-----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, KSoJAKHQN00cCgDLR3d+yuaeUWCZUUzf30XuSdDB86WK5EuV/Ii1/lbAtEnk1nA6 bLXVrUeQZ58K3ncxZh+i1Q== 0000950147-99-000341.txt : 19990409 0000950147-99-000341.hdr.sgml : 19990409 ACCESSION NUMBER: 0000950147-99-000341 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990408 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: 99589422 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 KAYNE ANDERSON FUNDS ANNUAL REPORT KAYNE ANDERSON Annual Report December 31, 1998 KAYNE ANDERSON TABLE OF CONTENTS LETTER TO SHAREHOLDERS.................................................... 2 INVESTMENT ADVISER COMMENTS AND PORTFOLIOS OF INVESTMENTS Rising Dividends Fund.................................................. 3 Small Cap Rising Dividends Fund........................................ 8 International Rising Dividends Fund.................................... 13 Intermediate Total Return Bond Fund.................................... 19 Intermediate Tax-Free Bond Fund........................................ 24 STATEMENTS OF ASSETS AND LIABILITIES...................................... 30 STATEMENTS OF OPERATIONS.................................................. 32 STATEMENTS OF CHANGES IN NET ASSETS....................................... 34 FINANCIAL HIGHLIGHTS...................................................... 36 NOTES TO FINANCIAL STATEMENTS............................................. 40 We Focus On Quality Dear Shareholder: We are pleased to express our appreciation for your investment in the Kayne Anderson Mutual Funds. If you are new to the Kayne Anderson family of investors, we welcome you. The enclosed annual report contains a commentary and year-end financial statements for each of our mutual funds. In each commentary, the portfolio manager reviews the objectives, 1998 performance and outlook for the fund. We hope that you will find these comments interesting and timely. As investment advisors, we have managed private accounts for both equity and fixed-income investors for many years. We are delighted to be able to offer our mutual funds to you so that diversification among asset classes can be readily accomplished. Through these funds, shareholders can structure a diversified portfolio consistent with their personal investment objectives and goals. We thank you again for your investment in the Kayne Anderson no-load mutual funds. We are committed to assisting you with the realization of your financial goals. As always, we welcome your questions and comments. Sincerely, /s/ Richard A. Kayne, /s/ Allan M. Rudnick Richard A. Kayne, Allan M. Rudnick Chairman President KAYNE ANDERSON RISING DIVIDENDS FUND OBJECTIVE: The Rising Dividends Fund (the "Fund") is invested in a diversified portfolio of high-quality, growing companies that are leaders in their respective industries. These companies are managed by exceptional people who are committed to maximizing shareholder value. The investment goals of the Fund are to provide competitive returns over a full market cycle, while assuming less risk than the market. The fund is also structured to provide rising dividend income over the long term. COMMENTARY: For the year ended December 31, 1998, the return for the Fund was 14.14%, compared with a 14.52% return for the average equity fund. For the three years ended December 31, 1998, the Fund produced an annual average return of 21.2%, compared with 19.5% for the average equity fund. (Average equity fund returns are as reported by Lipper Analytical Services, Inc.) During the second half of the year, the portfolio achieved strong performance from a number of holdings, including in particular Intel and Electronic Data Systems. Both companies have continued to announce positive news in 1999 - Intel released better than expected fourth quarter earnings results and Electronic Data Systems has disclosed several key strategic partnerships and hired a well-regarded executive as their new CEO. Overall, however, our portfolio continues to be overweighted in financial services and consumer staples. After the U.S equity markets suffered in the third quarter in response to the turmoil in some international markets and well-documented domestic political events, investors regained confidence in large cap domestic stocks in the fourth quarter, as these stocks rallied to finish the year with a fourth consecutive double-digit annual return. At this time of investor ebullience, we would emphasize the following: 1. We encourage you not to spend time worrying about the "market," because the Rising Dividends Fund is not the market. Rather, this portfolio consists of some of the highest quality companies in the world, selected for their strong competitive positions in their respective industries, consistent earnings growth, solid balance sheets and a commitment to sharing their growing cash flows with shareholders. Our research work has led us to believe that, in both bull and bear environments, these businesses are sound and their management teams are excellent stewards of our capital. 2. We spend our time continually evaluating both macroeconomic and microeconomic factors in relation to the companies we own. For example, we forecast the impact of recession or increased competition for each major business division within each company. We monitor our price limit on each stock for both relative and absolute valuation and compare the attractiveness of alternative investments in each economic sector. 3. Your job as an investor in the Fund is to assure yourself that your asset allocation is appropriate. That is, you should be cognizant that markets can be volatile over the short run, and that the assets that you have in stocks should be those that you can dedicate to the Fund for two years or more. As the manager of the Fund, we feel confident that we are invested in companies that are growing consistently and creating shareholder value. However, these rewards come over time, and one must be patient enough to allow the management of these companies the time to accomplish their business goals. 3 KAYNE ANDERSON RISING DIVIDENDS FUND OUTLOOK: We always encourage clients to maintain the long view and to approach the vagaries of financial markets as short-term phenomena that are to be used to an advantage, such as adding to equities during times of distress, rather than a cause for serious concern. Whether we find ourselves in calm or turbulent times, avoiding the tendency to panic on the downside or overreach on the upside is the right course of action. In any event, we remain optimistic about the future for the Fund, and appropriately cautious and thoughtful about world events that may impact investors. As we continue to focus our research efforts on high quality, industry-leading growth companies with shareholder-friendly management, we are confident that our diversified portfolio of these superior companies will offer very satisfying returns to investors over the long-term. [PERFORMANCE CHART] Average Annual Total Return for the periods ending December 31, 1998 One Year Since Inception (5/1/95) 14.14% 23.16% COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE KAYNE ANDERSON RISING DIVIDENDS FUND AND THE S & P 500 INDEX KAYNE ANDERSON RISING DIVIDENDS FUND S & P 500 -------------- --------- May-95 $10,000.00 $10,000.00 Jun-95 10,394.37 10,592.89 Sep-95 11,089.20 11,364.10 Dec-95 12,064.79 11,977.40 Mar-96 12,809.88 12,552.02 Jun-96 13,249.30 13,040.68 Sep-96 13,688.71 13,365.03 Dec-96 14,367.38 14,404.00 Mar-97 14,718.96 14,722.51 Jun-97 17,137.01 17,211.92 Sep-97 17,879.48 18,420.25 Dec-97 18,821.01 18,870.42 Mar-98 21,086.50 21,423.99 Jun-98 21,500.39 22,047.99 Sep-98 18,510.86 19,776.18 Dec-98 21,482.90 23,902.89 Past performance is not predictive of future performance. 4 KAYNE ANDERSON RISING DIVIDENDS FUND PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998 - -------------------------------------------------------------------------------- Shares COMMON STOCKS: 99.4% Market Value - -------------------------------------------------------------------------------- BASIC MATERIALS / CHEMICALS: 3.9% 32,550 PPG Industries, Inc. ............................ $1,896,038 ---------- CAPITAL GOODS / ELECTRICAL EQUIPMENT: 8.3% 31,300 Emerson Electric Company ........................ 1,893,651 20,970 General Electric Company ........................ 2,140,250 ---------- 4,033,901 ---------- CONSUMER CYCLICAL / ENTERTAINMENT & LEISURE: 3.9% 62,770 The Walt Disney Company ......................... 1,883,101 ---------- CONSUMER CYCLICAL / RESTAURANTS: 4.2% 26,450 McDonald's Corporation .......................... 2,026,731 ---------- CONSUMER CYCLICAL / SERVICES: 3.1% 43,480 Equifax, Inc. ................................... 1,486,473 ---------- CONSUMER STAPLES / CONSUMER PRODUCTS: 10.7% 43,990 Gillette Company ................................ 2,125,267 18,570 Kimberly-Clark Corporation ...................... 1,012,065 22,500 Procter & Gamble Company ........................ 2,054,531 ---------- 5,191,863 ---------- CONSUMER STAPLES / FOODS: 10.1% 34,680 BestFoods ....................................... 1,846,710 15,210 Hershey Foods Corporation ....................... 945,872 23,540 Wm. Wrigley, Jr., Company ....................... 2,108,301 ---------- 4,900,883 ---------- CAPITAL GOODS / MANUFACTURING (DIVERSIFIED): 3.6% 30,320 Illinois Tool Works Inc. ........................ 1,758,560 ---------- ENERGY / PETROLEUM - INTERNATIONAL: 8.5% 12,000 Exxon Corporation ............................... 