STATEMENT OF ADDITIONAL INFORMATION
Kirr, Marbach Partners Funds, Inc.
KIRR, MARBACH PARTNERS VALUE FUND
P.O. Box 701
Milwaukee, Wisconsin 53201-0701
1-800-870-8039
This Statement of Additional Information is not a
prospectus and should be read in conjunction with the
Prospectus of the Kirr, Marbach Partners Value Fund
(the "Fund"), dated December 18, 1998. The Fund is a
series of Kirr, Marbach Partners Funds, Inc. (the
"Corporation").
A copy of the Prospectus is available without
charge upon request to the above-noted address or toll-
free telephone number.
This Statement of Additional Information is dated December
18, 1998, as supplemented on January 13, 1999.
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TABLE OF CONTENTS
Page No.
FUND ORGANIZATION 3
INVESTMENT RESTRICTIONS 3
IMPLEMENTATION OF INVESTMENT OBJECTIVES 4
DIRECTORS AND OFFICERS 11
PRINCIPAL SHAREHOLDERS 13
INVESTMENT ADVISER 13
FUND TRANSACTIONS AND BROKERAGE 14
CUSTODIAN 15
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT 15
ADMINISTRATOR 16
DISTRIBUTOR AND PLAN OF DISTRIBUTION 16
PURCHASE, EXCHANGE AND PRICING OF SHARES 17
REDEMPTIONS IN KIND 20
TAXATION OF THE FUND 20
PERFORMANCE INFORMATION 20
ADDITIONAL INFORMATION 22
INDEPENDENT ACCOUNTANTS 22
FINANCIAL STATEMENTS 22
APPENDIX A-1
In deciding whether to invest in the Fund, you
should rely on information in this Statement of
Additional Information and related Prospectus. The
Fund has not authorized others to provide additional
information. The Fund has not authorized the use of
this Statement of Additional Information in any state
or jurisdiction in which such offering may not legally
be made.
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FUND ORGANIZATION
The Corporation is an open-end, diversified,
management investment company, commonly referred to as
a mutual fund. The Fund is a series of common stock of
the Corporation, a Maryland company incorporated on
September 23, 1998. The Corporation is authorized to
issue shares of common stock in series and classes.
Each share of common stock of the Fund is entitled to
one vote, and each share is entitled to participate
equally in dividends and capital gain distributions and
in the assets of the Fund in the event of liquidation.
No certificates will be issued for shares held in your
account. You will, however, have full shareholder
rights. Generally, the Corporation will not hold
annual shareholders' meetings unless required by the
Investment Company Act of 1940, as amended (the "1940
Act") or Maryland law. Shareholders have certain
rights, including the right to call an annual meeting
upon a vote of 10% of the Corporation's outstanding
shares for the purpose of voting to remove one or more
directors or to transact any other business. The 1940
Act requires the Corporation to assist the shareholders
in calling such a meeting.
INVESTMENT RESTRICTIONS
The investment objective of the Fund is to seek
long-term capital growth. The following are the Fund's
fundamental investment restrictions which cannot be
changed without the approval of a majority of the
Fund's outstanding voting securities. As used herein,
a "majority of the Fund's outstanding voting
securities" means the lesser of (i) 67% of the shares
of common stock of the Fund represented at a meeting at
which more than 50% of the outstanding shares are
present, or (ii) more than 50% of the outstanding
shares of common stock of the Fund.
The Fund:
1. May not with respect to 75% of its total assets,
purchase the securities of any issuer (except
securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities)
if, as a result, (i) more than 5% of the Fund's
total assets would be invested in the securities
of that issuer, or (ii) the Fund would hold more
than 10% of the outstanding voting securities of
that issuer.
2. May (i) borrow money from banks for temporary or
emergency purposes (but not for leveraging or the
purchase of investments) and (ii) make other
investments or engage in other transactions
permissible under the Investment Company Act of
1940, as amended (the "1940 Act"), which may
involve a borrowing, including borrowing through
reverse repurchase agreements, provided that the
combination of (i) and (ii) shall not exceed 33
1/3% of the value of the Fund's total assets
(including the amount borrowed), less the Fund's
liabilities (other than borrowings). If the
amount borrowed at any time exceeds 33 1/3% of the
Fund's total assets, the Fund will, within three
days thereafter (not including Sundays, holidays
and any longer permissible period), reduce the
amount of the borrowings such that the borrowings
do not exceed 33 1/3% of the Fund's total assets.
The Fund may also borrow money from other persons
to the extent permitted by applicable law.
3. May not issue senior securities, except as
permitted under the 1940 Act.
4. May not act as an underwriter of another issuer's
securities, except to the extent that the Fund may
be deemed to be an underwriter within the meaning
of the Securities Act of 1933, as amended (the
"Securities Act"), in connection with the purchase
and sale of portfolio securities.
5. May not purchase or sell physical commodities
unless acquired as a result of ownership of
securities or other instruments (but this shall
not prevent the Fund from purchasing or selling
options, futures contracts or other derivative
instruments, or from investing in securities or
other instruments backed by physical commodities).
6. May not make loans if, as a result, more than 33
1/3% of the Fund's total assets would be lent to
other persons, except through (i) purchases of
debt securities or other debt instruments, or (ii)
engaging in repurchase agreements.
7. May not purchase the securities of any issuer if,
as a result, more than 25% of the Fund's total
assets would be invested in the securities of
issuers, the principal business activities of
which are in the same industry.
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8. May not purchase or sell real estate unless
acquired as a result of ownership of securities or
other instruments (but this shall not prohibit the
Fund from purchasing or selling securities or
other instruments backed by real estate or of
issuers engaged in real estate activities).
The following are the Fund's non-fundamental
investment policies which may be changed by the Board
of Directors without shareholder approval.
The Fund may not:
1. Sell securities short, unless the Fund owns or has
the right to obtain securities equivalent in kind
and amount to the securities sold short, or unless
it covers such short sale as required by the
current rules and positions of the Securities and
Exchange Commission (the "SEC") or its staff.
2. Purchase securities on margin, except that the
Fund may obtain such short-term credits as are
necessary for the clearance of transactions.
3. Invest in illiquid securities if, as a result of
such investment, more than 10% of its net assets
would be invested in illiquid securities.
4. Purchase securities of other investment companies
except in compliance with the 1940 Act.
5. Engage in futures or options on futures
transactions.
6. Make any loans, except through (i) purchases of
debt securities or other debt instruments, or (ii)
engaging in repurchase agreements.
7. Borrow money except from banks or through reverse
repurchase agreements, and will not purchase
securities when bank borrowings exceed 5% of its
total assets.
Except for the fundamental investment limitations
listed above and the Fund's investment objective, the
Fund's other investment policies are not fundamental
and may be changed with approval of the Corporation's
Board of Directors. Unless noted otherwise, if a
percentage restriction is adhered to at the time of
investment, a later increase or decrease in percentage
resulting from a change in the Fund's assets (i.e., due
to cash inflows or redemptions) or in market value of
the investment or the Fund's assets will not constitute
a violation of that restriction.
IMPLEMENTATION OF INVESTMENT OBJECTIVES
The following information supplements the
discussion of the Fund's investment objectives and
strategy described in the Prospectus under the captions
"Investment Objective" and "How the Fund Invests."
Illiquid Securities
The Fund may invest up to 10% of its net assets in
illiquid securities (i.e., securities that are not
readily marketable). For purposes of this restriction,
illiquid securities include, but are not limited to,
restricted securities (securities the disposition of
which is restricted under the federal securities laws),
repurchase agreements with maturities in excess of
seven days and other securities that are not readily
marketable. The Board of Directors of the Corporation,
or its delegate, has the ultimate authority to
determine, to the extent permissible under the federal
securities laws, which securities are liquid or
illiquid for purposes of this 10% limitation. Certain
securities exempt from registration or issued in
transactions exempt from registration under the
Securities Act, such as securities that may be resold
to institutional investors under Rule 144A under the
Securities Act, may be considered liquid under
guidelines adopted by the Board of Directors. However,
investing in securities which may be resold pursuant to
Rule 144A under the Securities Act could have the
effect of increasing the level of the Fund's
illiquidity to the extent that institutional investors
become, for a time, uninterested in purchasing such
securities.
The Board of Directors has delegated to the
Adviser the day-to-day determination of the liquidity
of any security, although it has retained oversight and
ultimate responsibility for such determinations.
Although no definitive
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liquidity criteria are used, the
Board of Directors has directed the Adviser to look to
such factors as (i) the nature of the market for a
security (including the institutional private resale
market), (ii) the terms of certain securities or other
instruments allowing for the disposition to a third
party or the issuer thereof (e.g., certain repurchase
obligations and demand instruments), (iii) the
availability of market quotations (e.g., for securities
quoted in the PORTAL system), and (iv) other
permissible relevant factors.
Restricted securities may be sold only in
privately negotiated transactions or in a public
offering with respect to which a registration statement
is in effect under the Securities Act. Where
registration is required, the Fund may be obligated to
pay all or part of the registration expenses and a
considerable period may elapse between the time of the
decision to sell and the time the Fund may be permitted
to sell a security under an effective registration
statement. If, during such a period, adverse market
conditions were to develop, the Fund might obtain a
less favorable price than that which prevailed when it
decided to sell. Restricted securities will be priced
at fair value as determined in good faith by the Board
of Directors. If, through the appreciation of
restricted securities or the depreciation of
unrestricted securities, the Fund should be in a
position where more than 10% of the value of its net
assets are invested in illiquid securities, including
restricted securities which are not readily marketable
(except for Rule 144A securities deemed to be liquid by
the Adviser), the Fund will take such steps as is
deemed advisable, if any, to protect liquidity.
Warrants
The Fund may invest up to 10% of its net assets in
warrants. Warrants are options to purchase equity
securities at a specific price for a specific period of
time. They do not represent ownership of the
securities but only the right to buy them. Investing
in warrants is purely speculative in that they have no
voting rights, pay no dividends and have no rights with
respect to the assets of the issuer of the underlying
securities. In addition, the value of a warrant does
not necessarily change with the value of the underlying
securities, and a warrant must be exercised prior to
its expiration date or it ceases to have value.
Fixed Income Securities
Fixed income Securities in General. The Fund may
invest up to 25% of its assets in a wide variety of
fixed income securities, including bonds and other debt
securities and non-convertible preferred stocks. Debt
securities are obligations of the issuer to pay
interest and repay principal. Preferred stocks have
rights senior to a company's common stock, but junior
to a company's creditors and, if held by the Fund as a
fixed income security, will generally pay a dividend.
Changes in market interest rates affect the value
of fixed income securities. If interest rates
increase, the value of fixed income securities
generally decrease. Similarly, if interest rates
decrease, the value of fixed income securities
generally increase. Shares in the Fund are likely to
fluctuate in a similar manner. In general, the longer
the remaining maturity of a fixed income security, the
greater it will fluctuate in value based on interest
rate changes. Longer-term fixed income securities
generally pay a higher interest rate. The Fund invests
in fixed income securities of varying maturities.
Changes in the credit quality of the issuer also
affect the value of fixed income securities. Lower-
rated fixed income securities generally pay a higher
interest rate. Although the Fund only invests in
investment grade debt securities, the value of these
securities may decrease due to changes in ratings over
time.
Types of Fixed income Securities. The Fund may
invest in the following types of fixed income
securities:
Corporate debt securities, including bonds,
debentures and notes;
U.S. government securities;
Preferred stocks;
Convertible securities;
Commercial paper (including variable amount master
demand notes);
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Bank obligations, such as certificates of deposit,
banker's acceptances and time deposits of domestic and
foreign banks, domestic savings associations and their
subsidiaries and branches (in amounts in excess of the
current $100,000 per account insurance coverage
provided by the Federal Deposit Insurance Corporation);
and
Repurchase agreements.
