-----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, UgGSNfy5QGjz8sVrYZaVlSOHj7bvmv2WukmFKU28KdQwkG6rkGDizRGSCF44wHxj ACh5WZ2B8+PwDHS853m2eg== 0000950147-99-000987.txt : 19990909 0000950147-99-000987.hdr.sgml : 19990909 ACCESSION NUMBER: 0000950147-99-000987 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990908 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KAYNE ANDERSON MUTUAL FUNDS CENTRAL INDEX KEY: 0001018593 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 956981193 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-07705 FILM NUMBER: 99707969 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 SEMI-ANNUAL REPORT FOR PERIOD ENDING 6-30-99 [KAYNE ANDERSON LOGO] Semi-Annual Report June 30, 1999 [KAYNE ANDERSON LOGO] TABLE OF CONTENTS - -------------------------------------------------------------------------------- LETTER TO SHAREHOLDERS..................................................... 2 INVESTMENT ADVISOR COMMENTS AND PORTFOLIOS OF INVESTMENTS Rising Dividends Fund............................................. 3 Small Cap Rising Dividends Fund................................... 8 International Rising Dividends Fund............................... 12 Intermediate Total Return Bond Fund............................... 18 Intermediate Tax-Free Bond Fund................................... 22 STATEMENTS OF ASSETS AND LIABILITIES....................................... 28 STATEMENTS OF OPERATIONS................................................... 30 STATEMENTS OF CHANGES IN NET ASSETS........................................ 32 FINANCIAL HIGHLIGHTS....................................................... 34 NOTES TO FINANCIAL STATEMENTS.............................................. 38 GRAPHIC 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. This semi-annual report contains financial statements for each of the funds for the period ended June 30, 1999. In addition, there are reports on the individual funds. In each case, the objective of the fund is stated and the portfolio manager has written a commentary and an 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 Rising Dividends Fund (the "Fund") is invested in a diversified portfolio of high-quality, large capitalization companies which exemplify strong management, financial strength and consistent growth. The investment goals of the Fund are to keep pace in a strong market environment, outperform during a weak market and, secondarily, provide rising dividend income throughout the entire market cycle. Our disciplined approach allows us to pursue above-average growth with lower volatility than the general market. COMMENTARY: Once again, U.S. large cap stocks provided a solid return for the first six months of this year. As of June 30, 1999, the Fund is up 12.97% vs. 12.38% for its benchmark, the S&P 500. Positive economic factors, including continued low inflation, increased corporate profitability, and sustained improvements in productivity propelled the increase in the market, as well as the Fund. For the first six months of 1999, the sectors in which the Fund was most heavily weighted included Technology, Financial, Healthcare and Consumer Staples. The Technology sector provided the most significant amount of growth over the first six months, and the Fund benefited by an increase in the sector weighting during this time. Specifically, companies including EDS, Hewlett Packard and IBM helped boost the sector. EDS appears to be successfully reengineering itself under new management. Hewlett Packard announced the separation of the company into two distinct entities, each with a more focused mission. And IBM continues to demonstrate strong leadership, and is experiencing rapid growth in the services segment of the technology industry. The Financial sector also turned in a strong performance, with Wells Fargo posting gains, reflecting the progress in achieving merger synergies from the combination of Norwest Bank and the "old" Wells Fargo. While the Healthcare sector did not experience universally positive returns, our selections within that sector nonetheless managed to also contribute positively to the Fund's overall return. Of the heaviest-weighted sectors, only Consumer Staples had a negative effect on the Fund's performance. The economic turmoil in foreign markets affected the sector in general, and companies like Gillette, McDonald's and Procter & Gamble declined as a result. These companies, as well as all Consumer Staples, should benefit as the foreign economies continue to recover. As we proceed in to the latter half of 1999, we have made some changes in the holdings of the Fund. Our holdings in IBM were increased, reflecting our confidence in their management. A new position was also established in AT&T, reflecting our belief in management's strategic realignment of the company to create a broadband platform for the delivery of bundled telecom, video and data services. We sold Royal Dutch Petroleum, which had appreciated strongly, in order to fund both the IBM and AT&T purchases. We traded our position in Franklin Resources to fund an increase in our holdings of Fannie Mae. The swap of Fannie Mae for Franklin Resources improves the Fund's characteristics by adding a stock that has both a lower P/E ratio and a lower beta (less market risk). 3 KAYNE ANDERSON RISING DIVIDENDS FUND OUTLOOK Our outlook for the domestic economy is for continued moderate growth with low inflation. We believe that international economies will begin to recover over the next year, which will benefit our multinational companies, particularly the branded consumer-oriented positions. Going forward, our focus will continue to be on positioning the Core Portfolio for consistent long-term growth. We believe that the companies in the portfolio can produce earnings growth averaging 13% to 14% annually with low variability. 4 KAYNE ANDERSON RISING DIVIDENDS FUND PORTFOLIO OF INVESTMENTS AT JUNE 30, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- Shares COMMON STOCKS: 98.5% Value - -------------------------------------------------------------------------------- BASIC MATERIALS / CHEMICALS: 3.7% 40,130 PPG Industries, Inc..................................... $ 2,370,178 ----------- CAPITAL GOODS / ELECTRICAL EQUIPMENT: 7.1% 38,450 Emerson Electric Company................................ 2,417,543 19,300 General Electric Company................................ 2,180,900 ----------- 4,598,443 ----------- CONSUMER CYCLICAL / ENTERTAINMENT & LEISURE: 3.6% 74,290 The Walt Disney Company................................. 2,289,060 ----------- CONSUMER CYCLICAL / RESTAURANTS: 3.5% 54,020 McDonald's Corporation.................................. 2,231,701 ----------- CONSUMER STAPLES / BEVERAGES: 1.9% 19,970 Coca-Cola Co............................................ 1,248,125 ----------- CONSUMER STAPLES / CONSUMER PRODUCTS: 7.3% 60,610 Gillette Company........................................ 2,485,010 25,160 Procter & Gamble Company................................ 2,245,530 ----------- 4,730,540 ----------- CONSUMER STAPLES / FOODS: 7.4% 48,430 BestFoods............................................... 2,397,285 22,040 Hershey Foods Corporation............................... 1,308,625 12,060 Wm. Wrigley Jr., Company................................ 1,085,400 ----------- 4,791,310 ----------- CAPITAL GOODS / MANUFACTURING (DIVERSIFIED): 3.9% 30,940 Illinois Tool Works Inc................................. 2,537,080 ----------- ENERGY / PETROLEUM - INTERNATIONAL: 3.6% 30,430 Exxon Corporation....................................... 2,346,913 ----------- FINANCIAL / BANKING: 4.0% 60,720 Wells Fargo & Company................................... 2,595,780 ----------- 5 KAYNE ANDERSON RISING DIVIDENDS FUND PORTFOLIO OF INVESTMENTS AT JUNE 30, 1999 (UNAUDITED), CONTINUED - -------------------------------------------------------------------------------- Shares Value - -------------------------------------------------------------------------------- FINANCIAL / FINANCIAL SERVICES: 8.5% 39,780 Federal National Mortgage Association................... $ 2,719,958 32,440 State Street Boston Corporation......................... 2,769,565 ----------- 5,489,523 ----------- FINANCIAL / INSURANCE: 3.8% 32,610 Marsh & McLennan Companies Inc.......................... 2,462,055 ----------- HEALTH CARE / DRUGS & HOSPITAL SUPPLIES: 12.1% 53,770 Abbott Laboratories..................................... 2,446,535 26,980 Johnson & Johnson....................................... 2,644,041 36,280 Merck & Co., Inc........................................ 2,684,720 ----------- 7,775,296 ----------- HEALTH CARE / MEDICAL DEVICES: 4.3% 35,170 Medtronics, Inc......................................... 2,738,863 ----------- TECHNOLOGY / COMPUTERS & OFFICE EQUIPMENT: 9.8% 26,900 Hewlett-Packard Company................................. 2,703,451 28,220 International Business Machine.......................... 3,647,436 ----------- 6,350,887 ----------- TECHNOLOGY / DATA SERVICES: 7.9% 58,360 Automatic Data Processing Inc........................... 2,567,840 44,490 Electronic Data Systems Corporation..................... 2,516,466 ----------- 5,084,306 ----------- TECHNOLOGY / SEMICONDUCTORS: 4.1% 43,920 Intel Corporation....................................... 2,613,240 ----------- TELECOMMUNICATION: 2.0% 22,900 AT&T Corporation........................................ 