-----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, C80YPzEcyuooIcASFIo+0UyjmCiC6z27zFfH8k2tKe/m7BvDbhS/pYnntYaNidCS VTyvsrvd3MUohDj/zf3lTw== 0000950147-01-500597.txt : 20010326 0000950147-01-500597.hdr.sgml : 20010326 ACCESSION NUMBER: 0000950147-01-500597 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KAYNE ANDERSON RUDNICK 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: 1577261 BUSINESS ADDRESS: STREET 1: 1800 AVENUE OF THE STARS, 2ND FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90067 BUSINESS PHONE: (310) 556-2721 MAIL ADDRESS: STREET 1: 1800 AVENUE OF THE STARS, 2ND FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90067 FORMER COMPANY: FORMER CONFORMED NAME: KAYNE ANDERSON MUTUAL FUNDS DATE OF NAME CHANGE: 19960711 N-30D 1 e-6517.txt ANNUAL REPORT FOR YEAR ENDED 12/31/00 KAYNE ANDERSON RUDNICK MUTUAL FUNDS ================================================================================ ANNUAL REPORT KAYNE ANDERSON RUDNICK LARGE CAP FUND KAYNE ANDERSON RUDNICK SMALL CAP FUND KAYNE ANDERSON RUDNICK INTERNATIONAL FUND KAYNE ANDERSON RUDNICK GROWTH AND OPPORTUNITY FUND KAYNE ANDERSON RUDNICK INTERMEDIATE TOTAL RETURN BOND FUND KAYNE ANDERSON RUDNICK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND ================================================================================ For the Year Ended December 31, 2000 KAYNE ANDERSON RUDNICK MUTUAL FUNDS TABLE OF CONTENTS SHAREHOLDER LETTER......................................................... 1 KAYNE ANDERSON RUDNICK LARGE CAP FUND Goal.................................................................. 2 Commentary............................................................ 2 Outlook............................................................... 2 Schedule of Investments............................................... 4 KAYNE ANDERSON RUDNICK SMALL CAP FUND Goal.................................................................. 6 Commentary............................................................ 7 Outlook............................................................... 8 Schedule of Investments............................................... 9 KAYNE ANDERSON RUDNICK INTERNATIONAL FUND Goal.................................................................. 12 Commentary............................................................ 12 New Purchases......................................................... 13 Outlook............................................................... 14 Schedule of Investments............................................... 15 KAYNE ANDERSON RUDNICK GROWTH AND OPPORTUNITY FUND Goal.................................................................. 19 Commentary............................................................ 19 Outlook............................................................... 20 Schedule of Investments............................................... 21 KAYNE ANDERSON RUDNICK INTERMEDIATE TOTAL RETURN BOND FUND Goal.................................................................. 23 Commentary............................................................ 23 Outlook............................................................... 24 Schedule of Investments............................................... 25 KAYNE ANDERSON RUDNICK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND Goal ................................................................. 28 Commentary............................................................ 28 Outlook............................................................... 29 Schedule of Investments............................................... 30 STATEMENTS OF ASSETS AND LIABILITIES....................................... 34 STATEMENTS OF OPERATIONS................................................... 36 STATEMENTS OF CHANGES IN NET ASSETS........................................ 38 FINANCIAL HIGHLIGHTS....................................................... 40 NOTES TO FINANCIAL STATEMENTS.............................................. 46 INDEPENDENT AUDITORS' REPORT............................................... 50 KAYNE ANDERSON RUDNICK MUTUAL FUNDS Dear Shareholder: We are pleased to express our appreciation for your investment in the Kayne Anderson Rudnick Mutual Funds. If you are new to our family of investors, we welcome you. The enclosed annual report contains a commentary and year-end financial statements for each of our mutual funds. In each commentary, the portfolio manager reviews the objectives, annual performance and outlook for the fund. We hope that you will find these comments interesting and timely. As investment advisors, we have managed private accounts for both equity and fixed-income investors for many years. We are delighted to be able to offer our mutual funds to you so that diversification among asset classes can be readily accomplished. Through these funds, shareholders can structure a diversified portfolio consistent with their personal investment objectives and goals. We thank you again for your investment in the Kayne Anderson Rudnick Mutual Funds. We are committed to assisting you with the realization of your financial goals. As you have likely noticed, we recently changed the name of the funds to Kayne Anderson Rudnick Mutual Funds, reflecting that our name has been expanded to Kayne Anderson Rudnick Investment Management, LLC. As always, we welcome your questions and comments. Sincerely, /s/ Richard A. Kayne /s/ Allan M. Rudnick Chief Richard A. Kayne Allan M. Rudnick Chief Executive Officer Chairman & President Kayne Anderson Rudnick Investment Management, LLC 1 KAYNE ANDERSON RUDNICK LARGE CAP FUND GOAL The KAYNE ANDERSON RUDNICK LARGE CAP FUND invests in high-quality, large-capitalization companies that enjoy global dominance, excellent management, financial strength and consistent growth. The investment goal of the Fund is to achieve superior long-term performance by owning shares in some of the world's best companies. COMMENTARY This past year was a very challenging one for stock markets here and abroad. With the benefit of our defensive, high-quality management disciplines, the Fund was able to perform substantially better then the market. For the full year 2000, with declines of 9.10% in the S&P 500 Index and 39.29% in the Nasdaq, the Fund was off a much smaller 2.00%. Including 2000 performance, the Fund has enjoyed an annualized return of 17.10% since its May 1, 1995 inception. The best performing sectors in the Fund's portfolio in 2000 were financial services, health care and consumer staples. The weakest sectors were communications services, technology and basic materials. The benefits of a diversified portfolio were evident. It is risky to concentrate assets in any given sector. Our strategy is to look for the best combination of quality, growth and value characteristics across each of the major economic sectors. OUTLOOK Our current outlook for 2001 is positive. We believe that the environment is now more favorable than last year. We hold this view because, first, the very positive long-term trends that propelled the longest peacetime economic expansion continue and, second, the very substantial imbalances present in the economy and the markets in 2000 have since corrected. The imbalances were brought about by the unsustainable rate of economic growth in the U.S. economy and the severe overvaluation of certain sectors of the equity markets, primarily internet-related technology stocks. Based on our conversations with corporate management, we, like most, believe that the first half of 2001 will show poor earnings comparisons with last year, but that improvement will come in the second half of 2001. The decisions by the Federal Reserve Board (the "Fed") in early 2001 to reduce short-term interest rates is an important factor in this outlook. By signaling a change to a more accommodative monetary policy, the Fed is lending strong support to growth and backing off from fighting inflation. The "lag effect" of a Fed move is generally six to nine months, so we are developing conviction in a thesis of a stronger economy in the third and fourth calendar quarters of 2001. As to the imbalances in the equity markets, the declines in the S&P 500 and in the Nasdaq have gone a long way toward correcting the overvaluation of those markets. There has been much written in the press about the collapse of internet stocks and what that means. Although we expect a slowdown, we do not subscribe to the dire predictions that spending by corporations will decline so dramatically that it will be the death-knell of the "New Economy" or the "Old Economy." Rather, we believe the more likely scenario is that the current slowdown is a precursor of a period of more moderate, sustainable growth. Just as the beginning of the internet era was over-hyped, the current slowdown is probably much exaggerated. As with electricity, the telegraph and railroads, these disruptive innovations had their ups and downs. There were once more than 200 automakers in the U.S., and as most of the firms collapsed, the survivors became stronger and continued to grow. We believe that we are in the throes of what the economist Joseph Schumpeter called "creative destruction," which is the self-corrective power of markets to sift through the winners and losers. Creative destruction means we are returning to a focus on businesses that provide products or services that customers want and are willing to pay for. The markets are 2 saying "good riddance" to those companies that got venture capital funding just because it sounded like a good idea and the IPO market was hot. As noted above, the major long-term forces propelling the longest economic expansion in U.S. history are still very much at work. Included, among them, are fiscal and monetary policies which have been coordinated to stimulate sustainable, non-inflationary growth, deregulation of industry, easing of trade restrictions, the end of the Cold War, and strong productivity growth due to expanded use of technology. We believe that we can participate in these positive trends by investing in the leading companies in key industries. The Fund is managed according to certain key investment principles, which are worth recalling: * Exclusive focus on very high quality companies. * Diversification across major industry sectors. * Substantial attention to the expected return of each position. * Strong and consistent earnings growth of the portfolio. * Long-term investment horizon reflected in low turnover. These principles are founded on the belief that superior companies possess essential competitive advantages that produce high profitability, solid growth and substantial free cash flow. Our focus as long-term investors is on the nature of a company's business advantages and their sustainability over time. Our core belief is that we can continue to produce durable, long-term growth of capital for our investors by investing in well managed, superior businesses. KAYNE ANDERSON RUDNICK LARGE CAP FUND COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE KAYNE ANDERSON RUDNICK LARGE CAP FUND AND THE S & P 500 INDEX Average Annual Total Return for the periods ending December 31, 2000 One Year Five Year Since Inception (5/1/95) (2.00%) 15.21% 17.10% Kayne Anderson S&P 500 Rudnick Large Cap Fund Index w/inc. ---------------------- ------------ May-95 10,000 10,000 Jun-95 10,394 10,641 Sep-95 11,089 11,487 Dec-95 12,065 12,178 Mar-96 12,810 12,832 Jun-96 13,249 13,408 Sep-96 13,689 13,823 Dec-96 14,367 14,975 Mar-97 14,719 15,376 Jun-97 17,137 18,062 Sep-97 17,879 19,413 Dec-97 18,821 19,971 Mar-98 21,087 22,757 Jun-98 21,500 23,508 Sep-98 18,511 21,170 Dec-98 21,483 25,678 Mar-99 22,290 26,958 Jun-99 24,268 28,861 Sep-99 22,721 27,055 Dec-99 24,991 31,081 Mar-00 25,071 31,793 Jun-00 25,606 30,947 Sep-00 24,949 30,647 Dec-00 24,492 28,251 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE S&P 500 INDEX IS A BROAD MARKET-WEIGHTED AVERAGE OF U.S. BLUE-CHIP COMPANIES. THIS INDEX IS UNMANAGED AND RETURNS INCLUDE REINVESTED DIVIDENDS. 3 KAYNE ANDERSON RUDNICK LARGE CAP FUND SCHEDULE OF INVESTMENTS IN SECURITIES at December 31, 2000 SHARES VALUE - -------------------------------------------------------------------------------- COMMON STOCKS: 97.5% BASIC MATERIALS/CHEMICALS: 2.6% 74,610 PPG Industries, Inc. .................................. $ 3,455,376 ------------ CAPITAL GOODS/ELECTRICAL EQUIPMENT: 7.6% 52,780 Emerson Electric Co. .................................. 4,159,724 121,260 General Electric Co. .................................. 5,812,901 ------------ 9,972,625 ------------ CAPITAL GOODS/MANUFACTURING - DIVERSIFIED: 2.1% 45,120 Illinois Tool Works, Inc. ............................. 2,687,460 ------------ CONSUMER STAPLES/BEVERAGES: 4.8% 103,360 Coca-Cola Co. ......................................... 6,298,500 ------------ CONSUMER STAPLES/CONSUMER PRODUCTS: 5.1% 84,850 Procter & Gamble Co. .................................. 