Prospectus
KPM FUNDS, INC.
KPM EQUITY PORTFOLIO
KPM FIXED INCOME PORTFOLIO
This Prospectus concisely describes information about the Portfolios that you
ought to know before investing. Please read it carefully before investing and
retain it for future reference. A Statement of Additional Information about the
Portfolios dated as of the date of this Prospectus is available free of charge
from Kirkpatrick Pettis, 10250 Regency Circle, Omaha, Nebraska 68114; or
telephone (402) 397-5777 or (800) 776- 5777. The Statement of Additional
Information has been filed with the Securities and Exchange Commission and is
incorporated in its entirety by reference in this Prospectus.
KPM FUNDS, Inc. (the "Fund") is a Nebraska corporation offering shares in
series, each series operated as a separate diversified open-end management
investment company. This Prospectus relates to the series designated KPM Equity
Portfolio and KPM Fixed Income Portfolio (individually a "Portfolio" or
collectively the "Portfolios"). The shares of the Portfolios are not deposits or
obligations of, or guaranteed or endorsed by any bank, nor are they federally
insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board,
or any other federal or state agency.
KPM Equity Portfolio
The KPM Equity Portfolio seeks to provide capital appreciation. At least 65% of
the Equity Portfolio's total assets will ordinarily be invested in equity
securities consisting of common stock and other securities convertible into
common stock. In making selections for the Portfolio, the Adviser will utilize
an investment approach based on fundamental analysis employing a value
philosophy. In pursuit of the Portfolio's investment objective, the Adviser
seeks to identify companies that are selling at market prices below what the
Adviser believes to be their intrinsic fundamental value. These companies
generally fall into two categories: well-recognized, large capitalization
companies (market capitalization in excess of $1 billion) that are currently out
of favor with investment professionals evidenced by low price to earnings ratios
compared to similar companies and/or relative to the market as a whole and small
to medium capitalization companies (market capitalization between $100 million
and $1 billion) that lack significant research coverage from major Wall Street
firms.
KPM Fixed Income Portfolio
The KPM Fixed Income Portfolio seeks to provide total return over a market cycle
of 3 to 5 years consistent with preservation of capital and prudent investment
management.
The Fixed Income Portfolio will invest primarily in fixed-income securities with
an emphasis on income. Capital appreciation, while more difficult to achieve, is
a secondary objective. The Portfolio will invest in investment-grade securities
(rated BBB or better by Standard & Poor's Corporation ("S&P") or Baa or better
by Moody's Investors Services ("Moody's"), corporate debt, preferred stock,
mortgage-backed securities and U.S. Government securities. The Portfolio has no
stated policy on portfolio maturity, but the Investment Adviser anticipates
average dollar weighted portfolio maturity to range between seven and fifteen
years.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is September 30, 1996
<PAGE>
INTRODUCTION
KPM FUNDS, Inc. (the "Fund") is a Nebraska corporation, commonly called a mutual
fund. The Fund, which was organized in February, 1994, has one class of capital
stock that is issued in series, each series referred to as a Portfolio and
operated as a separate diversified open-end management investment company. This
Prospectus only relates to the series designated KPM Equity Portfolio and KPM
Fixed Income Portfolio.
The Investment Adviser and Administrator
The Portfolios are managed by KPM Investment Management, Inc., Omaha, Nebraska
("KPM" or the "Adviser"). Lancaster Administrative Services, Inc. acts as the
Fund's transfer agent and administrator ("Administrator"). The Portfolios pay
the Adviser and Administrator monthly fees for advisory services and
administrative services rendered. See "Management -- Investment Adviser and
Administrator" and "Management -- Portfolio Brokerage."
The Distributor
Kirkpatrick, Pettis, Smith, Polian Inc. ("Kirkpatrick Pettis"), a wholly owned
subsidiary of Mutual of Omaha Insurance Company, acts as the distributor
("Distributor") of the Fund's shares. See "Purchase of Shares."
Purchase of Shares
Shares of the Portfolios are offered to the public at the next determined net
asset value after receipt of an order by the Distributor without a sales charge.
See "Valuation of Shares." The minimum aggregate initial investment in the
Portfolios is $25,000 unless waived by the Fund for Mutual of Omaha and
subsidiaries, employees and family members and certain other group purchases.
Subsequent investments can be made in amounts of $1,000 or more.
See "Purchase of Shares."
Certain Risk Factors to Consider
An investment in the Portfolios is subject to certain risks, as set forth in
detail under "Investment Objectives and Policies." As with other mutual funds,
there can be no assurance that the Portfolios will achieve their objectives. In
addition, the Portfolios are recently created and, as of the date of this
Prospectus, have a very limited history of operations.
Redemptions
Shares of the Portfolios may be redeemed at any time at their net asset value
next determined after receipt of a redemption request by the Distributor. See
"Redemption of Shares." The Fund reserves the right, upon 30 days' written
notice, to redeem a shareholder's investment in a Portfolio if the net asset
value of the shares held by such shareholder falls below $5,000 as a result of
redemptions or transfers. See "Redemption of Shares - Involuntary Redemption."
Dividends
Dividends are declared and paid at least annually (see "Dividends and Taxes"),
but may be declared and paid more frequently and will be automatically
reinvested unless the shareholder elects otherwise.
Expenses
The Fund offers shares of the Portfolios without any sales load or contingent
sales loads on purchases, reinvestments of dividends or redemptions and does not
charge any exchange or account maintenance fees. For more complete descriptions
of the various costs and expenses, see "Management--Investment Adviser and
Administrator" and "Management -- Expenses."
Annual Operating Expenses
The table below provides information regarding expenses for the Portfolios
expressed as annual percentages of average daily net assets. The Adviser has
agreed to reimburse the Portfolios monthly to the extent of the advisory fee
paid if in any year the annual total expenses exceed 1.50% of the Equity
Portfolio's and 1.25% of the Fixed Income Portfolio's average annual net assets.
KPM Equity KPM Fixed Income
Portfolio Portfolio
Management Fees .80% .60%
12b-1 Fees .25% .25%
Other Expenses (after expense reimbursement) . 45% .40%
Total Portfolio Operating Expenses
(after expense reimbursement) 1.50% 1.25%
Example
You would pay these expenses on a $1,000 investment assuming (1) 5% annual
return and (2) redemption at the end of each time period.
KPM Equity KPM Fixed Income
Portfolio Portfolio
1 year $15 $13
3 years $47 $40
5 years $82 $69
10 years $179 $151
The purpose of the table above is to assist investors in understanding the
various costs and expenses that an investor will bear directly or indirectly as
a result of an investment in the Portfolios. Such expenses do not include any
fees charged by some banks or other financial institutions to customer accounts
which may be invested in shares of the Portfolios. Long term shareholders may,
as a result of the Portfolios' payment of Rule 12b-1 fees, pay more than the
economic equivalent of the maximum front end sales charges permitted by the
National Association of Securities Dealers, Inc. The expense information
indicated above has been restated to reflect reimbursement by the adviser; the
total actual expense absent the expense reimbursement would have been 1.29% for
the KPM Fixed Income Portfolio. The advisory fee paid by the KPM Equity
Portfolio is higher than that paid by most other investment companies. See
"Management" for a more complete discussion of the shareholder transaction and
annual operating expenses for the Portfolios of the Fund.
Financial Highlights
The following financial information provides audited selected data for shares of
the Portfolios outstanding throughout the periods as indicated up to June 30,
1996. The information has been audited by KPMG Peat Marwick, LLP, independent
certified public accountants, to the extent of their report appearing in the
Fund's Annual Financial Report included with the Statement of Additional
Information and is available upon request without charge. Further information
about performance of the Portfolios is contained in the Annual Report.
<TABLE>
<CAPTION>
KPM KPM
Equity Fixed Income
Portfolio Portfolio
Year Ended July 5, 1994 to Year Ended July 5,1994 to
Net asset value: June 30, 1996 June 30, 1995 June 30, 1996 June 30, 1995
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Beginning of period $12.00 $10.00 $10.47 $10.00
Income from investment operations:
Net investment income 0.05 0.10 0.63 0.54
Less expense reimbursed by investment adviser --- 0.01 --- 0.03
Net realized and unrealized gain on investments 2.83 2.06 (0.23) 0.47
---- ---- ------ ----
Total income from investment operations 2.88 2.17 0.40 1.04
---- ---- ---- ----
Less distributions:
Dividends from net investment income (0.05) (0.10) (0.62) (0.57)
Distributions from capital gains (0.30) (0.07) (0.02) (0.00)
------ ------ ------ ------
(0.35) (0.17) (0.64) (0.57)
------ ------ ------ ------
End of period $14.35 $12.00 $10.23 $10.47
------ ------ ------ ------
Total Return 24.19% 22.01%* 3.63% 9.63%*
Ratios/Supplemental data:
Net assets, end of period $30,565,173 $15,360,742 $8,464,834 $5,867,926
Ratio of expenses to average net assets 1.50% 1.50%* 1.25% 1.25%*
Ratio of expenses to average net assets before
adviser reimbursements #1 1.50% 1.62%* 1.29% 1.56%*
Ratio of net income to average net assets 0.40% 1.04%* 5.94% 5.59%*
Portfolio turnover rate 34.05% 27.90% 19.52% 40.34%
#1 KPM Investment Management, Inc. reimbursed a portion of the fund's expenses
*Annualized for periods of less than twelve months in duration
</TABLE>
Shareholder Inquiries
Any questions or communications regarding a shareholder account should be
directed to your Kirkpatrick Pettis investment executive or other broker-dealer.
General inquiries regarding the Portfolios should be directed to the Fund at one
of the telephone numbers set forth on the cover page of this Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective of each of the Portfolios listed below cannot be
changed without shareholder approval in the manner described under the caption
"Investment Restrictions," below. In view of the risks inherent in all
investments in securities, there is no assurance that these objectives will be
achieved. The investment policies and techniques employed in pursuit of the
Portfolios' objectives may be changed without shareholder approval, unless
otherwise identified as fundamental policies. See "Special Investment Methods"
for definitions and discussion regarding certain types of securities and the
risks of investing in such securities.
KPM Equity Portfolio
Investment Objective
The KPM Equity Portfolio seeks to provide capital appreciation. At least 65% of
the KPM Equity Portfolio's total assets will ordinarily be invested in equity
securities consisting of common stock and other securities convertible into
common stock.
Investment Policies
In making selections for the Portfolio, the Adviser will utilize an investment
approach based on fundamental analysis employing a value philosophy. The
Adviser's philosophy can be summarized in its mission statement, which is "to
find high quality companies whose securities are selling at prices we believe
are below their long-term fundamental value." The Adviser regards long-term
fundamental value of a company as its economic value as a going concern, taking
into account the nature of its business, its assets, historical earnings and
profitability, projected earnings and profitability and the investment
environment. In terms of "high quality companies," the Adviser seeks companies
with a strong balance sheet, above average historical growth of sales and
earnings, companies with superior profitability as evidenced by a high return on
equity, and strong management as evidenced by a good historical track record.
The Adviser attempts to buy and hold securities over an anticipated four to five
year period. In valuing securities, the Adviser uses several methodologies
including, but not limited to, price-to-earnings, price-to-cash flow and
price-to-book value. Generally, the Adviser looks for companies that are selling
at a discount price-to-earnings ratio relative to their peer group and/or
relative to the market as a whole.
There are two areas of the market where the Adviser concentrates its analytical
efforts. First, the Adviser analyzes large capitalization companies that are
well known by the investment community but may be out of favor due to a recent
fundamental problem, such as a temporary decline in earnings. The Adviser
defines "large capitalization" as companies with market capitalizations in
excess of $1 billion. The Adviser attempts to take advantage of the short-term
oriented thinking displayed by many investment professionals by analyzing
companies whose stocks have been sold off dramatically due to a quarterly
earnings report or monthly sales figure that comes up short of the published
estimates. When the Adviser determines that the long-term fundamental value of a
company has not been harmed by such short-term earnings expectations, whether or
not they ultimately prove to be accurate, the Adviser will initiate purchases at
prices it believes provide solid value. Secondly, the Adviser analyzes small- to
medium-sized companies that it believes are not well received or followed by the
research community. These companies range in size from $100 million to $1
billion in market capitalization. The same analysis performed on the largest
companies is followed by the Adviser for these smaller to mid-sized companies;
however, because of the lack of widespread published research on these
companies, the Adviser may more frequently utilize more direct research
techniques, including company visitations and interviews with management.
Investment in smaller capitalization companies may involve greater risk than
investment in other companies. The securities of smaller capitalization
companies may be subject to more abrupt or erratic market movements, and many of
them have limited product lines, markets, financial resources and/or management
capabilities.
KPM Fixed Income Portfolio
Investment Objective
The KPM Fixed Income Portfolio seeks to provide total return over a market cycle
of 3 to 5 years consistent with preservation of capital and prudent investment
management.
