KPM FUNDS, INC.
SEMI-ANNUAL REPORT
KPM EQUITY PORTFOLIO
KPM FIXED INCOME PORTFOLIO
DECEMBER 31, 1997
Investment Adviser
KPM Investment Management, Inc.
Distributor
Kirkpatrick, Pettis, Smith, Polian, Inc.
Administrator, Transfer Agent and
Dividend Paying Agent
Lancaster Administation 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.
<PAGE>
KPM FUNDS, INC.
PERFORMANCE STATISTICS
One Year Avg. Annual Return
Ended Since Inception
12/31/97 (07/05/94)
-------- ---------------------
Equity Portfolio 20.1% 23.7%
Fixed Income Portfolio 8.4% 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 fund continued to provide strong positive returns in the second half of
1997. The KPM Equity Portfolio had a total return of 5.9% for the six-month
period and 20.1% for the twelve-month period ended December 31, 1997. The KPM
Fixed Income Portfolio had a total return of 5.6% for the six-month period and
8.4% for the twelve-month period.
While the equity returns were attractive on an absolute basis, your managers
were disappointed with the 1997 returns on a relative basis, i.e., compared to
other stock market indices. For example, the Value Line Composite Index had an
increase of 21.1% for 1997, the Dow Jones Industrials Average had a total return
of 24.3%, and the Standard & Poor's 500 Average had a total return of 33.3%. As
I mentioned in our 1996 Semi-Annual Report, the largest capitalization stocks
which are heavily weighted in the S&P 500 Index had the best gains last year.
There have been few years in the past where the disparity between the large
capitalization stocks and the average stocks has been so great. We owned a few
of these large capitalization stocks, but according to our value analysis many
of them were "over priced" compared to their long-term economic value and,
therefore, didn't meet our criteria. However in 1997, these stocks continued to
outpace the rest of the market. We are confident that the stocks that we do own
represent good long-term value. While many of them lagged the market in 1997, we
believe that they have the potential to be valued at much higher levels in some
future period. The "value" philosophy has served us well over the long-term even
though it may cause us to lag some of the indices for temporary periods.
The KPM Fixed Income Portfolio's gross returns (before expenses and fees) were
comparable to the fixed income indices. This portfolio continues to provide
attractive returns with a very low risk profile. The average maturity is
relatively short to minimize market risk due to changes in interest rates and
the credit risk is minimized by a large investment in government-backed
securities, asset-backed securities and high grade corporates.
In recent months, many of the major nations in Asia have suffered significant
declines in the value of their currencies, stock markets and real estate. The
International Monetary Fund (IMF), with the cooperation of banks and other
lenders to the region, has offered financial loan packages to these countries to
help them work out their difficulties. However, this crisis will reduce economic
activity in 1998 in Asia and the rest of the world. As a result, the earnings of
many U.S.-based companies will, most likely, grow at a slower rate than analysts
and investors had previously estimated. On the positive side, these worldwide
deflationary forces will probably help inflation at low levels and may allow
interest rates to decline further. This confluence of trends will probably
create a challenging investment environment in 1998, but often it is from such
environments that some of the best investment opportunities are created.
Total assets of the KPM Funds currently exceed $61 million and we have a total
of 490 shareholders. We thank you for your support.
Sincerely,
Randall D. Greer, CFA
Chairman
<PAGE>
KPM EQUITY PORTFOLIO
PORTFOLIO COMMENTARY
Bruce H. Van Kooten, CFA
Portfolio Manager
The second half of 1997 was again strong for the equity markets. The 10.6%
return of the Standard & Poor's 500 almost equaled the 11.8% in the year ago
period. Unfortunately, the KPM Equity Portfolio did not perform in the second
half of 1997 as well as in the second half of 1996, returning 5.9% for the
six-month period. For the twelve months ending December 31, 1997, the Equity
Portfolio achieved a total return of 20.1%. While this return is respectable
based on historical and absolute standards, it was disappointing to us when
compared to the S&P 500 total return of 33.3%. The return of the S&P was
primarily generated from the mega-capitalization stocks which have the greatest
weightings in the index itself. We have written previously about our concerns of
index funds and their effect on the stock market and these concerns still remain
valid today.
As 1998 unfolds, we note that volatility has increased dramatically, not only on
a weekly or daily basis, but on an hourly basis. The market appears to be
exhibiting the excessive mood swings of a manic-depressive disorder. Gyrations
in sentiment result in stock prices plunging or soaring by the minute, while
swift rotation from one industry group to another by market players has most
investors very confused.
