(KPM FUNDS LOGO)
ANNUAL REPORT
KPM EQUITY PORTFOLIO
KPM FIXED INCOME PORTFOLIO
JUNE 30, 1999
(KPM FUNDS LOGO)
PERFORMANCE STATISTICS
ONE YEAR ENDED AVERAGE ANNUAL RETURN
6/30/99 SINCE INCEPTION (7/5/94)
-------------- ------------------------
Equity Portfolio (1.97)% 16.23%
Fixed Income Portfolio 1.86% 6.46%
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.
Dear Shareholder:
Hallelujah! KPM's "value" equity style finally came back into favor in the most
recent quarter (ended June 30, 1999) after six consecutive quarters of lagging
performance compared to the large capitalization growth stocks. And once again,
the KPM Fixed Income Portfolio provided returns that were competitive to the
fixed income index benchmarks, adjusted for fees and expenses.
As we have explained in prior shareholder communications, up until the most
recent quarter investors had favored the large capitalization growth stocks even
though by most historical standards they had become very richly valued. In
addition, the magnitude of the divergence in performance between these stocks
and the rest of the stock market was almost unprecedented. As an illustration
of this point I use the S&P 500 Index as a proxy for large capitalization growth
stocks (which comprise over two-thirds of the index) and the Value Line
Composite Index as a proxy for the average stock (since it equally weights over
1700 stocks). From the December quarter of 1997 through the first quarter of
1999, the S&P 500 Index (large cap growth stocks) increased a cumulative 38.8%
while the Value Line Composite Index (the average stock) declined 12.4%, an
--------
incredible difference of over 51 percentage points in only six quarters!
However, in the most recent quarter, the stock market leadership changed in
favor of "value" and mid and small capitalization stocks. As a result the Value
Line Composite Index increased 13.8% in the quarter, far outpacing the 7.0%
return of the S&P 500 Index. Why did the leadership change in favor of "value?"
There are several hypotheses. First, Asia is showing signs of recovery from the
sharp economic contraction of last year. This should fuel stronger earnings in
a number of basic industrial stocks (which are mostly "value" stocks). Second,
investors have become concerned that inflation may be rising due to renewed
demand from Asia, rising oil prices and tight labor markets in the U.S. This
has led to increases in interest rates which penalizes the growth stocks more
since much of their value is based on the discounting of future earnings as
opposed to current earnings which are more important to value stocks. This rise
in interest rates also had a temporary adverse impact on the total returns of
fixed income funds, including the KPM Fixed Income Portfolio. Finally, after
six quarters of significant outperformance, the large capitalization growth
stocks had reached values that were not sustainable and, in our opinion, not
supportable by any rational economic analysis.
How long this new trend favoring value stocks will last is impossible to
predict. However, a recent study by Merrill Lynch found that in the past when
there was such a significant leadership change it always persisted for at least
a year. Certainly given the extreme divergence of performance during the
previous six quarters, value stocks have a lot of catching up to do. As a
result, this may be an excellent opportunity to add to your investment in the
KPM Equity Portfolio.
We appreciate your patronage and patience over the past year.
Sincerely,
/s/Randall D. Greer
Randall D. Greer, CFA
Chairman
KPM EQUITY PORTFOLIO
PORTFOLIO COMMENTARY
Bruce H. Van Kooten, CFA
Portfolio Manager
The year ended June 30, 1999 has been the most difficult time period in the
history of your fund not only from a relative performance standpoint but also in
terms of absolute performance. A one-year return of -2.0% is not acceptable in
a bull market environment even if the leadership has resulted from just a few
stocks. Over the last six months we have repositioned the Portfolio to a more
appropriate mix of larger capitalization companies. Since the beginning of the
year, we have added to the Portfolio such large-cap quality names as
AlliedSignal, Emerson Electric, AT&T, Johnson & Johnson and First Data Corp. In
addition, we also found some high-quality undervalued mid-cap companies
including Snap-On Inc., Gartner Group and Transaction Systems Architects. The
addition of these names gives the Portfolio additional exposure to capital
goods, communications services, health care and technology.
