----------------------
THE LIPPER FUNDS, INC.
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LIPPER HIGH INCOME BOND FUND
Annual Report
-----------------------------------------------
December 31, 1999
<PAGE>
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TABLE OF CONTENTS
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Shareholder's Letter ............................................. 1
Portfolio of Investments ......................................... 4
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
Report of Independent Accountants ................................ 19
<PAGE>
THE LIPPER FUNDS, INC. ANNUAL REPORT
LIPPER HIGH INCOME BOND FUND DECEMBER 31, 1999
Dear Shareholder:
We are pleased to present the Annual Report for the Lipper High Income Bond Fund
for the year ended December 31, 1999. The Lipper High Income Bond Fund is one of
three investment portfolios, together with the Lipper U.S. Equity Fund and the
Lipper Prime Europe Equity Fund, which comprise The Lipper Funds, Inc. This
report presents the financial statements and performance review of the Lipper
High Income Bond Fund (the "Fund") for the year ended December 31, 1999.
The Lipper High Income Bond Fund seeks to achieve high total returns while
preserving capital by investing in a diversified portfolio of quality, high
yield, intermediate-term bonds rated BBB+ to B-. The Fund focuses exclusively on
the U.S. high yield bond market. As of December 31, 1999, the portfolio
consisted of 92 securities representing 28 industries. The average credit
quality of the portfolio was BB-. The Fund maintained an average maturity of 5.9
years and an effective duration of 3.7 years.
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. The Fund seeks to reduce
default risk by investing in cash-pay bonds issued by companies with proven
track records of established cash flow. Further, the Fund favors bonds that are
senior in the capital structure. Due in part to this discipline, the Fund has
never experienced a default with respect to any bond holding.
Plagued by rising interest rates, inflation jitters and Y2K concerns, the bond
market suffered its second-worst year since 1973 and its worst year since 1994
during 1999. Supposedly "safe" Treasuries fared the worst, with the 30-Year
Treasury bond generating a return of -14.92% for the year and the 10-Year
Treasury bond generating a return of -8.43% for the year. Although the fixed
income markets were disappointing across the board, high yield bonds performed
better than most during 1999, generating positive returns in an extremely
difficult environment and grossly outperforming benchmark Treasury securities.
The Lipper High Income Bond Fund Premier Shares generated a net return of 4.20%
for the year.* Although this return is lower than the Fund's historical average,
the Fund outperformed its benchmark index, the Lehman Brothers BB Intermediate
Bond Index, by approximately 200 basis points. The Fund also outperformed the
average return generated by the 321 high yield mutual funds tracked by
Morningstar, Inc. for the 12-month period ending December 31, 1999. Thus, the
Lipper High Income Bond Fund performed well given the extremely difficult bond
market conditions.
As of December 31, 1999, the average yield to maturity of the Fund was 9.6%.
Therefore, the lower return generated by the Fund merely reflects the fact that
on a mark-to-market basis, bond prices are unusually depressed. This is due to
the fact that the high yield bond market had not yet fully recovered from the
Russian debt crisis of 1998 when the inflation jitters hit in May 1999. Three
interest rate hikes by the Federal Reserve between June and November, concerns
regarding Y2K liquidity issues, plus the possibility of additional interest rate
hikes in 2000 definitely spooked the bond market. As a result, high yield bond
spreads remain unusually wide compared to historical norms. According to
Donaldson Lufkin & Jenrette's High Yield Research Department, the spread of high
yield bonds over comparable U.S. Treasury bonds was 549 basis points as of
December 31, 1999. Similarly, the spread of BB-rated bonds over comparable U.S.
Treasuries was 320 basis points as of December 31, 1999. These spreads are wider
than historical norms, where the average spread of high yield bonds was 441
basis points and the average spread of BB-rated bonds was 296 basis points
between December 31, 1992 and December 31, 1999.
Although bond prices are depressed across the board and spreads are unusually
wide, the Fund continues to collect the coupon on its underlying holdings and
has never experienced a default with respect to any bond. Therefore, the Fund's
performance should continue to improve as bonds cease trading at a discount.
Even if the Federal Reserve raises interest rates in 2000, we do not expect that
the high yield bond market will experience significant deterioration considering
that plenty of bad news is already built into the market. Since
- ---------------
* Fee waivers and reimbursements were in effect during 1999, without which
total returns would have been lower.
1
<PAGE>
December 1998, intermediate and long bond yields have increased approximately
200 and 150 basis points, respectively. Further, with stock indexes at record
highs, high yield bonds represent an attractive investment for long-term, value
seeking investors.
During 2000, 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
relative value than longer dated paper.
We hope you find the enclosed report informative. We appreciate your
participation in the Lipper High Income Bond Fund.
Sincerely,
/s/ KENNETH LIPPER
-----------------------------------
KENNETH LIPPER
President and Chairman of the Board
2
<PAGE>
LIPPER HIGH INCOME BOND FUND PERFORMANCE
- -------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED DECEMBER 31, 1999
- -------------------------------------------------------------------------------
SINCE
1 YEAR 5 YEAR INCEPTION*
- -------------------------------------------------------------------------------
PREMIER SHARES 4.20% 8.79% 8.71%
- -------------------------------------------------------------------------------
RETAIL SHARES 3.84% 8.58% 8.57%
- -------------------------------------------------------------------------------
GROUP RETIREMENT PLAN SHARES 3.84% 8.57% 8.57%
- -------------------------------------------------------------------------------
LIPPER HIGH INCOME BOND FUND--PREMIER SHARES*
Growth of $10,000 Invested in the Fund's Premier Shares vs.
the Lehman Brothers BB Intermediate Bond Index**
<TABLE>
[GRAPHICAL REPRESENTATION OF DATA CHART]
<CAPTION>
2/1/92 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/97 12/31/99
------ -------- -------- -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lipper High Income Bond
Fund Premier Shares ... 10,000 11,064 12,644 12,703 14,535 16,133 17,946 18,594 19,375
Lehman Brother
BB Intermediate
Bond Index............. 10,000 10,919 12,519 12,625 15,033 16,446 18,295 19,350 19,777
</TABLE>
* Past performance is no guarantee of future results. The net asset value and
investment return of the Lipper High Income Bond Fund (the "Fund") will
fluctuate, and the value of the Fund's shares may be worth more or less than
original cost upon redemption. The performance information presented reflects
the performance of the Fund's predecessor partnership for the period February 1,
1992 (commencement of the predecessor partnership's operations) through March
31, 1996. On April 1, 1996, the assets of the Fund's predecessor partnership
were exchanged for the Fund's Premier Shares. The investment policies,
objectives, guidelines and restrictions of the Fund are in all material respects
equivalent to those of its predecessor partnership. As a mutual fund registered
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 Act and the Code,
its investment performance may have been adversely affected. Fee waivers and
reimbursements were in effect for the Fund since inception, without which total
returns would have been lower. Total returns include the reinvestment of income,
dividends and capital gains. The Fund invests primarily in high yield bonds,
which entail greater risks than in investment grade bonds, such as reduced
liquidity and the possibility of default. The minimum investment for Premier
Shares is $1,000,000.
The Fund's Retail and Group Retirement Plan Shares were introduced on April 11,
1996 and April 12, 1996, respectively. Performance for each of the Retail and
Group Retirement Plan Shares reflects the performance of the Fund's predecessor
partnership for the period February 1, 1992 through March 31, 1996 and the
Fund's Premier Shares for the period April 1, 1996 through April 11, 1996 and
April 12, 1996, respectively. Performance for each of the Retail and Group
Retirement Plan Shares differs from the Fund's Premier Shares due to the
different inception dates and class specific expenses associated with the Retail
and Group Retirement Plan Shares.
** The chart above illustrates the growth of $10,000 invested in the Fund's
Premier Shares versus $10,000 invested in the Lehman Brothers BB Intermediate
Bond Index for the period February 1, 1992 (commencement of the Fund's
predecessor partnership's operations) through December 31, 1999. The Lehman
Brothers BB Intermediate Bond Index (the "Index") is an unmanaged index
comprised of BB-rated bonds with maturities of less than ten years. The Index
does not reflect fees or expenses required to be reflected in the Fund's
returns, and if such fees and expenses were reflected, they would reduce the
returns of the Index. The Index has been adjusted to include the reinvestment of
dividends. One cannot invest directly in the Index.
3
<PAGE>
LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1999
FACE
AMOUNT VALUE
---------- ----------
CORPORATE BONDS (91.2%)
ADVERTISING & BROADCASTING (4.9%)
Ackerley Group, Inc. Series B
9.00%, 01/15/09 ............................ $ 750,000 $ 736,875
Lamar Media Corp.
9.625%, 12/01/06 ........................... 1,000,000 1,037,500
Outdoor Systems, Inc.
9.375%, 10/15/06 ........................... 1,000,000 1,057,500
Salem Communications Corp. Series B
9.50%, 10/01/07 ............................ 875,000 879,375
----------
3,711,250
----------
AEROSPACE/DEFENSE (1.7%)
BE Aerospace, Series B
8.00%, 03/01/08 ............................ 625,000 546,875
Sequa Corp
9.00%, 08/01/09 ............................ 750,000 727,500
----------
1,274,375
----------
AUTO MANUFACTURING & RELATED (2.5%)
Federal - Mogul Co
7.375%, 01/15/06 ........................... 1,000,000 919,820
Lear Seating
8.25%, 02/01/02 ............................ 1,000,000 990,000
----------
1,909,820
----------
BEVERAGES & BOTTLING (1.3%)
Canandaigua Wine, Inc.,
8.75%, 12/15/03 ............................ 1,000,000 1,000,000
----------
CABLE/DISTRIBUTED ENTERTAINMENT (7.0%)
Adelphia Communications
7.50%, 01/15/04 ............................ 1,000,000 945,000
Charter Communications Holdings LLC
8.25%, 04/01/07 ............................ 500,000 465,000
CSC Holdings, Inc.
9.25%, 11/01/05 ............................ 1,000,000 1,027,500
Echostar Dbs Corp.
9.25%, 02/01/06 ............................ 750,000 759,375
Fox/Liberty Networks LLC
8.875%, 08/15/07 ........................... 1,000,000 1,027,500
Fundy Cable Ltd.
11.00%, 11/15/05 ........................... 1,000,000 1,082,500
----------
5,306,875
----------
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1999
FACE
AMOUNT VALUE
---------- ----------
CAPITAL GOODS, EQUIPMENT & OTHER MANUFACTURING (0.9%)
American Standard, Inc. .......................
7.125%, 02/15/03 ............................. $ 750,000 $ 720,938
----------
CHEMICALS (4.2%)
Georgia Gulf Corp.
7.625%, 11/15/05 ............................. 1,000,000 923,120
Lyondell Chemical Co. Series B
9.875%, 05/01/07 ............................. 500,000 512,500
Lyondell Chemical Co. (Arco Chemical Co.)
9.90%, 11/01/00 .............................. 750,000 761,250
*Scotts Co.
8.625%, 01/15/09 ............................. 1,000,000 980,000
----------
3,176,870
----------
COMMERCIAL SERVICES (0.7%)
Iron Mountain, Inc.
8.75%, 09/30/09 .............................. 525,000 502,688
----------
CONSUMER PRODUCTS (1.0%)
Selmer Co., Inc.
11.00%, 05/15/05 ............................. 750,000 791,250
----------
ELECTRICAL EQUIPMENT (2.2%)
Ametek, Inc.
7.20%, 07/15/08 .............................. 750,000 667,988
Amphenol Corp.
9.875%, 05/15/07 ............................. 1,000,000 1,045,000
----------
1,712,988
----------
ELECTRIC UTILITIES & POWER (5.0%)
AES Corp.
8.375%, 08/15/07 ............................. 1,000,000 932,500
Calpine Corp.
7.625%, 04/15/06 ............................. 1,000,000 950,000
CMS Energy Corp.
6.75%, 01/15/04 .............................. 1,000,000 932,260
Cogentrix Energy, Inc.
