<PAGE>
[LOGO] EMERGING GROWTH FUND
ANNUAL REPORT 1998
<PAGE>
OCTOBER 20, 1998
DEAR FELLOW SHAREHOLDERS:
This past year, the first for the Kopp Emerging Growth Fund, has dramatically
shown the volatility and risks of investing in the small-cap market. The year
has also reinforced our stated investment objective of long-term capital
appreciation, the key words being "long-term." As we discuss below, we believe
that the outlook for the second year of the Fund is much improved over the last.
CATCH-UP
In recent correspondence, we have discussed the relative valuations between
small-cap stocks and large-cap stocks. We concluded that the valuations were out
of sync and due for realignment to more historical levels. In other words, it
was time for the small-caps to play catch-up. The rotation that we envisioned
was one of small-caps catching up with large caps. Instead, the large-caps
joined the small-caps.
Between July and early October, the indices dominated by large-cap stocks (the
Dow Jones Industrial Average, the S&P 500, and the NASDAQ Composite) gave up
their gains for the year. These indices corrected between 20% and 30%, and the
Russell 2000, which topped out months ahead of the large-cap indices, corrected
38%. To a degree, some catch-up had taken place, but not quite as we believed it
would. Since those early October lows, there has been some recovery.
A CLOSER LOOK
Our comments above relate to the general indices. We want to point out, however,
that they are not typical or representative of the "average" stock. The indices
that are weighted to the large-caps have masked a broader underlying
deterioration. While declines of 20-30% are dramatic enough, consider that at
the recent lows, the average NASDAQ stock had declined 52% from its high, the
average NYSE stock was down 39%, and the average S&P 500 stock declined 31%.
While these figures may not make you feel better about the performance of your
investment in the Kopp Emerging Growth Fund, they may at least help to explain
it and point out that the large-cap indices have not been good barometers for
the "average" stock.
SMALL-CAPS
We believe there will be a period of testing and re-testing the recent lows.
Nevertheless, we believe that the lion's share of the decline is behind us. We
do not expect a V-bottom recovery from the lows. Rather, we expect the
re-testing period will last for several weeks and perhaps months. Ultimately,
however, we believe this will represent a solid bottom from which the market
will move higher. When the market resumes its advance, we expect that the
recovery will broaden out to include, and may be led by, the small-caps that
have underperformed in recent years.
Small-cap stocks tend to go down first in a market downturn, but they also
typically lead the market out of the downturn. For an interesting comparison on
correction and recovery, we can look back to the correction experienced between
the fourth quarter of 1972 and the third quarter of 1974. In that 21-month
period, the Dow declined 40% and the NASDAQ (which, back then, was much more
indicative of small-caps than it is today) declined 58%. It took a long time for
both indices to return to the highs previously seen in 1972, but the NASDAQ came
back in about half the time of the Dow's recovery (16 quarters versus 33
quarters).
SIGNS OF A MARKET BOTTOM & A RECOVERY DOWN THE ROAD
Recent dramatic movements in the stock market have revealed a bear market in
1998 (typically a 20% decline). However, we believe there are a number of
indicators that have reached historically significant inflection points and are
signaling that a bottom is in the making for small-cap stocks and the market in
general. For example:
"BEARS CURRENTLY OUTNUMBER BULLS"
As if the economic problems in Asia and Russia weren't enough, Latin America is
now experiencing similar problems, the Fed is bailing out a troubled hedge fund,
terrorist activity is a concern, and personal problems continue to plague the
President. It wasn't long ago that the primary concern domestically was the risk
of too much growth and the potential for inflation to rear its ugly head. The
focus has shifted 180 degrees. Now the concern is that economic turbulence
around the world will
1
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cause profit growth to slow dramatically, pushing us into a global recession.
Growth is slowing worldwide. At this point, it is impossible to say whether we
will head into a recession, but it is clear that the eyes and ears of the people
who can make a difference are focused on this issue, and this gives us
confidence that the situation will be dealt with appropriately.
One needn't look far to find reasons to be bearish. Just consider your own
feelings right now. Are you worried about the economy? Are you scared about the
market? You're not alone, and you're part of an important sentiment indicator.
When times are very good and euphoric bulls surround you, you should beware.
When things look the bleakest and nervous bears are everywhere, history
indicates you're near the bottom.
INSIDER BUYING IS UP SIGNIFICANTLY
Insider buying was up significantly in August, especially in small- to mid-cap
stocks and in some of the hardest hit areas like technology. The ratio of
insider selling to buying typically runs 2:1. This may seem like a lot of
selling for a "typical" period, but keep in mind that for many insiders, stock
and stock options represent a large part of their compensation (and also a large
percentage of their overall investment holdings). It is therefore not unusual
for this group of people to be net sellers as they regularly divest themselves
of some of their stock holdings in order to diversify. At the beginning of May,
this relative figure was 3.19:1, but fell to 1.09:1 in the July-August period.
Clearly, these insiders are seeing value.
CASH ON THE SIDELINES = POTENTIAL DEMAND
The buildup of cash in money market funds has continued to rise as investors'
nervousness has risen. There is now approximately $4.5 trillion in liquid assets
sitting on the sidelines. Approximately $1.2 trillion of that is in money market
funds. This represents a potential force that could propel stocks if investors
re-enter the market.
BUYOUTS, BUYBACKS AND DECREASING IPOS (INITIAL
PUBLIC OFFERINGS) = REDUCED SUPPLY
Extremely undervalued stock prices have given rise to mergers and acquisitions,
as well as corporate stock buyback programs. In addition, the market conditions
have caused the IPO calendar to virtually dry up. According to research by The
Leuthold Group, well-respected analysts, cancelled or postponed deals
out-numbered completed deals by 2:1 in August. The reduced "supply" of stocks
caused by a decrease in IPOs and an increase in mergers, acquisitions and stock
buyback programs is a positive for existing stocks. When demand for stocks picks
up, there are fewer places for new cash to go.
INTEREST RATE CUTS
The Fed announced a cut in the Fed Funds rate in late September. The gap between
the Fed Funds rate and the Treasury Bill rate was already giving a clear signal
that a change was due in the Fed Funds rate. The Fed cut the rate by 25 basis
points, which was in line with general "stated" expectations. Obviously the
market had its own idea of what an appropriate move would be, and a 25 basis
point cut was clearly not satisfactory. Just a few weeks later, a second set of
rate cuts was announced.
As we stated to private clients before the second round of cuts, we believe that
Mr. Greenspan's intention is to reduce rates through a series of moves rather
than in one fell swoop. While it may not seem like it now, rate cuts may yet be
the catalyst to turn the market around.
