ANNUAL REPORT
SEPTEMBER 30, 2000
K I R R , M A R B A C H P A R T N E R S
V A L U E F U N D
--------------------------------------------------------------------------------
"HOUSTON, WE'VE HAD A PROBLEM HERE."-- JACK SWIGERT, APOLLO 13 CREW MEMBER,
APRIL 13, 1970
--------------------------------------------------------------------------------
OCTOBER 4, 2000
Dear Fellow Shareholder:
After a strong end of summer rally, U.S. stocks stumbled badly in September as a
steady stream of companies began announcing to the market, "we've had an
earnings problem here." Central banks worldwide raised interest rates on 130
occasions during the past 15 months. The Federal Reserve increased short-term
rates by 175 basis points (1.75%) and the European Central Bank by 200 basis
points (2.00%). Tightening of credit slows economic activity with a time lag and
the cumulative effect is starting to bite. Crude oil hit a 10-year high and
other energy prices are skyrocketing. While some market watchers argue energy
costs are not as large a proportion of expenditures in the U.S. as they once
were, they are very visible and impact consumer behavior, at the margin. The
euro hit an all-time low versus the U.S. Dollar, down 27% since its introduction
in January of 1999. The U.S. government recently intervened in the crude oil
market by stating its intention to release 30 million barrels from the Strategic
Petroleum Reserve and in the currency market by selling dollars and buying
euros. Both interventions curiously occurred on the very same day, which,
coincidentally, was six weeks ahead of a presidential election. Whether or not
these twin interventions have any lasting impact on the oil or currency markets
is anyone's guess. However, it is clear this "cocktail" of higher rates, higher
energy and a weaker euro has proved deleterious to the profitability of a
significant part of corporate America.
As we have stated more times than we can remember, certain sectors of the
market, particularly technology, have been priced for absolute perfection. Many
market experts predicted the Fed would engineer an economic "soft landing" and
technology earnings would climb 20-30% or more ad infinitum (notwithstanding the
historical HIGHLY CYCLICAL nature of tech earnings). Fundamentals and earnings
have once again become relevant in 2000 and the market has severely punished the
stocks of companies who have disappointed. This phenomena has hurt the tech
sector particularly hard, as investors in a sector priced for perfection cut an
Apple Computer by MORE THAN HALF, for what the company characterized as a one
time "bump in the road."
THIS IS UNEQUIVOCALLY GREAT NEWS FOR US IN THAT THIS DOSE OF HARSH REALITY HAS
FORCED MARKET PARTICIPANTS TO REASSESS AND REFOCUS ON FUNDAMENTALS. WE VIEW OUR
PART OF THE MARKET AS STILL EXTREMELY ATTRACTIVELY VALUED AND INVESTORS HAVE
FINALLY STARTED TO TAKE NOTICE. Bob Farrell of Merrill Lynch is one of the last
of a dying breed, the still-employed cautious market strategist. Farrell summed
up our thoughts very succinctly in a recent research publication:
"Although (stock) price is basically a function of earning power, psychology
determines how much the earning power is worth at a given moment. When
psychology is enthusiastic and tainted with greed, investors pay almost any
price for a given level of earnings. Or they may forego earnings altogether, as
they did with the Internet stocks, if they think they have a conceptual new era.
Similar, but opposite extremes in psychology, on the other hand, can result in
investors ignoring earnings no matter how much they improve if a sector of the
market is viewed as having unexciting prospects. Either way, psychology often
can be more influential on price than all the economic statistics. The world of
imagination knows no bounds until reality intervenes. Something happened in the
first quarter as the new millennium dawned. A sea change developed as the boom
in new economy stocks bubbled to a halt and the long-neglected old economy
majority began to find support. There is no less a positive reality for the
information technology revolution or diminished importance of the Internet, but
what investors are willing to pay for those prospects has changed. Over the long
term, returns from growth and value investing have been about the same, but over
shorter time spans, sometimes as long as five years, one or the other can show
substantially differentiated returns. Although this usually causes investors to
begin to doubt the usefulness of the approach that is lagging, history tells us
to expect a return to the mean and a shift back to the lagging method. It is no
surprise, therefore, that the market performance pendulum has started to swing
back toward value. BASED UPON THE EXTREME OF GROWTH OUTPERFORMANCE IN RECENT
YEARS, IT SHOULD NOT BE SURPRISING TO SEE VALUE OUTPERFORM FOR AN EXTENDED
PERIOD."
<TABLE>
<CAPTION>
PERIODS ENDING FUND S&P 500 VALUE LINE S&P 400 MIDCAP
SEPTEMBER 30, 2000 TOTAL RETURN INDEX INDEX INDEX
------------------------- -------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
3 months +9.5% -1.0% +3.4% +12.2%
6 months +11.3% -3.6% -1.2% +8.5%
9 months +15.4% -1.4% -1.4% +22.2%
12 months +16.8% +13.3% +2.2% +43.2%
--------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Past performance does not reflect how the Fund may perform in the future.