Our views on the widespread overvaluation present in the market have not changed
either. Every once in a while we come across some statistic that causes us to
question the market's judgment. For example, the current combined stock market
value of Indonesia, Malaysia, the Philippines, Singapore, Taiwan and Thailand is
less than the stock market value of General Electric Company. General Electric
is a tremendous company, but to say that it is worth more than all the public
companies in these countries seems a bit of a stretch. Either the stock markets
of these countries are undervalued or General Electric is overvalued. (We happen
to believe that General Electric is overvalued, but have no opinion on whether
or not the Asian stock markets are undervalued.)
Regardless of the tone of the domestic or international markets, our basic value
discipline remains the same--preserving your capital by controlling risk with
conservative long-term investments purchased at a discount to their intrinsic
value.
PORTFOLIO PROFILE AS OF DECEMBER 31, 1997
KPM EQUITY
WEIGHTED AVERAGE S&P 500
----------------- -----------------
Price/Earnings* 14.0x 19.9x
Price/Book Value 2.7x 3.9x
Dividend Yield 1.6% 1.7%
Return on Equity (5-year 17.5% 16.3%
average)
Market Capitalization $20.9 billion $53.9 billion
*based on 1998 estimates
2
<PAGE>
1 Year Ended Avg. Annual
12/31/97 Return
Since Inception*
----------------- -----------------
KPM Equity Portfolio 20.1% 23.7%
* Inception date is 7/5/94
- ------------------------------------------------------------------------------
RETURN ON A $10,000 INVESTMENT
KPM EQUITY PORTFOLIO $21,022
S&P 500 COMPOSITE $23,533
[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 rally stayed surprisingly strong throughout the last half of
1997 with yield decreases of 40 to 65 basis points (0.40% to 0.65%) in
intermediate rates and a decline of 85 basis points (0.85%) in long-term rates.
In addition to the friendly 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 disturbing developments in the Asian markets. The KPM Fixed
Income Portfolio posted a gain of 5.6% in total return for the second half of
the year compared with a 6.4% gain for the Lehman Aggregate Index. Over the past
twelve months the Portfolio has posted a very solid 8.4% return.
The macro-economic environment remains "friendly" for the bond market. Growth is
expected to moderate in 1998, allowing inflation expectations to remain benign
and the Federal Reserve to remain "neutral" -- or possibly even ease short-term
rates. Wholesale price inflation has been virtually non-existent for the past
year, and this should result in very low consumer inflation numbers in 1998. But
with this economic expansion entering its seventh year, it shouldn't be much of
surprise if consumer spending slows in the face of a further decline in
inflation. Consumers are getting "spent out." This scenario will provide a
continuing environment for lower interest rates and a continuation of the bond
market rally.
We continue to de-emphasize Treasury debt securities in favor of high-quality
corporate, mortgage-backed and asset-backed securities to take advantage of the
higher yields available in these sectors. We have increased the Portfolio's
allocation in mortgage-backed securities to 39% as their spread, versus
comparable Treasury securities, remains attractive. We have also increased the
asset-backed securities allocation from 12% to 14%. Both of these market sectors
are approaching their maximum portfolio weighting as rates. Looking forward into
1998, we see the potential for an increase in bond market volatility as rates
work their way lower -- providing us an opportunity to improve portfolio yield
in periods of market weakness. Future purchases will focus on corporate issues
now that we have begun to see some meaningful widening of corporate bond spreads
for the first time in a few years.
