0000950147-01-501592.txt : 20011008
0000950147-01-501592.hdr.sgml : 20011008
ACCESSION NUMBER: 0000950147-01-501592
CONFORMED SUBMISSION TYPE: N-30D
PUBLIC DOCUMENT COUNT: 1
CONFORMED PERIOD OF REPORT: 20010630
FILED AS OF DATE: 20010917
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: 1940 Act
SEC FILE NUMBER: 811-07705
FILM NUMBER: 1738291
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-7448.txt
SEMI-ANNUAL REPORT DATED 06/30/2001
KAYNE ANDERSON RUDNICK
MUTUAL FUNDS
================================================================================
SEMI-ANNUAL REPORT
KAYNE ANDERSON RUDNICK LARGE CAP FUND
KAYNE ANDERSON RUDNICK SMALL-MID 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 Six Months Ended
June 30, 2001
KAYNE ANDERSON RUDNICK MUTUAL FUNDS
TABLE OF CONTENTS
SHAREHOLDER LETTER ........................................................ 1
KAYNE ANDERSON RUDNICK LARGE CAP FUND
Goal .................................................................... 2
Commentary .............................................................. 2
Outlook ................................................................. 3
Schedule of Investments ................................................. 4
KAYNE ANDERSON RUDNICK SMALL-MID 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 ................................................................. 13
Schedule of Investments ................................................. 15
KAYNE ANDERSON RUDNICK GROWTH AND OPPORTUNITY FUND
Goal .................................................................... 18
Commentary .............................................................. 18
Outlook ................................................................. 18
Schedule of Investments ................................................. 19
KAYNE ANDERSON RUDNICK INTERMEDIATE TOTAL RETURN BOND FUND
Goal .................................................................... 21
Commentary .............................................................. 21
Outlook ................................................................. 22
Schedule of Investments ................................................. 23
KAYNE ANDERSON RUDNICK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
Goal .................................................................... 26
Commentary .............................................................. 26
Outlook ................................................................. 27
Schedule of Investments ................................................. 28
STATEMENTS OF ASSETS AND LIABILITIES ...................................... 32
STATEMENTS OF OPERATIONS .................................................. 34
STATEMENTS OF CHANGES IN NET ASSETS ....................................... 36
FINANCIAL HIGHLIGHTS ...................................................... 38
NOTES TO FINANCIAL STATEMENTS ............................................. 44
KAYNE ANDERSON RUDNICK MUTUAL FUNDS
Dear Shareholder:
We are pleased to express appreciation for your investment in the Kayne
Anderson Rudnick Mutual Funds. If you are new to the Kayne Anderson Rudnick
family of investors, we welcome you.
The enclosed semi-annual report contains a commentary and June 30, 2001
financial statements for each of our mutual funds. In each commentary, the
portfolio manager reviews the objectives, performance and outlook for the fund.
We hope that you will find these comments interesting and timely.
As an investment adviser, we have managed private accounts for both equity
and fixed-income investors for many years. We are delighted to be able to offer
our mutual funds to you so that diversification among asset classes can be
readily accomplished. Through these funds, shareholders can structure a
diversified portfolio consistent with their personal investment objectives and
goals.
We thank you again for your investment in the Kayne Anderson Rudnick Mutual
Funds. We are committed to assisting you with the realization of your financial
goals. As always, we welcome your questions and comments.
Sincerely,
/s/ Richard A. Kayne /s/ Allan M. Rudnick
Richard A. Kayne Allan M. Rudnick
Chief Executive Officer Chief Investment Officer
Kayne Anderson Rudnick Investment Management, LLC
1
KAYNE ANDERSON RUDNICK LARGE CAP FUND
GOAL
The KAYNE ANDERSON RUDNICK LARGE CAP FUND portfolio 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 some of the
world's finest companies.
COMMENTARY
Since its inception on May 1, 1995, the Fund has returned 13.77% annually
through June 30, 2001. However, the most recent six months and twelve months
ended June 30, 2001 produced negative returns for the major equity indices and
for our Fund. For such periods, the S&P 500 Index declined 6.70% and 14.83%,
respectively, the Nasdaq Composite Index declined 12.74% and 45.64%,
respectively, and the Fund declined 9.51% and 13.45%, respectively. The markets
declined in large part because of the disappointing corporate earnings results
announced during the period and an uncertain outlook going forward. Nonetheless,
as noted below, we are keeping a long-term view, rather than reacting to current
short-term uncertainties.
The strongest performing economic sectors in the S&P 500 during the quarter
ended June 30, were technology (+12%), capital goods (+12%), and basic materials
(+10%). The weakest sectors were utilities (-6%), communication services (-2%),
and health care (-1%).
Thematically, the strongest areas of the domestic equity markets in the second
quarter were lesser quality (B+ stock ranking, as ranked by Standard & Poors)
and non-rated companies. In addition, the stocks of small to mid size companies
performed much stronger than the larger capitalization equities.
A key point of differentiation between the Fund and the S&P 500 is the Fund's
singular focus on high quality companies. In a weighting of quality, 88% of the
Core Portfolio is invested in companies with stock rankings in the "A" category
(as ranked by Standard & Poors) versus 55% for the S&P 500 (see chart below). In
addition, 100% of the companies in the Core Portfolio have a credit rating of
"A-" to "AAA." (as rated by Standard & Poors.)
WEIGHTS BY QUALITY
A+, A, A- B+ B, B-, C, D NC
--------- ----- ----------- ----
KAR 87.6% 9.0% 3.4% 0.0%
S&P 500 54.7% 18.5% 18.8% 8.0%
Source: Kayne Anderson Rudnick Investment Management, LLC
2
The mission of the Large Cap Fund is to invest for the long-term in outstanding
businesses that possess distinct competitive advantages. These companies
consistently have superior profit margins, high returns on investment, material
free cash flows, and strong balance sheets. We employ a variety of valuation
models, including discounted free cash flow analysis, to determine when the
equities of these companies provide an attractive expected rate of return.
OUTLOOK
The economy has slowed dramatically. The real GDP growth rate has declined from
8.3% at its peak in the fourth quarter of 1999 to 1.2% for the first quarter of
2001. This dramatic deceleration may feel like a recession. However, the economy
continues to show growth, albeit at low levels, and we expect that growth to
continue and improve over time.
In part, our optimistic view relates to consumer spending, which accounts for
two-thirds of the national economic activity. The personal consumption
expenditure component of the gross domestic product (GDP) grew at a relatively
healthy 3.4% annual rate during the first quarter, up from a 2.8% growth rate in
the fourth quarter. Further, we expect to see a rebound in corporate profits to
begin early next year. And, with inflation under control, the Federal Reserve
has continued flexibility to adjust interest rates to help stimulate the
economy.
The external economic environment is currently difficult for corporate profits
in general. However, we believe that, in a year when S&P 500 profits are likely
to be down, the underlying profits of the companies in the Fund should be up,
and the average return on equity should remain high. Looking longer term, we
believe that while profits for the S&P 500 should grow at a mid-to-high
single-digit rate, the profits for the companies in the Large Cap Fund should
grow at solid double-digit rates, providing the underpinning for attractive
growth of investor capital.
Our investment 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 strength of a company's business advantages and the sustainability of those
advantages 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.
--------------------------------------------------------------------------------
Past performance is no indication of future results. The Fund had an average
annual return of 10.84% for the five years ended June 30, 2001. Share prices and
returns fluctuate and shares, when redeemed, may be worth more than their
original cost. Due to market volatility, Fund performance may fluctuate
substantially over the short-term and current performance may differ from that
shown.
3
KAYNE ANDERSON RUDNICK LARGE CAP FUND
SCHEDULE OF INVESTMENTS IN SECURITIES at June 30, 2001 (Unaudited)
SHARES VALUE
--------------------------------------------------------------------------------
COMMON STOCKS: 96.4%
CAPITAL GOODS/ELECTRICAL EQUIPMENT: 8.3%
54,780 Emerson Electric Co. .......................... $ 3,314,190
141,060 General Electric Co. .......................... 6,876,675
------------
10,190,865
------------
CAPITAL GOODS/MANUFACTURING--DIVERSIFIED: 2.3%
45,120 Illinois Tool Works, Inc. ..................... 2,856,096
------------
CONSUMER NON-DURABLES/RESTAURANTS: 4.1%
186,810 McDonald's Corp. .............................. 5,055,079
------------
CONSUMER STAPLES/BEVERAGES: 3.8%
103,360 Coca-Cola Co. ................................. 4,651,200
------------
CONSUMER STAPLES/CONSUMER PRODUCTS: 4.8%
92,550 Procter & Gamble Co. .......................... 5,904,690
------------
CONSUMER STAPLES/FOODS: 2.6%
66,520 Wm. Wrigley, Jr. Co. .......................... 3,116,462
------------
ENERGY/PETROLEUM--INTERNATIONAL: 4.6%
64,170 Exxon Mobil Corp. ............................. 5,605,250
------------
FINANCIAL/BANKING: 3.9%
101,880 Wells Fargo & Co. ............................. 4,730,288
------------
FINANCIAL/FINANCIAL SERVICES: 7.0%
87,600 American Express Co. .......................... 3,398,880
60,920 Fannie Mae .................................... 5,187,338
------------
8,586,218
------------
FINANCIAL/INSURANCE: 7.9%
74,500 American International Group, Inc. ............ 6,407,000
32,240 Marsh & McLennan Companies, Inc. .............. 3,256,240
------------
9,663,240
------------
HEALTH CARE/DRUGS & HOSPITAL SUPPLIES: 14.3%
131,020 Johnson & Johnson ............................. 6,551,000
80,610 Merck & Co., Inc. ............................. 5,151,785
145,700 Pfizer, Inc. .................................. 5,835,285
------------
17,538,070
------------
RAW MATERIALS/CHEMICALS--DIVERSIFIED: 2.7%
67,000 E. I. du Pont de Nemours and Co. .............. 3,232,080
------------
RETAIL/APPAREL: 3.8%
159,600 Gap, Inc. (The) ............................... 4,628,400
------------
4
KAYNE ANDERSON RUDNICK LARGE CAP FUND
SCHEDULE OF INVESTMENTS IN SECURITIES at June 30, 2001 (Unaudited) - (Continued)
SHARES VALUE
--------------------------------------------------------------------------------
RETAIL/BUILDING PRODUCTS: 2.2%
58,100 Home Depot, Inc. (The) ........................ $ 2,704,555
------------
TECHNOLOGY/COMMUNICATIONS--EQUIPMENT: 2.6%
171,600 Cisco Systems, Inc.* .......................... 3,123,120
------------
TECHNOLOGY/COMPUTERS & OFFICE EQUIPMENT: 3.1%
33,810 International Business Machines Corp. ......... 3,820,530
------------
TECHNOLOGY/DATA SERVICES: 3.7%
90,300 Automatic Data Processing, Inc. ............... 4,487,910
------------
TECHNOLOGY/SEMICONDUCTORS: 5.4%
171,560 Intel Corp. ................................... 5,018,130
52,000 Texas Instruments, Inc. ....................... 1,638,000
------------
6,656,130
------------
TECHNOLOGY/SOFTWARE: 7.5%
91,890 Microsoft Corp.* .............................. 6,707,970
130,600 Oracle Corp.* ................................. 2,481,400
------------
9,189,370
------------
TELECOMMUNICATION SERVICES/TELEPHONE: 1.8%
54,200 SBC Communications, Inc. ...................... 2,171,252
------------
TOTAL COMMON STOCKS
(cost $119,120,533) ........................................ 117,910,805
------------
TOTAL INVESTMENTS IN SECURITIES
(cost $119,120,533+): 96.4% ................................ 117,910,805
Other Assets less Liabilities: 3.6% .......................... 4,418,069
------------
NET ASSETS: 100.0% ........................................... $122,328,874
============
* Non-income producing security.
