KAYNE ANDERSON
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
LETTER TO SHAREHOLDERS....................................................... 2
INVESTMENT ADVISOR COMMENTS AND PORTFOLIOS OF INVESTMENTS
Rising Dividends Fund..................................................... 3
Small Cap Rising Dividends Fund........................................... 8
International Rising Dividends Fund....................................... 15
Intermediate Total Return Bond Fund....................................... 23
California Intermediate Tax-Free Bond Fund................................ 29
STATEMENTS OF ASSETS AND LIABILITIES......................................... 36
STATEMENTS OF OPERATIONS..................................................... 38
STATEMENTS OF CHANGES IN NET ASSETS.......................................... 40
FINANCIAL HIGHLIGHTS......................................................... 42
NOTES TO FINANCIAL STATEMENTS................................................ 46
[Graphic]
Annual Report
December 31, 1999
<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, annual 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
Chief Executive Officer Chairman & President
Kayne Anderson Investment Management, LLC
2
<PAGE>
KAYNE ANDERSON RISING DIVIDENDS FUND
OBJECTIVE:
The KAYNE ANDERSON RISING DIVIDENDS FUND (the "Fund") invests in high-quality,
large-capitalization companies, seeking out those businesses having global
dominance, excellent management, financial strength and consistent growth. The
investment goal of the Fund is to achieve excellent long-term performance by
owning shares in some of the world's finest companies.
COMMENTARY:
The Fund produced a 16.33% return for the year ending December 31, 1999,
compared to 21.04% for the S&P 500 Index. For the three years ending December
31, 1999, the Fund was up an annualized average of 20.26%, versus 27.56% for the
S&P 500.
For the full year, the Fund benefited from gains by companies in the computer
systems, insurance, electrical equipment, electronics, computer software and
household products industries. It was a year marked by strong performance by the
technology sector, and our technology holdings, such as Hewlett Packard and
Intel, performed well. While there is significant exposure to the technology
sector in the Fund, overall the portfolio is underweighted in this area compared
to the S&P 500. As noted below, we expect to be adding to technology holdings
when valuations become more attractive.
The portfolio's performance was hindered during the year by negative sentiment
affecting the health care and consumer staples industries. In general, health
care stocks were impacted by concerns about upcoming pharmaceutical patent
expirations and by the discussion in Congress of a Medicare prescription drug
benefit, which could pressure pricing. Consumer staples stocks have been
affected by retail consolidation, sluggish domestic growth, a lack of pricing
power and slow recovery in key international markets.
For the year, thematically, we removed certain turnaround situations from the
Fund and replaced them with more consistent, growth-oriented positions. We
lessened exposure to the smaller companies in the large capitalization spectrum
and increased exposure to the larger companies, consistent with the composition
of the benchmark. During the year, we also increased our weighting in the
technology area.
OUTLOOK:
Looking forward, we believe that the Fund is well positioned for consistent
growth. Based on our research, we believe the companies in the portfolio should
produce earnings per share growth averaging 13% to 15% annually with low
variability.
Our outlook for the domestic economy is for continued moderate growth with low
inflation. There are signs that economies in the Asia-Pacific region are picking
up, which bodes well for our portfolio of industry-leading multinational
companies. Given the general low level of price inflation around the world, the
environment should continue to favor companies that can produce solid unit
volume growth, driving consistent double-digit earnings increases. The Fund is
populated with high-quality companies that fit this description.
3
<PAGE>
KAYNE ANDERSON RISING DIVIDENDS FUND
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE KAYNE ANDERSON
RISING DIVIDENDS FUND AND THE S&P INDEX
Average Annual Total Return
for the periods ending December 31, 1999
One Year Since Inception (5/1/95)
16.33% 21.66%
Kayne Anderson Rising
Dividends Fund S & P 500 Index
-------------- ---------------
May-95 10000 10000
Jun-95 10394.37 10592.89
Sep-95 11089.2 11364.1
Dec-95 12064.79 11977.4
Mar-96 12809.88 12552.02
Jun-96 13249.3 13040.68
Sep-96 13688.71 13365.03
Dec-96 14367.379 14404
Mar-97 14718.96 14722.51
Jun-97 17137.01 17211.92
Sep-97 17879.48 18420.25
Dec-97 18821.01 18870.42
Mar-98 21086.5 21423.99
Jun-98 21500.39 22047.99
Sep-98 18510.86 19776.18
Dec-98 21482.9 23902.89
Mar-99 22290.02 25014
Jun-99 24268.2 26692.92
Sep-99 22721.1 24942.83
Dec-99 24990.7 28570.18
Past performance is not predictive of future performance.
4
<PAGE>
KAYNE ANDERSON RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS at December 31, 1999
Shares COMMON STOCKS: 99.1% Value
- ------ -------------------- -----
BASIC MATERIALS / CHEMICALS: 3.6%
70,930 PPG Industries, Inc...................................... $ 4,437,558
-----------
CAPITAL GOODS / ELECTRICAL EQUIPMENT: 7.4%
74,450 Emerson Electric Company................................. 4,271,568
31,300 General Electric Company................................. 4,843,675
-----------
9,115,243
-----------
CONSUMER CYCLICAL / ENTERTAINMENT & LEISURE: 4.1%
171,390 The Walt Disney Company.................................. 5,013,157
-----------
CONSUMER CYCLICAL / RESTAURANTS: 3.5%
107,020 McDonald's Corporation................................... 4,314,243
-----------
CONSUMER STAPLES / BEVERAGES: 3.7%
79,470 Coca-Cola Co............................................. 4,629,127
-----------
CONSUMER STAPLES / CONSUMER PRODUCTS: 4.3%
48,160 Procter & Gamble Company................................. 5,276,530
-----------
CONSUMER STAPLES / FOODS: 5.6%
79,050 BestFoods................................................ 4,155,065
33,260 Wm. Wrigley, Jr., Company................................ 2,758,501
-----------
6,913,566
-----------
CAPITAL GOODS / MANUFACTURING (DIVERSIFIED): 3.5%
64,440 Illinois Tool Works Inc.................................. 4,353,727
-----------
ENERGY / PETROLEUM - INTERNATIONAL: 4.0%
60,930 Exxon Mobil Corp......................................... 4,908,673
-----------
FINANCIAL / BANKING: 3.5%
107,140 Wells Fargo & Company.................................... 4,332,474
-----------
5
<PAGE>
KAYNE ANDERSON RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS at December 31, 1999 (continued)
Shares Value
- ------ -----
FINANCIAL / FINANCIAL SERVICES: 7.6%
76,780 Fannie Mae............................................... $ 4,793,951
62,440 State Street Boston Corporation.......................... 4,562,022
-----------
9,355,973
-----------
FINANCIAL / INSURANCE: 7.1%
61,810 Marsh & McLennan Companies Inc........................... 5,914,444
26,900 American International Group............................. 2,908,562
-----------
8,823,006
-----------
HEALTH CARE / DRUGS & HOSPITAL SUPPLIES: 10.6%
111,670 Abbott Laboratories...................................... 4,055,017
52,470 Johnson & Johnson........................................ 4,886,269
62,280 Merck & Co., Inc......................................... 4,176,653
-----------
13,117,939
-----------
HEALTH CARE / MEDICAL DEVICES: 3.9%
132,340 Medtronics, Inc.......................................... 4,822,139
-----------
TECHNOLOGY / COMPUTERS & OFFICE EQUIPMENT: 9.0%
53,880 Hewlett-Packard Company.................................. 6,138,953
46,220 International Business Machines.......................... 4,991,761
-----------
11,130,714
-----------
TECHNOLOGY / DATA SERVICES: 8.4%
101,160 Automatic Data Processing Inc............................ 5,449,996
74,560 Electronic Data Systems Corporation...................... 4,990,861
-----------
10,440,857
-----------
TECHNOLOGY / SEMICONDUCTORS: 5.1%
76,690 Intel Corporation........................................ 6,312,546
-----------
TELECOMMUNICATION: 4.2%
101,420 AT&T Corporation......................................... 5,147,066
-----------
TOTAL COMMON STOCKS (Cost $104,187,345).................. 122,444,538
-----------
6
<PAGE>
KAYNE ANDERSON RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS at December 31, 1999 (continued)
Value
-----
TOTAL INVESTMENTS IN SECURITIES
(Cost $104,187,345*): 99.1%............................ $122,444,538
OTHER ASSETS LESS LIABILITIES: 0.9%.................... 1,060,233
------------
NET ASSETS: 100.0%..................................... $123,504,771
============
* Cost for federal income tax purposes is the same.
Net unrealized appreciation consists of:
Gross unrealized appreciation.......................... $ 20,076,698
Gross unrealized depreciation.......................... (1,819,505)
------------
Net unrealized appreciation................. $ 18,257,193
============
See accompanying Notes to Financial Statements.
7
<PAGE>
KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND
OBJECTIVE:
The goals of the KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND are:
* To build a diversified portfolio of the next generation of high quality
"blue chip" companies.
* To produce returns typical of small stocks, but with no more risk than the
S&P 500 Index of large stocks.
We manage the Fund to achieve a combination of superior quality, growth and
value. Earnings growth of the companies within the portfolio is the basic driver
of the Fund's stock market returns. Quality is designed to keep the Fund out of
trouble in difficult economies like that in 1998 when our portfolio advanced
despite a decline in the overall market for small stocks. And value helps
translate earnings growth into stock market growth. As seen in the following
table, we believe the balance of these financial characteristics in the Fund
today are exceptional.
<TABLE>
<CAPTION>
Kayne Russell
Anderson 2500
Small Cap Index
--------- -----
<S> <C> <C> <C>
QUALITY
Return on Equity - Past 5 Years 23.7% 14.0% More Profitable
Long-term Debt/total Capital 18.5% 36.0% Less Financial Risk
Interest Expense Coverage Net Interest Income 7.0X Less Financial Risk
Earnings Variance - Past 10 Years 35.4% 77.0% More Dependable
a Rated by S&p 51.5% 8.0% Better Quality
Growth
Earnings Per Share Growth - Past 5 Years 17.6% 14.5% Recovery
Earnings Per Share Growth - Past 10 Years 14.7% 9.3% Recession
Dividend Per Share Growth - Past 5 Years 16.3% 10.7% Recovery
Dividend Per Share Growth - Past 10 Years 12.6% 5.7% Recession
Capital Generation - {Roe X (1-Payout)} 18.0% 11.3% Faster Growth
VALUE
P/E Ratio - Latest 12 Months 19.3 30.8 Better Value
Dividend Yield 1.4% 1.3% Better Income
MARKET CHARACTERISTICS
$ Weighted Average Market Capitalization $1.15 Billion $1.01 Billion Comparable Size
Monthly Standard Deviation - Since Inception 12.2% 16.9% Less Market Risk
</TABLE>
- ----------
Note: Data as of December 31, 1999.
