-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DjQkpJ4WIDtTR+ho57MmfgdRXWsZ+GH70U+qFOnzkq2pMpNUmCOiatutASLZR66d N4GvfghOypFIsSbJMSzyGg== /in/edgar/work/20000908/0000950147-00-001382/0000950147-00-001382.txt : 20000922 0000950147-00-001382.hdr.sgml : 20000922 ACCESSION NUMBER: 0000950147-00-001382 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000908 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KAYNE ANDERSON MUTUAL FUNDS CENTRAL INDEX KEY: 0001018593 STANDARD INDUSTRIAL CLASSIFICATION: [ ] IRS NUMBER: 956981193 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-07705 FILM NUMBER: 718861 BUSINESS ADDRESS: STREET 1: 1800 AVENUE OF THE STARS, 2ND FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90067 MAIL ADDRESS: STREET 1: 1800 AVENUE OF THE STARS, 2ND FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90067 N-30D 1 0001.txt SEMI-ANNUAL REPORT DATED 6/30/2000 KAYNE ANDERSON MUTUAL FUNDS ================================================================================ SEMI-ANNUAL REPORT KAYNE ANDERSON LARGE CAP FUND KAYNE ANDERSON SMALL CAP FUND KAYNE ANDERSON INTERNATIONAL FUND KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND KAYNE ANDERSON CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND ================================================================================ For the Six Months Ended June 30, 2000 KAYNE ANDERSON MUTUAL FUNDS TABLE OF CONTENTS SHAREHOLDER LETTER ......................................................... 1 KAYNE ANDERSON LARGE CAP FUND Goal ..................................................................... 2 Commentary ............................................................... 2 Outlook .................................................................. 2 Schedule of Investments .................................................. 3 KAYNE ANDERSON SMALL CAP FUND Goal ..................................................................... 6 Commentary ............................................................... 7 Outlook .................................................................. 8 Schedule of Investments .................................................. 9 KAYNE ANDERSON INTERNATIONAL FUND Goal ..................................................................... 12 Commentary ............................................................... 12 New Purchases ............................................................ 13 Outlook .................................................................. 14 Schedule of Investments .................................................. 15 KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND Goal ..................................................................... 19 Commentary ............................................................... 19 Outlook .................................................................. 19 Schedule of Investments .................................................. 20 KAYNE ANDERSON CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND Goal ..................................................................... 23 Commentary ............................................................... 23 Outlook .................................................................. 23 Schedule of Investments .................................................. 24 STATEMENTS OF ASSETS AND LIABILITIES ....................................... 28 STATEMENTS OF OPERATIONS ................................................... 30 STATEMENTS OF CHANGES IN NET ASSETS ........................................ 32 FINANCIAL HIGHLIGHTS ....................................................... 34 NOTES TO FINANCIAL STATEMENTS .............................................. 39 KAYNE ANDERSON MUTUAL FUNDS Dear Shareholder: We are pleased to express 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 semi-annual report contains a commentary and June 30, 2000 financial statements for each of our mutual funds. In each commentary, the portfolio manager reviews the objectives, performance and outlook for the fund. We hope that you will find these comments interesting and timely. As an investment adviser, 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 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 Investment Officer Chief Executive Officer Kayne Anderson Investment Management, LLC 1 KAYNE ANDERSON LARGE CAP FUND GOAL The KAYNE ANDERSON LARGE CAP FUND (the "Fund") invests in high-quality, large-capitalization companies that enjoy global dominance, excellent management, financial strength and consistent growth. Our intent is to be long-term owners of some of the world's finest companies. COMMENTARY During the second quarter of 2000, most large-cap stock indices produced negative total returns. Specifically, the S&P 500 returned -2.66%, while the Dow Jones Industrials and Nasdaq returned -3.98% and -13.23%, respectively. In contrast, the Fund produced a POSITIVE return in the second quarter. For the first six months ended June 30, 2000, the Fund's total return was 2.46% vs. - -0.42% for the S&P 500. During the last few months, we added three new names to the Fund. Specifically, we purchased Home Depot, Gap Inc. and Cisco Systems. We are attracted to Home Depot's business model of 23% to 25% EPS growth, the new EXPO Design Centers (a potential home run), and an S&P relative price to earnings (P/E) ratio of 148% versus a target range of 130% to 210%. We like Gap because comparable store sales comparisons are easing, management can get the company back on fashion trend, the online stores can tap the global potential of the brand and the stock is very cheap. We bought Cisco because the company is the leader in a rapidly growing, important technology sector and the overall sell-off for the technology group afforded us the opportunity to buy well below the 52-week high of $82. We also sold two positions in the last few months, one in financial services and one in entertainment. Both sales involved companies that had appreciated strongly to high levels. We believed that the combination of high valuation and short-term earnings growth above sustainable long-term trends was reason enough to sell the positions. We replaced them with securities with more favorable valuation characteristics. OUTLOOK Looking forward from a macro perspective, we understand that rising interest rates and some slowing of economic growth tend to limit upside potential in the stock market. However, we believe that the engineering by the Federal Reserve toward a less frenetic economic pace, in combination with ample global capacity and productivity gained from technology spending, should allow inflation to be constrained to an acceptable rate. Our view of the next five years is that earnings growth will be the engine that powers stock returns, because we are not counting on P/E expansion from today's levels. Based on this premise, over the last year and a half we have been systematically increasing the expected long-term earnings growth rate of securities held in the Fund. Today, the anticipated growth rate is 15% to 16%, up from 12% to 13% two years ago. Importantly, this has been accomplished while retaining the consistency of earnings growth that is a key feature of Kayne Anderson portfolios. As we have previously indicated, we believe a portfolio with underlying profits growing at a rate in the mid-teens provides a strong underpinning for long-term capital appreciation. Past performance is not indicative of future results. For the one and five years ended June 30, 2000, the Fund is up 5.51% and 19.76%, annualized, respectively. Since the Fund's inception on May 1, 1995 through June 30, 2000 the Fund is up 20.01% annualized. Each of the above mentioned securities account for 2.06%, 1.84% and 3.56% of the Fund as of June 30, 2000. 2 KAYNE ANDERSON LARGE CAP FUND SCHEDULE OF INVESTMENTS AT JUNE 30, 2000 (UNAUDITED) SHARES VALUE - -------------------------------------------------------------------------------- COMMON STOCKS: 99.5% BASIC MATERIALS/CHEMICALS: 2.3% 74,610 PPG Industries, Inc. ............................. $ 3,306,156 ------------ CAPITAL GOODS/ELECTRICAL EQUIPMENT: 6.8% 52,780 Emerson Electric Co. ............................. 3,186,592 121,260 General Electric Co. ............................. 6,426,780 ------------ 9,613,372 ------------ CONSUMER STAPLES/BEVERAGES: 4.2% 103,360 Coca-Cola Co. .................................... 5,936,740 ------------ CONSUMER STAPLES/CONSUMER PRODUCTS: 3.2% 78,950 Procter & Gamble Co. ............................. 4,519,887 ------------ CONSUMER STAPLES/FOODS: 4.8% 59,060 BestFoods ........................................ 4,089,905 33,260 Wm. Wrigley, Jr., Co. ............................ 2,667,036 ------------ 6,756,941 ------------ CONSUMER STAPLES/RESTAURANTS: 3.6% 153,510 McDonald's Corp .................................. 5,056,236 ------------ CAPITAL GOODS/MANUFACTURING (DIVERSIFIED): 1.8% 45,120 Illinois Tool Works, Inc. ........................ 2,571,840 ------------ ELECTRONIC MEASURE INSTRUMENT: 0.9% 16,937 Agilent Technologies, Inc.* ...................... 1,249,104 ------------ ENERGY/PETROLEUM - INTERNATIONAL: 3.6% 64,170 Exxon Mobil Corp. ................................ 5,037,345 ------------ FINANCIAL/BANKING: 4.2% 152,080 Wells Fargo & Co. ................................ 5,893,100 ------------ FINANCIAL/FINANCIAL SERVICES: 3.3% 89,820 Fannie Mae ....................................... 4,687,481 ------------ FINANCIAL/INSURANCE: 7.4% 32,240 Marsh & McLennan Companies, Inc. ................. 3,367,065 59,600 American International Group ..................... 7,003,000 ------------ 10,370,065 ------------ 3 KAYNE ANDERSON LARGE CAP FUND SCHEDULE OF INVESTMENTS AT JUNE 30, 2000 (UNAUDITED) - (CONTINUED) SHARES VALUE - -------------------------------------------------------------------------------- HEALTH CARE/DRUGS & HOSPITAL SUPPLIES: 15.1% 72,410 Johnson & Johnson ................................ $ 7,376,769 81,310 Merck & Co., Inc ................................. 6,230,379 158,930 Pfizer, Inc. ..................................... 7,628,640 ------------ 21,235,788 ------------ HEALTH CARE/MEDICAL DEVICES: 2.1% 59,730 Medtronics, Inc. ................................. 2,975,301 ------------ RETAIL/APPAREL: 1.8% 83,000 Gap, Inc. (The) .................................. 2,593,750 ------------ RETAIL/BUILDING PRODUCTS: 2.1% 58,100 Home Depot, Inc. (The) ........................... 2,901,369 ------------ TECHNOLOGY/COMMUNICATIONS EQUIPMENT: 5.5% 78,700 Cisco Systems, Inc.* ............................. 5,002,369 45,200 Lucent Technologies, Inc ......................... 2,678,100 ------------ 7,680,469 ------------ TECHNOLOGY/COMPUTERS & OFFICE EQUIPMENT: 8.2% 44,410 Hewlett-Packard Co. .............................. 5,545,699 54,310 International Business Machines Corp. ............ 5,950,339 ------------ 11,496,038 ------------ TECHNOLOGY/DATA SERVICES: 6.8% 119,050 Automatic Data Processing, Inc. .................. 6,376,616 78,530 Electronic Data Systems Corp ..................... 