PORTFOLIO PROFILE AS OF DECEMBER 31, 1997
WEIGHTED AVERAGE
-----------------
Average Quality of Securities Aa2
Average Life of Securities 7.31 years
Effective Duration 4.75 years
SEC Yield 6.13%
4
<PAGE>
1 Year Ended Avg. Annual
12/31/97 Return
Since Inception*
----------------- -----------------
KPM Fixed Income Portfolio 8.4% 7.7%
* Inception date is 7/5/94
- --- ---------------------------- ----------------- - ----------------- -
RETURN ON A $10,000 INVESTMENT
KPM FIXED INCOME PORTFOLIO $12,950
LEHMAN AGGREGATE BOND INDEX $13,597
[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>
KPM FUNDS, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
KPM EQUITY PORTFOLIO
PERCENT
OF NET MARKET
SHARES COMMON STOCK - 88.57% ASSESTS VALUE
------ --------------------- ------- -----
APPAREL/SHOES 2.66%
-------------
35,000 Nike, Inc. $1,373,750
BASIC MATERIALS 9.46%
---------------
22,000 Consolidated Papers 1,174,250
65,000 Hanna (M.A.) Company 1,641,250
25,000 Potash Corporation 2,075,000
---------
4,890,500
BUSINESS/CONSUMER SERVICES 6.83%
--------------------------
56,500 Banta Corporation 1,525,500
47,000 Toro Company 2,003,375
---------
3,528,875
CAPITAL GOODS 14.25%
-------------
35,500 Bandag, Inc. 1,897,031
40,000 Pentair, Inc. 1,437,500
64,500 Fibermark, Inc. 1,386,750
48,000 Trinity Industries 2,142,000
25,600 Valmont Industries 499,200
-------
7,362,481
CONSUMER PRODUCTS 10.56%
-----------------
64,000 Franklin Covey* 1,408,000
36,500 Kimberly Clark 1,799,906
50,000 TBC Corporation* 478,125
63,500 Tupperware 1,770,063
---------
5,456,094
* Indicates nonincome-producing security.
6
<PAGE>
KPM FUNDS, INC.
SCHEDULE OF INVESTMENTS
(CONTINUED)
KPM EQUITY PORTFOLIO
PERCENT
OF NET MARKET
SHARES COMMON STOCK (CONTINUED) ASSESTS VALUE
------- -------------------------- --------- ---------
ENERGY 11.02%
------
25,000 Atlantic Richfield 2,003,125
47,850 Prima Energy Corporation 921,113
70,000 Union Pacific Resources 1,697,500
17,500 Exxon Corporation 1,070,781
---------
5,692,519
FINANCIAL SERVICES 10.88%
------------------
6,400 Gallagher (Arthur J.) & Company 1,222,531
3,100 Freddie Mac 2,243,656
8,485 SLM Holding Corporation 2,156,438
---------
5,622,625
FOOD/BEVERAGE/TOBACCO 3.20%
---------------------
36,500 Phillip Morris Companies, Inc. 1,653,906
INSURANCE 12.87%
---------
24,000 Allstate Corporation 2,181,000
50 Berkshire Hathaway* 2,300,000
32,500 MBIA Incorporated 2,171,406
---------
6,652,406
RETAILING 3.22%
---------
53,000 Toys "R" Us Inc. 1,666,188
TRANSPORTATION 3.62%
--------------
30,000 Union Pacific Corporation 1,873,125
Total Investment in Securities
(Cost $35,328,618) 88.57% 45,772,469
Cash Equivalents 11.29% 5,835,968
Other Assets, Less Liabilities 0.14% 69,448
----- ------
NET ASSETS 100.00% $51,677,885
====== ============
* Indicates nonincome-producing security.
See accompanying notes to financial statements.
7
<PAGE>
KPM FUNDS, INC.
SCHEDULE OF INVESTMENTS
DECEMBER 31, 1997
KPM FIXED INCOME PORTFOLIO
PRINCIPAL MARKET
AMOUNT VALUE
- ---------- ---------
U.S. GOVERNMENT SECURITIES - 5.01%
----------------------------------
200,000 U.S. Treasury Bond 7.125% due 2/15/23 $228,219
250,000 U.S. Treasury Bond 6.625% due 2/15/27 271,445
-------
Total U.S. Government Securities 499,664
ASSET BACKED SECURITIES - 12.43%
---------------------------------
125,452 Green Tree Financial Corp. ABS 7.95% due 6/15/25 125,864
112,150 Green Tree Financial Corp. ABS 7.7% due 1/15/20 112,869
100,000 Green Tree Financial Corp. ABS 7.3% due 7/15/25 101,203
300,000 Green Tree Financial Corp. CMO 7.95% due 8/15/25 322,453
250,000 Oakwood Mortgage Investors, Inc. 7.5% due 1/15/21 255,234
24,331 Security Pacific Acceptance Corp. 7.25% due 12/15/11 24,358
147,000 Vander Mortgage 7.19% due 2/7/14 152,421
120,000 Westinghouse 6.875% due 9/1/03 118,177
26,750 Zions AB 5.15% due 9/25/03 26,201
------
Total Asset Backed Securities 1,238,780
COLLATERALIZED MORTGAGE OBLIGATIONS - 40.80%
--------------------------------------------
$150,000 Federal Home Loan Mtg. Corp. 8% due 10/15/20 153,692
56,951 Federal Home Loan Mtg. Corp. 6% due 6/15/23 55,657
200,000 Federal Home Loan Mtg. Corp. 7.5% due 9/15/06 206,313
372,000 Federal Home Loan Mtg. Corp. 7% due 6/15/21 384,555
250,000 Federal Home Loan Mtg. Corp. 8% due 6/15/21 258,770
87,270 Federal National Mortgage Assn. 6.95% due 1/25/20 87,768
350,000 Federal National Mortgage Assn. 6% due 8/25/23 338,625
195,000 Federal National Mortgage Assn. 6.35% due 3/25/19 195,351
195,000 Federal National Mortgage Assn. 8.5% due 1/25/20 201,002
112,303 Federal National Mortgage Assn. 8.5% due 9/25/21 117,454
100,000 Federal National Mortgage Assn. 6.71% due 12/25/11 100,828
100,000 Federal National Mortgage Assn. 6.25% due 6/25/19 99,859
50,000 Federal National Mortgage Assn. 5.5% due 9/25/07 48,691
345,000 Federal National Mortgage Assn. 6% due 12/25/09 335,755
97,000 Federal National Mortgage Assn. 6% due 7/25/06 96,303
165,000 Federal National Mortgage Assn. 6.5% due 1/25/06 165,219
8
<PAGE>
KPM FUNDS, INC.
