KAYNE ANDERSON
Annual Report
December 31, 1998
<PAGE>
KAYNE ANDERSON
TABLE OF CONTENTS
LETTER TO SHAREHOLDERS.................................................... 2
INVESTMENT ADVISER COMMENTS AND PORTFOLIOS OF INVESTMENTS
Rising Dividends Fund.................................................. 3
Small Cap Rising Dividends Fund........................................ 8
International Rising Dividends Fund.................................... 13
Intermediate Total Return Bond Fund.................................... 19
Intermediate Tax-Free Bond Fund........................................ 24
STATEMENTS OF ASSETS AND LIABILITIES...................................... 30
STATEMENTS OF OPERATIONS.................................................. 32
STATEMENTS OF CHANGES IN NET ASSETS....................................... 34
FINANCIAL HIGHLIGHTS...................................................... 36
NOTES TO FINANCIAL STATEMENTS............................................. 40
We Focus On Quality
<PAGE>
Dear Shareholder:
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.
The enclosed annual report contains a commentary and year-end financial
statements for each of our mutual funds. In each commentary, the portfolio
manager reviews the objectives, 1998 performance and outlook for the fund. 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 our
mutual funds to you 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 no-load mutual
funds. We are committed to assisting you with the realization of your 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
<PAGE>
KAYNE ANDERSON RISING DIVIDENDS FUND
OBJECTIVE:
The Rising Dividends Fund (the "Fund") is invested in a diversified
portfolio of high-quality, growing companies that are leaders in their
respective industries. These companies are managed by exceptional people who are
committed to maximizing shareholder value.
The investment goals of the Fund are to provide competitive returns over a
full market cycle, while assuming less risk than the market. The fund is also
structured to provide rising dividend income over the long term.
COMMENTARY:
For the year ended December 31, 1998, the return for the Fund was 14.14%,
compared with a 14.52% return for the average equity fund. For the three years
ended December 31, 1998, the Fund produced an annual average return of 21.2%,
compared with 19.5% for the average equity fund. (Average equity fund returns
are as reported by Lipper Analytical Services, Inc.)
During the second half of the year, the portfolio achieved strong
performance from a number of holdings, including in particular Intel and
Electronic Data Systems. Both companies have continued to announce positive news
in 1999 - Intel released better than expected fourth quarter earnings results
and Electronic Data Systems has disclosed several key strategic partnerships and
hired a well-regarded executive as their new CEO. Overall, however, our
portfolio continues to be overweighted in financial services and consumer
staples.
After the U.S equity markets suffered in the third quarter in response to
the turmoil in some international markets and well-documented domestic political
events, investors regained confidence in large cap domestic stocks in the fourth
quarter, as these stocks rallied to finish the year with a fourth consecutive
double-digit annual return. At this time of investor ebullience, we would
emphasize the following:
1. We encourage you not to spend time worrying about the "market," because
the Rising Dividends Fund is not the market. Rather, this portfolio consists of
some of the highest quality companies in the world, selected for their strong
competitive positions in their respective industries, consistent earnings
growth, solid balance sheets and a commitment to sharing their growing cash
flows with shareholders. Our research work has led us to believe that, in both
bull and bear environments, these businesses are sound and their management
teams are excellent stewards of our capital.
2. We spend our time continually evaluating both macroeconomic and
microeconomic factors in relation to the companies we own. For example, we
forecast the impact of recession or increased competition for each major
business division within each company. We monitor our price limit on each stock
for both relative and absolute valuation and compare the attractiveness of
alternative investments in each economic sector.
3. Your job as an investor in the Fund is to assure yourself that your
asset allocation is appropriate. That is, you should be cognizant that markets
can be volatile over the short run, and that the assets that you have in stocks
should be those that you can dedicate to the Fund for two years or more. As the
manager of the Fund, we feel confident that we are invested in companies that
are growing consistently and creating shareholder value. However, these rewards
come over time, and one must be patient enough to allow the management of these
companies the time to accomplish their business goals.
3
<PAGE>
KAYNE ANDERSON RISING DIVIDENDS FUND
OUTLOOK:
We always encourage clients to maintain the long view and to approach the
vagaries of financial markets as short-term phenomena that are to be used to an
advantage, such as adding to equities during times of distress, rather than a
cause for serious concern. Whether we find ourselves in calm or turbulent times,
avoiding the tendency to panic on the downside or overreach on the upside is the
right course of action. In any event, we remain optimistic about the future for
the Fund, and appropriately cautious and thoughtful about world events that may
impact investors.
As we continue to focus our research efforts on high quality,
industry-leading growth companies with shareholder-friendly management, we are
confident that our diversified portfolio of these superior companies will offer
very satisfying returns to investors over the long-term.
[PERFORMANCE CHART]
Average Annual Total Return
for the periods ending December 31, 1998
One Year Since Inception (5/1/95)
14.14% 23.16%
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE
KAYNE ANDERSON RISING DIVIDENDS FUND AND THE S & P 500 INDEX
KAYNE ANDERSON RISING
DIVIDENDS FUND S & P 500
-------------- ---------
May-95 $10,000.00 $10,000.00
Jun-95 10,394.37 10,592.89
Sep-95 11,089.20 11,364.10
Dec-95 12,064.79 11,977.40
Mar-96 12,809.88 12,552.02
Jun-96 13,249.30 13,040.68
Sep-96 13,688.71 13,365.03
Dec-96 14,367.38 14,404.00
Mar-97 14,718.96 14,722.51
Jun-97 17,137.01 17,211.92
Sep-97 17,879.48 18,420.25
Dec-97 18,821.01 18,870.42
Mar-98 21,086.50 21,423.99
Jun-98 21,500.39 22,047.99
Sep-98 18,510.86 19,776.18
Dec-98 21,482.90 23,902.89
Past performance is not predictive of future performance.
4
<PAGE>
KAYNE ANDERSON RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998
- --------------------------------------------------------------------------------
Shares COMMON STOCKS: 99.4% Market Value
- --------------------------------------------------------------------------------
BASIC MATERIALS / CHEMICALS: 3.9%
32,550 PPG Industries, Inc. ............................ $1,896,038
----------
CAPITAL GOODS / ELECTRICAL EQUIPMENT: 8.3%
31,300 Emerson Electric Company ........................ 1,893,651
20,970 General Electric Company ........................ 2,140,250
----------
4,033,901
----------
CONSUMER CYCLICAL / ENTERTAINMENT & LEISURE: 3.9%
62,770 The Walt Disney Company ......................... 1,883,101
----------
CONSUMER CYCLICAL / RESTAURANTS: 4.2%
26,450 McDonald's Corporation .......................... 2,026,731
----------
CONSUMER CYCLICAL / SERVICES: 3.1%
43,480 Equifax, Inc. ................................... 1,486,473
----------
CONSUMER STAPLES / CONSUMER PRODUCTS: 10.7%
43,990 Gillette Company ................................ 2,125,267
18,570 Kimberly-Clark Corporation ...................... 1,012,065
22,500 Procter & Gamble Company ........................ 2,054,531
----------
5,191,863
----------
CONSUMER STAPLES / FOODS: 10.1%
34,680 BestFoods ....................................... 1,846,710
15,210 Hershey Foods Corporation ....................... 945,872
23,540 Wm. Wrigley, Jr., Company ....................... 2,108,301
----------
4,900,883
----------
CAPITAL GOODS / MANUFACTURING (DIVERSIFIED): 3.6%
30,320 Illinois Tool Works Inc. ........................ 1,758,560
----------
ENERGY / PETROLEUM - INTERNATIONAL: 8.5%
12,000 Exxon Corporation ............................... 877,500
13,190 Mobil Corporation ............................... 1,149,178
43,830 Royal Dutch Petroleum NY Shares ................. 2,098,361
----------
4,125,039
----------
5
<PAGE>
KAYNE ANDERSON RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998, CONTINUED
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------
FINANCIAL / BANKING: 4.3%
53,040 Wells Fargo & Company ........................... $ 2,118,285
-----------
FINANCIAL / FINANCIAL SERVICES: 7.4%
46,050 Franklin Resources, Inc. ........................ 1,473,601
30,300 State Street Boston Corporation ................. 2,107,743
-----------
3,581,344
-----------
FINANCIAL / INSURANCE: 4.1%
33,980 Marsh & McLennan Companies, Inc. ................ 1,985,707
-----------
HEALTH CARE / DRUGS & HOSPITAL SUPPLIES: 12.5%
24,110 Johnson & Johnson ............................... 2,022,226
30,250 Medtronic, Inc. ................................. 2,246,062
12,410 Merck & Co., Inc. ............................... 1,832,802
-----------
6,101,090
-----------
TECHNOLOGY / COMPUTERS & OFFICE EQUIPMENT: 4.5%
32,400 Hewlett-Packard Company ......................... 2,213,326
-----------
TECHNOLOGY / DATA SERVICES: 5.5%
26,090 Automatic Data Processing, Inc. ................. 2,092,091
11,300 Electronic Data Systems Corporation ............. 567,824
-----------
2,659,915
-----------
TECHNOLOGY / SEMICONDUCTORS: 4.8%
19,810 Intel Corporation ............................... 2,348,723
-----------
Total Common Stocks (cost $36,536,733) .......... 48,310,979
-----------
Total Investments in Securities (cost
$36,536,733+): 99.4% ......................... 48,310,979
Other Assets less Liabilities: 0.6% ............. 269,779
-----------
NET ASSETS: 100.0% .............................. $48,580,758
===========
6
<PAGE>
KAYNE ANDERSON RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998, CONTINUED
- --------------------------------------------------------------------------------
+ Cost for Federal income tax purposes is the same.
