THE MAXUS FUNDS
Dear Shareholder:
For the first six months of 1997, each of The Maxus Funds continued to
demonstrate excellent relative total return performance. At the same time, both
Alan Miller and I have been keenly aware that the most visible investment
markets , attracting both capital appreciation and income oriented investors,
appear to be exceeding most historic measures of value. Within the context of
the very positive global demand for all things American, and the exceptional
productivity of the American economy, we continue to remain cautious.
Why caution in the light of the very positive economic environment and
exceptional performance the markets have demonstrated for most of the past 15
years? My conclusions are based upon the relative comparisons between economic
growth and investor expectations, and the growing disparity I see in the
numbers.
The growth rate in gross domestic product alone is not the power point of
investor enthusiasm. The U.S. economy is growing at less than 3% annually and,
based upon the historic ratio between the annual growth in domestic product to
the level of stock prices, the expectation for the DJIA in 1997 should be more
like 4000 instead of 8000 or 9000. In fact, forecasters during most of the 20th
century would base their predictions of market performance on their forecast of
economic growth, i.e. the higher the growth rate, the higher earnings would apt
to be, and the higher the market should go. For example, in the late 1980's the
argument for 30 and 40 multiples in the Japanese stock market centered around
the 12% to 15% annual growth in the Japanese economy, and the extrapolation of
normalized earnings to the year 2000. When Japanese growth in domestic product
declined as competition heated up in the rest of Asia, the market fell
precipitously, and today, after nearly 10 years it still remains at only 60% of
an all-time high in 1989.
For the past five years, market forecasters here in the United States have based
their predictions primarily on the earnings growth resulting from increasing
productivity and increasing profit margins. Fed Chairman Greenspan has recently
stated what I have been saying all along, i.e. potential growth in GDP is higher
than the consensus forecast because of hidden productivity, and therefore price
inflation should continue to be subdued and profitability should continue to
increase. Unlike the topline growth in domestic product, however, productivity
gains, in and of themselves, create practical limitations on earnings growth and
extrapolating past earnings growth could be a very dangerous exercise for
investors.
<PAGE>
The gains in productivity have resulted primarily through corporate downsizing
and the replacement of antiquated machines and workers with high technology
capital. To date, neither labor nor the consumer have enjoyed much of the gain,
although price inflation has remained subdued and greater job opportunities has
resulted in the process. While American workers have been more concerned with
holding onto their jobs than with wage negotiations, sooner or later they are
apt to demand a greater piece of the pie. Likewise, while price inflation at the
consumer level appears almost non-existent across many industries, the entry of
additional players into high margin businesses and/or the competitive global
marketplace, should continue to put downward pressure on prices. Either way,
profit margins are apt to get squeezed and corporate profitably may well begin
to decline. Finally, downsizing almost by definition has its practical
limitations, and the cost benefits of replacing antiquated capital equipment
will begin to diminish over time, i.e. most equipment is depreciated over 5 to 7
years and replacing it before it is fully depreciated results in increasing
costs to corporations.
I have argued that much of the enthusiasm for stocks in recent years has been
the result of productivity increases and its effect of transforming the economy
from its historic cycles (where corporate earnings tend to fluctuate in a
cyclical pattern) to a more growth oriented trendline (where earnings tend to
rise every year). Growth tends to hold the market at a higher multiple, and low
interest rates tend to reinforce that multiple going forward. While this can
explain why the DJIA should be at 6000 instead of 4000, there isn't any good
explanation to explain why it should be at 8000 or 10000.
Moreover, the practical limitations imposed by downsizing and productivity gains
are already showing up. From 15% earnings gain for American corporations in
1996, the consensus forecast projects 10% gains in 1997. The best guess for 1998
is 5%. If we ignore this trend toward lower (or perhaps even negative) earnings
growth, and hold to the rosy scenario that growth will average 10% annually over
the next five years, corporate earnings will double their current level. In the
light of a low GDP growth, a fully employed economy and the ultimate profit
squeeze resulting from past productivity gains, it is hard to imagine that this
scenario will develop that smoothly. But I will make the assumption
nevertheless.
Anyone investing in today's market is doing so with a five year horizon. If the
expectation is for an annual 20% growth in the value of their portfolio, on June
30, 2002, the average market multiple for the S&P 500 will be over 40 times.
Even a 15% annual growth in portfolio value would be that multiple at 30 times.
This is a far cry from the 14 times multiple the stock market has averaged for
almost all of the 20th century, and places a great deal of faith in our
economy's ability to regain topline growth, keep global competitors out of our
markets and, to the exclusion of both labor and the consumer, maintain the
productivity gains for top executives and shareholders; then again, blind faith
is the stuff by which bull markets survive.
