<PAGE> 1
MATHERS FUND, INC.
100 Corporate North - Bannockburn, Illinois 60015
800-962-FUND - 847-295-7400
DIRECTORS
KARL M. BECKER
TYLER R. CAIN
CHARLES G. FREUND
ROBERT J. REYNOLDS
HENRY G. VAN DER EB, JR.
OFFICERS MATHERS
FUND
HENRY G. VAN DER EB, JR., CFA
Chairman
ROBERT J. REYNOLDS, CFA
President
ANNE E. MORRISSY, CFA
Senior Vice President and Secretary
LAWRENCE A. KENYON
Senior Vice President and Chief Financial Officer
EDITH L. COOK
Vice President and Treasurer
MARY ANNE KINNUCAN
Vice President
HEIDI M. STUBNER
Vice President
Investment Adviser
MATHERS AND COMPANY, INC.
Bannockburn, Illinois
Custodian SEMI-ANNUAL
STATE STREET BANK AND TRUST CO.
Boston, Massachusetts REPORT
Transfer Agent 1997
DST SYSTEMS, INC.
Kansas City, Missouri
Counsel
SIDLEY & AUSTIN
Chicago, Illinois
Auditors
ARTHUR ANDERSEN LLP
Chicago, Illinois
This report is submitted for the information of shareholders of the Fund. It
is not authorized for distribution to prospective investors unless preceded or
accompanied by a current prospectus.
<PAGE> 2
MATHERS FUND
GROWTH OF A $10,000 INVESTMENT IN THE
MATHERS FUND SINCE AUGUST 19, 1965*
<TABLE>
<CAPTION>
Compound 6-30-97
Annual Return Value of
From 8-19-65 $1 invested
to 6-30-97 8-19-65
<S> <C> <C>
MATHERS FUND..................12.18% $39.00
Standard & Poor's 500.........11.65 33.52
Value Line Composite...........7.64 10.43
Dow Jones Industrial Average..11.47 31.81
Long Term U.S. Treasury Bonds..7.41 9.77
U.S. Treasury Bills............6.60 7.65
Consumer Price Index...........5.23 5.07
*Date of public offering
Income Dividends and Capital Gains Distributions Reinvested
</TABLE>
MATHERS FUND MATHERS FUND
RANKED #1 RANKED #1
GROWTH FUND GROWTH FUND
1 YEAR ENDED 1 YEAR ENDED
12-31-87 6-30-88
Source: Lipper Analytical Services Source: Lipper Analytical Services
12-31-87 "Growth Fund" Category 6-30-88 "Growth Fund" Category
Consists of 236 Funds. Consists of 235 Funds.
MATHERS FUND
RANKED #1
GROWTH FUND
1 YEAR ENDED
9-30-90
Source: Lipper Analytical Services
9-30-90 "Growth Fund" Category
Consists of 257 Funds.
<PAGE> 3
Full Calendar years
ending December 31
MATHER FUND PLOTTING POINTS S&P 500 PLOTTING POINTS
<TABLE>
<S> <C> <C> <C>
10000 INITIAL INVESTMENT 8-19-65 10000
"1965" 12089 "1965" 10768
"1966" 12597 "1966" 9685
"1967" 24265 "1967" 12007
"1968" 30783 "1968" 13335
"1969" 28936 "1969" 12200
"1970" 29507 "1970" 12688
"1971" 35358 "1971" 14504
"1972" 41059 "1972" 17256
"1973" 25806 "1973" 14727
"1974" 17908 "1974" 10830
"1975" 28124 "1975" 14859
"1976" 40604 "1976" 18404
"1977" 46368 "1977" 17082
"1978" 53349 "1978" 18202
"1979" 78188 "1979" 21558
"1980" 109687 "1980" 28548
"1981" 101193 "1981" 27143
"1982" 116227 "1982" 32952
"1983" 135015 "1983" 40372
"1984" 131529 "1984" 42900
"1985" 167682 "1985" 56534
"1986" 191108 "1986" 67115
"1987" 242780 "1987" 70635
"1988" 276110 "1988" 82334
"1989" 304849 "1989" 108392
"1990" 336643 "1990" 105037
"1991" 368441 "1991" 136961
"1992" 379883 "1922" 147380
"1993" 387977 "1993" 162206
"1994" 365253 "1994" 164328
"1995" 390861 "1995" 226017
"1996" 390577 "1996" 277905
"1997" 389988 "1997" 335204
</TABLE>
<PAGE> 4
LETTER TO SHAREHOLDERS JULY 27, 1997
- --------------------------------------------------------------------------------
Federal Reserve Chairman Alan Greenspan warned about the current "financial
asset bubble" and its potential to "impair the real economy" in his now famous
"irrational exuberance" speech on December 5th (DJIA 6437). Apparently piqued
at the market's disregard for his point of view, he tried again on February
26th (DJIA 6983) at a Congressional presentation during which he made the
following statements: "Regrettably, history is strewn with visions of such 'new
eras' that, in the end, have proven to be a mirage. . . . History demonstrates
that participants in financial markets are susceptible to waves of optimism . .