For the first time in a long while, there is finally something good to say about
value investing. The most recent quarter again witnessed a very distinct
divergence in performance between growth and value. Only this time value came
out with the upper hand. Evidence of a demand recovery in the Asian economies
coupled with increasing interest rates here in the U.S. has fostered an
environment where industrial cyclicals and other low valuation companies are
likely to exhibit strong relative earnings growth. Higher valuations should
accompany earnings growth. With the market and many growth stocks priced to
perfection, any small disappointment can result in a substantial downward
revision in price. We have seen this take place with the release of second
quarter earnings. If a high expectation stock misses the earnings estimate from
analysts by only a penny per share, the stock has been beaten up in short order.
With Wall Street's need for instant gratification (where the stock price must go
up in a short period of time) and the requirement that earnings must meet Wall
Street expectations, there are a lot of stocks out there poised for big
downdrafts.
We continue to believe that the holdings in the Portfolio represent good long-
term value, even though a number of them have exhibited anemic price performance
over various short periods of time. For example, Berkshire Hathaway, our
largest holding in the Portfolio is actually down 12% for the 12 months ending
June 30, 1999. One of the more amusing reasons for Berkshire's lackluster
performance was that it's "portfolio is stale." We would bet Mr. Buffett got a
chuckle from that one. For a company whose book value has grown at a rate of
24.7%, compounded annually over the last 34 years, and whose chairman has
amassed a cash hoard of more than $14 billion, we believe there are much greater
things to come from owning Berkshire Hathaway.
PORTFOLIO PROFILE AS OF JUNE 30, 1999
KPM EQUITY
WEIGHTED AVERAGE S&P 500
---------------- -------
Price/Earnings*<F1> 16.1x 27.8x
Price/Book Value 3.7x 5.0x
Dividend Yield 1.4% 1.2%
Return on Equity (5-year average) 23.0% 16.8%
Market Capitalization $33.4 billion $104.6 billion
*<F1>based on 1999 estimates
AVERAGE ANNUAL RATE OF RETURN (%)
FOR THE YEAR ENDED JUNE 30, 1999
SINCE INCEPTION
1 YEAR 3 YEARS 7/5/94
------ ------- ---------------
KPM Equity Portfolio (1.97) 11.80 16.23
DATE KPM EQUITY PORTFOLIO S&P 500 COMPOSITE
-------- -------------------- -----------------
7/5/94 $10,000 $10,000
12/31/94 $10,234 $10,440
6/30/95 $12,201 $12,549
12/31/95 $13,565 $14,363
6/30/96 $15,162 $15,813
12/31/96 $17,506 $17,660
6/30/97 $19,850 $21,300
12/31/97 $21,023 $23,554
6/30/98 $21,612 $27,725
12/31/98 $20,204 $30,284
6/30/99 $21,185 $29,869
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. and assuming 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.
KPM FIXED INCOME PORTFOLIO
PORTFOLIO COMMENTARY
Patrick M. Miner, CFA
Portfolio Manager
The first quarter of 1999 brought a strong reversal to the fixed income markets,
with an increase in interest rates not seen in a long time. Across the yield
curve - from two-year to thirty-year maturities - interest rates rose 50 basis
points (0.50 percentage points) in a short time period. At the same time,
incremental income available from "spread products" (mortgage-backed securities,
corporate bonds, etc.) decreased to offset some of the rate rise. In a mirror
image of last Fall, rates rose precipitously and we experienced significant
spread widening in just a few short months.
The KPM Fixed Income Portfolio experienced a modest negative total return for
the quarter as the price decline caused by higher interest rates exceeded the
amount of coupon income generated. For the quarter, the Portfolio posted a
total return of -0.19%. The Lehman Brothers Aggregate Bond Index was slightly
worse at -0.51%. This divergence was due to the Index's longer average maturity
than the Portfolio and a smaller allocation to mortgage-backed securities. The
mortgage sector actually outperformed all other sectors in the first quarter as
higher rates eased fears of prepayments and mortgages experienced a less severe
price decline that resulted in a positive return for the quarter. This explains
most of the relative out-performance by the Portfolio and also exemplifies why
we have been maintaining an above average weighting in the mortgage-backed
sector. The higher income available from mortgage related securities proves to
be an advantage over time as the short-term price swings even out among the
various fixed income sectors. Quite simply, over the long-term, bonds with
higher interest rate outperform.
