UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-8267
Kopp Funds, Inc.
(Exact name of registrant as specified in charter)
7701 France Avenue South, Suite 500
Edina, MN 55435
(Address of principal executive offices) (Zip code)
John P. Flakne
Kopp Funds, Inc.
7701 France Avenue South, Suite 500
Edina, MN 55435
(Name and address of agent for service)
(952) 841-0400
Registrant's telephone number, including area code
Date of fiscal year end: September 30, 2006
Date of reporting period: September 30, 2006
ITEM 1. REPORT TO STOCKHOLDERS.
- -------------------------------
1
November 15, 2006
DEAR FELLOW SHAREHOLDERS,
Kopp Investment Advisors has entered into an agreement in principle to sell Kopp
Funds, our retail mutual fund business, to American Century Investments. The
sale is scheduled to be completed in the first quarter of 2007. You should have
received the applicable proxy voting materials in the mail.
American Century is a highly regarded investment manager that I believe shares
many of the same investing, cultural and business values as Kopp Investment
Advisors. The acquisition of the Kopp mutual funds by American Century should
provide a number of benefits for Kopp shareholders including:
- - A parent company focused primarily on the mutual fund business.
- - Proven performance from a seasoned growth investor.
- - Broader product choices and award winning services.
Upon completion of the transaction, the Kopp Emerging Growth Fund will be
reorganized into the American Century New Opportunities II Fund and the Kopp
Total Quality Management Fund will be reorganized into the American Century
Equity Growth Fund.
In recent years, it has been increasingly difficult for small fund groups to
thrive. Heightened regulatory and compliance burdens along with aggressive
industry competition require the scale of a larger firm like American Century.
As an increasing share of industry assets move to the largest companies, many
funds have determined that consolidation is in their shareholders' best
interest. At least eight fund groups have changed hands in 2006 alone. American
Century Investments has been one of the consolidators.
We are proud to have had the opportunity to serve Kopp Funds since 1997. Going
forward, Kopp Investment Advisors will focus exclusively on our private account
management. Sally Anderson and I will lead the investment team and look forward
to continuing to serve our private account clients.
Turning to the markets, we've seen headlines recently about the Dow Jones
Industrial Average surpassing the highs achieved in early-2000, but that narrow
gauge of 30 large-cap stocks doesn't show the whole picture. The broader
averages are still off their highs. The Standard & Poor's 500 Index is still 13%
below its highest close in the previous bull market, and the NASDAQ Composite
Index is 55% below its record high.
Investors need to remember, however, that the NASDAQ rose far higher at the peak
than did the other indices, so when the pullback came, it fell further too. An
article in the New York Times points out that "one reason the Dow may have
recovered faster is that it had a shorter path to travel." While the Dow only
fell 38%, peak to trough, the S&P 500 declined 49% and the NASDAQ plunged a
whopping 78%.
Looking forward, we are optimistic due to two key drivers, liquidity and
earnings. Liquidity is good, as cash on the sidelines remains plentiful -- cash
in investors' pockets as well as cash on corporate balance sheets. Dividends and
share buybacks are obviously the fastest and easiest ways for corporations to
employ their cash for the benefit of shareholders, and those two categories have
been running well above historic norms during a typical economic recovery. Bear,
Stearns & Co. points out that M&A and capital expenditures, though increasing,
have so far remained below the norm. Perhaps we are reaching a point at which
this will change. Morgan Stanley's new survey of CFOs points out that M&A
activity has moved up
2
the priority list for CFOs. In fact, it ranked #1 this year (up from #7 in 2005)
as the most important planned use of corporate capital over the year ahead.
Capital expenditures on new projects ranked #2. Accelerated spending in these
areas would definitely benefit many of our stocks. In addition, earnings in
recent quarters have generally surprised on the upside. While earnings growth is
slowing somewhat, we believe analysts recognize that and estimates reflect that.
Slower but steady growth can continue to be a driver.
For the year ended September 30, 2006, the Emerging Growth Fund saw the most
benefit from investments in Software and also Wireless Systems and Components.
For Software, product upgrade cycles, business investment, and some merger and
acquisition activity were contributing factors. For Wireless, the most important
factor was carrier investment in network upgrades. The Life Sciences area was
the most challenging as the area in general was out of favor. The strategy of
the Emerging Growth Fund is to focus on those areas of the economy and those
individual companies that we believe have the potential for above average growth
over a period of years. From quarter to quarter, areas may come in and out of
favor with the market. We believe that over time, as the companies we invest in
grow their businesses, the market will eventually recognize that growth and the
stock prices will appreciate accordingly. The growth that the companies show,
while primarily affected by the success of their products and strategies, will
also depend on the general economy and, based on current holdings, on business
investment in particular. We view the current outlook for business investment as
favorable.
For the Total Quality Management Fund, the Consumer Discretionary and Materials
sectors provided the greatest benefit relative to the benchmark while the
Financial sector had relatively weaker performance. The strategy of the TQM fund
is not based on a particular outlook for the economy. Instead, we believe that
over time, companies with a Quality Advantage are likely to outlast, outpace and
outperform their competitors. The strategy is based on holding investments
chosen from a large number of industry groups using the advisor's proprietary
Quality scoring system to select those companies viewed as the most effective at
implementing and using Quality systems to gain a competitive advantage. It is
our view that a portfolio of companies, each chosen for having the highest
Quality score versus its industry peers, will provide a solid core for an
investment portfolio across a wide range of economic and market conditions.
Sincerely,
/s/ L.C. KOPP
LEE KOPP
President
Kopp Investment Advisors
3
It should not be assumed that either Fund's stock
selection or investment philosophy will be
profitable or will equal past performance. Because
of daily market fluctuations, current Fund
performance may also be different from the
performance described in this report. Small- and
mid-cap stocks involve greater risks and volatility
than those of larger, more established companies.
Potential for profit entails possibility of loss.
This shareholder letter is for general information
only and is not intended to provide specific advice
or stock recommendations to any individual. It is
also not a solicitation for the purchase or sale of
any security or investment advisory service. The
opinions in the letter are those of Kopp Investment
Advisors, are subject to change without notice, and
may not come to pass. Future investment decisions
and commentary may be made under different economic,
market, and industry conditions from those existing
at the time the letter was written.
A stock market index is unmanaged and does not
charge advisory fees, transactions costs, or other
expenses incurred by a mutual fund. Any index will
include a different degree of investment in
individual securities, industries, or sectors from
the Kopp Emerging Growth Fund or the Kopp Total
Quality Management Fund. The mention of an index
does not mean that the index is an appropriate
benchmark for the Fund. Although the data in the
letter has been obtained from sources believed
reliable, Kopp Investment Advisors cannot guarantee
the accuracy of such information.
Important Disclosure Information
The information included herein is not an offer to
sell, nor a solicitation of an offer to buy, shares
of any investment company, nor is it a solicitation
of any proxy. American Century Mutual Funds, Inc.
and American Century Quantitative Equity Funds, Inc.
have filed a proxy statement/prospectus and other
relevant documents regarding the reorganization of
the Kopp Funds with the U.S. Securities and Exchange
Commission (the "SEC"). INVESTORS ARE URGED TO READ
THESE DOCUMENTS BECAUSE THEY CONTAIN IMPORTANT
INFORMATION ABOUT THE REORGANIZATIONS AND RELATED
MATTERS. You may obtain these documents free of
charge at the SEC website (www.sec.gov).
This report is not authorized for distribution to
prospective investors in either Fund unless preceded
or accompanied by a prospectus. For more information
on either Fund, including current performance and
expenses, call 1-888-533-KOPP for a free prospectus.
It describes the investment objectives, risks,
charges, expenses, and other information. Read it
carefully before you invest or send money. Each Fund
should be used in a program of diversified investing
and not as a complete investment program.
Kopp Funds are distributed by Centennial Lakes
Capital, LLC, a member of the NASD and an affiliate
of Kopp Investment Advisors, LLC and the Funds.
4
KOPP EMERGING GROWTH FUND
INDUSTRY representation
- --------------------------------------------------------------------------------
(PIE CHART)
<Table>
1 Communication Components & Subsystems 18.1%
2 Therapeutics/Specialty Compounds 16.8%
3 Wireless Equipment 10.3%
4 Software Applications 9.7%
5 Networking 6.5%
6 Telecommunication Equipment 5.7%
7 Arthroscopy & Orthopedics 4.1%
8 Data Capture Software 3.2%
9 Surgical Products 3.1%
10 Genomics 3.1%
11 Research Instrumentation 2.8%
12 Clinical Laboratory Diagnostics 2.5%
13 Medical Device Related Software 2.5%
14 Miscellaneous Services 2.1%
15 Imaging Products 1.9%
16 Industrial Automation 1.6%
17 Specialty Pharmaceuticals 1.5%
18 Point-of-Care Diagnostics 1.5%
19 Semiconductor 0.7%
20 Cash & Equivalents 2.3%
100.0%
------------------------------------------------------------ -----
</Table>
Percentages represent market value as a percentage of total investments on
9/30/06.
5
TOP ten HOLDINGS
- --------------------------------------------------------------------------------
<Table>
<Caption>
TICKER
------
1. REDBACK NETWORKS INC. RBAK
2. EPICOR SOFTWARE CORPORATION EPIC
3. MEDAREX, INC. MEDX
4. STRATEX NETWORKS, INC. STXN
5. FINISAR CORPORATION FNSR
</Table>
<Table>
<Caption>
TICKER
------
6. OPLINK COMMUNICATIONS, INC. OPLKD
7. ADC TELECOMMUNICATIONS, INC. ADCT
8. ARRAY BIOPHARMA INC. ARRY
9. CELL GENESYS, INC. CEGE
10. NUVASIVE, INC. NUVA
</Table>
5
KOPP EMERGING GROWTH FUND
$10,000 INITIAL INVESTMENT MADE 10/1/97 THROUGH 9/30/06
(LINE GRAPH)
<Table>
<Caption>
KOPP EMERGING GROWTH KOPP EMERGING GROWTH RUSSELL 2000R GROWTH
FUND - CLASS A (NO LOAD) FUND - CLASS A (LOAD) RUSSELL 2000R INDEX INDEX
------------------------ --------------------- ------------------- --------------------
10/1/1997 10000.00 9653.00 10000.00 10000.00
3/31/1998 8400.00 8108.00 10637.00 10271.00
9/30/1998 5810.00 5608.00 8098.00 7517.00
3/31/1999 8550.00 8252.00 8908.00 9137.00
9/30/1999 11889.00 11476.00 9643.00 9969.00
3/31/2000 28437.00 27448.00 12230.00 14532.00
9/30/2000 30778.00 29708.00 11898.00 12926.00
3/31/2001 12366.00 11936.00 10355.00 8747.00
9/30/2001 9364.00 9039.00 9384.00 7422.00
3/31/2002 11294.00 10901.00 11804.00 9180.00
9/30/2002 5083.00 4907.00 8503.00 6074.00
3/31/2003 5766.00 5566.00 8621.00 6277.00
9/30/2003 9863.00 9520.00 11606.00 8608.00
3/31/2004 10936.00 10556.00 14124.00 10241.00
9/30/2004 8671.00 8370.00 13785.00 9634.00
3/31/2005 8671.00 8370.00 14888.00 10331.00
9/30/2005 9690.00 9353.00 16260.00 11366.00
3/31/2006 12551.00 12115.00 18736.00 13206.00
9/30/2006 9451.00 9123.00 17873.00 12034.00
</Table>
<Table>
<Caption>
Average Annual Rate of Return*
For the Period Ended September 30, 2006
----------------------------------------------------
One Year Five Years Since Inception*
-------- ---------- ----------------
Kopp Emerging Growth Fund -- Class A (no load)...... -2.46% 0.18% -0.63%
Kopp Emerging Growth Fund -- Class A (load)......... -5.83% -0.52% -1.02%
Kopp Emerging Growth Fund -- Class C (no load)...... -3.15% -0.45% 1.42%
Kopp Emerging Growth Fund -- Class C (load)......... -4.12% -0.45% 1.42%
Kopp Emerging Growth Fund -- Class I................ -2.06% 0.56% -0.24%
Russell 2000 Index.................................. 9.92% 13.78% 6.65%
Russell 2000 Growth Index........................... 5.88% 10.15% 2.08%
</Table>
* Class A and Class I, October 1, 1997; Class C, February 19, 1999.