. excessive optimism sews the seeds of its own reversal in the form of
imbalances that tend to grow over time. When unwarranted expectations
ultimately are not realized, the unwinding of these financial excesses can act
to amplify a downturn." Stocks sold off sharply after both speeches,
particularly in March, during which the Fed added emphasis by raising the
Federal funds rate by 1/4 point to 5 1/2%. In mid-April, the S&P 500
bottomed, then rocketed to new highs, ending the first six months of 1997 with
a gain of 20.62%, leaving the two warnings from the financial world's most
prominent figure far behind.
Market observers wondered if Mr. Greenspan would comment on the stock market
for the third time as he gave his eagerly awaited Humphrey-Hawkins testimony on
July 22nd. Since the DJIA was about 1500 points, or 23%, higher than in early
December, it seemed logical to assume that he would address the issue again.
In the interim, the release of the minutes of the December 17th Federal Open
Market Committee meeting revealed the following concerns: "The behavior of the
stock market injected an additional note of uncertainty into the forecast for
consumer spending and the economy more generally. The rise over recent years
had been extraordinary and had brought market valuations to fairly high levels
relative to earnings and dividends. ... Members recognized the need to monitor
with special care price movements in the stock market and asset markets more
generally. ..."
When the text of Mr. Greenspan's July speech was made available, however, there
was no mention of the stock market, nor did it come up in the question and
answer period. The markets roared with approval as both stocks and bonds
jumped in price. At last, the Chairman had become a convert to the "new age
economics" school of thought; or had he? Did his views of "new era" stock
market overvaluation, a possible '87-style crash and its subsequent effect on
the "real economy" simply vanish? Had the fundamentals that might support
sky-high valuations improved so much from December and February to July that an
additional 20 percent plus increase in stock prices was now justified, even
though all-time record high valuations were already present in December?
To answer these questions, a look at some recent numbers is in order. Since
interest rates and corporate earnings, both of which reflect the level of
inflation, among a multitude of other economic variables, are arguably two of
the primary fundamental determinants of stock prices, they are a good place to
start. On December 4th, the day before Mr. Greenspan first mentioned
"irrational exuberance," the yield on the 30-year Treasury bond was 6.4% and
the Federal funds target rate was 5 1/4%; on July 21 these interest rates were
6.5% and 5 1/2%, respectively. Operating earnings (before write-offs) for the
S&P 500 on a trailing four quarter basis increased about 6% from 12-31-96 to
6-30-97. So, between Mr. Greenspan's December warning and his July silence,
both long and short-term interest rates rose, normally a negative for stocks,
and operating profits increased about 6%, yet stocks boomed by about 25%,
outrunning the gain in operating earnings by an amazing 4 to 1 ratio which
pushed traditional stock market valuations higher by the end of this period
than at its beginning. The bubble had gotten bigger between December and July.
So why was Mr. Greenspan surprisingly silent on July 22nd with regard to
stocks, even though the stock market was way above the levels and valuations
which concerned him in December and again in February? No one but the Chairman
knows for sure. We do know that, despite the wealth-creating effect of rising
stock prices, the economy has decelerated and secular deflationary forces are
mustering, as indicated by six consecutive months of negative producer prices,
falling gold, oil and other commodity prices, a strong dollar and an
accelerating disinflationary trend in consumer prices. Taken together, these
<PAGE> 5
- --------------------------------------------------------------------------------
conditions warn of a potentially destructive deflation for both the economy and
the stock market. Being a keen student of economic history, Mr. Greenspan
knows that inflation was 0% in the summer of 1929, the economy was on a new
plateau of permanent prosperity, the stock market was on a vertical roll, and
after the Fed raised interest rates in August, it was a long time before anyone
worried about inflation again.
Using the previous format, let's take an intermediate term look back, and a
peek forward, at the ever widening divergence between the stock market and its
underlying fundamentals: S&P 500 operating earnings were $38.81 for calendar
1995, $40.35 for 1996 and are now estimated to be about $45 for 1997 and $47.70
for 1998. As such, earnings increased a mere 4% in calendar 1996 and are
estimated to increase 11.5% in '97 and 6% in '98. At year-end 1995, the yield
on the 30-year U.S. Treasury bond was 6% vs. 6.4% now and the Federal funds
target rate was 5 3/4% then vs. 5 1/2% now, up from 3% at year-end 1993. The
S&P 500 total return was 23% in 1996 and is up 28% so far in 1997. Thus, over
the last 19 months, the S&P 500 is up 57% with operating earnings up about 10%
and estimated earnings growth falling to 6% in 1998. So stocks are up an
astounding 5.7 times the percentage increase in earnings. The rationale that
stocks are zooming due to strong earnings growth and lower interest rates is
not supported by these facts. With the current S&P 500 P/E ratio reflecting
"excessive optimism" at a record 23.3X reported earnings, and a high-risk 3.9
times the projected slowing earnings growth rate of 6% in 1998, one has to ask
what will occur when the market's "unwarranted expectations ultimately are not
realized".