877,500 13,190 Mobil Corporation ............................... 1,149,178 43,830 Royal Dutch Petroleum NY Shares ................. 2,098,361 ---------- 4,125,039 ---------- 5 KAYNE ANDERSON RISING DIVIDENDS FUND PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998, CONTINUED - -------------------------------------------------------------------------------- Shares Market Value - -------------------------------------------------------------------------------- FINANCIAL / BANKING: 4.3% 53,040 Wells Fargo & Company ........................... $ 2,118,285 ----------- FINANCIAL / FINANCIAL SERVICES: 7.4% 46,050 Franklin Resources, Inc. ........................ 1,473,601 30,300 State Street Boston Corporation ................. 2,107,743 ----------- 3,581,344 ----------- FINANCIAL / INSURANCE: 4.1% 33,980 Marsh & McLennan Companies, Inc. ................ 1,985,707 ----------- HEALTH CARE / DRUGS & HOSPITAL SUPPLIES: 12.5% 24,110 Johnson & Johnson ............................... 2,022,226 30,250 Medtronic, Inc. ................................. 2,246,062 12,410 Merck & Co., Inc. ............................... 1,832,802 ----------- 6,101,090 ----------- TECHNOLOGY / COMPUTERS & OFFICE EQUIPMENT: 4.5% 32,400 Hewlett-Packard Company ......................... 2,213,326 ----------- TECHNOLOGY / DATA SERVICES: 5.5% 26,090 Automatic Data Processing, Inc. ................. 2,092,091 11,300 Electronic Data Systems Corporation ............. 567,824 ----------- 2,659,915 ----------- TECHNOLOGY / SEMICONDUCTORS: 4.8% 19,810 Intel Corporation ............................... 2,348,723 ----------- Total Common Stocks (cost $36,536,733) .......... 48,310,979 ----------- Total Investments in Securities (cost $36,536,733+): 99.4% ......................... 48,310,979 Other Assets less Liabilities: 0.6% ............. 269,779 ----------- NET ASSETS: 100.0% .............................. $48,580,758 =========== 6 KAYNE ANDERSON RISING DIVIDENDS FUND PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998, CONTINUED - -------------------------------------------------------------------------------- + Cost for Federal income tax purposes is the same. Net unrealized appreciation consists of: Gross unrealized appreciation................ $12,419,788 Gross unrealized depreciation................ (645,542) ----------- Net unrealized appreciation............ $11,774,246 =========== 7 See accompanying Notes to Financial Statements. KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND OBJECTIVE: The objective of the KAYNE ANDERSON SMALL CAP FUND is long-term capital appreciation. The Fund seeks to achieve this objective by: + Building a diversified portfolio of the next generation of high quality "blue chip" companies. + Seeking returns typical of small-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 seeking to assume less financial and stock market risk. The following table demonstrates our commitment to these objectives:
KAYNE RUSSELL ANDERSON 2500 SMALL CAP INDEX --------- ----- QUALITY Return on Equity - Past 5 Years 22.9% 14.6% MORE PROFITABLE Long-Term Debt/Total Capital 32.9% 37.5% LESS FINANCIAL RISK Interest Expense Coverage 10.5X 5.5X LESS FINANCIAL RISK Earnings Variance - Past 10 Years 20.0% 61.4% MORE DEPENDABLE A Rated by S&P 71.0% 10.1% BETTER QUALITY GROWTH Earnings Per Share Growth - Past 5 Years 16.3% 16.6% RECOVERY Earnings Per Share Growth - Past 10 Years 16.4% 8.3% RECESSION Dividend Per Share Growth - Past 5 Years 16.4% 8.9% RECOVERY Dividend Per Share Growth - Past 10 Years 14.5% 5.3% RECESSION Capital Generation - {ROE x (1-Payout)} 16.3% 11.0% FASTER GROWTH VALUE P/E Ratio - Latest 12 Months 22.5 24.9 BETTER VALUE Dividend Yield 1.7% 1.3% BETTER INCOME MARKET CHARACTERISTICS $ Weighted Average Market Capitalization $1,100 million* $880 million COMPARABLE SIZE Monthly Standard Deviation - Since Inception 12.3% 15.4% LESS MARKET RISK
Note: Data as of December 31, 1998 and is subject to change. Data is obtained from the Frank Russell Company and is assumed to be reliable. * Excludes one company over $3 billion in market cap that we are looking to replace. S&P 500 standard deviation, a generally accepted measure of investment risk, is 12.3%. 8 KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND COMMENTARY: Small stock investors experienced a wild ride during the second half of 1998. In the third quarter alone, the Russell 2000 Index lost over 20%. Fortunately, the fund was down less than half that amount, but this type of market environment creates an opportune time to consider how much risk is being assumed to generate investment returns. Most investors manage risk through diversification. We agree that diversification is important and we manage a diversified portfolio. But our primary tool for controlling risk is quality - quality of the businesses and financial results of the companies we are willing to invest in. Because of the strength of the business franchise and financial results of our companies, they tend to grow in economic expansions and recessions alike. The chart above shows that while the Russell 2000 Index gave back half a decade's earnings growth in the 1991 recession (8.3% EPS growth over the past 10 years vs. 16.6% over the past 5 years), our portfolio of companies has grown earnings consistently (16.4% over the past 10 years vs. 16.3% over the past 5 years). Earnings for small companies, as measured by the Russell 2000 index, were down in 1998. Small stocks were down as well. Earnings for our portfolio of small companies were up in 1998. Our portfolio of small stocks was up as well. We focus on high quality small companies with consistent growth. Our focus on quality results in competitive investment returns while better protecting our clients' capital in difficult times. OUTLOOK: After five consecutive years of small stocks under performing large stocks, our current Small Cap portfolio now sells at a 25% discount P/E ratio versus the S&P 500 Index of large stocks. We own high quality companies growing faster than the S&P 500. We believe that these are reasons to expect this portfolio to once again sell at a premium P/E ratio to the S&P 500 in the future. [PERFORMANCE CHART] KAYNE ANDERSON SMALL CAP P/E VERSUS S&P 500 P/E KAYNE ANDERSON KAYNE ANDERSON SMALL CAP S&P 500 SMALL CAP S&P 500 --------- ------- --------- ------- 12/88 $1.00 $0.00 $1.00 1/94 $1.00 $0.84 $1.84 1/89 $1.00 ($0.03) $0.97 2/94 $1.00 $0.84 $1.84 2/89 $1.00 $0.02 $1.02 3/94 $1.00 $0.87 $1.87 3/89 $1.00 $0.01 $1.01 4/94 $1.00 $0.84 $1.84 4/89 $1.00 $0.02 $1.02 5/94 $1.00 $0.80 $1.80 5/89 $1.00 $0.05 $1.05 6/94 $1.00 $0.79 $1.79 6/89 $1.00 $0.02 $1.02 7/94 $1.00 $0.76 $1.76 7/89 $1.00 ($0.01) $0.99 8/94 $1.00 $0.79 $1.79 8/89 $1.00 ($0.01) $0.99 9/94 $1.00 $0.84 $1.84 9/89 $1.00 $0.02 $1.02 10/94 $1.00 $0.85 $1.85 10/89 $1.00 $0.03 $1.03 11/94 $1.00 $0.87 $1.87 11/89 $1.00 $0.03 $1.03 12/94 $1.00 $0.90 $1.90 12/89 $1.00 $0.01 $1.01 1/95 $1.00 $0.84 $1.84 1/90 $1.00 $0.01 $1.01 2/95 $1.00 $0.88 $1.88 2/90 $1.00 $0.03 $1.03 3/95 $1.00 $0.88 $1.88 3/90 $1.00 $0.03 $1.03 4/95 $1.00 $0.87 $1.87 4/90 $1.00 $0.07 $1.07 5/95 $1.00 $0.80 $1.80 5/90 $1.00 $0.06 $1.06 6/95 $1.00 $0.84 $1.84 6/90 $1.00 $0.08 $1.08 7/95 $1.00 $0.84 $1.84 7/90 $1.00 $0.08 $1.08 8/95 $1.00 $0.91 $1.91 8/90 $1.00 $0.04 $1.04 9/95 $1.00 $0.89 $1.89 9/90 $1.00 $0.06 $1.06 10/95 $1.00 $0.83 $1.83 10/90 $1.00 $0.04 $1.04 11/95 $1.00 $0.82 $1.82 11/90 $1.00 $0.06 $1.06 12/95 $1.00 $0.84 $1.84 12/90 $1.00 $0.12 $1.12 1/96 $1.00 $0.81 $1.81 1/91 $1.00 $0.12 $1.12 2/96 $1.00 $0.82 $1.82 2/91 $1.00 $0.14 $1.14 3/96 $1.00 $0.82 $1.82 3/91 $1.00 $0.16 $1.16 4/96 $1.00 $0.87 $1.87 4/91 $1.00 $0.19 $1.19 5/96 $1.00 $0.84 $1.84 5/91 $1.00 $0.21 $1.21 6/96 $1.00 $0.82 $1.82 6/91 $1.00 $0.25 $1.25 7/96 $1.00 $0.80 $1.80 7/91 $1.00 $0.26 $1.26 8/96 $1.00 $0.80 $1.80 8/91 $1.00 $0.27 $1.27 9/96 $1.00 $0.78 $1.78 9/91 $1.00 $0.34 $1.34 10/96 $1.00 $0.82 $1.82 10/91 $1.00 $0.42 $1.42 11/96 $1.00 $0.79 $1.79 11/91 $1.00 $0.46 $1.46 12/96 $1.00 $0.88 $1.88 12/91 $1.00 $0.43 $1.43 1/97 $1.00 $0.76 $1.76 1/92 $1.00 $0.59 $1.59 2/97 $1.00 $0.75 $1.75 2/92 $1.00 $0.64 $1.64 3/97 $1.00 $0.79 $1.79 3/92 $1.00 $0.65 $1.65 4/97 $1.00 $0.72 $1.72 4/92 $1.00 $0.58 $1.58 5/97 $1.00 $0.73 $1.73 5/92 $1.00 $0.57 $1.57 6/97 $1.00 $0.73 $1.73 6/92 $1.00 $0.56 $1.56 7/97 $1.00 $0.74 $1.74 7/92 $1.00 $0.56 $1.56 8/97 $1.00 $0.84 $1.84 8/92 $1.00 $0.62 $1.62 9/97 $1.00 $0.88 $1.88 9/92 $1.00 $0.69 $1.69 10/97 $1.00 $0.88 $1.88 10/92 $1.00 $0.68 $1.68 11/97 $1.00 $0.88 $1.88 11/92 $1.00 $0.71 $1.71 12/97 $1.00 $0.86 $1.86 12/92 $1.00 $0.76 $1.76 1/98 $1.00 $0.87 $1.87 1/93 $1.00 $0.78 $1.78 2/98 $1.00 $0.87 $1.87 2/93 $1.00 $0.76 $1.76 3/98 $1.00 $0.85 $1.85 3/93 $1.00 $0.77 $1.77 4/98 $1.00 $0.86 $1.86 4/93 $1.00 $0.74 $1.74 5/98 $1.00 $0.85 $1.85 5/93 $1.00 $0.75 $1.75 6/98 $1.00 $0.81 $1.81 6/93 $1.00 $0.79 $1.79 7/98 $1.00 $0.80 $1.80 7/93 $1.00 $0.82 $1.82 8/98 $1.00 $0.76 $1.76 8/93 $1.00 $0.82 $1.82 9/98 $1.00 $0.87 $1.87 9/93 $1.00 $0.88 $1.88 10/98 $1.00 $0.80 $1.80 10/93 $1.00 $0.81 $1.81 11/98 $1.00 $0.77 $1.77 11/93 $1.00 $0.82 $1.82 12/98 $1.00 $0.00 $0.00 12/93 $1.00 $0.86 $1.86 Price / Earnings ratio for the stocks currently in the Kayne Anderson Small Cap Fund, as of December 31, 1998, divided by the Price / Earnings ratio of the Standard & Poors 500 Index. Source: Compustat This information is subject to change. 