This chart assumes an initial gross investment of $10,000 made on October 1,
1997 (commencement of operations). Returns shown include the reinvestment of
dividends. For Class A Shares, a maximum 3.50% sales load is in effect. For
Class C Shares, a maximum contingent deferred sales charge of 1.00% is in
effect for redemptions less than one year from the purchase date. Class A
Shares are sold with a 0.35% 12b-1 fee. Class C Shares are sold with a 1.00%
12b-1 fee. Performance reflects expense reimbursements, fee waivers and
Advisor recovery of fees waived. Absent expense reimbursements and fee waivers
for the years ended September 30, 1999 and September 30, 1998, total returns
would be reduced. Absent Advisor fee-waiver recovery for the year ended
September 30, 2000, total returns would be increased.
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 original cost. The $10,000 table and the Fund's
returns do not reflect the deduction of taxes that a shareholder would pay on
distributions or the redemption of Fund shares. Performance data shown does
not reflect the redemption fee imposed on shares. If it did, total returns
would be reduced. Indices are for illustrative purposes only, do not include
expenses and are not available for investment.
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 Russell 2000 Index 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.
Russell 2000 Growth Index -- A stock market index which measures the
performance of the Russell 2000 companies with higher price-to-book ratios and
higher forecasted growth values.
6
KOPP EMERGING GROWTH FUND
SCHEDULE OF INVESTMENTS
September 30, 2006
<Table>
<Caption>
Number of
Shares Value
- ---------------------------------------------------------------
COMMON STOCK -- 98.0%
- ---------------------------------------------------------------
ARTHROSCOPY & ORTHOPEDICS -- 4.1%
420,000 NuVasive, Inc. $ 8,446,200
280,000 Regeneration Technologies, Inc. 1,965,600
- ---------------------------------------------------------------
10,411,800
- ---------------------------------------------------------------
CLINICAL LABORATORY DIAGNOSTICS -- 2.6%
265,000 E-Z-EM, Inc. 4,181,700
200,000 IRIS International Inc. 2,300,000
- ---------------------------------------------------------------
6,481,700
- ---------------------------------------------------------------
COMMUNICATION COMPONENTS & SUBSYSTEMS -- 18.1%
270,000 Bookham, Inc. 869,400
1,069,900 Centillium Communications, Inc. 2,182,596
600,000 EMCORE Corporation 3,552,000
3,925,000 Finisar Corporation 14,247,750
1,800,000 Mindspeed Technologies Inc. 3,114,000
700,000 Oplink Communications, Inc. 13,986,000
400,000 PLX Technology, Inc. 4,148,000
4,000,000 Vitesse Semiconductor Corporation 3,960,000
- ---------------------------------------------------------------
46,059,746
- ---------------------------------------------------------------
DATA CAPTURE SOFTWARE -- 3.2%
675,000 Phase Forward Incorporated 8,059,500
- ---------------------------------------------------------------
GENOMICS -- 3.1%
1,422,500 Sangamo BioSciences, Inc. 7,909,100
- ---------------------------------------------------------------
IMAGING PRODUCTS -- 1.9%
167,500 SonoSite, Inc. 4,757,000
- ---------------------------------------------------------------
INDUSTRIAL AUTOMATION -- 1.6%
356,961 Adept Technology, Inc. 4,090,773
</Table>
<Table>
<Caption>
Number of
Shares Value
- ---------------------------------------------------------------
MEDICAL DEVICE RELATED SOFTWARE -- 2.5%
200,000 Vital Images, Inc. $ 6,316,000
- ---------------------------------------------------------------
MISCELLANEOUS SERVICES -- 2.1%
700,000 Digimarc Corporation 5,425,000
- ---------------------------------------------------------------
NETWORKING -- 6.6%
1,200,000 Redback Networks Inc. 16,656,000
- ---------------------------------------------------------------
POINT-OF-CARE DIAGNOSTICS -- 1.5%
378,800 Cepheid, Inc. 2,734,936
100,000 DexCom, Inc. 1,113,000
- ---------------------------------------------------------------
3,847,936
- ---------------------------------------------------------------
RESEARCH INSTRUMENTATION -- 2.8%
1,024,900 Caliper Life Sciences, Inc. 5,001,512
50,000 Harvard Bioscience, Inc. 225,000
3,420,000 Transgenomic, Inc.(#) 1,915,200
- ---------------------------------------------------------------
7,141,712
- ---------------------------------------------------------------
SEMICONDUCTOR -- 0.7%
530,000 QuickLogic Corporation 1,876,200
- ---------------------------------------------------------------
SOFTWARE APPLICATIONS -- 9.7%
1,245,000 Epicor Software Corporation 16,321,950
650,000 MapInfo Corporation 8,339,500
- ---------------------------------------------------------------
24,661,450
- ---------------------------------------------------------------
SPECIALTY PHARMACEUTICALS -- 1.5%
950,000 DepoMed, Inc. 3,876,000
- ---------------------------------------------------------------
SURGICAL PRODUCTS -- 3.1%
200,000 Cutera, Inc. 5,318,000
850,000 Rita Medical Systems, Inc. 2,677,500
- ---------------------------------------------------------------
7,995,500
</Table>
See Notes to the Financial Statements.
7
KOPP EMERGING GROWTH FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
September 30, 2006
<Table>
<Caption>
Number of
Shares Value
- ---------------------------------------------------------------
TELECOMMUNICATION EQUIPMENT -- 5.7%
760,000 ADC Telecommunications, Inc. $ 11,400,000
3,300,000 Tut Systems, Inc.# 3,135,000
- ---------------------------------------------------------------
14,535,000
- ---------------------------------------------------------------
THERAPEUTICS/SPECIALTY COMPOUNDS -- 16.9%
1,166,000 Array BioPharma Inc. 9,934,320
1,926,500 Cell Genesys, Inc. 8,804,105
1,490,000 Medarex, Inc. 16,002,600
2,415,000 Neose Technologies, Inc.# 4,781,700
200,000 ZymoGenetics, Inc. 3,374,000
- ---------------------------------------------------------------
42,896,725
- ---------------------------------------------------------------
WIRELESS EQUIPMENT -- 10.3%
920,000 RAE Systems Inc. 2,806,000
3,500,000 Stratex Networks, Inc. 15,540,000
580,000 Superconductor Technologies Inc. 841,000
3,240,000 WJ Communications, Inc. 6,998,400
- ---------------------------------------------------------------
26,185,400
- ---------------------------------------------------------------
TOTAL COMMON STOCK (Cost $341,796,715) 249,182,542
</Table>
<Table>
<Caption>
Number of
Shares Value
- ---------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 2.2%
- ---------------------------------------------------------------
INVESTMENT COMPANIES -- 2.2%
491,911 Fidelity Money Market Portfolio
Select Class* $ 491,911
5,236,992 First American Prime Obligations
Fund, Class I* 5,236,992
- ---------------------------------------------------------------
Total Short-Term Investments (Cost $5,728,903) 5,728,903
- ---------------------------------------------------------------
Total Investments -- 100.2% (Cost $347,525,618) 254,911,445
- ---------------------------------------------------------------
Liabilities in Excess of Other Assets -- (0.2)% (630,542)
- ---------------------------------------------------------------
NET ASSETS -- 100.0% $254,280,903
- ---------------------------------------------------------------
</Table>
# Affiliated company; the Fund owns 5% or more of the outstanding voting
securities of the issuer. See note 7 to the Notes to the Financial Statements.
* Income producing security. All other securities are non-income producing.
See Notes to the Financial Statements.
8
KOPP TOTAL QUALITY MANAGEMENT FUND
SECTOR representation
- --------------------------------------------------------------------------------
(PIE CHART)
<Table>
1 Financials 19.6%
2 Information Technology 15.9%
3 Consumer Discretionary 13.1%
4 Industrials 11.8%
5 Health Care 11.6%
6 Consumer Staples 6.9%
7 Energy 6.3%
8 Materials 6.2%
9 Utilities 5.7%
10 Telecommunication Services 1.9%
11 Cash & Equivalents 1.0%
---------------------------------- -----
100.0%
---------------------------------- -----
</Table>
Percentages represent market value as a percentage of total investments on
9/30/06.
TOP ten HOLDINGS
- --------------------------------------------------------------------------------
<Table>
<Caption>
TICKER
------
1. PUBLIC STORAGE, INC. PSA
2. MERRILL LYNCH & CO., INC. MER
3. ALLSTATE CORPORATION ALL
4. CISCO SYSTEMS, INC. CSCO
5. TEXAS INSTRUMENTS, INC. TXN
</Table>
<Table>
<Caption>
TICKER
------
6. BANK OF AMERICA CORPORATION BAC
7. NORTHERN TRUST CORPORATION NTRS
8. ANHEUSER-BUSCH COMPANIES, INC. BUD
9. WAL-MART STORES, INC. WMT
10. EMERSON ELECTRIC CO. EMR
</Table>
9
KOPP TOTAL QUALITY MANAGEMENT FUND
$10,000 INITIAL INVESTMENT MADE 11/30/96 THROUGH 9/30/06
(LINE GRAPH)
<Table>
<Caption>
KOPP TOTAL QUALITY MANAGEMENT FUND
-CLASS I (NO LOAD) S&P 500 INDEX
---------------------------------- -------------
11/30/96 10000.00 10000.00
12/31/96 10087.00 9802.00
3/31/97 10148.00 10065.00
6/30/97 11485.00 11822.00
9/30/97 12194.00 12707.00
12/31/97 11436.00 13072.00
3/31/98 12574.00 14896.00
6/30/98 11867.00 15387.00
9/30/98 10696.00 13857.00
12/31/98 12079.00 16808.00
3/31/99 11829.00 17645.00
6/30/99 13445.00 18889.00
9/30/99 12862.00 17710.00
12/31/99 16251.00 20345.00
3/31/00 18956.00 20811.00
6/30/00 20019.00 20258.00
9/30/00 16940.00 20062.00
12/31/00 13262.00 18492.00
3/31/01 11823.00 16300.00
6/30/01 12114.00 17254.00
9/30/01 10358.00 14721.00
12/31/01 11403.00 16294.00
3/31/02 11541.00 16339.00
6/30/02 9856.00 14150.00
9/30/02 8068.00 11706.00
12/31/02 8718.00 12693.00
3/31/03 8502.00 12293.00
6/30/03 9590.00 14186.00
9/30/03 9823.00 14561.00
12/31/03 10867.00 16334.00
3/31/04 11069.00 16611.00
6/30/04 11362.00 16897.00
9/30/04 11133.00 16581.00
12/31/04 12194.00 18112.00
3/31/05 11910.00 17723.00
6/30/05 12204.00 17965.00
9/30/05 12545.00 18613.00
12/31/05 12864.00 19001.00
3/31/06 13458.00 19801.00
6/30/06 13072.00 19516.00
9/30/06 13478.00 20621.00
</Table>
<Table>
<Caption>
Average Annual Rate of Return*
For the Period Ended September 30, 2006
-------------------------------------------------------------
One Year Five Years Ten Years Since Inception*
-------- ---------- --------- ----------------
Kopp Total Quality Management Fund -- Class A (no
load) 7.43% -- -- 10.03%
Kopp Total Quality Management Fund -- Class A (load) 3.67% -- -- 8.07%
Kopp Total Quality Management Fund -- Class C (no
load) 7.43% -- -- 10.03%
Kopp Total Quality Management Fund -- Class C (load) 6.43% -- -- 10.03%
Kopp Total Quality Management Fund -- Class I 7.43% 5.41% 3.78% --
S&P 500 Index 10.79% 6.97% 8.59% --
</Table>
* Class A and Class C, September 30, 2004. At the close of business on
September 30, 2004, the Kopp Total Quality Management Fund, Class I became
the successor by merger to General Securities, Incorporated. Performance
presented prior to September 30, 2004 for Class I, represents that of
General Securities, Incorporated.
This chart assumes an initial gross investment of $10,000 made on November 30,
1996. Returns shown include the reinvestment of dividends. For Class A Shares,
a maximum 3.50% sales load is in effect. For Class C Shares, a maximum
contingent deferred sales charge of 1.00% is in effect for redemptions less
than one year from the purchase date. Class A Shares are sold with a 0.35%
12b-1 fee. Class C Shares are sold with a 1.00% 12b-1 fee. Performance
reflects fee waivers. In the absence of fee waivers, 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 original cost. The $10,000 table and the Fund's
returns do not reflect the deduction of taxes that a shareholder would pay on
distributions or the redemption of Fund shares. Performance data shown does
not reflect the redemption fee imposed on shares. If it did, total returns
would be reduced. Index is for illustrative purposes only, does not include
expenses and is not available for investment.
