KPM FUNDS, INC.
ANNUAL REPORT
KPM EQUITY PORTFOLIO
KPM FIXED INCOME PORTFOLIO
June 30, 1996
<PAGE>
KPM FUND'S
PERFORMANCE
Avg. Annual Return
Since Inception
(07/05/94)
Equity Portfolio 23.27%
Fixed Income Portfolio 6.63%
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
Chairman'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
Equity Portfolio....................12
Fixed Income Portfolio..............13
Notes to Financial Statements.........14
<PAGE>
Dear Shareholder:
The fiscal year ended June 30, 1996 was an exciting and rewarding year for
KPM Funds shareholders. The KPM Funds Equity Portfolio increased 24.2% aided by
a continuing strong bull market in stocks. Since inception, the KPM Equity
Portfolio has had an average annual return of 23.3%.
The KPM Funds Fixed Income Portfolio faced a mixed environment in the past
year. During the last half of calendar 1995 interest rates declined modestly
which provided additional return through increased prices on bonds. However,
interest rates increased sharply during the first half of 1996 which caused bond
prices to decline and reduced total returns on the portfolio. As a result, while
the net coupon returns averaged 6.0% during the last fiscal year, the total
return, which includes changes in market prices, was only 3.6%. Since inception,
the KPM Funds Fixed Income Portfolio has had an average annual total return of
6.6%.
Thus far in the new fiscal year, the financial markets have been very
volatile as investors grapple with concerns about inflation, interest rates,
slowing corporate earnings growth and historically high stock market valuations.
Some of our shareholders have asked if they should be making any changes in
light of this uncertainty. While you should consult periodically with your
investment consultant regarding your specific situation and financial goals,
most shareholders, in our opinion, should stay with their long-term investment
strategy. It is true that the KPM Funds will most likely experience periods of
lower or even negative returns at some time in the future. If we, or any other
"experts", could predict with any accuracy when these low return periods will
occur, then making changes in one's asset allocation, or market timing, would
make sense. Unfortunately, most investors, including the experts, often get
"whipsawed" when they attempt to time the market; selling out at low prices
after they are finally convinced of a declining trend and then buying back at
higher prices only after they are convinced that a new rising trend has been
established.
A better way to manage your investments is to choose a good advisor that
manages your money prudently for the long term. KPM's equity philosophy is to
acquire securities in companies with solid balance sheets, good managements,
high returns on investment, and growing markets, and, as importantly, at prices
that, in our opinion, represent a discount to intrinsic value. KPM's fixed
income philosophy is to acquire only investment grade securities and maintain an
intermediate-term maturity or duration in the portfolio. Bull markets and bear
markets will come and go, but these philosophies have stood the test of time.
We are pleased with the progress made during our second year of operations.
Total assets more than doubled to nearly $46 million and shareholders have
increased to 186. Most importantly, KPM Funds have provided solid performance
during the past two years. Thank you for investing in KPM Funds.
Sincerely,
Randall D. Greer
Chairman
KPM Funds, Inc.
<PAGE>
KPM Funds - Equity Portfolio
Thomas J. Sudyka, Jr., CFA
Portfolio Manager
The first half of 1996 was a strong one for the equity markets as the Standard &
Poor's 500 total return was 10.04%. The KPM Funds Equity Portfolio's total
return for the same period was 11.77%. Over the past 12 months this portfolio's
return was 24.19%. Over the same period, the Standard & Poor's 500 total return
was 26.03%. Since June 30, 1996, the equity markets have experienced a
noticeable decline, especially in smaller-capitalization securities. While this
most recent price drop has brought valuation levels down, we continue to be
relatively cautious toward the general stock market. We remain on the lookout
for attractively valued securities, not necessarily those that are off 50% (or
more) from their price highs, but those whose fundamental valuations exceed
current prices by a sufficient amount to justify the risks involved with owning
them. We plan to remain relatively fully invested, and are attempting to
position the portfolio in the stocks of companies which we feel will perform
well no matter what the market environment.