8.10%, 03/15/04 .............................. 1,000,000 976,320
----------
3,791,080
----------
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1999
FACE
AMOUNT VALUE
----------- ----------
ENERGY (9.0%)
Canadian Occidental Petroleum
7.125%, 02/04/04 ........................... $1,000,000 $ 966,530
Ferrellgas Partners LP
9.375%, 06/15/06 ........................... 825,000 812,625
Gulf Canada Resources Ltd.
9.25%, 01/15/04 ............................ 875,000 879,226
Pride Petroleum Services, Inc.
9.375%, 05/01/07 ........................... 1,000,000 1,005,000
Seagull Energy, Inc.
8.625%, 08/01/05 ........................... 750,000 738,750
Tubscope, Inc.
7.50%, 02/15/08 ............................ 750,000 640,230
Veritas DGC, Inc.
9.75%, 10/15/03 ............................ 750,000 763,125
Vintage Petroleum
9.00%, 12/15/05 ............................ 1,000,000 1,002,500
----------
6,807,986
----------
ENTERTAINMENT (1.3%)
Premier Parks, Inc.
9.25%, 04/01/06 ............................ 500,000 493,750
Six Flags Entertainment Corp.
8.875%, 04/01/06 ........................... 500,000 490,625
----------
984,375
----------
ENVIRONMENTAL SERVICES (0.9%)
Allied Waste N.A., Series B
7.375%, 01/01/04 ........................... 750,000 686,250
----------
FINANCIAL INSTITUTIONS (2.3%)
DVI, Inc.
9.875%, 02/01/04 ........................... 750,000 738,750
Navistar Financial Corp., Series B
9.00%, 06/01/02 ............................ 1,000,000 1,007,500
----------
1,746,250
----------
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1999
FACE
AMOUNT VALUE
---------- ----------
FOOD & SERVICES (5.1%)
Chiquita Brands
9.625%, 01/15/04 ............................. $1,000,000 $ 750,000
Host Mar Travel Plaza, Class B
9.50%, 05/15/05 .............................. 1,000,000 1,049,140
Keebler Corp.
10.75%, 07/01/06 ............................. 1,030,000 1,114,975
SC International Services, Series B
9.25%, 09/01/07 .............................. 1,000,000 935,000
----------
3,849,115
----------
HEALTHCARE SERVICES & RELATED (2.4%)
Quorum Health Group, Inc.
8.75%, 11/01/05 .............................. 875,000 835,625
Tenet Healthcare Corp.
8.625%, 01/15/07 ............................. 1,000,000 967,500
----------
1,803,125
----------
HOMEBUILDING & BUILDING MATERIALS (5.3%)
D.R. Horton, Inc.
8.375%, 06/15/04 ............................. 1,000,000 975,000
Kaufman & Broad Home
9.375%, 05/01/03 ............................. 1,000,000 995,000
NVR, Inc.
8.00%, 06/01/05 .............................. 750,000 708,750
Republic Group, Inc.
9.50%, 07/15/08 .............................. 500,000 472,500
U.S. Home Corp.
7.95%, 03/01/01 .............................. 875,000 872,812
----------
4,024,062
----------
HOTELS (1.2%)
HMH Properties, Series A
7.875%, 08/01/05 ............................. 1,000,000 947,500
----------
METALS (3.4%)
AK Steel Corp.
9.125%, 12/15/06 ............................. 1,000,000 1,017,500
Ivaco, Inc.
11.50%, 09/15/05 ............................. 995,000 1,082,062
Ryerson Tull, Inc.
8.50%, 07/15/01 .............................. 500,000 501,010
----------
2,600,572
----------
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1999
FACE
AMOUNT VALUE
---------- ----------
PACKAGING (3.3%)
Ball Corp.
7.75%, 08/01/06 ............................ $ 750,000 $ 735,000
Owens-Illinois, Inc.
7.85%, 05/15/04 ............................ 1,000,000 971,180
Packaging Corp. of America
9.625%, 04/01/09 ........................... 750,000 772,500
----------
2,478,680
----------
PAPER & FOREST PRODUCTS (6.9%)
Boise Cascade Co.
9.85%, 06/15/02 ............................ 1,000,000 1,041,030
Buckeye Cellulose Corp.
8.50%, 12/15/05 ............................ 875,000 859,687
Container Corp. of America, Series A
11.25%, 05/01/04 ........................... 1,000,000 1,047,500
*Kimberly-Clark De Mexico
8.875%, 08/01/09 ........................... 500,000 514,520
Tembec Finance Corp.
9.875%, 09/30/05 ........................... 1,000,000 1,045,000
U.S. Timberlands
9.625%, 11/15/07 ........................... 750,000 702,188
----------
5,209,925
----------
PUBLISHING (2.0%)
Hollinger International, Inc.
9.25%, 02/01/06 ............................ 1,000,000 987,500
K-III Communications Corp.
10.25%, 06/01/04 ........................... 500,000 521,250
----------
1,508,750
----------
RETAILERS (1.4%)
Southland Corp.
5.00%, 12/15/03 ............................ 750,000 637,500
Southland Corp., Series A
4.50%, 06/15/04 ............................ 500,000 407,500
----------
1,045,000
----------
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1999
FACE
AMOUNT VALUE
---------- ----------
TELECOMMUNICATIONS (11.0%)
*Alestra S.A .
12.625%, 05/15/09 .......................... $ 1,000,000 $ 1,010,000
Hermes Euro Rail
10.375%, 01/15/09 .......................... 1,000,000 992,500
Intermedia Communications, Series B
8.875%, 11/01/07 ........................... 875,000 822,500
Level 3 Communications, Inc.
9.125%, 05/01/08 ........................... 750,000 713,437
Loral Space & Communication Ltd.
9.50%, 01/15/06 ............................ 500,000 457,500
McLeodUSA, Inc.
8.125%, 02/15/09 ........................... 500,000 466,250
Metromedia Fiber Network
10.00%, 12/15/09 ........................... 500,000 512,500
*Nextel Communications, Inc.
9.375%, 11/15/09 ........................... 625,000 617,188
Psinet, Inc., Series B
10.00%, 02/15/05 ........................... 750,000 746,250
Qwest Communications International, Inc.
7.25%, 11/01/08 ............................ 500,000 484,375
Verio, Inc.
10.375%, 04/01/05 .......................... 750,000 761,250
Williams Communication Group, Inc.
10.70%, 10/01/07 ........................... 750,000 789,375
-----------
8,373,125
-----------
TEXTILE/APPAREL MANUFACTURING (2.1%)
Interface, Inc., Series B
9.50%, 11/15/05 ............................ 750,000 693,750
WestPoint Stevens
7.875%, 06/15/05 ........................... 1,000,000 920,000
-----------
1,613,750
-----------
TRANSPORTATION (2.2%)
Cenargo International plc
9.75%, 06/15/08 ............................ 750,000 626,250
Sea Containers Ltd., Series A
12.50%, 12/01/04 ........................... 1,000,000 1,037,500
-----------
1,663,750
-----------
TOTAL CORPORATE BONDS (COST $71,116,923) ....... 69,240,349
-----------
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
LIPPER HIGH INCOME BOND FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1999
FACE
AMOUNT VALUE
---------- ----------
CONVERTIBLE BONDS (5.5%)
AUTO MANUFACTURING & RELATED (1.0%)
Mascotech, Inc.
4.50%, 12/15/03 ................................. $ 1,000,000 $ 738,750
-----------
CAPITAL GOODS, EQUIPMENT & OTHER MANUFACTURING (1.8%)
Mark IV Industries, Inc.
4.75%, 11/01/04 ................................. 1,000,000 821,650
*Thermo Electron Corp.
4.25%, 01/01/03 ................................. 625,000 529,556
-----------
1,351,206
-----------
HEALTHCARE SERVICES & RELATED (1.9%)
HEALTHSOUTH Corp.
3.25%, 04/01/03 ................................. 1,000,000 775,160
Omnicare, Inc.
5.00%, 12/01/07 ................................. 1,000,000 675,220
-----------
1,450,380
-----------
RETIREMENT (0.8%)
Sunrise Assisted Living
5.50%, 06/15/02 ................................. 750,000 599,813
-----------
TOTAL CONVERTIBLE BONDS (COST $4,521,904) ........... 4,140,149
-----------
SHORT-TERM INVESTMENT (1.4%)
REPURCHASE AGREEMENT
Chase Securities, Inc., 2.60%, dated 12/31/99,
due 1/3/00, to be repurchased at $1,053,228,
collateralized by $1,080,000, U.S. Treasury
Notes, 6.125%, due 12/31/01, valued at
$1,077,806 (COST $1,053,000) .................... 1,053,000 1,053,000
-----------
TOTAL INVESTMENTS (98.1%) (COST $76,691,827) ........ 74,433,498
OTHER ASSETS AND LIABILITIES (1.9%) ................. 1,461,880
-----------
NET ASSETS (100%) ................................... $75,895,378
===========
- ---------------
* 144A Security. Certain conditions for public sale may exist.
