Kayne Anderson
Mutual Funds
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS................................................ 2
INVESTMENT ADVISER COMMENTS AND PORTFOLIOS OF INVESTMENTS
Rising Dividends Fund........................................ 3
Small-Mid Cap Rising Dividends Fund.......................... 9
International Rising Dividends Fund.......................... 15
Intermediate Total Return Bond Fund.......................... 21
Intermediate Tax-Free Bond Fund.............................. 25
STATEMENTS OF ASSETS AND LIABILITIES.................................. 30
STATEMENTS OF OPERATIONS.............................................. 32
STATEMENTS OF CHANGES IN NET ASSETS................................... 34
FINANCIAL HIGHLIGHTS.................................................. 36
NOTES TO FINANCIAL STATEMENTS......................................... 38
<PAGE>
Dear Shareholder:
Once again we 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 financial statements for each of the Funds for
the period ended December 31, 1997. In addition, there are portfolio manager
comments on the individual Funds which state the goals and objectives of each
Fund, and the portfolio manager's 1997 commentary and outlook. We hope that you
will find these comments interesting and timely.
As investment advisors, we have managed private accounts for both equity
and fixed-income investors for many years. We are delighted to be able to offer
these Mutual Funds for our clients so that diversification among asset classes
can be readily accomplished. Through these Funds, shareholders can structure a
diversified portfolio consistent with their personal investment objectives and
goals.
We thank you again for your investment in the Kayne Anderson 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
2
<PAGE>
Kayne Anderson Rising Dividends Fund
------------------------------------
Objective:
- ---------
The investment goals of the Rising Dividends Fund are to own high-quality
growth stocks which have relatively low debt, which keep pace in rising stock
markets, outperform during weak stock markets, and provide rising dividend
income. We adhere to a disciplined investment approach that allows us to pursue
above-average growth with generally lower volatility than the general market.
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. If we conclude that the company is not maintaining its focus,
we will sell the stock.
Commentary:
- ----------
The last six months of 1997 was a time of increased volatility in global
equity markets. U.S. fixed-income markets performed well, as the interest rate
on the 30-year bellwether treasury bond yielded 5.87%--the lowest level since
October 1993. U.S. stocks reacted positively to this news, as well as to the
nation's status as the "safe haven" for global investing. In addition, U.S.
corporate profits continued to advance in line with recent forecasts.
At the end of the year the fund was most heavily weighted in the
technology and consumer staples sectors. We feel that the fund is well
positioned in the technology sector to benefit from global trends. In the fourth
quarter of 1997, both Intel and Linear Technology were added to the portfolio.
After visiting Intel, we believe in the company's continued ability to lead the
computer chip industry in design capabilities and process technology. Regarding
Linear Technology, we like the fact that by focusing on proprietary high
performance analog semiconductors products that are designed into various
manufacturer's products, the company is able to produce industry-leading profit
margins, returns on capital, and free cash flow from a debt free balance sheet.
In the consumer staples sector the fund continues to hold positions in
companies such as Coca-Cola and Gillette. Another major holding in the portfolio
is CPC International, which became Bestfoods at the beginning of 1998 when it
spun off its corn refining business to shareholders. The packaged foods
business, owning brands such as Knorr, Best Foods, Hellman's, and Entenmann's
was renamed Bestfoods.
The financial sector continues to be one of the best performing sectors in
the fund. This sector includes banks, money managers and insurance companies,
all of which performed well in 1997. Financial services companies such as State
Street and Franklin Resources benefited from the structural redirection of
savings into mutual funds.
Outlook:
- -------
The questions we are most often asked at this time are: "Will the Asian
economic crisis affect our economy significantly so as to cause U.S. corporate
earnings to suffer materially? And, further, "Will the U.S. stock market in
general catch "the Asian Flu" and have a major decline in the coming months?"
To understand the answer, we would highlight two key fundamental economic
trends that we believe are still very much in force and which argue in favor of
continued positive stock and bond markets in 1998. The Consumer
3
<PAGE>
Price Index (CPI), a proxy for inflation, has been steadily declining since
1991. We attribute this to three basic causes. First, the Federal Reserve Board
has been very diligent in allowing the money supply to grow only enough to
support moderate growth with little inflation. Second, the significant advances
in communication and technology have provided dramatic improvements in labor
productivity. Third, the globalization of production ensures that products are
sourced from the lowest cost plant locations, helping to keep a lid on consumer
prices. As long as inflation is under control, interest rates will be in a
positive trend, and bonds and stocks will have favorable underpinnings.
The other key statistic is Manufacturers' New Orders. This consistently
positive growth rate stands in stark contrast to the negative or, at best,
extremely cyclical trends of other major established economies. The U.S. economy
is the stalwart juggernaut that plows forward. Investors around the world have
come to realize that the U.S. alone stands out for stability, consistency and
dependability--hence, its "safe haven" status.
The Asian crisis could cause a slight reduction in Manufacturers' New
Orders. But, whereas 18.2% of Japan's trade is conducted with newly
industrializing nations in Asia, only 11.3% of U.S. trade falls into this
category. Therefore, even a 20% loss in trade with those countries should affect
only approximately 2% of our total trade. Indeed, an updated International
Monetary Fund (IMF) report, published in the first week of December 1997, said
that "the Asian turmoil will have little effect on the U.S., Canada and Western
Europe. Buoyant domestic demand in those nations outweighs the negative effects
of diminished trade and investment in Asia." The IMF prediction for the U.S. is
in line with comments by Federal Reserve Chairman, Alan Greenspan, who said that
the effect of the Asian crisis on the U.S. would be "modest."
Based on conversations with companies across the globe, our outlook for
the U.S. economy in 1998 is for another year of moderate growth and mild
inflation. Continued job creation will add upward pressure on wages, but prices
of many goods will be flat or down in response to excess global capacity and
slow growth in global demand. Given this fundamental outlook, we would expect
U.S. equities to continue to respond positively. However, as we have been
writing over the past year or two, we would not be surprised to see a 10% or
more correction in U.S. stock prices at any given time. This would create a
"buying opportunity" in some of the superbly managed, high-quality growth
companies in our universe of rising dividend, low-debt companies. We continue to
focus our research efforts on these companies that have excellent management
teams which are gaining market share, have proven franchises in their individual
industries and where we have conviction that the companies are undervalued
relative to their expected growth rates in the 1998-99 time-frame.
We thank you for your support and welcome any questions or comments on the
information in this report.
4
<PAGE>
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT
IN THE KAYNE ANDERSON RISING DIVIDENDS FUND AND THE S&P 500
INDEX.
Average Annual Total Return
One Year Since Inception
30.99% 26.71%
Kayne Anderson
Rising Dividends S & P 500
Fund Index
---------------- ---------
01 May 95 $10,000 $10,000
30 Jun 95 10,394 10,641
30 Sep 95 11,089 11,487
31 Dec 95 12,065 12,180
31 Mar 96 12,810 12,834
30 Jun 96 13,249 13,410
30 Sep 96 13,689 13,824
31 Dec 96 14,368 14,977
31 Mar 97 14,719 15,378
30 Jun 97 17,137 18,059
30 Sep 97 17,879 19,411
31 Dec 97 18,821 19,969
Past performance is not predictive of future performance.