S&P 500 Index -- An unmanaged index generally representative of the market for
the stocks of large-sized U.S. companies. The average annual rate of return
for this index assumes the reinvestment of dividends.
10
KOPP TOTAL QUALITY MANAGEMENT FUND
SCHEDULE OF INVESTMENTS
September 30, 2006
<Table>
<Caption>
Number of
Shares Value
- ---------------------------------------------------------------
COMMON STOCK -- 97.3%
- ---------------------------------------------------------------
AEROSPACE & DEFENSE -- 2.2%
3,500 Boeing Company $ 275,975
3,100 Lockheed Martin Corporation 266,786
- ---------------------------------------------------------------
542,761
- ---------------------------------------------------------------
AIR FREIGHT & LOGISTICS -- 1.0%
2,300 FedEx Corp. 249,964
- ---------------------------------------------------------------
AIRLINES -- 1.0%
15,000 Southwest Airlines Co. 249,900
- ---------------------------------------------------------------
AUTO COMPONENTS -- 1.1%
3,600 Johnson Controls, Inc. 258,264
- ---------------------------------------------------------------
BEVERAGES -- 2.2%
6,100 Anheuser-Busch Companies, Inc. 289,811
3,900 PepsiCo, Inc. 254,514
- ---------------------------------------------------------------
544,325
- ---------------------------------------------------------------
BIOTECHNOLOGY -- 1.1%
3,600 Amgen, Inc.* 257,508
- ---------------------------------------------------------------
CAPITAL MARKETS -- 3.6%
3,800 Merrill Lynch & Co., Inc. 297,236
5,000 Northern Trust Corporation 292,150
4,500 State Street Corporation 280,800
- ---------------------------------------------------------------
870,186
- ---------------------------------------------------------------
CHEMICALS -- 3.0%
3,600 Air Products & Chemicals, Inc. 238,932
6,000 Dow Chemical Company 233,880
5,500 Monsanto Company 258,555
- ---------------------------------------------------------------
731,367
</Table>
<Table>
<Caption>
Number of
Shares Value
- ---------------------------------------------------------------
COMMERCIAL BANKS -- 5.5%
5,459 Bank of America Corporation $ 292,439
6,900 Fifth Third Bancorp 262,752
3,500 PNC Financial Services Group, Inc. 253,540
9,500 Synovus Financial Corp. 279,015
7,000 Wells Fargo & Company 253,260
- ---------------------------------------------------------------
1,341,006
- ---------------------------------------------------------------
COMMERCIAL SERVICES & SUPPLIES -- 1.1%
5,800 Pitney Bowes, Inc. 257,346
- ---------------------------------------------------------------
COMMUNICATIONS EQUIPMENT -- 2.8%
12,800 Cisco Systems, Inc.* 294,400
5,500 Corning, Inc.* 134,255
10,000 Motorola, Inc. 250,000
- ---------------------------------------------------------------
678,655
- ---------------------------------------------------------------
COMPUTERS & PERIPHERALS -- 1.7%
6,700 Dell, Inc.* 153,028
3,100 International Business Machines
Corporation 254,014
- ---------------------------------------------------------------
407,042
- ---------------------------------------------------------------
CONSUMER FINANCE -- 1.2%
5,000 American Express Company 280,400
- ---------------------------------------------------------------
CONTAINERS & PACKAGING -- 1.0%
7,400 Bemis Company, Inc. 243,164
- ---------------------------------------------------------------
DIVERSIFIED FINANCIAL SERVICES -- 1.2%
5,700 Citigroup, Inc. 283,119
- ---------------------------------------------------------------
DIVERSIFIED TELECOMMUNICATION
SERVICES -- 1.9%
11,600 Sprint Nextel Corporation 198,940
6,800 Verizon Communications, Inc. 252,484
- ---------------------------------------------------------------
451,424
</Table>
See Notes to the Financial Statements.
11
KOPP TOTAL QUALITY MANAGEMENT FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
September 30, 2006
<Table>
<Caption>
Number of
Shares Value
- ---------------------------------------------------------------
ELECTRIC UTILITIES -- 2.8%
2,900 Entergy Corporation $ 226,867
6,500 Southern Company 223,990
10,900 Xcel Energy, Inc. 225,085
- ---------------------------------------------------------------
675,942
- ---------------------------------------------------------------
ELECTRICAL EQUIPMENT -- 1.2%
3,400 Emerson Electric Co. 285,124
- ---------------------------------------------------------------
ELECTRONIC EQUIPMENT &
INSTRUMENTS -- 0.8%
57,400 Solectron Corporation* 187,124
- ---------------------------------------------------------------
ENERGY EQUIPMENT & SERVICES -- 1.8%
7,600 Halliburton Company 216,220
3,600 Noble Corporation+ 231,048
- ---------------------------------------------------------------
447,268
- ---------------------------------------------------------------
FOOD & STAPLES RETAILING -- 2.3%
6,100 Walgreen Co. 270,779
5,800 Wal-Mart Stores, Inc. 286,056
- ---------------------------------------------------------------
556,835
- ---------------------------------------------------------------
FOOD PRODUCTS -- 1.1%
4,900 Hershey Foods Corporation 261,905
- ---------------------------------------------------------------
HEALTH CARE EQUIPMENT & SUPPLIES -- 2.7%
5,700 Baxter International, Inc. 259,122
11,200 Boston Scientific Corporation* 165,648
5,000 Medtronic, Inc. 232,200
- ---------------------------------------------------------------
656,970
- ---------------------------------------------------------------
HEALTH CARE PROVIDERS & SERVICES -- 4.2%
4,000 Cardinal Health, Inc. 262,960
5,400 HCA, Inc. 269,406
4,100 Quest Diagnostics Incorporated 250,756
4,950 UnitedHealth Group, Inc. 243,540
- ---------------------------------------------------------------
1,026,662
</Table>
<Table>
<Caption>
Number of
Shares Value
- ---------------------------------------------------------------
HOTELS, RESTAURANTS & LEISURE -- 2.1%
6,500 Marriott International, Inc. -- Class
A $ 251,160
7,800 Starbucks Corporation* 265,590
- ---------------------------------------------------------------
516,750
- ---------------------------------------------------------------
HOUSEHOLD DURABLES -- 1.1%
3,300 Whirlpool Corporation 277,563
- ---------------------------------------------------------------
HOUSEHOLD PRODUCTS -- 1.2%
4,600 Procter & Gamble Company 285,108
- ---------------------------------------------------------------
INDUSTRIAL CONGLOMERATES -- 2.0%
3,100 3M Co. 230,702
7,200 General Electric Company 254,160
- ---------------------------------------------------------------
484,862
- ---------------------------------------------------------------
INFORMATION TECHNOLOGY SERVICES -- 2.1%
5,000 Computer Sciences Corporation* 245,600
6,400 First Data Corporation 268,800
- ---------------------------------------------------------------
514,400
- ---------------------------------------------------------------
INSURANCE -- 4.4%
5,500 AFLAC, Inc. 251,680
4,700 Allstate Corporation 294,831
4,200 American International Group, Inc. 278,292
9,600 Progressive Corporation 235,584
- ---------------------------------------------------------------
1,060,387
- ---------------------------------------------------------------
INTERNET & CATALOG RETAIL -- 0.7%
6,300 eBay, Inc.* 178,668
- ---------------------------------------------------------------
MACHINERY -- 3.1%
3,700 Caterpillar, Inc. 243,460
3,800 Eaton Corporation 261,630
6,200 Ingersoll-Rand Company, Ltd. -- Class
A+ 235,476
- ---------------------------------------------------------------
740,566
- ---------------------------------------------------------------
MEDIA -- 2.1%
14,100 Time Warner, Inc. 257,043
8,500 Walt Disney Company 262,735
- ---------------------------------------------------------------
519,778
</Table>
See Notes to the Financial Statements.
12
KOPP TOTAL QUALITY MANAGEMENT FUND
SCHEDULE OF INVESTMENTS (CONTINUED)
September 30, 2006
<Table>
<Caption>
Number of
Shares Value
- ---------------------------------------------------------------
METALS & MINING -- 1.1%
5,200 Nucor Corporation $ 257,348
- ---------------------------------------------------------------
MULTILINE RETAIL -- 2.1%
6,000 Nordstrom, Inc. 253,800
4,800 Target Corporation 265,200
- ---------------------------------------------------------------
519,000
- ---------------------------------------------------------------
MULTI-UTILITIES & UNREGULATED POWER -- 2.8%
3,800 Constellation Energy Group 224,960
2,900 Dominion Resources Inc. 221,821
4,500 Sempra Energy 226,125
- ---------------------------------------------------------------
672,906
- ---------------------------------------------------------------
OIL & GAS -- 4.4%
5,800 Anadarko Petroleum Corporation 254,214
4,400 ConocoPhillips 261,932
4,100 Exxon Mobil Corporation 275,110
5,200 Valero Energy Corporation 267,644
- ---------------------------------------------------------------
1,058,900
- ---------------------------------------------------------------
PAPER & FOREST PRODUCTS -- 1.0%
3,900 Weyerhaeuser Company 239,967
- ---------------------------------------------------------------
PHARMACEUTICALS -- 3.4%
4,700 Eli Lilly and Company 267,900
4,200 Johnson & Johnson 272,748
9,900 Pfizer, Inc. 280,764
- ---------------------------------------------------------------
821,412
- ---------------------------------------------------------------
REAL ESTATE -- 2.4%
3,500 Public Storage, Inc. 300,965
3,000 Simon Property Group, Inc. 271,860
- ---------------------------------------------------------------
572,825
</Table>
<Table>
<Caption>
Number of
Shares Value
- ---------------------------------------------------------------
SEMICONDUCTOR & SEMICONDUCTOR
EQUIPMENT -- 4.2%
15,500 Applied Materials, Inc. $ 274,815
10,400 Intel Corporation 213,928
10,100 National Semiconductor Corporation 237,653
8,800 Texas Instruments, Inc. 292,600
- ---------------------------------------------------------------
1,018,996
- ---------------------------------------------------------------
SOFTWARE -- 3.3%
8,000 Intuit, Inc.* 256,720
10,300 Microsoft Corporation 281,499
14,800 Oracle Corporation* 262,552
- ---------------------------------------------------------------
800,771
- ---------------------------------------------------------------
SPECIALTY RETAIL -- 3.1%
4,700 Best Buy Co., Inc. 251,732
6,700 Home Depot, Inc. 243,009
10,500 Staples, Inc. 255,465
- ---------------------------------------------------------------
750,206
- ---------------------------------------------------------------
TEXTILES, APPAREL & LUXURY GOODS -- 1.1%
8,100 Coach, Inc.* 278,640
- ---------------------------------------------------------------
THRIFTS & MORTGAGE FINANCE -- 1.1%
7,400 Countrywide Financial Corporation 259,296
- ---------------------------------------------------------------
TOTAL COMMON STOCK (Cost $18,334,998) 23,572,610
- ---------------------------------------------------------------
SHORT-TERM INVESTMENT -- 1.0%
- ---------------------------------------------------------------
INVESTMENT COMPANY -- 1.0%
243,978 First American Prime Obligations Fund,
Class I 243,978
- ---------------------------------------------------------------
Total Short-Term Investment (Cost $243,978) 243,978
- ---------------------------------------------------------------
Total Investments -- 98.3% (Cost $18,578,976) 23,816,588
- ---------------------------------------------------------------
Other Assets Less Liabilities -- 1.7% 418,884
- ---------------------------------------------------------------
NET ASSETS -- 100.0% $24,235,472
- ---------------------------------------------------------------
</Table>
* Non-income producing.
+ U.S. traded security of a foreign issuer.
See Notes to the Financial Statements.
13
KOPP FUNDS, INC.
INFORMATION ABOUT YOUR FUNDS'
EXPENSES
September 30, 2006 (Unaudited)
As a shareholder of the Funds, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on purchase payments, contingent deferred
sales charges on redemptions, and redemption fees, if any; and (2) ongoing
costs, including management fees, distribution and/or service fees (12b-1) and
other Fund expenses. The following Expense Examples are intended to help you
understand your ongoing costs (in dollars) of investing in the Funds and to
compare these costs with the ongoing costs of investing in other mutual funds.
These Examples are based on an investment of $1,000 invested at the beginning of
the period and held for the entire period from April 1, 2006 through September
30, 2006.
