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ANNUAL REPORT
TO SHAREHOLDERS
SAND HILL PORTFOLIO MANAGER FUND
A SERIES of
The World Funds, Inc.
a "Series" Investment Company
FOR THE YEAR ENDED
DECEMBER 31, 1997
<PAGE>
[GRAPH GOES HERE]
SAND HILL
PORTFOLIO MANAGER
FUND S&P 500
01/01/95 $10,000.00 $10,000.00
12/31/95 $11,160.09 $13,758.00
12/31/96 $13,344.01 $16,918.21
12/31/97 $15,728.59 $22,520.50
Sand Hill Portfolio Manager Fund
Schedule of Portfolio Investments
December 31, 1997
<TABLE>
<CAPTION>
Number Market
Shares Security Value
<S> <C>
COMMON STOCK: 65.26%
BASIC INDUSTRY: 1.61%
1,200 Hoechst $ 42,075
10,500 Material Sciences* 127,969
---------
170,044
---------
CAPITAL GOODS: 5.25%
3,900 Avery Dennison 174,525
4,800 Dover Corp 173,400
300 Sumitomo Electric ADR 41,070
1,700 W.W. Grainger 165,219
---------
554,214
---------
CLOSED END MUTUAL FUND: 0.56%
6,000 Japan Webs Index Service 59,250
---------
CONSUMER DURABLES: 8.75%
2,455 Desc, S.A. De C.V. ADR 92,063
4,500 The Gap 159,469
3,200 Johnson Controls 152,800
3,700 Leggett & Platt Inc. 154,937
2,800 Manpower 98,700
400 Matsushita Electric ADR 60,800
3,500 Sherwin Williams 97,125
1,200 Sony Corp ADR 108,900
---------
924,794
---------
CONSUMER NON-DURABLES: 7.64%
1,200 Carlton Communications ADR 46,800
3,100 Kimberly Clark 152,869
2,000 Panamerican Beverage 65,250
800 Procter & Gamble 63,850
3,300 Sara Lee Corp 185,831
2,000 Walgreen 62,750
4,500 Whole Foods Markets* 230,063
---------
807,413
---------
ENERGY: 6.88%
1,900 Atlantic Richfield 152,237
1,000 British Petroleum ADR 79,688
2,400 Mobil 173,250
6,000 Nabors Industries* 188,625
1,800 Western Atlas Inc* 133,200
---------
727,000
---------
FINANCE: 7.43%
2,700 Banco de Santander ADR 87,919
7,900 Cheung Kong Holdings ADR 51,742
6,000 Hang Seng Bank Ltd ADR 57,884
3,400 MBIA Inc. 227,163
5,000 PXRE Corp. 165,938
4,600 Regions Financial Corp 194,062
---------
784,708
---------
HEALTH CARE: 8.90%
2,700 Amgen* 146,138
5,866 Astra AB ADR 100,822
3,000 Becton Dickinson & Co. 150,000
4,100 Manor Care 143,500
600 Roche Holdings ADR 59,669
3,400 Schering Plough Corp 211,225
2,600 United Healthcare 129,188
---------
940,542
---------
TECHNOLOGY: 10.46%
3,600 3Com* 125,775
4,000 Adaptec* 148,500
4,000 Adobe Systems Inc 165,000
5,000 E M C Corp 137,188
2,200 Ericsson ADR 82,088
2,200 Intel 154,550
2,200 Hewlett Packard 37,500
5,000 Sungard Data Systems 155,000
---------
1,105,601
------------
R E I T: 4.53%
4,300 Apartment Investment & Management Co 158,024
5,000 Boston Properties 165,312
6,000 J P Realty 155,624
--------
478,960
--------
UTILITIES: 3.25%
1,300 Ameritech Corp 104,650
16,000 Hong Kong Electric ADR 60,812
3,100 Hong Kong Telecom 63,937
2,300 Nipsco Industies 113,706
--------
343,105
--------
TOTAL COMMON STOCKS:
(Cost: $4,936,273) 6,895,631
--------
Principal
Amount U.S. GOVT. SECURITIES: 24.03%
- ----------
LONG TERM:
$100,000 U.S. Treasury Note 100,281
maturity date 07/31/99; 5.875%
100,000 U.S. Treasury Note 103,094
maturity date 10/31/99; 7.5%
200,000 U.S. Treasury Note 202,000
maturity date 07/31/00; 6.125%
200,000 U.S. Treasury Note 199,625
maturity date 02/28/01; 5.625%
200,000 U.S. Treasury Note 201,188
maturity date 09/30/02; 5.875%
200,000 U.S. Treasury Note 204,563
maturity date 2/15/03; 6.25%
200,000 U.S. Treasury Note 201,813
maturity date 02/15/04; 5.875%
400,000 U.S. Treasury Note 417,000
maturity date 05/15/05; 6.5%
300,000 U.S. Treasury Note 321,094
