KPM FUNDS, INC.
SEMI-ANNUAL REPORT
DECEMBER 31, 1996
KPM EQUITY PORTFOLIO
KPM FIXED INCOME PORTFOLIO
<PAGE>
KPM FUND'S
PERFORMANCE
1 Year Avg. Annual Return
Ended Since Inception
12/31/96 (07/05/94)
-------------- ------------
Equity Portfolio 29.1% 25.2%
Fixed Income Portfolio 3.2% 7.4%
The total returns represent the overall performance of an investment for a
specific period of time, assuming reinvestment of dividends and capital gains.
Total returns reflect past performance. Past performance does not predict future
performance. The investment return and principal value of an investment will
fluctuate so that shares, when redeemed, may be worth more or less than their
original cost.
CONTENTS
Chairman's Letter......................1
Portfolio Commentary
Equity Portfolio.....................2
Fixed Income Portfolio...............4
Schedule of Investments
Equity Portfolio.....................6
Fixed Income Portfolio..............10
Statement of Assets & Liabilities.....13
Statement of Operations...............14
Statement of Changes
in Net Assets......................15
Financial Highlights
Equity Portfolio....................16
Fixed Income Portfolio..............17
Notes to Financial Statements.........18
<PAGE>
Dear Shareholder:
The second half of 1996 continued to be very rewarding for our shareholders. The
KPM Equity Portfolio had a total return of 15.4% for the six month period and
29.1% for the twelve months ended December 31, 1996. The KPM Fixed Income
Portfolio had a total return of 5.1% for the six month period and 3.2% for the
year.
Tom Sudyka and Pat Miner, the portfolio managers for the KPM Funds give more
details on the results in their respective reports. However, I wanted to
emphasize how special their performance was during the past year. While
achieving strong absolute returns in equities last year was relatively easy,
achieving strong returns relative to the Standard & Poor's 500 benchmark, as Tom
Sudyka did, was extremely difficult. Why was it so difficult? Because most of
the extraordinary returns during 1996 were concentrated in a relatively small
number of large capitalization stocks which are heavily weighted in the Standard
& Poor's 500 Average. This can be demonstrated by the wide divergence of returns
between the weighted S&P 500 average (i.e. large capitalization companies are
given more weight in the return calculation than small capitalization companies)
which had a total return of 23.0% in 1996 and the unweighted S&P 500 average
(i.e. all companies are weighted the same) which had a total return of 19.0%.
The Value Line Composite Index, which is comprised of 1700 equally weighted
stocks increased 15%. As a result, most equity portfolio managers lagged behind
the S&P 500 last year. Your Portfolio Manager, Tom Sudyka, was one of the few
who beat the average last year.
KPM Funds also had good relative returns in the Fixed Income Portfolio. Despite
a period of declining and extremely volatile interest rates, Pat Miner was able
to provide good relative returns, net of all expenses, which bettered the return
of the Lehman Government/Corporate Bond Index and was just shy of that of the
Lehman Aggregate Bond Index.
Finally, a word about the current market environment. The economic fundamentals
continue to be favorable. Inflation remains under control, interest rates are
relatively low, and growth in real Gross Domestic Product (GDP) continues at a
"Goldilocks" pace (i.e., not too fast and not too slow). The biggest risk that
we see for stocks is their valuations. Based on traditional measures such as
price/earnings ratios, price/book value ratios and dividend yields, stocks are
selling at the high end of their historical ranges. The Standard & Poor's 500
average has increased 69% in the last two years. Obviously, this can not
continue indefinitely. The trouble is that such valuation measures are not very
good timing tools. In the past, there have been periods where valuations have
remained at very high or at low levels for many years. Our approach is to
"manage" the valuation risk by taking profits in stocks that have reached our
estimate of full value and reinvest in stocks that, in our opinion, are selling
at a significant discount to their full value. This way we can stay nearly fully
invested to take advantage of bull markets like that of the last two years, but
at the same time, we have reduced the valuation or price risk of the portfolio
in the event of a market decline.
The KPM Funds portfolios continue to grow. Total assets stand at nearly $42
million and shareholders have increased to 354. Thank you for investing in KPM
Funds.