9 KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND [PERFORMANCE CHART] Average Annual Total Return for the periods ending December 31, 1998 One Year Since Inception (10/18/96) 16.17% 18.12% COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND, THE RUSSELL 2000 INDEX AND THE RUSSELL 2500 INDEX Kayne Anderson Small Cap Rising Dividends Fund Russell 2000 Index Russell 2500 Index ------------------------- ------------------ ------------------ Oct-96 10,000 10,000 10,000 Dec-96 10,401 10,471 10,438 Mar-97 10,129 9,930 10,088 Jun-97 11,390 11,539 11,612 Sep-97 12,856 13,257 13,279 Dec-97 12,426 12,813 12,980 Mar-98 13,781 14,101 14,311 Jun-98 13,933 13,444 13,714 Sep-98 12,506 10,736 11,099 Dec-98 14,435 12,486 13,030 Past performance is not predictive of future performance. 10 KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998 - -------------------------------------------------------------------------------- Shares COMMON STOCKS: 97.9% Market Value - -------------------------------------------------------------------------------- BASIC MATERIALS / PACKAGING: 9.1% 39,889 Bemis Company .................................. $ 1,513,289 28,876 Liqui-Box Corporation .......................... 1,501,553 ----------- 3,014,842 ----------- CAPITAL GOODS / MACHINERY EQUIPMENT: 9.9% 62,326 Federal Signal Corporation ..................... 1,706,174 30,117 Nordson Corporation ............................ 1,547,260 ----------- 3,253,434 ----------- CONSUMER CYCLICALS / FURNITURE: 4.9% 91,440 LA-Z Boy Chair Company ......................... 1,628,776 ----------- CONSUMER CYCLICAL / SERVICES: 4.7% 21,956 Cintas Corporation ............................. 1,546,526 ----------- CONSUMER STAPLES / FOOD: 4.5% 37,920 Tootsie Roll Industries, Inc. .................. 1,483,620 ----------- ENERGY / OIL & GAS PRODUCTION: 3.8% 41,129 Devon Energy Corporation ....................... 1,262,146 ----------- FINANCE / BANKING: 9.5% 90,002 National Commerce Bancorp ...................... 1,693,162 54,033 Washington Federal, Inc. ....................... 1,442,005 ----------- 3,135,167 ----------- FINANCE / FINANCIAL SERVICES: 5.4% 62,420 Eaton Vance Corporation ........................ 1,303,017 10,581 Fiduciary Trust Company ........................ 465,565 ----------- 1,768,582 ----------- FINANCE / INSURANCE: 9.7% 62,572 American Heritage Life Investment Corporation .. 1,529,103 42,406 Mutual Risk Management, Ltd. ................... 1,659,134 ----------- 3,188,237 ----------- 11 KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998, CONTINUED - -------------------------------------------------------------------------------- Shares Market Value - -------------------------------------------------------------------------------- HEALTH CARE / DRUGS & HOSPITAL SUPPLIES: 10.9% 74,794 Ballard Medical Products ....................... $ 1,818,430 54,760 Landauer Inc. .................................. 1,772,855 ----------- 3,591,285 ----------- TECHNOLOGY / COMPUTER & OFFICE EQUIPMENT: 6.7% 96,780 Reynolds & Reynolds, Inc., Class A ............. 2,219,891 ----------- TECHNOLOGY / SEMICONDUCTORS: 4.9% 18,213 Linear Technology Corporation .................. 1,631,202 ----------- TECHNOLOGY / SOFTWARE & SERVICE: 4.5% 107,744 Timberline Software Corporation ................ 1,481,480 ----------- TRANSPORTATION / AIR TRANSPORT: 3.8% 57,650 Air Express International Corporation .......... 1,253,888 ----------- UTILITIES / CABLE TELEVISION: 5.6% 52,066 TCA Cable TV, Inc. ............................. 1,858,105 ----------- Total Common Stocks (cost $28,868,391) ......... 32,317,181 ----------- Total Investments in Securities (cost $28,868,391+): 97.9% ......................... 32,317,181 Other Assets less Liabilities: 2.1% ............ 699,337 ----------- NET ASSETS: 100.0% $33,016,518 =========== + Cost for Federal income tax purposes is the same. Net unrealized appreciation consists of: Gross unrealized appreciation...................... $ 4,223,343 Gross unrealized depreciation...................... (774,553) ----------- Net unrealized appreciation..................... $ 3,448,790 =========== See accompanying Notes to Financial Statements. 12 KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND OBJECTIVE: The objective of the International Rising Dividends Fund is to achieve superior long-term results. The Fund seeks to achieve this objective by investing in the best quality international companies. We pursue this goal through a focused investment philosophy that relies on the following principles: (1) a commitment to quality; (2) long-term vision; (3) independent fundamental research; (4) broad diversification; and (5) a value driven-decision 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, Australasia and the Far East) index. COMMENTARY: For the year ended December 31, 1998, the Kayne Anderson International Rising Dividends Fund had a total return of +26.5% versus +20.3% for the MSCI EAFE index (in dollar terms). The Fund's performance is all the more satisfactory because the majority of international managers significantly underperformed their benchmarks. In fact, the average performance of the diversified international mutual funds tracked by Lipper was +12.6%. During 1998, the European equity markets moved upward strongly (+28.9%), as tracked by the Morgan Stanley Europe Index, continuing the trend from 1997 (+24.2% on average, in dollar terms). The Morgan Stanley Europe Index tracks the 15 developed countries in Europe. The Japanese market, however, rose by only +4.3% in dollar terms. The US dollar depreciated 12.3% against the Yen to 114 (Y)/$ and declined 7.2% against the German Mark to 1.67 DM/$, while remaining relatively stable against the Pound Sterling at 1.68 $/(pound). At the end of December 1998, the Fund was fully invested. The four largest countries represented were the United Kingdom (27.5%), France (16.0%), Japan (13.7%), and Switzerland (7.6%). The major changes in the portfolio during the second half of the year included a slight reduction of the Fund's exposure to Japan and an increase of the Fund's weight to the United Kingdom, France, and the Netherlands. In Japan, we sold Nintendo and Rohm, which were both trading above our target prices, and purchased Sony, the world's second-largest consumer electronic products manufacturer. In the UK, we bought Zeneca, the third-largest British pharmaceutical company and a world leader in oncology, while we sold British American Tobacco after it was spun off from BAT Industries. In France we added to some of our favorite positions: AXA (the world's third-largest insurer) and Total (a world-class integrated oil company). In the Netherlands we sold Polygram, which had been taken over by Seagram, and Unilever, whose valuation had become unattractive. We used the proceeds from these sales to purchase ING, an emerging global financial services group. We also bought Panamerican Beverages of Mexico, an "anchor" bottler in the Coca Cola system with strong market positions throughout Latin America. Finally, we eliminated Genting, our sole position in Malaysia, and sold Hong Kong Telecom after its strong relative outperformance. In general, 1998 has been a paradoxical year, full of surprises that tested investors' nerves and their stamina. Since 1997 ended on such an uncertain and problematic note, 1998 was widely expected to be the "crisis year" that would ravage investor performance across the board. In actuality, we did get the crisis -- but we got the returns as well. The price we had to pay for this odd combination was extreme volatility, the source of so many mistakes 13 KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND for the average market participant. We hope it has convinced even the most skeptical investor that market timing is not a strategy on which to run a long-term international equity portfolio. Ironically, the uncertainty in emerging markets has proved to be a boon for the European equity markets, as it has kept interest rates low and inflation under control. Kayne Anderson's International Rising Dividends Fund portfolio, which today is weighted towards European stocks, has profited from investors' gravitation to quality. Our investment strategy, focusing exclusively on the highest-quality stocks around the world, has buffered the Fund portfolio against the negative impact of the Asian and Russian crises. The country allocation of the Fund, as a percentage of invested assets, on December 31, 1998 was: [PIE CHART] UK 27.4% Sweden 6.2% France 15.8% Japan 13.9% Switzerland 7.5% Netherlands 6.7% Hong Kong 5.3% Finland 5.6% Australia 3.2% Mexico 3.1% Spain 5.3% OUTLOOK: Although we would recommend some prudence in the short term after the powerful advance of the last three months, we view the future with confidence. We remind investors that January 1, 1999 marked the birth of the Euro, which we believe will foster greater economic discipline in Europe and create the accelerated structural changes in European companies that will continue to benefit investors. We believe that the emerging markets turmoil of the past two years will actually serve to pave the road to a brighter future, as they provide powerful stimuli to reform archaic and inefficient economic and social systems. Our conservative, disciplined and quality-oriented investment approach should provide potential investors with the necessary comfort to remain committed to the international equity asset class for the long term. 14 KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND [PERFORMANCE CHART] Average Annual Total Return for the periods ending December 31, 1998 One Year Since Inception (10/18/96) 26.47% 20.58% COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND AND THE MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALASIA AND FAR EAST INDEX Kayne Anderson International MSCI Europe, Australasia Rising Dividends Fund and Far East Index --------------------- ------------------ Oct-96 10,000 10,000 Dec-96 10,256 10,269 Mar-97 10,604 10,116 Jun-97 11,949 11,436 Sep-97 12,306 11,363 Dec-97 11,940 10,480 Mar-98 13,853 12,030 Jun-98 14,071 12,166 Sep-98 12,462 10,444 Dec-98 15,101 12,611 Past performance is not predictive of future performance. 