(2) The S&P 500 Index is an unmanaged, capitalization-weighted index generally
representative of the U.S. market for large capitalization stocks.
(3) The Value Line Index is an unmanaged, equally-weighted index which includes
1,700 U.S. stocks.
(4) The S&P 400 Midcap Index is an unmanaged, capitalization-weighted index
generally representative of the U.S. market for medium capitalization
stocks.
THE STOCK MARKET
The third calendar quarter of 2000 was the worst quarter in terms of negative
surprise earnings pre-announcements since the second quarter of 1998, more than
two years ago. According to First Call, 65% of companies pre-announcing earnings
for the third quarter indicated their earnings would be less than forecast, 24%
indicated their earnings would be in line with forecast and only 12% said their
earnings would be better than forecast. The overall tone of third quarter
earnings pre-announcements was obviously quite negative, with a number of large,
(formerly) highly regarded industry leaders revealing their current and/or
future business prospects were somewhat less than perfect. In a market priced
for perfection, the fallout from earnings disappointment was swift and severe.
The table below illustrates ten of the third calendar quarter's more noteworthy
earnings disasters, which resulted in a cumulative destruction ALMOST A HALF
TRILLION DOLLARS of market value/wealth (roughly the equivalent of the COMBINED
market capitalization of AT&T, Boeing, Ford, General Motors and Merrill Lynch):
<TABLE>
<CAPTION>
DATE OF EARNINGS STOCK PRICE STOCK PRICE
DISAPPOINTMENT PRIOR TO 9/29/00 % CHANGE LOSS OF
COMPANY DISAPPOINTMENT MARKET VALUE
<S> <C> <C> <C> <C> <C>
Intel Corporation 9/21/00 $61.4800 $41.5625 -32.4% -$133.7 Billion
Lucent Technologies 7/20/00 $64.5000 $30.5000 -52.7% -$113.5 Billion
Microsoft Corporation 7/18/00 $78.5000 $60.2500 -23.2% -$92.4 Billion
Nokia Oyj 7/27/00 $54.9375 $39.8125 -27.5% -$70.9 Billion
Dell Computer 8/10/00 $41.7500 $30.8125 -26.2% -$28.6 Billion
The Gap, Inc. 8/10/00 $31.2500 $20.1250 -35.6% -$9.5 Billion
Apple Computer, Inc. 9/28/00 $53.5000 $25.7500 -51.9% -$9.0 Billion
Eastman Kodak 9/26/00 $59.0000 $40.8750 -44.3% -$5.6 Billion
Albertson's, Inc. 8/22/00 $31.3750 $21.0000 -33.1% -$4.4 Billion
Lexmark Int'l 7/21/00 $64.0000 $37.5000 -41.4% -$3.4 Billion
TOTAL -$471.0 BILLION
</TABLE>
We've utilized a lot of space in past letters to shareholders explaining the
risks to the technology bull argument, so we'll briefly review what we've said
and what has happened subsequently. Our observation was technology investors
were paying ever-increasing multiples of ever-increasing earnings estimates, a
dangerous and highly combustible mix. Technology companies have historically
exhibited a very CYCLICAL pattern to their earnings, contrary to the
straight-line (or increasing rate) growth assumptions utilized by the bulls. An
academic study by Josef Lakonishok and Louis D. Chan, finance professors at
the University of Illinois at Urbana-Champaign, concluded a technology company
sustaining consistent, above-average earnings growth for each of the next five
years is "so rare as to approach statistical insignificance." Our conclusion was
(and is), if history was (is) not totally irrelevant, the rate of technology
companies failing to meet earnings growth expectations is being SIGNIFICANTLY
UNDERESTIMATED by investors.
What has happened since the spring of 2000 to bring about the sea change in
investor perception and psychology towards the technology sector? First,
investors discovered stocks can't live on hype alone (witness the continuing
Internet Tech Wreck of 2000); fundamentals are what ultimately set the price in
the market. Second, investors' lofty expectations have proven to be increasingly
at risk of disappointment (witness the list above). In some ways, the technology
sector has become a victim of its own success. Tech succeeded in garnering a
rapidly increasing share of capital spending over the past five years, nearly
doubling its share of nominal GDP in ten years. Tech has clearly been the engine
powering the acceleration of the U.S. economy over the past several years and
the stocks have benefited mightily. It stands to reason the sector that led and
was the biggest beneficiary of the economic upturn will play an equally
important role in the inevitable economic slowdown. In a recent report, J.P.
Morgan stated a wide gap has developed between the level of cash flow being
generated by the U.S. corporate sector ($827 billion at an annual rate in
Q2/2000) and the level of capital expenditures ($964 billion). Private and
public capital markets that were once happy to finance this cash flow deficit
are not nearly as accommodative now. This cash flow deficit cannot continue
indefinitely and if capital expenditure projects are deferred or cut, the
technology sector will quickly feel the pain. The seas are becoming rougher for
the technology sector and, if we experience a "hard" economic landing rather
than the "soft" landing which is currently priced into the market, an increasing
number of technology "boats" are going to end up on the rocks.
