-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Abpw6QfnmTE6jPPeciI9CyIqDyhDsfnWB01NtvJlx8hZmMCg7jW/UA1G6O6gX5Xr FJr3+P63SbEcgDnRC0TNJw== 0001047469-04-006899.txt : 20040308 0001047469-04-006899.hdr.sgml : 20040308 20040308130021 ACCESSION NUMBER: 0001047469-04-006899 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20031231 FILED AS OF DATE: 20040308 EFFECTIVENESS DATE: 20040308 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PHOENIX-KAYNE FUNDS CENTRAL INDEX KEY: 0001018593 IRS NUMBER: 956981193 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-07705 FILM NUMBER: 04654171 BUSINESS ADDRESS: STREET 1: 1800 AVENUE OF THE STARS, 2ND FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90067 BUSINESS PHONE: (310) 556-2721 MAIL ADDRESS: STREET 1: 56 PROSPECT ST. STREET 2: P.O. BOX 150480 CITY: HARTFORD STATE: CT ZIP: 06115-0480 FORMER COMPANY: FORMER CONFORMED NAME: KAYNE ANDERSON RUDNICK MUTUAL FUNDS DATE OF NAME CHANGE: 20010226 FORMER COMPANY: FORMER CONFORMED NAME: KAYNE ANDERSON MUTUAL FUNDS DATE OF NAME CHANGE: 19960711 N-CSR 1 a2129569zn-csr.txt N-CSR As filed with the Securities and Exchange Commission on [date] 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) US Bancorp Fund Services, LLC 2020 East Financial Way, Suite 200 Glendora, California 91741 (Name and address of agent for service) 1-800-243-4361 Registrant's telephone number, including area code Date of fiscal year end: December 31, 2003 ----------------- Date of reporting period: DECEMBER 31, 2003 ----------------- ITEM 1. REPORT TO STOCKHOLDERS. Annual Report December 31, 2003 ANNUAL REPORT - - DECEMBER 31, 2003 KAYNE ANDERSON RUDNICK PHOENIX-KAYNE CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND PHOENIX-KAYNE INTERMEDIATE TOTAL RETURN BOND FUND PHOENIX-KAYNE INTERNATIONAL FUND PHOENIX-KAYNE RISING DIVIDENDS FUND PHOENIX-KAYNE SMALL-MID CAP FUND DO YOU WANT TO STOP RECEIVING FUND DOCUMENTS BY MAIL? GO TO PHOENIXINVESTMENTS.COM, LOG IN AND SIGN UP FOR E-DELIVERY [PHOENIX INVESTMENT PARTNERS, LTD. LOGO] CHIEF INVESTMENT OFFICER 2003 REVIEW The year 2004 begins with the economy in the best shape it has been since the recent recession that began in 2001. Business expansion, which floundered from mid-2001 to mid-2003, took off during the second half of last year, bolstered by the cumulative effect of multiple interest-rate cuts, the stimulus generated by the rise in government spending and the decline in tax rates. The employment outlook also brightened after months of negative reports. Encouragingly, the strengthening in business activity was broad-based, with the consumer and industrial sectors participating in tandem for the first time since 1998. The Gross Domestic Product ("GDP") growth rate is expected to hold around 4% in 2004, with the strength spread across most of the consumer and industrial markets. Corporate earnings, which rose strongly in 2003, are projected to increase 10 to 15% in 2004, helped by improving demand and further cost cutting. In addition, foreign demand for U.S. exports, mainly from Western Europe and Asia, will provide further stimulus. However, this economic expansion is by no means a risk-free environment. The government's fiscal stimulus programs, including the tax cuts, have contributed to a substantial and rising U.S. budget deficit. Federal government spending, as a share of GDP, has grown from 18.4% to 20% in the past two years, including expenditures for the war in Iraq and the war on terrorism. At the same time, accommodative monetary policy threatens to increase inflation. The Federal Reserve has held the real federal funds rate below zero for the past 15 months, the longest stretch of negative real rates since 1975-1976. Commodity prices are up 30% across the board, gold has risen above $400 an ounce, and the U.S. dollar is weak compared to all major currencies. However, many expect the Federal Reserve will raise interest rates to reflect the improved economic activity and that the administration will institute policies to reduce the deficit. Otherwise, it is likely that we will see further declines in the U.S. dollar and more intense inflationary pressures. Reflecting the very good economic news, the stock market showed excellent gains. Stocks did well across the board. However, as Floyd Norris, chief financial correspondent of THE NEW YORK TIMES pointed out in a recent (January 2, 2004) column: "If it was a great year for most stocks, it is also true that high quality was not rewarded as well as lower quality." In the S&P 500 Index, stocks that pay dividends rose, on average, about half as much as non-dividend-paying stocks. S&P quality rankings show that A-ranked companies were up about half as much as B-ranked companies, which were up about half as much as C-ranked companies. In 2004, we expect investors will begin to favor high-quality, dividend-paying stocks with strong earnings growth and low debt--such as the companies in our portfolios--and that these companies will outperform lower quality, non-dividend paying companies. DIVERSIFICATION WITHIN HIGH-QUALITY We have consistently recommended diversification between high-quality stocks and bonds, with the stock portion diversified among large-cap, small to mid cap, and international strategies. The importance of diversification cannot be overemphasized. A diversified portfolio enables the investor to participate across various asset classes and reduces the risk of making investment decisions based on emotional reactions to short-term price movements. With this perspective in mind, we encourage you to review your asset allocation with your personal financial adviser. 1 MUTUAL-FUND PRACTICES With all of the media attention on the scandals in the mutual-fund industry, we have been asked: "What is your firm doing to prevent such abuse?" "Have you had some of the same problems as others in the industry?" Kayne Anderson Rudnick Investment Management, LLC and Phoenix Investment Partners, Ltd., follow trading policies and practices that are consistent with industry practices of the highest integrity. Our strict procedures are designed to help ensure that our shareholders' interests come first. Please visit our Web site for more information on Phoenix's trading policies and mutual-fund industry investigations. We thank you for your continued trust and confidence in us, and we invite any questions or comments. /s/ Allan M. Rudnick Allan M. Rudnick Chief Investment Officer JANUARY 16, 2004 2 TABLE OF CONTENTS Phoenix-Kayne California Intermediate Tax-Free Bond Fund 4 Phoenix-Kayne Intermediate Total Return Bond Fund 14 Phoenix-Kayne International Fund 24 Phoenix-Kayne Rising Dividends Fund 34 Phoenix-Kayne Small-Mid Cap Fund 43 Notes to Financial Statements 54
3 PHOENIX-KAYNE CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND COMMENTARY INVESTMENT OBJECTIVES Phoenix-Kayne California Intermediate Tax-Free Bond Fund has an investment objective to seek income exempt from Federal and California state personal income taxes. There is no guarantee that the Fund will achieve its objective. MARKET OVERVIEW The year 2003 proved volatile for the fixed-income markets. In May, the volatility became dramatic as bonds rallied on comments from the Federal Reserve governors concerning the use of "unconventional" measures--purchases of long-term government securities--to bring rates down on the long-end of the yield curve. Bonds then rapidly switched course and sold off in mid-July when Federal Reserve Chairman Alan Greenspan stated that he thought that the economy would pick up without the central bank resorting to such alternative measures. Investors switched from bonds to stocks to take advantage of the perceived accelerating economy and bond prices dropped. Positive economic news also brought on fears of inflation, which would trigger higher interest rates and cause a further drop in bond prices. Along with the about-face on the use of unconventional purchases of longer-dated securities, Alan Greenspan in his testimony to Congress down-played deflation and provided a more upbeat assessment of the economy than investors had expected. Such a reverse viewpoint from the Chairman's analysis the month before whipsawed the bond markets. In July, the 30-year Treasury experienced its worst month in history, down over 11%, and the 10-year Treasury note lost more than 7%, its worst month in over 20 years. The sell-off in the fixed-income markets was exacerbated when mortgage investors, a significant portion of the fixed-income market, adjusted their portfolios' exposure to rising interest rates. Such reactions to sharp moves in interest rates added energy to the overall volatility in the bond market. During September, prices rose again in the bond market and rates dropped as the economy seemed to be moving more sluggishly than first thought, dampening fears of a rate hike. However, by early November, prices fell and the yields rose back up with stronger-than-expected manufacturing reports and positive labor-market news. By the middle of November, bond investors covered their short positions, moving prices up, which fell again later in the month as the buoyant economic data continued to defy expectations. Although the bond market has already priced in a rate increase for mid 2004, the Federal Reserve has committed itself to low rates unless inflation begins to escalate. We believe that fears of high inflation may be overblown (See Chart, "Consumer Price Index, Year over Year, January 1993--December 2003") and certain compelling economic factors indicate that inflation may remain tame for some time. Domestic labor markets remain sluggish because of excess capacity in manufacturing, global competition, and gains in productivity. These factors limit pricing power and wage gains. Despite the apparent economic expansion, we believe sufficient slack exists in the economy to keep inflation relatively low and, therefore, not put pressure on the bond market. 4 [CHART] CONSUMER PRICE INDEX, YEAR OVER YEAR JANUARY 1, 1993-DECEMBER 31, 2003 1/31/93 3.5 2/28/93 3.6 3/31/93 3.4 4/30/93 3.5 5/31/93 3.4 6/30/93 3.3 7/31/93 3.2 8/31/93 3.3 9/30/93 3.2 10/31/93 3.0 11/30/93 3.1 12/31/93 3.2 1/31/94 2.9 2/28/94 2.8 3/31/94 2.9 4/30/94 2.8 5/31/94 2.8 6/30/94 2.9 7/31/94 2.9 8/31/94 2.9 9/30/94 3.0 10/31/94 2.9 11/30/94 2.8 12/31/94 2.6 1/31/95 2.9 2/28/95 3.0 3/31/95 3.0 4/30/95 3.1 5/31/95 3.1 6/30/95 3.0 7/31/95 3.0 8/31/95 2.9 9/30/95 2.9 10/31/95 3.0 11/30/95 3.0 12/31/95 3.0 1/31/96 3.0 2/29/96 2.9 3/31/96 2.8 4/30/96 2.7 5/31/96 2.7 6/30/96 2.7 7/31/96 2.7 8/31/96 2.6 9/30/96 2.7 10/31/96 2.6 11/30/96 2.6 12/31/96 2.6 1/31/97 2.5 2/28/97 2.5 3/31/97 2.5 4/30/97 2.7 5/31/97 2.5 6/30/97 2.4 7/31/97 2.4 8/31/97 2.3 9/30/97 2.2 10/31/97 2.3 11/30/97 2.2 12/31/97 2.2 1/31/98 2.2 2/28/98 2.3 3/31/98 2.1 4/30/98 2.1 5/31/98 2.2 6/30/98 2.2 7/31/98 2.2 8/31/98 2.5 9/30/98 2.5 10/31/98 2.3 11/30/98 2.3 12/31/98 2.4 1/31/99 2.4 2/28/99 2.1 3/31/99 2.1 4/30/99 2.2 5/31/99 2.0 6/30/99 2.1 7/31/99 2.1 8/31/99 1.9 9/30/99 2.0 10/31/99 2.1 11/30/99 2.1 12/31/99 1.9 1/31/2000 2.0 2/29/2000 2.2 3/31/2000 2.4 4/30/2000 2.3 5/31/2000 2.4 6/30/2000 2.5 7/31/2000 2.5 8/31/2000 2.6 9/30/2000 2.6 10/31/2000 2.5 11/30/2000 2.6 12/31/2000 2.6 1/31/2001 2.6 2/28/2001 2.7 3/31/2001 2.7 4/30/2001 2.6 5/31/2001 2.5 6/30/2001 2.7 7/31/2001 2.7 8/31/2001 2.7 9/30/2001 2.6 10/31/2001 2.6 11/30/2001 2.8 12/31/2001 2.7 1/31/2002 2.6 2/28/2002 2.6 3/31/2002 2.4 4/30/2002 2.5 5/31/2002 2.5 6/30/2002 2.3 7/31/2002 2.2 8/31/2002 2.4 9/30/2002 2.2 10/31/2002 2.2 11/30/2002 2.0 12/31/2002 1.9 1/31/2003 1.9 2/28/2003 1.7 3/31/2003 1.7 4/30/2003 1.5 5/31/2003 1.6 6/30/2003 1.5 7/31/2003 1.5 8/31/2003 1.3 9/30/2003 1.2 10/31/2003 1.3 11/30/2003 1.1 12/31/2003 1.1
SOURCE: BLOOMBERG California municipal-bond prices dropped slightly and yields rose after Standard & Poor's cut the credit rating of California General Obligation bonds, or "GOs", from single-A to triple-B-rating, based on the state's budgetary problems. Meanwhile, local municipalities issued record amounts of new bonds to restructure their debt at lower interest rates. FUND PERFORMANCE For the year, Phoenix-Kayne California Intermediate Tax-Free Bond Fund slightly underperformed its benchmark, the S&P California Municipal Index(1). The Fund returned 4.25% while index returned 5.13%, but the Fund took on significantly less duration risk. The Fund was among the top-five performing California intermediate-term bond funds for 2003 (THE WALL STREET JOURNAL ONLINE, January 2, 2004). All performance figures assume reinvestment of distributions and exclude the effect of sales charges. Past performance is not indicative of future results and current performance may be higher or lower than the performance shown. The Fund profited by having a lower allocation than the index to the state GOs, and by focusing on local issues, critical infrastructure, and essential services. The Fund also benefited by having a higher allocation than the index to higher coupon, callable issues, which provide a high level of cash flow and help to lower the Fund's overall duration risk. SUMMARY With rates likely to remain at historically low levels, we believe that the Phoenix-Kayne California Intermediate Tax Free Bond Fund offers steady tax-free income with total returns that have exceeded taxable bonds on a tax-adjusted basis. We believe our concentration in high-quality intermediate-term municipal bonds with a focus on local issues and essential services, is the best strategy to maintain the Fund's value while generating significant tax-adjusted income. (1) THE S&P CALIFORNIA MUNICIPAL BOND INDEX IS AN UNMANAGED INDEX COMPRISED OF ALL CALIFORNIA MUNICIPAL BONDS IN THE STANDARD & POOR'S INVESTOR TOOLS MUNICIPAL BOND UNIVERSE. THE INDEXES ARE UNMANAGED AND ARE NOT AVAILABLE FOR DIRECT INVESTMENT. 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. 5 PHOENIX-KAYNE CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND AVERAGE ANNUAL TOTAL RETURNS(1) PERIOD ENDING 12/31/03
INCEPTION INCEPTION 1 YEAR 5 YEAR TO 12/31/03 DATE ------ ------ ----------- --------- Class X Shares at NAV(2) 4.25% 4.91% 4.62% 10/28/96 S&P California Municipal Bond Index(4) 5.13 5.53 5.72 10/31/96 Lehman Brothers Aggregate Bond Index(5) 4.10 6.62 7.40 10/28/96
(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) This chart illustrates NAV returns on Class X shares since inception. (4) The S&P California Municipal Bond Index is an unmanaged index comprised of all California bonds in the S&P/Investortools Municipal Bond Index universe. This Index has replaced the Lehman Brothers 5-Year Municipal Bond Index as it more specifically reflects the performance of the market sector in which the fund invests. Prior to January 1, 1999, the S&P California Municipal Bond Index is linked to the Lehman Brothers 5-Year Municipal Bond Index. (5) The Lehman Brothers Aggregate Bond Index is an unmanaged, commonly used measure of broad bond market total return performance. The index's performance does not reflect sales charges. All returns represent past performance which may not be indicative of future performance. 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. Because the fund holds a limited number of securities, it will be impacted by each security's performance more than a fund with a large number of holdings. Some interest generated by bonds in the fund may be subject to the federal alternative minimum tax. GROWTH OF $10,000 PERIODS ENDING 12/31/03 [CHART]
PHOENIX-KAYNE CALIFORNIA INTERMEDIATE S&P CALIFORNIA MUNICIPAL LEHMAN BROTHERS AGGREGATE TAX-FREE BOND FUND CLASS X(3) BOND INDEX(4) BOND INDEX(5) 10/28/96 $ 10,000 $ 10,000 $ 10,000 12/31/96 $ 10,002 $ 10,111 $ 10,162 12/31/97 $ 10,428 $ 10,756 $ 11,143 12/31/98 $ 10,883 $ 11,384 $ 12,111 12/31/99 $ 10,833 $ 11,049 $ 12,011 12/29/2000 $ 11,936 $ 12,476 $ 13,408 12/31/2001 $ 12,445 $ 13,062 $ 14,540 12/31/2002 $ 13,266 $ 14,170 $ 16,032 12/31/2003 $ 13,830 $ 14,897 $ 16,690
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 do not include the effect of any sales charge. Performance assumes dividends and capital gains are reinvested. SECTOR WEIGHTINGS 12/31/03 As a percentage of bond holdings [CHART] Water and Sewer Revenue 18.7% General Obligation 18.3% Transportation Revenue 17.1% General Revenue 14.8% Municipal Utility District Revenue 10.8% Single Family Housing Revenue 8.2% Veteran Revenue 4.9% Other 7.2%
See Notes to Financial Statements 6 TEN LARGEST HOLDINGS AT DECEMBER 31, 2003 (AS A PERCENTAGE OF TOTAL NET ASSETS) 1. Oakland, California Port Authority, 5.60%, 11/1/19 (MBIA Insured) 2.8% TRANSPORTATION MUNICIPAL SECURITY 2. Mountain View, California Shoreline Regional Park, 5.50%, 8/1/21(MBIA Insured) 2.8% WATER AND SEWER MUNICIPAL SECURITY 3. Oakland, California Series B, 5.875%, 6/15/19 (FSA Insured) 2.8% GENERAL OBLIGATION MUNICIPAL SECURITY 4. San Jose-Santa Clara, California Water Financing Authority, 5.375%, 11/15/15 (FGIC Insured) 2.7% WATER AND SEWER MUNICIPAL SECURITY 5. San Francisco, California City & County Airport, 5.375%, 5/1/17 (MBIA Insured) 2.7% TRANSPORTATION MUNICIPAL SECURITY 6. Northern California Public Power Agency, 5.00%, 7/1/15 (MBIA Insured) 2.7% MUNICIPAL UTILITY DISTRICT MUNICIPAL REVENUE 7. Redlands California Financing Authority Wastewater Revenue Refunding Ser A, 5.00%, 9/1/17 (FSA Insured) 2.7% WATER AND SEWER MUNICIPAL REVENUE 8. San Diego County California Certificates of Participation, 5.25%, 11/1/15 2.7% GENERAL OBLIGATION MUNICIPAL SECURITY 9. San Francisco, California Port Authority, 5.90%, 7/1/09 2.6% TRANSPORTATION MUNICIPAL SECURITY 10. California State for previous AMT-Veterans, 5.375%, 12/1/16 (MBIA Insured) 2.6% VETERAN MUNICIPAL SECURITY
INVESTMENTS AT DECEMBER 31, 2003
STANDARD & POOR'S PAR RATING VALUE (UNAUDITED) (000) VALUE ----------- -------- ------------ MUNICIPAL TAX-EXEMPT BONDS--99.9% EDUCATION REVENUE--2.1% California Educational Facilities Authority, 5.375%, 10/1/16 (CONNIE LEE Insured) AAA $ 250 $ 273,275 University California Revenues, 5.00%, 5/15/10 (AMBAC Insured) AAA 500 565,825 ------------ 839,100 ------------ GENERAL OBLIGATION--18.3% Brea Olinda California Unified School District, 6.00%, 8/1/15 (FGIC Insured) AAA 150 182,385 Brentwood Union School District, 7.30%, 8/1/07 (FGIC Insured) AAA 155 182,985 California State, 5.375%, 3/1/06, Prerefunded BBB 100 102,661 California State, 5.375%, 3/1/06, Prerefunded BBB 5 5,133 California State, 5.375%, 3/1/06, Unrefunded BBB $ 45 $ 46,126 California State, 5.25%, 11/1/09 BBB 200 220,376 California State, 5.25%, 6/1/16 BBB 250 260,407 California State, 5.50%, 4/1/10 (MBIA Insured) AAA 200 229,092 California State, 6.25%, 4/1/08 BBB 825 927,374 Fremont California Unified School District, 5.25%, 9/1/15 AA 200 220,104 Long Beach Unified School District, 5.375%, 8/1/16 (MBIA Insured) Aaa(c) 300 332,472 Los Angeles California Unified School District, 5.00%, 7/1/14 (FSA Insured) AAA 500 555,830
See Notes to Financial Statements 7
STANDARD & POOR'S PAR RATING VALUE (UNAUDITED) (000) VALUE ----------- -------- ------------ GENERAL OBLIGATION--CONTINUED Oakland, California Series B, 5.875%, 6/15/19 (FSA Insured) AAA $ 1,000 $ 1,086,880 Oakland Unified School District, 5.00%, 8/1/16 (FSA Insured) AAA 400 428,712 Oakland Unified School District Alameda County, 5.00%, 8/1/15 (FSA Insured) AAA 765 824,823 Petaluma California School, 0.00%, 8/1/20 (FGIC Insured) AAA 1,000 381,380 San Diego County California Ctfs Partner, 5.25%, 11/1/15 (AMBAC Insured) AAA 960 1,064,304 Torrance California Certificates of Participation, 5.50%, 4/1/12 (AMBAC Insured) AAA 125 134,150 ------------ 7,185,194 ------------ GENERAL REVENUE--14.8% ABAG Financing Authority for Nonprofit Corporations, 4.7%, 10/1/14 A3(c) 475 498,565 California State Public Works Board Lease, 5.25%, 12/1/04 (MBIA Insured) AAA 300 306,870 California State Public Works Board Lease Revenue Refunding for the Franchise Tax Board, 5.50%, 9/1/09 BBB- 510 564,356 California State Public Works Board Lease Revenue Refunding for the California Community Colleges Ser. A, 5.25%, 12/1/13 BBB- 290 306,776 California State Public Works Board Lease Revenue, 5.50%, 6/1/15 (MBIA-IBC Insured) AAA 300 345,624 California State Public Works Board Lease Revenue Refunding for the California Highway Patrol, 5.25%, 11/1/20 BBB 500 509,265 Contra Costa County California Home, 7.50%, 5/1/14 (GNMA COLL Insured)(b) AAA 500 675,050 Los Angeles California State Building Authority, 5.375%, 5/1/06 BBB- 200 214,088 Los Angeles Convention & Exhibit Center, 9.00%, 12/1/20 AAA $ 150 $ 171,297 Los Angeles County California Public Works Financing Authority, 5.50%, 10/1/18 (FSA Insured) AAA 450 522,391 Ontario California Redevelopment Fianncing Authority, 6.9%, 8/1/10 (MBIA Insured) AAA 70 85,885 Pleasanton Joint Powers Financing, 6.15%, 9/2/12 Baa1(c) 500 513,965 Riverside County California Redevelopment Agency Tax Allocation, 5.25%, 10/1/17 (AMBAC Insured) AAA 250 274,497 San Jose, California Financing Authority, 5.00%, 9/1/16 (MBIA Insured) AAA 350 376,684 Santa Barbara, California Redevelopment Agency, 4.60%, 3/1/14 (FSA Insured) AAA 250 266,608 Stockton California, 5.60%, 3/20/28 (GNMA COLL Insured) AAA 200 203,566 ------------ 5,835,487 ------------ MEDICAL REVENUE--4.3% California Health Facilities Financing Authority, 6.25%, 10/1/13 (MBIA Insured) AAA 1,000 1,005,250 California Statewide Communities Development Authority Certf. Partn., 1.14%, 8/15/27 (AMBAC Insured)(e) AAA 700 700,000 ------------ 1,705,250 ------------ MULTI-FAMILY HOUSING--0.7% Menlo Park Community Development Agency Multifamily Revenue, 5.375%, 6/1/16 (AMBAC Insured) AAA 250 272,350 MUNICIPAL UTILITY DISTRICT REVENUE--10.8% Los Angeles, California Water & Power Revenue, 4.50%, 7/1/13 AA- 700 716,527 Los Angeles, California Water & Power Revenue, 5.25%, 7/1/18 AA- 300 315,390
See Notes to Financial Statements 8