3,239,362 ------------ 9,615,978 ------------ TECHNOLOGY/SEMICONDUCTORS: 6.0% 62,680 Intel Corp ....................................... 8,379,532 ------------ TECHNOLOGY/SOFTWARE: 3.4% 59,390 Miscrosoft Corp.* ................................ 4,751,200 ------------ TELECOMMUNICATION SERVICES/TELEPHONE: 2.4% 106,750 AT&T Corp ........................................ 3,375,969 ------------ TOTAL COMMON STOCKS (cost $123,578,327) ....................................... 140,003,661 ------------ 4 KAYNE ANDERSON LARGE CAP FUND SCHEDULE OF INVESTMENTS AT JUNE 30, 2000 (UNAUDITED) - (CONTINUED) VALUE - -------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (cost $123,578,327+): 99.5% .............................. $140,003,661 Other Assets less Liabilities: 0.5% ........................... 652,995 ------------ NET ASSETS: 100.0% ............................................ $140,656,656 ============ * Non-income producing securities. + At June 30, 2000, the basis of investments for federal income tax purposes was the same as their cost for financial reporting purposes. Unrealized appreciation and depreciation were as follows: Gross unrealized appreciation ............................ $ 25,011,294 Gross unrealized depreciation ............................ (8,585,960) ------------ Net unrealized appreciation .............................. $ 16,425,334 ============ See accompanying Notes to Financial Statements. 5 KAYNE ANDERSON SMALL CAP FUND GOAL The goals of the KAYNE ANDERSON SMALL CAP 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. In summary, we strive to buy stock in high-quality companies at discount prices in order to allow clients to participate in the strong growth of small companies while assuming less financial and stock market risk. The following table demonstrates our commitment to these objectives. Our portfolio combines: (1) quality comparable to that of the high-quality benchmark, the S&P 500 Index of large stocks; (2) growth comparable to that of the high-growth benchmark, the Russell 2000 Small Cap Growth Index; and (3) value comparable to that of the deep-value benchmark, the Russell 2000 Small Cap Value Index. PORTFOLIO CHARACTERISTICS
RUSSELL RUSSELL KAYNE RUSSELL RUSSELL S&P 2000 2000 ANDERSON 2000 2500 500 GROWTH VALUE SMALL CAP INDEX INDEX INDEX INDEX INDEX --------- ----- ----- ----- ----- ----- QUALITY Return on Equity - Past 5 Years 22.7% 13.9% 14.5% 24.5% 14.5% 13.6% MORE PROFITABLE Long-Term Debt/Total Capital 20.7% 34.8% 37.3% 39.5% 24.6% 48.3% LESS FINANCIAL RISK Interest Expense Coverage 14 x 6 x 5.5 x 5.5 x 12.8 x 3.8 x LESS FINANCIAL RISK Earnings Variance - Past 10 Years 34.2% 66.5% 62.5% 42.8% 83.8% 55.9% MORE DEPENDABLE A Rated by S&P 42.7% 10.0% 14.2% 49.9% 4.1% 17.3% BETTER QUALITY GROWTH Earnings Per Share Growth - Past 5 Years 19.4% 13.1% 10.8% 17.3% 17.6% 10.8% RECOVERY Earnings Per Share Growth - Past 10 Years 15.3% 9.4% 9.9% 14.7% 13.1% 8.0% RECESSION Dividend Per Share Growth - Past 5 Years 15.9% 8.9% 7.8% 10.9% 9.0% 8.8% RECOVERY Dividend Per Share Growth - Past 10 Years 12.8% 5.9% 5.9% 9.7% 6.6% 5.7% RECESSION Capital Generation - {ROE x (1-Payout)} 16.9% 11.1% 11.1% 17.5% 13.5% 9.1% FASTER GROWTH VALUE P/E Ratio - Latest 12 months 19.0 26.9 25.1 28.7 128.2 13.6 BETTER VALUE Dividend Yield 1.4% 1.5% 1.5% 1.1% 0.2% 3.0% BETTER INCOME MARKET CHARACTERISTICS $ Weighted Average Market Cap $ 1.3 b $ 1.2 b $ 2.8 b $148.3 b $ 1.4 b $ 0.8 b COMPARABLE SIZE Quarterly Standard Deviation - Since Inception 11.7% 17.2% 15.3% 12.6% 22.5% 14.4% LESS MARKET RISK
Notes: Data as of June 30, 2000 Data is obtained from the Frank Russell Company and CompuStat and is assumed to be reliable. 6 COMMENTARY Small cap markets were down modestly in the second quarter following a modest first quarter advance. Year-to-date, the markets have produced a mid-single digit return. By avoiding the second quarter decline, the Fund is ahead of the indices year-to-date. This is very much in keeping with our investment objective of generating the returns of the asset class, but with much less risk. Since inception, Kayne Anderson's small cap portfolio has historically declined much less often and to a much lesser degree than the overall markets. As illustrated below, this year provides a good example. At the March 10th market peak, the Russell 2000 small cap benchmark was up 20% with Kayne Anderson's portfolio up single digits. Through the subsequent 25% market decline, our portfolio continued to advance. Chart courtesy of Bloomberg. Russell 2000 Kayne Russell 2000 Kayne Date Index Anderson Date Index Anderson ---- ----- -------- ---- ----- -------- 12/31/1999 0 0 4/3/2000 2.24% 2.90% 1/3/2000 -1.65% -0.94% 4/4/2000 0.27% 1.75% 1/4/2000 -5.22% -3.58% 4/5/2000 2.63% 3.58% 1/5/2000 -5.14% -3.37% 4/6/2000 5.50% 5.60% 1/6/2000 -5.83% -3.10% 4/7/2000 7.58% 5.40% 1/7/2000 -3.26% -2.56% 4/10/2000 2.76% 3.17% 1/10/2000 -0.57% -2.02% 4/11/2000 1.07% 3.31% 1/11/2000 -2.41% -2.90% 4/12/2000 -2.24% 3.31% 1/12/2000 -2.91% -3.51% 4/13/2000 -3.08% 2.16% 1/13/2000 -0.71% -3.10% 4/14/2000 -10.11% -1.42% 1/14/2000 0.56% -2.97% 4/17/2000 -9.01% -1.35% 1/18/2000 1.73% 0.54% 4/18/2000 -3.70% 2.02% 1/19/2000 3.03% -2.36% 4/19/2000 -3.67% 2.90% 1/20/2000 4.46% -2.90% 4/20/2000 -4.54% 2.77% 1/21/2000 5.78% -2.90% 4/24/2000 -7.17% 1.96% 1/24/2000 3.61% -3.51% 4/25/2000 -3.11% 4.05% 1/25/2000 3.34% -3.91% 4/26/2000 -4.06% 2.16% 1/26/2000 3.23% -4.12% 4/27/2000 -2.01% 2.83% 1/27/2000 2.43% -4.72% 4/28/2000 0.30% 2.77% 1/28/2000 -0.03% -5.13% 5/1/2000 2.81% 4.39% 1/31/2000 -1.69% -5.87% 5/2/2000 0.12% 2.56% 2/1/2000 -0.20% -4.86% 5/3/2000 -1.82% 1.48% 2/2/2000 1.02% -4.39% 5/4/2000 -0.56% 2.56% 2/3/2000 3.34% -3.98% 5/5/2000 1.60% 4.18% 2/4/2000 4.11% -2.16% 5/8/2000 -0.93% 2.43% 2/7/2000 5.48% -2.02% 5/9/2000 -2.75% 1.82% 2/8/2000 6.49% -1.55% 5/10/2000 -6.04% 0.74% 2/9/2000 6.19% -0.94% 5/11/2000 -3.04% 4.45% 2/10/2000 7.42% -1.89% 5/12/2000 -2.74% 4.39% 2/11/2000 6.41% -2.83% 5/15/2000 -1.37% 5.94% 2/14/2000 6.97% -2.29% 5/16/2000 0.24% 7.22% 2/15/2000 7.03% -2.09% 5/17/2000 -1.01% 6.34% 2/16/2000 8.52% -1.82% 5/18/2000 -2.73% 5.67% 2/17/2000 10.63% -0.54% 5/19/2000 -4.96% 3.64% 2/18/2000 8.11% -2.77% 5/22/2000 -6.55% 3.37% 2/22/2000 7.17% -2.70% 5/23/2000 -9.06% 2.90% 2/23/2000 8.95% -1.08% 5/24/2000 -8.52% 4.52% 2/24/2000 9.77% -1.69% 5/25/2000 -9.62% 3.64% 2/25/2000 10.30% -1.28% 5/26/2000 -9.39% 3.44% 2/28/2000 10.49% -0.47% 5/30/2000 -5.56% 4.93% 2/29/2000 14.45% 1.48% 5/31/2000 -5.66% 5.67% 3/1/2000 16.56% 1.75% 6/1/2000 -2.43% 8.43% 3/2/2000 15.71% 0.94% 6/2/2000 1.64% 10.93% 3/3/2000 18.45% 2.02% 6/5/2000 1.69% 9.51% 3/6/2000 19.20% 1.55% 6/6/2000 1.37% 9.38% 3/7/2000 17.97% 2.70% 6/7/2000 2.34% 9.78% 3/8/2000 17.82% 3.17% 6/8/2000 1.94% 8.30% 3/9/2000 20.07% 4.25% 6/9/2000 3.63% 8.23% 3/10/2000 19.63% 3.31% 6/12/2000 0.74% 7.89% 3/13/2000 16.92% 2.63% 6/13/2000 1.78% 7.22% 3/14/2000 13.52% 1.89% 6/14/2000 0.97% 5.87% 3/15/2000 10.72% 3.98% 6/15/2000 1.49% 7.15% 3/16/2000 13.77% 7.83% 6/16/2000 1.78% 7.35% 3/17/2000 13.87% 7.42% 6/19/2000 3.57% 6.21% 3/20/2000 8.81% 4.79% 6/20/2000 4.15% 5.94% 3/21/2000 9.52% 2.90% 6/21/2000 4.53% 5.20% 3/22/2000 13.16% 3.98% 6/22/2000 2.03% 4.66% 3/23/2000 13.68% 3.71% 6/23/2000 1.12% 4.32% 3/24/2000 13.72% 4.52% 6/26/2000 2.30% 5.20% 3/27/2000 13.65% 3.24% 6/27/2000 0.66% 3.71% 3/28/2000 10.76% 2.23% 6/28/2000 3.22% 5.60% 3/29/2000 7.58% 1.21% 6/29/2000 1.55% 6.14% 3/30/2000 5.31% 1.01% 6/30/2000 2.47% 4.39% 3/31/2000 6.80% 2.97% Two of our holdings, Air Express International and Duff & Phelps Credit Rating, were acquired at premium prices by larger companies during the first half of this year. This follows the acquisition of three of our holdings by larger companies in 1999. We believe the reasons for this exceptional acquisition activity are clear. Relative to the S&P 500 Index, at June 30, 2000, the holdings in our portfolio exhibit the superior quality and growth characteristics shown above. They grow faster than the companies of the S&P 500 Index. Yet, as shown in the graph on page 8, our companies sell near the steepest discount ever to the S&P 500 Index. As a result, large companies see the opportunity to use their more richly valued common stocks as currency to buy high quality, fast growing, small companies, such as our holdings, at discount prices. The stock market volatility noted in the chart above created profit-taking opportunities in some of our holdings. Proceeds from partial sales in these holdings, along with proceeds from Air Express and Duff & Phelps, were reinvested in the following companies. Each of these companies is an industry profit leader. * ABM Industries - Largest U.S. based facilities services outsourcer - janitorial, security, parking, lighting, engineering * C.H. Robinson - Largest intra-national freight forwarder. Manages flow of goods across customers' supply chain * CSG Systems International - Customer billing for 45% of all U.S. cable subscribers and 50% of all U.S. DBS subscribers * Catalina Marketing - Dominant supplier of individualized electronic coupons delivered at the checkout counter in real-time * E.W. Blanch Holdings - Leading independent re-insurance broker, provides integrated risk management solutions * FactSet Research Systems - On-line financial data that is built into the investment industry's analytical systems * Fair, Isaac & Company - Industry leading credit decision-making tools. Enables off-line & on-line financial transactions. * HEICO Corp. Class A - World's largest non-OEM manufacturer of jet engine replacement parts * Jones Pharma - Sole-source drugs produce industry's highest profit margins 7 OUTLOOK Small stocks have outperformed large stocks so far this year following a multi-year period of lagging performance. Large cap companies are using their richly valued stock as currency in small company takeovers. Our current Small Cap portfolio now sells at a price-to-earnings (P/E) ratio 20% lower than the P/E ratio of the S&P 500 Index of large stocks -indicating good value. Our portfolio has sold as high as a 30% premium over the past decade. We own companies higher in quality and growing faster than the S&P 500. Thus we believe our portfolio will again sell at a premium P/E ratio to that of the S&P 500 in the future. KAYNE ANDERSON SMALL CAP P/E VERSUS S&P 500 P/E DATE P/E RELATIVE TO S&P 500 DATE P/E RELATIVE TO S&P 500 ---- ----------------------- ---- ----------------------- 6/90 97.27% 7/95 127.30% 7/90 93.61% 8/95 131.98% 8/90 90.26% 9/95 127.36% 9/90 90.00% 10/95 121.81% 10/90 88.96% 11/95 121.33% 11/90 85.19% 12/95 111.78% 12/90 86.00% 1/96 113.17% 1/91 83.00% 2/96 114.07% 2/91 80.00% 3/96 110.86% 3/91 81.00% 4/96 121.56% 4/91 80.00% 5/96 122.95% 5/91 80.00% 6/96 120.88% 6/91 79.72% 7/96 117.25% 7/91 77.12% 8/96 118.75% 8/91 76.41% 9/96 120.26% 9/91 68.57% 10/96 120.26% 10/91 71.07% 11/96 111.05% 11/91 76.20% 12/96 119.21% 12/91 74.00% 1/97 113.95% 1/92 76.00% 2/97 107.94% 2/92 82.00% 3/97 117.85% 3/92 90.87% 4/97 115.72% 4/92 87.17% 5/97 122.13% 5/92 88.89% 6/97 120.65% 6/92 90.00% 7/97 108.49% 7/92 86.00% 8/97 117.14% 8/92 90.00% 9/97 115.25% 9/92 91.71% 10/97 118.98% 10/92 89.63% 11/97 116.29% 11/92 92.59% 12/97 101.95% 12/92 95.57% 1/98 101.97% 1/93 93.51% 2/98 100.20% 2/93 90.05% 3/98 95.09% 3/93 93.55% 4/98 92.99% 4/93 90.01% 5/98 92.03% 5/93 90.22% 6/98 86.72% 6/93 87.75% 7/98 86.46% 7/93 86.59% 8/98 84.68% 8/93 86.71% 9/98 79.66% 9/93 98.26% 10/98 81.14% 10/93 94.83% 11/98 80.65% 11/93 93.91% 12/98 75.11% 12/93 95.57% 1/99 77.88% 1/94 95.82% 2/99 76.14% 2/94 95.60% 3/99 73.92% 3/94 97.17% 4/99 74.81% 4/94 94.44% 5/99 80.12% 5/94 92.52% 6/99 83.82% 6/94 98.04% 7/99 73.61% 7/94 95.61% 8/99 69.08% 8/94 95.56% 9/99 80.34% 9/94 102.84% 10/99 72.85% 10/94 100.19% 11/99 71.36% 11/94 103.26% 12/99 76.89% 12/94 121.51% 1/00 75.42% 1/95 115.83% 2/00 83.29% 2/95 114.82% 3/00 73.26% 3/95 132.67% 4/00 76.43% 4/95 128.57% 5/00 78.47% 5/95 124.82% 6/00 77.19% 6/95 131.91% PRICE / EARNINGS RATIO FOR THE STOCKS CURRENTLY IN THE KAYNE ANDERSON SMALL CAP FUND DIVIDED BY THE PRICE / EARNINGS RATIO OF THE STANDARD & POORS 500 INDEX. SOURCE: COMPUSTAT Robert Schwarzkopf, CFA, Portfolio Manager Sandi Gleason, CFA, Portfolio Manager 8 KAYNE ANDERSON SMALL CAP FUND SCHEDULE OF INVESTMENTS at June 30, 2000 (Unaudited) SHARES VALUE - -------------------------------------------------------------------------------- COMMON STOCK: 98.0% BASIC MATERIALS/PACKAGING: 4.7% 42,007 Bemis Co. ........................................ $ 1,412,485 14,049 Liqui-Box Corp. .................................. 695,425 ------------ 2,107,910 ------------ BASIC MATERIALS/PAINTS AND COATING: 2.7% 49,414 Benjamin Moore & Co. ............................. 1,192,113 ------------ CAPITAL GOODS/AEROSPACE & DEFENSE: 1.7% 63,910 HEICO Corp. - Class A ............................ 782,897 ------------ CAPITAL GOODS/MACHINERY EQUIPMENT: 5.5% 73,077 Federal Signal Corp. ............................. 1,205,771 24,894 Nordson Corp. .................................... 1,260,259 ------------ 2,466,030 ------------ CONSUMER CYCLICALS/ADVERTISING: 4.1% 17,760 Catalina Marketing Corp.* ........................ 1,811,520 ------------ CONSUMER CYCLICALS/FURNITURE: 3.6% 114,952 LA-Z Boy, Inc. ................................... 1,609,328 ------------ CONSUMER CYCLICALS/RETAIL: 4.5% 104,390 Claire's Stores, Inc. ............................ 2,009,508 ------------ CONSUMER CYCLICALS/SERVICES: 5.5% 48,635 ABM Industries, Inc. ............................. 1,118,605 55,542 Strayer Education, Inc. .......................... 1,333,008 ------------ 2,451,613 ------------ CONSUMER STAPLES/FOOD: 4.9% 62,971 Tootsie Roll Industries, Inc. .................... 2,203,985 ------------ ENERGY/OIL & GAS PRODUCTION: 3.8% 29,969 Devon Energy Corp. ............................... 1,683,883 ------------ FINANCE/BANKING: 5.9% 101,117 National Commerce Bancorp ........................ 1,624,192 55,632 Washington Federal, Inc. ......................... 1,015,284 ------------ 2,639,476 ------------ 9 KAYNE ANDERSON SMALL CAP FUND SCHEDULE OF INVESTMENTS at June 30, 2000 (Unaudited) - (Continued) SHARES VALUE - -------------------------------------------------------------------------------- FINANCE/FINANCIAL SERVICES: 12.4% 32,022 Eaton Vance Corp. ................................ $ 1,481,018 40,000 FactSet Research Systems, Inc. ................... 1,130,000 31,860 Fair, Isaac and Company, Inc ..................... 1,401,840 34,008 Fiduciary Trust Co. .............................. 1,547,389 ------------ 5,560,247 ------------ FINANCE/INSURANCE: 1.5% 32,010 E.W. Blanch Holdings, Inc. ....................... 650,203 ------------ HEALTH CARE/DRUGS & HOSPITAL SUPPLIES: 10.9% 132,440 Hooper Holmes, Inc ............................... 1,059,520 64,170 Jones Pharma, Inc. ............................... 2,562,789 80,520 Landauer, Inc. ................................... 1,253,092 ------------ 4,875,401 ------------ TECHNOLOGY/COMPUTER & INTEGRATED SYSTEMS: 10.8% 76,162 Reynolds & Reynolds Inc. - Class A ............... 1,389,956 68,640 Jack Henry & Associates .......................... 3,440,580 ------------ 4,830,536 ------------ TECHNOLOGY/ELECTRONICS: 5.3% 57,850 Dallas Semiconductor Corp ........................ 2,357,388 ------------ TECHNOLOGY/SOFTWARE & SERVICE: 6.4% 43,630 CSG Systems International, Inc.* ................. 2,446,007 59,036 Timberline Software Corp. ........................ 431,701 ------------ 2,877,708 ------------ TRANSPORTATION SERVICES: 3.8% 34,660 C.H. Robinson Worldwide, Inc ..................... 1,715,670 ------------ TOTAL COMMON STOCKS (cost $42,616,859) ........................................ 43,825,416 ------------ 10 KAYNE ANDERSON SMALL CAP FUND SCHEDULE OF INVESTMENTS at June 30, 2000 (Unaudited) - (Continued) VALUE - -------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (cost $42,616,859+): 98.0% ............................... $ 43,825,416 Other Assets less Liabilities: 2.0% ........................... 901,921 ------------ NET ASSETS: 100.0% ............................................ $ 44,727,337 ============ * Non-income producing security. + At June 30, 2000, the basis of investments for federal income tax purposes was the same as their cost for financial reporting purposes. Unrealized appreciation and depreciation were as follows: Gross unrealized appreciation ............................ $ 6,117,585 Gross unrealized depreciation ............................ (4,909,028) ------------ Net unrealized appreciation .............................. $ 1,208,557 ============ See accompanying Notes to Financial Statements. 11 KAYNE ANDERSON INTERNATIONAL FUND GOAL The goal of the KAYNE ANDERSON INTERNATIONAL 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 process. We define quality companies as those possessing a global competitive advantage, management 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 (Europe, Australia and the Far East) index. COMMENTARY For the six-month period ended June 30, 2000, the Kayne Anderson International Fund produced a total return of +0.31% versus a decline of 3.95% for the MSCI EAFE index (in dollar terms). Since March 10th, the date that marks the beginning of the US Nasdaq market collapse, the Fund returned +6.24% compared to a 3.69% decline for the benchmark. The Fund's balanced, long-term oriented investment approach has again shown its defensive characteristics in times of market turmoil. Speculation around TMT stocks (Technology, Media, Telecommunications) that developed in the second half of 1999 continued unabated during the first two months of 2000, as none of the feared Y2K-related computer problems manifested. At the beginning of March, the valuation levels reached by most TMT stocks around the world could not be justified by fundamentals anymore, which led market participants to rotate their portfolios out of TMT stocks in favor of more defensive, reasonably priced sectors such as food, beverage, pharmaceuticals, and financials. This phenomenon was particularly acute in Europe where media, telecommunications, and software and computer services groups fell sharply, while beverages, pharmaceuticals, and insurance groups rose significantly. In Japan, a similar phenomenon took place, with dramatic declines in the Internet area. The well publicized collapse of 1999 stock market darlings Softbank and Hikari Tushin confirmed our previously stated opinion that complacent, short-term-oriented investors would pay a hefty price for ignoring fundamentals. At the end of June, the four largest countries represented in the Fund were the United Kingdom (22.6%), Japan (22.4%), France (16.2%), and The Netherlands (10.3%). We continued to add to our Japanese equity position, purchasing during the first quarter a few high-quality stocks which were already sharply down at the time we purchased them: Fujitsu, Matsushita Electric, NTT, and Sumitomo Bank. We also took advantage of sharp declines in the TMT sectors to buy Alcatel and Telefonica. In order to finance those purchases, we sold Elsevier, and Tomkins, which were not meeting our expectations, and Uni-Charm, which reached our target price. We also took profits in some of the portfolio winners (Ericsson, SAP, Reuters and others). Among the first-half 2000 winners, were Alcatel (+49%), Canon (+24%), Ericsson (+22%), Danone (+17%), AXA (+15%), Diageo (+13%), and Astra-Zeneca (+13%). The losers included Panamco (-26%), Unilever (-19%) and Rentokil-Initial (-39%), and Minebea (-27%). We have seen during last three months a sector broadening of the market that bodes well for our diversified investment approach. 12 NEW PURCHASES FUJITSU Based in Japan, Fujitsu is a leading provider of comprehensive information technology and network solutions for the global marketplace. It manufactures computers, communication equipment and semiconductors, and provides Internet connection services through @nifty, the largest Internet provider in Japan. We believe Fujitsu should benefit from a focus on the Internet (new slogan: "Everything on the Internet"), a reorganization of existing businesses, and the current trend towards greater IT-related capital spending in Japan. NTT NTT is the leading telecom service provider in Japan, and, we believe, stands to benefit from the rapid growth in Internet and data transmission by leveraging its strength to own the lucrative last mile to customers. In addition, it has announced plans to cut costs and reduce capital expenditures in the next three years, increasing free cash flow. We believe that NTT's valuation is attractive, considering profitability improvements in its wireline businesses and its rapidly growing subsidiaries, which include NTT DOCOMO (a wireless service operator) and OCN (the second-largest ISP in Japan). MATSUSHITA ELECTRIC Matsushita Electric Industrial ("MEI") is the world's largest consumer electronics company. We believe MEI should be a major beneficiary of rapid growth in the digital and network sectors, based on its technological leadership, production capabilities, and strong brand names. Its management team has devised a reorganization plan in order to improve operating and financial efficiency and to maximize shareholder value. We believe MEI should also benefit from the economic recovery in Asia through its exposure to Asian emerging markets, and particularly China. ALCATEL Headquartered in France, Alcatel is a leading telecommunications equipment supplier. As a clear leader in ADSL and ATM technology (particularly after its recent take-over of Newbridge Networks of Canada), we believe Alcatel is well positioned to benefit from the internet-linked "broadband" explosion. We believe the company will achieve strong earnings growth this year due to a sustained top-line expansion and sharp margin improvement, providing the catalyst for the stock to close the valuation gap it has suffered versus its peer group. 