KAYNE ANDERSON
MUTUAL FUNDS
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Prospectus
Kayne Anderson Growth and Opportunity Fund
The SEC has not approved or disapproved these
securities or passed upon the accuracy or adequacy of this prospectus.
Any representation to the contrary is a criminal offense.
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July 14, 2000
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TABLE OF CONTENTS
RISK/RETURN SUMMARY ....................................................... 1
ADDITIONAL INVESTMENT STRATEGIES .......................................... 4
Defensive Investments .................................................. 4
Portfolio Turnover ..................................................... 4
PORTFOLIO MANAGEMENT ...................................................... 4
YOUR ACCOUNT INFORMATION .................................................. 5
How Fund Shares Are Priced ............................................. 5
Buying Shares .......................................................... 5
Buying Additional Shares ............................................... 6
Exchanging Shares ...................................................... 6
Selling Shares (Redemptions) ........................................... 7
Special Account Options ................................................ 8
Other Policies ......................................................... 9
After You Invest ....................................................... 10
This prospectus contains important information about the investment
objective, strategies and risks of the Kayne Anderson Growth and Opportunity
Fund that you should know before you invest. Please read it carefully and keep
it on hand for future reference. Please be aware that this Fund:
* Is not a bank deposit
* Is 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 Fund.
Kayne Anderson Investment Management, LLC, serves as the investment adviser
to the Fund and is referred to in this Prospectus as Kayne Anderson or the
Adviser.
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KAYNE ANDERSON GROWTH AND OPPORTUNITY FUND
RISK/RETURN SUMMARY
OBJECTIVE
The Fund seeks long-term growth of capital.
STRATEGY
The Fund seeks to achieve its objective by investing at least 65% of its assets
in securities of companies which, in the Adviser's opinion, exhibit
above-average growth potential. Although the Fund may invest in the securities
of companies of any market capitalization, it is anticipated that the Fund will
principally invest in the securities of established companies with mid- to
large-market capitalizations. The Fund considers companies with a market
capitalization of over $3 billion to be mid-cap and companies with a market
capitalization of over $10 billion to be large-cap. Current income will not be a
factor in selecting the Fund's investments.
The Fund is operated as a diversified fund but may, depending on market
conditions, focus on specific industry sectors from time to time. In selecting
investments, the Adviser places a strong emphasis on companies that it believes
have a leading competitive positions in their industry niches. The strength of a
company's competitive position will be assessed by considering such factors as
market leadership, market share, patents and other intellectual property,
strength of management, marketing prowess and product development capabilities.
The Adviser's analysis of a potential investment also focuses on purchasing
securities of companies the Adviser believes are undervalued given potential for
future growth. In assessing a company's potential, the Adviser may consider a
number of factors, including technical vision, marketing acumen, proprietary
technological advantages and the company's ability to rapidly respond to
changing market conditions.
Although the Fund will invest primarily in domestic companies, it may invest in
the securities of foreign issuers.
The Fund's portfolio manager will sell a security when he believes it is
appropriate to do so, regardless of how long the Fund has owned that security.
RISKS
By investing in common stocks and other equity securities, 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.
The Fund will focus on securities of companies engaged in business in various
growth industries. These are expected to include, primarily, companies that
develop, produce or distribute electronics-based technology products or services
(e.g. computer hardware and software, semi-conductors and telecommunications)
and bio-technology and medical companies. These companies are subject to
legislative or regulatory changes, adverse market conditions and increased
competition affecting the industry as well as product-specific risks such as
technological obsolescence or ineffectiveness. The value of such investments can
and often does fluctuate considerably and may expose the Fund to greater than
average financial and market risk.
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KAYNE ANDERSON GROWTH AND OPPORTUNITY FUND
RISK/RETURN SUMMARY (continued)
RISKS (continued)
The Fund may also invest in smaller companies which may expose shareholders to
additional risks. Smaller companies typically have more limited product lines,
markets and financial resources than larger companies, and their securities may
trade less frequently and in more limited volume than those of larger, more
mature companies.
The Fund's ability to invest in securities of foreign companies may expose
shareholders to additional risks. Some of these risks include unfavorable
changes in currency exchange rates, economic and political instability and
higher volatility in foreign stock markets.
PAST FUND PERFORMANCE
Because the Fund has been in operation for less than a full calendar year, its
total return bar chart and performance table have not been included.
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Kayne Anderson Growth and Opportunity Fund
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 1.00%
Distribution/Service (12b-1) Fee 0.00%
Other Expenses 0.50%
----
Total Annual Fund Operating Expenses 1.50%
----
Fee Reduction and/or Expense Reimbursement 0.00%
----
Net Expenses 1.50%
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+ Other expenses have been estimated for the first fiscal year of the Fund.
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 1.50%. This contract has a one-year term,
renewable at the end of each fiscal year.
EXAMPLE OF FUND EXPENSES
This example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The table below shows what you
would pay in expenses over time, whether or not you sold your shares at the end
of each period. It assumes a $10,000 initial investment, 5% total return each
year and no changes in expenses. This example is for comparison purposes only.