+ At June 30, 2001, 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 ...................... $ 11,963,791
Gross unrealized depreciation ...................... (13,173,519)
------------
Net unrealized depreciation ........................ $ (1,209,728)
============
See accompanying Notes to Financial Statements.
5
KAYNE ANDERSON RUDNICK SMALL-MID CAP FUND
GOAL
The goals of the KAYNE ANDERSON RUDNICK SMALL-MID CAP FUND are:
* To build a diversified portfolio of the next generation of high quality
"blue chip" companies.
* To produce returns typical of small and mid cap stocks, but with no more
risk than the S&P 500 Index of large stocks.
In summary, we strive to buy stocks of high quality companies at discount prices
in order to allow clients to participate in the strong growth of small companies
while assuming less financial and stock market risk.
The following table demonstrates our commitment to these objectives. Our
portfolio combines: (1) quality comparable to the high-quality benchmark, the
S&P 500 Index of large stocks; (2) growth comparable to the high-growth
benchmark, the Russell 2500 Small-Mid Cap Growth Index; and (3) value comparable
to the deep-value benchmark, the Russell 2500 Small Mid Cap Value Index.
KAYNE RUSSELL RUSSELL
ANDERSON RUSSELL RUSSELL S&P 2500(TM) 2500(TM)
RUDNICK 2500(TM) 2000(TM) 500 GROWTH VALUE
QUALITY SMALL-MIDCAP INDEX INDEX INDEX INDEX INDEX
------- ------------ ----- ----- ----- ----- -----
Return on Equity - Past 5 Years 24.9% 15.0% 14.2% 24.4% 16.8% 14.1% MORE PROFITABLE
Long-Term Debt/Total Capital 28.4% 39.0% 36.4% 44.1% 27.8% 48.3% LESS FINANCIAL RISK
Interest Expense Coverage 11.9x 4.8x 5.1x 4.8x 8.4x 3.7x LESS FINANCIAL RISK
Earnings Variance - Past 10 Years 27.8% 64.8% 71.4% 40.7% 79.4% 58.5% MORE DEPENDABLE
A Rated by S&P 56.3% 13.8% 10.9% 53.7% 4.7% 20.9% BETTER QUALITY
GROWTH
------
Earnings Per Share Growth - Past 5 Years 21.2% 13.2% 12.3% 15.5% 22.1% 9.7% RECOVERY
Earnings Per Share Growth - Past 10 Years 18.3% 10.1% 9.9% 15.7% 15.6% 8.5% RECESSION
Dividend Per Share Growth - Past 5 Years 14.0% 7.0% 7.3% 10.8% 7.9% 6.8% RECOVERY
Dividend Per Share Growth - Past 10 Years 13.9% 5.9% 5.6% 10.0% 6.6% 5.8% RECESSION
Capital Generation - {ROE x(1-Payout)} 19.7% 11.5% 11.3% 17.2% 15.6% 9.3% FASTER GROWTH
VALUE
-----
P/E Ratio - Latest 12 months 22.4 27.8 31.1 26.4 61.2 19.6 BETTER VALUE
Dividend Yield 0.9% 1.3% 1.2% 1.3% 0.3% 2.1% COMPARABLE INCOME
MARKET CHARACTERISTICS
----------------------
$ Weighted Average Market Cap - 4 qtr. average $2.9 b $2.1 b $1.0 b $ 90.1 b $2.0 b $2.2 b COMPARABLE SIZE
Largest Market Cap - 4 qtr. average $9.6 b $9.4 b $4.4 b $383.6 b $8.6 b $8.7 b COMPARABLE SIZE
Annualized Standard Deviation - Since Inception 12.6% 16.8% 17.3% 13.8% 25.4% 13.5% LESS MARKET RISK
Note: As of June 30, 2001
Data is obtained from Frank Russell Company and is assumed to be reliable. Other
principal consultant firms use different algorithms to calculate selected
statistics. Estimates are based on certain assumptions and historical
information.
6
COMMENTARY
As seen in the following chart, corporate earnings in 2001 are experiencing
their most serious decline since the 1991 recession. The second quarter of this
year is expected to be the most difficult comparison with a 15% decline in S&P
500 earnings. In this environment, the overall stock market as measured by the
S&P 500 Index has produced a loss for the first half of 2001 and the small-mid
cap market as measured by the Russell 2500 Index has produced a modest gain.
Despite the weak stock market environment, the Small-Mid Cap Fund produced a
12.47% return for the first half of the year. We attribute this result to our
focus on owning the highest quality businesses in America. Regardless of whether
or not corporate earnings recover this year, we believe our portfolio of
companies can generate double-digit earnings growth in this difficult year.
RUSSELL 2000 EARNINGS PER SHARE
[This bar-chart illustrates the earning per share for the Russell
2000 from 1989 through the first half of 2001.]
S&P 500 EARNINGS PER SHARE
[This bar-chart illustrates the earning per share for the S&P 500
from 1989 through the first half of 2001.]
DATA IS OBTAINED FROM FIRST CALL AND IS ASSUMED TO BE RELIABLE.
Two of our holdings, E.W. Blanch and Timberline Software, were sold at losses in
the first six months of 2001. In each case, growth had faltered and we elected
to reinvest the proceeds from these holdings into other companies with stronger
prospects. New additions to the Fund year-to-date include:
* Black Box Corporation - World's leading direct marketer of communication
equipment
* Cintas Corporation - Market leader in the corporate uniform industry
* Cincinnati Financial - The most "agent friendly" insurer according to
Independent Agent Magazine
* Equifax - One of the nation's leading credit reporting agencies
* Hanover Compressor - The nation's largest natural gas compression fleet
serving oil & gas producers
* Insituform Technologies - Global leader in rehabilitation of underground
sewers using trenchless technologies
* Techne - The primary producer of reagent test kits for biotechnology
researchers worldwide
* Teleflex - Manufactures automotive, marine, industrial, aerospace and
medical products with leadership in technical niches
7
OUTLOOK
Small stocks are outperforming large stocks this year despite that small and mid
cap company earnings are suffering more than their large cap counterparts in the
current economic slowdown. We believe this is due to recognition that small
stocks are significantly undervalued compared to large cap stocks. This can be
seen in the first chart below. The value of small and mid cap stocks has
attracted individual and corporate investors alike.
RELATIVE PRICE TO CASH FLOW
[This line chart illustrates the relative price to cash flow from
1977 through June 2000.]
M&A ACTIVITY AMONG SMALLER STOCKS
(MARKET CAPITALIZATION BETWEEN $200 MILLION AND $1 BILLION)
Year Total Deals-Completed & Funding
---- -------------------------------
86 49
87 67
88 63
89 58
90 26
91 22
92 31
93 25
94 58
95 72
96 92
97 181
98 156
99 206
00 126
SOURCE: MERRILL LYNCH SMALL CAP RESEARCH
As the second chart above shows, corporate investors have reacted to the
attractive valuations of small and mid cap stocks via acquisitions. In the
Small-Mid Cap Fund, Dallas Semiconductor agreed to be acquired, at a premium
price, by Maxim Integrated Products this year. Maxim is the second most
profitable semi-conductor company we know, and so, we have elected to hold Maxim
Integrated Products following its acquisition of Dallas Semiconductor.
Our portfolio is selling at a discount valuation compared to both the small cap
and large cap indices, we believe that our companies will experience
double-digit earnings growth while the earnings of many small cap and large cap
stocks are expected to decline. We believe the Fund is well positioned to
perform going forward.
8
KAYNE ANDERSON RUDNICK SMALL-MID CAP FUND
SCHEDULE OF INVESTMENTS IN SECURITIES at June 30, 2001 (Unaudited)
SHARES VALUE
--------------------------------------------------------------------------------
COMMON STOCKS: 99.5%
BASIC MATERIALS/PACKAGING: 3.3%
50,772 Bemis Co. ..................................... $ 2,039,511
10,099 Liqui--Box Corp. .............................. 393,558
------------
2,433,069
------------
BASIC MATERIALS/PAINTS AND COATING: 3.2%
66,120 Valspar Corp. ................................. 2,347,260
------------
BUSINESS EQUIPMENT & SERVICES/TEXTILES: 2.7%
43,440 Cintas Corp. .................................. 2,009,100
------------
CAPITAL GOODS/AEROSPACE & DEFENSE: 1.7%
70,301 HEICO Corp.--Class A .......................... 1,261,903
------------
CAPITAL GOODS/MACHINERY EQUIPMENT: 4.9%
59,807 Federal Signal Corp. .......................... 1,403,670
49,788 Nordson Corp. ................................. 1,319,382
19,260 Teleflex, Inc. ................................ 847,440
------------
3,570,492
------------
CONSTRUCTION/BUILDING AND CONSTRUCTION: 3.1%
62,300 Insituform Technologies, Inc.--Class A* ....... 2,273,950
------------
CONSUMER CYCLICAL/ADVERTISING: 5.0%
119,555 Catalina Marketing Corp.* ..................... 3,647,623
------------
CONSUMER CYCLICAL/FURNITURE: 2.7%
107,572 LA-Z Boy, Inc. ................................ 1,990,082
------------
CONSUMER CYCLICAL/RETAIL: 3.5%
134,700 Claire's Stores, Inc. ......................... 2,607,792
------------
CONSUMER CYCLICAL/SERVICES: 5.8%
69,765 ABM Industries, Inc. .......................... 2,598,746
34,982 Strayer Education, Inc. ....................... 1,705,372
------------
4,304,118
------------
CONSUMER STAPLES/FOOD: 1.4%
26,307 Tootsie Roll Industries, Inc. ................. 1,013,872
------------
9
KAYNE ANDERSON RUDNICK SMALL-MID CAP FUND
SCHEDULE OF INVESTMENTS IN SECURITIES at June 30, 2001 (Unaudited) - (Continued)
SHARES VALUE
--------------------------------------------------------------------------------
ENERGY/OIL AND GAS PRODUCTION: 6.4%
44,529 Devon Energy Corp. ............................ $ 2,337,773
72,315 Hanover Compressor Co.* ....................... 2,392,903
------------
4,730,676
------------
FINANCIAL/BANKS: 6.1%
122,082 National Commerce Financial Corp. ............. 2,975,138
61,195 Washington Federal, Inc. ...................... 1,500,501
------------
4,475,639
------------
FINANCIAL/FINANCIAL SERVICES: 11.6%
51,004 Eaton Vance Corp. ............................. 1,774,939
47,585 Equifax, Inc. ................................. 1,745,418
58,050 FactSet Research Systems, Inc. ................ 2,072,385
47,790 Fair, Isaac and Company, Inc. ................. 2,954,377
2 Franklin Resources, Inc. ...................... 92
------------
8,547,211
------------
FINANCIAL/INSURANCE: 2.5%
46,325 Cincinnati Financial Corp. .................... 1,829,838
------------
HEALTH CARE/DRUGS & HOSPITAL SUPPLIES: 7.6%
34,572 King Pharmaceuticals, Inc.* ................... 1,858,245
39,400 Landauer, Inc. ................................ 1,182,000
78,785 Techne Corp.* ................................. 2,560,513
------------
5,600,758
------------
HEALTH CARE/MEDICAL INFORMATION SYSTEMS: 5.4%
132,440 Hooper Holmes, Inc. ........................... 1,357,510
92,965 IMS Health, Inc. .............................. 2,649,503
------------
4,007,013
------------
TECHNOLOGY/COMPUTERS--INTEGRATED SYSTEMS: 6.6%
102,715 Jack Henry & Associates ....................... 3,184,165
76,162 Reynolds & Reynolds Inc.--Class A ............. 1,671,756
------------
4,855,921
------------
TECHNOLOGY/SEMICONDUCTORS: 3.4%
57,099 Maxim Integrated Products, Inc.* .............. 2,524,347
------------
10
KAYNE ANDERSON RUDNICK SMALL-MID CAP FUND
SCHEDULE OF INVESTMENTS IN SECURITIES at June 30, 2001 (Unaudited) - (Continued)
SHARES VALUE
--------------------------------------------------------------------------------
TECHNOLOGY/SOFTWARE & SERVICES: 8.6%
45,580 Black Box Corp.* .............................. $ 3,070,269
55,570 CSG Systems International, Inc.* .............. 3,223,060
------------
6,293,329
------------
TRANSPORTATION/TRANSPORTATION--SERVICES: 4.0%
104,700 C.H. Robinson Worldwide, Inc. ................. 2,920,083
------------
TOTAL COMMON STOCKS
(cost $59,763,054) ......................................... 73,244,076
------------
TOTAL INVESTMENTS IN SECURITIES
(cost $59,763,054+): 99.5% ................................. 73,244,076
============
Other Assets less Liabilities: 0.5% .......................... 335,813
------------
NET ASSETS: 100.0% ........................................... $ 73,579,889
============
* Non-income producing security.
