<PAGE>
MORGAN FUNSHARES SEMI ANNUAL REPORT- LETTER TO SHAREHOLDERS
To Our Shareholders:
We have great news. Morgan Funshares common stock has sold recently at a
premium, which is uncommon for a closed-end equity fund. Our theory of "buy low
and never sell" is working. Of course, we stole the idea from Warren Buffett.
The original value of the Fund a few short years ago was $3,969,286. It is now
$8,410,936. This is an unexpected gain because the real purpose of the fund is
to weather a depression. Our criteria for investment is to purchase a security
in a company with a great trade name, with a product that is habit forming and
is a low cost commodity. We can not pick these companies very often because we
rarely sell any of our holdings.
The Directors of the Fund are using their own research sources to suggest
potential purchases and any shareholder is welcome to submit a suggestion.
Sincerely,
Burton D. Morgan
<PAGE>
Morgan FunShares, Inc.
Schedule of Investments
June 30, 1998 (unauditied)
- --------------------------------------------------------------------------------
Shares/Units Cost Current Value % of Assets
- --------------------------------------------------------------------------------
Beverage Alcoholic
6,000 Anheuser Busch 101,236 283,125
10,000 Seagrams 246,643 409,375
------- -------
347,879 692,500 8.23%
Beverage Non-Alcoholic
8,000 Coca Cola 113,295 684,000
10,000 PepsiCo 142,480 411,875
------- -------
255,775 1,095,875 13.03%
Consumer Products - Retail
4,000 Eastman Kodak 192,390 292,250
3,000 Fortune Brands 88,421 115,313
------ -------
280,811 407,563 4.85%
Consumer Products - Paper
8,000 Kimberly Clark 126,220 367,000 4.36%
Consumer Products - Food
240 EarthGrains 4,218 13,410
3,200 McDonalds 141,680 220,800
6,000 RJR Nabisco 203,925 142,500
1,000 Tricon Global Restaurants* 11,708 31,687
5,000 Wrigley Co. 230,330 490,000
------- -------
591,861 898,397 10.68%
Drugs & Toiletries
10,000 Carter Wallace 126,301 181,875 2.16%
Entertainment
6,000 AMC Ent $1.75 CV Pfd 133,490 186,838
5,000 Harrah's Entertainment* 93,851 116,250
400 Schweitzer-Mauduit 3,529 11,600
10,000 Time Warner 206,446 854,375
3,000 Walt Disney 123,565 316,500
------- -------
560,881 1,485,563 17.66%
Gaming
11,000 Circus Circus Enterprises* 292,182 186,313
10,000 International Gaming Tech 225,628 242,500
------- -------
517,810 428,813 5.10%
Healthcare Products
6,000 Bristol Myers Squibb 161,167 689,625
4,000 Gillette Co. 167,590 455,000
12,000 Johnson & Johnson 202,705 888,000
------- -------
531,462 2,032,625 24.17%
Tobacco
3,000 Gallaher Group PLC 51,529 65,625
15,000 Phillip Morris 243,684 590,625
------- -------
295,213 656,250 7.80%
Total of Securities** $3,634,213 $8,246,461 98.04%
145,993 Star Bank Treasury 79,638 79,638 0.95%
Total Investments $3,713,851 $8,326,099 98.99%
Other Assets Less Liabilities 84,837 1.01%
Net Assets Equivalent to $7.15 per
share on 1,175,990 shares of capital
stock outstanding $8,410,936 100.00%
* Non Income Producing
** Identified cost equals tax basis of securities.
Realized losses on investments expire in 2002 ($16,097),
2003 ($26,492) and 2005 ($113,600).
The Accompanying Notes are an Integral part of the Financial Statements.
<PAGE>
Morgan FunShares, Inc.