Activity for the quarter was tilted towards a reduction in Treasury obligations
and an increase in mortgage-backed securities and high-quality corporate bonds.
We also added to holdings of the newest sector in the bond market - commercial
mortgage-backed securities. These assets, collateralized by large pools of
commercial mortgage loans experienced the greatest short-term volatility last
Fall and have represented the best "value" in the bond market since then.
Although spreads are tightening at a rapid pace - and performance is outpacing
all other sectors - we still see strong relative value in these securities.
Looking forward we expect to see some short-term volatility in interest rates.
But, by the end of the year we expect to be at levels not too different from
today. Inflation is still not a significant threat. So our focus will continue
to be on generating maximum coupon income by over-weighting the "spread" sectors
and under-weighting government bonds. And until the yield curve steepens
appreciably, we will maintain an average maturity of 6-7 years until the market
"pays" us more in terms of higher yields to extend maturities.
PORTFOLIO PROFILE AS OF JUNE 30, 1999
KPM FIXED INCOME PORTFOLIO
WEIGHTED AVERAGE
--------------------------
Average Quality of Securities Aa3
Average Life of Securities 6.94 years
Effective Duration 4.88 years
SEC Yield 5.79%
AVERAGE ANNUAL RATE OF RETURN (%)
FOR THE YEAR ENDED JUNE 30, 1999
SINCE INCEPTION
1 YEAR 3 YEARS 7/5/94
------ ------- ---------------
KPM Fixed Income Portfolio 1.86 6.35 6.46
DATE KPM FIXED INCOME PORTFOLIO LEHMAN BROTHERS AGGREGATE BOND INDEX
---- -------------------------- ------------------------------------
7/5/94 $10,000 $10,000
12/31/94 $9,925 $10,099
6/30/95 $10,963 $11,254
12/31/95 $11,569 $11,964
6/30/96 $11,362 $11,820
12/31/96 $11,943 $12,399
6/30/97 $12,266 $12,782
12/31/97 $12,949 $13,595
6/30/98 $13,417 $14,129
12/31/98 $13,833 $14,776
6/30/99 $13,667 $16,606
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. and assuming 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 Brothers Aggregate Bond Index includes all public obligations 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 EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS - JUNE 30, 1999
COMMON STOCKS -- 96.6% SHARES VALUE
- ----------------------------------------------------------------------
BASIC MATERIALS -- 8.1%
FiberMark, Inc. *<F2> 36,000 $ 474,750
Hanna (M.A.) Company 31,000 509,563
Potash Corporation 22,000 1,138,500
-------------
2,122,813
-------------
CAPITAL GOODS -- 5.0%
Emerson Electric Co. 12,000 754,500
Pentair, Inc. 12,000 549,000
-------------
1,303,500
-------------
CONSUMER CYCLICALS -- 17.7%
The Dun & Bradstreet Corporation 32,000 1,134,000
Mattel, Inc. 50,000 1,321,875
Nike, Inc. 25,000 1,582,813
Snap-on Incorporated 17,500 633,281
-------------
4,671,969
-------------
CONSUMER STAPLES -- 18.5%
Anheuser-Busch Companies, Inc. 10,000 709,375
Johnson & Johnson 9,000 882,000
Kimberly-Clark Corporation 13,000 741,000
McDonald's Corporation 20,000 826,250
Philip Morris Companies Inc. 25,000 1,004,688
Sara Lee Corporation 31,000 703,312
-------------
4,866,625
-------------
ENERGY -- 6.3%
Atlantic Richfield Company 12,000 1,002,750
Prima Energy Corporation *<F2> 29,000 656,125
-------------
1,658,875
-------------
FINANCIAL SERVICES -- 18.9%
Gallagher (Arthur J.) & Co. 10,000 495,000
First Data Corporation 20,000 978,750
Freddie Mac 25,000 1,450,000
Gartner Group, Inc. *<F2> 25,000 510,937
SLM Holding Corporation 34,000 1,557,625
-------------
4,992,312
-------------
INSURANCE -- 9.7%
The Allstate Corporation 23,000 825,125
Berkshire Hathaway Inc. *<F2> 25 1,722,500
-------------
2,547,625
-------------
TECHNOLOGY -- 7.4%
AlliedSignal Inc. 13,000 $819,000
Electronic Data Systems
Corporation 12,500 707,031
Transaction Systems
Architects, Inc. *<F2> 11,000 429,000
-------------
1,955,031
-------------
UTILITIES -- 5.0%
AT&T Corp. 10,000 558,125
CalEnergy Company, Inc. *<F2> 22,000 761,750
-------------
1,319,875
-------------
TOTAL COMMON STOCK
(cost $18,408,261) 25,438,625
-------------
SHORT-TERM PRINCIPAL
INVESTMENTS -- 3.5% AMOUNT
- ----------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES -- 3.5%
General Mills, Inc. 517,040 517,040
Warner-Lambert Company 100,000 100,000
Wisconsin Corporate Central
Credit Union 312,708 312,708
-------------
929,748
-------------
TOTAL SHORT-TERM INVESTMENTS
(cost $929,748) 929,748
-------------
TOTAL INVESTMENTS -- 100.1%
(cost $19,338,009) 26,368,373
Liabilities in excess of other assets -- (0.1)% (16,864)
-------------
Total net assets -- 100.00% $26,351,509
-------------
-------------
*<F2> Non-income producing
See notes to the financial statements.