STANDARD & POOR'S PAR RATING VALUE (UNAUDITED) (000) VALUE ----------- -------- ------------ MUNICIPAL UTILITY DISTRICT REVENUE--CONTINUED Northern California Public Power Agency, 5.00%, 7/1/15 (MBIA Insured) AAA $ 1,000 $ 1,072,920 Pasadena California Electric, 5.00%, 6/1/17 (MBIA Insured) AAA 300 322,551 Sacramento California Municipal Utility Ditrict, 5.25%, 8/15/10 (MBIA Insured) AAA 500 572,450 Sacramento California Municipal Utility Revenue, 5.10%, 7/1/13 (AMBAC Insured) AAA 500 549,655 Southern California Public Power Authority Tr., 5.00%, 7/1/12 (FSA Insured) AAA 635 712,832 ------------ 4,262,325 ------------ SINGLE FAMILY HOUSING REVENUE--8.2% California Housing Finance Agency, 5.85%, 8/1/16 (MBIA FHA/VA/CAHLIF MTGS Insured) AAA 500 534,575 California Housing Finance Agency, 5.90%, 8/1/17 (MBIA FHA/VA GTD CAHLIF Insured) AAA 800 832,416 California Housing Finance Agency, 5.95%, 8/1/14 (MBIA FHA/VA/CAHLIF MTGS Insured) AAA 960 1,002,317 California Housing Finance Agency Revenue, 1.50%, 2/1/31(e) AA- 600 600,000 Cypress California Single Family Residential Mortgage Revenue, 7.25%, 1/1/12 (PRIV MTGS Insured)(b) AAA(d) 200 258,154 ------------ 3,227,462 ------------ TRANSPORTATION REVENUE--17.1% Alameda Corridor Transition Authority, 5.125%, 10/1/17 (MBIA Insured) AAA 125 134,531 Foothill/Eastern Corridor Agency California Toll Road, 0.00%, 1/1/07(b) AAA 200 214,746 Foothill/Eastern Corridor Agency California Toll Road, 0.00%, 1/1/08(b) AAA 200 221,458 Foothill/Eastern Corridor Agency California Toll Road, 0.00%, 1/1/11 AAA 550 642,901 Oakland, California Port Authority, 5.60%, 11/1/19 (MBIA Insured) AAA $ 1,000 $ 1,104,070 San Francisco, California Bay Area Rapid Transit, 5.50%, 7/1/15 (FGIC Insured) AAA 190 203,454 San Francisco, California City & County Airport, 5.375%, 5/1/17 (MBIA Insured) AAA 1,000 1,077,560 San Francisco California Bay Area, 5.25%, 7/1/17 AA- 500 542,700 San Francisco California City and County, 5.5%, 6/15/12 AA 500 560,465 San Francisco, California Port Authority, 5.90%, 7/1/09 A- 1,000 1,040,580 San Mateo County Transit District, 5.00%, 6/1/14 (MBIA Insured) AAA 400 433,676 Santa Clara Valley, California Transportation Authority, 5.00%, 6/1/17 (MBIA Insured) AAA 500 533,725 ------------ 6,709,866 ------------ VETERAN REVENUE--4.9% California State for Previous AMT-Veterans, 5.375%, 12/1/16 A 1,000 1,013,250 California State Veteran Bonds, 5.15%, 12/1/14 A 895 922,951 ------------ 1,936,201 ------------ WATER & SEWER REVENUE--18.7% California State Department of Water, 5.125%, 12/1/15 AA 200 218,666 California State Department of Water Resources, Central Valley Project Revenue Ser. T, 5.125%, 12/1/12 AA 250 276,448 California State Department of Water Resources, Central Valley Project, 5.50%, 12/1/13 (FSA-CR Insured) AAA 400 468,276 Irvine Ranch California Water District, 1.14%, 6/1/15(e) AAA 900 900,000
See Notes to Financial Statements 9
STANDARD & POOR'S PAR RATING VALUE (UNAUDITED) (000) VALUE ----------- -------- ------------ WATER & SEWER REVENUE--CONTINUED Los Angeles California Wastewater System, 5.00%, 6/1/08 (FSA Insured) AAA $ 375 $ 420,330 Los Angeles, California Wastewater System, 5.00%, 6/1/14 (FGIC Insured) AAA 700 754,432 Metropolitan Water District of Southern California, 5.00%, 7/1/13 AA 200 217,880 Mountain View, California Shoreline Regional Park, 5.50%, 8/1/21 (MBIA Insured) AAA 1,000 1,090,060 Redlands California Financing Authority Wastewater Revenue Refunding Ser A, 5.00%, 9/1/17 (FSA Insured) AAA 1,000 1,071,880 San Diego California Sewer Ser A Public Facility Financing Authority, 5.00%, 5/15/13 (AMBAC Insured) AAA 300 306,714 San Jose-Santa Clara, California Water Financing Authority, 5.375%, 11/15/15 (FGIC Insured) AAA $ 1,000 $ 1,080,650 Westlands Water District Revenue Certificates of Participation, 5.250%, 9/1/14 (MBIA Insured) AAA 500 564,520 ------------ 7,369,856 ------------ TOTAL MUNICIPAL TAX-EXEMPT BONDS (IDENTIFIED COST $36,775,447) 39,343,091 TOTAL INVESTMENTS--99.9% (IDENTIFIED COST $37,675,447) $ 39,343,091(a) Other assets and liabilities, net--0.1% 25,158 ------------ NET ASSETS--100.0% $ 39,368,249 ============
(a) Federal Income Tax Information: Net unrealized appreciation of investment securities is comprised of gross appreciation of $1,698,833 and gross depreciation of $31,189 for federal income tax purposes. At December 31, 2003, the aggregate cost of securities for federal income tax purposes was $37,675,447. (b) Escrowed to Maturity. At December 31, 2003, the concentration of the Fund's investments by state or territory, determined as a percentage of net assets, is as follows: California 100%. At December 31, 2003, 67% 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: FSA, 16% and MBIA, 30%. (c) Rated by Moody's. (d) Rating provided by adviser. (e) Variable rate security, interest rate reflects the rate currently in effect. See Notes to Financial Statements 10 STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2003 ASSETS Investments in securities, at value (Identified cost $37,675,447) $ 39,343,091 Cash 150,901 Receivables Interest 475,908 Prepaid expenses 6,813 --------------- Total Assets 39,976,713 --------------- LIABILITIES Payables Securities purchased 544,589 Fund shares repurchased 1,526 Distributions to shareholders 4,945 Investment advisory fee 8,479 Administration fee 5,013 Financial agent fee 4,948 Transfer agent fee 3,330 Trustees' fee 2,033 Accrued expenses 33,601 --------------- Total liabilities 608,464 --------------- NET ASSETS $ 39,368,249 =============== NET ASSETS CONSIST OF: Capital paid in on shares of beneficial interest $ 37,568,281 Undistributed net investment income 5,176 Accumulated net realized gain 127,148 Net unrealized appreciation 1,667,644 --------------- NET ASSETS $ 39,368,249 =============== NUMBER OF SHARES ISSUED AND OUTSTANDING (unlimited shares authorized no par value) 3,592,934 =============== NET ASSET VALUE PER SHARE $ 10.96 ===============
STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2003 INVESTMENT INCOME Interest $ 1,624,319 --------------- Total investment income 1,624,319 --------------- EXPENSES Investments advisory fee 181,533 Administration fee 29,999 Financial agent fee 48,255 Transfer agent 14,501 Trustees 14,063 Custodian 10,077 Professional 28,598 Registration 19,869 Printing 8,673 Miscellaneous 18,533 --------------- Total expenses 374,101 Less: expenses borne by investment adviser (100,802) Less: custodian fees paid indirectly (1,000) --------------- Net expenses 272,299 --------------- NET INVESTMENT INCOME 1,352,020 --------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain on investments 179,694 Net change in unrealized appreciation (depreciation) on investments (17,141) --------------- NET LOSS ON INVESTMENTS 162,553 --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,514,573 ===============
See Notes to Financial Statements 11 STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED 12/31/03 12/31/02 ------------- ------------- FROM OPERATIONS Net investment income (loss) $ 1,352,020 $ 1,352,775 Net realized gain (loss) 179,694 174,298 Net change in unrealized appreciation (depreciation) (17,141) 572,903 ------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,514,573 2,099,976 ------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income (1,360,391) (1,351,420) Net realized long-term gains (52,546) (151,744) ------------- ------------- DECREASE IN NET ASSETS FROM DISTRIBUITIONS TO SHAREHOLDERS (1,412,937) (1,503,164) ------------- ------------- FROM SHARE TRANSACTIONS Proceeds from sales of shares (864,287 and 823,861 shares, respectively) 9,441,863 8,986,927 Net asset value of shares issued on reinvestment of distributions (67,285 and 44,676 shares, respectively) 737,267 486,832 Cost of shares repurchased (384,895 and 1,027,079 shares, respectively) (4,219,993) (11,184,822) ------------- ------------- INCREASE (DECREASE) IN NET ASSETS FROM SHARE TRANSACTIONS 5,959,137 (1,711,063) ------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS 6,060,773 (1,114,251) NET ASSETS Beginning of period 33,307,476 34,421,727 ------------- ------------- END OF PERIOD [INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $5,176 AND $13,498, RESPECTIVELY] $ 39,368,249 $ 33,307,476 ============= =============
See Notes to Financial Statements 12 PHOENIX-KAYNE CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND FINANCIAL HIGHLIGHTS (SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
CLASS X ---------------------------------------------------------- YEAR ENDED DECEMBER 31 ---------------------------------------------------------- 2003 2002 2001 2000 1999 Net asset value, beginning of period $ 10.93 $ 10.74 $ 10.83 $ 10.29 $ 10.77 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.41 0.46 0.47 0.49 0.44 Net realized and unrealized gain (loss) 0.04 0.24 (0.02) 0.54 (0.48) -------- -------- -------- -------- -------- TOTAL FROM INVESTMENT OPERATIONS 0.45 0.70 0.45 1.03 (0.04) -------- -------- -------- -------- -------- LESS DISTRIBUTIONS: From net investment income (0.41) (0.46) (0.47) (0.49) (0.44) From net realized gains (0.01) (0.05) (0.07) -- -- -------- -------- -------- -------- -------- TOTAL DISTRIBUTIONS (0.42) (0.51) (0.54) (0.49) (0.44) -------- -------- -------- -------- -------- Change in net asset value 0.03 0.19 (0.09) 0.54 (0.48) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 10.96 $ 10.93 $ 10.74 $ 10.83 $ 10.29 ======== ======== ======== ======== ======== Total return 4.25% 6.60% 4.26% 10.18% (0.44)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 39,368 $ 33,307 $ 34,422 $ 31,353 $ 41,862 RATIO OF EXPENSES TO AVERAGE NET ASSETS: Operating expenses(1) 0.75%(2) 0.75% 0.75% 0.75%(2) 0.75%(2) Net investment income (loss) 3.72% 4.18% 4.38% 4.63% 4.14% Portfolio turnover rate 33% 21% 61% 33% 65%
(1) If the investment adviser had not waived fees and reimbursed expenses, the ratio of operating expenses to average net assets would have been 1.03%, 0.98%, 0.85%, 0.96% and 1.37% for the period ended December 31, 2003, 2002, 2001, 2000 and 1999, respectively. (2) The ratio of operating expenses to average net assets excludes the effect of expense offsets for custodian fees; if expense offsets were included, the ratio would be 0.74% and 0.71% for the period ended December 31, 2000 and 1999, respectively. The ratio would not significantly differ for the year ended December 31, 2003. See Notes to Financial Statements 13 PHOENIX-KAYNE INTERMEDIATE TOTAL RETURN BOND FUND COMMENTARY INVESTMENT OBJECTIVES Phoenix-Kayne Intermediate Total Return Bond Fund has an investment objective of maximizing total return (mainly through current income, with capital appreciation as a secondary factor). There is no guarantee that the Fund will achieve its objective. MARKET OVERVIEW The year 2003 proved volatile for the fixed-income markets. In May, the volatility became dramatic as bonds rallied on comments from the Federal Reserve governors concerning the use of "unconventional" measures--purchases of long-term government securities--to bring rates down on the long-end of the yield curve. Bonds then rapidly switched course and sold off in mid-July when Federal Reserve Chairman Alan Greenspan stated that he thought that the economy would pick up without the central bank resorting to such alternative measures. Investors switched from bonds to stocks to take advantage of the perceived accelerating economy and bond prices dropped. Positive economic news also brought on fears of inflation, which would trigger higher interest rates and cause a further drop in bond prices. Along with the about-face on the use of unconventional purchases of longer-dated securities, Alan Greenspan in his testimony to Congress down-played deflation and provided a more upbeat assessment of the economy than investors had expected. Such a reverse viewpoint from the Chairman's analysis the month before whipsawed the bond markets. In July, the 30-year Treasury experienced its worst month in history, down over 11%, and the 10-year Treasury note lost more than 7%, its worst month in over 20 years. The sell-off in the fixed-income markets was exacerbated when mortgage investors, a significant portion of the fixed-income market, adjusted their portfolios' exposure to rising interest rates. Such reactions to sharp moves in interest rates added energy to the overall volatility in the bond market. During September, prices rose again in the bond market and rates dropped as the economy seemed to be moving more sluggishly than first thought, dampening fears of a rate hike. However, by early November, prices fell and the yields rose back up with stronger-than-expected manufacturing reports and positive labor-market news. By the middle of November, bond investors covered their short positions, moving prices up, which fell again later in the month as the buoyant economic data continued to defy expectations. Although the bond market has already priced in a rate increase for mid 2004, the Federal Reserve has committed itself to low rates unless inflation begins to escalate. We believe that fears of high inflation may be overblown (See Chart, "Consumer Price Index, Year over Year, January 1993-December 2003") and certain compelling economic factors indicate that inflation may remain tame for some time. Domestic labor markets remain sluggish because of excess capacity in manufacturing, global competition, and gains in productivity. These factors limit pricing power and wage gains. 14 [CHART] CONSUMER PRICE INDEX, YEAR OVER YEAR JANUARY 1, 1993-DECEMBER 31, 2003 1/31/93 3.5 2/28/93 3.6 3/31/93 3.4 4/30/93 3.5 5/31/93 3.4 6/30/93 3.3 7/31/93 3.2 8/31/93 3.3 9/30/93 3.2 10/31/93 3.0 11/30/93 3.1 12/31/93 3.2 1/31/94 2.9 2/28/94 2.8 3/31/94 2.9 4/30/94 2.8 5/31/94 2.8 6/30/94 2.9 7/31/94 2.9 8/31/94 2.9 9/30/94 3.0 10/31/94 2.9 11/30/94 2.8 12/31/94 2.6 1/31/95 2.9 2/28/95 3.0 3/31/95 3.0 4/30/95 3.1 5/31/95 3.1 6/30/95 3.0 7/31/95 3.0 8/31/95 2.9 9/30/95 2.9 10/31/95 3.0 11/30/95 3.0 12/31/95 3.0 1/31/96 3.0 2/29/96 2.9 3/31/96 2.8 4/30/96 2.7 5/31/96 2.7 6/30/96 2.7 7/31/96 2.7 8/31/96 2.6 9/30/96 2.7 10/31/96 2.6 11/30/96 2.6 12/31/96 2.6 1/31/97 2.5 2/28/97 2.5 3/31/97 2.5 4/30/97 2.7 5/31/97 2.5 6/30/97 2.4 7/31/97 2.4 8/31/97 2.3 9/30/97 2.2 10/31/97 2.3 11/30/97 2.2 12/31/97 2.2 1/31/98 2.2 2/28/98 2.3 3/31/98 2.1 4/30/98 2.1 5/31/98 2.2 6/30/98 2.2 7/31/98 2.2 8/31/98 2.5 9/30/98 2.5 10/31/98 2.3 11/30/98 2.3 12/31/98 2.4 1/31/99 2.4 2/28/99 2.1 3/31/99 2.1 4/30/99 2.2 5/31/99 2.0 6/30/99 2.1 7/31/99 2.1 8/31/99 1.9 9/30/99 2.0 10/31/99 2.1 11/30/99 2.1 12/31/99 1.9 1/31/2000 2.0 2/29/2000 2.2 3/31/2000 2.4 4/30/2000 2.3 5/31/2000 2.4 6/30/2000 2.5 7/31/2000 2.5 8/31/2000 2.6 9/30/2000 2.6 10/31/2000 2.5 11/30/2000 2.6 12/31/2000 2.6 1/31/2001 2.6 2/28/2001 2.7 3/31/2001 2.7 4/30/2001 2.6 5/31/2001 2.5 6/30/2001 2.7 7/31/2001 2.7 8/31/2001 2.7 9/30/2001 2.6 10/31/2001 2.6 11/30/2001 2.8 12/31/2001 2.7 1/31/2002 2.6 2/28/2002 2.6 3/31/2002 2.4 4/30/2002 2.5 5/31/2002 2.5 6/30/2002 2.3 7/31/2002 2.2 8/31/2002 2.4 9/30/2002 2.2 10/31/2002 2.2 11/30/2002 2.0 12/31/2002 1.9 1/31/2003 1.9 2/28/2003 1.7 3/31/2003 1.7 4/30/2003 1.5 5/31/2003 1.6 6/30/2003 1.5 7/31/2003 1.5 8/31/2003 1.3 9/30/2003 1.2 10/31/2003 1.3 11/30/2003 1.1 12/31/2003 1.1
SOURCE: BLOOMBERG Despite the apparent economic expansion, we believe sufficient slack exists in the economy to keep inflation relatively low and, therefore, not put pressure on the bond market. FUND PERFORMANCE During the year, the Phoenix-Kayne Intermediate Total Return Bond Fund underperformed the benchmark Lehman Brothers Intermediate Government/Credit Index(1). The fund returned 2.74% while the index returned 4.31%. Performance of the Fund was driven largely by shifts in credit quality, the yield curve, and duration. All performance figures assume reinvestment of distributions and exclude the effect of sales charges. Past performance is not indicative of future results and current performance may be higher or lower than the performance shown. The strong performance of low credit-quality issues negatively affected the Fund's performance. In 2003, lower quality bonds outperformed higher quality issues (See Chart, "Total Return for Major Asset Classes 2002 & 2003") as investors reached for higher yields. Our Fund's exclusive focus on high-quality issues hurt our performance on a relative basis. 15 [CHART] Total Return for Major Asset Classes 2002 & 2003
2002 TOTAL RETURNS 2003 TOTAL RETURNS Aaa 10.2% 2.8% Aa 13.3% 4.6% A 11.0% 6.3% Baa 8.7% 11.7% U.S. Treasury 11.8% 2.2% U.S. Agency 11.0% 2.6% U.S. Credit 10.5% 7.7% ABS 8.5% 4.0% MBS 8.7% 3.1%
SOURCE: LEHMAN BROTHERS; ASSET CLASS BREAKDOWN IS BASED UPON THE LEHMAN AGGREGATE INDEX SUMMARY During 2003, fixed-income investors faced the fluctuating forecasts of a sustained low interest-rate environment punctuated by contradictory economic data. These factors triggered swings in interest rates and bond prices. We believe, however, that bond yields are likely to remain range bound, with inflation not a major concern. We also believe that the best strategy for our investors is to invest in high-quality intermediate-term bonds that provide the majority of returns of the longer-term bond market, while taking on significantly less interest-rate risk. (1) THE LEHMAN BROTHERS INTERMEDIATE GOVERNMENT BOND / CREDIT INDEX MEASURES GOVERNMENT AND CORPORATE BROAD BOND MARKET TOTAL RETURN PERFORMANCE. THE INDEXES ARE UNMANAGED AND ARE NOT AVAILABLE FOR DIRECT INVESTMENT. 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. 16 PHOENIX-KAYNE INTERMEDIATE TOTAL RETURN BOND FUND AVERAGE ANNUAL TOTAL RETURNS(1) PERIOD ENDING 12/31/03
INCEPTION INCEPTION 1 YEAR 5 YEAR TO 12/31/03 DATE ------ ------ ----------- --------- Class X Shares at NAV(2) 2.74% 5.70% 6.06% 10/28/96 Lehman Brothers Intermediate Government/Credit Bond Index(4) 4.31 6.65 7.43 10/28/96 Lehman Brothers Aggregate Bond Index(5) 4.10 6.62 7.40 10/28/96
(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) This chart illustrates NAV returns on Class X shares since inception. (4) The Lehman Brothers Intermediate Government/Credit Bond Index is an unmanaged, commonly used measure of bond market total return performance. It includes securities in the Lehman Brothers Government and the Lehman Brothers Corporate Indexes. The index's performance does not reflect sales charges. (5) The Lehman Brothers Aggregate Bond Index is an unmanaged, commonly used measure of broad bond market total return performance. The index's performance does not reflect sales charges. All returns represent past performance which may not be indicative of future performance. 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. Because the fund holds a limited number of securities, it will be impacted by each security's performance more than a fund with a large number of holdings. GROWTH OF $10,000 PERIODS ENDING 12/31/03 [CHART]
PHOENIX-KAYNE INTERMEDIATE TOTAL LEHMAN BROTHERS INTERMEDIATE LEHMAN BROTHERS AGGREGATE RETURN BOND FUND CLASS X(3) GOVERNMENT/CREDIT BOND INDEX(4) BOND INDEX(5) 10/28/96 $ 10,000 $ 10,000 $ 10,000 12/31/96 $ 10,020 $ 10,364 $ 10,162 12/31/97 $ 10,741 $ 11,180 $ 11,143 12/31/98 $ 11,558 $ 12,123 $ 12,111 12/31/99 $ 11,484 $ 12,169 $ 12,011 12/29/2000 $ 12,563 $ 13,400 $ 13,408 12/31/2001 $ 13,565 $ 14,601 $ 14,540 12/31/2002 $ 14,846 $ 16,037 $ 16,032 12/31/2003 $ 15,253 $ 16,728 $ 16,690
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 do not include the effect of any sales charge. Performance assumes dividends and capital gains are reinvested. SECTOR WEIGHTINGS 12/31/03 [CHART] As a percentage of bond holdings U.S. Government And Government Agency Obligations 56.1% Corporate Bonds 43.9%
See Notes to Financial Statements 17 TEN LARGEST HOLDINGS AT DECEMBER 31, 2003 (AS A PERCENTAGE OF NET ASSETS) 1. U.S. Treasury Notes, 5.00%, 8/15/11 4.8% U.S. GOVERNMENT SECURITY 2. U.S. Treasury Notes, 7.50%, 2/15/05 4.4% U.S. GOVERNMENT SECURITY 3. U.S. Treasury Notes, 6.00%, 8/15/09 4.3% U.S. GOVERNMENT SECURITY 4. U.S. Treasury Notes, 6.50%, 2/15/10 3.9% U.S. GOVERNMENT SECURITY 5. U.S. Treasury Notes, 6.50%, 10/15/06 3.7% U.S. GOVERNMENT SECURITY 6. Daimlerchrysler National Holding Corp., 7.20%, 9/1/09 3.1% CONSUMER FINANCE CORPORATE SECURITY 7. Heller Financial, 7.375%, 11/1/09 2.6% DIVERSIFIED FINANCIAL SERVICES CORPORATE SECURITY 8. Federal National Mortgage Association, 6.625%, 11/15/10 2.6% PASS-THROUGH AGENCY MORTGAGE-BACKED SECURITY 9. Conoco Funding Co., 6.35%, 10/15/11 2.5% INTEGRATED OIL PRODUCTS CORPORATE SECURITY 10. Citicorp, 6.375%, 11/15/08 2.5% BANK CORPORATE SECURITY
INVESTMENTS AT DECEMBER 31, 2003
STANDARD & POOR'S PAR RATING VALUE (UNAUDITED) (000) VALUE ----------- -------- ------------ CORPORATE BONDS--42.0% AEROSPACE & DEFENSE--2.8% Boeing Capital Corp., 5.65%, 5/15/06 A $ 850 $ 908,001 Boeing Capital Corp., 7.10%, 9/27/05 A 335 362,448 ------------ 1,270,449 ------------ BANKS--5.1% Bank of America Corp., 7.125%, 05/1/06 A 540 598,180 Citicorp, 6.375%, 11/15/08 A+ 1,000 1,107,228 Wells Fargo Financial, 6.375%, 8/1/11 A+ 500 558,334 ------------ 2,263,742 ------------ BREWERS--2.3% Anheuser Busch Companies, Inc., 7.10%, 06/15/07 A+ 1,000 1,026,048 COMPUTER HARDWARE--1.8% Hewlett-Packard Co., 7.15%, 6/15/05 A- 750 806,622 CONSUMER FINANCE--7.3% Daimlerchrysler National Holding Corp., 7.20%, 9/1/09 BBB 1,250 1,397,607 Ford Motor Credit Corp., 9.03%, 12/30/09 BBB- 500 518,185 General Electric Capital Corp., 4.625%, 9/15/09 AAA 800 832,674 Household Finance Corp., 6.75%, 6/15/12 A $ 500 $ 499,949 ------------ 3,248,415 ------------ DIVERSIFIED COMMERCIAL SERVICES--1.4% International Lease Finance Corp., 5.75%, 10/15/06 AA- 600 645,950 DIVERSIFIED FINANCIAL SERVICES--5.7% Bear Stearns Co., 7.80%, 8/15/07 A 825 954,751 Goldman Sachs Group. Inc., 5.25%, 04/1/13 A+ 425 431,252 Heller Financial, 7.375%, 11/1/09 AAA 1,000 1,174,980 ------------ 2,560,983 ------------ GENERAL MERCHANDISE STORES--1.1% Wal-Mart Stores, 4.55%, 5/01/13 AA 500 494,795 HOUSEHOLD PRODUCTS--1.5% Colgate-Palmolive Co., 5.98%, 4/25/12 AA- 620 681,363 INTEGRATED OIL & GAS--2.5% Conoco Funding Co., 6.35%, 10/15/11 A- 1,000 1,122,902 INTEGRATED TELECOMMUNICATION SERVICES--1.2% SBC Communications, 5.875%, 2/1/12 A+ 500 532,049
See Notes to Financial Statements 18
STANDARD & POOR'S PAR RATING VALUE (UNAUDITED) (000) VALUE ----------- -------- ------------ PACKAGED FOODS AND MEATS--1.8% Kraft Foods, Inc., 6.25%, 6/1/12 BBB+ $ 750 $ 818,744 PERSONAL PRODUCTS--2.9% Gillette Co., 4.00%, 6/30/05 AA- 260 269,323 Kimberly-Clark Corp., 5.00%, 8/15/13 AA- 1,000 1,024,092 ------------ 1,293,415 ------------ PHARMACEUTICALS--4.6% Abbott Laboratories, 5.625%, 7/1/06 AA 1,000 1,079,267 Merk & Co., Inc., 4.375%, 2/15/13 AAA 1,000 986,192 ------------ 2,065,459 ------------ TOTAL CORPORATE BONDS (IDENTIFIED COST $17,952,701) 18,830,936 ------------ U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS--53.7% OTHER AGENCY MORTGAGE-BACKED--4.1% Federal Home Loan Mortgage Corp., 7.00%, 4/1/16 AAA 89 94,723 Federal Home Loan Mortgage Corp., 7.50%, 7/1/09 AAA 66 70,663 Federal Home Loan Mortgage Corp., 7.50%, 4/1/14 AAA 140 150,922 Federal Home Loan Mortgage Corp., MTN, 5.125%, 2/20/13 AAA 500 502,353 Federal Home Loan Mortgage Corp., MTN, 6.00%, 5/25/12 AAA 1,000 1,016,893 ------------ 1,835,554 ------------ PASS-THROUGH AGENCY MBS, FNMA--2.9% Federal National Mortgage Association, 6.625%, 11/15/10 AAA 1,000 1,150,590 Federal National Mortgage Association, 7.00%, 5/1/14 AAA 109 116,122 Federal National Mortgage Association, 8.00%, 1/1/15 AAA 29 31,126 ------------ 1,297,838 ------------ PASS-THROUGH AGENCY MBS, GNMA--4.3% Government National Mortgage Association, 6.00%, 8/15/31 AAA $ 933 $ 970,787 Government National Mortgage Association, 7.00%, 7/20/13 AAA 206 220,855 Government National Mortgage Association, 8.00%, 11/15/21 AAA 2 2,232 Government National Mortgage Association, 8.00%, 7/15/23 AAA 87 95,107 Government National Mortgage Association, 8.00%, 7/15/23 AAA 48 52,766 Government National Mortgage Association, 8.00%, 7/20/26 AAA 195 211,383 Government National Mortgage Association, 8.00%, 9/15/26 AAA 19 20,878 Government National Mortgage Association, 8.00%, 11/15/26 AAA 11 12,055 Government National Mortgage Association, 8.00%, 9/20/27 AAA 113 122,755 Government National Mortgage Association, 8.50%, 12/15/22 AAA 3 2,925 Government National Mortgage Association, 8.50%, 8/15/24 AAA 174 191,429 Government National Mortgage Association, 8.50%, 8/15/25 AAA 27 30,142 Government National Mortgage Association, 8.50%, 6/15/26 AAA 6 6,346 ------------ 1,939,660 ------------ U.S. AGENCY (NON-MBS)--15.3% Federal Farm Credit Bank, 5.85%, 5/14/08 AAA 250 254,657 Federal Farm Credit Bank, 6.48%, 4/4/12 AAA 1,000 1,053,126 Federal Home Loan Bank, 5.15%, 1/28/13 AAA 345 348,963 Federal Home Loan Bank, 5.20%, 10/22/08 AAA 195 201,526 Federal Home Loan Bank, 5.85%, 2/13/09 AAA 250 251,356 Federal Home Loan Bank, 5.925%, 4/9/08 AAA 1,000 1,105,629 Federal Home Loan Bank, 6.35%, 2/13/12 AAA 1,000 1,005,270