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
<TABLE>
LIPPER HIGH INCOME BOND FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
<CAPTION>
ASSETS:
<S> <C>
Investments at value (Cost $76,691,827) ......................................... $ 74,433,498
Cash ............................................................................ 562
Interest Receivable ............................................................. 1,635,684
Deferred Organization Costs ..................................................... 23,506
Prepaid Assets .................................................................. 4,188
------------
TOTAL ASSETS ................................................................... 76,097,438
------------
LIABILITIES:
Investment Advisory Fees Payable ................................................ 41,822
Distribution Fees Payable -- Retail Shares ...................................... 35,748
Shareholder Servicing Fees Payable -- Group Retirement Plan Shares .............. 29,551
Administrative Fees Payable ..................................................... 28,831
Directors' Fees Payable ......................................................... 7,135
Other Liabilities ............................................................... 58,973
------------
TOTAL LIABILITIES .............................................................. 202,060
------------
NET ASSETS ....................................................................... $ 75,895,378
============
NET ASSETS CONSIST OF:
Paid in Capital ................................................................. $ 81,241,405
Undistributed Net Investment Income ............................................. 5,777
Accumulated Net Realized Loss ................................................... (3,093,475)
Unrealized Depreciation on Investments .......................................... (2,258,329)
------------
$ 75,895,378
============
PREMIER SHARES:
Net Assets ...................................................................... $ 66,163,158
Shares Issued and Outstanding ($.001 par value) (Authorized 3,333,333,333) ...... 7,179,320
Net Asset Value, Offering and Redemption Price Per Share ........................ $ 9.22
============
RETAIL SHARES:
Net Assets ...................................................................... $ 6,186,951
Shares Issued and Outstanding ($.001 par value) (Authorized 3,333,333,333) ...... 671,676
Net Asset Value, Offering and Redemption Price Per Share ........................ $ 9.21
============
GROUP RETIREMENT PLAN SHARES:
Net Assets ...................................................................... $ 3,545,269
Shares Issued and Outstanding ($.001 par value) (Authorized 3,333,333,333) ...... 384,950
Net Asset Value, Offering and Redemption Price Per Share ........................ $ 9.21
============
</TABLE>
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, 1999
INVESTMENT INCOME
Interest ......................................... $ 7,708,793
-----------
EXPENSES:
Investment Advisory Fees
Basic Fee ....................................... $ 662,673
Less: Fee Waived ................................ (140,133) 522,540
-----------
Administrative Fees .............................. 193,025
Professional Fees ................................ 33,760
Registration and Filing Fees ..................... 32,013
Amortization of Organization Costs ............... 18,779
Distribution Fees -- Retail Shares ............... 17,158
Custodian Fees ................................... 15,516
Servicing Fees -- Group Retirement Plan Shares ... 12,989
Directors' Fees .................................. 12,388
Other Expenses ................................... 55,593
-----------
Total Expenses .................................. 913,761
-----------
NET INVESTMENT INCOME ............................ 6,795,032
-----------
NET REALIZED LOSS FROM:
Investments sold ................................. (1,020,788)
-----------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION:
Investments ...................................... (2,113,011)
-----------
TOTAL NET REALIZED LOSS AND NET CHANGE IN
UNREALIZED APPRECIATION/DEPRECIATION ............. (3,133,799)
-----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ........................ $ 3,661,233
===========
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,
1999 1998
------------- -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS:
Net Investment Income ............................................... $ 6,795,032 $ 7,794,986
Net Realized Loss ................................................... (1,020,788) (2,058,188)
Net Change in Unrealized Appreciation/Depreciation .................. (2,113,011) (2,393,395)
------------ ------------
Net Increase in Net Assets Resulting from Operations ............... 3,661,233 3,343,403
------------ ------------
DISTRIBUTIONS:
PREMIER SHARES:
From Net Investment Income .......................................... (5,890,520) (6,980,439)
Return of Capital ................................................... -- (123,963)
From Net Realized Gains ............................................. -- (288,220)
RETAIL SHARES:
From Net Investment Income .......................................... (518,850) (471,618)
Return of Capital ................................................... -- (11,680)
From Net Realized Gains ............................................. -- (22,238)
GROUP RETIREMENT PLAN SHARES:
From Net Investment Income .......................................... (398,342) (342,929)
Return of Capital ................................................... -- (12,575)
From Net Realized Gains ............................................. -- (14,885)
------------ ------------
Total Distributions ................................................ (6,807,712) (8,268,547)
------------ ------------
CAPITAL SHARE TRANSACTIONS (NOTES G AND H):
PREMIER SHARES:
Issued -- Regular ............................................... 10,414,241 16,399,322
-- Distributions Reinvested .............................. 4,727,285 5,630,833
Redeemed ............................................................ (31,982,397) (17,169,754)
------------ ------------
Net Increase (Decrease) in Premier Shares Transactions ............. (16,840,871) 4,860,401
------------ ------------
RETAIL SHARES:
Issued -- Regular ............................................... 4,256,820 2,991,781
-- Distributions Reinvested .............................. 491,383 460,384
Redeemed ............................................................ (4,232,591) (1,853,051)
------------ ------------
Net Increase in Retail Shares Transactions ......................... 515,612 1,599,114
------------ ------------
GROUP RETIREMENT PLAN SHARES:
Issued -- Regular ................................................... 1,273,417 1,668,959
-- Distributions Reinvested .................................. 388,408 370,479
Redeemed ............................................................ (2,421,558) (813,119)
------------ ------------
Net Increase (Decrease) in Group Retirement Plan Shares Transactions (759,733) 1,226,319
------------ ------------
Net Increase (Decrease) in Net Assets From Capital Share Transactions (17,084,992) 7,685,834
------------ ------------
TOTAL INCREASE (DECREASE) ........................................... (20,231,471) 2,760,690
------------ ------------
NET ASSETS:
Beginning of Year ................................................... 96,126,849 93,366,159
------------ ------------
End of Year (A) ..................................................... $ 75,895,378 $ 96,126,849
------------ ------------
(A) Includes Undistributed Net Investment Income .................... $ 5,777 $ --
============ ============
</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 PERMIER PREMIER RETAIL RETAIL
SHARES SHARES SHARES SHARES SHARES SHARES
----------- ----------- ---------- ---------- --------- ---------
APRIL 1,
YEAR ENDED YEAR ENDED YEAR ENDED 1996** TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1996 1999 1998
----------- ----------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .. $ 9.57 $ 10.11 $ 10.18 $ 10.00 $ 9.57 $ 10.11
----------- ----------- ---------- ---------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income (1) ............ 0.74 0.84 0.91 0.68 0.73 0.82
Net Realized and Unrealized
Gain/(Loss) on Investments .......... (0.35) (0.48) 0.19 0.21 (0.37) (0.49)
----------- ----------- ---------- ---------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS .... 0.39 0.36 1.10 0.89 0.36 0.33
DISTRIBUTIONS:
Net Investment Income ................ (0.74) (0.86) (0.91) (0.68) (0.72) (0.83)
In Excess of Net Investment Income ... -- --+ -- -- -- --+
Net Realized Gain .................... -- (0.04) (0.26) (0.03) -- (0.04)
----------- ----------- ---------- ---------- --------- ---------
TOTAL DISTRIBUTIONS ................. (0.74) (0.90) (1.17) (0.71) (0.72) (0.87)
----------- ----------- ---------- ---------- --------- ---------
NET ASSET VALUE, END OF PERIOD ........ $ 9.22 $ 9.57 $ 10.11 $ 10.18 $ 9.21 $ 9.57
=========== =========== ========== ========== ========= =========
TOTAL RETURN (2) ...................... 4.20% 3.61% 11.22% 9.23% 3.84% 3.36%
=========== =========== ========== ========== ========= =========
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) ..... $ 66,163 $ 85,662 $ 85,151 $ 102,945 $ 6,187 $ 5,950
Ratios After Expense Waiver
and/or Reimbursement:
Expenses to Average Net Assets ....... 1.00% 1.00% 1.00% 1.00%* 1.25% 1.25%
Net Investment Income to
Average Net Assets ................. 7.72% 8.50% 8.58% 9.01%* 7.48% 8.12%
Ratios Before Expense Waiver
and/or Reimbursement:
Expenses to Average Net Assets ....... 1.15% 1.15% 1.16% 1.27%* 1.40% 1.40%
Net Investment Income to
Average Net Assets ................. 7.56% 8.35% 8.42% 8.74%* 7.32% 7.97%
Portfolio Turnover Rate ............... 103% 110% 105% 74% 103% 110%
<CAPTION>
GROUP GROUP GROUP GROUP
RETAIL RETAIL RETIREMENT RETIREMENT RETIREMENT RETIREMENT
SHARES SHARES PLAN SHARES PLAN SHARES PLAN SHARES PLAN SHARES
----------- ----------- ---------- ---------- --------- ---------
APRIL 11, APRIL 12,
YEAR ENDED 1996*** TO YEAR ENDED YEAR ENDED YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1999 1998 1997 1996
----------- ----------- ---------- ---------- --------- ---------
NET ASSET VALUE, BEGINNING OF PERIOD .. $ 10.18 $ 9.91 $ 9.57 $ 10.11 $ 10.18 $ 9.93
----------- ----------- ---------- ---------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income (1) ............ 0.84 0.62 0.72 0.80 0.85 0.62
Net Realized and Unrealized
Gain/(Loss) on Investments .......... 0.23 0.34 (0.36) (0.47) 0.22 0.32
----------- ----------- ---------- ---------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS .... 1.07 0.96 0.36 0.33 1.07 0.94
DISTRIBUTIONS:
Net Investment Income ................ (0.88) (0.66) (0.72) (0.83) (0.88) (0.66)
In Excess of Net Investment Income ... -- -- -- --+ -- --
Net Realized Gain .................... (0.26) (0.03) -- (0.04) (0.26) (0.03)
----------- ----------- ---------- ---------- --------- ---------
TOTAL DISTRIBUTIONS ................. (1.14) (0.69) (0.72) (0.87) (1.14) (0.69)
----------- ----------- ---------- ---------- --------- ---------
NET ASSET VALUE, END OF PERIOD ........ $ 10.11 $ 10.18 $ 9.21 $ 9.57 $ 10.11 $ 10.18
=========== =========== ========== ========== ========= =========
TOTAL RETURN (2) ...................... 10.97% 10.04% 3.84% 3.37% 10.96% 9.78%
=========== =========== ========== ========== ========= =========
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) ..... $ 4,697 $ 845 $ 3,545 $ 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% 1.25% 1.25%*
Net Investment Income to
Average Net Assets ................. 8.31% 8.95%* 7.49% 8.13% 8.32% 8.91%*
Ratios Before Expense Waiver
and/or Reimbursement:
Expenses to Average Net Assets ....... 1.41% 1.59%* 1.40% 1.40% 1.41% 1.55%*
Net Investment Income to
Average Net Assets ................. 8.15% 8.61%* 7.33% 7.98% 8.16% 8.61%*
Portfolio Turnover Rate ............... 105% 74% 103% 110% 105% 74%
</TABLE>
- ----------------
* 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 were:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1996
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Premier Shares ................. $ 0.02 $ 0.01 $ 0.02 $ 0.02
Retail Shares .................. $ 0.02 $ 0.01 $ 0.02 $ 0.02
Group Retirement Plan Shares ... $ 0.02 $ 0.01 $ 0.02 $ 0.02
</TABLE>
(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.
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, 1999, the Company was
comprised of three diversified portfolios: Lipper High Income Bond Fund, Lipper
U.S. Equity Fund, and Lipper Prime 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 total returns consistent with
capital preservation by investing primarily in high yield securities with
maturities of 10 years or less.
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. Net capital 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, 1999 to December 31, 1999 the Fund incurred and elected to defer until
January 1, 2000 for U.S. Federal income tax purposes net capital losses of
approximately $416,624. At December 31, 1999, the Fund had a capital loss
carryforward of approximately $2,606,137 of which $1,440,232 and $1,165,905 will
expire on December 31, 2006 and 2007, respectively.
At December 31, 1999, the cost of investments and unrealized appreciation
(depreciation) of investments for Federal income tax purposes were:
COST APPRECIATION (DEPRECIATION) NET DEPRECIATION
- --------------- --------------- --------------- ---------------
$76,762,540 $409,842 $(2,738,884) $(2,329,042)
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
marked-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.
15
<PAGE>
LIPPER HIGH INCOME BOND FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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. Those differences are primarily due to differing book and
tax treatments for deferred organization costs, post-October losses and losses
due to wash sales transactions.
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 net realized gain(loss) and paid in capital. Such
adjustments are not included for the purpose of calculating the financial
highlights.
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.
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
RETIREMENT
PREMIER SHARES RETAIL SHARES 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
16
<PAGE>
LIPPER HIGH INCOME BOND FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 31,1999, 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
--------------- --------------
$85,102,309 $92,855,025
There were no long-term purchases or sales 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. CAPITAL STOCK: Capital share transactions for the Fund, by class of
shares, were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
---------- ----------
PREMIER SHARES:
Issued -- Regular ......................... 1,093,926 1,673,871
-- Distributions Reinvested ........ 499,280 569,763
Redeemed .................................. (3,360,531) (1,716,828)
---------- ----------
Net Increase (Decrease) ................... (1,767,325) 526,806
---------- ----------
RETAIL SHARES:
Issued -- Regular ......................... 444,466 296,524
-- Distributions Reinvested ........ 51,985 46,722
Redeemed .................................. (446,644) (186,151)
---------- ----------
Net Increase .............................. 49,807 157,095
---------- ----------
GROUP RETIREMENT PLAN SHARES:
Issued -- Regular ......................... 134,102 167,761
-- Distributions Reinvested ........ 41,101 37,540
Redeemed .................................. (262,245) (81,410)
---------- ----------
Net Increase (Decrease) ................... (87,042) 123,891
---------- ----------
17
<PAGE>
LIPPER HIGH INCOME BOND FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
I. OTHER: At December 31,1999, 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 ................................. 7 56.7%
Retail Shares ................................. 4 25.6%
Group Retirement Shares ........................ 3 86.9%
Transactions by shareholders having a significant ownership percentage of
the 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.
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.
18
<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, 1999, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the periods presented, in
conformity with accounting principles generally accepted in the United States.
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 auditing standards generally accepted in the United States, 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, 1999 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 15, 2000
19
<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
DISTRIBUTOR Lipper & Company, L.P.
- --------------------------------------- 101 Park Avenue, 6th Floor
New York, NY 10178
ADMINISTRATOR AND Chase Global Funds Services Company
TRANSFER AGENT 73 Tremont Street, 9th Floor
- --------------------------------------- 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
For more complete information concerning The Lipper Funds, Inc., including a
prospectus, please call 1-800-LIPPER9. The Lipper High Income Bond Fund invests
primarily in high yield bonds, which entail greater risks than investment grade
bonds, such as reduced liquidity and the possibility of default. Please read the
prospectus carefully before investing.