KPM FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS - JUNE 30, 1999
LONG-TERM PRINCIPAL MARKET
INVESTMENTS -- 96.1% AMOUNT VALUE
- ----------------------------------------------------------------------
COLLATERALIZED MORTGAGE
OBLIGATIONS -- 24.7%
Federal Home Loan Mortgage
Corporation (FHLMC):
Series 1035, Class E,
8.00%, 10/15/20 $ 58,718 $59,630
Series 1455, Class H,
7.00%, 6/15/21 372,000 374,959
Series 1545, Class C,
6.00%, 6/15/23 25,892 25,165
Federal National Mortgage
Association (FNMA):
Series 1993-76, Class PG,
6.00%, 7/25/06 97,000 96,498
Series 1993-221, Class C,
5.50%, 9/25/07 100,000 98,090
Series 1994-23, Class K,
6.00%, 12/25/09 18,231 17,383
Series 1996-W4, Class A3,
6.72%, 12/25/11 100,000 100,370
Series 1990-96, Class E,
9.67%, 1/25/17 14,777 14,823
Series 1993-82, Class D,
6.35%, 3/25/19 195,000 193,848
Series 1993-103, Class PG,
6.25%, 6/25/19 100,000 99,640
Series 1989-66, Class J,
7.00%, 9/25/19 200,000 201,164
Series G-29, Class O,
8.50%, 9/25/21 59,498 61,592
Series 1993-149, Class L,
6.00%, 8/25/23 450,000 424,066
GE Capital Mortgage
Services, Inc.,
Series 1994-12, Class A4,
6.00%, 3/25/09 236,684 236,201
Saxon Mortgage
Securities Corporation,
Series 1994-9A, Class 1A3,
7.50%, 7/25/24 44,108 44,406
Zions Home Refinance
Loan Trust,
Series 1993-1, Class A,
5.15%, 9/25/03 $8,432 $8,339
-------------
TOTAL COLLATERALIZED
MORTGAGE OBLIGATIONS 2,056,174
-------------
COMMERCIAL MORTGAGE-BACKED
SECURITIES -- 3.5%
Chase Commercial Mortgage
Securities Corporation,
Series 1997-2, Class A2,
6.60%, 11/19/07 90,000 88,564
Merrill Lynch Mortgage
Investors, Inc.,
Series 1996-C1, Class A1,
7.15%, 4/25/28 197,753 199,345
-------------
TOTAL COMMERCIAL MORTGAGE-
BACKED SECURITIES 287,909
-------------
ASSET-BACKED SECURITIES -- 19.4%
Asset Securitization Corporation,
Series 1997-D4, Class A1D,
7.49%, 4/14/29 281,000 288,994
Green Tree Financial Corporation:
Series 1995-4, Class B1,
7.30%, 6/15/25 98,100 97,497
Series 1995-3, Class M1,
7.95%, 8/15/25 300,000 278,235
Morgan Stanley Capital,
Series 1997-ALIC, Class A1B,
6.44%, 11/15/02 250,000 249,290
Newcourt Receivables Asset Trust,
Series 1997-1, Class A4,
6.19%, 5/20/05 195,000 194,421
Oakwood Mortgage Investors, Inc.,
Series 1995-B, Class B1,
7.55%, 1/15/21 250,000 239,137
Vanderbilt Mortgage Finance,
Series 1997-B, Class 1A4,
7.19%, 2/7/14 $147,000 $149,664
Westinghouse Electric
Corporation Notes,
6.875%, 9/01/03 120,000 119,863
-------------
TOTAL ASSET-BACKED SECURITIES 1,617,101
-------------
U.S. TREASURY OBLIGATIONS -- 5.5%
U.S. Treasury Notes,
5.25%, 5/15/04 250,000 243,672
U.S. Treasury Strips,
Principal Only,
0.00%, 11/15/24 1,000,000 212,419
-------------
TOTAL U.S. TREASURY OBLIGATIONS 456,091
-------------
CORPORATE BONDS -- 43.0%
AT&T Corporation Debentures,
8.125%, 7/15/24 250,000 248,129
Chevron Capital USA, Inc.,
7.45%, 8/15/04 50,000 50,919
