KPM FUNDS, INC.
ANNUAL REPORT
JUNE 30, 1995
KPM EQUITY PORTFOLIO
KPM FIXED INCOME PORTFOLIO
KPM INVESTMENT MANAGEMENT, INC.
<PAGE>
KPM FUND'S
PERFORMANCE
Since Inception
(07/05/94)
---------------
Equity Portfolio 22.01%
Fixed Income Portfolio 9.63%
Total returns represent the overall performance of an investment for a specific
period of time, assuming reinvestment of dividends and capital gains.
Total returns reflect past performance. Past performance does not predict future
performance. The investment return and principal value of an investment will
fluctuate so that shares, when redeemed, may be worth more or less than their
original cost.
CONTENTS
President's Letter....................1
Managers Commentary
Equity Portfolio...................2
Fixed Income Portfolio.............3
Schedule of Investments
Equity Portfolio....................4
Fixed Income Portfolio..............7
Statement of Assets & Liabilities...9
Statement of Operations............10
Statement of Changes
in Net Assets.....................11
Financial Highlights...............12
Notes to Financial Statements......13
Independent Auditors' Report.......18
<PAGE>
Dear Shareholder,
KPM Investment Management, Inc, the adviser to KPM Funds, bases its investment
decisions on research into the financial performance of individual companies and
specific securities issues, taking into account general economic and market
trends. KPM Funds certainly experienced divergent market trends in its first
year of operation.
A sharply rising trend in interest rates for the second half of 1994 had a
negative impact on bond prices and contributed to erratic swings in stock
prices. The first half of 1995 brought on a steep decline in interest rates and
both the bond and stock markets responded by moving sharply higher. While these
day-to-day, month-to-month, and quarter-to-quarter moves provide periods of both
excitement and anxiety, we believe a continuing focus on the long-term will
allow KPM to provide the portfolios with superior long-term results.
We are pleased with progress made during the KPM Funds first year of operations.
Total assets increased to over $21,000,000 and we now have 87 shareholders. Most
importantly KPM Funds provided solid investment performance during the past year
which hopefully brought you a step closer to realizing your financial goals.
KPM stands ready to serve your investment needs and provide the professional
assistance you deserve. Thank you for investing with KPM.
Sincerely,
Randall D. Greer
Chairman
<PAGE>
KPM Funds - Equity Portfolio
Thomas J. Sudyka, Jr., CFA
Portfolio Manager
The first half of 1995 was a buoyant one for the equity markets as the Standard
& Poor's 500 total return was 20.09%. The KPM Funds Equity Portfolio's total
return for the same period was 19.22%. Since inception (July 5, 1994) this
portfolio's return was +22.01%. Over the same period, the Standard & Poor's 500
total return was +25.31%. We continue to be relatively cautious toward the
general stock market. While the Standard & Poors 500 has a current
price/earnings ratio that is only modestly above the post war average, other
measures of value such as dividend yields and price/book ratios suggest an
extended market. Stocks have historically performed well during periods of
falling interest rates and the recent lowering of short-term interest rates by
the Federal Reserve suggests the declining trend in rates may continue. We plan
to remain relatively fully invested, and are attempting to position the
portfolio in stocks which we believe are undervalued and whose earnings should
hold up well in the event of an economic slowdown.
GRAPH
Comparison of Change in Value of $10,000 Investment in
KPM Equity and the S&P 500
Avg. Annual Return 6/30/95 Value
Inception 22.35% KPM Equity $12,201.00
S&P 500 $12,540.31
<PAGE>
KPM Funds - Fixed Income Portfolio
Patrick M. Miner, CFA
Portfolio Manager
With steadily declining interest rates during the first half of 1995 the Fixed
Income Portfolio showed an increase in net asset value of nearly 8% in addition
to dividend income, leading to a total return of 10.46%. This compares to a
total return for the Lehman Brothers Aggregate Bond Index of 11.44% for the same
period. As interest rates have fallen our primary emphasis has been to maintain
income yield by minimizing positions in short maturities (1-3 years) to take
advantage of higher rates offered by intermediate bonds (5-10 years). We have
also increased positions in corporate bonds and mortgage-backed securities to
further preserve income in the face of declining rates. At the end of June the
Fixed Income Portfolio's average maturity was still shorter than that of the
market indices, but with a higher income yield. This gives us the ability to
extend maturities and capture additional income during any periods of bond
market weakness. Since inception (July 5, 1994) the Fixed Income Portfolio has
earned a total return of 9.63%. Over the same period the Lehman Brothers
Aggregate Bond Index has posted a total return of 12.55%.
