlying Municipal Securities, its
interest rate will exceed the rate paid on the second class. In no event will
the aggregate interest paid with respect to the two classes exceed the interest
paid by the underlying Municipal Securities. The value of the second class and
similar securities should be expected to fluctuate more than the value of a
Municipal Security of comparable quality and maturity and their purchase by the
California Intermediate Tax-Free Bond Fund should increase the volatility of its
net asset value and, thus, its price per share. These custodial receipts are
sold in private placements and are subject to the California Intermediate
Tax-Free Bond Fund's limitation with respect to illiquid investments. The
California Intermediate Tax-Free Bond Fund also may purchase directly from
issuers, and not in a private placement, Municipal Securities having the same
characteristics as the custodial receipts.

TENDER OPTION BONDS. The California Intermediate Tax-Free Bond Fund may purchase
tender option bonds and similar securities. A tender option bond is a Municipal
Security, generally held pursuant to a custodial arrangement, having a
relatively long maturity and bearing interest at a fixed rate substantially
higher than prevailingshort-term tax- short-termtax- tax-exempt rates, coupled
with an agreement of a third party, such as a bank, broker-dealer or other
financial institution, granting the security holders the option, at periodic
intervals, to tender their securities to the institution and receive their face
value. As consideration for providing the option, the financial institution
receives periodic fees equal to the difference between the Municipal Security's
fixed coupon rate and the rate, as determined by a remarketing or similar agent
at or near the commencement of such period, that would cause the securities,
coupled with the tender option, to trade at par on the date of such
determination. Thus, after payment of this fee, the security holder effectively
holds a demand obligation that bears interest at the prevailing short-term
tax-exempt rate. The Adviser, on behalf of the California Intermediate Tax-Free
Bond Fund, considers on a periodic basis the creditworthiness of the issuer of
the underlying Municipal Security, of any custodian and of the third party
provider of the tender option. In certain instances and for certain tender
option bonds, the option may be terminable in the event of a default in payment
of principal or interest on the underlying Municipal Obligations and for other
reasons. The California Intermediate Tax-Free Bond Fund will not invest more
than 10% of its net assets in securities that are illiquid (including tender
option bonds with a tender feature that cannot be exercised on not more than
seven days' notice if there is no secondary market available for these
obligations).

OBLIGATIONS WITH PUTS ATTACHED. The California Intermediate Tax-Free Bond Fund
may purchase Municipal Securities together with the right to resell the
securities to the seller at an agreed-upon price or yield within a specified

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period prior to the securities' maturity date. Although an obligation with a put
attached is not a put option in the usual sense, it is commonly known as a "put"
and is also referred to as a "stand-by commitment." The California Intermediate
Tax-Free Bond Fund will use such puts in accordance with regulations issued by
the Securities and Exchange Commission (the "SEC"). In 1982, the Internal
Revenue Service (the "IRS") issued a revenue ruling to the effect that, under
specified circumstances, a regulated investment company would be the owner of
tax-exempt municipal obligations acquired with a put option. The IRS also has
issued private letter rulings to certain taxpayers (which do not serve as
precedent for other taxpayers) to the effect that tax-exempt interest received
by a regulated investment company with respect to such obligations will be
tax-exempt in the hands of the company and may be distributed to its
shareholders as exempt-interest dividends. The last such ruling was issued in
1983. The IRS subsequently announced that it will not ordinarily issue advance
ruling letters as to the identity of the true owner of property in cases
involving the sale of securities or participation interests therein if the
purchaser has the right to cause the securities, or the participation interest
therein, to be purchased by either the seller or a third party. The California
Intermediate Tax-Free Bond Fund intends to take the position that it is the
owner of any municipal obligations acquired subject to a stand-by commitment or
a similar put and that tax-exempt interest earned with respect to such municipal
obligations will be tax exempt in its hands. There is no assurance that stand-by
commitments will be available to the Tax-Free Bond Fund nor has it assumed that
such commitments would continue to be available under all market conditions.
There may be other types of municipal securities that become available and are
similar to the foregoing described Municipal Securities in which the California
Intermediate Tax-Free Bond Fund may invest.

ZERO COUPON DEBT SECURITIES. The Funds may invest in zero coupon securities.
Zero coupon debt securities do not make interest payments; instead, they are
sold at a discount from face value and are redeemed at face value when they
mature. Because zero coupon bonds do not pay current income, their prices can be
very volatile when interest rates change. In calculating its daily net asset
value, a Fund takes into account as income a portion of the difference between a
zero coupon bond's purchase price and its face value. The amount of the discount
on a zero coupon bond (other than a zero coupon Municipal Security) acquired by
a Fund from its issuer must be included in the Fund's income during the period
when the Fund holds the bond, even though the Fund does not receive payments of
interest on the bond. In order to qualify for favorable federal income tax
treatment, a Fund may have to increase its distributions to shareholders to
reflect the amount of the discount that the Fund includes in its income, and may
be required to borrow to meet its distribution requirements.

CURRENCY HEDGING AND RISK MANAGEMENT PRACTICES. The Funds that may invest in
foreign securities do not expect to engage actively in hedging practices.
However, from time to time when deemed appropriate by the Adviser, they may seek
to protect against the effect of adverse changes in currency exchange rates that
are adverse to the present or prospective position of a Fund by employing
forward currency exchange contracts or options (sometimes called "derivatives").
A forward currency contract is individually negotiated and privately traded by
currency traders and their customers and creates an obligation to purchase or
sell a specific currency for an agreed-upon price at a future date.

The Funds generally enter into forward contracts only under two circumstances.
First, if a Fund enters into a contract for the purchase of a security
denominated in a foreign currency, it may desire to "lock in" the U.S. dollar
price of the security by entering in a forward contract to buy the amount of a
foreign currency needed to settle the transaction. Second, if the Adviser

B-11
<PAGE>
believes that the currency of a particular foreign country will substantially
rise or fall against the U.S. dollar, it may enter in a forward contract to buy
or sell the currency approximating the value of some or all of a Fund's
portfolio securities denominated in such currency. Although forward contracts
are used primarily to protect a Fund from adverse currency movements, they
involve the risk that currency movements will not be accurately anticipated.

A Fund also may purchase a put or call option on a currency in an effort to
hedge its current or prospective investments. A Fund will not enter into any
futures contracts or related options if the sum of initial margin deposits on
futures contracts, related options (including options on securities, securities
indices and currencies) and premiums paid for any such related options would
exceed 5% of the its total assets. There can be no assurance that hedging
transactions by a Fund, if employed, will be successful.

Despite their limited use, the Funds may enter into hedging transactions when,
in fact, it is inopportune to do so and, conversely, when it is more opportune
to enter into hedging transactions the Funds might not enter into such
transactions. Such inopportune timing of utilization of hedging practices could
result in substantial losses to the Funds.

OPTIONS ON SECURITIES, SECURITIES INDICES AND CURRENCIES. Although not currently
intended, the Funds may purchase put and call options on securities in which
they have invested, on foreign currencies represented in their portfolios and on
any securities index based in whole or in part on securities in which these
Funds may invest. The Funds also may enter into closing sales transactions in
order to realize gains or minimize losses on options they have purchased.

A Fund normally would purchase call options only in anticipation of an increase
in the market value of securities of the type in which it may invest or a
positive change in the currency in which such securities are denominated. The
purchase of a call option would entitle a Fund, in return for the premium paid,
to purchase specified securities or a specified amount of a foreign currency at
a specified price during the option period.

A Fund may purchase and sell options traded on U.S. and foreign exchanges.
Although the Funds will generally purchase only those options for which there
appears to be an active secondary market, there can be no assurance that a
liquid secondary market on an exchange will exist for any particular option or
at any particular time. For some options, no secondary market on an exchange may
exist. In such event, it might not be possible to effect closing transactions in
particular options, with the result that a Fund would have to exercise its
options in order to realize any profit and would incur transaction costs upon
the purchase or sale of the underlying securities.

Secondary markets on an exchange may not exist or may not be liquid for a
variety of reasons including: (i) insufficient trading interest in certain
options; (ii) restrictions on opening transactions or closing transactions
imposed by an exchange; (iii) trading halts, suspensions or other restrictions
may be imposed with respect to particular classes or series of options; (iv)
unusual or unforeseen circumstances which interrupt normal operations on an
exchange; (v) inadequate facilities of an exchange or the Options Clearing
Corporation to handle current trading volume at all times; or (vi)
discontinuance in the future by one or more exchanges for economic or other
reasons, of trading of options (or of a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange

B-12
<PAGE>
that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their
terms.

Although these Funds do not currently intend to do so, they may, in the future,
write (I.E., sell) covered put and call options on securities, securities
indices and currencies in which they may invest. A covered call option involves
a Fund's giving another party, in return for a premium, the right to buy
specified securities owned by the Fund at a specified future date and price set
at the time of the contract. A covered call option serves as a partial hedge
against the price decline of the underlying security. However, by writing a
covered call option, a Fund gives up the opportunity, while the option is in
effect, to realize gain from any price increase (above the option exercise price
and premium) in the underlying security. In addition, a Fund's ability to sell
the underlying security is limited while the option is in effect unless the Fund
effects a closing purchase transaction.

The Funds also may write covered put options that give the holder of the option
the right to sell the underlying security to the Fund at the stated exercise
price. A Fund will receive a premium for writing a put option but will be
obligated for as long as the option is outstanding to purchase the underlying
security at a price that may be higher than the market value of that security at
the time of exercise. In order to "cover" put options it has written, a Fund
will designate liquid assets with an aggregate value equal to at least the
exercise price of the put options. A Fund will not write put options if the
aggregate value of the obligations underlying the put options exceeds 25% of the
Fund's total assets. There is no assurance that higher than anticipated trading
activity or other unforeseen events might not, at times, render certain of the
facilities of the Options Clearing Corporation inadequate, and result in the
institution by an exchange of special procedures that may interfere with the
timely execution of the Funds' orders.

OTHER INVESTMENT PRACTICES

WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. The Funds may purchase securities
on a "when-issued" basis and may purchase or sell securities on a "forward
commitment" or "delayed-delivery" basis. The price of such securities is fixed
at the time the commitment to purchase or sell is made, but delivery and payment
for the securities take place at a later date. Normally, the settlement date
occurs within one month of the purchase; during the period between purchase and
settlement, no payment is made by a Fund to the issuer. While the Funds reserve
the right to sell when-issued or delayed delivery securities prior to the
settlement date, the Funds intend to purchase such securities with the purpose
of actually acquiring them unless a sale appears desirable for investment
reasons. At the time a Fund makes a commitment to purchase a security on a
when-issued or delayed delivery basis, it will record the transaction and
reflect the value of the security in determining its net asset value. The market
value of the when-issued securities may be more or less than the settlement
price. The Funds do not believe that their net asset values will be adversely
affected by their purchase of securities on a when-issued or delayed delivery
basis. The Funds will designate liquid assets with a value equal in value to
commitments for when-issued or delayed delivery securities. The designated
securities either will mature or, if necessary, be sold on or before the
settlement date. To the extent that assets of a Fund are held in cash pending
the settlement of a purchase of securities, that Fund will earn no income on
these assets.