Data was obtained from the Frank Russell Company and CompuStat and is assumed to
be reliable.
S&P 500 Index standard deviation is 12.4%.
8
<PAGE>
KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND
COMMENTARY:
The Russell 2000 Index of small stocks produced a very strong return of +18.6%
for the 4th quarter, accounting for most of the 1999 year return of +21.3%. The
Kayne Anderson small cap portfolio, which performed in-line with the Russell
2000 Index for the first nine months of 1999, lagged significantly in the fourth
quarter as the market was driven by aggressive technology stocks with little or
no earnings behind them. In 1998, investors gravitated toward quality companies,
helping us to outperform the Russell 2000 Index by nearly 20%. To a lesser
degree, that situation reversed in 1999. Stocks selling at over 60 times
earnings were the best performers (+88%), those with no earnings were the next
best performing group (+63%), and those selling at 16 to 20 times earnings,
which characterizes our portfolio, were the worst performing group (-7%). We are
confident that our investment discipline of seeking profitable companies will be
validated.
1999 Return - Russell 2000 Index
Trailing P/E 1999 Return
- ------------ -----------
0-8 3.7%
8-12 0.2%
12-14 -5.2%
14-16 -4.2%
16-20 -6.7%
20-30 6.4%
30-45 20.8%
45-60 47.0%
Over 60 88.4%
Negative 63.2%
1999 Return - Russell 2000 Index
Russell 2000
1999 Return
-----------
Staples -20.7%
Finance -6.7%
Transport -5.3%
Basic Materials -3.7%
Consumer Cyclical 11.6%
Healthcare 15.2%
Energy 29.5%
Capital Goods 36.0%
Utilities 39.7%
Technology 104.8%
We added three new names to the portfolio in the second half of the year -
Dallas Semiconductor Corporation, Duff & Phelps Credit Rating Company, and Jack
Henry & Associates. We sold two positions - American Heritage Life and Mutual
Risk Management.
Dallas Semiconductor manufactures specialty semiconductors for communications,
computing and industrial applications. This is a consistent 20% grower
generating strong profit margins and free cash flow from a cash-rich balance
sheet. Its products are in over half of all cellular telephones. On the
Internet, the company's timekeeping chips keep network servers synchronized and
its T1 transceivers are in Cisco and Lucent's hubs and routers.
Duff & Phelps is a global credit rating agency that issues credit ratings on
bonds, preferred stocks, commercial paper, certificates of deposit, structured
financings, asset-backed securities, and insurance claims paying ability. The
business is very difficult to enter because it requires SEC designation and the
SEC has not approved new credit rating agencies in years. New innovative
securities issued by Wall Street help fuel growth. In addition, growth will come
from an increased level of securities issuance as companies continue to raise
capital. The business produces strong, consistent growth with high profit
margins and requires very little in the way of capital investment.
9
<PAGE>
KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND
During the second half of 1999, we also invested in Jack Henry & Associates, the
leading supplier of software and computer systems to community banks. Products
include core-banking systems, ATM switching services, check imaging systems, and
the nation's most widely installed Internet banking software. The company's
leading market position allows Jack Henry to generate strong growth with high
profit margins and high returns on capital from a debt free balance sheet,
producing free cash flow along the way. Because banking is becoming more
dependent on advancing technology, community banks are becoming more reliant on
Jack Henry in order to remain competitive.
We sold our holdings of American Heritage Life in the second half of the year
following its agreement to be purchased by The Allstate Corporation at a premium
price. Allstate is the nation's largest auto and home insurer. It was attracted
to American Heritage's strong position, selling life and health insurance
through corporate payroll deduction plans.
We also sold Mutual Risk Management following the announcement that third
quarter earnings would be flat-to-down 10% after nearly a decade of consistent
year-over-year growth averaging 20%. Full year 2000 earnings are expected to
decline as well. The problem is not unique to the company. One "Wall Street"
analyst has seen 77% of the companies in the property and casualty insurance
industry under their coverage "blow up".
OUTLOOK:
Our current small cap portfolio now sells at a price-to-earnings (P/E) ratio 35%
lower than the P/E ratio of the S&P 500 Index of large stocks. This is an
exceptional value and this value has attracted corporate buyers. Larger
companies acquired three of our holdings in 1999 because they were attractive
businesses available at discounted market valuations - American Heritage Life,
Ballard Medical Products, and TCA Cable Television. Because we own high quality
companies growing faster than the S&P 500, our portfolio has sold as high as a
30% premium over the past decade. 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.
10
<PAGE>
KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND
KAYNE ANDERSON SMALL CAP P/E VERSUS S&P 500 P/E
DATE P/E RELATIVE TO S&P 500
---- -----------------------
12/89 110.00%
1/90 100.00%
2/90 95.00%
3/90 91.08%
4/90 93.84%
5/90 97.57%
6/90 92.02%
7/90 89.68%
8/90 84.56%
9/90 85.44%
10/90 84.63%
11/90 81.56%
12/90 85.00%
1/91 84.00%
2/91 90.00%
3/91 84.00%
4/91 80.00%
5/91 78.00%
6/91 78.85%
7/91 76.16%
8/91 74.44%
9/91 67.32%
10/91 70.17%
11/91 74.77%
12/91 82.00%
1/92 84.00%
2/92 86.00%
3/92 83.51%
4/92 81.96%
5/92 83.36%
6/92 88.00%
7/92 88.00%
8/92 87.00%
9/92 88.06%
10/92 85.85%
11/92 88.01%
12/92 92.17%
1/93 89.12%
2/93 85.96%
3/93 86.87%
4/93 83.76%
5/93 86.39%
6/93 84.82%
7/93 82.52%
8/93 82.65%
9/93 94.70%
10/93 89.84%
11/93 89.65%
12/93 90.75%
1/94 89.91%
2/94 89.84%
3/94 93.69%
4/94 90.14%
5/94 87.15%
6/94 93.26%
7/94 90.71%
8/94 89.45%
9/94 95.58%
10/94 93.42%
11/94 94.35%
12/94 109.55%
1/95 107.90%
2/95 108.52%
3/95 128.55%
4/95 124.64%
5/95 120.98%
6/95 125.63%
7/95 121.59%
8/95 127.43%
9/95 122.06%
10/95 117.40%
11/95 115.85%
12/95 106.11%
1/96 106.73%
2/96 107.18%
3/96 104.77%
4/96 114.66%
5/96 115.49%
6/96 109.94%
7/96 106.48%
8/96 108.69%
9/96 111.49%
10/96 110.88%
11/96 104.36%
12/96 105.07%
1/97 99.67%
2/97 95.93%
3/97 94.81%
4/97 96.03%
5/97 98.03%
6/97 97.58%
7/97 91.41%
8/97 96.11%
9/97 95.33%
10/97 98.78%
11/97 98.69%
12/97 90.16%
1/98 90.42%
2/98 89.39%
3/98 83.14%
4/98 83.66%
5/98 83.58%
6/98 78.59%
7/98 77.40%
8/98 75.78%
9/98 70.83%
10/98 74.03%
11/98 72.58%
12/98 69.35%
1/99 71.65%
2/99 71.54%
3/99 68.78%
4/99 70.58%
5/99 78.09%
6/99 80.67%
7/99 69.40%
8/99 65.81%
9/99 77.10%
10/99 66.62%
11/99 66.14%
12/99 65.25%
Price / Earnings ratio for the stocks currently in the Kayne Anderson Small Cap
Rising Dividends Fund divided by the Price / Earnings ratio of the Standard &
Poors 500 Index. Source: CompuStat
11
<PAGE>
KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE KAYNE ANDERSON
SMALL CAP RISING DIVIDENDS FUND AND THE RUSSELL 2000 INDEX
Average Annual Total Return
for the periods ending December 31, 1999
One Year Since Inception (10/18/96)
3.64% 13.40%
Kayne Anderson Small Cap
Rising Dividends Fund Russell 2000 Index Russell 2500 Index
--------------------- ------------------ ------------------
10/18/96 10,000 10,000 10,000
12/31/96 10,401 10,471 10,438
3/31/97 10,129 9,930 10,088
6/30/97 11,390 11,539 11,612
9/30/97 12,856 13,257 13,279
12/31/97 12,426 12,813 12,980
3/31/98 13,781 14,101 14,311
6/30/98 13,933 13,444 13,714
9/30/98 12,506 10,736 11,099
12/31/98 14,435 12,486 13,030
3/31/99 13,838 11,809
6/30/99 15,779 13,646
9/30/99 14,349 12,783
12/31/99 14,957 15,140
Past performance is not predictive of future performance.
The Russell 2500 Index is no longer used by the Fund as a benchmark because of a
change in its classification from a small & mid cap fund to a small cap fund.
12
<PAGE>
KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS at December 31, 1999
Shares COMMON STOCKS: 96.5% Value
- ------ -------------------- -----
BASIC MATERIALS / PACKAGING: 7.3%
60,427 Bemis Company........................................... $ 2,107,391
27,069 Liqui-Box Corporation................................... 1,339,915
-----------
3,447,306
-----------
BASIC MATERIALS / PAINTS AND COATING: 5.1%
66,054 Benjamin Moore & Co..................................... 2,419,227
-----------
CAPITAL GOODS / MACHINERY EQUIPMENT: 6.5%
114,297 Federal Signal Corporation.............................. 1,835,895
24,894 Nordson Corporation..................................... 1,201,135
-----------
3,037,030
-----------
CONSUMER CYCLICALS / FURNITURE: 4.1%
114,952 LA-Z Boy Chair Co....................................... 1,932,630
-----------
CONSUMER CYCLICALS / RETAIL: 5.6%
118,230 Claire's Stores Inc..................................... 2,645,396
-----------
CONSUMER CYCLICALS / SERVICES: 5.2%
124,052 Strayer Education Inc................................... 2,450,027
-----------
CONSUMER STAPLES / FOOD: 4.8%
67,687 Tootsie Roll Industries, Inc............................ 2,229,440
-----------
ENERGY / OIL & GAS PRODUCTION: 3.1%
44,524 Devon Energy Corporation................................ 1,463,726
-----------
FINANCE / BANKING: 7.8%
107,407 National Commerce Bancorp............................... 2,436,796
61,092 Washington Federal, Inc................................. 1,206,567
-----------
3,643,363
-----------
FINANCE / FINANCIAL SERVICES: 13.2%
70,342 Eaton Vance Corporation................................. 2,672,997
34,008 Fiduciary Trust Company................................. 1,096,776
27,600 Duff & Phelps Credit Rating Company..................... 2,454,676
-----------
6,224,449
-----------
13
KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS at December 31, 1999
Shares Value
- ------ -----
HEALTH CARE / DRUGS & HOSPITAL SUPPLIES: 8.5%
78,550 Hooper Holmes Inc....................................... $ 2,022,663
90,210 Landauer Inc............................................ 1,973,344
-----------
3,996,007
-----------
TECHNOLOGY / COMPUTER & INTEGRATED SYSTEMS: 12.5%
111,462 Reynolds & Reynolds Inc., Class A....................... 2,507,896
63,000 Jack Henry & Associates................................. 3,382,312
-----------
5,890,208
-----------
TECHNOLOGY / ELECTRONICS: 2.1%
15,000 Dallas Semiconductor Corporation........................ 966,563
-----------
TECHNOLOGY / SOFTWARE & SERVICE: 5.9%
206,005 Timberline Software Corporation......................... 2,768,193
-----------
TRANSPORTATION / AIR TRANSPORT: 4.8%
69,956 Air Express International Corporation................... 2,260,453
-----------
TOTAL COMMON STOCKS (Cost $43,183,182).................. 45,374,018
-----------
TOTAL INVESTMENTS IN SECURITIES
(Cost $43,183,182*): 96.5%.............................. 45,374,018
OTHER ASSETS LESS LIABILITIES: 3.5%..................... 1,623,049
-----------
NET ASSETS: 100.0%..................................... $46,997,067
===========
* Cost for federal income tax purposes is the same.