GRAPH
Comparison of Change in Value of $10,000 Investment in
KPM Fixed Income and the Lehman Aggregate Bond Index
Avg. Annual Return 6/30/95 Value
Inception 9.77% KPM Fixed Income $10,962.76
Lehman Aggregate
Bond Index $11,092.00
<PAGE>
KPM FUNDS, INC.
Schedule of Investments
June 30, 1995
KPM EQUITY PORTFOLIO
Percent
of Net Market
Shares Common Stock 91.40% Assets Value
------ ------------- ------ ------ -----
Auto Parts 1.22%
---------- -----
17,500 TBC Corporation* $ 188,125
---------
Beverages 2.64%
--------- -----
8,900 Pepsico, Inc. 406,062
---------
Broadcast, Radio & TV 2.23%
--------------------- -----
14,650 Tele-Communications Class A* 342,444
---------
Chemicals 5.33%
--------- -----
17,000 Hanna (M.A.) Company 442,000
10,650 Lubrizol Corporation 376,744
---------
818,744
---------
Commercial Services 0.88%
------------------- -----
5,600 Franklin Quest Company* 134,400
---------
Electronics/Electrical Equipment 6.45%
-------------------------------- -----
7,000 Emerson Electric Company 500,500
8,700 General Electric Company 490,462
---------
990,962
---------
Entertainment/Leisure 1.34%
--------------------- -----
9,068 Johnson Worldwide Associates, Inc. Class A* 206,297
---------
Financial Services 11.41%
------------------ ------
5,650 Federal Home Loan Mortgage Corporation 388,437
11,700 Finova Group, Inc. 409,500
7,300 MBIA, Inc. 485,450
10,000 Student Loan Marketing Association 468,750
----------
1,752,137
----------
Food Processing 2.08%
--------------- -----
4,300 Philip Morris Companies, Inc. 319,812
----------
*Indicates nonincome-producing security.
<PAGE>
KPM FUNDS, INC.
Schedule of Investments (Continued)
KPM EQUITY PORTFOLIO
Percent
of Net Market
Shares Common Stock (Continued) Assets Value
------ ------------- ------ ------ -----
Forest Products/Paper 4.80%
--------------------- -----
7,600 Consolidated Papers, Inc. $ 437,950
24,000 Specialty Paperboard, Inc.* 300,000
---------
737,950
---------
Home Appliance 1.11%
-------------- -----
10,700 Maytag Corporation 171,200
---------
Insurance 2.04%
--------- -----
8,600 Gallagher (Arthur J.) & Company 312,825
---------
Machine Tool 1.09%
------------ -----
9,400 Giddings & Lewis, Inc. 166,850
---------
Manufacturing 4.91%
------------- -----
13,950 Pall Corporation 310,387
10,200 Pentair, Inc. 443,700
---------
754,087
---------
Medical Supplies 2.54%
---------------- -----
6,700 Becton, Dickinson & Company 390,275
---------
Metals/Mining 6.99%
------------- -----
11,600 Potash Corporation of Saskatchewan 648,150
20,500 Valmont Industries 425,375
----------
1,073,525
---------
Oil/Gas 6.69%
------- -----
9,100 Burlington Resources, Inc. 335,563
5,200 Exxon Corporation 367,250
22,400 Prima Energy Corporation* 324,800
----------
1,027,613
----------
*Indicates nonincome-producing security.
