Semi-Annual Report to Shareholders
THE NEW MARKET FUND
A Series of
The World Fund, Inc.
a "Series" Investment Company
For the Period Ended
February 28, 1999
<PAGE>
March 16, 1999
Dear Shareholders:
In the first six months since the fund's inception, we generated a 13.4%
net return. While heavy cash inflows significantly diluted our "equity only"
results, we were overall pleased with the returns.
Our investment approach will be gradual and long-term, with an emphasis on
after-tax, net results. The mutual fund industry discloses pretax returns to
their investors which are generally 2%-4% higher than the actual, after-tax
return realized by the shareholder. The hidden cost is significant and one we
will try to avoid for our shareholders.
Our holdings are consistent in terms of reasonable valuations,
shareholder-oriented management and financial strength. With a highly
speculative market trading in excess of 30x earnings, we are quite comfortable
with the relative valuation of our positions estimated at an average 15x
adjusted cash earnings. The fund has underweighted the speculative technology
and large cap growth sectors which have been the leading performers over the
past three years. Instead, our focus has been on undervalued quality companies
under $10 billion in market capitalization, trading at 50+% discount to larger
capitalized competitors. We believe the wide disparity in valuation (16 P/E
versus 40 P/E) will close in the future in one or two ways:
1. Larger capitalization firms will utilize their richly valued stock to
acquire their mid-cap competitors; or
2. Large capitalization valuations will fall significantly more,
relative to their smaller capitalized counterparts.
Either way, we believe our portfolio is positioned to outperform over the next
3-5 years.
And finally, an important attribute to our investment philosophy is
concentration. Over time, we believe investors need to establish meaningful
positions in quality companies in order to generate above-average returns. The
industry standard of owning 1% in a hundred different companies assures
investors of mediocre (and usually subpar) returns relative to the market. It is
our opinion that overall market returns going forward will be well below
average, and conventional overdiversification will lead to disappointing
results. We will ultimately wait and take meaningful, selective positions in
high quality, high return companies when the opportunity is attractive.
Patience, focus and discipline are the three legs to our investment
philosophy. We believe over time our highly efficient, long-term, investment
process will lead to consistent, top performing, after-tax returns.
We appreciate your trust and welcome any comments you may have.
Sincerely,
Stephen M. Goddard, CFA
Portfolio Manager
Principal
<PAGE>
Schedule of Portfolio Investments
February 28, 1999
(Unaudited)
Number
of Market
Shares Security Description Value
- ----------- ----------------------------- ---------------
COMMON STOCKS: 92.51%
AEROSPACE/DEFENSE: 4.90%
2,400 Allied Signal, Inc. $ 99,300
---------------
CHEMICALS: 5.36%
4,600 Albemarle Corp. 108,675
---------------
COMPUTERS: 4.19%
500 International Business
Machines Corp. 85,000
---------------
CONSUMER GOODS 14.85%
1,500 Gillette Co. 80,438
1,200 Mattel, Inc. 31,650
2,400 Nike, Inc. 128,700
1,600 Pepsico, Inc. 60,200
---------------
300,988
---------------
DIVERSIFIED: 14.10%
4,500 Tredegar Industries, Inc. 115,031
2 Berkshire Hathaway, Inc-Cl A* 142,200
12 Berkshire Hathaway, Inc-Cl B* 28,548
---------------
285,779
---------------
FINANCIALS: 21.53%
600 American Express Co. 65,100
600 Capital One Financial Corp. 76,575
1,200 Financial Security Assurance
Holdings Ltd. 63,375
800 Federal Home Loan Mortgage Corp. 47,100
600 Merrill Lynch & Co. 46,050
400 Markel Corp.* 72,000
1,800 Wells Fargo Co. 66,150
---------------
436,350
---------------
MEDICAL: 8.49%
700 Bristol-Myers Squibb Co. 88,156
600 Johnson & Johnson 51,225
400 Merck & Co. 32,700
---------------
172,081
---------------
DRILLING: 1.82%
2,200 Atwood Oceanics, Inc.* 36,987
---------------
REITS: 5.20%
1,925 Prison Realty Corp. 38,380
6,800 United Dominion Realty Trust 67,150
---------------
105,530
---------------
RETAIL: 5.73%
600 McDonald's Corp. 51,000
1,200 Circuit City Stores 65,100
---------------
116,100
---------------
SERVICES: 2.48%
1,500 Service Corp. Int'l. 23,063
1,200 United Asset Management Corp. 27,225
---------------
50,288
---------------
TOBACCO: 3.86%
2,000 Philip Morris Companies, Inc. 78,250
---------------
TOTAL COMMON STOCKS:
(Cost: $1,805,334) 1,875,328
---------------
SHORT TERM INVESTMENTS: 5.92%
119,972 Star Treasury Fund (Cost: $119,972) 119,972
---------------
TOTAL INVESTMENTS:
(Cost: $1,925,306)** 98.43% $ 1,995,300
Other assets, net 1.57% 31,801
--------- ------------
NET ASSETS 100.00% $ 2,027,101
========= ============
* Non-income producing
** Cost for Federal income tax purpose is $1,925,306 and net unrealized
appreciation consists of:
Gross unrealized appreciation $ 169,989
Gross unrealized depreciation (99,995)
---------------
Net unrealized appreciation $ 69,994
===============
See Notes to Financial Statements
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1999 (Unaudited)
- --------------------------------------------------------------------------------
ASSETS
Investments at value (identified cost of $1,925,306 )
(Notes 1 & 3) $ 1,995,300
Receivable for:
Dividends $ 859
Interest 801
Capital stock sold 26,478
---------- 28,138
Deferred organization costs (Note 1) 50,652
Other assets 3,011
----------
TOTAL ASSETS 2,077,101
----------
LIABILITIES
Organization costs due to manager 50,000
----------
TOTAL LIABILITIES 50,000
----------
NET ASSETS $ 2,027,101
============
NET ASSET VALUE AND REDEMPTION
PRICE PER SHARE ($ 2,027,101 / 178,748 shares outstanding) $11.34
==========
OFFERING PRICE ($11.34 x 100 / 97.25) $11.66
==========
At February 28, 1999 there were 50,000,000 shares of
$.01 par value stock authorized and components of net
assets are:
Paid in capital $ 1,959,005
Net investment loss (1,898)
Net unrealized appreciation of investments 69,994
----------
Net Assets $ 2,027,101
