N-CSR 1 g19994kayne_ncsr.txt PHOENIX-KAYNE FUNDS UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-07705 --------- Phoenix-Kayne Funds -------------------------------------------------- (Exact name of registrant as specified in charter) 1800 Avenue of the Stars, 2nd Floor Los Angeles, California 90067 -------------------------------------------------- (Address of principal executive offices) (Zip code) Kevin J. Carr, Esq. Vice President, Chief Legal Officer, John H. Beers, Esq. Counsel and Secretary for Registrant Vice President and Secretary Phoenix Life Insurance Company Phoenix Life Insurance Company One American Row One American Row Hartford, CT 06103-2899 Hartford, CT 06103-2899 ----------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (860)-403-5000 Date of fiscal year end: December 31 ----------- Date of reporting period: December 31, 2005 ----------------- Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507. ITEM 1. REPORTS TO STOCKHOLDERS. The Report to Shareholders is attached herewith. -------------------------------------------------------------------------------- DECEMBER 31, 2005 -------------------------------------------------------------------------------- ANNUAL REPORT -------------------------------------------------------------------------------- o PHOENIX CA INTERMEDIATE TAX-FREE BOND FUND FORMERLY PHOENIX-KAYNE CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND o PHOENIX INTERMEDIATE BOND FUND FORMERLY PHOENIX-KAYNE INTERMEDIATE TOTAL RETURN BOND FUND o PHOENIX OVERSEAS FUND FORMERLY PHOENIX-KAYNE INTERNATIONAL FUND o PHOENIX RISING DIVIDENDS FUND FORMERLY PHOENIX-KAYNE RISING DIVIDENDS FUND o PHOENIX SMALL-MID CAP FUND FORMERLY PHOENIX-KAYNE SMALL-MID CAP FUND GET FUND DOCUMENTS BY E-MAIL INSTEAD. ELIGIBLE SHAREHOLDERS MAY SIGN UP FOR E-DELIVERY AT PHOENIXFUND.COM. TRUST NAME: PHOENIX-KAYNE FUNDS [LOGO] PHOENIXFUNDS(SM) ------------------------------------------------------------------------------- Mutual funds are not insured by the FDIC; are not deposits or other obligations of a bank and are not guaranteed by a bank; and are subject to investment risks, including possible loss of the principal invested. -------------------------------------------------------------------------------- This report is not authorized for distribution to prospective investors in the Phoenix-Kayne Funds unless preceded or accompanied by an effective Prospectus which includes information concerning the sales charge, each Fund`s record and other pertinent information. MESSAGE FROM THE CHAIRMAN DEAR SHAREHOLDER: [PHOTO] I encourage you to review this annual report for the Phoenix CA Intermediate Tax-Free Bond Fund, Phoenix Intermediate Bond Fund, Phoenix Overseas Fund, Phoenix Rising Dividends Fund and Phoenix Small-Mid Cap Fund, for the fiscal year ended December 31, 2005. Looking back at 2005, the equity market posted modest returns for the year, with most of the gains coming after Labor Day, driven by strong corporate earnings. The economy posted a 3.5% growth rate in 2005, down from 4% in 2004, as rising interest rates and energy prices continued to weigh on the consumer. As we enter a new year, the pace of U.S. economic growth continues to moderate. No matter what the market brings, short-term performance changes should not distract you from your long-term financial plan. Now may be an opportune time for you to review your portfolio with your financial advisor to make sure that your asset allocation remains on target. Keep in mind that finding the best balance of performance and protection requires discipline and diversification.(1) Your Phoenix mutual fund allocation may help in this effort. As an alternative to paper mail, if you would like to view your mutual fund communications electronically, including account statements, prospectuses, and annual and semiannual reports, sign up for our E-Delivery service. To register, go online to PhoenixFunds.com, select the Individual Investors option, and follow the E-Delivery instructions, or call Mutual Fund Services at 1-800-243-1574 and a customer service representative will be happy to assist you. Sincerely, /s/ Philip R. McLoughlin Philip R. McLoughlin Chairman, Phoenix Funds JANUARY 2006 (1) DIVERSIFICATION DOES NOT GUARANTEE AGAINST A LOSS, AND THERE IS NO GUARANTEE THAT A DIVERSIFIED PORTFOLIO WILL OUTPERFORM A NON-DIVERSIFIED PORTFOLIO. The preceding information is the opinion of the Chairman of the Phoenix Funds Board of Trustees. There is no guarantee that market forecasts discussed will be realized. 1 TABLE OF CONTENTS Glossary ................................................................. 3 Phoenix CA Intermediate Tax-Free Bond Fund ............................... 6 Phoenix Intermediate Bond Fund ........................................... 16 Phoenix Overseas Fund .................................................... 24 Phoenix Rising Dividends Fund ............................................ 37 Phoenix Small-Mid Cap Fund ............................................... 48 Notes to Financial Statements ............................................ 60 Report of Independent Registered Public Accounting Firm .................. 65 Board of Trustees' Consideration of Investment Advisory and Subadvisory Agreements ............................................................... 66 Results of Shareholder Meeting ........................................... 71 Fund Management Tables ................................................... 72 -------------------------------------------------------------------------------- PROXY VOTING PROCEDURES (FORM N-PX) The Adviser votes proxies relating to portfolio securities in accordance with procedures that have been approved by the Trust's Board of Trustees. You may obtain a description of these procedures, along with information regarding how the Funds voted proxies during the most recent 12-month period ended June 30, 2005, free of charge, by calling toll-free 1-800-243-1574. This information is also available through the Securities and Exchange Commission's website at http://www.sec.gov. FORM N-Q INFORMATION The Trust files a complete schedule of portfolio holdings with the Securities and Exchange Commission (the "SEC") for the first and third quarters of each fiscal year on Form N-Q. Form N-Q is available on the SEC's website at http://www.sec.gov. Form N-Q may be reviewed and copied at the SEC's Public Reference Room. Information on the operation of the SEC's Public Reference Room can be obtained by calling toll-free 1-800-SEC-0330. -------------------------------------------------------------------------------- 2 GLOSSARY ADR (AMERICAN DEPOSITARY RECEIPT) Represents shares of foreign companies traded in U.S. dollars on U.S. exchanges that are held by a bank or a trust. Foreign companies use ADRs in order to make it easier for Americans to buy their shares. AMBAC (AMERICAN MUNICIPAL BOND ASSURANCE CORPORATION) One of the largest insurers of new municipal bond offerings. DURATION A measure of volatility of a fixed income security, fixed income portfolio or fixed income portion of a portfolio. It is the change in the value of the fixed income security, fixed income portfolio or portion thereof that will result from a 1% change in interest rates. Duration is stated in years. For example, a 5-year duration means the fixed income security, fixed income portfolio or portion will decrease in value by 5% if interest rates rise 1%, and increase in value by 5% if interest rates fall 1%. FEDERAL FUNDS RATE The interest rate charged on overnight loans of reserves by one financial institution to another in the United States. The federal funds rate is the most sensitive indicator of the direction of interest rates since it is set daily by the market. FEDERAL RESERVE (THE "FED") The central bank of the United States, responsible for controlling the money supply, interest rates and credit with the goal of keeping the U.S. economy and currency stable. Governed by a seven-member board, the system includes 12 regional Federal Reserve Banks, 25 branches and all national and state banks that are part of the system. FGIC (FINANCIAL GUARANTY INSURANCE COMPANY) A leading financial guaranty insurance company providing triple-A credit enhancement on public finance, structured finance and asset-backed securities. FNMA OR "FANNIE MAE" (FEDERAL NATIONAL MORTGAGE ASSOCIATION) Congressionally chartered corporation which buys mortgages on the secondary market, pools them and sells them as mortgage-backed securities to investors on the open market. Monthly principal and interest payments are guaranteed by FNMA but not the U.S. government. FSA (FINANCIAL SECURITY ASSURANCE, INC.) A leading provider of Aaa/AAA/AAA financial guaranty insurance for asset-backed securities, municipal bonds and other structured obligations in the global markets. GNMA OR "GINNIE MAE" (GOVERNMENT NATIONAL MORTGAGE ASSOCIATION) Wholly-owned U.S. government corporation within the Department of Housing and Urban Development, which guarantees the timely payment of principal and interest on securities that are issued by private institutions and are backed by pools of federally-issued or guaranteed mortgage loans. 3 GLOSSARY (CONTINUED) LEHMAN BROTHERS 5-YEAR MUNICIPAL BOND INDEX The Lehman Brothers 5-Year Municipal Bond Index is a market capitalization-weighted index that measures the long-term tax-exempt bond market, and consists of general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds, all in the maturity range of 4 to 6 years. The index is calculated on a total return basis. LEHMAN BROTHERS 7-YEAR MUNICIPAL BOND INDEX The Lehman Brothers 7-Year Municipal Bond Index measures the performance of investment grade bonds with maturities of seven to eight years. LEHMAN BROTHERS AGGREGATE BOND INDEX An index that measures the U.S. investment grade fixed rate bond market. The index is calculated on a total return basis. LEHMAN BROTHERS INTERMEDIATE GOVERNMENT/CREDIT BOND INDEX Measures U.S. investment grade government and corporate debt securities with an average maturity of 4 to 5 years. The index is calculated on a total return basis. LEHMAN BROTHERS MUNICIPAL LONG BOND INDEX The Lehman Brothers Municipal Long Bond Index measures the performance of long-term tax-exempt bonds. MBIA (MUNICIPAL BOND INSURANCE ASSOCIATION) One of the largest insurers of financial obligations for municipalities, not-for-profit organizations, banks, insurance and finance companies, and other private-sector entities in the primary and secondary markets. Provides triple-A-rating guarantee as an unconditional and irrevocable guarantee of full principal and interest payment. MSCI EAFE(R) GROWTH INDEX The MSCI EAFE Growth Index is an unmanaged index considered representative of growth stocks of Europe, Australia, Asia and the Far East. MSCI EAFE(R) INDEX (NET) A free float-adjusted market capitalization index that measures developed foreign market equity performance, excluding the U.S. and Canada. The index is calculated on a total return basis with net dividends reinvested. MSCI EAFE(R) VALUE INDEX The MSCI EAFE Value Index is a market-weighted index of companies in developed markets, excluding the U.S. and Canada, with lower price-to-book ratios. MSCI EMERGING MARKETS INDEX The MSCI Emerging Markets Index is a free float-adjusted market capitalization index designed to measure equity market performance in the global emerging markets. The index is calculated on a total return basis with gross dividends reinvested. 4 GLOSSARY (CONTINUED) MUNICIPAL MARKET ADVISORS (MMA) An analytical firm specializing in the municipal bond market that provides research to financial services clients used for formulating investment strategies in the tax-exempt and broader interest rate markets. RUSSELL 2000(R) INDEX The Russell 2000(R) Index is a market capitalization-weighted index of the 2,000 smallest companies in the Russell Universe, which comprises the 3,000 largest U.S. companies. The index is calculated on a total return basis with dividends reinvested. RUSSELL 2500(TM) INDEX A market capitalization-weighted index of the 2,500 smallest companies in the Russell Universe, which comprises the 3,000 largest U.S. companies. The index is calculated on a total return basis with dividends reinvested. S&P 500(R) INDEX A free-float market capitalization-weighted index of 500 of the largest U.S. companies. The index is calculated on a total return basis with dividends reinvested. S&P CALIFORNIA MUNICIPAL BOND INDEX A market value-weighted index of California municipal bond issues held by managed municipal bond fund customers of Standard & Poor's that are priced daily. The index is calculated on a total return basis. SPONSORED ADR An ADR which is issued with the cooperation of the company whose stock will underlie the ADR. These shares carry all the rights of the common share such as voting rights. ADRs must be sponsored to be able to trade on the NYSE. XLCA (XL CAPITAL ASSURANCE) A monoline financial guarantee insurance company that provides triple-A rated financial guaranty insurance for the asset-backed structured finance, structured investment products, future flow, global infrastructure project finance, power & utilities, public finance, and bank deposit insurance markets worldwide. YIELD CURVE A line chart that shows interest rates at a specific point in time for securities of equivalent quality but with different maturities. A "normal or positive" yield curve indicates that short-term securities have a lower interest rate than long-term securities; an "inverted or negative" yield curve indicates short-term rates are exceeding long-term rates; and a "flat yield curve" means short- and long-term rates are about the same. INDEXES ARE UNMANAGED AND NOT AVAILABLE FOR DIRECT INVESTMENT; THEREFORE, THEIR PERFORMANCE DOES NOT REFLECT THE EXPENSES ASSOCIATED WITH THE ACTIVE MANAGEMENT OF AN ACTUAL PORTFOLIO. 5 PHOENIX CA INTERMEDIATE TAX-FREE BOND FUND A DISCUSSION WITH THE FUND'S PORTFOLIO MANAGER, KIMBERLY C. FRIEDRICKS Q: HOW DID THE PHOENIX CA INTERMEDIATE TAX-FREE BOND FUND PERFORM FOR ITS FISCAL YEAR ENDED DECEMBER 31, 2005? A: For the fiscal year ended December 31, 2005, the Fund's Class X shares returned 1.33%. For the same period, the Lehman Brothers Aggregate Bond Index, a broad-based fixed income index, returned 2.43%, and the S&P California Municipal Bond Index, the Fund's style-specific benchmark, returned 4.73%. All performance figures assume reinvestment of distributions. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE SHOWN ABOVE. Q: HOW DID THE FIXED INCOME MARKETS PERFORM DURING THE FUND'S FISCAL YEAR? A: The Federal Reserve raised the federal funds rate to 4.25% over the course of 2005, leading to a flattening of the U.S. Treasury yield curve. The municipal bond yield curve, as measured by Municipal Market Advisors, also flattened, although not to the same extent as the U.S. Treasury yield curve. For the full year, 5-year municipal rates were up 0.64% and 30-year municipal rates were down 0.14%. This flattening of the yield curve led to extreme performance differences between long and shorter duration strategies. To illustrate, the Lehman 5-Year Municipal Index, with a duration of 4.09 years, returned 0.95% in 2005; the Lehman 7-Year Municipal Index, with a duration of 5.27 years, returned 1.72%; while the Lehman Municipal Long Bond Index, with a duration of 6.78 years, achieved a 7.06% return. Q: WHAT FACTORS AFFECTED THE FUND'S PERFORMANCE DURING ITS FISCAL YEAR? A: The Fund underperformed the S&P California Municipal Bond Index for the year. The lag in performance was due to the Fund's shorter duration strategy relative to the index. With a duration of 5.35 years, the benchmark's duration was much longer than the Fund's duration of 3.84 years. Rising interest rates in the intermediate portion of the curve throughout the year offered us the opportunity to increase the Fund's yield while maintaining our intermediate duration and high quality standards. We believe that once the Federal Reserve ends the tightening cycle, the intermediate portion of the yield curve will offer a compelling risk-to-reward ratio. JANUARY 2006 THE PRECEDING INFORMATION IS THE OPINION OF PORTFOLIO MANAGEMENT. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, AND THERE IS NO GUARANTEE THAT MARKET FORECASTS DISCUSSED WILL BE REALIZED. FOR DEFINITIONS OF INDEXES CITED AND CERTAIN INVESTMENT TERMS USED IN THIS REPORT, SEE THE GLOSSARY ON PAGE 3. 6 PHOENIX CA INTERMEDIATE TAX-FREE BOND FUND -------------------------------------------------------------------------------- TOTAL RETURNS(1) PERIODS ENDING 12/31/05 --------------------------------------------------------------------------------
INCEPTION INCEPTION 1 YEAR 5 YEAR TO 12/31/05 DATE ------- ------- ----------- --------- Class X Shares 1.33% 3.88% 4.08% 10/28/96 Lehman Brothers Aggregate Bond Index 2.43 5.87 6.51 10/28/96 S&P California Municipal Bond Index 4.73 5.71 5.59 10/31/96
ALL RETURNS REPRESENT PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE SHOWN. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE ABOVE TABLE AND GRAPH BELOW DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF SHARES. PLEASE VISIT PHOENIXFUNDS.COM FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END. (1) TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE AND THE REINVESTMENT OF BOTH DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS. -------------------------------------------------------------------------------- GROWTH OF $10,000 PERIODS ENDING 12/31 -------------------------------------------------------------------------------- This Growth of $10,000 chart assumes an initial investment of $10,000 made on 10/28/96 (inception of the Fund) in Class X shares. The total return for Class X shares reflects no sales charge. Performance assumes dividends and capital gain distributions are reinvested. [GRAPHIC OMITTED] EDGAR REPRESENTATION OF DATA USED IN PRINTED GRAPHIC AS FOLLOWS: Phoenix CA Intermediate Tax-Free Bond Fund Lehman Brothers S&P California Class X Aggregate Bond Index Municipal Bond Index ------------------ -------------------- -------------------- 10/28/96 $10,000 $10,000 $10,000 12/31/96 10,002 10,162 10,111 12/31/97 10,428 11,143 10,756 12/31/98 10,883 12,111 11,384 12/31/99 10,833 12,011 11,049 12/29/00 11,936 13,408 12,476 12/31/01 12,445 14,540 13,062 12/31/02 13,266 16,032 14,170 12/31/03 13,830 16,690 14,897 12/31/04 14,250 17,414 15,728 12/31/05 14,439 17,837 16,471 For information regarding the indexes, see the glossary on page 3. 7 PHOENIX CA INTERMEDIATE TAX-FREE BOND FUND ABOUT YOUR FUND'S EXPENSES We believe it is important for you to understand the impact of costs on your investment. All mutual funds have operating expenses. As a shareholder of the CA Intermediate Tax-Free Bond Fund, you incur ongoing costs, including investment advisory fees and other expenses. Class X shares are sold without a sales charge and do not incur distribution and service fees. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. This example is based on an investment of $1,000 invested at the beginning of the period and held for the entire six- month period. ACTUAL EXPENSES The first line of the accompanying table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the accompanying table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not your Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in your Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the accompanying table is meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the accompanying table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. If you have incurred transactional costs, your costs could have been higher. The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions. CA Intermediate Beginning Ending Expenses Paid Tax-Free Bond Fund Account Value Account Value During Class X June 30, 2005 December 31, 2005 Period* ------------------ ------------- ----------------- ------------- Actual $1,000.00 $1,001.50 $3.78 Hypothetical (5% return before expenses) 1,000.00 1,021.38 3.83 * EXPENSES ARE EQUAL TO THE FUND'S CLASS X ANNUALIZED EXPENSE RATIO OF 0.75%, WHICH INCLUDES WAIVED FEES AND REIMBURSED EXPENSES, IF APPLICABLE, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE MOST RECENT FISCAL HALF-YEAR, THEN DIVIDED BY 365 TO REFLECT THE ONE-HALF YEAR PERIOD. ACTUAL RETURN AS CALCULATED IN THE ABOVE TABLE IS BASED ON THE FUND'S CLASS X RETURN FOR THE PAST SIX MONTHS. WHILE REQUIRED TO BE PRESENTED IN THIS FORMAT, IT IS NOT THE CLASS' ACTUAL RETURN FOR THE YEAR ENDED DECEMBER 31, 2005. THE CLASS' ACTUAL RETURN AT NAV FOR THE FISCAL YEAR WAS 1.33%. UTILIZING THIS 12 MONTH RETURN YIELDS AN ACCOUNT VALUE AT DECEMBER 31, 2005 OF $1,013.30. YOU CAN FIND MORE INFORMATION ABOUT THE FUND'S EXPENSES IN THE FINANCIAL STATEMENTS SECTION THAT FOLLOWS. FOR ADDITIONAL INFORMATION ON OPERATING EXPENSES AND OTHER SHAREHOLDER COSTS REFER TO THE PROSPECTUS. 8 PHOENIX CA INTERMEDIATE TAX-FREE BOND FUND -------------------------------------------------------------------------------- TEN LARGEST HOLDINGS AT DECEMBER 31, 2005 (AS A PERCENTAGE OF NET ASSETS)(e) -------------------------------------------------------------------------------- 1. California State Department of Water Resources Series W 5.50%, 12/1/13 3.1% 2. East Bay Municipal Utility District Water System Revenue 5.25%, 6/1/18 3.1% 3. South Coast Air Quality Management District 6%, 8/1/11 3.1% 4. Desert Community College District 5%, 8/1/18 3.0% 5. San Jose Financing Authority Convention Center Project Series F 5%, 9/1/15 3.0% 6. Redlands Financing Authority Series A 5%, 9/1/17 3.0% 7. Port of Oakland California Series I 5.60%, 11/1/19 2.9% 8. California State Department of Water Resource Power Supply Series A 5.25%, 5/1/09 2.9% 9. Irvine Unified School District Community Facilities District No. 86-1 5.50%, 11/1/13 2.9% 10. Northern California Power Agency Public Power Revenue Hydroelectric Project No. 1 Series A 5%, 7/1/15 2.9% -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECTOR WEIGHTINGS 12/31/05 -------------------------------------------------------------------------------- As a percentage of total investments [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Water & Sewer Revenue 21% General Obligation 15 Pre-Refunded 12 General Revenue 10 Power Revenue 10 Municipal Utility District Revenue 8 Transportation Revenue 7 Other 17 SCHEDULE OF INVESTMENTS DECEMBER 31, 2005 PAR VALUE (000) VALUE --------- ----------- MUNICIPAL TAX-EXEMPT BONDS(d)--99.1% DEVELOPMENT REVENUE--4.6% Los Angeles County Public Works Financing Authority Series A 5.50%, 10/1/18 (FSA Insured)...................................... $ 450 $ 495,103 Menlo Park Community Development Agency Las Pulgas Community Development Project 5.375%, 6/1/16 (AMBAC Insured)..................... 250 257,075 PAR VALUE (000) VALUE --------- ----------- DEVELOPMENT REVENUE--CONTINUED Ontario Redevelopment Financing Authority Project No. 1 6.90%, 8/1/10 (MBIA Insured).............................. $ 70 $ 80,037 Ontario Redevelopment Financing Authority Project No. 1 Center City & Cimarron 5.25%, 8/1/13 (MBIA Insured).............................. 500 545,405 Riverside County Redevelopment Agency Jurupa Valley Project Area 5.25%, 10/1/17 (AMBAC Insured).................................... 250 272,005 ----------- 1,649,625 ----------- See Notes to Financial Statements 9 PHOENIX CA INTERMEDIATE TAX-FREE BOND FUND PAR VALUE (000) VALUE --------- ----------- FACILITIES REVENUE--2.5% California State Public Works Board Series C 5.25%, 11/1/20............................ $ 500 $ 529,460 Los Angeles State Building Authority Department of General Services Series A 5.375%, 5/1/06..................................... 200 201,076 Oakland State Building Authority Series A 5%, 4/1/17 (AMBAC Insured)......................... 150 156,383 ----------- 886,919 ----------- GENERAL OBLIGATION--17.5% Brea Olinda Unified School District Series A 6%, 8/1/15 (FGIC Insured)................. 150 175,350 California State 6.25%, 4/1/08..................... 825 874,855 California State 5.50%, 4/1/10 (MBIA Insured)...... 200 217,014 California State 5.25%, 6/1/16..................... 80 81,406 California State Unrefunded Balance-2001 5.375%, 3/1/06..................................... 45 45,110 Desert Community College District 5%, 8/1/18 (MBIA Insured)..................................... 990 1,068,883 Grossmont Cuyamaca Community College Series A 5%, 8/1/19 (MBIA Insured)................. 250 266,355 Long Beach Unified School District Series C 5.375%, 8/1/16 (MBIA Insured)...................... 300 320,853 Metropolitan Water District Southern California Series A 5.25%, 3/1/11............................. 180 189,223 Oakland Unified School District Alameda County School Improvements 5%, 8/1/16 (FSA Insured)....... 400 420,912 San Diego County Certificates of Participation 5.25%, 11/1/15 (AMBAC Insured)..................... 960 1,041,437 San Francisco City and County Educational Facilities Unified School District Series B 5.50%, 6/15/12............................................ 500 525,940 Santa Ana Unified School District 5.70%, 8/1/22 (FGIC Insured)..................................... 400 439,216 Wiseburn School District Series A 5%, 8/1/17 (MBIA Insured)..................................... 580 628,615 ----------- 6,295,169 ----------- GENERAL REVENUE--10.3% California State Public Works Board 5%, 11/1/17 (XLCA Insured)..................................... 460 493,557 Puerto Rico Public Finance Corp. Series A 5.25%, 8/1/30 (AMBAC Insured)(c).......................... 500 541,225 PAR VALUE (000) VALUE --------- ----------- GENERAL REVENUE--CONTINUED San Jose Financing Authority Convention Center Project Series F 5%, 9/1/15 (MBIA Insured)......... $ 1,000 $ 1,062,070 Santa Clara County Financing Authority Leasing Revenue 7.75%, 11/15/11 (AMBAC Insured)............ 400 484,164 South Coast Air Quality Management District 6%, 8/1/11 (AMBAC Insured)............................. 1,000 1,113,760 ----------- 3,694,776 ----------- HIGHER EDUCATION REVENUE--2.4% California State Public Works Board Community Colleges Series A 5.25%, 12/1/13................... 290 307,345 University of California Series A 5%, 5/15/10 (AMBAC Insured).................................... 500 533,615 ----------- 840,960 ----------- MEDICAL REVENUE--1.0% California Health Facilities Financing Authority Series A 5%, 11/15/14.............................. 250 265,150 San Joaquin County General Hospital Project Certificates of Participation 5.25%, 9/1/12 (MBIA Insured)..................................... 100 106,797 ----------- 371,947 ----------- MUNICIPAL UTILITY DISTRICT REVENUE--7.9% City of San Diego Public Facilities Financial Authority Series A 5%, 5/15/13 (AMBAC Insured).................................... 300 300,375 Los Angeles Wastewater System Revenue 5%, 6/1/08 (FSA Insured)............................... 375 390,585 Sacramento Municipal Utility District Electricity Revenue Series L 5.10%, 7/1/13 (AMBAC Insured).................................... 500 522,570 Sacramento Municipal Utility District Electricity Revenue Series O 5.25%, 8/15/10 (MBIA Insured)..................................... 500 539,595 Sacramento Municipal Utility District Electricity Revenue Series O 5.25%, 8/15/15 (MBIA Insured)..................................... 310 336,257 Sacramento Municipal Utility District Electricity Revenue Series O 5.25%, 8/15/17 (MBIA Insured)..................................... 200 215,676 Sacramento Municipal Utility District Electricity Revenue Series P 5.25%, 8/15/17 (FSA Insured)...... 500 537,875 ----------- 2,842,933 ----------- 10 See Notes to Financial Statements PHOENIX CA INTERMEDIATE TAX-FREE BOND FUND PAR VALUE (000) VALUE --------- ----------- POWER REVENUE--9.5% California State Department of Water Resource Power Supply Series A 5.25%, 5/1/09 (MBIA Insured)..................................... $ 1,000 $ 1,059,220 City of Pasadena 5%, 6/1/17 (MBIA Insured)......... 300 317,838 Los Angeles Department of Water & Power Series A-A-3 5.25%, 7/1/18......................... 300 303,045 Northern California Power Agency Public Power Revenue Hydroelectric Project No. 1 Series A 5%, 7/1/15 (MBIA Insured).............................. 1,000 1,050,250 Southern California Public Power Authority Series B 5%, 7/1/12 (FSA Insured).................. 635 688,708 ----------- 3,419,061 ----------- PRE-REFUNDED--10.1% California Educational Facilities Authority Chapman University 5.375%, 10/1/16................. 250 258,755 Contra Costa County Home Mortgage Revenue 7.50%, 5/1/14 (GNMA Collateralized)(b)............. 500 625,620 Cypress Residential Mortgage Revenue Series B 7.25%, 1/1/12(b)................................... 200 240,086 Duarte Redevelopment Agency Single Family Mortgage Revenue Series A 6.875%, 11/1/11 (FNMA Collateralized)(b)........................... 300 352,896 Fremont Union High School District/Santa Clara County Series B 5.25%, 9/1/15 Prerefunded 9/1/10 @ 100....................................... 200 216,514 Los Angeles County Public Works Financing Authority Revenue Regional Park and Open Space Series A 5%, 10/1/13 Prerefunded 10/1/07 @ 101...................................... 325 338,159 Modesto Wastewater Treatment Facilities Revenue 6%, 11/1/12 (MBIA Insured)(b)...................... 735 843,692 San Francisco Bay Area Rapid Transit District Sales Tax Revenue 5.25%, 7/1/17 Prerefunded 7/1/08 @ 101....................................... 320 338,688 Stockton Housing Facilities Revenue O'Connor Woods Project A 5.60%, 3/20/28 Prerefunded 9/20/17 @ 100 (GNMA Collateralized)................ 200 200,896 Truckee Public Financing Authority Leasing Revenue Series A 5.875%, 11/1/20 Prerefunded 11/1/08 @ 102 (AMBAC Insured)...................... 