<PAGE>
KPM FUNDS, INC.
Schedule of Investments (Continued)
KPM EQUITY PORTFOLIO
Percent
of Net Market
Shares Common Stock (Continued) Assets Value
------ -------------------------------- ------ -----
Pharmaceutical 6.05%
-------------- -----
4,600 Bristol-Myers Squibb Company $ 313,375
4,400 Johnson & Johnson 297,550
6,500 Merck & Company, Inc. 318,500
------------
929,425
------------
Publishing/Printing 7.24%
------------------- -----
11,500 Banta Corporation 382,375
8,000 Gannett Company, Inc. 434,000
16,000 Merrill Corporation 296,000
------------
1,112,375
------------
Retail 2.29%
------ -----
12,000 Toys R Us, Inc.* 351,000
------------
Transportation 3.43%
-------------- -----
9,500 Union Pacific Corporation 526,063
------------
Utilities 5.41%
--------- -----
13,100 California Energy Company, Inc.* 214,513
8,000 Dominion Resources, Inc. 292,000
10,000 Midwest Resources, Inc. 148,750
12,650 Southwestern Energy Company 175,519
------------
830,782
------------
Utilities - Telecommunications 3.23%
------------------------------ -----
9,350 American Telephone & Telegraph Corporation 496,719
------------
Total Investments 91.40% 14,039,672
Cash Equivalents 9.21% 1,415,119
Net Receivables/(Payables) (0.61)% (94,049)
-------- -----------
TOTAL NET ASSETS 100.00% $15,360,742
======== ==========
* Indicates nonincome-producing security.
<PAGE>
KPM FUNDS, INC.
Schedule of Investments
June 30, 1995
KPM FIXED INCOME PORTFOLIO
Percent of
Principal Net Assets Market
Amount U.S. Government Securities 38.92% Value
------ -------------------------- ------ -----
150,000 U. S. Treasury Note, 6.50%, due 5/15/97 $ 151,688
400,000 U. S. Treasury Note, 9.25%, due 8/15/98 436,938
250,000 U. S. Treasury Note, 5.125%, due 11/30/98 243,594
70,000 U. S. Treasury Note, 6.75%, due 6/30/99 71,881
200,000 U. S. Treasury Note, 6.875%, due 7/31/99 206,281
1,000,000 U. S. Treasury Note, 8.75%, due 8/15/00 1,119,844
50,000 U. S. Treasury Note, 7.25%, due 5/15/04 53,352
-----------
2,283,578
Collateralized Mortgage Obligations 36.87%
----------------------------------- ------
250,000 Federal Home Loan Mortgage Corp. 258,848
Series 1761 G, 8.00%, due 6/15/21
150,000 Federal Home Loan Mortgage Corp. 155,227
Series 1035 E, 8.00%, due 10/15/20
81,121 Federal Home Loan Mortgage Corp. 76,881
Series 1545 C, 6.00%, due 6/15/23
165,000 Federal National Mortgage Assn. 161,481
Series 1992-164 PH, 6.50%, due 1/25/06
97,000 Federal National Mortgage Assn. 93,226
Series 1993-76 PG, 6.00%, due 7/25/06
50,000 Federal National Mortgage Assn. 46,461
Series 1993-221 C, 5.50%, due 9/25/07
263,296 Federal National Mortgage Assn. 274,384
Series 1990-96 E, 9.67%, due 1/25/17
195,000 Federal National Mortgage Assn. 187,017
Series 1993-82 D, 6.35%, due 3/25/19
100,000 Federal National Mortgage Assn. 97,234
Series 1993-103 PG, 6.25%, due 6/25/19
90,000 Federal National Mortgage Assn. 89,824
Series 1991-173 HP, 6.95%, due 1/25/20
195,000 Federal National Mortgage Assn. 204,064
Series 1999-65 H, 8.50%, due 1/25/20
195,000 Federal National Mortgage Assn. 204,110
Series G-29 Class O, 8.50%, due 9/25/21
<PAGE>
KPM FUNDS, INC.