15 KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998 - -------------------------------------------------------------------------------- Shares COMMON STOCKS: 100.4% Market Value - -------------------------------------------------------------------------------- AUSTRALIA: 3.2% 78,159 Broken Hill Proprietary ADR ...................... $ 1,123,535 ----------- FINLAND: 5.6% 16,490 Nokia Corporation ADR ............................ 1,986,015 ----------- FRANCE: 15.8% 26,684 AXA-UAP S.A. ADR ................................. 1,927,919 16,872 Groupe Danone S.A. ADR ........................... 949,051 30,580 Louis Vuitton Moet Hennessey ADR ................. 1,246,135 30,050 Total S.A. ADR ................................... 1,494,988 ----------- 5,618,093 ----------- HONG KONG / CHINA: 5.3% 730,000 Hong Kong & China Gas Co. Ltd. ................... 928,122 15,000 Hong Kong & China Gas Co. Ltd. Warrants (Exp. 9/30/99) ................................. 987 3,776 HSBC Holdings Plc ADR ............................ 940,707 ----------- 1,869,816 ----------- JAPAN: 13.9% 40,000 Canon Inc. 850,688 80,000 Kao Corporation 1,796,488 11,000 Sony Corporation 797,235 32,000 Uni-Charm 1,493,548 ----------- 4,937,959 ----------- MEXICO: 3.1% 49,850 Panamerican Beverages Inc. Class A ADR 1,087,353 ----------- NETHERLANDS: 6.7% 49,299 Elsevier N.V. ADR ................................ 1,380,373 16,620 ING Groep N.V. ................................... 1,012,335 ----------- 2,392,708 ----------- SPAIN: 5.4% 38,621 Endesa S.A. ADR .................................. 1,042,768 15,650 Repsol S.A. ADR .................................. 854,881 ----------- 1,897,649 ----------- 16 KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998, CONTINUED - -------------------------------------------------------------------------------- Shares Market Value - -------------------------------------------------------------------------------- SWEDEN: 6.3% 49,321 Astra AB-ADR, Class A ............................ $ 1,020,329 50,000 L.M. Ericsson Telephone ADR ...................... 1,196,875 ----------- 2,217,204 ----------- SWITZERLAND: 7.6% 6,162 Nestle S.A. ADR .................................. 670,719 10,290 Novartis AG ADR .................................. 1,011,409 8,139 Roche Holdings, Ltd., ADR ........................ 993,167 ----------- 2,675,295 ----------- UNITED KINGDOM: 27.5% 43,159 Allied Zurich Plc ADR ............................ 641,839 40,730 BOC Group Plc .................................... 1,109,893 23,070 Cable & Wireless Plc ADR ......................... 847,823 18,230 Diageo Plc ADR ................................... 843,138 73,000 Marks and Spencer Plc ............................ 499,217 45,000 Pearson Plc ...................................... 890,550 13,055 Reuters Holding Plc ADR .......................... 827,360 91,440 Siebe Plc ADR .................................... 718,096 46,659 Tomkins Plc ADR .................................. 933,180 8,432 Vodafone Group Plc ADR ........................... 1,358,606 25,000 Zeneca Group Plc ................................. 1,085,298 ----------- 9,755,000 ----------- Total Common Stocks (cost $31,429,337) ........... 35,560,627 ----------- Total Investments in Securities (cost $31,429,337+): 100.4% .......................... 35,560,627 Liabilities less Other Assets: (0.4)% ............ (125,067) ----------- NET ASSETS: 100.0% ............................... $35,435,560 =========== +Cost for Federal income tax purposes is the same. Net unrealized appreciation consists of: Gross unrealized appreciation .................. $ 6,156,147 Gross unrealized depreciation .................. (2,024,857) ----------- Net unrealized appreciation .................. $ 4,131,290 =========== See accompanying Notes to Financial Statements. 17 KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND PORTFOLIO OF INVESTMENTS BY INDUSTRY AT DECEMBER 31, 1998 - -------------------------------------------------------------------------------- Industry Percentage - -------------------------------------------------------------------------------- Audio/Video Home Products ........................ 2.3 Beverages ........................................ 10.9 Books ............................................ 3.9 Chemicals & Allied Products ...................... 12.4 Commercial Banking ............................... 2.9 Communications Equipment/Services ................ 11.5 Crude Petroleum & Natural Gas .................... 9.8 Drugs ............................................ 11.6 Electric Services ................................ 2.9 Electronic Components & Accessories .............. 2.0 Electronic Industrial Apparatus .................. 2.4 Food Beverage & Tobacco .......................... 2.7 Holding Offices .................................. 9.9 Retail Stores .................................... 1.4 Services Allied with Exchange of Security ........ 2.3 Surgical, Medical, Dental Instruments & Supplies . 2.6 Telephone Communications ......................... 6.2 Utilities ........................................ 2.7 ----- Total Investments ................................ 100.4 Liabilities less Other Assets .................... (0.4) ----- Net Assets ....................................... 100.0% ===== See accompanying Notes to Financial Statements. 18 KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND OBJECTIVE: The objective of the Intermediate Total Return Bond Fund is to seek maximum total return primarily 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: The fund's net asset value increased $0.26, from $10.75 to $11.01. For the year ended December 31, 1998, the Fund's total return (principal gain or loss and income) was 7.61%. As of December 31st, the three largest sectors represented in the Fund were: U.S. Treasury (49%), Finance (14%), and U.S. Agency Obligations (9%). The three largest individual credits held in the portfolio were U.S Treasury (49%), Federal National Mortgage Association (9%), and Government National Mortgage Association (8%). OUTLOOK: With economic activity exceeding most forecasts, the Federal Reserve is expected to maintain its current policy towards the level of interest rates for the first quarter, but with a bias towards tightening. However, deflation abroad is a concern and we will watch closely for any developments within the domestic economy. Within individual sectors, both technical and fundamental forces are at work. The supply of new U.S. Treasury debt continues to dwindle due to a U.S. government budget surplus. The Euro (the European single monetary unit) will now compete with the U.S. dollar as a safe, liquid place to park funds. Decreased demand for U.S. treasuries from abroad will likely result and should help offset the lack of supply. Corporate yield spreads are narrowing from the wide levels reached in the fourth quarter and our overweighting in the corporate sector should benefit. Higher than expected prepayments in real estate loans have limited the return for higher coupon mortgage backed securities, but with interest rates continuing to hover around the same levels, prepayments are expected to slow from their rapid pace. SECTOR DIVERSIFICATION PIE CHART DECEMBER 31, 1998 ----------------- U.S. TREASURY 49% AGENCY 9% CASH & EQUIVALENTS 4% FINANCE 14% CORPORATE 12% YANKEE/EURO 2% ASSET-BACKED 2% MORTGAGE-BACKED 8% 19 KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND [PERFORMANCE CHART] Average Annual Total Return for the periods ending December 31, 1998 One Year Since Inception (10/28/96) 7.61% 6.88% 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 Kayne Anderson Intermediate Lehman Brothers Government / Total Return Bond Fund Corporate Intermediate Bond Index ---------------------- --------------------------------- Oct-96 10,000 10,000 Dec-96 10,020 10,077 Mar-97 9,948 10,064 Jun-97 10,249 10,403 Sep-97 10,525 10,723 Dec-97 10,741 10,984 Mar-98 10,900 11,155 Jun-98 11,071 11,364 Sep-98 11,307 11,874 Dec-98 11,558 11,908 Past performance is not predictive of future performance. 20 KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998 - -------------------------------------------------------------------------------- Principal Amount LONG-TERM DEBT SECURITIES: 96.1% Market Value - -------------------------------------------------------------------------------- U.S. TREASURY OBLIGATIONS: 49.4% --------------------------------------------------- U.S. Treasury Notes / Bonds $2,700,000 6.250%, due 10/31/2001 ...................... $ 2,813,062 4,720,000 11.875%, due 11/15/2003 ...................... 6,159,600 3,300,000 7.250%, due 8/15/2004 ....................... 3,712,500 1,225,000 5.625%, due 5/15/2008 ....................... 1,307,305 ----------- Total U.S. Treasury Obligations .................. 13,992,467 ----------- U.S. AGENCY OBLIGATIONS: 8.8% --------------------------------------------------- Federal National Mortgage Association (FNMA) 1,200,000 6.100%, due 2/10/2000 ....................... 