Annual Report to Shareholders
THE NEW MARKET FUND
A Series of
The World Funds, Inc.
a "Series" Investment Comapny
For the Year Ended
August 31, 1999
<PAGE>
Dear Shareholder:
We completed the New Market Fund's first year with a 13.2% net return
(adjusted after-tax). With initial high fund expenses, large cash reserves, and
a value style emphasis, we lagged the indices. As mentioned in earlier
correspondence, our investment philosophy is long-term and relatively
concentrated with an emphasis on consistency and capital preservation. In "high
flying" speculative markets like the past year, we will underperform. However,
under more normal market conditions, our conservative approach is positioned to
outperform. We make no attempt to "mimic" the market, as our "focused" style
will deviate widely from the averages (both on the upside and downside) over
short-term periods. Our ultimate goal is to achieve consistent, above-average,
after-tax returns over a five-year horizon with minimal risk.
With the current bull market now in its fifth year, coupled with pockets of
extreme speculation, we believe it is prudent to be cautious. Rarely do the
leading performing sectors of the past repeat over the next cycle, and we
believe this will be the case over the next five years. We have avoided the more
popular, overvalued sectors (technology, telecommunications) and weighted the
portfolio heavily to financial services and consumer staples, where valuations
are far more reasonable. At the chance of looking "foolish" in the short-term,
we have taken meaningfully positions in well-managed, shareholder-oriented
companies of these unpopular industries. We believe many of the larger positions
are 30%-50% undervalued relative to their intrinsic values and will lead the
markets in the future.
More recently, capitalization-weighted indices have declined approximately
10+%, with the broader market reflecting a far serious "bear market". According
to a recent Salomon Smith Barney report (see below), the average stock on the
NYSE has declined nearly 30%. The disparity in valuations between the broader
market and the S&P 500 is enormous. While the S&P 500 is close to 30x earnings,
the broader, equal weighted Value Line composite is trading at a modest 15x
earnings. The extremely narrow bull market has been led by only a handful of the
largest companies, predominantly high technology stocks which were deemed
"absurdly overvalued" by Microsoft President Steve Ballmer at a recent investor
conference.
AVERAGE STOCK DECLINE FROM 52-WEEK HIGH
(AS OF SEPTEMBER 29, 1999)
NASDAQ NYSE S&P 500
Average Decline......(34.8%) (27.7%) (24.8%)
Such speculation in a small selected group of overvalued stocks usually
leads to an "ugly" ending, if history repeats itself. One only has to reflect
back to the "Nifty Fifty" in the early 1970s, the oil stocks of the early 1980s,
and more recently, emerging/international markets in the early 1990s.
Short-sighted investor psychology rationalized the gross overvaluations and
momentum at the time only to be humbled at the end. This "time may be
different", but we seriously doubt it.
In summary, our conservative, disciplined approach is not to chase the
performance leaders of today or yesterday, but to gradually invest in the
undervalued, high growth performance leaders over the next 3-5 year cycle.
Currently, we are finding ample opportunities with valuations as low as 3x-5x
EBITDA in quality companies expected to grow 15%-20% over the next five years.
If valuations persist at this level, we believe strategic alternatives will be
forced through merger recapitalizations, hostile offers, buy-outs, and other
value-enhancing methods. Barring any significant interest rate rise or an
economic catastrophe, current valuations of our positions should generate
attractive above-average returns from this level.
We appreciate your continued confidence.
Sincerely,
Stephen M. Goddard, CFA
Portfolio Manager
The New Market Fund
<PAGE>
COMPARISON OF $10,000 INVESTMENT IN
NEW MARKET FUND VS. LIPPER LARGE CAP VALUE INDEX
[graph goes here]
Date The New Market Fund Lipper Large-Cap Value Index
10/1/1998 $10,000 $10,000
8/31/1999 $11,320 $12,510
Past performance is not predictive of future performance.
[end graph]
--------------------------------------------------
Total Return for Period ended August 31, 1999
Since Inception (October 1, 1998)
13.20%
--------------------------------------------------
- --------------------------------------------------------------------------------
The Lipper Large-Cap Value Index is an equally-weighted performance
indice, adjusted for capital Gains distributions and income dividends
of the largest 30 qualifying equity funds that, by practice, invest at
least 75% of their equity assets in companies with market capitalizations
(on a three- year weighted basis) of greater than 300% of the
dollar-weighted median market capitalization of the S&P Mid-Cap 400 Index
(The comparative index is not adjusted to reflect expenses that the SEC
requires to be reflected in the Fund's performance.)