+ At June 30, 2001, 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 ...................... $ 14,501,406
Gross unrealized depreciation ...................... (1,020,384)
------------
Net unrealized appreciation ........................ $ 13,481,022
============
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 profitability and consistency of earnings. We
seek to diversify the fund across countries and industries but do not aim to
replicate the country allocation of our benchmark, the MSCI EAFE (Europe,
Australia and the Far East) index.
COMMENTARY
For the six-month period ended June 30, 2001, the International Fund's net asset
value fell 19.82% versus a decline of 15.47% for the MSCI EAFE index (in dollar
terms). The portfolio's negative return was in line with the performance of the
MSCI EAFE Growth Index (-19.31%) for the same period. The portfolio outperformed
strongly in April, when it appreciated by 8.25% against a 6.74% increase in the
MSCI EAFE Index. This supports our belief that the portfolio is well positioned
to outperform in a market recovery, when the global economies stabilize, rather
than in a protracted bear market.
During the first part of 2001, the downturn in the international equity markets
that started in March 2000 accelerated, as it became more evident that the U.S.
economic slowdown was spilling over to the rest of the world. A series of profit
warnings reflecting precipitous deteriorating business conditions in various
industries, such as telecommunications equipment and semiconductors, hurt many
stocks even among the best-positioned and financially strong companies.
Over the last six months, Europe was the worst performing geographic area with a
decline of 17.21% (FTSE Eurotop 300 Index) in dollars, outperforming the
Japanese market, which declined 8.26% (MSCI Japan Index) in dollars. Both the
euro and the yen weakened against the US dollar, by 9.81% and 8.16%,
respectively. This occurred despite the US Federal Reserve Bank's series of
aggressive interest rate cuts in 2001. It is our belief that this anomaly
reflects the confidence by investors around the world that US fiscal and
monetary policies will be successful in putting the world's largest economy back
on the growth track. What is good for the US is perceived to be good for the
rest of the world.
There are two primary reasons for the portfolio's year-to-date underperformance.
First, the portfolio was underweighted in Japan-based stocks while overweighted
in Europe-based stocks. On one hand, our underweight position in Japanese stocks
stems from our cautious view about Japan's short-to-medium term economic outlook
and from our difficulty in finding, at reasonable prices, stocks that present
the fundamental quality characteristics we favor for our high-quality portfolio.
On the other hand, our overweight position in continental Europe reflects our
conviction that the region is more advanced than the rest of the world in
achieving structural reforms, corporate restructuring, and adoption of
shareholder- value-creation principles. We perceive these to be the main drivers
of equity performance in the current decade.
More importantly, the portfolio has been overweighted in traditional growth
sectors as opposed to traditional value or deep-value sectors, both in Europe
and Japan. In Europe, stocks belonging to traditional value sectors that do not
present our required quality characteristics have been successful so far this
year. The best performing sectors include mining, oil and gas, tobacco, steel,
and real estate. We are more typically invested in food and beverage, food
retailers, insurance,
12
media, information technologies, and marginally, oil and gas, banks,
pharmaceuticals, software, and telecommunications services. In Japan, the
picture has been similar. Over the past six months, the best performing sectors
were oil and coal, mining, rubber products, maritime transportation, fishing and
farming, transportation equipment, warehousing, and textiles.
During the first six months of this year, fundamental activity in the fund was
restrained. We bought Adecco, Glaxo-Smithkline, and SMC (see below), while we
sold Compass and Shiseido.
Among best performing stocks for the first-half 2001 were Panamco (+44%), Canon
(+22.6%), BHP (+4.8%), Repsol (+4.4%), and Rentokil Initial (-0.6%). Among the
worst performing stock for this period were Alcatel (-62%), Cable & Wireless
(-54%), Nokia (-48%), Zurich Financial Services (-40%), and Vodafone (-37%).
NEW PURCHASES
ADECCO
Based in Switzerland, Adecco is the world's largest staffing company. Its broad
geographic diversification profile should help to weather any significant
slowdown in the U.S. market. Thanks to an aggressive organic expansion strategy,
the company is expected to grow 50% more than the staffing market in general.
Historically, management has proven its superior acquisition and execution
capabilities.
GLAXO-SMITHKLINE
Headquartered in the UK, Glaxo-Smithkline is the world's second largest
pharmaceutical company with leadership positions in five major therapeutic
areas. It enjoys strong research and development capabilities with an annual
budget in excess of $4bn and an early stage pipeline that includes 117
compounds. GSK can also leverage it strong sales force and global reach by
signing co-promotion or licensing agreements with other drug companies, which
has been done already successful by Pfizer or Bristol-Myers Squibb.
SMC
Based in Japan, SMC is a leading manufacturer of automation devices based on
pneumatic technology. The company's unique competitive advantages and
exceptionally strong financial position are supporting an aggressive growth
strategy aimed at seizing 26% share of each of its markets outside Japan, where
it holds 54% market share.
OUTLOOK
The past six months have been unfavorable to equities generally and to large
capitalization growth companies in particular. Only value or deep value stocks
did relatively well. We do not believe this is a sustainable phenomenon. We
believe longer-term fundamentals continue to favor international large
capitalization growth companies, driven by deregulation, restructuring, and
increased attention to shareholder value creation.
13
The International Fund is better positioned for a market recovery than for a
continued market downturn, as we believe the portfolio's strong outperformance
in April confirms. Although the timing of a sustainable recovery is uncertain,
we are looking for early signs of recovery toward the end of this year. We own
some of the best foreign companies. We believe they will, in time, benefit and
emerge stronger from the current difficult environment from which we anticipate
they will, rewarding the patient, serious, long-term investor.
We continue to believe that an investment strategy that focuses exclusively on
the highest quality foreign companies constitutes a long-term winning strategy
for the prudent investor.
--------------------------------------------------------------------------------
Past performance is no indication of future results. Foreign stock markets tend
to be more volatile than the U.S. markets due to economic and political
instability and regulatory conditions in some countries. The Fund had a -27.79%
return for the twelve months year ended June 30, 2001, since the Fund's
inception on October 18, 1996, the Fund has had an average annual return of
7.96% through June 30, 2001. Share prices and returns fluctuate and shares, when
redeemed, may be worth more than their original cost. Due to market volatility,
Fund performance may fluctuate substantially over the short-term and current
performance may differ from that shown.
The MSCI EAFE Index is an unmanaged index that is a 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. The FTSE Eurotop 300 Index measures the performance of
Europe's largest 300 companies based on market capitalization.
14
KAYNE ANDERSON RUDNICK INTERNATIONAL FUND
SCHEDULE OF INVESTMENTS IN SECURITIES at June 30, 2001 (Unaudited)
SHARES VALUE
--------------------------------------------------------------------------------
COMMON STOCKS: 91.8%
AUSTRALIA: 3.1%
86,732 BHP Ltd. ADR .................................. $ 1,886,421
------------
FINLAND: 2.8%
78,022 Nokia Corp. ADR ............................... 1,719,605
------------
FRANCE: 13.2%
9,410 Air Liquide ................................... 1,352,255
65,500 Alcatel ....................................... 1,370,018
63,124 Axa ADR ....................................... 1,778,203
49,070 Groupe Danone ADR ............................. 1,342,064
30,971 Total Fina Elf S.A. ADR ....................... 2,174,164
------------
8,016,704
------------
GERMANY: 4.1%
70,866 SAP AG ADR .................................... 2,486,688
------------
HONG KONG: 2.7%
27,334 HSBC ADR ...................................... 1,637,307
------------
JAPAN: 16.4%
45,000 Canon, Inc. ................................... 1,818,328
105,000 Fujitsu, Ltd. ................................. 1,102,784
60,000 Matsushita Electric Industrial Co. ............ 938,988
176,000 Minebea Co., Ltd. ............................. 1,158,467
210 Nippon Telegraph & Telephone Co. .............. 1,094,364
10,000 SMC Corp. ..................................... 1,070,312
25,000 Sony Corp. .................................... 1,643,550
141,000 Sumitomo Mitsui Banking Corp. ................. 1,164,350
------------
9,991,143
------------
MEXICO: 2.6%
77,091 Panamerican Beverages, Inc. ADR ............... 1,564,947
------------
NETHERLANDS: 10.8%
54,500 Aegon N.V. .................................... 1,534,529
26,137 Heineken N.V. ................................. 1,054,199
30,262 ING Groep N.V. ................................ 1,978,345
63,100 Koninklijke Ahold N.V. ........................ 1,977,049
------------
6,544,122
------------
15
KAYNE ANDERSON RUDNICK INTERNATIONAL FUND
SCHEDULE OF INVESTMENTS IN SECURITIES at June 30, 2001 (Unaudited) - (Continued)
SHARES VALUE
--------------------------------------------------------------------------------
SPAIN: 7.5%
78,510 Endesa S.A. ADR ............................... $ 1,246,739
98,311 Repsol S.A. ADR ............................... 1,637,861
133,598 Telefonica S.A. ............................... 1,647,210
------------
4,531,810
------------
SWEDEN: 0.8%
89,052 Ericsson ADR .................................. 482,662
------------
SWITZERLAND: 10.9%
35,300 Aden SW ....................................... 1,659,930
30,808 Nestle ADR .................................... 1,636,946
62,576 Novartis AG ADR ............................... 2,262,122
3,093 Zurich Financial Services ..................... 1,053,865
------------
6,612,863
------------
UNITED KINGDOM: 16.9%
39,510 Cable & Wireless Plc ADR ...................... 711,180
31,240 Diageo Plc ADR ................................ 1,372,998
40,000 GlaxoSmithKline Plc ........................... 1,128,240
274,613 Invensys Plc ADR .............................. 1,038,916
83,824 Pearson Plc ................................... 1,385,443
538,600 Rentokil Initial Plc .......................... 1,830,540
19,604 Reuters Group Plc ADR ......................... 1,524,211
57,330 Vodafone Group Plc ADR ........................ 1,281,326
------------
10,272,854
------------
TOTAL COMMON STOCKS
(cost $64,314,308) ......................................... 55,747,126
------------
TOTAL INVESTMENTS IN SECURITIES
(cost $64,314,308+): 91.8% ................................. 55,747,126
Other Assets less Liabilities: 8.2% .......................... 4,971,144
------------
NET ASSETS: 100.0% ........................................... $ 60,718,270
============
* Non-income producing security.
+ At June 30, 2001, 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 ...................... $ 2,705,873
Gross unrealized depreciation ...................... (11,273,055)
------------
Net unrealized depreciation ........................ $ (8,567,182)
============
See accompanying Notes to Financial Statements.
