(KPM Funds Logo)
SEMI-ANNUAL
REPORT
KPM EQUITY PORTFOLIO
KPM FIXED INCOME PORTFOLIO
DECEMBER 31, 1998
(KPM Funds Logo)
PERFORMANCE STATISTICS
<TABLE>
SIX MONTHS ENDED ONE YEAR ENDED AVERAGE ANNUAL RETURN
12/31/98 12/31/98 SINCE INCEPTION (7/5/94)
---------------- -------------- -----------------------
<S> <C> <C> <C>
Equity Portfolio (6.51)% (3.89)% 16.93%
Fixed Income Portfolio 3.10% 6.82% 7.48%
</TABLE>
The total returns represent the overall performance of an investment for a
specific period of time, assuming reinvestment of dividends and capital gains.
Total returns reflect past performance. Past performance does not predict
future performance. The investment return and principal value of an investment
will fluctuate so that shares, when redeemed, may be worth more or less than
their original cost.
Dear Shareholder:
Your funds had a challenging year in 1998. The KPM Equity Portfolio declined -
6.5% in the six month period ended December 31, 1998 which was slightly better
than the Value Line Composite Index which declined -8.3%. However, your fund
lagged well behind the Standard & Poor's 500 average which increased +9.3%. For
the calendar year the KPM Equity Portfolio declined -3.9% which was comparable
to the Value Line Composite Index but was again well behind the S&P 500 Index.
The KPM Fixed Income Portfolio had a +3.1% return in the six month period and a
+6.8% return in the calendar year ended December 31, 1998.
Much of the challenge in managing equities in 1998 can be explained by the huge
divergence between the returns of the S&P 500 Index and the Value Line Composite
Index. This difference was 17.6 percentage points in the six month period and
32.4 percentage points for the calendar year, both in the S&P 500 Index's favor.
This is the largest divergence I have ever seen in my 23 years of experience and
some other money managers have suggested that it was the largest divergence in
over 50 years.
Why did this happen? There are two basic reasons. First, a relatively small
number of the largest growth stocks provided nearly all of the returns of the
S&P 500 Index in 1998. In fact, only 13 stocks made up about 50% of the S&P 500
Index return. Why investors chose to focus interest on such few stocks is open
to debate. Some reasons may include the increasing popularity of index funds,
foreign investors preference for well known companies, the rapid growth and
glamour of such companies (especially technology and internet stocks) and their
recent superior stock market returns. The second reason for the divergence is
the method in which the stock indices are constructed. The S&P 500 Index is
weighted by the size (or capitalization) of each company, i.e. the largest
companies comprise proportionately larger percentages of the index. As a
result, the return of the largest companies dominate the return of the whole S&P
500 Index. In contrast, the Value Line Composite Index, in addition to
containing more stocks (over 1,700), weights each company equally which, in our
opinion, is closer to how a portfolio is constructed.
And as if this disparity wasn't enough of a challenge, the large capitalization
stocks that were favored were also selling at price/earnings ratios that were
among the highest in the entire stock market. This outperformance by stocks
with the highest price/earnings ratios is in contrast to numerous academic
studies which have shown that in most years stocks with lower price/earnings
ratios tend to outperform those with higher ratios. KPM, as a value manager,
stayed true to its philosophy and invested in mostly stocks with lower
price/earnings ratios, which decidedly worked against us in 1998.
As discussed in the equity portfolio commentary, we have made some modification
to KPM's approach to try to reduce the impact of such market divergences on your
portfolio in the future. However, we also believe that it is just a matter of
time before value type stocks are once again favored by the market. In fact,
the last time that the largest growth stocks dominated stock market performance
was in 1972-73, and after that period the broad market and value type stocks
outperformed the S&P 500 Index for ten consecutive years. History has shown
that good things happen to investors who have patience and stick to their
philosophy over long periods of time. When value comes back into favor, KPM
will be ready!
Sincerely,
/s/ Randall D. Greer
Randall D. Greer, CFA
Chairman
KPM EQUITY PORTFOLIO
PORTFOLIO COMMENTARY
Bruce H. Van Kooten, CFA
Portfolio Manager
There is an old Chinese curse that reads: "May you live in interesting times."
This curse has definitely rung true for a number of value managers over the last
five quarters. Your manager is obviously included in those impacted by the
curse. We have been through a period where tried and true value measures
including low P/E, low Price/Book and low beta strategies have not worked. In
the past, these strategies have generated very good returns while providing
investors with a margin of safety against loss. Unfortunately, this time around
companies we thought had a high margin of safety seemed instead to have a high
margin of loss.
Realizing that the value style we have practiced for years was not performing as
in the past, we painstakingly looked at everything we do and how we do it: our
philosophy, our investment process and how we construct portfolios. This self-
examination has resulted in a few changes to our approach of investing. What we
will not do is change our basic value philosophy, as we remain totally committed
- --------
to value. But we are modifying the manner in which we build portfolios and the
valuation parameters we have been using. Following is a summary of the
important points of our review.