Interest rate cuts, coupled with other appropriate moves by the Federal Reserve
and the G-7, should eventually bring some degree of confidence back to the US
equity markets and help to stabilize the economies around the globe. Stocks
typically perform well in an environment of declining rates. The last time the
Fed embarked on a SERIES of rate cuts was late in 1990. The Fed easings sparked
a rally in the stock market.
VALUATIONS HAVE REACHED HISTORIC LOWS
There are a number of technical and fundamental valuation parameters that point
to improvement in the market and in small-caps.
- The chart on the next page shows that, in the past 15 years, the Russell
2000 Index has dropped SUBSTANTIALLY below its 200-day moving average only
three times. Following the first two occasions (in 1987 and 1990), the
small-cap stock index made rather dramatic recoveries from the lows.
2
<PAGE>
- The chart also offers an interesting comparison with respect to the extent
of the retreats in the Russell 2000. The small-cap index declined 39% over
five months between August 1987 and December 1987, followed by a rally
that lasted into 1990. The index declined 31% in the six months between
July 1990 and December 1990, followed by an extended recovery. A common
denominator fueling the recovery in both cases was a series of rate cuts.
In early October, the Russell was off 38% in the seven months from its
peak in April of this year. A series of rate cuts could once again be the
catalyst for recovery.
- Finally, the price/earnings ratio of the T. Rowe Price New Horizons Fund
(PRNHX may be considered a proxy for small-cap stocks) fell below that of
the S&P 500 earlier this month. This has happened only twice before in the
fund's 38-year history -- in late-1976 and in the third quarter of 1980.
Both times were followed by multi-year rallies in small-cap stocks.
VOLATILITY
In recent weeks, volatility in the market has become exceptionally high,
reaching levels last seen in the fall of 1987. According to The Leuthold Group,
a "high volatility" day means a day when the S&P 500 records a move of 1% or
more (either up or down). In the third quarter, 42% of the trading days were
"high volatility" days. This is well above the historical median of 15.6%. Days
when the S&P 500 records a move of 3% or more (either up or down) are
categorized as "ultra volatility" days. There were more "ultra volatility" days
in the months of August and September than in the previous seven years combined.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
RUSSELL 2000 VS. 200-DAY
MOVING AVERAGE (SOLID LINE)
200 DAY
MOVING
LOW HIGH CLOSE AVERAGE
<S> <C> <C> <C> <C>
09/01/83 116.04 119.54 117.43 0
10/01/83 109.17 118.08 109.17 0
11/01/83 107.76 114.66 114.66 0
12/01/83 110.75 114.71 112.27 0
01/01/84 110.21 116.69 110.21 0
02/01/84 101.26 109.61 103.72 0
03/01/84 102.93 105.17 104.1 0
04/01/84 100.63 103.72 103.34 0
05/01/84 97.41 105.75 97.75 0
06/01/84 98.63 100.6 100.3 107.295
07/01/84 93.95 100.06 95.25 105.077
08/01/84 96.69 106.21 106.21 104.781
09/01/84 105.12 106.82 105.17 103.832
10/01/84 102.54 104.88 103.7 102.975
11/01/84 100.11 104.47 100.11 101.965
12/01/84 98.55 101.49 101.49 101.742
01/01/85 101.21 114.77 114.77 102.809
02/01/85 114.62 119.37 117.54 104.229
03/01/85 113.63 118.68 114.92 105.946
04/01/85 113.35 115.35 113.35 107.251
05/01/85 112.73 117.71 117.26 109.452
06/01/85 115.5 118.38 118.38 110.669
07/01/85 118.64 123.6 121.56 112.308
08/01/85 118.57 122.49 120.1 113.948
09/01/85 112.61 119.42 112.65 115.202
10/01/85 111.81 116.73 116.73 116.726
11/01/85 117.32 124.62 124.62 117.711
12/01/85 124.32 129.87 129.87 118.944
01/01/86 128.23 131.99 131.78 120.63
02/01/86 132.11 141 141 123.395
03/01/86 141.26 147.63 147.63 126.432
04/01/86 144.08 152.95 149.66 129.56
05/01/86 149.03 154.61 154.61 132.865
06/01/86 152.35 154.67 154.23 136.278
07/01/86 139.59 155.3 139.65 138.978
08/01/86 137.77 143.83 143.83 141.688
09/01/86 132.07 144.14 134.73 142.699
10/01/86 135.19 139.95 139.95 143.707
11/01/86 136.05 140.94 139.26 144.455
12/01/86 134.23 140.42 135 143.855
01/01/87 137.25 151.72 150.48 144.14
02/01/87 152.29 162.84 162.84 145.458
03/01/87 162.74 169 166.79 146.676
04/01/87 158.57 169.77 161.82 147.435
05/01/87 157.06 164.04 161.02 149.572
06/01/87 160.4 165.76 164.75 151.664
07/01/87 164.39 169.49 169.42 155.133
08/01/87 168.8 174.44 173.31 158.469
09/01/87 166.78 174.25 170.81 161.624
10/01/87 106.07 172.54 118.26 159.95
11/01/87 111.7 120.22 111.7 156.072
12/01/87 106.43 121.59 120.42 151.83
01/01/88 121.23 128.03 125.24 147.675
02/01/88 125.26 136.1 136.1 145.103
03/01/88 136.26 143.67 142.15 143.216
04/01/88 140.41 145.32 145.01 141.242
05/01/88 139.2 145.31 141.37 138.437
06/01/88 142.8 151.3 151.3 136.236
07/01/88 148.77 151.42 149.88 134.143
08/01/88 144 150.67 145.74 136.891
09/01/88 144.57 149.09 149.09 140.63
10/01/88 146.67 149.15 147.25 143.313
11/01/88 139.87 147.21 142.01 144.99
12/01/88 142.56 147.36 147.36 146.116
01/01/89 146.79 153.85 153.85 147.286
02/01/89 153.96 157.07 154.56 148.241
03/01/89 154.67 158.33 157.9 149.894
04/01/89 157.97 164.68 164.68 151.232
05/01/89 164.29 171.53 171.53 153.397
06/01/89 167.43 173.4 167.43 155.566
07/01/89 167.6 174.5 174.5 158.107
08/01/89 174.21 178.2 178.2 161.202
09/01/89 175.99 179.16 178.21 164.822
10/01/89 166.33 180.78 167.47 166.833
11/01/89 165.76 168.48 168.18 168.266
12/01/89 162.82 168.87 168.31 169.641
01/01/90 152.62 170.8 153.26 169.177
02/01/90 154.36 159.3 157.72 168.481