B-13
<PAGE>
FOREIGN CURRENCY TRANSACTIONS. Because the Funds may invest in foreign
securities, the Funds may hold foreign currency deposits from time to time, and
may convert U.S. dollars and foreign currencies in the foreign exchange markets.
Currency conversion involves dealer spreads and other costs, although
commissions usually are not charged. Currencies may be exchanged on a spot
(I.E., cash) basis, or by entering into forward contracts to purchase or sell
foreign currencies at a future date and price. Forward contracts generally are
traded in an interbank market conducted directly between currency traders
(usually large commercial banks) and their customers. The parties to a forward
contract may agree to offset or terminate the contract before its maturity, or
may hold the contract to maturity and complete the contemplated currency
exchange.

In connection with purchases and sales of securities denominated in foreign
currencies, the Funds may enter into currency forward contracts to fix a
definite price for the purchase or sale in advance of the trade's settlement
date. This technique is sometimes referred to as a "settlement hedge" or
"transaction hedge." The Adviser expects to enter into settlement hedges in the
normal course of managing the Funds' foreign investments. A Fund also could
enter into forward contracts to purchase or sell a foreign currency in
anticipation of future purchases or sales of securities denominated in foreign
currency, even if the specific investments have not yet been selected by the
Adviser.

The Funds also may use forward contracts to hedge against a decline in the value
of existing investments denominated in foreign currency. For example, if a Fund
owned securities denominated in Deutschemarks, it could enter into a forward
contract to sell Deutschemarks in return for U.S. dollars to hedge against
possible declines in the Deutschemark's value. Such a hedge (sometimes referred
to as a "position hedge") would tend to offset both positive and negative
currency fluctuations, but would not offset changes in security values caused by
other factors. A Fund also could hedge the position by selling another currency
expected to perform similarly to the Deutschemark -- for example, by entering
into a forward contract to sell Deutschemarks or European Currency Units in
return for U.S. dollars. This type of hedge, sometimes referred to as a "proxy
hedge," could offer advantages in terms of cost, yield, or efficiency, but
generally will not hedge currency exposure as effectively as a simple hedge into
U.S. dollars. Proxy hedges may result in losses if the currency used to hedge
does not perform similarly to the currency in which the hedge securities are
denominated.

SEC guidelines require mutual funds to designate appropriate liquid assets to
cover forward currency contracts that are deemed speculations. The Funds are not
required to designate assets to cover forward contracts entered into for hedging
purposes, including settlement hedges, position hedges, and proxy hedges.

A Fund will not enter into a forward contract if, as a result, it would have
more than one-third of its total assets committed to such contracts (unless it
owns the currency that it is obligated to deliver or has designated cash or
high-quality liquid assets having a value sufficient to cover its obligations).

The successful use of forward currency contracts will depend on the Adviser's
skill in analyzing and predicting currency values. Forward contracts may change
a Fund's investment exposure to changes in currency exchange rates
substantially, and could result in losses to a Fund if exchange rates do not
perform as the Adviser anticipates. For example, if a currency's value rose at a
time when the Adviser had hedged a Fund by selling currency in exchange for
dollars, a Fund would be unable to participate in the currency's appreciation.
If the Adviser hedges currency exposure through proxy hedges, a Fund could

B-14
<PAGE>
realize currency losses from the hedge and the security position at the same
time if the two currencies do not move in tandem. Similarly, if the Adviser
increases a Fund's exposure to a foreign currency, and that currency's value
declines, the Fund will realize a loss. There is no assurance that the Adviser's
use of forward currency contracts will be advantageous to any Fund or that the
Adviser will hedge at an appropriate time. If the Adviser is not correct in its
forecast of interest rates, market values and other economic factors, a Fund
would be better off without a hedge. The policies described in this section are
non-fundamental policies of the Funds.

INDEXED SECURITIES. The Funds may purchase securities whose prices are indexed
to the prices of other securities, securities indices, currencies, precious
metals or other commodities, or other financial indicators. No Fund will invest
more than 5% of its net assets in indexed securities. Indexed securities
typically, but not always, are debt securities or deposits whose value at
maturity or coupon rate is determined by reference to a specific instrument or
statistic. Gold-indexed securities, for example, typically provide for a
maturity value that depends on the price of gold, resulting in a security whose
price tends to rise and fall together with gold prices. Currency-indexed
securities typically are short-term to intermediate-term debt securities whose
maturity values or interest rates are determined by reference to the values of
one or more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; for example, their maturity value may
increase when the specified currency value increases, resulting in a security
whose price characteristics are similar to a call option on the underlying
currency. Currency-indexed securities also may have prices that depend on the
values of a number of different foreign currencies relative to each other.

The performance of indexed securities depends to a great extent on the
performance of the security, currency, commodity or other instrument to which
they are indexed, and also may be influenced by interest rate changes in the
U.S. and abroad. At the same time, indexed securities are subject to the credit
risks associated with the issuer of the security, and their values may decline
substantially if the issuer's creditworthiness deteriorates. Recent issuers of
indexed securities have included banks, corporations, and certain U.S.
Government agencies.

REPURCHASE AGREEMENTS. In a repurchase agreement, a Fund purchases a security
and simultaneously commits to resell that security to the seller at an agreed
upon price on an agreed upon date within a specified number of days (usually not
more than seven) from the date of purchase. The resale price reflects the
purchase price plus an agreed upon incremental amount which is unrelated to the
coupon rate or maturity of the purchased security. A repurchase agreement
involves the obligation of the seller to pay the agreed upon price, which
obligation is, in effect, secured by the value (at least equal to the amount of
the agreed upon resale price and marked to market daily) of the underlying
security. A Fund may engage in a repurchase agreement with respect to any
security in which it is authorized to invest. Any repurchase transaction in
which a Fund engages will require at least 100% collateralization of the
seller's obligation during the entire term of the repurchase agreement. Each
Fund may engage in straight repurchase agreements and tri-party repurchase
agreements. While it does not presently appear possible to eliminate all risks
from these transactions (particularly the possibility of a decline in the market
value of the underlying securities, as well as delays and costs to a Fund in
connection with bankruptcy proceedings involving a counterparty), it is each
Fund's current policy to limit repurchase agreement transactions to those
parties whose creditworthiness has been reviewed and deemed satisfactory by the
Adviser.

B-15
<PAGE>
REVERSE REPURCHASE AGREEMENTS. The Funds may engage in reverse repurchase
agreements. In a reverse repurchase agreement, a Fund sells a portfolio
instrument to another party, such as a bank, broker-dealer or other financial
institution, in return for cash, and agrees to repurchase the instrument at a
particular price and time. While a reverse repurchase agreement is outstanding,
a Fund generally will designate cash and high quality liquid assets to cover its
obligation under the agreement. The Funds enter into reverse repurchase
agreements only with parties whose creditworthiness has been reviewed and deemed
satisfactory by the Adviser. A Fund's reverse repurchase agreements and dollar
roll transactions that are accounted for as financings will be included among
that Fund's borrowings for purposes of its investment policies and limitations.

DOLLAR ROLL TRANSACTIONS. The Funds may enter into dollar roll transactions. A
dollar roll transaction involves a sale by a Fund of a security to a financial
institution concurrently with an agreement by that Fund to purchase a similar
security from the institution at a later date at an agreed-upon price. The
securities that are repurchased will bear the same interest rate as those sold,
but generally will be collateralized by different pools of mortgages with
different prepayment histories than those sold. During the period between the
sale and repurchase, a Fund will not be entitled to receive interest and
principal payments on the securities sold. Proceeds of the sale will be invested
in additional portfolio securities of that Fund, and the income from these
investments, together with any additional fee income received on the sale, may
or may not generate income for that Fund exceeding the yield on the securities
sold. When a Fund enters into a dollar roll transaction, it will designate
liquid assets having a value equal to the purchase price for the similar
security (including accrued interest) and subsequently marks the assets to
market daily to ensure that full collateralization is maintained.

SECURITIES LENDING. Each Fund may lend its securities in an amount not exceeding
30% of its assets to parties such as broker-dealers, banks, or institutional
investors if the loan is collateralized in accordance with applicable
regulations. Securities lending allows the Funds to retain ownership of the
securities loaned and, at the same time, to earn additional income. Because
there may be delays in the recovery of loaned securities, or even a loss of
rights in collateral supplied, should the borrower fail financially, loans will
be made only to parties whose creditworthiness has been reviewed and deemed
satisfactory by the Adviser. Furthermore, they will only be made if, in the
judgment of the Adviser, the consideration to be earned from such loans would
justify the risk.

The Adviser understands that it is the current view of the SEC staff that a Fund
may engage in loan transactions only under the following conditions: (1) the
Fund must receive 100% collateral in the form of cash, cash equivalents (e.g.,
U.S. Treasury bills or notes) or other high-grade liquid debt instruments from
the borrower; (2) the borrower must increase the collateral whenever the market
value of the securities loaned (determined on a daily basis) rises above the
value of the collateral; (3) after giving notice, the Fund must be able to
terminate the loan at any time; (4) the Fund must receive reasonable interest on
the loan or a flat fee from the borrower, as well as amounts equivalent to any
dividends, interest, or other distributions on the securities loaned and to any
increase in market value; (5) the Fund may pay only reasonable custodian fees in
connection with the loan; and (6) the Board of Trustees must be able to vote
proxies on the securities loaned, either by terminating the loan or by entering
into an alternative arrangement with the borrower.

Cash received through loan transactions may be invested in any security in which
the Funds are authorized to invest. Investing this cash subjects that
investment, as well as the security loaned, to market forces (i.e., capital
appreciation or depreciation).

B-16
<PAGE>
BORROWING. Each Fund may borrow money from banks in an aggregate amount not to
exceed one-third of the value of the Fund's total assets to meet temporary or
emergency purposes, and each Fund may pledge its assets in connection with such
borrowings. A Fund will not purchase any securities while any such borrowings
exceed 10% of that Fund's total assets (including reverse repurchase agreements
and dollar roll transactions that are accounted for as borrowings).

Each Fund aggregates reverse repurchase agreements and dollar roll transactions
that are accounted for as financings with its bank borrowings for purposes of
limiting borrowings to one-third of the value of the Fund's total assets.

SHORT SALES. The Funds may engage in short sales of securities. In a short sale,
the Fund sells stock that it does not own, making delivery with securities
"borrowed" from a broker. The Fund is then obligated to replace the security
borrowed by purchasing it at the market price at the time of replacement. This
price may or may not be less then the price at which the security was sold by
the Fund. Until the security is replaced, the Fund is required to pay to the
lender any dividends or interest which accrue during the period of the loan. In
order to borrow the security, the Fund may also have to pay a premium which
would increase the cost of the security sold. The proceeds of the short sale
will be retained by the broker, to the extent necessary to meet margin
requirements, until the short position is closed out.

A Fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which a
Fund replaces the borrowed security. A Fund will realize a gain if the security
declines in price between those dates. The amount of any gain will be decreased,
and the amount of any loss increased, by the amount of the premium, dividends,
interest or expenses a Fund may be required to pay in connection with a short
sale.