Investment Policies
The KPM Fixed Income Portfolio will invest at least 65% of its assets in
fixed-income securities with an emphasis on income. Capital appreciation, while
more difficult to achieve, is a secondary objective. The KPM Fixed Income
Portfolio will invest only in investment-grade (securities rated BBB or better
by Standard & Poor's Corporation ("S&P") or Baa or better by Moody's Investors
Services ("Moody's")) corporate debt, preferred stock, mortgage-backed
securities and U.S. Government securities. Securities rated BBB by S&P or Baa by
Moody's are considered to have speculative characteristics and, as a result, are
more susceptible to fluctuations in market value than higher rated securities.
In the event that the rating of an investment grade security is lowered to below
investment grade, the Adviser will assess the creditworthiness of the issuer,
evaluate the likelihood of the security being upgraded to investment grade or
being further down-graded and may choose to hold or sell the security as
appropriate. The KPM Fixed Income Portfolio does not have a stated policy on
portfolio maturity, but the Adviser anticipates average dollar-weighted
portfolio maturity to range between seven and fifteen years. A longer portfolio
maturity results in greater fluctuation in net asset value in periods of
interest rate volatility.
Portfolio Turnover
While it is not the policy of either of the Portfolios to trade actively for
short-term (less than six months) profits, each Portfolio will dispose of
securities without regard to the time they have been held when such action
appears advisable to the Adviser, subject to, among other factors, the
constraints imposed on regulated investment companies by Subchapter M of the
Internal Revenue Code. See "Dividends and Taxes." For the period ending June 30,
1996, the portfolio turnover for the KPM Equity and KPM Fixed Inome Portfolios
were 34.05% and 19.52%, respectively. In the case of each Portfolio, frequent
changes will result in increased brokerage and other costs. The Fund does not
expect the turnover rate for the KPM Equity Portfolio to exceed 50% this year
and the KPM Fixed Income Portfolio to exceed 50% this year.
The methods of calculating portfolio turnover rate are set forth in the
Statement of Additional Information under "Investment Policies and
Restrictions--Portfolio Turnover."
Investment Restrictions
The Fund has adopted certain investment restrictions applicable to the
Portfolios which are fully set forth in the Statement of Additional Information.
Some of these restrictions, which are fundamental and may not be changed without
shareholder approval, include the following: (1) no Portfolio will invest 25% or
more of its total assets in any one industry (this restriction does not apply to
securities of the U.S. Government or its agencies and instrumentalities and
repurchase agreements relating thereto); (2) no security can be purchased by a
Portfolio if, as a result, more than 5% of the value of the total assets of that
Portfolio would then be invested in the securities of a single issuer (other
than U.S. Government obligations); and (3) no security can be purchased by a
Portfolio if, as a result, more than 10% of any class of securities, or more
than 10% of the outstanding voting securities of an issuer, would be held by
that Portfolio. Other restrictions, which are not fundamental policies and may
be changed without Shareholder approval include: (1) no Portfolio shall invest
more than 20% of its total assets in securities of foreign issuers; (2) no
Portfolio shall invest in companies for the purpose of exercising control or
management. Additional investment restrictions are set forth in the Statement of
Additional Information.
If a percentage restriction set forth under "Investment Objectives and Policies"
is adhered to at the time of an investment, a later increase or decrease in
percentage resulting from changes in values or assets will not constitute a
violation of such restriction. The foregoing investment restrictions, as well as
all investment objectives and policies designated by the Fund as fundamental
policies in the Statement of Additional Information, may not be changed without
the approval of a "majority" of a Portfolio's shares outstanding, defined as the
lesser of: (a) 67% of the votes cast at a meeting of shareholders for a
Portfolio at which more than 50% of the shares are represented in person or by
proxy, or (b) a majority of the outstanding voting shares of that Portfolio.
These provisions apply to each Portfolio if the action proposed to be taken
affects that Portfolio. The Adviser may also agree to certain additional
non-fundamental investment policies from time to time in order to qualify the
shares of one or both of the Portfolios in various states.
SPECIAL INVESTMENT METHODS
Both of the Portfolios may invest in U. S. Government Securities, repurchase
agreements, options for hedging purposes and money market instruments.
Additionally, the Portfolios may engage in limited borrowings, may invest for
temporary defensive purposes and may purchase fixed income securities on a
when-issued or delayed-delivery basis. The KPM Fixed Income Portfolio may also
invest in mortgage-backed securities. The KPM Equity Portfolio may invest in
convertible securities. Descriptions of such securities, and the inherent risks
of investing in such securities, are set forth below. Additional information
about special investment methods is set forth in the Statement of Additional
Information.
U.S. Government Securities
The Portfolios may invest in U.S. Government Securities which are obligations
issued or guaranteed by the U. S. Government, its agencies or instrumentalities.
Obligations issued by the U.S. Treasury include Bills, Notes and Bonds
("Treasury Securities") which differ from each other mainly in their interest
rates and the length of their maturity at original issue. In this regard,
Treasury Bills have a maturity of one year or less, Treasury Notes have
maturities of one to ten years and Treasury Bonds generally have maturities
greater than ten years. Such Treasury Securities are backed by the full faith
and credit of the U.S. Government.
The obligations of U.S. Government agencies or instrumentalities are guaranteed
or backed in a variety of ways by the U.S. Government, its agencies or
instrumentalities. Some of these obligations, such as Government National
Mortgage Association mortgage-related securities, and obligations of the Farmers
Home Administration, are backed by the full faith and credit of the U. S.
Treasury. Obligations of the Farmers Home Administration are also backed by the
issuer's right to borrow from the U.S. Treasury. Obligations of Federal Home
Loan Banks and the Farmers Home Administration are backed by the discretionary
authority of the U.S. Government to purchase certain obligations of agencies or
instrumentalities. Obligations of Federal Home Loan Banks, the Farmers Home
Administration, Federal Farm Credit Banks, the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation are backed by the
credit of the agency or instrumentality issuing the obligations.
As with all fixed income securities, various market forces influence the value
of such securities. There is an inverse relationship between the market value of
such securities and yield. As interest rates rise, the value of the securities
falls; conversely, as interest rates fall, the market value of such securities
rises.
Repurchase Agreements
The Portfolios may also enter into repurchase agreements on U.S. Government
Securities to invest cash awaiting investment and/or for temporary defensive
purposes. A repurchase agreement involves the purchase by a Portfolio of U.S.
Government Securities with the condition that after a stated period of time
(usually seven days or less) the original seller will buy back the same
securities ("collateral") at a predetermined price or yield. Repurchase
agreements involve certain risks not associated with direct investments in
securities. In the event the original seller defaults on its obligation to
repurchase, as a result of its bankruptcy or otherwise, the Portfolio will seek
to sell the collateral, which action could involve costs or delays. In such
case, the Portfolio's ability to dispose of the collateral to recover such
investment may be restricted or delayed. While collateral will at all times be
maintained in an amount equal to the repurchase price under the agreement
(including accrued interest due thereunder), to the extent proceeds from the
sale of collateral were less than the repurchase price, a Portfolio would suffer
a loss.
Mortgage-Backed Securities
Mortgage loans made by banks, savings and loan institutions, and other lenders
are often assembled into pools which are issued and guaranteed by an agency or
instrumentality of the U.S. Government, though not necessarily backed by the
full faith and credit of the U.S. Government itself. Pools are also created
directly by banks, savings and loans and other mortgage lenders with mortgage
loans that have been made by these institutions. Interests in such pools are
described as "Mortgage-Backed Securities". These include securities issued by
the Government National Mortgage Association ("GNMA"), Federal Home Loan
Mortgage Corporation ("FHLMC"), and the Federal National Mortgage Association
("FNMA"). The KPM Fixed Income Portfolio may invest in Mortgage-Backed
Securities representing undivided ownership interests in pools of mortgage
loans, including GNMA, FHLMC, and FNMA certificates and loans issued directly by
banks, savings and loans and other mortgage lenders.
The KPM Fixed Income Portfolio may invest a portion of its assets in
Collateralized Mortgage Obligations ("CMOs"), which are debt obligations
collateralized by mortgage loans or mortgage pass-through securities. Typically,
CMOs are collateralized by certificates issued by GNMA, FNMA or FHLMC but also
may be collateralized by whole loans or private mortgage pass-through securities
(such collateral collectively hereinafter referred to as "Mortgage Assets").
The KPM Fixed Income Portfolio may also invest a portion of its assets in
multiclass pass-through securities which are interests in a trust composed of
Mortgage Assets. CMOs (which include multiclass pass-through securities) may be
issued by agencies, authorities or instrumentalities of the U.S. Government or
by private originators or investors in mortgage loans, including savings and
loan associations, mortgage banks, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. Payments of principal and
interest on Mortgage Assets, and any reinvestment income thereon, provide the
funds to pay debt service on the CMOs or make scheduled distributions on the
multiclass pass-through securities. In a CMO, a series of bonds or certificates
is usually issued in multiple classes with different maturities. Each class of
CMOs, often referred to as a "tranche", is issued at a specific fixed or
floating coupon rate and has a stated maturity or final distribution date.
Principal repayments on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final distribution dates,
resulting in a loss of all or part of the premium if any has been paid.
The KPM Fixed Income Portfolio may also invest in parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which as with other CMO
structures, must be retired by its stated maturity date but may be retired
earlier. PAC Bonds generally require payment of a specified amount of principal
on each payment date. PAC Bonds are always parallel pay CMOs with the required
principal payment of such securities having the highest priority after interest
has been paid to all classes.
Options Transactions
The KPM Equity Portfolio may purchase put options, solely for hedging purposes,
in order to protect portfolio holdings in an underlying security against a
substantial decline in the market value of such holdings ("protective puts").
Such protection is provided during the life of the put because the Portfolio may
sell the underlying security at the put exercise price, regardless of a decline
in the underlying security's market price. Any loss to the Portfolio is limited
to the premium paid for, and transaction costs paid in connection with, the put
plus the initial excess, if any, of the market price of the underlying security
over the exercise price. However, if the market price of such security
increases, the profit a Portfolio realizes on the sale of the security will be
reduced by the premium paid for the put option less any amount for which the put
is sold.
The KPM Equity Portfolio may also purchase call options solely for the purpose
of hedging against an increase in prices of securities that the Portfolio
ultimately wants to buy. Such protection is provided during the life of the call
option because the Portfolio may buy the underlying security at the call
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. By using call options in this manner, a Portfolio
will reduce any profit it might have realized had it bought the underlying
security at the time it purchased the call option by the premium paid for the
call option and by transaction costs.
The KPM Equity Portfolio may only purchase exchange traded put and call options.
Exchange-traded options are third party contracts with standardized strike
prices and expiration dates and are purchased from a clearing corporation.
Exchange-traded options have a continuous liquid market while other options may
not. See "Investment Objectives and Policies--Investment Restrictions."
Use of options in hedging strategies is intended to protect performance but can
result in poorer performance than without hedging with options, if the Adviser
is incorrect in its forecasts of the direction of stock prices. Normally, the
Portfolio will only invest in options to protect existing positions and, as a
result, will normally invest no more than 10% of the Portfolio's assets in
options.
Convertible Securities
The KPM Equity Portfolio may invest in convertible securities which are rated
investment grade, BBB or better by S&P or Baa or better by Moody's. The KPM
Fixed Income Portfolio will not invest in convertible securities. Convertible
securities are securities that may be exchanged or converted into a
predetermined number of the issuer's underlying common shares at the option of
the holder during a specified time period. Convertible securities may take the
form of convertible preferred stock, convertible bonds or debentures, or a
combination of the features of these securities. The investment characteristics
of convertible securities vary widely, allowing convertible securities to be
employed for different investment objectives.
Convertible bonds and convertible preferred stocks are fixed income securities
entitling the holder to receive the fixed income of a bond or the dividend
preference of a preferred stock until the holder elects to exercise the
conversion privilege. They are senior securities, and, therefore, have a claim
to assets of the issuer prior to the common stock in the case of liquidation.
However, convertible securities are generally subordinated to non-convertible
securities of the same company. The interest income and dividends from
convertible bonds and preferred stocks provide a stream of income with generally
higher yields than common stocks, but lower than non-convertible securities of
similar quality.
As with all fixed income securities, various market forces influence the market
value of convertible securities, including changes in the prevailing level of
interest rates. As the level of interest rates increases, the market value of
convertible securities tends to decline and, conversely, as interest rates
decline, the market value of convertible securities tends to increase. The
unique investment characteristic of convertible securities (the right to
exchange for the issuer's common stock) causes the market value of the
convertible securities to increase when the value of the underlying common stock
increases. However, because security prices fluctuate, there cannot be an
assurance of capital appreciation. Most convertible securities will not reflect
as much capital appreciation as their underlying common stocks. When the
underlying common stock is experiencing a decline, the value of the convertible
security tends to decline to a level approximating the yield-to-maturity basis
of straight nonconvertible debt of similar quality, often called "investment
value," and may not experience the same decline as the underlying common stock.