Ratings. The Fund will limit investments in fixed
income securities to those that are rated at the time
of purchase as at least investment grade by at least
one national rating organization, such as S&P or
Moody's, or, if unrated, are determined to be of
equivalent quality by the Adviser. Investment grade
fixed income securities include:
U.S. government securities;
Bonds or bank obligations rated in one of the four
highest categories (e.g., BBB- or higher by S&P);
Short-term notes rated in one of the two highest
categories (e.g., SP-2 or higher by S&P);
Commercial paper or short-term bank obligations
rated in one of the three highest categories (e.g., A-3
or higher by S&P); and
Repurchase agreements involving investment grade
fixed income securities.
Investment grade fixed income securities are generally
believed to have a lower degree of credit risk. If a
security's rating falls below the above criteria, the
Adviser will determine what action, if any, should be
taken to ensure compliance with the Fund's investment
objective and to ensure that the Fund will at no time
have 5% or more of its net assets invested in non-
investment grade debt securities. Additional
information concerning securities ratings is contained
in the Appendix.
Government Securities. U.S. government securities
are issued or guaranteed by the U.S. government or its
agencies or instrumentalities. These securities may
have different levels of government backing. U.S.
Treasury obligations, such as Treasury bills, notes,
and bonds are backed by the full faith and credit of
the U.S. Treasury. Some U.S. government agency
securities are also backed by the full faith and credit
of the U.S. Treasury, such as securities issued by the
Government National Mortgage Association (GNMA). Other
U.S. government securities may be backed by the right
of the agency to borrow from the U.S. Treasury, such as
securities issued by the Federal Home Loan Bank, or may
be backed only by the credit of the agency. The U.S.
government and its agencies and instrumentalities only
guarantee the payment of principal and interest and not
the market value of the securities. The market value
of U.S. government securities will fluctuate based on
interest rate changes and other market factors.
Convertible Securities. Convertible securities
are bonds, debentures, notes, preferred stocks or other
securities that may be converted into or exchanged for
a specified amount of common stock of the same or a
different issuer within a particular period of time at
a specified price or formula. A convertible security
entitles the holder to receive interest normally paid
or accrued on debt or the dividend paid on preferred
stock until the convertible security matures or is
redeemed, converted or exchanged. Convertible
securities have unique investment characteristics in
that they generally (i) have higher yields than common
stocks, but lower yields than comparable non-
convertible securities, (ii) are less subject to
fluctuation in value than the underlying stock since
they have fixed income characteristics, and (iii)
provide the potential for capital appreciation if the
market price of the underlying common stock increases.
A convertible security may be subject to redemption at
the option of the issuer at a price established in the
convertible security's governing instrument. If a
convertible security held by the Fund is called for
redemption, the Fund will be required to permit the
issuer to redeem the security, convert it into the
underlying common stock, or sell it to a third party.
The Adviser will limit investments in convertible debt
securities to those that are rated at the time of
purchase as investment grade by at least one national
rating organization, such as S&P or Moody's, or, if
unrated, are determined to be of equivalent quality by
the Adviser.
Variable- or Floating-Rate Securities. Variable-
rate securities provide for automatic establishment of
a new interest rate at fixed intervals (e.g., daily,
monthly, semi-annually, etc.). Floating-rate
securities generally provide for
<PAGE>
automatic adjustment
of the interest rate whenever some specified interest
rate index changes. The interest rate on variable- or
floating-rate securities is ordinarily determined by
reference to or is a percentage of a bank's prime rate,
the 90-day U.S. Treasury bill rate, the rate of return
on commercial paper or bank certificates of deposit, an
index of short-term interest rates or some other
objective measure.
Variable- or floating-rate securities frequently
include a demand feature entitling the holder to sell
the securities to the issuer at par. In many cases,
the demand feature can be exercised at any time on
seven days notice, in other cases, the demand feature
is exercisable at any time on 30 days notice or on
similar notice at intervals of not more than one year.
Some securities which do not have variable or floating
interest rates may be accompanied by puts producing
similar results and price characteristics.
Variable-rate demand notes include master demand
notes which are obligations that permit the Fund to
invest fluctuating amounts, which may change daily
without penalty, pursuant to direct arrangements
between the Fund, as lender, and the borrower. The
interest rates on these notes fluctuate from time to
time. The issuer of such obligations normally has a
corresponding right, after a given period, to prepay in
its discretion the outstanding principal amount of the
obligations plus accrued interest upon a specified
number of days' notice to the holders of such
obligations. The interest rate on a floating-rate
demand obligation is based on a known lending rate,
such as a bank's prime rate, and is adjusted
automatically each time such rate is adjusted. The
interest rate on a variable-rate demand obligation is
adjusted automatically at specified intervals.
Frequently, such obligations are secured by letters of
credit or other credit support arrangements provided by
banks. Because these obligations are direct lending
arrangements between the lender and borrower, it is not
contemplated that such instruments will generally be
traded. There generally is not an established
secondary market for these obligations, although they
are redeemable at face value. Accordingly, where the
obligations are not secured by letters of credit or
other credit support arrangements, the Fund's right to
redeem is dependent on the ability of the borrower to
pay principal and interest on demand. Such obligations
frequently are not rated by credit rating agencies and,
if not so rated, the Fund may invest in them only if
the Adviser determines that at the time of investment
other obligations are of comparable quality to the
other obligations in which the Fund may invest.
The Fund will not invest more than 10% of its net
assets in variable- and floating-rate demand
obligations that are not readily marketable (a variable-
or floating-rate demand obligation that may be disposed
of on not more than seven days notice will be deemed
readily marketable and will not be subject to this
limitation). See "Implementation of Investment
Objectives -- Illiquid Securities." In addition, each
variable- and floating-rate obligation must meet the
credit quality requirements applicable to all the
Fund's investments at the time of purchase. When
determining whether such an obligation meets the Fund's
credit quality requirements, the Fund may look to the
credit quality of the financial guarantor providing a
letter of credit or other credit support arrangement.
Repurchase Agreements. The Fund may enter into
repurchase agreements with certain banks or non-bank
dealers. In a repurchase agreement, the Fund buys a
security at one price, and at the time of sale, the
seller agrees to repurchase the obligation at a
mutually agreed upon time and price (usually within
seven days). The repurchase agreement, thereby,
determines the yield during the purchaser's holding
period, while the seller's obligation to repurchase is
secured by the value of the underlying security. The
Adviser will monitor, on an ongoing basis, the value of
the underlying securities to ensure that the value
always equals or exceeds the repurchase price plus
accrued interest. Repurchase agreements could involve
certain risks in the event of a default or insolvency
of the other party to the agreement, including possible
delays or restrictions upon the Fund's ability to
dispose of the underlying securities. Although no
definitive creditworthiness criteria are used, the
Adviser reviews the creditworthiness of the banks and
non-bank dealers with which the Fund enters into
repurchase agreements to evaluate those risks.
Reverse Repurchase Agreements
The Fund may, with respect to up to 5% of its net
assets, engage in reverse repurchase agreements. In a
reverse repurchase agreement, the Fund would sell a
security and enter into an agreement to repurchase the
security at a specified future date and price. The
Fund generally retains the right to interest and
principal payments on the security. Since the Fund
receives cash upon entering into a reverse repurchase
agreement, it may be considered a borrowing. When
required by guidelines of the SEC, the Fund will set
aside permissible liquid assets in a segregated account
to secure its obligations to repurchase the security.
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Temporary Strategies
Prior to investing the proceeds from sales of Fund
shares, to meet ordinary daily cash needs or to respond
to adverse market, economic, political or other
conditions, the Adviser may hold cash and/or invest all
or a portion of the Fund's assets in money market
instruments, which are short-term fixed income
securities issued by private and governmental
institutions. Money market instruments include:
Commercial paper;
Short-term U.S. government securities;
Repurchase agreements;
Banker's acceptances;
Certificates of deposit;
Time deposits; and
Other short-term fixed income securities.
If these temporary strategies are used for adverse
market, economic or political conditions, it is
impossible to predict when or for how long the Adviser
may employ these strategies for the Fund. To the
extent the Fund engages in this temporary strategy, the
Fund may not achieve its investment objective.
Foreign Currencies
The Fund may purchase and sell foreign currency on
a spot or forward basis to facilitate the purchase of
foreign securities. Because most foreign securities
are denominated in non-U.S. currencies, the Fund may be
required to purchase and sell foreign currencies to
engage in transactions in a foreign security.
Purchasing and selling foreign currency on a spot
(cash) basis involves converting U.S. dollars into the
applicable foreign currency or converting the foreign
currency into U.S. dollars for purposes of short-term
settlement of the foreign security transaction.
Purchasing and selling foreign currency on a forward
basis involves converting U.S. dollars into the
applicable foreign currency or converting the foreign
currency into U.S. dollars for purposes of settling a
foreign security transaction at some date in the future
(i.e., when the Fund is obligated to purchase or sell a
foreign security at a specified future date at a
specified price). In general, if the currency in which
a Fund investment is denominated appreciates against
the U.S. dollar, the dollar value of the security will
increase. Conversely, a decline in the exchange rate
of the currency would adversely affect the value of the
Fund investment expressed in U.S. dollars.
Depositary Receipts and Foreign Securities
The Fund may invest up to 20% of its net assets in
foreign securities directly or by purchasing depositary
receipts, including American Depositary Receipts
("ADRs") and European Depositary Receipts ("EDRs") or
other securities convertible into securities or issuers
based in foreign countries. These securities may not
necessarily be denominated in the same currency as the
securities into which they may be converted.
Generally, ADRs, in registered form, are denominated in
U.S. dollars and are designed for use in the U.S.
securities markets, while EDRs, in bearer form, may be
denominated in other currencies and are designed for
use in European securities markets. ADRs are receipts
typically issued by a U.S. Bank or trust company
evidencing ownership of the underlying securities.
EDRs are European receipts evidencing a similar
arrangement. For purposes of the Fund's investment
objectives, ADRs and EDRs are deemed to have the same
classification as the underlying securities they
represent. Thus, an ADR or EDR representing ownership
of common stock will be treated as common stock.
ADR facilities may be established as either
"unsponsored" or "sponsored." While ADRs issued under
these two types of facilities are in some respects
similar, there are distinctions between them relating
to the rights and obligations of ADR holders and the
practices of market participants. For example, a non-
sponsored depositary may not provide the same
shareholder information that a sponsored depositary is
required to provide under its contractual
<PAGE>
arrangements
with the issuer, including reliable financial
statements. Under the terms of most sponsored
arrangements, depositories agree to distribute notices
of shareholder meetings and voting instructions, and to
provide shareholder communications and other
information to the ADR holders at the request of the
issuer of the deposited securities.
Investments in securities of foreign issuers
involve risks which are in addition to the usual risks
inherent in domestic investments. In many countries
there is less publicly available information about
issuers than is available in the reports and ratings
published about companies in the United States.
Additionally, foreign countries are not subject to
uniform accounting, auditing and financial reporting
standards. Other risks inherent in foreign investments
include expropriation; confiscatory taxation;
withholding taxes on dividends or interest; less
extensive regulation of foreign brokers, securities
markets and issuers; costs incurred in conversions
between currencies; possible delays in settlement in
foreign securities markets; limitations on the use or
transfer of assets (including suspension of the ability
to transfer currency from a given country); the
difficulty of enforcing obligations in other countries;
diplomatic developments; and political or social
instability. Foreign economies may differ favorably or
unfavorably from the U.S. economy in various respects
and many foreign securities are less liquid and their
prices are more volatile than comparable U.S.
securities. From time to time foreign securities may
be difficult to liquidate rapidly without adverse price
effects. Certain costs attributable to foreign
investing, such as custody charges and brokerage costs,
may be higher than those attributable to domestic
investment. The value of the Fund's assets denominated
in foreign currencies will increase or decrease in
response to fluctuations in the value of those foreign
currencies relative to the U.S. dollar. Currency
exchange rates can be volatile at times in response to
supply and demand in the currency exchange markets,
international balances of payments, governmental
intervention, speculation and other political and
economic conditions. In addition, a number of European
countries have entered into the European Monetary Union
("EMU"), an economic and monetary union which will
result in a single currency and a single monetary
policy for all EMU countries beginning January 1, 1999.
