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 811-09303 & 811-09923
KINETICS MUTUAL FUNDS, INC. & KINETICS PORTFOLIOS TRUST
-------------------------------------------------------
(Exact name of registrant as specified in charter)
16 NEW BROADWAY
SLEEPY HOLLOW, NY 10591
-----------------------
(Address of principal executive offices) (Zip code)
U.S. BANCORP FUND SERVICES, LLC
615 EAST MICHIGAN STREET
MILWAUKEE, WI 53202
-------------------
(Name and address of agent for service)
(800) 930-3828
--------------
Registrant's telephone number, including area code
Date of fiscal year end: DECEMBER 31, 2005
Date of reporting period: DECEMBER 31, 2005
ITEM 1. REPORT TO STOCKHOLDERS.
DECEMBER 31, 2005 WWW.KINETICSFUNDS.COM
ANNUAL REPORT
The INTERNET Fund
The INTERNET EMERGING GROWTH Fund
The PARADIGM Fund
The MEDICAL Fund
The SMALL CAP OPPORTUNITIES Fund
The KINETICS GOVERNMENT MONEY MARKET Fund
EACH A SERIES OF KINETICS MUTUAL FUNDS, INC.
[KINETICS MUTUAL FUNDS, INC. LOGO]
KINETICS MUTUAL FUNDS, INC.
TABLE OF CONTENTS
December 31, 2005
<Table>
<Caption>
PAGE
----
Shareholders' Letter........................................ 2
Year 2005 Annual Market Commentary.......................... 4
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
Expense Example........................................... 16
Statement of Assets & Liabilities......................... 21
Statement of Operations................................... 25
Statements of Changes in Net Assets....................... 28
Notes to Financial Statements............................. 36
Financial Highlights...................................... 48
Report of Independent Registered Public Accounting Firm... 61
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
Allocation of Portfolio Assets............................ 62
Portfolio of Investments The Internet Portfolio........... 65
Portfolio of Investments The Internet Emerging Growth
Portfolio.............................................. 71
Portfolio of Investments The Paradigm Portfolio........... 76
Portfolio of Investments The Medical Portfolio............ 85
Portfolio of Investments The Small Cap Opportunities
Portfolio.............................................. 89
Portfolio of Investments The Kinetics Government Money
Market Portfolio....................................... 97
Portfolio of Options Written The Internet Portfolio....... 98
Portfolio of Options Written The Internet Emerging Growth
Portfolio.............................................. 99
Statement of Assets & Liabilities......................... 100
Statement of Operations................................... 103
Statements of Changes in Net Assets....................... 106
Notes to Financial Statements............................. 109
Report of Independent Registered Public Accounting Firm... 122
</Table>
1
KINETICS MUTUAL FUNDS, INC.
SHAREHOLDERS' LETTER
Dear Fellow Shareholders:
We are pleased to present the Kinetics Mutual Funds' Annual Report for
the year ended December 31, 2005. The Kinetics Family of Mutual Funds
had mixed results in 2005, with gains of 16.11% for The Paradigm Fund,
13.17% for the Small-Cap Opportunities Fund, and 2.65% for the
Internet Emerging Growth Fund, and small losses of 1.69% for The
Internet Fund, and 0.72% for the Medical Fund. This compares with the
2005 total returns, assuming dividends reinvested in the indices, of
4.91% for the S&P 500 Index and 2.13% for the NASDAQ Composite Index.
Kinetics launched a new fund, the MARKET OPPORTUNITIES FUND, which
commenced operations at the end of January 2006. The focus of this
fund is to invest in those companies that benefit from increasing
transaction volume, such as publicly-traded exchanges.
For the Paradigm and Small-Cap Opportunities Funds, performance was
primarily driven by the formerly financially distressed utility
companies, as well as financial service companies. For the Internet
and Internet Emerging Growth Funds, performance was attributable to
the fact the Funds did not own many of the speculative names that had
a relatively good year; instead, the Funds found more attractive
valuations in companies that comprised each portfolio. The Medical
Fund's performance can be traced to several unrelated difficulties in
pharmaceutical manufacture and safety. This resulted in concomitant
friction across the bio-pharmaceutical industry.
We continue to inform our shareholders through our website,
www.kineticsfunds.com. This website provides a broad array of
information, including recent portfolio holdings, quarterly investment
commentaries, newsflashes, recent performance data, and online access
to account information.
Kinetics offers the following funds to investors:
THE PARADIGM FUND focuses on companies that currently have, or which
should soon have, sustainable high returns on equity. The Fund has
produced attractive returns over the last five years in what may be
described as a very difficult period for equity investors. The
Paradigm Fund is Kinetics' most conservative Fund.
2
THE SMALL CAP OPPORTUNITIES FUND focuses on undervalued and special
situation small capitalization equities that have the potential for
rewarding long- term investment results.
THE MEDICAL FUND is a sector fund, offering an investment in
scientific discovery within the promising field of medical research,
particularly in the development of cancer treatments and therapies. As
a sector fund, The Medical Fund is likely to have heightened
volatility.
THE INTERNET FUND is a sector fund that focuses on companies engaged
in the evolution of Internet-related technology. As a sector fund with
a focus on the Internet and Internet-related activities, this Fund has
been, and is likely to continue to be, quite volatile. The Internet
Fund is not designed to be a major component of one's equity exposure.
We view this Fund's holdings as publicly traded venture capital and
are quite aware that many of these investments will not fulfill their
early promise. However, we expect that over time some small percentage
will develop into excellent investments, allowing the fund to produce
overall satisfactory, albeit lumpy, investment results.
THE INTERNET EMERGING GROWTH FUND focuses upon early life cycle
companies that are positioned on the edge of the curve in the
evolution of the Internet and Internet-related activities. The
statements made about the Internet Fund are equally applicable to this
fund.
THE KINETICS GOVERNMENT MONEY MARKET FUND is a short-term investment
vehicle that helps to round out our equity product offerings.
/s/ Peter B. Doyle
Peter B. Doyle
President
Kinetics Mutual Funds, Inc.
-----------------------
(1) The S&P 500 Index is a broad based unmanaged index of 500 stocks, which
is widely recognized as representative of the equity market in general.
You cannot invest directly in an index.
(2) The NASDAQ Composite Index is a market capitalization-weighted index
that is designed to represent the performance of the National Market
System which includes over 5,000 stocks traded only over-the-counter
and not on an exchange. You cannot invest directly in an index.
3
KINETICS MUTUAL FUNDS, INC.
YEAR 2005 ANNUAL MARKET COMMENTARY
Dear Fellow Shareholders,
As noted in many past communications, we have no opinion regarding the
short-term direction of the stock market because the number of
variables that might influence such a prediction is infinite. We
believe that any talk by investment professionals regarding the near
term direction of the stock market is merely guesswork, and that your
predictions would have as likely a chance of being accurate as would
theirs. This is apparently not just an opinion we espouse, as a
20-year study conducted by Phillip Tetlock, a psychology professor
from Berkeley University, has shown. Professor Tetlock selected two
hundred and eighty-four people who made their living as experts,
offering opinions on political and economic trends, and other topics.
The conclusion of the study, which was developed into a book, was that
the experts were no better than the average person in predicting
future events. The study further revealed that the more famous the
pundits, the less useful were their predictions. It is far easier,
although by no means simple, to understand the underlying potential of
individual companies. Thus, we devote our time to bottom-up company
research and not to macroeconomic considerations. However, we are
aware of several factors that might significantly affect the future
investment climate.
Our first concern pertains to peak oil, which is the concept that
global oil demand will outstrip the world's ability to supply oil, and
the effect that peak oil might have on the price per barrel, as well
as the larger consequences to world economies. The concept of peak oil
was first put forth in a paper by M. King Hubbert in 1956, in which he
predicted that U.S. oil production would peak sometime between 1965
and 1970. The U.S. reached peak production in 1971, and has been in
continual decline from that time. Since oil is a non-renewable form of
energy, at some point, global peak production is inevitable, which is
also true for other sources of non-renewable energy, such as natural
gas. A minority of geologists believe that we have either already
reached global peak oil production or will shortly. The concern to the
public is not that there are no other alternative sources of energy,
but rather, that they are not being sufficiently pursued because the
4
majority of the world still operates under the assumption that an
abundant quantity of cheap oil will always be available.
Unfortunately, this assumption was not true with regard to the United
States nor will it hold true with the world at large.
It took approximately 125 years for the world to consume the first
trillion barrels of oil; it is estimated the next trillion will be
consumed in only 30 years. A 5% dislocation in oil supply back in the
early 1970s caused a 4-fold price increase for oil. The average price
for a barrel of crude oil in 1970 was $3.39; in 1980 it was $37.42, an
11-fold increase over the average price of 1970. Recently, the Ukraine
and Europe saw what could happen to natural gas prices when Russia
stopped supplying the Ukraine with gas for a very brief period of
time. In a recent editorial in the Financial Times, Martin Feldstein,
professor of economics at Harvard University, proposed that America's
robust economy over the last two years, which seems immune to rising
oil prices, unlike past experiences, is the result of the household
savings rate falling from 2.5% of after-tax income in the third
quarter of 2003 to negative 1.8% by year-end 2005. He believes this
decline in savings allowed Americans to continue to spend on non-oil
goods and services even during a period of materially higher-priced
oil. It is unlikely that such a decline in savings can go on
indefinitely without some very serious negative consequences.
With oil at close to $70 a barrel and premium gasoline at
approximately $2.85 a gallon, the typical American does not appear to
be modifying his habits. This means, in all probability, that oil is
still being incorrectly priced relative to its supply. In economics,
the study of how societies allocate resources, we are taught that if
you wish to curb demand, you raise prices, or, if supply is
insufficient, prices will rise to create a new equilibrium. Even
though the price of oil has approximately doubled in the last two
years, we have not yet experienced an "oil shock." However, should
supply become insufficient by even minor amounts in percentage terms,
an oil shock could rapidly develop. The prospects for such an event
would be most unpleasant for investors and should be hedged against by
having some exposure to oil companies. Our choice of the Canadian oil
sands
5
companies in our Paradigm Fund was the result of their future earnings
being discounted at a very high rate, such that we believe we would
achieve a satisfactory return even if the world were to successfully
navigate this serious supply condition.
Our second concern is global political instability, particularly
Iran's decision to resume its nuclear research program. If Iran
continues down this path, the United States might have no other choice
but to challenge its efforts. Our third concern is that equity
valuations remain expensive based on historical metrics. The typical
investor should expect lower future returns since an important
stimulus, multiple expansion, is being undermined by the Federal
Reserve's tightening policy. Thus, equity returns, we believe, for the
foreseeable future, will be a function of dividend yields plus
earnings growth.
Notwithstanding these concerns, we believe that we have uncovered
several unique investment opportunities that might perform well even
if the overall stock market does not prosper in 2006.
We are quite enthusiastic regarding the publicly-traded exchanges,
such as the Chicago Mercantile Exchange (CME), Chicago Board of Trade
(BOT), NYSE Holdings (which will be going public shortly) and NASDAQ
Stock Market (NDAQ). Over the last seventy years, the world's central
bankers have been keenly concerned with keeping demand robust, in
contrast to prior periods, when the focus was on supply and building
infrastructure. We believe the focus on demand stimulus has created a
situation where global competition is intense, and the absolute level
of interest rates is still quite low. As investors seek adequate
investment returns, their response has been to trade more frequently.
This has allowed the exchange operators to grow their earnings at very
attractive rates. Further, modern portfolio theory, which is still
being taught at most universities, encourages a continual trading of
assets. We expect these trading trends to continue and own a variety
of exchanges in several of the funds.
Another significant opportunity to which we are exposed in both our
Paradigm Fund and Small Cap Opportunities Fund is that of formerly
financially distressed utility companies. Most of these
6
companies pursued diversification strategies into unregulated
businesses that went awry with the collapse of the Western energy
market and the demise of Enron. We believe the business operations of
these companies will allow them to pay down a significant amount of
debt over the next several years, thereby, creating significant
equity. Further, the repeal of the Public Utility Holding Company Act
sets into motion the possibility of increased merger activity within
the utility industry.
We remain very optimistic regarding the prospects for the underlying
companies in our Funds. Of course, the Paradigm and Small Cap
Opportunities Funds offer the most diversification potential for
investors. However, we still encourage you to investigate our sector
funds. We are well aware of the vast array of opportunities investors
have before them; accordingly, we thank you for your confidence as we
strive to deliver rewarding investment results.
/s/ Peter B. Doyle
Peter B. Doyle
Chief Investment Strategist
7
DISCLOSURE
THIS MATERIAL IS INTENDED TO BE REVIEWED IN CONJUNCTION WITH A CURRENT
PROSPECTUS, WHICH INCLUDES ALL FEES AND EXPENSES THAT APPLY TO A
CONTINUED INVESTMENT PROGRAM, AS WELL AS INFORMATION REGARDING THE
RISK FACTORS, POLICIES AND OBJECTIVES OF THE FUNDS. READ IT CAREFULLY
BEFORE INVESTING.
MUTUAL FUND INVESTING INVOLVES RISK. PRINCIPAL LOSS IS POSSIBLE.
BECAUSE THE FUNDS [OTHER THAN THE PARADIGM FUND, THE SMALL CAP
OPPORTUNITIES FUND AND THE KINETICS GOVERNMENT MONEY MARKET FUND]
INVEST IN A SINGLE INDUSTRY OR GEOGRAPHIC REGION, THEIR SHARES ARE
SUBJECT TO A HIGHER DEGREE OF RISK THAN FUNDS WITH A HIGHER LEVEL OF
DIVERSIFICATION. INTERNET AND BIOTECHNOLOGY STOCKS ARE SUBJECT TO A
RATE OF CHANGE IN TECHNOLOGY, OBSOLESCENCE AND COMPETITION THAT IS
GENERALLY HIGHER THAN THAT OF OTHER INDUSTRIES AND HAVE EXPERIENCED
EXTREME PRICE AND VOLUME FLUCTUATIONS. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE PERFORMANCE.
BECAUSE SMALLER COMPANIES [FOR THE INTERNET EMERGING GROWTH FUND AND
THE SMALL CAP OPPORTUNITIES FUND] OFTEN HAVE NARROWER MARKETS AND
LIMITED FINANCIAL RESOURCES, THEY PRESENT MORE RISK THAN LARGER, MORE
WELL ESTABLISHED, COMPANIES.
AS NON-DIVERSIFIED [OTHER THAN THE KINETICS GOVERNMENT MONEY MARKET
FUND] AND SINGLE INDUSTRY FUNDS, THE VALUE OF THEIR SHARES MAY
FLUCTUATE MORE THAN SHARES INVESTED IN A BROADER RANGE OF INDUSTRIES
AND COMPANIES.
AN INVESTMENT IN THE KINETICS GOVERNMENT MONEY MARKET FUND IS NEITHER
INSURED NOR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR
ANY OTHER GOVERNMENT AGENCY. ALTHOUGH THE FUND SEEKS TO PRESERVE THE
VALUE OF YOUR INVESTMENT AT $1.00 PER SHARE, IT IS POSSIBLE TO LOSE
MONEY BY INVESTING IN THE FUND.
UNLIKE OTHER INVESTMENT COMPANIES THAT DIRECTLY ACQUIRE AND MANAGE
THEIR OWN PORTFOLIOS OF SECURITIES, THE KINETICS MUTUAL FUNDS PURSUE
THEIR INVESTMENT OBJECTIVES BY INVESTING ALL OF THEIR INVESTABLE
ASSETS IN A CORRESPONDING PORTFOLIO SERIES OF KINETICS PORTFOLIOS
TRUST.
THE INFORMATION CONCERNING THE FUNDS INCLUDED IN THE SHAREHOLDER
REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS ABOUT
8
THE FACTORS THAT MAY AFFECT THE PERFORMANCE OF THE FUNDS IN THE
FUTURE. THESE STATEMENTS ARE BASED ON FUND MANAGEMENT'S PREDICTIONS
AND EXPECTATIONS CONCERNING CERTAIN FUTURE EVENTS AND THEIR EXPECTED
IMPACT ON THE FUNDS, SUCH AS PERFORMANCE OF THE ECONOMY AS A WHOLE AND
OF SPECIFIC INDUSTRY SECTORS, CHANGES IN THE LEVELS OF INTEREST RATES,
THE IMPACT OF DEVELOPING WORLD EVENTS, AND OTHER FACTORS THAT MAY
INFLUENCE THE FUTURE PERFORMANCE OF THE FUNDS. MANAGEMENT BELIEVES
THESE FORWARD-LOOKING STATEMENTS TO BE REASONABLE, ALTHOUGH THEY ARE
INHERENTLY UNCERTAIN AND DIFFICULT TO PREDICT. ACTUAL EVENTS MAY CAUSE
ADJUSTMENTS IN PORTFOLIO MANAGEMENT STRATEGIES FROM THOSE CURRENTLY
EXPECTED TO BE EMPLOYED.
DISTRIBUTOR: KINETICS FUNDS DISTRIBUTOR, INC. IS NOT AN AFFILIATE OF
KINETICS MUTUAL FUNDS, INC. KINETICS FUNDS DISTRIBUTOR, INC. IS AN
AFFILIATE OF KINETICS ASSET MANAGEMENT, INC., INVESTMENT ADVISER TO
KINETICS MUTUAL FUNDS, INC.
(C)JANUARY 1, 2006 -- KINETICS ASSET MANAGEMENT, INC.
9
HOW A $10,000 INVESTMENT HAS GROWN:
The charts show the growth of a $10,000 investment in the Funds as
compared to the performance of two representative market indices. The
tables below the charts show the average annual total returns on an
investment over various periods. Returns for periods greater than one year
are average annual total returns. The annual returns assume the
reinvestment of all dividends and distributions, however, the graph and
table do not reflect the deduction of taxes that a shareholder would pay
on fund distributions or the redemption of fund shares. Past performance
is not predictive of future performance. Investment return and principal
value will fluctuate, so that your shares, when redeemed, may be worth
more or less than their original costs.
S&P 500 INDEX -- The S&P 500 Index is a capital-weighted index,
representing the aggregate market value of the common equity of 500 stocks
primarily traded on the New York Stock Exchange. The S&P 500 is unmanaged
and includes the reinvestment of dividends and does not reflect the
payments of transaction costs and advisory fees associated with an
investment in the Funds. The securities that comprise the S&P 500 may
differ substantially from the securities in the Funds' portfolios. It is
not possible to directly invest in an index.
NASDAQ COMPOSITE INDEX -- The NASDAQ Composite Index is a broad- based
capitalization-weighted index of all NASDAQ stocks. The NASDAQ Composite
is unmanaged and does not include the reinvestment of dividends and does
not reflect the payment of transaction costs or advisory fees associated
with an investment in the Funds. The securities that comprise the NASDAQ
Composite may differ substantially from the securities in the Funds'
portfolios. It is not possible to directly invest in an index.
10
THE INTERNET FUND
OCTOBER 21, 1996 -- DECEMBER 31, 2005
[GRAPH]
<Table>
<Caption>
THE INTERNET FUND -- NO
LOAD CLASS S&P 500 NASDAQ COMPOSITE
----------------------- ------- ----------------
10/21/1996 10000 10000 10000
10/31/1996 11160 9941 9879
11/30/1996 9420 10692 10455
12/31/1996 9420 10480 10442
01/31/1997 9280 11135 11160
02/28/1997 8380 11222 10587
03/31/1997 7420 10761 9881
04/30/1997 7640 11403 10197
05/31/1997 8840 12098 11326
06/30/1997 8780 12640 11663
07/31/1997 9840 13645 12891
08/31/1997 9980 12881 12838
09/30/1997 11020 13587 13634
10/31/1997 10240 13133 12889
11/30/1997 10320 13741 12945
12/31/1997 10620 13977 12701
01/31/1998 11400 14131 13097
02/28/1998 12620 15150 14320
03/31/1998 13700 15926 14847
04/30/1998 15720 16087 15112
05/31/1998 13780 15810 14387
06/30/1998 19000 16452 15325
07/31/1998 19360 16277 15144
08/31/1998 13420 13924 12126
09/30/1998 17140 14816 13700
10/31/1998 18120 16021 14327
11/30/1998 26300 16992 15768
12/31/1998 31450 17971 17734
01/31/1999 47455 18723 20267
02/28/1999 45635 18141 18505
03/31/1999 60720 18866 19908
04/30/1999 69183 19597 20566
05/31/1999 61400 19134 19981
06/30/1999 67002 20196 21725
07/31/1999 57719 19566 21340
08/31/1999 55778 19469 22156
09/30/1999 59259 18935 22211
10/31/1999 64141 20133 23992
11/30/1999 75585 20543 26983
12/31/1999 99521 21752 32912
01/31/2000 97199 20660 31869
02/29/2000 108368 20268 37986
03/31/2000 107627 22251 36985
04/30/2000 78303 21582 31225
05/31/2000 67535 21139 27506
06/30/2000 71658 21660 32078
07/31/2000 69636 21322 30467
08/31/2000 71978 22646 34021
09/30/2000 65093 21450 29706
10/31/2000 60869 21360 27253
11/30/2000 50241 19676 21012
12/31/2000 48279 19772 19981
01/31/2001 53163 20473 22426
02/28/2001 48920 18607 17404
03/31/2001 44836 17428 14884
04/30/2001 48199 18782 17116
05/31/2001 48900 18908 17070
06/30/2001 49300 18448 17474
07/31/2001 47358 18266 16395
08/31/2001 44836 17123 14602
09/30/2001 39872 15740 12122
10/31/2001 39912 16040 13670
11/30/2001 42214 17271 15614
12/31/2001 43635 17422 15775
01/31/2002 42174 17168 15642
02/28/2002 39812 16837 14004
03/31/2002 41574 17470 14925
04/30/2002 40813 16411 13654
05/31/2002 40893 16290 13068
06/30/2002 35869 15129 11834
07/31/2002 32727 13950 10743
08/31/2002 32466 14042 10634
09/30/2002 30865 12516 9480
10/31/2002 32767 13617 10755
11/30/2002 34128 14419 11960
12/31/2002 33407 13572 10802
01/31/2003 33807 13216 10683
02/28/2003 32847 13018 10818
03/31/2003 34168 13144 10847
04/30/2003 36009 14227 11843
05/31/2003 38952 14976 12908
06/30/2003 42354 15167 13125
07/31/2003 43435 15435 14033
08/31/2003 43115 15736 14643
09/30/2003 43355 15569 14453
10/31/2003 45997 16450 15628
11/30/2003 45537 16594 15854
12/31/2003 46808 17465 16203
01/31/2004 48896 17785 16711
02/29/2004 46507 18032 16417
03/31/2004 45242 17760 16129
04/30/2004 44278 17481 15530
05/31/2004 44920 17721 16069
06/30/2004 45563 18066 16562
07/31/2004 43876 17468 15265
08/31/2004 43876 17539 14866
09/30/2004 45362 17729 15342
10/31/2004 46607 17999 15974
11/30/2004 48796 18728 16959
12/31/2004 51516 19365 17595
01/31/2005 48521 18893 16681
02/28/2005 47503 19291 16594
03/31/2005 47768 18949 16170
04/30/2005 46708 18590 15542
05/31/2005 47931 19181 16728
06/30/2005 47870 19208 16637
07/31/2005 48908 19923 17671
08/31/2005 49438 19741 17406
09/30/2005 49682 19901 17403
10/31/2005 48868 19569 17149
11/30/2005 50395 20309 18059
12/31/2005 50647 20316 17836
</Table>
<Table>
<Caption>
ENDED 12/31/05
---------------------------------------------------------------
ADVISOR ADVISOR
NO LOAD CLASS A CLASS A NASDAQ
CLASS (NO LOAD) (LOAD ADJUSTED)(1) S&P 500 COMPOSITE
- -----------------------------------------------------------------------------------------------
One Year -1.69% -1.55% -7.21% 4.91% 1.37%
- -----------------------------------------------------------------------------------------------
Five Years 0.96% N/A N/A 0.54% -2.25%
- -----------------------------------------------------------------------------------------------
Since Inception
No Load Class
(10/21/96) 19.30% N/A N/A 8.01% 6.50%
- -----------------------------------------------------------------------------------------------
Since Inception
Advisor Class A
(4/26/01) N/A 1.13% -0.14% 1.95% 1.73%
- -----------------------------------------------------------------------------------------------
</Table>
(1) Reflects front-end sales charge of 5.75%.
Returns for periods greater than one year are average annual total returns.
11
THE INTERNET EMERGING GROWTH FUND
DECEMBER 31, 1999 -- DECEMBER 31, 2005
[GRAPH]
<Table>
<Caption>
THE INTERNET EMERGING
GROWTH FUND S&P 500 NASDAQ COMPOSITE
--------------------- ------- ----------------
12/31/1999 10000 10000 10000
01/31/2000 10010 9498 9683
02/29/2000 12050 9318 11542
03/31/2000 10770 10229 11237
04/30/2000 7640 9922 9487
05/31/2000 6470 9718 8357
06/30/2000 7060 9958 9746
07/31/2000 6520 9802 9257
08/31/2000 6700 10411 10337
09/30/2000 5960 9861 9026
10/31/2000 5260 9819 8281
11/30/2000 4100 9045 6384
12/31/2000 3690 9090 6071
01/31/2001 4490 9412 6814
02/28/2001 4060 8554 5288
03/31/2001 3740 8012 4522
04/30/2001 3720 8635 5200
05/31/2001 3940 8692 5186
06/30/2001 4030 8481 5309
07/31/2001 4060 8397 4982
08/31/2001 3920 7872 4437
09/30/2001 3700 7236 3683
10/31/2001 3850 7374 4154
11/30/2001 4020 7940 4744
12/31/2001 4300 8009 4793
01/31/2002 4120 7892 4753
02/28/2002 3820 7740 4255
03/31/2002 4000 8031 4535
04/30/2002 4050 7544 4149
05/31/2002 3880 7489 3971
06/30/2002 3540 6955 3596
07/31/2002 3180 6413 3264
08/31/2002 3220 6455 3231
09/30/2002 3080 5754 2880
10/31/2002 3150 6260 3268
11/30/2002 3310 6629 3634
12/31/2002 3240 6239 3282
01/31/2003 3210 6076 3246
02/28/2003 3150 5985 3287
03/31/2003 3190 6043 3296
04/30/2003 3310 6540 3598
05/31/2003 3600 6885 3922
06/30/2003 3730 6973 3988
07/31/2003 3820 7096 4264
08/31/2003 4050 7234 4449
09/30/2003 4300 7157 4391
10/31/2003 4410 7562 4748
11/30/2003 4470 7629 4817
12/31/2003 4327 8029 4923
01/31/2004 4600 8176 5077
02/29/2004 4236 8290 4988
03/31/2004 4247 8165 4901
04/30/2004 4125 8037 4719
05/31/2004 4196 8147 4882
06/30/2004 4327 8305 5032
07/31/2004 4065 8030 4638
08/31/2004 4044 8063 4517
09/30/2004 4125 8150 4661
10/31/2004 4206 8275 4853
11/30/2004 4489 8610 5153
12/31/2004 4659 8902 5346
01/31/2005 4545 8685 5068
02/28/2005 4576 8868 5042
03/31/2005 4483 8711 4913
04/30/2005 4297 8546 4722
05/31/2005 4431 8818 5082
06/30/2005 4452 8830 5055
07/31/2005 4659 9159 5369
08/31/2005 4732 9075 5289
09/30/2005 4763 9149 5288
10/31/2005 4639 8996 5210
11/30/2005 4690 9336 5487
12/31/2005 4783 9340 5419
</Table>
<Table>
<Caption>
ENDED 12/31/05
-----------------------------
NASDAQ
FUND S&P 500 COMPOSITE
- --------------------------------------------------------------------------------------
One Year 2.65% 4.91% 1.37%
- --------------------------------------------------------------------------------------
Five Years 5.33% 0.54% -2.25%
- --------------------------------------------------------------------------------------
Since Inception
(12/31/99) -11.57% -1.13% -9.71%
- --------------------------------------------------------------------------------------
</Table>
Returns for periods greater than one year are average annual total returns.
12
THE PARADIGM FUND
DECEMBER 31, 1999 -- DECEMBER 31, 2005
[GRAPH]
<Table>
<Caption>
THE PARADIGM FUND - NO
LOAD CLASS S&P 500 NASDAQ COMPOSITE
---------------------- ------- ----------------
12/31/1999 10000 10000 10000
01/31/2000 9660 9498 9683
02/29/2000 9800 9318 11542
03/31/2000 10200 10229 11237
04/30/2000 8980 9922 9487
05/31/2000 8790 9718 8357
06/30/2000 8920 9958 9746
07/31/2000 8940 9802 9257
08/31/2000 9190 10411 10337
09/30/2000 9370 9861 9026
10/31/2000 9630 9819 8281
11/30/2000 9600 9045 6384
12/31/2000 10400 9090 6071
01/31/2001 10540 9412 6814
02/28/2001 10530 8554 5288
03/31/2001 10200 8012 4522
04/30/2001 10360 8635 5200
05/31/2001 10740 8692 5186
06/30/2001 10910 8481 5309
07/31/2001 10900 8397 4982
08/31/2001 10780 7872 4437
09/30/2001 10150 7236 3683
10/31/2001 10220 7374 4154
11/30/2001 10340 7940 4744
12/31/2001 10610 8009 4793
01/31/2002 10610 7892 4753
02/28/2002 10860 7740 4255
03/31/2002 11000 8031 4535
04/30/2002 11080 7544 4149
05/31/2002 11130 7489 3971
06/30/2002 10670 6955 3596
07/31/2002 10130 6413 3264
08/31/2002 10190 6455 3231
09/30/2002 9730 5754 2880
10/31/2002 9810 6260 3268
11/30/2002 9980 6629 3634
12/31/2002 10120 6239 3282
01/31/2003 10070 6076 3246
02/28/2003 9790 5985 3287
03/31/2003 10130 6043 3296
04/30/2003 11180 6540 3598
05/31/2003 12060 6885 3922
06/30/2003 12220 6973 3988
07/31/2003 12040 7096 4264
08/31/2003 12780 7234 4449
09/30/2003 12870 7157 4391
10/31/2003 13530 7562 4748
11/30/2003 13920 7629 4817
12/31/2003 14954 8029 4923
01/31/2004 14904 8176 5077
02/29/2004 15185 8290 4988
03/31/2004 15215 8165 4901
04/30/2004 14824 8037 4719
05/31/2004 15095 8147 4882
06/30/2004 15266 8305 5032
07/31/2004 15195 8030 4638
08/31/2004 15256 8063 4517
09/30/2004 15868 8150 4661
10/31/2004 16209 8275 4853
11/30/2004 17454 8610 5153
12/31/2004 18084 8902 5346
01/31/2005 17414 8685 5068
02/28/2005 18321 8868 5042
03/31/2005 18321 8711 4913
04/30/2005 18135 8546 4722
05/31/2005 18723 8818 5082
06/30/2005 19455 8830 5055
07/31/2005 20445 9159 5369
08/31/2005 20713 9075 5289
09/30/2005 21362 9149 5288
10/31/2005 20270 8996 5210
11/30/2005 20569 9336 5487
12/31/2005 20997 9340 5419
</Table>
<Table>
<Caption>
ENDED 12/31/05
----------------------------------------------------------------------------------------
ADVISOR ADVISOR
NO LOAD CLASS A CLASS A ADVISOR INSTITUTIONAL NASDAQ
CLASS (NO LOAD) (LOAD ADJUSTED)(1) CLASS C CLASS S&P 500 COMPOSITE
- ---------------------------------------------------------------------------------------------------------------
One Year 16.11% 15.54% 8.91% 14.96% N/A 4.91% 1.37%
- ---------------------------------------------------------------------------------------------------------------
Five Years 15.09% N/A N/A N/A N/A 0.54% -2.25%
- ---------------------------------------------------------------------------------------------------------------
Since Inception No
Load Class
(12/31/99) 13.16% N/A N/A N/A N/A -1.13% -9.71%
- ---------------------------------------------------------------------------------------------------------------
Since Inception
Advisor Class A
(4/26/01) N/A 15.79% 14.32% N/A N/A 1.95% 1.73%
- ---------------------------------------------------------------------------------------------------------------
Since Inception
Advisor Class C
(06/28/02) N/A N/A N/A 20.29% N/A 8.76% 12.40%
- ---------------------------------------------------------------------------------------------------------------
Since Inception
Institutional Class
(05/27/05) N/A N/A N/A N/A 12.35%(2) 5.27%(2) 6.24%(2)
- ---------------------------------------------------------------------------------------------------------------
</Table>
(1) Reflects front-end sales charge of 5.75%.
