-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KUO2dzD403PVjKKoG0+WZK3UIRC1EfkCF+nKOgrVKVG40nWwreQu+cIC+76/PWLl m495fceyEWK6KylYsbCZJQ== 0000950147-98-000185.txt : 19980313 0000950147-98-000185.hdr.sgml : 19980313 ACCESSION NUMBER: 0000950147-98-000185 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980312 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KAYNE ANDERSON MUTUAL FUNDS CENTRAL INDEX KEY: 0001018593 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-07705 FILM NUMBER: 98564472 BUSINESS ADDRESS: STREET 1: 1800 AVENUE OF THE STARS, 2ND FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90067 MAIL ADDRESS: STREET 1: 1800 AVENUE OF THE STARS, 2ND FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90067 N-30D 1 FORM N-30D Kayne Anderson Mutual Funds TABLE OF CONTENTS - -------------------------------------------------------------------------------- LETTER TO SHAREHOLDERS................................................ 2 INVESTMENT ADVISER COMMENTS AND PORTFOLIOS OF INVESTMENTS Rising Dividends Fund........................................ 3 Small-Mid Cap Rising Dividends Fund.......................... 9 International Rising Dividends Fund.......................... 15 Intermediate Total Return Bond Fund.......................... 21 Intermediate Tax-Free Bond Fund.............................. 25 STATEMENTS OF ASSETS AND LIABILITIES.................................. 30 STATEMENTS OF OPERATIONS.............................................. 32 STATEMENTS OF CHANGES IN NET ASSETS................................... 34 FINANCIAL HIGHLIGHTS.................................................. 36 NOTES TO FINANCIAL STATEMENTS......................................... 38 Dear Shareholder: Once again we are pleased to express our appreciation for your investment in the Kayne Anderson Mutual Funds. If you are new to the Kayne Anderson family of investors, we welcome you. This annual report contains financial statements for each of the Funds for the period ended December 31, 1997. In addition, there are portfolio manager comments on the individual Funds which state the goals and objectives of each Fund, and the portfolio manager's 1997 commentary and outlook. We hope that you will find these comments interesting and timely. As investment advisors, we have managed private accounts for both equity and fixed-income investors for many years. We are delighted to be able to offer these Mutual Funds for our clients 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 family of No-Load Mutual Funds. We at Kayne Anderson are committed to assisting shareholders with the realization of their financial goals. As always, we welcome your questions and comments. Sincerely, /s/ Richard A. Kayne /s/ Allan M. Rudnick Richard A. Kayne, Allan M. Rudnick Chairman President 2 Kayne Anderson Rising Dividends Fund ------------------------------------ Objective: - --------- The investment goals of the Rising Dividends Fund are to own high-quality growth stocks which have relatively low debt, which keep pace in rising stock markets, outperform during weak stock markets, and provide rising dividend income. We adhere to a disciplined investment approach that allows us to pursue above-average growth with generally lower volatility than the general market. The stocks we own are high-quality growth companies that are industry leaders. Many of them could be characterized as "visionary companies" with well-defined core ideologies that drive their organization. These ideologies keep management and employees focused, and product development and corporate growth on track. If we conclude that the company is not maintaining its focus, we will sell the stock. Commentary: - ---------- The last six months of 1997 was a time of increased volatility in global equity markets. U.S. fixed-income markets performed well, as the interest rate on the 30-year bellwether treasury bond yielded 5.87%--the lowest level since October 1993. U.S. stocks reacted positively to this news, as well as to the nation's status as the "safe haven" for global investing. In addition, U.S. corporate profits continued to advance in line with recent forecasts. At the end of the year the fund was most heavily weighted in the technology and consumer staples sectors. We feel that the fund is well positioned in the technology sector to benefit from global trends. In the fourth quarter of 1997, both Intel and Linear Technology were added to the portfolio. After visiting Intel, we believe in the company's continued ability to lead the computer chip industry in design capabilities and process technology. Regarding Linear Technology, we like the fact that by focusing on proprietary high performance analog semiconductors products that are designed into various manufacturer's products, the company is able to produce industry-leading profit margins, returns on capital, and free cash flow from a debt free balance sheet. In the consumer staples sector the fund continues to hold positions in companies such as Coca-Cola and Gillette. Another major holding in the portfolio is CPC International, which became Bestfoods at the beginning of 1998 when it spun off its corn refining business to shareholders. The packaged foods business, owning brands such as Knorr, Best Foods, Hellman's, and Entenmann's was renamed Bestfoods. The financial sector continues to be one of the best performing sectors in the fund. This sector includes banks, money managers and insurance companies, all of which performed well in 1997. Financial services companies such as State Street and Franklin Resources benefited from the structural redirection of savings into mutual funds. Outlook: - ------- The questions we are most often asked at this time are: "Will the Asian economic crisis affect our economy significantly so as to cause U.S. corporate earnings to suffer materially? And, further, "Will the U.S. stock market in general catch "the Asian Flu" and have a major decline in the coming months?" To understand the answer, we would highlight two key fundamental economic trends that we believe are still very much in force and which argue in favor of continued positive stock and bond markets in 1998. The Consumer 3 Price Index (CPI), a proxy for inflation, has been steadily declining since 1991. We attribute this to three basic causes. First, the Federal Reserve Board has been very diligent in allowing the money supply to grow only enough to support moderate growth with little inflation. Second, the significant advances in communication and technology have provided dramatic improvements in labor productivity. Third, the globalization of production ensures that products are sourced from the lowest cost plant locations, helping to keep a lid on consumer prices. As long as inflation is under control, interest rates will be in a positive trend, and bonds and stocks will have favorable underpinnings. The other key statistic is Manufacturers' New Orders. This consistently positive growth rate stands in stark contrast to the negative or, at best, extremely cyclical trends of other major established economies. The U.S. economy is the stalwart juggernaut that plows forward. Investors around the world have come to realize that the U.S. alone stands out for stability, consistency and dependability--hence, its "safe haven" status. The Asian crisis could cause a slight reduction in Manufacturers' New Orders. But, whereas 18.2% of Japan's trade is conducted with newly industrializing nations in Asia, only 11.3% of U.S. trade falls into this category. Therefore, even a 20% loss in trade with those countries should affect only approximately 2% of our total trade. Indeed, an updated International Monetary Fund (IMF) report, published in the first week of December 1997, said that "the Asian turmoil will have little effect on the U.S., Canada and Western Europe. Buoyant domestic demand in those nations outweighs the negative effects of diminished trade and investment in Asia." The IMF prediction for the U.S. is in line with comments by Federal Reserve Chairman, Alan Greenspan, who said that the effect of the Asian crisis on the U.S. would be "modest." Based on conversations with companies across the globe, our outlook for the U.S. economy in 1998 is for another year of moderate growth and mild inflation. Continued job creation will add upward pressure on wages, but prices of many goods will be flat or down in response to excess global capacity and slow growth in global demand. Given this fundamental outlook, we would expect U.S. equities to continue to respond positively. However, as we have been writing over the past year or two, we would not be surprised to see a 10% or more correction in U.S. stock prices at any given time. This would create a "buying opportunity" in some of the superbly managed, high-quality growth companies in our universe of rising dividend, low-debt companies. We continue to focus our research efforts on these companies that have excellent management teams which are gaining market share, have proven franchises in their individual industries and where we have conviction that the companies are undervalued relative to their expected growth rates in the 1998-99 time-frame. We thank you for your support and welcome any questions or comments on the information in this report. 4 COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE KAYNE ANDERSON RISING DIVIDENDS FUND AND THE S&P 500 INDEX. Average Annual Total Return One Year Since Inception 30.99% 26.71% Kayne Anderson Rising Dividends S & P 500 Fund Index ---------------- --------- 01 May 95 $10,000 $10,000 30 Jun 95 10,394 10,641 30 Sep 95 11,089 11,487 31 Dec 95 12,065 12,180 31 Mar 96 12,810 12,834 30 Jun 96 13,249 13,410 30 Sep 96 13,689 13,824 31 Dec 96 14,368 14,977 31 Mar 97 14,719 15,378 30 Jun 97 17,137 18,059 30 Sep 97 17,879 19,411 31 Dec 97 18,821 19,969 Past performance is not predictive of future performance. 5 Kayne Anderson Rising Dividends Fund
PORTFOLIO OF INVESTMENTS at December 31, 1997 - -------------------------------------------------------------------------------------------------------- Shares COMMON STOCKS: 105.0% Market Value - -------------------------------------------------------------------------------------------------------- Basic Materials / Chemicals: 6.8% 23,470 Du Pont (E.I.) de Nemours..................................... $ 1,409,667 17,280 PPG Industries, Inc........................................... 987,120 ----------- 2,396,787 ----------- Capital Goods / Electrical Equipment: 9.8% 12,200 Emerson Electric Company...................................... 688,537 12,000 General Electric Company...................................... 880,500 13,260 Minnesota Mining & Manufacturing Company...................... 1,088,149 8,350 W.W. Grainger Corporation..................................... 811,516 ----------- 3,468,702 ----------- Communication Services / Telecommunications: 1.8% 9,150 Intel Corporation............................................. 642,787 ----------- Consumer Cyclical / Entertainment & Leisure: 2.5% 9,000 The Walt Disney Company....................................... 891,563 ----------- Consumer Cyclical / Publishing & Broadcasting: 2.8% 15,940 Gannett Company, Inc.......................................... 985,291 ----------- Consumer Cyclical / Restaurants: 4.5% 33,460 McDonald's Corporation........................................ 1,597,715 ----------- Consumer Cyclical / Services: 2.4% 22,080 Cintas Corporation............................................ 861,120 ----------- Consumer Staples / Beverages: 4.7% 12,040 Coca-Cola Company............................................. 802,165 11,500 Nestle S.A. ADR............................................... 862,962 ----------- 1,665,127 ----------- Consumer Staples / Consumer Products: 8.7% 8,370 Gillette Company.............................................. 840,662 29,260 Kimberly-Clark Corporation.................................... 1,442,884 10,000 Procter & Gamble Company...................................... 798,125 ----------- 3,081,671 ----------- 6
