<PAGE> 1
KAYNE ANDERSON MUTUAL FUNDS
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS.................................... i
COMMENTS FROM INVESTMENT ADVISOR.......................... 1
PORTFOLIOS OF INVESTMENTS
Rising Dividends Fund............................ 9
Small-Mid Cap Rising Dividends Fund.............. 12
International Rising Dividends Fund.............. 14
Intermediate Total Return Bond Fund.............. 17
Intermediate Tax-Free Bond Fund.................. 18
STATEMENTS OF ASSETS AND LIABILITIES...................... 20
STATEMENTS OF OPERATIONS.................................. 22
STATEMENTS OF CHANGES IN NET ASSETS....................... 24
FINANCIAL HIGHLIGHTS...................................... 26
NOTES TO FINANCIAL STATEMENTS............................. 28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ....... 32
<PAGE> 2
Dear Shareholder,
We at Kayne Anderson are pleased to express our appreciation for your investment
in the Kayne Anderson Mutual Funds. If you are new to the Kayne Anderson family
of investors, we welcome you. This annual report contains audited financial
statements for each of the Funds for the period ended December 31, 1996.
As investment advisors, we have managed private accounts for equity and fixed
income investors for many years. We were delighted to expand our mutual fund
offerings beyond the Rising Dividends Fund in October 1996, when we introduced
the International Rising Dividends and Small-Mid Cap Rising Dividends equity
funds, as well as the Intermediate Total Return and Intermediate Tax-Free bond
funds.
Now that we offer three equity and two bond funds, our shareholders can create a
diversified portfolio of mutual fund holdings while benefiting from our
disciplined investment approach. Through these funds, shareholders can structure
a diversified portfolio consistent with their personal investment objectives and
goals.
Thank you again for your investment in Kayne Anderson Mutual Fund's family of
No-Load Mutual Funds. We at Kayne Anderson are committed to assisting
shareholders with the realization of their financial goals. As always, we
welcome your questions and comments.
Sincerely,
/s/ Richard A. Kayne /s/ Allan M. Rudnick
Richard A. Kayne Allan M. Rudnick
Chairman President
i
<PAGE> 3
KAYNE ANDERSON RISING DIVIDENDS FUND
Objective:
The Rising Dividends Fund is invested in only high quality growth
companies at all times. The strong performance of the Rising Dividends Fund for
calendar 1996 reflects that investors wanted to own more of those companies that
had consistent double-digit earnings and dividend growth.
The stocks we own are high-quality growth companies that are industry
leaders. Many of them could be characterized as "visionary companies" with
well-defined core ideologies that drive their organization. These ideologies
keep management and employees focused, and product development and corporate
growth on track.
Commentary:
The questions we are asked most often these days are: "Aren't you nervous
about how high the market is?" and "Shouldn't I be taking some money out of
equities now because we've done so well over these past two years?"
Our answer to these questions is "No," for two basic reasons. First, no
one is a good "market timer." History has shown that one does much better by
staying invested in high quality companies over the long term and participating
in the growth rate of these companies. Second, investors in this fund do not own
"the market," but rather a portfolio of selected high quality, well managed
industry leaders that are growing 13% to 15% a year, on average.
In the three years prior to 1996, stocks of lower quality companies in the
S&P 500 provided superior returns to the higher quality companies in the index.
This occurred because the economy benefited from a cyclical recovery in earnings
from the last recession and interest rates were declining. As a result,
investors bought companies with high debt, figuring that the declining interest
rates would help them. However, beginning in the fourth quarter of 1995 and
continuing into 1996, higher quality equities outperformed lower quality ones.
This reflected a rotation into quality due to the concern that profits of
cyclical businesses were nearing a peak.
From a sector standpoint, the greatest contributions to total return were
derived from the Technology and Financial Services sectors, as we were
overweighted in these two sectors and our individual stock selections
outperformed.
Within Technology, service companies provided strong returns on the basis
of good underlying business fundamentals. In addition, telecommunications
equipment suppliers added value due to strong growth in wireless technologies.
In the Financial Sector, bank stocks and financial services companies
provided the majority of the return, while insurers contributed relatively
little. Our selection of high quality banks performed well because they
delivered solid profit growth, utilization of excess capital to repurchase
shares and good management of credit risk, despite some aging in the consumer
cycle. Service companies, such as money managers, benefited, in part, from
revenue and income streams tied to strong securities markets.
1
<PAGE> 4
Although Technology and Financial Services were the highest weighted
sectors, it is our policy to structure a diversified portfolio, with significant
representation in each economic sector. These representations are created by
selecting from the highest quality companies available on an industry by
industry basis.
Outlook:
Regarding our current outlook, we would not be surprised to see a 5% to
10% correction in the popular market averages. However, many individual stocks
and industry groups have experienced a 10% or greater correction over the past
few months so that market averages themselves do not necessarily have to correct
at this time.
Moreover, the macro-economic outlook is more benign and positive for U.S.
equities now than at any other time in recent memory. To list a few key points:
(1) Inflation appears to be under control.
(2) Interest rates seem to be in a trading range that allows for moderate
growth in the economy.
(3) Corporate profits are expected to advance 8% to 10% in 1997, with
overall real GDP growing in the 2% to 3% range.
(4) Fiscal and monetary policies are aligned--the Federal Reserve Board
is intent on allowing for moderate growth with low inflation. A
Democratic Administration and Republican Congress is intent on moving
towards a balanced budget while providing tax incentives for targeted
areas of need.
(5) Demographics are very positive, with the "baby boomers" now in their
high earning, spending, and saving years, all of which stimulates the
economy as well as financial assets.
(6) The global situation is positive for U.S. equities, as there is no
other "super power" who can challenge us militarily. Also, millions
of new consumers are emerging from Eastern Europe, Latin America,
Southeast Asia, China and other countries as their economies become
healthier. The U.S. is still the best country in the world in which
to invest long term savings with peace of mind.
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT
IN THE KAYNE ANDERSON RISING DIVIDENDS FUND AND THE
S & P 500 INDEX.
[GRAPH]
<TABLE>
<CAPTION>
5/1/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96 9/30/96 12/31/96
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Kayne Anderson Rising Dividends Fund 10,000 10,394 11,089 12,065 12,810 13,249 13,689 14,368
S & P 500 Index 10,000 10,632 11,489 12,177 12,833 13,400 13,819 14,976
</TABLE>
Average Annual Total Return
<TABLE>
<CAPTION>
One Year Since Inception
<S> <C>
19.09% 24.22%
</TABLE>
2
<PAGE> 5
SMALL-MID CAP RISING DIVIDENDS FUND
Objective:
The goal of the Small-Mid Capitalization Rising Dividends Fund is to build
a diversified portfolio of the next generation of high-quality "Blue Chip"
companies. Using Rising Dividends criteria, our investment objective is to
produce small-mid cap stock returns, but with less risk. We focus on the highest
quality companies to allow clients to participate in the strong growth of small
companies while assuming less financial and stock market risk. Our focus on
these attributes is demonstrated by the following table:
<TABLE>
<CAPTION>
Small-Mid Cap. Fund Russell 2500 Index
<S> <C> <C>
A-, A, or A+ Quality by S&P 65.0% 15.5%
Long Term Debt / Total Capital 25.7% 40.5%
Average ROE - Past 5 Years 21.0% 13.5%
</TABLE>
Commentary:
Small stocks under-performed large stocks in 1996. Contributing factors
include: (1) The strong dollar drew international investors into the U.S. Equity
market. These investors have a preference for large companies with a world wide
presence. (2) The "Nifty 50" investment theme was revived in 1996 driving
domestic investors into large stocks.
