Semi - Annual Report
LMH FUND, LTD.
December 31, 1996
560 Hudson Street
Hackensack, New Jersey 07601
<PAGE>
LMH FUND, LTD.
February 20, 1997
Dear Fellow Shareholder:
Our first two transactions as the sub-advisor to the Fund entailed the
purchase of Super Food Services at $9.81 per share and the sale of Deluxe
Corp. at $36.81 per share. Subsequently, Super Food Services was acquired
by Nash Finch at $15.50 per share five months later (a very healthy gain in
a short period) and Deluxe Corp. currently trades at $30.50 per share. We
hope these very favorable transactions portend a bright new beginning to
the LMH Fund.
I am pleased to be able to write this correspondence to you and report
a number of favorable trends and events.
o The Fund had solid growth with the net asset value growing from June
30th's $24.10 to December 31's $26.33. This represents a gain of 10.6%
for the last 6 months of 1996 (includes year-end distribution).
o The Fund underwent a seamless portfolio repositioning and continues to
hold a high quality portfolio of undervalued securities. As of December
31, 1996 our average price/earnings ratio was 13.4 and our price to
book value was 2.6. These are well below the S&P 500's price/earnings
ratio of 17.4 and price to book value of 4.3.
o Assets grew from June 30th's $6.6 million dollars to $7.9 million
dollars on December 31st. The increase in assets under management came
from portfolio appreciation and from new shareholders purchasing the
Fund.
o The portfolio benefited from a number of takeovers/attempted takeovers
as our holdings in Carter-Wallace, MCI Communications and Super Food
Services all received offers at prices well above our initial purchase
price.
o Costs continue to be reduced as our expense ratio ended the quarter at
1.35% per annum. This represents a decline from June 30, 1996's 1.84%
and June 30, 1995's 2.35%.
These and other factors lead us to be optimistic about the long term
prospects for the Fund.
Beginning in this semi-annual report, we intend to periodically provide
you with a commentary on our analysis and outlook on the financial markets
as well as the Fund. We welcome your feedback and comments on these
discussions.
MARKET COMMENTARY
In 1996, the equity markets provided a reprise of their strong 1995
results. As in 1995, 1996 stock prices were driven higher in large measure
by the "Goldilocks" economy-not too hot and not too cold, modest inflation,
improving earnings and huge inflows of cash into the stock market.*
* Probably the single most important force in the past year.
<PAGE>
LMH FUND, LTD.
1997's Fearless Forecast:
Looking forward, we foresee a similar economic landscape to the past
two years. We see the economy achieving modest growth, with some slowdown
in the latter half of the year. Inflation will show small but manageable
increases and the Fed will maintain a neutral stance. After two very strong
years, we believe that the equity markets will slow from their robust pace,
with a continuation of the recent day to day volatility. We also feel the
year will be front loaded with the better returns occurring early in the
period.
Economic Outlook:
The economy ended 1996 with modest growth. We expect this slow and
steady pace to continue into the upcoming year. We foresee a modest up-tick
in inflation, but are concerned that any unforeseen additional increases in
oil prices could result in a negative inflation surprise.
YEAR-END PORTFOLIO REVIEW AND OUTLOOK
The LMH Fund showed solid gains over the past six months. Returns were
aided by strong showings in numerous stocks spread over a variety of
industries. Equity standouts included: APL Limited, American Brands,
American Greetings, Bristol-Myers, Canandaigua Wine Company,
Carter-Wallace, J.P. Morgan, John H. Harland Financial, MCI Communications,
Mellon Bank, O'Sullivan Industries, PNC Bank Corp., Reebok International
Ltd., and Super Food Service.
Importantly, our returns were achieved by being in the right stocks,
rather than owning hot industries or being in the "hot" large
capitalization stocks. As a result we believe our gains were achieved with
less than market risk. Looking forward, we feel this stock selection will
continue to provide ample upside, while protecting the portfolio in
choppier times.
Strategic Acquisitions/Takeover Bait:
The past six month's return was aided by a number of
takeovers/attempted takeovers. These strategic acquisitions included
Carter-Wallace, MCI Communications and Super Food Services. In each of
these cases, other entities saw the intrinsic worth that our Benjamin
Graham valuation process had identified.
In reviewing the current portfolio we feel that a number of holdings
make sense to be owned by larger entities. Takeover bait in upcoming
periods include: Bausch & Lomb, Ennis Business Forms, Eskimo Pie Corp.,
Frontier Corp., Mylan Laboratories, SpaceLabs Medical, Inc., and Topps
Company, Inc.