See Notes to Financial Statements 19
STANDARD & POOR'S PAR RATING VALUE (UNAUDITED) (000) VALUE ----------- -------- ------------ Federal Home Loan Bank, 6.40%, 1/26/11 AAA $ 250 $ 250,755 Federal Home Loan Bank, 7.80%, 2/11/10 AAA 350 373,452 Federal National Mortgage Association, 3.00%, 11/01/05 AAA 125 127,047 Federal National Mortgage Association, 6.00%, 5/16/11 AAA 875 939,279 Federal National Mortgage Association, 6.20%, 2/27/12 AAA 116 116,809 Federal National Mortgage Association, 6.20%, 5/3/12 AAA 500 525,285 Federal National Mortgage Association, 6.25%, 2/17/11 AAA 275 276,533 ------------ 6,829,687 ------------ U.S. TREASURY BONDS--1.2% U.S. Treasury Bonds, 7.875%, 11/15/04 AAA 500 528,770 U.S. TREASURY NOTES--25.9% U.S. Treasury Notes, 4.875%, 2/15/12 AAA 1,000 1,059,376 U.S. Treasury Notes, 5.00%, 8/15/11 AAA 2,000 2,140,938 U.S. Treasury Notes, 5.625%, 5/15/08 AAA 987 1,093,642 U.S. Treasury Notes, 6.00%, 8/15/09 AAA 1,700 1,926,114 U.S. Treasury Notes, 6.50%, 10/15/06 AAA 1,500 1,671,270 U.S. Treasury Notes, 6.50%, 2/15/10 AAA 1,500 1,743,516 U.S. Treasury Notes, 7.50%, 2/15/05 AAA 1,830 1,956,885 ------------ 11,591,741 ------------ TOTAL U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS (IDENTIFIED COST $23,204,101) 24,023,250 ------------ SHORT-TERM OBLIGATIONS--2.2% U.S. GOVERNMENT AGENCY--2.2% Federal Home Loan Bank., 0.88%, 1/9/04 AAA $ 1,000 $ 999,780 TOTAL SHORT-TERM OBLIGATIONS (IDENTIFIED COST $999,780) 999,780 TOTAL INVESTMENTS--97.9% (IDENTIFIED COST $42,156,582) $ 43,853,966(a) Other assets and liabilities, net--2.1% 943,270 ------------ NET ASSETS--100.0% $ 44,797,236 ============
(a) Federal Income Tax Information: Net unrealized appreciation of investment securities is comprised of gross appreciation of $1,928,993 and gross depreciation of $231,609 for federal income tax purposes. At December 31, 2003, the aggregate cost of securities for federal income tax purposes was $42,156,582. See Notes to Financial Statements 20 PHOENIX-KAYNE INTERMEDIATE TOTAL RETURN BOND FUND STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2003 ASSETS Investments securities at value (Identified cost $42,156,582) $ 43,853,966 Cash 403,717 Receivables: Dividends and interest 610,369 Prepaid expenses 7,355 --------------- Total Assets 44,875,407 --------------- LIABILITIES Payables Fund shares repurchased 12,000 Investment advisory fee 18,989 Administration fee 5,393 Professional fee 24,984 Transfer agent fee 3,226 Financial agent fee 3,204 Trustees' fee 2,031 Accrued expenses 8,344 --------------- Total liabilities 78,171 --------------- NET ASSETS $ 44,797,236 =============== NET ASSETS CONSIST OF: Capital paid in on shares of beneficial interest $ 43,005,115 Undistributed net investment income 11,668 Accumulated net realized gain 83,069 Net unrealized appreciation 1,697,384 --------------- NET ASSETS $ 44,797,236 =============== NUMBER OF SHARES ISSUED AND OUTSTANDING (unlimited shares authorized no par value) 4,039,995 =============== NET ASSET VALUE PER SHARE $ 11.09 ===============
STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2003 INVESTMENT INCOME Interest $ 2,271,086 --------------- Total investment income 2,271,086 --------------- EXPENSES Investment advisory fee 217,554 Administration 31,755 Financial agent fee 41,501 Professional 27,135 Registration 20,367 Custody fees 14,678 Trustees 14,063 Transfer agent fees 13,952 Printing 8,537 Miscellaneous 18,542 --------------- Total expenses 408,084 --------------- NET INVESTMENT INCOME 1,863,002 --------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain on investments 267,833 Net change in unrealized appreciation (depreciation) on investments (960,845) --------------- NET LOSS ON INVESTMENTS (693,012) --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,169,990 ===============
See Notes to Financial Statements 21 STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED 12/31/03 12/31/02 ------------- ------------- FROM OPERATIONS Net investment income (loss) $ 1,863,002 $ 2,021,372 Net realized gain (loss) 267,833 92,611 Net change in unrealized appreciation (depreciation) (960,845) 1,569,188 ------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,169,990 3,683,171 ------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income (1,851,334) (2,006,888) Net realized short-term gains -- (29,943) Net realized long-term gains (184,764) (164,616) ------------- ------------- DECREASE IN NET ASSETS FROM DISTRIBUITIONS TO SHAREHOLDERS (2,036,098) (2,201,447) ------------- ------------- FROM SHARE TRANSACTIONS Proceeds from sales of shares (1,005,966 and 1,477,478 shares, respectively) 11,288,844 16,377,803 Net asset value of shares issued from reinvestment of distributions (130,383 and 118,490 shares, respectively) 1,459,376 1,313,976 Cost of shares repurchased (888,284 and 1,505,214 shares, respectively) (9,986,834) (16,646,097) ------------- ------------- INCREASE (DECREASE) IN NET ASSETS FROM SHARE TRANSACTIONS 2,761,386 1,045,682 ------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS 1,895,278 2,527,406 NET ASSETS Beginning of period 42,901,958 40,374,552 ------------- ------------- END OF PERIOD [INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $11,668 AND $0, RESPECTIVELY] $ 44,797,236 $ 42,901,958 ============= =============
See Notes to Financial Statements 22 FINANCIAL HIGHLIGHTS (SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
CLASS X ----------------------------------------------------- YEAR ENDED DECEMBER 31 ----------------------------------------------------- 2003 2002 2001 2000 1999 Net asset value, beginning of period $ 11.31 $ 10.91 $ 10.82 $ 10.44 $ 11.01 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.48 0.55 0.57 0.56 0.50 Net realized and unrealized gain (loss) (0.17) 0.45 0.28 0.39 (0.57) -------- -------- -------- -------- -------- TOTAL FROM INVESTMENT OPERATIONS 0.31 1.00 0.85 0.95 (0.07) -------- -------- -------- -------- -------- LESS DISTRIBUTIONS: From net investment income (0.48) (0.55) (0.57) (0.57) (0.49) From net realized gains (0.05) (0.05) (0.19) -- (0.01) -------- -------- -------- -------- -------- TOTAL DISTRIBUTIONS (0.53) (0.60) (0.76) (0.57) (0.50) -------- -------- -------- -------- -------- Change in net asset value (0.22) 0.40 0.09 0.38 (0.57) -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 11.09 $ 11.31 $ 10.91 $ 10.82 $ 10.44 ======== ======== ======== ======== ======== Total return 2.74% 9.45% 7.98% 9.40% (0.65)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 44,797 $ 42,902 $ 40,375 $ 47,097 $ 53,404 RATIO OF EXPENSES TO AVERAGE NET ASSETS: Operating expenses 0.94% 0.88% 0.96% 0.94% 0.94%(1) Net investment income (loss) 4.28% 4.96% 5.13% 5.34% 4.94% Portfolio turnover rate 35% 27% 50% 10% 64%
(1) If the investment adviser had not waived fees and reimbursed expenses, the ratio of operating expenses to average net assets would have been 1.23% for the period ended December 31, 1999. See Notes to Financial Statements 23 PHOENIX-KAYNE INTERNATIONAL FUND COMMENTARY INVESTMENT OBJECTIVES Phoenix-Kayne International Fund has an investment objective of long-term capital appreciation, with dividend income a secondary consideration. There is no guarantee that the Fund will achieve its objective. Investing internationally involves risks not associated with investing solely in the U.S., such as currency fluctuation, political risk, differences in accounting and the limited availability of information. MARKET OVERVIEW Equity markets around the world surged during 2003, encouraged by positive global economic news. In addition, the imbalances of the U.S. economy continued to weigh on the U.S. dollar, magnifying international equities' investment returns when converted into U.S. dollars. For the full year, the MSCI EAFE Index(1) rose 38.59%, significantly outperforming the S&P 500 Index(2) for two successive years. The euro rose 8.06% against the U.S. dollar to a parity of $1.2595 for one euro, while the yen, contained by massive purchases of U.S. dollars by the Bank of Japan, rose only 3.98% to 107.22 yen for one U.S. dollar parity. For the entire year 2003, the euro appreciated 20.04% and the yen rose 10.79%. Japanese equities, as represented by the Topix Index(3), gained 38.27% during the year, and European equities, as represented by the FTSE EuroTop 300 Index(4), appreciated 38.19%. From an economic-sector standpoint, the industrials, materials, and information technology sectors performed the best, while consumer staples, energy, and health care lagged the overall market. In 2003, the MSCI EAFE Value(5) outperformed the MSCI EAFE Growth Index(6) by 1,331 basis points. We believe that this phenomenon testifies, in part, to the low quality of the equity-market recovery that we have witnessed since March of 2003. Nevertheless, since the end of October, we have noticed the long-awaited market rotation toward high-quality growth stocks, which bodes well for the Fund's investment style. For the entire year, stocks with a market capitalization of more than $40 billion underperformed the overall market by 860 basis points, and stocks with less than $1 billion in market cap outperformed by 2,216 basis points. However, during the fourth quarter, stocks within the MSCI EAFE Index with more than $40 billion in market cap modestly outperformed the overall index by a margin of 163 basis points; stocks with less than $1 billion in market cap underperformed the MSCI EAFE Index (1) THE MSCI EAFE INDEX IS A MEASURE OF FOREIGN STOCK FUND PERFORMANCE, WHICH INCLUDES NET DIVIDENDS, REINVESTED. TOTAL RETURN FIGURES ARE NET OF FOREIGN WITHOLDING TAXES. THE EAFE INDEX IS AN AGGREGATE OF 21 INDIVIDUAL COUNTRY INDEXES IN EUROPE, AUSTRALIA, NEW ZEALAND, AND THE FAR EAST. (2) THE S&P 500 INDEX IS A MEASURE OF STOCK MARKET TOTAL RETURN PERFORMANCE. (3) THE TOPIX INDEX, INTRODUCED BY THE TOKYO STOCK EXCHANGE (TSE) ON JULY 1, 1969, IS A COMPOSITE INDEX OF ALL THE COMMON STOCKS LISTED ON THE FIRST SECTION OF THE TSE. (4) THE FTSE EURO TOP 300 INDEX IS MEASURES THE PERFORMANCE OF THE 300 LARGEST CAPITALIZED COMPANIES RESIDENT AND INCORPORATED IN EUROPE. (5) THE MSCI EAFE VALUE INDEX IS IS A MARKET-WEIGHTED INDEX OF COMPANIES IN DEVELOPED COUNTRIES, EXCLUDING THE U.S. AND CANADA, AND MEASURES THE PERFORMANCE OF THOSE MSCI EAFE COMPANIES WITH LOW PRICE-TO-BOOK VALUES RELATIVE TO EACH MSCI COUNTRY. (6) THE MSCI EAFE GROWTH INDEX IS MARKET-WEIGHTED INDEX OF COMPANIES IN DEVELOPED COUNTRIES, EXCLUDING THE U.S. AND CANADA, AND MEASURES THE PERFORMANCE OF THOSE MSCI EAFE COMPANIES WITH HIGH PRICE-TO-BOOK VALUES RELATIVE TO EACH MSCI COUNTRY. THE INDEXES ARE UNMANAGED AND ARE NOT AVAILABLE FOR DIRECT INVESTMENT. 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. 24 by 518 basis points. This phenomenon--higher market cap outperforming lower market cap--, which was particularly noticeable during November and December, may mark the start of a new trend, as market participants begin to refocus on large-cap stocks after several years of neglect. For 2003, the financially strongest companies underperformed the overall market, by 1,279 basis points for the triple-A segment and by 485 basis points for the double-A segment. In the fourth quarter, companies within the MSCI EAFE Index with a triple-A (+13.49%) and double-A-credit rating (+16.33%) underperformed the market; but we noticed the start of a trend-change at the end of October, with significant outperformance of the triple-A and double-A-credit rating segments in November, and to a lesser extent in December. FUND PERFORMANCE The Phoenix-Kayne International Fund underperformed the MSCI EAFE Index during the year. The benchmark MSCI EAFE Index returned 38.59% while the Fund's Class X shares returned 26.15%. The underperformance of Fund reflects the overall underperformance of the high-quality segment of the market, coupled with the better-than-the-market performance of the smaller-cap segment. All performance figures assume reinvestment of distributions and exclude the effect of sales charges. Past performance is not indicative of future results and current performance may be higher or lower than the performance shown. PURCHASES AND SALES The Fund engaged in significant portfolio activity in the first quarter of 2003 as more than two-thirds of the stocks we were interested in buying were trading at or below our target prices after two months of almost uninterrupted market declines. In the consumer-staples sector, the Fund initiated a position in L'Oreal, the world's leading cosmetic company had priced in the market too expensively. The Fund also bought a position in Tesco, a very successful British food retailer. In health care, the Fund bought Sanofi-Synthelabo, a fast-growing European pharmaceutical company, which, to us, had also appeared too expensive in the past. Sanofi-Synthelabo sells what many believe is the world's best sleeping pill, Ambien. In the financial sector, the Fund bought positions in Banco Bilbao Vizcaya Argentaria, Royal Bank of Scotland, and Unicredito, three of Europe's best-run banks. Although the Fund did not need cash to implement our purchases, the Fund sold stocks that were not performing well, namely ING and Lloyds. For some time, we have had concerns over these company's long-term fundamentals. The Fund also sold Endesa because we were dissatisfied with the company's progress in reducing its debt level. The Fund initiated positions in Telecom Italia Mobile and in Telstra in the telecommunications-services sector. In the materials sector, the Fund initiated a position in Rio Tinto, a first-class natural-resources company benefiting from strong demand from China. The Fund also sold Adecco, as we become increasingly concerned about the company's strategy. During the second quarter, the Fund sold Sony toward the end of April after the company released full-fiscal-year results far below expectations and revised sharply downward its profit outlook for the year. In the consumer-discretionary sector, the Fund bought Hennes & Mauritz, a well-managed Swedish clothing retailer that is successfully expanding into the U.S. market. 25 In the third quarter, the Fund took some profit in the information-technology sector by selling SAP a strong performer this year and used the proceeds to buy Rohm, a leading Japanese semi-conductor company. In the consumer-staples sector, the Fund sold Henkel, Carrefour, and Heineken, which the Fund replaced with Kao and Diageo. The Fund invested in Hong Kong and China Gas, the dominant gas utility in the Chinese territory. In the financials sector, the Fund bought Fortis, a leading "bancassurance" group based in Belgium. The Fund also bought a position in Bank of Ireland. The Fund initiated a position in Societe Generale in France, and bought a position in Banco Popular in Spain. Finally, the Fund initiated positions in Peugeot, the most efficient European automaker, and in Svenska Cellulosa, a Swedish paper-based, consumer-products company, and reduced SMC of Japan. The Fund initiated positions in six new companies during the fourth quarter--HBOS, the U.K.'s leading mortgage bank, Swiss Re, the world's largest reinsurance company, Docomo, Japan's dominant cellular phone network operator, Singapore Technologies Engineering, Asia's premium diversified aerospace and defense group, Givaudan, the world's leading fragrances and flavors supplier, and Shin-Etsu, Japan's leading specialty chemicals player. To finance these purchases, the Fund sold HSBC, Rentokil, and Seven Eleven Japan, all of which reached our target prices. SUMMARY Several times over the last few years, we have alerted investors of the fragility of the U.S. dollar. We believed that a falling U.S. dollar was a major condition for sustainable outperformance of the international asset class and the major catalyst to foster renewed interest in the neglected international investment category. We see further weakness in the U.S. dollar going forward, although a period of consolidation may be warranted after the recent sharp decline. Although international markets have outperformed the U.S. market over the last two years, the best-performing subclass has been the small- and medium-cap, local-oriented, and, often, the lower-quality stocks. On a relative basis, 2003 has been particularly difficult for foreign large-cap high-quality multinational companies. Fortunately, we have begun to notice a changing trend in the market place since the end of October. In our view, a change in market leadership that is likely to favor our investment style and positioning is starting to develop. We invest for the long-term, mainly in high-quality, well-funded, dividend-paying, large-cap foreign stocks, which have been underappreciated by the market over the last three years. Nevertheless, we are confident that the excellent underlying fundamentals of those companies will not only reward investors over the longer term, but also in the medium term, we believe they will benefit from a long-awaited market rotation. 26 PHOENIX-KAYNE INTERNATIONAL FUND AVERAGE ANNUAL TOTAL RETURNS(1) PERIOD ENDING 12/31/03
INCEPTION INCEPTION 1 YEAR 5 YEAR TO 12/31/03 DATE ------ ------ ----------- --------- Class A Shares at NAV(2) 25.56% -- 14.31% 8/30/02 Class A Shares at POP(3) 18.34 -- 9.36 8/30/02 Class B Shares at NAV(2) 24.83 -- 13.63 8/30/02 Class B Shares with CDSC(4) 20.83 -- 10.75 8/30/02 Class C Shares at NAV(2) 24.83 -- 13.63 8/30/02 Class C Shares with CDSC(4) 24.83 -- 13.63 8/30/02 Class X Shares at NAV(2) 26.15 (3.43)% 3.35 10/18/96 MSCI EAFE (Net) Index(8) 38.59 (0.05) Note 5 Note 5 S&P 500 Index(9) 28.71 (0.57) Note 6 Note 6
(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 22.86% for Class A, Class B, Class C (since 8/30/02) and 3.16% for Class X (since 10/31/96). (6) Index performance is 17.74% for Class A, Class B, Class C (since 8/30/02) and 8.06% for Class X (since 10/18/96). (7) This chart illustrates NAV returns on Class X shares since inception. Returns on Class A, Class B and Class C shares will vary due to differing sales charges. (8) The MSCI EAFE (Net) Index is an unmanaged, commonly used measure of foreign stock market performance. The index's performance does not reflect sales charges. (9) The S&P 500 Index is an unmanaged, commonly used measure of stock market total performance. The index's performance does not reflect sales charges. All returns represent past performance which may not be indicative of future performance. 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. Because the fund holds a limited number of securities, it will be impacted by each security's performance more than a fund with a large number of holdings. Foreign investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risks. GROWTH OF $10,000 PERIODS ENDING 12/31/03 [CHART]
PHOENIX-KAYNE INTERNATIONAL FUND CLASS X(7) MSCI EAFE (NET) INDEX(8) S&P 500 TOTAL RETURN INDEX(9) 10/18/96 $ 10,000 $ 10,000 $ 10,000 12/31/96 $ 10,256 $ 10,264 $ 10,474 12/31/97 $ 11,940 $ 10,447 $ 13,970 12/31/98 $ 15,101 $ 12,536 $ 17,988 12/31/99 $ 19,792 $ 15,916 $ 21,789 12/29/2000 $ 17,882 $ 13,661 $ 19,788 12/31/2001 $ 12,571 $ 10,732 $ 17,438 12/31/2002 $ 10,052 $ 9,021 $ 13,584 12/31/2003 $ 12,680 $ 12,502 $ 17,484
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 do not include the effect of any sales charge. Performance assumes dividends and capital gains are reinvested. COUNTRY WEIGHTINGS 12/31/03 [CHART] As a percentage of equity holdings Japan 20.4% France 19.1% United Kingdom 17.8% Switzerland 11.1% Italy 5.4% Spain 5.5% Ireland 4.2% Netherlands 4.2% Other 12.3%
See Notes to Financial Statements 27 TEN LARGEST HOLDINGS AT DECEMBER 31, 2003 (AS A PERCENTAGE OF TOTAL NET ASSETS) 1. Air Liquide 3.2% CHEMICALS 2. Total Fina Elf ADR 3.2% INTEGRATED OIL AND GAS 3. Royal Dutch Petroleum Co. ADR 3.1% INTEGRATED OIL AND GAS 4. Unicredito Italiano SPA 3.1% BANKS 5. BP Amoco PLC 3.0% INTEGRATED OIL AND GAS 6. Telefonica 2.8% TELECOMMUNICATION SERVICES 7. Canon 2.8% BUSINESS MACHINES, CAMERAS AND OPTIC MANUFACTURER 8. Allied Irish Banks PLC 2.7% BANKS 9. Dexia 2.7% BANKS 10. Novartis ADR 2.7% PRODUCES PHARMACEUTICALS PRODUCTS
INVESTMENTS AT DECEMBER 31, 2003
SHARES VALUE ------------- ------------- FOREIGN COMMON STOCKS--99.7% AUSTRALIA--1.5% Rio Tinto Ltd. (Mining) 14,000 $ 390,965 Telstra Corp. Ltd. (Telecommunication) 109,000 394,403 ------------- 785,368 ------------- BELGIUM--4.2% Dexia (Banks)(d) 81,300 1,393,806 Fortis (Banks) 39,300 786,216 ------------- 2,180,022 ------------- FINLAND--2.1% Nokia Corp. ADR (Telecommunications Equipment) 63,007 1,071,119 FRANCE--19.0% Air Liquide (Chemicals) 9,223 1,620,546 Axa ADR (Multi-line Insurance) 44,984 965,806 BNP Paribas (Banks) 17,000 1,065,086 Groupe Danone ADR (Packaged Foods and Meats) 16,190 526,013 L'OREAL (Consumer Products) 7,300 595,521 Peugot SA (Automobile Manufacturers) 21,300 1,079,996 Sanofi Synthelabo SA (Pharmaceuticals) 15,000 1,123,897 Societe Generale (Banks) 6,600 579,833 STMicroelectronics NV (Semiconductors) 22,600 609,829 Total Fina Elf ADR (Integrated Oil & Gas) 17,496 1,618,555 ------------- 9,785,082 ------------- HONG KONG--1.1% Hong Kong & China Gas Co., Ltd. (Gas Utilities) 376,000 573,905 IRELAND--4.2% Allied Irish Banks PLC (Banks) 88,700 1,408,235 Bank of Ireland (Banks) 54,000 $ 733,301 ------------- 2,141,536 ------------- ITALY--5.4% Telecom Italia Mobil SPA (Wireless Telecommunications Services) 220,000 1,190,038 Unicredito Italiano SPA (Banks) 296,600 1,593,221 ------------- 2,783,259 ------------- JAPAN--20.4% Canon (Office Electronics) 31,000 1,439,378 Denso Corp. (Auto Parts & Equipment) 53,500 1,050,386 Fanuc Ltd. (Industrial Equipment) 8,000 477,901 Kao Corp. (Consumer Products) 22,000 446,264 Matsushita Electric Industrial (Consumer Electronics) 87,000 1,199,721 Nippon Telegraph & Telephone (Integrated Telecommunication Services) 215 1,034,289 NTT Docomo, Inc. (Wireless Telecommunications Services) 360 813,995 Rohm Co., Ltd. (Semiconductors) 4,200 490,853 SECOM CO., LTD. (Diversified Commercial Services) 15,000 558,295 Shin-Etsu Chemical Co. Ltd. (Chemicals) 21,800 888,471 SMC Corp. (Industrial Machinery) 9,100 1,129,562 Toyota Motor Corp. (Automobile Manufacturers) 27,600 929,673 ------------- 10,458,788 ------------- NETHERLANDS--4.1% Aegon (Life & Health Insurance) 35,462 522,062 Royal Dutch Petroleum Co. ADR (Integrated Oil & Gas) 30,685 1,607,587 ------------- 2,129,649 -------------