(2) Not annualized.
Returns for periods greater than one year are average annual total returns.
13
THE MEDICAL FUND
SEPTEMBER 30, 1999 -- DECEMBER 31, 2005
[GRAPH]
<Table>
<Caption>
THE MEDICAL FUND - NO
LOAD CLASS S&P 500 NASDAQ COMPOSITE
--------------------- ------- ----------------
09/30/1999 10000 10000 10000
10/31/1999 10490 10633 10802
11/30/1999 11390 10849 12148
12/31/1999 13360 11488 14818
01/31/2000 15220 10911 14349
02/29/2000 18690 10704 17103
03/31/2000 16910 11751 16652
04/30/2000 15970 11398 14058
05/31/2000 16240 11164 12384
06/30/2000 19360 11439 14442
07/31/2000 18640 11260 13717
08/31/2000 20470 11960 15317
09/30/2000 21130 11328 13374
10/31/2000 20940 11281 12270
11/30/2000 20330 10391 9460
12/31/2000 20980 10442 8996
01/31/2001 19860 10812 10097
02/28/2001 19470 9827 7836
03/31/2001 18100 9204 6701
04/30/2001 18620 9919 7706
05/31/2001 19170 9986 7685
06/30/2001 19140 9743 7867
07/31/2001 18640 9647 7382
08/31/2001 18280 9043 6574
09/30/2001 17520 8313 5458
10/31/2001 17990 8471 6155
11/30/2001 18520 9121 7030
12/31/2001 18091 9201 7102
01/31/2002 16799 9067 7043
02/28/2002 16478 8892 6305
03/31/2002 16518 9226 6720
04/30/2002 15066 8667 6148
05/31/2002 14455 8603 5884
06/30/2002 13273 7990 5328
07/31/2002 12962 7367 4837
08/31/2002 12832 7416 4788
09/30/2002 12010 6610 4268
10/31/2002 12782 7192 4842
11/30/2002 13213 7615 5385
12/31/2002 12819 7167 4863
01/31/2003 12909 6980 4810
02/28/2003 12496 6875 4871
03/31/2003 12960 6942 4884
04/30/2003 13897 7514 5332
05/31/2003 15066 7909 5811
06/30/2003 15126 8010 5909
07/31/2003 15257 8152 6318
08/31/2003 14784 8310 6593
09/30/2003 15076 8222 6507
10/31/2003 15157 8687 7036
11/30/2003 15278 8764 7138
12/31/2003 15791 9223 7295
01/31/2004 16084 9393 7524
02/29/2004 16305 9523 7391
03/31/2004 15802 9380 7262
04/30/2004 16003 9232 6992
05/31/2004 15973 9359 7235
06/30/2004 15912 9541 7457
07/31/2004 15378 9225 6873
08/31/2004 15419 9263 6693
09/30/2004 15721 9363 6907
10/31/2004 15469 9506 7192
11/30/2004 15812 9891 7635
12/31/2004 16890 10227 7922
01/31/2005 16074 9978 7510
02/28/2005 16013 10188 7471
03/31/2005 15449 10007 7280
04/30/2005 15660 9818 6998
05/31/2005 15842 10130 7531
06/30/2005 15610 10144 7490
07/31/2005 16315 10522 7956
08/31/2005 16295 10426 7837
09/30/2005 16729 10510 7835
10/31/2005 16457 10335 7721
11/30/2005 16376 10726 8131
12/31/2005 16769 10729 8031
</Table>
<Table>
<Caption>
ENDED 12/31/05
--------------------------------------------------------------
ADVISOR ADVISOR
NO LOAD CLASS A CLASS A NASDAQ
CLASS (NO LOAD) (LOAD ADJUSTED)(1) S&P 500 COMPOSITE
- ---------------------------------------------------------------------------------------------
One Year -0.72% -0.91% -6.63% 4.91% 1.37%
- ---------------------------------------------------------------------------------------------
Five Years -4.38% N/A N/A 0.54% -2.25%
- ---------------------------------------------------------------------------------------------
Since Inception
No Load Class
(9/30/99) 8.62% N/A N/A 1.13% -3.45%
- ---------------------------------------------------------------------------------------------
Since Inception
Advisor Class A
(4/26/01) N/A -2.16% -3.39% 1.95% 1.73%
- ---------------------------------------------------------------------------------------------
</Table>
(1) Reflects front-end sales charge of 5.75%.
Returns for periods greater than one year are average annual total returns.
14
THE SMALL CAP OPPORTUNITIES FUND
MARCH 20, 2000 -- DECEMBER 31, 2005
[GRAPH]
<Table>
<Caption>
THE SMALL CAP
OPPORTUNITIES FUND - NO
LOAD CLASS S&P 500 NASDAQ COMPOSITE
----------------------- ------- ----------------
03/20/2000 10000 10000 10000
03/31/2000 9900 10290 9919
04/30/2000 9740 9980 8375
05/31/2000 9500 9775 7377
06/30/2000 10210 10016 8603
07/31/2000 11140 9860 8171
08/31/2000 12050 10472 9124
09/30/2000 10970 9919 7967
10/31/2000 10580 9877 7309
11/30/2000 9710 9099 5635
12/31/2000 11100 9143 5359
01/31/2001 12580 9468 6015
02/28/2001 12310 8604 4668
03/31/2001 12180 8059 3992
04/30/2001 12790 8686 4591
05/31/2001 13370 8744 4578
06/30/2001 13940 8531 4687
07/31/2001 13890 8447 4397
08/31/2001 13650 7918 3916
09/30/2001 12610 7279 3251
10/31/2001 13440 7418 3666
11/30/2001 14280 7987 4188
12/31/2001 14500 8057 4231
01/31/2002 14330 7939 4195
02/28/2002 13810 7786 3756
03/31/2002 14610 8079 4003
04/30/2002 14430 7589 3662
05/31/2002 14240 7533 3505
06/30/2002 13680 6996 3174
07/31/2002 11630 6451 2881
08/31/2002 11910 6493 2852
09/30/2002 10730 5788 2542
10/31/2002 9940 6297 2884
11/30/2002 10140 6668 3208
12/31/2002 10110 6276 2897
01/31/2003 10301 6112 2865
02/28/2003 10281 6020 2901
03/31/2003 10915 6078 2909
04/30/2003 11590 6579 3176
05/31/2003 12778 6926 3462
06/30/2003 12738 7014 3520
07/31/2003 12949 7138 3764
08/31/2003 13876 7277 3927
09/30/2003 14581 7200 3876
10/31/2003 15688 7607 4191
11/30/2003 16242 7674 4252
12/31/2003 16834 8076 4346
01/31/2004 17108 8224 4482
02/29/2004 16803 8339 4403
03/31/2004 16681 8213 4326
04/30/2004 16284 8084 4165
05/31/2004 16437 8195 4310
06/30/2004 17352 8354 4442
07/31/2004 16712 8078 4094
08/31/2004 17047 8111 3987
09/30/2004 17230 8198 4115
10/31/2004 17688 8324 4284
11/30/2004 18919 8660 4548
12/31/2004 19594 8955 4719
01/31/2005 18881 8737 4474
02/28/2005 19174 8921 4451
03/31/2005 18975 8763 4337
04/30/2005 18703 8596 4168
05/31/2005 19615 8870 4486
06/30/2005 20233 8883 4462
07/31/2005 21743 9213 4739
08/31/2005 21932 9129 4668
09/30/2005 22456 9203 4667
10/31/2005 21544 9049 4599
11/30/2005 21890 9392 4843
12/31/2005 22174 9395 4784
</Table>
<Table>
<Caption>
ENDED 12/31/05
------------------------------------------------------------------------------
ADVISOR ADVISOR
NO LOAD CLASS A CLASS A INSTITUTIONAL NASDAQ
CLASS (NO LOAD) (LOAD ADJUSTED)(1) CLASS S&P 500 COMPOSITE
- ----------------------------------------------------------------------------------------------------------------
One Year 13.17% 12.83% 6.33% N/A 4.91% 1.37%
- ----------------------------------------------------------------------------------------------------------------
Five Years 14.84% N/A N/A N/A 0.54% -2.25%
- ----------------------------------------------------------------------------------------------------------------
Since Inception
No Load Class
(3/20/00) 14.76% 10.95% N/A N/A -1.07% -11.97%
- ----------------------------------------------------------------------------------------------------------------
Since Inception
Advisor Class A
(12/31/01) N/A N/A 9.33% N/A 3.92% 3.12%
- ----------------------------------------------------------------------------------------------------------------
Since Inception
Institutional Class
(8/12/05) N/A N/A N/A 3.23%(2) 2.20%(2) 2.24%(2)
- ----------------------------------------------------------------------------------------------------------------
</Table>
(1) Reflects front-end sales charge of 5.75%.
(2) Not annualized.
Returns for periods greater than one year are average annual total returns.
15
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
EXPENSE EXAMPLE
December 31, 2005
Shareholders incur two type of costs: (1) transaction costs, including sales
charges (loads) on purchase payments, reinvestments of dividends or other
distributions made by the Fund, redemption fees, and exchange fees, and (2),
ongoing costs, including management fees, distribution and/or service (12b-1)
fees, and other Fund expenses. This example is intended to help investors
understand the ongoing costs (in dollars) of investing in the Funds and to
compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested on July 1, 2005 and
held for the entire period from July 1, 2005 to December 31, 2005.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. Unlike other mutual funds that directly acquire and
manage their own portfolio securities, each Feeder Fund invests all of its
investable assets in a corresponding Master Portfolio, a separately registered
investment company. The Master Portfolio, in turn, invests in securities. With
this type of organization, expenses can accrue specifically to the Master
Portfolio or the Feeder Fund or both. The Adviser for the Master Portfolios has
directed a certain amount of the Master Portfolio's trades to brokers believed
to provide the best execution and, as a result, the Master Portfolios have
generated direct brokerage credits to reduce certain service provider fees. Each
Feeder Fund records its proportionate share of the Master Portfolio's expenses,
including directed brokerage credits, on a daily basis. Any expense reductions
includes Feeder Fund-specific expenses as well as the expenses allocated from
the Master Portfolio.
The Feeder Funds will charge shareholder fees for outgoing wire transfers,
returned checks, and exchanges executed by telephone between the Feeder Fund and
any other series of Kinetics Mutual Funds, Inc. The Feeder Fund's transfer agent
charges a $5.00 transaction fee to shareholder accounts for telephone exchanges
between any two series of Kinetics Mutual Funds, Inc. The Feeder Fund's transfer
agent does not charge a transaction fee for written exchange requests. IRA
accounts are assessed a $15.00 annual fee. Finally, as a disincentive to
market-timing transactions, the Feeder Funds will assess a 2.00% fee on the
redemption or exchange of Fund shares held for less than one month. These fees
will be paid to the Feeder Funds to help offset transaction costs. The Feeder
Funds reserve the right to waive the redemption
16
fee, subject to their sole discretion, in instances deemed not to be
disadvantageous to the Feeder Funds or shareholders.
You may use the information provided in the first line, together with the
amounts you invested, to estimate the expenses that you paid over the period.
Simply divide your account value by $1,000 (for example, an $8,600 account value
divided by $1,000 = 8.6), then multiply the result by the number in the first
line under the heading entitled "Expenses Paid During Period" to estimate the
expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
account values and hypothetical expenses based on the Feeder Funds' actual
expense ratio and an assumed rate of return of 5% per year before expenses,
which are not the Feeder Funds' actual returns. The hypothetical account values
and expenses may not be used to estimate the actual ending account balance or
expenses one paid for the period. You may use this information to compare the
ongoing costs of investing in the Feeder Funds and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds. Please note that the
expenses shown in the table are meant to highlight one's ongoing costs only and
do not reflect any transactional costs, such as sales charges (loads),
redemption fees, or exchange fees. Therefore, the second line of the table is
useful in comparing ongoing costs only, and will not help one determine the
relative total costs of owning different funds. In addition, if these
transactional costs were included, one's costs would have been higher.
17
EXPENSE EXAMPLE
<Table>
<Caption>
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID
VALUE VALUE DURING PERIOD*
(7/1/05) (12/31/05) (7/1/05 TO 12/31/05)
----------------- -------------- --------------------
THE INTERNET FUND
No Load Class Actual -- before expense
reimbursement....................... $1,000.00 $1,058.00 $12.19
No Load Class Actual -- after expense
reimbursement....................... $1,000.00 $1,058.00 $12.19
No Load Class Hypothetical (5% return
before expenses) -- before expense
reimbursement....................... $1,000.00 $1,013.36 $11.93
No Load Class Hypothetical (5% return
before expenses) -- after expense
reimbursement....................... $1,000.00 $1,013.36 $11.93
Advisor Class A Actual -- before
expense reimbursement............... $1,000.00 $1,060.60 $13.50
Advisor Class A Actual -- after
expense reimbursement............... $1,000.00 $1,060.60 $13.50
Advisor Class A Hypothetical (5%
return before expenses) -- before
expense reimbursement............... $1,000.00 $1,012.10 $13.19
Advisor Class A Hypothetical (5%
return before expenses) -- after
expense reimbursement............... $1,000.00 $1,012.10 $13.19
THE INTERNET EMERGING GROWTH FUND
No Load Class Actual -- before expense
reimbursement....................... $1,000.00 $1,074.30 $16.34
No Load Class Actual -- after expense
reimbursement....................... $1,000.00 $1,074.30 $13.98
No Load Class Hypothetical (5% return
before expenses) -- before expense
reimbursement....................... $1,000.00 $1,009.45 $15.83
No Load Class Hypothetical (5% return
before expenses) -- after expense
reimbursement....................... $1,000.00 $1,011.73 $13.55
THE PARADIGM FUND
No Load Class Actual -- before expense
reimbursement....................... $1,000.00 $1,079.30 $ 9.92
No Load Class Actual -- after expense
reimbursement....................... $1,000.00 $1,079.30 $ 8.88
No Load Class Hypothetical (5% return
before expenses) -- before expense
reimbursement....................... $1,000.00 $1,015.67 $ 9.61
No Load Class Hypothetical (5% return
before expenses) -- after expense
reimbursement....................... $1,000.00 $1,016.67 $ 8.61
Advisor Class A Actual -- before
expense reimbursement............... $1,000.00 $1,078.60 $11.22
Advisor Class A Actual -- after
expense reimbursement............... $1,000.00 $1,078.60 $10.18
Advisor Class A Hypothetical (5%
return before expenses) -- before
expense reimbursement............... $1,000.00 $1,014.41 $10.88
Advisor Class A Hypothetical (5%
return before expenses) -- after
expense reimbursement............... $1,000.00 $1,015.41 $ 9.87
Advisor Class C Actual -- before
expense reimbursement............... $1,000.00 $1,075.30 $13.82
Advisor Class C Actual -- after
expense reimbursement............... $1,000.00 $1,075.30 $12.78
Advisor Class C Hypothetical (5%
return before expenses) -- before
expense reimbursement............... $1,000.00 $1,011.89 $13.40
</Table>
18
<Table>
<Caption>
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID
VALUE VALUE DURING PERIOD*
(7/1/05) (12/31/05) (7/1/05 TO 12/31/05)
----------------- -------------- --------------------
Advisor Class C Hypothetical (5%
return before expenses) -- after
expense reimbursement............... $1,000.00 $1,012.89 $12.40
Institutional Class Actual -- before
expense reimbursement............... $1,000.00 $1,079.50 $ 8.87
Institutional Class Actual -- after
expense reimbursement............... $1,000.00 $1,079.50 $ 7.83
Institutional Class Hypothetical (5%
return before expenses) -- before
expense reimbursement............... $1,000.00 $1,016.67 $ 8.60
Institutional Class Hypothetical (5%
return before expenses) -- after
expense reimbursement............... $1,000.00 $1,017.68 $ 7.59
THE MEDICAL FUND
No Load Class Actual -- before expense
reimbursement....................... $1,000.00 $1,074.20 $12.23
No Load Class Actual -- after expense
reimbursement....................... $1,000.00 $1,074.20 $12.42
No Load Class Hypothetical (5% return
before expenses) -- before expense
reimbursement....................... $1,000.00 $1,013.41 $11.87
No Load Class Hypothetical (5% return
before expenses) -- after expense
reimbursement....................... $1,000.00 $1,013.23 $12.06
Advisor Class A Actual -- before
expense reimbursement............... $1,000.00 $1,072.90 $13.53
Advisor Class A Actual -- after
expense reimbursement............... $1,000.00 $1,072.90 $13.72
Advisor Class A Hypothetical (5%
return before expenses) -- before
expense reimbursement............... $1,000.00 $1,012.15 $13.14
Advisor Class A Hypothetical (5%
return before expenses) -- after
expense reimbursement............... $1,000.00 $1,011.97 $13.32
THE SMALL CAP OPPORTUNITIES FUND
No Load Class Actual -- before expense
reimbursement....................... $1,000.00 $1,095.90 $ 9.59
No Load Class Actual -- after expense
reimbursement....................... $1,000.00 $1,095.90 $ 9.40
No Load Class Hypothetical (5% return
before expenses) -- before expense
reimbursement....................... $1,000.00 $1,016.06 $ 9.22
No Load Class Hypothetical (5% return
before expenses) -- after expense
reimbursement....................... $1,000.00 $1,016.23 $ 9.05
Advisor Class A Actual -- before
expense reimbursement............... $1,000.00 $1,093.70 $10.90
Advisor Class A Actual -- after
expense reimbursement............... $1,000.00 $1,093.70 $10.71
Advisor Class A Hypothetical (5%
return before expenses) -- before
expense reimbursement............... $1,000.00 $1,014.80 $10.49
Advisor Class A Hypothetical (5%
return before expenses) -- after
expense reimbursement............... $1,000.00 $1,014.97 $10.31
Institutional Class Actual -- before
expense reimbursement**............. $1,000.00 $1,032.30 $ 6.34
Institutional Class Actual -- after
expense reimbursement**............. $1,000.00 $1,032.30 $ 6.20
</Table>
19
<Table>
<Caption>
BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID
VALUE VALUE DURING PERIOD*
(7/1/05) (12/31/05) (7/1/05 TO 12/31/05)
----------------- -------------- --------------------
Institutional Class Hypothetical (5%
return before expenses) -- before
expense reimbursement**............. $1,000.00 $1,013.08 $ 6.28
Institutional Class Hypothetical (5%
return before expenses) -- after
expense reimbursement**............. $1,000.00 $1,013.21 $ 6.14
THE KINETICS GOVERNMENT MONEY MARKET
FUND
No Load Class Actual -- before expense
reimbursement....................... $1,000.00 $1,012.90 $19.21
No Load Class Actual -- after expense
reimbursement....................... $1,000.00 $1,012.90 $ 4.88
No Load Class Hypothetical (5% return
before expenses) -- before expense
reimbursement....................... $1,000.00 $1,006.12 $19.15
No Load Class Hypothetical (5% return
before expenses) -- after expense
reimbursement....................... $1,000.00 $1,020.35 $ 4.90
</Table>
- ------------------
Note: Each Feeder Fund records its proportionate share of the respective Master
Portfolio's expenses, including directed brokerage credits, on a daily
basis. Any expense reductions includes Feeder Fund-specific expenses as
well as the expenses allocated for the Master Portfolio.
* Expenses are equal to the Fund's annualized expense ratio before expense
reimbursement and after expense reimbursement respectively of 2.35% and 2.35%
for The Internet Fund No Load Class, 2.60% and 2.60% for The Internet Fund
Advisor Class A, 3.12% and 2.67% for The Internet Emerging Growth Fund, 1.90%
and 1.70% for The Paradigm Fund No Load Class, 2.15% and 1.95% for The
Paradigm Fund Advisor Class A, 2.65% and 2.45% for The Paradigm Fund Advisor
Class C, 1.70% and 1.50% for The Paradigm Fund Institutional Class, 2.34% and
2.38% for The Medical Fund No Load Class, 2.59% and 2.63% for The Medical
Fund Advisor Class A, 1.89% and 1.85% for The Small Cap Opportunities Fund No
Load Class, 2.14% and 2.10% for The Small Cap Opportunities Fund Advisor
Class A, and 3.79% and 0.96% The Kinetics Government Money Market Fund,
multiplied by the average account value over the period, multiplied by
184/365.
** Expenses paid during period 8/12/05 -- 12/31/05 and are equal to the Fund's
annualized expense ratio before expense reimbursement and after expense
reimbursement of 1.69% and 1.65% respectively for The Small Cap Fund
Institutional Class, multiplied by the average account value over the period,
multiplied by 141/365 (to reflect the inception date to the end of the
semi-annual period).
20
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
STATEMENT OF ASSETS & LIABILITIES
December 31, 2005
<Table>
<Caption>
THE INTERNET
THE INTERNET EMERGING GROWTH
FUND FUND
- ----------------------------------------------------------------------------------
ASSETS:
Investments in the Master Portfolios, at
value*....................................... $ 148,790,301 $ 3,890,360
Receivable from Adviser........................ -- 2,225
Receivable for Master Portfolio interest
sold......................................... 508,421 11,974
Receivable for Fund shares sold................ 17,689 2,600
Prepaid expenses and other assets.............. 6,507 10,679
------------- ------------
Total assets................................. 149,322,918 3,917,838
------------- ------------
LIABILITIES:
Payable to shareholders........................ 63,174 7,118
Payable to Directors and Officers.............. 4,904 131
Payable for Fund shares repurchased............ 462,936 7,456
Payable for service fees....................... 32,559 837
Payable for distribution fees.................. 2,293 --
Accrued expenses and other liabilities......... 196,455 6,664
------------- ------------
Total liabilities............................ 762,321 22,206
------------- ------------
Net assets................................... $ 148,560,597 $ 3,895,632
============= ============
NET ASSETS CONSIST OF:
Paid in capital................................ $ 324,597,307 $ 14,782,894
Accumulated net investment loss................ (2,242,506) (66,901)
Accumulated net realized loss on investments,
options and written option contracts......... (185,254,583) (11,511,611)
Net unrealized appreciation on:
Investments.................................. 11,456,394 687,377
Written option contracts..................... 3,985 3,873
------------- ------------
Net assets................................... $ 148,560,597 $ 3,895,632
============= ============
CALCULATION OF NET ASSET VALUE PER SHARE -- NO
LOAD CLASS:
Net assets..................................... $ 148,260,435 $ 3,895,632
Shares outstanding............................. 6,011,696 880,080
Net asset value per share (offering and
redemption price)............................ $ 24.66 $ 4.43
============= ============
CALCULATION OF NET ASSET VALUE PER SHARE --
ADVISOR CLASS A:
Net assets..................................... $ 300,162
Shares outstanding............................. 12,301
Net asset value per share...................... $ 24.40
=============
Offering price per share ($24.40 divided by
.9425)....................................... $ 25.89
=============
</Table>
- ------------------
* Each Feeder Fund invests its assets directly in the corresponding Master
Portfolio. The financial statements for the Master Portfolios, along with the
portfolio of investments in securities, are contained elsewhere in this report
and should be read in conjunction with the Feeder Funds' financial statements.
See Notes to the Financial Statements.
21
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
STATEMENT OF ASSETS & LIABILITIES -- (CONTINUED)
December 31, 2005
<Table>
<Caption>
THE
PARADIGM THE MEDICAL
FUND FUND
- ----------------------------------------------------------------------------------------
ASSETS:
Investments in the Master Portfolios, at value*........... $529,194,811 $14,525,840
Receivable from Adviser................................... 128,700 --
Receivable for Master Portfolio interest sold............. -- 23,938
Receivable for Fund shares sold........................... 5,041,361 13,174
Prepaid expenses and other assets......................... 30,033 7,880
------------ -----------
Total assets............................................ 534,394,905 14,570,832
------------ -----------
LIABILITIES:
Payable for Master Portfolio interest purchased........... 3,855,459 --
Payable to shareholders................................... 60,631 --
Payable for Advisor....................................... -- 9,478
Payable to Directors and Officers......................... 15,531 508
Payable for Fund shares repurchased....................... 1,125,271 37,112
Payable for service fees.................................. 110,948 3,126
Payable for distribution fees............................. 35,919 110
Accrued expenses and other liabilities.................... 221,756 19,015
------------ -----------
Total liabilities....................................... 5,425,515 69,349
------------ -----------
Net assets.............................................. $528,969,390 $14,501,483
============ ===========
NET ASSETS CONSIST OF:
Paid in capital........................................... $467,345,340 $16,348,850
Accumulated net investment loss........................... (1,563,028) --
Accumulated net realized loss on investments, options and
written option contracts................................ (385,959) (127,962)
Net unrealized appreciation (depreciation) on:
Investments............................................. 63,573,037 (1,719,405)
------------ -----------
Net assets.............................................. $528,969,390 $14,501,483
============ ===========
CALCULATION OF NET ASSET VALUE PER SHARE -- NO LOAD CLASS:
Net assets................................................ $418,913,556 $13,942,611
Shares outstanding........................................ 20,600,641 837,717
Net asset value per share (offering and redemption
price).................................................. $ 20.33 $ 16.64
============ ===========
CALCULATION OF NET ASSET VALUE PER SHARE -- ADVISOR CLASS A:
Net assets................................................ $ 60,420,852 $ 558,873
Shares outstanding........................................ 3,009,704 34,205
Net asset value per share................................. $ 20.08 $ 16.34
============ ===========
Offering price per share ($20.08 divided by .9425 and
$16.34 divided by .9425, respectively).................. $ 21.31 $ 17.34
============ ===========
</Table>
See Notes to the Financial Statements.
22
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
STATEMENT OF ASSETS & LIABILITIES -- (CONTINUED)
December 31, 2005
<Table>
<Caption>
THE
PARADIGM THE MEDICAL
FUND FUND
- ----------------------------------------------------------------------------------------
CALCULATION OF NET ASSET VALUE PER SHARE -- ADVISOR CLASS C:
Net assets................................................ $ 38,739,845
Shares outstanding........................................ 1,960,156
Net asset value per share (offering and redemption
price).................................................. $ 19.76
============
CALCULATION OF NET ASSET VALUE PER SHARE -- INSTITUTIONAL
CLASS:
Net assets................................................ $ 10,895,137
Shares outstanding........................................ 536,477
Net asset value per share (offering and redemption
price).................................................. $ 20.31
============
</Table>
- ------------------
* Each Feeder Fund invests its assets directly in the corresponding Master
Portfolio. The financial statements for the Master Portfolios, along with the
portfolio of investments in securities, are contained elsewhere in this report
and should be read in conjunction with the Feeder Funds' financial statements.
See Notes to the Financial Statements.
23
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
STATEMENT OF ASSETS & LIABILITIES -- (CONTINUED)
December 31, 2005
<Table>
<Caption>
THE SMALL THE KINETICS
CAP GOVERNMENT
OPPORTUNITIES MONEY
FUND MARKET FUND
- ------------------------------------------------------------------------------------------
ASSETS:
Investments in the Master Portfolios, at value*............ $128,814,080 $1,045,299
Receivable from Adviser.................................... 8,285 3,755
Receivable for Fund shares sold............................ 968,686 45
Prepaid expenses and other assets.......................... 13,105 4,938
------------ ----------
Total assets............................................. 129,804,156 1,054,037
------------ ----------
LIABILITIES:
Payable for Master Portfolio interest purchased............ 847,770 15
Payable to shareholders.................................... 8,955 30
Payable to Directors and Officers.......................... 3,509 17
Payable for Fund shares repurchased........................ 111,961 --
Payable for service fees................................... 15,654 226
Payable for distribution fees.............................. 1,026 --
Accrued expenses and other liabilities..................... 45,299 1,692
------------ ----------
Total liabilities........................................ 1,034,174 1,980
------------ ----------
Net assets............................................... $128,769,982 $1,052,057
============ ==========
NET ASSETS CONSIST OF:
Paid in capital............................................ $110,846,399 $1,052,057
Accumulated net investment income.......................... 162,155 --
Accumulated net realized loss on investments, options and
written option contracts................................. (1,265,588) --
Net unrealized appreciation on:
Investments.............................................. 19,027,016 --
------------ ----------
Net assets............................................... $128,769,982 $1,052,057
============ ==========
CALCULATION OF NET ASSET VALUE PER SHARE -- NO LOAD CLASS:
Net assets................................................. $ 55,979,002 $1,052,057
Shares outstanding......................................... 2,663,043 1,052,057
Net asset value per share (offering and redemption
price)................................................... $ 21.02 $ 1.00
============ ==========
CALCULATION OF NET ASSET VALUE PER SHARE -- ADVISOR CLASS A:
Net assets................................................. $ 5,204,742
Shares outstanding......................................... 249,096
Net asset value per share.................................. $ 20.89
============
Offering price per share ($20.89 divided by .9425)......... $ 22.16
============
CALCULATION OF NET ASSET VALUE PER SHARE -- INSTITUTIONAL
CLASS:
Net Assets................................................. $ 67,586,238
Shares outstanding......................................... 3,218,641
Net asset value per share (offering and redemption
price)................................................... $ 21.00
============
</Table>
- ------------------
* Each Feeder Fund invests its assets directly in the corresponding Master
Portfolio. The financial statements for the Master Portfolios, along with the
portfolio of investments in securities, are contained elsewhere in this report
and should be read in conjunction with the Feeder Funds' financial statements.
See Notes to the Financial Statements.
24
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
STATEMENT OF OPERATIONS
For the Year Ended December 31, 2005
<Table>
<Caption>
THE INTERNET
THE INTERNET EMERGING
FUND GROWTH FUND
- -----------------------------------------------------------------------------------------
INVESTMENT INCOME ALLOCATED FROM MASTER PORTFOLIOS:
Dividends+................................................ $ 2,742,496 $169,189
Interest.................................................. 1,779,187 70,866
Income from securities lending............................ 163,277 3,598
Expenses only from Master Portfolio++..................... (2,416,388) (69,555)
----------- --------
Net investment income from Master Portfolio........... 2,268,572 174,098
----------- --------
EXPENSES:
Distribution fees -- Advisor Class A...................... 745 --
Shareholder servicing fees and expenses................... 1,064,019 33,275
Reports to shareholders................................... 185,858 6,780
Administration fees....................................... 83,918 2,006
Professional fees......................................... 79,145 1,148
Directors' and Officers' fees and expenses................ 28,068 551
Registration fees......................................... 35,374 16,735
Fund accounting fees...................................... 7,738 --
Other expenses............................................ 20,399 365
----------- --------
Total expenses........................................ 1,505,264 60,860
Less, expense reimbursement............................... -- (21,647)
----------- --------
Net expenses.......................................... 1,505,264 39,213
----------- --------
Net investment income................................. 763,308 134,885
----------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS ALLOCATED
FROM MASTER PORTFOLIOS:
Net realized gain (loss) on:
Investments and foreign currency...................... (7,612,128) (20,833)
Written option contracts expired or closed............ 309,754 --
Net change in unrealized appreciation (depreciation) of:
Investments and foreign currency...................... 1,680,380 (51,506)
Written option contracts.............................. (297,208) 4,432
----------- --------
Net loss on investments............................... (5,919,202) (67,907)
----------- --------
Net decrease (increase) in net assets resulting from
operations.......................................... $(5,155,894) $ 66,978
=========== ========
+ Net of Foreign Taxes Withheld of: $ 20,086 $ 492
=========== ========
++ Net of expense reduction of: $ 6,529 $ 605
=========== ========
</Table>
See Notes to the Financial Statements.