The following tables provide information about actual account values and actual
expenses. The Examples below include, but are not limited to, management fees,
distribution and/or service fees (12b-1), fund accounting, custody and transfer
agent fees. The Examples do not include portfolio trading commissions and
related expenses. You may use this information, together with the amount you
invested, to estimate the expenses that you paid over the period. Simply divide
your account value by $1,000 (for example, an $8,600 account value divided by
$1,000 = 8.6), then multiply the result by the number in the table under the
column entitled "Expenses Paid During Period" to estimate the expenses you paid
on your account during this period.
The Examples also provide information about hypothetical account values and
hypothetical expenses based on the Funds' actual expense ratio and an assumed
rate of return of 5% per year before expenses, which is not the actual return of
either Fund. The hypothetical account values and expenses may not be used to
estimate the actual ending account balance or expenses you paid for the period.
You may use this information to compare the ongoing costs of investing in the
Funds and other funds. To do so, compare this 5% hypothetical example with the
5% hypothetical examples that appear in the shareholder reports of the other
funds.
Please note that the expenses shown are meant to highlight your ongoing costs
only and do not reflect any transaction costs, such as sales charges (loads) on
purchase payments, contingent deferred sales charges on redemptions, and
redemption fees, if any. Therefore, the hypothetical information is useful in
comparing ongoing costs only and will not help you determine the relative total
costs of owning different funds. In addition, if transaction costs were
included, your costs would have been higher.
14
KOPP FUNDS, INC.
EXPENSE EXAMPLES
<Table>
<Caption>
Beginning Ending Expenses Paid
Account Value Account Value During Period*
KOPP EMERGING GROWTH FUND 4/1/06 9/30/06 4/1/06-9/30/06
- ------------------------- ------------- ------------- --------------
ACTUAL
Class A $1,000.00 $ 753.00 $ 7.73
Class I 1,000.00 754.60 6.20
Class C 1,000.00 750.50 10.58
HYPOTHETICAL
(5% ANNUAL RETURN BEFORE EXPENSES)
Class A $1,000.00 $1,016.24 $ 8.90
Class I 1,000.00 1,018.00 7.13
Class C 1,000.00 1,012.99 12.16
</Table>
<Table>
<Caption>
Beginning Ending Expenses Paid
Account Value Account Value During Period*
KOPP TOTAL QUALITY MANAGEMENT FUND 4/1/06 9/30/06 4/1/06-9/30/06
- ---------------------------------- ------------- ------------- --------------
ACTUAL
Class A $1,000.00 $1,001.50 $ 7.53
Class I 1,000.00 1,001.50 7.53
Class C 1,000.00 1,001.50 7.53
HYPOTHETICAL
(5% ANNUAL RETURN BEFORE EXPENSES)
Class A $1,000.00 $1,017.55 $ 7.59
Class I 1,000.00 1,017.55 7.59
Class C 1,000.00 1,017.55 7.59
</Table>
* Expenses are equal to each Fund's annualized expense ratio for the period,
multiplied by the average account value over the period, multiplied by 183/365
(to reflect the six month period). For the six month period ended September
30, 2006, the annualized expense ratios of the Kopp Emerging Growth Fund,
Class A, Class I, and Class C were 1.76%, 1.41%, and 2.41%, respectively. For
the six month period ended September 30, 2006, the annualized expense ratios
of the Kopp Total Quality Management Fund, Class A, Class I, and Class C were
each capped at 1.50%.
15
KOPP FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES
September 30, 2006
<Table>
<Caption>
Emerging Total Quality
Growth Management
Fund Fund
- ------------------------------------------------------------------------------------------------
ASSETS
Investments in securities, at value:
Investments in securities of unaffiliated issuers (cost
$295,544,003 and $18,578,976, respectively) $ 245,079,545 $ 23,816,588
Investments in securities of affiliated issuers (cost
$51,981,615 and $0, respectively) (note 7) 9,831,900 --
- ------------------------------------------------------------------------------------------------
Total investments in securities (cost $347,525,618 and
$18,578,976, respectively) 254,911,445 23,816,588
Receivable for securities sold 2,437,837 579,969
Receivable from capital shares issued 46,842 4,824
Income receivable 39,117 28,706
Prepaid expenses 32,694 26,327
- ------------------------------------------------------------------------------------------------
Total Assets 257,467,935 24,456,414
- ------------------------------------------------------------------------------------------------
LIABILITIES
Payables:
Capital shares redeemed 2,401,212 129,279
Due to investment advisor 223,326 5,664
Transfer agent fees and expenses 156,581 20,501
Service fees 107,968 4,406
Fund administration fees 79,652 13,346
12b-1 distribution fees 65,318 1,435
Fund accounting fees 26,572 11,444
Audit fees 25,018 25,011
Due to affiliated distributor 19,352 --
Accrued other expenses 82,033 9,856
- ------------------------------------------------------------------------------------------------
Total Liabilities 3,187,032 220,942
- ------------------------------------------------------------------------------------------------
NET ASSETS $ 254,280,903 $ 24,235,472
- ------------------------------------------------------------------------------------------------
</Table>
See Notes to the Financial Statements.
16
KOPP FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES (CONTINUED)
September 30, 2006
<Table>
<Caption>
Emerging Total Quality
Growth Management
Fund Fund
- ------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
Capital stock $ 288,913 $ 17,806
Paid-in-capital in excess of par 477,958,036 17,561,000
Accumulated undistributed net investment income -- 18,024
Accumulated net realized gain (loss) on investments (131,351,873) 1,401,030
Unrealized net appreciation (depreciation) on investments (92,614,173) 5,237,612
- ------------------------------------------------------------------------------------------------
Total Net Assets $ 254,280,903 $ 24,235,472
- ------------------------------------------------------------------------------------------------
CLASS A
Net Assets $ 158,285,730 $ 4,892,673
Shares authorized ($0.01 par value) 3,000,000,000 3,000,000,000
Shares issued and outstanding 18,144,553 359,516
Net asset value per share (note 1) $ 8.72 $ 13.61
- ------------------------------------------------------------------------------------------------
Maximum offering price per share (note 1) $ 9.04 $ 14.10
- ------------------------------------------------------------------------------------------------
CLASS I
Net Assets $ 83,099,346 $ 18,630,496
Shares authorized ($0.01 par value) 3,000,000,000 3,000,000,000
Shares issued and outstanding 9,193,437 1,368,743
Net asset value, offering price and redemption price per
share $ 9.04 $ 13.61
- ------------------------------------------------------------------------------------------------
CLASS C
Net Assets $ 12,895,827 $ 712,303
Shares authorized ($0.01 par value) 3,000,000,000 3,000,000,000
Shares issued and outstanding 1,553,282 52,332
Net asset value and offering price per share (note 1) $ 8.30 $ 13.61
- ------------------------------------------------------------------------------------------------
</Table>
See Notes to the Financial Statements.
17
KOPP FUNDS, INC.
STATEMENTS OF OPERATIONS
For the year ended September 30, 2006
<Table>
<Caption>
Emerging Total Quality
Growth Management
Fund Fund
- ---------------------------------------------------------------------------------------------
INVESTMENT INCOME
Dividends $ 221,502 $ 434,653
- ---------------------------------------------------------------------------------------------
Total investment income 221,502 434,653
- ---------------------------------------------------------------------------------------------
EXPENSES
Investment advisory fee 3,454,153 264,268
Service fees -- Class A 588,482 16,964
Service fees -- Class C 47,807 1,407
12b-1 distribution fees -- Class A 235,393 6,786
12b-1 distribution fees -- Class C 143,420 4,220
Transfer agent fees and expenses 506,005 61,506
Fund administration fees 273,547 40,057
Professional fees 193,996 63,736
Fund accounting fees 88,226 33,609
Reports to shareholders 74,104 12,526
Custody fees 45,974 7,356
Federal and state registration fees 43,163 28,917
Directors' fees and expenses 27,877 2,097
Other expenses 108,585 14,934
- ---------------------------------------------------------------------------------------------
Total expenses before waivers 5,830,732 558,383
Less: Waiver of expenses by investment advisor -- (161,551)
- ---------------------------------------------------------------------------------------------
Net expenses 5,830,732 396,832
- ---------------------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (5,609,230) 37,821
- ---------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
Net realized gain (loss) on investment transactions:
Net realized gain (loss) on investment transactions of
unaffiliated issuers (8,224,928) 1,430,688
Net realized loss on investment transactions of affiliated
issuers (25,850,691) --
Change in unrealized appreciation (depreciation) on
investments 38,657,464 422,483
- ---------------------------------------------------------------------------------------------
Net gain on investments 4,581,845 1,853,171
- ---------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM
OPERATIONS $ (1,027,385) $1,890,992
- ---------------------------------------------------------------------------------------------
</Table>
See Notes to the Financial Statements.
18
KOPP EMERGING GROWTH FUND
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
Year Ended Year Ended
September 30, September 30,
2006 2005
- ---------------------------------------------------------------------------------------------
OPERATIONS
Net investment loss $ (5,609,230) $ (6,603,133)
Net realized loss on investments (34,075,619) (38,804,633)
Change in unrealized depreciation on investments 38,657,464 92,530,423
- ---------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from
operations (1,027,385) 47,122,657
- ---------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Class A:
Proceeds from shares issued 19,900,070 16,671,259
Cost of shares redeemed (119,877,053) (126,970,607)
Redemption fees 2,865 3,347
Class I:
Proceeds from shares issued 6,662,489 15,655,523
Cost of shares redeemed (6,620,369) (7,191,612)
Redemption fees 1,994 1,166
Class C:
Proceeds from shares issued 1,747,600 4,718,646
Cost of shares redeemed (9,119,093) (12,582,244)
Redemption fees 207 --
- ---------------------------------------------------------------------------------------------
Net decrease in net assets resulting from capital share
transactions (107,301,290) (109,694,522)
- ---------------------------------------------------------------------------------------------
TOTAL DECREASE IN NET ASSETS (108,328,675) (62,571,865)
- ---------------------------------------------------------------------------------------------
NET ASSETS
Beginning of year 362,609,578 425,181,443
- ---------------------------------------------------------------------------------------------
End of year $ 254,280,903 $ 362,609,578
- ---------------------------------------------------------------------------------------------
Accumulated undistributed net investment income $ -- $ --
- ---------------------------------------------------------------------------------------------
</Table>
See Notes to the Financial Statements.
19
KOPP TOTAL QUALITY MANAGEMENT FUND
STATEMENTS OF CHANGES IN NET ASSETS
<Table>
<Caption>
Year Ended Year Ended
September 30, September 30,
2006 2005
- --------------------------------------------------------------------------------------------
OPERATIONS
Net investment income $ 37,821 $ 77,729
Net realized gain on investments 1,430,688 1,102,056
Change in unrealized appreciation on investments 422,483 1,750,862
- --------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 1,890,992 2,930,647
- --------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income:
Class A (11,129) (9,291)
Class I (32,266) (36,152)
Class C (731) (298)
From net realized gain on investments:
Class A (273,264) --
Class I (792,276) --
Class C (17,942) --
- --------------------------------------------------------------------------------------------
Net decrease in net assets resulting from distributions to
shareholders (1,127,608) (45,741)
- --------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS
Class A:
Proceeds from shares issued 1,783,549 7,771,305
Distributions reinvested 261,961 8,762
Cost of shares redeemed (3,820,129) (1,793,357)
Redemption fees 489 --
Class I:
Proceeds from shares issued 326,955 651,104
Distributions reinvested 777,766 34,036
Cost of shares redeemed (2,324,416) (4,401,913)
Redemption fees 1,674 88
Class C:
Proceeds from shares issued 455,372 375,423
Distributions reinvested 16,743 249
Cost of shares redeemed (117,784) (53,072)
- --------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from capital
share transactions (2,637,820) 2,592,625
- --------------------------------------------------------------------------------------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (1,874,436) 5,477,531
- --------------------------------------------------------------------------------------------
NET ASSETS
Beginning of year 26,109,908 20,632,377
- --------------------------------------------------------------------------------------------
End of year $24,235,472 $26,109,908
- --------------------------------------------------------------------------------------------
Accumulated undistributed net investment income $ 18,024 $ 32,354
- --------------------------------------------------------------------------------------------
</Table>
See Notes to the Financial Statements.
