KPM FUNDS, INC.
ANNUAL REPORT
KPM EQUITY PORTFOLIO
KPM FIXED INCOME PORTFOLIO
June 30, 1998
Investment Adviser
KPM Investment Management, Inc.
Distributor
Kirkpatrick, Pettis, Smith, Polian Inc.
Administrator, Transfer Agent and
Dividend Paying Agent
Lancaster Administrative Service, 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
<PAGE>
KPM FUNDS, INC.
PERFORMANCE STATISTICS
One Year Avg. Annual Return
Ended Since Inception
06/30/98 (07/05/94)
-------- ---------------------
Equity Portfolio 8.9% 21.3%
Fixed Income Portfolio 9.4% 7.7%
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:
Your funds had mixed results for the twelve months ended June 30, 1998. The KPM
Fixed Income Portfolio had a total return of 9.4% for the year which was
competitive with the fixed income index benchmarks, adjusted for fees and
expenses. However, the KPM Equity Portfolio had a total return of 8.9% for the
year which lagged modestly behind the Value Line Composite Index, and more
significantly behind the Standard & Poor's 500 Index.
There were two primary reasons for the modest equity returns. First, KPM's value
style was out-of-favor during the past year. Most of the stock market
performance during this period was contributed by approximately fifty of the
largest capitalization stocks while the remainder of market had much more modest
returns. This phenomenon can be seen in the huge divergence between the 30.1%
return of the Standard & Poor's 500 averages which is weighted toward the
largest capitalization stocks and the 13.5% price appreciation of the Value Line
composite which equally weights approximately 1700 stocks. These fifty largest
stocks also had very high valuations (e.g. high price/earnings ratios) which
made them too expensive for KPM's value criteria. As a result, your fund was
underweighted in these recent market favorites. Second, your manager, in his
search for value in an expensive market, invested in a higher than normal number
of "turnarounds". These are companies that have, in KPM's opinion, good
long-term business economics but are temporarily under performing and management
needs to turn them around. KPM has been very successful with turnarounds in the
past, but these stocks usually don't follow market trends and in some cases are
taking longer to turnaround than KPM expected. While KPM's value approach may
lag the market for temporary periods, it has provided very competitive returns
over the long-term. You can also rest assured that your manager is investing the
portfolio in a conservative and prudent fashion by trying to minimize the
downside risk in the portfolio.
This last statement is very important in the current equity market, in my
opinion. While KPM does not try to forecast stock market trends, its managers do
believe that there is a higher than normal risk in stocks today. This is because
of the historically high stock valuations relative to earnings and growth rates,
and the deterioration of the world economy. While the economic downturn started
in Asia, it has since spread to other countries. Even the U.S. and Europe are
starting to show significant slowing in the growth in their respective economies
and in corporate profits.
This is a good time to review your asset allocation strategy. Most investors
have become more heavily weighted in equities because of the huge returns during
the past several years. As a result, you may want to reallocate some of your
equity investments toward fixed income investments to get your allocation back
in line with your long-term target. I would also caution you against chasing
those investments that have performed the best in the last year or two (like S&P
Index funds). Investment styles fall into and out of fashion with some
regularity and yesterday's performance is usually not a very good indicator of
future performance.
Sincerely,
Randall D. Greer, CFA
Chairman
<PAGE>
KPM EQUITY PORTFOLIO
PORTFOLIO COMMENTARY
Bruce H. Van Kooten, CFA
Portfolio Manager
For the year ended June 30, 1998, the returns of the major market indices
continued to mask the bear market that has been apparent in second-tier stocks.
The Standard & Poor's 500 returned an incredible 30.1% for the last 12 months,
versus a paltry by comparison 8.9% for your Fund. Your manager has experienced
relative underperformance before, but never of this magnitude. While it remains
true that a value style will typically underperform in the latter stages of a
roaring momentum-driven market, many shareholders undoubtedly have questions as
to what caused this underperformance and what we are going to do about it.
We believe the causes of our recent underperformance basically related to our
value discipline and stem from three factors: 1) a lack of names that have
outperformed, 2) a large number of companies that are actually down, and 3) a
larger than normal holding of cash. A very good general explanation has already
been covered in the Chairman's letter on the previous page, so in this report I
will give you more specific examples.