5
<PAGE>
Kayne Anderson Rising Dividends Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at December 31, 1997
- --------------------------------------------------------------------------------------------------------
Shares COMMON STOCKS: 105.0% Market Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Basic Materials / Chemicals: 6.8%
23,470 Du Pont (E.I.) de Nemours..................................... $ 1,409,667
17,280 PPG Industries, Inc........................................... 987,120
-----------
2,396,787
-----------
Capital Goods / Electrical Equipment: 9.8%
12,200 Emerson Electric Company...................................... 688,537
12,000 General Electric Company...................................... 880,500
13,260 Minnesota Mining & Manufacturing Company...................... 1,088,149
8,350 W.W. Grainger Corporation..................................... 811,516
-----------
3,468,702
-----------
Communication Services / Telecommunications: 1.8%
9,150 Intel Corporation............................................. 642,787
-----------
Consumer Cyclical / Entertainment & Leisure: 2.5%
9,000 The Walt Disney Company....................................... 891,563
-----------
Consumer Cyclical / Publishing & Broadcasting: 2.8%
15,940 Gannett Company, Inc.......................................... 985,291
-----------
Consumer Cyclical / Restaurants: 4.5%
33,460 McDonald's Corporation........................................ 1,597,715
-----------
Consumer Cyclical / Services: 2.4%
22,080 Cintas Corporation............................................ 861,120
-----------
Consumer Staples / Beverages: 4.7%
12,040 Coca-Cola Company............................................. 802,165
11,500 Nestle S.A. ADR............................................... 862,962
-----------
1,665,127
-----------
Consumer Staples / Consumer Products: 8.7%
8,370 Gillette Company.............................................. 840,662
29,260 Kimberly-Clark Corporation.................................... 1,442,884
10,000 Procter & Gamble Company...................................... 798,125
-----------
3,081,671
-----------
6
</TABLE>
<PAGE>
Kayne Anderson Rising Dividends Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at December 31, 1997, Continued
- ------------------------------------------------------------------------------------------------------
Shares Market Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Consumer Staples / Foods: 5.2%
8,190 CPC International, Inc........................................ $ 882,473
12,000 Wm. Wrigley, Jr., Company..................................... 954,750
---------
1,837,223
---------
Energy / Gas: 7.2%
12,000 Exxon Corporation............................................. 734,250
16,220 Mobil Corporation............................................. 1,170,881
11,640 Royal Dutch Petroleum Corporation............................. 630,742
---------
2,535,873
---------
Financial / Banking: 5.2%
10,500 Fifth Third Bancorp........................................... 858,375
25,000 Norwest Corporation........................................... 965,625
---------
1,824,000
---------
Financial / Financial Services: 8.5%
25,060 Equifax, Inc.................................................. 888,064
12,120 Franklin Resources, Inc....................................... 1,053,682
18,000 State Street Boston Corporation............................... 1,047,375
---------
2,989,121
---------
Financial / Insurance: 4.5%
3,850 General Re Corporation........................................ 816,200
10,300 Marsh & McLennan Cos., Inc.................................... 767,994
---------
1,584,194
---------
Health Care / Drugs & Hospital Supplies: 13.4%
9,350 Abbott Laboratories........................................... 613,009
1 Astra AB-ADR, Class A......................................... 17
27,120 Johnson & Johnson............................................. 1,786,530
19,100 Medtronic, Inc................................................ 999,169
12,410 Merck & Company, Inc.......................................... 1,318,563
---------
4,717,288
---------
Technology / Computers & Office Equipment: 4.1%
12,100 Hewlett-Packard Company....................................... 756,250
12,020 Linear Technology Corporation................................. 692,652
---------
1,448,902
---------
</TABLE>
7
<PAGE>
Kayne Anderson Rising Dividends Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at December 31, 1997, Continued
- --------------------------------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Technology / Data Services: 8.6%
19,920 Automatic Data Processing, Inc................................ $ 1,222,590
24,990 Electronic Data Systems Corporation........................... 1,097,998
10,510 Reuters Holdings PLC, ADR..................................... 696,288
-----------
3,016,876
-----------
Technology / Telecommunications Equipment: 4.3%
26,410 Motorola, Inc................................................. 1,507,021
-----------
Total Common Stocks (cost $25,178,750)........................ 37,051,261
-----------
Total Investments in Securities (cost $25,178,750+): 105.0%... 37,051,261
Liabilities less Other Assets: (5.0%)......................... (1,768,737)
-----------
Net Assets: 100.0% ........................................... $35,282,524
===========
+ Cost for Federal income tax purposes is $25,180,898.
Net unrealized appreciation consists of:
Gross unrealized appreciation................................. $12,110,959
Gross unrealized depreciation................................. (240,596)
-----------
Net unrealized appreciation............................. $11,870,363
===========
</TABLE>
See accompanying Notes to Financial Statements.
8
<PAGE>
Kayne Anderson Small-Mid Cap Rising Dividends Fund
--------------------------------------------------
Objective:
- ---------
The objective of the Small-Mid Cap Rising Dividends Fund is long-term capital
appreciation. The Fund seeks to achieve this objective by:
o Building a diversified portfolio of the next generation of high quality
"blue chip" companies.
o Seeking returns typical of small and mid sized stocks, but with no more
risk than the S&P 500 Index of large stocks.
In summary, we strive to buy stock in high quality companies at discount
prices in order to allow clients to participate in the strong growth of small
and mid sized companies while assuming less financial and stock market risk.
Our commitment to these objectives is demonstrated by the following table:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Small-Mid Cap Russell 2500
Rising Dividends Index
Fund
Quality
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Return on Equity - Past 5 Years 23.2% 14.1% More Profitable
Long - Term Debt / Total Capital 26.8% 41.1% Less Financial Risk
- --------------------------------------------------------------------------------------------
Growth
- --------------------------------------------------------------------------------------------
Earnings Per Share Growth - Past 5 Years 20.1% 14.6% Faster Growth
Dividend Per Share Growth - Past 5 Years 20.1% 7.8% Faster Growth
- --------------------------------------------------------------------------------------------
Value
- --------------------------------------------------------------------------------------------
Price / Earnings Ratio - Latest 12 Months 21.1 23.9 Better Value
Dividend Yield 1.2% 1.4% Comparable Income
- --------------------------------------------------------------------------------------------
Market Characteristics
- --------------------------------------------------------------------------------------------
Average Stock Market Capitalization $ 1,520 $ 1,630 Comparable Size
Standard Deviation - Since Inception 12.7% 13.6% Less Market Risk
- --------------------------------------------------------------------------------------------
Note: As of December 31, 1997. Data is obtained from the Frank Russell Company and Zephyr
Style Advisor and is assumed to be reliable. S&P 500 standard deviation is 16.0%.
- --------------------------------------------------------------------------------------------
</TABLE>
Commentary:
- ----------
Stocks of small and mid sized companies, as measured by the Russell 2500
Index, trailed large stocks, as measured by the S&P 500 Index in 1997. In light
of the turmoil in Southeast Asian economies and currencies that erupted in the
second half of 1997, we are surprised by the lagging performance. Small stocks,
as an asset class, generally have less exposure to foreign economies than large
stocks. We would normally expect their performance to benefit when the domestic
economy is strong and foreign economies are suffering as is currently the case.
9
<PAGE>
Small-Mid Cap Rising Dividends Fund Russell 2500 Index
- ----------------------------------- ------------------
Basic Materials 10% Basic Materials 10%
Capital Goods 17% Capital Goods 8%
Consumer Cyclicals 4% Consumer Cyclicals 16%
Consumer Staples 8% Consumer Staples 3%
Energy 5% Energy 7%
Financial 23% Financial 22%
Healthcare 10% Healthcare 9%
Technology 15% Technology 12%
Transportation 2% Transportation 4%
Utilities 5% Utilities 9%
Cash 1% Cash 0%
The above charts show that: 1) the Fund is nearly fully invested and 2)
compared to the Russell 2500 Index, the Fund is over-weighted in Capital Goods
and under-weighted in Consumer Cyclicals. The over-weighting and under-weighting
are driven by value and are tactical rather than structural. As a result of the
turmoil in Southeast Asian economies, the stocks of fine Capital Goods companies
such as Diebold, Federal Signal, Nordson, and Wireless Telecom have been marked
down out of concern for their business in that part of the world. These
particular Capital Goods companies have relatively modest exposure to Asia. We
believe investors have over-reacted to the potential earnings impact. The
Consumer Cyclical sector has been under-weighted to provide funds for these
positions.
Outlook:
- -------
1997 was the 4th consecutive year of lagging stock performance for small
and mid sized companies compared to large companies. This multi-year period of
lagging performance has created compelling value in the group. The value can be
seen in the following 10 year chart of relative price/earnings ratio for the
stocks comprising the Kayne Anderson Small-Mid Cap Rising Dividends Fund. That
is, the price/earnings ratio of our current portfolio divided by the
price/earnings ratio of the S&P 500 Index of large stocks. Compelling value on
its own is not enough to create leading performance. If, however, the overseas
economic and currency turmoil continues, small companies with domestic
orientation and strong profitability from consistently growing, low debt
businesses should benefit economically. And the combination of compelling value
and improving economics can create leading performance. These characteristics
are common to our portfolio of Small-Mid Cap Rising Dividends companies.
10
<PAGE>
Relative Price / Earnings Ratio
1/88 138.28%
1/89 143.14%
1/90 122.00%
1/91 120.00%
1/92 112.00%
1/93 102.00%
1/94 96.52%
1/95 120.62%
1/96 109.68%
1/97 102.98%
1/98 100.17%
Price/earnings ratio for the stocks currently in the Small-Mid Cap Rising
Dividends Fund divided by the price/earnings ratio of the Standard & Poors 500
Index. Source: CompuStat
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.
Average Annual Total Return
One Year Since Inception
19.46% 19.78%
Kayne Anderson
Small-Mid Cap
Rising Dividends Russell 2500
Fund Index
---------------- ------------
18 Oct 96 $10,000 $10,000
31 Dec 96 10,400 10,627
31 Mar 97 10,127 10,271
30 Jun 97 11,387 11,823
30 Sep 97 12,854 13,520
31 Dec 97 12,424 13,215
Past performance is not predictive of future performance.