When a Fund engages in short sales, its custodian designates an amount of liquid
assets equal to the difference between (1) the market value of the securities
sold short at the time they were sold short (or later market value), and (2) any
cash or U.S. Government securities required to be deposited with the broker in
connection with the short sale (not including the proceeds from the short sale).
The designated assets are marked-to-market daily, provided that at no time will
the amount designated plus the amount deposited with the broker be less than the
market value of the securities when they were sold short (or later market
value).

In addition, the Funds in the future also may make short sales "against the
box," i.e., when a security identical to one owned by a Fund is borrowed and
sold short. If a Fund enters into a short sale against the box, it is required
to designate securities equivalent in kind and amount to the securities sold
short (or securities convertible or exchangeable into such securities), and is
required to hold such securities while the short sale is outstanding. A Fund
will incur transaction costs, including interest, in connection with opening,
maintaining, and closing short sales against the box. A short sale against the
box also will constitute a constructive sale of the security and recognition of
any applicable gain or loss.

ILLIQUID INVESTMENTS. Illiquid investments are investments that cannot be sold
or disposed of in the ordinary course of business at approximately the prices at
which they are valued. Under the supervision of the Board of Trustees, the
Adviser determines the liquidity of the Funds' investments and, through reports
from the Adviser, the Board monitors trading activity in illiquid investments.

B-17
<PAGE>
In determining the liquidity of the Funds' investments, the Adviser may consider
various factors, including:

(1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace,
(3) dealer undertakings to make a market,
(4) the nature of the security (including any demand or tender features),
(5) the nature of the marketplace for trades (including the ability to
assign or offset a Fund's rights and obligations relating to the
investment); and
(6) in the case of foreign currency-denominated securities, any
restriction on currency conversion.

Investments currently considered by a Fund to be illiquid include repurchase
agreements not entitling the holder to payments of principal and interest within
seven days, over-the-counter options (and securities underlying such options),
certain mortgage-backed securities and restricted securities. In the absence of
market quotations, illiquid investments are priced at fair value as determined
in good faith by a committee appointed by the Board of Trustees. If through a
change in values, net assets, or other circumstances, a Fund were in a position
where more than 10% of its net assets were invested in illiquid securities, it
would seek to take appropriate steps to protect liquidity.

RESTRICTED SECURITIES. Restricted securities, which are one type of illiquid
securities, generally can be sold in privately negotiated transactions, pursuant
to an exemption from registration under the Securities Act of 1933, as amended
(the "1933 Act"), or in a registered public offering. Where registration is
required, a Fund may be obligated to pay all or part of the registration expense
and a considerable period may elapse between the time it decides to seek
registration and the time the Fund may be permitted to sell a security under an
effective registration statement. If, during such a period, adverse market
conditions were to develop, a Fund might obtain a less favorable price than the
price that prevailed when it decided to seek registration of the security.
Currently, no Fund invests more than 10% of its assets in securities which have
legal or contractual restrictions on their resale unless there is an actual
dealer market for the particular issue and it has been determined to be a liquid
issue as described below.

In recent years a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including securities sold
in private placements, repurchase agreements, commercial paper, foreign
securities and corporate bonds and notes. These instruments are often restricted
securities because the securities are sold in transactions not requiring
registration. Institutional investors generally will not seek to sell these
instruments to the general public, but instead will often depend either on an
efficient institutional market in which such unregistered securities can be
readily resold or on an issuer's ability to honor a demand for repayment.
Therefore, the fact that there are contractual or legal restrictions on resale
to the general public or certain institutions is not determinative of the
liquidity of such investments.

Rule 144A under the 1933 Act establishes a safe harbor from the registration
requirements of the 1933 Act for resales of certain securities to qualified
institutional buyers. Institutional markets for restricted securities sold
pursuant to Rule 144A in many cases provide both readily ascertainable values
for restricted securities and the ability to liquidate an investment to satisfy
share redemption orders. Such markets might include automated systems for the
trading, clearance and settlement of unregistered securities of domestic and
foreign issuers, such as the PORTAL System sponsored by the National Association

B-18
<PAGE>
of Securities Dealers, Inc. An insufficient number of qualified buyers
interested in purchasing Rule 144A-eligible restricted securities held by a
Fund, however, could affect adversely the marketability of such portfolio
securities and the Fund might be unable to dispose of such securities promptly
or at favorable prices.

The Board of Trustees has delegated the function of making day-to-day
determinations of liquidity to the Adviser pursuant to guidelines approved by
the Board. The Adviser takes into account a number of factors in reaching
liquidity decisions, including but not limited to (1) the frequency of trades
for the security, (2) the number of dealers that make quotes for the security,
(3) the number of dealers that have undertaken to make a market in the security,
(4) the number of other potential purchasers and (5) the nature of the security
and how trading is effected (e.g., the time needed to sell the security, how
bids are solicited and the mechanics of transfer). The Adviser monitors the
liquidity of restricted securities in the Fund's portfolio and reports
periodically on such decisions to the Board of Trustees.

DEFENSIVE INVESTMENTS. The Adviser supports its selection of individual
securities through intensive research and pursues qualitative and quantitative
disciplines to determine when securities should be purchased and sold. In
unusual circumstances, economic, monetary and other factors may cause the
Adviser to assume a temporary, defensive position during which a portion of each
Fund's assets may be invested in cash and short-term instruments. During the
period following commencement of operations, each Fund may have its assets
invested substantially in cash and cash equivalents rather than in the equity or
debt securities identified in its investment policies. The Funds also may lend
securities, and use repurchase agreements. For more information on these
investments, see "Portfolio Securities and Investment Techniques."

================================================================================
RISK FACTORS
================================================================================

PRICE FLUCTUATION. Investments in equity securities in general are subject to
market risks that may cause their prices to fluctuate over time. The value of
debt securities changes as interest rates fluctuate. The value of securities,
such as warrants or convertible debt, exercisable for or convertible into equity
securities is also affected by prevailing interest rates, the credit quality of
the issuer and any call provisions. Fluctuations in the value of securities in
which a Fund invests will cause the net asset value of that Fund to fluctuate.
An investment in a Fund therefore may be more suitable for long-term investors
who can bear the risk of short-term principal fluctuations.

DEBT SECURITIES. Debt securities held by the Funds may be subject to several
types of investment risk. Market or interest rate risk relates to the change in
market value caused by fluctuations in prevailing interest rates, while credit
risk relates to the ability of the issuer to make timely interest payments and
to repay the principal upon maturity. Call or income risk relates to periods of
falling interest rates, and involves the possibility that securities with high
interest rates will be prepaid or "called" by the issuer prior to maturity. Such
an event would require a Fund to invest the resulting proceeds elsewhere, at
generally lower interest rates, which could cause fluctuations in a Fund's net
income. A Fund also may be exposed to event risk, which is the possibility that
corporate debt securities held by a Fund may suffer a substantial decline in
credit quality and market value due to a corporate restructuring.

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

SMALL COMPANIES. Investors in Funds that invest in smaller companies should
consider carefully the special risks involved. Such smaller companies may
present greater opportunities for capital appreciation but may involve greater
risk than larger, more mature issuers. Such smaller companies may have limited
product lines, markets or financial resources, and their securities may trade
less frequently and in more limited volume than those of larger, more mature
companies. As a result, the prices of their securities may fluctuate more than
those of larger issuers.

FOREIGN SECURITIES. The Large Cap, Small Cap, International and Intermediate
Total Return Bond Funds have the right to purchase, and the International Fund
emphasizes, securities in foreign countries. Accordingly, shareholders should
consider carefully the risks involved in investing in securities issued by
companies and governments of foreign nations, which are in addition to the usual
risks inherent in domestic investments.

Foreign investments involve the possibility of expropriation, nationalization or
confiscatory taxation, taxation of income earned in foreign nations (including,
for example, withholding taxes on interest and dividends) or other taxes imposed
with respect to investments in foreign nations, foreign exchange controls (which
may include suspension of the ability to transfer currency from a given country
and repatriation of investments), default in foreign government securities, and
political or social instability or diplomatic developments that could adversely
affect investments. In addition, there is often less publicly available
information about foreign issuers than those in the U.S. Foreign companies are
often not subject to uniform accounting, auditing and financial reporting
standards. Further, these Funds may encounter difficulties in pursuing legal
remedies or in obtaining judgments in foreign courts.

Brokerage commissions, fees for custodial services and other costs relating to
investments by these Funds in other countries are generally greater than in the
U.S. Foreign markets have different clearance and settlement procedures from
those in the U.S., and certain markets have experienced times when settlements
did not keep pace with the volume of securities transactions and resulted in
settlement difficulty. The inability of a Fund to make intended security
purchases because of settlement difficulties could cause it to miss attractive
investment opportunities. Inability to sell a portfolio security because of
settlement problems could result in loss to a Fund if the value of the portfolio
security declined or result in claims against the Fund if it had entered into a
contract to sell the security. In certain countries, there is less government
supervision and regulation of business and industry practices, stock exchanges,
brokers, and listed companies than in the U.S. The securities markets of many of
the countries in which these Funds may invest may also be smaller, less liquid,
and subject to greater price volatility than those in the U.S.

B-20
<PAGE>
Because the securities owned by the Large Cap, Small Cap, International and
Intermediate Total Return Bond Funds may be denominated in foreign currencies,
the value of such securities will be affected by changes in currency exchange
rates and in exchange control regulations, and costs will be incurred in
connection with conversions between currencies. A change in the value of a
foreign currency against the U.S. dollar results in a corresponding change in
the U.S. dollar value of a Fund's securities denominated in the currency. Such
changes also affect a Fund's income and distributions to shareholders. A Fund
may be affected either favorably or unfavorably by changes in the relative rates
of exchange between the currencies of different nations, and a Fund may
therefore engage in foreign currency hedging strategies. Such strategies,
however, involve certain transaction costs and investment risks, including
dependence upon the Adviser's ability to predict movements in exchange rates.

EXCHANGE RATES AND POLICIES. The International Fund endeavors to buy and sell
foreign currencies on favorable terms. Some price spreads on currency exchange
(to cover service charges) may be incurred, particularly when the Fund changes
investments from one country to another or when proceeds from the sale of shares
in U.S. dollars are used for the purchase of securities in foreign countries.
Also, some countries may adopt policies which would prevent the Fund from
repatriating invested capital and dividends, withhold portions of interest and
dividends at the source, or impose other taxes, with respect to the Fund's
investments in securities of issuers of that country. There also is the
possibility of expropriation, nationalization, confiscatory or other taxation,
foreign exchange controls (which may include suspension of the ability to
transfer currency from a given country), default in foreign government
securities, political or social instability, or diplomatic developments that
could adversely affect investments in securities of issuers in those nations.

The Fund may be affected either favorably or unfavorably by fluctuations in the
relative rates of exchange between the currencies of different nations, exchange
control regulations and indigenous economic and political developments.

The Board of Trustees considers at least annually the likelihood of the
imposition by any foreign government of exchange control restrictions that would
affect the liquidity of the Funds' assets maintained with custodians in foreign
countries, as well as the degree of risk from political acts of foreign
governments to which such assets may be exposed. The Board also considers the
degree of risk attendant to holding portfolio securities in domestic and foreign
securities depositories.