First of all, while the S&P was up over 30% over 12 months, the portfolio had
only one stock that significantly outperformed (Berkshire Hathaway) and five
more that outperformed modestly (Pentair, Trinity, Freddie Mac, MBIA, and Sallie
Mae). Second, there are a number of stocks in the portfolio actually down over
the last year including Union Pacific, M.A. Hanna, Toys'R' Us, Franklin Covey
and Fibermark. Third, our larger than normal holding of cash is simply the end
result of our discipline. If we cannot find enough cheap stocks to replace the
expensive stocks we have sold, then cash can build temporarily.
These days, there seem to be many problems with valuation in the large cap pond
where we normally cast our fishing line. In order to find value, we in effect
have had to fish in the midcap pond. Unfortunately, we have pulled up a few old
boots in our endeavors to hook a good catch. Our current task is to determine if
the boot is just that, or if there is a nice big fish hiding inside.
We fully believe in our philosophy and its long-term benefits of good returns
without being exposed to large amounts of risk. We have been out of step with
the market at numerous times in the past and will continue to be out of step at
times in the future. This is one of those occasions.
PORTFOLIO PROFILE AS OF JUNE 30, 1998
KPM EQUITY
WEIGHTED AVERAGE S&P 500
----------------- -----------------
Price/Earnings* 13.7x 23.8x
Price/Book Value 3.7x 4.3x
Dividend Yield 1.5% 1.3%
Return on Equity (5-year 18.4% 16.8%
average)
Market Capitalization $22.0 billion $66.2 billion
*based on 1998 estimates
2
<PAGE>
1 Year Ended Avg. Annual
06/30/98 Return
Since Inception*
----------------- -----------------
KPM Equity Portfolio 8.88% 21.31%
* Inception date is 7/5/94
RETURN ON A $10,000 INVESTMENT
S&P 500 Composite $27,682
KPM Equity Portfolio $21,611
[GRAPH OMITTED]
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 the 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 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.
3
<PAGE>
KPM FIXED INCOME PORTFOLIO
PORTFOLIO COMMENTARY
Patrick M. Miner, CFA
Portfolio Manager
The bond market was erratic and seemingly without direction for the first few
months of 1998, but during May and June a strong rally pushed yields lower -
with decreases of 15-25 basis points (0.15% - 0.25%) in intermediate and
long-term rates. In addition to a helpful inflation outlook, the bond market was
aided by a "flight to quality" as investors flocked to the U.S. government bond
market in reaction to the continued economic turbulence in Asia. The KPM Fixed
Income Portfolio posted a 3.6% return for the first half of the year compared
with a 3.9% gain for the Lehman Aggregate Index. Over the past 12 months the
Portfolio has posted a very solid 9.4% return.
The macro-economic environment remains "friendly" for the bond market. Economic
growth - very strong for much of late 1997 and early 1998 - moderated
sufficiently during the second quarter to allow the Federal Reserve Board to
remain in "neutral". Price inflation remains very benign and the near-term
horizon does not suggest any significant concerns. The Federal Reserve appears
to be closely watching labor costs as a harbinger of future inflation pressure.
But even in the face of low unemployment, we have not seen much of an increase
in employment costs as the weak Asian markets have depressed import prices and
export demand, leaving U.S. producers with little pricing power. Profits may get
squeezed in lieu of labor cost escalation. This scenario provides a continuing
environment for lower interest rates and a continuation of the bond market
rally.
We continue to favor high-quality mortgage-backed and asset-backed securities,
taking advantage of their higher yields and maintaining sector weightings close
to target levels (40% and 10% respectively). We have increased the Portfolio's
Treasury allocation from 10% to 15% offset by a reduction in the corporate
bonds. After 5+ years of spread tightening, the corporate market finally has
seen some widening of spreads in sympathy with the Asian problems. In
anticipation and in reaction to this, we have temporarily reduced the corporate
allocation. Looking forward, we see an opportunity to reallocate to corporate
issues at spreads 25-75 basis points (0.25 - 0.75%) wider than they were six
months ago.
PORTFOLIO PROFILE AS OF JUNE 30, 1998
WEIGHTED AVERAGE
-----------------
Average Quality of Securities Aa2
Average Life of Securities 7.84 years
Effective Duration 4.73 years
SEC Yield 5.30%
4
<PAGE>
1 Year Ended Avg. Annual
06/30/97 Return
Since Inception*
----------------- -----------------
KPM Fixed Income Portfolio 9.39% 7.65%
* Inception date is 7/5/94
RETURN ON A $10,000 INVESTMENT
Lehman Aggregate Bond Index $14,130
KPM Fixed Income Portfolio $13,417
[GRAPH OMITTED]
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 the 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.
