SEMI-ANNUAL REPORT
MATRIX/LMH
VALUE FUND
December 31, 1998
560 Hudson Street
Hackensack, New Jersey 07601
<PAGE>
MATRIX/LMH
VALUE FUND
February 9, 1999
Dear Fellow Shareholder:
I am pleased to enclose our report and commentary concerning the Fund for
the semi-annual period ending December 31, 1998.
Following a very disappointing third quarter, the Fund staged a strong
recovery in the fourth quarter. The Net Asset Value of the Fund ended the year
at $30.94, an impressive 24.30% increase for the quarter, and an overall
increase of 2.90% for the past 12 months.
You might recall that in our last correspondence we discussed the ability
of markets to recover rather quickly from steep declines. The Fund's results for
the fourth quarter are an excellent example of such a recovery. Our gains in the
past three months exceeded major market indices, which we attribute to renewed
attention in good businesses trading at attractive prices.
Nevertheless, performance for the calendar year was disappointing.
However, we do believe that the solid relative results in the fourth quarter
should carry over into 1999. We are very optimistic the Fund will generate
attractive performance this year, for reasons discussed in our enclosed market
commentary.
While the past year has been particularly difficult for sensible
investing, we believe this has set the stage for a prolonged resurgence for the
Value style. In the meantime, we believe we have made significant strides in
positioning the Fund for a bright future. These include:
+ Holding a portfolio of high-quality businesses selling well below the
market's Price/earnings, Price/sales and Price/ book value multiples.
+ Strong expense control which leaves the Fund's expense ratio at 1.26%
as of 12/31/98. This is below the industry's average, especially for
funds of less than $100 million.
+ Broad distribution, as the Fund can be purchased through Charles Schwab
as well as other major brokerage firms.
+ Increased ownership by friends, family and employees and partners of
Matrix Asset Advisors.
+ Improved communication through quarterly correspondence and a mutual
fund web-site to keep shareholders abreast of portfolio developments
and market outlook.
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MATRIX/LMH
VALUE FUND
If you have any questions on the enclosed or would like to discuss our
outlook on the market or the Fund in greater detail, please feel free to call us
at (800) 366-6223 or e-mail us at [email protected].
Best regards.
Sincerely,
/s/ David A. Katz
David A. Katz, CFA
Chief Investment Officer
The Fund's average annual total returns for the one-year, five-year and ten-year
period ended December 31, 1998 were 2.90%, 12.65% and 8.61%, respectively. Past
performance is not a guarantee of future results. Fund share value and returns
fluctuate and investors may have a gain or loss when they redeem shares. Matrix
Asset Advisors became sub-Advisor on July 3, 1996 and Advisor to the Fund on May
11, 1997. Prior to those dates, the Fund was managed by another advisor.
2
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MATRIX/LMH
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CAPITAL MARKET COMMENTARY - 1998 IN REVIEW
Overview:
To say that 1998 was an unusual year for the equity markets would be a
major understatement. Better stated, there were two very different markets -
with dramatically differing performance - in 1998.
On the one hand, there was the market for a relatively small number of
very large, very expensive stocks. These stocks enjoyed spectacular returns and
performance. Although they were only a handful, because of their tremendous
size, these stocks also dominated the major indices - the Dow and the S&P 500.
The result was that these indices each had strong annual returns. The Dow
posted an 18.1% return for the year, while the S&P 500 increased by 28.5%.
On the other hand, there was the rest of the market, literally thousands
of stocks, whose performance ranged from poor to mediocre. IN FACT, TWO-THIRDS
(2/3) OF ALL U.S. STOCKS DECLINED IN 1998. The broad market Value Line Index and
the small cap-oriented Russell 2000 Index each had negative performance of -2.3%
and -2.1%, respectively.
The relationship of size versus 1998 returns is illustrated in the
following table:
1998 COMMON EQUITY UNWEIGHTED PRICE PERFORMANCE
Unweighted
By Capitalization Performance
----------------- -----------
<$250 Million -24.14%
250 Million - 2 Billion -16.63%
2 Billion - 5 Billion - 6.11%
5 Billion - 20 Billion +6.19%
> 20 Billion +25.94%
Source: Salomon Smith Barney
Within the broader market were many stocks which we believe offered (and
continue to offer) the combination of favorable long-term business prospects and
very attractive valuations. It was the nature of the stock market in 1998 that
such stocks were largely ignored, or even penalized.
