<Page>
As filed with the Securities and Exchange Commission on [date]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-07705
---------
Phoenix-Kayne Funds
(Exact name of registrant as specified in charter)
1800 Avenue of the Stars, 2nd Floor
Los Angeles, California 90067
(Address of principal executive offices) (Zip code)
US Bancorp Fund Services, LLC
2020 East Financial Way, Suite 200
Glendora, California 91741
(Name and address of agent for service)
1-800-243-4361
Registrant's telephone number, including area code
Date of fiscal year end: December 31, 2003
-----------------
Date of reporting period: DECEMBER 31, 2003
-----------------
<Page>
ITEM 1. REPORT TO STOCKHOLDERS.
Annual Report December 31, 2003
<Page>
ANNUAL REPORT
- - DECEMBER 31, 2003
KAYNE ANDERSON RUDNICK
PHOENIX-KAYNE CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
PHOENIX-KAYNE INTERMEDIATE TOTAL RETURN BOND FUND
PHOENIX-KAYNE INTERNATIONAL FUND
PHOENIX-KAYNE RISING DIVIDENDS FUND
PHOENIX-KAYNE SMALL-MID CAP FUND
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<Page>
CHIEF INVESTMENT OFFICER 2003 REVIEW
The year 2004 begins with the economy in the best shape it has been since the
recent recession that began in 2001. Business expansion, which floundered from
mid-2001 to mid-2003, took off during the second half of last year, bolstered by
the cumulative effect of multiple interest-rate cuts, the stimulus generated by
the rise in government spending and the decline in tax rates. The employment
outlook also brightened after months of negative reports. Encouragingly, the
strengthening in business activity was broad-based, with the consumer and
industrial sectors participating in tandem for the first time since 1998.
The Gross Domestic Product ("GDP") growth rate is expected to hold around 4%
in 2004, with the strength spread across most of the consumer and industrial
markets. Corporate earnings, which rose strongly in 2003, are projected to
increase 10 to 15% in 2004, helped by improving demand and further cost cutting.
In addition, foreign demand for U.S. exports, mainly from Western Europe and
Asia, will provide further stimulus.
However, this economic expansion is by no means a risk-free environment. The
government's fiscal stimulus programs, including the tax cuts, have contributed
to a substantial and rising U.S. budget deficit. Federal government spending, as
a share of GDP, has grown from 18.4% to 20% in the past two years, including
expenditures for the war in Iraq and the war on terrorism. At the same time,
accommodative monetary policy threatens to increase inflation. The Federal
Reserve has held the real federal funds rate below zero for the past 15 months,
the longest stretch of negative real rates since 1975-1976. Commodity prices are
up 30% across the board, gold has risen above $400 an ounce, and the U.S. dollar
is weak compared to all major currencies.
However, many expect the Federal Reserve will raise interest rates to reflect
the improved economic activity and that the administration will institute
policies to reduce the deficit. Otherwise, it is likely that we will see further
declines in the U.S. dollar and more intense inflationary pressures.
Reflecting the very good economic news, the stock market showed excellent
gains. Stocks did well across the board. However, as Floyd Norris, chief
financial correspondent of THE NEW YORK TIMES pointed out in a recent (January
2, 2004) column: "If it was a great year for most stocks, it is also true that
high quality was not rewarded as well as lower quality." In the S&P 500 Index,
stocks that pay dividends rose, on average, about half as much as
non-dividend-paying stocks. S&P quality rankings show that A-ranked companies
were up about half as much as B-ranked companies, which were up about half as
much as C-ranked companies.
In 2004, we expect investors will begin to favor high-quality,
dividend-paying stocks with strong earnings growth and low debt--such as the
companies in our portfolios--and that these companies will outperform lower
quality, non-dividend paying companies.
DIVERSIFICATION WITHIN HIGH-QUALITY
We have consistently recommended diversification between high-quality stocks
and bonds, with the stock portion diversified among large-cap, small to mid cap,
and international strategies. The importance of diversification cannot be
overemphasized. A diversified portfolio enables the investor to participate
across various asset classes and reduces the risk of making investment decisions
based on emotional reactions to short-term price movements. With this
perspective in mind, we encourage you to review your asset allocation with your
personal financial adviser.
1
<Page>
MUTUAL-FUND PRACTICES
With all of the media attention on the scandals in the mutual-fund industry,
we have been asked: "What is your firm doing to prevent such abuse?" "Have you
had some of the same problems as others in the industry?" Kayne Anderson Rudnick
Investment Management, LLC and Phoenix Investment Partners, Ltd., follow trading
policies and practices that are consistent with industry practices of the
highest integrity. Our strict procedures are designed to help ensure that our
shareholders' interests come first. Please visit our Web site for more
information on Phoenix's trading policies and mutual-fund industry
investigations.
We thank you for your continued trust and confidence in us, and we invite any
questions or comments.
/s/ Allan M. Rudnick
Allan M. Rudnick
Chief Investment Officer
JANUARY 16, 2004
2
<Page>
TABLE OF CONTENTS
<Table>
Phoenix-Kayne California Intermediate Tax-Free Bond Fund 4
Phoenix-Kayne Intermediate Total Return Bond Fund 14
Phoenix-Kayne International Fund 24
Phoenix-Kayne Rising Dividends Fund 34
Phoenix-Kayne Small-Mid Cap Fund 43
Notes to Financial Statements 54
</Table>
3
<Page>
PHOENIX-KAYNE CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND COMMENTARY
INVESTMENT OBJECTIVES
Phoenix-Kayne California Intermediate Tax-Free Bond Fund has an investment
objective to seek income exempt from Federal and California state personal
income taxes. There is no guarantee that the Fund will achieve its objective.
MARKET OVERVIEW
The year 2003 proved volatile for the fixed-income markets. In May, the
volatility became dramatic as bonds rallied on comments from the Federal Reserve
governors concerning the use of "unconventional" measures--purchases of
long-term government securities--to bring rates down on the long-end of the
yield curve. Bonds then rapidly switched course and sold off in mid-July when
Federal Reserve Chairman Alan Greenspan stated that he thought that the economy
would pick up without the central bank resorting to such alternative measures.
Investors switched from bonds to stocks to take advantage of the perceived
accelerating economy and bond prices dropped. Positive economic news also
brought on fears of inflation, which would trigger higher interest rates and
cause a further drop in bond prices. Along with the about-face on the use of
unconventional purchases of longer-dated securities, Alan Greenspan in his
testimony to Congress down-played deflation and provided a more upbeat
assessment of the economy than investors had expected. Such a reverse viewpoint
from the Chairman's analysis the month before whipsawed the bond markets. In
July, the 30-year Treasury experienced its worst month in history, down over
11%, and the 10-year Treasury note lost more than 7%, its worst month in over 20
years.
The sell-off in the fixed-income markets was exacerbated when mortgage
investors, a significant portion of the fixed-income market, adjusted their
portfolios' exposure to rising interest rates. Such reactions to sharp moves in
interest rates added energy to the overall volatility in the bond market.
During September, prices rose again in the bond market and rates dropped as
the economy seemed to be moving more sluggishly than first thought, dampening
fears of a rate hike. However, by early November, prices fell and the yields
rose back up with stronger-than-expected manufacturing reports and positive
labor-market news. By the middle of November, bond investors covered their short
positions, moving prices up, which fell again later in the month as the buoyant
economic data continued to defy expectations. Although the bond market has
already priced in a rate increase for mid 2004, the Federal Reserve has
committed itself to low rates unless inflation begins to escalate.
We believe that fears of high inflation may be overblown (See Chart,
"Consumer Price Index, Year over Year, January 1993--December 2003") and certain
compelling economic factors indicate that inflation may remain tame for some
time. Domestic labor markets remain sluggish because of excess capacity in
manufacturing, global competition, and gains in productivity. These factors
limit pricing power and wage gains.
Despite the apparent economic expansion, we believe sufficient slack exists
in the economy to keep inflation relatively low and, therefore, not put pressure
on the bond market.
4
<Page>
[CHART]
CONSUMER PRICE INDEX, YEAR OVER YEAR
JANUARY 1, 1993-DECEMBER 31, 2003
<Table>
1/31/93 3.5
2/28/93 3.6
3/31/93 3.4
4/30/93 3.5
5/31/93 3.4
6/30/93 3.3
7/31/93 3.2
8/31/93 3.3
9/30/93 3.2
10/31/93 3.0
11/30/93 3.1
12/31/93 3.2
1/31/94 2.9
2/28/94 2.8
3/31/94 2.9
4/30/94 2.8
5/31/94 2.8
6/30/94 2.9
7/31/94 2.9
8/31/94 2.9
9/30/94 3.0
10/31/94 2.9
11/30/94 2.8
12/31/94 2.6
1/31/95 2.9
2/28/95 3.0
3/31/95 3.0
4/30/95 3.1
5/31/95 3.1
6/30/95 3.0
7/31/95 3.0
8/31/95 2.9
9/30/95 2.9
10/31/95 3.0
11/30/95 3.0
12/31/95 3.0
1/31/96 3.0
2/29/96 2.9
3/31/96 2.8
4/30/96 2.7
5/31/96 2.7
6/30/96 2.7
7/31/96 2.7
8/31/96 2.6
9/30/96 2.7
10/31/96 2.6
11/30/96 2.6
12/31/96 2.6
1/31/97 2.5
2/28/97 2.5
3/31/97 2.5
4/30/97 2.7
5/31/97 2.5
6/30/97 2.4
7/31/97 2.4
8/31/97 2.3
9/30/97 2.2
10/31/97 2.3
11/30/97 2.2
12/31/97 2.2
1/31/98 2.2
2/28/98 2.3
3/31/98 2.1
4/30/98 2.1
5/31/98 2.2
6/30/98 2.2
7/31/98 2.2
8/31/98 2.5
9/30/98 2.5
10/31/98 2.3
11/30/98 2.3
12/31/98 2.4
1/31/99 2.4
2/28/99 2.1
3/31/99 2.1
4/30/99 2.2
5/31/99 2.0
6/30/99 2.1
7/31/99 2.1
8/31/99 1.9
9/30/99 2.0
10/31/99 2.1
11/30/99 2.1
12/31/99 1.9
1/31/2000 2.0
2/29/2000 2.2
3/31/2000 2.4
4/30/2000 2.3
5/31/2000 2.4
6/30/2000 2.5
7/31/2000 2.5
8/31/2000 2.6
9/30/2000 2.6
10/31/2000 2.5
11/30/2000 2.6
12/31/2000 2.6
1/31/2001 2.6
2/28/2001 2.7
3/31/2001 2.7
4/30/2001 2.6
5/31/2001 2.5
6/30/2001 2.7
7/31/2001 2.7
8/31/2001 2.7
9/30/2001 2.6
10/31/2001 2.6
11/30/2001 2.8
12/31/2001 2.7
1/31/2002 2.6
2/28/2002 2.6
3/31/2002 2.4
4/30/2002 2.5
5/31/2002 2.5
6/30/2002 2.3
7/31/2002 2.2
8/31/2002 2.4
9/30/2002 2.2
10/31/2002 2.2
11/30/2002 2.0
12/31/2002 1.9
1/31/2003 1.9
2/28/2003 1.7
3/31/2003 1.7
4/30/2003 1.5
5/31/2003 1.6
6/30/2003 1.5
7/31/2003 1.5
8/31/2003 1.3
9/30/2003 1.2
10/31/2003 1.3
11/30/2003 1.1
12/31/2003 1.1
</Table>
SOURCE: BLOOMBERG
California municipal-bond prices dropped slightly and yields rose after
Standard & Poor's cut the credit rating of California General Obligation bonds,
or "GOs", from single-A to triple-B-rating, based on the state's budgetary
problems. Meanwhile, local municipalities issued record amounts of new bonds to
restructure their debt at lower interest rates.
FUND PERFORMANCE
For the year, Phoenix-Kayne California Intermediate Tax-Free Bond Fund
slightly underperformed its benchmark, the S&P California Municipal Index(1).
The Fund returned 4.25% while index returned 5.13%, but the Fund took on
significantly less duration risk. The Fund was among the top-five performing
California intermediate-term bond funds for 2003 (THE WALL STREET JOURNAL
ONLINE, January 2, 2004). All performance figures assume reinvestment of
distributions and exclude the effect of sales charges. Past performance is not
indicative of future results and current performance may be higher or lower than
the performance shown.
The Fund profited by having a lower allocation than the index to the state
GOs, and by focusing on local issues, critical infrastructure, and essential
services. The Fund also benefited by having a higher allocation than the index
to higher coupon, callable issues, which provide a high level of cash flow and
help to lower the Fund's overall duration risk.
SUMMARY
With rates likely to remain at historically low levels, we believe that the
Phoenix-Kayne California Intermediate Tax Free Bond Fund offers steady tax-free
income with total returns that have exceeded taxable bonds on a tax-adjusted
basis. We believe our concentration in high-quality intermediate-term municipal
bonds with a focus on local issues and essential services, is the best strategy
to maintain the Fund's value while generating significant tax-adjusted income.
(1) THE S&P CALIFORNIA MUNICIPAL BOND INDEX IS AN UNMANAGED INDEX COMPRISED OF
ALL CALIFORNIA MUNICIPAL BONDS IN THE STANDARD & POOR'S INVESTOR TOOLS
MUNICIPAL BOND UNIVERSE.
THE INDEXES ARE UNMANAGED AND ARE NOT AVAILABLE FOR DIRECT INVESTMENT.
THE PRECEDING INFORMATION IS THE OPINION OF PORTFOLIO MANAGEMENT. PAST
PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, AND THERE IS NO GUARANTEE THAT
MARKET FORECASTS DISCUSSED WILL BE REALIZED.
5
<Page>
PHOENIX-KAYNE CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
AVERAGE ANNUAL TOTAL RETURNS(1) PERIOD ENDING 12/31/03
<Table>
<Caption>
INCEPTION INCEPTION
1 YEAR 5 YEAR TO 12/31/03 DATE
------ ------ ----------- ---------
Class X Shares at NAV(2) 4.25% 4.91% 4.62% 10/28/96
S&P California Municipal Bond Index(4) 5.13 5.53 5.72 10/31/96
Lehman Brothers Aggregate Bond Index(5) 4.10 6.62 7.40 10/28/96
</Table>
(1) Total returns are historical and include changes in share price and the
reinvestment of both dividends and capital gain distributions.
(2) "NAV" (Net Asset Value) total returns do not include the effect of any sales
charge.
(3) This chart illustrates NAV returns on Class X shares since inception.
(4) The S&P California Municipal Bond Index is an unmanaged index comprised of
all California bonds in the S&P/Investortools Municipal Bond Index universe.
This Index has replaced the Lehman Brothers 5-Year Municipal Bond Index as
it more specifically reflects the performance of the market sector in which
the fund invests. Prior to January 1, 1999, the S&P California Municipal
Bond Index is linked to the Lehman Brothers 5-Year Municipal Bond Index.
(5) The Lehman Brothers Aggregate Bond Index is an unmanaged, commonly used
measure of broad bond market total return performance. The index's
performance does not reflect sales charges.
All returns represent past performance which may not be indicative of future
performance. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Because the fund holds a limited number of securities,
it will be impacted by each security's performance more than a fund with a large
number of holdings.
Some interest generated by bonds in the fund may be subject to the federal
alternative minimum tax.
GROWTH OF $10,000 PERIODS ENDING 12/31/03
[CHART]
<Table>
<Caption>
PHOENIX-KAYNE CALIFORNIA INTERMEDIATE S&P CALIFORNIA MUNICIPAL LEHMAN BROTHERS AGGREGATE
TAX-FREE BOND FUND CLASS X(3) BOND INDEX(4) BOND INDEX(5)
10/28/96 $ 10,000 $ 10,000 $ 10,000
12/31/96 $ 10,002 $ 10,111 $ 10,162
12/31/97 $ 10,428 $ 10,756 $ 11,143
12/31/98 $ 10,883 $ 11,384 $ 12,111
12/31/99 $ 10,833 $ 11,049 $ 12,011
12/29/2000 $ 11,936 $ 12,476 $ 13,408
12/31/2001 $ 12,445 $ 13,062 $ 14,540
12/31/2002 $ 13,266 $ 14,170 $ 16,032
12/31/2003 $ 13,830 $ 14,897 $ 16,690
</Table>
This Growth of $10,000 chart assumes an initial investment of $10,000 made on
10/28/96 (inception of the Fund) in Class X shares. The total return for Class X
shares do not include the effect of any sales charge. Performance assumes
dividends and capital gains are reinvested.
SECTOR WEIGHTINGS 12/31/03
As a percentage of bond holdings
[CHART]
<Table>
Water and Sewer Revenue 18.7%
General Obligation 18.3%
Transportation Revenue 17.1%
General Revenue 14.8%
Municipal Utility District Revenue 10.8%
Single Family Housing Revenue 8.2%
Veteran Revenue 4.9%
Other 7.2%
</Table>
See Notes to Financial Statements
6
<Page>
TEN LARGEST HOLDINGS AT DECEMBER 31, 2003 (AS A PERCENTAGE OF TOTAL NET ASSETS)
<Table>
1. Oakland, California Port Authority,
5.60%, 11/1/19 (MBIA Insured) 2.8%
TRANSPORTATION MUNICIPAL SECURITY
2. Mountain View, California Shoreline
Regional Park, 5.50%, 8/1/21(MBIA Insured) 2.8%
WATER AND SEWER MUNICIPAL SECURITY
3. Oakland, California Series B,
5.875%, 6/15/19 (FSA Insured) 2.8%
GENERAL OBLIGATION MUNICIPAL SECURITY
4. San Jose-Santa Clara, California
Water Financing Authority,
5.375%, 11/15/15 (FGIC Insured) 2.7%
WATER AND SEWER MUNICIPAL SECURITY
5. San Francisco, California City & County
Airport, 5.375%, 5/1/17 (MBIA Insured) 2.7%
TRANSPORTATION MUNICIPAL SECURITY
6. Northern California Public Power Agency,
5.00%, 7/1/15 (MBIA Insured) 2.7%
MUNICIPAL UTILITY DISTRICT MUNICIPAL REVENUE
7. Redlands California Financing Authority
Wastewater Revenue Refunding Ser A,
5.00%, 9/1/17 (FSA Insured) 2.7%
WATER AND SEWER MUNICIPAL REVENUE
8. San Diego County California Certificates
of Participation, 5.25%, 11/1/15 2.7%
GENERAL OBLIGATION MUNICIPAL SECURITY
9. San Francisco, California Port Authority,
5.90%, 7/1/09 2.6%
TRANSPORTATION MUNICIPAL SECURITY
10. California State for previous AMT-Veterans,
5.375%, 12/1/16 (MBIA Insured) 2.6%
VETERAN MUNICIPAL SECURITY
</Table>
INVESTMENTS AT DECEMBER 31, 2003
<Table>
<Caption>
STANDARD
& POOR'S PAR
RATING VALUE
(UNAUDITED) (000) VALUE
----------- -------- ------------
MUNICIPAL TAX-EXEMPT BONDS--99.9%
EDUCATION REVENUE--2.1%
California Educational Facilities Authority,
5.375%, 10/1/16 (CONNIE LEE Insured) AAA $ 250 $ 273,275
University California Revenues, 5.00%,
5/15/10 (AMBAC Insured) AAA 500 565,825
------------
839,100
------------
GENERAL OBLIGATION--18.3%
Brea Olinda California Unified School
District, 6.00%, 8/1/15 (FGIC Insured) AAA 150 182,385
Brentwood Union School District,
7.30%, 8/1/07 (FGIC Insured) AAA 155 182,985
California State, 5.375%, 3/1/06,
Prerefunded BBB 100 102,661
California State, 5.375%, 3/1/06,
Prerefunded BBB 5 5,133
California State, 5.375%, 3/1/06,
Unrefunded BBB $ 45 $ 46,126
California State, 5.25%, 11/1/09 BBB 200 220,376
California State, 5.25%, 6/1/16 BBB 250 260,407
California State, 5.50%, 4/1/10
(MBIA Insured) AAA 200 229,092
California State, 6.25%, 4/1/08 BBB 825 927,374
Fremont California Unified School District,
5.25%, 9/1/15 AA 200 220,104
Long Beach Unified School District, 5.375%,
8/1/16 (MBIA Insured) Aaa(c) 300 332,472
Los Angeles California Unified School District,
5.00%, 7/1/14 (FSA Insured) AAA 500 555,830
</Table>
See Notes to Financial Statements
7
<Page>
<Table>
<Caption>
STANDARD
& POOR'S PAR
RATING VALUE
(UNAUDITED) (000) VALUE
----------- -------- ------------
GENERAL OBLIGATION--CONTINUED
Oakland, California Series B, 5.875%,
6/15/19 (FSA Insured) AAA $ 1,000 $ 1,086,880
Oakland Unified School District, 5.00%,
8/1/16 (FSA Insured) AAA 400 428,712
Oakland Unified School District Alameda
County, 5.00%, 8/1/15 (FSA Insured) AAA 765 824,823
Petaluma California School, 0.00%, 8/1/20
(FGIC Insured) AAA 1,000 381,380
San Diego County California Ctfs Partner,
5.25%, 11/1/15 (AMBAC Insured) AAA 960 1,064,304
Torrance California Certificates of Participation,
5.50%, 4/1/12 (AMBAC Insured) AAA 125 134,150
------------
7,185,194
------------
GENERAL REVENUE--14.8%
ABAG Financing Authority for Nonprofit
Corporations, 4.7%, 10/1/14 A3(c) 475 498,565
California State Public Works Board Lease,
5.25%, 12/1/04 (MBIA Insured) AAA 300 306,870
California State Public Works Board Lease
Revenue Refunding for the Franchise
Tax Board, 5.50%, 9/1/09 BBB- 510 564,356
California State Public Works Board Lease
Revenue Refunding for the
California Community Colleges Ser. A,
5.25%, 12/1/13 BBB- 290 306,776
California State Public Works Board Lease
Revenue, 5.50%, 6/1/15 (MBIA-IBC Insured) AAA 300 345,624
California State Public Works Board Lease
Revenue Refunding for the California
Highway Patrol, 5.25%, 11/1/20 BBB 500 509,265
Contra Costa County California Home,
7.50%, 5/1/14 (GNMA COLL Insured)(b) AAA 500 675,050
Los Angeles California State Building
Authority, 5.375%, 5/1/06 BBB- 200 214,088
Los Angeles Convention & Exhibit Center,
9.00%, 12/1/20 AAA $ 150 $ 171,297
Los Angeles County California Public Works
Financing Authority, 5.50%,
10/1/18 (FSA Insured) AAA 450 522,391
Ontario California Redevelopment Fianncing
Authority, 6.9%, 8/1/10 (MBIA Insured) AAA 70 85,885
Pleasanton Joint Powers Financing,
6.15%, 9/2/12 Baa1(c) 500 513,965
Riverside County California Redevelopment
Agency Tax Allocation, 5.25%, 10/1/17
(AMBAC Insured) AAA 250 274,497
San Jose, California Financing Authority,
5.00%, 9/1/16 (MBIA Insured) AAA 350 376,684
Santa Barbara, California Redevelopment
Agency, 4.60%, 3/1/14 (FSA Insured) AAA 250 266,608
Stockton California, 5.60%, 3/20/28
(GNMA COLL Insured) AAA 200 203,566
------------
5,835,487
------------
MEDICAL REVENUE--4.3%
California Health Facilities Financing
Authority, 6.25%, 10/1/13 (MBIA Insured) AAA 1,000 1,005,250
California Statewide Communities
Development Authority Certf. Partn.,
1.14%, 8/15/27 (AMBAC Insured)(e) AAA 700 700,000
------------
1,705,250
------------
MULTI-FAMILY HOUSING--0.7%
Menlo Park Community Development Agency
Multifamily Revenue, 5.375%,
6/1/16 (AMBAC Insured) AAA 250 272,350
MUNICIPAL UTILITY DISTRICT REVENUE--10.8%
Los Angeles, California Water & Power
Revenue, 4.50%, 7/1/13 AA- 700 716,527
Los Angeles, California Water & Power
Revenue, 5.25%, 7/1/18 AA- 300 315,390
</Table>
See Notes to Financial Statements
8
<Page>
<Table>
<Caption>
STANDARD
& POOR'S PAR
RATING VALUE
(UNAUDITED) (000) VALUE
----------- -------- ------------
MUNICIPAL UTILITY DISTRICT REVENUE--CONTINUED
Northern California Public Power Agency,
5.00%, 7/1/15 (MBIA Insured) AAA $ 1,000 $ 1,072,920
Pasadena California Electric, 5.00%, 6/1/17
(MBIA Insured) AAA 300 322,551
Sacramento California Municipal Utility Ditrict,
5.25%, 8/15/10 (MBIA Insured) AAA 500 572,450
Sacramento California Municipal
Utility Revenue,
5.10%, 7/1/13 (AMBAC Insured) AAA 500 549,655
Southern California Public Power Authority Tr.,
5.00%, 7/1/12 (FSA Insured) AAA 635 712,832
------------
4,262,325
------------
SINGLE FAMILY HOUSING REVENUE--8.2%
California Housing Finance Agency,
5.85%, 8/1/16
(MBIA FHA/VA/CAHLIF MTGS Insured) AAA 500 534,575
California Housing Finance Agency, 5.90%,
8/1/17 (MBIA FHA/VA GTD CAHLIF Insured) AAA 800 832,416
California Housing Finance Agency, 5.95%,
8/1/14 (MBIA FHA/VA/CAHLIF MTGS Insured) AAA 960 1,002,317
California Housing Finance Agency Revenue,
1.50%, 2/1/31(e) AA- 600 600,000
Cypress California Single Family Residential
Mortgage Revenue, 7.25%, 1/1/12
(PRIV MTGS Insured)(b) AAA(d) 200 258,154
------------
3,227,462
------------
TRANSPORTATION REVENUE--17.1%
Alameda Corridor Transition Authority, 5.125%,
10/1/17 (MBIA Insured) AAA 125 134,531
Foothill/Eastern Corridor Agency California Toll
Road, 0.00%, 1/1/07(b) AAA 200 214,746
Foothill/Eastern Corridor Agency California Toll
Road, 0.00%, 1/1/08(b) AAA 200 221,458
Foothill/Eastern Corridor Agency California Toll
Road, 0.00%, 1/1/11 AAA 550 642,901
Oakland, California Port Authority, 5.60%,
11/1/19 (MBIA Insured) AAA $ 1,000 $ 1,104,070
San Francisco, California Bay Area Rapid
Transit, 5.50%, 7/1/15 (FGIC Insured) AAA 190 203,454
San Francisco, California City & County Airport,
5.375%, 5/1/17 (MBIA Insured) AAA 1,000 1,077,560
San Francisco California Bay Area,
5.25%, 7/1/17 AA- 500 542,700
San Francisco California City and County,
5.5%, 6/15/12 AA 500 560,465
San Francisco, California Port Authority,
5.90%, 7/1/09 A- 1,000 1,040,580
San Mateo County Transit District, 5.00%,
6/1/14 (MBIA Insured) AAA 400 433,676
Santa Clara Valley, California Transportation
Authority, 5.00%, 6/1/17 (MBIA Insured) AAA 500 533,725
------------
6,709,866
------------
VETERAN REVENUE--4.9%
California State for Previous AMT-Veterans,
5.375%, 12/1/16 A 1,000 1,013,250
California State Veteran Bonds,
5.15%, 12/1/14 A 895 922,951
------------
1,936,201
------------
WATER & SEWER REVENUE--18.7%
California State Department of Water,
5.125%, 12/1/15 AA 200 218,666
California State Department of Water Resources,
Central Valley Project Revenue Ser. T,
5.125%, 12/1/12 AA 250 276,448
California State Department of Water
Resources, Central Valley Project, 5.50%,
12/1/13 (FSA-CR Insured) AAA 400 468,276
Irvine Ranch California Water District,
1.14%, 6/1/15(e) AAA 900 900,000
</Table>
See Notes to Financial Statements
9
<Page>
<Table>
<Caption>
STANDARD
& POOR'S PAR
RATING VALUE
(UNAUDITED) (000) VALUE
----------- -------- ------------
WATER & SEWER REVENUE--CONTINUED
Los Angeles California Wastewater System,
5.00%, 6/1/08 (FSA Insured) AAA $ 375 $ 420,330
Los Angeles, California Wastewater System,
5.00%, 6/1/14 (FGIC Insured) AAA 700 754,432
Metropolitan Water District of Southern
California, 5.00%, 7/1/13 AA 200 217,880
Mountain View, California Shoreline Regional
Park, 5.50%, 8/1/21 (MBIA Insured) AAA 1,000 1,090,060
Redlands California Financing Authority
Wastewater Revenue Refunding Ser A,
5.00%, 9/1/17 (FSA Insured) AAA 1,000 1,071,880
San Diego California Sewer Ser A Public
Facility Financing Authority,
5.00%, 5/15/13 (AMBAC Insured) AAA 300 306,714
San Jose-Santa Clara, California Water
Financing Authority, 5.375%,
11/15/15 (FGIC Insured) AAA $ 1,000 $ 1,080,650
Westlands Water District Revenue
Certificates of Participation, 5.250%,
9/1/14 (MBIA Insured) AAA 500 564,520
------------
7,369,856
------------
TOTAL MUNICIPAL TAX-EXEMPT BONDS
(IDENTIFIED COST $36,775,447) 39,343,091
TOTAL INVESTMENTS--99.9%
(IDENTIFIED COST $37,675,447) $ 39,343,091(a)
Other assets and liabilities, net--0.1% 25,158
------------
NET ASSETS--100.0% $ 39,368,249
============
</Table>
(a) Federal Income Tax Information: Net unrealized appreciation of investment
securities is comprised of gross appreciation of $1,698,833 and gross
depreciation of $31,189 for federal income tax purposes. At December 31,
2003, the aggregate cost of securities for federal income tax purposes was
$37,675,447.