5
<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, 1998, and the related
statement of operations for the year then ended, and statements of changes in
net assets and financial highlights for each of the two years in the period 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
audits. 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 statements and such financial highlights.
We conducted our audits 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, 1998 by correspondence with the custodian and brokers. 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 audits provide 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, 1998, and
the results of its operations for the year then ended and the changes in its net
assets and its financial highlights for each of the two years in the period then
ended in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
July 24, 1998
6
<PAGE>
KPM FUNDS, INC.
SCHEDULE OF INVESTMENTS
JUNE 30, 1998
KPM EQUITY PORTFOLIO
PERCENT
OF NET MARKET
SHARES COMMON STOCK 84.72% ASSETS VALUE
------ ------------------- ------ -----
APPAREL/SHOES 5.21%
-------------
60,000 Nike, Inc. $2,921,250
BASIC MATERIALS 5.82%
---------------
75,000 Hanna (M.A.) Co. 1,373,438
25,000 Potash Corp. 1,889,063
---------
3,262,501
BUSINESS/CONSUMER SERVICES 5.02%
--------------------------
39,700 Banta Corp. 1,208,369
47,000 Toro Co. 1,609,750
---------
2,818,119
CAPITAL GOODS 7.64%
-------------
40,000 Pentair, Inc. 1,700,000
64,500 Fibermark, Inc.* 1,032,000
37,500 Trinity Industries 1,556,250
---------
4,288,250
CONSUMER PRODUCTS 9.83%
-----------------
75,500 Franklin Covey Co.* 1,453,375
36,500 Kimberly Clark Corp. 1,674,438
85,000 Tupperware Corp. 2,390,625
---------
5,518,438
ENERGY 4.97%
------
25,000 Atlantic Richfield Co. 1,953,125
47,850 Prima Energy Corp.* 837,375
-------
2,790,500
7
<PAGE>
KPM FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1998
PERCENT
OF NET MARKET
SHARES ASSETS VALUE
----------- --------- ------
FINANCIAL SERVICES 17.07%
------------------
35,500 Gallagher (Arthur J.) & Co. $1,588,625
11,100 Chicago Title Corp.* 512,679
53,500 Freddie Mac 2,517,844
65,500 SLM Holding Corp. 3,209,500
7,500 Alleghany Corp.* 1,749,375
---------
9,578,023
FOOD/BEVERAGE/TOBACCO 6.23%
---------------------
25,000 McDonald's Corp. 1,725,000
45,000 Phillip Morris Co., Inc. 1,771,875
---------
3,496,875
INSURANCE 17.28%
---------
24,000 Allstate Corp. 2,197,500
50 Bershire Hathaway, Inc.* 3,915,250
44,200 Commerce Group, Inc. 1,712,750
25,000 MBIA, Inc. 1,871,875
---------
9,697,375
RETAILING 2.23%
---------
53,000 Toys "R" Us, Inc.* 1,248,813
TECHNOLOGY 1.06%
----------
90,200 Sitel Corp.* 597,575
TRANSPORTATION 2.36%
--------------
30,000 Union Pacific Corp. 1,323,750
---------
TOTAL COMMON STOCK $47,541,469
8
<PAGE>
KPM FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
JUNE 30, 1998
PRINCIPAL MARKET
AMOUNT VALUE
------ -----
REPURCHASE AGREEMENTS - 13.37%
------------------------------
$2,500,000 ABN Ambro Repurchase Agreement 5.60% Due 7/1/98 $2,500,000
2,500,000 GX Clarke Repurchase Agreement 5.60% Due 7/1/98 2,500,000
2,500,000 Spear, Leeds, Kellog Repurchase
Agreement 5.60% Due 7/1/98 2,500,000
---------
7,500,000
Total Investment in Securities (Cost $44,701,201) 98.09% $55,041,469
Cash Equivalents 3.43% 31,925,256
Other Assets, Less Liabilities (1.52)% (851,721)
------ ---------
NET ASSETS 100.00% $56,115,004
====== ==========
9
<PAGE>
KPM FUNDS, INC.