11
<PAGE>
Kayne Anderson Small-Mid Cap Rising Dividends Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at December 31, 1997
- --------------------------------------------------------------------------------------------------------
Shares COMMON STOCKS: 99.0% Market Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Basic Materials / Packaging: 9.6%
6,639 Bemis Company................................................. $ 292,531
8,246 Liqui-Box Corporation......................................... 331,902
---------
624,433
---------
Basic Materials / Specialty Chemicals: 0.1%
576 Hach Company, Class A......................................... 5,400
---------
Capital Goods / Electronic Equipment: 9.1%
6,356 Diebold, Inc.................................................. 321,773
43,162 Wireless Telecommunications Group, Inc........................ 267,065
---------
588,838
---------
Capital Goods / Machinery Equipment: 3.5%
4,947 Nordson Corporation........................................... 226,944
---------
Capital Goods / Miscellaneous: 4.6%
13,786 Federal Signal Corporation.................................... 298,122
---------
Consumer Cyclical / Services: 4.1%
6,906 Cintas Corporation............................................ 269,334
---------
Consumer Staples / Food: 4.5%
4,700 Tootsie Roll Industries, Inc.................................. 293,806
---------
Consumer Staples / Food Chain: 3.7%
13,278 Smart & Final, Inc............................................ 239,004
---------
Energy / Oil & Gas Production: 5.2%
8,739 Devon Energy Corporation...................................... 336,452
---------
Finance / Banking: 5.8%
1,971 National Commerce Bancorp..................................... 69,478
9,785 Washington Federal, Inc....................................... 307,616
---------
377,094
---------
</TABLE>
12
<PAGE>
Kayne Anderson Small-Mid Cap Rising Dividends Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at December 31, 1997, Continued
- --------------------------------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Finance / Financial Services: 6.8%
3,990 Eaton Vance Corporation....................................... $ 150,622
11,792 United Asset Management Corporation........................... 288,167
---------
438,789
---------
Finance / Insurance: 10.2%
8,351 American Heritage Life Investment Corporation................. 300,636
1,002 HSB Group, Inc................................................ 55,298
10,306 Mutual Risk Management, Ltd................................... 308,536
---------
664,470
---------
Health Care / Drugs & Hospital Supplies: 10.2%
13,214 Ballard Medical Products...................................... 320,439
16,509 Mylan Labs, Inc............................................... 345,657
---------
666,096
---------
Technology / Computer & Office Equipment: 5.0%
17,470 Reynolds & Reynolds, Inc., Class A............................ 322,103
---------
Technology / Semiconductors: 5.1%
5,743 Linear Technology Corporation................................. 330,940
---------
Technology / Software & Services: 4.7%
25,088 Timberline Software Corporation............................... 308,902
---------
Transportation / Courier Services: 1.9%
4,000 Air Express International Corporation......................... 122,000
---------
Utilities / Cable Television: 4.8%
6,813 TCA Cable TV, Inc............................................. 313,398
---------
Total Common Stocks (cost $6,067,704)......................... 6,426,125
---------
Total Investments in Securities (cost $6,067,704+): 99.0%..... 6,426,125
Other Assets less Liabilities: 1.0%........................... 67,826
---------
Net Assets: 100.0% ........................................... $ 6,493,951
=========
</TABLE>
13
<PAGE>
Kayne Anderson Small-Mid Cap Rising Dividends Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at December 31, 1997, Continued
- --------------------------------------------------------------------------------------------------------
Market Value
- --------------------------------------------------------------------------------------------------------
<S> <C>
+Cost for Federal income tax purposes is the same.
Net unrealized appreciation consists of:
Gross unrealized appreciation................................. $ 701,698
Gross unrealized depreciation................................. (343,277)
---------
Net unrealized appreciation............................. $ 358,421
=========
</TABLE>
See accompanying Notes to Financial Statements.
14
<PAGE>
Kayne Anderson International Rising Dividends Fund
--------------------------------------------------
Objective:
- ---------
The goal of the International Rising Dividends Fund is to achieve superior
long-term results by investing in the best high-quality international companies.
We pursue this goal through a focused investment philosophy that is composed of
the following five principles: (1) a commitment to quality; (2) long-term
vision; (3) independent fundamental research; (4) broad diversification; and (5)
a disciplined investment process. We define quality companies as those
possessing a global competitive advantage, management excellence, financial
strength and flexibility, a high level of profitability and consistency of
earnings. We seek to diversify the fund across countries and industries but do
not aim to replicate the country allocation of our benchmark, the MSCI EAFE
(Europe, Australia, and the Far East) index.
Commentary:
- ----------
For the year ended December 31, 1997, the Fund's total return was 16.42%,
which compares to the MSCI EAFE index return of only 2.06% and the average
return of the International Mutual Funds tracked by Lipper Analytical of 11.57%.
The European equity markets, which combined account for 67.2% of the EAFE index,
were very strong, increasing an average of 21.6%. The Japanese market, which
alone accounts for 25.2% of the EAFE index, declined by 24.2%. In 1997, the U.S.
dollar appreciated significantly versus most foreign currencies; it rose 10%
against the Yen to 127 Yen/$, 17% against the German Mark to 1.79 DM/$, and 4%
against the British Pound to 1.67 $/UK Pound. The strength of the dollar did not
prevent investors from achieving good returns on their European investments, as
it helped to improve the competitive position of many foreign companies and
hence their earnings growth prospects.
At the end of December 1997, 5.7% of the Fund's assets were invested in
short-term money market instruments. In addition, the four largest countries
represented in the Fund were the United Kingdom (27.0%), France (13.5%),
Switzerland (10.4%), and the Netherlands (10.2%). During the year the Fund's
exposure to Japan remained limited at less than 10% of total assets. Far from
hurting the Fund's performance, this very selective allocation to Japan actually
had a positive contribution to annual performance.
15
<PAGE>
The country allocation of the Fund at December 31, 1997 was:
Spain 5.5%
UK 27.0%
Sweden 3.8%
France 13.5%
Japan 6.8%
Switzerland 10.4%
Netherlands 10.2%
Hong Kong 8.0%
Malaysia 1.4%
Australia 3.2%
Finland 4.5%
Cash 5.7%
The main event of 1997 was the currency turmoil that erupted in many
Southeast Asian countries in July, triggering a general sell-off in emerging
markets and market corrections in most developed markets. We are not
underestimating the short-term impact of the Asian crisis; however, we believe
that the long-term consequences will be minimal. The Fund showed good resilience
in the face of recent market weaknesses. We note that as a rule, the Fund's
exposure to emerging markets is achieved almost exclusively through its
multinational companies' operations in the newly industrialized regions of the
world. We have found that the great majority of the managers in these companies
consider the crisis in Asia to be an opportunity to strengthen their market
positions in the region for the long-term.
Outlook:
- -------
We strongly believe that the best time to invest internationally is when
short-term uncertainty creates long-term doubt. The 1997 Asian crisis is
offering investors precisely that kind of opportunity. We maintain that the
long-term prospects for international equities are excellent. Many of the
best-managed foreign companies are restructuring their operations, increasing
their focus on their core businesses, and adopting shareholder-friendly
attitudes, in a process that American companies began ten or fifteen years ago.
This is a powerful positive trend that we believe will continue to develop over
the next five to ten years as the market recognizes the greater value of the
stocks of these proactive companies.
Our conservative and disciplined investment approach should provide
investors with the necessary comfort to remain committed to the international
equity asset class for the long-term.
16
<PAGE>
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.
Average Annual Total Return
One Year Since Inception
16.42% 15.89%
Kayne Anderson Morgan Stanley
International Capital International
Rising Dividends Europe, Australia and
Fund Far East Index
---------------- ---------------------
18 Oct 96 $10,000 $10,000
31 Dec 96 10,256 10,269
31 Mar 97 10,604 10,116
30 Jun 97 11,949 11,436
30 Sep 97 12,306 11,363
31 Dec 97 11,940 10,480
Past performance is not predictive of future performance.