6,655,422 ------------ CONSUMER STAPLES/FOODS: 2.4% 33,260 Wm. Wrigley, Jr. Co. .................................. 3,186,724 ------------ CONSUMER STAPLES/RESTAURANTS: 4.8% 186,810 McDonald's Corp. ...................................... 6,351,540 ------------ ENERGY/PETROLEUM - INTERNATIONAL: 4.3% 64,170 Exxon Mobil Corp. ..................................... 5,578,779 ------------ FINANCIAL/BANKING: 5.2% 121,880 Wells Fargo & Co. ..................................... 6,787,193 ------------ FINANCIAL/FINANCIAL SERVICES: 5.9% 89,820 Fannie Mae ............................................ 7,791,885 ------------ FINANCIAL/INSURANCE: 8.5% 74,500 American International Group, Inc. .................... 7,342,906 32,240 Marsh & McLennan Companies, Inc. ...................... 3,772,080 ------------ 11,114,986 ------------ HEALTH CARE/DRUGS & HOSPITAL SUPPLIES: 15.7% 65,510 Johnson & Johnson ..................................... 6,882,644 75,310 Merck & Co., Inc. ..................................... 7,050,899 145,700 Pfizer, Inc. .......................................... 6,702,200 ------------ 20,635,743 ------------ 4 KAYNE ANDERSON RUDNICK LARGE CAP FUND SCHEDULE OF INVESTMENTS IN SECURITIES at December 31, 2000 (Continued) SHARES VALUE - -------------------------------------------------------------------------------- RETAIL/APPAREL: 3.0% 155,400 Gap, Inc. (The) ....................................... $ 3,962,700 ------------ RETAIL/BUILDING PRODUCTS: 2.0% 58,100 Home Depot, Inc. (The) ................................ 2,654,444 ------------ TECHNOLOGY/COMMUNICATIONS - EQUIPMENT: 2.5% 85,400 Cisco Systems, Inc.* .................................. 3,266,550 ------------ TECHNOLOGY/COMPUTERS & OFFICE EQUIPMENT: 6.1% 105,220 Hewlett-Packard Co. ................................... 3,321,006 54,310 International Business Machines Corp. ................. 4,616,350 ------------ 7,937,356 ------------ TECHNOLOGY/DATA SERVICES: 5.2% 108,300 Automatic Data Processing, Inc. ....................... 6,856,744 ------------ TECHNOLOGY/SEMICONDUCTORS: 5.2% 152,660 Intel Corp. ........................................... 4,589,341 48,000 Texas Instruments, Inc. ............................... 2,274,000 ------------ 6,863,341 ------------ TECHNOLOGY/SOFTWARE: 4.5% 91,890 Microsoft Corp.* ...................................... 3,985,729 64,600 Oracle Corp.* ......................................... 1,877,437 ------------ 5,863,166 ------------ TOTAL COMMON STOCKS (cost $116,349,972) .......................................... 127,920,534 ------------ TOTAL INVESTMENTS IN SECURITIES (cost $116,349,972+): 97.5% .................................. 127,920,534 Other Assets less Liabilities: 2.5% ............................. 3,331,447 ------------ NET ASSETS: 100.0% .............................................. $131,251,981 ============ * Non-income producing security. + At December 31, 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 .............................. $ 22,251,136 Gross unrealized depreciation .............................. (10,680,574) ------------ Net unrealized appreciation ................................ $ 11,570,562 ============ See accompanying Notes to Financial Statements. 5 KAYNE ANDERSON RUDNICK SMALL CAP FUND GOAL The goals of the KAYNE ANDERSON RUDNICK 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 goals. Our portfolio of companies combines: (1) quality comparable to the companies in the S&P 500 Index of large capitalization stocks; (2) growth comparable to the companies in the Russell 2000 Small Cap Growth Index; and (3) value comparable to the companies in the Russell 2000 Small Cap Value Index. PORTFOLIO CHARACTERISTICS
KAYNE RUSSELL RUSSELL ANDERSON RUSSELL RUSSELL S&P 2000 2000 RUDNICK 2000 2500 500 GROWTH VALUE QUALITY SMALL CAP INDEX INDEX INDEX INDEX INDEX - ------- --------- ----- ----- ----- ----- ----- Return on Equity - Past 5 Years 24.0% 14.1% 14.8% 23.7% 14.9% 13.7% MORE PROFITABLE Long-Term Debt/Total Capital 27.6% 38.5% 41.1% 44.3% 28.2% 48.2% LESS FINANCIAL RISK Interest Expense Coverage 12.5 x 4.9 x 4.6 x 4.6 x 8.6 x 3.7 x LESS FINANCIAL RISK Earnings Variance - Past 10 Years 22.1% 63.2% 56.5% 41.1% 80.4% 54.7% MORE DEPENDABLE A Rated by S&P 55.6% 12.9% 17.6% 54.1% 5.6% 19.1% BETTER QUALITY GROWTH - ------ Earnings Per Share Growth - Past 5 Years 22.1% 13.1% 11.1% 15.5% 18.9% 10.7% RECOVERY Earnings Per Share Growth - Past 10 Years 17.2% 9.7% 9.9% 14.8% 12.7% 8.8% RECESSION Dividend Per Share Growth - Past 5 Years 16.7% 8.3% 7.1% 10.3% 8.1% 8.4% RECOVERY Dividend Per Share Growth - Past 10 Years 13.5% 6.2% 6.1% 9.9% 6.7% 6.1% RECESSION Capital Generation - {ROE x (1-Payout)} 18.1% 11.0% 11.1% 16.1% 13.8% 9.7% FASTER GROWTH VALUE - ----- P/E Ratio - Latest 12 months 20.0 22.5 22.7 26.0 43.7 15.9 BETTER VALUE Dividend Yield 1.3% 1.4% 1.5% 1.2% 0.3% 2.4% COMPARABLE INCOME MARKET CHARACTERISTICS - ---------------------- $ Weighted Average Market Cap - 4 qtr. average $ 1.7 b $ 1.2 b $ 2.8 b $104.1 b $ 1.4 b $ 0.9 b COMPARABLE SIZE Largest Market Cap-4 qtr. average $ 6.2 b $ 6.5 b $14.3 b $420.0 b $ 6.5 b $ 4.2 b COMPARABLE SIZE Quarterly Standard Deviation - Since Inception 11.8% 17.0% 16.4% 12.1% 23.4% 14.1% LESS MARKET RISK
SOURCE: RUSSELL/MELLON ANALYTICAL SERVICES 6 COMMENTARY Small cap markets were down in the fourth quarter following a modest third quarter advance. For the year, small cap markets produced a negative return while the Kayne Anderson Rudnick Small Cap fund was up 24.77%. Kayne Anderson Rudnick invests in strong, consistently growing companies with low business risk to generate strong, consistent investment returns with low stock market risk. The Russell 2000, one of the popular small cap indices, carries greater stock market risks, as the chart below indicates. That index was down to 2.92% for the year. CHART COURTESY OF BLOOMBERG. Kayne-Small Cap Russell 2000 Index --------------- ------------------ 1/3/00 -0.94 -1.65 1/4/00 -3.58 -5.22 1/5/00 -3.37 -5.13 1/6/00 -3.10 -5.81 1/7/00 -2.56 -3.24 1/10/00 -2.02 -0.55 1/11/00 -2.90 -2.39 1/12/00 -3.51 -2.88 1/13/00 -3.10 -0.67 1/14/00 -2.97 0.59 1/18/00 0.54 1.76 1/19/00 -2.36 3.06 1/20/00 -2.90 4.51 1/21/00 -2.90 5.83 1/24/00 -3.51 3.65 1/25/00 -3.91 3.38 1/26/00 -4.12 3.28 1/27/00 -4.72 2.49 1/28/00 -5.13 0.04 1/31/00 -5.87 -1.62 2/1/00 -4.86 -0.13 2/2/00 -4.39 1.10 2/3/00 -3.98 3.43 2/4/00 -2.16 4.20 2/7/00 -2.02 5.57 2/8/00 -1.55 6.59 2/9/00 -0.94 6.30 2/10/00 -1.89 7.54 2/11/00 -2.83 6.53 2/14/00 -2.29 7.10 2/15/00 -2.09 7.16 2/16/00 -1.82 8.66 2/17/00 -0.54 10.78 2/18/00 -2.77 8.25 2/22/00 -2.70 7.32 2/23/00 -1.08 9.10 2/24/00 -1.69 9.92 2/25/00 -1.28 10.46 2/28/00 -0.47 10.66 2/29/00 1.48 14.64 3/1/00 1.75 16.75 3/2/00 0.94 15.90 3/3/00 2.02 18.65 3/6/00 1.55 19.40 3/7/00 2.70 18.18 3/8/00 3.17 18.03 3/9/00 4.25 20.29 3/10/00 3.31 19.85 3/13/00 2.63 17.15 3/14/00 1.89 13.74 3/15/00 3.98 10.95 3/16/00 7.83 14.01 3/17/00 7.42 14.11 3/20/00 4.79 9.04 3/21/00 2.90 9.75 3/22/00 3.98 13.42 3/23/00 3.71 13.93 3/24/00 4.52 13.98 3/27/00 3.24 13.91 3/28/00 2.23 11.01 3/29/00 1.21 7.86 3/30/00 1.01 5.60 3/31/00 2.97 7.09 4/3/00 2.90 2.52 4/4/00 1.75 0.55 4/5/00 3.58 2.92 4/6/00 5.60 5.80 4/7/00 5.40 7.89 4/10/00 3.17 3.05 4/11/00 3.31 1.36 4/12/00 3.31 -1.94 4/13/00 2.16 -2.78 4/14/00 -1.42 -9.83 4/17/00 -1.35 -8.73 4/18/00 2.02 -3.39 4/19/00 2.90 -3.36 4/20/00 2.77 -4.23 4/24/00 1.96 -6.67 4/25/00 4.05 -2.80 4/26/00 2.16 -3.74 4/27/00 2.83 -1.68 4/28/00 2.77 0.65 5/1/00 4.39 3.18 5/2/00 2.56 0.48 5/3/00 1.48 -1.46 5/4/00 2.56 -0.20 5/5/00 4.18 1.98 5/8/00 2.43 -0.55 5/9/00 1.82 -2.38 5/10/00 0.74 -5.67 5/11/00 4.45 -2.65 5/12/00 4.39 -2.34 5/15/00 5.94 -0.97 5/16/00 7.22 0.66 5/17/00 6.34 -0.60 5/18/00 5.67 -2.33 5/19/00 3.64 -4.56 5/22/00 3.37 -6.16 5/23/00 2.90 -8.68 5/24/00 4.52 -8.13 5/25/00 3.64 -9.23 5/26/00 3.44 -8.99 5/30/00 4.93 -5.13 5/31/00 5.67 -5.23 6/1/00 8.43 -1.99 6/2/00 10.93 2.11 6/5/00 9.51 2.16 6/6/00 9.38 1.84 6/7/00 9.78 2.82 6/8/00 8.30 2.42 6/9/00 8.23 4.12 6/12/00 7.89 1.22 6/13/00 7.22 2.29 6/14/00 5.87 1.48 6/15/00 7.15 2.00 6/16/00 7.35 2.30 6/19/00 6.21 4.10 6/20/00 5.94 4.68 6/21/00 5.20 5.07 6/22/00 4.66 2.56 6/23/00 4.32 1.65 6/26/00 5.20 2.83 6/27/00 3.71 1.19 6/28/00 5.60 3.80 6/29/00 6.36 2.13 6/30/00 4.61 3.05 7/3/00 6.23 4.41 7/5/00 5.01 3.26 7/6/00 6.16 4.29 7/7/00 6.57 5.27 7/10/00 8.66 5.79 7/11/00 8.73 5.57 7/12/00 9.34 7.68 7/13/00 9.34 8.19 7/14/00 9.61 8.16 7/17/00 10.35 8.67 7/18/00 10.02 6.90 7/19/00 9.00 5.22 7/20/00 11.16 6.60 7/21/00 8.39 4.20 7/24/00 8.05 2.52 7/25/00 7.99 2.53 7/26/00 8.93 2.44 7/27/00 8.19 0.01 7/28/00 6.70 -2.25 7/31/00 8.87 -0.17 8/1/00 9.07 -0.74 8/2/00 9.95 -0.24 8/3/00 11.03 -0.39 8/4/00 11.30 0.45 8/7/00 11.91 1.69 8/8/00 11.10 1.48 8/9/00 11.16 1.25 8/10/00 10.49 0.09 8/11/00 10.76 1.82 8/14/00 11.50 2.66 8/15/00 10.69 1.76 8/16/00 11.98 2.33 8/17/00 13.53 3.08 8/18/00 12.52 2.89 8/21/00 12.11 3.08 8/22/00 11.71 3.28 8/23/00 10.89 3.38 8/24/00 12.18 4.46 8/25/00 12.65 4.83 8/28/00 11.44 5.10 8/29/00 12.38 5.73 8/30/00 12.72 6.29 8/31/00 12.18 7.41 9/1/00 13.06 8.21 9/5/00 12.31 7.64 9/6/00 12.11 7.11 9/7/00 13.13 8.41 9/8/00 11.77 6.99 9/11/00 12.18 6.57 9/12/00 12.04 6.34 9/13/00 11.84 6.68 9/14/00 12.18 7.72 9/15/00 11.23 6.06 9/18/00 8.66 3.22 9/19/00 8.73 4.55 9/20/00 8.53 4.18 9/21/00 7.99 2.77 9/22/00 7.85 3.66 9/25/00 7.58 2.98 9/26/00 6.77 1.88 9/27/00 6.36 1.57 9/28/00 6.57 4.71 9/29/00 7.04 4.23 10/2/00 5.69 2.29 10/3/00 5.55 0.89 10/4/00 7.11 1.47 10/5/00 7.31 0.51 10/6/00 5.62 -1.82 10/9/00 5.42 -2.11 10/10/00 5.42 -3.69 10/11/00 7.18 -5.06 10/12/00 6.03 -7.40 10/13/00 8.19 -3.92 10/16/00 8.60 -3.64 10/17/00 6.43 -5.81 10/18/00 6.23 -6.74 10/19/00 8.60 -3.72 10/20/00 9.41 -2.49 10/23/00 8.19 -1.99 10/24/00 8.46 -2.41 10/25/00 9.81 -4.93 10/26/00 12.99 -4.02 10/27/00 13.33 -3.99 10/30/00 14.28 -3.41 10/31/00 16.37 -0.42 11/1/00 16.30 -0.91 11/2/00 18.47 1.46 11/3/00 18.33 1.62 11/6/00 17.86 0.86 11/7/00 18.54 1.27 11/8/00 17.93 0.23 11/9/00 19.21 -0.84 11/10/00 17.72 -3.73 11/13/00 17.25 -4.58 11/14/00 18.06 -2.50 11/15/00 19.08 -1.51 11/16/00 18.74 -3.54 11/17/00 19.95 -3.34 11/20/00 18.54 -5.82 11/21/00 17.86 -6.50 11/22/00 17.66 -8.28 11/24/00 19.08 -5.48 11/27/00 19.75 -5.51 11/28/00 17.39 -8.05 11/29/00 18.26 -8.91 11/30/00 16.44 -10.65 12/1/00 17.59 -8.46 12/4/00 17.59 -9.75 12/5/00 20.50 -5.59 12/6/00 19.89 -7.10 12/7/00 20.29 -7.59 12/8/00 23.00 -3.99 12/11/00 24.21 -2.35 12/12/00 21.17 -4.24 12/13/00 18.94 -5.79 12/14/00 17.72 -7.40 12/15/00 16.98 -8.16 12/18/00 17.18 -7.07 12/19/00 17.32 -7.96 12/20/00 15.36 -10.95 12/21/00 16.35 -10.30 12/22/00 19.98 -7.10 12/26/00 19.98 -6.37 12/27/00 23.10 -3.78 12/28/00 25.42 -0.82 12/29/00 24.77 -2.92 We sold two names during the second half of 2000, Benjamin Moore and Price Communications. Benjamin Moore was acquired by Warren Buffett's Berkshire Hathaway in December. Price Communications announced an agreement to be acquired by Verizon Wireless upon completion of Verizon's IPO. Because of the uncertain timing of the transaction, we opted to sell the stock now. Proceeds from the sales were used to buy the following companies: * Equifax - Nation's leading credit reporting company * IMS Health - Near monopoly supplier of prescription data to the pharmaceutical industry * Valspar - Low cost manufacturer of specialty high performance paints and coatings 7 OUTLOOK Although small stocks have outperformed large stocks the last two years, small stocks still sell at attractive discount valuations to large stocks. Arbitraging this valuation disparity, large corporations are acquiring record numbers of small companies, as illustrated below. As long as small stocks are selling at discount valuations to large stocks, we believe the merger and acquisition activity will remain high, and that should set the stage for continued strong performance of small stocks. M & A ACTIVITY AMONG SMALLER STOCKS (MARKET CAPITALIZATION BETWEEN $1 BILLON AND $2 BILLION) 1986 6 1987 14 1988 8 1989 7 1990 5 1991 5 1992 3 1993 4 1994 12 1995 18 1996 29 1997 35 1998 34 1999 42 Projected 2000 50 SOURCE: MERRILL LYNCH SMALL CAP RESEARCH KAYNE ANDERSON RUDNICK SMALL CAP FUND COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE KAYNE ANDERSON RUDNICK SMALL CAP FUND, THE RUSSELL 2000 INDEX AND THE RUSSELL 2500 INDEX Average Annual Total Return for the periods ending December 31, 2000 One Year Since Inception (10/18/96) 24.77% 15.99% Kayne Anderson Rudnick Small Cap Fund Russell 2000 Index Russell 2500 Index -------------- ------------------ ------------------ Oct-96 10,000 10,000 10,000 Dec-96 10,401 10,471 10,438 Mar-97 10,129 9,930 10,088 Jun-97 11,390 11,539 11,613 Sep-97 12,856 13,257 13,279 Dec-97 12,426 12,813 12,980 Mar-98 13,781 14,101 14,311 Jun-98 13,933 13,444 13,714 Sep-98 12,506 10,736 11,099 Dec-98 14,435 12,486 12,694 Mar-99 13,838 11,809 12,412 Jun-99 15,779 13,646 14,447 Sep-99 14,349 12,783 13,516 Dec-99 14,957 15,140 16,174 Mar-00 15,402 16,212 17,808 Jun-00 15,646 15,600 17,095 Sep-00 16,010 15,773 17,506 Dec-00 18,662 14,683 16,865 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE RUSSELL 2000 INDEX IS FORMED BY TAKING THE 3,000 LARGEST U.S. COMPANIES AND THEN ELIMINATING THE LARGEST 1,000 LEAVING A GOOD SMALL COMPANY INDEX. THE RUSSELL 2500 INDEX MEASURES THE PERFORMANCE OF THE 2,500 SMALLEST COMPANIES IN THE RUSSELL 3000 INDEX, WHICH REPRESENTS APPROXIMATELY 16% OF THE TOTAL MARKET CAPITALIZATION OF THE RUSSELL 3000 INDEX. 