25
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
STATEMENT OF OPERATIONS -- (CONTINUED)
For the Year Ended December 31, 2005
<Table>
<Caption>
THE PARADIGM THE MEDICAL
FUND FUND
- ----------------------------------------------------------------------------------------
INVESTMENT INCOME ALLOCATED FROM MASTER PORTFOLIOS:
Dividends+................................................ $ 3,104,513 $ 217,042
Interest.................................................. 1,327,061 2,114
Income from securities lending............................ 21,584 2,907
Expenses only from Master Portfolio++..................... (4,091,095) (246,855)
----------- -----------
Net investment income (loss) from Master Portfolio.... 362,063 (24,792)
----------- -----------
EXPENSES:
Distribution fees -- Advisor Class A...................... 99,367 1,449
Distribution fees -- Advisor Class C...................... 161,371 --
Shareholder servicing fees and expenses................... 1,041,227 101,703
Shareholder servicing fees -- Institutional Class......... 9,150 --
Reports to shareholders................................... 109,312 16,346
Administration fees....................................... 145,270 7,767
Professional fees......................................... 87,427 7,470
Directors' and Officers' fees and expenses................ 44,963 1,995
Registration fees......................................... 80,696 25,277
Fund accounting fees...................................... 44,544 769
Other expenses............................................ 7,496 2,225
----------- -----------
Total expenses........................................ 1,830,823 165,001
Less, expense waiver for Institutional Class service
fees.................................................... (6,863) --
Less, expense reimbursement............................... (687,406) (6,175)
----------- -----------
Net expenses.......................................... 1,136,554 158,826
----------- -----------
Net investment loss................................... (774,491) (183,618)
----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS ALLOCATED
FROM MASTER PORTFOLIOS:
Net realized gain on:
Investments and foreign currency...................... 273,094 1,811,031
Written option contracts expired or closed............ -- 83,651
Net change in unrealized appreciation (depreciation) of:
Investments and foreign currency...................... 37,040,705 (1,971,478)
Written option contracts.............................. -- (80,028)
----------- -----------
Net gain (loss) on investments........................ 37,313,799 (156,824)
----------- -----------
Net increase (decrease) in net assets resulting from
operations.......................................... $36,539,308 $ (340,442)
=========== ===========
+ Net of Foreign Taxes Withheld of: $ 191,053 $ 20,450
=========== ===========
++ Net of expense reduction of: $ 146,433 $ 2,956
=========== ===========
</Table>
See Notes to the Financial Statements.
26
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
STATEMENT OF OPERATIONS -- (CONTINUED)
For the Year Ended December 31, 2005
<Table>
<Caption>
THE KINETICS
THE SMALL CAP GOVERNMENT
OPPORTUNITIES MONEY MARKET
FUND FUND
- ------------------------------------------------------------------------------------------
INVESTMENT INCOME ALLOCATED FROM MASTER PORTFOLIOS:
Dividends+................................................ $ 1,055,763 $ --
Interest.................................................. 410,801 33,136
Income from securities lending............................ 23,385 --
Expenses only from Master Portfolio++..................... (1,054,085) (15,416)
----------- --------
Net investment income from Master Portfolio........... 435,864 17,720
----------- --------
EXPENSES:
Distribution fees -- Advisor Class A...................... 8,583 --
Shareholder servicing fees and expenses................... 181,061 6,655
Shareholder servicing fees -- Institutional Class......... 51,152 --
Reports to shareholders................................... 41,378 2,839
Administration fees....................................... 38,522 538
Professional fees......................................... 23,321 298
Directors' and Officers' fees and expenses................ 11,869 134
Registration fees......................................... 47,288 31,537
Fund accounting fees...................................... 6,445 --
Other expenses............................................ 2,254 508
----------- --------
Total expenses........................................ 411,873 42,509
Less, expense waiver for Institutional Class service
fees.................................................... (38,364) --
Less, expense reimbursement............................... (150,015) (45,848)
----------- --------
Net expenses.......................................... 223,494 (3,339)
----------- --------
Net investment income................................. 212,370 21,059
----------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS ALLOCATED
FROM MASTER PORTFOLIOS:
Net realized (loss) on:
Investments and foreign currency...................... (1,152,409) --
Written option contracts expired or closed............ -- --
Net change in unrealized appreciation of:
Investments and foreign currency...................... 10,830,822 --
----------- --------
Net gain on investments............................... 9,678,413 --
----------- --------
Net increase in net assets resulting from
operations.......................................... $ 9,890,783 $ 21,059
=========== ========
+ Net of Foreign Taxes Withheld of: $ 5,065 $ --
=========== ========
++ Net of expense reduction of: $ 82,356 $ --
=========== ========
</Table>
See Notes to the Financial Statements.
27
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
THE INTERNET EMERGING
THE INTERNET FUND GROWTH FUND
--------------------------- ---------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
- --------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income.......... $ 763,308 $ 899,885 $ 134,885 $ 79,835
Net realized gain (loss) on
sale of investments, foreign
currency and written option
contracts expired or
closed....................... (7,302,374) 33,311,287 (20,833) 128,442
Net change in unrealized
appreciation (depreciation)
of investments, foreign
currency and written
options...................... 1,383,172 (16,515,065) (47,074) 103,604
------------ ------------ ----------- -----------
Net increase (decrease) in
net assets resulting from
operations............... (5,155,894) 17,696,107 66,978 311,881
------------ ------------ ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS --
NO LOAD CLASS:
Net investment income.......... (1,218,235) (2,899,789) (160,455) (107,877)
Net realized gains............. -- -- -- --
------------ ------------ ----------- -----------
Total distributions........ (1,218,235) (2,899,789) (160,455) (107,877)
------------ ------------ ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS --
ADVISOR CLASS A:
Net investment income.......... (1,745) (3,218) N/A N/A
Net realized gains............. -- -- N/A N/A
------------ ------------ ----------- -----------
Total distributions........ (1,745) (3,218) N/A N/A
------------ ------------ ----------- -----------
CAPITAL SHARE TRANSACTIONS -- NO
LOAD CLASS:
Proceeds from shares sold...... 1,976,990 20,187,510 895,722 1,385,953
Redemption fees................ 3,071 -- 663 --
Proceeds from shares issued to
holders in reinvestment of
dividends.................... 1,155,106 2,758,435 153,337 97,802
Cost of shares redeemed........ (50,437,185) (66,950,463) (1,644,963) (1,780,526)
------------ ------------ ----------- -----------
Net decrease in net assets
resulting from No Load
Class capital share
transactions............. (47,302,018) (44,004,518) (595,241) (296,771)
------------ ------------ ----------- -----------
</Table>
See Notes to the Financial Statements.
28
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
STATEMENTS OF CHANGES IN NET ASSETS -- (CONTINUED)
<Table>
<Caption>
THE INTERNET EMERGING
THE INTERNET FUND GROWTH FUND
--------------------------- ---------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
- --------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS --
ADVISOR CLASS A:
Proceeds from shares sold...... $ 131,159 $ 21,396,074 $ N/A $ N/A
Redemption fees................ 995 -- N/A N/A
Proceeds from shares issued to
holders in reinvestment of
dividends.................... 1,700 3,128 N/A N/A
Cost of shares redeemed........ (177,757) (21,304,122) N/A N/A
------------ ------------ ----------- -----------
Net increase (decrease) in
net assets resulting from
Advisor Class A capital
share transactions....... (43,903) 95,080 N/A N/A
------------ ------------ ----------- -----------
TOTAL DECREASE IN NET ASSETS..... (53,721,795) (29,116,338) (688,718) (92,767)
NET ASSETS:
Beginning of year.............. 202,282,392 231,398,730 4,584,350 4,677,117
------------ ------------ ----------- -----------
End of year*................... 148,560,597 202,282,392 3,895,632 4,584,350
============ ============ =========== ===========
*Including undistributed net
investment loss of:............ (2,242,506) (1,845,522) (66,901) (41,327)
------------ ------------ ----------- -----------
CHANGES IN SHARES OUTSTANDING --
NO LOAD CLASS:
Shares sold.................... 82,811 863,154 200,890 324,922
Shares issued in reinvestment
of dividends and
distributions................ 46,841 108,472 34,613 21,685
Shares redeemed................ (2,104,010) (2,895,291) (373,836) (419,861)
------------ ------------ ----------- -----------
Net decrease in shares
outstanding.............. (1,974,358) (1,923,665) (138,333) (73,254)
============ ============ =========== ===========
CHANGES IN SHARES OUTSTANDING --
ADVISOR CLASS A:
Shares sold.................... 5,549 964,063
Shares issued in reinvestments
of dividends and
distributions................ 70 125
Shares redeemed................ (7,508) (968,696)
------------ ------------
Net decrease in shares
outstanding................ (1,889) (4,508)
============ ============
</Table>
See Notes to the Financial Statements.
29
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
STATEMENTS OF CHANGES IN NET ASSETS -- (CONTINUED)
<Table>
<Caption>
THE PARADIGM FUND THE MEDICAL FUND
------------------------------- ----------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------
OPERATIONS:
Net investment loss................... $ (774,491) $ (410,824) $ (183,618) $ (262,143)
Net realized gain on sale of
investments, foreign currency and
written option contracts expired or
closed.............................. 273,094 4,035,209 1,894,682 546,535
Net change in unrealized appreciation
(depreciation) of investments,
foreign currency and written
options............................. 37,040,705 13,988,562 (2,051,506) 1,117,785
------------- --------------- ----------- -----------
Net increase (decrease) in net
assets resulting from
operations...................... 36,539,308 17,612,947 (340,442) 1,402,177
------------- --------------- ----------- -----------
DISTRIBUTIONS TO
SHAREHOLDERS -- NO LOAD CLASS:
Net investment income................. (229,540) (73,771) -- --
Net realized gains.................... (505,860) (2,290,393) -- --
------------- --------------- ----------- -----------
Total distributions............... (735,400) (2,364,164) -- --
------------- --------------- ----------- -----------
DISTRIBUTIONS TO
SHAREHOLDERS -- ADVISOR CLASS A:
Net investment income................. -- (22,189) -- --
Net realized gains.................... (73,876) (689,040) -- --
------------- --------------- ----------- -----------
Total distributions............... (73,876) (711,229) -- --
------------- --------------- ----------- -----------
DISTRIBUTIONS TO
SHAREHOLDERS -- ADVISOR CLASS C:
Net investment income................. -- (7,531) N/A N/A
Net realized gains.................... (47,582) (233,914) N/A N/A
------------- --------------- ----------- -----------
Total distributions............... (47,582) (241,445) N/A N/A
------------- --------------- ----------- -----------
DISTRIBUTIONS TO SHAREHOLDERS --
INSTITUTIONAL CLASS:
Net investment income................. (18,827) -- N/A N/A
Net realized gains.................... (13,174) -- N/A N/A
------------- --------------- ----------- -----------
Total distributions................... (32,001) -- N/A N/A
------------- --------------- ----------- -----------
CAPITAL SHARE TRANSACTIONS -- NO LOAD
CLASS:
Proceeds from shares sold............. 416,026,097 57,276,719 487,835 3,456,495
Redemption fees....................... 391,025 -- 658 --
Proceeds from shares issued to holders
in reinvestment of dividends........ 684,456 2,324,520 -- --
Cost of shares redeemed............... (114,335,059) (37,924,198) (5,800,569) (8,926,297)
------------- --------------- ----------- -----------
Net increase (decrease) in net
assets resulting from No Load
Class capital share
transactions.................... 302,766,519 21,677,041 (5,312,076) (5,469,802)
------------- --------------- ----------- -----------
CAPITAL SHARE TRANSACTIONS -- ADVISOR
CLASS A:
Proceeds from shares sold............. 38,036,699 13,180,643 127,135 142,200
Redemption fees....................... 2,465 -- -- --
Proceeds from shares issued to holders
in reinvestment of dividends........ 66,629 624,768 -- --
Cost of shares redeemed............... (9,676,794) (3,787,846) (252,314) (248,964)
------------- --------------- ----------- -----------
Net increase (decrease) in net
assets resulting from Advisor
Class A capital share
transactions.................... 28,428,999 10,017,565 (125,179) (106,764)
------------- --------------- ----------- -----------
</Table>
See Notes to the Financial Statements.
30
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
STATEMENTS OF CHANGES IN NET ASSETS -- (CONTINUED)
<Table>
<Caption>
THE PARADIGM FUND THE MEDICAL FUND
------------------------------- ----------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS -- ADVISOR
CLASS C:
Proceeds from shares sold............. 28,425,604 6,800,263 N/A N/A
Redemption fees....................... 344 -- N/A N/A
Proceeds from shares issued to holders
in reinvestment of dividends........ 45,141 233,753 N/A N/A
Cost of shares redeemed............... (1,886,081) (688,644) N/A N/A
------------- --------------- ----------- -----------
Net increase in net assets
resulting from Advisor Class C
capital share transactions...... 26,585,008 6,345,372 N/A N/A
------------- --------------- ----------- -----------
CAPITAL SHARE TRANSACTIONS --
INSTITUTIONAL CLASS:
Proceeds from shares sold............. 10,716,396 -- N/A N/A
Proceeds from shares issued to holders
in reinvestments of dividends....... 32,002 -- N/A N/A
Cost of shares redeemed............... (474,197) -- N/A N/A
------------- --------------- ----------- -----------
Net increase in net assets resulting
from Institutional Class capital
share transactions.................. 10,274,201 -- N/A N/A
------------- --------------- ----------- -----------
TOTAL INCREASE (DECREASE) IN NET
ASSETS................................ $ 403,705,176 $ 52,336,087 $(5,777,697) $(4,174,389)
NET ASSETS:
Beginning of year..................... 125,264,214 72,928,127 20,279,180 24,453,569
------------- --------------- ----------- -----------
End of year*.......................... 528,969,390 125,264,214 14,501,483 20,279,180
============= =============== =========== ===========
*Including undistributed net investment
(loss) of:............................ (1,563,028) (414,319) -- --
------------- --------------- ----------- -----------
CHANGES IN SHARES OUTSTANDING -- NO
LOAD CLASS:
Shares sold........................... 21,458,479 3,574,328 30,290 222,542
Shares issued in reinvestment of
dividends and distributions......... 33,667 132,450 -- --
Shares redeemed....................... (5,982,715) (2,483,043) (361,333) (565,590)
------------- --------------- ----------- -----------
Net increase (decrease) in shares
outstanding..................... 15,509,431 1,223,735 (331,043) (343,048)
============= =============== =========== ===========
CHANGES IN SHARES OUTSTANDING --
ADVISOR CLASS A:
Shares sold........................... 1,998,353 845,585 7,926 9,081
Shares issued in reinvestment of
dividends and distributions......... 3,318 35,886 -- --
Shares redeemed....................... (516,504) (244,418) (15,948) (15,883)
------------- --------------- ----------- -----------
Net increase (decrease) in shares
outstanding..................... 1,485,167 637,053 (8,022) (6,802)
============= =============== =========== ===========
</Table>
See Notes to the Financial Statements.
31
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
STATEMENTS OF CHANGES IN NET ASSETS -- (CONTINUED)
<Table>
<Caption>
THE PARADIGM FUND THE MEDICAL FUND
------------------------------- ----------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
- -------------------------------------------------------------------------------------------------------
CHANGES IN SHARES OUTSTANDING --
ADVISOR CLASS C:
Shares sold........................... 1,510,217 434,911
Shares issued in reinvestment of
dividends and distributions......... 2,285 13,575
Shares redeemed....................... (100,110) (44,985)
------------- ---------------
Net increase in shares
outstanding..................... 1,412,392 403,501
============= ===============
CHANGES IN SHARES OUTSTANDING --
INSTITUTIONAL CLASS:
Shares sold........................... 558,748
Shares issued in reinvestments of
dividends and distributions......... 1,576
Shares redeemed....................... (23,847)
-------------
Net increase in shares
outstanding..................... 536,477
=============
</Table>
See Notes to the Financial Statements.
32
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
STATEMENTS OF CHANGES IN NET ASSETS -- (CONTINUED)
<Table>
<Caption>
THE SMALL CAP THE KINETICS GOVERNMENT
OPPORTUNITIES FUND MONEY MARKET FUND
---------------------------- ------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
- --------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income...... $ 212,370 $ 295,147 $ 21,059 $ --
Net realized gain on sale
of investments, foreign
currency and written
option contracts expired
or closed................ (1,152,409) 1,991,484 -- --
Net change in unrealized
appreciation
(depreciation) of
investments, foreign
currency and written
options.................. 10,830,822 2,368,164 -- --
------------ ------------- ------------ ---------------
Net increase in net
assets resulting from
operations........... 9,890,783 4,654,795 21,059 --
------------ ------------- ------------ ---------------
DISTRIBUTIONS TO SHAREHOLDERS
-- NO LOAD CLASS:
Net investment income...... (14,682) (305,568) (21,059) --
Net realized gains......... (329,578) (746,333) -- --
------------ ------------- ------------ ---------------
Total distributions.... (344,260) (1,051,901) (21,059) --
------------ ------------- ------------ ---------------
DISTRIBUTIONS TO SHAREHOLDERS
-- ADVISOR CLASS A:
Net investment income...... (1,343) (20,162) N/A N/A
Net realized gains......... (31,044) (62,614) N/A N/A
------------ ------------- ------------ ---------------
Total distributions.... (32,387) (82,776) N/A N/A
------------ ------------- ------------ ---------------
DISTRIBUTIONS TO
SHAREHOLDERS --
INSTITUTIONAL CLASS:
Net investment income...... (50,832) -- N/A N/A
Net realized gains......... (400,218) -- N/A N/A
------------ ------------- ------------ ---------------
Total distributions.... (451,050) -- N/A N/A
------------ ------------- ------------ ---------------
</Table>
See Notes to the Financial Statements.
33
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
STATEMENTS OF CHANGES IN NET ASSETS -- (CONTINUED)
<Table>
<Caption>
THE SMALL CAP THE KINETICS GOVERNMENT
OPPORTUNITIES FUND MONEY MARKET FUND
---------------------------- ------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
- --------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS --
NO LOAD CLASS:
Proceeds from shares
sold..................... 89,063,226 41,958,086 384,652 22,151,984
Redemption fees............ 19,178 -- -- --
Proceeds from shares issued
to holders in
reinvestment of
dividends................ 338,406 1,046,435 20,405 --
Cost of shares redeemed.... (76,175,619) (34,183,636) (519,245) (24,033,453)
------------ ------------- ------------ ---------------
Net increase (decrease)
in net assets
resulting from no
load class capital
share transactions... 13,245,191 8,820,885 (114,188) (1,881,469)
------------ ------------- ------------ ---------------
CAPITAL SHARE TRANSACTIONS --
ADVISOR CLASS A:
Proceeds from shares
sold..................... $ 3,263,742 1,527,681 N/A N/A
Redemption fees............ 2,745 -- N/A N/A
Proceeds from shares issued
to holders in
reinvestment of
dividends................ 29,430 69,025 N/A N/A
Cost of shares redeemed.... (1,390,407) (1,046,134) N/A N/A
------------ ------------- ------------ ---------------
Net increase in net
assets resulting from
Advisor Class A
capital share
transactions......... 1,905,510 550,572 N/A N/A
------------ ------------- ------------ ---------------
CAPITAL SHARE
TRANSACTIONS --INSTITUTIONAL
CLASS:
Proceeds from shares
sold..................... 67,454,811 -- N/A N/A
Proceeds from shares issued
to holders in
reinvestment of
dividends................ 450,906 -- N/A N/A
Cost of shares redeemed.... (1,981,158) -- N/A N/A
------------ ------------- ------------ ---------------
Net increase in net
assets resulting from
Institutional Class
capital share
transactions......... 65,924,559 -- N/A N/A
------------ ------------- ------------ ---------------
TOTAL INCREASE (DECREASE) IN
NET ASSETS................. 90,138,346 12,891,575 (114,188) (1,881,469)
</Table>
See Notes to the Financial Statements.
34
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
STATEMENTS OF CHANGES IN NET ASSETS -- (CONTINUED)
<Table>
<Caption>
THE SMALL CAP THE KINETICS GOVERNMENT
OPPORTUNITIES FUND MONEY MARKET FUND
---------------------------- ------------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
- --------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of year............ 38,631,636 25,740,061 1,166,245 3,047,714
------------ ------------- ------------ ---------------
End of year*................. 128,769,982 38,631,636 1,052,057 1,166,245
============ ============= ============ ===============
*Including undistributed net
investment income of:...... 162,155 -- -- --
------------ ------------- ------------ ---------------
CHANGES IN SHARES OUTSTANDING
-- NO LOAD CLASS:
Shares sold................ 4,480,908 2,480,060 384,652 22,151,984
Shares issued in
reinvestment of dividends
and distributions........ 16,099 55,869 20,405 --
Shares redeemed............ (3,744,356) (2,055,870) (519,245) (24,033,453)
------------ ------------- ------------ ---------------
Net increase (decrease)
in shares
outstanding.......... 752,651 480,059 (114,188) (1,881,469)
============ ============= ============ ===============
CHANGES IN SHARES OUTSTANDING
-- ADVISOR CLASS A:
Shares sold................ 163,666 89,828 N/A N/A
Shares issued in
reinvestment of dividends
and distributions........ 1,409 3,697 N/A N/A
Shares redeemed............ (73,232) (62,012) N/A N/A
------------ ------------- ------------ ---------------
Net increase in shares
outstanding.......... 91,843 31,513 N/A N/A
============ ============= ============ ===============
CHANGES IN SHARES
OUTSTANDING --
INSTITUTIONAL CLASS:
Shares sold................ 3,291,874 -- N/A N/A
Shares issued in
reinvestments of
dividends and
distributions............ 21,472 -- N/A N/A
Shares redeemed............ (94,705) -- N/A N/A
------------ ------------- ------------ ---------------
Net increase in shares
outstanding.......... 3,218,641 -- N/A N/A
============ ============= ============ ===============
</Table>
See Notes to the Financial Statements.
35
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
1. ORGANIZATION
Kinetics Mutual Funds, Inc. (the "Company") is registered under the Investment
Company Act of 1940, as amended (the "1940 Act") and is incorporated in the
State of Maryland. The Company is an open-end management investment company
issuing its shares in series. One billion shares are authorized for the Company
with a par value of $0.001 per share. The series of the Company presently
authorized are The Internet Fund ("Internet"), The Internet Emerging Growth Fund
("Emerging"),The Paradigm Fund ("Paradigm"), The Medical Fund ("Medical"), The
Small Cap Opportunities Fund ("Small Cap") and The Kinetics Government Money
Market Fund ("Government"). Investment operations of the Company began on
October 21, 1996 (Internet), September 30, 1999 (Medical), December 31, 1999
(Emerging and Paradigm), February 3, 2000 (Government) and March 20, 2000 (Small
Cap). Each series, unlike many other investment companies which directly acquire
and manage their own portfolios of securities, seeks its investment objective by
investing all of its investable assets in a corresponding portfolio series (each
a "Master Portfolio" and collectively the "Master Portfolios") of Kinetics
Portfolios Trust (the "Trust").
On April 28, 2000, each series in the Company, entered into a master-feeder fund
structure. By entering into this structure, each series (each a "Feeder Fund"
and collectively, the "Feeder Funds") invested all of its assets in a
corresponding Master Portfolio which had the same investment objective as the
Feeder Fund. Each Master Portfolio has multiple feeder funds. Each Feeder Fund
receives a proportionate amount of interest in the Master Portfolio equal to its
relative contribution of capital. Thus, each Feeder Fund is allocated its
portion of income, gains (losses) and expenses from the Master Portfolio.
Each Feeder Fund's respective interest in the corresponding Master Portfolio as
of December 31, 2005 is as follows:
<Table>
<Caption>
INTEREST IN
MASTER PORTFOLIO
----------------
Internet Fund........................................ 99.995%
Emerging Fund........................................ 99.832%
Paradigm Fund........................................ 99.996%
Medical Fund......................................... 99.924%
Small Cap Fund....................................... 99.983%
Government Fund...................................... 97.567%
</Table>
36
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2005
Prior to the conversion to a master-feeder fund structure, on April 28, 2000,
each then existing series conducted its own investment operations.
Effective April 26, 2001, the Internet, Paradigm and Medical Funds issued an
additional class of shares -- Advisor Class A. Effective December 31, 2001, the
Small Cap Fund issued an additional class of shares -- Advisor Class A. Advisor
Class A shares are subject to an annual Rule 12b-1 fee of 0.25% of average daily
net assets. The Advisor Class A shares are also subject to a front-end sales
charge of 5.75%. Effective June 28, 2002 the Paradigm Fund issued an additional
class of shares -- Advisor Class C. Advisor Class C shares are subject to an
annual Rule 12b-1 fee of 0.75% of average daily net assets. Effective May 27,
2005, the Paradigm Fund issued an additional class of shares -- the
Institutional Class. Effective August 12, 2005, the Small Cap Opportunities Fund
issued an additional class of shares -- the Institutional Class. The
Institutional Class shares are subject to a service fee of 0.20% of average
daily net assets. All other classes are subject to a service fee of 0.25% of
average daily net assets. The No Load Class and the Institutional Class shares
do not pay a 12b-1 fee or have a sales charge. Each class of shares for each
Fund has identical rights and privileges except with respect to the Rule 12b-1
fees paid by the Advisor Class A and Class C shares, the sales charge on the
Advisor Class A and Class C shares, the service fees paid by the No Load Class,
Advisor Class A and Advisor Class C versus those paid by the Institutional
Class, voting rights on matters pertaining to a single class of shares and the
exchange privileges of each class of shares. Shares of each Feeder Fund will
assess a 2.00% redemption fee (with exceptions) on shares redeemed or exchanged
within 30 days of purchase.
Refer to the Master Portfolio's financial statements to obtain information about
the investment objective of the corresponding Feeder Fund. The financial
statements of the Master Portfolios, including the portfolio of investments in
securities, are contained elsewhere in this report and should be read in
conjunction with the Feeder Funds' financial statements.
2. SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION
Master Portfolio securities (other than Government) that are listed on a U.S.
securities exchange for which market quotations are readily available are valued
at the last quoted sale price on the day the valuation is made. Price
information on listed securities is taken from the exchange where the security
is primarily traded. All equity securities that are traded using the National
37
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2005
Association of Securities Dealers' Automated Quotation System ("NASDAQ") are
valued using the NASDAQ Official Closing Price ("NOCP"). In the event market
quotations are not readily available or if events occur that may materially
affect the value of a particular security between the time trading ends on a
particular security and the close of regular trading on the New York Stock
Exchange ("NYSE"), "fair value" will be determined. Purchased options, futures,
unlisted U.S. securities and listed U.S. securities not traded on the valuation
date for which market quotations are readily available are valued at the mean of
the most recent bid and asked prices. Fixed-income securities (other than
obligations having a maturity of 60 days or less) are normally valued on the
basis of quotes obtained from pricing services, which take into account
appropriate factors such as institutional sized trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data.
Investments in The Kinetics Government Money Market Portfolio and instruments
with remaining maturities of 60 days or less are valued at amortized cost, which
approximates fair value. Other assets and securities for which no quotations are
readily available (including restricted securities) are valued in good faith at
fair value using methods determined by the Board of Trustees of the Master
Portfolios. At December 31, 2005, none of the Master Portfolios held securities
which were fair valued.
REPURCHASE AGREEMENTS
Each Master Portfolio may enter into repurchase agreements with banks that are
members of the Federal Reserve System or securities dealers who are members of a
national securities exchange or are primary dealers in U.S. Government
Securities. In connection with transactions in repurchase agreements, it is the
Trust's policy that the Master Portfolio receive, as collateral, securities
whose market value, including accrued interest, at all times will be at least
equal to 100% of the amount invested by the Master Portfolio in each repurchase
agreement. If the seller defaults, and the value of the collateral declines,
realization of the collateral by the Master Portfolio may be delayed or limited.
WRITTEN OPTION ACCOUNTING
The Master Portfolios may write (sell) call or put options for trading or
hedging purposes. When a Master Portfolio writes an option, an amount equal to
the premium received by the Master Portfolio is included in the Statement of
Assets and Liabilities as an asset and an equivalent liability. The amount of
the liability is subsequently marked-to-market to reflect the current
38
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2005
value of the option written. By writing the option, the Master Portfolio may
become obligated during the term of the option to deliver or purchase the
securities underlying the option at the exercise price if the option is
exercised. Option contracts are valued at the average of the current bid and
asked price reported on the day of the valuation. When an option expires on its
stipulated expiration date or the Master Portfolio enters into a closing
purchase transaction, the Master Portfolio realizes a gain or loss if the cost
of the closing transaction differs from the premium received when the option was
sold, without regard to any unrealized gain or loss on the underlying security,
and the liability related to such option is eliminated. When an option is
exercised, the premium originally received decreases the cost basis of the
underlying security (or increases the proceeds on the security sold short) and
the Master Portfolio realizes a gain or loss from the sale of the security (or
closing of the short sale). As collateral for uncovered written options, the
Master Portfolio is required under the 1940 Act to maintain assets consisting of
cash, cash equivalents or liquid securities. This collateral is required to be
adjusted daily to reflect the market value of the purchase obligation for put
options or the market value of the instrument underlying the contract for call
options.
FOREIGN CURRENCY TRANSLATIONS
The books and records of the Master Portfolios are maintained in U.S. dollars.
For the Master Portfolios, foreign currency transactions are translated into
U.S. dollars on the following basis: (i) market values of investment securities
and other assets and liabilities are translated at the exchange rate of such
currencies against the U.S. dollar, as provided by an approved pricing service,
and (ii) purchases and sales of investment securities, dividend and interest
income and certain expenses at the rates of exchange prevailing on the
respective dates of such transactions. The Master Portfolios do not isolate and
treat as ordinary income that portion of the results of operations arising as a
result of changes in the exchange rate from the fluctuations arising from
changes in the market prices of securities held during the period. However, for
federal income tax purposes, the Master Portfolios do isolate and treat as
ordinary income the effect of changes in foreign exchange rates arising from
actual foreign currency transactions and the effect of changes in foreign
exchange rates arising between trade date and settlement date.
RESTRICTED SECURITIES
The Master Portfolios may invest in restricted securities. These securities are
valued by the Master Portfolios after giving due consideration to pertinent
39
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2005
factors including recent private sales, market conditions and the issuer's
financial performance. The Master Portfolios have no right to require
registration of unregistered securities. At December 31, 2005, the Master
Portfolios did not hold any investment securities which were determined to be
illiquid pursuant to the guidelines adopted by the Board of Trustees.