It does not necessarily represent the Fund's actual expenses or returns.
1 Year 3 Years
------ -------
$153 $474
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KAYNE ANDERSON GROWTH AND OPPORTUNITY FUND
ADDITIONAL INVESTMENT STRATEGIES
DEFENSIVE INVESTMENTS
At the discretion of its portfolio manager, the Fund may invest up to 100% of
its assets in cash for temporary defensive purposes. Such a stance may help the
Fund minimize or avoid losses during adverse market, economic or political
conditions. During such a period, the Fund may not achieve its investment
objective. For example, should the market advance during this period, the Fund
may not participate as much as it would have if it had been more fully invested.
PORTFOLIO TURNOVER
Buying and selling securities generally involves some expense to the Fund, such
as commissions paid to brokers and other transaction costs. By selling a
security, the Fund may realize taxable capital gains that it will subsequently
distribute to shareholders. Generally speaking, the higher the 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 the Fund's performance. Also, unless you are a tax-exempt
investor or you purchase shares through a tax-exempt investor or tax-deferred
account, the distribution of capital gains may affect your after-tax return. The
Fund anticipates that, under normal market conditions, its portfolio turnover
rate will range from 50% to 100%.
PORTFOLIO MANAGEMENT
The investment adviser to the Fund is Kayne Anderson Investment Management, LLC.
Kayne Anderson has furnished investment advice to institutional and private
clients since 1989. As of June 30, 2000, the Adviser managed approximately $6.3
billion for their clients. For its services, the Fund will pay the Adviser a
monthly management fee based upon its average daily net assets at the annual
rate of 1.00%.
ALLAN RUDNICK is the Portfolio Manager for the Fund. Since joining the Advisor
in 1989, Mr. Rudnick has served as Chief Investment Officer of the Adviser.
Before joining the Adviser, 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.
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KAYNE ANDERSON GROWTH AND OPPORTUNITY FUND
YOUR ACCOUNT INFORMATION
HOW FUND SHARES ARE PRICED
How and when we calculate the Fund's price or net asset value (NAV) determines
the price at which you will buy or sell shares. We calculate the Fund's NAV by
dividing the total net value of its assets by the number of outstanding shares.
We base the value of the Fund's investments on its market value, usually the
last price reported for each security before the close of the stock market that
day. A market price may not be available for securities that trade infrequently.
Occasionally, an event that affects a security's value may occur after the
market closes. This is more likely to happen for foreign securities traded in
foreign markets that have different time zones from the United States. Major
developments affecting the price of those securities may happen after the
foreign markets in which such securities trade have closed, but before the 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 NAV of the 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. Certain exceptions apply as
described below. If we receive your order by the close of trading on the NYSE,
you can purchase shares at the price calculated for that day. The NYSE usually
closes at 4 p.m., 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 details about how
we calculate the Fund's NAV are in the Statement of Additional Information
(SAI).
BUYING SHARES
You pay no sales charge to invest in the Fund. The minimum initial investment is
$2,000. The minimum subsequent investment is $250 ($1,000 and $200,
respectively, for retirement plans and custodial accounts; $500 and $200 for
Education IRAs). Under certain conditions we may waive these minimums. If you
buy shares through a broker or investment advisor, different requirements may
apply. All investments must be made in U.S. dollars.
WE MUST RECEIVE PAYMENT FROM YOU WITHIN THREE BUSINESS DAYS OF YOUR PURCHASE. In
addition, the Fund 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 Kayne
Anderson Growth and Opportunity 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 name of the Fund. We will give you further instructions and a fax
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KAYNE ANDERSON GROWTH AND OPPORTUNITY FUND
YOUR ACCOUNT INFORMATION, Continued
number to which you should send your completed New Account Application. To
ensure that we handle your investment accurately, include complete account
information in all wire instructions. Then request your bank to wire money from
your account to the attention of:
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 Fund with a signed letter noting the name
of the Fund, 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 of the Fund for shares of the following Kayne Anderson
Mutual Funds:
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
Shares may only be exchanged to accounts with the same registration, Taxpayer
Identification Number and address. Note that an exchange may result in a
realized gain or loss for tax purposes. You may exchange shares by phone, at
(800) 395-3807, if you complete and file with us an authorization form, or by
mail. Exchanges are subject to our minimum investment requirement. You should
carefully read the prospectus for the Kayne Anderson Mutual Fund you wish to
invest in before making an exchange. Exchanges are subject to the following
policies:
* We will process your exchange order at the next-calculated NAV.
* You may exchange shares only in Funds that are qualified for sale in your
state.
* Before exchanging into a Fund, read its 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.
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KAYNE ANDERSON GROWTH AND OPPORTUNITY FUND
YOUR ACCOUNT INFORMATION, Continued
* 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 the 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 the Adviser and is not part of Kayne
Anderson Mutual Funds. You may invest in this money market fund only if its
shares are offered in your state of residence. You should carefully read
the prospectus for the money market fund before investing. This exchange
privilege does not mean that Kayne Anderson recommends that you invest in
the money market fund.