1,278,106 ----------- TOTAL COMMON STOCKS (Cost $49,492,341).................. 63,531,406 ----------- 6 KAYNE ANDERSON RISING DIVIDENDS FUND PORTFOLIO OF INVESTMENTS AT JUNE 30, 1999 (UNAUDITED), CONTINUED - -------------------------------------------------------------------------------- Value - -------------------------------------------------------------------------------- TOTAL INVESTMENTS IN SECURITIES (Cost $49,492,341*): 98.5%.............................. $63,531,406 OTHER ASSETS LESS LIABILITIES: 1.5%..................... 984,402 ----------- NET ASSETS: 100.0% ..................................... $64,515,808 =========== * Cost for Federal income tax purposes is the same. Net unrealized appreciation consists of: Gross unrealized appreciation......................... $14,724,181 Gross unrealized depreciation......................... (685,116) ----------- Net unrealized appreciation......................... $14,039,065 =========== See accompanying Notes to Financial Statements. 7 KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND OBJECTIVE: The goals of the KAYNE ANDERSON SMALL CAP FUND are: * To build a diversified portfolio of the next generation of high quality "blue chip" companies. * To produce returns typical of small stocks, but with no more risk than the S&P 500 Index of large stocks. In summary, we strive to buy stock in high quality companies at discount prices in order to allow clients to participate in the potential strong growth of small companies while assuming less financial and stock market risk. The following table demonstrates our commitment to these goals:
KAYNE RUSSELL ANDERSON 2000 QUALITY SMALL CAP INDEX - ------- --------- ------- Return on Equity - Past 5 Years 21.6% 14.3% MORE PROFITABLE Long-Term Debt/Total Capital 19.6% 40.1% LESS FINANCIAL RISK Interest Expense Coverage 9.8X 5.6X LESS FINANCIAL RISK Earnings Variance - Past 10 Years 32.9% 72.6% MORE DEPENDABLE A Rated by S&P 70.0% 9.5% BETTER QUALITY GROWTH Earnings Per Share Growth - Past 5 Years 14.0% 14.1% RECOVERY Earnings Per Share Growth - Past 10 Years 13.7% 7.7% RECESSION Dividend Per Share Growth - Past 5 Years 13.9% 10.8% RECOVERY Dividend Per Share Growth - Past 10 Years 12.6% 5.3% RECESSION Capital Generation - {ROE x (1-Payout)} 15.2% 11.0% FASTER GROWTH VALUE P/E Ratio - Latest 12 months 22.2 27.8 BETTER VALUE Dividend Yield 1.6% 1.3% BETTER INCOME MARKET CHARACTERISTICS $ Weighted Average Market Cap last 4 quarters $1,290 million $870 million COMPARABLE SIZE Monthly Standard Deviation - Since Inception 12.4% 15.7% LESS MARKET RISK
Notes: Data as of June 30, 1999 Data is obtained from the Frank Russell Company and CompuStat and is assumed to be reliable. S&P 500 standard deviation is 12.4%. 8 KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND COMMENTARY: After a weak first quarter in which the Russell 2000 was down 5.4%, small stocks strongly outperformed large stocks during the second quarter, with the Russell 2000 up 15.6%. For the first six months ended June 30, 1999, the Fund's total return was 9.33% vs. 9.28% for the Russell 2000. Activity was higher than normal for the first six months, all due to success. Two of our strongest performers in 1998, Cintas Corporation and Linear Technology, grew into mid-cap companies and therefore were sold. Two other holdings, Ballard Medical Products and TCA Cable TV, received acquisition offers at premium prices. We replaced these holdings with 1) Claire's Stores, a mall based retailer of fashion accessories for teenage girls that enjoys industry-leading profitability due to its strong brand name and pricing flexibility; 2) Strayer Education, the nation's most profitable post-secondary education company; 3) Hooper Holmes, the premier provider of physical examination services for the life insurance industry; and 4) Benjamin Moore, the nation's third largest paint manufacturer that focuses solely on the professional painter who is willing to pay premium prices for premium products and service. OUTLOOK: Small stocks are beginning to outperform large stocks after a multi-year period of lagging performance. Institutional investors are shifting money from large cap stocks into small cap and many large cap companies are using their richly valued stock as currency in small company takeovers. Our current Small Cap portfolio now sells at a price-to-earnings (P/E) ratio 15% lower than the P/E ratio of the S&P 500 Index of large stocks indicating good value. Our portfolio has sold as high as a 30% premium over the past decade. We own high quality companies growing faster than the S&P 500. These are reasons why we expect this portfolio to once again sell at a premium P/E ratio to the S&P 500 in the future. KAYNE ANDERSON SMALL CAP P/E VERSUS S&P 500 P/E 6/89 129.67% 10/92 90.30% 2/96 101.49% 7/89 122.28% 11/92 91.68% 3/96 97.14% 8/89 122.71% 12/92 96.37% 4/96 100.73% 9/89 120.58% 1/93 92.82% 5/96 100.97% 10/89 118.91% 2/93 91.24% 6/96 98.94% 11/89 118.24% 3/93 90.20% 7/96 93.66% 12/89 115.00% 4/93 86.34% 8/96 95.44% 1/90 110.00% 5/93 87.01% 9/96 92.80% 2/90 100.00% 6/93 85.26% 10/96 93.42% 3/90 94.11% 7/93 83.11% 11/96 90.37% 4/90 104.29% 8/93 83.57% 12/96 94.90% 5/90 105.88% 9/93 94.92% 1/97 88.17% 6/90 104.46% 10/93 89.75% 2/97 87.98% 7/90 108.17% 11/93 90.26% 3/97 89.36% 8/90 104.42% 12/93 92.74% 4/97 87.27% 9/90 104.66% 1/94 89.27% 5/97 89.77% 10/90 103.24% 2/94 89.73% 6/97 87.30% 11/90 105.56% 3/94 92.84% 7/97 87.58% 12/90 115.00% 4/94 89.89% 8/97 91.52% 1/91 110.00% 5/94 87.06% 9/97 90.31% 2/91 105.00% 6/94 92.90% 10/97 91.63% 3/91 115.00% 7/94 92.11% 11/97 91.92% 4/91 105.00% 8/94 91.95% 12/97 84.45% 5/91 105.00% 9/94 98.64% 1/98 83.65% 6/91 92.39% 10/94 96.52% 2/98 83.92% 7/91 87.82% 11/94 97.32% 3/98 81.18% 8/91 86.34% 12/94 114.34% 4/98 82.89% 9/91 80.48% 1/95 112.05% 5/98 82.66% 10/91 82.25% 2/95 113.31% 6/98 76.55% 11/91 87.19% 3/95 134.21% 7/98 74.18% 12/91 95.00% 4/95 128.48% 8/98 71.58% 1/92 93.00% 5/95 125.54% 9/98 70.68% 2/92 91.00% 6/95 129.23% 10/98 72.89% 3/92 90.87% 7/95 122.42% 11/98 71.05% 4/92 88.00% 8/95 128.00% 12/98 69.84% 5/92 88.81% 9/95 121.15% 1/99 75.12% 6/92 90.00% 10/95 113.82% 2/99 76.66% 7/92 98.00% 11/95 111.57% 3/99 73.21% 8/92 96.00% 12/95 103.69% 4/99 76.24% 9/92 95.22% 1/96 101.65% 5/99 84.39% 6/99 82.58% Price/Earnings ratio for the stocks currently in the Kayne Anderson Small Cap Fund divided by the Price / Earnings ratio of the Standard & Poors 500 Index. Source: CompuStat 9 KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND PORTFOLIO OF INVESTMENTS AT JUNE 30, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- Shares COMMON STOCKS: 96.7% Value - -------------------------------------------------------------------------------- BASIC MATERIALS / PACKAGING: 9.0% 40,427 Bemis Company.......................................... $ 1,606,973 25,749 Liqui-Box Corporation.................................. 1,384,008 ----------- 2,990,981 ----------- BASIC MATERIALS / PAINTS AND COATING: 4.3% 15,118 Benjamin Moore & Co.................................... 1,420,147 ----------- CAPITAL GOODS / MACHINERY EQUIPMENT: 8.5% 60,427 Federal Signal Corporation............................. 1,280,297 24,894 Nordson Corporation.................................... 1,524,757 ----------- 2,805,054 ----------- CONSUMER CYCLICALS / FURNITURE: 5.3% 76,952 LA-Z Boy Chair Company................................. 1,769,896 ----------- CONSUMER CYCLICALS / RETAIL: 4.7% 60,130 Claire's Stores Inc.................................... 1,540,831 ----------- CONSUMER CYCLICALS / SERVICES: 5.5% 59,552 Strayer Education Inc.................................. 1,827,502 ----------- CONSUMER STAPLES / FOOD: 4.6% 39,157 Tootsie Roll Industries, Inc........................... 1,512,439 ----------- ENERGY / OIL & GAS PRODUCTION: 3.5% 32,494 Devon Energy Corporation............................... 1,161,661 ----------- FINANCE / INSURANCE: 7.8% 57,834 American Heritage Life Insurance Corporation........... 1,416,934 34,253 Mutual Risk Management Ltd............................. 1,143,193 ----------- 2,560,127 ----------- FINANCE / BANKING: 8.9% 71,107 National Commerce Bancorp.............................. 1,555,466 61,092 Washington Federal, Inc................................ 1,370,752 ----------- 2,926,218 ----------- 10 KAYNE ANDERSON SMALL CAP RISING DIVIDENDS FUND PORTFOLIO OF INVESTMENTS AT JUNE 30, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- Shares COMMON STOCKS: 96.7% Value - -------------------------------------------------------------------------------- FINANCE / FINANCIAL SERVICES: 9.0% 70,442 Eaton Vance Corporation................................ $ 2,425,846 11,430 Fiduciary Trust Company................................ 545,809 ----------- 2,971,655 ----------- HEALTH CARE / DRUGS & HOSPITAL SUPPLIES: 9.2% 70,450 Hooper Holmes Inc...................................... 1,435,419 53,900 Landauer Inc........................................... 1,590,051 ----------- 3,025,470 ----------- TECHNOLOGY / COMPUTER & OFFICE EQUIPMENT: 5.4% 76,462 Reynolds & Reynolds Inc., Class A...................... 1,782,520 ----------- TECHNOLOGY / SOFTWARE & SERVICE: 5.4% 113,005 Timberline Software Corporation........................ 1,779,828 ----------- TRANSPORTATION/ AIR TRANSPORT: 5.6% 73,216 Air Express International Corporation.................. 1,857,857 ----------- TOTAL COMMON STOCKS (Cost $28,608,593)................. 