200 217,974 ----------- 3,633,280 ----------- PAR VALUE (000) VALUE --------- ----------- SCHOOL DISTRICT REVENUE--2.9% Irvine Unified School District Community Facilities District No. 86-1 5.50%, 11/1/13 (AMBAC Insured).................................... $ 1,000 $ 1,056,660 TRANSPORTATION REVENUE--7.2% Alameda Corridor Transportation Authority Series A 5.125%, 10/1/16 (MBIA Insured)............ 150 160,929 Alameda Corridor Transportation Authority Series A 5.125%, 10/1/17 (MBIA Insured)............ 125 133,880 Port of Oakland California Series I 5.60%, 11/1/19 (MBIA Insured)..................................... 1,000 1,059,330 San Francisco Bay Area Rapid Transit Financing Authority 5.25%, 7/1/17............................ 180 189,803 San Francisco City & County Airports Commission Second Series - Issue 10B 5.375%, 5/1/17 (MBIA Insured)..................................... 1,000 1,026,470 ----------- 2,570,412 ----------- VETERAN REVENUE--2.6% State of California Veterans Bonds Series 5.15%, 12/1/14............................................ 895 938,703 WATER & SEWER REVENUE--20.6% California State Department of Water Resources Series T 5.125%, 12/1/12........................... 250 264,738 California State Department of Water Resources Series U 5.125%, 12/1/15........................... 90 95,408 California State Department of Water Resources Series W 5.50%, 12/1/13 (FSA-CR Insured)........... 1,000 1,126,020 East Bay Municipal Utility District Water System Revenue 5.25%, 6/1/18 (MBIA Insured)............... 1,035 1,115,533 El Dorado Irrigation District Certificates of Participation Series A 5.25%, 3/1/16 (FGIC Insured)..................................... 365 395,536 Los Angeles Waste Water System Revenue Series B 5%, 6/1/14 (FGIC Insured)................. 700 734,748 Metropolitan Water District of Southern California Series B 5%, 7/1/13................................ 500 543,880 Modesto Waste Water Series A 5%, 11/1/19 (FSA Insured)...................................... 245 262,873 Mountain View Shoreline Regional Park Community Series A 5.50%, 8/1/21 (MBIA Insured)..................................... 1,000 1,032,090 See Notes to Financial Statements 11 PHOENIX CA INTERMEDIATE TAX-FREE BOND FUND PAR VALUE (000) VALUE --------- ----------- WATER & SEWER REVENUE--CONTINUED Redlands Financing Authority Series A 5%, 9/1/17 (FSA Insured)...................................... $ 1,000 $ 1,061,870 Sweetwater California Authority Water Revenue 5.25%, 4/1/10 (AMBAC Insured)...................... 200 207,420 Westlands Water District Revenue Certificates of Participation 5.25%, 9/1/14 (MBIA Insured)......... 500 548,005 ----------- 7,388,121 ----------- ----------------------------------------------------------------------------- TOTAL MUNICIPAL TAX-EXEMPT BONDS (IDENTIFIED COST $35,249,354) 35,588,566 ----------------------------------------------------------------------------- TOTAL INVESTMENTS--99.1% (IDENTIFIED COST $35,249,354) 35,588,566(a) Other assets and liabilities, net--0.9% 328,102 ----------- NET ASSETS--100.0% $35,916,668 =========== (a) Federal Income Tax Information: Net unrealized appreciation of investment securities is comprised of gross appreciation of $624,964 and gross depreciation of $285,752 for federal income tax purposes. At December 31, 2005, the aggregate cost of securities for federal income tax purposes was $35,249,354. (b) Escrowed to maturity. (c) Variable or step coupon security; interest rate shown reflects the rate currently in effect. (d) At December 31, 2005, 81% of the securities in the portfolio are backed by insurance of financial institutions and financial guaranty assurance agencies. Insurers with a concentration greater than 10% of net assets are as follows: MBIA 38%, AMBAC 19%, and FSA 14%. (e) Table excludes short-term investments. 12 See Notes to Financial Statements PHOENIX CA INTERMEDIATE TAX-FREE BOND FUND STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2005 ASSETS Investment securities at value (Identified cost $35,249,354) $ 35,588,566 Receivables Interest 476,670 Prepaid expenses 10,316 ------------- Total assets 36,075,552 ------------- LIABILITIES Cash overdraft 30,588 Payables Fund shares repurchased 194 Dividend distributions 65,447 Professional fee 23,560 Investment advisory fee 19,046 Financial agent fee 4,603 Transfer agent fee 2,937 Trustees' fee 1,785 Other accrued expenses 10,724 ------------- Total liabilities 158,884 ------------- NET ASSETS $ 35,916,668 ============= NET ASSETS CONSIST OF: Capital paid in on shares of beneficial interest $ 35,546,012 Undistributed net investment income 6,221 Accumulated net realized gain 25,223 Net unrealized appreciation 339,212 ------------- NET ASSETS $ 35,916,668 ============= Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $35,916,668) 3,408,300 Net asset value and offering price per share $ 10.54 STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2005 INVESTMENT INCOME Interest $ 1,568,570 ------------- Total investment income 1,568,570 ------------- EXPENSES Investment advisory fee 190,463 Financial agent fee 54,477 Trustees 35,446 Professional 32,332 Transfer agent 16,192 Registration 15,579 Printing 8,113 Custodian 6,300 Miscellaneous 33,154 ------------- Total expenses 392,056 Less expenses reimbursed by investment adviser (105,772) Custodian fees paid indirectly (591) ------------- Net expenses 285,693 ------------- NET INVESTMENT INCOME (LOSS) 1,282,877 ------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on investments 69,727 Net change in unrealized appreciation (depreciation) on investments (865,137) ------------- NET GAIN (LOSS) ON INVESTMENTS (795,410) ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 487,467 ============= See Notes to Financial Statements 13 PHOENIX CA INTERMEDIATE TAX-FREE BOND FUND
STATEMENT OF CHANGES IN NET ASSETS Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- FROM OPERATIONS Net investment income (loss) $ 1,282,877 $ 1,276,147 Net realized gain (loss) 69,727 387,638 Net change in unrealized appreciation (depreciation) (865,137) (463,295) -------------- -------------- INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 487,467 1,200,490 -------------- -------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income (1,281,172) (1,276,807) Net realized short-term gains (50) (31,815) Net realized long-term gains (44,454) (482,971) -------------- -------------- DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS (1,325,676) (1,791,593) -------------- -------------- FROM SHARE TRANSACTIONS Proceeds from sales of shares (300,844 and 500,653 shares, respectively) 3,212,011 5,418,380 Net asset value of shares issued from reinvestment of distributions (56,283 and 72,718 shares, respectively) 598,864 786,372 Cost of shares repurchased (502,660 and 612,472 shares, respectively) (5,341,011) (6,696,885) -------------- -------------- Total (1,530,136) (492,133) -------------- -------------- INCREASE (DECREASE) IN NET ASSETS FROM SHARE TRANSACTIONS (1,530,136) (492,133) -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS (2,368,345) (1,083,236) NET ASSETS Beginning of period 38,285,013 39,368,249 -------------- -------------- END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $6,221 AND $4,516, RESPECTIVELY) $ 35,916,668 $ 38,285,013 ============== ==============
14 See Notes to Financial Statements PHOENIX CA INTERMEDIATE TAX-FREE BOND FUND
FINANCIAL HIGHLIGHTS (SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD) CLASS X ------------------------------------------------------------------ YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 2005 2004 2003 2002 2001 Net asset value, beginning of period $ 10.77 $ 10.96 $ 10.93 $ 10.74 $ 10.83 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.36(1) 0.37 0.41 0.46 0.47 Net realized and unrealized gain (loss) (0.22) (0.04) 0.04 0.24 (0.02) ---------- ---------- ---------- ---------- ---------- TOTAL FROM INVESTMENT OPERATIONS 0.14 0.33 0.45 0.70 0.45 ---------- ---------- ---------- ---------- ---------- LESS DISTRIBUTIONS Dividends from net investment income (0.36) (0.37) (0.41) (0.46) (0.47) Distributions from net realized gains (0.01) (0.15) (0.01) (0.05) (0.07) ---------- ---------- ---------- ---------- ---------- TOTAL DISTRIBUTIONS (0.37) (0.52) (0.42) (0.51) (0.54) ---------- ---------- ---------- ---------- ---------- Change in net asset value (0.23) (0.19) 0.03 0.19 (0.09) ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 10.54 $ 10.77 $ 10.96 $ 10.93 $ 10.74 ========== ========== ========== ========== ========== Total return 1.33% 3.04% 4.25% 6.60% 4.26% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 35,917 $ 38,285 $ 39,368 $ 33,307 $ 34,422 RATIO OF EXPENSES TO AVERAGE NET ASSETS: Net operating expenses 0.75% 0.75% 0.75% 0.75% 0.75% Gross operating expenses 1.03% 0.98% 1.03% 0.98% 0.85% Net investment income (loss) 3.37% 3.39% 3.72% 4.18% 4.38% Portfolio turnover 36% 62% 33% 21% 61%
(1) Computed using average shares outstanding. See Notes to Financial Statements 15 PHOENIX INTERMEDIATE BOND FUND A DISCUSSION WITH THE FUND'S PORTFOLIO MANAGER, KIMBERLY C. FRIEDRICKS Q: HOW DID THE PHOENIX INTERMEDIATE BOND FUND PERFORM FOR ITS FISCAL YEAR ENDED DECEMBER 31, 2005? A: For the fiscal year ended December 31, 2005, the Fund's Class X shares returned 0.73%. For the same period, the Lehman Brothers Aggregate Bond Index, a broad-based fixed income index, returned 2.43%, and the Lehman Brothers Intermediate Government/Credit Bond Index, the Fund's style-specific benchmark, returned 1.58%. All performance figures assume reinvestment of distributions. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE SHOWN ABOVE. Q: HOW DID THE FIXED INCOME MARKETS PERFORM DURING THE FUND'S FISCAL YEAR? A: The Federal Reserve implemented eight interest rate hikes during the year, pushing the federal funds rate to 4.25%. Long-term rates, however, barely moved, creating a flat yield curve. Longer duration portfolios benefited greatly from the flattening of the yield curve, as intermediate bonds, as measured by the Lehman Intermediate Government/Credit Bond Index, were up 1.58% and long-term bonds, as measured by the Lehman Long Government/Credit Bond Index, rose 5.34%. Q: WHAT FACTORS AFFECTED THE FUND'S PERFORMANCE DURING ITS FISCAL YEAR? A: The Fund underperformed the Lehman Intermediate Government/Credit Bond Index. The Fund's overweight position in industrial bonds was the biggest detractor from performance, as the sector underperformed the overall market. The Fund experienced positive performance from its high quality bias and strong sector allocation. Specifically, the Fund's overweight position in fixed-rate mortgage-backed securities benefited from the rising interest rate environment, and agencies benefited performance. The Fund's underweight exposure to Treasuries relative to the benchmark had a neutral effect as Treasuries moved in line with the overall market. JANUARY 2006 THE PRECEDING INFORMATION IS THE OPINION OF PORTFOLIO MANAGEMENT. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, AND THERE IS NO GUARANTEE THAT MARKET FORECASTS DISCUSSED WILL BE REALIZED. FOR DEFINITIONS OF INDEXES CITED AND CERTAIN INVESTMENT TERMS USED IN THIS REPORT, SEE THE GLOSSARY ON PAGE 3. 16 PHOENIX INTERMEDIATE BOND FUND -------------------------------------------------------------------------------- TOTAL RETURNS(1) PERIODS ENDING 12/31/05 --------------------------------------------------------------------------------
INCEPTION INCEPTION 1 YEAR 5 YEAR TO 12/31/05 DATE ------ ------ ----------- --------- Class X Shares 0.73% 4.55% 5.03% 10/28/96 Lehman Brothers Aggregate Bond Index 2.43 5.87 6.51 10/28/96 Lehman Brothers Intermediate Government/Credit Bond Index 1.58 5.49 6.29 10/28/96
ALL RETURNS REPRESENT PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE SHOWN. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE ABOVE TABLE AND GRAPH BELOW DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF SHARES. PLEASE VISIT PHOENIXFUNDS.COM FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END. (1) TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE AND THE REINVESTMENT OF BOTH DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS. -------------------------------------------------------------------------------- GROWTH OF $10,000 PERIODS ENDING 12/31 -------------------------------------------------------------------------------- This Growth of $10,000 chart assumes an initial investment of $10,000 made on 10/28/96 (inception of the Fund) in Class X shares. The total return for Class X shares reflects no sales charge. Performance assumes dividends and capital gain distributions are reinvested. [GRAPHIC OMITTED] EDGAR REPRESENTATION OF DATA USED IN PRINTED GRAPHIC AS FOLLOWS: Phoenix Lehman Brothers Intermediate Intermediate Bond Fund Lehman Brothers Government/Credit Class X Aggregate Bond Index Bond Index ------------ -------------------- ----------------- 10/28/96 $10,000 $10,000 $10,000 12/31/96 10,020 10,162 10,364 12/31/97 10,741 11,143 11,180 12/31/98 11,558 12,111 12,123 12/31/99 11,484 12,011 12,169 12/29/00 12,563 13,408 13,400 12/31/01 13,565 14,540 14,601 12/31/02 14,846 16,032 16,037 12/31/03 15,253 16,690 16,728 12/31/04 15,579 17,414 17,237 12/30/05 15,692 17,837 17,509 For information regarding the indexes, see the glossary on page 3. 17 PHOENIX INTERMEDIATE BOND FUND ABOUT YOUR FUND'S EXPENSES We believe it is important for you to understand the impact of costs on your investment. All mutual funds have operating expenses. As a shareholder of the Intermediate Bond Fund, you incur ongoing costs, including investment advisory fees and other expenses. Class X shares are sold without a sales charge and do not incur distribution and service fees. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. This example is based on an investment of $1,000 invested at the beginning of the period and held for the entire six-month period. ACTUAL EXPENSES The first line of the accompanying table provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the accompanying table provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not your Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in your Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the accompanying tables are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the second line of the accompanying tables is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. If you have incurred transactional costs, your costs could have been higher. The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions. Intermediate Beginning Ending Expenses Paid Bond Fund Account Value Account Value During Class X June 30, 2005 December 31, 2005 Period* ----------------------- ------------- ----------------- ------------- Actual $1,000.00 $ 994.20 $4.47 Hypothetical (5% return before expenses) 1,000.00 1,020.66 4.54 * EXPENSES ARE EQUAL TO THE FUND'S CLASS X ANNUALIZED EXPENSE RATIO OF 0.89%, WHICH INCLUDES WAIVED FEES AND REIMBURSED EXPENSES, IF APPLICABLE, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE MOST RECENT FISCAL HALF-YEAR, THEN DIVIDED BY 365 TO REFLECT THE ONE-HALF YEAR PERIOD. ACTUAL RETURN AS CALCULATED IN THE ABOVE TABLE IS BASED ON THE FUND'S CLASS X RETURN FOR THE PAST SIX MONTHS. WHILE REQUIRED TO BE PRESENTED IN THIS FORMAT, IT IS NOT THE CLASS' ACTUAL RETURN FOR THE YEAR ENDED DECEMBER 31, 2005. THE CLASS' ACTUAL RETURN AT NAV FOR THE FISCAL YEAR WAS 0.73%. UTILIZING THIS 12 MONTH RETURN YIELDS AN ACCOUNT VALUE AT DECEMBER 31, 2005 OF $1,007.30. YOU CAN FIND MORE INFORMATION ABOUT THE FUND'S EXPENSES IN THE FINANCIAL STATEMENTS SECTION THAT FOLLOWS. FOR ADDITIONAL INFORMATION ON OPERATING EXPENSES AND OTHER SHAREHOLDER COSTS REFER TO THE PROSPECTUS. 18 PHOENIX INTERMEDIATE BOND FUND -------------------------------------------------------------------------------- TEN LARGEST HOLDINGS AT DECEMBER 31, 2005 (AS A PERCENTAGE OF NET ASSETS)(c) -------------------------------------------------------------------------------- 1. U.S. Treasury Note 5.75%, 8/15/10 8.7% 2. U.S. Treasury Note 6.50%, 2/15/10 8.7% 3. U.S. Treasury Note 4.75%, 5/15/14 3.8% 4. National Rural Utilities Cooperative Finance Corp. 7.25%, 3/1/12 3.0% 5. Wal-Mart Stores, Inc. 4.55%, 5/1/13 3.0% 6. FHLB 7.23%, 9/8/15 2.9% 7. MetLife, Inc. 6.125%, 12/1/11 2.8% 8. McDonald's Corp. 6%, 4/15/11 2.8% 9. FNMA 6.63%, 10/15/07 2.8% 10. Honeywell International, Inc. 7%, 3/15/07 2.7% -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECTOR WEIGHTINGS 12/31/05 -------------------------------------------------------------------------------- As a percentage of total investments [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Domestic Corporate Bonds 42% Agency Non-Mortgage- Backed Securities 28 U.S.Government Securities 24 Agency Mortgage-Backed Securities 5 Other 1 SCHEDULE OF INVESTMENTS DECEMBER 31, 2005 PAR VALUE (000) VALUE --------- ----------- U.S. GOVERNMENT SECURITIES--23.4% U.S. TREASURY NOTES--23.4% U.S. Treasury Note 6%, 8/15/09..................... $ 1,150 $ 1,212,352 U.S. Treasury Note 6.50%, 2/15/10.................. 4,500 4,855,608 U.S. Treasury Note 5.75%, 8/15/10.................. 4,600 4,867,917 U.S. Treasury Note 4.75%, 5/15/14.................. 2,100 2,151,763 ----------------------------------------------------------------------------- TOTAL U.S. GOVERNMENT SECURITIES (IDENTIFIED COST $13,313,881) 13,087,640 ----------------------------------------------------------------------------- AGENCY MORTGAGE-BACKED SECURITIES--4.8% FHLMC 7.50%, 4/1/14................................ 66 69,959 FHLMC 7%, 4/1/16................................... 62 65,448 FNMA 7.50%, 7/1/09................................. 27 27,779 FNMA 7%, 5/1/14.................................... 54 56,557 FNMA 8%, 1/1/15.................................... 12 13,057 FNMA 8.50%, 7/1/27................................. 336 365,077 GNMA 7%, 7/20/13................................... 63 65,614 GNMA 8%, '21-'27................................... 204 217,763 GNMA 8.50%, 12/15/22............................... 2 2,136 PAR VALUE (000) VALUE --------- ----------- GNMA 8.50%, 8/15/24................................ $ 71 $ 77,648 GNMA 8.50%, 8/15/25................................ 12 13,578 GNMA 8.50%, 6/15/26................................ 2 2,313 GNMA 7%, 6/15/31................................... 605 635,609 GNMA 6%, 8/15/31................................... 361 370,005 GNMA 6.50%, 10/15/31............................... 662 691,962 ----------------------------------------------------------------------------- TOTAL AGENCY MORTGAGE-BACKED SECURITIES (IDENTIFIED COST $2,639,906) 2,674,505 ----------------------------------------------------------------------------- AGENCY NON-MORTGAGE-BACKED SECURITIES--28.0% FFCB 7.125%, 11/16/15.............................. 500 547,069 FHLB 5.925%, 4/9/08................................ 1,000 1,025,953 FHLB 5.80%, 9/2/08................................. 350 358,998 FHLB 5%, 9/8/08.................................... 1,500 1,500,300 FHLB 5.15%, 1/28/13................................ 345 340,890 FHLB 6.30%, 5/13/13................................ 220 226,035 FHLB 7.23%, 9/8/15................................. 1,500 1,643,811 FHLB 6%, 4/27/22................................... 1,020 1,006,854 FHLMC 6%, 11/20/15................................. 1,000 1,005,899 See Notes to Financial Statements 19 PHOENIX INTERMEDIATE BOND FUND PAR VALUE (000) VALUE --------- ----------- FHLMC 6.125%, 12/1/15 ............................. $ 1,500 $ 1,505,820 FHLMC 7.09%, 11/22/16 ............................. 850 864,757 FNMA 6.625%, 10/15/07 ............................. 1,500 1,548,099 FNMA 6.375%, 6/15/09 .............................. 1,000 1,051,391 FNMA 6.625%, 11/15/10 ............................. 1,000 1,081,786 FNMA 6%, 5/16/11 .................................. 875 878,910 FNMA 6.96%, 9/5/12 ................................ 1,063 1,098,069 ----------------------------------------------------------------------------- TOTAL AGENCY NON-MORTGAGE-BACKED SECURITIES (IDENTIFIED COST $15,826,638) 15,684,641 ----------------------------------------------------------------------------- DOMESTIC CORPORATE BONDS--41.7% AEROSPACE & DEFENSE--4.2% Boeing Capital Corp. 5.75%, 2/15/07 ............... 815 822,689 Honeywell International, Inc. 7%, 3/15/07 ......... 1,500 1,534,645 ----------- 2,357,334 ----------- CONSUMER FINANCE--7.1% American General Finance Corp. 5.375%, 10/1/12 ........................................... 1,500 1,509,738 General Electric Capital Corp. Series A 4.625%, 9/15/09 ........................................... 800 792,650 National Rural Utilities Cooperative Finance Corp. 7.25%, 3/1/12 ..................................... 1,500 1,675,031 ----------- 3,977,419 ----------- HOUSEHOLD PRODUCTS--3.9% Colgate-Palmolive Co. 5.98%, 4/25/12 .............. 620 658,403 Kimberly-Clark Corp. 5%, 8/15/13 .................. 1,500 1,522,326 ----------- 2,180,729 ----------- HYPERMARKETS & SUPER CENTERS--3.0% Wal-Mart Stores, Inc. 4.55%, 5/1/13 ............... 1,700 1,659,724 INTEGRATED OIL & GAS--1.9% Conoco Funding Co. 6.35%, 10/15/11 ................ 1,000 1,072,776 INTEGRATED TELECOMMUNICATION SERVICES--2.2% AT&T, Inc. 5.875%, 2/1/12 ......................... 1,200 1,235,309 INVESTMENT BANKING & BROKERAGE--6.8% Bear Stearns Co., Inc. 7.80%, 8/15/07 ............. 825 862,059 Goldman Sachs Group, Inc. (The) 5.25%, 4/1/13 ..... 1,425 1,429,147 Morgan Stanley 6.60%, 4/1/12 ...................... 1,400 1,506,746 ----------- 3,797,952 ----------- PAR VALUE (000) VALUE --------- ----------- LIFE & HEALTH INSURANCE--2.8% MetLife, Inc. 6.125%, 12/1/11...................... $ 1,500 $ 1,591,456 OTHER DIVERSIFIED FINANCIAL SERVICES--1.9% Heller Financial, Inc. 7.375%, 11/1/09 ............ 1,000 1,085,681 PHARMACEUTICALS--5.1% Johnson & Johnson 6.625%, 9/1/09................... 1,300 1,388,239 Pfizer, Inc. 4.50%, 2/15/14........................ 1,500 1,470,483 ----------- 2,858,722 ----------- RESTAURANTS--2.8% McDonald's Corp. 6%, 4/15/11....................... 1,500 1,568,584 ----------------------------------------------------------------------------- TOTAL DOMESTIC CORPORATE BONDS (IDENTIFIED COST $23,502,637) 23,385,686 ----------------------------------------------------------------------------- TOTAL LONG TERM INVESTMENTS--97.9% (IDENTIFIED COST $55,283,062) 54,832,472 ----------------------------------------------------------------------------- SHORT-TERM INVESTMENTS--0.5% COMMERCIAL PAPER(b)--0.5% Allstate Corp. 4.05%, 1/3/06....................... 278 277,937 ----------------------------------------------------------------------------- TOTAL SHORT-TERM INVESTMENTS (IDENTIFIED COST $277,937) 277,937 ----------------------------------------------------------------------------- TOTAL INVESTMENTS--98.4% (IDENTIFIED COST $55,560,999) 55,110,409(a) Other assets and liabilities, net--1.6% 900,951 ----------- NET ASSETS--100.0% $56,011,360 =========== (a) Federal Income Tax Information: Net unrealized depreciation of investment securities is comprised of gross appreciation of $246,195 and gross depreciation of $701,718 for federal income tax purposes. At December 31, 2005, the aggregate cost of securities for federal income tax purposes was $55,565,932. (b) The rate shown is the discount rate. (c) Table excludes short-term investments. 20 See Notes to Financial Statements PHOENIX INTERMEDIATE BOND FUND STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2005 ASSETS Investment securities at value (Identified cost $55,560,999) $55,110,409 Cash 1,789 Receivables Interest 822,948 Fund shares sold 136,184 Prepaid expenses 10,214 ----------- Total assets 56,081,544 ----------- LIABILITIES Payables Investment advisory fee 23,988 Professional fee 23,361 Financial agent fee 5,405 Transfer agent fee 3,093 Trustees' fee 1,785 Other accrued expenses 12,552 ----------- Total liabilities 70,184 ----------- NET ASSETS $56,011,360 =========== NET ASSETS CONSIST OF: Capital paid in on shares of beneficial interest $56,841,336 Undistributed net investment income 22,654 Accumulated net realized loss (402,040) Net unrealized depreciation (450,590) ----------- NET ASSETS $56,011,360 =========== Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $56,011,360) 5,321,581 Net asset value and offering price per share $ 10.53 STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2005 INVESTMENT INCOME Interest $ 2,284,697 ----------- Total investment income 2,284,697 ----------- EXPENSES Investment advisory fee 264,240 Financial agent fee 62,281 Trustees 35,446 Professional 31,517 Registration 18,143 Transfer agent 17,783 Custodian 10,725 Printing 8,876 Miscellaneous 32,929 ----------- Total expenses 481,940 Custodian fees paid indirectly (621) ----------- Net expenses 481,319 ----------- NET INVESTMENT INCOME (LOSS) 1,803,378 ----------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on investments (362,303) Net change in unrealized appreciation (depreciation) on investments (968,070) ----------- NET GAIN (LOSS) ON INVESTMENTS (1,330,373) ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 473,005 =========== See Notes to Financial Statements 21 PHOENIX INTERMEDIATE BOND FUND STATEMENT OF CHANGES IN NET ASSETS
Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- FROM OPERATIONS Net investment income (loss) $ 1,803,378 $ 1,862,328 Net realized gain (loss) (362,303) 372,116 Net change in unrealized appreciation (depreciation) (968,070) (1,179,904) -------------- -------------- INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 473,005 1,054,540 -------------- -------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income (1,780,724) (1,895,342) Net realized long-term gains -- (495,005) -------------- -------------- DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS (1,780,724) (2,390,347) -------------- -------------- FROM SHARE TRANSACTIONS Proceeds from sales of shares (1,465,766 and 1,399,246 shares, respectively) 15,551,373 15,381,326 Net asset value of shares issued from reinvestment of distributions (125,578 and 159,446 shares, respectively) 1,335,897 1,741,504 Cost of shares repurchased (968,972 and 899,478 shares, respectively) (10,305,034) (9,847,416) -------------- -------------- Total 6,582,236 7,275,414 -------------- -------------- INCREASE (DECREASE) IN NET ASSETS FROM SHARE TRANSACTIONS 6,582,236 7,275,414 -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS 5,274,517 5,939,607 NET ASSETS Beginning of period 50,736,843 44,797,236 -------------- -------------- END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $22,654 AND $0, RESPECTIVELY) $ 56,011,360 $ 50,736,843 ============== ==============
22 See Notes to Financial Statements PHOENIX INTERMEDIATE BOND FUND FINANCIAL HIGHLIGHTS (SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
CLASS X ------------------------------------------------------------------ YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 2005 2004 2003 2002 2001 Net asset value, beginning of period $ 10.80 $ 11.09 $ 11.31 $ 10.91 $ 10.82 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.36(1) 0.41 0.48 0.55 0.57 Net realized and unrealized gain (loss) (0.27) (0.17) (0.17) 0.45 0.28 ---------- ---------- ---------- ---------- ---------- TOTAL FROM INVESTMENT OPERATIONS 0.09 0.24 0.31 1.00 0.85 ---------- ---------- ---------- ---------- ---------- LESS DISTRIBUTIONS Dividends from net investment income (0.36) (0.42) (0.48) (0.55) (0.57) Distributions from net realized gains -- (0.11) (0.05) (0.05) (0.19) ---------- ---------- ---------- ---------- ---------- TOTAL DISTRIBUTIONS (0.36) (0.53) (0.53) (0.60) (0.76) ---------- ---------- ---------- ---------- ---------- Change in net asset value (0.27) (0.29) (0.22) 0.40 0.09 ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 10.53 $ 10.80 $ 11.09 $ 11.31 $ 10.91 ========== ========== ========== ========== ========== Total return 0.73% 2.13% 2.74% 9.45% 7.98% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 56,011 $ 50,737 $ 44,797 $ 42,902 $ 40,375 RATIO OF EXPENSES TO AVERAGE NET ASSETS: Operating expenses 0.91% 0.90% 0.94% 0.88% 0.96% Net investment income 3.41% 3.71% 4.28% 4.96% 5.13% Portfolio turnover 36% 54% 35% 27% 50%