Kayne Anderson Rising Dividends Fund
PORTFOLIO OF INVESTMENTS at December 31, 1997, Continued - ------------------------------------------------------------------------------------------------------ Shares Market Value - ------------------------------------------------------------------------------------------------------ Consumer Staples / Foods: 5.2% 8,190 CPC International, Inc........................................ $ 882,473 12,000 Wm. Wrigley, Jr., Company..................................... 954,750 --------- 1,837,223 --------- Energy / Gas: 7.2% 12,000 Exxon Corporation............................................. 734,250 16,220 Mobil Corporation............................................. 1,170,881 11,640 Royal Dutch Petroleum Corporation............................. 630,742 --------- 2,535,873 --------- Financial / Banking: 5.2% 10,500 Fifth Third Bancorp........................................... 858,375 25,000 Norwest Corporation........................................... 965,625 --------- 1,824,000 --------- Financial / Financial Services: 8.5% 25,060 Equifax, Inc.................................................. 888,064 12,120 Franklin Resources, Inc....................................... 1,053,682 18,000 State Street Boston Corporation............................... 1,047,375 --------- 2,989,121 --------- Financial / Insurance: 4.5% 3,850 General Re Corporation........................................ 816,200 10,300 Marsh & McLennan Cos., Inc.................................... 767,994 --------- 1,584,194 --------- Health Care / Drugs & Hospital Supplies: 13.4% 9,350 Abbott Laboratories........................................... 613,009 1 Astra AB-ADR, Class A......................................... 17 27,120 Johnson & Johnson............................................. 1,786,530 19,100 Medtronic, Inc................................................ 999,169 12,410 Merck & Company, Inc.......................................... 1,318,563 --------- 4,717,288 --------- Technology / Computers & Office Equipment: 4.1% 12,100 Hewlett-Packard Company....................................... 756,250 12,020 Linear Technology Corporation................................. 692,652 --------- 1,448,902 ---------
7 Kayne Anderson Rising Dividends Fund
PORTFOLIO OF INVESTMENTS at December 31, 1997, Continued - -------------------------------------------------------------------------------------------------------- Shares Market Value - -------------------------------------------------------------------------------------------------------- Technology / Data Services: 8.6% 19,920 Automatic Data Processing, Inc................................ $ 1,222,590 24,990 Electronic Data Systems Corporation........................... 1,097,998 10,510 Reuters Holdings PLC, ADR..................................... 696,288 ----------- 3,016,876 ----------- Technology / Telecommunications Equipment: 4.3% 26,410 Motorola, Inc................................................. 1,507,021 ----------- Total Common Stocks (cost $25,178,750)........................ 37,051,261 ----------- Total Investments in Securities (cost $25,178,750+): 105.0%... 37,051,261 Liabilities less Other Assets: (5.0%)......................... (1,768,737) ----------- Net Assets: 100.0% ........................................... $35,282,524 =========== + Cost for Federal income tax purposes is $25,180,898. Net unrealized appreciation consists of: Gross unrealized appreciation................................. $12,110,959 Gross unrealized depreciation................................. (240,596) ----------- Net unrealized appreciation............................. $11,870,363 ===========
See accompanying Notes to Financial Statements. 8 Kayne Anderson Small-Mid Cap Rising Dividends Fund -------------------------------------------------- Objective: - --------- The objective of the Small-Mid Cap Rising Dividends Fund is long-term capital appreciation. The Fund seeks to achieve this objective by: o Building a diversified portfolio of the next generation of high quality "blue chip" companies. o Seeking returns typical of small and mid sized stocks, but with no more risk than the S&P 500 Index of large stocks. In summary, we strive to buy stock in high quality companies at discount prices in order to allow clients to participate in the strong growth of small and mid sized companies while assuming less financial and stock market risk. Our commitment to these objectives is demonstrated by the following table:
- -------------------------------------------------------------------------------------------- Small-Mid Cap Russell 2500 Rising Dividends Index Fund Quality - -------------------------------------------------------------------------------------------- Return on Equity - Past 5 Years 23.2% 14.1% More Profitable Long - Term Debt / Total Capital 26.8% 41.1% Less Financial Risk - -------------------------------------------------------------------------------------------- Growth - -------------------------------------------------------------------------------------------- Earnings Per Share Growth - Past 5 Years 20.1% 14.6% Faster Growth Dividend Per Share Growth - Past 5 Years 20.1% 7.8% Faster Growth - -------------------------------------------------------------------------------------------- Value - -------------------------------------------------------------------------------------------- Price / Earnings Ratio - Latest 12 Months 21.1 23.9 Better Value Dividend Yield 1.2% 1.4% Comparable Income - -------------------------------------------------------------------------------------------- Market Characteristics - -------------------------------------------------------------------------------------------- Average Stock Market Capitalization $ 1,520 $ 1,630 Comparable Size Standard Deviation - Since Inception 12.7% 13.6% Less Market Risk - -------------------------------------------------------------------------------------------- Note: As of December 31, 1997. Data is obtained from the Frank Russell Company and Zephyr Style Advisor and is assumed to be reliable. S&P 500 standard deviation is 16.0%. - --------------------------------------------------------------------------------------------
Commentary: - ---------- Stocks of small and mid sized companies, as measured by the Russell 2500 Index, trailed large stocks, as measured by the S&P 500 Index in 1997. In light of the turmoil in Southeast Asian economies and currencies that erupted in the second half of 1997, we are surprised by the lagging performance. Small stocks, as an asset class, generally have less exposure to foreign economies than large stocks. We would normally expect their performance to benefit when the domestic economy is strong and foreign economies are suffering as is currently the case. 9 Small-Mid Cap Rising Dividends Fund Russell 2500 Index - ----------------------------------- ------------------ Basic Materials 10% Basic Materials 10% Capital Goods 17% Capital Goods 8% Consumer Cyclicals 4% Consumer Cyclicals 16% Consumer Staples 8% Consumer Staples 3% Energy 5% Energy 7% Financial 23% Financial 22% Healthcare 10% Healthcare 9% Technology 15% Technology 12% Transportation 2% Transportation 4% Utilities 5% Utilities 9% Cash 1% Cash 0% The above charts show that: 1) the Fund is nearly fully invested and 2) compared to the Russell 2500 Index, the Fund is over-weighted in Capital Goods and under-weighted in Consumer Cyclicals. The over-weighting and under-weighting are driven by value and are tactical rather than structural. As a result of the turmoil in Southeast Asian economies, the stocks of fine Capital Goods companies such as Diebold, Federal Signal, Nordson, and Wireless Telecom have been marked down out of concern for their business in that part of the world. These particular Capital Goods companies have relatively modest exposure to Asia. We believe investors have over-reacted to the potential earnings impact. The Consumer Cyclical sector has been under-weighted to provide funds for these positions. Outlook: - ------- 1997 was the 4th consecutive year of lagging stock performance for small and mid sized companies compared to large companies. This multi-year period of lagging performance has created compelling value in the group. The value can be seen in the following 10 year chart of relative price/earnings ratio for the stocks comprising the Kayne Anderson Small-Mid Cap Rising Dividends Fund. That is, the price/earnings ratio of our current portfolio divided by the price/earnings ratio of the S&P 500 Index of large stocks. Compelling value on its own is not enough to create leading performance. If, however, the overseas economic and currency turmoil continues, small companies with domestic orientation and strong profitability from consistently growing, low debt businesses should benefit economically. And the combination of compelling value and improving economics can create leading performance. These characteristics are common to our portfolio of Small-Mid Cap Rising Dividends companies. 10 Relative Price / Earnings Ratio 1/88 138.28% 1/89 143.14% 1/90 122.00% 1/91 120.00% 1/92 112.00% 1/93 102.00% 1/94 96.52% 1/95 120.62% 1/96 109.68% 1/97 102.98% 1/98 100.17% Price/earnings ratio for the stocks currently in the Small-Mid Cap Rising Dividends Fund divided by the price/earnings ratio of the Standard & Poors 500 Index. Source: CompuStat COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE KAYNE ANDERSON SMALL-MID CAP RISING DIVIDENDS FUND AND THE RUSSELL 2500 INDEX. Average Annual Total Return One Year Since Inception 19.46% 19.78% Kayne Anderson Small-Mid Cap Rising Dividends Russell 2500 Fund Index ---------------- ------------ 18 Oct 96 $10,000 $10,000 31 Dec 96 10,400 10,627 31 Mar 97 10,127 10,271 30 Jun 97 11,387 11,823 30 Sep 97 12,854 13,520 31 Dec 97 12,424 13,215 Past performance is not predictive of future performance. 11 Kayne Anderson Small-Mid Cap Rising Dividends Fund
PORTFOLIO OF INVESTMENTS at December 31, 1997 - -------------------------------------------------------------------------------------------------------- Shares COMMON STOCKS: 99.0% Market Value - -------------------------------------------------------------------------------------------------------- Basic Materials / Packaging: 9.6% 6,639 Bemis Company................................................. $ 292,531 8,246 Liqui-Box Corporation......................................... 331,902 --------- 624,433 --------- Basic Materials / Specialty Chemicals: 0.1% 576 Hach Company, Class A......................................... 5,400 --------- Capital Goods / Electronic Equipment: 9.1% 6,356 Diebold, Inc.................................................. 321,773 43,162 Wireless Telecommunications Group, Inc........................ 267,065 --------- 588,838 --------- Capital Goods / Machinery Equipment: 3.5% 4,947 Nordson Corporation........................................... 226,944 --------- Capital Goods / Miscellaneous: 4.6% 13,786 Federal Signal Corporation.................................... 298,122 --------- Consumer Cyclical / Services: 4.1% 6,906 Cintas Corporation............................................ 269,334 --------- Consumer Staples / Food: 4.5% 4,700 Tootsie Roll Industries, Inc.................................. 293,806 --------- Consumer Staples / Food Chain: 3.7% 13,278 Smart & Final, Inc............................................ 239,004 --------- Energy / Oil & Gas Production: 5.2% 8,739 Devon Energy Corporation...................................... 336,452 --------- Finance / Banking: 5.8% 1,971 National Commerce Bancorp..................................... 69,478 9,785 Washington Federal, Inc....................................... 307,616 --------- 377,094 ---------