8 KAYNE ANDERSON RUDNICK SMALL CAP FUND SCHEDULE OF INVESTMENTS IN SECURITIES at December 31, 2000 SHARES VALUE - -------------------------------------------------------------------------------- COMMON STOCKS: 97.5% BASIC MATERIALS/PACKAGING: 4.2% 42,007 Bemis Co. ............................................ $ 1,409,860 10,099 Liqui-Box Corp. ...................................... 376,188 ------------ 1,786,048 ------------ BASIC MATERIALS/PAINTS AND COATING: 3.6% 47,000 Valspar Corp. ........................................ 1,512,460 ------------ CAPITAL GOODS/AEROSPACE & DEFENSE: 1.9% 70,301 HEICO Corp. - Class A ................................ 817,249 ------------ CAPITAL GOODS/MACHINERY EQUIPMENT: 5.7% 59,807 Federal Signal Corp. ................................. 1,173,712 49,788 Nordson Corp. ........................................ 1,269,594 ------------ 2,443,306 ------------ CONSUMER CYCLICAL/ADVERTISING: 3.8% 41,280 Catalina Marketing Corp.* ............................ 1,607,340 ------------ CONSUMER CYCLICAL/FURNITURE: 4.0% 107,572 LA-Z Boy, Inc. ....................................... 1,694,259 ------------ CONSUMER CYCLICAL/RETAIL: 4.2% 98,700 Claire's Stores, Inc. ................................ 1,770,431 ------------ CONSUMER CYCLICAL/SERVICES: 5.6% 48,635 ABM Industries, Inc. ................................. 1,489,447 34,982 Strayer Education, Inc. .............................. 894,228 ------------ 2,383,675 ------------ CONSUMER STAPLES/FOOD: 3.9% 35,761 Tootsie Roll Industries, Inc. ........................ 1,647,241 ------------ ENERGY/OIL AND GAS PRODUCTION: 4.3% 29,969 Devon Energy Corp. ................................... 1,827,210 ------------ FINANCIAL/BANKS: 9.6% 101,117 National Commerce Bancorp ............................ 2,502,646 55,632 Washington Federal, Inc. ............................. 1,582,035 ------------ 4,084,681 ------------ 9 KAYNE ANDERSON RUDNICK SMALL CAP FUND SCHEDULE OF INVESTMENTS IN SECURITIES at December 31, 2000 (Continued) SHARES VALUE - -------------------------------------------------------------------------------- FINANCIAL/FINANCIAL SERVICES: 10.6% 51,004 Eaton Vance Corp. .................................... $ 1,644,879 33,000 FactSet Research Systems, Inc. ....................... 1,223,310 31,860 Fair, Isaac and Company, Inc. ........................ 1,624,860 1 Fiduciary Trust Company International ................ 59 ------------ 4,493,108 ------------ FINANCIAL/INSURANCE: 1.3% 32,010 E.W. Blanch Holdings, Inc. ........................... 558,174 ------------ HEALTH CARE/DRUGS & HOSPITAL SUPPLIES: 5.9% 34,572 King Pharmaceuticals, Inc. ........................... 1,786,940 39,400 Landauer, Inc. ....................................... 719,050 ------------ 2,505,990 ------------ HEALTH CARE/MEDICAL INFORMATION SYSTEMS: 7.1% 132,440 Hooper Holmes, Inc. .................................. 1,464,787 59,050 IMS Health, Inc. ..................................... 1,594,350 ------------ 3,059,137 ------------ TECHNOLOGY/COMPUTERS - INTEGRATED SYSTEMS: 8.6% 34,115 Jack Henry & Associates .............................. 2,119,394 76,162 Reynolds & Reynolds Inc. - Class A ................... 1,542,281 ------------ 3,661,675 ------------ TECHNOLOGY/ELECTRONICS: 3.5% 57,850 Dallas Semiconductor Corp. ........................... 1,482,406 ------------ TECHNOLOGY/SOFTWARE & SERVICES: 5.3% 43,630 CSG Systems International, Inc.* ..................... 2,047,883 59,036 Timberline Software Corp. ............................ 210,316 ------------ 2,258,199 ------------ TRANSPORTATION/TRANSPORTATION - SERVICES: 4.4% 59,920 C.H. Robinson Worldwide, Inc. ........................ 1,883,735 ------------ TOTAL COMMON STOCKS (cost $36,137,370) .......................................... 41,476,324 ------------ 10 KAYNE ANDERSON RUDNICK SMALL CAP FUND SCHEDULE OF INVESTMENTS IN SECURITIES at December 31, 2000 (Continued) VALUE - -------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (cost $36,137,370+): 97.5% ..................................... $ 41,476,324 Other Assets less Liabilities: 2.5% ............................ 1,083,384 ------------ NET ASSETS: 100.0% ............................................. $ 42,559,708 ============ * Non-income producing security. + At December 31, 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 ............................. $ 8,332,049 Gross unrealized depreciation ............................. (2,993,095) ------------ Net unrealized appreciation ............................... $ 5,338,954 ============ See accompanying Notes to Financial Statements. 11 KAYNE ANDERSON RUDNICK INTERNATIONAL FUND GOAL The goal of the KAYNE ANDERSON RUDNICK 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 December 31, 2000, the Fund's total return was a negative 9.94% versus a decline of 10.42% for the MSCI EAFE index (in dollar terms). For the full year 2000, the Fund's performance was a negative 9.65%, compared to a 13.96% decline for its benchmark. The Fund's balanced, long-term oriented investment approach has in 2000 again shown its defensive characteristics. The Fund's outperformance is even more acute since March 10, 2000, the beginning of the collapse of the US Nasdaq (down close to 40% for the year). Concern about rising oil prices, weakness of the Euro, volatility of the US Nasdaq, the outlook for company profits, and the continued unwinding of company cross-shareholdings in Japan took its toll on the MSCI EAFE index during the second half of 2000. Nevertheless, we believe that we are coming close to the end of a global bear market that began in July 1999. This bear market was fostered by U.S. Federal Reserve policy, which until recently, has driven up interest rates in the U.S. and abroad. With economic activity slowing everywhere, it is likely that 2001 will see the beginning of a new downward cycle for global interest rates. Over the last six months of 2000, Europe (Eurotop 300 Index) was the best performing geographic area with a decline of only 4.09% in dollars, outperforming 8.71% decline in the S&P 500 for the same period. On the other hand, over the same period, Japan's equity market (Topic Index) dropped 25% in dollar terms, as it could not avoid the impact of the plummeting US Nasdaq. The additional unwinding of cross-shareholdings by Japanese banks and industrial groups, in anticipation of the introduction on April 1, 2001 of the "mark-to-market" accounting standard, also added to the selling pressure. At year-end, the four largest countries represented in the Fund were the United Kingdom (19.9%), Japan (18.6%), France (16.4%), and the Netherlands (11.5%). We added to the Fund's exposure to the financial sector, purchasing Sumitomo Bank of Japan in the third quarter, and Aegon NV of the Netherlands in the fourth quarter (see below). Also, we added to our positions in Telefonica, Fujitsu, and NTT. In order to finance those purchases we sold Unilever, UBS, Granada-Compass, and Kao. Among the second-half 2000 winners were Rentokil-Initial (+53%), HSBC (+28%), Diageo (+27%), Zurich Financial Services (+20%), and ING (+19%). The losers included Canon (-33%), Invensys (-37%), Ericsson (-44%), NTT (-47%), and Fujitsu (-58%). In general, foods, beverages, financial services, and pharmaceuticals stocks performed strongly, while technology, telecommunications stocks dropped sharply, correcting some of the excesses of 1999 and of early 2000. 12 NEW PURCHASES SUMITOMO BANK Sumitomo Bank is the second largest bank in Japan. It is scheduled to merge with Sakura Bank in April 2001 to form one of the top ten largest banks in the world. Sumitomo Bank is benefiting from its large customer base and its bold e-finance strategy. Its aggressive management team is increasingly looking to create value for shareholders. We expect Sumitomo Bank to achieve strong earnings growth based on merger-related synergies and its stronger market position. AEGON NV Based in the Netherlands, Aegon is one of the world's largest life insurance companies. It is positioning itself to take advantage of the expected increased demand in the types of savings products in which it specializes. Aegon's management has a clear and consistent strategy, and a track record of strong performance. The country allocation of the fund on December 31, 2000 was: Australia 2.5% Finland 3.3% France 16.4% Germany 3.1% Hong Kong 3.3% Japan 18.6% Mexico 2.1% Netherlands 11.5% Spain 8.8% Sweden 1.9% Switzerland 9.3% UK 19.9% 13 OUTLOOK The past year has reminded all of us of a few critical investment lessons we should never forget. Once again, we learned that in the end, quality, earnings, value, and diversification do matter. These are principles that always underlie the Fund's investment philosophy and process. We remain optimistic about future international market developments. The fantastic transformation of the world that started a decade ago is far from over and will reward the patient investor. In the short-term, with a row of tax cuts in 2001, Europe seems to be in a good position to absorb a global economic slowdown. The renewed strength of the Euro looks sustainable and should put some wind at the back of dollar-based investors. We continue to believe that by focusing exclusively on the highest quality foreign companies, the Fund offers a long-term strategy for the prudent investor. KAYNE ANDERSON RUDNICK INTERNATIONAL FUND COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE KAYNE ANDERSON RUDNICK INTERNATIONAL FUND AND THE MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALASIA AND FAR EAST INDEX Average Annual Total Return for the periods ending December 31, 2000 One Year Since Inception (10/18/96) (9.65%) 14.82% Kayne Anderson Rudnick MSCI Europe, Australasia International Fund and Far East Index ------------------ ------------------ Oct-96 10,000 10,000 Dec-96 10,256 10,269 Mar-97 10,604 10,116 Jun-97 11,949 11,436 Sep-97 12,306 11,363 Dec-97 11,940 10,480 Mar-98 13,853 12,030 Jun-98 14,071 12,166 Sep-98 12,462 10,444 Dec-98 15,101 12,611 Mar-99 15,821 12,796 Jun-99 16,913 13,130 Sep-99 16,933 13,715 Dec-99 19,792 16,054 Mar-00 19,888 16,046 Jun-00 19,854 15,420 Sep-00 18,641 14,185 Dec-00 17,882 13,813 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE MSCI EAFE INDEX IS AN UNMANAGED INDEX THAT IS THE GENERALLY ACCEPTED BENCHMARK FOR MAJOR OVERSEAS MARKETS. THE MSCI EAFE INDEX CONSISTS OF SECURITIES LISTED ON EXCHANGES IN EUROPEAN, AUSTRALASIAN AND FAR EASTERN MARKETS AND INCLUDES DIVIDENDS AND DISTRIBUTIONS, BUT DOES NOT REFLECT FEES, BROKERAGE COMMISSIONS, OR OTHER EXPENSES OF INVESTING. THE INDEX WEIGHTINGS REPRESENT THE RELATIVE CAPITALIZATIONS OF THE MAJOR OVERSEAS MARKETS INCLUDED IN THE INDEX ON A U.S. DOLLAR ADJUSTED BASIS. 14 KAYNE ANDERSON RUDNICK INTERNATIONAL FUND SCHEDULE OF INVESTMENTS IN SECURITIES at December 31, 2000 SHARES VALUE - -------------------------------------------------------------------------------- COMMON STOCKS: 100.7% AUSTRALIA: 2.5% 61,732 BHP ADR .............................................. $ 1,296,372 ------------ FINLAND: 3.3% 39,272 Nokia ADR* ........................................... 1,708,332 ------------ FRANCE: 16.4% 10,780 Air Liquide .......................................... 1,605,803 30,000 Alcatel* ............................................. 1,701,477 24,712 Axa ADR .............................................. 1,774,631 54,070 Groupe Danone ADR .................................... 1,659,949 23,871 Total Fina Elf ADR ................................... 1,735,123 ------------ 8,476,983 ------------ GERMANY: 3.1% 47,866 SAP ADR .............................................. 1,612,486 ------------ HONG KONG: 3.3% 23,034 HSBC ADR ............................................. 1,695,302 ------------ JAPAN: 18.6% 34,000 Canon ................................................ 1,188,031 90,000 Fujitsu .............................................. 1,323,954 60,000 Matsushita Electric Industrial ....................... 1,430,880 114,000 Minebea .............................................. 1,053,611 130 Nippon Telegraph & Telephone ......................... 934,615 116,000 Shiseido ............................................. 1,291,985 20,000 Sony ................................................. 1,380,214 100,000 Sumitomo Bank ........................................ 1,024,680 ------------ 9,627,970 ------------ MEXICO: 2.1% 77,091 Panamerican Beverages ADR ............................ 1,093,729 ------------ NETHERLANDS: 11.5% 37,700 Aegon ................................................ 1,557,168 20,910 Heineken ............................................. 1,263,359 20,562 ING Groep ............................................ 