We've worked hard to find companies with FINANCIAL STRENGTH, STRONG MANAGEMENT
and GOOD PROFITABILITY, whose stock represents COMPELLING VALUE. In short, we
look at a stock as if we're buying the business and try to identify good, solid
businesses selling at attractive prices. As the market focus has shifted
from hype and hope to fundamental analysis, we've seen increased interest in our
type of names. We're pleased for our fellow shareholders that our value
investment style seems to be back IN style with the market. We see no
fundamental reason why this should not continue, regardless of the difficulties
experienced in the still overpriced segments of the market.
THE ECONOMY
We realize predicting economic outcomes, especially in writing, is a losing
proposition, so we're not about to start. That said, the risk of a "hard"
economic landing or recession has certainly ticked up over the last several
weeks. The conventional market wisdom has been the Fed will engineer a "soft"
economic landing, with growth gliding down gently to a full-employment,
non-inflationary, continued high corporate profitability nirvana. However, as
stated in our opening paragraph, three "flies" have appeared in the proverbial
ointment; the lagged impact of higher interest rates, the collapse of the euro
and the significant increase in energy prices.
Central banks worldwide have raised short-term interest rates relentlessly over
the past fifteen months. Interest rates impact economic activity with a lagged
effect, which means you can make an educated guess that a given increase will
slow economic growth, but you can't be sure when. Similarly, no straight-line
relationship exists between a given change in rates and the magnitude of the
change in economic growth. Taken together, interest rate policy is tricky and
imprecise, at best. It seems the 130 worldwide rate increases have clearly
started to "bite" into economic growth, but it's less clear how deep the bite
will be.
The euro went from a high of $1.18 at its introduction in January of 1999 to
$0.85 at its pre-intervention low (before closing the third calendar quarter of
2000 at $0.88). This mid-20 percent collapse has wreaked havoc on both sides of
the Atlantic. American corporations doing business in "Euroland" have seen
their earnings decimated in the currency translation from euros to dollars. The
11 West European nations have seen import prices soar, particularly oil, which
is priced in dollars and much more heavily taxed than in the U.S. Economists
cite Euroland's slower economic growth (vs. the U.S.) and their insatiable
appetite for U.S. assets, both in the form of portfolio purchases of equity and
direct corporate acquisitions, as key factors in the euro's decline versus the
dollar. J.P. Morgan stated non-U.S. investors bought $176 billion (annualized)
of U.S. equities in the first half of 2000, while U.S. investors bought $99
billion of non-U.S. equities, a net inflow into U.S. equities of $77 billion.
The $176 billion purchased by foreigners in 2000 represents an 80% increase over
1999 and dwarfed the $10-$15 billion of foreign portfolio purchases as recently
as 1995-1996. Foreign direct investment (acquisitions) was at a $257 billion
annualized rate in the first half of 2000, not dramatically ahead of 1999, but
multiples larger than the $60-$85 billion common in the middle of the 1990s.
What's been bad for the euro has been great for the dollar and U.S. economy,
which has been spared the ills that usually accompany a huge trade deficit--a
weaker currency, higher inflation and higher interest rates. Now that the bloom
may be off the rose for the U.S. equity market, given its poor performance thus
far in 2000, it will be interesting to see if this foreign capital inflow
weakens or reverses.
U.S. benchmark West Texas Intermediate crude oil hit a 10-year high of
$37.44/barrel in late September, before falling to $30.84 in the wake of the
government's announcement of its intention to release 30 million barrels from
the Strategic Petroleum Reserve. Whether the "true" market price settles at $30
or $40 or somewhere in between, it will be dramatically higher than the
$11.37/barrel oil fetched at the beginning of 1999. In addition, U.S. refiners
are running at effective capacity, so additional supply of crude oil will not
help matters materially over the near term. While this has generally caused
little more than an increasing volume of grousing here in the U.S. (unless
you're an independent truck driver or running for president), this has become a
near crisis in parts of Asia and a huge issue in Europe, as a weak currency
combined with a soaring commodity and high taxes to produce $5/gallon gasoline.
Closer to home, the real interesting story for this winter promises to be the
price of natural gas, which more than half of U.S. households use to heat their
homes (by contrast, 29% use electricity to heat and 9% fuel oil). Natural
gas sold for $5.09/mmbtu at the end of the third quarter, an increase of 117%
over the price twelve months ago. Note there is no Strategic Gas Reserve, nor is
it practical to import gas from outside North America. There is an outside
possibility industrial gas users could see supplies interrupted, if we have a
colder than normal winter. For practical purposes, the net effect on consumers
is similar to a tax increase, which will have a negative impact on demand for
consumer goods and services.
To use an analogy, the Fed attempting to glide an economy as large as that of
the U.S. to a "soft landing" is as difficult proposition as a Navy pilot trying
to land a jet on the pitching deck of an aircraft carrier on a moonless night
with twenty foot seas. As Stephen Roach of Morgan Stanley Dean Witter put it,
"subpar economic growth is a precarious place to be." The Fed has applied the
flaps to slow the economy's air speed, but the slower moving aircraft is more
vulnerable to a shock-induced "hard landing" as it approaches its "stall" speed.