12 Kayne Anderson Small-Mid Cap Rising Dividends Fund
PORTFOLIO OF INVESTMENTS at December 31, 1997, Continued - -------------------------------------------------------------------------------------------------------- Shares Market Value - -------------------------------------------------------------------------------------------------------- Finance / Financial Services: 6.8% 3,990 Eaton Vance Corporation....................................... $ 150,622 11,792 United Asset Management Corporation........................... 288,167 --------- 438,789 --------- Finance / Insurance: 10.2% 8,351 American Heritage Life Investment Corporation................. 300,636 1,002 HSB Group, Inc................................................ 55,298 10,306 Mutual Risk Management, Ltd................................... 308,536 --------- 664,470 --------- Health Care / Drugs & Hospital Supplies: 10.2% 13,214 Ballard Medical Products...................................... 320,439 16,509 Mylan Labs, Inc............................................... 345,657 --------- 666,096 --------- Technology / Computer & Office Equipment: 5.0% 17,470 Reynolds & Reynolds, Inc., Class A............................ 322,103 --------- Technology / Semiconductors: 5.1% 5,743 Linear Technology Corporation................................. 330,940 --------- Technology / Software & Services: 4.7% 25,088 Timberline Software Corporation............................... 308,902 --------- Transportation / Courier Services: 1.9% 4,000 Air Express International Corporation......................... 122,000 --------- Utilities / Cable Television: 4.8% 6,813 TCA Cable TV, Inc............................................. 313,398 --------- Total Common Stocks (cost $6,067,704)......................... 6,426,125 --------- Total Investments in Securities (cost $6,067,704+): 99.0%..... 6,426,125 Other Assets less Liabilities: 1.0%........................... 67,826 --------- Net Assets: 100.0% ........................................... $ 6,493,951 =========
13 Kayne Anderson Small-Mid Cap Rising Dividends Fund
PORTFOLIO OF INVESTMENTS at December 31, 1997, Continued - -------------------------------------------------------------------------------------------------------- Market Value - -------------------------------------------------------------------------------------------------------- +Cost for Federal income tax purposes is the same. Net unrealized appreciation consists of: Gross unrealized appreciation................................. $ 701,698 Gross unrealized depreciation................................. (343,277) --------- Net unrealized appreciation............................. $ 358,421 =========
See accompanying Notes to Financial Statements. 14 Kayne Anderson International Rising Dividends Fund -------------------------------------------------- Objective: - --------- The goal of the International Rising Dividends Fund is to achieve superior long-term results by investing in the best high-quality international companies. We pursue this goal through a focused investment philosophy that is composed of the following five principles: (1) a commitment to quality; (2) long-term vision; (3) independent fundamental research; (4) broad diversification; and (5) a disciplined investment process. We define quality companies as those possessing a global competitive advantage, management excellence, financial strength and flexibility, a high level of profitability and consistency of earnings. We seek to diversify the fund across countries and industries but do not aim to replicate the country allocation of our benchmark, the MSCI EAFE (Europe, Australia, and the Far East) index. Commentary: - ---------- For the year ended December 31, 1997, the Fund's total return was 16.42%, which compares to the MSCI EAFE index return of only 2.06% and the average return of the International Mutual Funds tracked by Lipper Analytical of 11.57%. The European equity markets, which combined account for 67.2% of the EAFE index, were very strong, increasing an average of 21.6%. The Japanese market, which alone accounts for 25.2% of the EAFE index, declined by 24.2%. In 1997, the U.S. dollar appreciated significantly versus most foreign currencies; it rose 10% against the Yen to 127 Yen/$, 17% against the German Mark to 1.79 DM/$, and 4% against the British Pound to 1.67 $/UK Pound. The strength of the dollar did not prevent investors from achieving good returns on their European investments, as it helped to improve the competitive position of many foreign companies and hence their earnings growth prospects. At the end of December 1997, 5.7% of the Fund's assets were invested in short-term money market instruments. In addition, the four largest countries represented in the Fund were the United Kingdom (27.0%), France (13.5%), Switzerland (10.4%), and the Netherlands (10.2%). During the year the Fund's exposure to Japan remained limited at less than 10% of total assets. Far from hurting the Fund's performance, this very selective allocation to Japan actually had a positive contribution to annual performance. 15 The country allocation of the Fund at December 31, 1997 was: Spain 5.5% UK 27.0% Sweden 3.8% France 13.5% Japan 6.8% Switzerland 10.4% Netherlands 10.2% Hong Kong 8.0% Malaysia 1.4% Australia 3.2% Finland 4.5% Cash 5.7% The main event of 1997 was the currency turmoil that erupted in many Southeast Asian countries in July, triggering a general sell-off in emerging markets and market corrections in most developed markets. We are not underestimating the short-term impact of the Asian crisis; however, we believe that the long-term consequences will be minimal. The Fund showed good resilience in the face of recent market weaknesses. We note that as a rule, the Fund's exposure to emerging markets is achieved almost exclusively through its multinational companies' operations in the newly industrialized regions of the world. We have found that the great majority of the managers in these companies consider the crisis in Asia to be an opportunity to strengthen their market positions in the region for the long-term. Outlook: - ------- We strongly believe that the best time to invest internationally is when short-term uncertainty creates long-term doubt. The 1997 Asian crisis is offering investors precisely that kind of opportunity. We maintain that the long-term prospects for international equities are excellent. Many of the best-managed foreign companies are restructuring their operations, increasing their focus on their core businesses, and adopting shareholder-friendly attitudes, in a process that American companies began ten or fifteen years ago. This is a powerful positive trend that we believe will continue to develop over the next five to ten years as the market recognizes the greater value of the stocks of these proactive companies. Our conservative and disciplined investment approach should provide investors with the necessary comfort to remain committed to the international equity asset class for the long-term. 16 COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND AND THE MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALIA AND FAR EAST INDEX. Average Annual Total Return One Year Since Inception 16.42% 15.89% Kayne Anderson Morgan Stanley International Capital International Rising Dividends Europe, Australia and Fund Far East Index ---------------- --------------------- 18 Oct 96 $10,000 $10,000 31 Dec 96 10,256 10,269 31 Mar 97 10,604 10,116 30 Jun 97 11,949 11,436 30 Sep 97 12,306 11,363 31 Dec 97 11,940 10,480 Past performance is not predictive of future performance. 17 Kayne Anderson International Rising Dividends Fund
PORTFOLIO OF INVESTMENTS at December 31, 1997 - -------------------------------------------------------------------------------------------------------- Shares COMMON STOCKS: 94.3% Market Value - -------------------------------------------------------------------------------------------------------- Australia: 3.2% 12,000 Broken Hill Proprietary ADR................................... $ 222,000 --------- Finland: 4.5% 4,500 Nokia Corporation ADR......................................... 315,000 --------- France: 13.5% 5,370 AXA S.A. ADR.................................................. 209,430 7,390 Groupe Danone S.A. ADR........................................ 264,193 6,000 Louis Vuitton Moet Hennessey ADR.............................. 198,750 5,000 Total S.A. ADR................................................ 277,500 --------- 949,873 --------- Hong Kong: 8.0% 56,000 Hong Kong & China Gas Company Ltd. ADR........................ 108,405 1,050 Hong Kong & Shanghai Banking PLC ADR.......................... 258,832 9,526 Hong Kong Telecom, Ltd. ADR................................... 196,474 --------- 563,711 --------- Japan: 6.8% 1,000 Kao Corporation ADR........................................... 144,592 10,600 Nintendo Company Ltd. ADR..................................... 130,439 1,000 Rohm Company.................................................. 101,877 1,400 Seven Eleven Japan ADR........................................ 99,491 --------- 476,399 --------- Malaysia: 1.4% 40,000 Genting Berhad ADR............................................ 100,192 --------- Netherlands: 10.2% 10,000 Elsevier N.V. ADR............................................. 322,500 4,000 Polygram N.V. ADR............................................. 190,750 3,200 Unilever N.V. ADR............................................. 199,800 --------- 713,050 --------- Spain: 5.5% 9,400 Endesa S.A. ADR............................................... 170,963 5,000 Repsol S.A. ADR............................................... 212,812 --------- 383,775 ---------
18 Kayne Anderson International Rising Dividends Fund
PORTFOLIO OF INVESTMENTS at December 31, 1997, Continued - -------------------------------------------------------------------------------------------------------- Shares Market Value - -------------------------------------------------------------------------------------------------------- Sweden: 3.8% 15,400 Astra AB-ADR, Class A......................................... $ 264,688 --------- Switzerland: 10.4% 3,400 Nestle S.A. ADR............................................... 255,137 3,000 Novartis AG ADR............................................... 243,735 2,300 Roche Holdings, Ltd., ADR..................................... 228,730 --------- 727,602 --------- United Kingdom: 27.0% 12,000 BAT Industries PLC ADR........................................ 225,000 7,000 Cable & Wireless PLC ADR...................................... 190,312 9,000 Diageo PLC ADR................................................ 340,875 1,950 Marks and Spencer PLC ADR..................................... 115,314 15,000 Pearson PLC ADR............................................... 194,979 4,640 Rentokil Initial PLC ADR...................................... 205,371 2,500 Reuters Holding PLC ADR....................................... 165,625 3,000 Siebe PLC ADR................................................. 112,545 9,000 Tomkins PLC ADR............................................... 172,125 2,400 Vodafone Group PLC ADR........................................ 174,000 --------- 1,896,146 --------- Total Common Stocks (cost $6,196,298)......................... 6,612,436 --------- Total Investments in Securities (cost $6,196,298+): 94.3%..... 6,612,436 Other Assets less Liabilities: 5.7%........................... 399,860 --------- Net Assets: 100.0% ........................................... $ 7,012,296 =========