(b) Escrowed to Maturity. At December 31, 2003, the concentration of the Fund's
investments by state or territory, determined as a percentage of net assets,
is as follows: California 100%. At December 31, 2003, 67% of the securities
in the portfolio are backed by insurance of financial institutions and
financial guaranty assurance agencies. Insurers with a concentration greater
than 10% of net assets are as follows: FSA, 16% and MBIA, 30%.
(c) Rated by Moody's.
(d) Rating provided by adviser.
(e) Variable rate security, interest rate reflects the rate currently in effect.
See Notes to Financial Statements
10
<Page>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
<Table>
ASSETS
Investments in securities, at value
(Identified cost $37,675,447) $ 39,343,091
Cash 150,901
Receivables
Interest 475,908
Prepaid expenses 6,813
---------------
Total Assets 39,976,713
---------------
LIABILITIES
Payables
Securities purchased 544,589
Fund shares repurchased 1,526
Distributions to shareholders 4,945
Investment advisory fee 8,479
Administration fee 5,013
Financial agent fee 4,948
Transfer agent fee 3,330
Trustees' fee 2,033
Accrued expenses 33,601
---------------
Total liabilities 608,464
---------------
NET ASSETS $ 39,368,249
===============
NET ASSETS CONSIST OF:
Capital paid in on shares of beneficial interest $ 37,568,281
Undistributed net investment income 5,176
Accumulated net realized gain 127,148
Net unrealized appreciation 1,667,644
---------------
NET ASSETS $ 39,368,249
===============
NUMBER OF SHARES ISSUED AND OUTSTANDING
(unlimited shares authorized no par value) 3,592,934
===============
NET ASSET VALUE PER SHARE $ 10.96
===============
</Table>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
<Table>
INVESTMENT INCOME
Interest $ 1,624,319
---------------
Total investment income 1,624,319
---------------
EXPENSES
Investments advisory fee 181,533
Administration fee 29,999
Financial agent fee 48,255
Transfer agent 14,501
Trustees 14,063
Custodian 10,077
Professional 28,598
Registration 19,869
Printing 8,673
Miscellaneous 18,533
---------------
Total expenses 374,101
Less: expenses borne by investment adviser (100,802)
Less: custodian fees paid indirectly (1,000)
---------------
Net expenses 272,299
---------------
NET INVESTMENT INCOME 1,352,020
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 179,694
Net change in unrealized appreciation (depreciation) on
investments (17,141)
---------------
NET LOSS ON INVESTMENTS 162,553
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,514,573
===============
</Table>
See Notes to Financial Statements
11
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED
12/31/03 12/31/02
------------- -------------
FROM OPERATIONS
Net investment income (loss) $ 1,352,020 $ 1,352,775
Net realized gain (loss) 179,694 174,298
Net change in unrealized appreciation (depreciation) (17,141) 572,903
------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,514,573 2,099,976
------------- -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income (1,360,391) (1,351,420)
Net realized long-term gains (52,546) (151,744)
------------- -------------
DECREASE IN NET ASSETS FROM DISTRIBUITIONS TO SHAREHOLDERS (1,412,937) (1,503,164)
------------- -------------
FROM SHARE TRANSACTIONS
Proceeds from sales of shares (864,287 and 823,861 shares, respectively) 9,441,863 8,986,927
Net asset value of shares issued on reinvestment of distributions
(67,285 and 44,676 shares, respectively) 737,267 486,832
Cost of shares repurchased (384,895 and 1,027,079 shares, respectively) (4,219,993) (11,184,822)
------------- -------------
INCREASE (DECREASE) IN NET ASSETS FROM SHARE TRANSACTIONS 5,959,137 (1,711,063)
------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS 6,060,773 (1,114,251)
NET ASSETS
Beginning of period 33,307,476 34,421,727
------------- -------------
END OF PERIOD [INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF
$5,176 AND $13,498, RESPECTIVELY] $ 39,368,249 $ 33,307,476
============= =============
</Table>
See Notes to Financial Statements
12
<Page>
PHOENIX-KAYNE CALIFORNIA INTERMEDIATE TAX-FREE BOND FUND
FINANCIAL HIGHLIGHTS
(SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
<Table>
<Caption>
CLASS X
----------------------------------------------------------
YEAR ENDED DECEMBER 31
----------------------------------------------------------
2003 2002 2001 2000 1999
Net asset value, beginning of period $ 10.93 $ 10.74 $ 10.83 $ 10.29 $ 10.77
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.41 0.46 0.47 0.49 0.44
Net realized and unrealized gain (loss) 0.04 0.24 (0.02) 0.54 (0.48)
-------- -------- -------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS 0.45 0.70 0.45 1.03 (0.04)
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
From net investment income (0.41) (0.46) (0.47) (0.49) (0.44)
From net realized gains (0.01) (0.05) (0.07) -- --
-------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (0.42) (0.51) (0.54) (0.49) (0.44)
-------- -------- -------- -------- --------
Change in net asset value 0.03 0.19 (0.09) 0.54 (0.48)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 10.96 $ 10.93 $ 10.74 $ 10.83 $ 10.29
======== ======== ======== ======== ========
Total return 4.25% 6.60% 4.26% 10.18% (0.44)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $ 39,368 $ 33,307 $ 34,422 $ 31,353 $ 41,862
RATIO OF EXPENSES TO AVERAGE NET ASSETS:
Operating expenses(1) 0.75%(2) 0.75% 0.75% 0.75%(2) 0.75%(2)
Net investment income (loss) 3.72% 4.18% 4.38% 4.63% 4.14%
Portfolio turnover rate 33% 21% 61% 33% 65%
</Table>
(1) If the investment adviser had not waived fees and reimbursed expenses, the
ratio of operating expenses to average net assets would have been 1.03%,
0.98%, 0.85%, 0.96% and 1.37% for the period ended December 31, 2003, 2002,
2001, 2000 and 1999, respectively.
(2) The ratio of operating expenses to average net assets excludes the effect of
expense offsets for custodian fees; if expense offsets were included, the
ratio would be 0.74% and 0.71% for the period ended December 31, 2000 and
1999, respectively. The ratio would not significantly differ for the year
ended December 31, 2003.
See Notes to Financial Statements
13
<Page>
PHOENIX-KAYNE INTERMEDIATE TOTAL RETURN BOND FUND COMMENTARY
INVESTMENT OBJECTIVES
Phoenix-Kayne Intermediate Total Return Bond Fund has an investment
objective of maximizing total return (mainly through current income, with
capital appreciation as a secondary factor). There is no guarantee that the Fund
will achieve its objective.
MARKET OVERVIEW
The year 2003 proved volatile for the fixed-income markets. In May, the
volatility became dramatic as bonds rallied on comments from the Federal Reserve
governors concerning the use of "unconventional" measures--purchases of
long-term government securities--to bring rates down on the long-end of the
yield curve. Bonds then rapidly switched course and sold off in mid-July when
Federal Reserve Chairman Alan Greenspan stated that he thought that the economy
would pick up without the central bank resorting to such alternative measures.
Investors switched from bonds to stocks to take advantage of the perceived
accelerating economy and bond prices dropped. Positive economic news also
brought on fears of inflation, which would trigger higher interest rates and
cause a further drop in bond prices. Along with the about-face on the use of
unconventional purchases of longer-dated securities, Alan Greenspan in his
testimony to Congress down-played deflation and provided a more upbeat
assessment of the economy than investors had expected. Such a reverse viewpoint
from the Chairman's analysis the month before whipsawed the bond markets. In
July, the 30-year Treasury experienced its worst month in history, down over
11%, and the 10-year Treasury note lost more than 7%, its worst month in over 20
years.
The sell-off in the fixed-income markets was exacerbated when mortgage
investors, a significant portion of the fixed-income market, adjusted their
portfolios' exposure to rising interest rates. Such reactions to sharp moves in
interest rates added energy to the overall volatility in the bond market.
During September, prices rose again in the bond market and rates dropped as
the economy seemed to be moving more sluggishly than first thought, dampening
fears of a rate hike. However, by early November, prices fell and the yields
rose back up with stronger-than-expected manufacturing reports and positive
labor-market news. By the middle of November, bond investors covered their short
positions, moving prices up, which fell again later in the month as the buoyant
economic data continued to defy expectations. Although the bond market has
already priced in a rate increase for mid 2004, the Federal Reserve has
committed itself to low rates unless inflation begins to escalate.
We believe that fears of high inflation may be overblown (See Chart,
"Consumer Price Index, Year over Year, January 1993-December 2003") and certain
compelling economic factors indicate that inflation may remain tame for some
time. Domestic labor markets remain sluggish because of excess capacity in
manufacturing, global competition, and gains in productivity. These factors
limit pricing power and wage gains.
14
<Page>
[CHART]
CONSUMER PRICE INDEX, YEAR OVER YEAR
JANUARY 1, 1993-DECEMBER 31, 2003
<Table>
1/31/93 3.5
2/28/93 3.6
3/31/93 3.4
4/30/93 3.5
5/31/93 3.4
6/30/93 3.3
7/31/93 3.2
8/31/93 3.3
9/30/93 3.2
10/31/93 3.0
11/30/93 3.1
12/31/93 3.2
1/31/94 2.9
2/28/94 2.8
3/31/94 2.9
4/30/94 2.8
5/31/94 2.8
6/30/94 2.9
7/31/94 2.9
8/31/94 2.9
9/30/94 3.0
10/31/94 2.9
11/30/94 2.8
12/31/94 2.6
1/31/95 2.9
2/28/95 3.0
3/31/95 3.0
4/30/95 3.1
5/31/95 3.1
6/30/95 3.0
7/31/95 3.0
8/31/95 2.9
9/30/95 2.9
10/31/95 3.0
11/30/95 3.0
12/31/95 3.0
1/31/96 3.0
2/29/96 2.9
3/31/96 2.8
4/30/96 2.7
5/31/96 2.7
6/30/96 2.7
7/31/96 2.7
8/31/96 2.6
9/30/96 2.7
10/31/96 2.6
11/30/96 2.6
12/31/96 2.6
1/31/97 2.5
2/28/97 2.5
3/31/97 2.5
4/30/97 2.7
5/31/97 2.5
6/30/97 2.4
7/31/97 2.4
8/31/97 2.3
9/30/97 2.2
10/31/97 2.3
11/30/97 2.2
12/31/97 2.2
1/31/98 2.2
2/28/98 2.3
3/31/98 2.1
4/30/98 2.1
5/31/98 2.2
6/30/98 2.2
7/31/98 2.2
8/31/98 2.5
9/30/98 2.5
10/31/98 2.3
11/30/98 2.3
12/31/98 2.4
1/31/99 2.4
2/28/99 2.1
3/31/99 2.1
4/30/99 2.2
5/31/99 2.0
6/30/99 2.1
7/31/99 2.1
8/31/99 1.9
9/30/99 2.0
10/31/99 2.1
11/30/99 2.1
12/31/99 1.9
1/31/2000 2.0
2/29/2000 2.2
3/31/2000 2.4
4/30/2000 2.3
5/31/2000 2.4
6/30/2000 2.5
7/31/2000 2.5
8/31/2000 2.6
9/30/2000 2.6
10/31/2000 2.5
11/30/2000 2.6
12/31/2000 2.6
1/31/2001 2.6
2/28/2001 2.7
3/31/2001 2.7
4/30/2001 2.6
5/31/2001 2.5
6/30/2001 2.7
7/31/2001 2.7
8/31/2001 2.7
9/30/2001 2.6
10/31/2001 2.6
11/30/2001 2.8
12/31/2001 2.7
1/31/2002 2.6
2/28/2002 2.6
3/31/2002 2.4
4/30/2002 2.5
5/31/2002 2.5
6/30/2002 2.3
7/31/2002 2.2
8/31/2002 2.4
9/30/2002 2.2
10/31/2002 2.2
11/30/2002 2.0
12/31/2002 1.9
1/31/2003 1.9
2/28/2003 1.7
3/31/2003 1.7
4/30/2003 1.5
5/31/2003 1.6
6/30/2003 1.5
7/31/2003 1.5
8/31/2003 1.3
9/30/2003 1.2
10/31/2003 1.3
11/30/2003 1.1
12/31/2003 1.1
</Table>
SOURCE: BLOOMBERG
Despite the apparent economic expansion, we believe sufficient slack exists
in the economy to keep inflation relatively low and, therefore, not put pressure
on the bond market.
FUND PERFORMANCE
During the year, the Phoenix-Kayne Intermediate Total Return Bond Fund
underperformed the benchmark Lehman Brothers Intermediate Government/Credit
Index(1). The fund returned 2.74% while the index returned 4.31%. Performance of
the Fund was driven largely by shifts in credit quality, the yield curve, and
duration. All performance figures assume reinvestment of distributions and
exclude the effect of sales charges. Past performance is not indicative of
future results and current performance may be higher or lower than the
performance shown.
The strong performance of low credit-quality issues negatively affected the
Fund's performance. In 2003, lower quality bonds outperformed higher quality
issues (See Chart, "Total Return for Major Asset Classes 2002 & 2003") as
investors reached for higher yields. Our Fund's exclusive focus on high-quality
issues hurt our performance on a relative basis.
15
<Page>
[CHART]
Total Return for Major Asset Classes 2002 & 2003
<Table>
<Caption>
2002 TOTAL RETURNS 2003 TOTAL RETURNS
Aaa 10.2% 2.8%
Aa 13.3% 4.6%
A 11.0% 6.3%
Baa 8.7% 11.7%
U.S. Treasury 11.8% 2.2%
U.S. Agency 11.0% 2.6%
U.S. Credit 10.5% 7.7%
ABS 8.5% 4.0%
MBS 8.7% 3.1%
</Table>
SOURCE: LEHMAN BROTHERS; ASSET CLASS BREAKDOWN IS BASED UPON THE LEHMAN
AGGREGATE INDEX
SUMMARY
During 2003, fixed-income investors faced the fluctuating forecasts of a
sustained low interest-rate environment punctuated by contradictory economic
data. These factors triggered swings in interest rates and bond prices. We
believe, however, that bond yields are likely to remain range bound, with
inflation not a major concern. We also believe that the best strategy for our
investors is to invest in high-quality intermediate-term bonds that provide the
majority of returns of the longer-term bond market, while taking on
significantly less interest-rate risk.
(1) THE LEHMAN BROTHERS INTERMEDIATE GOVERNMENT BOND / CREDIT INDEX MEASURES
GOVERNMENT AND CORPORATE BROAD BOND MARKET TOTAL RETURN PERFORMANCE.
THE INDEXES ARE UNMANAGED AND ARE NOT AVAILABLE FOR DIRECT INVESTMENT.
THE PRECEDING INFORMATION IS THE OPINION OF PORTFOLIO MANAGEMENT. PAST
PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, AND THERE IS NO GUARANTEE THAT
MARKET FORECASTS DISCUSSED WILL BE REALIZED.
16
<Page>
PHOENIX-KAYNE INTERMEDIATE TOTAL RETURN BOND FUND
AVERAGE ANNUAL TOTAL RETURNS(1) PERIOD ENDING 12/31/03
<Table>
<Caption>
INCEPTION INCEPTION
1 YEAR 5 YEAR TO 12/31/03 DATE
------ ------ ----------- ---------
Class X Shares at NAV(2) 2.74% 5.70% 6.06% 10/28/96
Lehman Brothers Intermediate Government/Credit Bond Index(4) 4.31 6.65 7.43 10/28/96
Lehman Brothers Aggregate Bond Index(5) 4.10 6.62 7.40 10/28/96
</Table>
(1) Total returns are historical and include changes in share price and the
reinvestment of both dividends and capital gain distributions.
(2) "NAV" (Net Asset Value) total returns do not include the effect of any sales
charge.
(3) This chart illustrates NAV returns on Class X shares since inception.
(4) The Lehman Brothers Intermediate Government/Credit Bond Index is an
unmanaged, commonly used measure of bond market total return performance. It
includes securities in the Lehman Brothers Government and the Lehman
Brothers Corporate Indexes. The index's performance does not reflect sales
charges.
(5) The Lehman Brothers Aggregate Bond Index is an unmanaged, commonly used
measure of broad bond market total return performance. The index's
performance does not reflect sales charges.
All returns represent past performance which may not be indicative of future
performance. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Because the fund holds a limited number of securities,
it will be impacted by each security's performance more than a fund with a large
number of holdings.
GROWTH OF $10,000 PERIODS ENDING 12/31/03
[CHART]
<Table>
<Caption>
PHOENIX-KAYNE INTERMEDIATE TOTAL LEHMAN BROTHERS INTERMEDIATE LEHMAN BROTHERS AGGREGATE
RETURN BOND FUND CLASS X(3) GOVERNMENT/CREDIT BOND INDEX(4) BOND INDEX(5)
10/28/96 $ 10,000 $ 10,000 $ 10,000
12/31/96 $ 10,020 $ 10,364 $ 10,162
12/31/97 $ 10,741 $ 11,180 $ 11,143
12/31/98 $ 11,558 $ 12,123 $ 12,111
12/31/99 $ 11,484 $ 12,169 $ 12,011
12/29/2000 $ 12,563 $ 13,400 $ 13,408
12/31/2001 $ 13,565 $ 14,601 $ 14,540
12/31/2002 $ 14,846 $ 16,037 $ 16,032
12/31/2003 $ 15,253 $ 16,728 $ 16,690
</Table>
This Growth of $10,000 chart assumes an initial investment of $10,000 made on
10/28/96 (inception of the Fund) in Class X shares. The total return for Class X
shares do not include the effect of any sales charge. Performance assumes
dividends and capital gains are reinvested.