Statement of Assets & Liabilities
June 30, 1998 (unaudited)
Assets:
Investment Securities at Market Value
(Identified Cost $3,713,851) $8,326,099
Cash 100
Receivables:
Dividends and Interest 16,688
From related party 40,000
Prepaid expenses 28,634
---------
Total Assets 8,411,521
Liabilities
Payables:
Custodial fees 585
Total Liabilities 585
Net Assets 8,410,936
Net Assets Consist of:
Capital Paid In 3,969,286
Undistributed Net Investment Income (14,179)
Accumulated Realized Gain on Investments - Net (156,419)
Unrealized Appreciation in Value of Investments
Based on Identified Cost - Net 4,612,248
-----------
Net Assets, for 1,175,990 Shares Outstanding $8,410,936
Net Asset Value ($8,410,936/1,175,990) $7.15
Statement of Operations
June 30, 1998 (unaudited)
Investment Income:
Dividends 62,185
Interest 2,033
-------
Total Investment Income 64,218
Expenses
Registration Expense 5,350
Trustee Fees (Note 3) 1,200
Transfer Agent and Pricing 18,527
Custody 1,839
Audit 9,300
Legal 20,908
Management Fees (Note 2) 41,832
Proxy Solicitation 5,702
Increase of Quantity Shares 3,830
Printing & Other Miscellaneous 9,912
--------
Total Expenses 118,400
Reimburse of Management Fees (Note 2) (40,000)
--------
Total Expenses (after reimbursement) 78,400
Net Investment Income (Loss) (14,182)
Realized Gain (Loss) on Investments 0
Unrealized Gain (Loss)from Appreciation (Depreciation)
on Investments 791,481
--------
Net realized and Unrealized Gain (Loss) 777,299
Net Increase (Decrease) in Net Assets from Operations $777,299
=========
The Accompanying Notes are an Integral Part of the Financial Statements.
<PAGE>
Morgan FunShares, Inc.
Statements of Changes in Net Assets
June 30, 1998 (unaudited)
01/01/98 01/01/97
to to
06/30/98 12/31/97
From Operations
Net Investment Income $(14,182) $40,398
Net Realized Gain (Loss) on Investments 0 (113,600)
Net Unrealized Appreciation (Depreciation) 791,481 1,437,098
Increase (Decrease) in Net Assets from Operations 777,299 1,363,896
From Distributions to Shareholders
Net Investment Income 0 (40,395)
Net Realized Gain (Loss) from Security Transactions 0 0
Net Increase (Decrease) from Distributions 0 (40,395)
From Capital Share Transactions:
Proceeds From Sale of 0 Shares 0 0
Cost of Shares Retired 0 0
0 0
Net Increase in Net Assets $777,299 $1,323,501
Net Assets at Beginning of Period (including
undistributed net investment income of $0). $7,633,637 $6,310,136
Net Assets at End of Period (including undistributed
net investment income of $0) $8,410,936 $7,633,637
Financial Highlights
Selected data for a share of common
stock outstanding throughout the period:
<TABLE>
<S> <C> <C> <C> <C> <C>
01/01/98 01/01/97 01/01/96 01/01/95 06/22/94
to to to to to
06/30/98 12/31/97(a) 12/31/96(a) 12/31/95(a) 12/31/94(a)
Net Asset Value Beginning of Period $6.49 $5.37 $4.67 $3.66 $3.65
Net Investment Income (0.01) 0.04 (0.04) 0.03 0.02
Net Gain or Loss on Securities (realized and unrealized) 0.67 1.12 0.74 1.01 0.01
Total from Investment Operations 0.66 1.16 0.70 1.04 0.03
Dividends
(from net investment income) 0.00 (0.04) 0.00 (0.03) (0.02)
Distributions (from capital gains) 0.00 0.00 0.00 0.00 0.00
Return of Capital 0.00 0.00 0.00 0.00 0.00
Total Distributions 0.00 (0.04) 0.00 (0.03) (0.02)
Net Asset Value - End of Period $7.15 $6.49 $5.37 $4.67 $3.66
Total Return (b) 20.34% 21.61% 15.01% 28.29% 0.68%
Ratios/Supplemental Data
Net Assets - End of Period (Thousands) 8,411 7,634 6,310 5,486 4,306
Ratio of Expenses to Average Net Assets
Before reimbursements (b) 2.91% 1.99 2.80 2.04 1.06
After reimbursements (b) 1.93% 1.31 2.80 2.04 1.06
Ratio of Net Income to Average Net Assets
Before reimbursements (b) (1.33)% (0.11) (0.71) 0.59 0.47
After reimbursements (b) (0.35)% 0.58 (0.71) 0.59 0.47
Portfolio Turnover Rate (b) 0% 0% 0% 2% 6%
Average Commission Rate Paid 0.0000 0.0000 0.0000 0.0000 0.0000
(a) After 2 for 1 stock split in 1998
(b) Annualized
The Accompanying Notes are an Integral Part of the Financial Statements.