16
KAYNE ANDERSON RUDNICK INTERNATIONAL FUND
SCHEDULE OF INVESTMENTS BY INDUSTRY at June 30, 2001 (Unaudited)
INDUSTRY PERCENTAGE
--------------------------------------------------------------------------------
Insurance 7.2%
Oil & Gas 6.3
Diversified Financials 6.0
Communications--Equipment 5.9
Diversified Telecomm Services 5.7
Pharmaceuticals 5.6
Food Products 4.9
Beverages 4.8
Media 4.8
Household Durables 4.2
Software 4.1
Food & Drugs Retailing 3.3
Metals & Mining 3.1
Communication Services & Supplies 3.0
Office Electronics 3.0
Human Resources 2.7
Chemicals 2.2
Wireless Telecomm Services 2.1
Multi-Utilities 2.1
Banks 1.9
Machinery 1.9
Computers & Peripherals 1.8
Hand/Machine Tools 1.8
Beverages--Alcoholic 1.7
Electrical Equipment 1.7
-----
Total Investments in Securities 91.8
Other Assets less Liabilities 8.2
-----
Net Assets 100.0%
=====
17
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
After a rough start in the first quarter, growth stocks rebounded in the second
quarter with positive returns. The S&P 500 Barra Growth Index was up 7.71% in
the second quarter but is still down 11.04% for the six months ended June 30th.
With our focus on quality growth companies and a long-term investment
philosophy, the Growth and Opportunity Fund has outperformed the Growth Index by
decreasing 7.86% for the six months ended June 30, 2001.
At the end of June, the top 10 holdings in the Growth and Opportunity Fund had
returns that showed above-average volatility, both up and down. The stock that
declined the most was a high technology company, Cisco Systems. However, the top
performers in the portfolio were also in the technology sector. Ranking all 28
stocks in the portfolio, the top three performers for the six-month period were
Microsoft (up 68.3% for the six months ended June 30, 2001), AOL Time Warner (up
52.3% for the six months ended June 30, 2001), and Dell Computers (up 50.0% for
the six months ended June 30, 2001). Clearly, the market has made some
distinction among technology stocks. Again, because we focus on quality, the
portfolio was able to outperform, despite the weighting in technology stocks,
because the holdings are more defensive in nature.
Overall, growth stocks outperformed value stocks during the second quarter.
Along with the above-mentioned technology stocks, our holdings in the consumer
cyclical sector such as Home Depot and Gap Stores helped pace the Growth and
Opportunity Fund's return. The poorest performing sector of the Growth and
Opportunity Fund during the quarter was pharmaceutical stocks such as Pfizer and
Schering-Plough.
OUTLOOK
Looking ahead to the second half of the year, we expect the market volatility to
continue as companies adjust their spending and guidance based on the uncertain
economic conditions. Earnings announcements will be a key driving force as
investors react to good and bad news. But just as the lack of economic
visibility has created turmoil for the stock market, it will also provide
periods of opportunity.
As we have said before, the Growth and Opportunity Fund's portfolio is designed
to provide a more aggressive equity strategy as one part 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. Yet, it is our belief that
by owning quality companies at a reasonable price we will be well rewarded by
the market over the long-term. We thank you for your continued confidence.
18
KAYNE ANDERSON RUDNICK GROWTH AND OPPORTUNITY FUND
SCHEDULE OF INVESTMENTS IN SECURITIES at June 30, 2001 (Unaudited)
SHARES VALUE
--------------------------------------------------------------------------------
COMMON STOCK: 83.1%
CAPITAL GOODS/ELECTRICAL EQUIPMENT: 5.7%
4,080 General Electric Co. .......................... $ 198,900
------------
FINANCIAL/FINANCIAL SERVICES: 5.0%
11,410 Schwab (Charles) Corp. ........................ 174,573
------------
HEALTH CARE/DRUGS & HOSPITAL SUPPLIES: 13.0%
1,500 Amgen, Inc.* .................................. 91,020
1,200 Genentech, Inc.* .............................. 66,120
1,200 Guidant Corp.* ................................ 43,200
5,000 Pfizer, Inc. .................................. 200,250
1,500 Schering-Plough Corp. ......................... 54,360
------------
454,950
------------
HEALTH CARE/HEALTH PRODUCTS: 3.3%
2,320 Johnson & Johnson ............................. 116,000
------------
RETAIL/APPAREL: 4.6%
5,485 Gap, Inc. (The) ............................... 159,065
------------
RETAIL/BUILDING PRODUCTS: 5.3%
4,000 Home Depot, Inc. (The) ........................ 186,200
------------
TECHNOLOGY/COMMUNICATIONS--EQUIPMENT: 8.3%
840 Alcatel S.A. .................................. 17,422
7,745 Cisco Systems, Inc.* .......................... 140,959
1,350 JDS Uniphase Corp.* ........................... 17,212
3,215 Nokia Corp. ADR ............................... 70,859
2,305 Tellabs, Inc.* ................................ 44,440
------------
290,892
------------
TECHNOLOGY/COMPUTERS & OFFICE EQUIPMENT: 3.4%
4,070 Dell Computer Corp.* .......................... 105,616
490 EMC Corp.--Mass* .............................. 14,234
------------
119,850
------------
TECHNOLOGY/COMPUTERS--INTEGRATED SYSTEMS: 0.0%
18 McData Corp.* ................................. 316
------------
TECHNOLOGY/INTERNET: 6.1%
4,000 AOL Time Warner, Inc.* ........................ 212,000
------------
19
KAYNE ANDERSON RUDNICK GROWTH AND OPPORTUNITY FUND
SCHEDULE OF INVESTMENTS IN SECURITIES at June 30, 2001 (Unaudited) - (Continued)
SHARES VALUE
--------------------------------------------------------------------------------
TECHNOLOGY/SEMICONDUCTORS: 11.1%
1,495 Applied Materials, Inc.* ...................... $ 73,404
1,985 Broadcom Corp.* ............................... 84,879
5,705 Intel Corp. ................................... 166,871
1,400 Linear Technology Corp. ....................... 61,908
------------
387,062
------------
TECHNOLOGY/SOFTWARE: 14.8%
3,000 Microsoft Corp.* .............................. 217,800
5,120 Oracle Corp.* ................................. 97,280
3,195 SAP AG ADR .................................... 112,113
1,895 Siebel Systems, Inc.* ......................... 88,876
------------
516,069
------------
TELECOMMUNICATION SERVICES/TELECOMMUNICATIONS--LONG DISTANCE: 0.1%
220 WorldCom, Inc.--MCI Group ..................... 3,542
------------
TELECOMMUNICATION SERVICES/TELEPHONE: 2.4%
5,500 WorldCom, Inc.* ............................... 82,280
------------
TOTAL COMMON STOCKS
(cost $3,885,033) .......................................... 2,901,699
------------
TOTAL INVESTMENTS IN SECURITIES
(cost $3,885,033+): 83.1% .................................. 2,901,699
Other Assets less Liabilities: 16.9% ......................... 591,948
------------
NET ASSETS: 100.0% ........................................... $ 3,493,647
============
* Non-income producing security.
+ At June 30, 2001, 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 ...................... $ 109,650
Gross unrealized depreciation ...................... (1,092,984)
------------
Net unrealized depreciation ........................ $ (983,334)
============
See accompanying Notes to Financial Statements.
20
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. The Intermediate Total Return Bond Fund
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
the sectors and maturities of the portfolio in order to capitalize on changing
market conditions.
COMMENTARY
The Federal Open Market Committee (the "Fed") has reduced the Fed Funds Rate six
times this year, from a 6.50% to 3.50% level. While the Fed has been very
aggressive in their earlier rate reductions, the last two shifts were each .25%
rather than the .50% change for each of the previous reductions. This is
signaling to the markets that the Fed is approaching the end of the rate
reduction cycle. Further reductions in the Fed funds rate will be minor monetary
adjustments as opposed to major policy shifts.
U.S. TREASURY YIELD CURVE
This chart shows two lines at 6/30/01 and 12/31/00 for the US Treasury Yield
Curve ranging from 3 months to 23 years.
SOURCE: BLOOMBERG
The Fed's rate reductions have had a major impact on the shape of the yield
curve, shown above. You can easily see that the reduction in rates has been to
the short end of the yield curve, (five years or less), while for the remainder
of the yield curve interest rates have actually increased. The normalizing of
the yield curve is generally considered to be a precursor to economic recovery.
21
The minutes from the May 15th Fed meeting state that "the members anticipated
that a neutral balance of risks could be appropriate before long, probably well
before substantial evidence had emerged that economic growth had strengthened
appreciably...". It is generally accepted that monetary policy shifts take six
to 12 months to have an impact on the economy. This means that the fed rate cuts
in January have only recently begun to impact the economy, and that any
reductions in the rate from here forward will not have an impact on the economy
until well into 2002.
While the impacts of the Fed's prior monetary policy shifts are just beginning
to filter into the economy, we are also feeling the effects of more economic
stimulus in the form the new tax bill. Payroll withholding taxes were lowered
across the country on July 1st, and refunds were first mailed on July 20th. The
Fed believes that the delayed impact of the Fed rate cuts currently in the
pipeline, the lower payroll withholdings, and the refund checks rolling into the
economy in the next quarter will be enough stimulus to get the country moving at
an acceptable pace by 2002.
The Total Return Bond Fund has benefited from its short to neutral duration as
that portion of the yield curve has performed well. During the second quarter we
began reducing our allocation to Treasuries and increasing our allocation in
both the corporate and agency sectors. This allowed us to improve the overall
yield of the fund. We expect to continue this sector move in the near future.
SECTOR DIVERSIFICATION
U.S. TREASURY 40%
AGENCY 19%
INDUSTRIAL 16%
FINANCE 14%
CMO 3%
MORTGAGE-BACKED 6%
CASH & EQUIVALENTS 2%
OUTLOOK
The Fed may continue to reduce the Federal Funds Rate by an additional .25% to
.50% basis points over the next few months. While this will again affect the
short end of the yield curve, we do not expect to see significant reductions in
interest rates beyond ten years in the near future. The Fund is currently
positioned to take advantage of this shift. We also expect to see a reduction in
the CPI, which is always advantageous to bondholders.