==========
See Notes to Financial Statements
<PAGE>
STATEMENT OF OPERATIONS
Period ended February 28, 1999* (Unaudited)
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Dividend $4,188
Interest 3,466
----------
Total income $ 7,654
---------
EXPENSES:
Investment advisory fees (Note 2) 4,800
Transfer agent fees (Note 2) 4,601
Recordkeeping and
administrative services (Note 2) 6,329
Shareholder servicing and reports
(Note 2) 2,378
12B-1 fee 2,400
Organization expense amortization 754
Miscellaneous 1,629
----------
Total expenses 22,891
Management fee waiver and reimbursed expenses (13,339)
----------
Net expenses 9,552
----------
Net investment loss (1,898)
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net increase in unrealized
appreciation on investments 69,994
----------
Net increase in net assets
resulting from operations $68,096
==========
* Commencement of operations October 1, 1998
See Notes to Financial Statements
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
For the period ended February 28, 1999* (Unaudited)
- --------------------------------------------------------------------------------
OPERATIONS
Net investment loss $ (1,898)
Change in unrealized appreciation of investments 69,994
----------
Net increase in net assets resulting from operations 68,096
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income --
Capital gains --
CAPITAL SHARE TRANSACTIONS
Net increase in net assets resulting from
capital share transactions** 1,954,005
----------
Net increase in net assets 2,022,101
Net assets at beginning of period 5,000
----------
NET ASSETS at the end of the period $2,027,101
==========
* Commencement of operations October 1, 1998
** A summary of capital share transactions follows:
For the period
ended
February 28, 1999*
(Unaudited)
----------------------------
Shares Value
------- -----------
Shares sold 178,293 $1,954,518
Shares reinvested from dividends -- --
Shares redeemed (45) (513)
------- -----------
Net increase 178,248 $1,954,005
======= ===========
See Notes to Financial Statements
<PAGE>
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
- --------------------------------------------------------------------------------
Period ended
February 28, 1999*
(Unaudited)
-------------------
Per Share Operating Performance
Net asset value, beginning of period $10.00
Income from investment operations-
Net investment loss (0.01)
Net realized and unrealized gain on investments 1.35
-------
Total from investment operations 1.34
-------
Less distributions-
Distributions from net investment income --
Distributions from capital gains --
-------
Total distributions 0.00
-------
Net asset value, end of period $11.34
=======
Total Return 13.40%
Ratios/Supplemental Data
Net assets, end of period (000's) $2,027
Ratio to average net assets - (A)
Expenses 4.70% **
Expense ratio - net 1.96% **
Net investment loss (0.39%)**
Portfolio turnover rate 0.00%
* Commencement of operations October 1, 1998
** Annualized
(A) Management fee waivers reduced the expense ratios and increased the net
investment income ratio by 2.76%
See Notes to Financial Statements
<PAGE>
Notes to the Financial Statements
February, 28, 1999(Unaudited)
- --------------------------------------------------------------------------------
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES-The New Market 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 non-diversified open-end management
company. The Fund was established in June, 1998 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. Initial outside investors purchased shares of the fund on
June 30, 1998. However operations of the Fund did not commence until October 1,
1998.
The investment objective of the Fund is to achieve long-term growth of capital
by investing in a portfolio composed of common stocks and securities convertible
into common stock, such as warrants, convertible bonds, debentures or
convertible preferred 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.
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. Money market investments with a remaining maturity of
sixty days or less are valued at amortized cost, which 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 Income. As is common in the industry, security
transactions are accounted for on the trade date. Dividend income is recorded on
the ex-dividend date. Interest income is recorded on an accrual basis.
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 The
New Market Fund are being amortized over a period of fifty-six (56) 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 AND OTHER--Pursuant to
an Investment Advisory Agreement, the Advisor, Virginia Management Investment
Corporation ("VMIC")provides investment services for an annual fee of 1.0% of
the average daily net assets of the Fund.
The Fund has adopted a plan pursuant to Rule 12b-1 under the Investment Company
Act of 1940, as amended, whereby the Fund or VMIC may finance activities which
are primarily intended to result in the sale of the Fund's shares, including,
but not limited to, advertising, printing of prospectuses and reports for other
than existing shareholders, preparation and distribution of advertising
materials and sales literature, and payments to dealers and shareholder
servicing agents who enter into agreements with the Fund or VMIC. The Fund or
VMIC may incur such distribution expenses at the rate of .50% per annum on the
Fund's average net assets. For the period ended February 28, 1999, there were no
distribution expenses incurred by the Fund.
As provided in the Administrative Agreement, the Fund reimbursed Commonwealth
Shareholder Services, Inc. ("CSS"), its Administrative Agent, $10,124 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.
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend Disbursing
Agent. FSI received $4,601 for its services for the period ended February
28, 1999.
Certain officers and/or directors of the Fund are also officers and/or directors
of VMIC, CSS and FSI.
NOTE 3- INVESTMENTS--The cost of purchases of securities (excluding
money market investments) for the period ended February 28, 1999, was
$1,805,334.