SCHEDULE OF INVESTMENTS (CONTINUED)
KPM FIXED INCOME PORTFOLIO
PRINCIPAL MARKET
AMOUNT COLLATERALIZED MORTGAGE OBLIGATIONS - 40.80% VALUE
------ -------------------------------------------- -----
200,000 Federal National Mortgage Assn. 7% due 9/25/19 $202,219
105,066 Federal National Mortgage Assn. 9.67% due 1/25/17 108,071
300,000 GE Capital Mtg. Services 6% due 3/25/09 297,094
100,000 Government National Mortgage Assn. 7.98% due 7/16/12 100,102
500,000 Residential Accredit Loans, Inc. 7.5% due 6/25/12 514,453
-------
Total Collateralized Mortgage Obligations 4,067,781
CORPORATE BONDS - 37.08%
------------------------
250,000 Commonwealth Edison 9.05% due 10/15/99 261,634
50,000 Chevron 7.45% due 8/15/04 52,129
300,000 Dayton Hudson 9.625% due 2/1/08 365,275
200,000 Eastman Chemical Corporation 7.25% due 1/15/24 212,944
245,000 Enron Corporation 6.75% due 7/01/05 248,294
235,828 Federal Express Company 6.68% due 1/01/08 238,889
250,000 James River Corporation 7.92% due 12/27/04 267,500
150,000 Kansas City Power & Light 6.5% due 11/01/01 151,875
100,000 May Department Stores 9.45% due 2/2/99 103,513
300,000 May Department Stores 9.875% due 12/1/02 345,483
125,000 Occidental Petroleum Company 6.02% due 11/24/99 125,000
400,000 Supervalue 6.31% due 11/09/00 400,000
100,000 Union Pacific Corporation 6.25% due 3/15/99 99,994
50,000 United States Leasing International 8.75% due 12/01/01 54,338
300,000 U.S. West 7.3% due 1/15/07 315,375
200,000 United Telecom 9.5% due 4/01/03 229,047
10,000 Washington Natural Gas 6.07% due 1/16/04 9,788
200,000 Walmart 7.49% due 6/21/07 215,743
-------
Total Corporate Bonds 3,696,821
Total Investment in Securities
(Cost $9,177,787) 95.32% $9,503,046
Cash Equivalents 3.44% 342,561
Other Assets, Less Liabilities 1.24% 123,947
----- -------
NET ASSETS 100.00% $9,969,554
====== =========
See accompanying notes to financial statements.
9
<PAGE>
<TABLE>
<CAPTION>
KPM FUNDS, INC.