Net unrealized appreciation consists of:
Gross unrealized appreciation........................... $ 5,374,109
Gross unrealized depreciation........................... (3,183,273)
-----------
Net unrealized appreciation............................. $ 2,190,836
===========
See accompanying Notes to Financial Statements.
14
<PAGE>
KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND
OBJECTIVE:
The goal of the KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND is to achieve
superior long-term results by investing in the best quality international
companies. We pursue this goal through a focused investment philosophy that
relies on the following principles: (1) commitment to quality; (2) long-term
vision; (3) independent fundamental research; (4) broad diversification; and (5)
valuation-driven decision making. We define quality companies as those
possessing a global competitive advantage, managerial excellence, financial
strength and flexibility, high levels 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
(Morgan Stanley Capital International Europe, Australasia and Far East) Index.
COMMENTARY:
For six-month period ended December 31, 1999, the Kayne Anderson International
Rising Dividends Fund had a total return of +17.0% versus +22.3% for the MSCI
EAFE Index (in dollar terms). The Fund, which follows a disciplined and
conservative investment strategy, has faced a combination of unique phenomena in
the last six months -- the surge of the Japanese Yen and the "irrational"
performance of technology stocks -- in a year in which market participants
neglected traditional, defensive, high-quality growth companies.
For the full year 1999, the Fund returned +31.1% compared to +27.3% for the MSCI
EAFE Index. As a result of its strong relative performance during the first six
months of the year, the Fund outperformed its benchmark for the third
consecutive year since its creation. The Fund's three-year average compounded
return of +24.5% compares very favorably with the +16.1% average annual return
report for the MSCI EAFE Index.
During the second half-year of 1999, the Japanese equity market rose +27.9% in
dollar terms (Nikkei Index) boosted by a sharp appreciation of the Yen (+19.6%).
The underlying performance in local currency of the equity market was a more
modest +8.3%, reflecting some slowdown of momentum after a very positive first
six-month period. After a flat first half of 1999 performance, the European
equity markets performed strongly over the last six months--the Euro 100 index
increased +19.9% in dollars--despite continued weakness in the Euro/Dollar
exchange rate (-3.2%). The recovery of the Euro/dollar parity during the summer
of 1999 aborted after the U.S. released very firm GDP growth figures for the
third quarter of 1999, which suggested that U.S. interest rates might still be
on an upward trend.
As of December 1999, the four largest countries represented in the Fund were the
United Kingdom (25.0%), Japan (19.8%), The Netherlands (13.1%), and France
(11.7%). Over the last six months, the Fund's exposure to the Japanese market
increased by 11.7%, reflecting the appreciation of the market and the purchase
of two new stocks: Minebea and Shiseido (discussed below). Also, we added Air
Liquide in France and Heineken in the Netherlands. In order to finance those new
investments we reduced the Fund's exposure to the U.K. market, which came down
by 3.4%. We sold BOC in the U.K. and took some profits in several other stocks.
Among the second half strong winners we should name Sony (+158%), Nokia (+108%),
Ericsson (+99%), Pearson (+59%), SAP (+50%), Compass (+37%), and Cable &
Wireless (+35%). With the exception of Compass, all those stocks were either
15
<PAGE>
operating in the technology sector or related to the Internet. Among the losers,
we should mention Diageo (-24%), Unilever (-21%) and Tomkins (-19%). In general,
the weakest stocks in the portfolio were companies that operate in currently
out-of-favor sectors, such as foods, beverages, pharmaceuticals, and financials.
NEW PURCHASES:
AIR LIQUIDE:
Headquartered in France, Air Liquide is the world's leading industrial gases
company with strong positions in Southern Europe, the USA and Asia. In
conjunction with Air Products of the USA, Air Liquide offered to buy BOC, the
world number two player in the industry. The purchase is subject to regulatory
approval that should come in the next few months. BOC represents a very good fit
for Air Liquide with its dominant presence in the United Kingdom and
complementary positions in Asia and the U.S. After several years of heavy
investments to build capacity, the industry is entering a "harvesting" period at
a time when the global economy is recovering.
HEINEKEN NV:
Headquartered in the Netherlands, Heineken is the world's most internationally
diversified brewer. Heineken is a margin improvement story. The Heineken brand
represents only 25% of the company's total beer volume yet enjoys double the
margins of the firm's other brands. We believe strong volume growth in premium
beers, particularly in the U.S., should drive the company's margins up
dramatically. The company is a strong player that is expected to grow more than
15% per year over the next few years.
MINEBEA:
Based in Japan, Minebea is the world's leading manufacturer of miniature ball
bearings (22 mm or less). Minebea has dominant market share in its core
products, is the low-cost leader in manufacturing and maintains a commitment to
technological innovation. The company is currently benefiting from positive
changes in its product mix and higher rate utilization in its production
facilities. It has excellent long-term prospects based on increasing demand for
Hard Disk Drives (the primary consumer of ball bearings), as the consumer
electronics industry continues to develop new applications (for example, DVD
players).
SHISEIDO:
Shiseido is Japan's leading cosmetics company. It has strong brand name
associated with luxury and prestige in the U.S. and in Europe. Shiseido has
embarked on a comprehensive restructuring plan with a focus on cost-cutting that
should substantially improve its profitability. In addition, the company has the
financial muscle to increase shareholder value not only through M&A activity but
also through share buybacks. Shiseido should benefit from a recovery in Japan
consumer spending and on the aging of the Japanese population.
16
<PAGE>
KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND
The country allocation of the Fund on December 31, 1999 was:
Australia 2.6%
Finland 3.1%
France 11.8%
Germany 4.5%
Hong Kong 2.8%
Japan 20.0%
Mexico 2.3%
Netherlands 13.1%
Spain 4.1%
Sweden 3.8%
Switzerland 6.7%
United Kingdom 25.2%
OUTLOOK:
We believe that the trends observed in 1999 should continued into 2000, albeit
less pronounced. We anticipate a continued acceleration in the European economic
activity; the year 2000 may be the strongest in a decade for European economies
and we should therefore witness a recovery in the Euro/Dollar parity. Because
Japan should make further progress on its restructuring path, we remain
confident that investors will continue to be rewarded by our investments in very
sound Japanese companies. More aggressive interest rate increases from the U.S.
Federal Reserve Board and the European Central Bank, which could stop
momentarily the equity markets upward trend, are the main risks for 2000. Longer
term, we remain confident that the profound economic transformation that is
taking place outside the U.S. will continue to support equity markets around the
world.
17
<PAGE>
KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND
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
Average Annual Total Return
for the periods ending December 31, 1999
One Year Since Inception (10/18/96)
31.06% 23.76%
Kayne Anderson International MSCI Europe, Australasia
Rising Dividends Fund and Far East Index
--------------------- ------------------
10/18/96 10,000 10,000
12/31/96 10,256 10,269
3/31/97 10,604 10,116
6/30/97 11,949 11,436
9/30/97 12,306 11,363
12/31/97 11,940 10,480
3/31/98 13,853 12,030
6/30/98 14,071 12,166
9/30/98 12,462 10,444
12/31/98 15,101 12,611
3/31/99 15,821 12,796
6/30/99 16,913 13,130
9/30/99 16,933 13,715
12/31/99 19,792 16,054
Past performance is not predictive of future performance.
18
<PAGE>
KAYNE ANDERSON INTERNATIONAL CAP RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS at December 31, 1999
Shares COMMON STOCKS: 99.4% Value
- ------ -------------------- -----
AUSTRALIA: 2.7%
40,732 Broken Hill Proprietary ADR............................. $ 1,081,943
-----------
FINLAND: 3.1%
6,568 Nokia Corporation ADR.................................. 1,247,920
-----------
FRANCE: 11.7%
16,712 AXA-UAP S.A. ADR........................................ 1,186,552
6,800 Air Liquide............................................. 1,137,107
26,285 Groupe Danone S.A. ADR.................................. 1,223,895
17,471 Total Fina S.A. ADR..................................... 1,209,866
-----------
4,757,420
-----------
GERMANY: 4.5%
34,866 SAP AG ADR.............................................. 1,815,211
-----------
HONG KONG / CHINA: 2.8%
1 Hong Kong & China Gas .................................. 1
15,834 Hong Kong & Shanghai Banking ADR........................ 1,130,151
-----------
1,130,152
-----------
JAPAN: 19.8%
34,000 Canon Inc............................................... 1,350,290
26,000 Kao Corporation......................................... 741,367
76,000 Minebea Co, Ltd......................................... 1,303,217
70,000 Shiseido Co............................................. 1,020,250
8,000 Sony Corporation........................................ 2,371,124
22,000 Uni_Charm .............................................. 1,267,534
-----------
8,053,782
-----------
MEXICO: 2.3%
45,291 Panamerican Beverages Inc. Class A ..................... 931,296
-----------
19
<PAGE>
KAYNE ANDERSON INTERNATIONAL CAP RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS at December 31, 1999 (continued)
Shares Value
- ------ -----
NETHERLANDS: 13.1%
34,453 Elsevier N.V. ADR....................................... $ 822,565
20,910 Heineken N.V............................................ 1,018,687
20,962 ING Groep N.V........................................... 1,264,186
38,000 Koninklijke Ahold N.V................................... 1,123,686
19,821 Unilever N.V............................................ 1,079,005
-----------
5,308,129
-----------
SPAIN: 4.1%
45,110 Endesa S.A. ADR......................................... 910,658
32,811 Repsol S.A. ADR......................................... 762,855
-----------
1,673,513
-----------
SWEDEN: 3.7%
23,263 Ericsson L.M. Telephone ADR............................. 1,528,088
-----------
SWITZERLAND: 6.6%
10,674 Nestle S.A. ADR......................................... 972,559
11,938 Novartis AG ADR......................................... 871,823
3,136 Union Bank of Switzerland............................... 846,769
-----------
2,691,151
-----------
UNITED KINGDOM: 25.0%
60,162 Allied Zurich Plc ...................................... 709,189
2,140 Astrazeneca Plc ADR..................................... 89,346
17,471 Astrazeneca Plc......................................... 724,982
17,510 Cable & Wireless Plc ADR................................ 926,936
80,000 Compass Group Plc....................................... 1,098,817
18,820 Diageo Plc ADR.......................................... 602,241
112,613 Invensys Plc ADR........................................ 1,216,041
31,448 Pearson Plc ............................................ 1,018,369
231,670 Rentokil Initial Plc.................................... 845,109
12,204 Reuters Group Plc ADR................................... 986,236
53,993 Tomkins Plc ADR......................................... 793,023
22,930 Vodafone Airtouch Plc ADR............................... 1,135,036
-----------
10,145,325
-----------
TOTAL COMMON STOCKS (Cost $31,472,192).................. 40,363,930
-----------
20
<PAGE>
PORTFOLIO OF INVESTMENTS at December 31, 1999 (continued)
Value
-----
TOTAL INVESTMENTS IN SECURITIES
(Cost $31,472,192*): 99.4%............................... $40,363,930
OTHER ASSETS LESS LIABILITIES: 0.6%...................... 225,941
-----------
NET ASSETS: 100.0%....................................... $40,589,871
===========
* Cost for federal income tax purposes is the same.