(1) Computed using average shares outstanding. See Notes to Financial Statements 23 PHOENIX OVERSEAS FUND A DISCUSSION WITH THE FUND'S PORTFOLIO MANAGER, JEAN-BAPTISTE NADAL, CFA Q: HOW DID THE PHOENIX OVERSEAS FUND PERFORM FOR ITS FISCAL YEAR ENDED DECEMBER 31, 2005? A: For the fiscal year ended December 31, 2005, the Fund's Class X shares returned 10.53%, Class A shares returned 10.17%, Class B shares returned 9.37%, and Class C shares returned 9.37%. For the same period, the S&P 500(R) Index, a broad-based equity index, returned 4.93%, and the MSCI EAFE(R) Index (Net), the Fund's style-specific benchmark, returned 13.54%. All performance figures assume reinvestment of distributions and exclude the effect of sales charges. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE SHOWN ABOVE. Q: HOW DID THE INTERNATIONAL EQUITY MARKETS PERFORM DURING THE FUND'S FISCAL YEAR? A: The international equity markets outperformed the domestic equity markets in 2005, representing the fourth consecutive year of outperformance. For the year, the MSCI EAFE Index (Net) returned 13.54% and the S&P 500(R) Index returned 4.93%. Throughout the year, the international markets continued to favor smaller cap stocks over mega-cap stocks, lower quality names over higher quality names, and emerging markets over developed markets. To illustrate, those companies in the MSCI EAFE Index with a market capitalization of $5 to $10 billion advanced 17.77%, while companies with a market capitalization above $40 billion returned 9.33%. Below-investment-grade companies within the MSCI EAFE Index (Net) were the best performing group, gaining 33.19%, while double-A and single-A rated companies underperformed the overall index. Emerging markets, as measured by the MSCI Emerging Markets Index, rose 34%, more than double the performance of developed markets, as measured by the MSCI EAFE Index (Net). These trends underscore the pervasive appetite for risk in the marketplace. Nevertheless, the U.S. dollar and the growth investment style reached an inflection point in 2005. Both made significant improvements in their relative strength. The U.S. dollar appreciated over 12% from its 2004 levels, and growth stocks, as measured by the MSCI EAFE Growth Index, only slightly underperformed value stocks, as measured by the MSCI EAFE Value Index. Q: WHAT FACTORS AFFECTED THE FUND'S PERFORMANCE DURING ITS FISCAL YEAR? A: The Fund produced healthy returns but underperformed the MSCI EAFE Index (Net), a benchmark with a much larger scope than the Fund's international universe of high quality, large-cap stocks. The combination of a negative market cap effect, negative quality effect, and strong emerging markets detracted from performance, as the Fund is overweight in mega-cap, high quality names based in developed markets. On the other hand, the renewed strength in the U.S. dollar and the waning dominance of the value investment style have been two important factors underpinning our improved 24 PHOENIX OVERSEAS FUND (CONTINUED) relative performance. The strengthening U.S. dollar benefited our investment style as most of our companies generated a portion of their sales in U.S.-dollar related countries. At the same time, the lack of style leadership proved benign to our growth bias. JANUARY 2006 THE PRECEDING INFORMATION IS THE OPINION OF PORTFOLIO MANAGEMENT. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, AND THERE IS NO GUARANTEE THAT MARKET FORECASTS DISCUSSED WILL BE REALIZED. FOR DEFINITIONS OF INDEXES CITED AND CERTAIN INVESTMENT TERMS USED IN THIS REPORT, SEE THE GLOSSARY ON PAGE 3. 25 PHOENIX OVERSEAS FUND -------------------------------------------------------------------------------- TOTAL RETURNS(1) PERIODS ENDING 12/31/05 --------------------------------------------------------------------------------
INCEPTION INCEPTION 1 YEAR 5 YEAR TO 12/31/05 DATE ------ ------ ----------- --------- Class X Shares at NAV(2) 10.53% (2.30)% 5.18% 10/18/96 Class A Shares at NAV(2) 10.17 -- 12.73 8/30/02 Class A Shares at POP(3) 3.83 -- 10.75 8/30/02 Class B Shares at NAV(2) 9.37 -- 11.98 8/30/02 Class B Shares with CDSC(4) 5.37 -- 11.51 8/30/02 Class C Shares at NAV(2) 9.37 -- 11.98 8/30/02 Class C Shares with CDSC(4) 9.37 -- 11.98 8/30/02 S&P 500(R) Index 4.93 0.55 Note 5 Note 5 MSCI EAFE(R) Index (Net) 13.54 4.55 Note 6 Note 6
ALL RETURNS REPRESENT PAST PERFORMANCE WHICH, IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN PERFORMANCE SHOWN. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE ABOVE TABLE AND GRAPH BELOW DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF SHARES. PLEASE VISIT PHOENIXFUNDS.COM FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END. (1) TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE AND THE REINVESTMENT OF BOTH DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. (2) "NAV" (NET ASSET VALUE) TOTAL RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES CHARGE. (3) "POP" (PUBLIC OFFERING PRICE) TOTAL RETURNS INCLUDE THE EFFECT OF THE MAXIMUM FRONT-END 5.75% SALES CHARGE. (4) CDSC (CONTINGENT DEFERRED SALES CHARGE) IS APPLIED TO REDEMPTIONS OF CERTAIN CLASSES OF SHARES THAT DO NOT HAVE A SALES CHARGE APPLIED AT THE TIME OF PURCHASE. CDSC CHARGES FOR B SHARES DECLINE FROM 5% TO 0% OVER A FIVE YEAR PERIOD. CDSC CHARGES FOR C SHARES ARE 1% IN THE FIRST YEAR AND 0% THEREAFTER. (5) INDEX PERFORMANCE IS 8.02% FOR CLASS X (SINCE 10/18/96) AND 11.71% FOR CLASS A, CLASS B, CLASS C (SINCE 8/30/02). (6) INDEX PERFORMANCE IS 6.00% FOR CLASS X (SINCE 10/18/96) AND 19.22% FOR CLASS A, CLASS B, CLASS C (SINCE 8/30/02). -------------------------------------------------------------------------------- GROWTH OF $10,000 PERIODS ENDING 12/31 -------------------------------------------------------------------------------- This Growth of $10,000 chart assumes an initial investment of $10,000 made on 10/18/96 (inception of the Fund) in Class X shares. The total return for Class X shares reflects no sales charge. The performance of other share classes will be greater or less than that shown based on differences in inception dates, fees and sales charges. Performance assumes dividends and capital gain distributions are reinvested. [GRAPHIC OMITTED] EDGAR REPRESENTATION OF DATA USED IN PRINTED GRAPHIC AS FOLLOWS: Phoenix Overseas Fund S&P 500(R) MSCI EAFE(R) Class X Index Index (Net) ------------- ---------- ------------ 10/18/96 $10,000 $10,000 $10,000 12/31/96 10,256 10,474 10,264 12/31/97 11,940 13,970 10,447 12/31/98 15,101 17,988 12,536 12/31/99 19,792 21,789 15,916 12/29/00 17,882 19,788 13,661 12/31/01 12,571 17,438 10,732 12/31/02 10,052 13,584 9,021 12/31/03 12,680 17,484 12,502 12/31/04 14,399 19,383 15,033 12/30/05 15,916 20,339 17,068 For information regarding the indexes, see the glossary on page 3. 26 PHOENIX OVERSEAS FUND ABOUT YOUR FUND'S EXPENSES We believe it is important for you to understand the impact of costs on your investment. All mutual funds have operating expenses. As a shareholder of the Overseas Fund, you incur two types of costs: (1) transaction costs, including sales charges on purchases of Class A shares and contingent deferred sales charges on Class B and Class C shares; and (2) ongoing costs, including investment advisory fees; distribution and service fees and other expenses. Class X shares are sold without a sales charge and do not incur distribution and service fees. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire six-month period. ACTUAL EXPENSES The first line of the accompanying tables provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the accompanying tables provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not your Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in your Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the accompanying tables are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges or contingent deferred sales charges. Therefore, the second line of the accompanying tables is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs could have been higher. The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions. Beginning Ending Expenses Paid Overseas Fund Account Value Account Value During Class X June 30, 2005 December 31, 2005 Period* ----------------------- ------------- ----------------- ------------- Actual $ 1,000.00 $ 1,140.10 $ 7.55 Hypothetical (5% return before expenses) 1,000.00 1,018.06 7.14 * EXPENSES ARE EQUAL TO THE FUND'S CLASS X ANNUALIZED EXPENSE RATIO OF 1.40%, WHICH INCLUDES WAIVED FEES AND REIMBURSED EXPENSES, IF APPLICABLE, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE MOST RECENT FISCAL HALF-YEAR, THEN DIVIDED BY 365 TO REFLECT THE ONE-HALF YEAR PERIOD. ACTUAL RETURN AS CALCULATED IN THE ABOVE TABLE IS BASED ON THE FUND'S CLASS X RETURN FOR THE PAST SIX MONTHS. WHILE REQUIRED TO BE PRESENTED IN THIS FORMAT, IT IS NOT THE CLASS' ACTUAL RETURN FOR THE YEAR ENDED DECEMBER 31, 2005. THE CLASS' ACTUAL RETURN AT NAV FOR THE FISCAL YEAR WAS 10.53%. UTILIZING THIS 12 MONTH RETURN YIELDS AN ACCOUNT VALUE AT DECEMBER 31, 2005 OF $1,105.30. Beginning Ending Expenses Paid Overseas Fund Account Value Account Value During Class A June 30, 2005 December 31, 2005 Period* ----------------------- ------------- ----------------- ------------- Actual $ 1,000.00 $ 1,138.30 $ 8.89 Hypothetical (5% return before expenses) 1,000.00 1,016.79 8.42 * EXPENSES ARE EQUAL TO THE FUND'S CLASS A ANNUALIZED EXPENSE RATIO OF 1.65%, WHICH INCLUDES WAIVED FEES AND REIMBURSED EXPENSES, IF APPLICABLE, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE MOST RECENT FISCAL HALF-YEAR, THEN DIVIDED BY 365 TO REFLECT THE ONE-HALF YEAR PERIOD. ACTUAL RETURN AS CALCULATED IN THE ABOVE TABLE IS BASED ON THE FUND'S CLASS A RETURN FOR THE PAST SIX MONTHS. WHILE REQUIRED TO BE PRESENTED IN THIS FORMAT, IT IS NOT THE CLASS' ACTUAL RETURN FOR THE YEAR ENDED DECEMBER 31, 2005. THE CLASS' ACTUAL RETURN AT NAV FOR THE FISCAL YEAR WAS 10.17%. UTILIZING THIS 12 MONTH RETURN YIELDS AN ACCOUNT VALUE AT DECEMBER 31, 2005 OF $1,101.70. Beginning Ending Expenses Paid Overseas Fund Account Value Account Value During Class B June 30, 2005 December 31, 2005 Period* ----------------------- ------------- ----------------- ------------- Actual $ 1,000.00 $ 1,134.20 $ 12.92 Hypothetical (5% return before expenses) 1,000.00 1,012.95 12.26 * EXPENSES ARE EQUAL TO THE FUND'S CLASS B ANNUALIZED EXPENSE RATIO OF 2.40%, WHICH INCLUDES WAIVED FEES AND REIMBURSED EXPENSES, IF APPLICABLE, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE MOST RECENT FISCAL HALF-YEAR, THEN DIVIDED BY 365 TO REFLECT THE ONE-HALF YEAR PERIOD. ACTUAL RETURN AS CALCULATED IN THE ABOVE TABLE IS BASED ON THE FUND'S CLASS B RETURN FOR THE PAST SIX MONTHS. WHILE REQUIRED TO BE PRESENTED IN THIS FORMAT, IT IS NOT THE CLASS' ACTUAL RETURN FOR THE YEAR ENDED DECEMBER 31, 2005. THE CLASS' ACTUAL RETURN AT NAV FOR THE FISCAL YEAR WAS 9.37%. UTILIZING THIS 12 MONTH RETURN YIELDS AN ACCOUNT VALUE AT DECEMBER 31, 2005 OF $1,093.70. 27 PHOENIX OVERSEAS FUND Beginning Ending Expenses Paid Overseas Fund Account Value Account Value During Class C June 30, 2005 December 31, 2005 Period* ----------------------- ------------- ----------------- ------------- Actual $ 1,000.00 $ 1,134.20 $ 12.91 Hypothetical (5% return before expenses) 1,000.00 1,012.95 $ 12.25 * EXPENSES ARE EQUAL TO THE FUND'S CLASS C ANNUALIZED EXPENSE RATIO OF 2.40%, WHICH INCLUDES WAIVED FEES AND REIMBURSED EXPENSES, IF APPLICABLE, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE MOST RECENT FISCAL HALF-YEAR, THEN DIVIDED BY 365 TO REFLECT THE ONE-HALF YEAR PERIOD. ACTUAL RETURN AS CALCULATED IN THE ABOVE TABLE IS BASED ON THE FUND'S CLASS C RETURN FOR THE PAST SIX MONTHS. WHILE REQUIRED TO BE PRESENTED IN THIS FORMAT, IT IS NOT THE CLASS' ACTUAL RETURN FOR THE YEAR ENDED DECEMBER 31, 2005. THE CLASS' ACTUAL RETURN AT NAV FOR THE FISCAL YEAR WAS 9.37%. UTILIZING THIS 12 MONTH RETURN YIELDS AN ACCOUNT VALUE AT DECEMBER 31, 2005 OF $1,093.70. YOU CAN FIND MORE INFORMATION ABOUT THE FUND'S EXPENSES IN THE FINANCIAL STATEMENTS SECTION THAT FOLLOWS. FOR ADDITIONAL INFORMATION ON OPERATING EXPENSES AND OTHER SHAREHOLDER COSTS REFER TO THE PROSPECTUS. 28 PHOENIX OVERSEAS FUND -------------------------------------------------------------------------------- TEN LARGEST HOLDINGS AT DECEMBER 31, 2005 (AS A PERCENTAGE OF NET ASSETS)(f) -------------------------------------------------------------------------------- 1. BP plc 3.3% 2. Total SA Sponsored ADR 3.2% 3. Mitsubishi UFJ Financial Group, Inc. 3.0% 4. Air Liquide SA 2.4% 5. Koninklijke Philips Electronics N.V. 2.4% 6. BNP Paribas SA 2.4% 7. Sanofi-aventis 2.3% 8. Statoil ASA 2.3% 9. Canon, Inc. 2.2% 10. GlaxoSmithKline plc 2.1% -------------------------------------------------------------------------------- COUNTRY WEIGHTINGS 12/31/05 -------------------------------------------------------------------------------- As a percentage of total investments [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Japan 21% France 17 United Kingdom 17 Switzerland 8 Germany 5 Netherlands 4 Spain 3 Other 25 SCHEDULE OF INVESTMENTS DECEMBER 31, 2005 SHARES VALUE ----------- ------------ FOREIGN COMMON STOCKS(b)--99.5% AUSTRALIA--3.1% Rio Tinto Ltd. (Diversified Metals & Mining)(d) 23,000 $ 1,163,430 Westpac Banking Corp. (Diversified Banks) ...... 37,800 630,429 ------------ 1,793,859 ------------ BELGIUM--0.6% Fortis (Multi-Sector Holdings) ................. 11,400 363,728 FRANCE--20.0% Air Liquide SA (Industrial Gases)(d) ........... 7,285 1,401,509 AXA Sponsored ADR (Multi-line Insurance) ....... 26,824 867,220 BNP Paribas SA (Diversified Banks) ............. 17,000 1,375,626 Carrefour SA (Food Retail) ..................... 10,800 506,072 Compagnie de Saint-Gobain (Building Products)(d) ................................... 10,100 600,856 L'Oreal SA (Personal Products)(d) .............. 11,100 825,269 LVMH Moet Hennessy Louis Vuitton SA (Apparel, Accessories & Luxury Goods)(d) ....... 8,200 728,580 PSA Peugeot Citroen SA (Automobile Manufacturers)(d) .............................. 8,680 500,451 SHARES VALUE ----------- ------------ FRANCE--CONTINUED Sanofi-aventis (Pharmaceuticals)(d) ............ 15,000 $ 1,314,123 Schneider Electric SA (Electrical Components & Equipment)(d) .................................. 7,600 677,969 Societe Generale (Diversified Banks)(d) ........ 6,600 811,844 Total SA Sponsored ADR (Integrated Oil & Gas) .. 14,396 1,819,654 ------------ 11,429,173 ------------ GERMANY--6.2% BASF AG (Diversified Chemicals) ................ 10,800 827,386 Henkel KGaA (Personal Products) ................ 7,500 697,373 SAP AG (Application Software) .................. 5,340 968,277 Siemens AG (Industrial Conglomerates) .......... 12,000 1,028,567 ------------ 3,521,603 ------------ IRELAND--2.0% Allied Irish Banks plc (Diversified Banks) ..... 28,875 620,799 Bank of Ireland (Diversified Banks) ............ 33,400 526,305 ------------ 1,147,104 ------------ See Notes to Financial Statements 29 PHOENIX OVERSEAS FUND SHARES VALUE ----------- ------------ JAPAN--24.2% Canon, Inc. (Electronic Equipment Manufacturers)(d) .............................. 22,000 $ 1,287,150 Denso Corp. (Auto Parts & Equipment) ........... 22,600 779,938 Kao Corp. (Personal Products) .................. 38,000 1,018,188 Millea Holdings, Inc. (Property & Casualty Insurance) ..................................... 64 1,101,624 Mitsubishi UFJ Financial Group, Inc. (Diversified Banks) ............................ 125 1,695,849 Murata Manufacturing Co. Ltd. (Electronic Equipment Manufacturers) ....................... 10,500 673,082 Nomura Holdings, Inc. (Investment Banking & Brokerage) ..................................... 37,400 716,700 Secom Co. Ltd. (Specialized Consumer Services) . 15,000 784,754 Shimano, Inc. (Leisure Products)(d) ............ 23,600 620,342 Shin-Etsu Chemical Co. Ltd. (Diversified Chemicals) ..................................... 22,700 1,206,843 SMC Corp. (Electrical Components & Equipment) ..................................... 7,100 1,014,415 Sony Corp. (Household Appliances) .............. 17,300 707,050 Takeda Pharmaceutical Co. Ltd. (Pharmaceuticals) .............................. 12,500 676,220 TDK Corp. (Electronic Equipment Manufacturers) . 7,800 537,703 Toyota Motor Corp. (Automobile Manufacturers) .. 20,100 1,043,049 ------------ 13,862,907 ------------ NETHERLANDS--4.9% ABN AMRO Holding N.V. (Diversified Banks) ...... 28,700 750,569 Koninklijke Philips Electronics N.V. (Industrial Conglomerates) ................................. 44,500 1,382,937 Wolters Kluwer N.V. (Publishing & Printing) .... 33,000 667,290 ------------ 2,800,796 ------------ NORWAY--2.3% Statoil ASA (Integrated Oil & Gas) ............. 56,300 1,292,949 SINGAPORE--3.4% DBS Group Holdings, Ltd. (Diversified Banks)(d) 120,000 1,190,870 Singapore Technologies Engineering Ltd. (Aerospace & Defense) .......................... 444,000 763,745 ------------ 1,954,615 ------------ SPAIN--4.0% Banco Bilbao Vizcaya Argentaria SA (Diversified Banks) ......................................... 39,110 698,236 SHARES VALUE ----------- ------------ SPAIN--CONTINUED Banco Popular Espanol SA (Regional Banks)(d) ... 50,000 $ 609,705 Telefonica SA (Integrated Telecommunication Services) ...................................... 64,532 971,032 ------------ 2,278,973 ------------ SWITZERLAND--8.9% Credit Suisse Group (Diversified Banks) ........ 11,900 606,750 Nestle S.A. Registered Shares (Packaged Foods & Meats) ......................................... 2,800 837,411 Nestle S.A. Sponsored ADR (Packaged Foods & Meats) ......................................... 1,948 145,219 Novartis AG ADR (Pharmaceuticals) .............. 22,976 1,205,780 Roche Holding AG (Pharmaceuticals) ............. 5,700 855,835 Swiss Reinsurance (Property & Casualty Insurance) ..................................... 11,400 834,580 UBS AG Registered Shares (Diversified Capital Markets) ....................................... 6,480 616,908 ------------ 5,102,483 ------------ UNITED KINGDOM--19.9% BP plc (Integrated Oil & Gas) .................. 174,750 1,861,058 BT Group plc (Integrated Telecommunication Services) ...................................... 233,275 894,001 Diageo plc (Distillers & Vintners) ............. 46,800 678,372 GlaxoSmithKline plc (Pharmaceuticals) .......... 47,773 1,207,414 HBOS plc (Diversified Banks) ................... 43,000 734,632 Kingfisher plc (Home Improvement Retail) ....... 216,000 881,682 Lloyds TSB Group plc (Multi-Sector Holdings) ... 67,610 568,234 Pearson plc (Publishing & Printing) ............ 47,924 566,862 Prudential plc (Life & Health Insurance) ....... 68,500 648,194 Reed Elsevier plc (Publishing & Printing) ...... 99,100 930,933 Royal Bank of Scotland Group plc (Diversified Banks) ............................ 28,000 845,448 Tesco plc (Food Retail) ........................ 98,700 562,928 Vodafone Group plc Sponsored ADR (Wireless Telecommunication Services) .................... 46,980 1,008,662 ------------ 11,388,420 ------------ ----------------------------------------------------------------------------- TOTAL FOREIGN COMMON STOCKS (IDENTIFIED COST $42,640,304) 56,936,610 ----------------------------------------------------------------------------- TOTAL LONG TERM INVESTMENTS--99.5% (IDENTIFIED COST $42,640,304) 56,936,610 ----------------------------------------------------------------------------- 30 See Notes to Financial Statements PHOENIX OVERSEAS FUND SHARES VALUE ----------- ------------ SHORT-TERM INVESTMENTS--18.4% MONEY MARKET MUTUAL FUNDS--18.0% State Street Navigator Prime Plus (4.28% seven day effective yield)(c) .................. 10,280,241 $ 10,280,241 PAR VALUE (000) ----------- COMMERCIAL PAPER(e)--0.4% UBS Finance Delaware LLC 3.75%, 1/3/06 ......... $ 254 253,947 ----------------------------------------------------------------------------- TOTAL SHORT-TERM INVESTMENTS (IDENTIFIED COST $10,534,188) 10,534,188 ----------------------------------------------------------------------------- TOTAL INVESTMENTS--117.9% (IDENTIFIED COST $53,174,492) 67,470,798(a) Other assets and liabilities, net--(17.9)% (10,250,359) ------------ NET ASSETS--100.0% $ 57,220,439 ============ (a) Federal Income Tax Information: Net unrealized appreciation of investment securities is comprised of gross appreciation of $14,044,337 and gross depreciation of $303,717 for federal income tax purposes. At December 31, 2005, the aggregate cost of securities for federal income tax purposes was $53,730,178. (b) Foreign common stocks are determined based on the country in which the security is issued. The country of risk is determined based on criteria described in Note 2G "Foreign security country determination" in the Notes to Financial Statements. (c) Represents security purchased with cash collateral received for securities on loan. (d) All or a portion of security is on loan. (e) The rate shown is the discount rate. (f) Table excludes short-term investments. See Notes to Financial Statements 31 PHOENIX OVERSEAS FUND INDUSTRY DIVERSIFICATION AS A PERCENTAGE OF TOTAL VALUE OF TOTAL LONG-TERM INVESTMENTS (UNAUDITED) Aerospace & Defense ......................... 1.3% Apparel, Accessories & Luxury Goods ......... 1.3 Application Software ........................ 1.7 Auto Parts & Equipment ...................... 1.4 Automobile Manufacturers .................... 2.7 Building Products ........................... 1.1 Distillers & Vintners ....................... 1.2 Diversified Banks ........................... 18.4 Diversified Capital Markets ................. 1.1 Diversified Chemicals ....................... 3.6 Diversified Metals & Mining ................. 2.0 Electrical Components & Equipment ........... 3.0 Electronic Equipment Manufacturers .......... 4.4 Food Retail ................................. 1.9 Home Improvement Retail ..................... 1.5 Household Appliances ........................ 1.2 Industrial Conglomerates .................... 4.2 Industrial Gases ............................ 2.5 Integrated Oil & Gas ........................ 8.7 Integrated Telecommunication Services ....... 3.3 Investment Banking & Brokerage .............. 1.3 Leisure Products ............................ 1.1 Life & Health Insurance ..................... 1.1 Multi-Sector Holdings ....................... 1.6 Multi-line Insurance ........................ 1.5 Packaged Foods & Meats ...................... 1.7 Personal Products ........................... 4.5 Pharmaceuticals ............................. 9.2 Property & Casualty Insurance ............... 3.4 Publishing & Printing ....................... 3.8 Regional Banks .............................. 1.1 Specialized Consumer Services ............... 1.4 Wireless Telecommunication Services ......... 1.8 ----- 100.0% ===== 32 See Notes to Financial Statements PHOENIX OVERSEAS FUND STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2005 ASSETS Investment securities at value including $9,789,021 of securities on loan (Identified cost $53,174,492) $ 67,470,798 Cash 1,686 Receivables Dividends 72,957 Tax reclaims 43,620 Fund shares sold 10,764 Prepaid expenses 22,688 ------------- Total assets 67,622,513 ------------- LIABILITIES Payables Fund shares repurchased 852 Upon return of securities loaned 10,280,241 Investment advisory fee 53,435 Professional fee 23,541 Transfer agent fee 12,156 Custodian fee 9,566 Financial agent fee 5,436 Distribution and service fees 3,914 Trustees' fee 1,785 Other accrued expenses 11,148 ------------- Total liabilities 10,402,074 ------------- NET ASSETS $ 57,220,439 ============= NET ASSETS CONSIST OF: Capital paid in on shares of beneficial interest $ 63,566,439 Undistributed net investment income 1,871 Accumulated net realized loss (20,640,402) Net unrealized appreciation 14,292,531 ------------- NET ASSETS $ 57,220,439 ============= CLASS X Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $43,916,150) 3,153,589 Net asset value and offering price per share $ 13.93 CLASS A Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $11,627,497) 838,837 Net asset value per share $ 13.86 Offering price per share $13.86/(1-5.75%) $ 14.71 CLASS B Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $479,873) 34,816 Net asset value and offering price per share $ 13.78 CLASS C Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $1,196,919) 86,849 Net asset value and offering price per share $ 13.78 STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2005 INVESTMENT INCOME Dividends $ 1,577,443 Interest 7,847 Security lending 4,501 Foreign taxes withheld (158,653) ------------- Total investment income 1,431,138 ------------- EXPENSES Investment advisory fee 541,611 Service fees, Class A 28,557 Distribution and service fees, Class B 4,108 Distribution and service fees, Class C 11,293 Financial agent fee 64,991 Transfer agent 68,428 Custodian 55,234 Registration 39,049 Trustees 35,446 Professional 31,980 Printing 12,450 Miscellaneous 37,706 ------------- Total expenses 930,853 Less expenses reimbursed by investment adviser (88,689) ------------- Net expenses 842,164 ------------- NET INVESTMENT INCOME (LOSS) 588,974 ------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on investments 3,569,272 Net realized gain (loss) on foreign currency transactions (94,459) Net change in unrealized appreciation (depreciation) on investments 1,396,569 Net change in unrealized appreciation (depreciation) on foreign currency translation (8,468) ------------- NET GAIN (LOSS) ON INVESTMENTS 4,862,914 ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 5,451,888 ============= See Notes to Financial Statements 33 PHOENIX OVERSEAS FUND STATEMENT OF CHANGES IN NET ASSETS
Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- FROM OPERATIONS Net investment income (loss) $ 588,974 $ 562,786 Net realized gain (loss) 3,474,813 779,992 Net change in unrealized appreciation (depreciation) 1,388,101 5,802,995 ------------- ------------- INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 5,451,888 7,145,773 ------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income, Class X (444,123) (408,160) Net investment income, Class A (91,465) (69,738) Net investment income, Class B -- (74) Net investment income, Class C -- (209) ------------- ------------- DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS (535,588) (478,181) ------------- ------------- FROM SHARE TRANSACTIONS CLASS X Proceeds from sales of shares (425,496 and 838,947 shares, respectively) 5,479,441 9,607,428 Net asset value of shares issued from reinvestment of distributions (18,804 and 20,594 shares, respectively) 260,105 247,250 Cost of shares repurchased (962,406 and 814,640 shares, respectively) (12,322,572) (9,405,866) ------------- ------------- Total (6,583,026) 448,812 ------------- ------------- CLASS A Proceeds from sales of shares (154,346 and 215,708 shares, respectively) 1,972,828 2,477,322 Net asset value of shares issued from reinvestment of distributions (6,580 and 5,756 shares, respectively) 90,307 69,334 Cost of shares repurchased (219,550 and 174,457 shares, respectively) (2,843,061) (1,989,541) ------------- ------------- Total (779,926) 557,115 ------------- ------------- CLASS B Proceeds from sales of shares (10,332 and 20,499 shares, respectively) 132,392 234,135 Net asset value of shares issued from reinvestment of distributions (0 and 7 shares, respectively) -- 74 Cost of shares repurchased (6,416 and 3,352 shares, respectively) (81,146) (37,604) ------------- ------------- Total 51,246 196,605 ------------- ------------- CLASS C Proceeds from sales of shares (17,419 and 47,786 shares, respectively) 221,749 549,915 Net asset value of shares issued from reinvestment of distributions (0 and 17 shares, respectively) -- 198 Cost of shares repurchased (14,875 and 20,048 shares, respectively) (182,746) (226,867) ------------- ------------- Total 39,003 323,246 ------------- ------------- INCREASE (DECREASE) IN NET ASSETS FROM SHARE TRANSACTIONS (7,272,703) 1,525,778 ------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS (2,356,403) 8,193,370 NET ASSETS Beginning of period 59,576,842 51,383,472 ------------- ------------- END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $1,871 AND $42,944, RESPECTIVELY) $ 57,220,439 $ 59,576,842 ============= =============
34 See Notes to Financial Statements PHOENIX OVERSEAS FUND FINANCIAL HIGHLIGHTS (SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
CLASS X ---------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 2005 2004 2003 2002 2001 Net asset value, beginning of period $ 12.73 $ 11.31 $ 9.01 $ 11.32 $ 16.15 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.14(2) 0.13(2) 0.09(2) 0.03 0.04 Net realized and unrealized gain (loss) 1.20 1.40 2.26 (2.29) (4.83) ---------- ---------- ---------- ---------- ---------- TOTAL FROM INVESTMENT OPERATIONS 1.34 1.53 2.35 (2.26) (4.79) ---------- ---------- ---------- ---------- ---------- LESS DISTRIBUTIONS Dividends from net investment income (0.14) (0.11) (0.05) (0.03) (0.04) Return of capital -- -- -- (0.02) -- ---------- ---------- ---------- ---------- ---------- TOTAL DISTRIBUTIONS (0.14) (0.11) (0.05) (0.05) (0.04) ---------- ---------- ---------- ---------- ---------- Change in net asset value 1.20 1.42 2.30 (2.31) (4.83) ---------- ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 13.93 $ 12.73 $ 11.31 $ 9.01 $ 11.32 ========== ========== ========== ========== ========== Total return 10.53% 13.56% 26.15% (20.04)% (29.72)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 43,916 $ 46,748 $ 41,013 $ 50,656 $ 56,513 RATIO TO AVERAGE NET ASSETS OF: Net operating expenses 1.40% 1.40% 1.40% 1.41% 1.38% Gross operating expenses 1.56% 1.60% 1.77% 1.41% 1.38% Net investment income (loss) 1.11% 1.08% 0.93% 0.49% 0.09% Portfolio turnover 28% 33% 49% 65% 88% CLASS A ----------------------------------------------------------------- YEAR ENDED DECEMBER 31, FROM INCEPTION ------------------------------------------ AUGUST 30, 2002 TO 2005 2004 2003 DECEMBER 31, 2002 Net asset value, beginning of period $ 12.68 $ 11.27 $ 9.01 $ 9.45 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.11(2) 0.10(2) (0.03)(2) (0.03) Net realized and unrealized gain (loss) 1.18 1.39 2.32 (0.41) ---------- ---------- ---------- ---------- TOTAL FROM INVESTMENT OPERATIONS 1.29 1.49 2.29 (0.44) ---------- ---------- ---------- ---------- LESS DISTRIBUTIONS Dividends from net investment income (0.11) (0.08) (0.03) -- ---------- ---------- ---------- ---------- TOTAL DISTRIBUTIONS (0.11) (0.08) (0.03) -- ---------- ---------- ---------- ---------- Change in net asset value 1.18 1.41 2.26 (0.44) ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 13.86 $ 12.68 $ 11.27 $ 9.01 ========== ========== ========== ========== Total return(1) 10.17% 13.24% 25.56% (4.76)%(3) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 11,627 $ 11,377 $ 9,582 $ 153 RATIO TO AVERAGE NET ASSETS OF: Net operating expenses 1.65% 1.65% 1.65% 1.66%(4) Gross operating expenses 1.81% 1.85% 1.98% 1.66%(4) Net investment income (loss) 0.87% 0.81% (0.31)% 0.24%(4) Portfolio turnover 28% 33% 49% 65%(3)
(1) Sales charges are not reflected in the total return calculation. (2) Computed using average shares outstanding. (3) Not annualized. (4) Annualized. See Notes to Financial Statements 35 PHOENIX OVERSEAS FUND FINANCIAL HIGHLIGHTS (SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