Market Volatility - 1996 Review and Outlook:
Looking back over the past year, it "felt" as if there was more market
volatility than usual. The fact is that 15% of all 1996's trading days had
a gain or loss of 1% or more. This is exactly in line with the average post
World War
<PAGE>
LMH FUND, LTD.
II stock market volatility. Over this period, on average, 16% of
trading days have had 1% or greater daily market moves.
The reality is that the very calm 1992 to 1995 was "abnormal" and this
past year was a return to normalcy.
The moral of this past year's volatility is: 1) investors can make
money during volatile markets; and 2) while volatility and uncertainty are
uncomfortable, they are a normal part of investing. Looking forward we
expect continued day to day market fluctuations. The 50 and 100 point moves
are here to stay and in fact quite typical.
Equity Outlook:
Over the short term we believe the equity market will be most
influenced by strong cash inflows into the stock market. Secondarily,
stocks should be positively impacted by low interest rates, a good economy
and solid corporate profitability. This favorable environment should help
drive prices higher in the early part of the year. As the year progresses,
however, we expect continued volatility and a choppier climate.
We are confident that the Fund's investment focus on purchasing quality
businesses at discounted prices should be able to grow your assets as well
as weather turbulent times.
Closing Comments and New Year's Wish:
We are pleased with the progress that the Fund has made in our first
six months as the LMH Fund's sub-advisor. We are excited about its future
and remain committed to revitalizing its growth and building its
shareholder's wealth.
I and the entire Matrix team wish you and your family a very healthy,
happy and prosperous New Year.
We welcome your thoughts and comments. Please feel free to give me a
call at 800-366-6223.
With kind regards,
Sincerely,
/S/
David A. Katz, CFA
Chief Investment Officer
<PAGE>
LMH FUND, LTD.
<TABLE>
<CAPTION>
Schedule of
Investments (Unaudited) DECEMBER 31, 1996
- --------------------------------------------------------------------------------------------------------------
COMMON STOCKS (99.28%)
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------------------------------------
BANKS (4.90%)
<S> <C> <C>
Mellon Bank Corp. 2,400 $ 170,400
J.P. Morgan & Co. 2,200 214,775
-------
385,175
-------
BEVERAGES (2.54%)
Anheuser-Busch Companies, Inc. 5,000 200,000
-------
COMPUTERS & PERIPHERALS (1.86%)
Apple Computer, Inc.* 7,000 146,125
-------
COMPUTER SOFTWARE & SERVICES (2.62%)
Banctec, Inc.* 10,000 206,250
-------
CONSUMER PRODUCTS (6.82%)
American Brands, Inc. 5,300 263,013
Bausch & Lomb, Inc. 7,800 273,000
-------
536,013
-------
DISTILLING (3.92%)
Canandaigua Wine Company, Inc.* 10,800 307,800
-------
DRUGS (4.28%)
Bristol-Myers Squibb Co. 2,000 217,500
Pharmacia & Upjohn, Inc. 3,000 118,875
-------
336,375
-------
DRUGS - GENERIC (3.32%)
Ivax Corp. 14,000 143,500
Mylan Laboratories, Inc. 7,000 117,250
-------
260,750
-------
ELECTRONICS (3.35%)
Telxon Corp. 21,500 263,375
-------
ENTERTAINMENT - VIDEO & PUBLISHING (3.23%)
Carmike Cinemas, Inc.* 10,000 253,750
-------
<PAGE>
LMH FUND, LTD.
COMMON STOCKS (Unaudited), Continued
SECURITY SHARES VALUE
ENVIRONMENTAL SERVICES (2.89%)
Wheelabrator Technologies, Inc. 14,000 $ 227,500
---------
FINANCIAL SERVICES (1.81%)
H & R Block, Inc. 4,900 142,100
-------
FOOD PROCESSING (2.12%)
Eskimo Pie Corp. 15,000 166,875
-------
FURNITURE (8.10%)
O'Sullivan Industries* 27,000 378,000
Shaw Industries, Inc. 22,000 258,500
-------
636,500
-------
GROCERY (2.43%)
Great Atlantic & Pacific Tea Company 6,000 191,250
-------
INDUSTRIAL SERVICES (2.12%)
Olsten Corp. 11,000 166,375
-------
MARITIME SERVICES (2.74%)
APL Limited 9,100 214,988
-------
MEDICAL SERVICES (2.92%)
John Alden Financial Corp. 7,000 129,500
Physician Corp. of America* 10,000 100,000
-------
229,500
-------
MEDICAL SUPPLIES (3.26%)
SpaceLabs Medical, Inc.* 12,500 256,250
-------
OFFICE EQUIPMENT & SUPPLIES (2.15%)
Ennis Business Forms 15,000 168,750
-------
OIL & GAS - INTERNATIONAL (1.37%)
Exxon Corp. 1,100 107,800
-------
PACKAGING & CONTAINERS (2.89%)
American Greetings Class A 8,000 227,000
-------
PRECISION INSTRUMENTS (3.62%)
Sensormatic Electronics 17,000 284,750
-------
<PAGE>
LMH FUND, LTD.