Outlook:
[THE RUSSELL 2000 DIVIDEND BY THE S&P 500 GRAPHIC]
The 1996 lagging performance of small stocks leaves the group near its
lowest relative valuation in the past decade, except for the 1990 war with Iraq.
The value created by the lagging performance is visible in the above chart of
the Russell 2000 index (small-mid sized stocks) versus the Standard & Poors 500
index (large stocks). This valuation analysis suggests that small-mid cap stocks
currently offer better return opportunities than large stocks. There are no
guarantees, but long term commitments in the Small-Mid Cap Rising Dividends Fund
appear timely and may reward the investor well in the months and years to come.
3
<PAGE> 6
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE
KAYNE ANDERSON SMALL-MID CAP RISING DIVIDENDS FUND AND THE
RUSSELL 2500 INDEX.
[GRAPH]
<TABLE>
<CAPTION>
10/18/96 10/31/96 11/30/96 12/31/96
<S> <C> <C> <C> <C>
Kayne Anderson Small-Mid Cap Rising Dividends Fund 10,000 9,944 10,169 10,400
Russell 2500 Index 10,000 9,822 10,296 10,438
</TABLE>
Total Return Since Inception (10/18/96) 4.00%*
*Not annualized
4
<PAGE> 7
INTERNATIONAL RISING DIVIDENDS FUND
Objective:
The objective of the International Rising Dividends Fund is to achieve
consistent above average returns by investing in carefully selected
international stocks from a universe of very high quality companies. Our
investment universe is composed of companies with a history of consistent
increases in dividends and a low debt level. Generally, we focus our investments
on businesses with a global franchise rather than on local firms. Although we
favor broad international diversification, we are not looking to replicate the
country allocation of our benchmark, the MSCI EAFE (Europe, Australia, and Far
East) index.
Commentary:
Since it's inception date on October 18, 1996, the Fund's net asset value
increased 2.6%, while the MSCI EAFE index was up by only 0.6% in dollar terms.
While the Japanese market declined by more than 5% in dollar terms, the European
markets performed well over the last three months of 1996 (slightly more than
+5%).
At the end of the year, after less than three months of operations, 25% of
the fund assets were still invested in short-term money market instruments. As
our objective is to build a long-term portfolio with a fundamental,
price-conscious approach, we did not want to invest the portfolio in stocks
whose valuation looked out of line with their fundamental prospects,
particularly in Europe.
At the end of 1996, the fund was invested in companies whose headquarters
were located in nine different countries. The three largest countries
represented in the fund were the United Kingdom (22.3%), France (15.2%), and
Japan (8.7%). As almost all the companies owned by the fund are multinationals,
the country allocation presented below does not give a complete picture of the
true global diversification of the fund. Two examples will illustrate the point.
First, Nestle, the world's largest food company headquartered in Switzerland,
achieves most of its sales outside its home country and derives around 25% of
its sales from emerging markets. Second, Cable & Wireless, a telecommunications
company based in the UK, derives around 75% of its profits from Hong Kong. Only
two companies of the fund's twenty-seven holdings have little or no global
exposure; those are utility companies operating in Spain (Endesa) and in Hong
Kong (Hong Kong & China Gas).
We expect to fully invest the fund in the near future, as investments
opportunities occur. The country allocation of the fund at December 31, 1996
was:
[GRAPHIC]
5
<PAGE> 8
Outlook:
The long-term prospects for international equities look excellent,
although in the short-term some foreign stocks and markets may have run out of
steam after their recent strong performance. Many of the best managed foreign
companies are restructuring their operations, increasingly focusing on their
core businesses, and adopting a more shareholder-friendly attitude, much like
American companies did ten or fifteen years ago. Over time, the market will more
richly value the stocks of those outstanding companies. This is a powerful
movement that we see developing over the next five to ten years.
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE KAYNE
ANDERSON INTERNATIONAL RISING DIVIDENDS FUND AND THE MORGAN
STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALIA AND FAR EAST INDEX.
[GRAPH]
<TABLE>
<CAPTION>
10/18/96 10/31/96 11/30/96 12/31/96
<S> <C> <C> <C> <C>
Kayne Anderson International Rising Dividends Fund 10,000 9,869 10,301 10,256
Morgan Stanley Capital International Europe, Australia
and Far East Index. 10,000 10,000 10,400 10,269
</TABLE>
Total Return Since Inception (10/28/96) 2.56%*
*Not annualized
6
<PAGE> 9
INTERMEDIATE TOTAL RETURN BOND FUND
Objective:
The objective of the Intermediate Total Return Bond Fund is to seek total
return through current income and capital appreciation, with principal
preservation a secondary consideration. The Fund seeks to achieve its objective
by investing primarily in high quality, intermediate maturity debt securities.
Studies show that intermediate maturity debt securities can, over time, achieve
a majority of the return of long-term maturity debt without the associated level
of risk.
Commentary:
Since it's inception date on October 28, 1996, the Fund's net asset value
decreased $0.06, from $10.65 to $10.59. The total-return, principal gain or loss
with income, was 0.20% for the Fund and 0.67% for the Lehman Brothers
Intermediate Government/Corporate Bond Index. It should be noted that the Fund
began investing its initial funds during a period when overall level of interest
rates rose approximately 15 basis points (0.15%).
At the end of the year, after slightly more than 2 months of operations,
11% of the fund assets were still invested in short term money market
instruments. As we are looking to build a portfolio for the long term, we have
placed a majority of the Fund in U.S Treasury notes until we find the
appropriate levels for investing in other bond market sectors. The 3 largest
individual credits held in the portfolio were; U.S Treasury (71.5%), Federal
National Mortgage Association (4.9%), and General Motors Acceptance Corporation
(4.0%).
Outlook:
The Federal Reserve is expected to keep its current policy stance towards
the level of interest rates for the remainder of the quarter. We will continue
with our investment program to raise the current level of diversification and
income of the portfolio.
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE KAYNE
ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND AND THE LEHMAN
BROTHERS GOVERNMENT/CORPORATE INTERMEDIATE BOND INDEX.
[GRAPH]
<TABLE>
<CAPTION>
10/28/96 10/31/96 11/30/96 12/31/96
<S> <C> <C> <C> <C>
Kayne Anderson Intermediate Total Return Bond Fund 10,000 10,000 10,096 10,020
Lehman Brothers Gov't/Corp. Intermediate Bond Index 10,000 10,000 10,132 10,067
</TABLE>
Total Return Since Inception 0.20%*
*Not annualized
7
<PAGE> 10
INTERMEDIATE TAX-FREE BOND FUND
Objective:
The objective of the Intermediate Tax-Free Bond Fund is to seek current
income exempt from federal income tax consistent with preservation of capital.
The Fund seeks to achieve its objective by investing primarily in high quality,
intermediate maturity debt securities, interest from which is, exempt from
federal income tax. Part of the income from this Fund may also be exempt from
state income tax depending on the state of the shareholder's residence. Studies
show that intermediate maturity debt securities can, over time, achieve a
majority of the return of long-term debt without the associated level of risk.
Commentary:
Since it's inception on October 28, 1996, the Fund's net asset value
decreased $0.01, from $10.65 to $10.64. The total-return, principal gain or loss
with income, was 0.02% for the Fund and 1.10% for the Lehman Brothers 5-year
Municipal Bond Index for the same time period. It should be noted that the Fund
began investing its initial funds during a period when overall level of interest
rates rose approximately 15 basis points (0.15%).