+Cost for Federal income tax purposes is the same. Net unrealized appreciation consists of: Gross unrealized appreciation................................. $ 723,103 Gross unrealized depreciation................................. (306,965) --------- Net unrealized appreciation............................. $ 416,138 =========
See accompanying Notes to Financial Statements. 19 Kayne Anderson International Rising Dividends Fund
PORTFOLIO OF INVESTMENTS BY INDUSTRY at December 31, 1997 - -------------------------------------------------------------------------------------------------------- Industry Percentage - -------------------------------------------------------------------------------------------------------- Amusement & Recreation Services............................ 1.4% Audio/Video Home Products.................................. 2.7% Beverages.................................................. 11.2% Books...................................................... 4.6% Cigarettes................................................. 3.2% Communications Equipment................................... 4.5% Cosmetics & Personal Care.................................. 2.1% Crude Petroleum & Natural Gas.............................. 10.2% Dolls, Toys, Games & Sports................................ 5.6% Drugs...................................................... 10.5% Electric Services.......................................... 4.0% Electronic Components & Accessories........................ 1.6% Electronic Industrial Apparatus............................ 1.5% Family Clothing Stores..................................... 1.6% Grocery & Related Products................................. 2.9% Grocery Stores............................................. 1.4% Holding Offices............................................ 6.7% Miscellaneous Manufacturing Industries..................... 2.9% Newspapers................................................. 2.8% Services Allied with Exchange of Security.................. 2.4% Surgical, Medical, Dental Instruments & Supplies........... 2.5% Telephone Communications................................... 8.0% ------ Total Investments............................................. 94.3% Other Assets less Liabilities................................. 5.7% ------ Net Assets.................................................... 100.0% ======
See accompanying Notes to Financial Statements. 20 Kayne Anderson Intermediate Total Return Bond Fund -------------------------------------------------- Objective: - --------- The objective of the Intermediate Total Return Bond Fund is to seek maximum total return through current income with capital appreciation as a secondary consideration. The Fund seeks to achieve its objective by investing primarily in high quality, intermediate maturity debt securities. Studies show that intermediate maturity debt securities can, over time, achieve a majority of the return of long-term maturity debt without the associated level of risk. Commentary: - ---------- During 1997, the fund share's net asset value increased $0.16, from $10.59 to $10.75. After fund expenses, the total-return, principal gain or loss with income, was 7.2% for the Fund and 7.9% for the Lehman Brothers Intermediate Government/Corporate Bond Index. As of mid-year, after slightly more than eight months of operations, fund assets were fully invested in intermediate maturity taxable bond securities. By year-end the three largest sectors represented in the Fund were: U.S. Treasury (45%), Finance (17%), and Industrial (17%). The three largest individual credits held in the portfolio were U.S Treasury (45%), Government National Mortgage Association (9%), and Federal National Mortgage Association (4%). SECTOR DIVERSIFICATION DECEMBER 31, 1997 U.S. TREASURY 45% AGENCY 4% CASH & EQUIVALENTS 5% FINANCE 17% INDUSTRIAL 17% ASSET-BACKED 3% MORTGATE-BACKED 9% 21 Outlook: - -------- The Federal Reserve is expected to keep its current policy stance towards the level of interest rates for the near future. Interest rates are expected to continue their long-term decline, although we expect some short-term volatility capable of going against this trend. COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND AND THE LEHMAN BROTHERS GOVERNMENT/CORPORATE INTERMEDIATE BOND INDEX. Average Annual Total Return One Year Since Inception 7.19% 6.27% Kayne Anderson Lehman Brothers Intermediate Gov't/Corp. Total Return Intermediate Bond Fund Bond Index -------------- --------------- 10/28/96 $10,000 $10,000 12/30/96 10,020 10,077 03/31/97 9,948 10,064 06/30/97 10,249 10,403 09/30/97 10,525 10,723 12/31/97 10,741 10,984 Past performance is not predictive of future performance. 22 Kayne Anderson Intermediate Total Return Bond Fund
PORTFOLIO OF INVESTMENTS at December 31, 1997 - ------------------------------------------------------------------------------------------------------ Principal Amount LONG-TERM DEBT SECURITIES: 95.4% Market Value - ------------------------------------------------------------------------------------------------------ ASSET-BACKED RECEIVABLES: 3.2% ------------------------------------------------------------ $ 200,000 WFS Financial Owner Trust, 6.800%, due 12/20/2003........... $ 202,872 --------- CORPORATE BONDS: 34.2% ------------------------------------------------------------ Finance: 17.4% 200,000 Bear Stearns Co., 6.625%, due 10/01/2004.................... 201,060 200,000 Beneficial Corp., 6.600%, due 9/26/2001..................... 201,940 200,000 Capital One Bank, 6.730%, due 6/04/1998..................... 200,562 75,000 Ford Motor Credit Corp., 6.250%, due 11/08/2000............. 75,108 200,000 General Motors Acceptance Corp., 7.125%, due 5/01/2003...... 207,691 200,000 Household Finance Co., 8.000%, due 8/15/2004................ 205,567 --------- 1,091,928 --------- Industrial: 16.8% 200,000 Allied Signal, Inc., 9.200%, due 2/15/2003.................. 225,913 200,000 Anheuser-Busch Companies, 6.750%, due 11/01/2006............ 202,397 200,000 Coca-Cola Enterprises, 6.375%, due 8/01/2001................ 201,640 200,000 Sears Roebuck Co., 9.450%, due 7/25/2001.................... 220,220 200,000 Walt Disney Company, 6.375%, due 3/30/2001.................. 201,906 --------- 1,052,076 --------- Total Corporate Bonds.................................... 2,144,004 --------- MORTGAGE-BACKED / PASS-THROUGH SECURITIES: 9.3% ------------------------------------------------------------ Government National Mortgage Association (GNMA) 268,335 8.500%, due 6/15/2026...................................... 282,310 286,494 8.000%, due 11/15/2026..................................... 297,566 --------- Total Mortgage-Backed / Pass-Through Securities.......... 579,876 --------- U.S. AGENCY OBLIGATIONS: 4.1% ------------------------------------------------------------ 250,000 Federal National Mortgage Association (FNMA) 6.950%, due 11/13/2006..................................... 255,625 ---------
23 Kayne Anderson Intermediate Total Return Bond Fund
PORTFOLIO OF INVESTMENTS at December 31, 1997, Continued - ------------------------------------------------------------------------------------------------------ Principal Amount LONG-TERM DEBT SECURITIES Market Value - ------------------------------------------------------------------------------------------------------ U.S. TREASURY OBLIGATIONS: 44.6% ------------------------------------------------------------ U.S. Treasury Notes $ 500,000 6.875%, due 8/31/1999...................................... $ 509,531 1,500,000 6.250%, due 10/31/2001..................................... 1,526,718 700,000 7.250%, due 8/15/2004...................................... 756,875 --------- Total U.S. Treasury Obligations.......................... 2,793,124 --------- Total Long-Term Debt Securities (cost $5,906,154)........... 5,975,501 --------- Total Investments in Securities (cost $5,906,154+): 95.4%... 5,975,501 Other Assets less Liabilities: 4.6%......................... 285,268 --------- Net Assets: 100.0% ......................................... $ 6,260,789 =========
+Cost for Federal income tax purposes is the same. Net unrealized appreciation consists of: Gross unrealized appreciation............................... $ 69,580 Gross unrealized depreciation............................... (233) --------- Net unrealized appreciation........................... $ 69,347 =========
See accompanying Notes to Financial Statements. 24 Kayne Anderson Intermediate Tax-Free Bond Fund ---------------------------------------------- Objective: - --------- The objective of the Intermediate Tax-Free Bond Fund is to seek current income exempt from federal income tax consistent with preservation of capital. The Fund seeks to achieve its objective by investing primarily in high quality, intermediate maturity debt securities, interest from which is, exempt from federal income tax. Part of the income from this Fund may also be exempt from state income tax depending on the state of the shareholder's residence. Studies show that intermediate maturity debt securities can, over time, achieve a majority of the return of long-term maturity debt without the associated level of risk. Commentary: - ---------- During the year, the Fund share's net asset value increased $0.10, from $10.64 to $10.74. After fund expenses, the total-return, principal gain or loss with income, was 4.26% for the Fund and 6.38% for the Lehman Brothers 5-year Municipal Bond Index for the same time period. As of mid-year, after slightly more than eight months of operations, fund assets were fully invested in municipal, federally tax-exempt securities. By year-end, the Fund was invested among eight different sectors within the municipal bond market. The three largest sectors represented in the Fund were: General Obligation (34%), Electric Utility (16%), and Transportation (13%). The Fund was also invested in municipalities that are located in fourteen different states and territories. The 3 largest states represented in the Fund were: California (36%), New York (12%), and Washington (8%). SECTOR DIVERSIFICATION DECEMBER 31, 1997 GENERAL OBLIGATION 34% ELECTRIC 16% HOSPITAL 10% HOUSING 4% INDUSTRIAL DEVELOPMENT 3% TRANSPORTATION 13% EDUCATION 4% PREREFUNDED 11% CASH & EQUIVALENTS 5% 25 Outlook: - ------- We believe that municipal bonds should continue to perform well relative to most taxable bond sectors, while the Federal Reserve is expected to keep its current interest rate policy for the near future. We will seek to lengthen the average maturity of the Fund as opportunities in the market arise. COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND AND THE LEHMAN BROTHERS FIVE YEAR MUNICIPAL BOND INDEX. Kayne Anderson Lehman Brothers Intermediate Five Year Tax-Free Bond Municipal Fund Bond Index -------------- --------------- 10/18/96 $10,000 $10,000 12/31/96 10,002 10,240 03/31/97 9,989 10,234 06/30/97 10,160 10,772 09/30/97 10,306 11,252 12/31/97 10,428 11,642 Past performance is not predictive of future performance. 26 Kayne Anderson Intermediate Tax-Free Bond Fund