20
KOPP EMERGING GROWTH FUND
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
Year Ended Year Ended Year Ended Year Ended Year Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2006 2005 2004 2003 2002
---------- ---------- ---------- ---------- ----------
Class A Class A Class A Class A Class A
- ---------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Net asset value, beginning of year $8.94 $8.00 $9.10 $4.69 $8.64
- ---------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment loss (0.16)(1)(2) (0.18)(2) (0.17)(2) (0.11)(2) (0.15)(2)
Net realized and unrealized gain
(loss) on investments (0.06) 1.12 (0.93) 4.52 (3.80)
- ---------------------------------------------------------------------------------------------------------------------
Total from investment operations (0.22) 0.94 (1.10) 4.41 (3.95)
- ---------------------------------------------------------------------------------------------------------------------
Redemption fees retained -- (3) -- (3) -- -- --
Net asset value, end of year $8.72 $8.94 $8.00 $9.10 $4.69
- ---------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA AND RATIOS
Net assets, end of year (000's) $158,286 $257,309 $332,684 $423,165 $217,177
Ratio of expenses to average net
assets 1.75% 1.72% 1.66% 1.72% 1.69%
Ratio of net investment loss to
average net assets (1.68)% (1.69)% (1.65)% (1.71)% (1.67)%
Portfolio turnover rate(4) 31.7% 19.3% 11.0% 26.9% 17.4%
Total return(5) (2.46)% 11.75% (12.09)% 94.03% (45.72)%
- ---------------------------------------------------------------------------------------------------------------------
</Table>
(1) Net investment loss per share represents net investment loss divided by the
average shares outstanding throughout the year.
(2) Net investment loss per share is calculated using the ending balance of
undistributed net investment loss prior to consideration of adjustments for
permanent book and tax differences.
(3) Less than $0.01.
(4) Calculated on the basis of the Fund as a whole without distinguishing
between the classes of shares issued.
(5) Total return excludes sales charges.
21
<Table>
<Caption>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30, SEPT. 30,
2006 2005 2004 2003 2002 2006 2005 2004
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
CLASS I CLASS I CLASS I CLASS I CLASS I CLASS C CLASS C CLASS C
- ---------------------------------------------------------------------------------------------------------------------------
$9.23 $8.23 $9.33 $4.79 $8.79 $8.57 $7.71 $8.83
- ---------------------------------------------------------------------------------------------------------------------------
(0.13)(1)(2) (0.11)(2) (0.13)(2) (0.08)(2) (0.12)(2) (0.21)(1)(2) (0.23)(2) (0.22)(2)
(0.06) 1.11 (0.97) 4.62 (3.88) (0.06) 1.09 (0.90)
- ---------------------------------------------------------------------------------------------------------------------------
(0.19) 1.00 (1.10) 4.54 (4.00) (0.27) 0.86 (1.12)
- ---------------------------------------------------------------------------------------------------------------------------
-- (3) -- (3) -- -- -- -- (3) -- --
$9.04 $9.23 $8.23 $9.33 $4.79 $8.30 $8.57 $7.71
- ---------------------------------------------------------------------------------------------------------------------------
$83,099 $84,971 $66,871 $76,501 $31,920 $12,896 $20,330 $25,626
1.40% 1.37% 1.31% 1.37% 1.34% 2.40% 2.37% 2.31%
(1.33)% (1.34)% (1.30)% (1.36)% (1.32)% (2.33)% (2.34)% (2.30)%
31.7% 19.3% 11.0% 26.9% 17.4% 31.7% 19.3% 11.0%
(2.06)% 12.15% (11.79)% 94.78% (45.51)% (3.15)% 11.15% (12.68)%
- ---------------------------------------------------------------------------------------------------------------------------
<Caption>
YEAR ENDED YEAR ENDED
SEPT. 30, SEPT. 30,
2003 2002
---------- ----------
CLASS C CLASS C
- ---------------------------------
$4.58 $8.49
- ---------------------------------
(0.14)(2) (0.21)(2)
4.39 (3.70)
- ---------------------------------
4.25 (3.91)
- ---------------------------------
-- --
$8.83 $4.58
- ---------------------------------
$29,376 $12,364
2.37% 2.34%
(2.36)% (2.32)%
26.9% 17.4%
92.80% (46.05)%
- ---------------------------------
</Table>
See Notes to the Financial Statements.
22
KOPP TOTAL QUALITY MANAGEMENT FUND
FINANCIAL HIGHLIGHTS
<Table>
<Caption>
Year Ended Year Ended
Sept. 30, Sept. 30,
2006 2005(1)
---------- ----------
Class A Class A
- ------------------------------------------------------------------------------------------
PER SHARE DATA
Net asset value, beginning of period $13.23 $11.76
- ------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.02 0.03
Net realized and unrealized gain (loss) on investments 0.94 1.46
- ------------------------------------------------------------------------------------------
Total from investment operations 0.96 1.49
- ------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS
Distributions from net investment income (0.02) (0.02)
Distributions from net realized gain (0.56) --
- ------------------------------------------------------------------------------------------
Total distributions to shareholders (0.58) (0.02)
- ------------------------------------------------------------------------------------------
Redemption fees retained -- (2) --
Net asset value, end of period $13.61 $13.23
- ------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA AND RATIOS
Net assets, end of period (000's) $4,893 $6,469
Ratio of expenses to average net assets:
Before expense reimbursement 2.35% 2.21%
After expense reimbursement 1.50% 1.50%
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement (0.71)% (0.43)%
After expense reimbursement 0.14% 0.28%
Portfolio turnover rate(5) 7.9% 35.1%
Total return(6) 7.43% 12.69%
- ------------------------------------------------------------------------------------------
</Table>
(1) Commenced operations at the close of business on September 30, 2004.
(2) Less than $0.01.
(3) Annualized.
(4) Not annualized.
(5) Calculated on the basis of the Fund as a whole without distinguishing
between the classes of shares issued.
(6) Total return excludes sales charges. Total return would have been lower had
certain expenses not been reduced.
23
<Table>
<Caption>
For the Period
Year Ended Year Ended Dec. 1, 2003 Year Ended Year Ended Year Ended Year Ended Year Ended
Sept. 30, Sept. 30, through Nov. 30, Nov. 30, Nov. 30, Sept. 30, Sept. 30,
2006 2005 Sept. 30, 2004(7) 2003(7) 2002(7) 2001(7) 2006 2005(1)
- ---------- ---------- ----------------- ---------- ---------- ---------- ---------- ----------
Class I Class I Class I Class I Class I Class I Class C Class C
- --------------------------------------------------------------------------------------------------------------------------------
$13.23 $11.76 $11.31 $10.35 $13.36 $15.81 $13.23 $11.76
- --------------------------------------------------------------------------------------------------------------------------------
0.02 0.04 0.01 0.04 0.00 0.07 0.02 0.03
0.94 1.45 0.81 1.15 (2.59) (2.41) 0.94 1.46
- --------------------------------------------------------------------------------------------------------------------------------
0.96 1.49 0.82 1.19 (2.59) (2.34) 0.96 1.49
- --------------------------------------------------------------------------------------------------------------------------------
(0.02) (0.02) (0.01) (0.04) (0.01) (0.07) (0.02) (0.02)
(0.56) -- (0.36) (0.19) (0.41) (0.04) (0.56) --
- --------------------------------------------------------------------------------------------------------------------------------
(0.58) (0.02) (0.37) (0.23) (0.42) (0.11) (0.58) (0.02)
- --------------------------------------------------------------------------------------------------------------------------------
-- (2) -- (2) -- -- -- -- -- --
$13.61 $13.23 $11.76 $11.31 $10.35 $13.36 $13.61 $13.23
- --------------------------------------------------------------------------------------------------------------------------------
$18,630 $19,297 $20,632 $21,102 $20,785 $28,439 $712 $344
2.00% 1.88% 2.07%(3) 1.97% 1.83% 1.61% 3.00% 2.86%
1.50% 1.50% 1.50%(3) 1.50% 1.50% 1.50% 1.50% 1.50%
(0.36)% (0.07)% (0.42)%(3) (0.13)% (0.35)% 0.35% (1.34)% (1.11)%
0.14% 0.31% 0.15%(3) 0.34% (0.02)% 0.46% 0.16% 0.25%
7.9% 35.1% 6.0%(4) 50.0% 68.0% 1.0% 7.9% 35.1%
7.43% 12.69% 7.34%(4) 11.50% (19.34)% (14.86)% 7.43% 12.69%
- --------------------------------------------------------------------------------------------------------------------------------
</Table>
(7) The financial highlights for Class I as set forth herein reflect the
historical financial highlights of General Securities, Incorporated. The
assets of General Securities, Incorporated were acquired by Kopp Total
Quality Management Fund at the close of business on September 30, 2004. In
connection with such acquisition, the shares of General Securities,
Incorporated were exchanged for Class I shares of Kopp Total Quality
Management Fund.
See Notes to the Financial Statements.
24
KOPP FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2006
1. ORGANIZATION
Kopp Funds, Inc. (the "Corporation" or the "Funds") was incorporated on June 12,
1997, as a Minnesota corporation, and is registered as an open-end, investment
management company under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Corporation consists of two series: the Kopp Emerging Growth
Fund ("Emerging Growth Fund") and the Kopp Total Quality Management Fund ("Total
Quality Management Fund"), each of which has separate assets and liabilities and
differing investment objectives. The Emerging Growth Fund is a non-diversified
series and the Total Quality Management Fund is a diversified series of the
Corporation.
The Emerging Growth Fund's investment objective is to seek long-term capital
appreciation by investing primarily in common stocks of companies that Kopp
Investment Advisors, LLC (the "Advisor") believes to have the potential for
superior growth. The Total Quality Management Fund's investment objective is to
seek long-term capital appreciation by investing primarily in common stocks of
companies generally included in the S&P 500 Index that the Advisor determines
are Quality Advantaged through effective use of quality-based management
techniques.
The Corporation's registration statement was declared effective on September 16,
1997. The Emerging Growth Fund commenced operations on October 1, 1997 and the
Total Quality Management Fund commenced operations at the close of business on
September 30, 2004.
On June 25, 2004, the Board of Directors of the Corporation approved the
Agreement and Plan of Reorganization providing for the acquisition of General
Securities, Incorporated, an open-end management investment company in operation
since 1951 ("GSI"). At the close of business on September 30, 2004, the shares
of GSI were merged into Class I shares of the Total Quality Management Fund, a
newly formed shell portfolio which was organized solely to acquire the assets
and continue the business of GSI.
The value of the assets transferred at the time of the tax-free merger was
$20,632,377. There were 1,754,266 Class I shares of the Total Quality Management
Fund issued to shareholders of GSI. Net assets at the time of the merger
included unrealized appreciation of $3,063,946. As a result of this transaction,
GSI was designated the accounting survivor and the Total Quality Management Fund
was designated the legal survivor.
The Funds have issued three classes of shares: Class A, Class C 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. Class A shares are subject to an initial sales
charge imposed at the time of purchase, in accordance with each Fund's
prospectus. The maximum sales charge on Class A shares is 3.50% of the offering
price or 3.63% of the net asset value. Investments in Class A shares above $1
million are subject to a contingent deferred sales charge at the time of
redemption, in accordance with each Fund's prospectus. The maximum sales charge
is 1% for redemptions within the first 24 months. Class A shares may also be
subject to a 2% redemption fee on certain redemptions made within 30 days of
purchase. The Class I shares are subject to a 2% redemption fee of the then
current value of the shares on redemptions made within 24 months of purchase.
The Class C shares are subject to a contingent deferred sales charge at the time
of redemption, in accordance with each Fund's prospectus. The maximum sales
charge is 1% for redemptions in the first year. Class C shares may also be
subject to
25
a 2% redemption fee on certain redemptions made within 30 days of purchase.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds 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 traded primarily on a national
securities exchange are valued at the last sales price. For securities traded on
NASDAQ, the Funds utilize the NASDAQ Official Closing Price which compares the
last trade to the bid/ask price of a security. If the last trade is below the
bid, the Funds will use the bid as the closing price. 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.
Investments for which the above valuation procedures are inappropriate, when
valuations are not readily available or when valuations are deemed not to
reflect fair value, are stated at fair value, as determined in good faith under
procedures approved by the Board of Directors. In addition, if events materially
affecting the value of foreign securities occur between the time when the
exchange on which they are traded closes and the time when the Funds' net assets
are calculated, such securities will be valued at fair value in accordance with
procedures adopted by the Board of Directors. Some of the factors which may be
considered by the Board of Directors in determining fair value are fundamental
analytical data relating to the investment; the nature and duration of any
restrictions on dispositions of the securities; and an evaluation of the forces
that influence the market in which the securities are purchased and sold. The
Board of Directors has approved the use of pricing services to assist the Funds
in the determination of net asset value. Fixed income investments with a
remaining maturity of 60 days or less are valued on an amortized cost basis,
which approximates market value. Investments in other mutual funds are valued at
their net asset value per share, determined at the close of the New York Stock
Exchange (generally 3:00 p.m. central time) on the valuation date.