As of the end of the year, after slightly more than 2 months of
operations, 50% of the Fund's assets were still invested in short-term money
market instruments. As we are looking to build a portfolio for the long term, we
were not willing to invest in bonds whose characteristics did not fit within the
overall profile we are seeking for the portfolio. One of the goals of the Fund
is to achieve a high level of diversification among various municipal bond
sectors. As of December 31, 1996 we have diversified the Fund among 7 different
sectors within the municipal bond market. The 3 largest sectors represented in
the Fund were: Electric Utility (12.5 %), General Obligation (9.6%), and
Prerefunded (8.2%). The Fund was also invested in municipalities that are
located in 6 different states and territories. The 3 largest states represented
in the Fund were: California (21.4%), Washington (8.5%), and Colorado (4.3%).
Outlook:
Municipal bonds should continue to perform well relative to most taxable
bond sectors, while the Federal Reserve is expected to keep its current interest
rate policy for the remainder of the quarter. We will continue with our
investment program in order to reduce short-term cash and raise the current
level of income from the portfolio.
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE KAYNE
ANDERSON INTERMEDIATE TAX-FREE BOND FUND AND THE LEHMAN
BROTHERS FIVE YEAR MUNICIPAL BOND INDEX.
[GRAPH]
<TABLE>
<CAPTION>
10/28/96 10/31/96 11/30/96 12/31/96
<S> <C> <C> <C> <C>
Kayne Anderson Intermediate Tax-Free Bond Fund 10,000 10,000 10,031 10,002
Lehman Brothers Five Year Municipal Bond Index 10,000 10,000 10,130 10,110
</TABLE>
Total Return Since Inception 0.02%*
*Not annualized
8
<PAGE> 11
KAYNE ANDERSON RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares COMMON STOCKS: 98.8% Market Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BASIC MATERIALS / CHEMICALS: 7.6%
5,460 Du Pont (E.I.) de Nemours............................................... $ 515,288
18,500 Monsanto Company........................................................ 719,188
13,530 PPG Industries, Inc..................................................... 759,371
----------
1,993,847
----------
CAPITAL GOODS / ELECTRICAL EQUIPMENT: 9.9%
22,010 AMP, Inc................................................................ 844,634
11,800 General Electric Company................................................ 1,166,725
7,130 W.W. Grainger Corporation............................................... 572,183
----------
2,583,542
----------
COMMUNICATION SERVICES / TELECOMMUNICATIONS: 3.2%
6,960 Bell Atlantic Corporation............................................... 450,660
7,520 SBC Communications, Inc................................................. 389,160
----------
839,820
----------
CONSUMER CYCLICAL / ENTERTAINMENT & LEISURE: 2.9%
10,800 The Walt Disney Company................................................. 751,950
----------
CONSUMER CYCLICAL / PUBLISHING & BROADCASTING: 1.8%
6,370 Gannett Company, Inc.................................................... 476,954
----------
CONSUMER CYCLICAL / RETAILING: 2.1%
23,750 Wal-Mart Stores, Inc.................................................... 543,281
----------
CONSUMER CYCLICAL / SERVICES: 2.1%
9,500 Cintas Corporation...................................................... 558,125
----------
CONSUMER STAPLES / BEVERAGES: 2.4%
12,040 Coca-Cola Company....................................................... 633,605
----------
CONSUMER STAPLES / CONSUMER PRODUCTS: 4.3%
12,930 International Flavors & Fragrances...................................... 581,850
5,000 Procter & Gamble Co..................................................... 537,500
----------
1,119,350
----------
</TABLE>
9
<PAGE> 12
KAYNE ANDERSON RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1996, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Market Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER STAPLES / FOODS: 9.0%
6,350 Kellogg Company......................................................... $ 416,719
10,550 McDonald's Corporation.................................................. 477,388
13,100 Sara Lee Corporation.................................................... 487,975
16,800 Sysco Corporation....................................................... 548,100
7,450 Wm. Wrigley, Jr., Company............................................... 419,063
-----------
2,349,245
-----------
ENERGY: 6.7%
8,110 Exxon Corporation....................................................... 794,780
3,650 Mobil Corporation....................................................... 446,213
2,910 Royal Dutch Petroleum Company ADR....................................... 496,883
-----------
1,737,876
-----------
FINANCIAL / BANKING: 6.7%
14,250 Banc One Corporation.................................................... 612,750
9,300 Fifth Third Bancorp..................................................... 584,156
12,500 Norwest Corporation..................................................... 543,750
-----------
1,740,656
-----------
FINANCIAL / FINANCIAL: 7.8%
20,000 Equifax, Inc............................................................ 612,500
8,080 Franklin Resources, Inc................................................. 552,470
13,460 State Street Boston Corporation......................................... 868,170
-----------
2,033,140
-----------
FINANCIAL / INSURANCE: 3.8%
958 Cincinnati Financial Corporation........................................ 62,150
2,450 General Re Corporation.................................................. 386,488
5,150 Marsh & McLennan Cos., Inc.............................................. 535,600
-----------
984,238
-----------
HEALTH CARE / DRUGS & HOSPITAL SUPPLIES: 9.8%
9,350 Abbott Laboratories..................................................... 474,513
10,000 Astra AB-ADR, Class A................................................... 490,000
20,020 Johnson & Johnson....................................................... 995,995
7,480 Merck & Company, Inc.................................................... 592,790
-----------
2,553,298
-----------
MISCELLANEOUS: 2.5%
8,040 Minnesota Mining & Manufacturing Company................................ 666,315
-----------
</TABLE>
10
<PAGE> 13
KAYNE ANDERSON RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1996, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Market Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TECHNOLOGY / COMPUTERS & OFFICE EQUIPMENT: 3.5%
18,100 Hewlett-Packard Company................................................. $ 909,525
-----------
TECHNOLOGY / DATA SERVICES: 7.0%
19,920 Automatic Data Processing, Inc.......................................... 854,070
10,470 Electronic Data Systems................................................. 452,828
6,940 Reuters Holdings PLC, ADR............................................... 530,910
-----------
1,837,808
-----------
TECHNOLOGY / TELECOMMUNICATIONS EQUIPMENT: 4.4%
20,620 L.M. Ericsson Tel-Sp, ADR............................................... 622,466
8,720 Motorola, Inc........................................................... 535,186
-----------
1,157,652
-----------
UTILITIES: 1.3%
14,000 DPL, Inc................................................................ 343,000
-----------
Total Common Stocks (cost $18,319,268).................................. 25,813,227
-----------
Total Investments in Securities (cost $18,319,268+): 98.8%.............. 25,813,227
Other Assets less Liabilities: 1.2%..................................... 304,350
-----------
NET ASSETS: 100.0% ..................................................... $26,117,577
===========
+Cost for federal income tax purpose is the same.
Net unrealized appreciation consists of:
Gross unrealized appreciation........................................... $ 7,632,939
Gross unrealized depreciation........................................... (138,980)
-----------
Net unrealized appreciation....................................... $ 7,493,959
===========
</TABLE>
See accompanying Notes to Financial Statements.