HEDGING TRANSACTIONS. While transactions in options or other "hedging positions"
may reduce certain risks, such transactions themselves entail certain other
risks. Thus, while a Fund may benefit from the use of hedging positions,
unanticipated changes in interest rates, securities prices or currency exchange
rates may result in a poorer overall performance for that Fund than if it had
not entered into any hedging positions. If the correlation between a hedging
position and portfolio position which is intended to be protected is imperfect,
the desired protection may not be obtained, and a Fund may be exposed to risk of
financial loss.

Perfect correlation between a Fund's hedging positions and portfolio positions
may be difficult to achieve because hedging instruments in many foreign
countries are not yet available. In addition, it is not possible to hedge fully

B-21
<PAGE>
against currency fluctuations affecting the value of securities denominated in
foreign currencies because the value of such securities is likely to fluctuate
as a result of independent factors not related to currency fluctuations.

INVESTING IN MUNICIPAL SECURITIES. Because the California Intermediate Tax-Free
Bond Fund invests primarily in Municipal Securities, its performance may be
especially affected by factors pertaining to the economies of various states and
other factors specifically affecting the ability of issuers of Municipal
Securities to meet their obligations.

The ability of state, county or local governments to meet their obligations will
depend primarily on the availability of tax and other revenues to those
governments and on their fiscal conditions generally. The amount of tax and
other revenues available to governmental issuers of Municipal Securities may be
affected from time to time by economic, political, geographic and demographic
conditions. In addition, constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives may limit a
government's power to raise revenues or increase taxes and thus could adversely
affect the ability to meet financial obligations. The availability of federal,
state and local aid to issuers of Municipal Securities also may affect their
ability to meet their obligations.

Payments of principal and interest on limited obligation securities will depend
on the economic condition of the facility or specific revenue source from whose
revenues the payments will be made, which in turn could be affected by economic,
political, social, environmental and regulatory policies and conditions in a
given state. The Fund cannot predict whether or to what extent such factors or
other factors may affect the issuers of Municipal Securities, the market value
or marketability of such securities or the ability of the respective issuers of
such securities acquired by the Fund to pay interest on, or principal of, such
securities. The creditworthiness of obligations issued by local issuers may be
unrelated to the creditworthiness of obligations issued by a particular State,
and there is no responsibility on the part of a particular State to make
payments on such local obligations.

Any reduction in the actual or perceived ability of an issuer of Municipal
Securities to meet its obligations (including a reduction in the rating of its
outstanding securities) would likely affect adversely the market value and
marketability of its obligations and could affect adversely the values of
Municipal Securities as well. For example, in recent years, certain state
constitutional and statutory amendments and initiatives have restricted the
ability of those states' taxing entities to increase real property and other tax
revenues. Other initiative measures approved by voters, through limiting various
other taxes, have resulted in a substantial reduction in certain state revenues.
Decreased state revenues may result in reductions in allocations of state
revenues to local governments. It is not possible to determine the impact of
these measures on the ability of specific issuers to pay interest or repay
principal. In addition, from time to time, federal legislative proposals have
threatened the tax-exempt status or use of Municipal Securities.

INTEREST RATES. The market value of debt securities that are interest rate
sensitive is inversely related to changes in interest rates. That is, an
interest rate decline produces an increase in a security's market value and an
interest rate increase produces a decrease in value. The longer the remaining
maturity of a security, the greater the effect of interest rate changes. Changes
in the ability of an issuer to make payments of interest and principal and in
the market's perception of its creditworthiness also affect the market value of
that issuer's debt securities.

B-22
<PAGE>
Prepayments of principal of mortgage-related securities by mortgagors or
mortgage foreclosures affect the average life of the mortgage-related securities
in a Fund's portfolio. Mortgage prepayments are affected by the level of
interest rates and other factors, including general economic conditions and the
underlying location and age of the mortgage. In periods of rising interest
rates, the prepayment rate tends to decrease, lengthening the average life of a
pool of mortgage-related securities. In periods of falling interest rates, the
prepayment rate tends to increase, shortening the average life of a pool.
Because prepayments of principal generally occur when interest rates are
declining, it is likely that a Fund, to the extent that it retains the same
percentage of debt securities, may have to reinvest the proceeds of prepayments
at lower interest rates than those of its previous investments. If this occurs,
that Fund's yield will correspondingly decline. Thus, mortgage-related
securities may have less potential for capital appreciation in periods of
falling interest rates than other fixed-income securities of comparable
duration, although they may have a comparable risk of decline in market value in
periods of rising interest rates. To the extent that a Fund purchases
mortgage-related securities at a premium, unscheduled prepayments, which are
made at par, result in a loss equal to any unamortized premium.

Duration is one of the fundamental tools used by the Manager in managing
interest rate risks including prepayment risks. Traditionally, a debt security's
"term to maturity" characterizes a security's sensitivity to changes in interest
rates "Term to maturity," however, measures only the time until a debt security
provides its final payment, taking no account of prematurity payments. Most debt
securities provide interest ("coupon") payments in addition to a final ("par")
payment at maturity, and some securities have call provisions allowing the
issuer to repay the instrument in full before maturity date, each of which
affect the security's response to interest rate changes. "Duration" is
considered a more precise measure of interest rate risk than "term to maturity."
Determining duration may involve the Adviser's estimates of future economic
parameters, which may vary from actual future values. Fixed-income securities
with effective durations of three years are more responsive to interest rate
fluctuations than those with effective durations of one year. For example, if
interest rates rise by 1%, the value of securities having an effective duration
of three years will generally decrease by approximately 3%.

LEVERAGE. Leveraging the Funds through various forms of borrowing creates an
opportunity for increased net income but, at the same time, creates special risk
considerations. For example, leveraging may exaggerate changes in the net asset
value of a Fund's shares and in the yield on a Fund's portfolio. Although the
principal of such borrowings will be fixed, a Fund's assets may change in value
during the time the borrowing is outstanding. Leveraging will create interest
expenses for a Fund that can exceed the income from the assets retained. To the
extent the income derived from securities purchased with borrowed funds exceeds
the interest a Fund will have to pay, that Fund's net income will be greater
than if leveraging were not used. Conversely, if the income from the assets
retained with borrowed funds is not sufficient to cover the cost of leveraging,
the net income of a Fund will be less than if leveraging were not used, and
therefore the amount available for distribution to shareholders as dividends
will be reduced.

================================================================================
THE FUNDS' INVESTMENT LIMITATIONS
================================================================================

The following policies and investment restrictions have been adopted by each
Fund and (unless otherwise noted) are fundamental and cannot be changed without
the affirmative vote of a majority of a Fund's outstanding voting securities as
defined in the Investment Company Act. Each Fund may not:

(1) change its status as a diversified series, which requires that each Fund,
with respect to 75% of its total assets, not invest in the securities of
any one issuer (other than the U.S. Government and its agencies and
instrumentalities) if immediately after and as a result of such investment
more than 5% of the total assets of the Fund would be invested in such

B-23
<PAGE>
issuer (the remaining 25% of the Fund's total assets may be invested
without restriction except to the extent other investment restrictions may
be applicable); provided, that the foregoing limitation shall not apply to
the California Intermediate Tax-Free Bond Fund;

(2) invest 25% or more of the value of the Fund's total assets in the
securities of companies engaged in any one industry (except securities
issued by the U.S. Government, its agencies and instrumentalities or
tax-exempt securities issued by state governments or political
subdivisions);

(3) borrow money, except each Fund may enter into bank loans for temporary or
emergency purposes or engage in otherwise permissible leveraging activities
(including reverse repurchase agreements and dollar roll transactions that
are accounted for as financings) in an amount not in excess of one-third of
the value of the Fund's total assets (at the lesser of acquisition cost or
current market value). No investments will be made by any Fund if its
borrowings exceed 10% of total assets;

(4) issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from making any
otherwise permissible borrowings, mortgages or pledges, or entering into
permissible reverse repurchase agreements and dollar roll transactions, and
options transactions, or issuing shares of beneficial interest in multiple
classes;

(5) make loans of more than one-third of the Fund's net assets, including loans
of securities, except that the Fund may, subject to the other restrictions
or policies stated herein, purchase debt securities or enter into
repurchase agreements with banks or other institutions to the extent a
repurchase agreement is deemed to be a loan;

(6) purchase or sell commodities or commodity contracts, except that the Fund
may invest in companies that engage in such businesses to the extent
otherwise permitted by the Fund's investment policies and restrictions and
by applicable law, and may engage in otherwise permissible options and
futures activities as described in the Prospectus and this Statement of
Additional Information (such as foreign currency hedging);

(7) purchase or sell real estate, except that the Fund may invest in securities
secured by real estate or real estate interests, or issued by companies,
including real estate investment trusts, that invest in real estate or real
estate interests;

(8) underwrite securities of any other company, except that the Fund may invest
in companies that engage in such businesses, and except to the extent that
the Fund may be considered an underwriter within the meaning of the 1933
Act in the disposition of restricted securities; and

(9) notwithstanding any other fundamental investment restriction or policy,
each Fund reserves the right to invest all of its assets in the securities
of a single open-end investment company with substantially the same
fundamental investment objectives, restrictions and policies as that Fund.

B-24
<PAGE>
The Board of Trustees, as a matter of policy or in response to specific state
and/or federal legal requirements, has adopted the following additional
investment restrictions which may be changed at the Board's discretion
(consistent with any applicable legal requirements).

A Fund may not:

(10) purchase or write put, call, straddle or spread options except as described
in the Prospectus or Statement of Additional Information;

(11) make short sales (except covered or "against the box" short sales) or
purchases on margin, except that the Fund may obtain short-term credits
necessary for the clearance of purchases and sales of its portfolio
securities and, as required in connection with permissible options,
futures, short selling and leveraging activities as described elsewhere in
the Prospectus and Statement of Additional Information;

(12) mortgage, hypothecate, or pledge any of its assets as security for any of
its obligations, except as required for otherwise permissible borrowings
(including reverse repurchase agreements, dollar roll transactions, short
sales, financial options and other hedging activities);

(13) purchase the securities of any company for the purpose of exercising
management or control (but this restriction shall not restrict the voting
of any proxy);

(14) purchase more than 10% of the outstanding voting securities of any one
issuer;

(15) purchase the securities of other investment companies, except as permitted
by the 1940 Act and except as otherwise provided in the Prospectus (each
Fund reserves the right to invest all of its assets in shares of another
investment company);

(16) participate on a joint basis in any trading account in securities, although
the Adviser may aggregate orders for the sale or purchase of securities
with other accounts it manages to reduce brokerage costs or to average
prices;

(17) invest, in the aggregate, more than 10% of its net assets in illiquid
securities;

(18) invest more than 5% of its net assets in indexed securities.

Except as otherwise noted, all percentage limitations set forth above apply
immediately after a purchase and a subsequent change in the applicable
percentage resulting from market fluctuations does not require elimination of
any security from the portfolio.

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.

B-25
<PAGE>
If a percentage restriction is adhered to at the time of investment, a
subsequent increase or decrease in a percentage resulting from a change in the
values of assets will not constitute a violation of that restriction, except as
otherwise noted.