WHEN-ISSUED SECURITIES
The Master Portfolios may purchase securities on a when-issued or delayed
delivery basis. Although the purchase amounts of these securities are
established at the time the purchaser enters into the agreement, these
securities may be delivered and paid for at a future date. The Master Portfolios
record purchases of when-issued securities and reflect the values of such
securities in determining net asset value in the same manner as other portfolio
securities. The Master Portfolios maintain at all times cash or other liquid
assets in an amount at least equal to the amount of outstanding commitments for
when-issued securities.
SECURITIES LENDING
Each Master Portfolio may lend its portfolio securities to broker-dealers by
entering directly into lending arrangements with such broker-dealers or
indirectly through repurchase agreements with respect to no more than 33 1/3% of
the total assets of each Portfolio (including any collateral posted) or 50% of
the total assets of each Portfolio (excluding any collateral posted). Securities
lending and repurchase transactions will be fully collateralized at all times
with cash and/or short-term debt obligations. The Master Portfolios receive
interest on the collateral received as well as a fee for the securities loaned.
EXPENSE ALLOCATION
Common expenses incurred by Feeder Funds are allocated among the Feeder Funds
(i) based upon relative average net assets, (ii) as incurred on a specific
identification basis, or (iii) equally among the Feeder Funds, depending on the
nature of the expenditure.
Each Feeder Fund records its proportionate share of the Master Portfolio's
expenses on a daily basis. In addition, each Feeder Fund accrues its own
separate expenses. Any cap on expenses includes Feeder Fund-specific expenses as
well as the expenses allocated from the Master Portfolio.
FEDERAL INCOME TAXES
Each Master Portfolio will be treated as a partnership for federal income tax
purposes. As such, each investor in the Portfolio will be subject to taxation
40
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2005
on its share of the Portfolio's ordinary income and capital gains. It is
intended that the Portfolio's assets will be managed so an investor in the
Portfolio can satisfy the requirements of subchapter M of the Internal Revenue
Code.
It is the Feeder Funds' policy to meet the requirements of the Internal Revenue
Code applicable to regulated investment companies and the Feeder Funds intend to
distribute investment company net taxable income and net capital gains to
shareholders. Therefore, no federal income tax provision is recorded. Dividends
from net investment income and distributions of net realized capital gains, if
any, will be declared and paid at least annually. The character of distributions
made during the year from net investment income or net realized gains may differ
from the characterization for federal income tax purposes due to differences in
the recognition of income, expenses and gain items for financial statement and
tax purposes. Additionally, the Feeder Funds may utilize earnings and profits
distributed to shareholders on redemption of shares as part of the dividends
paid deduction for income tax purposes. Where appropriate, reclassifications
between capital accounts are made for such differences that are permanent in
nature.
USE OF ESTIMATES
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 in the financial
statements. Actual results could differ from those estimates.
OTHER
Realized gains and losses on the sale of investments are calculated on the
identified cost basis. Dividend income is recorded on the ex-dividend date and
interest income is recognized on the accrual basis. Other noncash dividends are
recognized as investment income at the fair value of the property received.
Income, expenses (other than expenses attributable to a specific class) and
realized and unrealized gains or losses on investments are allocated to each
class of shares based on its relative net assets.
3. INVESTMENT ADVISER
The Trust has entered into Investment Advisory Agreements (the "Agreements")
with Kinetics Asset Management, Inc. (the "Adviser"), with whom certain officers
and trustees of the Trust are affiliated, to furnish investment
41
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2005
advisory services to the Master Portfolios. Under the terms of the Agreements,
the Master Portfolios compensate the Adviser for its management services at the
annual rate of 1.25% of each Master Portfolio's average daily net assets, except
for The Kinetics Government Money Market Portfolio, which compensates the
Adviser at an annual rate of 0.50% of the Master Portfolio's average daily net
assets.
The Adviser has voluntarily agreed to continue to pay certain operating expenses
as deemed appropriate. The Adviser may discontinue the voluntary reimbursement
at any time, these reimbursements are not subject to recapture. For the year
ended December 31, 2005, the amounts earned by the Adviser and the reimbursed
expenses for the Feeder Funds are as follows:
<Table>
<Caption>
INTERNET EMERGING
--------- ----------
Annual Advisory Rate.................................. 1.25% 1.25%
Expenses Reimbursed by Adviser........................ $ -- $21,647
</Table>
<Table>
<Caption>
PARADIGM MEDICAL
--------- ----------
Annual Advisory Rate.................................. 1.25% 1.25%
Expenses Reimbursed by Adviser........................ $687,406 $ 6,175
</Table>
<Table>
<Caption>
SMALL CAP GOVERNMENT
--------- ----------
Annual Advisory Rate.................................. 1.25% 0.50%
Expenses Reimbursed by Adviser........................ $150,015 $45,848
</Table>
The Adviser receives a shareholder servicing fee from the No Load, Class A and
Class C shares of the Feeder Funds pursuant to a Shareholder Servicing Agreement
in the amount equal to 0.25% of the Feeder Fund's average daily net assets. For
the Institutional Class the Adviser receives a shareholder servicing fee in the
amount equal to 0.20% of the Institutional Class average daily net assets. At
this time the Investment Adviser has contractually agreed to waive and/or
reimburse the portion of the Institutional Class shareholder servicing fee in
excess of 0.05% of its average daily net assets until at least May 1, 2006. For
the period May 27, 2005 through December 31, 2005 the Adviser waived $6,863 and
$38,364 in shareholder servicing fees for the Institutional Class of the
Paradigm Fund and the Small Cap Opportunities Fund, respectively. The Adviser is
responsible for paying a portion of these shareholder servicing fees to various
agents that have a written shareholder servicing agreement with the Adviser and
that perform shareholder servicing functions and maintenance of shareholder
accounts on behalf of their clients who own shares of the Feeder Funds.
42
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2005
For the year ended December 31, 2005, the Feeder Funds were allocated $24,000
for the services of the Chief Compliance Officer employed by the Adviser.
The Company, on behalf of the Funds, has adopted two Retail Distribution Plans
pursuant to Rule 12b-1 under the 1940 Act (the "12b-1 Plans"). One Plan is for
Advisor Class A shares, while the other Plan is for Advisor Classes B and C
shares. Under the first Plan, Advisor Class A shares may pay up to an annual
rate of 0.50% of the average daily net asset value of shares to the Distributor
or other qualified recipients under the Plan. During the year ended December 31,
2005, payments under the 12b-1 Plan for the Advisor Class A shares of the
Internet, Paradigm, Medical and Small Cap Funds were limited to 0.25% of the
average daily net asset value of such shares of such Funds. During the year
ended December 31, 2005, the Advisor Class A shares of the Internet, Paradigm,
Medical and Small Cap Funds incurred expenses of $745, $99,367, $1,449 and
$8,583, respectively, pursuant to the 12b-1 Plan. Under the second Plan, Advisor
Classes B and C shares pay an annual rate of 0.75% of the average daily net
asset value of such shares. During the year ended December 31, 2005, Paradigm
Advisor Class C shares incurred expenses of $161,371, pursuant to the 12b-1
Plan. Through December 31, 2005, the Funds had not issued any Advisor Class B
shares.
Kinetics Funds Distributor, Inc. (the "Distributor") acts as the Fund's
principal underwriter in a continuous public offering of the Fund's shares. The
Distributor is an affiliate of the Adviser. For the year ended December 31,
2005, the Distributor received $669, $129,461, $562 and $9,915 from sales loads
from the Internet, Paradigm, Medical and Small Cap Funds.
4. RECLASSIFICATION OF CAPITAL ACCOUNTS
Accounting principles generally accepted in the United States of America require
that certain components of net assets relating to permanent differences be
reclassified between financial and tax reporting. These reclassifications have
no effect on net assets or net asset value per share. For the year ended
December 31, 2005, each Fund recorded the following reclassifications to the
accounts listed below:
43
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2005
<Table>
<Caption>
INCREASE (DECREASE)
---------------------------------------------
ACCUMULATED
NET ACCUMULATED
INVESTMENT NET REALIZED
PAID-IN-CAPITAL INCOME(LOSS) LOSS
--------------- ------------ ------------
The Internet Fund............................. $ $ 59,688 $ (59,688)
The Internet Emerging Growth Fund............. (4) 4
The Paradigm Fund............................. 263,110 (125,851) (137,259)
The Medical Fund.............................. (183,606) 183,618 (12)
The Small Cap Opportunities Fund.............. 8 16,642 (16,650)
</Table>
5. INCOME TAXES
At December 31, 2005 the Internet, Emerging, Paradigm and Small Cap Funds had
$517,916, $9,349, $1,234,776 and $448,253, respectively, of undistributed net
investment income on a tax basis.
At December 31, 2005 the Paradigm Fund had $72 of accumulated gains on a tax
basis.
At December 31, 2005, the Feeder Funds had accumulated net realized capital loss
carryovers expiring in the following years.
<Table>
<Caption>
FEEDER FUND 2013 2011 2010 2009 2008
----------- ---------- ------------ ------------ ----------- ----------
Internet............. $6,777,871 $ -- $140,178,775 $34,119,306 $ --
Emerging............. 4,885 887,154 2,635,504 5,481,052 2,488,196
Paradigm............. -- -- -- -- --
Medical.............. -- 22,109 -- -- --
Small Cap............ 499,629 -- -- -- --
</Table>
To the extent that the Feeder Funds realize future net capital gains, those
gains will be offset by any unused capital loss carryovers. For the year ended
December 31, 2005, Medical Fund utilized $1,863,391 of capital loss
carryforward.
At December 31, 2005, the following Feeder Funds deferred, on a tax basis,
post-October losses and straddle losses of:
<Table>
<Caption>
FEEDER FUND POST-OCTOBER LOSSES STRADDLE LOSSES
----------- ------------------- ---------------
Internet..................................... $2,499,021 $710,957
Emerging..................................... 23,208 --
Paradigm..................................... 289,117 19,348
Medical...................................... -- 105,854
Small Cap.................................... 657,878 64,069
</Table>
44
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2005
The tax components of dividends paid during the years ended December 31, 2005
and December 31, 2004, are:
<Table>
<Caption>
INTERNET EMERGING
----------------------------- -----------------------------
ORDINARY LONG-TERM ORDINARY LONG-TERM
INCOME CAPITAL GAINS INCOME CAPITAL GAINS
DISTRIBUTION DISTRIBUTION DISTRIBUTION DISTRIBUTION
------------ ------------- ------------ -------------
2005...................... $1,219,980 $-- $160,455 $--
2004...................... $2,903,007 $-- $107,877 $--
</Table>
<Table>
<Caption>
PARADIGM MEDICAL
----------------------------- -----------------------------
ORDINARY LONG-TERM ORDINARY LONG-TERM
INCOME CAPITAL GAINS INCOME CAPITAL GAINS
DISTRIBUTION DISTRIBUTION DISTRIBUTION DISTRIBUTION
------------ ------------- ------------ -------------
2005...................... $ 475,907 $412,952 $-- $--
2004...................... $2,388,158 $928,680 $-- $--
</Table>
<Table>
<Caption>
SMALL CAP
-----------------------------
ORDINARY LONG-TERM
INCOME CAPITAL GAINS
DISTRIBUTION DISTRIBUTION
------------ -------------
2005............................................... $ 436,587 $391,110
2004............................................... $1,134,677 $ --
</Table>
The following information is presented on an income tax basis as of December 31,
2005.
<Table>
<Caption>
INTERNET EMERGING PARADIGM MEDICAL SMALL CAP
-------- -------- ---------- ------- ---------
Distributable ordinary
income.................... $517,916 $59,349 $1,234,776 $-- $448,253
Distributable long-term
gains..................... $ -- $ -- $ 72 $-- $ --
</Table>
6 TAX INFORMATION (UNAUDITED)
The Internet, Emerging, Paradigm and Small Cap Funds designate 24%, 37%, 66% and
9%, respectively, of dividends declared after December 31, 2005 from net
investment income as qualified dividend income under the Jobs and Growth Tax
Relief Reconciliation Act of 2003.
The Paradigm Fund hereby designates $115,597 as ordinary income distributions
and $147,545 as long-term capital gain distributions for the purposes of the
dividends paid deduction, which include earnings and profits distributed to
shareholders on redemptions of Fund shares.
For corporate shareholders in the Funds, the percentage of ordinary dividend
income distributed for the year ended December 31, 2005, which is designated as
qualifying for the dividends-received deduction, is as follows: Internet 22.4%,
Emerging 36.0%, Paradigm 53.8% and Small Cap 6.5%.
45
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2005
7. INFORMATION ABOUT PROXY VOTING (UNAUDITED)
The funds' proxy voting policies and procedures are available without charge
upon request by calling toll-free at 1-800-930-3828 or by accessing the SEC's
website at www.sec.gov. Information regarding how the funds voted proxies
relating to portfolio securities during the twelve months ended June 30, 2006
will be available after August 31, 2006 without charge, upon request, by calling
toll-free at 1-800-930-3828 or by accessing the SEC's website at www.sec.gov.
8. INFORMATION ABOUT THE PORTFOLIO HOLDINGS (UNAUDITED)
The Funds file their complete schedule of portfolio holdings for their first and
third fiscal quarters with the SEC on Form N-Q. The Funds' Form N-Q is available
without charge, upon request, by calling toll-free at 1-(800) 930-3828.
Furthermore, you can obtain the Form N-Q on the SEC's website at www.sec.gov.
Finally, the Form N-Q may be reviewed and copied at the SEC's Public Reference
Room in Washington, D.C. Information on the operation of the Public Reference
Room may be obtained by calling 1-(800)-SEC-0330.
46
(This page intentionally left blank)
47
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
THE INTERNET FUND
----------------------------------------------------------------
NO LOAD CLASS ADVISOR CLASS A NO LOAD CLASS
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2005 2004
------------- --------------- -------------
PER SHARE DATA(3)
Net Asset Value,
Beginning of Period...... $ 25.29 $24.93 $ 23.31
-------- ------ --------
Income from Investment Operations:
Net investment income
(loss)................. 0.11(5) 0.05(5) 0.10(5)
Net realized and
unrealized gain (loss)
on investments......... (0.54) (0.44) 2.25
-------- ------ --------
Total gain (loss)
from investment
operations.......... (0.43) (0.39) 2.35
-------- ------ --------
Redemption fees............ 0.00(6) 0.00(6) --
Less Distributions:
From net investment
income................. (0.20) (0.14) (0.37)
From net realized
gains.................. -- -- --
-------- ------ --------
Total
distributions....... (0.20) (0.14) (0.37)
-------- ------ --------
Net Asset Value, End of
Period................... $ 24.66 $24.40 $ 25.29
======== ====== ========
Total Return(5)............ (1.69)% (1.55)% 10.06%
SUPPLEMENTAL DATA AND RATIOS
Net assets, end of period
(000's).................. $148,260 $ 300 $201,929
Ratio of expenses to
average net assets:
Before expense
reimbursement........ 2.35% 2.60% 2.37%
After expense
reimbursement........ 2.35% 2.60% 2.37%
Ratio of net investment
income (loss) to average
net assets:
Before expense
reimbursement........ 0.46% 0.21% 0.44%
After expense
reimbursement........ 0.46% 0.21% 0.44%
Portfolio turnover rate.... N/A N/A N/A
<Caption>
THE INTERNET FUND
--------------------------------------
ADVISOR CLASS A NO LOAD CLASS
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2004 2003
--------------- -------------
PER SHARE DATA(3)
Net Asset Value,
Beginning of Period...... $22.88 $ 16.69
------ --------
Income from Investment Oper
Net investment income
(loss)................. 0.05(5) 0.03
Net realized and
unrealized gain (loss)
on investments......... 2.23 6.66
------ --------
Total gain (loss)
from investment
operations.......... 2.28 6.69
------ --------
Redemption fees............ -- --
Less Distributions:
From net investment
income................. (0.23) (0.07)
From net realized
gains.................. -- --
------ --------
Total
distributions....... (0.23) (0.07)
------ --------
Net Asset Value, End of
Period................... $24.93 $ 23.31
====== ========
Total Return(5)............ 9.95% 40.11%
SUPPLEMENTAL DATA AND RATIOS
Net assets, end of period
(000's).................. $ 354 $230,971
Ratio of expenses to
average net assets:
Before expense
reimbursement........ 2.62% 2.39%
After expense
reimbursement........ 2.62% 2.39%
Ratio of net investment
income (loss) to average
net assets:
Before expense
reimbursement........ 0.19% 0.11%
After expense
reimbursement........ 0.19% 0.11%
Portfolio turnover rate.... N/A N/A
</Table>
- ------------------
(+) Commencement of operations.
(1) Not annualized.
(2) Annualized.
(3) Information presented relates to a share of capital stock outstanding for
each period.
(4) The total return calculation does not reflect the 5.75% front end sales
charge on Advisor Class A shares.
(5) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the period.
(6) The amount is less than $0.005 per share.
See Notes to the Financial Statements.
48
<Table>
<Caption>
THE INTERNET FUND
- -------------------------------------------------------------------------------------------------------------
ADVISOR CLASS A
ADVISOR CLASS A NO LOAD CLASS ADVISOR CLASS A NO LOAD CLASS APRIL 26,
FOR THE FOR THE FOR THE FOR THE 2001(+)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2002 2001 2001
--------------- ------------- --------------- --------------- ---------------
$16.47 $ 21.80 $21.75 $ 24.12 $23.50
------ -------- ------ -------- ------
(0.82) (0.08)(5) (0.12)(5) (0.17) (0.12)(5)
7.23 (5.03) (5.16) (2.15) (1.63)
------ -------- ------ -------- ------
6.41 (5.11) (5.28) (2.32) (1.75)
------ -------- ------ -------- ------
-- -- -- -- --
-- -- -- -- --
-- -- -- -- --
------ -------- ------ -------- ------
-- -- -- -- --
------ -------- ------ -------- ------
$22.88 $ 16.69 $16.47 $ 21.80 $21.75
====== ======== ====== ======== ======
38.92% (23.44)% (24.28)% (9.62)% (7.45)%(1)
$ 428 $189,618 $ 507 $297,793 $ 975
2.64% 2.42% 2.67% 2.37% 2.62%(2)
2.64% 2.42% 2.67% 2.37% 2.62%(2)
(0.14)% (0.41)% (0.66)% (0.61)% (0.86)%(2)
(0.14)% (0.41)% (0.66)% (0.61)% (0.86)%(2)
N/A N/A N/A N/A N/A
</Table>
See Notes to the Financial Statements.
49
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
THE INTERNET
EMERGING GROWTH FUND
------------------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
PER SHARE DATA(1)
Net Asset Value,
Beginning of Year................. $ 4.50 $ 4.28 $ 3.24 $ 4.30 $ 3.69
------ ------ ------ ------ ------
Income from Investment Operations:
Net investment income (loss)...... 0.15 0.08 0.04 (0.08) (0.03)
Net realized and unrealized gain
(loss) on investments........... (0.03) 0.25 1.05 (0.98) 0.64
------ ------ ------ ------ ------
Total gain (loss) from
investment operations........ 0.12 0.33 1.09 (1.06) 0.61
------ ------ ------ ------ ------
Redemption fees..................... 0.00(2) -- -- -- --
Less Distributions:
From net investment income........ (0.19) (0.11) (0.05) -- --
From net realized gains........... -- -- -- -- --
------ ------ ------ ------ ------
Total distributions........... (0.19) (0.11) (0.05) -- --
------ ------ ------ ------ ------
Net Asset Value, End of Year........ $ 4.43 $ 4.50 $ 4.28 $ 3.24 $ 4.30
====== ====== ====== ====== ======
Total Return........................ 2.65% 7.67% 33.56% (24.65)% 16.53%
SUPPLEMENTAL DATA AND RATIOS
Net assets, end of year (000's)..... $3,896 $4,584 $4,677 $3,338 $5,277
Ratio of expenses to average net
assets:
Before expense reimbursement.... 3.22% 3.45% 3.64% 3.78% 4.17%
After expense reimbursement..... 2.69% 2.67% 2.74% 2.74% 2.74%
Ratio of net investment income
(loss) to average net assets:
Before expense reimbursement.... 2.80% 1.08% 0.11% (3.03)% (2.09)%
After expense reimbursement..... 3.33% 1.84% 1.01% (1.99)% (0.66)%
Portfolio turnover rate............. N/A N/A N/A N/A N/A
</Table>
- ------------------
(1) Information presented relates to a share of capital stock outstanding for
each period.
(2) The amount is less than $0.005 per share.
See Notes to the Financial Statements.
50
(This page intentionally left blank)
51
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
THE PARADIGM FUND
---------------------------------------------------------------------------------------
INSTITUTIONAL CLASS
NO LOAD CLASS ADVISOR CLASS A ADVISOR CLASS C FOR THE PERIOD NO LOAD CLASS
FOR THE FOR THE FOR THE MAY 27, 2005 FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2005 2005 2005 2004
------------- --------------- --------------- ------------------- -------------
PER SHARE DATA(1)
Net Asset Value,
Beginning of Period................... $ 17.54 $ 17.40 $ 17.21 $ 18.13 $ 14.91
-------- ------- ------- ------- -------
Income from Investment Operations:
Net investment income (loss).......... (0.03)(6) (0.07)(6) (0.17)(6) 0.01(2)(6) (0.06)(6)
Net realized and unrealized gain
(loss) on investments............... 2.82 2.77 2.74 2.23 3.17
-------- ------- ------- ------- -------
Total gain (loss) from investment
operations....................... 2.79 2.70 2.57 2.24 3.11
-------- ------- ------- ------- -------
Redemption fees........................ 0.03 0.00(2) 0.00(2) -- --
Less Distributions:
From net investment income............ (0.01) -- -- (0.04) (0.02)
From net realized gains............... (0.02) (0.02) (0.02) (0.02) (0.46)
-------- ------- ------- ------- -------
Total distributions................ (0.03) (0.02) (0.02) (0.06) (0.48)
-------- ------- ------- ------- -------
Net Asset Value, End of Period......... $ 20.33 $ 20.08 $ 19.76 $ 20.31 $ 17.54
======== ======= ======= ======= =======
Total Return(5)........................ 16.11% 15.54% 14.96% 12.35%(3) 20.84%
SUPPLEMENTAL DATA AND RATIOS
Net assets, end of period (000's)...... $418,914 $60,421 $38,740 $10,895 $89,313
Ratio of expenses to average net
assets:
Before expense reimbursement and
waivers(7)......................... 1.93% 2.18% 2.68% 1.88%(4) 2.10%
After expense reimbursement......... 1.69% 1.94% 2.44% 1.49% 1.74%
Ratio of net investment income (loss)
to average net assets:
Before expense reimbursement........ (0.41)% (0.66)% (1.16)% (0.37)%(4) (0.77)%
After expense reimbursement......... (0.17)% (0.42)% (.92)% 0.02%(4) (0.41)%
Portfolio turnover rate................ N/A N/A N/A N/A N/A
</Table>
- ------------------
(+) Commencement of operations.
(1) Information presented relates to a share of capital stock outstanding for
each period.
(2) The amount is less than $0.005 per share.
(3) Not annualized.
(4) Annualized.
(5) The total return calculation does not reflect the 5.75% front end sales
charge on Advisor Class A shares.
(6) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the period.
(7) See footnote #3 for the Investment Adviser, waiver discussion.
See Notes to the Financial Statements.
52
<Table>
<Caption>
THE PARADIGM FUND
-----------------------------------------------------------------------------------------------------
ADVISOR CLASS A ADVISOR CLASS C NO LOAD CLASS ADVISOR CLASS A ADVISOR CLASS C NO LOAD CLASS
FOR THE FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2004 2003 2003 2003 2002
--------------- --------------- ------------- --------------- --------------- -------------
$ 14.82 $14.73 $ 10.12 $ 10.07 $10.05 $10.61
------- ------ ------- ------- ------ ------
(0.10) (0.18) 0.05 0.08 0.02 (0.14)
3.16 3.14 4.79 4.70 4.67 (0.35)
------- ------ ------- ------- ------ ------
3.06 2.96 4.84 4.78 4.69 (0.49)
------- ------ ------- ------- ------ ------
-- -- -- -- -- --
(0.02) (0.02) (0.05) (0.03) (0.01) --
(0.46) (0.46) -- -- -- --
------- ------ ------- ------- ------ ------
(0.48) (0.48) (0.05) (0.03) (0.01) --
------- ------ ------- ------- ------ ------
$ 17.40 $17.21 $ 14.91 $ 14.82 $14.73 $10.12
======= ====== ======= ======= ====== ======
20.63% 20.08% 47.87% 47.47% 46.68% (4.62)%
$26,525 $9,426 $57,646 $13,157 $2,125 $5,044
2.35% 2.85% 2.24% 2.49% 2.99% 2.97%
1.99% 2.49% 1.74% 1.99% 2.49% 2.74%
(1.02)% (1.52)% 0.57% 0.32% (0.18)% (1.61)%
(0.66)% (1.16)% 1.07% 0.82% 0.32% (1.38)%
N/A N/A N/A N/A N/A N/A
<Caption>
THE PARADIGM FUND
----------------------------------
ADVISOR CLASS A ADVISOR CLASS C
FOR THE JUNE 28, 2002(+)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
2002 2002
--------------- ----------------
$10.58 $10.64
------ ------
(0.17) (0.11)
(0.34) (0.48)
------ ------
(0.51) (0.59)
------ ------
-- --
-- --
-- --
------ ------
-- --
------ ------
$10.07 $10.05
====== ======
(4.82)% (5.55)(3)
$4,943 $ 519
3.22% 3.72%(4)
2.99% 3.49%(4)
(1.86)% (2.36)%(4)
(1.63)% (2.13)%(4)
N/A N/A
</Table>
See Notes to the Financial Statements.
53
<Table>
<Caption>
THE PARADIGM FUND
----------------------------------
NO LOAD CLASS ADVISOR CLASS A
FOR THE APRIL 26, 2001(+)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
2001 2001
------------- -----------------
PER SHARE DATA(1)
Net Asset Value,
Beginning of Period........................... $10.40 $10.42
------ ------
Income from Investment Operations:
Net investment income (loss).................. (0.13) (0.10)(6)
Net realized and unrealized gain (loss) on
investments................................. 0.34 0.26
------ ------
Total gain (loss) from investment
operations............................. 0.21 0.16
------ ------
Redemption fees................................. -- --
Less Distributions:
From net investment income.................... -- --
From net realized gains....................... -- --
------ ------
Total distributions...................... -- --
------ ------
Net Asset Value, End of Period.................. $10.61 $10.58
====== ======
Total Return(6)................................. 2.02% 1.54%(3)
SUPPLEMENTAL DATA AND RATIOS
Net assets, end of period (000's)............... $4,817 $4,091
Ratio of expenses to average net assets:
Before expense reimbursement................ 3.47% 3.72%(4)
After expense reimbursement................. 2.74% 2.99%(4)
Ratio of net investment income (loss) to average
net assets:
Before expense reimbursement................ (1.91)% (2.16)%(4)
After expense reimbursement................. (1.18)% (1.43)%(4)
Portfolio turnover rate......................... N/A N/A
</Table>
- ------------------
(+) Commencement of operations.
(1) Information presented relates to a share of capital stock outstanding for
each period.
(2) The amount is less than $0.005 per share.
(3) Not annualized.
(4) Annualized.
(5) The total return calculation does not reflect the 5.75% front end sales
charge on Advisor Class A shares.
(6) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the period.
See Notes to the Financial Statements.
54
(This page intentionally left blank)
55
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
THE MEDICAL FUND
---------------------------------------------------------------------------------------------------------
NO LOAD CLASS ADVISOR CLASS A NO LOAD CLASS ADVISOR CLASS A NO LOAD CLASS
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2005 2004 2004 2003
------------- --------------- ------------- --------------- -------------
PER SHARE DATA(3)
Net Asset Value,
Beginning of Period... $ 16.76 $16.49 $ 15.67 $15.47 $ 12.72
------- ------ ------- ------ -------
Income from Investment
Operations:
Net investment loss... (0.18)(5) (0.22)(5) (0.10)(5) (0.11)(5) (0.25)
Net realized and
unrealized gain
(loss) on
investments......... 0.06 0.07 1.19 1.13 3.20
------- ------ ------- ------ -------
Total gain (loss)
from investment
operations....... (0.12) (0.15) 1.09 1.02 2.95
------- ------ ------- ------ -------
Redemption fees......... 0.00(6) -- -- -- --
Less Distributions:
From net investment
income.............. -- -- -- -- --
From net realized
gains............... -- -- -- -- --
------- ------ ------- ------ -------
Total
distributions.... -- -- -- -- --
------- ------ ------- ------ -------
Net Asset Value, End of
Period................ $ 16.64 $16.34 $ 16.76 $16.49 $ 15.67
======= ====== ======= ====== =======
Total Return(4)......... (0.72)% (0.91)% 6.96% 6.59% 23.19%
SUPPLEMENTAL DATA AND RATIOS
Net assets, end of
period (000's)........ $13,943 $ 559 $19,583 $ 696 $23,695
Ratio of expenses to
average net assets:
Before expense
reimbursement..... 2.48% 2.73% 2.54% 2.79% 2.52%
After expense
reimbursement..... 2.44% 2.69% 2.39% 2.64% 2.52%
Ratio of net investment
loss to average net
assets:
Before expense
reimbursement..... (1.14)% (1.39)% (1.31)% (1.56)% (1.55)%
After expense
reimbursement..... (1.10)% (1.35)% (1.16)% (1.41)% (1.55)%
Portfolio turnover
rate.................. N/A N/A N/A N/A N/A
</Table>
- ------------------
(+) Commencement of operations.
(1) Not annualized.
(2) Annualized.
(3) Information presented relates to a share of capital stock outstanding for
each period.
(4) The total return calculation does not reflect the 5.75% front end sales
charge on Advisor Class A shares.
(5) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the period.
(6) The amount is less than $0.005 per share.
See Notes to the Financial Statements.
56
<Table>
<Caption>
THE MEDICAL FUND
--------------------------------------------------------------------------------------------------------
ADVISOR CLASS A NO LOAD CLASS ADVISOR CLASS A NO LOAD CLASS ADVISOR CLASS A
FOR THE FOR THE FOR THE FOR THE APRIL 26, 2001(+)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2002 2002 2001 2001
--------------- ------------- --------------- ------------- -----------------
$12.61 $ 18.06 $18.01 $ 20.98 $18.24
------ ------- ------ ------- ------
(0.63) (0.21) (0.24) (0.25) (0.17)(5)
3.49 (5.05) (5.08) (2.64) (0.03)
------ ------- ------ ------- ------
2.86 (5.26) (5.32) (2.89) (0.20)
------ ------- ------ ------- ------
-- -- -- -- --
-- -- -- -- --
-- (0.08) (0.08) (0.03) (0.03)
------ ------- ------ ------- ------
-- (0.08) (0.08) (0.03) (0.03)
------ ------- ------ ------- ------
$15.47 $ 12.72 $12.61 $ 18.06 $18.01
====== ======= ====== ======= ======
22.68% (29.14)% (29.56)% (13.77)% (1.09)%(1)
$ 758 $22,604 $ 794 $40,416 $1,203
2.77% 2.55% 2.80% 2.28% 2.53%(2)
2.77% 2.55% 2.80% 2.28% 2.53%(2)
(1.80)% (1.49)% (1.74)% (1.17)% (1.42)%(2)
(1.80)% (1.49)% (1.74)% (1.17)% (1.42)%(2)
N/A N/A N/A N/A N/A
</Table>
See Notes to the Financial Statements.