Schedule of Investments (Continued)
KPM FIXED INCOME PORTFOLIO
Percent of
Principal Net Assets Market
Amount Collateralized Mortgage Obligations (continued) Value
------ -------------------------------------------- -----
100,000 Government National Mortgage Assn. $ 102,047
Series 1994-4 K, 7.9875%, due 7/16/12
209,541 Security Pacific Accept. Corp. 212,455
----------
Series 1991-3 A1, 7.25%, due 12/15/11
2,163,259
------------
Corporate Bonds 22.53%
--------------- ------
50,000 Chevron Capital USA, 7.45%, due 8/15/04 51,906
100,000 Ford Motor Company, 6.11%, due 1/1/01 97,858
75,000 General Motors Accept. Corp., 8%, due 10/1/96 76,533
100,000 May Department Stores, 9.45%, due 2/2/99 108,639
50,000 Public Service Elec. & Gas Co., 6.50%, due 5/1/04 48,820
200,000 Tenneco Corporation, 9.625%, due 8/15/01 220,000
100,000 Union Pacific Corporation, 6.25%, due 3/15/99 99,508
50,000 U. S. Leasing International, 8.75%, due 12/1/01 55,237
200,000 United Telecom, 9.50%, due 4/1/03 229,505
10,000 Washington Natural Gas, 6.07%, due 1/16/04 9,403
200,000 Wal-Mart Stores, 7.49%, due 6/21/07 209,338
120,000 Westinghouse Electric, 6.875%, due 9/1/03 115,331
----------
1,322,078
Total Investments 98.32% 5,768,915
Cash Equivalents 7.89% 463,205
Net Receivables/(Payables) (6.21)% (364,194)
---------- ----------
TOTAL NET ASSETS 100.00% $5,867,926
======== =========
<PAGE>
KPM FUNDS, INC.
Statements of Assets and Liabilities
June 30, 1995
KPM
KPM Fixed
Equity Income
Assets: Portfolio Portfolio
Investments in securities, at
market value (note 4) $14,039,672 $5,768,915
Cash equivalents 1,415,119 463,205
Accrued interest and dividends receivable 34,362 99,449
Organizational costs, net of accumulated amortization 21,473 4,257
Receivable for fund shares sold - 3,213
Receivable for securities sold - 15,330
Total assets 15,510,626 6,354,369
---------- ---------
Liabilities,
Accrued expenses, including investment management and
service fees and distribution expenses payable to
adviser,administrator and
distributor (note 3) 16,694 5,167
Payable for fund shares redeemed - 11,663
Payable for securities purchased 133,190 469,613
------- -------
Total liabilities 149,884 486,443
------- -------
Net assets applicable to outstanding capital stock $15,360,742 $5,867,926
----------- ----------
Net assets are represented by:
Capital stock outstanding, at par (note 6) 13 6
Additional paid-in capital 13,438,515 5,727,253
Accumulated undistributed net investment income 7,065 (457)
Accumulated undistributed net realized gain (loss) 136,394 (3,342)
Unrealized appreciation (note 5) 1,778,755 144,466
--------- -------
Total amount representing net assets
applicable to shares outstanding $15,360,742 $5,867,926
=========== ==========
Net asset value per share of outstanding
capital stock $12.00 $10.47
====== ======
See accompanying notes to financial statements.
<PAGE>
KPM FUNDS, INC.