Sincerely,
Randall D. Greer
Chairman
<PAGE>
KPM EQUITY PORTFOLIO
PORTFOLIO COMMENTARY
Thomas J. Sudyka, Jr., CFA
Portfolio Manager
The second half of 1996 was another strong one for the equity markets as the
Standard & Poor's 500 total return was 11.8%. The KPM Equity Portfolio's total
return for the same period was 15.4%. Over the past twelve months (calendar year
1996), this portfolio's return was 29.1%. Over the same period, the Standard &
Poor's 500 total return was 23.0%. Since year-end, the equity markets have
continued their march to ever higher prices. While the market continues upward,
the best performing stocks are becoming fewer and fewer. The lack of market
breadth leads us to remain relatively cautious, while recognizing that the
popular averages could continue their upward climb on the backs of a few
securities. We continue to focus our efforts on looking for attractively valued
companies, and believe that by building this portfolio one stock at a time, we
will be better positioned for the long-run. We anticipate remaining fully
invested, and are attempting to position the portfolio in the stocks of
companies which we feel will perform well no matter what the market environment.
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 December 31, 1996
WEIGHTED AVERAGE
Price/Earnings* 16.4x
Price/Book Value* 2.98x
Dividend Yield 1.6%
Return on Equity 18.0%
Market Capitalization $14.3 billion
*Based on 1997 estimates
Return on Equity equals earnings available to common stock divided by common
shareholder's equity.
Data Source: Baseline Financial Services
<PAGE>
[GRAPHIC OMITTED]
Comparison of Change in Value of $10,000
Investment in KPM Equity Portfolio and the S&P 500
12/31/96 Value
1 Year Ended Avg. Annual Return KPM Equity $17,506
12/31/96 Inception * S&P 500 $17,650
- ------------ -----------------
29.05% 25.18%
KPM Equity Portfolio
*Inception Date is 7/5/94
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
The second half of 1996 was virtually a mirror image of the first half. Although
the bond market (and interest rates) remained choppy throughout the year, rates
worked their way steadily lower during the past two quarters. As the market
becomes more comfortable with moderation of economic growth and inflation, bond
yields fall and prices rise. The KPM Fixed Income Portfolio generated a total
return of 5.1% during the past six months compared with a 4.9% return posted by
the Lehman Aggregate Index. Although we have maintained a shorter average
maturity than the market indices to cushion the temporary price declines, our
focus on mortgage-backed and asset-backed securities have provided above-average
yields relative to the government and corporate bond sectors. This higher income
and our conservative maturity posture have resulted in the incremental total
return results.
During the past six months, our asset-backed security holdings were increased
from 9% to 12% of the portfolio and the mortgage-backed holdings were increased
to the maximum allowable allocation at 40% of the total portfolio. 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 December 31, 1996
WEIGHTED AVERAGE
Average Quality of Securities Aa2
Average Life of Securities 7.31 years
Effective Duration 5.05 years
SEC Yield 5.78%
<PAGE>
[GRAPHIC OMITTED]
Comparison of Change in Value of $10,000
Investment in KPM Fixed Income Portfolio and the Lehman Aggregate Bond Index
12/31/96 Value
1 Year Ended Avg. Annual Return KPM Equity $11,943
12/31/96 Inception * Lehman Agg. Bond $12,398
- ------------ -----------------
3.23% 7.38%
KPM Fixed Income Portfolio
*Inception Date is 7/5/94
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 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.
KPM FUNDS, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
KPM EQUITY PORTFOLIO
QUOTED
MARKET
SHARES COMMON STOCK -- 94.39% VALUE
------ ---------------------- ------
AUTO/TRUCK/PARTS
74,900 TBC Corporation $ 561,750
----------
BROADCAST, RADIO & TV
47,000 Tele-Communications, Inc. Class A* 611,000
4,700 TCI Satellite Entertainment* 46,413
----------
657,413
----------
CHEMICALS
48,000 Hanna (M.A.) Company 1,050,000
---------
COMMERCIAL SERVICES
48,000 Franklin Quest Company* 1,008,000
---------
ELECTRONICS/ELECTRICAL EQUIPMENT
40,000 America Power Conversion Corporation* 1,090,000
10,800 Emerson Electric Company 1,044,900
---------
2,134,900
----------
FINANCIAL SERVICES
11,400 Federal Home Loan Mortgage Corporation 1,255,425
14,000 Finova Group, Inc. 899,500
11,400 MBIA, Inc. 1,154,250
11,500 Student Loan Marketing Association 1,070,938
---------
4,380,113
----------
FOOD PROCESSING
5,550 Philip Morris Companies, Inc. 625,069
----------
*Indicates nonincome-producing security.