17
<PAGE>
Kayne Anderson International Rising Dividends Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at December 31, 1997
- --------------------------------------------------------------------------------------------------------
Shares COMMON STOCKS: 94.3% Market Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Australia: 3.2%
12,000 Broken Hill Proprietary ADR................................... $ 222,000
---------
Finland: 4.5%
4,500 Nokia Corporation ADR......................................... 315,000
---------
France: 13.5%
5,370 AXA S.A. ADR.................................................. 209,430
7,390 Groupe Danone S.A. ADR........................................ 264,193
6,000 Louis Vuitton Moet Hennessey ADR.............................. 198,750
5,000 Total S.A. ADR................................................ 277,500
---------
949,873
---------
Hong Kong: 8.0%
56,000 Hong Kong & China Gas Company Ltd. ADR........................ 108,405
1,050 Hong Kong & Shanghai Banking PLC ADR.......................... 258,832
9,526 Hong Kong Telecom, Ltd. ADR................................... 196,474
---------
563,711
---------
Japan: 6.8%
1,000 Kao Corporation ADR........................................... 144,592
10,600 Nintendo Company Ltd. ADR..................................... 130,439
1,000 Rohm Company.................................................. 101,877
1,400 Seven Eleven Japan ADR........................................ 99,491
---------
476,399
---------
Malaysia: 1.4%
40,000 Genting Berhad ADR............................................ 100,192
---------
Netherlands: 10.2%
10,000 Elsevier N.V. ADR............................................. 322,500
4,000 Polygram N.V. ADR............................................. 190,750
3,200 Unilever N.V. ADR............................................. 199,800
---------
713,050
---------
Spain: 5.5%
9,400 Endesa S.A. ADR............................................... 170,963
5,000 Repsol S.A. ADR............................................... 212,812
---------
383,775
---------
</TABLE>
18
<PAGE>
Kayne Anderson International Rising Dividends Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at December 31, 1997, Continued
- --------------------------------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Sweden: 3.8%
15,400 Astra AB-ADR, Class A......................................... $ 264,688
---------
Switzerland: 10.4%
3,400 Nestle S.A. ADR............................................... 255,137
3,000 Novartis AG ADR............................................... 243,735
2,300 Roche Holdings, Ltd., ADR..................................... 228,730
---------
727,602
---------
United Kingdom: 27.0%
12,000 BAT Industries PLC ADR........................................ 225,000
7,000 Cable & Wireless PLC ADR...................................... 190,312
9,000 Diageo PLC ADR................................................ 340,875
1,950 Marks and Spencer PLC ADR..................................... 115,314
15,000 Pearson PLC ADR............................................... 194,979
4,640 Rentokil Initial PLC ADR...................................... 205,371
2,500 Reuters Holding PLC ADR....................................... 165,625
3,000 Siebe PLC ADR................................................. 112,545
9,000 Tomkins PLC ADR............................................... 172,125
2,400 Vodafone Group PLC ADR........................................ 174,000
---------
1,896,146
---------
Total Common Stocks (cost $6,196,298)......................... 6,612,436
---------
Total Investments in Securities (cost $6,196,298+): 94.3%..... 6,612,436
Other Assets less Liabilities: 5.7%........................... 399,860
---------
Net Assets: 100.0% ........................................... $ 7,012,296
=========
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
+Cost for Federal income tax purposes is the same.
Net unrealized appreciation consists of:
Gross unrealized appreciation................................. $ 723,103
Gross unrealized depreciation................................. (306,965)
---------
Net unrealized appreciation............................. $ 416,138
=========
</TABLE>
See accompanying Notes to Financial Statements.
19
<PAGE>
Kayne Anderson International Rising Dividends Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS BY INDUSTRY at December 31, 1997
- --------------------------------------------------------------------------------------------------------
Industry Percentage
- --------------------------------------------------------------------------------------------------------
<S> <C>
Amusement & Recreation Services............................ 1.4%
Audio/Video Home Products.................................. 2.7%
Beverages.................................................. 11.2%
Books...................................................... 4.6%
Cigarettes................................................. 3.2%
Communications Equipment................................... 4.5%
Cosmetics & Personal Care.................................. 2.1%
Crude Petroleum & Natural Gas.............................. 10.2%
Dolls, Toys, Games & Sports................................ 5.6%
Drugs...................................................... 10.5%
Electric Services.......................................... 4.0%
Electronic Components & Accessories........................ 1.6%
Electronic Industrial Apparatus............................ 1.5%
Family Clothing Stores..................................... 1.6%
Grocery & Related Products................................. 2.9%
Grocery Stores............................................. 1.4%
Holding Offices............................................ 6.7%
Miscellaneous Manufacturing Industries..................... 2.9%
Newspapers................................................. 2.8%
Services Allied with Exchange of Security.................. 2.4%
Surgical, Medical, Dental Instruments & Supplies........... 2.5%
Telephone Communications................................... 8.0%
------
Total Investments............................................. 94.3%
Other Assets less Liabilities................................. 5.7%
------
Net Assets.................................................... 100.0%
======
</TABLE>
See accompanying Notes to Financial Statements.
20
<PAGE>
Kayne Anderson Intermediate Total Return Bond Fund
--------------------------------------------------
Objective:
- ---------
The objective of the Intermediate Total Return Bond Fund is to seek
maximum total return through current income with capital appreciation as 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:
- ----------
During 1997, the fund share's net asset value increased $0.16, from $10.59
to $10.75. After fund expenses, the total-return, principal gain or loss with
income, was 7.2% for the Fund and 7.9% for the Lehman Brothers Intermediate
Government/Corporate Bond Index.
As of mid-year, after slightly more than eight months of operations, fund
assets were fully invested in intermediate maturity taxable bond securities. By
year-end the three largest sectors represented in the Fund were: U.S. Treasury
(45%), Finance (17%), and Industrial (17%). The three largest individual credits
held in the portfolio were U.S Treasury (45%), Government National Mortgage
Association (9%), and Federal National Mortgage Association (4%).
SECTOR DIVERSIFICATION
DECEMBER 31, 1997
U.S. TREASURY 45%
AGENCY 4%
CASH & EQUIVALENTS 5%
FINANCE 17%
INDUSTRIAL 17%
ASSET-BACKED 3%
MORTGATE-BACKED 9%
21
<PAGE>
Outlook:
- --------
The Federal Reserve is expected to keep its current policy stance towards
the level of interest rates for the near future. Interest rates are expected to
continue their long-term decline, although we expect some short-term volatility
capable of going against this trend.
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.
Average Annual Total Return
One Year Since Inception
7.19% 6.27%
Kayne Anderson Lehman Brothers
Intermediate Gov't/Corp.
Total Return Intermediate
Bond Fund Bond Index
-------------- ---------------
10/28/96 $10,000 $10,000
12/30/96 10,020 10,077
03/31/97 9,948 10,064
06/30/97 10,249 10,403
09/30/97 10,525 10,723
12/31/97 10,741 10,984
Past performance is not predictive of future performance.
22
<PAGE>
Kayne Anderson Intermediate Total Return Bond Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at December 31, 1997
- ------------------------------------------------------------------------------------------------------
Principal Amount LONG-TERM DEBT SECURITIES: 95.4% Market Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSET-BACKED RECEIVABLES: 3.2%
------------------------------------------------------------
$ 200,000 WFS Financial Owner Trust, 6.800%, due 12/20/2003........... $ 202,872
---------
CORPORATE BONDS: 34.2%
------------------------------------------------------------
Finance: 17.4%
200,000 Bear Stearns Co., 6.625%, due 10/01/2004.................... 201,060
200,000 Beneficial Corp., 6.600%, due 9/26/2001..................... 201,940
200,000 Capital One Bank, 6.730%, due 6/04/1998..................... 200,562
75,000 Ford Motor Credit Corp., 6.250%, due 11/08/2000............. 75,108
200,000 General Motors Acceptance Corp., 7.125%, due 5/01/2003...... 207,691
200,000 Household Finance Co., 8.000%, due 8/15/2004................ 205,567
---------
1,091,928
---------
Industrial: 16.8%
200,000 Allied Signal, Inc., 9.200%, due 2/15/2003.................. 225,913
200,000 Anheuser-Busch Companies, 6.750%, due 11/01/2006............ 202,397
200,000 Coca-Cola Enterprises, 6.375%, due 8/01/2001................ 201,640
200,000 Sears Roebuck Co., 9.450%, due 7/25/2001.................... 220,220
200,000 Walt Disney Company, 6.375%, due 3/30/2001.................. 201,906
---------
1,052,076
---------
Total Corporate Bonds.................................... 2,144,004
---------
MORTGAGE-BACKED / PASS-THROUGH SECURITIES: 9.3%
------------------------------------------------------------
Government National Mortgage Association (GNMA)
268,335 8.500%, due 6/15/2026...................................... 282,310
286,494 8.000%, due 11/15/2026..................................... 297,566
---------
Total Mortgage-Backed / Pass-Through Securities.......... 579,876
---------
U.S. AGENCY OBLIGATIONS: 4.1%
------------------------------------------------------------
250,000 Federal National Mortgage Association (FNMA)
6.950%, due 11/13/2006..................................... 255,625
---------
</TABLE>
23
<PAGE>
Kayne Anderson Intermediate Total Return Bond Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at December 31, 1997, Continued
- ------------------------------------------------------------------------------------------------------
Principal Amount LONG-TERM DEBT SECURITIES Market Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY OBLIGATIONS: 44.6%
------------------------------------------------------------
U.S. Treasury Notes
$ 500,000 6.875%, due 8/31/1999...................................... $ 509,531
1,500,000 6.250%, due 10/31/2001..................................... 1,526,718
700,000 7.250%, due 8/15/2004...................................... 756,875
---------
Total U.S. Treasury Obligations.......................... 2,793,124
---------
Total Long-Term Debt Securities (cost $5,906,154)........... 5,975,501
---------
Total Investments in Securities (cost $5,906,154+): 95.4%... 5,975,501
Other Assets less Liabilities: 4.6%......................... 285,268
---------
Net Assets: 100.0% ......................................... $ 6,260,789
=========
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
+Cost for Federal income tax purposes is the same.