Renowned investor Warren Buffet warned back in 1993 that "stocks cannot forever
outperform their underlying businesses, as they have so dramatically done for
some time" and again in March of 1997 that investors are likely overpaying for
"virtually all stocks". At 118%, the gigantic size of today's total market
value of all publicly traded U.S. stocks relative to nominal U.S. GDP is put
into historical perspective in chart #1. Stocks would have to decline about
33% just to return to the area of previous secular tops, 59% to return to the
70 1/2 year mean, and 77% to reach undervaluation. A normal 25% bear market
would wipe out about $2.3 trillion of wealth, equivalent to about 30% of U.S.
GDP, exacerbating deflationary pressures caused by excessive consumer debt,
lack of corporate pricing power and global industrial overcapacity.
Chart#1
[Contained here in paper format is a chart reflecting the Stock Market
Capitalization as a Percentage of Nominal GDP. This chart was prepared for
Mathers Fund by Topline Investment Graphics, Boulder CO. A hard copy is
available by calling the Fund at 800-962-3863. The line is the ratio of stock
market capitalization divided by nominal GDP. The chart's x-axis represents
years, from 1926 through 2000 and its y-axis shows percentage points, from 0 to
120. The average, since 1926, has been 48.8%. The high points (August 1929,
81.4%); November 1968, 77.8% and December 1972, 78.10%) were all followed by
severe bear markets. The current value is a record high, 118.0%.
Also contained within the chart is a table of data as follows:
<TABLE>
S&P 500
1928 to 1997 Price/Book Dividend Yield P/E Ratio
- ------------ ---------- -------------- ---------
<S> <C> <C> <C>
Avg. of Five
Major Bottoms 0.9 7.14 7.8
Avg of Six
Major Tops 2.4 2.94 20.2
Sept. 1929 Top 3.6 2.86 21.1
Current: 7/25/97 4.8 1.64 23.3]
</TABLE>
<PAGE> 6
- --------------------------------------------------------------------------------
As stock prices spiral higher, the "new era" rationalization that "the old
rules and benchmarks are obsolete and no longer apply" is heard with increasing
frequency. However, we cannot tell where we are unless we know where we have
been, so a long-term perspective of stock market valuations is still
appropriate regardless of one's point of view. Downside risk is now at a record
high since current valuations are more extreme than in 1929 and 1987 and far
above historical medians. A move back to the 70 1/2 year (1926 to 6/30/97)
median valuation level implies a decline of 49% (see table below), a return to
low quartile valuation implies a decline of 61%, and a return to the bottom of
the historical valuation range a decline of 76% from 7/17/97 levels. Since
stock prices are stretched far above intrinsic value, the inevitable snap back
to the median or below, will likely start with an abrupt and sharp decline.
Until the next bear market is over, the sustainability of "new era" valuations
will be open to debate. For now, history remains on the side of caution.
ESTIMATING THE DOWNSIDE: BACK TO THE MEDIANS*
<TABLE>
<CAPTION>
1926 To Date Implied Downside
S&P 400 INDUSTRIALS 7/17/97 Median S&P 400 Risk %
------------------- ------- ----------- ------- --------
<S> <C> <C> <C> <C>
Normalized "Adjusted EPS" P/E 29.9 15.7 584 -47
Non-Normalized Operating EPS P/E 23.4 15.0 713 -36
Return On Sales Implied EPS P/E 28.7 15.9 614 -45
Dividend Yield 1.5% 3.9% 438 -61
Price To Book (Adjusted) 5.1 1.6 341 -69
Price To Cash Flow 12.8 8.0 692 -38
Price To Sales 1.5 0.8 616 -45
--- ---
AVG. 571 -49%
</TABLE>
<TABLE>
<CAPTION>
1926 To Date Implied Downside
DOW JONES INDUSTRIAL AVG. 7/17/97 Median Dow Jones Risk %
- ------------------------- ------- ----------- --------- --------
<S> <C> <C> <C> <C>
Normalized "Adjusted EPS" P/E 26.0 15.3 4744 -41
Non-Normalized Operating EPS P/E 19.2 13.4 5644 -30
Dividend Yield 1.6% 4.3% 2976 -63
Price To Book (Adjusted) 4.4 1.5 2773 -66
---- ---
AVG. 4034 -50%
</TABLE>
NORMALIZED "ADJUSTED Five-year arithmetically averaged annual earnings
EPS" P/E looking six months ahead and 54 months back
(12/31/92 - 12/31/97)
NON-NORMALIZED Based on estimated operating (not reported)
OPERATING EPS P/E earnings for the 12 months ending 12/31/97 ...
