THE LIPPER FUNDS, INC.
LIPPER HIGH INCOME BOND FUND
Annual Report
=================================================
December 31, 1998
<PAGE>
TABLE OF CONTENTS
Shareholder's Letter .................... 1-3
Portfolio of Investments ................ 4-10
Statement of Assets and Liabilities ..... 11
Statement of Operations ................. 12
Statement of Changes in Net Assets ...... 13
Financial Highlights .................... 14
Notes to Financial Statements ........... 15-17
Report of Independent Accountants ....... 18
Tax Information ......................... 18
<PAGE>
THE LIPPER FUNDS, INC. ANNUAL REPORT
LIPPER HIGH INCOME BOND FUND December 31, 1998
Dear Shareholder:
We are pleased to present the Annual Report for the Lipper High Income Bond
Fund for the year ended December 31, 1998. The Lipper High Income Bond Fund is
one of three investment portfolios, together with the Lipper U.S. Equity Fund
and the Prime Lipper Europe Equity Fund, which comprise The Lipper Funds, Inc.
Each of The Lipper Funds is made available to individual, institutional and
group retirement plan investors through a separate class of shares. This report
presents the financial statements and performance review of the Lipper High
Income Bond Fund (the "Fund") for the year ended December 31, 1998.
PERFORMANCE AND PORTFOLIO REVIEW
The Lipper High Income Bond Fund seeks to achieve high current income while
preserving capital by investing in a diversified portfolio of quality, high
yield, intermediate-term bonds rated BBB to B-. The Fund seeks to manage credit
risk and minimize interest rate risk through in-depth credit analysis, portfolio
diversification and by investing in securities with short-to-intermediate term
maturities. To manage default risk, the Fund invests in companies with proven
track records of established cash flow, invests exclusively in cash-pay bonds,
favors bonds that are senior in the capital structure and avoids companies where
it is difficult to quantify the inherent risks. Due in part to this discipline,
the Fund has never experienced a default with respect to any bond holding.
The high yield bond market experienced a challenging year in 1998.
Notwithstanding an impressive first half of the year, the high yield market
experienced unusual pressure and volatility during the second half of the year.
This pressure resulted from the ripple effect of Southeast Asia, Russian
defaults on sovereign debt and the commensurate impact on emerging markets, the
unwinding of leverage by certain hedge funds and general concerns regarding a
global economic slowdown. As a result of these events, a flight to quality
ensued (benefiting U.S. Treasuries) and the high yield market became less
liquid. Effectively, high yield bonds, like other fixed-income securities,
became decoupled from U.S. Treasuries and began to trade more like equity than
debt. As a result, the spread of high yield bonds over comparable U.S.
Treasuries widened by over 300 basis points to levels not witnessed since 1991.
During the tumultuous period experienced in the late summer and early fall
of 1998, the Lipper High Income Bond Fund fared relatively well compared to its
peers. During the third quarter, the Fund's Premier Shares generated a return of
- -2.45%. This return was strong compared to the -7,23% average return generated
by all high yield mutual funds tracked by Morningstar, Inc. Although Lipper &
Company's strategy did not completely insulate the Fund from losses during this
period of extreme market conditions, Lipper's investors benefited on a relative
basis from its conservative approach. As a result, the Fund ranked among the top
ten performers tracked by Lipper Inc. during the trailing 13-week and trailing
12-month period ended September 30, 1998.
Between September 28, 1998 and November 17, 1998, the U.S. Federal Reserve
implemented three interest rate cuts. These cuts, along with continued low
inflation, caused the equity markets to rebound and rally, resulting in a full
recovery by year-end. The high yield bond market participated in this recovery
to a degree, but unlike the equity markets, high yield investors did not return
to the market in droves, resulting in a slower recovery than that experienced in
the equity markets. As of mid-January 1999, the spread of split-BB rated bonds
over comparable U.S. Treasuries had narrowed approximately 150 basis points,
representing a fifty-percent recovery from the post-August peak. Yet, the spread
of split-BB rated bonds over comparable U.S. Treasuries is still significantly
wider than on June 30, 1998, when the spread was 341 basis points, and still
wider than historical levels, where the average spread of split-BB rated bonds
was approximately 335 basis points during the period 1993-1997. Consequently, we
view the current environment as an attractive buying opportunity.
In addition to performing well on a relative basis during the third quarter
of 1998, the Lipper High Income Bond Fund outperformed most of its peers during
the 12-month period ended December 31, 1998. During this period, the Fund's
Premier Shares generated a total return of 3.61% net of fees and expenses. This
return compares strongly against the -0.62% average annual return generated by
all high yield mutual funds tracked by Morningstar, Inc.
<PAGE>
According to The Wall Street Journal, the Lipper High Income Bond Fund ranked in
the top 20% of all mutual funds with similar objectives as the Fund during the
12-month period ended December 31, 1998. During 1998, the Fund benefited from a
number of factors, including the fact that it invests in $U.S.-denominated
securities issued primarily by U.S. domiciled companies, it invests exclusively
in cash-pay securities (avoiding zero coupon, pay-in-kind and pre-funded bonds)
and it does not invest in emerging market securities. Lipper's conservative
approach of focusing on higher rated bonds with an average credit quality of BB-
also insulated the Fund on a relative basis from the significant declines
experienced by funds holding lower rated bonds. In addition, the Fund avoided
bonds issued by companies without sufficient cash flow to cover interest expense
and capital expenditures, which sheltered the Fund from some of the volatility
experienced in 1998.
Our outlook for the Lipper High Income Bond Fund is positive. Given that
high yield bond spreads have not yet returned to historical levels, we believe
there is significant value in the high yield market. In addition, we believe the
U.S. economic environment supports an optimistic outlook for high yield bonds.
U.S. economic growth should remain moderate, unemployment low and inflationary
pressure benign, making U.S. bond yields attractive relative to inflation. Given
the low, stable interest rate environment and strong economy, demand for high
yield issues is strong, with cash flowing into high yield mutual funds at
increasing rates. As additional funds flow into the high yield market, liquidity
should continue to improve and spreads should narrow, benefiting current and new
investors. Further, default rates are expected to remain below the historic
average of 3.0%, supporting an optimistic outlook for high yield bonds.
As of December 31, 1998, the Lipper High Income Bond Fund was highly
diversified, with approximately 90 securities representing over 25 industries.
The average credit quality of the portfolio was BB-. The Fund's weighted average
coupon was approximately 9.0%, and the Fund maintained an average maturity of
6.2 years, with an effective duration of 3.5. In 1999, the Fund will continue to
pursue its investment strategy of adding value by investing and trading issues
which, based upon internal analysis, offer attractive yields compared to their
official credit rating or market perceptions. Particularly, the portfolio
manager will continue to focus on higher quality bonds that generate sufficient
cash flow to cover interest expense and capital expenditures and maintain
reasonable debt to cash flow ratios. We expect to maintain the Fund's stated
average maturity and duration on the shorter end of the maturity spectrum, which
currently offers greater value than longer dated paper.
We hope you find the enclosed report informative. We very much appreciate
your participation in the Lipper High Income Bond Fund.
Sincerely,
KENNETH LIPPER
-----------------------------------
President and Chairman of the Board
2
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THE LIPPER HIGH INCOME BOND FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURN*
FOR PERIODS ENDED DECEMBER 31, 1998
1 YEAR 5 YEAR SINCE INCEPTION*
PREMIER SHARES ................... 3.61% 8.01% 9.37%
RETAIL SHARES .................... 3.36% 7.87% 9.27%
GROUP RETIREMENT PLAN SHARES ..... 3.37% 7.86% 9.27%
LIPPER HIGH INCOME BOND FUND--PREMIER SHARES*+
Comparison of a $10,000 Investment in the Fund
with the Lehman Intermediate BB Index
PERIODS ENDED DECEMBER 31
- --------------------------------------------------------------------------------
Lipper High Lehman
Income Bond fund Intermediate
Premium Shares BB Index
-------------- --------
2/1/92 ..... 10,000 10,000
1992 ...... 11,064 10,919
1993 ...... 12,644 12,519
1994 ...... 12,703 12,725
1995 ...... 14,535 15,033
1996 ...... 16,133 16,446
1997 ...... 17,946 18,295
1998 ...... 18,594 19,350
- --------------------------------------------------------------------------------
........ Lipper High Income Bond Fund Premier Shares
-------- Lehman Intermediate BB Index
+ The minimum investment for Premier Shares is $1,000,000.
Past performance is not indicative of future results. Investment return and
principal value will fluctuate with market conditions. When shares are redeemed,
they may be worth more or less than their original cost.
* This chart illustrates comparative performance of $10,000 invested in the
Premier Shares of Lipper High Income Bond Fund (the "Fund") versus the Lehman
Intermediate BB Bond Index. The performance information presented reflects
performance of a predecessor partnership for the period from commencement of the
partnership's investment operations on February 1, 1992 through April 1, 1996.
Also shown is the predecessor partnership's performance for the five year
average annualized period and the performance of the Fund as a registered
investment company, for the period April 1, 1996 through December 31, 1998. As a
registered investment company under the Investment Company Act of 1940 ("the
Act"), the Fund is subject to certain restrictions under the Act and the
Internal Revenue Code ("the Code") to which its corresponding partnership was
not subject. Had the partnership been registered under the Act and subject to
the provisions of the Code, its investment performance may have been adversely
affected.
The Lipper High Income Bond Fund's Retail and Group Retirement Plan Shares
were introduced on April 11, 1996 and April 12, 1996, respectively. Performance
for the Fund's Retail and Group Retirement Plan Shares differs from the Fund's
Premier Shares due to the different inception dates and the higher class
specific expenses associated with the Retail and Group Retirement Plan Shares.
Performance information presented for the Retail and Group Retirement Plan
Shares prior to their introduction dates reflects the performance of the Fund's
Premier Shares which are not subject to the shareholder servicing or
distribution fees borne by these classes of shares. The Fund's performance
assumes the reinvestment of all dividends and distributions. Fee waivers and
reimbursements are currently in effect for the Fund without which total returns
would have been lower.
The comparative Lehman Intermediate BB Index has not been adjusted to
reflect expenses or other fees that the SEC requires to be reflected in the
Fund's performance. The fees, if reflected, would reduce the performance. The
comparative index has been adjusted to reflect reinvestment of dividends and
disbursements on securities in the index.
The Lehman Intermediate BB Index is an unmanaged index comprised of
intermediate-term bonds. Please note that one cannot directly invest in an
unmanaged index.
3
<PAGE>
LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
FACE
AMOUNT VALUE+
---------- ----------
CORPORATE BONDS (84.9%)
ADVERTISING & BROADCASTING (4.9%)
++ Ackerley Communications Inc.
9.00%, 01/15/09 .............................. $ 500,000 $ 510,000
Chancellor Media Corp., Series B
8.125%, 12/15/07 ............................. 1,000,000 997,500
++ Lamar Advertising Co.
9.625%, 12/01/06 ............................. 1,000,000 1,087,500
Outdoor Systems, Inc.
9.375%, 10/15/06 ............................. 1,000,000 1,085,000
Salem Communications Corp., Series B
9.50%, 10/01/07 .............................. 1,000,000 1,040,000
----------
4,720,000
----------
AEROSPACE/DEFENSE (3.1%)
BE Aerospace, Series B
8.00%, 03/01/08 .............................. 1,000,000 985,000
Sequa Corp.
9.625%, 10/15/99 ............................. 1,000,000 1,025,000
Wyman-Gordon Co.
8.00%, 12/15/07 .............................. 1,000,000 997,500
----------
3,007,500
----------
AUTO MANUFACTURING & RELATED (4.4%)
Delco Remy International, Inc.
10.625%, 08/01/06 ............................ 1,000,000 1,075,000
Federal-Mogul Corp.
7.50%, 07/01/04 .............................. 1,000,000 1,018,230
Hayes Wheels International, Inc.
11.00%, 07/15/06 ............................. 1,000,000 1,115,000
Lear Seating
8.25%, 02/01/02. ............................. 1,000,000 1,006,250
----------
4,214,480
----------
BEVERAGES & BOTTLING (1.1%)
Canandaigua Wine, Inc.
8.75%, 12/15/03 .............................. 1,000,000 1,035,000
----------
CABLE (2.8%)
Adelphia Communications Series B
9.25%, 10/01/02 .............................. 1,500,000 1,597,500
Fundy Cable Ltd.
11.00%, 11/15/05 ............................. 1,000,000 1,065,000
----------
2,662,500
----------
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1998
FACE
AMOUNT VALUE+
---------- ----------
CAPITAL GOODS, EQUIPMENT & OTHER MANUFACTURING (3.6%)
American Standard .............................
10.875%, 05/15/99 ............................ $ 500,000 $ 508,750
American Standard
7.125%, 02/15/03 ............................. 500,000 506,875
Communications & Power Industries, Series B
12.00%, 08/01/05 ............................. 625,000 651,562
International Knife & Saw, Inc.
11.375%, 11/15/06 ............................ 750,000 772,500
Mark IV Industries Inc.
7.75%, 04/01/06 .............................. 1,000,000 981,700
----------
3,421,387
----------
CHEMICALS (1.0%)
++ Huntsman Corp.
9.50%, 07/01/07 .............................. 1,000,000 1,000,000
----------
CONSUMER PRODUCTS (2.7%)
Herff Jones, Inc.
11.00%, 08/15/05 ............................. 750,000 817,500
Selmer Co., Inc.
11.00%, 05/15/05 ............................. 750,000 802,500
Werner Holdings Co., Series A
10.00%, 11/15/07 ............................. 1,000,000 995,000
----------
2,615,000
----------
ELECTRIC UTLITIES (4.0%)
AES Corp.
8.375%, 08/15/07 ............................. 1,125,000 1,136,250
Calenergy Co. Inc.
9.50%, 09/15/06 .............................. 1,000,000 1,115,000
Cogentrix Energy Inc.
8.10%, 03/15/04 .............................. 1,000,000 1,034,130
Niagara Mohawk Power Corp., Series E
7.375%, 07/01/03 ............................. 500,000 512,555
----------
3,797,935
----------
ENTERTAINMENT (2.7%)
J Seagram & Sons
6.25%, 12/15/01.. 500,000 498,005
++ Park Place Entertainment
7.875%, 12/15/05 1,000,000 1,006,250
Premier Parks
12.00%, 08/15/03 1,000,000 1,087,500
----------
2,591,755
----------
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1998
FACE
AMOUNT VALUE+
---------- ----------
ENVIRONMENTAL SERVICES (2.1%)
++ Allied Waste N.A.
7.375%, 01/01/04 ............................. 500,000 $ 507,500
++ Allied Waste N.A.
7.625%, 01/01/06 ............................. 500,000 507,500
++ Allied Waste N.A.
7.875%, 01/01/09 ............................. 1,000,000 1,015,000
----------
2,030,000
----------
FINANCIAL INSTITUTIONS (2.7%)
DVI, Inc.