First of all, in our search for undervalued companies in a highly priced market,
we have increased the portion of our portfolios invested in turnarounds, which
are dependent upon a management execution strategy to fix a problem, not the
general trend of the stock market. So in a rising market, if management
strategy has not yet taken hold, the stock has likely underperformed. Second,
in our search for value, we added more medium and small capitalization stocks we
felt were cheap. This did not work in 1998, as a two-tiered market developed
where investors favored the largest companies to the exclusion of the rest of
the market.
In order to restore the relative returns that clients deserve and expect we have
come up with a four-fold solution. First, we are reducing the portion of
turnarounds to no more than 15% of the portfolio, thereby minimizing management
execution risk. Second, we are increasing the portion of the portfolio invested
in great companies at a fair price. In other words, we will be more willing to
pay more for those companies that have a brand name franchise. We also will not
sell these companies as quickly as we have in the past when we feel they are
fully valued. Third, we plan to keep a closer eye on the portfolio's average
market capitalization. In other words, we don't want a disproportionate amount
of small companies in a portfolio that is basically compared to a large cap
index like the S&P 500 Index. Finally, we plan to increase our discipline with
respect to sector diversification. In the last few years, we have had very
limited exposure to both the technology and the healthcare sectors, both of
which have been stellar performers in the bull market. We want to have at least
some exposure to each of the economic sectors so that the portfolio can benefit
from any market sector rotation that may take place. Ideally, the portfolio
will have some representation in all of the following sectors: Basic Materials,
Capital Goods, Communications, Consumer Cyclicals, Consumer Staples, Energy,
Financial Services, Healthcare, Technology and Transportation. We believe that
these modifications will better enable us to meet or exceed your expectations in
the future.
If you would like a complete copy of our piece, "Ruminations of a Value
Manager," just give us a call at 800-776-5782, and we will send one to you.
PORTFOLIO PROFILE AS OF DECEMBER 31, 1998
KPM EQUITY
WEIGHTED AVERAGE S&P 500
---------------- --------
Price/Earnings*<F1> 13.8x 28.2x
Price/Book Value 3.0x 4.5x
Dividend Yield 1.6% 1.4%
Return on Equity
(5-year average) 19.4% 16.5%
Market Capitalization $28.4 billion $87.9 billion
*<F1>based on 1998 estimates
AVERAGE ANNUAL RATE OF RETURN (%)
FOR THE PERIOD ENDED DECEMBER 31, 1998
FISCAL SINCE INCEPTION
YEAR-TO-DATE 1 YEAR 3 YEARS 7/5/94
----------- ------ ------- --------------
KPM Equity Portfolio (6.51) (3.89) 14.19 16.93
DATE KPM EQUITY PORTFOLIO S&P 500 COMPOSITE
7/5/94 $10,000 $10,000
12/31/94 $10,234 $10,440
6/30/95 $12,201 $12,549
12/31/95 $13,565 $14,363
6/30/96 $15,162 $15,813
12/31/96 $17,506 $17,660
6/30/97 $19,850 $21,300
12/31/97 $21,023 $23,554
6/30/98 $21,612 $27,725
12/31/98 $20,204 $30,284
This chart assumes an initial investment of $10,000 made on 7/5/94. Total
return is based on the net change in N.A.V. assuming reinvestment of
distributions. Returns shown above include the reinvestment of all dividends
and other distributions. Performance figures represent past performance, which
is no guarantee of future results, and will fluctuate. The investment return
and principal value of an investment in the KPM Equity Portfolio will fluctuate
so that an investor's shares in the Fund, when redeemed, may be worth more or
less than their original cost.
The S&P 500 Composite is an index of 500 selected common stocks. The index
consists primarily of stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all U.S. common stocks.
The returns for this index do not reflect any fees or expenses.
KPM FIXED INCOME PORTFOLIO
PORTFOLIO COMMENTARY
Patrick M. Miner, CFA
Portfolio Manager
After a very rocky Summer and early Fall the bond market stabilized during the
last two months of 1998. Intermediate interest rates increased about 1/4%
during the past quarter, less in long-term and short-term maturities. Spreads
(vs. treasury securities) available from corporate bonds and structured
securities reached their highest level of the 1990's in early October, and have
been steadily retracing back down to more normal levels. But we do not expect
spreads to tighten to the levels seen early in 1998. Financial crises around
the world (Asia, Russia, Brazil, etc.) have awakened risk fears not seen during
the United State's multi-year economic expansion. A benign domestic inflation
outlook has allowed the Federal Reserve Board to provide financial liquidity to
the world via an easing of short-term interest rates, giving us a long period of
low rates and economic growth.