CLASS B ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, FROM INCEPTION ------------------------------------------ AUGUST 30, 2002 TO 2005 2004 2003 DECEMBER 31, 2002 Net asset value, beginning of period $ 12.60 $ 11.21 $ 8.98 $ 9.45 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.02(4) --(4)(5) (0.03)(4) (0.06) Net realized and unrealized gain (loss) 1.16 1.39 2.26 (0.41) ---------- ---------- ---------- ---------- TOTAL FROM INVESTMENT OPERATIONS 1.18 1.39 2.23 (0.47) ---------- ---------- ---------- ---------- LESS DISTRIBUTIONS Dividends from net investment income -- --(5) -- -- ---------- ---------- ---------- ---------- TOTAL DISTRIBUTIONS -- --(5) -- -- ---------- ---------- ---------- ---------- Change in net asset value 1.18 1.39 2.23 (0.47) ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 13.78 $ 12.60 $ 11.21 $ 8.98 ========== ========== ========== ========== Total return(1) 9.37% 12.43% 24.83% (4.97)%(2) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 480 $ 389 $ 154 $ 98 RATIO TO AVERAGE NET ASSETS OF: Net operating expenses 2.40% 2.40% 2.40% 2.41%(3) Gross operating expenses 2.56% 2.60% 2.73% 2.41%(3) Net investment income (loss) 0.12% (0.01)% (0.27)% (0.51)%(3) Portfolio turnover 28% 33% 49% 65%(2) CLASS C ---------------------------------------------------------------- YEAR ENDED DECEMBER 31, FROM INCEPTION ------------------------------------------ AUGUST 30, 2002 TO 2005 2004 2003 DECEMBER 31, 2002 Net asset value, beginning of period $ 12.60 $ 11.21 $ 8.98 $ 9.45 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.02(4) --(4)(5) (0.06)(4) (0.06) Net realized and unrealized gain (loss) 1.16 1.39 2.29 (0.41) ---------- ---------- ---------- ---------- TOTAL FROM INVESTMENT OPERATIONS 1.18 1.39 2.23 (0.47) ---------- ---------- ---------- ---------- LESS DISTRIBUTIONS Dividends from net investment income -- --(5) -- -- ---------- ---------- ---------- ---------- TOTAL DISTRIBUTIONS -- --(5) -- -- ---------- ---------- ---------- ---------- Change in net asset value 1.18 1.39 2.23 (0.47) ---------- ---------- ---------- ---------- NET ASSET VALUE, END OF PERIOD $ 13.78 $ 12.60 $ 11.21 $ 8.98 ========== ========== ========== ========== Total return(1) 9.37% 12.43% 24.83% (4.97)%(2) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 1,197 $ 1,062 $ 634 $ 99 RATIO TO AVERAGE NET ASSETS OF: Net operating expenses 2.40% 2.40% 2.40% 2.41%(3) Gross operating expenses 2.56% 2.60% 2.73% 2.41%(3) Net investment income (loss) 0.17% 0.02% (0.70)% (0.51)%(3) Portfolio turnover 28% 33% 49% 65%(2)
(1) Sales charges are not reflected in the total return calculation. (2) Not annualized. (3) Annualized. (4) Computed using average shares outstanding. (5) Amount is less than $0.01. 36 See Notes to Financial Statements PHOENIX RISING DIVIDENDS FUND A DISCUSSION WITH THE FUND'S PORTFOLIO MANAGERS, ALLAN M. RUDNICK AND PAUL WAYNE, CFA Q: HOW DID THE PHOENIX RISING DIVIDENDS FUND PERFORM FOR ITS FISCAL YEAR ENDED DECEMBER 31, 2005? A: For the fiscal year ended December 21, 2005, the Fund's Class X shares returned (1.19)%, Class A shares returned (1.43)%, Class B shares returned (2.22)%, and Class C shares returned (2.22)%. For the same period, the S&P 500(R) Index, a broad-based equity index and the Fund's style-specific benchmark, returned 4.93%. All performance figures assume reinvestment of distributions and exclude the effect of sales charges. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE SHOWN ABOVE. Q: HOW DID THE EQUITY MARKETS PERFORM DURING THE FUND'S FISCAL YEAR? A: For the year 2005, two definite themes drove the performance of the markets. First, stocks of smaller and lower quality companies outperformed stocks of larger and higher quality companies. To illustrate, those companies in the S&P 500(R) Index with a market capitalization of $20 billion or greater returned 2.17% for the year, while companies with a market capitalization between $5 and $10 billion advanced 13.75%. Companies in the S&P 500 Index with an S&P bond credit rating of triple-A lost 3.97%, while those companies with debt rated below investment grade produced positive returns. The second key theme was the energy sector's strong outperformance relative to the other sectors in the S&P 500 Index. The energy sector returned 31.41% while the overall S&P 500 Index returned only 4.93% for the year. Q: WHAT FACTORS AFFECTED THE FUND'S PERFORMANCE DURING ITS FISCAL YEAR? A: The Fund underperformed the S&P 500 Index in 2005. To a substantial degree, the Fund's underperformance reflected the strong returns of smaller, lower quality companies. The Fund is focused exclusively on higher quality companies and the companies tend to be larger in market capitalization than the S&P 500 Index. In addition, the Fund was negatively impacted by the underweighting of the energy and utilities sectors, as fairly valued, high quality companies that the Fund prefers are scarce in these sectors. A portion of the Fund's underperformance was driven by negative stock selection. The stocks that detracted the most from return included Gannett and Pfizer. Gannett, along with the rest of the newspaper industry, suffered margin pressure from online competition and tough comparisons relative to 2004, which featured two big news events - the Olympics and national elections. Pfizer struggled with continued uncertainty regarding the timing of management's earnings guidance and the Lipitor Paragraph 4 patent challenge decision, which was ultimately decided in Pfizer's favor in mid-December. Stocks that contributed positively to the Fund's performance included American International Group and Paychex. American International Group 37 PHOENIX RISING DIVIDENDS FUND (CONTINUED) and Paychex. American International Group posted strong results throughout 2005 despite management turnover earlier in the year. Paychex has combined price increases and new customer acquisition to generate strong growth. JANUARY 2006 THE PRECEDING INFORMATION IS THE OPINION OF PORTFOLIO MANAGEMENT. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, AND THERE IS NO GUARANTEE THAT MARKET FORECASTS DISCUSSED WILL BE REALIZED. FOR DEFINITIONS OF INDEXES CITED AND CERTAIN INVESTMENT TERMS USED IN THIS REPORT, SEE THE GLOSSARY ON PAGE 3. 38 PHOENIX RISING DIVIDENDS FUND -------------------------------------------------------------------------------- TOTAL RETURNS(1) PERIODS ENDING 12/31/05 --------------------------------------------------------------------------------
INCEPTION INCEPTION 1 YEAR 5 YEAR 10 YEAR TO 12/31/05 DATE ------ ------ ------- ----------- --------- Class X Shares at NAV(2) (1.19)% (2.03)% 6.24% --% -- Class A Shares at NAV(2) (1.43) -- -- 4.86 8/30/02 Class A Shares at POP(3) (7.10) -- -- 3.01 8/30/02 Class B Shares at NAV(2) (2.22) -- -- 4.06 8/30/02 Class B Shares with CDSC(4) (6.12) -- -- 3.51 8/30/02 Class C Shares at NAV(2) (2.22) -- -- 4.06 8/30/02 Class C Shares with CDSC(4) (2.22) -- -- 4.06 8/30/02 S&P 500(R) Index 4.93 0.55 9.12 Note 5 Note 5
ALL RETURNS REPRESENT PAST PERFORMANCE WHICH IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN PERFORMANCE SHOWN. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE ABOVE TABLE AND GRAPH BELOW DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF SHARES. PLEASE VISIT PHOENIXFUNDS.COM FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END. (1) TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE AND THE REINVESTMENT OF BOTH DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. (2) "NAV" (NET ASSET VALUE) TOTAL RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES CHARGE. (3) "POP" (PUBLIC OFFERING PRICE) TOTAL RETURNS INCLUDE THE EFFECT OF THE MAXIMUM FRONT-END 5.75% SALES CHARGE. (4) CDSC (CONTINGENT DEFERRED SALES CHARGE) IS APPLIED TO REDEMPTIONS OF CERTAIN CLASSES OF SHARES THAT DO NOT HAVE A SALES CHARGE APPLIED AT THE TIME OF PURCHASE. CDSC CHARGES FOR B SHARES DECLINE FROM 5% TO 0% OVER A FIVE YEAR PERIOD. CDSC CHARGES FOR C SHARES ARE 1% IN THE FIRST YEAR AND 0% THEREAFTER. (5) INDEX PERFORMANCE IS 11.71% FOR CLASS A, CLASS B AND CLASS C (SINCE 8/30/02). -------------------------------------------------------------------------------- GROWTH OF $10,000 PERIODS ENDING 12/31 -------------------------------------------------------------------------------- This Growth of $10,000 chart assumes an initial investment of $10,000 made on 12/31/95 in Class X shares. The total return for Class X shares reflects no sales charge. The performance of the other share classes will be greater or less than that shown based on differences in inception dates, fees and sales charges. Performance assumes dividends and capital gain distributions are reinvested. [GRAPHIC OMITTED] EDGAR REPRESENTATION OF DATA USED IN PRINTED GRAPHIC AS FOLLOWS: Phoenix Rising Dividends Fund S&P 500(R) Class X Index ----------------- ---------- 12/29/95 $10,000 $10,000 12/31/96 11,909 12,325 12/31/97 15,600 16,438 12/31/98 17,806 21,165 12/31/99 20,714 25,639 12/29/00 20,300 23,283 12/31/01 18,062 20,518 12/31/02 14,946 15,984 12/31/03 17,703 20,573 12/31/04 18,547 22,807 12/30/05 18,325 23,931 For information regarding the index, see the glossary on page 3. 39 PHOENIX RISING DIVIDENDS FUND ABOUT YOUR FUND'S EXPENSES We believe it is important for you to understand the impact of costs on your investment. All mutual funds have operating expenses. As a shareholder of the Rising Dividends Fund, you incur two types of costs: (1) transaction costs, including sales charges on purchases of Class A shares and contingent deferred sales charges on Class B and Class C shares; and (2) ongoing costs, including investment advisory fees; distribution and service fees; and other expenses. Class X shares are sold without a sales charge and do not incur distribution and service fees. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire six-month period. ACTUAL EXPENSES The first line of the accompanying tables provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the accompanying tables provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not your Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in your Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the accompanying tables are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges or contingent deferred sales charges. Therefore, the second line of the accompanying tables is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs could have been higher. The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions. Beginning Ending Expenses Paid Rising Dividends Fund Account Value Account Value During Class X June 30, 2005 December 31, 2005 Period* ----------------------- ------------- ----------------- ------------- Actual $ 1,000.00 $ 1,022.80 $ 5.36 Hypothetical (5% return before expenses) 1,000.00 1,019.84 5.36 * EXPENSES ARE EQUAL TO THE FUND'S CLASS X ANNUALIZED EXPENSE RATIO OF 1.05%, WHICH INCLUDES WAIVED FEES AND REIMBURSED EXPENSES, IF APPLICABLE, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE MOST RECENT FISCAL HALF-YEAR, THEN DIVIDED BY 365 TO REFLECT THE ONE-HALF YEAR PERIOD. ACTUAL RETURN AS CALCULATED IN THE ABOVE TABLE IS BASED ON THE FUND'S CLASS X RETURN FOR THE PAST SIX MONTHS. WHILE REQUIRED TO BE PRESENTED IN THIS FORMAT, IT IS NOT THE CLASS' ACTUAL RETURN FOR THE YEAR ENDED DECEMBER 31, 2005. THE CLASS' ACTUAL RETURN AT NAV FOR THE FISCAL YEAR WAS (1.19)%. UTILIZING THIS 12 MONTH RETURN YIELDS AN ACCOUNT VALUE AT DECEMBER 31, 2005 OF $988.10. Beginning Ending Expenses Paid Rising Dividends Fund Account Value Account Value During Class A June 30, 2005 December 31, 2005 Period* ----------------------- ------------- ----------------- ------------- Actual $ 1,000.00 $ 1,021.60 $ 6.55 Hypothetical (5% return before expenses) 1,000.00 1,018.64 6.56 * EXPENSES ARE EQUAL TO THE FUND'S CLASS A ANNUALIZED EXPENSE RATIO OF 1.29%, WHICH INCLUDES WAIVED FEES AND REIMBURSED EXPENSES, IF APPLICABLE, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE MOST RECENT FISCAL HALF-YEAR, THEN DIVIDED BY 365 TO REFLECT THE ONE-HALF YEAR PERIOD. ACTUAL RETURN AS CALCULATED IN THE ABOVE TABLE IS BASED ON THE FUND'S CLASS A RETURN FOR THE PAST SIX MONTHS. WHILE REQUIRED TO BE PRESENTED IN THIS FORMAT, IT IS NOT THE CLASS' ACTUAL RETURN FOR THE YEAR ENDED DECEMBER 31, 2005. THE CLASS' ACTUAL RETURN AT NAV FOR THE FISCAL YEAR WAS (1.43)%. UTILIZING THIS 12 MONTH RETURN YIELDS AN ACCOUNT VALUE AT DECEMBER 31, 2005 OF $985.70. Beginning Ending Expenses Paid Rising Dividends Fund Account Value Account Value During Class B June 30, 2005 December 31, 2005 Period* ----------------------- ------------- ----------------- ------------- Actual $ 1,000.00 $ 1,017.30 $ 10.45 Hypothetical (5% return before expenses) 1,000.00 1,014.71 10.49 * EXPENSES ARE EQUAL TO THE FUND'S CLASS B ANNUALIZED EXPENSE RATIO OF 2.06%, WHICH INCLUDES WAIVED FEES AND REIMBURSED EXPENSES, IF APPLICABLE, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE MOST RECENT FISCAL HALF-YEAR, THEN DIVIDED BY 365 TO REFLECT THE ONE-HALF YEAR PERIOD. ACTUAL RETURN AS CALCULATED IN THE ABOVE TABLE IS BASED ON THE FUND'S CLASS B RETURN FOR THE PAST SIX MONTHS. WHILE REQUIRED TO BE PRESENTED IN THIS FORMAT, IT IS NOT THE CLASS' ACTUAL RETURN FOR THE YEAR ENDED DECEMBER 31, 2005. THE CLASS' ACTUAL RETURN AT NAV FOR THE FISCAL YEAR WAS (2.22)%. UTILIZING THIS 12 MONTH RETURN YIELDS AN ACCOUNT VALUE AT DECEMBER 31, 2005 OF $977.80. 40 PHOENIX RISING DIVIDENDS FUND Beginning Ending Expenses Paid Rising Dividends Fund Account Value Account Value During Class C June 30, 2005 December 31, 2005 Period* ----------------------- ------------- ----------------- ------------- Actual $ 1,000.00 $ 1,017.30 $ 10.45 Hypothetical (5% return before expenses) 1,000.00 1,014.71 10.49 * EXPENSES ARE EQUAL TO THE FUND'S CLASS C ANNUALIZED EXPENSE RATIO OF 2.05%, WHICH INCLUDES WAIVED FEES AND REIMBURSED EXPENSES, IF APPLICABLE, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE MOST RECENT FISCAL HALF-YEAR, THEN DIVIDED BY 365 TO REFLECT THE ONE-HALF YEAR PERIOD. ACTUAL RETURN AS CALCULATED IN THE ABOVE TABLE IS BASED ON THE FUND'S CLASS C RETURN FOR THE PAST SIX MONTHS. WHILE REQUIRED TO BE PRESENTED IN THIS FORMAT, IT IS NOT THE CLASS' ACTUAL RETURN FOR THE YEAR ENDED DECEMBER 31, 2005. THE CLASS' ACTUAL RETURN AT NAV FOR THE FISCAL YEAR WAS (2.22)%. UTILIZING THIS 12 MONTH RETURN YIELDS AN ACCOUNT VALUE AT DECEMBER 31, 2005 OF $977.80. YOU CAN FIND MORE INFORMATION ABOUT THE FUND'S EXPENSES IN THE FINANCIAL STATEMENTS SECTION THAT FOLLOWS. FOR ADDITIONAL INFORMATION ON OPERATING EXPENSES AND OTHER SHAREHOLDER COSTS REFER TO THE PROSPECTUS. 41 PHOENIX RISING DIVIDENDS FUND -------------------------------------------------------------------------------- TEN LARGEST HOLDINGS AT DECEMBER 31, 2005 (AS A PERCENTAGE OF NET ASSETS)(e) -------------------------------------------------------------------------------- 1. General Electric Co. 4.4% 2. Johnson & Johnson 4.1% 3. Wells Fargo & Co. 4.1% 4. Exxon Mobil Corp. 3.9% 5. Citigroup, Inc. 3.7% 6. Pfizer, Inc. 3.7% 7. Intel Corp. 3.6% 8. Microsoft Corp. 3.6% 9. Procter & Gamble Co. (The) 3.2% 10. American International Group, Inc. 3.1% -------------------------------------------------------------------------------- SECTOR WEIGHTINGS 12/31/05 -------------------------------------------------------------------------------- As a percentage of total investments [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Financials 21% Information Technology 17 Consumer Staples 15 Industrials 13 Health Care 11 Consumer Discretionary 6 Energy 6 Other 11 SCHEDULE OF INVESTMENTS DECEMBER 31, 2005 SHARES VALUE ----------- ------------ DOMESTIC COMMON STOCKS--98.3% AIR FREIGHT & LOGISTICS--1.7% United Parcel Service, Inc. Class B ............ 24,000 $ 1,803,600 ASSET MANAGEMENT & CUSTODY BANKS--2.3% State Street Corp. ............................. 42,300 2,345,112 BREWERS--1.3% Anheuser-Busch Cos., Inc. ...................... 30,800 1,323,168 COMPUTER HARDWARE--4.4% Diebold, Inc.(c) ............................... 44,900 1,706,200 International Business Machines Corp. .......... 34,210 2,812,062 ------------ 4,518,262 ------------ DATA PROCESSING & OUTSOURCED SERVICES--3.9% Automatic Data Processing, Inc. ................ 46,130 2,116,906 Paychex, Inc. .................................. 49,800 1,898,376 ------------ 4,015,282 ------------ SHARES VALUE ----------- ------------ DIVERSIFIED BANKS--8.1% Bank of America Corp. .......................... 56,100 $ 2,589,015 U.S. Bancorp ................................... 53,300 1,593,137 Wells Fargo & Co. .............................. 66,680 4,189,504 ------------ 8,371,656 ------------ DIVERSIFIED CHEMICALS--2.4% Du Pont (E.I.) de Nemours & Co. ................ 58,300 2,477,750 DIVERSIFIED COMMERCIAL & PROFESSIONAL SERVICES--2.0% Cintas Corp. ................................... 49,100 2,021,938 ELECTRICAL COMPONENTS & EQUIPMENT--1.6% Emerson Electric Co. ........................... 21,900 1,635,930 FOOD DISTRIBUTORS--1.3% Sysco Corp.(c) ................................. 43,800 1,359,990 HEALTH CARE EQUIPMENT--3.9% Biomet, Inc.(c) ................................ 44,200 1,616,394 Medtronic, Inc. ................................ 41,500 2,389,155 ------------ 4,005,549 ------------ 42 See Notes to Financial Statements PHOENIX RISING DIVIDENDS FUND SHARES VALUE ----------- ------------ HOME FURNISHING RETAIL--1.8% Leggett & Platt, Inc.(c) ....................... 80,600 $ 1,850,576 HOME IMPROVEMENT RETAIL--2.6% Home Depot, Inc. (The) ......................... 65,550 2,653,464 HOUSEHOLD PRODUCTS--3.2% Procter & Gamble Co. (The) ..................... 57,200 3,310,736 HYPERMARKETS & SUPER CENTERS--5.2% Costco Wholesale Corp. ......................... 45,900 2,270,673 Wal-Mart Stores, Inc. .......................... 65,300 3,056,040 ------------ 5,326,713 ------------ INDUSTRIAL CONGLOMERATES--6.4% 3M Co.(c) ...................................... 27,600 2,139,000 General Electric Co. ........................... 128,560 4,506,028 ------------ 6,645,028 ------------ INDUSTRIAL MACHINERY--1.5% Illinois Tool Works, Inc. ...................... 17,320 1,523,987 INTEGRATED OIL & GAS--5.9% ConocoPhillips ................................. 36,500 2,123,570 Exxon Mobil Corp. .............................. 71,240 4,001,551 ------------ 6,125,121 ------------ INTEGRATED TELECOMMUNICATION SERVICES--2.7% AT&T, Inc. ..................................... 112,100 2,745,329 INVESTMENT BANKING & BROKERAGE--1.5% Morgan Stanley ................................. 27,100 1,537,654 LIFE & HEALTH INSURANCE--1.8% AFLAC, Inc. .................................... 40,700 1,889,294 MULTI-LINE INSURANCE--3.1% American International Group, Inc. ............. 46,800 3,193,164 OTHER DIVERSIFIED FINANCIAL SERVICES--3.7% Citigroup, Inc. ................................ 77,800 3,775,634 PHARMACEUTICALS--7.7% Johnson & Johnson .............................. 70,370 4,229,237 Pfizer, Inc. ................................... 161,500 3,766,180 ------------ 7,995,417 ------------ SHARES VALUE ----------- ------------ PUBLISHING & PRINTING--2.0% Gannett Co., Inc. .............................. 34,600 $ 2,095,722 REGIONAL BANKS--1.5% Synovus Financial Corp. ........................ 56,000 1,512,560 SEMICONDUCTORS--6.2% Intel Corp. .................................... 150,600 3,758,976 Linear Technology Corp. ........................ 73,500 2,651,145 ------------ 6,410,121 ------------ SOFT DRINKS--5.0% Coca-Cola Co. (The)............................. 75,660 3,049,854 PepsiCo, Inc. .................................. 36,500 2,156,420 ------------ 5,206,274 ------------ SYSTEMS SOFTWARE--3.6% Microsoft Corp. ................................ 141,380 3,697,087 ----------------------------------------------------------------------------- TOTAL DOMESTIC COMMON STOCKS (IDENTIFIED COST $95,033,126) 101,372,118 ----------------------------------------------------------------------------- TOTAL LONG TERM INVESTMENTS--98.3% (IDENTIFIED COST $95,033,126) 101,372,118 ----------------------------------------------------------------------------- SHORT-TERM INVESTMENTS--6.7% MONEY MARKET MUTUAL FUNDS--5.2% State Street Navigator Prime Plus (4.28% seven day effective yield)(b)......................... 5,323,305 5,323,305 PAR VALUE (000) ----------- COMMERCIAL PAPER(d)--1.5% Lehman Brothers Holdings, Inc. 4.10%, 1/3/06.......................................... $ 1,580 1,579,640 ----------------------------------------------------------------------------- TOTAL SHORT-TERM INVESTMENTS (IDENTIFIED COST $6,902,945) 6,902,945 ----------------------------------------------------------------------------- TOTAL INVESTMENTS--105.0% (IDENTIFIED COST $101,936,071) 108,275,063(a) Other assets and liabilities, net--(5.0)% (5,157,368) ------------ NET ASSETS--100.0% $103,117,695 ============ (a) Federal Income Tax Information: Net unrealized appreciation of investment securities is comprised of gross appreciation of $8,654,775 and gross depreciation of $3,277,593 for federal income tax purposes. At December 31, 2005, the aggregate cost of securities for federal income tax purposes was $102,897,881. (b) Represents security purchased with cash collateral received for securities on loan. (c) All or a portion of security is on loan. (d) The rate shown is the discount rate. (e) Table excludes short-term investments. See Notes to Financial Statements 43 PHOENIX RISING DIVIDENDS FUND STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2005 ASSETS Investment securities at value including $5,202,449 of securities on loan (Identified cost $101,936,071) $ 108,275,063 Cash 1,847 Receivables Fund shares sold 161,519 Dividends 133,559 Prepaid expenses 28,639 ------------- Total assets 108,600,627 ------------- LIABILITIES Payables Fund shares repurchased 17,430 Upon return of securities loaned 5,323,305 Investment advisory fee 67,613 Professional fee 22,420 Transfer agent fee 22,338 Financial agent fee 7,765 Distribution and service fees 7,273 Trustees' fee 1,785 Other accrued expenses 13,003 ------------- Total liabilities 5,482,932 ------------- NET ASSETS $ 103,117,695 ============= NET ASSETS CONSIST OF: Capital paid in on shares of beneficial interest $ 109,568,656 Undistributed net investment income 78,481 Accumulated net realized loss (12,868,434) Net unrealized appreciation 6,338,992 ------------- NET ASSETS $ 103,117,695 ============= CLASS X Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $85,075,326) 5,479,062 Net asset value and offering price per share $ 15.53 CLASS A Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $12,893,728) 832,359 Net asset value per share $ 15.49 Offering price per share $15.49/(1-5.75%) $ 16.44 CLASS B Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $2,753,770) 179,249 Net asset value and offering price per share $ 15.36 CLASS C Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $2,394,871) 155,799 Net asset value and offering price per share $ 15.37 STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2005 INVESTMENT INCOME Dividends $ 2,768,749 Interest 54,330 Security lending 112 ------------- Total investment income 2,823,191 ------------- EXPENSES Investment advisory fee 1,019,981 Service fees, Class A 95,312 Distribution and service fees, Class B 28,633 Distribution and service fees, Class C 28,232 Financial agent fee 108,595 Transfer agent 104,100 Registration 45,840 Trustees 41,145 Professional 27,846 Printing 23,129 Custodian 14,357 Miscellaneous 35,451 ------------- Total expenses 1,572,621 Custodian fees paid indirectly (6) ------------- Net expenses 1,572,615 ------------- NET INVESTMENT INCOME (LOSS) 1,250,576 ------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on investments 5,582,035 Net change in unrealized appreciation (depreciation) on investments (8,998,282) ------------- NET GAIN (LOSS) ON INVESTMENTS (3,416,247) ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (2,165,671) ============= 44 See Notes to Financial Statements PHOENIX RISING DIVIDENDS FUND
STATEMENT OF CHANGES IN NET ASSETS Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- FROM OPERATIONS Net investment income (loss) $ 1,250,576 $ 1,662,336 Net realized gain (loss) 5,582,035 404,869 Net change in unrealized appreciation (depreciation) (8,998,282) 4,306,551 ------------- ------------- INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS (2,165,671) 6,373,756 ------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income, Class X (1,324,154) (1,111,168) Net investment income, Class A (424,144) (419,864) Net investment income, Class B (9,192) (3,205) Net investment income, Class C (8,278) (2,729) ------------- ------------- DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS (1,765,768) (1,536,966) ------------- ------------- FROM SHARE TRANSACTIONS CLASS X Proceeds from sales of shares (436,950 and 1,380,241 shares, respectively) 6,804,544 21,627,667 Net asset value of shares issued from reinvestment of distributions (48,431 and 39,607 shares, respectively) 759,875 631,250 Cost of shares repurchased (1,059,956 and 716,034 shares, respectively) (16,369,469) (11,235,744) ------------- ------------- Total (8,805,050) 11,023,173 ------------- ------------- CLASS A Proceeds from sales of shares (552,328 and 1,681,448 shares, respectively) 8,601,133 26,244,605 Net asset value of shares issued from reinvestment of distributions (26,708 and 26,018 shares, respectively) 416,489 413,479 Cost of shares repurchased (3,101,744 and 241,473 shares, respectively) (48,397,862) (3,777,804) ------------- ------------- Total (39,380,240) 22,880,280 ------------- ------------- CLASS B Proceeds from sales of shares (22,646 and 110,300 shares, respectively) 349,846 1,713,590 Net asset value of shares issued from reinvestment of distributions (382 and 126 shares, respectively) 5,949 1,990 Cost of shares repurchased (33,260 and 33,910 shares, respectively) (513,247) (522,985) ------------- ------------- Total (157,452) 1,192,595 ------------- ------------- CLASS C Proceeds from sales of shares (30,780 and 95,231 shares, respectively) 475,661 1,478,747 Net asset value of shares issued from reinvestment of distributions (473 and 142 shares, respectively) 7,366 2,234 Cost of shares repurchased (74,357 and 24,835 shares, respectively) (1,141,833) (380,847) ------------- ------------- Total (658,806) 1,100,134 ------------- ------------- INCREASE (DECREASE) IN NET ASSETS FROM SHARE TRANSACTIONS (49,001,548) 36,196,182 ------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS (52,932,987) 41,032,972 NET ASSETS Beginning of period 156,050,682 115,017,710 ------------- ------------- END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $78,481 AND $593,673, RESPECTIVELY) $ 103,117,695 $ 156,050,682 ============= =============
See Notes to Financial Statements 45 PHOENIX RISING DIVIDENDS FUND
FINANCIAL HIGHLIGHTS (SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD) CLASS X ------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------- 2005 2004 2003 2002 2001 Net asset value, beginning of period $ 15.95 $ 15.40 $ 13.03 $ 15.81 $ 17.97 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.16(2) 0.20(2) 0.07(2) 0.06 0.05 Net realized and unrealized gain (loss) (0.35) 0.53 2.33 (2.78) (2.03) ----------- ----------- ----------- ----------- ----------- TOTAL FROM INVESTMENT OPERATIONS (0.19) 0.73 2.40 (2.72) (1.98) ----------- ----------- ----------- ----------- ----------- LESS DISTRIBUTIONS Dividends from net investment income (0.23) (0.18) (0.03) (0.06) (0.05) Distributions from net realized gain -- -- -- -- (0.13) ----------- ----------- ----------- ----------- ----------- TOTAL DISTRIBUTIONS (0.23) (0.18) (0.03) (0.06) (0.18) ----------- ----------- ----------- ----------- ----------- Change in net asset value (0.42) 0.55 2.37 (2.78) (2.16) ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, END OF PERIOD $ 15.53 $ 15.95 $ 15.40 $ 13.03 $ 15.81 =========== =========== =========== =========== =========== Total return (1.19)% 4.76% 18.45% (17.25)% (11.03)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 85,075 $ 96,558 $ 82,361 $ 77,263 $ 104,770 RATIO TO AVERAGE NET ASSETS OF: Operating expenses 1.04% 1.04% 1.19% 1.04% 0.95% Net investment income (loss) 1.04% 1.25% 0.53% 0.42% 0.30% Portfolio turnover 33% 22% 26% 26% 32%
CLASS A ------------------------------------------------------------------- YEAR ENDED DECEMBER 31, FROM INCEPTION --------------------------------------------- AUGUST 30, 2002 TO 2005 2004 2003 DECEMBER 31, 2002 Net asset value, beginning of period $ 15.91 $ 15.35 $ 13.02 $ 13.53 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.12(2) 0.17(2) 0.05(2) --(5) Net realized and unrealized gain (loss) (0.35) 0.53 2.31 (0.51) ----------- ----------- ----------- ----------- TOTAL FROM INVESTMENT OPERATIONS (0.23) 0.70 2.36 (0.51) ----------- ----------- ----------- ----------- LESS DISTRIBUTIONS Dividends from net investment income (0.19) (0.14) (0.03) -- ----------- ----------- ----------- ----------- TOTAL DISTRIBUTIONS (0.19) (0.14) (0.03) -- ----------- ----------- ----------- ----------- Change in net asset value (0.42) 0.56 2.33 (0.51) ----------- ----------- ----------- ----------- NET ASSET VALUE, END OF PERIOD $ 15.49 $ 15.91 $ 15.35 $ 13.02 =========== =========== =========== =========== Total return(1) (1.43)% 4.61% 18.06% (3.77)%(3) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 12,894 $ 53,369 $ 28,988 $ 4,012 RATIO TO AVERAGE NET ASSETS OF: Operating expenses 1.29% 1.28% 1.44% 1.29%(4) Net investment income (loss) 0.76% 1.09% 0.36% 0.17%(4) Portfolio turnover 33% 22% 26% 26%(3)
(1) Sales charges are not reflected in the total return calculation. (2) Computed using average shares outstanding. (3) Not annualized. (4) Annualized. (5) Amount is less than $0.01. 46 See Notes to Financial Statements PHOENIX RISING DIVIDENDS FUND