The EMU may have adverse effects on foreign securities
if it is not implemented as planned or if one or more
countries withdraws from the EMU. The EMU may also
have adverse effects on foreign securities if portfolio
management software used by the Adviser or the
accounting and trading systems used by the Fund do not
recognize the Euro, the new currency adopted by the
EMU. In the Euro's infancy, investment advisers, like
the Adviser, will be unfamiliar with new indices and
benchmarks for EMU countries and companies.
Investment Companies
The Fund may invest, to a limited extent, in
investment companies, including open-end and closed-end
mutual funds and money market funds. Under the 1940
Act, the Fund may invest up to 10% of its total assets
in shares of other investment companies and up to 5% of
its total assets in any one investment company as long
as the investment does not represent more than 3% of
the voting stock of the acquired investment company.
The Fund does not intend to invest in such investment
companies unless, in the judgment of the Adviser, the
potential benefits of such investments justify the
payment of any associated fees and expenses.
High-Yield (High-Risk) Securities
In General. The Fund will invest in fixed income
securities rated at the time of purchase as at least
investment grade by at least one nationally recognized
statistical rating organization ("NRSROs"), such as S&P
or Moody's. If a security's rating falls below the
ratings criteria set forth under "Implementation of
Investment Objectives Fixed Income Securities," the
Adviser will determine what action, if any, should be
taken to ensure compliance with the Fund's investment
objective and to ensure that the Fund will at no time
have 5% or more of its net assets invested in non-
investment grade debt securities. Non-investment grade
debt obligations ("lower-quality securities") include
(1) bonds rated as low as C by S&P, Moody's and
comparable ratings of other NRSROs; (2) commercial
paper rated as low as C by S&P, Not Prime by Moody's
and comparable ratings of other NRSROs; and (3) unrated
debt obligations of comparable quality. Lower-quality
securities, while generally offering higher yields than
investment grade securities with similar maturities,
involve greater risks, including the possibility of
default or bankruptcy. They are regarded as
predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal. The
special risk considerations in connection with
investments in these securities are discussed below.
Refer to the Appendix for a description of the
securities ratings.
Effect of Interest Rates and Economic Changes.
The lower-quality and comparable unrated security
market is relatively new and its growth has paralleled
a long economic expansion. As a result, it is not
clear how this market
<PAGE>
may withstand a prolonged
recession or economic downturn. Such conditions could
severely disrupt the market for and adversely affect
the value of such securities.
All interest-bearing securities typically
experience appreciation when interest rates decline and
depreciation when interest rates rise. The market
value of lower-quality and comparable unrated
securities tend to reflect individual corporate
developments to a greater extent than do higher rated
securities. As a result, they generally involve more
credit risks than securities in the higher-rated
categories. During an economic downturn or a sustained
period of rising interest rates, highly leveraged
issuers of lower-quality and comparable unrated
securities may experience financial stress and may not
have sufficient revenues to meet their payment
obligations. The issuer's ability to service its debt
obligations may also be adversely affected by specific
corporate developments, the issuer's inability to meet
specific projected business forecasts or the
unavailability of additional financing. The risk of
loss due to default by an issuer of these securities is
significantly greater than issuers of higher-rated
securities because such securities are generally
unsecured and are often subordinated to other
creditors. Further, if the issuer of a lower-quality
or comparable unrated security defaulted, the Fund
might incur additional expenses to seek recovery.
Periods of economic uncertainty and changes would also
generally result in increased volatility in the market
prices of these securities and thus in the Fund's net
asset value.
As previously stated, the value of a lower-quality
or comparable unrated security will decrease in a
rising interest rate market and accordingly, so will
the Fund's net asset value. If the Fund experiences
unexpected net redemptions in such a market, it may be
forced to liquidate a portion of its portfolio
securities without regard to their investment merits.
Due to the limited liquidity of lower-quality and
comparable unrated securities (discussed below), the
Fund may be forced to liquidate these securities as a
substantial discount. Any such liquidation would force
the Fund to sell the more liquid portion of its
portfolio.
Payment Expectations. Lower-quality and
comparable unrated securities typically contain
redemption, call or prepayment provisions which permit
the issuer of such securities containing such
provisions to, at its discretion, redeem the
securities. During periods of falling interest rates,
issuers of these securities are likely to redeem or
prepay the securities and refinance them with debt
securities with a lower interest rate. To the extent
an issuer is able to refinance the securities, or
otherwise redeem them, the Fund may have to replace the
securities with a lower yielding security, which would
result in a lower return for the Fund.
Credit Ratings. Credit ratings issued by credit
rating agencies are designed to evaluate the safety of
principal and interest payments of rated securities.
They do not, however, evaluate the market value risk of
lower-quality securities and, therefore, may not fully
reflect the true risks of an investment. In addition,
credit rating agencies may or may not make timely
changes in a rating to reflect changes in the economy
or in the condition of the issuer that affect the
market value of the security. Consequently, credit
ratings are used only as a preliminary indicator of
investment quality. Investments in lower-quality and
comparable unrated obligations will be more dependent
on the Adviser's credit analysis than would be the case
with investments in investment-grade debt obligations.
The Adviser employs its own credit research and
analysis, which includes a study of existing debt,
capital structure, ability to service debt and to pay
dividends, the issuer's sensitivity to economic
conditions, its operating history and the current trend
of earnings. The Adviser continually monitors the
investments in the Fund's portfolio and carefully
evaluates whether to dispose of or to retain lower-
quality and comparable unrated securities whose credit
ratings or credit quality may have changed.
Liquidity and Valuation. The Fund may have
difficulty disposing of certain lower-quality and
comparable unrated securities because there may be a
thin trading market for such securities. Because not
all dealers maintain markets in all lower-quality and
comparable unrated securities, there is no established
retail secondary market for many of these securities.
The Fund anticipates that such securities could be sold
only to a limited number of dealers or institutional
investors. To the extent a secondary trading market
does exist, it is generally not as liquid as the
secondary market for higher-rated securities. The lack
of a liquid secondary market may have an adverse impact
on the market price of the security. As a result, the
Fund's asset value and ability to dispose of particular
securities, when necessary to meet the Fund's liquidity
needs or in response to a specific economic event, may
be impacted. The lack of a liquid secondary market for
certain securities may also make it more difficult for
the Fund to obtain accurate market quotations for
purposes of valuing the Fund's portfolio. Market
quotations are generally available on many lower-
quality and comparable unrated issues only from a
limited number of dealers and may not necessarily
represent firm
<PAGE>
bids of such dealers or prices for
actual sales. During periods of thin trading, the
spread between bid and asked prices is likely to
increase significantly. In addition, adverse publicity
and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and
liquidity of lower-quality and comparable unrated
securities, especially in a thinly traded market.
Legislation. Legislation may be adopted, from
time to time, designed to limit the use of certain
lower-quality and comparable unrated securities by
certain issuers. It is anticipated that if additional
legislation is enacted or proposed, it could have a
material affect on the value of these securities and
the existence of a secondary trading market for the
securities.
When-Issued Securities
The Fund may from time to time invest up to 5% of
its net assets in securities purchased on a "when-
issued" basis. The price of securities purchased on a
when-issued basis is fixed at the time the commitment
to purchase is made, but delivery and payment for the
securities take place at a later date. Normally, the
settlement date occurs within 45 days of the purchase.
During the period between the purchase and settlement,
no payment is made by the Fund to the issuer, no
interest is accrued on debt securities and no dividend
income is earned on equity securities. Forward
commitments involve a risk of loss if the value of the
security to be purchased declines prior to the
settlement date, which risk is in addition to the risk
of decline in value of the Fund's other assets. While
when-issued securities may be sold prior to the
settlement date, the Fund intends to purchase such
securities with the purpose of actually acquiring them.
At the time the Fund makes the commitment to purchase a
security on a when-issued basis, it will record the
transaction and reflect the value of the security in
determining its net asset value. The Fund does not
believe that its net asset value will be adversely
affected by its purchases of securities on a when-
issued basis.
The Fund will maintain cash and marketable
securities equal in value to commitments for when-
issued securities. Such segregated securities either
will mature or, if necessary, be sold on or before the
settlement date. When the time comes to pay for when-
issued securities, the Fund will meet its obligations
from then available cash flow, sale of the securities
held in the separate account, described above, sale of
other securities or, although it would not normally
expect to do so, from the sale of the when-issued
securities themselves (which may have a market value
greater or less than the Fund's payment obligation).
Unseasoned Companies
The Fund may invest up to 5% of its total assets
in unseasoned companies, which are companies with less
than three years of continuous operation. While
smaller companies generally have potential for rapid
growth, they often involve higher risks because they
lack the management experience, financial resources,
product diversification and competitive strengths of
larger corporations. In addition, in many instances,
the securities of smaller companies are traded only
over-the-counter or on regional securities exchanges,
and the frequency and volume of their trading is
substantially less than is typical of larger companies.
Therefore, the securities of these companies may be
subject to wider price fluctuations. When making large
sales, the Fund may have to sell portfolio holdings of
these companies at discounts from quoted prices or may
have to make a series of smaller sales over an extended
period of time due to the trading volume in smaller
company securities.
Short Sales Against the Box
The Fund may sell securities short against the box
to hedge unrealized gains on portfolio securities.
Selling securities short against the box involves
selling a security that the Fund owns or has the right
to acquire, for delivery at a specified date in the
future. If the Fund sells securities short against the
box, it may protect unrealized gains, but will lose the
opportunity to profit on such securities if the price
rises.
DIRECTORS AND OFFICERS
Under the laws of the State of Maryland, the Board
of Directors of the Corporation is responsible for
managing its business and affairs. The directors and
officers of the Corporation, together with information
as to their
<PAGE>
principal business occupations during the
last five years, and other information, are shown
below. Each director who is deemed an "interested
person," as defined in the 1940 Act, is indicated by an
asterisk.
*Mark D. Foster, a Director, Chairman and
President of the Corporation.
Mr. Foster, 40 years old, received a Bachelor of
Science degree in finance from Ball State University in
1979. Prior to joining the Adviser, Mr. Foster managed
equity investments for Merchants Investment Counseling,
Inc. Mr. Foster joined the Adviser in 1987 as a
portfolio manager. Mr. Foster has been the Adviser's
chief investment officer since 1997. Mr. Foster is a
Chartered Financial Analyst.
*Mickey Kim, a Director, Vice President, Secretary
and Treasurer of the Corporation.
Mr. Kim, 40 years old, earned a Bachelor of
Science degree in finance from the University of
Illinois in 1980 and a Masters of Business
Administration in finance from the University of
Chicago in 1982. Prior to joining the Adviser, Mr. Kim
was an analyst with Driehaus Capital Management. Mr.
Kim joined the Adviser in 1986 as a portfolio manager.
Since 1996, Mr. Kim has been the chief operating
officer of the Adviser. Mr. Kim is a Chartered
Financial Analyst.
Jeffrey N. Brown, a Director of the Corporation.
Mr. Brown, 39 years old, is currently the
President of Home News Enterprises, a publishing
company. From 1992 to 1997, Mr. Brown served as Vice
President for that company.
Mark E. Chesnut, a Director of the Corporation.
Mr. Chesnut, 51 years old, worked at Cummins
Engine Co., a manufacturer of diesel engines, from 1966
to 1998. Mr. Chesnut's most recent position with
Cummins Engine Co. was Vice President of Public
Affairs. Mr. Chesnut is currently self-employed as a
health care and education consultant. Since 1990,
Mr. Chesnut has served as a director and chairman of
the Southeastern Indiana Health Organization.
