As filed with the Securities and Exchange Commission on August 23, 1999
1933 Act Registration Number 33-78234
1940 Act Registration Number 811-8488
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. |_|
------
Post-Effective Amendment No. 6 |X|
-----
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 7 |X|
-----
KPM FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
10250 Regency Circle
Omaha, NE 68114
(Address of Principal Offices)
Registrant's Telephone Number, including Area Code:
(402) 392-7931
Rodney D. Cerny
10250 Regency Circle
Omaha, NE 68114
(Name and Address of Agent for Service)
Copies of all communications to:
John C. Miles, Esq.
Cline, Williams, Wright, Johnson & Oldfather
1900 U.S. Bank Building, 233 South 13th Street
Lincoln, NE 68508
Approximate Date of Proposed Public Offering:
As soon as practical after effectiveness.
It is proposed that this filing will become effective (check appropriate box)
----- immediately upon filing pursuant to paragraph (b) of Rule 485 under
the Securities Act of 1933.
----- on _____________ pursuant to paragraph (b)
----- 60 days after filing pursuant to paragraph (a)(1)
--X-- on November 1, 1999 pursuant to paragraph (a)(1)
----- 75 days after filing pursuant to paragraph (a)(2)
----- on _____________ pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
----- This post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
[LOGO]
[LOGO]
KPM FUNDS, INC.
KPM EQUITY PORTFOLIO
Providing capital appreciation
KPM FIXED INCOME PORTFOLIO
Providing total return over 3-5 years consistent with preservation of capital
PROSPECTUS
November 1, 1999
INVESTMENT ADVISER
KPM Investment Management, Inc.
The Securities and Exchange Commission has not approved or disapproved these
securities or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
TABLE OF CONTENTS
RISK/RETURN SUMMARY............................................................2
PAST PERFORMANCE...............................................................3
FEE TABLES.....................................................................5
INVESTMENT OBJECTIVES, POLICIES AND RISKS......................................6
MANAGEMENT....................................................................10
DISTRIBUTION OF SHARES........................................................11
PRICING OF SHARES.............................................................11
PURCHASE OF SHARES............................................................12
REDEMPTION OF SHARES..........................................................13
INDIVIDUAL RETIREMENT ACCOUNTS................................................15
DIVIDENDS AND TAXES...........................................................15
FINANCIAL HIGHLIGHTS..........................................................17
YEAR 2000 ISSUE...............................................................18
RISK/RETURN SUMMARY
- --------------------------------------------------------------------------------
KPM EQUITY PORTFOLIO
INVESTMENT OBJECTIVE
To provide capital appreciation.
INVESTMENT STRATEGIES
At least 65% of the KPM Equity Portfolio's ("Equity Portfolio") total assets
will ordinarily be invested in equity securities consisting of common stock and
other securities convertible into common stock. In making selections for the
Equity Portfolio, the Adviser will use an investment approach based on
fundamental analysis with a value philosophy. The Adviser seeks to identify
small, medium and large capitalized companies that are selling at market prices
below what the Adviser believes to be their intrinsic value.
PRINCIPAL RISKS
The Equity Portfolio may be suitable for investors who wish to invest for the
long term and are willing to accept a high degree of volatility and risk.
o STOCK MARKET RISKS: Stock mutual funds are subject to stock market risks and
significant fluctuations in value. If the stock market declines in value,
theEquity Portfolio is likely to decline in value. Therefore, you may lose
money if the value of the Equity Portfolio declines.
o STOCK SELECTION RISKS: The stocks selected by the Adviser may decline in
value or not increase in value when the stock market in general is rising
and may fail to meet the Equity Portfolio's objective.
o LIQUIDITY RISKS: Liquidity risk is the risk that certain securities may be
difficult or impossible to sell at the time and price that the Adviser would
like to sell. The Adviser may have to sell the securities at a price lower
than it believes reasonable, sell other securities instead, or forego an
investment opportunity, any of which could have a negative effect on fund
management or performance.
KPM FIXED INCOME PORTFOLIO
INVESTMENT OBJECTIVE
To provide total return over a market cycle of 3 to 5 years consistent with
preservation of capital and prudent investment management.
INVESTMENT STRATEGIES
To achieve its two-fold objectives, the KPM Fixed Income Portfolio ("Fixed
Income Portfolio") will invest primarily in fixed-income securities with an
emphasis on income. The Fixed Income Portfolio will invest in investment-grade
securities rated BBB or better by Standard & Poor's Corporation or Baa or better
by Moody's Investors Services, corporate debt, preferred stock, mortgage-backed
securities, asset-backed securities and U.S. Government securities. The Adviser
anticipates average dollar-weighted portfolio maturity to range between seven
and ten years.
PRINCIPAL RISKS
The Fixed Income Portfolio may be suitable for investors who wish to invest for
the long term and want to earn income on investments considered more stable than
stocks.
o MARKET RISKS: The Fixed Income Portfolio is subject to bond market risk
which means that the value of the fund may go up or down. The market value
of fixed-income securities is significantly affected by changes in interest
rates. Generally, when interest rates decline, the market value rises and
when interest rates rise, the market value of fixed-income securities
declines. If the value of the Fixed Income Portfolio goes down, you may lose
money.
o MATURITY RISKS: The longer a bond's maturity, the greater the risk and the
higher its yield. Conversely, the shorter a bond's maturity, the lower the
risk and the lower its yield.
o BOND SELECTION RISKS: The Fixed Income Portfolio investment is subject to
the risks inherent in individual bond selections. The bonds selected by the
investment adviser may decline in value or not increase in value when the
bond market in general is rising.
o CREDIT RISKS: Individual issues of fixed-income securities may also be
subject to the credit risk of the issuer. That means that the underlying
company may experience unanticipated financial problems causing it to be
unable to meet its payment obligations.
Please note that an investment in KPM Funds is not a deposit of any bank and is
not issued or guaranteed by the Federal Deposit Insurance Corporation or any
other government agency.
PAST PERFORMANCE
- --------------------------------------------------------------------------------
The bar charts and tables below illustrate the variability of the Portfolios'
returns. The bar charts indicate the risks of investing in the Portfolios by
showing the changes in the Portfolios' performances from year to year on a
calendar year basis. The tables show how the Portfolios' average annual returns
for one year and since inception ended December 31, 1998, compare with those of
a broad measure of market performance. The Portfolios' past performance is not
necessarily an indication of how the Portfolios will perform in the future.
KPM EQUITY PORTFOLIO
Total Return
(per calendar year)
12/31/96 29.05%
12/31/97 20.09%
12/31/98 -3.89%
The total return for the nine months ended September 30, 1999 was _____%.
Best Quarter: Oct. - Dec. 1998 13.69%
Worst Quarter: July - Sept. 1998 (17.77)%
- -------------------------------- ---------- ------------
Average annual total return 1 Year Since
through 12/31/98 Inception
- -------------------------------- ---------- ------------
KPM Equity Portfolio 1<F1> (3.89) 16.93
S&P 500 Composite Index 2<F2> 28.58 28.02
- -------------------------------- ---------- ------------
1<F1>KPM Equity Portfolio commenced operations on July 5, 1994.
2<F2>The S&P 500 Composite Index 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
Total Return
(per calendar year)
12/31/96 3.23%
12/31/97 8.43%
12/31/98 6.82%
The total return for the nine moths ended September 30, 1999 was ___%.
Best Quarter: April - June 1995 5.33%
Worst Quarter: Jan - March 1996 (1.52)%
- ------------------------------------ -------- -----------
Average annual total return 1 Year Since
through 12/31/98 Inception
- ------------------------------------ -------- -----------
KPM Fixed Income Portfolio 1<F3> 6.82 7.48
Lehman Brothers Aggregate Bond
Index 2<F4> 8.69 9.06
- ------------------------------------ -------- -----------
1<F3>KPM Fixed Income Portfolio commenced operations on July 5, 1994.
2<F4>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; 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.
FEE TABLES
- --------------------------------------------------------------------------------
As an investor, you pay certain fees and expenses in connection with the KPM
Funds. These fees are described in the tables below and further explained in the
example that follows.
<TABLE>
SHAREHOLDER FEES 1<F5> KPM Equity KPM Fixed Income
(fees paid directly from your investment) Portfolio Portfolio
- -------------------------------------------------------------- ------------------- --------------------
<S> <C> <C>
Maximum Sales Charge (Load) Imposed on Purchases (as a None None
percentage of offering price)
Maximum Deferred Sales Charge (Load) None None
(as percentage of offering price)
Maximum Sales Charge (Load) Imposed on Reinvested Dividends None None
Redemption Fee None None
Exchange Fee None None
- -------------------------------------------------------------- ------------------- --------------------
</TABLE>
<TABLE>
ANNUAL PORTFOLIO OPERATING EXPENSES KPM Equity KPM Fixed Income
(expenses that are deducted from Portfolio assets) Portfolio Portfolio
- -------------------------------------------------------------- ------------------- --------------------
<S> <C> <C>
Management Fees 0.80% 0.60%
Distribution and Service (12b-1) Fees 0.25% 0.25%
Other Expenses 2<F6> 0.38% 0.93%
----- -----
Total Annual Portfolio Operating Expenses 2<F6> 1.43% 1.78%
----- -----
Expense Reimbursement None (0.53)%
Net Expenses 1.43% 1.25%
===== =====
- -------------------------------------------------------------- ------------------- --------------------
</TABLE>
1<F5>Although no sales loads or transaction fees are charged, you will be
assessed a $12.00 fee for outgoing wire transfers and a $25.00 fee for returned
checks.
2<F6>The amount shown for other expenses and total operating expenses represent
the other expenses and total operating expenses after expenses reimbursements by
the Adviser. By contract, the Adviser reimburses the Portfolios monthly to the
extent of the advisory fee paid for annual expenses of the Portfolios exceeding
1.50% of the average daily net assets for the Equity Portfolio and 1.25% of the
average daily net assets for the Fixed Income Portfolio.
EXAMPLE: This example is intended to help compare the cost of investing in the
Portfolios with the cost of investing in other mutual funds.
This example assumes that:
(1) the Adviser reimburses the Portfolios monthly to the extent of the
advisory fee paid for annual expenses of the Portfolios exceeding 1.5%
of the average daily net assets for the Equity Portfolio and 1.25% of
the average daily net assets for the Fixed Income Portfolio,
(2) You invest $10,000 in the Portfolios for the time period indicated and then
redeem all of your shares at the end of those
periods,
(3) your investment has a 5% return each year,
(4) all dividends and distributions have been reinvested, and
(5) that the Portfolios' operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
1 year 3 years 5 years 10 years
- ------------------------------------ --------- ---------- ---------- -----------
KPM Equity Portfolio $146 $452 $782 $1,713
KPM Fixed Income Portfolio*<F7> $127 $395 $684 $1,504
- ------------------------------------ --------- ---------- ---------- -----------
*<F7>Without expense reimbursements for the Fixed Income Portfolio, the cost for
the 1, 3, 5 and 10 year periods would be $181, $563, $972 and $2,113,
respectively.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
- --------------------------------------------------------------------------------
The investment objectives, policies and risks of each of the Portfolios are
discussed in further detail below. Unlike the investment objective, the
investment policies and techniques employed in pursuit of the Portfolios'
objectives may be changed without shareholder approval, unless otherwise
identified as fundamental policies. There is no assurance that these objectives
will be achieved.
KPM EQUITY PORTFOLIO
INVESTMENT OBJECTIVE
The investment objective of the Equity Portfolio is to provide capital
appreciation.
INVESTMENT POLICIES
To reach its investment objective, the Equity Portfolio will ordinarily invest
at least 65% of its total assets in equity securities consisting of common stock
and other securities convertible into common stock. In making selections for the
Equity Portfolio, the Adviser employs a value philosophy utilizing a
conservative "bottom-up" approach based on fundamental analysis. The Adviser's
philosophy can be summarized in its mission statement, which is "to find high
quality companies that are selling at prices we believe are below their
intrinsic value."
The Adviser views "intrinsic value" of a company as the value of a company based
upon:
o the nature of the company's business,
o the amount of earnings power based on a realistic expectation of the
company's asset growth and profitability,
o the level and sustainability of returns relative to the capital employed,
and
o the current economic/investment environment.
In terms of "high quality companies," the Adviser seeks companies with a strong
balance sheet, above-average historical growth of sales and earnings, companies
with superior profitability as evidenced by a high return on equity, and strong
management as evidenced by a good historical track record. The Adviser attempts
to buy and hold securities over an anticipated three to five year period.
The Adviser uses several methodologies to value the securities including, but
not limited to, price-to-earnings ratios, price-to-book value ratios past
earnings and future earnings projections, and strength and vision of management.
The Adviser also uses an analysis of the cash flow generated by the company
related to the amount of invested capital employed. Generally, the Adviser looks
for companies that are selling at a discount price-to-earnings ratio and
discount price-to-book ratio relative to the company's peer group and/or
relative to the market as a whole. The Adviser considers selling securities as
they achieve their target price or when there is a fundamental change in the
company's business prospects or other investment criteria.
There are two areas of the market where the Adviser concentrates its analytical
efforts: (1) large companies and (2) small to medium-sized companies.
LARGE COMPANIES STOCKS: In choosing stocks of large companies, the Adviser
analyzes large capitalization companies well known by the investment community,
but out of favor due to a recent fundamental problem, such as a temporary
decline in earnings. The Adviser defines "large capitalization" as companies
with market capitalizations in excess of $7.5 billion. The Adviser attempts to
take advantage of the short-term oriented thinking displayed by many investment
professionals by analyzing companies whose stocks have been sold off
dramatically due to a quarterly earnings report or monthly sales figure that
comes up short of the published estimates. When the Adviser determines that the
long-term fundamental value of a company has not been harmed by such short-term
earnings expectations, whether or not they ultimately prove to be accurate, the
Adviser will initiate purchases at prices it believes provide solid value.
SMALL TO MEDIUM-SIZED COMPANIES STOCKS: In selecting stocks of small to
medium-sized companies, the Adviser analyzes small to medium-sized companies
that it believes are not well received or followed by the research community.
These companies range in size from $100 million to $7.5 billion in market
capitalization. The same analysis performed on the large companies is followed
by the Adviser for these smaller to mid-sized companies; however, because of the
lack of widespread published research on these companies, the Adviser may
frequently utilize more direct research techniques, including company
visitations and interviews with management. Investments in smaller
capitalization companies may involve greater risk than investment in other
companies. The securities of smaller capitalized companies may be subject to
more abrupt or erratic market movements, and many of them have limited product
lines, markets, financial resources and/or management capabilities.
In addition to the equity securities mentioned above, the Equity Portfolio may
invest in:
o U.S. Government Securities (i.e., obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities which include U.S.
Treasury bills, notes and bonds),
o Convertible securities rated BBB or better by S&P or Baa or better by
Moody's,
o Options for hedging purposes,
o Money market instruments (i.e., U.S. Treasury bills and short-term notes,
U.S. Government Securities subject to repurchase agreements, bank
obligations, commercial paper, and other money market mutual funds), and
o Repurchase Agreements on U.S. Government Securities.
TEMPORARY INVESTMENTS: To respond to adverse or abnormal market, economic,
political and other conditions, the Equity Portfolio may deviate from its
policies and invest up to 100% of its assets in U.S. Government securities and
money market instruments described above to maintain liquidity. To the extent
the Equity Portfolio engages in this temporary defensive strategy, it may not
achieve its investment objective.
INVESTMENT RISKS
In addition to the principle risks mentioned in the Risk/Return Summary, the
Equity Portfolio is subject to the following risks:
PORTFOLIO TURNOVER RISKS: The Adviser may engage in active trading of Portfolio
securities to achieve its investment goals. This practice could result in the
Equity Portfolio experiencing a high turnover rate (100% or more). High
portfolio turnover rates lead to increased costs, could cause you to pay higher
taxes and could negatively affect the performance of the Equity Portfolio.
OPTIONS RISKS: The Equity Portfolio may use options for hedging purposes only.
The hedging strategy may not be successful if the Adviser is unable to
accurately predict movements in the prices of individual securities held by a
fund or if the strategy does not correlate well with the Equity Portfolio's
investments. The use of options may produce a loss for the Portfolio, even when
used only for hedging purposes.
SMALL AND MEDIUM-SIZED COMPANIES RISKS: The Equity Portfolio may invest in the
stocks of small, medium and large-sized companies. Small and medium-size
companies often have narrower markets for their goods and/or services and more
limited managerial and financial resources than larger, more established
companies. As a result, their performance can be more volatile and they face
greater risk of business failure, which could increase the volatility of the
fund's portfolio.