11
<PAGE> 14
KAYNE ANDERSON SMALL-MID CAP RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares COMMON STOCKS: 70.6% Market Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BASIC MATERIALS / PACKAGING: 6.8%
560 Bemis Company........................................................... $ 20,650
1,050 Liqui-Box Corporation................................................... 34,125
----------
54,775
----------
BASIC MATERIALS / SPECIALTY CHEMICALS: 4.3%
3,315 Wireless Telecom Group, Inc............................................. 34,393
----------
CAPITAL GOODS / ELECTRONIC EQUIPMENT: 1.3%
555 Hach Company............................................................ 10,545
----------
CAPITAL GOODS / MACHINERY EQUIPMENT: 3.1%
390 Nordson Corporation..................................................... 24,863
----------
CONSUMER CYCLICAL / SERVICES: 7.4%
505 Cintas Corporation...................................................... 29,669
1,125 Kelly Services.......................................................... 30,375
----------
60,044
----------
CONSUMER STAPLES / FOOD CHAIN: 3.5%
1,320 Smart & Final, Inc...................................................... 28,545
----------
CONSUMER STAPLES / FOOD: 3.8%
770 Tootsie Roll Industries, Inc............................................ 30,511
----------
ENERGY / OIL & GAS PRODUCTION: 2.1%
480 Devon Energy Corporation................................................ 16,680
----------
FINANCE / INSURANCE: 6.6%
890 American Heritage Life Investment Corporation........................... 23,363
655 Hartford Steam Boiler................................................... 30,376
----------
53,739
----------
FINANCE / BANKING: 3.6%
1,105 Washington Federal, Inc................................................. 29,283
----------
FINANCE / FINANCIAL SERVICES: 4.0%
675 Eaton Vance Corporation................................................. 32,147
----------
</TABLE>
12
<PAGE> 15
KAYNE ANDERSON SMALL-MID CAP RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1996, CONTINUED
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Market Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HEALTH CARE / DRUGS & HOSPITAL SUPPLIES: 7.9%
1,865 Ballard Medical Products................................................ $ 34,732
1,740 Mylan Labs, Inc......................................................... 29,145
---------
63,877
---------
MISCELLANEOUS / DIVERSIFIED: 4.4%
1,370 Federal Signal Corporation.............................................. 35,449
---------
TECHNOLOGY / SEMICONDUCTORS: 3.8%
700 Linear Technology Corporation........................................... 30,713
---------
TRANSPORTATION / TIRES: 3.8%
665 Bandag, Inc., Class A................................................... 30,424
---------
UTILITIES / CABLE TELEVISION: 4.2%
1,140 TCA Cable TV, Inc....................................................... 34,343
---------
Total Common Stocks (cost $548,840)..................................... 570,331
---------
Total Investments in Securities (cost $548,840+): 70.6%................. 570,331
Other Assets less Liabilities: 29.4%.................................... 237,450
---------
NET ASSETS: 100.0% ..................................................... $ 807,781
=========
+ Cost for federal income tax purpose is the same.
Net unrealized appreciation consists of:
Gross unrealized appreciation........................................... $ 23,780
Gross unrealized depreciation........................................... (2,289)
---------
Net unrealized appreciation....................................... $ 21,491
=========
</TABLE>
See accompanying Notes to Financial Statements.
13
<PAGE> 16
KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares COMMON STOCKS: 74.2% Market Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FRANCE: 15.2%
1,350 Axa S.A. ADR............................................................ $ 42,525
1,800 Groupe Danone S.A. ADR.................................................. 50,066
1,900 Lafarge S.A. ADR........................................................ 37,544
750 Total S.A. ADR.......................................................... 30,188
----------
160,323
----------
HONG KONG: 5.5%
5,000 Hong Kong & China Gas Company Ltd. ADR.................................. 9,664
3,000 Hong Kong Telecom, Ltd. ADR............................................. 48,750
----------
58,414
----------
JAPAN: 8.7%
400 Kao Corporation ADR..................................................... 46,524
2,400 Nintendo Company Ltd. ADR............................................... 21,427
400 Seven Eleven Japan ADR.................................................. 23,365
----------
91,316
----------
MALAYSIA: 2.3%
3,500 Genting Berhad ADR...................................................... 24,114
----------
NETHERLANDS: 6.6%
750 Elsevier, N.V. ADR...................................................... 25,313
600 Polygram, N.V. ADR...................................................... 29,850
80 Unilever, N.V. ADR...................................................... 14,020
----------
69,183
----------
SPAIN: 3.9%
200 Endesa ADR.............................................................. 14,000
700 Repsol S.A. ADR......................................................... 26,688
----------
40,688
----------
SWEDEN: 2.1%
460 Astra AB A Shares ADR................................................... 22,540
----------
SWITZERLAND: 7.6%
400 Nestle S.A. ADR......................................................... 21,404
600 Novartis AG ADR......................................................... 34,251
320 Roche Holdings, Ltd., ADR............................................... 24,821
----------
80,476
----------
</TABLE>
14
<PAGE> 17
KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1996, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Market Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
UNITED KINGDOM: 22.3%
1,500 Bat Industries PLC ADR.................................................. $ 24,750
1,000 Cable & Wireless PLC ADR................................................ 24,625
500 Carlton Communications PLC ADR.......................................... 22,250
1,200 Glaxo Wellcome PLC ADR.................................................. 38,100
1,000 Guinness PLC ADR........................................................ 39,146
400 Marks and Spencer PLC ADR............................................... 20,166
280 Rentokil Initial PLC ADR................................................ 21,035
1,200 Tomkins PLC ADR......................................................... 22,200
560 Vodafone Group PLC ADR.................................................. 23,168
-----------
235,440
-----------
Total Common Stocks (cost $763,885)..................................... 782,494
-----------
Total Investments in Securities (cost $763,885+): 74.2%................. 782,494
Other Assets less Liabilities: 25.8%.................................... 272,335
-----------
NET ASSETS: 100.0% ..................................................... $ 1,054,829
===========
+Cost for federal income tax purpose is the same.
Net unrealized appreciation consists of:
Gross unrealized appreciation........................................... $ 28,659
Gross unrealized depreciation........................................... (10,050)
-----------
Net unrealized appreciation....................................... $ 18,609
===========
</TABLE>
See accompanying Notes to Financial Statements.
15
<PAGE> 18
KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS BY INDUSTRY AT DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Percent of Investments
INDUSTRY in Securities
- --------------------------------------------------------------------------------
<S> <C>
Basic Industries 2.69%
Broadcast Media 2.84%
Construction and Housing 4.80%
Drugs 4.87%
Electrical Equipment 3.81%
Energy 10.15%
Finance / Financial Services 3.16%
Foods 15.94%
Health Care 3.17%
Insurance 5.43%
Leisure 3.08%
Machinery 2.84%
Miscellaneous 19.12%
Telecommunications 12.34%
Toy Manufacturer 2.74%
Utilities 3.02%
------
TOTAL INVESTMENTS IN SECURITIES 100.00%
======
</TABLE>
See accompanying Notes to Financial Statements.
16
<PAGE> 19
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount LONG-TERM DEBT SECURITIES: 88.9% Market Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY AND AGENCY OBLIGATIONS: 75.5%
U.S. TREASURY OBLIGATIONS: 70.6%
$2,500,000 U.S. Treasury Note, 6.250%, due 10/31/2001.............................. $ 2,502,343
1,000,000 U.S. Treasury Note, 7.250%, due 8/15/2004............................... 1,053,125
------------
3,555,468
------------
U.S. AGENCY OBLIGATIONS: 4.9%
250,000 FNMA, 6.950%, due 11/12/2006............................................ 247,025
------------
Total U.S. Treasury and Agency Obligations (cost $3,828,794)............ 3,802,493
------------
CORPORATE BONDS: 13.4%
FINANCE: 5.5%
75,000 Ford Motor Credit Corp., 6.250%, due 11/08/2000......................... 74,355
200,000 General Motors Acceptance Corp., 7.125%, due 5/01/2003.................. 202,507
------------
276,862
------------
INDUSTRIAL: 7.9%
200,000 Anheuser Busch Companies, 6.750%, due 11/01/2006........................ 195,754
200,000 The Walt Disney Company, 6.375%, due 3/30/2001.......................... 199,302
------------
395,056
------------
Total Corporate Bonds (cost $678,752)................................... 671,918
------------
Total Long-Term Debt Securities (cost $4,507,546)....................... 4,474,411
------------
Total Investments in Securities (cost $4,507,546+): 88.9%............... 4,474,411
Other Assets less Liabilities: 11.1%.................................... 559,084
------------
NET ASSETS: 100.0% ..................................................... $ 5,033,495
============
+Cost for federal income tax purpose is the same.