<PAGE>
The Maxus Funds will continue to look for investments which appear to be of high
quality, and where the underlying cash flow, earnings prospects and private
market evaluations all suggest that we are buying good value. At this juncture
our goal is to achieve, on a relative basis, a B+ in upward market spikes, an A
in flat markets, and an A+ if the market should decline.
Richard A Barone
<PAGE>
The Maxus Equity Fund
During the first six months of 1997, The Maxus Equity Fund produced a 17.26%
return for its investors. This matched almost exactly the return of the Russell
3000, a capitalization-weighted index which measures the performance of the
3,000 largest U. S. corporations. Maxus Equity managed to provide these returns
in spite of its risk averse position, its low beta, its high cash position and
its value oriented investment style. Moreover, less than 20% of all equities
were able to match this index.
In fact, these risk averse characteristics have gained The Maxus Equity Fund the
coveted 5-star ranking by Morningstar. Unlike the Maxus Income Fund, Morningstar
has correctly categorized Maxus Equity as an equity fund. Going forward, there
is no guarantee that Maxus Equity will continue to demonstrate a low beta
relative to the market, but in a stock market where high historic multiples are
the norm, this is our goal.
The major focus of our value approach continues to be on companies which have
high free cash flow relative to the share price, high underlying business value
and good earnings prospects. There are a variety of other characteristics we
look for in our investments. Companies with low debt to equity are favored, as
are companies where we believe the stock price in the future may be event
driven, e.g. a merger, buy out, spin off, etc. Finally, we insiders tend to be
value investors, so we attempt to own companies where the ratio of insider buys
to sells is clearly positive.
Richard A Barone
<PAGE>
Maxus Equity Fund
Schedule of Investments
June 30, 1997 (unaudited)
- --------------------------------------------------------------------------------
Shares/Principal Amount Cost Market Value % of Assets
- --------------------------------------------------------------------------------
INFORMATION TECHNOLOGY
25,000 Airtouch Communications* 629,625 687,500
37,500 Bel Fuse* 430,647 499,219
10,000 GTE 434,350 438,750
88,600 Intergraph 616,487 753,100
30,000 Tech Sym 841,863 1,001,250
$400,000 Unisys 8.25% Conv Due 8-1-00 388,877 403,166
32,300 VLSI Technology* 413,801 763,087
--------- ---------
3,755,650 4,546,072 9.72%
INFRASTRUCTURE
15,000 Ameron 514,513 849,375
17,000 Corrpro* 132,683 161,500
132,800 Foster L. B.* 512,856 581,000
45,000 Lamson & Sessions 332,938 374,063
--------- --------
1,492,990 1,965,938 4.20%
MACHINERY & EQUIPMENT
24,500 Flowserve 595,333 716,625
30,000 Snap on Tools 861,200 1,181,250
8,000 Walbro Capital Trust Conv 200,000 229,000
--------- ---------
1,656,533 2,126,875 4.55%
MEDICAL SERVICES & SUPPLIES
20,000 Becton Dickinson 359,650 1,012,500
19,000 Invacare 399,953 444,125
13,500 Mckesson 578,558 1,046,250
--------- ---------
1,338,161 2,502,875 5.35%
REAL ESTATE
17,000 Alexander & Baldwin 425,833 444,125
88,000 Crown American Realty Trust 689,305 814,000
35,000 MGI Properties 480,393 772,188
25,000 Public Storage 8.25% Conv Pfd X 652,478 1,225,000
10,000 St Joe Corp 579,110 837,500
--------- ---------
2,827,119 4,092,813 8.75%
CONSUMER PRODUCTS
50,000 Donna Karan 508,625 556,250
100,000 Jan Bell Marketing* 221,910 243,750
45,000 Limited 798,950 911,250
105,000 Michael Anthony Jewelers* 303,378 420,000
12,500 Movado Group 247,788 318,750
200,000 Royal Appliance* 610,810 1,712,500
24,400 Standard Motor Products 335,128 335,500
44,600 Universal Electronics* 225,274 301,050
--------- ---------
3,251,863 4,799,050 10.26%
BASIC MATERIALS
15,000 Minerals Technologies 520,650 562,500 1.20%
Entertainment
1,200,000 Time Warner % Conv Due 6-22-13 581,999 552,000 1.18%
ENVIRONMENT
15,200 Dionex* 242,016 779,000
50,000 International Tech 396,513 381,250
55,000 National Patent Dev 421,625 429,688
The accompanying notes are an integral part of the financial statements.