The Statement of Additional Information contains more information about the
Equity Portfolio and the types of securities in which it may invest.
KPM FIXED INCOME PORTFOLIO
INVESTMENT OBJECTIVE
The Fixed Income Portfolio seeks to provide total return over a market cycle of
3 to 5 years consistent with preservation of capital and prudent investment
management.
INVESTMENT POLICIES
To achieve its objective, the Fixed Income Portfolio will invest at least 65% of
its assets in fixed-income securities with an emphasis on income. The secondary
objective of capital appreciation is more difficult to achieve, however the
Adviser seeks to identify fixed income securities that provide above-average
relative yield, appreciation potential and safety of principle. The Adviser
places particular emphasis on analyzing the credit of corporate issuers to
enhance income return and protect against credit losses. The Adviser balances
the potential for capital appreciation with the need for capital preservation
and the stability of income. The Fixed Income Portfolio will invest only in:
o U.S. Government and corporate investment-grade securities which are
securities rated BBB or better by Standard & Poor's Corporation ("S&P") or
Baa or better by Moody's Investors Services ("Moody's"),
o preferred stock,
o mortgage-backed securities, and
o asset-backed securities.
The Fixed Income Portfolio does not have a stated policy on portfolio maturity,
but the Adviser anticipates average dollar-weighted portfolio maturity to range
between seven and ten years. Longer portfolio maturities result in greater
fluctuation in the net asset value during periods of interest rate volatility.
U.S. GOVERNMENT SECURITIES: The Fixed Income Portfolio may invest in securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
U.S. Government securities include direct obligations of the U.S. Treasury (such
as U.S. Treasury bills, notes and bonds).
CORPORATE FIXED INCOME SECURITIES: The Fixed Income Portfolio may invest in
domestic corporate debt obligations, obligations of the United States, and
notes, bonds, and discount notes of U.S. Government agencies or
instrumentalities. The Adviser selects bonds based on their potential interest
rates and yield in relation to other bonds of similar quality and maturity. The
Fixed Income Portfolio will only invest in investment grade securities, which
are securities rated BBB or better by S&P or rated Baa or better by Moody's. In
the event the rating of an investment grade security is lowered to below
investment grade, the Adviser will assess the creditworthiness of the issuer,
evaluate the likelihood of the security being upgraded to investment grade or
being further down-graded and may choose to hold or sell the security as
appropriate. Securities rated below BBB by S&P or below Baa by Moody's are
considered to have speculative characteristics and, as a result, are more
susceptible to fluctuations in market value than higher rated securities.
PREFERRED STOCK: The Fixed Income Portfolio may invest in high dividend paying
preferred stock of U.S. companies. The companies must have a history of stable
earnings and/or growing dividends for the Adviser to select preferred stock of
companies.
MORTGAGE-BACKED SECURITIES: The Fixed Income Portfolio may invest in
mortgage-backed securities. Mortgage-backed securities are mortgage loans made
by banks, savings and loan institutions, and other lenders assembled into pools,
which are issued and guaranteed by an agency or instrumentality of the U.S.
government, though not necessarily backed by the full faith and credit of the
U.S. Government itself. Interests in such pools are described as
"Mortgage-Backed Securities." These include securities issued by the Government
National Mortgage Association ("GNMA"), Federal Home Loan Mortgage Corporation
("FHLMC"), and the Federal National Mortgage Association ("FNMA").
The Fixed Income Portfolio may invest a portion of its assets in Collateralized
Mortgage Obligations ("CMOs"), which are debt obligations collateralized by
mortgage loans or mortgage pass-through securities. Typically, CMOs are
collateralized by certificates issued by GNMA, FNMA or FHLMC, but also may be
collateralized by whole loans or private mortgage pass-through securities.
ASSET-BACKED SECURITIES: The Fixed Income Portfolio may invest in asset-backed
securities. Asset-backed securities are securities secured by non-mortgage
assets such as company receivables, truck and auto loans, leases, credit card
receivables and other consumer loans. Such securities are generally issued as
pass-through certificates, which represent undivided fractional ownership
interests in the underlying pools of assets. Such securities also may be debt
instruments, which are also known as collateralized obligations and are
generally issued as the debt of a special-purpose entity, such as a trust,
organized solely for the purpose of owning such assets and issuing such debt.
TEMPORARY INVESTMENTS: To respond to adverse or abnormal market, economic,
political and other conditions, the Fixed Income Portfolio may deviate from its
policies and invest up to 100% of its assets in U.S. Government securities and
money market instruments. Money market instruments include U.S. Treasury bills
and short-term notes, U.S. Government Securities subject to repurchase
agreements, bank obligations, commercial paper and other money market mutual
funds. To the extent the Fixed Income Portfolio engages in this temporary
defensive strategy, it may not achieve its investment objective.
INVESTMENT RISKS
In addition to the principal risks discussed in the Risk/Return summary, the
Fixed Income Portfolio is subject to the following risks:
STOCK MARKET RISKS: One of the risks of investing in equity securities is stock
market risk. The portion of the fund's portfolio invested in equity securities
may experience sudden, unpredictable declines in value, as well as periods of
poor performance. Because stock values go up and down, the value of your Fixed
Income Portfolio's shares may go up and down. Therefore, when you sell your
investment, you may receive more or less money than you originally invested.
LIQUIDITY RISKS: Liquidity risk is the risk that certain securities may be
difficult or impossible to sell at the time and price that the investment
Adviser would like to sell. The Adviser may have to lower the price, sell other
securities instead or forego an investment opportunity, any of which could have
a negative effect on fund management or performance.
PORTFOLIO TURNOVER RISKS: The Adviser may engage in active trading of Portfolio
securities to achieve its investment goals. This practice could result in the
Fixed Income Portfolio experiencing a high turnover rate (100% or more). High
portfolio rates lead to increased costs, could cause you to pay higher taxes and
could negatively affect the Fixed Income Portfolio's performance.
MORTGAGE AND ASSET-BACKED SECURITIES RISKS: The main risk of mortgage and
asset-backed securities is that the borrower will prepay some or all of the
principal owed to the issuer. If that happens, the Fixed Income Portfolio may
have to replace the security by investing the proceeds in a less attractive
security. This could reduce the Portfolio's share price and its income
distributions.
OPTIONS RISKS: The Fixed Income Portfolio may use options for hedging purposes
only. The hedging strategy may not be successful if the Adviser is unable to
accurately predict movements in the prices of individual securities held by a
fund or if the strategy does not correlate well with the Fixed Income
Portfolio's investments. The use of options may produce a loss for the
Portfolio, even when used only for hedging purposes.
The Statement of Additional Information contains more information about the
Fixed Income Portfolio and the types of securities in which it may invest.
MANAGEMENT
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
KPM Investment Management, Inc. ("KPM" or "Adviser") is the investment adviser
for the two Portfolios of the KPM Funds. KPM has been retained under an
Investment Advisory Agreement with KPM Funds to act as the Portfolios'
investment adviser subject to the authority of the Board of Directors. (The
Statement of Additional Information contains more information regarding the
Board of Directors). KPM is a wholly-owned subsidiary of KFS Corporation, which
is a wholly owned subsidiary of Mutual of Omaha Insurance Company.
Under the Investment Advisory Agreement, the Adviser receives a monthly fee
computed separately for the Portfolios at an annual rate as follows:
Percentage Amount of
Adviser's Annual Fee Average Daily Net Assets
------------------------------- -----------------------------
Equity Portfolio 0.80%
Fixed Income Portfolio 0.60%
------------------------------- -----------------------------
The Adviser furnishes the Equity Portfolio and the Fixed Income Portfolio with
investment advice and in general, supervises the management and investment
programs of KPM Funds. The Adviser provides all necessary administrative
services, office space, equipment, clerical personnel for servicing the
investments of the Portfolios, investment advisory facilities, executive and
supervisory personnel for managing the investments and effecting the securities
transactions of the Portfolios. In addition, the Adviser pays the salaries and
fees of all officers and directors of KPM Funds who are affiliated persons of
the Adviser.
PORTFOLIO MANAGERS
RODNEY D. CERNY, President of KPM Funds, Inc. and Executive Vice President and
Chief Investment Officer of the Adviser, co-manages the Equity Portfolio with
Bruce H. Van Kooten (see below). Mr. Cerny also serves as a director for
Kirkpatrick Pettis Trust Company and is the Executive Vice President and Chief
Investment Officer at Kirkpatrick, Pettis, Smith, Polian Inc. Mr. Cerny has been
an investment analyst since 1975 and has been affiliated with KPM in various
capacities since 1986. During that time, Mr. Cerny has managed many taxable and
tax-exempt portfolios for high net worth individuals and corporations. Mr. Cerny
is a Chartered Financial Analyst with a Bachelor of Science Degree from the
University of Nebraska-Lincoln.
BRUCE H. VAN KOOTEN, First Vice President and Portfolio Manager for the Adviser,
co-manages the Equity Portfolio with Rodney D. Cerny (see above). Mr. Van Kooten
has been a portfolio manager with KPM since 1988. As such, Mr. Van Kooten has
managed many taxable and tax-exempt portfolios for high net worth individuals
and corporations. Prior to that time, Mr. Van Kooten was a Trust Investment
Officer for a regional national bank from 1982 through 1988. Mr. Van Kooten is a
Chartered Financial Analyst with a Bachelor of Science Degree from Iowa State
University.
PATRICK M. MINER, Vice President of the Adviser, manages the Fixed Income
Portfolio. Since 1992, Mr. Miner has been affiliated with Mutual of Omaha
Insurance Company as Vice President and Portfolio Manager. As such, Mr. Miner
has managed many taxable and tax-exempt portfolios for high net worth
individuals and corporations. Prior to that time, Mr. Miner was a portfolio
manager for a regional national bank from 1984 through 1992 and was an account
executive with two broker-dealer firms from 1978 through 1984. Mr. Miner is a
Chartered Financial Analyst and received his Bachelor of Science Degree from the
University of Nebraska-Lincoln in 1972.
FUND ADMINISTRATION, FUND ACCOUNTING, TRANSFER AGENT AND CUSTODY SERVICES
Firstar Mutual Fund Services, LLC serves as KPM Fund's administrator, transfer
agent and fund accountant. As such, Firstar Mutual Fund Services, LLC provides
all necessary recordkeeping services and share transfer services for KPM Funds.
Firstar Bank Milwaukee, N.A. serves as custodian for KPM Funds.
DISTRIBUTION OF SHARES
- --------------------------------------------------------------------------------
DISTRIBUTOR
Kirkpatrick, Pettis, Smith, Polian Inc., ("Kirkpatrick Pettis" or "Distributor")
a wholly owned subsidiary of Mutual of Omaha Insurance Company, serves as
distributor and principal underwriter for the shares of KPM Funds pursuant to a
Distribution Agreement and a Rule 12b-1 Plan. Kirkpatrick Pettis is located at
10250 Regency Circle, Omaha, Nebraska 68114.
RULE 12B-1 PLAN AND DISTRIBUTION AGREEMENT
The KPM Funds have adopted a Plan of Distribution under Rule 12b-1 of the
Investment Company Act of 1940 ("Rule 12b-1 Plan"). Under the Rule 12b-1 Plan,
the Equity Portfolio and the Fixed Income Portfolio may pay up to an annual rate
of 0.25% of the average daily net asset value of shares to the Distributor. The
Distributor uses this fee to finance activities that promote the sale of the
Portfolio's shares. Such activities include, but are not necessarily limited to,
advertising, printing and mailing prospectus to persons other than current
shareholders, printing and mailing sales literature, and compensating
broker-dealers, and sales personnel.
The Distributor may enter into related selling group agreements with various
broker-dealer firms that provide distribution services to investors. Although
the Distributor does not currently compensate firms for selling shares of the
Portfolios, it may elect to compensate the firms solely from its assets. The
Distributor may, from time to time, pay additional commissions or promotional
incentives to firms that sell shares of KPM Funds. In some instances, such
additional commissions, fees or other incentives may be offered only to certain
firms that sell or are expected to sell during specified time periods certain
minimum amounts of shares of KPM Funds, or of other funds distributed by
Kirkpatrick Pettis.
Rule 12b-1 fees are paid to Kirkpatrick Pettis out of Portfolio assets on an
on-going basis. Over time, these fees will increase the cost of your investment
and may cost you more than paying other types of sales charges.
PRICING OF SHARES
- --------------------------------------------------------------------------------
The Portfolios determine their net asset value each day the New York Stock
Exchange (the "Exchange") is open for business. The calculation is made as of
the close of business of the Exchange (currently 4:00 p.m., Eastern Standard
Time) after the Portfolios have declared any applicable dividends.
The net asset value per share for each of the Portfolios is determined by
dividing the Portfolio's total assets less all liabilities by the number of
Portfolio shares outstanding. For purposes of determining the aggregate net
assets of the Portfolios, cash and receivables are valued at their face amounts.
Interest will be recorded as accrued and dividends will be recorded on the
ex-dividend date.
Individual securities in the Portfolios are valued as follows:
(1) Securities traded on a national securities exchange are valued at the last
reported sale price that day.
(2) 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.
(3) Portfolio securities underlying actively traded options will be valued
at their market price as determined above. The current market value of
any exchange-traded option held by a Portfolio is its last sales price
on the exchange prior to the time when assets are valued unless the bid
price is higher or the asked price is lower, in which event such bid or
asked price is used. Lacking any sales that day, the options will be
valued at the mean between the current closing bid and asked prices.
(4) Securities and other assets for which market prices are not readily
available are valued at fair value as determined in good faith in
accordance with procedures approved by the Board of Directors.
With the approval of the Board of Directors, the Portfolios may utilize a
pricing service, bank, or broker-dealer experienced in such matters to perform
any of the above-described functions.
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
IN GENERAL
The KPM Funds do not apply any sales charges to shares of the Equity Portfolio
or the Fixed Income Portfolio. Shares of the Portfolios are offered at the net
asset value per share next determined following receipt of an order by
Kirkpatrick Pettis or KPM Funds. You may purchase Portfolio shares from
registered representatives of Kirkpatrick Pettis, from other broker-dealers who
have sales agreements with Kirkpatrick Pettis, or directly from KPM Funds. You
will receive written confirmation of your purchases, however, you will not be
issued any stock certificates. KPM Funds reserves the right to reject any
purchase order.
PAYING FOR PORTFOLIO SHARES
You should pay for shares of the Portfolios by check or money order in U.S.
dollars drawn on a U.S. bank, savings and loan, or credit union. The minimum
aggregate initial investment in the Portfolios is $5,000. Subsequent investments
of at least $100 may be made by mail or by wire. These minimums can be changed
or waived by KPM Funds at any time. You will be given at least 30 days' notice
of any increase in the minimum dollar amount of subsequent investments.
METHODS OF PURCHASE
BY MAIL
You may purchase Portfolio shares by completing the enclosed shareholder
application and mailing it and a check or money order payable to "KPM Funds,
Inc." to the Distributor or the Transfer Agent at the address below. The minimum
initial investment is $5,000. If your check does not clear, you will be charged
a $25 service fee. You will also be responsible for any losses suffered by KPM
Funds as a result. Neither cash nor third-party checks will be accepted.
<TABLE>
- ---------------------------------------- ------------------------------------- ------------------------------------------
<S> <C> <C>
Distributor's Address Transfer Agent's Addresses Overnight:
KPM Funds, Inc. Regular Mail: KPM Funds, Inc.
Kirkpatrick, Pettis, Smith, Polian Inc. KPM Funds, Inc. Firstar Mutual Fund Services, LLC
10250 Regency Circle Firstar Mutual Fund Services, LLC Third Floor
Omaha, Nebraska 68114 P.O. Box 701 615 East Michigan Street
Milwaukee, Wisconsin 53201-0701 Milwaukee, Wisconsin 53202
- ---------------------------------------- ------------------------------------- -------------------------------------------
</TABLE>
NOTE: The KPM Funds do not consider the U.S. Postal Service or other independent
delivery services to be its agents. Therefore, deposits in the mail or with such
services, or receipt at the Transfer Agent's post office box, of purchase
applications does not constitute receipt by the Transfer Agent or KPM Funds. Do
not mail letters by overnight courier to the post office box.
