(KPM FUNDS LOGO)
ANNUAL
REPORT
KPM EQUITY PORTFOLIO
JUNE 30, 2000
(KPM FUNDS LOGO)
PERFORMANCE STATISTICS
ONE YEAR ENDED AVERAGE ANNUAL RETURN
6/30/00 SINCE INCEPTION (7/5/94)
-------------- ------------------------
Equity Portfolio (19.29)% 9.36%
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:
The first order of business in this letter to shareholders is to communicate a
change in the management of the KPM Equity Portfolio. I have taken on the
responsibility of managing the Fund after Bruce Van Kooten, the previous
portfolio manager, resigned his position at KPM Investment Management, Inc. As
many of you know, I have been President of the Fund since inception and have had
an active role in the management of the Fund's Adviser, KPM Investment
Management. I've been in this business for over 25 years and have been
affiliated with KPM for the past 13 years. My investment philosophy is similar
to Bruce's; that is, value-oriented. However, at times I may include companies
that are value-priced but have higher growth characteristics. For example, we
recently purchased CVS Corp. (CVS-$36), a fast-growing drug store chain, second
in size to Walgreen's and one of the best performing companies in all of retail.
We also added Gannett Corp (GCI-$56), the largest newspaper chain in the country
and owner of the very popular USA Today. My philosophy will also differ
slightly from the previous manager in that I have less patience with companies
that do not meet our fundamental expectations. In the equity markets of today,
if a company makes a mistake, investors punish the stock quickly and severely.
Moreover, the share price will remain in the "penalty box" for a long time
before investors will come back into the name. Consequently, unless a quick
turnaround is evident, my tendency is to eliminate the position and invest the
proceeds in a situation with better prospects.
I also wanted to express my appreciation for the commitment you have made to the
KPM Equity Portfolio and the patience you have shown during the past couple
years when value investing significantly underperformed. I believe the tide is
turning and am looking forward to improving the performance of your Fund in the
months and years ahead.
PORTFOLIO AND MARKET COMMENTARY
The equity markets were generally weak during the first half of Calender 2000
(which is the second half of KPM Fund's fiscal year). The March quarter started
out much the same way 1999 ended, with technology stocks soaring to record highs
and most everything else falling. However, as that quarter came to a close a
change in leadership started to unfold. "Old Economy" value stocks began to
strengthen, and air began to leak from the "new economy" technology bubble.
This reversal, which started in mid-March, gained significant momentum into mid-
April and a significant shakeout in many technology stocks took place. For
example, from the highs reached in early March, the NASDAQ Composite (which is
heavily weighted toward technology) plunged some 37% by the middle part of
April. At the same time, many value stocks rallied sharply and produced
significant gains. For example, after falling in the early part of the year,
the KPM Equity Portfolio rose nearly 17% during the mid-March through mid-April
period.
This see-saw battle between growth and value continued to rage on during the
calendar second quarter as growth stocks rallied through June and value stocks
gave back some gains. Overall, growth once again outperformed value for the six
month period ended June 30, 2000. Although the KPM Equity Portfolio performed
better in the June quarter, the full six month period produced a decline of
7.9%. Together with a decrease of 11.37% in the first half of the fiscal year,
this resulted in a very disappointing loss of 19.29% for the year.
Obviously, this kind of performance is unacceptable, and, as the new portfolio
manager, I am committed to making improvements. My goal is to manage the KPM
Equity Portfolio emphasizing high quality companies with good growth profiles
and reasonable valuations. I am especially keen on adding companies operating in
the "Old Economy" that will benefit from utilizing "New Economy" technologies.
However, we do not have to own the very expensive (and very risky) high tech
companies to benefit from the dramatic changes taking place in technology. For
example, "Old Economy" companies that embrace the internet to help sell
products, improve their procurement processes and reduce costs should see
growing profits and higher stock prices over time. In other words, the "users"
of all this new technology will benefit greatly in the future.