As he pointed out, contrary to popular belief, shocks are the norm, not the
exception. There is no question the huge growth in U.S. worker productivity
(compliments of the boom in technology capital spending) has been a tremendous
boon to the economy. However, there is a downside to the productivity miracle
few have focused on. In general, there is a fair amount of excess capacity
worldwide, which has translated into very limited pricing power throughout this
expansion (witness the subdued growth in the CPI). In the inevitable slowdown
in growth, price weakness will likely accelerate, forcing companies to slash
costs/capacity in an attempt to maintain profit margins. If you are management
and want to cut costs, you can stop buying computers or buy fewer computers
going forward, but you can't "fire" the computer you bought yesterday. You can
cut payroll, however, and the risk is with the consumer up to his ears in
installment and stock margin debt (currently running at a historical high of
24.5% of disposable income--up from 18.4% during 1965-1995), job losses or fear
of job losses couldcause consumer spending to contract significantly,
exacerbating the slowdown.
SUMMARY
The next few months promise to be both interesting and most challenging for
investors. The presidential race is shaping up as the closest since 1960, with
the market anxious to see if the voters give the eventual winner a broad
mandate. Our take is Wall Street, political ideology aside, is not particularly
enamored with the prospect of either the increased spending proposed by Mr. Gore
or the tax cuts proposed by Mr. Bush, both of which would serve to attack the
current budget SURPLUS. The Street would like to see the status quo of
legislative gridlock maintained, insuring neither proposal sees the legislative
light of day, regardless of who is inaugurated next January.
We want to emphasize to our fellow shareholders that though we expect our value
investment style to outpace growth, hopefully for an extended period, THE DAYS
OF 20% COMPOUND ANNUAL RETURNS WILL NOT RETURN ANYTIME SOON. We've explained how
high P/E technology stocks have come to dominate the major stock indexes. As
those stocks falter, the indices they dominate will struggle. In this
environment, a manager able to compound returns at 8-10% will be doing an
outstanding job. Whether its flooding the system with liquidity or intervening
in the commodity and currency markets, we expect the government to bring all
the firepower at its disposal to bear in an attempt to insure a strong market
going into the election. To reiterate the point from the opening section, the
world of imagination knows no bounds until reality intervenes. We believe
that moment is soon to arrive, if it hasn't already. We look forward to the
challenge and relish our opportunity to shine for our fellow shareholders in
this new reality.
Regards,
/s/Mark D. Foster /s/Mickey Kim
------------------- -----------------
Mark D. Foster, CFA Mickey Kim, CFA
President Vice President, Treasurer and Secretary
[GRAPH]
1/1/99 3/31/99 6/30/99 9/30/99 12/31/99
Kirr Marbach Partners
Value Fund $10,000 $10,040 $11,570 $9,910 $10,024
S&P 500 $10,000 $10,498 $11,238 $10,537 $12,105
Value Line Index $10,000 $9,401 $10,740 $9,669 $10,021
S&P 400 Midcap Index $10,000 $9,362 $10,688 $9,790 $11,473
3/31/00 6/30/00 9/30/00
$10,396 $10,566 $11,571
$12,382 $12,053 $11,936
$10,008 $9,563 $9,885
$12,929 $12,502 $14,021
THIS CHART ASSUMES AN INITIAL INVESTMENT OF $10,000. PERFORMANCE REFLECTS FEE
WAIVERS IN EFFECT. IN THE ABSENCE OF FEE WAIVERS, TOTAL RETURN WOULD BE REDUCED.
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. INVESTMENT RETURN AND
PRINCIPAL VALUE WILL FLUCTUATE, SO THAT YOUR SHARES, WHEN REDEEMED MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST.
AS OF THE FISCAL YEAR ENDED SEPTEMBER 30, 2000 THE FUND HAS CHOSEN TO USE THE
S&P 500 INDEX, THE S&P 400 MIDCAP INDEX, AND THE VALUE LINE INDEX AS ITS
COMPARISON BENCHMARKS.
AVERAGE ANNUAL RATE OF RETURN (%)
--------------------------------------------
ONE YEAR ENDED SINCE INCEPTION* TO
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
--------------------------------------------
Kirr Marbach Partners Value Fund 16.77% 8.67%
S&P 500 ** 13.28% 10.66%
Value Line Index *** 2.23% -0.66%
S&P 400 Midcap Index **** 43.22% 21.33%
* DECEMBER 31, 1998.
** THE STANDARD & POOR'S 500 INDEX (S&P 500) IS AN UNMANAGED,
CAPITALIZATION-WEIGHTED INDEX GENERALLY REPRESENTATIVE OF THE U.S.
MARKET FOR LARGE CAPITALIZATION STOCKS.
*** THE VALUE LINE INDEX IS AN UNMANAGED, EQUALLY-WEIGHTED INDEX WHICH
INCLUDES 1,700 U.S. STOCKS.