WIRE PURCHASES
You may purchase Portfolio shares by wire. Please call the nationwide toll free
number 1-877-KPM-FUND prior to wiring any money to notify the Transfer Agent
that the wire is coming and to verify the proper wire instructions so that the
wire is properly applied when received. KPM Funds is not responsible for the
consequences of delays resulting from the banking or Federal Reserve wire
system. The wiring instructions are as follows:
Wire to: Firstar Bank
ABA Number 075000022
Credit: Firstar Mutual Fund Services, LLC
Account 112-952-137
Further Credit: KPM Funds, Inc.
(shareholder account number)
(shareholder name/account registration)
TELEPHONE PURCHASES
You may make subsequent investments directly from a bank checking or savings
account over the telephone. To establish the telephone purchase option on your
account, complete the appropriate section in the shareholder application. Only
bank accounts held at domestic financial institutions that are Automated
Clearing House ("ACH") members may be used for telephone transactions. This
option will become effective approximately 15 business days after the
application form is received by the Transfer Agent. Purchases must be in amounts
of $100 or more and may not be used for initial purchases of a Portfolio's
shares. To have Portfolio shares purchased at the offering price determined at
the close of regular trading on a given date, the Transfer Agent must receive
both your purchase order and payment by Electronic Funds Transfer through the
ACH system prior to the close of regular trading on such date. Most transfers
are completed within one business day. Subsequent investments may be made by
calling the nationwide toll free number 1-877-KPM-FUND.
SUBSEQUENT INVESTMENTS
Additions to your account may be made by mail or by wire. Any subsequent
investment must be at least $100. When making an additional purchase by mail,
enclose a check payable to "KPM Funds, Inc." and the Additional Investment Form
provided on the lower portion of your account statement. To make an additional
purchase by wire, please call the nationwide toll free number 1-877-KPM-FUND and
see above for complete wiring instructions.
AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan allows you to make regular, systematic investments
in one or more of the Portfolios from your bank checking account. The minimum
initial investment for the Automatic Investment Plan is $5,000. Under the
Automatic Investment Plan, you may make automatic monthly investments on the
days of your choosing (or the next business day thereafter) from your financial
institution in amounts of $100 or more.
You can set up the Automatic Investment Plan with any financial institution that
is an Automatic Clearing House member. To establish the Automatic Investment
Plan, complete the appropriate section in the shareholder application. There is
no service fee for participating in the plan. However, a service fee of $25 will
be deducted from your KPM Funds account if:
(1) any automatic investment purchase does not clear due to insufficient funds,
or
(2) you close your bank account or prevent withdrawal of funds before notifying
KPM Funds of your intention to terminate the plan.
KPM Funds reserves the right to close your account under certain circumstances.
If your account balance falls below $5,000, KPM Funds will give you 30 days'
written notice to reinstate the Automatic Investment Plan or otherwise reach the
minimum initial investment before closing your account.
Redemption of Shares
- --------------------------------------------------------------------------------
WHEN REDEMPTION PROCEEDS ARE SENT TO YOU
You may request redemption of part or all of your Portfolio shares at any time
at the next determined net asset value. No redemption request will become
effective until a redemption request is received in "good order" (as described
below) by the Transfer Agent. KPM Funds will normally mail your redemption
proceeds the next business day and, in any event, no later than seven days after
receipt of a redemption request in good order. However, when a purchase has been
made by check, KPM Funds may hold payment on redemption proceeds until it is
reasonably satisfied that the check has cleared. This may take up to 12 days.
WHERE REDEMPTION PROCEEDS ARE SENT
Checks will be sent to your address of record. If the proceeds of the redemption
are requested to be sent to an address other than the address of record or if
the address of record has been changed within 15 days of the redemption request,
you must request your redemption in writing with your signature guaranteed. If
the U.S. Postal Service is unable to deliver the check to the address of record
or if the check remains outstanding for at least six months, KPM Funds reserves
the right to reinvest the check at the then current net asset value.
METHODS OF REDEMPTION
WRITTEN REDEMPTIONS
For most redemption requests, you need only furnish a written, unconditional
request to redeem your shares at net asset value to the address below:
Regular Mail: Overnight Mail:
KPM Funds, Inc. KPM Funds, Inc.
Firstar Mutual Fund Services, LLC Firstar Mutual Fund Services, LLC
P.O. Box 701 Third Floor
Milwaukee, Wisconsin 53201-0701 615 East Michigan Street
Milwaukee, Wisconsin 53202
Redemption proceeds may also be wired to a commercial bank authorized by you on
your account application. KPM Funds may request additional documentation from
corporations, executors, administrators, trustees, guardians, agents or
attorneys-in-fact.
TELEPHONE REDEMPTIONS
You may also redeem shares of the Portfolios by calling the nationwide toll free
number 1-877-KPM-FUND. You may redeem $1,000 or more by telephone. Redemption
requests for less than $1,000 must be in writing. Be sure to indicate on the
application form that you authorize redemptions by telephone. Proceeds redeemed
by telephone can be mailed, wired, or sent via ACH only to your address or bank
of record as shown on the records of the Transfer Agent. Funds sent via ACH are
automatically credited to your account within three business days. There is
currently no charge for this service. To change the designated account or
address, send a written request with signature(s) guaranteed to the Transfer
Agent (see above). KPM Funds may request additional documentation from
corporations, executors, administrators, trustees, guardians, agents or
attorneys-in-fact. No telephone redemption requests will be allowed within 15
days of such a change. KPM Funds reserves the right to limit the number of
telephone redemptions. Once made, you may not modify or cancel your telephone
redemption.
NOTE: The Transfer Agent will use reasonable procedures to ensure that
instructions received by telephone are genuine. The Transfer Agent may require
some form of personal identification prior to acting upon your telephone
instructions, may record telephonic transactions and may send written
confirmation of the transactions to you. Assuming these procedures have been
followed, neither KPM Funds nor the Transfer Agent will be liable for any loss,
cost, or expense for acting upon an investor's instructions or for any
unauthorized telephone redemption. KPM Funds reserves the right to refuse a
telephone redemption request if so advised.
BROKER-DEALER REDEMPTIONS
You may redeem your shares through your broker or dealer. Such redemptions will
be effected at the net asset value next determined after receipt by KPM Funds of
your broker or dealer's instruction to redeem shares. Some brokers or dealers
may charge a fee in connection with such redemptions.
IRA ACCOUNTS
Investors who have an Individual Retirement Account ("IRA") must indicate on
their redemption requests whether or not federal income tax should be withheld.
Redemption requests failing to make an election will be subject to withholding.
SYSTEMATIC WITHDRAWAL PLAN
You may set up automatic withdrawals from your account at regular intervals if
you have at least $50,000 in your account. The minimum withdrawal is $100 per
payment. To establish the systematic withdrawal plan, complete the appropriate
section in the shareholder application and indicate whether you want redemptions
on a monthly, quarterly, semi-annual or annual basis. You may vary the amount or
frequency of withdrawal payments or temporarily discontinue them by calling the
nationwide toll free number 1-877-KPM-FUND. Depending upon the size of the
account and the withdrawals requested (and fluctuations in the net asset value
of the shares redeemed), redemptions for the purpose of satisfying such
withdrawals may reduce or even exhaust your account. If the amount remaining in
your account is not sufficient to meet a plan payment, the remaining amount will
be redeemed and the systematic withdrawal plan will be terminated.
REDEMPTIONS IN KIND
If your redemption request exceeds the lesser of $250,000 or 1% of the NAV, KPM
Funds reserves the right to make a "redemption in-kind." A redemption in-kind is
a payment in Portfolio securities rather than cash. The Portfolio securities
would be valued according to their NAV. KPM Funds will not recognize gain or
loss for federal tax purposes on the securities used to complete an in-kind
redemption, but you will recognize gain or loss equal to the difference between
the fair market value of the securities received and the shareholder's basis in
the Portfolio shares redeemed.
ACCOUNTS WITH LOW BALANCES
Your account may be terminated by KPM Funds with no less than 30 days' notice
if, at the time of any redemption of shares in your account, the value of the
remaining shares in the account falls below $5,000. In such cases, KPM Funds
will send you a check for the proceeds of redemption within seven days of the
redemption.
SIGNATURE GUARANTEES
You will need your signature guarantee for:
o redemption requests to be mailed or wired to a person other than the
registered owner(s) of the shares,
o redemption requests to be mailed or wired to an address other than the
address that appears of record,
o any redemption request if a change of address has been received by KPM Funds
or Transfer Agent within the last 15 days, and
o any redemption from an IRA account. A signature guarantee may be obtained
from any eligible guarantor institution, which generally includes banks,
saving associations, credit unions and brokerage firms, including
Kirkpatrick Pettis. A notary public stamp or seal is not acceptable.
GOOD ORDER
When making a redemption request, make sure your request is in good order. "Good
Order" means your letter of instruction includes:
o the name of the Portfolio
o the number of shares or dollar amount to be redeemed
o signatures of all registered shareholders exactly as the shares are
registered, and
o the account registration number.
INDIVIDUAL RETIREMENT ACCOUNTS
- --------------------------------------------------------------------------------
KPM Funds offers Individual Retirement Accounts as well as various other
retirement plan accounts. To obtain the appropriate disclosure documentation and
more complete information on how to open a retirement account call nationwide
toll free 1-877-KPM-FUND.
DIVIDENDS AND TAXES
- --------------------------------------------------------------------------------
DIVIDENDS
Unless you provide a written request to receive payments in cash, your dividends
and capital gain distributions will automatically be reinvested in additional
shares of the Portfolio. The Equity Portfolio and Fixed Income Portfolio declare
and pay dividends on a quarterly basis. The taxable status of income dividends
and/or net capital gains distributions is not affected by whether they are
reinvested or paid in cash. If you choose to have distribution checks mailed to
you and either the U.S. Postal Service is unable to deliver the check to you or
if the check remains outstanding for at least six months, KPM Funds reserves the
right to reinvest the check at the then current net asset value until you notify
us with different instructions.
TAXES
The Portfolios will each be treated as separate entities for federal income tax
purposes. The Portfolios of KPM Funds presently qualify as "regulated investment
companies" as defined in the Internal Revenue Code and take the necessary steps
to requalify the Portfolios as "regulated investment companies" on an annual
basis. Provided certain distribution requirements are met, the Portfolios will
not be subject to federal income tax on their net investment income and net
capital gains that they distribute to their shareholders.
Shareholders subject to federal income taxation will receive taxable dividend
income or capital gains, as the case may be, from distributions, whether paid in
cash or received in the form of additional shares. Promptly after the end of
each calendar year, each shareholder will receive a statement of the federal
income tax status of all dividends and distributions paid during the year. You
should consult your own tax adviser regarding tax consequences under state and
local laws.
KPM Funds may be required to withhold federal income tax at a rate of 31% (back
up withholding) from dividend payments, distributions and redemption proceeds if
you fail to furnish the Fund with your social security number. You must also
certify that your social security number is correct and that you are not subject
to backup withholding. The certification is included as part of the share
purchase application.
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The financial highlights tables set forth below are intended to help you
understand the Portfolios' financial performance for the past 5 years or for the
Portfolios' period of operations, as the case may be. Certain information
reflects financial results with respect to a single Portfolio share. The total
returns in the tables represent the rates that an investor would have earned (or
lost) on an investment in a Portfolio (assuming reinvestment of all dividends
and distributions). This information has been audited by Deloitte & Touche, LLP,
whose report, along with the Portfolios' financial statements are included in
the KPM Fund's annual report, which is available upon request.
KPM EQUITY PORTFOLIO
<TABLE>
Fiscal Year Ended
July 5, 1994(1)<F8> 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 (0.53) (1.92) (0.85) (0.30) (0.07)
from investment transactions
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)<F9>
Ratios and Supplemental Data:
Net assets, end of period (thousands) $26,352 $56,115 $41,343 $30,565 $15,361
Ratio of net expenses to average net 1.43%(3)<F10> 1.42% 1.45% 1.50% 1.50%(4)<F11>
assets
Ratio of net income to average net assets 0.41%(3)<F10> 0.45% 0.34% 0.40% 1.04%(4)<F11>
Portfolio turnover rate 36.22% 32.25% 41.83% 34.05% 27.90%
</TABLE>
(1)<F8>Commencement of Operations.
(2)<F9>Not Annualized.
(3)<F10>Without fees waived, ratio of 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)<F11>Annualized.
KPM FIXED INCOME PORTFOLIO
<TABLE>
Fiscal Year Ended
July 5, 1994(1)<F12> 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)<F13>
Ratios/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)<F14>
After expense reimbursement 1.25% 1.25% 1.25% 1.25% 1.25%(3)<F14>
Ratio of net income to average net assets:
Before expense reimbursement 4.87% 5.44% 5.56% 5.90% 5.28%(3)<F14>
After expense reimbursement 5.40% 5.52% 5.82% 5.94% 5.59%(3)<F14>
Portfolio Turnover Rate 34.25% 19.33% 26.14% 19.52% 40.34%
</TABLE>
(1)<F12>Commencement of Operations.
(2)<F13>Not Annualized.
(3)<F14>Annualized.
Year 2000 Issue
- --------------------------------------------------------------------------------
Like all financial service providers, the Adviser, Administrator, Custodian,
Transfer Agent, Distributor and other third parties utilize systems that may be
affected by Year 2000 transition issues. The services provided to KPM Funds and
the shareholders by these service providers depend on the smooth functioning of
their computer systems and those of other parties they deal with. Many computer
software systems in use today cannot distinguish the year 2000 from the year
1900 because of the way dates are encoded and calculated. Such an event could
have a negative impact on handling securities trades, payments of interest and
dividends, pricing and account services. Although, at this time, there can be no
assurance that there will be no adverse impact on KPM Funds, the service
providers have advised KPM Funds that they have been actively working on
necessary changes to their computer systems to prepare for the year 2000 and
expect that their systems, and those of other parties they deal with, will be
adapted in time for that event.
INVESTMENT ADVISER
KPM Investment Management, Inc.
Omaha, Nebraska
DISTRIBUTOR
Kirkpatrick, Pettis, Pettis, Polian Inc.
Omaha, Nebraska
AUDITOR
Deloitte & Touche LLP
Milwaukee, Wisconsin
ADMINISTRATOR, TRANSFER AGENT,
AND FUND ACCOUNTANT
Firstar Mutual Fund Services, LLC
Milwaukee, Wisconsin
CUSTODIAN
Firstar Bank Milwaukee, N.A.
Milwaukee, Wisconsin
FOR MORE INFORMATION
You may obtain the following and other information on the KPM Funds, free of
charge:
ANNUAL AND SEMI-ANNUAL REPORTS TO SHAREHOLDERS
The annual and semi-annual reports provide the most recent financial
statements and portfolio listings for KPM Funds, Inc. The annual report
contains a discussion of the market conditions and investment strategies
that affected the portfolios' performances during the last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI) DATED NOVEMBER 1, 1999
The SAI is incorporated into this Prospectus by reference (i.e., legally
made a part of this Prospectus). The SAI provides more details about the
portfolios' policies and management.
TO RECEIVE ANY OF THESE DOCUMENTS ON THE KPM FUNDS:
BY TELEPHONE:
1-877-KPM-FUND
BY MAIL:
KPM Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
ON THE INTERNET:
Text only versions of the fund documents can be viewed online or downloaded
from: http://www.sec.gov.com
You may review and obtain copies of fund information (including the SAI) at the
SEC Public Reference Room in Washington, D.C. Please call 1-800-SEC-0330 for
information relating to the operation of the Public Reference Room. Copies of
the information may be obtained for a fee by writing the Public Reference
Section, Securities and Exchange Commission, Washington, D.C. 20549-6009.
Investment Company Act File #811-8488
KPM FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
November 1, 1999
This Statement of Additional Information is not a prospectus. This Statement of
Additional Information relates to the Prospectus of KPM Funds, Inc. dated
November 1, 1999, and should be read together with that Prospectus. To receive a
copy of the Prospectus, write to KPM Funds, Inc. or call the nationwide toll
free number 1-877-KPM-FUND.
The audited financial statements for KPM Funds, Inc. for the fiscal year ended
June 30, 1999 are incorporated by reference to KPM Funds' 1999 Annual Report.