maturity date 05/15/06; 6.875%
------------
TOTAL LONG TERM U.S. GOVERNMENT SECURITIES:
(COST: $1,893,233) 1,950,658
------------
SHORT TERM:
150,000 U.S. Treasury Bill 149,758
maturity date 01/15/98; 3.87%
150,000 U.S. Treasury Bill 148,046
maturity date 04/02/98; 5.10%
150,000 U.S. Treasury Bill 146,216
maturity date 06/25/98; 5.16%
150,000 U.S. Treasury Bill 144,367
maturity date 09/17/98; 5.20%
------------
TOTAL SHORT TERM GOVERNMENT SECURITIES:
(Cost: $588,387) 588,387
------------
TOTAL INVESTMENTS:
(Cost: $7,417,893)** 89.29% 9,434,676
Other assets, net 10.71% 1,131,441
--------- ------------
NET ASSETS 100.00% $ 10,566,117
========= ============
</TABLE>
*Non-income producing
**Cost for Federal income tax purpose is $7,417,893 and
net unrealized appreciation consists of:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Gross unrealized appreciation $ 2,145,136
Gross unrealized depreciation (128,353)
------------
Net unrealized appreciation $ 2,016,783
</TABLE>
ADR --- Security represented is held by the custodian bank in the form
of American Depository Receipts.
See Notes to Financial Statements
<PAGE>
Statement of Assets and Liabilities
December 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments at value (identified
cost of $7,417,893)(Notes 1 & 3) $9,434,676
Cash 432,035
Receivables:
Dividend and interest 42,021
Capital stock sold 644,118
--------------
686,139
Deferred organization costs 16,209
--------------
TOTAL ASSETS 10,569,059
--------------
LIABILITIES
Accrued expenses 2,942
--------------
NET ASSETS $10,566,117
==============
NET ASSET VALUE, OFFERING AND
REDEMPTION PRICE PER SHARE $14.57
($10,566,117/725,028 shares outstanding) ==============
At December 31, 1997 there were 50,000,000 shares of $.01 par value stock
authorized and components of net assets are:
Paid in capital $8,486,136
Undistributed net realized on investments 58,285
Undistributed net investment income 4,913
Net unrealized appreciation of investments 2,016,783
--------------
Net Assets $10,566,117
</TABLE>
==============
See Notes to Financial Statements
<PAGE>
Statement of Operations
Year ended December 31, 1997
INVESTMENT INCOME
Income:
Interest $113,189
Dividend 98,335
------------
Total income $211,524
Expenses:
Investment management fees 80,675
(Note 2)
Transfer agent fees 19,313
(Note 2)
Custodian and accounting 16,800
fees (Note 3)
Legal & audit fees 12,371
Registration fees 3,572
Recordkeeping and administrative services 22,365
(Note 2)
Shareholder servicing and 5,327
reports (Note 2)
Organization 7,096
expense
amortization
Other 326
------------
167,845
Custodian fee credits (13,445)
------------
Total expenses 154,400
------------
Net investment income 57,124
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 265,654
Net increase in unrealized appreciation on investments 984,658
------------
Net gain on investments 1,250,312
------------
Net increase in net assets resulting from operations $1,307,436
============
See Notes to Financial Statements
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Year
ended ended
December December
31, 31,
1997 1996
<S> <C> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income $ 57,124 $ 68,634
Net realized gain on investments 265,654 230,479
Change in unrealized appreciation
of investments 984,658 740,80
Net increase in net assets resulting
from operations 1,307,436 1,039,920
DISTRIBUTION TO
SHAREHOLDERS
FROM:
Net investment income
($.08 and $.15 per share) (52,211) (72,905)
Capital gains ($.43 and $.33 per share) (280,635) (155,461)
CAPITAL SHARE
TRANSACTIONS
Net increase in net assets resulting from
capital share transactions* 3,132,102 1,622,851
Net increase in net 4,106,692 2,434,405
assets
Net asset at beginning of year 6,459,425 4,025,020
NET ASSETS at the end of the year $10,566,1 $6,459,425
(including undistributed net ============ =========
investment income of $4,913 and $0)
</TABLE>
*A summary of capital share transactions follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1997 1996
Shares Value Shares Value
----------
<S> <C> <C> <C> <C>
Shares sold 240,636 $3,384,487 199,556 $ 2,332,804
Shares reinvested
from dividend 21,704 318,619 17,744 225,708
Shares
redeemed (42,017) (571,004) (75,044) (935,661)
--------- ---------- ---------- -----------
Net increase 220,323 $3,132,102 142,256 $1,622,851
========== ========== ========== ===========
</TABLE>
See Notes to Financial Statements
<PAGE>
Financial Highlights
For a Share Outstanding Throughout Each Period
<TABLE>
<CAPTION>
Jan 2, 1995*
Year ended Year ended to
Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995
<S> <C> <C> <C> <C> <C> <C>
Per Share
Operating
Performance
Net asset value,
beginning of period $12.79 $11.11 $10.00
------ ------ ------
Income from investment
operations-
Net investment income 0.09 0.14 0.06
Net realized and unrealized
gain on investments 2.20 2.02 1.10
---- ---- ----
Total from investment
operations 2.29 2.16 1.16
---- ---- ----
Less distributions-
Distributions from net
investment income (0.08) (0.15) (0.05)
Distributions from
capital gains (0.43) (0.33) 0.00
----- ----- ----
Total distributions (0.51) (0.48) (0.05)
----- ----- -----
Net asset value,
end of period
(000's) $14.57 $12.79 $11.11
====== ====== ======
Total Return 17.87% 19.57% 11.60%
Ratios/Supplemental Data
Net assets, end
of period (000's) $10,566 $6,459 $4,025
Ratio to average
net assets-(A)
Expenses (B) 2.08% 2.50% 3.03%**
Expense ratio-net (C) 1.90% 2.00% 1.90%**
Net investment income 0.71% 1.29% 0.52%**
Portfolio turnover rate 16.48% 32.97% 40.96%
Average brokerage
commission per share $0.0459 $0.0581 ---
</TABLE>
* Commencement of operations
** Annualized
(A) Management fee waivers reduced the expense ratios and increased the net
investment income ratio by .64% in 1996 and 1.00% in 1995.
(B) Expense ratio has been increased to include custodian fees which were offset
by custodian credits.
(C) Expense ratio-net reflects the effect of the custodian fee credits the fund
received.
See Notes to Financial Statements
<PAGE>
Notes to the Financial Statements
December 31, 1997
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES--The Sand Hill Portfolio Manager Fund
(the "Fund") is a series of The World Funds, Inc. ("TWF") which is registered
under The Investment Company Act of 1940, as amended, as a diversified open-end
management company. The Fund was established in January 2, 1995 as a series of
TWF which has allocated to the Fund 50,000,000 shares of its 500,000,000 shares
of $.01 par value common stock. The following is a summary of significant
accounting policies consistently followed by the Fund. The policies are in
conformity with generally accepted accounting principles.
The investment objective of the Fund is to maximize total return by investing in
equity securities, debt securities and short term investments.