03/01/90 158.04 164.38 163.64 167.692
04/01/90 157.82 163.4 158.09 166.758
05/01/90 158.49 168.91 168.91 166.199
06/01/90 166.9 170.9 169.12 165.291
07/01/90 161.51 170.04 161.51 163.621
08/01/90 132.92 160.77 139.51 160.825
09/01/90 126.18 140.34 126.74 156.681
10/01/90 118.82 129.06 118.82 151.732
11/01/90 118.91 127.51 127.51 149.157
12/01/90 128.15 132.19 132.19 146.604
01/01/91 125.25 144.17 144.17 144.657
02/01/91 145.5 160.01 160.01 144.849
03/01/91 161.25 171.01 171.01 145.059
04/01/91 170.31 178.7 170.64 145.211
05/01/91 169.48 178.34 178.34 146.894
06/01/91 167.41 178.54 167.41 149.684
07/01/91 167 172.87 172.78 154.288
08/01/91 166.49 179.11 179.11 160.317
09/01/91 175.29 180.16 180.15 165.581
10/01/91 175.61 185 184.97 170.859
11/01/91 174.89 188.4 176.37 174.079
12/01/91 174.43 189.93 189.91 177.069
01/01/92 183.88 206.1 205.11 180.479
02/01/92 205.16 213 211.15 184.53
03/01/92 202.32 218.15 203.7 187.066
04/01/92 191.2 203.7 196.26 189.951
05/01/92 190.85 200.84 198.52 192.525
06/01/92 185.73 200.6 188.58 193.472
07/01/92 185.32 194.75 194.74 194.931
08/01/92 186.01 195.86 188.79 195.313
09/01/92 188.53 194.73 192.91 196.967
10/01/92 183.4 198.91 198.91 197.867
11/01/92 198.6 213.81 213.81 198.737
12/01/92 212.56 221.01 221.01 199.723
01/01/93 219.2 230.69 228.1 202.163
02/01/93 216.43 232.45 222.41 204.778
03/01/93 222.25 230.8 229.21 207.847
04/01/93 218.4 229.29 222.68 211.257
05/01/93 222.37 232.93 232.19 215.002
06/01/93 226.52 234.33 233.35 219.458
07/01/93 233.02 237.91 236.46 223.813
08/01/93 236.34 246.19 246.19 228.541
09/01/93 242.15 252.95 252.95 232.455
10/01/93 252.3 260.41 259.18 236.272
11/01/93 246.66 260.17 250.41 238.503
12/01/93 249.33 258.59 258.59 242.121
01/01/94 256.08 266.71 266.52 245.852
02/01/94 258.81 267.75 265.53 250.137
03/01/94 248.37 271.08 251.06 252.024
04/01/94 241.95 256.01 252.55 253.944
05/01/94 242.39 255 249.28 255.226
06/01/94 238.23 253.39 240.29 254.636
07/01/94 239.91 245.98 244.06 253.747
08/01/94 243.67 257.32 257.32 253.561
09/01/94 252.32 260.29 256.12 254.132
10/01/94 247.97 256.44 255.02 253.775
11/01/94 238.9 255.04 244.25 251.548
12/01/94 233.9 250.36 250.36 250.031
01/01/95 246.39 253.13 246.85 249.61
02/01/95 246.85 257.47 256.57 250.012
03/01/95 253.69 261.55 260.77 251.161
04/01/95 259.69 266.18 266.17 253.7491
05/01/95 264.59 273.84 270.25 256.368
06/01/95 270.25 284.37 283.63 258.9991
07/01/95 283.24 299.72 299.72 263.3591
08/01/95 297.22 305.5 305.31 268.3881
09/01/95 303.88 316.97 310.38 275.0011
10/01/95 291.25 310.38 296.25 279.5901
11/01/95 295.69 308.58 308.58 285.7631
12/01/95 303.38 315.97 315.97 291.7031
01/01/96 299.44 316.89 315.38 297.1641
02/01/96 315.19 326.44 324.93 303.0401
03/01/96 318.34 331.52 330.77 309.0921
04/01/96 328.34 348.58 348.28 315.5571
05/01/96 341.34 364.97 361.85 321.7701
06/01/96 339.28 364.34 346.61 325.9001
07/01/96 303.03 347.84 316 326.4621
08/01/96 316 335.62 333.88 330.225
09/01/96 330.42 346.54 346.39 334.006
10/01/96 337.71 350.43 340.57 336.4661
11/01/96 338.9 354.29 354.11 340.3391
12/01/96 348.45 362.61 362.61 344.1071
01/01/97 357.61 373.17 369.45 347.975
02/01/97 358.41 370.65 360.05 349.152
03/01/97 342.49 367.87 342.56 347.2231
04/01/97 335.18 347.59 343 346.8621
05/01/97 342.99 380.76 380.76 353.3381
06/01/97 380.59 396.99 396.37 359.5871
07/01/97 392.99 414.641 414.48 366.3961
08/01/97 406.172 423.82 423.43 374.6821
09/01/97 423.43 453.82 453.82 384.6531
10/01/97 405.371 466.211 433.262 391.7183
11/01/97 418.828 444.93 429.922 397.7655
12/01/97 412.68 442.031 437.02 405.4625
01/01/98 404.859 438.172 430.051 414.2116
02/01/98 430.051 462.422 461.828 426.0944
03/01/98 456.078 480.68 480.68 436.0864
04/01/98 466.031 492.281 482.891 444.7385
05/01/98 445.602 487.539 456.621 448.9526
06/01/98 433.66 457.66 457.391 452.3487
07/01/98 419.75 464.328 419.75 448.9417
08/01/98 337.84 420.18 337.949 439.4104
09/01/98 335.871 376.969 363.59 432.7772
10/13/98 320.328 325.691 320.328 421.108
39% Decline 5 Months Oct-Feb
31% Decline 6 Months July-Dec
38% Decline 7 Months Apr-Oct 8
</TABLE>
The performance shown is illustrative only and is not intended to represent or
predict the performance of the Kopp Emerging Growth Fund, which returned -43.92
from the Fund's inception (10/1//97) through 9/30/98. This figure reflects a
maximum sales charge of 3.5%. The Fund is currently waiving a portion of fees
and such arrangements may be modified or terminated after 9/30/99, which would
reduce returns.
3
<PAGE>
Technical analysts consider extremes in price movement and market volume to be
key indicators of both tops and bottoms in the market. Recent activity points to
the likelihood of a bottom.
Even with all of these convincing arguments for a market recovery, many
investors will find it difficult to step up to the plate in an environment that
is so tumultuous and uncertain. It is easy to get emotionally involved in what
we read in the newspaper and see on CNBC, yet we should not allow emotions to
drive our financial decisions. At Kopp Funds, we try to remain focused on what
we believe are the long-term opportunities in the market rather than being
detoured by short-term emotions.
For many investors, dollar-cost-averaging is the best solution to investing. It
forces an investor to buy every month or every quarter at the same time,
regardless of what the market did THAT DAY, regardless of what news was in the
headlines THAT DAY, and regardless of personal emotions THAT DAY.