Net unrealized appreciation consists of:
Gross unrealized appreciation............................... $ 69,580
Gross unrealized depreciation............................... (233)
---------
Net unrealized appreciation........................... $ 69,347
=========
</TABLE>
See accompanying Notes to Financial Statements.
24
<PAGE>
Kayne Anderson 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 maturity debt without the associated level
of risk.
Commentary:
- ----------
During the year, the Fund share's net asset value increased $0.10, from
$10.64 to $10.74. After fund expenses, the total-return, principal gain or loss
with income, was 4.26% for the Fund and 6.38% for the Lehman Brothers 5-year
Municipal Bond Index for the same time period.
As of mid-year, after slightly more than eight months of operations, fund
assets were fully invested in municipal, federally tax-exempt securities. By
year-end, the Fund was invested among eight different sectors within the
municipal bond market. The three largest sectors represented in the Fund were:
General Obligation (34%), Electric Utility (16%), and Transportation (13%). The
Fund was also invested in municipalities that are located in fourteen different
states and territories. The 3 largest states represented in the Fund were:
California (36%), New York (12%), and Washington (8%).
SECTOR DIVERSIFICATION
DECEMBER 31, 1997
GENERAL OBLIGATION 34%
ELECTRIC 16%
HOSPITAL 10%
HOUSING 4%
INDUSTRIAL DEVELOPMENT 3%
TRANSPORTATION 13%
EDUCATION 4%
PREREFUNDED 11%
CASH & EQUIVALENTS 5%
25
<PAGE>
Outlook:
- -------
We believe that 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 near future. We will seek to lengthen the
average maturity of the Fund as opportunities in the market arise.
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.
Kayne Anderson Lehman Brothers
Intermediate Five Year
Tax-Free Bond Municipal
Fund Bond Index
-------------- ---------------
10/18/96 $10,000 $10,000
12/31/96 10,002 10,240
03/31/97 9,989 10,234
06/30/97 10,160 10,772
09/30/97 10,306 11,252
12/31/97 10,428 11,642
Past performance is not predictive of future performance.
26
<PAGE>
Kayne Anderson Intermediate Tax-Free Bond Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at December 31, 1997
- --------------------------------------------------------------------------------------------------------
Principal Amount LONG-TERM MUNICIPAL DEBT: 94.7% Market Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Education: 3.5%
$205,000 Maricopa County, Arizona School District Series E, 5.550%,
dated 6/1/1993, due 7/1/2004..................................... $ 209,100
---------
Electric: 15.9%
200,000 Colorado Springs Utilities, 6.750%, dated 4/15/1991,
due 11/15/2005................................................... 219,250
100,000 Hillsborough, Florida Utilities, 7.000%, dated 9/1/1991,
due 8/1/2114..................................................... 111,080
200,000 Puerto Rico Electric Power Authority, 6.000%, dated 8/15/1995,
due 7/1/2000..................................................... 210,250
200,000 Piedmont Municipal Power Agency, 6.550%, dated 9/1/1996,
due 1/1/2016..................................................... 201,514
200,000 Tacoma Washington Electric System Revenue, 5.900%,
dated 9/1/1992, due 1/1/2005..................................... 213,750
---------
955,844
---------
General Obligation: 34.2%
200,000 California State, 5.900%, dated 2/1/1991, due 2/1/2000............ 207,250
250,000 California State, 5.375%, dated 3/1/1994, due 3/1/2006............ 265,000
200,000 California State Veterans Bond, 6.375%, dated 3/1/1995,
due 2/1/2027..................................................... 204,152
200,000 Hawaii State, 5.250%, dated 3/1/1997, due 3/1/2000................ 205,000
100,000 Los Angeles County, California Certificates of Participation,
5.800%, dated 11/1/1991, due 11/1/1998........................... 101,673
100,000 Los Angeles, California State Building Authority, 5.300%,
dated 12/1/1995, due 5/1/2001.................................... 103,750
250,000 Maryland State, 4.750%, dated 8/1/1997, due 8/1/2002.............. 256,875
250,000 Massachusetts State, 5.000%, dated 8/1/1997, due 8/1/2000......... 255,938
200,000 New York, New York, 5.000%, dated 7/28/1994, due 8/1/1998......... 201,480
250,000 Washoe County, Nevada, 6.750%, dated 3/15/1991,
due 3/15/2000.................................................... 258,290
---------
2,059,408
---------
</TABLE>
27
<PAGE>
Kayne Anderson Intermediate Tax-Free Bond Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at December 31, 1997, Continued
- --------------------------------------------------------------------------------------------------------
Principal Amount Market Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Hospital: 10.3%
$200,000 California Health Facility Financing Authority, 6.750%,
dated 10/1/1989, due 10/1/2019................................... $ 211,750
200,000 Dade County Health Facilities Authority, 6.600%, dated 3/1/1987,
due 8/15/2002.................................................... 204,518
200,000 New York Dormitory, 5.000%, dated 3/1/1997, due 8/15/2000......... 204,000
---------
620,268
---------
Housing: 3.5%
200,000 New York Urban Development, 6.000%, dated 1/1/1995,
due 1/1/2001..................................................... 209,750
---------
IDR / PCR: 3.4%
200,000 Matagorda County Navigation District, Texas, 7.700%,
dated 2/1/1989, due 2/1/2019.................................... 204,466
---------
Prerefunded: 10.9%
220,000 California State Franchise Tax, 6.900%, dated 7/1/1989,
due 10/1/2006.................................................... 234,850
150,000 Los Angeles Convention & Exhibit Center, 9.000%,
dated 12/1/1985, due 12/1/2020................................... 196,875
200,000 Washington Public Power Supply Systems, 7.625%,
dated 10/15/1990, due 7/1/2010................................... 223,250
---------
654,975
---------
Transportation: 13.0%
250,000 Albuquerque, New Mexico Airport, 6.500%, dated 4/15/1989,
due 7/1/2019..................................................... 253,082
200,000 Los Angeles, California Harbor Department Revenue, 6.000%,
dated 1/1/1995, due 8/1/2001..................................... 212,500
100,000 Orange County, California Local Transportation Authority, 5.750%,
dated 9/1/1996, due 2/15/2005.................................... 106,625
200,000 Orange County Airport, 5.500%, dated 4/2/1997, due 7/1/2002....... 210,000
---------
782,207
---------
Total Long-Term Municipal Debts (cost $5,643,511)................. 5,696,018
---------
</TABLE>
28
<PAGE>
Kayne Anderson Intermediate Tax-Free Bond Fund
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS at December 31, 1997, Continued
- --------------------------------------------------------------------------------------------------------
Principal Amount VARIABLE RATE MUNICIPAL DEBT: 3.0% Market Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
$ 40,000 California State, 3.90%*, dated 11/21/1994, due 8/1/2019.......... $ 40,000
40,000 New York, New York, 4.00%*, dated 10/14/1993,
due 9/30/2023.................................................... 40,000
100,000 Puerto Rico Telephone Authority, 3.660%*, due 1/16/2015........... 100,000
-----------
Total Variable Rate Municipal Debt (cost $179,979)................ 180,000
-----------
Total Investments in Securities (cost $5,823,490+): 97.7%......... 5,876,018
Other Assets less Liabilities: 2.3%............................... 139,185
-----------
Net Assets: 100.0% ............................................... $ 6,015,203
===========
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
+Cost for Federal income tax purposes is the same.
Net unrealized appreciation consists of:
Gross unrealized appreciation..................................... $ 52,987
Gross unrealized depreciation..................................... (459)
-----------
Net unrealized appreciation................................. $ 52,528
===========
</TABLE>
*Variable-rate securities are subject to a demand feature which reduces the
remaining maturity. The stated rate is the rate in effect on December 31, 1997.
See accompanying Notes to Financial Statements.