A. Security Valuation. Investments in securities traded on a national securities
exchange or included in the NASDAQ National Market System are valued at the last
reported sales price; other securities traded in the over-the-counter market and
listed securities for which no sale is reported on that date are valued at the
last reported bid price. Short-term investments (securities with a remaining
maturity of sixty days or less) are valued at cost which, when combined with
accrued interest, approximates market value.
B. Federal Income Taxes. The Fund intends to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
C. Security Transactions and Dividends. As is common in the industry,
security transactions are accounted for on the trade date. Dividend income
is recorded on the ex-dividend date.
D. Deferred Organizational Expenses. All of the expenses of TWF incurred in
connection with its organization and the public offering of its shares have been
assumed by the series funds of TWF. The organization expenses allocable to Sand
Hill Portfolio Manager Fund are being amortized over a period of fifty-seven
(57) months.
E. Distributions to Shareholders. Distributions from net investment income and
realized gains, if any, are recorded on the ex-dividend date. Income
distributions and capital gain distributions are determined in accordance with
income tax regulations which may differ from generally accepted accounting
principles. These distribution differences primarily result from different
treatments of equalization and post-October capital losses.
F. Accounting Estimates. In preparing financial statements in conformity with
generally accepted accounting principles, management makes estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements, as well as the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 2-INVESTMENT MANAGEMENT AND DISTRIBUTION AGREEMENTS--Pursuant to an
Investment Advisory Agreement, the Advisor, Sand Hill Advisors ("SHA") provides
investment services for an annual fee of 1.0% of the first $100 million of
average daily net assets and .75% on average daily net assets over $100 million.
As provided in the Administrative Agreement, the Fund reimbursed Commonwealth
Shareholder Services, Inc. ("CSS"), its Administrative Agent, $25,224 for
providing shareholder services, recordkeeping, administrative services and
blue-sky filings. The Fund compensates CSS for blue-sky filings and certain
shareholder servicing on an hourly rate basis. For other administrative
services, CSS receives .20% of average daily net assets, with a mnimum fee
of $60,000, of which $43,400 has been waived.
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend Disbursing
Agent. FSI received $19,313 for its services for the year ended
December 31, 1997.
Certain officers and/or directors of the Fund are also officers and/or directors
of CSS and FSI.
NOTE 3-PURCHASES AND SALES OF SECURITIES--Purchases and sales of securities
other than short-term notes aggregated $2,733,675 and $1,180,931, respectively.
The Custodian has provided credits in the amount of $13,445 , against
custodian and accounting charges based on credits on uninvested cash
balances of the Fund.
<PAGE>
Report of Independent Certified Public Accountants
To the Shareholders and Board of Directors of World Funds, Incorporated
Richmond, Virginia
We have audited the accompanying statement of assets and liabilities of the Sand
Hill Portfolio Manager Fund, a series of World Funds, Incorporated, including
the schedule of portfolio investments as of December 31, 1997, and the related
statement of operations for the year then ended and the statement of changes in
net assets for each of the two years in the period then ended and the financial
highlights for each of the three years in the period then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatements. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Sand Hill Portfolio Manager Fund as of December 31, 1997, the results of its
operations for the year then ended, and the changes in its net assets for each
of the two years in the period then ended and the financial highlights for each
of the three years in the period then ended, in conformity with generally
accepted accounting principles.
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
January 23, 1998
<PAGE>
Investment Advisor:
Sand Hill Advisors, Inc.
3000 Sand Hill Road
Building Three, Suite 150
Menlo Park, California 94025-7111
Distributor:
First Dominion Capital Corp.
1500 Forest Avenue
Suite 223
Richmond, Virginia 23229
Independent Auditors:
Tait, Weller and Baker
Eight Penn Center Plaza
Suite 800
Philadelphia, Pennsylvania 19103
Transfer Agent:
For account information, wire purchase or redemptions, call or write to Sand
Hill's Transfer Agent:
Fund Services, Inc.
Post Office Box 26305
Richmond, Virginia 23260
(800) 628-4077 Toll Free
More Information:
For 24 hour, 7 days a week price information, and for information on
any series of The World Funds, Inc., investment plans, and other
shareholder services, call Commonwealth Shareholder Services at (800)
527-9500 Toll Free.
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