SECTOR WEIGHTINGS 12/31/03
[CHART]
As a percentage of bond holdings
<Table>
U.S. Government And Government Agency Obligations 56.1%
Corporate Bonds 43.9%
</Table>
See Notes to Financial Statements
17
<Page>
TEN LARGEST HOLDINGS AT DECEMBER 31, 2003 (AS A PERCENTAGE OF NET ASSETS)
<Table>
1. U.S. Treasury Notes, 5.00%, 8/15/11 4.8%
U.S. GOVERNMENT SECURITY
2. U.S. Treasury Notes, 7.50%, 2/15/05 4.4%
U.S. GOVERNMENT SECURITY
3. U.S. Treasury Notes, 6.00%, 8/15/09 4.3%
U.S. GOVERNMENT SECURITY
4. U.S. Treasury Notes, 6.50%, 2/15/10 3.9%
U.S. GOVERNMENT SECURITY
5. U.S. Treasury Notes, 6.50%, 10/15/06 3.7%
U.S. GOVERNMENT SECURITY
6. Daimlerchrysler National Holding Corp.,
7.20%, 9/1/09 3.1%
CONSUMER FINANCE CORPORATE SECURITY
7. Heller Financial, 7.375%, 11/1/09 2.6%
DIVERSIFIED FINANCIAL SERVICES CORPORATE SECURITY
8. Federal National Mortgage Association,
6.625%, 11/15/10 2.6%
PASS-THROUGH AGENCY MORTGAGE-BACKED SECURITY
9. Conoco Funding Co., 6.35%, 10/15/11 2.5%
INTEGRATED OIL PRODUCTS CORPORATE SECURITY
10. Citicorp, 6.375%, 11/15/08 2.5%
BANK CORPORATE SECURITY
</Table>
INVESTMENTS AT DECEMBER 31, 2003
<Table>
<Caption>
STANDARD
& POOR'S PAR
RATING VALUE
(UNAUDITED) (000) VALUE
----------- -------- ------------
CORPORATE BONDS--42.0%
AEROSPACE & DEFENSE--2.8%
Boeing Capital Corp., 5.65%, 5/15/06 A $ 850 $ 908,001
Boeing Capital Corp., 7.10%, 9/27/05 A 335 362,448
------------
1,270,449
------------
BANKS--5.1%
Bank of America Corp., 7.125%, 05/1/06 A 540 598,180
Citicorp, 6.375%, 11/15/08 A+ 1,000 1,107,228
Wells Fargo Financial, 6.375%, 8/1/11 A+ 500 558,334
------------
2,263,742
------------
BREWERS--2.3%
Anheuser Busch Companies, Inc., 7.10%,
06/15/07 A+ 1,000 1,026,048
COMPUTER HARDWARE--1.8%
Hewlett-Packard Co., 7.15%, 6/15/05 A- 750 806,622
CONSUMER FINANCE--7.3%
Daimlerchrysler National Holding Corp.,
7.20%, 9/1/09 BBB 1,250 1,397,607
Ford Motor Credit Corp., 9.03%, 12/30/09 BBB- 500 518,185
General Electric Capital Corp.,
4.625%, 9/15/09 AAA 800 832,674
Household Finance Corp., 6.75%, 6/15/12 A $ 500 $ 499,949
------------
3,248,415
------------
DIVERSIFIED COMMERCIAL SERVICES--1.4%
International Lease Finance Corp.,
5.75%, 10/15/06 AA- 600 645,950
DIVERSIFIED FINANCIAL SERVICES--5.7%
Bear Stearns Co., 7.80%, 8/15/07 A 825 954,751
Goldman Sachs Group. Inc.,
5.25%, 04/1/13 A+ 425 431,252
Heller Financial, 7.375%, 11/1/09 AAA 1,000 1,174,980
------------
2,560,983
------------
GENERAL MERCHANDISE STORES--1.1%
Wal-Mart Stores, 4.55%, 5/01/13 AA 500 494,795
HOUSEHOLD PRODUCTS--1.5%
Colgate-Palmolive Co., 5.98%, 4/25/12 AA- 620 681,363
INTEGRATED OIL & GAS--2.5%
Conoco Funding Co., 6.35%, 10/15/11 A- 1,000 1,122,902
INTEGRATED TELECOMMUNICATION SERVICES--1.2%
SBC Communications, 5.875%, 2/1/12 A+ 500 532,049
</Table>
See Notes to Financial Statements
18
<Page>
<Table>
<Caption>
STANDARD
& POOR'S PAR
RATING VALUE
(UNAUDITED) (000) VALUE
----------- -------- ------------
PACKAGED FOODS AND MEATS--1.8%
Kraft Foods, Inc., 6.25%, 6/1/12 BBB+ $ 750 $ 818,744
PERSONAL PRODUCTS--2.9%
Gillette Co., 4.00%, 6/30/05 AA- 260 269,323
Kimberly-Clark Corp., 5.00%, 8/15/13 AA- 1,000 1,024,092
------------
1,293,415
------------
PHARMACEUTICALS--4.6%
Abbott Laboratories, 5.625%, 7/1/06 AA 1,000 1,079,267
Merk & Co., Inc., 4.375%, 2/15/13 AAA 1,000 986,192
------------
2,065,459
------------
TOTAL CORPORATE BONDS
(IDENTIFIED COST $17,952,701) 18,830,936
------------
U.S. GOVERNMENT AND GOVERNMENT AGENCY
OBLIGATIONS--53.7%
OTHER AGENCY MORTGAGE-BACKED--4.1%
Federal Home Loan Mortgage Corp.,
7.00%, 4/1/16 AAA 89 94,723
Federal Home Loan Mortgage Corp.,
7.50%, 7/1/09 AAA 66 70,663
Federal Home Loan Mortgage Corp.,
7.50%, 4/1/14 AAA 140 150,922
Federal Home Loan Mortgage Corp., MTN,
5.125%, 2/20/13 AAA 500 502,353
Federal Home Loan Mortgage Corp., MTN,
6.00%, 5/25/12 AAA 1,000 1,016,893
------------
1,835,554
------------
PASS-THROUGH AGENCY MBS, FNMA--2.9%
Federal National Mortgage Association,
6.625%, 11/15/10 AAA 1,000 1,150,590
Federal National Mortgage Association,
7.00%, 5/1/14 AAA 109 116,122
Federal National Mortgage Association,
8.00%, 1/1/15 AAA 29 31,126
------------
1,297,838
------------
PASS-THROUGH AGENCY MBS, GNMA--4.3%
Government National Mortgage Association,
6.00%, 8/15/31 AAA $ 933 $ 970,787
Government National Mortgage Association,
7.00%, 7/20/13 AAA 206 220,855
Government National Mortgage Association,
8.00%, 11/15/21 AAA 2 2,232
Government National Mortgage Association,
8.00%, 7/15/23 AAA 87 95,107
Government National Mortgage Association,
8.00%, 7/15/23 AAA 48 52,766
Government National Mortgage Association,
8.00%, 7/20/26 AAA 195 211,383
Government National Mortgage Association,
8.00%, 9/15/26 AAA 19 20,878
Government National Mortgage Association,
8.00%, 11/15/26 AAA 11 12,055
Government National Mortgage Association,
8.00%, 9/20/27 AAA 113 122,755
Government National Mortgage Association,
8.50%, 12/15/22 AAA 3 2,925
Government National Mortgage Association,
8.50%, 8/15/24 AAA 174 191,429
Government National Mortgage Association,
8.50%, 8/15/25 AAA 27 30,142
Government National Mortgage Association,
8.50%, 6/15/26 AAA 6 6,346
------------
1,939,660
------------
U.S. AGENCY (NON-MBS)--15.3%
Federal Farm Credit Bank, 5.85%, 5/14/08 AAA 250 254,657
Federal Farm Credit Bank, 6.48%, 4/4/12 AAA 1,000 1,053,126
Federal Home Loan Bank, 5.15%, 1/28/13 AAA 345 348,963
Federal Home Loan Bank, 5.20%, 10/22/08 AAA 195 201,526
Federal Home Loan Bank, 5.85%, 2/13/09 AAA 250 251,356
Federal Home Loan Bank, 5.925%, 4/9/08 AAA 1,000 1,105,629
Federal Home Loan Bank, 6.35%, 2/13/12 AAA 1,000 1,005,270
</Table>
See Notes to Financial Statements
19
<Page>
<Table>
<Caption>
STANDARD
& POOR'S PAR
RATING VALUE
(UNAUDITED) (000) VALUE
----------- -------- ------------
Federal Home Loan Bank, 6.40%, 1/26/11 AAA $ 250 $ 250,755
Federal Home Loan Bank, 7.80%, 2/11/10 AAA 350 373,452
Federal National Mortgage Association,
3.00%, 11/01/05 AAA 125 127,047
Federal National Mortgage Association,
6.00%, 5/16/11 AAA 875 939,279
Federal National Mortgage Association,
6.20%, 2/27/12 AAA 116 116,809
Federal National Mortgage Association,
6.20%, 5/3/12 AAA 500 525,285
Federal National Mortgage Association,
6.25%, 2/17/11 AAA 275 276,533
------------
6,829,687
------------
U.S. TREASURY BONDS--1.2%
U.S. Treasury Bonds, 7.875%, 11/15/04 AAA 500 528,770
U.S. TREASURY NOTES--25.9%
U.S. Treasury Notes, 4.875%, 2/15/12 AAA 1,000 1,059,376
U.S. Treasury Notes, 5.00%, 8/15/11 AAA 2,000 2,140,938
U.S. Treasury Notes, 5.625%, 5/15/08 AAA 987 1,093,642
U.S. Treasury Notes, 6.00%, 8/15/09 AAA 1,700 1,926,114
U.S. Treasury Notes, 6.50%, 10/15/06 AAA 1,500 1,671,270
U.S. Treasury Notes, 6.50%, 2/15/10 AAA 1,500 1,743,516
U.S. Treasury Notes, 7.50%, 2/15/05 AAA 1,830 1,956,885
------------
11,591,741
------------
TOTAL U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS
(IDENTIFIED COST $23,204,101) 24,023,250
------------
SHORT-TERM OBLIGATIONS--2.2%
U.S. GOVERNMENT AGENCY--2.2%
Federal Home Loan Bank., 0.88%, 1/9/04 AAA $ 1,000 $ 999,780
TOTAL SHORT-TERM OBLIGATIONS
(IDENTIFIED COST $999,780) 999,780
TOTAL INVESTMENTS--97.9%
(IDENTIFIED COST $42,156,582) $ 43,853,966(a)
Other assets and liabilities, net--2.1% 943,270
------------
NET ASSETS--100.0% $ 44,797,236
============
</Table>
(a) Federal Income Tax Information: Net unrealized appreciation of investment
securities is comprised of gross appreciation of $1,928,993 and gross
depreciation of $231,609 for federal income tax purposes. At December 31,
2003, the aggregate cost of securities for federal income tax purposes was
$42,156,582.
See Notes to Financial Statements
20
<Page>
PHOENIX-KAYNE INTERMEDIATE TOTAL RETURN BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
<Table>
ASSETS
Investments securities at value
(Identified cost $42,156,582) $ 43,853,966
Cash 403,717
Receivables:
Dividends and interest 610,369
Prepaid expenses 7,355
---------------
Total Assets 44,875,407
---------------
LIABILITIES
Payables
Fund shares repurchased 12,000
Investment advisory fee 18,989
Administration fee 5,393
Professional fee 24,984
Transfer agent fee 3,226
Financial agent fee 3,204
Trustees' fee 2,031
Accrued expenses 8,344
---------------
Total liabilities 78,171
---------------
NET ASSETS $ 44,797,236
===============
NET ASSETS CONSIST OF:
Capital paid in on shares of beneficial interest $ 43,005,115
Undistributed net investment income 11,668
Accumulated net realized gain 83,069
Net unrealized appreciation 1,697,384
---------------
NET ASSETS $ 44,797,236
===============
NUMBER OF SHARES ISSUED AND OUTSTANDING
(unlimited shares authorized no par value) 4,039,995
===============
NET ASSET VALUE PER SHARE $ 11.09
===============
</Table>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
<Table>
INVESTMENT INCOME
Interest $ 2,271,086
---------------
Total investment income 2,271,086
---------------
EXPENSES
Investment advisory fee 217,554
Administration 31,755
Financial agent fee 41,501
Professional 27,135
Registration 20,367
Custody fees 14,678
Trustees 14,063
Transfer agent fees 13,952
Printing 8,537
Miscellaneous 18,542
---------------
Total expenses 408,084
---------------
NET INVESTMENT INCOME 1,863,002
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on investments 267,833
Net change in unrealized appreciation (depreciation) on
investments (960,845)
---------------
NET LOSS ON INVESTMENTS (693,012)
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,169,990
===============
</Table>
See Notes to Financial Statements
21
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED
12/31/03 12/31/02
------------- -------------
FROM OPERATIONS
Net investment income (loss) $ 1,863,002 $ 2,021,372
Net realized gain (loss) 267,833 92,611
Net change in unrealized appreciation (depreciation) (960,845) 1,569,188
------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 1,169,990 3,683,171
------------- -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income (1,851,334) (2,006,888)
Net realized short-term gains -- (29,943)
Net realized long-term gains (184,764) (164,616)
------------- -------------
DECREASE IN NET ASSETS FROM DISTRIBUITIONS TO SHAREHOLDERS (2,036,098) (2,201,447)
------------- -------------
FROM SHARE TRANSACTIONS
Proceeds from sales of shares (1,005,966 and 1,477,478 shares, respectively) 11,288,844 16,377,803
Net asset value of shares issued from reinvestment of distributions (130,383
and 118,490 shares, respectively) 1,459,376 1,313,976
Cost of shares repurchased (888,284 and 1,505,214 shares, respectively) (9,986,834) (16,646,097)
------------- -------------
INCREASE (DECREASE) IN NET ASSETS FROM SHARE TRANSACTIONS 2,761,386 1,045,682
------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS 1,895,278 2,527,406
NET ASSETS
Beginning of period 42,901,958 40,374,552
------------- -------------
END OF PERIOD [INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF $11,668
AND $0, RESPECTIVELY] $ 44,797,236 $ 42,901,958
============= =============
</Table>
See Notes to Financial Statements
22
<Page>
FINANCIAL HIGHLIGHTS
(SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
<Table>
<Caption>
CLASS X
-----------------------------------------------------
YEAR ENDED DECEMBER 31
-----------------------------------------------------
2003 2002 2001 2000 1999
Net asset value, beginning of period $ 11.31 $ 10.91 $ 10.82 $ 10.44 $ 11.01
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.48 0.55 0.57 0.56 0.50
Net realized and unrealized gain (loss) (0.17) 0.45 0.28 0.39 (0.57)
-------- -------- -------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS 0.31 1.00 0.85 0.95 (0.07)
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
From net investment income (0.48) (0.55) (0.57) (0.57) (0.49)
From net realized gains (0.05) (0.05) (0.19) -- (0.01)
-------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (0.53) (0.60) (0.76) (0.57) (0.50)
-------- -------- -------- -------- --------
Change in net asset value (0.22) 0.40 0.09 0.38 (0.57)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 11.09 $ 11.31 $ 10.91 $ 10.82 $ 10.44
======== ======== ======== ======== ========
Total return 2.74% 9.45% 7.98% 9.40% (0.65)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $ 44,797 $ 42,902 $ 40,375 $ 47,097 $ 53,404
RATIO OF EXPENSES TO AVERAGE NET ASSETS:
Operating expenses 0.94% 0.88% 0.96% 0.94% 0.94%(1)
Net investment income (loss) 4.28% 4.96% 5.13% 5.34% 4.94%
Portfolio turnover rate 35% 27% 50% 10% 64%
</Table>
(1) If the investment adviser had not waived fees and reimbursed expenses, the
ratio of operating expenses to average net assets would have been 1.23% for
the period ended December 31, 1999.
See Notes to Financial Statements
23
<Page>
PHOENIX-KAYNE INTERNATIONAL FUND COMMENTARY
INVESTMENT OBJECTIVES
Phoenix-Kayne International Fund has an investment objective of long-term
capital appreciation, with dividend income a secondary consideration. There is
no guarantee that the Fund will achieve its objective. Investing internationally
involves risks not associated with investing solely in the U.S., such as
currency fluctuation, political risk, differences in accounting and the limited
availability of information.
MARKET OVERVIEW
Equity markets around the world surged during 2003, encouraged by positive
global economic news. In addition, the imbalances of the U.S. economy continued
to weigh on the U.S. dollar, magnifying international equities' investment
returns when converted into U.S. dollars.
For the full year, the MSCI EAFE Index(1) rose 38.59%, significantly
outperforming the S&P 500 Index(2) for two successive years. The euro rose 8.06%
against the U.S. dollar to a parity of $1.2595 for one euro, while the yen,
contained by massive purchases of U.S. dollars by the Bank of Japan, rose only
3.98% to 107.22 yen for one U.S. dollar parity. For the entire year 2003, the
euro appreciated 20.04% and the yen rose 10.79%.
Japanese equities, as represented by the Topix Index(3), gained 38.27%
during the year, and European equities, as represented by the FTSE EuroTop 300
Index(4), appreciated 38.19%. From an economic-sector standpoint, the
industrials, materials, and information technology sectors performed the best,
while consumer staples, energy, and health care lagged the overall market.
In 2003, the MSCI EAFE Value(5) outperformed the MSCI EAFE Growth Index(6)
by 1,331 basis points. We believe that this phenomenon testifies, in part, to
the low quality of the equity-market recovery that we have witnessed since March
of 2003. Nevertheless, since the end of October, we have noticed the
long-awaited market rotation toward high-quality growth stocks, which bodes well
for the Fund's investment style.
For the entire year, stocks with a market capitalization of more than $40
billion underperformed the overall market by 860 basis points, and stocks with
less than $1 billion in market cap outperformed by 2,216 basis points. However,
during the fourth quarter, stocks within the MSCI EAFE Index with more than $40
billion in market cap modestly outperformed the overall index by a margin of 163
basis points; stocks with less than $1 billion in market cap underperformed the
MSCI EAFE Index
(1) THE MSCI EAFE INDEX IS A MEASURE OF FOREIGN STOCK FUND PERFORMANCE, WHICH
INCLUDES NET DIVIDENDS, REINVESTED. TOTAL RETURN FIGURES ARE NET OF FOREIGN
WITHOLDING TAXES. THE EAFE INDEX IS AN AGGREGATE OF 21 INDIVIDUAL COUNTRY
INDEXES IN EUROPE, AUSTRALIA, NEW ZEALAND, AND THE FAR EAST.
(2) THE S&P 500 INDEX IS A MEASURE OF STOCK MARKET TOTAL RETURN PERFORMANCE.
(3) THE TOPIX INDEX, INTRODUCED BY THE TOKYO STOCK EXCHANGE (TSE) ON JULY 1,
1969, IS A COMPOSITE INDEX OF ALL THE COMMON STOCKS LISTED ON THE FIRST
SECTION OF THE TSE.
(4) THE FTSE EURO TOP 300 INDEX IS MEASURES THE PERFORMANCE OF THE 300 LARGEST
CAPITALIZED COMPANIES RESIDENT AND INCORPORATED IN EUROPE.
(5) THE MSCI EAFE VALUE INDEX IS IS A MARKET-WEIGHTED INDEX OF COMPANIES IN
DEVELOPED COUNTRIES, EXCLUDING THE U.S. AND CANADA, AND MEASURES THE
PERFORMANCE OF THOSE MSCI EAFE COMPANIES WITH LOW PRICE-TO-BOOK VALUES
RELATIVE TO EACH MSCI COUNTRY.
(6) THE MSCI EAFE GROWTH INDEX IS MARKET-WEIGHTED INDEX OF COMPANIES IN
DEVELOPED COUNTRIES, EXCLUDING THE U.S. AND CANADA, AND MEASURES THE
PERFORMANCE OF THOSE MSCI EAFE COMPANIES WITH HIGH PRICE-TO-BOOK VALUES
RELATIVE TO EACH MSCI COUNTRY.
THE INDEXES ARE UNMANAGED AND ARE NOT AVAILABLE FOR DIRECT INVESTMENT.
THE PRECEDING INFORMATION IS THE OPINION OF PORTFOLIO MANAGEMENT. PAST
PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, AND THERE IS NO GUARANTEE THAT
MARKET FORECASTS DISCUSSED WILL BE REALIZED.
24
<Page>
by 518 basis points. This phenomenon--higher market cap outperforming lower
market cap--, which was particularly noticeable during November and December,
may mark the start of a new trend, as market participants begin to refocus on
large-cap stocks after several years of neglect.
For 2003, the financially strongest companies underperformed the overall
market, by 1,279 basis points for the triple-A segment and by 485 basis points
for the double-A segment. In the fourth quarter, companies within the MSCI EAFE
Index with a triple-A (+13.49%) and double-A-credit rating (+16.33%)
underperformed the market; but we noticed the start of a trend-change at the end
of October, with significant outperformance of the triple-A and double-A-credit
rating segments in November, and to a lesser extent in December.
FUND PERFORMANCE
The Phoenix-Kayne International Fund underperformed the MSCI EAFE Index
during the year. The benchmark MSCI EAFE Index returned 38.59% while the Fund's
Class X shares returned 26.15%. The underperformance of Fund reflects the
overall underperformance of the high-quality segment of the market, coupled with
the better-than-the-market performance of the smaller-cap segment. All
performance figures assume reinvestment of distributions and exclude the effect
of sales charges. Past performance is not indicative of future results and
current performance may be higher or lower than the performance shown.
PURCHASES AND SALES
The Fund engaged in significant portfolio activity in the first quarter of
2003 as more than two-thirds of the stocks we were interested in buying were
trading at or below our target prices after two months of almost uninterrupted
market declines. In the consumer-staples sector, the Fund initiated a position
in L'Oreal, the world's leading cosmetic company had priced in the market too
expensively. The Fund also bought a position in Tesco, a very successful British
food retailer. In health care, the Fund bought Sanofi-Synthelabo, a fast-growing
European pharmaceutical company, which, to us, had also appeared too expensive
in the past. Sanofi-Synthelabo sells what many believe is the world's best
sleeping pill, Ambien. In the financial sector, the Fund bought positions in
Banco Bilbao Vizcaya Argentaria, Royal Bank of Scotland, and Unicredito, three
of Europe's best-run banks. Although the Fund did not need cash to implement our
purchases, the Fund sold stocks that were not performing well, namely ING and
Lloyds. For some time, we have had concerns over these company's long-term
fundamentals. The Fund also sold Endesa because we were dissatisfied with the
company's progress in reducing its debt level. The Fund initiated positions in
Telecom Italia Mobile and in Telstra in the telecommunications-services sector.
In the materials sector, the Fund initiated a position in Rio Tinto, a
first-class natural-resources company benefiting from strong demand from China.
The Fund also sold Adecco, as we become increasingly concerned about the
company's strategy.
During the second quarter, the Fund sold Sony toward the end of April after
the company released full-fiscal-year results far below expectations and revised
sharply downward its profit outlook for the year. In the consumer-discretionary
sector, the Fund bought Hennes & Mauritz, a well-managed Swedish clothing
retailer that is successfully expanding into the U.S. market.
25
<Page>
In the third quarter, the Fund took some profit in the
information-technology sector by selling SAP a strong performer this year and
used the proceeds to buy Rohm, a leading Japanese semi-conductor company. In the
consumer-staples sector, the Fund sold Henkel, Carrefour, and Heineken, which
the Fund replaced with Kao and Diageo. The Fund invested in Hong Kong and China
Gas, the dominant gas utility in the Chinese territory. In the financials
sector, the Fund bought Fortis, a leading "bancassurance" group based in
Belgium. The Fund also bought a position in Bank of Ireland. The Fund initiated
a position in Societe Generale in France, and bought a position in Banco Popular
in Spain. Finally, the Fund initiated positions in Peugeot, the most efficient
European automaker, and in Svenska Cellulosa, a Swedish paper-based,
consumer-products company, and reduced SMC of Japan.
The Fund initiated positions in six new companies during the fourth
quarter--HBOS, the U.K.'s leading mortgage bank, Swiss Re, the world's largest
reinsurance company, Docomo, Japan's dominant cellular phone network operator,
Singapore Technologies Engineering, Asia's premium diversified aerospace and
defense group, Givaudan, the world's leading fragrances and flavors supplier,
and Shin-Etsu, Japan's leading specialty chemicals player. To finance these
purchases, the Fund sold HSBC, Rentokil, and Seven Eleven Japan, all of which
reached our target prices.
SUMMARY
Several times over the last few years, we have alerted investors of the
fragility of the U.S. dollar. We believed that a falling U.S. dollar was a major
condition for sustainable outperformance of the international asset class and
the major catalyst to foster renewed interest in the neglected international
investment category. We see further weakness in the U.S. dollar going forward,
although a period of consolidation may be warranted after the recent sharp
decline.
Although international markets have outperformed the U.S. market over the
last two years, the best-performing subclass has been the small- and medium-cap,
local-oriented, and, often, the lower-quality stocks. On a relative basis, 2003
has been particularly difficult for foreign large-cap high-quality multinational
companies. Fortunately, we have begun to notice a changing trend in the market
place since the end of October. In our view, a change in market leadership that
is likely to favor our investment style and positioning is starting to develop.
We invest for the long-term, mainly in high-quality, well-funded,
dividend-paying, large-cap foreign stocks, which have been underappreciated by
the market over the last three years. Nevertheless, we are confident that the
excellent underlying fundamentals of those companies will not only reward
investors over the longer term, but also in the medium term, we believe they
will benefit from a long-awaited market rotation.
26
<Page>
PHOENIX-KAYNE INTERNATIONAL FUND
AVERAGE ANNUAL TOTAL RETURNS(1) PERIOD ENDING 12/31/03
<Table>
<Caption>
INCEPTION INCEPTION
1 YEAR 5 YEAR TO 12/31/03 DATE
------ ------ ----------- ---------
Class A Shares at NAV(2) 25.56% -- 14.31% 8/30/02
Class A Shares at POP(3) 18.34 -- 9.36 8/30/02
Class B Shares at NAV(2) 24.83 -- 13.63 8/30/02
Class B Shares with CDSC(4) 20.83 -- 10.75 8/30/02
Class C Shares at NAV(2) 24.83 -- 13.63 8/30/02
Class C Shares with CDSC(4) 24.83 -- 13.63 8/30/02
Class X Shares at NAV(2) 26.15 (3.43)% 3.35 10/18/96
MSCI EAFE (Net) Index(8) 38.59 (0.05) Note 5 Note 5
S&P 500 Index(9) 28.71 (0.57) Note 6 Note 6
</Table>
(1) Total returns are historical and include changes in share price and the
reinvestment of both dividends and capital gain distributions.