See Notes to Financial Statements 28
SHARES VALUE ------------- ------------- SINGAPORE--1.1% Singapore Technologies Engineering Ltd. (Engineering Services) 460,000 $ 552,553 SPAIN--5.5% Banco Bilbao Vizcaya SA (Banks) 55,000 755,854 Banco Popular Espanol SA (Banks) 10,000 593,639 Telefonica (Integrated Telecommunication Services)(b) 99,700 1,456,496 ------------- 2,805,989 ------------- SWEDEN--2.2% Hennes & Mauritz AB--Series B (Retail) 25,600 605,938 Svenska Cellulosa AB--Class B (Paper & Packaging Products) 13,000 529,033 ------------- 1,134,971 ------------- SWITZERLAND--11.1% Givaudan (Specialty Chemicals) 1,140 589,038 Nestle ADR (Packaged Foods and Meats) 17,443 1,089,526 Novartis ADR (Pharmaceuticals) 29,676 1,361,832 Swiss Reinsurance (Reinsurance) 7,500 504,024 Swisscom AG (Integrated Telecommunication Services) 3,250 1,067,203 UBS AG (Banks) 15,990 1,090,022 ------------- 5,701,645 ------------- UNITED KINGDOM--17.8% BP Amoco PLC (Integrated Oil & Gas) 190,950 1,540,528 Compass Group PLC (Food Distributors) 156,000 1,055,747 Diageo PLC (Beverage) 59,800 782,781 GlaxoSmithKline PLC (Pharmaceuticals) 57,373 1,307,884 HBOS PLC (Banks) 43,000 554,062 Pearson PLC (Publishing) 51,924 575,189 Reed International PLC (Publishing) 60,300 501,786 Royal Bank of Scotland Group PLC (Banks) 37,200 1,090,497 Tesco PLC (Food Retail) 118,000 541,667 Vodafone ADR (Wireless Telecommunication Services) 46,980 1,176,379 ------------- 9,126,520 ------------- TOTAL FOREIGN COMMON STOCKS (IDENTIFIED COST $44,134,703) 51,230,406 -------------
STANDARD & POOR'S PAR RATING VALUE (UNAUDITED) (000) VALUE ----------- -------- ------------ SHORT-TERM OBLIGATIONS--2.8%(c) TIME DEPOSITS--1.4% Bank of Montreal, 1.06%, 1/15/04 A-1+ $ 330 $ 329,930 Credit Agricole Indosuez, 1.08%, 1/6/04 A-1+ 378 377,814 ------------ 707,744 ------------ REPURCHASE AGREEMENT--0.7% Credit Suisse First Boston Corporation, (Date 12/31/03), 1.04%, Due 1/2/04 (Repurchased proceeds $377,825); Collateralized by $385,370 in various investment grade corporate bonds and commercial papers with interest range of 3.45% to 8.62% 378 377,814 SHARES -------- MONEY MARKET MUTUAL FUNDS--0.7% Merrill Lynch Premier Institutional Fund 27,000 27,000 Merrimac Cash Fund-Premium Class 321,142 321,142 ------------ 348,142 ------------ TOTAL SHORT-TERM OBLIGATIONS (IDENTIFIED COST $1,433,700) 1,433,700 ------------ TOTAL INVESTMENTS--102.5% (IDENTIFIED COST $45,568,403) $ 52,664,106(a) Other assets and liabilities, net--(2.5)% (1,280,634) ------------ NET ASSETS--100.0% $ 51,383,472 ============
(a) Federal Income Tax Information: Net unrealized depreciation of investment securities is comprised of gross appreciation of $8,515,146 and gross depreciation of $2,392,359 for federal income tax purposes. At December 31, 2003, the aggregate cost of securities for federal income tax purposes was $46,541,319. (b) Non-income producing (c) Represents securities purchased with cash collateral received for securities on loan. (d) All or a portion of this security was on loan at December 31, 2003. See Notes to Financial Statements 29 INDUSTRY DIVERSIFICATION AS A PERCENTAGE OF TOTAL VALUE OF TOTAL LONG-TERM INVESTMENTS (UNAUDITED) Banks 22.7% Integrated Oil & Gas 9.3 Integrated Telecommunication Services 7.7 Pharmaceuticals 7.4 Wireless Telecommunications Services 6.2 Chemicals 6.0 Automobile Manufacturers 3.9 Packaged Foods & Meats 3.2 Industrial Machinery and Equipment 3.1 Multi-Line Insurance 2.9 Office Electronics 2.8 Consumer Electronics 2.3 Semiconductors 2.2 Publishing 2.1 Telecommunications Equipment 2.1 Food Distributors 2.1 Auto Parts & Equipment 2.1 Consumer Products 2.0 Brewers 1.5 Retail 1.2 Oil & Gas Equipment & Services 1.1 Diversified Commercial Services 1.1 Engineering Services 1.1 Food Retail 1.1 Paper & Packaging Products 1.0 Reinsurance 1.0 Mining 0.8 ----- 100.0% =====
See Notes to Financial Statements 30 STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2003 ASSETS Investments securities at value including $1,346,751 of securities on loan (Identified cost $45,568,403) $ 52,664,106 Receivables Securities sold 1,008,283 Fund shares sold 848,270 Dividends and interest 43,058 Tax reclaim 38,749 Prepaid expenses 15,538 --------------- Total Assets 54,618,004 --------------- LIABILITIES Cash overdraft 1,679,082 Payables Fund shares repurchased 1,249 Collateral on securities loaned 1,433,700 Investment advisory fee 28,661 Distribution and service fees 7,279 Administration fee 11,026 Transfer agent fee 10,597 Financial agent fee 7,215 Trustees' fee 2,032 Accrued expenses 53,691 --------------- Total liabilities 3,234,532 --------------- NET ASSETS $ 51,383,472 =============== NET ASSETS CONSIST OF: Capital paid in on shares of beneficial interest $ 69,313,365 Undistributed net investment income 16,556 Accumulated net realized loss (25,047,884) Net unrealized appreciation 7,101,435 --------------- NET ASSETS $ 51,383,472 =============== CLASS A Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $9,582,043) 850,454 Net asset value per share $ 11.27 Offering price per share $11.27/(1-5.75%) $ 11.96 CLASS B Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $154,145) 13,746 Net asset value and offering price per share $ 11.21 CLASS C Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $634,054) 56,550 Net asset value and offering price per share $ 11.21 CLASS X Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $41,013,230) 3,626,794 Net asset value and offering price per share $ 11.31
STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2003 INVESTMENT INCOME Dividends $ 1,202,028 Interest 5,738 Income from securities loaned, net 15,976 Foreign taxes withheld (125,649) --------------- Total investment income 1,098,093 --------------- EXPENSES Investment advisory fee 464,735 Service fees, Class A 10,506 Distribution and service fees, Class B 1,114 Distribution and service fees, Class C 3,229 Administration 64,463 Financial agent fee 75,709 Transfer agent fee 72,991 Registration 56,235 Custodian 36,895 Professional 28,133 Trustees 14,065 Printing 11,307 Miscellaneous 23,270 --------------- Total expenses 862,652 Less: expenses borne by investment adviser (162,514) --------------- Net expenses 700,138 --------------- NET INVESTMENT INCOME 397,955 --------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized loss on investments (6,283,498) Net realized loss on foreign currency and foreign currency transactions (157,258) Net change in unrealized appreciation (depreciation) on investments 17,341,830 Net change in unrealized appreciation (depreciation) on foreign currency and foreign currency transactions 362 --------------- NET GAIN ON INVESTMENTS 10,901,436 --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 11,299,391 ===============
See Notes to Financial Statements 31 STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED 12/31/03 12/31/02 ------------- ------------- FROM OPERATIONS Net investment income (loss) $ 397,955 $ 313,144 Net realized gain (loss) (6,440,756) (13,935,767) Net change in unrealized appreciation (depreciation) 17,342,192 (394,327) ------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 11,299,391 (14,016,950) ------------- ------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income, Class A (25,007) (179,583) Net investment income, Class X (204,039) -- Return of capital, Class X -- (139,712) ------------- ------------- DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS (229,046) (319,295) ------------- ------------- FROM SHARE TRANSACTIONS CLASS A Proceeds from sales of shares (1,170,998 and 64,724 shares, respectively) 11,154,384 583,861 Net asset value of shares issued from reinvestment of distributions (2,263 and 0 shares, respectively) 24,891 -- Cost of shares repurchased (339,778 and 47,753 shares, respectively) (3,169,700) (433,739) ------------- ------------- Total 8,009,575 150,122 ------------- ------------- CLASS B Proceeds from sales of shares (14,162 and 10,951 shares, respectively) 133,689 103,399 Cost of shares repurchased (11,367 and 0 shares, respectively) (105,759) -- ------------- ------------- Total 27,930 103,399 ------------- ------------- CLASS C Proceeds from sales of shares (65,781 and 15,991 shares, respectively) 617,964 147,818 Cost of shares repurchased (20,284 and 4,938 shares, respectively) (188,779) (44,049) ------------- ------------- Total 429,185 103,769 ------------- ------------- CLASS X Proceeds from sales of shares (1,366,544 and 11,453,659 shares, respectively) 12,834,307 119,303,594 Net asset value of shares issued from reinvestment of distributions (13,861 and 23,316 shares, respectively) 153,020 237,358 Cost of shares repurchased (3,375,056 and 10,847,888 shares, respectively) (32,146,995) (111,069,098) ------------- ------------- Total (19,159,668) 8,471,854 ------------- ------------- INCREASE (DECREASE) IN NET ASSETS FROM SHARE TRANSACTIONS (10,692,978) 8,829,144 ------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS 377,367 (5,507,101) NET ASSETS Beginning of period 51,006,105 56,513,206 ------------- ------------- END OF PERIOD [INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $16,556 AND $0, RESPECTIVELY] $ 51,383,472 $ 51,006,105 ============= =============
See Notes to Financial Statements 32 FINANCIAL HIGHLIGHTS (SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
CLASS X ----------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------- 2003 2002 2001 2000 1999 Net asset value, beginning of period $ 9.01 $ 11.32 $ 16.15 $ 18.47 $ 15.51 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) 0.09(5) 0.03 0.04 0.03 0.12 Net realized and unrealized gain (loss) 2.26 (2.29) (4.83) (1.82) 4.68 -------- -------- -------- -------- -------- TOTAL FROM INVESTMENT OPERATIONS 2.35 (2.26) (4.79) (1.79) 4.80 -------- -------- -------- -------- -------- LESS DISTRIBUTIONS: From net investment income (0.05) (0.03) (0.04) (0.03) (0.12) From net realized gain -- -- -- (0.50) (1.72) From return of capital -- (0.02) -- -- -- -------- -------- -------- -------- -------- TOTAL DISTRIBUTIONS (0.05) (0.05) (0.04) (0.53) (1.84) -------- -------- -------- -------- -------- Change in net asset value 2.30 (2.31) (4.83) (2.32) 2.96 -------- -------- -------- -------- -------- NET ASSET VALUE, END OF PERIOD $ 11.31 $ 9.01 $ 11.32 $ 16.15 $ 18.47 ======== ======== ======== ======== ======== Total return 26.15% (20.04)% (29.72)% (9.65)% 0.31% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 41,013 $ 50,656 $ 56,513 $ 51,828 $ 40,590 RATIO TO AVERAGE NET ASSETS OF: Operating expenses 1.40%(1) 1.41% 1.38% 1.38% 1.40%(1) Net investment income (loss) 0.93% 0.49% 0.09% 0.24% 0.63% Portfolio turnover rate 49% 65% 88% 35% 57% CLASS A CLASS B --------------------------------- -------------------------------- YEAR ENDED FROM INCEPTION YEAR ENDED FROM INCEPTION DECEMBER 31, 8/30/02 TO DECEMBER 31, 8/30/02 TO 2003 12/31/02 2003 12/31/02 ------------- -------------- ------------- -------------- Net asset value, beginning of period $ 9.01 $ 9.45 $ 8.98 $ 9.45 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) (0.03)(5) (0.03) (0.03)(5) (0.06) Net realized and unrealized gain (loss) 2.32 (0.41) 2.26 (0.41) ------------- -------------- ------------- -------------- TOTAL FROM INVESTMENT OPERATIONS 2.29 (0.44) 2.23 (0.47) ------------- -------------- ------------- -------------- LESS DISTRIBUTIONS: From net investment income (0.03) -- -- -- From net realized gain -- -- -- -- ------------- -------------- ------------- -------------- TOTAL DISTRIBUTIONS (0.03) -- -- -- ------------- -------------- ------------- -------------- Change in net asset value 2.26 (0.44) 2.23 (0.47) ------------- -------------- ------------- -------------- NET ASSET VALUE, END OF PERIOD $ 11.27 $ 9.01 $ 11.21 $ 8.98 ============= ============== ============= ============== Total return(2) 25.56% (4.76)%(3) 24.83% (4.97)%(3) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 9,582 $ 153 $ 154 $ 98 RATIO TO AVERAGE NET ASSETS OF: Operating expenses 1.65% 1.66%(4) 2.40% 2.41%(4) Net investment income (loss) (0.31)% 0.24%(4) (0.27)% (0.51)%(4) Portfolio turnover rate 49% 65%(3) 49% 65%(3) CLASS C --------------------------------- YEAR ENDED FROM INCEPTION DECEMBER 31, 8/30/02 TO 2003 12/31/02 ------------- -------------- Net asset value, beginning of period $ 8.98 $ 9.45 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) (0.06)(5) (0.06) Net realized and unrealized gain (loss) 2.29 (0.41) ------------- -------------- TOTAL FROM INVESTMENT OPERATIONS 2.23 (0.47) ------------- -------------- LESS DISTRIBUTIONS: From net investment income -- -- From net realized gain -- -- ------------- -------------- TOTAL DISTRIBUTIONS -- -- ------------- -------------- Change in net asset value 2.23 (0.47) ------------- -------------- NET ASSET VALUE, END OF PERIOD $ 11.21 $ 8.98 ============= ============== Total return(2) 24.83% (4.97)%(3) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 634 $ 99 RATIO TO AVERAGE NET ASSETS OF: Operating expenses 2.40% 2.41%(4) Net investment income (loss) (0.70)% (0.51)%(4) Portfolio turnover rate 49% 65%(3)
(1) If the investment adviser had not waived fees and reimbursed expenses, the ratio of operating expenses to average net assets would have been 1.77% and 1.47% for the period ended December 31, 2003 and 1999, respectively. (2) Maximum sales charges are not reflected in the total return calculation. (3) Not annualized. (4) Annualized. (5) Computed using average shares outstanding. See Notes to Financial Statements 33 PHOENIX-KAYNE RISING DIVIDENDS FUND COMMENTARY INVESTMENT OBJECTIVE Phoenix-Kayne Rising Dividends Fund has an investment objective of long-term capital appreciation, with dividend income a secondary consideration. There is no guarantee that the fund will achieve its objective. MARKET OVERVIEW In the full year of 2003, the domestic equity markets provided exceptional returns, as illustrated by the performance of the S&P 500 Index(1) (+28.71%), Dow Jones Industrial Average(2) (+28.04%), and Nasdaq Composite Index(3) (+50.01%). For the entire year, the strongest sectors in the S&P 500 were information technology (+47.08%), materials (+38.12%), and consumer discretionary (+38.46%). The relatively weakest sectors were telecommunications services (+7.06%), consumer staples (+13.11%), and health care (+15.06%). Essentially, in a recovery year, the cyclical sectors performed better than the defensive sectors. Thematically, for the year, lower quality and smaller cap stocks performed much stronger than did higher quality and larger cap stocks. FUND PERFORMANCE The Rising Dividends Fund's Class X shares produced strong returns for the year (+18.45%), but underperformed the benchmark S&P 500 Index for the year 2003 (+28.71%). Although stock selection in the triple-A-rated companies somewhat affected relative return, the majority of the underperformance versus the S&P 500 was attributable to the Fund's exclusive focus on high-quality companies. In addition, our investment policy of not investing in smaller cap companies also was a factor in the underperformance of the Fund. All performance figures assume reinvestment of distributions and exclude the effect of sales charges. Past performance is not indicative of future results and current performance may be higher or lower than the performance shown. (1) THE S&P 500 INDEX IS A MEASURE OF STOCK MARKET TOTAL RETURN PERFORMANCE. (2) THE DOW JONES INDUSTRIAL AVERAGE IS A MEASURE OF LARGE-CAP STOCK PERFORMANCE. (3) THE NASDAQ COMPOSITE INDEX IS A MARKET CAPITALIZATION-WEIGHTED INDEX OF ALL ISSUES LISTED ON THE NASDAQ STOCK MARKET, EXCEPT FOR RIGHTS, WARRANTS, UNITS AND CONVERTIBLE DEBENTURES. THE INDEX IS CALCULATED AS A PRICE ONLY RETURN. THE INDEXES ARE UNMANAGED AND ARE NOT AVAILABLE FOR DIRECT INVESTMENT. 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. 34 The market's emphasis on lower quality companies is illustrated by the following chart: [CHART] S&P 500(R) Index Returns by Credit Quality One Year Ending December 31, 2003 AAA 14.49% AA+, AA, AA- 18.65% A+, A, A- 29.93% BBB+ 33.52% BBB+, BBB- 35.91% BELOW INVESTMENT GRADE 74.91% NOT RATED 55.23%
Approximately 29% of the weight of the S&P 500 Index is represented by companies that have a triple-B-plus or lower credit rating or no rating. In contrast, the Rising Dividends Fund is 100% invested in companies with an A-minus or better credit-quality profile. For the full year, the five positions that contributed the most to the Fund's return were Linear Technology, Home Depot, General Electric, Intel, and Wells Fargo. The five positions that contributed the least were SBC Communications, Merck, Johnson & Johnson, Leggett & Platt, and Wrigley. Over time in the universe of high-quality companies, we have observed that last year's loser (Home Depot in 2002) often becomes this year's winner. High-quality companies have strong staying power and usually find a way to solve their problems. PURCHASES AND SALES During the year, seven new stocks were purchased for the Fund and six stocks were sold in their entirety. In chronological order, the Fund purchased PepsiCo, Air Products & Chemicals, Harley-Davidson, Emerson, ConocoPhillips, Leggett & Platt, and Avery Dennison. The purchases of PepsiCo and Harley-Davidson reflected opportunistic valuations in consistent-growth companies, while the buys of Air Products, Emerson, Leggett & Platt, and Avery Dennison reflected attractive valuations, above-average dividend yields, and a belief in the industrial recovery. The purchase of ConocoPhillips was based on good value, above-average income, and the improvement of the company's balance sheet. In chronological order, the Fund sold SBC Communications, Fannie Mae, Medtronic, Golden 35 West Financial, Medco Health Solutions, and Intel. SBC and Fannie Mae were sold because of deterioration in their fundamentals. Medtronic, Golden West Financial, and Intel were sold because their solid stock performance created rich valuations. Medco was a non-strategic fractional spin-off from Merck. In addition to the new purchases and complete sales, positions were increased in Wal-Mart, Fifth Third Bancorp, Harley-Davidson, Citigroup, and Merck. Positions were trimmed in Wrigley, Coca-Cola, Linear Technology, State Street, Home Depot, Microsoft, and IBM. SUMMARY The Fund invests solely in high-quality companies, but low-quality stocks were favored by the equity markets in 2003. There are certain factors that indicate that the higher quality, more consistent earnings-growth companies could assume market leadership in 2004. To a significant extent, low real interest rates and abundant liquidity in the financial system provided an environment that allowed lower quality stocks to rebound from their cyclical lows. With the economic recovery strongly underway, we believe that interest rates have probably seen their lows. In addition, we believe earnings comparisons for more operationally and financially levered companies will be much more difficult in the second half of 2004. High-quality companies have differentiated businesses that produce high returns on investor capital, substantial free cash flows, and low-debt balance sheets. Such strong financial characteristics allow the companies to reinvest for continued growth and deliver cash to the shareholders through share repurchases and cash dividends. We believe in the power of cash dividends compounding over time. Various studies have shown that approximately two-thirds of long-term stock returns are derived from dividends. The Rising Dividends Fund provides a dividend yield that is approximately twice the level of Treasury-bill yields. In addition, the companies in the Fund have increased their dividends by 10 to 15% per year over time, which we believe provides a basis for an increasing income stream in the future and related capital appreciation. 36 PHOENIX-KAYNE RISING DIVIDENDS FUND AVERAGE ANNUAL TOTAL RETURNS(1) PERIOD ENDING 12/31/03
INCEPTION INCEPTION 1 YEAR 5 YEAR TO 12/31/03 DATE ------ ------ ----------- --------- Class A Shares at NAV(2) 18.06% -- 10.02% 8/30/02 Class A Shares at POP(3) 11.27 -- 5.25 8/30/02 Class B Shares at NAV(2) 17.29 -- 9.23 8/30/02 Class B Shares with CDSC(4) 13.29 -- 6.31 8/30/02 Class C Shares at NAV(2) 17.24 -- 9.19 8/30/02 Class C Shares with CDSC(4) 17.24 -- 9.19 8/30/02 Class X Shares at NAV(2) 18.45 (0.12)% 9.14 5/1/95 S&P 500 Index(7) 28.71 (0.57) Note 5 Note 5
(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 17.74% for Class A, Class B and Class C (since 8/30/02) and 11.18% for Class X (since 5/1/95). (6) This chart illustrates NAV returns on Class X shares since inception. Returns on Class A, Class B and Class C shares will vary due to differing sales charges. (7) The S&P 500 Index is an unmanaged, commonly used measure of stock market total return performance. The index's performance does not reflect sales charges. All returns represent past performance which may not be indicative of future performance. 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. Because the fund holds a limited number of securities, it will be impacted by each security's performance more than a fund with a large number of holdings. GROWTH OF $10,000 PERIODS ENDING 12/31/03 [CHART]
PHOENIX-KAYNE RISING DIVIDENDS FUND CLASS X(6) S&P 500 TOTAL RETURN INDEX(7) 5/1/95 $ 10,000 $ 10,000 12/29/95 $ 12,065 $ 12,184 12/31/96 $ 14,368 $ 15,017 12/31/97 $ 18,821 $ 20,029 12/31/98 $ 21,483 $ 25,789 12/31/99 $ 24,991 $ 31,239 12/29/2000 $ 24,492 $ 28,369 12/31/2001 $ 21,791 $ 25,000 12/31/2002 $ 18,032 $ 19,475 12/31/2003 $ 21,359 $ 25,067
This Growth of $10,000 chart assumes an initial investment of $10,000 made on 5/1/95 (inception of the Fund) in Class X shares. The total return for Class X shares do not include the effect of any sales charge. Performance assumes dividends and capital gains are reinvested. The performance of other shares will be greater or less than that shown based on differences in inception dates, fees and sales charges. SECTOR WEIGHTINGS 12/31/03 [CHART] As a percentage of equity holdings Financials 21.6% Consumer Staples 15.3% Health Care 14.1% Information Technology 14.0% Industrials 12.6% Consumer Discretionary 9.2% Energy 8.4% Materials 4.8%
See Notes to Financial Statements 37 TEN LARGEST HOLDINGS AT DECEMBER 31, 2003 (AS A PERCENTAGE OF NET ASSETS) 1. General Electric Co. 5.0% CONSUMER AND INDUSTRIAL ELECTRICAL PRODUCTS PRODUCER 2. Exxon Mobil Corp. 4.8% ENERGY AND PETROCHEMICAL PRODUCER 3. Pfizer, Inc. 4.5% PHARMACEUTICAL DEVELOPER AND MANUFACTURER 4. Linear Technology Corp. 4.3% INTEGRATED CIRCUITS MANUFACTURER 5. Wells Fargo & Co. 4.2% REGIONAL BANK 6. Procter & Gamble Co. 4.2% HOUSEHOLD PRODUCTS 7. Citigroup, Inc. 4.0% DIVERSIFIED FINANCIAL SERVICES 8. Home Depot, Inc. (The) 4.0% BUILDING AND HOME IMPROVEMENT STORES 9. Microsoft Corp. 3.9% LEADING COMPUTER SOFTWARE DEVELOPER 10. Wal-Mart Stores, Inc. 3.7% GENERAL MERCHANDISE STORES