13 The country allocation of the fund on June 30th, 2000 was: Australia Finland France Germany Hong Kong Japan Mexico - --------- ------- ------ ------- --------- ----- ------ 3.1% 2.3% 16.2% 2.9% 2.7% 22.4% 1.6% Netherlands Spain Sweden Switzerland UK Cash - ----------- ----- ------ ----------- ----- ---- 10.3% 6.4% 2.1% 7.2% 22.6% 0.2% OUTLOOK We welcome the return to more realistic valuation levels of the so-called "new economy" stocks. The sector broadening that we have witnessed since mid-March, which we believe will continue, should greatly benefit our well diversified equity portfolio. In our opinion, the outlook for international developed equity markets remains very positive. The European equity markets continue to be supported by strong fundamentals; economic growth is accelerating, and corporate restructuring, M&A activity, pension and fiscal reforms, and technological advances should continue to attract international capital flows over the next few years. In Japan, globalization and the continued maturation of the domestic economy are putting intense pressure on the corporate sector, which is poised to experience profound changes. Although we remain cautious about the short-term, we believe that corporate restructuring and merger and acquisition activities are likely to drive the Japanese equity markets to significantly higher levels over the next few years. We continue to believe that an investment strategy that focuses exclusively on the highest quality foreign companies constitutes a long-term winning strategy for the prudent investor. Jean-Baptiste Nadal, CFA Portfolio Manager Past performance is no indication of future performance. For the one year ended June 30, 2000 the Fund was up 17.39%. From inception (October 18, 1996) through June 30, 2000 the Fund's annualized return has been 20.42%. The Fund invests in international securities which carry a greater risk then domestic securities. 14 KAYNE ANDERSON INTERNATIONAL FUND SCHEDULE OF INVESTMENTS at June 30, 2000 (Unaudited) SHARES VALUE - ------ ----- COMMON STOCKS: 99.8% AUSTRALIA: 3.1% 74,732 Broken Hill Proprietary ADR ......................... $ 1,774,885 ------------ FINLAND: 2.3% 26,272 Nokia Corp. ADR ..................................... 1,311,958 ------------ FRANCE: 16.2% 10,780 Air Liquide ......................................... 1,407,534 36,000 Alcatel S.A. ........................................ 2,364,005 24,712 Axa ADR ............................................. 1,966,149 72,570 Groupe Danone S.A. ADR .............................. 1,954,854 20,871 Total Fina Elf S.A. ADR ............................. 1,603,154 9,295,696 ------------ GERMANY: 2.9% 34,866 SAP AG ADR .......................................... 1,636,523 ------------ HONG KONG/CHINA: 2.7% 1 Hong Kong & China Gas ............................... 1 26,834 Hong Kong & Shanghai Banking ADR .................... 1,554,695 ------------ 1,554,696 ------------ JAPAN: 22.4% 34,000 Canon Inc. .......................................... 1,690,079 55,000 Fujitsu ............................................. 1,900,300 26,000 Kao Corp. ........................................... 793,070 60,000 Matsushita Electric Industrial Co., Ltd. ............ 1,553,382 114,000 Minebea Co., Ltd .................................... 1,427,417 90 Nippon Telegraph & Telphone Co. ..................... 1,194,690 116,000 Shiseido Co. ........................................ 1,791,005 16,000 Sony Corp. .......................................... 1,491,245 80,000 Sumitomo Bank, Ltd (The) ............................ 979,096 ------------ 12,820,284 ------------ MEXICO: 1.6% 61,291 Panamerican Beverages Inc. - Class A ................ 915,534 ------------ 15 KAYNE ANDERSON INTERNATIONAL FUND SCHEDULE OF INVESTMENTS at June 30, 2000 (Unaudited) - (Continued) SHARES VALUE - ------ ----- NETHERLANDS: 10.3% 57,000 Ahold N.V. .......................................... $ 1,679,722 20,910 Heineken N.V. ....................................... 1,274,159 28,562 ING Groep N.V. ...................................... 1,932,908 22,821 Unilever N.V. ....................................... 981,303 ------------ 5,868,092 ------------ SPAIN: 6.4% 54,110 Endesa S.A. ADR ..................................... 1,055,145 81,811 Repsol S.A. ADR ..................................... 1,620,880 46,900 Telefonica S.A. ..................................... 1,008,660 ------------ 3,684,685 ------------ SWEDEN: 2.1% 59,052 Ericsson L.M. Telephone ADR ......................... 1,181,040 ------------ SWITZERLAND: 7.2% 12,674 Nestle S.A. ADR ..................................... 1,272,411 41,876 Novartis AG ADR ..................................... 1,675,040 8,072 Union Bank of Switzerland ........................... 1,183,346 ------------ 4,130,797 ------------ UNITED KINGDOM: 22.6% 106,622 Allied Zurich Plc ................................... 1,264,953 23,921 Astrazeneca Plc ..................................... 1,120,299 31,510 Cable & Wireless Plc ADR ............................ 1,577,469 110,000 Compass Group Plc ................................... 1,453,650 42,240 Diageo Plc ADR ...................................... 1,502,160 174,613 Invensys Plc ADR .................................... 1,309,824 31,448 Pearson Plc ......................................... 1,002,562 438,600 Rentokil Initial Plc ................................ 998,736 13,304 Reuters Group Plc ADR ............................... 1,329,568 32,930 Vodafone Airtouch Plc ADR ........................... 1,364,537 ------------ 12,923,758 ------------ TOTAL COMMON STOCKS (cost $48,376,666) ........................................... 57,097,948 ------------ 16 KAYNE ANDERSON INTERNATIONAL FUND SCHEDULE OF INVESTMENTS at June 30, 2000 (Unaudited) - (Continued) VALUE ----- TOTAL INVESTMENTS IN SECURITIES (cost $48,376,666+): 99.8% .................................. $57,097,948 Other Assets less Liabilities: 0.2% .............................. 104,030 ----------- NET ASSETS: 100.0% ............................................... $57,201,978 =========== + At June 30, 2000, the basis of investments for federal income tax purposes was the same as their cost for financial reporting purposes. Unrealized appreciation and depreciation were as follows: Gross unrealized appreciation ............................... $10,640,911 Gross unrealized depreciation ............................... (1,919,629) ----------- Net unrealized appreciation ................................. $ 8,721,282 =========== ADR - American depositary receipt. See accompanying Notes to Financial Statements. 17 KAYNE ANDERSON INTERNATIONAL FUND SCHEDULE OF INVESTMENTS BY INDUSTRY at June 30, 2000 (Unaudited) INDUSTRY PERCENTAGE - -------- ---------- Beer, Wine and Distilled Beverages ............................... 4.9% Beverages ........................................................ 3.8 Chemical & Allied Products ....................................... 4.5 Commercial Banking ............................................... 6.1 Communication Services ........................................... 5.6 Communications Equipment ......................................... 11.8 Computer & Other Data Processing Services ........................ 2.9 Crude Petroleum & Natural Gas .................................... 6.0 Drugs ............................................................ 2.9 Drugs, Proprietors and Sundries .................................. 2.0 Eating & Drinking Places ......................................... 2.5 Electric Services ................................................ 1.8 Electrical Industrial Apparatus .................................. 3.0 Electronic Components & Accessories .............................. 2.3 Food Beverage & Tobacco .......................................... 3.4 Foreign Banks and Branches & Agencies ............................ 3.8 Groceries & Related Products ..................................... 1.7 Grocery Stores ................................................... 2.9 Holding Offices .................................................. 2.2 Household Audio & Video Equipment ................................ 5.3 Insurance Carriers ............................................... 3.4 Miscellaneous Business Services .................................. 1.7 Miscellaneous Chemial Products ................................... 2.5 Miscellaneous Electronic Machinery Equipment & Supplies ........................................... 2.5 Oil and Gas Field Services ....................................... 2.8 Security and Commodity Services .................................. 2.3 Telephone Communication .......................................... 5.2 ----- Total Investments ................................................ 99.8 Other Assets less Liabilities .................................... 0.2 ----- Net Assets ....................................................... 100.0% ===== See accompanying Notes to Financial Statements. 18 KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND GOAL 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 The first half of 2000 has been a volatile time in both the fixed income and equity markets. Fixed income markets have responded not only to the actions of the Federal Reserve Board and the movements in equity markets, but also to virtually every comment made by a member of the Fed. Overall, it has been positive for the Intermediate Total Return Bond Fund, which is up 3.11% year to date as of June 30, 2000. The fund has benefited from our short to neutral duration relative to our benchmark, and our current weighting in U.S. Treasuries. While the spreads have been widening in the corporate and agency sectors, the treasury sector has performed well for a couple of reasons: first, there is a "scarcity" factor currently affecting U.S. Treasuries as the issuance level declines (We have seen the portion of the Lehman Government/Corporate Index represented by US Government debt fall from 80% in December 1994 to 63% this month.); second, as mentioned above, the volatility in the markets always lends support to the treasury sector. SECTOR DIVERSIFICATION MORTGAGE-BACKED ......... 7% COMMERCIAL PAPER ....... 2% CMO ..................... 3% CASH & EQUIVALENTS ..... 1% INDUSTRIAL .............. 10% AGENCY ................. 1% FINANCE ................. 9% U.S. TREASURY .......... 67% OUTLOOK Since the Fed began its current tightening cycle in June of last year, it has taken the Federal Funds rate from 4.75% to its current level of 6.50%. Although it made no change at its last meeting, the Committee has stated that "the risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future". However, we are beginning to see the effects of their actions flowing through the economy. Mortgage rates are at their highest levels since the early 1990's, and we are now seeing some signs of softening in the demand for housing. Banks are tightening credit standards for commercial and industrial loans, and unemployment claims continue to trend higher. Although upcoming inflation reports are likely to be higher than expected due to oil prices, we do expect the core inflation numbers to be encouraging. That said, it is still too early to tell what the Fed's next move will be, but we can expect the fixed income markets to continue to react in anticipation. 19 KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND SCHEDULE OF INVESTMENTS at June 30, 2000 (Unaudited)