(2) "NAV" (Net Asset Value) total returns do not include the effect of any sales
charge.
(3) "POP" (Public Offering Price) total returns include the effect of the
maximum front-end 5.75% sales charge.
(4) CDSC (contingent deferred sales charge) is applied to redemptions of certain
classes of shares that do not have a sales charge applied at the time of
purchase. CDSC charges for B shares decline from 5% to 0% over a five year
period. CDSC charges for C shares are 1% in the first year and 0%
thereafter.
(5) Index performance is 22.86% for Class A, Class B, Class C (since 8/30/02)
and 3.16% for Class X (since 10/31/96).
(6) Index performance is 17.74% for Class A, Class B, Class C (since 8/30/02)
and 8.06% for Class X (since 10/18/96).
(7) This chart illustrates NAV returns on Class X shares since inception.
Returns on Class A, Class B and Class C shares will vary due to differing
sales charges.
(8) The MSCI EAFE (Net) Index is an unmanaged, commonly used measure of foreign
stock market performance. The index's performance does not reflect sales
charges.
(9) The S&P 500 Index is an unmanaged, commonly used measure of stock market
total performance. The index's performance does not reflect sales charges.
All returns represent past performance which may not be indicative of future
performance. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Because the fund holds a limited number of securities,
it will be impacted by each security's performance more than a fund with a large
number of holdings.
Foreign investing involves special risks such as currency fluctuation and less
public disclosure, as well as economic and political risks.
GROWTH OF $10,000 PERIODS ENDING 12/31/03
[CHART]
<Table>
<Caption>
PHOENIX-KAYNE INTERNATIONAL FUND CLASS X(7) MSCI EAFE (NET) INDEX(8) S&P 500 TOTAL RETURN INDEX(9)
10/18/96 $ 10,000 $ 10,000 $ 10,000
12/31/96 $ 10,256 $ 10,264 $ 10,474
12/31/97 $ 11,940 $ 10,447 $ 13,970
12/31/98 $ 15,101 $ 12,536 $ 17,988
12/31/99 $ 19,792 $ 15,916 $ 21,789
12/29/2000 $ 17,882 $ 13,661 $ 19,788
12/31/2001 $ 12,571 $ 10,732 $ 17,438
12/31/2002 $ 10,052 $ 9,021 $ 13,584
12/31/2003 $ 12,680 $ 12,502 $ 17,484
</Table>
This Growth of $10,000 chart assumes an initial investment of $10,000 made on
10/18/96 (inception of the Fund) in Class X shares. The total return for Class X
shares do not include the effect of any sales charge. Performance assumes
dividends and capital gains are reinvested.
COUNTRY WEIGHTINGS 12/31/03
[CHART]
As a percentage of equity holdings
<Table>
Japan 20.4%
France 19.1%
United Kingdom 17.8%
Switzerland 11.1%
Italy 5.4%
Spain 5.5%
Ireland 4.2%
Netherlands 4.2%
Other 12.3%
</Table>
See Notes to Financial Statements
27
<Page>
TEN LARGEST HOLDINGS AT DECEMBER 31, 2003 (AS A PERCENTAGE OF TOTAL NET ASSETS)
<Table>
1. Air Liquide 3.2%
CHEMICALS
2. Total Fina Elf ADR 3.2%
INTEGRATED OIL AND GAS
3. Royal Dutch Petroleum Co. ADR 3.1%
INTEGRATED OIL AND GAS
4. Unicredito Italiano SPA 3.1%
BANKS
5. BP Amoco PLC 3.0%
INTEGRATED OIL AND GAS
6. Telefonica 2.8%
TELECOMMUNICATION SERVICES
7. Canon 2.8%
BUSINESS MACHINES, CAMERAS AND OPTIC MANUFACTURER
8. Allied Irish Banks PLC 2.7%
BANKS
9. Dexia 2.7%
BANKS
10. Novartis ADR 2.7%
PRODUCES PHARMACEUTICALS PRODUCTS
</Table>
INVESTMENTS AT DECEMBER 31, 2003
<Table>
<Caption>
SHARES VALUE
------------- -------------
FOREIGN COMMON STOCKS--99.7%
AUSTRALIA--1.5%
Rio Tinto Ltd. (Mining) 14,000 $ 390,965
Telstra Corp. Ltd. (Telecommunication) 109,000 394,403
-------------
785,368
-------------
BELGIUM--4.2%
Dexia (Banks)(d) 81,300 1,393,806
Fortis (Banks) 39,300 786,216
-------------
2,180,022
-------------
FINLAND--2.1%
Nokia Corp. ADR (Telecommunications Equipment) 63,007 1,071,119
FRANCE--19.0%
Air Liquide (Chemicals) 9,223 1,620,546
Axa ADR (Multi-line Insurance) 44,984 965,806
BNP Paribas (Banks) 17,000 1,065,086
Groupe Danone ADR (Packaged Foods and Meats) 16,190 526,013
L'OREAL (Consumer Products) 7,300 595,521
Peugot SA (Automobile Manufacturers) 21,300 1,079,996
Sanofi Synthelabo SA (Pharmaceuticals) 15,000 1,123,897
Societe Generale (Banks) 6,600 579,833
STMicroelectronics NV (Semiconductors) 22,600 609,829
Total Fina Elf ADR (Integrated Oil & Gas) 17,496 1,618,555
-------------
9,785,082
-------------
HONG KONG--1.1%
Hong Kong & China Gas Co., Ltd. (Gas Utilities) 376,000 573,905
IRELAND--4.2%
Allied Irish Banks PLC (Banks) 88,700 1,408,235
Bank of Ireland (Banks) 54,000 $ 733,301
-------------
2,141,536
-------------
ITALY--5.4%
Telecom Italia Mobil SPA
(Wireless Telecommunications Services) 220,000 1,190,038
Unicredito Italiano SPA (Banks) 296,600 1,593,221
-------------
2,783,259
-------------
JAPAN--20.4%
Canon (Office Electronics) 31,000 1,439,378
Denso Corp. (Auto Parts & Equipment) 53,500 1,050,386
Fanuc Ltd. (Industrial Equipment) 8,000 477,901
Kao Corp. (Consumer Products) 22,000 446,264
Matsushita Electric Industrial (Consumer Electronics) 87,000 1,199,721
Nippon Telegraph & Telephone
(Integrated Telecommunication Services) 215 1,034,289
NTT Docomo, Inc. (Wireless
Telecommunications Services) 360 813,995
Rohm Co., Ltd. (Semiconductors) 4,200 490,853
SECOM CO., LTD. (Diversified Commercial Services) 15,000 558,295
Shin-Etsu Chemical Co. Ltd. (Chemicals) 21,800 888,471
SMC Corp. (Industrial Machinery) 9,100 1,129,562
Toyota Motor Corp. (Automobile Manufacturers) 27,600 929,673
-------------
10,458,788
-------------
NETHERLANDS--4.1%
Aegon (Life & Health Insurance) 35,462 522,062
Royal Dutch Petroleum Co. ADR
(Integrated Oil & Gas) 30,685 1,607,587
-------------
2,129,649
-------------
</Table>
See Notes to Financial Statements
28
<Page>
<Table>
<Caption>
SHARES VALUE
------------- -------------
SINGAPORE--1.1%
Singapore Technologies Engineering Ltd.
(Engineering Services) 460,000 $ 552,553
SPAIN--5.5%
Banco Bilbao Vizcaya SA (Banks) 55,000 755,854
Banco Popular Espanol SA (Banks) 10,000 593,639
Telefonica (Integrated Telecommunication
Services)(b) 99,700 1,456,496
-------------
2,805,989
-------------
SWEDEN--2.2%
Hennes & Mauritz AB--Series B (Retail) 25,600 605,938
Svenska Cellulosa AB--Class B (Paper &
Packaging Products) 13,000 529,033
-------------
1,134,971
-------------
SWITZERLAND--11.1%
Givaudan (Specialty Chemicals) 1,140 589,038
Nestle ADR (Packaged Foods and Meats) 17,443 1,089,526
Novartis ADR (Pharmaceuticals) 29,676 1,361,832
Swiss Reinsurance (Reinsurance) 7,500 504,024
Swisscom AG (Integrated Telecommunication Services) 3,250 1,067,203
UBS AG (Banks) 15,990 1,090,022
-------------
5,701,645
-------------
UNITED KINGDOM--17.8%
BP Amoco PLC (Integrated Oil & Gas) 190,950 1,540,528
Compass Group PLC (Food Distributors) 156,000 1,055,747
Diageo PLC (Beverage) 59,800 782,781
GlaxoSmithKline PLC (Pharmaceuticals) 57,373 1,307,884
HBOS PLC (Banks) 43,000 554,062
Pearson PLC (Publishing) 51,924 575,189
Reed International PLC (Publishing) 60,300 501,786
Royal Bank of Scotland Group PLC (Banks) 37,200 1,090,497
Tesco PLC (Food Retail) 118,000 541,667
Vodafone ADR (Wireless Telecommunication
Services) 46,980 1,176,379
-------------
9,126,520
-------------
TOTAL FOREIGN COMMON STOCKS
(IDENTIFIED COST $44,134,703) 51,230,406
-------------
</Table>
<Table>
<Caption>
STANDARD
& POOR'S PAR
RATING VALUE
(UNAUDITED) (000) VALUE
----------- -------- ------------
SHORT-TERM OBLIGATIONS--2.8%(c)
TIME DEPOSITS--1.4%
Bank of Montreal, 1.06%, 1/15/04 A-1+ $ 330 $ 329,930
Credit Agricole Indosuez, 1.08%, 1/6/04 A-1+ 378 377,814
------------
707,744
------------
REPURCHASE AGREEMENT--0.7%
Credit Suisse First Boston Corporation,
(Date 12/31/03), 1.04%, Due 1/2/04
(Repurchased proceeds $377,825);
Collateralized by $385,370 in various
investment grade corporate bonds and
commercial papers with interest range
of 3.45% to 8.62% 378 377,814
<Caption>
SHARES
--------
MONEY MARKET MUTUAL FUNDS--0.7%
Merrill Lynch Premier Institutional Fund 27,000 27,000
Merrimac Cash Fund-Premium Class 321,142 321,142
------------
348,142
------------
TOTAL SHORT-TERM OBLIGATIONS
(IDENTIFIED COST $1,433,700) 1,433,700
------------
TOTAL INVESTMENTS--102.5%
(IDENTIFIED COST $45,568,403) $ 52,664,106(a)
Other assets and liabilities, net--(2.5)% (1,280,634)
------------
NET ASSETS--100.0% $ 51,383,472
============
</Table>
(a) Federal Income Tax Information: Net unrealized depreciation of investment
securities is comprised of gross appreciation of $8,515,146 and gross
depreciation of $2,392,359 for federal income tax purposes. At December 31,
2003, the aggregate cost of securities for federal income tax purposes was
$46,541,319.
(b) Non-income producing
(c) Represents securities purchased with cash collateral received for securities
on loan.
(d) All or a portion of this security was on loan at December 31, 2003.
See Notes to Financial Statements
29
<Page>
INDUSTRY DIVERSIFICATION
AS A PERCENTAGE OF TOTAL VALUE OF
TOTAL LONG-TERM INVESTMENTS
(UNAUDITED)
<Table>
Banks 22.7%
Integrated Oil & Gas 9.3
Integrated Telecommunication Services 7.7
Pharmaceuticals 7.4
Wireless Telecommunications Services 6.2
Chemicals 6.0
Automobile Manufacturers 3.9
Packaged Foods & Meats 3.2
Industrial Machinery and Equipment 3.1
Multi-Line Insurance 2.9
Office Electronics 2.8
Consumer Electronics 2.3
Semiconductors 2.2
Publishing 2.1
Telecommunications Equipment 2.1
Food Distributors 2.1
Auto Parts & Equipment 2.1
Consumer Products 2.0
Brewers 1.5
Retail 1.2
Oil & Gas Equipment & Services 1.1
Diversified Commercial Services 1.1
Engineering Services 1.1
Food Retail 1.1
Paper & Packaging Products 1.0
Reinsurance 1.0
Mining 0.8
-----
100.0%
=====
</Table>
See Notes to Financial Statements
30
<Page>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
<Table>
ASSETS
Investments securities at value
including $1,346,751 of securities on loan
(Identified cost $45,568,403) $ 52,664,106
Receivables
Securities sold 1,008,283
Fund shares sold 848,270
Dividends and interest 43,058
Tax reclaim 38,749
Prepaid expenses 15,538
---------------
Total Assets 54,618,004
---------------
LIABILITIES
Cash overdraft 1,679,082
Payables
Fund shares repurchased 1,249
Collateral on securities loaned 1,433,700
Investment advisory fee 28,661
Distribution and service fees 7,279
Administration fee 11,026
Transfer agent fee 10,597
Financial agent fee 7,215
Trustees' fee 2,032
Accrued expenses 53,691
---------------
Total liabilities 3,234,532
---------------
NET ASSETS $ 51,383,472
===============
NET ASSETS CONSIST OF:
Capital paid in on shares of beneficial interest $ 69,313,365
Undistributed net investment income 16,556
Accumulated net realized loss (25,047,884)
Net unrealized appreciation 7,101,435
---------------
NET ASSETS $ 51,383,472
===============
CLASS A
Shares of beneficial interest outstanding, no par value,
unlimited authorization (Net Assets $9,582,043) 850,454
Net asset value per share $ 11.27
Offering price per share $11.27/(1-5.75%) $ 11.96
CLASS B
Shares of beneficial interest outstanding, no par value,
unlimited authorization (Net Assets $154,145) 13,746
Net asset value and offering price per share $ 11.21
CLASS C
Shares of beneficial interest outstanding, no par value,
unlimited authorization (Net Assets $634,054) 56,550
Net asset value and offering price per share $ 11.21
CLASS X
Shares of beneficial interest outstanding, no par value,
unlimited authorization (Net Assets $41,013,230) 3,626,794
Net asset value and offering price per share $ 11.31
</Table>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
<Table>
INVESTMENT INCOME
Dividends $ 1,202,028
Interest 5,738
Income from securities loaned, net 15,976
Foreign taxes withheld (125,649)
---------------
Total investment income 1,098,093
---------------
EXPENSES
Investment advisory fee 464,735
Service fees, Class A 10,506
Distribution and service fees, Class B 1,114
Distribution and service fees, Class C 3,229
Administration 64,463
Financial agent fee 75,709
Transfer agent fee 72,991
Registration 56,235
Custodian 36,895
Professional 28,133
Trustees 14,065
Printing 11,307
Miscellaneous 23,270
---------------
Total expenses 862,652
Less: expenses borne by investment adviser (162,514)
---------------
Net expenses 700,138
---------------
NET INVESTMENT INCOME 397,955
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments (6,283,498)
Net realized loss on foreign currency and foreign currency
transactions (157,258)
Net change in unrealized appreciation (depreciation) on
investments 17,341,830
Net change in unrealized appreciation (depreciation)
on foreign currency and foreign currency transactions 362
---------------
NET GAIN ON INVESTMENTS 10,901,436
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 11,299,391
===============
</Table>
See Notes to Financial Statements
31
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED
12/31/03 12/31/02
------------- -------------
FROM OPERATIONS
Net investment income (loss) $ 397,955 $ 313,144
Net realized gain (loss) (6,440,756) (13,935,767)
Net change in unrealized appreciation (depreciation) 17,342,192 (394,327)
------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 11,299,391 (14,016,950)
------------- -------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income, Class A (25,007) (179,583)
Net investment income, Class X (204,039) --
Return of capital, Class X -- (139,712)
------------- -------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS (229,046) (319,295)
------------- -------------
FROM SHARE TRANSACTIONS
CLASS A
Proceeds from sales of shares (1,170,998 and 64,724 shares, respectively) 11,154,384 583,861
Net asset value of shares issued from reinvestment of distributions
(2,263 and 0 shares, respectively) 24,891 --
Cost of shares repurchased (339,778 and 47,753 shares, respectively) (3,169,700) (433,739)
------------- -------------
Total 8,009,575 150,122
------------- -------------
CLASS B
Proceeds from sales of shares (14,162 and 10,951 shares, respectively) 133,689 103,399
Cost of shares repurchased (11,367 and 0 shares, respectively) (105,759) --
------------- -------------
Total 27,930 103,399
------------- -------------
CLASS C
Proceeds from sales of shares (65,781 and 15,991 shares, respectively) 617,964 147,818
Cost of shares repurchased (20,284 and 4,938 shares, respectively) (188,779) (44,049)
------------- -------------
Total 429,185 103,769
------------- -------------
CLASS X
Proceeds from sales of shares (1,366,544 and 11,453,659 shares, respectively) 12,834,307 119,303,594
Net asset value of shares issued from reinvestment of distributions
(13,861 and 23,316 shares, respectively) 153,020 237,358
Cost of shares repurchased (3,375,056 and 10,847,888 shares, respectively) (32,146,995) (111,069,098)
------------- -------------
Total (19,159,668) 8,471,854
------------- -------------
INCREASE (DECREASE) IN NET ASSETS FROM SHARE TRANSACTIONS (10,692,978) 8,829,144
------------- -------------
NET INCREASE (DECREASE) IN NET ASSETS 377,367 (5,507,101)
NET ASSETS
Beginning of period 51,006,105 56,513,206
------------- -------------
END OF PERIOD [INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF
$16,556 AND $0, RESPECTIVELY] $ 51,383,472 $ 51,006,105
============= =============
</Table>
See Notes to Financial Statements
32
<Page>
FINANCIAL HIGHLIGHTS
(SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
<Table>
<Caption>
CLASS X
-----------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2003 2002 2001 2000 1999
Net asset value, beginning of period $ 9.01 $ 11.32 $ 16.15 $ 18.47 $ 15.51
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) 0.09(5) 0.03 0.04 0.03 0.12
Net realized and unrealized gain (loss) 2.26 (2.29) (4.83) (1.82) 4.68
-------- -------- -------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS 2.35 (2.26) (4.79) (1.79) 4.80
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS:
From net investment income (0.05) (0.03) (0.04) (0.03) (0.12)
From net realized gain -- -- -- (0.50) (1.72)
From return of capital -- (0.02) -- -- --
-------- -------- -------- -------- --------
TOTAL DISTRIBUTIONS (0.05) (0.05) (0.04) (0.53) (1.84)
-------- -------- -------- -------- --------
Change in net asset value 2.30 (2.31) (4.83) (2.32) 2.96
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD $ 11.31 $ 9.01 $ 11.32 $ 16.15 $ 18.47
======== ======== ======== ======== ========
Total return 26.15% (20.04)% (29.72)% (9.65)% 0.31%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $ 41,013 $ 50,656 $ 56,513 $ 51,828 $ 40,590
RATIO TO AVERAGE NET ASSETS OF:
Operating expenses 1.40%(1) 1.41% 1.38% 1.38% 1.40%(1)
Net investment income (loss) 0.93% 0.49% 0.09% 0.24% 0.63%
Portfolio turnover rate 49% 65% 88% 35% 57%
<Caption>
CLASS A CLASS B
--------------------------------- --------------------------------
YEAR ENDED FROM INCEPTION YEAR ENDED FROM INCEPTION
DECEMBER 31, 8/30/02 TO DECEMBER 31, 8/30/02 TO
2003 12/31/02 2003 12/31/02
------------- -------------- ------------- --------------
Net asset value, beginning of period $ 9.01 $ 9.45 $ 8.98 $ 9.45
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.03)(5) (0.03) (0.03)(5) (0.06)
Net realized and unrealized gain (loss) 2.32 (0.41) 2.26 (0.41)
------------- -------------- ------------- --------------
TOTAL FROM INVESTMENT OPERATIONS 2.29 (0.44) 2.23 (0.47)
------------- -------------- ------------- --------------
LESS DISTRIBUTIONS:
From net investment income (0.03) -- -- --
From net realized gain -- -- -- --
------------- -------------- ------------- --------------
TOTAL DISTRIBUTIONS (0.03) -- -- --
------------- -------------- ------------- --------------
Change in net asset value 2.26 (0.44) 2.23 (0.47)
------------- -------------- ------------- --------------
NET ASSET VALUE, END OF PERIOD $ 11.27 $ 9.01 $ 11.21 $ 8.98
============= ============== ============= ==============
Total return(2) 25.56% (4.76)%(3) 24.83% (4.97)%(3)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $ 9,582 $ 153 $ 154 $ 98
RATIO TO AVERAGE NET ASSETS OF:
Operating expenses 1.65% 1.66%(4) 2.40% 2.41%(4)
Net investment income (loss) (0.31)% 0.24%(4) (0.27)% (0.51)%(4)
Portfolio turnover rate 49% 65%(3) 49% 65%(3)
<Caption>
CLASS C
---------------------------------
YEAR ENDED FROM INCEPTION
DECEMBER 31, 8/30/02 TO
2003 12/31/02
------------- --------------
Net asset value, beginning of period $ 8.98 $ 9.45
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.06)(5) (0.06)
Net realized and unrealized gain (loss) 2.29 (0.41)
------------- --------------
TOTAL FROM INVESTMENT OPERATIONS 2.23 (0.47)
------------- --------------
LESS DISTRIBUTIONS:
From net investment income -- --
From net realized gain -- --
------------- --------------
TOTAL DISTRIBUTIONS -- --
------------- --------------
Change in net asset value 2.23 (0.47)
------------- --------------
NET ASSET VALUE, END OF PERIOD $ 11.21 $ 8.98
============= ==============
Total return(2) 24.83% (4.97)%(3)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $ 634 $ 99
RATIO TO AVERAGE NET ASSETS OF:
Operating expenses 2.40% 2.41%(4)
Net investment income (loss) (0.70)% (0.51)%(4)
Portfolio turnover rate 49% 65%(3)
</Table>
(1) If the investment adviser had not waived fees and reimbursed expenses, the
ratio of operating expenses to average net assets would have been 1.77% and
1.47% for the period ended December 31, 2003 and 1999, respectively.
(2) Maximum sales charges are not reflected in the total return calculation.
(3) Not annualized.
(4) Annualized.
(5) Computed using average shares outstanding.
See Notes to Financial Statements
33
<Page>
PHOENIX-KAYNE RISING DIVIDENDS FUND COMMENTARY
INVESTMENT OBJECTIVE
Phoenix-Kayne Rising Dividends Fund has an investment objective of
long-term capital appreciation, with dividend income a secondary consideration.
There is no guarantee that the fund will achieve its objective.
MARKET OVERVIEW
In the full year of 2003, the domestic equity markets provided exceptional
returns, as illustrated by the performance of the S&P 500 Index(1) (+28.71%),
Dow Jones Industrial Average(2) (+28.04%), and Nasdaq Composite Index(3)
(+50.01%). For the entire year, the strongest sectors in the S&P 500 were
information technology (+47.08%), materials (+38.12%), and consumer
discretionary (+38.46%). The relatively weakest sectors were telecommunications
services (+7.06%), consumer staples (+13.11%), and health care (+15.06%).
Essentially, in a recovery year, the cyclical sectors performed better than the
defensive sectors.
Thematically, for the year, lower quality and smaller cap stocks performed
much stronger than did higher quality and larger cap stocks.
FUND PERFORMANCE
The Rising Dividends Fund's Class X shares produced strong returns for the
year (+18.45%), but underperformed the benchmark S&P 500 Index for the year 2003
(+28.71%). Although stock selection in the triple-A-rated companies somewhat
affected relative return, the majority of the underperformance versus the S&P
500 was attributable to the Fund's exclusive focus on high-quality companies. In
addition, our investment policy of not investing in smaller cap companies also
was a factor in the underperformance of the Fund. All performance figures assume
reinvestment of distributions and exclude the effect of sales charges. Past
performance is not indicative of future results and current performance may be
higher or lower than the performance shown.
(1) THE S&P 500 INDEX IS A MEASURE OF STOCK MARKET TOTAL RETURN PERFORMANCE.
(2) THE DOW JONES INDUSTRIAL AVERAGE IS A MEASURE OF LARGE-CAP STOCK
PERFORMANCE.
(3) THE NASDAQ COMPOSITE INDEX IS A MARKET CAPITALIZATION-WEIGHTED INDEX OF ALL
ISSUES LISTED ON THE NASDAQ STOCK MARKET, EXCEPT FOR RIGHTS, WARRANTS, UNITS
AND CONVERTIBLE DEBENTURES. THE INDEX IS CALCULATED AS A PRICE ONLY RETURN.
THE INDEXES ARE UNMANAGED AND ARE NOT AVAILABLE FOR DIRECT INVESTMENT.
THE PRECEDING INFORMATION IS THE OPINION OF PORTFOLIO MANAGEMENT. PAST
PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, AND THERE IS NO GUARANTEE THAT
MARKET FORECASTS DISCUSSED WILL BE REALIZED.