VALUATION TABLE REVISITED
At the right is an updated version of the valuation table that was printed and
discussed in our last letter. The P/E to growth rate for the large-caps
(represented by the S&P 500) has come down since last quarter, reflecting the
recent sharp pullback, yet the index is still trading at a premium to the
projected earnings growth rate. The Russell 2000, on the other hand, trades at a
deep discount to its growth rate.
<TABLE>
<CAPTION>
Earnings
P/E Fwd Growth P/E to
4 Qtrs 99 vs. 98 Growth
<S> <C> <C> <C>
S&P 500 18.1x 15% 1.20
Russell 2000 13.3x 19% 0.70
</TABLE>
- ------------------------------------------
Note: Median figures above are based on prices and estimates as of October 19,
1998.
In general, small-cap stocks have continued to grow earnings faster than the
large-caps, and prospects for relative future growth remain stronger for small-
caps. Yet the small-caps continue to sell at discounts to their earnings growth
rates. There is clearly room for upside in stock prices in order to bring P/E
multiples in line with growth rates.
Sincerely,
/s/ Lee Kopp
LEE KOPP
PRESIDENT
TOP TEN HOLDINGS
-----------------------------------------
1. RATIONAL SOFTWARE CORPORATION (RATL)
2. AVT CORPORATION (AVTC)
3. SEROLOGICALS CORPORATION (SERO)
4. MACROVISION CORPORATION (MVSN)
5. ADC TELECOMMUNICATIONS (ADCT)
6. COGNOS, INC. (COGNF)
7. ASPECT TELECOMMUNICATIONS CORPORATION (ASPT)
8. CN BIOSCIENCES, INC. (CNBI)
9. MOLECULAR DEVICES CORPORATION (MDCC)
10. SDL, INC. (SDLI)
TOP TEN INDUSTRIES
-----------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Research Reagents/ Instrumentation 10.3%
Voice Processing 10.1%
Application Development Tools 8.5%
Software Applications 7.7%
Telecommunication Equipment 7.3%
Networking 6.5%
Wireless 6.3%
Semiconductor 5.6%
Information Technology Services 4.7%
Electronic Design Automation 4.5%
Other Common Stocks 26.4%
Short-term Investments 2.1%
</TABLE>
Percentages indicated above represent market value as a percentage of
total investments.
4
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
KOPP EMERGING KOPP EMERGING KOPP EMERGING
GROWTH FUND - GROWTH FUND - GROWTH FUND -
CLASS A (NO CLASS A RUSSELL 2000
LOAD) (LOAD) CLASS I INDEX
<S> <C> <C> <C> <C>
10/01/97 10,000 9,650 10,000 10,000
12/31/97 8,030 7,749 8,040 9,665
03/31/98 8,400 8,106 8,430 10,637
06/30/98 7,640 7,373 7,670 10,142
09/30/98 5,810 5,607 5,840 8,098
AVERAGE ANNUAL RATE OF RETURN
FOR THE YEAR ENDED SEPTEMBER 30, 1998
SINCE
INCEPTION
Kopp Emerging Growth Fund - Class A (no load) -41.90%
Kopp Emerging Growth Fund - Class A (load) -43.92%
Kopp Emerging Growth Fund - Class I -41.60%
Russell 2000 Index -19.02%
</TABLE>
This chart assumes an initial gross investment of $10,000 made
on October 1, 1997 (commencement of operations). Returns shown
include the reinvestment of all dividends. For Class A shares, a
3.50% sales load is in effect. Performance reflects expense
reimbursements and fee waivers in effect. Absent expense
reimbursements and fee waivers, total returns would be reduced.
Past performance is not predictive of future performance.
Investment return and principal value will fluctuate, so that
your shares, when redeemed, may be worth more or less than the
original cost.
Russell 2000 Index - A stock market index comprising the 2,000
smallest U.S. domiciled publicly traded common stocks that are
included in the Russell 3000 Index. The Russel 2000 represents
approximately 11% of the U.S. publicly traded equity market. The
Russell 3000 Index comprises the 3,000 largest U.S. domiciled
publicly traded common stocks by market capitalization
representing approximately 98% of the U.S. equity market.
- --------------------------------------------------------------------------------
IT SHOULD NOT BE ASSUMED THAT OUR STOCK SELECTIONS OR INVESTMENT
PHILOSOPHY WILL BE PROFITABLE OR WILL EQUAL ANY PAST PERFORMANCE.
SMALL-CAP STOCKS INVOLVE GREATER RISKS AND VOLATILITY THAN THOSE OF
LARGER, MORE ESTABLISHED COMPANIES. THIS REPORT IS FOR GENERAL
INFORMATION ONLY AND IS NOT INTENDED TO PROVIDE SPECIFIC ADVICE OR
RECOMMENDATIONS TO ANY INDIVIDUAL. FUTURE INVESTMENT DECISIONS AND
COMMENTARY MAY BE MADE UNDER DIFFERENT ECONOMIC, MARKET, AND
INDUSTRY CONDITIONS FROM THOSE EXISTING AT THE TIME THESE COMMENTS
WERE PREPARED.
ALL CHARTS AND DATA IN TABLES COURTESY OF BASELINE FINANCIAL
SERVICES, INC., OR FIRST CALL CORPORATION. INVESTMENTS CANNOT BE
MADE IN THE RUSSELL 2000 AS IT IS AN UNMANAGED SMALL-CAP INDEX.
THIS REPORT AND THE FINANCIAL STATEMENTS CONTAINED HEREIN ARE
SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF THE
FUND. THIS REPORT IS NOT AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE
INVESTORS IN THE FUND UNLESS PRECEDED OR ACCOMPANIED BY AN EFFECTIVE
PROSPECTUS. FOR MORE INFORMATION ON THE KOPP EMERGING GROWTH FUND,
INCLUDING CHARGES AND EXPENSES, CALL 1-888-533-KOPP FOR A FREE
PROSPECTUS. READ IT CAREFULLY BEFORE YOU INVEST OR SEND MONEY.