PORTFOLIO OF INVESTMENTS at December 31, 1997 - -------------------------------------------------------------------------------------------------------- Principal Amount LONG-TERM MUNICIPAL DEBT: 94.7% Market Value - -------------------------------------------------------------------------------------------------------- Education: 3.5% $205,000 Maricopa County, Arizona School District Series E, 5.550%, dated 6/1/1993, due 7/1/2004..................................... $ 209,100 --------- Electric: 15.9% 200,000 Colorado Springs Utilities, 6.750%, dated 4/15/1991, due 11/15/2005................................................... 219,250 100,000 Hillsborough, Florida Utilities, 7.000%, dated 9/1/1991, due 8/1/2114..................................................... 111,080 200,000 Puerto Rico Electric Power Authority, 6.000%, dated 8/15/1995, due 7/1/2000..................................................... 210,250 200,000 Piedmont Municipal Power Agency, 6.550%, dated 9/1/1996, due 1/1/2016..................................................... 201,514 200,000 Tacoma Washington Electric System Revenue, 5.900%, dated 9/1/1992, due 1/1/2005..................................... 213,750 --------- 955,844 --------- General Obligation: 34.2% 200,000 California State, 5.900%, dated 2/1/1991, due 2/1/2000............ 207,250 250,000 California State, 5.375%, dated 3/1/1994, due 3/1/2006............ 265,000 200,000 California State Veterans Bond, 6.375%, dated 3/1/1995, due 2/1/2027..................................................... 204,152 200,000 Hawaii State, 5.250%, dated 3/1/1997, due 3/1/2000................ 205,000 100,000 Los Angeles County, California Certificates of Participation, 5.800%, dated 11/1/1991, due 11/1/1998........................... 101,673 100,000 Los Angeles, California State Building Authority, 5.300%, dated 12/1/1995, due 5/1/2001.................................... 103,750 250,000 Maryland State, 4.750%, dated 8/1/1997, due 8/1/2002.............. 256,875 250,000 Massachusetts State, 5.000%, dated 8/1/1997, due 8/1/2000......... 255,938 200,000 New York, New York, 5.000%, dated 7/28/1994, due 8/1/1998......... 201,480 250,000 Washoe County, Nevada, 6.750%, dated 3/15/1991, due 3/15/2000.................................................... 258,290 --------- 2,059,408 ---------
27 Kayne Anderson Intermediate Tax-Free Bond Fund
PORTFOLIO OF INVESTMENTS at December 31, 1997, Continued - -------------------------------------------------------------------------------------------------------- Principal Amount Market Value - -------------------------------------------------------------------------------------------------------- Hospital: 10.3% $200,000 California Health Facility Financing Authority, 6.750%, dated 10/1/1989, due 10/1/2019................................... $ 211,750 200,000 Dade County Health Facilities Authority, 6.600%, dated 3/1/1987, due 8/15/2002.................................................... 204,518 200,000 New York Dormitory, 5.000%, dated 3/1/1997, due 8/15/2000......... 204,000 --------- 620,268 --------- Housing: 3.5% 200,000 New York Urban Development, 6.000%, dated 1/1/1995, due 1/1/2001..................................................... 209,750 --------- IDR / PCR: 3.4% 200,000 Matagorda County Navigation District, Texas, 7.700%, dated 2/1/1989, due 2/1/2019.................................... 204,466 --------- Prerefunded: 10.9% 220,000 California State Franchise Tax, 6.900%, dated 7/1/1989, due 10/1/2006.................................................... 234,850 150,000 Los Angeles Convention & Exhibit Center, 9.000%, dated 12/1/1985, due 12/1/2020................................... 196,875 200,000 Washington Public Power Supply Systems, 7.625%, dated 10/15/1990, due 7/1/2010................................... 223,250 --------- 654,975 --------- Transportation: 13.0% 250,000 Albuquerque, New Mexico Airport, 6.500%, dated 4/15/1989, due 7/1/2019..................................................... 253,082 200,000 Los Angeles, California Harbor Department Revenue, 6.000%, dated 1/1/1995, due 8/1/2001..................................... 212,500 100,000 Orange County, California Local Transportation Authority, 5.750%, dated 9/1/1996, due 2/15/2005.................................... 106,625 200,000 Orange County Airport, 5.500%, dated 4/2/1997, due 7/1/2002....... 210,000 --------- 782,207 --------- Total Long-Term Municipal Debts (cost $5,643,511)................. 5,696,018 ---------
28 Kayne Anderson Intermediate Tax-Free Bond Fund
PORTFOLIO OF INVESTMENTS at December 31, 1997, Continued - -------------------------------------------------------------------------------------------------------- Principal Amount VARIABLE RATE MUNICIPAL DEBT: 3.0% Market Value - -------------------------------------------------------------------------------------------------------- $ 40,000 California State, 3.90%*, dated 11/21/1994, due 8/1/2019.......... $ 40,000 40,000 New York, New York, 4.00%*, dated 10/14/1993, due 9/30/2023.................................................... 40,000 100,000 Puerto Rico Telephone Authority, 3.660%*, due 1/16/2015........... 100,000 ----------- Total Variable Rate Municipal Debt (cost $179,979)................ 180,000 ----------- Total Investments in Securities (cost $5,823,490+): 97.7%......... 5,876,018 Other Assets less Liabilities: 2.3%............................... 139,185 ----------- Net Assets: 100.0% ............................................... $ 6,015,203 ===========
+Cost for Federal income tax purposes is the same. Net unrealized appreciation consists of: Gross unrealized appreciation..................................... $ 52,987 Gross unrealized depreciation..................................... (459) ----------- Net unrealized appreciation................................. $ 52,528 ===========
*Variable-rate securities are subject to a demand feature which reduces the remaining maturity. The stated rate is the rate in effect on December 31, 1997. See accompanying Notes to Financial Statements. 29 Kayne Anderson Mutual Funds
STATEMENTS OF ASSETS AND LIABILITIES at December 31, 1997 - --------------------------------------------------------------------------------------------------------------------------------- Rising Small-Mid Cap Dividends Rising Dividends Fund Fund ------------------------------- ASSETS Investments in securities, at market value (cost $25,178,750, $6,067,704, $6,196,298, $5,906,154 and $5,823,490, respectively) ............................................ $37,051,261 $ 6,426,125 Cash .................................................................................. 1,261,624 139,076 Receivables: Investment securities sold ...................................................... -- 64,805 Dividends and interest .......................................................... 40,855 13,080 Prepaid expenses ...................................................................... 15,104 15,348 Due from investment advisor ........................................................... -- 1,531 Deferred organization expenses ........................................................ 15,458 16,203 ----------- ----------- Total assets .............................................................. 38,384,302 6,676,168 ----------- ----------- LIABILITIES Payables: Investment securities purchased ................................................. -- 120,306 Distributions to shareholders ................................................... 3,018,659 45,819 Due to investment advisor ............................................................. -- -- Other accrued expenses ................................................................ 83,119 16,092 ----------- ----------- Total liabilities ......................................................... 3,101,778 182,217 ----------- ----------- NET ASSETS .................................................................................. $35,282,524 $ 6,493,951 =========== =========== Number of shares issued and outstanding (unlimited shares authorized without par value) 2,041,842 494,800 Net asset value, offering and redemption price per share .............................. $ 17.28 $ 13.12 =========== =========== COMPOSITION OF NET ASSETS Paid-in capital ....................................................................... $21,011,199 $ 6,135,310 Undistributed net investment income ................................................... -0- 220 Undistributed (accumulated) net realized gain (loss) on investments ................... 2,398,814 -0- Net unrealized appreciation of investments ............................................ 11,872,511 358,421 ----------- ----------- Net assets ................................................................ $35,282,524 $ 6,493,951 =========== ===========
30
------------------------------ International Intermediate Rising Dividends Total Return Fund Bond Fund ------------------------------ ASSETS Investments in securities, at market value (cost $25,178,750, $6,067,704, $6,196,298, $5,906,154 and $5,823,490, respectively) ............................................ $ 6,612,436 $ 5,975,501 Cash .................................................................................. 274,371 214,786 Receivables: Investment securities sold ...................................................... 303,830 -- Dividends and interest .......................................................... 13,343 89,934 Prepaid expenses ...................................................................... 15,482 18,102 Due from investment advisor ........................................................... -- -- Deferred organization expenses ........................................................ 16,203 16,202 ----------- ----------- Total assets .............................................................. 7,235,665 6,314,525 ----------- ----------- LIABILITIES Payables: Investment securities purchased ................................................. 155,688 -- Distributions to shareholders ................................................... 50,715 33,777 Due to investment advisor ............................................................. 163 2,812 Other accrued expenses ................................................................ 16,803 17,147 ----------- ----------- Total liabilities ......................................................... 223,369 53,736 ----------- ----------- NET ASSETS .................................................................................. $ 7,012,296 $ 6,260,789 =========== =========== Number of shares issued and outstanding (unlimited shares authorized without par value) 556,084 582,362 Net asset value, offering and redemption price per share .............................. $ 12.61 $ 10.75 =========== =========== COMPOSITION OF NET ASSETS Paid-in capital ....................................................................... $ 6,596,158 $ 6,195,402 Undistributed net investment income ................................................... -0- -0- Undistributed (accumulated) net realized gain (loss) on investments ................... -0- (3,960) Net unrealized appreciation of investments ............................................ 416,138 69,347 ----------- ----------- Net assets ................................................................ $ 7,012,296 $ 6,260,789 =========== ===========