INVESTMENTS AT DECEMBER 31, 2003
SHARES VALUE -------------- -------------- COMMON STOCKS--99.0% BANKS--7.4% Fifth Third Bancorp. 61,900 $ 3,658,290 Wells Fargo & Co. 81,980 4,827,802 -------------- 8,486,092 -------------- COMPUTER HARDWARE--1.9% International Business Machines Corp. 23,610 2,188,175 DATA PROCESSING SERVICES--3.7% Automatic Data Processing, Inc. 108,330 4,290,952 DIVERSIFIED CHEMICALS--4.7% Air Products & Chemicals, Inc. 46,700 2,467,161 E. I. du Pont de Nemours and Co. 64,800 2,973,672 -------------- 5,440,833 -------------- DIVERSIFIED FINANCIAL SERVICES--8.5% American Express Co. 58,500 2,821,455 Citigroup, Inc. 94,400 4,582,176 State Street Corp. 46,200 2,406,096 -------------- 9,809,727 -------------- ELECTRICAL COMPONENTS & EQUIPMENT--3.3% Emerson Electric Co. 58,000 3,755,500 GENERAL MERCHANDISE STORES--3.7% Wal-Mart Stores, Inc. 80,900 4,291,745 HOME FURNISHINGS--2.1% Leggett & Platt, Inc. 110,300 $ 2,385,789 HOME IMPROVEMENT RETAIL--4.0% Home Depot, Inc. (The) 128,100 4,546,269 HOUSEHOLD PRODUCTS--4.2% Procter & Gamble Co. 47,950 4,789,246 INDUSTRIAL CONGLOMERATES--5.0% General Electric Co. 184,660 5,720,767 INDUSTRY MACHINERY--2.3% Illinois Tool Works, Inc. 31,020 2,602,888 INSURANCE BROKERS--2.5% Marsh & McLennan Companies, Inc. 61,180 2,929,910 INTEGRATED OIL & GAS--8.3% ConocoPhillips 62,200 4,078,454 Exxon Mobil Corp. 133,640 5,479,240 -------------- 9,557,694 -------------- MOTORCYCLE MANUFACTURERS--3.1% Harley-Davidson, Inc.(b) 74,500 3,540,985 MULTI-LINE INSURANCE--2.9% American International Group, Inc. 50,800 3,367,024 OFFICE SUPPLIES--2.0% Avery Dennison Corp. 41,100 2,302,422
See Notes to Financial Statements 38
SHARES VALUE -------------- -------------- PACKAGED FOODS AND MEATS--1.7% Wm. Wrigley, Jr. Co.(b) 34,720 $ 1,951,611 PHARMACEUTICALS--14.0% Eli Lilly & Co. 39,400 2,771,002 Johnson & Johnson 82,770 4,275,898 Merck & Co., Inc. 82,810 3,825,822 Pfizer, Inc. 147,300 5,204,109 -------------- 16,076,831 -------------- SEMICONDUCTORS--4.3% Linear Technology Corp. 118,600 4,989,502 SOFT DRINKS--5.5% Coca-Cola Co. 83,360 4,230,520 PepsiCo, Inc. 45,800 2,135,196 -------------- 6,365,716 -------------- SYSTEMS SOFTWARE--3.9% Microsoft Corp. 162,480 4,474,699 - ----------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (IDENTIFIED COST $102,833,654) 113,864,377 - ----------------------------------------------------------------------------------------- STANDARD & POOR'S PAR RATING VALUE (UNAUDITED) (000) VALUE ----------- -------------- -------------- SHORT-TERM OBLIGATIONS--1.8%(c) TIME DEPOSITS--0.9% Bank of Montreal, 1.06%, 1/15/04 A-1+ $ 466 $ 465,667 Credit Agricole Indosuez, 1.08%, 1/6/04 A-1+ 533 533,251 -------------- 998,918 -------------- REPURCHASE AGREEMENT--0.5% Credit Suisse First Boston Corporation (Dated 12/31/03), 1.04%, Due 1/2/04 (Repurchased proceeds $533,281); Collateralized by $543,915 in various investment grade corporate bonds and commercial papers with interest ranges of 3.45% to 8.62% 533 533,251 SHARES -------------- MONEY MARKET MUTUAL FUNDS-0.4% Merrill Lynch Premier Institutional Fund 38,108 38,108 Merrimac Cash Fund-Premium Class 453,263 453,263 -------------- 491,371 -------------- - ----------------------------------------------------------------------------------------- TOTAL SHORT-TERM OBLIGATIONS (IDENTIFIED COST $2,023,540) 2,023,540 - ----------------------------------------------------------------------------------------- TOTAL INVESTMENTS--100.8% (IDENTIFIED COST $104,857,194) $ 115,887,917(a) Other assets and liabilities, net--(0.8)% (870,207) -------------- NET ASSETS--100.0% $ 115,017,710 ==============
(a) Federal Income Tax Information: Net unrealized depreciation of investment securities is comprised of gross appreciation of $15,218,107 and gross depreciation of $4,826,551 for federal income tax purposes. At December 31, 2003, the aggregate cost of securities for federal income tax purposes was $105,496,361. (b) All or a portion of this security was on loan as of December 31, 2003. (c) Represents securities purchased with cash collateral received for securities on loan. See Notes to Financial Statements 39 STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 2003 ASSETS Investments securities at value including $1,954,312 of securities on loan (Identified cost $104,857,194) $ 115,887,917 Receivables Securities sold 3,183,465 Fund shares sold 1,340,805 Dividends and interest 185,909 Securities loan earnings 540 Prepaid expenses 21,005 --------------- Total Assets 120,619,641 --------------- LIABILITIES Cash overdraft 3,397,559 Payables Fund shares repurchased 6,365 Collateral on securities loaned 2,023,540 Investment advisory fee 75,273 Distribution and service fees 22,562 Administration fee 14,860 Transfer agent fee 13,611 Financial agent fee 6,182 Trustees' fee 2,030 Accrued expenses 39,949 --------------- Total liabilities 5,601,931 --------------- NET ASSETS $ 115,017,710 =============== NET ASSETS CONSIST OF: Capital paid in on shares of beneficial interest $ 122,374,022 Undistributed net investment income 468,303 Accumulated net realized loss (18,855,338) Net unrealized appreciation 11,030,723 --------------- NET ASSETS $ 115,017,710 =============== CLASS A Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $28,988,184) 1,889,074 Net asset value per share $ 15.35 Offering price per share $15.35/(1-5.75%) $ 16.29 CLASS B Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $1,716,719) 112,965 Net asset value and offering price per share $ 15.20 CLASS C Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $1,951,757) 128,365 Net asset value and offering price per share $ 15.20 CLASS X Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $82,361,050) 5,349,823 Net asset value and offering price per share $ 15.40
STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2003 INVESTMENT INCOME Dividends $ 1,671,372 Interest 15,178 Income from securities loaned, net 2,986 --------------- Total investment income 1,689,536 --------------- EXPENSES Investment advisory fee 738,917 Service fees, Class A 29,151 Distribution and service fees, Class B 8,692 Distribution and service fees, Class C 11,269 Administration 84,631 Transfer agent 108,558 Financial agent fee 64,038 Registration 57,872 Printing 29,778 Custodian 24,631 Professional 22,213 Trustees 14,063 Miscellaneous 25,996 --------------- Total expenses 1,219,809 --------------- NET INVESTMENT INCOME 469,727 --------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized loss on investments (3,486,365) Net change in unrealized appreciation (depreciation) on investments 20,351,108 --------------- NET GAIN ON INVESTMENTS 16,864,743 --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 17,334,470 ===============
See Notes to Financial Statements 40 STATEMENTS OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED 12/31/03 12/31/02 -------------- -------------- FROM OPERATIONS Net investment income (loss) $ 469,727 $ 406,929 Net realized gain (loss) (3,486,365) (11,471,387) Net change in unrealized appreciation (depreciation) 20,351,108 (7,832,614) -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 17,334,470 (18,897,072) -------------- -------------- FROM DISTRIBUTIONS TO SHAREHOLDERS Net investment income, Class A (11,252) -- Net investment income, Class B (1,267) -- Net investment income, Class C (1,111) -- Net investment income, Class X (201,163) (394,434) -------------- -------------- DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS (214,793) (394,434) -------------- -------------- FROM CAPITAL SHARE TRANSACTIONS CLASS A Proceeds from sales of shares (1,795,261 and 315,888 shares, respectively) 25,695,166 4,351,036 Net asset value of shares issued from reinvestment of distributions (763 and 0 shares, respectively) 10,818 -- Cost of shares repurchased (215,207 and 7,631 shares, respectively) (3,001,765) (103,096) -------------- -------------- Total 22,704,219 4,247,940 -------------- -------------- CLASS B Proceeds from sales of shares (98,526 and 25,981 shares, respectively) 1,380,545 348,303 Net asset value of shares issued from reinvestment of distributions (72 and 0 shares, respectively) 1,021 -- Cost of shares repurchased (11,515 and 99 shares, respectively) (158,007) (1,313) -------------- -------------- Total 1,223,559 346,990 -------------- -------------- CLASS C Proceeds from sales of shares (121,194 and 49,610 shares, respectively) 1,690,342 665,389 Net asset value of shares issued from reinvestment of distributions (63 and 0 shares, respectively) 890 -- Cost of shares repurchased (37,218 and 5,284 shares, respectively) (497,184) (70,475) -------------- -------------- Total 1,194,048 594,914 -------------- -------------- CLASS X Proceeds from sales of shares (1,250,880 and 1,455,292 shares, respectively) 16,952,203 21,577,941 Net asset value of shares issued from reinvestment of distributions (9,414 and 16,393 shares, respectively) 133,675 237,373 Cost of shares repurchased (1,840,544 and 2,170,367 shares, respectively) (26,496,577) (30,296,859) -------------- -------------- Total (9,410,699) (8,481,545) -------------- -------------- INCREASE (DECREASE) IN NET ASSETS FROM SHARE TRANSACTIONS 15,711,127 (3,291,701) -------------- -------------- NET INCREASE(DECREASE) IN NET ASSETS 32,830,804 (22,583,207) NET ASSETS Beginning of period 82,186,906 104,770,113 -------------- -------------- END OF PERIOD [INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $468,303 AND $213,369, RESPECTIVELY] $ 115,017,710 $ 82,186,906 ============== ==============
See Notes to Financial Statements 41 PHOENIX-KAYNE RISING DIVIDENDS FUND FINANCIAL HIGHLIGHTS (SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
CLASS X ----------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ----------- ----------- ----------- ----------- Net asset value, beginning of period $ 13.03 $ 15.81 $ 17.97 $ 18.67 $ 17.03 INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) 0.07(4) 0.06 0.05 0.06 0.04 Net realized and unrealized gain (loss) 2.33 (2.78) (2.03) (0.44) 2.71 ----------- ----------- ----------- ----------- ----------- TOTAL FROM INVESTMENT OPERATIONS 2.40 (2.72) (1.98) (0.38) 2.75 ----------- ----------- ----------- ----------- ----------- LESS DISTRIBUTIONS: From net investment income (0.03) (0.06) (0.05) (0.03) (0.04) From net realized gain -- -- (0.13) (0.29) (1.07) ----------- ----------- ----------- ----------- ----------- TOTAL DISTRIBUTIONS (0.03) (0.06) (0.18) (0.32) (1.11) ----------- ----------- ----------- ----------- ----------- Change in net asset value 2.37 (2.78) (2.16) (0.70) 1.64 ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, END OF PERIOD $ 15.40 $ 13.03 $ 15.81 $ 17.97 $ 18.67 =========== =========== =========== =========== =========== Total return 18.45% (17.25)% (11.03)% (2.00)% 16.33% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 82,361 $ 77,263 $ 104,770 $ 131,252 $ 123,505 RATIO TO AVERAGE NET ASSETS OF: Operating expenses 1.19% 1.04% 0.95% 0.90% 1.03% Net investment income (loss) 0.53% 0.42% 0.30% 0.30% 0.28% Portfolio turnover rate 26% 26% 32% 42% 33% CLASS A CLASS B --------------------------------- --------------------------------- YEAR ENDED FROM INCEPTION YEAR ENDED FROM INCEPTION DECEMBER 31, 8/30/02 TO DECEMBER 31, 8/30/02 TO 2003 12/31/02 2003 12/31/02 ------------ -------------- ------------ -------------- Net asset value, beginning of period $ 13.02 $ 13.53 $ 12.98 $ 13.53 INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) 0.05(4) -- (0.06)(4) (0.01) Net realized and unrealized gain (loss) 2.31 (0.51) 2.30 (0.54) ------------ -------------- ------------ -------------- TOTAL FROM INVESTMENT OPERATIONS 2.36 (0.51) 2.24 (0.55) ------------ -------------- ------------ -------------- LESS DISTRIBUTIONS: From net investment income (0.03) -- (0.02) -- From net realized gain -- -- -- -- ------------ -------------- ------------ -------------- TOTAL DISTRIBUTIONS (0.03) -- (0.02) -- ------------ -------------- ------------ -------------- Change in net asset value 2.33 (0.51) 2.22 (0.55) ------------ -------------- ------------ -------------- NET ASSET VALUE, END OF PERIOD $ 15.35 $ 13.02 $ 15.20 $ 12.98 ============ ============== ============ ============== Total return(1) 18.06% (3.77)%(2) 17.29% (4.07)%(2) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 28,988 $ 4,012 $ 1,717 $ 336 RATIO TO AVERAGE NET ASSETS OF: Operating expenses 1.44% 1.29%(3) 2.19% 2.04%(3) Net investment income (loss) 0.36% 0.17%(3) (0.47)% (0.58)%(3) Portfolio turnover rate 26% 26%(2) 26% 26%(2) CLASS C --------------------------------- YEAR ENDED FROM INCEPTION DECEMBER 31, 8/30/02 TO 2003 12/31/02 ------------ -------------- Net asset value, beginning of period $ 12.98 $ 13.53 INCOME FROM INVESTMENT OPERATIONS: Net investment income (loss) (0.06)(4) (0.01) Net realized and unrealized gain (loss) 2.30 (0.54) ------------ -------------- TOTAL FROM INVESTMENT OPERATIONS 2.24 (0.55) ------------ -------------- LESS DISTRIBUTIONS: From net investment income (0.02) -- From net realized gain -- -- ------------ -------------- TOTAL DISTRIBUTIONS (0.02) -- ------------ -------------- Change in net asset value 2.22 (0.55) ------------ -------------- NET ASSET VALUE, END OF PERIOD $ 15.20 $ 12.98 ============ ============== Total return(1) 17.24% (4.07)%(2) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 1,952 $ 575 RATIO TO AVERAGE NET ASSETS OF: Operating expenses 2.19% 2.04%(3) Net investment income (loss) (0.47)% (0.58)%(3) Portfolio turnover rate 26% 26%(2)
(1) Maximum 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 42 PHOENIX-KAYNE SMALL-MID CAP FUND COMMENTARY INVESTMENT OBJECTIVE Phoenix-Kayne Small-Mid Cap Fund has an investment objective of long-term capital appreciation, with dividend income a secondary consideration. There is no guarantee that the fund will achieve its objective. MARKET OVERVIEW After a three-year bear market, investors concluded that the market had bottomed in the first quarter of 2003 and that the 2001-2002 recession had finally ended. Unlike the period from the end of first quarter of 2000 until the fall of 2002, when investors sought refuge in high-quality companies with strong balance sheets, in 2003, investors went on a buying frenzy, seeking out the most beaten-down companies--low-quality speculative companies with low profitability and high debt. With strengthening economic news, investors rotated into low-quality companies that would most benefit from a firming economy. For the year 2003, quality companies lagged--the worse the quality, the higher the performance--across all major indexes. FUND PERFORMANCE Because of the Fund's focus on high-quality businesses, the fund lagged its benchmark, the Russell 2500 Index(1), for the year despite generating attractive absolute returns. The Fund's Class X shares returned 26.71%, while the index returned 45.51%. All performance figures assume reinvestment of distributions and exclude the effect of sales charges. Past performance is not indicative of future results and current performance may be higher or lower than the performance shown. For the year 2003, economically sensitive, high-risk sectors, such as capital goods and technology, produced the strongest performance in the Russell 2500 Index. Interest-rate sensitive stocks, such as financials and utilities, underperformed during the year as investors anticipated that the strengthening economy would lead to a rise in interest rates. During the year 2003, the companies that contributed the most to the Fund's performance included World Acceptance, Rent-A-Center, and Polaris Industries. The Fund purchased World Acceptance, a leading blue-collar consumer finance company, in 2002 after it came under pressure because of heightened industry-wide regulatory and credit-quality concerns. Our research showed the company to be insulated from these pressures. Investors ultimately realized that the industry issues did not affect World Acceptance and drove the stock price up. Rent-A-Center operates rent-to-own stores that offer high-quality durable goods such as home electronics, appliances, computers, and furniture to consumers. The stock price was driven higher by strong revenue growth and strong free-cash-flow generation that allowed the company to repurchase over two million of its shares outstanding. Polaris is the world's number-one manufacturer of snowmobiles and a top maker of all-terrain vehicles (ATV's) and personal watercraft. The company has proven itself through exceptional financial performance. Polaris has achieved 20 consecutive years of earnings per share growth, and has grown through the last (1) THE RUSSELL 2500 INDEX IS 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. 43 several economic recessions. Despite superior results, the stock was purchased in 2003 at a significant discount valuation to overall market. The combination of continued double-digit earnings growth and narrowing of the discount valuation contributed to the stock's strong performance. [CHART] 2003 - Russell 2500 Index Returns by S&P Bond Rating Below Investment Grade 59.63% BBB- to BBB+ 37.46% A- to A+ 28.84% AA- to AA+ 12.59%
The companies that contributed the least to the Fund's performance for 2003 were CSG Systems International, First Health Group, and Hanover Compressor. CSG Systems International ("CSG") is the leading provider of customer-care and billing services to the cable TV market. The stock was hurt by lowered earnings expectations because of financial difficulties in the cable and telecommunications industry that CSG serves. We sold the stock from the Fund. First Health Group is a full-service national health-benefits company. In the fourth quarter, the company announced that it expected flat earnings in 2004, mainly because of aggressive competitive pricing. We view the earnings disappointment as related more to the insurance underwriting cycle than the company's fundamental strength and the fund continues to hold the stock. Hanover Compressor operates the nation's largest national-gas compression fleet for exploration and production companies that outsource this function. The company suffered diminished outlook for compression outsourcing and it shifted emphasis to equipment fabrication. We saw little competitive differentiation in this area and decided to sell the stock from the Fund. PURCHASES AND SALES During the year, the Fund bought 99 Cents Only Stores, American Italian Pasta, Arbitron, Balchem, Consolidated Water Corporation, Diagnostic Products, ICU Medical, and Inter-Tel. 99 Cents Only Stores is a deep-discount retailer of 44 primarily name-brand, consumable general merchandise. The company's stores offer a wide assortment of regularly available consumer goods, as well as a broad variety of first-quality closeout merchandise, with each item priced at 99 cents. The 99 Cents Only Stores are typically two to three times larger than traditional dollar stores and this size advantage creates longer visits and higher average tickets. American Italian Pasta Company is the largest pasta producer in the U.S. and the second largest in the world. The company is the low-cost producer that also owns a strong branded portfolio. We expect free cash flow and Return on Equity to increase because the company recently completed a heavy capital spending cycle. Arbitron is the nation's dominant radio-audience measurement company. The company's ratings represent the industry standard for radio broadcasting. The company's status as the industry standard creates pricing power that produces operating margins in excess of 30%. Balchem Corporation, a specialty chemicals company that operates specialty products and encapsulates businesses. In the specialty products segment, Balchem is the leading supplier of ethylene oxide, a gas used by the medical device industry to sterilize products. In the encapsulates segment, the company has developed a proprietary technology to coat active ingredients and nutrients used in food production to keep food fresh and vitamins active. Once specified into a food product, the ingredient becomes an integral part of the product, providing Balchem with a recurring revenue stream. Consolidated Water develops and operates water utilities in areas where water is scarce, primarily in the Caribbean. The company is an attractive investment in the utility sector given Consolidated Water's unique niche expertise, long-term exclusive service contracts, additional revenue opportunities through leveraging its expertise to new geographies, and under-levered balance sheet. The company has benefited from the accretive effects of its recent large acquisitions. Diagnostic Products manufactures medical immunodiagnostic test kits that utilize state-of-the-art technology derived from immunology and molecular biology and accompanying automated laboratory instruments that perform blood tests in hospitals, laboratories, and doctors' offices. Inter-Tel provides communications systems, software, and services including telephones, PBX's, voice mail, and Internet telephony systems to medium-sized business customers. With many telecommunications providers in financial distress, Inter-Tel's strong financial position has proven to be an important selection criterion for customers and is allowing the company to gain market share. In addition to CSG Systems and Hanover Compressor, mentioned above, the Fund sold La-Z-Boy, Landauer, and Maxim Integrated Products. La-Z-Boy suffered from increased competition from Chinese imports. The company has managed import competition in its case-goods business (such as tables and dressers) by increased overseas sourcing of its own casegoods' products. Historically, upholstered furniture has been relatively immune from import competition because the bulk of recliners and sofas made overseas shipping too expensive. When we learned that China was building new upholstered furniture factories for export business, the Fund sold our holdings of La-Z-Boy. Landauer was sold from the fund when it reached an all-time high price and traded at approximately 21 times estimated 2003 earnings per share, which was near its all-time high valuation multiple. Maxim was sold from the Fund when its market capitalization grew too large at $12 billion for a small-mid cap fund. 45 OUTLOOK Our Fund continues to produce strong, consistent earnings growth from companies with under-leveraged balance sheets and with the stocks selling at discount valuations. That combination of quality, growth, and value is the source of our strong long-term performance. Lower quality companies can lead in an accelerating economy emerging from recession as occurred in 2003. However, we believe the combination of quality, growth, and value will come once again to the fore when the peak in the rate of the economic recovery is past. Economists believe that peak growth rate occurred in the 4th quarter of 2003.