5
<PAGE>
KOPP EMERGING GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
<TABLE>
<S> <C>
- -----------------------------------------------------------------
ASSETS
Investments in securities, at value:
Investments in securities of unaffiliated
issuers (cost $355,464,243) $ 240,626,178
Investments in securities of affiliated issuers
(cost $17,759,883) 5,284,500
- -----------------------------------------------------------------
Total investments in securities
(cost $373,224,126) 245,910,678
Receivable from capital shares sold 465,223
Receivable from securities sold 114,371
Interest receivable 21,692
Deferred organization expenses, net of accumulated
amortization 77,818
Prepaid expenses 20,567
- -----------------------------------------------------------------
Total Assets 246,610,349
- -----------------------------------------------------------------
LIABILITIES
Payable for securities purchased 152,281
Payable for capital shares redeemed 1,425,507
Payable to Investment Advisor 380,691
Payable for services fees 150,171
Payable for distribution fees 60,323
Payable to Affiliated Distributor 19,252
Accrued other expenses 311,867
- -----------------------------------------------------------------
Total Liabilities 2,500,092
- -----------------------------------------------------------------
NET ASSETS $ 244,110,257
- -----------------------------------------------------------------
- -----------------------------------------------------------------
NET ASSETS CONSIST OF
Capital stock $ 420,187
Paid-in-capital in excess of par 377,704,613
Accumulated net realized loss on securities (6,701,095)
Unrealized net depreciation on securities (127,313,448)
- -----------------------------------------------------------------
Total Net Assets $ 244,110,257
- -----------------------------------------------------------------
CLASS A
Net Assets $ 216,533,273
Shares authorized ($0.01 par value) 3,000,000,000
Shares issued and outstanding 37,294,918
Net asset value and redemption price per share $ 5.81
- -----------------------------------------------------------------
Maximum offering price per share $ 6.02
- -----------------------------------------------------------------
CLASS I
Net Assets $ 27,576,984
Shares authorized ($0.01 par value) 3,000,000,000
Shares issued and outstanding 4,723,814
Net asset value, redemption price and offering
price per share $ 5.84
- -----------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements.
6
<PAGE>
KOPP EMERGING GROWTH FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1998
<TABLE>
<S> <C>
- -----------------------------------------------------------------
INVESTMENT INCOME
Interest $ 483,135
Dividends 61,049
- -----------------------------------------------------------------
Total investment income 544,184
- -----------------------------------------------------------------
EXPENSES
Investment advisory fee 2,795,449
Transfer agent fees 499,500
Service fees -- Class A 640,833
12b-1 fees -- Class A 256,333
Federal and state registration fees 297,542
Fund administration fees 157,083
Custody fees 80,915
Fund accounting fees 57,858
Professional fees 49,798
Directors' fees and expenses 30,005
Reports to shareholders 67,356
Amortization of deferred organization expenses 19,117
Other expenses 15,139
- -----------------------------------------------------------------
Total expenses before waivers 4,966,928
Less: Waiver of expenses by Investment Advisor (863,185)
- -----------------------------------------------------------------
Net expenses 4,103,743
- -----------------------------------------------------------------
NET INVESTMENT LOSS (3,559,559)
- -----------------------------------------------------------------
REALIZED AND UNREALIZED LOSS
Net realized loss on investment transactions:
Net realized loss on investment transactions of
unaffiliated issuers (6,553,591)
Net realized loss on investment transactions of
affiliated issuers (147,504)
Change in unrealized depreciation on investments (127,313,448)
- -----------------------------------------------------------------
Net loss on investments (134,014,543)
- -----------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM
OPERATIONS $(137,574,102)
- -----------------------------------------------------------------
</TABLE>
KOPP EMERGING GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year Ended
September 30, 1998
<S> <C>
- --------------------------------------------------------------------------
OPERATIONS
Net investment loss $ (3,559,559)
Net realized loss on investments (6,701,095)
Change in unrealized depreciation on investments (127,313,448)
- --------------------------------------------------------------------------
Net decrease in net assets resulting from
operations (137,574,102)
- --------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Class A:
Proceeds from shares sold 394,592,927
Cost of shares redeemed (51,519,044)
Class I:
Proceeds from shares sold 38,670,416
Cost of shares redeemed (59,940)
- --------------------------------------------------------------------------
Net increase resulting from capital share
transactions 381,684,359
- --------------------------------------------------------------------------
TOTAL INCREASE IN NET ASSETS: 244,110,257
- --------------------------------------------------------------------------
NET ASSETS
Beginning of year 0
- --------------------------------------------------------------------------
End of year $ 244,110,257
- --------------------------------------------------------------------------
</TABLE>
See Notes to the Financial Statements.
7
<PAGE>
KOPP EMERGING GROWTH FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended
September 30, 1998
----------------------------------------
Class A Class I
<S> <C> <C>
- ----------------------------------------------------------------------------------
PER SHARE DATA
Net asset value, beginning of year $10.00 $10.00
- ----------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (0.09)(1) (0.06)(1)
Net realized and unrealized losses on
investments (4.10) (4.10)
- ----------------------------------------------------------------------------------
Total from investment operations (4.19) (4.16)
- ----------------------------------------------------------------------------------
Net asset value, end of year $ 5.81 $ 5.84
- ----------------------------------------------------------------------------------
Total return (41.90)%(2) (41.60)%
- ----------------------------------------------------------------------------------
SUPPLEMENTAL DATA AND RATIOS
Net assets, end of year (000's) $216,533 $27,577
Ratio of expenses to average net assets 1.50%(3) 1.15%(3)
Ratio of net investment (loss) to
average net assets (1.30)%(4) (0.95)%(4)
Before expense reimbursement (1.76)% (1.26)%
After expense reimbursement (1.30)% (0.95)%
Portfolio turnover rate 19.7%(5) 19.7%(5)
</TABLE>
- ----------------------------------------------------
(1) Net investment loss per share is calculated using the ending balance of
undistributed net investment loss prior to considerations of adjustments
for permanent book and tax differences.
(2) Total return excludes sales charges.
(3) Absent voluntary fee waivers, the ratio of expenses to average net assets
would have been 1.96% an 1.65% for the year ended September 30, 1998, for
Class A and Class I respectively. Included in the fee waivers were 12b-1
fee waivers of 0.15% and 0.19% for Class A and Class I respectively.
(4) Absent voluntary fee waivers, the ratio of net investment (loss) to average
net assets would have been (1.76)% and (1.45)% for the year ended September
30, 1998, for Class A and Class I respectively.
(5) Calculated on the basis of the Fund as a whole without distinguishing
between the classes of shares issued.