22
KAYNE ANDERSON RUDNICK INTERMEDIATE TOTAL RETURN BOND FUND
SCHEDULE OF INVESTMENTS IN SECURITIES at June 30, 2001 (Unaudited)
PRINCIPAL COUPON MATURITY
AMOUNT RATE DATE VALUE
-------------------------------------------------------------------------------------------------
CORPORATE BONDS: 29.3%
AEROSPACE: 0.9%
$ 335,000 Boeing Capital Corp. ...................... 7.100% 09/27/05 $ 352,003
70,000 Honeywell International ................... 9.200% 02/15/03 74,789
------------
426,792
------------
AUTO/TRUCK MANUFACTURER: 2.6%
1,250,000 Daimlerchrysler National Holding Corp. .... 7.200% 09/01/09 1,249,965
------------
BANKS: 2.1%
1,000,000 Citicorp .................................. 6.375% 11/15/08 989,810
------------
BEVERAGES: 3.8%
70,000 Anheuser Busch Companies .................. 6.750% 11/01/06 71,810
236,000 Coca Cola Enterprises, Inc. ............... 6.375% 08/01/01 236,385
1,500,000 Coca-Cola Bottling Co. Consolidated ....... 6.850% 11/01/07 1,478,570
------------
1,786,765
------------
COMMUNICATION SERVICES: 0.4%
175,000 TCI Communications, Inc. .................. 6.375% 05/01/03 177,783
------------
COMPUTERS--MICRO: 1.6%
750,000 Hewlett-Packard Co. ....................... 7.150% 06/15/05 776,478
------------
DEPARTMENT STORES: 0.2%
70,000 Sears Roebuck & Co. ....................... 9.450% 07/25/01 70,146
------------
FINANCE: 14.0%
175,000 Bear Stearns Co. .......................... 6.625% 10/01/04 178,478
825,000 Bear Stearns Co. .......................... 7.800% 08/15/07 869,833
70,000 Beneficial Corp. .......................... 6.600% 09/26/01 70,440
850,000 Boeing Capital Corp. ...................... 5.650% 05/15/06 842,251
1,000,000 Countrywide Home Loans, Inc. .............. 7.450% 09/16/03 1,050,075
300,000 Ford Motor Credit Corp. ................... 6.700% 07/16/04 306,439
500,000 Ford Motor Credit Corp. ................... 9.030% 12/30/09 541,012
1,000,000 General Motors Acceptance Corp. ........... 6.750% 01/15/06 1,016,434
192,000 General Motors Acceptance Corp. ........... 7.125% 05/01/03 197,760
1,000,000 Lehman Brothers Holdings, Inc. ............ 7.250% 10/15/03 1,036,273
500,000 Lehman Brothers Holdings, Inc. ............ 8.750% 05/15/02 516,973
------------
6,625,968
------------
23
KAYNE ANDERSON RUDNICK INTERMEDIATE TOTAL RETURN BOND FUND
SCHEDULE OF INVESTMENTS IN SECURITIES at June 30, 2001 (Unaudited) - (Continued)
PRINCIPAL COUPON MATURITY
AMOUNT RATE DATE VALUE
-------------------------------------------------------------------------------------------------
INDUSTRIALS: 0.4%
$ 175,000 Caterpillar, Inc. ......................... 8.440% 11/26/03 $ 186,842
------------
MOTION PICTURE PRODUCTION & OTHER SERVICES: 2.6%
1,250,000 Walt Disney Co. (The) ..................... 5.500% 12/29/06 1,221,250
------------
RETAIL STORES: 0.7%
300,000 Wal-Mart Stores ........................... 6.550% 08/10/04 312,137
------------
TOTAL CORPORATE BONDS
(cost $13,618,384) 13,823,936
------------
U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS: 68.7%
MORTGAGE-BACKED/PASS-THROUGH SECURITIES: 9.4%
358,205 Federal Home Loan Mortgage Corp. .......... 7.000% 04/01/16 363,670
224,845 Federal Home Loan Mortgage Corp. .......... 7.500% 07/01/09 232,723
545,534 Federal Home Loan Mortgage Corp. .......... 7.500% 04/01/14 563,417
1,400,000 Federal National Mortgage Association ..... 6.000% 08/25/08 1,417,381
384,400 Federal National Mortgage Association ..... 7.000% 05/01/14 391,099
145,310 Federal National Mortgage Association ..... 8.000% 01/01/15 152,598
624,091 Government National Mortgage Association... 7.000% 07/20/13 636,956
8,197 Government National Mortgage Association... 8.000% 11/15/21 8,501
218,284 Government National Mortgage Association... 8.000% 07/15/23 226,381
171,379 Government National Mortgage Association... 8.000% 07/15/23 177,736
88,908 Government National Mortgage Association... 8.000% 09/15/26 92,206
44,738 Government National Mortgage Association... 8.000% 11/15/26 46,397
12,041 Government National Mortgage Association... 8.500% 12/15/22 12,585
90,606 Government National Mortgage Association... 8.500% 08/15/25 94,704
25,488 Government National Mortgage Association... 8.500% 06/15/26 26,640
------------
4,442,994
------------
U.S. AGENCY OBLIGATIONS: 18.9%
1,000,000 Federal Home Loan Bank .................... 5.925% 04/09/08 1,003,756
250,000 Federal Home Loan Bank .................... 6.400% 01/26/11 248,475
1,000,000 Federal Home Loan Mortgage Corp. .......... 6.500% 05/09/11 986,300
600,000 Federal National Mortgage Association ..... 5.625% 05/14/04 609,925
1,000,000 Federal National Mortgage Association ..... 6.000% 03/29/11 966,100
500,000 Federal National Mortgage Association ..... 6.440% 04/08/09 499,063
650,000 Federal National Mortgage Association ..... 6.600% 03/11/09 651,667
1,000,000 Federal National Mortgage Association ..... 6.625% 11/15/10 1,036,481
1,305,000 Federal National Mortgage Association ..... 6.750% 07/30/07 1,329,952
24
KAYNE ANDERSON RUDNICK INTERMEDIATE TOTAL RETURN BOND FUND
SCHEDULE OF INVESTMENTS IN SECURITIES at June 30, 2001 (Unaudited) - (Continued)
PRINCIPAL COUPON MATURITY
AMOUNT RATE DATE VALUE
-------------------------------------------------------------------------------------------------
U.S. AGENCY OBLIGATIONS (CONTINUED)
$ 87,000 Federal National Mortgage Association ..... 6.950% 11/13/06 $ 87,940
1,000,000 Federal National Mortgage Association ..... 6.990% 07/09/07 1,023,148
462,000 Federal National Mortgage Association ..... 7.050% 02/12/07 471,244
------------
8,914,051
------------
U.S. TREASURY OBLIGATIONS: 40.4%
1,500,000 U.S. Treasury Bonds ....................... 7.875% 11/15/04 1,643,083
2,050,000 U.S. Treasury Bonds ....................... 11.875% 11/15/03 2,386,940
1,257,000 U.S. Treasury Notes ....................... 5.625% 05/15/08 1,283,123
700,000 U.S. Treasury Notes ....................... 6.000% 08/15/09 728,171
2,000,000 U.S. Treasury Notes ....................... 6.250% 02/15/07 2,109,524
1,500,000 U.S. Treasury Notes ....................... 6.500% 10/15/06 1,595,795
3,330,000 U.S. Treasury Notes ....................... 7.250% 08/15/04 3,576,870
700,000 U.S. Treasury Notes ....................... 7.500% 05/15/02 721,897
4,650,000 U.S. Treasury Notes ....................... 7.500% 02/15/05 5,061,920
------------
19,107,323
------------
TOTAL U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS
(cost $31,830,796) ............................................................ 32,464,368
------------
TOTAL INVESTMENTS IN SECURITIES
(cost $45,449,180+): 98.0% .................................................... 46,288,304
Other Assets less Liabilities: 2.0% ............................................. 949,265
------------
NET ASSETS: 100.0% .............................................................. $ 47,237,569
============
+ At June 30, 2001, 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 ......................................... $ 992,449
Gross unrealized depreciation ......................................... (153,325)
------------
Net unrealized appreciation ........................................... $ 839,124
============
See accompanying Notes to Financial Statements.
25
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
The Federal Open Market Committee (the "Fed") has reduced the Fed Funds Rate six
times this year, from a 6.50% to 3.50% level. While the Fed has been very
aggressive in their earlier rate reductions, the last two shifts were each .25%
rather than the .50% change for each of the previous reductions. This is
signaling to the markets that the Fed is approaching the end of the
rate-reduction cycle. Further reductions in the Fed funds rate will be minor
monetary adjustments as opposed to major policy shifts.
U.S. TREASURY YIELD CURVE
[This chart shows two lines at 6/30/01 and 12/31/00 for the US
Treasury Yield Curve ranging from 3 months to 24 years.]
SOURCE: BLOOMBERG
The Fed's rate reductions have had a major impact on the shape of the treasury
yield curve, shown above. You can easily see that the reduction in rates has
been to the short end of the yield curve, (five years or less), while for the
remainder of the yield curve interest rates have actually increased. The
normalizing of the yield curve is generally considered to be a precursor to
economic recovery.
The minutes from the May 15th Fed meeting state that "the members anticipated
that a neutral balance of risks could be appropriate before long, probably well
before substantial evidence had emerged that economic growth had strengthened
appreciably...". It is generally accepted that monetary policy shifts take six
to 12 months to have an impact on the economy. This means that the fed rate cuts
in January have only recently begun to impact the economy, and that any
reductions in the rate from here forward will not have an impact on the economy
until well into 2002.
26
While the impacts of the Fed's prior monetary policy shifts are just beginning
to filter into the economy, we are also feeling the effects of more economic
stimulus in the form the new tax bill. Payroll withholding taxes were lowered
across the country on July 1st, and refunds were first mailed on July 20th. The
Fed believes that the delayed impact of the Fed rate cuts currently in the
pipeline, the lower payroll withholdings, and the refund checks rolling into the
economy will be enough stimulus to get the country moving at an acceptable pace
by 2002.
In California, we have been working our way through an electrical crisis, which
made many investors unnecessarily nervous. California is now the fifth largest
economy in the world. Not only is our economy large, it is also geographically
and economically diverse. This has traditionally led to strength in the
California municipal bond market. During the first half of 2001, we have seen a
convergence of the California and national municipal yield curves. While one
might expect that the energy problems in California would have led to the
California market moving to higher yield levels, it has in fact been the
opposite. California has maintained its low yields, and actually moved lower in
the shorter end of the curve, while national bonds have moved to an unusually
expensive level.
NATIONAL VS. CALIFORNIA TAX FREE YIELD CURVES
[This line-chart compares the National vs. California Tax Free
Yield at 12/31 and 6/30 from the years 2002 through 2031.]
SOURCE: BLOOMBERG AND STONE & YOUNGBERG
In the California Tax Free Fund, we have tried to take advantage of nervousness
over the electricity problems by purchasing bonds in the secondary markets at
cheaper levels than were warranted. The tightening of the national yield curve
has led to national funds, as well as our national benchmark, outperforming
California funds for the first half of the year.
OUTLOOK
In January and February of this year, Californians saw electricity prices
averaging over $200 per mega-watt hour; during June the average price was $81
per mega-watt hour. We believe we have weathered the storm. The next major
hurdle is finding a way to get the investor-owned utilities back on their feet.
This may involve another bump in the road for California municipals. If it does,
we will take advantage of the higher yields offered at that time. We believe
that the year will end with California's yield curve in its traditional location
below the national curve as we absorb whatever plan our state government decides
on to correct the situation with the investor-owned utilities, and move forward.