the most positive P/E measure
RETURN ON SALES Based on five-year arithmetically averaged return
IMPLIED EPS P/E on sales, multiplied by estimated sales for the
12 months ending 12/31/97
DIVIDEND YIELD Based on indicated 12 months' dividends as
calculated by Barron's
PRICE TO BOOK Based on Leuthold "adjusted" book value
(ADJUSTED) calculation which adds back about 25% of big
write-offs (1985 to present) to improve
comparability
PRICE TO CASH FLOW Based on estimated 12 months' cash flow for the
period ending 12/31/97. Net income plus
depreciation
PRICE TO SALES Based on 12 months' estimated sales for the
period ending 12/31/97
*Source: Leuthold Group. 7/17/97 closing prices: S&P 400 Industrials 1110,
Dow Jones Industrial Average 8070.
<PAGE> 7
- --------------------------------------------------------------------------------
Our own views of the recent straight up move in stocks and today's "slam dunk"
stock market psychology are well described in the following quotes from Richard
McCabe, Chief Market Analyst, Merrill Lynch, July 1997. "Sometimes, however,
markets can get too strong for their own good, such as when they go into a
parabolic rise or a near-vertical rate of ascent. Some examples of this in
recent history are oil and gold in the early '80s, Japan in '89 ... When such
a parabolic rise develops, it is virtually impossible to judge how far it will
carry in terms of distance, but it usually does not last long in terms of time,
and it typically marks the climax of the preceding accelerating advance.
Looking at the major U.S. market averages on a monthly chart (chart #2), one
can see that from their late '94 lows, they initially rose at about a 55 degree
angle of ascent. Then, from their July '96 intermediate reaction low, the
uptrend accelerated to about a 65 degree angle of ascent. Since the April low
of this year, however, the advance has accelerated further to about an 85
degree rate of ascent. We all know from our basic geometry classes that the
maximum angle of ascent is 90 degrees (pure vertical), so things can't get much
better than they are now, although the advance could certainly continue for a
while. We know from history, however, that parabolic advances, when they
finally end, do not correct gradually or quietly. On the contrary, they
usually are followed by a substantial retracement of the parabolic portion of
the preceding uptrend."
Chart#2
[Contained here in paper format is a chart reflecting the Standard & Poors 500
Stock index. The x-axis reflects the years form 1972 through 6/30/97 and its
Y-axis is on an arithmetic scale and extends from 50 to 970. The chart was
prepared internally by Mathers Fund. A hard copy is available by calling
Mathers Fund at 800-962-3863. The chart is a bar chart with monthly data and
shows the parabolic rise in level of the S&P 500 Index since 1972.
Three smaller charts appear in a box inset in the main chart. Each of these
charts show a parabolic price rise, a top and the following sharp decline. The
first of the three charts reflects gold prices from Jan 1978 at about $150,
through its peak in late 1979 at over $800, to its decline in February 1980 at
about $470. The second of the three charts reflects the price of the Tokyo
Nikkei stock index and begins in January 1985 at about 11,000 Yen, continues
through its peak in November 1989 near 39,000 Yen to its year-end 1992 level of
15,000 Yen. The last of the three charts shows the Dow Jones Industrial Average
from its 1925 level of 125, through the 1929 peak of around 375 to its year-end
1931 level of 80.]
"In 1968, near the last secular bull market top, there was widespread
acceptance of the false premises that the business cycle was dead and that the
new surge of buying of common stocks by pension funds would create a severe
shortage of equities. In 1989 in Japan, near the peak of that country's great
secular bull market around Nikkei 40,000, the false premise was that this
market would never have a severe decline because the P/E multiples were not as
high as they seemed to be because accounting methods for earnings calculations
were different and that the widespread intercorporate stock investments would
never be liquidated. Now, in our present-day market, the most popular premises
seem to be that inflation is dead and that the huge flow of investment funds
for retirement has no place to go except to stocks. While the present evidence
(as in 1968 and 1989) seems to make these theses nearly irrefutable, we know
from history that such 'sure things' often go awry."
What could go "awry", turning the bull into a bear? Some possibilities
include: S&P 500 earnings growth turns negative; the economy upticks and the
Fed pops the equity bubble by reluctantly raising interest rates
<PAGE> 8
- --------------------------------------------------------------------------------
to preempt inflation; high real interest rates pull investment flows away from
stocks into fixed income; currency instability and faltering economies in the
Pacific rim countries start chain-reaction banking crises; and a 1962-type
overvalued market collapse caused by an abrupt change in crowd psychology.
The classic characteristics of a stock market mania increasingly fit the period
from late 1994 to today. These include: a powerful upward price thrust
starting where a long-term bull market would normally end; relentless price
spurts with progressively fewer, shorter and smaller pull-backs; heavy public
participation; gross overvaluation; novices outperforming professionals; and a
terminal move blow-off and sharp trend reversal with prices ultimately ending
below the starting point of the initial upthrust.