------------ Intermediate Tax-Free Bond Fund ------------ ASSETS Investments in securities, at market value (cost $25,178,750, $6,067,704, $6,196,298, $5,906,154 and $5,823,490, respectively) ............................................ $ 5,876,018 Cash .................................................................................. 8,709 Receivables: Investment securities sold ...................................................... -- Dividends and interest .......................................................... 126,338 Prepaid expenses ...................................................................... 18,155 Due from investment advisor ........................................................... 8,490 Deferred organization expenses ........................................................ 16,202 ----------- Total assets .............................................................. 6,053,912 ----------- LIABILITIES Payables: Investment securities purchased ................................................. -- Distributions to shareholders ................................................... 23,040 Due to investment advisor ............................................................. -- Other accrued expenses ................................................................ 15,669 ----------- Total liabilities ......................................................... 38,709 ----------- NET ASSETS .................................................................................. $ 6,015,203 =========== Number of shares issued and outstanding (unlimited shares authorized without par value) 560,136 Net asset value, offering and redemption price per share .............................. $ 10.74 =========== COMPOSITION OF NET ASSETS Paid-in capital ....................................................................... $ 5,964,128 Undistributed net investment income ................................................... -0- Undistributed (accumulated) net realized gain (loss) on investments ................... (1,453) Net unrealized appreciation of investments ............................................ 52,528 ----------- Net assets ................................................................ $ 6,015,203 ===========
See accompanying Notes to Financial Statements. 31 Kayne Anderson Mutual Funds
STATEMENTS OF OPERATIONS - For the Year Ended December 31, 1997 - ------------------------------------------------------------------------------------------------------------------------------- Rising Small-Mid Cap International Dividends Rising Dividends Rising Dividends Fund Fund Fund ---------------------------------------------- INVESTMENT INCOME: Income: Dividends ...................................................... $ 573,190 $ 56,993 $ 67,498 Interest ....................................................... 53,161 12,992 14,941 ---------- ---------- ---------- Total income ............................................. 626,351 69,985 82,439 ---------- ---------- ---------- Expenses: Investment advisory fees ....................................... 271,652 34,033 39,034 Custodian fees ................................................. 11,399 5,301 3,526 Administration fees ............................................ 19,943 17,980 17,980 Fund accounting fees ........................................... 31,307 31,568 39,296 Transfer agent fees ............................................ 17,416 16,662 16,662 Legal fees ..................................................... 10,010 739 739 Insurance ...................................................... 1,296 169 179 Audit fees ..................................................... 17,599 4,008 4,008 Miscellaneous expenses ......................................... 14,436 1,895 1,895 Reports to shareholders ........................................ 3,000 1,083 1,083 Registration fees .............................................. 19,285 8,392 8,392 Trustees' fees ................................................. 3,000 3,513 3,513 Amortization of deferred organization expenses ................. 7,672 4,216 4,216 ---------- ---------- ---------- Total expenses ........................................... 428,015 129,559 140,523 Less: Expenses reimbursed/waived ......................... -- (77,861) (83,125) Indirectly paid expenses ........................... -- -- -- ---------- ---------- ---------- Net expenses ............................................. 428,015 51,698 57,398 ---------- ---------- ---------- Net investment income .............................. 198,336 18,287 25,041 ---------- ---------- ---------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) on investments .............................. 5,093,470 237,764 20,183 Net change in unrealized appreciation of investments ................. 4,378,552 336,930 397,529 ---------- ---------- ---------- Net gain on investments .................................. 9,472,022 574,694 417,712 ---------- ---------- ---------- Net Increase in Net Assets Resulting from Operations $9,670,358 $ 592,981 $ 442,753 ========== ========== ==========
32
---------------------------- Intermediate Intermediate Total Return Tax-Free Bond Fund Bond Fund ---------------------------- INVESTMENT INCOME: Income: Dividends ...................................................... $ -- $ -- Interest ....................................................... 343,994 228,548 ---------- ---------- Total income ............................................. 343,994 228,548 ---------- ---------- Expenses: Investment advisory fees ....................................... 27,332 27,588 Custodian fees ................................................. 4,799 2,538 Administration fees ............................................ 17,718 17,718 Fund accounting fees ........................................... 30,541 35,559 Transfer agent fees ............................................ 16,662 18,062 Legal fees ..................................................... 968 968 Insurance ...................................................... 322 324 Audit fees ..................................................... 4,009 4,009 Miscellaneous expenses ......................................... 2,100 1,894 Reports to shareholders ........................................ 1,017 1,017 Registration fees .............................................. 8,392 8,392 Trustees' fees ................................................. 3,863 3,863 Amortization of deferred organization expenses ................. 4,216 4,216 ---------- ---------- Total expenses ........................................... 121,939 126,148 Less: Expenses reimbursed/waived ......................... (70,713) (40,123) Indirectly paid expenses ........................... -- (34,315) ---------- ---------- Net expenses ............................................. 51,226 51,710 ---------- ---------- Net investment income .............................. 292,768 176,838 ---------- ---------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) on investments .............................. (5,750) (1,453) Net change in unrealized appreciation of investments ................. 102,483 58,234 ---------- ---------- Net gain on investments .................................. 96,733 56,781 ---------- ---------- Net Increase in Net Assets Resulting from Operations $ 389,501 $ 233,619 ========== ==========
See accompanying Notes to Financial Statements. 33 Kayne Anderson Mutual Funds
STATEMENTS OF CHANGES IN NET ASSETS - ---------------------------------------------------------------------------------------------------------------------------------- Rising Small-Mid Cap Dividends Rising Dividends Fund Fund ------------------------------------------------------------ Year Year Year 10/18/96* INCREASE IN NET ASSETS FROM: Ended Ended Ended to 12/31/97 12/31/96 12/31/97 12/31/96 ------------------------------------------------------------ OPERATIONS Net investment income ............................................. $ 198,336 $ 140,942 $ 18,287 $ 1,406 Net realized gain (loss) on investments sold ...................... 5,093,470 1,246,299 237,764 -- Net change in unrealized appreciation (depreciation) of investments 4,378,552 2,813,912 336,930 21,491 ------------ ------------ ------------ ------------ Net increase in net assets resulting from operations ........ 9,670,358 4,201,153 592,981 22,897 ------------ ------------ ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS Net investment income ............................................. (222,979) (131,956) (23,419) (1,102 Net realized gain on investments .................................. (2,795,680) (1,145,275) (22,399) -- ------------ ------------ ------------ ------------ Total distributions to shareholders ......................... (3,018,659) (1,277,231) (45,818) (1,102 ------------ ------------ ------------ ------------ CAPITAL SHARE TRANSACTIONS Proceeds from shares sold ......................................... 11,725,624 4,811,059 8,244,623 759,908 Net asset value of shares issued on reinvestment of distributions . -- 1,266,895 -- 1,078 Cost of shares redeemed ........................................... (9,212,376) (3,497,629) (3,105,616) -- ------------ ------------ ------------ ------------ Net increase from capital share transactions ................ 2,513,248 2,580,325 5,139,007 760,986 ------------ ------------ ------------ ------------ Total increase in net assets ................................ 9,164,947 5,504,247 5,686,170 782,781 NET ASSETS Beginning of period ............................................... 26,117,577 20,613,330 807,781 25,000 ------------ ------------ ------------ ------------ End of period ..................................................... $ 35,282,524 $ 26,117,577 $ 6,493,951 $ 807,781 ============ ============ ============ ============ CHANGE IN SHARES Shares sold ....................................................... 752,018 349,950 656,347 70,592 Shares issued in reinvestment of distributions .................... -- 86,655 -- 98 Shares redeemed ................................................... (534,351) (245,124) (234,584) -- ------------ ------------ ------------ ------------ Net increase ................................................ 217,667 191,481 421,763 70,690 ============ ============ ============ ============
34
------------------------------------------------------------- International Intermediate Rising Dividends Total Return Fund Bond Fund ------------------------------------------------------------- Year 10/18/96* Year 10/28/96* INCREASE IN NET ASSETS FROM: Ended to Ended to 12/31/97 12/31/96 12/31/97 12/31/96 ------------------------------------------------------------- OPERATIONS Net investment income ............................................. $ 25,041 $ 1,366 $ 292,768 $ 41,630 Net realized gain (loss) on investments sold ...................... 20,183 -- (5,750) -- Net change in unrealized appreciation (depreciation) of investments 397,529 18,609 102,483 (33,135) ------------ ------------ ------------ ------------ Net increase in net assets resulting from operations ........ 442,753 19,975 389,501 8,495 ------------ ------------ ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS Net investment income ............................................. (30,206) (1,249) (298,892) (38,764) Net realized gain on investments .................................. (20,183) -- -- -- ------------ ------------ ------------ ------------ Total distributions to shareholders ......................... (50,389) (1,249) (298,892) (38,764) ------------ ------------ ------------ ------------ CAPITAL SHARE TRANSACTIONS Proceeds from shares sold ......................................... 6,170,378 1,009,948 933,235 5,000,000 Net asset value of shares issued on reinvestment of distributions . 396 1,155 261,111 38,764 Cost of shares redeemed ........................................... (605,671) -- (57,661) -- ------------ ------------ ------------ ------------ Net increase from capital share transactions ................ 5,565,103 1,011,103 1,136,685 5,038,764 ------------ ------------ ------------ ------------ Total increase in net assets ................................ 5,957,467 1,029,829 1,227,294 5,008,495 NET ASSETS Beginning of period ............................................... 1,054,829 25,000 5,033,495 25,000 ------------ ------------ ------------ ------------ End of period ..................................................... $ 7,012,296 $ 1,054,829 $ 6,260,789 $ 5,033,495 ============ ============ ============ ============ CHANGE IN SHARES Shares sold ....................................................... 507,753 94,185 87,412 469,484 Shares issued in reinvestment of distributions .................... 28 115 24,683 3,636 Shares redeemed ................................................... (48,344) -- (5,200) -- ------------ ------------ ------------ ------------ Net increase ................................................ 459,437 94,300 106,895 473,120 ============ ============ ============ ============