SELLING SHARES (REDEMPTIONS)
You may sell some or all of your Fund shares on days that the NYSE is open for
trading. Note that a redemption may result in a realized gain or loss for tax
purposes.
Your shares will be sold at the next NAV we calculate for the Fund after
receiving your order. We will promptly pay the proceeds to you, normally within
one business day of receiving your order and all necessary documents (including
a written redemption order with any required signature guarantee). We will mail
or wire you the proceeds, depending on your instructions. If you did not
purchase your shares with a certified check or wire, the Fund may delay payment
of your redemption proceeds for up to fifteen business days from the date of
purchase or until your check has cleared, whichever occurs first.
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 (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 name of
the Fund 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 member firms of the National Association of
Securities Dealers, Inc. (NASD).
* 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,
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KAYNE ANDERSON GROWTH AND OPPORTUNITY FUND
YOUR ACCOUNT INFORMATION, Continued
exists making disposal of portfolio investments or determination of the
value of the net assets of the Fund not reasonably practicable.
* REDEMPTION BY AUTOMATED CLEARING HOUSE (ACH). You may have redemption
proceeds, cash distributions or systematic cash withdrawal payments
transferred to a bank, savings and loan association or credit union that is
an on-line member of the ACH system. There are no fees associated with the
use of the ACH service. We must receive ACH redemption requests before the
close of regular trading on the NYSE, normally 4:00 p.m., Eastern time, to
receive that day's closing net asset value. The funds from the ACH
redemption will be available two days after the redemption has been
processed.
SPECIAL ACCOUNT OPTIONS
We offer the following special account options to individual shareholders but
not to participants in employer- sponsored retirement plans. There are no
charges for the programs noted below, and you may change or stop these plans at
any time by written notice to us.
SYSTEMATIC WITHDRAWAL PLAN. You may participate in the Systematic Withdrawal
Program if you wish to withdraw funds from an account on a regular basis. You
must either own or purchase shares having a value of $10,000 or more. We will
mail automatic payments by check to you on either a monthly, quarterly,
semi-annual or annual basis in amounts of $100 or more. All withdrawals are
processed on the last business day of the month or, if such day is not a
business day, on the next business day and paid promptly thereafter. Please
complete the appropriate section on the New Account Application indicating the
amount of the distribution and the desired frequency.
AUTOMATIC INVESTING. This service allows you to make regular investments once an
account is established. You simply authorize the automatic withdrawal of funds
from a bank account into the Fund. The minimum subsequent investment pursuant to
this plan is $100 per month. You must open an account with the $2,000 minimum
before participating in this plan. To enroll, complete the appropriate section
on the New Account Application indicating the amount of the automatic
investment.
RETIREMENT PLANS. The Fund is 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 Fund for any expenses or losses incurred in connection with
transfers of money from your account. This includes any losses or expenses
caused by your bank's failure to honor your debit or act in accordance with your
instructions. If your bank makes erroneous payments or fails to make payment
after you buy shares, we may cancel the purchase and immediately terminate your
telephone transaction privilege.
The shares you purchase by phone will be priced at the first net asset value we
determine after receiving your purchase. You will not actually own the shares,
however, until we receive your payment in full. If we do not receive your
payment within three business days of your request, we will cancel your
purchase. You may be responsible for any losses incurred by the Fund as a
result.
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KAYNE ANDERSON GROWTH AND OPPORTUNITY FUND
YOUR ACCOUNT INFORMATION, Continued
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 Fund and its Transfer Agent may be held liable for any losses due to
unauthorized or fraudulent telephone transactions only if we have not followed
these reasonable procedures.
We reserve the right to revoke the telephone transaction privilege of any
shareholder at any time if he or she has used abusive language or misused the
phone privilege by making purchases and redemptions that appear to be part of a
systematic market-timing strategy.
If you notify us that your address has changed, we will temporarily suspend your
telephone redemption privileges until 30 days after your notification to protect
you and your account. We require all redemption requests made during this period
to be in writing with a signature guarantee.
Shareholders may experience delays in exercising telephone redemption privileges
during periods of volatile economic or market conditions. In these cases you may
want to transmit your redemption request:
* by overnight courier
* by telegram
OTHER POLICIES
PURCHASING SHARES THROUGH A BROKER. You may buy, exchange and sell shares of the
Fund through certain brokers (and their agents) that have made arrangements with
the Fund to sell its 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 Fund's Transfer Agent, and you will pay or receive the next NAV calculated
for the 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 Adviser 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 Fund's 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 gain
distributions, and redemption and exchange proceeds (unless you qualify as an
exempt payee under certain rules).
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KAYNE ANDERSON GROWTH AND OPPORTUNITY FUND
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
Fund pays to them may be subject to up to 30% withholding instead of backup
withholding.