OUTLOOK
As we move into the second half of the calendar year, several dynamics are
unfolding. For one, investors are realizing that profits and valuations matter.
The high flying technology stocks, after a partial recovery from the drubbing in
April, are again coming under significant selling pressure. Companies with
little or no earnings that were once soaring "dot.com" stocks have fallen 70-80-
90% from their highs. Moreover, investors are finding that even the more
seasoned technology stocks are susceptible to sharp declines when valuations get
out of hand. In contrast, many of the more traditional value stocks are again
performing better. Financial service stocks have been strong, especially in the
property & casualty insurance area. Berkshire Hathaway (BRE-$63,000), one of
our largest holdings, has risen nearly 17% since the end of our fiscal year
(June 30), and Allstate (ALL-$29) is up 28%. Overall, the KPM Equity Portfolio
has gained about 4% over the past month and a half, which compares very
favorably to most of the major indices especially to the growth indices, many of
which are down.
I am convinced we can regain the superior performance the KPM Equity Portfolio
once enjoyed. I will do all I can to make that happen.
Thank you for your patronage.
/s/ Rodney D. Cerny
Rodney D. Cerny
President
Portfolio Manager
PORTFOLIO PROFILE AS OF JUNE 30, 2000
KPM EQUITY
WEIGHTED AVERAGE S&P 500
---------------- -------
Price/Earnings*<F1> 15.5x 25.3x
Price/Book Value 3.3x 5.0x
Dividend Yield 1.7% 1.1%
Return on Equity (5-year average) 23.7% 18.0%
Market Capitalization $59.0 billion $148.4 billion
*<F1> based on 2000 estimates
AVERAGE ANNUAL RATE OF RETURN (%)
FOR THE YEAR ENDED JUNE 30, 2000
SINCE INCEPTION
1 YEAR 3 YEARS 7/5/94
------ ------- ---------------
KPM Equity Portfolio (19.29) (4.85) 9.36
Date KPM Equity Portfolio S&P 500 Composite
---- -------------------- -----------------
7/5/94 $10,000 $10,000
12/31/94 $10,234 $10,440
6/30/95 $12,201 $12,549
12/31/95 $13,565 $14,363
6/30/96 $15,162 $15,813
12/31/96 $17,506 $17,660
6/30/97 $19,850 $21,300
12/31/97 $21,023 $23,554
6/30/98 $21,612 $27,725
12/31/98 $20,204 $30,284
6/30/99 $21,185 $29,869
12/31/99 $18,776 $32,172
6/30/00 $17,098 $32,037
This chart assumes an initial investment of $10,000 made on 7/5/94. Total
return is based on the net change in N.A.V. and assuming reinvestment of all
dividends and other distributions. Performance figures represent past
performance, which is no guarantee of future results, and will fluctuate. The
investment return and principal value of an investment in the KPM Equity
Portfolio will fluctuate so that an investor's shares in the Fund, when
redeemed, may be worth more or less than their original cost.
The S&P 500 Composite is an index of 500 selected common stocks. The index
consists primarily of stocks with large market capitalizations and represents
approximately two-thirds of the total market value of all U.S. common stocks.
The returns for this index do not reflect any fees or expenses.
