KPM FUNDS, INC.
ANNUAL REPORT
KPM EQUITY PORTFOLIO
KPM FIXED INCOME PORTFOLIO
June 30, 1997
<PAGE>
KPM FUNDS, INC.
PERFORMANCE STATISTICS
One Year Avg. Annual Return
Ended Since Inception
06/30/97 (07/05/94)
-------- ---------------------
Equity Portfolio 30.9% 25.8%
Fixed Income Portfolio 8.0% 7.1%
Total returns represent the overall performance of an investment for a specific
period of time, assuming reinvestment of dividends and capital gains.
Total returns reflect past performance. Past performance does not predict future
performance. The investment return and principal value of an investment will
fluctuate so that shares, when redeemed, may be worth more or less than their
original cost.
<PAGE>
Dear Shareholder:
I am pleased to report that the KPM Funds had good returns in the first of half
of 1997. The KPM Equity Portfolio had a total return of 13.4% for the six-month
period and 30.9% for the twelve months ended June 30, 1997. The KPM Fixed Income
Portfolio had a total return of 2.7% for the six-month period and 8.0% for the
twelve-month period.
Both of the KPM Funds portfolios enjoyed a "tail wind", especially in the June
quarter, from strong returns in the equity and fixed income markets. The
economic environment continues to be very favorable for investing. Solid growth
in real Gross Domestic Product (GDP), lower inflation rates, and declining
interest rates helped propel the major stock market indices to new record highs.
In addition, the Administration and Congress agreed to a balanced budget
proposal and appear to be near an agreement on a tax cut proposal that would,
among other things, reduce the tax rate on capital gains.
There continues to be a very wide disparity between the performance of the
largest 50 stocks and the rest of the stock market. In the first six months of
1997, the 50 largest stocks in the Standard & Poor's 500 (S&P 500) gained 22.6%
compared to only 15.8% for the remaining 450 issues. Since the S&P 500 is
weighted by size, these 50 largest stocks comprise 50% of the S&P 500 index.
This disparity increases when you look at broader stock indices like the Value
Line Composite which is comprised of 1700 stocks and each is equally weighted.
The Value Line increased only 11.9% in the first half of 1997. With such a
strong performance from such a narrow list of stocks, it should not be
surprising to readers that most mutual fund managers found it difficult to
surpass the S&P 500 in the first half of 1997. In fact, 95% of all equity mutual
fund managers failed to beat the S&P 500, and the average total return was 13%.
You may ask, why was there this disparity in performance and how long will it
last? The answer to the first question is easier than the second. The largest
companies have enjoyed higher earnings growth in recent quarters and many have
worldwide franchises that probably deserve a sizable premium price compared to
the average stock. In addition, growth in index investing and large
institutional investors preferences for highly liquid (i.e., easily tradable)
stocks has created a high demand for these issues. However, a good thing can be
taken too far. Witness the rise and fall of the "nifty fifty" in the late 1960's
and early 1970's. When the average S&P stock sells for 20 times 1997 earnings
estimates, should Coca-Cola sell for 43 times, should Gillette for 37 times, or
Microsoft for 51 times? We plan to stay with our philosophy of buying high
quality companies at significant discounts to their long-term value. This value
approach to investing may temporarily lag behind the S&P 500 from time-to-time,
but based on our experience it has provided superior returns over the long term.
KPM Funds celebrated its third anniversary on July 5, 1997. Total assets stand
at over $50 million and shareholders now number 335. Most importantly, total
returns have averaged 25.8% for the Equity Portfolio and 7.1% for the Fixed
Income Portfolio. We appreciate your continued support.
Sincerely,
Randall D. Greer
Chairman
<PAGE>
KPM EQUITY PORTFOLIO
PORTFOLIO COMMENTARY
Bruce H. Van Kooten, CFA
Portfolio Manager
The first half of 1997 witnessed the continuation of the explosive rally in the
equity markets. Through June 30, 1997, the Standard & Poor's 500 total return of
17.4% stands as the fourth strongest first-half gain over the past fifty years.
Equity returns as represented by the S&P 500 over the past decade have been
substantially above the average for the last seventy years of around 12%. To
believe that equity returns can continue to produce 20%+ per year just doesn't
make much sense to us given that overall corporate profits are growing at less
than 10% per year. Equity prices have become disconnected from the main driver -
corporate profits. We continue to be believers that rates of return will
eventually regress to the long-term mean.
Subsequent to June 30, the S&P 500 has continued its march upward to valuation
levels that are approaching all-time historical highs. The S&P 500
price/earnings multiple reached 22.8x in 1961 when inflation was 1.1%. The
current price/earnings multiple of the S&P 500 is 21.2x based upon 1997 earnings
estimates with inflation at 1.4%. In short, the market is selling very near its
all-time high, and we don't think it can get any better than this.