1,639,989 47,000 Koninklijke Ahold .................................... 1,513,912 ------------ 5,974,428 ------------ 15 KAYNE ANDERSON RUDNICK INTERNATIONAL FUND SCHEDULE OF INVESTMENTS IN SECURITIES at December 31, 2000 (Continued) SHARES VALUE - -------------------------------------------------------------------------------- SPAIN: 8.8% 94,110 Endesa ADR ........................................... $ 1,570,461 81,811 Repsol ADR ........................................... 1,319,202 99,900 Telefonica* .......................................... 1,648,270 ------------ 4,537,933 ------------ SWEDEN: 1.9% 89,052 Ericsson ADR* ........................................ 996,269 ------------ SWITZERLAND: 9.3% 12,674 Nestle ADR ........................................... 1,478,178 41,876 Novartis ADR ......................................... 1,873,951 2,483 Zurich Financial Services ............................ 1,494,972 ------------ 4,847,101 ------------ UNITED KINGDOM: 19.9% 39,510 Cable & Wireless ADR ................................. 1,575,461 31,240 Diageo ADR ........................................... 1,386,275 274,613 Invensys ADR ......................................... 1,283,981 60,024 Pearson .............................................. 1,426,134 438,600 Rentokil Initial ..................................... 1,513,959 15,304 Reuters ADR .......................................... 1,507,444 45,930 Vodafone ADR ......................................... 1,644,868 ------------ 10,338,122 ------------ TOTAL COMMON STOCKS (cost $49,715,976) .......................................... 52,205,027 ------------ 16 KAYNE ANDERSON RUDNICK INTERNATIONAL FUND SCHEDULE OF INVESTMENTS IN SECURITIES at December 31, 2000 (Continued) VALUE - -------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (cost $49,715,976+): 100.7% ................................. $ 52,205,027 Liabilities in excess of Other Assets: (0.7)% .................. (376,749) ------------ NET ASSETS: 100.0% ............................................. $ 51,828,278 ============ * Non-income producing security. + At December 31, 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 ............................. $ 7,220,188 Gross unrealized depreciation ............................. (4,731,137) ------------ Net unrealized appreciation ............................... $ 2,489,051 ============ See accompanying Notes to Financial Statements. 17 KAYNE ANDERSON RUDNICK INTERNATIONAL FUND Schedule of Investments by Industry at December 31, 2000 INDUSTRY PERCENTAGE - -------------------------------------------------------------------------------- Insurance ............................................................ 9.3% Communications - Equipment ........................................... 8.5 Diversified Telecomm Services ........................................ 8.0 Beverages ............................................................ 7.2 Diversified Financials ............................................... 6.4 Food Products ........................................................ 6.1 Oil & Gas ............................................................ 5.9 Media ................................................................ 5.7 Household Durables ................................................... 5.4 Pharmaceuticals ...................................................... 3.6 Wireless Telecomm Services ........................................... 3.2 Software ............................................................. 3.1 Chemicals ............................................................ 3.1 Multi-Utilities ...................................................... 3.0 Communication Services & Supplies .................................... 2.9 Food & Drugs Retailing ............................................... 2.9 Computers & Peripherals .............................................. 2.6 Metals & Mining ...................................................... 2.5 Personal Products .................................................... 2.5 Electrical Equipment ................................................. 2.5 Office Electronics ................................................... 2.3 Machinery ............................................................ 2.0 Banks ................................................................ 2.0 ------ Total Investments .................................................... 100.7 Liabilities in excess of Other Assets ................................ (0.7) ------ Net Assets ........................................................... 100.0% ====== See accompanying Notes to Financial Statements. 18 KAYNE ANDERSON RUDNICK GROWTH AND OPPORTUNITY FUND GOAL The goal of the KAYNE ANDERSON RUDNICK GROWTH AND OPPORTUNITY FUND is to achieve long-term appreciation of capital through a diversified portfolio of domestic and international companies that exhibit above-average growth potential. We pursue this goal through a focused investment philosophy that relies on the following principles: (1) a commitment to quality; (2) long-term vision; (3) independent fundamental research; (4) broad diversification; and (5) a valuation-driven decision process. We define quality as those companies that exhibit such characteristics as market dominance, management excellence, strong free cash flow growth, strong balance sheet and relatively high research and development expenditures. COMMENTARY Since the inception of the Growth and Opportunity Fund on July 17, 2000, we have experienced a volatile environment for growth-oriented stocks. During this period, the Nasdaq Composite Index dropped from a level of 3825 to 2470, a more than 35% decline. The other major stock indices, such as the S&P 500 and the Dow Jones Industrial Average, also had negative returns. Even quality growth stocks with strong global franchises were not immune to this downturn. For example, during the six months ended December 31, 2000, Microsoft was down 45.7%, Intel was down 55.1%, and Nortel Networks was down 53.1%. Technology stocks were hit hardest, as the economy slowed in the fourth quarter and companies started to revise their earnings guidance downward. The Fund has a disciplined yet substantial weighting in technology stocks. We continue to believe that our high-quality holdings in the technology sector will do well fundamentally over the next 12 to 18 months. 19 OUTLOOK We believe the Federal Reserve Board's interest rate cut in early January and the subsequent cuts expected later this year will stabilize the market and help growth stocks get back to a more predictive model, rather than the unsustainable hyper-growth phase we saw in late 1999 and early 2000. The recent market turmoil and correction should benefit high quality growth companies with strong global franchises in the long-term. This portfolio is designed to provide a more aggressive equity strategy as one piece of a balanced overall asset allocation. The portfolio can be expected to be more volatile, both on the upside and downside, than the broad equity markets generally. Nonetheless, we believe the strong underlying fundamentals of our portfolio holdings should be reflected in favorable long-term capital appreciation. KAYNE ANDERSON RUDNICK GROWTH AND OPPORTUNITY FUND COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE KAYNE ANDERSON RUDNICK GROWTH AND OPPORTUNITY FUND AND THE S & P BARRA GROWTH INDEX Total Return for the periods ending December 31, 2000 Since Inception (7/17/00) (28.02%) Kayne Anderson Rudnick S&P Barra Growth and Opportunity Fund Growth Index --------------------------- ------------ Jul-00 10,000 10,000 Aug-00 9,861 10,579 Sep-00 8,824 9,546 Oct-00 8,452 9,298 Nov-00 7,554 8,310 Dec-00 7,198 7,950 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. THE S&P/BARRA GROWTH INDEX IS AN UNMANAGED CAPITALIZATION-WEIGHTED INDEX THAT CONTAINS APPROXIMATELY 50% OF THE STOCKS IN THE S&P 500 WITH HIGHER PRICE-TO-BOOK RATIOS. 20 KAYNE ANDERSON RUDNICK GROWTH AND OPPORTUNITY FUND SCHEDULE OF INVESTMENTS at December 31, 2000 SHARES VALUE - -------------------------------------------------------------------------------- COMMON STOCKS: 97.1% CAPITAL GOODS/ELECTRICAL EQUIPMENT: 5.7% 4,080 General Electric Co. .................................. $ 195,585 ----------- FINANCIAL/FINANCIAL SERVICES: 3.0% 3,680 Schwab (Charles) Corp ................................. 104,420 ----------- HEALTH CARE/DRUGS & HOSPITAL SUPPLIES: 17.5% 1,500 Amgen, Inc.* .......................................... 95,906 1,200 Genentech, Inc.* ...................................... 97,800 1,200 Guidant Corp.* ........................................ 64,725 5,500 Pfizer, Inc. .......................................... 253,000 1,500 Schering-Plough Corp .................................. 85,125 ----------- 596,556 ----------- RETAIL/APPAREL: 4.1% 5,485 Gap, Inc. (The) ....................................... 139,867 ----------- RETAIL/BUILDING PRODUCTS: 6.7% 4,990 Home Depot, Inc. (The) ................................ 227,981 ----------- TECHNOLOGY/COMMUNICATIONS - EQUIPMENT: 22.8% 840 Alcatel SA ............................................ 46,987 3,250 Cisco Systems, Inc.* .................................. 124,312 1,500 Digital Lightwave, Inc ................................ 47,531 1,500 Foundry Networks, Inc ................................. 22,500 1,350 JDS Uniphase Corp.* ................................... 56,278 3,215 Nokia Corp. ADR ....................................... 139,852 2,620 Nortel Networks Corp. ................................. 84,004 1,545 Qualcomm, Inc.* ....................................... 126,980 2,305 Tellabs, Inc.* ........................................ 130,233 ----------- 778,677 ----------- TECHNOLOGY/COMPUTERS & OFFICE EQUIPMENT: 7.5% 4,070 Dell Computer Corp.* .................................. 70,971 490 EMC Corp-Mass* ........................................ 32,585 965 International Business Machines Corp. ................. 82,025 1,500 Xilinx, Inc.* ......................................... 69,188 ----------- 254,769 ----------- TECHNOLOGY/ELECTRONICS: 3.6% 2,640 Texas Instruments, Inc ................................ 125,070 ----------- 21 KAYNE ANDERSON RUDNICK GROWTH AND OPPORTUNITY FUND SCHEDULE OF INVESTMENTS at December 31, 2000 (Continued) SHARES VALUE - -------------------------------------------------------------------------------- TECHNOLOGY/INTERNET: 4.1% 4,000 America Online, Inc.* $ 139,200 ----------- TECHNOLOGY/SEMICONDUCTORS: 8.6% 1,495 Applied Materials, Inc.* 57,090 5,705 Intel Corp. 171,507 1,400 Linear Technology Corp 64,750 ----------- 293,347 ----------- TECHNOLOGY/SOFTWARE: 11.2% 2,930 BMC Software, Inc.* 41,020 3,255 Microsoft Corp.* 141,186 5,120 Oracle Corp.* 148,800 1,500 SAP AG ADR 50,531 ----------- 381,537 ----------- TELECOMMUNICATION SERVICES/TELEPHONE: 2.3% 5,500 WorldCom, Inc. 77,344 ----------- TOTAL COMMON STOCKS (cost $4,332,632) 3,314,353 ----------- TOTAL INVESTMENTS IN SECURITIES (cost $4,332,632+): 97.1% 3,314,353 Other Assets less Liabilities: 2.9% 97,786 ----------- NET ASSETS: 100.0% $ 3,412,139 =========== * Non-income producing security. + At December 31, 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 $ 71,806 Gross unrealized depreciation (1,090,085) ----------- Net unrealized depreciation $(1,018,279) =========== See accompanying Notes to Financial Statements. 22 KAYNE ANDERSON RUDNICK INTERMEDIATE TOTAL RETURN BOND FUND GOAL The KAYNE ANDERSON RUDNICK INTERMEDIATE TOTAL RETURN BOND FUND seeks to provide total returns in excess of the Lehman Intermediate Government/Credit index, while maintaining quality and liquidity. Our strategy is to provide a total return which captures much of the fixed income market return with a combination of income and capital appreciation by adjusting sectors and maturities in order to capitalize on changing market conditions. COMMENTARY In the first half of 2000, the Federal Reserve Board (the "Fed") continued in a tightening bias, increasing short-term interest rates. The U.S. Treasury began its buy-back program, decreasing supply of longer US Treasury bonds, thus lowering the yields on the longer end of the curve. These actions caused the yield curve to become inverted. As the price of oil rose and the economy began to show signs of slowing later in the year, the longer end of the curve began to move up. The shift and reshaping of the yield curve can clearly be seen in the chart shown below. TREASURY SECURITY YIELD CURVE [GRAPHIC] SOURCE: VALUE LINE SELECTION & OPINION, DECEMBER 29, 2000 The Fund's weighting in the treasury sector benefited performance throughout the majority of the year as Treasuries outperformed the Corporate and Agency sectors of the bond market. The Agency sector was under the cloud of increased scrutiny from Congress until late in the year when an agreement was reached for additional credit oversight. As the equity markets remained volatile, investors began to worry about credit risk in the high-yield portion of the corporate bond market. This moved investors into the Treasury market, with its high quality and dwindling supply. While there has been talk of a widening in corporate yield spreads, it is important to remember that this has primarily affected the non-investment grade sector of the bond market. This, once again showed the value of investing in quality. Throughout the year, we maintained a slightly over-weighted position in Treasuries relative to our benchmark, while slowly moving into additional high quality corporate bond positions. In this way we have been able to capture much of the Treasury sectors performance, while also increasing the yield of the portfolio. 