John F. Dorenbusch, a Director of the Corporation.
Mr. Dorenbusch, 60 years old, is retired. Prior
to retiring, Mr. Dorenbusch was President and a
director of Tipton Lakes Company, a real estate
development company, from 1981 to 1996. Mr. Dorenbusch
was also President and a director of Irwin Management
Company, an investment, financial and tax management
company, from 1990 to 1994 and 1981-1996, respectively.
Mr. Dorenbusch served as a director of Irwin-Sweeney-
Miller Foundation, a private foundation from 1987 to
1996.
The address for Messrs. Foster and Kim is Kirr,
Marbach & Company, LLC, 621 Washington Street,
Columbus, Indiana 47201. The address for Mr. Brown is
333 Second Street, Columbus, Indiana 47201. The
address for Mr. Chesnut is 9567 West Kelly Court,
Columbus, Indiana 47201. The address for Mr.
Dorenbusch is 4115 North Riverside Drive, Columbus,
Indiana 47203.
As of December 2, 1998, officers and directors of
the Corporation did not beneficially own any of the
shares of common stock of the Fund's then outstanding
shares; however, the Adviser owned 100% of such shares.
Directors and officers of the Corporation who are also
officers, directors, employees or shareholders of the
Adviser do not receive any remuneration from the Fund
for serving as directors or officers.
The following table provides information relating
to annual compensation to be paid to directors of the
Corporation for their services as such (1):
<PAGE>
Name Cash Other Tota
Compensation Compensatio l
(2) n
Mark D. Foster $ 0 $0 $ 0
Mickey Kim $ 0 $0 $ 0
Jeffrey N. Brown $2,000 $0 $2,000
Mark E. Chesnut $2,000 $0 $2,000
John F.Dorenbusch $2,000 $0 $2,000
All directors $6,000 $0 $6,000
as a group
(5 persons)
____________________
(1) The amounts indicated are estimates of amounts to
be paid by the Corporation.
(2) Each director who is not deemed an "interested
person" as defined in the 1940 Act, will receive $500
for each Board of Directors meeting attended by such
person and reasonable expenses incurred in connection
therewith. The Board anticipates holding four meetings
during fiscal 1999. Thus, each disinterested director
is entitled to up to $2,000 during such time period
from the Corporation, plus reasonable expenses.
PRINCIPAL SHAREHOLDERS
As of December 2, 1998, the following person owned
of record or is known by the Corporation to own of
record or beneficially 5% or more of the outstanding
shares of the Fund:
Name and Address No. Shares Percentage
Kirr, Marbach & Company, LLC 10,000 100%
Based on the foregoing, as of December 2, 1998,
the Adviser owned a controlling interest in the
Corporation. Shareholders with a controlling interest
could effect the outcome of proxy voting or the
direction of management of the Corporation.
INVESTMENT ADVISER
Kirr, Marbach & Company, LLC (the "Adviser") is
the investment adviser to the Fund. The Adviser is
controlled by David Kirr and Gregg Summerville.
The investment advisory agreement between the
Corporation and the Adviser dated as of December 31,
1998 (the "Advisory Agreement") has an initial term of
two years and thereafter is required to be approved
annually by the Board of Directors of the Corporation
or by vote of a majority of the Fund's outstanding
voting securities. Each annual renewal must also be
approved by the vote of a majority of the Corporation's
directors who are not parties to the Advisory Agreement
or interested persons of any such party, cast in person
at a meeting called for the purpose of voting on such
approval. The Advisory Agreement was approved by the
Board of Directors, including a majority of the
disinterested directors on December 17, 1998 and by the
initial shareholder of the Fund on December 17, 1998.
The Advisory Agreement is terminable without penalty,
on 60 days' written notice by the Board of Directors of
the Corporation, by vote of a majority of the Fund's
outstanding voting securities or by the Adviser, and
will terminate automatically in the event of its
assignment.
<PAGE>
Under the terms of the Advisory Agreement, the
Adviser manages the Fund's investments and business
affairs, subject to the supervision of the
Corporation's Board of Directors. At its expense, the
Adviser provides office space and all necessary office
facilities, equipment and personnel for managing the
investments of the Fund. As compensation for its
services, the Fund pays the Adviser an annual
management fee of 1.00% of its average daily net
assets. The advisory fee is accrued daily and paid
monthly.
The Adviser has agreed that until December 31,
1999, the Adviser will waive its management fee and/or
reimburse the Fund's operating expenses to the extent
necessary to ensure that the total operating expenses
(on an annual basis) for the Fund do not exceed 1.50%
of average daily net assets. After such date, the
Adviser may from time to time voluntarily waive all or
a portion of its fee and/or absorb expenses for the
Fund. Any waiver of fees or absorption of expenses
will be made on a monthly basis and, with respect to
the latter, will be paid to the Fund by reduction of
the Adviser's fee. Any such waiver/absorption is
subject to later adjustment during the term of the
Advisory Agreement to allow Adviser to recoup amounts
waived/absorbed, including initial organization costs
of the Fund, provided, however, that, the Adviser shall
only be entitled to recoup such amounts for a maximum
period of three years from the date such amount was
waived or reimbursed.
FUND TRANSACTIONS AND BROKERAGE
Under the Advisory Agreement, the Adviser, in its
capacity as portfolio manager, is responsible for
decisions to buy and sell securities for the Fund and
for the placement of the Fund's securities business,
the negotiation of the commissions to be paid on such
transactions and the allocation of portfolio brokerage
business. The Adviser seeks to obtain the best
execution at the best security price available with
respect to each transaction. The best price to the
Fund means the best net price without regard to the mix
between purchase or sale price and commission, if any.
While the Adviser seeks reasonably competitive
commission rates, the Fund does not necessarily pay the
lowest available commission. Brokerage will not be
allocated based on the sale of the Fund's shares.
When the Adviser buys or sells the same security
for two or more advisory accounts, including the Fund,
the Adviser may place concurrent orders with a single
broker to be executed as a single, aggregated block in
order to facilitate orderly and efficient execution.
Whenever the Adviser does so, each advisory account on
whose behalf an order was placed will receive the
average price at which the block was executed and will
bear a proportionate share of all transaction costs,
based on the size of the advisory account's order.
While the Adviser believes combining orders for
advisory accounts will, over time, be advantageous to
all participants, in particular cases the average price
at which the block was executed could be less
advantageous to one particular advisory account than if
the advisory account had been the only account
effecting the transaction or had completed its
transaction before the other participants.
Section 28(e) of the Securities Exchange Act of
1934, as amended ("Section 28(e)"), permits an
investment adviser, under certain circumstances, to
cause an account to pay a broker or dealer who supplies
brokerage and research services a commission for
effecting a transaction in excess of the amount of
commission another broker or dealer would have charged
for effecting the transaction. Brokerage and research
services include (a) furnishing advice as to the value
of securities, the advisability of investing,
purchasing or selling securities and the availability
of securities or purchasers or sellers of securities;
(b) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends,
portfolio strategy and the performance of accounts; and
(c) effecting securities transactions and performing
functions incidental thereto (such as clearance,
settlement and custody).
In selecting brokers or dealers, the Adviser
considers investment and market information and other
research, such as economic, securities and performance
measurement research provided by such brokers or
dealers and the quality and reliability of brokerage
services, including execution capability, performance
and financial responsibility. Accordingly, the
commissions charged by any such broker or dealer may be
greater than the amount another firm might charge if
the Adviser determines in good faith that the amount of
such commissions is reasonable in relation to the value
of the research information and brokerage services
provided by such broker or dealer to the Fund. The
Adviser believes that the research information received
in this manner provides the Fund with benefits by
supplementing the research otherwise available to the
Fund. Such higher commissions will not be paid by the
Fund unless (a) the Adviser determines in good faith
that the amount is reasonable in relation to the
services in terms of the particular transaction or in
terms of the Adviser's overall responsibilities with
respect to the accounts, including the Fund, as to
which it exercises investment discretion; (b) such
payment is made in compliance with the provisions of
Section 28(e) and other
<PAGE>
applicable state and federal
laws; and (c) in the opinion of the Adviser, the total
commissions paid by the Fund will be reasonable in
relation to the benefits to the Fund over the long
term.
The Adviser may, from time to time, cause advisory
accounts, including the Fund, to participate in initial
public offerings ("IPOs"). The Adviser's policy is to
allocate, to the extent operationally and otherwise
practical, IPOs, including those IPOs where the Adviser
anticipates the security will initially trade in the
market at a premium ("hot issues"), to each advisory
account without regard to the size or fee structure of
the advisory account. The Adviser allocates IPOs to
advisory accounts based on numerous issues, including
cash availability, the time advisory account funds have
been available for investment or have had investments
available for sale, investment objectives and
restrictions, an advisory account's participation in
other IPOs and relative size of portfolio holdings of
the same or comparable securities. An additional
consideration used in the Adviser's allocation of "hot
issues" is the relative investment performance of an
advisory account versus the index benchmarks and/or the
average of all of the Adviser's advisory accounts.
From time to time, the Adviser may allocate "hot
issues" to enhance the performance of advisory accounts
that the Adviser believes have lagged relative to the
performance of other accounts. The Adviser's
participation in and allocation of "hot issues" is
extremely limited.
The Adviser places portfolio transactions for
other advisory accounts managed by the Adviser.
Research services furnished by firms through which the
Fund effects its securities transactions may be used by
the Adviser in servicing all of its accounts; not all
of such services may be used by the Adviser in
connection with the Fund. The Adviser believes it is
not possible to measure separately the benefits from
research services to each of the accounts (including
the Fund) managed by it. Because the volume and nature
of the trading activities of the accounts are not
uniform, the amount of commissions in excess of those
charged by another broker paid by each account for
brokerage and research services will vary. However,
the Adviser believes such costs to the Fund will not be
disproportionate to the benefits received by the Fund
on a continuing basis. The Adviser seeks to allocate
portfolio transactions equitably whenever concurrent
decisions are made to purchase or sell securities by
the Fund and another advisory account. In some cases,
this procedure could have an adverse effect on the
price or the amount of securities available to the
Fund. In making such allocations between the Fund and
other advisory accounts, the main factors considered by
the Adviser are the respective investment objectives,
the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for
investment and the size of investment commitments
generally held.
CUSTODIAN
As custodian of the Fund's assets, Firstar Bank
Milwaukee, N.A. ("Firstar Bank"), Third Floor, 615 East
Michigan Street, Milwaukee, Wisconsin 53202, has
custody of all securities and cash of the Fund,
delivers and receives payment for portfolio securities
sold, receives and pays for portfolio securities
purchased, collects income from investments and
performs other duties, all as directed by the officers
of the Corporation.
TRANSFER AGENT AND DIVIDEND-DISBURSING AGENT
Firstar Mutual Fund Services, LLC ("Firstar"),
Third Floor, 615 East Michigan Street, Milwaukee,
Wisconsin 53202, acts as transfer agent and dividend-
disbursing agent for the Fund. Firstar is compensated
based on an annual fee per open account of $14 (subject
to a minimum annual fee of $22,500) plus out-of-pocket
expenses, such as postage and printing expenses in
connection with shareholder communications. Firstar
also receives an annual fee per closed account of $14.
From time to time, the Corporation, on behalf of
the Fund, directly or indirectly through arrangements
with the Adviser, the Distributor (as defined below) or
Firstar, may pay amounts to third parties that provide
transfer agent type services and other administrative
services relating to the Fund to persons who
beneficially have interests in the Fund, such as
participants in 401(k) plans. These services may
include, among other things, sub-accounting services,
transfer agent type activities, answering inquiries
relating to the Fund, transmitting proxy statements,
annual reports, updated prospectuses, other
communications regarding the Fund and related services
as the Fund or beneficial owners may reasonably
request. In such cases, the Fund will not pay fees
based on the number of beneficial owners at a rate that
is greater than the rate the Fund is currently paying
Firstar for providing these services to the Fund's
shareholders (i.e., $14 per account plus expenses).