27
KAYNE ANDERSON RUDNICK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS IN SECURITIES at June 30, 2001 (Unaudited)
PRINCIPAL COUPON MATURITY
AMOUNT RATE DATE VALUE
------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS: 99.9%
EDUCATION: 2.9%
$ 155,000 Brentwood Union School District ........................ 7.300% 08/01/07 $ 183,869
765,000 Oakland Unified School District Alameda County ......... 5.000% 08/01/15 774,562
------------
958,431
------------
ELECTRIC: 6.9%
1,000,000 M-S-R Public Power Agency California ................... 6.000% 07/01/20 1,051,250
1,000,000 Northern California Public Power Agency ................ 5.000% 07/01/15 1,012,500
200,000 Sacramento, California Municipal Utilities District .... 5.700% 05/15/12 210,250
------------
2,274,000
------------
GENERAL OBLIGATION: 20.0%
250,000 California State ....................................... 5.250% 06/01/16 253,125
200,000 California State ....................................... 5.375% 03/01/06 215,000
5,000 California State ....................................... 5.375% 03/01/06 5,375
45,000 California State ....................................... 5.375% 03/01/06 47,587
1,000,000 California State ....................................... 5.375% 12/01/16 1,003,750
825,000 California State ....................................... 6.250% 04/01/08 917,812
895,000 California State Veteran Bonds ......................... 5.150% 12/01/14 918,494
200,000 California State Veterans Bonds ........................ 6.375% 02/01/27 200,440
200,000 Los Angeles County, California Public Works ............ 5.000% 10/01/16 203,000
500,000 Newport Beach, California .............................. 3.050% 10/01/22 500,000
1,000,000 Oakland, California .................................... 5.875% 06/15/19 1,062,500
300,000 San Diego, California .................................. 5.000% 05/15/13 306,624
1,000,000 San Mateo Redevelopment Agency ......................... 5.400% 08/01/18 1,000,000
------------
6,633,707
------------
HOSPITALS: 7.8%
1,000,000 California Health Facilities Financing Authority ....... 6.250% 10/01/13 1,026,090
560,000 California Statewide Communities ....................... 3.050% 04/01/28 560,000
1,000,000 Stockton, California Health Facilities ................. 5.350% 12/01/09 1,010,000
------------
2,596,090
------------
HOUSING: 6.3%
800,000 California Housing Finance Agency ...................... 5.900% 08/01/17 830,000
960,000 California Housing Finance Agency ...................... 5.950% 08/01/14 1,011,600
250,000 Orange County California Financing Authority ........... 6.250% 09/01/14 256,007
------------
2,097,607
------------
28
KAYNE ANDERSON RUDNICK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS IN SECURITIES at June 30, 2001 (Unaudited) - (Continued)
PRINCIPAL COUPON MATURITY
AMOUNT RATE DATE VALUE
----------------------------------------------------------------------------------------------------------------
IDR/PCR: 10.7%
$ 200,000 California Pollution Control Financing Authority ......... 5.850% 12/01/23 $ 168,750
290,000 California State Public Works Board Lease Revenue
(community colleges) ..................................... 5.140% 12/01/13 297,613
1,000,000 California State Public Works Board Lease Revenue (FTB)... 5.250% 11/01/20 987,500
300,000 California State Public Works Board Lease Revenue
(Dept. of Corrections) ................................... 5.375% 11/01/13 308,625
510,000 California State Public Works Board Lease Revenue
(Dept. of Justice) ....................................... 5.500% 09/01/09 545,700
1,000,000 Mountain View, California Shoreline Regional Park ........ 5.500% 08/01/21 1,031,250
200,000 Pinole Redevelopment Agency Tax Allocation ............... 5.600% 08/01/17 204,750
------------
3,544,188
------------
PREREFUNDED: 3.7%
1,000,000 California Educational Facilities Authority Revenues
Pomona College ........................................... 6.125% 02/15/08 1,038,200
150,000 Los Angeles Convention & Exhibit Center .................. 9.000% 12/01/20 184,125
------------
1,222,325
------------
TRANSPORTATION: 15.4%
250,000 Long Beach, California Harbor Revenues ................... 6.000% 05/15/06 274,063
1,000,000 Oakland, California Port Authority ....................... 5.600% 11/01/19 1,043,750
750,000 San Francisco, California Bay Area Rapid ................. 5.500% 07/01/15 786,563
1,000,000 San Francisco, California City & County Airport .......... 5.375% 05/01/17 1,021,250
1,000,000 San Francisco, California Port Authority ................. 5.900% 07/01/09 1,072,500
400,000 San Mateo County Transit District ........................ 5.000% 06/01/14 408,500
500,000 Santa Clara Valley Transportation Authority/CA ........... 5.000% 06/01/17 500,000
------------
5,106,626
------------
WATER & SEWER: 26.2%
200,000 California State Department of Water Resources
Center Valley Project .................................... 5.650% 12/01/11 210,500
100,000 Irvine Ranch Water District .............................. 2.750% 09/01/06 100,000
400,000 Irvine Ranch Water District .............................. 2.900% 08/01/09 400,000
700,000 Los Angeles, California Water and Power Revenue .......... 4.500% 07/01/13 680,750
700,000 Los Angeles, California Wastewater System ................ 5.000% 06/01/14 714,875
200,000 Los Angeles, California Wastewater System ................ 5.700% 06/01/20 206,250
1,000,000 Marina, California Municipal Water District .............. 5.550% 07/01/13 1,036,250
100,000 Orange County, California Water District ................. 3.050% 08/15/15 100,000
29
KAYNE ANDERSON RUDNICK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
SCHEDULE OF INVESTMENTS IN SECURITIES at June 30, 2001 (Unaudited) - (Continued)
PRINCIPAL COUPON MATURITY
AMOUNT RATE DATE VALUE
---------------------------------------------------------------------------------------------------------------
WATER & SEWER (CONTINUED)
$1,000,000 Rancho, California Water District Financing Authority ..... 5.875% 11/01/10 $ 1,092,500
1,000,000 Redlands, California Financing Authority .................. 5.000% 09/01/17 1,000,000
1,000,000 San Francisco, California City and County Public Utility... 6.000% 11/01/15 1,027,500
1,000,000 San Jose Clara, California Water .......................... 5.375% 11/15/15 1,031,250
1,000,000 Tulare, California Sewer Revenue .......................... 5.700% 11/15/15 1,062,500
------------
8,662,375
------------
TOTAL MUNICIPAL BONDS
(cost $32,076,116) .......................................................................... 33,095,349
------------
TOTAL INVESTMENTS IN SECURITIES
(cost $32,076,116+): 99.9% .................................................................. 33,095,349
Other Assets less Liabilities: 0.1% ........................................................... 32,301
------------
NET ASSETS: 100.0% ............................................................................ $ 33,127,650
============
+ At June 30, 2001, the basis of investments for federal income tax purposes
was the same a their cost for financial reporting purposes. Unrealized
appreciation and depreciation were as follows:
Gross unrealized appreciation ....................................................... $ 1,104,860
Gross unrealized depreciation ....................................................... (85,627)
------------
Net unrealized appreciation ......................................................... $ 1,019,233
============
See accompanying Notes to Financial Statements.
30
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31
KAYNE ANDERSON RUDNICK MUTUAL FUNDS
STATEMENTS OF ASSETS AND LIABILITIES at June 30, 2001 (Unaudited)
SMALL-MID
LARGE CAP FUND CAP FUND
------------- -------------
ASSETS
Investments in securities, at cost ............................ $ 119,120,533 $ 59,763,054
============= =============
Foreign currency, at cost ..................................... $ -- $ --
============= =============
Investments in securities, at value ........................... $ 117,910,805 $ 73,244,076
Foreign currency, at value .................................... -- --
Cash .......................................................... 6,171,300 1,884,203
Receivables:
Fund shares sold ............................................ -- --
Due from advisor ............................................ -- --
Dividends and interest ...................................... 74,478 73,600
Tax reclaims ................................................ -- --
Prepaid expenses .............................................. -- 6,817
------------- -------------
Total assets ............................................... 124,156,583 75,208,696
------------- -------------
LIABILITIES
Payables:
Securities purchased ....................................... 1,126,341 710,109
Fund shares purchased ...................................... -- --
Distributions to shareholders .............................. 596,089 835,860
Due to advisor ............................................. 73,860 59,804
Accrued expenses .............................................. 31,419 23,034
------------- -------------
Total liabilities .......................................... 1,827,709 1,628,807
------------- -------------
NET ASSETS ...................................................... $ 122,328,874 $ 73,579,889
============= =============
Number of shares issued and outstanding
(unlimited shares authorized, no par value) .................. 7,608,101 3,931,758
------------- -------------
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE.... $ 16.08 $ 18.71
============= =============
COMPONENTS OF NET ASSETS
Paid-in capital ............................................... $ 123,810,046 $ 68,075,592
Accumulated net investment income (loss) ...................... (11,527) (27,961)
Accumulated net realized gain (loss) on investments ........... (259,917) (7,948,764)
Net unrealized appreciation (depreciation) on:
Investments ................................................. (1,209,728) 13,481,022
Foreign currency ............................................ -- --
------------- -------------
Net assets ................................................. $ 122,328,874 $ 73,579,889
============= =============
See accompanying Notes to Financial Statements.
32
CALIFORNIA
GROWTH AND INTERMEDIATE INTERMEDIATE
INTERNATIONAL OPPORTUNITY TOTAL RETURN TAX-FREE
FUND FUND BOND FUND BOND FUND
------------ ------------ ------------ ------------
$ 64,314,308 $ 3,885,033 $ 45,449,180 $ 32,076,116
============ ============ ============ ============
$ 602,864 $ -- $ -- $ --
============ ============ ============ ============
$ 55,747,126 $ 2,901,699 $ 46,288,304 $ 33,095,349
592,301 -- -- --
6,061,883 606,945 234,227 66,604
-- -- 185,000 --
-- 1,044 -- --
85,904 693 778,680 416,216
32,947 40 -- --
11,544 7,749 2,564 --
------------ ------------ ------------ ------------
62,531,705 3,518,170 47,488,775 33,578,169
------------ ------------ ------------ ------------
1,707,924 -- -- 307,253
37,001 -- 203,726 116,083
48,765 -- 26,612 10,425
19,745 24,523 20,868 16,758
------------ ------------ ------------ ------------
1,813,435 24,523 251,206 450,519
------------ ------------ ------------ ------------
$ 60,718,270 $ 3,493,647 $ 47,237,569 $ 33,127,650
============ ============ ============ ============
4,702,144 407,973 4,334,597 3,072,476
------------ ------------ ------------ ------------
$ 12.91 $ 8.56 $ 10.90 $ 10.78
============ ============ ============ ============
$ 69,926,518 $ 5,013,176 $ 46,384,907 $ 31,860,172
(20,840) (17,075) (9,000) 7,802
(613,518) (519,120) 22,538 240,443
(8,567,182) (983,334) 839,124 1,019,233
(6,708) -- -- --
------------ ------------ ------------ ------------
$ 60,718,270 $ 3,493,647 $ 47,237,569 $ 33,127,650
============ ============ ============ ============
33
KAYNE ANDERSON RUDNICK MUTUAL FUNDS
STATEMENTS OF OPERATIONS For the Periods Ended June 30, 2001 (Unaudited)
SMALL-MID
LARGE CAP FUND CAP FUND
------------ ------------
INVESTMENT INCOME
Income
Dividends .................................................................. $ 605,609 $ 287,992
Interest ................................................................... 85,513 25,290
------------ ------------
Total income ............................................................ 691,122 313,282
------------ ------------
Expenses
Advisory fees .............................................................. 458,425 223,749
Registration expense ....................................................... 7,038 6,970
Fund accounting fees ....................................................... 22,186 17,921
Administration fees ........................................................ 29,930 18,148
Transfer agent fees ........................................................ 15,438 10,378
Trustee fees ............................................................... 3,433 3,408
Audit fees ................................................................. 2,497 4,189
Custodian fees ............................................................. 15,413 6,581
Legal fees ................................................................. 4,328 1,460
Reports to shareholders .................................................... 2,459 3,006
Insurance expense .......................................................... 559 204
Miscellaneous .............................................................. 596 1,197
------------ ------------
Total expenses .......................................................... 562,302 297,211
Add: expenses recouped by advisor ....................................... -- 46,399
Less: fees waived and expenses absorbed ................................. -- --
Less: expenses paid indirectly .......................................... -- (124)
------------ ------------
Net expenses ............................................................ 562,302 343,486
------------ ------------
Net investment income (loss) .......................................... 128,820 (30,204)
------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY
Net realized gain (loss) on investments ...................................... 97,793 (1,182,898)
Net realized loss on foreign currency ........................................ -- --
Net unrealized appreciation (depreciation) on:
Investments ................................................................ (12,780,290) 8,142,068
Foreign currency ........................................................... -- --
------------ ------------
Net realized and unrealized gain on investments and foreign currency..... (12,682,497) 6,959,170
------------ ------------
Net increase (decrease) in net assets resulting from operations ....... $(12,553,677) $ 6,928,966
============ ============
* Net of foreign tax withheld of $71,233.
** Net of foreign tax withheld of $181.
See accompanying Notes to Financial Statements.