<PAGE>
KPM FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
KPM EQUITY PORTFOLIO
QUOTED
MARKET
SHARES COMMON STOCK (CONTINUED) VALUE
------ ---------------------- -----
FOREST PRODUCTS/PAPER
12,700 Consolidated Papers $ 623,888
11,400 Kimberly Clark Corporation 1,085,850
37,500 Specialty Paperboard, Inc.* 750,000
----------
2,459,738
----------
HOUSEHOLD PRODUCTS/WARE
31,500 Toro Company 1,149,750
----------
INSURANCE
22,000 Allstate Corporation 1,273,250
29,450 Gallagher (Arthur J.) & Company 912,950
----------
2,186,200
----------
IRON/STEEL
20,000 Worthington Industries, Inc. 362,500
----------
LODGING
75,000 Supertel Hospitality, Inc.* 675,000
---------
MANUFACTURING
35,000 Pentair, Inc. 1,128,750
---------
METALS/MINING
15,000 Potash Corporation of Saskatchewan, Inc. 1,275,000
22,800 Valmont Industries 929,100
----------
2,204,100
----------
OIL COMPANY - EXPLORATION & PRODUCTION
31,900 Prima Energy Corporation 685,850
----------
*Indicates nonincome-producing security.
<PAGE>
KPM FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
KPM EQUITY PORTFOLIO
QUOTED
MARKET
SHARES COMMON STOCK (CONTINUED) VALUE
------ ---------------------- -----
OIL COMPANY INTEGRATED
7,450 Exxon Corporation $ 730,100
----------
PHARMACEUTICAL
5,800 Bristol-Myers Squibb Company 630,750
----------
PUBLISHING/PRINTING
31,000 Banta Corporation 697,500
14,200 Gannett Company, Inc. 1,063,225
26,700 Merrill Corporation 614,100
----------
2,374,825
----------
RETAIL/APPAREL
32,000 Reebok International Ltd. 1,344,000
36,000 Toys R Us, Inc.* 1,080,000
----------
2,424,000
----------
TRANSPORTATION
14,000 Union Pacific Corporation 841,750
11,856 Union Pac Resource 346,788
----------
1,188,538
----------
UTILITIES
39,000 CalEnergy, Inc.* 1,311,375
8,000 Dominion Resources, Inc. 308,000
10,000 Midamerican Energy 158,750
12,650 Southwestern Energy Company 191,331
----------
1,969,456
----------
UTILITIES - TELECOMMUNICATIONS
29,200 American Telephone & Telegraph Corporation 1,270,200
----------
Total Investment in Securities (cost $23,521,297) 94.39% 31,857,002
Short-Term Investments
(Repurchase Agreements - 4.75%) 5.46% 1,831,962
Other Assets, Less Liabilities 0.13% 45,391
-------- -----------
NET ASSETS 100.00% $33,734,353
======== ==========
* Indicates nonincome-producing security.
See accompanying notes to financial statements.