AFTER YOU INVEST
TAXES. IRS rules require that the Fund distribute all of its net investment
income and capital gains, if any, to shareholders. Capital gains may be taxable
at different rates depending upon the length of time the 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 Fund's distributions, whether received in cash or reinvested, may be
taxable. Any redemption of Fund shares or any exchange of Fund shares for
another Kayne Anderson Mutual Fund or the money market fund will be treated as a
sale, and any gain on the transaction may be taxable.
Additional information about tax issues relating to the Fund can be found in the
SAI, available free by calling (800) 395-3807. Consult your tax advisor about
the potential tax consequences of investing in the Fund.
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, all distributions will be
reinvested in additional Fund shares. The Fund will distribute income dividends
and capital gain distributions annually. Following its fiscal year end (December
31), the Fund 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, redemption or exchange
of shares
* ACCOUNT STATEMENTS. Mailed after the close of each calendar quarter.
* ANNUAL AND SEMI-ANNUAL REPORTS. Mailed approximately 60 days after December
31 and June 30.
* 1099 TAX FORM. Sent by January 31.
* ANNUAL UPDATED PROSPECTUS. Mailed to existing shareholders in the spring.
To save shareholders' money, we will send only one copy of each shareholder
report or other mailing to your household if you hold accounts under common
ownership or at the same address (regardless of the number of shareholders or
accounts at that household or address), unless you request additional copies.
If you plan to purchase shares of the Fund, check if it is planning to make a
distribution in the near future. You should do this because, if you buy shares
of the Fund just before a distribution, you'll pay full price for the shares but
receive a portion of your purchase price back as a taxable distribution. This is
called "buying a dividend." Unless you hold the Fund in a tax-deferred account,
you will have to include the distribution in your gross income for tax purposes,
even though you may not have participated in the increase of the Fund's
appreciation.
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KAYNE ANDERSON MUTUAL FUNDS
KAYNE ANDERSON GROWTH AND OPPORTUNITY FUND
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 the Fund's investment policies in the 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 the Fund, including the SAI, at the SEC's Public
Reference Room in Washington, D.C. To obtain information on the operation of the
Public Reference Room please call 1-200-942-8090. 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 Room of the SEC, Washington,
D.C., 20549-0102 or by electronic request at the following e-mail address:
[email protected].
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SEC File No.: Kayne Anderson Mutual Funds 811-07705
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KAYNE ANDERSON GROWTH AND OPPORTUNITY FUND,
A SERIES OF KAYNE ANDERSON MUTUAL FUNDS
STATEMENT OF ADDITIONAL INFORMATION
JULY 14, 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 Kayne Anderson
Growth and Opportunity Fund (the "Fund"), a series of Kayne Anderson Mutual
Funds (the "Trust"). The Trust offers five other series which are combined in a
separate SAI: Kayne Anderson Large Cap Fund, Kayne Anderson Small Cap Fund,
Kayne Anderson International Fund, Kayne Anderson Intermediate Total Return Bond
Fund, and Kayne Anderson California Intermediate Tax-Free Bond Fund.
This SAI is not a prospectus and should be read in conjunction with the
Prospectus for the Fund dated July 14, 2000, as may be revised from time to
time. The Prospectus may be obtained by writing or calling the Fund at the above
address and telephone number.
Table of Contents
PAGE
----
The Trust................................................................. B-2
Investment Objective and Policies......................................... B-2
Risk Factors.............................................................. B-7
The Fund's Investment Limitations......................................... B-8
Distributions and Tax Information......................................... B-10
Management of the Fund.................................................... B-13
The Fund's Administrator.................................................. B-16
The Fund's Distributor.................................................... B-16
Transfer Agent and Custodian.............................................. B-17
How Net Asset Value Is Determined......................................... B-17
Share Purchases and Redemptions........................................... B-18
How Performance Is Determined............................................. B-18
Additional Information.................................................... B-20
B-1
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THE TRUST
The Trust is an open-end, diversified management investment company organized as
a Delaware business trust on May 29, 1996. It is registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). The Trust
currently offers shares of beneficial interest $0.01 par value per share, in six
series. This SAI pertains to the Kayne Anderson Growth and Opportunity Fund.
INVESTMENT OBJECTIVE AND POLICIES
The Fund is managed by Kayne Anderson Investment Management, LLC (the
"Adviser"). The investment objective and policies of the Fund are described in
detail in the Prospectus. Whether the 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. The Fund may invest up to 10% of its total assets in
securities issued by other investment companies investing in securities in which
the Fund can invest provided that such investment companies invest in portfolio
securities in a manner consistent with the Fund's investment objective and
policies. Applicable provisions of the Investment Company Act require the 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 the Fund's total assets
will be invested in the aggregate in securities of investment companies as a
group, and (b) either (i) the Fund and affiliated persons of the 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 the Fund in excess of 1% of the company's total outstanding shares be
deemed illiquid), or (ii) the 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, the 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 the Fund bears directly in connection
with its own operations.