Dayton Hudson Corporation
Debentures,
9.625%, 2/01/08 300,000 347,702
Eastman Chemical Corporation
Debentures,
7.25%, 1/15/24 200,000 189,540
Enron Corporation Senior
Subordinated Debentures,
6.75%, 7/01/05 245,000 241,473
Equifax, Inc. Notes,
6.30%, 7/01/05 250,000 245,624
Federal Express Sinking Fund
Pass-Thru Certificates,
6.68%, 1/01/08 543,562 531,452
James River Corporation Notes,
7.92%, 12/27/04 250,000 256,609
Kansas City Power & Light,
6.50%, 11/01/01 150,000 149,830
May Department
Stores Debentures,
9.875%, 12/01/02 300,000 331,117
Phillips Petroleum Co. Debentures,
6.65%, 7/15/18 $300,000 $275,699
Union Carbide Corporation Notes,
6.75%, 4/01/03 200,000 196,922
United States Leasing International
Senior Notes,
8.75%, 12/01/01 50,000 52,570
United Telecom Debentures,
9.50%, 4/01/03 200,000 218,612
Wal-Mart Stores Pass-Thru
Certificates,
7.49%, 6/21/07 228,751 237,396
Washington Natural Gas,
6.07%, 1/16/04 10,000 9,696
-------------
TOTAL CORPORATE BONDS 3,583,290
-------------
TOTAL LONG-TERM INVESTMENTS 8,000,565
(cost $8,058,575)
TOTAL INVESTMENTS -- 96.1%
(cost $8,058,575) 8,000,565
Other assets in excess of liabilities -- 3.9% 328,106
-------------
Total net assets -- 100.00% $ 8,328,671
-------------
-------------
See notes to the financial statements.
STATEMENTS OF ASSETS AND LIABILITIES
JUNE 30, 1999
KPM KPM
EQUITY FIXED INCOME
PORTFOLIO PORTFOLIO
--------- ------------
ASSETS:
Investments, at value
(cost of $19,338,009 and
$8,058,575, respectively) $ 26,368,373 $ 8,000,565
Dividends and interest receivable 48,822 121,161
Receivable for investments sold -- 774,438
Receivable from Adviser -- 5,259
Capital shares sold 2,345 1,030
Other assets 8 416
------------ ------------
Total assets 26,419,548 8,902,869
------------ ------------
LIABILITIES:
Payable to Adviser 20,587 --
Payable to Distributor 6,533 1,809
Payable to Custodian -- 294,683
Payable for investments purchased -- 243,672
Capital shares redeemed -- 300
Accrued expenses and other liabilities 40,919 33,734
------------ ------------
Total liabilities 68,039 574,198
------------ ------------
NET ASSETS $ 26,351,509 $ 8,328,671
------------ ------------
------------ ------------
NET ASSETS CONSIST OF:
Paid in capital $ 18,358,895 $ 8,340,585
Accumulated undistributed net investment income -- 2,759
Accumulated undistributed net realized
gain on investments 962,250 43,337
Unrealized appreciation (depreciation)
on investments 7,030,364 (58,010)
------------ ------------
NET ASSETS $ 26,351,509 $ 8,328,671
------------ ------------
------------ ------------
Shares issued and outstanding (Fifty million
shares of $0.00001 par value authorized
per Portfolio) 1,613,816 806,289
Net asset value per share
(offering and redemption price) $ 16.33 $ 10.33
------------ ------------
------------ ------------
See notes to the financial statements.