57
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
THE SMALL CAP OPPORTUNITIES FUND
----------------------------------------------------------------------
NO LOAD CLASS ADVISOR CLASS A INSTITUTIONAL CLASS
FOR THE FOR THE FOR THE PERIOD
YEAR ENDED YEAR ENDED AUGUST 12, 2005
DECEMBER 31, DECEMBER 31, THROUGH
2005 2005 DECEMBER 31, 2005
------------- --------------- -------------------
PER SHARE DATA(3)
Net Asset Value, Beginning of
Period...................... $ 18.69 $18.63 $ 20.48
------- ------ -------
Income from Investment
Operations:
Net investment income
(loss).................... 0.12(5) 0.02(5) 0.00(5)(6)
Net realized and unrealized
gain (loss) on
investments............... 2.35 2.38 0.67
------- ------ -------
Total gain (loss) from
investment
operations............. 2.47 2.40 0.67
------- ------ -------
Redemption fees............... 0.00(6) 0.00(6) --
Less Distributions:
From net investment
income.................... (0.01) (0.01) (0.02)
From net realized gains..... (0.13) (0.13) (0.13)
------- ------ -------
Total distributions..... (0.14) (0.14) (0.15)
------- ------ -------
Net Asset Value, End of
Period...................... $ 21.02 $20.89 $ 21.00
======= ====== =======
Total Return(4)............... 13.17% 12.83% 3.23%(1)
SUPPLEMENTAL DATA AND RATIOS
Net assets, end of period
(000's)..................... $55,979 $5,205 $67,586
Ratio of expenses to average
net assets:
Before expense
reimbursement........... 1.93% 2.16% 1.77%(2)
After expense
reimbursement........... 1.66% 1.94% 1.59%(2)
Ratio of net investment income
(loss) to average net
assets:
Before expense
reimbursement........... 0.18% (0.17)% (0.21)%(2)
After expense
reimbursement........... 0.45% 0.06% (0.03)%(2)
Portfolio turnover rate....... N/A N/A N/A
<Caption>
THE SMALL CAP OPPORTUNITIES FUND
------------------------------------
NO LOAD CLASS ADVISOR CLASS A
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2004 2004
------------- ---------------
PER SHARE DATA(3)
Net Asset Value, Beginning of
Period...................... $ 16.55 $16.50
------- ------
Income from Investment
Operations:
Net investment income
(loss).................... 0.22(5) 0.18(5)
Net realized and unrealized
gain (loss) on
investments............... 2.49 2.49
------- ------
Total gain (loss) from
investment
operations............. 2.71 2.67
------- ------
Redemption fees............... -- --
Less Distributions:
From net investment
income.................... (0.16) (0.13)
From net realized gains..... (0.41) (0.41)
------- ------
Total distributions..... (0.57) (0.54)
------- ------
Net Asset Value, End of
Period...................... $ 18.69 $18.63
======= ======
Total Return(4)............... 16.40% 16.17%
SUPPLEMENTAL DATA AND RATIOS
Net assets, end of period
(000's)..................... $35,702 $2,929
Ratio of expenses to average
net assets:
Before expense
reimbursement........... 2.03% 2.28%
After expense
reimbursement........... 1.74% 1.99%
Ratio of net investment income
(loss) to average net
assets:
Before expense
reimbursement........... 1.01% 0.76%
After expense
reimbursement........... 1.30% 1.05%
Portfolio turnover rate....... N/A N/A
</Table>
- ------------------
(+) Commencement of operations.
(1) Not annualized.
(2) Annualized.
(3) Information presented relates to a share of capital stock outstanding for
each period.
(4) The total return calculation does not reflect the 5.75% front end sales
charge on Advisor Class A shares.
(5) Net investment income per share represents net investment income divided by
the average shares outstanding throughout the period.
(6) The amount listed is less than $0.005 per share.
See Notes to the Financial Statements.
58
<Table>
<Caption>
THE SMALL CAP OPPORTUNITIES FUND
---------------------------------------------------------------------------------------------------------------------------
NO LOAD CLASS ADVISOR CLASS A NO LOAD CLASS ADVISOR CLASS A NO LOAD CLASS
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ADVISOR CLASS A
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2003 2003 2002 2002 2001 2001(+)
------------- --------------- ------------- --------------- ------------- ---------------
10.04
$ $10.03 $14.50 $14.50 $11.10 $14.50
------- ------ ------ ------ ------ ------
0.25 0.15 (0.18)(5) (0.20)(5) (0.19)(5) --
6.43 6.47 (4.21) (4.20) 3.59 --
------- ------ ------ ------ ------ ------
6.68 6.62 (4.39) (4.40) 3.40 --
------- ------ ------ ------ ------ ------
-- -- -- -- -- --
(0.17) (0.15) -- -- -- --
-- -- (0.07) (0.07) -- --
------- ------ ------ ------ ------ ------
(0.17) (0.15) (0.07) (0.07) -- --
------- ------ ------ ------ ------ ------
$ 16.55 $16.50 $10.04 $10.03 $14.50 $14.50
======= ====== ====== ====== ====== ======
66.51% 65.98% (30.28)% (30.35)% 30.63% 0.00%(1)
$23,665 $2,075 $3,313 $ 172 $9,266 $ 1
%
2.34 2.59% 2.95% 3.20% 3.73% N/A
%
2.34 2.59% 2.74% 2.99% 2.74% N/A
%
2.14 1.89% (1.59)% (1.84)% (2.37)% N/A
%
2.14 1.89% (1.38)% (1.63)% (1.38)% N/A
N/A N/A N/A N/A N/A N/A
</Table>
See Notes to the Financial Statements.
59
KINETICS MUTUAL FUNDS, INC. -- FEEDER FUNDS
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
THE KINETICS GOVERNMENT MONEY MARKET FUND
------------------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
PER SHARE DATA(3)
Net Asset Value, Beginning of
Period........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ -------- -------
Income from Investment
Operations:
Net investment income......... 0.02 -- -- 0.00(4) 0.02
Net realized and unrealized
gain on investments......... -- -- -- -- --
------ ------ ------ -------- -------
Total gain from investment
operations.............. 0.02 -- -- 0.00(4) 0.02
------ ------ ------ -------- -------
Less Distributions:
From net investment income.... (0.02) -- -- (0.00)(4) (0.02)
From net realized gains....... -- -- -- -- --
------ ------ ------ -------- -------
Total distributions....... (0.02) -- -- (0.00)(4) (0.02)
------ ------ ------ -------- -------
Net Asset Value, End of
Period........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
====== ====== ====== ======== =======
Total Return.................... 1.88% 0.00% 0.00% 0.22% 2.36%
SUPPLEMENTAL DATA AND RATIOS
Net assets, end of period
(000's)....................... $1,052 $1,166 $3,048 $128,657 $94,886
Ratio of expenses to average net
assets:
Before expense
reimbursement............. 5.08% 2.11% 1.32% 1.29% 1.35%
After expense
reimbursement............. 1.06% 0.98% 0.94% 1.23% 1.24%
Ratio of net investment income
(loss) to average net assets:
Before expense
reimbursement............. (2.17)% (1.13)% (0.38)% 0.13% 2.12%
After expense
reimbursement............. 1.85% 0.00% 0.00% 0.19% 2.23%
Portfolio turnover rate......... N/A N/A N/A N/A N/A
</Table>
- ------------------
(+) Commencement of operations.
(1) Not annualized.
(2) Annualized.
(3) Information presented relates to a share of capital stock outstanding for
each period.
(4) The amount listed is less than $0.005 per share.
See Notes to the Financial Statements.
60
KINETICS MUTUAL FUNDS, INC.
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Shareholders of and Board of Directors
Kinetics Mutual Funds, Inc.
Sleepy Hollow, New York
We have audited the accompanying statements of assets and liabilities of The
Internet Fund, The Internet Emerging Growth Fund, The Paradigm Fund, the Medical
Fund, the Small Cap Opportunities Fund and The Kinetics Government Money Market
Fund, each a series of shares of Kinetics Mutual Funds, Inc. (the "Funds"), as
of December 31, 2005, and the related statements of operations for the year then
ended, the statements of changes in net assets and financial highlights for each
of the two years in the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit. The financial highlights for each of
the three years in the period ended December 31, 2003 were audited by other
auditors whose report dated February 20, 2004 expressed an unqualified opinion
on the statement of changes in net assets and the financial highlights.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Fund's internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Fund's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly in all material respects, the financial position of the
above mentioned Funds as of December 31, 2005, the results of their operations
for the year then ended, the changes in their net assets and the financial
highlights for each of the two years in the period then ended, in conformity
with accounting principles generally accepted in the United States of America.
TAIT, WELLER & BAKER LLP
Philadelphia, Pennsylvania
February 03, 2006
61
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
ALLOCATION OF PORTFOLIO ASSETS
December 31, 2005
THE INTERNET PORTFOLIO
[GRAPH]
<Table>
Common Stocks 91.28
Short-Term Investments 1.18
Preferred Stocks 0.00
Corporate Bonds 2.13
Rights 2.63
Convertible Bonds 1.99
Put Options 0.00
Written Options 0.00
Investments Purchased with Cash Proceeds from Securities 11.24
Lending
Other Assets and Liabilities -10.45
</Table>
THE INTERNET EMERGING GROWTH PORTFOLIO
[GRAPH]
<Table>
Common Stocks 82.02
Short-Term Investments 4.44
Preferred Stocks 0.03
Corporate Bonds 5.06
Rights 4.77
Convertible Bonds 3.70
Put Options 0.26
Written Options -0.48
Investments Purchased with Cash Proceeds from Securities 9.89
Lending
Other Assets and Liabilities -9.69
</Table>
62
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
ALLOCATION OF PORTFOLIO ASSETS
December 31, 2005 -- (Continued)
THE PARADIGM PORTFOLIO
[GRAPH]
<Table>
Common Stocks 88.39
Short-Term Investments 11.32
Convertible Bonds 0.03
Call Options 0.07
Investments Purchased with Cash Proceeds from Securities 9.71
Lending
Other Assets and Liabilities -9.52
</Table>
THE MEDICAL PORTFOLIO
[GRAPH]
<Table>
Common Stocks 97.57
Short-Term Investments 2.50
Rights 0.00
Investments Purchased with Cash Proceeds from Securities 6.65
Lending
Other Assets and Liabilities -6.72
</Table>
63
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
ALLOCATION OF PORTFOLIO ASSETS
December 31, 2005 -- (Continued)
THE SMALL CAP OPPORTUNITIES PORTFOLIO
[GRAPH]
<Table>
Common Stocks 83.39
Short-Term Investments 14.55
Rights 1.60
Convertible Bonds 0.41
Investments Purchased with Cash Proceeds from Securities 16.72
Lending
Other Assets and Liabilities -16.67
</Table>
GOVERNMENT MONEY MARKET PORTFOLIO
[GRAPH]
<Table>
Short-Term Investments 100.1
Other Assets and Liabilities -0.1
</Table>
64
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE INTERNET PORTFOLIO
Portfolio of Investments -- December 31, 2005
<Table>
<Caption>
COMMON STOCKS -- 91.28%+ SHARES VALUE
- ------------------------------------------------------------------------
AEROSPACE & DEFENSE -- 7.71%+
CACI International, Inc. -- Class A*..... 200,000 $ 11,476,000
------------
AIR FREIGHT & LOGISTICS -- 5.45%+
Expeditors International of Washington,
Inc.................................... 120,000 8,101,200
------------
ASIAN EXCHANGES -- 0.33%+
Hong Kong Exchanges & Clearing Limited... 120,000 497,572
------------
CAPITAL MARKETS -- 0.07%+
Internet HOLDRs Trust(1)................. 500 32,915
Van der Moolen Holding N.V. ADR.......... 10,000 71,400
------------
104,315
------------
COMMERCIAL SERVICES & SUPPLIES -- 5.03%+
Comdisco Holding Company, Inc............ 194,400 3,693,600
Copart, Inc.*............................ 6,000 138,360
FTI Consulting, Inc.*.................... 50,000 1,372,000
Ritchie Bros. Auctioneers Incorporated... 54,000 2,281,500
------------
7,485,460
------------
COMMUNICATIONS EQUIPMENT -- 0.03%+
QUALCOMM, Inc............................ 1,000 43,080
------------
COMPUTERS & PERIPHERALS -- 0.10%+
Apple Computer, Inc.*.................... 2,000 143,780
------------
DERIVATIVE EXCHANGES -- 3.17%+
CBOT Holdings, Inc. -- Class A*(2)....... 7,200 675,072
Chicago Mercantile Exchange Holdings
Inc.................................... 5,600 2,057,944
International Securities Exchange,
Inc.*.................................. 72,000 1,981,440
------------
4,714,456
------------
DIVERSIFIED CONSUMER SERVICES -- 0.08%+
Apollo Group, Inc. -- Class A*........... 2,000 120,920
------------
DIVERSIFIED FINANCIAL SERVICES -- 0.47%+
eSPEED, Inc. -- Class A*................. 90,000 693,900
------------
</Table>
See Notes to the Financial Statements.
65
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE INTERNET PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
<Caption>
SHARES VALUE
- ------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES --
13.96%+
Leucadia National Corporation............ 354,000 $ 16,800,840
Lynch Interactive Corporation*........... 1,800 3,913,200
XO Communications, Inc.*................. 30,000 54,600
------------
20,768,640
------------
EUROPEAN EXCHANGES -- 0.26%+
London Stock Exchange plc................ 36,000 384,013
------------
HEALTH CARE PROVIDERS & SERVICES --0.62%+
Emdeon Corporation*(2)................... 109,000 922,140
------------
INTERNET & CATALOG RETAIL -- 0.21%+
eBay, Inc.*.............................. 6,000 259,500
IAC/InterActiveCorp*..................... 1,000 28,310
Overstock.com, Inc.*(2).................. 1,000 28,150
------------
315,960
------------
INTERNET SOFTWARE & SERVICES -- 1.57%+
Baidu.com, Inc. ADR*(2).................. 200 12,584
Google Inc. -- Class A*.................. 1,800 746,748
MIVA, Inc.*.............................. 10,000 49,500
Netease.com, Inc. ADR*(2)................ 1,000 56,160
NetRatings, Inc.*........................ 116,000 1,430,280
SINA Corp*............................... 1,000 24,160
Sohu.com, Inc.*.......................... 1,000 18,340
------------
2,337,772
------------
IT SERVICES -- 14.68%+
Anteon International Corporation*........ 24,000 1,304,400
CheckFree Corporation*................... 360,000 16,524,000
ManTech International Corporation --
Class A*............................... 144,000 4,011,840
------------
21,840,240
------------
LEISURE EQUIPMENT & PRODUCTS -- 0.00%+
Marvel Entertainment, Inc.*.............. 322 5,274
------------
</Table>
See Notes to the Financial Statements.
66
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE INTERNET PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
<Caption>
SHARES VALUE
- ------------------------------------------------------------------------
MEDIA -- 28.62%+
DreamWorks Animation SKG, Inc.*.......... 3,000 $ 73,680
The E.W. Scripps Company -- Class A...... 2,400 115,248
Gemstar-TV Guide International, Inc.*.... 600,000 1,566,000
Getty Images, Inc.*...................... 36,600 3,267,282
Groupe Bruxelles Lambert S.A............. 50,000 4,904,282
Harris Interactive, Inc.*................ 600,000 2,586,000
Liberty Global, Inc. -- Class A*......... 300,707 6,765,908
Liberty Global, Inc. -- Series C*........ 315,707 6,692,988
Pixar*................................... 3,600 189,792
PrimaCom AG ADR*......................... 610,000 2,211,250
ProQuest Company*........................ 6,000 167,460
The Washington Post Company -- Class B... 18,000 13,770,000
XM Satellite Radio Holdings, Inc. --
Class A*............................... 10,000 272,800
------------
42,582,690
------------
SPECIALISTS -- 1.26%+
LaBranche & Co Inc.*(2).................. 186,000 1,880,460
------------
U.S. EQUITY EXCHANGES -- 7.65%+
Archipelago Holdings Inc.*(2)............ 144,000 7,166,880
Nasdaq Stock Market Inc.*................ 120,000 4,221,600
------------
11,388,480
------------
WIRELESS TELECOMMUNICATION SERVICES --
0.01%+
Sunshine PCS Corporation -- Class A*..... 149,890 16,863
------------
TOTAL COMMON STOCKS
(cost $124,195,481).................... 135,823,215
------------
</Table>
See Notes to the Financial Statements.
67
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE INTERNET PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
<Caption>
SHARES VALUE
- ------------------------------------------------------------------------
<Caption>
CONVERTIBLE PREFERRED
STOCKS -- 0.00%+ SHARES VALUE
- ------------------------------------------------------------------------
MEDIA -- 0.00%+
Adelphia Communications Corporation,
7.500%*
(cost $583,300)........................ 190,000 $ 3,800
------------
<Caption>
CORPORATE BONDS -- PRINCIPAL
CONVERTIBLE -- 1.99%+ AMOUNT
- ------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES --
1.99%+
Level 3 Communications, Inc., CLB,
6.000%, due 03/15/2010(2).............. $ 4,600,000 2,949,750
------------
MEDIA -- 0.00%+
Adelphia Communications Corporation,
6.000%, due 2/15/2006, Acquired on
2/10/2004 at $123,000 (Default
Effective 8/12/2002)*.................. 200,000 2,750
------------
TOTAL CORPORATE BONDS -- CONVERTIBLE
(cost $2,727,911)...................... 2,952,500
------------
<Caption>
CORPORATE BONDS -- 2.13%+
- ------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES --
2.13%+
Level 3 Communications, Inc., CLB,
12.875%, due 03/15/2010(+)(2)
(cost $3,648,162)...................... 3,600,000 3,168,000
------------
<Caption>
RIGHTS -- 2.63%+ SHARES
- ------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES -- 2.63%+
Comdisco Holding Company, Inc. Expiration
Date: 12/31/2050, Strike Price $1.00#
(cost $3,253,775)...................... 12,240,699 3,917,024
------------
</Table>
See Notes to the Financial Statements.
68
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE INTERNET PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
<Caption>
RIGHTS -- 2.63%+ SHARES
- ------------------------------------------------------------------------
<Caption>
PUT OPTIONS PURCHASED -- 0.00%+ CONTRACTS VALUE
- ------------------------------------------------------------------------
Internet HOLDRs Trust
Expiration: January, 2006, Exercise
Price: $60.00....................... 7 $ 105
Expiration: January, 2007, Exercise
Price: $70.00....................... 7 5,005
------------
TOTAL PUT OPTIONS PURCHASED
(cost $15,715)......................... 5,110
------------
<Caption>
PRINCIPAL
SHORT-TERM INVESTMENTS -- 1.18%+ AMOUNT
- ------------------------------------------------------------------------
INVESTMENT COMPANIES -- 0.26%+
First American Prime Obligations Fund --
Class I................................ 381,838 381,838
------------
US GOVERNMENT AGENCY ISSUES -- 0.92%+
Federal Home Loan Bank Discount Note,
2.650%, due 1/3/2006................... $ 1,372,000 1,371,768
------------
TOTAL SHORT-TERM INVESTMENTS
(cost $1,753,606)...................... 1,753,606
------------
<Caption>
INVESTMENTS PURCHASED WITH PRINCIPAL
CASH PROCEEDS FROM SECURITIES AMOUNT OR
LENDING -- 11.24%+ SHARES
- ------------------------------------------------------------------------
INVESTMENT COMPANIES -- 0.00%+
Merrill Lynch Premier Institutional
Fund................................... 36 36
------------
</Table>
See Notes to the Financial Statements.
69
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE INTERNET PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
<Caption>
INVESTMENTS PURCHASED WITH PRINCIPAL
CASH PROCEEDS FROM SECURITIES AMOUNT OR
LENDING -- 11.24%+ SHARES VALUE
- ------------------------------------------------------------------------
REPURCHASE AGREEMENTS -- 11.24%+
CS First Boston Repurchase Agreement,
4.250%, dated 12/30/2005, due
1/3/2006(3)
Repurchase price $2,206,953.............. $ 2,205,911 $ 2,205,911
4.300%, dated 12/30/2005, due
1/3/2006(3)
Repurchase price $919,569................ 919,130 919,130
4.300%, dated 12/30/2005, due
1/3/2006(3)
Repurchase price $735,655................ 735,304 735,304
4.300%, dated 12/30/2005, due
1/3/2006(3)
Repurchase price $6,436,981.............. 6,433,907 6,433,907
4.300%, dated 12/30/2005, due
1/3/2006(3)
Repurchase price $2,758,706.............. 2,757,388 2,757,388
4.300%, dated 12/30/2005, due
1/3/2006(3)
Repurchase price $3,678,275.............. 3,676,518 3,676,518
------------
16,728,158
------------
TOTAL INVESTMENTS PURCHASED WITH CASH
PROCEEDS FROM SECURITIES LENDING
(cost $16,728,194)..................... 16,728,194
------------
TOTAL INVESTMENTS -- 110.45%+
(COST $152,906,144).................... $164,351,449
============
</Table>
- -------------------------
* -- Non-income producing security.
(+) -- Security has a stepped rate. The rate listed is as of December 31, 2005.
+ -- Calculated as a percentage of net assets.
# -- Contingent value right (contingent upon profitability of company).
ADR -- American Depository Receipts.
CLB -- Callable Security.
(1) -- All or a portion of the shares have been committed as collateral for
written option contracts.
(2) -- This security or a portion of this security was out on loan at December
31, 2005. Total loaned securities had a market value of $14,312,196 at
December 31, 2005.
(3) -- See Repurchase Agreements disclosure in the Notes to Financial Statements
for the Kinetics Portfolios Trust.
See Notes to the Financial Statements.
70
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE INTERNET EMERGING GROWTH PORTFOLIO
Portfolio of Investments -- December 31, 2005
<Table>
<Caption>
COMMON STOCKS -- 82.02%+ SHARES VALUE
- -------------------------------------------------------------------------
AEROSPACE & DEFENSE -- 5.88%+
SI International, Inc.*....................... 7,500 $ 229,275
----------
CAPITAL MARKETS -- 4.15%+
Nasdaq-100 Index Tracking Stock(1)............ 4,000 161,680
----------
COMMERCIAL SERVICES & SUPPLIES -- 6.35%+
Comdisco Holding Company, Inc. ............... 9,300 176,700
Deluxe Corporation............................ 1,100 33,154
John H. Harland Company....................... 1,000 37,600
----------
247,454
----------
COMPUTERS & PERIPHERALS -- 8.32%+
ActivCard Corporation*........................ 7,500 26,175
M-Systems Flash Disk Pioneers Ltd.*........... 9,000 298,080
----------
324,255
----------
DERIVATIVE EXCHANGES -- 3.30%+
Chicago Mercantile Exchange Holdings Inc...... 200 73,498
International Securities Exchange, Inc.*...... 2,000 55,040
----------
128,538
----------
DIVERSIFIED FINANCIAL SERVICES -- 2.86%+
eSPEED, Inc. -- Class A*...................... 10,000 77,100
MarketAxess Holdings, Inc.*................... 3,000 34,290
----------
111,390
----------
DIVERSIFIED TELECOMMUNICATION SERVICES --
7.86%+
IDT Corporation*.............................. 5,300 61,268
IDT Corporation -- Class B*................... 5,300 62,010
Lynch Interactive Corporation*................ 61 132,614
Warwick Valley Telephone Company.............. 1,200 22,908
XO Communications, Inc.*...................... 15,000 27,300
----------
306,100
----------
INSURANCE -- 4.40%+
Fidelity National Financial, Inc.............. 4,173 153,525
Fidelity National Title Group, Inc. -- Class
A........................................... 730 17,775
----------
171,300
----------
</Table>
See Notes to the Financial Statements.
71
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE INTERNET EMERGING GROWTH PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
<Caption>
SHARES VALUE
- -------------------------------------------------------------------------
INTERNET SOFTWARE & SERVICES -- 10.84%+
Digital River, Inc.*.......................... 1,000 $ 29,740
Imergent, Inc.*(2)............................ 2,500 16,500
Netease.com, Inc. ADR*(2)..................... 240 13,479
NetRatings, Inc.*............................. 6,700 82,611
SINA Corp*.................................... 500 12,080
Sohu.com, Inc.*............................... 300 5,502
Websense, Inc.*............................... 4,000 262,560
----------
422,472
----------
IT SERVICES -- 0.72%+
Lionbridge Technologies, Inc.*................ 4,000 28,080
----------
MEDIA -- 25.42%+
Discovery Holding Company -- Class A*......... 50 758
Gemstar-TV Guide International, Inc.*......... 5,000 13,050
Groupe Bruxelles Lambert S.A. ................ 1,600 156,937
Interactive Data Corporation.................. 13,000 295,230
Liberty Global, Inc. -- Class A*.............. 30 675
Liberty Global, Inc. -- Series C*............. 30 636
Liberty Media Corporation -- Class A*......... 504 3,966
Naspers Limited ADR(2)........................ 9,470 170,460
Navarre Corporation*(2)....................... 5,000 27,650
PrimaCom AG ADR*.............................. 4,750 17,219
ProQuest Company*............................. 3,000 83,730
RCN Corporation*.............................. 6,545 153,480
Valassis Communications, Inc.*................ 2,300 66,861
----------
990,652
----------
SOFTWARE -- 0.63%+
FactSet Research Systems, Inc................. 600 24,696
----------
U.S. EQUITY EXCHANGES -- 1.28%+
Archipelago Holdings Inc.*(2)................. 1,000 49,770
----------
WIRELESS TELECOMMUNICATION SERVICES -- 0.02%+
Sunshine PCS Corporation -- Class A*.......... 6,000 675
----------
TOTAL COMMON STOCKS
(cost $2,439,081)........................... 3,196,337
----------
</Table>
See Notes to the Financial Statements.
72
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE INTERNET EMERGING GROWTH PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
<Caption>
SHARES VALUE
- -------------------------------------------------------------------------
PREFERRED STOCKS -- 0.03%+ SHARES VALUE
- -------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES --
0.03%+
PTV, Inc. -- Series A, CLB, 10.000%
(cost $3,774)............................... 487 $ 1,023
----------
CORPORATE BONDS -- PRINCIPAL
CONVERTIBLE -- 3.70%+ AMOUNT
- -------------------------------------------------------------------------
SEMICONDUCTOR EQUIPMENT & PRODUCTS -- 3.70%+
Conexant Systems, Inc., CLB,
4.000%, due 2/1/2007 (cost $131,620)........ $150,000 144,187
----------
CORPORATE BONDS -- 5.08%+
- -------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES --
5.08%+
Level 3 Communications, Inc., CLB,
12.875%, due 03/15/2010(+)(2) (cost
$204,998)................................... 225,000 198,000
----------
RIGHTS -- 4.77%+ SHARES
- -------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES -- 4.77%+
Comdisco Holding Company, Inc.,
Expiration Date: 12/31/2050, Strike Price
$1.00# (cost $245,273)...................... 581,000 185,920
----------
PUT OPTIONS PURCHASED -- 0.26%+ CONTRACTS
- -------------------------------------------------------------------------
Nasdaq-100 Index Tracking Stock
Expiration: January, 2007, Exercise Price:
$38.625.................................. 28 4,760
Expiration: January, 2007, Exercise Price:
$39.625.................................. 28 5,460
----------
TOTAL PUT OPTIONS PURCHASED
(cost $22,568).............................. 10,220
----------
</Table>
See Notes to the Financial Statements.
73
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE INTERNET EMERGING GROWTH PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
/PRINCIPALSHORT-TERM INVESTMENTS -- 4.12%+ AMOUNT VALUE
- -------------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES** -- 4.12%+
American Family, 4.025%.................................. $ 45,643 $ 45,643
U.S. Bank, N.A., 4.130%.................................. 51,092 51,092
Wisconsin Corporate Central Credit Union, 4.050%......... 63,931 63,931
-------------
TOTAL SHORT-TERM INVESTMENTS
(cost $160,666)........................................ 160,666
-------------
INVESTMENTS PURCHASED WITH PRINCIPAL
CASH PROCEEDS FROM SECURITIES AMOUNT OR
LENDING -- 9.89%+ SHARES
- -------------------------------------------------------------------------------------
INVESTMENT COMPANIES -- 0.00%+
Merrill Lynch Premier Institutional Fund................. 1 1
-------------
REPURCHASE AGREEMENTS -- 9.89%+
CS First Boston Repurchase Agreement,
4.250%, dated 12/30/2005, due 1/3/2006(3)
Repurchase price $50,848................................. $ 50,824 50,824
4.300%, dated 12/30/2005, due 1/3/2006(3)
Repurchase price $21,187................................. 21,177 21,177
4.300%, dated 12/30/2005, due 1/3/2006(3)
Repurchase price $16,949................................. 16,941 16,941
4.300%, dated 12/30/2005, due 1/3/2006(3)
Repurchase price $148,309................................ 148,238 148,238
4.300%, dated 12/30/2005, due 1/3/2006(3)
Repurchase price $63,561................................. 63,531 63,531
4.300%, dated 12/30/2005, due 1/3/2006(3)
Repurchase price $84,747................................. 84,707 84,707
-------------
385,418
-------------
TOTAL INVESTMENTS PURCHASED WITH CASH PROCEEDS FROM
SECURITIES LENDING
(cost $385,419)........................................ 385,419
-------------
TOTAL INVESTMENTS -- 110.19%+
(COST $3,593,399)...................................... $ 4,281,772
=============
</Table>
- -------------------------
* -- Non-income producing security.
** -- Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates.
The rates listed are as of December 31, 2005.
See Notes to the Financial Statements.
74
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE INTERNET EMERGING GROWTH PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
(+) -- Security has a stepped rate. The rate listed is as of December 31, 2005.
+ -- Calculated as a percentage of net assets.
# -- Contingent value right (contingent upon profitability of company).
ADR -- American Depository Receipts.
CLB -- Callable Security.
(1) -- All or a portion of the shares have been committed as collateral for
written option contracts.
(2) -- This security or a portion of this security was out on loan at December
31, 2005. Total loaned securities had a market value of $330,145 at
December 31, 2005.
(3) -- See Repurchase Agreements disclosure in the Notes to Financial Statements
for the Kinetics Portfolios Trust.
See Notes to the Financial Statements.
75
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE PARADIGM PORTFOLIO
Portfolio of Investments -- December 31, 2005
<Table>
<Caption>
COMMON STOCKS -- 88.39%+ SHARES VALUE
- --------------------------------------------------------------------
AEROSPACE & DEFENSE -- 0.98%+
General Dynamics Corporation............ 200 $ 22,810
CACI International, Inc. -- Class A*.... 90,000 5,164,200
------------
5,187,010
------------
AIRLINES -- 0.07%+
China Eastern Airlines Corporation
Limited ADR........................... 25,000 390,250
------------
ASIAN EXCHANGES -- 2.57%+
Hong Kong Exchanges & Clearing
Limited............................... 3,000,000 12,439,303
Osaka Securities Exchange Co., Ltd...... 100 627,464
Singapore Exchange Limited.............. 300,000 523,261
------------
13,590,028
------------
ASSET MANAGEMENT -- 4.59%+
Ameriprise Financial, Inc............... 80 3,280
Brookfield Asset Management Inc -- Class
A..................................... 356,000 17,917,480
Eaton Vance Corp........................ 7,200 196,992
Legg Mason, Inc......................... 32,000 3,830,080
Power Corporation of Canada............. 86,000 2,342,260
------------
24,290,092
------------
AUTO COMPONENTS -- 1.36%+
Toyota Industries Corporation........... 200,000 7,190,401
------------
AUTOMOBILES -- 0.00%+
Great Wall Automobile Holdings Company,
Limited -- Class H.................... 20,000 6,578
------------
BEVERAGES -- 0.17%+
Anheuser-Busch Companies, Inc. ......... 2,400 103,104
Brown-Forman Corporation -- Class B..... 3,000 207,960
Constellation Brands, Inc. -- Class
A*.................................... 600 15,738
Diageo plc ADR.......................... 4,000 233,200
Pernod Ricard SA........................ 1,200 209,407
Remy Cointreau SA....................... 2,400 113,654
Taittinger SA........................... 25 9,952
------------
893,015
------------
</Table>
See Notes to the Financial Statements.