With index funds and momentum investing enjoying unprecedented popularity, most
value investors are beginning to be left behind in the dust in the near-term
performance game. As value investors, we just cannot bring ourselves to buy
these overpriced stocks such as those found in the index funds. So, what is our
course of action? First of all, we will not change our discipline in an effort
to "catch" the indexes. Secondly, given the extreme levels of valuation, we
believe it is prudent to maintain a buying reserve for stocks that we find that
do truly represent long-term value. Third, we continue to assess the risk
profile of your portfolio, believing that stocks like Toro Corp., Potash Corp.
of Saskatchewan, Trinity Industries and Allstate Corp. have substantially less
downside than the market "favorites" like Coca-Cola, Microsoft, Intel and Dell
Computer.
As you can see by the portfolio profile presented below, the KPM Equity
Portfolio is more conservative and substantially cheaper than the S&P 500.
Although the value discipline is currently sacrificing near-term performance, we
remain committed to this style and believe that it will continue to show very
satisfactory returns over longer periods of time with substantially lower levels
of risk.
INVESTMENT OBJECTIVE
The KPM Equity Portfolio invests for capital appreciation through a diversified
portfolio composed primarily of common stocks, managed with a conservative
investment approach based on fundamental analysis and a value philosophy.
PORTFOLIO PROFILE as of June 30, 1997
Weighted Average
----------------
Price/Earnings* 13.2x
Price/Book Value 2.6x
Dividend Yield 1.7%
Return on Equity 21.1%
Market Capitalization $15.8 billion
*Based on 1998 estimates
Return on Equity equals earnings available to common stock divided by common
shareholder's equity.
Data Source: Baseline Financial Services
<PAGE>
GRAPH
1 Year Ended Avg. Annual Return
06/30/97 Since Inception*
------------ -----------------
KPM Equity Portfolio 30.92% 25.78%
* Inception Date is 7/5/94
RETURN ON A $10,000 INVESTMENT
KPM EQUITY PORTFOLIO $19,849
S&P 500 COMPOSITE $21,274
This chart assumes an initial investment of $10,000 made on 7/5/94. Total Return
is based on the net change in N.A.V. assuming reinvestment of distributions.
Returns shown above include the reinvestment of all dividends and other
distributions. Performance figures represent past performance, which is no
guarantee of future results, and will fluctuate. The investment return and
principal value of an investment in KPM Equity Portfolio will fluctuate so that
an investor's shares in the Fund, when redeemed, may be worth more or less than
their original cost.
The S&P 500 Composite is an index of 500 selected common stocks. The index
consists primarily of stocks with large market capitalizations and it represents
approximately two-thirds of the total market value of all U.S. common stocks.
The returns for this index do not reflect any fees or expenses.
<PAGE>
KPM FIXED INCOME PORTFOLIO
PORTFOLIO COMMENTARY
Patrick M. Miner, CFA
Portfolio Manager
Although the bond market (and interest rates) remained choppy throughout the
past year, rates have worked their way generally lower. The last six months of
1996 were very good to the bond market, but early 1997 results were negative as
the market "over anticipated" tightening action by the Federal Reserve Board.
The Fixed Income Portfolio generated a total return of only 3.2% for the first
half of 1997, but a solid return of 8.0% over the past year. This compares with
a 7.8% return posted by the Lehman Government/Corporate Index and an 8.2% return
for the Lehman Aggregate Index.
Although we have maintained a shorter average maturity than the market indices
to cushion against temporary price declines, our focus on mortgage-backed and
asset-backed securities has provided above-average yields relative to the
government and corporate bond sectors. This higher income, in combination with
our conservative maturity posture, has resulted in "market" returns with
below-market risk and price volatility.
During the past year months we have made only subtle changes in our sector
allocation. Spreads versus Treasury obligations have basically been flat to
tighter for all sectors of the bond market and there has been little incentive
to alter the Portfolio's composition. Our asset-backed security holdings were
increased slightly from 9% to 10% of the portfolio and the mortgage-backed
holdings were increased to the maximum allowable allocation at 40% of the total
portfolio. Treasury securities have been reduced from 19% to 10% of the
portfolio to generate better income yield. Looking forward, we expect these
sectors to continue to outperform the market averages and provide above-market
income levels.
INVESTMENT OBJECTIVE
The KPM Fixed Income Fund seeks to provide total return over a market cycle of 3
to 5 years consistent with preservation of capital and prudent investment
management.
PORTFOLIO PROFILE as of June 30, 1997
Weighted Average
-----------------
Average Quality of Securities Aa2
Average Life of Securities 7.46 years
Effective Duration 4.85 years
SEC Yield 5.63%
<PAGE>
GRAPH
1 Year Ended Avg. Annual Return
06/30/97 Since Inception*
------------ ------------------
KPM Fixed Income Portfolio 7.96% 7.07%
* Inception Date is 7/5/94
RETURN ON A $10,000 INVESTMENT
KPM FIXED INCOME PORTFOLIO $12,266
LEHMAN AGGREGATE BOND INDEX $12,782
This chart assumes an initial investment of $10,000 made on 7/5/94. Total Return
is based on the net change in N.A.V. assuming reinvestment of distributions.