Net unrealized appreciation consists of:
Gross unrealized appreciation................ $12,419,788
Gross unrealized depreciation................ (645,542)
-----------
Net unrealized appreciation............ $11,774,246
===========
7
See accompanying Notes to Financial Statements.
<PAGE>
KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND
OBJECTIVE:
The objective of the KAYNE ANDERSON SMALL CAP FUND is long-term capital
appreciation. The Fund seeks to achieve this objective by:
+ Building a diversified portfolio of the next generation of high quality
"blue chip" companies.
+ Seeking returns typical of small-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 seeking to assume less financial and stock market risk.
The following table demonstrates our commitment to these objectives:
<TABLE>
<CAPTION>
KAYNE RUSSELL
ANDERSON 2500
SMALL CAP INDEX
--------- -----
QUALITY
<S> <C> <C> <C>
Return on Equity - Past 5 Years 22.9% 14.6% MORE PROFITABLE
Long-Term Debt/Total Capital 32.9% 37.5% LESS FINANCIAL RISK
Interest Expense Coverage 10.5X 5.5X LESS FINANCIAL RISK
Earnings Variance - Past 10 Years 20.0% 61.4% MORE DEPENDABLE
A Rated by S&P 71.0% 10.1% BETTER QUALITY
GROWTH
Earnings Per Share Growth - Past 5 Years 16.3% 16.6% RECOVERY
Earnings Per Share Growth - Past 10 Years 16.4% 8.3% RECESSION
Dividend Per Share Growth - Past 5 Years 16.4% 8.9% RECOVERY
Dividend Per Share Growth - Past 10 Years 14.5% 5.3% RECESSION
Capital Generation - {ROE x (1-Payout)} 16.3% 11.0% FASTER GROWTH
VALUE
P/E Ratio - Latest 12 Months 22.5 24.9 BETTER VALUE
Dividend Yield 1.7% 1.3% BETTER INCOME
MARKET CHARACTERISTICS
$ Weighted Average Market Capitalization $1,100 million* $880 million COMPARABLE SIZE
Monthly Standard Deviation - Since Inception 12.3% 15.4% LESS MARKET RISK
</TABLE>
Note: Data as of December 31, 1998 and is subject to change.
Data is obtained from the Frank Russell Company and is assumed to be reliable.
* Excludes one company over $3 billion in market cap that we are looking to
replace.
S&P 500 standard deviation, a generally accepted measure of investment risk, is
12.3%.
8
<PAGE>
KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND
COMMENTARY:
Small stock investors experienced a wild ride during the second half of 1998. In
the third quarter alone, the Russell 2000 Index lost over 20%. Fortunately, the
fund was down less than half that amount, but this type of market environment
creates an opportune time to consider how much risk is being assumed to generate
investment returns. Most investors manage risk through diversification. We agree
that diversification is important and we manage a diversified portfolio. But our
primary tool for controlling risk is quality - quality of the businesses and
financial results of the companies we are willing to invest in. Because of the
strength of the business franchise and financial results of our companies, they
tend to grow in economic expansions and recessions alike. The chart above shows
that while the Russell 2000 Index gave back half a decade's earnings growth in
the 1991 recession (8.3% EPS growth over the past 10 years vs. 16.6% over the
past 5 years), our portfolio of companies has grown earnings consistently (16.4%
over the past 10 years vs. 16.3% over the past 5 years). Earnings for small
companies, as measured by the Russell 2000 index, were down in 1998. Small
stocks were down as well. Earnings for our portfolio of small companies were up
in 1998. Our portfolio of small stocks was up as well. We focus on high quality
small companies with consistent growth. Our focus on quality results in
competitive investment returns while better protecting our clients' capital in
difficult times.
OUTLOOK:
After five consecutive years of small stocks under performing large stocks, our
current Small Cap portfolio now sells at a 25% discount P/E ratio versus the S&P
500 Index of large stocks. We own high quality companies growing faster than the
S&P 500. We believe that these are reasons to expect this portfolio to once
again sell at a premium P/E ratio to the S&P 500 in the future.
[PERFORMANCE CHART]
KAYNE ANDERSON SMALL CAP P/E VERSUS S&P 500 P/E
KAYNE ANDERSON KAYNE ANDERSON
SMALL CAP S&P 500 SMALL CAP S&P 500
--------- ------- --------- -------
12/88 $1.00 $0.00 $1.00 1/94 $1.00 $0.84 $1.84
1/89 $1.00 ($0.03) $0.97 2/94 $1.00 $0.84 $1.84
2/89 $1.00 $0.02 $1.02 3/94 $1.00 $0.87 $1.87
3/89 $1.00 $0.01 $1.01 4/94 $1.00 $0.84 $1.84
4/89 $1.00 $0.02 $1.02 5/94 $1.00 $0.80 $1.80
5/89 $1.00 $0.05 $1.05 6/94 $1.00 $0.79 $1.79
6/89 $1.00 $0.02 $1.02 7/94 $1.00 $0.76 $1.76
7/89 $1.00 ($0.01) $0.99 8/94 $1.00 $0.79 $1.79
8/89 $1.00 ($0.01) $0.99 9/94 $1.00 $0.84 $1.84
9/89 $1.00 $0.02 $1.02 10/94 $1.00 $0.85 $1.85
10/89 $1.00 $0.03 $1.03 11/94 $1.00 $0.87 $1.87
11/89 $1.00 $0.03 $1.03 12/94 $1.00 $0.90 $1.90
12/89 $1.00 $0.01 $1.01 1/95 $1.00 $0.84 $1.84
1/90 $1.00 $0.01 $1.01 2/95 $1.00 $0.88 $1.88
2/90 $1.00 $0.03 $1.03 3/95 $1.00 $0.88 $1.88
3/90 $1.00 $0.03 $1.03 4/95 $1.00 $0.87 $1.87
4/90 $1.00 $0.07 $1.07 5/95 $1.00 $0.80 $1.80
5/90 $1.00 $0.06 $1.06 6/95 $1.00 $0.84 $1.84
6/90 $1.00 $0.08 $1.08 7/95 $1.00 $0.84 $1.84
7/90 $1.00 $0.08 $1.08 8/95 $1.00 $0.91 $1.91
8/90 $1.00 $0.04 $1.04 9/95 $1.00 $0.89 $1.89
9/90 $1.00 $0.06 $1.06 10/95 $1.00 $0.83 $1.83
10/90 $1.00 $0.04 $1.04 11/95 $1.00 $0.82 $1.82
11/90 $1.00 $0.06 $1.06 12/95 $1.00 $0.84 $1.84
12/90 $1.00 $0.12 $1.12 1/96 $1.00 $0.81 $1.81
1/91 $1.00 $0.12 $1.12 2/96 $1.00 $0.82 $1.82
2/91 $1.00 $0.14 $1.14 3/96 $1.00 $0.82 $1.82
3/91 $1.00 $0.16 $1.16 4/96 $1.00 $0.87 $1.87
4/91 $1.00 $0.19 $1.19 5/96 $1.00 $0.84 $1.84
5/91 $1.00 $0.21 $1.21 6/96 $1.00 $0.82 $1.82
6/91 $1.00 $0.25 $1.25 7/96 $1.00 $0.80 $1.80
7/91 $1.00 $0.26 $1.26 8/96 $1.00 $0.80 $1.80
8/91 $1.00 $0.27 $1.27 9/96 $1.00 $0.78 $1.78
9/91 $1.00 $0.34 $1.34 10/96 $1.00 $0.82 $1.82
10/91 $1.00 $0.42 $1.42 11/96 $1.00 $0.79 $1.79
11/91 $1.00 $0.46 $1.46 12/96 $1.00 $0.88 $1.88
12/91 $1.00 $0.43 $1.43 1/97 $1.00 $0.76 $1.76
1/92 $1.00 $0.59 $1.59 2/97 $1.00 $0.75 $1.75
2/92 $1.00 $0.64 $1.64 3/97 $1.00 $0.79 $1.79
3/92 $1.00 $0.65 $1.65 4/97 $1.00 $0.72 $1.72
4/92 $1.00 $0.58 $1.58 5/97 $1.00 $0.73 $1.73
5/92 $1.00 $0.57 $1.57 6/97 $1.00 $0.73 $1.73
6/92 $1.00 $0.56 $1.56 7/97 $1.00 $0.74 $1.74
7/92 $1.00 $0.56 $1.56 8/97 $1.00 $0.84 $1.84
8/92 $1.00 $0.62 $1.62 9/97 $1.00 $0.88 $1.88
9/92 $1.00 $0.69 $1.69 10/97 $1.00 $0.88 $1.88
10/92 $1.00 $0.68 $1.68 11/97 $1.00 $0.88 $1.88
11/92 $1.00 $0.71 $1.71 12/97 $1.00 $0.86 $1.86
12/92 $1.00 $0.76 $1.76 1/98 $1.00 $0.87 $1.87
1/93 $1.00 $0.78 $1.78 2/98 $1.00 $0.87 $1.87
2/93 $1.00 $0.76 $1.76 3/98 $1.00 $0.85 $1.85
3/93 $1.00 $0.77 $1.77 4/98 $1.00 $0.86 $1.86
4/93 $1.00 $0.74 $1.74 5/98 $1.00 $0.85 $1.85
5/93 $1.00 $0.75 $1.75 6/98 $1.00 $0.81 $1.81
6/93 $1.00 $0.79 $1.79 7/98 $1.00 $0.80 $1.80
7/93 $1.00 $0.82 $1.82 8/98 $1.00 $0.76 $1.76
8/93 $1.00 $0.82 $1.82 9/98 $1.00 $0.87 $1.87
9/93 $1.00 $0.88 $1.88 10/98 $1.00 $0.80 $1.80
10/93 $1.00 $0.81 $1.81 11/98 $1.00 $0.77 $1.77
11/93 $1.00 $0.82 $1.82 12/98 $1.00 $0.00 $0.00
12/93 $1.00 $0.86 $1.86
Price / Earnings ratio for the stocks currently in the Kayne Anderson Small Cap
Fund, as of December 31, 1998, divided by the Price / Earnings ratio of the
Standard & Poors 500 Index. Source: Compustat This information is subject to
change.