Most convertible securities sell at a premium over their conversion values
(i.e., the number of shares of common stock to be received upon conversion
multiplied by the current market price of the stock). This premium represents
the price investors are willing to pay for the privilege of purchasing a fixed
income security with a possibility of capital appreciation due to the conversion
privilege. If this appreciation potential is not realized, the premium may not
be recovered.
Money Market Instruments
The Portfolios may invest in money market instruments which include:
(i) U.S. Treasury Bills;
(ii) U.S. Treasury Notes with maturities of 18 months or less;
(iii) U.S. Government Securities subject to repurchase agreements;
(iv) Obligations of domestic branches of U.S. banks (including certificates
of deposit and bankers' acceptances with maturities of 18 months or
less) which, at the date of investment, have capital, surplus, and
undivided profits (as of the date of their most recently published
financial statements) in excess of $10,000,000 and obligations of
other banks or savings and loan associations if such obligations are
insured by the Federal Deposit Insurance Corporation ("FDIC") or the
Federal Savings and Loan Insurance Corporation ("FSLIC");
(v) Commercial paper which at the date of investment is rated A-1 by
Standard & Poor's ("S&P") or P-1 by Moody's Investors Service
("Moody's") or, if not rated, is issued or guaranteed as to payment of
principal and interest by companies which, at the date of investment,
have an outstanding debt issue rated AA or better by S&P or Aa or
better by Moody's;
(vi) Short-term (maturing in one year or less) corporate obligations which,
at the date of investment, are rated AA or better by S&P or Aa or
better by Moody's; and
(vii) Shares of no-load money market mutual funds (subject to the ownership
restrictions of the Investment Company Act of 1940). See "Investment
Policies and Restrictions" in the Statement of Additional Information.
Investment by a Portfolio in shares of a money market mutual fund indirectly
results in the investor paying not only the advisory fee and related fees
charged by the Portfolio, but also the advisory fees and related fees charged by
the adviser and other entities providing services to the money market mutual
fund.
Borrowing
The Portfolios may borrow money from banks for temporary or emergency purposes
in an amount of up to 10% of the value of a Portfolio's total assets. Interest
paid by a Portfolio on borrowed funds would decrease the net earnings of that
Portfolio. Neither of the Portfolios will purchase portfolio securities while
outstanding borrowings exceed 5% of the value of the Portfolio's total assets.
Each of the Portfolios may mortgage, pledge, or hypothecate its assets in an
amount not exceeding 10% of the value of its total assets to secure temporary or
emergency borrowing. The policies set forth in this paragraph are fundamental
and may not be changed with respect to a
Portfolio without the approval of a majority of that Portfolio's shares.
Temporary Defensive Positions
Both Portfolios may deviate from their fundamental and non-fundamental
investment policies during periods of adverse or abnormal market, economic,
political and other circumstances requiring immediate action to protect assets.
In such cases, the Portfolios may invest up to 100% of their assets in U.S.
Government Securities and any Money Market Investment described above.
MANAGEMENT
Board of Directors
As in all corporations, the Fund's Board of Directors has the primary
responsibility for overseeing the overall management of the Fund. The Board of
Directors meets periodically to review the activities of the Portfolios and the
Adviser and to consider policy matters relating to the Portfolios and the Fund.
Investment Adviser and Administrator
KPM has been retained under an Investment Advisory Agreement with the Fund to
act as the Portfolios' Adviser subject to the authority of the Board of
Directors. KPM is a wholly owned subsidiary of KFS Corporation, which is a
wholly owned subsidiary of Mutual of Omaha Insurance Company. KPM succeeded to
substantially all of the investment advisory business of KPM Investment
Management, a division of the Distributor in a reorganization of Kirkpatrick
Pettis on June 16, 1994. All of the investment advisory personnel associated
with KPM Investment Management when operated as a division of Kirkpatrick Pettis
continue in substantially the same employment positions with KPM. KPM Investment
Management as a division of Kirkpatrick Pettis managed $525 million in
discretionary advisory accounts, pension profit-sharing plan accounts, bank
trust department accounts and other accounts on the date the reorganization
became effective. KPM will continue to manage such assets. KPM Investment
Management operated as a division of Kirkpatrick Pettis and was registered with
the Securities and Exchange Commission as an investment adviser in 1981.
The Adviser furnishes the Portfolios with investment advice and, in general,
supervises the management and investment programs of the Fund. The Adviser
furnishes at its own expense all necessary administrative services, office
space, equipment, clerical personnel for servicing the investments of the
Portfolios, investment advisory facilities, executive and supervisory personnel
for managing the investments and effecting the securities transactions of the
Portfolios. In addition, the Adviser pays the salaries and fees of all officers
and directors of the Fund who are affiliated persons of the Adviser. Under the
Investment Advisory Agreement, the Adviser receives a monthly fee computed
separately for the Portfolios at an annual rate of .80% for the KPM Equity
Portfolio and .60% for the KPM Fixed Income Portfolio of the daily average net
asset value of the respective Portfolio. The advisory fee paid to the Adviser
for managing the KPM Equity Portfolio is higher than that paid by most other
investment companies.
KPM Equity Portfolio is managed jointly by Rodney D. Cerny, President of the
Fund, Executive Vice President and Chief Investment Officer of the Adviser and
Thomas J. Sudyka, Jr., Vice President of the Fund, Vice President, Analyst and
Portfolio Manager for the Adviser. Mr. Cerny is a Chartered Financial Analyst
with a bachelor of science degree from the University of Nebraska-Lincoln and
has been affiliated with KPM in various capacities since 1986. Mr. Cerny has
been an investment analyst since 1975. Mr. Sudyka is a Chartered Financial
Analyst, has a bachelor of science degree in business administration from
Creighton University and a masters of business administration degree from the
University of Nebraska-Lincoln. Mr. Sudyka has been associated with KPM since
March, 1993. Previous to that time, Mr. Sudyka was a securities analyst and
investment officer with an investment advisory firm located in Des Moines, Iowa
from 1989 to 1992 and was involved in the managing of mutual fund assets.
Previous to that time, Mr. Sudyka was a securities analyst for an insurance
company from 1986 to 1989.
The Fixed Income Portfolio will be managed by Patrick M. Miner, Vice President
of the Adviser. Mr. Miner is a Chartered Financial Analyst and received his
bachelor of science degree from the University of Nebraska-Lincoln in 1972. Mr.
Miner has been affiliated with Mutual of Omaha since 1992. Prior to that time,
Mr. Miner was a portfolio manager for a regional national bank from 1984 through
1992 and was an account executive with two broker-dealer firms from 1978 through
1984.
Lancaster Administrative Services, Inc. has been retained as the Fund's
Administrator under a Transfer Agent and Administrative Services Agreement with
the Fund. The Administrator provides, or contracts with others to provide, all
necessary recordkeeping services and share transfer services for the Fund. The
Administrator receives an administration fee, computed and paid monthly, at an
annual rate of .25% of the daily average net assets of each Portfolio.
Expenses
The expenses paid by the Portfolios are deducted from total income before
dividends are paid. These expenses include, but are not limited to, the fees
paid to the Adviser and the Administrator, taxes, interest, ordinary and
extraordinary legal and auditing fees, custodial charges, registration and blue
sky fees incurred in registering and qualifying the Portfolio under state and
federal securities laws, association fees, director fees paid to directors who
are not affiliated with the Adviser, and any other fees not expressly assumed by
the Adviser or Administrator. Any general expenses of the Fund that are not
readily identifiable as belonging to a particular Portfolio will be allocated to
the Portfolios on a pro rata basis at the time such expenses are accrued. The
Portfolios pay their own brokerage commissions and related transactions costs.
Portfolio Brokerage
The primary consideration in effecting transactions for the Portfolios is
execution at the most favorable prices. The Adviser has complete freedom as to
the markets in and the broker-dealers through or with which (acting on an agency
basis or as principal) they seek execution. The Adviser may consider a number of
factors in determining which broker-dealers to use for the Portfolios'
transactions. These factors, which are also discussed in the Statement of
Additional Information, include research services, the reasonableness of
commissions, the quality of services and execution. Portfolio transactions for
the Portfolios may be effected through the Distributor if the commissions, fees
or other remuneration received by the Distributor are reasonable and fair
compared to the commissions, fees or other remuneration paid to other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on an exchange during a comparable period of time. In
effecting portfolio transactions through the Distributor, the Portfolios intend
to comply with Section 17(e)(1) of the Investment Company Act of 1940, as
amended.
The Adviser may also purchase securities from time to time from broker-dealers
who are participating as underwriters in a firm commitment underwriting of
municipal securities where the Distributor is also a member of the selling
syndicate. The Board of Directors of the Fund has adopted a policy pursuant to
Rule 10f-3 under the 1940 Act governing such purchases. The purchase of such
municipal securities shall only be made pursuant to the requirements of Rule
10f-3 and the policies adopted by the Board of Directors of the Fund.
The Board of Directors of the Fund has also adopted a policy pursuant to Rule
17a-7 under the Investment Company Act of 1940 which allows certain principal
transactions between certain remote affiliates of the Fund and the Fund and
between Portfolios of the Fund. These transactions will only be effected in
accordance with the provisions of Rule 17a-7 under the Investment Company Act of
1940 and are further restricted by the policies adopted by the Board of
Directors pursuant thereto.
Distributor
Kirkpatrick Pettis serves as distributor and principal underwriter for the Fund
pursuant to a Distribution Agreement and a Rule 12b-1 Plan. Kirkpatrick Pettis
bears all expenses of providing distribution services pursuant to the
Distribution Agreement. Kirkpatrick Pettis provides for the preparation of
advertising or sales literature and bears the cost of printing and mailing
prospectuses to persons other than shareholders. The Fund bears the cost of
qualifying and maintaining the qualification of Fund shares for sale under the
securities laws of the various states and the expense of registering their
shares with the Securities and Exchange Commission. For its services under the
Distribution Agreement, Kirkpatrick Pettis receives a fee, payable monthly, at
the annual rate of 0.25% of average daily net assets of the shares of each
Portfolio. This fee is accrued daily as an expense of each Portfolio.
Kirkpatrick Pettis, as the Distributor, may enter into related selling group
agreements with various broker-dealer firms that provide distribution services
to investors. Kirkpatrick Pettis does not currently compensate firms for sales
of shares of the Fund but may elect to pay such compensation solely from its
assets. Kirkpatrick Pettis may, from time to time, pay additional commissions or
promotional incentives to firms that sell shares of the Fund. In some instances,
such additional commissions, fees or other incentives may be offered only to
certain firms that sell or are expected to sell during specified time periods
certain minimum amounts of shares of the Fund, or of other funds distributed by
Kirkpatrick Pettis.
Banks and other financial services firms may provide administrative services to
facilitate transactions in shares of the Fund for their clients, and Kirkpatrick
Pettis may pay them a fee up to the level of the distribution fee allowable as
described above. Banks currently are prohibited under the Glass-Steagall Act
from providing certain underwriting or distribution services. If the
Glass-Steagall Act should prevent banking firms from acting in any capacity or
providing any of the described services, management will consider what action,
if any, is appropriate in order to provide efficient services for the Fund.
Banks or other financial services firms may be subject to various state laws
regarding the services described above and may be required to register as
dealers pursuant to state law. The Fund does not believe that a termination of a
relationship with a bank would result in any material adverse consequence to the
Fund.
Since the Distribution Agreement provides for fees that are used by Kirkpatrick
Pettis to pay for distribution services, the Distribution Agreement along with
the related selling agreements is approved and reviewed in accordance with the
Fund's Rule 12b-1 Plan under the 1940 Act, which regulates the manner in which
an investment company may, directly or indirectly, bear the expenses of
distributing its shares.
PURCHASE OF SHARES
General
Kirkpatrick Pettis acts as the principal distributor of the Fund's shares. The
Portfolios' shares may be purchased at the net asset value per share from
registered representatives of Kirkpatrick Pettis and from certain other
broker-dealers who have sales agreements with Kirkpatrick Pettis. The address of
Kirkpatrick Pettis is that of the Fund. Shareholders will receive written
confirmation of their purchases. Stock certificates will not be issued.
Kirkpatrick Pettis reserves the right to reject any purchase order. Shares of
the Portfolios are offered to the public without a sales charge at the net asset
value per share next determined following receipt of an order by Kirkpatrick
Pettis. See "Valuation of Shares."
Investors may purchase shares by completing the Purchase Application included in
this Prospectus and submitting it with a check payable to:
KPM FUNDS, Inc.
10250 Regency Circle
Omaha, Nebraska 68114
For subsequent purchases, the name of the account and the account number should
be included with any purchase order to properly identify your account. Payment
for shares may also be made by bank wire. To do so, the investor must direct his
or her bank to wire immediately available funds directly to the Custodian as
indicated below:
1. Telephone the Fund (402) 397-5777 or (800) 776-5777 and furnish the
name, the account number and the telephone number of the investor as
well as the amount being wired and the name of the wiring bank. If a
new account is being opened, additional account information will be
requested and an account number will be provided.