The following analysis provides an interesting explanation of and insight into
the dynamics of today's extraordinary stock market price action: "Investment
manias are characterized by unusual supply/demand curves. Whereas typically,
these lead to price stability, the behavior of supply and demand during manias
leads to price instability. This atypical behavior is the core feature of
every mania. How so? In traditional markets, prices tend to gravitate toward
an equilibrium level, as with rising prices, demand falls and supply increases
(see chart 3A). However, the case is different in manic markets: with rising
prices, demand does not fall, but actually rises as more and more people are
sucked into the whirlwind of speculation. The individual at this stage
displays typical crowd behavior; overtaken by greed and contagion, he loses his
critical faculty. Risk is no longer an issue. What counts is "getting rich
quick". In the meantime, the traditional suppliers of a market are also caught
by the mania. Instead of increasing their supplies with rising prices, as they
would ordinarily do, they hold supplies back or even reduce them, as they
overestimate the demand and are thus convinced that prices will continue to
appreciate ad infinitum. As a result, in a mania, the supply and demand curves
look something like what is shown in chart 3B. It is not difficult to see that
this uncharacteristic behavior by the market participants must lead to unstable
markets. First, prices overshoot dramatically on the upside before they
totally collapse and overshoot on the downside. The reason manic markets
eventually collapse very badly is that, when the trend reverses and prices
begin to fall, the demand suddenly shrinks and the supply increases. However,
the tricky part of manic markets and the reason why almost all participants end
up losing money, is that euphoric markets in their final upside acceleration
phase become totally irrational and their reversal points are also impossible
to predict. A final top can only be labeled as such long after its occurrence
and only once prices have already fallen quite dramatically." Dr. Marc
Faber, April 1997.
Chart#3A & 3B
[Contained here in paper format are two charts. These charts were obtained
from The Boom, Gloom and Doom Report, April 1997, Dr. Marc Faber, editor. A
hard copy is available by calling the Fund at 800-962-3863. Chart 3A reflects
the typical Supply and Demand Curves with the y-axis reflecting price, and the
x-axis reflecting quantity. The chart shows that, normally, as the price of an
item increases, demand for that item goes down and the supply of that item goes
up. Conversely, as the price of an item goes down, the quantity demanded goes
up and the quantity supplied goes down. These opposing forces result in price
stability.
Chart 3B shows the different Supply and Demand curves that occur during a mania.
In this case, the chart shows that as the price of an item increases, demand for
that item also increases and the supply of that item goes down. Conversely, as
the price of an item goes down, the quantity demanded goes down and the quantity
supplied goes up. These forces result in price instability, parabolically rising
prices and eventual collapse.]
<PAGE> 9
- --------------------------------------------------------------------------------
Other symptoms of today's mania mentality include: after a Microsoft executive
publicly said that Wall Street's $160 billion valuation of the company's stock
is "laughable", the stock went higher; Warren Buffet said he would not buy
Berkshire "B" shares at the recent prospectus offering price, because it was
"not undervalued", and the stock went up; this bull market will be a record
15-years old in August and approximately 90% of all the money ever put into
equity mutual funds has been invested in the last five years, and as such, is a
late comer to the bull market party; and the S&P 500 has not had a 10%-plus
correction for an unprecedented run of 81 months, almost twice the previous
record of 43 months.
During the first half of '97, as hot money from momentum players poured into
their latest rage, S&P 500 Index funds, 95% of all U.S. equity mutual funds
underperformed the S&P 500, while only 34% of NYSE and 32% of NASDAQ common
stocks posted gains. Momentum investing ignores valuation and buys relative
price strength. However, when the price rise stalls and a decline starts,
these sellers stampede out and prices fall precipitously. Thus, the potential
is building for the S&P 500 itself to mimic last spring's double-digit declines
of many momentum driven equity mutual funds. When momentum money exits the S&P
500 Index funds, the negative impact on the entire market could be substantial.
In an effort to maximize potential gain and minimize the risk of loss, the
Mathers Fund portfolio has been conservatively managed for many years using the
discipline of historical precedent valuation analysis. This approach is based
on the long-term statistical record of numerous time-tested fundamental
valuation benchmarks which show that the stock market, and therefore most
stocks, traverse across a range from overvaluation to undervaluation and back
again over various time periods. Many of the benchmarks used to measure value
have been described and illustrated in this and other shareholder letters.
Central to the success of this approach is the assumption that valuations for
the market are unlikely to stay at historical extremes for an extended period,
as was the case in 1987, and portfolio risk levels should be appropriately
adjusted at these points i.e. take more risk when the market is undervalued and
less risk when the market is overvalued. It is also assumed, given the extreme
1929 data, that the chances of a benchmark's previously recorded outer limits
being exceeded is possible but very unlikely, and should this occur, it is
probably an anomaly. The challenge is to control risk so that one does not
lose money, or at least not much, when wrong, and makes money when right.