34
CALIFORNIA
GROWTH AND INTERMEDIATE INTERMEDIATE
INTERNATIONAL OPPORTUNITY TOTAL RETURN TAX-FREE
FUND FUND BOND FUND BOND FUND
------------- ------------ ------------ ------------
$ 434,761* $ 5,284** $ -- $ --
21,174 8,414 1,456,979 797,619
------------- ------------ ------------ ------------
455,935 13,698 1,456,979 797,619
------------- ------------ ------------ ------------
245,682 17,758 118,918 77,179
6,751 5,923 4,582 1,048
21,903 17,841 18,795 21,628
17,917 10,312 16,878 14,932
11,169 8,606 10,063 7,515
3,122 3,559 3,370 3,431
5,798 5,233 3,031 4,091
6,465 443 6,000 3,859
1,877 208 1,510 1,208
2,115 2,123 1,728 364
195 4 224 169
1,299 1,052 3,316 584
------------- ------------ ------------ ------------
324,293 73,062 188,415 136,008
37,080 -- 40,396 --
-- (42,289) -- (18,751)
(4) -- (129) (2,137)
------------- ------------ ------------ ------------
361,369 30,773 228,682 115,120
------------- ------------ ------------ ------------
94,566 (17,075) 1,228,297 682,499
------------- ------------ ------------ ------------
(587,344) (409,815) 348,027 368,421
(24,047) --
(11,056,233) 39,945 (19,015) (500,894)
(7,267) -- -- --
------------- ------------ ------------ ------------
(11,674,891) (369,870) 329,012 (132,473)
------------- ------------ ------------ ------------
$ (11,580,325) $ (386,945) $ 1,557,309 $ 550,026
============= ============ ============ ============
35
KAYNE ANDERSON RUDNICK MUTUAL FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
LARGE CAP FUND SMALL-MID CAP FUND
------------------------------ ------------------------------
SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED
06/30/01# 12/31/00 06/30/01# 12/31/00
------------- ------------- ------------- -------------
INCREASE (DECREASE) IN NET ASSETS FROM:
OPERATIONS
Net investment income (loss) ................................. $ 128,820 $ 409,317 $ (30,204) $ 115,428
Net realized gain (loss) on investments ...................... 97,793 3,862,289 (1,182,898) 6,268,833
Net realized loss on foreign currency ........................ -- -- -- --
Net unrealized appreciation (depreciation) on
Investments ................................................. (12,780,290) (6,686,631) 8,142,068 3,148,118
Foreign currency ............................................ -- -- -- --
------------- ------------- ------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING........ (12,553,677) (2,415,025) 6,928,966 9,532,379
------------- ------------- ------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income ................................... (347,539) (202,125) (19,055) (95,614)
From net realized gain ....................................... (1,042,615) (2,103,740) (2,347,515) (2,984,357)
------------- ------------- ------------- -------------
TOTAL DISTRIBUTIONS ................................... (1,390,154) (2,305,865) (2,366,570) (3,079,971)
------------- ------------- ------------- -------------
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold .................................... 8,280,591 35,673,292 29,409,426 12,857,014
Net asset value of shares issued on reinvestment of
distributions ................................................ 794,065 1,917,678 1,530,710 2,730,421
Cost of shares redeemed ...................................... (4,053,932) (25,122,870) (4,482,351) (26,477,202)
------------- ------------- ------------- -------------
NET INCREASE (DECREASE) FROM CAPITAL SHARE TRANSACTIONS.... 5,020,724 12,468,100 26,457,785 (10,889,767)
------------- ------------- ------------- -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS ............... (8,923,107) 7,747,210 31,020,181 (4,437,359)
NET ASSETS
Beginning of period .......................................... 131,251,981 123,504,771 42,559,708 46,997,067
------------- ------------- ------------- -------------
END OF PERIOD ................................................ $ 122,328,874 $ 131,251,981 $ 73,579,889 $ 42,559,708
============= ============= ============= =============
Accumulated net investment income (loss) ..................... $ (11,527) $ 207,192 $ (27,961) $ 21,298
============= ============= ============= =============
CHANGE IN CAPITAL SHARES
Shares sold .................................................. 503,203 1,928,516 1,625,376 833,907
Shares issued on reinvestment of distributions ............... 48,746 108,938 82,164 170,427
Shares redeemed .............................................. (247,640) (1,349,153) (251,591) (1,698,840)
------------- ------------- ------------- -------------
Net increase (decrease) ........................................ 304,309 688,301 1,455,949 (694,506)
============= ============= ============= =============
* Commencement of operations.
# Unaudited.
See accompanying Notes to Financial Statements.
36
INTERMEDIATE CALIFORNIA
TOTAL RETURN INTERMEDIATE
INTERNATIONAL FUND GROWTH AND OPPORTUNITY FUND BOND FUND TAX-FREE BOND FUND
---------------------------- ---------------------------- ---------------------------- ----------------------------
SIX MONTHS SIX MONTHS 07/17/00* SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED THROUGH ENDED YEAR ENDED ENDED YEAR ENDED
06/30/01# 12/31/00 06/30/01# 12/31/00 06/30/01# 12/31/00 06/30/01# 12/31/00
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
$ 94,566 $ 124,003 $ (17,075) $ 3,078 $ 1,228,297 $ 2,526,002 $ 682,499 $ 1,452,528
(587,344) 1,527,366 (409,815) (109,305) 348,027 (52,824) 368,421 28,652
(24,047) -- -- -- -- -- -- --
(11,056,233) (6,401,952) 34,945 (1,018,279) (19,015) 1,755,943 (500,894) 1,449,699
(7,267) -- -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
(11,580,325) (4,750,583) (391,945) (1,124,506) 1,557,309 4,229,121 550,026 2,930,879
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
(115,406) (78,826) -- (3,078) (1,241,101) (2,554,297) (684,375) (1,444,570)
(13,193) (1,569,846) -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
(128,599) (1,648,672) -- (3,078) (1,241,101) (2,554,297) (684,375) (1,444,570)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
57,403,821 60,195,182 1,616,801 6,611,442 8,761,015 6,193,726 16,170,486 15,967,030
130,116 1,454,588 -- 3,234 547,343 1,744,804 101,106 411,905
(36,935,021) (44,012,108) (1,143,348) (2,074,953) (9,484,428) (15,920,099) (14,362,216) (28,374,555)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
20,598,916 17,637,662 473,453 4,539,723 (176,070) (7,981,569) 1,909,376 (11,995,620)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
8,889,992 11,238,407 81,508 3,412,139 140,138 (6,306,745) 1,775,027 (10,509,311)
51,828,278 40,589,871 3,412,139 -- 47,097,431 53,404,176 31,352,623 41,861,934
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
$ 60,718,270 $ 51,828,278 $ 3,493,647 $ 3,412,139 $ 47,237,569 $ 47,097,431 $ 33,127,650 $ 31,352,623
============ ============ ============ ============ ============ ============ ============ ============
$ (20,840) $ -- $ (17,075) $ -- $ (9,000) $ 3,804 $ 7,802 $ 9,678
============ ============ ============ ============ ============ ============ ============ ============
4,076,437 3,413,087 172,206 535,151 797,715 586,089 1,494,321 1,533,893
10,165 92,252 -- 357 49,963 166,269 9,336 39,528
(2,593,625) (2,493,793) (131,462) (168,279) (863,938) (1,519,193) (1,327,037) (2,745,628)
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
1,492,977 1,011,546 40,744 367,229 (16,260) (766,835) 176,620 (1,172,207)
============ ============ ============ ============ ============ ============ ============ ============
37
KAYNE ANDERSON RUDNICK LARGE CAP FUND
FINANCIAL HIGHLIGHTS For a capital share outstanding throughout each period
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED -----------------------------------------------------
06/30/01# 2000 1999 1998 1997 1996
------- ------- ------- ------- ------- -------
Net asset value, beginning of period ....................... $ 17.97 $ 18.67 $ 17.03 $ 17.28 $ 14.32 $ 12.63
------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .................................... 0.02 0.06 0.04 0.11 0.10 0.08
Net realized and unrealized gain (loss) on investments.... (1.72) (0.44) 2.71 2.38 4.34 2.35
------- ------- ------- ------- ------- -------
Total income (loss) from investment operations ............. (1.70) (0.38) 2.75 2.49 4.44 2.43
------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
From net investment income ............................... (0.05) (0.03) (0.04) (0.11) (0.11) (0.08)
From net realized gain ................................... (0.14) (0.29) (1.07) (2.63) (1.37) (0.66)
------- ------- ------- ------- ------- -------
Total distributions ........................................ (0.19) (0.32) (1.11) (2.74) (1.48) (0.74)
------- ------- ------- ------- ------- -------
Net asset value, end of period ............................. $ 16.08 $ 17.97 $ 18.67 $ 17.03 $ 17.28 $ 14.32
======= ======= ======= ======= ======= =======
Total return ............................................... (9.51)%** (2.00)% 16.33% 14.14% 30.99% 19.09%
Net assets, end of period (millions) ....................... $ 122.3 $ 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 ..... 0.92%+ 0.90% 1.03% 1.11% 1.18% 1.37%
After fees waived and expenses absorbed or recouped ...... 0.92%+ 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)..... 0.21%+ 0.30% 0.28% 0.57% 0.55% 0.59%
Portfolio turnover rate .................................. 11%** 42% 33% 76% 51% 23%
# Unaudited
** Not annualized.
+ Annualized.
See accompanying Notes to Financial Statements.
38
KAYNE ANDERSON RUDNICK SMALL-MID CAP FUND
FINANCIAL HIGHLIGHTS For a capital share outstanding throughout each period
SIX MONTHS YEAR ENDED DECEMBER 31, 10/18/96*
ENDED --------------------------------------- THROUGH
6/30/01# 2000 1999 1998 1997 12/31/96
------ ------ ------ ------ ------ ------
Net asset value, beginning of ............................. $17.19 $14.82 $15.04 $13.12 $11.06 $10.65
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ................................... 0.01 0.04 0.07 0.05 0.02 0.02
Net realized and unrealized gain on investments ......... 2.14 3.54 0.47 2.07 2.14 0.41
------ ------ ------ ------ ------ ------
Total income from investment operations ................... 2.15 3.58 0.54 2.12 2.16 0.43
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
From net investment income .............................. (0.01) (0.04) (0.07) (0.05) (0.05) (0.02)
From net realized gain .................................. (0.62) (1.17) (0.69) -- (0.05) --
From paid-in capital .................................... -- -- -- (0.15) -- --
------ ------ ------ ------ ------ ------
Total distributions ....................................... (0.63) (1.21) (0.76) (0.20) (0.10) (0.02)
------ ------ ------ ------ ------ ------
Net asset value, end of period ............................ $18.71 $17.19 $14.82 $15.04 $13.12 $11.06
====== ====== ====== ====== ====== ======
Total return .............................................. 12.47%** 24.77% 3.64% 16.17% 19.46% 4.00%**
Net assets, end of period (millions) ...................... $ 73.6 $ 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..... 1.13%+ 1.20% 1.34% 1.35% 3.22% 18.91%+
After fees waived and expenses absorbed or recouped ..... 1.30%+ 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).... (0.11)%+ 0.26% 0.53% 0.38% 0.45% 1.58%+
Portfolio turnover rate ................................... 4%** 50% 50% 28% 47% 0%**
* Commencement of operations.
** Not annualized.
+ Annualized.
# Unaudited.
See accompanying Notes to Financial Statements.