The KPM Fixed Income Portfolio posted a total return of 3.10% for the last half
of 1998 - a solid return in light of the chaos experienced in the bond market
from August through October. The Lehman Brothers Aggregate Bond Index - heavily
weighted in government securities - earned a 4.58% return for the same period.
Relative performance compared to the Lipper Fixed Income Fund Average was much
better. Many funds, in a quest for higher yield had invested heavily in foreign
bonds and added a significant position in lower rated securities over the past
couple of years. These added risks resulted in some rather poor returns during
this chaotic period of illiquidity and the Lipper Fixed Income Fund Average
earned only a 2.07% return for the last half of the year.
These same influences impacted full year performances in similar fashion with
the KPM Fixed Income Portfolio generating a return of 6.82% versus 8.67% for the
Lehman Brothers Aggregate Bond Index and only 5.61% for the Lipper Fixed Income
Fund Average.
During the quarter we increased the allocation of corporate bonds from 31% of
the portfolio to 41%, adding several positions after the extreme spread
widening. We also initiated a position in high-quality commercial mortgage-
backed securities, which experienced the most severe widening of any sector due
to liquidity problems as several heavily leveraged hedge funds were forced to
sell at an inopportune time. These portfolio additions were funded with new
cash and a reduction in the government bond allocation from 15% to 7% of the
portfolio. This reduction of government securities in favor of the spread
sectors allowed us to improve the income yield of the portfolio while acquiring
assets that also have an above-average potential to outperform in terms of
future price appreciation.
Looking forward we see continued tightening of spreads - at least for the next
couple of quarters - but stopping short of the very tight levels seen last
spring. Consensus estimates call for the Federal Reserve Board to remain on
hold indefinitely, balancing domestic growth with concern for future foreign
financial problems. As long as inflation stays muted, there will really be no
compelling reasons for the Fed to act. Interest rates should remain in a fairly
tight range around current levels until growth decelerates or inflation starts
moving up. At this time, there is no evidence that either is imminent.
PORTFOLIO PROFILE AS OF DECEMBER 31, 1998
KPM FIXED INCOME PORTFOLIO
WEIGHTED AVERAGE
-------------------------
Average Quality of Securities Aa3
Average Life of Securities 7.67 years
Effective Duration 4.88 years
SEC Yield 4.70%
AVERAGE ANNUAL RATE OF RETURN (%)
FOR THE PERIOD ENDED DECEMBER 31, 1998
FISCAL SINCE INCEPTION
YEAR-TO-DATE 1 YEAR 3 YEARS 7/5/94
----------- ------ ------- ---------------
KPM Fixed Income
Portfolio 3.10 6.82 6.13 7.48
KPM FIXED LEHMAN BROTHERS
DATE INCOME PORTFOLIO AGGREGATE BOND INDEX
7/5/94 $10,000 $10,000
12/31/94 $9,925 $10,099
6/30/95 $10,963 $11,254
12/31/95 $11,569 $11,964
6/30/96 $11,362 $11,820
12/31/96 $11,943 $12,399
6/30/97 $12,266 $12,782
12/31/97 $12,949 $13,595
6/30/98 $13,417 $14,129
12/31/98 $13,833 $14,776
This chart assumes an initial investment of $10,000 made on 7/5/94. Total
return is based on the net change in N.A.V. assuming reinvestment of
distributions. Returns shown above include the reinvestment of all dividends
and other distributions. Performance figures represent past performance, which
is no guarantee of future results, and will fluctuate. The investment return
and principal value of an investment in the KPM Fixed Income Portfolio will
fluctuate so that an investor's shares in the Fund, when redeemed, may be worth
more or less than their original cost.
The Lehman Brothers Aggregate Bond Index includes all public obligations of the
U.S. Treasury, excluding flower bonds and foreign-targeted issues; all publicly
issued debt of U.S. government agencies and quasi-federal corporations, and
corporate debt guaranteed by the U.S. Government; and all publicly issued, SEC-
registered corporate debt (including debt issued or guaranteed by foreign
sovereign governments, municipalities, or governmental agencies, or
international agencies). The returns for this index do not reflect any fees or
expenses.