KPM Funds, Inc.
c/o Firstar Mutual Fund Services, LLC
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
Table of Contents
GENERAL INFORMATION ABOUT KPM FUNDS............................................2
DESCRIPTION OF THE PORTFOLIOS..................................................3
INVESTMENT RESTRICTIONS........................................................4
INVESTMENTS AND RISKS..........................................................6
MANAGEMENT OF THE FUND........................................................10
CONTROL PERSON AND PRINCIPAL HOLDERS OF SECURITIES............................12
INVESTMENT ADVISER............................................................13
FUND ADMINISTRATIVE...........................................................14
FUND ACCOUNTING AND TRANSFER AGENT............................................14
CUSTODIAN.....................................................................14
DISTRIBUTOR...................................................................14
DISTRIBUTION PLAN.............................................................15
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATIONS..............................17
PURCHASE......................................................................18
REDEMPTION OF SHARES..........................................................19
PRICING OF SHARES.............................................................19
TAX STATUS....................................................................20
CALCULATIONS OF PERFORMANCE DATA..............................................20
AUDITORS......................................................................21
FINANCIAL STATEMENTS..........................................................21
APPENDIX A....................................................................22
KPM FUNDS, INC.
GENERAL INFORMATION ABOUT KPM FUNDS
- --------------------------------------------------------------------------------
FUND HISTORY
KPM Funds, Inc. (the "Fund") is a Nebraska corporation established
under Articles of Incorporation dated February 17, 1994. The Fund offers shares
in two series, which are both diversified open-ended management investment
companies.
CAPITAL STOCK
The Fund is authorized to issue a total of one billion shares of common
stock, with a par value of $.00001 per share. Of these shares, the Fund's
Articles of Incorporation authorize the issuance of 50 million shares in each
series designated KPM Equity Portfolio shares and KPM Fixed Income Portfolio
shares. The Board of Directors is empowered under the Fund's Articles of
Incorporation to issue other shares of the Fund's common stock without
shareholder approval or to designate additional authorized but unissued shares
for issuance by one or more existing Portfolios.
All shares, when issued, will be fully paid and nonassessable and will
be redeemable and freely transferable. All shares have equal voting rights. They
can be issued as full or fractional shares. A fractional share has pro rata the
same rights and privileges as a full share. The shares possess no preemptive or
conversion rights. All shareholders are entitled to receive dividends when and
as declared by the Directors from time to time and as further discussed in the
Prospectus.
VOTING RIGHTS
Each share of the Portfolios has one vote (with proportionate voting
for fractional shares) irrespective of the relative net asset value of the
Fund's shares. On some issues, such as the election of directors, all shares of
the Fund vote together as one series. Cumulative voting in the election of
Directors is authorized. This means that shareholders may cumulate their shares
by multiplying the number of shares they hold by the number of directors and
then allocate the result among one or more directors.
On an issue affecting only one Portfolio, the shares of the Portfolio
vote as a separate series. Examples of such issues would be proposals to (1)
change the Investment Advisory Agreement, (2) change a fundamental investment
restriction pertaining to only one Portfolio or (3) change a Portfolio's
Distribution Plan. In voting on the Investment Advisory Agreement or proposals
affecting only one Portfolio, approval of such an agreement or proposal by the
shareholders of one Portfolio would make that agreement effective as to that
Portfolio whether or not the agreement or proposal had been approved by the
shareholders of the Fund's other Portfolios.
SHAREHOLDERS' MEETINGS
The Fund does not intend to hold annual or periodically scheduled
regular meetings of shareholders unless it is required to do so. Nebraska
Corporation law requires only that the Board of Directors of a mutual fund
convene shareholder meetings when it deems appropriate. The Investment Company
Act of 1940, as amended ("1940 Act") requires a shareholder vote for all
amendments to fundamental investment policies and restrictions, for all
investment advisory contracts and amendments thereto, and for all amendments to
Rule 12b-l distribution plans. The Fund's Articles of Incorporation provide that
shareholders also have the right to remove Directors upon two-thirds vote of the
outstanding shares and may call a meeting to remove a Director upon the
application of 10% or more of the outstanding shares. The Fund is obligated to
facilitate shareholder communications in this situation if certain conditions
are met.
ALLOCATION OF INCOME AND EXPENSES
The assets received by the Fund for the issue or sale of shares of the
Portfolios, and all income, earnings, profits, and proceeds thereof, subject
only to the rights of creditors, are allocated to the Portfolios, and constitute
the underlying assets of the Portfolios. The underlying assets of the Portfolios
are required to be segregated on the books of account, and are to be charged
with the expenses of the Portfolios and with a share of the general expenses of
the Fund. Any general expenses of the Fund not readily identifiable as belonging
to a particular series are allocated among all series based upon the relative
net assets of each series at the time such expenses were accrued.
DESCRIPTION OF THE PORTFOLIOS
- --------------------------------------------------------------------------------
The investment objectives listed below are fundamental and therefore cannot be
changed without the approval of shareholders.
KPM EQUITY PORTFOLIO - INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the KPM Equity Portfolio is capital
appreciation.
As further discussed in the Prospectus, the Adviser uses a "bottom-up"
approach in selecting stocks for the Portfolio. In applying its "bottom up"
approach to stock selection, the Adviser uses computer and manual screens of a
large number of publicly-held securities looking for specific balance sheet,
return on investment and valuation criteria. These lists are further reduced
through more in-depth company and industry analysis as well as contacts with
company management. KPM Equity Portfolio looks for above-average quality
companies as evidenced by a strong balance sheet, current or expected high
return on equity and expected growth in excess of the rate of inflation. As
further explained in the Prospectus, the Adviser considers purchasing securities
when these companies are selling for low relative price/earnings ratios. Other
valuation criteria such as price/book value, price/sales per share, price/cash
flow per share and current yield are considered. Target purchase/sale prices are
based on analytical judgments of objective relative price/earnings ratios and
current earning power (or normalized earnings) of the company. Since such target
prices are based on relative price/earnings ratios (relative to the Standard &
Poor's 400 average) these target prices are adjusted as the overall market
changes or when estimates of normalized earnings change.
KPM FIXED INCOME PORTFOLIO - INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the KPM Fixed Income Portfolio is to
provide a high level of total return over a market cycle of 3 to 5 years,
consistent with the preservation of capital and prudent investment management.
As further discussed in the Prospectus, this Portfolio will invest in
marketable, fixed income securities with investment grade ratings. See Appendix
A for a description of ratings. These include government obligations, corporate
debt, asset-backed securities and mortgage-backed securities such as mortgage
pass-through certificates and collateralized mortgage obligations (CMOs) issued
by government-sponsored agencies and mortgage banking companies. Additional
investments may also include dividend paying preferred stocks, non-investment
grade corporate debt, municipal bonds and various money market instruments. With
respect to asset-backed and mortgage-backed securities, the term issuer will
mean any separate trust or other entity formed exclusively to issue
mortgage-backed and asset-backed securities, consisting of a discrete pool of
underlying loans or leases.
INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
In addition to the investment objectives and policies set forth in the
Prospectus, the Fund and each of the Portfolios is subject to certain investment
restrictions, as set forth below, which may not be changed without the vote of a
majority of the Portfolio's outstanding shares. "Majority," as used in the
Prospectus and in this Statement of Additional Information, means the lesser of
(a) 67% of the Portfolio's outstanding shares voting at a meeting of
shareholders at which more than 50% of the outstanding shares are represented in
person or by proxy or (b) a majority of the Portfolio's outstanding shares.
Similar shareholder approval is required to change the investment
objective of each of the Portfolios. The following discussion provides
fundamental investment restrictions for all Portfolios, non-fundamental policies
for all Portfolios, and then, for each Portfolio, a statement of its investment
objective, a description of its investment restrictions that are matters of
fundamental policy specifically for it and a description of any investment
restrictions that may be changed without shareholder approval. For purposes of
the investment restrictions, all percentage and rating limitations apply at the
time of acquisition of a security, and any subsequent change in any applicable
percentage resulting from market fluctuations or in a rating by a rating service
will not require elimination of any security from the Portfolio. Unless
specifically identified as a matter of fundamental policy, each investment
policy discussed in the Prospectus or this Statement of Additional Information
is not fundamental and may be changed by the Portfolio's Board of Directors.
As fundamental policies, unless otherwise specified below, none of the
Portfolios will:
1. Invest more than 5% of the value of their total assets in the
securities of any one issuer (other than securities of the U.S.
Government, its agencies or instrumentalities).
2. Purchase more than 10% of any class of securities of any one
issuer (taking all preferred stock issues of an issuer as a single
class and all debt issues of an issuer as a single class) or
acquire more than 10% of the outstanding voting securities of an
issuer. In the aggregate, the Fund may not own more than 15% of
all classes of securities or more than 10% of the outstanding
voting securities of an issuer.
3. Invest 25% or more of the value of their total assets in the
securities of issuers conducting their principal business
activities in any one industry. This restriction does not apply to
securities of the U.S. Government or its agencies and
instrumentalities and repurchase agreements relating thereto. The
various types of utilities companies, such as gas, electric and
telephone and telegraph are considered as separate industries.
4. Issue any senior securities as defined in the 1940 Act except as otherwise
excepted or excluded by Section 18(g) of the 1940 Act or as permitted by
Investment Company Act Release No. 10666.
5. Borrow money except from banks for temporary or emergency
purposes. The amount of such borrowing may not exceed the lesser
of (a) 10% of the value of the Portfolio's total assets or (b) 5%
of the value of the Portfolio's total assets less liabilities
other than such borrowings. None of the Portfolios will purchase
securities while outstanding borrowings exceeds 5% of the value of
the Portfolio's total assets. None of the Portfolios will borrow
money for leverage purposes.
6. Make short sales of securities or maintain a short position,
except that short sales against the box shall not be deemed short
sales.
7. Purchase any securities on margin except to obtain such short-term
credits as may be necessary for the clearance of transactions.
8. Purchase or retain the securities of any issuer if, to the
Portfolio's knowledge, those officers or directors of the Fund or
its affiliates or of its investment adviser who individually own
beneficially more than 0.5% of the outstanding securities of such
issuer, together own more than 5% of such outstanding securities.
9. Purchase or sell commodities or commodity futures contracts,
except that the Portfolios may purchase stock and bond index
options, financial futures contracts and options on such
contracts.
10. Purchase or sell real estate or real estate mortgage loans, except
that the Portfolios may invest in securities secured by real
estate or interests therein or issued by companies that invest in
real estate or interests therein.
11. Purchase or sell oil, gas or other mineral leases, rights or
royalty contracts, except that the Portfolios may purchase or sell
securities of companies investing in the foregoing.
12. Participate on a joint or a joint and several basis in any
securities trading account (as prohibited by Section 12(a)2 of the
1940 Act) except as permitted by 16 below.
13. Underwrite securities of other issuers, except that the Portfolio
may acquire portfolio securities under circumstances where if sold
the Portfolio might be deemed an underwriter for purposes of the
Securities Act of 1933.
14. Invest more than 10% of their net assets in restricted securities
or more than 10% of their net assets in repurchase agreements with
a maturity of more than seven days, and other liquid assets, such
as securities with no readily available market quotation. The
value of any options purchased in the over-the-counter market are
deemed to be illiquid.
15. Invest more than 5% of their total assets at the time of purchase
in rights and/or warrants (other than those that have been
acquired in units or attached to other securities).
16. Make loans, except that the Portfolios may (a) purchase and hold
debt obligations in accordance with their investment objective and
policies, (b) enter into repurchase agreements, and (c) lend
portfolio securities without limitation against collateral
(consisting of cash or securities issued or guaranteed by the
United States Government or its agencies or instrumentalities)
equal at all times to not less than 100% of the value of the
securities loaned.
The Fund has also adopted the following restrictions for each of the
Portfolios that are not fundamental policies and may be changed without
shareholder approval. The Portfolios shall not:
1. Invest in warrants that are not listed on the New York or American Stock
Exchange in excess of 2% of the Portfolio's total assets.
2. Invest more than 20% of their total assets in securities of foreign issuers.
3. Invest more than 5% of their total assets in the purchase of
covered spread options and the purchase of put and call options on
securities, securities indices and financial futures contracts.
Options on financial futures contracts and options on securities
indices will be used solely for hedging purposes--not for speculation.
4. Invest more than 5% of their assets in initial margin and premiums on
financial futures contracts and options on such contracts.
5. Invest in arbitrage transactions.
6. Invest in real estate limited partnership interests.
7. Invest in companies for the purpose of exercising control or management.
8. Purchase the securities of other investment companies except as provided by
Section 12(d)(1) of the 1940 Act.
9. Invest more than 5% of the value of their total assets in the
securities of any issuers, which with their predecessors, have a
record of less than three years' continuous operation. (Securities
of such issuers will not be deemed to fall within this limitation
if they are guaranteed by an entity in continuous operation for
more than three years.) Asset-backed and mortgage-backed
securities will not be deemed to fall within this limitation if
the originator of the underlying loan has been in continuous
operation for more than three years. The value of all securities
issued or guaranteed by such guarantor and owned by a Portfolio
shall not exceed 10% of the value of the total assets of such Portfolio.
10. Mortgage, pledge or hypothecate their assets except in an amount
not exceeding 15% of the value of their total assets to secure
temporary or emergency borrowing. For purposes of this policy,
collateral arrangements for margin deposits on futures contracts
or with respect to the writing of options are not deemed to be a
pledge of assets.
11. Lend Portfolio securities when the value of securities subject to
such transactions and the value of the securities to be loaned
would exceed 5% of the total asset value of the Portfolio.
Any investment restriction or limitation referred to above or in the
Prospectus, except the borrowing policy, which involves a maximum percentage of
securities or assets, shall not be considered to be violated unless an excess
over the percentage occurs immediately after an acquisition of securities or
utilization of assets and results therefrom.
INVESTMENTS AND RISKS
- --------------------------------------------------------------------------------
Both of the Portfolios may invest in U. S. Government Securities,
repurchase agreements, options for hedging purposes and money market
instruments. Additionally, the Portfolios may engage in limited borrowings, may
invest for temporary defensive purposes and may purchase fixed-income securities
on a when-issued or delayed-delivery basis. The KPM Fixed Income Portfolio may
also invest in mortgage-backed securities and asset-backed securities. The KPM
Equity Portfolio may invest in convertible securities. Descriptions of such
securities, and the inherent risks of investing in such securities, are set
forth below.
U.S. GOVERNMENT SECURITIES
The Portfolios may invest in U.S. Government Securities, which are
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. Obligations issued by the U.S. Treasury include Bills, Notes
and Bonds ("Treasury Securities") which differ from each other mainly in their
interest rates and the length of their maturity at original issue. In this
regard, Treasury Bills have a maturity of one year or less, Treasury Notes have
maturities of one to ten years and Treasury Bonds generally have maturities
greater than ten years. Such Treasury Securities are backed by the full faith
and credit of the U.S. Government.
The obligations of U.S. Government agencies or instrumentalities are
guaranteed or backed in a variety of ways by the U.S. Government, its agencies
or instrumentalities. Some of these obligations, such as Government National
Mortgage Association mortgage-related securities, and obligations of the Farmers
Home Administration, are backed by the full faith and credit of the U. S.
Treasury. Obligations of the Farmers Home Administration are also backed by the
issuer's right to borrow from the U.S. Treasury. Obligations of Federal Home
Loan Banks and the Farmers Home Administration are backed by the discretionary
authority of the U.S. Government to purchase certain obligations of agencies or
instrumentalities. Obligations of Federal Home Loan Banks, the Farmers Home
Administration, Federal Farm Credit Banks, the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation are backed by the
credit of the agency or instrumentality issuing the obligations.
As with all fixed-income securities, various market forces influence
the value of such securities. There is an inverse relationship between the
market value of such securities and yield. As interest rates rise, the value of
the securities falls; conversely, as interest rates fall, the market value of
such securities rises.
REPURCHASE AGREEMENTS
The Portfolios may also enter into repurchase agreements on U.S.
Government Securities to invest cash awaiting investment and/or for temporary
defensive purposes. A repurchase agreement involves the purchase by a Portfolio
of U.S. Government Securities with the condition that after a stated period of
time (usually seven days or less) the original seller will buy back the same
securities ("collateral") at a predetermined price or yield. Repurchase
agreements involve certain risks not associated with direct investments in
securities. In the event the original seller defaults on its obligation to
repurchase, as a result of its bankruptcy or otherwise, the Portfolio will seek
to sell the collateral, which action could involve costs or delays. In such
case, the Portfolio's ability to dispose of the collateral to recover such
investment may be restricted or delayed. While collateral will at all times be
maintained in an amount equal to the repurchase price under the agreement
(including accrued interest due thereunder), to the extent proceeds from the
sale of collateral were less than the repurchase price, a Portfolio would suffer
a loss.