Comparison of Change in Value of $10,000 Investment in
KPM Equity and the S&P 500
[GRAPHIC OMITTED]
Avg. Annual Return * 6/30/96 Value
1 Year 24.19% KPM Equity $15,162
Inception 23.27% S&P 500 $15,793
Past performance is not predictive of future performance.
*For the period July 5, 1994, (inception) through June 30, 1996.
<PAGE>
KPM Funds - Fixed Income Portfolio
Patrick M. Miner, CFA
Portfolio Manager
Interest rates have made a steady climb during the first half of 1996, producing
negative returns for the bond market year-to-date. The Fixed Income Portfolio
generated a total return of -1.79% since year-end compared with the -1.22%
return posted by the Lehman Aggregate Index. We have maintained a shorter
average maturity than the market indices to cushion the temporary price declines
experienced during a weak market. At the same time, we have enhanced the
Portfolio's income by adding to positions in corporate bonds and asset-backed
securities that provide attractive higher yields versus other sectors of the
fixed income market. As rates continued to rise, we did take advantage of the
opportunity to lengthen duration. Since year-end the Portfolio's duration has
been increased nearly 20% to 4.9 years. Relative to the market (as measured by
the Lehman Aggregate Index), duration was increased to 103% of the Index
duration from 91% last December. Purchases have been focused on securities with
3-10 year maturities as that segment of the yield curve showed the greatest
increase in interest rates (over 1.1 percentage points). Looking forward, we do
not see a risk of significantly higher interest rates. Economic growth should
moderate during the second half of the year -- potentially with the help of the
Federal Reserve Board who will be compelled to raise short-term interest rates
if employment and consumer spending reports stay strong. We expect to be
lengthening portfolio maturity and outperforming the market on a price basis by
the fourth quarter.
Comparison of Change in Value of $10,000 Investment in
KPM Fixed Income and the Lehman Aggregate Bond Index
[GRAPHIC OMITTED]
Avg. Annual Return * 6/30/96 Value
1 Year 3.63% Fixed Income $11,362
Inception 6.63% Lehman Aggregate Bond Index $11,819
Past performance is not predictive of future performance.
*For the period July 5, 1994, (inception) through June 30, 1996.
<PAGE>
KPM FUNDS, INC.
Schedule of Investments in Securities
June 30, 1996
KPM EQUITY PORTFOLIO
Quoted
Market
Shares/Units Common Stock -- 92.55% Value
------------ --------------------------------- ------
Auto/Truck/Parts -- 2.62%
-------------------------
74,900 TBC Corporation* $ 646,013
8,800 Wabash National Corporation 156,200
----------
802,213
----------
Broadcast, Radio & TV -- 2.77%
------------------------------
47,000 Tele-Communications, Inc. Class A* 846,000
----------
Building Materials/Construction -- 3.89%
----------------------------------------
35,000 Apogee Enterprise, Inc. 1,190,000
---------
Chemicals -- 3.28%
------------------
48,000 Hanna (M.A.) Company 1,002,000
---------
Commercial Services -- 3.26%
----------------------------
48,000 Franklin Quest Company* 996,000
----------
Electronics/Electrical Equipment -- 5.88%
-----------------------------------------
80,000 America Power Conversion Corporation* 820,000
10,800 Emerson Electric Company 976,050
----------
1,796,050
----------
Entertainment/Leisure -- 0.87%
------------------------------
19,318 Johnson Worldwide Associates, Inc. Class A* 265,623
----------
Financial Services -- 11.47%
----------------------------
11,400 Federal Home Loan Mortgage Corporation 974,700
14,000 Finova Group, Inc. 682,500
11,400 MBIA, Inc. 887,775
13,000 Student Loan Marketing Association 962,000
----------
$3,506,975
----------
*Indicates nonincome-producing security.
See accompanying notes to financial statements.
<PAGE>
KPM FUNDS, INC.