Net unrealized appreciation consists of:
Gross unrealized appreciation............................ $10,621,323
Gross unrealized depreciation............................ (1,729,585)
-----------
Net unrealized appreciation................... $ 8,891,738
===========
ADR - American depositary receipt.
See accompanying Notes to Financial Statements.
21
<PAGE>
KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND
PORTFOLIO OF INVESTMENTS BY INDUSTRY AT DECEMBER 31, 1999
- ------------------------------------------------------------------------------
Industry Percentage
- ------------------------------------------------------------------------------
Beer, Wine and Distilled Beverages........................ 4.0%
Books..................................................... 2.0
Beverages................................................. 4.7
Chemicals & Allied Products............................... 7.4
Commercial Banking........................................ 5.9
Communications Equipment.................................. 6.8
Communication Services.................................... 2.5
Computer & Other Data Processing Services................. 4.4
Crude Petroleum & Natural Gas............................. 4.5
Drugs..................................................... 2.4
Drugs, Proprietors & Sundries............................. 1.8
Eating & Drinking Places.................................. 2.7
Electric Services......................................... 2.3
Electrical Industrial Apparatus........................... 3.4
Electronic Components & Accessories....................... 3.0
Food, Beverage & Tobacco.................................. 3.0
Foreign Banks, Branches & Agencies........................ 2.1
Groceries & Related Products.............................. 2.6
Grocery Stores............................................ 2.8
Holding Offices........................................... 1.7
Household Audio & Video Equipment......................... 5.8
Insurance Carriers........................................ 2.9
Medical Instruments & Supplies............................ 2.0
Miscellaneous Business Services........................... 2.1
Miscellaneous Chemical Products........................... 2.8
Miscellaneous Electrical Machinery Equipment & Supplies... 3.2
Oil & Gas Field Services.................................. 3.0
Security & Commodity Services............................. 2.5
Telephone Communication................................... 5.1
-----
Total Investments......................................... 99.4
Other Assets less Liabilities............................. 0.6
-----
Net Assets................................................ 100.0%
=====
22
<PAGE>
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND
OBJECTIVE:
The goal of the KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND is to seek
total return through current income and capital appreciation, with principal
preservation a secondary consideration. The Fund seeks to achieve its goal by
investing primarily in high quality, intermediate maturity debt securities. The
Fund follows the premise 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:
For the year, the Fund's net asset value decreased $0.57, from $11.01 to $10.44.
After expenses, the Fund's total return (principal gain or loss and income) was
- -0.65%.
As of December 31, 1999, the three largest sectors represented in the Fund were:
U.S. Treasury (68%), Mortgage-Backed (10%), and Finance (8%). The three largest
individual credits held in the portfolio were U.S Treasury (68%), Federal
National Mortgage Association (6%) and Federal Home Loan Mortgage Corp. (5%).
OUTLOOK:
The Federal Reserve raised interest rates three times during the year citing
strong economic activity and creeping wage inflation. The marketplace continues
to be cautious, anticipating further tightening in the near future. Inflation,
as measured by the Consumer Price Index, has risen to 2.7% for the year, a rise
from 1.6% last year. Although inflation appears to still be low, on a percentage
basis the rise is significant and continues to be the main focus of the Federal
Reserve.
Within individual sectors, supply forces are at work. The supply of new U.S.
Treasury debt continues to dwindle due to a U.S. government budget surplus.
Corporate yield spreads are expanding in response to the huge supply currently
coming to market, highlighted by Ford Motor Co.'s $7 billion in global bonds
issued in July. Prepayments on real estate loans continue to slow and higher
coupon mortgages continue to benefit from longer outstanding coupon receipts.
23
<PAGE>
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND
SECTOR DIVERSIFICATION
Mortgage-Backed 10%
Asset-Backed 0%
Yankee/Euro 0%
CMO 0%
Industrial 5%
Finance 8%
Cash & Equivalents 1%
Agency 5%
U.S. Treasury 68%
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
for the periods ending December 31, 1999
One Year Since Inception (10/28/96)
-0.65% 4.45%
Kayne Anderson Lehman Brothers
Intermediate Total Government / Corporate
Return Bond Fund Intermediate Bond Index
---------------- -----------------------
10/28/96 10,000 10,000
12/31/96 10,020 10,077
3/31/97 9,948 10,064
6/30/97 10,249 10,403
9/30/97 10,525 10,723
12/31/97 10,741 10,984
3/31/98 10,900 11,155
6/30/98 11,071 11,364
9/30/98 11,307 11,874
12/31/98 11,558 11,908
3/31/99 11,531 13,410
6/30/99 11,413 13,463
9/30/99 11,519 13,541
12/31/99 11,483 13,533
Past performance is not predictive of future performance.
24
<PAGE>
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1999
Principal
Amount DEBT SECURITIES: 97.6% Value
------ ---------------------- -----
U.S. TREASURY OBLIGATIONS: 68.0%
U.S. TREASURY NOTES / BONDS
$ 250,000 5.375% due 07/31/2000............................. $ 249,454
1,000,000 7.750% due 02/15/2001............................. 1,017,500
6,000,000 7.500% due 05/15/2002............................. 6,161,250
1,775,000 6.250% due 10/31/2001............................. 1,775,556
2,200,000 6.250% due 02/15/2003............................. 2,193,814
1,000,000 5.750% due 08/15/2003............................. 979,376
2,050,000 11.875% due 11/15/2003............................ 2,420,923
2,000,000 7.875% due 11/15/2004............................. 2,116,250
4,980,000 7.250% due 08/15/2004............................. 5,140,297
8,000,000 7.500% due 02/15/2005............................. 8,347,505
551,000 5.875% due 11/15/2005............................. 535,159
1,500,000 6.500% due 10/15/2006............................. 1,496,250
2,000,000 6.250% due 02/15/2007............................. 1,968,750
2,007,000 5.625% due 05/15/2008............................. 1,888,463
-----------
Total U.S. Treasury Obligations...................... 36,290,547
-----------
U.S. AGENCY OBLIGATIONS: 5.4%
FEDERAL NATIONAL MORTGAGE ASSOCIATION: 2.0%
420,000 6.100% due 02/10/2000............................. 419,936
600,000 5.625% due 05/14/2004............................. 572,815
87,000 6.950% due 11/13/2006............................. 84,554
-----------
1,077,305
-----------
FEDERAL HOME LOAN MORTGAGE CORPORATION: 1.6%
875,000 8.530% due 02/02/2005............................. 876,022
-----------
FEDERAL HOME LOAN BANK: 1.8%
1,000,000 5.925% due 04/09/2008............................. 929,548
-----------
Total U.S. Agency Obligations........................ 2,882,875
-----------
25
<PAGE>
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1999 (continued)
Principal
Amount Value
------ -----
MORTGAGE-BACKED / PASS-THROUGH SECURITIES: 10.0%
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION: 2.6%
$ 796,003 7.000% due 07/20/2013............................. $ 783,659
10,011 8.000% due 11/15/2021............................. 10,122
15,056 8.500% due 12/15/2022............................. 15,510
220,855 8.000% due 07/15/2023............................. 223,294
127,159 8.500% due 08/15/2025............................. 130,987
43,795 8.500% due 06/15/2026............................. 45,113
120,555 8.000% due 09/15/2026............................. 121,886
54,431 8.000% due 11/15/2026............................. 55,032
-----------
1,385,603
-----------
FEDERAL NATIONAL MORTGAGE ASSOCIATION: 3.8%
1,400,000 6.000% due 08/25/2008............................. 1,347,549
472,082 7.000% due 05/01/2014............................. 464,079
230,686 8.000% due 01/01/2015............................. 233,697
-----------
2,045,325
-----------
FEDERAL HOME LOAN MORTGAGE CORPORATION: 3.6%
309,949 7.500% due 07/01/2009............................. 313,303
666,288 7.500% due 04/01/2014............................. 667,356
475,287 7.000% due 04/01/2016............................. 465,413
471,748 6.100% due 11/15/2016............................. 470,784
-----------
1,916,856
-----------
Total Mortgage-Backed / Pass-Through Securities...... 5,347,784
-----------
ASSET-BACKED RECEIVABLES: 0.2%
97,101 WFS Financial Owner Trust, 6.800% due 12/20/2003..... 97,306
-----------
CORPORATE BONDS: 14.0%
AUTO RENTALS: 0.3%
175,000 Ryder System Inc., 7.480% due 05/15/2000............. 175,402
-----------
AEROSPACE: 0.2%
70,000 Honeywell International, 9.200% due 02/15/2003....... 74,055
-----------
26
<PAGE>
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1999 (continued)
Principal
Amount Value
------ -----
BEVERAGES: 3.2%
$ 70,000 Anheuser Busch Companies, 6.750% due 11/01/2006...... $ 67,956
236,000 Coca-Cola Enterprises, 6.375% due 08/01/2001......... 234,752
1,500,000 Coca-Cola Bottling Company, 6.850% due 11/01/2007.... 1,421,041
-----------
1,723,749
-----------
COMMUNICATION SERVICES: 0.3%
175,000 TCI Communications Inc., 6.375% due 05/01/2003....... 171,465
-----------
DEPARTMENT STORES: 0.1%
70,000 Sears, Roebuck and Company, 9.450% due 07/25/2001.... 72,045
-----------
FINANCE: 8.2%
280,000 AT & T Capital Corporation, 7.500% due 11/15/2000.... 281,427
175,000 Bear Stearns Company, 6.625% due 10/01/2004.......... 169,045
70,000 Beneficial Corporation, 6.600% due 09/26/2001........ 69,773
1,000,00 Countrywide Home Loan, 7.450% due 09/16/2003......... 1,002,176
175,000 Finova Capital Corporation, 6.450% due 06/01/2000.... 174,864
300,000 Ford Motor Credit Corporation, 6.700% due 07/16/2004. 293,803
192,000 General Motors Acceptance Corporation, 7.125%
due 05/01/2003..................................... 191,479
175,000 Lehman Brothers Holdings, 8.875% due 03/01/2002...... 180,267
500,000 Lehman Brothers Holdings, 8.750% due 05/15/2002...... 514,410
1,000,000 Lehman Brothers Holdings, 7.250% due 10/15/2003...... 991,776
500,000 Salomon Inc., 9.250% due 05/01/2001.................. 514,554
-----------
4,383,574
-----------
INDUSTRIAL: 0.3%
175,000 Caterpillar Inc., 8.440% due 11/26/2003.............. 181,656
-----------
MOTION PICTURE PRODUCTION & OTHER SERVICES: 0.5%
278,000 The Walt Disney Company, 6.375% due 03/30/2001....... 277,259
-----------
RETAIL STORES: 0.6%
300,000 Wal-Mart Stores 6.55% due 08/10/2004................. 294,750
-----------
27
<PAGE>
KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1999 (continued)
Principal
Amount Value
------ -----
YANKEEEURO: 0.3%
$ 175,000 Cable & Wireless, 6.375% due 03/06/2003................$ 173,336
-----------
Total Corporate Bonds.................................. 7,527,291
TOTAL DEBT SECURITIES (Cost $53,043,607)............... 52,145,803
-----------
TOTAL INVESTMENTS IN SECURITIES
(Cost $53,043,607*): 97.6%.......................... 52,145,803
OTHER ASSETS LESS LIABILITIES: 2.4%.................... 1,258,373
-----------
NET ASSETS: 100.0%.....................................$53,404,176
===========
* Cost for federal income tax purposes is the same.