34
<Page>
The market's emphasis on lower quality companies is illustrated by the following
chart:
[CHART]
S&P 500(R) Index Returns by Credit Quality
One Year Ending December 31, 2003
<Table>
AAA 14.49%
AA+, AA, AA- 18.65%
A+, A, A- 29.93%
BBB+ 33.52%
BBB+, BBB- 35.91%
BELOW INVESTMENT GRADE 74.91%
NOT RATED 55.23%
</Table>
Approximately 29% of the weight of the S&P 500 Index is represented by
companies that have a triple-B-plus or lower credit rating or no rating. In
contrast, the Rising Dividends Fund is 100% invested in companies with an
A-minus or better credit-quality profile.
For the full year, the five positions that contributed the most to the
Fund's return were Linear Technology, Home Depot, General Electric, Intel, and
Wells Fargo. The five positions that contributed the least were SBC
Communications, Merck, Johnson & Johnson, Leggett & Platt, and Wrigley.
Over time in the universe of high-quality companies, we have observed that
last year's loser (Home Depot in 2002) often becomes this year's winner.
High-quality companies have strong staying power and usually find a way to solve
their problems.
PURCHASES AND SALES
During the year, seven new stocks were purchased for the Fund and six
stocks were sold in their entirety. In chronological order, the Fund purchased
PepsiCo, Air Products & Chemicals, Harley-Davidson, Emerson, ConocoPhillips,
Leggett & Platt, and Avery Dennison. The purchases of PepsiCo and
Harley-Davidson reflected opportunistic valuations in consistent-growth
companies, while the buys of Air Products, Emerson, Leggett & Platt, and Avery
Dennison reflected attractive valuations, above-average dividend yields, and a
belief in the industrial recovery. The purchase of ConocoPhillips was based on
good value, above-average income, and the improvement of the company's balance
sheet.
In chronological order, the Fund sold SBC Communications, Fannie Mae,
Medtronic, Golden
35
<Page>
West Financial, Medco Health Solutions, and Intel. SBC and Fannie Mae were sold
because of deterioration in their fundamentals. Medtronic, Golden West
Financial, and Intel were sold because their solid stock performance created
rich valuations. Medco was a non-strategic fractional spin-off from Merck.
In addition to the new purchases and complete sales, positions were
increased in Wal-Mart, Fifth Third Bancorp, Harley-Davidson, Citigroup, and
Merck. Positions were trimmed in Wrigley, Coca-Cola, Linear Technology, State
Street, Home Depot, Microsoft, and IBM.
SUMMARY
The Fund invests solely in high-quality companies, but low-quality stocks
were favored by the equity markets in 2003. There are certain factors that
indicate that the higher quality, more consistent earnings-growth companies
could assume market leadership in 2004. To a significant extent, low real
interest rates and abundant liquidity in the financial system provided an
environment that allowed lower quality stocks to rebound from their cyclical
lows. With the economic recovery strongly underway, we believe that interest
rates have probably seen their lows. In addition, we believe earnings
comparisons for more operationally and financially levered companies will be
much more difficult in the second half of 2004.
High-quality companies have differentiated businesses that produce high
returns on investor capital, substantial free cash flows, and low-debt balance
sheets. Such strong financial characteristics allow the companies to reinvest
for continued growth and deliver cash to the shareholders through share
repurchases and cash dividends.
We believe in the power of cash dividends compounding over time. Various
studies have shown that approximately two-thirds of long-term stock returns are
derived from dividends. The Rising Dividends Fund provides a dividend yield that
is approximately twice the level of Treasury-bill yields. In addition, the
companies in the Fund have increased their dividends by 10 to 15% per year over
time, which we believe provides a basis for an increasing income stream in the
future and related capital appreciation.
36
<Page>
PHOENIX-KAYNE RISING DIVIDENDS FUND
AVERAGE ANNUAL TOTAL RETURNS(1) PERIOD ENDING 12/31/03
<Table>
<Caption>
INCEPTION INCEPTION
1 YEAR 5 YEAR TO 12/31/03 DATE
------ ------ ----------- ---------
Class A Shares at NAV(2) 18.06% -- 10.02% 8/30/02
Class A Shares at POP(3) 11.27 -- 5.25 8/30/02
Class B Shares at NAV(2) 17.29 -- 9.23 8/30/02
Class B Shares with CDSC(4) 13.29 -- 6.31 8/30/02
Class C Shares at NAV(2) 17.24 -- 9.19 8/30/02
Class C Shares with CDSC(4) 17.24 -- 9.19 8/30/02
Class X Shares at NAV(2) 18.45 (0.12)% 9.14 5/1/95
S&P 500 Index(7) 28.71 (0.57) Note 5 Note 5
</Table>
(1) Total returns are historical and include changes in share price and the
reinvestment of both dividends and capital gain distributions.
(2) "NAV" (Net Asset Value) total returns do not include the effect of any sales
charge.
(3) "POP" (Public Offering Price) total returns include the effect of the
maximum front-end 5.75% sales charge.
(4) CDSC (contingent deferred sales charge) is applied to redemptions of certain
classes of shares that do not have a sales charge applied at the time of
purchase. CDSC charges for B shares decline from 5% to 0% over a five year
period. CDSC charges for C shares are 1% in the first year and 0%
thereafter.
(5) Index performance is 17.74% for Class A, Class B and Class C (since 8/30/02)
and 11.18% for Class X (since 5/1/95).
(6) This chart illustrates NAV returns on Class X shares since inception.
Returns on Class A, Class B and Class C shares will vary due to differing
sales charges.
(7) The S&P 500 Index is an unmanaged, commonly used measure of stock market
total return performance. The index's performance does not reflect sales
charges.
All returns represent past performance which may not be indicative of future
performance. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Because the fund holds a limited number of securities,
it will be impacted by each security's performance more than a fund with a large
number of holdings.
GROWTH OF $10,000 PERIODS ENDING 12/31/03
[CHART]
<Table>
<Caption>
PHOENIX-KAYNE RISING DIVIDENDS FUND CLASS X(6) S&P 500 TOTAL RETURN INDEX(7)
5/1/95 $ 10,000 $ 10,000
12/29/95 $ 12,065 $ 12,184
12/31/96 $ 14,368 $ 15,017
12/31/97 $ 18,821 $ 20,029
12/31/98 $ 21,483 $ 25,789
12/31/99 $ 24,991 $ 31,239
12/29/2000 $ 24,492 $ 28,369
12/31/2001 $ 21,791 $ 25,000
12/31/2002 $ 18,032 $ 19,475
12/31/2003 $ 21,359 $ 25,067
</Table>
This Growth of $10,000 chart assumes an initial investment of $10,000 made on
5/1/95 (inception of the Fund) in Class X shares. The total return for Class X
shares do not include the effect of any sales charge. Performance assumes
dividends and capital gains are reinvested. The performance of other shares will
be greater or less than that shown based on differences in inception dates, fees
and sales charges.
SECTOR WEIGHTINGS 12/31/03
[CHART]
As a percentage of equity holdings
<Table>
Financials 21.6%
Consumer Staples 15.3%
Health Care 14.1%
Information Technology 14.0%
Industrials 12.6%
Consumer Discretionary 9.2%
Energy 8.4%
Materials 4.8%
</Table>
See Notes to Financial Statements
37
<Page>
TEN LARGEST HOLDINGS AT DECEMBER 31, 2003 (AS A PERCENTAGE OF NET ASSETS)
<Table>
1. General Electric Co. 5.0%
CONSUMER AND INDUSTRIAL ELECTRICAL PRODUCTS PRODUCER
2. Exxon Mobil Corp. 4.8%
ENERGY AND PETROCHEMICAL PRODUCER
3. Pfizer, Inc. 4.5%
PHARMACEUTICAL DEVELOPER AND MANUFACTURER
4. Linear Technology Corp. 4.3%
INTEGRATED CIRCUITS MANUFACTURER
5. Wells Fargo & Co. 4.2%
REGIONAL BANK
6. Procter & Gamble Co. 4.2%
HOUSEHOLD PRODUCTS
7. Citigroup, Inc. 4.0%
DIVERSIFIED FINANCIAL SERVICES
8. Home Depot, Inc. (The) 4.0%
BUILDING AND HOME IMPROVEMENT STORES
9. Microsoft Corp. 3.9%
LEADING COMPUTER SOFTWARE DEVELOPER
10. Wal-Mart Stores, Inc. 3.7%
GENERAL MERCHANDISE STORES
</Table>
INVESTMENTS AT DECEMBER 31, 2003
<Table>
<Caption>
SHARES VALUE
-------------- --------------
COMMON STOCKS--99.0%
BANKS--7.4%
Fifth Third Bancorp. 61,900 $ 3,658,290
Wells Fargo & Co. 81,980 4,827,802
--------------
8,486,092
--------------
COMPUTER HARDWARE--1.9%
International Business Machines Corp. 23,610 2,188,175
DATA PROCESSING SERVICES--3.7%
Automatic Data Processing, Inc. 108,330 4,290,952
DIVERSIFIED CHEMICALS--4.7%
Air Products & Chemicals, Inc. 46,700 2,467,161
E. I. du Pont de Nemours and Co. 64,800 2,973,672
--------------
5,440,833
--------------
DIVERSIFIED FINANCIAL SERVICES--8.5%
American Express Co. 58,500 2,821,455
Citigroup, Inc. 94,400 4,582,176
State Street Corp. 46,200 2,406,096
--------------
9,809,727
--------------
ELECTRICAL COMPONENTS & EQUIPMENT--3.3%
Emerson Electric Co. 58,000 3,755,500
GENERAL MERCHANDISE STORES--3.7%
Wal-Mart Stores, Inc. 80,900 4,291,745
HOME FURNISHINGS--2.1%
Leggett & Platt, Inc. 110,300 $ 2,385,789
HOME IMPROVEMENT RETAIL--4.0%
Home Depot, Inc. (The) 128,100 4,546,269
HOUSEHOLD PRODUCTS--4.2%
Procter & Gamble Co. 47,950 4,789,246
INDUSTRIAL CONGLOMERATES--5.0%
General Electric Co. 184,660 5,720,767
INDUSTRY MACHINERY--2.3%
Illinois Tool Works, Inc. 31,020 2,602,888
INSURANCE BROKERS--2.5%
Marsh & McLennan Companies, Inc. 61,180 2,929,910
INTEGRATED OIL & GAS--8.3%
ConocoPhillips 62,200 4,078,454
Exxon Mobil Corp. 133,640 5,479,240
--------------
9,557,694
--------------
MOTORCYCLE MANUFACTURERS--3.1%
Harley-Davidson, Inc.(b) 74,500 3,540,985
MULTI-LINE INSURANCE--2.9%
American International Group, Inc. 50,800 3,367,024
OFFICE SUPPLIES--2.0%
Avery Dennison Corp. 41,100 2,302,422
</Table>
See Notes to Financial Statements
38
<Page>
<Table>
<Caption>
SHARES VALUE
-------------- --------------
PACKAGED FOODS AND MEATS--1.7%
Wm. Wrigley, Jr. Co.(b) 34,720 $ 1,951,611
PHARMACEUTICALS--14.0%
Eli Lilly & Co. 39,400 2,771,002
Johnson & Johnson 82,770 4,275,898
Merck & Co., Inc. 82,810 3,825,822
Pfizer, Inc. 147,300 5,204,109
--------------
16,076,831
--------------
SEMICONDUCTORS--4.3%
Linear Technology Corp. 118,600 4,989,502
SOFT DRINKS--5.5%
Coca-Cola Co. 83,360 4,230,520
PepsiCo, Inc. 45,800 2,135,196
--------------
6,365,716
--------------
SYSTEMS SOFTWARE--3.9%
Microsoft Corp. 162,480 4,474,699
- -----------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(IDENTIFIED COST $102,833,654) 113,864,377
- -----------------------------------------------------------------------------------------
<Caption>
STANDARD
& POOR'S PAR
RATING VALUE
(UNAUDITED) (000) VALUE
----------- -------------- --------------
SHORT-TERM OBLIGATIONS--1.8%(c)
TIME DEPOSITS--0.9%
Bank of Montreal, 1.06%, 1/15/04 A-1+ $ 466 $ 465,667
Credit Agricole Indosuez, 1.08%, 1/6/04 A-1+ 533 533,251
--------------
998,918
--------------
REPURCHASE AGREEMENT--0.5%
Credit Suisse First Boston Corporation
(Dated 12/31/03), 1.04%, Due 1/2/04
(Repurchased proceeds $533,281);
Collateralized by $543,915 in various
investment grade corporate bonds and
commercial papers with interest ranges
of 3.45% to 8.62% 533 533,251
<Caption>
SHARES
--------------
MONEY MARKET MUTUAL FUNDS-0.4%
Merrill Lynch Premier Institutional Fund 38,108 38,108
Merrimac Cash Fund-Premium Class 453,263 453,263
--------------
491,371
--------------
- -----------------------------------------------------------------------------------------
TOTAL SHORT-TERM OBLIGATIONS
(IDENTIFIED COST $2,023,540) 2,023,540
- -----------------------------------------------------------------------------------------
TOTAL INVESTMENTS--100.8%
(IDENTIFIED COST $104,857,194) $ 115,887,917(a)
Other assets and liabilities, net--(0.8)% (870,207)
--------------
NET ASSETS--100.0% $ 115,017,710
==============
</Table>
(a) Federal Income Tax Information: Net unrealized depreciation of investment
securities is comprised of gross appreciation of $15,218,107 and gross
depreciation of $4,826,551 for federal income tax purposes. At December 31,
2003, the aggregate cost of securities for federal income tax purposes was
$105,496,361.
(b) All or a portion of this security was on loan as of December 31, 2003.
(c) Represents securities purchased with cash collateral received for securities
on loan.
See Notes to Financial Statements
39
<Page>
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
<Table>
ASSETS
Investments securities at value
including $1,954,312 of securities on loan
(Identified cost $104,857,194) $ 115,887,917
Receivables
Securities sold 3,183,465
Fund shares sold 1,340,805
Dividends and interest 185,909
Securities loan earnings 540
Prepaid expenses 21,005
---------------
Total Assets 120,619,641
---------------
LIABILITIES
Cash overdraft 3,397,559
Payables
Fund shares repurchased 6,365
Collateral on securities loaned 2,023,540
Investment advisory fee 75,273
Distribution and service fees 22,562
Administration fee 14,860
Transfer agent fee 13,611
Financial agent fee 6,182
Trustees' fee 2,030
Accrued expenses 39,949
---------------
Total liabilities 5,601,931
---------------
NET ASSETS $ 115,017,710
===============
NET ASSETS CONSIST OF:
Capital paid in on shares of beneficial interest $ 122,374,022
Undistributed net investment income 468,303
Accumulated net realized loss (18,855,338)
Net unrealized appreciation 11,030,723
---------------
NET ASSETS $ 115,017,710
===============
CLASS A
Shares of beneficial interest outstanding, no par value,
unlimited authorization (Net Assets $28,988,184) 1,889,074
Net asset value per share $ 15.35
Offering price per share $15.35/(1-5.75%) $ 16.29
CLASS B
Shares of beneficial interest outstanding, no par value,
unlimited authorization (Net Assets $1,716,719) 112,965
Net asset value and offering price per share $ 15.20
CLASS C
Shares of beneficial interest outstanding, no par value,
unlimited authorization (Net Assets $1,951,757) 128,365
Net asset value and offering price per share $ 15.20
CLASS X
Shares of beneficial interest outstanding, no par value,
unlimited authorization (Net Assets $82,361,050) 5,349,823
Net asset value and offering price per share $ 15.40
</Table>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
<Table>
INVESTMENT INCOME
Dividends $ 1,671,372
Interest 15,178
Income from securities loaned, net 2,986
---------------
Total investment income 1,689,536
---------------
EXPENSES
Investment advisory fee 738,917
Service fees, Class A 29,151
Distribution and service fees, Class B 8,692
Distribution and service fees, Class C 11,269
Administration 84,631
Transfer agent 108,558
Financial agent fee 64,038
Registration 57,872
Printing 29,778
Custodian 24,631
Professional 22,213
Trustees 14,063
Miscellaneous 25,996
---------------
Total expenses 1,219,809
---------------
NET INVESTMENT INCOME 469,727
---------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments (3,486,365)
Net change in unrealized appreciation
(depreciation) on investments 20,351,108
---------------
NET GAIN ON INVESTMENTS 16,864,743
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 17,334,470
===============
</Table>
See Notes to Financial Statements
40
<Page>
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED
12/31/03 12/31/02
-------------- --------------
FROM OPERATIONS
Net investment income (loss) $ 469,727 $ 406,929
Net realized gain (loss) (3,486,365) (11,471,387)
Net change in unrealized appreciation (depreciation) 20,351,108 (7,832,614)
-------------- --------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 17,334,470 (18,897,072)
-------------- --------------
FROM DISTRIBUTIONS TO SHAREHOLDERS
Net investment income, Class A (11,252) --
Net investment income, Class B (1,267) --
Net investment income, Class C (1,111) --
Net investment income, Class X (201,163) (394,434)
-------------- --------------
DECREASE IN NET ASSETS FROM DISTRIBUTIONS TO SHAREHOLDERS (214,793) (394,434)
-------------- --------------
FROM CAPITAL SHARE TRANSACTIONS
CLASS A
Proceeds from sales of shares (1,795,261 and 315,888 shares, respectively) 25,695,166 4,351,036
Net asset value of shares issued from reinvestment of distributions
(763 and 0 shares, respectively) 10,818 --
Cost of shares repurchased (215,207 and 7,631 shares, respectively) (3,001,765) (103,096)
-------------- --------------
Total 22,704,219 4,247,940
-------------- --------------
CLASS B
Proceeds from sales of shares (98,526 and 25,981 shares, respectively) 1,380,545 348,303
Net asset value of shares issued from reinvestment of distributions
(72 and 0 shares, respectively) 1,021 --
Cost of shares repurchased (11,515 and 99 shares, respectively) (158,007) (1,313)
-------------- --------------
Total 1,223,559 346,990
-------------- --------------
CLASS C
Proceeds from sales of shares (121,194 and 49,610 shares, respectively) 1,690,342 665,389
Net asset value of shares issued from reinvestment of distributions
(63 and 0 shares, respectively) 890 --
Cost of shares repurchased (37,218 and 5,284 shares, respectively) (497,184) (70,475)
-------------- --------------
Total 1,194,048 594,914
-------------- --------------
CLASS X
Proceeds from sales of shares (1,250,880 and 1,455,292 shares, respectively) 16,952,203 21,577,941
Net asset value of shares issued from reinvestment of distributions
(9,414 and 16,393 shares, respectively) 133,675 237,373
Cost of shares repurchased (1,840,544 and 2,170,367 shares, respectively) (26,496,577) (30,296,859)
-------------- --------------
Total (9,410,699) (8,481,545)
-------------- --------------
INCREASE (DECREASE) IN NET ASSETS FROM SHARE TRANSACTIONS 15,711,127 (3,291,701)
-------------- --------------
NET INCREASE(DECREASE) IN NET ASSETS 32,830,804 (22,583,207)
NET ASSETS
Beginning of period 82,186,906 104,770,113
-------------- --------------
END OF PERIOD [INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME OF
$468,303 AND $213,369, RESPECTIVELY] $ 115,017,710 $ 82,186,906
============== ==============
</Table>
See Notes to Financial Statements
41
<Page>
PHOENIX-KAYNE RISING DIVIDENDS FUND
FINANCIAL HIGHLIGHTS
(SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
<Table>
<Caption>
CLASS X
-----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------- ----------- ----------- ----------- -----------
Net asset value, beginning of period $ 13.03 $ 15.81 $ 17.97 $ 18.67 $ 17.03
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.07(4) 0.06 0.05 0.06 0.04
Net realized and unrealized gain (loss) 2.33 (2.78) (2.03) (0.44) 2.71
----------- ----------- ----------- ----------- -----------
TOTAL FROM INVESTMENT OPERATIONS 2.40 (2.72) (1.98) (0.38) 2.75
----------- ----------- ----------- ----------- -----------
LESS DISTRIBUTIONS:
From net investment income (0.03) (0.06) (0.05) (0.03) (0.04)
From net realized gain -- -- (0.13) (0.29) (1.07)
----------- ----------- ----------- ----------- -----------
TOTAL DISTRIBUTIONS (0.03) (0.06) (0.18) (0.32) (1.11)
----------- ----------- ----------- ----------- -----------
Change in net asset value 2.37 (2.78) (2.16) (0.70) 1.64
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 15.40 $ 13.03 $ 15.81 $ 17.97 $ 18.67
=========== =========== =========== =========== ===========
Total return 18.45% (17.25)% (11.03)% (2.00)% 16.33%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $ 82,361 $ 77,263 $ 104,770 $ 131,252 $ 123,505
RATIO TO AVERAGE NET ASSETS OF:
Operating expenses 1.19% 1.04% 0.95% 0.90% 1.03%
Net investment income (loss) 0.53% 0.42% 0.30% 0.30% 0.28%
Portfolio turnover rate 26% 26% 32% 42% 33%
<Caption>
CLASS A CLASS B
--------------------------------- ---------------------------------
YEAR ENDED FROM INCEPTION YEAR ENDED FROM INCEPTION
DECEMBER 31, 8/30/02 TO DECEMBER 31, 8/30/02 TO
2003 12/31/02 2003 12/31/02
------------ -------------- ------------ --------------
Net asset value, beginning of period $ 13.02 $ 13.53 $ 12.98 $ 13.53
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) 0.05(4) -- (0.06)(4) (0.01)
Net realized and unrealized gain (loss) 2.31 (0.51) 2.30 (0.54)
------------ -------------- ------------ --------------
TOTAL FROM INVESTMENT OPERATIONS 2.36 (0.51) 2.24 (0.55)
------------ -------------- ------------ --------------
LESS DISTRIBUTIONS:
From net investment income (0.03) -- (0.02) --
From net realized gain -- -- -- --
------------ -------------- ------------ --------------
TOTAL DISTRIBUTIONS (0.03) -- (0.02) --
------------ -------------- ------------ --------------
Change in net asset value 2.33 (0.51) 2.22 (0.55)
------------ -------------- ------------ --------------
NET ASSET VALUE, END OF PERIOD $ 15.35 $ 13.02 $ 15.20 $ 12.98
============ ============== ============ ==============
Total return(1) 18.06% (3.77)%(2) 17.29% (4.07)%(2)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $ 28,988 $ 4,012 $ 1,717 $ 336
RATIO TO AVERAGE NET ASSETS OF:
Operating expenses 1.44% 1.29%(3) 2.19% 2.04%(3)
Net investment income (loss) 0.36% 0.17%(3) (0.47)% (0.58)%(3)
Portfolio turnover rate 26% 26%(2) 26% 26%(2)
<Caption>
CLASS C
---------------------------------
YEAR ENDED FROM INCEPTION
DECEMBER 31, 8/30/02 TO
2003 12/31/02
------------ --------------
Net asset value, beginning of period $ 12.98 $ 13.53
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) (0.06)(4) (0.01)
Net realized and unrealized gain (loss) 2.30 (0.54)
------------ --------------
TOTAL FROM INVESTMENT OPERATIONS 2.24 (0.55)
------------ --------------
LESS DISTRIBUTIONS:
From net investment income (0.02) --
From net realized gain -- --
------------ --------------
TOTAL DISTRIBUTIONS (0.02) --
------------ --------------
Change in net asset value 2.22 (0.55)
------------ --------------
NET ASSET VALUE, END OF PERIOD $ 15.20 $ 12.98
============ ==============
Total return(1) 17.24% (4.07)%(2)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $ 1,952 $ 575
RATIO TO AVERAGE NET ASSETS OF:
Operating expenses 2.19% 2.04%(3)
Net investment income (loss) (0.47)% (0.58)%(3)
Portfolio turnover rate 26% 26%(2)
</Table>
(1) Maximum sales charges are not reflected in the total return calculation.
(2) Not annualized.
(3) Annualized.
(4) Computed using average shares outstanding.
See Notes to Financial Statements
42
<Page>
PHOENIX-KAYNE SMALL-MID CAP FUND COMMENTARY
INVESTMENT OBJECTIVE
Phoenix-Kayne Small-Mid Cap Fund has an investment objective of long-term
capital appreciation, with dividend income a secondary consideration. There is
no guarantee that the fund will achieve its objective.
MARKET OVERVIEW
After a three-year bear market, investors concluded that the market had
bottomed in the first quarter of 2003 and that the 2001-2002 recession had
finally ended. Unlike the period from the end of first quarter of 2000 until the
fall of 2002, when investors sought refuge in high-quality companies with strong
balance sheets, in 2003, investors went on a buying frenzy, seeking out the most
beaten-down companies--low-quality speculative companies with low profitability
and high debt. With strengthening economic news, investors rotated into
low-quality companies that would most benefit from a firming economy. For the
year 2003, quality companies lagged--the worse the quality, the higher the
performance--across all major indexes.