KPM EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998 (UNAUDITED)
- ---------------------------------------------------------------------------
COMMON STOCKS -- 92.6% SHARES VALUE
- ---------------------------------------------------------------------------
BASIC MATERIALS -- 8.3%
FiberMark, Inc. *<F2> 64,500 $ 878,812
Hanna (M.A.) Company 67,500 831,094
Potash Corporation 27,500 1,756,563
-----------
3,466,469
-----------
CAPITAL GOODS -- 6.5%
Pentair, Inc. 35,000 1,393,437
Trinity Industries, Inc. 33,500 1,289,750
-----------
2,683,187
-----------
CONSUMER CYCLICALS -- 12.4%
The Dun & Bradstreet Corporation 53,000 1,672,812
Mattel, Inc. 45,000 1,026,562
Nike, Inc. 60,000 2,433,750
-----------
5,133,124
-----------
CONSUMER STAPLES -- 18.0%
Anheuser-Busch Companies, Inc. 13,000 853,125
Kimberly-Clark Corporation 36,500 1,989,250
McDonald's Corporation 25,000 1,915,625
Philip Morris Companies Inc. 38,000 2,033,000
Sara Lee Corporation 25,000 704,688
-----------
7,495,688
-----------
ENERGY -- 5.4%
Atlantic Richfield Company 25,000 1,631,250
Prima Energy Corporation *<F2> 47,850 607,097
-----------
2,238,347
-----------
FINANCIAL SERVICES -- 19.6%
Alleghany Corporation 8,500 1,596,938
Freddie Mac 42,000 2,706,375
Gallagher (Arthur J.) & Co. 22,000 970,750
SLM Holding Corporation 60,000 2,880,000
-----------
8,154,063
-----------
INSURANCE -- 16.7%
The Allstate Corporation 48,000 1,854,000
Berkshire Hathaway Inc. *<F2> 50 3,500,000
The Commerce Group, Inc. 44,200 1,566,338
-----------
6,920,338
-----------
TECHNOLOGY -- 2.4%
Electronic Data Systems Corporation 20,000 1,005,000
-----------
UTILITIES -- 3.3%
Cal Energy Company, Inc. *<F2> 40,000 1,387,500
-----------
TOTAL COMMON STOCK (cost $29,791,565) 38,483,716
-----------
- ---------------------------------------------------------------------------
SHORT-TERM PRINCIPAL
INVESTMENTS -- 4.8% AMOUNT
- ---------------------------------------------------------------------------
U.S. TREASURIES -- 4.8%
U.S. Treasury Bill, 4.99%, 1/28/99 $2,000,000 1,992,029
-----------
TOTAL SHORT-TERM INVESTMENTS (cost $1,992,698) 1,992,029
-----------
TOTAL INVESTMENTS -- 97.4% (cost $31,784,263) 40,475,745
Other assets in excess of liabilities -- 2.6% 1,094,014
-----------
Total net assets -- 100.0% $41,569,759
-----------
-----------
*<F2> Non-income producing
See notes to the financial statements.
KPM FIXED INCOME PORTFOLIO
SCHEDULE OF INVESTMENTS -- DECEMBER 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------
LONG-TERM PRINCIPAL MARKET
INVESTMENTS -- 94.7% AMOUNT VALUE
- --------------------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS -- 35.4%
Federal Home Loan Mortgage Corporation (FHLMC):
Series 1232, Class F, 7.50%, 9/15/06 $ 200,000 $ 204,917
Series 1035, Class E, 8.00%, 10/15/20 86,811 88,188
Series 1455, Class H, 7.00%, 6/15/21 372,000 381,654
Series 1761, Class G, 8.00%, 6/15/21 250,000 252,970
Series 1545, Class C, 6.00%, 6/15/23 35,962 35,795
Federal National Mortgage Association (FNMA):
Series 1993-76, Class PG, 6.00%, 7/25/06 97,000 97,713
Series 1993-221, Class C, 5.50%, 9/25/07 50,000 49,679
Series 1996-26, Class E, 7.00%, 10/25/09 300,000 308,215
Series 1994-23, Class K, 6.00%, 12/25/09 325,100 318,494
Series 1996-W4, Class A3, 6.72%, 12/25/11 100,000 101,098
Series 1990-96, Class E, 9.67%, 1/25/17 45,231 45,642
Series 1993-82, Class D, 6.35%, 3/25/19 195,000 196,355
Series 1993-103, Class PG, 6.25%, 6/25/19 100,000 100,810
Series 1989-66, Class J, 7.00%, 9/25/19 200,000 203,403
Series 1991-173, Class PH, 6.95%, 1/25/20 22,683 22,717
Series 1992-65, Class H, 8.50%, 1/25/20 49,299 49,194
Series G-29, Class O, 8.50%, 9/25/21 75,524 78,203
Series 1993-149, Class L, 6.00%, 8/25/23 350,000 340,410