Net unrealized depreciation consists of:
Gross unrealized appreciation........................................... $ -0-
Gross unrealized depreciation........................................... (33,135)
------------
Net unrealized depreciation....................................... $ (33,135)
============
</TABLE>
See accompanying Notes to Financial Statements.
17
<PAGE> 20
KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount LONG-TERM MUNICIPAL DEBT: 46.5% Market Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GENERAL OBLIGATION: 9.7%
$250,000 California State, 5.375%, dated 3/1/1994, due 3/1/2006.................. $ 257,188
220,000 California State Franchise Tax, 6.900%, dated 7/1/1989, due 10/1/2006... 237,325
------------
494,513
------------
ELECTRIC: 12.5%
200,000 Colorado Springs Utilities, 6.750%, dated 4/15/1991, due 11/15/2005..... 218,500
200,000 Puerto Rico Electric Power Authority, 6.000%,
dated 8/15/1995, due 7/1/2000......................................... 210,750
200,000 Tacoma Washington Electric System, 5.900%,
dated 9/1/1992, due 1/1/2005.......................................... 211,500
------------
640,750
------------
HOSPITAL: 4.0%
200,000 Dade County Health Facilities Authority, 6.600%,
dated 3/1/1987, due 8/15/2002......................................... 206,458
------------
IDR / PCR: 4.1%
200,000 Matagorda County Navigation District Texas, 7.700%,
dated 2/1/1989, due 2/1/2019.......................................... 209,702
------------
TRANSPORTATION: 4.1%
200,000 Los Angeles California Harbor Department, 6.000%,
dated 1/1/1995, due 8/1/2001.......................................... 211,250
------------
WATER & SEWER: 3.9%
200,000 Central Coast Water Authority California, 4.000%,
dated 11/1/1996, due 10/1/1998........................................ 200,000
------------
PREREFUNDED: 8.2%
150,000 Los Angeles Convention & Exhibit Center, 9.000%,
dated 12/1/1985, due 12/1/2020........................................ 195,188
200,000 Washington Public Power Supply Systems, 7.625%,
dated 10/15/1990, due 7/1/2010........................................ 225,999
------------
421,187
------------
Total Long-Term Municipal Debts (cost $2,389,566)....................... 2,383,860
------------
Total Investments in Securities (cost $2,389,566+): 46.5%............... 2,383,860
Other Assets less Liabilities: 53.5%.................................... 2,740,580
------------
NET ASSETS: 100.0% ..................................................... $ 5,124,440
============
</TABLE>
18
<PAGE> 21
KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1996, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Market Value
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
+Cost for federal income tax purpose is the same.
Net unrealized depreciation consists of:
Gross unrealized appreciation........................................... $ 1,077
Gross unrealized depreciation........................................... (6,783)
------------
Net unrealized depreciation....................................... $ (5,706)
============
</TABLE>
See accompanying Notes to Financial Statements.
19
<PAGE> 22
KAYNE ANDERSON MUTUAL FUNDS
STATEMENTS OF ASSETS AND LIABILITIES AT DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RISING
DIVIDENDS
FUND
-----------
<S> <C>
ASSETS
Investments in securities, at
value (cost $18,319,268,
$548,840, $763,885, $4,507,546
and $2,389,566, respectively)
(Note 2A) ........................ $25,813,227
Cash ............................... 274,105
Receivables:
Capital stock sold ........... 25,250
Dividends and interest ....... 43,566
Prepaid expenses ................... 12,345
Deferred organization expenses
(Note 2D) ........................ 23,130
-----------
Total assets ........... 26,191,623
-----------
LIABILITIES
Payables:
Investment securities
purchased .................. --
Capital stock redeemed ....... 500
Distributions to
shareholders ............... --
Due to Investment Advisor (Note
3) ............................... 22,048
Accrued expenses ................... 51,498
-----------
Total liabilities ...... 74,046
-----------
NET ASSETS ............................... $26,117,577
===========
Net asset value, offering and
redemption price per share ....... $ 14.32
===========
Number of shares issued and
outstanding (unlimited shares
authorized without par value) .... 1,824,175
SOURCE OF NET ASSETS
Paid-in capital .................... $18,505,623
Undistributed net investment
income ........................... 16,971
Undistributed accumulated net
realized gain on investments ..... 101,024
Net unrealized appreciation
(depreciation) of investments .... 7,493,959
-----------
Net assets ............. $26,117,577
===========
</TABLE>
See accompanying Notes to Financial Statements.
20
<PAGE> 23
KAYNE ANDERSON MUTUAL FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL-MID CAP INTERNATIONAL INTERMEDIATE INTERMEDIATE
RISING DIVIDENDS RISING DIVIDENDS TOTAL RETURN TAX-FREE
FUND FUND BOND FUND BOND FUND
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in securities, at
value (cost $18,319,268,
$548,840, $763,885, $4,507,546
and $2,389,566, respectively)
(Note 2A) ........................ $570,331 $ 782,494 $ 4,474,411 $ 2,383,860
Cash ............................... 221,041 307,951 498,248 2,700,402
Receivables:
Capital stock sold ........... 25,000 50 -- --
Dividends and interest ....... 1,698 2,243 68,760 48,386
Prepaid expenses ................... 11,969 11,970 12,380 12,380
Deferred organization expenses
(Note 2D) ........................ 20,418 20,418 20,418 20,418
-------- ---------- ----------- -----------
Total assets ........... 850,457 1,125,126 5,074,217 5,165,446
-------- ---------- ----------- -----------
LIABILITIES
Payables:
Investment securities
purchased .................. 6,525 33,861 -- --
Capital stock redeemed ....... -- -- -- --
Distributions to
shareholders ............... -- -- -- 163
Due to Investment Advisor (Note
3) ............................... 26,730 25,859 31,637 39,673
Accrued expenses ................... 9,421 10,577 9,085 1,170
-------- ---------- ----------- -----------
Total liabilities ...... 42,676 70,297 40,722 41,006
-------- ---------- ----------- -----------
NET ASSETS ............................... $807,781 $1,054,829 $ 5,033,495 $ 5,124,440
======== ========== =========== ===========
Net asset value, offering and
redemption price per share ....... $ 11.06 $ 10.91 $ 10.59 $ 10.64
======== ========== =========== ===========
Number of shares issued and
outstanding (unlimited shares
authorized without par value) .... 73,037 96,647 475,467 481,757
SOURCE OF NET ASSETS
Paid-in capital .................... $785,154 $1,035,271 $ 5,062,932 $ 5,129,874
Undistributed net investment
income ........................... 1,136 949 3,698 272
Undistributed accumulated net
realized gain on investments ..... -- -- -- --
Net unrealized appreciation
(depreciation) of investments .... 21,491 18,609 (33,135) (5,706)
-------- ---------- ----------- -----------
Net assets ............. $807,781 $1,054,829 $ 5,033,495 $ 5,124,440
======== ========== =========== ===========
</TABLE>
21
<PAGE> 24
KAYNE ANDERSON MUTUAL FUNDS
STATEMENTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RISING
DIVIDENDS
FUND
----------
<S> <C>
INVESTMENT INCOME:
Income:
Dividends .................... $ 445,782
Interest ..................... 24,281
----------
Total income ........... 470,063
----------
Expenses:
Investment advisory fees
(Note 3) ................... 180,502
Custodian fees ............... 9,914
Administration fees .......... 44,164
Fund accounting fees ......... 11,888
Transfer agent fees .......... 22,339
Legal fees ................... 7,493
Insurance .................... 3,293
Audit fees ................... 12,000
Miscellaneous fees ........... 7,156
Reports to shareholders ...... 9,546
Registration fees ............ 9,675
Trustees' fees ............... 3,458
Amortization of deferred
organization expenses
(Note 2D) .................. 7,693
----------
Total expenses ......... 329,121
Less: Expenses paid
indirectly
(Note 2F) ...... --
Expenses
reimbursed ..... --
----------
Net expenses ........... 329,121
----------
NET INVESTMENT
INCOME ......... 140,942
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain on investments ... 1,246,299
Net change in unrealized
appreciation (depreciation) of
investments ...................... 2,813,912
----------
Net gain (loss) on
investments .......... 4,060,211
----------
NET INCREASE
(DECREASE)
IN NET
ASSETS
RESULTING
FROM
OPERATIONS ..... $4,201,153
==========
</TABLE>
*For the period October 18, 1996 (Commencement of operations) to December 31,
1996.