Lipper & Company, L.P., Distributor. The Lipper Funds, Inc., is not affiliated
with Lipper Inc.
<PAGE>
----------------------
THE LIPPER FUNDS, INC.
----------------------
LIPPER U.S. EQUITY FUND
Annual Report
=======================================================
December 31, 1999
<PAGE>
TABLE OF CONTENTS
Shareholder's Letter ..................................... 1
Portfolio of Investments ................................. 4
Statement of Assets and Liabilities ...................... 6
Statement of Operations .................................. 7
Statement of Changes in Net Assets ....................... 8
Financial Highlights ..................................... 9
Notes to Financial Statements ............................ 10
Report of Independent Accountants ........................ 13
Tax Information .......................................... 13
<PAGE>
THE LIPPER FUNDS, INC. ANNUAL REPORT
LIPPER U.S. EQUITY FUND DECEMBER 31, 1999
Dear Shareholder:
We are pleased to present the Annual Report for the Lipper U.S. Equity Fund
for the year ended December 31, 1999. The Lipper U.S. Equity Fund is one of
three investment portfolios, together with the Lipper Prime Europe Equity Fund
and the Lipper High Income Bond Fund, which comprise The Lipper Funds, Inc. This
report presents the financial statements and performance review of the Lipper
U.S. Equity Fund for the year ended December 31, 1999.
The Lipper U.S. Equity Fund (the "Fund") seeks to achieve long-term capital
appreciation while preserving capital by investing in a diversified portfolio of
common stocks of companies with market capitalizations in excess of $500
million. The Fund employs a value-oriented investment strategy and invests in
stocks that the investment adviser believes are trading below their inherent
values.
1999 was a difficult year for value managers. Although major stock markets
reached record highs during the year, the markets were driven by a small
fraction of publicly traded stocks. Particularly, internet-related and other
technology stocks served as the primary catalyst for the phenomenal 86.1% rise
in the Nasdaq composite index, 27.2% rise in the Dow Jones Industrial Average
and 21.0% rise in the Standard and Poor's 500 index. Although many of the
companies fueling the surge never earned a penny in profits and are not expected
to do so in the near future, the market continued to support higher and higher
valuations for these companies. Traditional valuation methods fell by the
wayside as market participants embraced "new economy" stocks. However, the
overall market did not experience the same euphoria as the technology sector.
During 1999, 63% of the stocks traded on the New York Stock Exchange fell, and
as many Nasdaq stocks fell as gained. Obviously, this situation created a
challenging environment for value-seeking stockpickers.
The Lipper U.S. Equity Fund Premier Shares generated a net return of 10.25%
during 1999, outperforming the 6.59% average total return generated by the 592
large capitalization value funds tracked by Morningstar, Inc. for the 12-month
period ending December 31, 1999. This return ranked the Fund in the top 30% of
all large capitalization value funds tracked by Morningstar for the year.*
During 1999, the Fund's adviser focused on identifying undervalued securities
that offer attractive earnings growth prospects. The adviser increased certain
existing positions and made several new investments during the year, reducing
the Fund's unusually large cash position at December 31, 1998 to 2% as of
December 31, 1999. Particularly, the adviser increased the Fund's exposure to
the information technology sector, seeking to take advantage of renewed growth
in companies that focus on business-to-business e-commerce solutions. In
addition, the adviser sought to take advantage of weaknesses in the
pharmaceutical, financial services and steel industries.
During 2000, we expect continued growth in the U.S. economy fueled by low
unemployment, strong consumer confidence and global expansion. Although the
Federal Reserve may raise interest rates during 2000, we do not expect
significant interest rate consequences considering that intermediate and long
bond yields have increased approximately 200 basis points and 150 basis points,
respectively, since December 1998. Notwithstanding our expectation of continued
economic growth and a relatively stable interest rate environment, we expect the
U.S. stock market to experience significant volatility during the year as
certain stocks with unusually high valuations (by historical standards) undergo
a correction. Further, we anticipate a rotation back into companies that trade
at more reasonable levels relative to their actual earnings and cash flow. Such
a rotation should benefit value funds such as the Lipper U.S. Equity Fund.
- ----------
* Past performance is no guarantee of future results. The Morningstar, Inc.
ranking is based upon total return and compares the Lipper U.S. Equity Fund
Premier Shares with all funds in the same Morningstar category. This ranking
may change monthly and compares a fund's calendar-year total returns to its
Morningstar category's total returns for the same period. Fee waivers and
reimbursements were in effect during 1999, without which total returns would
have been lower.
1
<PAGE>
We at Lipper & Company 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 appreciate your
participation in The Lipper Funds, Inc.
Sincerely,
/s/ KENNETH LIPPER
---------------------------------------
Kenneth Lipper
President and Chairman of the Board
2
<PAGE>
LIPPER U.S. EQUITY FUND PERFORMANCE
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED DECEMBER 31, 1999
1 YEAR SINCE INCEPTION*
------ ----------------
Premier Shares 10.25% 14.95%
Retail Shares 10.01% 14.78%
Group Retirement Plan Shares 9.96% 14.78%
LIPPER U.S. EQUITY FUND--PREMIER SHARES*
Growth of $10,000 Invested in the Fund's Premier Shares vs.
Standard & Poor's 500 Index**
[GRAPHICAL REPRESENTATION OF DATA CHART]
1/2/96 12/31/96 12/31/97 12/31/98 12/31/99
------ -------- -------- -------- --------
Lipper U.S. Equity Fund
Premier Shares ........ 10,000 11,981 14,253 15,870 17,496
S&P 500 Index ........... 10,000 12,296 16,398 21,105 25,551
* Past performance is no guarantee of future results. The net asset value
and investment return of the Lipper U.S. Equity Fund (the "Fund") will
fluctuate, and the value of the Fund's shares may be worth more or less than
original cost upon redemption. The Fund's Premier Shares were introduced on
January 2, 1996 and the Retail and Group Retirement Plan Shares were introduced
on January 4, 1996. Performance for the Retail and Group Retirement Plan Shares
differs from the Fund's Premier Shares due to the different inception dates and
class specific expenses associated with the Retail and Group Retirement Plan
Shares. Fee waivers and reimbursements were in effect for the Fund since
inception, without which total returns would have been lower. Total returns
include the reinvestment of income, dividends and capital gains. The minimum
investment for Premier Shares is $1,000,000.
** The chart above illustrates the growth of $10,000 invested in the Fund's
Premier Shares versus $10,000 invested in the Standard & Poor's 500 Index (the
"Index") for the period January 2, 1996 (commencement of the Fund's operations)
through December 31, 1999. The Index is an unmanaged index comprised of 400
industrial, 40 financial, 40 utilities and 20 transportation stocks. The Index
does not reflect fees or expenses required to be reflected in the Fund's returns
and if such fees and expenses were reflected, they would reduce the returns of
the Index. The Index has been adjusted to reflect the reinvestment of dividends.
One cannot invest directly in the Index.
3
<PAGE>
LIPPER U.S. EQUITY FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1999
SHARES VALUE
------ ----------
COMMON STOCKS (94.4%)
AEROSPACE/DEFENSE (5.4%)
General Dynamics Corp. .......................... 24,500 $1,292,375
----------
AGRICULTURAL BIOTECH//LIFE SCIENCES (11.0%)
E.I. du Pont de Nemours and Company ............. 21,000 1,383,375
Monsanto Company ................................ 34,100 1,214,813
----------
2,598,188
----------
BASIC MATERIALS (6.6%)
Nucor Corp. ..................................... 28,700 1,573,119
----------
BEVERAGES & BOTTLING (5.8%)
PepsiCo, Inc. ................................... 39,000 1,374,750
----------
DIVERSIFIED MANUFACTURING (6.8%)
Tyco International, Ltd. ........................ 41,500 1,613,312
----------
FINANCIAL SERVICES (10.3%)
First Union Corp. ............................... 36,000 1,181,250
Household International, Inc. ................... 33,900 1,262,775
----------
2,444,025
----------
FOOD & FOOD SERVICES (5.7%)
*Safeway, Inc. .................................. 38,000 1,351,375
----------
INFORMATION TECHNOLOGY (20.8%)
*J. D. Edwards & Company ........................ 90,700 2,709,662
SAP AG ADR ...................................... 42,600 2,217,862
----------
4,927,524
----------
OFFICE EQUIPMENT (6.0%)
Pitney Bowes, Inc. .............................. 29,700 1,434,881
----------
PHARMACEUTICALS (9.8%)
*Alza Corp., Class A ............................ 37,300 1,291,513
American Home Products Corp. .................... 26,000 1,025,375
----------
2,316,888
----------
TECHNOLOGY/COMPUTERS (6.2%)
Compaq Computer Corp. ........................... 54,000 1,461,375
----------
TOTAL COMMON STOCKS (COST $19,678,935) .............. 22,387,812
----------
FACE AMOUNT
-----------
CONVERTIBLE BONDS (3.3%)
RETIREMENT (3.3%)
Sunrise Assisted Living, 5.50%, 06/15/02
(Cost $798,240) ............................... $1,000,000 787,500
----------
SHARES
-----------
SHORT-TERM INVESTMENTS (1.8%)
Vista Prime Money Market (Cost $429,892) ........ 429,892 429,892
----------
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
LIPPER U.S. EQUITY FUND
PORTFOLIO OF INVESTMENTS--(CONTINUED)
DECEMBER 31, 1999
NO. OF
CONTRACTS VALUE
--------- ----------
PURCHASED OPTIONS (0.1%)
*Alza Corp. Put Option expiring 01/31/00,
strike price $30 (Cost $61,731) ............... 373 $ 16,319
-----------
TOTAL INVESTMENTS (99.6%) (COST $20,968,798) ........ 23,621,523
OTHER ASSETS AND LIABILITIES (0.4%) ................. 106,565
-----------
NET ASSETS (100.0%) ................................. $23,728,088
===========
- ----------
* Non-Income Producing Security
ADR -- American Depositary Receipt
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
LIPPER U.S. EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
ASSETS:
Investments, at value (Cost $20,968,798) .................... $23,621,523
Cash ........................................................ 129,629
Deferred Organization Costs ................................. 18,851
Dividends Receivable ........................................ 16,628
Interest Receivable ......................................... 9,851
Prepaid Assets .............................................. 1,308
-----------
TOTAL ASSETS ............................................ 23,797,790
-----------
LIABILITIES:
Shareholder Servicing Fees Payable--Group
Retirement Plan Shares .................................... 13,577
Administrative Fees Payable ................................. 12,537
Investment Advisory Fees Payable ............................ 9,950
Distribution Fees Payable ................................... 8,852
Directors' Fees Payable ..................................... 2,158
Custodian Fees Payable ...................................... 1,043
Other Liabilities ........................................... 21,585
-----------
TOTAL LIABILITIES ....................................... 69,702
-----------
NET ASSETS .................................................... $23,728,088
===========
NET ASSETS CONSIST OF:
Paid in Capital ............................................. $20,806,484
Accumulated Net Realized Gain ............................... 268,879
Unrealized Appreciation on Investments ...................... 2,652,725
-----------
$23,728,088
===========
PREMIER SHARES:
Net Assets .................................................. $19,425,880
Shares Issued and Outstanding
($.001 par value) (Authorized 3,333,333,333) .............. 1,529,610
Net Asset Value, Offering and Redemption Price Per Share .... $ 12.70
===========
RETAIL SHARES:
Net Assets .................................................. $ 565,317
Shares Issued and Outstanding
($.001 par value) (Authorized 3,333,333,333) ............... 44,618
Net Asset Value, Offering and Redemption Price Per Share .... $ 12.67
===========
GROUP RETIREMENT PLAN SHARES:
Net Assets .................................................. $ 3,736,891
Shares Issued and Outstanding
($.001 par value) (Authorized 3,333,333,333) .............. 295,926
Net Asset Value, Offering and Redemption Price Per Share .... $ 12.63
===========
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
LIPPER U.S. EQUITY FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
INVESTMENT INCOME:
Dividends ........................................... $ 148,814