COMMON STOCKS (Unaudited), Continued
SECURITY SHARES VALUE
PRINTING & PUBLISHING (5.48%)
Cognizant Corp.* 2,700 $ 89,100
The Dun & Bradstreet Corporation 2,700 64,125
John H. Harland & Co. 8,000 264,000
A.C. Nielson Corp.* 900 13,612
------
430,837
-------
RECREATION (2.29%)
The Topps Company, Inc.* 45,000 180,000
-------
RETAIL - SPECIAL LINES (2.58%)
Designs, Inc.* 36,000 202,500
-------
SHOES (4.28%)
Reebok International Ltd.* 8,000 336,000
-------
TELECOMMUNICATIONS SERVICES (8.00%)
Frontier Corp. 11,000 248,875
MCI Communications Corp. 5,000 163,438
NYNEX Corp. 4,500 216,562
-------
628,875
-------
TOILETRIES & COSMETICS (1.39%)
Carter-Wallace, Inc. 7,000 109,375
-------
TOTAL COMMON STOCKS 7,802,838
(Cost $7,066,837)
SHORT-TERM INVESTMENT (0.76%)
Dreyfus Treasury Prime (Cost $59,740) 59,740
LIABILITIES LESS OTHER ASSETS (-.04%) (2,881)
------
TOTAL NET ASSETS $7,859,697
<FN>
* Non-income producing security.
</FN>
</TABLE>
The accompanying notes to financial statements are an integral part of
this schedule.
<PAGE>
LMH FUND, LTD.
<TABLE>
<CAPTION>
Statement of
Assets and Liabilities
(Unaudited) DECEMBER 31, 1996
- --------------------------------------------------------------------------------------------------------------
ASSETS
Investments in securities, at value:
<S> <C>
Common stocks (cost $7,066,837)...................................................... $7,802,838
Short-term investment (cost $59,740)................................................. 59,740
Dividends and interest receivable....................................................... 9,057
Receivable for investments sold......................................................... 164,375
-------
TOTAL ASSETS 8,036,010
---------
LIABILITIES
Accrued investment advisory fee......................................................... 2,216
Other accrued expenses.................................................................. 23,177
Payable for investments purchased....................................................... 150,920
-------
TOTAL LIABILITIES 176,313
-------
NET ASSETS $7,859,697
==========
SOURCE OF NET ASSETS
Capital
Par value of 298,523 shares outstanding
(30,000,000 shares authorized)
at $.01 per share................................................................. $ 2,985
Paid-in capital ..................................................................... 8,772,194
---------
Total capital paid in on shares...................................................... 8,775,179
Undistributed net investment income.................................................. 533
Accumulated net realized loss on
investments transactions.......................................................... (1,652,016)
Unrealized appreciation of investments............................................... 736,001
-------
NET ASSETS $7,859,697
==========
NET ASSET VALUE PER SHARE
(Offering and Redemption Price) $ 26.33
=======
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
<PAGE>
LMH FUND, LTD.
<TABLE>
<CAPTION>
Statement of
Operations
(Unaudited)
- --------------------------------------------------------------------------------
INVESTMENT
INCOME
<S> <C>
Dividends............................................................................... $ 71,454
Interest................................................................................ 7,555
-----
TOTAL INCOME 79,009
------
EXPENSES
Investment advisory fee................................................................. 36,114
Administration fee...................................................................... 12,621
Transfer agent fee and expenses......................................................... 11,636
Audit fees.............................................................................. 7,562
Legal fees.............................................................................. 2,521
Registration and filing fees............................................................ 2,269
Insurance............................................................................... 2,066
Custodian fee and expenses.............................................................. 2,420
Reports to shareholders ................................................................ 764
Miscellaneous........................................................................... 1,008
-----
TOTAL EXPENSES 78,981
Less: Advisory fees waived (30,370)
-------
NET EXPENSES 48,611
------
NET INVESTMENT INCOME 30,398
------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS - NET
Realized gain on investments - net...................................................... 827,485
Decrease in unrealized appreciation on investments...................................... (116,734)
--------
GAIN ON INVESTMENTS - NET 710,751
-------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 741,149
=========
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
<PAGE>
LMH FUND, LTD.