FINANCIAL HIGHLIGHTS (SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD) CLASS B ------------------------------------------------------------------- YEAR ENDED DECEMBER 31, FROM INCEPTION --------------------------------------------- AUGUST 30, 2002 TO 2005 2004 2003 DECEMBER 31, 2002 Net asset value, beginning of period $ 15.76 $ 15.20 $ 12.98 $ 13.53 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.01(4) 0.06(4) (0.06)(4) (0.01) Net realized and unrealized gain (0.36) 0.52 2.30 (0.54) ----------- ----------- ----------- ----------- TOTAL FROM INVESTMENT OPERATIONS (0.35) 0.58 2.24 (0.55) ----------- ----------- ----------- ----------- LESS DISTRIBUTIONS Dividends from net investment income (0.05) (0.02) (0.02) -- ----------- ----------- ----------- ----------- TOTAL DISTRIBUTIONS (0.05) (0.02) (0.02) -- ----------- ----------- ----------- ----------- Change in net asset value (0.40) 0.56 2.22 (0.55) ----------- ----------- ----------- ----------- NET ASSET VALUE, END OF PERIOD $ 15.36 $ 15.76 $ 15.20 $ 12.98 =========== =========== =========== =========== Total return(1) (2.22)% 3.80% 17.29% (4.07)%(2) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 2,754 $ 2,987 $ 1,717 $ 336 RATIO TO AVERAGE NET ASSETS OF: Operating expenses 2.05% 2.04% 2.19% 2.04%(3) Net investment income (loss) 0.05% 0.36% (0.47)% (0.58)%(3) Portfolio turnover 33% 22% 26% 26%(2)
CLASS C ------------------------------------------------------------------- YEAR ENDED DECEMBER 31, FROM INCEPTION --------------------------------------------- AUGUST 30, 2002 TO 2005 2004 2003 DECEMBER 31, 2002 Net asset value, beginning of period $ 15.77 $ 15.20 $ 12.98 $ 13.53 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.01(4) 0.05(4) (0.06)(4) (0.01) Net realized and unrealized gain (0.36) 0.54 2.30 (0.54) ----------- ----------- ----------- ----------- TOTAL FROM INVESTMENT OPERATIONS (0.35) 0.59 2.24 (0.55) ----------- ----------- ----------- ----------- LESS DISTRIBUTIONS Dividends from net investment income (0.05) (0.02) (0.02) -- ----------- ----------- ----------- ----------- TOTAL DISTRIBUTIONS (0.05) (0.02) (0.02) -- ----------- ----------- ----------- ----------- Change in net asset value (0.40) 0.57 2.22 (0.55) ----------- ----------- ----------- ----------- NET ASSET VALUE, END OF PERIOD $ 15.37 $ 15.77 $ 15.20 $ 12.98 =========== =========== =========== =========== Total return(1) (2.22)% 3.85% 17.24% (4.07)%(2) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 2,395 $ 3,137 $ 1,952 $ 575 RATIO TO AVERAGE NET ASSETS OF: Operating expenses 2.05% 2.04% 2.19% 2.04%(3) Net investment income (loss) 0.05% 0.32% (0.47)% (0.58)%(3) Portfolio turnover 33% 22% 26% 26%(2)
(1) Sales charges are not reflected in the total return calculation. (2) Not annualized. (3) Annualized. (4) Computed using average shares outstanding. See Notes to Financial Statements 47 PHOENIX SMALL-MID CAP FUND A DISCUSSION WITH THE FUND'S PORTFOLIO MANAGERS, ROBERT A. SCHWARZKOPF, CFA AND SANDRA L. GLEASON, CFA Q: HOW DID THE PHOENIX SMALL-MID CAP FUND PERFORM FOR ITS FISCAL YEAR ENDED DECEMBER 31, 2005? For the fiscal year ended December 31, 2005, the Fund's Class X shares returned 2.95%, Class A shares returned 2.72%, Class B shares returned 1.97%, and Class C shares returned 1.92%. For the same period, the S&P 500(R) Index, a broad-based equity index, returned 4.93% and the Russell 2500(TM) Index, the Fund's style-specific benchmark, returned 8.11%. All performance figures assume reinvestment of distributions and exclude the effect of sales charges. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS AND CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN THE PERFORMANCE SHOWN ABOVE. Q: HOW DID THE EQUITY MARKETS PERFORM DURING THE FUND'S FISCAL YEAR? A: In 2005, large-cap stocks outperformed small-cap stocks, while mid caps surpassed them both. This is the first time in six years that the Russell 2000 Index has underperformed the S&P 500 Index for the year. Energy prices dominated stock market returns for the year. Despite small weightings in the indexes, energy's strong performance created disproportionate returns. Energy and utilities were the best performing sectors, as energy prices rose from strong demand. Transportation and consumer discretionary were two of the worst performing sectors for the year. To preempt inflation from rising energy prices, the Federal Reserve implemented eight interest-rate hikes during the year, including two during the fourth quarter, pushing the federal funds rate to 4.25% by year end. Long-term rates, however, barely moved during the year, indicating investors' diminishing concerns over inflation. This trend continued to benefit the most highly indebted companies, as corporate cost of capital is based upon long-term interest rates. Q: WHAT FACTORS AFFECTED THE FUND'S PERFORMANCE DURING ITS FISCAL YEAR? A: Higher quality stocks in the portfolio, with S&P rankings of A- and above, outperformed stocks similarly ranked in the Russell 2500 Index. However, the Fund underperformed its benchmark, as low quality companies, those ranked B to D, pushed the market higher. Stocks that detracted the most from performance included 99 Cents Only Stores and Rent-A-Center. 99 Cents Only Stores is a deep-discount retailer of consumable general merchandise priced at ninety-nine cents. Shares have disappointed due to ongoing infrastructure issues as the company invests for future growth and its core customer struggles with higher year-over-year energy costs. We believe the company is addressing its operational issues and they are not related to the general health of the business. With only 227 stores and leading store-level economics, we believe the company can resume its historical growth once infrastructure issues are resolved. Rent-A-Center is the leading "rent-to-own" retailer in the U.S. with a highly fragmented market. The company's main customer base, with low discretionary income levels, has been disproportionately hurt by rising energy costs. In addition, cannibalization caused by recent store 48 PHOENIX SMALL-MID CAP FUND (continued) openings in existing markets and aggressive expansion by its chief competitor have temporarily affected sales growth. However, with its solid free-cash-flow characteristics, a strong stock buyback program, a compelling valuation, and new initiatives underway to improve store performance, we continue to hold the shares. Stocks that contributed positively to the Fund's performance included Brown & Brown and C.H. Robinson Worldwide. Brown & Brown is the nation's leader in the "second tier" of property & casualty (P&C) insurance brokerage firms, which serves small and mid-size businesses. The stock rose sharply after reporting consistent double-digit earnings growth despite general softening of the P&C insurance market. Along with other P&C insurance brokers, the company also benefited from expectations of market hardening following the recent heavy hurricane season. C.H. Robinson Worldwide, one of North America's largest third-party logistics companies (freight forwarder) providing truck, rail, ocean, and air transportation services, benefited from increased usage of third-party logistics services while the transportation industry struggled with tight capacity. The company was able to overcome truck capacity shortages using its large network of independently owned motor carriers while generating strong double-digit earnings and free cash-flow growth. Logistic dependence on C.H. Robinson Worldwide from its customers appears to be a long-term trend. JANUARY 2006 THE PRECEDING INFORMATION IS THE OPINION OF PORTFOLIO MANAGEMENT. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, AND THERE IS NO GUARANTEE THAT MARKET FORECASTS DISCUSSED WILL BE REALIZED. FOR DEFINITIONS OF INDEXES CITED AND CERTAIN INVESTMENT TERMS USED IN THIS REPORT, SEE THE GLOSSARY ON PAGE 3. 49 PHOENIX SMALL-MID CAP FUND
----------------------------------------------------------------------------------------- TOTAL RETURNS(1) PERIODS ENDING 12/31/05 ----------------------------------------------------------------------------------------- INCEPTION INCEPTION 1 YEAR 5 YEAR TO 12/31/05 DATE ------ ------ ----------- --------- Class X Shares at NAV(2) 2.95% 5.08% 9.93% 10/18/96 Class A Shares at NAV(2) 2.72 -- 10.21 8/30/02 Class A Shares at POP(3) (3.19) -- 8.27 8/30/02 Class B Shares at NAV(2) 1.97 -- 9.46 8/30/02 Class B Shares with CDSC(4) (2.03) -- 8.97 8/30/02 Class C Shares at NAV(2) 1.92 -- 9.49 8/30/02 Class C Shares with CDSC(4) 1.92 -- 9.49 8/30/02 S&P 500(R) Index 4.93 0.55 Note 5 Note 5 Russell 2500(TM) Index 8.11 9.14 Note 6 Note 6
ALL RETURNS REPRESENT PAST PERFORMANCE WHICH, IS NO GUARANTEE OF FUTURE RESULTS. CURRENT PERFORMANCE MAY BE HIGHER OR LOWER THAN PERFORMANCE SHOWN. THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. THE ABOVE TABLE AND GRAPH BELOW DO NOT REFLECT THE DEDUCTION OF TAXES THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF SHARES. PLEASE VISIT PHOENIXFUNDS.COM FOR PERFORMANCE DATA CURRENT TO THE MOST RECENT MONTH-END. (1) TOTAL RETURNS ARE HISTORICAL AND INCLUDE CHANGES IN SHARE PRICE AND THE REINVESTMENT OF BOTH DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS. (2) "NAV" (NET ASSET VALUE) TOTAL RETURNS DO NOT INCLUDE THE EFFECT OF ANY SALES CHARGE. (3) "POP" (PUBLIC OFFERING PRICE) TOTAL RETURNS INCLUDE THE EFFECT OF THE MAXIMUM FRONT-END 5.75% SALES CHARGE. (4) CDSC (CONTINGENT DEFERRED SALES CHARGE) IS APPLIED TO REDEMPTIONS OF CERTAIN CLASSES OF SHARES THAT DO NOT HAVE A SALES CHARGE APPLIED AT THE TIME OF PURCHASE. CDSC CHARGES FOR B SHARES DECLINE FROM 5% TO 0% OVER A FIVE YEAR PERIOD. CDSC CHARGES FOR C SHARES ARE 1% IN THE FIRST YEAR AND 0% THEREAFTER. (5) INDEX PERFORMANCE IS 8.02% FOR CLASS X (SINCE 10/18/96) AND 11.71% FOR CLASS A, CLASS B, CLASS C (SINCE 8/30/02). (6) INDEX PERFORMANCE IS 11.23% FOR CLASS X (SINCE 10/18/96) AND 19.80% FOR CLASS A, CLASS B, CLASS C (SINCE 8/30/02). -------------------------------------------------------------------------------- GROWTH OF $10,000 PERIODS ENDING 12/31 -------------------------------------------------------------------------------- This Growth of $10,000 chart assumes an initial investment of $10,000 made on 10/18/96 (inception of the Fund) in Class X shares. The total return for Class X shares reflects no sales charge. The performance of other share classes will be greater or less than that shown based on differences in inception dates, fees and sales charges. Performance assumes dividends and capital gain distributions are reinvested. [GRAPHIC OMITTED] EDGAR REPRESENTATION OF DATA USED IN PRINTED GRAPHIC AS FOLLOWS: Phoenix Small-Mid Cap Fund S&P 500(R) Russell 2500(TM) Class X Index Index ------------- ---------- ---------------- 10/18/96 $10,000 $10,000 $10,000 12/31/96 10,400 10,474 10,642 12/31/97 12,424 13,970 13,234 12/31/98 14,433 17,988 13,285 12/31/99 14,958 21,789 16,493 12/29/00 18,663 19,788 17,197 12/31/01 19,857 17,438 17,407 12/31/02 16,087 13,584 14,309 12/31/03 20,384 17,484 20,821 12/31/04 23,222 19,383 24,630 12/30/05 23,907 20,338 26,627 For information regarding the indexes, see the glossary on page 3. 50 PHOENIX SMALL-MID CAP FUND ABOUT YOUR FUND'S EXPENSES We believe it is important for you to understand the impact of costs on your investment. All mutual funds have operating expenses. As a shareholder of the Small-Mid Cap Fund, you incur two types of costs: (1) transaction costs, including sales charges on purchases of Class A shares and contingent deferred sales charges on Class B and Class C shares; and (2) ongoing costs, including investment advisory fees; distribution and service fees; and other expenses. Class X shares are sold without a sales charge and do not incur distribution and service fees. These examples are intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other mutual funds. These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire six-month period. ACTUAL EXPENSES The first line of the accompanying tables provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading entitled "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES The second line of the accompanying tables provides information about hypothetical account values and hypothetical expenses based on the Fund's actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not your Fund's actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in your Fund and other funds. To do so, compare these 5% hypothetical examples with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the accompanying tables are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges or contingent deferred sales charges. Therefore, the second line of the accompanying tables is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs could have been higher. The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions. Beginning Ending Expenses Paid Small Mid-Cap Fund Account Value Account Value During Class X June 30, 2005 December 31, 2005 Period* ------------------------ ------------- ----------------- ------------- Actual $1,000.00 $1,077.40 $6.18 Hypothetical (5% return before expenses) 1,000.00 1,019.18 6.03 * EXPENSES ARE EQUAL TO THE FUND'S CLASS X ANNUALIZED EXPENSE RATIO OF 1.18%, WHICH INCLUDES WAIVED FEES AND REIMBURSED EXPENSES, IF APPLICABLE, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE MOST RECENT FISCAL HALF-YEAR, THEN DIVIDED BY 365 TO REFLECT THE ONE-HALF YEAR PERIOD. ACTUAL RETURN AS CALCULATED IN THE ABOVE TABLE IS BASED ON THE FUND'S CLASS X RETURN FOR THE PAST SIX MONTHS. WHILE REQUIRED TO BE PRESENTED IN THIS FORMAT, IT IS NOT THE CLASS' ACTUAL RETURN FOR THE YEAR ENDED DECEMBER 31, 2005. THE CLASS' ACTUAL RETURN AT NAV FOR THE FISCAL YEAR WAS 2.95%. UTILIZING THIS 12 MONTH RETURN YIELDS AN ACCOUNT VALUE AT DECEMBER 31, 2005 OF $1,029.50. Beginning Ending Expenses Paid Small Mid-Cap Fund Account Value Account Value During Class A June 30, 2005 December 31, 2005 Period* ------------------------ ------------- ----------------- ------------- Actual $1,000.00 $1,076.30 $7.44 Hypothetical (5% return before expenses) 1,000.00 1,017.95 7.26 * EXPENSES ARE EQUAL TO THE FUND'S CLASS A ANNUALIZED EXPENSE RATIO OF 1.42%, WHICH INCLUDES WAIVED FEES AND REIMBURSED EXPENSES, IF APPLICABLE, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE MOST RECENT FISCAL HALF-YEAR, THEN DIVIDED BY 365 TO REFLECT THE ONE-HALF YEAR PERIOD. ACTUAL RETURN AS CALCULATED IN THE ABOVE TABLE IS BASED ON THE FUND'S CLASS A RETURN FOR THE PAST SIX MONTHS. WHILE REQUIRED TO BE PRESENTED IN THIS FORMAT, IT IS NOT THE CLASS' ACTUAL RETURN FOR THE YEAR ENDED DECEMBER 31, 2005. THE CLASS' ACTUAL RETURN AT NAV FOR THE FISCAL YEAR WAS 2.72%. UTILIZING THIS 12 MONTH RETURN YIELDS AN ACCOUNT VALUE AT DECEMBER 31, 2005 OF $1,027.20. Beginning Ending Expenses Paid Small Mid-Cap Fund Account Value Account Value During Class B June 30, 2005 December 31, 2005 Period* ------------------------ ------------- ----------------- ------------- Actual $1,000.00 $1,073.20 $11.46 Hypothetical (5% return before expenses) 1,000.00 1,014.01 11.20 * EXPENSES ARE EQUAL TO THE FUND'S CLASS B ANNUALIZED EXPENSE RATIO OF 2.19%, WHICH INCLUDES WAIVED FEES AND REIMBURSED EXPENSES, IF APPLICABLE, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE MOST RECENT FISCAL HALF-YEAR, THEN DIVIDED BY 365 TO REFLECT THE ONE-HALF YEAR PERIOD. ACTUAL RETURN AS CALCULATED IN THE ABOVE TABLE IS BASED ON THE FUND'S CLASS B RETURN FOR THE PAST SIX MONTHS. WHILE REQUIRED TO BE PRESENTED IN THIS FORMAT, IT IS NOT THE CLASS' ACTUAL RETURN FOR THE YEAR ENDED DECEMBER 31, 2005. THE CLASS' ACTUAL RETURN AT NAV FOR THE FISCAL YEAR WAS 1.97%. UTILIZING THIS 12 MONTH RETURN YIELDS AN ACCOUNT VALUE AT DECEMBER 31, 2005 OF $1,019.70. 51 PHOENIX SMALL-MID CAP FUND Beginning Ending Expenses Paid Small Mid-Cap Fund Account Value Account Value During Class C June 30, 2005 December 31, 2005 Period* ------------------------ ------------- ----------------- ------------- Actual $1,000.00 $1,072.60 $11.45 Hypothetical (5% return before expenses) 1,000.00 1,014.02 11.19 * EXPENSES ARE EQUAL TO THE FUND'S CLASS C ANNUALIZED EXPENSE RATIO OF 2.19%, WHICH INCLUDES WAIVED FEES AND REIMBURSED EXPENSES, IF APPLICABLE, MULTIPLIED BY THE AVERAGE ACCOUNT VALUE OVER THE PERIOD, MULTIPLIED BY THE NUMBER OF DAYS IN THE MOST RECENT FISCAL HALF-YEAR, THEN DIVIDED BY 365 TO REFLECT THE ONE-HALF YEAR PERIOD. ACTUAL RETURN AS CALCULATED IN THE ABOVE TABLE IS BASED ON THE FUND'S CLASS C RETURN FOR THE PAST SIX MONTHS. WHILE REQUIRED TO BE PRESENTED IN THIS FORMAT, IT IS NOT THE CLASS' ACTUAL RETURN FOR THE YEAR ENDED DECEMBER 31, 2005. THE CLASS' ACTUAL RETURN AT NAV FOR THE FISCAL YEAR WAS 1.92%. UTILIZING THIS 12 MONTH RETURN YIELDS AN ACCOUNT VALUE AT DECEMBER 31, 2005 OF $1,019.20. YOU CAN FIND MORE INFORMATION ABOUT THE FUND'S EXPENSES IN THE FINANCIAL STATEMENTS SECTION THAT FOLLOWS. FOR ADDITIONAL INFORMATION ON OPERATING EXPENSES AND OTHER SHAREHOLDER COSTS REFER TO THE PROSPECTUS. 52 PHOENIX SMALL-MID CAP FUND -------------------------------------------------------------------------------- TEN LARGEST HOLDINGS AT DECEMBER 31, 2005 (AS A PERCENTAGE OF NET ASSETS)(c) -------------------------------------------------------------------------------- 1. Eaton Vance Corp. 4.6% 2. Diagnostic Products Corp. 4.5% 3. Universal Compression Holdings, Inc. 4.5% 4. Regis Corp. 4.2% 5. Microchip Technology, Inc. 4.0% 6. Fair Isaac Corp. 3.8% 7. Jack Henry & Associates, Inc. 3.8% 8. Reinsurance Group of America, Inc. 3.5% 9. Bemis Co., Inc. 3.4% 10. StanCorp Financial Group, Inc. 3.3% -------------------------------------------------------------------------------- SECTOR WEIGHTINGS 12/31/05 -------------------------------------------------------------------------------- As a percentage of total investments [THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.] Information Technology 20% Financials 18 Industrials 16 Consumer Discretionary 13 Health Care 6 Energy 5 Materials 4 Other 18 SCHEDULE OF INVESTMENTS DECEMBER 31, 2005 SHARES VALUE ----------- ------------ DOMESTIC COMMON STOCKS--99.4% ADVERTISING--2.8% Catalina Marketing Corp.(e)..................... 146,010 $ 3,701,354 AEROSPACE & DEFENSE--1.1% HEICO Corp. Class A(e).......................... 71,564 1,468,493 AIR FREIGHT & LOGISTICS--1.8% Robinson (C.H.) Worldwide, Inc.(e).............. 66,600 2,466,198 APPLICATION SOFTWARE--10.3% FactSet Research Systems, Inc.(e)............... 88,075 3,625,167 Fair Isaac Corp.(e)............................. 116,585 5,149,560 Jack Henry & Associates, Inc.(e)................ 265,815 5,071,750 ------------ 13,846,477 ------------ ASSET MANAGEMENT & CUSTODY BANKS--4.7% Eaton Vance Corp.(e)............................ 228,508 6,251,979 SHARES VALUE ----------- ------------ CONSUMER FINANCE--2.8% World Acceptance Corp.(b)(e).................... 132,800 $ 3,784,800 DATA PROCESSING & OUTSOURCED SERVICES--2.5% Certegy, Inc.(e)................................ 82,867 3,361,086 DIVERSIFIED COMMERCIAL & PROFESSIONAL SERVICES--6.6% Cintas Corp.(e)................................. 53,565 2,205,807 Copart, Inc.(b)................................. 176,500 4,070,090 Equifax, Inc.(e)................................ 67,885 2,580,987 ------------ 8,856,884 ------------ ELECTRONIC EQUIPMENT MANUFACTURERS--3.1% Mettler-Toledo International, Inc.(b)........... 75,000 4,140,000 ENVIRONMENTAL & FACILITIES SERVICES--3.5% ABM Industries, Inc. ........................... 112,530 2,199,961 Stericycle, Inc.(b)(e).......................... 43,400 2,555,392 ------------ 4,755,353 ------------ See Notes to Financial Statements 53 PHOENIX SMALL-MID CAP FUND SHARES VALUE ----------- ------------ GENERAL MERCHANDISE STORES--2.0% 99 Cents Only Stores(b)(e) ..................... 260,000 $ 2,719,600 HEALTH CARE EQUIPMENT--4.5% Diagnostic Products Corp.(e) ................... 125,700 6,102,735 HEALTH CARE SERVICES--1.0% IMS Health, Inc. ............................... 55,000 1,370,600 HOME FURNISHING RETAIL--3.1% Rent-A-Center, Inc.(b) ......................... 221,250 4,172,775 INDUSTRIAL CONGLOMERATES--2.4% Teleflex, Inc.(e) .............................. 50,610 3,288,638 INDUSTRIAL MACHINERY--4.3% Donaldson Co., Inc.(e) ......................... 110,200 3,504,360 Lincoln Electric Holdings, Inc.(e) ............. 55,700 2,209,062 ------------ 5,713,422 ------------ INSURANCE BROKERS--2.2% Brown & Brown, Inc.(e) ......................... 95,600 2,919,624 LEISURE PRODUCTS--1.8% Polaris Industries, Inc.(e) .................... 47,000 2,359,400 LIFE & HEALTH INSURANCE--3.3% StanCorp Financial Group, Inc. ................. 89,000 4,445,550 OFFICE ELECTRONICS--2.5% Zebra Technologies Corp. Class A(b)(e) ......... 79,300 3,398,005 OIL & GAS EQUIPMENT & SERVICES--4.5% Universal Compression Holdings, Inc.(b)(e) ..... 146,000 6,003,520 OIL & GAS REFINING, MARKETING & TRANSPORTATION--1.1% World Fuel Services Corp.(e) ................... 45,200 1,524,144 SHARES VALUE ----------- ------------ PACKAGED FOODS & MEATS--0.9% Tootsie Roll Industries, Inc.(e) ............... 43,000 $ 1,243,990 PAPER PACKAGING--3.4% Bemis Co., Inc.(e) ............................. 162,944 4,541,249 PHARMACEUTICALS--1.5% Axcan Pharma, Inc.(b)(e) ....................... 137,000 2,074,180 PROPERTY & CASUALTY INSURANCE--2.8% Cincinnati Financial Corp.(e) .................. 85,674 3,827,914 REGIONAL BANKS--2.4% UCBH Holdings, Inc.(e) ......................... 180,000 3,218,400 REINSURANCE--3.5% Reinsurance Group of America, Inc.(e) .......... 98,600 4,709,136 SEMICONDUCTOR EQUIPMENT--1.5% Cabot Microelectronics Corp.(b)(e) ............. 69,650 2,042,835 SEMICONDUCTORS--4.0% Microchip Technology, Inc. ..................... 168,000 5,401,200 SPECIALIZED CONSUMER SERVICES--4.2% Regis Corp.(e) ................................. 147,000 5,669,790 SPECIALTY CHEMICALS--2.0% Valspar Corp. (The)(e) ......................... 109,040 2,690,017 SPECIALTY STORES--1.3% Tiffany & Co.(e) ............................... 43,900 1,680,931 ----------------------------------------------------------------------------- TOTAL DOMESTIC COMMON STOCKS (IDENTIFIED COST $99,306,385) 133,750,279 ----------------------------------------------------------------------------- TOTAL LONG TERM INVESTMENTS--99.4% (IDENTIFIED COST $99,306,385) 133,750,279 ----------------------------------------------------------------------------- 54 See Notes to Financial Statements PHOENIX SMALL-MID CAP FUND SHARES VALUE ----------- ------------ SHORT-TERM INVESTMENTS--20.3% MONEY MARKET MUTUAL FUNDS--19.6% State Street Navigator Prime Plus (4.28% seven day effective yield)(d)................... 26,413,165 $ 26,413,165 PAR VALUE (000) ----------- COMMERCIAL PAPER(f)--0.7% Lehman Brothers Holdings, Inc. 4.10%, 1/3/06.......................................... $ 890 889,797 ----------------------------------------------------------------------------- TOTAL SHORT-TERM INVESTMENTS (IDENTIFIED COST $27,302,962) 27,302,962 ----------------------------------------------------------------------------- TOTAL INVESTMENTS--119.7% (IDENTIFIED COST $126,609,347) 161,053,241(a) Other assets and liabilities, net--(19.7)% (26,531,856) ------------ NET ASSETS--100.0% $134,521,385 ============ (a) Federal Income Tax Information: Net unrealized appreciation of investment securities is comprised of gross appreciation of $36,193,341 and gross depreciation of $1,749,447 for federal income tax purposes. At December 31, 2005, the aggregate cost of securities for federal income tax purposes was $126,609,347. (b) Non-income producing. (c) Table excludes short-term investments. (d) Represents security purchased with cash collateral received for securities on loan. (e) All or a portion of security is on loan. (f) The rate shown is the discount rate. See Notes to Financial Statements 55 PHOENIX SMALL-MID CAP FUND STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2005 ASSETS Investment securities at value including $25,825,161 of securities on loan (Identified cost $126,609,347) $ 161,053,241 Cash 3,681 Receivables Fund shares sold 146,154 Dividends 74,656 Prepaid expenses 30,149 ------------- Total assets 161,307,881 ------------- LIABILITIES Payables Fund shares repurchased 164,406 Upon return of securities loaned 26,413,165 Investment advisory fee 98,717 Transfer agent fee 32,277 Distribution and service fees 24,013 Professional fee 22,420 Financial agent fee 9,013 Trustees' fee 1,785 Other accrued expenses 20,700 ------------- Total liabilities 26,786,496 ------------- NET ASSETS $ 134,521,385 ============= NET ASSETS CONSIST OF: Capital paid in on shares of beneficial interest $ 97,283,350 Accumulated net realized gain 2,794,141 Net unrealized appreciation 34,443,894 ------------- NET ASSETS $ 134,521,385 ============= CLASS X Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $78,290,019) 3,673,899 Net asset value and offering price per share $ 21.31 CLASS A Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $38,169,547) 1,805,074 Net asset value per share $ 21.15 Offering price per share $21.15/(1-5.75%) $ 22.44 CLASS B Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $3,960,060) 191,582 Net asset value and offering price per share $ 20.67 CLASS C Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $14,101,759) 681,499 Net asset value and offering price per share $ 20.69 STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2005 INVESTMENT INCOME Dividends $ 1,550,581 Interest 28,947 Security lending 6,503 ------------- Total investment income 1,586,031 ------------- EXPENSES Investment advisory fee 1,374,646 Service fees, Class A 149,812 Distribution and service fees, Class B 40,221 Distribution and service fees, Class C 154,596 Financial agent fee 122,897 Transfer agent 179,726 Printing 50,238 Registration 45,842 Trustees 41,145 Professional 27,944 Custodian 15,655 Miscellaneous 36,997 ------------- Total expenses 2,239,719 ------------- NET INVESTMENT INCOME (LOSS) (653,688) ------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on investments 18,147,704 Net change in unrealized appreciation (depreciation) on investments (15,195,581) ------------- NET GAIN (LOSS) ON INVESTMENTS 2,952,123 ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 2,298,435 ============= 56 See Notes to Financial Statements PHOENIX SMALL-MID CAP FUND
STATEMENT OF CHANGES IN NET ASSETS Year Ended Year Ended December 31, 2005 December 31, 2004 ----------------- ----------------- FROM OPERATIONS Net investment income (loss) $ (653,688) $ (847,956) Net realized gain (loss) 18,147,704 (2,427,226) Net change in unrealized appreciation (depreciation) (15,195,581) 26,148,760 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 2,298,435 22,873,578 ----------------- ----------------- FROM SHARE TRANSACTIONS CLASS X Proceeds from sales of shares (477,066 and 674,594 shares, respectively) 9,519,100 12,509,815 Cost of shares repurchased (1,287,633 and 1,872,057 shares, respectively) (25,745,311) (34,757,079) ----------------- ----------------- Total (16,226,211) (22,247,264) ----------------- ----------------- CLASS A Proceeds from sales of shares (847,062 and 1,898,490 shares, respectively) 16,653,578 34,894,504 Cost of shares repurchased (2,626,953 and 502,551 shares, respectively) (52,735,024) (9,306,773) ----------------- ----------------- Total (36,081,446) 25,587,731 ----------------- ----------------- CLASS B Proceeds from sales of shares (70,155 and 96,144 shares, respectively) 1,363,205 1,759,784 Cost of shares repurchased (95,771 and 29,932 shares, respectively) (1,863,646) (536,789) ----------------- ----------------- Total (500,441) 1,222,995 ----------------- ----------------- CLASS C Proceeds from sales of shares (128,207 and 382,735 shares, respectively) 2,482,794 6,972,739 Cost of shares repurchased (325,669 and 203,578 shares, respectively) (6,363,844) (3,696,766) ----------------- ----------------- Total (3,881,050) 3,275,973 ----------------- ----------------- INCREASE (DECREASE) IN NET ASSETS FROM SHARE TRANSACTIONS (56,689,148) 7,839,435 ----------------- ----------------- NET INCREASE (DECREASE) IN NET ASSETS (54,390,713) 30,713,013 NET ASSETS Beginning of period 188,912,098 158,199,085 ----------------- ----------------- END OF PERIOD (INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $0 AND $0, RESPECTIVELY) $ 134,521,385 $ 188,912,098 ================= =================
See Notes to Financial Statements 57 PHOENIX SMALL-MID CAP FUND
FINANCIAL HIGHLIGHTS (SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD) CLASS X -------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------- 2005 2004 2003 2002 2001 Net asset value, beginning of period $ 20.70 $ 18.17 $ 14.34 $ 17.70 $ 17.19 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) (0.04)(4) (0.06)(4) (0.05)(4) (0.06) (0.01) Net realized and unrealized gain (loss) 0.65 2.59 3.88 (3.30) 1.15 ----------- ----------- ----------- ----------- ----------- TOTAL FROM INVESTMENT OPERATIONS 0.61 2.53 3.83 (3.36) 1.14 ----------- ----------- ----------- ----------- ----------- LESS DISTRIBUTIONS Dividends from net investment income -- -- -- -- (0.01) Distributions from net realized gain -- -- -- -- (0.62) ----------- ----------- ----------- ----------- ----------- TOTAL DISTRIBUTIONS -- -- -- -- (0.63) ----------- ----------- ----------- ----------- ----------- Change in net asset value 0.61 2.53 3.83 (3.36) 0.51 ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, END OF PERIOD $ 21.31 $ 20.70 $ 18.17 $ 14.34 $ 17.70 =========== =========== =========== =========== =========== Total return 2.95% 13.92% 26.71% (18.98)% 6.40% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 78,290 $ 92,838 $ 103,269 $ 98,112 $ 95,138 RATIO TO AVERAGE NET ASSETS OF: Operating expenses 1.17% 1.15% 1.26% 1.22% 1.17% Net investment income (loss) (0.18)% (0.32)% (0.35)% (0.38)% (0.14)% Portfolio turnover 22% 16% 17% 16% 17%