<PAGE>
ADMINISTRATOR
Pursuant to a Fund Administration Servicing
Agreement and a Fund Accounting Servicing Agreement,
Firstar also performs accounting and certain compliance
and tax reporting functions for the Corporation. For
these services, Firstar receives from the Corporation
out-of-pocket expenses plus the following aggregate
annual fees, computed daily and payable monthly, based
on the Fund's aggregate average net assets:
Administrative Services Fees
First $200 million of average net assets .06 of 1%*
Next $500 million of average net assets .05 of 1%
Average net assets in excess of $700 million .03 of 1%
_____________________________
* Subject to a minimum fee of $35,000.
Accounting Services Fees
First $40 million of average net assets $22,000
Next $200 million of average net assets .01 of 1%
Average net assets in excess of $240 million .005 of 1%
DISTRIBUTOR AND PLAN OF DISTRIBUTION
Distributor
Under a distribution agreement dated December 31,
1998 (the "Distribution Agreement"), Rafferty Capital
Markets, Inc. (the "Distributor"), 550 Mamaroneck
Avenue, Harrison, New York 10528, acts as principal
distributor of the Fund's shares. The Distribution
Agreement provides that the Distributor will use its
best efforts to distribute the Fund's shares, which
shares are offered for sale by the Fund continuously at
net asset value per share without the imposition of a
sales charge. Pursuant to the terms of the
Distribution Agreement, the Distributor bears the costs
of printing prospectuses and shareholder reports which
are used for selling purposes, as well as advertising
and any other costs attributable to the distribution of
Fund shares. All or a portion of the distribution and
shareholder servicing fee may be used by the
Distributor to pay such expenses under the distribution
and shareholder servicing plan discussed below.
Distribution and Shareholder Servicing Plan
The Corporation, on behalf of the Fund, has
adopted a plan pursuant to Rule 12b-1 under the 1940
Act (the "12b-1 Plan"), which authorizes it to pay the
Distributor, in its capacity as the principal
distributor of Fund shares, or any Recipient (as
defined below) a distribution and shareholder servicing
fee of up to 0.25% per annum of the Fund's average
daily net assets. Under the terms of the 12b-1 Plan,
the Corporation or the Distributor may pay all or a
portion of this fee to any securities dealer, financial
institution or any other person (the "Recipient") who
renders assistance in distributing or promoting the
sale of Fund shares, or who provides certain
shareholder services to Fund shareholders, pursuant to
a written agreement (the "Related Agreement"). The
12b-1 Plan is a "reimbursement" plan, which means that
the fees paid by the Fund are intended as reimbursement
for services rendered up to the maximum allowable fee.
If more money for services rendered is due than is
immediately payable because of the expense limitation
under the 12b-1 Plan, the unpaid amount is carried
forward from period to period while the 12b-1 Plan is
in effect until such time as it may be paid. No
interest, carrying or other forward charge will be
borne by the Fund with respect to unpaid amounts
carried forward. The 12b-1 Plan has the effect of
increasing the Fund's expenses from what they would
otherwise be. The Board of Directors reviews the
Fund's distribution and shareholder servicing fee
payments in connection with its determination as to the
continuance of the 12b-1 Plan.
The 12b-1 Plan, including forms of Related
Agreements, has been unanimously approved by a majority
of the Board of Directors of the Corporation, and of
the members of the Board who are not "interested
persons" of the Corporation as defined in the 1940 Act
and who have no direct or indirect financial interest
in the operation of the
<PAGE>
12b-1 Plan or any Related
Agreements (the "Disinterested Directors") voting
separately. The 12b-1 Plan, and any Related Agreement
which is entered into, will continue in effect for a
period of more than one year only so long as its
continuance is specifically approved at least annually
by a vote of a majority of the Corporation's Board of
Directors and of the Disinterested Directors, cast in
person at a meeting called for the purpose of voting on
the 12b-1 Plan or the Related Agreement, as applicable.
In addition, the 12b-1 Plan and any Related Agreement
may be terminated at any time, without penalty, by vote
of a majority of the outstanding voting securities of
the Fund, or by vote of a majority of Disinterested
Directors (on not more than 60 days' written notice in
the case of the Related Agreement only). Payment of the
distribution and shareholder servicing fee is to be
made monthly. The Distributor and/or Recipients will
provide reports or invoices to the Corporation of all
amounts payable to them (and the purposes for which the
amounts were expended) pursuant to the 12b-1 Plan.
Interests of Certain Persons
With the exception of the Adviser, in its capacity
as the Fund's investment adviser, and the Distributor,
in its capacity as principal distributor of Fund
shares, no "interested person" of the Fund, as defined
in the 1940 Act, and no director of the Fund who is not
an "interested person" has or had a direct or indirect
financial interest in the 12b-1 Plan or any Related
Agreement.
Anticipated Benefits to the Fund
The Board of Directors considered various factors
in connection with its decision to approve the 12b-1
Plan, including: (a) the nature and causes of the
circumstances which make implementation of the 12b-1
Plan necessary and appropriate; (b) the way in which
the 12b-1 Plan would address those circumstances,
including the nature and potential amount of
expenditures; (c) the nature of the anticipated
benefits; (d) the merits of possible alternative plans
or pricing structures; (e) the relationship of the
12b-1 Plan to other distribution efforts of the Fund;
and (f) the possible benefits of the 12b-1 Plan to any
other person relative to those of the Fund.
Based upon its review of the foregoing factors and
the material presented to it, and in light of its
fiduciary duties under relevant state law and the 1940
Act, the Board of Directors determined, in the exercise
of its business judgment, that the 12b-1 Plan was
reasonably likely to benefit the Fund and its
shareholders in at least one or several potential ways.
Specifically, the Board concluded that the Distributor
and any Recipients operating under Related Agreements
would have little or no incentive to incur promotional
expenses on behalf of the Fund if a 12b-1 Plan were not
in place to reimburse them, thus making the adoption of
such 12b-1 Plan important to the initial success and
thereafter, continued viability of the Fund. In
addition, the Board determined that the payment of
distribution fees to these persons should motivate them
to provide an enhanced level of service to Fund
shareholders, which would, of course, benefit such
shareholders. Finally, the adoption of the 12b-1 Plan
would help to increase net assets under management in a
relatively short amount of time, given the marketing
efforts on the part of the Distributor and Recipients
to sell Fund shares, which should result in certain
economies of scale.
While there is no assurance that the expenditure
of Fund assets to finance distribution of Fund shares
will have the anticipated results, the Board of
Directors believes there is a reasonable likelihood
that one or more of such benefits will result, and
since the Board will be in a position to monitor the
distribution and shareholder servicing expenses of the
Fund, it will be able to evaluate the benefit of such
expenditures in deciding whether to continue the 12b-1
Plan.
PURCHASE, EXCHANGE AND PRICING OF SHARES
Automatic Investment Plan
The Automatic Investment Plan ("AIP") allows you
to make regular, systematic investments in the Fund
from your bank checking or NOW account. The minimum
initial investment for investors using the AIP is
$5,000. To establish the AIP, complete the appropriate
section in the shareholder application. Under certain
circumstances (such as discontinuation of the AIP
before the Fund's minimum initial investment is
reached), the Fund reserves the right to close the
investor's account. Prior to closing any account for
failure to reach the minimum initial investment, the
Fund will give the investor written notice and 60 days
in which to reinstate the AIP or otherwise reach the
minimum initial investment. You should consider your
financial ability to continue in the AIP until the
minimum initial investment
<PAGE>
amount is met because the
Fund has the right to close an investor's account for
failure to reach the minimum initial investment. Such
closing may occur in periods of declining share prices.
Under the AIP, you may choose to make monthly
investments on the days of your choosing (or the next
business day thereafter) from your financial
institution in amounts of $250 or more. There is no
service fee for participating in the AIP. However, a
service fee of $20 will be deducted from your Fund
account for any AIP purchase that does not clear due to
insufficient funds or, if prior to notifying the Fund
in writing or by telephone of your intention to
terminate the plan, you close your bank account or in
any manner prevent withdrawal of funds from the
designated checking or NOW account. You can set up the
AIP with any financial institution that is a member of
Automated Clearing House.
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.
Individual Retirement Accounts
In addition to purchasing Fund shares as described
in the Prospectus under "How to Purchase Shares,"
individuals may establish their own tax-sheltered
individual retirement accounts ("IRAs"). The Fund
offers two types of IRAs, including the Traditional
IRA, that can be adopted by executing the appropriate
Internal Revenue Service ("IRS") Form.
Traditional IRA. In a Traditional IRA, amounts
contributed to the IRA may be tax deductible at the
time of contribution depending on whether the investor
is an "active participant" in an employer-sponsored
retirement plan and the investor's income.
Distributions from a Traditional IRA will be taxed at
distribution except to the extent that the distribution
represents a return of the investor's own contributions
for which the investor did not claim (or was not
eligible to claim) a deduction. Distributions prior to
age 59-1/2 may be subject to an additional 10% tax
applicable to certain premature distributions.
Distributions must commence by April 1 following the
calendar year in which the investor attains age 70-1/2.
Failure to begin distributions by this date (or
distributions that do not equal certain minimum
thresholds) may result in adverse tax consequences.
Roth IRA. In a Roth IRA, amounts contributed to
the IRA are taxed at the time of contribution, but
distributions from the IRA are not subject to tax if
the investor has held the IRA for certain minimum
periods of time (generally, until age 59-1/2).
Investors whose income exceeds certain limits are
ineligible to contribute to a Roth IRA. Distributions
that do not satisfy the requirements for tax-free
withdrawal are subject to income taxes (and possibly
penalty taxes) to the extent that the distribution
exceeds the investor's contributions to the IRA. The
minimum distribution rules applicable to Traditional
IRAs do not apply during the lifetime of the investor.
Following the death of the investor, certain minimum
distribution rules apply.
For Traditional and Roth IRAs, the maximum annual
contribution generally is equal to the lesser of $2,000
or 100% of the investor's compensation (earned income).
An individual may also contribute to a Traditional IRA
or Roth IRA on behalf of his or her spouse provided
that the individual has sufficient compensation (earned
income). Contributions to a Traditional IRA reduce the
allowable contributions under a Roth IRA, and
contributions to a Roth IRA reduce the allowable
contribution to a Traditional IRA.
Simplified Employee Pension Plan. A Traditional
IRA may also be used in conjunction with a Simplified
Employee Pension Plan ("SEP-IRA"). A SEP-IRA is
established through execution of Form 5305-SEP together
with a Traditional IRA established for each eligible
employee. Generally, a SEP-IRA allows an employer
(including a self-employed individual) to purchase
shares with tax deductible contributions not exceeding
annually for any one participant 15% of compensation
(disregarding for this purpose compensation in excess
of $160,000 per year). The $160,000 compensation limit
applies for 1998 and is adjusted periodically for cost
of living increases. A number of special rules apply
to SEP Plans, including a requirement that
contributions generally be made on behalf
<PAGE>
of all
employees of the employer (including for this purpose a
sole proprietorship or partnership) who satisfy certain
minimum participation requirements.