**** THE S&P 400 MIDCAP INDEX IS AN UNMANAGED, CAPITALIZATION-WEIGHTED
INDEX GENERALLY REPRESENTATIVE OF THE U.S. MARKET FOR MEDIUM
CAPITALIZATION STOCKS.
K I R R , M A R B A C H P A R T N E R S
--------------------------------------------------------------------------------
V A L U E F U N D
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2000
ASSETS:
Investments, at current value
(cost $15,369,689) $20,026,791
Receivable for investments sold 359,219
Receivable for Fund shares sold 6,273
Dividends receivable 25,315
Interest receivable 7,215
Other assets 2,765
---------------
Total Assets 20,427,578
---------------
LIABILITIES:
Payable for securities purchased 182,130
Payable to Adviser 10,601
Accrued expenses 51,936
---------------
Total Liabilities 244,667
---------------
NET ASSETS $20,182,911
===============
NET ASSETS CONSIST OF:
Capital stock $18,290,482
Undistributed net investment
loss (17,206)
Undistributed net realized loss
on investments (2,747,467)
Net unrealized appreciation
on investments 4,657,102
---------------
Total Net Assets $20,182,911
===============
Shares outstanding (500,000,000
shares of $0.01 par value
authorized) 1,753,351
Net asset value, redemption price
and offering price per share $ 11.51
===============
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2000
INVESTMENT INCOME:
Dividend income
(net of withholding of $852) $ 216,944
Interest income 67,469
----------------
Total Investment Income 284,413
----------------
EXPENSES:
Investment Adviser fee 182,286
Shareholder servicing and
accounting costs 58,702
Administration fee 34,903
Professional fees 31,515
Federal and state registration 11,348
Custody fee 7,975
Distribution fees 15,544
Reports to shareholders 2,631
Directors fees 6,195
Other 6,769
----------------
Total expenses before
reimbursement 357,868
Less: Reimbursement from
Investment Adviser (84,439)
----------------
Net Expenses 273,429
----------------
NET INVESTMENT INCOME 10,984
----------------
REALIZED AND UNREALIZED
GAIN/(LOSS) ON INVESTMENTS: (2,115,417)
Net realized loss on investments
Change in unrealized appreciation/
(depreciation) on investments 4,966,231
----------------
Net realized and unrealized gain 2,850,814
on investments ----------------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS $ 2,861,798
================
See notes to the financial statements.
K I R R , M A R B A C H P A R T N E R S
--------------------------------------------------------------------------------
V A L U E F U N D
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS
DECEMBER 31, 1998(1)
YEAR ENDED THROUGH
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
--------------------- ------------------------
<S> <C> <C>
OPERATIONS:
Net investment income $ 10,984 $ 29,205
Net realized loss on investments ( 2,115,417) (632,050)
Change in unrealized appreciation/(depreciation)
on investments 4,966,231 (309,129)
Net increase/(decrease) in net assets resulting ----------------- ---------------
from operations 2,861,798 (911,974)
----------------- ---------------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 3,106,089 19,310,833
Shares issued to holders in reinvestment
of dividends 95,116 -
Cost of shares redeemed (3,954,598) (225,888)
Net increase/(decrease) in net assets from ---------------- ----------------
capital share transactions (753,393) 19,084,945
---------------- ----------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income (81,953)
-
Tax return of capital (16,512) -
--------------- -----------------
(98,465) -
--------------- -----------------
TOTAL INCREASE IN NET ASSETS 2,009,940 18,172,971
--------------- -----------------
NET ASSETS:
Beginning of period 18,172,971 -
---------------- -----------------
End of period (including undistributed
net investment income/(loss) of ($17,206)
and $53,763, respectively) $20,182,911 $ 18,172,971
================= ===============
CHANGES IN SHARES OUTSTANDING:
Shares sold 302,902 1,854,244
Shares issued to holders in reinvestment
of dividends 9,637 -
Shares redeemed (392,721) (20,711)
---------------- -----------------
Net increase/(decrease) (80,182) 1,833,533
================ =================
(1) Commencement of operations.
</TABLE>
See notes to the financial statements.
K I R R , M A R B A C H P A R T N E R S
-------------------------------------------------------------------------------
V A L U E F U N D
FINANCIAL HIGHLIGHTS
For a Fund share outstanding throughout the period
<TABLE>
<CAPTION>
DECEMBER 31, 1998(1)
YEAR ENDED THROUGH
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
---------------------- --------------------------
<S> <C> <C>
PER SHARE DATA:
Net asset value, beginning of period $9.91 $10.00
---------------- ----------------
Income from investment operations:
Net investment income 0.00 0.04
Net realized and unrealized gain/(loss)
on investments 1.65 (0.13)
---------------- ----------------
Total from investment operations
1.65 (0.09)
---------------- ----------------
Less distributions:
Dividends from net investment income (0.04)
-
Tax return of capital (0.01)
-
---------------- ----------------
(0.05) -
---------------- ----------------
Net asset value, end of period $11.51 $9.91
================ ================
TOTAL RETURN 16.77% (0.90)% (2)
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period $20,182,911 $18,172,971
Ratio of expenses to average net assets:
Before expense reimbursement 1.97% 3.01% (3)
After expense reimbursement 1.50% 1.50% (3)
Ratio of net investment income/(loss) to average
net assets
Before expense reimbursement (0.41)% (0.76)% (3)
After expense reimbursement 0.06% 0.75% (3)
Portfolio turnover rate 96.48% 77.79%
(1) Commencement of operations.