FUND PERFORMANCE
Because of the Fund's focus on high-quality businesses, the fund lagged its
benchmark, the Russell 2500 Index(1), for the year despite generating attractive
absolute returns. The Fund's Class X shares returned 26.71%, while the index
returned 45.51%. All performance figures assume reinvestment of distributions
and exclude the effect of sales charges. Past performance is not indicative of
future results and current performance may be higher or lower than the
performance shown.
For the year 2003, economically sensitive, high-risk sectors, such as
capital goods and technology, produced the strongest performance in the Russell
2500 Index. Interest-rate sensitive stocks, such as financials and utilities,
underperformed during the year as investors anticipated that the strengthening
economy would lead to a rise in interest rates.
During the year 2003, the companies that contributed the most to the Fund's
performance included World Acceptance, Rent-A-Center, and Polaris Industries.
The Fund purchased World Acceptance, a leading blue-collar consumer finance
company, in 2002 after it came under pressure because of heightened
industry-wide regulatory and credit-quality concerns. Our research showed the
company to be insulated from these pressures. Investors ultimately realized that
the industry issues did not affect World Acceptance and drove the stock price
up. Rent-A-Center operates rent-to-own stores that offer high-quality durable
goods such as home electronics, appliances, computers, and furniture to
consumers. The stock price was driven higher by strong revenue growth and strong
free-cash-flow generation that allowed the company to repurchase over two
million of its shares outstanding. Polaris is the world's number-one
manufacturer of snowmobiles and a top maker of all-terrain vehicles (ATV's) and
personal watercraft. The company has proven itself through exceptional financial
performance. Polaris has achieved 20 consecutive years of earnings per share
growth, and has grown through the last
(1) THE RUSSELL 2500 INDEX IS A MARKET CAPITALIZATION-WEIGHTED INDEX OF THE
2,500 SMALLEST COMPANIES IN THE RUSSELL UNIVERSE, WHICH COMPRISES THE 3,000
LARGEST U.S. COMPANIES. THE INDEX IS CALCULATED ON A TOTAL-RETURN BASIS WITH
DIVIDENDS REINVESTED.
43
<Page>
several economic recessions. Despite superior results, the stock was purchased
in 2003 at a significant discount valuation to overall market. The combination
of continued double-digit earnings growth and narrowing of the discount
valuation contributed to the stock's strong performance.
[CHART]
2003 - Russell 2500 Index Returns by S&P Bond Rating
<Table>
Below Investment Grade 59.63%
BBB- to BBB+ 37.46%
A- to A+ 28.84%
AA- to AA+ 12.59%
</Table>
The companies that contributed the least to the Fund's performance for 2003
were CSG Systems International, First Health Group, and Hanover Compressor. CSG
Systems International ("CSG") is the leading provider of customer-care and
billing services to the cable TV market. The stock was hurt by lowered earnings
expectations because of financial difficulties in the cable and
telecommunications industry that CSG serves. We sold the stock from the Fund.
First Health Group is a full-service national health-benefits company. In the
fourth quarter, the company announced that it expected flat earnings in 2004,
mainly because of aggressive competitive pricing. We view the earnings
disappointment as related more to the insurance underwriting cycle than the
company's fundamental strength and the fund continues to hold the stock. Hanover
Compressor operates the nation's largest national-gas compression fleet for
exploration and production companies that outsource this function. The company
suffered diminished outlook for compression outsourcing and it shifted emphasis
to equipment fabrication. We saw little competitive differentiation in this area
and decided to sell the stock from the Fund.
PURCHASES AND SALES
During the year, the Fund bought 99 Cents Only Stores, American Italian
Pasta, Arbitron, Balchem, Consolidated Water Corporation, Diagnostic Products,
ICU Medical, and Inter-Tel. 99 Cents Only Stores is a deep-discount retailer of
44
<Page>
primarily name-brand, consumable general merchandise. The company's stores offer
a wide assortment of regularly available consumer goods, as well as a broad
variety of first-quality closeout merchandise, with each item priced at 99
cents. The 99 Cents Only Stores are typically two to three times larger than
traditional dollar stores and this size advantage creates longer visits and
higher average tickets. American Italian Pasta Company is the largest pasta
producer in the U.S. and the second largest in the world. The company is the
low-cost producer that also owns a strong branded portfolio. We expect free cash
flow and Return on Equity to increase because the company recently completed a
heavy capital spending cycle. Arbitron is the nation's dominant radio-audience
measurement company. The company's ratings represent the industry standard for
radio broadcasting. The company's status as the industry standard creates
pricing power that produces operating margins in excess of 30%. Balchem
Corporation, a specialty chemicals company that operates specialty products and
encapsulates businesses. In the specialty products segment, Balchem is the
leading supplier of ethylene oxide, a gas used by the medical device industry to
sterilize products. In the encapsulates segment, the company has developed a
proprietary technology to coat active ingredients and nutrients used in food
production to keep food fresh and vitamins active. Once specified into a food
product, the ingredient becomes an integral part of the product, providing
Balchem with a recurring revenue stream. Consolidated Water develops and
operates water utilities in areas where water is scarce, primarily in the
Caribbean. The company is an attractive investment in the utility sector given
Consolidated Water's unique niche expertise, long-term exclusive service
contracts, additional revenue opportunities through leveraging its expertise to
new geographies, and under-levered balance sheet. The company has benefited from
the accretive effects of its recent large acquisitions. Diagnostic Products
manufactures medical immunodiagnostic test kits that utilize state-of-the-art
technology derived from immunology and molecular biology and accompanying
automated laboratory instruments that perform blood tests in hospitals,
laboratories, and doctors' offices. Inter-Tel provides communications systems,
software, and services including telephones, PBX's, voice mail, and Internet
telephony systems to medium-sized business customers. With many
telecommunications providers in financial distress, Inter-Tel's strong financial
position has proven to be an important selection criterion for customers and is
allowing the company to gain market share.
In addition to CSG Systems and Hanover Compressor, mentioned above, the
Fund sold La-Z-Boy, Landauer, and Maxim Integrated Products. La-Z-Boy suffered
from increased competition from Chinese imports. The company has managed import
competition in its case-goods business (such as tables and dressers) by
increased overseas sourcing of its own casegoods' products. Historically,
upholstered furniture has been relatively immune from import competition because
the bulk of recliners and sofas made overseas shipping too expensive. When we
learned that China was building new upholstered furniture factories for export
business, the Fund sold our holdings of La-Z-Boy. Landauer was sold from the
fund when it reached an all-time high price and traded at approximately 21 times
estimated 2003 earnings per share, which was near its all-time high valuation
multiple. Maxim was sold from the Fund when its market capitalization grew too
large at $12 billion for a small-mid cap fund.
45
<Page>
OUTLOOK
Our Fund continues to produce strong, consistent earnings growth from
companies with under-leveraged balance sheets and with the stocks selling at
discount valuations. That combination of quality, growth, and value is the
source of our strong long-term performance. Lower quality companies can lead in
an accelerating economy emerging from recession as occurred in 2003. However, we
believe the combination of quality, growth, and value will come once again to
the fore when the peak in the rate of the economic recovery is past. Economists
believe that peak growth rate occurred in the 4th quarter of 2003.
<Table>
<Caption>
PHOENIX- RUSSELL RUSSELL
KAYNE RUSSELL S&P 2500(TM) 2500(TM)
SMALL-MID 2500(TM) 500(R) GROWTH VALUE
CAP FUND INDEX INDEX(2) INDEX(3) INDEX(4)
--------- ---------- -------- ---------- ----------
QUALITY
Return on Equity--Past 5 Years 21.0% 12.0% 21.4% 14.1% 10.7%
Long-Term Debt/Total Capital 33.9% 42.8% 49.4% 33.5% 49.8%
Interest Expense Coverage 11.61x 5.33x 5.77x 9.23x 4.01x
Earnings Variance--Past 10 Years 36.6% 70.7% 50.2% 84.7% 62.5%
S&P Stock Ranking (A+, A, A-) 41.0% 16.0% 50.0% 11.0% 20.0%
GROWTH
Earnings Per Share Growth--Past 5 Years 17.4% 7.0% 7.7% 14.5% 2.7%
Earnings Per Share Growth--Past 10 Years 17.6% 7.9% 11.4% 12.9% 5.5%
Dividend Per Share Growth--Past 5 Years 11.3% 4.5% 8.8% 7.5% 3.5%
Dividend Per Share Growth--Past 10 Years 11.4% 4.9% 10.1% 7.0% 4.3%
Capital Generation--{ROE X (1 - Payout)} 18.0% 9.4% 15.2% 12.9% 7.4%
VALUE
P/E Ratio--Trailing 12 Months 18.1x 28.9x 22.6x 38.7x 24.0x
Dividend Yield 0.8% 1.2% 1.6% 0.4% 1.8%
MARKET CHARACTERISTICS
$ Weighted Average Market Cap--4 Qtr. Average $ 2.3B $ 1.6B $ 84.6B $ 1.5B $ 1.6B
Largest Market Cap--4 Qtr. Average $ 11.1B $ 5.1B $ 289.2B $ 4.7B $ 5.1B
Annualized Standard Deviation--Since Inception* 17.9% 20.7% 18.3% 29.8% 16.4%
</Table>
Notes: Data as of December 31,2003
Data is obtained from the Frank Russell Company and CompuStat and is assumed to
be reliable.
(2) THE S&P 500 INDEX IS A MEASURE OF STOCK MARKET TOTAL RETURN PERFORMANCE.
(3) THE RUSSELL 2500 GROWTH INDEX IS A MARKET CAPITALIZATION-WEIGHTED INDEX OF
GROWTH-ORIENTED STOCKS OF THE SMALLEST 2,500 COMPANIES IN THE RUSSELL
UNIVERSE, WHICH COMPRISES THE 3,000 LARGEST U.S. COMPANIES. THE INDEX IS
CALCUALTED ON A TOTAL-RETURN BASIS WITH DIVIDENDS REINVESTED.
(4) THE RUSSELL 2500 VALUE INDEX IS A MARKET CAPITALIZATION-WEIGHTED INDEX OF
VALUE-ORIENTED STOCKS OF THE SMALLEST 2,500 COMPANIES IN THE RUSSELL
UNIVERSE, WHICH COMPRISES THE 3,000 LARGEST U.S. COMPANIES. THE INDEX IS
CALCULATED ON A TOTAL-RETURN BASIS WITH DIVIDENDS REINVESTED.
THE INDEXES ARE UNMANAGED AND ARE NOT AVAILABLE FOR DIRECT INVESTMENT.
THE PRECEDING INFORMATION IS THE OPINION OF PORTFOLIO MANAGEMENT. PAST
PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, AND THERE IS NO GUARANTEE THAT
MARKET FORECASTS DISCUSSED WILL BE REALIZED.
46
<Page>
PHOENIX-KAYNE SMALL-MID CAP FUND
AVERAGE ANNUAL TOTAL RETURNS(1) PERIOD ENDING 12/31/03
<Table>
<Caption>
INCEPTION INCEPTION
1 YEAR 5 YEAR TO 12/31/03 DATE
------ ------ ----------- ---------
Class A Shares at NAV(2) 26.36% -- 13.54% 8/30/02
Class a Shares at POP(3) 19.09 -- 8.62 8/30/02
Class B Shares at NAV(2) 25.45 -- 12.70 8/30/02
Class B Shares with CDSC(4) 21.45 -- 9.81 8/30/02
Class C Shares at NAV(2) 25.59 -- 12.79 8/30/02
Class C Shares with CDSC(4) 25.59 -- 12.79 8/30/02
Class X Shares at NAV(2) 26.71 7.15% 10.39 10/18/96
Russell 2500 Stock Index(8) 45.51 9.40 Note 5 Note 5
S&P 500 Index(9) 28.71 (0.57) Note 6 Note 6
</Table>
(1) Total returns are historical and include changes in share price and the
reinvestment of both dividends and capital gain distributions.
(2) "NAV" (Net Asset Value) total returns do not include the effect of any sales
charge.
(3) "POP" (Public Offering Price) total returns include the effect of the
maximum front-end 5.75% sales charge.
(4) CDSC (contingent deferred sales charge) is applied to redemptions of certain
classes of shares that do not have a sales charge applied at the time of
purchase. CDSC charges for B shares decline from 5% to 0% over a five year
period. CDSC charges for C shares are 1% in the first year and 0%
thereafter.
(5) Index performance is 30.58% for Class A, Class B, Class C (since 8/30/02)
and 10.71% for Class X (since 10/18/96).
(6) Index performance is 17.74% for Class A, Class B, Class C (since 8/30/02)
and 8.06% for Class X (since 10/18/96).
(7) This chart illustrates NAV returns on Class X shares since inception.
Returns on Class A, Class B and Class C shares will vary due to differing
sales charges.
(8) The Russell 2500 Index is an unmanaged, commonly used measure of total
return performance of smaller-capitalization stocks. The index's performance
does not reflect sales charges.
(9) The S&P 500 Index is an unmanaged, commonly used measure of stock market
total performance. The index's performance does not reflect sales charges.
All returns represent past performance which may not be indicative of future
performance. The investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than their original cost. Because the fund holds a limited number of securities,
it will be impacted by each security's performance more than a fund with a large
number of holdings.
Small-Cap investing includes the risks or greater price volatility, less
liquidity and increased competitive threat than those of larger, established
companies.
GROWTH OF $10,000 PERIODS ENDING 12/31/03
[CHART]
<Table>
<Caption>
PHOENIX-KAYNE SMALL-MID CAP FUND CLASS X(7) RUSSELL 2500 STOCK INDEX(8) S&P 500 TOTAL RETURN INDEX(9)
10/18/96 $ 10,000 $ 10,000 $ 10,000
12/31/96 $ 10,400 $ 10,642 $ 10,474
12/31/97 $ 12,424 $ 13,234 $ 13,970
12/31/98 $ 14,433 $ 13,285 $ 17,988
12/31/99 $ 14,958 $ 16,493 $ 21,789
12/29/2000 $ 18,663 $ 17,197 $ 19,788
12/31/2001 $ 19,857 $ 17,407 $ 17,438
12/31/2002 $ 16,087 $ 14,309 $ 13,584
12/31/2003 $ 20,384 $ 20,821 $ 17,484
</Table>
This Growth of $10,000 chart assumes an initial investment of $10,000 made on
10/18/96 (inception of the Fund) in Class X shares. The total return for Class X
shares do not include the effect of any sales charge. Performance assumes
dividends and capital gains are reinvested.
SECTOR WEIGHTINGS 12/31/03
[CHART]
As a percentage of equity holdings
<Table>
Financials 16.5%
Consumer Discretionary 15.9%
Health Care 16.2%
Information Technology 20.7%
Industrials 19.4%
Materials 3.8%
Consumer Staples 3.4%
Energy 3.3%
Utilities 0.8%
</Table>
See Notes to Financial Statements
47
<Page>
TEN LARGEST HOLDINGS AT DECEMBER 31, 2003 (AS A PERCENTAGE OF NET ASSETS)
<Table>
1. Rent-A-Center, Inc. 3.5%
THE LARGEST RENT-TO-OWN RETAILER OF HOUSEHOLD PRODUCTS IN THE U.S.
2. Catalina Marketing Corp. 3.5%
INVENTED ELECTRONIC COUPONS DELIVERED TO SHOPPERS AT THE POINT OF
SALE AND TAILORED TO THEIR PURCHASES
3. Reinsurance Group of America 3.5%
THE NATION'S LEADING FACULTATIVE (NON-STANDARD RISKS) REINSURER
OF LIFE INSURANCE
4. Regis Corp. 2.9%
THE GLOBAL LEADER IN HAIR SALONS
5. Microchip Technology, Inc. 2.7%
THE LEADING SEMICONDUCTOR COMPANY IN THE 8-BIT
MICROCONTROLLER MARKET
6. Teleflex Inc. 2.7%
MANUFACTURES PRODUCTS FOR AUTOMOTIVE, MARINE, INDUSTRIAL,
MEDICAL AND AEROSPACE INDUSTRIES
7. Fair, Isaac & Company, Inc. 2.7%
CREDIT EVALUATION SYSTEM DEVELOPER
8. Polaris Industries, Inc. 2.6%
THE WORLD'S NO.1 MANUFACTURER OF SNOWMOBILES AND A TOP MAKER
OF ALL-TERRAIN VEHICLES (ATV'S) AND PERSONAL WATERCRAFT
9. Medicis Pharmaceutical Corp.--Class A 2.5%
A SPECIALTY PHARMACEUTICAL COMPANY FOCUSED ON DERMATOLOGY,
PODIATRY AND PEDIATRICS.
10. Copart, Inc. 2.4%
THE LEADER IN SALVAGE VEHICLE AUCTIONS FOR AUTO INSURERS
</Table>
INVESTMENTS AT DECEMBER 31, 2003
<Table>
<Caption>
SHARES VALUE
-------------- --------------
COMMON STOCKS--97.0%
ADVERTISING--3.5%
Catalina Marketing Corp.(b)(d) 275,910 $ 5,562,346
AEROSPACE & DEFENSE--1.7%
HEICO Corp.--Class A 194,331 2,736,180
AIR FREIGHT & COURIERS--2.0%
C.H. Robinson Worldwide, Inc. 82,400 3,123,784
APPLICATION SOFTWARE--9.5%
FactSet Research Systems, Inc.(d) 91,850 3,509,589
Fair, Isaac and Company, Inc. 85,390 4,197,772
Jack Henry & Associates, Inc. 180,815 3,721,173
Reynolds & Reynolds, Inc.--Class A. 122,762 3,566,236
--------------
14,994,770
--------------
AUTO PARTS AND EQUIPMENT--0.7%
Federal Signal Corp. 59,807 1,047,819
BANKS--3.5%
National Commerce Financial Corp. 125,730 3,429,914
Washington Federal, Inc. 74,045 2,102,878
--------------
5,532,792
--------------
BIOTECHNOLOGY--2.3%
Techne Corp.(b)(d) 98,085 3,705,651
CONSTRUCTION & ENGINEERING--1.0%
Insituform Technologies, Inc.--Class A(b)(d) 95,480 $ 1,575,420
CONSUMER FINANCE--2.2%
World Acceptance Corp.(b) 176,000 3,504,160
DATA PROCESSING SERVICES--3.4%
Arbitron Inc.(b) 63,700 2,657,564
Certegy, Inc. 82,867 2,718,038
--------------
5,375,602
--------------
DISTRIBUTORS--0.8%
Advanced Marketing Services, Inc. 116,000 1,322,400
DIVERSIFIED COMMERCIAL SERVICES--5.8%
ABM Industries, Inc. 204,530 3,560,867
Cintas Corp.(d) 68,565 3,437,163
Equifax, Inc.(d) 88,385 2,165,433
--------------
9,163,463
--------------
DIVERSIFIED FINANCIAL SERVICES--1.9%
Eaton Vance Corp. 80,004 2,931,347
FOOD--DIVERSIFIED--1.1%
American Italian Pasta Co.--Class A(b) 40,000 1,676,000
</Table>
See Notes to Financial Statements
48
<Page>
<Table>
<Caption>
SHARES VALUE
-------------- --------------
HEALTH CARE DISTRIBUTORS & SERVICES--4.8%
Hooper Holmes, Inc. 132,440 $ 818,479
ICU Medical, Inc.(b)(d) 100,000 3,428,000
IMS Health, Inc. 135,965 3,380,090
--------------
7,626,569
--------------
HEALTH CARE EQUIPMENT--2.3%
Diagnostic Products Corp. 79,000 3,626,890
HOUSEHOLD PRODUCTS--2.2%
Lancaster Colony Corp. 77,300 3,490,868
INDUSTRIAL CONGLOMERATES--2.7%
Teleflex, Inc. 87,410 4,224,525
INDUSTRIAL MACHINERY--0.9%
Donaldson Co., Inc. 25,100 1,484,916
INSURANCE BROKERS--3.2%
Brown & Brown, Inc.(d) 107,000 3,489,270
Stancorp Financial Group, Inc. 24,000 1,509,120
--------------
4,998,390
--------------
LEISURE PRODUCTS--2.6%
Polaris Industries, Inc.(d) 47,000 4,163,260
MANAGED HEALTH CARE--1.9%
First Health Group Corp.(b) 153,200 2,981,272
NETWORKING EQUIPMENT--2.0%
Black Box Corp. 67,995 3,132,530
OFFICE ELECTRONICS--4.1%
Inter-Tel, Inc. 139,600 3,487,208
Zebra Technologies Corp.(b) 46,200 3,066,294
--------------
6,553,502
--------------
OIL & GAS EQUIPMENT & SERVICES--1.1%
World Fuel Services Corp. 49,500 1,680,525
OIL & GAS EXPLORATION & PRODUCTION--2.1%
Devon Energy Corp. 59,129 $ 3,385,727
PAPER PACKAGING--1.8%
Bemis Co. 55,472 2,773,600
PHARMACEUTICALS--4.4%
King Pharmaceuticals, Inc.(b) 193,296 2,949,697
Medicis Pharmaceutical Corp.--Class A 55,800 3,978,540
--------------
6,928,237
--------------
PROPERTY & CASUALTY INSURANCE--1.7%
Cincinnati Financial Corp. 66,055 2,766,383
REINSURANCE--3.5%
Reinsurance Group of America, Inc. 143,100 5,530,815
RETAIL--2.0%
99 Cents Only Stores, Inc.(b) 118,000 3,213,140
SEMICONDUCTORS--2.7%
Microchip Technology, Inc.(d) 129,000 4,303,440
SPECIALTY CHEMICALS--1.9%
Balchem Corp. 14,300 326,040
Valspar Corp. 54,520 2,694,378
--------------
3,020,418
--------------
SPECIALTY STORES--8.9%
Copart, Inc.(b) 231,000 3,811,500
Regis Corp. 117,000 4,623,840
Rent-A-Center, Inc.(b) 186,250 5,565,150
--------------
14,000,490
--------------
WATER--0.8%
Consolidated Water Co., Ltd. 64,500 1,293,225
- -----------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(IDENTIFIED COST $129,939,741) 153,430,456
- -----------------------------------------------------------------------------------------
</Table>
See Notes to Financial Statements
49
<Page>
<Table>
<Caption>
STANDARD
& POOR'S PAR
RATING VALUE
(UNAUDITED) (000) VALUE
----------- -------------- --------------
SHORT-TERM OBLIGATIONS--17.0%(c)
TIME DEPOSITS--8.4%
Bank of Montreal, 1.06%, 1/15/04 A-1+ $ 6,190 $ 6,190,491
Credit Agricole Indosuez, 1.08%, 1/6/04 A-1+ 7,089 7,088,935
--------------
13,279,426
--------------
REPURCHASE AGREEMENTS--4.5%
Credit Suisse First Boston Corporation,
(Dated 12/31/03), 1.04%, Due 1/2/04
(Repurchased proceeds $7,089,137);
Collateralized by $7,230,714 in various
investment grade corporate bonds
and commercial papers with interest
range of 3.45% to 8.62% 7,089 7,088,935
<Caption>
SHARES VALUE
-------------- --------------
MONEY MARKET MUTUAL FUNDS--4.1%
Merrill Lynch Premier Institutional Fund 506,599 $ 506,599
Merrimac Cash Fund--Premium Class 6,025,595 6,025,595
--------------
6,532,194
--------------
- -----------------------------------------------------------------------------------------
TOTAL SHORT-TERM OBLIGATIONS
(IDENTIFIED COST $26,900,555) 26,900,555
- -----------------------------------------------------------------------------------------
TOTAL INVESTMENTS--114.0%
(IDENTIFIED COST $156,840,296) $ 180,331,011(a)
Other assets and liabilities, net--(14.0)% (22,131,926)
--------------
NET ASSETS--100.0% $ 158,199,085
==============
</Table>
(a) Federal Income Tax Information: Net unrealized depreciation of investment
securities is comprised of gross appreciation of $30,448,553 and gross
depreciation of $6,957,838 for federal income tax purposes. At December 31,
2003, the aggregate cost of securities for federal income tax purposes was
$156,840,296.
(b) Non income producing.
(c) Represents securities purchased with cash collateral received for securities
on loan.
(d) All or a portion of this security was on loan as of December 31, 2003.