Based on historical probabilities, to bet that the 70-year upper limits of
overvaluation for virtually all fundamental benchmarks would be substantially
exceeded for more than a short time would be imprudent, especially if one's
early defining investment experiences rewarded risk averse behavior. However
unlikely, the improbable has occurred over the last several years as
valuations have surpassed all previous records. During this time, the Fund has
essentially broken even, as was the case for the first half of '97 with (.15%)
return. While the stock market may continue to exert pressure to hop on the
"new era" bandwagon, our instincts and methodology continue to keep the Fund's
portfolio defensively structured.
If one believes the frequently heard observation that "it just doesn't get any
better than this" for the economy and the stock market, then we must be at or
near the point of maximum optimism. That being the case, the following
quotations from a May 27th New York Times interview with 84-year old investment
maven John Templeton are of interest. When asked which stocks looked
attractive, he replied "There aren't any common stocks that I put in that
category at present in this country." Commenting on his many years of
investing experience he said, "I started out fairly young saying that I was
going to buy based on value rather than trend or price, that I was searching
for good values instead of seeing what was going to move up or down. Common
sense will tell you that the only time you can get something for a small
fraction of what it's worth is when other people are despondently selling. So
it's a theory of mine, the theory of maximum pessimism. If you want to succeed
in selecting investments, look for points of maximum pessimism."
/s/ Henry Van der Eb Chairman
<PAGE> 10
SCHEDULE OF INVESTMENTS June 30, 1997
(Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCKS 28.0% SHORT-TERM NOTES 3.5%
Shares Market Value Par Value Market Value
- ------ ------------ --------- ------------
<S> <C> <C> <C> <C> <C>
BIOTECHNOLOGY 0.9% $ 5,219,000 State Street Bank Repo,
150,000 Liposome Company, Inc.* $1,340,625 5.0%, due 7-1-97**
(Cost $5,219,000) $5,219,000
COMPUTER SOFTWARE 2.1% ----------
1,300,000 Syncronys Softcorp* 3,087,500
U.S. TREASURIES 68.5%
FOOD 1.6% Par Value
170,000 Chiquita Brands International, Inc 2,337,500 ---------
$ 80,000,000 U.S. Treasury Notes
INSURANCE 11.1% 7 7/8% due 11-15-04 $86,350,000
300,000 Conseco, Inc. 11,100,000 10,000,000 U.S. Treasury Bills
197,400 Western National Corporation 5,292,788 due 8-21-97 9,920,978
----------- 5,000,000 U.S. Treasury Bills
16,392,788 due 7-10-97+ 4,963,410
MARITIME 2.8% -----------
200,000 Avondale Industries, Inc.* 4,200,000 Total U.S. Treasuries (Cost $94,809,388) $101,234,388
------------
OFFICE PRODUCTS 2.7%
275,000 Corporate Express, Inc.* 3,970,312 TOTAL INVESTMENTS (Cost $139,297,831) $147,947,013
------------
TECHNOLOGY 3.1% FUTURES 0.7%
2,700,000 Aura Systems, Inc.* 4,640,625 Contracts
---------
TELECOMMUNICATIONS 3.7% 94 Short, S&P 500 Stock
605,400 Cellular Technical Services Index Futures, Expiration
Company, Inc.* 5,524,275 9-19-97 983,468
-----------
Total Common Stocks (Cost $39,269,443) $41,493,625
----------- OTHER ASSETS (Net) (0.7%) (990,903)
-------------
TOTAL NET ASSETS - 100% $ 147,939,578
=============
* Non-income producing ** Collateralized by a U.S. Treasury Bond + Pledged to cover S&P Futures margin
The accompanying Notes to Financial Statements are an integral part of this schedule.