The Portfolios' Custodian will hold the securities underlying any
repurchase agreement or such securities will be part of the Federal Reserve Book
Entry System. The market value of the collateral underlying the repurchase
agreement will be determined on each business day. If at any time the market
value of the collateral falls below the repurchase price of the repurchase
agreement (including any accrued interest), the respective Portfolio will
promptly receive additional collateral so that the total collateral is an amount
at least equal to the repurchase price plus accrued interest.
MORTGAGE-BACKED SECURITIES
The KPM Fixed Income Portfolio may invest in mortgage-backed securities. A
portion of its assets may also be invested in multiclass pass-through
securities, which are interests in a trust composed of Mortgage Assets.
Collateralized mortgage obligations ("CMOs") (which include multiclass
pass-through securities) may be issued by agencies, authorities or
instrumentalities of the U.S. Government or by private originators or investors
in mortgage loans, including savings and loan associations, mortgage banks,
commercial banks, investments banks and special-purpose subsidiaries of the
foregoing. Payments of principal and interest on Mortgage Assets, and any
reinvestment income thereon, provide the funds to pay debt service on the CMOs
or make scheduled distributions on the multiclass pass-through securities. In a
CMO, a series of bonds or certificates is usually issued in multiple classes
with different maturities. Each class of CMOs, often referred to as a "tranche",
is issued at a specific fixed or floating coupon rate and has a stated maturity
or final distribution date. Principal repayments on the Mortgage Assets may
cause the CMOs to be retired substantially earlier than their stated maturities
or final distribution dates, resulting in a loss of all or part of the premium
if any has been paid.
The KPM Fixed Income Portfolio may also invest in parallel pay CMOs and
Planned Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured
to provide payments of principal on each payment date to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class, which as with other CMO
structures, must be retired by its stated maturity date but may be retired
earlier. PAC Bonds generally require payment of a specified amount of principal
on each payment date. PAC Bonds are always parallel pay CMOs with the required
principal payment of such securities having the highest priority after interest
has been paid to all classes.
ASSET-BACKED SECURITIES
The KPM Fixed Income Portfolio may invest in asset-backed securities.
Asset-backed securities are not issued or guaranteed by the U.S. Government or
its agencies or instrumentalities; however, the payment of principal and
interest on such obligations may be guaranteed up to certain amounts and for a
certain period by a letter of credit issued by a financial institution (such as
bank or insurance company) unaffiliated with the issuers of such securities, or
insured by a financial insurance company. The purchase of asset-backed
securities raises risk considerations peculiar to the instruments underlying
such securities. For example, there is a risk that another party could acquire
an interest in the obligations superior to that of the holders of the
asset-backed securities. There also is the possibility that recoveries on
repossessed collateral may not, in some cases, be available to support payments
on those securities. The ability of an issuer of asset-backed securities to
enforce its security interest in the underlying assets may be limited. In
addition, some asset-backed securities (e.g., credit card receivables are
unsecured obligations of the card holders.)
RISKS OF MORTGAGE-BACKED AND ASSET-BACKED SECURITIES
Mortgage-backed and asset-backed securities have yield and maturity
characteristics corresponding to the underlying assets. Unlike corporate debt
securities, which may pay a fixed rate of interest until maturity when the
entire principal amount comes due, payments on certain mortgage-backed
securities and asset-backed securities include both interest and a partial
payment of principal. In addition to scheduled repayment of principal via normal
amortization, payments of principal may result from the voluntary prepayment,
refinancing, or foreclosure of the underlying loans. Asset-backed securities
entail prepayment risk, which may vary depending on the type of asset, but is
generally less than the prepayment risk associated with mortgage-backed
securities.
Due to their prepayment aspect, mortgage-backed and asset-backed
securities are less effective than other types of securities as a means of
"locking in" attractive long-term interest rates. This is caused by the need to
reinvest repayment of scheduled principal and the possibility of significant
unscheduled prepayments resulting from declines in interest rates. In such an
environment these prepayments would have to be reinvested at lower interest
rates. As a result, these securities may have less potential for capital
appreciation during periods of declining interest rates than other securities of
comparable maturities, although they may have a comparable risk of decline in
market value during periods of rising interest rates. At times, some of the
mortgage-backed and asset-backed securities in which the Fund may invest will
have higher than market interest rates, and will therefore be purchased at a
premium above their par value. Unscheduled prepayments, which are made at par,
will cause a Fund to suffer a loss equal to any unamortized premium.
OPTIONS TRANSACTIONS
The Portfolios may purchase put options, solely for hedging purposes, in order
to protect portfolio holdings in an underlying security against a substantial
decline in the market value of such holdings ("protective puts"). Such
protection is provided during the life of the put because the Portfolio may sell
the underlying security at the put exercise price, regardless of a decline in
the underlying security's market price. Any loss to the Portfolio is limited to
the premium paid for, and transaction costs paid in connection with, the put
plus the initial excess, if any, of the market price of the underlying security
over the exercise price. However, if the market price of such security
increases, the profit a Portfolio realizes on the sale of the security will be
reduced by the premium paid for the put option less any amount for which the put
is sold.
The Portfolios may also purchase call options solely for the purpose of hedging
against an increase in prices of securities that the Portfolio ultimately wants
to buy. Such protection is provided during the life of the call option because
the Portfolio may buy the underlying security at the call exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, a Portfolio will reduce
any profit it might have realized had it bought the underlying security at the
time it purchased the call option by the premium paid for the call option and by
transaction costs.
The Portfolios may only purchase exchange traded put and call options.
Exchange-traded options are third party contracts with standardized strike
prices and expiration dates and are purchased from a clearing corporation.
Exchange-traded options have a continuous liquid market while other options may
not.
Use of options in hedging strategies is intended to protect performance but can
result in poorer performance than without hedging with options, if the Adviser
is incorrect in its forecasts of the direction of stock prices. Normally, the
Portfolio will only invest in options to protect existing positions and, as a
result, will normally invest no more than 10% of the Portfolio's assets in
options.
The writing by the Portfolios of options on securities is subject to
limitations established by each of the registered securities exchanges on which
such options are traded. Such limitations govern the maximum number of options
in each class which may be written by a single investor or group of investors
acting in concert, regardless of whether the options are written on the same or
different securities exchanges or are held or written in one or more accounts or
through one or more brokers. Thus, the number of options that one Portfolio may
write may be affected by options written by the other Portfolios and by other
investment advisory clients of the Adviser. An exchange may order the
liquidation of positions found to be in excess of these limits, and it may
impose certain other sanctions. The Adviser believes it is unlikely that the
level of option trading by the Fund will exceed applicable limitations.
CONVERTIBLE SECURITIES
The KPM Equity Portfolio may invest in convertible securities which are
rated investment grade, BBB or better by S&P or Baa or better by Moody's. The
KPM Fixed Income Portfolio will not invest in convertible securities.
Convertible securities are securities that may be exchanged or converted into a
predetermined number of the issuer's underlying common shares at the option of
the holder during a specified time period. Convertible securities may take the
form of convertible preferred stock, convertible bonds or debentures, or a
combination of the features of these securities. The investment characteristics
of convertible securities vary widely, allowing convertible securities to be
employed for different investment objectives.
Convertible bonds and convertible preferred stocks are fixed-income
securities entitling the holder to receive the fixed income of a bond or the
dividend preference of a preferred stock until the holder elects to exercise the
conversion privilege. They are senior securities, and, therefore, have a claim
to assets of the issuer prior to the common stock in the case of liquidation.
However, convertible securities are generally subordinated to non-convertible
securities of the same company. The interest income and dividends from
convertible bonds and preferred stocks provide a stream of income with generally
higher yields than common stocks, but lower than non-convertible securities of
similar quality.
As with all fixed-income securities, various market forces influence
the market value of convertible securities, including changes in the prevailing
level of interest rates. As the level of interest rates increases, the market
value of convertible securities tends to decline and, conversely, as interest
rates decline, the market value of convertible securities tends to increase. The
unique investment characteristic of convertible securities (the right to
exchange for the issuer's common stock) causes the market value of the
convertible securities to increase when the value of the underlying common stock
increases. However, because security prices fluctuate, there cannot be an
assurance of capital appreciation. Most convertible securities will not reflect
as much capital appreciation as their underlying common stocks. When the
underlying common stock is experiencing a decline, the value of the convertible
security tends to decline to a level approximating the yield-to-maturity basis
of straight nonconvertible debt of similar quality, often called "investment
value," and may not experience the same decline as the underlying common stock.
Most convertible securities sell at a premium over their conversion
values (i.e., the number of shares of common stock to be received upon
conversion multiplied by the current market price of the stock). This premium
represents the price investors are willing to pay for the privilege of
purchasing a fixed-income security with a possibility of capital appreciation.
If this appreciation potential is not realized, the premium may not be
recovered.
MONEY MARKET INSTRUMENTS
The Portfolios may invest in money market instruments, which include:
(a) U.S. Treasury Bills;
(b) U.S. Treasury Notes with maturities of 18 months or less;
(c) U.S. Government Securities subject to repurchase agreements;
(d) Obligations of domestic branches of U.S. banks (including
certificates of deposit and bankers' acceptances with maturities
of 18 months or less) which, at the date of investment, have
capital, surplus, and undivided profits (as of the date of their
most recently published financial statements) in excess of
$10,000,000 and obligations of other banks or savings and loan
associations if such obligations are insured by the Federal
Deposit Insurance Corporation ("FDIC") or the Federal Savings and
Loan Insurance Corporation ("FSLIC");
(e) Commercial paper which at the date of investment is rated A-1 by
S&P or P-1 by Moody's or, if not rated, is issued or guaranteed as
to payment of principal and interest by companies which, at the
date of investment, have an outstanding debt issue rated AA or
better by S&P or Aa or better by Moody's;
(f) Short-term (maturing in one year or less) corporate obligations
which, at the date of investment, are rated AA or better by S&P or
Aa or better by Moody's; and
(g) Shares of no-load money market mutual funds (subject to the
ownership restrictions of the 1940 Act). See "Investment Policies
and Restrictions" in the Statement of Additional Information.
Investment by a Portfolio in shares of a money market mutual fund indirectly
results in the investor paying not only the advisory fee and related fees
charged by the Portfolio, but also the advisory fees and related fees charged by
the adviser and other entities providing services to the money market mutual
fund.
BORROWING
The Portfolios may borrow money from banks for temporary or emergency
purposes in an amount up to 10% of the value of a Portfolio's total assets.
Interest paid by a Portfolio on borrowed funds would decrease the net earnings
of that Portfolio. Neither of the Portfolios will purchase portfolio securities
while outstanding borrowings exceed 5% of the value of the Portfolio's total
assets. Each of the Portfolios may mortgage, pledge, or hypothecate its assets
in an amount not exceeding 10% of the value of its total assets to secure
temporary or emergency borrowing. The policies set forth in this paragraph are
fundamental and may not be changed with respect to a Portfolio without the
approval of a majority of that Portfolio's shares.
TEMPORARY DEFENSIVE POSITIONS
Both Portfolios may deviate from their fundamental and non-fundamental
investment policies during periods of adverse or abnormal market, economic,
political and other circumstances requiring immediate action to protect assets.
In such cases, the Portfolios may invest up to 100% of their assets in U.S.
Government Securities and any Money Market Investment described above.
PORTFOLIO TURNOVER
While it is not the policy of either of the Portfolios to trade
actively for short-term profits, each Portfolio will dispose of securities
without regard to the time they have been held when such action appears
advisable to the Adviser. Portfolio turnover is the ratio of the lesser of
annual purchases or sales of portfolio securities to the average monthly value
of portfolio securities, not including short-term securities maturing in less
than 12 months. A 100% portfolio turnover rate would occur, for example, if the
lesser of the value of purchases or sales of portfolio securities for a
particular year were equal to the average monthly value of the portfolio
securities owned during such year. The turnover rate will not be a limiting
factor when management deems portfolio changes appropriate. The table below
shows the turnover rates for the Portfolio's for the past two fiscal years.
Turnover Rates for the Year Ended: June 30, 1999 June 30, 1998
- ------------------------------------------ -------------------- ----------------
KPM Equity Portfolio 36.22% 32.25%
KPM Fixed Income Portfolio 34.25% 19.33%
- ------------------------------------------ -------------------- ----------------
[Intentionally left blank]
MANAGEMENT OF THE FUND
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
The Fund is managed by a Board of Directors. The Fund's Board of Directors
consists of five individuals, three of whom are not "interested persons" of the
Fund as that term is defined in the 1940 Act. The Directors are fiduciaries of
the Portfolios' shareholders and are governed by the laws of the state of
Nebraska in the regard. They establish policies for the operation of the Fund
and appoint the officers who conduct the daily business of the Fund.
MANAGEMENT INFORMATION
The names, addresses and principal occupations during the past five
years of the directors and executive officers of the Fund are as follows:
<TABLE>
Position with
Name and Address Age the Fund Principal Occupation during Last Five Years
- ------------------------------- -------- ---------------- ------------------------------------------------------------------
<S> <C> <C> <C>
Randall D. Greer*<F15> 47 Chairman and Director, President, Chairman of the Board and
10250 Regency Circle Director Chief Executive Officer, KPM Investment
Omaha, NE 68114 Management, Inc., Omaha, Nebraska (1994-present);
Director, President and Chief Executive Officer, Kirkpatrick
Pettis Trust Company, Omaha, Nebraska (1995-Present);
Director (1987-Present, President and Chief Operating Officer,
Kirkpatrick, Pettis, Smith, Polian Inc., Omaha, Nebraska
(1988-1994).
- ------------------------------- -------- ---------------- -----------------------------------------------------------------
Rodney D. Cerny*<F15> 47 President and Director, Executive Vice President and Chief
10250 Regency Circle Director Investment Officer, KPM Investment Management,
Omaha, NE 68114 Inc., Omaha, Nebraska (1994-present); Director,
Kirkpatrick Pettis Trust Company, Omaha, Nebraska
(1995-Present); First Vice President (1987-1990),
Executive Vice President and Chief Investment
Officer, Kirkpatrick, Pettis, Smith, Polian Inc.,
Omaha, Nebraska (1990-1996)
- ------------------------------- -------- ---------------- ----------------------------------------------------------------
Donald L. Stroh 71 Director Retired; Superintendent of Schools, Millard,
5069 South 149th Court Nebraska Public Schools (1955-1989)
Omaha, Nebraska 68137
- ------------------------------- -------- ---------------- ----------------------------------------------------------------
William G. Campbell 64 Director Attorney - private practice (1993-present);
P.O. Box 51 Partner Roger & Wells (law firm), New York City,
3239 Wolf Lake Road New York (1991-1993)
Ely, MN 55731
- ------------------------------- -------- ---------------- ----------------------------------------------------------------
Herbert H. Davis, Jr. 74 Director Owner, Miracle Hill Golf & Tennis Center;
1401 North 120th Street President - Legacy Golf, Omaha, Nebraska (1978
Omaha, NE 68154 -Present).
- ------------------------------- -------- ---------------- ----------------------------------------------------------------
Brian P. McGinty 47 Secretary Executive Vice President and General Counsel,
10250 Regency Circle Kirkpatrick, Pettis, Smith, Polian Inc., Omaha,
Omaha, NE 68114 Nebraska (1998-present); Partner, Kutak, Rock &
Huie (law firm), Omaha, Nebraska (1997-1998);
Associate General Counsel, MFS Communications (a
telecommunications company), Omaha, Nebraska
(1994-1997).
- ------------------------------- -------- ---------------- ---------------------------------------------------------------
Jeffrey N. Sime 37 Treasurer Executive Vice President, Chief Financial Officer,
10250 Regency Circle Kirkpatrick, Pettis, Smith, Polian Inc., Omaha,
Omaha, NE 68114 Nebraska (1993-present); Audit Supervisor, Peter
Kiewit Sons, Inc., Omaha, Nebraska (1990-1993)
- ------------------------------- -------- -------------- ----------------------------------------------------------------
</TABLE>
*<F15>This director is deemed to be an "interested person" of the Fund by virtue
of his affiliation with KPM Investment Management, Inc.
COMPENSATION
For their services as Directors, the independent Directors receive
$1,000 as an annual retainer fee and $200 per meeting attended, as well as
reimbursement of expenses incurred in connection with attendance at such
meetings. The interested Directors of the Fund receive no compensation for their
service as Directors from the Fund. The table below details the compensation
amounts received by the Directors from the Fund for the past fiscal year.
Presently, none of the executive officers receive compensation from the Fund.