FEDERAL INCOME TAXES
The Funds intend to qualify for treatment as a "Regulated Investment Company"
under Subchapter M of the Internal Revenue Code, and the Funds intend to
distribute investment company net taxable income and net capital gains to
shareholders. Therefore, no federal tax provision is recorded.
INCOME AND EXPENSES
Expenses that are directly related to one of the Funds are charged directly to
that Fund. Other operating expenses are allocated to the Funds on the basis of
relative net assets of all Funds within the Corporation. 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. Distributions are determined
in accordance with income tax regulations which may differ from accounting
principles generally accepted in the United States. These differences are
primarily due to differing treatments for amounts related to the deferral of
post-October and wash sale losses.
26
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 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.
REITS
The Total Quality Management Fund has made certain investments in real estate
investment trusts ("REITs") which pay dividends to their shareholders based upon
available funds from operations. It is quite common for these dividends to
exceed the REITs' taxable earnings and profits resulting in the excess portion
of such dividends being designated as a return of capital. The Total Quality
Management Fund intends to include the gross dividends from such REITs in its
annual distribution to its shareholders and, accordingly, a portion of the
Fund's distribution may also be designated as a return of capital.
DERIVATIVE FINANCIAL INSTRUMENTS AND OTHER INVESTMENT STRATEGIES
The Emerging Growth Fund may engage in various portfolio strategies, to the
extent that they are consistent with the Emerging Growth Fund's investment
objectives and limitations, to attempt to hedge against changes in net asset
value or to attempt to realize a greater current return. The use of these
instruments involves certain risks, including the possibility that the value of
the underlying assets or indices fluctuates, the derivative becomes illiquid,
imperfect correlation between the value of the derivative and the underlying
assets or indices, or that the counterparty fails to perform its obligations
when due.
ILLIQUID OR RESTRICTED SECURITIES
Restricted securities are often purchased in private placement transactions, are
not registered under the Securities Act of 1933, may have contractual
restrictions on resale, and are valued under methods approved by the Board of
Directors as reflecting fair value. A security may also be considered illiquid
if it lacks a readily available market or if its valuation has not changed for a
certain period of time. Each Fund intends to invest no more than 15% of its net
assets (determined at the time of purchase and reviewed periodically) in
illiquid securities. Certain restricted securities, eligible for resale to
qualified institutional investors, are not subject to this limitation. As of
September 30, 2006, the Funds held no illiquid or restricted securities.
GUARANTEES AND INDEMNIFICATIONS
In the normal course of business, the Funds enter into contracts with service
providers that contain general indemnification clauses. The Funds' maximum
exposure under these arrangements is unknown as this would involve future claims
against the Funds that have not yet occurred. Based on experience, the Funds
expect the risk of loss to be remote.
ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES
On July 13, 2006, the Financial Accounting Standards Board ("FASB") released
FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes
27
("FIN 48"). FIN 48 provides guidance for how uncertain tax positions should be
recognized, measured, presented and disclosed in the financial statements. FIN
48 requires the affirmative evaluation of tax positions taken or expected to be
taken in the course of preparing the Funds' tax returns to determine whether it
is more-likely-than-not (i.e., greater than 50 percent) that each tax position
will be sustained upon examination by a taxing authority based on the technical
merits of the position. A tax position that meets the more-likely-than-not
recognition threshold is measured to determine the amount of benefit to
recognize in the financial statements. Differences between tax positions taken
in a tax return and amounts recognized in the financial statements will
generally result in an increase in a liability for taxes payable (or a reduction
of a tax refund receivable) and an increase in a deferred tax liability (or a
reduction in a deferred tax asset). Adoption of FIN 48 is required for fiscal
years beginning after December 15, 2006 and is to be applied to all open tax
years as of the effective date. At this time, management is evaluating the
implications of FIN 48. Its impact to the financial statements has not yet been
determined.
FAIR VALUE MEASUREMENTS
In September 2006, FASB issued Statement on Financial Accounting Standards
(SFAS) No. 157, "Fair Value Measurements." This standard establishes a single
authoritative definition of fair value, sets out a framework for measuring fair
value and requires additional disclosures about fair value measurements. SFAS
No. 157 applies to fair value measurements already required or permitted by
existing standards. SFAS No. 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those fiscal years.
The changes to current generally accepted accounting principles from the
application of this statement relate to the definition of fair value, the
methods used to measure fair value, and the expanded disclosures about fair
value measurements. Management has recently begun to evaluate the application of
the statement to the Funds, and is not in a position at this time to evaluate
the significance of its impact, if any, on the Funds' financial statements.
OTHER
Investment and shareholder transactions are recorded on the trade date. The
Funds determine 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 Funds, and interest income is
recognized on an accrual basis.
3. INCOME TAX INFORMATION
Generally accepted accounting principles require that permanent financial
reporting and tax differences be reclassified. These reclassifications have no
effect on net assets or net asset value per share. On the Statements of Assets
and Liabilities, as a result of permanent book to tax differences, the following
reclassifications were made:
<Table>
<Caption>
Accumulated Undistributed
Net Realized Net Investment Capital
Fund Gain (Loss) Income (Loss) Stock
- ---- ------------ -------------- -------
Emerging Growth Fund $ -- $5,609,230 $(5,609,230)
Total Quality
Management Fund 6,999 (8,025) 1,026
</Table>
28
At September 30, 2006, the components of accumulated earnings (losses) on a tax
basis were as follows:
<Table>
<Caption>
Emerging Total Quality
Growth Fund Management Fund
----------- ---------------
Cost of investments(a) $ 349,537,802 $18,615,043
------------- -----------
Gross unrealized
appreciation $ 57,960,210 $ 5,841,998
Gross unrealized
depreciation (152,586,567) (640,453)
Net unrealized
appreciation
(depreciation) on
investments $ (94,626,357) $ 5,201,545
- -----------------------------------------------------------
Undistributed ordinary
income $ -- $ 68,587
Undistributed long-term
capital gain -- 1,386,534
------------- -----------
Total distributable
earnings $ -- $ 1,455,121
- -----------------------------------------------------------
Other accumulated losses $(129,339,689) $ --
------------- -----------
Total accumulated gains
(losses) $(223,966,046) $ 6,656,666
- -----------------------------------------------------------
</Table>
(a) Represents cost for federal income tax purposes and differs from the cost
for financial reporting purposes due to the deferral of losses on wash
sales.
The distributions paid during the years ended September 30, 2006 and September
30, 2005 were characterized as follows:
<Table>
<Caption>
Total Quality Management Fund
Year Ended Year Ended
September 30, 2006 September 30, 2005
------------------ ------------------
Ordinary income $313,432 $45,741
Long-term capital
gains 814,176 --
</Table>
At September 30, 2006, the Emerging Growth Fund had net realized capital loss
carryovers expiring as follows:
<Table>
2009 $ 187,528
2010 208,436
2011 12,647,345
2012 19,365,048
2013 19,655,453
2014 42,248,002
- -------------------------------------------------------
$94,311,812
- -------------------------------------------------------
</Table>
To the extent that the Emerging Growth Fund realizes future net capital gains,
taxable distributions to its respective shareholders will be reduced by any
unused capital loss carryover as permitted by the Internal Revenue Code. During
the year ended September 30, 2006, the Emerging Growth Fund recognized post-
October capital losses of $44,010,594. The Emerging Growth Fund incurred losses
in the amount of $35,027,877 from November 1, 2005 to September 30, 2006. As
permitted by tax regulations, the Emerging Growth Fund intends to elect to defer
and treat these losses as arising in the fiscal year ending September 30, 2007.
4. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Emerging Growth Fund were as follows:
<Table>
<Caption>
Year Ended Year Ended
September 30, 2006 September 30, 2005
------------------ ------------------
Class A:
Shares issued 1,926,668 1,912,293
Shares redeemed (12,557,971) (14,724,105)
- --------------------------------------------------------------
Net decrease (10,631,303) (12,811,812)
Class I:
Shares issued 639,017 1,878,948
Shares redeemed (649,016) (800,345)
- --------------------------------------------------------------
Net increase
(decrease) (9,999) 1,078,603
Class C:
Shares issued 182,625 557,324
Shares redeemed (1,002,758) (1,506,193)
- --------------------------------------------------------------
Net decrease (820,133) (948,869)
</Table>
29
Transactions in shares of the Total Quality Management Fund were as follows:
<Table>
<Caption>
Year Ended Year Ended
September 30, 2006 September 30, 2005
------------------ ------------------
Class A:
Shares issued 134,101 629,844
Shares reinvested 20,028 681
Shares redeemed (283,684) (141,454)
- --------------------------------------------------------------
Net increase
(decrease) (129,555) 489,071
Class I:
Shares issued 24,426 51,641
Shares reinvested 59,462 2,645
Shares redeemed (173,826) (349,871)
- --------------------------------------------------------------
Net decrease (89,938) (295,585)
Class C:
Shares issued 33,780 30,174
Shares reinvested 1,280 19
Shares redeemed (8,736) (4,185)
- --------------------------------------------------------------
Net increase 26,324 26,008
</Table>
5. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of securities, excluding short-term
investments, for the Emerging Growth Fund for the year ended September 30, 2006,
were $107,904,377 and $221,431,418, respectively. The aggregate purchases and
sales of securities, excluding short-term investments, for the Total Quality
Management Fund for the year ended September 30, 2006 were $2,056,995 and
$6,057,249, respectively. There were no purchases or sales of long-term U.S.
government securities.
6. INVESTMENT ADVISORY AND OTHER AGREEMENTS
Pursuant to its investment advisory agreement with the Funds, 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 each Fund.
For the year ended September 30, 2006, the Advisor contractually agreed to waive
its management fee to the extent necessary to ensure that the total operating
expenses for Class A, Class I and Class C of the Total Quality Management Fund
did not exceed 1.50%. The Advisor may recoup previously waived management fees.
Management fees waived during the year ended September 30, 2006 in the Total
Quality Management Fund were $161,151. Cumulative waived management fees in the
Total Quality Management Fund as of September 30, 2006 are $278,190.
U.S. Bancorp Fund Services, LLC, serves as accounting services agent,
administrator, and transfer agent for the Funds. U.S. Bank, N.A. serves as
custodian for the Funds.
The Funds have 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, LLC (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 Funds attributable
to Class A and Class I shares and up to 0.75% of the average daily net assets of
the Funds attributable to Class C shares (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 Funds attributable to all three
classes (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. Class C shares are
currently incurring 1.00%, which represents a 0.75% distribution fee and a 0.25%
shareholder servicing fee. The Distributor currently has no intention of
30
charging any Rule 12b-1 fees in connection with the 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 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. 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 Funds
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, 2006, there were $708,287 and $49,616 of unreimbursed
distribution and shareholder servicing related expenses to be carried forward to
future plan years for the Emerging Growth Fund and the Total Quality Management
Fund, respectively. Upon termination of the 12b-1 Plan, the Funds are not
contractually obligated to continue paying these excess costs. As such, these
amounts have not been recorded as a liability in the Funds' records.
Distribution and shareholder servicing fees incurred by the Funds, related to
Class A and Class C shares, for the year ended September 30, 2006 were as
follows:
<Table>
<Caption>
Class A
Distribution Shareholder
Fees Servicing Fees
------------ --------------
Emerging Growth Fund $235,393 $588,482
Total Quality Management
Fund 6,786 16,964
</Table>
<Table>
<Caption>
Class C
Distribution Shareholder
Fees Servicing Fees
------------ --------------
Emerging Growth Fund $143,420 $47,807
Total Quality Management
Fund 4,220 1,407
</Table>
The distribution and shareholder servicing fees retained by the Distributor,
related to Class A and Class C shares, for the year ended September 30, 2006
were as follows:
<Table>
<Caption>
Class A
Distribution Shareholder
Fees Servicing Fees
------------ --------------
Emerging Growth Fund $22,040 $55,100
Total Quality Management
Fund 172 427
</Table>
<Table>
<Caption>
Class C
Distribution Shareholder
Fees Servicing Fees
------------ --------------
Emerging Growth Fund $20,404 $ 6,800
Total Quality Management
Fund 2,185 729
</Table>
The Emerging Growth Fund and the Total Quality Management Fund were advised that
the Distributor advanced $16,401 and $3,865 of distribution and shareholder
servicing fees related to Class C shares, respectively, for the year ended
September 30, 2006. These fees were advanced to broker/dealers who have selling
agreements with the Funds.