2. Instruct the bank to wire the specific amount of immediately available
funds to the Custodian. The Fund will not be responsible for the
consequences of delays in the bank or Federal Reserve wire system. The
investor's bank must furnish the full name of the investor's account
and the account number.
The wire should be addressed as follows:
Union Bank & Trust Company
Lincoln, Nebraska
Fund Department, ABA #104910795
Lincoln, Nebraska 68506
Attn: Trust Department
For Account #6027566
Final Credit to: KPM Funds, Inc.
3. If this wire transfer represents an initial purchase, complete a
Purchase Application and mail it to the Fund. The completed Purchase
Application must be received by the Fund before subsequent
instructions to redeem Fund shares will be accepted. Banks may impose
a charge for the wire transfer of funds.
Minimum Investments
A minimum initial aggregate investment of $25,000 is required, except in certain
limited situations. Investments may be made through a Kirkpatrick Pettis
investment executive , a representative of another broker-dealer having a valid
selling agreement with Kirkpatrick Pettis, or directly with KPM Funds, Inc.
REDEMPTION OF SHARES
Redemption Procedure
Shares of the Portfolios, in any amount, may be redeemed at any time at their
current net asset value next determined after a request in good order is
received by the Fund. To redeem shares of the Portfolios, an investor must make
a redemption request through a Kirkpatrick Pettis investment executive or other
broker-dealer. If the redemption request is made to a broker-dealer other than
Kirkpatrick Pettis, such broker-dealer will wire a redemption request to the
Fund immediately following the receipt of such a request. A redemption request
will be considered to be in "good order" if made in writing and accompanied by
the following:
1. A letter of instruction or stock assignment specifying the number or
dollar value of shares to be redeemed, signed by all the owners of the
shares in the exact names in which they appear on the account, or by
an authorized officer of a corporate shareholder indicating the
capacity in which such officer is signing;
2. A guarantee of the signature of each owner by an eligible institution
which is a participant in the Securities Transfer Agent of the
Medallion Program, which includes many U.S. commercial banks and
members of recognized securities exchanges; and
3. Other supporting legal documents, if required by applicable law, in
the case of estates, trusts, guardianships, custodianships,
corporations and pension and profit-sharing plans.
Payment of Redemption Proceeds
Normally, the Fund will make payment for all shares redeemed within five
business days, but in no event will payment be made more than seven days after
receipt by the Fund of a redemption request in good order. However, payment may
be postponed or the right of redemption suspended for more than seven days under
unusual circumstances, such as when trading is not taking place on the New York
Stock Exchange. Payment of redemption proceeds may also be delayed until the
check used to purchase the shares to be redeemed has cleared the banking system,
which may take up to 15 days from the purchase date. A shareholder may request
that the Fund transmit redemption proceeds by Federal Funds bank wire to a bank
account designated by the shareholder, provided such bank wire redemptions are
in the amounts of $500 or more and all requisite account information is provided
to the Fund.
Involuntary Redemption
The Fund reserves the right to redeem a shareholder's account at any time the
net asset value of the account falls below $5,000 as the result of a redemption
or transfer request. Shareholders will be notified in writing that the value of
their account is less than $5,000 and will be allowed 30 days to make additional
investments before the redemption is processed.
Systematic Withdrawal
Investors who own shares of the Fund with a value of $50,000 or more may elect
to redeem a portion of their shares on a regular periodic (monthly, quarterly or
annual) basis. A withdrawal plan may be established by delivering a written
notice to the Fund. The withdrawal plan may be terminated at any time by written
notice to the Fund.
VALUATION OF SHARES
The Portfolios determine their net asset value on each day the New York Stock
Exchange (the "Exchange") is open for business, provided that the net asset
value need not be determined for a Portfolio on days when no Portfolio shares
are tendered for redemption and no order for Portfolio shares is received. The
calculation is made as of the close of business of the Exchange (currently 4:00
p.m., New York time) after the Portfolios have declared any applicable
dividends.
The net asset value per share for each of the Portfolios is determined by
dividing the value of the securities owned by the Portfolio plus any cash and
other assets (including interest accrued and dividends declared but not
collected) less all liabilities by the number of Portfolio shares outstanding.
For the purposes of determining the aggregate net assets of the Portfolios, cash
and receivables will be valued at their face amounts. Interest will be recorded
as accrued and dividends will be recorded on the ex-dividend date. Securities
traded on a national securities exchange are valued at the last reported sale
price that day. 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. Portfolio securities
underlying actively traded options will be valued at their market price as
determined above. The current market value of any exchange-traded option held by
a Portfolio is its last sales price on the exchange prior to the time when
assets are valued unless the bid price is higher or the asked price is lower, in
which event such bid or asked price is used. Lacking any sales that day, the
options will be valued at the mean between the current closing bid and asked
prices. Securities and other assets for which market prices are not readily
available are valued at fair value as determined in good faith by the Board of
Directors. With the approval of the Board of Directors, the Portfolios may
utilize a pricing service, bank, or broker-dealer experienced in such matters to
perform any of the above-described functions.
DIVIDENDS AND TAXES
Dividends
All net investment income dividends and net realized capital gains distributions
with respect to the shares of either Portfolio will be payable in additional
shares of such Portfolio unless the shareholder gives written notification to
the Fund of an election to receive cash. The taxable status of income dividends
and/or net capital gains distributions is not affected by whether they are
reinvested or paid in cash.
Each of the Portfolios will pay dividends from net investment income to its
shareholders at least annually or as may be required to remain a regulated
investment company under the Internal Revenue Code (the "Code") and distribute
net realized capital gains, if any, to its shareholders on an annual basis. At
the present time, the Fund anticipates distributing net investment income
quarterly.
Taxes
The Portfolios will each be treated as separate entities for federal income tax
purposes. The Portfolios of the Fund are presently qualified as "regulated
investment companies" as defined in the Code and take the necessary steps to
requalify the Portfolios as "regulated investment companies" on an annual basis.
Provided certain distribution requirements are met, the Portfolios will not be
subject to federal income tax on their net investment income and net capital
gains that they distribute to their shareholders.
Shareholders subject to federal income taxation will receive taxable dividend
income or capital gains, as the case may be, from distributions, whether paid in
cash or received in the form of additional shares. Promptly after the end of
each calendar year, each shareholder will receive a statement of the federal
income tax status of all dividends and distributions paid during the year.
The Fund is subject to the backup withholding provisions of the Code and is
required to withhold income tax from dividends paid to a shareholder at a 20%
rate if such shareholder fails to furnish the Portfolio with a taxpayer
identification number or under certain other circumstances. Accordingly,
shareholders are urged to complete and return Form W-9 when requested to do so
by the Fund.
This discussion is only a summary and relates solely to federal tax matters.
Dividends may also be subject to state and local taxation. Shareholders are
urged to consult with their personal tax advisers.
GENERAL INFORMATION
Capital Stock
The Fund is authorized to issue a total of one billion shares of common stock,
with a par value of $.00001 per share. Of these shares, the Fund's Articles of
Incorporation authorize the issuance of 50 million shares in each series
designated KPM Equity Portfolio shares and KPM Fixed Income Portfolio shares.
The Board of Directors is empowered under the Fund's Articles of Incorporation
to issue other shares of the Fund's common stock without shareholder approval or
to designate additional authorized but unissued shares for issuance by one or
more existing Portfolios.
All shares, when issued, will be fully paid and nonassessable and will be
redeemable and freely transferable. All shares have equal voting rights. They
can be issued as full or fractional shares. A fractional share has pro rata the
same rights and privileges as a full share. The shares possess no preemptive or
conversion rights.
As of July 31, 1996, Kirkpatrick Pettis controlled the Fund as a result of its
control of the voting power of 907,490.849 shares of the 2,947,300.944 shares
outstanding owned through its 401K Profit Sharing Plan. As a result, Kirkpatrick
Pettis can elect all of the directors if such shares are voted on a
noncumulative basis and three out of the five directors if such shares are voted
on a cumulative basis.
Voting Rights
Each share of the Portfolios has one vote (with proportionate voting for
fractional shares) irrespective of the relative net asset value of the Fund's
shares. On some issues, such as the election of directors, all shares of the
Fund, irrespective of series, vote together as one series. Cumulative voting in
the election of directors is authorized. This means that shareholders may
cumulate their shares by multiplying the number of shares they hold by the
number of directors and then allocate the result among one or more directors.
On an issue affecting only one Portfolio, the shares of the Portfolio vote as a
separate series. Examples of such issues would be proposals to (i) change the
Investment Advisory Agreement, (ii) change a fundamental investment restriction
pertaining to only one Portfolio or (iii) change a Portfolio's Distribution
Plan. In voting on the Investment Advisory Agreement or proposals affecting only
one Portfolio, approval of such an agreement or proposal by the shareholders of
one Portfolio would make that agreement effective as to that Portfolio whether
or not the agreement or proposal had been approved by the shareholders of the
Fund's other Portfolios.
Shareholders Meetings
The Fund does not intend to hold annual or periodically scheduled regular
meetings of shareholders unless it is required to do so. Nebraska corporation
law requires only that the Board of Directors of a mutual fund convene
shareholder meetings when it deems appropriate.
In addition, the 1940 Act requires a shareholder vote for all amendments to
fundamental investment policies and restrictions, for all investment advisory
contracts and amendments thereto, and for all amendments to Rule 12b-l
distribution plans. Finally, the Fund's Articles of Incorporation provide that
shareholders also have the right to remove Directors upon two-thirds vote of the
outstanding shares and may call a meeting to remove a Director upon the
application of 10% or more of the outstanding shares. The Fund is obligated to
facilitate shareholder communications in this situation if certain conditions
are met.
Allocation of Income and Expenses
The assets received by the Fund for the issue or sale of shares of the
Portfolios, and all income, earnings, profits, and proceeds thereof, subject
only to the rights of creditors, are allocated to the Portfolios, and constitute
the underlying assets of the Portfolios. The underlying assets of the Portfolios
are required to be segregated on the books of account, and are to be charged
with the expenses of the Portfolios and with a share of the general expenses of
the Fund. Any general expenses of the Fund not readily identifiable as belonging
to a particular series are allocated among all series based upon the relative
net assets of each series at the time such expenses were accrued.
Transfer Agent, Dividend Disbursing Agent and Custodian
Union Bank & Trust Company, Lincoln, Nebraska, serves as Custodian for the
Fund's portfolio securities and cash. The Administrator acts as Transfer Agent
and Dividend Disbursing Agent. In its capacity as Transfer Agent and Dividend
Disbursing Agent, the Administrator performs many of the clerical and
administrative functions for the Portfolios.
Reports to Shareholders
The Fund will issue semi-annual reports, which will include a list of securities
owned by the Fund and financial statements which, in the case of the annual
report, will be examined and reported upon by the Fund's independent auditor.
Legal Opinion
The legality of the shares offered hereby will be passed upon and an opinion
will be rendered by Cline, Williams, Wright, Johnson & Oldfather, 1900 FirsTier
Bank Building, Lincoln, Nebraska 68508.
Auditors
The Fund's auditors are KPMG Peat Marwick, LLP, Omaha, Nebraska, independent
certified public accountants.
<PAGE>
TABLE OF CONTENTS
Introduction..................................................................1
Investment Objectives
and Policies .................................................................4
KPM Equity Portfolio ......................................................4
KPM Fixed Income Portfolio.................................................5
Special Investment Methods ...................................................6
Management...................................................................11
Purchase of Shares ..........................................................13
Redemption of Shares ........................................................15
Valuation of Shares .........................................................16
Dividends and Taxes .........................................................16
General Information .........................................................17
No dealer, sales representative or other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus (and/or in the Statement of Additional Information referred to on the
cover page of this Prospectus), and, if given or made, such information or
representations must not be relied upon as having been authorized by KPM FUNDS,
Inc. or Kirkpatrick Pettis This Prospectus does not constitute an offer or
solicitation by anyone in any state in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not
qualified to do so, or to any person to whom it is unlawful to make such offer
or solicitation.
INVESTMENT ADVISER
KPM Investment Management, Inc.
DISTRIBUTOR
Kirkpatrick Pettis
ADMINISTRATOR,
TRANSFER AGENT AND
DIVIDEND PAYING AGENT
Lancaster Administrative
Services, Inc.
CUSTODIAN
Union Bank & Trust Co.
Lincoln, Nebraska
<PAGE>
KPM FUNDS, Inc.