In the face of growing evidence of a slowdown in corporate earnings, the
expanding disparity between stock prices and earnings growth will be
increasingly untenable. And the meteoric rise of Internet stocks has all the
hallmarks of an investment mania. History has shown that manias do not end
happily.
On the favorable side, the fourth quarter saw a dramatic rebound, with our
Matrix/LMH Value Fund outpacing major market indices. The surging recovery of
the Fund and those of other Value-oriented managers served as a reminder that at
a certain point investors still focus on identifying bargains, and still
perceive that buying stocks "right' is the surest way to good performance. As
the pendulum fully swings back toward "value and sensibility", we expect that
such movement will be both significant and long-term in duration.
3
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MATRIX/LMH
VALUE FUND
REVISITING OUR FORECAST FOR 1998
Last year we predicted increased stock market volatility for 1998. Well,
we certainly got that one right! The stock market had daily movements up or down
of 1% or more in 32% of the trading days last year (compared to 5% of the
trading days in 1995).
We were also accurate about our assessment of likely continued strength
for the American economy. Furthermore, we projected a relatively modest year for
stocks, and, excluding the mega-stocks, we were correct. What we missed was the
ability of that segment of the market to overextend itself to the levels seen in
1998.
OUR FEARLESS FORECAST FOR 1999
Our economy will remain fundamentally healthy. However, international
weakness poses the greatest threat to our economy in the form of shrunken
markets, credit crunches and perceived instability. It is also possible that
commodity prices will begin to recover. A rise in commodity prices would result
in a modest uptick in inflation. This in turn could have a negative impact on
very expensive stocks.
Like 1998, the stock market will be selective in its performance. However,
in 1999, we expect to have a reverse of last year, with the mega-cap stocks
being outpaced by the broader market.
YEAR-END FUND REVIEW AND OUTLOOK
FUND PERFORMANCE
As in the overall market, the Fund had a handful of very strong performing
stocks and a large number of stocks that were ignored or punished. Our
willingness to buy stocks along the entire capitalization spectrum proved to be
a detriment rather than a benefit last year, as small- and medium-sized
companies fared relatively poorly in the market.
Following the third quarter market sell-off, we identified a substantial
number of large capitalization stocks that had compelling valuations. We moved
aggressively into such stocks as Alcatel, Bank America, First Data, and
Schlumberger.
On the positive side, Bausch & Lomb, Bristol-Myers, Eastman Kodak,
Frontier Corp., Pharmacia & Upjohn, Philip Morris, Shaw Industries, SLM Holding,
SpaceLabs Medical, and St. Jude Medical all had strong performances. Allergan,
Anheuser Busch, Fruit of the Loom, and U.S. Surgical were all sold for solid
gains. Finally, a number of companies that were purchased in the wake of the
market sell-off had a good year-end bounce, including Novellus Systems and
Schlumberger.
On the downside, several established holdings had weak returns, including
Lone Star Steakhouse, Olsten Corp., Sensormatic, Toys R Us, and Tupperware.
Several stocks that were purchased because of the combination of favorable
long-term outlooks and a significant sell-off (prior to our purchase) continued
to show weakness. These included Lam Research, Polaroid and Vishay
Intertechnology. Interestingly, though, as we write this report in mid-February,
Lam has doubled since the start of the year, and is now substantially above our
cost. We expect to see similar recoveries in a number of last year's laggards as
the year progresses.
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MATRIX/LMH
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The sell-off of attractive companies in 1998 and the continuing trend to
consolidation are likely to stimulate a significant number of takeovers in 1999.
Likely candidates include Alcatel, Frontier Corp., Mark IV Industries, St. Jude
Medical, Sensormatic and SpaceLabs Medical.
EQUITIES OUTLOOK
When it looked like the wheels were falling off the U.S. equity markets in
the third quarter, our market letter focused on the surprisingly strong
recoveries that occur after market corrections. In hindsight, this call was well
timed. TODAY WE MAKE A SIMILAR PREDICTION FOR THE VALUE DISCIPLINE IN 1999.