DEPOSITARY RECEIPTS. The Fund 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
the Fund's investment policies, the Fund's 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.
OPTIONS ON SECURITIES AND SECURITIES INDICES. Although it does not currently
intend to, the Fund may purchase put and call options on securities in which
they have invested and on any securities index based in whole or in part on
securities in which the Fund may invest. The Fund also may enter into closing
sales transactions in order to realize gains or minimize losses on options it
has purchased.
The 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.
The purchase of a call option would entitle the Fund, in return for the premium
paid, to purchase specified securities at a specified price during the option
period.
The Fund may purchase and sell options traded on U.S. exchanges. Although the
Fund 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
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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 the 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
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 the Fund does not currently intend to do so, it may, in the future,
write (I.E., sell) covered put and call options on securities and securities
indices in which it may invest. A covered call option involves the Fund 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,
the 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, the 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 Fund 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. The 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, the Fund
will designate liquid assets with an aggregate value equal to at least the
exercise price of the put options. The 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 Fund's orders.
OTHER INVESTMENT PRACTICES
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. The Fund 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 the Fund to the issuer. While the Fund
reserves the right to sell when-issued or delayed delivery securities prior to
the settlement date, the Fund intends to purchase such securities with the
purpose of actually acquiring them unless a sale appears desirable for
investment reasons. At the time the 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 Fund does not believe that its net asset value will be
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adversely affected by its purchase of securities on a when-issued or delayed
delivery basis. The Fund 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 the Fund are held in cash
pending the settlement of a purchase of securities, the Fund will earn no income
on these assets.
REPURCHASE AGREEMENTS. In a repurchase agreement, the 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. The Fund may engage in a repurchase agreement with respect to any
security in which it is authorized to invest. Any repurchase transaction in
which the Fund engages will require at least 100% collateralization of the
seller's obligation during the entire term of the repurchase agreement. The 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 the Fund in
connection with bankruptcy proceedings involving a counterparty), it is the
Fund's current policy to limit repurchase agreement transactions to those
parties whose creditworthiness has been reviewed and deemed satisfactory by the
Adviser.
REVERSE REPURCHASE AGREEMENTS. The Fund may engage in reverse repurchase
agreements. In a reverse repurchase agreement, the 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,
the Fund generally will designate cash and high quality liquid assets to cover
its obligation under the agreement. The Fund enters into reverse repurchase
agreements only with parties whose creditworthiness has been reviewed and deemed
satisfactory by the Adviser. The Fund's reverse repurchase agreements and dollar
roll transactions that are accounted for as financings will be included among
the Fund's borrowings for purposes of its investment policies and limitations.
SECURITIES LENDING. The 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 Fund 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 the
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.
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Cash received through loan transactions may be invested in any security in which
the Fund is authorized to invest. Investing this cash subjects that investment,
as well as the security loaned, to market forces (i.e., capital appreciation or
depreciation).
BORROWING. The 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 the Fund may pledge its assets in connection with such
borrowings. The Fund will not purchase any securities while any such borrowings
exceed 10% of the Fund's total assets (including reverse repurchase agreements
and dollar roll transactions that are accounted for as borrowings).
The 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 Fund 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.
The 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 the
Fund replaces the borrowed security. The 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 the Fund may be required to pay in connection
with a short sale.
When the 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 Fund in the future also may make short sales "against the box,"
i.e., when a security identical to one owned by the Fund is borrowed and sold
short. If the 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. The 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 Fund's investments and, through reports
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from the Adviser, the Board monitors trading activity in illiquid investments.
In determining the liquidity of the Fund's 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 the 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 the 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, the Fund were in a
position where more than 15% 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, the 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, the Fund might obtain a less favorable price than
the price that prevailed when it decided to seek registration of the SECURITY.
Currently, the Fund may not invest more than 15% 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
of Securities Dealers, Inc. An insufficient number of qualified buyers
interested in purchasing Rule 144A-eligible restricted securities held by the
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,
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(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 the
Fund's assets may be invested in cash and short-term instruments. During the
period following commencement of operations, the 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 Fund also may lend
securities, and use repurchase agreements. For more information on these
investments, see "Portfolio Securities and Investment Techniques."
POOLED FUND. The initial shareholders of the Fund have approved a fundamental
policy authorizing the Fund, subject to authorization by the Board of Trustees,
and notwithstanding any other investment restriction, to invest all of its
assets in the securities of a single open-end investment company (a "pooled
fund"). If authorized by the Trustees, the Fund would seek to achieve its
investment objective by investing in a pooled fund which would invest in a
portfolio of securities that complies with the Fund's investment objective,
policies and restrictions. The Board currently does not intend to authorize
investing in pooled funds.
RISK FACTORS
PRICE FLUCTUATION. Investments in equity securities in general are subject to
market risks that may cause their prices to fluctuate over time. Fluctuations in
the value of securities in which the Fund invests will cause the net asset value
of the Fund to fluctuate. An investment in the Fund therefore may be more
suitable for long-term investors who can bear the risk of short-term principal
fluctations.