<PAGE>
50,800 Weston Roy F* 207,782 152,400
--------- ---------
1,267,936 1,742,338 3.72%
FINANCIAL SERVICES
20,000 American Express 848,750 1,490,000
15,000 Cincinnati Financial 858,925 1,185,000
20,000 First Chicago NBD 525,381 1,210,000
30,000 Lehman Brothers Holdings 651,175 1,215,000
10,000 Salomon 361,300 556,250
--------- ---------
3,245,531 5,656,250 12.09%
UTILITIES
16,000 Central VT Pub Svc 196,920 177,000
30,000 Citizens Utilities Class B 283,925 258,750
------- -------
480,845 435,750 0.93%
INDUSTRIAL PRODUCTS
35,000 Algoma Steel* 114,713 208,359
17,000 Armco 3.625% Cum Conv Pfd 831,475 724,625
10,000 Dow Chemical 797,475 868,750
10,000 NCH 558,350 625,000
22,100 Schulman A 413,314 544,212
30,000 Timken 524,175 1,066,875
20,000 Worthington Inds 366,250 366,250
--------- ---------
3,605,752 4,404,071 9.42%
PRODUCT DISTRIBUTION
28,000 Bell Industries 534,248 525,000
10,000 Applied Indl Technologies 299,350 360,000
250,000 Petrie Stores Liquidating Trust* 805,473 781,250
70,800 Pioneer Std Electronics 833,360 955,800
--------- ---------
2,472,431 2,622,050 5.61%
CLOSED END GLOBAL EQUITY FUNDS
40,000 Emerging Markets
Telecommunications 682,162 750,000
55,000 Emerging Markets Infrastructure 582,713 752,813
100,000 First Australia 887,394 887,500
50,000 New Germany 604,125 787,500
--------- ---------
2,756,394 3,177,813 6.79%
U.S. GOVERNMENT SECURITIES
2,500,000 US Treasury 6.00%, 8-31-97 2,500,786 2,501,172 5.35%
Total Investments 31,754,610 41,687,567 89.12%
Other Assets Less Liabilities 5,089,511 10.88%
Net Assets - Equivalent to $18.65 per
share on 2,507,738shares of capital 46,777,078 100.00%
stock outstanding ========== =======
* Non-Income Producing
The accompanying notes are an integral part of the financial statements.
<PAGE>
Maxus Equity Fund
STATEMENT OF ASSETS & LIABILITIES
JUNE 30, 1997 (UNAUDITED)
Assets:
Investment Securities at Market Value
(Identified Cost - $31,754,640) $41,687,567
Cash 5,963,357
Receivables:
Investment Securities Sold 0
Dividends and Interest 159,748
-----------
Total Assets 47,810,672
Liabilities
Payables:
Investment Securities Purchased 926,479
Shareholder Distributions 28,729
Accrued Expenses 78,386
----------
Total Liabilities 1,033,594
Net Assets $46,777,078
Net Assets Consist of:
Capital Paid In 34,401,045
Undistributed Net Investment Income (154,349)
Accumulated Realized Gain (Loss) on Investments - Net 2,597,455
Unrealized Appreciation in Value
of Investments Based on Identified Cost - Net 9,932,927
------------
Net Assets, for 2,507,738 Shares Outstanding $46,777,078
Net Asset Value and Redemption Price
Per Share ($46,777,078/2,507,738 shares) $18.65
Offering Price Per Share $18.65
STATEMENT OF OPERATIONS
JUNE 30, 1997 (UNAUDITED)
Investment Income:
Dividends $393,467
Interest 176,601
---------
Total Investment Income 570,068
Expenses
Registration Expense 13,624
Trustee Fees (Note 3) 400
Accounting and Pricing 20,254
Custody 11,486
Distribution Plan Expenses 105,073
Audit 12,980
Legal 4,679
Management Fees (Note 2) 210,146
Printing & Other Miscellaneous 19,461
--------
Total Expenses 398,103
Net Investment Income 171,965
Realized and Unrealized Gain (Loss) on Investments
Realized Gain (Loss) on Investments 2,631,481
Capital Gains from Mutual Funds 0
Unrealized Gain (Loss) from Appreciation
(Depreciation) on Investments 4,091,728
----------
Net Realized and Unrealized Gain (Loss) on Investments 6,723,209
Net Increase (Decrease) in Net Assets from Operations $6,895,174
===========
The accompanying notes are an integral part of the financial statements.