SCHEDULE OF INVESTMENTS
JUNE 30, 1998
KPM FIXED INCOME PORTFOLIO
PRINCIPAL MARKET
AMOUNT VALUE
------ -----
COLLATERALIZED MORTGAGE OBLIGATIONS - 45.34%
--------------------------------------------
$127,586 Federal Home Loan Mtg. Corp. 8% Due 10/15/20 $130,607
46,141 Federal Home Loan Mtg. Corp. 6% Due 6/15/23 45,640
200,000 Federal Home Loan Mtg. Corp. 7.5% Due 9/15/06 205,890
372,000 Federal Home Loan Mtg. Corp. 7% Due 6/15/21 384,671
250,000 Federal Home Loan Mtg. Corp. 8% Due 6/15/21 256,992
53,645 Federal Natl. Mtg. Assn. 6.95% Due 1/25/20 53,885
350,000 Federal Natl. Mtg. Assn. 6% Due 8/25/23 342,426
195,000 Federal Natl. Mtg. Assn. 6.35% Due 3/25/19 196,341
195,000 Federal Natl. Mtg. Assn. 8.5% Due 1/25/20 197,726
93,260 Federal Natl. Mtg. Assn. 8.5% Due 9/25/21 96,794
100,000 Federal Natl. Mtg. Assn. 6.71% Due 12/25/11 101,063
100,000 Federal Natl. Mtg. Assn. 6.25% Due 6/25/19 100,445
50,000 Federal Natl. Mtg. Assn. 5.5% Due 9/25/07 49,180
335,404 Federal Natl. Mtg. Assn. 6% Due 12/25/09 330,662
300,000 Federal Natl. Mtg. Assn. 7% Due 10/25/09 308,484
97,000 Federal Natl. Mtg. Assn. 6% Due 7/25/06 96,886
165,000 Federal Natl. Mtg. Assn. 6.5% Due 1/25/06 165,710
79,661 Federal Natl. Mtg. Assn. 9.67% Due 1/25/17 81,317
300,000 GE Capital Mtg. Services Corp. 6% Due 3/25/09 298,852
34,610 Green Tree Financial Corp. ABS 7.7% Due 1/15/20 34,703
100,000 Green Tree Financial Corp. ABS 7.3% Due 7/15/25 100,469
300,000 Green Tree Financial Corp. CMO 7.95% Due 8/15/25 329,953
180,319 Merrill Lynch Mtg. Investors 7.15% Due 4/25/28 185,714
195,000 Newcourt 6.193% Due 5/20/05 196,478
250,000 Oakwood Mtg. Investors, Inc. 7.5% Due 1/15/21 257,891
140,000 Residential Accredit Loans, Inc. 7.46% Due 6/25/26 140,656
500,000 Residential Accredit Loans, Inc. 7.5% Due 6/25/12 515,975
10
<PAGE>
KPM FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
KPM FIXED INCOME PORTFOLIO
PRINCIPAL MARKET
AMOUNT VALUE
- --------- -------
COLLATERALIZED MORTGAGE OBLIGATIONS (CONTINUED)
----------------------------------------------
$100,000 Saxon Mtg. Securities Corp. 7.5% Due 7/25/24 $101,016
19,182 Zions ABS 5.15% Due 9/25/03 18,880
------
Total Collateralized Mortgage Obligations 5,325,306
GOVERNMENT AGENCY BONDS - 1.73%
200,000 Federal Natl. Mtg. Assn. 7% Due 9/25/19 203,734
ASSET BACKED SECURITIES - 2.33%
120,000 Westinghouse 6.875% Due 9/1/03 120,173
147,000 Vander Mtg. 7.19% Due 2/7/14 153,799
-------
Total Asset Backed Securities 273,972
U.S. GOVERNMENT SECURITIES - 14.29%
200,000 U.S. Treasury Bond 7.125% Due 2/15/23 236,313
250,000 U.S. Treasury Bond 6.625% Due 2/15/27 282,070
400,000 U.S. Treasury Note 5.5% Due 3/31/03 399,688
200,000 U.S. Treasury Note 7.5% Due 11/15/16 239,906
500,000 U.S. Treasury Bond 6% Due 2/15/26 519,688
-------
Total U.S. Government Securities 1,677,665
CORPORATE BONDS - 29.68%
250,000 Commonwealth Edison 9.05% Due 10/15/99 258,956
50,000 Chevron 7.45% Due 8/15/04 52,332
300,000 Dayton Hudson 9.625% Due 2/1/08 370,878
200,000 Eastman Chemical Corp. 7.25% Due 1/15/24 211,331
245,000 Enron Corp. 6.75% Due 7/01/05 249,985
330,159 Federal Express 6.68% Due 1/1/08 336,733
200,000 United Telecom 9.5% Due 4/01/03 228,500
250,000 James River Corp. 7.92% Due 12/27/04 269,688
11
<PAGE>
KPM FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
KPM FIXED INCOME PORTFOLIO
PRINCIPAL MARKET
AMOUNT VALUE
- -------- ---------
CORPORATE BONDS (CONTINUED)
---------------------------
$150,000 Kansas City Power & Light 6.5% Due 11/01/01 $152,438
100,000 May Department Stores 9.45% Due 2/2/99 102,019