Interest ............................................ 86,844
----------
TOTAL INCOME .................................... 235,658
----------
EXPENSES:
Investment Advisory Fees
Basic Fee ......................................... $229,263
Less: Fee Waived .................................. (110,370) 118,893
--------
Administrative Fees ................................. 78,306
Registration and Filing Fees ........................ 30,860
Shareholder Reports ................................. 21,769
Amortization of Organization Costs .................. 18,798
Professional Fees ................................... 10,246
Servicing Fees--Group Retirement Plan Shares ....... 9,264
Directors' Fees ..................................... 7,036
Custodian Fees ...................................... 3,130
Distribution Fees--Retail Shares ................... 2,778
Other Expenses ...................................... 7,477
----------
Total Expenses .................................. 308,557
----------
NET INVESTMENT LOSS ............................. (72,899)
----------
NET REALIZED GAIN FROM:
Investments Sold .................................... 1,414,779
----------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION:
Investments ......................................... 1,161,737
----------
TOTAL NET REALIZED GAIN AND NET CHANGE IN
UNREALIZED APPRECIATION/DEPRECIATION ................ 2,576,516
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .. $2,503,617
==========
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
LIPPER U.S. EQUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
----------- -----------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS:
Net Investment Income (Loss) ................................................. $ (72,899) $ 260,003
Net Realized Gain ............................................................ 1,414,779 1,924,964
Net Change in Unrealized Appreciation/Depreciation ........................... 1,161,737 (94,477)
----------- -----------
Net Increase in Net Assets Resulting from Operations ..................... 2,503,617 2,090,490
----------- -----------
DISTRIBUTIONS:
PREMIER SHARES:
From Net Investment Income ................................................... -- (228,137)
In Excess of Net Investment Income ........................................... -- (16,622)
From Net Realized Gains ...................................................... (2,002,981) (1,153,473)
RETAIL SHARES:
From Net Investment Income ................................................... -- (10,186)
In Excess of Net Investment Income ........................................... -- (514)
From Net Realized Gains ...................................................... (89,896) (66,919)
GROUP RETIREMENT PLAN SHARES:
From Net Investment Income ................................................... -- (23,517)
In Excess of Net Investment Income ........................................... -- (8,718)
From Net Realized Gains ...................................................... (333,751) (151,784)
----------- -----------
Total Distributions ...................................................... (2,426,628) (1,659,870)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
PREMIER SHARES:
Issued--Regular .............................................................. 10,170,894 9,755,618
--Distributions Reinvested ............................................. 1,992,949 1,391,142
Redeemed ..................................................................... (14,934,048) (3,608,698)
----------- -----------
Net Increase (Decrease) in Premier Shares Transactions ....................... (2,770,205) 7,538,062
----------- -----------
RETAIL SHARES:
Issued--Regular .............................................................. 199,190 804,846
--Distributions Reinvested ............................................. 89,791 76,632
Redeemed ..................................................................... (962,389) (481,807)
----------- -----------
Net Increase (Decrease) in Retail Shares Transactions ........................ (673,408) 399,671
----------- -----------
GROUP RETIREMENT PLAN SHARES:
Issued--Regular .............................................................. 935,353 1,587,243
--Distributions Reinvested ............................................. 333,751 184,019
Redeemed ..................................................................... (1,079,942) (222,970)
----------- -----------
Net Increase in Group Retirement Plan Shares Transactions .................... 189,162 1,548,292
----------- -----------
Net Increase (Decrease) in Net Assets From Capital Share Transactions ........ (3,254,451) 9,486,025
----------- -----------
TOTAL INCREASE (DECREASE) ................................................ (3,177,462) 9,916,645
----------- -----------
NET ASSETS:
Beginning of Year. ........................................................... 26,905,550 16,988,905
----------- -----------
End of Year .................................................................. $23,728,088 $26,905,550
=========== ===========
The accompanying notes are an integral part of the financial statements.
</TABLE>
8
<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 PREMIER RETAIL
SHARES SHARES SHARES SHARES SHARES
----------- ------------ ----------- ------------ ------------
JANUARY 2
YEAR ENDED YEAR ENDED YEAR ENDED 1996** TO YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1996 1999
----------- ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .............. $12.62 $12.04 $11.38 $10.00 $12.62
------- ------- ------- ------- ----
Income From Investment Operations:
Net Investment Income (Loss) (1) ................ (0.03) 0.13 0.16 0.18 (0.14)
Net Realized and Unrealized Gain
on Investments ................................ 1.25 1.26 1.96 1.81 1.33
------- ------- ------- ------- ----
Total From Investment Operations .......... 1.22 1.39 2.12 1.99 1.19
------- ------- ------- ------- ----
Distributions:
Net Investment Income ........................... -- (0.14) (0.16) (0.19) --
In Excess of Net Investment Income .............. -- --+ -- -- --
Net Realized Gain ............................... (1.14) (0.67) (1.30) (0.34) (1.14)
In Excess of Net Realized Gain .................. -- -- -- (0.08) --
------- ------- ------- ------- ----
Total Distributions ....................... (1.14) (0.81) (1.46) (0.61) (1.14)
------- ------- ------- ------- ----
NET ASSET VALUE, END OF PERIOD .................... $12.70 $12.62 $12.04 $11.38 $12.67
======= ======= ======= ======= ====
TOTAL RETURN (2) .................................. 10.25% 11.35% 18.96% 19.81% 10.01%
======= ======= ======= ======= ====
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) ................. $19,426 $22,088 $14,203 $15,098 $565
Ratios After Expense Waiver and/or
Reimbursement:
Expenses to Average Net Assets ................ 1.10% 1.10% 1.10% 1.10%* 1.35%
Net Investment Income (Loss) to Average
Net Assets .................................. (0.22)% 1.07% 1.24% 1.68%* (0.58)%
Ratios Before Expense Waiver and/or
Reimbursement:
Expenses to Average Net Assets ................ 1.51% 1.51% 1.76% 2.28%* 1.76%
Net Investment Income (Loss) to Average
Net Assets .................................. (0.63)% 0.66% 0.58% 0.50%* (1.12)%
Portfolio Turnover Rate ........................... 123% 204% 145% 117% 123%
<CAPTION>
GROUP GROUP
RETIREMENT RETIREMENT
RETAIL RETAIL RETAIL PLAN PLAN
SHARES SHARES SHARES SHARES SHARES
------------ ------------ ------------ ----------- ------------
JANUARY 4
YEAR ENDED YEAR ENDED 1996** TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1999 1998
------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .............. $12.03 $11.38 $10.00 $12.59 $12.01
------ ---- ---- ------ ------
Income From Investment Operations:
Net Investment Income (Loss) (1) ................ 0.11 0.13 0.11 (0.06) 0.09
Net Realized and Unrealized Gain
on Investments ................................ 1.26 1.95 1.86 1.24 1.28
------ ---- ---- ------ ------
Total From Investment Operations .......... 1.37 2.08 1.97 1.18 1.37
------ ---- ---- ------ ------
Distributions:
Net Investment Income ........................... (0.11) (0.13) (0.17) -- (0.12)
In Excess of Net Investment Income .............. --+ -- -- -- --+
Net Realized Gain ............................... (0.67) (1.30) (0.34) (1.14) (0.67)
In Excess of Net Realized Gain .................. -- -- (0.08) -- --
------ ---- ---- ------ ------
Total Distributions ....................... (0.78) (1.43) (0.59) (1.14) (0.79)
------ ---- ---- ------ ------
NET ASSET VALUE, END OF PERIOD .................... $12.62 $12.03 $11.38 $12.63 $12.59
====== ==== ==== ====== ======
TOTAL RETURN (2) .................................. 11.15% 18.58% 19.62% 9.96% 11.16%
====== ==== ==== ====== ======
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) ................. $1,308 $899 $613 $3,737 $3,510
Ratios After Expense Waiver and/or
Reimbursement:
Expenses to Average Net Assets ................ 1.35% 1.35% 1.35%* 1.35% 1.35%
Net Investment Income (Loss) to Average
Net Assets .................................. 0.80% 0.96% 1.31%* (0.76)% 0.87%
Ratios Before Expense Waiver and/or
Reimbursement:
Expenses to Average Net Assets ................ 1.76% 2.01% 2.75%* 1.76% 1.76%
Net Investment Income (Loss) to Average
Net Assets .................................. 0.39% 0.30% (0.09)%* (1.12)% 0.46%
Portfolio Turnover Rate ........................... 204% 145% 117% 123% 204%
<CAPTION>
GROUP GROUP
RETIREMENT RETIREMENT
PLAN PLAN
SHARES SHARES
------------- ------------
JANUARY 4,
YEAR ENDED 1996*** TO
DECEMBER 31, DECEMBER 31,
1997 1996
------------- ------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .............. $11.38 $10.00
------ ----
Income From Investment Operations:
Net Investment Income (Loss) (1) ................ 0.08 0.07
Net Realized and Unrealized Gain
on Investments ................................ 2.00 1.91
------ ----
Total From Investment Operations .......... 2.08 1.98
------ ----
Distributions:
Net Investment Income ........................... (0.15) (0.18)
In Excess of Net Investment Income .............. -- --
Net Realized Gain ............................... (1.30) (0.34)
In Excess of Net Realized Gain .................. -- (0.08)
------ ----
Total Distributions ....................... (1.45) (0.60)
------ ----
NET ASSET VALUE, END OF PERIOD .................... $12.01 $11.38
====== ====
TOTAL RETURN (2) .................................. 18.55% 19.69%
====== ====
RATIOS AND SUPPLEMENTAL DATA:
Net Assets, End of Period (000's) ................. $1,887 $452
Ratios After Expense Waiver and/or
Reimbursement:
Expenses to Average Net Assets ................ 1.35% 1.35%*
Net Investment Income (Loss) to Average
Net Assets .................................. 0.89% 1.29%*
Ratios Before Expense Waiver and/or
Reimbursement:
Expenses to Average Net Assets ................ 2.01% 2.39%*
Net Investment Income (Loss) to Average
Net Assets .................................. 0.25% 0.25%*
Portfolio Turnover Rate ........................... 145% 117%
</TABLE>
- ----------
* 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:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Premier Shares ......................... $0.06 $0.05 $0.08 $0.13
Retail Shares .......................... $0.10 $0.06 $0.09 $0.12
Group Retirement Plan Shares ........... $0.05 $0.04 $0.06 $0.06
</TABLE>
(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.
The accompanying notes are an integral part of the financial statements.
9
<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, 1999, the Company was
comprised of three diversified portfolios: Lipper High Income Bond Fund, Lipper
U.S. Equity Fund, and Lipper Prime 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. The Lipper U.S. Equity Fund (the "Fund") commenced
investment operations on January 2, 1996.
The Lipper U.S. Equity Fund seeks capital appreciation by investing
primarily in a diversified portfolio of common stocks of U.S. issuers with
market capitalizations 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, 1999, the cost of investments and unrealized appreciation
(depreciation) of investments for Federal income tax purposes were:
NET
COST APPRECIATION (DEPRECIATION) APPRECIATION
----------- ------------ -------------- ------------
$20,968,798 $3,271,939 $(619,214) $2,652,725
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.
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
10
<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.
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.
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
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
11
<PAGE>
lIPPER U.S. EQUITY FUND
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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, 1999, 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
----------- -----------
$29,473,058 $21,692,202
There were no purchases or sales of long-term U.S. Government securities.