<TABLE>
Aggregate Pension Total
Compensation or Compensation
Name & Position from the Fund Retirement from the Fund
- ------------------------------------- --------------------- ---------------------- ----------------------
<S> <C> <C> <C>
Randall D. Greer*<F16> None None None
Chairman, Director
Rodney D. Cerny*<F16> None None None
President, Director
Donald L. Stroh $1,800 None $1,800
Director
William G. Campbell $1,800 None $1,800
Director
Herbert H. Davis, Jr. $1,800 None $1,800
Director
- ------------------------------------- --------------------- ---------------------- ----------------------
</TABLE>
*<F16>This Director is deemed to be an "interested person" of the Fund as
that term is defined under the 1940 Act.
CONTROL PERSON AND PRINCIPAL HOLDERS OF SECURITIES
- --------------------------------------------------------------------------------
The following table provides the name and address of any person who owns of
record or beneficially 5% or more of the outstanding shares of each Portfolio as
of October 1, 1999 (a "principal shareholder"). A control person is one who owns
beneficially or through controlled companies more than 25% of the voting
securities of a company or acknowledges the existence of control.
<TABLE>
Portfolio Name and Address Shares % Ownership
- ---------------------------- --------------------------------------- ---------------- ----------------------
<S> <C> <C> <C>
Equity Portfolio Kirkpatrick, Pettis, Smith, Polian
Inc. _____ ____%
10250 Regency Circle
Omaha, NE 68114
Maril & Co.
c/o Marshall & Ilsley Trust & Co. _____ ____%
P.O. Box 2977
Milwaukee, WI 53202
- ---------------------------- --------------------------------------- ---------------- ----------------------
Fixed Income Maril & Co.
c/o Marshall & Ilsley Trust & Co. _____ ____%
P.O. Box 2977
Milwaukee, WI 53202
- ---------------------------- --------------------------------------- ---------------- ----------------------
</TABLE>
As of October 1, 1999, Kirkpatrick Pettis had control of the voting
power of ___________ shares of the _____________ shares outstanding held by it
as trustee of its employees' 401(k) Profit Sharing Plan and an affiliated
entity, Kirkpatrick Pettis Trust Company, had control of the voting power of
___________ shares of the ________ shares outstanding held by it as trustee for
its customers. As a result, Kirkpatrick Pettis and Kirkpatrick Pettis Trust
Company could elect all of the directors if such shares were voted on a
noncumulative basis and three out of the five directors if such shares were
voted on a cumulative basis. In addition, Kirkpatrick Pettis and Kirkpatrick
Pettis Trust Company could ratify the selection of the Fund's accountants. On
matters affecting the Portfolios, Kirkpatrick Pettis and Kirkpatrick Pettis
Trust Company could control the outcome of all matters presented to the Equity
Portfolio and the Fixed Income Portfolio.
As of October 1, 1999, the Directors and officers of the Fund
beneficially owned ________ shares or ____% of the Equity Portfolio and less
then 1% of the Fixed Income Portfolio. Directors and officers owned an aggregate
of ___% of the shares outstanding in both Portfolios as of October 1, 1999.
INVESTMENT ADVISER
- --------------------------------------------------------------------------------
KPM Investment Management, Inc. (the "Adviser" or "KPM") is the
investment adviser to the Fund and the Portfolios under an Investment Advisory
Agreement ("Advisory Agreement"). The Adviser is a wholly owned subsidiary of
KFS Corporation, a Nebraska corporation which is a wholly owned subsidiary of
Mutual of Omaha Insurance Company, a mutual insurance company organized under
Nebraska law and engaged in the business of providing life, health, accident and
related insurance products throughout the United States.
The Advisory Agreement has been approved by the Board of Directors
(including a majority of the Directors who are not "interested persons" as
defined under the 1940 Act). The Advisory Agreement for all Portfolios was
approved by the shareholders on April 15, 1994. The Advisory Agreement was last
approved by the Board of Directors on July 26, 1999.
The Advisory Agreement terminates automatically in the event of its
assignment. In addition, the Advisory Agreement is terminable at any time with
respect to a Portfolio, without penalty, by the Board of Directors of the Fund,
by vote of a majority of the affected Portfolio's outstanding voting securities
on 60 days' written notice to the Adviser, and by the Adviser on 60 days'
written notice to the Fund. Unless sooner terminated, the Advisory Agreement
shall continue in effect for more than two years after its execution only so
long as such continuance is specifically approved at least annually by either
the Board of Directors or by a vote of a majority of the outstanding voting
securities of the Portfolio, provided that in either event such continuance is
also approved by a vote of a majority of the directors who are not parties to
such agreement, or interested persons of such parties, cast in person at a
meeting called for the purpose of voting on such approval. If a majority of the
outstanding voting securities of any of the Portfolios approves the Advisory
Agreement, the Advisory Agreement shall continue in effect with respect to such
approving Portfolio whether or not the shareholders of any other Portfolio
approve such Advisory Agreement.
Pursuant to the Advisory Agreement, the Fund pays the Adviser a monthly
advisory fee equal on an annual basis to 0.80% of the KPM Equity Portfolio's
average daily net assets. The Fund pays the Adviser a monthly advisory fee equal
on an annual basis to 0.60% of the KPM Fixed Income Portfolio's average daily
net assets.
Under the Advisory Agreement, the Adviser provides each Portfolio with
advice and assistance in the selection and disposition of that Portfolio's
investments. All investment decisions are subject to review by the Board of
Directors of the Fund. The Adviser is obligated to pay the salaries and fees of
any affiliates of the Adviser serving as officers or directors of the Fund.
Under the Advisory Agreement, the Adviser has agreed to reimburse the Portfolios
monthly to the extent of the advisory fee paid if annual total expenses exceed
1.50% of the Equity Portfolio's and 1.25% of the Fixed Income Portfolio's
average annual net assets. The dollar amounts of fees earned and waived by the
Adviser over the past three fiscal years are shown below.
Adviser Fees Earned (Waived)
During the Fiscal Year Ended:
June 30, 1999 June 30, 1998 June 30, 1997
- ------------------------------- ----------------- ---------------- -------------
Equity Portfolio $ 311,627 $ 408,062 $ 272,525
$ (272) (0) $ (500)
Fixed Income Portfolio $ 66,023 $ 60,788 $ 50,207
$ (58,303) $ (8,538) $ (21,824)
- ------------------------------- ----------------- ---------------- -------------
FUND ADMINISTRATION
- --------------------------------------------------------------------------------
Firstar Mutual Fund Services, LLC ("Firstar") serves as Fund
Administrator pursuant to a Fund Administration Servicing Agreement with the
Fund. As such Firstar provides all necessary bookkeeping, shareholder
recordkeeping services and share transfer services to the Fund.
Under the Fund Administration Servicing Agreement, Firstar receives an
administration fee, for both Portfolios combined, at an annual rate of 6 basis
points (0.06%) on the first $400 million, 5 basis points (0.05%) on the next $1
billion and 3 basis points (0.03%) on the balance of the daily average net
assets of the Portfolios. The Fund Administration Servicing Agreement further
provides that the annual fee in any event shall not be less than $60,000 in the
aggregate for all Portfolios. Fees are billed to the Fund on a monthly basis.
Prior to September 1, 1998, Lancaster Administrative Services, Inc.
("Lancaster") provided administrative services to the Fund. Over the last three
fiscal years, the Fund paid the following amounts in administrative fees:
Administrative Fees Paid To:
<TABLE>
Firstar Lancaster Lancaster Lancaster
- ----------------------------- -------------------- -------------------- --------------------- --------------------
<S> <C> <C> <C> <C>
September 1, 1998 July 1, 1998 to Fiscal year ended Fiscal year ended
to June 30, 1999 August 31, 1998 June 30, 1998 June 30, 1997
- ----------------------------- -------------------- -------------------- --------------------- --------------------
Equity Portfolio $25,000 $19,752 $127,519 $ 85,164
Fixed Income Portfolio $25,000 $ 5,326 $ 25,328 $ 20,919
- ----------------------------- -------------------- -------------------- --------------------- --------------------
</TABLE>
FUND ACCOUNTING AND TRANSFER AGENT
- --------------------------------------------------------------------------------
Firstar Mutual Fund Services, LLC, serves as Fund Accountant and
Transfer Agent to the Fund pursuant to a Fund Accounting Servicing Agreement and
a Transfer Agent Servicing Agreement. Under the Fund Accounting Servicing
Agreement, Firstar will provide portfolio accounting services, expense accrual
and payment services, fund valuation and financial reporting services, tax
accounting services and compliance control services. Firstar will receive a fund
accountant fee, for both Portfolios combined, which will be billed on a monthly
basis.
Under the Transfer Agent Servicing Agreement, Firstar will provide all
of the customary services of a transfer agent and dividend disbursing agent
including, but not limited to: (1) receiving and processing orders to purchase
or redeem shares; (2) mailing shareholder reports and prospectuses to current
shareholders; and (3) providing blue sky services to monitor the number of Fund
shares sold in each state. Firstar will receive a transfer agent fee, which will
be billed on a monthly basis.
CUSTODIAN
- --------------------------------------------------------------------------------
The Custodian for the Fund and each of the Portfolios is Firstar Bank
Milwaukee, N.A., 615 East Michigan Street, Milwaukee, Wisconsin 53202. Firstar
Bank Milwaukee, N.A., as Custodian, holds all of securities and cash owned by
the Portfolios.
DISTRIBUTOR
- --------------------------------------------------------------------------------
Kirkpatrick, Pettis, Smith, Polian Inc. ("Kirpatrick Pettis" or
"Distributor") serves as distributor and principal underwriter for the Fund
pursuant to a Distribution Agreement and a Rule 12b-1 Plan. Kirkpatrick Pettis
is a wholly owned subsidiary of KFS Corporation, a Nebraska corporation which is
a wholly owned subsidiary of Mutual of Omaha Insurance Company, a mutual
insurance company organized under Nebraska law and engaged in the business of
providing life, health, accident and related insurance products throughout the
United States.
Kirkpatrick Pettis bears all expenses of providing distribution
services pursuant to the Distribution Agreement. Kirkpatrick Pettis provides for
the preparation of advertising or sales literature and bears the cost of
printing and mailing prospectuses to persons other than shareholders. The Fund
bears the cost of qualifying and maintaining the qualification of Fund shares
for sale under the securities laws of the various states and the expense of
registering their shares with the Securities and Exchange Commission. For its
services under the Distribution Agreement, Kirkpatrick Pettis receives a fee,
payable monthly, at the annual rate of 0.25% of average daily net assets of the
shares of each Portfolio. This fee is accrued daily as an expense of each
Portfolio.
Kirkpatrick Pettis, as the Distributor, may enter into related selling
group agreements with various broker-dealer firms that provide distribution
services to investors. Kirkpatrick Pettis does not currently compensate firms
for sales of shares of the Fund, but may elect to pay such compensation solely
from its assets. Kirkpatrick Pettis may, from time to time, pay additional
commissions or promotional incentives to firms that sell shares of the Fund. In
some instances, such additional commissions, fees or other incentives may be
offered only to certain firms that sell or are expected to sell during specified
time periods certain minimum amounts of shares of the Fund, or of other funds
distributed by Kirkpatrick Pettis.
Banks and other financial services firms may provide administrative
services to facilitate transactions in shares of the Fund for their clients, and
Kirkpatrick Pettis may pay them a fee up to the level of the distribution fee
allowable as described above. Banks currently are prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If the Glass-Steagall Act should prevent banking firms from acting in any
capacity or providing any of the described services, management will consider
what action, if any, is appropriate in order to provide efficient services for
the Fund. Banks or other financial services firms may be subject to various
state laws regarding the services described above and may be required to
register as dealers pursuant to state law. The Fund does not believe that a
termination of a relationship with a bank would result in any material adverse
consequence to the Fund.
Since the Distribution Agreement provides for fees that are used by
Kirkpatrick Pettis to pay for distribution services, the Distribution Agreement
along with the related selling agreements is approved and reviewed in accordance
with the Fund's Rule 12b-1 Plan under the 1940 Act, which regulates the manner
in which an investment company may, directly or indirectly, bear the expenses of
distributing its shares.
Pursuant to the Fund's Rule 12b-1 Plan, the Fund paid the Distributor the
following amounts over the last three fiscal years:
Rule 12b-1 Fees Paid
During Fiscal Year Ended:
---------------------------- ------------------ ----------------- -------------
June 30, 1999 June 30, 1998 June 30, 1997
---------------------------- ------------------ ----------------- -------------
Equity Portfolio $ 97,383 $127,496 $ 85,056
Fixed Income Portfolio $ 27,510 $ 25,329 $ 20,901
---------------------------- ------------------ ----------------- -------------
Total $ 124,893 $152,825 $105,957
---------------------------- ------------------ ----------------- -------------
DISTRIBUTION PLAN
- --------------------------------------------------------------------------------
As stated in the Prospectus, the Fund, on behalf of the Portfolio has
adopted a Plan of Distribution under Rule 12b-1 of the 1940's Act ("Rule 12b-1
Plan"). Rule 12b-1(b) under the 1940 Act provides that any payments made by the
Portfolios in connection with financing the distribution of their shares may
only be made pursuant to a written plan describing all aspects of the proposed
financing of distribution, and also requires that all agreements with any person
relating to the implementation of the plan must be in writing. Because some of
the payments described below to be made by the Portfolios are distribution
expenses within the meaning of Rule 12b-1, the Fund has entered into a
Distribution Agreement with the Distributor pursuant to a 12b-1 Plan adopted in
accordance with the Rule.
In addition, Rule 12b-1(b)(1) requires that such plan be approved by a
majority of a Portfolio's outstanding shares, and Rule 12b-1(b)(2) requires that
such plan, together with any related agreements, be approved by a vote of the
Board of Directors who are not interested persons of the Fund and who have no
direct or indirect interest in the operation of the plan, cast in person at a
meeting for the purpose of voting on such plan or agreement. Rule 12(b)-1(b)(3)
requires that the plan or agreement provide, in substance:
(a) that it shall continue in effect for a period of more than one
year from the date of its execution or adoption only so long as
such continuance is specifically approved at least annually in
the manner described in paragraph (b)(2) of Rule 12b-1;
(b) that any person authorized to direct the disposition of moneys
paid or payable by the Fund pursuant to the plan or any related
agreement shall provide to the Fund's Board of Directors, and the
directors shall review, at least quarterly, a written report of
the amounts so expended and the purposes for which such
expenditures were made; and
(c) in the case of a plan, that it may be terminated at any time by a
vote of a majority of the members of the Board of Directors of
the Fund who are not interested persons of the Fund and who have
no direct or indirect financial interest in the operation of the
plan or in any agreements related to the plan or by a vote of a
majority of the outstanding voting securities of a Portfolio.
Rule 12b-1(b)(4) requires that such a plan may not be amended to
increase materially the amount to be spent for distribution without shareholder
approval and that all material amendments to the plan must be approved in the
manner described in paragraph (b)(2) of Rule 12b-1.
Rule 12b-1(c) provides that the Fund may rely upon Rule 12b-1(b) only
if the selection and nomination of the Fund's disinterested directors are
committed to the discretion of such disinterested directors. Rule 12b-1(e)
provides that the Fund may implement or continue a plan pursuant to Rule
12b-1(b) only if the directors who vote to approve such implementation or
continuation conclude, in the exercise of reasonable business judgment and in
light of their fiduciary duties under state law, and under Sections 36(a) and
(b) of the 1940 Act, that there is a reasonable likelihood that the plan will
benefit the Fund and its shareholders. The Fund has complied with the provisions
of Rule 12b-1 and the Board of Directors has concluded that there is a
reasonable likelihood that the 12b-1 Plan will benefit the Fund and its
shareholders.
Pursuant to the provisions of the 12b-1 Plan, each of the Portfolios
pays a fee to the Distributor computed and paid monthly at an annual rate of up
to 0.25% of such Portfolio's average daily net assets in order to reimburse the
Distributor for its actual expenses incurred in the distribution and promotion
of such Portfolio's shares.