29
<PAGE>
Kayne Anderson Mutual Funds
<TABLE>
<CAPTION>
STATEMENTS OF ASSETS AND LIABILITIES at December 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Rising Small-Mid Cap
Dividends Rising Dividends
Fund Fund
-------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market value (cost $25,178,750, $6,067,704, $6,196,298,
$5,906,154 and $5,823,490, respectively) ............................................ $37,051,261 $ 6,426,125
Cash .................................................................................. 1,261,624 139,076
Receivables:
Investment securities sold ...................................................... -- 64,805
Dividends and interest .......................................................... 40,855 13,080
Prepaid expenses ...................................................................... 15,104 15,348
Due from investment advisor ........................................................... -- 1,531
Deferred organization expenses ........................................................ 15,458 16,203
----------- -----------
Total assets .............................................................. 38,384,302 6,676,168
----------- -----------
LIABILITIES
Payables:
Investment securities purchased ................................................. -- 120,306
Distributions to shareholders ................................................... 3,018,659 45,819
Due to investment advisor ............................................................. -- --
Other accrued expenses ................................................................ 83,119 16,092
----------- -----------
Total liabilities ......................................................... 3,101,778 182,217
----------- -----------
NET ASSETS .................................................................................. $35,282,524 $ 6,493,951
=========== ===========
Number of shares issued and outstanding (unlimited shares authorized without par value) 2,041,842 494,800
Net asset value, offering and redemption price per share .............................. $ 17.28 $ 13.12
=========== ===========
COMPOSITION OF NET ASSETS
Paid-in capital ....................................................................... $21,011,199 $ 6,135,310
Undistributed net investment income ................................................... -0- 220
Undistributed (accumulated) net realized gain (loss) on investments ................... 2,398,814 -0-
Net unrealized appreciation of investments ............................................ 11,872,511 358,421
----------- -----------
Net assets ................................................................ $35,282,524 $ 6,493,951
=========== ===========
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
------------------------------
International Intermediate
Rising Dividends Total Return
Fund Bond Fund
------------------------------
<S> <C> <C>
ASSETS
Investments in securities, at market value (cost $25,178,750, $6,067,704, $6,196,298,
$5,906,154 and $5,823,490, respectively) ............................................ $ 6,612,436 $ 5,975,501
Cash .................................................................................. 274,371 214,786
Receivables:
Investment securities sold ...................................................... 303,830 --
Dividends and interest .......................................................... 13,343 89,934
Prepaid expenses ...................................................................... 15,482 18,102
Due from investment advisor ........................................................... -- --
Deferred organization expenses ........................................................ 16,203 16,202
----------- -----------
Total assets .............................................................. 7,235,665 6,314,525
----------- -----------
LIABILITIES
Payables:
Investment securities purchased ................................................. 155,688 --
Distributions to shareholders ................................................... 50,715 33,777
Due to investment advisor ............................................................. 163 2,812
Other accrued expenses ................................................................ 16,803 17,147
----------- -----------
Total liabilities ......................................................... 223,369 53,736
----------- -----------
NET ASSETS .................................................................................. $ 7,012,296 $ 6,260,789
=========== ===========
Number of shares issued and outstanding (unlimited shares authorized without par value) 556,084 582,362
Net asset value, offering and redemption price per share .............................. $ 12.61 $ 10.75
=========== ===========
COMPOSITION OF NET ASSETS
Paid-in capital ....................................................................... $ 6,596,158 $ 6,195,402
Undistributed net investment income ................................................... -0- -0-
Undistributed (accumulated) net realized gain (loss) on investments ................... -0- (3,960)
Net unrealized appreciation of investments ............................................ 416,138 69,347
----------- -----------
Net assets ................................................................ $ 7,012,296 $ 6,260,789
=========== ===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
------------
Intermediate
Tax-Free
Bond Fund
------------
<S> <C>
ASSETS
Investments in securities, at market value (cost $25,178,750, $6,067,704, $6,196,298,
$5,906,154 and $5,823,490, respectively) ............................................ $ 5,876,018
Cash .................................................................................. 8,709
Receivables:
Investment securities sold ...................................................... --
Dividends and interest .......................................................... 126,338
Prepaid expenses ...................................................................... 18,155
Due from investment advisor ........................................................... 8,490
Deferred organization expenses ........................................................ 16,202
-----------
Total assets .............................................................. 6,053,912
-----------
LIABILITIES
Payables:
Investment securities purchased ................................................. --
Distributions to shareholders ................................................... 23,040
Due to investment advisor ............................................................. --
Other accrued expenses ................................................................ 15,669
-----------
Total liabilities ......................................................... 38,709
-----------
NET ASSETS .................................................................................. $ 6,015,203
===========
Number of shares issued and outstanding (unlimited shares authorized without par value) 560,136
Net asset value, offering and redemption price per share .............................. $ 10.74
===========
COMPOSITION OF NET ASSETS
Paid-in capital ....................................................................... $ 5,964,128
Undistributed net investment income ................................................... -0-
Undistributed (accumulated) net realized gain (loss) on investments ................... (1,453)
Net unrealized appreciation of investments ............................................ 52,528
-----------
Net assets ................................................................ $ 6,015,203
===========
</TABLE>
See accompanying Notes to Financial Statements.
31
<PAGE>
Kayne Anderson Mutual Funds
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS - For the Year Ended December 31, 1997
- -------------------------------------------------------------------------------------------------------------------------------
Rising Small-Mid Cap International
Dividends Rising Dividends Rising Dividends
Fund Fund Fund
----------------------------------------------
<S> <C> <C> <C>
INVESTMENT INCOME:
Income:
Dividends ...................................................... $ 573,190 $ 56,993 $ 67,498
Interest ....................................................... 53,161 12,992 14,941
---------- ---------- ----------
Total income ............................................. 626,351 69,985 82,439
---------- ---------- ----------
Expenses:
Investment advisory fees ....................................... 271,652 34,033 39,034
Custodian fees ................................................. 11,399 5,301 3,526
Administration fees ............................................ 19,943 17,980 17,980
Fund accounting fees ........................................... 31,307 31,568 39,296
Transfer agent fees ............................................ 17,416 16,662 16,662
Legal fees ..................................................... 10,010 739 739
Insurance ...................................................... 1,296 169 179
Audit fees ..................................................... 17,599 4,008 4,008
Miscellaneous expenses ......................................... 14,436 1,895 1,895
Reports to shareholders ........................................ 3,000 1,083 1,083
Registration fees .............................................. 19,285 8,392 8,392
Trustees' fees ................................................. 3,000 3,513 3,513
Amortization of deferred organization expenses ................. 7,672 4,216 4,216
---------- ---------- ----------
Total expenses ........................................... 428,015 129,559 140,523
Less: Expenses reimbursed/waived ......................... -- (77,861) (83,125)
Indirectly paid expenses ........................... -- -- --
---------- ---------- ----------
Net expenses ............................................. 428,015 51,698 57,398
---------- ---------- ----------
Net investment income .............................. 198,336 18,287 25,041
---------- ---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments .............................. 5,093,470 237,764 20,183
Net change in unrealized appreciation of investments ................. 4,378,552 336,930 397,529
---------- ---------- ----------
Net gain on investments .................................. 9,472,022 574,694 417,712
---------- ---------- ----------
Net Increase in Net Assets Resulting from Operations $9,670,358 $ 592,981 $ 442,753
========== ========== ==========
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
----------------------------
Intermediate Intermediate
Total Return Tax-Free
Bond Fund Bond Fund
----------------------------
<S> <C> <C>
INVESTMENT INCOME:
Income:
Dividends ...................................................... $ -- $ --
Interest ....................................................... 343,994 228,548
---------- ----------
Total income ............................................. 343,994 228,548
---------- ----------
Expenses:
Investment advisory fees ....................................... 27,332 27,588
Custodian fees ................................................. 4,799 2,538
Administration fees ............................................ 17,718 17,718
Fund accounting fees ........................................... 30,541 35,559
Transfer agent fees ............................................ 16,662 18,062
Legal fees ..................................................... 968 968
Insurance ...................................................... 322 324
Audit fees ..................................................... 4,009 4,009
Miscellaneous expenses ......................................... 2,100 1,894
Reports to shareholders ........................................ 1,017 1,017
Registration fees .............................................. 8,392 8,392
Trustees' fees ................................................. 3,863 3,863
Amortization of deferred organization expenses ................. 4,216 4,216
---------- ----------
Total expenses ........................................... 121,939 126,148
Less: Expenses reimbursed/waived ......................... (70,713) (40,123)
Indirectly paid expenses ........................... -- (34,315)
---------- ----------
Net expenses ............................................. 51,226 51,710
---------- ----------
Net investment income .............................. 292,768 176,838
---------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments .............................. (5,750) (1,453)
Net change in unrealized appreciation of investments ................. 102,483 58,234
---------- ----------
Net gain on investments .................................. 96,733 56,781
---------- ----------
Net Increase in Net Assets Resulting from Operations $ 389,501 $ 233,619
========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
33
<PAGE>
Kayne Anderson Mutual Funds
<TABLE>
<CAPTION>
STATEMENTS OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
Rising Small-Mid Cap
Dividends Rising Dividends
Fund Fund
------------------------------------------------------------
Year Year Year 10/18/96*
INCREASE IN NET ASSETS FROM: Ended Ended Ended to
12/31/97 12/31/96 12/31/97 12/31/96
------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income ............................................. $ 198,336 $ 140,942 $ 18,287 $ 1,406