31,932,186 ----------- TOTAL INVESTMENTS IN SECURITIES (Cost $28,608,593*): 96.7%............................. 31,932,186 OTHER ASSETS LESS LIABILITIES: 3.3%.................... 1,077,698 ----------- NET ASSETS: 100.0% .................................... $33,009,884 =========== * Cost for Federal income tax purposes is the same. Net unrealized appreciation consists of: Gross unrealized appreciation........................ $ 3,837,377 Gross unrealized depreciation........................ (513,784) ----------- Net unrealized appreciation........................ $ 3,323,593 =========== See accompanying Notes to Financial Statements. 11 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 quality international companies. We pursue this goal through a focused investment philosophy that relies on the following principles: (1) commitment to quality; (2) long-term vision; (3) independent fundamental research; (4) broad diversification; and (5) valuation-driven decision process. We define quality companies as those possessing a global competitive advantage, management excellence, financial strength and flexibility, high 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 six months ended June 30, 1999, the Kayne Anderson International Rising Dividends Fund had a total return of +12.0% versus +4.1% for the MSCI EAFE index (in dollar terms). Once again the fund outperformed the average diversified international mutual funds tracked by Lipper, which rose by 6.9%. During the first half-year, the best performing market was Japan, with the Nikkei index rising 20.85% in dollar terms. Although European equity markets performed satisfactorily expressed in local currency--the Euro 100 index increased +12.15%--the actual return for dollar-based investors was slightly negative (-0.85%), reflecting the close to 12% decline in the Euro/dollar exchange rate since the beginning of the year. Thus, the +4.1% increased in the value of the MSCI EAFE index is entirely explained by the performance of the Japanese market, which capitalization accounts for 20% of the world's market capitalization outside the USA. The US dollar appreciated +6.6% against the Yen to 121.10 (Y)/$, +11.3%% against the Euro to 1.03 $/EUR, and +4.9% against the Sterling Pound at 1.5778 $/(pound). The strength of the dollar reflects the significantly higher level of interest rates in the USA than in the rest of the world. Short-term US interest rates reached 5% at the end of June, while they were cut to 2.5% in Continental Europe in early April and remained close to 0% in Japan. At the end of June 1999, the Fund showed a 3.3% cash position. The four largest countries represented were the United Kingdom (33.2%), The Netherlands (11.6%). Japan (10.2%), and France (10.1%). The performance of the fund during the reviewed period is all the more satisfactory as most of the fund assets were concentrated in Europe. The fund's large positions in European multinational companies, whose earnings benefit from a stronger dollar, accounted for most of the outperformance. Moreover, our stock selections in Asia performed particularly well (BHP, Canon, Sony, and HSBC.) Finally, the fund performance benefited from its exposure to a few international integrated oil companies (Total-Fina, Repsol, and Royal Dutch Shell), which posted sharp gains following the more than 50% increase in crude oil prices. Among this first half winners we can name Repsol, the Spanish oil refining company, that sharply increased after it announced its bid to take over Argentina's YPF. Also, BOC, the British industrial gas producer, rose strongly after three of its main competitors approached the company to engage in merger talks. Among the losers, we should mention Elsevier and Rentokil, which underperformed after issuing profit warnings for 1999. Nevertheless, we remain committed to these two very well managed, financially strong companies. 12 KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND NEW PURCHASES: Ahold NV: Headquartered in the Netherlands, Ahold is a leading global food retailer with strong positions in Europe and the USA and operations in Latin America and Asia. Ahold has a respected and experienced management team, a geographically diversified store base, and outstanding operational expertise. It aims to become the world's largest food retailer. Compass Plc: Based in the UK, Compass is the world's leading food service organization, working on-site at client locations. It operates in 50 countries. The outlook for contact catering is very bright, with particularly strong potential outside the US. Compass enjoys a strong competitive edge due to its highly tailored market approach, its dominant size, and its global reach. Unilever NV: One of the world's largest consumer product organizations. After several years of aggressive restructuring, the group is now focused on its three core businesses: foods, cleaning products, and personal care products. With a third of its sales coming from emerging markets, Unilever is well positioned to benefit from excellent long-term growth in the developing world. The country allocation of the fund on June 30th, 1999 was:
UNITED AUSTRALIA CASH FINLAND FRANCE GERMANY HONG KONG JAPAN MEXICO NETHERLANDS SPAIN SWEDEN SWITZERLAND KINGDOM - --------- ---- ------- ------ ------- --------- ----- ------ ----------- ----- ------ ----------- ------- 2.9% 3.3% 3.2% 10.1% 3.7% 2.9% 10.2% 2.5% 11.6% 5.0% 3.5% 7.9% 33.2%
OUTLOOK: Looking forward, we anticipate adding to our exposure to Japan, and reducing our allocation to the British market. Although Japan is not entirely out of the woods, it appears that its economy is starting to bottom out and that its sick banking system is healing. More importantly, a growing number of companies are willing to take over the control of their destiny and therefore are following the restructuring path taken earlier by their US and European peers. We also believe that a stronger economy in Europe, which is expected for the second part of the year, will have a positive impact on the Euro/$ parity. More generally, we feel confident that the selective international investor will continue to be rewarded by the continued adaptation of foreign countries and firms to the discipline of the free market. 13 KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND PORTFOLIO OF INVESTMENTS AT JUNE 30, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- Shares COMMON STOCKS: 96.7% Value - -------------------------------------------------------------------------------- AUSTRALIA: 2.9% 40,732 Broken Hill Proprietary ADR............................. $ 964,839 ----------- FINLAND: 3.2% 11,578 Nokia Corporation ADR................................... 1,060,110 ----------- FRANCE: 10.1% 16,712 AXA-UAP S.A. ADR........................................ 1,041,367 17,285 Groupe Danone S.A. ADR.................................. 904,221 21,001 Total S.A. ADR.......................................... 1,353,252 ----------- 3,298,840 ----------- GERMANY: 3.7% 34,866 SAP AG.................................................. 1,207,236 ----------- HONG KONG/ CHINA: 2.9% 15,000 Hong Kong & China Gas Co. Ltd. Warrants (Exp. 9/30/99).. 2,436 2,639 HSBC Holdings Plc ADR................................... 962,591 ----------- 965,027 ----------- JAPAN: 10.2% 28,000 Canon Inc............................................... 805,056 26,000 Kao Corporation......................................... 730,366 8,000 Sony Corporation........................................ 862,561 22,000 Uni_Charm .............................................. 954,269 ----------- 3,352,252 ----------- MEXICO: 2.5% 34,401 Panamerican Beverages Inc. Class A ADR.................. 819,173 ----------- NETHERLANDS: 11.6% 34,453 Elsevier N.V. ADR....................................... 813,953 23,690 ING Groep N.V........................................... 1,282,402 25,000 Koninklijke Ahold N.V................................... 860,967 11,821 Unilever N.V............................................ 824,515 ----------- 3,781,837 ----------- 14 KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND PORTFOLIO OF INVESTMENTS AT JUNE 30, 1999 (UNAUDITED), CONTINUED - -------------------------------------------------------------------------------- Shares Value - -------------------------------------------------------------------------------- SPAIN: 5.0% 45,110 Endesa S.A. ADR......................................... $ 958,587 32,811 Repsol S.A. ADR......................................... 666,473 ----------- 1,625,060 ----------- SWEDEN: 3.5% 34,943 L.M. Ericsson Telephone ADR............................. 1,150,935 ----------- SWITZERLAND: 7.9% 10,674 Nestle S.A. ADR......................................... 961,600 11,938 Novartis AG ADR......................................... 871,589 2,516 Union Bank of Switzerland............................... 751,479 ----------- 2,584,668 ----------- UNITED KINGDOM: 33.2% 60,162 Allied Zurich Plc ADR................................... 756,266 17,390 Astrazeneca Plc ADR..................................... 681,471 17,471 Astrazeneca Plc......................................... 675,795 28,465 BOC Group Plc ADR....................................... 1,147,495 23,740 Cable & Wireless Plc ADR................................ 940,697 80,000 Compass Group Plc....................................... 793,169 18,820 Diageo Plc ADR.......................................... 809,260 112,613 Invensys Plc ADR........................................ 1,066,839 31,448 Pearson Plc ............................................ 