---------------------------- Intermediate Tax-Free Bond Fund ---------------------------- Year 10/28/96* INCREASE IN NET ASSETS FROM: Ended to 12/31/97 12/31/96 ---------------------------- OPERATIONS Net investment income ............................................. $ 176,838 $ 5,308 Net realized gain (loss) on investments sold ...................... (1,453) -- Net change in unrealized appreciation (depreciation) of investments 58,234 (5,706) ------------ ------------ Net increase in net assets resulting from operations ........ 233,619 (398) ------------ ------------ DISTRIBUTIONS TO SHAREHOLDERS Net investment income ............................................. (181,326) (5,868) Net realized gain on investments .................................. -- -- ------------ ------------ Total distributions to shareholders ......................... (181,326) (5,868) ------------ ------------ CAPITAL SHARE TRANSACTIONS Proceeds from shares sold ......................................... 787,429 5,104,514 Net asset value of shares issued on reinvestment of distributions . 157,563 1,192 Cost of shares redeemed ........................................... (106,522) -- ------------ ------------ Net increase from capital share transactions ................ 838,470 5,105,706 ------------ ------------ Total increase in net assets ................................ 890,763 5,099,440 NET ASSETS Beginning of period ............................................... 5,124,440 25,000 ------------ ------------ End of period ..................................................... $ 6,015,203 $ 5,124,440 ============ ============ CHANGE IN SHARES Shares sold ....................................................... 73,658 479,298 Shares issued in reinvestment of distributions .................... 14,770 112 Shares redeemed ................................................... (10,049) -- ------------ ------------ Net increase ................................................ 78,379 479,410 ============ ============
*Commencement of operations. See accompanying Notes to Financial Statements. 35 Kayne Anderson Mutual Funds
FINANCIAL HIGHLIGHTS For a capital share outstanding throughout each period - ------------------------------------------------------------------------------------------------------------------ Rising Dividends Fund ------------------------------------------------- Year Year 5/1/95* Ended Ended to 12/31/97 12/31/96 12/31/95 ------------------------------------------------- Net asset value, beginning of period ......................... $ 14.32 $ 12.63 $ 10.65 ------------ ------------ ------------ Income from investment operations: Net investment income .................................. 0.10 0.08 0.07 Net realized and unrealized gain (loss) on investments . 4.34 2.35 2.13 ------------ ------------ ------------ Total income from investment operations ...................... 4.44 2.43 2.20 ------------ ------------ ------------ Less distributions: Dividends from net investment income ................... (0.11) (0.08) (0.07) Distributions from net capital gains ................... (1.37) (0.66) (0.15) ------------ ------------ ------------ Total distributions .......................................... (1.48) (0.74) (0.22) ------------ ------------ ------------ Net asset value, end of period ............................... $ 17.28 $ 14.32 $ 12.63 ============ ============ ============ Total return ................................................. 30.99% 19.09% 20.65%** Net assets, end of period (in 000's) ......................... $ 35,283 $ 26,118 $ 20,613 Ratio of expenses to average net assets: Before expense reimbursement ........................... -- -- -- After expense reimbursement ............................ 1.18% 1.37% 1.31%+ After expense reimbursement and expenses paid indirectly -- -- -- Ratio of net investment income to average net assets: (net of expense reimbursement, if applicable) .......... 0.55% 0.59% 0.94%+ Portfolio turnover rate ...................................... 51% 23% 28% Average commission paid per share*** ......................... $ .0600 $ .0600 --
36
--------------------------------------------------------------- Small-Mid Cap International Rising Dividends Rising Dividends Fund Fund --------------------------------------------------------------- Year 10/18/96* Year 10/18/96* Ended to Ended to 12/31/97 12/31/96 12/31/97 12/31/96 --------------------------------------------------------------- Net asset value, beginning of period ......................... $ 11.06 $ 10.65 $ 10.91 $ 10.65 ------------ ------------ ------------ ------------ Income from investment operations: Net investment income .................................. 0.02 0.02 0.04 0.01 Net realized and unrealized gain (loss) on investments . 2.14 0.41 1.75 0.26 ------------ ------------ ------------ ------------ Total income from investment operations ...................... 2.16 0.43 1.79 0.27 ------------ ------------ ------------ ------------ Less distributions: Dividends from net investment income ................... (0.05) (0.02) (0.05) (0.01) Distributions from net capital gains ................... (0.05) 0.00 (0.04) 0.00 ------------ ------------ ------------ ------------ Total distributions .......................................... (0.10) (0.02) (0.09) (0.01) ------------ ------------ ------------ ------------ Net asset value, end of period ............................... $ 13.12 $ 11.06 $ 12.61 $ 10.91 ============ ============ ============ ============ Total return ................................................. 19.46% 4.00%** 16.42% 2.56%** Net assets, end of period (in 000's) ......................... $ 6,494 $ 808 $ 7,012 $ 1,055 Ratio of expenses to average net assets: Before expense reimbursement ........................... 3.22% 18.91%+ 3.41% 15.74%+ After expense reimbursement ............................ 1.30% 1.30%+ 1.40% 1.40%+ After expense reimbursement and expenses paid indirectly -- -- -- -- Ratio of net investment income to average net assets: (net of expense reimbursement, if applicable) .......... 0.45% 1.58%+ 0.61% 1.14%+ Portfolio turnover rate ...................................... 47% 0% 29% 0% Average commission paid per share*** ......................... $ .0637 $ .0955 $ .0666 $ .0936
-------------------------------------------------------- Intermediate Intermediate Total Return Tax-Free Bond Fund Bond Fund -------------------------------------------------------- Year 10/28/96* Year 10/28/96* Ended to Ended to 12/31/97 12/31/96 12/31/97 12/31/96 -------------------------------------------------------- Net asset value, beginning of period ......................... $ 10.59 $ 10.65 $ 10.64 $ 10.65 ------------ ------------ ------------ ------------ Income from investment operations: Net investment income .................................. 0.56 0.09 0.34 0.01 Net realized and unrealized gain (loss) on investments . 0.18 (0.07) 0.11 (0.01) ------------ ------------ ------------ ------------ Total income from investment operations ...................... 0.74 0.02 0.45 0.00 ------------ ------------ ------------ ------------ Less distributions: Dividends from net investment income ................... (0.58) (0.08) (0.35) (0.01) Distributions from net capital gains ................... 0.00 0.00 0.00 0.00 ------------ ------------ ------------ ------------ Total distributions .......................................... (0.58) (0.08) (0.35) (0.01) ------------ ------------ ------------ ------------ Net asset value, end of period ............................... $ 10.75 $ 10.59 $ 10.74 $ 10.64 ============ ============ ============ ============ Total return ................................................. 7.19% 0.20%** 4.26% 0.02%** Net assets, end of period (in 000's) ......................... $ 6,261 $ 5,033 $ 6,015 $ 5,124 Ratio of expenses to average net assets: Before expense reimbursement ........................... 2.23% 2.10%+ 2.29% 2.08%+ After expense reimbursement ............................ 0.95% 0.95%+ 1.56% 1.81%+ After expense reimbursement and expenses paid indirectly -- -- 0.95% 0.95%+ Ratio of net investment income to average net assets: (net of expense reimbursement, if applicable) .......... 5.35% 4.72%+ 2.58% 0.60%+ Portfolio turnover rate ...................................... 27% 0% 40% 0% Average commission paid per share*** ......................... -- -- -- --
*Commencement of operations. **Not annualized. ***A fund is required to disclose its average commission rate paid per share for security trades on which commissions are charged. This amount may vary from fund to fund depending on the mix of trades executed in various markets where trading practices and commission structures may differ. This rule took effect on September 30, 1996 and is not required for periods ending prior to that date. +Annualized. See accompanying Notes to Financial Statements. 