Net unrealized depreciation consists of:
Gross unrealized appreciation..................$ 74,329
Gross unrealized depreciation.................. (972,133)
-----------
Net unrealized depreciation..........$ (897,804)
===========
See accompanying Notes to Financial Statements.
28
<PAGE>
KAYNE ANDERSON CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
OBJECTIVE:
The goal of the KAYNE ANDERSON CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND is to
seek current income exempt from both federal and California income taxes
consistent with preservation of capital. The Fund seeks to achieve its goal by
investing primarily in high-quality, intermediate-maturity debt securities,
interest from which is exempt from federal and California state income taxes.
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:
For the year, the Fund's net asset value decreased $0.48, from $10.77 to $10.29.
After expenses, the Fund's total return (principal gain or loss and income) for
the year was -0.44%.
While invested among 10 sectors within the municipal bond market, the four
largest sectors represented in the Fund were: Water & Sewer (21%), General
Obligation (20%), Prerefunded (17%), and Transportation (11%). With the
acquisition of the Sefton California Tax-Free Fund by the Fund in November 1999,
California is now the dominant issuer.
OUTLOOK:
Currently long, intermediate and short-maturity municipal bonds are all fairly
valued relative to taxable bonds. Issuance was still large last year, at
approximately $220 billion, which was less than the year before and consequently
municipals performed well relative to taxable bonds.
The Federal Reserve raised interest rates three times last year citing strong
economic activity and creeping wage inflation. The marketplace is cautious,
fearing further tightening if inflation statistics continue to rise. Inflation,
as measured by the Consumer Price Index, has risen to 2.7% for the 12 month
period ending December 31, 1999, a rise from 1.6% last December.
SECTOR DIVERSIFICATION
Cash & Equivalents 0%
Daily Savrs 4%
Prerefunded 17%
Water & Sewer 21%
Education 1%
Transportation 11%
IDR/PCR 2%
Housing 7%
Hospital 10%
Electric 7%
General Obligation 20%
29
<PAGE>
KAYNE ANDERSON CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE KAYNE ANDERSON
CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND AND THE LEHMAN BROTHERS FIVE YEAR
MUNICIPAL BOND INDEX
Average Annual Total Return
for the periods ending December 31, 1999
One Year Since Inception (10/28/96)
-0.44% 2.56%
Kayne Anderson Lehman Brothers
California Intermediate Five Year Municipal
Tax-Free Bond Fund Bond Index
------------------ ----------
10/28/96 10,000 10,000
12/31/96 10,002 10,240
3/31/97 9,989 10,234
6/30/97 10,160 10,772
9/30/97 10,306 11,252
12/31/97 10,428 11,642
3/31/98 10,506 11,777
6/30/98 10,613 11,909
9/30/98 10,802 12,222
12/31/98 10,877 12,323
3/31/99 10,978 12,451
6/30/99 10,886 12,297
9/30/99 10,922 12,412
12/31/99 10,836 12,414
30
<PAGE>
KAYNE ANDERSON CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1999
Principal
Amount LONG-TERM MUNICIPAL DEBT: 94.6% Value
------ ------------------------------- -----
GENERAL OBLIGATION: 19.8%
California State
$ 100,000 6.500% dated 03/01/1994 due 03/01/2002............ $ 104,125
California State
175,000 5.250% dated 04/01/1998 due 10/01/2005............ 179,375
California State
250,000 5.250% dated 02/01/1999 due 02/01/2006............ 255,312
California State
250,000 5.375% dated 03/01/1994 due 03/01/2006............ 257,187
California State
1,325,000 6.250% dated 04/01/1990 due 04/01/2008............ 1,426,031
California State
65,000 5.250% dated 11/01/1996 due 06/01/2011............ 65,000
California State
250,000 5.250% dated 11/01/1996 due 06/01/2016............ 235,937
California State Veterans Bonds
100,000 6.250% dated 03/01/1995 due 02/01/2014............ 100,086
California State Veterans Bonds
1,395,000 5.150% dated 12/01/1997 due 12/01/2014............ 1,313,043
California State Veterans Bonds
200,000 6.375% dated 03/01/1995 due 02/01/2027............ 200,028
California State Public Works
1,000,000 5.250% dated 03/01/1993 due 12/01/2008............ 1,017,500
Los Angeles County, California Public Works
200,000 5.000% dated 11/01/1997 due 10/01/2016............ 181,500
Oakland, California
1,000,000 5.875% dated 03/01/1995 due 06/15/2019............ 1,000,000
Puerto Rico Public Buildings Authority
60,000 5.750% dated 06/01/1993 due 07/01/2015............ 60,000
San Francisco, California City & County
150,000 4.500% dated 10/15/1997 due 06/15/2005............ 148,710
San Francisco, California Bay Area Rapid
1,500,000 5.500% dated 05/15/1995 due 07/01/2015............ 1,475,625
Washoe County, Nevada
250,000 6.750% dated 03/15/1991 due 03/15/2000............ 250,352
-----------
8,269,811
-----------
31
<PAGE>
KAYNE ANDERSON CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1999 (continued)
Principal
Amount Value
------ -----
EDUCATION: 0.5%
University of California Revenues
$ 200,000 5.250% dated 08/15/1993 due 09/01/2011............ $ 200,000
-----------
ELECTRIC: 7.2%
Lower Colorado River Texas Authority
100,000 5.250% dated 05/01/1993 due 01/01/2015............ 95,625
M-S-R Public Power Agency California
1,500,000 6.000% dated 04/01/1993 due 07/01/2020............ 1,505,625
Northern California Public Power Agency
1,000,000 5.000% dated 07/01/1998 due 07/01/2015............ 916,250
Piedmont Municipal Power Agency
85,000 6.550% dated 09/01/1996 due 01/01/2016............ 84,150
Puerto Rico Electric Power Authority
200,000 6.000% dated 08/15/1995 due 07/01/2000............ 202,070
Sacramento, California Municipal Utilities District
200,000 5.700% dated 04/01/1993 due 05/15/2012............ 204,250
-----------
3,007,970
-----------
HOSPITAL: 9.9%
California Health Facilities Financing Authority
1,000,000 5.000% dated 03/01/1998 due 11/15/2013............ 941,250
California Health Facilities Financing Authority
1,500,000 6.250% dated 10/01/1991 due 10/01/2013............ 1,561,875
Dade County Health Facilities Authority
200,000 6.600% dated 03/01/1987 due 08/15/2002............ 200,860
Stockton, California Health Facilities
1,000,000 5.350% dated 09/01/1997 due 12/01/2009............ 953,750
Stockton, California Health Facilities
500,000 5.450% dated 09/01/1997 due 12/01/2010............ 476,875
-----------
4,134,610
-----------
32
<PAGE>
KAYNE ANDERSON CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1999 (continued)
Principal
Amount Value
------ -----
HOUSING: 6.6%
California Housing Finance Agency
$1,460,000 5.950% dated 05/15/1995 due 08/01/2014............ $ 1,485,550
California Housing Finance Agency
800,000 5.900% dated 11/01/1995 due 08/01/2017............ 802,000
California Housing Finance Agency
260,000 4.350% dated 12/01/1998 due 08/01/2008............ 243,750
Santa Clara County, California Housing
250,000 4.250% dated 11/01/1998 due 11/01/2007............ 240,000
-----------
2,771,300
-----------
IDR/PCR: 1.7%
California Pollution Control Financing Authority
200,000 7.150% dated 02/01/1991 due 02/01/2011............ 200,750
California Pollution Control Financing Authority
200,000 5.850% dated 11/01/1993 due 12/01/2023............ 190,250
Gallup, New Mexico Pollution Control Revenue
250,000 6.650% dated 04/15/1992 due 08/15/2017............ 260,000
Mercer County, North Dakota Pollution Control
75,000 5.850% dated 06/01/1993 due 06/01/2023............ 73,875
-----------
724,875
-----------
TRANSPORTATION: 10.6%
Long Beach, California Harbor Revenues
250,000 6.000% dated 11/01/1995 due 05/15/2006............ 263,125
Orange County Airport
200,000 5.500% dated 04/02/1997 due 07/01/2002............ 204,000
Oakland, California Port Authority
1,000,000 5.600% dated 01/01/1997 due 11/01/2019............ 967,500
San Francisco, California
250,000 5.500% dated 05/01/1999 due 05/01/2005............ 256,563
San Francisco, California Port Authority
1,000,000 5.900% dated 06/01/1994 due 7/01/2009............. 1,038,750
San Francisco, California City & County Airport
1,800,000 5.375% dated 03/01/1996 due 05/01/2017............ 1,721,250
-----------
4,451,188
-----------
33
<PAGE>
KAYNE ANDERSON CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1999 (continued)
Principal
Amount Value
------ -----
PREREFUNDED: 16.9%
California Educational Facilities Authority Revenues
Santa Clara $1,500,000
University 6.250% dated 12/01/1991 due 02/01/2016. $ 1,576,875
California Educational Facilities Authority Revenues
Pomona College 1,690,000
6.125% dated 02/01/1992 due 02/15/2008............ 1,766,050
California State
185,000 5.250% dated 11/01/1996 due 06/01/2011............ 190,319
Los Angeles Convention & Exhibit Center
150,000 9.000% dated 12/01/1985 due 12/01/2020............ 181,876
Orange County, California Local Transporation
Authority
100,000 5.750% dated 09/01/1992 due 02/15/2005............ 104,250
University of California Revenues
1,500,000 6.300% dated 06/01/1995 due 09/01/2015............ 1,610,625
West Covina, California Queen of the Valley Hospital
1,500,000 6.500% dated 05/01/1994 due 08/15/2014............ 1,633,125
-----------
7,063,120
-----------
WATER & SEWER: 21.4%
Contra Costa, California Water District
275,000 5.250% dated 07/01/1993 due 10/01/2016............ 259,532
Los Angeles, California Wastewater System
1,200,000 5.000% dated 03/01/1998 due 06/01/2014............ 1,120,500
Los Angeles, California Wastewater System
200,000 5.700% dated 04/01/1993 due 06/01/2020............ 195,000
Marina, California Municipal Water District
1,000,000 5.550% dated 06/01/1993 due 07/01/2013............ 998,750
Mountain View, California Shoreline Regional Park
1,000,000 5.500% dated 08/01/1996 due 08/01/2021............ 943,750
Rancho, California Water District Financing
Authority 5.875% dated
1,000,000 08/03/1995 due 11/01/2010......................... 1,045,000
Redlands, California Financing Authority
1,000,000 5.000% dated 06/23/1999 due 09/01/2017............ 898,750
San Francisco, California City & County
Public Utility
1,500,000 6.000% dated 02/01/1992 due 11/01/2015............ 1,513,126
34
<PAGE>
KAYNE ANDERSON CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1999 (continued)
Principal
Amount Value
------ -----
WATER & SEWER, CONTINUED
San Jose Clara California Water
$1,000,000 5.375% dated 11/01/95 due 11/15/2015.............. $ 970,000
Tulare, California Sewer Revenue
1,000,000 5.700% dated 09/01/1996 due 11/15/2015............ 1,002,500
-----------
8,946,908
-----------
TOTAL LONG-TERM MUNICIPAL DEBT....................... 39,569,782
-----------
VARIABLE RATE MUNICIPAL DEBT: 3.9%
Southern California Public Power Authority