Expenses for which the Distributor will be reimbursed under the 12b-1
Plan include, but are not limited to, compensation paid to registered
representatives of the Distributor and to broker-dealers which have entered into
sales agreements with the Distributor; expenses incurred in the printing of
prospectuses, statements of additional information and reports used for sales
purposes; expenses of preparation and printing of sales literature;
advertisement, promotion, marketing and sales expenses; and other
distribution-related expenses. Compensation will be paid out of such amounts to
investment executives of the Distributor and to broker-dealers who have entered
into sales agreements with the Distributor as follows. If shares of the
Portfolios are sold by a representative of a broker-dealer other than the
Distributor, that portion of the reimbursement attributable to shares sold by
such representative is paid to such broker-dealer. If shares of the Portfolios
are sold by an investment executive of the Distributor, compensation will be
paid to the investment executive by the Distributor in an amount not to exceed
that portion of 0.25% of the average daily net assets of the Portfolios which is
attributable to shares sold by such investment executive.
For the year ended June 30, 1999, the Fund reimbursed the following
amounts under the Rule 12b-1 Plan to the Distributor:
Advertising $0.00
Printing & Mailing of Prospectuses to new shareholders 1,553.89
Compensation to Dealers/Sales Personnel 187,926.48
Other Finance Charges 0.00
Other Fees 0.00
================
TOTAL $189,480.37
================
Under the Distribution Agreement, the Distributor is also the principal
underwriter of the Fund's shares and continuously distributes the shares on an
"agency best efforts" basis. In so doing, the Distributor may pay its
representatives or others additional amounts over the amounts paid under the
12b-1 Plan in furtherance of distribution of the Fund's shares.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATIONS
- --------------------------------------------------------------------------------
The Adviser is responsible for decisions to buy and sell securities for
the Portfolios, the selection of broker-dealers to effect the transactions and
the negotiation of brokerage commissions, if any. In placing orders for
securities transactions, the primary criterion for the selection of a
broker-dealer is the ability of the broker-dealer, in the opinion of the
Adviser, to secure prompt execution of the transactions on favorable terms,
including the reasonableness of the commission (if any) and considering the
state of the market at the time.
The primary consideration in effecting transactions for the Portfolios
is execution at the most favorable prices. The Adviser has complete freedom as
to the markets in and the broker-dealers through or with which (acting on an
agency basis or as principal) they seek execution. The Adviser may consider a
number of factors in determining which broker-dealers to use for the Portfolios'
transactions. These factors, which are also discussed in the Statement of
Additional Information, include research services, the reasonableness of
commissions, the quality of services and execution. Portfolio transactions for
the Portfolios may be effected through the Distributor if the commissions, fees
or other remuneration received by the Distributor are reasonable and fair
compared to the commissions, fees or other remuneration paid to other brokers in
connection with comparable transactions involving similar securities being
purchased or sold on an exchange during a comparable period of time. In
effecting portfolio transactions through the Distributor, the Portfolios intend
to comply with Section 17(e)(1) of the 1940 Act, as amended.
When consistent with these objectives, business may be placed with
broker-dealers, including the Distributor, who furnish investment research
and/or services to the Adviser. Such research or services include advice, both
directly and in writing, as to the value of securities; the advisability of
investing in, purchasing or selling securities; and the availability of
securities, or purchasers or sellers of securities; as well as analyses and
reports concerning issues, industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts. This allows the Adviser to
supplement its own investment research activities and enables the Adviser to
obtain the views and information of individuals and research staffs of many
different securities firms prior to making investment decisions for the
Portfolios. To the extent portfolio transactions are effected with
broker-dealers who furnish research services to the Adviser, the Adviser may
receive a benefit, not capable of evaluation in dollar amounts, without
providing any direct monetary benefit to the Portfolios from these transactions.
The Adviser believes that most research services obtained by it generally
benefit several or all of the accounts that it manages, as opposed to solely
benefiting one specific managed fund or account. Normally, research services
obtained through managed funds or accounts investing in common stocks would
primarily benefit the managed funds or accounts which invest in common stock;
similarly, services obtained from transactions in fixed-income securities would
normally be of greater benefit to the managed funds or accounts which invest in
debt securities.
The Adviser may also purchase securities from time to time from
broker-dealers who are participating as underwriters in a firm commitment
underwriting of municipal securities where the Distributor is also a member of
the selling syndicate. The Board of Directors of the Fund has adopted a policy
pursuant to Rule 10f-3 under the 1940 Act governing such purchases. The purchase
of such municipal securities shall only be made pursuant to the requirements of
Rule 10f-3 and the policies adopted by the Board of Directors of the Fund.
The Adviser has not entered into any formal or informal agreements with
any broker-dealers, nor does it maintain any "formula" which must be followed in
connection with the placement of any Portfolio's transactions in exchange for
research services provided the Adviser except as noted below. However, from time
to time the Adviser may elect to use certain brokers to execute transactions in
order to encourage them to provide the Adviser with research services that the
Adviser anticipates will be useful to it. The Adviser will authorize the
Portfolio to pay an amount of commission for effecting a securities transaction
in excess of the amount of commission another broker-dealer would have charged
only if the Adviser doing so determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker-dealer, viewed in terms of either that
particular transaction or the Adviser's overall responsibilities with respect to
the accounts as to which it exercises investment discretion.
In determining the commissions to be paid to the Distributor, it is the
policy of the Fund that such commissions, will, in the judgment of the Adviser,
subject to review by the Board of Directors, be both (a) at least as favorable
as those which would be charged by other qualified brokers in connection with
comparable transactions involving similar securities being purchased or sold on
a securities exchange during a comparable period of time, (b) at least as
favorable as commissions contemporaneously charged by the Distributor on
comparable transactions for its most favored comparable unaffiliated customers,
and (c) conform to the requirements of Rule 17e-1 under the 1940 Act. While the
Adviser does not deem it practicable and in the best interest of the Portfolios
to solicit competitive bids for commission rates on each transaction,
consideration will regularly be given to posted commission rates as well as to
other information concerning the level of commissions charged on comparable
transactions by other qualified brokers.
In certain instances, there may be securities that are suitable for the
Fund as well as for that of one or more of the advisory clients of the Adviser.
Investment decisions for the Portfolios and for such advisory clients are made
by the Adviser with a view to achieving their respective investment objectives.
It may develop that a particular security is bought or sold for only one client
of the Adviser even though it might be held by, or bought or sold for, other
clients. Likewise, a particular security may be bought for one or more clients
of one of the Adviser when one or more other clients are selling that same
security. Some simultaneous transactions are inevitable when several clients
receive investment advice from the same investment adviser, particularly when
the same security is suitable for the investment objectives of more than one
client. When two or more clients of the Adviser are simultaneously engaged in
the purchase or sale of the same security, the securities are allocated among
clients in a manner believed by the Adviser to be equitable to each (and may
result, in the case of purchases, in allocation of that security only to some of
those clients and the purchase of another security for other clients regarded by
the Adviser as a satisfactory substitute). It is recognized that in some cases
this system could have a detrimental effect on the price or volume of the
security as far as the Portfolio involved is concerned. At the same time,
however, it is believed that the ability of the Portfolio to participate in
volume transactions will sometimes produce better execution prices.
The Board of Directors of the Fund has also adopted a policy pursuant
to Rule 17a-7 under the 1940 Act that allows certain principal transactions
between certain remote affiliates of the Fund and the Fund and between
Portfolios of the Fund. These transactions will only be effected in accordance
with the provisions of Rule 17a-7 under the 1940 Act and are further restricted
by the policies adopted by the Board of Directors pursuant thereto.
During the fiscal years ended June 30, 1999, 1998 and 1997, the
Portfolios paid the following total brokerage commissions. The dollar and
percentage amount of commissions paid to Kirkpatrick Pettis is also listed.
<TABLE>
Brokerage Commissions Paid
During Fiscal Year Ended:
- ---------------------------- -------------------------- --------------------------- ---------------------------
June 30, 1999 June 30, 1998 June 30, 1997
- ---------------------------- ------------- ------------ -------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Amount Paid to: Kirkpatrick Other Kirkpatrick Other Kirkpatrick Other
Pettis brokers Pettis brokers Pettis brokers
- ---------------------------- ------------- ------------ -------------- ------------ ------------- -------------
Equity Portfolio $1,227 $73,631 $11,976 *<F17> $10,518 *<F17>
Fixed Income Portfolio 0 0 4 *<F17> 0 *<F17>
Total Commissions Paid $1,227 $73,631 $11,980 $34,450 $10,518 $24,602
- ---------------------------- ------------- ------------ -------------- ------------ ------------- -------------
% of Commissions Paid 2% 98% 26% 74% 30% 70%
- ---------------------------- ------------- ------------ -------------- ------------ ------------- -------------
</TABLE>
*<F17>The specific amount paid by each Portfolio to other brokers is unknown;
however, the total amount paid to other brokers by the Fund as a whole is shown.
PURCHASE OF SHARES
- --------------------------------------------------------------------------------
The manner in which the shares of the Portfolios are offered to the
public is described in the Prospectus. Shares of the Portfolios may be purchased
initially subject to the minimums set forth in the Prospectus, unless the
purchaser is an employee of the Distributor, Adviser or Mutual of Omaha
Insurance Company, or is a family member of such employee. The term family
member shall include parents, mother-in-law or father-in-law, husband or wife,
brother or sister, brother-in-law or sister-in-law, son or daughter, son-in-law
or daughter-in-law, and their respective children. In addition, the term shall
include any person who is supported directly or indirectly, to a material
extent, by the employee or other family member. The minimum initial investment
for accounts established by money purchase/profit-sharing plans, 401(k) plans,
IRA/SEP, 403(b) plans or 457 (state deferred compensation plans) is $2,000.
Finally, investments made by an individual, or by an individual's spouse and/or
children under the age of 21, purchasing shares for their own account, or by a
trustee, or other fiduciary purchasing for a single trust estate, or single
fiduciary account will be treated as investments made by a single investor for
purposes of meeting initial purchase requirements.
AUTOMATIC INVESTMENT PLAN
The Prospectus provides details about purchasing through the automatic
investment plan. The AIP is a method of using dollar cost averaging, which is an
investment strategy that involves investing a fixed amount of money at a regular
time interval. However, a program of regular investment cannot ensure a profit
or protect against a loss from declining markets. By always investing the same
amount, you will be purchasing more shares when the price is low and fewer
shares when the price is high. Since such a program involves continuous
investment regardless of fluctuating share values, you should consider your
financial ability to continue the program through periods of low share price
levels.
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
Redemption of shares, or payment, may be suspended at times (a) when
the New York Stock Exchange is closed for other than customary weekend or
holiday closings, (b) when trading on said exchange is restricted, (c) when an
emergency exists, as a result of which disposal by the Portfolios of securities
owned by them is not reasonably practicable, or it is not reasonably practicable
for the Portfolios fairly to determine the value of their net assets, or (d)
during any other period when the Securities and Exchange Commission, by order,
so permits, provided that applicable rules and regulations of the Securities and
Exchange Commission shall govern as to whether the conditions prescribed in (b)
or (c) exist.
REDEMPTION IN-KIND
The Prospectus provides details about redemptions in-kind. You should
note that you may have additional expenses such as brokerage commissions for the
sale of the securities received from the Fund. Furthermore, in-kind payments do
not have to constitute a cross section of the Fund's portfolio.
PRICING OF SHARES
- --------------------------------------------------------------------------------
The method for determining the public offering price of Portfolio
shares is summarized in the Prospectus. The net asset value of each Portfolio's
shares is determined on each day on which the New York Stock Exchange is open,
provided that the net asset value need not be determined on days when no
Portfolio shares are tendered for redemption and no order for Portfolio shares
is received. The New York Stock Exchange is not open for business on the
following holidays (or on the nearest Monday or Friday if the holiday falls on a
weekend): New Year's Day, Martin Luther King Jr.'s Day, Presidents' Day, Good
Friday, Memorial Day, July 4th, Labor Day, Thanksgiving and Christmas.
The portfolio securities in which each Portfolio invests fluctuate in
value, and hence the net asset value per share of each Portfolio also
fluctuates. An example of how the net asset value per share for all Portfolios
was calculated on June 30, 1999 is as follows:
Equity Portfolio
- --------------------------------------------------
Net Assets Net Asset Value
Shares Outstanding = per Share
$26,351,509
-----------
1,613,816 = $16.33
Fixed Income Portfolio
- ----------------------------------------------
Net Assets Net Asset Value
Shares Outstanding = per Share
$8,328,671
----------
806,289 = $10.33
TAX STATUS
- --------------------------------------------------------------------------------
The Fund will qualify and intends to continue to qualify its Portfolios
as "regulated investment companies" under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), so as to be relieved of federal income
tax on its capital gains and net investment income distributed to shareholders.
To qualify as a regulated investment company, a Portfolio must, among other
things, receive at least 90% of its gross income each year from dividends,
interest, gains from the sale or other disposition of securities and certain
other types of income including, with certain exceptions, income from options
and futures contracts. The Code also requires a regulated investment company to
diversify its holdings. The Internal Revenue Service has not made its position
clear regarding the treatment of futures contracts and options for purposes of
the diversification test, and the extent to which a Portfolio could buy or sell
futures contracts and options may be limited by this requirement.
The Code requires that all regulated investment companies pay a
nondeductible 4% excise tax to the extent the regulated investment company does
not distribute 98% of its ordinary income, determined on a calendar year basis,
and 98% of its capital gains, determined, in general, on an October 31 year end.
The required distributions are based only on the taxable income of a regulated
investment company.
Ordinarily, distributions and redemption proceeds earned by a Portfolio
shareholder are not subject to withholding of federal income tax. However, if a
shareholder fails to furnish a tax identification number or social security
number, or certify under penalties of perjury that such number is correct, the
Fund may be required to withhold federal income tax ("backup withholding") from
all dividend, capital gain and/or redemption payments to such shareholder.
Dividends and capital gain distributions may also be subject to backup
withholding if a shareholder fails to certify under penalties of perjury that
such shareholder is not subject to backup withholding due to the underreporting
of certain income. These certifications are contained in the purchase
application enclosed with the Prospectus.
CALCULATIONS OF PERFORMANCE DATA
- --------------------------------------------------------------------------------
From time to time the Fund may quote the yield for the Portfolios in
advertisements or in reports and other communications to shareholders. For this
purpose, yield is calculated by dividing a Portfolio's net investment income per
share for the base period, which is 30 days or one month, by the Portfolio's
maximum offering purchase price on the last day of the period and annualizing
the result. The Portfolio's net investment income changes in response to
fluctuations in interest rates and in the expenses of the Portfolio.
Consequently, any given quotation should not be considered as representative of
what the Portfolio's yield may be for any specified period in the future.
Yield information may be useful in reviewing a Portfolio's performance
and for providing a basis for comparison with other investment alternatives.
However, a Portfolio's yield will fluctuate, unlike other investments, which pay
a fixed yield for a stated period of time. Current yield should be considered
together with fluctuations in the Portfolio's net asset value over the period
for which yield has been calculated, which, when combined, will indicate a
Portfolio's total return to shareholders for that period. Other investment
companies may calculate yields on a different basis. In addition, investors
should give consideration to the quality and maturity of the portfolio
securities of the respective investment companies when comparing investment
alternatives.
Investors should recognize that in periods of declining interest rates
a bond portfolio's yield will tend to be somewhat higher than prevailing market
rates, and in periods of rising interest rates, such portfolio's yield will tend
to be somewhat lower. Also, when interest rates are falling, the inflow of net
new money to a bond portfolio from the continuous sale of its shares will likely
be invested in instruments producing lower yields than the balance of such
portfolio's holdings, thereby reducing the current yield of such portfolio. In
periods of rising interest rates, the opposite can be expected to occur.
The Fund may also quote the indices of bond prices and yields prepared
by Lehman Bros., Inc., Salomon Bros., Inc., Merrill Lynch or other leading
broker-dealer firms. These indices are not managed for any investment goal and
their composition may be changed from time to time.
The Fixed Income Portfolio may quote the yield or total return on
Ginnie Maes, Fannie Maes, Freddie Macs, corporate bonds and Treasury bonds and
notes, either as compared to each other or as compared to the Portfolio's
performance. In considering such yields or total returns, investors should
recognize that the performance of securities in which the Portfolio may invest
does not reflect the Portfolio's performance. Furthermore, such yields or total
returns do not take into account either the effects of portfolio management or
of management fees or other expenses. The issuers of such securities guarantee
that interest will be paid when due and that principal will be fully repaid if
the securities are held to maturity; however there are no such guarantees with
respect to shares of the Portfolio. Investors should also be aware that the
mortgages underlying mortgage-related securities may be prepaid at any time.