Schedule of Investments in Securities (Continued)
KPM EQUITY PORTFOLIO
Quoted
Market
Shares/Units Common Stock (Continued) Value
------------ --------------------------------- ------
Food Processing -- 1.89%
------------------------
5,550 Philip Morris Companies, Inc. $ 577,200
----------
Forest Products/Paper -- 4.60%
-------------------------------
11,400 Kimberly Clark Corporation 880,650
37,500 Specialty Paperboard, Inc.* 525,000
----------
1,405,650
----------
Insurance -- 6.37%
--------------------
22,000 Allstate Corporation 1,003,750
29,450 Gallagher (Arthur J.) & Company 942,400
----------
1,946,150
----------
Iron/Steel -- 1.35%
-------------------
20,000 Worthington Industries, Inc. 412,500
----------
Lodging -- 2.52%
---------------
75,000 Supertel Hospitality, Inc.* 768,750
----------
Manufacturing -- 3.44%
----------------------
35,000 Pentair, Inc. 1,050,000
---------
Metals/Mining -- 6.38
----------------------
15,000 Potash Corporation of Saskatchewan, Inc. 993,750
28,800 Valmont Industries 957,600
----------
1,951,350
----------
Oil/Gas -- 3.66%
----------------
7,450 Exxon Corporation 647,219
31,900 Prima Energy Corporation* 470,525
----------
$1,117,744
----------
*Indicates nonincome-producing security.
See accompanying notes to financial statements.
<PAGE>
KPM FUNDS, INC.
Schedule of Investments in Securities (Continued)
KPM EQUITY PORTFOLIO
Quoted
Market
Shares/Units Common Stock (Continued) Value
------------ --------------------------------- ------
Pharmaceutical -- 1.71%
-----------------------
5,800 Bristol-Myers Squibb Company $ 522,000
------------
Publishing/Printing -- 8.03%
----------------------------
31,000 Banta Corporation 782,750
14,200 Gannett Company, Inc. 1,004,650
26,700 Merrill Corporation 667,500
------------
2,454,900
------------
Retail/Apparel -- 6.88%
-----------------------
32,000 Reebok International Ltd. 1,076,000
36,000 Toys R Us, Inc.* 1,026,000
-----------
2,102,000
------------
Transportation -- 3.20%
-----------------------
14,000 Union Pacific Corporation 978,250
------------
Utilities -- 5.45
--------------------
39,000 CalEnergy, Inc.* 994,500
8,000 Dominion Resources, Inc. 320,000
10,000 MidAmerican Energy * 172,500
12,650 Southwestern Energy Company 178,680
------------
1,665,680
------------
Utilities - Telecommunications -- 3.03%
---------------------------------------
15,000 American Telephone & Telegraph Corporation 930,000
------------
Short-Term Investments -- 6.52%
--------------------------------
1,994,638 Government Agency Repurchase Pool, 4.75% 1,994,638
-----------
Total Investment in Securities (cost $25,281,899) 99.07% 30,281,673
Other Assets Less Liabilities 0.93% 283,500
------ ----------
TOTAL NET ASSETS 100.00% $30,565,173
====== ===========
* Indicates nonincome-producing security.
See accompanying notes to financial statements.
<PAGE>
KPM FUNDS, INC.
