MATTHEW 25 FUND, INC.
FINANCIAL STATEMENTS
JUNE 30, 2000
MATTHEW 25 FUND, INC.
605 Cloverly Ave.
Jenkintown, PA 19046
1-215-884-4458
1-888-M25-FUND
Dear Shareholders of Matthew 25 Fund, Inc.,
This letter will focus on one of the most important aspects of long-term
investing in stocks. We have all heard the old adage in Real Estate "LOCATION,
LOCATION and LOCATION". I posit that with stocks you need to focus on "EARNINGS,
EARNINGS and EARNINGS". The repetition emphasizes that there are three aspects
to a stock's earnings:
1. What is the quality and growth ability of the earnings?
2. How will management allocate earnings?
3. How do these earnings compare to other stocks and bonds?
The standard measure of earnings for stocks is the PE Ratio. This simply
means Price to Earnings Ratio or the market price of a stock divided by its
earnings. This ratio is inverted from our usual way of thinking; typically we
divide earnings by the price of an investment. For example, with a bond or a
certificate of deposit you would look at the Yield, which is simply the interest
you will earn per dollar invested. Therefore, besides PE's, I like quoting the
Earnings Yield of a stock which is its earnings divided by its market price. An
Earnings Yield should not be confused with a stock's Dividend Yield, which only
reflects the earnings paid to you. The remaining earnings though not paid to
you should have economic value for you. Earnings not paid in dividends may be
used to grow the business, make investments within the company, pay off debt,
buyback shares or simply build up corporate cash.
The following list shows the PE's and Earnings Yields for the stocks
within our Fund. The earnings are the average of analysts estimates for the
full year 2000. Two exceptions are for Berkshire Hathaway, for which I used
1999's actual earnings because there were no analysts estimates, and for Niagara
Mohawk where I included the annual charges for its MRA, which is the
amortization of an intangible regulatory asset that does not affect cash
earnings.
Stock PE Earnings Yield
ADVANTA "A" 4.53 22.07%
ADVANTA "B" 3.16 31.65%
BERKSHIRE H. "A" 44.83 2.23%
BERKSHIRE H. "B" 44.00 2.27%
COMMONWEALTH BK 9.06 11.03%
SPRINT 25.88 3.86%
FREDDIE MAC 12.02 8.32%
HARRIS FIN. 12.13 8.24%
HOME DEPOT 40.00 2.50%
INTEL 42.31 2.36%
KANSAS CITY SO. 17.53 5.71%
LINDSAY 18.00 5.55%
MBIA 9.41 10.63%
NIAGARA MOHAWK 5.60 17.87%
POLARIS 9.33 10.72%
AT&T 17.45 5.73%
SABRE GRP. 13.57 7.73%
MEDIA ONE 17.44 5.74%
WORLDCOM 24.14 4.14%
WILLOW GROVE BK 10.42 9.60%
WRIGLEYS "B" 27.56 3.63%
ZANY BRAINY 13.82 7.24%
Portfolio Average 12.33 8.11%
This table is convenient for answering the 3rd question on earnings by
comparing our portfolio earnings to the general market and to bond rates. The
PE for the Dow Jones stands at 18.7 on projected earnings. This means that our
portfolio is at a 34% discount or in other words, it has an appreciation
potential of 52% in order to match the Dow's average. During the past 20 years
the Dow's Earnings Yields have averaged 79% of Bond Yields. Currently AAA-Bond
Yields (Taxable) are around 6% while our portfolio's Earnings Yield is 8.11%.
Our portfolio would appreciate 35% in order to only match Bond Yields today.
This portfolio information is also applicable in valuing the holdings in
our Fund. For example, if you owned $10,000 of Matthew 25 Fund shares then your
investment has an Earnings Yield of 8.11% or its underlying earnings are $811.
Obviously, the main goal of capitalism is to grow your capital, and when markets
are as volatile as the past 12 months it becomes difficult to see progress.
Measuring Earnings Yield is a prudent way to measure your progress.
Three factors will grow your portfolio's earnings:
(1) The company itself grow its earnings. This is the
responsibility of the management and employees of the company,
and is to be constantly analyzed by your Investment Adviser.
(2) It is up to our Fund to own stocks that provide the most
earnings now or in the foreseeable future per dollar invested.
This is the responsibility of your Investment Adviser.
(3) Invest more. This is your job.
If your investments' earnings are going up, then your capital will ultimately
grow in value.