KPM EQUITY PORTFOLIO
SCHEDULE OF INVESTMENTS -- JUNE 30, 2000
COMMON STOCKS -- 94.1% SHARES VALUE
--------------------------------------------------------------------------------
BASIC MATERIALS -- 4.5%
FiberMark, Inc. *<F2> 7,000 $ 86,625
Potash Corporation 4,500 248,344
----------
334,969
----------
CAPITAL GOODS -- 14.2%
BP Amoco 6,060 342,769
Emerson Electric Co. 4,000 241,500
Honeywell International, Inc. 8,000 269,500
Pentair, Inc. 6,000 213,000
----------
1,066,769
----------
COMMUNICATION SERVICES -- 9.8%
AT&T Corp. 3,500 110,687
SBC Communications, Inc. 7,000 302,750
Worldcom, Inc. *<F2> 7,000 321,125
----------
734,562
----------
CONSUMER CYCLICALS -- 6.6%
The Dun & Bradstreet Corporation 12,000 343,500
Mattel, Inc. 11,500 151,656
----------
495,156
----------
CONSUMER STAPLES -- 14.4%
Anheuser-Busch Companies, Inc. 3,000 224,063
Kimberly-Clark Corporation 5,000 286,875
McDonald's Corporation 8,000 263,500
Philip Morris Companies Inc. 11,500 305,469
----------
1,079,907
----------
DIRECT MARKETING -- 3.3%
SITEL Corporation *<F2> 50,000 246,875
----------
ENERGY -- 4.2%
Exxon Mobil Corporation 4,000 314,000
----------
FINANCIAL SERVICES -- 9.8%
Freddie Mac 9,000 364,500
SLM Holding Corporation 10,000 374,375
----------
738,875
----------
INSURANCE -- 7.6%
The Allstate Corporation 10,000 222,500
Berkshire Hathaway Inc. *<F2> 200 352,000
----------
574,500
----------
HEALTHCARE -- 6.6%
IMS Health, Inc. 10,500 189,000
Johnson & Johnson 3,000 305,625
----------
494,625
----------
RETAIL -- 3.0%
CVS Corporation 5,600 224,000
----------
TECHNOLOGY -- 10.1%
Electronic Data Systems
Corporation 6,100 251,625
First Data Corporation 5,000 248,125
Gartner Group, Inc. *<F2> 14,000 168,000
Transaction Systems
Architects, Inc. *<F2> 5,500 93,844
----------
761,594
----------
TOTAL COMMON STOCK
(cost $6,241,221) 7,065,832
----------
SHORT-TERM PRINCIPAL
INVESTMENTS -- 6.1% AMOUNT
--------------------------------------------------------------------------------
VARIABLE RATE DEMAND NOTES -- 6.1%
American Family Financial
Services, Inc. $449,190 449,190
Wisconsin Corporate Central
Credit Union 9,593 9,593
----------
458,783
----------
TOTAL SHORT-TERM INVESTMENTS
(cost $458,783) 458,783
----------
TOTAL INVESTMENTS -- 100.2%
(cost $6,700,004) 7,524,615
Liabilities in excess of other assets -- (0.2)% (13,228)
----------
Total net assets -- 100.0% $7,511,387
----------
----------
*<F2> Non-income producing
See notes to the financial statements.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2000
KPM
EQUITY
PORTFOLIO
---------
ASSETS:
Investments, at value (cost of $6,700,004) $7,524,615
Dividends and interest receivable 14,264
Receivable from Adviser 2,071
Other assets 1,368
----------
Total assets 7,542,318
----------
LIABILITIES:
Payable to Distributor 2,287
Accrued expenses and other liabilities 28,644
----------
Total liabilities 30,931
----------
NET ASSETS $7,511,387
----------
----------
NET ASSETS CONSIST OF:
Paid in capital $4,559,427
Accumulated undistributed net investment income 10,515
Accumulated undistributed net realized gain on investments 2,116,834
Unrealized appreciation on investments 824,611
----------
NET ASSETS $7,511,387
----------
----------
Shares issued and outstanding (Fifty million
shares of $0.00001 par value authorized) 604,341
Net asset value per share (offering and redemption price) $ 12.43
----------
----------
See notes to the financial statements.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JUNE 30, 2000
KPM
EQUITY
PORTFOLIO
---------
INVESTMENT INCOME:
Dividends (net of foreign taxes withheld of $2,218) $ 234,027
Interest 32,797
-----------
Total investment income 266,824
-----------
EXPENSES:
Investment advisory fees 119,890
Distribution fees (12b-1) 37,466
Transfer agent fees and expenses 36,906
Administrative fees 30,012
Fund accounting fees 25,424
Custody fees and expenses 7,133
Directors' fees and expenses 6,588
Shareholder reports 5,124
Professional fees 5,004