G. CAPITAL STOCK: Capital share transactions for the Fund, by class of shares,
were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998
----------------- -----------------
PREMIER SHARES:
Issued--Regular .......................... 812,199 744,322
Distributions Reinvested .......... 162,762 105,483
Redeemed ................................. (1,195,698) (279,463)
---------- --------
Net Increase (Decrease) .................. (220,737) 570,342
---------- --------
RETAIL SHARES:
Issued--Regular .......................... 15,687 60,005
Distributions Reinvested .......... 7,349 5,801
Redeemed ................................. (82,052) (36,924)
---------- --------
Net Increase (Decrease) .................. (59,016) 28,882
---------- --------
GROUP RETIREMENT PLAN SHARES:
Issued--Regular ......................... 76,595 124,270
Distributions Reinvested ......... 27,399 14,102
Redeemed ................................ (86,861) (16,734)
---------- --------
Net Increase ............................ 17,133 121,638
---------- --------
H. OTHER: At December 31,1999, the percentage of total shares outstanding held
by record shareholders owning 10% or greater of the aggregate net assets of the
Fund was as follows:
NO. OF %
SHAREHOLDERS OWNERSHIP
------------ ---------
Premier Shares ........................... 5 64.5%
Retail Shares ............................ 10 70.9%
Group Retirement Shares .................. 3 99.9%
Transactions by shareholders holding a significant ownership percentage of
the Fund can have an impact on other shareholders of the Fund.
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.
12
<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, 1999, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the periods presented, in
conformity with accounting principles generally accepted in the United States.
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 auditing standards generally accepted in the United States, 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, 1999 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 15, 2000
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
Lipper U.S. Equity Fund hereby designates $1,152,904 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 1999, 14.42% of the distribution taxable
as ordinary income, as reported on Form 1099-DIV, qualifies for the dividends
received deduction for corporations.
13
<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
DISTRIBUTOR Lipper & Company, L.P.
- ------------------------- 101 Park Avenue, 6th floor
New York, NY 10178
ADMINISTRATOR AND Chase Global Funds Services Company
TRANSFER AGENT 73 Tremont Street, 9th floor
- ------------------------- 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
For more complete information concerning The Lipper Funds, Inc., including a
prospectus, please call 1-800-LIPPER9. Please read the prospectus carefully
before investing.
Lipper & Company, L.P., Distributor. The Lipper Funds, Inc. is not affiliated
with Lipper Inc.
<PAGE>
----------------------
THE LIPPER FUNDS, INC.
----------------------
LIPPER PRIME EUROPE EQUITY FUND
Annual Report
---------------------------------------------------------
December 31, 1999
<PAGE>
-----------------
TABLE OF CONTENTS
-----------------
Shareholder's Letter ................................. 1
Portfolio of Investments ............................. 4
Statement of Assets and Liabilities .................. 8
Statement of Operations .............................. 9
Statement of Changes in Net Assets ................... 10
Financial Highlights ................................. 11
Notes to Financial Statements ........................ 12
Report of Independent Accountants .................... 16
Tax Information ...................................... 16
<PAGE>
THE LIPPER FUNDS, INC. ANNUAL REPORT
LIPPER PRIME EUROPE EQUITY FUND DECEMBER 31, 1999
Dear Shareholder:
We are pleased to present the Annual Report for the Lipper Prime Europe
Equity Fund for the year ended December 31, 1999. The Lipper Prime Europe Equity
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.
This report presents the financial statements and performance review of the
Lipper Prime Europe Equity Fund for the year ended December 31, 1999.
The Lipper Prime Europe Equity Fund (the Fund) seeks long-term capital
appreciation through investing in a diversified portfolio of widely traded,
medium and large capitalization Western 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.
Early in 1999, economic forecasts predicted an accelerating trend in
Europe: a slow start in the first half of the year to be followed by a livelier
second half. Actually, European economies were somewhat weaker than expected
during the first half of the year. Notwithstanding the successful launch of the
Euro, some unexpected factors dampened the short-term economic prospects of the
region. First among these was the war in Kosovo. Besides creating uncertainty
and stress, the war highlighted the need for stronger political bodies and more
effective policymaking at the European level. At the individual country level,
governments had to add the warfare in Kosovo to their already challenging
agendas aimed at structural reform of the labor markets, fiscal systems, pension
systems and welfare systems. As a result of this setback, the region experienced
slower economic growth than anticipated, causing the European Central Bank to
reduce its benchmark refinancing rate by 0.50% to 2.5% in early April 1999. The
Euro also suffered as a result of the war in Kosovo and economic weakness across
the region, declining 12% against the US dollar during the first half of the
year.
In late April 1999, prospects of peace in Kosovo, combined with signs of
economic improvement in Europe, renewed expectations of stronger growth in the
second half of 1999. Particularly, expectations of a cyclical recovery fueled
the markets, with cyclical stocks grossly outperforming growth stocks between
April and July. Between July and September, the excessive euphoria surrounding
cyclicals declined, but by October 1999, a burst of new enthusiasm appeared for
internet-related and other technology stocks. Similar to the United States,
market participants exuberantly embraced new economy stocks, pushing the markets
higher and higher.
On a Euro denominated basis, the Lipper Prime Europe Equity Fund Premier
Shares generated a net return of 34% for the year ended December 31, 1999.
However, as a result of the significant decline of the Euro against the US
dollar during 1999, the Fund's Premier Shares generated a net return of 15.7% on
a dollar denominated basis. Throughout 1999, the Fund was highly diversified,
with approximately 60-70 securities representing approximately twenty industries
invested in twelve 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 continued integration of the region
and industry consolidation) 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. Compared to the MSCI Europe 15 Index, the Fund overweighted the
information technology, telecommunications, media, pharmaceutical and consumer
cyclical (retail and consumer goods) sectors.
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. During 1999,
the Fund was relatively neutral with respect to this allocation. Given our
outlook for
1
<PAGE>
2000 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 2000 is positive. Gross domestic product is
expected to grow approximately 3% (up from 2.1% in 1999), fueled by substantial
increases in fixed investments, moderate increases in private consumption and
increases in exports (resulting from global expansion). We expect this economic
growth to have a positive impact on corporate earnings and to boost the European
markets. In addition, stock prices should benefit from the plethora of mergers,
acquisitions and restructurings taking place across the region and the expected
efficiencies resulting therefrom. After falling 14% against the US Dollar in
1999, the Euro has a strong potential of appreciating in 2000 as well. Based
upon these factors plus current valuations across continental Europe, we believe
investing in the region is extremely attractive on both an absolute and a
relative basis.
Given our current outlook for Europe, we believe the prospects for Lipper
Prime Europe Equity Fund in 2000 are strong. The Fund is well positioned in
growth stocks, which should benefit from the expected acceleration in internal
consumption and the opportunities stemming from the structural changes taking
place in European companies. The Lipper Prime 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 appreciate your
participation in The Lipper Funds, Inc.
Sincerely,
/s/ KENNETH LIPPER
-----------------------------------
KENNETH LIPPER
President and Chairman of the Board
2
<PAGE>
LIPPER PRIME EUROPE EQUITY FUND PERFORMANCE
(Formerly Prime Lipper Europe Equity Fund)
----------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS*
FOR PERIODS ENDED DECEMBER 31, 1999
----------------------------------------------------------------
SINCE
1 YEAR 5 YEAR INCEPTION
----------------------------------------------------------------
PREMIER SHARES 15.70% 22.22% 15.27%
----------------------------------------------------------------
RETAIL SHARES 15.54% 22.02% 15.16%
----------------------------------------------------------------
GROUP RETIREMENT PLAN SHARES 15.47% 22.04% 15.16%
----------------------------------------------------------------
LIPPER PRIME EUROPE EQUITY FUND--PREMIER SHARES*
Growth of $10,000 Invested in the Fund's
Premier Shares vs. MSCI Europe 15 Index**
<TABLE>
[GRAPHICAL REPRESENTATION OF DATA CHART]
<CAPTION>
1/13/92 12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/97 12/31/99
------- -------- -------- -------- --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Lipper Prime Europe Equity
Fund Premier Shares ..... 10,000 9,750 11,632 11,426 14,073 17,158 20,390 26,973 31,208
MSCI Europe 15 Index....... 10,000 9,745 12,648 12,986 15,859 19,280 23,946 30,867 35,874
</TABLE>
* Past performance is no guarantee of future results. The net asset value
and investment return of the Lipper Prime Europe Equity Fund (the "Fund") will
fluctuate, and the value of the Fund's shares may be worth more or less than
original cost upon redemption. The performance information presented reflects
the performance of the Fund's predecessor partnership for the period January 13,
1992 (commencement of the predecessor partnership's operations) through March
31, 1996. On April 1, 1996, the assets of the Fund's predecessor partnership
were exchanged for the Fund's Premier Shares. The investment policies,
objectives, guidelines and restrictions of the Fund are in all material respects
equivalent to those of its predecessor partnership. As a mutual fund registered
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 Act and the Code,
its investment performance may have been adversely affected. Fee waivers and
reimbursements were in effect for the Fund during 1996, without which total
returns would have been lower. Total returns include the reinvestment of income,
dividends and capital gains. European investments involve currency and other
risks, which may also include political and market risks. The minimum investment
for Premier Shares is $1,000,000.
The Fund's Retail and Group Retirement Plan Shares were introduced on April
11, 1996 and April 12, 1996, respectively. Performance for each of the Retail
and Group Retirement Plan Shares reflects the performance of the Fund's
predecessor partnership for the period January 13, 1992 through March 31, 1996
and the Fund's Premier Shares for the period April 1, 1996 through April 11,
1996 and April 12, 1996, respectively. Performance for each of the Retail and
Group Retirement Plan Shares differs from the Fund's Premier Shares due to the
different inception dates and class specific expenses associated with the Retail
and Group Retirement Plan Shares.
** The chart above illustrates the growth of $10,000 invested in the Fund's
Premier Shares versus $10,000 invested in the Morgan Stanley Capital
International ("MSCI") Europe 15 Index for the period January 13, 1992
(commencement of the Fund's predecessor partnership's operations) through
December 31, 1999. The MSCI Europe 15 Index (the "Index") is an unmanaged index
comprised of stocks from fifteen Western European countries. The Index does not
reflect fees or expenses required to be reflected in the Fund's returns, and if
such fees and expenses were reflected, they would reduce the returns of the
Index. The Index has been adjusted to include the reinvestment of dividends. One
cannot invest directly in an unmanaged Index.