As stated above, many of the factors that worked against Value last year
should help in 1999. The dramatic appreciation of the most expensive stocks in
1998 will make it all the more difficult for them to repeat such performance in
1999. As these companies disappoint their shareholders, investors will become
more sensitive and should increasingly favor good, stable companies with strong
fundamentals selling at modest valuations.
Other factors that will make 1999 a far better environment for Value
include: an increase in takeover activity; the wide divergence between the
private market value and the stock price of many Value stocks; and the historic
valuation disparity between the mega-cap stocks and the rest of the market.
* * *
Following this letter is our regular quarterly segment focusing on
investing. This quarter we examine the more complex reality behind the
performance results for the S&P 500 Index and the danger of making long-term
decisions based on short-term market anomalies.
The continued trust and confidence of our clients is our highest priority.
We therefore urge you to call any of us with any questions or concerns. As a
reminder, we can be reached via e-mail at [email protected]. We wish you all the
best for a year filled with good health, contentment and even market
appreciation.
5
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MATRIX/LMH
VALUE FUND
IDEAS ABOUT INVESTING
A QUARTERLY QUEST FOR INVESTING ENLIGHTENMENT
"UNMASKING THE REALITY BEHIND THE S&P 500 INDEX"
For many investors, the S&P 500 Index has become the ultimate benchmark
for gauging stock market performance. In 1998, the S&P 500 posted its fourth
consecutive annual performance in excess of 20%. As a result, many investors
conclude that it was not only a strong year for the stock market, but also a
year in which any performance substantially less than that of the S&P 500 was
unusual.
It therefore behooves us to examine more closely the results for the Index
in 1998:
Segment of the S&P 500 % Return for 1998* Difference
---------------------- ------------------ ----------
Overall Index (Weighted) 26.7
Average Stock (Unweighted) 11.2 15.5%
Top 50 Stocks 34.9
Remaining 450 Stocks 8.4 26.5%
Median Stock 3.7
* Without dividends
Source: Zacks, Inc., Matrix Asset Advisors
The numbers above are staggering for the disparities they reveal. Unless
one owned the largest 50 stocks or the Index itself, performance for the year
was mediocre at best.
Please recognize that when we and other investment professionals speak of
how "narrow" the stock market was in 1998, the components of the S&P 500 offer
compelling confirmation. (Plus, remember that the S&P 500 is the large
capitalization index, the best-performing sector of the market in 1998. When one
examines broad market or small cap indexes, the news becomes increasingly
negative.)
Of course, the logical question is: so why not own those largest stocks or
just buy an Index fund and cover all the bases? To us the answer lies in the
valuations of those largest stocks.
Simply stated, these stocks are priced with the expectation that only
tremendous things will possibly happen to them. As a result, they are
increasingly vulnerable to any kind of disappointment. The more expensive the
stock, the greater its vulnerability; and the greater likelihood of a
dramatically negative market response in the event of such a disappointment.
6
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MATRIX/LMH
VALUE FUND
We believe that the key to consistently making money in the stock market
is to buy good businesses at good prices. Better to pay a very good price on a
merely good business than to pay an inflated price on a great business. All
businesses, however great, hit bumps in the road. If the investing public is
definitionally paying prices that do not anticipate any bumps, then those bumps
will be painful ones indeed.
In 1998, the rapid collapse of banking and brokerage stocks occurred
because of the combination of their very rich prices and the fear that the
Asian, Russian and South American credit crises might wreak havoc with profits.
The prices became unjustifiable and the reactions were swift and painful:
Citigroup dropped from 180 to 80; Merrill Lynch, from 108 to 38.
So biggest is not necessarily safest. However, that is the erroneous basis
that underlies current Index or mega-cap investing. Again, 1998 notwithstanding,
there is no long-term substitute for buying right.
AVOID THE TRAP: BEWARE OF INVESTMENT DECISIONS BASED ON THE MARKET IN 1998
In investing, as in other aspects of life, there is a tendency to make
decisions based on one's most recent experience. Unfortunately, this is a
formula for significant disappointment for any investor.
Last year was an exception to the investment rule in two important and
unusual ways. First, as we have discussed in recent correspondence, 1998
featured the greatest performance differential between the highest and lowest
P/E stocks that has existed in the past 50 years.
Second, as shown at the very beginning of this letter, there was a
complete correlation between the size of a company and its market performance in
1998: the larger the better.