9
<PAGE>
KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND
[PERFORMANCE CHART]
Average Annual Total Return
for the periods ending December 31, 1998
One Year Since Inception (10/18/96)
16.17% 18.12%
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT
IN THE KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND,
THE RUSSELL 2000 INDEX AND THE RUSSELL 2500 INDEX
Kayne Anderson Small
Cap Rising Dividends Fund Russell 2000 Index Russell 2500 Index
------------------------- ------------------ ------------------
Oct-96 10,000 10,000 10,000
Dec-96 10,401 10,471 10,438
Mar-97 10,129 9,930 10,088
Jun-97 11,390 11,539 11,612
Sep-97 12,856 13,257 13,279
Dec-97 12,426 12,813 12,980
Mar-98 13,781 14,101 14,311
Jun-98 13,933 13,444 13,714
Sep-98 12,506 10,736 11,099
Dec-98 14,435 12,486 13,030
Past performance is not predictive of future performance.
10
<PAGE>
KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998
- --------------------------------------------------------------------------------
Shares COMMON STOCKS: 97.9% Market Value
- --------------------------------------------------------------------------------
BASIC MATERIALS / PACKAGING: 9.1%
39,889 Bemis Company .................................. $ 1,513,289
28,876 Liqui-Box Corporation .......................... 1,501,553
-----------
3,014,842
-----------
CAPITAL GOODS / MACHINERY EQUIPMENT: 9.9%
62,326 Federal Signal Corporation ..................... 1,706,174
30,117 Nordson Corporation ............................ 1,547,260
-----------
3,253,434
-----------
CONSUMER CYCLICALS / FURNITURE: 4.9%
91,440 LA-Z Boy Chair Company ......................... 1,628,776
-----------
CONSUMER CYCLICAL / SERVICES: 4.7%
21,956 Cintas Corporation ............................. 1,546,526
-----------
CONSUMER STAPLES / FOOD: 4.5%
37,920 Tootsie Roll Industries, Inc. .................. 1,483,620
-----------
ENERGY / OIL & GAS PRODUCTION: 3.8%
41,129 Devon Energy Corporation ....................... 1,262,146
-----------
FINANCE / BANKING: 9.5%
90,002 National Commerce Bancorp ...................... 1,693,162
54,033 Washington Federal, Inc. ....................... 1,442,005
-----------
3,135,167
-----------
FINANCE / FINANCIAL SERVICES: 5.4%
62,420 Eaton Vance Corporation ........................ 1,303,017
10,581 Fiduciary Trust Company ........................ 465,565
-----------
1,768,582
-----------
FINANCE / INSURANCE: 9.7%
62,572 American Heritage Life Investment Corporation .. 1,529,103
42,406 Mutual Risk Management, Ltd. ................... 1,659,134
-----------
3,188,237
-----------
11
<PAGE>
KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998, CONTINUED
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------
HEALTH CARE / DRUGS & HOSPITAL SUPPLIES: 10.9%
74,794 Ballard Medical Products ....................... $ 1,818,430
54,760 Landauer Inc. .................................. 1,772,855
-----------
3,591,285
-----------
TECHNOLOGY / COMPUTER & OFFICE EQUIPMENT: 6.7%
96,780 Reynolds & Reynolds, Inc., Class A ............. 2,219,891
-----------
TECHNOLOGY / SEMICONDUCTORS: 4.9%
18,213 Linear Technology Corporation .................. 1,631,202
-----------
TECHNOLOGY / SOFTWARE & SERVICE: 4.5%
107,744 Timberline Software Corporation ................ 1,481,480
-----------
TRANSPORTATION / AIR TRANSPORT: 3.8%
57,650 Air Express International Corporation .......... 1,253,888
-----------
UTILITIES / CABLE TELEVISION: 5.6%
52,066 TCA Cable TV, Inc. ............................. 1,858,105
-----------
Total Common Stocks (cost $28,868,391) ......... 32,317,181
-----------
Total Investments in Securities (cost
$28,868,391+): 97.9% ......................... 32,317,181
Other Assets less Liabilities: 2.1% ............ 699,337
-----------
NET ASSETS: 100.0% $33,016,518
===========
+ Cost for Federal income tax purposes is the same.
Net unrealized appreciation consists of:
Gross unrealized appreciation...................... $ 4,223,343
Gross unrealized depreciation...................... (774,553)
-----------
Net unrealized appreciation..................... $ 3,448,790
===========
See accompanying Notes to Financial Statements.
12
<PAGE>
KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND
OBJECTIVE:
The objective of the International Rising Dividends Fund is to achieve superior
long-term results. The Fund seeks to achieve this objective by investing in the
best quality international companies. We pursue this goal through a focused
investment philosophy that relies on the following principles: (1) a commitment
to quality; (2) long-term vision; (3) independent fundamental research; (4)
broad diversification; and (5) a value driven-decision 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, Australasia and the Far East) index.
COMMENTARY:
For the year ended December 31, 1998, the Kayne Anderson International Rising
Dividends Fund had a total return of +26.5% versus +20.3% for the MSCI EAFE
index (in dollar terms). The Fund's performance is all the more satisfactory
because the majority of international managers significantly underperformed
their benchmarks. In fact, the average performance of the diversified
international mutual funds tracked by Lipper was +12.6%.
During 1998, the European equity markets moved upward strongly (+28.9%), as
tracked by the Morgan Stanley Europe Index, continuing the trend from 1997
(+24.2% on average, in dollar terms). The Morgan Stanley Europe Index tracks the
15 developed countries in Europe. The Japanese market, however, rose by only
+4.3% in dollar terms. The US dollar depreciated 12.3% against the Yen to 114
(Y)/$ and declined 7.2% against the German Mark to 1.67 DM/$, while remaining
relatively stable against the Pound Sterling at 1.68 $/(pound).
At the end of December 1998, the Fund was fully invested. The four largest
countries represented were the United Kingdom (27.5%), France (16.0%), Japan
(13.7%), and Switzerland (7.6%). The major changes in the portfolio during the
second half of the year included a slight reduction of the Fund's exposure to
Japan and an increase of the Fund's weight to the United Kingdom, France, and
the Netherlands. In Japan, we sold Nintendo and Rohm, which were both trading
above our target prices, and purchased Sony, the world's second-largest consumer
electronic products manufacturer. In the UK, we bought Zeneca, the third-largest
British pharmaceutical company and a world leader in oncology, while we sold
British American Tobacco after it was spun off from BAT Industries. In France we
added to some of our favorite positions: AXA (the world's third-largest insurer)
and Total (a world-class integrated oil company). In the Netherlands we sold
Polygram, which had been taken over by Seagram, and Unilever, whose valuation
had become unattractive. We used the proceeds from these sales to purchase ING,
an emerging global financial services group. We also bought Panamerican
Beverages of Mexico, an "anchor" bottler in the Coca Cola system with strong
market positions throughout Latin America. Finally, we eliminated Genting, our
sole position in Malaysia, and sold Hong Kong Telecom after its strong relative
outperformance.
In general, 1998 has been a paradoxical year, full of surprises that tested
investors' nerves and their stamina. Since 1997 ended on such an uncertain and
problematic note, 1998 was widely expected to be the "crisis year" that would
ravage investor performance across the board. In actuality, we did get the
crisis -- but we got the returns as well. The price we had to pay for this odd
combination was extreme volatility, the source of so many mistakes
13
<PAGE>
KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND
for the average market participant. We hope it has convinced even the most
skeptical investor that market timing is not a strategy on which to run a
long-term international equity portfolio.
Ironically, the uncertainty in emerging markets has proved to be a boon for the
European equity markets, as it has kept interest rates low and inflation under
control. Kayne Anderson's International Rising Dividends Fund portfolio, which
today is weighted towards European stocks, has profited from investors'
gravitation to quality. Our investment strategy, focusing exclusively on the
highest-quality stocks around the world, has buffered the Fund portfolio against
the negative impact of the Asian and Russian crises.