8 See Notes to the Financial Statements.
<PAGE>
KOPP EMERGING GROWTH FUND
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Number of Market
Shares Value
<C> <S> <C>
- ------------------------------------------------------------------
COMMON STOCK -- 98.6%
- ------------------------------------------------------------------
APPLICATION DEVELOPMENT TOOLS -- 8.6%
1,250,000 Rational Software Corporation $ 21,015,625
- ------------------------------------------------------------------
CARDIOVASCULAR -- 0.8%
200,000 AVECOR Cardiovascular, Inc. 1,900,000
- ------------------------------------------------------------------
DATA STORAGE -- 1.3%
300,000 Western Digital Corporation 3,225,000
- ------------------------------------------------------------------
DATA WAREHOUSING -- 2.8%
410,000 Cognos, Inc.+ 6,867,500
- ------------------------------------------------------------------
DIAGNOSTICS -- 0.8%
445,000 Cholestech Corporation 2,085,937
- ------------------------------------------------------------------
ELECTRONIC COMPONENTS -- 1.6%
220,000 Artesyn Technologies, Inc. 3,795,000
- ------------------------------------------------------------------
ELECTRONIC DATA INTERCHANGE -- 2.5%
200,000 National Data Corporation * 6,175,000
- ------------------------------------------------------------------
ELECTRONIC DESIGN AUTOMATION -- 4.5%
360,000 ANSYS, Inc. 2,610,000
200,000 Applied Microsystems Corporation 725,000
250,000 Quickturn Design System, Inc. 2,500,000
154,563 Synopsys, Inc. 5,148,880
- ------------------------------------------------------------------
10,983,880
<CAPTION>
Number of Market
Shares Value
<C> <S> <C>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
INDUSTRIAL AUTOMATION -- 1.4%
615,000 Adept Technology, Inc.(#) $ 3,459,375
- ------------------------------------------------------------------
INFECTION CONTROL EQUIPMENT -- 1.2%
100,000 STERIS Corporation 2,825,000
- ------------------------------------------------------------------
INFORMATION SECURITY -- 4.4%
570,000 Cylink Corporation 2,565,000
280,000 Macrovision Corporation 8,190,000
- ------------------------------------------------------------------
10,755,000
- ------------------------------------------------------------------
INFORMATION TECHNOLOGY SERVICES -- 4.7%
80,000 Acxiom Corporation 1,985,000
100,000 Interim Services, Inc. 2,056,250
260,000 Lightbridge, Inc. 1,430,000
110,000 Norstan, Inc. 1,925,000
200,000 ONTRACK Data International, Inc. 1,450,000
60,000 PSW Technologies, Inc. 146,250
220,000 Technology Solutions Company 2,475,000
- ------------------------------------------------------------------
11,467,500
- ------------------------------------------------------------------
LASER-BASED COMPONENTS & SUBSYSTEMS -- 2.7%
170,000 Laser Power Corporation 297,500
500,000 SDL, Inc. 6,250,000
- ------------------------------------------------------------------
6,547,500
- ------------------------------------------------------------------
MACHINE VISION/INSPECTION -- 0.6%
235,000 Zygo Corporation 1,542,188
</TABLE>
See Notes to the Financial Statements. 9
<PAGE>
KOPP EMERGING GROWTH FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Number of Market
Shares Value
<C> <S> <C>
- ------------------------------------------------------------------
- ------------------------------------------------------------------
NETWORKING -- 6.6%
150,000 3 Com Corporation $ 4,509,375
471,000 Digital Link Corporation(#) 1,825,125
300,000 Larscom Incorporated 825,000
342,000 Network Equipment Technologies, Inc. 3,420,000
510,000 VideoServer, Inc. 5,482,500
- ------------------------------------------------------------------
16,062,000
- ------------------------------------------------------------------
ONCOLOGY -- 0.9%
255,000 ImClone Systems Incorporated 2,231,250
- ------------------------------------------------------------------
RESEARCH REAGENTS/INSTRUMENTATION -- 10.4%
267,000 CN Biosciences, Inc. 6,541,500
368,900 Molecular Devices Corporation 6,317,413
375,000 Serologicals Corporation 9,421,875
209,700 Techne Corporation 3,066,863
- ------------------------------------------------------------------
25,347,651
- ------------------------------------------------------------------
SEMICAP EQUIPMENT -- 3.5%
260,000 Aetrium Incorporated 1,137,500
165,000 Applied Science and Technology, Inc. 670,312
120,000 Asyst Technologies, Inc. 840,000
100,000 Brooks Automation, Inc. 993,750
320,000 Credence Systems Corporation 4,300,000
70,000 Lam Research Corporation 700,000
- ------------------------------------------------------------------
8,641,562
- ------------------------------------------------------------------
SEMICONDUCTOR -- 5.6%
250,000 ANADIGIC, Inc. 1,656,250
307,950 Burr-Brown Corporation 5,235,150
60,000 Level One Communications, Incorporated 1,207,500
<CAPTION>
Number of Market
Shares Value
<C> <S> <C>
- ------------------------------------------------------------------
SEMICONDUCTOR (CONTINUED)
120,000 PMC-Sierra, Inc. $ 3,825,000
210,400 RF Monolithics, Inc. 1,867,300
- ------------------------------------------------------------------
13,791,200
- ------------------------------------------------------------------
SOFTWARE APPLICATIONS -- 7.8%
125,000 Aspen Technology, Inc. 3,343,750
250,000 Gensym Corporation 750,000
190,000 Hyperion Software Corporation 4,120,625
311,000 Infinium Software, Inc. 2,915,625
240,000 Information Management Associates, Inc. 1,770,000
200,000 Platinum Software Corporation 2,050,000
262,000 Project Software & Development, Inc. 3,438,750
100,000 The Vantive Corporation 600,000
- ------------------------------------------------------------------
18,988,750
- ------------------------------------------------------------------
TELECOMMUNICATION EQUIPMENT -- 7.3%
360,000 ADC Telecommunications, Inc. 7,605,000
326,000 Alcatel * 5,542,000
100,000 Applied Digital Access, Inc. 287,500
200,000 Summa Four, Inc. 3,200,000
30,000 Tellabs, Inc. 1,194,375
- ------------------------------------------------------------------
17,828,875
- ------------------------------------------------------------------
TEST AND MEASUREMENT -- 2.0%
364,900 LeCroy Corporation 4,926,150
- ------------------------------------------------------------------
VOICE PROCESSING -- 10.2%
280,000 Aspect Telecommunications Corporation 6,720,000
541,500 AVT Corporation 12,251,437
</TABLE>
10 See Notes to the Financial Statements.
<PAGE>
KOPP EMERGING GROWTH FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Number of Market
Shares Value
<C> <S> <C>
- ------------------------------------------------------------------
VOICE PROCESSING (CONTINUED)
150,000 Centigram Communications Corporation $ 1,181,250
110,000 Davox Corporation 1,031,250
130,000 Dialogic Corporation 3,623,750
- ------------------------------------------------------------------
24,807,687
- ------------------------------------------------------------------
WIRELESS -- 6.4%
88,000 Celeritek, Inc. 264,000
1,400,000 Digital Microwave Corporation 4,287,500
187,000 Electromagnetic Sciences, Inc. 2,571,250
200,000 Itron, Inc. 1,325,000
120,000 Proxim, Inc. 1,560,000
460,000 Spectrian Corporation 5,577,500
- ------------------------------------------------------------------
15,585,250
- ------------------------------------------------------------------
Total Common Stock (cost $368,168,328) $240,854,880
</TABLE>
<TABLE>
<CAPTION>
Principal Market
Amount Value
<C> <S> <C>
- ------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 2.1%
- ------------------------------------------------------------------
INVESTMENT COMPANIES -- 2.1%
$5,055,798 Firstar Institutional Money Market Fund,
5.24% * $ 5,055,798
- ------------------------------------------------------------------
Total Short-Term Investments (cost $5,055,798) 5,055,798
- ------------------------------------------------------------------
Total Investments -- 100.7% (cost $373,224,126) 245,910,678
Liabilities, less Other Assets -- (0.7%) (1,800,421)
- ------------------------------------------------------------------
NET ASSETS -- 100.0% $244,110,257
</TABLE>
- ----------------------------------------------------
* Income producing security.