As you will see in the following paragraphs, our fund owns stocks with
quality earnings and superior strategies:
ADVANTA - Earnings have been growing aggressively the past two years. Loans
made riskier but well managed. Current low price is due to government concerns
over banks making sub-prime mortgage loans. Good dividends even with most of
its earnings retained to improve credit rating and to grow business.
Berkshire Hathaway - Reported earnings understates true economic earnings.
Operating income should show large increase this year. Earnings retained for
investments, which are managed by top capitalist, Warren Buffett.
Commonwealth Bancorp - Earnings growing while earnings quality improving.
Dividends increasing while all of retained earnings plus surplus capital used
to buy-back shares. Company not getting bigger only better.
Sprint - Earnings growing. Small dividend with bulk of earnings being
reinvested into its business.
Freddie Mac - Company has consistently grown earnings. Also provides steadily
increasing dividends, while retaining majority of earnings. High rates of
return on earnings kept for business growth or share repurchases.
Home Depot - Earnings growing 20% or better. Retains almost all of its
earnings. Rate of return on retained earnings increased over past 5 years,
which means company is getting bigger and better.
Intel - Has been a high earnings grower, but earnings quality is declining.
Includes capital gains from investments in earnings now. Keeps almost all of
earnings. Most of retained earnings reinvests in business, but some used for
venture-capital. I would prefer that the v-c portion be paid in dividends.
Stock too expensive for buy-back.
Kansas City Southern - Earnings growing strongly. Retains earnings for business
and investments in other companies. Very successful in this strategy.
Lindsay Mfg. - Earnings are cyclical. Profitable during down cycle. Pays a
modest dividend and has used majority of earnings to buy-back stock.
MBIA - Predictable earnings growth. Pays a respectable dividend with steady
increases. Retains most of its earnings to finance growth and to maintain its
AAA rating that is so vital to its business. Has recently bought some shares in
open market due to undervalued price.
Niagara Mohawk - Corporate earnings stable. Earnings per share will rise due to
aggressive stock buy-back and debt reduction. Will likely pay dividends when
current program is complete.
Polaris - Strong history of earnings growth with solid plans to continue to grow
earnings. Pays a fair dividend and then retains most of its earnings. Has an
outstanding record of managing its capital. Invests in its business for growth
and cost reduction, while maintaining meaningful stock buy-backs.
AT&T - Earnings in core business declining. Pays a steady dividend and then
invests its retained earnings plus other capital into higher growth businesses.
Strategy makes sense and is fair to shareholders if these divisions are spun off
to the stock owners.
Sabre Holdings - Technology business generates good earnings, which it then
invests in itself. Needs to show profit growth more than products growth to
know if its strategy is correct.
Worldcom - High growth by acquisitions and retains all of its earnings to
invests in its business. Has been very successful and its outlook is good.
Willow Grove Bank - Solid earnings with modest growth. Pays generous, growing
dividends while profitably expanding business with excess capital and retained
earnings. Current structure limits stock buy-backs.
Zany Brainy - Good earnings in 1999, but profits are still inconsistent. Any
and all earnings will be invested in store expansion program. Time will tell
if its concept works.
Earnings matter and our portfolio has great earnings. So take advantage
of our portfolio by buying more shares, because I do believe that you will be
pleased. As always, thank you for allowing me to work for you.
Best Regards,
Mark Mulholland
President
7/31/00
MATTHEW 25 FUND,INC.
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 2000
ASSETS
Investments in securities at value (cost $20,979,185) $ 25,422,032
Cash 253,488
Receivable for dividends 79,348
___________
TOTAL ASSETS $ 25,754,868
LIABILITIES
Accounts payable 1,380
__________
TOTAL LIABILITIES 1,380
NET ASSETS: (Equivalent to $10.267 per share based on
2,508,351 shares of capital stock outstanding
100,000,000 shares authorized, $0.1 par value) $ 25,753,488
============
COMPOSITION OF NET ASSETS
Shares of common stock $ 25,084
Paid-in capital 20,738,039
Net unrealized appreciation of investments 4,442,847
Retained Earnings 547,518
___________
NET ASSETS, JUNE 30, 2000 $ 25,753,488
============
THIS IS AN UNAUDITED STATEMENT
The accompanying notes are an integral part of these financial statements.
MATTHEW 25 FUND, INC.