250,000 dated 07/29/1992 due 07/01/2012................... 250,000
California Statewide Communities
Development Authority
1,000,000 dated 10/29/1997 due 08/15/2027................... 1,000,000
California Pollution Control Financing Authority
200,000 dated 05/23/96 due 11/01/2026..................... 200,000
Los Angeles International Airport
200,000 dated 10/03/1989 due 12/01/2025................... 200,000
-----------
TOTAL VARIABLE RATE MUNICIPAL DEBT................... 1,650,000
-----------
TOTAL INVESTMENTS IN SECURITIES
(Cost $41,149,354*): 98.5%........................ 41,219,782
OTHER ASSETS LESS LIABILITIES: 1.5%.................. 642,152
-----------
NET ASSETS: 100.0%................................... $41,861,934
===========
*Cost for federal income tax purposes is the same.
Net unrealized appreciation consists of:
Gross unrealized appreciation........................ $ 755,856
Gross unrealized depreciation........................ (685,428)
-----------
Net unrealized appreciation.......................... $ 70,428
===========
See accompanying Notes to Financial Statements.
35
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
STATEMENTS OF ASSETS AND LIABILITIES AT DECEMBER 31, 1999
- --------------------------------------------------------------------------------
RISING
DIVIDENDS
FUND
- --------------------------------------------------------------------------------
ASSETS
Investments in securities at value
(cost of $104,187,345, $43,183,182, $31,472,192
$53,043,607 and $41,149,354, respectively)..................... $122,444,538
Cash............................................................. --
Receivable for:
Capital stock sold............................................ 1,643,676
Securities sold............................................... --
Dividends and interest........................................ 115,528
Prepaid expenses................................................. 5,959
Deferred organization costs...................................... --
------------
Total assets................................................... 124,209,701
------------
LIABILITIES
Payables:
Cash overdraft................................................. 565,592
Distributions to shareholders.................................. --
Capital stock redeemed......................................... --
Due to investment advisor ..................................... 80,413
Accrued expenses ............................................... 58,925
Total liabilities.............................................. 704,930
------------
NET ASSETS ..................................................... $123,504,771
============
Number of shares issued and outstanding
(unlimited shares authorized, no par value).................... 6,615,491
============
Net asset value, offering and redemption price per share......... $ 18.67
============
COMPOSITION OF NET ASSETS
Paid-in capital.................................................. $106,310,409
Undistributed net investment income.............................. --
Accumulated net realized loss on investments..................... (1,062,831)
Net unrealized appreciation (depreciation) on
investments and foreign currency............................... 18,257,193
------------
Net assets........................................... $123,504,771
============
See accompanying Notes to Financial Statements.
36
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
SMALL CAP INTERNATIONAL INTERMEDIATE CALIFORNIA
RISING DIVIDENDS RISING DIVIDENDS TOTAL RETURN INTERMEDIATE TAX-FREE
FUND FUND BOND FUND BOND FUND
------------ ------------ ------------ ------------
$ 45,374,018 $ 40,363,930 $ 52,145,803 $ 41,219,782
34,777 -- 73,746 23,274
860,374 939,885 374,901 --
911,425 -- -- --
118,314 30,424 904,922 655,222
6,193 5,883 5,596 9,293
1,484 1,728 1,484 1,480
------------ ------------ ------------ ------------
47,306,585 41,341,850 53,506,452 41,909,051
------------ ------------ ------------ ------------
-- 103,133 -- --
-- 196,172 63,914 16,443
273,691 422,625 175 --
15,924 16,728 15,766 12,963
19,903 13,321 22,421 17,711
309,518 751,979 102,276 47,117
------------ ------------ ------------ ------------
$ 46,997,067 $ 40,589,871 $ 53,404,176 $ 41,861,934
============ ============ ============ ============
3,170,315 2,197,621 5,117,691 4,068,063
============ ============ ============ ============
$ 14.82 $ 18.47 $ 10.44 $ 10.29
============ ============ ============ ============
$ 52,517,778 $ 31,691,669 $ 54,528,570 $ 41,947,896
-- 6,694 32,099 240
(7,711,547) (54) (258,689) (156,630)
2,190,836 8,891,562 (897,804) 70,428
------------ ------------ ------------ ------------
$ 46,997,067 $ 40,589,871 $ 53,404,176 $ 41,861,934
============ ============ ============ ============
37
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
STATEMENTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
RISING
DIVIDENDS
FUND
----
INVESTMENT INCOME:
Income:
Dividend income............................................. $ 850,457
Interest income............................................. 23,406
------------
Total income.............................................. 873,863
------------
Expenses:
Investment advisory fees ................................... 496,362
Custodian fees.............................................. 20,692
Administration fees ........................................ 41,836
Fund accounting fees........................................ 33,700
Transfer agent fees......................................... 22,724
Legal fees.................................................. 9,674
Audit fees.................................................. 13,502
Registration fees........................................... 22,998
Trustees' fees.............................................. 7,336
Amortization of deferred organization costs................. 9,378
Miscellaneous .............................................. 5,758
Total expenses............................................ 683,960
Expenses waived and reimbursed............................ --
Expenses paid indirectly.................................. --
------------
Net expenses ............................................. 683,960
------------
Net investment income................................... 189,903
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments.......................... 5,505,297
Net change in unrealized appreciation (depreciation) of
investments and foreign currency............................... 3,127,462
------------
Net gain (loss) on investments................................... 8,632,759
------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.. $ 8,822,662
============
See accompanying Notes to Financial Statements.
38
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
SMALL CAP INTERNATIONAL INTERMEDIATE CALIFORNIA
RISING DIVIDENDS RISING DIVIDENDS TOTAL RETURN INTERMEDIATE TAX-FREE
FUND FUND BOND FUND BOND FUND
----------- ----------- ----------- ---------
$ 588,874 $ 665,740 $ -- $ --
36,707 30,320 1,212,874 702,947
----------- ----------- ----------- ---------
625,581 696,060 1,212,874 702,947
----------- ----------- ----------- ---------
289,991 326,970 102,843 71,258
14,174 16,714 9,516 4,152
30,966 30,000 23,632 23,087
33,825 42,501 36,000 31,746
19,999 21,548 17,799 14,914
9,500 11,489 6,735 3,245
6,501 4,824 4,500 5,501
26,748 25,208 28,975 22,495
7,692 7,482 9,637 9,032
10,470 10,997 10,469 10,473
7,910 4,591 4,186 912
----------- ----------- ----------- ---------
457,776 502,324 254,292 196,815
(14,699) (20,848) (59,911) (88,631)
-- -- -- (6,279)
----------- ----------- ----------- ---------
443,077 481,476 194,381 101,905
----------- ----------- ----------- ---------
182,504 214,584 1,018,493 601,042
----------- ----------- ----------- ---------
2,615,590 4,945,967 101,815 (156,510)
(1,587,364) 4,760,202 (1,442,513) (768,087)
----------- ----------- ----------- ---------
1,028,226 9,706,169 (1,340,698) (924,597)
----------- ----------- ----------- ---------
$ 1,210,730 $ 9,920,753 $ (322,205) $(323,555)
=========== =========== =========== =========
39
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
RISING
DIVIDENDS
FUND
--------------------------
INCREASE IN NET ASSETS FROM: Year Year
Ended Ended
12/31/99 12/31/98
------------ -----------
<S> <C> <C>
OPERATIONS
Net investment income............................................ $ 189,903 $ 256,507
Net realized gain (loss)
on investments ................................................ 5,505,297 5,326,022
Net change in unrealized appreciation
(depreciation) of investments and
foreign currency............................................... 3,127,462 (98,265)
------------ -----------
INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS ................................. 8,822,662 5,484,264
------------ -----------
Distributions to shareholders:
From net investment income....................................... (199,281) (262,588)
From net realized gains ......................................... (6,052,026) (6,701,884)
From paid-in capital............................................. -- --
------------ -----------
TOTAL DISTRIBUTIONS ........................................... (6,251,307) (6,964,472)
------------ -----------
Capital share transactions:
Shares issued in exchange for
Sefton Funds................................................... 56,532,609 --
Proceeds from shares sold........................................ 49,326,207 12,570,871
Net asset value of shares issued
on reinvestment of distributions............................... 6,164,507 9,358,197
Cost of shares redeemed.......................................... (39,670,665) (7,150,626)
------------ -----------
NET INCREASE (DECREASE) FROM CAPITAL SHARE TRANSACTIONS ...... 72,352,658 14,778,442
------------ -----------
NET INCREASE IN NET ASSETS ...................................... 74,924,013 13,298,234
NET ASSETS
Beginning of year................................................ 48,580,758 35,282,524
------------ -----------
End of year ..................................................... $123,504,771 $48,580,758
============ ===========
CHANGE IN CAPITAL SHARES
Shares issued in exchange for
Sefton Funds................................................... 2,888,694 --
Shares sold ..................................................... 2,670,917 692,639
Shares issued on reinvestment
of distributions............................................... 336,104 527,641
Shares redeemed.................................................. (2,132,053) (410,214)
------------ -----------
Net increase (decrease)........................................ 3,763,662 810,066
============ ===========
</TABLE>
See accompanying Notes to Financial Statements.