================================================================================
DISTRIBUTIONS AND TAX INFORMATION
================================================================================

Each Fund intends to distribute substantially all of its net investment income
and net capital gains, if any. In determining amounts of capital gains to be
distributed, any capital loss carryovers from prior years will be offset against
capital gains of the current year. Unless a shareholder elects cash
distributions on the Account Application form or submits a written request to a
Fund at least 10 full business days before the record date for a distribution in
which the shareholder elects to receive such distribution in cash, distributions
will be credited to the shareholder's account in additional shares of a Fund
based on the net asset value per share at the close of business on the day
following the record date for such distribution.

Any dividend or distribution paid by a Fund has the effect of reducing the net
asset value per share on the reinvestment date by the amount of the dividend or
distribution. Investors should note that a dividend or distribution paid on
shares purchased shortly before such dividend or distribution was declared will
be subject to income taxes as discussed below even though the dividend or
distribution represents, in substance, a partial return of capital to the
shareholder.

Each Fund has qualified and elected to be treated as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"), and intends to maintain such qualification. In order to so qualify, a
Fund must meet certain requirements with respect to the source of its income,
diversification of its assets and distributions to its shareholders. Dividends
declared by a Fund in October, November, or December of any calendar year to
shareholders of record as of a record date in such a month will be treated for
federal income tax purposes as having been received by shareholders on December
31 of that year if they are paid during January of the following year.

Under Subchapter M, a Fund will not be subject to federal income taxes on the
net investment income and capital gains it distributes to shareholders, provided
that at least 90% of its investment company taxable income for the taxable year
is so distributed. A Fund will generally be subject to federal income taxes on
its undistributed net investment income and capital gains. A nondeductible 4%
excise tax also is imposed on each regulated investment company to the extent
that it does not distribute to investors in each calendar year an amount equal
to 98% of its ordinary income for such calendar year plus 98% of its capital
gain net income for the one-year period ending on October 31 of such calendar
year plus 100% of any undistributed ordinary or capital gain net income for the
prior period. Each Fund intends to declare and pay dividends and capital gain
distributions in a manner to avoid imposition of the excise tax.

The Trustees reserve the right not to maintain the qualification of a Fund as a
regulated investment company if they determine such course of action to be more
beneficial to the shareholders. In such case, a Fund will be subject to federal
and state corporate income taxes on its income and gains, and all dividends and
distributions to shareholders will be ordinary dividend income to the extent of
the Fund's earnings and profits.

B-26
<PAGE>
The Funds may write, purchase or sell certain option and foreign currency
contracts. Such transactions are subject to special tax rules that may affect
the amount, timing and character of distributions to shareholders. Unless the
Funds are eligible to make a special election, such option and foreign currency
contracts that are "Section 1256 contracts" will be "marked-to-market" for
federal income tax purposes at the end of each taxable year, i.e., each option
contract will be treated as sold for its fair market value on the last day of
the taxable year. In general, unless the special election referred to in the
previous sentence is made, gain or loss from transactions in such option
contracts will be 60% long-term and 40% short-term capital gain or loss.

Section 1092 of the Code, which applies to certain "straddles," may affect the
taxation of the Funds' transactions in option contracts. Under Section 1092, the
Funds may be required to postpone recognition for tax purposes of losses
incurred in certain closing transactions in options.

Section 988 of the Code contains special tax rules applicable to certain foreign
currency transactions that may affect the amount, timing, and character of
income, gain or loss recognized by a Fund. Under these rules, foreign exchange
gain or loss realized with respect to foreign currency-denominated debt
instruments, foreign currency forward contracts, foreign currency-denominated
payables and receivables, and foreign currency options and futures contracts
(other than options and futures contracts that are governed by the
mark-to-market and 60%-40% rules of Section 1256 of the Code and for which no
election is made) is treated as ordinary income or loss. Some part of a Fund's
gain or loss on the sale or other disposition of shares of a foreign corporation
may, because of changes in foreign currency exchange rates, be treated as
ordinary income or loss under Section 988 of the Code, rather than as capital
gain or loss.

The Funds also may invest in the stock of foreign companies that may be treated
as "passive foreign investment companies" ("PFICs") under the Code. Certain
other foreign corporations, not operated as investment companies, may
nevertheless satisfy the PFIC definition. A portion of the income and gains that
a Fund derives from PFIC stock may be subject to a non-deductible federal income
tax at the Fund level. In some cases, a Fund may be able to avoid this tax by
electing to be taxed currently on its share of the PFIC's income, whether or not
such income is actually distributed by the PFIC. The Funds will endeavor to
limit their exposure to the PFIC tax by investing in PFICs only where the
election to be taxed currently will be made. Since it is not always possible to
identify a foreign issuer as a PFIC in advance of making the investment, these
Funds may incur the PFIC tax in some instances.

Dividends of net investment income (including any net realized short-term
capital gains other than exempt-interest dividends described below) paid by a
Fund are taxable to shareholders of the Fund as ordinary income, whether such
distributions are taken in cash or reinvested in additional shares.
Distributions of net capital gain (i.e., the excess of net long-term capital
gains over net short-term capital losses), if any, by a Fund are taxable as
long-term capital gains, whether such distributions are taken in cash or
reinvested in additional shares, and regardless of how long shares of the Fund
have been held. Fund distributions also will be included in individual and
corporate shareholders' income on which the alternative minimum tax may be
imposed. Tax-exempt shareholders will not be required to pay taxes on amounts
distributed to them, unless they have borrowed to purchase or carry their shares
of a Fund. Statements as to the tax status of distributions to shareholders will
be mailed annually.

B-27
<PAGE>
Provided that, as anticipated, the California Intermediate Tax-Free Bond Fund
qualifies as a regulated investment company under the Code, and, at the close of
each quarter of its taxable year at least 50% of the value of the total assets
of that Fund consists of obligations the interest on which is exempt from
federal income tax, that Fund will be qualified to pay exempt-interest dividends
to its shareholders that, to the extent attributable to interest received by
that Fund on such obligations, are exempt from federal income tax. The total
amount of exempt-interest dividends paid by the California Intermediate Tax-Free
Bond Fund to its shareholders with respect to any taxable year cannot exceed the
amount of interest received by the Fund during such year on tax-exempt
obligations less any expenses attributable to such interest. Income from other
transactions engaged in by the California Intermediate Tax-Free Bond Fund, such
as income from options and repurchase agreements, will be taxable distributions
to its shareholders.

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

Interest on indebtedness incurred or continued by a shareholder to purchase or
carry shares of the California Intermediate Tax-Free Bond Fund is not deductible
for federal income tax purposes. Under regulations prescribed by the IRS for
determining when borrowed funds are considered used for the purposes of
purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though the borrowed funds
are not directly traceable to the purchase of shares of this Fund.

Up to 85% of social security or railroad retirement benefits may be included in
federal taxable income of recipients whose adjusted gross income (including
income from tax-exempt sources such as tax-exempt bonds and exempt-interest
dividends) plus 50% of their benefits exceed certain base amounts. Income from
the California Intermediate Tax-Free Bond Fund is included in the calculation of
whether a recipient's income exceeds these base amounts, but is not taxable
directly.

From time to time, proposals have been introduced in Congress to restrict or
eliminate the federal income tax exemption for interest on Municipal Securities.
It can be expected that similar proposals may be introduced in the future. If
such proposals were enacted, the availability of Municipal Securities for
investment by the California Intermediate Tax-Free Bond Fund and the value of
that Fund's portfolio would be affected. In such event, that Fund would
reevaluate its investment objectives and policies.

Any dividend from net investment income or distribution of long-term capital
gains received by a shareholder will have the effect of reducing the net asset
value of a Fund's shares held by such shareholder by the amount of the dividend
or distribution. If the net asset value of the shares should be reduced below a
shareholder's cost as a result of the dividend of net investment income or a
long-term capital gains distribution, such dividend or distribution, although
constituting a return of capital, nevertheless will be taxable as described
above. Investors should be careful to consider the tax implications of buying
shares just prior to a distribution. The price of shares purchased at that time
may include the amount of the forthcoming distribution. Those investors
purchasing shares just prior to a distribution will then receive a partial
return of their investment upon such distribution, which will nevertheless be
taxable to them.

B-28
<PAGE>
Any gain or loss realized upon an exchange or redemption of shares in a Fund by
a shareholder who holds the shares as a capital asset will be treated as a
long-term capital gain or loss if the shares have been held for more than one
year, and otherwise as a short-term capital gain or loss. However, any loss
realized by a shareholder upon an exchange or redemption of shares of a Fund
held (or treated as held) for six months or less will be treated as a long-term
capital loss to the extent of any long-term capital gain distribution received
on the shares.

All or a portion of a loss realized upon the exchange or redemption of shares
may be disallowed to the extent shares are purchased (including shares acquired
by means of reinvested dividends) within 30 days before or after such
redemption. In addition, with respect to the California Intermediate Tax-Free
Bond Fund, any loss realized upon the exchange or redemption of shares of the
Fund held (or treated as held) for six months or less will be disallowed to the
extent of any exempt-interest dividends received on the shares.

Dividends paid by a Fund will be eligible for the 70% dividends received
deduction for corporate shareholders, to the extent that a Fund's income is
derived from certain qualifying dividends received from domestic corporations.
Availability of the deduction is subject to certain holding period and
debt-financing limitations. Capital gains distributions are not eligible for the
70% dividends received deduction.

A Fund may be subject to foreign withholding taxes on dividends and interest
earned with respect to securities of foreign corporations. If more than 50% in
value of the total assets of a Fund at the end of its fiscal year is invested in
stock or securities of foreign corporations, the Fund may elect to pass through
to its shareholders their pro rata share of all foreign income taxes paid by the
Fund. If this election is made by a Fund, shareholders will be (i) required to
include in their gross income their pro rata share of the Fund's foreign source
income (including any foreign income taxes paid by the Fund), and (ii) entitled
either to deduct their share of such foreign taxes in computing their taxable
income or to claim a credit for such taxes against their U.S. income tax,
subject to certain limitations under the Code. If a Fund does not qualify to, or
does not, make the election, the Fund will deduct the foreign income taxes it
pays. The International Fund may qualify to make this election.

Each Fund is required to withhold 31% of reportable payments (including
dividends, capital gain distributions and redemption proceeds) paid to
individuals and other nonexempt shareholders who have not complied with
applicable regulations. In order to avoid this backup withholding requirement,
each shareholder must provide a social security number or other taxpayer
identification number and certify that the number provided is correct and that
the shareholder is not currently subject to backup withholding, or the
shareholder should indicate that it is exempt from backup withholding. Even
though all certifications have been made on the Application, a Fund may be
required to impose backup withholding if it is notified by the IRS or a broker
that such withholding is required for previous under-reporting of interest or
dividend income or use of an incorrect taxpayer identification number.
Nonresident aliens, foreign corporations, and other foreign entities may be
subject to withholding of up to 30% on certain payments received from a Fund.

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

B-29
<PAGE>
================================================================================
MANAGEMENT OF THE FUNDS
================================================================================

TRUSTEES AND OFFICERS

The Trustees are responsible for the overall management of the Fund, including
establishing the Fund's policies, general supervision and review of their
investment activities. The officers who administer the Fund's daily operations,
are appointed by the Board of Trustees. The current Trustees and officers of the
Trust performing a policy-making function and their affiliations and principal
occupations for the past five years are set forth below:

<TABLE>
<CAPTION>
POSITION(S)
HELD WITH OTHER PRINCIPAL OCCUPATIONS(S)
NAME, ADDRESS AND AGE TRUST DURING PAST FIVE YEARS
--------------------- ----------- ------------------------------
<S> <C> <C>
Allan Michael Rudnick(1) (Age 60) Trustee Equity owner and the Chief Investment
c/o Kayne Anderson Mutual Funds and Officer of the general partner of Kayne
1800 Avenue of the Stars, Ste 200 President Anderson (and its predecessor) since
Los Angeles, CA 90067 August 1989.