Statement of Assets and Liabilities
December 31, 1997
(Unaudited)
KPM KPM
Equity Fixed Income
Portfolio Portfolio
Assets: --------- --------------
<S> <C> <C>
Investments in securities, at market value
(cost $35,328,618 and $9,177,787, respectively) $45,772,469 $9,503,046
Cash equivalents 5,835,968 342,561
Accrued interest and dividends receivable 130,149 128,504
Receivable for fund shares sold 311 4,373
Organizational costs, net of accumulated amortization 10,493 1,594
---------- ---------
Total assets 51,749,391 9,980,078
---------- ---------
Liabilities:
Accrued expenses, including investment management and
service fees and distribution expenses payable to adviser,
administrator and distributor 64,005 10,524
Payable for fund shares redeemed 7,500 -
---------- ---------
Total liabilities 71,505 10,524
---------- ---------
Net assets applicable to outstanding capital stock $51,677,886 $9,969,554
========== =========
Net assets represented by:
Capital stock (1 billion authorized, $.00001 par value) $41 $10
Additional paid-in capital 41,220,247 9,652,235
Accumulated undistributed net investment income/(loss) 219 (141)
Accumulated net realized gain/(loss) on investments 13,526 (7,809)
Unrealized appreciation of securities 10,443,851 325,259
---------- ---------
Total net assets applicable to shares outstanding $51,677,885 $9,969,554
========== =========
Shares outstanding and net asset value per share
Shares of capital stock outstanding: 3,062,384
and 931,839, respectively (note 5) $16.88 $10.70
========== =========
See accompanying notes to financial statements.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
KPM FUNDS, INC.
STATEMENT OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1997
(UNAUDITED)
KPM KPM
EQUITY FIXED INCOME
INVESTMENT INCOME: PORTFOLIO PORTFOLIO
------------- -------------
<S> <C> <C>
Dividends $313,907 $ -
Interest 115,482 333,752
------------- -------------
Total investment income 429,389 333,752
------------- -------------
EXPENSES (NOTE 3):
Investment advisory fee 185,186 36,970
Administration fee 57,871 11,847
Distribution fees 57,871 11,847
Amortization of organization costs 2,208 535
Other operating expenses 36,219 14,745
------------- -------------
Total expenses 339,355 75,944
Less expenses reimbursed by investment adviser (note 3) - (8,538)
------------- -------------
Net expenses 339,355 67,406
------------- -------------
Net investment income 90,034 266,346
------------- -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 4):
Net realized gain (loss) 1,491,634 18,214
Net unrealized appreciation (depreciation)
Beginning of period 9,494,456 99,635
End of period 10,443,851 325,259
------------- -------------
Net unrealized appreciation 949,395 225,624
------------- -------------
Net realized and unrealized gain on investments 2,441,029 243,838
------------- -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,531,063 $510,184
============= =============
See accompanying notes to financial statements.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
KPM FUNDS, INC.
Statements of Changes in Net Assets
Six Months Ended December 31, 1997 and the Year Ended June 30, 1997
KPM KPM
Equity Fixed Income
Portfolio Portfolio
Six Months Year Endeded Six Months Ended Year Ended
Dec. 31, 1997 June 30, 1997 Dec. 31, 1997 June 30, 1997
(Unaudited) (Unaudited)
Operations: --------------- -------------- ----------------- -------------
<S> <C> <C> <C> <C>
Net investment income $90,034 $117,374 $266,346 $487,422
Net realized gain (loss)
on investments 1,491,634 4,702,062 18,214 (25,599)
Unrealized appreciation 949,395 4,494,682 225,624 179,236
--------- --------- -------- --------
Net increase in net assets
resulting from operations 2,531,063 9,314,118 510,184 641,059
--------- --------- -------- --------
Distributions to shareholders from:
Net investment income 91,069 125,160 268,845 494,093
Net realized gains 5,646,345 1,828,489 - 809
--------- --------- -------- --------
Total distributions 5,737,414 1,953,649 268,845 494,902
--------- --------- -------- --------
Capital share transactions: (note 5)
Proceeds from sales 10,370,748 7,152,647 1,542,694 2,512,764
Payment for redemptions (2,163,885) (5,551,204) (920,161) (2,683,686)
Reinvestment of net investment
income and net realized gain
distributions at net asset value 5,334,665 1,815,623 233,397 432,216
--------- --------- -------- --------
Total increase from capital
share transactions 13,541,528 3,417,066 855,930 261,294
---------- --------- -------- --------
Total increase in net assets 10,335,177 10,777,535 1,097,269 407,451
Net assets:
Beginning of period 41,342,708 30,565,173 8,872,285 8,464,834
---------- ---------- --------- ---------
End of period $51,677,885 $41,342,708 $9,969,554 $8,872,285
========== ========== ========= =========
See accompanying notes to financial statements.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
KPM FUNDS, INC.