See Notes to Financial Statements
50
<Page>
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2003
<Table>
ASSETS
Investments securities at value
including $26,027,622 of securities on loan
(Identified cost $156,840,296) $ 180,331,011
Cash 6,506,359
Receivables
Fund shares sold 1,163,913
Dividends and interest 141,922
Securities loan earnings 10,652
Prepaid expenses 20,108
-----------------
Total Assets 188,173,965
-----------------
LIABILITIES
Payables
Securities purchased 2,772,951
Fund shares repurchased 47,872
Collateral on securities loaned 26,900,555
Investment advisory fee 110,804
Distribution and service fees 53,843
Transfer agent fee 16,471
Administration fee 15,540
Financial agent fee 6,448
Trustees' fee 2,030
Accrued expenses 48,366
-----------------
Total liabilities 29,974,880
-----------------
NET ASSETS $ 158,199,085
=================
NET ASSETS CONSIST OF:
Capital paid in on shares of beneficial interest $ 147,634,707
Accumulated net realized loss (12,926,337)
Net unrealized appreciation 23,490,715
-----------------
NET ASSETS $ 158,199,085
=================
CLASS A
Shares of beneficial interest outstanding, no par value,
unlimited authorization (Net Assets $39,656,129) 2,189,026
Net asset value per share $ 18.12
Offering price per share $18.12/(1-5.75%) $ 19.23
CLASS B
Shares of beneficial interest outstanding, no par value,
unlimited authorization (Net Assets $2,708,707) 150,986
Net asset value and offering price per share $ 17.94
CLASS C
Shares of beneficial interest outstanding, no par value,
unlimited authorization (Net Assets $12,565,291) 699,804
Net asset value and offering price per share $ 17.96
CLASS X
Shares of beneficial interest outstanding, no par value,
unlimited authorization (Net Assets $103,268,958) 5,681,929
Net asset value and offering price per share $ 18.17
</Table>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2003
<Table>
INVESTMENT INCOME
Dividends $ 1,061,641
Interest 6,683
Income from securities loaned, net 44,574
-----------------
Total investment income 1,112,898
-----------------
EXPENSES
Investment advisory fee 1,037,267
Service fees, Class A 38,901
Distribution and service fees, Class B 15,394
Distribution and service fees, Class C 59,049
Administration 89,131
Transfer agent fee 139,238
Financial agent fee 68,290
Registration 59,881
Printing 43,993
Custodian 30,508
Professional 29,231
Trustees 14,063
Miscellaneous 29,155
-----------------
Total expenses 1,654,101
-----------------
NET INVESTMENT LOSS (541,203)
-----------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investments (4,057,120)
Net change in unrealized appreciation (depreciation) on
investments 35,896,645
-----------------
NET GAIN ON INVESTMENTS 31,839,525
-----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 31,298,322
=================
</Table>
See Notes to Financial Statements
51
<Page>
STATEMENT OF CHANGES IN NET ASSETS
<Table>
<Caption>
YEAR ENDED YEAR ENDED
12/31/03 12/31/02
--------------- ---------------
FROM OPERATIONS
Net investment income (loss) $ (541,203) $ (432,968)
Net realized gain (loss) (4,057,120) (2,593,808)
Net change in unrealized appreciation (depreciation) 35,896,645 (22,593,792)
--------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS 31,298,322 (25,620,568)
--------------- ---------------
FROM SHARE TRANSACTIONS
CLASS A
Proceeds from sales of shares (2,365,960 and 146,581 shares, respectively) 38,107,253 2,103,515
Cost of shares repurchased (322,337 and 1,178 shares, respectively) (5,285,348) (16,705)
--------------- ---------------
Total 32,821,905 2,086,810
--------------- ---------------
CLASS B
Proceeds from sales of shares (124,511 and 43,790 shares, respectively) 1,925,053 639,229
Cost of shares repurchased (17,313 and 2 shares, respectively) (278,692) (30)
--------------- ---------------
Total 1,646,361 639,199
--------------- ---------------
CLASS C
Proceeds from sales of shares (699,943 and 39,973 shares, respectively) 10,745,910 582,457
Cost of shares repurchased (40,105 and 7 shares, respectively) (621,347) (100)
--------------- ---------------
Total 10,124,563 582,357
--------------- ---------------
CLASS X
Proceeds from sales of shares (1,716,610 and 6,136,774 shares, respectively) 25,334,280 104,014,998
Net asset value of shares issued from reinvestment of distributions
(0 and 582 shares, respectively) -- 8,158
Cost of shares repurchased (2,874,955 and 4,672,212 shares, respectively) (44,421,603) (75,454,186)
--------------- ---------------
Total (19,087,323) 28,568,970
--------------- ---------------
INCREASE (DECREASE) IN NET ASSETS FROM SHARE TRANSACTIONS 25,505,506 31,877,336
--------------- ---------------
NET INCREASE (DECREASE) IN NET ASSETS 56,803,828 6,256,768
NET ASSETS
Beginning of period 101,395,257 95,138,489
--------------- ---------------
END OF PERIOD [INCLUDING UNDISTRIBUTED NET INVESTMENT INCOME
OF $0 AND $0, RESPECTIVELY] $ 158,199,085 $ 101,395,257
=============== ===============
</Table>
See Notes to Financial Statements
52
<Page>
PHOENIX-KAYNE SMALL-MID CAP FUND
FINANCIAL HIGHLIGHTS
(SELECTED DATA FOR A SHARE OUTSTANDING THROUGHOUT THE INDICATED PERIOD)
<Table>
<Caption>
CLASS X
-----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2003 2002 2001 2000 1999
Net asset value, beginning of period $ 14.34 $ 17.70 $ 17.19 $ 14.82 $ 15.04
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.05)(5) (0.06) (0.01) 0.04 0.07
Net realized and unrealized gain (loss) 3.88 (3.30) 1.15 3.54 0.47
----------- ----------- ----------- ----------- -----------
TOTAL FROM INVESTMENT OPERATIONS 3.83 (3.36) 1.14 3.58 0.54
----------- ----------- ----------- ----------- -----------
LESS DISTRIBUTIONS
From net investment income -- -- (0.01) (0.04) (0.07)
From net realized gain -- -- (0.62) (1.17) (0.69)
From paid-in capital -- -- -- -- --
----------- ----------- ----------- ----------- -----------
TOTAL DISTRIBUTIONS -- -- (0.63) (1.21) (0.76)
----------- ----------- ----------- ----------- -----------
Change in net asset value 3.83 (3.36) 0.51 2.37 (0.22)
----------- ----------- ----------- ----------- -----------
NET ASSET VALUE, END OF PERIOD $ 18.17 $ 14.34 $ 17.70 $ 17.19 $ 14.82
=========== =========== =========== =========== ===========
Total return 26.71% (18.98)% 6.40% 24.77% 3.64%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $ 103,269 $ 98,112 $ 95,138 $ 42,560 $ 46,997
RATIO TO AVERAGE NET ASSETS OF:
Operating expenses 1.26% 1.22% 1.17% 1.29% 1.30%(1)
Net investment income (loss) (0.35)% (0.38)% (0.14)% 0.26% 0.53%
Portfolio turnover rate 17% 16% 17% 50% 50%
<Caption>
CLASS A CLASS B
--------------------------------- ---------------------------------
YEAR ENDED FROM INCEPTION YEAR ENDED FROM INCEPTION
DECEMBER 31, 8/30/02 TO DECEMBER 31, 8/30/02 TO
2003 12/31/02 2003 12/31/02
------------ -------------- ------------ --------------
Net asset value, beginning of period $ 14.34 $ 15.29 $ 14.30 $ 15.29
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.09)(5) (0.02) (0.20)(5) (0.02)
Net realized and unrealized gain (loss) 3.87 (0.93) 3.84 (0.97)
------------ -------------- ------------ --------------
TOTAL FROM INVESTMENT OPERATIONS 3.78 (0.95) 3.64 (0.99)
------------ -------------- ------------ --------------
LESS DISTRIBUTIONS
From net investment income -- -- -- --
From net realized gain -- -- -- --
------------ -------------- ------------ --------------
TOTAL DISTRIBUTIONS -- -- -- --
------------ -------------- ------------ --------------
Change in net asset value 3.78 (0.95) 3.64 (0.99)
------------ -------------- ------------ --------------
NET ASSET VALUE, END OF PERIOD $ 18.12 $ 14.34 $ 17.94 $ 14.30
============ ============== ============ ==============
Total return(2) 26.36% (6.21)%(3) 25.45% (6.47)%(3)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $ 39,656 $ 2,086 $ 2,709 $ 626
RATIO TO AVERAGE NET ASSETS OF:
Operating expenses 1.51% 1.47%(4) 2.26% 2.22%(4)
Net investment income (loss) (0.60)% (0.62)%(4) (1.35)% (1.37)%(4)
Portfolio turnover rate 17% 16%(3) 17% 16%(3)
<Caption>
CLASS C
---------------------------------
YEAR ENDED FROM INCEPTION
DECEMBER 31, 8/30/02 TO
2003 12/31/02
------------ --------------
Net asset value, beginning of period $ 14.31 $ 15.29
INCOME FROM INVESTMENT OPERATIONS
Net investment income (loss) (0.20)(5) (0.03)
Net realized and unrealized gain (loss) 3.85 (0.95)
------------ --------------
TOTAL FROM INVESTMENT OPERATIONS 3.65 (0.98)
------------ --------------
LESS DISTRIBUTIONS
From net investment income -- --
From net realized gain -- --
------------ --------------
TOTAL DISTRIBUTIONS -- --
------------ --------------
Change in net asset value 3.65 (0.98)
------------ --------------
NET ASSET VALUE, END OF PERIOD $ 17.96 $ 14.31
============ ==============
Total return(2) 25.59% (6.47)%(3)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $ 12,565 $ 572
RATIO TO AVERAGE NET ASSETS OF:
Operating expenses 2.26% 2.22%(4)
Net investment income (loss) (1.35)% (1.37)%(4)
Portfolio turnover rate 17% 16%(3)
</Table>
(1) If the investment adviser had not waived fees and reimbursed expenses, the
ratio of operating expenses to average net assets would have been 1.34% for
the period ended December 31, 1999.
(2) Maximum sales charges are not reflected in the total return calculation.
(3) Not annualized.
(4) Annualized.
(5) Computed using average shares outstanding.
See Notes to Financial Statements
53
<Page>
PHOENIX-KAYNE FUNDS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2003
1. ORGANIZATION
Phoenix-Kayne Funds (the "Trust") was organized as a Delaware business trust
on May 29, 1996 and is registered under the Investment Company Act of 1940 as an
open-end management investment company. The Trust currently consists of five
separate series: California Intermediate Tax-Free Bond Fund, Intermediate Total
Return Bond Fund, International Fund, Rising Dividends Fund (formerly, the
"Large Cap Fund") and Small-Mid Cap Fund (each a "Fund" and collectively the
"Funds").
The California Intermediate Tax-Free Bond Fund is a non-diversified fund and
seeks current income exempt from federal and California state income tax. The
Fund invests primarily in investment grade debt securities and may maintain an
average maturity of more than ten years.
The Intermediate Total Return Bond Fund is a diversified fund and seeks to
obtain maximum total return, primarily through current income, with capital
appreciation as a secondary consideration. The Fund invests primarily in
investment grade debt securities and seeks to maintain an average maturity of
three to ten years.
The International Fund is a diversified fund and seeks long-term capital
appreciation, with dividend income as a secondary consideration. The Fund
invests primarily in equity securities, usually common stocks, of companies
outside the United States.
The Rising Dividends Fund is a diversified fund and seeks long-term capital
appreciation, with dividend income as a secondary consideration. The Fund
invests primarily in equity securities, usually common stocks, of companies
generally having a total market capitalization of $5 billion or more.
The Small-Mid Cap Fund is a diversified fund and seeks long-term capital
appreciation, with dividend income as a secondary consideration. The Fund
invests primarily in equity securities, usually common stocks, of small and
mid-capitalization companies included in the Russell 2500 Index.
The Trust offers Class X shares on each Fund. Additionally, the Trust offers
three additional classes of shares, Class A, Class B and Class C shares on
Rising Dividends Fund, Small-Mid Cap Fund and International Fund. Class X shares
are sold without a sales charge. Class A shares are sold with a front-end sales
charge of up to 5.75%. Class B shares are sold with a contingent deferred sales
charge which declines from 5% to zero depending on the period of time the shares
are held. Class C shares are sold with a 1% contingent deferred sales charge if
redeemed within one year of purchase. Each class of shares has identical voting,
dividend, liquidation and other rights and the same terms and conditions, except
that each class bears different distribution expenses and has exclusive voting
rights with respect to its distribution plan. Income and expenses of each Fund
are borne pro rata by the holders of each class of shares, except that each
class bears distribution expenses unique to that class.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, disclosure of contingent assets and liabilities, revenues and
expenses. Actual results could differ from those estimates.
A. SECURITY VALUATION:
Equity securities are valued at the official closing price (typically last
sale) on the exchange on which the securities are primarily traded, or if no
closing price is available, at the last bid price. Debt securities are valued on
the basis of broker quotations or valuations provided by a pricing service which
utilizes information with respect to recent sales, market transactions in
comparable securities, quotations from dealers, and various relationships
between securities in determining value. Short-term investments having a
remaining maturity of 60 days or less are valued at amortized cost which
approximates market. As required, some investments are valued at fair value as
determined in good faith by or under the direction of the Trustees.
B. SECURITY TRANSACTIONS AND RELATED INCOME:
Security transactions are recorded on the trade date. Dividend income is
recorded on the ex-dividend date or, in the case of certain foreign securities,
as soon as the Fund is notified. Interest income is recorded on the accrual
basis. The Trust amortizes premiums and accretes discounts using the effective
interest method. Realized gains and losses are determined on the identified cost
basis.
C. INCOME TAXES:
Each Fund is treated as a separate taxable entity. It is the policy of each
Fund to comply with the requirements of the Internal Revenue Code (the "Code")
applicable to regulated investment companies, and to distribute substantially
all of its taxable and tax-exempt income to its shareholders. In addition, each
Fund intends to distribute an amount sufficient to avoid imposition of any
excise tax under Section 4982 of the Code. Therefore, no provision for federal
income taxes or excise taxes has been made. The Funds may be subject to foreign
taxes on income, gains on investments or currency repatriation, a portion of
which may be recoverable. The Funds will accrue such taxes and recoveries as
applicable based upon their current interpretations of the tax rules and
regulations that exist in the markets in which they invest.
D. DISTRIBUTIONS TO SHAREHOLDERS:
Distributions are recorded by each series on the ex-dividend date and all
distributions are reinvested into the Fund. Income and capital gain
distributions are determined in accordance with income tax regulations which may
differ from accounting principles generally accepted in the United States of
America. These differences may include the treatment of non-taxable dividends,
market premium and discount, non-deductible expenses, expiring capital loss
carryovers, foreign currency gain or loss, gain or loss on futures contracts,
partnerships, operating losses and
54
<Page>
losses deferred due to wash sales. Permanent book and tax basis differences
relating to shareholder distributions will result in reclassifications to paid
in capital.
E. SECURITIES LENDING TRANSACTIONS:
The Funds receive compensation in the form of fees, or retain a portion of
interest of any cash received as collateral for lending their securities. The
Funds also continue to receive interest and dividends on securities loaned. The
loans are secured by collateral (102% for US dollar denominated securities and
105% for non-US denominations) consisting of cash, U.S. government securities or
letters of credit. Gain or loss in the fair value of the securities loaned that
may occur during the term of the loan will be for the account of the Funds.
F. FOREIGN CURRENCY TRANSLATION:
Foreign securities and other assets and liabilities are valued using the
foreign currency exchange rate effective at the end of the reporting period.
Cost of investments is translated at the currency exchange rate effective at the
trade date. The gain or loss resulting from a change in currency exchange rates
between the trade and settlement dates of a portfolio transaction is treated as
a gain or loss on foreign currency. Likewise, the gain or loss resulting from a
change in currency exchange rates between the date income is accrued and paid is
treated as a gain or loss on foreign currency. The Trust does not separate that
portion of the results of operations arising from changes in exchange rates and
that portion arising from changes in the market prices of securities.
G. FORWARD CURRENCY CONTRACTS:
The International Fund may enter into forward currency contracts in
conjunction with the planned purchase or sale of foreign denominated securities
in order to hedge the U.S. dollar cost or proceeds. Forward currency contracts
involve, to varying degrees, elements of market risk in excess of the amount
recognized in the Statement of Assets and Liabilities. Risks arise from the
possible movements in foreign exchange rates or if the counterparty does not
perform under the contract. A forward currency contract involves an obligation
to purchase or sell a specific currency at a future date, which may be any
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are traded directly
between currency traders and their customers. The contract is marked-to-market
daily and the change in market value is recorded by each Fund as an unrealized
gain (or loss). When the contract is closed or offset with the same
counterparts, the Fund records a realized gain (or loss) equal to the change in
the value of the contract when it was opened and the value at the time it was
closed or offset.
H. EXPENSES:
Expenses incurred by the Trust with respect to any two or more Funds are
allocated in proportion to the net assets of each Fund, except where allocation
of direct expense to each Fund or an alternative allocation method can be more
fairly made.
I. REPURCHASE AGREEMENTS
A repurchase agreement is a transaction where a series acquires a security
for cash and obtains a simultaneous commitment from the seller to repurchase the
security at an agreed upon price and date. The series, through its custodian,
takes possession of securities collateralizing the repurchase agreement. The
collateral is marked-to-market daily to ensure that the market value of the
underlying assets remains sufficient to protect the series in the event of
default by the seller. If the seller defaults and the value of the collateral
declines or, if the seller enters insolvency proceedings, realization of
collateral may be delayed or limited.
J. FOREIGN SECURITY COUNTRY DETERMINATION:
A combination of the following criteria is used to assign the countries at
risk listed in the Schedule of Investments: country of incorporation, actual
building address, primary exchange on which the security is traded and country
in which greatest percentage of company revenue is generated.
3. INVESTMENT ADVISORY FEES AND RELATED PARTY TRANSACTIONS
The Adviser, Kayne Anderson Rudnick Investment Management, LLC provides the
Funds with investment management services under an Investment Advisory Agreement
(the "Agreement"). The majority interest of the Adviser is owned by Phoenix
Investment Partners, Ltd. ("PXP"). PXP is the investment management subsidiary
of The Phoenix Companies, Inc. ("PNX"). The Adviser furnishes all investment
advice, office space and certain administrative services, and provides personnel
as needed by the Funds. As compensation for its services, the Adviser is
entitled to a monthly fee at the following annual rates:
<Table>
California Intermediate Tax-Free Bond Fund 0.50%
Intermediate Total Return Bond Fund 0.50%
International Fund 0.95%
Rising Dividends Fund 0.75%
Small-Mid Cap Fund 0.85%
</Table>
For the year ended December 31, 2003, the Funds incurred the following
advisory fees:
<Table>
California Intermediate Tax-Free Bond Fund $ 181,533
Intermediate Total Return Bond Fund 217,554
International Fund 464,735
Rising Dividends Fund 738,917
Small-Mid Cap Fund 1,037,267
</Table>
55
<Page>
The Funds are responsible for their own operating expenses. The Adviser has
agreed to limit each Fund's total operating expenses by reducing all or a
portion of its fees and reimbursing each Fund for expenses, excluding interest,
so that their ratio of expenses to average net assets will not exceed the
following levels:
<Table>
<Caption>
CLASS X CLASS A CLASS B CLASS C
------- ------- ------- -------
California Intermediate Tax-Free
Bond Fund 0.75% N/A N/A N/A
Intermediate Total Return
Bond Fund 0.95 N/A N/A N/A
International Fund 1.40 1.65% 2.40% 2.40%
Rising Dividends Fund 1.20 1.45 2.20 2.20
Small-Mid Cap Fund 1.30 1.55 2.30 2.30
</Table>
Any fee waived and/or any Fund expense absorbed by the Adviser pursuant to an
agreed upon expense cap shall be reimbursed by the Fund to the Adviser, if so
requested by the Adviser, provided the aggregate amount of the Fund's current
operating expense for such fiscal year does not exceed the applicable limitation
on Fund expenses. For the year ended December 31, 2003, the Adviser waived fees
and paid expenses of $100,802, and $162,514 for the California Intermediate
Tax-Free Bond Fund and International Fund, respectively.
At December 31, 2003, the amount available for reimbursement that has been
paid and/or waived by the Adviser on behalf of the Funds are as follows:
<Table>
California Intermediate Tax-Free Bond Fund $ 207,476
International Fund 162,514
</Table>
No fees were recouped for the year ended December 31, 2003.
At December 31, 2003, the Adviser may recapture a portion of the above
amounts no later than the dates as stated below:
<Table>
<Caption>
DECEMBER 31,
---------------------------------
FUNDS: 2004 2005 2006
- ------ --------- -------- ---------
California Intermediate Tax-Free Bond Fund $ 30,868 $ 75,806 $ 100,802
International Fund -- -- 162,514
</Table>
Each Fund must pay its current ordinary operating expenses before the Adviser
is entitled to any reimbursement. Any such reimbursement is also contingent upon
the Board of Trustees review and approval prior to the time the reimbursement is
initiated.
U.S. Bancorp Fund Services, L.L.C. (the "Administrator") acts as the Funds'
Administrator under an Administration Agreement. The Administrator prepares
various federal and state regulatory filings, reports and returns for the Funds;
prepares reports and materials to be supplied to the Trustees; monitors the
activities of the Funds' custodian, transfer agent and auditors; coordinates the
preparation and payment of Funds' expenses and reviews the Funds' expense
accruals. For its services, each Fund pays the Administrator an annual fee equal
to 0.075% of the first $40 million of the average daily net assets, 0.050% of
the next $40 million, 0.025% of the next $40 million, and 0.010% thereafter,
subject to a minimum annual fee.
Phoenix Equity Planning Corporation, ("PEPCO") an indirect, wholly-owned
subsidiary of PNX, which serves as the national distributor of the Trust's
shares has advised the Trust that it retained net selling commissions and
deferred sales charges for the year ended December 31, 2003 as follows:
<Table>
<Caption>
CLASS A CLASS B CLASS C
NET SELLING DEFERRED DEFERRED
COMMISSIONS SALES CHARGES SALES CHARGES
----------- ------------- -------------
International Fund $ 1,259 $ -- $ 55
Rising Dividends Fund 6,960 1,029 337
Small-Mid Cap Fund 22,795 1,093 1,933
</Table>
In addition to these amounts, the following was paid to W.S. Griffith
Securities, Inc., an indirect subsidiary of PNX, for Class A net selling
commissions:
<Table>
International Fund $ 10
Rising Dividends Fund 5,469
Small-Mid Cap Fund 1,736
</Table>
The International, Rising Dividends and Small-Mid Cap Funds pay PEPCO a
distribution fee at an annual rate of 0.25% for Class A shares and 1.00% for
Class B and C shares applied to the daily average net assets of each respective
class. The distributor has advised the Trust that the total amount expensed for
the year ended December 31, 2003 is as follows:
<Table>
<Caption>
DISTRIBUTION AND/OR DISTRIBUTION AND/OR
DISTRIBUTION AND/OR SERVICE FEES SERVICE FEES
SERVICE FEES PAID TO PAID TO
RETAINED BY UNAFFILIATED W.S. GRIFFITH
DISTRIBUTOR PARTICIPANTS SECURITIES, INC.
------------------- ------------------- -------------------
International Fund $ 13,956 $ 890 $ 3
Rising Dividends Fund 28,016 20,248 848
Small-Mid Cap Fund 87,854 24,405 1,085
</Table>
W.S. Griffith Securities, Inc. is an indirect subsidiary of PNX.
PEPCO serves as the Trust's Transfer Agent with State Street Bank and Trust
Company as sub-transfer agent. For the year ended December 31, 2003, transfer
agent fees were $349,240 as reported in the Statements of Operations, of which
PEPCO retained the following:
<Table>
<Caption>
TRANSFER AGENT FEE
RETAINED (PAID)
------------------
California Intermediate Tax-Free Bond Fund $ (4,551)
Intermediate Total Return Bond Fund (4,551)
International Fund (17,597)
Rising Dividends Fund (2,927)
Small-Mid Cap Fund 20,924
</Table>
56
<Page>
At December 31, 2003, PNX and affiliates and the retirement plans of PNX and
affiliates held Phoenix-Kayne Fund shares which aggregated the following:
<Table>
<Caption>
AGGREGATE
NET ASSET
SHARES VALUE
------ -----------
International Fund
- --Class A 10,611 $ 108,335
- --Class B 10,582 107,302
- --Class C 10,582 107,302
Rising Dividends Fund
- --Class A 7,406 108,428
- --Class B 7,403 107,492
- --Class C 7,399 107,440
Small-Mid Cap Fund
- --Class A 6,540 113,015
- --Class B 6,540 112,034
- --Class C 6,540 112,099
</Table>
4. PURCHASES AND SALES OF SECURITIES
For the year ended December 31, 2003, the cost of purchases and the proceeds
from sales of securities, excluding U.S. Government securities and short-term
investments, were as follows:
<Table>
<Caption>
FUND PURCHASES SALES
- ---- ------------- -------------
California Intermediate Tax-Free Bond Fund $ 17,261,045 $ 11,777,095
Intermediate Total Return Bond Fund 10,622,650 13,329,989
International Fund 22,962,131 34,543,147
Rising Dividends Fund 39,380,609 24,091,497
Small-Mid Cap Fund 40,516,268 20,250,939
</Table>
The Intermediate Total Return Bond Fund purchased $6,028,691 and sold
$1,050,000 in U.S. Government securities. There were no purchases or sales of
U.S. Government securities by California Intermediate Tax-Free Bond Fund,
International Fund, Rising Dividends Fund and Small-Mid Cap Fund.