23 OUTLOOK At this point, all eyes continue to be on Mr. Greenspan. Having made an extraordinary 100 basis point reduction in the Fed Funds rate in January, the question now becomes how much more and how fast will the additional rate reductions be implemented. Many in the market are anticipating as much as an additional 100 basis points in interest rate reduction through the course of 2001. This will depend on many factors, including the amount of fiscal stimulus to be added to the economy by the incoming Congress, and how quickly its effects will be felt. We believe that most of the Fed's rate reductions will occur in the first half of the year, so that it is finished with its work before the Congress begins. That will allow the Fed to see the impact of the rate reductions separate from any moves made by Congress before taking any additional action. We believe that the monetary and fiscal policy changes over the next few months should lead to a more normalized yield curve. We also believe that with our Fund's intermediate duration and high quality characteristics, we are well positioned to take advantage of these shifts in the yield curve, as well as the current focus in the markets on quality. KAYNE ANDERSON RUDNICK INTERMEDIATE TOTAL RETURN BOND FUND COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE KAYNE ANDERSON RUDNICK INTERMEDIATE TOTAL RETURN BOND FUND AND THE LEHMAN BROTHERS GOVERNMENT / CREDIT INTERMEDIATE BOND INDEX Average Annual Total Return for the periods ending December 31, 2000 One Year Since Inception (10/28/96) 9.40% 5.61% Kayne Anderson Rudnick Intermediate Lehman Brothers Government/ Total Return Bond Fund Credit Intermediate Bond Index ---------------------- ------------------------------ Oct-96 10,000 10,000 Dec-96 10,020 10,067 Mar-97 9,948 10,056 Jun-97 10,249 10,352 Sep-97 10,525 10,631 Dec-97 10,741 10,859 Mar-98 10,900 11,028 Jun-98 11,071 11,235 Sep-98 11,307 11,739 Dec-98 11,558 11,773 Mar-99 11,531 11,751 Jun-99 11,413 11,705 Sep-99 11,519 11,813 Dec-99 11,483 11,819 Mar-00 11,661 11,995 Jun-00 11,840 12,198 Sep-00 12,150 12,549 Dec-00 12,563 13,013 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. LEHMAN BROTHERS GOVERNMENT/CREDIT INTERMEDIATE BOND INDEX IS A TOTAL RETURN INDEX CONSISTING OF INVESTMENT GRADE CORPORATE DEBT ISSUES AS WELL AS DEBT ISSUES OF U.S. GOVERNMENT AGENCIES AND THE U.S. TREASURY. THE DEBT ISSUES ALL MAINTAIN MATURITIES WITHIN A RANGE OF 1 - 10 YEARS. 24 KAYNE ANDERSON RUDNICK INTERMEDIATE TOTAL RETURN BOND FUND SCHEDULE OF INVESTMENTS IN SECURITIES at December 31, 2000 - -------------------------------------------------------------------------------- PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------- CORPORATE BONDS: 22.0% AEROSPACE: 0.9% $ 335,000 Boeing Capital Corp., 7.100%, 09/27/05 ............... $ 349,199 70,000 Honeywell International, 9.200%, 02/15/03 ............ 74,547 ----------- 423,746 ----------- AUTO/TRUCK MANUFACTURER: 2.6% 1,250,000 Daimlerchrysler National Holding Corp., 7.200%, 09/01/09 ................................... 1,207,050 ----------- BEVERAGES: 3.8% 70,000 Anheuser Busch Companies, 6.750%, 11/01/06 ........... 71,512 236,000 Coca Cola Enterprises, Inc., 6.375%, 08/01/01 ........ 235,913 1,500,000 Coca-Cola Bottling Co. Consolidated, 6.850%, 11/01/07 1,459,590 ----------- 1,767,015 ----------- COMMUNICATION SERVICES: 0.4% 175,000 TCI Communications, Inc., 6.375%, 05/01/03 ........... 174,467 ----------- COMPUTERS - MICRO: 1.6% 750,000 Hewlett-Packard Co., 7.150%, 06/15/05 ................ 775,508 ----------- DEPARTMENT STORES: 0.1% 70,000 Sears Roebuck & Co., 9.450%, 07/25/01 ................ 70,802 ----------- FINANCE: 11.0% 70,000 Beneficial Corp., 6.600%, 09/26/01 ................... 70,214 1,000,000 Countrywide Home Loans, Inc., 7.450%, 09/16/03 ....... 1,018,738 300,000 Ford Motor Credit Corp., 6.700%, 07/16/04 ............ 299,460 500,000 Ford Motor Credit Corp., 9.030%, 12/30/09 ............ 540,091 192,000 General Motors Acceptance Corp., 7.125%, 05/01/03 .... 193,553 1,000,000 Lehman Brothers Holdings, Inc., 7.250%, 10/15/03 ..... 1,013,920 500,000 Lehman Brothers Holdings, Inc., 8.750%, 05/15/02 ..... 514,220 500,000 Salomon, Inc., 9.250%, 05/01/01 ...................... 504,316 175,000 Bear Stearns Co., 6.625%, 10/01/04 ................... 173,636 825,000 Bear Stearns Co., 7.800%, 08/15/07 ................... 852,222 ----------- 5,180,370 ----------- INDUSTRIAL: 0.4% 175,000 Caterpillar, Inc., 8.440%, 11/26/03 .................. 184,051 ----------- 25 KAYNE ANDERSON RUDNICK INTERMEDIATE TOTAL RETURN BOND FUND SCHEDULE OF INVESTMENTS IN SECURITIES at December 31, 2000 - (Continued) - -------------------------------------------------------------------------------- PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------- MOTION PICTURE PRODUCTION & OTHER SERVICES: 0.6% $ 278,000 Walt Disney Co. (The), 6.375%, 03/30/01 .............. $ 277,864 ----------- RETAIL STORES: 0.6% 300,000 Wal-Mart Stores, 6.550%, 08/10/04 .................... 306,893 ----------- TOTAL CORPORATE BONDS (cost $10,326,988) .......................... 10,367,766 ----------- U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS: 74.5% MORTGAGE-BACKED/PASS-THROUGH SECURITIES: 10.1% 414,078 Federal Home Loan Mortgage Corp., 7.000%, 04/01/16 ... 419,224 258,863 Federal Home Loan Mortgage Corp., 7.500%, 07/01/09 ... 265,450 592,335 Federal Home Loan Mortgage Corp., 7.500%, 04/01/14 ... 605,063 1,400,000 Federal National Mortgage Association, 6.000%, 08/25/08 ........................................... 1,401,421 420,887 Federal National Mortgage Association, 7.000%, 05/01/14 ........................................... 425,587 195,556 Federal National Mortgage Association, 8.000%, 01/01/15 ........................................... 201,171 706,715 Government National Mortgage Association, 7.000%, 07/20/13 ........................................... 714,790 8,825 Government National Mortgage Association, 8.000%, 11/15/21 ........................................... 9,044 239,071 Government National Mortgage Association, 8.000%, 07/15/23 ........................................... 245,016 187,452 Government National Mortgage Association, 8.000%, 07/15/23 ........................................... 192,113 99,445 Government National Mortgage Association, 8.000%, 09/15/26 ........................................... 101,917 46,990 Government National Mortgage Association, 8.000%, 11/15/26 ........................................... 48,158 13,492 Government National Mortgage Association, 8.500%, 12/15/22 ........................................... 13,897 103,180 Government National Mortgage Association, 8.500%, 08/15/25 ........................................... 106,280 29,716 Government National Mortgage Association, 8.500%, 06/15/26 ........................................... 30,609 ----------- 4,779,740 ----------- U.S. AGENCY OBLIGATIONS: 3.6% 1,000,000 Federal Home Loan Bank, 5.925%, 04/09/08 ............. 1,002,301 600,000 Federal National Mortgage Association, 5.625%, 05/14/04 ........................................... 599,741 87,000 Federal National Mortgage Association, 6.950%, 11/13/06 ........................................... 87,295 ----------- 1,689,337 ----------- U.S. TREASURY OBLIGATIONS: 60.8% 1,500,000 U.S. Treasury Bonds, 7.875%, 11/15/04 ................ 1,642,208 2,050,000 U.S. Treasury Bonds, 11.875%, 11/15/03 ............... 2,408,992 1,257,000 U.S. Treasury Notes, 5.625%, 05/15/08 ................ 1,291,547 700,000 U.S. Treasury Notes, 6.000%, 08/15/09 ................ 739,059 2,100,000 U.S. Treasury Notes, 6.250%, 02/15/03 ................ 2,145,587 26 KAYNE ANDERSON RUDNICK INTERMEDIATE TOTAL RETURN BOND FUND SCHEDULE OF INVESTMENTS IN SECURITIES at December 31, 2000 - (Continued) - -------------------------------------------------------------------------------- PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------- $2,000,000 U.S. Treasury Notes, 6.250%, 02/15/07 ................ $ 2,114,140 1,500,000 U.S. Treasury Notes, 6.500%, 10/15/06 ................ 1,601,369 4,980,000 U.S. Treasury Notes, 7.250%, 08/15/04 ................ 5,324,616 4,000,000 U.S. Treasury Notes, 7.500%, 05/15/02 ................ 4,112,896 6,650,000 U.S. Treasury Notes, 7.500%, 02/15/05 ................ 7,234,568 ----------- 28,614,982 ----------- TOTAL U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS (cost $34,266,698) 35,084,059 ----------- SHORT-TERM INVESTMENT: 1.9% 899,010 AT&T Capital Corp., 6.600%, 01/04/01 ................. 899,010 TOTAL SHORT-TERM INVESTMENT (cost $899,010) ....................... 899,010 TOTAL INVESTMENTS IN SECURITIES (cost $45,492,696+): 98.4% ........ 46,350,835 Other Assets less Liabilities: 1.6% ............................... 746,596 ----------- NET ASSETS: 100.0% $47,097,431 =========== + At December 31, 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 ..................................... $ 977,772 Gross unrealized depreciation ..................................... (119,633) ----------- Net unrealized appreciation ....................................... $ 858,139 ========== See accompanying Notes to Financial Statements. 27 KAYNE ANDERSON RUDNICK CALIFORNIA INTERMEDIATE TAX FREE BOND FUND GOAL The Kayne Anderson Rudnick California Intermediate Tax-Free Bond Fund seeks to provide current income exempt from both federal and California state income taxes, by investing in high quality, intermediate maturity, California municipal securities. COMMENTARY Looking at the municipal market, it is easy to see the combined effects of a strong economy and fiscal discipline among municipal governments: municipal credit ratings improved again during the year, and new debt issuance was again lower. Municipal debt issuance dropped 10% in 2000, a total decline of 26% in just the last two years. This low level of new issuance, along with strong demand among municipal bond investors, affected the California market in particular. In 2000, we saw the end of the Federal Reserve Board (the "Fed") tightening cycle, and municipal interest rates dropped along with the rest of the bond market. The chart below shows the change in the California municipal yield curve for the year. The yield on a typical five-year AAA rated California municipal fell 65 basis points. CA TAX FREE YIELD CURVES [GRAPHIC] 28 As markets became more volatile toward year-end, investors became more focused on quality. The strength and diversification of California's economy helped to improve credit ratings throughout the state over the year. As would be expected this was very beneficial to the California municipal market at year-end. Our fund in particular benefited from our focus on quality within the state and our goal of maintaining a diversified portfolio. The Kayne Anderson Intermediate California Tax Free Fund was up 10.18% in 2000 versus the Lehman 5-year municipal index which was up 7.72%. SECTOR DIVERSIFICATION WATER & SEWER 23.9% TRANSPORT 15.1% GENERAL OBLIGATION 12.6% HOSPITAL 11.4% PREREFUNDED 11.2% IDR/PCR 8.6% ELECTRIC 7.3% HOUSING 6.7% CASH & EQUIVALENTS 2.0% EDUCATION 1.2% OUTLOOK With the economy slowing, and the Fed in an easing stance, we believe there will be a decrease in short-term taxable rates, and a normalizing of the yield curve in 2001. While this will bring down rates in the taxable markets, we do not believe that it will be translated into large shifts in municipal yields. However, we believe that the intermediate term duration and high quality characteristics of our portfolio have us well-positioned to take advantage of continuing credit improvements in the municipal market, as well as shifts in the yield curve. KAYNE ANDERSON RUDNICK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE KAYNE ANDERSON RUDNICK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND AND THE LEHMAN BROTHERS FIVE YEAR MUNICIPAL BOND INDEX Kayne Anderson Rudnick Lehman Brothers California Intermediate Five Year Tax-Free Bond Fund Municipal Bond Index ------------------ -------------------- Oct-96 10,000 10,000 Dec-96 10,002 10,111 Mar-97 9,989 10,108 Jun-97 10,160 10,354 Sep-97 10,306 10,576 Dec-97 10,428 10,756 Mar-98 10,506 10,881 Jun-98 10,613 11,002 Sep-98 10,802 11,292 Dec-98 10,877 11,385 Mar-99 10,978 11,504 Jun-99 10,886 11,361 Sep-99 10,922 11,468 Dec-99 10,836 11,469 Mar-00 11,161 11,607 Jun-00 11,324 11,789 Sep-00 11,608 12,021 Dec-00 11,936 12,353 PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. LEHMAN BROTHERS 5 YEAR MUNICIPAL BOND INDEX IS A TOTAL RETURN BENCHMARK DESIGNED FOR SHORT-TERM MUNICIPAL ASSETS. THE INDEX INCLUDES BONDS WITH A MINIMUM CREDIT RATING OF BAA3, ARE ISSUED AS PART OF A DEAL OF AT LEAST 50 MILLION, HAVE AN AMOUNT OUTSTANDING OF AT LEAST 5 MILLION, HAVE A MATURITY BETWEEN FOUR AND SIX YEARS, AND HAVE BEEN ISSUED AFTER DECEMBER 31, 1990. 