Net realized gain (loss) on investments sold ...................... 5,093,470 1,246,299 237,764 --
Net change in unrealized appreciation (depreciation) of investments 4,378,552 2,813,912 336,930 21,491
------------ ------------ ------------ ------------
Net increase in net assets resulting from operations ........ 9,670,358 4,201,153 592,981 22,897
------------ ------------ ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income ............................................. (222,979) (131,956) (23,419) (1,102
Net realized gain on investments .................................. (2,795,680) (1,145,275) (22,399) --
------------ ------------ ------------ ------------
Total distributions to shareholders ......................... (3,018,659) (1,277,231) (45,818) (1,102
------------ ------------ ------------ ------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ......................................... 11,725,624 4,811,059 8,244,623 759,908
Net asset value of shares issued on reinvestment of distributions . -- 1,266,895 -- 1,078
Cost of shares redeemed ........................................... (9,212,376) (3,497,629) (3,105,616) --
------------ ------------ ------------ ------------
Net increase from capital share transactions ................ 2,513,248 2,580,325 5,139,007 760,986
------------ ------------ ------------ ------------
Total increase in net assets ................................ 9,164,947 5,504,247 5,686,170 782,781
NET ASSETS
Beginning of period ............................................... 26,117,577 20,613,330 807,781 25,000
------------ ------------ ------------ ------------
End of period ..................................................... $ 35,282,524 $ 26,117,577 $ 6,493,951 $ 807,781
============ ============ ============ ============
CHANGE IN SHARES
Shares sold ....................................................... 752,018 349,950 656,347 70,592
Shares issued in reinvestment of distributions .................... -- 86,655 -- 98
Shares redeemed ................................................... (534,351) (245,124) (234,584) --
------------ ------------ ------------ ------------
Net increase ................................................ 217,667 191,481 421,763 70,690
============ ============ ============ ============
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------
International Intermediate
Rising Dividends Total Return
Fund Bond Fund
-------------------------------------------------------------
Year 10/18/96* Year 10/28/96*
INCREASE IN NET ASSETS FROM: Ended to Ended to
12/31/97 12/31/96 12/31/97 12/31/96
-------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATIONS
Net investment income ............................................. $ 25,041 $ 1,366 $ 292,768 $ 41,630
Net realized gain (loss) on investments sold ...................... 20,183 -- (5,750) --
Net change in unrealized appreciation (depreciation) of investments 397,529 18,609 102,483 (33,135)
------------ ------------ ------------ ------------
Net increase in net assets resulting from operations ........ 442,753 19,975 389,501 8,495
------------ ------------ ------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income ............................................. (30,206) (1,249) (298,892) (38,764)
Net realized gain on investments .................................. (20,183) -- -- --
------------ ------------ ------------ ------------
Total distributions to shareholders ......................... (50,389) (1,249) (298,892) (38,764)
------------ ------------ ------------ ------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ......................................... 6,170,378 1,009,948 933,235 5,000,000
Net asset value of shares issued on reinvestment of distributions . 396 1,155 261,111 38,764
Cost of shares redeemed ........................................... (605,671) -- (57,661) --
------------ ------------ ------------ ------------
Net increase from capital share transactions ................ 5,565,103 1,011,103 1,136,685 5,038,764
------------ ------------ ------------ ------------
Total increase in net assets ................................ 5,957,467 1,029,829 1,227,294 5,008,495
NET ASSETS
Beginning of period ............................................... 1,054,829 25,000 5,033,495 25,000
------------ ------------ ------------ ------------
End of period ..................................................... $ 7,012,296 $ 1,054,829 $ 6,260,789 $ 5,033,495
============ ============ ============ ============
CHANGE IN SHARES
Shares sold ....................................................... 507,753 94,185 87,412 469,484
Shares issued in reinvestment of distributions .................... 28 115 24,683 3,636
Shares redeemed ................................................... (48,344) -- (5,200) --
------------ ------------ ------------ ------------
Net increase ................................................ 459,437 94,300 106,895 473,120
============ ============ ============ ============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
----------------------------
Intermediate
Tax-Free
Bond Fund
----------------------------
Year 10/28/96*
INCREASE IN NET ASSETS FROM: Ended to
12/31/97 12/31/96
----------------------------
<S> <C> <C>
OPERATIONS
Net investment income ............................................. $ 176,838 $ 5,308
Net realized gain (loss) on investments sold ...................... (1,453) --
Net change in unrealized appreciation (depreciation) of investments 58,234 (5,706)
------------ ------------
Net increase in net assets resulting from operations ........ 233,619 (398)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income ............................................. (181,326) (5,868)
Net realized gain on investments .................................. -- --
------------ ------------
Total distributions to shareholders ......................... (181,326) (5,868)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold ......................................... 787,429 5,104,514
Net asset value of shares issued on reinvestment of distributions . 157,563 1,192
Cost of shares redeemed ........................................... (106,522) --
------------ ------------
Net increase from capital share transactions ................ 838,470 5,105,706
------------ ------------
Total increase in net assets ................................ 890,763 5,099,440
NET ASSETS
Beginning of period ............................................... 5,124,440 25,000
------------ ------------
End of period ..................................................... $ 6,015,203 $ 5,124,440
============ ============
CHANGE IN SHARES
Shares sold ....................................................... 73,658
479,298
Shares issued in reinvestment of distributions .................... 14,770 112
Shares redeemed ................................................... (10,049) --
------------ ------------
Net increase ................................................ 78,379 479,410
============ ============
</TABLE>
*Commencement of operations.
See accompanying Notes to Financial Statements.
35
<PAGE>
Kayne Anderson Mutual Funds
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
For a capital share outstanding throughout each period
- ------------------------------------------------------------------------------------------------------------------
Rising
Dividends
Fund
-------------------------------------------------
Year Year 5/1/95*
Ended Ended to
12/31/97 12/31/96 12/31/95
-------------------------------------------------
<S> <C> <C> <C>
Net asset value, beginning of period ......................... $ 14.32 $ 12.63 $ 10.65
------------ ------------ ------------
Income from investment operations:
Net investment income .................................. 0.10 0.08 0.07
Net realized and unrealized gain (loss) on investments . 4.34 2.35 2.13
------------ ------------ ------------
Total income from investment operations ...................... 4.44 2.43 2.20
------------ ------------ ------------
Less distributions:
Dividends from net investment income ................... (0.11) (0.08) (0.07)
Distributions from net capital gains ................... (1.37) (0.66) (0.15)
------------ ------------ ------------
Total distributions .......................................... (1.48) (0.74) (0.22)
------------ ------------ ------------
Net asset value, end of period ............................... $ 17.28 $ 14.32 $ 12.63
============ ============ ============
Total return ................................................. 30.99% 19.09% 20.65%**
Net assets, end of period (in 000's) ......................... $ 35,283 $ 26,118 $ 20,613
Ratio of expenses to average net assets:
Before expense reimbursement ........................... -- -- --
After expense reimbursement ............................ 1.18% 1.37% 1.31%+
After expense reimbursement and expenses paid indirectly -- -- --
Ratio of net investment income to average net assets:
(net of expense reimbursement, if applicable) .......... 0.55% 0.59% 0.94%+
Portfolio turnover rate ...................................... 51% 23% 28%
Average commission paid per share*** ......................... $ .0600 $ .0600 --
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------
Small-Mid Cap International
Rising Dividends Rising Dividends
Fund Fund
---------------------------------------------------------------
Year 10/18/96* Year 10/18/96*
Ended to Ended to
12/31/97 12/31/96 12/31/97 12/31/96
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ......................... $ 11.06 $ 10.65 $ 10.91 $ 10.65
------------ ------------ ------------ ------------
Income from investment operations:
Net investment income .................................. 0.02 0.02 0.04 0.01
Net realized and unrealized gain (loss) on investments . 2.14 0.41 1.75 0.26
------------ ------------ ------------ ------------
Total income from investment operations ...................... 2.16 0.43 1.79 0.27
------------ ------------ ------------ ------------
Less distributions:
Dividends from net investment income ................... (0.05) (0.02) (0.05) (0.01)
Distributions from net capital gains ................... (0.05) 0.00 (0.04) 0.00
------------ ------------ ------------ ------------
Total distributions .......................................... (0.10) (0.02) (0.09) (0.01)
------------ ------------ ------------ ------------
Net asset value, end of period ............................... $ 13.12 $ 11.06 $ 12.61 $ 10.91
============ ============ ============ ============
Total return ................................................. 19.46% 4.00%** 16.42% 2.56%**
Net assets, end of period (in 000's) ......................... $ 6,494 $ 808 $ 7,012 $ 1,055
Ratio of expenses to average net assets:
Before expense reimbursement ........................... 3.22% 18.91%+ 3.41% 15.74%+
After expense reimbursement ............................ 1.30% 1.30%+ 1.40% 1.40%+
After expense reimbursement and expenses paid indirectly -- -- -- --
Ratio of net investment income to average net assets:
(net of expense reimbursement, if applicable) .......... 0.45% 1.58%+ 0.61% 1.14%+
Portfolio turnover rate ...................................... 47% 0% 29% 0%
Average commission paid per share*** ......................... $ .0637 $ .0955 $ .0666 $ .0936
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------
Intermediate Intermediate
Total Return Tax-Free
Bond Fund Bond Fund
--------------------------------------------------------
Year 10/28/96* Year 10/28/96*
Ended to Ended to
12/31/97 12/31/96 12/31/97 12/31/96
--------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ......................... $ 10.59 $ 10.65 $ 10.64 $ 10.65
------------ ------------ ------------ ------------
Income from investment operations:
Net investment income .................................. 0.56 0.09 0.34 0.01
Net realized and unrealized gain (loss) on investments . 0.18 (0.07) 0.11 (0.01)
------------ ------------ ------------ ------------
Total income from investment operations ...................... 0.74 0.02 0.45 0.00
------------ ------------ ------------ ------------
Less distributions:
Dividends from net investment income ................... (0.58) (0.08) (0.35) (0.01)
Distributions from net capital gains ................... 0.00 0.00 0.00 0.00
------------ ------------ ------------ ------------
Total distributions .......................................... (0.58) (0.08) (0.35) (0.01)
------------ ------------ ------------ ------------
Net asset value, end of period ............................... $ 10.75 $ 10.59 $ 10.74 $ 10.64
============ ============ ============ ============
Total return ................................................. 7.19% 0.20%** 4.26% 0.02%**
Net assets, end of period (in 000's) ......................... $ 6,261 $ 5,033 $ 6,015 $ 5,124
Ratio of expenses to average net assets:
Before expense reimbursement ........................... 2.23% 2.10%+ 2.29% 2.08%+
After expense reimbursement ............................ 0.95% 0.95%+ 1.56% 1.81%+
After expense reimbursement and expenses paid indirectly -- -- 0.95% 0.95%+
Ratio of net investment income to average net assets:
(net of expense reimbursement, if applicable) .......... 5.35% 4.72%+ 2.58% 0.60%+
Portfolio turnover rate ...................................... 27% 0% 40% 0%
Average commission paid per share*** ......................... -- -- -- --
</TABLE>
*Commencement of operations.