</TABLE>
<PAGE>
Morgan FunShares, Inc.
NOTES TO FINANCIAL STATEMENTS
June 30,1998 (unaudited)
1. Significant Accounting Policies
Morgan FunShares, Inc., (The Fund), a non-diversified, closed-end
management investment company that seeks appreciation of capital, primarily
through investments in equity securities of companies that derive 50% or
more of their revenues from the sale of consumer durable products and
entertainment. The Fund was incorporated under the laws of the State of
Ohio, registered under The Investment Company Act of 1940, as amended for
years ending after December 31, 1993. Significant accounting policies of
the Fund are presented below:
Securities Valuation:
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 or at fair value. Short-term investments are
valued at amortized cost, which approximates market value. 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 fiscal 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 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 those
estimates.
2. Investment Advisory Agreement
The Fund has entered into an investment advisory agreement with Burton D.
Morgan. The Investment Advisor receives from the Fund as compensation for
his services to the Fund an annual fee of 1% of the average value of the
Fund's net assets up to $150,000,000 and 0.75% of the average value of the
Fund's net assets in excess of $150,000,000. The advisor will reimburse the
fund for any management fees whish cause the total expenses to exceed 2% of
average net assets.
<PAGE>
Morgan FunShares, Inc.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997 (unaudited)
3. Related Party Transactions
Certain officers and/or directors of the Fund are officers and/or directors
of the parent company of Maxus Information Systems, Inc, which provides
administrative services to the Fund. Each director who is not an
"affiliated person" receives an attendance fee of $100 per meeting.
Maxus Securities is a registered broker dealer. Certain officers and/or
directors of the Fund are officers and/or directors of the broker dealer.
Maxus Securities effected substantially all of the investment portfolio
transactions for the Fund. For this service Maxus Securities received
commissions of $0 for the six month period ending June 30, 1998.
4. Capital Stock and Distribution
At June 30, 1998 2,500,000 shares of capital stock ($.10 par value) were
authorized, and paid-in capital amounted to $3,969,286. Transactions in
common stock were as follows:
Shares sold 0
2 for 1 Stock split 587,995
Shares retired
0
Net Increase 587,995
Shares Outstanding:
Beginning of Period 587,995
End of Period 1,175,990
Distributions to shareholders are recorded on the ex-dividend date.
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 month period ended June 30, 1998, purchases and sales of
investment securities other than U.S. Government obligations and short-term
investments aggregated $0 and $0 respectively.
6. Financial Instruments Disclosure
There are no reportable financial instruments which have any off-balance
sheet risk as of June 30, 1998.
7. Ownership-Control
Approximately 65% of the Fund's outstanding shares are owned by Burton D.
Morgan and his family. Burton D. Morgan is a Director of the Fund and the
Fund's investment advisor. Burton D. Morgan may be deemed to be a
controlling person.
8. Security Transactions
For Federal income tax purposes, the cost of investments owned at June 30,
1998 was the same as identified cost.
At June 30, 1998, 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)
4,136,581 (167,295) 3,969,286
<PAGE>
MORGAN FUNSHARES, INC.
1301 East Ninth Street, Suite 3600, Cleveland, OH 44114
(216) 687-1000
INVESTMENT ADVISOR
Burton D. Morgan
10 West Streetsboro Street
Hudson, Ohio 44236
BOARD OF TRUSTEES
Keith Brown
William K. Cordier
J. Martin Erbaugh
James M. Hojnacki
Burton D. Morgan
Robert F. Pincus
OFFICERS
Burton D. Morgan, Chairman
Robert F. Pincus, President
James C. Onorato, Vice-President
Catherine Kantorowski, Secretary
CUSTODIAN
Star Bank, N. A.
425 Walnut Street
P. O. Box 1118
Cincinnati, Ohio 45201-1118
TRANSFER AGENT
Star Bank, N. A.
425 Walnut Street
P. O. Box 1118
Cincinnati, Ohio 45201-1118
LEGAL COUNSEL
Buckingham, Doolittle & Burroughs
50 South Main Street
P. O. Box 1500
Akron, OH 44309
AUDITOR
McCurdy & Associates CPA's Inc
27955 Clemens Road
Westlake, Ohio 44145
<PAGE>