When these two unusual circumstances are combined, the result is an
anomaly: investors were greatly rewarded for investment strategies that usually
lag significantly. The spoils went to the largest, most expensive companies.
Value investors who prefer lower to higher P/E stocks were penalized, as were
investors who diversify away from the handful of largest companies.
What therefore makes 1998 so strangely remarkable is that it was a year in
which prudence was thrown to the winds and the normal factors that determine
successful investing were a detriment rather than a benefit.
Consider the size of companies. It is a truism to say that the largest
companies have less business enterprise risk than smaller, more tenuous ones. If
for only this reason, smaller companies typically outperform larger ones,
because otherwise no one would own anything but the largest companies. This is a
basic risk/reward tradeoff.
However, smaller companies can also increase their earnings faster than
very large ones because they are working from a smaller base of earnings. Rapid
earnings growth is a very popular rationale for paying more and more for a
stock.
The following performance comparison between the small-cap focused Russell
2000 Index and the large-cap oriented S&P 500 Index shows how unusual 1998 was:
7
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MATRIX/LMH
VALUE FUND
1979-1997 (Annualized) 1998
---------------------- ----
Russell 2000 Index 13.3% -3.4%
S&P 500 Index 13.0% 26.7%
Source: The Leuthold Group
The performance disparity in 1998 was by far the largest in this
20-year period.
On the matter of performance based on price/earnings, history has clearly
favored lower cost stocks over more expensive ones. Consider the following
comparison between the highest and lowest P/E stocks:
1950 - 1996 (Annualized Performance) 1998 (Annualized Performance)
------------------------------------ -----------------------------
Lowest P/E stocks: +18.2% Highest P/E stocks: +26.1%
Highest P/E stocks +12.7% Lowest P/E stocks: -2.7%
Source: David Dreman & Co.; Zacks, Inc; Matrix Asset Advisors
By definition, anomalous situations do not last. They happen at a point in
time and then pass. In investing, anomalous situations are followed by strong
reversals and reversions back to historic norms. So, in the case of high and low
P/Es, the two previous times in the past 40 years where low P/E stocks
significantly lagged high P/E stocks were followed by a multi-year reversion to
the norm. Low P/E stocks subsequently trounced high P/E stocks.
Similarly, larger stocks have outperformed smaller ones for the past five
years, which is their longest consecutive dominance in the past 20 years. As
with the P/E comparison, periods of large-cap dominance have historically been
followed by prolonged periods of small-cap outperformance.
It is therefore not mere wishful thinking to believe that what happened in
1998 will not be repeated in 1999. Rather, investors should expect a return to
more normative investing criteria and relationships.
Therefore, let us see 1998 for what it was - an anomaly, not a roadmap for
future direction.
8
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MATRIX/LMH
VALUE FUND
SCHEDULE OF
INVESTMENTS (UNAUDITED) DECEMBER 31, 1998
---------------------------------------------
COMMON STOCKS (98.68%)
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
AUTO PARTS (2.44%)
Mark IV Industries, Inc. 17,000 $221,000
--------
BANKS (6.99%)
Bankamerica Corp. 3,000 180,375
Mellon Bank Corp. 4,000 275,000
J.P. Morgan & Co. 1,700 178,606
--------
633,981
--------
COMPUTER SOFTWARE AND SERVICES (4.43%)
Electronic Data Sytems Corp. 8,000 402,000
--------
CONSUMER PRODUCTS (9.72%)
Bausch & Lomb, Inc. 6,000 360,000
Eastman Kodak Co. 5,300 381,600
Polaroid Corp. 7,500 140,156
--------
881,756
--------
DRUGS (8.30%)
Bristol-Myers Squibb Co. 2,600 347,913
Pharmacia & Upjohn, Inc. 5,000 283,125
Teva Pharmaceutical SP ADR 3,000 122,062
--------
753,100
--------
ELECTRONICS (5.04%)
Arrow Electronics, Inc. 9,000 240,188
Vishay Intertechnology, Inc. 15,000 217,500
--------
457,688
--------
FINANCIAL SERVICES: (7.71%)
First Data Corp. 13,000 411,937