The country allocation of the Fund, as a percentage of invested assets, on
December 31, 1998 was:
[PIE CHART]
UK 27.4%
Sweden 6.2%
France 15.8%
Japan 13.9%
Switzerland 7.5%
Netherlands 6.7%
Hong Kong 5.3%
Finland 5.6%
Australia 3.2%
Mexico 3.1%
Spain 5.3%
OUTLOOK:
Although we would recommend some prudence in the short term after the powerful
advance of the last three months, we view the future with confidence. We remind
investors that January 1, 1999 marked the birth of the Euro, which we believe
will foster greater economic discipline in Europe and create the accelerated
structural changes in European companies that will continue to benefit
investors. We believe that the emerging markets turmoil of the past two years
will actually serve to pave the road to a brighter future, as they provide
powerful stimuli to reform archaic and inefficient economic and social systems.
Our conservative, disciplined and quality-oriented investment approach should
provide potential investors with the necessary comfort to remain committed to
the international equity asset class for the long term.
14
<PAGE>
KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND
[PERFORMANCE CHART]
Average Annual Total Return
for the periods ending December 31, 1998
One Year Since Inception (10/18/96)
26.47% 20.58%
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, AUSTRALASIA AND FAR EAST INDEX
Kayne Anderson International MSCI Europe, Australasia
Rising Dividends Fund and Far East Index
--------------------- ------------------
Oct-96 10,000 10,000
Dec-96 10,256 10,269
Mar-97 10,604 10,116
Jun-97 11,949 11,436
Sep-97 12,306 11,363
Dec-97 11,940 10,480
Mar-98 13,853 12,030
Jun-98 14,071 12,166
Sep-98 12,462 10,444
Dec-98 15,101 12,611
Past performance is not predictive of future performance.
15
<PAGE>
KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998
- --------------------------------------------------------------------------------
Shares COMMON STOCKS: 100.4% Market Value
- --------------------------------------------------------------------------------
AUSTRALIA: 3.2%
78,159 Broken Hill Proprietary ADR ...................... $ 1,123,535
-----------
FINLAND: 5.6%
16,490 Nokia Corporation ADR ............................ 1,986,015
-----------
FRANCE: 15.8%
26,684 AXA-UAP S.A. ADR ................................. 1,927,919
16,872 Groupe Danone S.A. ADR ........................... 949,051
30,580 Louis Vuitton Moet Hennessey ADR ................. 1,246,135
30,050 Total S.A. ADR ................................... 1,494,988
-----------
5,618,093
-----------
HONG KONG / CHINA: 5.3%
730,000 Hong Kong & China Gas Co. Ltd. ................... 928,122
15,000 Hong Kong & China Gas Co. Ltd. Warrants
(Exp. 9/30/99) ................................. 987
3,776 HSBC Holdings Plc ADR ............................ 940,707
-----------
1,869,816
-----------
JAPAN: 13.9%
40,000 Canon Inc. 850,688
80,000 Kao Corporation 1,796,488
11,000 Sony Corporation 797,235
32,000 Uni-Charm 1,493,548
-----------
4,937,959
-----------
MEXICO: 3.1%
49,850 Panamerican Beverages Inc. Class A ADR 1,087,353
-----------
NETHERLANDS: 6.7%
49,299 Elsevier N.V. ADR ................................ 1,380,373
16,620 ING Groep N.V. ................................... 1,012,335
-----------
2,392,708
-----------
SPAIN: 5.4%
38,621 Endesa S.A. ADR .................................. 1,042,768
15,650 Repsol S.A. ADR .................................. 854,881
-----------
1,897,649
-----------
16
<PAGE>
KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998, CONTINUED
- --------------------------------------------------------------------------------
Shares Market Value
- --------------------------------------------------------------------------------
SWEDEN: 6.3%
49,321 Astra AB-ADR, Class A ............................ $ 1,020,329
50,000 L.M. Ericsson Telephone ADR ...................... 1,196,875
-----------
2,217,204
-----------
SWITZERLAND: 7.6%
6,162 Nestle S.A. ADR .................................. 670,719
10,290 Novartis AG ADR .................................. 1,011,409
8,139 Roche Holdings, Ltd., ADR ........................ 993,167
-----------
2,675,295
-----------
UNITED KINGDOM: 27.5%
43,159 Allied Zurich Plc ADR ............................ 641,839
40,730 BOC Group Plc .................................... 1,109,893
23,070 Cable & Wireless Plc ADR ......................... 847,823
18,230 Diageo Plc ADR ................................... 843,138
73,000 Marks and Spencer Plc ............................ 499,217
45,000 Pearson Plc ...................................... 890,550
13,055 Reuters Holding Plc ADR .......................... 827,360
91,440 Siebe Plc ADR .................................... 718,096
46,659 Tomkins Plc ADR .................................. 933,180
8,432 Vodafone Group Plc ADR ........................... 1,358,606
25,000 Zeneca Group Plc ................................. 1,085,298
-----------
9,755,000
-----------
Total Common Stocks (cost $31,429,337) ........... 35,560,627
-----------
Total Investments in Securities (cost
$31,429,337+): 100.4% .......................... 35,560,627
Liabilities less Other Assets: (0.4)% ............ (125,067)
-----------
NET ASSETS: 100.0% ............................... $35,435,560
===========
+Cost for Federal income tax purposes is the same.
Net unrealized appreciation consists of:
Gross unrealized appreciation .................. $ 6,156,147
Gross unrealized depreciation .................. (2,024,857)
-----------
Net unrealized appreciation .................. $ 4,131,290
===========
See accompanying Notes to Financial Statements.
17
<PAGE>
KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS BY INDUSTRY AT DECEMBER 31, 1998
- --------------------------------------------------------------------------------
Industry Percentage
- --------------------------------------------------------------------------------
Audio/Video Home Products ........................ 2.3
Beverages ........................................ 10.9
Books ............................................ 3.9
Chemicals & Allied Products ...................... 12.4
Commercial Banking ............................... 2.9
Communications Equipment/Services ................ 11.5
Crude Petroleum & Natural Gas .................... 9.8
Drugs ............................................ 11.6
Electric Services ................................ 2.9
Electronic Components & Accessories .............. 2.0
Electronic Industrial Apparatus .................. 2.4
Food Beverage & Tobacco .......................... 2.7
Holding Offices .................................. 9.9
Retail Stores .................................... 1.4
Services Allied with Exchange of Security ........ 2.3
Surgical, Medical, Dental Instruments & Supplies . 2.6
Telephone Communications ......................... 6.2
Utilities ........................................ 2.7
-----
Total Investments ................................ 100.4
Liabilities less Other Assets .................... (0.4)
-----
Net Assets ....................................... 100.0%
=====
See accompanying Notes to Financial Statements.
18
<PAGE>
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND
OBJECTIVE:
The objective of the Intermediate Total Return Bond Fund is to seek maximum
total return primarily 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:
The fund's net asset value increased $0.26, from $10.75 to $11.01. For the year
ended December 31, 1998, the Fund's total return (principal gain or loss and
income) was 7.61%.
As of December 31st, the three largest sectors represented in the Fund were:
U.S. Treasury (49%), Finance (14%), and U.S. Agency Obligations (9%). The three
largest individual credits held in the portfolio were U.S Treasury (49%),
Federal National Mortgage Association (9%), and Government National Mortgage
Association (8%).
OUTLOOK:
With economic activity exceeding most forecasts, the Federal Reserve is expected
to maintain its current policy towards the level of interest rates for the first
quarter, but with a bias towards tightening. However, deflation abroad is a
concern and we will watch closely for any developments within the domestic
economy.
Within individual sectors, both technical and fundamental forces are at work.
The supply of new U.S. Treasury debt continues to dwindle due to a U.S.
government budget surplus. The Euro (the European single monetary unit) will now
compete with the U.S. dollar as a safe, liquid place to park funds. Decreased
demand for U.S. treasuries from abroad will likely result and should help offset
the lack of supply. Corporate yield spreads are narrowing from the wide levels
reached in the fourth quarter and our overweighting in the corporate sector
should benefit. Higher than expected prepayments in real estate loans have
limited the return for higher coupon mortgage backed securities, but with
interest rates continuing to hover around the same levels, prepayments are
expected to slow from their rapid pace.
SECTOR DIVERSIFICATION PIE CHART
DECEMBER 31, 1998
-----------------
U.S. TREASURY 49%
AGENCY 9%
CASH & EQUIVALENTS 4%
FINANCE 14%
CORPORATE 12%
YANKEE/EURO 2%
ASSET-BACKED 2%
MORTGAGE-BACKED 8%
19
<PAGE>
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND
[PERFORMANCE CHART]
Average Annual Total Return
for the periods ending December 31, 1998
One Year Since Inception (10/28/96)
7.61% 6.88%
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
Kayne Anderson Intermediate Lehman Brothers Government /
Total Return Bond Fund Corporate Intermediate Bond Index
---------------------- ---------------------------------
Oct-96 10,000 10,000
Dec-96 10,020 10,077
Mar-97 9,948 10,064
Jun-97 10,249 10,403
Sep-97 10,525 10,723
Dec-97 10,741 10,984
Mar-98 10,900 11,155
Jun-98 11,071 11,364
Sep-98 11,307 11,874
Dec-98 11,558 11,908
Past performance is not predictive of future performance.