<PAGE>
Maxus Equity Fund
STATEMENT OF CHANGES IN NET ASSETS
JUNE 30, 1997 (UNAUDITED)
- --------------------------------------------------------------------------------
01/01/97 01/01/96
to to
06/30/97 12/31/96
- --------------------------------------------------------------------------------
From Operations:
Net Investment Income $171,965 $620,573
Net Realized Gain (Loss) on Investments 2,631,481 2,437,747
Net Unrealized Appreciation (Depreciation) 4,091,728 3,419,289
Increase (Decrease) in Net Assets from Operations 6,895,174 6,477,609
From Distributions to Shareholders
Net Investment Income (326,495) (620,392)
Net Realized Gain (Loss) from Security Transactions(5,342) (2,436,220)
Net Increase (Decrease) from Distributions (331,837) (3,056,612)
From Capital Share Transactions:
Proceeds From Sale of 360,048 Shares 6,111,209 12,447,924
Net Asset Value of 16,002 Shares Issued
on Reinvestment of Dividends 278,026 2,637,296
Cost of 291,061 Shares Redeemed (4,940,197) (11,328,765)
1,449,038 3,756,455
Net Increase in Net Assets 8,012,375 7,177,452
Net Assets at Beginning of Period
(including undistributed net investment
income of $181 and $0, respectively) 38,764,703 31,587,251
Net Assets at End of Period (including
undistributed net investment income
of $0 and $181, respectively) $46,777,078 $38,764,703
FINANCIAL HIGHLIGHTS
Selected data for a share of common stock outstanding throughout the period:
<TABLE>
<S> <C> <C> <C> <C> <C>
01/01/97 01/01/96 01/01/95 01/01/94 01/01/93
to to to to to
06/30/97 12/31/96 12/31/95 12/31/94 12/31/93
-------- -------- -------- -------- --------
Net Asset Value -
Beginning of Period $16.00 $14.57 $12.95 $13.60 $12.29
Net Investment Income 0.07 0.27 0.30 0.25 0.13
Net Gains or Losses on Securities
(realized and unrealized) 2.71 2.50 2.60 (0.17) 3.13
---- ---- ---- ------ ----
Total from Investment Operations 2.78 2.77 2.90 0.08 3.26
Dividends
(from net investment income) (0.13) (0.27) (0.27) (0.22) (0.12)
Distributions (from capital gains) 0.00 (1.07) (1.01) (0.51) (1.83)
Return of Capital 0.00 0.00 0.00 0.00 0.00
------ ------ ------ ------ ------
Total Distributions (0.13) (1.34) (1.28) (0.73) (1.95)
Net Asset Value -
End of Period $18.65 $16.00 $14.57 $12.95 $13.60
Total Return 17.45% 19.13% 22.43% 0.59% 24.51%
Ratios/Supplemental Data
Net Assets -
End of Period (Thousands) 46,777 38,765 31,576 17,018 11,343
Ratio of Expenses to Average Net Assets 1.87%* 1.90% 1.96% 2.00% 2.61%
Ratio of Net Income to Average Net Assets 1.71% 2.01% 1.82% 0.91% 0.81% *
Portfolio Turnover Rate 79% * 111% 173% 184% 175%
*Annualized
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
Maxus Equity Fund
Notes to Financial Statements
June 30, 1997 (unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
The Fund is a diversified, open-end management investment company,
organized as a Trust under the laws of the State of Ohio by a Declaration
of Trust dated July 12, 1989. Significant accounting policies of the Fund
are presented below:
SECURITY VALUATION:
The Fund intends to invest in a wide variety of equity and debt securities.
The investments in securities are carried at market value. The market
quotation used for common stocks, including those listed on the NASDAQ
National Market System, is the last sale price on the date on which the
valuation is made or, in the absence of sales, at the closing bid price.
Over-the-counter securities will be valued on the basis of the bid price at
the close of each business day. Short-term investments are valued at
amortized cost, which approximates market. Securities for which market
quotations are not readily available will be valued at fair value as
determined in good faith pursuant to procedures established by the Board of
Directors.
SECURITY TRANSACTION TIMING
Security transactions are recorded on the dates transactions are entered
into (the trade dates). Dividend income and distributions to shareholders
are recorded on the ex-dividend date. Interest income is recorded as
earned. The Fund uses the identified cost basis in computing gain or loss
on sale of investment securities. Discounts and premiums on securities
purchased are amortized over the life of the respective securities.
INCOME TAXES:
It is the Fund's policy to distribute annually, prior to the end of the
calendar year, dividends sufficient to satisfy excise tax requirements of
the Internal Revenue Service. This Internal Revenue Service requirement may
cause an excess of distributions over the book year-end accumulated income.
In addition, it is the Fund's policy to distribute annually, after the end
of the calendar year, any remaining net investment income and net realized
capital gains.