SMALL COMPANIES. Investors in the Fund should consider carefully the special
risks involved in investments in smaller companies. 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 Fund has the right to purchase 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, the Fund 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 the Fund 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
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did not keep pace with the volume of securities transactions and resulted in
settlement difficulty. The inability of the 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 the 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 the Fund may invest may also be
smaller, less liquid, and subject to greater price volatility than those in the
U.S.
Because the securities owned by the Fund 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 the Fund's securities denominated in the currency. Such
changes also affect the Fund's income and distributions to shareholders. The
Fund may be affected either favorably or unfavorably by changes in the relative
rates of exchange between the currencies of different nations, and the 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.
HEDGING TRANSACTIONS. While transactions in options or other hedging positions
may reduce certain risks, such transactions themselves entail certain other
risks. Thus, while the 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 the 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 the Fund may be exposed to risk
of financial loss.
Perfect correlation between the Fund's hedging positions and portfolio positions
may be difficult to achieve because hedging instruments in many foreign
countries are not yet available. In addition, it is not possible to hedge fully
against currency fluctuations affecting the value of securities denominated in
foreign currencies because the value of such securities is likely to fluctuate
as a result of independent factors not related to currency fluctuations.
LEVERAGE. Leveraging the Fund 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 the Fund's shares and in the yield on the Fund's portfolio. Although
the principal of such borrowings will be fixed, the Fund's assets may change in
value during the time the borrowing is outstanding. Leveraging will create
interest expenses for the 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 the Fund will have to pay, the 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 the 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 FUND'S INVESTMENT LIMITATIONS
The following policies and investment restrictions have been adopted by the Fund
and (unless otherwise noted) are fundamental and cannot be changed without the
affirmative vote of a majority of the Fund's outstanding voting securities as
defined in the Investment Company Act. The Fund may not:
(1) change its status as a diversified series, which requires that the 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
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more than 5% of the total assets of the Fund would be invested in such
issuer (the remaining 25% of the Fund's total assets may be invested
without restriction except to the extent other investment restrictions may
be applicable);
(2) borrow money, except the 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 the Fund if its
borrowings exceed 10% of total assets;
(3) issue senior securities, as defined in the Investment Company 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;
(4) 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;
(5) 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 SAI (such as
foreign currency hedging);
(6) 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;
(7) 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;
(8) notwithstanding any other fundamental investment restriction or policy, the
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 the Fund; and
(9) invest 25% or more of the market value of its assets in the securities of
companies engaged in any one industry. (Does not apply to investment in the
securities of the U.S. Government, its agencies or instrumentalities.)
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).
The Fund may not:
(1) purchase or write put, call, straddle or spread options except as described
in the Prospectus or SAI;
(2) 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, short
selling and leveraging activities as described elsewhere in the Prospectus
and SAI;
(3) 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);
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(4) 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);
(5) purchase more than 15% of the outstanding voting securities of any one
issuer;
(6) purchase the securities of other investment companies, except as permitted
by the and except as otherwise provided in the Prospectus (the Fund
reserves the right to invest all of its assets in shares of another
investment company);
(7) 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;
(8) invest, in the aggregate, more than 15% of its net assets in illiquid
securities;
(9) 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.
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
The 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
the 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 the 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 the 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.
The Fund intends to elect 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, the 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 the 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.
B-10
<PAGE>
Under Subchapter M, the 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. The 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. The 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 the Fund as
a regulated investment company if they determine such course of action to be
more beneficial to the shareholders. In such case, the Fund will be subject to
federal and state corporate income taxes on its income and gains, and all
dividends and distributions to shareholders will be ordinary dividend income to
the extent of the Fund's earnings and profits.
The Fund may write, purchase or sell certain option. Such transactions are
subject to special tax rules that may affect the amount, timing and character of
distributions to shareholders. Unless the Fund is eligible to make a special
election, such option 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 Fund's transactions in option contracts. Under Section 1092, the
Fund may be required to postpone recognition for tax purposes of losses incurred
in certain closing transactions in options.
The Fund also may invest in the stock of foreign companies that may be treated
as "passive foreign investment companies" (each, a "PFIC") 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
the Fund derives from PFIC stock may be subject to a non-deductible federal
income tax at the Fund level. In some cases, the 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 Fund 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, the
Fund 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 the
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 the 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 the Fund. Statements as to the tax status of distributions to shareholders
will be mailed annually.
B-11
<PAGE>
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 the 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.
Any gain or loss realized upon an exchange or redemption of shares in the 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 the 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.
Dividends paid by the Fund will be eligible for the 70% dividends received
deduction for corporate shareholders, to the extent that the 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.
The Fund may be subject to foreign withholding taxes on dividends and interest
earned with respect to securities of foreign corporations.
The 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, the 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 the 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 the
Fund. A shareholder should consult his or her own tax adviser for more
information about the application of federal, state, local, or foreign taxes nd.