20
<PAGE>
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998
- --------------------------------------------------------------------------------
Principal
Amount LONG-TERM DEBT SECURITIES: 96.1% Market Value
- --------------------------------------------------------------------------------
U.S. TREASURY OBLIGATIONS: 49.4%
---------------------------------------------------
U.S. Treasury Notes / Bonds
$2,700,000 6.250%, due 10/31/2001 ...................... $ 2,813,062
4,720,000 11.875%, due 11/15/2003 ...................... 6,159,600
3,300,000 7.250%, due 8/15/2004 ....................... 3,712,500
1,225,000 5.625%, due 5/15/2008 ....................... 1,307,305
-----------
Total U.S. Treasury Obligations .................. 13,992,467
-----------
U.S. AGENCY OBLIGATIONS: 8.8%
---------------------------------------------------
Federal National Mortgage Association (FNMA)
1,200,000 6.100%, due 2/10/2000 ....................... 1,214,562
1,000,000 7.700%, due 8/10/2004 ....................... 1,015,747
250,000 6.950%, due 11/13/2006 ...................... 260,440
-----------
Total U.S. Agency Obligations .................... 2,490,749
-----------
MORTGAGE-BACKED / PASS-THROUGH SECURITIES: 7.9%
---------------------------------------------------
Government National Mortgage Association (GNMA)
667,734 8.000%, due 7/15/2023 ....................... 694,443
563,576 8.500%, due 8/15/2025 ....................... 598,096
183,365 8.500%, due 6/15/2026 ....................... 194,597
552,488 8.000%, due 9/15/2026 ....................... 574,587
176,395 8.000%, due 11/15/2026 ...................... 183,450
-----------
Total Mortgage-Backed / Pass-Through Securities .. 2,245,173
-----------
ASSET-BACKED RECEIVABLES: 1.8%
---------------------------------------------------
515,000 WFS Financial Owner Trust, 6.800%, due 12/20/2003 522,411
-----------
CORPORATE BONDS: 28.2%
---------------------------------------------------
AUTO RENTALS: 1.8%
500,000 Ryder System, Inc., 7.480%, due 5/15/2000 ........ 509,540
-----------
21
<PAGE>
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998, CONTINUED
- --------------------------------------------------------------------------------
Principal
Amount LONG-TERM DEBT SECURITIES Market Value
- --------------------------------------------------------------------------------
BEVERAGES: 2.8%
$200,000 Anheuser Busch Companies, 6.750%, due 11/1/2006 .. $ 209,469
575,000 Coca-Cola Enterprises, 6.375%, due 8/1/2001 ...... 588,776
-----------
798,245
-----------
COMMUNICATION SERVICES: 1.8%
500,000 TCI Communications, Inc., 6.375%, due 5/1/2003 ... 517,774
-----------
DEPARTMENT STORES: 0.8%
200,000 Sears Roebuck Company, 9.450%, due 7/25/2001 ..... 217,017
-----------
FINANCE: 13.7%
715,000 At&T Capital Corporation, 7.500%, due 11/15/2000 . 727,229
500,000 Bear Stearns Company, 6.625%, due 10/1/2004 ...... 513,377
200,000 Beneficial Corporation, 6.600%, due 9/26/2001 .... 204,252
500,000 Finova Capital Corporation, 6.450%, due 6/1/2000 . 503,219
680,000 Ford Motor Credit Corporation, 6.250%,
due 11/8/2000 .................................. 690,403
475,000 General Motors Acceptance Corporation, 7.125%,
due 5/1/2003 ................................... 501,385
200,000 Household Finance Company, 8.000%, due 8/15/2004 . 203,066
500,000 Lehman Brothers Holdings, 8.875%, due 3/1/2002 ... 534,026
-----------
3,876,957
-----------
INDUSTRIAL: 2.8%
200,000 Allied Signal, Inc., 9.200%, due 2/15/2003 ....... 228,750
500,000 Catapillar, 8.440%, due 11/26/2003 ............... 559,116
-----------
787,866
-----------
MOTION PICTURE PRODUCTION & OTHER SERVICES: 2.7%
735,000 Walt Disney Company, 6.375%, due 3/30/2001 ....... 757,530
-----------
YANKEEEURO: 1.8%
500,000 Cable & Wireless, 6.375%, due 3/6/2003 ........... 501,712
-----------
Total Corporate Bonds ............................ 7,966,641
-----------
Total Long-Term Debt Securities
(cost $26,657,803) ............................. 27,217,441
-----------
22
<PAGE>
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998, CONTINUED
- --------------------------------------------------------------------------------
Market Value
- --------------------------------------------------------------------------------
Total Investments in Securities
(cost $26,657,803+): 96.1% ..................... $27,217,441
Other Assets less Liabilities: 3.9% .............. 1,112,697
-----------
NET ASSETS: 100.0% ............................... $28,330,138
===========
+Cost for Federal income tax purposes is the same.
Net unrealized appreciation consists of:
Gross unrealized appreciation .................. $ 576,018
Gross unrealized depreciation .................. (16,380)
-----------
Net unrealized appreciation .................. $ 559,638
===========
See accompanying Notes to Financial Statements.
23
<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's net asset value increased $0.03, from $10.74 to
$10.77. After expenses, the Fund's total-return (principal gain or loss and
income) for the year was 4.37%.
While invested among eight sectors within the municipal bond market, the three
largest sectors represented in the Fund were: General Obligation (31%), Electric
Utility (19%), and Hospital (11%). The Fund was also invested in municipalities
that are located in 20 different states and territories. The three states with
the highest representation in the Fund were: California (41%), New York (7%),
and New Jersey (6%).
OUTLOOK:
Intermediate-to-long-maturity municipal bonds are attractively valued relative
to taxable bonds. In 1998, total issuances were the second highest ever at $284
billion, and helped to keep interest rates on municipals from moving
significantly lower. New issuances in 1999 are expected to be lower but still
well above $200 billion. Strong economic activity helped credit upgrades exceed
downgrades by almost 7 to 1, and we expect the trend to continue.
Economic strength continues to be higher than most forecasts, so the Federal
Reserve is expected to maintain its current interest rate policy for the rest of
the first quarter with a bias towards tightening. This should cause short-term
interest rates to move slightly above their current trading range. This may
cause long-term interest rates to climb as well, but as long as inflation
remains subdued we would expect the rise to be limited. Deflation abroad is a
concern and we will watch closely for any developments within the domestic
economy.
SECTOR DIVERSIFICATION PIE CHART
DECEMBER 31, 1998
-----------------
GENERAL OBLIGATION 28%
ELECTRIC REVENUE 19%
HOSPITAL 10%
HOUSING 6%
IDR/PCR 8%
TRANSPORTATION 7%
EDUCATION 5%
WATER & SEWER 5%
PREREFUNDED 8%
CASH & EQUIVALENTS 4%
24
<PAGE>
KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND
[PERFORMANCE CHART]
Average Annual Total Return
for the periods ending December 31, 1998
One Year Since Inception (10/28/96)
4.37% 3.94%
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 Intermediate Lehman Brothers Five Year
Tax-Free Bond Fund Municipal Bond Index
------------------ --------------------
Oct-96 10,000 10,000
Dec-96 10,002 10,240
Mar-97 9,989 10,234
Jun-97 10,160 10,772
Sep-97 10,306 11,252
Dec-97 10,428 11,642
Mar-98 10,506 11,777
Jun-98 10,613 11,909
Sep-98 10,802 12,222
Dec-98 10,877 12,323
25
<PAGE>
KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998
- --------------------------------------------------------------------------------
Principal
Amount LONG-TERM MUNICIPAL DEBT: 97.4% Market Value
- --------------------------------------------------------------------------------
GENERAL OBLIGATION: 30.7%
$175,000 California State, 5.250%, dated 4/1/1998,
due 10/1/2005 .................................. $ 188,562
250,000 California State, 5.375%, dated 3/1/1994,
due 3/1/2006 ................................... 270,312
250,000 California State, 5.250%, dated 11/1/1996,
due 6/1/2011 ................................... 265,000
100,000 California State, 6.250%, dated 3/1/1995,
due 2/1/2014 ................................... 101,161
250,000 California State, 5.250%, dated 11/1/1996,
due 6/1/2016 ................................... 257,812
200,000 California State Veterans Bond, 6.375%,
dated 3/1/1995, due 2/1/2027 ................... 202,316
200,000 Hawaii State, 5.250%, dated 3/1/1997, due 3/1/2000 204,000
195,000 Indiana Bond Bank, 6.600%, dated 2/1/1991, .......
due 1/1/2003 ................................... 208,650
200,000 Los Angeles County, California Public Works,
5.000%, dated 11/1/1997, due 10/1/2016 ......... 202,000
250,000 Massachusetts State, 5.000%, dated 8/1/1997,
due 8/1/2000 ................................... 255,937
150,000 Salt Lake City, Utah Redevelopment Agency, 5.500%,
dated 8/1/1997, due 10/1/2008 .................. 162,188
300,000 San Bernardino County, California, 3.310%, dated
12/1/1996, due 6/1/2002 ........................ 309,844
250,000 Washoe County, Nevada, 6.750%, dated 3/15/1991,
due 3/15/2000 .................................. 258,125
-----------
2,885,907
-----------
EDUCATION: 4.5%
200,000 Pinal County, Arizona School District, 6.000%,
dated 10/1/1992, due 7/1/2004 .................. 215,000
200,000 University California Revenues, 5.250%, dated,
8/15/1993 due 9/1/2011 ......................... 209,750
-----------
424,750
-----------
ELECTRIC: 18.6%
200,000 Colorado Springs Utilities, 6.750%, dated
4/15/1991, due 11/15/2005 ...................... 218,500
100,000 HillsBorough, Florida Utilities, 7.000%,
dated 9/1/1991, due 8/1/2114 ................... 109,250
400,000 Knoxville Tennessee Electric Revenue, 5.000%,
dated 11/1/1998, due 7/1/1998 .................. 396,500
100,000 Lower Colorado River Texas Authority, 5.250%,
dated 5/1/1993, due 1/1/2015 ................... 101,750
Past performance is not predictive of future performance.