[GRAPHIC OMITTED] 10250 Regency Circle, Omaha, NE 68114
1. ACCOUNT REGISTRATION
(Please Print)
In the case of two or more co-owners, the account will be registered "Joint
Tenants with Right of Survivorship" and not as "Tenants-in-common" unless
otherwise specified. For Trust, Corporation or other entity, complete the first
two lines exactly as the registration should appear. Include completed Corporate
Resolution or attach a copy of the Trust Agreement.
o Individual
- ---------------------------------------------------- o Jt. WROS
Name of Shareholder o Corporation
- ---------------------------------------------------- o Trust
Name of Co-Owner (if any) o UTMA
o Other
- ------------------------------------------------------------------------------
Street Address City State Zip Code
- -----------------------------Citizen of o U.S. o Other(specify)
- -------------------------------------------- -------------------------------
(Area Code) Home Telephone (Area Code) Business Telephone
2. INVESTOR INFORMATION
(This Section Must be Completed)
My(Our) investment objective(s) is(are):
o Income o Capital Preservation o Capital Appreciation
o Tax-Free o Other--------
Estimated Income (current tax year in thousands):
o Under $25 o $25-$50 o $50-$100 o $100-$200
o Over $200 Tax Bracket --------%
Approximate Net Worth (in thousands):
o Under $50 o $50-$100 o $100-$500 o $500-$1,000 o Over $1,000
Occupation(s):------------------------------------------------------------
Employer(s) name and address-----------------------------------------------
Source of funds for this purchase------------------------------------------
I am an associate person of an NASD member firm o No o Yes----------
Name and Address of Firm
3. INVESTMENT AND DIVIDEND SELECTION
(One must be checked)
In accordance with the terms and conditions set forth in this form, the current
prospectus, and my instructions below, I wish to establish a Shareholder Account
in the designated portfolio(s) as follows:
KPM FUNDS Investment Dividends & Dividends Dividends
Capital Gains Paid & Capital Gains
Reinvested Paid
o Equity Portfolio $ --------- o o o
o Fixed Income Portfolio $---------- o o o
(Note: Dividends and capital gains will be reinvested if no election is made.)
4. SIGNATURE AND TAX NUMBER CERTIFICATION
I have read this application and have had the opportunity to read the prospectus
and agree to all their terms. In addition, I authorize the instructions in this
application. I have been given the opportunity to ask any questions I have
regarding this investment, and they have been answered to my satisfaction. I
understand the investment objective(s) of the KPM Funds for which I am applying
and believe it is compatible with my investment objective(s). I understand that
exchanges between funds are taxable transactions. I certify under penalties of
perjury (check the appropriate response):
o (1) that the Social Security or taxpayer identification number shown in
Section 1 is correct and that the IRS has never notified me that I am
subject to backup withholding, or has notified me that I am no longer
subject to such backup withholding; or
o (2) I have not been issued a taxpayer identification number but have
applied for such number, or intend to apply for such number in the near
future. I understand that if I do not provide a correct taxpayer
identification number to the Fund within 60 days from the date of this
certification, backup withholding as described in the Fund's prospectus
will commence; or
o (3) I am subject to backup withholding.
Sign below exactly as your name appears in Section 1. For joint registration,
all owners must sign.
X X
----------------------------------- -----------------------------------------
Signature of Shareholder Date Signature of Co-Owner (if any) Date
or Authorized Officer (if corporation)
TO BE COMPLETED BY SELLING FIRM
(We hereby authorize KPM Funds, Inc. as our agent in connection
with transactions under this authorization form. We guarantee
the shareholder's signature.)
- ------------------------------------- -----------------------------------------
Dealer Name (Please Print) Signature of Registered Representative
- ------------------------------------- -----------------------------------------
Home Office Address Address of Office Serving Account
- ------------------------------------- -----------------------------------------
City State Zip Code City State Zip Code
- ------------------------------------- -----------------------------------------
Authorized Signature of Dealer Branch No.Reg.Rep. No. Reg. Rep. Last Name
<PAGE>
KPM FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
September 30, 1996
Table of Contents
Page
Investment Policies and Restrictions....................................... 1
Directors and Executive Officers........................................... 6
Investment Advisory and Other Services..................................... 8
Distribution Plan.......................................................... 10
Portfolio Transactions and Brokerage Allocations........................... 12
Capital Stock and Control.................................................. 14
Net Asset Value and Public Offering Price.................................. 15
Purchase of Shares......................................................... 16
Redemption................................................................. 16
Tax Status................................................................. 16
Calculations of Performance Data........................................... 17
Financial Statements....................................................... 19
Auditors................................................................... 19
Appendix A - Ratings of Corporate Obligations,
Commercial Paper and Preferred Stock.............................. A-1
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information relates to the Prospectus dated September
30, 1996, and should be read in conjunction therewith. A copy of the Prospectus
may be obtained from the Fund or Kirkpatrick, Pettis, Smith, Polian Inc. at
10250 Regency Circle, Omaha, Nebraska 68114.
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS
The shares of KPM Funds, Inc. (the "Fund") are offered in series. This
Statement of Additional Information relates to the series designated: KPM Equity
Portfolio and KPM Fixed Income Portfolio (sometimes referred to herein as a
"Portfolio" or, collectively, as the "Portfolios"). The investment objectives
and policies of the Portfolios are set forth in the Prospectus. Certain
additional investment information is set forth below.
Investment Restrictions
In addition to the investment objectives and policies set forth in the
Prospectus, the Fund and each of the Portfolios is subject to certain investment
restrictions, as set forth below, which may not be changed without the vote of a
majority of the Portfolio's outstanding shares. "Majority," as used in the
Prospectus and in this Statement of Additional Information, means the lesser of
(a) 67% of the Portfolio's outstanding shares voting at a meeting of
shareholders at which more than 50% of the outstanding shares are represented in
person or by proxy or (b) a majority of the Portfolio's outstanding shares.
Similar shareholder approval is required to change the investment
objective of each of the Portfolios. The following discussion provides
fundamental investment restrictions for all Portfolios, non-fundamental policies
for all Portfolios, and then, for each Portfolio, a statement of its investment
objective, a description of its investment restrictions that are matters of
fundamental policy specifically for it and a description of any investment
restrictions that may be changed without shareholder approval. For purposes of
the investment restrictions, all percentage and rating limitations apply at the
time of acquisition of a security, and any subsequent change in any applicable
percentage resulting from market fluctuations or in a rating by a rating service
will not require elimination of any security from the Portfolio. Unless
specifically identified as a matter of fundamental policy, each investment
policy discussed in the Prospectus or the Statement of Additional Information is
not fundamental and may be changed by the Portfolio's Board of Directors.
As fundamental policies, unless otherwise specified below, none of the
Portfolios will:
1. Invest more than 5% of the value of their total assets in the
securities of any one issuer (other than securities of the
U.S. Government, its agencies or instrumentalities).
2. Purchase more than 10% of any class of securities of any one
issuer (taking all preferred stock issues of an issuer as a
single class and all debt issues of an issuer as a single
class) or acquire more than 10% of the outstanding voting
securities of an issuer. In the aggregate, the Fund may not
own more than 15% of all classes of securities or more than
10% of the outstanding voting securities of an issuer.
3. Invest 25% or more of the value of their total assets in the
securities of issuers conducting their principal business
activities in any one industry. This restriction does not
apply to securities of the U.S. Government or its agencies
and instru- mentalities and repurchase agreements relating
thereto. The various types of utilities companies, such as
gas, electric and telephone and telegraph are considered as
separate industries.
4. Issue any senior securities as defined in the Investment
Company Act of 1940, as amended ("1940 Act") except as
otherwise excepted or excluded by Section 18(g) of the 1940
Act or as permitted by Investment Company Act Release No.
10666.
5. Borrow money except from banks for temporary or emergency
purposes. The amount of such borrowing may not exceed the
lesser of (1) 10% of the value of the Portfolio's total
assets or (2) 5% of the value of the Portfolio's total assets
less liabilities other than such borrowings. None of the
Portfolios will purchase securities while outstanding
borrowings exceeds 5% of the value of the Portfolio's total
assets. None of the Portfolios will borrow money for leverage
purposes.
6. Make short sales of securities or maintain a short position,
except that short sales against the box shall not be deemed
short sales.
7. Purchase any securities on margin except to obtain such short
-term credits as may be necessary for the clearance of
transactions.
8. Purchase or retain the securities of any issuer if, to the
Portfolio's knowledge, those officers or directors of the
Fund or its affiliates or of its investment adviser who
individually own beneficially more than 0.5% of the
outstanding securities of such issuer, together own more than
5% of such outstanding securities.
9. Purchase or sell commodities or commodity futures contracts,
except that the Portfolios may purchase stock and bond index
options, financial futures contracts and options on such
contracts.
10. Purchase or sell real estate or real estate mortgage loans,
except that the Portfolios may invest in securities secured
by real estate or interests therein or issued by companies
that invest in real estate or interests therein.
11. Purchase or sell oil, gas or other mineral leases, rights or
royalty contracts, except that the Portfolios may purchase or
sell securities of companies investing in the foregoing.
12. Participate on a joint or a joint and several basis in any
securities trading account (as prohibited by Section 12(a)2
of the Investment Company Act of 1940) except as permitted by
16 below.
13. Underwrite securities of other issuers, except that the
Portfolio may acquire portfolio securities under
circumstances where if sold the Portfolio might be deemed an
underwriter for purposes of the Securities Act of 1933.
14. Invest more than 10% of their net assets in restricted
securities or more than 10% of their net assets in repurchase
agreements with a maturity of more than seven days, and other
liquid assets, such as securities with no readily available
market quotation. The value of any options purchased in the
over-the-counter market are deemed to be illiquid.
15. Invest more than 5% of their total assets at the time of
purchase in rights and/or warrants (other than those that
have been acquired in units or attached to other securities).
16. Make loans, except that the Portfolios may (1) purchase and
hold debt obligations in accordance with their investment
objective and policies, (ii) enter into repurchase
agreements, and (iii) lend portfolio securities without
limitation against collateral (consisting of cash or
securities issued or guaranteed by the United States
Government or its agencies or instrumentalities) equal at all
times to not less than 100% of the value of the securities
loaned.
The Fund has also adopted the following restrictions for each of the
Portfolios which are not fundamental policies and may be changed without
shareholder approval. The Portfolios shall not:
(1) Invest in warrants that are not listed on the New York or
American Stock Exchange in excess of 2% of the Portfolio's
total assets.
(2) Invest more than 20% of their total assets in securities of
foreign issuers.
(3) Invest more than 5% of their total assets in the purchase of
covered spread options and the purchase of put and call
options on securities, securities indices and financial
futures contracts. Options on financial futures contracts and
options on securities indices will be used solely for hedging
purposes; not for speculation.
(4) Invest more than 5% of their assets in initial margin and
premiums on financial futures contracts and options on such
contracts.
(5) Invest in arbitrage transactions.
(6) Invest in real estate limited partnership interests.
(7) Invest in companies for the purpose of exercising control or
management.
(8) Purchase the securities of other investment companies except
as provided by Section 12(d)(1) of the Investment Company Act
of 1940.
(9) Invest more than 5% of the value of their total assets in the
securities of any issuers which, with their predecessors,
have a record of less than three years' continuous operation.
(Securities of such issuers will not be deemed to fall within
this limitation if they are guaranteed by an entity in
continuous operation for more than three years. The value of
all securities issued or guaranteed by such guarantor and
owned by a Portfolio shall not exceed 10% of the value of the
total assets of such Portfolio.)
(10) Mortgage, pledge or hypothecate their assets except in an
amount not exceeding 15% of the value of their total assets
to secure temporary or emergency borrowing. For purposes of
this policy, collateral arrangements for margin deposits on
futures contracts or with respect to the writing of options
are not deemed to be a pledge of assets.
(11) Lend Portfolio securities when the value of securities
subject to such transactions and the value of the securities
to be loaned would exceed 5% of the total asset value of the
Portfolio.
KPM Equity Portfolio - Investment Objective and Policies
The investment objective of the KPM Equity Portfolio is capital
appreciation. In seeking to achieve this objective, the Adviser's investment
philosophy is to follow a value analysis utilizing fundamental considerations to
identify companies that are either large companies (market capitalizations in
excess of $1 billion) or small to medium capitalization companies (market
capitalizations between $100 million and $1 billion) which are selling at
current prices substantially below what the Adviser believes to be a fair market
price. Determinations of value are not made based upon market movement but are
achieved from the Adviser's analysis of past earnings, future earnings
projections, return on equity, strength and vision of management, price to
earnings ratios and other factors. The Adviser views "long-term fundamental
value" of a company as the value of a company based upon: (1) the level of
earnings and profitability in the employment of the company's assets as
distinguished from currently reported earnings (which may be and frequently are
distorted by transient influences); (2) dividends actually paid or the capacity
to pay such dividends currently and in the future; (3) a realistic expectation
about the company's historical and projected growth of earning power, and; (4)
stability and predictability of these quantitative and qualitative projections
of the future economic value of the company.