40
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
<TABLE>
<CAPTION>
SMALL CAP INTERNATIONAL INTERMEDIATE CALIFORNIA
RISING DIVIDENDS RISING DIVIDENDS TOTAL RETURN INTERMEDIATE TAX-FREE
FUND FUND BOND FUND BOND FUND
- --------------------------- --------------------------- --------------------------- ---------------------------
Year Year Year Year Year Year Year Year
Ended Ended Ended Ended Ended Ended Ended Ended
12/31/99 12/31/98 12/31/99 12/31/98 12/31/99 12/31/98 12/31/99 12/31/98
- ------------ ----------- ------------ ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 182,504 $ 97,381 $ 214,584 $ 231,082 $ 1,018,493 $ 1,185,729 $ 601,042 $ 265,556
2,615,590 (168,179) 4,945,967 750,612 101,815 131,606 (156,510) 5,204
(1,587,364) 3,090,369 4,760,202 3,715,222 (1,442,513) 490,291 (768,087) 23,836
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ -----------
1,210,730 3,019,571 9,920,753 4,696,916 (322,205) 1,807,626 (323,555) 294,596
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ -----------
(192,974) (101,850) (228,995) (206,890) (996,864) (1,189,978) (612,951) (268,129)
(1,995,755) -- (3,423,689) (750,612) (37,955) (89,690) -- (3,871)
-- (313,138) -- -- -- -- -- --
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ -----------
(2,188,729) (414,988) (3,652,684) (957,502) (1,034,819) (1,279,668) (612,951) (272,000)
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ -----------
15,192,065 -- -- -- 40,785,659 -- 38,536,951 --
39,706,761 26,726,710 49,868,493 27,482,344 11,764,071 23,343,075 16,527,584 3,766,151
2,104,853 432,070 3,440,942 964,005 939,429 1,228,220 547,899 292,998
(42,045,131) (3,240,796) (54,423,193) (3,762,499) (27,058,097) (3,029,904) (22,204,986) (705,956)
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ -----------
14,958,548 23,917,984 (1,113,758) 24,683,850 26,431,062 21,541,391 33,407,448 3,353,193
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ -----------
13,980,549 26,522,567 5,154,311 28,423,264 25,074,038 22,069,349 32,470,942 3,375,789
33,016,518 6,493,951 35,435,560 7,012,296 28,330,138 6,260,789 9,390,992 6,015,203
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ -----------
$ 46,997,067 $ 33,016,518 $ 40,589,871 $ 35,435,560 $ 53,404,176 $ 28,330,138 $ 41,861,934 $ 9,390,992
============ ============ ============ ============ ============ ============ ============ ===========
998,150 -- -- -- 3,858,624 -- 3,694,818 --
2,550,670 1,897,692 2,899,614 1,923,801 1,094,407 2,153,359 1,558,667 350,249
142,735 29,469 186,992 63,755 88,042 93,163 52,149 27,265
(2,716,708) (226,493) (3,173,764) (258,861) (2,496,667) (274,756) (2,109,671) (65,550)
- ------------ ------------ ------------ ------------ ------------ ------------ ------------ -----------
974,847 1,700,668 (87,158) 1,728,695 2,544,406 1,971,766 3,195,963 311,964
============ ============ ============ ============ ============ ============ ============ ===========
</TABLE>
41
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
FINANCIAL HIGHLIGHTS
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
RISING DIVIDENDS FUND
-------------------------------------------------------
Year Year Year Year 05/01/95*
Ended Ended Ended Ended to
12/31/99 12/31/98 12/31/97 12/31/96 12/31/95
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period........ $17.03 $17.28 $14.32 $12.63 $10.65
------ ------ ------ ------ ------
Income from investment operations:
Net investment income.................... 0.04 0.11 0.10 0.08 0.07
Net realized and unrealized gains
on investments........................ 2.71 2.38 4.34 2.35 2.13
------ ------ ------ ------ ------
Total income from investment
operations........................ 2.75 2.49 4.44 2.43 2.20
------ ------ ------ ------ ------
Distributions:
From net investment income............... (0.04) (0.11) (0.11) (0.08) (0.07)
From net realized gains.................. (1.07) (2.63) (1.37) (0.66) (0.15)
From paid-in capital..................... 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------
Total distributions................... (1.11) (2.74) (1.48) (0.74) (0.22)
------ ------ ------ ------ ------
Net asset value, end of period ............. $18.67 $17.03 $17.28 $14.32 $12.63
====== ====== ====== ====== ======
Total return................................ 16.33% 14.14% 30.99% 19.09% 20.65%**
Net assets, end of period (in 000's)........ $123,505 $48,581 $35,283 $26,118 $20,613
Ratio of expenses to average net assets:
Before expenses waived and reimbursed.... 1.03% 1.11% 1.18% 1.37% 1.31%***
After expenses waived and reimbursed..... 1.03% 1.11% 1.18% 1.37% 1.31%***
Ratio of net investment income to average
net assets (after expenses waived and
reimbursed).............................. 0.28% 0.57% 0.55% 0.59% 0.94%***
Portfolio turnover rate..................... 33% 76% 51% 23% 28%**
</TABLE>
- ----------
* Commencement of operations.
** Not annualized.
*** Annualized.
See accompanying Notes to Financial Statements.
42
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
<TABLE>
<CAPTION>
SMALL CAP INTERNATIONAL
RISING DIVIDENDS RISING DIVIDENDS
FUND FUND
----------------------------------------- ------------------------------- --------
Year Year Year 10/18/96* Year Year Year 10/18/96*
Ended Ended Ended to Ended Ended Ended to
12/31/99 12/31/98 12/31/97 12/31/96 12/31/99 12/31/98 12/31/97 12/31/96
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 15.04 $ 13.12 $ 11.06 $ 10.65 $ 15.51 $ 12.61 $ 10.91 $ 10.65
- --------- --------- --------- --------- --------- --------- --------- ---------
0.07 0.05 0.02 0.02 0.12 0.08 0.04 0.01
0.47 2.07 2.14 0.41 4.68 3.25 1.75 0.26
- --------- --------- --------- --------- --------- --------- --------- ---------
0.54 2.12 2.16 0.43 4.80 3.33 1.79 0.27
- --------- --------- --------- --------- --------- --------- --------- ---------
(0.07) (0.05) (0.05) (0.02) (0.12) (0.08) (0.05) (0.01)
(0.69) 0.00 (0.05) 0.00 (1.72) (0.35) (0.04) 0.00
0.00 (0.15) 0.00 0.00 0.00 0.00 0.00 0.00
- --------- --------- --------- --------- --------- --------- --------- ---------
(0.76) (0.20) (0.10) (0.02) (1.84) (0.43) (0.09) (0.01)
- --------- --------- --------- --------- --------- --------- --------- ---------
$ 14.82 $ 15.04 $ 13.12 $ 11.06 $ 18.47 $ 15.51 $ 12.61 $ 10.91
========= ========= ========= ========= ========= ========= ========= =========
3.64% 16.17% 19.46% 4.00%** 31.06% 26.47% 16.42% 2.56%**
$46,997 $33,017 $6,494 $ 808 $ 40,590 $ 35,436 $ 7,012 $ 1,055
1.34% 1.35% 3.22% 18.91%*** 1.47% 1.45% 3.41% 15.74%***
1.30% 1.30% 1.30% 1.30%*** 1.40% 1.38% 1.40% 1.40%***
0.53% 0.38% 0.45% 1.58%*** 0.63% 0.85% 0.61% 1.14%***
50% 28% 47% 0%** 57% 28% 29% 0%**
</TABLE>
43
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
FINANCIAL HIGHLIGHTS
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD
INTERMEDIATE
TOTAL RETURN
BOND FUND
---------------------
Year Year
Ended Ended
12/31/99 12/31/98
-------- --------
Net asset value, beginning of period............ $11.01 $10.75
------ ------
Income from investment operations:
Net investment income......................... 0.50 0.51
Net realized and unrealized gains
(loss) on investments....................... (0.57) 0.30
------ ------
Total income from investment operations..... (0.07) 0.81
------ ------
Distributions:
From net investment income.................... (0.49) (0.51)
From net realized gains....................... (0.01) (0.04)
------ ------
Total distributions......................... (0.50) (0.55)
------ ------
Net asset value, end of period ................. $10.44 $11.01
====== ======
Total return.................................... (0.65)% 7.61%
Net assets, end of period (in 000's)............ $53,404 $28,330
Ratio of expenses to average net assets:
Before expenses waived and reimbursed......... 1.23% 1.00%
After expenses waived and reimbursed.......... 0.94% 0.94%
After expenses waived, reimbursed and
paid indirectly............................. 0.94% 0.94%
Ratio of net investment income to average
net assets (after expenses waived,
reimbursed and paid indirectly)............... 4.94% 4.93%
Portfolio turnover rate......................... 64% 49%
* Commencement of operations.
** Not annualized.
*** Annualized.
See accompanying Notes to Financial Statements.