GE Capital Mortgage Services, Inc.:
Series 1994-12, Class A4, 6.00%, 3/25/09 300,000 300,447
Series 1993-17, Class A6, 6.50%, 12/25/23 250,000 251,713
Residential Accredit Loans, Inc.:
Series 1997-QS6, Class A4, 7.50%, 6/25/12 500,000 513,965
Series 1996-QS3, Class AI5, 7.46%, 6/25/26 92,449 92,262
Saxon Mortgage Securities Corporation,
Series 1994-9A, Class 1A3, 7.50%, 7/25/24 86,005 86,501
Zions Home Refinance Loan Trust,
Series 1993-1, Class A, 5.15%, 9/25/03 13,422 13,262
-----------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS 4,133,607
-----------
COMMERCIAL MORTGAGE-BACKED SECURITIES -- 2.3%
Chase Commercial Mortgage Securities Corporation,
Series 1997-2, Class A2, 6.60%, 11/19/07 90,000 93,691
Merrill Lynch Mortgage Investors, Inc.,
Series 1996-C1, Class A1, 7.15%, 4/25/28 167,554 172,386
-----------
TOTAL COMMERCIAL MORTGAGE-BACKED SECURITIES 266,077
-----------
ASSET-BACKED SECURITIES -- 9.6%
Green Tree Financial Corporation:
Series 1995-4, Class B1, 7.30%, 6/15/25 100,000 100,623
Series 1995-3, Class M1, 7.95%, 8/15/25 300,000 298,188
Newcourt Receivables Asset Trust,
Series 1997-1, Class A4, 6.19%, 5/20/05 195,000 198,225
Oakwood Mortgage Investors, Inc.,
Series 1995-B, Class B1, 7.55%, 1/15/21 250,000 247,470
Vanderbilt Mortgage Finance,
Series 1997-B, Class 1A4, 7.19%, 2/7/14 147,000 152,813
Westinghouse Electric Corporation Notes,
6.875%, 9/01/03 120,000 123,576
-----------
TOTAL ASSET-BACKED SECURITIES 1,120,895
-----------
U.S. TREASURY OBLIGATIONS -- 6.8%
U.S. Treasury Bonds,
6.00%, 2/15/26 500,000 545,625
U.S. Treasury Strips, Principal Only,
0.00%, 11/15/24 1,000,000 247,669
-----------
TOTAL U.S. TREASURY OBLIGATIONS 793,294
-----------
CORPORATE BONDS -- 40.6%
AT&T Corporation Debentures, 8.125%, 7/15/24 250,000 275,315
Chevron Capital USA, Inc. 7.45%, 8/15/04 50,000 52,700
Commonwealth Edison Notes, 9.05%, 10/15/99 250,000 255,817
Dayton Hudson Corporation Debentures,
9.625%, 2/01/08 300,000 379,682
Eastman Chemical Corporation Debentures,
7.25%, 1/15/24 200,000 197,126
Enron Corporation Senior Subordinated Debentures,
6.75%, 7/01/05 245,000 253,860
Equifax, Inc. Notes,
6.30%, 7/01/05 250,000 257,472
Federal Express Sinking Fund Pass-Thru Certificates,
6.68%, 1/01/08 543,562 552,673
James River Corporation Notes,
7.92%, 12/27/04 250,000 271,417
Kansas City Power & Light,
6.50%, 11/01/01 150,000 153,806
May Department Stores Debentures:
9.45%, 2/02/99 100,000 100,269
9.875%, 12/01/02 300,000 345,194
Occidental Petroleum Co. Notes,
6.02%, 11/24/99 125,000 124,727
Phillips Petroleum Co. Debentures,
6.65%, 7/15/18 300,000 305,749
Supervalu, Inc. Notes,
6.31%, 11/09/00 400,000 403,241
Union Carbide Corporation Notes,
6.75%, 4/01/03 200,000 203,996
Union Pacific Corporation Notes,
6.25%, 3/15/99 100,000 100,110
United States Leasing International Senior Notes,
8.75%, 12/01/01 50,000 54,055
United Telecom Debentures,
9.50%, 4/01/03 200,000 229,543
Wal-Mart Stores Pass-Thru Certificates,
7.49%, 6/21/07 195,498 210,227
Washington Natural Gas,
6.07%, 1/16/04 10,000 10,176
-----------
TOTAL CORPORATE BONDS 4,737,155
-----------
TOTAL LONG-TERM INVESTMENTS (COST $10,761,739) 11,051,028
-----------
- --------------------------------------------------------------------------
SHORT-TERM INVESTMENTS -- 4.1%
- --------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES -- 4.1%
Pitney Bowes 362,276 362,276
Sara Lee 24,649 24,649
Wisconsin Corporate Central Credit Union 99,740 99,740
-----------
TOTAL SHORT-TERM INVESTMENTS (COST $486,665) 486,665
-----------
TOTAL INVESTMENTS -- 98.8%
(cost $11,248,404) 11,537,693
Other assets in excess of liabilities -- 1.2% 137,029
-----------
Total net assets -- 100.0% $11,674,722
-----------
-----------
See notes to the financial statements.