The Emerging Growth Fund and the Total Quality Management Fund were advised that
the Distributor retained front-end sales charges on Class A shares of $24,553
and $2,252, respectively, for the year ended September 30, 2006. The Emerging
Growth Fund and the Total Quality Management Fund were also advised that the
Distributor retained contingent deferred sales charges on Class C shares of
$8,642 and $498, respectively, for the year ended September 30, 2006.
31
7. OTHER AFFILIATES(1)
Investments representing 5% or more of the outstanding voting securities of a
portfolio company result in that company being considered an affiliated company,
as defined in the 1940 Act. The aggregate market value of all securities of
affiliated companies as of September 30, 2006 amounted to $9,831,900,
representing 3.9% of net assets in the Emerging Growth Fund. Transactions during
the year ended September 30, 2006 in which the issuer was an "affiliated person"
are as follows:
<Table>
<Caption>
Emerging Growth Fund
Adept Neose Superconductor
Technology, Technologies, QuickLogic Technologies, Transgenomic, Tut Systems,
Inc.(2) Inc. Corporation(2) Inc.(2),(3) Inc. Inc.
----------- ------------- -------------- -------------- ------------- ------------
September 30, 2005
Balance
Shares 171,470 1,120,120 1,750,000 200,000 3,333,000 3,000,000
Cost $7,887,612 $26,283,566 $ 20,225,376 $ 2,601,757 $9,720,269 $15,808,862
Gross Additions
Shares 185,491 1,379,880 -- 440,000 97,000 300,000
Cost $1,916,735 $ 3,300,791 $ -- $ 2,797,973 $ 77,840 $ 972,105(4)
Gross Deductions
Shares -- 85,000 1,220,000 60,000 10,000 --
Cost $ -- $ 4,067,843 $ 18,191,696 $ 1,629,827 $ 113,975 $ --
September 30, 2006
Balance
Shares 356,961 2,415,000 530,000 580,000 3,420,000 3,300,000
Cost $9,804,347 $25,516,514 $ 2,033,680 $ 3,769,903 $9,684,134 $16,780,967
- -----------------------------------------------------------------------------------------------------------------------------
Realized loss $ -- $(3,849,233) $(12,448,325) $(1,546,316) $ (107,025) $ --
- -----------------------------------------------------------------------------------------------------------------------------
Investment income $ -- $ -- $ -- $ -- $ -- $ --
- -----------------------------------------------------------------------------------------------------------------------------
<Caption>
Emerging Growth Fund
WJ
Verilink Communications,
Corporation(2) Inc.(2) Total
-------------- --------------- -----
September 30, 2005
Balance
Shares 520,000 2,400,000
Cost $ 5,630,027 $ 8,686,516 $ 96,843,985
Gross Additions
Shares 1,900,000 1,100,000
Cost $ 1,667,250 $ 2,804,475 $ 13,537,169
Gross Deductions
Shares 2,420,000 260,000
Cost $ 7,297,277 $ 1,339,136 $ 32,639,754
September 30, 2006
Balance
Shares -- 3,240,000
Cost $ -- $10,151,855 $ 77,741,400
- ---------------------------------------------------------------------------------
Realized loss $(7,051,655) $ (848,137) $ (25,850,691)
- ---------------------------------------------------------------------------------
Investment income $ -- $ -- $ --
- ---------------------------------------------------------------------------------
</Table>
(1) As a result of the Fund's beneficial ownership of the common stock of these
companies, regulators require that the Fund state that it may be deemed an
affiliate of the respective issuer. The Fund disclaims that the "affiliated
persons" are affiliates of the Distributor, Advisor, Fund, Corporation, or
any other client of the Advisor.
(2) Security that was affiliated during the year ended September 30, 2006, but
not at September 30, 2006.
(3) Shares adjusted by 1-for-10 reverse stock split on March 13, 2006.
(4) Includes reclass of security litigation proceeds.
8. LINE OF CREDIT
The Emerging Growth Fund has a $50,000,000 line of credit with U.S. Bank, N.A
expiring July 31, 2007. The interest rate on any borrowings is the Bank's
announced prime rate and borrowings would be for liquidity purposes. The
Emerging Growth Fund pays a commitment fee equal to the amount of the line at a
rate of 0.12% per annum. During the year ended September 30, 2006, the Emerging
Growth Fund did not draw upon the line of credit.
9. RELATED PARTY TRANSACTIONS
As of September 30, 2006, related parties of the Emerging Growth Fund
beneficially owned 7,722,633 shares or 26.7% of the Fund's outstanding shares
(0.3% of which was owned through the Advisor's profit sharing plan). As of
September 30, 2006, related parties of the Total Quality Management Fund
beneficially owned 755 shares or 0.04% of
32
the Fund's outstanding shares (0.04% of which was owned through the Advisor's
profit sharing plan).
10. PROPOSED REORGANIZATION OF THE FUNDS
On September 12, 2006, the Advisor entered into an agreement with American
Century Investment Management, Inc. ("American Century") that contemplates that
the Funds will be reorganized with and into two American Century funds. This
agreement is subject to a number of conditions, including the separate approval
of agreements and plans of reorganization (the "Reorganization Agreements") by
the Funds' shareholders at a special shareholders meeting to be held on January
12, 2007. The Reorganization Agreements were unanimously approved by the Funds'
Board of Directors on August 30, 2006.
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Kopp Funds, Inc.:
In our opinion, the accompanying statements of assets and liabilities, including
the schedules 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 the Kopp Emerging Growth Fund and
the Kopp Total Quality Management Fund (each a series of Kopp Funds, Inc.) at
September 30, 2006, the results of each of their operations for the year then
ended, the changes in each of their net assets for each of the two years in the
period then ended, the financial highlights of Kopp Emerging Growth Fund for
each of the five periods in the period then ended and the financial highlights
of Kopp Total Quality Management Fund for each of the two years in the period
then ended, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Funds' management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements 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
September 30, 2006 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion. The financial highlights of the Kopp Total
Quality Management Fund for each of the periods ended September 30, 2004 and
prior were audited by other auditors whose report dated November 8, 2004
expressed an unqualified opinion on those financial highlights.
As discussed in Note 10 to the financial statements, on August 30, 2006, the
Funds' directors have approved (subject to shareholder approval) a
reorganization of the Funds with an unaffiliated fund organization.
(PRICEWATERHOUSECOOPERS LLP SIGNATURE)
Milwaukee, Wisconsin
November 8, 2006
34
NOTICE TO SHAREHOLDERS
SEPTEMBER 30, 2006 (UNAUDITED)
For the year ended September 30, 2006, the Total Quality Management Fund
designated $313,432 as ordinary income and $814,176 as long-term capital gains
for purposes of the dividends paid deduction.
For the year ended September 30, 2006 certain dividends paid by the Total
Quality Management Fund may be subject to a maximum rate of 15%, as provided for
by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The percentage of
dividends declared from net investment income designated as qualified dividend
income was 100.0%.
For corporate shareholders in the Total Quality Management Fund, the percent of
ordinary income distributions qualifying for the corporate dividends received
deduction for the year ended September 30, 2006 was 100.0%.
The Total Quality Management Fund designates 1.45% of its ordinary income
distribution for the year ended September 30, 2006 as interest-related dividends
under Internal Revenue Code section 871(k)(1)(c).
HOW TO OBTAIN A COPY OF THE FUNDS' PROXY VOTING POLICIES -- A description of the
policies and procedures that the Funds use to determine how to vote proxies
relating to portfolio securities is available (1) without charge upon request by
calling 1-888-533-KOPP and (2) on the U.S. Securities and Exchange Commission's
website at www.sec.gov.
PROXY VOTING RECORDS FOR THE 12-MONTH PERIOD ENDED JUNE 30, 2006 -- Information
regarding how the Funds voted proxies relating to portfolio securities during
the most recent 12-month period ended June 30 is available (1) without charge
upon request by calling 1-888-533-KOPP and (2) on the U.S. Securities and
Exchange Commission's website at www.sec.gov.
QUARTERLY FILINGS ON FORM N-Q -- The Funds file their complete schedule of
portfolio holdings with the U.S. Securities and Exchange Commission for the
first and third quarters of each fiscal year on Form N-Q. The Funds' Forms N-Q
are available on the U.S. Securities and Exchange Commission's website at
www.sec.gov. The Funds' Forms N-Q may be reviewed and copied at the U.S.
Securities and Exchange Commission's Public Reference Room in Washington, D.C.
and information on the operation of the Public Reference Room may be obtained by
calling 1-800-SEC-0330. Information included in the Funds' Forms N-Q is also
available upon request by calling 1-888-533-KOPP.
Except for historical information, the matters discussed in this report may
constitute forward-looking statements. These include any advisor and/or
portfolio manager predictions, assessments, analyses or outlooks for individual
securities, industries, market sectors and/or markets. These statements involve
risks and uncertainties. In addition to the general risks described in each
Fund's current prospectus, other factors bearing on this report include the
accuracy of the advisor's forecasts and predictions and the appropriateness of
the investment program designed by the advisor to implement its strategies
efficiently and effectively. Any one or more of these factors, as well as other
risks affecting the securities markets and investment instruments generally,
could cause the actual results of the Funds to differ materially as compared to
benchmarks associated with the Funds.
35
DIRECTORS AND OFFICERS OF THE FUNDS
<Table>
<Caption>
Position(s)
Held with
Name, Address and Age the Funds Term of Office and Length of Time Served Principal Occupation(s) During Past 5 Years
--------------------- ----------- ---------------------------------------- -------------------------------------------
INDEPENDENT DIRECTORS
Robert L. Stehlik Director Term expiring earlier of death, Retired; Senior Vice President, Peoples
10313 Normandy Crest resignation, removal, disqualification, Bank of Commerce (1998-2003); Senior Vice
Eden Prairie, MN 55347 or successor duly elected and qualified. President, Richfield Bank & Trust Co.
Age: 68 Director of the Funds since 1997. (1994-1998)
Thomas R. Stuart Director Term expiring earlier of death, Chairman and Chief Executive Officer,
3400 Technology Drive resignation, removal, disqualification, Bureau of Engraving, Inc., a private
Minneapolis, MN 55418 or successor duly elected and qualified. manufacturer (1988-present)
Age: 62 Director of the Funds since 1997.
INTERESTED DIRECTOR AND OFFICERS
LeRoy C. Kopp* Director, Term expiring earlier of death, Chairman, Sole Governor, Chief Executive
7701 France Avenue South, Chairman, resignation, removal, disqualification Officer, President and Chief Investment
Suite 500 President and or successor duly elected and qualified. Officer, Advisor (1990- present); Sole
Edina, MN 55435 Chief Executive Director of the Funds (1997-2004; Governor, Distributor (1997-present)
Age: 72 Officer 2005-present).
Chairman, President and Chief Executive
Officer of the Funds (1997-2004;
2005-present)
John P. Flakne Chief Financial Re-elected by the Board annually; Chief Secretary, Advisor and Secretary, Chief
7701 France Avenue South, Officer, Financial Officer and Treasurer of the Compliance Officer and AML Compliance
Suite 500 Secretary and Funds since 1998. Secretary of the Funds Officer, Distributor (2005-present);
Edina, MN 55435 Treasurer since August 2005; Chairman, President Executive Vice President, Advisor
Age: 41 and Chief Executive Officer of the Funds (2003-present); Chief Financial Officer,
(2004-2005) Advisor and Chief Executive Officer and
Chief Financial Officer, Distributor (2000-
present)
Pamela M. Krill Chief Re-elected by the Board annually; Chief Chief Compliance Officer, Advisor (August
One East Main Street, Compliance Compliance Officer and AML Compliance 2005-present); Shareholder, Godfrey & Kahn,
Suite 500 Officer Officer of the Funds since August 2005. S.C., a law firm (2003-present); Associate,
P.O. Box 2719 Godfrey & Kahn, S.C. (1994-2003)
Madison, WI 53701
Age: 40
<Caption>
Number of Portfolios in Other Public
Fund Complex Directorships
Overseen Held by
Name, Address and Age by Director Director
--------------------- ----------------------- -------------
INDEPENDENT DIRECTORS
Robert L. Stehlik 2 MagStar
10313 Normandy Crest Technologies,
Eden Prairie, MN 55347 Inc.