**For the period October 28, 1996 (Commencement of operations) to December 31,
1996.
See accompanying Notes to Financial Statements.
22
<PAGE> 25
KAYNE ANDERSON MUTUAL FUNDS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL-MID CAP INTERNATIONAL INTERMEDIATE INTERMEDIATE
RISING DIVIDENDS RISING DIVIDENDS TOTAL RETURN TAX-FREE
FUND* FUND* BOND FUND** BOND FUND**
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Income:
Dividends .................... $ 923 $ 1,034 $ -- $ --
Interest ..................... 1,565 1,984 49,882 13,583
-------- -------- -------- --------
Total income ........... 2,488 3,018 49,882 13,583
-------- -------- -------- --------
Expenses:
Investment advisory fees
(Note 3) ................... 736 1,292 4,343 4,355
Custodian fees ............... 927 1,000 329 246
Administration fees .......... 1,973 1,973 1,739 1,739
Fund accounting fees ......... 6,173 7,681 5,509 5,509
Transfer agent fees .......... 2,761 2,761 2,450 2,450
Legal fees ................... 300 300 300 300
Insurance .................... -- -- -- --
Audit fees ................... -- -- -- --
Miscellaneous fees ........... 49 55 349 348
Reports to shareholders ...... -- -- -- --
Registration fees ............ 3,045 3,046 2,646 2,646
Trustees' fees ............... 600 600 600 600
Amortization of deferred
organization expenses
(Note 2D) .................. 832 832 832 832
-------- -------- -------- --------
Total expenses ......... 17,396 19,540 19,097 19,025
Less: Expenses paid
indirectly
(Note 2F) ...... -- -- -- (7,832)
Expenses
reimbursed ..... (16,314) (17,888) (10,845) (2,918)
-------- -------- -------- --------
Net expenses ........... 1,082 1,652 8,252 8,275
-------- -------- -------- --------
NET INVESTMENT
INCOME ......... 1,406 1,366 41,630 5,308
-------- -------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS:
Net realized gain on investments ... -- -- -- --
Net change in unrealized
appreciation (depreciation) of
investments ...................... 21,491 18,609 (33,135) (5,706)
-------- -------- -------- --------
Net gain (loss) on
investments .......... 21,491 18,609 (33,135) (5,706)
-------- -------- -------- --------
NET INCREASE
(DECREASE)
IN NET
ASSETS
RESULTING
FROM
OPERATIONS ..... $ 22,897 $ 19,975 $ 8,495 $ (398)
======== ======== ======== ========
</TABLE>
23
<PAGE> 26
KAYNE ANDERSON MUTUAL FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RISING
DIVIDENDS
FUND
- --------------------------------------------------------------------------------------------------
FOR THE MAY 1, 1995*
INCREASE IN NET ASSETS FROM: YEAR ENDED TO
DECEMBER 31, 1996 DECEMBER 31, 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
Net investment income ................................. $ 140,942 $ 114,280
Net realized gain (loss)
on investments ....................................... 1,246,299 232,704
Net change in unrealized appreciation
(depreciation) of investments ......................... 2,813,912 3,060,930
----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ..................... 4,201,153 3,407,914
----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Net investment income ................................. (131,956) (118,762)
Net realized gain on investments ...................... (1,145,275) (232,704)
----------- -----------
TOTAL DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS (1,277,231) (351,466)
----------- -----------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ............................. 4,811,059 5,826,371
Shares issued in consideration for
like-kind contributions .............................. -- 12,177,173
Net asset value of shares issued on
reinvestment of distributions ........................ 1,266,895 351,428
Cost of shares redeemed ............................... (3,497,629) (798,090)
----------- -----------
NET INCREASE FROM CAPITAL SHARE TRANSACTIONS .... 2,580,325 17,556,882
----------- -----------
TOTAL INCREASE IN NET ASSETS .................... 5,504,247 20,613,330
NET ASSETS:
Beginning of period ................................... 20,613,330 --
----------- -----------
END OF PERIOD ......................................... $26,117,577 $20,613,330
=========== ===========
CHANGE IN SHARES
Shares sold ........................................... 349,950 534,414
Shares issued in consideration for
like-kind contributions .............................. -- 1,143,396
Shares issued in reinvestment of distributions ........ 86,655 27,825
Shares redeemed ....................................... (245,124) (72,941)
----------- -----------
Net increase .................................... 191,481 1,632,694
=========== ===========
</TABLE>
*Commencement of operations.
See accompanying Notes to Financial Statements.