In selecting equity securities, KPM Equity Portfolio uses a conservative,
fundamental, value selection process. KPM Equity Portfolio employs a "bottom-up"
approach to stock selection. The Adviser uses computer and manual screens of a
large number of publicly-held securities looking for specific balance sheet,
return on investment and valuation criteria. These lists are further reduced
through more in-depth company and industry analysis as well as contacts with
company management. KPM Equity Portfolio looks for above-average quality
companies as evidenced by a strong balance sheet, current or expected high
return on equity and expected growth in excess of the rate of inflation. The
Adviser considers purchase when these companies are selling for low relative
price/earnings ratios. Other valuation criteria such as price/book value,
price/sales per share, price/cash flow per share and current yield are
considered. Target purchase/sale prices are based on analytical judgements of
objective relative price/earnings ratios and current earning power (or
normalized earnings) of the company. Since such target prices are based on
relative price/earnings ratios (relative to the Standard & Poor's 400 average)
these target prices are adjusted as the overall market changes or when estimates
of normalized earnings change. The Adviser considers selling companies as
securities achieve their target price or when there is a fundamental change in
the company's business prospects or other investment criteria.
KPM Fixed Income Portfolio - Investment Objective and Policies
The investment objective of the KPM Fixed Income Portfolio is to
provide a high level of total return over a market cycle of 3 to 5 years,
consistent with the preservation of capital and prudent investment risk. In
seeking to achieve this objective, the Adviser intends to invest in debt
obligations of the U.S. Government, its agencies and instrumentalities, and
corporate bonds rated BBB or better by Standard & Poor's or Baa or better by
Moody's Investors Service. See Appendix A for a description of ratings. In
pursuit of this objective, the Adviser seeks to identify fixed income securities
which provide above-average relative yield, appreciation potential and safety of
principal. Particular emphasis is placed on credit analysis of corporate issuers
to enhance income return and protect against credit losses. The potential for
capital appreciation is balanced with the need for capital preservation and
stability of income.
This Portfolio will invest in marketable, fixed income securities with
investment grade ratings. These include government obligations, corporate debt
and mortgage backed securities such as mortgage pass-through certificates and
collateralized mortgage obligations (CMO's) issued by government sponsored
agencies and mortgage banking companies. Additional investments may also include
dividend paying preferred stocks, non-investment grade corporate debt, municipal
bonds and various money market instruments.
Repurchase Agreements
Both of the Portfolios may invest in repurchase agreements on U. S.
Government Securities. The Portfolios' Custodian will hold the securities
underlying any repurchase agreement or such securities will be part of the
Federal Reserve Book Entry System. The market value of the collateral underlying
the repurchase agreement will be determined on each business day. If at any time
the market value of the collateral falls below the repurchase price of the
repurchase agreement (including any accrued interest), the respective Portfolio
will promptly receive additional collateral so that the total collateral is an
amount at least equal to the repurchase price plus accrued interest.
Portfolio Turnover
Portfolio turnover is the ratio of the lesser of annual purchases or sales
of portfolio securities to the average monthly value of portfolio securities,
not including short-term securities maturing in less than 12 months. A 100%
portfolio turnover rate would occur, for example, if the lesser of the value of
purchases or sales of portfolio securities for a particular year were equal to
the average monthly value of the portfolio securities owned during such year.
For the period ending June 30, 1996, the portfolio turnover rate for KPM equity
Portfolio and KPM Fixed Income Portfolio was 34.05% and 19.52% respectively. The
Fund does not expect the turnover rate for the KPM Equity Portfolio to exceed
50% and the KPM Fixed Income Portfolio to exceed 50% this year. The turnover
rate will not be a limiting factor when management deems portfolio changes
appropriate.
Any investment restriction or limitation referred to above or in the
Prospectus, except the borrowing policy, which involves a maximum percentage of
securities or assets, shall not be considered to be violated unless an excess
over the percentage occurs immediately after an acquisition of securities or
utilization of assets and results therefrom.
DIRECTORS AND EXECUTIVE OFFICERS
The names, addresses and principal occupations during the past five years
of the directors and executive officers of the Fund are as follows:
Name, Position with Fund and Address Age Principal Occupation Last Five Years
- ----------------------------------- --- -----------------------------------
*Randall D. Greer, Chairman, Director 45 Director, President and Chief
Executive Officer, KPM Investment
Management, Inc., Omaha, Nebraska
(March 1994-present)
Director, (1987-Present), President
and Chief Operating Officer,
Kirkpatrick, Pettis, Smith, Polian
Inc., Omaha, Nebraska (December 1988
-February 1994)
*Rodney D. Cerny, President and Director 45 Executive Vice President, KPM
Investment Management, Inc., Omaha,
Nebraska (March 1994-present)
First Vice President (1987-1990),
Executive Vice President and Chief
Investment Officer (1990-Present),
Kirkpatrick, Pettis, Smith, Polian
Inc., Omaha, Nebraska
Donald L. Stroh, Director 69 Retired; Superintendent of Schools,
6616 Stratford Circle Millard, Nebraska Public Schools
Omaha, Nebraska 68137 (1955-1989)
William G. Campbell, Director 62 Attorney - private practice (1993-
P.O. Box 51, present); Partner Roger & Wells
3239 Wolf Lake Road (attorneys),New York City, New York
Ely, MN 55731 (1991-1993); Partner Kutak Rock &
Campbell (attorneys), Omaha,
Nebraska (1965-1991)
Herbert H. Davis, Jr., Director 72 Owner, Miracle Hill Golf & Tennis
1401 North 120th Street Center; President - Legacy Golf,
Omaha, NE 68154 Omaha, Nbraska
Thomas J. Sudyka, Jr., Vice President 32 Vice President, Analyst and
Portfolio Manager, KPM Investment
Management,Inc. Omaha, Nebraska
(March 1994-present)
Vice President, Analyst and
Portfolio Manager, Kirkpatrick,
Pettis, Smith, Polian Inc., Omaha,
Nebraska (1993-present); Investment
Officer (1992-1993)and Securities
Analyst (1989-1992) Invista Capital
Management, Des Moines, Iowa
Christine E. Walker, Assistant Secretary 26 Associate Portfolio Manager, KPM
Investment Management, Omaha,
Nebraska (1996-Present),
Administrative Supervisor (1993-
1996), University of Omaha -
Nebraska, Student-Omaha (1988-1992)
Scott C. Hoyt, Secretary 51 Executive Vice President, General
Counsel and Secretary, Kirkpatrick,
Pettis, Smith, Polian Inc., Omaha,
Nebraska (January 1995-Present),
General Counsel Financial Services-
Mutual of Omaha, Omaha, Nebraska
(1988-January 1995)
Jeffrey N. Sime, Treasurer 35 Vice President,Treasurer, Accounting
Manager and Internal Controller,
Kirkpatrick, Pettis, Smith, Polian
Inc.,Omaha, Nebraska (1993-present);
Audit Supervisor, Peter Kiewit Sons,
Inc., Omaha, Nebraska (1990-1993);
Controller, The Stuart James
Company, Denver, Colorado(1986-1990)
The addresses of the directors and officers of the Fund are that of the Fund
unless otherwise indicated.
*Interested directors of the Fund by virtue of their affiliation with KPM
Investment Management, Inc.
The following table represents the compensation amounts received for services as
a director of the Fund:
Aggregate Total
Compensation Pension or Compensation
Name & Position from the Fund Retirement* from the Fund
- ---------------------------- ---------------- ------------ -------------
Randall D. Greer, Chairman, $0 $0 $0
Director
Rodney D. Cerny, President, $0 $0 $0
Director
Donald L. Stroh, Director $1,800 $0 $1,800
William G. Campbell, Director $1,800 $0 $1,800
Herbert H. Davis, Jr., Director $1,800 $0 $1,800
* Benefits Accrued as part of the Fund's Expenses
INVESTMENT ADVISORY AND OTHER SERVICES
General
The investment adviser for the Portfolios is KPM Investment Management,
Inc. (the "Adviser" or "KPM"). Lancaster Administrative Services, Inc. acts as
the administrator ("Administrator") and Kirkpatrick, Pettis, Smith, Polian Inc.
("Kirkpatrick Pettis") acts as the Fund's distributor ("Distributor"). The
Adviser, the Administrator and the Distributor will act as such pursuant to
written agreements which will be periodically approved by the directors and/or
the shareholders of the Fund. The Adviser's and the Distributor's address is the
same as the Fund's.
Control of the Adviser and the Distributor
The Adviser and Kirkpatrick Pettis are wholly owned subsidiaries of KFS
Corporation, a Nebraska corporationwhich is a wholly owned subsidiary of Mutual
of Omaha Insurance Company, a mutual insurance company organized under Nebraska
law and engaged in the business of providing life, health, accident and related
insurance products throughout the United States.
Investment Advisory Agreements and Administration Agreement
KPM acts as the investment adviser to the Fund and the Portfolios under
an Investment Advisory Agreement ("Advisory Agreement"). The Advisory Agreement
has been approved by the Board of Directors (including a majority of the
directors who are not parties to the Advisory Agreement, or interested persons
of any such party, other than as directors of the Fund). The Advisory Agreement
for all Portfolios was approved by the shareholders on April 15, 1994. The
Advisory Agreement was last approved by the Board of Directors on July 29, 1996.
The Advisory Agreement terminates automatically in the event of its
assignment. In addition, the Advisory Agreement is terminable at any time with
respect to a Portfolio, without penalty, by the Board of Directors of the Fund,
by vote of a majority of the affected Portfolio's outstanding voting securities
on 60 days' written notice to the Adviser, and by the Adviser on 60 days'
written notice to the Fund. Unless sooner terminated, the Advisory Agreement
shall continue in effect for more than two years after its execution only so
long as such continuance is specifically approved at least annually by either
the Board of Directors or by a vote of a majority of the outstanding voting
securities of the Portfolio, provided that in either event such continuance is
also approved by a vote of a majority of the directors who are not parties to
such agreement, or interested persons of such parties, cast in person at a
meeting called for the purpose of voting on such approval. If a majority of the
outstanding voting securities of any of the Portfolios approves the Advisory
Agreement, the Advisory Agreement shall continue in effect with respect to such
approving Portfolio whether or not the shareholders of any other Portfolio
approve such Advisory Agreement.
Pursuant to the Advisory Agreement, the Fund pays the Adviser a monthly
advisory fee equal on an annual basis to .80% of the KPM Equity Portfolio's
average daily net assets. The Fund pays the Adviser a monthly advisory fee equal
on an annual basis to .60% of the KPM Fixed Income Portfolio's average daily net
assets. The Advisory Agreement also provides that the Adviser shall reimburse
the Portfolios monthly to the extent of the advisory fee paid, for annual
expenses of the Portfolios exceeding 1.5% of the average daily net assets for
the KPM Equity Portfolio and 1.25% of the average daily net assets for the KPM
Fixed Income Portfolio.
Under the Advisory Agreement, the Adviser provides each Portfolio with
advice and assistance in the selection and disposition of that Portfolio's
investments. All investment decisions are subject to review by the Board of
Directors of the Fund. The Adviser is obligated to pay the salaries and fees of
any affiliates of the Adviser serving as officers or directors of the Fund.
Under the Advisory Agreement, the Adviser has agreed to reimburse the Portfolios
monthly to the extent of the advisory fee paid if annual total expenses exceed
1.50% of the Equity Portfolio's and 1.25% of the Fixed Income Portfolio's
average annual net assets. At June 30, 1996, the Adviser had reimbursed the
Fixed Income Portfolio $3,793 for expenses.
Pursuant to the Administration Agreement, the Administrator acts as
transfer agent and provides, or contracts with others to provide, to the Fund
all necessary bookkeeping and shareholder recordkeeping services and share
transfer services. Under the Administration Agreement, the Administrator
receives an administration fee, computed separately for each Portfolio and paid
monthly, at an annual rate of .25% of the daily average net assets of the
Portfolios. The Administration Agreement further provides that the annual fee in
any event shall not be less than $10,000 in the aggregate for all Portfolios.
For the period July 5, 1994 to June 30, 1995, and during the fiscal
year ended June 30, 1996 the Fund paid to the Adviser and the Administrator the
following amounts for advisory and administrative services as indicated:
Advisory Fee Administrative Fee
--------------------- -----------------------
7-5-94 to 7-1-95 to 7-5-94 to 7-1-95 to
6-30-95 6-30-96 6-30-95 6-30-96
------- ------- ------- -------
Equity Portfolio $77,104 $181,817 $24,095 $56,865
Fixed Income Portfolio 16,101 44,938 6,709 18,757
------ ------ ----- ------
$93,205 $226,755 $30,804 $75,622
The laws of certain states require that if a mutual fund's expenses
(including advisory fees but excluding interest, taxes, brokerage commissions
and extraordinary expenses) exceed certain percentages of average net assets,
the Fund must be reimbursed for such excess expenses. The Fund does not believe
it will be subject to any such restrictions.
Custodian
The Custodian for the Fund and each of the Portfolios is Union Bank and
Trust Company ("Union"), 3643 South 48th, Lincoln, Nebraska 68506. Union, as
Custodian, holds all of securities and cash owned by the Portfolios.