29 KAYNE ANDERSON RUDNICK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND SCHEDULE OF INVESTMENTS IN SECURITIES at December 31, 2000 PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------- MUNICIPAL BONDS: 98.0% EDUCATION: 1.2% $ 155,000 Brentwood Union School District, 7.300%, 08/01/07 .... $ 182,900 200,000 University of California Revenues, 5.250%, 09/01/11 .. 208,250 ----------- 391,150 ----------- ELECTRIC: 7.3% 1,000,000 M-S-R Public Power Agency California, 6.000%, 07/01/20 ........................................... 1,047,500 1,000,000 Northern California Public Power Agency, 5.000%, 07/01/15 ........................................... 1,028,750 200,000 Sacramento, California Municipal Utilities District, 5.700%, 05/15/12 ................................... 210,750 ----------- 2,287,000 ----------- GENERAL OBLIGATION: 12.6% 250,000 California State, 5.250%, 06/01/16 ................... 258,125 250,000 California State, 5.375%, 03/01/06 ................... 264,375 825,000 California State, 6.250%, 04/01/08 ................... 934,312 100,000 California State, 6.250%, 02/01/14 ................... 100,132 895,000 California State Veterans Bonds, 5.150%, 12/01/14 .... 914,019 200,000 California State Veterans Bonds, 6.375%, 02/01/27 .... 200,318 200,000 Los Angeles County, California Public Works, 5.000%, 10/01/16 ................................... 204,000 1,000,000 Oakland, California, 5.875%, 06/15/19 ................ 1,066,250 ----------- 3,941,531 ----------- HOSPITALS: 11.4% 1,000,000 California Health Facilities Authority Revenues, 5.000%, 11/15/13 ................................... 1,040,000 1,000,000 California Health Facilities Financing Authority, 6.250%, 10/01/13 ................................... 1,035,250 1,000,000 Stockton, California Health Facilities, 5.350%, 12/01/09 ........................................... 987,500 500,000 Stockton, California Health Facilities, 5.450%, 12/01/10 ........................................... 495,625 ----------- 3,558,375 ----------- HOUSING: 6.7% 800,000 California Housing Finance Agency, 5.900%, 08/01/17 .. 830,000 960,000 California Housing Finance Agency, 5.950%, 08/01/14 .. 1,014,000 250,000 Orange County California Financing Authority, 6.250%, 09/01/14 ................................... 258,475 ----------- 2,102,475 ----------- IDR/PCR: 8.6% 200,000 California Pollution Control Financing Authority, 5.850%, 12/01/23 ................................... 171,000 200,000 California Pollution Control Financing Authority, 7.150%, 02/01/11 ................................... 204,750 1,000,000 California State Public Works, 5.250%, 12/01/08 ...... 1,077,500 1,000,000 Mountain View, California Shoreline Regional Park, 5.500%, 08/01/21 ................................... 1,033,750 200,000 Pinole Redevelopment Agency Tax Allocation, 5.600%, 08/01/17 ........................................... 204,750 ----------- 2,691,750 ----------- 30 KAYNE ANDERSON RUDNICK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND SCHEDULE OF INVESTMENTS IN SECURITIES at December 31, 2000 - (Continued) PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------- PREREFUNDED: 11.2% $1,000,000 California Educational Facilities Authority Revenues Pomona College, 6.125%, 02/15/08 ................... $ 1,043,750 150,000 Los Angeles Convention & Exhibit Center, 9.000%, 12/01/20 ........................................... 182,625 100,000 Orange County, California Local Transportation Authority, 5.750%, 02/15/05 ........................ 104,000 1,000,000 University of California Revenues, 6.300%, 09/01/15 .. 1,078,750 1,000,000 West Covina, California Queen of the Valley Hospital, 6.500%, 08/15/14 ................................... 1,102,500 ----------- 3,511,625 ----------- TRANSPORTATION: 15.1% 250,000 Long Beach, California Harbor Revenues, 6.000%, 05/15/06 ........................................... 270,625 1,000,000 Oakland, California Port Authority, 5.600%, 11/01/19 1,051,250 1,250,000 San Francisco, California Bay Area Rapid, 5.500%, 07/01/15 ........................................... 1,321,875 1,000,000 San Francisco, California City & County Airport, 5.375%, 05/01/17 ................................... 1,032,500 1,000,000 San Francisco, California Port Authority, 5.900%, 07/01/09 ........................................... 1,072,500 ----------- 4,748,750 ----------- WATER & SEWER: 23.9% 275,000 Contra Costa, California Water District, 5.250%, 10/01/16 ........................................... 279,813 700,000 Los Angeles, California Wastewater System, 5.000%, 06/01/14 ........................................... 723,625 200,000 Los Angeles, California Wastewater System, 5.700%, 06/01/20 ........................................... 205,750 1,000,000 Marina, California Municipal Water District, 5.550%, 07/01/13 ........................................... 1,040,000 1,000,000 Rancho, California Water District Financing Authority, 5.875%, 11/01/10 ........................ 1,090,000 1,000,000 Redlands, California Financing Authority, 5.000%, 09/01/17 ........................................... 1,012,500 1,000,000 San Francisco, California City and County Public Utility, 6.000%, 11/01/15 .......................... 1,035,000 1,000,000 San Jose Clara, California Water, 5.375%, 11/15/15 ... 1,040,000 1,000,000 Tulare, California Sewer Revenue, 5.700%, 11/15/15 ... 1,072,500 ----------- 7,499,188 ----------- TOTAL MUNICIPAL BONDS (cost $29,211,717) .......................... $30,731,844 ----------- 31 KAYNE ANDERSON RUDNICK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND SCHEDULE OF INVESTMENTS IN SECURITIES at December 31, 2000 - (Continued) TOTAL INVESTMENTS IN SECURITIES (cost $29,211,717+): 98.0% ........ 30,731,844 Other Assets less Liabilities: 2.0% ............................... 620,779 ----------- NET ASSETS: 100.0% ................................................ $31,352,623 =========== + At December 31, 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 .............................. $1,577,447 Gross unrealized depreciation .............................. (57,320) ---------- Net unrealized appreciation ................................ $1,520,127 ========== See accompanying Notes to Financial Statements. 32 KAYNE ANDERSON RUDNICK MUTUAL FUNDS STATEMENTS OF ASSETS AND LIABILITIES at December 31, 2000
LARGE CAP SMALL CAP FUND FUND ------------ ------------ ASSETS Investments in securities, at cost .............................. $116,349,972 $ 36,137,370 ============ ============ Investments in securities, at value ............................. $127,920,534 $ 41,476,324 Cash ............................................................ 3,430,927 888,358 Receivables: Fund shares sold .............................................. 97,076 184,611 Due from advisor .............................................. -- -- Dividends and interest ........................................ 89,000 78,911 Tax reclaims .................................................. -- -- Prepaid expenses ................................................ 606 2,419 ------------ ------------ Total assets .............................................. 131,538,143 42,630,623 ------------ ------------ LIABILITIES Payables: Securities purchased .......................................... -- -- Fund shares purchased ......................................... 149,309 -- Distributions to shareholders ................................. -- -- Due to advisor ................................................ 82,497 32,145 Accrued expenses .............................................. 54,356 38,770 ------------ ------------ Total liabilities ......................................... 286,162 70,915 ------------ ------------ NET ASSETS ...................................................... $131,251,981 $ 42,559,708 ============ ============ Number of shares issued and outstanding (unlimited shares authorized, no par value) ................... 7,303,792 2,475,809 ------------ ------------ NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE ........ $ 17.97 $ 17.19 ============ ============ COMPONENTS OF NET ASSETS Paid-in capital ............................................... $118,789,322 $ 41,617,807 Accumulated net investment income ............................. 207,192 21,298 Accumulated net realized gain (loss) on investments ........... 684,905 (4,418,351) Net unrealized appreciation (depreciation) on investments and foreign currency ......................... 11,570,562 5,338,954 ------------ ------------ Net assets ................................................ $131,251,981 $ 42,559,708 ============ ============
See accompanying Notes to Financial Statements. 34 GROWTH CALIFORNIA AND INTERMEDIATE INTERMEDIATE INTERNATIONAL OPPORTUNITY TOTAL RETURN TAX-FREE BOND FUND FUND BOND FUND FUND ------------ ----------- ------------ ------------ $ 49,715,976 $ 4,332,632 $ 45,492,696 $ 29,211,717 ============ =========== ============ ============ $ 52,205,027 $ 3,314,353 $ 46,350,835 $ 30,731,844 1,603,052 114,590 22,971 97,765 4,038 -- 705 207,048 -- 3,803 -- -- 46,830 2,119 782,731 450,760 25,438 5 -- -- 6,674 872 243 -- ------------ ----------- ------------ ------------ 53,891,059 3,435,742 47,157,485 31,487,417 ------------ ----------- ------------ ------------ 578,570 1,404,501 -- -- -- -- -- -- 94,673 46,733 -- 25,786 8,352 32,977 23,603 34,268 31,769 ------------ ----------- ------------ ------------ 2,062,781 23,603 60,054 134,794 ------------ ----------- ------------ ------------ $ 51,828,278 $ 3,412,139 $ 47,097,431 $ 31,352,623 ============ =========== ============ ============ 3,209,167 367,229 4,350,856 2,895,856 ------------ ----------- ------------ ------------ $ 16.15 $ 9.29 $ 10.82 $ 10.83 ============ =========== ============ ============ $ 49,327,602 $ 4,539,723 $ 46,560,977 $ 29,950,796 -- -- 3,804 9,678 11,066 (109,305) (325,489) (127,978) 2,489,610 (1,018,279) 858,139 1,520,127 ------------ ----------- ------------ ------------ $ 51,828,278 $ 3,412,139 $ 47,097,431 $ 31,352,623 ============ =========== ============ ============ 35 KAYNE ANDERSON RUDNICK MUTUAL FUNDS STATEMENTS OF OPERATIONS For the Periods Ended December 31, 2000
LARGE CAP SMALL CAP FUND FUND ----------- ----------- INVESTMENT INCOME Income Dividends ....................................................................... $ 1,488,743 $ 657,484 Interest ........................................................................ 141,576 37,667 ----------- ----------- Total income .................................................................. 1,630,319 695,151 ----------- ----------- Expenses Advisory fees ................................................................... 1,009,765 378,861 Registration expense ............................................................ 23,056 18,382 Fund accounting fees ............................................................ 33,965 35,893 Administration fees ............................................................. 61,200 32,314 Transfer agent fees ............................................................. 26,670 21,693 Trustee fees .................................................................... 6,497 6,401 Audit fees ...................................................................... 13,563 8,494 Custodian fees .................................................................. 32,686 16,358 Legal fees ...................................................................... 5,997 5,210 Amortization of deferred organization costs ..................................... -- 1,484 Reports to shareholders ......................................................... 3,122 9,697 Insurance expense ............................................................... 1,188 401 Miscellaneous ................................................................... 1,713 3,065 ----------- ----------- Total expenses ............................................................... 1,219,422 538,253 Add: expenses recouped by advisor ............................................ -- 38,042 Less: fees waived and expenses absorbed ...................................... -- -- Less: expenses paid indirectly ............................................... -- (3) ----------- ----------- Net expenses before interest ................................................. 1,219,422 576,292 Add: interest expense ........................................................ 1,580 3,431 ----------- ----------- Net expenses ................................................................. 1,221,002 579,723 ----------- ----------- NET INVESTMENT INCOME ...................................................... 409,317 115,428 ----------- ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY Net realized gain (loss) on investments ........................................... 3,862,289 6,268,833 Net unrealized appreciation (depreciation) on investments and foreign currency ............................................................ (6,686,631) 3,148,118 ----------- ----------- Net realized and unrealized gain on investments and foreign currency ............ (2,824,342) 9,416,951 ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ............ $(2,415,025) $ 9,532,379 =========== ===========