24
<PAGE> 27
KAYNE ANDERSON MUTUAL FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SMALL-MID CAP INTERNATIONAL INTERMEDIATE
RISING DIVIDENDS RISING DIVIDENDS TOTAL RETURN
FUND FUND BOND FUND
- ---------------------------------------------------------------------------------------------------------------------------
OCTOBER 18, 1996* OCTOBER 18, 1996* OCTOBER 28, 1996*
INCREASE IN NET ASSETS FROM: TO TO TO
DECEMBER 31, 1996 DECEMBER 31, 1996 DECEMBER 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATIONS
Net investment income ................................. $ 1,406 $ 1,366 $ 41,630
Net realized gain (loss)
on investments ....................................... -- -- --
Net change in unrealized appreciation
(depreciation) of investments ......................... 21,491 18,609 (33,135)
-------- ---------- ----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ..................... 22,897 19,975 8,495
-------- ---------- ----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Net investment income ................................. (1,102) (1,249) (38,764)
Net realized gain on investments ...................... -- -- --
-------- ---------- ----------
TOTAL DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS (1,102) (1,249) (38,764)
-------- ---------- ----------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ............................. 759,908 1,009,948 5,000,000
Shares issued in consideration for
like-kind contributions .............................. -- -- --
Net asset value of shares issued on
reinvestment of distributions ........................ 1,078 1,155 38,764
Cost of shares redeemed ............................... -- -- --
-------- ---------- ----------
NET INCREASE FROM CAPITAL SHARE TRANSACTIONS .... 760,986 1,011,103 5,038,764
-------- ---------- ----------
TOTAL INCREASE IN NET ASSETS .................... 782,781 1,029,829 5,008,495
NET ASSETS:
Beginning of period ................................... 25,000 25,000 25,000
-------- ---------- ----------
END OF PERIOD ......................................... $807,781 $1,054,829 $5,033,495
======== ========== ==========
CHANGE IN SHARES
Shares sold ........................................... 70,592 94,185 469,484
Shares issued in consideration for
like-kind contributions .............................. -- -- --
Shares issued in reinvestment of distributions ........ 98 115 3,636
Shares redeemed ....................................... -- -- --
-------- ---------- ----------
Net increase .................................... 70,690 94,300 473,120
======== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE
TAX-FREE
BOND FUND
- --------------------------------------------------------------------------------
OCTOBER 28, 1996*
INCREASE IN NET ASSETS FROM: TO
DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<S> <C>
OPERATIONS
Net investment income ................................. $ 5,308
Net realized gain (loss)
on investments ....................................... --
Net change in unrealized appreciation
(depreciation) of investments ......................... (5,706)
----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ..................... (398)
----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Net investment income ................................. (5,868)
Net realized gain on investments ...................... --
----------
TOTAL DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS (5,868)
----------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ............................. 5,104,514
Shares issued in consideration for
like-kind contributions .............................. --
Net asset value of shares issued on
reinvestment of distributions ........................ 1,192
Cost of shares redeemed ............................... --
----------
NET INCREASE FROM CAPITAL SHARE TRANSACTIONS .... 5,105,706
----------
TOTAL INCREASE IN NET ASSETS .................... 5,099,440
NET ASSETS:
Beginning of period ................................... 25,000
----------
END OF PERIOD ......................................... $5,124,440
==========
CHANGE IN SHARES
Shares sold ........................................... 479,298
Shares issued in consideration for
like-kind contributions .............................. --
Shares issued in reinvestment of distributions ........ 112
Shares redeemed ....................................... --
----------
Net increase .................................... 479,410
==========
</TABLE>
25
<PAGE> 28
KAYNE ANDERSON MUTUAL FUNDS
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
For a capital share outstanding throughout each period
- -------------------------------------------------------------------------------------------------
RISING
DIVIDENDS
FUND
-------------------------------------
FOR THE YEAR MAY 1, 1995*
ENDED TO
DECEMBER 31, 1996 DECEMBER 31, 1995
-------------------------------------
<S> <C> <C>
Net asset value, beginning of period $ 12.63 $ 10.65
--------- ---------
Income from investment operations:
Net investment income 0.08 0.07
Net realized and unrealized gain (loss) on investments 2.35 2.13
--------- ---------
Total income from investment operations 2.43 2.20
--------- ---------
Less distributions:
Dividends from net investment income (0.08) (0.07)
Distributions from net capital gains (0.66) (0.15)
--------- ---------
Total distributions (0.74) (0.22)
--------- ---------
Net asset value, end of period $ 14.32 $ 12.63
========= =========
Total return 19.09% 20.65%*
Net assets, end of period (in 000's) $ 26,118 $ 20,613
Ratio of expenses to average net assets:
Before expense reimbursement 1.37% 1.31%+
After expense reimbursement 1.37% 1.31%+
Ratio of net investment income to average net assets:
(net of expense reimbursement) 0.59% 0.94%+
Portfolio turnover rate 23% 28%
Average commission per share $ 0.0600 --
</TABLE>
*Commencement of operations
**Not annualized.
+ Annualized.
See accompanying Notes to Financial Statements.
26
<PAGE> 29
KAYNE ANDERSON MUTUAL FUNDS
<TABLE>
<CAPTION>
SMALL-MID CAP INTERNATIONAL INTERMEDIATE INTERMEDIATE
RISING DIVIDENDS RISING DIVIDENDS TOTAL RETURN TAX-FREE
FUND FUND BOND FUND BOND FUND
------------------------------------------------------------------------------
OCTOBER 18, 1996* OCTOBER 18, 1996* OCTOBER 28, 1996* OCTOBER 28, 1996*
TO TO TO TO
DECEMBER 31, 1996 DECEMBER 31, 1996 DECEMBER 31, 1996 DECEMBER 31, 1996
------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.65 $ 10.65 $ 10.65 $ 10.65
-------- -------- -------- --------
Income from investment operations:
Net investment income 0.02 0.01 0.09 0.01
Net realized and unrealized gain (loss)
on investments 0.41 0.26 (0.07) (0.01)
-------- -------- -------- --------
Total income from investment operations 0.43 0.27 0.02 0.00
-------- -------- -------- --------
Less distributions:
Dividends from net investment income (0.02) (0.01) (0.08) (0.01)
Distributions from net capital gains 0.00 0.00 0.00 0.00
-------- -------- -------- --------
Total distributions (0.02) (0.01) (0.08) (0.01)
-------- -------- -------- --------
Net asset value, end of period $ 11.06 $ 10.91 $ 10.59 $ 10.64
======== ======== ======== ========
Total return 4.00%** 2.56%** 0.20%** 0.02%**
Net assets, end of period (in 000's) $ 808 $ 1,055 $ 5,033 $ 5,124
Ratio of expenses to average net assets:
Before expense reimbursement 18.91%+ 15.74%+ 2.10%+ 2.08%+
After expense reimbursement 1.30%+ 1.40%+ 0.95%+ 0.95%+
Ratio of net investment income to average net assets:
(net of expense reimbursement) 1.58%+ 1.14%+ 4.72%+ 0.60%+
Portfolio turnover rate -- -- -- --
Average commission per share $ 0.0955 $ 0.0936 -- --
</TABLE>
27
<PAGE> 30
KAYNE ANDERSON MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS AT DECEMBER 31, 1996
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION
Kayne Anderson Mutual Funds (the "Trust") was organized as a business trust
in Delaware on May 29, 1996 and is registered under the Investment Company Act
of 1940 (the "1940 Act") as a diversified, open-end management investment
company. The Trust currently consists of five separate diversified series:
Rising Dividends Fund, Small-Mid Cap Rising Dividends Fund, International Rising
Dividends Fund, Intermediate Total Return Bond Fund, and Intermediate Tax-Free
Bond Fund (each a "Fund" and collectively the "Funds").
Between May 29, 1996 and the respective dates of commencement of operations,
the Funds had no operations other than those related to organizational matters
and the sale of 2,347 shares of the Small-Mid Cap Rising Dividends Fund, the
International Rising Dividends Fund, the Intermediate Total Return Bond Fund,
and the Intermediate Tax-Free Bond Fund to Kayne Anderson Investment Management,
the Funds' investment advisor, for $25,000, respectively. On October 4, 1996 the
shareholders of the Kayne Anderson Rising Dividends Fund (the "Predecessor
Fund"), a series of shares of Professionally Managed Portfolios, entered into a
tax-free reorganization pursuant to which they agreed to exchange their
Predecessor Fund shares for shares of the Rising Dividends Fund series of the
Trust, which had no operations prior to the reorganization. The Predecessor Fund
is deemed to be the accounting survivor and accordingly the statements of
operations and changes in net assets, and the financial highlights include the
operations of the Predecessor Fund for periods prior to the reorganization.
The Rising Dividends Fund seeks long-term capital appreciation, with
dividend income as a secondary consideration. The Fund invests primarily in
equity securities, usually common stocks, of companies of all sizes.
The Small-Mid Cap Rising Dividends Fund seeks long-term capital
appreciation, with dividend income as a secondary consideration. The Fund
invests primarily in equity securities, usually common stocks, of small and
mid-capitalization companies, which the Fund currently considers to be companies
having market capitalizations of not more than $3 billion.
The International Rising Dividends Fund seeks long-term capital
appreciation, with dividend income as a secondary consideration. The Fund
invests primarily in equity securities, usually common stocks, of companies
outside the U.S. generally having total market capitalizations of $1 billion or
more.
The Intermediate Total Return Bond Fund seeks to obtain maximum total
return, primarily through current income with capital appreciation as a
secondary consideration. The Fund invests primarily in investment grade debt
securities and seeks to maintain an average maturity of three to ten years.
The Intermediate Tax-Free Bond Fund seeks current income exempt from federal
income tax consistent with preservation of capital. The Fund invests primarily
in investment grade debt securities and may maintain an average maturity of more
than ten years.