<PAGE>
KPM FUNDS, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1996
KPM FIXED INCOME PORTFOLIO
QUOTED
PRINCIPAL PERCENT OF MARKET
AMOUNT NET ASSETS VALUE
- ---------------- ------------- --------
U.S. GOVERNMENT SECURITIES 8.42%
-----------------------------------------
100,000 U. S. Treasury Note, 6.875%, due 7/31/99 $ 102,031
150,000 U. S. Treasury Note, 6.125%, due 12/31/01 150,269
50,000 U. S. Treasury Note, 7.25%, due 5/15/04 52,609
150,000 U. S. Treasury Note, 6.50%, due 10/15/06 152,249
200,000 U. S. Treasury Bond, 7.125%, due 2/15/23 208,813
----------
665,971
----------
COLLATERALIZED MORTGAGE OBLIGATIONS 40.14%
-------------------------------------------
200,000 Federal Home Loan Mortgage Corporation 204,016
Series 1232 F, 7.50%, due 9/15/06
150,000 Federal Home Loan Mortgage Corporation 153,445
Series 1035 E, 8.00%, due 10/15/20
372,000 Federal Home Loan Mortgage Corporation 374,820
Series 1455 H, 7.00%, due 6/15/21
250,000 Federal Home Loan Mortgage Corporation 257,130
Series 1761 G, 8.00%, due 6/15/21
65,689 Federal Home Loan Mortgage Corporation 62,271
Series 1545 C, 6.00%, due 6/15/23
165,000 Federal National Mortgage Association 164,227
Series 1992-164 PH, 6.50%, due 1/25/06
97,000 Federal National Mortgage Association 95,136
Series 1993-76 PG, 6.00%, due 7/25/06
50,000 Federal National Mortgage Association 47,754
Series 1993-221 C, 5.50%, due 9/25/07
155,361 Federal National Mortgage Association 160,653
Series 1990-96 E, 9.67%, due 1/25/17
195,000 Federal National Mortgage Association 193,766
Series 1993-82 D, 6.35%, due 3/25/19
100,000 Federal National Mortgage Association 98,906
Series 1993-103 PG, 6.25%, due 6/25/19
90,000 Federal National Mortgage Association 90,759
Series 1991-173 HP, 6.95%, due 1/25/20
195,000 Federal National Mortgage Association 201,474
Series 1999-65 H, 8.50%, due 1/25/20
<PAGE>
KPM FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
KPM FIXED INCOME PORTFOLIO
QUOTED
PRINCIPAL PERCENT OF MARKET
AMOUNT NET ASSETS VALUE
------------- ------------- -------
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
--------------------------------------------------
200,000 Federal National Mortgage Association $ 197,375
Series 1989-66 J, 7.00%, due 9/25/19
145,004 Federal National Mortgage Association 150,556
Series G-29 O, 8.50%, due 9/25/21
345,000 Federal National Mortgage Association 327,399
Series 1994-23 K, 6.00%, due 12/25/09
300,000 GE Capital Mortgage Services 294,539
Series 1994-12, 6.00%, due 4/25/09
100,000 Government National Mortgage Association 100,523
Series 1994-4 K, 7.9875%, due 7/16/12
100,000 Green Tree Financial Corporation 99,188
ABS, 7.30%, due 7/15/25
300,000 Green Tree Financial Corporation 309,984
Series 1995-3 M1, 7.95%, due 8/15/25
185,000 Green Tree Financial Corporation 187,920
Series 1994-6 A3, 7.70%, due 1/15/20
250,000 Oakwood Management Investors, Inc. 244,375
Series 1995-B B1, 7.55%, due 1/15/21
87,951 Security Pacific Acceptance Corporation 88,948
Series 1991-3 A1, 7.25%, due 12/15/11 ---------
4,105,164
---------
CORPORATE BONDS 37.74%
------------------------------------------
270,000 Apollo Computer, Inc., 7.25%, due 2/1/11 269,625
50,000 Chevron Capital USA, 7.45%, due 8/15/04 51,134
250,000 Commonwealth Edison Co. MTN, 9.05%, due 10/15/99 265,197
300,000 Dayton Hudson Corporation 9.625%, due 2/1/08 353,875
245,000 Enron Corporation, 6.75%, due 7/1/05 240,991
250,000 Federal Express Company, 6.68%, due 1/1/08 243,713
250,000 Ford Motor Company, 6.11%, due 1/1/01 243,961
250,000 James River Corporation, 7.92%, due 12/27/04 260,000
100,000 May Department Stores Company, 9.45%, due 2/2/99 106,164
250,000 Public Service Electric & Gas Co., 6.50%, due 5/1/04 242,188
100,000 Union Pacific Corporation, 6.25%, due 3/15/99 99,788
50,000 U. S. Leasing International, Inc., 8.75%, due 12/1/01 54,097
200,000 United Telecom, 9.50%, due 4/1/03 224,292
<PAGE>
KPM FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
KPM FIXED INCOME PORTFOLIO
PRINCIPAL PERCENT OF MARKET
AMOUNT CORPORATE BONDS Continued NET ASSETS VALUE
- ---------------- -------------------------- ---------- ----------
200,000 Wal-Mart Stores, Inc., 7.49%, due6/21/07 $ 206,882
10,000 Washington Natural Gas, 6.07%, due 1/16/04 9,421
120,000 Westinghouse Electric Corp., 6.875%, due 9/1/03 113,702
----------
2,985,030
----------
Total Investment in Securities (cost $7,647,585) 98.06% 7,756,165
Short-Term Investments
(Repurchase Agreements - 4.75%) 4.43% 350,785
Other Assets, Less Liabilities (2.49)% (197,374)
---------- ------------
NET ASSETS 100.00% $7,909,576
======== =========
<PAGE>
<TABLE>
<CAPTION>
KPM FUNDS, INC.