Registration and filing fees 1,155
Other 732
-----------
Total expenses before reimbursement from Adviser 275,434
Less, expense reimbursement (50,612)
-----------
Net expenses 224,822
-----------
NET INVESTMENT INCOME 42,002
-----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments 2,117,070
Net change in unrealized depreciation of investments (6,205,753)
-----------
NET LOSS ON INVESTMENTS (4,088,683)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(4,046,681)
-----------
-----------
See notes to the financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
KPM EQUITY PORTFOLIO
---------------------------------
YEAR YEAR
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 42,002 $ 160,025
Net realized gain on investments 2,117,070 963,869
Change in unrealized depreciation of investments (6,205,753) (3,309,904)
------------ ------------
Net decrease in net assets resulting from operations (4,046,681) (2,186,010)
------------ ------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Net investment income (31,487) (165,014)
Net realized gain on investments (962,486) (1,379,833)
------------ ------------
Total dividends and distributions (993,973) (1,544,847)
------------ ------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 2,760,592 5,660,483
Shares issued in connection with payment of dividends and distributions 952,040 1,411,524
Cost of shares redeemed (17,512,100) (33,104,645)
------------ ------------
Net decrease in net assets from capital share transactions (13,799,468) (26,032,638)
------------ ------------
TOTAL DECREASE IN NET ASSETS (18,840,122) (29,763,495)
------------ ------------
NET ASSETS:
Beginning of year 26,351,509 56,115,004
------------ ------------
End of year*<F3> $ 7,511,387 $ 26,351,509
------------ ------------
*<F3> Including undistributed net investment income of: $ 10,515 $ --
------------ ------------
------------ ------------
CHANGES IN SHARES OUTSTANDING:
Shares sold 205,710 375,834
Shares issued in connection with payment of dividends and distributions 68,052 91,538
Shares redeemed (1,283,237) (2,095,537)
------------ ------------
NET DECREASE IN SHARES OUTSTANDING (1,009,475) (1,628,165)
------------ ------------
------------ ------------
</TABLE>
See notes to the financial statements.
FINANCIAL HIGHLIGHTS
SELECTED DATA FOR EACH SHARE OF CAPITAL STOCK OUTSTANDING
<TABLE>
KPM EQUITY PORTFOLIO
-----------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1996
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE -
BEGINNING OF YEAR $16.33 $17.31 $17.92 $14.53 $12.00
------ ------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.04 0.07 0.08 0.05 0.05
Net realized gain (loss) and
unrealized appreciation
(depreciation) (3.10) (0.45) 1.31 4.25 2.83
------ ------ ------ ------ ------
Total from investment
operations (3.06) (0.38) 1.39 4.30 2.88
------ ------ ------ ------ ------
LESS DISTRIBUTIONS:
Dividends from net investment
income (0.02) (0.07) (0.08) (0.06) (0.05)
Distributions from net realized
gain from investment
transactions (0.82) (0.53) (1.92) (0.85) (0.30)
------ ------ ------ ------ ------
Total distributions (0.84) (0.60) (2.00) (0.91) (0.35)
------ ------ ------ ------ ------
NET ASSET VALUE - END OF YEAR $12.43 $16.33 $17.31 $17.92 $14.53
------ ------ ------ ------ ------
------ ------ ------ ------ ------
TOTAL RETURN -19.29% -1.97% 8.88% 30.92% 24.27%
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of year
(thousands) $7,511 $26,352 $56,115 $41,343 $30,565
Ratio of expenses to average
net assets 1.50%(1)<F4> 1.43%(1)<F4> 1.42% 1.45% 1.50%
Ratio of net investment income
to average net assets 0.28%(1)<F4> 0.41%(1)<F4> 0.45% 0.34% 0.40%
Portfolio turnover rate 22.93% 36.22% 32.25% 41.83% 34.05%
</TABLE>
(1)<F4> Without fees waived, ratio of expenses to average net assets would have
been 1.84% and 1.43% and ratio of net investment income to average net
assets would have been -0.06% and 0.41% for the years ended June 30,
2000 and June 30, 1999, respectively.