638,955 182,000 Rentokil Initial Plc.................................... 710,019 9,124 Reuters Group Plc ADR................................... 739,615 53,993 Tomkins Plc ADR......................................... 985,373 4,586 Vodafone Group Plc ADR.................................. 903,443 ----------- 10,848,397 ----------- TOTAL COMMON STOCKS (Cost $27,441,823).................. 31,658,374 ----------- TOTAL INVESTMENTS IN SECURITIES (Cost $27,441,823*): 96.7%.............................. 31,658,374 OTHER ASSETS LESS LIABILITIES: 3.3%..................... 1,076,228 ----------- NET ASSETS: 100.0% ..................................... $32,734,602 =========== 15 KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND PORTFOLIO OF INVESTMENTS AT JUNE 30, 1999 (UNAUDITED), CONTINUED - -------------------------------------------------------------------------------- Shares Value - -------------------------------------------------------------------------------- * Cost for Federal income tax purposes is the same. Net unrealized appreciation consists of: Gross unrealized appreciation......................... $ 5,110,086 Gross unrealized depreciation......................... (893,535) ----------- Net unrealized appreciation......................... $ 4,216,551 =========== See accompanying Notes to Financial Statements. 16 KAYNE ANDERSON INTERNATIONAL RISING DIVIDENDS FUND PORTFOLIO OF INVESTMENTS BY INDUSTRY AT JUNE 30, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- Industry Percentage - -------------------------------------------------------------------------------- Beer, Wine and Distilled Beverages............................... 2.5% Beverages........................................................ 5.4 Books............................................................ 2.5 Chemicals & Allied Products...................................... 8.7 Commercial Banking............................................... 3.9 Communications Equipment......................................... 6.8 Communication Service............................................ 2.0 Computer & Other Data Processing Services........................ 3.7 Crude Petroleum & Natural Gas.................................... 5.0 Drugs............................................................ 4.7 Drugs, Proprietors and Sundries.................................. 2.1 Eating & Drinking Places......................................... 2.4 Electric Service................................................. 2.9 Electronic Components & Accessories.............................. 3.3 Electronic Industrial Apparatus.................................. 2.5 Food Beverage & Tobacco.......................................... 2.8 Foreign Banks and Branches and Agencies.......................... 2.3 Gas Production & Distribution.................................... 0.0 Groceries & Related Products..................................... 2.5 Grocery Stores................................................... 2.6 Holding Offices.................................................. 8.4 Household Audio and Video Equipment.............................. 2.6 Medical Instruments and Supplies................................. 3.0 Miscellaneous Business Services.................................. 2.2 Oil and Gas Field Services....................................... 4.1 Security and Commodity Services.................................. 2.3 Telephone Communication.......................................... 5.5 ----- Total Investments................................................ 96.7 ----- Other Assets less Liabilities.................................... 3.3 ----- Net Assets....................................................... 100.0% ===== See accompanying Notes to Financial Statements. 17 KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND OBJECTIVE: The objective of the INTERMEDIATE TOTAL RETURN BOND FUND is to seek total return through current income and capital appreciation, with principal preservation a secondary consideration. The Fund seeks to achieve its 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: For the six months ended June 30, 1999, the fund per share net asset value decreased $0.40, from $11.01 to $10.61. After expenses, the Fund's total return (principal gain or loss and income) was -1.25%. As of June 30th, the three largest sectors represented in the Fund were: U.S. Treasury (54%), U.S. Agency (12%), and Industrial (12%). The three largest individual credits held in the portfolio were U.S Treasury (54%), Federal National Mortgage Association (12%), and Government National Mortgage Association (6%). OUTLOOK: The Federal Reserve raised interest rates at their June meeting citing strong economic activity and creeping wage inflation. Although indicating a neutral stance in policy going forward, the marketplace is cautious, fearing further tightening if inflation statistics continue to rise. Inflation, as measured by the Consumer Price Index, has risen to 2% for the 12 month period ending June 30, a rise from 1.6% last December. We will continue to watch the inflation statistics and their impact on interest rates. Within individual sectors, supply forces are at work. The supply of new U.S. Treasury debt continues to dwindle due to a U.S. government budget surplus. Corporate yield spreads are expanding in response to the huge supply currently coming to market, highlighted by Ford Motor Co.'s $7 billion in global bonds issued at quarter-end. Prepayments on real estate loans continue to slow and we believe our premium coupon GNMA bonds should perform well relative to other mortgage backed securities. SECTOR DIVERSIFICATION JUNE 30, 1999 U.S. MORTGAGE- ASSET- YANKEE/ CASH & TREASURY BACKED BACKED EURO INDUSTRIAL FINANCE EQUIVALENTS AGENCY - -------- ------ ------ ---- ---------- ------- ----------- ------ 53% 6% 2% 2% 11% 12% 2% 12% Note: The stated returns are fee subsidized by the advisor. the unsubsidized return for the fund is -1.32% for the six months ending June 30, 1999. 18 KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND PORTFOLIO OF INVESTMENTS AT JUNE 30, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- Par Value LONG-TERM DEBT SECURITIES: 97.8% Value - -------------------------------------------------------------------------------- U.S. TREASURY OBLIGATIONS: 53.4% ---------------------------------------------------- U.S. Treasury Notes/Bonds $ 376,000 6.875% due 08/31/1999.............................. $ 377,292 875,000 6.250% due 10/31/2001.............................. 887,578 2,050,000 11.875% due 11/15/2003............................. 2,520,860 1,330,000 7.250% due 08/15/2004.............................. 1,413,125 551,000 5.875% due 11/15/2005.............................. 550,828 507,000 5.625% due 05/15/2008.............................. 496,701 ----------- Total U.S. Treasury Obligations..................... 6,246,384 ----------- U.S. AGENCY OBLIGATIONS: 12.4% ---------------------------------------------------- Federal National Mortgage Association 420,000 6.100% due 02/10/2000.............................. 421,565 600,000 5.625% due 05/14/2004.............................. 586,150 350,000 7.700% due 08/10/2004.............................. 350,762 87,000 6.950% due 11/13/2006.............................. 87,161 ----------- Total U.S Agency Obligations........................ 1,445,638 ----------- MORTGAGE-BACKED / PASS-THROUGH SECURITIES: 5.9% ---------------------------------------------------- Government National Mortgage Association 11,206 8.000% due 11/15/2021.............................. 11,533 17,815 8.500% due 12/15/2022.............................. 18,677 228,772 8.000% due 07/15/2023.............................. 235,442 162,915 8.500% due 08/15/2025.............................. 170,799 53,582 8.500% due 06/15/2026.............................. 56,175 139,196 8.000% due 09/15/2026.............................. 143,254 59,125 8.000% due 11/15/2026.............................. 60,848 ----------- Total Mortgage-Backed/Pass-Through Securities....... 696,728 ----------- ASSET-BACKED RECEIVABLES: 1.8% ---------------------------------------------------- WFS Financial Owner Trust 210,000 6.800% due 12/20/2003.......................... 211,342 ----------- 19 KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND PORTFOLIO OF INVESTMENTS AT JUNE 30, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- Par Value Value - -------------------------------------------------------------------------------- CORPORATE BONDS: 24.3% ---------------------------------------------------- AUTO RENTALS: 1.5% $175,000 Ryder System Inc., 7.480% due 05/15/2000............ $ 176,477 ----------- BEVERAGES: 2.6% 70,000 Anheuser Busch Companies, 6.750% due 11/01/2006..... 68,797 236,000 Coca-Cola Enterprises, 6.375% due 08/01/2001........ 237,026 ----------- 305,823 ----------- COMMUNICATION SERVICES: 1.5% 175,000 TCI Communications Inc., 6.375% due 05/01/2003...... 174,162 ----------- DEPARTMENT STORES: 0.6% 70,000 Sears Roebuck Company, 9.450% due 07/25/2001........ 73,511 ----------- FINANCE: 12.0% 280,000 AT & T Capital Corporation, 7.500% due 11/15/2000... 