**Not annualized.
***A fund is required to disclose its average commission rate paid per share for
security trades on which commissions are charged. This amount may vary from fund
to fund depending on the mix of trades executed in various markets where trading
practices and commission structures may differ. This rule took effect on
September 30, 1996 and is
not required for periods ending prior to that date.
+Annualized.
See accompanying Notes to Financial Statements.
37
<PAGE>
Kayne Anderson Mutual Funds
NOTES TO FINANCIAL STATEMENTS at December 31, 1997
- --------------------------------------------------------------------------------
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 as a diversified, open-end management investment company. The Trust
currently consists of five seperate 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, LLC, 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 statement of 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 total 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.
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.
38
<PAGE>
Kayne Anderson Mutual Funds
NOTES TO FINANCIAL STATEMENTS at December 31, 1997, Continued
- --------------------------------------------------------------------------------
A. Security Valuation: The Fund's 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 Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required. At December 31, 1997 the Intermediate Total
Return Bond Fund and the Intermediate Tax-Free Bond Fund had capital
loss carryforwards available for Federal income tax purposes of
$3,960 and $1,083, respectively, which expire in 2005.
C. Security Transactions, Dividends and Distributions: As is common in
the industry, security transactions are accounted for on the trade
date. Interest income is recognized on the accrual basis. Bond
discounts and premiums are amortized over their respective lives.
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
Fund's shares will be borne by the Fund 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 with respect to expenses that affect
the reported amounts of assets and liabilities at the date of the
financial statements, as well as the reported amounts of 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
January 1, 1997 to December 31, 1997 were reduced by $34,315 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, 1997, Kayne Anderson Investment
Management, LLC (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. The Advisor is entitled to a monthly
fee at the following annual rates based upon the average daily net assets of the
Funds:
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%
39
<PAGE>
Kayne Anderson Mutual Funds
NOTES TO FINANCIAL STATEMENTS at December 31, 1997, Continued
- --------------------------------------------------------------------------------
Although not required to do so, the 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 expenses 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:
Rising Dividends Fund.......................................... 1.20%
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%
Pursuant to these expense limitation provisions, the Advisor reimbursed
the Small-Mid Cap Rising Dividends Fund $77,861, the International Rising
Dividends Fund $83,125, the Intermediate Total Return Bond Fund $70,713, and the
Intermediate Tax-Free Bond Fund $40,123 during the year ended December 31,
1997.
The Funds executed certain investment security transactions through KA
Associates, an affiliate of the Funds' Advisor. Commissions paid by the Funds to
this affiliate during the year ended December 31, 1997 were as follows:
International Rising Dividends Fund............................ $9,627
Small-Mid Cap Rising Dividends Fund............................ $8,439
Investment Company Administration Corporation (the "Administrator") acts
as the Funds' Administrator under an Administration Agreement. The Administrator
prepares various federal and state regulatory filings, reports and returns for
the Funds; prepares reports and materials to be supplied to the trustees;
monitors the activities of the Funds' custodian, transfer agent and accountants;
coordinates the preparation and payment of Fund expenses and reviews the Funds'
expense accruals. For its services, each Fund has agreed to pay the
Administrator an annual fee equal to 0.075% of the first $40 million of its
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 Distributor, Inc. (the "Distributor") acts as the Funds'
principal underwriter in a continuous public offering of the Funds' shares. The
Distributor is an affiliate of the Administrator.
Certain officers and Trustees of the Fund are also officers and/or
directors of the Advisor.
NOTE 4 - PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 1997, the cost of purchases and the
proceeds from sales of securities, excluding short-term securities and U.S.
Government securities were as follows:
40
<PAGE>
Kayne Anderson Mutual Funds
NOTES TO FINANCIAL STATEMENTS at December 31, 1997, Continued
- --------------------------------------------------------------------------------
Fund Purchases Sales
--------- -----
Rising Dividends Fund $19,529,312 $17,763,312
Small-Mid Cap Rising Dividends Fund $ 7,042,181 $ 1,761,082
International Rising Dividends Fund $ 6,491,054 $ 1,078,822
Intermediate Total Return Bond Fund $ 2,284,876 $ 51,171
Intermediate Tax-Free Bond Fund $ 5,497,399 $ 2,000,962
The Intermediate Total Return Bond Fund purchased $510,039, and sold
$1,321,383, respectively, of U.S. Government securities. There were no purchases
or sales of U.S. Government securities by Rising Dividends Fund, Small-Mid Cap
Rising Dividends Fund, International Rising Dividends Fund, and Intermediate
Tax-Free Bond Fund.
During the year ended December 31, 1997, the Small-Mid Cap Rising
Dividends Fund realized gains in the amount of $215,365 from the "in-kind"
distribution of appreciated securities to a redeeming shareholder.
41
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
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 portfolio of investments, as of December 31, 1997, and the
related statement of operations, the statements of changes in net assets, and
the financial highlights for the year then ended. These financial statements and
financial highlights are the responsibility of Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit. The statements of changes in net assets
for the year ended December 31, 1996 and 1995 were audited by other auditors
whose report dated February 4, 1997 expressed an unqualified opinion on the
statements of changes in net assets and financial highlights.
We conducted our audit 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, 1997, 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 our
audit provides 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 the Kayne Anderson Mutual Funds as of December 31, 1997,
the results of their operations, the changes in their net assets, and the
financial highlights for the year then ended in conformity with generally
accepted accounting principles.
BRIGGS, BUNTING & DOUGHERTY, LLP
Philadelphia, Pennsylvania
January 27, 1998
<PAGE>
[This page intentionally left blank.]
<PAGE>
Advisor
Kayne Anderson Investment Management, LLC
1800 Avenue of the Stars, 2nd Floor
Los Angeles, California 90067
(310) 556-2721
o
Distributor
First Fund Distributors, Inc.
4455 East Camelback Road, Suite 261E
Phoenix, Arizona 85018
o
Custodian and Transfer Agent
Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02116
o
Auditors
Briggs, Bunting & Dougherty, LLP
Two Logan Square, Suite 2121
Philadelphia, Pennsylvania 19103
o
Legal Counsel
Paul, Hastings, Janofsky & Walker, LLP
345 California Street, 29th Floor
San Francisco, California 94104
This report is intended for the shareholders of the Fund and may not be used as
sales literature unless preceded or accompanied by a current prospectus.
Past performance results shown in this report should not be considered a
representation of future performance. Share price and returns will fluctuate so
that shares, when redeemed, may be worth more or less than their original cost.
Statements and other information herein are dated and are subject to change.
Kayne Anderson
Mutual Funds
Annual Report
December 31, 1997