- --------------------------------------------------------------------------------
<PAGE>
THE NEW MARKET FUND
Schedule of Portfolio Investments
August 31, 1999
Number of Market
Shares Security Description Value
------ -------------------- -------
Common Stock: 92.72%
Aerospace/Defense: 4.51%
2,400 Allied Signal Inc. $ 147,000
----------
Chemicals: 3.14%
5,900 Albemarle Corp. 102,144
----------
Computers: 6.12%
1,600 International Business Machines Corp. 199,300
----------
Consumer Goods: 12.47%
2,300 Gillette Co. 107,238
700 General Electric 78,619
2,400 Nike Inc. 111,000
3,200 Pepsico Inc. 109,200
----------
406,057
----------
Diversified: 16.62%
2 Berkshire Hathaway Inc-Cl A* 128,400
92 Berkshire Hathaway Inc-Cl B* 184,276
6,500 Tredegar Industries Inc. 141,375
300 Wesco Fine Corp. 87,000
----------
541,051
----------
Financials: 21.85%
1,000 American Express Co. 137,500
2,600 Capital One Financial Corp. 98,150
2,400 Financial Security Assurance Holdings Ltd. 120,150
2,600 Federal Home Loan Mortgage Corp. 133,900
600 Merrill Lynch & Co. 44,775
600 Markel Corp.* 105,375
1,800 Wells Fargo Co. 71,662
----------
711,512
----------
Medical: 5.74%
1,400 Bristol-Myers Squibb Co. 98,525
600 Johnson & Johnson 61,350
400 Merck & Co. 26,875
----------
186,750
----------
Drilling: 2.13%
2,200 Atwood Oceanics Inc.* 69,300
----------
Electronics: 3.28%
1,300 Intel Corp. 106,844
----------
Money Center Banks: 1.86%
1,000 Bank America 60,500
----------
Oil: 2.34%
1,200 Texaco 76,200
----------
REITS: 4.52%
12,800 United Dominion Realty Trust 147,200
----------
Retail: 4.69%
1,200 McDonald's Corporation 49,650
2,400 Circuit City Stores 103,200
----------
152,850
----------
Tobacco: 3.45%
3,000 Philip Morris Companies Inc. 112,312
----------
Total Common Stocks:
(Cost: $2,896,580) 3,019,020
----------
Short-Term Investments: 9.25%
301,326 Star Treasury Fund
(Cost: $301,326) 301,326
----------
Total Investments:
(Cost: $3,197,906)** 101.97% $ 3,320,346
Other assets,net (1.97%) (64,084)
-------- -----------
Net Assets 100.00% $ 3,256,262
======== ===========
* Non-income producing
** Cost for Federal income tax purpose is $3,197,906 and net
unrealized appreciation consists of:
Gross unrealized appreciation $ 302,404
Gross unrealized depreciation (179,964)
----------
Net unrealized appreciation $ 122,440
==========
See Notes to Financial Statements
<PAGE>
THE NEW MARKET FUND
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1999
- --------------------------------------------------------------------------------
ASSETS
Investments at value
(identified cost of $3,197,906 )(Notes 1 & 3) $ 3,320,346
Receivable
Dividends $ 2,442
Interest 898
Investment securities sold 23,090
-------
26,430
Deferred organization costs (Note 1) 45,221
----------
TOTAL ASSETS 3,391,997
----------
LIABILITIES
Accrued expenses 6,529
Payable for securities purchased 129,206
--------
TOTAL LIABILITIES 135,735
----------
NET ASSETS $ 3,256,262
===========
NET ASSET VALUE AND REDEMPTION
PRICE PER SHARE ($3,256,262 / 279,841 shares
outstanding) $ 11.64
===========
OFFERING PRICE ($11.64 x 100 / 97.25) $ 11.97
===========
At August 31, 1999 there were 50,000,000 shares of $.01
par value stock authorized and components of net
assets are:
Paid in capital $ 3,188,188
Net accumulated realized loss (54,366)
Net unrealized appreciation of investments 122,440
------------
Net Assets $ 3,256,262
============
See Notes to Financial Statements
<PAGE>
THE NEW MARKET FUND
STATEMENT OF OPERATIONS
Period ended August 31, 1999*
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Dividend $ 22,715
Interest 7,611
---------
Total income $ 30,326
EXPENSES
Investment advisory fees (Note 2) 19,278
Transfer agent fees (Note 2) 10,948
Custodian and accounting fees 11,349
Recordkeeping and administrative services (Note 2) 13,767
Shareholder servicing and reports (Note 2) 4,582
Director fees 6,375
12b-1 fee 9,639
Organization expense amortization 6,185
Miscellaneous 4,609
---------
Total expenses 86,732
Management fee waiver and reimbursed expenses (48,368)
----------
Net expenses 38,364
----------
Net investment loss (8,038)
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net increase in unrealized appreciation on investments 122,440
Net accumulated realized loss (54,366)
----------
Net gain on investments 68,074
----------
Net increase in net assets resulting from operations $ 60,036
==========
* Commencement of operations October 1, 1998
See Notes to Financial Statements
<PAGE>
THE NEW MARKET FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