Statements of Operations
Period from July 5, 1994 (commencement of operations) to June 30, 1995
KPM KPM
Equity Fixed Income
Investment income: Portfolio Portfolio
--------- ---------
Dividends $223,849 $ -
Interest 24,590 187,549
------ -------
Total investment income 248,439 187,549
------- -------
Expenses (note 3):
Investment advisory fee 77,104 16,101
Administration fee 24,095 6,709
Distribution fees 24,104 6,712
Amortization of organization costs 3,703 838
Custodial fees 4,167 4,167
Registration fees 2,298 2,152
Other operating expenses 22,301 5,992
------ -----
Total expenses 157,772 42,671
Less expenses reimbursed by
investment adviser (note 3) (10,855) (8,315)
-------- -------
Net expenses 146,917 34,356
------- ------
Net investment income 101,522 153,193
------- -------
Realized and unrealized gain (loss) on
investments (note 5):
Net realized gain (loss) 202,563 (2,799)
Net unrealized appreciation
Beginning of period - -
End of period 1,778,755 144,466
--------- -------
Net unrealized appreciation 1,778,755 144,466
--------- -------
Net realized and unrealized
gain on investments 1,981,318 141,667
--------- -------
Net increase in net assets resulting
from operations $2,082,840 $294,860
========== ========
See accompanying notes to financial statements.
<PAGE>
KPM FUNDS, INC.
Statements of Changes in Net Assets Period from July 5,
1994 (commencement of operations) to June 30, 1995
KPM KPM
Equity Fixed Income
Operations: Portfolio Portfolio
--------- -----------
Net investment income $101,522 $153,193
Net realized gain (loss) on investments 202,563 (2,799)
Change in unrealized appreciation 1,778,755 144,466
--------- -------
Net increase in net assets resulting
from operations 2,082,840 294,860
--------- -------
Distributions to shareholders from:
Net investment income 94,457 153,650
Net realized gains 66,169 543
------ ---
Total distributions 160,626 154,193
------- -------
Capital share transactions (note 6):
Proceeds from sales 13,884,315 5,902,328
Payment for redemptions (603,478) (417,343)
Reinvestment of net investment income
at net asset value 157,691 142,274
------- -------
Total increase from capital
share transactions 13,438,528 5,627,259
Total increase in net assets 15,360,742 5,767,926
Net assets:
Beginning of period - 100,000
------------- -------
End of period $15,360,742 $5,867,926
=========== ==========
See accompanying notes to financial statements.
<PAGE>
KPM FUNDS, INC.
Financial Highlights
Period from July 5, 1994 (commencement of operations)
to June 30, 1995
KPM KPM
Equity Fixed Income
Net asset value: Portfolio Portfolio
Beginning of period $10.00 $10.00
Income from investment operations:
Net investment income 0.11 0.57
Net realized and unrealized gain on investments 2.06 0.47
---- ----
Total income from investment operations 2.17 1.04
---- ----
Less distributions:
Dividends from net investment income (0.10) (0.57)
Dividends from capital gains (0.07) 0.00
------ ----
(0.17) (0.57)
End of period $12.00 $10.47
====== ======
Total return 22.01% 9.63%
====== =====
Ratios/Supplemental data:
Net assets, end of period $15,360,742 $5,867,926
Ratio of expenses to average net assets 1.50% 1.25%*
Ratio of expenses to average net assets before
adviser reimbursements # 1.62% 1.56%*
Ratio of net income to average net assets 1.04% 5.59%*
Portfolio turnover rate 27.90% 40.34%
# KPM Management, Inc. reimbursed a portion of the fund's expenses (note 3)
*Annualized for periods of less than twelve months in duration
See accompanying notes to financial statements.
<PAGE>
Notes to Financial Statements
June 30, 1995
1. Organization
KPM Funds, Inc. (the "Fund") is registered under the Investment Company Act
of 1940, as amended, as a diversified, open-end management investment
company. The Fund issues its shares in series, each series representing a
distinct portfolio with its own investment objectives and policies. At June
30, 1995 the Fund had only two portfolios in operation the KPM Equity
Portfolio and the KPM Fixed Income Portfolio.
2. Summary of Significant Accounting Policies
The following is a summary of significant accounting policies employed by
the Fund in preparing its financial statements.
Valuation of Investments
Investment securities are carried at market determined using the following
valuation methods:
o Securities traded on a national securities exchange are valued at the
last reported sale price that day.
o Securities traded on a national securities exchange for which there
were no sales on that day or on the NASDAQ National Market System and
securities traded on other over-the-counter markets for which market
quotations are readily available are valued at closing bid prices.
o Securities including bonds or other assets for which market prices are
not readily available are valued at fair market value as determined in
good faith or under the direction of the Board of Directors.