Returns shown a bove include the reinvestment of all dividends and other
distributions. Performance figures represent past performance, which is no
guarantee of future results, and will fluctuate. The investment return and
principal value of an investment in KPM Fixed Income Portfolio will fluctuate so
that an investor's shares in the Fund, when redeemed, may be worth more or less
than their original cost.
The Lehman Aggregate Bond Index includes all public obligation of the U.S.
Treasury, excluding flower bonds and foreign-targeted issues; all publicly
issued debt of U.S. government agencies and quasi-federal corporations, and
corporate debt guaranteed by the U.S. government; and all publicly issued,
SEC-registered corporate debt (including debt issued or guaranteed by foreign
sovereign governments, municipalities, or governmental agencies, or
international agencies). The returns for this index do not reflect any fees or
expenses.
<PAGE>
KPM FUNDS, INC.
SCHEDULE OF INVESTMENTS
JUNE 30, 1997
KPM EQUITY PORTFOLIO
PERCENT
OF NET MARKET
SHARES COMMON STOCK - 90.80% ASSETS VALUE
------ --------------------- ------ -----
AUTO/TRUCK/PARTS 1.52%
---------------- -----
74,900 TBC Corporation* $627,288
--------
BROADCAST, RADIO & TV 1.68%
--------------------- -----
47,000 Tele-Communications Inc. Class A* 696,188
-------
CHEMICALS 4.32%
--------- -----
62,000 Hanna (M.A.) Company 1,786,375
---------
COMMERCIAL SERVICES 3.75%
------------------- -----
61,300 Franklin Quest Company * 1,551,656
---------
FINANCIAL SERVICES 11.23%
------------------ ------
49,000 Federal Home Loan Mortgage Corporation 1,684,375
13,300 MBIA Inc. 1,500,406
11,500 Student Loan Marketing Association 1,460,500
---------
4,645,281
---------
FOOD PROCESSING 2.90%
--------------- -----
27,000 Philip Morris Companies Inc. 1,198,125
---------
FOREST PRODUCTS/PAPER 8.05%
--------------------- -----
18,300 Consolidated Papers 988,200
20,000 Kimberly Clark Corporation 995,000
64,500 Specialty Paperboard Inc. * 1,346,438
---------
3,329,638
---------
*Indicates nonincome-producing security.
<PAGE>
KPM FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
KPM EQUITY PORTFOLIO
PERCENT
OF NET MARKET
SHARES COMMON STOCK (CONTINUED) ASSETS VALUE
HOUSEHOLD PRODUCTS/WARE 3.43%
----------------------- -----
37,400 Toro Company $1,416,525
----------
INSURANCE 7.13%
--------- -----
22,000 Allstate Corporation 1,606,000
35,500 Gallagher (Arthur J.) & Company 1,340,125
---------
2,946,125
---------
LODGING 1.50%
------- -----
75,000 Supertel Hospitality* 618,750
-------
MANUFACTURING 10.33%
------------- ------
24,500 Bandag Inc. 1,200,500
35,000 Tupperware Corp 1,277,500
40,000 Pentair Inc. 1,315,000
25,600 Valmont Industries 486,400
---------
4,279,400
---------
METALS/MINING 7.89%
------------- -----
24,000 Potash Corporation of Saskatchewan, Inc. 1,801,500
46,000 Trinity Industries 1,460,500
---------
3,262,000
---------
OIL COMPANY - EXPLORATION & PRODUCTION 1.91%
-------------------------------------- -----
47,850 Prima Energy Corporation 789,525
-------
OIL COMPANY INTEGRATED 2.22%
---------------------- -----
14,900 Exxon Corporation 916,350
-------
OIL/GAS DRILLING 3.41%
---------------- -----
20,000 Atlantic Richfield 1,410,000
---------
*Indicates nonincome-producing security.
<PAGE>
KPM FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
KPM EQUITY PORTFOLIO
PERCENT
OF NET MARKET
SHARES COMMON STOCK (CONTINUED) ASSETS VALUE
PUBLISHING/PRINTING 4.69%
------------------- -----
37,800 Banta Corporation $1,025,325
25,500 Merrill Corporation 911,625
-------
1,936,950
---------
RETAIL/APPAREL 6.05%
-------------- -----
20,000 Reebok International Ltd. 938,750
44,600 Toys "R" Us Inc. * 1,561,000
---------
2,499,750
---------
TRANSPORTATION 5.31%
-------------- -----
14,000 Union Pacific Corporation 987,000
48,500 Union Pacific Resources Group Inc. 1,206,436
---------
2,193,436
---------
UTILITIES - TELECOMMUNICATIONS 3.48%
------------------------------ -----
41,000 American Telephone & Telegraph Corporation 1,437,563
---------
TOTAL INVESTMENT IN SECURITIES (COST $28,046,469) 90.80% $37,540,925
CASH EQUIVALENTS 8.84% 3,654,691
OTHER ASSETS, LESS LIABILITIES 0.36% 147,092
------ -------------
NET ASSETS 100.00% $41,342,708
====== =============
*Indicates nonincome-producing security.
See accompanying notes to financial statements.
<PAGE>
KPM FUNDS, INC.