9.875%, 02/01/04 ............................. 500,000 486,250
Navistar Financial Corp., Series B
9.00%, 06/01/02 .............................. 1,000,000 1,040,000
Reliance Group Holdings
9.75%, 11/15/03 .............................. 1,000,000 1,042,500
----------
2,568,750
----------
FOOD & FOOD SERVICES (3.0%)
Host Mar Travel Plaza, Class B
9.50%, 05/15/05 .............................. 1,000,000 1,045,000
Keebler Corp.
10.75%, 07/01/06 ............................. 500,000 567,500
Rykoff Sexton, Inc.
8.875%, 11/01/03 ............................. 251,000 261,040
SC International Services, Series B
9.25%, 09/01/07 .............................. 1,000,000 1,005,000
----------
2,878,540
----------
HEALTHCARE SERVICES & RELATED (3.7%)
Columbia/HCA Healthcare
6.41%, 06/15/00 .............................. 1,000,000 990,820
Healthsouth Corp.
9.50%, 04/01/01 .............................. 500,000 515,000
Quorum Health Group, Inc.
8.75%, 11/01/05 .............................. 1,000,000 960,000
Tenet Healthcare
8.625%, 01/15/07 ............................. 1,000,000 1,045,000
----------
3,510,820
----------
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1998
FACE
AMOUNT VALUE+
---------- ----------
HOMEBUILDING & BUILDING MATERIALS (6.3%)
Kaufman & Broad Home
9.375%, 05/01/03 ............................. $1,000,000 $1,018,750
NVR, Inc.
8.00%, 06/01/05 .............................. 1,000,000 985,000
Nortek, Inc.
9.875%, 03/01/04 ............................. 1,000,000 1,047,500
Republic Group Inc.
9.50%, 07/15/08 .............................. 1,000,000 980,000
Toll Brothers Corp.
9.50%, 03/15/03 .............................. 1,000,000 1,030,000
U.S. Home Corp.
7.95%, 03/01/01 .............................. 1,000,000 1,000,000
----------
6,061,25
----------
HOTELS (2.1%)
HMH Properties, Series A
7.875%, 08/01/05 ............................. 1,250,000 1,246,875
Red Roof Inns, Inc.
9.625%, 12/15/03 ............................. 750,000 766,875
----------
2,013,750
----------
METALS (1.0%) Ivaco, Inc.
11.50%, 09/15/05 ............................. 1,000,000 975,000
----------
OIL & GAS (7.7%)
Gulf Canada Resources Ltd.
9.25%, 01/15/04 .............................. 1,000,000 1,004,930
Nuevo Energy Co.
9.50%, 04/15/06 .............................. 1,000,000 995,000
Ocean Energy Inc., (United Meridian)
10.375%, 10/15/05 ............................ 1,000,000 1,035,000
Pride Petroleum Services, Inc.
9.375%, 05/01/07 ............................. 1,000,000 935,000
Seagull Energy Corp.
8.625%, 08/01/05 ............................. 750,000 753,750
Tubscope, Inc.
7.50%, 02/15/08 .............................. 500,000 473,825
Veritas DGC, Inc.
9.75%, 10/15/03 .............................. 1,000,000 1,020,000
Vintage Petroleum
9.00%, 12/15/05 .............................. 1,250,000 1,221,875
----------
7,439,380
----------
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1998
FACE
AMOUNT VALUE+
---------- ----------
PAPER & FOREST PRODUCTS (3.5%)
Boise Cascade Co.
9.85%, 06/15/02 .............................. $1,000,000 $1,081,610
Buckeye Cellulose Corp.
8.50%, 12/15/05 .............................. 250,000 261,250
Container Corp. of America, Series A
11.25%, 05/01/04 ............................. 1,000,000 1,045,000
U.S. Timberlands
9.625%, 11/15/07 ............................. 1,000,000 1,015,000
----------
3,402,860
----------
PRINTING (1.1%)
++ Big Flower Press Holdings
8.625%, 12/01/08 ............................. 1,000,000 1,005,000
---------
PUBLISHING (2.2%)
Hollinger International, Inc.
9.25%, 02/01/06 .............................. 783,000 826,065
K-III Communications Corp.
10.25%, 06/01/04 ............................. 1,250,000 1,325,000
----------
2,151,065
----------
RETAILERS (3.3%)
Ann Taylor Inc.
8.75%, 06/15/00 .............................. 1,000,000 1,013,750
Leslies Poolmart
10.375%, 07/15/04 ............................ 1,000,000 1,035,000
Southland Corp.
5.00%, 12/15/03 .............................. 500,000 442,500
Southland Corp., Series A
4.50%, 06/15/04 .............................. 750,000 637,500
----------
3,128,750
----------
TECHNOLOGY (4.1%)
Amphenol Corp.
9.875%, 05/15/07 ............................. 1,000,000 1,040,000
Plantronics, Inc.
10.00%, 01/15/01 ............................. 1,825,000 1,870,625
++ Worldwide Fiber Inc.
12.50%, 12/15/05 ............................. 1,000,000 1,010,000
----------
3,920,625
----------
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1998
FACE
AMOUNT VALUE+
---------- -----------
TELECOMMUNICATIONS (5.4%)
++ Filtronic plc (United Kingdom)
10.00%, 12/01/05 ............................. $1,000,000 $ 1,007,500
Intermedia Communications, Series B
8.875%, 11/01/07 ............................. 1,250,000 1,212,500
Level 3 Communications Inc.
9.125%, 05/01/08 ............................. 1,000,000 997,500
Psinet Inc., Series B
10.00%, 02/15/05 ............................. 1,000,000 995,000
Verio Inc.
10.375%, 04/01/05 ............................ 1,000,000 985,000
----------
5,197,500
----------
TEXTILE/APPAREL MANUFACTURING (2.4%)
Pillowtex Corp.
10.00%, 11/15/06 ............................. 1,250,000 1,343,750
WestPoint Stevens
7.875%, 06/15/05 ............................. 1,000,000 1,017,500
----------
2,361,250
----------
TRANSPORTATION (4.0%)
++ Cenargo International plc (United Kingdom)
9.75%, 06/15/08. ............................. 750,000 708,750
Continental Airlines, Inc.
8.00%, 12/15/05 .............................. 1,000,000 1,013,700
Sea Containers Ltd.
9.50%, 07/01/03 .............................. 750,000 776,250
Sea Containers Ltd.
12.50%, 12/01/04 ............................. 1,250,000 1,381,250
----------
3,879,95
----------
TOTAL CORPORATE BONDS (84.9%) (COST $81,447,541) 81,590,047
----------
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1998
FACE
AMOUNT VALUE+
---------- ----------
CONVERTIBLE BONDS (2.9%)
CAPITAL GOODS, EQUIPMENT & OTHER
MANUFACTURING (0.8%)
Mark IV Industries, Inc.
4.75%, 11/01/04 .............................. $ 250,000 $ 201,015
++Thermo Electron Corp.
4.25%, 01/01/03 .............................. 625,000 562,113
----------
763,128
----------
HEALTHCARE SERVICES & RELATED (0.3%)
Novacare, Inc.
5.50%, 01/15/00 .............................. 375,000 305,156
----------
PRINTING (0.9%)
Mail-Well Inc.
5.00%, 11/01/02 .............................. 1,000,000 895,000
----------
RETAILERS (0.9%)
Nine West Group
5.50%, 07/15/03 .............................. 1,125,000 887,524
----------
TOTAL CONVERITBLE BONDS (2.9%) (COST $3,138,632) 2,850,808
----------
SHORT-TERM INVESTMENT (9.6%)
REPURCHASE AGREEMENTS (9.6%)
Chase Securities, Inc., 4.45%, dated 12/31/98, due 1/04/99, to be
repurchased at $9,186,540, collateralized by $5,525,000 U.S. Treasury Bond
11.25%, due 02/15/15, valued at $9,378,537
(COST $9,182,000) ............................ $9,182,000 $ 9,182,000
------------
TOTAL INVESTMENTS (97.4%) (COST $93,768,173) ..... 93,622,855
OTHER ASSETS AND LIABILITIES (2.6%) .............. 2,503,994
-----------
NET ASSETS (100%) ................................ $96,126,849
===========
- ----------
+ See Note A to Financial Statements.
++ 144A Security. Certain conditions for public sale may exist.
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
LIPPER HIGH INCOME BOND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
ASSETS:
Investments, at value (Cost $84,586,173) ....................... $84,440,855
Repurchase Agreement (Cost $9,182,000) ......................... 9,182,000
Cash ........................................................... 908
Interest Receivable ............................................ 1,673,792
Receivable for Investments Sold ................................ 1,081,556
Deferred Organization Costs .................................... 42,285
Receivable for Fund Shares Sold ................................ 2,692
Prepaid Assets ................................................. 15,020
-----------
TOTAL ASSETS ................................................ 96,439,108
-----------
LIABILITIES:
Dividends Payable--Premier Shares .............................. 155,478
Dividends Payable--Retail Shares ............................... 2,925
Investment Advisory Fees Payable ............................... 50,051
Distribution Fees Payable-- Retail Shares ...................... 20,833
Administrative Fees Payable .................................... 17,628
Shareholder Servicing Fees Payable--Group Retirement
Plan Shares .................................................. 17,354
Directors' Fees Payable ........................................ 4,624
Custodian Fees Payable ......................................... 2,608
Other Liabilities .............................................. 40,758
-----------
TOTAL LIABILITIES ........................................... 312,259
-----------
NET ASSETS ...................................................... $96,126,849
===========
NET ASSETS CONSIST OF:
Paid in Captial ................................................ $98,345,176
Accumulated Net Realized Loss .................................. (2,073,009)
Unrealized Depreciation on Investments ......................... (145,318)
-----------
$96,126,849
===========
PREMIER SHARES:
Net Assets ..................................................... $85,662,044
Shares Issued and Outstanding ($.001 par value)
(Authorized 3,333,333,333) ................................... 8,946,645
Net Asset Value, Offering and Redemption Price Per Share ....... $ 9.57
===========
RETAIL SHARES:
Net Assets ..................................................... $ 5,949,598
Shares Issued and Outstanding ($.001 par value)
(Authorized 3,333,333,333) ................................... 621,869
Net Asset Value, Offering and Redemption Price Per Share ....... $ 9.57
===========
GROUP RETIREMENT PLAN SHARES:
Net Assets ..................................................... $ 4,515,207
Shares Issued and Outstanding ($.001 par value)
(Authorized 3,333,333,333) ................................... 471,992
Net Asset Value, Offering and Redemption Price Per Share ....... $ 9.57
===========
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
LIPPER HIGH INCOME BOND FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME
Interest ............................................ $8,742,616
----------
EXPENSES
Investment Advisory Fees
Basic Fee .......................................... $ 690,487
Less: Fee Waived ................................... (137,400) 553,087
---------
Administrative Fees ................................. 204,009
Registration and Filing Fees ........................ 31,976
Professional Fees ................................... 28,946
Amortization of Organization Costs .................. 18,779
Directors' Fees ..................................... 17,555
Distribution Fees-- Retail Shares ................... 14,372
Custodian Fees ...................................... 13,107
Servicing Fees-- Group Retirement Plan Shares ....... 10,423
Other Expenses ...................................... 55,376
----------
Total Expenses .................................... 947,630
----------
NET INVESTMENT INCOME ............................. 7,794,986
----------
NET REALIZED LOSS FROM:
Investments sold .................................... (2,058,188)
----------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION:
Investments ......................................... (2,393,395)
----------
TOTAL NET REALIZED LOSS AND NET CHANGE IN
UNREALIZED APPRECIATION/DEPRECIATION ................ (4,451,583)
----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ........................... $3,343,403
==========
The accompanying notes are an integral part of the financial statements.