<TABLE>
<CAPTION>
Statement of Changes
in Net Assets FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
DECEMBER 31, JUNE 30,
1996* 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net investment income................................................ $30,398 $ 128,905
Realized gain on investments - net................................... 827,485 608,596
Change in unrealized appreciation of investments - net............... (116,734) 275,717
-------- -------
NET INCREASE
IN NET ASSETS
FROM OPERATIONS 741,149 1,013,218
------- ---------
DISTRIBUTIONS TO
SHAREHOLDERS
Net investment income................................................ (97,339) (132,354)
------- --------
CAPITAL SHARE
TRANSACTIONS
Shares sold ......................................................... 575,432 44,611
Shares issued in connection with reinvestment of dividends........... 94,160 128,205
Shares redeemed...................................................... (101,600) (451,012)
-------- --------
TOTAL 567,992 (278,196)
------- --------
TOTAL INCREASE
IN NET ASSETS 1,211,802 602,668
Net assets, beginning of period ..................................... 6,647,895 6,045,227
--------- ---------
Net assets, end of period (including undistributed
net investment income of $533 and $67,474,
respectively)..................................................... $7,859,697 $6,647,895
========== ==========
CHANGES IN SHARES
OUTSTANDING
Shares sold.......................................................... 23,224 1,945
Shares issued in connection with reinvestment of dividends........... 3,556 5,567
Shares redeemed...................................................... (4,120) (19,837)
------ -------
INCREASE (DECREASE) 22,660 (12,325)
====== =======
<FN>
*Unaudited.
</FN>
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
<PAGE>
LMH FUND, LTD.
Notes to
Financial
Statements (Unaudited) DECEMBER 31, 1996
- --------------------------------------------------------------------------------
NOTE 1 -
ORGANIZATION
LMH Fund, Ltd. (the "Fund") is a Maryland corporation registered under the
Investment Company Act of 1940 as a diversified open-end management
investment company. The Fund commenced operations September 16, 1983. The
objective of the Fund is to achieve a total rate of return composed of
capital appreciation and current income.
NOTE 2 -
SIGNIFICANT ACCOUNTING POLICIES
The Fund consistently follows the accounting policies set forth below which
are in conformity with generally accepted accounting principles.
(a) Security Valuation
Portfolio securities which are traded on national securities exchanges are
valued at the last sale price on the principal exchange on which the
security is traded as of the close of the New York Stock Exchange. If there
were no transactions in a security on that day, the security is generally
valued at the last reported bid price. Securities traded over-the-counter
are generally valued at the latest bid price. If no quotations are
available for a security, or if the Board of Directors (or committee of the
Board of Directors appointed for that purpose) believes that the latest bid
price of a security which has not been traded on the date in question does
not fairly reflect its market value, it is valued in a manner determined in
good faith by the Board of Directors, or their delegates, to reflect its
fair value. U.S. Government obligations are stated at market value and any
related premium or discount is amortized on a straight-line basis through
maturity. Short-term notes are stated at cost which approximates market.
(b) Federal Income Taxes
The Fund has elected to be treated as a "regulated investment company"
under Subchapter M of the Internal Revenue Code. To maintain this
qualification the Fund will continue to distribute substantially all of its
taxable income and any capital gains less any applicable capital loss
carryforwards. Accordingly, no provision for Federal income taxes has been
made in the accompanying financial statements.
(c) Portfolio Transactions
Security transactions are accounted for on the trade date, the date the
order to buy or sell is executed. Security gains and losses are computed on
an identified cost basis.
(d) 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 these
estimates.
<PAGE>
LMH FUND, LTD.
(e) Other
Interest income is recorded on the accrual basis. Dividend income and
distributions to shareholders are recorded on the ex-dividend date.
NOTE 3 -
INVESTMENT ADVISORY FEE
The Fund has a management agreement with Heine Management Group, Inc. (the
"Advisor") to serve as investment advisor. Certain officers of the Advisor
are also officers of the Fund. Under the terms of the agreement, the Fund
has agreed to pay the Advisor as compensation for all services rendered,
staff and facilities provided and expenses paid or assumed, an annual fee,
accrued daily, paid monthly, of 1.00% of the Fund's average daily net
assets. For the fiscal six months ended December 31, 1996, the Advisor
waived all but $5,744 of the advisory fee, amounting to approximately 0.20%
of the Fund's average daily net assets.
On July 3, 1996, the Fund's directors unanimously approved a Sub-Advisory
Agreement between the Fund's Advisor and Matrix Asset Advisors, Inc.