CLASS A ------------------------------------------------------------------ YEAR ENDED DECEMBER 31, FROM INCEPTION ------------------------------------------- AUGUST 30, 2002 TO 2005 2004 2003 DECEMBER 31, 2002 Net asset value, beginning of period $ 20.59 $ 18.12 $ 14.34 $ 15.29 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) (0.09)(4) (0.10)(4) (0.09)(4) (0.02) Net realized and unrealized gain (loss) 0.65 2.57 3.87 (0.93) ----------- ----------- ----------- -------- TOTAL FROM INVESTMENT OPERATIONS 0.56 2.47 3.78 (0.95) ----------- ----------- ----------- -------- Change in net asset value 0.56 2.47 3.78 (0.95) ----------- ----------- ----------- -------- NET ASSET VALUE, END OF PERIOD $ 21.15 $ 20.59 $ 18.12 $ 14.34 =========== =========== =========== ======== Total return(1) 2.72% 13.63% 26.36% (6.21)%(2) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 38,170 $ 73,825 $ 39,656 $ 2,086 RATIO TO AVERAGE NET ASSETS OF: Operating expenses 1.42% 1.41% 1.51% 1.47%(3) Net investment income (loss) (0.45)% (0.55)% (0.60)% 0.62%(3) Portfolio turnover 22% 16% 17% 16%(2)
(1) Sales charges are not reflected in the total return calculation. (2) Not annualized. (3) Annualized. (4) Computed using average shares outstanding. 58 See Notes to Financial Statements PHOENIX SMALL-MID CAP FUND
FINANCIAL HIGHLIGHTS (SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD) CLASS B ------------------------------------------------------------------ YEAR ENDED DECEMBER 31, FROM INCEPTION ------------------------------------------- AUGUST 30, 2002 TO 2005 2004 2003 DECEMBER 31, 2002 Net asset value, beginning of period $ 20.27 $ 17.94 $ 14.30 $ 15.29 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) (0.23)(4) (0.24)(4) (0.20)(4) (0.02) Net realized and unrealized gain (loss) 0.63 2.57 3.84 (0.97) ----------- ----------- ----------- -------- TOTAL FROM INVESTMENT OPERATIONS 0.40 2.33 3.64 (0.99) ----------- ----------- ----------- -------- Change in net asset value 0.40 2.33 3.64 (0.99) ----------- ----------- ----------- -------- NET ASSET VALUE, END OF PERIOD $ 20.67 $ 20.27 $ 17.94 $ 14.30 =========== =========== =========== ======== Total return(1) 1.97% 12.99% 25.45% (6.47)%(2) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 3,960 $ 4,404 $ 2,709 $ 626 RATIO TO AVERAGE NET ASSETS OF: Operating expenses 2.19% 2.16% 2.26% 2.22%(3) Net investment income (loss) (1.19)% (1.31)% (1.35)% (1.37)%(3) Portfolio turnover 22% 16% 17% 16%(2)
CLASS C ------------------------------------------------------------------ YEAR ENDED DECEMBER 31, FROM INCEPTION ------------------------------------------- AUGUST 30, 2002 TO 2005 2004 2003 DECEMBER 31, 2002 Net asset value, beginning of period $ 20.30 $ 17.96 $ 14.31 $ 15.29 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) (0.23)(4) (0.24)(4) (0.20)(4) (0.03) Net realized and unrealized gain (loss) 0.62 2.58 3.85 (0.95) ----------- ----------- ----------- -------- TOTAL FROM INVESTMENT OPERATIONS 0.39 2.34 3.65 (0.98) ----------- ----------- ----------- -------- Change in net asset value 0.39 2.34 3.65 (0.98) ----------- ----------- ----------- -------- NET ASSET VALUE, END OF PERIOD $ 20.69 $ 20.30 $ 17.96 $ 14.31 =========== =========== =========== ======== Total return(1) 1.92% 13.03% 25.59% (6.47)%(2) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 14,102 $ 17,845 $ 12,565 $ 572 RATIO TO AVERAGE NET ASSETS OF: Operating expenses 2.19% 2.16% 2.26% 2.22%(3) Net investment income (loss) (1.19)% (1.31)% (1.35)% (1.37)%(3) Portfolio turnover 22% 16% 17% 16%(2)
(1) Sales charges are not reflected in the total return calculation. (2) Not annualized. (3) Annualized. (4) Computed using average shares outstanding. See Notes to Financial Statements 59 PHOENIX-KAYNE FUNDS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2005 1. ORGANIZATION Phoenix-Kayne Funds (the "Trust") is organized as a Delaware statutory trust and is registered under the Investment Company Act of 1940, as amended, as an open-end management investment company. Currently five Funds are offered for sale (each a "Fund"). The Phoenix CA Intermediate Tax-Free Bond Fund ("CA Intermediate Tax-Free Bond Fund") is a non-diversified fund and seeks current income exempt from Federal and California state personal income taxes. The Phoenix Intermediate Bond Fund ("Intermediate Bond Fund") is a diversified fund and seeks to maximize total return, mainly through current income, with capital appreciation as a secondary factor. The Phoenix Overseas Fund ("Overseas Fund") is a diversified fund and seeks long-term capital appreciation, with dividend income as a secondary consideration. The Phoenix Rising Dividends Fund ("Rising Dividends Fund") is a diversified fund and seeks long-term capital appreciation, with dividend income as a secondary consideration. The Phoenix Small-Mid Cap Fund ("Small-Mid Cap Fund") is a diversified fund and seeks long-term capital appreciation, with dividend income as a secondary consideration. The funds offer the following classes of shares for sale: Class X Class A Class B Class C ------- ------- ------- ------- CA Intermediate Tax-Free Bond Fund ......... X -- -- -- Intermediate Bond Fund ........ X -- -- -- Overseas Fund ................. X X X X Rising Dividends Fund ......... X X X X Small-Mid Cap Fund............. X X X X Class X shares are sold without a sales charge. Class A shares are sold with a front-end sales charge of up to 5.75%. Generally, Class A shares are not subject to any charges by the Funds when redeemed; however, effective January 11, 2006, a 1% contingent deferred sales charge may be imposed on certain redemptions within one year on purchases on which a finder's fee has been paid. Class B shares are sold with a contingent deferred sales charge which declines from 5% to zero depending on the period of time the shares are held. Class C shares are sold with a 1% contingent deferred sales charge if redeemed within one year of purchase. Each class of shares has identical voting, dividend, liquidation and other rights and the same terms and conditions, except that each class bears different distribution and/or service expenses and has exclusive voting rights with respect to its distribution plan. Class X bears no distribution and/or service expenses. Income and expenses and realized and unrealized gains and losses of each Fund are borne pro rata by the holders of each class of shares. 2. SIGNIFICANT ACCOUNTING POLICIES The following is a summary of significant accounting policies consistently followed by the Trust in the preparation of its financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. A. SECURITY VALUATION: Equity securities are valued at the official closing price (typically last sale) on the exchange on which the securities are primarily traded, or if no closing price is available, at the last bid price. Debt securities are valued on the basis of broker quotations or valuations provided by a pricing service, which utilizes information with respect to recent sales, market transactions in comparable securities, quotations from dealers, and various relationships between securities in determining value. As required, some securities and assets may be valued at fair value as determined in good faith by or under the direction of the Trustees. Certain foreign common stocks may be fair valued in cases where closing prices are not readily available or are deemed not reflective of readily available market prices. For example, significant events (such as movement in the U.S. securities market, or other regional and local developments) may occur between the time that foreign markets close (where the security is principally traded) and the time that the Fund calculates its net asset value (generally, the close of the NYSE) that may impact the value of securities traded in these foreign markets. In these cases, information from an external vendor may be utilized to adjust closing market prices of certain foreign common stocks to reflect their fair value. Because the frequency of significant events is not predictable, fair valuation of certain foreign common stocks may occur on a frequent basis. Short-term investments having a remaining maturity of 60 days or less are valued at amortized cost, which approximates market. B. SECURITY TRANSACTIONS AND RELATED INCOME: Security transactions are recorded on the trade date. Dividend income is recorded on the ex-dividend date, or in the case of certain foreign securities, as soon as the Fund is notified. Interest income is recorded on the accrual basis. Each Fund amortizes premiums and accretes discounts using the effective interest method. Realized gains and losses are determined on the identified cost basis. C. INCOME TAXES: Each Fund is treated as a separate taxable entity. It is the policy of each Fund in the Trust to comply with the requirements of the Internal Revenue Code and to distribute substantially all of its taxable income to its shareholders. Therefore, no provision for federal income taxes or excise taxes has been made. 60 PHOENIX-KAYNE FUNDS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2005 (CONTINUED) The Trust may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. Each Fund will accrue such taxes and recoveries as applicable based upon current interpretations of the tax rules and regulations that exist in the markets in which they invest. D. DISTRIBUTIONS TO SHAREHOLDERS: Distributions are recorded by each Fund on the ex-dividend date. For the CA Intermediate Tax-Free Bond Fund, income distributions are recorded daily. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. These differences may include the treatment of non-taxable dividends, market premium and discount, non-deductible expenses, expiring capital loss carryovers, foreign currency gain or loss, gain or loss on futures contracts, partnerships, operating losses and losses deferred due to wash sales. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to capital paid in on shares of beneficial interest. E. EXPENSES: Expenses incurred by the Trust with respect to more than one Fund are allocated in proportion to the net assets of each Fund, except where allocation of direct expense to each Fund or an alternative allocation method can be more appropriately made. F. FOREIGN CURRENCY TRANSLATION: Foreign securities and other assets and liabilities are valued using the foreign currency exchange rate effective at the end of the reporting period. The cost of investments is translated at the currency exchange rate effective at the trade date. The gain or loss resulting from a change in currency exchange rates between the trade and settlement date of a portfolio transaction is treated as a gain or loss on foreign currency. Likewise, the gain or loss resulting from a change in currency exchange rates between the date income is accrued and paid is treated as a gain or loss on foreign currency. The Trust does not isolate that portion of the results of operations arising from either changes in exchange rates or in the market prices of securities. G. FOREIGN SECURITY COUNTRY DETERMINATION: A combination of the following criteria is used to assign the countries of risk listed in the schedules of investments: country of incorporation, actual building address, primary exchange on which the security is traded and country in which the greatest percentage of company revenue is generated. H. SECURITIES LENDING: Certain Funds loan securities to qualified brokers through an agreement with State Street Bank and Trust (the "Custodian"). Under the terms of the agreement, the Funds receive collateral with a market value not less than 100% of the market value of loaned securities. Collateral is adjusted daily in connection with changes in the market value of securities on loan. Collateral consists of cash, securities issued or guaranteed by the U.S. Government or its agencies and the sovereign debt of foreign countries. Cash collateral has been invested in short-term money market funds. Dividends earned on the collateral and premiums paid by the borrower are recorded as income by the Fund net of fees charged by the Custodian for its services in connection with this securities lending program. Lending portfolio securities involves a risk of delay in the recovery of the loaned securities or in the foreclosure on collateral. 3. INVESTMENT ADVISORY FEES AND RELATED PARTY TRANSACTIONS The Adviser, Kayne Anderson Rudnick Investment Management, LLC provides each Fund with investment management services under an Investment Advisory Agreement (the "Agreement"). Kayne Anderson Rudnick Investment Management, LLC is wholly-owned by Phoenix Investment Partners, Ltd. ("PXP"). PXP is the wholly-owned investment management subsidiary of The Phoenix Companies, Inc. ("PNX"). As compensation for its services, the Adviser is entitled to a fee based upon the following annual rates as a percentage of the average daily net assets of each Fund: CA Intermediate Tax-Free Bond Fund ................ 0.50% Intermediate Bond Fund ............................ 0.50% Overseas Fund ..................................... 0.95% Rising Dividends Fund ............................. 0.75% Small-Mid Cap Fund ................................ 0.85% The Adviser has voluntarily agreed to reimburse each Fund's total annual operating expenses (excluding interest, taxes, and extraordinary expenses) through April 30, 2006, to the extent that such expenses exceed the following percentages of average annual net assets: Class X Class A Class B Class C ------- ------- ------- ------- CA Intermediate Tax-Free Bond Fund .......... 0.75% -- -- -- Intermediate Bond Fund ......... 0.95% -- -- -- Overseas Fund .................. 1.40% 1.65% 2.40% 2.40% Rising Dividends Fund .......... 1.20% 1.45% 2.20% 2.20% Small-Mid Cap Fund ............. 1.30% 1.55% 2.30% 2.30% 61 PHOENIX-KAYNE FUNDS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2005 (CONTINUED) Any fee reimbursed and/or any Fund expense absorbed by the Adviser pursuant to an agreed upon expense cap shall be reimbursed by the Fund to the Adviser, if so requested by the Adviser, provided the aggregate amount of the Fund's current operating expense for such fiscal year does not exceed the applicable limitation on Fund expenses. For the fiscal year (the "period") ended December 31, 2005, the Adviser reimbursed fees and paid expenses of $105,772 and $88,689 for the CA Intermediate Tax-Free Bond Fund and Overseas Fund, respectively. The Management Agreement permits the Adviser to seek reimbursement of any reductions made to its management fee within the three-year period following such reduction, subject to a Fund's ability to effect such reimbursement and remain in compliance with applicable expense limitations. At December 31, 2005, the amounts available for reimbursement recapture that has been paid and/or waived by the Adviser on behalf of each of the Funds listed below. The Adviser may recapture all or a portion of the amounts no later than the each of the dates shown: 2006 2007 2008 Total -------- -------- -------- -------- CA Intermediate Tax-Free Bond Fund ..... $100,802 $ 87,348 $105,772 $293,922 Overseas Fund ............. 162,514 108,890 88,689 360,093 For the period ended December 31, 2005, the adviser recouped $0 and $0 from CA Intermediate Tax-Free Bond Fund and Overseas Fund respectively. Each Fund must pay its current ordinary operating expenses before the Adviser is entitled to any reimbursement. Any such reimbursement is also contingent upon the Board of Trustees review and approval prior to the time the reimbursement is initiated. As a distributor of each Fund's shares, Phoenix Equity Planning Corporation ("PEPCO") an indirect wholly-owned subsidiary of PNX, has advised the Funds that it retained net selling commissions and deferred sales charges for the period ended December 31, 2005, as follows: Class A Class B Class C Net Selling Deferred Deferred Commisions Sales Charges Sales Charges ----------- ------------- ------------- Overseas Fund ................ $ -- $ 673 $ 36 Rising Dividends Fund ........ 2,615 5,369 757 Small-Mid Cap Fund ........... 4,603 51,643 2,494 In addition, each Fund pays PEPCO distribution and/or service fees at an annual rate of 0.25% for Class A shares, 1.00% for Class B shares and 1.00% for Class C shares applied to the average daily net assets of each respective Class. Under certain circumstances, shares of certain Phoenix Funds may be exchanged for shares of the same class of certain other Phoenix Funds on the basis of the relative net asset values per share at the time of the exchange. On exchanges with share classes that carry a contingent deferred sales charge, the CDSC schedule of the original shares purchased continues to apply. As financial agent of the Trust, PEPCO receives a financial agent fee equal to the sum of (1) the documented cost to PEPCO to provide oversight of the performance of PFPC Inc. (subagent to PEPCO), plus (2) the documented cost of fund accounting, tax services and related services provided by PFPC Inc. For the period ended December 31, 2005, the Trust incurred financial agent fees totaling $413,241. PEPCO serves as the Trust's transfer agent with State Street Bank and Trust Company serving as sub-transfer agent. For the period ended December 31, 2005, transfer agent fees were $386,229 as reported in the Statement of Operations, of which PEPCO retained the following: Transfer Agent Fee Retained -------------- Small-Mid Cap Fund .................................... $23,987 At December 31, 2005, PNX and its affiliates, the retirement plans of PNX and its affiliates, and Phoenix affiliated Funds held shares which aggregated the following: Aggregate Net Asset Shares Value ------------- ------------- Overseas Fund --Class B ................................. 10,585 $145,861 --Class C ................................. 10,585 145,861 Rising Dividends Fund --Class B ................................. 7,435 114,202 --Class C ................................. 7,431 114,214 Small-Mid Cap Fund --Class B ................................. 6,540 135,182 4. PURCHASES AND SALES OF SECURITIES Purchases and sales of securities (excluding U.S. Government securities and agency securities and short-term securities) for the period ended December 31, 2005, were as follows: Purchases Sales ----------- ----------- CA Intermediate Tax-Free Bond Fund ....... $13,627,437 $14,741,575 Intermediate Bond Fund ................... 13,404,085 8,969,824 Overseas Fund ............................ 15,940,444 23,385,783 Rising Dividends Fund .................... 43,771,269 90,860,318 Small-Mid Cap Fund ....................... 36,194,293 92,650,433 62 PHOENIX-KAYNE FUNDS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2005 (CONTINUED) Purchases and sales of long-term U.S. Government and agency securities for the period ended December 31, 2005, were as follows: Purchases Sales ------------ ------------ Intermediate Bond Fund ................... $ 15,738,310 $ 9,499,426 5. CREDIT RISK AND ASSET CONCENTRATION In countries with limited or developing markets, investments may present greater risks than in more developed markets and the prices of such investments may be volatile. The consequences of political, social or economic changes in these markets may have disruptive effects on the market prices of these investments and the income they generate, as well as a Fund's ability to repatriate such amounts. Certain Funds may invest a high percentage of their assets in specific sectors of the market in their pursuit of a greater investment return. Fluctuations in these sectors of concentration may have a greater impact on a Fund, positive or negative, than if a Fund did not concentrate its investments in such sectors. The CA Intermediate Tax-Free Bond Fund invests primarily in California municipal securities and is more susceptible to economic, political and other developments that may adversely affect issuers of such securities, than a more geographically diversified fund. Such developments could result in certain adverse consequences including impairing the market value and marketability of the securities, as well as impairing the ability of certain issuers of California municipal securities to pay principal and interest on their obligations. At December 31, 2005, the CA Intermediate Tax-Free Bond Fund was 98% invested in California municipal securities. At December 31, 2005, the Intermediate Bond Fund held $31,446,786 in investments issued by the U.S. Government, comprising 56% of the total net assets of the Fund. 6. 10% SHAREHOLDERS As of December 31, 2005, the Trust had single shareholders and omnibus shareholder accounts (which are comprised of several individual shareholders), which individually amounted to more than 10% of the total shares outstanding as detailed below: % Shares Outstanding ----------- CA Intermediate Tax-Free Bond Fund ........ 50% Intermediate Bond Fund .................... 36 Overseas Fund ............................. 36 Rising Dividends Fund ..................... 10 7. INDEMNIFICATIONS Under the Funds' organizational documents, its trustees and officers are indemnified against certain liabilities arising out of the performance of their duties to the Funds. In addition, the Funds enter into contracts that contain a variety of indemnifications. The Funds' maximum exposure under these arrangements is unknown. However, the Funds have not had prior claims or losses pursuant to these contracts and expect the risk of loss to be remote. 8. REGULATORY EXAMS Federal and state regulatory authorities from time to time make inquiries and conduct examinations regarding compliance by The Phoenix Companies, Inc. and its subsidiaries (collectively "the Company") with securities and other laws and regulations affecting their registered products. During 2004 and 2005, the Boston District Office of the Securities and Exchange Commission ("SEC") conducted an examination of the Company's investment company and investment adviser affiliates. Following the examination, the staff of the SEC Boston District Office issued a deficiency letter primarily focused on perceived weaknesses in procedures for monitoring trading to prevent market timing activity prior to 2004. The staff requested the Company to conduct an analysis as to whether shareholders, policyholders and contract holders who invested in the funds that may have been affected by undetected market timing activity had suffered harm and to advise the staff whether the Company believes reimbursement is necessary or appropriate under the circumstances. Market timing is an investment technique involving frequent short-term trading of mutual fund shares that is designed to exploit market movements or inefficiencies in the way mutual fund companies price their shares. A third party was retained to assist the Company in preparing the analysis. In 2005, based on the third party analysis the Company notified the staff at the SEC Boston District Office that reimbursements were not appropriate under the circumstances. The Company does not believe that the outcome of this matter will be material to these financial statements. 9. FEDERAL INCOME TAX INFORMATION The Funds have capital loss carryovers which may be used to offset future capital gains, as follows:
Expiration Date --------------------------------------------------------------- 2006 2010 2011 2013 Total -------- ----------- ----------- --------- ------------ Intermediate Bond Fund ...... $ -- $ -- $ -- $ 273,543 $ 273,543 Overseas Fund ..... -- 12,916,895 7,167,821 -- 20,084,716 Rising Dividends Fund ........... -- 6,937,638 4,873,757 -- 11,811,395 Small-Mid Cap Fund ........... 838,736 -- -- -- 838,736
The Trust may not realize the benefit of these losses to the extent each Fund does not realize gains on investments prior to the expiration of the capital loss carryovers. 63 PHOENIX-KAYNE FUNDS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2005 (CONTINUED) For the period ended December 31, 2005, the Funds utilized losses deferred in prior years against current year capital gains as follows: Overseas Fund ................... $ 3,501,958 Rising Dividends Fund ........... 6,133,990 Small-Mid Cap Fund .............. 13,413,785 Under current tax law, foreign currency and capital losses realized after October 31 may be deferred and treated as occurring on the first day of the following fiscal year. For the year ended December 31, 2005 the Funds deferred and recognized post-October losses as follows: Capital Capital Currency Deferred Recognized Deferred ----------- ----------- --------- Intermediate Bond Fund .... $ 123,564 $ 34,804 $ -- Overseas Fund ............. -- -- 6,050 Rising Dividends Fund ..... 95,229 -- -- Small-Mid Cap Fund ........ -- 1,101,042 -- The components of distributable earnings on a tax basis (excluding unrealized appreciation (depreciation), which are disclosed in the Schedules of Investments) consist of undistributed ordinary income and undistributed long-term capital gains as follows: Undistributed Undistributed Undistributed Ordinary Long-Term Tax-Exempt Income Capital Gains Income ------------- ------------- ------------- CA Intermediate Tax-Free Bond Fund ..... $ -- $ 25,223 $ 6,221 Intermediate Bond Fund .... 22,654 -- -- Overseas Fund ............. 7,921 -- -- Rising Dividends Fund ..... 78,481 -- -- Small-Mid Cap Fund ........ -- 3,632,877 -- The differences between the book and tax basis components of distributable earnings relate principally to the timing of recognition of income and gains for federal income tax purposes. Short-term gain distributions reported in the Statements of Changes in Net Assets, if any, are reported as ordinary income for federal tax purposes. 10. RECLASSIFICATION OF CAPITAL ACCOUNTS For financial reporting purposes, book basis capital accounts are adjusted to reflect the tax character of permanent book/tax differences. Permanent reclassifications can arise from differing treatment of certain income and gain transactions, nondeductible current year net operating losses, expiring capital loss carryovers and investments in passive foreign investment companies. The reclassifications have no impact on the net assets or net asset value of the Funds. For the year ended December 31, 2005, the following Funds recorded reclassifications to increase (decrease) the accounts as listed below: Capital Paid in on Shares of Accumulated Undistributed Beneficial Net Realized Net Investment Interest Gain (Loss) Income (Loss) ------------- ------------- -------------- Overseas Fund .......... $ -- $ 94,459 $ (94,459) Small-Mid Cap Fund ..... (653,688) -- 653,688 -------------------------------------------------------------------------------- TAX NOTICE (UNAUDITED) For federal income tax purposes, 99.8% of the income dividends paid by the CA Intermediate Tax-Free Bond Fund qualify as exempt-interest dividends. For the fiscal year ended December 31, 2005, for federal income tax purposes, 100% of the ordinary income dividends earned by the Rising Dividends Fund qualify for the dividends received deduction for corporate shareholders. For the fiscal year ended December 31, 2005, the Rising Dividends Fund and Overseas Fund hereby designate 100%, or the maximum amount allowable, of its ordinary income dividends to qualify for the lower tax rates applicable to individual shareholders. The actual percentage for the calendar year will be designated in the year-end tax statements. For the year ended December 31, 2005, the following funds designated long-term capital gains dividends: CA Intermediate Tax-Free Bond Fund .......... $ 69,677 Small-Mid Cap Fund .......................... 