KPM KPM
EQUITY FIXED INCOME
PORTFOLIO PORTFOLIO
--------- ------------
INVESTMENT INCOME:
Dividends (net of foreign taxes withheld
of $2,926 and $0, respectively) $ 529,966 $ --
Interest 187,693 732,075
------------ ------------
Total investment income 717,659 732,075
------------ ------------
EXPENSES:
Investment advisory fees 311,627 66,023
Administrative fees 44,752 30,326
Custody fees and expenses 10,031 5,143
Accounting and transfer agent fees and expenses 55,103 43,828
Professional fees 11,853 12,939
Directors' fees and expenses 5,702 2,141
Registration and filing fees 3,866 3,262
Shareholder reports 5,212 2,393
Amortization of deferred fees 8,320 1,069
Distribution fees (12b-1) 97,383 27,510
Other 4,057 1,349
------------ ------------
Total expenses before reimbursement
from Adviser 557,906 195,983
Less, expense reimbursement (272) (58,303)
------------ ------------
Net expenses 557,634 137,680
------------ ------------
NET INVESTMENT INCOME 160,025 594,395
------------ ------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 963,869 103,929
Net change in unrealized appreciation
(depreciation) of investments (3,309,904) (457,071)
------------ ------------
NET GAIN (LOSS) ON INVESTMENTS (2,346,035) (353,142)
------------ ------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ (2,186,010) $ 241,253
------------ ------------
------------ ------------
See notes to the financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
KPM EQUITY PORTFOLIO KPM FIXED INCOME PORTFOLIO
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income $ 160,025 $ 232,638 $ 594,395 $ 559,502
Net realized gain on investments 963,869 2,858,996 103,929 43,244
Change in unrealized
appreciation (depreciation) of investments (3,309,904) 845,812 (457,071) 299,425
------------ ------------- ------------ -------------
Net increase (decrease) in net assets
resulting from operations (2,186,010) 3,937,446 241,253 902,171
------------ ------------- ------------ -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (165,014) (230,975) (591,790) (559,794)
Net realized gain on investments (1,379,833) (5,646,345) (78,239) --
------------ ------------- ------------ -------------
Total dividends and distributions (1,544,847) (5,877,320) (670,029) (559,794)
------------ ------------- ------------ -------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 5,660,483 18,512,949 3,710,101 4,617,298
Shares issued in connection with payment of
dividends and distributions 1,411,524 5,464,299 622,146 474,197
Cost of shares redeemed (33,104,645) (7,265,078) (7,318,836) (2,562,121)
------------ ------------- ------------ -------------
Net increase (decrease) in net assets
from capital share transactions (26,032,638) 16,712,170 (2,986,589) 2,529,374
------------ ------------- ------------ -------------
TOTAL INCREASE (DECREASE) IN NET ASSETS (29,763,495) 14,772,296 (3,415,365) 2,871,751
NET ASSETS:
Beginning of period 56,115,004 41,342,708 11,744,036 8,872,285
------------ ------------- ------------ -------------
End of period*<F7> $ 26,351,509 $ 56,115,004 $ 8,328,671 $ 11,744,036
------------ ------------- ------------ -------------
*<F7>Including undistributed net investment
income (loss) of: $ -- $ (249) $ 2,759 $ (2,504)
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
CHANGES IN SHARES OUTSTANDING:
Shares sold 375,834 1,017,370 340,697 430,107
Shares issued in connection with payment
of dividends and distributions 91,538 324,718 58,182 44,337
Shares redeemed (2,095,537) (407,792) (679,628) (238,960)
------------ ------------- ------------ -------------
NET INCREASE (DECREASE) (1,628,165) 934,296 (280,749) 235,484
------------ ------------- ------------ -------------
------------ ------------- ------------ -------------
</TABLE>
See notes to the financial statements.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING
<TABLE>
KPM EQUITY PORTFOLIO
YEAR YEAR YEAR YEAR JULY 5, 1994(1)<F3>