5. CREDIT RISK AND ASSET CONCENTRATIONS
In countries with limited or developing markets, investments may present
greater risks than in more developed markets and the prices of such investments
may be volatile. The consequences of political, social or economic changes in
these markets may have disruptive effects on the market prices of these
investments and the income they generate, as well as a Fund's ability to
repatriate such amounts.
Certain funds invest a high percentage of their assets in specific sectors of
the market in their pursuit of a greater investment return. Fluctuations in
these sectors of concentration may have a greater impact to a Fund, positive or
negative, than if the Fund did not concentrate its investments in such sectors.
The California Intermediate Tax-Free Bond Fund invests primarily in
California municipal securities and is more susceptible to economic, political
and other developments that may adversely affect issuers of such securities,
than a more geographically diversified fund. Such developments could result in
certain adverse consequences including impairing the market value and
marketability of the securities, as well as impairing the ability of certain
issuers of California municipal securities to pay principal and interest on
their obligations.
6. PORTFOLIO SECURITIES LOANED
As of December 31, 2003, the following Funds loaned common stocks and
received the following collateral for the loans:
<Table>
<Caption>
FAIR VALUE COLLATERAL VALUE
------------- ----------------
International Fund $ 1,346,751 $ 1,433,700
Rising Dividends Fund 1,954,312 2,023,540
Small-Mid Cap Fund 26,027,622 26,900,555
</Table>
7. OTHER
As of December 31, 2003, the Funds had individual shareholders and omnibus
shareholder accounts (which are comprised of several individual shareholders)
which individually amounted to more than 10% of total shares outstanding as
detailed below. None of the accounts are affiliated with PNX. In addition,
affiliate holdings are presented in the table located within Note 3.
<Table>
California Intermediate Tax-Free Bond Fund 1 Omnibus Accounts 11.08%
2 shareholders 62.80%
Intermediate Total Return Bond Fund 2 Omnibus Accounts 31.79%
International Fund 2 Omnibus Accounts 35.66%
Rising Dividends Fund 1 Omnibus Account 10.36%
</Table>
8. TAX MATTERS
The Funds have capital loss carryovers which may be used to offset future
capital gains, as follows:
<Table>
<Caption>
INTERNATIONAL RISING DIVIDENDS SMALL-MID CAP
EXPIRATION DATE FUND FUND FUND
- --------------- ------------- ---------------- -------------
2006 -- -- $ 5,032,416*
2009 $ 2,522,232 $ 2,968,666 1,242,993
2010 14,384,915 10,373,748 826,352
2011 7,167,821 4,873,757 5,824,576
------------- ---------------- -------------
Total 24,074,968 18,216,171 12,926,337
============= ================ =============
</Table>
* UTILIZATION OF THIS CAPITAL LOSS CARRYFORWARD WHICH AROSE IN CONNECTION WITH
THE TAX-FREE REORGANIZATION WITH SEFTON SMALL COMPANY VALUE FUND IS LIMITED
BY FEDERAL INCOME TAX REGULATIONS TO $5,032,416.
57
<Page>
The Funds may not realize the benefit of these losses to the extent they do
not realize gains on investments prior to the expiration of the capital loss
carryovers.
The components of distributable earnings on tax basis (excluding unrealized
appreciation (depreciation) which is disclosed in the Schedule of Investments)
consist of the following:
<Table>
<Caption>
UNDISTRIBUTED UNDISTRIBUTED
ORDINARY LONG-TERM
INCOME CAPITAL GAINS
------------- -------------
California Intermediate Tax-Free Bond Fund $ 5,176 $ 127,148
Intermediate Total Return Bond Fund 11,668 83,069
International Fund 16,556 --
Rising Dividends Fund 468,303 --
Small-Mid Cap Fund -- --
</Table>
Under current tax law, foreign currency and capital losses realized after
October 31, may be deferred and treated as occurring on the first day of the
following fiscal year. For the year ended December 31, 2003, the Funds deferred
post-October losses and recognized prior year post-October losses as follows:
<Table>
<Caption>
DEFERRED RECOGNIZED
-------- -----------
California Intermediate Tax-Free Bond Fund $ -- $ --
Intermediate Total Return Bond Fund -- --
International Fund** -- --
Rising Dividends Fund -- 1,518,318
Small-Mid Cap Fund -- 1,767,456
</Table>
** THE INTERNATIONAL FUND HAS ELECTED DECEMBER 31 AS ITS YEAR END FOR EXCISE TAX
PURPOSE.
For the year ended December 31, 2003, the California Intermediate Tax-Free
Bond Fund distributed $1,357,287 of exempt-interest dividends.
9. RECLASS OF CAPITAL ACCOUNTS
For financial reporting purposes, book basis capital accounts are adjusted to
reflect the tax character of permanent book/tax differences. Permanent
reclassifications can arise from differing treatment of certain income and gain
transactions, nondeductible current year net operating losses, expiring capital
loss carryovers and investments in passive foreign investment companies. The
reclassifications have no impact on the net assets or net asset values of the
Funds. As of December 31, 2003, the following Funds recorded reclassifications
to increase (decrease) the accounts listed below:
<Table>
<Caption>
UNDISTRIBUTED ACCUMULATED CAPITAL PAID IN
NET INVESTMENT NET REALIZED ON SHARES OF
INCOME (LOSS) GAIN(LOSS) BENEFICIAL INTEREST
-------------- ------------ -------------------
California Intermediate Tax-Free Bond
Fund $ 49 $ -- $ (49)
Intermediate Total Return Bond Fund -- -- --
International Fund (152,353) 152,375 (22)
Rising Dividends Fund -- -- --
Small-Mid Cap Fund 541,203 1,698,482 (2,239,685)
</Table>
10. PROXY VOTING PROCEDURES
The Adviser of the Phoenix-Kayne Funds vote proxies relating to portfolio
securities in accordance with procedures that have been approved by the Board of
Trustees of the Fund. You may obtain a description of these procedures, free of
charge, by calling "toll-free" 800-243-1574. This information is also available
through the Securities and Exchange Commission's website at http://www.sec.gov.
TAX NOTICE (UNAUDITED)
For federal income tax purposes, 99.8% of the income dividends paid by the
California Intermediate Tax-Free Bond Fund qualify as exempt-interest dividends.
100% of the income dividends earned by the Rising Dividends Fund qualify as
corporate dividend received deduction income.
Effective for the calendar year 2003, qualified dividends will be taxed at a
lower rate for individual shareholders. 100% of the ordinary income dividends
distributed by the International Fund and Rising Dividends Fund and applicable
to qualifying dividends received after January 1, 2003 will qualify for the
lower tax rate. The Funds plan to designate the maximum amount allowable under
the Jobs and Growth Tax Relief Reconciliation Act. The actual percentage for the
calendar year will be designated in the year-end tax statements.
For the year ended December 31, 2003 the following funds designated long-term
capital gains dividends:
<Table>
California Intermediate Tax-Free Bond Fund $ 179,694
Intermediate Total Return Bond Fund 267,833
</Table>
This report is not authorized for distribution to prospective investors in
the Phoenix-Kayne Funds unless preceded or accompanied by an effective
prospectus which includes information concerning the sales charge, the Fund's
record and other pertinent information.
58
<Page>
REPORT OF INDEPENDENT AUDITORS
[PRICEWATERHOUSECOOPERS LOGO]
To the Board of Trustees and Shareholders of
Phoenix-Kayne Funds
In our opinion, the accompanying statements of assets and liabilities,
including the schedules of investments, and the related statements of operations
and changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Phoenix-Kayne Rising Dividends
Fund, Phoenix-Kayne Small-Mid Cap Fund, Phoenix-Kayne International Fund,
Phoenix-Kayne Intermediate Total Return Bond Fund, and Phoenix-Kayne California
Intermediate Tax-Free Bond Fund (each a series of the Phoenix-Kayne Funds) (the
"Funds") at December 31, 2003, the results of each of their operations, the
changes in each of their net assets and the financial highlights for the year
then ended, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Funds' management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 2003 by
correspondence with the custodian and brokers, provide a reasonable basis for
our opinion. The financial statements and financial highlights of the Funds as
of December 31, 2002 and for the periods then ended were audited by other
independent accountants whose report dated January 24, 2003 expressed an
unqualified opinion on those statements.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 13, 2004
59
<Page>
PHOENIX-KAYNE FUNDS
FUND MANAGEMENT
Information pertaining to the Trustees and officers of the Trust is set forth
below. The statement of additional information (SAI) includes additional
information about the Trustees and is available without charge, upon request, by
calling (800) 243-4361.
INDEPENDENT TRUSTEES
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX PRINCIPAL OCCUPATION(S)
NAME, (AGE), AND LENGTH OF OVERSEEN BY DURING PAST 5 YEARS AND
ADDRESS TIME SERVED TRUSTEE OTHER DIRECTORSHIPS HELD BY TRUSTEE
- --------------------------------------------------------------------------------------------------------------------------------
E. Virgil Conway Served since 35 Chairman, Rittenhouse Advisors, LLC (consulting
Rittenhouse Advisors, LLC November 2002. firm) since 2001. Trustee/Director, Realty
101 Park Avenue Foundation of New York (1972-present), Josiah Macy,
New York, NY 10178 Jr., Foundation (1975- present), Pace University
DOB: 8/2/29 (1978-present), New York Housing Partnership
Development Corp. (Chairman) (1981-present), Greater
New York Councils, Boy Scouts of America
(1985-present), The Academy of Political Science
(Vice Chairman) (1985-present), Urstadt Biddle
Property Corp. (1989-present). Chairman,
Metropolitan Transportation Authority (1992-2001).
Director, Trism, Inc. (1994-2001), Consolidated
Edison Company of New York, Inc. (1970-2002),
Atlantic Mutual Insurance Company (1974- 2002),
Centennial Insurance Company (1974-2002), Union
Pacific Corp. (1978-2002), BlackRock Freddie Mac
Mortgage Securities Fund (Advisory Director)
(1990-2000), Accuhealth (1994-2002), The Harlem Youth
Development Foundation (1998-2002).
Harry Dalzell-Payne Served since 35 Currently retired.
The Flat, Elmore Court November 2002.
Elmore, GL05, GL2 3NT U.K.
DOB: 8/9/29
Geraldine M. McNamara Served since 35 Managing Director, U.S. Trust Company of New York
United States Trust Company of NY November 2002. (private bank) (1982-present).
114 West 47th Street
New York, NY 10036
DOB: 4/17/51
Everett L. Morris Served since 35 Currently retired, Vice President, W.H. Reaves and
W.H. Reaves and Company November 2002. Company (investment management)
10 Exchange Place (1993-2003).
Jersey City, NJ 07302
DOB: 5/6/28
</Table>
60
<Page>
INTERESTED TRUSTEE
The individual listed below is an "interested person" of the Trust, as defined
in Section 2(a)(19) of the Investment Company Act of 1940, as amended, and the
rules and regulations thereunder.
<Table>
<Caption>
NUMBER OF
PORTFOLIOS IN
FUND COMPLEX PRINCIPAL OCCUPATION(S)
NAME, (AGE), ADDRESS AND LENGTH OF OVERSEEN BY DURING PAST 5 YEARS AND
POSITION(S) WITH TRUST TIME SERVED TRUSTEE OTHER DIRECTORSHIPS HELD BY TRUSTEE
- --------------------------------------------------------------------------------------------------------------------------------
*Philip R. McLoughlin Served since 78 Consultant, Phoenix Investment Partners Ltd.
56 Prospect Street November 2002. (2002-present). Director, PXRE Corporation
Hartford, CT 06115-0480 (Delaware) (1985-present), World Trust Fund
DOB: 10/23/46 (1991-present). Chairman (1997-2002), Director
(1995-2002), Vice Chairman (1995-1997) and Chief
Chairman Executive Officer (1995-2002), Phoenix Investment
Partners, Ltd. Director and Executive Vice
President, The Phoenix Companies, Inc. (2000-2002).
Director (1994-2002) and Executive Vice President,
Investments (1987-2002), Phoenix Life Insurance
Company. Director (1983-2002) and Chairman
(1995-2002), Phoenix Investment Counsel, Inc.
Director (1982-2002) and President (1990-2000),
Phoenix Equity Planning Corporation. Chairman and
President, Phoenix/Zweig Advisers LLC (2001-2002).
Director (2001-2002) and President (April
2002-September 2002), Phoenix Investment Management
Company. Director and Executive Vice President,
Phoenix Life and Annuity Company (1996-2002).
Director (1995-2000) and Executive Vice President
(1994-2002), PHL Variable Insurance Company.
Director, Phoenix National Trust Holding Company
(2001-2002). Director (1985-2002) and Vice President
(1986-2002), PM Holdings, Inc. Director, W.S.
Griffith Associates, Inc. (1995-2002). Director
(1992-2002) and President (1993-1994), W.S. Griffith
Securities, Inc.
</Table>
*Mr. McLoughlin is an "interested person," as defined in the Investment Company
Act of 1940, by reason of his relationship with Phoenix Investment Partners,
Ltd., and its affiliates.
61
<Page>
OFFICERS OF THE TRUST WHO ARE NOT TRUSTEES
<Table>
<Caption>
POSITION(S) HELD WITH
NAME, (AGE), AND TRUST AND LENGTH OF PRINCIPAL OCCUPATION(S)
ADDRESS TIME SERVED DURING PAST 5 YEARS
- ----------------------------------------------------------------------------------------------------------------------------
Allan M. Rudnick President and Chief President and Chief Investment Officer, Kayne Anderson
Kayne Anderson Rudnick Investment Officer since Rudnick Investment Management, LLC (1989-present).
Investment Management, LLC 1995; Chief Executive
1800 Avenue of the Stars Officer since 2002; Trustee
Suite 200 (1995-2002).
Los Angeles, CA 90067
DOB: 6/20/40
William R. Moyer Executive Vice President Executive Vice President and Chief Financial Officer
56 Prospect Street since 2002. (1999-present), Senior Vice President and Chief Financial
Hartford, CT 06115-0480 Officer (1995-1999), Phoenix Investment Partners, Ltd.
DOB: 8/16/44 Director (1998-present), Senior Vice President, Finance
(1990-present), Chief Financial Officer (1996-present), and
Treasurer (1998-present), Phoenix Equity Planning
Corporation. Director (1998-present), Senior Vice President
(1990-present), Chief Financial Officer (1996-present) and
Treasurer (1994-present), Phoenix Investment Counsel, Inc.
Senior Vice President and Chief Financial Officer, Duff &
Phelps Investment Management Co. (1996-present). Vice
President, Phoenix Fund Complex (1990-present).
John F. Sharry Executive Vice President President, Private Client Group (1999-present), Executive
56 Prospect Street since 2002. Vice President, Retail Division (1997-1999), Phoenix
Hartford, CT 06115-0480 Investment Partners, Ltd. President, Private Client Group,
DOB: 3/28/52 Phoenix Equity Planning Corporation (2000-present).
Executive Vice President, Phoenix Fund Complex
(1998-present).
Ralph Walter Chief Operating Officer and Chief Operating Officer and Treasurer, Kayne Anderson
Kayne Anderson Rudnick Investment Treasurer since 2000; Chief Rudnick Investment Management, LLC (2000-present). Chief
Management, LLC Financial Officer since Administrative Officer, ABN AMRO (1986-2000).
1800 Avenue of the Stars 2002.
Suite 200
Los Angeles, CA 90067
DOB: 11/25/46
Richard J. Wirth Vice President, Secretary Vice President and Insurance and Investment Products Counsel
One AmericanRow and Counsel since 2002. (2002-present), Counsel (1993-2002), Phoenix Life Insurance
Hartford, CT 06102 Company. Secretary, Phoenix Funds Complex (2002-present).
DOB: 11/14/58
</Table>
62
<Page>
(This page has been left blank intentionally.)
<Page>
PHOENIX-KAYNE FUNDS
1800 Avenue of the Stars, 2nd Floor
Los Angeles, California 90067
TRUSTEES
E. Virgil Conway
Harry Dalzell-Payne
Geraldine M. McNamara
Everett L. Morris
Philip R. McLoughlin
OFFICERS
Allan M. Rudnick, President
William R. Moyer, Executive Vice President
John F. Sharry, Executive Vice President
Ralph Walter, Treasurer
Richard J. Wirth, Secretary
IMPORTANT NOTICE TO SHAREHOLDERS
The Securities and Exchange Commission has modified mailing regulations for
semiannual and annual shareholder fund reports to allow mutual fund companies to
send a single copy of these reports to shareholders who share the same mailing
address. If you would like additional copies, please call Mutual Fund Services
at 1-800-243-1574.
INVESTMENT ADVISER
Kayne Anderson Rudnick Investment Management,
LLC
1800 Avenue of the Stars, 2nd Floor
Los Angeles, California 90067
PRINCIPAL UNDERWRITER
Phoenix Equity Planning Corporation
56 Prospect Street
Hartford, CT 06115-0480
CUSTODIAN
Investors Bank & Trust Company
200 Clarendon Street
Boston, Massachusetts 02116
INDEPENDENT AUDITORS
PricewaterhouseCoopers LLP
125 High Street
Boston, Massachusetts 02110
TRANSFER AGENT
Phoenix Equity Planning Corporation
56 Prospect Street
Hartford, CT 06115-0480
HOW TO CONTACT US
Mutual Fund Services 1-800-243-1574
Advisor Consulting Group 1-800-231-4361
Text Telephone 1-800-243-1926
Website
www.phoenixinvestments.com
<Page>
PHOENIX EQUITY PLANNING CORPORATION
P.O. Box 150480
Hartford, CT 06115-0480
[PHOENIX INVESTMENT PARTNERS, LTD. LOGO]
A MEMBER OF THE PHOENIX COMPANIES, INC.
For more information about Phoenix mutual funds, please call your financial
representative or contact us at 1-800-243-4361 or PhoenixInvestments.com.
PXP 1739 (2/04)
<Page>
PRSRT STD
US POSTAGE
PAID
PERMIT #6
HUDSON, MA
01749
PHOENIX EQUITY PLANNING CORPORATION
P.O. Box 150480
Hartford, CT 06115-0480
[PHOENIX INVESTMENT PARTNERS, LTD. LOGO]
A MEMBER OF THE PHOENIX COMPANIES, INC.
For more information about Phoenix mutual funds, please call your financial
representative or contact us at 1-800-243-4361 or PhoenixInvestments.com.
PXP 1739 (2/04)
<Page>
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant
or a third party.
(b) There have been no amendments, during the period covered by this report,
to a provision of the code of ethics that applies to the registrant's
principal executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the
registrant or a third party, and that relates to any element of the code
of ethics description.
(c) The registrant has not granted any waivers, including an implicit
waiver, from a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions, regardless of whether these individuals are employed
by the registrant or a third party, that relates to one or more of
the items set forth in paragraph (b) of this item's instructions.
A COPY OF THE REGISTRANT'S CODE OF ETHICS IS FILED HEREWITH.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the Board of Trustees of the
Funds has determined that E. Virgil Conway and Everett L. Morris possess the
technical attributes identified in Instruction 2(b) of Item 3 to Form N-CSR to
qualify as an "audit committee financial expert". Mr. Conway and Mr. Morris are
"independent" trustees pursuant to paragraph (a) (2) of Item 3 to Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Audit Fees
- ----------
(a) The aggregate fees billed for the fiscal years ended December 31, 2003
and 2002 for professional services rendered by the principal accountant
for the audit of the registrant's annual financial statements or
services that are normally provided by the accountant in connection
with statutory and regulatory filings or engagements for those fiscal
years are $102,600 and $51,000, respectively.
Audit-Related Fees
- ------------------
(b) The aggregate fees billed in each of the last two fiscal years for
assurance and related services by the principal accountant that are
reasonably related to the performance of the audit of the registrant's
financial statements and are not reported under paragraph (a) of this
Item are $0.
Tax Fees
- --------
(c) The aggregate fees billed in the fiscal years ended December 31, 2003
and 2002 for professional services rendered by the principal accountant
for tax compliance, tax advice, and tax planning are $20,500 and
$5,000, respectively. "Tax Fees" are those primarily associated with
review of the Trust's tax provision and qualification as a regulated
investment company (RIC) in connection with audits of the Trust's
financial statement, review of year-end distributions by the Funds to
avoid excise tax for the Trust, periodic discussion with management on
tax issues affecting the Trust, and reviewing and signing the Funds'
federal income and excise tax returns.
All Other Fees
- --------------
(d) The aggregate fees billed in each of the last two fiscal years for
products and services provided by the principal accountant, other than
the services reported in paragraphs (a) through (c) of this Item are $0.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X.
The Phoenix-Kayne Funds (the "Trust") Board has adopted policies and
procedures with regard to the pre-approval of services provided by PwC.
Audit, audit-related and tax compliance services provided to the Trust
on an annual basis require specific pre-approval by the Board. As
noted above, the Board must also approve other non-audit services
provided to the Trust and those non-audit services provided to the
Trust's Affiliated Service Providers that relate directly to the
operations and financial reporting of the Trust. Certain of these
non-audit services that the Board believes are a) consistent with the
SEC's auditor independence rules and b) routine and recurring services
that will not impair the independence of the independent auditors may
be approved by the Board without consideration on a specific
case-by-case basis ("general pre-approval"). The Audit Committee has
determined that Mr. E. Virgil Conway, Chair of the Audit Committee, may
provide pre-approval for such services that meet the above requirements
in the event such approval is sought between regularly scheduled
meetings. In the event that Mr. Conway determines that the full board
should review the request, he has the opportunity to convene a meeting
of the Funds Board. In any event, the Board is informed of each
service approved subject to general pre-approval at the next regularly
scheduled in-person board meeting.
<Page>
(e)(2) The percentage of services described in each of paragraphs (b) through
(d) of this Item that were approved by the audit committee pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X are as follows:
<Table>
<Caption>
2003 2002
---- ----
(b) N/A N/A
(c) 100% 100%
(d) N/A N/A
</Table>
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most
recent fiscal year that were attributed to work performed by persons
other than the principal accountant's full-time, permanent employees
was less than fifty percent.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by
another investment adviser), and any entity controlling, controlled by,
or under common control with the adviser that provides ongoing services
to the registrant for the fiscal years ended December 31, 2003 and 2002
of the registrant was $46,250 and $29,000, respectively.
(h) The registrant's audit committee of the board of directors has
considered whether the provision of non-audit services that were
rendered to the registrant's investment adviser (not including any
sub-adviser whose role is primarily portfolio management and is
subcontracted with or overseen by another investment adviser), and any
entity controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal
accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to open-end investment companies.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to open-end investment companies.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASES.
Not applicable to open-end investment companies.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable
ITEM 10. CONTROLS AND PROCEDURES.
(a) The Registrant's Principal Executive Officer and Principal Financial
Officer have concluded that the Registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment Company Act
of 1940 (the "Act")) are effective as of a date within 90 days of the
filing date of the report that includes the disclosure required by this
paragraph, based on the evaluation of these controls and procedures
required by Rule 30a-3(b) under the Act.
<Page>
(b) There were no changes in the Registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the Act) that occurred during
the Registrant's last fiscal half-year that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 11. EXHIBITS.
(a) (1) CODE OF ETHICS. Filed herewith.
(2) CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF
2002. Filed herewith.
(b) CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002.
Filed herewith.
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) PHOENIX-KAYNE FUNDS
By (Signature and Title)* /s/ ALLAN M. RUDNICK
-------------------------------------
Allan M. Rudnick, President
Date March 4, 2004
----------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /s/ ALLAN M. RUDNICK
----------------------------------
Allan M. Rudnick, President
Date March 4, 2004
--------------------------------------------------------
By (Signature and Title)* /s/ RALPH WALTER
----------------------------------
Ralph Walter, Treasurer
Date March 4, 2004
--------------------------------------------------------
* PRINT THE NAME AND TITLE OF EACH SIGNING OFFICER UNDER HIS OR HER SIGNATURE.