+ For the period 7/17/00, commencement of operations, to 12/31/00. * Net of foreign tax withheld of $62,656. See accompanying Notes to Financial Statements. 36 GROWTH CALIFORNIA AND INTERMEDIATE INTERMEDIATE INTERNATIONAL OPPORTUNITY TOTAL RETURN TAX-FREE BOND FUND FUND+ BOND FUND FUND ----------- ----------- ----------- ----------- $ 797,714* $ 2,759** $ -- $ -- 53,530 21,469 2,972,033 1,684,784 ----------- ----------- ----------- ----------- 851,244 24,228 2,972,033 1,684,784 ----------- ----------- ----------- ----------- 493,406 15,484 235,069 156,616 9,979 -- 19,625 19,241 43,579 15,918 40,493 43,065 35,083 4,535 33,452 30,086 21,456 9,095 20,642 21,105 6,999 3,184 6,266 6,577 18,370 8,946 4,600 8,494 18,280 387 14,851 6,965 8,298 2,274 8,096 5,380 1,728 -- 1,484 1,480 6,477 682 3,011 627 319 -- 467 372 2,920 1,137 1,544 1,238 ----------- ----------- ----------- ----------- 666,894 61,642 389,600 301,246 58,285 -- 54,517 -- -- (38,417) -- (66,383) -- (2,075) (73) (4,666) ----------- ----------- ----------- ----------- 725,179 21,150 444,044 230,197 2,062 -- 1,987 2,059 ----------- ----------- ----------- ----------- 727,241 21,150 446,031 232,256 ----------- ----------- ----------- ----------- 124,003 3,078 2,526,002 1,452,528 ----------- ----------- ----------- ----------- 1,527,366 (109,305) (52,824) 28,652 (6,401,952) (1,018,279) 1,755,943 1,449,699 ----------- ----------- ----------- ----------- (4,874,586) (1,127,584) 1,703,119 1,478,351 ----------- ----------- ----------- ----------- $(4,750,583) $(1,124,506) $ 4,229,121 $ 2,930,879 =========== =========== =========== =========== 37 KAYNE ANDERSON RUDNICK MUTUAL FUNDS STATEMENTS OF CHANGES IN NET ASSETS
LARGE CAP SMALL CAP FUND FUND ------------------------------- ----------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 12/31/00 12/31/99 12/31/00 12/31/99 ------------- ------------- ------------ ------------ INCREASE (DECREASE) IN NET ASSETS FROM: OPERATIONS Net investment income ............................. $ 409,317 $ 189,903 $ 115,428 $ 182,504 Net realized gain (loss) on investments ........... 3,862,289 5,505,297 6,268,833 2,615,590 Net unrealized appreciation (depreciation) on investments and foreign currency ................ (6,686,631) 3,127,462 3,148,118 (1,587,364) ------------- ------------- ------------ ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ..................... (2,415,025) 8,822,662 9,532,379 1,210,730 ------------- ------------- ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS From net investment income ........................ (202,125) (199,281) (95,614) (192,974) From net realized gain ............................ (2,103,740) (6,052,026) (2,984,357) (1,995,755) ------------- ------------- ------------ ------------ TOTAL DISTRIBUTIONS ............................. (2,305,865) (6,251,307) (3,079,971) (2,188,729) ------------- ------------- ------------ ------------ CAPITAL SHARE TRANSACTIONS Shares issued in exchange for Sefton Funds ........ -- 56,532,609 -- 15,192,065 Proceeds from shares sold ......................... 35,673,292 49,326,207 12,857,014 39,706,761 Net asset value of shares issued on reinvestment of distributions ................... 1,917,678 6,164,507 2,730,421 2,104,853 Cost of shares redeemed ........................... (25,122,870) (39,670,665) (26,477,202) $(42,045,131) ------------- ------------- ------------ ------------ NET INCREASE (DECREASE) FROM CAPITAL SHARE TRANSACTIONS .................................. 12,468,100 72,352,658 $(10,889,767) 14,958,548 ------------- ------------- ------------ ------------ TOTAL INCREASE (DECREASE) IN NET ASSETS ....... 7,747,210 74,924,013 (4,437,359) 13,980,549 NET ASSETS Beginning of period ............................... 123,504,771 48,580,758 46,997,067 33,016,518 ------------- ------------- ------------ ------------ END OF PERIOD ..................................... $ 131,251,981 $ 123,504,771 $ 42,559,708 $ 46,997,067 ============= ============= ============ ============ Accumulated net investment income ................. $ 207,192 $ -- $ 21,298 $ -- ============= ============= ============ ============ CHANGE IN CAPITAL SHARES Shares issued in exchange for Sefton Funds .......... -- 2,888,694 -- 998,150 Shares sold ......................................... 1,928,516 2,670,917 833,907 2,550,670 Shares issued on reinvestment of distributions 108,938 336,104 170,427 142,735 Shares redeemed ..................................... (1,349,153) (2,132,053) (1,698,840) (2,716,708) ------------- ------------- ------------ ------------ Net increase (decrease) ............................. 688,301 3,763,662 (694,506) 974,847 ============= ============= ============ ============
* Commencement of operations. See accompanying Notes to Financial Statements. 38
GROWTH CALIFORNIA AND INTERMEDIATE INTERMEDIATE INTERNATIONAL OPPORTUNITY TOTAL RETURN TAX-FREE BOND FUND FUND BOND FUND FUND - ------------------------------ ----------- ---------------------------- ------------------------------ 07/17/00* YEAR ENDED YEAR ENDED THROUGH YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED 12/31/00 12/31/99 12/31/00 12/31/00 12/31/99 12/31/00 12/31/99 - ------------ ------------ ----------- ------------ ------------ ------------ ------------ $ 124,003 $ 214,584 $ 3,078 $ 2,526,002 $ 1,018,493 $ 1,452,528 $ 601,042 1,527,366 4,945,967 (109,305) (52,824) 101,815 28,652 (156,510) (6,401,952) 4,760,202 (1,018,279) 1,755,943 (1,442,513) 1,449,699 (768,087) - ------------ ------------ ----------- ------------ ------------ ------------ ------------ (4,750,583) 9,920,753 (1,124,506) 4,229,121 (322,205) 2,930,879 (323,555) - ------------ ------------ ----------- ------------ ------------ ------------ ------------ (78,826) (228,995) (3,078) (2,554,297) (996,864) (1,444,570) (612,951) (1,569,846) (3,423,689) -- -- (37,955) -- -- - ------------ ------------ ----------- ------------ ------------ ------------ ------------ (1,648,672) (3,652,684) (3,078) (2,554,297) (1,034,819) (1,444,570) (612,951) - ------------ ------------ ----------- ------------ ------------ ------------ ------------ -- -- -- -- 40,785,659 -- 38,536,951 60,195,182 49,868,493 6,611,442 6,193,726 11,764,071 15,967,030 16,527,584 1,454,588 3,440,942 3,234 1,744,804 939,429 411,905 547,899 (44,012,108) (54,423,193) (2,074,953) (15,920,099) (27,058,097) (28,374,555) (22,204,986) - ------------ ------------ ----------- ------------ ------------ ------------ ------------ 17,637,662 (1,113,758) 4,539,723 (7,981,569) 26,431,062 (11,995,620) 33,407,448 - ------------ ------------ ----------- ------------ ------------ ------------ ------------ 11,238,407 5,154,311 3,412,139 (6,306,745) 25,074,038 (10,509,311) 32,470,942 40,589,871 35,435,560 -- 53,404,176 28,330,138 41,861,934 9,390,992 - ------------ ------------ ----------- ------------ ------------ ------------ ------------ $ 51,828,278 $ 40,589,871 $ 3,412,139 $ 47,097,431 $ 53,404,176 $ 31,352,623 $ 41,861,934 ============ ============ =========== ============ ============ ============ ============ $ -- $ 6,694 $ -- $ 3,804 $ 32,099 $ 9,678 $ 240 ============ ============ =========== ============ ============ ============ ============ -- -- -- -- 3,858,624 -- 3,694,818 3,413,087 2,899,614 535,151 586,089 1,094,407 1,533,893 1,558,667 92,252 186,992 357 166,269 88,042 39,528 52,149 (2,493,793) (3,173,764) (168,279) (1,519,193) (2,496,667) (2,745,628) (2,109,671) - ------------ ------------ ----------- ------------ ------------ ------------ ------------ 1,011,546 (87,158) 367,229 (766,835) 2,544,406 (1,172,207) 3,195,963 ============ ============ =========== ============ ============ ============ ============
39 KAYNE ANDERSON RUDNICK LARGE CAP FUND FINANCIAL HIGHLIGHTS For a share outstanding throughout each year
YEAR ENDED DECEMBER 31, ------------------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- Net asset value, beginning of year ........................... $ 18.67 $ 17.03 $ 17.28 $ 14.32 $ 12.63 -------- -------- -------- -------- -------- INCOME FROM INVESTMENT OPERATIONS: Net investment income ...................................... 0.06 0.04 0.11 0.10 0.08 Net realized and unrealized gain (loss) on investments ..... (0.44) 2.71 2.38 4.34 2.35 -------- -------- -------- -------- -------- Total income (loss) from investment operations ............... (0.38) 2.75 2.49 4.44 2.43 -------- -------- -------- -------- -------- LESS DISTRIBUTIONS: From net investment income ................................. (0.03) (0.04) (0.11) (0.11) (0.08) From net realized gain ..................................... (0.29) (1.07) (2.63) (1.37) (0.66) -------- -------- -------- -------- -------- Total distributions .......................................... (0.32) (1.11) (2.74) (1.48) (0.74) -------- -------- -------- -------- -------- Net asset value, end of year ............................... $ 17.97 $ 18.67 $ 17.03 $ 17.28 $ 14.32 ======== ======== ======== ======== ======== Total return ............................................... (2.00)% 16.33% 14.14% 30.99% 19.09% Net assets, end of year (millions) ......................... $ 131.3 $ 123.5 $ 48.6 $ 35.3 $ 26.1 RATIO OF EXPENSES TO AVERAGE NET ASSETS: Before fees waived and expenses absorbed or recouped ....... 0.90% 1.03% 1.11% 1.18% 1.37% After fees waived and expenses absorbed or recouped ........ 0.90% 1.03% 1.11% 1.18% 1.37% RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS (after fees waived and expenses absorbed or recouped)....... 0.30% 0.28% 0.57% 0.55% 0.59% Portfolio turnover rate .................................... 42% 33% 76% 51% 23
See accompanying Notes to Financial Statements. 40 KAYNE ANDERSON RUDNICK SMALL CAP FUND FINANCIAL HIGHLIGHTS For a capital share outstanding throughout each period
YEAR ENDED DECEMBER 31, 10/18/96* ------------------------------------------ THROUGH 2000 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 ......................................... 0.04 0.07 0.05 0.02 0.02 Net realized and unrealized gain on investments ............... 3.54 0.47 2.07 2.14 0.41 ------ ------ ------ ------ ------ Total income from investment operations ......................... 3.58 0.54 2.12 2.16 0.43 ------ ------ ------ ------ ------ LESS DISTRIBUTIONS: From net investment income .................................... (0.04) (0.07) (0.05) (0.05) (0.02) From net realized gain ........................................ (1.17) (0.69) -- (0.05) -- From paid-in capital .......................................... -- -- (0.15) -- -- ------ ------ ------ ------ ------ Total distributions ............................................. (1.21) (0.76) (0.20) (0.10) (0.02) ------ ------ ------ ------ ------ Net asset value, end of period .................................. $17.19 $14.82 $15.04 $13.12 $11.06 ====== ====== ====== ====== ====== Total return .................................................... 24.77% 3.64% 16.17% 19.46% 4.00%** Net assets, end of period (millions) ............................ $ 42.6 $ 47.0 $ 33.0 $ 6.5 $ 0.8 RATIO OF EXPENSES TO AVERAGE NET ASSETS: Before fees waived and expenses absorbed or recouped .......... 1.20% 1.34% 1.35% 3.22% 18.91%*** After fees waived and expenses absorbed or recouped ........... 1.29% 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).......... 0.26% 0.53% 0.38% 0.45% 1.58%*** Portfolio turnover rate ......................................... 50% 50% 28% 47% 0%**
* Commencement of operations. ** Not annualized. *** Annualized. See accompanying Notes to Financial Statements. 41 KAYNE ANDERSON RUDNICK INTERNATIONAL FUND FINANCIAL HIGHLIGHTS For a capital share outstanding throughout each period