SCHEDULE OF INVESTMENTS
JUNE 30, 1997
KPM FIXED INCOME PORTFOLIO
PRINCIPAL MARKET
AMOUNT U.S. GOVERNMENT SECURITIES - 10.18% VALUE
------ ----------------------------------- -----
$100,000 U.S. Treasury Note 6.875%, due 7/31/99 $101,469
150,000 U.S. Treasury Note 6.125%, due 12/31/01 148,570
50,000 U.S. Treasury Note 7.25%, due 5/15/04 52,141
150,000 U.S. Treasury Note 6.50%, due 10/15/06 149,461
200,000 U.S. Treasury Bond 7.125%, due 2/15/23 206,250
250,000 U.S. Treasury Bond 6.625%, due 2/15/27 244,883
-------
Total U.S. Government Securities 902,774
-------
ASSET BACKED SECURITIES - 10.06%
100,000 Green Tree Financial Corp. ABS, 7.30%, due 7/15/25 98,656
300,000 Green Tree Financial Corp. Series 1995-3 M1, 7.95%, due 8/15/25 307,688
185,000 Green Tree Financial Corp. Series 1994-6 A3, 7.70% due 1/15/20 186,937
250,000 Oakwood Mtg. Investors, Inc. Series 1995-B B1, 7.55% due 1/15/21 243,594
55,317 Security Pacific Accept. Corp. Series 1991-3 A1, 7.25%,
due 12/15/11 55,737
-------
Total Asset Backed Securities 892,612
-------
COLLATERALIZED MORTGAGE OBLIGATIONS - 35.30%
200,000 Federal Home Loan Mtg. Corp. Series 1232 F 7.50%, due 9/15/06 204,204
150,000 Federal Home Loan Mtg. Corp. Series 1035 E 8.00%, due 10/15/20 153,586
372,000 Federal Home Loan Mtg. Corp. Series 1455 H 7.00%, due 6/15/21 374,065
250,000 Federal Home Loan Mtg. Corp. Series 1761 G 8.00%, due 6/15/21 258,535
61,672 Federal Home Loan Mtg. Corp. Series 1545 C 6.00%, due 6/15/23 58,859
165,000 Federal Natl. Mtg. Assn. Series 1992-164 PH 6.50%, due 1/25/06 163,569
97,000 Federal Natl. Mtg. Assn. Series 1993-76 PG 6.00%, due 7/25/06 94,924
50,000 Federal Natl. Mtg. Assn. Series 1993-221 C 5.50%, due 9/25/07 47,762
134,702 Federal Natl. Mtg. Assn. Series 1990-96 E 9.67%, due 1/25/17 138,943
195,000 Federal Natl. Mtg. Assn. Series 1993-82 D 6.35%, due 3/25/19 192,380
<PAGE>
KPM FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
KPM FIXED INCOME PORTFOLIO
PRINCIPAL MARKET
AMOUNT COLLATERALIZED MORTGAUGE OBLIGATIONS (CONTINUED) VALUE
$100,000 Federal Natl. Mtg. Assn. Series 1993-103 PG 6.25%, due 6/25/19 $98,563
90,000 Federal Natl. Mtg. Assn. Series 1991-173 HP 6.95%, due 1/25/20 90,246
195,000 Federal Natl. Mtg. Assn. Series 1999-65 H 8.50%, due 1/25/20 201,780
200,000 Federal Natl. Mtg Assn. Series 1989-66 J 7.00% due 9/25/19 197,938
129,281 Federal Natl. Mtg. Assn. Series G-29 O 8.50%, due 9/25/21 134,412
345,000 Federal Natl. Mtg. Assn. Series 1994-23K, 6.00% due 12/25/09 327,022
300,000 GE Capital Mtg. Services Series 1994-12 6.00%, due 4/25/09 293,742
100,000 Govt. Natl. Mtg. Assn. Series 1994-4 K 7.9875%, due 7/16/12 101,227
-------
Total Collateralized Mortgage Obligations 3,131,757
---------
CORPORATE BONDS - 39.22%
50,000 Chevron Capital USA 7.45%, due 8/15/04 50,849
250,000 Commonwealth Edison MTN 9.05%, due 10/15/99 262,030
300,000 Dayton Hudson Corporation 9.625%, due 2/1/08 351,802
200,000 Eastman Chemical Corporation 7.25% due 1/15/24 195,846
245,000 Enron Corporation 6.75%, due 7/1/05 240,431
244,578 Federal Express Company 6.68%, due 1/1/08 238,608
250,000 Ford Motor Company 6.11%, due 1/1/01 250,000
250,000 James River Corporation 7.92%, due 12/27/04 257,813
150,000 Kansas City Power & Light 6.50% due 11/1/01 148,688
100,000 May Department Stores 9.45%, due 2/2/99 104,658
125,000 Occidental Petroleum Company 6.02% due 11/24/99 123,594
250,000 Public Service Electric & Gas Company 6.50%, due 5/1/04 244,331
100,000 Union Pacific Corporation 6.25%, due 3/15/99 99,887
50,000 United States Leasing International 8.75%, due 12/1/01 53,599
300,000 US West 7.3%, due 1/15/07 302,250
200,000 United Telecom 9.50%, due 4/1/03 224,995
200,000 Wal-Mart Stores 7.49%, due 6/21/07 205,646
<PAGE>
KPM FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
KPM FIXED INCOME PORTFOLIO
PRINCIPAL MARKET
AMOUNT CORPORATE BONDS (CONTINUED) VALUE
- ---------- ----------------------------------------- ---------
$10,000 Washington Natural Gas 6.07%, due 1/16/04 $9,403
120,000 Westinghouse Electric 6.875%, due 9/1/03 115,956
-------
Total Corporate Bonds 3,480,386
Total Investment in Securities (cost $8,307,894) 94.76% $8,407,529
Repurchase Agreements 3.90% 346,122
Other Assets, less Liabilities 1.34% 118,634
-------- ----------
NET ASSETS 100.00 $8,872,285
======== ==========
See accompanying notes to financial statements.