12
<PAGE>
<TABLE>
LIPPER HIGH INCOME BOND FUND
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
----------- ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS:
Net Investment Income ............................................. $ 7,794,986 $ 8,900,319
Net Realized Gain/Loss ............................................ (2,058,188) 2,631,435
Net Change in Unrealized Appreciation/Depreciation ................ (2,393,395) (295,674)
----------- ------------
Net Increase in Net Assets Resulting from Operations ............ 3,343,403 11,236,080
----------- ------------
DISTRIBUTIONS:
PREMIER SHARES:
From net investment income ........................................ (6,980,439) (8,415,284)
Return of Capital ................................................. (123,963) --
From net realized gains ........................................... (288,220) (2,140,829)
RETAIL SHARES:
From net investment income ........................................ (471,618) (228,895)
Return of Capital ................................................. (11,680) --
From net realized gains ........................................... (22,238) (120,871)
GROUP RETIREMENT PLAN SHARES:
From net investment income ........................................ (342,929) (248,840)
Return of Capital ................................................. (12,575) --
From net realized gains ........................................... (14,885) (88,296)
----------- ------------
Total Distributions ............................................. (8,268,547) (11,243,015)
----------- ------------
CAPITAL SHARE TRANSACTIONS (NOTES G AND H):
PREMIER SHARES:
Issued -- Regular ................................................. 16,399,322 22,290,649
-- Distributions Reinvested ................................ 5,630,833 8,673,740
Redeemed .......................................................... 17,169,754) (48,895,579)
----------- ------------
Net Increase (Decrease) from Premier Shares ..................... 4,860,401 (17,931,190)
----------- ------------
RETAIL SHARES:
Issued -- Regular ................................................. 2,991,781 3,993,908
-- Distributions Reinvested ................................ 460,384 292,126
Redeemed .......................................................... (1,853,051) (327,954)
----------- ------------
Net Increase from Retail Shares ................................. 1,599,114 3,958,080
----------- ------------
GROUP RETIREMENT PLAN SHARES:
Issued -- Regular ................................................. 1,668,959 1,773,908
-- Distributions Reinvested ................................ 370,479 337,135
Redeemed .......................................................... (813,119) (752,919)
----------- ------------
Net Increase from Group Retirement Plan Shares Transactions ..... 1,226,319 1,358,124
----------- ------------
Net Increase (Decrease) in Net Assets From Capital
Share Transactions ........................................... 7,685,834 (12,614,986)
----------- ------------
Total Increase (Decrease) ......................................... 2,760,690 (12,621,921)
----------- ------------
NET ASSETS:
Beginning of Year ................................................. 93,366,159 105,988,080
----------- ------------
End of Year ....................................................... 96,126,849 $ 93,366,159
=========== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
13
<PAGE>
<TABLE>
LIPPER HIGH INCOME BOND FUND
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA & RATIOS (3)
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<CAPTION>
PREMIER PREMIER PREMIER RETAIL RETAIL
SHARES SHARES SHARES SHARES SHARES
----------- ----------- ----------- ----------- -----------
APRIL 1,
YEAR ENDED YEAR ENDED 1996** to YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1998 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .................. $10.11 $10.18 $10.00 $10.11 $10.18
------- ------- -------- ------ ------
Income From Investment Operations:
Net Investment Income (1) ........................... 0.84 0.91 0.68 0.82 0.84
Net Realized and Unrealized Gain
on Investments ..................................... (0.48) 0.19 0.21 (0.49) 0.23
------- ------- -------- ------ ------
Total From Investment Operations ................. 0.36 1.10 0.89 0.33 1.07
------- ------- -------- ------ ------
Distributions:
Net Investment Income ............................... (0.86) (0.91) (0.68) (0.83) (0.88)
Return of Capital ................................... -- + -- -- -- + --
Net Realized Gain ................................... (0.04) (0.26) (0.03) (0.04) (0.26)
------- ------- -------- ------ ------
Total Distributions .............................. (0.90) (1.17) (0.71) (0.87) (1.14)
------- ------- -------- ------ ------
NET ASSET VALUE, END OF PERIOD ........................ $ 9.57 $10.11 $10.18 $ 9.57 $10.11
====== ====== ====== ====== ======
TOTAL RETURN (2) ...................................... 3.61% 11.22% 9.23% 3.36% 10.97%
====== ====== ====== ====== ======
Ratios and Supplemental Data:
Net Assets, End of Period (000's) .................... $85,662 $85,151 $102,945 $5,950 $4,697
Ratios After Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets ....................... 1.00% 1.00% 1.00%* 1.25% 1.25%
Net Investment Income to Average Net Assets .......... 8.50% 8.58% 9.01%* 8.12% 8.31%
Ratios Before Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets ....................... 1.15% 1.16% 1.27%* 1.40% 1.41%
Net Investment Income to Average Net Assets .......... 8.35% 8.42% 8.74%* 7.97% 8.15%
Portfolio Turnover Rate ............................... 110% 105% 74% 110% 105%
<CAPTION>
GROUP GROUP GROUP
RETIREMENT RETIREMENT RETIREMENT
RETAIL PLAN PLAN PLAN
SHARES SHARES SHARES SHARES
----------- ----------- ----------- ------------
APRIL 11, APRIL 12,
1996*** to YEAR ENDED YEAR ENDED 1996*** to
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1998 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .................. $ 9.91 $10.11 $10.18 $ 9.93
------ ------ ------ ------
Income From Investment Operations:
Net Investment Income (1) ........................... 0.62 0.80 0.85 0.62
Net Realized and Unrealized Gain
on Investments ..................................... 0.34 (0.47) 0.22 0.32
------ ------ ------ ------
Total From Investment Operations ................. 0.96 0.33 1.07 0.94
------ ------ ------ ------
Distributions:
Net Investment Income ............................... (0.66) (0.83) (0.88) (0.66)
Return of Capital ................................... -- -- + -- --
Net Realized Gain ................................... (0.03) (0.04) (0.26) (0.03)
------ ------ ------ ------
Total Distributions .............................. (0.69) (0.87) (1.14) (0.69)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD ........................ $10.18 $ 9.57 $10.11 $10.18
====== ====== ====== ======
TOTAL RETURN (2) ...................................... 10.04% 3.37% 10.96% 9.78%
====== ====== ====== ======
Ratios and Supplemental Data:
Net Assets, End of Period (000's) .................... $845 $4,515 $3,518 $2,198
Ratios After Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets ....................... 1.25%* 1.25% 1.25% 1.25%*
Net Investment Income to Average Net Assets .......... 8.95%* 8.13% 8.32% 8.91%*
Ratios Before Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets ....................... 1.59%* 1.40 1.41% 1.55%*
Net Investment Income to Average Net Assets .......... 8.61%* 7.98% 8.16% 8.61%*
Portfolio Turnover Rate ............................... 74% 110% 105% 74%
<FN>
- ----------
* Annualized
** Commencement of Fund operations
*** Initial offering of shares by the Fund
+ Amount represents less than $0.01 per share
(1) The effect to net investment income per share of voluntarily waived fees
and reimbursed expenses was:
YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
Premier Shares ............................... $0.01 $0.02 $0.02
Retail Shares ................................ $0.01 $0.02 $0.02
Group Retirement Plan Shares ................. $0.01 $0.02 $0.02
(2) Total return would have been lower had the Adviser not waived or reimbursed
certain expenses during the periods shown. Total returns for periods of
less than one year are not annualized.
(3) The per share data shown does not reflect adjustments to undistributed net
investment income due to book/tax differences.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
14
<PAGE>
LIPPER HIGH INCOME BOND FUND
NOTES TO FINANCIAL STATEMENTS
The Lipper Funds, Inc. (the "Company") is registered under the Investment
Company Act of 1940 as an open-end management investment company and was
incorporated on August 22, 1995. As of December 31, 1998 the Company was
comprised of three diversified portfolios: Lipper High Income Bond Fund, Lipper
U.S. Equity Fund, and Prime Lipper Europe Equity Fund. These financial
statements pertain to Lipper High Income Bond Fund only. The financial
statements of the remaining Funds are presented separately. The Company offers
the shares of each Fund in three classes: Premier Shares, Retail Shares and
Group Retirement Plan Shares. The Lipper High Income Bond Fund (the "Fund") was
funded as a registered investment company on April 1, 1996 with a contribution
of securities from a corresponding limited partnership (see Note G).
The Lipper High Income Bond Fund seeks high current income by investing
primarily in high yield securities with maturities of less than 10 years.
A. SIGNIFICANT ACCOUNTING POLICIES. The following significant accounting
policies are in conformity with generally accepted accounting principles for
investment companies. Such policies are consistently followed by the Fund in the
preparation of its financial statements. Generally accepted accounting
principles may require management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual results
may differ from those estimates.
1. SECURITY VALUATION: Fixed income securities are stated on the basis of
valuations provided by brokers and/or a pricing service which uses information
with respect to transactions in fixed income securities, quotations from
dealers, market transactions in comparable securities and various relationships
between securities in determining value. Short-term investments that have
remaining maturities of sixty days or less at time of purchase are valued at
amortized cost, if it approximates market value. The value of securities for
which no quotations are readily available is determined in good faith at fair
value using methods determined by the Board of Directors.
2. FEDERAL INCOME TAXES: It is the Fund's intention to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code and
to distribute all of its taxable income. Accordingly, no provision for Federal
income taxes is required in the financial statements.
At December 31, 1998 the cost of investments and unrealized appreciation
(depreciation) of investments for Federal income tax purposes were:
NET
COST APPRECIATION (DEPRECIATION) DEPRECIATION
----------- ------------ ------------ ------------
$93,768,173 $974,183 $(1,119,501) $(145,318)
3. REPURCHASE AGREEMENTS: The Fund may enter into repurchase agreements
under which it lends excess cash and takes possession of securities with an
agreement that the counterparty will repurchase such securities. In connection
with transactions in repurchase agreements, a bank as custodian for the Fund
takes possession of the underlying securities which are held as collateral, with
a market value at least equal to the amount of the repurchase transaction,
including principal and accrued interest. To the extent that any repurchase
transaction exceeds one business day, the value of the collateral is
market-to-market on a daily basis to determine the adequacy of the collateral.
In the event of default on the obligation to repurchase, the Fund has the right
to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. In the event of default or bankruptcy by the counterparty to the
agreement, realization and/or retention of the collateral or proceeds may be
subject to legal proceedings.
4. DISTRIBUTIONS TO SHAREHOLDERS: The Fund intends to distribute
substantially all of its net investment income monthly. Net realized capital
gains, if any, will be distributed at least annually by the Fund. All
distributions are recorded on the ex-dividend date.
Income and capital gains distributions are determined in accordance with
U.S. Federal income tax regulations which may differ from generally accepted
accounting principles.
Permanent book and tax differences between U.S. federal income tax
regulations and generally accepted accounting principles may result in
reclassifications to undistributed or distributions in excess of net investment
income (loss), undistributed realized net gain (loss) and paid in capital.
For the year ended December 31, 1998, such adjustments resulted from
differing book and tax treatment of non-deductible organization expenses and a
return of capital to shareholders.
15
<PAGE>
LIPPER HIGH INCOME BOND FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1998 the Fund had a capital loss carryforward of $1,440,232
available to offset future capital gains through December 31, 2006. To the
extent that capital loss carryforwards are used to offset any future capital
gains realized during the carryforward period as provided by U.S. Federal Income
tax regulations, no capital gains tax liability will be incurred by the Fund for
gains realized and not distributed. To the extent that capital gains are offset,
such gains will not be distributed to the shareholders.
5. ORGANIZATION COSTS: Costs incurred by the Fund in connection with its
organization have been deferred and are being amortized on a straight-line basis
over a five-year period.
6. OTHER: Securities transactions are accounted for on the date the
securities are purchased or sold. Costs used in determining realized gains and
losses on the sale of investment securities are based on the specific
identification method. Interest income is recognized on the accrual basis.
Discounts and premiums on securities purchased are amortized according to the
effective yield method over their respective lives. Expenses of the Company,
which are not directly attributable to a Fund, are allocated among the Funds
based on their relative net assets. Income, expenses (other than class specific
expenses) and realized and unrealized gains or losses are allocated to each
class of shares based upon their relative net assets. The Company has a $20
million line of credit with The Chase Manhattan Bank which is available to meet
temporary cash needs of the Company. The Company pays a commitment fee for this
line of credit.
B. ADVISORY SERVICES: Lipper & Company, L.L.C. (the "Adviser") serves as the
investment adviser to the Fund. Under the terms of the Investment Advisory
Agreement (the "Agreement"), the Adviser provides investment advisory services
for a fee calculated at an annual rate of 0.75% of the Fund's average daily net
assets. From time to time, the Adviser may voluntarily waive, for a period of
time, all or a portion of the fee to which it is entitled under its Agreement
with the Fund. Until further notice, the Adviser has agreed to voluntarily waive
fees and reimburse expenses to the extent necessary to maintain an annual
operating expense ratio to net assets of not more than the following:
GROUP
PREMIER SHARES RETAIL SHARES RETIREMENT PLAN SHARES
-------------- ------------- ----------------------
1.00% 1.25% 1.25%
C. ADMINISTRATIVE SERVICES: Chase Global Funds Services Company, a wholly owned
subsidiary of The Chase Manhattan Bank ("Chase"), serves as the Company's
administrator (the "Administrator") pursuant to an Administrative Agreement.
Under the Administrative Agreement, the Administrator provides administrative,
fund accounting, dividend disbursing and transfer agent services to the Company.
As compensation for its services, the Company pays the Administrator a monthly
fee at the annual rate of 0.20% of the Company's average daily net assets up to
and including $200 million; 0.10% of the Company's average daily net assets in
excess of $200 million up to and including $400 million; and 0.05% of the
Company's average daily net assets in excess of $400 million. The Fund is
subject to a minimum annual fee of $70,000 per year. Under a separate agreement,
Chase also acts as the Company's custodian for the Fund's assets.
D. DIRECTORS' FEES: The Company pays each Director who is not a director,
officer or employee of the Adviser or any of its affiliates, a fee of $8,000 per
annum plus $500 per quarterly meeting attended and reimbursements for expenses
incurred in attending Board meetings.
E. DISTRIBUTION SERVICES: Lipper & Company, L.P., an affiliate of the Adviser,
serves as the Company's distributor (the "Distributor"). The Distributor is
entitled to receive an annual distribution fee payable from the net assets of
the Fund's Retail Shares of up to 0.25% of the average daily net assets of such
Fund's Retail Shares. The Company has entered into shareholder servicing
agreements with respect to the Fund's Group Retirement Plan Shares. Under such
servicing agreements, each servicing agent will be entitled to receive from the
net assets of the Fund's Group Retirement Plan Shares, an annual servicing fee
of up to 0.25% of the average daily net assets of such Fund's Group Retirement
Plan Shares for certain support services which supplement the services provided
by the Company's administrator and transfer agent.
F. PURCHASES AND SALES: For the year ended December 31, 1998, the cost of
purchases and proceeds of sales for investment securities other than long-term
U.S. Government and short-term securities were:
PURCHASES SALES
----------- -----------
$95,063,506 $94,121,519
16
<PAGE>
LIPPER HIGH INCOME BOND FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
There were no purchases or sales long-term of U.S. Government securities.
G. LIMITED PARTNERSHIP TRANSFER: The Fund was formed as a successor investment
vehicle for a limited partnership (a "Partnership") for which Lipper & Company,
L.P., an affiliate of the Adviser, acted as general partner and investment
adviser since inception. On April 1, 1996, the Fund exchanged Premier Shares for
portfolio securities of the Partnership (the "Transfer"). Premier Shares issued
by the Fund in the Transfer were issued at the net asset value of Premier Shares
prior to the Transfer. Premier Shares received in the Transfer have been
distributed to the Partnership's limited partners who elected to participate in
the Transfer. Securities valued at $74,518,234 at the date of Transfer with
unrealized appreciation of $337,368 were contributed to the Fund on a tax-free
basis. To the extent that the Fund acquired securities in the Transfer that had
appreciated in value from the date originally acquired by its corresponding
Partnership, the Transfer may have adverse tax consequences to investors who
subsequently acquire shares of the Fund.
H. OTHER: Capital share transactions for the Fund, by class of shares, were as
follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
PREMIER SHARES:
Issued--Regular ......................... 1,673,871 2,177,661
Distributions Reinvested ........ 569,763 847,370
Redeemed ................................ (1,716,828) (4,718,897)
---------- ----------
Net Increase (Decrease) ................. 526,806 (1,693,866)
---------- ----------
RETAIL SHARES:
Issued--Regular ......................... 296,524 385,019
Distributions Reinvested ........ 46,722 28,585
Redeemed ................................ (186,151) (31,845)
---------- ----------
Net Increase ............................ 157,095 381,759
---------- ----------
GROUP RETIREMENT PLAN SHARES:
Issued--Regular ......................... 167,761 171,458
Distributions Reinvested ........ 37,540 32,968
Redeemed ................................ (81,410) (72,343)
---------- ----------
Net Increase ............................ 123,891 132,083
---------- ----------
I. OTHER: At December 31, 1998, the percentage of total shares outstanding held
by record shareholders owning 10% or greater of the aggregate total shares for
the Fund was as follows:
NO. OF %
SHAREHOLDERS OWNERSHIP
------------ ---------
Premier Shares ............... 1 11.5%
Retail Shares ................ 1 12.9%
Group Retirement Shares ...... 3 85.4%
Transactions by shareholders having a significant ownership percentage of a
Fund could have an impact on other shareholders of the Fund.
The Fund currently invests in high yield lower grade debt. The market
values of these higher yielding debt securities tend to be more sensitive to
economic conditions and individual corporate developments than do higher rated
securities.
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Lipper High Income Bond Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Lipper High Income Bond Fund (one
of the Funds constituting The Lipper Funds, Inc., hereinafter referred to as the
"Fund") at December 31, 1998, the results of its operations for the year then
ended, the changes in its net assets for each of the two years then ended, and
the financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards 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 examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 22 1999
================================================================================
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
Lipper High Income Bond Fund hereby designates $325,343 as 20% long-term
capital gain dividends for the purpose of the dividend paid deduction on the
Fund's Federal income tax return.