44
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
INTERMEDIATE CALIFORNIA
TOTAL RETURN INTERMEDIATE TAX-FREE
BOND FUND BOND FUND
- ------------------- -------------------------------------------------
Year 10/28/96* Year Year Year 10/28/96*
Ended to Ended Ended Ended to
12/31/97 12/31/96 12/31/99 12/31/98 12/31/97 12/31/96
- -------- -------- -------- -------- -------- --------
$ 10.59 $ 10.65 $ 10.77 $ 10.74 $ 10.64 $ 10.65
0.56 0.09 0.44 0.43 0.34 0.01
0.18 (0.07) (0.48) 0.03 0.11 (0.01)
0.74 0.02 (0.04) 0.46 0.45 0.00
(0.58) (0.08) (0.44) (0.43) (0.35) (0.01)
0.00 0.00 0.00 0.00 0.00 0.00
(0.58) (0.08) (0.44) (0.43) (0.35) (0.01)
$ 10.75 $ 10.59 $ 10.29 $ 10.77 $ 10.74 $ 10.64
7.19% 0.20%** (0.44)% 4.37% 4.26% 0.02%**
$ 6,261 $ 5,033 $ 41,862 $ 9,391 $ 6,015 $ 5,124
2.23% 2.10%*** 1.37% 2.23% 2.29% 2.08%***
0.95% 0.95%*** 0.75% 0.77% 1.56% 1.81%***
0.95% 0.95%*** 0.71% 0.77% 0.95% 0.95%***
5.35% 4.72%*** 4.14% 3.88% 2.58% 0.60%***
27% 0%** 65% 47% 40% 0%**
45
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS at December 31, 1999.
- --------------------------------------------------------------------------------
NOTE 1 - ORGANIZATION
Kayne Anderson Mutual Funds (the "Trust") was organized as a Delaware
business trust 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 California Intermediate Tax-Free Bond
Fund (formerly 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 California Intermediate Tax-Free Bond Fund to Kayne
Anderson Investment Management, LLC (the "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 a total
market capitalization 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 a total market capitalization 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 California Intermediate Tax-Free Bond Fund seeks current income exempt
from federal and California state 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 the Funds' shares fluctuate daily and may be
worth more or less than their purchase price when redeemed.
46
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS at December 31, 1999, Continued
- --------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds. These policies are in conformity with generally accepted
accounting principles.
A. SECURITY VALUATION: The Funds' investments are carried at 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 by an independent pricing
service or determined following procedures approved by the Board of
Trustees. Short-term investments are valued at amortized cost, which
approximates market value.
B. FEDERAL INCOME TAXES: It is the Funds' policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of their
taxable income to shareholders. Therefore, no federal income tax
provision is required. At December 31, 1999 the Rising Dividends Fund,
Small Cap Rising Dividends Fund, Intermediate Total Return Bond Fund
and the California Intermediate Tax-Free Bond Fund had capital loss
carryforwards available for federal income tax purposes of $1,205,594,
$7,648,002, $253,513 and $2,026, respectively, which expire in 2007.
C. SECURITY TRANSACTIONS, INVESTMENT INCOME AND DISTRIBUTIONS: 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 COSTS: All of the expenses incurred by the
Advisor in connection with the organization and registration of the
Funds' shares will be borne by the Funds and 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 result could differ from those estimates.
F. RECLASSIFICATION OF CAPITAL ACCOUNTS: The Funds account for and report
distributions to shareholders in accordance with the American
Institute of Certified Public Accountant's Statement of Position 93-2:
DETERMINATION, DISCLOSURE, AND FINANCIAL STATEMENT PRESENTATION OF
INCOME, CAPITAL GAINS, AND RETURN OF CAPITAL DISTRIBUTION BY
INVESTMENT COMPANIES. Distributions of net investment income and
realized gains are determined in accordance with income tax
regulations which may differ from generally accepted accounting
principles. Paid-in capital, undistributed net investment income and
accumulated net realized loss on investments have been adjusted for
permanent book-tax differences. Reclassifications between accumulated
net realized loss on investments and paid-in capital arose from
"in-kind" distributions of appreciated securities to redeeming
shareholders. Reclassifications between undistributed net investment
income and paid-in capital arose from net operating losses, and
differing book and tax treatments for foreign currency transactions.
47
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS at December 31, 1999, Continued
- --------------------------------------------------------------------------------
For the year ended December 31, 1999, reclassifications among the
components of net assets are as follows:
Increase (Increase) Decrease
(Decrease) Increase (Decrease) Accumulated Net
Paid-in Undistributed Net Realized Loss on
Capital Investment Income Investments
------- ----------------- -----------
Rising Dividends Fund $ (9,378) $ 9,378 $ --
Small Cap Rising
Dividends Fund $ 415,113 $10,470 $ (425,583)
International Rising
Dividends Fund $ 1,501,227 $21,105 $(1,522,332)
Intermediate Total
Return Bond Fund $ 88,240 $10,470 $ (98,710)
California Intermediate
Tax-Free Bond Fund $ (10,473) $10,473 $ --
NOTE 3 - INVESTMENT ADVISORY AND MANAGEMENT FEES AND OTHER TRANSACTIONS WITH
AFFILIATES
The Advisor provides the Funds with investment management services under an
Investment Advisory Agreement (the "Agreement"). The Advisor furnishes 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 rates:
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%
California 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
expenses to daily 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%
California Intermediate Tax-Free Bond Fund..............................0.75%
48
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS at December 31, 1999, Continued
- --------------------------------------------------------------------------------
Pursuant to these expense limitation provisions, the Advisor reimbursed the
Small Cap Rising Dividends Fund $14,699, the International Rising Dividends Fund
$20,848, the Intermediate Total Return Bond Fund $59,911 and California
Intermediate Tax-Free Bond Fund $88,631 during the year ended December 31, 1999.
The 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 Funds in any of the three following years are
less than the applicable expense limitation provisions outlined above. At
December 31, 1999, the Advisor has waived fees and reimbursed other fund
expenses amounting to $105,525 for the Small Cap Rising Dividends Fund, $122,822
for the International Rising Dividends Fund, $145,756 for the Intermediate Total
Return Bond Fund and $228,551 for the California Intermediate Tax-Free Bond Fund
as follows:
FUNDS: 1997 1998 1999 TOTAL
- ------ ---- ---- ---- -----
Small Cap Rising Dividends Fund $77,861 $12,965 $14,699 $105,525
International Rising Dividends Fund $83,125 $18,889 $20,848 $122,822
Intermediate Total Return
Bond Fund $70,713 $15,132 $59,911 $145,756
California Intermediate
Tax-Free Bond Fund $40,123 $99,797 $88,631 $228,551
Any fee withheld or voluntarily reduced and/or any Fund expense absorbed by
the Advisor voluntarily or pursuant to an agreed upon expense cap (collectively
"subsidies") shall be reimbursed by the Fund to the Advisor, if so requested by
the Advisor, anytime before the end of the third fiscal year following the year
to which the subsidy relates, provided the aggregate amount of the Fund's
current operating expense for such fiscal year (taking into account the
reimbursement) does not exceed the applicable limitation on Fund expense. Each
Fund must pay its current ordinary operating expenses before the Advisor is
entitled to any reimbursement of fees and/ or expenses. Any such reimbursement
is also contingent upon Board of Trustees review and approval prior to the time
the reimbursement is initiated.
The Funds executed certain investment security transactions through KA
Associates, Inc., an affiliate of the Funds' Advisor. Commissions paid by the
Funds to this affiliate during the year ended December 31, 1999 were as follows:
Small Cap Rising Dividends Fund......................................... $3,598
International Rising Dividends Fund..................................... $6,931
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 the Funds' expenses and reviews the
Funds' expense accruals. For its services, each Fund pays the Administrator an
annual fee equal to 0.075% of the first $40 million of the its average daily net
assets, 0.050% of the next $40 million, 0.025% of the next $40 million, and
0.010% thereafter, subject to a minimum annual fee of $30,000 per Fund.
49
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS at December 31, 1999, Continued
- --------------------------------------------------------------------------------
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, 1999, 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 $31,989,864 $22,372,577
Small Cap Rising Dividends Fund $17,120,804 $19,013,041
International Rising Dividends Fund $19,438,919 $24,331,922
Intermediate Total Return Bond Fund $ 1,068,212 $ 6,636,233
California Intermediate Tax-Free Bond Fund $ 9,773,764 $14,689,053
The Intermediate Total Return Bond Fund purchased $13,145,643 and sold
$19,448,153 in 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 California Intermediate Tax-Free
Bond Fund.
During the year ended December 31, 1999 the Small Cap Rising Dividends
Fund, the International Rising Dividends Fund and the Intermediate Total Return
Bond Fund realized gains in the amount of $425,583, $1,512,332 and $98,710,
respectively, from the "in-kind" distribution of appreciated securities to
redeeming shareholders.
NOTE 5 - ACQUISITION OF SEFTON FUNDS
On November 22, 1999, the shareholders of the Sefton Funds approved a plan
of reorganization whereby on that date, Rising Dividends Fund acquired all the
net assets of Sefton Value Fund, Small Cap Rising Dividends Fund acquired all
the net assets of Sefton Small Company Value Fund, Intermediate Total Return
Bond Fund acquired all the net assets of Sefton U.S. Government Fund and
California Intermediate Tax-Free Bond Fund acquired all the net assets of Sefton
California Tax-Free Fund. These acquisitions were accomplished by the tax-free
exchange of shares of equal value on the acquisition date, pursuant to a plan of
reorganization approved by Sefton Funds' shareholders. Sefton Funds' net assets
at that date were combined with those of the Funds. The net assets of each of
the Sefton Funds immediately prior to the acquisition were as follows:
50
<PAGE>
KAYNE ANDERSON MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS at December 31, 1999, Continued
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Unrealized
Accumulated Net Appreciation
Realized Loss (Depreciation)
Net Assets Paid-in Capital on Investments on Investments
---------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Equity Value Fund $56,532,609 $54,716,178 $(1,539,054) $3,355,485
Small Company
Value Fund $15,192,065 $22,600,275 $(7,737,620) $ 329,410
U.S. Government Fund $40,785,659 $41,062,382 $ (261,794) $ (14,929)
California Tax-Free Fund $38,536,951 $37,774,800 $ -- $ 762,151
</TABLE>
The net assets of the following Funds, the accounting survivors of the
reorganizations, immediately before the acquisitions were as follows:
Rising Dividends Fund.............................................. $66,643,720
Small Cap Rising Dividends Fund.................................... $31,612,147
Intermediate Total Return Bond Fund................................ $12,672,429
California Intermediate Tax-Free Bond Fund......................... $11,543,669
51
<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 statements 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 California Intermediate Tax-Free
Bond Fund), including the portfolios of investments, as of December 31, 1999,
and the related statements of operations for the year then ended, the statements
of changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the three years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. 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, 1999, 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the Funds comprising Kayne Anderson Mutual Funds as of December 31, 1999, the
results of their operations for the year then ended, the changes in their net
assets for each of the two years in the period then ended, and the financial
highlights for each of the three years in the period then ended in conformity
with generally accepted accounting principles.
BRIGGS, BUNTING & DOUGHERTY, LLP
Philadelphia, Pennsylvania
January 28, 2000
52
<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 Funds 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.