<PAGE>
<TABLE>
KPM FUNDS, INC.
Statement of Assets and Liabilities
June 30, 1997
<CAPTION>
KPM KPM
Equity Fixed Income
Assets: Portfolio Portfolio
<S> <C> <C>
Investments in securities, at market value ----------- ----------
(cost $28,046,469 and $8,307,894, respectively) $37,540,925 $8,407,529
Cash Equivalents 3,654,691 346,122
Accrued interest and dividends receivable 94,859 126,337
Receivable for investment securities sold 113,996 -
Organizational costs, net of accumulated amortization 12,701 2,130
---------- ---------
Total assets 41,417,172 8,882,118
---------- ---------
Liabilities:
Accrued expenses, including investment management and
service fees and distribution expenses payable to adviser,
administrator and distributor 49,464 9,833
Payable for fund shares redeemed 25,000 -
---------- ---------
Total liabilities 74,464 9,833
---------- ---------
Net assets applicable to outstanding capital stock $41,342,708 $8,872,285
========== =========
Net assets represented by:
Capital stock (1 billion authorized, $.00001 par value) $23 $9
Additional paid-in capital 27,681,904 8,800,876
Accumulated undistributed net investment income/(loss) (1,912) (2,212)
Accumulated net realized gain/(loss) on investments 4,168,237 (26,023)
Unrealized appreciation of securities 9,494,456 99,635
---------- ---------
Total net assets applicable to shares outstanding $41,342,708 $8,872,285
========== =========
Shares outstanding and net asset value per share
Shares of capital stock outstanding: 2,307,684
and 851,557, respectively (note 5) $17.92 $10.42
========== =========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KPM FUNDS, INC.
STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1997
KPM KPM
EQUITY FIXED INCOME
INVESTMENT INCOME: PORTFOLIO PORTFOLIO
---------- ---------
Dividends $495,839 $ -
Interest 114,553 592,268
---------- ---------
Total investment income 610,392 592,268
---------- ---------
EXPENSES (NOTE 3):
Investment advisory fee 272,525 50,207
Administration fee 85,164 20,919
Distribution fees 85,056 20,901
Amortization of organization costs 4,380 1,062
Other operating expenses 46,393 33,581
---------- ---------
Total expenses 493,518 126,670
Less expenses reimbursed by investment
adviser (note 3) (500) (21,824)
---------- ---------
Net expenses 493,018 104,846
---------- ---------
Net investment income 117,374 487,422
---------- ---------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 4):
Net realized gain (loss) 4,702,062 (25,599)
Net unrealized appreciation (depreciation)
Beginning of period 4,999,774 (79,601)
End of period 9,494,456 99,635
---------- ---------
Net unrealized appreciation 4,494,682 179,236
---------- ---------
Net realized and unrealized
gain on investments 9,196,744 153,637
---------- ---------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $9,314,118 $641,059
========== =========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
KPM FUNDS, INC.
Statements of Changes in Net Assets
Years Ended June 30, 1997 and June 30, 1996
<CAPTION>
KPM KPM
Equity Fixed Income
Portfolio Portfolio
Year Ended Year Ended Year Ended Year Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------- ------------- ------------- --------------
Operations:
<S> <C> <C> <C> <C>
Net investment income $117,374 $91,857 $487,422 $444,149
Net realized gain (loss)
on investments 4,702,062 1,595,222 (25,599) 17,153
Unrealized appreciation (depreciation) 4,494,682 3,221,019 179,236 (224,065)
---------- --------- ------- --------
Net increase in net assets
resulting from operations 9,314,118 4,908,098 641,059 237,237
---------- --------- ------- --------
Distributions to shareholders from:
Net investment income 125,160 91,465 494,093 436,949
Net realized gains 1,828,489 436,952 809 13,425
---------- --------- ------- --------
Total distributions 1,953,649 528,417 494,902 450,374
---------- --------- ------- --------
Capital share transactions: (note 5)
Proceeds from sales 7,152,647 12,208,239 2,512,764 4,157,544
Payment for redemptions (5,551,204) (1,896,909) (2,683,686) (1,764,323)
Reinvestment of net investment
income and net realized gain
distributions at net asset value 1,815,623 513,420 432,216 416,824
---------- --------- ------- --------
Total increase from capital
share transactions 3,417,066 10,824,750 261,294 2,810,045
---------- ---------- ------- ---------
Total increase in net assets 10,777,535 15,204,431 407,451 2,596,908
Net assets:
Beginning of period 30,565,173 15,360,742 8,464,834 5,867,926
---------- ---------- --------- ---------
End of period $41,342,708 $30,565,173 $8,872,285 $8,464,834
========== ========== ========= =========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
KPM FUNDS, INC.