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
(UNAUDITED)
KPM
KPM FIXED
EQUITY INCOME
ASSETS: PORTFOLIO PORTFOLIO
------------ ------------
<S> <C> <C>
Investments in securities, at market value
(cost $25,336,836 and $7,998,370, respectively) $33,688,962 $8,106,950
Accrued interest and dividends receivable 74,137 114,782
Organizational costs, net of accumulated amortization 14,873 2,657
------------ ------------
Total assets 33,777,972 8,224,389
------------ ------------
LIABILITIES:
Accrued expenses, including investment management and
service fees and distribution expenses payable to
adviser, administrator and distributor 43,619 10,231
Payable for investment securities purchased - 304,582
------------ ------------
Total liabilities 43,619 314,813
------------ ------------
Net assets applicable to outstanding capital stock $33,734,353 $7,909,576
============ ============
NET ASSETS REPRESENTED BY:
Capital stock (1 billion authorized, $.00001 par value) $21 $8
Additional paid-in capital 24,777,001 7,815,687
Accumulated undistributed net investment income 930 7,130
Accumulated net realized gain/loss on investments 620,698 (21,829)
Unrealized appreciation (depreciation) of securities 8,335,703 108,580
------------ ------------
Total net assets applicable to shares outstanding $33,734,353 $7,909,576
============ ============
SHARES OUTSTANDING AND NET ASSET VALUE PER SHARE
Shares of capital stock outstanding: 2,131,493
and 757,836, respectively (note 5) $15.83 $10.44
====== ======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KPM FUNDS, INC.
STATEMENTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1996
(UNAUDITED)
KPM
KPM FIXED
EQUITY INCOME
INVESTMENT INCOME: PORTFOLIO PORTFOLIO
---------- ---------
<S> <C> <C>
Dividends $237,966 $ -
Interest 49,806 298,185
---------- ---------
Total investment income 287,772 298,185
---------- ---------
EXPENSES (NOTE 3):
Investment advisory fee 125,805 25,022
Administration fee 39,314 10,426
Distribution fees 39,226 10,401
Amortization of organization costs 2,208 535
Other operating expenses 31,447 28,203
---------- ---------
Less expenses reimbursed by investment adviser (note 3) - (21,824)
---------- ---------
Total expenses 238,000 52,763
---------- ---------
Net investment income 49,772 245,422
---------- ---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 4):
Net realized gain (loss) 1,154,523 (22,215)
Net unrealized appreciation (depreciation)
Beginning of period 4,999,774 (79,599)
End of period 8,335,703 108,580
---------- ---------
Net unrealized appreciation 3,335,929 188,179
---------- ---------
Net realized and unrealized gain on investments 4,490,452 165,964
---------- ---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,540,224 $411,386
========== =========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KPM FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED DECEMBER 31, 1996, AND THE
YEAR ENDED JUNE 30, 1996
KPM KPM
EQUITY FIXED INCOME
PORTFOLIO PORTFOLIO
--------------------------- --------------------------
SIX MONTHS ENDED YEAR ENDED SIX MONTHS ENDED YEAR ENDED
DEC, 31, 1996 JUNE 30,1996 DEC, 31,1996 JUNE 30, 1996
------------- ------------- ------------- -----------