281,759 175,000 Bear Stearns Company, 6.625% due 10/01/2004......... 172,912 70,000 Beneficial Corporation, 6.600% due 09/26/2001....... 70,258 175,000 Finova Capital Corporation, 6.450% due 06/01/2000... 175,426 255,000 Ford Motor Credit Corporation, 6.250% due 11/08/2000........................................ 255,599 192,000 General Motors Acceptance Corportation, 7.125% due 05/01/2003............................. 193,681 70,000 Household Finance Company, 8.000% due 08/15/2004.... 70,211 175,000 Lehman Brothers Holdings, 8.875% due 03/01/2002..... 183,084 ----------- 1,402,930 ----------- INDUSTRIAL: 2.2% 70,000 Allied Signal Inc., 9.200% due 02/15/2003........... 75,377 175,000 Caterpillar Inc., 8.440% due 11/26/2003............. 185,876 ----------- 261,253 ----------- MOTION PICTURE PRODUCTION & OTHER SERVICES: 2.4% 278,000 The Walt Disney Company, 6.375% due 03/30/2001...... 279,592 ----------- 20 KAYNE ANDERSON INTERMEDIATE TOTAL RETURN BOND FUND PORTFOLIO OF INVESTMENTS AT JUNE 30, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- Par Value Value - -------------------------------------------------------------------------------- YANKEEEURO: 1.5% $175,000 Cable & Wireless, 6.375% due 03/06/2003............. $ 172,240 ----------- Total Corporate Bonds............................... 2,845,988 ----------- TOTAL LONG-TERM DEBT SECURITIES (Cost $11,597,669).. 11,446,080 ----------- TOTAL INVESTMENTS IN SECURITIES (Cost $11,597,669*): 97.8%.......................... 11,446,080 OTHER ASSETS LESS LIABILITIES: 2.2%................. 254,825 ----------- NET ASSETS: 100.0%.................................. $11,700,905 =========== * Cost for Federal income tax purposes is the same. Net unrealized depreciation consists of: Gross unrealized appreciation..................... $ 8,385 Gross unrealized depreciation..................... (159,974) ----------- Net unrealized depreciation..................... $ (151,589) =========== See accompanying Notes to Financial Statements. 21 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 six months, the Fund's net asset value decreased $0.20, from $10.77 to $10.57. After expenses, the Fund's total return (principal gain or loss and income) for the six months was 0.03%. While invested among eight sectors within the municipal bond market, the three largest sectors represented in the Fund were: General Obligation (26%), Electric Utility (15%), and Transportation (12%). The Fund was also invested in municipalities that are located in 19 different states and territories. The four states with the highest representation in the Fund were: California (41%), New York (5%), Hawaii (5%), and New Jersey (5%). OUTLOOK: Long maturity municipal bonds are attractively valued relative to taxable bonds, while intermediate and short maturities are relatively expensive. While less than last year, issuance was high in the first six months of the year at over $113 billion, and helped to keep interest rates on municipal bonds higher. The Federal Reserve raised interest rates at their June meeting citing strong economic activity and creeping wage inflation. Although indicating a neutral stance in policy going forward, the marketplace is cautious, fearing further tightening if inflation statistics continue to rise. Inflation, as measured by the Consumer Price Index, has risen to 2% for the 12 month period ending June 30, a rise from 1.6% last December. We will continue to watch the inflation statistics and their impact on interest rates. SECTOR DIVERSIFICATION JUNE 30, 1999
GENERAL TRANSPOR- WATER & PRE- CASH & OBLIGATION ELECTRIC HOSPITAL HOUSING IDR/PCR TATION EDUCATION SEWER REFUNDED EQUIVALENTS - ---------- -------- -------- ------- ------- ------ --------- ----- -------- ----------- 26% 15% 8% 6% 12% 12% 4% 4% 11% 2%
Note: The stated returns are fee subsidized by the advisor. The unsubsidized return for the fund is -0.36% For the six months ending June 30, 1999. 22 KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS AT JUNE 30, 1999 (UNAUDITED) - --------------------------------------------------------------------------------------- Par Value MUNICIPAL DEBT: 94.4% Value - --------------------------------------------------------------------------------------- GENERAL OBLIGATION: 25.7% $100,000 California State, 6.500% dated 03/01/1998 due 03/01/2002...... $ 106,000 175,000 California State, 5.250% dated 04/01/1998 due 10/01/2005...... 183,093 250,000 California State, 5.25% dated 02/01/1999 due 02/01/2006...... 260,625 250,000 California State, 5.375% dated 03/01/1994 due 03/01/2006...... 262,500 65,000 California State, 5.250% dated 11/01/1996 due 06/01/2011...... 66,300 250,000 California State, 5.250% dated 11/01/1996 due 06/01/2016...... 249,375 California State Veterans Bonds, 100,000 6.250% dated 03/01/1995 due 02/01/2014....................... 101,070 California State Veterans Bond 200,000 6.375% dated 03/01/1995 due 02/01/2027....................... 202,234 200,000 Hawaii State, 5.250% dated 03/01/1997 due 03/01/2000......... 202,294 195,000 Indiana Bond Bank, 6.600% dated 02/01/1991 due 01/01/2003..... 205,237 Los Angeles County California Public Works 200,000 5.000% 11/01/1997 due 10/01/2016............................. 194,000 250,000 Massachusetts State, 5.000% dated 08/01/1997 due 08/01/2000... 253,397 100,000 Nevada State, 5.600% dated 07/01/1996 due 05/15/2009.......... 104,750 Puerto Rico Public Buildings Authority 60,000 5.750% dated 06/01/1993 due 07/01/2015....................... 61,725 Salt Lake City Utah Redevelopment Agency 150,000 5.500% dated 08/01/1997 due 10/01/2008...................... 154,312 250,000 Washoe County Nevada, 6.750% dated 03/15/1991 due 03/15/2000.............................................. 257,677 ----------- 2,864,589 ----------- EDUCATION: 3.7% Pinal County Arizona School District 200,000 6.000% dated 10/01/1992 due 07/01/2004....................... 210,250 University of California Revenues 200,000 5.250% dated 08/15/1993 due 09/01/2011....................... 204,000 ----------- 414,250 ----------- ELECTRIC: 15.1% Colorado Springs Utilities 200,000 6.750% dated 04/15/1991 due 11/15/2005....................... 213,500 HillsBorough Florida Utilities 100,000 7.000% dated 09/01/1991 due 08/01/2114....................... 107,000 Knoxville Tennessee Electric Revenue 400,000 5.000% dated 11/01/1998 due 07/01/1998....................... 375,500
23 KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS AT JUNE 30, 1999 (UNAUDITED), CONTINUED - --------------------------------------------------------------------------------------- Par Value Value - --------------------------------------------------------------------------------------- ELECTRIC, CONTINUED Lower Colorado River Texas Authority $100,000 5.250% dated 05/01/1993 due 01/01/2015....................... $ 99,125 Massachusetts State Power 75,000 5.875% dated 08/01/1992 due 07/01/2003....................... 78,187 Piedmont Municipal Power Agency 85,000 6.550% dated 09/01/1996 due 01/01/2016....................... 85,513 Puerto Rico Electric Power Authority 200,000 6.000% dated 08/15/1995 due 07/01/2000....................... 205,000 Sacramento California Municipal Utilities District 200,000 5.700% dated 04/01/1993 due 05/15/2012....................... 208,750 Tacoma Washington Electric System Revenue 200,000 5.900% dated 09/01/1992 due 01/01/2005....................... 209,750 Washington Public Power Supply Systems 100,000 4.750% dated 05/01/1993 due 07/01/1999....................... 100,000 ----------- 1,682,325 ----------- HOSPITAL: 8.2% Dade County Health Facilities Authority 200,000 6.600% dated 03/01/1987 due 08/15/2002....................... 202,380 New Jersey Health Facility Financing Authority 300,000 6.800% dated 04/01/192 due 07/01/2011........................ 319,500 New York Dormatory Authority 200,000 5.000% dated 03/01/1997 due 08/15/2000....................... 202,500 New York State Dormatory Authority 200,000 5.500% dated 02/01/1998 due 02/15/2003....................... 205,750 ----------- 930,130 ----------- HOUSING: 6.3% California Housing Finance Agency 260,000 4.350% dated 12/01/1998 due 08/01/2008....................... 249,925 New York Urban Development 200,000 6.000% dated 01/01/1995 due 01/01/2001....................... 204,750 Santa Clara County California Housing 250,000 4.250% dated 11/01/1998 due 11/01/2007....................... 245,938 ----------- 700,613 -----------