SCHEDULE OF INVESTMENTS IN SECURITIES
FOR THE PERIOD ENDED JUNE 30, 2000
Number of Shares Historical Cost Value
________________ _______________ ____________
COMMON STOCKS
Banks & Finance, 00.00%
Advanta Corporation Class A 66,000 $ 1,074,194 $ 804,375
Advanta Corporation Class B 36,000 476,363 306,000
Commonwealth Bancorp, Inc. 100,000 1,367,282 1,187,500
Harris Financial 8,500 47,569 52,594
Willow Grove Bancorp, Inc. 109,500 1,107,967 1,095,000
_______________ ____________
4,073,375 3,445,469
Communications, 00.00%
AT&T Corporation 35,000 901,728 1,111,250
MCI WorldCom, Inc.* 19,000 370,098 871,625
Mediaone Group, Inc.* 2,500 171,606 166,081
Sprint Corporation 7,000 420,250 360,500
_______________ ____________
1,863,682 2,509,456
Insurance, 0.00%
MBIA, Inc. 35,000 1,852,078 1,686,562
_______________ ____________
1,852,078 1,686,562
Manufacturing, 00.00%
Intel Corp. 32,000 1,476,753 4,278,000
Lindsay Manufacturing Co. 20,000 293,051 392,500
Polaris Industries, Inc. 53,500 1,763,111 1,712,000
Wm. Wrigley Jr. Co., Class B 400 20,580 32,075
______________ _____________
3,553,495 6,414,575
Mortgage securities, 00.00%
Federal Home Loan 90,500 3,377,099 3,665,250
______________ _____________
3,377,099 3,665,250
Miscellaneous, 0.00%
Berkshire Hathaway, Class A* 23 1,142,503 1,237,400
Berkshire Hathaway, Class B* 187 314,885 329,120
______________ _____________
1,457,388 1,566,520
THIS IS AN UNAUDITED STATEMENT
The accompanying notes are an integral part of these financial statements.
MATTHEW 25 FUND, INC.
SCHEDULE OF INVESTMENTS IN SECURITIES (CONTINUED)
FOR THE PERIOD ENDED JUNE 30, 2000
Number of Shares Historical Cost Value
________________ _______________ ____________
Retail, 0.00%
Home Depot, Inc. 17,000 241,992 850,000
Zany Brainy 50,000 197,986 131,250
_______________ ___________
439,978 981,250
Software / Internet, 0.00%
Sabre Corporation 36,500 1,429,958 1,040,250
_______________ ___________
1,429,958 1,040,250
Transportation, 0.00%
Kansas City Southern Industries 22,800 1,172,367 2,022,075
______________ ___________
1,172,367 2,022,075
Utilities, 0.00%
Niagara Mohawk Power Corp.* 150,000 1,759,765 2,090,625
______________ ____________
1,759,765 2,090,625
TOTAL SECURITIES, 00.00% $ 20,979,185 $ 25,422,032
============== ============
* Non-income producing security
THIS IS AN UNAUDITED STATEMENT
The accompanying notes are an integral part of these financial statements.
MATTHEW 25 FUND, INC.
STATEMENT OF OPERATIONS
PERIOD ENDED JUNE 30, 2000
INVESTMENT INCOME
Dividends $142,797
Interest 3,789
Short-Term Gains 205,364
________
TOTAL INVESTMENT INCOME 351,950
EXPENSES
Bank Fees 175
Insurance 10,868
Investment Advisory Fee 124,821
IRA Expense 5,235
Marketing 1,598
Office Supplies 2,285
Postage 1,380
Registration and Filing Fees 1,854
Software 7,930
Telephone 605
Other Expenses 3,388
____________
TOTAL EXPENSES 160,139
____________
INVESTMENT INCOME, NET 191,811
____________
NET REALIZED GAIN ON SECURITY TRANSACTIONS 355,707
NET CHANGE IN UNREALIZED APPRECIATION OF INVESTMENTS (1,229,814)
____________
NET LOSS ON INVESTMENTS (874,107)
____________
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(682,296)
============
THIS IS AN UNAUDITED STATEMENT
The accompanying notes are an integral part of these financial statements.
MATTHEW 25 FUND, INC.