300,000 May Department Stores 9.875% Due 12/1/02 343,124
125,000 Occidential Petroleum Co. 6.02% 11/24/99 125,156
400,000 Supervalue 6.31% Due 11/09/00 401,000
100,000 Union Pacific Corp. 6.25% Due 3/15/99 100,055
50,000 United States Leasing International 8.75% Due 12/01/01 54,205
10,000 Washington Natural Gas 6.07% Due 1/16/04 9,903
200,000 Walmart 7.49% Due 6/21/07 218,842
-------
Total Corporate Bonds 3,485,145
---------
Total Investment in Securities (Cost $10,566,761) 93.37% $10,965,822
Cash Equivalents 5.56% 652,895
Other Assets, Less Liabilities 1.07% 125,319
----- -------
NET ASSETS 100.00% $11,744,036
====== ==========
12
<PAGE>
KPM FUNDS, INC
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998
KPM KPM
EQUITY FIXED INCOME
ASSETS: PORTFOLIO PORTFOLIO
------------- --------------
Investments in securities, at market value
(cost $44,701,201 and $10,566,761 respectively) $55,041,469 $10,965,822
Cash equivalents 1,925,256 652,895
Accrued interest and dividends receivable 115,913 139,051
Receivable for fund shares sold 30,875 -
Organizational costs, net of accumulated amortization 8,320 1,069
------ -------
Total assets 57,121,833 11,758,837
----------- ----------
LIABILITIES:
Accrued expenses, including investment
management and distribution expense payable to
adviser, administrator and distributor 74,391 14,801
Payable for securities purchased 873,179 -
Payable for fund shares redeemed 59,259 -
------- --------
Total liabilities 1,006,829 14,801
NET ASSETS APPLICABLE TO OUTSTANDING --------- ---------
CAPITAL STOCK $56,115,004 $11,744,036
========== ==========
NET ASSETS ARE REPRESENTED BY:
Capital stock (1 billion authorized,
$.00001 par value) $32 $11
Additional paid-in capital 44,394,065 11,330,247
Accumulated undistributed net investment loss (249) (2,504)
Accumulated net realized gain on investments 1,380,888 17,221
Unrealized appreciation 10,340,268 399,061
----------- -------
Total net assets applicable to shares
outstanding $56,115,004 $11,744,036
========== ==========
SHARES OUTSTANDING AND NET ASSET VALUE PER SHARE
Shares of capital stock outstanding: 3,241,980 $17.31 $10.80
and 1,087,041, respectively (note 5) ====== ======
See accompanying notes to financial statements.
13
<PAGE>
KPM FUNDS, INC
STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1998
KPM KPM
EQUITY FIXED INCOME
INVESTMENT INCOME: PORTFOLIO PORTFOLIO
------------- ------------
Dividends $681,263 $ -
Interest 277,996 685,689
-------- -------
Total investment income 959,259 685,689
-------- -------
EXPENSES (NOTE 3):
Investment advisory fees 408,062 60,788
Administration fees 127,519 25,328
Distribution fees 127,496 25,329
Amortization of organization costs 4,381 1,062
Other operating expenses 59,163 22,218
------- ------
Total Expenses 726,621 134,725
-------- -------
Less expenses reimbursed by investment
adviser (note 3) - (8,538)
---- -------
Net expenses 726,621 126,187
-------- -------
Net investment income 232,638 559,502
-------- -------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTE 4):
Net realized gain 2,858,996 43,244
---------- ------
Net unrealized appreciation
Beginning of period 9,494,456 (99,636)
End of period 10,340,268 399,061
----------- -------
Net unrealized appreciation 845,812 299,425
Net realized and unrealized ---------- -------
gain on investments 3,704,808 342,669
NET INCREASE IN NET ASSETS RESULTING --------- ---------
FROM OPERATIONS $3,937,446 $ 902,171
=========== ==========
See accompanying notes to financial statements.