1,214,562 1,000,000 7.700%, due 8/10/2004 ....................... 1,015,747 250,000 6.950%, due 11/13/2006 ...................... 260,440 ----------- Total U.S. Agency Obligations .................... 2,490,749 ----------- MORTGAGE-BACKED / PASS-THROUGH SECURITIES: 7.9% --------------------------------------------------- Government National Mortgage Association (GNMA) 667,734 8.000%, due 7/15/2023 ....................... 694,443 563,576 8.500%, due 8/15/2025 ....................... 598,096 183,365 8.500%, due 6/15/2026 ....................... 194,597 552,488 8.000%, due 9/15/2026 ....................... 574,587 176,395 8.000%, due 11/15/2026 ...................... 183,450 ----------- Total Mortgage-Backed / Pass-Through Securities .. 2,245,173 ----------- ASSET-BACKED RECEIVABLES: 1.8% --------------------------------------------------- 515,000 WFS Financial Owner Trust, 6.800%, due 12/20/2003 522,411 ----------- CORPORATE BONDS: 28.2% --------------------------------------------------- AUTO RENTALS: 1.8% 500,000 Ryder System, Inc., 7.480%, due 5/15/2000 ........ 509,540 ----------- 21 KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998, CONTINUED - -------------------------------------------------------------------------------- Principal Amount LONG-TERM DEBT SECURITIES Market Value - -------------------------------------------------------------------------------- BEVERAGES: 2.8% $200,000 Anheuser Busch Companies, 6.750%, due 11/1/2006 .. $ 209,469 575,000 Coca-Cola Enterprises, 6.375%, due 8/1/2001 ...... 588,776 ----------- 798,245 ----------- COMMUNICATION SERVICES: 1.8% 500,000 TCI Communications, Inc., 6.375%, due 5/1/2003 ... 517,774 ----------- DEPARTMENT STORES: 0.8% 200,000 Sears Roebuck Company, 9.450%, due 7/25/2001 ..... 217,017 ----------- FINANCE: 13.7% 715,000 At&T Capital Corporation, 7.500%, due 11/15/2000 . 727,229 500,000 Bear Stearns Company, 6.625%, due 10/1/2004 ...... 513,377 200,000 Beneficial Corporation, 6.600%, due 9/26/2001 .... 204,252 500,000 Finova Capital Corporation, 6.450%, due 6/1/2000 . 503,219 680,000 Ford Motor Credit Corporation, 6.250%, due 11/8/2000 .................................. 690,403 475,000 General Motors Acceptance Corporation, 7.125%, due 5/1/2003 ................................... 501,385 200,000 Household Finance Company, 8.000%, due 8/15/2004 . 203,066 500,000 Lehman Brothers Holdings, 8.875%, due 3/1/2002 ... 534,026 ----------- 3,876,957 ----------- INDUSTRIAL: 2.8% 200,000 Allied Signal, Inc., 9.200%, due 2/15/2003 ....... 228,750 500,000 Catapillar, 8.440%, due 11/26/2003 ............... 559,116 ----------- 787,866 ----------- MOTION PICTURE PRODUCTION & OTHER SERVICES: 2.7% 735,000 Walt Disney Company, 6.375%, due 3/30/2001 ....... 757,530 ----------- YANKEEEURO: 1.8% 500,000 Cable & Wireless, 6.375%, due 3/6/2003 ........... 501,712 ----------- Total Corporate Bonds ............................ 7,966,641 ----------- Total Long-Term Debt Securities (cost $26,657,803) ............................. 27,217,441 ----------- 22 KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998, CONTINUED - -------------------------------------------------------------------------------- Market Value - -------------------------------------------------------------------------------- Total Investments in Securities (cost $26,657,803+): 96.1% ..................... $27,217,441 Other Assets less Liabilities: 3.9% .............. 1,112,697 ----------- NET ASSETS: 100.0% ............................... $28,330,138 =========== +Cost for Federal income tax purposes is the same. Net unrealized appreciation consists of: Gross unrealized appreciation .................. $ 576,018 Gross unrealized depreciation .................. (16,380) ----------- Net unrealized appreciation .................. $ 559,638 =========== See accompanying Notes to Financial Statements. 23 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's net asset value increased $0.03, from $10.74 to $10.77. After expenses, the Fund's total-return (principal gain or loss and income) for the year was 4.37%. While invested among eight sectors within the municipal bond market, the three largest sectors represented in the Fund were: General Obligation (31%), Electric Utility (19%), and Hospital (11%). The Fund was also invested in municipalities that are located in 20 different states and territories. The three states with the highest representation in the Fund were: California (41%), New York (7%), and New Jersey (6%). OUTLOOK: Intermediate-to-long-maturity municipal bonds are attractively valued relative to taxable bonds. In 1998, total issuances were the second highest ever at $284 billion, and helped to keep interest rates on municipals from moving significantly lower. New issuances in 1999 are expected to be lower but still well above $200 billion. Strong economic activity helped credit upgrades exceed downgrades by almost 7 to 1, and we expect the trend to continue. Economic strength continues to be higher than most forecasts, so the Federal Reserve is expected to maintain its current interest rate policy for the rest of the first quarter with a bias towards tightening. This should cause short-term interest rates to move slightly above their current trading range. This may cause long-term interest rates to climb as well, but as long as inflation remains subdued we would expect the rise to be limited. Deflation abroad is a concern and we will watch closely for any developments within the domestic economy. SECTOR DIVERSIFICATION PIE CHART DECEMBER 31, 1998 ----------------- GENERAL OBLIGATION 28% ELECTRIC REVENUE 19% HOSPITAL 10% HOUSING 6% IDR/PCR 8% TRANSPORTATION 7% EDUCATION 5% WATER & SEWER 5% PREREFUNDED 8% CASH & EQUIVALENTS 4% 24 KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND [PERFORMANCE CHART] Average Annual Total Return for the periods ending December 31, 1998 One Year Since Inception (10/28/96) 4.37% 3.94% 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 Intermediate Lehman Brothers Five Year Tax-Free Bond Fund Municipal Bond Index ------------------ -------------------- Oct-96 10,000 10,000 Dec-96 10,002 10,240 Mar-97 9,989 10,234 Jun-97 10,160 10,772 Sep-97 10,306 11,252 Dec-97 10,428 11,642 Mar-98 10,506 11,777 Jun-98 10,613 11,909 Sep-98 10,802 12,222 Dec-98 10,877 12,323 25 KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998 - -------------------------------------------------------------------------------- Principal Amount LONG-TERM MUNICIPAL DEBT: 97.4% Market Value - -------------------------------------------------------------------------------- GENERAL OBLIGATION: 30.7% $175,000 California State, 5.250%, dated 4/1/1998, due 10/1/2005 .................................. $ 188,562 250,000 California State, 5.375%, dated 3/1/1994, due 3/1/2006 ................................... 270,312 250,000 California State, 5.250%, dated 11/1/1996, due 6/1/2011 ................................... 265,000 100,000 California State, 6.250%, dated 3/1/1995, due 2/1/2014 ................................... 101,161 250,000 California State, 5.250%, dated 11/1/1996, due 6/1/2016 ................................... 257,812 200,000 California State Veterans Bond, 6.375%, dated 3/1/1995, due 2/1/2027 ................... 202,316 200,000 Hawaii State, 5.250%, dated 3/1/1997, due 3/1/2000 204,000 195,000 Indiana Bond Bank, 6.600%, dated 2/1/1991, ....... due 1/1/2003 ................................... 208,650 200,000 Los Angeles County, California Public Works, 5.000%, dated 11/1/1997, due 10/1/2016 ......... 202,000 250,000 Massachusetts State, 5.000%, dated 8/1/1997, due 8/1/2000 ................................... 255,937 150,000 Salt Lake City, Utah Redevelopment Agency, 5.500%, dated 8/1/1997, due 10/1/2008 .................. 162,188 300,000 San Bernardino County, California, 3.310%, dated 12/1/1996, due 6/1/2002 ........................ 309,844 250,000 Washoe County, Nevada, 6.750%, dated 3/15/1991, due 3/15/2000 .................................. 258,125 ----------- 2,885,907 ----------- EDUCATION: 4.5% 200,000 Pinal County, Arizona School District, 6.000%, dated 10/1/1992, due 7/1/2004 .................. 215,000 200,000 University California Revenues, 5.250%, dated, 8/15/1993 due 9/1/2011 ......................... 209,750 ----------- 424,750 ----------- ELECTRIC: 18.6% 200,000 Colorado Springs Utilities, 6.750%, dated 4/15/1991, due 11/15/2005 ...................... 218,500 100,000 HillsBorough, Florida Utilities, 7.000%, dated 9/1/1991, due 8/1/2114 ................... 109,250 400,000 Knoxville Tennessee Electric Revenue, 5.000%, dated 11/1/1998, due 7/1/1998 .................. 396,500 100,000 Lower Colorado River Texas Authority, 5.250%, dated 5/1/1993, due 1/1/2015 ................... 101,750 Past performance is not predictive of future performance. 