STATEMENTS OF ASSETS AND LIABILITIES
DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
KPM KPM
EQUITY FIXED INCOME
PORTFOLIO PORTFOLIO
----------- -----------
<S> <C> <C>
ASSETS:
Investments, at value
(cost of $31,784,263 and $11,248,404, respectively) $40,475,745 $11,537,693
Dividends and interest receivable 61,021 156,596
Receivable for investments sold 1,568,412 --
Receivable from Adviser -- 367
Capital shares sold 2,062 2,940
Organizational costs 6,113 526
Other assets 5,933 1,290
------------ ------------
Total assets 42,119,286 11,699,412
------------ ------------
LIABILITIES:
Payable to Adviser 28,346 --
Payable to Distributor 8,870 2,498
Capital shares redeemed 63,242 6,445
Accrued expenses and other liabilities 449,069 15,747
------------ ------------
Total liabilities 549,527 24,690
------------ ------------
NET ASSETS $ 41,569,759 $ 11,674,722
------------ ------------
------------ ------------
NET ASSETS CONSIST OF:
Paid in capital $ 34,918,040 $ 11,317,931
Accumulated undistributed net investment (loss) (2,726) (1,621)
Accumulated undistributed net realized gain (loss) on investments (2,037,037) 69,123
Unrealized appreciation on investments 8,691,482 289,289
------------ ------------
NET ASSETS 41,569,759 $ 11,674,722
------------ ------------
------------ ------------
Shares issued and outstanding (Fifty million
shares of $0.00001 par value authorized per Portfolio) 2,667,282 1,084,388
Net asset value per share (offering and redemption price) $ 15.59 $ 10.77
------------ ------------
------------ ------------
</TABLE>
See notes to the financial statements.
STATEMENTS OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1998 (UNAUDITED)
<TABLE>
KPM KPM
EQUITY FIXED INCOME
PORTFOLIO PORTFOLIO
----------- -----------
<S> <C> <C>
INVESTMENT INCOME:
Dividends (net of foreign taxes withheld of $972 and $0, respectively) $ 281,177 $ --
Interest 148,438 395,288
----------- -----------
Total investment income 429,615 395,288
----------- -----------
EXPENSES:
Investment advisory fees 170,321 36,005
Administrative fees 19,738 12,520
Custody fees and expenses 2,650 1,390
Accounting and transfer agent fees and expenses 18,260 12,612
Professional fees 7,316 6,666
Directors' fees and expenses 1,644 874
Registration and filing fees 5,062 3,064
Shareholder reports 2,228 826
Amortization of deferred fees 1,608 396
Distribution fees (12b-1) 53,225 15,002
Other 18,611 6,081
----------- -----------
Total expenses before reimbursement from Adviser 300,663 95,436
Less, expense reimbursement -- (20,294)
----------- -----------
Net expenses 300,663 75,142
----------- -----------
NET INVESTMENT INCOME 128,952 320,146
----------- -----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain (loss) on investments (2,038,091) 130,143
Net change in unrealized appreciation (depreciation) of investments (1,648,786) (109,773)
----------- -----------
NET GAIN (LOSS) ON INVESTMENTS (3,686,877) 20,370
----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $(3,557,925) $ 340,516
----------- -----------
----------- -----------
</TABLE>
See notes to the financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
KPM EQUITY PORTFOLIO KPM FIXED INCOME PORTFOLIO
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
DEC. 31, 1998 JUNE 30, 1998 DEC. 31, 1998 JUNE 30, 1998
------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income $ 128,952 $ 232,638 $ 320,146 $ 559,502
Net realized gain (loss) on investments (2,038,091) 2,858,996 130,143 43,244
Change in unrealized
appreciation (depreciation) of investments (1,648,786) 845,812 (109,773) 299,425
----------- ----------- ----------- -----------
Net increase (decrease) in net assets
resulting from operations (3,557,925) 3,937,446 340,516 902,171
----------- ----------- ----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (131,429) (230,975) (319,264) (559,794)
Net realized gain on investments (1,379,833) (5,646,345) (78,240) --
----------- ----------- ----------- -----------
Total dividends and distributions (1,511,262) (5,877,320) (397,504) (559,794)
----------- ----------- ----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 3,112,546 18,512,949 2,622,527 4,617,298
Shares issued in connection with payment of
dividends and distributions 1,380,919 5,464,299 379,829 474,197
Cost of shares redeemed (13,969,523) (7,265,078) (3,014,682) (2,562,121)
----------- ----------- ----------- -----------
Net increase (decrease) in net assets
from capital share transactions (9,476,058) 16,712,170 (12,326) 2,529,374
----------- ----------- ----------- -----------
TOTAL INCREASE (DECREASE) IN NET ASSETS (14,545,245) 14,772,296 (69,314) 2,871,751
NET ASSETS:
Beginning of period 56,115,004 41,342,708 11,744,036 8,872,285
----------- ----------- ----------- -----------
End of period*<F3> $41,569,759 $56,115,004 $11,674,722 $11,744,036
----------- ----------- ----------- -----------
*<F3>Including undistributed net investment
(loss) of: $ (2,726) $ (249) $ (1,621) $ (2,504)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
CHANGES IN SHARES OUTSTANDING:
Shares sold 208,170 1,017,370 238,782 430,107
Shares issued in connection with payment
of dividends and distributions 89,569 324,718 35,039 44,337
Shares redeemed (872,437) (407,792) (276,471) (238,960)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) (574,698) 934,296 (2,650) 235,484
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See notes to the financial statements.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING
<TABLE>
KPM EQUITY PORTFOLIO
SIX MONTHS YEAR YEAR YEAR JULY 5, 1994(1)<F4>
ENDED ENDED ENDED ENDED TO
DEC. 31, 1998 JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<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 0.05 0.08 0.05 0.05 0.11
Net realized gain (loss) and
unrealized appreciation
(depreciation) (1.19) 1.31 4.25 2.83 2.06
------ ------ ------ ------ ------
Total from investment
operations (1.14) 1.39 4.30 2.88 2.17
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment
income (0.05) (0.08) (0.06) (0.05) (0.10)
Distributions from net realized
gain from investment
transactions (0.53) (1.92) (0.85) (0.30) (0.07)
------ ------ ------ ------ ------
Total distributions (0.58) (2.00) (0.91) (0.35) (0.17)
------ ------ ------ ------ ------
NET ASSET VALUE - END OF PERIOD $15.59 $17.31 $17.92 $14.53 $12.00
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN -6.51%(2)<F5> 8.88% 30.92% 24.19% 22.01%(2)<F5>
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period
(thousands) $41,570 $56,115 $41,343 $30,565 $15,361
Ratio of expenses to average
net assets 1.41%(3)<F6> 1.42% 1.45% 1.50% 1.50%(3)<F6>
Ratios of net investment income
to average net assets 0.61%(3)<F6> 0.45% 0.34% 0.40% 1.04%(3)<F6>
Portfolio turnover rate 18.34% 32.25% 41.83% 34.05% 27.90%
(1)<F4> Commencement of Operations
(2)<F5> Not Annualized
(3)<F6> Annualized
</TABLE>
See notes to the financial statements.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING
<TABLE>
KPM FIXED INCOME PORTFOLIO
SIX MONTHS YEAR YEAR YEAR JULY 5, 1994(1)<F7>
ENDED ENDED ENDED ENDED TO
DEC. 31, 1998 JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<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 0.29 0.59 0.61 0.63 0.57
Net realized gain (loss) and
unrealized appreciation
(depreciation) 0.04 0.38 0.19 (0.23) 0.47
------ ------ ------ ------ ------
Total from investment
operations 0.33 0.97 0.80 0.40 1.04
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment
income (0.29) (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 (0.36) (0.59) (0.61) (0.64) (0.57)
------ ------ ------ ------ ------
NET ASSET VALUE - END OF PERIOD $10.77 $10.80 $10.42 $10.23 $10.47
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN 3.10%(2)<F8> 9.39% 7.96% 3.63% 9.63%(2)<F8>
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of period
(thousands) $11,675 $11,744 $8,872 $8,465 $5,868
Ratio of expenses to average
net assets:
Before expense
reimbursement 1.59%(3)<F9> 1.33% 1.51% 1.29% 1.56%(3)<F9>
After expense
reimbursement 1.25%(3)<F9> 1.25% 1.25% 1.25% 1.25%(3)<F9>
Ratios of net investment income
to average net assets:
Before expense
reimbursement 4.99%(3)<F9> 5.44% 5.56% 5.90% 5.28%(3)<F9>
After expense
reimbursement 5.33%(3)<F9> 5.52% 5.82% 5.94% 5.59%(3)<F9>
Portfolio turnover rate 18.79% 19.33% 26.14% 19.52% 40.34%
(1)<F7> Commencement of Operations
(2)<F8> Not Annualized
(3)<F9> Annualized
</TABLE>
See notes to the financial statements.
KPM FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS -- DECEMBER 31, 1998 (UNAUDITED)
1. ORGANIZATION
KPM Funds, Inc. (the "Fund") is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment company. The
Fund issues its shares in series, each series representing a distinct portfolio
with its own investment objectives and policies. At December 31, 1998, the Fund
had two portfolios in operation: the KPM Equity Portfolio and the KPM Fixed
Income Portfolio.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies employed by the
Fund in preparing its financial statements.
USE OF ESTIMATES: In preparing the financial statements in accordance with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the date
of the financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
VALUATION OF INVESTMENTS: Investment securities are carried at market
determined using the following valuation methods:
o Securities traded on a national securities exchange are valued at the last
reported sale price that day.
o Securities traded on a national securities exchange for which there were no
sales on that day or on the NASDAQ National Market System and securities
traded on other over-the-counter markets for which market quotations are
readily available are valued at closing bid prices.
o Securities including bonds or other assets for which market prices are not
readily available are valued at fair market value as determined in good faith
or under the direction of the Board of Directors. Determination of fair
value involves, among other things, reference to market indices, matrices and
data from independent brokers and pricing services.