("Matrix") whereby Matrix would become Sub-Advisor to the Fund, effective
immediately. While serving as Sub-Advisor, Matrix has agreed to waive any
Sub-Advisory fees payable from the Advisor. On February 11, 1997, the
Fund's directors approved an investment advisory agreement pursuant to
which Matrix will become investment advisor to the Fund, contingent upon
approval of the Agreement by Fund shareholders.
NOTE 4 -
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities for the six months ended
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Proceeds from
Sales (Including
Purchases Maturities)
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock $6,074,227 $5,547,190
Short-term Obligations 3,382,751 3,421,279
</TABLE>
At December 31, 1996, the cost of securities for federal income tax
purposes was substantially the same as that recorded for book purposes.
Accordingly, the aggregate gross unrealized appreciation on investments
over cost for federal income tax purposes was $986,224 and the aggregate
gross unrealized depreciation was $250,223, or a net unrealized
appreciation of $736,001. At June 30, 1996, the Fund had a capital loss
carryforward of $2,479,501 of which $1,373,139 expires in fiscal 1999 and
$1,106,362 expires in fiscal 2000. The Fund also had Post-October losses of
$216,260. To the extent future capital gains are offset by these capital
losses, the Fund does not anticipate distributing any such gains to the
shareholders.
<PAGE>
LMH FUND, LTD.
<TABLE>
<CAPTION>
Financial Highlights
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
YEARS ENDED JUNE 30,
- ---------------------------------------------------------------------------------------------------------------
31, 1996* 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.. $24.10 $20.98 $17.78 $18.45 $17.08 $15.79
Income from investment operations:
Net investment income.............. 0.09 0.47 0.46 0.34 0.30 0.36
Net realized and unrealized gain
(loss) on investments............ 2.47 3.12 3.13 (0.78) 1.44 1.36
---- ---- ---- ----- ---- ----
Total from investment operations...... 2.56 3.59 3.59 (0.44) 1.74 1.72
---- ---- ---- ----- ---- ----
Less distributions:
Dividends from net investment
income........................... (0.33) (0.47) (0.39) (0.23) (0.37) (0.43)
Distributions from net capital gains 0.00 0.00 0.00 0.00 0.00 0.00
---- ---- ---- ---- ---- ----
Total distributions................... (0.33) (0.47) (0.39) (0.23) (0.37) (0.43)
----- ----- ----- ----- ----- -----
Net asset value, end of period........ $26.33 $24.10 $20.98 $17.78 $18.45 $17.08
====== ====== ====== ====== ====== ======
Total return ......................... 22.15%+ 17.16% 20.47% (2.44%) 10.30% 11.09%
Ratios/supplemental data:
Net assets, end of period (millions).. $ 7.9 $ 6.6 $ 6.0 $ 5.7 $ 6.9 $ 7.7
Ratio of operating expenses to
average net assets:
Before expense reimbursement.... 2.19%+ 1.84% 2.35% 2.51% 2.55% 2.63%
After expense reimbursement..... 1.35%+ 1.84% 2.35% 2.50% 2.50% 2.63%
Ratio of net investment income to average net assets:
Before expense reimbursement ... 0.00%+ 2.01% 2.27% 1.79% 1.52% 1.86%
After expense reimbursement .... 0.84%+ 2.01% 2.27% 1.80% 1.58% 1.86%
Portfolio turnover rate .............. 81% 57% 34% 46% 53% 76%
Average commission rate paid per share $.0585 - - - - -
<FN>
*Unaudited.
+Annualized.
</FN>
</TABLE>
The accompanying notes to financial statements are an integral part of
these statements.
<PAGE>
Board of Directors
Leonard M. Heine, Jr., Chairman
Richard S. Harman
Robert M. Rosencrans
o
Officers
Leonard M. Heine, Jr.
President
David A. Katz
Vice President and
Chief Investment Officer
o
Investment Advisor and Sub-Advisor
Heine Management Group, Inc.
Matrix Asset Advisors, Inc.
444 Madison Avenue, 3rd Floor
New York, NY 10022
(800) 366-6223
o
Custodian and Transfer Agent
The Provident Bank
One East Fourth Street
Cincinnati, Ohio 45202
o
Administrator
Investment Company Administration Corporation
o
Independent Accountants
Price Waterhouse LLP
o
Legal Counsel
Shereff, Friedman, Hoffman & Goodman
This report is intended for the information of shareholders of
LMH Fund, Ltd. and should not be used as sales literature
unless preceded or accompanied by a current prospectus.