Age: 68
Thomas R. Stuart 2 None
3400 Technology Drive
Minneapolis, MN 55418
Age: 62
INTERESTED DIRECTOR AND
OFFICERS
LeRoy C. Kopp* 2 None
7701 France Avenue South,
Suite 500
Edina, MN 55435
Age: 72
John P. Flakne N/A N/A
7701 France Avenue South,
Suite 500
Edina, MN 55435
Age: 41
Pamela M. Krill N/A N/A
One East Main Street,
Suite 500
P.O. Box 2719
Madison, WI 53701
Age: 40
</Table>
* Mr. Kopp is deemed to be an "interested" Director of the Funds, because he
controls Kopp Holding Company, LLC which owns 100% of Kopp Investment
Advisors, LLC, Advisor of the Funds.
The Statement of Additional Information (SAI) includes additional information
about directors and officers of the Funds and is available upon request without
charge by calling 1-888-533-KOPP, or writing Kopp Funds, Inc., 7701 France
Avenue South, Suite 500, Edina, MN 55435.
36
BOARD APPROVAL OF INVESTMENT
ADVISORY AGREEMENT
When the Board reviewed the agreement between the Corporation and Advisor, dated
as of October 1, 1997, as amended (the "Advisory Agreement"), with respect to
the Funds on August 30, 2006, it was provided with materials relating to, and
considered and evaluated, the following key items: (i) the terms and conditions
of the agreement, including the nature, extent, and quality of the services
provided to the Funds by Advisor; (ii) a comparison of the Funds' fees and
expenses in relation to various industry averages; (iii) the costs incurred by
Advisor in providing advisory services to the Funds and the profitability of the
Funds to Advisor; (iv) the performance of the Emerging Growth Fund since the
Fund commenced operations on October 1, 1997 and the performance of the Total
Quality Management Fund since Advisor began managing it on October 1, 2004; (v)
the directors' legal duties in considering the approval of the agreement, and
(vi) the pending transaction involving the reorganization of the Funds into
American Century Investment Management's ("American Century") mutual fund
family, which is expected to close in February 2007 (the "Reorganization").
The Board's analysis of the nature, extent and quality of Advisor's services to
the Funds took into account knowledge gained over the course of interacting with
Advisor during the Board's regular quarterly meetings throughout the year. In
addition, the Board considered Advisor's resources and personnel involved in
providing investment management services to the Funds, including the experience
and qualifications of such personnel. The Board also considered that the Advisor
provided other services to the Funds, such as selection of broker-dealers for
execution of portfolio transactions, monitoring adherence to the Funds'
investment restrictions, providing support services to the Board, oversight of
the Funds' other service providers, and monitoring compliance with other
applicable securities laws and regulations. The Board concluded that the nature,
extent and quality of the services provided by Advisor to the Funds was
appropriate and that the Funds were likely to continue to benefit from services
provided under the Advisory Agreement.
Moreover, the Board examined the fee and expense information for the Funds
relative to other funds of comparable size, character and investment objective
as determined by Lipper. The Board noted that the Emerging Growth Fund's
investment management fee was in the fourth quartile relative to peer funds (the
industry average was 0.884%, in the third quartile), and also observed that the
Fund's total expense ratio for Class A, Class I and Class C shares was in the
third quartile, second quartile and fourth quartile, respectively, relative to
the Fund's peers (the industry average was 1.665%, in the third quartile). The
Board noted that the Total Quality Management Fund's investment management fee
was in the fourth quartile relative to peer funds (the industry average was
0.70%, in the third quartile), but also observed that the Fund's total expense
ratio, after the Fund's expense limitation was considered, was in the second
quartile relative to the Fund's peers (the industry average was 1.586%, in the
third quartile). The Board also considered the costs incurred by Advisor in
providing investment management services to the Funds and the profitability of
the Funds to Advisor. In this regard, the Board considered the expense
limitation agreement in place for the Total Quality Management Fund, which will
continue through September 2007, and Advisor's investment in propriety research,
which benefits the Funds as well as other clients. The Board noted that Advisor
received minimal ancillary benefits from its association with the Funds in the
form of soft dollar research. In light of the foregoing, the Board concluded
that the Funds'
37
fees and expenses were reasonable with respect to the services provided.
The Board considered the recent performance of the Funds as well as the Emerging
Growth Fund's performance since inception and the Total Quality Management
Fund's performance since Advisor took over as investment manager, noting that
both Funds' performance had been below their relative benchmark indices. In this
regard, the Board discussed Advisor's quarterly portfolio commentary and review
of Fund performance, including the reasons for underperformance during certain
periods. After considering this information, the Board concluded that despite
the recent underperformance of the Funds, the Funds and their respective
shareholders were likely to benefit from Advisor's continued management of the
Funds.
Finally, the Board considered the pending Reorganization involving American
Century and concluded that, given the expected timing of the close of the
Reorganization (and assuming shareholder approval is received), it would be
advisable for the Funds to maintain the current arrangement with Advisor to
ensure an orderly transition to American Century's mutual fund complex.
On the basis of its review and the foregoing information, the Board found that
the terms of the Advisory Agreement were fair and reasonable and in the best
interests of the Funds' shareholders.
The subadvisory agreement between Advisor and American Century relating to the
Emerging Growth Fund, which will become effective upon shareholder approval of
the Reorganization and which will terminate upon the closing of the
Reorganization, was also approved by the Board of Directors on August 30, 2006.
For a discussion of the factors considered by the Board in approving this
agreement, refer to the Form N-14 Registration Statement filed with the SEC on
November 9, 2006 by American Century Mutual Funds, Inc., which is available on
the SEC's EDGAR database at www.sec.gov.
38
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39
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[KOPP FUNDS LOGO]
(C)2006 Kopp Investment Advisors, LLC
DIRECTORS
LeRoy C. Kopp (Chairman)
Robert L. Stehlik
Thomas R. Stuart
OFFICERS
LeRoy C. Kopp, President and Chief Executive Officer
John P. Flakne, Chief Financial Officer, Secretary and Treasurer
Pamela M. Krill, Chief Compliance Officer
INVESTMENT ADVISER
KOPP INVESTMENT ADVISORS, LLC
7701 France Avenue South, Suite 500
Edina, MN 55435
ANNUAL REPORT 2006
KOPP EMERGING GROWTH FUND
KOPP TOTAL QUALITY
MANAGEMENT FUND
ADMINISTRATOR AND TRANSFER AGENT
U.S. BANCORP FUND SERVICES, LLC
<Table>
For overnight deliveries, For regular mail deliveries,
use: use:
Kopp Funds, Inc. Kopp Funds, Inc.
c/o U.S. Bancorp Fund c/o U.S. Bancorp Fund
Services, LLC Services, LLC
Third Floor P.O. Box 701
615 East Michigan Street Milwaukee, WI 53201-0701
Milwaukee, WI 53202-5207
</Table>
CUSTODIAN
U.S. BANK, N.A.
1555 North RiverCenter Drive, Suite 302
Milwaukee, WI 53212
DISTRIBUTOR
CENTENNIAL LAKES CAPITAL, LLC
7701 France Avenue South, Suite 500
Edina, MN 55435
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PRICEWATERHOUSECOOPERS LLP
100 East Wisconsin Avenue, Suite 1800
Milwaukee, WI 53202
LEGAL COUNSEL
GODFREY & KAHN, S.C.
780 North Water Street
Milwaukee, WI 53202
Kopp Funds, Inc. are distributed by Centennial Lakes Capital, LLC, a member of
the NASD and an affiliate of Kopp Investment Advisors, LLC and the Funds.
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to the registrant's
principal executive officer and principal financial officer. The registrant has
not made any amendments to a provision of its code of ethics that applies to the
registrant's principal executive officer and principal financial officer during
the covered period. The registrant has not granted any waivers from any
provisions of the code of ethics during the covered period. A copy of the code
of ethics dated November 14, 2005 was filed as an exhibit to the Form N-CSR
filed for the period ended September 30, 2005.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The registrant's Board of Directors has determined that there are two audit
committee financial experts serving on its audit committee. Mr. Thomas R. Stuart
and Mr. Robert L. Stehlik are the "audit committee financial experts" and are
considered to be "independent" as each term is defined in Item 3 of Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The registrant has engaged its principal accountant to perform audit services,
audit-related services, and tax services during the past two fiscal years.
"Audit services" refer to performing an audit of the registrant's annual
financial statements or services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements for those fiscal
years. "Audit-related services" refer to the assurance and related services by
the principal accountant that are reasonably related to the performance of the
audit. "Tax services" refer to professional services rendered by the principal
accountant for tax compliance, tax advice, and tax planning. The following table
details the aggregate fees billed or expected to be billed for each of the last
two fiscal years for audit fees, audit-related fees, tax fees and other fees by
the principal accountant.
<Table>
<Caption>
- ----------------------------- ----------------------- -----------------------
FYE 9/30/06 FYE 9/30/05
- ----------------------------- ----------------------- -----------------------
Audit Fees $42,000 $37,000
Audit-Related Fees $0 $0
Tax Fees $8,000 $11,000
All Other Fees $0 $0
- ----------------------------- ----------------------- -----------------------
</Table>
The audit committee has adopted pre-approval policies and procedures that
require the audit committee to pre-approve all audit and non-audit services of
the registrant, including services provided to any entity affiliated with the
registrant. All of the principal accountant's hours spent on auditing the
registrant's financial statements were attributed to work performed by full-time
permanent employees of the principal accountant.
The following table indicates the non-audit fees billed or expected to be billed
by the registrant's accountant for services to the registrant and to the
registrant's investment adviser (and any other controlling entity, etc.) for the
last two years. The audit committee of the board of directors has considered
whether the provision of non-audit services that were rendered to the
registrant's investment adviser is compatible with maintaining the principal
accountant's independence and has concluded that the provision of such non-audit
services by the accountant has not compromised the accountant's independence.
<Table>
<Caption>
- ------------------------------------------- ------------------------ -----------------------
Non-Audit Related Fees FYE 9/30/06 FYE 9/30/05
- ------------------------------------------- ------------------------ -----------------------
Registrant $0 $0
Registrant's Investment Adviser $0 $0
- ------------------------------------------- ------------------------ -----------------------
</Table>
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to registrants who are not listed issuers (as defined in Rule
10A-3 under the Securities Exchange Act of 1934).
ITEM 6. SCHEDULE OF INVESTMENTS.
Schedule of Investments is included as part of the report to shareholders filed
under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to open-end investment companies.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable to open-end investment companies.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable to open-end investment companies.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The Registrant's President/Chief Executive Officer and Treasurer/Chief
Financial Officer have reviewed the Registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment Company Act of
1940 (the "Act")) as of a date within 90 days of the filing of this report,
as required by Rule 30a-3(b) under the Act and Rules 13a-15(b) or 15d-15(b)
under the Securities Exchange Act of 1934. Based on their review, such
officers have concluded that the disclosure controls and procedures are
effective in ensuring that information required to be disclosed in this
report is appropriately recorded, processed,
summarized and reported and made known to them by others within the
Registrant and by the Registrant's service providers.
(b) There were no changes in the Registrant's internal control over financial
reporting (as defined in Rule 30a-3(d) under the Act) that occurred during
the fourth fiscal quarter of the period covered by this report that has
materially affected, or is reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a) (1) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant intends to
satisfy the Item 2 requirements through the filing of an exhibit.
Incorporated by reference to previous Form N-CSR filing for the period
ended September 30, 2005.
(2) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. Filed herewith.
(3) Any written solicitation to purchase securities under Rule 23c-1 under
the Act sent or given during the period covered by the report by or on
behalf of the registrant to 10 or more persons. Not applicable to open-end
investment companies.
(b) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Furnished herewith.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Kopp Funds, Inc.
---------------------------------------------------------
By (Signature and Title) /s/ LeRoy C. Kopp
---------------------------------------------
LeRoy C. Kopp, President and Chief
Executive Officer
Date 12/4/06
----------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title) /s/ LeRoy C. Kopp
---------------------------------------------
LeRoy C. Kopp, President and Chief
Executive Officer
Date 12/4/06
----------------------------------------------------------------
By (Signature and Title) /s/ John P. Flakne
---------------------------------------------
John P. Flakne, Secretary, Treasurer and
Chief Financial Officer
Date 12/4/06
----------------------------------------------------------------