26
<PAGE>
KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998,
CONTINUED
- --------------------------------------------------------------------------------
Principal
Amount Market Value
- --------------------------------------------------------------------------------
ELECTRIC, CONTINUED
$ 75,000 Massachusetts State Power, 5.875%, dated
8/1/1992, due 7/1/2003 $ 80,156
200,000 Piedmont Municipal Power Agency, 6.550%,
dated 9/1/1996, due 1/1/2016 201,620
200,000 Puerto Rico Electric Power Authority, 6.000%,
dated 8/15/1995, due 7/1/2000 207,500
200,000 Sacramento California Municipal Utilities
District, 5.700%, dated 4/1/1993, due 5/15/2012 215,500
200,000 Tacoma Washington Electric System Revenue,
5.900%, dated 9/1/1992, due 1/1/2005 213,750
-----------
1,744,526
-----------
HOSPITAL: 10.7%
200,000 Dade County Health Facilities Authority, 6.600%,
dated 3/1/1987, due 8/15/2002 203,028
300,000 New Jersey Health Facility Financing Authority,
6.800%, dated 4/1/1992, due 7/1/2011 327,750
200,000 New York Dormitory Authority, 5.000%, dated
3/1/1997, due 8/15/2000 204,000
200,000 New York State Dormatory Authority, 5.500%,
date 2/1/1998, due 2/15/2003 210,000
60,000 Puerto Rico Public Buildings Authority, 5.750%,
dated 6/1/1993, due 7/1/2015 63,075
-----------
1,007,853
-----------
HOUSING: 4.3%
200,000 New York Urban Development, 6.000%, dated
1/1/1995, due 1/1/2001 208,000
200,000 Ohio Housing Finance Agency, 3.800%, dated
8/28/1991, due 3/31/2031 200,000
-----------
408,000
-----------
IDR / PCR: 8.2%
200,000 California Pollution Control Financing Authority,
7.150%, dated 2/1/1991, due 2/1/2011 214,750
200,000 California Pollution Control Financing Authority,
5.850%, dated 11/1/1993, due 12/1/2023 209,250
250,000 Gallup, New Mexico Pollution Control Revenue,
6.650%, dated 4/15/1992, due 8/15/2017 262,813
27
<PAGE>
KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998,
CONTINUED
- --------------------------------------------------------------------------------
Principal
Amount Market Value
- --------------------------------------------------------------------------------
IDR / PCR, CONTINUED
$ 75,000 Mercer County, North Dakota Pollution Control,
5.850%, dated 6/1/1993, due 6/1/2023 $ 79,125
-----------
765,938
-----------
TRANSPORTATION: 7.4%
250,000 Hawaii State Airports System, 7.500%, dated
10/1/1990, due 7/1/2005 267,187
200,000 New Jersey State Turnpike Authority, 5.900%,
dated 1/1/1992, due 1/1/2003 212,250
200,000 Orange County Airport, 5.500%, dated 4/2/1997,
due 7/1/2002 211,250
-----------
690,687
-----------
PREREFUNDED: 7.8%
200,000 California Health Facility Financing Authority,
6.750%, dated 10/1/1989, due 10/1/2019 209,320
150,000 Los Angeles Convention & Exhibit Center, 9.000%,
dated 12/1/1985, due 12/1/2020 195,375
100,000 Orange County, California Local Transportation
Authority, 5.750%, dated 9/1/1992, due 2/15/2005 107,751
200,000 Washington Public Power Supply Systems, 7.625%,
dated 10/15/1990, due 7/1/2010 218,751
-----------
731,197
-----------
WATER & SEWER: 5.2%
275,000 Contra Costa, California Water District, 5.250%,
date 7/1/1993, due 10/1/2016 280,500
200,000 Los Angeles, California Wastewater System,
5.700%, dated 4/1/1993, due 6/1/2020 211,500
-----------
492,000
-----------
Total Long-Term Municipal Debts (cost $9,074,494) 9,150,858
-----------
Total Investments in Securities (cost
$9,074,494+): 97.4% 9,150,858
Other Assets less Liabilities: 2.6% 240,134
-----------
NET ASSETS: 100.0% $ 9,390,992
===========
28
<PAGE>
KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998,
CONTINUED
- --------------------------------------------------------------------------------
Principal
Amount Market Value
- --------------------------------------------------------------------------------
+Cost for Federal income tax purposes is the same.
Net unrealized appreciation consists of:
Gross unrealized appreciation $ 93,130
Gross unrealized depreciation (16,766)
-----------
Net unrealized appreciation $ 76,364
===========
See accompanying Notes to Financial Statements.
29
<PAGE>
KAYNE ANDERSON MUTUAL FUND
STATEMENTS OF ASSETS AND LIABILITIES AT DECEMBER 31, 1998
- --------------------------------------------------------------------------------
RISING
DIVIDENDS
FUND
---------
ASSETS
Investments in securities, at market value (cost
$36,536,733, $28,868,391, $31,429,337, $26,657,803,
and $9,074,494, respectively) .............................. $48,310,979
Cash ......................................................... 267,656
Receivable for:
Capital stock sold ........................................... --
Dividends and interest ....................................... 52,193
Prepaid expenses ............................................. 10,773
Due from investment advisor .................................. --
Deferred organization costs, net ............................. 9,378
-----------
Total assets ................................................. 48,650,979
-----------
LIABILITIES
Cash overdraft ............................................... --
Payables:
Capital stock redeemed ....................................... --
Distributions of capital gains ............................... --
Due to investment advisor .................................... 36,765
Other accrued expenses ....................................... 33,456
-----------
Total liabilities ............................................ 70,221
-----------
NET ASSETS ..................................................... $48,580,758
===========
Number of shares issued and outstanding (unlimited
shares authorized without par value) ....................... 2,851,829
-----------
Net asset value, offering and redemption price per share ..... $ 17.03
===========
COMPOSITION OF NET ASSETS
Paid-in capital .............................................. $35,783,560
Undistributed net investment income .......................... 0
Undistributed net realized gain (loss) on investments ........ 1,022,952
Net unrealized appreciation on investments and foreign
currency ..................................................... 11,774,246
-----------
Net assets ................................................... $48,580,758
===========
See accompanying Notes to Financial Statements.
30
<PAGE>
KAYNE ANDERSON MUTUAL FUND
SMALL CAP INTERNATIONAL
RISING RISING INTERMEDIATE INTERMEDIATE
DIVIDENDS DIVIDENDS TOTAL RETURN TAX-FREE
FUND FUND BOND FUND BOND FUND
---------------------------------------------------------------------------
$ 32,317,181 $35,560,627 $27,217,441 $9,150,858
585,218 -- 689,495 57,989
49,887 -- --
74,246 25,764 420,179 168,618
13,119 11,094 16,051 15,222
-- -- -- 10,130
11,954 12,725 11,953 11,953
------------ ----------- ----------- ----------
33,051,605 35,610,210 28,355,119 9,414,770
------------ ----------- ----------- ----------
-- 129,964 -- --
1,301 661 -- --
-- 2,262 572 --
21,837 29,465 11,850 --
11,949 12,298 12,559 23,778
------------ ----------- ----------- ----------
35,087 174,650 24,981 23,778
------------ ----------- ----------- ----------
$ 33,016,518 $35,435,560 $28,330,138 $9,390,992
============ =========== =========== ==========
2,195,468 2,284,779 2,573,285 872,100
========= ========= ========= =======
$ 15.04 $ 15.51 $ 11.01 $ 10.77
============ =========== =========== ==========
$ 29,735,907 $31,304,200 $27,732,545 $9,313,072
0 0 0 1,676
(168,179) 0 37,955 (120)
3,448,790 4,131,360 559,638 76,364
------------ ----------- ----------- ----------
$ 33,016,518 $35,435,560 $28,330,138 $9,390,992
============ =========== =========== ==========
31
<PAGE>
KAYNE ANDERSON MUTUAL FUND
STATEMENTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
RISING
DIVIDENDS
FUND
---------
INVESTMENT INCOME:
Income:
Dividend ................................................... $ 696,723
Interest ................................................... 57,488
-----------
Total income ............................................. 754,211
-----------
Expenses:
Investment advisory fees ................................... 334,518
Custodian fees ............................................. 14,080
Administration fees ........................................ 30,783
Fund accounting fees ....................................... 34,739
Transfer agent fees ........................................ 23,398
Legal fees ................................................. 8,257
Insurance .................................................. 1,647
Audit fees ................................................. 14,500
Miscellaneous expenses ..................................... 4,038
Reports to shareholders .................................... 3,001
Registration fees .......................................... 17,961
Trustees' fees ............................................. 4,701
Amortization of deferred organization expenses ............. 6,081
-----------
Total expenses ........................................... 497,704
Less: Expenses reimbursed/waived ......................... --
-----------
Net expenses ............................................. 497,704
-----------
NET INVESTMENT INCOME .................................. 256,507
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments ...................... 5,326,022
Net change in unrealized appreciation of investments
and foreign currency ....................................... (98,265)
-----------
Net gain on investments ...................................... 5,227,757
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ... $ 5,484,264
===========
32
<PAGE>
KAYNE ANDERSON MUTUAL FUND
SMALLCAP
RISING INTERNATIONAL INTERMEDIATE INTERMEDIATE
DIVIDENDS RISING DIVIDENDS TOTAL RETURN TAX-FREE
FUND FUND BOND FUND BOND FUND
---------------------------------------------------------------------------
$ 399,531 $ 547,236 $ -- $ --
31,685 56,835 1,411,875 318,389
----------- ----------- ----------- ---------
431,216 604,071 1,411,875 318,389
----------- ----------- ----------- ---------
218,722 256,701 120,618 34,150
9,966 10,720 5,429 2,518
26,052 26,052 26,052 20,873
30,570 36,101 32,258 37,318
21,456 21,138 20,322 22,877
2,749 1,949 2,939 1,500
91 91 70 70
5,100 5,168 5,153 5,150
3,846 4,002 2,263 2,000
2,688 4,701 1,000 1,000
16,577 16,577 16,487 16,487
4,734 4,429 4,438 4,438
4,249 4,249 4,249 4,249
----------- ----------- ----------- ---------
346,800 391,878 241,278 152,630
(12,965) (18,889) (15,132) (99,797)
----------- ----------- ----------- ---------
333,835 372,989 226,146 52,833
----------- ----------- ----------- ---------
97,381 231,082 1,185,729 265,556
----------- ----------- ----------- ---------
(168,179) 750,612 131,606 5,204
3,090,369 3,715,222 490,291 23,836
----------- ----------- ----------- ---------
2,922,190 4,465,834 621,897 29,040
----------- ----------- ----------- ---------
$ 3,019,571 $ 4,696,916 $ 1,807,626 $ 294,596
=========== =========== =========== =========
See accompanying Notes to Financial Statements.