</TABLE>
<PAGE> 11
<TABLE>
<CAPTION>
BALANCE SHEET STATEMENT OF OPERATIONS
June 30, 1997 For the Six Months Ended June 30, 1997
(Unaudited) (Unaudited)
- -------------------------------------------------------------- ------------------------------------------------------------------
ASSETS: INVESTMENT INCOME:
<S> <C> <C> <C> <C> <C>
INVESTMENTS AT MARKET VALUE: INCOME:
Common Stocks
(Cost $39,269,443) $41,493,625 Interest $3,673,288
U.S. Treasuries:
Notes Dividends 88,112 $3,761,400
(Cost $79,925,000) 86,350,000 ---------- ----------
Bills (Amortized
Cost $14,884,388) 14,884,388
Repurchase Agreement
(Cost $5,219,000) 5,219,000 $147,947,013 OPERATING EXPENSES:
----------- ------------
CASH 863
Management Fee $ 595,480
RECEIVABLES FOR:
Dividends and Accrued Transfer Agent 115,305
Interest $ 832,456
Subscriptions to Capital Legal and Auditing 85,943
Stock 1,397
Other Assets 312,550 1,146,403 Other 39,063
----------- ---------
TOTAL ASSETS $149,094,279
============ Printing 22,812
LIABILITIES:
Custodian 20,153
PAYABLES FOR:
Registration 16,286
Redemptions of Capital Stock $ 583,451
Investments Purchased 426,250 Taxes 8,126 903,168
Accrued Expenses 145,000 ---------- ----------
------------
TOTAL LIABILITIES $ 1,154,701 NET INVESTMENT INCOME $2,858,232
------------ ----------
CAPITAL:
Capital Stock, $1.00 par value; REALIZED AND UNREALIZED
11,167,273 shares outstanding GAINS ON INVESTMENTS:
(100 million shares authorized) $ 11,167,273
Paid-In Surplus 164,005,253 Net Realized Loss on Investments Sold $(2,817,863)
Accumulated Undistributed Net Investment
Income 3,094,562 Net Change in Unrealized Appreciation on
Accumulated Undistributed Net Realized Investments 8,803
Loss on Investments (39,960,161) -----------
Net Unrealized Appreciation on Investments 9,632,651 Net Realized and Unrealized Loss on
------------- Investments (2,809,060)
TOTAL CAPITAL (NET ASSETS) $147,939,578 -----------
------------ Net Increase in Net Assets Resulting from
TOTAL LIABILITIES AND CAPITAL $149,094,279 Operations $ 49,172
============ ===========
Net Asset Value (Capital) Per Share at
June 30, 1997 $13.25
============
The accompanying Notes to Financial Statements are an integral part of these statements.
</TABLE>
<PAGE> 12
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
6 MOS. ENDED FULL YEAR ENDED
JUNE 30, 1997 DEC. 31, 1996
------------- ---------------
<S> <C> <C>
OPERATIONS:
Net Investment Income ........................................................... $2,858,232 $5,838,134
Net Realized Loss on Investments Sold ........................................... (2,817,863) (20,317,145)
Net Change in Unrealized Appreciation ........................................... 8,803 13,749,425
------------ ------------
Net Increase/(Decrease) in Net Assets Resulting from Operations ............... 49,172 (729,586)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from Net Investment Income ............................................ 0 (5,756,774)
Distribution of Realized Capital Gains .......................................... 0 0
------------ ------------
Total Distributions to Shareholders ........................................... 0 ( 5,756,774)
------------ ------------
CAPITAL STOCK ISSUED AND REDEEMED:
Net Proceeds from Sales of Shares, 87,250 and 620,300 shares, respectively ...... 1,174,787 8,338,600
Net Proceeds from Dividend Reinvestment Plan, 0 and 397,258 shares, respectively. 0 5,271,615
Cost of Shares Redeemed, 1,849,818 and 4,983,552 shares, respectively ........... (24,880,045) (67,831,082)
------------ ------------
Decrease in Net Assets Derived from Capital Stock Transactions, (1,762,568) and
(3,965,994) shares, respectively ............................................ (23,705,258) (54,220,867)
------------ ------------
Net Decrease in Net Assets .................................................... (23,656,086) (60,707,227)
TOTAL NET ASSETS:
Beginning of Period ............................................................. 171,595,664 232,302,891
------------ ------------
End of Period (including undistributed net investment income of $3,094,562 and
$242,940 respectively) ........................................................ $147,939,578 $171,595,664
============ ============
The accompanying Notes to Financial Statements are an integral part of these statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. The Fund is registered under the Investment Company Act of 1940
as a diversified, open-end investment company. The primary
objective of the Fund is capital appreciation over the long term
principally through investment in common stocks. However, the
Fund may invest all or any portion of its assets in securities
other than common stocks when the adviser believes that the risk
of owning equity securities is high. The following is a summary
of the significant accounting policies of the Fund:
(a) The Fund intends to distribute all taxable income to its
shareholders and otherwise comply with the provisions of the
Internal Revenue Code applicable to regulated investment
companies. Therefore, no provision has been made for Federal
Income taxes since the Fund has elected to be taxed as a
regulated investment company. The Fund intends to utilize
provisions of the Federal income tax laws which allow it to
carry a realized capital loss forward to eight years following
the year of the loss and offset such losses against any future
realized gains. At December 31, 1996, the Fund had a capital
loss carryforward of $37,494,305, of which $15,267,420 expires
on December 31, 2003 and $22,226,885 expires on December 31,
2004.
(b) Common stocks traded on securities exchanges and stocks traded
on the NASDAQ National Market are valued at the last sales price
as of the close of the New York Stock Exchange on the day of
valuation. In the event a security does not trade on a given
date, the current bid price is used as the valuation. Fixed
income securities with a maturity of greater than 60 days are
valued at the current bid price, and those of 60 days or less
are carried at amortized cost which approximates market value.