PRINCIPAL AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------ U.S. TREASURY OBLIGATIONS: 65.5% $2,050,000 U.S. Treasury Bonds, 11.875%, 11/15/2003 ....................................... $ 2,388,250 525,000 U.S. Treasury Notes, 6.250%, 10/31/2001 ........................................ 523,359 4,000,000 U.S. Treasury Notes, 7.500%, 05/15/2002 ........................................ 4,075,000 2,100,000 U.S. Treasury Notes, 6.250%, 02/15/2003 ........................................ 2,094,750 4,980,000 U.S. Treasury Notes, 7.250%, 08/15/2004 ........................................ 5,148,075 1,500,000 U.S. Treasury Notes, 7.875%, 11/15/2004 ........................................ 1,588,125 8,000,000 U.S. Treasury Notes, 7.500%, 02/15/2005 ........................................ 8,392,504 551,000 U.S. Treasury Notes, 5.875%, 11/15/2005 ........................................ 541,702 1,500,000 U.S. Treasury Notes, 6.500%, 10/15/2006 ........................................ 1,517,345 2,000,000 U.S. Treasury Notes, 6.250%, 02/15/2007 ........................................ 2,002,500 2,007,000 U.S. Treasury Notes, 5.625%, 05/15/2008 ........................................ 1,936,129 ----------- Total U.S. Treasury Obligations .............................................................. 30,207,739 ----------- U.S. AGENCY OBLIGATIONS: 3.4% 600,000 Federal National Mortgage Association, 5.625%, 05/14/2004 ...................... 571,876 87,000 Federal National Mortgage Association, 6.950%, 11/13/2006 ...................... 84,557 1,000,000 Federal Home Loan Bank, 5.925%, 04/09/2008 ..................................... 928,851 ----------- Total U.S. Agency Obligations ................................................................ 1,585,284 ----------- MORTGAGE-BACKED/PASS-THROUGH SECURITIES: 10.5% 741,453 Government National Mortgage Association, 7.000%, 07/20/2013 ................... 729,565 9,155 Government National Mortgage Association, 8.000%, 11/15/2021 ................... 9,261 14,075 Government National Mortgage Association, 8.500%, 12/15/2022 ................... 14,420 262,175 Government National Mortgage Association, 8.000%, 07/15/2023 ................... 265,192 109,894 Government National Mortgage Association, 8.500%, 08/15/2025 ................... 112,586 34,036 Government National Mortgage Association, 8.500%, 06/15/2026 ................... 34,870 115,522 Government National Mortgage Association, 8.000%, 09/15/2026 ................... 116,852 51,818 Government National Mortgage Association, 8.000%, 11/15/2026 ................... 52,415 286,358 Federal Home Loan Mortgage Corp., 7.500%, 07/01/2009 ........................... 286,843 625,419 Federal Home Loan Mortgage Corp., 7.500%, 04/01/2014 ........................... 626,003 451,455 Federal Home Loan Mortgage Corp., 7.000%, 04/01/2016 ........................... 441,288 135,335 Federal Home Loan Mortgage Corp., 6.100%, 11/15/2016 ........................... 135,035 1,400,000 Federal National Mortgage Association, 6.000%, 08/25/2008 ...................... 1,342,285 446,607 Federal National Mortgage Association, 7.000%, 05/01/2014 ...................... 436,765 207,570 Federal National Mortgage Association, 8.000%, 01/01/2015 ...................... 210,182 ----------- Total Mortgage-Backed/Pass-Through Securities ................................................ 4,813,562 -----------
20 KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND SCHEDULE OF INVESTMENTS at June 30, 2000 (Unaudited) - (Continued) PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------- ASSET-BACKED RECEIVABLES: 0.1% $ 47,078 WFS Financial Owner Trust, 6.800%,12/20/2003 ......... $ 46,925 ---------- CORPORATE BONDS: 19.3% AEROSPACE: 0.2% 70,000 Honeywell International, 9.200%, 02/15/2003 .......... 73,290 ---------- AUTO - CARS/LIGHT TRUCKS: 2.6% 1,250,000 Daimlerchrysler National Holding Corp., 7.200%, 09/01/2009 ......................................... 1,210,700 ---------- BEVERAGES: 3.7% 70,000 Anheuser Busch Companies, 6.750%, 11/01/2006 ......... 67,790 236,000 Coca-Cola Enterprises, 6.375%, 08/01/2001 ............ 234,529 1,500,000 Coca-Cola Bottling Co., 6.850%, 11/01/2007 ........... 1,412,645 1,714,964 ---------- COMMUNICATION SERVICES: 0.4% 175,000 TCI Communications Inc., 6.375%, 05/01/2003 .......... 170,822 ---------- COMPUTERS - MICRO: 1.6% 750,000 Hewlett-Packard Co., 7.150%, 06/15/2005 .............. 753,000 ---------- DEPARTMENT STORES: 0.2% 70,000 Sears, Roebuck and Co., 9.450%, 07/25/2001 ........... 71,262 ---------- FINANCE: 9.0% 280,000 AT & T Capital Corp., 7.500%, 11/15/2000 ............. 280,458 175,000 Bear Stearns Co., 6.625%, 10/01/2004 ................. 167,716 70,000 Beneficial Corp., 6.600%, 09/26/2001 ................. 69,562 1,000,000 Countrywide Home Loan, 7.450%, 09/16/2003 ............ 988,091 300,000 Ford Motor Credit Corp., 6.700%, 07/16/2004 .......... 289,898 192,000 General Motors Acceptance Corp., 7.125%, 05/01/2003... 191,280 175,000 Lehman Brothers Holdings, 8.875%, 03/01/2002 ......... 178,248 500,000 Lehman Brothers Holdings, 8.750%, 05/15/2002 ......... 509,429 1,000,000 Lehman Brothers Holdings, 7.250%, 10/15/2003 ......... 980,076 500,000 Salomon Inc., 9.250%, 05/01/2001 ..................... 507,259 4,162,017 ---------- INDUSTRIAL: 0.4% 175,000 Caterpillar Inc., 8.440%, 11/26/2003 ................. 179,732 ---------- MOTION PICTURE PRODUCTION & OTHER SERVICES: 0.6% 278,000 Walt Disney Co. (The), 6.375%, 03/30/2001 ............ 277,349 ---------- 21 KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND SCHEDULE OF INVESTMENTS at June 30, 2000 (Unaudited) - (Continued) PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------- RETAIL STORES: 0.6% $ 300,000 Wal-Mart Stores, 6.550%, 08/10/2004 ................. $ 296,250 ----------- Total Corporate Bonds ............................................ 8,909,386 ----------- TOTAL INVESTMENTS IN SECURITIES (cost $46,238,574+): 98.8% .................................. 45,562,896 Other Assets less Liabilities: 1.2% .............................. 535,737 ----------- NET ASSETS: 100.0% ............................................... $46,098,633 =========== + At June 30, 2000, the basis of investments for federal income tax purposes was the same as their cost for financial reporting purposes. Unrealized appreciation and depreciation were as follows: Gross unrealized appreciation ............................... $ 69,875 Gross unrealized depreciation ............................... (745,553) ----------- Net unrealized depreciation ................................. $ (675,678) =========== See accompanying Notes to Financial Statements. 22 KAYNE ANDERSON CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND GOAL 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 The first half of 2000 has been a volatile time in both the fixed income and equity markets. Fixed income markets have responded not only to the actions of the Federal Reserve Board and the movements in equity markets, but also to virtually every comment made by a member of the Fed. Overall, the Intermediate California Tax Free Bond Fund has benefited from our intermediate term duration, as well as our focus on quality, by being up 4.53% year-to-date as of June 30, 2000. The municipal market as a whole is performing well. We are seeing credit ratings on the rise, as revenues to state and local agencies are up, and new debt issuance is down. New issue volume peaked in 1998 at $292 billion, in 1999 it dropped to $225 billion, and in 2000 it is approximately 30% below year-to-date levels last year. We are seeing this scarcity of bonds strongly effecting the California market. Again, we see the focus on quality in a market with a scarcity factor as adding value. SECTOR DIVERSIFICATION ELECTRIC .................. 7.5% DAILY SAVRS ............... 0.9% HOSPITAL .................. 12.0% TRANSPORTATION ............ 15.0% GENERAL OBLIGATION ........ 16.4% PREREFUNDED ............... 11.6% HOUSING ................... 6.0% EDUCATION ................. 0.7% IDR/PCR ................... 1.3% WATER & SEWER ............. 27.2% CASH & EQUIVALENTS ........ 1.4% OUTLOOK Since the Fed began its current tightening cycle in June of last year, it has taken the Federal Funds rate from 4.75% to its current level of 6.50%. Although it made no change at its last meeting, the Committee has stated that "the risks continue to be weighted mainly toward conditions that may generate heightened inflation pressures in the foreseeable future". However, we are beginning to see the effects of their actions flowing through the economy. Mortgage rates are at their highest levels since the early 1990's, and we are now seeing some signs of softening in the demand for housing. Banks are tightening credit standards for commercial and industrial loans, and unemployment claims continue to trend higher. Although upcoming inflation reports are likely to be higher than expected due to oil prices, we do expect the core inflation numbers to be encouraging. That said, it is still too early to tell what the Fed's next move will be, but we can expect the fixed income markets to continue to react in anticipation. 23 KAYNE ANDERSON CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND SCHEDULE OF INVESTMENTS AT March June 30, 31, 2000 (UNAUDITED) (Continued)
PRINCIPAL AMOUNT VALUE - ------------------------------------------------------------------------------------------------------------- LONG-TERM MUNICIPAL DEBT: 97.7% GENERAL OBLIGATION: 16.4% $ 100,000 California State, 6.500%, 03/01/2002 ............................................... $ 103,500 250,000 California State, 5.375%, 03/01/2006 ............................................... 261,250 825,000 California State, 6.250%, 04/01/2008 ............................................... 907,500 250,000 California State, 5.250%, 06/01/2016 ............................................... 247,188 100,000 California State Veterans Bonds, 6.250%, 02/01/2014 ................................ 100,065 895,000 California State Veterans Bonds, 5.150%, 12/01/2014 ................................ 869,269 200,000 California State Veterans Bonds, 6.375%, 02/01/2027 ................................ 200,076 1,000,000 California State Public Works, 5.250%, 12/01/2008 .................................. 1,042,500 200,000 Los Angeles County, California Public Works, 5.000%, 10/01/2016 .................... 192,250 1,000,000 Oakland, California, 5.875%, 06/15/2019 ............................................ 1,018,750 ---------- 4,942,348 ---------- EDUCATION: 0.7% 200,000 University of California Revenues, 5.250%, 09/01/2011 .............................. 203,500 ---------- ELECTRIC: 7.5% 1,000,000 M-S-R Public Power Agency California, 6.000%, 07/01/2020 ........................... 1,017,500 1,000,000 Northern California Public Power Agency, 5.000%, 07/01/2015 ........................ 967,500 85,000 Piedmont Municipal Power Agency, 6.550%, 01/01/2016 ................................ 85,090 200,000 Sacramento, California Municipal Utilities District, 5.700%, 05/15/2012 ............ 207,500 ---------- 2,277,590 ---------- HOSPITAL: 12.0% 1,000,000 California Health Facilities Financing Authority, 6.250%, 10/01/2013 ............... 1,036,250 1,000,000 California Health Facilities Authority Revenues, 5.000%, 11/15/2013 ................ 982,500 200,000 Dade County Health Facilities Authority, 6.600%, 08/15/2002 ........................ 200,320 1,000,000 Stockton, California Health Facilities, 5.350%, 12/01/2009 ......................... 947,500 500,000 Stockton, California Health Facilities, 5.450%, 12/01/2010 ......................... 472,500 ---------- 3,639,070 ---------- HOUSING: 6.0% 960,000 California Housing Finance Agency, 5.950%, 08/01/2014 .............................. 987,600 800,000 California Housing Finance Agency, 5.900%, 08/01/2017 .............................. 812,000 ---------- 1,799,600 ---------- IDR/PCR: 1.3% 200,000 California Pollution Control Financing Authority, 7.150%, 02/01/2011 ............... 203,000 200,000 California Pollution Control Financing Authority, 5.850%, 12/01/2023 ............... 200,250 ---------- 403,250 ----------