PHOENIX- RUSSELL RUSSELL KAYNE RUSSELL S&P 2500(TM) 2500(TM) SMALL-MID 2500(TM) 500(R) GROWTH VALUE CAP FUND INDEX INDEX(2) INDEX(3) INDEX(4) --------- ---------- -------- ---------- ---------- QUALITY Return on Equity--Past 5 Years 21.0% 12.0% 21.4% 14.1% 10.7% Long-Term Debt/Total Capital 33.9% 42.8% 49.4% 33.5% 49.8% Interest Expense Coverage 11.61x 5.33x 5.77x 9.23x 4.01x Earnings Variance--Past 10 Years 36.6% 70.7% 50.2% 84.7% 62.5% S&P Stock Ranking (A+, A, A-) 41.0% 16.0% 50.0% 11.0% 20.0% GROWTH Earnings Per Share Growth--Past 5 Years 17.4% 7.0% 7.7% 14.5% 2.7% Earnings Per Share Growth--Past 10 Years 17.6% 7.9% 11.4% 12.9% 5.5% Dividend Per Share Growth--Past 5 Years 11.3% 4.5% 8.8% 7.5% 3.5% Dividend Per Share Growth--Past 10 Years 11.4% 4.9% 10.1% 7.0% 4.3% Capital Generation--{ROE X (1 - Payout)} 18.0% 9.4% 15.2% 12.9% 7.4% VALUE P/E Ratio--Trailing 12 Months 18.1x 28.9x 22.6x 38.7x 24.0x Dividend Yield 0.8% 1.2% 1.6% 0.4% 1.8% MARKET CHARACTERISTICS $ Weighted Average Market Cap--4 Qtr. Average $ 2.3B $ 1.6B $ 84.6B $ 1.5B $ 1.6B Largest Market Cap--4 Qtr. Average $ 11.1B $ 5.1B $ 289.2B $ 4.7B $ 5.1B Annualized Standard Deviation--Since Inception* 17.9% 20.7% 18.3% 29.8% 16.4%
Notes: Data as of December 31,2003 Data is obtained from the Frank Russell Company and CompuStat and is assumed to be reliable. (2) THE S&P 500 INDEX IS A MEASURE OF STOCK MARKET TOTAL RETURN PERFORMANCE. (3) THE RUSSELL 2500 GROWTH INDEX IS A MARKET CAPITALIZATION-WEIGHTED INDEX OF GROWTH-ORIENTED STOCKS OF THE SMALLEST 2,500 COMPANIES IN THE RUSSELL UNIVERSE, WHICH COMPRISES THE 3,000 LARGEST U.S. COMPANIES. THE INDEX IS CALCUALTED ON A TOTAL-RETURN BASIS WITH DIVIDENDS REINVESTED. (4) THE RUSSELL 2500 VALUE INDEX IS A MARKET CAPITALIZATION-WEIGHTED INDEX OF VALUE-ORIENTED STOCKS OF THE SMALLEST 2,500 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. THE INDEXES ARE UNMANAGED AND ARE NOT AVAILABLE FOR DIRECT INVESTMENT. 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. 46 PHOENIX-KAYNE SMALL-MID CAP FUND AVERAGE ANNUAL TOTAL RETURNS(1) PERIOD ENDING 12/31/03
INCEPTION INCEPTION 1 YEAR 5 YEAR TO 12/31/03 DATE ------ ------ ----------- --------- Class A Shares at NAV(2) 26.36% -- 13.54% 8/30/02 Class a Shares at POP(3) 19.09 -- 8.62 8/30/02 Class B Shares at NAV(2) 25.45 -- 12.70 8/30/02 Class B Shares with CDSC(4) 21.45 -- 9.81 8/30/02 Class C Shares at NAV(2) 25.59 -- 12.79 8/30/02 Class C Shares with CDSC(4) 25.59 -- 12.79 8/30/02 Class X Shares at NAV(2) 26.71 7.15% 10.39 10/18/96 Russell 2500 Stock Index(8) 45.51 9.40 Note 5 Note 5 S&P 500 Index(9) 28.71 (0.57) Note 6 Note 6
(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 30.58% for Class A, Class B, Class C (since 8/30/02) and 10.71% for Class X (since 10/18/96). (6) Index performance is 17.74% for Class A, Class B, Class C (since 8/30/02) and 8.06% for Class X (since 10/18/96). (7) This chart illustrates NAV returns on Class X shares since inception. Returns on Class A, Class B and Class C shares will vary due to differing sales charges. (8) The Russell 2500 Index is an unmanaged, commonly used measure of total return performance of smaller-capitalization stocks. The index's performance does not reflect sales charges. (9) The S&P 500 Index is an unmanaged, commonly used measure of stock market total performance. The index's performance does not reflect sales charges. All returns represent past performance which may not be indicative of future performance. 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. Because the fund holds a limited number of securities, it will be impacted by each security's performance more than a fund with a large number of holdings. Small-Cap investing includes the risks or greater price volatility, less liquidity and increased competitive threat than those of larger, established companies. GROWTH OF $10,000 PERIODS ENDING 12/31/03 [CHART]
PHOENIX-KAYNE SMALL-MID CAP FUND CLASS X(7) RUSSELL 2500 STOCK INDEX(8) S&P 500 TOTAL RETURN INDEX(9) 10/18/96 $ 10,000 $ 10,000 $ 10,000 12/31/96 $ 10,400 $ 10,642 $ 10,474 12/31/97 $ 12,424 $ 13,234 $ 13,970 12/31/98 $ 14,433 $ 13,285 $ 17,988 12/31/99 $ 14,958 $ 16,493 $ 21,789 12/29/2000 $ 18,663 $ 17,197 $ 19,788 12/31/2001 $ 19,857 $ 17,407 $ 17,438 12/31/2002 $ 16,087 $ 14,309 $ 13,584 12/31/2003 $ 20,384 $ 20,821 $ 17,484
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 do not include the effect of any sales charge. Performance assumes dividends and capital gains are reinvested. SECTOR WEIGHTINGS 12/31/03 [CHART] As a percentage of equity holdings Financials 16.5% Consumer Discretionary 15.9% Health Care 16.2% Information Technology 20.7% Industrials 19.4% Materials 3.8% Consumer Staples 3.4% Energy 3.3% Utilities 0.8%
See Notes to Financial Statements 47 TEN LARGEST HOLDINGS AT DECEMBER 31, 2003 (AS A PERCENTAGE OF NET ASSETS) 1. Rent-A-Center, Inc. 3.5% THE LARGEST RENT-TO-OWN RETAILER OF HOUSEHOLD PRODUCTS IN THE U.S. 2. Catalina Marketing Corp. 3.5% INVENTED ELECTRONIC COUPONS DELIVERED TO SHOPPERS AT THE POINT OF SALE AND TAILORED TO THEIR PURCHASES 3. Reinsurance Group of America 3.5% THE NATION'S LEADING FACULTATIVE (NON-STANDARD RISKS) REINSURER OF LIFE INSURANCE 4. Regis Corp. 2.9% THE GLOBAL LEADER IN HAIR SALONS 5. Microchip Technology, Inc. 2.7% THE LEADING SEMICONDUCTOR COMPANY IN THE 8-BIT MICROCONTROLLER MARKET 6. Teleflex Inc. 2.7% MANUFACTURES PRODUCTS FOR AUTOMOTIVE, MARINE, INDUSTRIAL, MEDICAL AND AEROSPACE INDUSTRIES 7. Fair, Isaac & Company, Inc. 2.7% CREDIT EVALUATION SYSTEM DEVELOPER 8. Polaris Industries, Inc. 2.6% THE WORLD'S NO.1 MANUFACTURER OF SNOWMOBILES AND A TOP MAKER OF ALL-TERRAIN VEHICLES (ATV'S) AND PERSONAL WATERCRAFT 9. Medicis Pharmaceutical Corp.--Class A 2.5% A SPECIALTY PHARMACEUTICAL COMPANY FOCUSED ON DERMATOLOGY, PODIATRY AND PEDIATRICS. 10. Copart, Inc. 2.4% THE LEADER IN SALVAGE VEHICLE AUCTIONS FOR AUTO INSURERS
INVESTMENTS AT DECEMBER 31, 2003
SHARES VALUE -------------- -------------- COMMON STOCKS--97.0% ADVERTISING--3.5% Catalina Marketing Corp.(b)(d) 275,910 $ 5,562,346 AEROSPACE & DEFENSE--1.7% HEICO Corp.--Class A 194,331 2,736,180 AIR FREIGHT & COURIERS--2.0% C.H. Robinson Worldwide, Inc. 82,400 3,123,784 APPLICATION SOFTWARE--9.5% FactSet Research Systems, Inc.(d) 91,850 3,509,589 Fair, Isaac and Company, Inc. 85,390 4,197,772 Jack Henry & Associates, Inc. 180,815 3,721,173 Reynolds & Reynolds, Inc.--Class A. 122,762 3,566,236 -------------- 14,994,770 -------------- AUTO PARTS AND EQUIPMENT--0.7% Federal Signal Corp. 59,807 1,047,819 BANKS--3.5% National Commerce Financial Corp. 125,730 3,429,914 Washington Federal, Inc. 74,045 2,102,878 -------------- 5,532,792 -------------- BIOTECHNOLOGY--2.3% Techne Corp.(b)(d) 98,085 3,705,651 CONSTRUCTION & ENGINEERING--1.0% Insituform Technologies, Inc.--Class A(b)(d) 95,480 $ 1,575,420 CONSUMER FINANCE--2.2% World Acceptance Corp.(b) 176,000 3,504,160 DATA PROCESSING SERVICES--3.4% Arbitron Inc.(b) 63,700 2,657,564 Certegy, Inc. 82,867 2,718,038 -------------- 5,375,602 -------------- DISTRIBUTORS--0.8% Advanced Marketing Services, Inc. 116,000 1,322,400 DIVERSIFIED COMMERCIAL SERVICES--5.8% ABM Industries, Inc. 204,530 3,560,867 Cintas Corp.(d) 68,565 3,437,163 Equifax, Inc.(d) 88,385 2,165,433 -------------- 9,163,463 -------------- DIVERSIFIED FINANCIAL SERVICES--1.9% Eaton Vance Corp. 80,004 2,931,347 FOOD--DIVERSIFIED--1.1% American Italian Pasta Co.--Class A(b) 40,000 1,676,000
See Notes to Financial Statements 48
SHARES VALUE -------------- -------------- HEALTH CARE DISTRIBUTORS & SERVICES--4.8% Hooper Holmes, Inc. 132,440 $ 818,479 ICU Medical, Inc.(b)(d) 100,000 3,428,000 IMS Health, Inc. 135,965 3,380,090 -------------- 7,626,569 -------------- HEALTH CARE EQUIPMENT--2.3% Diagnostic Products Corp. 79,000 3,626,890 HOUSEHOLD PRODUCTS--2.2% Lancaster Colony Corp. 77,300 3,490,868 INDUSTRIAL CONGLOMERATES--2.7% Teleflex, Inc. 87,410 4,224,525 INDUSTRIAL MACHINERY--0.9% Donaldson Co., Inc. 25,100 1,484,916 INSURANCE BROKERS--3.2% Brown & Brown, Inc.(d) 107,000 3,489,270 Stancorp Financial Group, Inc. 24,000 1,509,120 -------------- 4,998,390 -------------- LEISURE PRODUCTS--2.6% Polaris Industries, Inc.(d) 47,000 4,163,260 MANAGED HEALTH CARE--1.9% First Health Group Corp.(b) 153,200 2,981,272 NETWORKING EQUIPMENT--2.0% Black Box Corp. 67,995 3,132,530 OFFICE ELECTRONICS--4.1% Inter-Tel, Inc. 139,600 3,487,208 Zebra Technologies Corp.(b) 46,200 3,066,294 -------------- 6,553,502 -------------- OIL & GAS EQUIPMENT & SERVICES--1.1% World Fuel Services Corp. 49,500 1,680,525 OIL & GAS EXPLORATION & PRODUCTION--2.1% Devon Energy Corp. 59,129 $ 3,385,727 PAPER PACKAGING--1.8% Bemis Co. 55,472 2,773,600 PHARMACEUTICALS--4.4% King Pharmaceuticals, Inc.(b) 193,296 2,949,697 Medicis Pharmaceutical Corp.--Class A 55,800 3,978,540 -------------- 6,928,237 -------------- PROPERTY & CASUALTY INSURANCE--1.7% Cincinnati Financial Corp. 66,055 2,766,383 REINSURANCE--3.5% Reinsurance Group of America, Inc. 143,100 5,530,815 RETAIL--2.0% 99 Cents Only Stores, Inc.(b) 118,000 3,213,140 SEMICONDUCTORS--2.7% Microchip Technology, Inc.(d) 129,000 4,303,440 SPECIALTY CHEMICALS--1.9% Balchem Corp. 14,300 326,040 Valspar Corp. 54,520 2,694,378 -------------- 3,020,418 -------------- SPECIALTY STORES--8.9% Copart, Inc.(b) 231,000 3,811,500 Regis Corp. 117,000 4,623,840 Rent-A-Center, Inc.(b) 186,250 5,565,150 -------------- 14,000,490 -------------- WATER--0.8% Consolidated Water Co., Ltd. 64,500 1,293,225 - ----------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (IDENTIFIED COST $129,939,741) 153,430,456 - -----------------------------------------------------------------------------------------
See Notes to Financial Statements 49
STANDARD & POOR'S PAR RATING VALUE (UNAUDITED) (000) VALUE ----------- -------------- -------------- SHORT-TERM OBLIGATIONS--17.0%(c) TIME DEPOSITS--8.4% Bank of Montreal, 1.06%, 1/15/04 A-1+ $ 6,190 $ 6,190,491 Credit Agricole Indosuez, 1.08%, 1/6/04 A-1+ 7,089 7,088,935 -------------- 13,279,426 -------------- REPURCHASE AGREEMENTS--4.5% Credit Suisse First Boston Corporation, (Dated 12/31/03), 1.04%, Due 1/2/04 (Repurchased proceeds $7,089,137); Collateralized by $7,230,714 in various investment grade corporate bonds and commercial papers with interest range of 3.45% to 8.62% 7,089 7,088,935 SHARES VALUE -------------- -------------- MONEY MARKET MUTUAL FUNDS--4.1% Merrill Lynch Premier Institutional Fund 506,599 $ 506,599 Merrimac Cash Fund--Premium Class 6,025,595 6,025,595 -------------- 6,532,194 -------------- - ----------------------------------------------------------------------------------------- TOTAL SHORT-TERM OBLIGATIONS (IDENTIFIED COST $26,900,555) 26,900,555 - ----------------------------------------------------------------------------------------- TOTAL INVESTMENTS--114.0% (IDENTIFIED COST $156,840,296) $ 180,331,011(a) Other assets and liabilities, net--(14.0)% (22,131,926) -------------- NET ASSETS--100.0% $ 158,199,085 ==============
(a) Federal Income Tax Information: Net unrealized depreciation of investment securities is comprised of gross appreciation of $30,448,553 and gross depreciation of $6,957,838 for federal income tax purposes. At December 31, 2003, the aggregate cost of securities for federal income tax purposes was $156,840,296. (b) Non income producing. (c) Represents securities purchased with cash collateral received for securities on loan. (d) All or a portion of this security was on loan as of December 31, 2003. See Notes to Financial Statements 50 STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 2003 ASSETS Investments securities at value including $26,027,622 of securities on loan (Identified cost $156,840,296) $ 180,331,011 Cash 6,506,359 Receivables Fund shares sold 1,163,913 Dividends and interest 141,922 Securities loan earnings 10,652 Prepaid expenses 20,108 ----------------- Total Assets 188,173,965 ----------------- LIABILITIES Payables Securities purchased 2,772,951 Fund shares repurchased 47,872 Collateral on securities loaned 26,900,555 Investment advisory fee 110,804 Distribution and service fees 53,843 Transfer agent fee 16,471 Administration fee 15,540 Financial agent fee 6,448 Trustees' fee 2,030 Accrued expenses 48,366 ----------------- Total liabilities 29,974,880 ----------------- NET ASSETS $ 158,199,085 ================= NET ASSETS CONSIST OF: Capital paid in on shares of beneficial interest $ 147,634,707 Accumulated net realized loss (12,926,337) Net unrealized appreciation 23,490,715 ----------------- NET ASSETS $ 158,199,085 ================= CLASS A Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $39,656,129) 2,189,026 Net asset value per share $ 18.12 Offering price per share $18.12/(1-5.75%) $ 19.23 CLASS B Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $2,708,707) 150,986 Net asset value and offering price per share $ 17.94 CLASS C Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $12,565,291) 699,804 Net asset value and offering price per share $ 17.96 CLASS X Shares of beneficial interest outstanding, no par value, unlimited authorization (Net Assets $103,268,958) 5,681,929 Net asset value and offering price per share $ 18.17
STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 2003 INVESTMENT INCOME Dividends $ 1,061,641 Interest 6,683 Income from securities loaned, net 44,574 ----------------- Total investment income 1,112,898 ----------------- EXPENSES Investment advisory fee 1,037,267 Service fees, Class A 38,901 Distribution and service fees, Class B 15,394 Distribution and service fees, Class C 59,049 Administration 89,131 Transfer agent fee 139,238 Financial agent fee 68,290 Registration 59,881 Printing 43,993 Custodian 30,508 Professional 29,231 Trustees 14,063 Miscellaneous 29,155 ----------------- Total expenses 1,654,101 ----------------- NET INVESTMENT LOSS (541,203) ----------------- NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized loss on investments (4,057,120) Net change in unrealized appreciation (depreciation) on investments 35,896,645 ----------------- NET GAIN ON INVESTMENTS 31,839,525 ----------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 31,298,322 =================
See Notes to Financial Statements 51 STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED YEAR ENDED 12/31/03 12/31/02 --------------- --------------- FROM OPERATIONS Net investment income (loss) $ (541,203) $ (432,968) Net realized gain (loss) (4,057,120) (2,593,808) Net change in unrealized appreciation (depreciation) 35,896,645 (22,593,792) --------------- --------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 31,298,322 (25,620,568) --------------- --------------- FROM SHARE TRANSACTIONS CLASS A Proceeds from sales of shares (2,365,960 and 146,581 shares, respectively) 38,107,253 2,103,515 Cost of shares repurchased (322,337 and 1,178 shares, respectively) (5,285,348) (16,705) --------------- --------------- Total 32,821,905 2,086,810 --------------- --------------- CLASS B Proceeds from sales of shares (124,511 and 43,790 shares, respectively) 1,925,053 639,229 Cost of shares repurchased (17,313 and 2 shares, respectively) (278,692) (30) --------------- --------------- Total 1,646,361 639,199 --------------- --------------- CLASS C Proceeds from sales of shares (699,943 and 39,973 shares, respectively) 10,745,910 582,457 Cost of shares repurchased (40,105 and 7 shares, respectively) (621,347) (100) --------------- --------------- Total 10,124,563 582,357 --------------- --------------- CLASS X Proceeds from sales of shares (1,716,610 and 6,136,774 shares, respectively) 25,334,280 104,014,998 Net asset value of shares issued from reinvestment of distributions (0 and 582 shares, respectively) -- 8,158 Cost of shares repurchased (2,874,955 and 4,672,212 shares, respectively) (44,421,603) (75,454,186) --------------- --------------- Total (19,087,323) 28,568,970 --------------- --------------- INCREASE (DECREASE) IN NET ASSETS FROM SHARE TRANSACTIONS 25,505,506 31,877,336 --------------- --------------- NET INCREASE (DECREASE) IN NET ASSETS 56,803,828 6,256,768 NET ASSETS Beginning of period 101,395,257 95,138,489 --------------- --------------- END OF PERIOD [INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $0 AND $0, RESPECTIVELY] $ 158,199,085 $ 101,395,257 =============== ===============
See Notes to Financial Statements 52 PHOENIX-KAYNE SMALL-MID CAP FUND FINANCIAL HIGHLIGHTS (SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
CLASS X ----------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------- 2003 2002 2001 2000 1999 Net asset value, beginning of period $ 14.34 $ 17.70 $ 17.19 $ 14.82 $ 15.04 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) (0.05)(5) (0.06) (0.01) 0.04 0.07 Net realized and unrealized gain (loss) 3.88 (3.30) 1.15 3.54 0.47 ----------- ----------- ----------- ----------- ----------- TOTAL FROM INVESTMENT OPERATIONS 3.83 (3.36) 1.14 3.58 0.54 ----------- ----------- ----------- ----------- ----------- LESS DISTRIBUTIONS From net investment income -- -- (0.01) (0.04) (0.07) From net realized gain -- -- (0.62) (1.17) (0.69) From paid-in capital -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- TOTAL DISTRIBUTIONS -- -- (0.63) (1.21) (0.76) ----------- ----------- ----------- ----------- ----------- Change in net asset value 3.83 (3.36) 0.51 2.37 (0.22) ----------- ----------- ----------- ----------- ----------- NET ASSET VALUE, END OF PERIOD $ 18.17 $ 14.34 $ 17.70 $ 17.19 $ 14.82 =========== =========== =========== =========== =========== Total return 26.71% (18.98)% 6.40% 24.77% 3.64% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 103,269 $ 98,112 $ 95,138 $ 42,560 $ 46,997 RATIO TO AVERAGE NET ASSETS OF: Operating expenses 1.26% 1.22% 1.17% 1.29% 1.30%(1) Net investment income (loss) (0.35)% (0.38)% (0.14)% 0.26% 0.53% Portfolio turnover rate 17% 16% 17% 50% 50% CLASS A CLASS B --------------------------------- --------------------------------- YEAR ENDED FROM INCEPTION YEAR ENDED FROM INCEPTION DECEMBER 31, 8/30/02 TO DECEMBER 31, 8/30/02 TO 2003 12/31/02 2003 12/31/02 ------------ -------------- ------------ -------------- Net asset value, beginning of period $ 14.34 $ 15.29 $ 14.30 $ 15.29 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) (0.09)(5) (0.02) (0.20)(5) (0.02) Net realized and unrealized gain (loss) 3.87 (0.93) 3.84 (0.97) ------------ -------------- ------------ -------------- TOTAL FROM INVESTMENT OPERATIONS 3.78 (0.95) 3.64 (0.99) ------------ -------------- ------------ -------------- LESS DISTRIBUTIONS From net investment income -- -- -- -- From net realized gain -- -- -- -- ------------ -------------- ------------ -------------- TOTAL DISTRIBUTIONS -- -- -- -- ------------ -------------- ------------ -------------- Change in net asset value 3.78 (0.95) 3.64 (0.99) ------------ -------------- ------------ -------------- NET ASSET VALUE, END OF PERIOD $ 18.12 $ 14.34 $ 17.94 $ 14.30 ============ ============== ============ ============== Total return(2) 26.36% (6.21)%(3) 25.45% (6.47)%(3) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 39,656 $ 2,086 $ 2,709 $ 626 RATIO TO AVERAGE NET ASSETS OF: Operating expenses 1.51% 1.47%(4) 2.26% 2.22%(4) Net investment income (loss) (0.60)% (0.62)%(4) (1.35)% (1.37)%(4) Portfolio turnover rate 17% 16%(3) 17% 16%(3) CLASS C --------------------------------- YEAR ENDED FROM INCEPTION DECEMBER 31, 8/30/02 TO 2003 12/31/02 ------------ -------------- Net asset value, beginning of period $ 14.31 $ 15.29 INCOME FROM INVESTMENT OPERATIONS Net investment income (loss) (0.20)(5) (0.03) Net realized and unrealized gain (loss) 3.85 (0.95) ------------ -------------- TOTAL FROM INVESTMENT OPERATIONS 3.65 (0.98) ------------ -------------- LESS DISTRIBUTIONS From net investment income -- -- From net realized gain -- -- ------------ -------------- TOTAL DISTRIBUTIONS -- -- ------------ -------------- Change in net asset value 3.65 (0.98) ------------ -------------- NET ASSET VALUE, END OF PERIOD $ 17.96 $ 14.31 ============ ============== Total return(2) 25.59% (6.47)%(3) RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (thousands) $ 12,565 $ 572 RATIO TO AVERAGE NET ASSETS OF: Operating expenses 2.26% 2.22%(4) Net investment income (loss) (1.35)% (1.37)%(4) Portfolio turnover rate 17% 16%(3)