Prepayment is particularly likely in the event of an interest rate decline, as
the holders of the underlying mortgages seek to pay off high-rate mortgages or
re-negotiate them at potentially lower current rates. Because the underlying
mortgages are more likely to be prepaid at their par value when interest rates
decline, the value of certain high-yielding mortgage-related securities may have
less potential for capital appreciation than conventional debt securities (such
as U. S. Treasury bonds and notes) in such markets. At the same time, such
mortgage-related securities may have less potential for capital appreciation
when interest rates rise.
In connection with the quotations of yields in advertisements described
above, the Fund will also provide average annual total returns from the date of
inception for one, five and ten-year periods if applicable. Total return is a
calculation that equates the initial amount invested to the ending redeemable
value at a specified time. It assumes the reinvestment of all dividends and
capital gains distributions. Average total return will be the average of the
total returns for each year in the period. The Portfolios may also provide a
total return figure for the most recent calendar quarter prior to the
publication of the advertisement. The yield of the Fixed Income Portfolio for
the 30-day period ending June 30, 1999 was 5.79%.
The average annual total returns of the Portfolios for one year ending
June 30, 1999 and from inception to date ending June 30, 1999 are as follows:
- ------------------------------------- ---------------- -----------------
Annualized Total Return 07/05/94
(Inception)
1 Year To Date
Equity Portfolio (1.97)% 16.23%
Fixed Income Portfolio 1.86% 6.46%
- ------------------------------------- ---------------- -----------------
AUDITORS
- --------------------------------------------------------------------------------
Deloitte & Touche, LLP, 411 East Wisconsin Avenue, Milwaukee, Wisconsin
53202, serves as the Fund's independent public accountants. Their services
include examination of the Fund's financial statements and the performance of
other related audit services.
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Fund's audited financial statements are incorporated by reference
to the Fund's Annual Report for the fiscal year ended June 30, 1999 as filed
with the SEC.
APPENDIX A
- --------------------------------------------------------------------------------
RATINGS OF CORPORATE OBLIGATIONS,
COMMERCIAL PAPER, AND PREFERRED STOCK
RATINGS OF CORPORATE OBLIGATIONS
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds that are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present that
make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds that are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds that are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. Such bonds may be in default or there
may be present elements of danger with respect to principal and interest.
Ca: Bonds rated Ca represent obligations that are speculative in a high degree.
Such bonds are often in default or have other marked shortcomings.
Those securities in the A and Baa groups which Moody's believes possess
the strongest investment attributes are designated by the symbols A-1 and Baa-1.
Other A and Baa securities comprise the balance of their respective groups.
These rankings (1) designate the securities which offer the maximum in security
within their quality groups, (2) designate securities which can be bought for
possible upgrading in quality, and (3) additionally afford the investor an
opportunity to gauge more precisely the relative attractiveness of offerings in
the marketplace.
STANDARD & POOR'S CORPORATION
AAA: Bonds rated AAA have the highest rating assigned by Standard & Poor's to a
debt obligation. Capacity to pay interest and repay principal is extremely
strong.
AA: Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree.
A: Bonds rated A have a strong capacity to pay interest and repay
principal, although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Although they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
bonds in this category than for bonds in higher rated categories. Bonds rated
BBB are regarded as having speculation characteristics.
BB--B--CCC-CC: Bonds rated BB, B, CCC, and CC are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation among such bonds and CC the highest
degree of speculation. Although such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
COMMERCIAL PAPER RATINGS
STANDARD & POOR'S CORPORATION
Commercial paper ratings are graded into four categories, ranging from
"A" for the highest quality obligations to "D" for the lowest. Issues assigned
the A rating are regarded as having the greatest capacity for timely payment.
Issues in this category are further refined with the designation 1, 2 and 3 to
indicate the relative degree of safety. The "A-1" designation indicates that the
degree of safety regarding timely payment is very strong. Those issues
determined to possess overwhelming safety characteristics will be denoted with a
plus sign designation.
MOODY'S INVESTORS SERVICE, INC.
Moody's commercial paper ratings are opinions of the ability of the
issuers to repay punctually promissory obligations not having an original
maturity in excess of nine months. Moody's makes no representation that such
obligations are exempt from registration under the Securities Act of 1933, nor
does it represent that any specific note is a valid obligation of a rated issuer
or issued in conformity with any applicable law. Moody's employs the following
three designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Prime-1 Superior capacity for repayment
Prime-2 Strong capacity for repayment
Prime-3 Acceptable capacity for repayment
RATINGS OF PREFERRED STOCK
STANDARD & POOR'S CORPORATION
Standard & Poor's preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue. Therefore, to
reflect this difference, the preferred stock rating symbol will normally not be
higher than the bond-rating symbol assigned to, or that would be assigned to,
the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
1. Likelihood of payment--capacity and willingness of the issuer
to meet the timely payment of preferred stock dividends and any
applicable sinking fund requirements in accordance with the
terms of the obligation.
2. Nature of and provisions of the issue.
3. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements affecting creditors'
rights.
AAA: This is the highest rating that may be assigned by Standard & Poor's to a
preferred stock issue and indicates an extremely strong capacity to pay the
preferred stock obligations.
AA: A preferred stock issue rated AA also qualifies as a high quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated AAA.
A: An issue rated A is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
BBB: An issue rated BBB is regarded as backed by an adequate capacity
to pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the A category.
BB, B, CCC: Preferred stock issues rated BB, B, and CCC are regarded,
on balance, as predominantly speculative with respect to the issuer's capacity
to pay preferred stock obligations. BB indicates the lowest degree of
speculation and CCC the highest degree of speculation. While such issues will
likely have some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
CC: The rating CC is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C: A preferred stock rated C is a nonpaying issue.
D: A preferred stock rated D is a nonpaying issue with the issuer in default on
debt instruments.
NR indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S & P does not rate
a particular type of obligation as a matter of policy.
Plus (+) or Minus (-): To provide more detailed indications of
preferred stock quality, the ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
MOODY'S INVESTORS SERVICE, INC.
aaa: An issue that is rated aaa is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa: An issue that is rated aa is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
a: An issue which is rated a is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the aaa
and aa classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
baa: An issue that is rated baa is considered to be medium grade,
neither highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great length of
time.
ba: An issue that is rated ba is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b: An issue that is rated b generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa: An issue that is rated caa is likely to be in arrears on dividend payments.
This rating designation does not purport to indicate the future status of
payments.
ca: An issue which is rated ca is speculative in a high degree and is likely to
be in arrears on dividends with little likelihood of eventual payment.
c: This is the lowest rated class of preferred or preference stock. Issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
KPM FUNDS, INC.
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Articles of Incorporation(1)<F18>
(b) Bylaws(2)<F19>
(c) Instruments Defining Rights of Security Holders(3)<F20>
(d) Amended Management and Investment Advisory Agreement(1)<F18>
(e) Distribution Agreement(1)<F18>
(f) Bonus or Profit Sharing Contracts(1)<F18>
(g) Custodian Servicing Agreement between KPM Funds, Inc. and Firstar
Mutual Fund Services, LLC dated September 1, 1998(4)<F21>
(h) Other Material Contracts
(1) Fund Administration Servicing Agreement between KPM Funds, Inc. and
Firstar Mutual Fund Services, LLC dated September 1, 1998.(4)<F21>
(2) Fund Accounting Servicing Agreement between KPM Funds, Inc. and
Firstar Mutual Fund Services, LLC dated September 1, 1998.(4)<F21>
(3) Transfer Agent Servicing Agreement between KPM Funds, Inc. and
Firstar Mutual Fund Services, LLC dated September 1, 1998.(4)<F21>
(4) Prototype Retirement Plan Documents(1)<F18>
(i) Legal Opinion. Consent of Cline, Williams, Wright, Johnson & Oldfather
to be filed by subsequent amendment.
(j) Other Opinion. Consent of Deloitte & Touche LLP to be filed by
subsequent amendment.
(k) Omitted Financial Statements(3)<F20>
(l) Subscription Agreement of KPM Investment Management, Inc.
(m) Rule 12b-1 Plan(1)<F18>
(n) Financial Data Schedule(3)<F20>
(o) Rule 18f-3 Plan(3)<F20>
(1)<F18> Filed in Post-effective Amendment No. 2 on October 13, 1995.
(2)<F19> Filed in Pre-effective Amendment No. 1 on June 24, 1994.
(3)<F20> Not Applicable.
(4)<F21> Filed in Post-effective Amendment No. 5 on September 2, 1998.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Kirkpatrick, Pettis, Smith, Polian Inc., a Nebraska corporation
("Kirkpatrick Pettis"), which serves as the distributor of the Registrant, is
deemed to be in control of the Registrant as a result of its capacity as Trustee
of its employees' 401K Profit Sharing Plan which holds a significant percentage
of the shares of the Registrant. Kirkpatrick Pettis is a wholly owned subsidiary
of Mutual of Omaha Insurance Company, a mutual insurance company organized under
Nebraska law.
ITEM 25. INDEMNIFICATION
The Nebraska Business Corporation Act allows indemnification of officers
and directors of the Registrant under circumstances set forth therein. The
Registrant has made such indemnification mandatory. Reference is made to Article
8.d. of the Articles of Incorporation (Exhibit a) and Article XIII of the Bylaws
of Registrant (Exhibit b).
The general effect of such provisions is to require indemnification of
persons who are in an official capacity with the corporation against judgments,
penalties, fines and reasonable expenses, including attorneys' fees incurred by
said person if: (1) the person has not been indemnified by another organization
for the same judgments penalties, fines and expenses for the same acts or
omissions; (2) the person acted in good faith; (3) the person received no
improper personal benefit; (4) in the case of a criminal proceeding, the person
had no reasonable cause to believe the conduct was unlawful; (5) in the case of
directors, officers and employees of the corporation, or in the case of
directors, officers, or employees serving at the request of the corporation for
another organization, such person reasonably believed that the conduct was not
opposed to the best interests of the corporation. A corporation is permitted to
maintain insurance on behalf of any officer, director, employee or agent of the
corporation, or any person serving as such at the request of the corporation,
against any liability of such person.
Nevertheless, Article 8.d. of the Articles of Incorporation prohibits any
indemnification which would be in violation of Section 17(h) of the Investment
Company Act of 1940, as now enacted or hereafter amended, and Article XIII of
the Fund's Bylaws prohibits any indemnification inconsistent with the guidelines
set forth in Investment Company Act Releases No. 7221 (June 9, 1972) and No.
11330 (September 2, 1980). Such Releases prohibit indemnification in cases
involving willful misfeasance, bad faith, gross negligence and reckless
disregard of duty and establish procedures for the determination of entitlement
to indemnification and expense advances.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification by the Registrant is against public policy as expressed in the
Act and, therefore, may be unenforceable. In the event that a claim for such
indemnification (except insofar as it provides for the payment by the Registrant
of expenses incurred or paid by a director, officer or controlling person in the
successful defense of any action, suit or proceeding) is asserted against the
Registrant by such director officer or controlling person and the Securities and
Exchange Commission is still of the same opinion, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether or not
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
In addition to the indemnification provisions contained in the Registrant's
Articles and Bylaws, there are also indemnification and hold harmless provisions
contained in the Investment Advisory Agreement, Distribution Agreement, Fund
Administration Servicing Agreement, Transfer Agent Servicing Agreement, Fund
Accountant Servicing Agreement and Custodian Servicing Agreement. Finally, the
Registrant has also included in its Articles of Incorporation (See Article X of
the Articles of Incorporation [Exhibit a]) a provision which eliminates the
liability of outside directors to monetary damages for breach of fiduciary duty
of such directors. Such limitation of liability does not eliminate or limit
liability of such directors for any act or omission not in good faith which
involves intentional misconduct or a knowing violation of law, any transaction
from which such director derived an improper direct or indirect financial
benefit, for paying a dividend or approving a stock repurchase which was in
violation of the Nebraska Business Corporation Act and for any act or omission
which violates a declaratory or injunctive order obtained by the Registrant or
its shareholders.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
<TABLE>
Position With Business Connections
Name Advisor (Present and for past two years)
- ---------------------------- ----------------------------- ----------------------------------------------------
<S> <C> <C>
Randall D. Greer*<F22> Chairman of the Board, Director, Butler Holdings, Inc.
President and CEO
Rodney D. Cerny*<F22> Director, Executive Vice Director and Secretary, Smeal Manufacturing, Inc.,
President and Chief Board Member, University of Nebraska, CBA Alumni
Investment Officer Board
Brian P. McGinty*<F22> Secretary Executive Vice President and General Counsel for
Kirkpatrick, Pettis, Smith , Polian Inc.; Partner
for Kutak, Rock and Huie.
Jeffrey N. Sime*<F22> Treasurer
Bruce H. Van Kooten*<F22> First Vice President and
Portfolio Manager
Patrick M. Miner Vice President and Vice President, Mutual Asset Management Co. and
Portfolio Manager Vice President and Portfolio Manager, Mutual of
Omaha Insurance Company and United of Omaha
Insurance Company
John W. Weekly Director Vice Chairman and Chief Executive Officer, Mutual
of Omaha Insurance Company and United of Omaha
Insurance Company; Director of Companion Life
Insurance Company; Kirkpatrick, Pettis, Smith,
Polian Inc.; Tele-Trip Company, Inc., Omaha
Financial Insurance Company; Omaha Property and
Casualty Insurance Company; United World Life
Insurance Company; Norwest Bank Nebraska, N.A.;
Health Insurance Association of America; Omaha
Airport Authority; and Bellevue College.
John A. Sturgeon Director President, Mutual of Omaha Insurance Company,
United of Omaha Insurance Company and United Arts
of Omaha; Director of Kirkpatrick, Pettis, Smith,
Polian Inc.; Mutual of Omaha Marketing
Corporation; Omaha Property and Casualty Insurance
Company; Tele-Trip Company, Inc.; Companion Life
Insurance Company; United World Life Insurance
Company; The Omaha Indemnity Company, and Omaha
Chamber of Commerce; Trustee, University of
Nebraska-Lincoln School of Accountancy.
Peter N. Lahti Director Chairman of the Board, President and Chief
Executive Officer, Kirkpatrick, Pettis, Smith,
Polian Inc.; Director of KFS Corporation; Child
Saving Institute; American Red Cross; and
Chairman, PSA PAC.
</TABLE>
*<F22> See caption "Management of the Fund" in the Prospectus and Statement of
Additional Information forming a part of this Registration Statement.
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Not applicable.
(b)
<TABLE>
Position and Offices Positions and Offices
Name with Underwriter with Registrant
- ------------------------------------- ------------------------------------------------ ---------------------------
<S> <C> <C>
Samuel C. Doyle (1)<F23> Executive Vice President, Fixed Income Capital None
Markets, Denver, CO
Peter N. Lahti (2)<F24> Chairman of the Board, President and Chief None
Executive Officer
Brian P. McGinty(2)<F24> Executive Vice President, General Counsel, Secretary
Omaha, NE
Jeffrey N. Sime (2)<F24> Executive Vice President, Treasurer and Chief Treasurer
Financial Officer, Omaha, NE
</TABLE>
(1)<F23> One Norwest Center, 1700 Lincoln St., Ste. 1300, Denver, CO 80203
(2)<F24> 10250 Regency Circle, Omaha, NE 68114
(c) Not applicable
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
All required accounts, books and records will be maintained by KPM
Investment Management, Inc. and Kirkpatrick, Pettis, Smith, Polian Inc., 10250
Regency Circle, Omaha, Nebraska 68114. Separate ledger accounts will be
maintained by Firstar Mutual Fund Services, LLC, 615 E. Michigan Street,
Milwaukee, Wisconsin 53202.
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
Not applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Omaha,
State of Nebraska, on the 23rd day of August, 1999.
KPM FUNDS, INC.
By:/s/ Rodney D. Cerny
Rodney D. Cerny
President and Principal Executive Officer
Pursuant to the requirements of the Securities Act of 1933, the Registration
Statement has been signed below by the following persons in the capacities
indicated on August 23, 1999:
Signatures
/s/ Rodney D. Cerny
Rodney D. Cerny, President, Director
and Principal Executive Officer
/s/ Randall D. Greer*
Randall D. Greer, Chairman and Director
/s/ Jeffrey N. Sime*
Jeffrey N. Sime, Treasurer and
Principal Financial Officer
/s/ Donald L. Stroh*
Donald L. Stroh, Director
/s/ William G. Campbell*
William G. Campbell, Director
/s/ Herbert H. Davis*
Herbert H. Davis, Jr., Director
*Signed as attorney in fact by:
/s/ Rodney D. Cerny
Rodney D. Cerny
Attorney-in-fact