FINANCIAL HIGHLIGHTS
YEARS ENDED JUNE 30, 1997 AND 1996 AND THE PERIOD FROM
JULY 5, 1994 (COMMENCEMENT OF OPERATIONS) TO JUNE 30, 1995
KPM EQUITY PORTFOLIO
------------------------------------
YEAR ENDED YEAR ENDED PERIOD ENDED
1997 1996 1995
------------ ------------ ----------
NET ASSET VALUE:
Beginning of period $14.53 $12.00 $10.00
------ ------ ------
Income from investment operations:
Net investment income 0.05 0.05 0.11
Net realized and unrealized
gain on investments 4.25 2.83 2.06
---- ---- ----
Total income from investment operations 4.30 2.88 2.17
---- ---- ----
Less distributions:
Dividends from net investment income (0.06) (0.05) (0.10)
Dividends from capital gains (0.85) (0.30) (0.07)
------ ------ ------
(0.91) (0.35) (0.17)
------ ------ ------
End of period $17.92 $14.53 $12.00
====== ====== ======
TOTAL RETURN 30.92% 24.19% 22.01%*
====== ====== ======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $41,342,708 $30,565,173 $15,360,742
Ratio of expenses to average net assets 1.45% 1.50% 1.50%*
Ratio of net income to average net assets 0.34% 0.40% 1.04%*
Portfolio turnover rate 41.83% 34.05% 27.90%
Average Commission Rate** $0.0683 N/A N/A
Per share data has been calculated using weighted average shares outstanding
during the period indicated.
* Annualized for periods of less than twelve months in duration.
** Average commission rate is computed by dividing the total amount of
commissions paid by the total number of shares purchased and sold during the
period for which there was a commission charged.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
KPM FUNDS, INC.
FINANCIAL HIGHLIGHTS
YEARS ENDED JUNE 30, 1997 AND 1996 AND THE PERIOD FROM
JULY 5, 1994 (COMMENCEMENT OF OPERATIONS) TO JUNE 30, 1995
KPM FIXED INCOME PORTFOLIO
-----------------------------------
YEAR ENDED YEAR ENDED PERIOD ENDED
1997 1996 1995
----------- ----------- ----------
NET ASSET VALUE:
Beginning of period $10.23 $10.47 $10.00
------ ------ ------
Income from investment operations:
Net investment income 0.61 0.63 0.57
Net realized and unrealized
gain/(loss) on investmenst 0.19s (0.23) 0.47
Total income from investment operations 0.80 0.40 1.04
---- ---- ----
Less distributions:
Dividends from net investment income (0.61) (0.62) (0.57)
Dividends from capital gains (0.00) (0.02) (0.00)
------ ------ ------
(0.61) (0.64) (0.57)
------ ------ ------
End of period $10.42 $10.23 $10.47
====== ====== ======
TOTAL RETURN 7.96% 3.63% 9.63%*
===== ===== =====
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $8,872,285 $8,464,834 $5,867,926
Ratio of expenses to average net assets 1.25% 1.25% 1.25%*
Ratio of expenses to average net assets before
adviser reimbursements # 1.51% 1.29% 1.56%*
Ratio of net income to average net assets 5.82% 5.94% 5.59%
Portfolio turnover rate 26.14% 19.52% 40.34%
Per share data has been calculated using weighted average shares outstanding
during the period indicated.
# KPM Investment Management, Inc. reimbursed a portion of the fund's expenses
(note 3)
* Annualized for periods of less than twelve months in duration
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
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KPM FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. ORGANIZATION
KPM Funds, Inc. (the "Fund") is registered under the Investment Company Act
of 1940, as amended, as a diversified, open-end management investment
company. The Fund issues its shares in series, each series representing a
distinct portfolio with its own investment objectives and policies. At June
30, 1997 the Fund had two portfolios in operation: the KPM Equity Portfolio
and the KPM Fixed Income Portfolio.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies employed by
the Fund in preparing its financial statements.
USE OF ESTIMATES: In preparing the financial statements in accordance with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the
date of the financial statements and changes in net assets for the period.
Actual results could differ from those estimates.
VALUATION OF INVESTMENTS
Investment securities are carried at market determined using the following
valuation methods:
o Securities traded on a national securities exchange are valued at the
last reported sale price that day.
o Securities traded on a national securities exchange for which there
were no sales on that day or on the NASDAQ National Market System and
securities traded on other over-the-counter markets for which market
quotations are readily available are valued at closing bid prices.
o Securities including bonds or other assets for which market prices are
not readily available are valued at fair market value as determined in
good faith or under the direction of the Board of Directors.