76
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE PARADIGM PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
<Caption>
SHARES VALUE
- --------------------------------------------------------------------
BROKERAGE & INVESTMENT BANKING -- 0.20%+
The Bear Stearns Companies Inc. ........ 2,000 $ 231,060
Greenhill & Co., Inc. .................. 6,400 359,424
ICAP plc................................ 48,000 334,463
Lazard Ltd -- Class A................... 2,000 63,800
Nomura Holdings, Inc. ADR............... 4,000 76,880
Refco Inc.*............................. 24,000 10,560
------------
1,076,187
------------
CHEMICALS -- 0.01%+
Novozymes A/S -- Class B................ 200 10,949
Potash Corporation of Saskatchewan
Inc. ................................. 400 32,088
------------
43,037
------------
COMMERCIAL BANKS -- 3.44%+
Fifth Third Bancorp..................... 4,000 150,880
HDFC Bank Ltd. ADR...................... 4,400 223,960
ICICI Bank Limited ADR.................. 9,000 259,200
M&T Bank Corporation.................... 124,000 13,522,200
State Bank of India GDR................. 14,000 707,000
Wells Fargo and Company................. 53,000 3,329,990
------------
18,193,230
------------
COMMERCIAL SERVICES & SUPPLIES -- 0.06%+
Acco Brands Corporation*................ 658 16,121
Equifax Inc............................. 100 3,802
FTI Consulting, Inc.*................... 10,000 274,400
------------
294,323
------------
CONSUMER FINANCE -- 0.64%+
American Express Company................ 400 20,584
The Student Loan Corporation............ 16,000 3,347,680
------------
3,368,264
------------
DERIVATIVE EXCHANGES -- 3.21%+
CBOT Holdings, Inc. -- Class A*(2)...... 56,000 5,250,560
Chicago Mercantile Exchange Holdings
Inc................................... 24,000 8,819,760
International Securities Exchange,
Inc.*................................. 106,000 2,917,120
------------
16,987,440
------------
</Table>
See Notes to the Financial Statements.
77
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE PARADIGM PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
<Caption>
SHARES VALUE
- --------------------------------------------------------------------
DIVERSIFIED CONSUMER SERVICES -- 0.37%+
H&R Block, Inc.......................... 80,000 $ 1,964,000
------------
DIVERSIFIED FINANCIAL SERVICES -- 0.78%+
Pargesa Holding AG -- Class B........... 48,000 4,098,474
------------
DIVERSIFIED GAS -- 1.05%+
The Williams Companies, Inc............. 240,000 5,560,800
------------
DIVERSIFIED TELECOMMUNICATION SERVICES--
2.87%+
Leucadia National Corporation........... 320,000 15,187,200
------------
ELECTRIC UTILITIES -- 9.83%+
Allegheny Energy, Inc.*................. 672,000 21,268,800
Huaneng Power International, Inc. ADR... 230,000 6,028,300
Korea Electric Power Corporation ADR.... 606,000 11,810,940
Sierra Pacific Resources*............... 990,000 12,909,600
------------
52,017,640
------------
EUROPEAN EXCHANGES -- 1.65%+
Deutsche Boerse AG...................... 18,000 1,841,619
Euronext NV............................. 58,000 3,021,298
London Stock Exchange plc............... 364,857 3,891,942
------------
8,754,859
------------
FOOD PRODUCTS -- 0.88%+
Archer-Daniels-Midland Company.......... 72,000 1,775,520
Bunge Limited........................... 25,400 1,437,894
Cadbury Schweppes PLC ADR............... 4,000 153,160
Dean Foods Company*..................... 30,000 1,129,800
The J.M. Smucker Company................ 1,000 44,000
McCormick & Company, Incorporated....... 1,000 30,920
TreeHouse Foods, Inc.*.................. 3,600 67,392
------------
4,638,686
------------
GAMING -- 1.14%+
Harrah's Entertainment, Inc............. 28,000 1,996,120
Hilton Group plc ADR.................... 8,000 99,846
MGM MIRAGE*............................. 72,000 2,640,240
Wynn Resorts, Limited*(2)............... 24,000 1,316,400
------------
6,052,606
------------
</Table>
See Notes to the Financial Statements.
78
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE PARADIGM PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
<Caption>
SHARES VALUE
- --------------------------------------------------------------------
HOTELS RESTAURANTS & LEISURE -- 0.02%+
Carnival Corporation.................... 2,000 $ 106,940
------------
HOUSEHOLD DURABLES -- 0.04%+
Fortune Brands, Inc. ................... 2,800 218,456
------------
HOUSEHOLD PRODUCTS -- 0.08%+
Church & Dwight Co., Inc. .............. 12,000 396,360
------------
INDEPENDENT POWER PRODUCERS & ENERGY
TRADERS -- 1.60%+
Dynegy Inc. -- Class A*(2).............. 92,000 445,280
TXU Corporation......................... 160,000 8,030,400
------------
8,475,680
------------
INDUSTRIAL CONGLOMERATES -- 0.00%+
Alleghany Corporation*.................. 24 6,816
------------
INSURANCE -- 10.92%+
Arthur J. Gallagher & Co................ 1,000 30,880
Berkshire Hathaway Inc. -- Class B*..... 4,900 14,383,950
Brown & Brown, Inc. .................... 2,400 73,296
China Life Insurance Co., Limited
ADR*(2)............................... 1,000 35,280
Fairfax Financial Holdings Limited(2)... 18,800 2,695,168
Fidelity National Financial, Inc. ...... 8,200 301,678
Fidelity National Title Group, Inc. --
Class A............................... 1,435 34,942
Markel Corporation*..................... 12,000 3,804,600
Mercury General Corporation............. 2,000 116,440
Millea Holdings, Inc. ADR............... 4,000 344,200
Montpelier Re Holdings Ltd.(2).......... 192,000 3,628,800
The Progressive Corporation............. 128,000 14,947,840
Wesco Financial Corporation............. 1,700 654,500
White Mountains Insurance Group Ltd..... 30,000 16,756,500
------------
57,808,074
------------
IT SERVICES -- 0.02%+
Automatic Data Processing, Inc.......... 100 4,589
Iron Mountain Incorporated*............. 1,800 75,996
------------
80,585
------------
</Table>
See Notes to the Financial Statements.
79
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE PARADIGM PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
<Caption>
SHARES VALUE
- --------------------------------------------------------------------
xMEDIA -- 6.08%+
DreamWorks Animation SKG, Inc.*......... 10,000 $ 245,600
The E.W. Scripps Company -- Class A..... 54,000 2,593,080
Groupe Bruxelles Lambert S.A............ 150,000 14,712,846
Meredith Corporation.................... 2,000 104,680
The New York Times Company -- Class A... 600 15,870
The Walt Disney Company................. 10,650 255,281
The Washington Post Company -- Class
B..................................... 18,654 14,270,310
------------
32,197,667
------------
METALS & MINING -- 1.50%+
Anglo American PLC ADR(2)............... 224,000 7,790,720
Cameco Corporation...................... 2,400 152,136
------------
7,942,856
------------
MULTILINE RETAIL -- 2.05%+
Sears Holdings Corporation*............. 94,000 10,859,820
------------
MULTI-UTILITIES -- 4.14%+
CenterPoint Energy, Inc................. 900,000 11,565,000
Reliant Energy Inc.*.................... 900,000 9,288,000
Sempra Energy........................... 24,000 1,076,160
------------
21,929,160
------------
OIL & GAS -- 0.02%+
Norsk Hydro ASA ADR..................... 1,000 103,180
------------
</Table>
See Notes to the Financial Statements.
80
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE PARADIGM PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
<Caption>
SHARES VALUE
- --------------------------------------------------------------------
OIL, GAS & CONSUMABLE FUELS -- 14.15%+
Canadian Natural Resources Ltd.......... 8,000 $ 396,960
Canadian Oil Sands Trust................ 120,000 12,943,200
CNOOC Limited ADR....................... 80,000 5,437,600
El Paso Corporation..................... 1,110,000 13,497,600
EnCana Corporation...................... 82,000 3,703,120
Imperial Oil Ltd. ...................... 36,000 3,585,600
Nexen Inc. ............................. 66,000 3,143,580
Petro-Canada............................ 72,000 2,886,480
PetroChina Company Limited ADR.......... 40,000 3,278,400
Petroleo Brasileiro S.A. ADR............ 4,000 285,080
Shell Canada Limited.................... 112,000 4,051,443
Statoil ASA ADR......................... 10,000 229,600
Suncor Energy, Inc...................... 328,000 20,706,640
Western Oil Sands Inc. -- Class A*...... 30,000 717,708
------------
74,863,011
------------
OTHER EXCHANGES -- 0.46%+
Australian Stock Exchange Limited....... 18,000 428,864
TSX Group Inc. ......................... 50,000 2,014,280
------------
2,443,144
------------
PAPER & FOREST PRODUCTS -- 0.01%+
Pope Resources, L.P..................... 1,800 55,836
------------
PHARMACEUTICALS -- 0.02%+
Novo-Nordisk A/S ADR.................... 2,000 112,680
------------
PUBLISHING -- 0.31%+
Dow Jones & Company, Inc................ 100 3,549
John Wiley & Sons, Inc. -- Class B...... 2,000 77,950
Moody's Corporation..................... 25,300 1,553,926
------------
1,635,425
------------
REAL ESTATE -- 3.46%+
American Real Estate Partners, L.P. .... 200,000 7,710,000
Forest City Enterprises, Inc. -- Class
A..................................... 184,000 6,979,120
The St. Joe Company..................... 3,600 241,992
Texas Pacific Land Trust(2)............. 17,200 2,562,800
Vornado Realty Trust.................... 10,000 834,700
------------
18,328,612
------------
</Table>
See Notes to the Financial Statements.
81
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE PARADIGM PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
<Caption>
SHARES VALUE
- --------------------------------------------------------------------
SPECIALISTS -- 1.26%+
LaBranche & Co Inc.*(2)................. 660,000 $ 6,672,600
------------
SPECIALTY RETAIL -- 0.01%+
Tiffany & Co. .......................... 1,000 38,290
------------
TOBACCO -- 0.27%+
Altria Group, Inc....................... 18,000 1,344,960
British American Tobacco p.l.c. ADR..... 2,000 90,080
------------
1,435,040
------------
TRANSPORTATION INFRASTRUCTURE -- 0.24%+
Anhui Expressway Co., Ltd. -- Class H... 660,000 319,204
Beijing Capital International Airport
Company Limited -- Class H............ 100,000 45,785
Jiangsu Expressway Company Ltd. -- Class
H..................................... 200,000 112,850
Shenzhen Expressway Company Limited --
Class H............................... 1,200,000 394,653
Zhejiang Expressway Co., Ltd. -- Class
H..................................... 660,000 408,582
------------
1,281,074
------------
U.S. EQUITY EXCHANGES -- 5.84%+
Archipelago Holdings Inc.*(2)........... 366,000 18,215,820
Nasdaq Stock Market Inc.*............... 360,000 12,664,800
------------
30,880,620
------------
WIRELESS TELECOMMUNICATION SERVICES --
0.02%+
China Mobile (Hong Kong) Limited ADR.... 4,000 96,160
------------
TOTAL COMMON STOCKS
(cost $404,420,249)................... 467,752,206
------------
<Caption>
CORPORATE BONDS -- PRINCIPAL
CONVERTIBLE -- 0.03%+ AMOUNT
- --------------------------------------------------------------------
xINDEPENDENT POWER PRODUCERS & ENERGY
TRADERS -- 0.03%+
Calpine Corporation, CLB, 4.750%, due
11/15/2023, Acquired on 11/30/05-
12/02/05 at $180,150 (Default
Effective 12/20/2005)*
(cost $181,238)....................... $ 700,000 182,000
------------
</Table>
See Notes to the Financial Statements.
82
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE PARADIGM PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
CALL OPTIONS PURCHASED --
0.07%+ CONTRACTS VALUE
<Table>
- --------------------------------------------------------------------
xTXU Corporation
Expiration: January, 2007, Exercise
Price: $22.50
(cost $143,073)....................... 142 $ 394,760
------------
SHORT-TERM INVESTMENTS -- PRINCIPAL
11.32%+ AMOUNT
- --------------------------------------------------------------------
xUS GOVERNMENT AGENCY ISSUES -- 10.99%+
Federal Home Loan Bank Discount Note,
2.650%, due 1/3/2006.................. $58,200,000 58,190,138
------------
VARIABLE RATE DEMAND NOTES** -- 0.33%+
American Family, 4.025%................. 578 578
U.S. Bank, N.A., 4.130%................. 1,723,566 1,723,566
Wisconsin Corporate Central Credit
Union, 4.050%......................... 2,707 2,707
------------
1,726,851
------------
TOTAL SHORT-TERM INVESTMENTS
(cost $59,916,989).................... 59,916,989
------------
INVESTMENTS PURCHASED WITH PRINCIPAL
CASH PROCEEDS FROM SECURITIES AMOUNT OR
LENDING -- 9.71%+ SHARES
- --------------------------------------------------------------------
xINVESTMENT COMPANIES -- 0.00%+
Merrill Lynch Premier Institutional
Fund.................................. 109 109
------------
</Table>
See Notes to the Financial Statements.
83
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE PARADIGM PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
<Caption>
INVESTMENTS PURCHASED WITH PRINCIPAL
CASH PROCEEDS FROM SECURITIES AMOUNT OR
LENDING -- 9.71%+ SHARES VALUE
- --------------------------------------------------------------------
xREPURCHASE AGREEMENTS -- 9.71%+
CS First Boston Repurchase Agreement,
4.250%, dated 12/30/2005, due
1/3/2006(3)
Repurchase price $6,778,110............. $ 6,774,911 $ 6,774,911
4.300%, dated 12/30/2005, due
1/3/2006(3)
Repurchase price $2,824,229............. 2,822,880 2,822,880
4.300%, dated 12/30/2005, due
1/3/2006(3)
Repurchase price $2,259,383............. 2,258,304 2,258,304
4.300%, dated 12/30/2005, due
1/3/2006(3)
Repurchase price $19,769,599............ 19,760,158 19,760,158
4.300%, dated 12/30/2005, due
1/3/2006(3)
Repurchase price $8,472,685............. 8,468,639 8,468,639
4.300%, dated 12/30/2005, due
1/3/2006(3)
Repurchase price $11,296,914............ 11,291,519 11,291,519
------------
51,376,411
------------
TOTAL INVESTMENTS PURCHASED WITH CASH
PROCEEDS FROM SECURITIES LENDING
(cost $51,376,520).................... 51,376,520
------------
TOTAL INVESTMENTS -- 109.52%+
(COST $516,038,069)................... $579,622,475
============
</Table>
- ---------------
* -- Non-income producing security.
** -- Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates.
The rates listed are as of December 31, 2005.
+ -- Calculated as a percentage of net assets.
GDR -- Global Depository Receipts.
ADR -- American Depository Receipts.
CLB -- Callable Security.
(1) -- All or a portion of the shares have been committed as collateral for
written option contracts.
(2) -- This security or a portion of this security was out on loan at December
31, 2005. Total loaned securities had a market value of $43,618,328 at
December 31, 2005.
(3) -- See Repurchase Agreements disclosure in the Notes to Financial Statements
for the Kinetics Portfolios Trust.
See Notes to the Financial Statements.
84
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE MEDICAL PORTFOLIO
Portfolio of Investments -- December 31, 2005
<Table>
<Caption>
COMMON STOCKS -- 97.57%+ SHARES VALUE
- ------------------------------------------------------------------------
BIOTECHNOLOGY -- 35.14%+
AEterna Zentaris Inc.*..................... 20,500 $ 103,935
Arena Pharmaceuticals, Inc.*............... 14,000 199,080
AVAX Technologies, Inc.*................... 50,000 12,500
Avigen, Inc.*(2)........................... 21,000 63,630
Biogen Idec, Inc.*......................... 8,250 373,972
Biomira, Inc.*(2).......................... 37,000 51,800
Cambridge Antibody Technology Group PLC
ADR*(2).................................. 15,000 180,165
Cell Genesys, Inc.*(2)..................... 14,725 87,319
Chiron Corporation*........................ 19,000 844,740
Cubist Pharmaceuticals, Inc.*.............. 2,000 42,500
CuraGen Corporation*....................... 13,000 40,040
deCODE genetics, Inc.*..................... 11,000 90,860
Dendreon Corporation*...................... 7,000 37,940
EntreMed, Inc.*............................ 11,000 21,340
Favrille Inc.*............................. 10,000 40,500
Genzyme Corporation*....................... 7,038 498,150
Human Genome Sciences, Inc.*............... 17,000 145,520
ImmunoGen, Inc.*........................... 6,000 30,780
Isis Pharmaceuticals, Inc.*................ 5,000 26,200
Isotechnika, Inc.*......................... 15,000 25,162
Maxim Pharmaceuticals, Inc.*............... 10,000 11,000
Medarex, Inc.*............................. 20,000 277,000
MedImmune, Inc.*........................... 29,500 1,033,090
Millennium Pharmaceuticals, Inc.*.......... 30,296 293,871
NeoRx Corporation*......................... 27,000 20,520
Progenics Pharmaceuticals, Inc.*........... 2,200 55,022
QLT Inc.*.................................. 10,000 63,600
Savient Pharmaceuticals Inc.*.............. 34,000 127,160
Serono SA ADR.............................. 12,000 238,320
Sirna Therapeutics, Inc.*.................. 3,491 10,578
Targeted Genetics Corporation*............. 10,000 4,900
Vical Incorporated*........................ 13,500 56,700
-----------
5,107,894
-----------
</Table>
See Notes to the Financial Statements.
85
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE MEDICAL PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
<Caption>
SHARES VALUE
- ------------------------------------------------------------------------
]xCHEMICALS -- 7.80%+
Akzo Nobel N.V. ADR........................ 10,000 $ 460,800
Lonza Group AG............................. 11,000 673,034
-----------
1,133,834
-----------
HEALTH CARE EQUIPMENT & SUPPLIES -- 0.04%+
Theragenics Corporation*................... 2,000 6,040
-----------
HEALTH CARE PROVIDERS & SERVICES -- 0.36%+
IMPATH Bankruptcy Liquidating Trust --
Class A*................................. 26,000 52,000
-----------
PHARMACEUTICALS -- 54.23%+
Abbott Laboratories........................ 17,000 670,310
Altana AG ADR(2)........................... 14,000 762,580
Antigenics, Inc.*(2)....................... 892 4,246
Bristol-Meyers Squibb Company.............. 15,000 344,700
China Pharmaceutical Group Limited*........ 1,440,000 222,863
Eli Lilly and Company...................... 11,000 622,490
GlaxoSmithKline PLC ADR.................... 22,673 1,144,533
Johnson & Johnson.......................... 7,000 420,700
MGI Pharma, Inc.*.......................... 2,000 34,320
Novartis AG ADR............................ 26,000 1,364,480
Schering AG ADR............................ 14,000 936,740
SuperGen, Inc.*............................ 14,000 70,700
Wyeth...................................... 27,900 1,285,353
-----------
7,884,015
-----------
TOTAL COMMON STOCKS
(cost $15,904,545)....................... 14,183,783
-----------
RIGHTS -- 0.00%+
- ------------------------------------------------------------------------
]xBIOTECHNOLOGY -- 0.00%+
OSI Pharmaceuticals, Inc.*
Expiration Date 6/12/2008,
Strike Price $1.00#
(cost $0)................................ 13,932 558
-----------
</Table>
See Notes to the Financial Statements.
86
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE MEDICAL PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
PRINCIPAL
SHORT-TERM INVESTMENTS -- 2.50%+ AMOUNT VALUE
- ------------------------------------------------------------------------------------
xVARIABLE RATE DEMAND NOTES** -- 2.50%+
U.S. Bank, N.A., 4.130%
(cost $362,903).................................... $ 362,903 $ 362,903
--------------
INVESTMENTS PURCHASED WITH PRINCIPAL
CASH PROCEEDS FROM SECURITIES AMOUNT OR
LENDING -- 6.65%+ SHARES
- ------------------------------------------------------------------------------------
xINVESTMENT COMPANIES -- 0.00%+
Merrill Lynch Premier Institutional Fund............. 2 2
--------------
REPURCHASE AGREEMENTS -- 6.65%+
CS First Boston Repurchase Agreement,
4.250%, dated 12/30/2005, due 1/3/2006(3)
Repurchase price $127,566............................ $ 127,506 127,506
4.300%, dated 12/30/2005, due 1/3/2006(3)
Repurchase price $53,152............................. 53,127 53,127
4.300%, dated 12/30/2005, due 1/3/2006(3)
Repurchase price $42,522............................. 42,502 42,502
4.300%, dated 12/30/2005, due 1/3/2006(3)
Repurchase price $372,069............................ 371,891 371,891
4.300%, dated 12/30/2005, due 1/3/2006(3)
Repurchase price $159,458............................ 159,382 159,382
4.300%, dated 12/30/2005, due 1/3/2006(3)
Repurchase price $212,611............................ 212,509 212,509
--------------
966,917
--------------
TOTAL INVESTMENTS PURCHASED WITH CASH PROCEEDS FROM
SECURITIES LENDING
(cost $966,919).................................... 966,919
--------------
TOTAL INVESTMENTS -- 106.72%+
(COST $17,234,367)................................. $ 15,514,163
==============
</Table>
- ---------------
* -- Non-income producing security.
** -- Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates.
The rates listed are as of December 31, 2005.
+ -- Calculated as a percentage of net assets.
See Notes to the Financial Statements.
87
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE MEDICAL PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
# -- Contingent value right (contingent upon profitability of company).
ADR -- American Depository Receipts.
(1) -- All or a portion of the shares have been committed as collateral for
written option contracts.
(2) -- This security or a portion of this security was out on loan at December
31, 2005. Total loaned securities had a market value of $800,488 at
December 31, 2005.
(3) -- See Repurchase Agreements disclosure in the Notes to Financial Statements
for the Kinetics Portfolios Trust.
See Notes to the Financial Statements.
88
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE SMALL CAP OPPORTUNITIES PORTFOLIO
Portfolio of Investments -- December 31, 2005
<Table>
<Caption>
COMMON STOCKS -- 83.39%+ SHARES VALUE
- ------------------------------------------------------------------------
AEROSPACE & DEFENSE -- 3.41%+
Armor Holdings, Inc.*.................... 800 $ 34,120
Bombardier Inc........................... 360,000 854,747
CACI International, Inc. -- Class A*..... 58,000 3,328,040
GenCorp Inc.*............................ 10,000 177,500
------------
4,394,407
------------
AIRLINES -- 1.34%+
China Eastern Airlines Corporation
Limited ADR............................ 58,000 905,380
China Southern Airlines Company Limited
ADR*(2)................................ 58,000 823,600
------------
1,728,980
------------
ASIAN EXCHANGES -- 1.61%+
Hong Kong Exchanges & Clearing Limited... 500,000 2,073,217
------------
BEVERAGES -- 0.04%+
Tsingtao Brewery Company Limited -- Class
H...................................... 50,000 52,878
------------
BROKERAGE & INVESTMENT BANKING -- 0.31%+
Greenhill & Co., Inc..................... 7,200 404,352
------------
CAPITAL MARKETS -- 3.41%+
Calamos Asset Management, Inc. -- Class
A...................................... 20,000 629,000
GAMCO Investors, Inc. -- Class A......... 1,000 43,530
Jefferies Group, Inc..................... 1,000 44,980
Nuveen Investments -- Class A............ 24,000 1,022,880
SWS Group, Inc........................... 4,000 83,760
Van der Moolen Holding N.V. ADR.......... 360,217 2,571,949
------------
4,396,099
------------
</Table>
See Notes to the Financial Statements.
89
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE SMALL CAP OPPORTUNITIES PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
<Caption>
SHARES VALUE
- ------------------------------------------------------------------------
COMMERCIAL BANKS -- 4.07%+
Banque du Liban et d'Outre-Mer S.A.L.
(BLOM) -- Class B GDR*................. 20,000 $ 1,330,000
Cathay General Bancorp................... 12,000 431,280
Center Financial Corporation............. 22,000 553,520
East West Bancorp, Inc. ................. 12,000 437,880
Farmers & Merchants Bank of Long Beach... 12 69,060
First Bank of Delaware*.................. 300,000 969,000
Hanmi Financial Corporation.............. 22,062 394,027
Nara Bancorp, Inc........................ 22,000 391,160
UCBH Holdings, Inc....................... 22,000 393,360
Wilshire Bancorp, Inc.................... 16,000 275,040
------------
5,244,327
------------
COMMERCIAL SERVICES & SUPPLIES -- 2.36%+
Comdisco Holding Company, Inc. .......... 1,000 19,000
Deluxe Corporation....................... 10,000 301,400
FIND/SVP, Inc.*.......................... 10,000 12,900
FTI Consulting, Inc.*.................... 54,000 1,481,760
Loring Ward International Ltd.*.......... 1,000 516
PICO Holdings, Inc.*..................... 25,000 806,500
Ritchie Bros. Auctioneers Incorporated... 10,000 422,500
------------
3,044,576
------------
CONSTRUCTION & ENGINEERING -- 3.68%+
Quanta Services, Inc.*................... 360,000 4,741,200
------------
DERIVATIVE EXCHANGES -- 2.35%+
International Securities Exchange,
Inc.*.................................. 110,000 3,027,200
------------
DIVERSIFIED CONSUMER SERVICES -- 0.01%+
Sotheby's Holdings, Inc. -- Class A*..... 800 14,688
------------
DIVERSIFIED FINANCIAL SERVICES -- 0.03%+
IntercontinentalExchange Inc.*........... 1,000 36,350
------------
</Table>
See Notes to the Financial Statements.
90
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE SMALL CAP OPPORTUNITIES PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
<Caption>
SHARES VALUE
- ------------------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION SERVICES --
0.31%+
Lynch Interactive Corporation*........... 18 $ 39,132
NeuStar, Inc. -- Class A*................ 1,000 30,490
XO Communications, Inc.*(2).............. 180,000 327,600
------------
397,222
------------
ELECTRIC UTILITIES -- 10.56%+
Allegheny Energy, Inc.*.................. 200,000 6,330,000
China Resources Power Holdings Company
Limited................................ 100,000 56,425
Datang International Power Generation
Company Limited -- Class H............. 100,000 73,514
Huadian Power International Corporation
Limited -- Class H..................... 180,000 45,965
Sierra Pacific Resources*................ 544,000 7,093,760
------------
13,599,664
------------
ENERGY -- 0.92%+
Siem Industries Inc.*.................... 32,000 1,184,000
------------
GAS UTILITIES -- 1.95%+
Southern Union Company*.................. 106,263 2,510,983
------------
HOLDING COMPANY -- 0.20%+
BNN Investments Ltd.*.................... 2,600 253,805
------------
HOTELS RESTAURANTS & LEISURE -- 1.07%+
Triarc Companies, Inc. -- Class A(2)..... 82,000 1,372,680
------------
HOUSEHOLD DURABLES -- 0.28%+
Jarden Corporation*...................... 12,000 361,800
------------
INDEPENDENT POWER PRODUCERS & ENERGY
TRADERS -- 1.13%+
Dynegy Inc. -- Class A*(2)............... 300,000 1,452,000
------------
INDUSTRIAL CONGLOMERATES -- 0.90%+
Alleghany Corporation*................... 4,084 1,159,856
------------
</Table>
See Notes to the Financial Statements.
91
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE SMALL CAP OPPORTUNITIES PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
<Caption>
SHARES VALUE
- ------------------------------------------------------------------------
INSURANCE -- 2.82%+
Covanta Holding Corporation*............. 6,000 $ 90,360
Fairfax Financial Holdings Limited(2).... 2,000 286,720
Montpelier Re Holdings Ltd.(2)........... 80,000 1,512,000
National Western Life Insurance
Company -- Class A..................... 1,200 248,292
RLI Corp................................. 8,000 398,960
Safety Insurance Group, Inc. ............ 15,800 637,846
Wesco Financial Corporation.............. 1,000 385,000
Zenith National Insurance Corp........... 1,500 69,180
------------
3,628,358
------------
IT SERVICES -- 1.21%+
Anteon International Corporation*........ 4,000 217,400
ManTech International Corporation --
Class A*............................... 48,000 1,337,280
------------
1,554,680
------------
LEISURE EQUIPMENT & PRODUCTS -- 0.00%+
Steinway Musical Instruments, Inc.*...... 200 5,102
------------
MACHINERY -- 0.07%+
Oshkosh Truck Corporation................ 2,000 89,180
------------
MEDIA -- 1.27%+
CCE Spinco, Inc.*........................ 24,000 314,400
Courier Corporation...................... 30,000 1,030,200
Gemstar-TV Guide International, Inc.*.... 36,000 93,960
PrimaCom AG ADR*......................... 54,000 195,750
------------
1,634,310
------------
METALS & MINING -- 1.86%+
Aber Diamond Corporation................. 8,800 324,104
Commercial Metals Company................ 24,000 900,960
Inmet Mining Corporation................. 30,000 761,323
Stillwater Mining Company*............... 36,000 416,520
------------
2,402,907
------------
MULTILINE RETAIL -- 1.04%+
Dillard's, Inc. -- Class A............... 54,000 1,340,280
------------
</Table>
See Notes to the Financial Statements.
92
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE SMALL CAP OPPORTUNITIES PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
<Caption>
SHARES VALUE
- ------------------------------------------------------------------------
MULTI-UTILITIES -- 8.99%+
Aquila, Inc.*............................ 700,000 $ 2,520,000
CMS Energy Corporation*.................. 172,000 2,495,720
Reliant Energy Inc.*..................... 636,000 6,563,520
------------
11,579,240
------------
OIL, GAS & CONSUMABLE FUELS -- 1.11%+
Shell Canada Limited..................... 3,000 108,521
UTS Energy Corporation*.................. 360,000 1,325,476
------------
1,433,997
------------
PAPER & FOREST PRODUCTS -- 0.00%+
Pope Resources, L.P...................... 200 6,204
------------
PUBLISHING -- 2.62%+
Dex Media, Inc........................... 26,000 704,340
John Wiley & Sons, Inc. -- Class A....... 24,000 936,960
R.H. Donnelley Corporation*.............. 24,000 1,478,880
Value Line, Inc. ........................ 7,200 253,512
------------
3,373,692
------------
REAL ESTATE -- 6.23%+
Alexander's, Inc.*....................... 2,600 638,300
American Real Estate Partners, L.P....... 148,000 5,705,400
Forest City Enterprises, Inc. -- Class
A...................................... 10,000 379,300
HomeFed Corporation...................... 200 13,400
SOLIDERE GDR*............................ 800 13,600
Tejon Ranch Co.*......................... 400 15,968
Texas Pacific Land Trust................. 8,400 1,251,600
United Capital Corporation*.............. 400 9,868
------------
8,027,436
------------
ROAD & RAIL -- 0.90%+
Laidlaw International, Inc. ............. 50,000 1,161,500
------------
SOFTWARE -- 1.06%+
Midway Games Inc.*(2).................... 72,000 1,365,840
------------
SPECIALISTS -- 5.21%+
LaBranche & Co Inc.*(2).................. 664,000 6,713,040
------------
</Table>
See Notes to the Financial Statements.