Financial futures are valued at the settlement price established
each day by the exchange on which they are traded.
(c) During the six months ended June 30, 1997, the Fund entered
into S&P 500 index futures contracts to hedge against possible
declines of its portfolio securities. Risks of entering into
futures contracts include the possibility that changes in the
value of the futures contract may not correlate with changes in
the value of the portfolio securities being hedged. Upon
entering into a futures contract, the Fund deposits with its
custodian, in a segregated account, a U.S. Treasury Bill to
cover margin requirements. Subsequent payments are made or
received by the Fund equal to the daily change in the contract
value and are recorded as unrealized gains or loses. The Fund
recognizes a realized gain or loss when the contract is closed
or expires.
(d) Realized gains or losses are determined on the specific
identification method. Dividends from investments are
recognized as income on the ex-dividend date.
(e) Dividends to shareholders are recorded on the declaration date
which coincides with the ex-dividend date.
(f) The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
in these financial statements. Actual results could differ from
those estimates.
2. The Fund has an agreement dated May 1, 1988 with Mathers and
Company, Inc., of which certain officers and directors of the
Fund are officers, directors and shareholders, to serve as its
investment adviser and manager. Under the agreement, the Fund
pays an annual management fee of 0.75% of the first $200,000,000
of the Fund's average monthly net asset value plus 0.625% of any
excess over $200,000,000 but not exceeding $500,000,000, plus
0.50% of any excess over $500,000,000. The adviser is required
to reimburse the Fund to the extent expenses, other than taxes
but including the management fee, in any year exceed the sum of 1
1/2% of the first $30,000,000 of the Fund's average monthly net
asset value plus 1% of such value in excess of $30,000,000.
Under the agreement, Mathers and Company, Inc. also provides
office facilities and bookkeeping services to the Fund.
3. Cost of U.S. Treasury obligations and of other investment
securities purchased during the six months ended June 30, 1997,
amounted to $94,492,343 and $36,229,526, respectively. Proceeds
of U.S. Treasury obligations and other investment securities sold
or matured during the six months were $94,503,210 and
$68,873,638, respectively. The cost of investments is the same
for financial statement and Federal income tax purposes. At June
30, 1997, gross unrealized appreciation on investments was
$19,089,733 and gross unrealized depreciation of investments was
$9,457,082.
<PAGE> 13
MATHERS FUND
TOTAL RETURN INVESTMENT PERFORMANCE
(All Periods Ended 6-30-97)
PERCENT CHANGE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1 YR. 5 YR. 10 YR. 20 YR. 32 YR.#
----- ----- ------ ------ --------
MATHERS FUND ................... 2.84 6.87 63.54 798.05 3799.88
Standard & Poor's 500 .......... 34.71 146.35 291.86 1810.65 3252.04
Value Line Composite * ......... 21.35 92.72 106.34 779.61 942.75
Dow Jones Industrial Average ... 38.36 162.89 332.25 1833.58 3080.63
Long-Term U.S. Treasury Bonds .. 8.88 55.65 159.66 531.87 876.63
30-Day U.S. Treasury Bills ..... 5.08 23.54 69.69 308.43 665.42
Consumer Price Index ........... 2.30 14.33 41.19 164.08 407.24
</TABLE>
COMPOUND ANNUAL RETURNS
<TABLE>
1 YR. 5 YR. 10 YR. 20 YR. 32 YR.#
----- ----- ------ ------ --------
<S> <C> <C> <C> <C> <C>
MATHERS FUND ................... 2.84 1.34 5.04 11.60 12.18
Standard & Poor's 500 .......... 34.71 19.76 14.63 15.89 11.65
Value Line Composite * ......... 21.35 14.02 7.51 11.48 7.64
Dow Jones Industrial Average ... 38.36 21.33 15.76 15.96 11.47
Long-Term U.S. Treasury Bonds .. 8.88 9.25 10.01 9.66 7.41
30-Day U.S. Treasury Bills ..... 5.08 4.32 5.43 7.29 6.60
Consumer Price Index ........... 2.30 2.71 3.51 4.98 5.23
* Unweighted average of 1600 stocks # From date of initial public offering: 8-19-65
</TABLE>
THE FUND'S DAILY PRICE AND ASSET MIX PERCENTAGES ARE AVAILABLE VIA RECORDED
MESSAGE (AFTER 4:30 P.M. CENTRAL TIME) MONDAY THROUGH FRIDAY AT 800-962-FUND.
SHAREHOLDER ACCOUNT BALANCES MAY BE OBTAINED FROM THE FUND'S TRANSFER AGENT AT
800-235-7458 BETWEEN 8:00 A.M. AND 4:30 P.M. CENTRAL TIME.
The results shown reflect past performance and should not be considered
representative of future performance. The investment return and principal
value of an investment in the Fund will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
Results reflect income dividends reinvested and capital gains distributions
accepted in shares.