STATEMENT OF CHANGES IN NET ASSETS
June 30, 2000 December 31, 1999
__________________ __________________
INCREASE IN NET ASSETS FROM OPERATIONS
Investment income (loss), net $ 191,811 $ (57,320)
Net realized gain on securities
transactions 355,707 198,979
Net change in unrealized appreciation
on investments (1,229,814) 104,032
__________________ __________________
NET (DECREASE) INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS (682,296) 245,691
DISTRIBUTIONS TO SHAREHOLDERS FROM
Investment income, net 0 0
Net realized gain on investments 0 (141,659)
Capital share transactions 1,034,139 3,969,893
__________________ ___________________
NET INCREASE IN NET ASSETS 351,843 4,073,925
NET ASSETS, BEGINNING OF YEAR 25,401,645 21,327,720
__________________ ___________________
NET ASSETS, END OF PERIOD $ 25,753,488 $ 25,401,645
================== ===================
MATTHEW 25 FUND, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Matthew 25 Fund, Inc.("the Fund") was incorporated on August 28, 1995 and
commenced operations on October 16, 1995. The Fund had no operations prior to
the commencement of operations other than matters relating to its organization
and registration as an open-end, non-diversified management investment company
under the Investment Company Act of 1940 and its shares under the Security Act
of 1933. The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements. These policies are in conformity with generally accepted accounting
principles.
SECURITY VALUATIONS
The Fund values investment securities, where market quotations are available,
at market value based on the last recorded sales price as reported by the
principal securities exchange on which the security is traded, or if the
security is not traded on an exchange, market value is based on the latest bid
price.
THIS IS AN UNAUDITED STATEMENT
The accompanying notes are an integral part of these financial statements.
MATTHEW 25 FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Cont.)
FEDERAL INCOME TAXES
The Fund's policy is to comply with the requirements of the Internal Revenue
Code that are applicable to regulated investment companies and to distribute
all its taxable income to its shareholders. Therefore, no federal income tax
provision is required.
DISTRIBUTION TO SHAREHOLDERS
The Fund intends to distribute to its shareholders substantially all of its net
investment income, if any, and net realized capital gains, if any, at year end.
OTHER
The Fund follows industry practice and records security transactions on the
trade date. The specific identification method is used for determining gains
or losses for financial statements and income tax purposes. Dividend income
is recorded on the ex-dividend date and interest income is recorded on an
accrual basis.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of income and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 2 INVESTMENT ADVISORY AGREEMENT AND OTHER RELATED TRANSACTIONS
The Fund has an investment advisory agreement with The Matthew 25 Management
Corporation, whereby Matthew 25 Management Corp. receives a fee of 1% per year
on the net assets of the Fund. All fees are computed on the average daily
closing net asset value of the Fund and are payable monthly. Matthew 25
Management Corp. has agreed to decrease the investment advisory fee or, if
necessary, to reimburse the Fund if and to the extent that the Fund's aggregate
annual operating expenses exceed 2.0% of the first $10,000,000 and 1.5% of the
next $20,000,000.
The management fee for the first six months of 2000, as computed pursuant to
the investment advisory agreement, totaled $128,111. The Matthew 25 Management
Corporation has agreed to accept as its advisory fee for the first six months
of 2000 the amount it has been paid totaling $124,821 and to irrevocably waive
any and all rights to the difference between actual management fees paid and
fees per the agreement. The management fee waived for the first six months of
2000 was $3,290.
Mr. Mark Mulholland is the sole owner, director and officer of Matthew 25
Management Corporation and is also the president of the Fund.
In addition, Mr. Mulholland is a broker at Boenning and Scattergood, Inc.
During the six months ending June 30, 2000, the Fund paid brokerage commission
of $9,004 to Boenning & Scattergood, Inc. of which Mr. Mulholland received
compensation totaling $3,534. Boenning & Scattergood, Inc. is not otherwise
associated with Matthew 25 Fund, Inc. or Matthew 25 Management Corp. and is not
responsible for any of the investment advice rendered to the Fund by Matthew 25
Management Corporation or Mr. Mulholland.
THIS IS AN UNAUDITED STATEMENT
The accompanying notes are an integral part of these financial statements.
MATTHEW 25 FUND, INC.
NOTES TO FINANCIAL STATEMENTS (Cont.)
NOTE 3 INVESTMENTS
For the six months ended June 30, 2000, purchases and sales of investment
securities other than short-term investments aggregated $5,401,731 and
$3,836,137 respectively. At June 30, 2000, the gross unrealized appreciation
for all securities totaled $5,814,123 and the gross unrealized depreciation
for all securities totaled $1,371,276 or a net unrealized appreciation of
$4,442,847. The aggregate cost of securities for federal income tax purposes
at June 30, 2000 was $20,979,185
NOTE 4 CAPITAL SHARE TRANSACTIONS
As of June 30, 2000, there were 100,000,000 shares of $.01 per value capital
stock authorized. The total par value and paid-in capital totaled $20,763,123.