18
<PAGE>
BOARD OF DIRECTORS KENNETH LIPPER
- -------------------------------- Director, President and Chairman
ABRAHAM BIDERMAN
Director, Executive Vice President,
Secretary and Treasurer
STANLEY BREZENOFF
Director
MARTIN MALTZ
Director
IRWIN RUSSELL
Director
INVESTMENT ADVISER Lipper & Company, L.L.C.
- -------------------------------- 101 Park Avenue, 6th floor
New York, NY 10178
(212) 883-6333
ADMINISTRATOR AND Chase Global Funds Services Company
- -------------------------------- 73 Tremont Street, 9th floor
TRANSFER AGENT Boston, MA 02108
1-800-LIPPER9
CUSTODIAN The Chase Manhattan Bank
- -------------------------------- 770 Broadway
New York, NY 10003
LEGAL COUNSEL Simpson Thacher & Bartlett
- -------------------------------- 425 Lexington Avenue
New York, NY 10017
INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP
- -------------------------------- 1177 Avenue of the Americas
New York, NY 10036
<PAGE>
THE LIPPER FUNDS, INC.
LIPPER U.S. EQUITY FUND
Annual Report
----------------------------------------------
December 31, 1998
<PAGE>
TABLE OF CONTENTS
Shareholder's Letter ...................... 1-3
Portfolio of Investments .................. 4
Statement of Assets and Liabilities ....... 5
Statement of Operations ................... 6
Statement of Changes in Net Assets ........ 7
Financial Highlights ...................... 8
Notes to Financial Statements ............. 9-11
Report of Independent Accountants ......... 12
Tax Information ........................... 12
<PAGE>
THE LIPPER FUNDS, INC. ANNUAL REPORT
Lipper U.S. Equity Fund December 31, 1998
Dear Shareholder:
We are pleased to present the Annual Report for the Lipper U.S. Equity Fund
for the year ended December 31, 1998. The Lipper U.S. Equity Fund is one of
three investment portfolios, together with the Prime Lipper Europe Equity Fund
and the Lipper High Income Bond Fund, which comprise The Lipper Funds, Inc. Each
of The Lipper Funds is made available to individual, institutional and group
retirement plan investors through a separate class of shares. This report
presents the financial statements and performance review of the Lipper U.S.
Equity Fund for the year ended December 31, 1998.
PERFORMANCE AND PORTFOLIO REVIEW
The Lipper U.S. Equity Fund (the "Fund") seeks to achieve long-term capital
appreciation while preserving capital by investing primarily in a diversified
portfolio of common stocks of issuers with market capitalizations in excess of
$500 million. The Fund employs a value-oriented investment strategy and invests
in stocks the investment adviser believes to be selling at prices below their
inherent values.
The U.S. equity markets experienced tremendous volatility in 1998. Although
performance in the first half of the year was impressive, the equity markets
experienced extreme price swings in the late summer and early fall of 1998. This
volatility resulted from the ripple effect of Southeast Asia's economic and
political crises, Russian defaults on sovereign debt, the forced unwinding of
leverage by certain hedge funds and investors' fears of a global economic
slowdown. As a result, a flight to quality ensued, benefiting U.S. Treasuries,
and the Standard & Poor's 500 Index declined approximately 22% between mid-July
and early October. In effect, the market lost approximately 75% of the gains
achieved in the first half of the year. In response, between September 28, 1998
and November 17, 1998, the U.S. Federal Reserve implemented three interest rate
cuts. These cuts, together with continued reports of low inflation, low
unemployment and high consumer confidence, caused the equity markets to quickly
rebound, resulting in a full recovery by year-end.
The Lipper U.S. Equity Fund fared relatively well last year, with the
Premier Shares generating a total return of 11.4%, net of fees and expenses, for
the twelve-month period ended December 31, 1998. As a result of the tremendous
volatility experienced in the late summer and early fall, the investment adviser
made a strategic decision to preserve the capital of the Fund rather than risk
significant potential losses in a highly volatile market under extreme pricing
pressure. Consequently, the investment adviser increased the cash position of
the Fund to 49% as of year-end and focused on the companies it believed to be
best positioned to weather the unusual volatility. As a result,the Fund did not
participate in the full recovery of the U.S. equity markets to the same degrees
as some of its peers.
In 1998, the U.S. Equity Fund benefited from its investments in leading
companies in the banking and telecommunications industries. For example, the
Fund benefited from its position in Chase Manhattan Corp., which integrated its
merger with Chemical Bank smoothly and ahead of schedule. In addition, the Fund
profited from its position in Hughes Electronics, which sucessfully increased
its position in the satellite broadcasting industry(i.e., DirectTV).
Our outlook for 1999 is positive. U.S. economic growth should remain
moderate, unemployment low and inflationary pressure benign, providing a
favorable environment for corporate America and the equity markets. Although
global economic uncertainty may cause some volatility in 1999, we believe that
the U.S. equity markets will be relatively stable, and money should continue to
flow to those companies with reasonable valuations and strong earnings growth.
As a result, the investment adviser has begun to reduce the Fund's cash
position, which is currently at approximately 40%.
<PAGE>
Given current valuation levels of U.S. equities, our biggest challenge in
1999 will be to identify undervalued securities which offer attractive earnings
growth prospects. We at Lipper & Company, L.L.C. remain dedicated to achieving
superior long-term results while focusing on capital preservation. Therefore, we
adhere to a rigorous and disciplined investment strategy designed to identify
undervalued securities of outstanding companies that generate positive
investment results under most market conditions.
We hope you find the enclosed report informative. We very much appreciate
your participation in The Lipper Funds, Inc.
Sincerely,
KENNETH LIPPER
President and Chairman of the Board
2
<PAGE>
THE LIPPER U.S. EQUITY FUND PERFORMANCE
------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN
FOR PERIODS ENDED DECEMBER 31, 1998*
------------------------------------------------------------
1 YEAR SINCE INCEPTION*
------------------------------------------------------------
PREMIER SHARES 11.35% 16.56%
------------------------------------------------------------
RETAIL SHARES 11.15% 16.42%
------------------------------------------------------------
GROUP RETIREMENT PLAN SHARES 11.16% 16.43%
------------------------------------------------------------
LIPPER U.S. EQUITY FUND--PREMIER SHARES*+
Comparison of a $10,000 Investment in the Fund
with the Standard & Poor's 500 Index
PERIODS ENDED DECEMBER 31
- --------------------------------------------------------------------------------
LIPPER U.S.
EQUITY FUND S&P 500
PREMIUM SHARES INDEX
-------------- ------
01/02/96 ..... 10,000 10,000
12/31/96 ..... 11,981 12,296
12/31/97 ..... 14,253 16,398
12/31/98 ..... 15,870 21,105
- --------------------------------------------------------------------------------
+ The minimum investment for Premier Shares is $1,000,000.
Past performance is not indicative of future results. Investment return and
principal value will fluctuate with market conditions. When shares are redeemed,
they may be worth more or less than their original cost.
* This chart illustrates comparative performance of $10,000 invested in the
Premier Shares of Lipper U.S. Equity Fund (the "Fund") versus the Standard &
Poor's ("S&P") 500 Index from the commencement of the Fund's investment
operations on January 2, 1996 to December 31, 1998. The Lipper U.S. Equity
Fund's Retail and Group Retirement Plan Shares were introduced on January 4,
1996. Performance for the Fund's Retail and Group Retirement Plan Shares differs
from the Fund's Premier Shares due to the different inception dates and the
higher class specific expenses associated with the Retail and Group Retirement
Plan Shares. The Fund's performance assumes the reinvestment of all dividends
and distributions. Fee waivers and reimbursements are currently in effect for
the Fund without which total returns would have been lower.
The comparative S&P 500 Index has not been adjusted to reflect expenses or
other fees that the SEC requires to be reflected in the Fund's performance. The
fees, if reflected, would reduce the performance. The comparative index has been
adjusted to reflect reinvestment of dividends on securities in the index.
The S&P 500 Index is an unmanaged index composed of 400 industrial, 40
financial, 40 utilities and 20 transportation stocks. Please note that one
cannot invest directly in an unmanaged index.
3
<PAGE>
LIPPER U.S. EQUITY FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
SHARES VALUE
------ -----
COMMON STOCKS (92.7%)
AEROSPACE/DEFENSE EQUIPMENT (8.7%)
Lockheed Martin Corporation ........................ 14,200 $1,203,450
-----------
AGRICULTURAL BIOTECH/LIFE SCIENCES (11.8%)
Monsanto Company ................................... 34,100 1,619,750
-----------
BANKS-SUPER REGIONAL (5.3%)
First Union Corp. .................................. 12,000 729,750
-----------
BASIC MATERIALS (8.1%)
E.I. du Pont de Nemours and Company ................ 21,000 1,114,313
-----------
ENERGY (1.1%)
Schlumberger Ltd. .................................. 3,400 156,825
-----------
INFORMATION TECHNOLOGY OUTSOURCING SERVICES (10.5%)
* J.D. Edwards & Company ............................ 50,700 1,438,613
-----------
PHARMACEUTICALS (10.4%)
American Home Products Corp. ....................... 25,400 1,430,338
-----------
TECHNOLOGY/COMPUTERS (13.7%)
Compaq Computer Corp. .............................. 45,000 1,887,186
-----------
TELECOMMUNICATIONS/SATELLITE (23.1%)
* General Motors Corporation--Class H ............... 71,000 2,817,813
* Loral Space & Communications ...................... 20,000 356,250
-----------
3,174,063
-----------
TOTAL COMMON STOCKS (COST $11,263,300) ............... 12,754,288
-----------
SHORT-TERM INVESTMENTS (7.3%)
Vista Prime Money Market Fund (Cost $1,000,000) .... 1,000,000 1,000,000
-----------
TOTAL INVESTMENTS (100.0%) (COST $12,263,300) ........ $13,754,288
===========
- ----------
* Non-Income Producing Security.
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
<TABLE>
LIPPER U.S. EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<CAPTION>
<S> <C>
ASSETS:
Investments, at value (Cost $12,263,300) .................................... $13,754,288
Cash ........................................................................ 13,153,216
Interest Receivable ......................................................... 4,124
Dividends Receivable ........................................................ 1,538
Receivable for Fund Shares Sold ............................................. 1,440
Deferred Organization Costs ................................................. 37,648
Prepaid Assets .............................................................. 4,761
-----------
TOTAL ASSETS ............................................................. 26,957,015
LIABILITIES:
Investment Advisory Fees Payable ............................................ 11,114
Administrative Fees Payable ................................................. 6,441
Distribution Fees Payable--Retail Shares .................................... 6,074
Shareholder Servicing Fees Payable--Group Retirement Plan Shares ............ 5,777
Distribution Payable ........................................................ 3,744
Directors' Fees Payable ..................................................... 1,258
Custodian Fees Payable ...................................................... 1,173
Other Liabilities ........................................................... 15,884
-----------
TOTAL LIABILITIES ........................................................ 51,465
-----------
NET ASSETS ................................................................... $26,905,550
-----------
NET ASSETS CONSIST OF:
Paid in Capital ............................................................. $24,079,733
Accumulated Net Realized Gain ............................................... 1,334,829
Unrealized Appreciation on Investments ...................................... 1,490,988
-----------
$26,905,550
===========
PREMIER SHARES:
Net Assets .................................................................. $22,088,244
Shares Issued and Outstanding ($.001 par value) (Authorized 3,333,333,333) .. 1,750,347
Net Asset Value, Offering and Redemption Price Per Share .................... $ 12.62
===========
RETAIL SHARES:
Net Assets .................................................................. $ 1,307,708
Shares Issued and Outstanding ($.001 par value) (Authorized 3,333,333,333) .. 103,634
Net Asset Value, Offering and Redemption Price Per Share .................... $ 12.62
===========
GROUP RETIREMENT PLAN SHARES:
Net Assets .................................................................. $ 3,509,598
Shares Issued and Outstanding ($.001 par value) (Authorized 3,333,333,333) .. 278,793
Net Asset Value, Offering and Redemption Price Per Share .................... $ 12.59
===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
LIPPER U.S. EQUITY FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME
Dividends ............................................. $ 343,242
Interest .............................................. 205,182
Less: Foreign Taxes Withheld .......................... (1,463)
----------
TOTAL INCOME ....................................... 546,961
----------
EXPENSES
Investment Advisory Fees
Basic Fee ............................................ $214,111
Less: Fee Waived ..................................... (103,555) 110,556
--------
Administrative Fees ................................... 76,675
Registration and Filing Fees .......................... 32,464
Amortization of Organization Costs .................... 18,798
Professional Fees ..................................... 9,199
Servicing Fees - Group Retirement Plan Shares ......... 6,801
Directors' Fees ....................................... 4,872
Custodian Fees ........................................ 4,207
Distribution Fees - Retail Shares ..................... 3,263
Other Expenses ........................................ 20,123
----------
Total Expenses ..................................... 286,958
----------
NET INVESTMENT INCOME .............................. 260,003
----------
NET REALIZED GAIN (LOSS) FROM:
Investments sold ...................................... 2,050,263
Written Options ....................................... (125,299)
----------
TOTAL NET REALIZED GAIN ................................ 1,924,964
----------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION:
Investments ........................................... (94,477)
----------
TOTAL NET REALIZED GAIN (LOSS) AND NET CHANGE IN
UNREALIZED APPRECIATION/DEPRECIATION .................. 1,830,487
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ... $2,090,490
==========
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
LIPPER U.S. EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Increase (Decrease) in Net Assets Resulting From Operations:
Net Investment Income ........................................................ $ 260,003 $ 184,492
Net Realized Gain ............................................................ 1,924,964 2,507,795
Net Change in Unrealized Appreciation/Depreciation ........................... (94,477) (31,755)
----------- -----------
Net Increase in Net Assets Resulting from Operations ....................... 2,090,490 2,660,532
----------- -----------
Distributions:
Premier Shares:
From net investment income ................................................... (228,137) (171,940)
In excess of net investment income ........................................... (16,622) --
From net realized gains ...................................................... (1,153,473) (1,364,816)
Retail Shares:
From net investment income ................................................... (10,186) (8,737)
In excess of net investment income ........................................... (514) --
From net realized gains ...................................................... (66,919) (86,666)
Group Retirement Plan Shares:
From net investment income ................................................... (23,517) (20,542)
In excess of net investment income ........................................... (8,718) --
From net realized gains ...................................................... (151,784) (181,951)
----------- -----------
Total Distributions ........................................................ (1,659,870) (1,834,652)
----------- -----------
Capital Share Transactions:
Premier Shares:
Issued-- Regular ............................................................. 9,755,618 6,377,636
-- Distributions Reinvested ............................................ 1,391,142 1,536,755
Redeemed ..................................................................... (3,608,698) (9,627,970)
----------- -----------
Net Increase (Decrease) from Premier Shares ................................ 7,538,062 (1,713,579)
----------- -----------
Retail Shares:
Issued-- Regular ............................................................. 804,846 574,702