SIMPLE IRA. An IRA may also be used in connection
with a SIMPLE Plan established by the investor's
employer (or by a self-employed individual). When this
is done, the IRA is known as a SIMPLE IRA, although it
is similar to a Traditional IRA with the exceptions
described below. Under a SIMPLE Plan, the investor may
elect to have his or her employer make salary reduction
contributions of up to $6,000 per year to the SIMPLE
IRA. The $6,000 limit applies for 1998 and is adjusted
periodically for cost of living increases. In
addition, the employer will contribute certain amounts
to the investor's SIMPLE IRA, either as a matching
contribution to those participants who make salary
reduction contributions or as a non-elective
contribution to all eligible participants whether or
not making salary reduction contributions. A number of
special rules apply to SIMPLE Plans, including (1) a
SIMPLE Plan generally is available only to employers
with fewer than 100 employees; (2) contributions must
be made on behalf of all employees of the employer
(other than bargaining unit employees) who satisfy
certain minimum participation requirements; (3)
contributions are made to a special SIMPLE IRA that is
separate and apart from the other IRAs of employees;
(4) the distribution excise tax (if otherwise
applicable) is increased to 25% on withdrawals during
the first two years of participation in a SIMPLE IRA;
and (5) amounts withdrawn during the first two years of
participation may be rolled over tax-free only into
another SIMPLE IRA (and not to a Traditional IRA or to
a Roth IRA). A SIMPLE IRA is established by executing
Form 5304-SIMPLE together with an IRA established for
each eligible employee.
Under current IRS regulations, all IRA applicants
must be furnished a disclosure statement containing
information specified by the IRS. Applicants generally
have the right to revoke their account within seven
days after receiving the disclosure statement and
obtain a full refund of their contributions. Firstar,
the Fund's custodian, may, in its discretion, hold the
initial contribution uninvested until the expiration of
the seven-day revocation period. Firstar does not
anticipate that it will exercise its discretion but
reserves the right to do so.
Systematic Withdrawal Plan
Shareholders may set up automatic withdrawals from
their Fund accounts at regular intervals. To begin
distributions, a shareholder's account must have an
initial balance of $50,000 and at least $250 per
payment must be withdrawn. To establish the systematic
withdrawal plan ("SWP"), the appropriate section in the
shareholder application must be completed. Redemptions
will take place on a monthly, quarterly, semi-annual or
annual basis (or the following business day) as
indicated on the shareholder application. The amount
or frequency of withdrawal payments may be varied or
temporarily discontinued by calling 1-800-870-8039.
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 a shareholder's account. If the amount
remaining in a shareholder's account is not sufficient
to meet a plan payment, the remaining amount will be
redeemed and the SWP will be terminated.
Money Market Exchange
As a service to our shareholders, the Fund has
established a program whereby our shareholders can
exchange shares of the Fund for shares of the Firstar
Money Market Fund (the "Firstar Fund"). Exchange
requests are available for exchanges of $1,000 or more.
The Firstar Fund is a no-load money market fund managed
by an affiliate of Firstar. The Firstar Fund is
unrelated to the Corporation or the Fund. However, the
Distributor may be compensated by the Firstar Fund for
servicing and related services provided in connection
with exchanges made by shareholders of the Fund. This
exchange privilege is a convenient way to buy shares in
a money market fund in order to respond to changes in
your goals or in market conditions. Before exchanging
into the Firstar Fund, please read the prospectus,
which may be obtained by calling 1-800-870-8039. There
is no charge for written exchange requests. Firstar
will, however, charge a $5 fee for each exchange
transaction that is executed via the telephone.
An exchange from the Fund to the Firstar Fund is
treated the same as an ordinary sale and purchase for
federal income tax purposes and you will realize a
capital gain or loss. An exchange is not a tax-free
transaction.
<PAGE>
Pricing of Shares
Shares of the Fund are sold on a continual basis
at the net asset value per share next computed
following receipt of an order in proper form by a
dealer, the Distributor or Firstar, the Fund's transfer
agent.
The net asset value per share is determined as of
the close of trading (generally 4:00 p.m. Eastern
Standard Time) on each day the New York Stock Exchange
(the "NYSE") is open for business. Purchase orders
received or shares tendered for redemption on a day the
NYSE is open for trading, prior to the close of trading
on that day, will be valued as of the close of trading
on that day. Applications for purchase of shares and
requests for redemption of shares received after the
close of trading on the NYSE will be valued as of the
close of trading on the next day the NYSE is open. The
Fund's net asset value may not be calculated on days
during which the Fund receives no orders to purchase
shares and no shares are tendered for redemption. Net
asset value is calculated by taking the fair value of
the Fund's total assets, including interest or
dividends accrued, but not yet collected, less all
liabilities, and dividing by the total number of shares
outstanding. The result, rounded to the nearest cent,
is the net asset value per share.
In determining net asset value, expenses are
accrued and applied daily and securities and other
assets for which market quotations are available are
valued at market value. Common stocks and other equity-
type securities are valued at the last sales price on
the national securities exchange or NASDAQ on which
such securities are primarily traded; however,
securities traded on a national securities exchange or
NASDAQ for which there were no transactions on a given
day, and securities not listed on a national securities
exchange or NASDAQ, are valued at the average of the
most recent bid and asked prices. Fixed income
securities are valued by a pricing service that
utilizes electronic data processing techniques to
determine values for normal institutional-sized trading
units of fixed income securities without regard to sale
or bid prices when such values are believed to more
accurately reflect the fair market value of such
securities; otherwise, actual sale or bid prices are
used. Any securities or other assets for which market
quotations are not readily available are valued at fair
value as determined in good faith by the Board of
Directors of the Corporation. The Board of Directors
may approve the use of pricing services to assist the
Fund in the determination of net asset value. Fixed
income securities having remaining maturities of 60
days or less when purchased are generally valued by the
amortized cost method. Under this method of valuation,
a security is initially valued at its acquisition cost
and, thereafter, amortization of any discount or
premium is assumed each day, regardless of the impact
of fluctuating interest rates on the market value of
the security.
REDEMPTIONS IN KIND
The Fund has filed a Notification under Rule 18f-1
of the 1940 Act, pursuant to which it has agreed to pay
in cash all requests for redemption by any shareholder
of record, limited in amount with respect to each
shareholder during any 90-day period to the lesser
amount of (i) $250,000 or (ii) 1% of the Fund's net
asset value, valued at the beginning of the election
period. The Fund intends also to pay redemption
proceeds in excess of such lesser amount in cash, but
reserves the right to pay such excess amount in kind,
if it is deemed to be in the best interest of the Fund
to do so. If you receive an in kind distribution, you
will likely incur a brokerage charge on the disposition
of such securities through a securities dealer.
TAXATION OF THE FUND
The Fund intends to qualify annually as a
"regulated investment company" under Subchapter M of
the Code, and, if so qualified, will not be liable for
federal income taxes to the extent earnings are
distributed to shareholders on a timely basis. In the
event the Fund fails to qualify as a "regulated
investment company," it will be treated as a regular
corporation for federal income tax purposes.
Accordingly, the Fund would be subject to federal
income taxes and any distributions that it makes would
be taxable and non-deductible by the Fund. This would
increase the cost of investing in the Fund for
shareholders and would make it more economical for
shareholders to invest directly in securities held by
the Fund instead of investing indirectly in such
securities through the Fund.
PERFORMANCE INFORMATION
The Fund's historical performance or return may be
shown in the form of various performance figures. The
Fund's performance figures are based upon historical
results and are not necessarily representative of
future
<PAGE>
performance. Factors affecting the Fund's
performance include general market conditions,
operating expenses and investment management.
Total Return
The average annual total return of the Fund is
computed by finding the average annual compounded rates
of return over the periods that would equate the
initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n = ERV
P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a
hypothetical $1,000 payment made at
the beginning of the stated periods
at the end of the stated periods.
Performance for a specific period is calculated by
first taking an investment (assumed to be $1,000)
("initial investment") in the Fund's shares on the
first day of the period and computing the "ending
value" of that investment at the end of the period.
The total return percentage is then determined by
subtracting the initial investment from the ending
value and dividing the remainder by the initial
investment and expressing the result as a percentage.
The calculation assumes that all income and capital
gains dividends paid by the Fund have been reinvested
at the net asset value of the Fund on the reinvestment
dates during the period. Total return may also be
shown as the increased dollar value of the hypothetical
investment over the period.
Cumulative total return represents the simple
change in value of an investment over a stated period
and may be quoted as a percentage or as a dollar
amount. Total returns may be broken down into their
components of income and capital (including capital
gains and changes in share price) in order to
illustrate the relationship between these factors and
their contributions to total return.
Comparisons
From time to time, in marketing and other Fund
literature, the Fund's performance may be compared to
the performance of other mutual funds in general or to
the performance of particular types of mutual funds
with similar investment goals, as tracked by
independent organizations. Among these organizations,
Lipper Analytical Services, Inc. ("Lipper"), a widely
used independent research firm which ranks mutual funds
by overall performance, investment objectives and
assets, may be cited. Lipper performance figures are
based on changes in net asset value, with all income
and capital gains dividends reinvested. Such
calculations do not include the effect of any sales
charges imposed by other funds. The Fund will be
compared to Lipper's appropriate fund category, that
is, by fund objective and portfolio holdings.
The Fund's performance may also be compared to the
performance of other mutual funds by Morningstar, Inc.
("Morningstar"), which ranks funds on the basis of
historical risk and total return. Morningstar's
rankings range from five stars (highest) to one star
(lowest) and represent Morningstar's assessment of the
historical risk level and total return of a fund as a
weighted average for 3, 5 and 10 year periods.
Rankings are not absolute or necessarily predictive of
future performance.
Evaluations of Fund performance made by
independent sources may also be used in advertisements
concerning the Fund, including reprints of or
selections from, editorials or articles about the Fund.
Sources for Fund performance and articles about the
Fund may include publications such as Money, Forbes,
Kiplinger's, Financial World, Business Week, U.S. News
and World Report, the Wall Street Journal, Barron's and
a variety of investment newsletters.
The Fund may compare its performance to a wide
variety of indices and measures of inflation including
the Standard & Poor's Index of 500 Stocks, the NASDAQ
Over-the-Counter Composite Index and the Russell 2000
Index.
<PAGE>
There are differences and similarities between
the investments that the Fund may purchase for its
portfolio and the investments measured by these
indices.
ADDITIONAL INFORMATION
From time to time, in marketing and other Fund
literature, the Adviser may discuss the benefits of
investing in mutual funds in general and compare mutual
funds to other investment products, such as separate
account management or bank common or collective funds
and particularly with respect to changes in the
retirement plan market. The Fund believes that mutual
funds offer certain advantages over such other
investment products, including daily pricing, daily
liquidity and, with respect to IRA plans, being a
permissive investment. While the Fund believes that
certain of such advantages exist, the Adviser
anticipates that it will continue to offer separate
account management.
INDEPENDENT ACCOUNTANTS
KPMG Peat Marwick LLP, 777 East Wisconsin Avenue,
Milwaukee, Wisconsin 53202, independent accountants for
the Fund, audit and report on the Fund's financial
statements.
FINANCIAL STATEMENTS
The following financial statements of the Fund are
contained herein:
(a) Report of Independent Accountants.
(b) Statement of Assets and Liabilities.
(c) Statement of Operations.
(d) Notes to the Financial Statements.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Kirr, Marbach Partners Value Fund:
We have audited the accompanying statement of
assets and liabilities of Kirr, Marbach Partners
Value Fund (the "Fund"), as of December 2, 1998,
and the related statement of operations for the
period September 23, 1998 (inception) through
December 2, 1998. These financial statements
are the responsibility of the Fund's management.
Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with
generally accepted auditing standards. Those
standards require that we plan and perform the
audit to obtain reasonable assurance about
whether the financial statements are free of
material misstatements. An audit includes
examining, on a test basis, evidence supporting
the amounts and disclosures in the financial
statements. 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 audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements
referred to above present fairly, in all
material respects, the financial position of the
Fund as of December 2, 1998 and the results of
its operations for the period September 23, 1998
(inception) through December 2, 1998, in
conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
Milwaukee, Wisconsin
December 8, 1998
<PAGE>
The Kirr, Marbach Partners Value Fund
Statement of Assets and Liabilities
December 2, 1998
ASSETS:
Cash $100,000
Receivable from Adviser 43,952
Prepaid Blue sky 10,415
Prepaid Insurance 32,050
Total Assets 186,417
LIABILITIES:
Payable to Adviser 86,417
Total Liabilities
NET ASSETS $100,000
Capital shares, $0.01 par value;
500,000,000 shares authorized 10,000
Net Asset value, offering and
redemption price per share
(net assets/shares outstanding) $10.00
See accompanying notes to the financial statements
<PAGE>
The Kirr, Marbach Partners Value Fund
Statement of Operations
For the Period September 23, 1998 (Inception) through
December 2, 1998
EXPENSES:
Organization expenses $43,952
Less: Expenses waived by Adviser (43,952)
Net income/(loss) $0
See accompanying notes to the financial statements
<PAGE>
The Kirr, Marbach Partners Value Fund
Notes to the Financial Statements
For the Period September 23,1998 through December 2,
1998
1. Organization
The Kirr, Marbach Partners Funds, Inc. (the
"Corporation") was organized as a Maryland corporation on
September 23, 1998 and is registered under the Investment
Company Act of 1940, as amended (the "1940 act"), as an
open-end management investment company issuing its shares
in series, each series representing a distinct portfolio
with its own investment objectives and policies. The
series presently authorized is the Kirr, Marbach Partners
Value Fund (the "Fund"). Pursuant to the 1940 Act, the
Fund is a "diversified" series of the Corporation. The
Fund has had no operations other than those related to
organizational matters, including the sale of 10,000
shares for cash in the amount of $100,000 of the Fund to
capitalize the Fund, which was sold to Kirr, Marbach &
Company, LLC (the "Adviser") on December 2, 1998.
2. Significant Accounting Policies
(a) Organization and Prepaid Initial Registration
Expense
Expenses incurred by the Corporation in connection with
the organization are expensed as incurred. These
expenses were advanced by the Adviser, and the Adviser
has agreed to reimburse the Fund for these expenses,
subject to potential recovery (see Note 3). Prepaid
initial state registration and prepaid insurance
expenses are deferred and amortized over the period of
benefit.
(b) Federal Income Taxes
The Fund intends to comply with the requirements of the
Internal Revenue Code necessary to qualify as a
regulated investment company and to make the requisite
distributions of income and capital gains to their
shareholders sufficient to relieve it from all or
substantially all Federal income taxes.
(c) Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that
affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported
amounts of revenues and expenses during the reporting
period. Actual results could differ from those
estimates.
3. Investment Adviser
The Corporation has an Investment Advisory Agreement (the
"Agreement") with the Adviser, with whom certain Officers
and Directors of the Corporation are affiliated, to
furnish investment advisory services to the Fund. Under
the terms of the Agreement, the Corporation, on behalf of
the Fund,
<PAGE>
compensates the Adviser for its management
services at the annual rate of 1.00% of the Fund's
average daily assets.
The Adviser has agreed to waive, through December 31,
1999 its management fee and/or reimburse the Fund's other
expenses, including organization expenses, to the extent
necessary to ensure that the Fund's operating expenses,
do not exceed 1.50% of its average daily net assets. Any
such waiver or reimbursement is subject to later
adjustment to allow the Adviser to recoup amounts waived
or reimbursed to the extent actual fees and expense for a
period are less than the expense limitation cap of 1.50%,
provided, however, that the Adviser shall only be
entitled to recoup such amounts for a period of three
years from the date such amount was waived or reimbursed.
4. Distribution Plan
The Corporation, on behalf of the Fund, has adopted a
distribution plan pursuant to Rule 12b-1 under the 1940
Act (the "12b-1 Plan"), which provides that the Fund will
pay distribution fees to Rafferty Capital Markets, Inc.
(the "Distributor") or others that provide distribution
or service assistance to the Fund at annual rates of up
to 0.25% of the average daily net assets attributable to
its shares. Payments under the distribution plan shall
be used to compensate or reimburse the Fund's distributor
for services provided and expenses incurred in connection
with the sales of shares.
<PAGE>
APPENDIX
SHORT-TERM RATINGS
Standard & Poor's Short-Term Debt Credit Ratings
A Standard & Poor's credit rating is a current
opinion of the creditworthiness of an obligor with
respect to a specific financial obligation, a specific
class of financial obligations or a specific financial
program. It takes into consideration the
creditworthiness of guarantors, insurers or other forms
of credit enhancement on the obligation and takes into
account the currency in which the obligation is
denominated. The credit rating is not a recommendation
to purchase, sell or hold a financial obligation,
inasmuch as it does not comment as to market price or
suitability for a particular investor.
Credit ratings are based on current information
furnished by the obligors or obtained by Standard &
Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in
connection with any credit rating and may, on occasion,
rely on unaudited financial information. Credit
ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such
information, or based on other circumstances.
Short-term ratings are generally assigned to those
obligations considered short-term in the relevant
market. In the U.S., for example, that means
obligations with an original maturity of no more than
365 days_including commercial paper. Short-term
ratings are also used to indicate the creditworthiness
of an obligor with respect to put features on long-term
obligations. The result is a dual rating, in which the
short-term rating addresses the put feature, in
addition to the usual long-term rating.
Ratings are graded into several categories,
ranging from `A-1' for the highest quality obligations
to `D' for the lowest. These categories are as
follows:
A-1 A short-term obligation rated `A-1' is rated
in the highest category by Standard & Poor's.
The obligor's capacity to meet its financial
commitment on the obligation is strong.
Within this category, certain obligations are
designated with a plus sign (+). This
indicates that the obligor's capacity to meet
its financial commitment on these obligations
is extremely strong.
A-2 A short-term obligation rated `A-2' is
somewhat more susceptible to the adverse
effects of changes in circumstances and
economic conditions than obligations in
higher rating categories. However, the
obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
A-3 A short-term obligation rated `A-3' exhibits
adequate protection parameters. However,
adverse economic conditions or changing
circumstances are more likely to lead to a
weakened capacity of the obligor to meet its
financial commitment on the obligation.
B A short-term obligation rated `B' is regarded
as having significant speculative
characteristics. The obligor currently has
the capacity to meet its financial commitment
on the obligation; however, it faces major
ongoing uncertainties which could lead to the
obligor's inadequate capacity to meet its
financial commitment on the obligation.
C A short-term obligation rated `C' is
currently vulnerable to nonpayment and is
dependent upon favorable business, financial
and economic conditions for the obligor to
meet its financial commitment on the
obligation.
D A short-term obligation rated `D' is in
payment default. The `D' rating category is
used when payments on an obligation are not
made on the date due even if the applicable
grace period has not expired, unless Standard
& Poor's believes that such payments will be
made during such grace period. The `D'
rating also will be used upon the filing of a
bankruptcy petition or the taking of a
similar action if payments on an obligation
are jeopardized.
<PAGE>
Moody's Short-Term Debt Ratings
Moody's short-term debt ratings are opinions of
the ability of issuers to repay punctually senior debt
obligations. These obligations have an original
maturity not exceeding one year, unless explicitly
noted. Moody's ratings are opinions, not
recommendations to buy or sell, and their accuracy is
not guaranteed.
Moody's employs the following three designations,
all judged to be investment grade, to indicate the
relative repayment ability of rated issuers:
PRIME-1 Issuers rated `Prime-1' (or supporting
institutions) have a superior ability for
repayment of senior short-term debt
obligations. Prime-1 repaying ability will
often be evidenced by many of the following
characteristics:
Leading market positions in well-established
industries.
High rates of return on funds employed.
Conservative capitalization structure with
moderate reliance on debt and ample asset
protection.
Broad margins in earnings coverage of fixed
financial charges and high internal cash generation.
Well-established access to a range of financial
markets and assured sources of alternate liquidity.
PRIME-2 Issuers rated `Prime-2' (or supporting
institutions) have a strong ability for
repayment of senior short-term debt
obligations. This will normally be evidenced
by many of the characteristics cited above,
but to a lesser degree. Earnings trends and
coverage ratios, while sound, may be more
subject to variation. Capitalization
characteristics, while still appropriate, may
be more affected by external conditions.
Ample alternate liquidity is maintained.
PRIME-3 Issuers rated `Prime-3' (or supporting
institutions) have an acceptable ability for
repayment of senior short-term obligations.
The effect of industry characteristics and
market compositions may be more pronounced.
Variability in earnings and profitability may
result in changes in the level of debt
protection measurements and may require
relatively high financial leverage. Adequate
alternate liquidity is maintained.
NOT PRIME Issuers rated `Not Prime' do not fall within
any of the Prime rating categories.
Fitch IBCA International Short-Term Debt Credit Ratings
Fitch IBCA's international debt credit ratings are
applied to the spectrum of corporate, structured and
public finance. They cover sovereign (including
supranational and subnational), financial, bank,
insurance and other corporate entities and the
securities they issue, as well as municipal and other
public finance entities, securities backed by
receivables or other financial assets and
counterparties. When applied to an entity, these short-
term ratings assess its general creditworthiness on a
senior basis. When applied to specific issues and
programs, these ratings take into account the relative
preferential position of the holder of the security and
reflect the terms, conditions and covenants attaching
to that security.
International credit ratings assess the capacity
to meet foreign currency or local currency commitments.
Both "foreign currency" and "local currency" ratings
are internationally comparable assessments. The local
currency rating measures the probability of payment
within the relevant sovereign state's currency and
jurisdiction and therefore, unlike the foreign currency
rating, does not take account of the possibility of
foreign exchange controls limiting transfer into
foreign currency.
A short-term rating has a time horizon of less
than 12 months for most obligations, or up to three
years for U.S. public finance securities, and thus
places greater emphasis on the liquidity necessary to
meet financial commitments in a timely manner.
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F-1 Highest credit quality. Indicates the
strongest capacity for timely payment of
financial commitments; may have an added "+"
to denote any exceptionally strong credit
feature.
F-2 Good credit quality. A satisfactory capacity
for timely payment of financial commitments,
but the margin of safety is not as great as
in the case of the higher ratings.
F-3 Fair credit quality. The capacity for timely
payment of financial commitments is adequate;
however, near term adverse changes could
result in a reduction to non-investment
grade.
B Speculative. Minimal capacity for timely
payment of financial commitments, plus
vulnerability to near term adverse changes in
financial and economic conditions.
C High default risk. Default is a real
possibility. Capacity for meeting financial
commitments is solely reliant upon a
sustained, favorable business and economic
environment.
D Default. Denotes actual or imminent payment
default.
Duff & Phelps, Inc. Short-Term Debt Ratings
Duff & Phelps Credit Ratings' short-term debt
ratings are consistent with the rating criteria used by
money market participants. The ratings apply to all
obligations with maturities of under one year,
including commercial paper, the uninsured portion of
certificates of deposit, unsecured bank loans, master
notes, bankers acceptances, irrevocable letters of
credit and current maturities of long-term debt. Asset-
backed commercial paper is also rated according to this
scale.
Emphasis is placed on liquidity which is defined
as not only cash from operations, but also access to
alternative sources of funds including trade credit,
bank lines and the capital markets. An important
consideration is the level of an obligor's reliance on
short-term funds on an ongoing basis.
The distinguishing feature of Duff & Phelps Credit
Ratings' short-term debt ratings is the refinement of
the traditional `1' category. The majority of short-
term debt issuers carry the highest rating, yet quality
differences exist within that tier. As a consequence,
Duff & Phelps Credit Rating has incorporated gradations
of `1+' (one plus) and `1-` (one minus) to assist
investors in recognizing those differences.
These ratings are recognized by the SEC for broker-
dealer requirements, specifically capital computation
guidelines. These ratings meet Department of Labor
ERISA guidelines governing pension and profit sharing
investments. State regulators also recognize the
ratings of Duff & Phelps Credit Rating for insurance
company investment portfolios.