Carl D. Covitz (Age 61) Trustee President and owner of Landmark Capital
c/o Landmark Capital, Inc. since 1973 (except for various periods
9595 Wilshire Boulevard of government service). Landmark Capital
Beverly Hills, CA 90212 is a national real estate development
and investment firm with activities as
diverse as construction, financing,
management and food distribution.
Secretary of the California Business,
Transportation and Housing Agency, and a
member of the Governor's Cabinet, from
1990 to 1993. Undersecretary of the U.S.
Department of Housing and Urban
Development (HUD) and a member of
President Ronald Reagan's Cabinet.

Arnold Brustin (Age 57) Trustee President of Vision Investments, a firm
c/o Vision Investments Inc. involved in the entertainment industry,
601 North Saltair Avenue since 1982. Prior to that, Senior Vice
Los Angeles, CA 90049 President - Business Affairs for
Tri-Star Television and has worked in
various legal and executive capacities
with CBS, Inc.

Gerald I. Isenberg (Age 60) Trustee Professor at the School of
1637 East Valley Road Cinema-Television at the University of
Montecito, CA 93108 Southern California in Los Angeles.
Chief Operating Officer of Hearst
Entertainment, a subsidiary of the
Hearst Corporation, which produces and
distributes television entertainment,
from 1989 to 1994.
B-30
<PAGE>
William H. Waldorf (Age 62) Trustee Chairman and Chief Executive Officer of
c/o Landmark Distrib. Group, Inc. Landmark Distribution Group, Inc., and
100 Jericho Quadrangle its affiliated companies. These
Jericho, NY 11753 companies are involved in the food
storage and distribution, real estate
and financial investment businesses.
Director of the NYSE-listed Griffon
Corporation for over 30 years and is a
Trustee of Hope College, Elmira College
and The Interchurch Center.

David Shladovsky (39) Trustee Serves as General Counsel and Secretary
c/o Kayne Anderson Mutual Funds of Kayne Anderson. Prior to joining the
1800 Avenue of the Stars, Ste 200 firm in January 1997, Mr. Shladovsky was
Los Angeles, CA 90067 in the private practice of corporate and
securities law for 11 years, most
recently as Corporate Counsel to Hughes,
Hubbard & Reed LLP. Mr. Shladovsky is a
1982 graduate, magna cum laude, of
Brandeis University. In 1985, he earned
his JD from the Boston University School
of Law, where he served as a member of
the Boston University Law Review.
</TABLE>

----------
(1) Denotes a Trustee who is an "interested person," as defined in the 1940
Act.

The officers of the Trust, and the Trustees who are considered "interested
persons" of the Trust, receive no compensation directly from it for performing
the duties of their offices. However, those officers and Trustees of the Trust
who are officers or partners of the Adviser or the Distributor may receive
remuneration indirectly because the Adviser receives a management fee from the
Fund. The Trustees who are not affiliated with the Adviser or the Distributor
receive a fee of $2,000 for each regular Board meeting attended and $250 for
each committee meeting attended, together with reasonable expenses. The
aggregate compensation paid by the Trust to each Trustee during the fiscal year
ended December 31, 1999 is set forth below.

PENSION OR RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED FROM THE TRUST AND
COMPENSATION AS PART OF FUND COMPLEX (NO
NAME OF TRUSTEE FROM THE TRUST FUND EXPENSES* ADDITIONAL TRUSTS)
--------------- -------------- -------------- ------------------
Allan M. Rudnick None None None
Carl D. Covitz $7,250 None $7,250
Arnold Brustin $7,250 None $7,250
Gerald I. Isenberg $7,250 None $7,250
William H. Waldorf $7,250 None $7,250

----------
* The Trust does not maintain pension or retirement plans.

B-31
<PAGE>
CONTROL PERSONS AND SHARE OWNERSHIP

As of April 17, 2000, the following persons held of record 5% or more of the
outstanding shares of the Funds:

PERCENTAGE
FUND SHAREHOLDER NAME & ADDRESS HELD
---- -------------------------- ----
Large Cap Fund SBT & Co. 26.59%
P.O. Box 8469
La Jolla, CA 92038

Small Cap Fund Bear Stearns Securities Corporation (1) 16.94%
One Metrotech Center North
Brooklyn, NY 11201

International Fund SBT & Co. 12.84%
P.O. Box 8469
La Jolla, CA 92038

SBT & Co. 14.16%
P.O. Box 8469
La Jolla, CA 92038

Bear Stearns Securities Corporation (1) 10.17%
One Metrotech Center North
Brooklyn, NY 11201

Charles Schwab & Co. Inc. (1) 6.46%
Special Custody Account for Benefit
of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104

Intermediate Total SBT & Co. 38.30%
Return Bond Fund P.O. Box 8469
La Jolla, CA 92038

c/o The Bank of New York 23.47%
Attn: Mutual Funds/Reorg Dept.
P.O. Box 1066
New York, NY 10286

Fidelity Investments Institutional 6.37%
Attn: IC Funds
100 Magellan Way KW1C
Covington, KY 41015

Bear Stearns Securities Corporation (1) 5.40%
One Metrotech Center North
Brooklyn, NY 11201

California Intermediate SBT & Co. 7.61%
Tax-Free Bond Fund P.O. Box 8469
La Jolla, CA 92038

Bear Stearns Securities Corporation (1) 69.80%
One Metrotech Center North
Brooklyn, NY 11201

Charles Schwab & Co. Inc. (1) 7.41%
Special Custody Account for Benefit
of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104

----------
(1) Bear Stearns Securities Corporation and Charles Schwab & Co., Inc., are the
nominee accounts for many individual shareholder accounts; the Funds are
not aware of the size or identity of the underlying individual accounts
thereof.

B-32
<PAGE>
As of March 31, 2000, the Trustees and Officers of the Trust as a whole owned
less than 1% of the outstanding shares of the Funds.

THE ADVISER

As set forth in the Prospectus, Kayne Anderson Investment Management LLC. is the
Adviser for the Funds. Pursuant to an Investment Management Agreement (the
"Management Agreement"), the Adviser determines the composition of the Funds'
portfolios, the nature and timing of the changes to the Funds' portfolios and
the manner of implementing such changes. The Adviser also (a) provides the Funds
with investment advice, research and related services for the investment of
their assets, subject to such directions as it may receive from the Board of
Trustees; (b) pays all of the Trust's executive officers' salaries and executive
expenses (if any); (c) pays all expenses incurred in performing its investment
advisory duties under the Management Agreement; and (d) furnishes the Funds with
office space and certain administrative services. The services of the Adviser to
the Funds are not deemed to be exclusive, and the Adviser or any affiliate
thereof may provide similar services to other series of the Trust, other
investment companies and other clients, and may engage in other activities. The
Funds may reimburse the Adviser (on a cost recovery basis only) for any services
performed for a Fund by the Adviser outside its duties under the Management
Agreement.

Kayne Anderson Investment Management LLC is a registered investment adviser
organized as a California limited liability company. The Adviser's predecessor
was founded in 1984, by Richard Kayne and John Anderson. The Adviser is in the
business of furnishing investment advice to institutional and private clients
and, together with its affiliated investment adviser, Kayne Anderson Capital
Advisors, L.P., managed, as of March 31, 2000, approximately $6 billion for such
clients.

The Management Agreement may be terminated by the Adviser or the Trust, without
penalty, on 60-days' written notice to the other and will terminate
automatically in the event of its assignment.

The Management Agreement permits the Adviser to seek reimbursement of any
reductions made to its management fee within the three-year period following
such reduction, subject to a Fund's ability to effect such reimbursement and
remain in compliance with applicable expense limitations. Any such management
fee reimbursement will be accounted for on the financial statements of a Fund as
a contingent liability of the Fund, and will appear as a footnote to the Fund's
financial statements until such time as it appears that the Fund will be able to
effect such reimbursement. At such time as it appears probable that a Fund is
able to effect such reimbursement, the amount of reimbursement that the Fund is
able to effect will be accrued as an expense of the Fund for that current
period.

Management fees accrued by each fund, are as follows:

INTERMEDIATE CALIFORNIA
TOTAL INTERMEDIATE
LARGE SMALL INTERNATIONAL RETURN TAX-FREE
CAP FUND CAP FUND FUND BOND FUND BOND FUND
-------- -------- ---- --------- ---------
1997 $271,652 $ 34,033 $ 39,034 $ 27,332 $27,588
1998 $334,518 $218,722 $256,701 $120,618 $34,150
1999 $496,362 $289,991 $326,970 $102,843 $71,258

The Large Cap Fund commenced operations on May 1, 1995. The Small Cap Fund and
the International Fund commenced operations on October 18, 1996. The Total
Return Bond Fund and the California Intermediate Tax-Free Bond Fund commenced
operations on October 28, 1996.

B-33
<PAGE>
EXPENSES

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

As noted in the Prospectus, the Adviser has agreed to reduce its fee to each
Fund by the amount, if any, necessary to keep the Fund's annual operating
expenses (expressed as a percentage of its average daily net assets), at or
below the lesser of the following levels: Large Cap Fund, 1.20%; Small Cap Fund,
1.30%; International Fund, 1.40%; Total Return Bond Fund, 0.95%; and California
Intermediate Tax-Free Bond Fund, 0.75%. The Adviser also may, at its discretion,
from time to time pay for other Fund expenses from its own assets, or reduce the
management fee of a Fund in excess of that required.

During the past three years, Kayne Anderson reimbursed the Funds the following
amounts:

INTERMEDIATE CALIFORNIA
TOTAL INTERMEDIATE
LARGE SMALL INTERNATIONAL RETURN TAX-FREE
CAP FUND CAP FUND FUND BOND FUND BOND FUND
-------- -------- ---- --------- ---------
1997 -- $77,861 $83,125 $70,713 $40,123
1998 -- $12,965 $18,889 $15,132 $99,797
1999 $14,699 $20,848 $59,911 $88,631

The Adviser permits its employees to buy and sell securities for their own
accounts in accordance with a policy governing personal investing by its
principals and employees. The policy requires officers, inside directors and
employees to pre-clear all transactions in securities that are not exempt under
the policy. Requests for trading authority will be denied when, among other
reasons, the proposed personal transaction would be contrary to the provisions
of the policy or would be deemed to affect adversely any transaction then known
to be under consideration for or to have been effected on behalf of any client
account, including the Fund.

B-34
<PAGE>
In addition to the pre-clearance requirement described above, all personal
transactions must be reported on a quarterly basis to a designated officer. All
reportable transactions are reviewed for compliance with the policy.