-- Distributions Reinvested ............................................ 76,632 95,404
Redeemed ..................................................................... (481,807) (437,479)
----------- -----------
Net Increase from Retail Shares ............................................ 399,671 232,627
----------- -----------
Group Retirement Plan Shares:
Issued-- Regular ............................................................. 1,587,243 1,780,338
-- Distributions Reinvested ............................................ 184,019 202,493
Redeemed ..................................................................... (222,970) (502,495)
----------- -----------
Net Increase from Group Retirement Plan Shares ............................... 1,548,292 1,480,336
----------- -----------
Net Increase (Decrease) in Net Assets From Capital Share Transactions ........ 9,486,025 (616)
----------- -----------
Total Increase ............................................................. 9,916,645 825,264
----------- -----------
Net Assets:
Beginning of Year ............................................................ 16,988,905 16,163,641
End of Year (A) .............................................................. $26,905,550 16,988,905
=========== ===========
(A) Includes undistributed net investment income .............................. $ -- $ 1,837
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
<TABLE>
LIPPER U.S. EQUITY FUND
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA & RATIOS
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<CAPTION>
PREMIER PREMIER PREMIER RETAIL RETAIL
SHARES SHARES SHARES SHARES SHARES
----------- ----------- ----------- ----------- -----------
JANUARY 2,
YEAR ENDED YEAR ENDED 1996** to YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1998 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ................... $12.04 $11.38 $10.00 $12.03 $11.38
------ ------ ------ ------ ------
Income From Investment Operations:
Net Investment Income(1) .............................. 0.13 0.16 0.18 0.11 0.13
Net Realized and Unrealized Gain
on Investments ....................................... 1.26 1.96 1.81 1.26 1.95
------ ------ ------ ------ ------
Total From Investment Operations ................... 1.39 2.12 1.99 1.37 2.08
------ ------ ------ ------ ------
Distributions:
Net Investment Income ................................. (0.14) (0.16) (0.19) (0.11) (0.13)
In Excess of Net Investment Income .................... -- + -- -- -- + --
Net Realized Gain ..................................... (0.67) (1.30) (0.34) (0.67) (1.30)
In Excess of Net Realized Gain ........................ -- -- (0.08) -- --
------ ------ ------ ------ ------
Total Distributions ................................ (0.81) (1.46) (0.61) (0.78) (1.43)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD ......................... $12.62 $12.04 $11.38 $12.62 $12.03
====== ====== ====== ====== ======
TOTAL RETURN (2) ....................................... 11.35% 18.96% 19.81% 11.15% 18.58%
====== ====== ====== ====== ======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) ...................... $22,088 $14,203 $15,098 $1,308 $899
Ratios After Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets ........................ 1.10% 1.10% 1.10%* 1.35% 1.35%
Net Investment Income to Average Net Assets ........... 1.07% 1.24% 1.68%* 0.80% 0.96%
Ratios Before Expense Waiver and/or Reimbursement
Expenses to Average Net Assets ........................ 1.51% 1.76% 2.28%* 1.76% 2.01%
Net Investment Income to Average Net Assets ........... 0.66% 0.58% 0.50%* 0.39% 0.30%
Portfolio Turnover Rate ................................ 204% 145% 117% 204% 145%
<CAPTION>
GROUP GROUP GROUP
RETIREMENT RETIREMENT RETIREMENT
RETAIL PLAN PLAN PLAN
SHARES SHARES SHARES SHARES
----------- ----------- ----------- ------------
JANUARY 4, JANUARY 4,
1996*** to YEAR ENDED YEAR ENDED 1996*** to
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1998 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $12.01 $11.38 $10.00
------ ------ ------ ------
Income From Investment Operations:
Net Investment Income(1) .............................. 0.11 0.09 0.08 0.07
Net Realized and Unrealized Gain
on Investments ....................................... 1.86 1.28 2.00 1.91
------ ------ ------ ------
Total From Investment Operations ................... 1.97 1.37 2.08 1.98
------ ------ ------ ------
Distributions:
Net Investment Income ................................. (0.17) (0.12) (0.15) (0.18)
In Excess of Net Investment Income .................... -- -- + -- --
Net Realized Gain ..................................... (0.34) (0.67) (1.30) (0.34)
In Excess of Net Realized Gain ........................ (0.08) -- -- (0.08)
------ ------ ------ ------
Total Distributions ................................ (0.59) (0.79) (1.45) (0.60)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD ......................... $11.38 $12.59 $12.01 $11.38
====== ====== ====== ======
TOTAL RETURN (2) ....................................... 19.62% 11.16% 18.55% 19.69%
====== ====== ====== ======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) ...................... $613 $3,510 $1,887 $452
Ratios After Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets ........................ 1.35%* 1.35% 1.35% 1.35%*
Net Investment Income to Average Net Assets ........... 1.31%* 0.87% 0.89% 1.29%*
Ratios Before Expense Waiver and/or Reimbursement
Expenses to Average Net Assets ........................ 2.75%* 1.76% 2.01% 2.39%*
Net Investment Income to Average Net Assets ........... (0.09)%* 0.46% 0.25% 0.25%*
Portfolio Turnover Rate ................................ 117% 204% 145% 117%
- ----------
<FN>
* Annualized
** Commencement of Fund Operations
*** Initial offering of shares by the Fund
+ Amount represents less than $0.01 per share
(1) The effect to net investment income per share by voluntarily waived fees
and reimbursed expenses were:
YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- -----------------
Premier Shares ..................... $0.05 $0.08 $0.13
Retail Shares ...................... $0.06 $0.09 $0.12
Group Retirement Plan Shares ....... $0.04 $0.06 $0.06
(2) Total return would have been lower had the Adviser not waived or reimbursed
certain expenses during the periods shown. Total returns for periods of
less than one year are not annualized.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
LIPPER U.S. EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
The Lipper Funds, Inc. (the "Company") is registered under the Investment
Company Act of 1940 as an open-end management investment company and was
incorporated on August 22, 1995. As of December 31, 1998 the Company was
comprised of three diversified portfolios: Lipper High Income Bond Fund, Lipper
U.S. Equity Fund, and Prime Lipper Europe Equity Fund. These financial
statements pertain to Lipper U.S. Equity Fund only. The financial statements of
the remaining portfolios are presented separately. The Company offers the shares
of each Fund in three classes: Premier Shares, Retail Shares and Group
Retirement Plan Shares. Lipper U.S. Equity Fund (the "Fund") commenced
investment operations on January 2, 1996.
Lipper U.S. Equity Fund seeks capital appreciation by investing primarily
in a diversified portfolio of common stocks of U.S. issuers with market
capitalization in excess of $500 million.
A. SIGNIFICANT ACCOUNTING POLICIES. The following is a summary of significant
accounting policies followed by the Fund which are in conformity with generally
accepted accounting principles for investment companies. Such policies are
consistently followed by the Fund in the preparation of its financial
statements. Generally accepted accounting principles may require management to
make estimates and assumptions that affect the reported amounts and disclosures
in the financial statements. Actual results may differ from those estimates.
1. SECURITY VALUATION: Securities listed on a securities exchange for which
market quotations are readily available are valued at the last sale price as of
the close of the exchange on the day the valuation is made or, if no sale
occurred on such day, at the mean of the closing bid and asked prices on such
day. Price information on listed securities is taken from the exchange where the
security is primarily traded. Over-the-counter and unlisted securities are
valued at the bid price. Short-term investments that have remaining maturities
of sixty days or less at time of purchase are valued at amortized cost, if it
approximates market value. The value of securities for which no quotations are
readily available is determined in good faith at fair value using methods
determined by the Board of Directors.
2. FEDERAL INCOME TAXES: It is the Fund's intention to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code
and to distribute all of its taxable income. Accordingly, no provision for
Federal income taxes is required in the financial statements.
At December 31, 1998 the cost of investments and unrealized
appreciation (depreciation) of investments for Federal income tax purposes were:
NET
COST APPRECIATION (DEPRECIATION) APPRECIATION
----------- ------------ -------------- ------------
$12,263,300 $1,709,744 $(218,756) $1,490,988
3. DISTRIBUTIONS TO SHAREHOLDERS: The Fund intends to distribute
substantially all of its net investment income annually. Net realized capital
gains, if any, will be distributed at least annually by the Fund. All
distributions are recorded on ex-dividend date.
Income and capital gains distributions are determined in accordance with
U.S. Federal income tax regulations which may differ from generally accepted
accounting principles. Those differences are primarily due to differing book and
tax treatments for deferred organization costs.
Permanent book and tax differences between U.S. Federal income tax
regulations and generally accepted accounting principles may result in
reclassifications to undistributed net investment income (loss), accumulated net
realized gain (loss) and paid in capital. For the year ended December 31, 1998,
such adjustments resulted from non-deductible organization costs and the
redesignation of certain distributions made by the Fund.
4. PURCHASED AND WRITTEN OPTIONS: The Fund may purchase or write put and
call options on securities, securities indices, currencies and other financial
instruments. A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer the obligation to buy, the underlying
security, index or other instrument at the exercise price. The Fund may purchase
a put option on a security to protect its holdings in the underlying instrument,
or a similar instrument, against a substantial decline in the market value of
such instrument by giving the Fund the right to sell the instrument at the
option exercise price. A call option, upon payment of a premium, gives the
purchaser of the option the right to buy, and the seller the obligation to sell,
the underlying instrument at the
9
<PAGE>
LIPPER U.S. EQUITY FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
exercise price. The purchase of a call option on a security, index or other
instrument might be intended to protect the Fund against an increase in the
price of the underlying instrument that it intends to purchase in the future by
fixing the price at which it may purchase the instrument. The Fund may purchase
a put or call option to limit exposure to a written put or call option.
Options contracts are valued daily and unrealized appreciation or
depreciation is recorded based upon the last sales price on the principal
exchange on which the option is traded. The Fund will realize a gain or loss
upon the expiration or closing of the option transaction. Premiums received or
paid from the writing or purchasing of options are offset against the proceeds
of securities sold or added to the cost of securities purchased upon the
exercise of the option. Upon expiration of a purchased or written option, the
premium is recorded as a realized loss or gain, respectively. Possible losses on
purchased options can not exceed the total premium paid.
Use of written put and call options could result in losses to the Fund,
force the purchase or sale of portfolio securities at inopportune times or for
prices higher or lower than current market values, or cause the Fund to hold a
security it might otherwise not purchase or sell. Losses which may result from
the use of options will reduce the Fund's net asset value, and possibly income,
and such losses may be greater than if options had not been used.
During the year ended December 31, 1998, the Fund participated in writing
call options. The Fund had option activity as follows:
NUMBER OF
CONTRACTS PREMIUM
--------- -------
Options outstanding at December 31, 1997 -- $ --
Options written during the year 129 72,788
Options exercised during the year (129) (72,788)
---- -------
Options outstanding as of December 31, 1998 -- $ --
==== =======
5. ORGANIZATION COSTS: Costs incurred by the Fund in connection with its
organization have been deferred and are being amortized on a straight-line basis
over a five-year period.
6. OTHER: Securities transactions are accounted for on the date the
securities are purchased or sold. Costs used in determining realized gains and
losses on the sale of investment securities are based on the specific
identification method. Dividend income is recorded on the ex-dividend date.
Interest income is recognized on the accrual basis. Expenses of the Company,
which are not directly attributable to a Fund, are allocated among the Funds
based on their relative net assets. Income, expenses (other than class specific
expenses) and realized and unrealized gains or losses are allocated to each
class of shares based upon their relative net assets. The company has a $20
million line of credit with the Chase Manhattan Bank which is available to meet
temporary cash needs of the Company. The Company pays a commitment fee for this
line of credit.
B. ADVISORY SERVICES: Lipper & Company, L.L.C. (the "Adviser") serves as the
investment adviser to the Fund. Under the terms of the Investment Advisory
Agreement (the "Agreement"), the Adviser provides investment advisory services
for a fee calculated at an annual rate of 0.85% of the Fund's average daily net
assets. From time to time, the Adviser may voluntarily waive, for a period of
time, all or a portion of the fee to which it is entitled under its Agreement
with the Fund. Until further notice, the Adviser has agreed to voluntarily waive
fees and reimburse expenses to the extent necessary to maintain an annual
operating expense ratio to net assets of not more than the following:
GROUP RETIREMENT
PREMIER SHARES RETAIL SHARES PLAN SHARES
-------------- ------------- -----------
1.10% 1.35% 1.35%
C. ADMINISTRATIVE SERVICES: Chase Global Funds Services Company, a wholly owned
subsidiary of The Chase Manhattan Bank ("Chase"), serves as the Company's
administrator (the "Administrator") pursuant to an Administrative Agreement.
Under the Administrative Agreement, the Administrator provides administrative,
fund accounting, dividend disbursing and transfer agent services to the Company.
As compensation for its services, the Company pays the Administrator a monthly
fee at the annual rate of 0.20% of the Company's average daily net assets up to
and including $200 million; 0.10% of the Company's average daily net assets in
excess of $200 million up to and including $400 million; and 0.05% of the
Company's average daily net assets in excess of $400 million. The Fund is
10
<PAGE>
LIPPER U.S. EQUITY FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
subject to a minimum annual fee of $70,000 per year. Under a separate agreement,
Chase also acts as the Company's custodian for the Fund's assets.
D. DIRECTORS' FEES: The Company pays each Director who is not a director,
officer or employee of the Adviser or any of its affiliates, a fee of $8,000 per
annum plus $500 per quarterly meeting attended and reimbursements for expenses
incurred in attending Board meetings.
E. DISTRIBUTION SERVICES: Lipper & Company, L.P., an affiliate of the Adviser,
serves as the Company's distributor (the "Distributor"). The Distributor is
entitled to receive an annual distribution fee payable from the net assets of
the Fund's Retail Shares of up to 0.25% of the average daily net assets of such
Fund's Retail Shares. The Company has entered into shareholder servicing
agreements with respect to the Fund's Group Retirement Plan Shares. Under such
servicing agreements, each servicing agent will be entitled to receive from the
net assets of the Fund's Group Retirement Plan Shares, an annual servicing fee
of up to 0.25% of the average daily net assets of such Fund's Group Retirement
Plan Shares for certain support services which supplement the services provided
by the Company's administrator and transfer agent.
F. PURCHASES AND SALES: For the year ended December 31, 1998, the cost of
purchases and proceeds of sales for investment securities other than long-term
U.S. Government and short-term securities were:
PURCHASES SALES
----------- -----------
$39,768,800 $46,049,651
There were no purchases or sales of long-term U.S. Government securities.
G. CONCENTRATION OF CREDIT RISK: At December 31, 1998 the Fund has cash on
deposit with its custodian exceeding the federally insured maximum. A
concentration of credit risk therefore exists with the Fund's custodian.