Transactions in capital stock were as follows for the period ending:
June 30, 2000 December 31, 1999
_______________________ _____________________
Shares Amount Shares Amount
__________ __________ __________ ___________
Shares sold 119,426 $1,237,908 535,502 $5,687,487
Shares issued in reinvestment
of dividends 0 0 13,595 141,659
Shares redeemed (19,465) (203,770) (173,281) (1,859,253)
__________ __________ __________ ___________
Net Increase 99,961 $1,034,138 375,816 $3,969,893
========== ========== ========== ===========
THIS IS AN UNAUDITED STATEMENT
The accompanying notes are an integral part of these financial statements.
FINANCIAL HIGHLIGHTS AND RELATED RATIOS/SUPPLEMENTAL DATA
For a Share Outstanding throughout each Period Ended:
December 31,1999; 1998, 1997, 1996 and 1995
For the
period from
June 30 December 31 10/16/95
________ __________________________________ through
2000 1999 1998 1997 1996 12/31/95
_____ _____ _____ _____ _____ ________
Net asset value, $10.55 $10.49 $ 8.50 $ 6.11 $ 5.16 $ 5.00
beginning of period
Income from
investment operations
Net investment income 0.07 (0.03) (0.02) 0.01 0.01 (0.01)
(loss)
Net gains on
securities both
realized and
unrealized (0.35) 0.15 2.22 2.41 0.95 0.17
_____ _____ _____ _____ _____ _____
Total from investment 10.27 10.61 10.70 8.53 6.12 5.16
operations
Less, distributions
Net investment
income 0 (0.02) (0.01) (0.01)
Net realized gains
on investments 0 (0.06) (0.19) (0.02)
_____ _____ _____ _____ _____ _____
Net Asset value,
end of period $ 10.27 10.55 10.49 8.50 6.11 5.16
====== ====== ====== ====== ====== ======
Total return -2.65% 1.08% 25.93% 39.65% 18.63% 17.43%*
Net assets,
end of period $25,753 25,402 21,328 10,579 1,421 106
(000's Omitted)
Ratio of expenses to
average net assets 1.25%* 1.22% 1.26% 1.26% 1.34% 2.00%*
Ratio of investment
income, net to
average assets 2.74%* (0.24)% (0.25)% 0.31% 0.44% 0.96%*
Portfolio turnover
rate 29.91%* 17.88% 30.64% 9.89% 2.52% N/A
*Annualized
N/A- Disclosure not applicable to prior periods.
THIS IS AN UNAUDITED STATEMENT
The accompanying notes are an integral part of these financial statements.
MATTHEW 25 FUND INC.
PERFORMANCE SUMMARY
The graph below represents the changes in value for a $10,000.00 investment
in the Matthew 25 Fund from its inception, October 16,1995, to years ending
December 31st for 1995, 1996, 1997, 1998, and 1999, along with the first six
months of 2000. These changes are then compared to a $10,000.00 investment
in the Value Line Index, which is an index comprising of 1,617 stocks, for the
same periods.
Incep. Yr.Ended Yr.Ended Yr.Ended Yr.Ended Yr.Ended 6Mos.Ended
10/16/95 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 6/30/00
Matthew 25 Fund $10,000. $10,320. $12,247. $17,104. $21,539. $21,772. $21,195
Value Line Indx $10,000. $10,287. $12,322. $15,827. $16,748. $18,517. $19,184
________________________________________________________________________________
Matthew 25 Fund, Inc.
22,000 - . . . . . (*) .
- (*) (*)
20,800 - . . . . . . .
-
V 19,600 - . . . . . . [*]
- [*]
a 18,400 - . . . . . . .
-
l 17,200 - . . . (*) . . .
- [*]
u 16,000 - . . . [*] . . .
-
e 14,800 - . . . . . . .
-
13,600 - . . . . . . .
-
12,400 - . . [*] . . . .
-
11,200 - . . . . . . .
- [*]
10,000 - [*] . . . . . .
________________________________________________________________________________
10/16/95 12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 6/30/00
Category
(*)Matthew 25 Fund [*]Value Line Index
_____________________________________________________________________________
Compounded
76 days 1 year 1 year 1 year 1 year 6 months Average
12/31/95 12/31/96 12/31/97 12/31/98 12/31/99 6/30/00 Ann. Rate
________ ________ ________ ________ ________ ________ _________
Matthew 25 Fund 3.20% 18.68% 39.65% 25.93% 1.08% -2.65% 17.23%
Value Line Index 2.87% 19.78% 28.45% 5.82% 10.56% 3.60% 14.79%
THIS IS AN UNAUDITED STATEMENT
The accompanying notes are an integral part of these financial statements.
