WEST UNIVERSITY FUND, INC.
SEMI-ANNUAL REPORT
JUNE 30, 1998
Dear Shareholder:
The West University Fund's total return for the six month period ending
June 30, 1998 was 2.13%. This compares to 3.47% for the Lehman
Government/Corporate Intermediate Bond Index, and 17.70% for the
Standard & Poors 500 Index. As of this writing August 20,1998 the net asset
value is $9.99 or a decline of 3.48% year to date.
The Securities & Exchange Commission recently mandated that mutual funds
write their prospectus in "Plain English." They issued a handbook with a
preface by Warren Buffett. In the preface Buffett urged companies to write
with a "specific person in mind." His goal is "simply to give them the
information I would wish them to supply me if our positions were reversed."
I think this is a great idea, and in this spirit I thought it would be
interesting to write this letter in a question and answer format.
There will be no "lay up" questions, and I will answer them with a
sincere desire to inform you of our current status.
Question: Our returns are poor, shouldn't we be doing better?
Answer: Yes, we should be doing better, but this has proven to be a
very difficult year for our fund, and the overall stock market. If you
look beyond the popular averages you see a tremendous amount of weakness
in the typical stock price. The Wall Street Journal recently wrote that
the average NYSE listing was down 24.3% from its 52-week high price, and
the average NASDAQ stock was down 35% from its 52 week high price. Within
the S &P 500, losers outpaced winners by about 3 to 1 in 1998. Only five
huge stocks provided one quarter of the S&P 500's 1998 return. There is
also an incredible differential in twelve month performance by company size.
The smallest companies of less than $250 million in market capitalization
are down 43% from their highs, and there are 5,375 such issues out of
about 8,100 total issues on the NYSE.
Question: In past letters you spoke of having 10%-15% downside protection
from selling covered call options. In light of our losses is the strategy
working?
Answer: Yes the strategy is working . Without the option hedging we would
be down significantly more than we are today.
Question: What mistakes have you made and what are you doing to improve
future returns?
Answer: I have made mistakes with stock selection and sector weightings.
As an example I am bullish on oil long term because of world wide
consumption data. Per capita usage in the Far East can only go up over
time. China and India use only a small fraction of energy on a per person
basis even when compared to Mexico. Because of this view and the very low
earnings multiples on the oil service companies I felt there was a great
deal of opportunity here.
Page 2
Unfortunately my long term views on such things as oil don't amount to
much as these stocks continue to go down because of low oil prices, and the
Asian contagion. As for improving future returns, I have spent the last few
weeks re-evaluating every position we own and strengthening my sell
discipline. I have reduced our risk by selling stocks across the board
and rolling option positions down for more protection. I feel strongly
that I have eliminated most of our problem positions. We now have a more
well diversified portfolio by market capitalization and industry.Of course
this works both ways and it may prohibit us from taking full advantage of
some great opportunities, but the key here is to reduce risk. I have
stated before my main job is to provide a vehicle for above average
income, and to minimize capital losses in any market environment.
Ultimately there will be plenty of opportunities in many different industries.
Question: What does the future hold for the market, and give me an example
of the kind of stock you want to own?
Answer: I really don't have an answer to your first question. I hear market
mavens every day who will give you an opinion by the minute hour and day,
but ultimately no one knows. However, this "stealth" bear market has sure
been an example of what can happen to good companies in a bad market.
A great example of the kind of stock I want to own is Leucadia National.
We do own this company, and it should probably be a standard for everything
I buy. Leucadia is an insurance holding company that is run like a
private company with public shareholders. Since inception in 1978 book
value has grown at an annualized rate of 28.5%. The company trades in the
low thirties and has a $29.00 book value with $25.00 in cash. The risk in
the stock is that management is frustrated with the lack of good deals
available to them, and may decide to retire, and liquidate the company.
However, I suspect that in this environment they will see more and more
interesting prospects every day. Either way I don't see much risk in
this stock.
As always, thank you for your patience and confidence.
Sincerely,
Richard P. Cancelmo, Jr.
Page 3
WEST UNIVERSITY FUND, INC.