DISTRIBUTION PLAN
Rule 12b-1(b) under the 1940 Act provides that any payments made by the
Portfolios in connection with financing the distribution of their shares may
only be made pursuant to a written plan describing all aspects of the proposed
financing of distribution, and also requires that all agreements with any person
relating to the implementation of the plan must be in writing. Because some of
the payments described below to be made by the Portfolios are distribution
expenses within the meaning of Rule 12b-1, the Fund has entered into a
Distribution Agreement with the Distributor pursuant to a Distribution Plan
adopted in accordance with such Rule.
In addition, Rule 12b-1(b)(1) requires that such plan be approved by a
majority of a Portfolio's outstanding shares, and Rule 12b-1(b)(2) requires that
such plan, together with any related agreements, be approved by a vote of the
Board of Directors who are not interested persons of the Fund and who have no
direct or indirect interest in the operation of the plan, cast in person at a
meeting for the purpose of voting on such plan or agreement. Rule 12(b)-1(b)(3)
requires that the plan or agreement provide, in substance:
(a) that it shall continue in effect for a period of more than
one year from the date of its execution or adoption only so long as
such continuance is specifically approved at least annually in the
manner described in paragraph (b)(2) of Rule 12b-1;
(b) that any person authorized to direct the disposition of
moneys paid or payable by the Fund pursuant to the plan or any related
agreement shall provide to the Fund's Board of Directors, and the
directors shall review, at least quarterly, a written report of the
amounts so expended and the purposes for which such expenditures were
made; and
(c) in the case of a plan, that it may be terminated at any
time by a vote of a majority of the members of the Board of Directors
of the Fund who are not interested persons of the Fund and who have no
direct or indirect financial interest in the operation of the plan or
in any agreements related to the plan or by a vote of a majority of the
outstanding voting securities of a Portfolio.
Rule 12b-1(b)(4) requires that such a plan may not be amended to
increase materially the amount to be spent for distribution without shareholder
approval and that all material amendments to the plan must be approved in the
manner described in paragraph (b)(2) of Rule 12b-1.
Rule 12b-1(c) provides that the Fund may rely upon Rule 12b-1(b) only
if the selection and nomination of the Fund's disinterested directors are
committed to the discretion of such disinterested directors. Rule 12b-1(e)
provides that the Fund may implement or continue a plan pursuant to Rule
12b-1(b) only if the directors who vote to approve such implementation or
continuation conclude, in the exercise of reasonable business judgment and in
light of their fiduciary duties under state law, and under Sections 36(a) and
(b) of the 1940 Act, that there is a reasonable likelihood that the plan will
benefit the Fund and its shareholders. The Fund has complied with the provisions
of Rule 12b-1 and the Board of Directors has concluded that there is a
reasonable likelihood that the Distribution Plan will benefit the Fund and its
shareholders.
Pursuant to the provisions of the Distribution Plan, each of the
Portfolios pays a fee to the Distributor computed and paid monthly at an annual
rate of up to .25% of such Portfolio's average daily net assets in order to
reimburse the Distributor for its actual expenses incurred in the distribution
and promotion of such Portfolio's shares.
Expenses for which the Distributor will be reimbursed under the
Distribution Plan include, but are not limited to, compensation paid to
registered representatives of the Distributor and to broker-dealers which have
entered into sales agreements with the Distributor; expenses incurred in the
printing of prospectuses, statements of additional information and reports used
for sales purposes; expenses of preparation and printing of sales literature;
advertisement, promotion, marketing and sales expenses; and other
distribution-related expenses. Compensation will be paid out of such amounts to
investment executives of the Distributor and to broker-dealers which have
entered into sales agreements with the Distributor as follows. If shares of the
Portfolios are sold by a representative of a broker-dealer other than the
Distributor, that portion of the reimbursement which is attributable to shares
sold by such representative is paid to such broker-dealer. If shares of the
Portfolios are sold by an investment executive of the Distributor, compensation
will be paid to the investment executive by the Distributor in an amount not to
exceed that portion of .25% of the average daily net assets of the Portfolios
which is attributable to shares sold by such investment executive.
Under the Distribution Plan, the Fund paid the Distributor a total of
$30,816 for the period July 5, 1994 to June 30, 1995, and $75,259 during the
fiscal year ended June 30, 1996 allocated as follows:
7/5/94 to 7/1/95 to
6/30/95 6/30/96
------- -------
Equity Portfolio $24,104 $56,550
Fixed Income Portfolio 6,712 18,709
For the year ending June 30, 1996, the Distributor has paid for the
following:
Advertising $0.00
Printing & Mailing of Prospectuses 0.00
to new shareholders**
Compensation to Dealers 0.00
Compensation to Sales Personnel 75,259.00
Other Finance Charges 0.00
Other Fees 0.00
TOTAL $75,259.00
** This expense has been paid by the Adviser to date.
Under the Distribution Agreement, the Distributor is also the principal
underwriter of the Fund's shares and continuously distributes the shares on an
agency best efforts basis. In so doing, the Distributor may pay its
representatives or others additional amounts over the amounts paid under the
Distribution Plan in furtherance of distribution of the Fund's shares.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATIONS
The Adviser is responsible for decisions to buy and sell securities for
the Portfolios, the selection of broker-dealers to effect the transactions and
the negotiation of brokerage commissions, if any. In placing orders for
securities transactions, the primary criterion for the selection of a
broker-dealer is the ability of the broker-dealer, in the opinion of the
Adviser, to secure prompt execution of the transactions on favorable terms,
including the reasonableness of the commission (if any) and considering the
state of the market at the time.
When consistent with these objectives, business may be placed with
broker-dealers, including the Distributor, who furnish investment research
and/or services to the Adviser. Such research or services include advice, both
directly and in writing, as to the value of securities; the advisability of
investing in, purchasing or selling securities; and the availability of
securities, or purchasers or sellers of securities; as well as analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. This allows the Adviser to
supplement its own investment research activities and enables the Adviser to
obtain the views and information of individuals and research staffs of many
different securities firms prior to making investment decisions for the
Portfolios. To the extent portfolio transactions are effected with
broker-dealers who furnish research services to the Adviser, the Adviser may
receive a benefit, not capable of evaluation in dollar amounts, without
providing any direct monetary benefit to the Portfolios from these transactions.
The Adviser believes that most research services obtained by it generally
benefit several or all of the accounts which it manages, as opposed to solely
benefiting one specific managed fund or account. Normally, research services
obtained through managed funds or accounts investing in common stocks would
primarily benefit the managed funds or accounts which invest in common stock;
similarly, services obtained from transactions in fixed-income securities would
normally be of greater benefit to the managed funds or accounts which invest in
debt securities.
The Adviser has not entered into any formal or informal agreements with
any broker-dealers, nor does it maintain any "formula" which must be followed in
connection with the placement of any Portfolio's transactions in exchange for
research services provided the Adviser except as noted below. However, from time
to time the Adviser may elect to use certain brokers to execute transactions in
order to encourage them to provide the Adviser with research services which the
Adviser anticipates will be useful to it. The Adviser will authorize the
Portfolio to pay an amount of commission for effecting a securities transaction
in excess of the amount of commission another broker-dealer would have charged
only if the Adviser doing so determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker-dealer, viewed in terms of either that
particular transaction or the Adviser's overall responsibilities with respect to
the accounts as to which it exercises investment discretion.
Agency transactions for the Portfolios may be effected through the
Distributor, as discussed in the Prospectus under "Management-Portfolio
Brokerage." In determining the commissions to be paid to the Distributor, it is
the policy of the Fund that such commissions, will, in the judgment of the
Adviser, subject to review by the Board of Directors, be both (a) at least as
favorable as those which would be charged by other qualified brokers in
connection with comparable transactions involving similar securities being
purchased or sold on a securities exchange during a comparable period of time,
(b) at least as favorable as commissions contemporaneously charged by the
Distributor on comparable transactions for its most favored comparable
unaffiliated customers, and (c) conform to the requirements of Rule 17e-1 under
the 1940 Act. While the Adviser does not deem it practicable and in the best
interest of the Portfolios to solicit competitive bids for commission rates on
each transaction, consideration will regularly be given to posted commission
rates as well as to other information concerning the level of commissions
charged on comparable transactions by other qualified brokers.
In certain instances, there may be securities which are suitable for the
Fund as well as for that of one or more of the advisory clients of the Adviser.
Investment decisions for the Portfolios and for such advisory clients are made
by the Adviser with a view to achieving their respective investment objectives.
It may develop that a particular security is bought or sold for only one client
of the Adviser even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
of one of the Adviser when one or more other clients are selling that same
security. Some simultaneous transactions are inevitable when several clients
receive investment advice from the same investment adviser, particularly when
the same security is suitable for the investment objectives of more than one
client. When two or more clients of the Adviser are simultaneously engaged in
the purchase or sale of the same security, the securities are allocated among
clients in a manner believed by the Adviser to be equitable to each (and may
result, in the case of purchases, in allocation of that security only to some of
those clients and the purchase of another security for other clients regarded by
the Adviser as a satisfactory substitute). It is recognized that in some cases
this system could have a detrimental effect on the price or volume of the
security as far as the Portfolio involved is concerned. At the same time,
however, it is believed that the ability of the Portfolio to participate in
volume transactions will sometimes produce better execution prices.
For the period July 5, 1994 to June 30, 1995 and the fiscal year ended
June 30, 1996 the Fund paid $26,538and $30,853 in brokerage commissions, some of
which was paid to the Fund's Distributor, allocated among the Portfolios as
follows:
7/5/94 - 6/30/95 7/1/95 - 6/30/96
---------------- ----------------
Equity $10,736 $18,684
Fixed Income 260 300
For the period July 5, 1994 to June 30, 1995, $10,996, or 41% and during the
fiscal year ended June 30, 1996, $18,984 or 62%, was paid to the Fund's
Distributor, which is a related person to the Fund's adviser and the remaining
brokerage commissions were paid to 6 unrelated broker dealers. Of the aggregate
dollar amount of transactions involving payment of commissions, 58% were
effected through the Distributor during the fiscal year ended June 30, 1996. It
is the Fund's intent that brokerage transactions executed through the
Distributor be effected pursuant to the Fund's Guidelines Regarding Payment of
Brokerage Commissions to Affiliated Persons adopted by the Board of Directors,
including a majority of the non-interested directors pursuant to Rule 17(e)-1
under the Investment Company Act of 1940.
Option Trading Limits
The writing by the Portfolios of options on securities is subject to
limitations established by each of the registered securities exchanges on which
such options are traded. Such limitations govern the maximum number of options
in each class which may be written by a single investor or group of investors
acting in concert, regardless of whether the options are written on the same or
different securities exchanges or are held or written in one or more accounts or
through one or more brokers. Thus, the number of options which one Portfolio may
write may be affected by options written by the other Portfolios and by other
investment advisory clients of the Adviser. An exchange may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions. The Adviser believes it is unlikely that the
level of option trading by the Fund will exceed applicable limitations.
CAPITAL STOCK AND CONTROL
A complete description of the rights and characteristics of the Fund's
capital stock is included in the Prospectus.
The following table provides the name and address of any person who
owns of record or beneficially 5% or more of the outstanding shares of each
Portfolio as of August 31, 1996:
PORTFOLIO NAME AND ADDRESS SHARES % OWNERSHIP
Equity Kirkpatrick, Pettis, Smith, Polian Inc.
Portfolio 401k Profit Sharing Plan 802,217.190 37.60%
10250 Regency Circle
Omaha, NE 68114
Kirkpatrick Pettis Trust Company
ELAD & Co. - Rebate Account 298,518.142 13.99%
10250 Regency Circle, 5th Flr.
Omaha, NE 68114
Swanson Corporation 263,148.624 12.34%
Retirement Savings Plan
3200 S. 60th Street
Omaha, NE 68106
Fixed Income Kirkpatrick, Pettis, Smith, Polian Inc.
401k Profit Sharing Plan 111,104.508 13.21%
10250 Regency Circle
Omaha, NE 68114
Kirkpatrick Pettis Trust Company
ELAD & Co. - Rebate Account 224,635.025 26.70%
10250 Regency Circle, 5th Flr.
Omaha, NE 68114
Swanson Corporation 56,940.093 6.77%
Retirement Savings Plan
3200 S. 60th Street
Omaha, NE 68106
As of August 30, 1996, Kirkpatrick Pettis controlled the Fund as a
result of its control of the voting power of 913,321.698 shares of the
2,974,545.074 shares outstanding owned through its 401k Profit Sharing Plan. As
a result, Kirkpatrick Pettis can elect all of the directors if such shares are
voted on a noncumulative basis and three out of the five directors if such
shares are voted on a cumulative basis. In addition, Kirkpatrick Pettis could
ratify the selection of the Fund's accountants. On matters affecting the
Portfolios, Kirkpatrick Pettis could control the outcome of all matters
presented to the Equity Portfolio and the Fixed Income Portfolio.