24 KAYNE ANDERSON CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND SCHEDULE OF INVESTMENTS at June 30, 2000 (Unaudited) - (Continued)
PRINCIPAL AMOUNT VALUE - ---------------------------------------------------------------------------------------------------------------------- TRANSPORTATION: 15.0% $ 250,000 Long Beach, California Harbor Revenues, 6.000%, 05/15/2006 ................................. $ 267,187 ----------- 200,000 Orange County Airport, 5.500%, 07/01/2002 .................................................. 204,000 1,000,000 Oakland, California Port Authority, 5.600%, 11/01/2019 ..................................... 1,003,750 1,000,000 San Francisco, California Bay Area Rapid, 5.500%, 07/01/2015 ............................... 1,013,750 1,000,000 San Francisco, California Port Authority, 5.900%, 07/01/2009 ............................... 1,055,000 1,000,000 San Francisco, California City & County Airport, 5.375%, 05/01/2017 ........................ 991,250 ----------- 4,534,937 ----------- PREREFUNDED: 11.6% 1,000,000 California Educational Facilities Authority Revenues Pomona College, 6.125%, 02/15/2008 .... 1,045,000 150,000 Los Angeles Convention & Exhibit Center, 9.000%, 12/01/2020 ................................ 182,250 100,000 Orange County, California Local Transporation Authority, 5.750%, 02/15/2005 ................ 104,125 1,000,000 University of California Revenues, 6.300%, 09/01/2015 ...................................... 1,075,000 1,000,000 West Covina, California Queen of the Valley Hospital, 6.500%, 08/15/2014 ................... 1,095,000 ----------- 3,501,375 ----------- WATER & SEWER: 27.2% 275,000 Contra Costa, California Water District, 5.250%, 10/01/2016 ................................ 271,906 700,000 Los Angeles, California Wastewater System, 5.000%, 06/01/2014 .............................. 687,750 200,000 Los Angeles, California Wastewater System, 5.700%, 06/01/2020 .............................. 200,750 1,000,000 Marina, California Municipal Water District, 5.550%, 07/01/2013 ............................ 1,013,750 1,000,000 Mountain View, California Shoreline Regional Park, 5.500%, 08/01/2021 ...................... 983,750 1,000,000 Rancho, California Water District Financing Authority, 5.875%, 11/01/2010 .................. 1,068,750 1,000,000 Redlands, California Financing Authority, 5.000%, 09/01/2017 ............................... 948,750 1,000,000 San Francisco, California City and County Public Utility, 6.000%, 11/01/2015 ............... 1,013,750 1,000,000 San Jose Clara, California Water, 5.375%, 11/15/2015 ....................................... 1,006,250 1,000,000 Tulare, California Sewer Revenue, 5.700%, 11/15/2015 ....................................... 1,027,500 ----------- 8,222,906 ----------- TOTAL LONG-TERM MUNICIPAL DEBT (cost $28,910,333) ...................................................... 29,524,576 ----------- VARIABLE RATE MUNICIPAL DEBT: 0.9% 175,000 California Statewide Communities Development Authority, 4.000%, 08/15/2027* ................ 175,000 100,000 California Statewide Communities Development Authority, 4.000%, 04/01/2028* ................ 100,000 ----------- TOTAL VARIABLE RATE MUNICIPAL DEBT (cost $275,000) ..................................................... 275,000 -----------
25 KAYNE ANDERSON CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND SCHEDULE OF INVESTMENTS at June 30, 2000 (Unaudited) - (Continued) VALUE - -------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (cost $29,185,333+): 98.6% .................................. $29,799,576 Other Assets less Liabilities: 1.4% .............................. 426,772 ----------- NET ASSETS: 100.0% ............................................... $30,226,348 =========== * Variable rate security. The interest rate shown reflects the rate currently in effect. + At June 30, 2000, the basis of investments for federal income tax purposes was the same as their cost for financial reporting purposes. Unrealized appreciation and depreciation were as follows: Gross unrealized appreciation ............................... $ 829,966 Gross unrealized depreciation ............................... (215,723) ----------- Net unrealized appreciation ................................. $ 614,243 =========== See accompanying Notes to Financial Statements. 26 This page has been intentionally left blank. KAYNE ANDERSON MUTUAL FUNDS STATEMENTS OF ASSETS AND LIABILITIES at June 30, 2000 (Unaudited)
LARGE CAP SMALL CAP FUND FUND ------------- ------------ ASSETS Investments in securities, at cost ...................... $ 123,578,327 $ 42,616,859 ============= ============ Investments in securities, at value ..................... $ 140,003,661 $ 43,825,416 Cash .................................................... 685,995 892,180 Receivables: Dividends and interest ................................. 121,190 77,857 Tax reclaim ............................................ -- -- Prepaid expenses ........................................ 153 258 ------------- ------------ Total assets ........................................ 140,810,999 44,795,711 ------------- ------------ LIABILITIES Payables: Distributions to shareholders .......................... -- -- Due to advisor ......................................... 87,019 41,722 ------------- ------------ Accrued expenses ........................................ 67,324 26,652 Total liabilities ................................... 154,343 68,374 ------------- ------------ NET ASSETS .............................................. $ 140,656,656 $ 44,727,337 ============= ============ Number of shares issued and outstanding (unlimited shares authorized, no par value) ............ 7,372,855 2,890,937 ------------- ------------ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE $ 19.08 $ 15.47 ============= ============ COMPONENTS OF NET ASSETS Paid-in capital ......................................... $ 120,261,443 $ 48,608,827 Accumulated net investment income (loss) ................ (5,247) (2,105) Accumulated net realized gain (loss) on investments ..... 3,975,126 (5,087,942) Net unrealized appreciation (depreciation) on investments and foreign currency ................................... 16,425,334 1,208,557 ------------- ------------ Net assets .......................................... $ 140,656,656 $ 44,727,337 ============= ============
See accompanying Notes to Financial Statements. 28 CALIFORNIA INTERMEDIATE INTERMEDIATE INTERNATIONAL TOTAL RETURN TAX-FREE BOND FUND BOND FUND FUND - ------------- ------------ ------------ $48,376,666 $ 46,238,574 $ 29,185,333 =========== ============ ============ $57,097,948 $ 45,562,896 $ 29,799,576 76,768 13,051 115,273 70,066 786,383 453,404 34,271 -- -- 285 137 -- ----------- ------------ ------------ 57,279,338 46,362,467 30,368,253 ----------- ------------ ------------ -- 202,522 115,956 56,719 27,749 9,810 20,641 33,563 16,139 ----------- ------------ ------------ 77,360 263,834 141,905 ----------- ------------ ------------ $57,201,978 $ 46,098,633 $ 30,226,348 =========== ============ ============ 3,094,008 4,402,650 2,875,069 ----------- ------------ ------------ $ 18.49 $ 10.47 $ 10.51 =========== ============ ============ $47,628,004 $ 47,071,792 $ 29,750,079 52,555 1,552 4,540 799,720 (299,033) (142,514) 8,721,699 (675,678) 614,243 ----------- ------------ ------------ $57,201,978 $ 46,098,633 $ 30,226,348 =========== ============ ============ 29 KAYNE ANDERSON MUTUAL FUNDS STATEMENTS OF OPERATIONS For the Six Months Ended June 30, 2000 (Unaudited)
LARGE CAP SMALL CAP FUND FUND ----------- ----------- INVESTMENT INCOME Income Dividends ............................................. $ 741,244 $ 359,795 Interest .............................................. 79,989 19,398 ----------- ----------- Total income ....................................... 821,233 379,193 ----------- ----------- Expenses Advisory fees ......................................... 503,557 187,050 Registration expense .................................. 19,208 15,961 Fund accounting fees .................................. 21,571 17,992 Administration fees ................................... 30,582 16,059 Transfer agent fees ................................... 12,747 11,694 Trustee fees .......................................... 4,195 4,193 Audit fees ............................................ 5,063 4,018 Custodian fees ........................................ 15,813 10,716 Legal fees ............................................ 7,215 2,437 Amortization of deferred organization costs ........... -- 1,484 Reports to shareholders ............................... 2,089 2,998 Insurance expense ..................................... 602 177 Miscellaneous ......................................... 1,713 2,058 ----------- ----------- Total expenses ..................................... 624,355 276,837 Add: expenses recouped by advisor .................. -- 8,847 Less: fees waived and expenses absorbed ............ -- -- Less: expenses paid indirectly ..................... -- -- ----------- ----------- Net expenses ....................................... 624,355 285,684 ----------- ----------- NET INVESTMENT INCOME ........................... 196,878 93,509 ----------- ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY Net realized gain (loss) on investments ................ 5,201,582 2,623,605 Net unrealized appreciation (depreciation) on investments and foreign currency ...................... (1,831,859) (982,279) ----------- ----------- Net realized and unrealized gain on investments and foreign currency ................................ 3,369,723 1,641,326 ----------- ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ................................ $ 3,566,601 $ 1,734,835 =========== ===========