+ Foreign security.
# Affiliated company; the Fund owns 5% or more of the outstanding voting
securities of the issuer.
See Notes to the Financial Statements.
11
<PAGE>
KOPP EMERGING GROWTH FUND
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
1. ORGANIZATION
Kopp Funds, Inc. (the "Company") was incorporated on June 12, 1997 as a
Minnesota company, and is registered as an open-end, non-diversified management
investment company under the Investment Company Act of 1940 (the "1940 Act").
The Kopp Emerging Growth Fund (the "Fund") is a series of the Company. The
Fund's investment objective is to seek long-term capital appreciation by
investing primarily in common stocks of companies Kopp Investment Advisors, Inc.
(the "Advisor") believes to have the potential for superior growth. The
Company's registration statement was declared effective on September 16, 1997.
The Fund commenced operations on October 1, 1997.
The costs incurred in connection with the organization, initial registration and
public offering of shares aggregated $96,935. These costs are being amortized
over the period of benefit, but not to exceed sixty months from the Fund's
commencement of operations. The proceeds of any redemption of the initial shares
by the original shareholders or any transferee will be reduced by a pro rata
portion of any then unamortized organizational expenses in the same proportion
as the number of initial shares being redeemed bears to the number of initial
shares outstanding at the time of such redemption.
The Fund has issued two classes of shares: Class A and Class I. Each class of
shares has identical rights and privileges except that each class bears its own
expenses and exclusive voting rights on matters pertaining to the distribution
plan for that class.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
INVESTMENT VALUATION
Common stocks and other equity-type securities are valued at the last sales
price on the national securities exchange or NASDAQ on which such securities are
primarily traded; however, securities traded on a national securities exchange
or NASDAQ for which there were no transactions on a given day, and securities
not listed on a national securities exchange or NASDAQ, are valued at the
average of the most recent bid and asked prices. Any securities or other assets
for which market quotations are not readily available are valued at fair value
as determined in good faith by the Board of Directors of the Company or its
delegate. The Board of Directors may approve the use of pricing services to
assist the Fund in the determination of net asset value. Instruments with a
remaining maturity of 60 days or less are valued on an amortized cost basis.
FEDERAL INCOME TAXES
The Fund intends to qualify for treatment as a "Regulated Investment Company"
under Subchapter M of the Internal Revenue Code, and the Fund intends to
distribute investment company net taxable income and net capital gains to
shareholders. Therefore, no federal tax provision is required.
INCOME AND EXPENSES
Net investment income (loss), other than class specific expenses, and realized
and unrealized gains and losses are allocated daily to each class of shares
based upon the relative net asset value of outstanding shares of each class of
shares at the beginning of the day (after adjusting for the current day's
capital share activity of the respective class).
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income and distributions of net realized gains, if
any, will be declared and paid at least annually.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses
12
<PAGE>
during the reporting period. Actual results could differ from those estimates.
FOREIGN SECURITIES
Investing in securities of foreign companies and foreign governments involves
special risks and considerations not typically associated with investing in U.S.
companies and the U.S. government. These risks include revaluation of currencies
and future adverse political and economic developments. Moreover, securities of
many foreign companies and foreign governments and their markets may be less
liquid and their prices more volatile than those of securities of comparable
U.S. companies and the U.S. government.
OTHER
Investment and shareholder transactions are recorded on the trade date. The Fund
determines the gain or loss realized from investment transactions by comparing
the original cost of the security lot sold with the net sales proceeds (specific
identification). Dividend income is recognized on the ex-dividend date or as
soon as this information is available to the Fund, and interest income is
recognized on an accrual basis. Generally accepted accounting principles require
that permanent financial reporting and tax differences be reclassified to more
closely present capital balances on a tax basis. On the Statement of Assets and
Liabilities, as a result of permanent book to tax differences, a
reclassification adjustment has been made to decrease accumulated net investment
loss and decrease paid in capital in excess of par by $3,559,559.
3. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund were as follows:
<TABLE>
<CAPTION>
Class A
Year Ended
September 30, 1998
---------------------
Shares
---------------------
<S> <C>
Shares sold 44,227,076
Shares redeemed (6,932,158)
- -------------------------------------------------------------------------
Net increase 37,294,918
</TABLE>
<TABLE>
<CAPTION>
Class I
Year Ended
September 30, 1998
---------------------
Shares
---------------------
<S> <C>
Shares sold 4,731,586
Shares redeemed (7,772)
- -------------------------------------------------------------------------
Net increase 4,723,814
</TABLE>
4. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of securities, excluding short-term
investments, for the Fund for the year ended September 30, 1998, were
$425,253,345 and $50,367,107 respectively. There were no purchases or sales of
long-term U.S. Government securities.
At September 30, 1998, gross unrealized appreciation and depreciation of
investments for federal income tax purposes were as follows:
<TABLE>
<S> <C>
Appreciation $ 22,287,858
(Depreciation) (149,604,655)
- -----------------------------------------------------------------
Net unrealized depreciation on investments $(127,316,797)
- -----------------------------------------------------------------
</TABLE>
At September 30, 1998, the cost of investments for federal income tax purposes
was $373,227,475.
The Fund realized, on a tax basis, post-October losses of $6,697,746 which are
not recognized for tax purposes until the first day of the following fiscal
year. These losses are available to offset future capital gains prior to a
distribution.
5. INVESTMENT ADVISORY AND OTHER AGREEMENTS
Pursuant to its investment advisory agreement with the Fund, the Advisor is
entitled to receive a fee, calculated daily and payable monthly, at an annual
rate of 1.00% applied to the daily net assets of the Fund.
Through September 30, 1998, the Advisor voluntarily agreed to waive its
management fee to the extent necessary to ensure that (i) the total operating
expenses for Class A shares do not exceed 1.50% and (ii) the operating expenses
for Class I shares do not exceed 1.15%.