24 KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS AT JUNE 30, 1999 (UNAUDITED), CONTINUED - --------------------------------------------------------------------------------------- Par Value Value - --------------------------------------------------------------------------------------- IDR/PCR: 8.3% California Pollution Control Financing Authority $200,000 7.150% dated 02/01/1991 due 02/01/2011 ...................... $ 211,250 California Pollution Control Financing Authority 200,000 5.850% dated 11/01/1993 due 12/01/2023....................... 204,000 Gallup, New Mexico Pollution Control Revenue 250,000 6.650% dated 04/15/1992 due 08/15/2017....................... 257,188 Mercer County, North Dakota Pollution Control 75,000 5.850% 06/01/1993 due 06/01/2023............................. 77,156 Jefferson County 180,000 5.300% dated 08/17/1994 due 08/01/1999....................... 180,095 ----------- 929,689 ----------- TRANSPORTATION: 12.2% Colorado Springs Colorado Airport 105,000 6.900% dated 09/15/1992 due 01/01/2012....................... 113,400 Denver Colorado City & County Airport 200,000 8.100% dated 05/01/1990 due 11/15/2000....................... 210,000 Hawaii State Airports System 250,000 7.500% dated 10/01/1990 due 07/01/2005....................... 261,816 Hawaii State Airports Revenue 100,000 5.750% dated 04/01/1994 due 07/01/2009....................... 105,000 New Jersey State Turnpike Authority 200,000 5.900% dated 01/01/1992 due 01/01/2003....................... 208,500 Orange County Airport 200,000 5.500% dated 04/02/1997 due 07/01/2002....................... 207,000 San Francisco California City 250,000 5.500% dated 05/01/1999 due 05/01/2005....................... 261,562 ----------- 1,367,278 ----------- PREREFUNDED: 10.6% California Health Facility Financing Authority 200,000 6.750% dated 10/01/1989 due 10/01/2019....................... 205,609 California State 185,000 5.250% dated 11/01/1996 due 06/01/2011....................... 194,018 Los Angeles Convention & Exhibit Center 150,000 9.000% dated 12/01/1985 due 12/01/2020....................... 187,687
25 KAYNE ANDERSON INTERMEDIATE TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS AT JUNE 30, 1999 (UNAUDITED), CONTINUED - --------------------------------------------------------------------------------------- Par Value Value - --------------------------------------------------------------------------------------- PREREFUNDED, CONTINUED Orange County California Local Transporation Authority $100,000 5.750% dated 09/01/1992 due 02/15/2005....................... $ 105,750 Washington Public Power Supply Systems 200,000 7.625% dated 10/15/1990 due 07/01/2010....................... 213,751 Webb County Partnership 275,000 5.250% dated 10/01/1997 due 10/01/2022....................... 283,251 ----------- 1,190,066 ----------- WATER & SEWER: 4.3% Contra Costa California Water District 275,000 5.250% dated 07/01/1993 due 10/01/2016....................... 276,375 Los Angeles California Wastewater System 200,000 5.700% dated 04/01/1993 due 06/01/2020....................... 207,251 ----------- 483,626 ----------- TOTAL MUNICIPAL DEBT (Cost $10,685,362)....................... 10,562,566 ----------- VARIABLE RATE MUNICIPAL DEBT: 3.6% -------------------------------------------------------------- 400,000 California State Economic Development, 0.000%+ dated 05/15/1998 due 04/01/2008 (Cost $400,000).............. 400,000 ----------- TOTAL INVESTMENTS IN SECURITIES (Cost $11,085,362*): 98.0%.................................... 10,962,566 OTHER ASSETS LESS LIABILITIES: 2.0%........................... 220,133 ----------- NET ASSETS: 100.0%............................................ $11,182,699 =========== + Non-income producing security. * Cost for Federal income tax purposes is the same. Net unrealized depreciation consists of: Gross unrealized appreciation............................... $ 26,917 Gross unrealized depreciation............................... (149,713) ----------- Net unrealized depreciation............................... $ (122,796) ===========
See accompanying Notes to Financial Statements. 26 This page intentionally left blank. 27 KAYNE ANDERSON MUTUAL FUNDS
STATEMENTS OF ASSETS AND LIABILITIES AT JUNE 30, 1999 (UNAUDITED) - -------------------------------------------------------------------------------------------------------- RISING DIVIDENDS FUND ----------- ASSETS Investments in securities at value (cost of $49,492,341, $28,608,593, $27,441,823, $11,597,669 and $11,085,362, respectively) .................................. $63,531,406 Cash .............................................................................. 623,309 Foreign Cash ...................................................................... -- Receivables Investment securities sold .................................................. 1,594,280 Dividends and interest ...................................................... 65,120 Prepaid expenses .................................................................. 12,681 Due from investment advisor (Note 3) .............................................. -- Deferred organization costs ....................................................... 5,846 ----------- Total assets .......................................................... 65,832,642 ----------- LIABILITIES Payables: Investments securities purchased ............................................ 1,255,896 Distributions to shareholders ............................................... -- Due to investment advisor (Note 3) ................................................ 42,218 Accrued expenses .................................................................. 18,720 ----------- Total liabilities ........................................................... 1,316,834 ----------- NET ASSETS .............................................................................. $64,515,808 =========== Number of shares issued and outstanding (unlimited shares authorized, no par value) 3,399,813 =========== Net asset value, offering and redemption price per share .......................... $ 18.98 =========== COMPOSITION OF NET ASSETS Paid-in capital ................................................................... $45,565,218 Undistributed (overdistributed) net investment income ............................. 3,176 Undistributed net realized gain (loss) on investments ............................. 4,908,349 Net unrealized appreciation (depreciation) on investments and foreign currency .... 14,039,065 ----------- Net assets ........................................................................ $64,515,808 ===========
See accompanying Notes to Financial Statements. 28 KAYNE ANDERSON MUTUAL FUNDS - -------------------------------------------------------------------------------- SMALL CAP INTERNATIONAL INTERMEDIATE INTERMEDIATE RISING DIVIDENDS RISING DIVIDENDS TOTAL RETURN TAX-FREE FUND FUND BOND FUND BOND FUND ---------------- ---------------- ------------ ----------- $31,932,186 $31,658,374 $11,446,080 $10,962,566 2,596,754 1,012,108 86,558 143,113 -- 8,448 -- -- -- -- -- -- 50,472 53,204 168,705 204,729 18,166 16,896 20,382 16,733 -- -- 3,544 2,262 9,847 10,618 9,847 9,847 ----------- ----------- ----------- ----------- 34,607,425 32,759,648 11,735,116 11,339,250 ----------- ----------- ----------- ----------- 1,574,859 -- -- 108,199 -- 1,249 33,093 35,868 21,495 19,786 -- -- 1,187 4,011 1,118 12,484 ----------- ----------- ----------- ----------- 1,597,541 25,046 34,211 156,551 ----------- ----------- ----------- ----------- $33,009,884 $32,734,602 $11,700,905 $11,182,699 2,021,500 1,896,155 1,103,094 1,057,802 $ 16.33 $ 17.26 $ 10.61 $ 10.57 $27,323,562 $24,780,818 $11,733,049 $11,311,678 (457) (13,000) (9,650) (5,851) 2,363,186 3,750,325 129,095 (332) 3,323,593 4,216,459 (151,589) (122,796) ----------- ----------- ----------- ----------- $33,009,884 $32,734,602 $11,700,905 $11,182,699 =========== =========== =========== =========== 29 KAYNE ANDERSON MUTUAL FUNDS STATEMENTS OF OPERATIONS - FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- RISING DIVIDENDS FUND ---------- INVESTMENT INCOME: Income: Dividend income ...................................... $ 361,700 Interest income ...................................... 11,134 ---------- Total income ................................... 372,834 ---------- Expenses: Investment advisory fees (Note 3) .................... 208,079 Custodian fees ....................................... 7,439 Administration fees .................................. 18,831 Fund accounting fees ................................. 16,336 Transfer agent fees .................................. 11,136 Legal fees ........................................... 5,463 Insurance ............................................ 643 Audit fees ........................................... 6,943 Miscellaneous expenses ............................... 1,736 Reports to shareholders .............................. 2,736 Registration fees .................................... 8,688 Trustees fees ........................................ 1,933 Amortization of deferred organization costs .......... 3,531 ---------- Total expenses ................................. 293,494 Expenses recouped (reimbursed) (Note 3) ........ -- Expenses paid indirectly (Note 3) .............. -- ---------- Net expenses ................................... 293,494 ---------- Net investment income ...................................... 79,340 ---------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) on investments .................... 4,663,814 Net unrealized appreciation (depreciation) of investments and foreign currency ......................... 2,264,819 ---------- Net gain (loss) on investments ....................... 6,928,633 ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS .. $7,007,973 ========== See accompanying Notes to Financial Statements. 30 KAYNE ANDERSON MUTUAL FUNDS SMALL CAP INTERNATIONAL INTERMEDIATE INTERMEDIATE RISING DIVIDENDS RISING DIVIDENDS TOTAL RETURN TAX-FREE FUND FUND BOND FUND BOND FUND ---------------- ---------------- ------------ ----------- $ 271,345 $ 421,177 $ -- $ -- 16,578 14,794 571,490 232,564 ---------- ---------- ---------- ---------- 287,923 435,971 571,490 232,564 ---------- ---------- ---------- ---------- 140,274 163,361 50,597 26,217 5,455 7,943 4,472 1,439 12,377 12,888 7,589 9,919 16,364 21,076 17,356 18,236 7,636 7,636 7,636 8,636 6,488 9,353 3,388 1,289 45 45 92 92 2,728 1,728 1,728 1,728 1,240 1,240 1,240 744 744 744 744 248 8,296 8,258 8,348 7,615 2,933 2,933 3,933 1,933 2,107 2,107 2,107 2,107 ---------- ---------- ---------- ---------- 206,687 239,312 109,230 80,203 7,593 1,197 (13,534) (39,581) -- -- -- (1,264) ---------- ---------- ---------- ---------- 214,280 240,509 95,696 39,358 ---------- ---------- ---------- ---------- 73,643 195,462 475,794 193,206 ---------- ---------- ---------- ---------- 2,682,777 3,750,325 91,140 (212) (125,197) 85,099 (711,227) (199,160) ---------- ---------- ---------- ---------- 2,557,580 3,835,424 (620,087) (199,372) ---------- ---------- ---------- ---------- $2,631,223 $4,030,886 $ (144,293) $ (6,166) ========== ========== ========== ========== KAYNE ANDERSON MUTUAL FUNDS