All securities are valued in accordance with the above noted policies at the
close of each business day.
DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment income are
declared and paid quarterly. Distributions of net realized capital gains, if
any, will be declared at least annually.
EXPENSE ALLOCATION: Common expenses incurred by the Portfolio are allocated
among the Portfolios based upon relative average net assets, as incurred on a
specific identification basis, number of shareholder accounts or net sales or
evenly among the Portfolios, depending on the nature of the expenditure.
ORGANIZATIONAL COSTS: Costs associated with the formation of the Fund,
consisting primarily of accounting and legal fees, have been capitalized and are
being amortized using the straight-line basis over five years. If any or all of
the shares representing initial capital of the Fund is redeemed by any holder
prior to the end of the amortization period, the proceeds will be reduced by the
unamortized organization cost balance in the same proportion as the number of
shares redeemed bears to the number of initial shares outstanding.
FEDERAL INCOME TAXES: It is the Portfolios' policy to meet the requirements of
the Internal Revenue Code applicable to regulated investment companies and the
Portfolios intend to distribute investment company net taxable income and net
capital gains to shareholders. Therefore, no federal income tax provision is
required.
OTHER: Security and shareholder transactions are recorded on trade date.
Realized gains and losses on sales of investments are calculated on the
identified cost basis. Dividend income and dividends and distributions to
shareholders are recorded on the ex-dividend date. Interest income is
recognized on an accrual basis. Generally accepted accounting principles
require that permanent financial reporting and tax differences relating to
shareholder distributions be reclassified to paid in capital.
3. INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Fund and each of its Portfolios have retained KPM Investment Management,
Inc. (the "Adviser"), a wholly-owned subsidiary of KFS Corporation, which is a
wholly-owned subsidiary of Mutual of Omaha Insurance Company, as its exclusive
investment adviser. The Adviser receives a fee, computed daily and payable
monthly, at the annual rates presented below as applied to each Portfolio's
daily net assets. The Adviser has voluntarily agreed to reimburse the
Portfolios to the extent of the advisory fee paid, if operating expenses exceed
the annual rates presented below as applied to each Portfolio's daily net
assets. For the six months ended December 31, 1998 the Adviser waived the
following fees:
KPM EQUITY KPM FIXED
PORTFOLIO INCOME PORTFOLIO
---------- --------------
Annual Advisory Rate 0.80% 0.60%
Annual Cap on Expenses 1.50% 1.25%
Fees Waived -- $20,294
The Fund has an agreement with Kirkpatrick, Pettis, Smith, Polian Inc. ("KPSP"),
a wholly-owned subsidiary of KFS Corporation, to act as principal underwriter
and distributor for the Portfolios' shares. Pursuant to the distribution
agreement and Rule 12b-1 Plan, KPSP is paid a fee of 0.25% per annum of each
Portfolio's daily net assets. Under the terms of the distribution agreement,
the Portfolios incurred $53,225 and $15,002, respectively for such service.
For the six months ended December 31, 1998, the KPM Equity Portfolio paid KPSP
$809 in broker commissions.
4. SECURITIES TRANSACTIONS
Purchases and sales of investment securities, other than short-term investments,
for the six months ended December 31, 1998 were as follows:
KPM EQUITY KPM FIXED
PORTFOLIO INCOME PORTFOLIO
---------- ---------------
Purchases:
U.S. Government -- $ 529,913
Other $ 6,743,909 1,797,265
Sales:
U.S. Government -- 1,827,580
Other 12,144,784 331,065
At December 31, 1998, unrealized appreciation (depreciation) for federal income
tax purposes was as follows:
NET
APPRECIATION APPRECIATION DEPRECIATION
------------ ----------- ------------
KPM Equity Portfolio $8,691,482 $10,221,534 $(1,530,052)
KPM Fixed Income Portfolio 289,289 321,527 (32,238)
At December 31, 1998, the cost of investment securities is identical for
financial reporting and income tax purposes.
INVESTMENT ADVISER
KPM Investment Management, Inc.
DISTRIBUTOR
Kirkpatrick, Pettis, Smith, Polian Inc.
ADMINISTRATOR, TRANSFER AGENT,
DIVIDEND PAYING AGENT AND
SHAREHOLDER SERVICING AGENT
Firstar Mutual Fund Services, LLC
CUSTODIAN
Firstar Bank Milwaukee, N.A.
This report has been prepared for the general information of KPM Funds
shareholders. It is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus. The Prospectus contains
more complete information about the Fund's objectives, policies, expenses and
risks. Please read the prospectus carefully before investing or sending money.
(KPM Funds Logo)
10250 Regency Circle, Suite 500
Omaha, NE 68114-3723