(2) Not annualized.
(3) Annualized.
</TABLE>
See notes to the financial statements.
--------------------------------------------------------------------------------
K I R R , M A R B A C H P A R T N E R S
--------------------------------------------------------------------------------
V A L U E F U N D
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2000
NUMBER NUMBER
OF SHARES VALUE OF SHARES VALUE
-------------- -------------- -----------
<S> <C> <C> <C>
COMMON STOCKS - 92.3% FOOD & BEVERAGE - 5.6%
BUSINESS SERVICES - 1.2% 21,600 CBRL Group, Inc. $ 310,500
21,500 Cendant Corporation* $ 233,812 12,200 Darden Restaurants, Inc. 253,912
------------ 19,600 The Kroger Co.* 442,225
9,800 Wild Oats Markets, Inc.* 115,150
------------
1,121,787
------------
BUSINESS SUPPLIES - 0.6%
21,000 Daisytek International
Corporation* 132,562
------------
COMMUNICATIONS & MEDIA - 6.6% INSURANCE - 7.2%
11,400 The Allstate Corporation 396,150
7,743 Adelphia Communications 7,300 Annuity and Life Re
Corporation - Class A* 213,416 (Holdings), Ltd. 176,113
58,000 Citizens Communications 7,150 MBIA, Inc. 508,544
Company* 779,375 13,200 Torchmark Corporation 367,125
---------------
14,000 Emmis Communications 1,447,932
Corporation - Class A* 346,500 ---------------
--------------
1,339,291 MANUFACTURING / PRODUCTION - 11.1%
--------------
9,700 The B.F. Goodrich Company 380,119
23,100 EMCOR Group, Inc.* 600,600
CONSUMER PRODUCTS - 2.3%
26,100 Tupperware Corporation 469,800 23,900 Engelhard Corporation 388,375
-------------- 17,600 Precision Castparts Corp. 675,400
ENERGY / NATURAL RESOURCES - 11.0% 9,200 The Sherwin-Williams
4,700 Anadarko Petroleum Company 196,650
Corporation 312,362 ---------------
2,241,144
---------------
9,350 Devon Energy Corporation 562,402
6,600 El Paso Energy Corporation 406,725 MEDICAL - 4.5%
13,200 Kinder Morgan, Inc 540,375 11,600 St. Jude Medical, Inc.* 591,600
13,900 USX - Marathon Group 394,413 8,500 Tenet Healthcare Corporation* 309,188
------------- ---------------
2,216,277 900,788
-------------- ---------------
FINANCIAL SERVICES - 14.1% PHARMACEUTICALS - 3.7%
30,700 Allied Capital Corporation 637,025 6,900 Elan Corporation plc ADR* 377,775
26,200 Commercial Federal 11,000 ICN Pharmaceuticals, Inc. 365,750
Corporation 501,075 ---------------
743,525
---------------
10,400 The New Dun & Bradstreet
Corporation* 176,800 PUBLISHING - 2.3%
8,900 Equifax, Inc. 239,744 13,000 The Reader's Digest
12,300 H&R Block, Inc. 455,869 Association, Inc. - Class A 459,063
---------------
24,900 KeyCorp 630,281
22,100 Sovereign Bancorp, Inc. 204,425 RETAIL - 1.9%
--------------
2,845,219 32,700 J. C. Penney Company, Inc. 386,269
-------------- ---------------
</TABLE>
See notes to the financial statements.
--------------------------------------------------------------------------------
K I R R , M A R B A C H P A R T N E R S
--------------------------------------------------------------------------------
V A L U E F U N D
<TABLE>
<CAPTION>
SCHEDULE OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 2000
NUMBER PRINCIPAL
OF SHARES VALUE AMOUNT VALUE
-------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
TECHNOLOGY - 5.9% SHORT-TERM INVESTMENTS - 6.9%
5,900 Electronics for Imaging, Inc.* $ 148,975 VARIABLE RATE DEMAND NOTES**
14,850 NYFIX, Inc.* 664,538
17,600 Sensormatic Electronics $549,308 American Family, 6.24% $ 549,308
Corporation* 264,000 403,245 Wisconsin Electric, 6.24% 403,245
10,700 Walt Disney Internet Group* 113,687 393,654 Sara Lee Corp., 5.73% 393,654
--------------
1,191,200 50,084 Wisconsin Corporate Central
-------------- Credit Union, 6.29% 50,084
-----------
TELECOMMUNICATIONS - 0.6%
3,400 IDT Corporation* 132,175 Total short-term investments
-------------- (cost $1,396,291) 1,396,291
----------------
TOYS - 1.2%
21,500 Mattel, Inc. 240,531 Total investments - 99.2%
-------------- (cost $15,369,689) 20,026,791
TRAVEL & RECREATION - 2.3%
40,000 Hilton Hotels Corporation 462,500 Other assets in excess of
-------------- liabilities - 0.8%
156,120
---------------
UTILITIES & RELATED - 10.2%
19,800 Calpine Corporation* 2,066,625
--------------
TOTAL NET ASSETS -100.0% $20,182,911
===============
Total common stocks
(cost $13,973,398) 18,630,500
--------------
* -- Non-income producing security.