3
<PAGE>
LIPPER PRIME EUROPE EQUITY FUND
(FORMERLY PRIME LIPPER EUROPE EQUITY FUND)
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1999
SHARES VALUE
-------- ------------
COMMON AND PREFERRED STOCKS (92.4%)
BELGIUM (1.3%)
Credit Communal Holding de Belique-DEXIA 13,000 $ 2,073,255
-----------
DENMARK (0.4%)
Bang & Olufsen Holding A/S ............. 17,000 618,232
-----------
FINLAND (4.9%)
Nokia Oyj .............................. 35,080 6,329,527
Tietoenator Oyj ........................ 23,000 1,410,746
-----------
7,740,273
-----------
FRANCE (13.6%)
Axa .................................... 21,100 2,927,236
Cap Gemini Sogeti ...................... 9,888 2,497,746
Carrefour S.A .......................... 17,000 3,120,157
Dassault Systemes S.A. ................. 37,000 2,399,635
Grand Optical Photoservice ............. 70,000 2,083,279
Hermes International ................... 12,000 1,801,907
Sidel S.A. ............................. 14,000 1,438,438
Technip S.A. ........................... 16,000 1,632,702
Total Fina S.A., B Shares .............. 27,020 3,588,727
-----------
21,489,827
-----------
GERMANY (13.6%)
Adidas-Salomon AG ...................... 21,500 1,605,587
Allianz Holding AG ..................... 11,000 3,677,289
Bayer AG ............................... 64,000 3,015,206
Bayerische Motoren Werke AG ............ 58,120 1,773,994
Deutsche Telekom AG .................... 92,000 6,441,595
Porsche AG Preferred ................... 600 1,635,910
Preussag AG ............................ 38,000 2,125,480
Wella AG Preferred ..................... 56,300 1,241,567
-----------
21,516,628
-----------
IRELAND (1.6%)
Bank of Ireland ........................ 70,000 554,325
CRH plc ................................ 50,000 1,067,551
*Ryanair Holding plc .................... 90,000 956,285
-----------
2,578,161
-----------
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
LIPPER PRIME EUROPE EQUITY FUND
(FORMERLY PRIME LIPPER EUROPE EQUITY FUND)
PORTFOLIO OF INVESTMENTS - (CONTINUED)
DECEMBER 31, 1999
SHARES VALUE
-------- -----------
ITALY (5.6%)
Alleanza Assicurazioni S.p.A. .............. 74,900 $ 909,212
Banca Popolare di Bergamo S.p.A. ........... 47,300 1,088,610
Bulgari S.p.A. ............................. 110,000 983,551
ENI S.p.A. ................................. 274,190 1,500,664
Gewiss S.p.A. .............................. 115,000 668,598
Rinascente ................................. 133,000 849,239
Telecom Italia Mobile S.p.A. ............... 260,080 2,891,197
-----------
8,891,071
-----------
NETHERLANDS (7.4%)
Getronics N.V. ............................. 22,000 1,746,574
ING Groep N.V., Certificate Shares ......... 48,000 2,884,013
Koninklijke Ahold N.V. ..................... 70,000 2,062,229
Koninklijke Numico N.V. .................... 42,000 1,559,407
VNU-Verenigde Nederlandse Uitgeversbedrijven 36,000 1,882,980
Wolters Kluwer N.V. ........................ 50,000 1,684,025
-----------
11,819,228
-----------
SPAIN (4.7%)
Banco Bilbao Vizcaya S.A. .................. 60,000 850,432
Banco Santander, S.A. ...................... 135,000 1,521,035
Endesa S.A. ................................ 48,000 948,347
Indra Sistemas S.A. ........................ 39,000 729,092
*Telefonica Publicidad e Informacion, S.A. .. 15,000 725,484
*Telefonica de Espana S.A. .................. 108,000 2,684,817
-----------
7,459,207
-----------
SWEDEN (3.2%)
Ericsson LM, Class B ....................... 58,700 3,758,504
Skandia Forsakrings AB ..................... 41,000 1,233,407
-----------
4,991,911
-----------
SWITZERLAND (8.3%)
Disetronic Holding AG ...................... 320 1,487,349
Julius Baer Holding AG ..................... 410 1,232,023
*Logitech International S.A. ................ 3,500 983,945
Novartis AG, Bearer Registered ............. 2,800 4,089,711
Roche Holding AG, DRC ...................... 320 3,778,347
Zurich Allied AG ........................... 2,800 1,588,305
-----------
13,159,680
-----------
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
LIPPER PRIME EUROPE EQUITY FUND
(FORMERLY PRIME LIPPER EUROPE EQUITY FUND)
PORTFOLIO OF INVESTMENTS - (CONTINUED)
DECEMBER 31, 1999
Shares Value
-------- -------------
- -----------------------------
UNITED KINGDOM (27.8%)
AstraZeneca Group plc ....................... 83,000 $ 3,435,258
Boots plc ................................... 182,000 1,765,851
British Telecommunications plc .............. 220,000 5,364,729
Cadbury Schweppes plc ....................... 420,278 2,533,346
Compass Group plc ........................... 134,700 1,845,324
Glaxo Wellcome plc .......................... 146,000 4,117,913
Invensys plc ................................ 450,000 2,444,154
Lloyds TSB Group plc ........................ 280,000 3,495,149
Misys plc ................................... 145,000 2,255,182
Pearson plc ................................. 76,000 2,454,695
PizzaExpress plc ............................ 145,000 1,711,835
SEMA Group plc .............................. 87,000 1,562,035
SmithKline Beecham plc ...................... 280,000 3,565,097
Smiths Industries plc ....................... 145,000 2,161,703
The Sage Group plc .......................... 157,500 1,917,791
Vodafone Airtouch plc ....................... 714,000 3,529,954
------------
44,160,016
------------
TOTAL INVESTMENTS (92.4%) (COST $115,067,377) 146,497,489
OTHER ASSETS AND LIABILITIES (7.6%) ......... 12,063,951
------------
NET ASSETS (100.0%) ......................... $158,561,440
============
- ----------
* Non-Income Producing Security
DRC -- Dividend Right Certificates
FOREIGN CURRENCY EXCHANGE CONTRACT INFORMATION:
Under the terms of foreign currency exchange contracts open at December 31,
1999, the Fund is obligated to deliver foreign currency in exchange for U.S.
dollars as indicated below:
<TABLE>
<CAPTION>
Net
Settlement Unrealized
Currency to Deliver Value Date In Exchange for Value Gain (Loss)
- ------------------- ---------- ----------- ------------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
GBP 765,837 $1,234,304 01/04/00 USD 1,232,231 $1,232,231 $(2,073)
EU 295,062 295,769 01/18/00 USD 297,570 297,570 1,801
---------- ---------- -------
$1,530,073 $1,529,801 $ (272)
========== ========== ========
</TABLE>
- ----------
EU European Currency Unit
GBP British Pound
USD US Dollar
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
LIPPER PRIME EUROPE EQUITY FUND
(FORMERLY PRIME LIPPER EUROPE EQUITY FUND)
PORTFOLIO OF INVESTMENTS - (CONTINUED)
DECEMBER 31, 1999
SUMMARY OF FOREIGN SECURITIES BY INDUSTRY CLASSIFICATION
PERCENT OF NET
SHARES VALUE
-------------- -------------
INDUSTRY
Automobiles .................................... 2.1% $ 3,409,904
Banking ........................................ 6.8 10,814,829
Broadcasting and Publishing .................... 4.3 6,747,184
Building Materials ............................. 0.7 1,067,551
Business and Public Service .................... 1.2 1,845,324
Chemicals ...................................... 1.9 3,015,206
Computer Services .............................. 9.2 14,518,801
Electrical/Components/Instruments .............. 1.5 2,444,154
Electrical/Electronics ......................... 7.4 11,740,574
Energy Sources ................................. 3.2 5,089,391
Financial Services ............................. 1.8 2,884,013
Food and Household Products .................... 2.6 4,092,753
Health and Personal Care ....................... 13.7 21,715,242
Insurance ...................................... 6.5 10,335,449
Leisure ........................................ 1.1 1,711,835
Machinery and Engineering ...................... 3.3 5,232,843
Merchandising .................................. 6.2 9,880,755
Multi-Industry ................................. 1.3 2,125,480
Recreation and Other Consumer Goods ............ 3.2 5,009,277
Telecommunications ............................. 13.2 20,912,292
Transportation ................................. 0.6 956,285
Utilities ...................................... 0.6 948,347
----- ------------
TOTAL INVESTMENTS .............................. 92.4 146,497,489
NET OTHER ASSETS AND LIABILITIES ............... 7.6 12,063,951
----- ------------
NET ASSETS ..................................... 100.0% $158,561,440
===== ============
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
LIPPER PRIME EUROPE EQUITY FUND
(FORMERLY PRIME LIPPER EUROPE EQUITY FUND)
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at value (Cost $115,067,377) ................................... $ 146,497,489
Cash ........................................................................ 10,110,054
Receivable for Investments Sold ............................................. 1,530,074
Receivable for Fund Shares Sold ............................................. 454,125
Dividends Receivable ........................................................ 253,070
Deferred Organization Costs ................................................. 23,506
Prepaid Assets .............................................................. 5,395
-------------
TOTAL ASSETS ............................................................... 158,873,713
-------------
LIABILITIES:
Investment Advisory Fees Payable ............................................ 144,985
Administrative Fees Payable ................................................. 29,574
Custodian Fees Payable ...................................................... 17,971
Distribution Fees Payable -- Retail Shares .................................. 16,089
Payable for Fund Shares Redeemed ............................................ 13,943
Shareholder Servicing Fees Payable -- Group Retirement Plan Shares .......... 9,619
Directors' Fees Payable ..................................................... 6,635
Unrealized Depreciation on Foreign Currency Contracts ....................... 272
Professional Fees Payable ................................................... 60,758
Other Liabilities ........................................................... 12,427
-------------
TOTAL LIABILITIES .......................................................... 312,273
-------------
NET ASSETS ................................................................... $ 158,561,440
=============
NET ASSETS CONSIST OF:
Paid in Capital ............................................................. $ 114,543,589
Accumulated Net Investment Loss ............................................. (23,987)
Accumulated Net Realized Gain ............................................... 12,616,684
Unrealized Appreciation on Investments and Foreign Currency Translations .... 31,425,154
-------------
$ 158,561,440
=============
PREMIER SHARES:
Net Assets .................................................................. $ 150,979,141
Shares Issued and Outstanding ($.001 par value) (Authorized 3,333,333,333) .. 10,044,107
Net Asset Value, Offering and Redemption Price Per Share .................... $ 15.03
=============
RETAIL SHARES:
Net Assets .................................................................. $ 4,295,370
Shares Issued and Outstanding ($.001 par value) (Authorized 3,333,333,333) .. 287,263
Net Asset Value, Offering and Redemption Price Per Share .................... $ 14.95
=============
GROUP RETIREMENT PLAN SHARES:
Net Assets .................................................................. $ 3,286,929
Shares Issued and Outstanding ($.001 par value) (Authorized 3,333,333,333) .. 220,072
Net Asset Value, Offering and Redemption Price Per Share .................... $ 14.94
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
LIPPER PRIME EUROPE EQUITY FUND
(FORMERLY PRIME LIPPER EUROPE EQUITY FUND)
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
INVESTMENT INCOME:
Dividends .................................................. $ 1,834,285
Interest ................................................... 220,159
Less: Foreign Taxes Withheld ............................... (206,995)
------------
TOTAL INCOME .............................................. 1,847,449
------------
EXPENSES:
Investment Advisory Fees ................................... 1,494,623
Administrative Fees ........................................ 271,813
Custodian Fees ............................................. 97,578
Professional Fees .......................................... 51,023
Registration and Filing Fees ............................... 39,458
Amortization of Organization Costs ......................... 18,779
Directors' Fees ............................................ 18,621
Distribution Fees -- Retail Shares ......................... 8,142
Servicing Fees -- Group Retirement Plan Shares ............. 7,067
Other Expenses ............................................. 60,987
------------
Total Expenses ............................................ 2,068,091
------------
NET INVESTMENT LOSS ....................................... (220,642)
------------
NET REALIZED GAIN (LOSS) FROM:
Investments Sold ........................................... 20,620,949
Foreign Currency Transactions .............................. (80,600)
------------
TOTAL NET REALIZED GAIN ..................................... 20,540,349
------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION:
Investments ................................................ 2,879,171
Foreign Currency Translations .............................. (6,699)
------------
NET CHANGE IN UNREALIZED APPRECIATION/DEPRECIATION .......... 2,872,472
------------
TOTAL NET REALIZED GAIN AND NET CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ................................. 23,412,821
------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS .................................. $ 23,192,179
============
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
LIPPER PRIME EUROPE EQUITY FUND
(FORMERLY PRIME LIPPER EUROPE EQUITY FUND)
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
-------------- --------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS:
Net Investment Loss ........................................... $ (220,642) $ (77,367)