Determination of fair value involves, among other things, reference to
market indices, matrices and data from independent brokers and pricing
services.
All securities are valued in accordance with the above noted policies at
the close of each business day.
At June 30, 1995, the cost of investment securities is identical for
financial reporting and income tax purposes.
Security Transactions
Security transactions are accounted for on the date securities are
purchased or sold (trade date). Dividend income is recognized on the
ex-dividend date and interest income, including amortization of premium and
discount, is accrued daily on the straight-line basis.
<PAGE>
KPM FUNDS, INC.
Notes to Financial Statements
2. Continued
Realized investment gains and losses are determined by specifically
identifying the issue sold.
Federal Income Taxes
It is the policy of each Portfolio to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute virtually all of the taxable income generated by the Portfolios
to their shareholders within the time period allowed by Federal law.
Consequently, no liability for Federal income taxes is required. Each
Portfolio is treated as a separate entity for tax purposes, and on a
calendar basis, will distribute substantially all of its net investment
income and realized gains, if any, to avoid payment of any Federal excise
tax. There will be no net realized gain distributions until the net
realized loss carry forwards have been offset or expired. The losses will
expire in 8 years. Each Portfolio prepares its tax return on an accrual
basis.
Distribution to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. The
dividends declared become payable immediately.
Cash Equivalents
The Fund considers investments with an original maturity of three months or
less when purchased to be cash equivalents.
Organizational Costs
Costs associated with the formation of the Fund, consisting primarily of
accounting and legal fees, have been capitalized and are being amortized
using the straight-line basis over five years. If any or all of the shares
representing initial capital of the Fund is redeemed by any holder prior to
the end of the amortization period, the proceeds will be reduced by the
unamortized organization cost balance in the same proportion as the number
of shares redeemed bears to the number of initial shares outstanding.
3. Fees, Expenses and Related Party Transactions
The Fund and each of its Portfolios have retained KPM Investment
Management, Inc. (the "Adviser"), a wholly-owned subsidiary of Kirkpatrick,
Pettis, Smith, Polian Inc. ("KPSP"), which is a wholly-owned subsidiary of
Mutual of Omaha Insurance Company, as its exclusive investment adviser. In
addition, the Fund has an agreement with KPSP to act as principal
underwriter and distributor for the Portfolio's shares, and an
administration agreement with Lancaster Administrative Services, Inc. (the
"Administrator") to provide administrative and transfer agent services.
<PAGE>
KPM FUNDS, INC.
Notes to Financial Statements
3. Continued
Under the terms of the investment advisory agreement, the Adviser receives
a management fee equal to .80% and .60% per annum of the daily average net
asset value, respectively, of the KPM Equity Portfolio and the KPM Fixed
Income Portfolio.
The Adviser has voluntarily agreed to reimburse the Portfolios to the
extent of the advisory fee paid, if in any year the annual operating
expenses of the Portfolio exceeds 1.50% for the KPM Equity Portfolio and
1.25% for the KPM Fixed Income Portfolio.
Under the terms of the administration agreement, certain services will be
provided including the transfer of shares, disbursement of dividends and
maintenance of shareholder accounting records of the Fund, for which the
Administrator will be paid a fee of .25% per annum of each of the
Portfolio's daily average net asset value.
Pursuant to the distribution agreement and Rule 12b-1 Plan, KPSP is paid a
fee of .25% per annum of each Portfolio's daily average net asset value.
Under the terms of the advisory, administrative and distribution agreements
outlined above, the Portfolios collectively incurred $93,205, $30,804 and
$30,816, respectively for such services. Of the amount paid to the adviser,
$19,170 was reimbursed to the Portfolios by the Adviser for expenses.
At June 30, 1995, the following accrued investment advisory, administrative
and distribution fees were payable to the Adviser and Administrator.