33
<PAGE>
KAYNE ANDERSON MUTUAL FUND
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
RISING
DIVIDENDS
FUND
--------------------------
Year Year
INCREASE IN NET ASSETS FROM: Ended Ended
12/31/97 12/31/98
-------- --------
OPERATIONS
Net investment income .............................. $ 256,507 $ 198,336
Net realized gain (loss) on investments sold ....... 5,326,022 5,093,470
Net change in unrealized appreciation of investments (98,265) 4,378,552
----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS .................................... 5,484,264 9,670,358
----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS
Net investment income .............................. (262,588) (222,979)
Net realized gain on investments ................... (6,701,884) (2,795,680)
Return of capital .................................. -- --
----------- -----------
TOTAL DISTRIBUTIONS TO SHAREHOLDERS .............. (6,964,472) (3,018,659)
----------- -----------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold .......................... 12,570,871 11,725,624
Net asset value of shares issued on reinvestment
of distributions ................................. 9,358,197 --
Cost of shares redeemed ............................ (7,150,626) (9,212,376)
----------- -----------
NET INCREASE FROM CAPITAL SHARE TRANSACTIONS ..... 14,778,442 2,513,248
----------- -----------
TOTAL INCREASE IN NET ASSETS ..................... 13,298,234 9,164,947
NET ASSETS
Beginning of period ................................ 35,282,524 26,117,577
----------- -----------
END OF PERIOD ...................................... $48,580,758 $35,282,524
=========== ===========
CHANGE IN SHARES
Shares sold ........................................ 692,639 752,018
Shares issued in reinvestment of distributions ..... 527,641 --
Shares redeemed .................................... (410,214) (534,351)
----------- -----------
Net increase ..................................... 810,066 217,667
=========== ===========
See accompanying Notes to Financial Statements.
34
<PAGE>
<TABLE>
<CAPTION>
KAYNE ANDERSON MUTUAL FUND
SMALL CAP INTERNATIONAL INTERMEDIATE INTERMEDIATE
RISING DIVIDENDS RISING DIVIDENDS TOTAL RETURN TAX-FREE
FUND FUND BOND FUND BOND FUND
- ----------------------------------------------------------------------------------------------------------------
Year Year Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended Ended Ended
12/31/97 12/31/98 12/31/97 12/31/98 12/31/97 12/31/98 12/31/97 12/31/97
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 97,381 $ 18,287 $ 231,082 $ 25,041 $ 1,185,729 $ 292,768 $ 265,556 $ 176,838
(168,179) 237,764 750,612 20,183 131,606 (5,750) 5,204 (1,453)
3,090,369 336,930 3,715,222 397,529 490,291 102,483 23,836 58,234
- ------------ ----------- ------------ ----------- ------------ ----------- ----------- -----------
3,019,571 592,981 4,696,916 442,753 1,807,626 389,501 294,596 233,619
- ------------ ----------- ------------ ----------- ------------ ----------- ----------- -----------
(101,850) (23,419) (206,890) (30,206) (1,189,978) (298,892) (268,129) (181,326)
-- (22,399) (750,612) (20,183) (89,690) -- (3,871) --
(313,138) -- -- -- -- -- -- --
- ------------ ----------- ------------ ----------- ------------ ----------- ----------- -----------
(414,988) (45,818) (957,502) (50,389) (1,279,668) (298,892) (272,000) (181,326)
- ------------ ----------- ------------ ----------- ------------ ----------- ----------- -----------
26,726,710 8,244,623 27,482,344 6,170,378 23,343,075 933,235 3,766,151 787,429
432,070 -- 964,005 396 1,228,220 261,111 292,998 157,563
(3,240,796) (3,105,616) (3,762,499) (605,671) (3,029,904) (57,661) (705,956) (106,522)
- ------------ ----------- ------------ ----------- ------------ ----------- ----------- -----------
23,917,984 5,139,007 24,683,850 5,565,103 21,541,391 1,136,685 3,353,193 838,470
- ------------ ----------- ------------ ----------- ------------ ----------- ----------- -----------
26,522,567 5,686,170 28,423,264 5,957,467 22,069,349 1,227,294 3,375,789 890,763
6,493,951 807,781 7,012,296 1,054,829 6,260,789 5,033,495 6,015,203 5,124,440
- ------------ ----------- ------------ ----------- ------------ ----------- ----------- -----------
$ 33,016,518 $ 6,493,951 $ 35,435,560 $ 7,012,296 $ 28,330,138 $ 6,260,789 $ 9,390,992 $ 6,015,203
============ =========== ============ =========== ============ =========== =========== ===========
1,897,692 656,347 1,923,801 507,753 2,153,359 87,412 350,249 73,658
29,469 -- 63,755 28 93,163 24,683 27,265 14,770
(226,493) (234,584) (258,861) (48,344) (274,756) (5,200) (65,550) (10,049)
- ------------ ----------- ------------ ----------- ------------ ----------- ----------- -----------
1,700,668 421,763 1,728,695 459,437 1,971,766 106,895 311,964 78,379
============ =========== ============ =========== ============ =========== =========== ===========
</TABLE>
35
<PAGE>
KAYNE ANDERSON MUTUAL FUND
FINANCIAL HIGHLIGHTS
For a capital share outstanding throughout each period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RISING
DIVIDENDS
FUND
---------------------------------------------
Year Year Year 05/01/95*
Ended Ended Ended to
12/31/98 12/31/97 12/31/96 12/31/95
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net asset value, beginning of period ........... $ 17.28 $ 14.32 $ 12.63 $ 10.65
------- ------- ------- -------
Income from investment operations:
Net investment income ........................ 0.11 0.10 0.08 0.07
Net realized and unrealized gains
on investments ............................ 2.38 4.34 2.35 2.13
------- ------- ------- -------
Total income from investment operations ........ 2.49 4.44 2.43 2.20
------- ------- ------- -------
Less distributions:
From net investment income ................... (0.11) (0.11) (0.08) (0.07)
From net realized gains ...................... (2.63) (1.37) (0.66) (0.15)
From paid in capital ......................... 0.00 0.00 0.00 0.00
------- ------- ------- -------
Total distributions ............................ (2.74) (1.48) (0.74) (0.22)
------- ------- ------- -------
Net asset value, end of period ................. $ 17.03 $ 17.28 $ 14.32 $ 12.63
======= ======= ======= =======
Total return ................................... 14.14% 30.99% 19.09% 20.65%**
Net assets, end of period (in 000's) ........... $48,581 $35,283 $26,118 $20,613
Ratio of expenses to average net assets:+
Before expense reimbursement ................. -- -- -- --
After expense reimbursement .................. 1.11% 1.18% 1.37% 1.31%+
After expense reimbursement and expenses
paid indirectly ............................ -- -- -- --
Ratio of net investment income to average
net assets:+
(net of expense reimbursement/recoupment) ...... 0.57% 0.55% 0.59% 0.94%+
Portfolio turnover rate ........................ 76% 51% 23% 28%
</TABLE>
* Commencement of operations.
** Not annualized.
+Annualized.
See accompanying Notes to Financial Statements.