26 KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998, CONTINUED - -------------------------------------------------------------------------------- Principal Amount Market Value - -------------------------------------------------------------------------------- ELECTRIC, CONTINUED $ 75,000 Massachusetts State Power, 5.875%, dated 8/1/1992, due 7/1/2003 $ 80,156 200,000 Piedmont Municipal Power Agency, 6.550%, dated 9/1/1996, due 1/1/2016 201,620 200,000 Puerto Rico Electric Power Authority, 6.000%, dated 8/15/1995, due 7/1/2000 207,500 200,000 Sacramento California Municipal Utilities District, 5.700%, dated 4/1/1993, due 5/15/2012 215,500 200,000 Tacoma Washington Electric System Revenue, 5.900%, dated 9/1/1992, due 1/1/2005 213,750 ----------- 1,744,526 ----------- HOSPITAL: 10.7% 200,000 Dade County Health Facilities Authority, 6.600%, dated 3/1/1987, due 8/15/2002 203,028 300,000 New Jersey Health Facility Financing Authority, 6.800%, dated 4/1/1992, due 7/1/2011 327,750 200,000 New York Dormitory Authority, 5.000%, dated 3/1/1997, due 8/15/2000 204,000 200,000 New York State Dormatory Authority, 5.500%, date 2/1/1998, due 2/15/2003 210,000 60,000 Puerto Rico Public Buildings Authority, 5.750%, dated 6/1/1993, due 7/1/2015 63,075 ----------- 1,007,853 ----------- HOUSING: 4.3% 200,000 New York Urban Development, 6.000%, dated 1/1/1995, due 1/1/2001 208,000 200,000 Ohio Housing Finance Agency, 3.800%, dated 8/28/1991, due 3/31/2031 200,000 ----------- 408,000 ----------- IDR / PCR: 8.2% 200,000 California Pollution Control Financing Authority, 7.150%, dated 2/1/1991, due 2/1/2011 214,750 200,000 California Pollution Control Financing Authority, 5.850%, dated 11/1/1993, due 12/1/2023 209,250 250,000 Gallup, New Mexico Pollution Control Revenue, 6.650%, dated 4/15/1992, due 8/15/2017 262,813 27 KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998, CONTINUED - -------------------------------------------------------------------------------- Principal Amount Market Value - -------------------------------------------------------------------------------- IDR / PCR, CONTINUED $ 75,000 Mercer County, North Dakota Pollution Control, 5.850%, dated 6/1/1993, due 6/1/2023 $ 79,125 ----------- 765,938 ----------- TRANSPORTATION: 7.4% 250,000 Hawaii State Airports System, 7.500%, dated 10/1/1990, due 7/1/2005 267,187 200,000 New Jersey State Turnpike Authority, 5.900%, dated 1/1/1992, due 1/1/2003 212,250 200,000 Orange County Airport, 5.500%, dated 4/2/1997, due 7/1/2002 211,250 ----------- 690,687 ----------- PREREFUNDED: 7.8% 200,000 California Health Facility Financing Authority, 6.750%, dated 10/1/1989, due 10/1/2019 209,320 150,000 Los Angeles Convention & Exhibit Center, 9.000%, dated 12/1/1985, due 12/1/2020 195,375 100,000 Orange County, California Local Transportation Authority, 5.750%, dated 9/1/1992, due 2/15/2005 107,751 200,000 Washington Public Power Supply Systems, 7.625%, dated 10/15/1990, due 7/1/2010 218,751 ----------- 731,197 ----------- WATER & SEWER: 5.2% 275,000 Contra Costa, California Water District, 5.250%, date 7/1/1993, due 10/1/2016 280,500 200,000 Los Angeles, California Wastewater System, 5.700%, dated 4/1/1993, due 6/1/2020 211,500 ----------- 492,000 ----------- Total Long-Term Municipal Debts (cost $9,074,494) 9,150,858 ----------- Total Investments in Securities (cost $9,074,494+): 97.4% 9,150,858 Other Assets less Liabilities: 2.6% 240,134 ----------- NET ASSETS: 100.0% $ 9,390,992 =========== 28 KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND PORTFOLIO OF INVESTMENTS AT DECEMBER 31, 1998, CONTINUED - -------------------------------------------------------------------------------- Principal Amount Market Value - -------------------------------------------------------------------------------- +Cost for Federal income tax purposes is the same. Net unrealized appreciation consists of: Gross unrealized appreciation $ 93,130 Gross unrealized depreciation (16,766) ----------- Net unrealized appreciation $ 76,364 =========== See accompanying Notes to Financial Statements. 29 KAYNE ANDERSON MUTUAL FUND STATEMENTS OF ASSETS AND LIABILITIES AT DECEMBER 31, 1998 - -------------------------------------------------------------------------------- RISING DIVIDENDS FUND --------- ASSETS Investments in securities, at market value (cost $36,536,733, $28,868,391, $31,429,337, $26,657,803, and $9,074,494, respectively) .............................. $48,310,979 Cash ......................................................... 267,656 Receivable for: Capital stock sold ........................................... -- Dividends and interest ....................................... 52,193 Prepaid expenses ............................................. 10,773 Due from investment advisor .................................. -- Deferred organization costs, net ............................. 9,378 ----------- Total assets ................................................. 48,650,979 ----------- LIABILITIES Cash overdraft ............................................... -- Payables: Capital stock redeemed ....................................... -- Distributions of capital gains ............................... -- Due to investment advisor .................................... 36,765 Other accrued expenses ....................................... 33,456 ----------- Total liabilities ............................................ 70,221 ----------- NET ASSETS ..................................................... $48,580,758 =========== Number of shares issued and outstanding (unlimited shares authorized without par value) ....................... 2,851,829 ----------- Net asset value, offering and redemption price per share ..... $ 17.03 =========== COMPOSITION OF NET ASSETS Paid-in capital .............................................. $35,783,560 Undistributed net investment income .......................... 0 Undistributed net realized gain (loss) on investments ........ 1,022,952 Net unrealized appreciation on investments and foreign currency ..................................................... 11,774,246 ----------- Net assets ................................................... $48,580,758 =========== See accompanying Notes to Financial Statements. 30 KAYNE ANDERSON MUTUAL FUND SMALL CAP INTERNATIONAL RISING RISING INTERMEDIATE INTERMEDIATE DIVIDENDS DIVIDENDS TOTAL RETURN TAX-FREE FUND FUND BOND FUND BOND FUND --------------------------------------------------------------------------- $ 32,317,181 $35,560,627 $27,217,441 $9,150,858 585,218 -- 689,495 57,989 49,887 -- -- 74,246 25,764 420,179 168,618 13,119 11,094 16,051 15,222 -- -- -- 10,130 11,954 12,725 11,953 11,953 ------------ ----------- ----------- ---------- 33,051,605 35,610,210 28,355,119 9,414,770 ------------ ----------- ----------- ---------- -- 129,964 -- -- 1,301 661 -- -- -- 2,262 572 -- 21,837 29,465 11,850 -- 11,949 12,298 12,559 23,778 ------------ ----------- ----------- ---------- 35,087 174,650 24,981 23,778 ------------ ----------- ----------- ---------- $ 33,016,518 $35,435,560 $28,330,138 $9,390,992 ============ =========== =========== ========== 2,195,468 2,284,779 2,573,285 872,100 ========= ========= ========= ======= $ 15.04 $ 15.51 $ 11.01 $ 10.77 ============ =========== =========== ========== $ 29,735,907 $31,304,200 $27,732,545 $9,313,072 0 0 0 1,676 (168,179) 0 37,955 (120) 3,448,790 4,131,360 559,638 76,364 ------------ ----------- ----------- ---------- $ 33,016,518 $35,435,560 $28,330,138 $9,390,992 ============ =========== =========== ========== 31 KAYNE ANDERSON MUTUAL FUND STATEMENTS OF OPERATIONS - FOR THE YEAR ENDED DECEMBER 31, 1998 - -------------------------------------------------------------------------------- RISING DIVIDENDS FUND --------- INVESTMENT INCOME: Income: Dividend ................................................... $ 696,723 Interest ................................................... 57,488 ----------- Total income ............................................. 754,211 ----------- Expenses: Investment advisory fees ................................... 334,518 Custodian fees ............................................. 14,080 Administration fees ........................................ 30,783 Fund accounting fees ....................................... 34,739 Transfer agent fees ........................................ 23,398 Legal fees ................................................. 8,257 Insurance .................................................. 1,647 Audit fees ................................................. 14,500 Miscellaneous expenses ..................................... 4,038 Reports to shareholders .................................... 3,001 Registration fees .......................................... 17,961 Trustees' fees ............................................. 4,701 Amortization of deferred organization expenses ............. 6,081 ----------- Total expenses ........................................... 497,704 Less: Expenses reimbursed/waived ......................... -- ----------- Net expenses ............................................. 497,704 ----------- NET INVESTMENT INCOME .................................. 256,507 ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) on investments ...................... 5,326,022 Net change in unrealized appreciation of investments and foreign currency ....................................... (98,265) ----------- Net gain on investments ...................................... 