* Net of foreign tax withheld of $48,845. See accompanying Notes to Financial Statements. 30 CALIFORNIA INTERMEDIATE INTERMEDIATE INTERNATIONAL TOTAL RETURN TAX-FREE BOND FUND BOND FUND FUND --------- ----------- ----------- $ 488,339* $ -- $ -- 29,283 1,548,832 871,538 --------- ----------- ----------- 517,622 1,548,832 871,538 --------- ----------- ----------- 240,894 121,521 79,958 13,209 17,075 16,515 21,699 18,566 15,964 16,820 17,125 10,977 10,478 9,369 10,134 4,225 4,213 4,219 4,098 3,955 4,018 11,635 9,173 3,132 6,098 4,941 2,889 1,728 1,484 1,480 1,179 1,123 603 142 212 172 1,428 52 918 --------- ----------- ----------- 333,633 208,809 150,979 20,785 20,997 -- -- -- (31,148) -- (73) (2,712) --------- ----------- ----------- 354,418 229,733 117,119 --------- ----------- ----------- 163,204 1,319,099 754,419 --------- ----------- ----------- 799,774 (40,344) 14,116 (169,863) 222,126 543,815 --------- ----------- ----------- 629,911 181,782 557,931 --------- ----------- ----------- $ 793,115 $ 1,500,881 $ 1,312,350 ========= =========== =========== 31 KAYNE ANDERSON MUTUAL FUNDS STATEMENTS OF CHANGES IN NET ASSETS
LARGE CAP FUND -------------------------------- SIX MONTHS ENDED YEAR ENDED 6/30/00# 12/31/99 ------------- ------------- INCREASE (DECREASE) IN NET ASSETS FROM: OPERATIONS Net investment income ................................................ $ 196,878 $ 189,903 Net realized gain (loss) on investments .............................. 5,201,582 5,505,297 Net unrealized appreciation (depreciation) on investments and foreign currency ................................................ (1,831,859) 3,127,462 ------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS.... 3,566,601 8,822,662 ------------- ------------- DISTRIBUTIONS TO SHAREHOLDERS From net investment income ........................................... (202,125) (199,281) From net realized gain ............................................... (163,625) (6,052,026) ------------- ------------- TOTAL DISTRIBUTIONS ............................................... (365,750) (6,251,307) ------------- ------------- CAPITAL SHARE TRANSACTIONS Shares issued in exchange for Sefton Funds ........................... -- 56,532,609 Proceeds from shares sold ............................................ 28,604,510 49,326,207 Net asset value of shares issued on reinvestment of distributions.... 291,003 6,164,507 Cost of shares redeemed .............................................. (14,944,479) (39,670,665) ------------- ------------- NET INCREASE (DECREASE) FROM CAPITAL SHARE TRANSACTIONS ........... 13,951,034 72,352,658 ------------- ------------- TOTAL INCREASE (DECREASE) IN NET ASSETS ........................ 17,151,885 74,924,013 NET ASSETS Beginning of period ................................................ 123,504,771 48,580,758 ------------- ------------- END OF PERIOD ...................................................... $ 140,656,656 $ 123,504,771 ============= ============= Accumulated net investment income ..................................... $ -- $ -- ============= ============= CHANGE IN CAPITAL SHARES Shares issued in exchange for Sefton Funds ............................ -- 2,888,694 Shares sold ........................................................... 1,547,828 2,670,917 Shares issued on reinvestment of distributions ........................ 15,397 336,104 Shares redeemed ....................................................... (805,861) (2,132,053) ------------- ------------- Net increase (decrease) ............................................... 757,364 3,763,662 ============= =============
# Unaudited. See accompanying Notes to Financial Statements. 32
CALIFORNIA INTERMEDIATE INTERMEDIATE SMALL CAP INTERNATIONAL TOTAL RETURN TAX-FREE BOND FUND FUND BOND FUND FUND - ---------------------------- ---------------------------- ---------------------------- ---------------------------- SIX MONTHS SIX MONTHS SIX MONTHS SIX MONTHS ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED 6/30/00# 12/31/99 6/30/00# 12/31/99 6/30/00# 12/31/99 6/30/00# 12/31/99 - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ $ 93,509 $ 182,504 $ 163,204 $ 214,584 $ 1,319,099 $ 1,018,493 $ 754,419 $ 601,042 2,623,605 2,615,590 799,774 4,945,967 (40,344) 101,815 14,116 (156,510) (982,279) (1,587,364) (169,863) 4,760,202 222,126 (1,442,513) 543,815 (768,087) - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ 1,734,835 1,210,730 793,115 9,920,753 1,500,881 (322,205) 1,312,350 (323,555) - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ (95,614) (192,974) (117,343) (228,995) (1,349,646) (996,864) (750,119) (612,951) -- (1,995,755) -- (3,423,689) -- (37,955) -- -- - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ (95,614) (2,188,729) (117,343) (3,652,684) (1,349,646) (1,034,819) (750,119) (612,951) - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ -- 15,192,065 -- -- -- 40,785,659 -- 38,536,951 8,989,202 39,706,761 41,377,352 49,868,493 2,843,124 11,764,071 11,662,133 16,527,584 80,000 2,104,853 90,621 3,440,942 836,846 939,429 266,615 547,899 (12,978,153) (42,045,131) (25,531,638) (54,423,193) (11,136,748) (27,058,097) (24,126,565) (22,204,986) - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ (3,908,951) 14,958,548 15,936,335 (1,113,758) (7,456,778) 26,431,062 (12,197,817) 33,407,448 - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ (2,269,730) 13,980,549 16,612,107 5,154,311 (7,305,543) 25,074,038 (11,635,586) 32,470,942 46,997,067 33,016,518 40,589,871 35,435,560 53,404,176 28,330,138 41,861,934 9,390,992 - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ $ 44,727,337 $ 46,997,067 $ 57,201,978 $ 40,589,871 $ 46,098,633 $ 53,404,176 $ 30,226,348 $ 41,861,934 ============ ============ ============ ============ ============ ============ ============ ============ $ -- $ -- $ 52,555 $ 6,694 $ 1,552 $ 32,099 $ 4,540 $ 240 ============ ============ ============ ============ ============ ============ ============ ============ -- 998,150 -- -- -- 3,858,624 -- 3,694,818 599,855 2,550,670 2,316,550 2,899,614 273,327 1,094,407 1,128,071 1,558,667 5,086 142,735 4,930 186,992 80,629 88,042 25,908 52,149 (884,319) (2,716,708) (1,425,093) (3,173,764) (1,068,997) (2,496,667) (2,346,973) (2,109,671) - ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ (279,378) 974,847 896,387 (87,158) (715,041) 2,544,406 (1,192,994) 3,195,963 ============ ============ ============ ============ ============ ============ ============ ============
33 KAYNE ANDERSON LARGE CAP FUND FINANCIAL HIGHLIGHTS For a capital share outstanding throughout each period
SIX MONTHS YEAR ENDED DECEMBER 31, 05/01/95* ENDED ----------------------------------------- THROUGH 06/30/00# 1999 1998 1997 1996 12/31/95 ------- ------- ------- ------- ------- ------- Net asset value, beginning of period ..... $ 18.67 $ 17.03 $ 17.28 $ 14.32 $ 12.63 $ 10.65 ------- ------- ------- ------- ------- ------- INCOME FROM INVESTMENT OPERATIONS: Net investment income .................. 0.03 0.04 0.11 0.10 0.08 0.07 Net realized and unrealized gain on investments ....................... 0.43 2.71 2.38 4.34 2.35 2.13 ------- ------- ------- ------- ------- ------- Total income from investment operations... 0.46 2.75 2.49 4.44 2.43 2.20 ------- ------- ------- ------- ------- ------- LESS DISTRIBUTIONS: From net investment income ............. (0.03) (0.04) (0.11) (0.11) (0.08) (0.07) From net realized gain ................. (0.02) (1.07) (2.63) (1.37) (0.66) (0.15) ------- ------- ------- ------- ------- ------- Total distributions ...................... (0.05) (1.11) (2.74) (1.48) (0.74) (0.22) ------- ------- ------- ------- ------- ------- Net asset value, end of period ........... $ 19.08 $ 18.67 $ 17.03 $ 17.28 $ 14.32 $ 12.63 ======= ======= ======= ======= ======= ======= Total return ............................. 2.46%** 16.33% 14.14% 30.99% 19.09% 20.65%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions).... $ 140.7 $ 123.5 $ 48.6 $ 35.3 $ 26.1 $ 20.6 RATIO OF EXPENSES TO AVERAGE NET ASSETS: Before fees waived and expenses absorbed or recouped................... 0.93%*** 1.03% 1.11% 1.18% 1.37% 1.31%*** After fees waived and expenses absorbed or recouped................... 0.93%*** 1.03% 1.11% 1.18% 1.37% 1.31%*** RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS (after fees waived and expenses absorbed or recouped)................. 0.29%*** 0.28% 0.57% 0.55% 0.59% 0.94%*** Portfolio turnover rate .............. 26%** 33% 76% 51% 23% 28%**
# Unaudited. * Commencement of operations. ** Not annualized. *** Annualized. See accompanying Notes to Financial Statements. 34 KAYNE ANDERSON SMALL CAP FUND FINANCIAL HIGHLIGHTS For a capital share outstanding throughout each period
SIX MONTHS YEAR ENDED DECEMBER 31, 10/18/96* ENDED ---------------------------- THROUGH 06/30/00# 1999 1998 1997 12/31/96 ------ ------ ------ ------ ------ Net asset value, beginning of period ..... $14.82 $15.04 $13.12 $11.06 $10.65 ------ ------ ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS: Net investment income .................. 0.03 0.07 0.05 0.02 0.02 Net realized and unrealized gain on investments ....................... 0.65 0.47 2.07 2.14 0.41 ------ ------ ------ ------ ------ Total income from investment operations... 0.68 0.54 2.12 2.16 0.43 ------ ------ ------ ------ ------ LESS DISTRIBUTIONS: From net investment income ............. (0.03) (0.07) (0.05) (0.05) (0.02) From net realized gain ................. -- (0.69) -- (0.05) -- From paid-in capital ................... -- -- (0.15) -- -- ------ ------ ------ ------ ------ Total distributions ...................... (0.03) (0.76) (0.20) (0.10) (0.02) ------ ------ ------ ------ ------ Net asset value, end of period ........... $15.47 $14.82 $15.04 $13.12 $11.06 ====== ====== ====== ====== ====== Total return ............................. 4.61%** 3.64% 16.17% 19.46% 4.00%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions).... $ 44.7 $ 47.0 $ 33.0 $ 6.5 $ 0.8 RATIO OF EXPENSES TO AVERAGE NET ASSETS: Before fees waived and expenses absorbed or recouped .................. 1.26%*** 1.34% 1.35% 3.22% 18.91%*** After fees waived and expenses absorbed or recouped .................. 1.30%*** 1.30% 1.30% 1.30% 1.30%*** RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS (after fees waived and expenses absorbed or recouped) ................ 0.43%*** 0.53% 0.38% 0.45% 1.58%*** Portfolio turnover rate .............. 36%** 50% 28% 47% 0%**