STATEMENTS OF CHANGES IN NET ASSETS - ------------------------------------------------------------------------------------------------------- RISING DIVIDENDS FUND --------------------------- Six Months Year INCREASE IN NET ASSETS FROM: Ended Ended 6/30/99# 12/31/98 ----------- ----------- OPERATIONS Net investment income............................................... $ 79,340 $ 256,507 Net realized gain (loss) on investments sold........................ 4,663,814 5,326,022 Net unrealized appreciation (depreciation) of investments and foreign currency............................. 2,264,819 (98,265) ----------- ----------- Increase (decrease) in net assets resulting from operations... 7,007,973 5,484,264 ----------- ----------- Distributions to shareholders: Net investment income............................................... (76,164) (262,588) Net realized gains on investments................................... (778,417) (6,701,884) Return of capital................................................... -- -- ----------- ----------- Total distributions........................................... (854,581) (6,964,472) ----------- ----------- Capital share transactions: Proceeds from shares sold........................................... 40,600,765 12,570,871 Net asset value of shares issued on reinvestment of distributions... 835,847 9,358,197 Cost of shares redeemed............................................. (31,654,954) (7,150,626) ----------- ----------- Net increase (decrease) from capital share transactions....... 9,781,658 14,778,442 ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS .............................. 15,935,050 13,298,234 ----------- ----------- NET ASSETS Beginning of period....................................................... 48,580,758 35,282,524 ----------- ----------- End of period............................................................. $64,515,808 $48,580,758 =========== =========== CHANGE IN SHARES Shares sold......................................................... 2,204,901 692,639 Shares issued on reinvestment of distributions...................... 44,602 527,641 Shares redeemed..................................................... (1,701,519) (410,214) ----------- ----------- Net increase (decrease)....................................... 547,984 810,066 =========== ===========
# Unaudited. See accompanying Notes to Financial Statements. 32 KAYNE ANDERSON MUTUAL FUNDS
SMALL CAP INTERNATIONAL INTERMEDIATE INTERMEDIATE RISING DIVIDENDS RISING DIVIDENDS TOTAL RETURN TAX-FREE FUND FUND BOND FUND BOND FUND -------------------------- ------------------------- -------------------------- ------------------------ Six Months Year Six Months Year Six Months Year Six Months Year Ended Ended Ended Ended Ended Ended Ended Ended 6/30/99# 12/31/98 6/30/99# 12/31/98 6/30/99# 12/31/98 6/30/99# 12/31/98 -------- -------- -------- -------- -------- -------- -------- -------- $ 73,643 $ 97,381 $ 195,462 $ 231,082 $ 475,794 $ 1,185,729 $ 193,206 $ 265,556 2,682,777 (168,179) 3,750,325 750,612 91,140 131,606 (212) 5,204 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- (125,197) 3,090,369 85,099 3,715,222 (711,227) 490,291 (199,160) 23,836 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- 2,631,223 3,019,571 4,030,886 4,696,916 (144,293) 1,807,626 (6,166) 294,596 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- (74,100) (101,850) (208,462) (206,890) (485,444) (1,189,978) (200,733) (268,129) (151,412) -- -- (750,612) -- (89,690) -- (3,871) -- (313,138) -- -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- (225,512) (414,988) (208,462) (957,502) (485,444) (1,279,668) (200,733) (272,000) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- 32,530,879 26,726,710 35,517,882 27,482,344 8,820,936 23,343,075 9,722,538 3,766,151 215,310 432,070 191,643 964,005 450,710 1,228,220 157,398 292,998 (35,158,534) (3,240,796) (42,232,907) (3,762,499) (25,271,142) (3,029,904) (7,881,330) (705,956) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- (2,412,345) 23,917,984 (6,523,382) 24,683,850 (15,999,496) 21,541,391 1,998,606 3,353,193 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- (6,634) 26,522,567 (2,700,958) 28,423,264 (16,629,233) 22,069,349 1,791,707 3,375,789 33,016,518 6,493,951 35,435,560 7,012,296 28,330,138 6,260,789 9,390,992 6,015,203 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- $33,009,884 $33,016,518 $32,734,602 $35,435,560 $11,700,905 $28,330,138 $11,182,699 $9,390,992 =========== =========== =========== =========== =========== =========== =========== ========== 2,078,515 1,897,692 2,100,646 1,923,801 815,525 2,153,359 905,922 350,249 13,226 29,469 11,137 63,755 41,539 93,163 14,635 27,265 (2,265,709) (226,493) (2,500,407) (258,861) (2,327,255) (274,756) (734,855) (65,550) ----------- ----------- ----------- ----------- ----------- ----------- ----------- ---------- (173,968) 1,700,668 (388,624) 1,728,695 (1,470,191) 1,971,766 185,702 311,964 =========== =========== =========== =========== =========== =========== =========== ==========
33 KAYNE ANDERSON MUTUAL FUNDS
FINANCIAL HIGHLIGHTS FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD - ---------------------------------------------------------------------------------------------------------- RISING DIVIDENDS FUND - ---------------------------------------------------------------------------------------------------------- Six Months Year Year Year 05/01/95* Ended Ended Ended Ended to 6/30/99# 12/31/98 12/31/97 12/31/96 12/31/95 - ---------------------------------------------------------------------------------------------------------- Net asset value, beginning of period........ $ 17.03 $ 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......................... 2.20 2.38 4.34 2.35 2.13 ------- ------- ------- ------- ------- Total from investment operations...... 2.20 2.49 4.44 2.43 2.20 ------- ------- ------- ------- ------- Distributions: From net investment income............... (0.02) (0.11) (0.11) (0.08) (0.07) From net realized gains.................. (0.23) (2.63) (1.37) (0.66) (0.15) Return of capital........................ - - - - - ------- ------- ------- ------- ------- Total distributions................... (0.25) (2.74) (1.48) (0.74) (0.22) ------- ------- ------- ------- ------- Net asset value, end of period.............. $ 18.98 $ 17.03 $ 17.28 $ 14.32 $ 12.63 ------- ------- ------- ------- ------- Total return................................ 11.45%** 14.14% 30.99% 19.09% 20.65%** Net assets at end of period (in 000's)...... $64,516 $48,581 $35,283 $26,118 $20,613 Ratio of expenses to average net assets..... Before expense reimbursement/ recoupment............................ 1.06%*** 1.11% 1.18% 1.37% 1.31%*** After expense reimbursement/ recoupment............................ 1.06%*** 1.11% 1.18% 1.37% 1.31%*** After expense reimbursement/ recoupment and excluding expenses paid indirectly....................... 1.06%*** 1.11% 1.18% 1.37% 1.31%*** Ratio of net investment income to average... net assets (net of expense reimbursement/ recoupment).............................. 0.29%*** 0.57% 0.55% 0.59% 0.94%*** Portfolio turnover rate..................... 28% 76% 51% 23% 28%
# Unaudited. * Commencement of operations. ** Not annualized. *** Annualized. See accompanying Notes to Financial Statements. 34 KAYNE ANDERSON MUTUAL FUNDS
--------------------------------------------------------------------------------------------- SMALL CAP INTERNATIONAL RISING DIVIDENDS RISING DIVIDENDS FUND FUND -------------------------------------------- --------------------------------------------- Six Months Year Year 10/18/96* Six Months Year Year 10/18/96* Ended Ended Ended to Ended Ended Ended to 6/30/99# 12/31/98 12/31/97 12/31/96 6/30/99# 12/31/98 12/31/97 12/31/96 -------- -------- -------- -------- -------- -------- -------- -------- $15.04 $13.12 $11.06 $10.65 $15.51 $12.61 $10.91 $10.65 ------ ------ ------ ------ ------ ------ ------ ------ -- 0.05 0.02 0.02 (0.01) 0.08 0.04 0.01 1.41 2.07 2.14 0.41 1.87 3.25 1.75 0.26 ------ ------ ------ ------ ------ ------ ------ ------ 1.41 2.12 2.16 0.43 1.86 3.33 1.79 0.27 ------ ------ ------ ------ ------ ------ ------ ------ (0.04) (0.05) (0.05) (0.02) (0.11) (0.08) (0.05) (0.01) (0.08) -- (0.05) -- -- (0.35) (0.04) -- -- (0.15) -- -- -- -- -- -- ------ ------ ------ ------ ------ ------ ------ ------ (0.12) (0.20) (0.10) (0.02) (0.11) (0.43) (0.09) (0.01) ------ ------ ------ ------ ------ ------ ------ ------ $16.33 $15.04 $13.12 $11.06 $17.26 $15.51 $12.61 $10.91 ====== ====== ====== ====== ====== ====== ====== ====== 8.58%** 16.17% 19.46% 4.00%** 11.28%** 26.47% 16.42% 2.56%** 1.25%*** 1.35% 3.22% 18.91%*** 1.39%*** 1.45% 3.41% 15.74%*** 1.30%*** 1.30% 1.30% 1.30%*** 1.40%*** 1.38% 1.40% 1.40%*** 1.30%*** 1.30% 1.30% 1.30%*** 1.40%*** 1.38% 1.40% 1.40%*** 0.45%*** 0.38% 0.45% 1.58%*** 1.14%*** 0.85% 0.61% 1.14%*** 33% 28% 47% --% 38% 28% 29% --%