** -- Variable rate security. The rates
listed are as of September 30, 2000.
ADR -- American Depository Receipt.
</TABLE>
See notes to the financial statements.
--------------------------------------------------------------------------------
K I R R , M A R B A C H P A R T N E R S
--------------------------------------------------------------------------------
V A L U E F U N D
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. ORGANIZATION AND The Kirr Marbach Partners Fund, Inc. (the
SIGNIFICANT ACCOUNTING "Corporation") was organized as a Maryland
POLICIES corporation on September 23, 1998 and is
registered under the Investment Company Act of
1940, as amended (the "1940 Act"), as an open-end
diversified management investment company issuing
its shares in series, each series representing a
distinct portfolio with its own investment
objective and policies. The one series presently
authorized is the Kirr, Marbach Partners Value
Fund (the "Fund"). The investment objective of
the Fund is to seek long-term capital growth. The
Fund commenced operations on December 31, 1998.
The following is a summary of significant
accounting policies consistently followed by the
Fund.
a) Investment Valuation - Common stocks and other
equity-type securities that are listed on a
securities exchange are valued at the last quoted
sales price at the close of regular trading on
the day the valuation is made. Price information,
on listed stocks, is taken from the exchange
where the security is primarily traded.
Securities which are listed on an exchange but
which are not traded on the valuation date are
valued at the mean of the most recent bid and
asked prices. Unlisted securities for which
market quotations are readily available are
valued at the latest quoted bid price. Debt
securities are valued at the latest bid prices
furnished by independent pricing services. Other
assets and securities for which no quotations are
readily available are valued at fair value as
determined in good faith under the supervision of
the Board of Directors of the Corporation.
Short-term instruments (those with remaining
maturities of 60 days or less) are valued at
amortized cost, which approximates market.
b) Federal Income Taxes - A provision, for
federal income taxes or excise taxes, has not
been made since the Fund has elected to be taxed
as a "regulated investment company" and intends
to distribute substantially all taxable income to
its shareholders and otherwise comply with the
provisions of the Internal Revenue Code
applicable to regulated investment companies.
c) Income and Expense - The Fund is charged for
those expenses that are directly attributable to
the Fund, such as advisory, administration and
certain shareholder service fees.
d) Distributions to Shareholders - Dividends from
net investment income and distributions of net
realized capital gains, if any, will be declared
and paid at least annually.
e) 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.
f) Repurchase Agreements - The Fund may enter
into repurchase agreements with certain banks or
non-bank dealers. 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.
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
g) Other - Investment and shareholder
transactions are recorded on the trade date. The
Fund determines the gain or loss realized from
the investment transactions by comparing the
original cost of the security lot sold with the
net sales proceeds. Dividend income is recognized
on the ex-dividend date or as soon as information
is available to the Fund and interest income is
recognized on an accrual basis. Generally
accepted accounting principles require that
permanent financial reporting and tax differences
be reclassified to capital stock.
2. INVESTMENT TRANSACTIONS The aggregate purchases and sales of securities,
excluding short-term investments, by the Fund for
the year ended September 30, 2000, were as
follows:
PURCHASES SALES
U.S. Government.........$ - $ -
Other...................$17,573,742 $16,365,537
At September 30, 2000, gross unrealized
appreciation and depreciation of investments for
tax purposes were as follows:
Appreciation $ 5,683,434
(Depreciation) (1,026,332)
------------
Net appreciation on
investments $ 4,657,102
============
At September 30, 2000, the cost of investments
for federal income tax purposes was $15,369,689.
At September 30, 2000, the Fund had accumulated
net realized capital loss carryovers of $759,595,
which expire in 2008. In addition, the Fund
realized, on a tax basis, post-October losses
through September 30, 2000 of $1,987,872. These
losses are not recognized for tax purposes until
the first day of the following fiscal year.
Net investment income may differ for financial
and tax reporting purposes as a result of
organizational costs which have been capitalized
and are being amortized for tax purposes over a
60 month period.
3. AGREEMENTS The Fund has entered into an Investment Advisory
Agreement with Kirr, Marbach & Company, LLC (the
"Investment Adviser"). Pursuant to its advisory
agreement with the Fund, the Investment Adviser
is entitled to receive a fee, calculated daily
and payable monthly, at the annual rate of 1.00%
as applied to the Fund's daily net assets.