(UNAUDITED) (UNAUDITED)
OPERATIONS:
<S> <C> <C> <C> <C>
Net investment income $49,772 $91,857 $245,422 $444,149
Net realized gain (loss)
on investments 1,154,523 1,595,222 (22,215) 17,153
Unrealized appreciation(depreciation) 3,335,929 3,221,019 188,179 (224,065)
------------- ------------- --------------------------
Net increase in net assets
resulting from operations 4,540,224 4,908,098 411,386 237,237
------------- ------------- ------------- -----------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income 56,298 91,465 245,036 436,949
Net realized gains 1,828,489 436,952 - 13,425
------------- ------------- ------------- -----------
Total distributions 1,884,787 528,417 245,036 450,374
------------- ------------- ------------- -----------
CAPITAL SHARE TRANSACTIONS: (NOTE 5)
Proceeds from sales 3,263,373 12,208,239 1,085,236 4,157,544
Payment for redemptions (4,501,726) (1,896,909) (2,022,788) (1,764,323)
Reinvestment of net investment
income and net realized gain
distributions at net asset value 1,752,096 513,420 215,944 416,824
------------- ------------- ------------- -----------
Total increase (decrease)
from capital share transactions 513,743 10,824,750 (721,608) 2,810,045
------------- ------------- ------------- -----------
TOTAL INCREASE IN NET ASSETS 3,169,180 15,204,431 (555,258) 2,596,908
NET ASSETS:
Beginning of period 30,565,173 15,360,742 8,464,834 5,867,926
------------- ------------- ------------- -----------
End of period $33,734,353 $30,565,173 $7,909,576 $8,464,834
============= ============= ============= ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KPM FUNDS, INC.
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND THE
YEAR ENDED JUNE 30, 1996, AND THE PERIOD FROM JULY 5, 1994
(COMMENCEMENT OF OPERATIONS) TO JUNE 30, 1995
KPM EQUITY PORTFOLIO
------------------------------------
SIX MONTHS ENDED YEAR ENDED PERIOD ENDED
DEC. 31, 1996 1996 1995
------------ ------------ ----------
(UNAUDITED)
NET ASSET VALUE:
<S> <C> <C> <C>
Beginning of period $14.53 $12.00 $10.00
------ ------ ------
Income from investment operations:
Net investment income 0.02 0.05 0.11
Net realized and unrealized gain
on investments 2.16 2.83 2.06
---- ---- ----
Total income from investment operations 2.18 2.88 2.17
---- ---- ----
Less distributions:
Dividends from net investment income (0.03) (0.05) (0.10)
Dividends from capital gains (0.85) (0.30) (0.07)
------ ------ ------
(0.88) (0.35) (0.17)
------ ------ ------
End of period $15.83 $14.53 $12.00
====== ====== ======
TOTAL RETURN 30.75% * 24.19% 22.01% *
====== ====== ======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $33,734,353 $30,565,173 $15,360,742
Ratio of expenses to average net assets 1.50% * 1.50% 1.50% *
Ratio of net income to average net assets 0.32% * 0.40% 1.04% *
Portfolio turnover rate 9.46% 34.05% 27.90%
#KPM Investment Management, Inc. reimbursed a portion of the fund's
expenses (note 3)
*Annualized for periods of less than twelve months in duration
Per share data has been calculated using weighted average shares outstanding
during the period indicated
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
KPM FUNDS, INC.