ENDED ENDED ENDED ENDED TO
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE -
BEGINNING OF PERIOD $17.31 $17.92 $14.53 $12.00 $10.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.07 0.08 0.05 0.05 0.11
Net realized gain (loss) and
unrealized appreciation
(depreciation) (0.45) 1.31 4.25 2.83 2.06
------ ------ ------ ------ ------
Total from investment
operations (0.38) 1.39 4.30 2.88 2.17
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment
income (0.07) (0.08) (0.06) (0.05) (0.10)
Distributions from net realized
gain from investment
transactions (0.53) (1.92) (0.85) (0.30) (0.07)
------ ------ ------ ------ ------
Total distributions (0.60) (2.00) (0.91) (0.35) (0.17)
------ ------ ------ ------ ------
NET ASSET VALUE - END OF PERIOD $16.33 $17.31 $17.92 $14.53 $12.00
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN -1.97% 8.88% 30.92% 24.27% 22.01%(2)
RATIOS AND SUPPLEMENTAL DATA: <F4>
Net assets, end of period
(thousands) $26,352 $56,115 $41,343 $30,565 $15,361
Ratio of net expenses to average
net assets 1.43%(3) 1.42% 1.45% 1.50% 1.50%(4)
<F5> <F6>
Ratio of net investment income
to average net assets 0.41%(3) 0.45% 0.34% 0.40% 1.04%(4)
<F5> <F6>
Portfolio turnover rate 36.22% 32.25% 41.83% 34.05% 27.90%
(1)<F3>Commencement of Operations
(2)<F4>Not Annualized
(3)<F5>Without fees waived, ratio of net expenses to average net assets and ratio of net investment income to average net assets for
the year ended June 30, 1999, would have been 1.43% and 0.41%, respectively.
(4)<F6>Annualized
</TABLE>
See notes to the financial statements.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING
KPM FIXED INCOME PORTFOLIO
<TABLE>
YEAR YEAR YEAR YEAR JULY 5, 1994(1)<F8>
ENDED ENDED ENDED ENDED TO
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE -
BEGINNING OF PERIOD $10.80 $10.42 $10.23 $10.47 $10.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.60 0.59 0.61 0.63 0.57
Net realized gain (loss) and
unrealized appreciation
(depreciation) (0.40) 0.38 0.19 (0.23) 0.47
------ ------ ------ ------ ------
Total from investment
operations 0.20 0.97 0.80 0.40 1.04
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment
income (0.60) (0.59) (0.61) (0.62) (0.57)
Distributions from net realized
gain from investment
transactions (0.07) 0.00 0.00 (0.02) 0.00
------ ------ ------ ------ ------
Total distributions (0.67) (0.59) (0.61) (0.64) (0.57)
------ ------ ------ ------ ------
NET ASSET VALUE - END OF PERIOD $10.33 $10.80 $10.42 $10.23 $10.47
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN 1.86% 9.39% 7.96% 3.63% 9.63%(2)<F9>
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period
(thousands) $8,329 $11,744 $8,872 $8,465 $5,868
Ratio of net expenses to average
net assets:
Before expense
reimbursement 1.78% 1.33% 1.51% 1.29% 1.56%(3)<F10>
After expense
reimbursement 1.25% 1.25% 1.25% 1.25% 1.25%(3)<F10>
Ratio of net investment income
to average net assets:
Before expense
reimbursement 4.87% 5.44% 5.56% 5.90% 5.28%(3)<F10>
After expense
reimbursement 5.40% 5.52% 5.82% 5.94% 5.59%(3)<F10>
Portfolio turnover rate 34.25% 19.33% 26.14% 19.52% 40.34%
(1)<F8>Commencement of Operations
(2)<F9>Not Annualized
(3)<F10>Annualized
</TABLE>
See notes to the financial statements.
KPM FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS - JUNE 30, 1999
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, 1999, the Fund had
two portfolios in operation: the KPM Equity Portfolio and the KPM Fixed Income
Portfolio (collectively, the "Portfolios").
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 the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
VALUATION OF INVESTMENTS: Investment securities are carried at value 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.
DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income are
declared and paid quarterly. Distributions of net realized capital gains, if
any, will be declared at least annually.