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 liabilites and
disclosure of contingent assets and liabilites at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. INVESTMENT ADVISORY AGREEMENT
The Fund has entered into an investment advisory and administration
agreement with Maxus Asset Management Inc. a wholly owned subsidiary of
Resource Management Inc. The Investment Advisor receives from the Fund as
compensation for its services to the Fund an annual fee of 1% on the first
$150,000,000 of the Fund's net assets, and 0.75% of the Fund's net assets
in excess of $150,000,000.
3. RELATED PARTY TRANSACTIONS
Resource Management, Inc. has three wholly owned subsidiaries which provide
services to the Fund. These subsidiaries are Maxus Asset Management Inc,
Maxus Securities Corp, and Maxus Information Systems Inc. Maxus Asset
Management was paid $210,146 in investment advisory fees during the six
months ended June 30, 1997. Maxus Securities, who served as the national
distributor of the Fund's shares, was reimbursed $105,073 for distribution
expenses. Maxus Information Systems received fees totaling $11,486 for
services rendered to the Fund for the six months ended June 30, 1997. Maxus
Securities is a registered broker-dealer. Maxus Securities effected
substantially all of the investment portfolio transactions for the Fund.
For this service Maxus Securities received commissions of $107,276 for the
six months ending June 30, 1997.
<PAGE>
At June 30, 1997, Maxus Securities Corp owned 20,000 shares in the Fund.
Certain officers and/or trustees of the Fund are officers and/or directors
of the Investment Advisor and Administrator. Each director who is not an
"affiliated person" receives an attendance fee of $100 per meeting.
4. CAPITAL STOCK AND DISTRIBUTION
At June 30, 1997 an indefinite number of shares of capital stock ($.10 par
value) were authorized, and paid-in capital amounted to $34,401,045.
Transactions in common stock were as follows:
Shares sold 360,048
Shares issued to shareholders in reinvestment of dividends 16,002
-------
376,050
Shares redeemed 291,061
-------
Net Increase 84,989
Shares Outstanding:
Beginning of Period 2,422,749
---------
End of Period 2,507,738
=========
Distributions to shareholders are recorded on the ex-dividend date.
Payments in excess of net investment income or of accumulated net realized
gains reported in the financial statements are due primarily to book/tax
differences. Payments due to permanent differences have been charged to
paid in capital. Payments due to temporary differences have been charged to
distributions in excess of net investment income or realized gains.
5. PURCHASES AND SALES OF SECURITIES
During the six months ended June 30, 1997, purchases and sales of
investment securities other than U.S. Government obligations and short-term
investments aggregated $16,796,638 and $20,224,314 respectively. Purchases
and sales of U.S. Government obligations aggregated $0 and $500,234
respectively.
6. FINANCIAL INSTRUMENTS DISCLOSURE
There are no reportable financial instruments which have any off-balance
sheet risk as of June 30, 1997.
7. SECURITY TRANSACTIONS
For Federal income tax purposes, the cost of investments owned at June 30,
1997 was the same as identified cost.
At June 30, 1997, the composition of unrealized appreciation (the excess of
value over tax cost) and depreciation (the excess of tax cost over value)
was as follows:
Appreciation (Depreciation) Net Appreciation (Depreciation)
------------ -------------- -------------------------------
10,353,133 (420,206) 9,932,927
<PAGE>
THE MAXUS FUNDS
28601 Chagrin Boulevard, Cleveland, Ohio 44122
(216) 292-3434
INVESTMENT ADVISOR
Maxus Asset Management Inc
28601 Chagrin Boulevard
Cleveland, Ohio 44122
BOARD OF TRUSTEES
Richard A. Barone
N. Lee Dietrich
Sanford A. Fox, D.D.S.
Burton D. Morgan
Jerry Murphy
Michael A. Rossi
Robert A. Schenkelberg, Jr.
OFFICERS
Richard A. Barone, Chairman
James C. Onorato, Vice-President
Robert W. Curtin, Secretary
CUSTODIAN
Star Bank, N. A.
425 Walnut Street
P. O. Box 1118
Cincinnati, Ohio 45201-1118
TRANSFER AGENT
Maxus Information Systems Inc
28601 Chagrin Boulevard
Cleveland, Ohio 44122
DISTRIBUTOR
Maxus Securities Corp
28601 Chagrin Boulevard
Cleveland, Ohio 44122
LEGAL COUNSEL
Benesch, Friedlander, Coplan & Aronoff
2300 BP America Building
200 Public Square
Cleveland, Ohio 44114-2378
AUDITOR
McCurdy & Associates CPA's Inc
27955 Clemens Road
Westlake, Ohio 44145
<PAGE>