There can be no assurances that the Funds will be able to achieve their
investment objectives. The value of Fund shares fluctuates daily and may be
worth more or less than their purchase price when redeemed.
28
<PAGE> 31
KAYNE ANDERSON MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS AT DECEMBER 31, 1996, CONTINUED
- --------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds. These policies are in conformity with generally accepted
accounting principles.
A. Security Valuation: The Funds' investments are carried at market value.
Securities listed on an exchange or quoted on a national market system
are valued at the last sale price. Other securities are valued at the
last quoted bid price. Securities for which market quotations are not
readily available, if any, are valued at an independent pricing service
or determined following procedures approved by the Board of Trustees.
Short-term investments are valued at amortized cost which approximates
market value.
B. Federal Income Taxes: It is the Funds' policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of their
taxable income to their shareholders. Therefore, no federal income tax
provision is required.
C. Securities Transactions, Dividends and Distributions: As is common in
the industry, security transactions are accounted for on the trade date.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
D. Deferred Organization Expenses: All of the expenses incurred by the
Advisor in connection with the organization and registration of the
Funds' shares will be borne by the Funds and are being amortized to
expense on a straight-line basis over a period of five years.
E. Accounting Estimates: In preparing financial statements in conformity
with generally accepted accounting principles, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the period. Actual
results could differ from those estimates.
F. Expenses Paid Indirectly: The Intermediate Tax-Free Bond Fund's
custodian, fund accounting and transfer agency fees for the period
October 28, 1996 to December 31, 1996 were reduced by $7,832 as a result
of earning credits from overnight cash balances with its custodian bank.
NOTE 3 - INVESTMENT ADVISORY AND MANAGEMENT FEES AND OTHER TRANSACTIONS
WITH AFFILIATES
For the year ended December 31, 1996, Kayne Anderson Investment Management
(the "Advisor") provided the Funds with investment management services under an
Investment Advisory Agreement. The Advisor furnished all investment advice,
office space and certain administrative services, and provides personnel as
needed by the Funds. As compensation for its services, the Advisor is entitled
to a monthly fee at the annual rate of the following based upon the average
daily net assets of the Funds:
29
<PAGE> 32
KAYNE ANDERSON MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS AT DECEMBER 31, 1996, CONTINUED
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Rising Dividends Fund 0.75%
Small-Mid Cap Rising Dividends Fund 0.85%
International Rising Dividends Fund 0.95%
Intermediate Total Return Bond Fund 0.50%
Intermediate Tax-Free Bond Fund 0.50%
</TABLE>
Although not required to do so, the Investment Advisor has agreed to waive
or reimburse the expenses of each Fund to the extent necessary so that its ratio
of operating expenses to average net assets will not exceed the following
levels. Overall operating expense for each Fund will not fall below the
applicable percentage limitation until the Investment Advisor has been fully
reimbursed for fees foregone and expenses paid by the Advisor under this
agreement:
<TABLE>
<S> <C>
Rising Dividends Fund 1.20% (effective October 4, 1996)
Small-Mid Cap Rising Dividends Fund 1.30%
International Rising Dividends Fund 1.40%
Intermediate Total Return Bond Fund 0.95%
Intermediate Tax-Free Bond Fund 0.95%
</TABLE>
Pursuant to these expense limitation provisions the Advisor reimbursed the
Small-Mid Cap Rising Dividends Fund $15,714, the International Rising Dividends
Fund $17,288, the Intermediate Total Return Bond Fund $10,245, and the
Intermediate Tax-Free Bond Fund $2,318 during the period ended December 31,
1996.
Investment Company Administration Corporation (the "Administrator") acts as
the Fund's Administrator under an Administration Agreement. The Administrator
prepares various federal and state regulatory filings, reports and returns for
the Fund; prepares reports and materials to be supplied to the trustees;
monitors the activities of the Fund's custodian, transfer agent and accountants;
coordinates the preparation and payment of Fund expenses and reviews the Fund's
expense accruals. For its services, the Trust has agreed to pay the
Administrator an annual fee equal to 0.075% 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.
First Fund Distributors, Inc. (the "Distributor") acts as the Fund's
principal underwriter in a continuous public offering of the Fund's shares. The
Distributor is an affiliate of the Administrator.
Certain officers and Trustees of the Trust are also officers and/or
directors of the Advisor.
30
<PAGE> 33
KAYNE ANDERSON MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS AT DECEMBER 31, 1996, CONTINUED
- --------------------------------------------------------------------------------
NOTE 4 - PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 1996, the cost of purchases and the proceeds
from sales of securities, excluding short-term securities and U.S. Government
securities, were as follows:
<TABLE>
<CAPTION>
FUND PURCHASES SALES
<S> <C> <C>
Rising Dividends Fund $7,191,100 $5,329,179
Small-Mid Cap Rising Dividends Fund 548,840 0
International Rising Dividends Fund 763,885 0
Intermediate Total Return Bond Fund 928,664 0
Intermediate Tax-Free Bond Fund 2,391,295 0
</TABLE>
The Intermediate Total Return Bond Fund purchased $3,579,844, and sold $0,
respectively, of U.S. Government securities. There were no purchases or sales of
U.S. Government securities by the Rising Dividends Fund, Small-Mid Cap Rising
Dividends Fund, International Rising Dividends Fund, and Intermediate Tax-Free
Bond Fund.
NOTE 5 - IN-KIND CONTRIBUTION TRANSACTIONS
At the Rising Dividends Fund's inception on May 1, 1995, certain
shareholders purchased Fund shares through nontaxable in-kind contributions of
securities with a market value totaling $12,177,173 (including contributed
unrealized gain of $1,619,117). These securities were deemed to be in accordance
with the investment objective of the Fund.
31
<PAGE> 34
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES
KAYNE ANDERSON MUTUAL FUNDS
LOS ANGELES, CALIFORNIA
We have audited the accompanying statement of assets and liabilities of Kayne
Anderson Mutual Funds (comprising, respectively, the Rising Dividends Fund, the
Small-Mid Cap Rising Dividends Fund, the International Rising Dividends Fund,
the Intermediate Total Return Bond Fund, and the Intermediate Tax-Free Bond
Fund), including the portfolios of investments, as of December 31, 1996, and the
related statement of operations for the periods then ended, and the statements
of changes in net assets and the financial highlights for each of the periods
indicated thereon. These financial statements and financial highlights are the
responsibility of the Fund's management, our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996 by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the Funds comprising Kayne Anderson Mutual Funds as of December 31, 1996, the
results of their operations for the periods then ended, and the changes in their
net assets, and the financial highlights for each of the periods indicated
thereon, in conformity with generally accepted accounting principles.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
February 4, 1997
32
<PAGE> 35
KAYNE ANDERSON
Mutual Funds
ADVISOR
Kayne Anderson Investment Management
1800 Avenue of the Stars, 2nd Floor
Los Angeles, California 90067
(310) 556-2721
-
DISTRIBUTOR
First Fund Distributors, Inc.
4455 East Camelback Road, Suite 261E
Phoenix, Arizona 85018
-
CUSTODIAN AND TRANSFER AGENT
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
-
AUDITORS
Tait, Weller & Baker
Two Penn Center Plaza
Philadelphia, Pennsylvania 19102
-
LEGAL COUNSEL
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, California 94104
This report is intended for shareholders of
Kayne Anderson Mutual Funds and may not
be used as sales literature unless preceded
or accompanied by a current prospectus.
RISING DIVIDENDS FUND
SMALL-MID CAP RISING DIVIDENDS FUND
INTERNATIONAL RISING DIVIDENDS FUND
INTERMEDIATE TOTAL RETURN BOND FUND
INTERMEDIATE TAX-FREE BOND FUND
Annual Report
December 31, 1996