Schedule of Investments in Securities
June 30, 1996
KPM FIXED INCOME PORTFOLIO Quoted
Principal Market
Amount U.S. Government Securities -- 18.64%
------ ------------------------------------------
Value
- -------
150,000 U. S. Treasury Note, 9.25%, due 8/15/98 $ 159,000
200,000 U. S. Treasury Note, 6.875%, due 7/31/99 202,812
500,000 U. S. Treasury Note, 8.75%, due 8/15/00 541,406
50,000 U. S. Treasury Note, 7.25%, due 5/15/04 51,781
400,000 U. S. Treasury Note, 5.625%, due 2/15/06 370,687
250,000 U. S. Treasury Bond, 7.125%, due 2/15/23 252578
---------
Total U.S. Government Securities (cost $1,608,332) 1,578,264
---------
Collateralized Mortgage Obligations -- 41.99%
-----------------------------------------------
200,000 Federal Home Loan Mortgage Corporation 198,594
Series 1232 F, 7.50%, due 9/15/06
150,000 Federal Home Loan Mortgage Corporation 153,035
Series 1035 E, 8.00%, due 10/15/20
372,000 Federal Home Loan Mortgage Corporation 359,794
Series 1455 H, 7.00%, due 6/15/21
250,000 Federal Home Loan Mortgage Corporation 253,789
Series 1761 G, 8.00%, due 6/15/21
69,917 Federal Home Loan Mortgage Corporation 63,281
Series 1545 C, 6.00%, due 6/15/23
165,000 Federal National Mortgage Association 160,269
Series 1992-164 PH, 6.50%, due 1/25/06
97,000 Federal National Mortgage Association 92,355
Series 1993-76 PG, 6.00%, due 7/25/06
50,000 Federal National Mortgage Association 46,121
Series 1993-221 C, 5.50%, due 9/25/07
185,804 Federal National Mortgage Association 192,148
Series 1990-96 E, 9.67%, due 1/25/17
195,000 Federal National Mortgage Association 186,118
Series 1993-82 D, 6.35%, due 3/25/19
100,000 Federal National Mortgage Association 96,023
Series 1993-103 PG, 6.25%, due 6/25/19
90,000 Federal National Mortgage Association 88,488
Series 1991-173 HP, 6.95%, due 1/25/20
195,000 Federal National Mortgage Association 201,445
Series 1999-65 H, 8.50%, due 1/25/20
161,173 Federal National Mortgage Association 165,896
Series G-29 O, 8.50%, due 9/25/21
160,000 Federal National Mortgage Association $ 151,937
Series 1993-223 L, 6.50%, due 9/25/22
<PAGE>
KPM FUNDS, INC.
Schedule of Investments in Securities (Continued)
KPM FIXED INCOME PORTFOLIO Quoted
Principal Market
Amount Collateralized Mortgage Obligations (continued) Value
- ---------------- ------------------------------------------------- -------
300,000 GE Capital Mortgage Services $ 287,109
Series 1994-12, 6.00%, due 4/25/09
100,000 Government National Mortgage Association 99,805
Series 1994-4 K, 7.9875%, due 7/16/12
100,000 Green Tree Financial Corporation ABS, 7.30%,
due 7/15/25 97,953
300,000 Green Tree Financial Corporation 296,813
Series 1995-3 M1, 7.95%, due 8/15/25
250,000 Oakwood Management Investors, Inc. 239,023
Series 1995-B B1, 7.55%, due 1/15/21
123,639 Security Pacific Acceptance Corporation 124,789
Series 1991-3 A1, 7.25%, due 12/15/11
Total Collateralized Mortgage Obligations
(cost $3,538,993) 3,554,785
Corporate Bonds -- 37.27%
-------------------------------------
270,000 Apollo Computer, Inc., 7.25%, due 2/1/11 262,426
50,000 Chevron Capital USA, 7.45%, due 8/15/04 50,466
250,000 Commonwealth Edison Co. MTN, 9.05%, due 10/15/99 263,539
300,000 Dayton Hudson Corporation 9.625%, due 2/1/08 350,356
245,000 Enron Corporation, 6.75%, due 7/1/05 234,162
250,000 Federal Express Company, 6.68%, due 1/1/08 238,991
250,000 Ford Motor Company, 6.11%, due 1/1/01 240,962
250,000 James River Corporation, 7.92%, due 12/27/04 254,688
100,000 May Department Stores Company, 9.45%, due 2/2/99 106,372
250,000 Public Service Electric & Gas Co., 6.50%, due 5/1/04 237,500
200,000 Tenneco Corporation, 9.625%, due 8/15/01 220,594
100,000 Union Pacific Corporation, 6.25%, due 3/15/99 99,157
50,000 U. S. Leasing International, Inc., 8.75%, due 12/1/01 53,750
200,000 United Telecom, 9.50%, due 4/1/03 222,256
200,000 Wal-Mart Stores, Inc., 7.49%, due 6/21/07 201,183
10,000 Washington Natural Gas, 6.07%, due 1/16/04 9,181
120,000 Westinghouse Electric Corporation, 6.875%,
due 9/1/03 108,465
---------
Total Corporate Bonds (cost $3,219,371) 3,154,048
---------
Short-Term Investments -- .53%
44,792 Government Agency Repurchase Pool, 4.75% 44,792
-----------
Total Investment in Securities (cost $8,411,488) 98.43% 8,331,889
Other Assets Less Liabilities 0.93% 132,945
TOTAL NET ASSETS 100.00% $8,464,834
====== ==========
See accompanying notes to financial statements.