PORTFOLIO TRANSACTIONS AND BROKERAGE

Subject to policies established by the Board of Trustees, the Adviser is
primarily responsible for arranging the execution of the Funds' portfolio
transactions and the allocation of brokerage activities. In arranging such
transactions, the Adviser will seek to obtain the best execution for each Fund,
taking into account such factors as price, size of order, difficulty of
execution, operational facilities of the firm involved, the firm's risk in
positioning a block of securities, and research, market and statistical
information provided by such firm. While the Adviser generally seeks reasonably
competitive commission rates, a Fund will not necessarily always receive the
lowest commission available.

The Funds have no obligation to deal with any broker or group of brokers in
executing transactions in portfolio securities. Brokers who provide supplemental
research, market and statistical information to the Adviser may receive orders
for transactions by a Fund. The term "research, market and statistical
information" includes advice as to the value of securities, the advisability of
purchasing or selling securities, the availability of securities or purchasers
or sellers of securities, and furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends, portfolio
strategy, and the performance of accounts. Information so received will be in
addition to and not in lieu of the services required to be performed by the
Adviser under the Management Agreement and the expenses of the Adviser will not
necessarily be reduced as a result of the receipt of such supplemental
information. Such information may be useful to the Adviser in providing services
to clients other than the Funds, and not all such information may be used by the
Adviser in connection with a Fund. Conversely, such information provided to the
Adviser by brokers and dealers through whom other clients of the Adviser in the
future may effect securities transactions may be useful to the Adviser in
providing services to a Fund. To the extent the Adviser receives valuable
research, market and statistical information from a broker-dealer, the Adviser
intends to direct orders for Fund transactions to that broker-dealer, subject to
the foregoing policies, regulatory constraints, and the ability of that
broker-dealer to provide competitive prices and commission rates. In accordance
with the rules of the National Association of Securities Dealers, Inc., the
Adviser also may direct brokerage to broker-dealers who facilitate sales of the
Funds' shares, subject to also obtaining best execution as described above from
such broker-dealer.

A portion of the securities in which the Funds may invest are traded in the
over-the-counter markets, and each Fund intends to deal directly with the
dealers who make markets in the securities involved, except as limited by
applicable law and in certain circumstances where the Adviser believes better
prices and execution are available elsewhere. Securities traded through market
makers may include markups or markdowns, which are generally not determinable.
Under the 1940 Act, persons affiliated with a Fund are prohibited from dealing

B-35
<PAGE>
with that Fund as principal in the purchase and sale of securities except after
application for and receipt of an exemptive order from the SEC. The 1940 Act
restricts transactions involving a Fund and its "affiliates," including, among
others, the Trust's trustees, officers, and employees and the Adviser, and any
affiliates of such affiliates. Affiliated persons of a Fund are permitted to
serve as its broker in over-the-counter transactions conducted on an agency
basis only.

Investment decisions for each Fund are made independently from those of other
accounts advised by the Adviser or its affiliates. However, the same security
may be held in the portfolios of more than one account. When two or more
accounts advised by the Adviser simultaneously engage in the purchase or sale of
the same security, the prices and amounts will be equitably allocated among each
account. In some cases, this procedure may adversely affect the price or
quantity of the security available to a particular account. In other cases,
however, an account's ability to participate in large volume transactions may
produce better executions and prices. The following Funds paid the listed
commissions during the periods indicated.

YEAR ENDED YEAR ENDED YEAR ENDED
12/31/97 12/31/98 12/31/99
-------- -------- --------
Large Cap Fund $42,598 $79,037 $49,208
Small Cap Fund $16,065 $69,339 $36,544
International Fund $18,035 $73,886 $17,381

For the years ended December 31, 1997, 1998 and 1999, the Small Cap Fund and the
International Fund executed a majority of their trades through KA Associates, an
affiliated broker of the Adviser. Commissions paid by the Funds to this
affiliate the years ended December 31, 1997, 1998 and 1999 were as follows:

YEAR ENDED YEAR ENDED YEAR ENDED
12/31/97 12/31/98 12/31/99
-------- -------- --------
Small Cap Fund $8,439 $48,597 $3,598
International Fund $9,627 $ 5,749 $6,931

================================================================================
THE FUNDS' ADMINISTRATOR
================================================================================

The Funds have an Administration Agreement with Investment Company
Administration LLC (the "Administrator"), with offices at 2020 East Financial
Way, Suite 100, Glendora, CA 91741. The Administration Agreement provides that
the Administrator will prepare and coordinate reports and other materials
supplied to the Trustees; prepare and/or supervise the preparation and filing of
all securities filings, periodic financial reports, prospectuses, statements of
additional information, marketing materials, tax returns, shareholder reports
and other regulatory reports or filings required of the Funds; prepare all
required filings necessary to maintain the Funds' qualifications and/or
registrations to sell shares in all states where each Fund currently does, or
intends to do, business; coordinate the preparation, printing and mailing of all
materials (e.g., Annual Reports) required to be sent to shareholders; coordinate
the preparation and payment of Fund-related expenses; monitor and oversee the
activities of the Funds' servicing agents (i.e., transfer agent, custodian, fund
accountants, etc.); review and adjust as necessary each Fund's daily expense
accruals; and perform such additional services as may be agreed upon by the
Funds and the Administrator. For its services, the Administrator receives the
fees described in the Prospectus.

The following table sets forth Administration Fees paid by the respective Funds.

Year Ended Year Ended Year Ended
12/31/97 12/31/98 12/31/99
-------- -------- --------
Large Cap Fund $19,943 $30,783 $41,836
Small Cap Fund $17,980 $26,052 $30,966
International Fund $17,980 $26,052 $30,000
Intermediate Total Return Bond Fund $17,718 $26,052 $23,632
California Intermediate Tax-Free Bond Fund $17,718 $20,873 $23,087

B-36
<PAGE>
================================================================================
THE FUNDS' DISTRIBUTOR
================================================================================

First Fund Distributors, Inc. (the "Distributor"), a broker-dealer affiliated
with the Administrator, acts as each Fund's principal underwriter in a
continuous public offering of the Fund's shares. Its address is: 4455 E.
Camelback Road, Suite 261-E, Phoenix, Arizona 85018. The Distribution Agreement
between the Funds and the Distributor continues in effect for periods not
exceeding one year if approved at least annually by (i) the Board of Trustees or
the vote of a majority of the outstanding shares of each Fund (as defined in the
1940 Act) and (ii) a majority of the Trustees who are not interested persons of
any such party, in each case cast in person at a meeting called for the purpose
of voting on such approval. The Distribution Agreement may be terminated without
penalty by the parties thereto upon 60-days' written notice, and is
automatically terminated in the event of its assignment as defined in the 1940
Act. There are no underwriting commissions paid with respect to sales of the
Fund's shares.

================================================================================
TRANSFER AGENT AND CUSTODIAN
================================================================================

Investors Bank & Trust Company, Boston, Massachusetts ("IB & T"), serves as the
Funds' Transfer Agent. As Transfer Agent, it maintains records of shareholder
accounts, processes purchases and redemptions of shares, acts as dividend and
distribution disbursing agent and performs other related shareholder functions.
IB & T also serves as the Funds' Custodian. As Custodian, it and subcustodians
designated by the Board of Trustees hold the securities in the Funds' portfolio
and other assets for safekeeping. The Transfer Agent and Custodian do not and
will not participate in making investment decisions for the Funds.

================================================================================
HOW NET ASSET VALUE IS DETERMINED
================================================================================

The net asset values of the Funds' shares are calculated once daily, as of as of
the close of the New York Stock Exchange (the "NYSE") (the "Portfolio Valuation
Time"), on each day that the NYSE is open for trading by dividing each Fund's
net assets (assets less liabilities) by the total number of shares outstanding
and adjusting to the nearest cent per share. The NYSE is closed on Saturdays,
Sundays, and certain holidays, generally including: New Year's Day, Dr. Martin
Luther King, Jr.'s Birthday, Presidents Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving, and Christmas Day. The Funds do not
expect to determine the net asset value of their shares on any day when the NYSE
is not open for trading even if there is sufficient trading in their portfolio
securities on such days to materially affect the net asset value per share.

Because of the difference between the bid and asked prices of the
over-the-counter securities in which a Fund may invest, there may be an
immediate reduction in the net asset value of the shares of a Fund after a Fund
has completed a purchase of such securities. This is because such OTC securities
generally will be valued at the last sale price (which is generally below the
asked price), but usually are purchased at or near the asked price.

B-37
<PAGE>
Each Fund's (other than the California Tax-Free Bond Fund's) portfolio is
expected to include foreign securities listed on foreign stock exchanges and
debt securities of foreign governments and corporations. Generally, trading in
and valuation of foreign securities is substantially completed each day at
various times prior to the Portfolio Valuation Time. In addition, trading in and
valuation of foreign securities may not take place on every day that the NYSE is
open for trading. Furthermore, trading takes place in various foreign markets on
days on which the NYSE is not open for trading and on which the Funds' net asset
values are not calculated. Foreign securities quoted in foreign currencies are
translated into U.S. dollars using the latest available exchange rates. As a
result, fluctuations in the value of such currencies in relation to the U.S.
dollar will affect the net asset value of a Fund's shares even though there has
not been any change in the market values of such securities. Any changes in the
value of foreign currency forward contracts due to exchange rate fluctuations
are included in determination of net asset value.

Generally, each Fund's investments are valued at market value or, in the absence
of a market value, at fair value as determined in good faith by the Adviser and
the Board of Trustees. Portfolio securities that are listed or admitted to
trading on a U.S. exchange are valued at the last sale price on the principal
exchange on which the security is traded, or, if there has been no sale that
day, at the mean between the closing bid and asked prices. Securities admitted
to trading on the Nasdaq National Market and securities traded only in the U.S.
over-the-counter market are valued at the last sale price, or, if there has been
no sale that day, at the mean between the closing bid and asked prices. Foreign
securities are valued at the last sale price in the principal market where they
are traded, or if the last sale price is unavailable, at the mean between the
last bid and asked prices available reasonably prior to the time the Funds' net
asset values are determined. Securities and assets for which market quotations
are not readily available (including restricted securities which are subject to
limitations as to their sale) are valued at fair value as determined in good
faith by or under the direction of the Board of Trustees.

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

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

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

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

B-38
<PAGE>
================================================================================
SHARE PURCHASES AND REDEMPTIONS
================================================================================

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

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

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

================================================================================
HOW PERFORMANCE IS DETERMINED
================================================================================

STANDARDIZED PERFORMANCE INFORMATION

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

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

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

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

B-39
<PAGE>
Investors should recognize that, in periods of declining interest rates, these
Funds' yields will tend to be somewhat higher than prevailing market rates and,
in periods of rising interest rates, will tend to be somewhat lower. In
addition, when interest rates are falling, investments of new deposits or
reinvestments of a Fund's existing assets will likely be invested in instruments
producing lower yields than the balance of their portfolio of securities,
thereby reducing the current yield of these Funds. During periods of rising
interest rates, the opposite result can be expected to occur.