SLM Holding Corp. 6,000 288,000
--------
699,937
--------
FOOD PROCESSING (2.77%)
Eskimo Pie Corp. 19,000 251,750
--------
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MATRIX/LMH
VALUE FUND
COMMON STOCKS, CONTINUED
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
FURNITURE (8.07%)
O'Sullivan Industries* 30,500 $320,250
Shaw Industries, Inc. 17,000 412,250
--------
732,500
--------
HOUSEHOLD PRODUCTS (2.54%)
Tupperware Corp. 14,000 230,125
--------
INDUSTRIAL SERVICES (1.67%)
Olsten Corp. 20,500 151,188
--------
MEDICAL SERVICES (4.61%)
Aetna Inc. 3,800 298,775
Foundation Health Systems 10,000 119,375
--------
418,150
--------
MEDICAL SUPPLIES (7.20%)
SpaceLabs Medical, Inc.* 17,600 404,800
St. Jude Medical, Inc. 9,000 249,187
--------
653,987
--------
OILFIELD SERVICES/EQUIPMENT (1.07%)
Schlumberger Ltd. 2,100 96,863
--------
PRECISION INSTRUMENTS (2.04%)
Sensormatic Electronics Corp. 26,700 185,231
--------
RESTAURANTS (1.82%)
Lone Star Steakhouse & Saloon 18,000 165,375
--------
SEMICONDUCTORS/CAPITAL EQUIPMENT: (3.21%)
Lam Research Corp. 8,000 142,500
Novellus Systems, Inc. 3,000 148,500
--------
291,000
--------
TELECOMMUNICATIONS/EQUIPMENT: (3.50%)
Alcatel SA 5,500 134,406
Motorola Inc. 3,000 183,188
--------
317,594
--------
TELECOMMUNICATIONS SERVICES (4.50%)
Frontier Corp. 12,000 408,000
--------
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MATRIX/LMH
VALUE FUND
COMMON STOCKS, CONTINUED
SECURITY SHARES VALUE
- --------------------------------------------------------------------------------
TEXTILE (1.29%)
Unifi, Inc. 6,000 $ 117,375
----------
TIRE AND RUBBER (3.38%)
Cooper Tire & Rubber Co. 15,000 306,563
----------
TOBACCO (4.24%)
Philip Morris Co., Inc. 7,200 385,200
----------
TOYS AND SCHOOL SUPPLIES (2.14%)
Toys R Us 11,500 194,062
----------
TOTAL COMMON STOCKS
(cost $8,473,677) 8,954,425
----------
SHORT-TERM INVESTMENTS (0.51%)
- --------------------------------------------------------------------------------
Star Treasury Fund (cost $45,874) 45,874 45,874
----------
TOTAL INVESTMENTS IN SECURITIES
(cost $8,519,551) - 99.19% 9,000,299
OTHER ASSETS LESS LIABILITIES - 0.81% 73,628
----------
TOTAL NET ASSETS $9,073,927
==========
* Non-income producing security.
The accompanying notes to financial statements are an integral part of
this schedule.
11
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MATRIX/LMH
VALUE FUND
STATEMENT OF
ASSETS AND LIABILITIES (UNAUDITED) DECEMBER 31, 1998
----------------------------------------------------
ASSETS
Investments in securities, at value:
Common stocks (cost $8,473,677) .......................... $8,954,425
Short-term investments (cost $45,874) .................... 45,874
Receivables:
Dividends and interest ................................... 14,689
Fund shares sold ......................................... 6,160
Securities sold .......................................... 66,380
Prepaid expenses ........................................... 3,942
----------
TOTAL ASSETS ................... 9,091,470
----------
LIABILITIES
Payables:
Advisory fee ............................................. 2,738
Fund shares repurchased .................................. 9,225
Dividends ................................................ 176
Accrued expenses ........................................... 5,404
----------
TOTAL LIABILITIES .............. 17,543
----------
NET ASSETS ..................... $9,073,927
==========
SOURCE OF NET ASSETS
Capital
Par value of 293,292 shares outstanding
(30,000,000 shares authorized)
at $.01 per share ....................................... $ 2,933
Paid-in capital .......................................... 8,648,630
----------
Total capital paid in on shares .......................... 8,651,563
Undistributed net investment income ...................... 256
Accumulated net realized loss on
investment transactions ................................ (58,640)
Unrealized appreciation of investments ................... 480,748
----------
NET ASSETS ..................... $9,073,927
==========
NET ASSET VALUE PER SHARE
(Offering and Redemption Price). $ 30.94
==========
The accompanying notes to financial statements are an integral part of
these statements.