<PAGE>
<TABLE>
<CAPTION>
KPM FUNDS, INC.
Statements of Assets and
Liabilities
June 30, 1996
KPM KPM
Equity
Fixed
Income
Assets: Portfolio Portfolio
------------ ------------
<S> <C> <C>
Investments in securities, at market value
(cost $25,281,899 and $8,411,488, respectively) $30,281,673 $8,331,889
Accrued interest and dividends receivable 47,390 135,937
Organizational costs, net of accumulated amortization 17,081 3,192
Receivable for fund shares sold 58,125 2,306
Receivable for investment securities sold 1,129,922 -
------------ ------------
Total assets 31,534,191 8,473,324
------------ ------------
Liabilities:
Accrued expenses, including investment management and
service fees and distribution expenses payable to
adviser, administrator and distributor (note 3) 36,233 8,490
Payable for investment securities purchased 932,785 -
------------ ------------
Total liabilities 969,018 8,490
------------ ------------
Net assets applicable to outstanding capital stock $30,565,173 $8,464,834
============ ============
Net assets represented by:
Capital stock(1 billion authorized, $.00001 par value)(note 5) $21 $8
Additional paid-in capital 24,264,841 8,536,753
Accumulated undistributed net investment income 5,874 4,459
Accumulated net realized gain on investments 1,294,663 3,213
Unrealized appreciation (depreciation) of
securities (note 4) 4,999,774 (79,599)
------------ ------------
Total net assets applicable to
shares outstanding $30,565,173 $8,464,834
============ ============
Shares outstanding and net asset value per share
Shares of capital stock outstanding: 2,103,658
and 827,483, respectively (note 5) $14.53 $10.23
====== ======
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KPM FUNDS, INC.
Statements of
Operations
Year Ended June 30, 1996
KPM KPM
Equity
Fixed
Income
Investment income: Portfolio Portfolio
---------- ---------
<S> <C> <C>
Dividends $373,364 $ -
Interest 60,115 536,677
---------- ---------
Total investment income 433,479 536,677
---------- ---------
Expenses (note 3):
Investment advisory fee 181,817 44,938
Administration fee 56,707 18,733
Distribution fees 56,708 18,733
Amortization of organization costs 4,392 1,065
Other operating expenses 41,998 12,852
---------- ---------
Less expenses reimbursed by investment adviser (note 3) (3,793) -
---------- ---------
Total expenses 341,622 92,528
---------- ---------
Net investment income 91,857 444,149
---------- ---------
Realized and unrealized gain (loss) on investments (note 4):
Net realized gain 1,595,222 17,153
Net unrealized appreciation (depreciation)
Beginning of period 1,778,755 144,466
End of period 4,999,774 (79,599)
---------- ---------
Net unrealized appreciation (depreciation) 3,221,019 (224,065)
---------- ---------
Net realized and unrealized gain (loss) on 4,816,241 (206,912)
investments
---------- ---------
Net increase in net assets resulting from operations $4,908,098 $237,237
========== =========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Statements of Changes in Net Assets
Year Ended June 30, 1996 and the Period from July 5,
1994 (commencement of operations) to June 30, 1995
KPM KPM
Equity Fixed Income
Portfolio Portfolio
------------------------- ------------------------
Year Ended Period Ended Year Ended Period Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Operations:
Net investment income $91,857 $101,522 $444,149 $153,193
Net realized gain (loss)
on investments 1,595,222 202,563 17,153 (2,799)
Unrealized appreciation
(depreciation) 3,221,019 1,778,755 (224,065) 144,466
------------ ------------ ------------------------
Net increase in net assets
resulting from operations 4,908,098 2,082,840 237,237 294,860
------------ ------------ ----------- -----------
Distributions to shareholders from:
Net investment income 91,465 94,457 436,949 153,650
Net realized gains 436,952 66,169 13,425 543