Payable to Payable to Payable to
Adviser Administrator Distributor Total
KPM Equity
Portfolio $9,581 $2,994 $2,947 $15,522
KPM Fixed
Income Portfolio 2,745 1,144 1,111 5,000
===== ===== ===== =======
The Portfolios also used KPSP to affect security trades on their behalf. As
is customary in the industry, the investment adviser evaluates the pricing
and ability to execute the transaction in selecting brokers to affect
trades. KPSP was paid commissions in the amount of $10,996 for their
brokerage services during the period ended June 30, 1995.
<PAGE>
KPM FUNDS, INC.
Notes to Financial Statements
4. Investments
Cost of investment securities held at June 30, 1995 was as follows for each
portfolio:
KPM Equity Portfolio $12,260,917
KPM Fixed Income Portfolio 5,624,449
===========
5. Securities Transactions
Purchases of securities and proceeds from sales, including short-term
securities, were as follows for each Portfolio:
Purchases of Proceeds
Securities from Sales
------------- -----------
KPM Equity Portfolio $18,135,718 $6,080,602
KPM Fixed Income Portfolio $ 8,239,446 $2,614,291
=========== ==========
At June 30, 1995, the aggregate gross unrealized appreciation and the
aggregate gross unrealized depreciation of securities in each Portfolio
were as follows:
Aggregate Gross
Unrealized
Appreciation Depreciation
------------- -------------
KPM Equity Portfolio $1,917,106 $138,351
KPM Fixed Income Portfolio $ 161,409 $ 16,943
========= =======
6. Capital Share Transactions
The Fund is authorized to issue a total of 1 billion shares of common stock
in series with a par value of $.00001. Fifty million of these shares have
been authorized by the Board of Directors to be issued in each series. The
Board of Directors is empowered to issue other series of the Fund's shares
without shareholders approval. Each share of stock will have a pro rata
interest in the assets of the Portfolio to which the stock of that series
relates and will have no interest in the net assets of any other Portfolio.
On June 30, 1995, KPM Equity Portfolio and KPM Fixed Income Portfolio had
1,280,006.968 and 560,663.641 shares outstanding, respectively.
<PAGE>
KPM FUNDS, INC.
Notes to Financial Statements
6. Continued
Transactions in the capital stock of each portfolio for the period ended
June 30, 1995 were as follows:
KPM Fixed
KPM Equity Income
Portfolio Portfolio
------------ ------------
Transactions in shares:
Shares sold 1,322,062.144 588,206.043
Shares redeemed (56,988.589) (41,535.540)
Reinvested dividends 14,933.413 13,993.138
-------------- ------------
Net increase 1,280,006.968 560,663.641
============= ===========
At June 30, 1995, directors, officers and employees of the Fund, the
Adviser and Administrator and their immediate families held 96,594.586
shares of the KPM Equity Portfolio representing $1,159,135.
7. Business Changes
In June of 1995, the Board of Directors of KPM Funds, Inc. approved the
appointment of Lancaster Administrative Services, Inc. successor to the
transfer agent and administrative services functions of SMITH HAYES
Portfolio Management, Inc.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
KPM Funds, Inc.
We have audited the accompanying statements of assets and liabilities including
the schedule of investments in securities of KPM Funds, Inc. (comprised
respectively of the KPM Equity and KPM Fixed Income Portfolios) as of June 30,
1995, the related statements of operations, changes in net assets and financial
highlights for the period from July 5, 1994 (commencement of operations) to June
30, 1995. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of June 30, 1995, by
correspondence with the custodian. As to securities purchased and sold, but not
received or delivered, we request confirmations from brokers and where replies
are not received, we carry out other appropriate auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by the accounting principles used and significant estimates made by the
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
<PAGE>
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective portfolios constituting KPM Funds, Inc. as of June 30, 1995,
the results of their operations, changes in their net assets and the financial
highlights for the period from July 5, 1994 (commencement of operations) to June
30, 1995 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK, LLP
Omaha, Nebraska
July 13, 1995