The Directors and officers of the Fund beneficially owned 109,544.468
shares or 5.13% of the Equity Portfolio. Directors and officers owned 3.68% of
the shares outstanding in all Portfolios.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of Portfolio
shares is summarized in the Prospectus in the text following the headings
"Purchase of Shares" and "Valuation of Shares." The net asset value of each
Portfolio's shares is determined on each day on which the New York Stock
Exchange is open, provided that the net asset value need not be determined on
days when no Portfolio shares are tendered for redemption and no order for
Portfolio shares is received. The New York Stock Exchange is not open for
business on the following holidays (or on the nearest Monday or Friday if the
holiday falls on a weekend): New Year's Day, Presidents' Day, Good Friday,
Memorial Day, July 4th, Labor Day, Thanksgiving and Christmas.
The portfolio securities in which each Portfolio invests fluctuate in
value, and hence the net asset value per share of each Portfolio also
fluctuates. An example of how the net asset value per share for all Portfolios
is calculated is as follows:
Equity Portfolio
- ----------------
Net Assets ($30,565,172.74) = Net Asset Value
Shares Outstanding (2,103,657.527) per Share ($14.53)
Fixed Income Portfolio
- ----------------------
Net Assets ($8,464,833.63) = Net Asset Value
Shares Outstanding (827,483.346) per Share ($10.23)
PURCHASE OF SHARES
The manner in which the shares of the Portfolios are offered to the
public is described in the Prospectus under the headings "Purchase of Shares"
and "Valuation of Shares". Shares of the Portfolios may be purchased initially
subject to the minimums set forth in the Prospectus, unless the purchaser is an
employee of the Distributor, Adviser or Mutual of Omaha Insurance Company, or is
a family member of such employee. The term family member shall include parents,
mother-in-law or father-in-law, husband or wife, brother or sister,
brother-in-law or sister-in-law, son or daughter, son-in-law or daughter-in-law,
and their respective children. In addition, the term shall include any person
who is supported directly or indirectly, to a material extent, by the employee
or other family member. The minimum initial investment for accounts established
by money purchase/profit-sharing plans, 401(k) plans, IRA/SEP, 403(b) plans or
457 (state deferred compensation plans) is $2,000. Finally, investments made by
an individual, or by an individual's spouse and/or children under the age of 21,
purchasing shares for their own account, or by a trustee, or other fiduciary
purchasing for a single trust estate, or single fiduciary account will be
treated as investments made by a single investor for purposes of meeting initial
purchase requirements.
REDEMPTION
Redemption of shares, or payment, may be suspended at times (a) when the
New York Stock Exchange is closed for other than customary weekend or holiday
closings, (b) when trading on said exchange is restricted, (c) when an emergency
exists, as a result of which disposal by the Portfolios of securities owned by
them is not reasonably practicable, or it is not reasonably practicable for the
Portfolios fairly to determine the value of their net assets, or (d) during any
other period when the Securities and Exchange Commission, by order, so permits,
provided that applicable rules and regulations of the Securities and Exchange
Commission shall govern as to whether the conditions prescribed in (b) or (c)
exist.
TAX STATUS
The Fund will qualify and intends to continue to qualify its Portfolios
as "regulated investment companies" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), so as to be relieved of federal income
tax on its capital gains and net investment income distributed to shareholders.
To qualify as a regulated investment company, a Portfolio must, among other
things, receive at least 90% of its gross income each year from dividends,
interest, gains from the sale or other disposition of securities and certain
other types of income including, with certain exceptions, income from options
and futures contracts. However, gains from the sale or other disposition of
stock or securities held for less than three months must constitute less than
30% of each Portfolio's gross income. This restriction may limit the extent to
which a Portfolio may effect sales of securities held for less than three months
or transactions in futures contracts and options even when the Adviser otherwise
would deem such transaction to be in the best interest of a Portfolio. The Code
also requires a regulated investment company to diversify its holdings. The
Internal Revenue Service has not made its position clear regarding the treatment
of futures contracts and options for purposes of the diversification test, and
the extent to which a Portfolio could buy or sell futures contracts and options
may be limited by this requirement.
The Code requires that all regulated investment companies pay a
nondeductible 4% excise tax to the extent the regulated investment company does
not distribute 98% of its ordinary income, determined on a calendar year basis,
and 98% of its capital gains, determined, in general, on an October 31 year end.
The required distributions are based only on the taxable income of a regulated
investment company.
Ordinarily, distributions and redemption proceeds earned by a Portfolio
shareholder are not subject to withholding of federal income tax. However, if a
shareholder fails to furnish a tax identification number or social security
number, or certify under penalties of perjury that such number is correct, the
Fund may be required to withhold federal income tax ("backup withholding") from
all dividend, capital gain and/or redemption payments to such shareholder.
Dividends and capital gain distributions may also be subject to backup
withholding if a shareholder fails to certify under penalties of perjury that
such shareholder is not subject to backup withholding due to the underreporting
of certain income. These certifications are contained in the purchase
application enclosed with the Prospectus.
CALCULATIONS OF PERFORMANCE DATA
From time to time the Fund may quote the yield for the Portfolios in
advertisements or in reports and other communications to shareholders. For this
purpose, yield is calculated by dividing a Portfolios's net investment income
per share for the base period, which is 30 days or one month, by the Portfolio's
maximum offering purchase price on the last day of the period and annualizing
the result. The Portfolio's net investment income changes in response to
fluctuations in interest rates and in the expenses of the Portfolio.
Consequently, any given quotation should not be considered as representative of
what the Portfolio's yield may be for any specified period in the future.
Yield information may be useful in reviewing a Portfolio's performance
and for providing a basis for comparison with other investment alternatives.
However, a Portfolio's yield will fluctuate, unlike other investments which pay
a fixed yield for a stated period of time. Current yield should be considered
together with fluctuations in the Portfolio's net asset value over the period
for which yield has been calculated, which, when combined, will indicate a
Portfolio's total return to shareholders for that period. Other investment
companies may calculate yields on a different basis. In addition, investors
should give consideration to the quality and maturity of the portfolio
securities of the respective investment companies when comparing investment
alternatives.
Investors should recognize that in periods of declining interest rates
a bond portfolio's yield will tend to be somewhat higher than prevailing market
rates, and in periods of rising interest rates, such portfolio's yield will tend
to be somewhat lower. Also, when interest rates are falling, the inflow of net
new money to a bond portfolio from the continuous sale of its shares will likely
be invested in instruments producing lower yields than the balance of such
portfolio's holdings, thereby reducing the current yield of such portfolio. In
periods of rising interest rates, the opposite can be expected to occur.
The Fund may also quote the indices of bond prices and yields prepared
by Lehman Bros, Inc., Salomon Bros., Inc., Merrill Lynch or other leading
broker-dealer firms. These indices are not managed for any investment goal and
their composition may be changed from time to time.
The Fixed Income Portfolio may quote the yield or total return on
Ginnie Maes, Fannie Maes, Freddie Macs, corporate bonds and Treasury bonds and
notes, either as compared to each other or as compared to the Portfolio's
performance. In considering such yields or total returns, investors should
recognize that the performance of securities in which the Portfolio may invest
does not reflect the Portfolio's performance, and does not take into account
either the effects of portfolio management or of management fees or other
expenses; and that the issuers of such securities guarantee that interest will
be paid when due and that principal will be fully repaid if the securities are
held to maturity, while there are no such guarantees with respect to shares of
the Portfolio. Investors should also be aware that the mortgages underlying
mortgage-related securities may be prepaid at any time. Prepayment is
particularly likely in the event of an interest rate decline, as the holders of
the underlying mortgages seek to pay off high-rate mortgages or renegotiate them
at potentially lower current rates. Because the underlying mortgages are more
likely to be prepaid at their par value when interest rates decline, the value
of certain high-yielding mortgage-related securities may have less potential for
capital appreciation than conventional debt securities (such as U. S. Treasury
bonds and notes) in such markets. At the same time, such mortgage-related
securities may have less potential for capital appreciation when interest rates
rise.
In connection with the quotations of yields in advertisements described
above, the Fund will also provide average annual total returns from the date of
inception for one, five and ten-year periods if applicable. Total return is a
calculation which equates an initial amount invested to the ending redeemable
value at a specified time. It assumes the reinvestment of all dividends and
capital gains distributions. Average total return will be the average of the
total returns for each year in the period. The Portfolios may also provide a
total return figure for the most recent calendar quarter prior to the
publication of the advertisement. The yield of the Fixed Income Portfolio for
the 30-day period ending June 30, 1996 was 6.34%.
The average annual total returns of the Portfolios for the one year and
from inception to date ending June 30, 1996 are as follows:
Annualized
Total Return
(Inception)
7/5/95
1 Year To Date
------ -------
Equity Portfolio 24.19% 23.27%
Fixed Income Portfolio 3.63% 6.63%
FINANCIAL STATEMENTS
Attached hereto is the Fund's Annual Financial Report dated June 30,
1996.
AUDITORS
The Board of Directors, including all disinterested directors,
unanimously approved the appointment of KPMG Peat Marwick LLP, Two Central Park
Plaza, Suite 1501, Omaha, Nebraska 68102 as the Fund's accountants.
<PAGE>
APPENDIX A
RATINGS OF CORPORATE OBLIGATIONS,
COMMERCIAL PAPER, AND PREFERRED STOCK
Ratings of Corporate Obligations
Moody's Investors Service, Inc.
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times over the future. Uncertainty of position characterizes
bonds in this class.
B: Bonds rated B generally lack characteristics of desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. Such bonds may be in default or
there may be present elements of danger with respect to principal and interest.
Ca: Bonds rated Ca represent obligations which are speculative in a high
degree. Such bonds are often in default or have other marked shortcomings.
Those securities in the A and Baa groups which Moody's believes possess
the strongest investment attributes are designated by the symbols A-1 and Baa-1.
Other A and Baa securities comprise the balance of their respective groups.
These rankings (1) designate the securities which offer the maximum in security
within their quality groups, (2) designate securities which can be bought for
possible upgrading in quality, and (3) additionally afford the investor an
opportunity to gauge more precisely the relative attractiveness of offerings in
the marketplace.
Standard & Poor's Corporation
AAA: Bonds rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree.
A: Bonds rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Although they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories. Bonds rated
BBB are regarded as having speculation characteristics.
BB--B--CCC-CC: Bonds rated BB, B, CCC, and CC are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation among such bonds and CC the highest
degree of speculation. Although such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
Commercial Paper Ratings
Standard & Poor's Corporation
Commercial paper ratings are graded into four categories, ranging from
"A" for the highest quality obligations to "D" for the lowest. Issues assigned
the A rating are regarded as having the greatest capacity for timely payment.
Issues in this category are further refined with the designation 1, 2 and 3 to
indicate the relative degree of safety. The "A-1" designation indicates that the
degree of safety regarding timely payment is very strong. Those issues
determined to possess overwhelming safety characteristics will be denoted with a
plus sign designation.
Moody's Investors Service, Inc.
Moody's commercial paper ratings are opinions of the ability of the
issuers to repay punctually promissory obligations not having an original
maturity in excess of nine months. Moody's makes no representation that such
obligations are exempt from registration under the Securities Act of 1933, nor
does it represent that any specific note is a valid obligation of a rated issuer
or issued in conformity with any applicable law. Moody's employs the following
three designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Prime-1 Superior capacity for repayment
Prime-2 Strong capacity for repayment
Prime-3 Acceptable capacity for repayment
Ratings of Preferred Stock
Standard & Poor's Corporation
Standard & Poor's preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not be
higher than the bond rating symbol assigned to, or that would be assigned to,
the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
1. Likelihood of payment--capacity and willingness of the issuer
to meet the timely payment of preferred stock dividends and any
applicable sinking fund requirements in accordance with the
terms of the obligation.
2. Nature of and provisions of the issue.
3. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements affecting creditors'
rights.
AAA: This is the highest rating that may be assigned by Standard &
Poor's to a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
AA: A preferred stock issue rated AA also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.
A: An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB: An issue rated BBB is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the A category.
BB, B, CCC: Preferred stock issues rated BB, B, and CCC are regarded,
on balance, as predominantly speculative with respect to the issuer's capacity
to pay preferred stock obligations. BB indicates the lowest degree of
speculation and CCC the highest degree of speculation. While such issues will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CC: The rating CC is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C: A preferred stock rated C is a nonpaying issue.
D: A preferred stock rated D is a nonpaying issue with the issuer in
default on debt instruments.
NR indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S & P does not rate a particular
type of obligation as a matter of policy.
Plus (+) or Minus (-): To provide more detailed indications of
preferred stock quality, the ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Moody's Investors Service, Inc.
aaa: An issue which is rated aaa is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa: An issue which is rated aa is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
a: An issue which is rated a is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the aaa
and aa classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
baa: An issue which is rated baa is considered to be medium grade,
neither highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great length of
time.
ba: An issue which is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b: An issue which is rated b generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa: An issue which is rated caa is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate the
future status of payments.
ca: An issue which is rated ca is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual payment.
c: This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