Until February 28, 2001, the Investment Adviser
has contractually agreed to waive its management
fee and/or reimburse the Funds other expenses to
the extent necessary to ensure that the Fund's
total annual operating expenses do not exceed
1.50% of its average daily net assets.
Accordingly, for the year ended September 30,
2000, the Investment Adviser waived advisory fees
to reimburse the Fund for other expenses in the
amount of $84,439. The Investment Adviser may
decide to continue the agreement, or revise the
total annual operating expense limitations after
February 28, 2001. Any waiver or reimbursement is
subject to later
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
adjustment to allow the Investment Adviser to
recoup amounts waived or reimbursed, $233,184 as
of September 30, 2000, to the extent actual fees
and expenses for a period are less than the
expense limitation cap of 1.50%, provided,
however, that the Investment Adviser shall only
be entitled to recoup such amounts for a period
of three years from the date such amount was
waived or reimbursed.
Rafferty Capital Markets, Inc., (the
"Distributor") serves as principal underwriter of
the shares of the Fund pursuant to a Distribution
Agreement between the Distributor and the
Corporation. The Fund's shares are sold on a
no-load basis and, therefore, the Distributor
receives no sales commission or sales load for
providing services to the Fund. The Corporation
has adopted a plan pursuant to Rule 12b-1 under
the 1940 Act (the "12b-1 Plan"), which authorizes
the Corporation to pay the Distributor a
distribution and shareholder servicing fee of up
to 0.25% of the Fund's average daily net assets
(computed on an annual basis). All or a portion
of the fee may be used by the Fund or the
Distributor to pay its distribution fee and costs
of printing reports and prospectuses for
potential investors and the costs of other
distribution and shareholder servicing expenses.
During the year ended September 30, 2000, the
Fund incurred expenses of $15,544 pursuant to the
12b-1 Plan.
Firstar Mutual Fund Services, LLC serves as
transfer agent, administrator and accounting
services agent for the Fund. Firstar Bank, N.A.
serves as custodian for the Fund.
INDEPENDENT AUDITORS' REPORT
THE SHAREHOLDERS AND BOARD OF TRUSTEES
THE KIRR, MARBACH PARTNERS VALUE FUND:
We have audited the accompanying statement of
assets and liabilities of Kirr, Marbach Partners
Value Fund (the "Fund"), including the schedule
of investments, as of September 30, 2000, and the
related statement of operations for the year then
ended and the statements of changes in net assets
and financial highlights for the year ended
September 30, 2000 and period December 31, 1998
(commencement of operations) through September
30, 1999. These financial statements and
financial highlights are the responsibility of
the Fund's management. Our responsibility is to
express an opinion on these financial statements
and financial highlights based on our audits.
We conducted our audits in accordance with
auditing standards generally accepted in the
United States of America. Those standards require
that we plan and perform the audit to obtain
reasonable assurance about whether the financial
statements and financial highlights are free of
material misstatements. An audit includes
examining, on a test basis, evidence supporting
the amounts and disclosures in the financial
statements and financial highlights. Our
procedures included confirmation of securities
owned as of September 30, 2000, by correspondence
with the custodian and brokers. An audit also
includes assessing the accounting principles used
and significant estimates made by management, as
well as evaluating the overall financial
statement presentation. We believe that our
audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and
financial highlights referred to above present
fairly, in all material respects, the financial
position of the Fund as of September 30, 2000,
the results of its operations for the year then
ended and the changes in its net assets and
financial highlights for the year ended September
30, 2000 and period December 31, 1998
(commencement of operations) through September
30, 1999, in conformity with accounting
principles generally accepted in the United
States of America.
/s/KPMG LLP
-----------------
Chicago, Illinois
November 1, 2000
D I R E C T O R S
MARK D. FOSTER
MICKEY KIM
JEFFREY N. BROWN
MARK E. CHESNUT
JOHN F. DORENBUSCH
P R I N C I P A L O F F I C E R S
MARK D. FOSTER, President
MICKEY KIM, Vice President, Treasurer and Secretary
I N V E S T M E N T A D V I S E R
KIRR, MARBACH & COMPANY, LLC
621 WASHINGTON STREET
COLUMBUS, INDIANA 47201
D I S T R I B U T O R
RAFFERTY CAPITAL MARKETS, INC.
1311 MAMARONECK AVENUE
WHITE PLAINS, NEW YORK 10605
C U S T O D I A N
FIRSTAR BANK, N.A.
THIRD FLOOR
615 E. MICHIGAN STREET
MILWAUKEE, WISCONSIN 53202
A D M I N I S T R A T O R ,
T R A N S F E R A G E N T A N D
D I V I D E N D - D I S B U R S I N G A G E N T
FIRSTAR MUTUAL FUND SERVICES, LLC
THIRD FLOOR
615 E. MICHIGAN STREET
MILWAUKEE, WISCONSIN 53202
I N D E P E N D E N T A C C O U N T A N T S
KPMG LLP
303 E. WACKER DRIVE
CHICAGO, ILLINOIS 60601
THIS REPORT SHOULD BE ACCOMPANIED OR PRECEDED BY A PROSPECTUS.