Period ended
August 31, 1999*
----------------
OPERATIONS
Net investment loss $ (8,038)
Net accumulated realized loss (54,366)
Change in unrealized appreciation of investments 122,440
------------
Net increase in net assets resulting from operations 60,036
CAPITAL SHARE TRANSACTIONS
Net increase in net assets resulting from capital share
transactions** 3,196,226
------------
Net increase in net assets 3,256,262
Net assets at beginning of period ---
------------
NET ASSETS at the end of the period $ 3,256,262
============
* Commencement of operations October 1, 1998
** A summary of capital share transactions follows:
For the period ended
August 31, 1999*
---------------------------------
Shares Value
------ ------
Shares sold 282,806 $ 3,245,359
Shares reinvested from distributions - -
Shares redeemed (2,965) (49,133)
-------- ------------
Net increase 279,841 $ 3,196,226
======== ============
See Notes to Financial Statements
<PAGE>
THE NEW MARKET FUND
FINANCIAL HIGHLIGHTS
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD
- --------------------------------------------------------------------------------
Period ended
August 31, 1999*
----------------
Per Share Operating Performance
Net asset value, beginning of period $ 10.00
Income from investment operations-
Net investment loss (0.03)
Net realized and unrealized gain on investments 1.67
-------
Total from investment operations 1.64
-------
Less distributions-
Distributions from net investment income ---
Distributions from capital gains ---
-------
Total distributions ---
-------
Net asset value, end of period $ 11.64
=======
Total Return 13.20%***
Ratios/Supplemental Data
Net assets, end of period (000's) $ 3,256
Ratio to average net assets
Expenses 4.47%**
Expense ratio - net 1.99%**
Net investment loss (0.41)%**
Portfolio turnover rate 8.31%
* Commencement of operations October 1, 1998
** Annualized
*** Non-annualized
See Notes to Financial Statements
<PAGE>
The New Market Fund
Notes to the Financial Statements
August 31, 1999
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 Management Agreement, the Manager, Virginia
Investment Corporation ("VMIC") provides investment management services for an
annual fee of 1.0% of the average daily net assets of the Fund. VMIC has
contractually agreed to waive its fees and reimburse the fund through
September 30, 2001 for expenses in order to limit the operating expenses to
1.99% of average net assets. For the period ended August 31, 1999, the manager
waived fees of $19,278 and reimbursed expenses of $19,451.
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 August 31, 1999,
there were $9,639 of distribution expenses incurred which were waived by VMIC.
As provided in the Administrative Agreement, the Fund reimbursed
Commonwealth Shareholder Services, Inc. ("CSS"), its Administrative Agent,
$18,283 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 minimum fee of
$15,000.
Fund Services, Inc. ("FSI") is the Fund's Transfer and Dividend Disbursing
Agent. FSI received $10,948 for its services for the period ended August 31,
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 and the proceeds from sales of securities other than
short-term notes for the period ended August 31, 1999, aggregated $3,113,270 and
$162,324 respectively.
<PAGE>
Report of Independent Certified Public Accountants
To the Shareholders and Board of Directors of World Funds, Inc.
Richmond, Virginia
We have audited the accompanying statement of assets and liabilities of the
New Market Fund, a series of World Funds, Inc., including the schedule of
portfolio investments as of August 31, 1999, and the related statements of
operations, changes in net assets and financial highlights for 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
audit.
We conducted our audit 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
August 31, 1999 by correspondence with the custodian and brokers. 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
New Market Fund as of August 31, 1999, the results of its operations, the
changes in its net assets and the financial highlights for the period then
ended, in conformity with generally accepted accounting principles.
TAIT, WELLER AND BAKER
Philadelphia, Pennsylvania
October 1, 1999
<PAGE>
Investment Manager:
Virginia Management Investment Corporation
7800 Rockfalls Drive
Richmond, Virginia 23225
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 The
New Market Fund'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) 527-9525 Toll Free.