(1) If the investment adviser had not waived fees and reimbursed expenses, the ratio of operating expenses to average net assets would have been 1.34% for the period ended December 31, 1999. (2) Maximum sales charges are not reflected in the total return calculation. (3) Not annualized. (4) Annualized. (5) Computed using average shares outstanding. See Notes to Financial Statements 53 PHOENIX-KAYNE FUNDS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2003 1. ORGANIZATION Phoenix-Kayne Funds (the "Trust") was organized as a Delaware business trust on May 29, 1996 and is registered under the Investment Company Act of 1940 as an open-end management investment company. The Trust currently consists of five separate series: California Intermediate Tax-Free Bond Fund, Intermediate Total Return Bond Fund, International Fund, Rising Dividends Fund (formerly, the "Large Cap Fund") and Small-Mid Cap Fund (each a "Fund" and collectively the "Funds"). The California Intermediate Tax-Free Bond Fund is a non-diversified fund and seeks current income exempt from federal and California state income tax. The Fund invests primarily in investment grade debt securities and may maintain an average maturity of more than ten years. The Intermediate Total Return Bond Fund is a diversified fund and seeks to obtain maximum total return, primarily through current income, with capital appreciation as a secondary consideration. The Fund invests primarily in investment grade debt securities and seeks to maintain an average maturity of three to ten years. The International Fund is a diversified fund and seeks long-term capital appreciation, with dividend income as a secondary consideration. The Fund invests primarily in equity securities, usually common stocks, of companies outside the United States. The Rising Dividends Fund is a diversified fund and seeks long-term capital appreciation, with dividend income as a secondary consideration. The Fund invests primarily in equity securities, usually common stocks, of companies generally having a total market capitalization of $5 billion or more. The Small-Mid Cap Fund is a diversified fund and seeks long-term capital appreciation, with dividend income as a secondary consideration. The Fund invests primarily in equity securities, usually common stocks, of small and mid-capitalization companies included in the Russell 2500 Index. The Trust offers Class X shares on each Fund. Additionally, the Trust offers three additional classes of shares, Class A, Class B and Class C shares on Rising Dividends Fund, Small-Mid Cap Fund and International Fund. 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%. 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 expenses and has exclusive voting rights with respect to its distribution plan. Income and expenses of each Fund are borne pro rata by the holders of each class of shares, except that each class bears distribution expenses unique to that class. 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, liabilities, disclosure of contingent assets and liabilities, revenues and expenses. 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. Short-term investments having a remaining maturity of 60 days or less are valued at amortized cost which approximates market. As required, some investments are valued at fair value as determined in good faith by or under the direction of the Trustees. 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. The Trust 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 to comply with the requirements of the Internal Revenue Code (the "Code") applicable to regulated investment companies, and to distribute substantially all of its taxable and tax-exempt income to its shareholders. In addition, each Fund intends to distribute an amount sufficient to avoid imposition of any excise tax under Section 4982 of the Code. Therefore, no provision for federal income taxes or excise taxes has been made. The Funds may be subject to foreign taxes on income, gains on investments or currency repatriation, a portion of which may be recoverable. The Funds will accrue such taxes and recoveries as applicable based upon their 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 series on the ex-dividend date and all distributions are reinvested into the Fund. 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 54 losses deferred due to wash sales. Permanent book and tax basis differences relating to shareholder distributions will result in reclassifications to paid in capital. E. SECURITIES LENDING TRANSACTIONS: The Funds receive compensation in the form of fees, or retain a portion of interest of any cash received as collateral for lending their securities. The Funds also continue to receive interest and dividends on securities loaned. The loans are secured by collateral (102% for US dollar denominated securities and 105% for non-US denominations) consisting of cash, U.S. government securities or letters of credit. Gain or loss in the fair value of the securities loaned that may occur during the term of the loan will be for the account of the Funds. 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. 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 dates 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 separate that portion of the results of operations arising from changes in exchange rates and that portion arising from changes in the market prices of securities. G. FORWARD CURRENCY CONTRACTS: The International Fund may enter into forward currency contracts in conjunction with the planned purchase or sale of foreign denominated securities in order to hedge the U.S. dollar cost or proceeds. Forward currency contracts involve, to varying degrees, elements of market risk in excess of the amount recognized in the Statement of Assets and Liabilities. Risks arise from the possible movements in foreign exchange rates or if the counterparty does not perform under the contract. A forward currency contract involves an obligation to purchase or sell a specific currency at a future date, which may be any number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are traded directly between currency traders and their customers. The contract is marked-to-market daily and the change in market value is recorded by each Fund as an unrealized gain (or loss). When the contract is closed or offset with the same counterparts, the Fund records a realized gain (or loss) equal to the change in the value of the contract when it was opened and the value at the time it was closed or offset. H. EXPENSES: Expenses incurred by the Trust with respect to any two or more Funds 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 fairly made. I. REPURCHASE AGREEMENTS A repurchase agreement is a transaction where a series acquires a security for cash and obtains a simultaneous commitment from the seller to repurchase the security at an agreed upon price and date. The series, through its custodian, takes possession of securities collateralizing the repurchase agreement. The collateral is marked-to-market daily to ensure that the market value of the underlying assets remains sufficient to protect the series in the event of default by the seller. If the seller defaults and the value of the collateral declines or, if the seller enters insolvency proceedings, realization of collateral may be delayed or limited. J. FOREIGN SECURITY COUNTRY DETERMINATION: A combination of the following criteria is used to assign the countries at risk listed in the Schedule of Investments: country of incorporation, actual building address, primary exchange on which the security is traded and country in which greatest percentage of company revenue is generated. 3. INVESTMENT ADVISORY FEES AND RELATED PARTY TRANSACTIONS The Adviser, Kayne Anderson Rudnick Investment Management, LLC provides the Funds with investment management services under an Investment Advisory Agreement (the "Agreement"). The majority interest of the Adviser is owned by Phoenix Investment Partners, Ltd. ("PXP"). PXP is the investment management subsidiary of The Phoenix Companies, Inc. ("PNX"). The Adviser furnishes all investment advice, office space and certain administrative services, and provides personnel as needed by the Funds. As compensation for its services, the Adviser is entitled to a monthly fee at the following annual rates: California Intermediate Tax-Free Bond Fund 0.50% Intermediate Total Return Bond Fund 0.50% International Fund 0.95% Rising Dividends Fund 0.75% Small-Mid Cap Fund 0.85%
For the year ended December 31, 2003, the Funds incurred the following advisory fees: California Intermediate Tax-Free Bond Fund $ 181,533 Intermediate Total Return Bond Fund 217,554 International Fund 464,735 Rising Dividends Fund 738,917 Small-Mid Cap Fund 1,037,267
55 The Funds are responsible for their own operating expenses. The Adviser has agreed to limit each Fund's total operating expenses by reducing all or a portion of its fees and reimbursing each Fund for expenses, excluding interest, so that their ratio of expenses to average net assets will not exceed the following levels:
CLASS X CLASS A CLASS B CLASS C ------- ------- ------- ------- California Intermediate Tax-Free Bond Fund 0.75% N/A N/A N/A Intermediate Total Return Bond Fund 0.95 N/A N/A N/A International 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
Any fee waived 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 year ended December 31, 2003, the Adviser waived fees and paid expenses of $100,802, and $162,514 for the California Intermediate Tax-Free Bond Fund and International Fund, respectively. At December 31, 2003, the amount available for reimbursement that has been paid and/or waived by the Adviser on behalf of the Funds are as follows: California Intermediate Tax-Free Bond Fund $ 207,476 International Fund 162,514
No fees were recouped for the year ended December 31, 2003. At December 31, 2003, the Adviser may recapture a portion of the above amounts no later than the dates as stated below:
DECEMBER 31, --------------------------------- FUNDS: 2004 2005 2006 - ------ --------- -------- --------- California Intermediate Tax-Free Bond Fund $ 30,868 $ 75,806 $ 100,802 International Fund -- -- 162,514
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. U.S. Bancorp Fund Services, L.L.C. (the "Administrator") acts as the Funds' Administrator under an Administration Agreement. The Administrator prepares various federal and state regulatory filings, reports and returns for the Funds; prepares reports and materials to be supplied to the Trustees; monitors the activities of the Funds' custodian, transfer agent and auditors; coordinates the preparation and payment of Funds' expenses and reviews the Funds' expense accruals. For its services, each Fund pays the Administrator an annual fee equal to 0.075% of the first $40 million of the average daily net assets, 0.050% of the next $40 million, 0.025% of the next $40 million, and 0.010% thereafter, subject to a minimum annual fee. Phoenix Equity Planning Corporation, ("PEPCO") an indirect, wholly-owned subsidiary of PNX, which serves as the national distributor of the Trust's shares has advised the Trust that it retained net selling commissions and deferred sales charges for the year ended December 31, 2003 as follows:
CLASS A CLASS B CLASS C NET SELLING DEFERRED DEFERRED COMMISSIONS SALES CHARGES SALES CHARGES ----------- ------------- ------------- International Fund $ 1,259 $ -- $ 55 Rising Dividends Fund 6,960 1,029 337 Small-Mid Cap Fund 22,795 1,093 1,933
In addition to these amounts, the following was paid to W.S. Griffith Securities, Inc., an indirect subsidiary of PNX, for Class A net selling commissions: International Fund $ 10 Rising Dividends Fund 5,469 Small-Mid Cap Fund 1,736
The International, Rising Dividends and Small-Mid Cap Funds pay PEPCO a distribution fee at an annual rate of 0.25% for Class A shares and 1.00% for Class B and C shares applied to the daily average net assets of each respective class. The distributor has advised the Trust that the total amount expensed for the year ended December 31, 2003 is as follows:
DISTRIBUTION AND/OR DISTRIBUTION AND/OR DISTRIBUTION AND/OR SERVICE FEES SERVICE FEES SERVICE FEES PAID TO PAID TO RETAINED BY UNAFFILIATED W.S. GRIFFITH DISTRIBUTOR PARTICIPANTS SECURITIES, INC. ------------------- ------------------- ------------------- International Fund $ 13,956 $ 890 $ 3 Rising Dividends Fund 28,016 20,248 848 Small-Mid Cap Fund 87,854 24,405 1,085
W.S. Griffith Securities, Inc. is an indirect subsidiary of PNX. PEPCO serves as the Trust's Transfer Agent with State Street Bank and Trust Company as sub-transfer agent. For the year ended December 31, 2003, transfer agent fees were $349,240 as reported in the Statements of Operations, of which PEPCO retained the following:
TRANSFER AGENT FEE RETAINED (PAID) ------------------ California Intermediate Tax-Free Bond Fund $ (4,551) Intermediate Total Return Bond Fund (4,551) International Fund (17,597) Rising Dividends Fund (2,927) Small-Mid Cap Fund 20,924
56 At December 31, 2003, PNX and affiliates and the retirement plans of PNX and affiliates held Phoenix-Kayne Fund shares which aggregated the following:
AGGREGATE NET ASSET SHARES VALUE ------ ----------- International Fund - --Class A 10,611 $ 108,335 - --Class B 10,582 107,302 - --Class C 10,582 107,302 Rising Dividends Fund - --Class A 7,406 108,428 - --Class B 7,403 107,492 - --Class C 7,399 107,440 Small-Mid Cap Fund - --Class A 6,540 113,015 - --Class B 6,540 112,034 - --Class C 6,540 112,099
4. PURCHASES AND SALES OF SECURITIES For the year ended December 31, 2003, the cost of purchases and the proceeds from sales of securities, excluding U.S. Government securities and short-term investments, were as follows:
FUND PURCHASES SALES - ---- ------------- ------------- California Intermediate Tax-Free Bond Fund $ 17,261,045 $ 11,777,095 Intermediate Total Return Bond Fund 10,622,650 13,329,989 International Fund 22,962,131 34,543,147 Rising Dividends Fund 39,380,609 24,091,497 Small-Mid Cap Fund 40,516,268 20,250,939
The Intermediate Total Return Bond Fund purchased $6,028,691 and sold $1,050,000 in U.S. Government securities. There were no purchases or sales of U.S. Government securities by California Intermediate Tax-Free Bond Fund, International Fund, Rising Dividends Fund and Small-Mid Cap Fund. 5. CREDIT RISK AND ASSET CONCENTRATIONS 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 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 to a Fund, positive or negative, than if the Fund did not concentrate its investments in such sectors. The California 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. 6. PORTFOLIO SECURITIES LOANED As of December 31, 2003, the following Funds loaned common stocks and received the following collateral for the loans:
FAIR VALUE COLLATERAL VALUE ------------- ---------------- International Fund $ 1,346,751 $ 1,433,700 Rising Dividends Fund 1,954,312 2,023,540 Small-Mid Cap Fund 26,027,622 26,900,555
7. OTHER As of December 31, 2003, the Funds had individual shareholders and omnibus shareholder accounts (which are comprised of several individual shareholders) which individually amounted to more than 10% of total shares outstanding as detailed below. None of the accounts are affiliated with PNX. In addition, affiliate holdings are presented in the table located within Note 3. California Intermediate Tax-Free Bond Fund 1 Omnibus Accounts 11.08% 2 shareholders 62.80% Intermediate Total Return Bond Fund 2 Omnibus Accounts 31.79% International Fund 2 Omnibus Accounts 35.66% Rising Dividends Fund 1 Omnibus Account 10.36%
8. TAX MATTERS The Funds have capital loss carryovers which may be used to offset future capital gains, as follows:
INTERNATIONAL RISING DIVIDENDS SMALL-MID CAP EXPIRATION DATE FUND FUND FUND - --------------- ------------- ---------------- ------------- 2006 -- -- $ 5,032,416* 2009 $ 2,522,232 $ 2,968,666 1,242,993 2010 14,384,915 10,373,748 826,352 2011 7,167,821 4,873,757 5,824,576 ------------- ---------------- ------------- Total 24,074,968 18,216,171 12,926,337 ============= ================ =============
* UTILIZATION OF THIS CAPITAL LOSS CARRYFORWARD WHICH AROSE IN CONNECTION WITH THE TAX-FREE REORGANIZATION WITH SEFTON SMALL COMPANY VALUE FUND IS LIMITED BY FEDERAL INCOME TAX REGULATIONS TO $5,032,416. 57 The Funds may not realize the benefit of these losses to the extent they do not realize gains on investments prior to the expiration of the capital loss carryovers. The components of distributable earnings on tax basis (excluding unrealized appreciation (depreciation) which is disclosed in the Schedule of Investments) consist of the following:
UNDISTRIBUTED UNDISTRIBUTED ORDINARY LONG-TERM INCOME CAPITAL GAINS ------------- ------------- California Intermediate Tax-Free Bond Fund $ 5,176 $ 127,148 Intermediate Total Return Bond Fund 11,668 83,069 International Fund 16,556 -- Rising Dividends Fund 468,303 -- Small-Mid Cap Fund -- --
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, 2003, the Funds deferred post-October losses and recognized prior year post-October losses as follows:
DEFERRED RECOGNIZED -------- ----------- California Intermediate Tax-Free Bond Fund $ -- $ -- Intermediate Total Return Bond Fund -- -- International Fund** -- -- Rising Dividends Fund -- 1,518,318 Small-Mid Cap Fund -- 1,767,456
** THE INTERNATIONAL FUND HAS ELECTED DECEMBER 31 AS ITS YEAR END FOR EXCISE TAX PURPOSE. For the year ended December 31, 2003, the California Intermediate Tax-Free Bond Fund distributed $1,357,287 of exempt-interest dividends. 9. RECLASS 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 values of the Funds. As of December 31, 2003, the following Funds recorded reclassifications to increase (decrease) the accounts listed below:
UNDISTRIBUTED ACCUMULATED CAPITAL PAID IN NET INVESTMENT NET REALIZED ON SHARES OF INCOME (LOSS) GAIN(LOSS) BENEFICIAL INTEREST -------------- ------------ ------------------- California Intermediate Tax-Free Bond Fund $ 49 $ -- $ (49) Intermediate Total Return Bond Fund -- -- -- International Fund (152,353) 152,375 (22) Rising Dividends Fund -- -- -- Small-Mid Cap Fund 541,203 1,698,482 (2,239,685)
10. PROXY VOTING PROCEDURES The Adviser of the Phoenix-Kayne Funds vote proxies relating to portfolio securities in accordance with procedures that have been approved by the Board of Trustees of the Fund. You may obtain a description of these procedures, free of charge, by calling "toll-free" 800-243-1574. This information is also available through the Securities and Exchange Commission's website at http://www.sec.gov. TAX NOTICE (UNAUDITED) For federal income tax purposes, 99.8% of the income dividends paid by the California Intermediate Tax-Free Bond Fund qualify as exempt-interest dividends. 100% of the income dividends earned by the Rising Dividends Fund qualify as corporate dividend received deduction income. Effective for the calendar year 2003, qualified dividends will be taxed at a lower rate for individual shareholders. 100% of the ordinary income dividends distributed by the International Fund and Rising Dividends Fund and applicable to qualifying dividends received after January 1, 2003 will qualify for the lower tax rate. The Funds plan to designate the maximum amount allowable under the Jobs and Growth Tax Relief Reconciliation Act. The actual percentage for the calendar year will be designated in the year-end tax statements. For the year ended December 31, 2003 the following funds designated long-term capital gains dividends: California Intermediate Tax-Free Bond Fund $ 179,694 Intermediate Total Return Bond Fund 267,833
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, the Fund's record and other pertinent information. 58 REPORT OF INDEPENDENT AUDITORS [PRICEWATERHOUSECOOPERS LOGO] To the Board of Trustees and Shareholders of Phoenix-Kayne Funds In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Phoenix-Kayne Rising Dividends Fund, Phoenix-Kayne Small-Mid Cap Fund, Phoenix-Kayne International Fund, Phoenix-Kayne Intermediate Total Return Bond Fund, and Phoenix-Kayne California Intermediate Tax-Free Bond Fund (each a series of the Phoenix-Kayne Funds) (the "Funds") at December 31, 2003, the results of each of their operations, the changes in each of their net assets and the financial highlights for the year then ended, 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 Funds' 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 auditing standards generally accepted in the United States of America, which 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, 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, 2003 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. The financial statements and financial highlights of the Funds as of December 31, 2002 and for the periods then ended were audited by other independent accountants whose report dated January 24, 2003 expressed an unqualified opinion on those statements. /s/ PricewaterhouseCoopers LLP Boston, Massachusetts February 13, 2004 59 PHOENIX-KAYNE FUNDS FUND MANAGEMENT Information pertaining to the Trustees and officers of the Trust 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. INDEPENDENT TRUSTEES
NUMBER OF PORTFOLIOS IN FUND COMPLEX PRINCIPAL OCCUPATION(S) NAME, (AGE), AND LENGTH OF OVERSEEN BY DURING PAST 5 YEARS AND ADDRESS TIME SERVED TRUSTEE OTHER DIRECTORSHIPS HELD BY TRUSTEE - -------------------------------------------------------------------------------------------------------------------------------- E. Virgil Conway Served since 35 Chairman, Rittenhouse Advisors, LLC (consulting Rittenhouse Advisors, LLC November 2002. firm) since 2001. Trustee/Director, Realty 101 Park Avenue Foundation of New York (1972-present), Josiah Macy, New York, NY 10178 Jr., Foundation (1975- present), Pace University DOB: 8/2/29 (1978-present), New York Housing Partnership Development Corp. (Chairman) (1981-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). Chairman, Metropolitan Transportation Authority (1992-2001). Director, 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), The Harlem Youth Development Foundation (1998-2002). Harry Dalzell-Payne Served since 35 Currently retired. The Flat, Elmore Court November 2002. Elmore, GL05, GL2 3NT U.K. DOB: 8/9/29 Geraldine M. McNamara Served since 35 Managing Director, U.S. Trust Company of New York United States Trust Company of NY November 2002. (private bank) (1982-present). 114 West 47th Street New York, NY 10036 DOB: 4/17/51 Everett L. Morris Served since 35 Currently retired, Vice President, W.H. Reaves and W.H. Reaves and Company November 2002. Company (investment management) 10 Exchange Place (1993-2003). Jersey City, NJ 07302 DOB: 5/6/28
60 INTERESTED TRUSTEE The individual listed below is an "interested person" of the Trust, 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 PRINCIPAL OCCUPATION(S) NAME, (AGE), ADDRESS AND LENGTH OF OVERSEEN BY DURING PAST 5 YEARS AND POSITION(S) WITH TRUST TIME SERVED TRUSTEE OTHER DIRECTORSHIPS HELD BY TRUSTEE - -------------------------------------------------------------------------------------------------------------------------------- *Philip R. McLoughlin Served since 78 Consultant, Phoenix Investment Partners Ltd. 56 Prospect Street November 2002. (2002-present). Director, PXRE Corporation Hartford, CT 06115-0480 (Delaware) (1985-present), World Trust Fund DOB: 10/23/46 (1991-present). Chairman (1997-2002), Director (1995-2002), Vice Chairman (1995-1997) and Chief Chairman Executive Officer (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) 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), PHL Variable Insurance Company. Director, Phoenix National Trust Holding Company (2001-2002). Director (1985-2002) and Vice President (1986-2002), PM Holdings, Inc. Director, W.S. Griffith Associates, Inc. (1995-2002). Director (1992-2002) and President (1993-1994), W.S. Griffith Securities, Inc.