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (unaudited)
Common Stocks
Basic Materials-13.19%
A. Schulman 2,500 shares
Market value $48,906
Options written
25 December 20 calls
Market value $3,125
Exp. 12-98
Barrick Gold 9,000 shares
Market value $172,688
Options written
25 July 22.5 calls
Market value $156
Exp. 07-98
20 Oct 17.5 calls
Market value $5,813
Exp. 10-98
25 Oct. 15 calls
Market value $11,875
Exp. 10-98
Calgon Carbon 6,300 shares
Market value $62,606
Options written
50 Aug. 10 calls
Market value $3,437
Exp. 08-98
Newmont Mining 6,000 shares
Market value $141,750
Options written
20 Dec. 20 calls
Market value $10,500
Exp. 12-98
Worthington Ind. 6,000 shares
Market value $90,375
Options written
20 Sept. 17.5 calls
Market value $500
Exp. 09-98
Basic Materials
Total Market value stocks $516,325
Total Market value calls $35,406
Capital Goods-12.94%
Aviall,Inc*. 3,000 shares
Market value $41,063
Options written
30 Sept. 15 calls
Market value $1,500
Exp. 09-98
AVX Corp*. 5,500 shares
Market value $88,344
Options written
55 Nov. 17.5 calls
Market value $7,390
Exp. 11-98
ITEQ Corp.* 7,000 shares
Market value $52,063
Options written
30 July 10 calls
Market value $188
Exp. 07-98
20 Oct. 12.5 calls
Market value $250
Exp. 10-98
Kemet Corp.* 7,500 shares
Market value $98,672
Options written
25 Oct. 15 calls
Market value $1,641
Exp. 10-98
50 Jan. 12.5 calls
Market value $11,250
Exp. 01-99
Lawter Int. 5,000 shares
Market value $54,375
Options written
50 Sept. 10 calls
Market value $5,250
Exp. 09-98
Miller Ind.* 9,000 shares
Market value $69,750
Options written
40 Aug. 7.5 calls
Market value $2,500
Exp. 08-98
50 Aug. 5 calls
Market value $13,750
Exp. 08-98
Pall Corp. 5,000 shares
Market value $102,500
Options written
20 Sept. 17.5 calls
Market value $6,625
Exp. 09-98
30 Dec. 17.5 calls
Market value $10,688
Exp. 12-98
Capital Goods
Total Market value stocks $506,767
Total Market value calls $61,032
Consumer Cyclicals-9.69%
Eagle Hardware* 2,500 shares
Market value $57,813
Options written
25 Aug. 15 calls
Market value $20,781
Exp. 08-98
Helig Meyers 500 shares
Market value $6,156
Options written
5 Aug. 10 calls
Market value $1,250
Exp. 08-98
Nike, Inc. 1,500 shares
Market value $73,031
Options written
15 Oct. 40 calls
Market value $14,625
Exp. 10-98
Pep Boys 6,500 shares
Market value $123,094
Options written
25 July 25 calls
Market value $312
Exp. 08-98
20 July 20 calls
Market value $500
Exp. 08-98
20 July 22.5 calls
Market value $250
Exp. 08-98
TBC Corp* 18,000 shares
Market value $119,250
Options written
60 Sept. 7.5 calls
Market value $1,500
Exp. 09-98
120 Dec. 7.5 calls
Market value $6,000
Exp. 12-98
Consumer Cyclicals
Total Market value stocks $379,344
Total Market value calls $45,218
* Non-Income Producing Security
Page 4
WEST UNIVERSITY FUND, INC
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (unaudited)
Common Stocks (continued)
Consumer Staples-5.70%
AMC Entertainment* 4,000 shares
Market value $72,250
Carmike Cinemas* 2,000 shares
Market value $53,875
Options written
20 Nov 25 calls
Market value $7,875
Exp. 11-98
Jackpot Enterprises 4,000 shares
Market value $50,250
Wendy's Intl 2,000 shares
Market value $47,000
Options written
20 Sept. 20 calls
Market value $7,875
Exp. 09-98
Consumer Staples
Total Market value stocks $223,375
Total Market value options $15,750
Energy-14.70%
Baker Hughes 2,000 shares
Market value $69,125
Options written
20 Jan. 30 calls
Market value $13,000
Exp. 01-99
Bellwether Exp.* 8,000 shares
Market value $62,500
Options written
80 July 10 calls
Market value $750
Exp. 07-98
Marine Drilling Co. * 2,000 shares
Market value $32,000
Options written
20 Nov. 17.5 calls
Market value $4,125
Exp. 11-98
Nabors Ind.* 3,000 shares
Market value $59,438