14
<PAGE>
<TABLE>
<CAPTION>
KPM FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
YEARS ENDED JUNE 30, 1998 AND 1997
KPM EQUITY PORTFOLIO KPM FIXED INCOME PORTFOLIO
--------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30,1998 JUNE 30,1997 JUNE 30,1998 JUNE 30,1997
--------------------------------------------------
OPERATIONS:
<S> <C> <C> <C> <C>
Net investment income $232,638 $117,374 $559,502 $487,422
Net realized gain (loss)
on investments 2,858,996 4,702,062 43,244 (25,599)
Unrealized appreciation 845,812 4,494,682 299,425 179,236
-------- ---------- -------- -------
Net increase in net assets
resulting from operations 3,937,446 9,314,118 902,171 641,059
---------- ---------- -------- -------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income 230,975 125,160 559,794 494,093
Net realized gain 5,646,345 1,828,489 - 809
---------- ---------- -- ---
Total Distributions 5,877,320 1,953,649 559,794 494,902
---------- ---------- -------- -------
CAPITAL SHARE TRANSACTIONS: (NOTE 5)
Proceeds from sales 18,512,949 7,152,647 4,617,298 2,512,764
Payment for redemptions (7,265,078) (5,551,204) (2,562,121) (2,683,686)
Reinvestment of net investment
income and net realized
gain distributions
at net asset value 5,464,299 1,815,623 474,197 432,216
---------- ---------- -------- -------
Total increase from capital
share transactions 16,712,170 3,417,066 2,529,374 261,294
----------- ---------- ---------- -------
Total increase in net assets 14,772,296 10,777,535 2,871,751 407,451
NET ASSETS:
Beginning of period 41,342,708 30,565,173 8,872,285 8,464,834
----------- ----------- ---------- ---------
End of period $56,115,004 $41,342,708 $11,744,036 $8,872,285
============ ======================== ==========
</TABLE>
See accompanying notes to financial statements.
15
<PAGE>
<TABLE>
<CAPTION>
KPM FUNDS, INC.
FINANCIAL HIGHLIGHTS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996 AND THE PERIOD FROM JULY 5,
1994 (COMMENCEMENT OF OPERATIONS) TO JUNE 30, 1995
KPM EQUITY PORTFOLIO
---------------------------------------------
Period Ended
1998 1997 1996 1995
---- ---- ---- ----
NET ASSET VALUE:
<S> <C> <C> <C> <C>
Beginning of period $17.92 $14.53 $12.00 $10.00
------ ------ ------- ------
Income from investment operations:
Net investment income 0.08 0.05 0.05 0.11
Net realized and unrealized gain
on investments 1.31 4.25 2.83 2.06
---- ---- ----- ----
Total income from investment operations 1.39 4.30 2.88 2.17
---- ---- ---- ----
Less Distributions:
Dividends from net investment income (0.08) (0.06) (0.05) (0.10)
Dividends from capital gains (1.92) (0.85) (0.30) (0.07)
------ ------ ------ ------
Total Distributions (2.00) (0.91) (0.35) (0.17)
------ ------ ------ ------
End of period $17.31 $17.92 $14.53 $12.00
======= ======= ======= ======
TOTAL RETURN: 8.88% 30.92% 24.19% 22.01%*
----- ------ ------ -----
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $56,115,004 41,342,708 30,565,173 15,360,742
Ratio of expenses to average net assets 1.42% 1.45% 1.50% 1.50%*
Ratio of net income to average net assets 0.45% 0.34% 0.40% 1.04%*
Portfolio turnover rate 32.25% 41.83% 34.05% 27.90%
Per share data has been calculated using weighted average shares outstanding
during the period indicated.
* Annualized for those periods less than twelve months in duration.
See accompanying notes to financial statements.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
KPM FUNDS, INC.