35 KAYNE ANDERSON MUTUAL FUNDS
FINANCIAL HIGHLIGHTS FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT EACH PERIOD - ---------------------------------------------------------------------------------------- INTERMEDIATE TOTAL RETURN BOND FUND ----------------------- Six Months Year Ended Ended 6/30/99# 12/31/98 -------- -------- Net asset value, beginning of period............................. $ 11.01 $ 10.75 ------- ------- Income from investment operations Net investment income...................................... 0.22 0.51 Net realized and unrealized gains (loss) on investments.... (0.36) 0.30 ------- ------- Total from investment operations..................... (0.14) 0.81 ------- ------- Distributions: From net investment income................................. (0.26) (0.51) From net realized gains.................................... - (0.04) ------- ------- Total distributions.................................. (0.26) (0.55) ------- ------- Net asset value, end of period (in 000's)........................ $10.61 $11.01 ======= ======= Total return..................................................... (1.25%)** 7.61% Net assets at end of period (in 000's)........................... $11,701 $28,330 Ratio of expenses to average net assets Before expense reimbursement/recoupment.................. 1.08%*** 1.00% After expense reimbursement/recoupment................... 0.95%*** 0.94% After expense reimbursement/recoupment and excluding expenses paid indirectly................... 0.95%*** 0.94% Ratio of net investment income to average net assets (net of expense reimbursement/recoupment) ...... 4.72%*** 4.93% Portfolio turnover rate.......................................... 28% 49%
# Unaudited. * Commencement of operations. ** Not annualized. *** Annualized. See accompanying Notes to Financial Statements. 36 INTERMEDIATE INTERMEDIATE TOTAL RETURN TAX-FREE BOND FUND BOND FUND ---------------------- ----------------------------------------------- Year 10/28/96* Six Months Year Year 10/28/96* Ended to Ended Ended Ended to 12/31/97 12/31/96 6/30/99# 12/31/98 12/31/97 12/31/96 -------- -------- -------- -------- -------- -------- $10.59 $10.65 $10.77 $10.74 $10.64 $10.65 ------ ------ ------ ------ ------ ------ 0.56 0.09 (0.01) 0.43 0.34 0.01 0.18 (0.07) 0.01 0.03 0.11 (0.01) ------ ------ ------ ------ ------ ------ 0.74 0.02 -- 0.46 0.45 -- ------ ------ ------ ------ ------ ------ (0.58) (0.08) (0.20) (0.43) (0.35) (0.01) -- -- -- -- -- -- ------ ------ ------ ------ ------ ------ (0.58) (0.08) (0.20) (0.43) (0.35) (0.01) ------ ------ ------ ------ ------ ------ $10.75 $10.59 $10.57 $10.77 $10.74 $10.64 ====== ====== ====== ====== ====== ====== 7.19% 0.20%** 0.03%** 4.37% 4.26% 0.02%** $6,261 $5,033 $11,183 $9,391 $6,015 $5,124 2.23% 2.10%*** 1.53%*** 2.23% 2.29% 2.08%*** 0.95% 0.95%*** 0.77%*** 0.77% 1.56% 1.81%*** 0.95% 0.95%*** 0.75%*** 0.77% 0.95% 0.95%*** 5.35% 4.72%*** 3.68%*** 3.88% 2.58% 0.60% 27% -- % 9% 47% 40% -- % 37 KAYNE ANDERSON MUTUAL FUND NOTES TO FINANCIAL STATEMENTS AT JUNE 30, 1999 (UNAUDITED) - -------------------------------------------------------------------------------- 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 "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. 38 KAYNE ANDERSON MUTUAL FUND NOTES TO FINANCIAL STATEMENTS AT JUNE 30, 1999 (UNAUDITED), CONTINUED - -------------------------------------------------------------------------------- NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Funds. These policies are in conformity with generally accepted accounting principles. A. SECURITY VALUATION: The Funds' investments are carried at value. Securities listed on an exchange or quoted on a national market system are valued at the last sale price. Other securities are valued at the last quoted bid price. Securities for which market quotations are not readily available, if any, are valued by an independent pricing service or determined following procedures approved by the Board of Trustees. Short-term investments are valued at amortized cost, which approximates market value. B. FEDERAL INCOME TAXES: It is the Funds' policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of their taxable income to shareholders. Therefore, no Federal income tax provision is required. At December 31, 1998 the Small Cap Rising Dividends Fund had a capital loss carryforward available for Federal income tax purposes of $107,282 which expires in 2006. C. SECURITY TRANSACTIONS, DIVIDENDS AND DISTRIBUTIONS: Security transactions are accounted for on the trade date. Interest income is recognized on the accrual basis. Bond discounts and premiums are amortized over their respective lives. Dividend income and distributions to shareholders are recorded on the ex-dividend date. D. DEFERRED ORGANIZATION COSTS: All of the expenses incurred by the Advisor in connection with the organization and registration of the Fund's shares 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. NOTE 3 - INVESTMENT ADVISORY AND MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES For the six months ended June 30, 1999, the Advisor provided the Funds with investment management services under an Investment Advisory Agreement (the "Agreement"). Under the Agreement the Advisor furnishes all investment advice, office space and certain administrative services, and provides personnel as needed by the Funds. As compensation for its services, the Advisor is entitled to a monthly fee at the annual rate of the following based upon the average daily net assets of the Funds: 39 KAYNE ANDERSON MUTUAL FUND NOTES TO FINANCIAL STATEMENTS AT JUNE 30, 1999 (UNAUDITED), CONTINUED - -------------------------------------------------------------------------------- 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% Pursuant to an expense reimbursement agreement the Advisor has agreed to reimburse the funds' expenses through December 31, 1999 to: 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 Intermediate Total Return Bond Fund $13,534 and the Intermediate Tax-Free Bond Fund $39,581 during the six months ended June 30, 1999. The 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. During the six months ended June 30, 1999 the actual expenses incurred by certain of the Funds fell below the applicable expense limitation provisions. Accordingly, the Advisor recouped $7,593 of previously waived fees from the Small Cap Rising Dividends Fund and $1,197 of previously waived fees from the International Rising Dividends Fund. At June 30, 1999, the Advisor has waived fees and reimbursed other fund expenses amounting to $99,547 for the Small Cap Rising Dividends Fund, $118,705 for the International Rising Dividends Fund, $110,224 for the Intermediate Total Return Bond Fund, and $182,419 for the Intermediate Tax-Free Fund which may be reimbursable in the future. The Funds executed certain investment security transactions through KA Associates, Inc., an affiliate of the Funds' Advisor. Commissions paid by the Funds to this affiliate during the six months ended June 30, 1999 were as follows: Small Cap Rising Dividends Fund..................................... $3,459 International Rising Dividends Fund................................. $6,931 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 40 KAYNE ANDERSON MUTUAL FUND NOTES TO FINANCIAL STATEMENTS AT JUNE 30, 1999 (UNAUDITED), CONTINUED - -------------------------------------------------------------------------------- Administrator an annual fee equal to 0.075% of the first $40 million of the its average daily net assets, 0.050% of the next $40 million, 0.025% of the next $40 million, and 0.010% thereafter, subject to a minimum annual fee of $30,000 per Fund. First Fund Distributors, Inc. (the "Distributor") acts as the Funds' principal underwriter in a continuous public offering of the Funds' shares. The Distributor is an affiliate of the Administrator. Certain officers and Trustees of the Fund are also officers and/or directors of the Advisor. NOTE 4 - PURCHASES AND SALES OF SECURITIES For the six months ended June 30, 1999, 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.......................... $23,848,571 $15,556,778 Small Cap Rising Dividends Fund................ $10,882,506 $13,825,080 International Rising Dividends Fund............ $12,960,451 $20,685,249 Intermediate Total Return Bond Fund............ $ 468,800 $ 5,779,788 Intermediate Tax-Free Bond Fund................ $ 2,537,887 $ 886,895 The Intermediate Total Return Bond Fund purchased $5,220,916, and sold $14,667,233, 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 six months ended June 30, 1999 the Small Cap Rising Dividends Fund, the International Rising Dividends Fund and the Intermediate Total Return Bond Fund realized gains in the amount of $425,583, $1,512,223 and $98,710, respectively, from the "in-kind" distribution of appreciated securities to a redeeming shareholder. 41 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-----