H. OTHER: Capital share transactions for the Fund, by class of shares, were as
follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
PREMIER SHARES:
Issued--Regular ...................... 744,322 506,749
Distributions Reinvested ......... 105,483 130,566
Redeemed ............................. (279,463) (783,489)
------- --------
Net Increase (Decrease) .............. 570,342 (146,174)
------- --------
RETAIL SHARES:
Issued--Regular ...................... 60,005 48,391
Distributions Reinvested ......... 5,801 8,112
Redeemed ............................. (36,924) (35,615)
------- --------
Net Increase ......................... 28,882 20,888
------- --------
GROUP RETIREMENT PLAN SHARES:
Issued--Regular ...................... 124,270 141,807
Distributions Reinvested ......... 14,102 17,248
Redeemed ............................. (16,734) (41,627)
------- --------
Net Increase ......................... 121,368 117,428
------- --------
I. OTHER: At December 31, 1998, the percentage of total shares outstanding held
by record shareholders owning 10% or greater of the aggregate total shares for
the Fund was as follows:
No. of %
SHAREHOLDERS OWNERSHIP
------------ ---------
Premier Shares .............. 2 47.4%
Retail Shares ............... 1 19.1%
Group Retirement Shares ..... 2 87.6%
Transactions by shareholders holding a significant ownership percentage of
a Fund can have an impact on other shareholders of the Fund.
11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Lipper U.S. Equity Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Lipper U.S. Equity Fund (one of the
Funds constituting The Lipper Funds, Inc., hereinafter referred to as the
"Fund") at December 31, 1998, the results of its operations for the year then
ended, the changes in its net assets for each of the two years then ended, and
the financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards 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 examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 22, 1999
================================================================================
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
Lipper U.S. Equity Fund hereby designates $487,715 as 20% long-term capital
gain dividends for the purpose of the dividend paid deduction on the Fund's
Federal income tax return.
For the Lipper U.S. Equity Fund in 1998, 11.33% of the distribution taxable
as ordinary income, as reported on Form 1099-DIV, qualifies for the dividends
received deduction for corporations.
12
<PAGE>
BOARD OF DIRECTORS KENNETH LIPPER
- ------------------------------- Director, President and Chairman
ABRAHAM BIDERMAN
Director, Executive
Vice President, Secretary
and Treasurer
STANLEY BREZENOF
Director
MARTIN MALTZ
Director
IRWIN RUSSELL
Director
INVESTMENT ADVISER Lipper & Company, L.L.C.
- ------------------------------- 101 Park Avenue, 6th floor
New York, NY 10178
(212) 883-6333
ADMINISTRATOR AND Chase Global Funds Services Company
- ------------------------------- 73 Tremont Street, 9th floor
TRANSFER AGENT Boston, MA 02108
1-800-LIPPER9
CUSTODIAN The Chase Manhattan Bank
- ------------------------------- 770 Broadway
New York, NY 10003
LEGAL COUNSEL Simpson Thacher & Bartlett
- ------------------------------- 425 Lexington Avenue
New York, NY 10017
INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP
- ------------------------------- 1177 Avenue of the Americas
New York, NY 10036
<PAGE>
THE LIPPER FUNDS, INC.
PRIME LIPPER EUROPE EQUITY FUND
Annual Report
-------------------------------------------------
December 31, 1998
<PAGE>
TABLE OF CONTENTS
Shareholder's Letter .................................... 1-3
Portfolio of Investments ................................ 4-6
Statement of Assets and Liabilities ..................... 7
Statement of Operations ................................. 8
Statement of Changes in Net Assets ...................... 9
Financial Highlights .................................... 10
Notes to Financial Statements ........................... 11-14
Report of Independent Accountants ....................... 15
Tax Information ......................................... 15
<PAGE>
THE LIPPER FUNDS, INC. ANNUAL REPORT
Prime Lipper Europe Equity Fund December 31, 1998
Dear Shareholder:
We are pleased to present the Annual Report for the Prime Lipper Europe
Equity Fund for the year ended December 31, 1998. The Prime Lipper Europe Fund
is one of three investment portfolios, together with the Lipper U.S. Equity Fund
and the Lipper High Income Bond Fund, which comprise The Lipper Funds, Inc. Each
of The Lipper Funds is made available to individual, institutional and group
retirement plan investors through a separate class of shares. This report
represents the financial statements and performance review of the Prime Lipper
Europe Equity Fund for the year ended December 31, 1998.
PERFORMANCE AND PORTFOLIO REVIEW
The Prime Lipper Europe Equity Fund (the "Fund") seeks long-term capital
appreciation through investment in a diversified portfolio consisting primarily
of widely traded, large capitalization European growth stocks. The Fund's
investments are selected based upon a highly structured investment process that
utilizes both quantitative and qualitative criteria to target companies that
offer the potential for strong earnings growth and capital appreciation.
The European equity markets experienced a volatile year in 1998. During the
first half of the year, the equity markets were very strong. In anticipation of
the introduction of the euro, many European companies sought to improve their
competitive positioning through corporate restructurings and merger and
acquisition activity. Throughout continental Europe, investment activity surged,
resulting in accelerated growth. In the late summer and early fall of 1998, the
European equity markets experienced unusual pressure and volatility as a result
of the ripple effect of Southeast Asia, Russian defaults on sovereign debt and
the commensurate impact on the emerging markets, the unwinding of leverage by
certain hedge funds and general concerns regarding a global economic slowdown.
Similar to other financial markets, the European equity markets experienced
pricing pressure and increased volatility during this period. Between September
28, 1998 and November 17, 1998, the U.S. Federal Reserve implemented three
interest rate cuts, causing the U.S. equity markets to rebound and rally.
Similarly, the European equity markets followed suit, and by December 31, 1998,
the European equity markets substantially recovered from the financial crises
experienced earlier in the year.
The Prime Lipper Europe Equity Fund had an exceptional year in 1998, with
the Premier Shares generating a total return of 32.3%, net of fees and expenses,
for the twelve-month period ended December 31, 1998. During this period, the
Fund ranked among the top 10 European equity funds tracked by Lipper Inc. and
outperformed the 18.99% average return generated by all European equity funds
tracked by Morningstar, Inc. In addition, the Fund compared strongly against its
unmanaged benchmark index, the Morgan Stanley Capital International ("MSCI")
Europe Index, which posted a total return of 28.9%, including dividends, for the
twelve-month period. During 1998, the Fund's strong performance was primarily
attributable to stock selection. In addition, the Fund benefited from the fact
that compared to the MSCI Europe Index, it was overweighted in the technology,
pharmaceutical and consumer services sectors and underweighted in the cyclical
sectors.
Throughout 1998, the Fund was highly diversified, with approximately 60-70
securities representing approximately twenty industries invested in eleven
Western European countries. During the year, the investment adviser continued to
position the Fund to benefit from the positive changes occurring throughout
Europe, including the integration of the region and transition to the euro, by
focusing on companies with sound financial positions and high growth prospects.
In particular, our analysts targeted companies that offer competitive products
or services, maintain leading positions in their industries, have histories of
consistently strong financial performance and present earnings growth prospects
superior to the market average. To date, the Fund has focused on select European
companies such as information technology, telecommunications and pharmaceutical
companies, which we believe are well positioned to successfully compete on both
a regional and global basis by offering advanced and innovative products and
services. During the year, the investment adviser also sold certain securities
in an effort to reduce the Fund's exposure to industries such as the banking
industry where our analysis identified a potential weakness in earnings growth.
<PAGE>
The Fund's country allocation decisions typically reflect the equity market
capitalization across the region, with the United Kingdom representing the
largest allocation at approximately 30% of the portfolio's assets. In 1998, the
Fund was relatively neutral with respect to this allocation. Given our outlook
for 1999 of moderate economic growth across the region, we do not anticipate any
significant over or underweighting of any country relative to our current
allocation.
Our outlook for Europe in 1999 is positive. We expect moderate growth in
continental Europe supported by increases in private consumption, continued low
inflation and a stable currency environment. Although the European equity
markets, like the U.S. equity markets, may experience some volatility as a
result of global pressures, we expect the positive changes in the region and the
growth in internal demand to support an increase in earnings growth. Further,
based upon current valuations across continental Europe, we believe investing in
the region is attractive.
Given our current outlook for Europe, we believe the prospects for Prime
Lipper Europe Equity Fund in 1999 are strong. The Fund is well-positioned in
growth stocks, which should benefit from the healthy economy and continued
political and economic integration of continental Europe. The Prime Lipper
Europe Equity Fund remains dedicated to superior long-term results, which we
believe are best achieved by adhering to a rigorous and disciplined investment
strategy designed to generate positive results and preserve capital under
various market conditions.
We hope you find the enclosed report informative. We very much appreciate
your participation in The Lipper Funds, Inc.
Sincerely,
Kenneth Lipper
President and Chairman of the Board
2
<PAGE>
THE PRIME LIPPER EUROPE EQUITY FUND PERFORMANCE
-----------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN*
FOR PERIODS ENDED DECEMBER 31, 1998
-----------------------------------------------------------------------------
1 YEAR 5 YEAR SINCE INCEPTION
-----------------------------------------------------------------------------
PREMIER SHARES 32.29% 18.30% 15.21%
-----------------------------------------------------------------------------
RETAIL SHARES 31.96% 18.14% 15.10%
-----------------------------------------------------------------------------
GROUP RETIREMENT PLAN SHARES 32.08% 18.17% 15.12%
-----------------------------------------------------------------------------
PRIME LIPPER EUROPE EQUITY FUND--PREMIER SHARES*
Comparison of a $10,000 Investment in the Fund with
the MSCI Europe Index
PERIODS ENDED DECEMBER 31
Prime Lipper
Europe Equity Fund Msci
Premier Shares Europe Index
-------------- ------------
1/13/92 10,000 10,000
1992 9,750 9,745
1993 11,632 12,648
1994 11,462 12,986
1995 14,073 15,859
1996 17,158 19,280
1997 20,390 23,946
1998 26,973 30,867
+ The minimum investment for Premier Shares is $1,000,000.
Past performance is not indicative of future results. Investment return and
principal value will fluctuate with market conditions. When shares are redeemed,
they may be worth more or less than their original cost.
* This chart illustrates comparative performance of $10,000 invested in the
Premier Shares of Prime Lipper Europe Equity Fund (the "Fund") versus the Morgan
Stanley Capital International ("MSCI") Europe Index. The performance information
presented reflects performance of a corresponding predecessor partnership for
the period January 13, 1992 (commencement of the predecessor partnership's
investment operations) through April 1, 1996, when the Fund commenced
operations. The predecessor partnership's performance is also reflected in the
average annualized return for the five year and since inception periods. The
performance information reflects performance of the Fund as a registered
investment company for the period April 1, 1996 through December 31, 1998. As a
registered investment company under the Investment Company Act of 1940 ("the
Act"), the Fund is subject to certain restrictions under the Act and the
Internal Revenue Code (the "Code") to which its corresponding partnership was
not subject. Had the partnership been registered under the Act and subject to
the provisions of the Code, its investment performance may have been adversely
affected.
The Prime Lipper Europe Equity Fund's Retail and Group Retirement Plan
Shares were introduced on April 11, 1996 and April 12, 1996, respectively.
Performance for the Fund's Retail and Group Retirement Plan Shares differs from
the Fund's Premier Shares due to the different inception dates and the higher
class specific expenses associated with the Retail and Group Retirement Plan
Shares. Performance information presented for the Retail and Group Retirement
Plan Shares prior to their introduction dates reflects the performance of the
Fund's Premier Shares and a corresponding predeccessor partnership which are not
subject to the shareholder servicing or distribution fees borne by these classes
of shares. The Fund's performance assumes the reinvestment of all dividends and
distributions.
The comparative MSCI Europe Index has not been adjusted to reflect expenses
or other fees that the SEC requires to be reflected in the Fund's performance.
The fees, if reflected, would reduce the performance of the comparative index
quoted. The comparative index has been adjusted to reflect reinvestment of
dividends and distributions on securities in the index.
The MSCI Europe Index is an unmanaged index comprised of European common
equities. Please note that one cannot invest directly in an unmanaged index.