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED DECEMBER 31, 1997 AND THE
YEARS ENDED JUNE 30, 1997 AND 1996 AND THE
PERIOD FROM JULY 5, 1994 (COMMENCEMENT OF
OPERATIONS) TO JUNE 30, 1995
KPM EQUITY PORTFOLIO
-----------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DEC. 31, 1997 1997 1996 1995
-------------------- -------------- ------------- -------------
(UNAUDITED)
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 0.04 0.05 0.05 0.11
Net realized and unrealized gain on investments 0.99 4.25 2.83 2.06
---- ---- ---- ----
Total income from investment operations 1.03 4.30 2.88 2.17
---- ---- ---- ----
Less distributions:
Dividends from net investment income (0.04) (0.06) (0.05) (0.10)
Dividends from capital gains (2.03) (0.85) (0.30) (0.07)
------ ------ ------ ------
(2.07) (0.91) (0.35) (0.17)
------ ------ ------ ------
End of period $16.88 $17.92 $14.53 $12.00
====== ====== ====== ======
TOTAL RETURN 11.72%* 30.92% 24.19% 22.01*
====== ====== ====== ======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $51,677,885 $41,342,708 $30,565,173 $15,360,742
Ratio of expenses to average net assets 1.46%* 1.45% 1.50% 1.50%*
Ratio of net income to average net assets 0.39%* 0.34% 0.40% 1.04%*
Portfolio turnover rate 13.99% 41.83% 34.05% 27.90%
Average Commission Rate** $0.0575 $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.
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
KPM FUNDS, INC.
FINANCIAL HIGHLIGHTS
SIX MONTHS ENDED DECEMBER 31, 1997 AND THE 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
-----------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
DEC. 31, 1997 1997 1996 1995
------------------ -------------- -------------- --------------
(UNAUDITED)
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 0.30 0.61 0.63 0.57
Net realized and unrealized gain/(loss) on investments 0.28 0.19 (0.23) 0.47
---- ---- ------ ----
Total income from investment operations 0.58 0.80 0.40 1.04
---- ---- ---- ----
Less distributions:
Dividends from net investment income (0.30) (0.61) (0.62) (0.57)
Dividends from capital gains (0.00) (0.00) (0.02) (0.00)
------ ------ ------ ------
(0.30) (0.61) (0.64) (0.57)
------ ------ ------ ------
End of period $10.70 $10.42 $10.23 $10.47
====== ====== ====== ======
TOTAL RETURN 11.05%* 7.96% 3.63%* 9.63%
====== ===== ===== =====
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $9,969,554 $8,872,285 $8,464,834 $5,867,926
Ratio of expenses to average net assets 1.24%* 1.25% 1.25% 1.25%*
Ratio of expenses to average net assets before
adviser reimbursements # 1.42%* 1.51% 1.29% 1.56%*
Ratio of net income to average net assets 5.62%* 5.82% 5.94% 5.59%*
Portfolio turnover rate 15.22% 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.
</TABLE>
14
<PAGE>
KPM FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 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
December 31, 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 December 31, 1997, the cost of investment securities is identical for
financial reporting and income tax purposes.
15
<PAGE>
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 December 31, 1997, the KPM Equity Portfolio had no such option contracts
outstanding nor were any written during the six months then ended.
16
<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.
17
<PAGE>
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 $213,618, $69,718 and
$69,718, respectively for such services. Of the amount paid to the Adviser,
$8,538 was reimbursed to the KPM Fixed Income Portfolio for expenses.
At December 31, 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 $34,630 $10,822 $10,776 $56,228
KPM Fixed
Income Portfolio 5,023 2,093 2,090 9,206
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 $6,250 for its brokerage
services during the six months ended December 31, 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 $11,576,853 $5,786,338
KPM Fixed Income Portfolio 2,608,550 1,364,629
18
<PAGE>
KPM FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS
4. CONTINUED
At December 31, 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 $11,447,532 $1,003,681
KPM Fixed Income Portfolio 329,717 4,457
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 six months
ended December 31, 1997 were as follows:
KPM Fixed
KPM Equity Income
Portfolio Portfolio
Transactions in shares: ----------- ------------
Shares sold 554,816.392 145,080.602
Shares redeemed (117,386.258) (86,730.816)
Reinvested dividends 317,269.986 21,932.330
----------- ------------
Net increase 754,700.120 80,282.116
============ ============
At December 31, 1997, directors, officers and employees of the Fund, the
Adviser and Administrator and their immediate families held 100,683 shares
of the KPM Equity Portfolio representing $1,699,529.
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 December 31, 1997, the Fund paid directors' fees and reimbursed
expenses of $3,927 and $813 for the KPM Equity and Fixed Income Portfolios,
respectively.
19