37 Kayne Anderson Mutual Funds NOTES TO FINANCIAL STATEMENTS at December 31, 1997 - -------------------------------------------------------------------------------- NOTE 1 - ORGANIZATION Kayne Anderson Mutual Funds (the "Trust") was organized as a business trust in Delaware on May 29, 1996 and is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. The Trust currently consists of five seperate diversified series: Rising Dividends Fund, Small-Mid Cap Rising Dividends Fund, International Rising Dividends Fund, Intermediate Total Return Bond Fund, and Intermediate Tax-Free Bond Fund (each a "Fund" and collectively the "Funds"). Between May 29, 1996 and the respective dates of commencement of operations, the Funds had no operations other than those related to organizational matters and the sale of 2,347 shares of the Small-Mid Cap Rising Dividends Fund, the International Rising Dividends Fund, the Intermediate Total Return Bond Fund, and the Intermediate Tax-Free Bond Fund to Kayne Anderson Investment Management, LLC, the Funds' investment advisor, for $25,000, respectively. On October 4, 1996 the shareholders of the Kayne Anderson Rising Dividends Fund (the "Predecessor Fund"), a series of shares of Professionally Managed Portfolios, entered into a tax-free reorganization pursuant to which they agreed to exchange their Predecessor Fund shares for shares of the Rising Dividends Fund series of the Trust, which had no operations prior to the reorganization. The Predecessor Fund is deemed to be the accounting survivor and accordingly the statement of changes in net assets and the financial highlights include the operations of the Predecessor Fund for periods prior to the reorganization. The Rising Dividends Fund seeks long-term capital appreciation, with dividend income as a secondary consideration. The Fund invests primarily in equity securities, usually common stocks, of companies of all sizes. The Small-Mid Cap Rising Dividends Fund seeks long-term capital appreciation, with dividend income as a secondary consideration. The Fund invests primarily in equity securities, usually common stocks, of small and mid-capitalization companies, which the Fund currently considers to be companies having total market capitalizations of not more than $3 billion. The International Rising Dividends Fund seeks long-term capital appreciation, with dividend income as a secondary consideration. The Fund invests primarily in equity securities, usually common stocks, of companies outside the U.S. generally having total market capitalizations of $1 billion or more. The Intermediate Total Return Bond Fund seeks to obtain maximum total return, primarily through current income with capital appreciation as a secondary consideration. The Fund invests primarily in investment grade debt securities and seeks to maintain an average maturity of three to ten years. The Intermediate Tax-Free Bond Fund seeks current income exempt from Federal income tax consistent with preservation of capital. The Fund invests primarily in investment grade debt securities and may maintain an average maturity of more than ten years. There can be no assurances that the Funds will be able to achieve their investment objectives. The value of Fund shares fluctuates daily and may be worth more or less than their purchase price when redeemed. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Funds. These policies are in conformity with generally accepted accounting principles. 38 Kayne Anderson Mutual Funds NOTES TO FINANCIAL STATEMENTS at December 31, 1997, Continued - -------------------------------------------------------------------------------- A. Security Valuation: The Fund's investments are carried at market value. Securities listed on an exchange or quoted on a national market system are valued at the last sale price. Other securities are valued at the last quoted bid price. Securities for which market quotations are not readily available, if any, are valued at an independent pricing service or determined following procedures approved by the Board of Trustees. Short-term investments are valued at amortized cost, which approximates market value. B. Federal Income Taxes: It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no Federal income tax provision is required. At December 31, 1997 the Intermediate Total Return Bond Fund and the Intermediate Tax-Free Bond Fund had capital loss carryforwards available for Federal income tax purposes of $3,960 and $1,083, respectively, which expire in 2005. C. Security Transactions, Dividends and Distributions: As is common in the industry, security transactions are accounted for on the trade date. Interest income is recognized on the accrual basis. Bond discounts and premiums are amortized over their respective lives. Dividend income and distributions to shareholders are recorded on the ex-dividend date. D. Deferred Organization Expenses: All of the expenses incurred by the Advisor in connection with the organization and registration of the Fund's shares will be borne by the Fund and are being amortized to expense on a straight-line basis over a period of five years. E. Accounting Estimates: In preparing financial statements in conformity with generally accepted accounting principles, management makes estimates and assumptions with respect to expenses that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of expenses during the period. Actual results could differ from those estimates. F. Expenses Paid Indirectly: The Intermediate Tax-Free Bond Fund's custodian, fund accounting and transfer agency fees for the period January 1, 1997 to December 31, 1997 were reduced by $34,315 as a result of earning credits from overnight cash balances with its custodian bank. NOTE 3 - INVESTMENT ADVISORY AND MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES For the year ended December 31, 1997, Kayne Anderson Investment Management, LLC (the "Advisor") provided the Funds with investment management services under an Investment Advisory Agreement. The Advisor furnished all investment advice, office space and certain administrative services, and provides personnel as needed by the Funds. The Advisor is entitled to a monthly fee at the following annual rates based upon the average daily net assets of the Funds: Rising Dividends Fund.......................................... 0.75% Small-Mid Cap Rising Dividends Fund ........................... 0.85% International Rising Dividends Fund............................ 0.95% Intermediate Total Return Bond Fund............................ 0.50% Intermediate Tax-Free Bond Fund................................ 0.50% 39 Kayne Anderson Mutual Funds NOTES TO FINANCIAL STATEMENTS at December 31, 1997, Continued - -------------------------------------------------------------------------------- Although not required to do so, the Advisor has agreed to waive or reimburse the expenses of each Fund to the extent necessary so that its ratio of operating expenses to average net assets will not exceed the following levels. Overall operating expenses for each Fund will not fall below the applicable percentage limitation until the Investment Advisor has been fully reimbursed for fees foregone and expenses paid by the Advisor under this agreement: Rising Dividends Fund.......................................... 1.20% Small-Mid Cap Rising Dividends Fund ........................... 1.30% International Rising Dividends Fund............................ 1.40% Intermediate Total Return Bond Fund............................ 0.95% Intermediate Tax-Free Bond Fund................................ 0.95% Pursuant to these expense limitation provisions, the Advisor reimbursed the Small-Mid Cap Rising Dividends Fund $77,861, the International Rising Dividends Fund $83,125, the Intermediate Total Return Bond Fund $70,713, and the Intermediate Tax-Free Bond Fund $40,123 during the year ended December 31, 1997. The Funds executed certain investment security transactions through KA Associates, an affiliate of the Funds' Advisor. Commissions paid by the Funds to this affiliate during the year ended December 31, 1997 were as follows: International Rising Dividends Fund............................ $9,627 Small-Mid Cap Rising Dividends Fund............................ $8,439 Investment Company Administration Corporation (the "Administrator") acts as the Funds' Administrator under an Administration Agreement. The Administrator prepares various federal and state regulatory filings, reports and returns for the Funds; prepares reports and materials to be supplied to the trustees; monitors the activities of the Funds' custodian, transfer agent and accountants; coordinates the preparation and payment of Fund expenses and reviews the Funds' expense accruals. For its services, each Fund has agreed to pay the Administrator an annual fee equal to 0.075% of the first $40 million of its average daily net assets, 0.05% of the next $40 million, 0.025% of the next $40 million, and 0.01% thereafter, subject to a minimum annual fee of $30,000 per Fund. First Fund Distributor, Inc. (the "Distributor") acts as the Funds' principal underwriter in a continuous public offering of the Funds' shares. The Distributor is an affiliate of the Administrator. Certain officers and Trustees of the Fund are also officers and/or directors of the Advisor. NOTE 4 - PURCHASES AND SALES OF SECURITIES For the year ended December 31, 1997, the cost of purchases and the proceeds from sales of securities, excluding short-term securities and U.S. Government securities were as follows: 40 Kayne Anderson Mutual Funds NOTES TO FINANCIAL STATEMENTS at December 31, 1997, Continued - -------------------------------------------------------------------------------- Fund Purchases Sales --------- ----- Rising Dividends Fund $19,529,312 $17,763,312 Small-Mid Cap Rising Dividends Fund $ 7,042,181 $ 1,761,082 International Rising Dividends Fund $ 6,491,054 $ 1,078,822 Intermediate Total Return Bond Fund $ 2,284,876 $ 51,171 Intermediate Tax-Free Bond Fund $ 5,497,399 $ 2,000,962 The Intermediate Total Return Bond Fund purchased $510,039, and sold $1,321,383, respectively, of U.S. Government securities. There were no purchases or sales of U.S. Government securities by Rising Dividends Fund, Small-Mid Cap Rising Dividends Fund, International Rising Dividends Fund, and Intermediate Tax-Free Bond Fund. During the year ended December 31, 1997, the Small-Mid Cap Rising Dividends Fund realized gains in the amount of $215,365 from the "in-kind" distribution of appreciated securities to a redeeming shareholder. 41 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS - -------------------------------------------------------------------------------- To the Shareholders and Board of Trustees of Kayne Anderson Mutual Funds Los Angeles, California We have audited the accompanying statement of assets and liabilities of Kayne Anderson Mutual Funds (comprising, respectively, the Rising Dividends Fund, the Small-Mid Cap Rising Dividends Fund, the International Rising Dividends Fund, the Intermediate Total Return Bond Fund, and the Intermediate Tax-Free Bond Fund), including the portfolio of investments, as of December 31, 1997, and the related statement of operations, the statements of changes in net assets, and the financial highlights for the year then ended. These financial statements and financial highlights are the responsibility of Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. The statements of changes in net assets for the year ended December 31, 1996 and 1995 were audited by other auditors whose report dated February 4, 1997 expressed an unqualified opinion on the statements of changes in net assets and financial highlights. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1997, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the Funds comprising the Kayne Anderson Mutual Funds as of December 31, 1997, the results of their operations, the changes in their net assets, and the financial highlights for the year then ended in conformity with generally accepted accounting principles. BRIGGS, BUNTING & DOUGHERTY, LLP Philadelphia, Pennsylvania January 27, 1998 [This page intentionally left blank.] Advisor Kayne Anderson Investment Management, LLC 1800 Avenue of the Stars, 2nd Floor Los Angeles, California 90067 (310) 556-2721 o Distributor First Fund Distributors, Inc. 4455 East Camelback Road, Suite 261E Phoenix, Arizona 85018 o Custodian and Transfer Agent Investors Bank & Trust Company 200 Clarendon Street Boston, Massachusetts 02116 o Auditors Briggs, Bunting & Dougherty, LLP Two Logan Square, Suite 2121 Philadelphia, Pennsylvania 19103 o Legal Counsel Paul, Hastings, Janofsky & Walker, LLP 345 California Street, 29th Floor San Francisco, California 94104 This report is intended for the shareholders of the Fund and may not be used as sales literature unless preceded or accompanied by a current prospectus. Past performance results shown in this report should not be considered a representation of future performance. Share price and returns will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Statements and other information herein are dated and are subject to change. Kayne Anderson Mutual Funds Annual Report December 31, 1997 -----END PRIVACY-ENHANCED MESSAGE-----