Options written
30 Dec. 20 calls
Market value $8,438
Exp. 12-98
NGC Corp. 3,500 shares
Market value $43,750
Options written
35 Sept. 12.5 calls
Market value $4,812
Exp. 09-98
Nuevo Energy* 1,500 shares
Market value $48,188
Options written
15 July 35 calls
Market value $328
Exp. 07-98
Pioneer Natural Res. 3,000 shares
Market value $71,625
Options written
30 Dec. 22.5 calls
Market value $9,563
Exp. 12-98
Precision Drilling* 1,000 shares
Market value $19,625
R & B Falcon* 2,000 shares
Market value $45,250
Options written
20 Sept. 25 calls
Market value $3,000
Exp. 09-98
Santa Fe Energy 4,000 shares
Market value $43,000
Options written
40 Oct. 7.5 calls
Market value $13,750
Exp. 10-98
Seagull Energy* 2,500 shares
Market value $41,406
Options written
25 Nov. 15 calls
Market value $7,656
Exp. 11-98
Varco Energy 2,000 shares
Market value $39,625
Options written
20 Dec. 20 calls
Market value
Exp. 12-98
Energy
Total Market value stocks $575,531
Total Market value calls $72,797
Financials-3.07%
Leucadia National 1,500 shares
Market value $49,594
Southern Pacific Funding* 4,500 shares
Market value $70,593
Options written
25 Oct. 12.5 calls
Market value $9,688
Exp. 10-98
Financials
Total Market value stocks $120,187
Total Market value calls $9,688
Health Care-5.48%
C.R. Bard 3000 shares
Market value $114,187
Options written
30 July 25 calls
Market value $39,750
Exp. 07-98
Space Labs Medical* 6,000 shares
Market value $100,500
Options written
30 Oct.17.5 calls
Market value $5,625
Exp. 10-98
30 Oct. 15 calls
Market value $9,937
Exp. 10-98
Health Care
Total Market value stocks $214,687
Total Market value calls $55,312
* Non-Income Producing Security
Page 5
WEST UNIVERSITY FUND, INC.
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (unaudited)
Common Stocks (continued)
Investment Companies-2.08%
Putnam Master Int. Fund 10,000 shares
Market value $81,250
Technology-13.36%
Biogen* 1,500 shares
Market value $73,500
Options written
15 July 30 calls
Market value $28,594
Exp. 07-98
Compaq Computer 3,000 shares
Market value $85,125
Options written
30 Jan. 20 calls
Market value $28,875
Exp. 01-99
Hewlett Packard 1,500 shares
Market value $89,812
Options written
15 Aug. 55 calls
Market value $9,562
Exp. 08-98
Midway Games, Inc.* 5,000 shares
Market value $78,125
Options written
50 Feb. 10 calls
Market value $31,875
Exp. 02-99
Motorola 2,500 shares
Market value $131,406
Options written
10 Oct 50 calls
Market value $5,875
Exp. 10-98
15 Jan 40 calls
Market value $21,188
Exp. 01-99
NCR Corp. 2,000 shares
Market value $65,000
Options written
20 July 25 calls
Market value $15,000
Exp. 07-98
Technology
Total Market value stocks $522,968
Total Market value calls $140,969
Utilities-2.24%
Peco Energy 3,000 shares
Market value $87,563
Options written
30 Oct. 22.5 calls
Market value $21,000
Exp. 10-98
Total Equities-82.45%
(Cost $3,440,387)
Market value $3,227,997
Total Option Contracts Written-(11.68%)
Premiums received: ($511,055)
Market value ($457,172)
*Non Income Producing Security
Page 6
WEST UNIVERSITY FUND, INC.
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998 (unaudited)
(continued)
Short Term Investments
Variable Demand Notes
Firstar-4.85% $190,000
(cost: $190,000)
General Mills-4.85% $190,000
(cost: $190,000)
Johnson Controls-4.85% $190,000
(cost: $190,000)
Pitney Bowes- 3.79% $148,578
(cost: $148,578)
Total Variable Demand Notes $718,578
Commercial Paper
Ford Motor- 4.96% $194,224
5.51% due 07-27-98
(cost: $194,244)
GE- 6.38% $249,694
5.5% due 07-09-98
(cost: $249,694)
Total Commercial Paper $443,918
Total Short Term Investments -29.69% $1,162,496
(cost: $1,162,496)
Other Assets and Liabilities Net -(.46%) ($17,868)
Net Assets -100% $3,915,453
Page 7
WEST UNIVERSITY FUND, INC.