EXPENSE ALLOCATION: Common expenses incurred by the Fund are allocated among
the Portfolios based upon relative average net assets, as incurred on a specific
identification basis, number of shareholder accounts or net sales or evenly
among the Portfolios, depending on the nature of the expenditure.
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. As of
June 30, 1999, all organizational costs have been fully amortized in each of the
Portfolios.
FEDERAL INCOME TAXES: It is the Portfolios' policy to meet the requirements of
the Internal Revenue Code applicable to regulated investment companies and the
Portfolios intend to distribute investment company net taxable income and net
capital gains to shareholders. Therefore, no federal income tax provision is
required.
OTHER: Security and shareholder transactions are recorded on trade date.
Realized gains and losses on sales of investments are calculated on the
identified cost basis. Dividend income and dividends and distributions to
shareholders are recorded on the ex-dividend date. Interest income is
recognized on an accrual basis. Generally accepted accounting principles
require that permanent financial reporting and tax differences relating to
shareholder distributions be reclassified to paid in capital.
3. INVESTMENT ADVISORY AND OTHER AGREEMENTS
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. The Adviser receives a fee, computed daily and payable
monthly, at the annual rates presented below as applied to each Portfolio's
daily net assets. The Adviser has voluntarily agreed to reimburse the
Portfolios to the extent of the advisory fee paid, if operating expenses exceed
the annual rates presented below as applied to each Portfolio's daily net
assets. For the year ended June 30, 1999 the Adviser waived the following fees:
KPM EQUITY KPM FIXED
PORTFOLIO INCOME PORTFOLIO
--------- ----------------
Annual Advisory Rate 0.80% 0.60%
Annual Cap on Expenses 1.50% 1.25%
Fees Waived $272 $58,303
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 Portfolios' shares. Pursuant to the distribution
agreement and Rule 12b-1 Plan, KPSP is paid a fee of 0.25% per annum of each
Portfolio's daily net assets. Under the terms of the distribution agreement,
the Portfolios incurred $97,383 and $27,510, respectively for such service.
For the year ended June 30, 1999, the KPM Equity Portfolio paid KPSP $1,227 in
broker commissions.
4. SECURITIES TRANSACTIONS
Purchases and sales of investment securities, other than short-term investments,
for the year ended June 30, 1999 were as follows:
KPM EQUITY KPM FIXED
PORTFOLIO INCOME PORTFOLIO
--------- ----------------
Purchases:
U.S. Government -- $1,133,615
Other $12,699,584 2,440,882
Sales:
U.S. Government -- 3,829,726
Other 32,455,866 2,249,451
At June 30, 1999, unrealized appreciation (depreciation) for federal income tax
purposes was as follows:
NET
APPRECIATION APPRECIATION DEPRECIATION
------------ ------------ ------------
KPM Equity Portfolio $7,030,364 $7,561,574 $(531,210)
KPM Fixed Income Portfolio (58,010) 105,169 (163,179)
At June 30, 1999, the cost of investment securities is identical for financial
reporting and income tax purposes.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of KPM Funds, Inc.:
We have audited the accompanying statement of assets and liabilities of the KPM
Equity Portfolio and the KPM Fixed Income Portfolio (collectively, the
"Portfolios") which comprise KPM Funds, Inc., including the schedules of
investments, as of June 30, 1999, and the related statements of operations for
the year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
three years in the period then ended. These financial statements and financial
highlights are the responsibility of the Portfolios' 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 on unqualified opinion on 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, 1999, by correspondence with the Portfolios' custodian and brokers. An
audit also includes assessing the accounting principles used and significant
estimates made by 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
KPM Equity Portfolio and the KPM Fixed Income Portfolio as of June 30, 1999, the
results of their operations for the year then ended, the changes in their net
assets for each of the two years in the period then ended, and the financial
highlights for each of the three years in the period then ended, in conformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
August 6, 1999
INVESTMENT ADVISER
KPM Investment Management, Inc.
DISTRIBUTOR
Kirkpatrick, Pettis, Smith, Polian Inc.
ADMINISTRATOR, TRANSFER AGENT, DIVIDEND PAYING AGENT AND SHAREHOLDER SERVICING
AGENT
Firstar Mutual Fund Services, LLC
CUSTODIAN
Firstar Bank Milwaukee, N.A.
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 logo)
10250 Regency Circle, Suite 500
Omaha, NE 68114-3723