Firstar Mutual Fund Services LLC, serves as accounting services agent,
administrator and transfer
13
<PAGE>
agent for the Fund. Firstar Bank Milwaukee, N.A. serves as custodian for the
Fund.
The Fund has adopted a plan pursuant to Rule 12b-1 under the 1940 Act (the
"Plan") with respect to each class of shares pursuant to which certain
distribution and shareholder servicing fees may be paid to Centennial Lakes
Capital, Inc. (the "Distributor"). The Distributor is an affiliate of the
Advisor. Under the terms of the Plan, each class of shares may be required to
pay the Distributor (i) a distribution fee for the promotion and distribution of
shares of up to 0.25% of the average daily net assets of the Fund attributable
to each class (computed on an annual basis) and (ii) a shareholder servicing fee
for personal service provided to shareholders of up to 0.25% of the average
daily net assets of the Fund attributable to each class (computed on an annual
basis). Payments under the Plan with respect to Class A shares are currently
limited to 0.35%, which represents a 0.10% distribution fee and a 0.25%
shareholder servicing fee; the Fund currently has no intention of paying any
Rule 12b-1 fees in connection with Class I shares. The Distributor is authorized
to, in turn, pay all or a portion of these fees to any registered securities
dealer, financial institution, or other person (the "Recipient") who renders
assistance in distributing or promoting the sale of Fund shares, or who provides
certain shareholder services to Fund shareholders, pursuant to a written
agreement ("Rule 12b-1 Related Agreement"). To the extent such fee is not paid
to such persons, the Distributor may use the fee for its own distribution
expenses incurred in connection with the sale of Fund shares, or for any of its
shareholder servicing expenses. The Plan is a "reimbursement" plan, which means
that the fees paid by the Fund under the Plan are intended to reimburse the
Distributor for services rendered and commission fees borne up to the maximum
allowable distribution and shareholder servicing fees. If the Distributor is due
more money for its services rendered and commission fees borne than are
immediately payable because of the expense limitation under the Plan, the unpaid
amount is carried forward from period to period while the Plan is in effect
until such time as it may be paid. As of September 30, 1998, there were $540,941
of unreimbursed distribution and shareholder servicing related expenses to be
carried forward to future plan years. Distribution fees and shareholder
servicing fees incurred by Class A shares for the year ended September 30, 1998
were $256,333 and $640,833 respectively (net of voluntary waiver). The
distribution fees and shareholder servicing fees retained by the Distributor for
the year ended September 30, 1998 were $15,738 and $39,345 respectively.
The Fund was advised that the Distributor retained front-end sales charges on
Class A shares of $1,992,628 for the year ended September 30, 1998.
6. OTHER AFFILIATES
Investments representing 5% or more of the outstanding voting securities of an
issuer results in that company being considered an affiliated company, as
defined in the Investment Company Act of 1940. The aggregate market value of all
securities of affiliated companies as of September 30, 1998 amounted to
$5,284,500, representing 2.2% of net assets. Transactions during the year ended
September 30, 1998 in which the issuer was an affiliate are as follows:
<TABLE>
<CAPTION>
Adept Digital
Technology, Link
Inc. Corporation Total
------------ ------------ ------------
<S> <C> <C> <C>
October 1, 1997 Balance
Shares 0 0 0
Cost $0 $0 $0
Gross Additions
Shares 615,000 481,000 1,096,000
Cost $ 8,533,551 $ 9,486,332 $ 18,019,883
Gross Deductions
Shares 0 10,000 10,000
Cost $0 $260,000 $260,000
- -------------------------------------------------------------------------------
September 30, 1998 Balance
Shares 615,000 471,000 1,086,000
Cost $ 8,533,551 $ 9,226,332 $ 17,759,883
- -------------------------------------------------------------------------------
</TABLE>
7. BANK BORROWING
The Fund has secured a $10,000,000 line of credit with Firstar Bank Milwaukee,
N.A. The interest rate on any borrowings is the Bank's announced prime rate and
borrowings would be for liquidity purposes. During the year ended September 30,
1998, the Fund did not draw upon the line of credit.
14
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
KOPP FUNDS, INC.
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Kopp Emerging Growth Fund (a separate portfolio
within Kopp Funds, Inc.) as of September 30, 1998, and the related statements of
operations and changes in net assets and the financial highlights for the year
then ended. These financial statements and the financial highlights are the
responsibility of the fund's management. Our responsibility is to express an
opinion on these financial statements and the financial highlights based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and the financial highlights
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of September 30, 1998,
by correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and the financial highlights referred
to above present fairly, in all material respects, the financial position of
Kopp Emerging Growth Fund as of September 30, 1998, and the results of its
operations, the changes in its net assets and the financial highlights for the
year then ended, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
October 16, 1998
15
<PAGE>
[LOGO] EMERGING GROWTH FUND
-----------------------------------------------------------------------
ANNUAL REPORT 1998
DIRECTORS
LeRoy C. Kopp
Robert L. Stehlik
Thomas R. Stuart
OFFICERS
LeRoy C. Kopp, CHIEF EXECUTIVE OFFICER, CHIEF FINANCIAL
OFFICER AND PRESIDENT
Kathleen S. Tillotson, EXECUTIVE VICE PRESIDENT AND SECRETARY
Gregory S. Kulka, FIRST VICE PRESIDENT
INVESTMENT ADVISER
KOPP INVESTMENT ADVISORS, INC.
7701 France Avenue South, Suite 500
Edina, MN 55435
ADMINISTRATOR AND TRANSFER AGENT
FIRSTAR MUTUAL FUND SERVICES, LLC
For Overnight deliveries, use: For regular mail deliveries, use:
Kopp Funds, Inc. Kopp Funds, Inc.
c/o Firstar Mutual Fund c/o Firstar Mutual Fund
Services, LLC Services, LLC
Third Floor P.O. Box 701
615 E. Michigan Street Milwaukee, WI 53201-0701
Milwaukee, WI 53202
CUSTODIAN
FIRSTAR BANK MILWAUKEE N.A.
777 E. Wisconsin Avenue
Milwaukee, WI 53202
DISTRIBUTOR
CENTENNIAL LAKES CAPITAL, INC.
7701 France Avenue South, Suite 500
Edina, MN 55435
INDEPENDENT AUDITORS
KPMG PEAT MARWICK LLP
4200 Norwest Center
90 South Seventh Street
Minneapolis, MN 55402
LEGAL COUNSEL
GODFREY & KAHN, S.C.
780 N. Water Street
Milwaukee, WI 53202
KOPP FUNDS IS DISTRIBUTED BY CENTENNIAL LAKES CAPITAL, INC., A MEMBER OF
THE NASD AND AN AFFILIATE OF KOPP INVESTMENT ADVISORS, INC. AND THE FUND.