5,227,757 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ... $ 5,484,264 =========== 32 KAYNE ANDERSON MUTUAL FUND SMALLCAP RISING INTERNATIONAL INTERMEDIATE INTERMEDIATE DIVIDENDS RISING DIVIDENDS TOTAL RETURN TAX-FREE FUND FUND BOND FUND BOND FUND --------------------------------------------------------------------------- $ 399,531 $ 547,236 $ -- $ -- 31,685 56,835 1,411,875 318,389 ----------- ----------- ----------- --------- 431,216 604,071 1,411,875 318,389 ----------- ----------- ----------- --------- 218,722 256,701 120,618 34,150 9,966 10,720 5,429 2,518 26,052 26,052 26,052 20,873 30,570 36,101 32,258 37,318 21,456 21,138 20,322 22,877 2,749 1,949 2,939 1,500 91 91 70 70 5,100 5,168 5,153 5,150 3,846 4,002 2,263 2,000 2,688 4,701 1,000 1,000 16,577 16,577 16,487 16,487 4,734 4,429 4,438 4,438 4,249 4,249 4,249 4,249 ----------- ----------- ----------- --------- 346,800 391,878 241,278 152,630 (12,965) (18,889) (15,132) (99,797) ----------- ----------- ----------- --------- 333,835 372,989 226,146 52,833 ----------- ----------- ----------- --------- 97,381 231,082 1,185,729 265,556 ----------- ----------- ----------- --------- (168,179) 750,612 131,606 5,204 3,090,369 3,715,222 490,291 23,836 ----------- ----------- ----------- --------- 2,922,190 4,465,834 621,897 29,040 ----------- ----------- ----------- --------- $ 3,019,571 $ 4,696,916 $ 1,807,626 $ 294,596 =========== =========== =========== ========= See accompanying Notes to Financial Statements. 33 KAYNE ANDERSON MUTUAL FUND STATEMENTS OF CHANGES IN NET ASSETS - -------------------------------------------------------------------------------- RISING DIVIDENDS FUND -------------------------- Year Year INCREASE IN NET ASSETS FROM: Ended Ended 12/31/97 12/31/98 -------- -------- OPERATIONS Net investment income .............................. $ 256,507 $ 198,336 Net realized gain (loss) on investments sold ....... 5,326,022 5,093,470 Net change in unrealized appreciation of investments (98,265) 4,378,552 ----------- ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .................................... 5,484,264 9,670,358 ----------- ----------- DISTRIBUTIONS TO SHAREHOLDERS Net investment income .............................. (262,588) (222,979) Net realized gain on investments ................... (6,701,884) (2,795,680) Return of capital .................................. -- -- ----------- ----------- TOTAL DISTRIBUTIONS TO SHAREHOLDERS .............. (6,964,472) (3,018,659) ----------- ----------- CAPITAL SHARE TRANSACTIONS Proceeds from shares sold .......................... 12,570,871 11,725,624 Net asset value of shares issued on reinvestment of distributions ................................. 9,358,197 -- Cost of shares redeemed ............................ (7,150,626) (9,212,376) ----------- ----------- NET INCREASE FROM CAPITAL SHARE TRANSACTIONS ..... 14,778,442 2,513,248 ----------- ----------- TOTAL INCREASE IN NET ASSETS ..................... 13,298,234 9,164,947 NET ASSETS Beginning of period ................................ 35,282,524 26,117,577 ----------- ----------- END OF PERIOD ...................................... $48,580,758 $35,282,524 =========== =========== CHANGE IN SHARES Shares sold ........................................ 692,639 752,018 Shares issued in reinvestment of distributions ..... 527,641 -- Shares redeemed .................................... (410,214) (534,351) ----------- ----------- Net increase ..................................... 810,066 217,667 =========== =========== See accompanying Notes to Financial Statements. 34
KAYNE ANDERSON MUTUAL FUND SMALL CAP INTERNATIONAL INTERMEDIATE INTERMEDIATE RISING DIVIDENDS RISING DIVIDENDS TOTAL RETURN TAX-FREE FUND FUND BOND FUND BOND FUND - ---------------------------------------------------------------------------------------------------------------- Year Year Year Year Year Year Year Year Ended Ended Ended Ended Ended Ended Ended Ended 12/31/97 12/31/98 12/31/97 12/31/98 12/31/97 12/31/98 12/31/97 12/31/97 -------- -------- -------- -------- -------- -------- -------- -------- $ 97,381 $ 18,287 $ 231,082 $ 25,041 $ 1,185,729 $ 292,768 $ 265,556 $ 176,838 (168,179) 237,764 750,612 20,183 131,606 (5,750) 5,204 (1,453) 3,090,369 336,930 3,715,222 397,529 490,291 102,483 23,836 58,234 - ------------ ----------- ------------ ----------- ------------ ----------- ----------- ----------- 3,019,571 592,981 4,696,916 442,753 1,807,626 389,501 294,596 233,619 - ------------ ----------- ------------ ----------- ------------ ----------- ----------- ----------- (101,850) (23,419) (206,890) (30,206) (1,189,978) (298,892) (268,129) (181,326) -- (22,399) (750,612) (20,183) (89,690) -- (3,871) -- (313,138) -- -- -- -- -- -- -- - ------------ ----------- ------------ ----------- ------------ ----------- ----------- ----------- (414,988) (45,818) (957,502) (50,389) (1,279,668) (298,892) (272,000) (181,326) - ------------ ----------- ------------ ----------- ------------ ----------- ----------- ----------- 26,726,710 8,244,623 27,482,344 6,170,378 23,343,075 933,235 3,766,151 787,429 432,070 -- 964,005 396 1,228,220 261,111 292,998 157,563 (3,240,796) (3,105,616) (3,762,499) (605,671) (3,029,904) (57,661) (705,956) (106,522) - ------------ ----------- ------------ ----------- ------------ ----------- ----------- ----------- 23,917,984 5,139,007 24,683,850 5,565,103 21,541,391 1,136,685 3,353,193 838,470 - ------------ ----------- ------------ ----------- ------------ ----------- ----------- ----------- 26,522,567 5,686,170 28,423,264 5,957,467 22,069,349 1,227,294 3,375,789 890,763 6,493,951 807,781 7,012,296 1,054,829 6,260,789 5,033,495 6,015,203 5,124,440 - ------------ ----------- ------------ ----------- ------------ ----------- ----------- ----------- $ 33,016,518 $ 6,493,951 $ 35,435,560 $ 7,012,296 $ 28,330,138 $ 6,260,789 $ 9,390,992 $ 6,015,203 ============ =========== ============ =========== ============ =========== =========== =========== 1,897,692 656,347 1,923,801 507,753 2,153,359 87,412 350,249 73,658 29,469 -- 63,755 28 93,163 24,683 27,265 14,770 (226,493) (234,584) (258,861) (48,344) (274,756) (5,200) (65,550) (10,049) - ------------ ----------- ------------ ----------- ------------ ----------- ----------- ----------- 1,700,668 421,763 1,728,695 459,437 1,971,766 106,895 311,964 78,379 ============ =========== ============ =========== ============ =========== =========== ===========
35 KAYNE ANDERSON MUTUAL FUND FINANCIAL HIGHLIGHTS For a capital share outstanding throughout each period - --------------------------------------------------------------------------------
RISING DIVIDENDS FUND --------------------------------------------- Year Year Year 05/01/95* Ended Ended Ended to 12/31/98 12/31/97 12/31/96 12/31/95 -------- -------- -------- -------- Net asset value, beginning of period ........... $ 17.28 $ 14.32 $ 12.63 $ 10.65 ------- ------- ------- ------- Income from investment operations: Net investment income ........................ 0.11 0.10 0.08 0.07 Net realized and unrealized gains on investments ............................ 2.38 4.34 2.35 2.13 ------- ------- ------- ------- Total income from investment operations ........ 2.49 4.44 2.43 2.20 ------- ------- ------- ------- Less distributions: From net investment income ................... (0.11) (0.11) (0.08) (0.07) From net realized gains ...................... (2.63) (1.37) (0.66) (0.15) From paid in capital ......................... 0.00 0.00 0.00 0.00 ------- ------- ------- ------- Total distributions ............................ (2.74) (1.48) (0.74) (0.22) ------- ------- ------- ------- Net asset value, end of period ................. $ 17.03 $ 17.28 $ 14.32 $ 12.63 ======= ======= ======= ======= Total return ................................... 14.14% 30.99% 19.09% 20.65%** Net assets, end of period (in 000's) ........... $48,581 $35,283 $26,118 $20,613 Ratio of expenses to average net assets:+ Before expense reimbursement ................. -- -- -- -- After expense reimbursement .................. 1.11% 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/recoupment) ...... 0.57% 0.55% 0.59% 0.94%+ Portfolio turnover rate ........................ 76% 51% 23% 28%
* Commencement of operations. ** Not annualized. +Annualized. See accompanying Notes to Financial Statements. 36 KAYNE ANDERSON MUTUAL FUND SMALL CAP INTERNATIONAL RISING DIVIDENDS RISING DIVIDENDS FUND FUND - --------------------------------------------------------------------- Year Year 10/18/96* Year Year 10/18/96* Ended Ended to Ended Ended to 12/31/98 12/31/97 12/31/96 12/31/98 12/31/97 12/31/96 - -------- -------- -------- -------- -------- -------- $ 13.12 $11.06 $10.65 $ 12.61 $ 10.91 $ 10.65 0.05 0.02 0.02 0.08 0.04 0.01 2.07 2.14 0.41 3.25 1.75 0.26 2.12 2.16 0.43 3.33 1.79 0.27 (0.05) (0.05) (0.02) (0.08) (0.05) (0.01) 0.00 (0.05) 0.00 (0.35) (0.04) 0.00 (0.15) 0.00 0.00 0.00 0.00 0.00 (0.20) (0.10) (0.02) (0.43) (0.09) (0.01) $ 15.04 $13.12 $11.06 $ 15.51 $ 12.61 $ 10.91 16.17% 19.46% 4.00%** 26.47% 16.42% 2.56%** $ 33,017 $6,494 $ 808 $ 35,436 $ 7,012 $ 1,055 1.35% 3.22% 18.91%+ 1.45% 3.41% 15.74%+ 1.30% 1.30% 1.30%+ 1.38% 1.40% 1.40%+ 0.38% 0.45% 1.58%+ 0.85% 0.61% 1.14%+ 28% 47% 0% 28% 29% 0% 37 FINANCIAL HIGHLIGHTS FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD Net asset value, beginning of period ................ Income from investment operations: Net investment income ............................. Net realized and unrealized gains on investments .. Total income from investment operations ............. Less distributions: From net investment income ........................ From net realized gains ........................... From paid in capital .............................. Total distributions ................................. Net asset value, end of period ...................... Total return ........................................ Net assets, end of period (in 000's) ................ Ratio of expenses to average net assets:+ Before expense reimbursement ...................... After expense reimbursement ....................... After expense reimbursement and expenses paid indirectly ...................................... Ratio of net investment income to average net assets+ (net of expense reimbursement, if applicable) ..... Portfolio turnover rate ............................. * Commencement of operations. ** Not annualized. + Annualized. See accompanying Notes to Financial Statements. 38 KAYNE ANDERSON MUTUAL FUND INTERMEDIATE INTERMEDIATE TOTAL RETURN TAX-FREE BOND FUND BOND FUND - --------------------------------------------------------------------------- Year Year 10/28/96* Year Year 10/28/96* Ended Ended to Ended Ended to 12/31/98 12/31/97 12/31/96 12/31/98 12/31/97 12/31/96 -------- -------- -------- -------- -------- -------- $ 10.75 $ 10.59 $ 10.65 $ 10.74 $ 10.64 $ 10.65 0.51 0.56 0.09 0.43 0.34 0.01 0.30 0.18 (0.07) 0.03 0.11 (0.01) 0.81 0.74 0.02 0.46 0.45 0.00 (0.51) (0.58) (0.08) (0.43) (0.35) (0.01) (0.04) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 (0.55) (0.58) (0.08) (0.43) (0.35) (0.01) $ 11.01 $ 10.75 $ 10.59 $ 10.77 $ 10.74 $ 10.64 7.61% 7.19% 0.20%** 4.37% 4.26% 0.02%** $ 28,330 $ 6,261 $ 5,033 $ 9,391 $ 6,015 $ 5,124 1.00% 2.23% 2.10%+ 2.23% 2.29% 2.08%+ 0.94% 0.95% 0.95%+ 0.77% 1.56% 1.81%+ -- -- -- -- 0.95% 0.95%+ 4.93% 5.35% 4.72%+ 3.88% 2.58% 0.60%+ 49% 27% 0% 47% 40% 0% 39 KAYNE ANDERSON MUTUAL FUND NOTES TO FINANCIAL STATEMENTS AT DECEMBER 31, 1998 - -------------------------------------------------------------------------------- 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 separate diversified series: Rising Dividends Fund, Small 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 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 financial highlights include the operations of the Predecessor Fund for periods prior to the reorganization. The Rising Dividends Fund seeks long-term capital appreciation, with dividend income as a secondary consideration. The Fund invests primarily in equity securities, usually common stocks, of companies generally having a total market capitalization of $1 billion or more. The Small Cap Rising Dividends Fund seeks long-term capital appreciation, with dividend income as a secondary consideration. The Fund invests primarily in equity securities, usually common stocks, of small and mid-capitalization companies, which the Fund currently considers to be companies having 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. 40 KAYNE ANDERSON MUTUAL FUND NOTES TO FINANCIAL STATEMENTS AT DECEMBER 31, 1998, CONTINUED - -------------------------------------------------------------------------------- NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Fund. These policies are in conformity with generally accepted accounting principles. 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, 1998 the Small Cap Rising Dividends Fund had capital loss carryforwards available for Federal income tax purposes of $107,282 which expire in 2006. 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. 41 KAYNE ANDERSON MUTUAL FUND NOTES TO FINANCIAL STATEMENTS AT DECEMBER 31, 1998 - -------------------------------------------------------------------------------- NOTE 3 - INVESTMENT ADVISORY AND MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES For the year ended December 31, 1998, 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. As compensation for its services, the Advisor is entitled to a monthly fee at the following annual rate based upon the average daily net assets of the Funds: Rising Dividends Fund.............................................. 0.75% Small Cap Rising Dividends Fund.................................... 0.85% International Rising Dividends Fund................................ 0.95% Intermediate Total Return Bond Fund................................ 0.50% Intermediate Tax-Free Bond Fund.................................... 0.50% Although not required to do so, the Advisor has agreed to waive or reimburse the expenses of each Fund to the extent necessary so that its ratio of operating expenses to average net assets will not exceed the following levels: Rising Dividends Fund.............................................. 1.20% Small Cap Rising Dividends Fund.................................... 1.30% International Rising Dividends Fund................................ 1.40% Intermediate Total Return Bond Fund................................ 0.95% Intermediate Tax-Free Bond Fund.................................... 0.75% Pursuant to these expense limitation provisions, the Advisor reimbursed the Small Cap Rising Dividends Fund $12,965, the International Rising Dividends Fund $18,889, the Intermediate Total Return Bond Fund $15,132, and the Intermediate Tax-Free Bond Fund $99,797 during the year ended December 31, 1998. The Investment Advisory Agreement further provides that the Advisor may seek reimbursement from the funds for any fees foregone and expenses paid pursuant to these expense limitation provisions. However, such reimbursement will be made only if the actual expenses incurred by the fund in any of the three following years are less than the applicable expense limitation provisions outlined above. At December 31, 1998, the Advisor has waived fees and paid expenses of $107,140 for the Small Cap Rising Dividends Fund, $119,902 for the International Rising Dividends Fund, $96,690 for the Intermediate Total Return Bond Fund, and $142,838 for the Intermediate Tax-Free Fund which may be reimbursable in the future. 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, 1998 were as follows: Small Cap Rising Dividends Fund.................................. $48,597 International Rising Dividends Fund.............................. $ 5,749 42 KAYNE ANDERSON MUTUAL FUND Investment Company Administration, L.L.C. (the "Administrator") acts as the Funds' Administrator under an Administration Agreement. The Administrator prepares various federal and state regulatory filings, reports and returns for the Funds; prepares reports and materials to be supplied to the trustees; monitors the activities of the Funds' custodian, transfer agent and accountants; coordinates the preparation and payment of 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 the 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 Distributors, Inc. (the "Distributor") acts as the Funds' principal underwriter in a continuous public offering of the Funds' shares. The Distributor is an affiliate of the Administrator. Certain officers and Trustees of the Fund are also officers and/or directors of the Advisor. NOTE 4 - PURCHASES AND SALES OF SECURITIES For the year ended December 31, 1998, the cost of purchases and the proceeds from sales of securities, excluding short-term securities and U.S. Government securities were as follows: FUND PURCHASES SALES ---- --------- ----- Rising Dividends Fund $38,430,448 $32,398,487 Small Cap Rising Dividends Fund $29,864,665 $ 6,895,670 International Rising Dividends Fund $31,713,580 $ 7,291,010 Intermediate Total Return Bond Fund $11,350,633 $ 1,349,001 Intermediate Tax-Free Bond Fund $ 6,354,825 $ 3,059,388 The Intermediate Total Return Bond Fund purchased $18,925,384, and sold $8,093,031, respectively, of U.S. Government securities. There were no purchases or sales of U.S. Government securities by Rising Dividends Fund, Small Cap Rising Dividends Fund, International Rising Dividends Fund, and Intermediate Tax-Free Bond Fund. During the year ended December 31, 1998 the International Rising Dividends Fund realized gains in the amount of $42,057 from the "in-kind" distribution of appreciated securities to a redeeming shareholder. 43 KAYNE ANDERSON MUTUAL FUND 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 Cap Rising Dividends Fund, the International Rising Dividends Fund, the Intermediate Total Return Bond Fund, and the Intermediate Tax-Free Bond Fund), including the portfolios of investments, as of December 31, 1998, and the related statements of operations for the year then ended, and the statements of changes in net assets and the financial highlights for each of the two years in the period 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 audits. The financial highlights for each of the periods ended December 31, 1996 and 1995 were audited by other auditors whose report dated February 4, 1997 expressed an unqualified opinion on the financial highlights. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1998, by correspondence with the custodian. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of each of the Funds comprising the Kayne Anderson Mutual Funds as of December 31, 1998, the results of their operations for the year then ended, and the changes in their net assets and the financial highlights for each of the two years in the period then ended in conformity with generally accepted accounting principles. BRIGGS, BUNTING & DOUGHERTY, LLP PHILADELPHIA, PENNSYLVANIA JANUARY 22, 1999 44 ADVISOR Kayne Anderson Investment Management, LLC 1800 Avenue of the Stars, 2nd Floor Los Angeles, California 90067 (310) 556-2721 * DISTRIBUTOR First Fund Distributors, Inc. 4455 East Camelback Road, Suite 261E Phoenix, Arizona 85018 * CUSTODIAN AND TRANSFER AGENT Investors Bank & Trust Company 200 Clarendon Street Boston, Massachusetts 02116 * AUDITORS Briggs, Bunting & Dougherty, LLP Two Logan Square, Suite 2121 Philadelphia, Pennsylvania 19103 * LEGAL COUNSEL Paul, Hastings, Janofsky & Walker, LLP 345 California Street, 29th Floor San Francisco, California 94104 This report is intended for the shareholders of the 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. -----END PRIVACY-ENHANCED MESSAGE-----