# Unaudited. * Commencement of operations. ** Not annualized. *** Annualized. See accompanying Notes to Financial Statements. 35 KAYNE ANDERSON INTERNATIONAL FUND FINANCIAL HIGHLIGHTS For a capital share outstanding throughout each period
SIX MONTHS YEAR ENDED DECEMBER 31, 10/18/96* ENDED ---------------------------- THROUGH 06/30/00# 1999 1998 1997 12/31/96 ------ ------ ------ ------ ------ Net asset value, beginning of period ..... $18.47 $15.51 $12.61 $10.91 $10.65 ------ ------ ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS: Net investment income .................. 0.05 0.12 0.08 0.04 0.01 Net realized and unrealized gain on investments ....................... 0.01 4.68 3.25 1.75 0.26 ------ ------ ------ ------ ------ Total income from investment operations .. 0.06 4.80 3.33 1.79 0.27 ------ ------ ------ ------ ------ LESS DISTRIBUTIONS: From net investment income ............. (0.04) (0.12) (0.08) (0.05) (0.01) From net realized gain ................. -- (1.72) (0.35) (0.04) -- ------ ------ ------ ------ ------ Total distributions ...................... (0.04) (1.84) (0.43) (0.09) (0.01) ------ ------ ------ ------ ------ Net asset value, end of period ........... $18.49 $18.47 $15.51 $12.61 $10.91 ====== ====== ====== ====== ====== Total return ............................. 0.31%** 31.06% 26.47% 16.42% 2.56%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions).... $ 57.2 $ 40.6 $ 35.4 $ 7.0 $ 1.1 RATIO OF EXPENSES TO AVERAGE NET ASSETS: Before fees waived and expenses absorbed or recouped .................. 1.31%*** 1.47% 1.45% 3.41% 15.74%*** After fees waived and expenses absorbed or recouped .................. 1.39%*** 1.40% 1.38% 1.40% 1.40%*** RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS (after fees waived and expenses absorbed or recouped)................. 0.64%*** 0.63% 0.85% 0.61% 1.14%*** Portfolio turnover rate .............. 16%** 57% 28% 29% 0%**
# Unaudited. * Commencement of operations. ** Not annualized. *** Annualized. See accompanying Notes to Financial Statements. 36 KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND FINANCIAL HIGHLIGHTS For a capital share outstanding throughout each period
SIX MONTHS YEAR ENDED DECEMBER 31, 10/28/96* ENDED ---------------------------- THROUGH 06/30/00# 1999 1998 1997 12/31/96 ------ ------ ------ ------ ------ Net asset value, beginning of period ..... $10.44 $11.01 $10.75 $10.59 $10.65 ------ ------ ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS: Net investment income .................. 0.04 0.50 0.51 0.56 0.09 Net realized and unrealized gain (loss) on investments ................ 0.04 (0.57) 0.30 0.18 (0.07) ------ ------ ------ ------ ------ Total income from investment operations .. 0.08 (0.07) 0.81 0.74 0.02 ------ ------ ------ ------ ------ LESS DISTRIBUTIONS: From net investment income ............. (0.05) (0.49) (0.51) (0.58) (0.08) From net realized gain ................. -- (0.01) (0.04) -- -- ------ ------ ------ ------ ------ Total distributions ...................... (0.05) (0.50) (0.55) (0.58) (0.08) ------ ------ ------ ------ ------ Net asset value, end of period ........... $10.47 $10.44 $11.01 $10.75 $10.59 ====== ====== ====== ====== ====== Total return ............................. 3.11%** (0.65)% 7.61% 7.19% 0.20%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions).... $ 46.1 $ 53.4 $ 28.3 $ 6.3 $ 5.0 RATIO OF EXPENSES TO AVERAGE NET ASSETS: Before fees waived and expenses absorbed or recouped .................. 0.86%*** 1.23% 1.00% 2.23% 2.10%*** After fees waived and expenses absorbed or recouped .................. 0.95%*** 0.94% 0.94% 0.95% 0.95%*** After fees waived, expenses absorbed or recouped, and paid indirectly,...... 0.95%*** 0.94% 0.94% 0.95% 0.95%*** RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS (after fees waived, expenses absorbed or recouped, and paid indirectly)..... 5.43%*** 4.94% 4.93% 5.35% 4.72%*** Portfolio turnover rate .............. 4%** 64% 49% 27% 0%**
# Unaudited. * Commencement of operations. ** Not annualized. *** Annualized. See accompanying Notes to Financial Statements. 37 KAYNE ANDERSON CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND FINANCIAL HIGHLIGHTS For a capital share outstanding throughout each period
SIX MONTHS YEAR ENDED DECEMBER 31, 10/28/96* ENDED ---------------------------- THROUGH 06/30/00# 1999 1998 1997 12/31/96 ------ ------ ------ ------ ------ Net asset value, beginning of period ...... $10.29 $10.77 $10.74 $10.64 $10.65 ------ ------ ------ ------ ------ INCOME FROM INVESTMENT OPERATIONS: Net investment income ................. 0.24 0.44 0.43 0.34 0.01 Net realized and unrealized gain (loss) on investments ............... 0.22 (0.48) 0.03 0.11 (0.01) ------ ------ ------ ------ ------ Total income from investment operations ... 0.46 (0.04) 0.46 0.45 0.00 ------ ------ ------ ------ ------ LESS DISTRIBUTIONS: From net investment income ............ (0.24) (0.44) (0.43) (0.35) (0.01) ------ ------ ------ ------ ------ Net asset value, end of period ............ $10.51 $10.29 $10.77 $10.74 $10.64 ====== ====== ====== ====== ====== Total return .............................. 4.53%** (0.44)% 4.37% 4.26% 0.02%** RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (millions) .. $ 30.2 $ 41.9 $ 9.4 $ 6.0 $ 5.1 RATIO OF EXPENSES TO AVERAGE NET ASSETS: Before fees waived and expenses absorbed or recouped ................ 0.95%*** 1.37% 2.23% 2.29% 2.08%*** After fees waived and expenses absorbed or recouped ................ 0.75%*** 0.75% 0.77% 1.56% 1.81%*** After fees waived, expenses absorbed or recouped, and paid indirectly ....... 0.73%*** 0.71% 0.77% 0.95% 0.95%*** RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS (after fees waived, expenses absorbed or recouped, and paid indirectly) ... 4.73%*** 4.14% 3.88% 2.58% 0.60%*** Portfolio turnover rate ............... 23%** 65% 47% 40% 0%**
# Unaudited. * Commencement of operations. ** Not annualized. *** Annualized. See accompanying Notes to Financial Statements. 38 KAYNE ANDERSON MUTUAL FUNDS NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 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: Large Cap Fund (formerly Rising Dividends Fund), Small Cap Fund (formerly Small Cap Rising Dividends Fund), International Fund (formerly International Rising Dividends Fund), Intermediate Total Return Bond Fund and California 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 Fund, the International 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 Large Cap 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 Large Cap 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 Large Cap 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 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 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 Funds' shares fluctuates daily and may be worth more or less than their purchase price when redeemed. 39 KAYNE ANDERSON MUTUAL FUNDS NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (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 all of their taxable income to shareholders. Therefore, no federal income tax provision is required. At December 31, 1999 the Large Cap Fund, Small Cap Fund, Intermediate Total Return Bond Fund and the Cali-fornia 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. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements. Actual result could differ from those estimates. 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: Large Cap Fund 0.75% Small Cap Fund 0.85% International Fund 0.95% Intermediate Total Return Bond Fund 0.50% California Intermediate Tax-Free Bond Fund 0.50% 40 KAYNE ANDERSON MUTUAL FUNDS NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) For the six months ended June 30, 2000, the Funds incurred the following advisory fees: Large Cap Fund $503,557 Small Cap Fund $187,050 International Fund $240,894 Intermediate Total Return Bond Fund $121,521 California Intermediate Tax-Free Bond Fund $ 79,958 The Funds are responsible for their own operating expenses. The Advisor has agreed to limit each Fund's total operating expenses by reducing all or a portion of its fees and reimbursing each Fund for expenses, excluding interest, so that their ratio of expenses to average net assets will not exceed the following levels: Large Cap Fund 1.03% Small Cap Fund 1.30% International Fund 1.40% Intermediate Total Return Bond Fund 0.95% California Intermediate Tax-Free Bond Fund 0.75% Any fee waived and/or any Fund expense absorbed by the Advisor pursuant to an agreed upon expense cap shall be reimbursed by the Fund to the Advisor, if so requested by the Advisor, provided the aggregate amount of the Fund's current operating expense for such fiscal year does not exceed the applicable limitation on Fund expenses. For the six months ended June 30, 2000, the Advisor waived fees of $31,148 for the California Intermediate Tax-Free Bond Fund. For the six months ended June 30, 2000, the Advisor recouped fees previously waived and expenses absorbed of $8,847, $20,785 and $20,997 for Small Cap Fund, International Fund and Intermediate Total Return Bond Fund, respectively. At June 30, 2000, the amount available for reimbursement that has been paid and/or waived by the Advisor on behalf of the Funds are as follows: Small Cap Fund $ 96,678 International Fund $102,077 Intermediate Total Return Bond Fund $124,759 California Intermediate Tax-Free Bond Fund $259,699 41 KAYNE ANDERSON MUTUAL FUNDS NOTES TO FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED) At June 30, 2000, the Advisor may recapture a portion of the above amounts no later than the dates as stated below: December 31, ------------------------------------- Funds 2000 2001 2002 2003 - ----- ---- ---- ---- ---- Small Cap Funds ......................... $69,014 $12,965 $14,699 -- International Funds ..................... 62,340 18,889 20,848 -- Intermediate Total Return Bond Funds .... 49,716 15,132 59,911 -- California Intermediate Tax-Free Bond Funds ............................ 40,123 99,797 88,631 $31,148 Each Fund must pay its current ordinary operating expenses before the Advisor is entitled to any reimbursement. 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. The Funds paid no commission to this affiliate during the six months ended June 30, 2000. 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 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. 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 six months ended June 30, 2000, the cost of purchases and the proceeds from sales of securities, excluding U.S. Government securities and short-term investments, were as follows: Fund Purchases Sales - ---- --------- ----- Large Cap Fund ..................................... $48,999,194 $34,809,795 Small Cap Fund ..................................... 15,673,205 18,863,134 International Fund ................................. 24,245,224 8,169,370 Intermediate Total Return Bond Fund ................ 1,953,125 575,023 California Intermediate Tax-Free Bond Fund ......... 7,350,000 19,312,622 The Intermediate Total Return Bond Fund purchased $42,447 and sold $8,010,676 in U.S. Government securities. There were no purchases or sales of U.S. Government securities by Large Cap Fund, Small Cap Fund, International Fund and California Intermediate Tax-Free Bond Fund. 42 ================================================================================ ADVISOR KAYNE ANDERSON INVESTMENT MANAGEMENT, LLC 1800 Avenue of the Stars, 2nd Floor Los Angeles, California 90067 (800) 222-0380 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. -----END PRIVACY-ENHANCED MESSAGE-----