3
<PAGE>
<TABLE>
PRIME LIPPER EUROPE EQUITY FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
COMMON AND PREFERRED STOCKS (94.5%)
BELGIUM (1.6%)
Credit Communal Preferred de Belique-DEXIA .............. 12,000 $ 2,008,511
------------
FINLAND (1.4%)
* Nokia Oyj, Class A ...................................... 14,440 1,768,140
------------
FRANCE (14.1%)
AXA ..................................................... 19,500 2,827,503
Carefour Supermarche S.A. ............................... 3,200 2,416,813
Dassault Systemes S.A. .................................. 40,000 1,881,064
GrandVision S.A. ........................................ 59,000 1,478,644
Promodes S.A. ........................................... 3,000 2,182,521
Sanofi S.A. ............................................. 10,530 1,734,202
Sidel S.A. .............................................. 20,000 1,697,039
Societe Technip S.A. .................................... 20,000 1,883,212
Total S.A., B Shares .................................... 21,020 2,129,770
------------
18,230,768
-----------
GERMANY (14.4%)
Adidas-Salomon AG ....................................... 12,000 1,304,035
Allianz Holding AG ...................................... 11,200 4,108,549
BHW Holding AG .......................................... 126,000 2,042,507
Bayer AG ................................................ 79,000 3,298,781
Bayerische Motoren Werke AG ............................. 2,300 1,785,483
* Bayerische Motoren Werke AG, New ........................ 200 148,295
Dr. Ing H.C.F. Porche AG, Preferred ..................... 600 1,368,876
Mannesmann AG ........................................... 29,000 3,325,528
Wella AG, Preffered ..................................... 1,400 1,168,348
------------
18,550,402
------------
IRELAND (1.0%)
Bank of Ireland ......................................... 58,000 1,290,686
------------
ITALY (6.8%)
Alleanza Assicurazioni S.p.A. ........................... 64,900 919,023
Banca Popolare Di Bergamo S.p.A. ........................ 42,000 1,021,382
Bulgari S.p.A. .......................................... 190,000 1,134,970
ENI S.p.A. .............................................. 309,190 2,025,088
Parmalat Finanziaria S.p.A. ............................. 498,612 955,530
Telecom Italia Mobile S.p.A. ............................ 370,080 2,738,105
------------
8,794,098
------------
NETHERLANDS (7.2%)
Aegon N.V. .............................................. 18,300 2,248,617
* Baan Company, N.V. ...................................... 59,100 601,487
Getronics N.V. .......................................... 20,000 991,101
ING Groep N.V., Certificate Shares ...................... 21,212 1,294,173
Koninklijke Ahold N.V. .................................. 39,460 1,459,223
VNU-Verenigde Nederlandse Uitgeversbedrijven ............ 33,000 1,244,951
Wolters Kluwer N.V. ..................................... 6,900 1,477,285
------------
9,316,837
------------
</TABLE>
4
<PAGE>
<TABLE>
PRIME LIPPER EUROPE EQUITY FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1998
<CAPTION>
SHARES VALUE
------ -----
<S> <C> <C>
SPAIN (4.8%)
Banco Santander S.A. .................................... 75,000 $ 1,492,636
Centros Comerciales Pryca, S.A. ......................... 46,000 1,428,414
Endesa S.A. ............................................. 60,000 1,592,145
Gas Natural SDG ......................................... 16,000 1,744,585
------------
6,257,780
------------
SWEDEN (3.7%)
Astra AIB, Class B ...................................... 70,000 1,424,906
Enator AB ............................................... 33,000 916,011
Ericsson LM, Class B .................................... 76,000 1,809,568
* Skandia Forsakrings AB .................................. 45,000 688,396
------------
4,838,881
------------
SWITZERLAND (10.1%)
Julius Baer Holding AG, Bearer .......................... 400 1,329,450
Novartis AG, Registered ................................. 2,500 4,914,452
Roche Holding AG, DRC ................................... 355 4,331,853
* Zurich Versicherungsgesellschaft, Registered ............ 3,300 2,443,466
------------
13,019,221
------------
UNITED KINGDOM (29.4%)
Boots plc ............................................... 119,975 2,043,066
British Telecom plc ..................................... 264,000 3,977,372
Compass Group plc ....................................... 120,000 1,374,640
Cadbury Schweppes plc ................................... 151,639 2,586,060
Glaxo Wellcome plc ...................................... 130,000 4,472,988
Lloyds TSB Group plc .................................... 256,323 3,646,343
Misys plc ............................................... 350,000 2,549,166
Marks & Spencer plc ..................................... 113,000 775,074
Pearson plc ............................................. 113,000 2,242,966
SEMA Group plc .......................................... 145,000 1,425,802
Siebe plc ............................................... 384,000 1,514,201
SmithKline Beecham plc .................................. 240,000 3,354,242
Smiths Industries plc ................................... 105,000 1,498,053
The Sage Group plc ...................................... 65,000 1,719,548
Vodafone Group plc ...................................... 166,000 2,695,639
Zeneca Group plc ........................................ 50,000 2,177,098
------------
38,052,258
------------
TOTAL INVESMENTS (94.5%) (COST $93,576,641) ................ 122,127,582
OTHER ASSETS AND LIABILITIES (5.5%) ........................ 7,068,547
------------
NET ASSETS (100%) .......................................... $129,196,129
============
<FN>
- ----------
* Non-Income Producing Security.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
<TABLE>
PRIME LIPPER EUROPE EQUITY FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1998
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
<CAPTION>
PERCENT OF
NET
INDUSTRY ASSETS VALUE
- -------- ------ -----------
<S> <C> <C>
Automobiles ................................................ 2.6% $ 3,302,654
Banking .................................................... 9.9 12,831,516
Broadcast & Publishing ..................................... 3.8 4,965,202
Business & Public Services ................................. 4.7 6,037,488
Chemicals .................................................. 2.5 3,298,781
Computer Services .......................................... 3.4 4,430,229
Data Processing ............................................ .8 991,101
Electrical/Electronics ..................................... 2.8 3,577,708
Electrical/Components/Instruments .......................... 1.2 1,514,201
Energy Sources ............................................. 3.2 4,154,857
Financial Services ......................................... 1.9 2,443,466
Food & Household Products .................................. 2.7 3,541,590
Health & Personal Care ..................................... 14.8 19,105,100
Insurance .................................................. 9.3 12,086,262
Machinery & Engineering .................................... 3.9 5,078,305
Merchandising .............................................. 9.1 11,783,755
Pharmaceuticals ............................................ 3.5 4,472,988
Recreation & Other Consumer Goods .......................... 1.9 2,439,005
Telecommunications ......................................... 9.9 12,736,644
Utilities--Electric/Gas ................................... 2.6 3,336,730
----- ------------
Total Investments .......................................... 94.5 122,127,582
Net Other Assets and Liabilities ........................... 5.5 7,068,547
----- ------------
Net Assets ................................................. 100.0% $129,196,129
===== ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
PRIME LIPPER EUROPE EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<CAPTION>
<S> <C>
ASSETS:
Investments, at value (Cost $93,576,641) ................................... $122,127,582
Cash ....................................................................... 6,974,595
Dividends Receivable ....................................................... 241,016
Interest Receivable ........................................................ 20,287
Deferred Organization Costs ................................................ 42,285
Prepaid Assets ............................................................. 19,561
------------
TOTAL ASSETS ............................................................. 129,425,326
------------
LIABILITIES:
Distribution Payable-- Retail Shares ....................................... 3,528
Distribution Payable-- Group Retirement Plan Shares ........................ 826
Investment Advisory Fees Payable ........................................... 112,446
Administrative Fees Payable ................................................ 21,576
Custodian Fees Payable ..................................................... 25,218
Directors' Fees Payable .................................................... 5,453
Distribution Fees Payable-- Retail Shares .................................. 7,996
Shareholder Servicing Fees Payable-- Group
Retirement Plan Shares .................................................... 3,293
Other Liabilities .......................................................... 48,861
------------
TOTAL LIABILITIES ........................................................ 229,197
------------
NET ASSETS .................................................................. $129,196,129
============
NET ASSETS CONSIST OF:
Paid in Capital ............................................................ $ 96,410,268
Accumulated Net Investment Loss ............................................ (58,710)
Accumulated Net Realized Gain .............................................. 4,291,889
Unrealized Appreciation on Investments and Foreign Currency Translations ... 28,552,682
------------
$129,196,129
============
PREMIER SHARES:
Net Assets ................................................................. $124,405,913
Shares Issued and Outstanding ($.001 par value) (Authorized 3,333,333,333) . 8,826,117
Net Asset Value, Offering and Redemption Price Per Share ................... $ 14.10
============
RETAIL SHARES:
Net Assets ................................................................. $ 2,471,615
Shares Issued and Outstanding ($.001 par value) (Authorized 3,333,333,333) . 175,923
Net Asset Value, Offering and Redemption Price Per Share ................... $ 14.05
============
GROUP RETIREMENT PLAN SHARES:
Net Assets ................................................................. $ 2,318,601
Shares Issued and Outstanding ($.001 par value) (Authorized 3,333,333,333) 165,081
Net Asset Value, Offering and Redemption Price Per Share ................... $ 14.05
============
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
PRIME LIPPER EUROPE EQUITY FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
INVESTMENT INCOME
Dividends ....................................................... $ 1,624,564
Interest ........................................................ 190,905
Less: Foreign Taxes Withheld .................................... (198,415)
-----------
Total Income ................................................. 1,617,054
-----------
EXPENSES
Investment Advisory Fees ........................................ 1,198,678
Administrative Fees ............................................. 224,826
Directors' Fees ................................................. 21,507
Distribution Fees-- Retail Shares ............................... 5,135
Shareholder Servicing Fees-- Group Retirement Plan Shares ....... 4,375
Custodian Fees .................................................. 97,799
Professional Fees ............................................... 38,790
Registration and Filing Fees .................................... 35,857
Amortization of Organization Costs .............................. 18,779
Other Expenses .................................................. 48,675
-----------
Total Expenses ............................................... 1,694,421
-----------
NET INVESTMENT LOSS .......................................... (77,367)
-----------
NET REALIZED GAIN (LOSS) FROM:
Investments sold ................................................ 13,153,944
Foreign Currency Transactions ................................... (253,766)
-----------
TOTAL NET REALIZED GAIN .......................................... 12,900,178
-----------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION:
Investments ..................................................... 14,450,987
Foreign Currency Translations ................................... 1,815
----------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION ............... 14,452,802
-----------
TOTAL NET REALIZED GAIN AND NET CHANGE IN
UNREALIZED APPRECIATION/DEPRECIATION ............................ 27,352,980
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ....................................... $27,275,613
===========
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
<TABLE>
PRIME LIPPER EUROPE EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------ -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS:
Net Investment Income (Loss) .................................................... $ (77,367) $ 324,797
Net Realized Gain ............................................................... 12,900,178 12,722,779
Net Change in Unrealized Appreciation/Depreciation .............................. 14,452,802 263,553
------------ ------------
Net Increase in Net Assets Resulting from Operations ........................... 27,275,613 13,311,129
------------ ------------
DISTRIBUTIONS:
PREMIER SHARES:
From net investment income ...................................................... -- (142,928)
In excess of net investment income .............................................. -- (33,407)
From net realized gains ......................................................... (11,390,232) (9,927,607)
RETAIL SHARES:
From net investment income ...................................................... -- (62)
In excess of net investment income .............................................. -- (15)
From net realized gains ......................................................... (232,187) (136,371)
GROUP RETIREMENT PLAN SHARES:
From net investment income ...................................................... -- (693)
In excess of net investment income .............................................. -- (162)
From net realized gains ......................................................... (210,280) (109,302)
------------ ------------
Total Distributions ............................................................ (11,832,699) (10,350,547)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
PREMIER SHARES:
Issued-- Regular ................................................................. 23,551,688 16,358,781
-- Distributions Reinvested ................................................ 11,413,219 10,081,098
Redeemed ........................................................................ (8,372,885) (9,510,532)
------------ ------------
Net Increase from Premier Shares ............................................... 26,592,022 16,929,347
------------ ------------
RETAIL SHARES:
Issued-- Regular ................................................................. 1,603,199 367,267
-- Distributions Reinvested ................................................ 226,949 136,448
Redeemed ........................................................................ (684,234) (12,548)
------------ ------------
Net Increase from Retail Shares ................................................ 1,145,914 491,167
------------ ------------
GROUP RETIREMENT PLAN SHARES:
Issued-- Regular ................................................................. 1,238,603 957,709
-- Distributions Reinvested ................................................ 209,098 110,157
Redeemed ........................................................................ (297,247) (329,771)
------------ ------------
Net Increase from Group Retirement Plan Shares ................................... 1,150,454 738,095
------------ ------------
Net Increase in Net Assets From Capital Share Transactions ....................... 28,888,390 18,158,609
------------ ------------
TOTAL INCREASE ................................................................. 44,331,304 21,119,191
------------ ------------
NET ASSETS:
Beginning of Period ............................................................. 84,864,825 63,745,634
------------ ------------
End of Period (A) ............................................................... 129,196,129 84,864,825
============ ===========
(A) Includes accumulated net investment loss ..................................... ($ 58,710) ($ 33,584)
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
<TABLE>
PRIME LIPPER EUROPE EQUITY FUND
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA & RATIO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD
<CAPTION>
PREMIER PREMIER PREMIER RETAIL RETAIL
SHARES SHARES SHARES SHARES SHARES
----------- ----------- ----------- ----------- -----------
APRIL 1,
YEAR ENDED YEAR ENDED 1996** to YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1998 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .................... $11.74 $11.25 $10.00 $11.73 $11.25
------ ------ ------ ------ ------
Income From Investment Operations:
Net Investment Income (Loss)(1) ...................... (0.01) 0.05 0.04 (0.03) 0.02
Net Realized and Unrealized Gain
on Investments ...................................... 3.79 2.06 1.62 3.77 2.05
------ ------ ------ ------ ------
Total From Investment Operations .................. 3.78 2.11 1.66 3.74 2.07
------ ------ ------ ------ ------
Distributions:
Net Investment Income ................................ -- (0.03) (0.02) -- --
In Excess of Net Investment Income ................... -- -- -- -- --
Net Realized Gain .................................... (1.42) (1.59) (0.39) (1.42) (1.59)
------ ------ ------ ------ ------
Total Distributions .................................. (1.42) (1.62) (0.41) (1.42) (1.59)
------ ------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD ........................ $14.10 $11.74 $11.25 $14.05 $11.73
====== ====== ====== ====== ======
TOTAL RETURN .......................................... 32.29% 18.83% 16.68%(2) 31.96% 18.49%
===== ===== ===== == ===== =====
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) ..................... $124,406 $82,787 $62,942 $2,472 $1,137
Ratios After Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets ....................... 1.54% 1.59% 1.60%* 1.79% 1.84%
Net Investment Income (Loss) to Average Net Assets ... (0.06)% 0.43% 0.53%* (0.25)% 0.16%
Ratios Before Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets ....................... -- -- 1.78%* -- --
Net Investment Income (Loss) to Average Net Assets ... -- -- 0.35%* -- --
Portfolio Turnover Rate ............................... 61.04% 71% 34% 61.04% 71%
<CAPTION>
GROUP GROUP GROUP
RETIREMENT RETIREMENT RETIREMENT
RETAIL PLAN PLAN PLAN
SHARES SHARES SHARES SHARES
----------- ----------- ----------- ------------
APRIL 11, APRIL 12,
1996*** to YEAR ENDED YEAR ENDED 1996*** to
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1998 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ................... $ 9.93 $11.72 $11.24 $ 9.92
------ ------ ------ ------
Income From Investment Operations:
Net Investment Income (Loss)(1) ..................... (0.01) (0.03) 0.03 (0.02)
Net Realized and Unrealized Gain
on Investments ..................................... 1.73 3.78 2.05 1.74
------ ------ ------ ------
Total From Investment Operations ................. 1.72 3.75 2.08 1.72
------ ------ ------ ------
Distributions:
Net Investment Income ............................... (0.01) -- (0.01) (0.01)
In Excess of Net Investment Income .................. -- -- -- --
Net Realized Gain ................................... (0.39) (1.42) (1.59) (0.39
------ ------ ------ ------
Total Distributions ................................. (0.40) (1.42) (1.60) (0.40)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD ....................... $11.25 $14.05 $11.72 $11.24
====== ====== ====== ======
TOTAL RETURN ......................................... 17.37%(2) 32.08% 18.60% 17.40%(2
====== ====== ====== ======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) .................... $609 $2,318 $941 $195
Ratios After Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets ...................... 1.85%* 1.79% 1.84% 1.85%*
Net Investment Income (Loss) to Average Net Assets .. (0.13)%* (0.29)% 0.34% (0.43)%*
Ratios Before Expense Waiver and/or Reimbursement:
Expenses to Average Net Assets ...................... 2.07%* -- -- 2.04%*
Net Investment Income (Loss) to Average Net Assets .. (0.35)%* -- -- (0.62)%*
Portfolio Turnover Rate .............................. 34% 61.04% 71% 34%
<FN>
- ----------
* Annualized
** Commencement of Fund Operations
*** Initial offering of shares by the Fund
(1) The effect to net investment income per share of voluntarily waived fees
and reimbursed expenses were:
PERIOD ENDED
DECEMBER 31, 1996
-----------------
Premier Shares .............................. $0.01
Retail Shares ............................... $0.02
Group Retirement Plan Shares ................ $0.01
There were no waivers or reimbursements for the years ended December 31,
1998 or 1997.