12
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MATRIX/LMH
VALUE FUND
FOR THE
STATEMENT OF SIX MONTHS ENDED
OPERATIONS (UNAUDITED) DECEMBER 31, 1998
----------------------------------------------------
INVESTMENT
INCOME
Dividends ...................................................... $ 59,320
Interest ....................................................... 5,051
---------
TOTAL INCOME ....................... 64,371
---------
EXPENSES
Investment advisory fee ........................................ 44,011
Transfer agent fee and expenses ................................ 12,604
Audit fees ..................................................... 10,081
Custodian fee and expenses ..................................... 4,537
Registration and filing fees ................................... 3,781
Reports to shareholders ........................................ 1,765
Miscellaneous .................................................. 1,260
Legal fees ..................................................... 1,260
Insurance ...................................................... 1,000
---------
TOTAL EXPENSES ..................... 80,299
LESS: Advisory fees waived ......... (24,897)
---------
NET EXPENSES ....................... 55,402
---------
NET INVESTMENT INCOME .............. 8,969
---------
REALIZED AND UNREALIZED
LOSS ON INVESTMENTS - NET
Realized loss on investments - net ............................. (50,725)
Change in unrealized appreciation of investments - net ......... (316,355)
---------
LOSS ON INVESTMENTS - NET .......... (367,080)
---------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS .......... $(358,111)
=========
The accompanying notes to financial statements are an integral part of
these statements.
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MATRIX/LMH
VALUE FUND
STATEMENT OF CHANGES
IN NET ASSETS FOR THE SIX FOR THE
MONTHS ENDED YEAR ENDED
DECEMBER 31, JUNE 30,
1998# 1998
------------ ------------
Net investment income ............................... $ 8,969 $ 41,565
Realized (loss) gain on investments - net ........... (50,725) 1,559,450
Change in unrealized appreciation of
investments - net.................................. (316,355) (528,272)
----------- -----------
NET (DECREASE) INCREASE
IN NET ASSETS RESULTING
FROM OPERATIONS ................. (358,111) 1,072,743
----------- -----------
DISTRIBUTIONS TO
SHAREHOLDERS
Net investment income ............................... (26,658) (49,806)
Realized gain on investments ........................ (201,601) 0
----------- -----------
TOTAL DISTRIBUTIONS
TO SHAREHOLDERS ................. (228,259) (49,806)
----------- -----------
CAPITAL SHARE
TRANSACTIONS
Shares sold ......................................... 883,221 2,678,341
Shares issued in connection with reinvestment
of dividends....................................... 227,357 49,203
Shares redeemed ..................................... (1,450,958) (2,285,586)
----------- -----------
TOTAL ........................... (340,380) 441,958
----------- -----------
TOTAL INCREASE
IN NET ASSETS ................... (926,750) 1,464,895
Net assets, beginning of period ..................... 10,000,677 8,535,782
----------- -----------
Net assets, end of period (including undistributed
net investment income of $256 and $17,945,
respectively) ..................................... $ 9,073,927 $10,000,677
=========== ===========
CHANGES IN SHARES
OUTSTANDING
Shares sold ......................................... 31,158 84,762
Shares issued in connection with reinvestment
of dividends ...................................... 7,519 1,604
Shares redeemed ..................................... (49,322) (72,880)
----------- -----------
(DECREASE) INCREASE ............. (10,645) 13,486
=========== ===========
# Unaudited.
The accompanying notes to financial statements are an integral part of
these statements.
14
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MATRIX/LMH
VALUE FUND
NOTES TO
FINANCIAL
STATEMENTS (UNAUDITED) DECEMBER 31, 1998
NOTE 1 -
ORGANIZATION
Matrix/LMH Value Fund (the "Fund"), formerly known as LMH Fund, Ltd., 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 its
delegates, to reflect its fair value.
(b) Federal Income Taxes
The Fund has elected to be treated as a "regulated investment company" under
Subchapter M of the Internal Revenue Code. The Fund intends 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.