3,632,877 -------------------------------------------------------------------------------- 64 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PRICEWATERHOUSECOOPERS [LOGO] To the Board of Trustees of Phoenix-Kayne Funds and Shareholders of Phoenix CA Intermediate Tax-Free Bond Fund Phoenix Intermediate Bond Fund Phoenix Overseas Fund Phoenix Rising Dividends Fund Phoenix Small-Mid Cap Fund In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Phoenix CA Intermediate Tax-Free Bond Fund (formerly Phoenix-Kayne California Intermediate Tax-Free Bond Fund), Phoenix Intermediate Bond Fund (formerly Phoenix-Kayne Intermediate Total Return Bond Fund), Phoenix Overseas Fund (formerly Phoenix-Kayne International Fund), Phoenix Rising Dividends Fund (formerly Phoenix-Kayne Rising Dividends Fund) and Phoenix Small-Mid Cap Fund (formerly Phoenix-Kayne Small-Mid Cap Fund) (constituting Phoenix-Kayne Funds hereafter referred to as the "Trust") at December 31, 2005 and the results of each of their operations, the changes in each of their net assets and their financial highlights for the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Trust's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2005 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. /s/ Pricewaterhousecoopers LLP Boston, Massachusetts February 17, 2006 65 BOARD OF TRUSTEES' CONSIDERATION OF INVESTMENT ADVISORY AGREEMENT FOR PHOENIX CA INTERMEDIATE TAX-FREE BOND FUND (THE "FUND") DECEMBER 31, 2005 (UNAUDITED) The Board of Trustees is responsible for determining whether to approve the Fund's investment advisory agreement. At a meeting held on November 4, 2005, the Board, including a majority of the independent Trustees, approved the investment advisory agreement (the "Advisory Agreement") between Kayne Anderson Rudnick Investment Management, LLC ("Kayne") and the Fund. Pursuant to the Advisory Agreement between Kayne and the Fund, Kayne provides advisory services to the Fund. During the review process, the Board received assistance and advice from, and met separately with, independent legal counsel. In approving the Advisory Agreement, the Board, including a majority of the independent Trustees, determined that the fee structure was fair and reasonable and that approval of the Advisory Agreement was in the best interests of the Fund and its shareholders. While attention was given to all information furnished, the following discusses the primary factors relevant to the Board's decision. ADVISORY AGREEMENT CONSIDERATIONS NATURE, EXTENT AND QUALITY OF SERVICES. The Board concluded that the nature, extent and quality of the overall services provided by Kayne and its affiliates to the Fund and its shareholders was reasonable. The Board's conclusion was based, in part, upon services provided to the Fund such as quarterly reports provided by Kayne comparing the performance of the Fund with a peer group and benchmark, reports provided by Kayne showing that the investment policies and restrictions for the Fund were followed and reports provided by Kayne covering matters such as the compliance of investment personnel and other access persons with Kayne's and the Fund's code of ethics, the adherence to fair value pricing procedures established by the Board, the monitoring of portfolio compliance, information on illiquid securities and derivatives, brokerage commissions and presentations regarding the economic environment and general investment outlook. The Board also considered the experience of Kayne having acted as an investment adviser to mutual funds for over 20 years. The Board also noted the extent of benefits that are provided Fund shareholders from being part of the Phoenix family of funds, including the right to exchange investments between the same class of funds without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings in other funds to obtain a reduced sales charge. The Board also considered the transfer agent and shareholder services that are provided to Fund shareholders by an affiliate of Kayne, noting continuing improvements by management in the scope and quality of services and favorable reports on such service conducted by third parties. INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of the Fund in view of its importance to shareholders. While consideration was given to performance reports and discussions at Board meetings throughout the year, particular attention in assessing such performance was given to a report for the Fund prepared by Lipper Inc. ("Lipper") furnished for the contract renewal process. The Lipper report showed the investment performance of the Fund's Class X shares for the 1, 3 and 5 year and year-to-date periods ended September 30, 2005. The Board reviewed the investment performance of the Fund, along with comparative performance information of a peer group of funds and a relevant market index. The Board noted that the Fund had underperformed its benchmark for the 1 and 3 year and year-to-date periods but had outperformed the benchmark for the 5 year period. The Board noted Management's conclusion that the Fund had underperformed due to the Fund's emphasis on holding investment grade debt securities in an economy where low grade debt securities are outperforming. The Board concluded that it was satisfied with the performance of the Fund given management's comment regarding the Fund's investment philosophy. PROFITABILITY. The Board also considered the level of profits realized by Kayne and its affiliates in connection with the operation of the Fund. In this regard, the Board reviewed the Fund profitability analysis that addressed the overall profitability of Kayne for its management of the Phoenix retail fund family, as well as its profits and that of its affiliates, for managing the Fund. Specific attention was given to the methodology followed in allocating costs to the Fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this regard, the Board noted that the allocation appeared reasonable. The Board also noted the voluntary waiver provided to the Fund. The Board concluded that the profitability to Kayne was reasonable. MANAGEMENT FEE AND TOTAL EXPENSES. The Board also placed significant emphasis on the review of expenses of the Fund. Consideration was given to a comparative analysis of the management fee and total expense ratio of the Fund compared with those of a group of other funds selected by Lipper as its appropriate Lipper expense group in the Lipper report. The Board noted that although the total expenses of the Fund were higher than the average total expenses for comparable funds, the contractual management fee was slightly lower than the median for the peer group. Management noted that because of the Trust's small size this Fund and the other Funds in the Trust, had to bear a disproportionate amount of fixed costs. Management indicated to the Board that it was considering whether to recommend that the Fund merge with a similar fund. The Board was satisfied with the management fee and with management's response regarding expenses and concluded that the Fund's management fee and expenses were reasonable, particularly given the plan to possibly merge the Fund with another similar fund. ECONOMIES OF SCALE. The Board noted that it was likely that Kayne and the Fund would achieve certain economies of scale as the assets grew covering certain fixed costs. The Board concluded that shareholders would have an opportunity to benefit from these economies of scale. 66 BOARD OF TRUSTEES' CONSIDERATION OF INVESTMENT ADVISORY AGREEMENT FOR PHOENIX INTERMEDIATE BOND FUND (THE "FUND") DECEMBER 31, 2005 (UNAUDITED) The Board of Trustees is responsible for determining whether to approve the Fund's investment advisory agreement. At a meeting held on November 4, 2005, the Board, including a majority of the independent Trustees, approved the investment advisory agreement (the "Advisory Agreement") between Kayne Anderson Rudnick Investment Management, LLC ("Kayne") and the Fund. Pursuant to the Advisory Agreement between Kayne and the Fund, Kayne provides advisory services to the Fund. During the review process, the Board received assistance and advice from, and met separately with, independent legal counsel. In approving the Advisory Agreement, the Board, including a majority of the independent Trustees, determined that the fee structure was fair and reasonable and that approval of the Advisory Agreement was in the best interests of the Fund and its shareholders. While attention was given to all information furnished, the following discusses the primary factors relevant to the Board's decision. ADVISORY AGREEMENT CONSIDERATIONS NATURE, EXTENT AND QUALITY OF SERVICES. The Board concluded that the nature, extent and quality of the overall services provided by Kayne and its affiliates to the Fund and its shareholders was reasonable. The Board's conclusion was based, in part, upon services provided to the Fund such as quarterly reports provided by Kayne comparing the performance of the Fund with a peer group and benchmark, reports provided by Kayne showing that the investment policies and restrictions for the Fund were followed and reports provided by Kayne covering matters such as the compliance of investment personnel and other access persons with Kayne's and the Fund's code of ethics, the adherence to fair value pricing procedures established by the Board, the monitoring of portfolio compliance, information on illiquid securities and derivatives, brokerage commissions and presentations regarding the economic environment and general investment outlook. The Board also considered the experience of Kayne having acted as an investment adviser to mutual funds for over 20 years. The Board also noted the extent of benefits that are provided Fund shareholders from being part of the Phoenix family of funds, including the right to exchange investments between the same class of funds without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings in other funds to obtain a reduced sales charge. The Board also considered the transfer agent and shareholder services that are provided to Fund shareholders by an affiliate of Kayne, noting continuing improvements by management in the scope and quality of services and favorable reports on such service conducted by third parties. INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of the Fund in view of its importance to shareholders. While consideration was given to performance reports and discussions at Board meetings throughout the year, particular attention in assessing such performance was given to a report for the Fund prepared by Lipper Inc. ("Lipper") furnished for the contract renewal process. The Lipper report showed the investment performance of the Fund's Class X shares for the 1, 3 and 5 year and year-to-date periods ended September 30, 2005. The Board reviewed the investment performance of the Fund, along with comparative performance information of a peer group of funds and a relevant market index. The Board noted that the Fund had underperformed its benchmark for the 1, 3 and 5 year and year-to-date periods. Management indicated to the Board that it was considering whether to recommend that the Fund merge with a similar fund. The Board concluded that it was satisfied with the performance of the Fund given Management's plan to possibly merge the Fund into a similar Fund. PROFITABILITY. The Board also considered the level of profits realized by Kayne and its affiliates in connection with the operation of the Fund. In this regard, the Board reviewed the Fund profitability analysis that addressed the overall profitability of Kayne for its management of the Phoenix retail fund family, as well as its profits and that of its affiliates, for managing the Fund. Specific attention was given to the methodology followed in allocating costs to the Fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this regard, the Board noted that the allocation appeared reasonable. The Board concluded that the profitability to Kayne was reasonable. MANAGEMENT FEE AND TOTAL EXPENSES. The Board also placed significant emphasis on the review of expenses of the Fund. Consideration was given to a comparative analysis of the management fee and total expense ratio of the Fund compared with those of a group of other funds selected by Lipper as its appropriate Lipper expense group in the Lipper report. The Board noted that although the total expenses of the Fund were higher than the average total expenses for comparable funds, the contractual management fee was in line with the median for the peer group. The Board was satisfied with the management fee and with management's response regarding expenses and concluded that the Fund's management fee and expenses were reasonable. ECONOMIES OF SCALE. The Board noted that it was likely that Kayne and the Fund would achieve certain economies of scale as the assets grew covering certain fixed costs. The Board concluded that shareholders would have an opportunity to benefit from these economies of scale. 67 BOARD OF TRUSTEES' CONSIDERATION OF INVESTMENT ADVISORY AGREEMENT FOR PHOENIX OVERSEAS FUND (THE "FUND") DECEMBER 31, 2005 (UNAUDITED) The Board of Trustees is responsible for determining whether to approve the Fund's investment advisory agreement. At a meeting held on November 4, 2005, the Board, including a majority of the independent Trustees, approved the investment advisory agreement (the "Advisory Agreement") between Kayne Anderson Rudnick Investment Management, LLC ("Kayne") and the Fund. Pursuant to the Advisory Agreement between Kayne and the Fund, Kayne provides advisory services to the Fund. During the review process, the Board received assistance and advice from, and met separately with, independent legal counsel. In approving the Advisory Agreement, the Board, including a majority of the independent Trustees, determined that the fee structure was fair and reasonable and that approval of the Advisory Agreement was in the best interests of the Fund and its shareholders. While attention was given to all information furnished, the following discusses the primary factors relevant to the Board's decision. ADVISORY AGREEMENT CONSIDERATIONS NATURE, EXTENT AND QUALITY OF SERVICES. The Board concluded that the nature, extent and quality of the overall services provided by Kayne and its affiliates to the Fund and its shareholders was reasonable. The Board's conclusion was based, in part, upon services provided to the Fund such as quarterly reports provided by Kayne comparing the performance of the Fund with a peer group and benchmark, reports provided by Kayne showing that the investment policies and restrictions for the Fund were followed and reports provided by Kayne covering matters such as the compliance of investment personnel and other access persons with Kayne's and the Fund's code of ethics, the adherence to fair value pricing procedures established by the Board, the monitoring of portfolio compliance, information on illiquid securities and derivatives, brokerage commissions and presentations regarding the economic environment and general investment outlook. The Board also considered the experience of Kayne having acted as an investment adviser to mutual funds for over 20 years. The Board also noted the extent of benefits that are provided Fund shareholders from being part of the Phoenix family of funds, including the right to exchange investments between the same class of funds without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings in other funds to obtain a reduced sales charge. The Board also considered the transfer agent and shareholder services that are provided to Fund shareholders by an affiliate of Kayne, noting continuing improvements by management in the scope and quality of services and favorable reports on such service conducted by third parties. INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of the Fund in view of its importance to shareholders. While consideration was given to performance reports and discussions at Board meetings throughout the year, particular attention in assessing such performance was given to a report for the Fund prepared by Lipper Inc. ("Lipper") furnished for the contract renewal process. The Lipper report showed the investment performance of the Fund's Class X shares for the 1, 3 and 5 year and year-to-date periods ended September 30, 2005. The Board reviewed the investment performance of the Fund, along with comparative performance information of a peer group of funds and a relevant market index. The Board noted that the Fund had underperformed its benchmark for the 1, 3 and 5 year periods and slightly underperformed its benchmark for the year-to-date period. Management indicated to the Board that it was considering whether to recommend that the Fund merge with a similar fund. The Board concluded that it was satisfied with the performance of the Fund given Management's plan to possibly merge the Fund into a similar Fund. PROFITABILITY. The Board also considered the level of profits realized by Kayne and its affiliates in connection with the operation of the Fund. In this regard, the Board reviewed the Fund profitability analysis that addressed the overall profitability of Kayne for its management of the Phoenix retail fund family, as well as its profits and that of its affiliates, for managing the Fund. Specific attention was given to the methodology followed in allocating costs to the Fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this regard, the Board noted that the allocation appeared reasonable. The Board concluded that the profitability to Kayne was reasonable. MANAGEMENT FEE AND TOTAL EXPENSES. The Board also placed significant emphasis on the review of expenses of the Fund. Consideration was given to a comparative analysis of the management fee and total expense ratio of the Fund compared with those of a group of other funds selected by Lipper as its appropriate Lipper expense group in the Lipper report. The Board noted that the total expenses of the Fund were slightly higher than the average total expenses for comparable funds and the contractual management fee was also slightly higher than the average for the peer group. Management noted that the Fund's total expenses and contractual management fee were within 10 and 1 basis points, respectively, of the peer group average. The Board was satisfied with the management fee and concluded that the Fund's management fee and expenses were reasonable. ECONOMIES OF SCALE. The Board noted that it was likely that Kayne and the Fund would achieve certain economies of scale as the assets grew covering certain fixed costs. The Board concluded that shareholders would have an opportunity to benefit from these economies of scale. 68 BOARD OF TRUSTEES' CONSIDERATION OF INVESTMENT ADVISORY AGREEMENT FOR PHOENIX RISING DIVIDENDS FUND (THE "FUND") DECEMBER 31, 2005 (UNAUDITED) The Board of Trustees is responsible for determining whether to approve the Fund's investment advisory agreement. At a meeting held on November 4, 2005, the Board, including a majority of the independent Trustees, approved the investment advisory agreement (the "Advisory Agreement") between Kayne Anderson Rudnick Investment Management, LLC ("Kayne") and the Fund. Pursuant to the Advisory Agreement between Kayne and the Fund, Kayne provides advisory services to the Fund. During the review process, the Board received assistance and advice from, and met separately with, independent legal counsel. In approving the Advisory Agreement, the Board, including a majority of the independent Trustees, determined that the fee structure was fair and reasonable and that approval of the Advisory Agreement was in the best interests of the Fund and its shareholders. While attention was given to all information furnished, the following discusses the primary factors relevant to the Board's decision. ADVISORY AGREEMENT CONSIDERATIONS NATURE, EXTENT AND QUALITY OF SERVICES. The Board concluded that the nature, extent and quality of the overall services provided by Kayne and its affiliates to the Fund and its shareholders was reasonable. The Board's conclusion was based, in part, upon services provided to the Fund such as quarterly reports provided by Kayne comparing the performance of the Fund with a peer group and benchmark, reports provided by Kayne showing that the investment policies and restrictions for the Fund were followed and reports provided by Kayne covering matters such as the compliance of investment personnel and other access persons with Kayne's and the Fund's code of ethics, the adherence to fair value pricing procedures established by the Board, the monitoring of portfolio compliance, information on illiquid securities and derivatives, brokerage commissions and presentations regarding the economic environment and general investment outlook. The Board also considered the experience of Kayne having acted as an investment adviser to mutual funds for over 20 years. The Board also noted the extent of benefits that are provided Fund shareholders from being part of the Phoenix family of funds, including the right to exchange investments between the same class of funds without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings in other funds to obtain a reduced sales charge. The Board also considered the transfer agent and shareholder services that are provided to Fund shareholders by an affiliate of Kayne, noting continuing improvements by management in the scope and quality of services and favorable reports on such service conducted by third parties. INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of the Fund in view of its importance to shareholders. While consideration was given to performance reports and discussions at Board meetings throughout the year, particular attention in assessing such performance was given to a report for the Fund prepared by Lipper Inc. ("Lipper") furnished for the contract renewal process. The Lipper report showed the investment performance of the Fund's Class X shares for the 1, 3, 5 and 10 year and year-to-date periods ended September 30, 2005. The Board reviewed the investment performance of the Fund, along with comparative performance information of a peer group of funds and a relevant market index. The Board noted that the Fund had underperformed its benchmark for the 1, 3 and year-to-date periods and slightly underperformed the benchmark for the 5 and 10 year periods. Management noted that the Fund had adhered to its investment style in managing the Fund. The Board noted that Management had previously informed the Board that Kayne was making adjustments to the Fund's investment strategy in an attempt to improve the Fund's performance relative to its peer group. The Board concluded that it was satisfied with the performance of the Fund given Management's earlier comment and the Fund's investment style. PROFITABILITY. The Board also considered the level of profits realized by Kayne and its affiliates in connection with the operation of the Fund. In this regard, the Board reviewed the Fund profitability analysis that addressed the overall profitability of Kayne for its management of the Phoenix retail fund family, as well as its profits and that of its affiliates, for managing the Fund. Specific attention was given to the methodology followed in allocating costs to the Fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this regard, the Board noted that the allocation appeared reasonable. The Board concluded that the profitability to Kayne was reasonable. MANAGEMENT FEE AND TOTAL EXPENSES. The Board also placed significant emphasis on the review of expenses of the Fund. Consideration was given to a comparative analysis of the management fee and total expense ratio of the Fund compared with those of a group of other funds selected by Lipper as its appropriate Lipper expense group in the Lipper report. The Board noted that the total expenses of the Fund were slightly higher than the average total expenses for comparable funds and the contractual management fee was lower than the median for the peer group. Management noted that the Fund's assets were declining which causes an increase in expenses. The Board was satisfied with the management fee and with management's response regarding expenses and concluded that the Fund's management fee and expenses were reasonable. ECONOMIES OF SCALE. The Board noted that it was likely that Kayne and the Fund would achieve certain economies of scale as the assets grew covering certain fixed costs. The Board concluded that shareholders would have an opportunity to benefit from these economies of scale. 69 BOARD OF TRUSTEES' CONSIDERATION OF INVESTMENT ADVISORY AGREEMENT FOR PHOENIX SMALL-MID CAP FUND (THE "FUND") DECEMBER 31, 2005 (UNAUDITED) The Board of Trustees is responsible for determining whether to approve the Fund's investment advisory agreement. At a meeting held on November 4, 2005, the Board, including a majority of the independent Trustees, approved the investment advisory agreement (the "Advisory Agreement") between Kayne Anderson Rudnick Investment Management, LLC ("Kayne") and the Fund. Pursuant to the Advisory Agreement between Kayne and the Fund, Kayne provides advisory services to the Fund. During the review process, the Board received assistance and advice from, and met separately with, independent legal counsel. In approving the Advisory Agreement, the Board, including a majority of the independent Trustees, determined that the fee structure was fair and reasonable and that approval of the Advisory Agreement was in the best interests of the Fund and its shareholders. While attention was given to all information furnished, the following discusses the primary factors relevant to the Board's decision. ADVISORY AGREEMENT CONSIDERATIONS NATURE, EXTENT AND QUALITY OF SERVICES. The Board concluded that the nature, extent and quality of the overall services provided by Kayne and its affiliates to the Fund and its shareholders was reasonable. The Board's conclusion was based, in part, upon services provided to the Fund such as quarterly reports provided by Kayne comparing the performance of the Fund with a peer group and benchmark, reports provided by Kayne showing that the investment policies and restrictions for the Fund were followed and reports provided by Kayne covering matters such as the compliance of investment personnel and other access persons with Kayne's and the Fund's code of ethics, the adherence to fair value pricing procedures established by the Board, the monitoring of portfolio compliance, information on illiquid securities and derivatives, brokerage commissions and presentations regarding the economic environment and general investment outlook. The Board also considered the experience of Kayne having acted as an investment adviser to mutual funds for over 20 years. The Board also noted the extent of benefits that are provided Fund shareholders from being part of the Phoenix family of funds, including the right to exchange investments between the same class of funds without a sales charge, the ability to reinvest Fund dividends into other funds and the right to combine holdings in other funds to obtain a reduced sales charge. The Board also considered the transfer agent and shareholder services that are provided to Fund shareholders by an affiliate of Kayne, noting continuing improvements by management in the scope and quality of services and favorable reports on such service conducted by third parties. INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment performance of the Fund in view of its importance to shareholders. While consideration was given to performance reports and discussions at Board meetings throughout the year, particular attention in assessing such performance was given to a report for the Fund prepared by Lipper Inc. ("Lipper") furnished for the contract renewal process. The Lipper report showed the investment performance of the Fund's Class X shares for the 1, 3, and 5 year and year-to-date periods ended September 30, 2005. The Board reviewed the investment performance of the Fund, along with comparative performance information of a peer group of funds and a relevant market index. The Board noted that the Fund had lagged its benchmark for the 1, 3, 5 and year-to-date periods. Management noted that the Fund had adhered to its focus on high quality securities in managing the Fund and was in the top 3% of the Lipper universe for the month of October 2005. The Board concluded that it was satisfied with the performance of the Fund. PROFITABILITY. The Board also considered the level of profits realized by Kayne and its affiliates in connection with the operation of the Fund. In this regard, the Board reviewed the Fund profitability analysis that addressed the overall profitability of Kayne for its management of the Phoenix retail fund family, as well as its profits and that of its affiliates, for managing the Fund. Specific attention was given to the methodology followed in allocating costs to the Fund, it being recognized that allocation methodologies are inherently subjective and various allocation methodologies may each be reasonable while producing different results. In this regard, the Board noted that the allocation appeared reasonable. The Board concluded that the profitability to Kayne was reasonable. MANAGEMENT FEE AND TOTAL EXPENSES. The Board also placed significant emphasis on the review of expenses of the Fund. Consideration was given to a comparative analysis of the management fee and total expense ratio of the Fund compared with those of a group of other funds selected by Lipper as its appropriate Lipper expense group in the Lipper report. The Board noted that the total expenses of the Fund were slightly higher than the average total expenses for comparable funds and the contractual management fee was slightly lower than the median for the peer group. Management noted that once the Fund achieved economies of scale, its total expense ratio would decrease. The Board was satisfied with the management fee and with management's response regarding expenses and concluded that the Fund's management fee and expenses were reasonable. ECONOMIES OF SCALE. The Board noted that it was likely that Kayne and the Fund would achieve certain economies of scale as the assets grew covering certain fixed costs. The Board concluded that shareholders would have an opportunity to benefit from these economies of scale. 70 RESULTS OF SHAREHOLDER MEETING FEBRUARY 15, 2005 (UNAUDITED) A Special Meeting of Shareholders of The Phoenix-Kayne Funds was held on February 15, 2005, to approve the following matters: 1. Reconstitute the Board of Trustees and to elect fourteen Trustees to such Board. 2. Ratify selection of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm, as auditors for the fiscal year ending December 31, 2005. NUMBER OF ELIGIBLE UNITS VOTED: 1. Election of Trustees For Withheld ----------- ---------- E. Virgil Conway 385,430,412 52,921,000 Harry Dalzell-Payne 385,430,412 52,921,000 S. Leland Dill 385,430,412 52,921,000 Francis E. Jeffries 385,456,548 52,894,865 Leroy Keith, Jr. 385,430,412 52,921,000 Marilyn E. LaMarche 385,456,548 52,894,865 Philip R. McLoughlin 385,430,412 52,921,000 Geraldine M. McNamara 385,469,906 52,881,506 Everett L. Morris 385,469,906 52,881,506 James M. Oates 385,430,412 52,921,000 Donald B. Romans 385,456,548 52,894,865 Richard E. Segerson 385,456,548 52,894,865 Ferdinand L. J. Verdonck 385,430,412 52,921,000 Lowell P. Weicker, Jr 384,840,119 53,511,294 2. PricewaterhouseCoopers LLP For Against Abstain ----------- ---------- ---------- 385,404,031 10,352,298 42,595,083 71 FUND MANAGEMENT TABLES (UNAUDITED) Information pertaining to the Trustees and officers of the Trust as of December 31, 2005 is set forth below. The statement of additional information (SAI) includes additional information about the Trustees and is available without charge, upon request, by calling (800) 243-4361. The address of each individual, unless otherwise noted, is 56 Prospect Street, Hartford, CT 06115-0480. There is no stated term of office for Trustees of the Trust except for Messrs Dill and Romans who are serving a two year term expiring April 29, 2006.