STATEMENT OF ASSETS AND
LIABILITIES
JUNE 30, 1998 (unaudited)
ASSETS
Investments in securities, at market value $3,227,997
(cost: $3,440,387)
Variable demand notes, at market value $718,578
(cost: $718,578)
Commercial paper, at market value $443,918
(cost: $443,918)
Receivables:
Dividends $1,449
Interest $2,159
Total Assets $4,394,093
LIABILITIES
Covered call options written, at market value $457,172
(Premiums received: $511,055)
Payable for investment securities purchased $14,370
Accrued expenses $7,098
Total Liabilities $478,640
NET ASSETS $3,915,453
Net asset value per share
($3,915,453 / 370,432 shares outstanding) $10.57
COMPONENTS OF NET ASSETS
Common stock, $1.00 par value; 10,000,000 shares authorized,
370,432 shares issued and outstanding $370,432
Paid-in capital $3,454,818
Undistributed net investment income $23,207
Net unrealized appreciation (depreciation)
on investments ($158,506)
Net realized gain on investments $223,750
NET ASSETS $3,915,453
The accompanying notes are an integral part of
these financial statements.
Page 8
WEST UNIVERSITY FUND, INC.
STATEMENT OF OPERATIONS
June 30,1998 (unaudited)
INCOME:
Interest $34,184
Dividends $18,658
TOTAL INCOME $52,842
EXPENSES:
Management fee $18,844
Accounting fee $4,203
Audit and tax consulting fees $3,620
Custodian fees $2,968
Total Expenses $29,635
Net Investment Income $23,207
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments $223,750
Net change in unrealized appreciation ($158,506)
Net gain on investments $65,244
Net increase in net assets
resulting from operations $88,451
The accompanying notes are an integral
part of these financial statements.
Page 9
WEST UNIVERSITY FUND, INC.
STATEMENT OF CHANGES
IN NET ASSETS
JUNE 30,1998 (unaudited)
Six months ended Year ended
06-30-98 12-31-97
OPERATIONS:
Net investment income $23,207 $41,592
Net realized gain on investments $223,750 $234,551
Net change in unrealized appreciation($158,506) ($6,062)
Net increase in net assets resulting
from operations $88,451 $270,081
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net investment income $0 $41,590
Distributions from net realized gains $0 $232,779
Total distributions $0 $274,369
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares issued (28,145 and
158,253, respectively) $413,600 $1,675,696
Increase from shares issued in
reinvested distributions $0 $209,797
Cost of shares redeemed ($110,652) ($377,425)
Net increase in net assets derived from
capital share transactions $302,948 $1,508,068
Net increase in net assets $374,222 $1,503,780
NET ASSETS AT BEGINNING
OF PERIOD $3,541,231 $2,037,451
NET ASSETS AT
END OF PERIOD $3,915,453 $3,541,231
The accompanying notes are an integral part of these financial
statements.
Page 10
WEST UNIVERSITY FUND, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998 (unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
West University Fund, Inc. (the"fund"), was incorporated under the laws
of the State of Texas on October 25,1995 and commenced investment
activity in February 1996. The fund is registered under the Investment
Company Act of 1940, as amended, as a diversified, no-load, open-end
management investment company. The following is a summary of the fund's
significant accounting policies.
Basis of Accounting- The accounting records of the fund and its financial
statements are maintained and prepared on the accrual basis under generally
accepted accounting principles. 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.
Securities Valuation- Investments and outstanding options (collectively
referred to as securities) are stated at market value. Securities traded
on securities exchanges are valued at the last sale price on the day, at
the mean between the last current bid and asked prices.
Investment Income and Securities Transactions- Dividend income is
recorded on the ex-dividend date and interest income is accrued as
earned. Securities transactions are accounted for on the trade date
(the date the order to buy or sell is executed). Realized gains and
losses from securities transactions and unrealized appreciation or
depreciation of securities are reported on an identified cost basis
for both financial statement and Federal income tax purposes.
Option Accounting Principles- When the fund writes a call option,
an amount equal to the premium received by the fund is included
in the fund's Statement of Assets and Liabilities as an asset and an
equivalent liability. The amount of the liability will be subsequently
marked-to-market to reflect the current market value of the option
written. The current market value of a traded option is the last sales
price or, in the absence of a sale, the mean between the last current
bid and asked prices.
When a call expires on its stipulated expiration date, or if the fund
enters into a closing purchase transaction, the fund will realize a gain
(or loss if the cost of a closing purchase transaction exceeds the
premium received when the call option was written) without
regard to any unrealized gain or loss on the underlying security,
and the liability related to such option will be extinguished. When a
call option is exercised, the fund will realize a gain or loss from the
sale of the underlying security and the proceeds of the sale
are increased by the premium originally received.
Fund Share Valuation- Fund shares are sold and redeemed on a
continuing basis at net asset value. Net asset value per share is
determined daily as of the close of trading of the New York
Stock Exchange on each day the Exchange is open for trading
by dividing the total value of the fund's investments and other assets,
less the sum of liabilities and the value of outstanding call options,
by the number of fund shares outstanding.