36
<PAGE>
KAYNE ANDERSON MUTUAL FUND
SMALL CAP INTERNATIONAL
RISING DIVIDENDS RISING DIVIDENDS
FUND FUND
- ---------------------------------------------------------------------
Year Year 10/18/96* Year Year 10/18/96*
Ended Ended to Ended Ended to
12/31/98 12/31/97 12/31/96 12/31/98 12/31/97 12/31/96
- -------- -------- -------- -------- -------- --------
$ 13.12 $11.06 $10.65 $ 12.61 $ 10.91 $ 10.65
0.05 0.02 0.02 0.08 0.04 0.01
2.07 2.14 0.41 3.25 1.75 0.26
2.12 2.16 0.43 3.33 1.79 0.27
(0.05) (0.05) (0.02) (0.08) (0.05) (0.01)
0.00 (0.05) 0.00 (0.35) (0.04) 0.00
(0.15) 0.00 0.00 0.00 0.00 0.00
(0.20) (0.10) (0.02) (0.43) (0.09) (0.01)
$ 15.04 $13.12 $11.06 $ 15.51 $ 12.61 $ 10.91
16.17% 19.46% 4.00%** 26.47% 16.42% 2.56%**
$ 33,017 $6,494 $ 808 $ 35,436 $ 7,012 $ 1,055
1.35% 3.22% 18.91%+ 1.45% 3.41% 15.74%+
1.30% 1.30% 1.30%+ 1.38% 1.40% 1.40%+
0.38% 0.45% 1.58%+ 0.85% 0.61% 1.14%+
28% 47% 0% 28% 29% 0%
37
<PAGE>
FINANCIAL HIGHLIGHTS
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD
Net asset value, beginning of period ................
Income from investment operations:
Net investment income .............................
Net realized and unrealized gains on investments ..
Total income from investment operations .............
Less distributions:
From net investment income ........................
From net realized gains ...........................
From paid in capital ..............................
Total distributions .................................
Net asset value, end of period ......................
Total return ........................................
Net assets, end of period (in 000's) ................
Ratio of expenses to average net assets:+
Before expense reimbursement ......................
After expense reimbursement .......................
After expense reimbursement and expenses paid
indirectly ......................................
Ratio of net investment income to average net assets+
(net of expense reimbursement, if applicable) .....
Portfolio turnover rate .............................
* Commencement of operations.
** Not annualized.
+ Annualized.
See accompanying Notes to Financial Statements.
38
<PAGE>
KAYNE ANDERSON MUTUAL FUND
INTERMEDIATE INTERMEDIATE
TOTAL RETURN TAX-FREE
BOND FUND BOND FUND
- ---------------------------------------------------------------------------
Year Year 10/28/96* Year Year 10/28/96*
Ended Ended to Ended Ended to
12/31/98 12/31/97 12/31/96 12/31/98 12/31/97 12/31/96
-------- -------- -------- -------- -------- --------
$ 10.75 $ 10.59 $ 10.65 $ 10.74 $ 10.64 $ 10.65
0.51 0.56 0.09 0.43 0.34 0.01
0.30 0.18 (0.07) 0.03 0.11 (0.01)
0.81 0.74 0.02 0.46 0.45 0.00
(0.51) (0.58) (0.08) (0.43) (0.35) (0.01)
(0.04) 0.00 0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00 0.00 0.00
(0.55) (0.58) (0.08) (0.43) (0.35) (0.01)
$ 11.01 $ 10.75 $ 10.59 $ 10.77 $ 10.74 $ 10.64
7.61% 7.19% 0.20%** 4.37% 4.26% 0.02%**
$ 28,330 $ 6,261 $ 5,033 $ 9,391 $ 6,015 $ 5,124
1.00% 2.23% 2.10%+ 2.23% 2.29% 2.08%+
0.94% 0.95% 0.95%+ 0.77% 1.56% 1.81%+
-- -- -- -- 0.95% 0.95%+
4.93% 5.35% 4.72%+ 3.88% 2.58% 0.60%+
49% 27% 0% 47% 40% 0%
39
<PAGE>
KAYNE ANDERSON MUTUAL FUND
NOTES TO FINANCIAL STATEMENTS AT DECEMBER 31, 1998
- --------------------------------------------------------------------------------
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 separate diversified series: Rising Dividends Fund,
Small 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 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 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 generally having a total
market capitalization of $1 billion or more.
The Small 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.
40
<PAGE>
KAYNE ANDERSON MUTUAL FUND
NOTES TO FINANCIAL STATEMENTS AT DECEMBER 31, 1998, CONTINUED
- --------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund. These policies are in conformity with generally accepted
accounting principles.
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, 1998 the Small Cap Rising
Dividends Fund had capital loss carryforwards available for Federal
income tax purposes of $107,282 which expire in 2006.
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.
41
<PAGE>
KAYNE ANDERSON MUTUAL FUND
NOTES TO FINANCIAL STATEMENTS AT DECEMBER 31, 1998
- --------------------------------------------------------------------------------
NOTE 3 - INVESTMENT ADVISORY AND MANAGEMENT FEES AND OTHER
TRANSACTIONS WITH AFFILIATES
For the year ended December 31, 1998, 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. As compensation for its services, the
Advisor is entitled to a monthly fee at the following annual rate based upon the
average daily net assets of the Funds:
Rising Dividends Fund.............................................. 0.75%
Small 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%
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:
Rising Dividends Fund.............................................. 1.20%
Small Cap Rising Dividends Fund.................................... 1.30%
International Rising Dividends Fund................................ 1.40%
Intermediate Total Return Bond Fund................................ 0.95%
Intermediate Tax-Free Bond Fund.................................... 0.75%
Pursuant to these expense limitation provisions, the Advisor reimbursed
the Small Cap Rising Dividends Fund $12,965, the International Rising Dividends
Fund $18,889, the Intermediate Total Return Bond Fund $15,132, and the
Intermediate Tax-Free Bond Fund $99,797 during the year ended December 31, 1998.
The Investment Advisory Agreement further provides that the Advisor may
seek reimbursement from the funds for any fees foregone and expenses paid
pursuant to these expense limitation provisions. However, such reimbursement
will be made only if the actual expenses incurred by the fund in any of the
three following years are less than the applicable expense limitation provisions
outlined above. At December 31, 1998, the Advisor has waived fees and paid
expenses of $107,140 for the Small Cap Rising Dividends Fund, $119,902 for the
International Rising Dividends Fund, $96,690 for the Intermediate Total Return
Bond Fund, and $142,838 for the Intermediate Tax-Free Fund which may be
reimbursable in the future.
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, 1998 were as follows:
Small Cap Rising Dividends Fund.................................. $48,597
International Rising Dividends Fund.............................. $ 5,749
42
<PAGE>
KAYNE ANDERSON MUTUAL FUND
Investment Company Administration, L.L.C. (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 the 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 Distributors, 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, 1998, the cost of purchases and the
proceeds from sales of securities, excluding short-term securities and U.S.
Government securities were as follows:
FUND PURCHASES SALES
---- --------- -----
Rising Dividends Fund $38,430,448 $32,398,487
Small Cap Rising Dividends Fund $29,864,665 $ 6,895,670
International Rising Dividends Fund $31,713,580 $ 7,291,010
Intermediate Total Return Bond Fund $11,350,633 $ 1,349,001
Intermediate Tax-Free Bond Fund $ 6,354,825 $ 3,059,388
The Intermediate Total Return Bond Fund purchased $18,925,384, and sold
$8,093,031, respectively, of U.S. Government securities. There were no purchases
or sales of U.S. Government securities by Rising Dividends Fund, Small Cap
Rising Dividends Fund, International Rising Dividends Fund, and Intermediate
Tax-Free Bond Fund.
During the year ended December 31, 1998 the International Rising Dividends
Fund realized gains in the amount of $42,057 from the "in-kind" distribution of
appreciated securities to a redeeming shareholder.
43
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KAYNE ANDERSON MUTUAL FUND
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 Cap Rising Dividends Fund, the International Rising Dividends Fund, the
Intermediate Total Return Bond Fund, and the Intermediate Tax-Free Bond Fund),
including the portfolios of investments, as of December 31, 1998, and the
related statements of operations for the year then ended, and the statements of
changes in net assets and the financial highlights for each of the two years in
the period 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
audits. The financial highlights for each of the periods ended December 31, 1996
and 1995 were audited by other auditors whose report dated February 4, 1997
expressed an unqualified opinion on the financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, 1998, by correspondence with the custodian. 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the Funds comprising the Kayne Anderson Mutual Funds as of December 31, 1998,
the results of their operations for the year then ended, and the changes in
their net assets and the financial highlights for each of the two years in the
period then ended in conformity with generally accepted accounting principles.
BRIGGS, BUNTING & DOUGHERTY, LLP
PHILADELPHIA, PENNSYLVANIA
JANUARY 22, 1999
44
<PAGE>
ADVISOR
Kayne Anderson Investment Management, LLC
1800 Avenue of the Stars, 2nd Floor
Los Angeles, California 90067
(310) 556-2721
*
DISTRIBUTOR
First Fund Distributors, Inc.
4455 East Camelback Road, Suite 261E
Phoenix, Arizona 85018
*
CUSTODIAN AND TRANSFER AGENT
Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02116
*
AUDITORS
Briggs, Bunting & Dougherty, LLP
Two Logan Square, Suite 2121
Philadelphia, Pennsylvania 19103
*
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.