Net Realized Gain ............................................. 20,540,349 12,900,178
Net Change in Unrealized Appreciation/Depreciation ............ 2,872,472 14,452,802
------------- -------------
Net Increase in Net Assets Resulting from Operations ......... 23,192,179 27,275,613
------------- -------------
DISTRIBUTIONS:
PREMIER SHARES:
From Net Realized Gains ....................................... (11,443,098) (11,390,232)
RETAIL SHARES:
From Net Realized Gains ....................................... (294,481) (232,187)
GROUP RETIREMENT PLAN SHARES:
From Net Realized Gains ....................................... (241,531) (210,280)
------------- -------------
Total Distributions .......................................... (11,979,110) (11,832,699)
------------- -------------
CAPITAL SHARE TRANSACTIONS:
PREMIER SHARES:
Issued--Regular ............................................... 49,375,141 23,551,688
Issued--Distributions Reinvested .............................. 11,427,527 11,413,219
Redeemed ...................................................... (44,975,160) (8,372,885)
------------- -------------
Net Increase in Premier Shares Transactions .................. 15,827,508 26,592,022
------------- -------------
RETAIL SHARES:
Issued--Regular ............................................... 2,372,216 1,603,199
Issued--Distributions Reinvested .............................. 283,521 226,949
Redeemed ...................................................... (1,091,178) (684,234)
------------- -------------
Net Increase in Retail Shares Transactions ................... 1,564,559 1,145,914
------------- -------------
GROUP RETIREMENT PLAN SHARES:
Issued--Regular ............................................... 1,403,835 1,238,603
Issued--Distributions Reinvested .............................. 240,567 209,098
Redeemed ...................................................... (884,227) (297,247)
------------- -------------
Net Increase in Group Retirement Plan Shares Transactions .... 760,175 1,150,454
------------- -------------
Net Increase in Net Assets From Capital Share Transactions .... 18,152,242 28,888,390
------------- -------------
TOTAL INCREASE ............................................... 29,365,311 44,331,304
------------- -------------
NET ASSETS:
Beginning of Year ............................................. 129,196,129 84,864,825
------------- -------------
End of Year (A) ............................................... $ 158,561,440 $ 129,196,129
------------- -------------
(A) Includes accumulated net investment loss .................. ($ 23,987) ($ 58,710)
============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
LIPPER PRIME EUROPE EQUITY FUND
(FORMERLY PRIME LIPPER EUROPE EQUITY FUND)
FINANCIAL HIGHLIGHTS
SELECTED PER SHARE DATA & RATIOS FOR A SHARE
OUTSTANDING THROUGHOUT EACH PERIOD
<TABLE>
<CAPTION>
PREMIER PREMIER PREMIER PREMIER
SHARES SHARES SHARES SHARES RETAIL SHARES RETAIL SHARES
------------- ------------ ----------- --------------- ------------- -------------
APRIL 1, 1996**
YEAR ENDED YEAR ENDED YEAR ENDED TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997 1996 1999 1998
------------- ------------ ----------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .. $ 14.10 $ 11.74 $ 11.25 $ 10.00 $ 14.05 $ 11.73
----------- ----------- ---------- ---------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income (Loss) (1) ..... (0.02) (0.01) 0.05 0.04 (0.04) (0.03)
Net Realized and Unrealized Gain
on Investments ..................... 2.11 3.79 2.06 1.62 2.10 3.77
----------- ----------- ---------- ---------- --------- ---------
Total From Investment Operations .... 2.09 3.78 2.11 1.66 2.06 3.74
----------- ----------- ---------- ---------- --------- ---------
DISTRIBUTIONS:
Net Investment Income ................ -- -- (0.03) (0.02) -- --
In Excess of Net Investment Income ... -- -- --+ -- -- --
Net Realized Gain .................... (1.16) (1.42) (1.59) (0.39) (1.16) (1.42)
----------- ----------- ---------- ---------- --------- ---------
TOTAL DISTRIBUTIONS ................. (1.16) (1.42) (1.62) (0.41) (1.16) (1.42)
----------- ----------- ---------- ---------- --------- ---------
Net Asset Value, End of Period ........ $ 15.03 $ 14.10 $ 11.74 $ 11.25 $ 14.95 $ 14.05
=========== =========== ========== ========== ========= =========
TOTAL RETURN .......................... 15.70% 32.29% 18.83% 16.68%(2) 15.54% 31.96%
=========== =========== ========== ========== ========= =========
Ratios and Supplemental Data:
Net Assets, End of Period (000's) ..... $ 150,979 $ 124,406 $ 82,787 $ 62,942 $ 4,295 $ 2,472
Ratios After Expense Waiver
and/or Reimbursement:
Expenses to Average Net Assets ........ 1.51% 1.54% 1.59% 1.60%* 1.76% 1.79%
Net Investment Income (Loss) to
Average Net Assets .................. (0.15%) (0.06%) 0.43% 0.53%* (0.34%) (0.25%)
Ratios Before Expense Waiver
and/or Reimbursement:
Expenses to Average Net Assets ...... N/A N/A N/A 1.78%* N/A N/A
Net Investment Income (Loss) to
Average Net Assets ................ N/A N/A N/A 0.35%* N/A N/A
Portfolio Turnover Rate ............. 52% 61% 71% 34% 52% 61%
<CAPTION>
Group Group Group Group
Retirement Retirement Retirement Retirement
Retail Shares Retail Shares Plan Shares Plan Shares Plan Shares Plan Shares
------------- ----------------- ----------- ------------ ------------ -----------------
April 11, 1996*** April 12, 1996***
Year Ended to Year Ended Year Ended Year Ended to
December 31, December 31, December 31, December 31, December 31, December 31,
1997 1996 1999 1998 1997 1996
------------- ----------------- ----------- ------------ ------------ -----------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD .. $ 11.25 $ 9.93 $ 14.05 $ 11.72 $ 11.24 $ 9.92
----------- ----------- ---------- ---------- --------- ---------
INCOME FROM INVESTMENT OPERATIONS:
Net Investment Income (Loss) (1) ..... 0.02 (0.01) (0.05) (0.03) 0.03 (0.02)
Net Realized and Unrealized Gain
on Investments ..................... 2.05 1.73 2.10 3.78 2.05 1.74
----------- ----------- ---------- ---------- --------- ---------
Total From Investment Operations .... 2.07 1.72 2.05 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 .................... (1.59) (0.39) (1.16) (1.42) (1.59) (0.39)
----------- ----------- ---------- ---------- --------- ---------
TOTAL DISTRIBUTIONS ................. (1.59) (0.40) (1.16) (1.42) (1.60) (0.40)
----------- ----------- ---------- ---------- --------- ---------
Net Asset Value, End of Period ........ $ 11.73 $ 11.25 $ 14.94 $ 14.05 $ 11.72 $ 11.24
=========== =========== ========== ========== ========= =========
TOTAL RETURN .......................... 18.49% 17.37%(2) 15.47% 32.08% 18.60% 17.40%(2)
=========== =========== ========== ========== ========= =========
Ratios and Supplemental Data:
Net Assets, End of Period (000's) ..... $ 1,137 $ 609 $ 3,287 $ 2,318 $ 941 $ 195
Ratios After Expense Waiver
and/or Reimbursement:
Expenses to Average Net Assets ........ 1.84% 1.85%* 1.76% 1.79% 1.84% 1.85%*
Net Investment Income (Loss) to
Average Net Assets .................. 0.16% (0.13%)* (0.41%) (0.29%) 0.34% (0.43%)*
Ratios Before Expense Waiver
and/or Reimbursement:
Expenses to Average Net Assets ....... N/A 2.07%* N/A N/A N/A 2.04%*
Net Investment Income (Loss) to
Average Net Assets .................. N/A (0.35%)* N/A N/A N/A (0.62%)*
Portfolio Turnover Rate .............. 71% 34% 52% 61% 71% 34%*
</TABLE>
- -----------
* Annualized
** Commencement of Fund Operations
*** Initial offering of shares by the Fund
+ Amount is less than $0.01 per share
N/A= Not Applicable
(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,
1999, 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.
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
LIPPER PRIME EUROPE EQUITY FUND
(FORMERLY 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, 1999, the Company was
comprised of three diversified portfolios: Lipper High Income Bond Fund, Lipper
U.S. Equity Fund, and Lipper Prime Europe Equity Fund. These financial
statements pertain to Lipper Prime 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. The Lipper Prime 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 G).
The Lipper Prime Europe Equity Fund seeks capital appreciation by investing
primarily in a diversified portfolio of medium and large capitalization Western
European common stocks issued by companies that have strong growth prospects
based on balance sheet strength (including leverage and free cash flow available
for capital investment), historic return on equity, projected earnings per share
growth rates, 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, 1999 to December 31, 1999 the
Fund incurred and elected to defer until January 1, 2000 for U.S. Federal income
tax purposes net currency losses of approximately $24,259.
At December 31, 1999, the cost of investments and unrealized appreciation
(depreciation) of investments for Federal income tax purposes were:
NET
COST APPRECIATION (DEPRECIATION) APPRECIATION
------------ ------------ ------------ ------------
$115,263,601 $35,860,213 $(4,626,325) $31,233,888
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
12
<PAGE>
LIPPER PRIME EUROPE EQUITY FUND
(FORMERLY PRIME LIPPER EUROPE EQUITY FUND)
NOTES TO FINANCIAL STATEMENTS
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.
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 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 net investment income (loss),
undistributed net realized gain (loss) and paid in capital. Such adjustments are
not included for the purpose of calculating the financial highlights.
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
13
<PAGE>
LIPPER PRIME EUROPE EQUITY FUND
(FORMERLY PRIME LIPPER EUROPE EQUITY FUND)
NOTES TO FINANCIAL STATEMENTS
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.
B. ADVISORY SERVICES: Prime Lipper Asset Management (the "Adviser") serves
as the investment adviser to the Fund. Under the terms 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 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
-------------- ------------- -----------
1.60% 1.85% 1.85%
No waivers or reimbursements were received by the Fund for the year ended
December 31, 1999.
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 31,1999, 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
----------- -----------
$67,742,628 $66,872,840
There were no purchases or sales of long-term U.S. Government securities.
G. 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
14
<PAGE>
LIPPER PRIME EUROPE EQUITY FUND
(FORMERLY PRIME LIPPER EUROPE EQUITY FUND)
NOTES TO FINANCIAL STATEMENTS
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.
H. CAPITAL STOCK: Capital share transactions for the Fund, by class of
shares, were as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1999 1998
------------- -----------
PREMIER SHARES:
Issued -- Regular ......................... 3,609,486 1,605,948
-- Distributions Reinvested ........ 822,415 797,991
Redeemed .................................. (3,213,911) (631,722)
---------- ----------
Net Increase .............................. 1,217,990 1,772,217
---------- ----------
RETAIL SHARES:
Issued -- Regular ......................... 171,205 113,663
-- Distributions Reinvested ........ 20,569 15,887
Redeemed .................................. (80,434) (50,514)
---------- ----------
Net Increase .............................. 111,340 79,036
---------- ----------
GROUP RETIREMENT PLAN SHARES:
Issued -- Regular ......................... 102,735 90,078
-- Distributions Reinvested ........ 17,437 14,661
Redeemed .................................. (65,181) (19,882)
---------- ----------
Net Increase .............................. 54,991 84,857
---------- ----------
I. OTHER: At December 31, 1999, 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 ............................ 4 30.7%
Retail Shares ............................. 3 25.6%
Group Retirement Shares ................... 3 98.3%
Transactions by shareholders holding a significant ownership percentage of
the Fund can have an impact on other shareholders of the Fund.
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.
15
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Lipper Prime Europe Equity Fund
(formerly, Prime Lipper Europe Equity Fund):
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, 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 Prime Europe Equity Fund
(one of the Funds constituting The Lipper Funds, Inc., hereinafter referred to
as the "Fund") at December 31, 1999, the results of its operations for the year
then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the periods
presented, in conformity with accounting principles generally accepted in the
United States. 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 auditing standards generally accepted in the
United States, 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, 1999 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 15, 2000
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX INFORMATION (UNAUDITED)
Lipper Prime Europe Equity Fund hereby designates $11,815,163 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, 1999, amounting to
$206,995 for the Lipper Prime 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, 1999, gross income derived from sources within
foreign countries amounted to $2,054,444 for Lipper Prime Europe Equity Fund.
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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
DISTRIBUTOR Lipper & Company, L.P.
- -------------------------- 101 Park Avenue, 6th Floor
New York, NY 10178
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
For more complete information concerning The Lipper Funds, Inc., including a
prospectus, please call 1-800-LIPPER9. European investments involve currency and
other risks, which may include political and market risks. Please read the
prospectus carefully before investing.
Lipper & Company, L.P., Distributor. The Lipper Funds, Inc., is not affiliated
with Lipper Inc.