*Mr. McLoughlin is an "interested person," as defined in the Investment Company Act of 1940, by reason of his relationship with Phoenix Investment Partners, Ltd., and its affiliates. 61 OFFICERS OF THE TRUST WHO ARE NOT TRUSTEES
POSITION(S) HELD WITH NAME, (AGE), AND TRUST AND LENGTH OF PRINCIPAL OCCUPATION(S) ADDRESS TIME SERVED DURING PAST 5 YEARS - ---------------------------------------------------------------------------------------------------------------------------- Allan M. Rudnick President and Chief President and Chief Investment Officer, Kayne Anderson Kayne Anderson Rudnick Investment Officer since Rudnick Investment Management, LLC (1989-present). Investment Management, LLC 1995; Chief Executive 1800 Avenue of the Stars Officer since 2002; Trustee Suite 200 (1995-2002). Los Angeles, CA 90067 DOB: 6/20/40 William R. Moyer Executive Vice President Executive Vice President and Chief Financial Officer 56 Prospect Street since 2002. (1999-present), Senior Vice President and Chief Financial Hartford, CT 06115-0480 Officer (1995-1999), Phoenix Investment Partners, Ltd. DOB: 8/16/44 Director (1998-present), Senior Vice President, Finance (1990-present), Chief Financial Officer (1996-present), and Treasurer (1998-present), Phoenix Equity Planning Corporation. Director (1998-present), Senior Vice President (1990-present), Chief Financial Officer (1996-present) and Treasurer (1994-present), Phoenix Investment Counsel, Inc. Senior Vice President and Chief Financial Officer, Duff & Phelps Investment Management Co. (1996-present). Vice President, Phoenix Fund Complex (1990-present). John F. Sharry Executive Vice President President, Private Client Group (1999-present), Executive 56 Prospect Street since 2002. Vice President, Retail Division (1997-1999), Phoenix Hartford, CT 06115-0480 Investment Partners, Ltd. President, Private Client Group, DOB: 3/28/52 Phoenix Equity Planning Corporation (2000-present). Executive Vice President, Phoenix Fund Complex (1998-present). Ralph Walter Chief Operating Officer and Chief Operating Officer and Treasurer, Kayne Anderson Kayne Anderson Rudnick Investment Treasurer since 2000; Chief Rudnick Investment Management, LLC (2000-present). Chief Management, LLC Financial Officer since Administrative Officer, ABN AMRO (1986-2000). 1800 Avenue of the Stars 2002. Suite 200 Los Angeles, CA 90067 DOB: 11/25/46 Richard J. Wirth Vice President, Secretary Vice President and Insurance and Investment Products Counsel One AmericanRow and Counsel since 2002. (2002-present), Counsel (1993-2002), Phoenix Life Insurance Hartford, CT 06102 Company. Secretary, Phoenix Funds Complex (2002-present). DOB: 11/14/58
62 (This page has been left blank intentionally.) PHOENIX-KAYNE FUNDS 1800 Avenue of the Stars, 2nd Floor Los Angeles, California 90067 TRUSTEES E. Virgil Conway Harry Dalzell-Payne Geraldine M. McNamara Everett L. Morris Philip R. McLoughlin OFFICERS Allan M. Rudnick, President William R. Moyer, Executive Vice President John F. Sharry, Executive Vice President Ralph Walter, Treasurer Richard J. Wirth, Secretary 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. INVESTMENT ADVISER Kayne Anderson Rudnick Investment Management, LLC 1800 Avenue of the Stars, 2nd Floor Los Angeles, California 90067 PRINCIPAL UNDERWRITER Phoenix Equity Planning Corporation 56 Prospect Street Hartford, CT 06115-0480 CUSTODIAN Investors Bank & Trust Company 200 Clarendon Street Boston, Massachusetts 02116 INDEPENDENT AUDITORS PricewaterhouseCoopers LLP 125 High Street Boston, Massachusetts 02110 TRANSFER AGENT Phoenix Equity Planning Corporation 56 Prospect Street Hartford, CT 06115-0480 HOW TO CONTACT US Mutual Fund Services 1-800-243-1574 Advisor Consulting Group 1-800-231-4361 Text Telephone 1-800-243-1926 Website www.phoenixinvestments.com PHOENIX EQUITY PLANNING CORPORATION P.O. Box 150480 Hartford, CT 06115-0480 [PHOENIX INVESTMENT PARTNERS, LTD. LOGO] A MEMBER OF THE PHOENIX COMPANIES, INC. For more information about Phoenix mutual funds, please call your financial representative or contact us at 1-800-243-4361 or PhoenixInvestments.com. PXP 1739 (2/04) PRSRT STD US POSTAGE PAID PERMIT #6 HUDSON, MA 01749 PHOENIX EQUITY PLANNING CORPORATION P.O. Box 150480 Hartford, CT 06115-0480 [PHOENIX INVESTMENT PARTNERS, LTD. LOGO] A MEMBER OF THE PHOENIX COMPANIES, INC. For more information about Phoenix mutual funds, please call your financial representative or contact us at 1-800-243-4361 or PhoenixInvestments.com. PXP 1739 (2/04) 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. (b) 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 description. (c) The registrant has not granted any waivers, 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 this item's instructions. A COPY OF THE REGISTRANT'S CODE OF ETHICS IS FILED HEREWITH. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. As of the end of the period covered by the report, the Board of Trustees of the Funds has determined that E. Virgil Conway and Everett L. Morris 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. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Audit Fees - ---------- (a) The aggregate fees billed for the fiscal years ended December 31, 2003 and 2002 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 $102,600 and $51,000, respectively. 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 $0. Tax Fees - -------- (c) The aggregate fees billed in the fiscal years ended December 31, 2003 and 2002 for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning are $20,500 and $5,000, respectively. "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 Funds to avoid excise tax for the Trust, periodic discussion with management on tax issues affecting the Trust, and reviewing and signing the Funds' 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. (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 "Trust") 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 Trust 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 Trust and those non-audit services provided to the Trust's Affiliated Service Providers that relate directly to the operations and financial reporting of the Trust. 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 Funds 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:
2003 2002 ---- ---- (b) N/A N/A (c) 100% 100% (d) N/A N/A
(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 the fiscal years ended December 31, 2003 and 2002 of the registrant was $46,250 and $29,000, respectively. (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 to open-end investment companies. ITEM 6. [RESERVED] ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable to open-end investment companies. ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASES. Not applicable to open-end investment companies. ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable ITEM 10. CONTROLS AND PROCEDURES. (a) The Registrant's Principal Executive Officer and Principal Financial Officer have concluded that the Registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the "Act")) 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 Act. (b) There were no changes in the Registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the Registrant's last fiscal half-year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 11. EXHIBITS. (a) (1) CODE OF ETHICS. Filed herewith. (2) CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002. Filed herewith. (b) CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002. Filed herewith. 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/ ALLAN M. RUDNICK ------------------------------------- Allan M. Rudnick, President Date March 4, 2004 ---------------------------------- 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/ ALLAN M. RUDNICK ---------------------------------- Allan M. Rudnick, President Date March 4, 2004 -------------------------------------------------------- By (Signature and Title)* /s/ RALPH WALTER ---------------------------------- Ralph Walter, Treasurer Date March 4, 2004 -------------------------------------------------------- * PRINT THE NAME AND TITLE OF EACH SIGNING OFFICER UNDER HIS OR HER SIGNATURE. EX-99.CERT 3 a2129569zex-99_cert.txt EXHIBIT 99.CERT EXHIBIT 99.CODE ETH EXHIBIT (a)(1) THE "CODE" THE CODE OF ETHICS APPLIES TO THE PRINCIPAL EXECUTIVE, FINANCIAL AND ACCOUNTING OFFICERS OF THE PHOENIX COMPANIES, INC. ("PNX"). IT CONSTITUTES THE MAIN PART OF THE PHOENIX CODE OF CONDUCT, WHICH HAS APPLIED TO ALL EMPLOYEES OF PNX AND ITS SUBSIDIARIES FOR MANY YEARS. WE PLAN TO CONTINUE TO REVISE BOTH CODES FROM TIME TO TIME AS NEEDED TO KEEP THEM VIABLE, RELEVANT AND IN COMPLIANCE WITH ALL APPLICABLE LEGISLATIVE AND REGULATORY REQUIREMENTS. COMMITMENT TO SHAREHOLDERS PHOENIX IS COMMITTED TO PROVIDING SHAREHOLDER VALUE. ONE WAY WE DO THIS IS BY OBSERVING THE HIGHEST STANDARDS OF LEGAL AND ETHICAL CONDUCT IN ALL OF OUR BUSINESS DEALINGS. CONFLICTS OF INTEREST Phoenix expects every employee, officer and director to maintain the highest moral and ethical standards and to avoid conflicts of interest in conducting business activities. A "conflict of interest" occurs when an individual's private interest interferes, or even appears to interfere, in any way with the interests of the corporation as a whole. A conflict situation can arise when an employee, officer or director takes actions or has interests that may make it difficult to perform his or her work for the Company objectively and effectively. Conflicts of interest also arise when an employee, officer or director, or a member of his or her family, receives improper personal benefits as a result of his or her position in the Company. Employees requested to serve on the Board of Directors of another company by Phoenix owe a fiduciary duty to Phoenix as well as to the company on whose Board of Directors he or she serves. Where conflicts of interest arise between the interests of Phoenix and the other company, the employee should consult Phoenix's General Counsel for guidance. Moreover, no employee requested to serve on the Board of Directors of another company shall accept fees or other compensation for Board service. In the event the company for which an employee serves as a director requires directors to receive fees, any remuneration received by the employee shall be donated to a charitable organization. The Company will offset any tax consequences incurred by the employee. All conflicts of interest must be disclosed in writing to the Chief Compliance Officer. Employees, officers and directors are required to file a Conflict of Interest Statement annually. Any conflicts of interest that arise following completion of the Conflict of Interest Statement must be promptly reported to the Chief Compliance Officer in writing. CORPORATE OPPORTUNITIES Employees, officers and directors owe a duty to the Company to advance its legitimate interests when the opportunity to do so arises. Consequently, employees, officers and directors are prohibited from engaging in the following activities: - - Taking for themselves personal opportunities that are discovered through the use of corporate property, information or position; - - Using Company property, information or position for personal gain; and - - Competing with the Company. INSIDER TRADING AND PERSONAL TRADING Federal securities laws and Company policy prohibit the purchase or sale of securities while in possession of material non-public information and prohibit passing such information on to others. No employee, officer or director may buy or sell Phoenix securities if he or she has material non-public information. This restriction also applies to an employee's spouse, other adults living in the employee's household, and minor children. Employees and their family members also must avoid passing non-public information on to third parties. Information is "material" if a reasonable investor would probably consider the information important in deciding whether to buy, hold or sell securities of the company to which the information relates. Officers are subject to certain restrictions under New York Insurance Law governing ownership of Phoenix stock. Officers and their family members are prohibited from purchasing shares of Phoenix stock for a period of two years from the date of demutualization. All employees with a title of Vice President or higher, plus certain other employees whose positions place them in regular contact with non-public information, are subject to a further restriction as well. These employees may only buy or sell Phoenix securities during "window" periods. No employee, officer or director may buy or sell securities of another company with the knowledge that those securities are being considered for purchase or sale by Phoenix, any of its subsidiaries or any advisory accounts. In the case of any company in which Phoenix owns 10 percent or more of the outstanding equity, no employee (or family member) may make any personal investment without prior approval from the Law Department. Certain employees who are involved with the Company's investment adviser and broker-dealer operations may be required to secure preclearance of and/or report all personal securities transactions. In addition, Phoenix reserves the right to require duplicate confirmations, quarterly transaction reports and prior clearance for any personal securities transactions. If you have any question whether your position requires preclearance or reporting, you should contact the compliance officer for your business area (investment adviser or broker-dealer) or the Corporate Compliance Department. CONFIDENTIALITY Employees are required to maintain the confidentiality of information entrusted to them by the Company or its customers. Disclosure of confidential information is restricted to authorized persons or in situations in which disclosure is legally mandated. Confidential information includes all non-public information that may or may not be of use to competitors, or harmful to the Company or its customers if disclosed, including, but not limited to: internal operating procedures; investment strategies; sales data and customer lists; financial plans; projections; and reports. An employee's obligation to protect confidential information continues even after termination of his or her employment. PROTECTION AND USE OF COMPANY PROPERTY AND ASSETS Employees are given access to Company property to assist them in effectively carrying out their duties to the Company. Company property should only be used for legitimate purposes. All employees should protect the Company's property and ensure its efficient use. Theft, fraud, carelessness and waste have a direct impact on the Company's profitability. Examples of Company property include proprietary and non-public information, equipment, facilities, vehicles, funds and other assets. Improper use or abuse of Company property is prohibited. Expenses to be paid for by the Company, via reimbursement or direct payment, are limited to those expenses that are authorized and related to legitimate business activities. CORPORATE DISCLOSURES As a public company, Phoenix is required to publicly disclose certain information on a regular basis. This includes financial information and other material information about The Phoenix Companies, Inc. It is imperative that such information is disseminated in a consistent manner and in accordance with SEC disclosure requirements and Company policy. In order to ensure that information released is accurate and properly disseminated, only certain individuals are authorized to speak on behalf of the Company. Employees are prohibited from speaking with rating agencies, analysts, investors or the press without obtaining prior authorization from the President and Chief Executive Officer. Employees receiving any such inquiries should refer such individuals to the appropriate area for response: - - Press and News Media - All inquiries must be referred to the Senior Vice President, Corporate Communications. - - Rating Agencies - All inquiries must be referred to the Chief Financial Officer. - - Securities Analysts and Investors - All inquiries must be referred to the Vice President, Investor Relations or the Chief Financial Officer. Employees are prohibited from disclosing any non-public information about the Company's financial performance or commenting on the Company's stock performance. ACCURACY AND RETENTION OF COMPANY RECORDS The integrity of Phoenix's records is vital to the Company's continued success. The altering, falsification or misuse of Company documents is strictly prohibited. Phoenix's business transactions must be accurately recorded on the Company's books and records in accordance with generally accepted accounting principles, any other required accounting basis and established Company policy. Financial information must fairly represent all relevant information. The retention and destruction of Company records shall be in accordance with established Company policies and applicable legal and regulatory requirements. COMMITMENT TO CLIENTS Phoenix upholds its commitment to our clients by conducting our business fairly and honestly, and maintaining the highest ethical standards in all dealings with customers. SAFEGUARDING CUSTOMER ASSETS Employees have an obligation to safeguard the assets of our customers at all times, and to protect them from all forms of misuse. Misappropriation of funds can include theft, fraud, embezzlement or unauthorized borrowing. Employees must not, under any circumstances, misappropriate funds, property or other assets, or assist another individual in doing so. ETHICAL MARKET CONDUCT The Company expects all who are involved in the sales and marketing of its products and services to abide by the following principles: - - Conduct business according to high standards of honesty and fairness; - - Provide competent and customer-focused sales and service; - - Engage in active and fair competition; - - Provide clear, honest and fair advertising and sales materials; - - Handle customer complaints and disputes in an appropriate and timely manner; and - - Monitor sales and service procedures to help ensure compliance with ethical market conduct. PRIVACY AND CONFIDENTIAL PERSONAL INFORMATION It is the responsibility of every employee to maintain the privacy of confidential personal information. Confidential personal information includes non-public financial and health information obtained from consumers and customers in connection with providing a financial product or service. Specific examples of confidential personal information include information concerning assets, income, businesses, estates, financial plans and health. The misuse of confidential personal information could subject Phoenix and its employees to civil liability or criminal penalties. Before releasing confidential information to anyone, employees must make certain that releasing it is permitted under Phoenix's policies or authorized in writing by the person to whom it relates. CUSTOMER COMPLAINTS The Company is committed to fairly and expeditiously handling all customer complaints. All complaints must be handled and reported in accordance with established corporate policies as well as procedures established for the applicable business unit or affiliate. Maintaining centralized records serves not only regulatory authorities with oversight of the Companies, but also provides Phoenix and its affiliates with information to consider areas where changes or improvements are needed. FRAUD The Company strongly supports all efforts to detect and prevent fraud. It believes that only through aggressive action to combat fraud can the Company continue to meet its fundamental obligations to its stockholders and customers. When there is reason to believe that Phoenix has been the target of fraud or attempted fraud, it will aggressively work with the appropriate law enforcement officials to seek prosecution and conviction of the responsible individual(s). Any employee who is aware of or suspects fraud must report it to the Corporate Audit Department immediately. INSURANCE ANTI-FRAUD PLAN In accordance with insurance regulatory requirements, Phoenix has a comprehensive insurance anti-fraud plan that is designed to: - - Prevent insurance fraud, including: internal fraud involving the Company's officers, employees or agents, fraud resulting from misrepresentations on applications for insurance, and claims fraud; - - Report insurance fraud to appropriate law enforcement and regulatory authorities; - - Encourage cooperation in the prosecution of insurance fraud cases; and - - Aggressively pursue recovery of all sums improperly paid by the Company as a result of fraud. COMMITMENT TO CORPORATE CITIZENSHIP Phoenix is committed to being a responsible corporate citizen, which includes compliance with applicable laws and regulations of the jurisdictions in which we operate as well as engaging in fair competition in the marketplace. COMPLYING WITH LEGAL AND REGULATORY REQUIREMENTS The Company expects all employees to conduct business in accordance with all applicable laws and regulations. The laws and regulations related to the financial services industry are complex, thus placing a duty on each employee to take all reasonable steps to ensure his or her actions are in compliance. Compliance with the law does not comprise our entire ethical responsibility. Rather, it is a minimum standard for performance of our duties. ACCOUNTING, INTERNAL ACCOUNTING CONTROLS OR AUDITING MATTERS The Company treats complaints about accounting, internal accounting controls, or auditing matters seriously and expeditiously. Employees will be given the opportunity to submit confidential and anonymous complaints about accounting or auditing matters for review by representatives of Phoenix, and if appropriate, the Audit Committee of the Board of Directors. These complaints will be handled in a manner that protects the confidentiality and anonymity of the employee when so requested by the employee. No employee will be terminated or otherwise retaliated against for submitting a complaint under this procedure if the employee reasonably believes that the complaint involves a violation of federal securities or anti-fraud laws. FAIR DEALING Each employee must deal fairly with the Company's customers, suppliers, competitors and employees. No employee shall take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts, or other unfair-dealing practice. ANTITRUST Phoenix is committed to preserving a free and competitive marketplace and will not engage in any understandings or agreements with any competitor that could result in a restraint of trade. Employees must avoid engaging in any conduct that violates the antitrust laws, such as agreements with competitors regarding prices, terms of sale, division of markets and allocations of customers. Discussions with competitors related to market share, projected sales for any specific product or service, revenues and expenses, production schedules, unannounced products and services, pricing or marketing strategies are prohibited. The antitrust laws also apply to informal contacts with competitors, such as trade shows or meetings of professional organizations. Every employee has an obligation to avoid situations that could result in a violation of the antitrust laws. Any questions concerning the legality or appropriateness of specific acts should be directed to the Law Department. ANTI-MONEY LAUNDERING It is the responsibility of every employee to protect the Company from exploitation by individuals engaged in money laundering activities. Accordingly, each employee must undertake the following: - - Become familiar with the anti-money laundering laws and their requirements as applied to the Company; and - - Learn and fully comply with the Company's anti-money laundering policies and procedures. Failure to comply with applicable laws or the Company's policies may result in significant criminal and civil penalties to the Company as well as those individuals involved. Furthermore, association with any money laundering activity subjects both the Company and its employees to civil and criminal penalties. LOBBYING AND POLITICAL CONTRIBUTIONS Lobbying is generally defined as communicating with a public official, or a member of his or her staff, in the legislative or executive branch of government, for the purpose of influencing legislative or administrative action. Lobbying is highly regulated and lobbyists are required to be registered and to report their activities. No employee may engage in lobbying on behalf of Phoenix without prior permission of the Law Department. The giving of gifts to local public officials and members of their staff, whether in the form of meals, tickets to events or otherwise, is strictly regulated by most states and by the federal government. Employees must be careful to distinguish between personal and corporate political activities. Unless specifically requested by the Company to communicate on its behalf on a particular issue, you should identify communications with legislators as expressing your own personal beliefs and not those of Phoenix. The use of Phoenix stationery for any personal political communication is prohibited. Any employee wishing to be a candidate for elective office should consult with his or her supervisor and department head in advance. Questions regarding the Company's position on proposed legislation or regulation should be referred to Government Relations or the Law Department. FOREIGN CORRUPT PRACTICES ACT The Foreign Corrupt Practices Act prohibits the payment or authorization of the payment of any money, or the giving of value, directly or indirectly, to a foreign official for the purpose of: - - Influencing any act or decision of the foreign official; or - - Inducing the foreign official to use his influence to assist in obtaining business for or directing business to any person. A "foreign official" is any person acting in an official capacity on behalf of a foreign government, agency, department or instrumentality. Also included under the term "foreign official" are foreign political parties, officials of political parties and candidates for foreign political office. The Foreign Corrupt Practices Act applies to all officers, directors, employees and agents of the Company. Violation of the act can result in both fines and imprisonment. COPYRIGHTS, TRADEMARKS AND PATENTS Employees must avoid infringing upon the intellectual property rights of others. Intellectual property includes copyrights, trademarks, service marks, patents and trade secrets. Improper use includes copying, distributing or modifying third party copyrighted materials without permission. Infringement may result in criminal as well as civil liabilities for Phoenix and its employees. The Company has an agreement with the Copyright Clearance Center that gives a license to Phoenix employees to make photocopies of many publications for business purposes. Contact the Corporate Compliance Department with any questions about the types of copying that are covered by the agreement. COMMITMENT TO EMPLOYEES PHOENIX'S EMPLOYEES ARE OUR MOST IMPORTANT ASSET AND WE ARE COMMITTED TO FOSTERING A WORK ENVIRONMENT IN WHICH EMPLOYEES HAVE THE OPPORTUNITY TO GROW, CONTRIBUTE AND PARTICIPATE FREE FROM DISCRIMINATION. EQUAL OPPORTUNITY Phoenix employs and promotes on the basis of merit and achievement without regard to age, race, gender, color, religion, national origin, ancestry, sexual orientation, marital status, or disability. This policy applies to every phase of the employment process and every aspect of the employment relationship: recruitment, hiring, training, promotions, transfers, terminations, benefits, compensation and participation in Company-sponsored educational, social and recreational programs. SEXUAL HARASSMENT Phoenix prohibits sexual harassment in the workplace. Sexual harassment includes unwelcome sexual advances, requests for sexual favors and other verbal, visual or physical conduct when: - - Submission is made either explicitly or implicitly a term or condition of a person's employment; - - Submission to or rejection of inappropriate conduct by an employee is used as the basis for employment decisions affecting the employee; or - - The conduct has the purpose or effect of unreasonably interfering with an individual's work performance or creating an intimidating, hostile or offensive working environment. Sexual harassment also includes unwelcome sexual flirtations and advances; verbal abuse of a sexual nature; inappropriate touching; graphic or verbal comments about an individual's body; displaying in the workplace a sexually suggestive object or picture; and sexually explicit or offensive jokes. EMPLOYMENT OF RELATIVES The employment of relatives of any director or officer, or any employee working in the Human Resources Department, Corporate Audit Department or Corporate Compliance Department is prohibited. If a situation arises in which relatives are employed by the company and one or both of them later become officers or employees in the departments specified so as to be covered by this policy, a request for a waiver to continue employment of both individuals must be submitted to the Senior Vice President, Corporate Services. Under no circumstances will exceptions be granted for officers at the Vice President level and above, or directors. In addition, related non-officer employees are prohibited from working in the same department, reporting to the same supervisor or reporting to a relative. This policy applies to directors, officers and employees of all affiliated companies, including situations in which the employees may be employed by separate legal entities. This policy also applies to consultants and service providers. For the purposes of this policy, a relative is defined as a spouse, child, parent, sibling, step-parent, step-child, step-sibling, grandparent, grandchild, aunt, uncle, nephew, niece, first cousin and in-law. WORKPLACE SAFETY Phoenix is committed to maintaining a work environment that is safe and healthy for its employees and others. Questions concerning health and safety matters should be referred to your supervisor or Human Resources representative. All job-related injuries or illnesses should be reported immediately to your supervisor or Human Resources representative. Phoenix also does not tolerate acts of violence or threats of violence against employees or Company property. Possession of firearms or other weapons anywhere on Company property or while conducting Company business is prohibited. Any situation or concern involving violent behavior or the threat of violence should be immediately reported to Security or Human Resources. DRUGS AND ALCOHOL The sale, purchase, use, possession or transfer of narcotics or other legally controlled substances by employees while on Company premises or on Company business (other than use of prescription drugs in accordance with a physician's orders) is prohibited. Employees attending functions on behalf of the Company where alcohol is served are expected to use good judgment and avoid consuming excessive amounts of alcoholic beverages. VIOLENT CRIME CONTROL AND LAW ENFORCEMENT ACT OF 1994 Federal Law prohibits the employment of any person convicted of a felony involving dishonesty or breach of trust by an insurance company without the consent of the appropriate state insurance department. To assist the Company in fulfilling its responsibilities under this law, employees are required to disclose any felony conviction to the Company at the time of application for employment. Any employee who is subsequently convicted of a felony must report this fact to the Company immediately. EMPLOYEE OWNERSHIP OF PHOENIX STOCK Employees, officers and directors are subject to various requirements including federal securities laws, and New York Insurance law restrictions governing the ownership of Company stock. Please refer to the Insider Trading and Personal Trading section of this Code for more information. COMMITMENT TO ETHICS AND COMPLIANCE A STRONG COMMITMENT TO BUSINESS ETHICS AND COMPLIANCE IS THE FOUNDATION OF A SUCCESSFUL ORGANIZATION. EVERY EMPLOYEE IS EXPECTED TO CARRY OUT THE COMPANY'S BUSINESS ACTIVITIES IN AN ETHICAL MANNER AND CONSISTENT WITH APPLICABLE LAWS, REGULATIONS, POLICIES AND GUIDELINES. ETHICAL DECISION MAKING Phoenix's success is dependent on each of us applying the highest ethical standards to whatever we do on behalf of the Company. Consider the following guidelines in making ethical decisions. - - Is my action consistent with approved Company practices? - - Is my action consistent with the Company's preeminent values? - - Does my action give the appearance of impropriety? - - Can I, in good conscience, defend my action to my supervisor, other employees or the general public? - - Does my action meet my personal code of ethical behavior? - - Does my action conform to the spirit of these guidelines? COMPLIANCE WITH LAWS AND REGULATIONS Phoenix values its corporate reputation for complying with all applicable laws and regulations in the conduct of its business. Every employee, officer and director shall comply with all applicable laws and regulations while acting on behalf of the Company. MONITORING CODE COMPLIANCE The Corporate Compliance and the Corporate Audit Departments are responsible for monitoring the compliance activities of all areas and ensuring that the Code is being followed. Compliance will be monitored by periodic audits where appropriate. OBTAINING GUIDANCE In any instance where you are uncertain of your obligations under the Code, you should seek guidance before taking any action. If you have a question concerning the Code or any of the Company's related policies or procedures, you should contact the Corporate Compliance Department or the Law Department. TOLL-FREE HELP LINE Phoenix maintains a confidential, 24-hour, toll-free telephone help line for the purpose of requesting assistance or reporting violations. Assistance is available during regular business hours. If you call outside of regular business hours, leave a confidential message and your call will be returned the following business day. Special security measures have been taken with this help line to ensure confidentiality. If you wish to remain anonymous, you may request a case identification number and refer to that number in subsequent phone calls. OBLIGATION TO REPORT Employees are obligated to report suspected violations of the Code to their department head, the Chief Compliance Officer or the Law Department. Failure to do so will result in disciplinary action, including potential termination of employment. WHISTLEBLOWER PROTECTION No retaliation or retribution of any kind will be taken against an employee who reports a suspected violation of the Code in good faith. INVESTIGATION All allegations of suspected violations will be promptly investigated and appropriate action will be taken. Investigations will be conducted in an objective, professional manner. The specifics of an investigation, including the identity of the individual reporting the information, will be kept confidential except as such disclosure is necessary to fully investigate the allegations, facilitate resolution and/or report the results to appropriate authorities. DISCLOSURE TO GOVERNMENT AUTHORITIES Certain actions and omissions prohibited by the Code may also violate criminal laws and may subject violators to criminal prosecution. The Law Department will review the results of investigations that indicate potential violations of criminal law and recommend to the appropriate senior officers whether disclosure to appropriate enforcement authorities is warranted. DISCIPLINARY ACTION FOR VIOLATIONS Failure to adhere to the Code as well as other Company policies and applicable laws may result in disciplinary action up to and including termination of employment. Situations in which disciplinary action may be appropriate include: - - Authorization of or participation in activities that violate the law, the Code or other Company policies; - - Retaliation, direct or indirect, or encouragement of others to retaliate against an employee who reports a suspected violation; - - Failure to cooperate with an investigation of suspected violations, including interfering with or obstructing an investigation; and - - Failure to report a violation of the law, the Code or other Company policies. EXHIBIT 99.CERT EXHIBIT (a)(2) CERTIFICATIONS I, Allan M. Rudnick, certify that: 1. I have reviewed this report on Form N-CSR of Phoenix-Kayne Funds; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Omitted] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 4, 2004 /s/ ALLAN M. RUDNICK --------------- -------------------- Allan M. Rudnick President CERTIFICATIONS I, Ralph Walter, certify that: 1. I have reviewed this report on Form N-CSR of Phoenix-Kayne Funds; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) [Omitted] (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 4, 2004 /s/ RALPH WALTER --------------- ---------------- Ralph Walter Treasurer EX-99.906CERT 4 a2129569zex-99_906cert.txt EXHIBIT 99.906CERT EXHIBIT 99.906CERT EXHIBIT (b) CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned officers of the Phoenix-Kayne Funds, does hereby certify, to such officer's knowledge, that the report on Form N-CSR of the Phoenix-Kayne Funds for the year ended December 31, 2003 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as applicable, and that the information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Phoenix-Kayne Funds for the stated period. /s/ ALLAN M. RUDNICK /s/ RALPH WALTER - -------------------- ---------------- Allan M. Rudnick Ralph Walter President, Phoenix-Kayne Funds Treasurer, Phoenix-Kayne Funds Dated: March 4, 2004 ------------- This statement accompanies this report on Form N-CSR pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed as filed by Phoenix-Kayne Funds for purposes of the Securities Exchange Act of 1934. -----END PRIVACY-ENHANCED MESSAGE-----