Paul, Hastings, Janofsky & Walker, LLP has expressed no opinion in respect
thereof.
B-12
<PAGE>
MANAGEMENT OF THE FUND
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 Other Principal Occupations(s)
Name, Address and Age with Trust During Past Five Years
--------------------- ---------- ----------------------
<S> <C> <C>
Allan Michael Rudnick1 (Age 60) Trustee and President Equity owner and the Chief Investment
c/o Kayne Anderson Mutual Funds Officer of the Adviser since August
1800 Avenue of the Stars, Ste 200 1989.
Los Angeles, CA 90067
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.
</TABLE>
B-13
<PAGE>
<TABLE>
<CAPTION>
Position(s) Held Other Principal Occupations(s)
Name, Address and Age with Trust During Past Five Years
--------------------- ---------- ----------------------
<S> <C> <C>
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) Treasurer and Serves as General Counsel and Secretary
c/o Kayne Anderson Mutual Funds Secretary 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>
The officers of the Trust, and the Trustees who are considered "interested
persons" of the Trust, receive no compensation directly from it for performing
the duties of their offices. However, those officers and Trustees of the Trust
who are officers or partners of the Adviser or the Distributor may receive
remuneration indirectly because the Adviser receives a management fee from the
Fund. The Trustees who are not affiliated with the Adviser or the Distributor
receive a fee of $1,000 for each regular Board meeting attended and $250 for
each committee meeting attended, together with reasonable expenses. The
aggregate compensation paid by the Trust to each Trustee during the fiscal year
ended December 31, 1999 is set forth below.
<TABLE>
<CAPTION>
Aggregate Pension or Retirement Total Compensation from the
Compensation Benefits Accrued as Trust and Fund Complex
Name of Trustee from the Trust Part of Fund Expenses* (no additional Trusts)
--------------- -------------- ---------------------- ----------------------
<S> <C> <C> <C>
Richard A. Kayne None None None
Allan M. Rudnick None None None
William T. Miller None None None
Carl D. Covitz $4,250 None $4,250
Arnold Brustin $4,250 None $4,250
Gerald I. Isenberg $4,250 None $4,250
William H. Waldorf $4,250 None $4,250
</TABLE>
* The Trust does not maintain pension or retirement plans.
B-14
<PAGE>
THE ADVISER
As set forth in the Prospectus, Kayne Anderson Investment Management LLC is the
Adviser for the Fund. Pursuant to an Investment Management Agreement (the
"Management Agreement"), the Adviser determines the composition of the Fund's
portfolio, the nature and timing of the changes to the Fund's portfolio and the
manner of implementing such changes. The Adviser also (a) provides the Fund with
investment advice, research and related services for the investment of its
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 Fund with office
space and certain administrative services. The services of the Adviser to the
Fund 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 Fund may
reimburse the Adviser (on a cost recovery basis only) for any services performed
for the 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 permits the Adviser to seek reimbursement of any
reductions made to its management fee within the three-year period following
such reduction, subject to the 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 the 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 the
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.
EXPENSES
The 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 the 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 the Fund; fees paid to members of the Board
B-14
<PAGE>
of Trustees (other than members who are affiliated persons of the Adviser or
Distributor); the Fund's pro rata portion of premiums of any fidelity bond and
other insurance covering the 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 the Fund
performed by the Adviser outside of its investment advisory duties under the
Management Agreement. The Fund also is liable for such nonrecurring expenses as
may arise, including litigation to which the Fund may be a party. The Fund has
agreed to indemnify its trustees and officers with respect to any such
litigation. The 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 the 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 1.40%. 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 the Fund in excess
of that required.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Trustees, the Adviser is
primarily responsible for arranging the execution of the Fund's portfolio
transactions and the allocation of brokerage activities. In arranging such
transactions, the Adviser will seek to obtain the best execution for the 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, the Fund will not necessarily always receive the
lowest commission available.
The Fund has 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 the 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 Fund, and not all such information may be used by the
Adviser in connection with the 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 the 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
Fund's shares, subject to also obtaining best execution as described above from
such broker-dealer.
B-15
<PAGE>
A portion of the securities in which the Fund may invest are traded in the
over-the-counter markets, and the 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
Investment Company Act, persons affiliated with the Fund are prohibited from
dealing with the Fund as principal in the purchase and sale of securities except
after application for and receipt of an exemptive order from the SEC. The
Investment Company Act restricts transactions involving the 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 the Fund are permitted to serve as its broker in over-the-counter
transactions conducted on an agency basis only.
Investment decisions for the 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 FUND'S ADMINISTRATOR
The Fund has 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 Fund; prepare all required filings
necessary to maintain the Fund's qualification and/or registrations to sell
shares in all states where the 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
Fund's servicing agents (i.e., transfer agent, custodian, fund accountants,
etc.); review and adjust as necessary the Fund's daily expense accruals; and
perform such additional services as may be agreed upon by the Fund and the
Administrator.