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED DECEMBER 31, 1996 AND THE
YEAR ENDED JUNE 30, 1996, AND THE PERIOD FROM JULY 5, 1994
(COMMENCEMENT OF OPERATIONS) TO JUNE 30, 1995
KPM FIXED INCOME PORTFOLIO
-------------------------------------------
SIX MONTHS ENDED YEAR ENDED PERIOD ENDED
DEC. 31, 1996 1996 1995
-------------- ----------- --------------
(UNAUDITED)
NET ASSET VALUE:
<S> <C> <C> <C>
Beginning of period $10.23 $10.47 $10.00
------ ------ ------
Income from investment operations:
Net investment income 0.31 0.63 0.57
Net realized and unrealized
gain on investments 0.21 (0.23) 0.47
---- ------ ----
Total income from investment operations 0.52 0.40 1.04
---- ---- ----
Less distributions:
Dividends from net investment income (0.31) (0.62) (0.57)
Dividends from capital gains (0.00) (0.02) (0.00)
------ ------ ------
(0.31) (0.64) (0.57)
------ ------ ------
End of period $10.44 $10.23 $10.47
====== ====== ======
TOTAL RETURN 10.16% * 3.63% 9.63% *
====== ===== =====
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $7,909,576 $7,102,726 $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 # 1.79% * 1.29% 1.56% *
Ratio of net income to average net assets 5.90% * 5.95% 5.59% *
Portfolio turnover rate 12.52% 19.52% 40.34%
#KPM Investment Management, Inc.reimbursed a portion of the fund's
expenses (note 3)
*Annualized for periods of less than twelve months in duration
Per share data has been calculated using weighted average shares outstanding
during the period indicated
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
Unaudited
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
December 31, 1996 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.
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 December 31, 1996, the cost of investment securities is identical for
financial reporting and income tax purposes.
SECURITY TRANSACTIONS
Security transactions are accounted for on the date securities are
purchased or sold (trade date). Dividend income 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.
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.
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 $150,827, $49,740 and
$49,627, respectively for such services. Of the amount paid to the Adviser,
$21,824 was reimbursed to the KPM Fixed Income Portfolio for expenses.
At December 31, 1996, the following accrued investment advisory,
administrative and distribution fees were payable to the Adviser and
Administrator.
Payable to Payable to Payable to
ADVISER ADMINISTRATOR DISTRIBUTOR TOTAL
KPM Equity
Portfolio $22,469 $7,022 $7,037 $36,528
KPM Fixed
Income Portfolio 4,040 1,683 1,687 7,410
===== ===== ===== =======
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 $3,415 for their
brokerage services during the six months ended December 31, 1996.
5. SECURITIES TRANSACTIONS
Purchases of securities and proceeds from sales, including short-term
securities, were as follows for each Portfolio:
Purchases of Proceeds
SECURITIES FROM SALES
KPM Equity Portfolio $2,758,895 $3,769,382
KPM Fixed Income Portfolio $1,007,554 $1,608,568
At December 31, 1996, the aggregate gross unrealized appreciation and the
aggregate gross unrealized depreciation of securities in each Portfolio
were as follows:
Aggregate Gross
UNREALIZED
APPRECIATION DEPRECIATION
KPM Equity Portfolio $8,955,789 $620,086
KPM Fixed Income Portfolio $ 144,916 $36,336
6. CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue a total of 1 billion shares of common stock
in series with a par value of $.00001. Fifty million of these shares have
been authorized by the Board of Directors to be issued in each series. The
Board of Directors is empowered to issue other series of the Fund's shares
without shareholders approval. Each share of stock will have a pro rata
interest in the assets of the Portfolio to which the stock of that series
relates and will have no interest in the net assets of any other Portfolio.
Transactions in the capital stock of each portfolio for the six months
ended December 31, 1996 were as follows:
KPM Fixed
KPM Equity Income
PORTFOLIO PORTFOLIO
Transactions in shares:
Shares sold 218,918.274 104,523.938
Shares redeemed (303,291.187) (195,025.540)
Reinvested dividends 112,210.008 20,854.102
-------------- ------------
Net increase 27,835.095 69,647.500
============= ==========
At December 31, 1996, directors, officers and employees of the Fund, the
Adviser and Administrator and their immediate families held 93,425.337
shares of the KPM Equity Portfolio representing $1,478,923.
7. 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 December 31, 1996, the Fund paid directors' fees and reimbursed
expenses of $1,903 and $649 for the KPM Equity and Fixed Income Portfolios,
respectively.
<PAGE>
Investment Adviser
KPM Investment Management, Inc.
Distributor
Kirkpatrick Pettis
Administrator, Transfer Agent and Dividend Paying Agent
Lancaster Administrative 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.