Determination of fair value involves, among other things, reference to
market indices, matrices and data from independent brokers and pricing
services.
All securities are valued in accordance with the above noted policies at
the close of each business day.
At June 30, 1997, the cost of investment securities is identical for
financial reporting and income tax purposes.
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KPM FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
2. CONTINUED
SECURITY TRANSACTIONS
Security transactions are accounted for on the date securities are
purchased or sold (trade date). Dividend income is recognized on the
ex-dividend date and interest income is accrued daily. Amortization of bond
premium and discount is amortized daily using both the constant yield and
the straight-line methods.
Realized investment gains and losses are determined by specifically
identifying the issue sold.
OPTIONS TRANSACTIONS
The KPM Equity Portfolio is authorized to purchase put options or call
options.
The amount of the liability is subsequently marked to market to reflect the
current value of the option written. The current market value of the traded
option is the last sales price on the principal exchange on which such
options are traded, or in the absence of such a sale, at the latest ask
quotation. When an option expires on its stipulated expiration date or the
Portfolio enters into a closing purchase transaction, the Portfolio
realizes a gain (or loss if the cost of a closing transaction exceeds the
premium received when the option was sold) without regard to any unrealized
gain or loss on the underlying security, and the liability related to such
option is extinguished. When an option is exercised, the Portfolio realizes
a gain or loss from the sale of the underlying security and the proceeds
from such sale are increased by the premium originally received.
When a put option is purchased, an amount equal to the premium paid by the
Portfolio is included by the Portfolio in the Portfolio's statement of
assets and liabilities as an asset. The amount of the asset is subsequently
marked to market to reflect the value of the option written. The current
market value of a traded option is the last sales price on the principal
exchange on which such options are traded, or in the absence of such a
sale, at the latest ask quotation. When an option expires on its stipulated
expiration date or the Portfolio enters into a closing sales transaction,
the Portfolio realized a gain (or loss if the cost of a closing transaction
is lower than the premium paid when the option was sold) without regard to
any unrealized gain or loss on the underlying security, and the asset
related to such option is extinguished. When an option is exercised, the
Portfolio realizes a gain or loss from the sale of the underlying security
and the proceeds from such sale are decreased by the premium originally
paid.
At June 30, 1997, the KPM Equity Portfolio had no such option contracts
outstanding nor were any written during the year then ended.
<PAGE>
KPM FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
2. CONTINUED
FEDERAL INCOME TAXES
It is the policy of each Portfolio to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute virtually all of the taxable income generated by the Portfolios
to their shareholders within the time period allowed by Federal law.
Consequently, no liability for Federal income taxes is required. Each
Portfolio is treated as a separate entity for tax purposes, and on a
calendar basis, will distribute substantially all of its net investment
income and realized gains, if any, to avoid payment of any Federal excise
tax. There will be no net realized gain distributions until the net
realized loss carry forwards have been offset or expired. The losses will
expire in 8 years. Each Portfolio prepares its tax return on an accrual
basis.
DISTRIBUTION TO SHAREHOLDERS
Dividends to shareholders are recorded on the ex-dividend date. The
dividends declared become payable immediately.
CASH EQUIVALENTS
The Fund considers investments with an original maturity of three months or
less when purchased to be cash equivalents.
ORGANIZATIONAL COSTS
Costs associated with the formation of the Fund, consisting primarily of
accounting and legal fees, have been capitalized and are being amortized
using the straight-line basis over five years. If any or all of the shares
representing initial capital of the Fund is redeemed by any holder prior to
the end of the amortization period, the proceeds will be reduced by the
unamortized organization cost balance in the same proportion as the number
of shares redeemed bears to the number of initial shares outstanding.
3. FEES, EXPENSES AND RELATED PARTY TRANSACTIONS
The Fund and each of its Portfolios have retained KPM Investment
Management, Inc. (the "Adviser"), a wholly-owned subsidiary of KFS
Corporation, which is a wholly-owned subsidiary of Mutual of Omaha
Insurance Company, as its exclusive investment adviser. In addition, the
Fund has an agreement with Kirkpatrick, Pettis, Smith, Polian Inc.
("KPSP"), a wholly-owned subsidiary of KFS Corporation, to act as principal
underwriter and distributor for the Portfolio's shares, and an
administration agreement with Lancaster Administrative Services, Inc. (the
"Administrator") to provide administrative and transfer agent services.
Under the terms of the investment advisory agreement, the Adviser receives
a management fee equal to .80% and .60% per annum of the daily average net
asset value, respectively, of the KPM Equity Portfolio and the KPM Fixed
Income Portfolio.
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KPM FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
3. CONTINUED
The Adviser has voluntarily agreed to reimburse the Portfolios to the
extent of the advisory fee paid, if in any year the annual operating
expenses of the Portfolio exceeds 1.50% for the KPM Equity Portfolio and
1.25% for the KPM Fixed Income Portfolio.