Rating Scale: Definition
High Grade
D-1+ Highest certainty of timely payment. Short-
term liquidity, including internal operating
factors and/or access to alternative sources
of funds, is outstanding, and safety is just
below risk-free U.S. Treasury short-term
obligations.
D-1 Very high certainty of timely payment.
Liquidity factors are excellent and supported
by good fundamental protection factors. Risk
factors are minor.
D-1- High certainty of timely payment. Liquidity
factors are strong and supported by good
fundamental protection factors. Risk factors
are very small.
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Good Grade
D-2 Good certainty of timely payment. Liquidity
factors and company fundamentals are sound.
Although ongoing funding needs may enlarge
total financing requirements, access to
capital markets is good. Risk factors are
small.
Satisfactory Grade
D-3 Satisfactory liquidity and other protection
factors qualify issue as to investment grade.
Risk factors are larger and subject to more
variation. Nevertheless, timely payment is
expected.
Non-investment Grade
D-4 Speculative investment characteristics.
Liquidity is not sufficient to insure against
disruption in debt service. Operating
factors and market access may be subject to a
high degree of variation.
Default
D-5 Issuer failed to meet scheduled principal
and/or interest payments.
LONG-TERM RATINGS
Standard & Poor's Long-Term Debt Credit Ratings
A Standard & Poor's credit rating is a current
opinion of the creditworthiness of an obligor with
respect to a specific financial obligation, a specific
class of financial obligations or a specific financial
program. It takes into consideration the
creditworthiness of guarantors, insurers or other forms
of credit enhancement on the obligation and takes into
account the currency in which the obligation is
denominated. The credit rating is not a recommendation
to purchase, sell or hold a financial obligation,
inasmuch as it does not comment as to market price or
suitability for a particular investor.
Credit ratings are based on current information
furnished by the obligors or obtained by Standard &
Poor's from other sources it considers reliable.
Standard & Poor's does not perform an audit in
connection with any credit rating and may, on occasion,
rely on unaudited financial information. Credit
ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such
information, or based on other circumstances.
Credit ratings are based, in varying degrees, on
the following considerations: (1) likelihood of
payment_capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance
with the terms of the obligation; (2) nature of and
provisions of the obligation; and (3) protection
afforded by, and relative position of, the obligation
in the event of bankruptcy, reorganization or other
arrangement under the laws of bankruptcy and other laws
affecting creditors' rights.
The rating definitions are expressed in terms of
default risk. As such, they pertain to senior
obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to
reflect the lower priority in bankruptcy. (Such
differentiation applies when an entity has both senior
and subordinated obligations, secured and unsecured
obligations, or operating company and holding company
obligations.) Accordingly, in the case of junior debt,
the rating may not conform exactly with the category
definition.
AAA An obligation rated `AAA' has the highest
rating assigned by Standard & Poor's. The
obligor's capacity to meet its financial
commitment on the obligation is EXTREMELY
STRONG.
AA An obligation rated `AA' differs from the
highest rated obligations only in small
degree. The obligor's capacity to meet its
financial commitment on the obligation is
VERY STRONG.
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A An obligation rated `A' is somewhat more
susceptible to the adverse effects of changes
in circumstances and economic conditions than
obligations in higher rated categories.
However, the obligor's capacity to meet its
financial commitment on the obligation is
still STRONG.
BBB An obligation rated `BBB' exhibits ADEQUATE
protection parameters. However, adverse
economic conditions or changing circumstances
are more likely to lead to a weakened
capacity of the obligor to meet its financial
commitment on the obligation.
Obligations rated `BB', `B', `CCC, `CC', and `C'
are regarded as having significant speculative
characteristics. `BB' indicates the least degree of
speculation and `C' the highest. While such
obligations will likely have some quality and
protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse
conditions.
BB An obligation rated `BB' is LESS VULNERABLE
to nonpayment than other speculative issues.
However, it faces major ongoing uncertainties
or exposure to adverse business, financial or
economic conditions which could lead to the
obligor's inadequate capacity to meet its
financial commitment on the obligation.
B An obligation rated `B' is MORE VULNERABLE to
nonpayment than obligations rated `BB', but
the obligor currently has the capacity to
meet its financial commitment on the
obligation. Adverse business, financial or
economic conditions will likely impair the
obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC An obligation rated `CCC' is CURRENTLY
VULNERABLE to nonpayment, and is dependent
upon favorable business, financial and
economic conditions for the obligor to meet
its financial commitment on the obligation.
In the event of adverse business, financial
or economic conditions, the obligor is not
likely to have the capacity to meet its
financial commitment on the obligation.
CC An obligation rated `CC' is CURRENTLY HIGHLY
VULNERABLE to nonpayment.
C The `C' rating may be used to cover a
situation where a bankruptcy petition has
been filed or similar action has been taken,
but payments on this obligation are being
continued.
D An obligation rated `D' is in payment
default. The `D' rating category is used
when payments on an obligation are not made
on the date due even if the applicable grace
period has not expired, unless Standard &
Poor's believes that such payments will be
made during such grace period. The `D'
rating also will be used upon the filing of a
bankruptcy petition or the taking of a
similar action if payments on an obligation
are jeopardized.
Plus (+) or minus (_): 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 Long-Term Debt Ratings
Aaa Bonds which 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 edged." 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 which 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 which make the long-term risk appear
somewhat larger than Aaa securities.
<PAGE>
A Bonds which 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 some time in the
future.
Baa Bonds which 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 which are 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 which are rated `B' generally lack
characteristics of the 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 which are rated `Caa' are of poor
standing. Such issues may be in default or
there may be present elements of danger with
respect to principal or interest.
Ca Bonds which are rated `Ca' represent
obligations which are speculative in a high
degree. Such issues are often in default or
have other marked shortcomings.
C Bonds which are rated `C' are the lowest
rated class of bonds, and issues so rated can
be regarded as having extremely poor
prospects of ever attaining any real
investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in
each generic rating classification from `Aa' through
`B.' The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category;
the modifier 2 indicates a mid-range ranking; and the
modifier 3 indicates a ranking in the lower end of that
generic rating category.
Fitch IBCA International Long-Term Debt Credit Ratings
Fitch IBCA's international debt credit ratings are
applied to the spectrum of corporate, structured and
public finance. They cover sovereign (including
supranational and subnational), financial, bank,
insurance and other corporate entities and the
securities they issue, as well as municipal and other
public finance entities, securities backed by
receivables or other financial assets and
counterparties. When applied to an entity, these long-
term ratings assess its general creditworthiness on a
senior basis. When applied to specific issues and
programs, these ratings take into account the relative
preferential position of the holder of the security and
reflect the terms, conditions and covenants attaching
to that security.
International credit ratings assess the capacity
to meet foreign currency or local currency commitments.
Both "foreign currency" and "local currency" ratings
are internationally comparable assessments. The local
currency rating measures the probability of payment
within the relevant sovereign state's currency and
jurisdiction and therefore, unlike the foreign currency
rating, does not take account of the possibility of
foreign exchange controls limiting transfer into
foreign currency.
Investment Grade
AAA Highest credit quality. `AAA' ratings
denote the lowest expectation of credit
risk. They are assigned only in case of
exceptionally strong capacity for timely
payment of financial commitments. This
capacity is highly unlikely to be
adversely affected by foreseeable
events.
<PAGE>
AA Very high credit quality. `AA' ratings
denote a very low expectation of credit
risk. They indicate very strong
capacity for timely payment of financial
commitments. This capacity is not
significantly vulnerable to foreseeable
events.
A High credit quality. `A' ratings denote
a low expectation of credit risk. The
capacity for timely payment of financial
commitments is considered strong. This
capacity may, nevertheless, be more
vulnerable to changes in circumstances
or in economic conditions than is the
case for higher ratings.
BBB Good credit quality. `BBB' ratings
indicate that there is currently a low
expectation of credit risk. The
capacity for timely payment of financial
commitments is considered adequate, but
adverse changes in circumstances and in
economic conditions are more likely to
impair this capacity. This is the
lowest investment grade category.
Speculative Grade
BB Speculative. `BB' ratings indicate that
there is a possibility of credit risk
developing, particularly as the result
of adverse economic change over time;
however, business or financial
alternatives may be available to allow
financial commitments to be met.
B Highly speculative. `B' ratings
indicate that significant credit risk is
present, but a limited margin of safety
remains. Financial commitments are
currently being met; however, capacity
for continued payment is contingent upon
a sustained, favorable business and
economic environment.
CCC, CC, C High default risk. Default is a
real possibility. Capacity for meeting
financial commitments is solely reliant
upon sustained, favorable business or
economic developments. A `CC' rating
indicates that default of some kind
appears probable. `C' ratings signal
imminent default.
DDD, DD and D Default. Securities are not
meeting current obligations and are
extremely speculative. `DDD' designates
the highest potential for recovery of
amounts outstanding on any securities
involved. For U.S. corporates, for
example, `DD' indicates expected
recovery of 50% - 90% of such
outstandings, and `D' the lowest
recovery potential, i.e. below 50%.
Duff & Phelps, Inc. Long-Term Debt Ratings
These ratings represent a summary opinion of the
issuer's long-term fundamental quality. Rating
determination is based on qualitative and quantitative
factors which may vary according to the basic economic
and financial characteristics of each industry and each
issuer. Important considerations are vulnerability to
economic cycles as well as risks related to such
factors as competition, government action, regulation,
technological obsolescence, demand shifts, cost
structure and management depth and expertise. The
projected viability of the obligor at the trough of the
cycle is a critical determination.
Each rating also takes into account the legal form
of the security (e.g., first mortgage bonds,
subordinated debt, preferred stock, etc.). The extent
of rating dispersion among the various classes of
securities is determined by several factors including
relative weightings of the different security classes
in the capital structure, the overall credit strength
of the issuer and the nature of covenant protection.
The Credit Rating Committee formally reviews all
ratings once per quarter (more frequently, if
necessary). Ratings of `BBB-` and higher fall within
the definition of investment grade securities, as
defined by bank and insurance supervisory authorities.
Structured finance issues, including real estate, asset-
backed and mortgage-backed financings, use this same
rating scale. Duff & Phelps Credit Rating claims
paying ability ratings of insurance companies use the
same scale with minor modification in the definitions.
Thus, an investor can compare the credit quality of
investment alternatives across industries and
structural types. A "Cash Flow Rating" (as noted for
specific ratings) addresses the
<PAGE>
likelihood that
aggregate principal and interest will equal or exceed
the rated amount under appropriate stress conditions.
Rating Scale Definition
AAA Highest credit quality. The risk factors are
negligible, being only slightly more
than for risk-free U.S. Treasury debt.
AA+ High credit quality. Protection factors are
strong. Risk is modest but may
AA vary slightly from time to time because of
economic conditions.
AA-
A+ Protection factors are average but adequate.
However, risk factors are more
A variable and greater in periods of economic
stress.
A-
BBB+ Below-average protection factors but still
considered sufficient for prudent
BBB investment. Considerable variability in risk
during economic cycles.
BBB-
BB+ Below investment grade but deemed likely to
meet obligations when due.
BB Present or prospective financial protection
factors fluctuate according to
BB- industry conditions or company fortunes.
Overall quality may move up or
down frequently within this category.
B+ Below investment grade and possessing risk
that obligations will not be met
B when due. Financial protection factors will
fluctuate widely according to
B- economic cycles, industry conditions and/or
company fortunes. Potential
exists for frequent changes in the rating
within this category or into a higher
or lower rating grade.
CCC Well below investment grade securities.
Considerable uncertainty exists as to
timely payment of principal, interest or
preferred dividends.
Protection factors are narrow and risk can be
substantial with unfavorable
economic/industry conditions, and/or with
unfavorable company developments.
DD Defaulted debt obligations. Issuer failed to
meet scheduled principal and/or
interest payments.
DP Preferred stock with dividend arrearages.
<PAGE>