See notes to the financial statements.
KPM FUNDS, INC.
NOTES TO THE FINANCIAL STATEMENTS -- JUNE 30, 2000
1. ORGANIZATION
KPM Funds, Inc. (the "Fund") is registered under the Investment Company Act of
1940, as amended, as a diversified, open-end management investment company. The
Fund issues its shares in series, each series representing a distinct portfolio
with its own investment objectives and policies. At June 30, 2000, the Fund had
one series in operation: the KPM Equity Portfolio (the "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
accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities as of the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
VALUATION OF INVESTMENTS: Investment securities are carried at value determined
using the following valuation methods:
o Securities traded on a national securities exchange are valued at the last
reported sale price at the close of business of the exchange.
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.
o Short-term securities with remaining maturities of 60 days or less are
valued at amortized cost, which approximates market value.
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.
FEDERAL INCOME TAXES: It is the Portfolio's policy to meet the requirements of
the Internal Revenue Code applicable to regulated investment companies and the
Portfolio intends 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. Short-term securities are amortized using the
straight-line method of amortization. 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 has 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 rate
presented below as applied to the Portfolio's daily net assets. The Adviser has
voluntarily agreed to reimburse the Portfolio to the extent of the advisory fee
paid, if operating expenses exceed the annual rate presented below as applied to
the Portfolio's daily net assets. The total amount of fees waived by the
Adviser for the year ended June 30, 2000 was $50,612.
KPM EQUITY
PORTFOLIO
----------
Annual Advisory Rate 0.80%
Annual Cap on Expenses 1.50%
The Fund has an agreement with Kirkpatrick, Pettis, Smith, Polian Inc. ("KPSP"),
a wholly-owned subsidiary of KFS Corporation, to act as principal underwriter
and distributor for the Portfolio's shares. Pursuant to the distribution
agreement and Rule 12b-1 Plan, KPSP is paid a fee of 0.25% per annum of the
Portfolio's daily net assets. Under the terms of the distribution agreement,
the Portfolio incurred $37,466 for such service.
For the year ended June 30, 2000, the KPM Equity Portfolio paid KPSP $50 in
broker commissions.
4. SECURITIES TRANSACTIONS
Purchases and sales of investment securities, other than short-term investments,
for the year ended June 30, 2000 were as follows:
KPM EQUITY
PORTFOLIO
----------
Purchases:
U.S. Government --
Other $ 3,294,988
Sales:
U.S. Government --
Other $17,579,098
At June 30, 2000, unrealized appreciation (depreciation) for federal income tax
purposes was as follows:
NET
APPRECIATION APPRECIATION DEPRECIATION
------------ ------------ ------------
KPM Equity Portfolio $800,098 $1,455,164 $(655,066)
At June 30, 2000, the cost of investment securities for income tax purposes was
$6,724,517. The cost of investment securities for income tax purposes differs
from the cost of investment securities for financial statement reporting
purposes by $24,513, which is attributable to wash sale loss deferrals.
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders of
KPM Funds, Inc.:
We have audited the accompanying statement of assets and liabilities of the KPM
Equity Portfolio (the "Portfolio"), a series of KPMFunds, Inc., including the
schedule of investments, as of June 30, 2000, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the two years in the period then ended, and the financial highlights for
each of the four years in the period then ended. These financial statements and
financial highlights are the responsibility of the Portfolio's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for the year
ended June 30, 1996 were audited by other auditors whose report, dated
July 12, 1996, expressed an unqualified opinion on such financial highlights.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation
of securities owned as of June 30, 2000, by correspondence with the Portfolio's
custodian. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
KPM Equity Portfolio as of June 30, 2000, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the four years in
the period then ended, in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
Chicago, Illinois
August 22, 2000
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, 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