39
KAYNE ANDERSON RUDNICK INTERNATIONAL FUND
FINANCIAL HIGHLIGHTS For a capital share outstanding throughout each period
SIX MONTHS YEAR ENDED DECEMBER 31, 10/18/96*
ENDED --------------------------------------- THROUGH
06/30/01# 2000 1999 1998 1997 12/31/96
------ ------ ------ ------ ------ ------
Net asset value, beginning of period ......................... $16.15 $18.47 $15.51 $12.61 $10.91 $10.65
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ...................................... 0.03 0.03 0.12 0.08 0.04 0.01
Net realized and unrealized gain (loss) on investments...... (3.23) (1.82) 4.68 3.25 1.75 0.26
------ ------ ------ ------ ------ ------
Total income (loss) from investment operations ............... (3.20) (1.79) 4.80 3.33 1.79 0.27
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
From net investment income ................................. (0.04) (0.03) (0.12) (0.08) (0.05) (0.01)
From net realized gain ..................................... -- (0.50) (1.72) (0.35) (0.04) --
------ ------ ------ ------ ------ ------
Total distributions .......................................... (0.04) (0.53) (1.84) (0.43) (0.09) (0.01)
------ ------ ------ ------ ------ ------
Net asset value, end of period ............................... $12.91 $16.15 $18.47 $15.51 $12.61 $10.91
====== ====== ====== ====== ====== ======
Total return ................................................. (19.82)%** (9.65)% 31.06% 26.47% 16.42% 2.56%**
Net assets, end of period (millions) ......................... $ 60.7 $ 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........ 1.25%+ 1.28% 1.47% 1.45% 3.41% 15.74%+
After fees waived and expenses absorbed or recouped......... 1.40%+ 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)....... 0.37%+ 0.24% 0.63% 0.85% 0.61% 1.14%+
Portfolio turnover rate ...................................... 8%** 35% 57% 28% 29% 0%**
* Commencement of operations.
** Not annualized.
+ Annualized.
# Unaudited.
See accompanying Notes to Financial Statements.
40
KAYNE ANDERSON RUDNICK GROWTH AND OPPORTUNITY FUND
FINANCIAL HIGHLIGHTS For a capital share outstanding throughout each period
SIX
MONTHS 07/17/00*
ENDED THROUGH
06/30/01# 12/31/00
------ ------
Net asset value, beginning of period ......................................... $ 9.29 $12.92
------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ...................................................... -- 0.01
Net realized and unrealized loss on investments ............................ (0.73) (3.63)
------ ------
Total loss from investment operations ........................................ (0.73) (3.62)
------ ------
LESS DISTRIBUTIONS:
From net investment income ................................................. -- (0.01)
Net asset value, end of period ............................................... $ 8.56 $ 9.29
====== ======
Total return ................................................................. (7.86)%** (28.02)%**
Net assets, end of period (millions) ......................................... $ 3.5 $ 3.4
RATIO OF EXPENSES TO AVERAGE NET ASSETS:
Before fees waived and expenses absorbed or recouped ....................... 4.11%+ 3.93%+
After fees waived and expenses absorbed or recouped ........................ 1.73%+ 1.48%+
After fees waived, expenses absorbed or recouped, and paid indirectly....... 1.73%+ 1.35%+
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS
(after fees waived, expenses absorbed or recouped, and paid indirectly)..... (0.96)%+ 0.20%+
Portfolio turnover rate ...................................................... 16%** 7%**
* Commencement of operations.
** Not annualized.
+ Annualized.
# Unaudited.
See accompanying Notes to Financial Statements.
41
KAYNE ANDERSON RUDNICK INTERMEDIATE TOTAL RETURN BOND FUND
FINANCIAL HIGHLIGHTS For a capital share outstanding throughout each period
SIX MONTHS YEAR ENDED DECEMBER 31, 10/18/96*
ENDED --------------------------------------- THROUGH
06/30/01# 2000 1999 1998 1997 12/31/00
------ ------ ------ ------ ------ ------
Net asset value, beginning of period ....................... $10.82 $10.44 $11.01 $10.75 $10.59 $10.65
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .................................... 0.04 0.56 0.50 0.51 0.56 0.09
Net realized and unrealized gain (loss)
on investments ......................................... 0.08 0.39 (0.57) 0.30 0.18 (0.07)
------ ------ ------ ------ ------ ------
Total income (loss) from investment
operations ............................................... 0.12 0.95 (0.07) 0.81 0.74 0.02
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
From net investment income ............................... (0.04) (0.57) (0.49) (0.51) (0.58) (0.08)
From net realized gain ................................... -- -- (0.01) (0.04) -- --
------ ------ ------ ------ ------ ------
Total distributions ...................................... (0.04) (0.57) (0.50) (0.55) (0.58) (0.08)
------ ------ ------ ------ ------ ------
Net asset value, end of period ............................. $10.90 $10.82 $10.44 $11.01 $10.75 $10.59
====== ====== ====== ====== ====== ======
Total return ............................................... 3.41%** 9.40% (0.65)% 7.61% 7.19% 0.20%**
Net assets, end of period (millions) ....................... $ 47.2 $ 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...... 0.79%+ 0.82% 1.23% 1.00% 2.23% 2.10%+
After fees waived and expenses absorbed or recouped....... 0.96%+ 0.94% 0.94% 0.94% 0.95% 0.95%+
After fees waived, expenses absorbed or recouped,
and paid indirectly ...................................... 0.96%+ 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) .................................... 5.16%+ 5.34% 4.94% 4.93% 5.35% 4.72%+
Portfolio turnover rate..................................... 22%** 10% 64% 49% 27% 0%**
* Commencement of operations.
** Not annualized.
+ Annualized.
# Unaudited.
See accompanying Notes to Financial Statements.
42
KAYNE ANDERSON RUDNICK CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
FINANCIAL HIGHLIGHTS For a capital share outstanding throughout each period
SIX MONTH YEAR ENDED DECEMBER 31, 10/28/96*
ENDED --------------------------------------- THROUGH
06/30/01# 2000 1999 1998 1997 12/31/96
------ ------ ------ ------ ------ ------
Net asset value, beginning of period ........................ $10.83 $10.29 $10.77 $10.74 $10.64 $10.65
------ ------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income ..................................... 0.24 0.49 0.44 0.43 0.34 0.01
Net realized and unrealized gain (loss) on investments..... (0.05) 0.54 (0.48) 0.03 0.11 (0.01)
------ ------ ------ ------ ------ ------
Total income from investment operations ..................... 0.19 1.03 (0.04) 0.46 0.45 0.00
------ ------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
From net investment income ................................ (0.24) (0.49) (0.44) (0.43) (0.35) (0.01)
------ ------ ------ ------ ------ ------
Net asset value, end of period .............................. $10.78 $10.83 $10.29 $10.77 $10.74 $10.64
====== ====== ====== ====== ====== ======
Total return ................................................ 1.75%** 10.18% (0.44)% 4.37% 4.26% 0.02%**
Net assets, end of period (millions) ........................ $ 33.1 $ 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 ...... 0.88%+ 0.96% 1.37% 2.23% 2.29% 2.08%+
After fees waived and expenses absorbed or recouped ....... 0.76%+ 0.75% 0.75% 0.77% 1.56% 1.81%+
After fees waived, expenses absorbed or recouped,
and paid indirectly ...................................... 0.75%+ 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) ..................................... 4.42%+ 4.63% 4.14% 3.88% 2.58% 0.60%+
Portfolio turnover rate ..................................... 40%** 33% 65% 47% 40% 0%**
* Commencement of operations.
** Not annualized.
+ Annualized.
# Unaudited.
See accompanying Notes to Financial Statements.
43
KAYNE ANDERSON RUDNICK MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS (Unaudited)
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 - Mid
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-Mid Cap Fund,
the International Fund, the Intermediate Total Return Bond Fund and the
California Intermediate Tax-Free Bond Fund to Kayne Anderson Rudnick 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, usually common stocks, of companies generally having a total market
capitalization of $1 billion or more.
The Small - Mid Cap Fund seeks long-term capital appreciation, with
dividend income as a secondary consideration. The Fund invests primarily in
equity securities, usually common stocks, of small and mid-capitalization
companies which the Fund currently considers to be companies having a total
market capitalization of not more than $3 billion.
The International Fund seeks long-term capital appreciation, with dividend
income as a secondary consideration. The Fund invests primarily in equity
securities, usually common stocks, of companies outside the U.S. generally
having a total market capitalization of $1 billion or more.
The Growth and Opportunity Fund seeks long-term growth of capital. The Fund
invests primarily in equity securities, usually 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. 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 accounting
principles generally accepted in the United States of America.
44
KAYNE ANDERSON RUDNICK MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS (Unaudited) - (Continued)
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. Securities traded on an exchange or Nasdaq for which
there have been no sales and other over-the-counter securities are valued
at the mean between the bid and asked prices. Securities for which market
quotations are not readily available, if any, are valued by an independent
pricing service or determined following procedures approved by the Board of
Trustees. Short-term investments are valued at amortized cost, which
approximates market value.
B. FEDERAL INCOME TAXES: It is the Funds' policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of their taxable income to
shareholders. Therefore, no federal income tax provision is required.
At June 30, 2001 the Funds had capital loss carryforwards available for
federal income tax purposes as follows:
Intermediate California
Growth & Total Intermediate
Capital loss Small - Mid Opportunity Return Tax-Free
carryforward Cap Fund Fund Bond Fund 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. ACCOUNTING ESTIMATES: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America 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.
45
KAYNE ANDERSON RUDNICK MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS (Unaudited) - (Continued)
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 - Mid 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%
For the six months ended June 30, 2001, the Funds incurred the following
advisory fees:
Large Cap Fund $458,425
Small - Mid Cap Fund $223,749
International Fund $245,682
Growth and Opportunity Fund $ 17,758
Intermediate Total Return Bond Fund $118,918
California Intermediate Tax-Free Bond Fund $ 77,179
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:
Small - Mid 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 period ended June 30, 2001, the Advisor waived fees
and paid expenses of $42,289 and $18,751 for the Growth and Opportunity Fund and
California Intermediate Tax-Free Bond Fund, respectively. For the period ended
June 30, 2001, the Advisor recouped fees previously waived and expenses absorbed
of $46,399, $37,080 and $40,396 for Small - Mid Cap Fund, International Fund and
Intermediate Total Return Bond Fund, respectively.
46
KAYNE ANDERSON RUDNICK MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS (Unaudited) - (Continued)
At June 30, 2001, the amount available for reimbursement that has been paid
and/or waived by the Advisor on behalf of the Funds are as follows:
International Fund $ 2,657
Growth and Opportunity Fund $ 80,706
Intermediate Total Return Bond Fund $ 34,647
California Intermediate Tax-Free Bond Fund $273,562
At June 30, 2001, the Advisor may recapture a portion of the above amounts
no later than the dates as stated below:
December 31,
----------------------------------------
Funds: 2001 2002 2003 2004
------ ------- ------- ------- -------
International Funds $ -- $ 2,657 $ -- --
Growth and Opportunity Fund -- -- $38,417 $42,289
Intermediate Total Return Bond Funds $ -- $34,647 $ -- --
California Intermediate Tax-Free Bond Funds $99,797 $88,631 $66,383 $18,751
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 of 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.
47
KAYNE ANDERSON RUDNICK MUTUAL FUNDS
NOTES TO FINANCIAL STATEMENTS (Unaudited) - (Continued)
NOTE 4 - PURCHASES AND SALES OF SECURITIES
For the period ended June 30, 2001, 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 $15,716,015 $13,045,017
Small - Mid Cap Fund $26,981,290 $ 2,172,707
International Fund $19,206,493 $ 4,023,661
Growth and Opportunity Fund $ 496,859 $ 534,642
Intermediate Total Return Bond Fund $11,864,751 $ --
California Intermediate Tax-Free Bond Fund $14,843,578 $12,326,821
The Intermediate Total Return Bond Fund purchased $7,779,890 and sold
$10,055,906 in U.S. Government securities. There were no purchases or sales of
U.S. Government securities by Large Cap Fund, Small - Mid Cap Fund,
International Fund, Growth and Opportunity Fund and California Intermediate
Tax-Free Bond Fund.
48
================================================================================
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. Due to market volatility, fund performance
may fluctuate substantially over short-term and current performance may differ
from that shown. 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.