(2) Total return would have been lower had the Adviser not waived or reimbursed
certain expenses during the periods shown. Total returns for periods of
less than one year are not annualized.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
PRIME LIPPER EUROPE EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
The Lipper Funds, Inc. (the "Company") is registered under the Investment
Company Act of 1940 as an open-end management investment company and was
incorporated on August 22, 1995. As of December 31, 1998 the Company was
comprised of three diversified portfolios: Lipper High Income Bond Fund, Lipper
U.S. Equity Fund, and Prime Lipper Europe Equity Fund. These financial
statements pertain to Prime Lipper Europe Equity Fund only. The financial
statements of the remaining Funds are presented separately. The Company offers
the shares of each Fund in three classes: Premier Shares, Retail Shares and
Group Retirement Plan Shares. Prime Lipper Europe Equity Fund (the "Fund") was
funded on April 1, 1996 with a contribution of securities to the Fund from a
corresponding limited partnership (see Note H).
Prime Lipper Europe Equity Fund seeks capital appreciation by investing
primarily in a diversified portfolio of common stocks of issuers located in
Europe that have strong levels of growth based on such factors as liquidity,
financial strength, earnings growth, industry position and management.
A. SIGNIFICANT ACCOUNTING POLICIES. The following significant accounting
policies are in conformity with generally accepted accounting principles for
investment companies. Such policies are consistently followed by the Fund in the
preparation of its financial statements. Generally accepted accounting
principles may require management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual results
may differ from those estimates.
1. SECURITY VALUATION: Securities listed on a securities exchange for which
market quotations are readily available are valued at the last sale price as of
the close of the exchange on the day the valuation is made or, if no sale
occurred on such day, at the mean of the closing bid and asked prices on such
day. Price information on listed securities is taken from the exchange where the
security is primarily traded. Over-the-counter and unlisted securities are
valued at the bid price. Short-term investments that have remaining maturities
of sixty days or less at time of purchase are valued at amortized cost, if it
approximates market value. The value of securities for which no quotations are
readily available is determined in good faith at fair value using methods
determined by the Board of Directors.
2. FEDERAL INCOME TAXES: It is the Fund's intention to qualify as a
regulated investment company under Subchapter M of the Internal Revenue Code and
to distribute all of its taxable income. Accordingly, no provision for Federal
income taxes is required in the financial statements. The Fund may be subject to
taxes imposed by countries in which it invests. Such taxes are generally based
on income earned or repatriated and are accrued when the related income is
earned.
Net capital and net currency losses incurred after October 31 and within
the taxable year are deemed to arise on the first business day of the Fund's
next taxable year. For the period from November 1, 1998 to December 31, 1998 the
Fund incurred and elected to defer until January 1, 1999 for U.S. Federal income
tax purposes net currency losses of approximately $58,710.
At December 31, 1998 the cost of investments and unrealized appreciation
(depreciation) of investments for Federal income tax purposes were:
NET
COST APPRECIATION (DEPRECIATION) APPRECIATION
----------- ------------ -------------- ------------
$94,215,057 $30,052,976 $(2,140,451) $27,912,525
3. FOREIGN CURRENCY TRANSLATION AND FOREIGN INVESTMENTS: The books and
records of the Fund are maintained in U.S. dollars. Foreign currency amounts are
translated into U.S. dollars at the mean of the bid and asked prices of such
currencies against U.S. dollars quoted by a major U.S. or foreign bank. Although
the net assets of the Fund are presented at the foreign exchange rates and
market values at the close of the period, the Fund does not isolate that portion
of operations arising as a result of changes in the foreign exchange rates from
the fluctuations arising from changes in the market prices of the securities
held at period end. Similarly, the Fund does not isolate the effect of changes
in foreign exchange rates from the fluctuations arising from changes in the
market prices of securities sold during the period. Accordingly, realized and
unrealized foreign currency gains (losses) are included in the reported net
realized and unrealized gains (losses) on investment transactions and balances.
Pursuant to U.S. Federal income tax regulations, gains and losses from certain
foreign currency transactions are treated as ordinary income for U.S. Federal
income tax purposes.
11
<PAGE>
PRIME LIPPER EUROPE EQUITY FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Net realized gains (losses) on foreign currency transactions represent net
foreign exchange gains (losses) from sales and maturities of foreign currency
exchange contracts, dispositions of foreign currencies, currency gains or losses
realized between the trade and settlement dates on securities transactions and
the difference between the amount of investment income and foreign withholding
taxes recorded on the Fund's books and the U.S. dollar equivalent amounts
actually received or paid. Net unrealized currency gains (losses) from valuing
foreign currency denominated assets and liabilities at period end exchange rates
are reflected as a component of unrealized appreciation (depreciation) in the
Statement of Asset and Liabilities. The change in net unrealized currency gains
(losses) for the period is reflected in the Statement of Operations.
Foreign security and currency transactions may involve certain
considerations and risks not typically associated with those of U.S. dollar
denominated transactions as a result of, among other factors, the possibility of
lower levels of governmental supervision and regulation of foreign securities
markets and the possibility of political or economic instability.
4. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS: The Fund may enter into
forward foreign currency exchange contracts to attempt to protect securities and
related receivables and payables against changes in future foreign currency
exchange rates. A forward foreign currency exchange contract is an agreement
between two parties to buy or sell currency at a set price on a future date. The
market value of the contract will fluctuate with changes in currency exchange
rates. The contract is marked-to-market daily using the forward rate and the
change in market value is recorded by the Fund as unrealized gain or loss. The
Fund records realized gains or losses, when the contract is closed, equal to the
difference between the value of the contract at the time it was opened and the
value at the time it was closed. Risk may arise upon entering into these
contracts from the potential inability of counterparties to meet the terms of
their contracts and is generally limited to the amount of the unrealized gain on
the contracts, if any, at the date of default. Risks may also arise from
unanticipated movements in the value of a foreign currency relative to the U.S.
dollar.
5. DISTRIBUTIONS TO SHAREHOLDERS: The Fund intends to distribute
substantially all of its net investment income annually. Net realized capital
gains, if any, will be distributed at least annually by the Fund. All
distributions are recorded on the ex-dividend date.
Income and capital gains distributions are determined in accordance with
U.S. Federal income tax regulations which may differ from generally accepted
accounting principles. Those differences are primarily due to differing book and
tax treatments for deferred organization costs, foreign currency transactions,
post-October losses and losses due to wash sales transactions.
Permanent book and tax differences relating to shareholder distributions
may result in reclassifications to undistributed accumulated net investment
income (loss), undistributed realized net gain (loss) and paid in capital. For
the year December 31, 1998, such adjustments resulted primarily from the
differing book and tax treatment of foreign currency gain (loss) and
non-deductible organization costs.
6. ORGANIZATION COSTS: Costs incurred by the Fund in connection with its
organization have been deferred and are being amortized on a straight-line basis
over a five-year period.
7. OTHER: Securities transactions are accounted for on the date the
securities are purchased or sold. Costs used in determining realized gains and
losses on the sale of investment securities are based on the specific
identification method. Dividend income is recorded on the ex-dividend date.
Interest income is recognized on the accrual basis. Discounts and premiums on
securities purchased are amortized according to the effective yield method over
their respective lives. Expenses of the Company, which are not directly
attributable to a Fund, are allocated among the Funds based on their relative
net assets. Income, expenses (other than class specific expenses) and realized
and unrealized gains or losses are allocated to each class of shares based upon
their relative net assets. The Company has a $20 million line of credit with The
Chase Manhattan Bank which is available to meet temporary cash needs of the
Company. The Company pays a commitment fee for this line of credit.
B. ADVISORY SERVICES: Prime Lipper Asset Management (the "Adviser") serves as
the investment adviser to the Fund. Under the terms of the Investment Advisory
Agreement (the "Agreement"), the Adviser provides investment advisory services
for a fee calculated at an annual rate of 1.10% of the Fund's average daily net
assets. From time to
12
<PAGE>
PRIME LIPPER EUROPE EQUITY FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
time, the Adviser may voluntarily waive, for a period of time, all or a portion
of the fee to which it is entitled under its Agreement with the Fund. Until
further notice, the Adviser has agreed to voluntarily waive fees and reimburse
expenses to the extent necessary to maintain an annual operating expense ratio
to net assets of not more than the following:
GROUP
PREMIER SHARES RETAIL SHARES RETIREMENT PLAN SHARES
-------------- ------------- ----------------------
1.60% 1.85% 1.85%
No waivers or reimbursements were received by the Fund for the year ended
December 31, 1998.
C. ADMINISTRATIVE SERVICES: Chase Global Funds Services Company, a wholly owned
subsidiary of The Chase Manhattan Bank ("Chase"), serves as the Company's
administrator (the "Administrator") pursuant to an Administrative Agreement.
Under the Administrative Agreement, the Administrator provides administrative,
fund accounting, dividend disbursing and transfer agent services to the Company.
As compensation for its services, the Company pays the Administrator a monthly
fee at the annual rate of 0.20% of the Company's average daily net assets up to
and including $200 million; 0.10% of the Company's average daily net assets in
excess of $200 million up to and including $400 million; and 0.05% of the
Company's average daily net assets in excess of $400 million. The Fund is
subject to a minimum annual fee of $70,000 per year. Under a separate agreement,
Chase also acts as the Company's custodian for the Fund's assets.
D. DIRECTORS' FEES: The Company pays each Director who is not a director,
officer or employee of the Adviser or any of its affiliates, a fee of $8,000 per
annum plus $500 per quarterly meeting attended and reimbursements for expenses
incurred in attending Board meetings.
E. DISTRIBUTION SERVICES: Lipper & Company, L.P., an affiliate of the Adviser,
serves as the Company's distributor (the "Distributor"). The Distributor is
entitled to receive an annual distribution fee payable from the net assets of
the Fund's Retail Shares of up to 0.25% of the average daily net assets of such
Fund's Retail Shares. The Company has entered into shareholder servicing
agreements with respect to the Fund's Group Retirement Plan Shares. Under such
servicing agreements, each servicing agent will be entitled to receive from the
net assets of the Fund's Group Retirement Plan Shares, an annual servicing fee
of up to 0.25% of the average daily net assets of such Fund's Group Retirement
Plan Shares for certain support services which supplement the services provided
by the Company's administrator and transfer agent.
F. PURCHASES AND SALES: For the year ended December 31, 1998, the cost of
purchases and proceeds of sales for investment securities other than long-term
U.S. Government and short-term securities were:
PURCHASES SALES
----------- -----------
$75,723,943 $63,385,040
There were no purchases or sales of long-term U.S. Government securities.
G. CONCENTRATION OF CREDIT RISK: At December 31, 1998 the Fund has cash on
deposit with its custodian exceeding the federally insured maximum. A
concentration of credit risk therefore exists with the Fund's custodian.
H. LIMITED PARTNERSHIP TRANSFERS: The Fund was formed as a successor investment
vehicle for a limited partnership (the "Partnership") for which the Adviser
acted as general partner and investment adviser since inception. On April 1,
1996, the Fund exchanged Premier Shares for portfolio securities of the
Partnership (the "Transfer"). Premier Shares issued by the Fund in the Transfer
were issued at the net asset value of Premier Shares prior to the Transfer.
Premier Shares received in the Transfer have been distributed to the
Partnership's limited partners who elected to participate in the Transfer.
Securities valued at $50,208,413 at the date of Transfer with unrealized
appreciation of $7,587,935 were contributed to the Fund on a tax free basis. To
the extent that the Fund acquired securities in the Transfer that had
appreciated in value from the date originally acquired by its corresponding
Partnership, the Transfer may have adverse tax consequences to investors who
subsequently acquire shares of the Fund.
13
<PAGE>
PRIME LIPPER EUROPE EQUITY FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
I. OTHER: Capital share transactions for the Fund, by class of shares, were as
follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
PREMIER SHARES:
Issued--Regular ..................... 1,605,948 1,398,901
--Distributions Reinvested .......... 797,991 857,040
Redeemed ............................ (631,722) (796,803)
--------- ---------
Net Increase ......................... 1,772,217 1,459,138
--------- ---------
RETAIL SHARES:
Issued--Regular ..................... 113,663 32,120
--Distributions Reinvested .......... 15,887 11,602
Redeemed ............................ (50,514) (1,004)
--------- ---------
Net Increase ......................... 79,036 42,718
--------- ---------
GROUP RETIREMENT PLAN SHARES:
Issued--Regular ..................... 90,078 80,068
--Distributions Reinvested .......... 14,661 9,385
Redeemed ............................ (19,882) (26,544)
--------- ---------
Net Increase ........................ 84,857 62,909
--------- ---------
J. OTHER: At December 31, 1998, the percentage of total shares outstanding held
by record shareholders owning 10% or greater of the aggregate total shares for
the Fund was as follows:
NO. OF %
SHAREHOLDERS OWNERSHIP
------------ ---------
Premier Shares .......................... 1 12.8%
Retail Shares ........................... 1 18.4%
Group Retirement Plan Shares ............ 2 89.0%
Transactions by shareholders holding a significant ownership percentage of
a Fund can have an impact on other shareholders of the Fund.
14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Prime Lipper Europe Equity Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prime Lipper Europe Equity Fund
(one of the Funds constituting The Lipper Funds, Inc., hereinafter referred to
as the "Fund") at December 31, 1998, the results of its operations for the year
then ended, the changes in its net assets for each of the two years then ended,
and the financial highlights for each of the periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards 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 examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1998 by
correspondence with the custodian, provide a reasonable basis for the opinion
expressed above.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York 10036
February 22, 1999
================================================================================
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
Prime Lipper Europe Equity Fund hereby designates $10,971,983 as 20%
long-term capital gain dividends for the purpose of the dividend paid deduction
on the Fund's Federal income tax return.
Foreign taxes paid during the year ended December 31, 1998, amounting to
$198,415 for the Prime Lipper Europe Equity Fund, are expected to be passed
through to shareholders as foreign tax credits on Form 1099-DIV. In addition,
for the year ended December 31, 1998, gross income derived from sources within
foreign countries amounted to $1,815,468 for Prime Lipper Europe Equity Fund.
15
<PAGE>
BOARD OF DIRECTORS KENNETH LIPPER
- -------------------------------- Director, President and Chairman
ABRAHAM BIDERMAN
Director, Executive Vice President,
Secretary and Treasurer
STANLEY BREZENOFF
Director
MARTIN MALTZ
Director
IRWIN RUSSELL
Director
INVESTMENT ADVISER Prime Lipper Asset Management
- -------------------------------- 101 Park Avenue, 6th floor
New York, NY 10178
(212) 883-6333
ADMINISTRATOR AND Chase Global Funds Services Company
- -------------------------------- 73 Tremont Street, 9th floor
TRANSFER AGENT Boston, MA 02108
1-800-LIPPER9
CUSTODIAN The Chase Manhattan Bank
- -------------------------------- 770 Broadway
New York, NY 10003
LEGAL COUNSEL Simpson Thacher & Bartlett
- -------------------------------- 425 Lexington Avenue
New York, NY 10017
INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP
- -------------------------------- 1177 Avenue of the Americas
New York, NY 10036