FINANCIAL HIGHLIGHTS
YEARS ENDED JUNE 30, 1998, 1997 AND 1996 AND THE PERIOD FROM JULY 5,
1994 (COMMENCEMENT OF OPERATIONS) TO JUNE 30, 1995
KPM FIXED INCOME PORTFOLIO
------------------------------------------
Period Ended
1998 1997 1996 1995
---- ---- ---- ----
NET ASSET VALUE:
<S> <C> <C> <C> <C>
Beginning of period $10.42 $10.23 $10.47 $10.00
------ ------ ------- ------
Income from investment operations:
Net investment income 0.59 0.61 0.63 0.57
Net realized and unrealized
gain/(loss) on investments 0.38 0.19 (0.23) 0.47
---- ---- ------ ----
Total income from investment operations 0.97 0.80 0.40 1.04
---- ---- ----- ----
Less Distributions:
Dividends from net investment income(0.59) (0.61) (0.62) (0.57)
Dividends from capital gains 0.00 0.00 (0.02) 0.00
----- ----- ------ ----
Total Distributions (0.59) (0.61) (0.64) (0.57)
------ ------ ------ ------
End of period $10.80 $10.42 $10.23 $10.47
======= ======= ======= ======
TOTAL RETURN: 9.39% 7.96% 3.63% 9.63%
----- ----- ----- -----
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $11,744,036 8,872,285 8,464,834 5,867,926
Ratio of expenses to average net assets 1.25% 1.25% 1.25% 1.25%*
Ratio of expenses to average net assets 1.33% 1.51% 1.29% 1.56%*
before adviser reimbursements #
Ratio of net income to average net assets 5.52% 5.82% 5.94% 5.59%*
Portfolio turnover rate 19.33% 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 poriton of the fund's expenses
(note 3)
* Annualized for those periods less than twelve months in duration.
See accompanying notes to financial statements.
</TABLE>
17
<PAGE>
KPM FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
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, 1998, 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, 1998, the cost of investment securities is identical for
financial reporting and income tax purposes.
18
<PAGE>
KPM FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (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 exchange traded put
options or call options.
At June 30, 1998, the KPM Equity Portfolio had no exchange traded option
contracts outstanding nor were any purchased during the year then ended.
FEDERAL INCOME TAXES
It is the policy of each Portfolio to comply with the requirements of the
Internal Revenue Code (the 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. For the purpose of Code Section 852(b)(3)(C), KPM Equity
Portfolio hereby designates $4,230,890 as long-term gain distributions paid
during the taxable year.
DISTRIBUTION TO SHAREHOLDERS
Dividends to shareholders are recorded on the ex-dividend date. The
dividends declared become payable immediately.
CASH EQUIVALENTS
Cash equivalents consist of money market funds which declare dividends
daily. As of June 30, 1998, the average yield on these funds was
approximately 5.00%.
19
<PAGE>
KPM FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $468,850, $152,847 and
$152,979, respectively for such services. Of the amount paid to the
Adviser, $8,538 was reimbursed to the KPM Fixed Income Portfolio for
expenses.
20
<PAGE>
KPM FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
3. FEES, EXPENSES AND RELATED PARTY TRANSACTIONS (CONTINUED)
At June 30, 1998, 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 $36,738 $11,481 $11,481 $59,699
KPM Fixed
Income Portfolio 5,750 2,396 2,396 10,542
The Portfolios also used KPSP to affect security trades on their behalf.
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 $11,980 for its brokerage services during the
year ended June 30, 1998.
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 $35,818,814 $22,023,079
KPM Fixed Income Portfolio 4,863,018 1,863,699
At June 30, 1998, 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 $12,017,476 $1,677,208
KPM Fixed Income Portfolio 403,047 3,986
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.
21
<PAGE>
KPM FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
5. CAPITAL SHARE TRANSACTIONS (CONTINUED)
Transactions in the capital stock of each portfolio for the year ended June
30, 1998 were as follows:
KPM Fixed
KPM Equity Income
Portfolio Portfolio
Transactions in shares:
Shares sold 1,017,370.121 430,106.958
Shares redeemed (407,792.256) (238,959.754)
Reinvested dividends 324,718.374 44,337.232
----------- ----------
Net increase 934,296.239 235,484.436
=========== ===========
At June 30, 1998, directors, officers and employees of the Fund, the
Adviser and Administrator and their immediate families held 100,946 shares
of the KPM Equity Portfolio representing $1,747,377.
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, 1998, the Fund paid directors' fees and reimbursed expenses
of $6,516 and $1,312 for the KPM Equity and Fixed Income Portfolios,
respectively.
22