INDEPENDENT TRUSTEES ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN FUND COMPLEX NAME, ADDRESS AND LENGTH OF OVERSEEN BY PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS AND DATE OF BIRTH TIME SERVED TRUSTEE OTHER DIRECTORSHIPS HELD BY TRUSTEE ----------------------------------------------------------------------------------------------------------------------------------- E. Virgil Conway Served since 53 Chairman, Rittenhouse Advisors, LLC (consulting firm) Rittenhouse Advisors, LLC November (2001-present). Trustee/Director, Phoenix Funds Complex 101 Park Avenue 2002. (1983-present). Trustee/Director, Realty Foundation of New York New York, NY 10178 (1972-present), Josiah Macy, Jr. Foundation (Honorary) DOB: 8/2/29 (2004-present), Pace University (Director/Trustee Emeritus) (2003-present), Greater New York Councils, Boy Scouts of America (1985-present), The Academy of Political Science (Vice Chairman) (1985-present), Urstadt Biddle Property Corp. (1989-present), Colgate University (Trustee Emeritus) (2004-present). Director/Trustee, The Harlem Youth Development Foundation, (Chairman) (1998-2002), Metropolitan Transportation Authority (Chairman) (1992-2001), Trism, Inc. (1994-2001), Consolidated Edison Company of New York, Inc. (1970-2002), Atlantic Mutual Insurance Company (1974-2002), Centennial Insurance Company (1974-2002), Union Pacific Corp. (1978-2002), BlackRock Freddie Mac Mortgage Securities Fund (Advisory Director) (1990-2000), Accuhealth (1994-2002), Pace University (1978-2003), New York Housing Partnership Development Corp. (Chairman) (1981-2003), Josiah Macy, Jr. Foundation (1975-2004). ----------------------------------------------------------------------------------------------------------------------------------- Harry Dalzell-Payne Served since 53 Retired. Trustee/Director, Phoenix Funds Complex (1983-present). The Flat, Elmore Court November Elmore, GL05, GL2 3NT 2002. U.K. DOB: 9/8/29 ---------------------------------------------------------------------------------------------------------------------------------- S. Leland Dill Served since 51 Retired. Trustee, Phoenix Funds Family (1989-present). Trustee, 7721 Blue Heron Way 2005 Scudder Investments (55 portfolios) (1986-present). Director, West Palm Beach, FL 33412 Coutts & Co. Trust Holdings Limited (1991-2000), Coutts & Co. DOB: 3/28/30 Group (1991-2000) and Coutts & Co. International (USA) (private banking) (1991-2000). ---------------------------------------------------------------------------------------------------------------------------------- Francis E. Jeffries Served since 53 Director, The Empire District Electric Company (1984-2004). 8477 Bay Colony Dr. #902 2005 Trustee/Director, Phoenix Funds Complex (1987-present). Naples, FL 34108 DOB: 9/23/30 ----------------------------------------------------------------------------------------------------------------------------------- Leroy Keith, Jr. Served since 51 Partner, Stonington Partners, Inc. (private equity fund) Stonington Partners, Inc. 2005 (2001-present). Director/Trustee, Evergreen Funds (six 736 Market Street, Ste. 1430 portfolios). Trustee, Phoenix Funds Family (1980-present). Chattanooga, TN 37402 Director, Diversapak (2002-present). Obaji Medical Products DOB: 2/14/39 Company (2002-present). Director, Lincoln Educational Services (2002-2004). Chairman, Carson Products Company (cosmetics) (1998 to 2000). -----------------------------------------------------------------------------------------------------------------------------------
72 FUND MANAGEMENT TABLES (UNAUDITED) (CONTINUED)
INDEPENDENT TRUSTEES ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN FUND COMPLEX NAME, ADDRESS AND LENGTH OF OVERSEEN BY PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS AND DATE OF BIRTH TIME SERVED TRUSTEE OTHER DIRECTORSHIPS HELD BY TRUSTEE ----------------------------------------------------------------------------------------------------------------------------------- Geraldine M. McNamara Served since 53 Managing Director, U.S. Trust Company of New York (private bank) U.S. Trust Company of November (1982-present). Trustee/Director, Phoenix Funds Complex New York 2002. (2001-present). 11 West 54th Street New York, NY 10019 DOB: 4/17/51 ----------------------------------------------------------------------------------------------------------------------------------- Everett L. Morris(1) Served since 53 Retired. Trustee/Director, Phoenix Funds Complex (1991-present). 164 Laird Road 1995. Director, W.H. Reaves Utility Income Fund (2004-present). Vice Colts Neck, NJ 07722 President, W.H. Reaves and Company (investment management) DOB: 5/26/28 (1993-2003). ----------------------------------------------------------------------------------------------------------------------------------- James M. Oates(2) Served since 51 Chairman, Hudson Castle Group, Inc. (Formerly IBEX Capital c/o Northeast Partners 2005 Markets, Inc.) (financial services) (1997-present). Trustee/ 150 Federal Street, Director Phoenix Funds Family (1987-present). Managing Director, Suite 1000 Wydown Group (consulting firm) (1994-present). Director, Boston, MA 02110 Investors Financial Service Corporation (1995-present), Investors DOB: 5/31/46 Bank & Trust Corporation (1995-present), Stifel Financial (1996-present), Connecticut River Bancorp (1998-present), Connecticut River Bank (1999-present), Trust Company of New Hampshire (2002-present). Chairman, Emerson Investment Management, Inc. (2000-present). Independent Chairman, John Hancock Trust (since 2005), Trustee, John Hancock Funds II and John Hancock Funds III (since 2005). Trustee, John Hancock Trust (2004-2005). Director/Trustee, AIB Govett Funds (six portfolios) (1991-2000), and Command Systems, Inc. (1998-2000), Phoenix Investment Partners, Ltd. (1995-2001), 1Mind, Inc. (formerly 1Mind.com), (2000-2002), Plymouth Rubber Co. (1995-2003). Director and Treasurer, Endowment for Health, Inc. (2000-2004). ----------------------------------------------------------------------------------------------------------------------------------- Donald B. Romans Served since 51 Retired. President, Romans & Company (private investors and 39 S. Sheridan Road 2005 financial consultants) (1987-2003). Trustee/Director, Phoenix Lake Forest, IL 60045 Funds Family (1985-present). Trustee, Burnham Investors Trust (5 DOB: 4/22/31 portfolios) (1967-2003). ----------------------------------------------------------------------------------------------------------------------------------- Richard E. Segerson Served since 51 Managing Director, Northway Management Company (1998-present). Northway Management 2005 Trustee/Director, Phoenix Funds Family (1983-present). Company 164 Mason Street Greenwich, CT 06830 DOB: 2/16/46 ----------------------------------------------------------------------------------------------------------------------------------- Ferdinand L. J. Verdonck Served since 51 Director, Banco Urquijo (Chairman)(1998-present). Trustee, Phoenix Nederpolder, 7 2005 Funds Family (2002-present). Director EASDAQ (Chairman) B-9000 Gent, Belgium (2001-present), The JP Morgan Fleming Continental European DOB: 7/30/42 Investment Trust (1998-present), Groupe SNEF (1998-present), Degussa Antwerpen N.V.(1998-present), Santens N.V. (1999-present). Managing Director, Almanij N.V. (1992-2003). Director, KBC Bank and Insurance Holding Company (Euronext) (1992-2003), KBC Bank (1992-2003), KBC Insurance (1992-2003), Kredietbank, S.A. Luxembourgeoise (1992-2003), Investco N.V. (1992-2003), Gevaert N.V. (1992-2003), Fidea N.V. (1992-2003), Almafin N.V. (1992-2003), Centea N.V. (1992-2003), Dutch Chamber of Commerce for Belgium and Luxemburg (1995-2001), Phoenix Investment Partners, Ltd. (1995-2001). -----------------------------------------------------------------------------------------------------------------------------------
73 FUND MANAGEMENT TABLES (UNAUDITED) (CONTINUED)
INDEPENDENT TRUSTEES ----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN FUND COMPLEX NAME, ADDRESS AND LENGTH OF OVERSEEN BY PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS AND DATE OF BIRTH TIME SERVED TRUSTEE OTHER DIRECTORSHIPS HELD BY TRUSTEE ----------------------------------------------------------------------------------------------------------------------------------- Lowell P. Weicker, Jr.(1) Served since 51 Director, Medallion Financial New York (2003-present), Compuware 7 Little Point Street 1995. (1996-present), WWE, Inc. (2000-present). President, The Trust Essex, CT 06426 for America's Health (non-profit) (2001-present). DOB: 5/16/31 Trustee/Director, Phoenix Funds Family (1995-present). Director, UST, Inc. (1995-2004), HPSC Inc. (1995-2004). -----------------------------------------------------------------------------------------------------------------------------------
(1) Pursuant to the Trust's retirement policy, Mr. Weicker will retire from the Board of Trustees effective January 1, 2006.Pursuant to the Trust's retirement policy Mr. Morris will retire from the Board immediately following its May 2006 meeting. (2) Mr. Oates is a Director and Chairman of the Board and a shareholder of Hudson Castle Group, Inc. (formerly IBEX Capital Markets, Inc.) ("Hudson"), a privately owned financial services firm. Phoenix Investment Partners, Ltd., an affiliate of the adviser, owns approximately 1% of the common stock of Hudson and Phoenix Life Insurance Company also an affiliate, owns approximately 8% of Hudson's common stock. 74 FUND MANAGEMENT TABLES (UNAUDITED) (CONTINUED) INTERESTED TRUSTEES Each of the individuals listed below is an "interested person" of the Fund, as defined in Section 2(a)(19) of the Investment Company Act of 1940, as amended, and the rules and regulations thereunder.
----------------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN FUND COMPLEX NAME, ADDRESS AND LENGTH OF OVERSEEN BY PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS AND DATE OF BIRTH TIME SERVED TRUSTEE OTHER DIRECTORSHIPS HELD BY TRUSTEE ----------------------------------------------------------------------------------------------------------------------------------- Daniel T. Geraci(3) Director 51 Executive Vice President, Asset Management, The Phoenix Companies, DOB: 6/12/57 since 2005 Inc. (since 2003). President and Chief Executive Officer, Phoenix and Investment Partners, Ltd. (since 2003). President, certain funds President within the Phoenix Fund Complex (2004-present). President and since 2004. Chief Executive Officer of North American investment operations, Pioneer Investment Management USA, Inc. (2001-2003). President of Private Wealth Management Group (2000-2001), and Executive Vice President of Distribution and Marketing for U.S. institutional services business (1998-2000) Fidelity Investments. ----------------------------------------------------------------------------------------------------------------------------------- Marilyn E. LaMarche(4) Served since 51 Limited Managing Director, Lazard Freres & Co. LLC (1997-present). Lazard Freres & Co. LLC 2002. Trustee/Director, Phoenix Funds Family (2002-present). Director, 30 Rockefeller Plaza, The Phoenix Companies, Inc. (2001-2005) and Phoenix Life Insurance 59th Floor Company (1989-2005). New York, NY 10020 DOB: 5/11/34 ----------------------------------------------------------------------------------------------------------------------------------- Philip R. McLoughlin(5) Served since 75 Director, PXRE Corporation (Reinsurance) (1985-present), World 200 Bridge Street 1989. Trust Fund (1991-present). Director/Trustee, Phoenix Funds Complex Chatham, MA 02633 (1989-present). Management Consultant (2002-2004), Chairman DOB: 10/23/46 Chairman (1997-2002), Chief Executive Officer (1995-2002), Director (1995-2002), Phoenix Investment Partners, Ltd., Director and Executive Vice President, The Phoenix Companies, Inc. (2000- 2002). Director (1994-2002) and Executive Vice President, Investments (1987-2002), Phoenix Life Insurance Company. Director (1983-2002) and Chairman (1995-2002), Phoenix Investment Counsel, Inc. Director (1982-2002), Chairman (2000-2002) and President (1990-2000), Phoenix Equity Planning Corporation. Chairman and President, Phoenix/Zweig Advisers LLC (2001-2002). Director (2001-2002) and President (April 2002-September 2002), Phoenix Investment Management Company. Director and Executive Vice President, Phoenix Life and Annuity Company (1996-2002). Director (1995-2000) and Executive Vice President (1994-2002) and Chief Investment Counsel (1994-2002), PHL Variable Insurance Company. Director, Phoenix National Trust Holding Company (2001-2002). Director (1985-2002) and Vice President (1986-2002) and Executive Vice President (April 2002-September 2002), PM Holdings, Inc. Director, WS Griffith Associates, Inc. (1995-2002). Director, WS Griffith Securities, Inc. (1992-2002). -----------------------------------------------------------------------------------------------------------------------------------
(3) Mr. Geraci is an "interested person" as defined in the Investment Company Act of 1940, by reason of his position as Executive Vice President, Asset Management, The Phoenix Companies Inc. and his position as President and Chief Executive Officer, Phoenix Investment Partners, Ltd. (4) Ms. LaMarche is an "interested person," as defined in the Investment Company Act of 1940, by reason of her former position as Director of The Phoenix Companies, Inc. and Phoenix Life Insurance Company. (5) Mr. McLoughlin is an "interested person," as defined in the Investment Company Act of 1940, by reason of his former relationship with Phoenix Investment Partners, Ltd. and its affiliates. 75 FUND MANAGEMENT TABLES (UNAUDITED) (CONTINUED)
OFFICERS OF THE TRUST WHO ARE NOT TRUSTEES ----------------------------------------------------------------------------------------------------------------------------------- POSITION(S) HELD WITH NAME, ADDRESS AND TRUST AND LENGTH OF PRINCIPAL OCCUPATION(S) DATE OF BIRTH TIME SERVED DURING PAST 5 YEARS ----------------------------------------------------------------------------------------------------------------------------------- George R. Aylward Executive Vice President Senior Vice President and Chief Operating Officer, Asset DOB: 8/17/64 since 2004. Management, The Phoenix Companies, Inc. (2004-present). Executive Vice President and Chief Operating Officer, Phoenix Investment Partners, Ltd. (2004-present). Vice President, Phoenix Life Insurance Company (2002-2004). Vice President, The Phoenix Companies, Inc. (2001-2004). Vice President, Finance, Phoenix Investment Partners, Ltd. (2001-2002). Assistant Controller, Phoenix Investment Partners, Ltd. (1996-2001). Executive Vice President, certain funds within the Phoenix Funds Family (2004-present). ----------------------------------------------------------------------------------------------------------------------------------- Francis G. Waltman Senior Vice President Senior Vice President, Product Development and Management, Phoenix DOB: 7/27/62 since 2004. Investment Partners, Ltd. (2005-present), Senior Vice President and Chief Administrative Officer, Phoenix Investment Partners, Ltd., (2003-2004). Senior Vice President and Chief Administrative Officer, Phoenix Equity Planning Corporation (1999-2003), Senior Vice President, certain funds within the Phoenix Fund Family (2004-present). ----------------------------------------------------------------------------------------------------------------------------------- Marc Baltuch Vice President and Chief Compliance Officer, Zweig-DiMenna Associates LLC 900 Third Avenue Chief Compliance Officer (1989-present); Vice President and Chief Compliance Officer, New York, NY 10022 since 2004. certain Funds within the Phoenix Fund Complex (2004-present); Vice DOB: 9/23/45 President, The Zweig Total Return Fund, Inc. (2004-present); Vice President, The Zweig Fund, Inc. (2004-present); President and Director of Watermark Securities, Inc. (1991-present); Assistant Secretary of Gotham Advisors Inc. (1990-present); Secretary, Phoenix-Zweig Trust (1989-2003); Secretary, Phoenix-Euclid Market Neutral Fund (1999-2002). ----------------------------------------------------------------------------------------------------------------------------------- W. Patrick Bradley Chief Financial Officer and Second Vice President, Fund Control and Tax, Phoenix Equity DOB: 3/2/72 Treasurer since 2005. Planning Corporation (2004-present). Chief Financial Officer and Treasurer (2005-present) or Assistant Treasurer (2004-present) of certain funds within the Phoenix Fund Family. Senior Manager (2002-2004), Manager (2000-2002), Audit, Deloitte & Touche, LLP. ----------------------------------------------------------------------------------------------------------------------------------- Kevin J. Carr Vice President, Counsel, Vice President and Counsel, Phoenix Life Insurance Company (May One American Row Secretary and 2005-present). Vice President, Counsel, Chief Legal Officer and Hartford, CT 06102 Chief Legal Officer Secretary of certain funds within the Phoenix Fund Complex (May DOB: 8/3/54 since 2005. 2005-present). Compliance Officer of Investments and Counsel, Travelers Life & Annuity Company (January 2005-May 2005). Assistant General Counsel, The Hartford Financial Services Group (1999-2005). -----------------------------------------------------------------------------------------------------------------------------------
76 PHOENIX-KAYNE FUNDS INVESTMENT ADVISER 1800 Avenue of the Stars, 2nd Floor Kayne Anderson Rudnick Investment Los Angeles, CA 90067 Management, LLC 1800 Avenue of the Stars, 2nd Floor Los Angeles, CA 90067 TRUSTEES PRINCIPAL UNDERWRITER E. Virgil Conway Harry Dalzell-Payne Phoenix Equity Planning Corporation S. Leland Dill One American Row Daniel T. Geraci Hartford, CT 06102 Francis E. Jeffries Leroy Keith, Jr. TRANSFER AGENT Marilyn E. LaMarche Philip R. McLoughlin, Chairman Phoenix Equity Planning Corporation Geraldine M. McNamara One American Row Everett L. Morris Hartford, CT 06102 James M. Oates Donald B. Romans CUSTODIAN Richard E. Segerson Ferdinand L. J. Verdonck State Street Bank and Trust Company Lowell P. Weicker, Jr. P.O. Box 5501 Boston, MA 02206-5501 OFFICERS INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Daniel T. Geraci, President PricewaterhouseCoopers LLP George R. Aylward, Executive Vice President 125 High Street Francis G. Waltman, Senior Vice President Boston, MA 02110 Marc Baltuch, Vice President and Chief Compliance Officer HOW TO CONTACT US W. Patrick Bradley, Chief Financial Officer and Treasurer Mutual Fund Services 1-800-243-1574 Kevin J. Carr, Vice President, Counsel, Secretary and Advisor Consulting Group 1-800-243-4361 Chief Legal Officer Telephone Orders 1-800-367-5877 Text Telephone 1-800-243-1926 Web site PHOENIXFUNDS.COM
-------------------------------------------------------------------------------- IMPORTANT NOTICE TO SHAREHOLDERS The Securities and Exchange Commission has modified mailing regulations for semiannual and annual shareholder fund reports to allow mutual fund companies to send a single copy of these reports to shareholders who share the same mailing address. If you would like additional copies, please call Mutual Fund Services at 1-800-243-1574. -------------------------------------------------------------------------------- (This page has been left blank intentionally.) (This page has been left blank intentionally.) (This page has been left blank intentionally.) (This page has been left blank intentionally.) (This page has been left blank intentionally.) (This page has been left blank intentionally.) (This page has been left blank intentionally.) --------------- PRESORTED STANDARD U.S. POSTAGE PAID Louisville, KY [LOGO] PHOENIXFUNDS(SM) Permit No. 1051 --------------- PHOENIX EQUITY PLANNING CORPORATION P.O. Box 150480 Hartford, CT 06115-0480 For more information about Phoenix mutual funds, please call your financial representative, contact us at 1-800-243-1574 or visit PHOENIXFUNDS.COM. NOT INSURED BY FDIC/NCUSIF OR ANY FEDERAL GOVERNMENT AGENCY. NO BANK GUARANTEE. NOT A DEPOSIT. MAY LOSE VALUE. PXP1813 2-06 BPD19589 ITEM 2. CODE OF ETHICS. (a) The registrant, as of the end of the period covered by this report, has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party. (c) There have been no amendments, during the period covered by this report, to a provision of the code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, and that relates to any element of the code of ethics described in Item 2(b) of the instructions for completion of Form N-CSR. (d) The registrant has not granted any waivers, during the period covered by this report, including an implicit waiver, from a provision of the code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party, that relates to one or more of the items set forth in paragraph (b) of the instructions for completion of this Item. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The Registrant's Board of Trustees has determined that the Registrant has two "audit committee financial experts" serving on its Audit Committee. (a)(2) E. Virgil Conway and Everett L. Morris have been determined by the Registrant to possess the technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to qualify as an "audit committee financial expert." Mr. Conway and Mr. Morris are "independent" trustees pursuant to paragraph (a)(2) of Item 3 to Form N-CSR. (a)(3) Not applicable. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Audit Fees ---------- (a) The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years are $95,000 for 2005 and $98,000 for 2004. Audit-Related Fees ------------------ (b) The aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of this Item are $5,000 for 2005 and $5,000 for 2004. This represents the review of the semi-annual financial statements. Tax Fees -------- (c) The aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning are $20,000 for 2005 and $20,000 for 2004. "Tax Fees" are those primarily associated with review of the Trust's tax provision and qualification as a regulated investment company (RIC) in connection with audits of the Trust's financial statement, review of year-end distributions by the Fund to avoid excise tax for the Trust, periodic discussion with management on tax issues affecting the Trust, and reviewing and signing the Fund's federal income and excise tax returns. All Other Fees -------------- (d) The aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in paragraphs (a) through (c) of this Item are $0 for 2005 and $0 for 2004. (e)(1) Disclose the audit committee's pre-approval policies and procedures described in paragraph (c)(7) of Rule 2-01 of Regulation S-X. The Phoenix-Kayne Funds (the "Fund") Board has adopted policies and procedures with regard to the pre-approval of services provided by PwC. Audit, audit-related and tax compliance services provided to the Fund on an annual basis require specific pre-approval by the Board. As noted above, the Board must also approve other non-audit services provided to the Fund and those non-audit services provided to the Fund's Affiliated Service Providers that relate directly to the operations and financial reporting of the Fund. Certain of these non-audit services that the Board believes are a) consistent with the SEC's auditor independence rules and b) routine and recurring services that will not impair the independence of the independent auditors may be approved by the Board without consideration on a specific case-by-case basis ("general pre-approval"). The Audit Committee has determined that Mr. E. Virgil Conway, Chair of the Audit Committee, may provide pre-approval for such services that meet the above requirements in the event such approval is sought between regularly scheduled meetings. In the event that Mr. Conway determines that the full board should review the request, he has the opportunity to convene a meeting of the Fund's Board. In any event, the Board is informed of each service approved subject to general pre-approval at the next regularly scheduled in-person board meeting. (e)(2) The percentage of services described in each of paragraphs (b) through (d) of this Item that were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X are as follows: (b) 100% for 2005; not applicable for 2004 (c) 100% for 2005; 100% for 2004 (d) Not applicable for 2005; not applicable for 2004 (f) The percentage of hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant's full-time, permanent employees was less than fifty percent. (g) The aggregate non-audit fees billed by the registrant's accountant for services rendered to the registrant, and rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant for each of the last two fiscal years of the registrant was $892,561 for 2005 and $1,876,791 for 2004. (h) The registrant's audit committee of the board of directors has considered whether the provision of non-audit services that were rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable. ITEM 6. SCHEDULE OF INVESTMENTS. Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this form. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. Not applicable. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There have been no material changes to the procedures by which the shareholders may recommend nominees to the registrant's board of trustees, where those changes were implemented after the registrant last provided disclosure in response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A (17 CFR 240.14a-101), or this Item. ITEM 11. CONTROLS AND PROCEDURES. (a) The registrant's principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on the evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). (b) There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant's second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a)(1) Code of ethics, or any amendment thereto, that is the subject of disclosure required by Item 2 is attached hereto. (a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. (a)(3) Not applicable. (b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (registrant) Phoenix-Kayne Funds ------------------------------------------------------------------- By (Signature and Title)* /s/ George R. Aylward ------------------------------------------------------- George R. Aylward, Executive Vice President (principal executive officer) Date March 9, 2006 ---------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title)* /s/ George R. Aylward ------------------------------------------------------- George R. Aylward, Executive Vice President (principal executive officer) Date March 9, 2006 ---------------------------------------------------------------------------- By (Signature and Title)* /s/ W. Patrick Bradley ------------------------------------------------------- W. Patrick Bradley, Chief Financial Officer and Treasurer (principal financial officer) Date March 9, 2006 ---------------------------------------------------------------------------- * Print the name and title of each signing officer under his or her signature.