Federal Income Taxes- It is the fund's intention to comply with
the provisions of the Internal Revenue Code enabling it to qualify
as a regulated investment company and, in the manner provided therein,
to distribute all of its taxable income to its shareholders. Accordingly,
no provision for income taxes has been made.
Custodian- The fund's custodian is Firstar Trust Company. Pursuant
to the terms of the Custodian Agreement the fund will forward to the
Custodian
Page 11
the proceeds of each purchase of fund shares. The Custodian
will hold such proceeds and make disbursements therefrom in accordance
with the terms of the Custodian Agreement. It will retain possession of the
securities purchased with such proceeds and maintain appropriate records
with respect to receipt and disbursements of money, receipt and release of
securities, and all other transactions of the Custodian with respect to the
securities and other assets of the fund.
NOTE 2.- INVESTMENT ADVISORY AGREEMENT
AND "AFFILIATED PERSONS"
Cancelmo Capital Management, Inc. (the "Adviser") is the investment
adviser of the fund. The Adviser, subject to the control and direction of
the Fund's board of directors, manages and supervises the investment
operations of the Fund and the composition of its portfolio, including
the writing of all options and making recommendations to the Fund's
board of directors as to investment policies.
As compensation for furnishing investment advisory, management, and
other services, and costs and expenses assumed, pursuant to the
Investment Management Agreement, the Fund pays the Adviser an
annual fee equal to 1.0% of average daily net assets. The Adviser
will reduce its fees to limit the total annual expenses of the Company
(including the Adviser's fee, but excluding interest, taxes, fees incurred
in acquiring and disposing of portfolio securities and certain extraordinary
expenses) to 2.0% of the first $10,000,000 of average daily assets,
1.5% of the next $20,000,000 of such assets, and 1.0% of such assets
over $30,000,000.
NOTE 3- CAPITAL SHARE TRANSACTIONS
The Fund is authorized to issue 10,000,000 shares of common stock,
par value $1.00. On October 25,1995, 35,400 shares of common
stock were issued for $354,000 of marketable securities. The 35,400
outstanding shares are held by two shareholders who are related to an
officer and director of the Company. As of June 30, 1998, there were
370,432 shares of $1.00 par value capital stock authorized and capital
paid-in aggregated $3,454,818.
Transactions in capital stock for the six months ended June 30,1998 and
the year ended December 31, 1997, were as follows:
1998 1997
Shares Amounts Shares Amounts
Shares sold 38,644 $413,600 158,253 $1,675,696
Shares issued
in reinvestment
of dividends 0 $0 20,310 $209,797
178,563 $1,885,493
Shares
redeemed 10,499 $110,652 35,773 $377,425
Net increase 28,145 $302,948 142,790 $1,508,068
NOTE 4.- INVESTMENT ACTIVITY
For the period ended June 30,1998, purchases of investment
securities (excluding short term investments) totaled $3,559,157
and proceeds from sales totaled $2,687,149.
As of June 30, 1998, portfolio securities valued at $2,702,735
were held in escrow by the custodian in connection with
covered call options written by the Fund.
Number of Contracts Premiums
Outstanding at beginning of year 1,199 $367,343
Call options written 1,800 $575,669
Call options terminated in closing
purchase transactions (105) ($34,079)
Call options expired (384) ($122,999)
Call options exercised (970) ($274879)
Outstanding at June 30, 1998 1,540 $511,055
Page 12
WEST UNIVERSITY FUND, INC.
SUPPLEMENTARY INFORMATION
JUNE 30,1998 (unaudited)
SELECTED PER SHARE DATA AND RATIOS
Six months ended 1997 1996
June 30,1998
Net asset value at
beginning of period $10.35 $10.21 $10.00
Income from investment operations:
Net investment income $.05 $.12 $.09
Net realized and unrealized gain
on securities $0 ($.12) ($.09)
Total from investment
operations $.17 $.82 $.80
Less: Distributions $0 ($.64) ($.59)
Net asset value at
end of period $10.57 $10.35 $10.21
Total return 2.13% 9.73% 9.71%
Ratios/Supplemental Data:
Net assets at end of
period(in thousands) $3,915 $3,541 $2,037
Expenses to average
net assets 1.56* 1.75 1.82
Net investment income before
taxes to average net assets 1.22* 1.36 1.19
Portfolio turnover rate 95.21% 188.53% 101.38%
Average commission rate** .0481 .0463 . 0446
*Annualized
** The formula for calculating the average commission rate
is total commission paid divided by total shares purchased
and sold. Each option contract is 100 shares.