The California Intermediate Tax-Free Bond Fund. A tax equivalent yield
demonstrates the taxable yield necessary to produce an after-tax yield
equivalent to that of a fund that invests in tax-exempt obligations. The tax
equivalent yield for the California Intermediate Tax-Free Bond Fund is computed
by dividing that portion of the current yield (or effective yield) of the
California Intermediate Tax-Free Bond Fund (computed for the Fund as indicated
above) that is tax exempt by one minus a stated income tax rate and adding the
quotient to that portion (if any) of the yield of the Fund that is not tax
exempt. In calculating tax equivalent yields for the California Intermediate
Tax-Free Bond Fund, this Fund assumes an effective tax rate (using the top
federal marginal tax rate) of 39.6%. The effective rate used in determining such
yield does not reflect the tax costs resulting from the loss of the benefit of
personal exemptions and itemized deductions that may result from the receipt of
additional taxable income by taxpayers with adjusted gross incomes exceeding
certain levels. The tax equivalent yield may be higher than the rate stated for
taxpayers subject to the loss of these benefits.

Average Annual Total Return. The average annual total return included with any
presentation of a Fund's performance data will be calculated according to the
following formula:

n
P(1+T) = ERV

Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
(made at the beginning of the 1-, 5-, or 10-year periods)
at the end of the 1-, 5-, or 10-year periods (or fractional
portion thereof).

The Funds impose no sales load on initial purchases or on reinvested dividends.
Accordingly, no sales charges are deducted for purposes of this calculation. The
calculation of total return assumes that all dividends, if any, and
distributions paid by a Fund would be reinvested at the net asset value on the
day of payment.

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<PAGE>
For the one-year period ended December 31, 1999, the total return for each Fund
is as follows:

INTERMEDIATE CALIFORNIA
TOTAL INTERMEDIATE
LARGE SMALL INTERNATIONAL RETURN TAX-FREE
CAP FUND CAP FUND FUND BOND FUND BOND FUND
-------- -------- ---- --------- ---------
16.34% 3.64% 31.06% -0.65% -0.44%

For the period May 1, 1995 (commencement of operations), through December 31,
1999, for the Large Cap Fund, October 18, 1996 (commencement of operations),
through December 31, 1999, for the Small Cap Fund and the International Fund and
October 28, 1996 (commencement of operations), through December 31, 1999, for
the Intermediate Total Return Bond Fund and the California IntermediateTax Free
Bond Fund, the average annual total returns are as follows:

INTERMEDIATE CALIFORNIA
TOTAL INTERMEDIATE
LARGE SMALL INTERNATIONAL RETURN TAX-FREE
CAP FUND CAP FUND FUND BOND FUND BOND FUND
-------- -------- ---- --------- ---------
21.66% 13.40% 23.76% 4.45% 2.56%

NON-STANDARDIZED TOTAL RETURN INFORMATION

From time to time, a Fund may present non-standardized total return information,
in addition to standardized performance information, which may include such
results as the growth of a hypothetical $10,000 investment in a Fund, and
cumulative total return. The results of a $10,000 investment in the Fund and
cumulative total return measure the absolute change in net asset value resulting
from all Fund operations including reinvestment of a distribution paid by the
Fund for the period specified.

The aggregate total return is calculated in a similar manner to average annual
total return, except that the results are not annualized. Each calculation
assumes that all dividends and distributions are reinvested at net asset value
on the reinvestment dates during the period.

INVESTMENT PHILOSOPHY

From time to time the Funds may publish or distribute information and reasons
why the Adviser believes investors should invest in the Funds. For example, the
Funds may refer to the Adviser's "rising dividends philosophy", which is founded
on the principles of value and growth. The Funds may state that the Adviser's
investment professionals actively research quality companies that are not only
undervalued based on their current earnings, but also offer significant
potential for future growth. The Funds also may state that the Adviser uses a
practical approach to investing that emphasizes sound business judgment and
common sense.

INDICES AND PUBLICATIONS

In the same shareholder communications, sales literature, and advertising, a
Fund may compare its performance with that of appropriate indices such as the
Standard & Poor's Composite Index of 500 stocks ("S&P 500"), Standard & Poor's
MidCap 400 Index ("S&P 400"), the NASDAQ Industrial Index, the NASDAQ Composite
Index, the Russell 2500 Stock Index ("Russell 2500"), the Morgan Stanley Capital
International Europe, Australia and Far East Index ("MSCI EAFE") and the Lehman

B-41
<PAGE>
Corporate Government Intermediate Index ("Lehman Index"), or other unmanaged
indices so that investors may compare the Fund's results with those of a group
of unmanaged securities. The S&P 500, the S&P 400, the Nasdaq Industrial Index,
the Nasdaq Composite Index, the Russell 2500, MSCI EAFE and the Lehman Index are
unmanaged groups of common stocks and debt securities traded principally on
national or foreign securities exchanges and the over the counter market. A Fund
also may, from time to time, compare its performance to other mutual funds with
similar investment objectives and to the industry as a whole, as quoted by
rating services and publications, such as Lipper Analytical Services, Inc.,
Morningstar Mutual Funds, Forbes, Money and Business Week.

In addition, one or more portfolio managers or other employees of the Adviser
may be interviewed by print media, such as The Wall Street Journal or Business
Week, or electronic news media, and such interviews may be reprinted or
excerpted for the purpose of advertising regarding the Fund.

================================================================================
ADDITIONAL INFORMATION
================================================================================

LEGAL OPINION

The validity of the shares offered by the Prospectus has been passed upon by
Paul, Hastings, Janofsky & Walker LLP, 345 California Street, San Francisco,
California 94104.

AUDITORS

The annual financial statements of the Funds will be audited by Briggs, Bunting
& Dougherty, Two Logan Square, Suite 2121, Philadelphia, Pennsylvania 19103,
independent public accountants for the Funds.

LICENSE TO USE NAME

Kayne Anderson has granted the Trust and each Fund the right to use the
designation "Kayne Anderson" in its name, and has reserved the right to withdraw
its consent to the use of such designation under certain conditions, including
the termination of the Adviser as the Funds' investment adviser. Kayne Anderson
Investment Management, LLC also has reserved the right to license others to use
this designation, including any other investment company.

OTHER INFORMATION

The Prospectus and this Statement of Additional Information, together, do not
contain all of the information set forth in the Registration Statement of Kayne
Anderson Mutual Funds filed with the Securities and Exchange Commission. Certain
information is omitted in accordance with rules and regulations of the
Commission. The Registration Statement may be inspected at the Public Reference
Room of the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, and copies thereof may be obtained from the Commission
at prescribed rates.

================================================================================
FINANCIAL STATEMENTS
================================================================================

Audited financial statements for the year ended December 31, 1999 for the Large
Cap Fund, the Small Cap Fund, International Fund, Intermediate Total Return Bond
Fund and California Intermediate Tax-Free Bond Fund, as contained in the Annual
Report to Shareholders of the Funds for the year ended December 31, 1999 (the
"Report") are incorporated herein by reference to the Report. The Report may be
obtained free of charge by writing or calling the Funds at 1800 Avenue of the
Stars, 2nd Floor, Los Angeles, California 90067, (800) 395-3807.

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<PAGE>
================================================================================
APPENDIX A: DESCRIPTION OF SECURITIES RATINGS
================================================================================

This Appendix describes ratings applied to corporate bonds by Standard & Poor's
Corporation ("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch
Investors Service, L.P. ("Fitch") and Duff & Phelps Credit Rating Co. ("Duff &
Phelps").

S&P'S RATINGS

AAA Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.

AA Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small
degree.

A Bonds rated A has a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds
in higher rated categories.

BBB Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than in higher
rated categories.

BB Bonds rated BB have less near-term vulnerability to default than other
speculative issues. However, they face major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to inadequate capacity to meet timely interest and
principal payments.

B Bonds rated B have a greater vulnerability to default but currently
have the capacity to meet interest payments and principal repayments.
Adverse business, financial, or economic conditions will likely impair
capacity or willingness to pay interest and repay principal.

The B rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied BB rating.

The ratings from AA to B may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.

MOODY'S RATINGS

AAA Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of these issues.

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<PAGE>
AA Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.

A Bonds rated A possess many favorable investment attributes and are to
be considered as upper medium-grade obligations. Factors giving
security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
sometime in the future.

BAA Bonds rated Baa are considered as medium-grade obligations, I.E, they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative
characteristics as well.

BA Bonds rated Ba are judged to have speculative elements. Their future
cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.

B Bonds rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of
time may be small.

Moody's applies numerical modifiers, 1, 2, and 3, in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its
generic rating category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its
generic rating category.

FITCH'S RATINGS

The ratings represent Fitch's assessment of the issuer's ability to meet
the obligations of a specific debt issue or class of debt. The ratings take
into consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political
and economic environment that might affect the issuer's future financial
strength and credit quality.

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<PAGE>
AAA Bonds rated AAA are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.

AA Bonds rated AA are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated
AAA. Because bonds rated in the AAA and AA categories are not
significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.

A Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.

BBB Bonds rated BBB are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more likely to
have an adverse impact on these bonds and, therefore, impair timely
payment. The likelihood that the ratings of these bonds will fall
below investment grade is higher than for bonds with higher ratings.

BB Bonds rated BB are considered speculative. The obligor's ability to
pay interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt
service requirements.

B Bonds rated B are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the probability
of continued timely payment of principal and interest reflects the
obligor's limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.

CCC Bonds rated CCC have certain identifiable characteristics, which, if
not remedied, may lead to default. The ability to meet obligations
requires an advantageous business and economic environment.

CC Bonds rated CC are minimally protected. Default in payment of interest
and/or principal seems probable over time.

C Bonds rated C are in imminent default in payment of interest or
principal.

DDD, Bonds rated DDD, DD and D are in actual default of interest
DD and/or principal payments. Such bonds are extremely speculative and
and should be valued on the basis of their ultimate recovery value in
D liquidation or reorganization of the obligor. DDD represents the
highest potential for recovery on these bonds and D represents the
lowest potential for recovery.

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<PAGE>
Plus (+) and minus (-) signs are used with a rating symbol to indicate
the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the AAA category covering 12-36
months.

DUFF & PHELPS' RATINGS

AAA Bonds rated AAA are considered highest credit quality. The risk
factors are negligible, being only slightly more than for risk-free
U.S. Treasury debt.

AA Bonds rated AA are considered high credit quality. Protection factors
are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.

A Bonds rated A have protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of
economic stress.

BBB Bonds rated BBB are considered to have below average protection
factors but still considered sufficient for prudent investment. There
may be considerable variability in risk for bonds in this category
during economic cycles.

BB Bonds rated BB are below investment grade but are deemed by Duff as
likely to meet obligations when due. Present or prospective financial
protection factors fluctuate according to industry conditions or
company fortunes. Overall quality may move up or down frequently
within the category.

B Bonds rated B are below investment grade and possess the risk that
obligations will not be met when due. Financial protection factors
will fluctuate widely according to economic cycles, industry
conditions and/or company fortunes. Potential exists for frequent
changes in quality rating within this category or into a higher or
lower quality rating grade.

CCC Bonds rated CCC are well below investment grade securities. Such bonds
may be in default or have considerable uncertainty as to timely
payment of interest, preferred dividends and/or principal. Protection
factors are narrow and risk can be substantial with unfavorable
economic or industry conditions and/or with unfavorable company
developments.

DD Defaulted debt obligations. Issuer has failed to meet scheduled
principal and/or interest payments.

Plus (+) and minus (-) signs are used with a rating symbol (except AAA) to
indicate the relative position of a credit within the rating category.

B-52