93
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE SMALL CAP OPPORTUNITIES PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
<Caption>
SHARES VALUE
- ------------------------------------------------------------------------
TOBACCO -- 0.23%+
Vector Group Ltd.(2)..................... 16,164 $ 293,700
------------
TRANSPORTATION INFRASTRUCTURE -- 0.05%+
Sichuan Expressway Co. Limited -- Class
H...................................... 480,000 66,859
------------
U.S. EQUITY EXCHANGES -- 8.78%+
Archipelago Holdings Inc.*(2)............ 100,000 4,977,000
Nasdaq Stock Market Inc.*................ 180,000 6,332,400
------------
11,309,400
------------
TOTAL COMMON STOCKS
(cost $88,376,956)..................... 107,436,009
------------
<Caption>
CORPORATE BONDS -- PRINCIPAL
CONVERTIBLE -- 0.41%+ AMOUNT
- ------------------------------------------------------------------------
INDEPENDENT POWER PRODUCERS & ENERGY
TRADERS -- 0.06%+
Calpine Corporation, CLB, 4.750%, due
11/15/2023, Acquired on 11/30/05-
12/02/05 at $180,150 (Default Effective
12/20/2005)*........................... $ 300,000 78,000
------------
INSURANCE -- 0.35%+
Fairfax Financial Holdings Limited
5.000%, due 07/15/2023................. 500,000 445,625
------------
TOTAL CORPORATE BONDS -- CONVERTIBLE
(cost $575,530)........................ 523,625
------------
<Caption>
RIGHTS -- 1.60%+ SHARES
- ------------------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES -- 1.60%+
Comdisco Holding Company, Inc. Expiration
Date: 12/31/2050, Strike Price $1.00#
(cost $2,031,987)...................... 6,438,000 2,060,160
------------
</Table>
See Notes to the Financial Statements.
94
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE SMALL CAP OPPORTUNITIES PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
<Caption>
RIGHTS -- 1.60%+ SHARES
- ------------------------------------------------------------------------
<Caption>
SHORT-TERM INVESTMENTS -- PRINCIPAL
14.55%+ AMOUNT VALUE
- ------------------------------------------------------------------------
US GOVERNMENT AGENCY ISSUES -- 14.26%+
Federal Home Loan Bank Discount Note,
2.650%, due 1/3/2006................... $18,381,000 $ 18,377,886
------------
VARIABLE RATE DEMAND NOTES** -- 0.29%+
American Family, 4.025%.................. 2,575 2,575
U.S. Bank, N.A., 4.130%.................. 365,485 365,485
Wisconsin Corporate Central Credit Union,
4.050%................................. 1,249 1,249
------------
369,309
------------
TOTAL SHORT-TERM INVESTMENTS
(cost $18,747,195)..................... 18,747,195
------------
<Caption>
INVESTMENTS PURCHASED WITH PRINCIPAL
CASH PROCEEDS FROM SECURITIES AMOUNT
LENDING -- 16.72%+ OR SHARES
- ------------------------------------------------------------------------
INVESTMENT COMPANIES -- 0.00%+
Merrill Lynch Premier Institutional
Fund................................... 46 46
------------
</Table>
See Notes to the Financial Statements.
95
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE SMALL CAP OPPORTUNITIES PORTFOLIO
Portfolio of Investments -- December 31, 2005 -- (Continued)
<Table>
<Caption>
INVESTMENTS PURCHASED WITH PRINCIPAL
CASH PROCEEDS FROM SECURITIES AMOUNT
LENDING -- 16.72%+ OR SHARES VALUE
- ------------------------------------------------------------------------
REPURCHASE AGREEMENTS -- 16.72%+
CS First Boston Repurchase Agreement,
4.250%, dated 12/30/2005, due
1/3/2006(3)
Repurchase price $2,842,190.............. $ 2,840,848 $ 2,840,848
4.300%, dated 12/30/2005, due
1/3/2006(3)
Repurchase price $1,184,252.............. 1,183,686 1,183,686
4.300%, dated 12/30/2005, due
1/3/2006(3)
Repurchase price $947,402................ 946,949 946,949
4.300%, dated 12/30/2005, due
1/3/2006(3)
Repurchase price $8,289,764.............. 8,285,806 8,285,806
4.300%, dated 12/30/2005, due
1/3/2006(3)
Repurchase price $3,552,757.............. 3,551,060 3,551,060
4.300%, dated 12/30/2005, due
1/3/2006(3)
Repurchase price $4,737,009.............. 4,734,747 4,734,747
------------
21,543,096
------------
TOTAL INVESTMENTS PURCHASED WITH CASH
PROCEEDS FROM SECURITIES LENDING
(cost $21,543,142)..................... 21,543,142
------------
TOTAL INVESTMENTS -- 116.67%+
(COST $131,274,810).................... $150,310,131
============
</Table>
- ---------------
* -- Non-income producing security.
** -- Variable rate demand notes are considered short-term obligations and are
payable on demand. Interest rates change periodically on specified dates.
The rates listed are as of December 31, 2005.
+ -- Calculated as a percentage of net assets.
# -- Contingent value right (contingent upon profitability of company).
GDR -- Global Depository Receipts.
ADR -- American Depository Receipts.
CLB -- Callable Security.
(1) -- All or a portion of the shares have been committed as collateral for
written option contracts.
(2) -- This security or a portion of this security was out on loan at December
31, 2005. Total loaned securities had a market value of $17,953,002 at
December 31, 2005.
(3) -- See Repurchase Agreements disclosure in the Notes to Financial Statements
for the Kinetics Portfolios Trust.
See Notes to the Financial Statements.
96
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE KINETICS GOVERNMENT MONEY MARKET PORTFOLIO
Portfolio of Investments -- December 31, 2005
<Table>
<Caption>
PRINCIPAL
SHORT-TERM INVESTMENTS -- 100.14%+ AMOUNT VALUE
- ----------------------------------------------------------------------
US GOVERNMENT AGENCY ISSUES -- 100.14%+
Federal Home Loan Bank Discount Note
2.650%, due 1/3/2006....................... $1,073,000 $1,072,818
----------
TOTAL INVESTMENTS -- 100.14%+
(COST $1,072,818).......................... $1,072,818
==========
</Table>
- ---------------
+ -- Calculated as a percentage of net assets.
See Notes to the Financial Statements.
97
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE INTERNET PORTFOLIO
Portfolio of Options Written -- December 31, 2005
<Table>
<Caption>
CALL OPTIONS WRITTEN CONTRACTS VALUE
- -----------------------------------------------------------------------
Internet HOLDRs Trust
Expiration: January, 2007, Exercise Price:
$70.00.......................................... 5 $ 3,000
-------
TOTAL OPTIONS WRITTEN
(PREMIUMS RECEIVED $6,985)...................... $ 3,000
=======
</Table>
See Notes to the Financial Statements.
98
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
THE INTERNET EMERGING GROWTH PORTFOLIO
Portfolio of Options Written -- December 31, 2005
<Table>
<Caption>
CALL OPTIONS WRITTEN CONTRACTS VALUE
- -----------------------------------------------------------------------
Nasdaq -- 100 Index Tracking Stock
Expiration: January, 2007, Exercise Price:
$38.625...................................... 20 $10,000
Expiration: January, 2007, Exercise Price:
$39.625...................................... 20 8,600
-------
TOTAL OPTIONS WRITTEN
(PREMIUMS RECEIVED $22,479)..................... $18,600
=======
</Table>
See Notes to the Financial Statements.
99
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
STATEMENT OF ASSETS & LIABILITIES
December 31, 2005
<Table>
<Caption>
THE INTERNET
THE INTERNET EMERGING GROWTH
PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------
ASSETS:
Investments, at value(1) (3)......................... $164,351,449 $4,281,772
Cash................................................. 505,371 4,901
Receivable for contributed capital................... 17,689 2,600
Dividends and interest receivable.................... 773,825 33,464
Investment securities sold........................... 631,417 --
Other assets......................................... 8,840 470
------------ ----------
Total assets..................................... 166,288,591 4,323,207
------------ ----------
LIABILITIES:
Written options, at value(2)......................... 3,000 18,600
Payable to Custodian................................. -- --
Payable to Adviser................................... 163,144 4,190
Cash payable due to overdraft from securities
lending............................................ 1,916,195 44,149
Payable to Trustees and Officers..................... 8,276 214
Payables for collateral received for securities
loaned............................................. 14,811,999 341,270
Payable for withdrawn capital........................ 526,110 14,574
Accrued expenses and other liabilities............... 62,751 3,322
------------ ----------
Total liabilities................................ 17,491,475 426,319
------------ ----------
Net assets......................................... $148,797,116 $3,896,888
============ ==========
(1) Cost of investments................................ $152,906,144 $3,593,399
============ ==========
(2) Premiums received.................................. $ 6,985 $ 22,479
============ ==========
(3) Includes loaned securities with a market value
of................................................... $ 14,312,196 $ 330,145
============ ==========
</Table>
See Notes to the Financial Statements.
100
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
STATEMENT OF ASSETS & LIABILITIES -- (CONTINUED)
December 31, 2005
<Table>
<Caption>
THE
PARADIGM THE MEDICAL
PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------
ASSETS:
Investments, at value(1)(2).............................. $579,622,475 $15,514,163
Foreign currencies, at value(3).......................... 18,254 --
Cash..................................................... 691,580 25,596
Receivable for contributed capital....................... 5,041,361 13,174
Dividends and interest receivable........................ 511,915 11,941
Other assets............................................. 7,668 371
------------ -----------
Total assets......................................... 585,893,253 15,565,245
------------ -----------
LIABILITIES:
Payable to Adviser....................................... 562,406 15,651
Cash payable due to overdraft from securities lending.... 5,885,119 110,760
Payable to Trustees and Officers......................... 11,218 970
Payable for securities purchased......................... 3,380,528 --
Payables for collateral received for securities loaned... 45,491,401 856,159
Payable for withdrawn capital............................ 1,185,902 37,111
Accrued expenses and other liabilities................... 158,286 7,640
------------ -----------
Total liabilities.................................... 56,674,860 1,028,291
------------ -----------
Net assets............................................. $529,218,393 $14,536,954
============ ===========
(1) Cost of investments.................................... $516,038,069 $17,234,367
============ ===========
(2) Includes loaned securities with a market value of...... $ 43,618,328 $ 800,488
============ ===========
(3) Cost of foreign currencies............................. $ 19,461 $ --
============ ===========
</Table>
See Notes to the Financial Statements.
101
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
STATEMENT OF ASSETS & LIABILITIES -- (CONTINUED)
December 31, 2005
<Table>
<Caption>
THE KINETICS
GOVERNMENT
THE SMALL CAP MONEY
OPPORTUNITIES MARKET
PORTFOLIO PORTFOLIO
- ------------------------------------------------------------------------------------------
ASSETS:
Investments, at value(1)(2)............................... $150,310,131 $1,072,818
Cash...................................................... 142,545 1,016
Receivable for contributed capital........................ 968,686 45
Dividends and interest receivable......................... 255,313 --
Other assets.............................................. 2,494 3
------------ ----------
Total assets.......................................... 151,679,169 1,073,882
------------ ----------
LIABILITIES:
Payable to Adviser........................................ 135,735 461
Cash payable due to overdraft from securities lending..... 2,467,741 --
Payable to Trustees and Officers.......................... 3,048 65
Payable for securities purchased.......................... 998,229 --
Payables for collateral received for securities loaned.... 19,075,401 --
Payable for withdrawn capital............................. 120,916 30
Accrued expenses and other liabilities.................... 42,207 1,965
------------ ----------
Total liabilities..................................... 22,843,277 2,521
------------ ----------
Net assets.............................................. $128,835,892 $1,071,361
============ ==========
(1) Cost of investments..................................... $131,274,810 $1,072,818
============ ==========
(2) Includes loaned securities with a market value of....... $ 17,953,002 --
============ ==========
</Table>
See Notes to the Financial Statements.
102
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
STATEMENT OF OPERATIONS
For the Year Ended December 31, 2005
<Table>
<Caption>
THE INTERNET
THE INTERNET EMERGING GROWTH
PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends+............................................ $ 2,742,601 $169,444
Interest.............................................. 1,779,256 70,973
Income from securities lending........................ 163,284 3,603
------------ --------
Total investment income......................... 4,685,141 244,020
------------ --------
EXPENSES:
Investment advisory fees.............................. 2,089,645 50,562
Administration fees................................... 167,677 3,955
Professional fees..................................... 35,985 1,782
Fund accounting fees.................................. 46,094 3,710
Trustees and Officers' fees and expenses.............. 32,488 716
Custodian fees and expenses........................... 30,664 9,129
Other expenses........................................ 20,456 414
------------ --------
Total expenses.................................. 2,423,009 70,268
Expense reduction*.............................. (6,529) (606)
------------ --------
Net expenses.................................... 2,416,480 69,662
------------ --------
Net investment income................................... 2,268,661 174,358
------------ --------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on:
Investments and foreign currency.................... (7,612,388) (20,871)
Written option contracts expired or closed.......... 309,768 --
Net change in unrealized appreciation (depreciation)
of:
Investments and foreign currency.................... 1,680,496 (51,511)
Written option contracts............................ (297,218) 4,440
------------ --------
Net loss on investments................................. (5,919,342) (67,942)
------------ --------
Net increase (decrease) in net assets resulting from
operations............................................ $ (3,650,681) $106,416
============ ========
+ Net of Foreign Taxes Withheld of:..................... $ 20,087 $ 492
============ ========
</Table>
- ------------------
* See "Expense Reduction" in the Notes to the Financial Statements.
See Notes to the Financial Statements.
103
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
STATEMENT OF OPERATIONS -- (CONTINUED)
For the Year Ended December 31, 2005
<Table>
<Caption>
THE
PARADIGM THE MEDICAL
PORTFOLIO PORTFOLIO
- ---------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends+................................................ $ 3,104,742 $ 217,177
Interest.................................................. 1,327,159 2,115
Income from securities lending............................ 21,586 2,909
----------- ----------
Total investment income............................. 4,453,487 222,201
----------- ----------
EXPENSES:
Investment advisory fees.................................. 3,645,672 207,698
Administration fees....................................... 287,965 16,710
Professional fees......................................... 62,272 4,055
Fund accounting fees...................................... 74,383 8,159
Trustees' and Officers' fees and expenses................. 45,377 2,721
Custodian fees and expenses............................... 114,677 8,418
Other expenses............................................ 7,490 2,210
----------- ----------
Total expenses...................................... 4,237,836 249,971
Expense reduction*.................................. (146,440) (2,958)
----------- ----------
Net expenses........................................ 4,091,396 247,013
----------- ----------
Net investment income (loss).............................. 362,091 (24,812)
----------- ----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on:
Investments and foreign currency........................ 273,557 1,812,227
Written option contracts expired or closed.............. -- 83,698
Net change in unrealized appreciation (depreciation) of:
Investments and foreign currency........................ 37,043,510 (1,972,626)
Written option contracts................................ -- (80,072)
----------- ----------
Net gain (loss) on investments.............................. 37,317,067 (156,773)
----------- ----------
Net increase (decrease) in net assets resulting from
operations................................................ $37,679,158 $ (181,585)
=========== ==========
+ Net of Foreign Taxes Withheld of:......................... $ 191,067 $ 20,463
=========== ==========
</Table>
- ------------------
* See "Expense Reduction" in the Notes to Financial Statements.
See Notes to the Financial Statements.
104
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
STATEMENT OF OPERATIONS -- (CONTINUED)
For the Year Ended December 31, 2005
<Table>
<Caption>
THE KINETICS
THE SMALL CAP GOVERNMENT
OPPORTUNITIES MONEY
PORTFOLIO MARKET PORTFOLIO
- -----------------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividends+........................................... $ 1,056,061 $ --
Interest............................................. 410,917 33,901
Income from securities lending....................... 23,392 --
----------- -------
Total investment income........................ 1,490,370 33,901
----------- -------
EXPENSES:
Investment advisory fees............................. 960,589 5,746
Administration fees.................................. 76,939 1,172
Professional fees.................................... 17,609 22
Fund accounting fees................................. 31,231 405
Trustees and Officers' fees and expenses............. 12,842 204
Custodian fees and expenses.......................... 35,268 7,730
Other expenses....................................... 2,250 488
----------- -------
Total expenses................................. 1,136,728 15,767
Expense reduction*............................. (82,370) --
----------- -------
Net expenses................................... 1,054,358 15,767
----------- -------
Net investment income.................................. 436,012 18,134
----------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized loss on:
Investments and foreign currency................... (1,152,617) --
Net change in unrealized appreciation of:
Investments and foreign currency................... 10,833,455 --
----------- -------
Net gain on investments................................ 9,680,838 --
----------- -------
Net increase in net assets resulting from operations... $10,116,850 $18,134
=========== =======
+ Net of Foreign Taxes Withheld of:.................... $ 5,066 $ --
=========== =======
</Table>
- ------------------
* See "Expense Reduction" in the Notes to Financial Statements.
See Notes to the Financial Statements.
105
KINETICS MUTUAL FUNDS, INC. -- MASTER INVESTMENT PORTFOLIOS
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
THE INTERNET
THE INTERNET PORTFOLIO EMERGING GROWTH PORTFOLIO
--------------------------- ---------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
- ------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income........ $ 2,268,661 $ 2,804,751 $ 174,358 $ 121,997
Net realized gain (loss) on
sale of investments,
foreign currency and
written options............ (7,302,620) 33,312,086 (20,871) 128,613
Net change in unrealized
appreciation (depreciation)
of investments, foreign
currency and written
options.................... 1,383,278 (16,515,271) (47,071) 103,782
------------ ------------ ----------- -----------
Net increase (decrease)
in net assets resulting
from operations........ (3,650,681) 19,601,566 106,416 354,392
------------ ------------ ----------- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
BENEFICIAL INTEREST
TRANSACTIONS:
Contributions................ 195,954 26,839,732 646,599 1,049,978
Withdrawals.................. (50,457,661) (75,601,294) (1,449,775) (1,462,409)
------------ ------------ ----------- -----------
Net decrease in net
assets resulting from
beneficial interest
transactions........... (50,261,707) (48,761,562) (803,176) (412,431)
------------ ------------ ----------- -----------
Total increase (decrease) in
net assets................. (53,912,388) (29,159,996) (696,760) (58,039)
NET ASSETS:
Beginning of year............ 202,709,504 231,869,500 4,593,648 4,651,687
------------ ------------ ----------- -----------
End of year.................. $148,797,116 $202,709,504 $ 3,896,888 $ 4,593,648
============ ============ =========== ===========
</Table>
See Notes to the Financial Statements.
106
KINETICS MUTUAL FUNDS, INC. -- MASTER INVESTMENT PORTFOLIOS
STATEMENTS OF CHANGES IN NET ASSETS -- (CONTINUED)
<Table>
<Caption>
THE PARADIGM PORTFOLIO THE MEDICAL PORTFOLIO
--------------------------- ---------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
- ---------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income (loss).... $ 362,091 $ (70,003) $ (24,812) $ (72,336)
Net realized gain on sale of
investments, foreign currency
and written options........... 273,557 4,037,192 1,895,925 547,201
Net change in unrealized
appreciation (depreciation) of
investments, foreign currency
and written options........... 37,043,510 13,990,179 (2,052,698) 1,117,954
------------ ------------ ----------- -----------
Net increase (decrease) in
net assets resulting from
operations................ 37,679,158 17,957,368 (181,585) 1,592,819
------------ ------------ ----------- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM BENEFICIAL
INTEREST TRANSACTIONS:
Contributions................... 408,538,810 58,008,906 165,335 2,545,683
Withdrawals..................... (42,407,006) (23,413,796) (5,778,914) 8,320,935
------------ ------------ ----------- -----------
Net increase (decrease) in
net assets resulting from
beneficial interest
transactions.............. 366,131,804 34,595,110 (5,613,579) (5,775,252)
------------ ------------ ----------- -----------
Total increase (decrease) in net
assets........................ 403,810,962 52,552,478 (5,795,164) (4,182,433)
NET ASSETS:
Beginning of year............... 125,407,431 72,854,953 20,332,118 24,514,551
------------ ------------ ----------- -----------
End of year..................... $529,218,393 $125,407,431 $14,536,954 $20,332,118
============ ============ =========== ===========
</Table>
See Notes to the Financial Statements.
107
KINETICS MUTUAL FUNDS, INC. -- MASTER INVESTMENT PORTFOLIOS
STATEMENTS OF CHANGES IN NET ASSETS -- (CONTINUED)
<Table>
<Caption>
THE SMALL CAP THE KINETICS GOVERNMENT
OPPORTUNITIES PORTFOLIO MONEY MARKET PORTFOLIO
--------------------------- ---------------------------
FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
- ------------------------------------------------------------------------------------------
OPERATIONS:
Net investment income......... $ 436,012 $ 426,516 $ 18,134 $ 3,582
Net realized gain (loss) on
sale of investments, foreign
currency and written
options..................... (1,152,617) 1,993,213 0 0
Net change in unrealized
appreciation (depreciation)
of investments, foreign
currency and written
options..................... 10,833,455 2,368,917 0 0
------------ ------------ ---------- ------------
Net increase in net assets
resulting from
operations.............. 10,116,850 4,788,646 18,134 3,582
------------ ------------ ---------- ------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
BENEFICIAL INTEREST
TRANSACTIONS:
Contributions................. 91,619,332 27,678,584 383,201 22,191,434
Withdrawals................... (11,574,985) (19,582,069) (511,184) (23,938,932)
------------ ------------ ---------- ------------
Net increase (decrease) in
net assets resulting
from beneficial interest
transactions............ 80,044,347 8,096,515 (127,983) (1,747,498)
------------ ------------ ---------- ------------
Total increase (decrease) in
net assets.................. 90,161,197 12,885,161 (109,849) (1,743,916)
NET ASSETS:
Beginning of year............. 38,674,695 25,789,534 1,181,210 2,925,126
------------ ------------ ---------- ------------
End of year................... $128,835,892 $38,674,695 $1,071,361 $ 1,181,210
============ ============ ========== ============
</Table>
See Notes to the Financial Statements.
108
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS
December 31, 2005
1. ORGANIZATION
The Kinetics Portfolios Trust (the "Trust") was organized as a Delaware
Statutory Trust on March 14, 2000 and is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as an open-end management investment
company issuing its beneficial interests in series, each series representing a
distinct portfolio with its own investment objectives and policies. The series
currently authorized are The Internet Portfolio, The Internet Emerging Growth
Portfolio, The Paradigm Portfolio, The Medical Portfolio, The Small Cap
Opportunities Portfolio, and The Kinetics Government Money Market Portfolio (the
"Master Portfolios"). Pursuant to the 1940 Act, the Master Portfolios, with the
exception of The Kinetics Government Money Market Portfolio, are
"non-diversified" series of the Trust. Each of the Master Portfolios commenced
operations on April 28, 2000.
Each Master Portfolio is a Master Investment Portfolio in a master-feeder fund
structure. Each Master Portfolio has multiple feeder funds invested in the
Master Portfolio. By contributing assets to the Master Portfolio, the feeder
funds receive a beneficial interest in the Master Portfolio. The Master
Portfolio then invests the contributed assets in portfolio securities and
allocates income, gains (losses) and expenses to the feeder funds based on the
funds' proportionate interest in the Master Portfolio.
Each of the Master Portfolios, with the exception of The Kinetics Government
Money Market Portfolio, seeks to provide investors with long-term capital
growth. The Internet Portfolio invests primarily in the equity securities of
U.S. and foreign companies engaged in the Internet and Internet-related
activities. The Internet Emerging Growth Portfolio invests primarily in the
equity securities of small and medium capitalization U.S. and foreign growth
emerging companies engaged in the Internet and Internet-related activities. The
Paradigm Portfolio invests primarily in the equity securities of U.S. and
foreign companies that the investment adviser believes are undervalued and that
have high returns on equity and are well positioned to reduce their costs,
extend the reach of their distribution channels and experience significant
growth in revenues. The Medical Portfolio invests primarily in the equity
securities of U.S. and foreign companies engaged in medical research,
pharmaceutical treatments and related medical technology with a focus on
companies engaged in cancer research and drug development. The Small Cap
Opportunities Portfolio invests primarily in the equity securities of U.S. and
foreign small capitalization companies that provide attractive valuation
109
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2005
opportunities due to special situations such as lack of institutional ownership,
lack of significant analyst coverage or companies with sound fundamentals that
have experienced a short-term earnings shortfall. The Kinetics Government Money
Market Portfolio seeks to provide investors with current income consistent with
the preservation of capital and maintenance of liquidity by investing in money
market instruments issued by the U.S. Government, its agencies or
instrumentalities.
2. SIGNIFICANT ACCOUNTING POLICIES
SECURITY VALUATION
Master Portfolio securities (other than Government) that are listed on a U.S.
securities exchange for which market quotations are readily available are valued
at the last quoted sale price on the day the valuation is made. Price
information on listed securities is taken from the exchange where the security
is primarily traded. All equity securities that are traded using the National
Association of Securities Dealers' Automated Quotation System ("NASDAQ") are
valued using the NASDAQ Official Closing Price ("NOCP"). In the event market
quotations are not readily available or if events occur that may materially
affect the value of a particular security between the time trading ends on a
particular security and the close of regular trading on the NYSE, "fair value"
will be determined. Purchased options, futures, unlisted U.S. securities and
listed U.S. securities not traded on the valuation date for which market
quotations are readily available are valued at the mean of the most recent bid
and asked prices. Fixed-income securities (other than obligations having a
maturity of 60 days or less) are normally valued on the basis of quotes obtained
from pricing services, which take into account appropriate factors such as
institutional sized trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data. Investments in The Kinetics Government Money Market Portfolio and
instruments purchased with remaining maturities of 60 days or less are valued at
amortized cost, which approximates fair value. Other assets and securities for
which no quotations are readily available (including restricted securities) will
be valued in good faith at fair value using methods determined by the Board of
Trustees of the Master Portfolios. At December 31, 2005, there were no fair
valued securities held by the Master Portfolios.
110
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2005
REPURCHASE AGREEMENTS
Each Master Portfolio may enter into repurchase agreements with banks that are
members of the Federal Reserve System or securities dealers who are members of a
national securities exchange or are primary dealers in U.S. Government
Securities. In connection with transactions in repurchase agreements, it is the
Trust's policy that the Master Portfolio receive, as collateral, securities
whose market value, including accrued interest, at all times will be at least
equal to 100% of the amount invested by the Master Portfolio in each repurchase
agreement. If the seller defaults, and the value of the collateral declines,
realization of the collateral by the Master Portfolio may be delayed or limited.
At December 31, 2005 the Master Portfolios, with the exception of the Kinetics
Government Money Market Portfolio, received, as collateral, securities with a
total market value of $95,206,593. The detailed list of the securities received
as collateral is listed below.
CS First Boston Repurchase Agreement, 4.250%, due 1/3/2006, par value
$12,000,000
Collateralized by:
<Table>
<Caption>
DESCRIPTION FAIR VALUE
----------- -----------
Government National Mortgage Association, Series 2005-17,
Class SL, 2.330%, 7/20/2034............................... $ 5,511,944
Government National Mortgage Association, Series 2005-77,
Class CS, 2.430%, 7/20/2032............................... 2,825,814
FHLMC, Series 2906, Class IB, 0.000%, 4/15/2033............. 1,254,777
FHLMC, Series 2989, Class BF, 5.620%, 1/15/2034............. 2,647,657
-----------
Total................................................... $12,240,192
===========
</Table>
CS First Boston Repurchase Agreement, 4.300%, due 1/3/2006, par value $5,000,000
Collateralized by:
<Table>
<Caption>
DESCRIPTION FAIR VALUE
----------- ----------
CS First Boston Mortgage Securities Corp., Series 2005-C5,
Class AM, 5.100%, 8/15/2038............................... $5,253,595
----------
Total................................................... $5,253,595
==========
</Table>
CS First Boston Repurchase Agreement, 4.300%, due 1/3/2006, par value $4,000,000
111
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2005
Collateralized by:
<Table>
<Caption>
DESCRIPTION FAIR VALUE
----------- ----------
CS First Boston Mortgage Securities Corp., Series 2005-11,
Class 5A3, 5.250%, 12/25/2020............................. $4,203,992
----------
Total................................................... $4,203,992
==========
</Table>
CS First Boston Repurchase Agreement, 4.300%, due 1/3/2006, par value
$35,000,000
Collateralized by:
<Table>
<Caption>
DESCRIPTION FAIR VALUE
----------- -----------
Armor MCP, Series 2005-1A, Class B1, 4.850%, 12/10/2037..... $ 7,495,000
Banc of America Mortgage Securities, Series 2004-G, Class
2A3, 4.232%, 8/25/2034.................................... 754,913
CS First Boston Mortgage Securities Corp., Series 2005-2,
Class CX, 5.000%, 2/25/2020............................... 245,422
CS First Boston Mortgage Securities Corp., Series 2005-3,
Class CX, 5.500%, 7/25/2020............................... 913,806
CS First Boston Mortgage Securities Corp., Series 2005-11,
Class 5A4, 5.250%, 12/25/2020............................. 2,495,706
CS First Boston Mortgage Securities Corp., Series 2005-11,
Class 6A7, 6.000%, 12/25/2035............................. 1,024,950
CS First Boston Mortgage Securities Corp., Series 2005-11,
Class 7A2, 6.000%, 12/25/2035............................. 6,933,814
CS First Boston Mortgage Securities Corp., Series 2005-11,
Class 8A7, 0.000%, 12/25/2035............................. 981,167
CS First Boston Mortgage Securities Corp., Series 2005-11,
Class 8A8, 5.500%, 12/25/2035............................. 3,165,917
CS First Boston Mortgage Securities Corp., Series 2005-11,
Class 8A10, 5.500%, 12/25/2035............................ 4,594,573
CS First Boston Mortgage Securities Corp., Series 2005-11,
Class AX, 5.500%, 12/25/2035.............................. 873,388
CS First Boston Mortgage Securities Corp., Series 2005-11,
Class DX, 6.000%, 12/25/2035.............................. 2,221,236
CS First Boston Mortgage Securities Corp., Series 2005-11,
Class 5X, 5.250%, 12/25/2020.............................. 538,158
CS First Boston Mortgage Securities Corp., Series 2005-11,
Class AP, 0.000%, 12/25/2035.............................. 2,385,532
CS First Boston Mortgage Securities Corp., Series 2004-8,
Class 4X, 5.500%, 12/25/2034.............................. 1,080,349
Wells Fargo Mortgage Backed Securities Trust, Series
2005-AR15, Class 1A9, 5.132%, 9/25/2035................... 1,049,131
-----------
Total................................................... $36,753,062
===========
</Table>
CS First Boston Repurchase Agreement, 4.300%, due 1/3/2006, par value
$15,000,000
112
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2005
Collateralized by:
<Table>
<Caption>
DESCRIPTION FAIR VALUE
----------- -----------
CMO 144A CS First Boston Mortgage Securities Corp., Pool
Number 225GH6, 0.000%, 8/25/2033.......................... $ 4,907,666
CS First Boston Mortgage Securities Corp., Series 2005-11,
Class 5A3, 5.250%, 12/25/2020............................. 6,636,337
Structured Adjustable Rate Mortgage Loan Trust, Series
2004-8, Class 5A1, 4.702%, 7/25/2034...................... 1,376,631
Wells Fargo Mortgage Backed Securities Trust, Series
2005-16, Class A5, 8.395%, 1/25/2036...................... 2,831,398
-----------
Total................................................... $15,752,032
===========
</Table>
CS First Boston Repurchase Agreement, 4.300%, due 1/3/2006, par value
$20,000,000
Collateralized by:
<Table>
<Caption>
DESCRIPTION FAIR VALUE
----------- -----------
CS First Boston Mortgage Securities Corp., Series 2005-11,
Class 6A5, 6.000%, 12/25/2035............................. $21,003,720
-----------
Total................................................... $21,003,720
===========
</Table>
WRITTEN OPTION ACCOUNTING
The Master Portfolios may write (sell) call or put options for trading or
hedging purposes. When a Master Portfolio writes an option, an amount equal to
the premium received by the Master Portfolio is included in the Statement of
Assets and Liabilities as an asset and an equivalent liability. The amount of
the liability is subsequently marked-to-market to reflect the current value of
the option written. By writing the option, the Master Portfolio may become
obligated during the term of the option to deliver or purchase the securities
underlying the option at the exercise price if the option is exercised. Option
contracts are valued at the average of the current bid and asked price reported
on the day of the valuation. When an option expires on its stipulated expiration
date or the Master Portfolio enters into a closing purchase transaction, the
Master Portfolio realizes a gain or loss if the cost of the closing transaction
differs from the premium received when the option was sold, without regard to
any unrealized gain or loss on the underlying security, and the liability
related to such option is eliminated. When an option is exercised, the premium
originally received decreases the cost basis of the underlying security (or
increases the proceeds on the security sold short) and the Master Portfolio
realizes a gain or loss from the sale of the security (or closing of the short
sale). As collateral for uncovered written options, the Master Portfolio is
required under the 1940 Act to maintain
113
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2005
assets consisting of cash, cash equivalents or liquid securities. This
collateral is required to be adjusted daily to reflect the market value of the
purchase obligation for put options or the market value of the instrument
underlying the contract for call options.