Under the terms of the administration agreement, certain services will be
provided including the transfer of shares, disbursement of dividends and
maintenance of shareholder accounting records of the Fund, for which the
Administrator will be paid a fee of .25% per annum of each of the
Portfolio's daily average net asset value.
Pursuant to the distribution agreement and Rule 12b-1 Plan, KPSP is paid a
fee of .25% per annum of each Portfolio's daily average net asset value.
Under the terms of the advisory, administrative and distribution agreements
outlined above, the Portfolios collectively incurred $322,732, $106,083 and
$105,957, respectively for such services. Of the amount paid to the
Adviser, $500 was reimbursed to the KPM Equity Portfolio and $21,824 was
reimbursed to the KPM Fixed Income Portfolio for expenses.
At June 30, 1997, the following accrued investment advisory, administrative
and distribution fees were payable to the Adviser and Administrator.
Payable to Payable to Payable to
Adviser Administrator Distributor Total
KPM Equity ------------ ------------- ---------- ---------
Portfolio $27,036 $8,449 $8,449 $43,934
KPM Fixed
Income Portfolio 4,331 1,805 1,805 7,941
The Portfolios also used KPSP to affect security trades on their behalf. As
is customary in the industry, the investment adviser evaluates the pricing
and ability to execute the transaction in selecting brokers to affect
trades. KPSP was paid commissions in the amount of $10,518 for its
brokerage services during the year ended June 30, 1997.
4. SECURITIES TRANSACTIONS
Purchases of securities and proceeds from sales were as follows for each
Portfolio:
Purchases of Proceeds
Securities from Sales
------------ -----------
KPM Equity Portfolio $12,456,425 $12,399,248
KPM Fixed Income Portfolio 2,255,255 2,110,895
<PAGE>
KPM FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
4. CONTINUED
At June 30, 1997, the aggregate gross unrealized appreciation and the
aggregate gross unrealized depreciation of securities in each Portfolio
were as follows:
Aggregate Gross
Unrealized
Appreciation Depreciation
------------ ------------
KPM Equity Portfolio $10,061,274 $566,818
KPM Fixed Income Portfolio 143,944 44,309
5. CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue a total of 1 billion shares of common stock
in series with a par value of $.00001. Fifty million of these shares have
been authorized by the Board of Directors to be issued in each series. The
Board of Directors is empowered to issue other series of the Fund's shares
without shareholders approval. Each share of stock will have a pro rata
interest in the assets of the Portfolio to which the stock of that series
relates and will have no interest in the net assets of any other Portfolio.
Transactions in the capital stock of each portfolio for the year ended June
30, 1997 were as follows:
KPM Fixed
KPM Equity Income
Portfolio Portfolio
Transactions in shares: ------------ -----------
Shares sold 454,858.990 241,113.327
Shares redeemed (366,589.191) (258,763.732)
Reinvested dividends 115,758.962 41,727.831
------------ ------------
Net increase 204,028.761 24,077.426
============ ============
At June 30, 1997, directors, officers and employees of the Fund, the
Adviser and Administrator and their immediate families held 80,836.847
shares of the KPM Equity Portfolio representing $1,448,596.
6. DIRECTORS' FEES AND EXPENSES
The Fund pays directors who are not deemed "interested persons" a fee of
$200 per Board meeting plus an annual retainer of $1,000. During the period
ended June 30, 1997, the Fund paid directors' fees and reimbursed expenses
of $5,733 and $1,550 for the KPM Equity and Fixed Income Portfolios,
respectively.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
KPM Funds, Inc.
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of KPM Funds, Inc. (comprised respectively of the
KPM Equity and KPM Fixed Income Portfolios) as of June 30, 1997, and the related
statements of operations, and changes in net assets and financial highlights for
the year then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audit. The statement of changes in net assets for the year ended June 30, 1996
and the financial highlights for the year ended June 30, 1996 and the period
from July 5, 1994 (commencement of operations) to June 30, 1995 were audited by
other auditors whose report dated July 12, 1996, expressed an unqualified
opinion on such statement and such financial highlights.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of June 30, 1997 by
correspondence with the custodian. An audit also includes assessing the
accounting principles used and significant estimates made by the management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of each of the
aforementioned portfolios constituting KPM Funds, Inc. as of June 30, 1997, and
the results of its operations, changes in its net assets, and its financial
highlights for the year then ended in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
July 25, 1997
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INVESTMENT ADVISER
KPM Investment Management, Inc.
DISTRIBUTOR
Kirkpatrick, Pettis, Smith, Polian Inc.
ADMINISTRATOR, TRANSFER AGENT AND
DIVIDEND PAYING AGENT
Lancaster Administration Services, Inc.
CUSTODIAN
Union Bank and Trust Co.
This report has been prepared for the general information of KPM Funds
shareholders. It is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus. The prospectus contains
more complete information about the Fund's objectives, policies, expenses and
risks. Please read the prospectus carefully before investing or sending money.
KPM FUNDS, INC.
10250 REGENCY CIRCLE, SUITE 500
OMAHA, NE 68114-3723