YEAR ENDED DECEMBER 31, 10/18/96* ------------------------------------------ THROUGH 2000 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 ......................................... 0.03 0.12 0.08 0.04 0.01 Net realized and unrealized gain (loss) on investments ........ (1.82) 4.68 3.25 1.75 0.26 ------ ------ ------ ------ ------ Total income (loss) from investment operations .................. (1.79) 4.80 3.33 1.79 0.27 ------ ------ ------ ------ ------ LESS DISTRIBUTIONS: From net investment income .................................... (0.03) (0.12) (0.08) (0.05) (0.01) From net realized gain ........................................ (0.50) (1.72) (0.35) (0.04) -- ------ ------ ------ ------ ------ Total distributions ............................................. (0.53) (1.84) (0.43) (0.09) (0.01) ------ ------ ------ ------ ------ Net asset value, end of period .................................. $16.15 $18.47 $15.51 $12.61 $10.91 ====== ====== ====== ====== ====== Total return .................................................... (9.65)% 31.06% 26.47% 16.42% 2.56%** Net assets, end of period (millions) ............................ $ 51.8 $ 40.6 $ 35.4 $ 7.0 $ 1.1 RATIO OF EXPENSES TO AVERAGE NET ASSETS: Before fees waived and expenses absorbed or recouped .......... 1.28% 1.47% 1.45% 3.41% 15.74%*** After fees waived and expenses absorbed or recouped ........... 1.38% 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) ......... 0.24% 0.63% 0.85% 0.61% 1.14%*** Portfolio turnover rate ......................................... 35% 57% 28% 29% 0%**
* Commencement of operations. ** Not annualized. *** Annualized. See accompanying Notes to Financial Statements. 42 KAYNE ANDERSON RUDNICK GROWTH AND OPPORTUNITY FUND FINANCIAL HIGHLIGHTS For a capital share outstanding throughout each period 07/17/00* THROUGH 12/31/00 -------- Net asset value, beginning of period ............................. $12.92 ------ INCOME FROM INVESTMENT OPERATIONS: Net investment income .......................................... 0.01 Net realized and unrealized loss on investments ................ (3.63) ------ Total loss from investment operations ............................ (3.62) ------ LESS DISTRIBUTIONS: From net investment income ..................................... (0.01) ------ Net asset value, end of period ................................... $ 9.29 ======= Total return ..................................................... (28.02)%** Net assets, end of period (millions) ............................. $ 3.4 RATIO OF EXPENSES TO AVERAGE NET ASSETS: Before fees waived and expenses absorbed or recouped ........... 3.93%*** After fees waived and expenses absorbed or recouped ............ 1.48%*** After fees waived, expenses absorbed or recouped, and paid indirectly .......................................... 1.35%*** RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS (after fees waived, expenses absorbed or recouped, and paid indirectly) ........................................... 0.20%*** Portfolio turnover rate .......................................... 7%** * Commencement of operations. ** Not annualized. *** Annualized. See accompanying Notes to Financial Statements. 43 KAYNE ANDERSON RUDNICK INTERMEDIATE TOTAL RETURN BOND FUND FINANCIAL HIGHLIGHTS For a capital share outstanding throughout each period
YEAR ENDED DECEMBER 31, 10/28/96* ----------------------------------------- THROUGH 2000 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 ......................................... 0.56 0.50 0.51 0.56 0.09 Net realized and unrealized gain (loss) on investments ........ 0.39 (0.57) 0.30 0.18 (0.07) ------ ------ ------ ------ ------ Total income (loss) from investment operations .................. 0.95 (0.07) 0.81 0.74 0.02 ------ ------ ------ ------ ------ LESS DISTRIBUTIONS: From net investment income ..................................... (0.57) (0.49) (0.51) (0.58) (0.08) From net realized gain ......................................... -- (0.01) (0.04) -- -- Total distributions ............................................ (0.57) (0.50) (0.55) (0.58) (0.08) ------ ------ ------ ------ ------ Net asset value, end of period ................................... $10.82 $10.44 $11.01 $10.75 $10.59 ====== ====== ====== ====== ====== Total return ..................................................... 9.40% (0.65)% 7.61% 7.19% 0.20%** Net assets, end of period (millions) ............................. $ 47.1 $ 53.4 $ 28.3 $ 6.3 $ 5.0 RATIO OF EXPENSES TO AVERAGE NET ASSETS: Before fees waived and expenses absorbed or recouped............ 0.82% 1.23% 1.00% 2.23% 2.10%*** After fees waived and expenses absorbed or recouped ............ 0.94% 0.94% 0.94% 0.95% 0.95%*** After fees waived, expenses absorbed or recouped, and paid indirectly................................................ 0.94% 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)............................................... 5.34% 4.94% 4.93% 5.35% 4.72%*** Portfolio turnover rate .......................................... 10%** 64% 49% 27% 0%**
* Commencement of operations. ** Not annualized. *** Annualized. See accompanying Notes to Financial Statements. 44 KAYNE ANDERSON RUDNICK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND FINANCIAL HIGHLIGHTS For a capital share outstanding throughout each period - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 10/28/96* --------------------------------------- THROUGH 2000 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 .............................. 0.49 0.44 0.43 0.34 0.01 Net realized and unrealized gain (loss) on investments ................................... 0.54 (0.48) 0.03 0.11 (0.01) ------ ------ ------ ------ ------ Total income from investment operations .............. 1.03 (0.04) 0.46 0.45 0.00 ------ ------ ------ ------ ------ LESS DISTRIBUTIONS: From net investment income ......................... (0.49) (0.44) (0.43) (0.35) (0.01) ------ ------ ------ ------ ------ Net asset value, end of period ....................... $10.83 $10.29 $10.77 $10.74 $10.64 ====== ====== ====== ====== ====== Total return ......................................... 10.18% (0.44)% 4.37% 4.26% 0.02%** Net assets, end of period (millions) ................. $ 31.4 $ 41.9 $ 9.4 $ 6.0 $ 5.1 RATIO OF EXPENSES TO AVERAGE NET ASSETS: Before fees waived and expenses absorbed or recouped ............................. 0.96% 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 ........ 0.74% 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) .................. 4.63% 4.14% 3.88% 2.58% 0.60%*** Portfolio turnover rate ............................ 33% 65% 47% 40% 0%**
* Commencement of operations. ** Not annualized. *** Annualized. See accompanying Notes to Financial Statements. 45 KAYNE ANDERSON RUDNICK MUTUAL FUNDS NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1 - ORGANIZATION Kayne Anderson Rudnick Mutual Funds (the "Trust") (formerly Kayne Anderson Mutual Funds) 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 six 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), Growth and Opportunity 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 Rud-nick Investment Management, LLC (the "Advisor") (formerly Kayne Anderson Investment Management, LLC) for $25,000, respectively. The Large Cap Fund seeks long-term capital appreciation, with dividend income as a secondary consideration. The Fund invests primarily in equity securities, principally 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, principally 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, principally common stocks, of companies outside the U.S. generally having a total market capitalization of $1 billion or more. The Growth and Opportunity Fund seeks long-term growth of capital. The Fund invests primarily in Equity securities, principally common stocks, of companies generally having a total market capitalization of $3 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. 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 46 KAYNE ANDERSON RUDNICK MUTUAL FUNDS NOTES TO FINANCIAL STATEMENTS-- (Continued) - -------------------------------------------------------------------------------- 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, 2000 the Funds had capital loss carryforwards available for federal income tax purposes as follows: Growth & Intermediate California Capital loss Small Cap Opportunity Total Return Intermediate Tax carryforward Fund Fund Bond Fund Free Bond Fund - ------------ ---- ---- --------- -------------- Expiring in: 2008 $6,730,898 $102,196 $267,489 $127,978 2009 58,000 ---------- -------- -------- -------- $6,730,898* $102,196 $325,489 $127,978 ========== ======== ======== ======== *Utilization of this capital loss carryforward which arose in connection with the tax-free reorganization with Sefton Small Company Value Fund is limited by federal income tax regulations to $838,736 annually. 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 Fund's shares, other than Growth and Opportunity Fund, were 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% Growth and Opportunity Fund 1.00% Intermediate Total Return Bond Fund 0.50% California Intermediate Tax-Free Bond Fund 0.50% 47 KAYNE ANDERSON RUDNICK MUTUAL FUNDS NOTES TO FINANCIAL STATEMENTS-- (Continued) For the year ended December 31, 2000, the Funds incurred the following advisory fees: Large Cap Fund $1,009,765 Small Cap Fund $ 378,861 International Fund $ 493,406 Growth and Opportunity Fund $ 15,484 Intermediate Total Return Bond Fund $ 235,069 California Intermediate Tax-Free Bond Fund $ 156,616 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% Growth and Opportunity Fund 1.50% 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 year ended December 31, 2000, the Advisor waived fees of $38,417 and $66,383 for the Growth and Opportunity Fund and Cali-fornia Intermediate Tax-Free Bond Fund, respectively. For the year ended December 31, 2000, the Advisor recouped fees previously waived and expenses absorbed of $38,042, $58,285 and $54,517 for Small Cap Fund, International Fund and Intermediate Total Return Bond Fund, respectively. At December 31, 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 $ 27,664 International Fund $ 39,737 Growth and Opportunity Fund $ 38,417 Intermediate Total Return Bond Fund $ 75,043 California Intermediate Tax-Free Bond Fund $254,811 48 KAYNE ANDERSON RUDNICK MUTUAL FUNDS NOTES TO FINANCIAL STATEMENTS-- (Continued) At December 31, 2000, the Advisor may recapture a portion of the above amounts no later than the dates as stated below: December 31, ----------------------------- Funds: 2001 2002 2003 - ------ ---- ---- ---- Small Cap Funds $12,965 $14,699 -- International Funds $18,889 $20,848 -- Growth and Opportunity Fund -- -- $38,417 Intermediate Total Return Bond Funds $15,132 $59,911 -- California Intermediate Tax-Free Bond Funds $99,797 $88,631 $66,383 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 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 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. The Growth and Opportunity Fund pays the Administrator a minimum annual fee of $16,000 in which $5,000 is for the first 6 months and $11,000 is for the second 6 months of its first year operations. First Fund Distributors, Inc. (the "Distributor") acts as the Funds' principal underwriter in a continuous public offering of the Funds' shares. The Distributor is an affiliate of the Administrator. Certain officers and Trustees of the Fund are also officers and/or directors of the Advisor. NOTE 4 - PURCHASES AND SALES OF SECURITIES For the year ended December 31, 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 $64,006,135 $55,703,869 Small Cap Fund 22,121,971 35,436,617 International Fund 34,352,910 17,690,091 Growth and Opportunity Fund 4,640,746 198,809 Intermediate Total Return Bond Fund 3,639,204 346,039 California Intermediate Tax-Free Bond Fund 10,398,656 22,329,910 The Intermediate Total Return Bond Fund purchased $972,819 and sold $10,247,316 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, Growth and Opportunity Fund and California Intermediate Tax-Free Bond Fund. 49 KAYNE ANDERSON RUDNICK MUTUAL FUNDS INDEPENDENT AUDITORS' REPORT To the Shareholders and Board of Trustees of Kayne Anderson Rudnick Mutual Funds Los Angeles, California We have audited the accompanying statements of assets and liabilities of Kayne Anderson Rudnick Mutual Funds (comprising, respectively, the Large Cap Fund, the Small Cap Fund, the International Fund, the Intermediate Total Return Bond Fund, the California Intermediate Tax-Free Bond Fund, and the Growth and Opportunity Fund), including the portfolios of investments, as of December 31, 2000, and the related statements of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for each of the periods ended December 31, 1996 were audited by other auditors whose report dated February 4, 1997 expressed an unqualified opinion on the financial highlights. We conducted our audits in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 2000, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the Funds comprising Kayne Anderson Mutual Funds as of December 31, 2000, the results of their operations for the year then ended, the changes in their net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended in conformity with U.S. generally accepted accounting principles. BRIGGS, BUNTING & DOUGHERTY, LLP Philadelphia, Pennsylvania January 19, 2001 50 - -------------------------------------------------------------------------------- ADVISOR KAYNE ANDERSON RUDNICK INVESTMENT MANAGEMENT, LLC 1800 Avenue of the Stars, 2nd Floor Los Angeles, California 90067 (800) 231-7414 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-----