FOREIGN CURRENCY TRANSLATIONS
The books and records of the Master Portfolios are maintained in U.S. dollars.
For the Master Portfolios, foreign currency transactions are translated into
U.S. dollars on the following basis: (i) market value of investment securities
and other assets and liabilities are translated at the exchange rate of such
currencies against the U.S. dollar, as provided by an approved pricing service,
and (ii) purchases and sales of investment securities, dividend and interest
income and certain expenses at the rates of exchange prevailing on the
respective dates of such transactions. The Master Portfolios do not isolate and
treat as ordinary income that portion of the results of operations arising as a
result of changes in the exchange rate from the fluctuations arising from
changes in the market prices of securities held during the period. However, for
federal income tax purposes, the Master Portfolios do isolate and treat as
ordinary income the effect of changes in foreign exchange rates arising from
actual foreign currency transactions and the effect of changes in foreign
exchange rates arising between trade date and settlement date.
RESTRICTED SECURITIES
The Master Portfolios may invest in restricted securities. These securities are
valued by the Master Portfolios after giving due consideration to pertinent
factors including recent private sales, market conditions and the issuer's
financial performance. The Master Portfolios have no right to require
registration of unregistered securities. At December 31, 2005, the Master
Portfolios did not hold any investment securities which were determined to be
illiquid pursuant to the guidelines adopted by the Board of Trustees.
WHEN-ISSUED SECURITIES
The Master Portfolios may purchase securities on a when-issued or delayed
delivery basis. Although the purchase amounts of these securities are
established at the time the purchaser enters into the agreement, these
securities may be delivered and paid for at a future date. The Master Portfolios
record purchases of when-issued securities and reflect the values of such
securities in determining net asset value in the same manner as other portfolio
securities. The Master Portfolios maintain at all times cash or other liquid
assets in an amount at least equal to the amount of outstanding commitments for
when-issued securities.
114
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2005
EXPENSE REDUCTION
The Adviser has directed a certain amount of the Master Portfolios' trades to
brokers believed to provide the best execution and, as a result, it has
generated directed brokerage credits to reduce certain service provider fees.
For the year ended December 31, 2005, the total expenses of The Internet
Portfolio, The Internet Emerging Growth Portfolio, The Paradigm Portfolio, The
Medical Portfolio and The Small Cap Opportunities Portfolio were reduced by
$6,529, $606, $146,440, $2,958 and $82,370, respectively, by using directed
brokerage credits. In accordance with the requirements of the Securities and
Exchange Commission, such amounts are required to be shown as an expense and
have been included in each of the service provider fees in the Statement of
Operations.
SECURITIES LENDING
Each Master Portfolio may lend its portfolio securities to broker-dealers by
entering directly into lending arrangements with such broker-dealers or
indirectly through repurchase agreements with respect to no more than 33 1/3% of
the total assets of each Portfolio (including any collateral posted) or 50% of
the total assets of each Portfolio (excluding any collateral posted). Securities
lending and repurchase transactions will be fully collateralized at all times
with cash and/or short-term debt obligations. The Master Portfolios receive
interest on the collateral received as well as a fee for the securities loaned.
EXPENSE ALLOCATION
Common expenses incurred by the Master Portfolios are allocated among the Master
Portfolios (i) based upon relative average net assets, (ii) as incurred on a
specific identification basis, or (iii) equally among the Master Portfolios,
depending on the nature of the expenditure. All expenses incurred by the Master
Portfolios are allocated to the feeder funds daily based on their proportionate
interest in the Master Portfolio.
FEDERAL INCOME TAXES
Each Master Portfolio will be treated as a partnership for federal income tax
purposes. As such, each investor in the Portfolio will be subject to taxation on
its share of the Portfolio's ordinary income and capital gains. It is intended
that the Portfolio's assets will be managed so an investor in the Portfolio can
satisfy the requirements of subchapter M of the Internal Revenue Code.
115
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2005
USE OF ESTIMATES
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 in the financial
statements. Actual results could differ from those estimates.
OTHER
Realized gains and losses on the sale of investments are calculated on the
identified cost basis. Dividend income is recorded on the ex-dividend date and
interest income is recognized on the accrual basis.
3. INVESTMENT ADVISER
The Trust has entered into Investment Advisory Agreements (the "Agreements")
with Kinetics Asset Management, Inc. (the "Adviser"), with whom certain officers
and trustees of the Trust are affiliated, to furnish investment advisory
services to the Master Portfolios. Under the terms of the Agreements, the Master
Portfolios compensate the Adviser for its management services at the annual rate
of 1.25% of each Master Portfolio's average daily net assets, except for The
Kinetics Government Money Market Portfolio, which compensates the Adviser at a
rate of 0.50% of the Master Portfolio's average daily net assets. For the year
ended December 31, 2005, The Internet Portfolio, The Internet Emerging Growth
Portfolio, The Paradigm Portfolio, The Medical Portfolio, The Small Cap
Opportunities Portfolio, and The Kinetics Government Money Market Portfolio
incurred expenses of $2,089,645, $50,562, $3,645,672, $207,698, $960,589 and
$5,746, respectively, pursuant to the Investment Advisory Agreements.
KBD Securities, LLC, an affiliate of the Adviser, received $339,149 in brokerage
fee commissions with respect to the Portfolios' portfolio transactions, which
constituted 34% of the Portfolios' brokerage commissions during the period.
<Table>
<Caption>
PORTFOLIO COMMISSIONS
--------- -----------
The Internet Portfolio...................................... $ 19,320
The Internet Emerging Growth Portfolio...................... $ 855
The Paradigm Portfolio...................................... $210,699
The Medical Portfolio....................................... $ 2,492
The Small Cap Opportunities Portfolio....................... $105,783
</Table>
For the year ended December 31, 2005, the Trust was allocated $24,000 for the
services of the Chief Compliance Officer employed by the Adviser.
116
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2005
4. SECURITIES TRANSACTIONS
Purchases and sales of investment securities, other than short-term investments,
for the year ended December 31, 2005 were as follows:
<Table>
<Caption>
PURCHASES SALES
------------------------- ------------------------
U.S. U.S.
GOVERNMENT OTHER GOVERNMENT OTHER
---------- ------------ ---------- -----------
The Internet Portfolio...... $-- $ 18,225,130 $-- $36,402,773
The Internet Emerging Growth
Portfolio................. -- 403,836 -- 68,206
The Paradigm Portfolio...... -- 328,039,996 -- 13,215,961
The Medical Portfolio....... -- 306,441 -- 6,088,944
The Small Cap Opportunities
Portfolio................. -- 70,152,889 -- 2,617,339
</Table>
As of December 31, 2005, unrealized appreciation (depreciation) on investment
securities for federal income tax purposes was as follows:
<Table>
<Caption>
NET
APPRECIATION APPRECIATED DEPRECIATED
(DEPRECIATION) SECURITIES SECURITIES
-------------- ----------- ------------
The Internet Portfolio................. $ 7,719,056 $42,142,745 $(34,423,689)
The Internet Emerging Growth
Portfolio............................ 620,515 1,329,184 (708,669)
The Paradigm Portfolio................. 60,709,037 76,735,985 (16,025,948)
The Medical Portfolio.................. (1,720,204) 2,919,292 (4,639,496)
The Small Cap Opportunities
Portfolio............................ 18,705,211 22,887,629 4,182,418
</Table>
At December 31, 2005, the cost of investments for federal income tax purposes
was $156,632,393, $3,661,257, $518,913,438, $17,234,367 and $131,604,920 for The
Internet Portfolio, The Internet Emerging Growth Portfolio, The Paradigm
Portfolio, The Medical Portfolio, and The Small Cap Opportunities Portfolio,
respectively.
For the year ended December 31, 2005, the Master Portfolios wrote the following
options:
<Table>
<Caption>
NUMBER PREMIUM
OF CONTRACTS AMOUNT
------------ ---------
THE INTERNET PORTFOLIO
- -----------------------------------------------------
Outstanding at the Beginning of Year................. 1,145 $ 316,753
Options Expired...................................... (1,140) (309,768)
------ ---------
Outstanding at the End of Year....................... 5 $ 6,985
====== =========
</Table>
117
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2005
<Table>
<Caption>
NUMBER PREMIUM
OF CONTRACTS AMOUNT
------------ ---------
THE INTERNET EMERGING GROWTH PORTFOLIO
- -----------------------------------------------------
Outstanding at the Beginning of Year................. 20 $ 11,540
Options Written...................................... 20 10,939
------ ---------
Outstanding at the End of Year....................... 40 $ 22,479
====== =========
THE MEDICAL PORTFOLIO
- -----------------------------------------------------
Outstanding at the Beginning of Year................. 150 $ 83,697
Options Expired...................................... (150) (83,697)
------ ---------
Outstanding at the End of Year....................... -- $ --
====== =========
</Table>
5. PORTFOLIO SECURITIES LOANED
As of December 31, 2005, the Master Portfolios had loaned securities that were
collateralized by cash. The cash collateral is invested by the custodian in a
money market pooled account approved by the Adviser. Although risk is mitigated
by the collateral, the Master Portfolio could experience a delay in recovering
its securities and possible loss of income or value if the borrower fails to
return them. The Master Portfolio receives interest on the collateral received
as well as a fee for the securities loaned. The Master Portfolios will continue
to receive dividends and interest on all securities loaned. Gain or loss in the
fair value of the securities loaned that may occur during the term of the loan
will be accounted for by the Master Portfolios. The value of the securities on
loan and the value of the related collateral at December 31, 2005, were as
follows:
<Table>
<Caption>
SECURITIES COLLATERAL
----------- -----------
The Internet Portfolio.................... $14,312,196 $14,811,999
The Internet Emerging Growth Portfolio.... 330,145 341,270
The Paradigm Portfolio.................... 43,618,328 45,491,401
The Medical Portfolio..................... 800,488 856,159
The Small Cap Opportunities Portfolio..... 17,953,002 19,075,401
</Table>
118
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2005
6. SELECTED FINANCIAL HIGHLIGHTS
Financial highlights for the Master Portfolios were as follows:
<Table>
<Caption>
THE INTERNET PORTFOLIO
------------------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
Ratio of expenses to average net assets:
Before expense reduction................. 1.45% 1.50% 1.51% 1.51% 1.44%
After expense reduction.................. 1.44% 1.44% 1.51% 1.51% 1.44%
Ratio of net investment income (loss) to
average net assets:
Before expense reduction................. 1.35% 1.30% 0.99% 0.50% 0.32%
After expense reduction.................. 1.36% 1.36% 0.99% 0.50% 0.32%
Portfolio turnover rate................... 12% 42% 69% 41% 44%
</Table>
<Table>
<Caption>
THE INTERNET EMERGING GROWTH PORTFOLIO
------------------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
Ratio of expenses to average net assets:
Before expense reduction................. 1.73% 1.78% 1.84% 1.83% 2.30%
After expense reduction.................. 1.72% 1.73% 1.84% 1.83% 2.30%
Ratio of net investment income (loss) to
average net assets:
Before expense reduction................. 4.30% 2.77% 1.94% (1.07%) (0.22%)
After expense reduction.................. 4.31% 2.82% 1.94% (1.07%) (0.22%)
Portfolio turnover rate................... 2% 18% 20% 27% 24%
</Table>
<Table>
<Caption>
THE PARADIGM PORTFOLIO
------------------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
Ratio of expenses to average net assets:
Before expense reduction................. 1.45% 1.52% 1.56% 1.64% 2.27%
After expense reduction.................. 1.40% 1.42% 1.46% 1.64% 2.27%
Ratio of net investment income (loss) to
average net assets:
Before expense reduction................. 0.07% (0.18%) 1.28% (0.27%) (0.69%)
After expense reduction.................. 0.12% (0.08%) 1.38% (0.27%) (0.69%)
Portfolio turnover rate................... 5% 52% 20% 40% 41%
</Table>
119
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2005
<Table>
<Caption>
THE MEDICAL PORTFOLIO
------------------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
Ratio of expenses to average net assets:
Before expense reduction................. 1.50% 1.58% 1.53% 1.53% 1.51%
After expense reduction.................. 1.49% 1.57% 1.53% 1.53% 1.51%
Ratio of net investment loss to average
net assets:
Before expense reduction................. (0.17%) (0.33%) (0.56%) (0.47%) (0.39%)
After expense reduction.................. (0.16%) (0.32%) (0.56%) (0.47%) (0.39%)
Portfolio turnover rate................... 2% 13% 16% 9% 6%
</Table>
<Table>
<Caption>
THE SMALL CAP OPPORTUNITIES PORTFOLIO
------------------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
Ratio of expenses to average net
assets:
Before expense reduction.............. 1.48% 1.55% 1.67% 1.66% 2.35%
After expense reduction............... 1.37% 1.21% 1.49% 1.66% 2.35%
Ratio of net investment income (loss)
to average net assets:
Before expense reduction.............. 0.46% 1.51% 2.88% (0.29%) (0.99%)
After expense reduction............... 0.57% 1.85% 3.06% (0.29%) (0.99%)
Portfolio turnover rate................ 4% 96% 180% 200% 181%
</Table>
<Table>
<Caption>
THE KINETICS GOVERNMENT
MONEY MARKET PORTFOLIO
------------------------------------------------------------------------
FOR THE FOR THE FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2003 2002 2001
------------ ------------ ------------ ------------ ------------
Ratio of expenses to average net
assets:............................... 1.37% 0.83% 0.79% 0.75% 0.79%
Ratio of net investment income to
average net assets:................... 1.58% 0.18% 0.15% 0.67% 2.70%
Portfolio turnover rate................ N/A N/A N/A N/A N/A
</Table>
7. INFORMATION ABOUT PROXY VOTING (UNAUDITED)
Information regarding how the Kinetics Portfolios Trust vote proxies relating to
portfolio securities is available without charge, upon request, by calling
toll-free at (800) 930-3828 or by accessing the Funds' website at
www.kineticsfunds.com and the SEC's website at www.sec.gov. Information
regarding how the Portfolios voted proxies relating to portfolio securities
during the twelve months ending June 30, 2005 is available without charge, upon
request, by calling toll-free at (800) 930-3828 or by accessing the SEC's
website at www.sec.gov.
120
KINETICS PORTFOLIOS TRUST -- MASTER INVESTMENT PORTFOLIOS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2005
8. INFORMATION ABOUT THE PORTFOLIO HOLDINGS (UNAUDITED)
The Kinetics Portfolios Trust file their complete schedule of portfolio holdings
for their first and third fiscal quarters with the SEC on Form N-Q. The
Portfolios' Form N-Q is available without charge, upon request, by calling
toll-free at (800) 930-3828. Furthermore, you can obtain the Form N-Q on the
SEC's website at www.sec.gov. The Form N-Q may be reviewed and copied at the
SEC's Public Reference Room in Washington, D.C. Information on the operation of
the Public Reference Room may be obtained by calling 1-(800)-SEC-0330.
121
KINETICS PORTFOLIOS TRUST
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
To the Shareholders of and Board of Trustees
Kinetics Portfolios Trust
Sleepy Hollow, New York
We have audited the accompanying statements of assets and liabilities, including
the schedule of investments, of The Internet Portfolio, The Internet Emerging
Growth Portfolio, The Paradigm Portfolio, the Medical Portfolio, the Small Cap
Opportunities Portfolio and The Kinetics Government Money Market Portfolio, each
a series of shares of Kinetics Portfolios Trust (the "Trust"), as of December
31, 2005, and the related statements of operations for the year then ended,
statements of changes in net assets and financial highlights for each of the two
years in the period then ended. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit. The financial highlights for each of the three years in the
period ended December 31, 2003 were audited by other auditors whose report dated
February 20, 2004 expressed an unqualified opinion on the financial highlights.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Trust's internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Trust's internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 2005, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly in all material respects, the financial position of the
above mentioned Portfolios as of December 31, 2005, the results of their
operations for the year then ended, the changes in their net assets and the
financial highlights for each of the two years in the period then ended, in
conformity with accounting principles generally accepted in the United States of
America.
TAIT, WELLER & BAKER LLP
Philadelphia, Pennsylvania
February 03, 2006
122
KINETICS MUTUAL FUNDS, INC.
MANAGEMENT OF THE FUNDS AND THE PORTFOLIOS
The management and affairs of the Funds and the Portfolios are supervised by the
Board of Directors of the Company and the Board of Trustees of the Trust,
respectively. Each Board consists of the same eight individuals, five of whom
are not "interested persons" of the Company or the Trust as that term is defined
in the Investment Company Act of 1940, as amended (the "1940 Act"). The
Directors are fiduciaries for the Funds' shareholders and are governed by the
laws of the State of Maryland in this regard. The Trustees are fiduciaries for
the Portfolios' shareholders and are governed by the laws of the State of
Delaware in this regard.
Each Board establishes policies for the operation of the Funds and the
Portfolios and appoints the officers who conduct the daily business of the Funds
and the Portfolios. Directors/Trustees of the Company and the Trust are listed
below with their addresses, present positions with the Company and Trust, length
of time served, principal occupations over at least the last five years, number
of Fund and Portfolios overseen and any other Directorships held. The SAI
includes additional information about the Funds' officers and directors and is
available, without charge, upon request by calling (800) 930-3828.
123
KINETICS MUTUAL FUNDS, INC.
MANAGEMENT OF THE FUNDS AND THE PORTFOLIOS -- (CONTINUED)
BOARD OF DIRECTORS/BOARD OF TRUSTEES
INDEPENDENT DIRECTORS/TRUSTEES
<Table>
<Caption>
NUMBER OF
PORTFOLIOS/FUNDS IN
TERM OF OFFICE/ FUND COMPLEX**
POSITION(S) WITH THE LENGTH OF OVERSEEN BY
NAME AND ADDRESS AGE COMPANY AND TRUST TIME SERVED TRUSTEE/DIRECTOR
- ------------------------------------------------------------------------------------------------
John J. Sullivan ............ 75 Independent Indefinite/ 12
c/o Kinetics Asset Director/Trustee 6 years
Management, Inc.
16 New Broadway
Sleepy Hollow,
New York, 10591
Steven T. Russell ........... 42 Independent Indefinite/ 12
c/o Kinetics Asset Director/Trustee 6 years
Management, Inc.
16 New Broadway
Sleepy Hollow,
New York, 10591
Douglas Cohen, C.P.A. ....... 45 Independent Indefinite/ 12
c/o Kinetics Asset Director/Trustee 6 years
Management, Inc.
16 New Broadway
Sleepy Hollow,
New York, 10591
William J. Graham ........... 44 Independent Indefinite/ 12
c/o Kinetics Asset Director/Trustee 6 years
Management, Inc.
16 New Broadway
Sleepy Hollow,
New York, 10591
Joseph E. Breslin ........... 52 Independent Indefinite/ 12
c/o Kinetics Asset Director/Trustee 6 years
Management, Inc.
16 New Broadway
Sleepy Hollow,
New York, 10591
</Table>
124
<Table>
<Caption>
PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS OTHER DIRECTORSHIPS HELD BY TRUSTEE/DIRECTOR
- --------------------------------------------------------------------------------------------------
Retired; Senior Advisor, Long Term Credit Bank Director, The Kinetics Funds ((2003 to
of Japan, Ltd.; Executive Vice President, Long Present)
Term Credit Bank Trust Company (1987-1999).
Attorney and Counselor at Law, Partner Law Firm N/A
of Russell and Fig (since September 2002);
Steven Russell Law Firm (1994 to 2002);
Professor of Business Law, Suffolk County
Community College (1997 to Present).
Sunrise Credit Services, Inc. (2005 to Director, The Kinetics Funds (2003 to
Present); Wagner & Zwerman, LLP Certified Present)
Public Accountant (1997 to 2005); Leon D.
Alpern & Co. (1985 to 1997).
Attorney, William J. Graham, PC (2001 to N/A
Present); Bracken & Margolin, LLP (1997 to
2001); Gabor & Gabor (1995 to 1997).
Chief Compliance Officer, Aladdin Capital Director of Andrx Corporation; Director, AIP
Management; Independent Consultant Whitehall Alternative Strategies Fund
Asset Management (May 2003 to 2004); Senior
Managing Director, Marketing & Sales, Whitehall
Asset Management, a financial services company
(1999 to May 2003); President, J.E. Breslin &
Co., an investment management consulting firm
(1994 to 1999).
</Table>
125
KINETICS MUTUAL FUNDS, INC.
MANAGEMENT OF THE FUNDS AND THE PORTFOLIOS -- (CONTINUED)
BOARD OF DIRECTORS/BOARD OF TRUSTEES (CONTINUED)
INTERESTED DIRECTORS/TRUSTEES AND OFFICERS
<Table>
<Caption>
NUMBER OF
PORTFOLIOS/FUNDS IN
TERM OF OFFICE/ FUND COMPLEX**
POSITION(S) WITH THE LENGTH OF OVERSEEN BY
NAME AND ADDRESS AGE COMPANY AND TRUST TIME SERVED TRUSTEE/DIRECTOR
- ----------------------------------------------------------------------------------------------
Murray Stahl* ............. 53 Director/Trustee, Indefinite/ 12
c/o Kinetics Asset Secretary 6 years
Management, Inc.
16 New Broadway
Sleepy Hollow,
New York, 10591
Peter B. Doyle* ........... 44 Director/Trustee, Indefinite/ 12
c/o Kinetics Asset President and 4 years
Management, Inc. Chairman of the
16 New Broadway Board
Sleepy Hollow,
New York, 10591
Leonid Polyakov* .......... 47 Director/Trustee Indefinite/ 12
c/o Kinetics Asset and Treasurer 4 years
Management, Inc.
16 New Broadway
Sleepy Hollow,
New York, 10591
</Table>
* Directors/Trustees who are considered "interested persons" as defined in
Section 2(a)(19) of the 1940 Act because of their association with the
Adviser.
126
<Table>
<Caption>
PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS OTHER DIRECTORSHIPS HELD BY TRUSTEE/DIRECTOR
- --------------------------------------------------------------------------------------------------
Chairman, The FRMO Corp. (2001 to Present) Chairman of Horizon Asset Management;
(provides consulting services to private Chairman of FRMO Corporation
investment funds and research services with
respect to marketable securities); Chairman,
Horizon Asset Management, an investment adviser
(1994 to Present); Director of Research,
Kinetics Asset Management and Kinetics Mutual
Funds, Inc.
President, Kinetics Asset Management and Director, The Kinetics Funds (2001 to
Kinetics Fund Distributors, Inc. (2002 to Present)
Present); Director, Kinetics Advisers, LLC
(2000 to Present); Director and Officer,
Horizon Asset Management, Inc. (1994 to
Present); Chief Investment Strategist, Kinetics
Asset Management and Kinetics Mutual Funds,
Inc. (1998 to Present).
CFO, Kinetics Asset Management, Inc. (2000 to Director, The Kinetics Funds (2001 to
Present); President, Kinetics Funds Present)
Distributor, Inc. (2002 to Present); Director,
Kinetics Advisers, LLC (2000 to Present); CFO,
KBD Securities, LLC (2000 to Present); Vice-
President, JP Morgan (1997 to 2000).
</Table>
** The term "fund complex" refers to the Company and the Trust, which hold
themselves out as related for investment purposes.
127
KINETICS MUTUAL FUNDS, INC. & KINETICS PORTFOLIOS TRUST
PRIVACY POLICY
We collect the following nonpublic personal information about you:
- Information we receive from you on or in applications or other forms,
correspondence, or conversations, including, but not limited to, your name,
address, phone number, social security number, assets, income and date of
birth; and
- Information about your transactions with us, our affiliates, or others,
including, but not limited to, your account number and balance, payments
history, parties to transactions, cost basis information, and other
financial information.
We do not disclose any nonpublic personal information about our current or
former shareholders to nonaffiliated third parties, except as permitted by law.
For example, we are permitted by law to disclose all of the information we
collect, as described above, to our transfer agent to process your transactions.
Furthermore, we restrict access to your nonpublic personal information to those
persons who require such information to provide products or services to you. We
maintain physical, electronic, and procedural safeguards that comply with
federal standards to guard your nonpublic personal information.
In the event that you hold shares of the fund(s) through a financial
intermediary, including, but not limited to, a broker-dealer, bank, or trust
company, the privacy policy of your financial intermediary would govern how your
nonpublic personal information would be shared with nonaffiliated third parties.
Kinetics Mutual
Funds, Inc.
16 New Broadway
Sleepy Hollow, NY 10591
INVESTMENT ADVISER AND
SHAREHOLDER SERVICING AGENT
Kinetics Asset Management, Inc.
16 New Broadway
Sleepy Hollow, NY 10591
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Tait, Weller & Baker LLP
1818 Market Street
Suite 2400
Philadelphia, PA 19103
DISTRIBUTOR
Kinetics Funds Distributor, Inc.
16 New Broadway
Sleepy Hollow, NY 10591
ADMINISTRATOR
FUND ACCOUNTANT AND
TRANSFER AGENT
U.S. Bancorp Fund Services, LLC
615 East Michigan Street
Milwaukee, WI 53202
CUSTODIAN
U.S. Bank, N.A.
615 East Michigan Street
Milwaukee, WI 53202
THIS MATERIAL MUST BE PRECEDED OR
ACCOMPANIED BY A PROSPECTUS
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to the registrant's
principal executive officer and principal financial officer. The registrant has
not made any material amendments to its code of ethics during the period covered
by this report. The registrant has not granted any waivers from any provisions
of the code of ethics during the period covered by this report. A copy of the
registrant's Code of Ethics is filed herewith.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's board of trustees/directors has determined that there is at
least one audit committee financial expert serving on its audit committee. Mr.
Douglas Cohen and Mr. Joseph Breslin are the "audit committee financial experts"
and are considered to be "independent" as each term is defined in Item 3 of Form
N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
(a) Audit Fees. The aggregate fees billed for each of the last two
fiscal years for professional services rendered by the principal
accountant for the audit of the registrant's annual financial
statements or services that are normally provided by the accountant
in connection with statutory and regulatory filings or engagements
for those fiscal years are $42,000 and $42,000 for Kinetics Mutual
Funds, Inc. and Kinetics Portfolios Trust, respectively, for 2004
and $45,000 and $45,000 for Kinetics Mutual Funds, Inc. and Kinetics
Portfolios Trust, respectively, for 2005.
(b) Audit-Related Fees. 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 and $0 for Kinetics Mutual
Funds, Inc. and Kinetics Portfolios Trust, respectively, for 2004
and $0 and $0 for Kinetics Mutual Funds, Inc. and Kinetics
Portfolios Trust, respectively, for 2005.
(c) Tax Fees. The aggregate fees billed in each of the last two fiscal
years for professional services rendered by the principal accountant
for tax compliance are $7,500 and $7,500 for Kinetics Mutual Funds,
Inc. and Kinetics Portfolios Trust, respectively, for 2004 and
$12,000 and $12,000 for Kinetics Mutual Funds, Inc. and Kinetics
Portfolios Trust, respectively, for 2005. Professional services for
tax compliance include review of the Funds' federal and state income
tax returns.
(d) All Other Fees. 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 and $0 for Kinetics Mutual Funds,
Inc. and Kinetics Portfolios Trust, respectively, for 2004
and $0 and $0 for Kinetics Mutual Funds, Inc. and Kinetics
Portfolios Trust, respectively, for 2005.
(e)(1)The audit committee does not have pre-approved policies and
procedures. Instead, the audit committee or sub-audit committee
approves on a case-by-case basis each audit or non-audit service
before the accountant is engaged by the registrant.
(e)(2)There were no 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) Rule 2-01 of Regulation S-X.
(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 zero percent (0%).
(g) The aggregate non-audit fees billed by the registrant's accountant
for services rendered to the registrant, and rendered to the
registrant's investment adviser (not including any sub-adviser whose
role is primarily portfolio management and is subcontracted with or
overseen by another investment adviser), and any entity controlling,
controlled by, or under common control with the adviser that
provides ongoing services to the registrant for each of the last two
fiscal years of the registrant was $0 and $0 for Kinetics Mutual
Funds, Inc. and Kinetics Portfolios Trust, respectively, for 2004
and $0 and $0 for Kinetics Mutual Funds, Inc. and Kinetics
Portfolios Trust, respectively, for 2005.
(h) Not applicable as the response to (g) of this item is none.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to open-end investment companies.
ITEM 6. SCHEDULE OF INVESTMENTS.
The Schedule of Investments is included as part of the report to shareholders
filed under Item 1 of this Form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to open-end investment companies.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable to open-end investment companies.
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ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable to open-end investment companies.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The Registrant's President/Chief Executive Officer and Treasurer/Chief
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, as amended (the "1940 Act")) are effective as of a date
within 90 days of the filing date of this report, that includes the
disclosure required by this paragraph, based on the evaluation of these
controls and procedures required by Rule 30a-3(b) under the 1940 Act and
Rule 15d-15(b) under the Securities Exchange Act of 1934, as amended.
(b) There were no changes in the Registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred
during the second fiscal quarter of the period covered by this report that
has materially affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a) (1) The registrant's Code of Ethics for Chief Executive and Chief Senior
Financial Officers is filed herewith.
(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. Filed herewith.
(3) Not applicable to open-end investment companies.
(b) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Furnished herewith.
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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) Kinetics Mutual Funds, Inc. & Kinetics Portfolios Trust
By (Signature and Title)* /s/ Peter B. Doyle
----------------------------------------
Peter B. Doyle, President
Date March 9, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ Peter B. Doyle
-----------------------------------------
Peter B. Doyle, President
Date March 9, 2006
By (Signature and Title)* /s/ Leonid Polyakov
-----------------------------------------
Leonid Polyakov, Treasurer
Date March 9, 2006
* Print the name and title of each signing officer under his or her signature.
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