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MATRIX/LMH
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(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 Matrix Asset Advisors, Inc. (the
"Advisor", "Matrix") to serve as investment advisor. Matrix, formerly the
Sub-Advisor, replaced Heine Management Group, Inc. ("Heine") as the Advisor on
May 11, 1997. 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 six months ended December 31,
1998, Matrix waived $24,897 of its fee.
NOTE 4 -
INVESTMENT TRANSACTIONS
The cost of purchases and the proceeds from sales of securities for the six
months ended December 31, 1998 were as follows:
Proceeds from
Sales (Including
Purchases Maturities)
--------- -----------
Common Stock and Bonds $1,889,848 $2,022,351
Short-term Obligations 1,918,572 2,463,940
At December 31, 1998, 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 of investments over cost for federal
income tax purposes was $1,738,058 and the aggregate gross unrealized
depreciation was $1,257,310, or a net unrealized appreciation of $480,748.
16
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
<TABLE>
<CAPTION>
MATRIX/LMH
VALUE FUND
SIX MONTHS
ENDED
DECEMBER 31, YEARS ENDED JUNE 30,
------------ -----------------------------------------
1998# 1998 1997 1996 1995 1994
----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period . $32.90 $29.39 $24.10 $20.98 $17.78 $18.45
Income from investment operations:
Net investment income .............. 0.03 0.14 0.10 0.47 0.46 0.34
Net realized and unrealized gain
(loss) on investments ............ (1.20) 3.54 5.52 3.12 3.13 (0.78)
------ ------ ------ ------ ------ ------
Total from investment operations ..... (1.17) 3.68 5.62 3.59 3.59 (0.44)
------ ------ ------ ------ ------ ------
Less distributions:
Dividends from net investment ......
income (0.09) (0.17) (0.33) (0.47) (0.39) (0.23)
Distributions from realized gains .. (0.70) (0.00) (0.00) (0.00) (0.00) (0.00)
------ ------ ------ ------ ------ ------
Total distributions (0.79) (0.17) (0.33) (0.47) (0.39) (0.23)
------ ------ ------ ------ ------ ------
Net asset value, end of period ....... $30.94 $32.90 $29.39 $24.10 $20.98 $17.78
====== ====== ====== ====== ====== ======
Total return ......................... (3.48%) 12.56% 23.47% 17.16% 20.47% (2.44%)
Ratios/supplemental data:
Net assets, end of period (millions).. $ 9.1 $ 10.0 $ 8.5 $ 6.6 $ 6.0 $ 5.7
Ratio of operating expenses to average
net assets:
Before expense reimbursement ..... 1.82%+ 1.80% 1.92% 1.84% 2.35% 2.51%
After expense reimbursement ...... 1.26%+ 1.23% 1.42% 1.84% 2.35% 2.50%
Ratio of net investment income (loss)
to average net assets:
Before expense reimbursement ...... (0.36%)+ (0.12)% (0.06)% 2.01% 2.27% 1.79%
After expense reimbursement ....... 0.20%+ 0.45% 0.44% 2.01% 2.27% 1.80%
Portfolio turnover rate .............. 22% 68% 129% 57% 34% 46%
</TABLE>
# Unaudited.
+ Annualized.
The accompanying notes to financial statements are an integral part of
these statements.
17
<PAGE>
BOARD OF DIRECTORS
Leonard M. Heine, Jr., Director Emeritus
David A. Katz
Larry D. Kieszek
Robert M. Rosencrans
T. Michael Tucker
+
INVESTMENT ADVISOR
Matrix Asset Advisors, Inc.
747 Third Avenue, 31st Floor
New York, NY 10017
(800) 366-6223
+
CUSTODIAN
Star Bank, N.A.
425 Walnut Street
Cincinnati, OH 45202
+
TRANSFER AGENT
American Data Services, Inc.
150 Motor Parkway
Hauppauge, NY 11788
(800) 385-7003
+
ADMINISTRATOR
Investment Company Administration LLC
+
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP
+
LEGAL COUNSEL
Swidler Berlin Shereff Friedman, LLP
This report is intended for shareholders of the Fund and may not be used as
sales literature unless preceded or accompanied by a current prospectus.
Past performance results shown in this report should not be considered a
representation of future performance. Share price and returns will fluctuate so
that shares, when redeemed, may be worth more or less than their original cost.
Statements and other information herein are dated and are subject to change.