------------ ------------ ----------- -----------
Total distributions 528,417 160,626 450,374 154,193
------------ ------------ ----------- -----------
Capital share transactions: (note 5)
Proceeds from sales 12,208,239 13,884,315 4,157,544 5,902,328
Payment for redemptions (1,896,909) (603,478) (1,764,323) (417,343)
Reinvestment of net investment
income and net realized gain
distributions at net asset value 513,420 157,691 416,824 142,274
------------ ------------ ----------- -----------
Total increase from capital
share transactions 10,824,750 13,438,528 2,810,045 5,627,259
------------ ------------ ----------- -----------
Total increase in net assets 15,204,431 15,360,742 2,596,908 5,767,926
Net assets:
Beginning of period 15,360,742 - 5,867,926 100,000
------------ ------------ ----------- -----------
End of period (including
undistributed
net investment income of $7,457
and 6,743, respectively) $30,565,173 $15,360,742 $8,464,834 $5,867,926
============ ============ =========== ===========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KPM FUNDS, INC.
Financial Highlights
The following financial information provides selected data for a share of
the KPM Equity Portfolio outstanding throughout the periods indicated.
KPM Equity Portfolio
------------------------
Period July
5, 1994
(commencement
of
Year Ended operations)
June 30, to June 30,
1996 1995
------------- -------------
Net asset value:
Beginning of period $12.00 $10.00
------ ------
Income from investment operations:
Net investment income 0.05 0.11
Net realized and unrealized gain on investments 2.83 2.06
---- ----
Total income from investment operations 2.88 2.17
---- ----
Less distributions:
Dividends from net investment income (0.05) (0.10)
Distributions from capital gains (0.30) (0.07)
------ ------
Total distributions (0.35) (0.17)
------ ------
Net asset value,
End of period $14.53 $12.00
====== ======
Total return 24.19% 22.01%
Ratios/Supplemental data:
Net assets, end of period $30,565,173 $15,360,742
Ratio of expenses to average net assets 1.50% 1.50% *
Ratio of expenses to average net assets before
adviser reimbursements # 1.50% 1.62% *
Ratio of net investment income to average net assets 0.40% 1.04% *
Portfolio turnover rate 34.05% 27.90%
#KPM Investment Management, Inc. reimbursed a portion of the fund's expenses
(note 3)
*Annualized for periods of less than twelve months.
Per share data has been calculated using weighted
average shares outstanding during the period indicated.
See accompanying notes to financial statements.
<PAGE>
KPM FUNDS, INC.
Financial Highlights
The following financial information provides selected data for a share of the
KPM Fixed Income Portfolio outstanding throughout the periods indicated.
KPM Fixed Income
Portfolio
------------------------
Period
July 5,
1994
(commencement
of
Year Ended operations)
June 30, to June
1996 30, 1995
------------- ---------
Net asset value:
Beginning of period $10.47 $10.00
------ ------
Income from investment operations:
Net investment income 0.63 0.57
Net realized and unrealized gain (loss) on investments (0.23) 0.47
------ ----
Total income from investment operations 0.40 1.04
---- ----
Less distributions:
Dividends from net investment income (0.62) (0.57)
Distributions from capital gains (0.02) 0.00
------ ----
Total distributions (0.64) (0.57)
------ ------
Net asset value,
End of period $10.23 $10.47
====== ======
Total return 3.63% 9.63%
Ratios/Supplemental data:
Net assets, end of period $8,464,834 $5,867,926
Ratio of expenses to average net assets 1.25% 1.25% *
Ratio of expenses to average net assets before
adviser reimbursements # 1.29% 1.56% *
Ratio of net investment income to average net assets 5.94% 5.59% *
Portfolio turnover rate 19.52% 40.34%
#KPM Investment Management, Inc. reimbursed a portion of the fund's expenses
(note 3)
*Annualized for periods of less than twelve months.