"The Trust has agreed to pay the Administrator an annual fee equal to 0.75% of
the first $40 million of the Trust's average daily net assets, 0.05% of the next
$40 million, 0.025% of the next $40 million and 0.01% thereafter, subject to a
minimum annual fee of $30,000 per Fund.
THE FUND'S DISTRIBUTOR
First Fund Distributors, Inc. (the "Distributor"), a broker-dealer affiliated
with the Administrator, acts as the 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 Fund
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 the Fund (as defined in the Investment
Company 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
Investment Company Act. There are no underwriting commissions paid with respect
to sales of the Fund's shares.
B-16
<PAGE>
TRANSFER AGENT AND CUSTODIAN
Investors Bank & Trust Company, Boston, Massachusetts ("IB&T"), serves as the
Fund's 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 Fund's Custodian. As Custodian, it and subcustodians
designated by the Board of Trustees hold the securities in the Fund's portfolio
and other assets for safekeeping. The Transfer Agent and Custodian do not and
will not participate in making investment decisions for the Fund.
HOW NET ASSET VALUE IS DETERMINED
The net asset values of the Fund's 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 the 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 Fund does not
expect to determine the net asset value of its shares on any day when the NYSE
is not open for trading even if there is sufficient trading in its 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 the Fund may invest, there may be an
immediate reduction in the net asset value of the shares of the Fund after the
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.
The Fund's portfolio may include foreign securities listed on foreign stock
exchanges. 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 Fund's net asset value is 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 the Fund's shares even though there has not been any change in
the market values of such securities.
Generally, the 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 NMS 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 Fund's net
asset value is determined. Securities and assets for which market quotations are
not readily available (including restricted securities which are subject to
limitations as to their sale) are valued at fair value as determined in good
faith by or under the direction of the Board of Trustees.
B-17
<PAGE>
Short-term debt obligations with remaining maturities in excess of 60 days are
valued at current market prices, as discussed above. Short-term securities with
60 days or less remaining to maturity are, unless conditions indicate otherwise,
amortized to maturity based on their cost to the Fund if acquired within 60 days
of maturity or, if already held by the Fund on the 60th day, based on the value
determined on the 61st day.
If any securities held by the 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 the 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 the 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 Fund are valued in such manner as the Board of Trustees
in good faith deems appropriate to reflect their fair value.
SHARE PURCHASES AND REDEMPTIONS
Information concerning the purchase and redemption of the Fund's 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 the 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 the 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 the 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
AVERAGE ANNUAL TOTAL RETURN. The average annual total return included with any
presentation of the 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
1B, 5B, or 10B year periods) at the end of
the 1B, 5-, or 10-year periods (or
fractional portion thereof).
B-18
<PAGE>
The Fund imposes 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 the Fund would be reinvested at the net asset value on the
day of payment.
NON-STANDARDIZED TOTAL RETURN INFORMATION
From time to time, the 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 the
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 Fund may publish or distribute information and reasons why
the Adviser believes investors should invest in the Fund. For example, the Fund
may refer to the Adviser's investment philosophy, which is founded on the
principles of growth and value. The Fund may state that the Adviser's investment
professionals actively research quality companies that offer significant
potential for future growth at attractive valuations. The Fund 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, the
Fund may compare its performance with that of appropriate indices such as the
Standard & Poor's Barra Growth Index (S&P Growth), Standard & Poor's Composite
Index of 500 stocks (S&P 500), Standard & Poor's MidCap 400 Index (S&P 400), the
Nasdaq Composite Index, the Russell 2500 Stock Index (Russell 2500), or other
unmanaged indices so that investors may compare the Fund's results with those of
a group of unmanaged securities. The S&P Growth, the S&P 500, the S&P 400 and
the Nasdaq Composite Index are unmanaged groups of common stocks traded
principally on national securities exchanges and the over the counter market.
The 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 Fund, 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.
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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 Fund will be audited by Briggs, Bunting &
Dougherty, Two Logan Square, Suite 2121, Philadelphia, Pennsylvania 19103,
independent public accountants for the Fund.
LICENSE TO USE NAME
Kayne Anderson has granted the Trust and the 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 Fund's investment adviser. Kayne Anderson
Investment Management, LLC also has reserved the right to license others to use
this designation, including any other investment company.
CODES OF ETHICS
The Boards of the Trust, the Advisor and the Distributor have adopted Codes of
Ethics under Rule 17j-1 of the 1940 Act. These Codes permit, subject to certain
conditions, personnel of the Advisor and Distributor to invest in securities
that may be purchased or held by the Fund.
OTHER INFORMATION
The Prospectus and this SAI, together, do not contain all of the information set
forth in the Registration Statement of Kayne Anderson Mutual Funds filed with
the SEC. Certain information is omitted in accordance with rules and regulations
of the SEC. The Registration Statement may be inspected at the Public Reference
Room of the SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, and copies thereof may be obtained from the SEC at
prescribed rates.
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