Per share data has been calculated using weighted
average shares outstanding during the period indicated
See accompanying notes to financial statements.
<PAGE>
Notes to Financial Statements
June 30, 1996
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, 1996 the Fund had two portfolios in operation: the KPM Equity Portfolio
and the KPM Fixed Income Portfolio. The accompanying financial statements
present the financial position and results of operations of each Portfolio
in the fund.
2. Summary of Significant Accounting Policies
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 quoted 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, 1996, 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 and distributions to
shareholders are recorded 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.
Net investment income and net realized gains may differ for financial
statement and tax purposes. The character of distributions made during the
year for net investment income or net realized gains may also differ from
its ultimate characterization for tax purposes. Also, due to the timing of
dividend distributions, the fiscal year in which amounts are distributed
may differ from the year that the income or realized gains (losses) are
recorded by the portfolios.
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.
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 at
the date of the financial statements and the reported amounts or revenues
and expenses during the reporting period. actual results could differ from
those estimates.
<PAGE>
KPM FUNDS, INC.
Notes to Financial Statements
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, which is a
wholly-owned subsidiary of KFS Corporation Mutual of Omaha Insurance
Company, as its exclusive investment adviser. In addition, the Fund has an
agreement with Pettis, Smith, Polian Inc. ("KPSP"), a wholly-owned
subsidiary of KFS Corporation 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.
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 $226,755, $75,622 and
$75,259, respectively for such services. Of the amount paid to the Adviser,
$3,793 was reimbursed to the KPM Fixed Income Portfolio by the Adviser.
<PAGE>
KPM FUNDS, INC.
Notes to Financial Statements
3. Continued
At June 30, 1996, 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 $19,849 $6,203 $6,192 $32,244
KPM Fixed
Income Portfolio 4,180 1,742 1,737 7,659
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 $18,984 for their
brokerage services during the year ended June 30, 1996.
4. Securities Transactions
Purchases of securities and proceeds from sales, excluding short-term
securities, were as follows for each Portfolio:
Purchases of Proceeds
Securities from Sales
-------------- --------------
KPM Equity Portfolio $16,684,676 $7,253,510
KPM Fixed Income Portfolio$ $ 4,545,151 $1,395,128
At June 30, 1996, 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 $5,636,489 $636,715
KPM Fixed Income Portfolio $ 78,651 $158,250
<PAGE>
KPM FUNDS, INC.
Notes to Financial Statements
5. 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.
Transactions in the capital stock of each portfolio for the year ended June
30, 1996 were as follows:
KPM Fixed
KPM Equity Income
Portfolio Portfolio
------------ ------------
Transactions in shares:
Shares sold 922,138.933 393,910.132
Shares redeemed (138,122.235) (167,102.590)
Reinvested dividends 39,633.861 40,012.163
------------- ------------
Net increase 823,650.559 266,819.705
============ ===========
At June 30, 1996, directors, officers and employees of the Fund, the
Adviser and Administrator and their immediate families held 104,243.700
and 2,955.825 shares of the KPM Equity Portfolio and KPM Fixed Income
Portfolio representing $1,514,661 and $30,238, respectively.
6. Directors' Fees and Expenses
The Fund pays directors who are not deemed "interested persons" a fee of
$200 per Board meeting plus and annual retainer of $1,000. During the
fiscal year ended June 30, 1996, the Fund paid directors' fees of $3,946
and $1,314 for the KPM Equity and KPM Fixed Income Portfolios, respectively.
