Annual Report to Shareholders
THIRD MILLENNIUM RUSSIA FUND
A Series of
The World Funds, Inc.
a "Series" Investment Company
For the Year Ended
August 31, 1999
<PAGE>
"RussiaGate": The Real Russian Scandal
John T. Connor, Jr.
Founder & Portfolio Manager, Third Millennium Russia Fund, NY Founder &
Chairman, ROSGAL Insurance Company, Moscow.
"Who Lost Russia?" (New York Times Magazine, Sunday, August 15th) is a
"present at the creation" recitation of the events surrounding the founding of
the Modern Russian State. And much progress has been made, lest we forget.
Russians are no longer afraid of the Gulag. They express themselves freely and
openly. Freedom of religion and of the press have increased exponentially. And
Russians have enjoyed newfound consumer goods, travel at home and abroad and
much more.
Centrist Politics. The recent formation of a centrist electoral block of
the powerful Moscow Mayor and regional governors, behind the figurehead of
former Prime Minister Evgeny Primakov, Russia's most respected politician, means
that finally a party can stand toe to toe with the Communists in each and every
electoral district in the country. Another, more right, but not as likely to
succeed, coalition has been announced by former Prime Minister Sergei Stepashin
and may include other former Prime Ministers, Viktor Chernomyrdin and Sergei
Kiriyenko, and other so-called Reformers, but has little regional base.
This second group reflects the more laissez faire, free market views of the
recent Reform Governments of Russia, while Primakov's coalition assigns the
State a more guiding role. In his recent book, Commanding Heights, Daniel Yergin
notes that Russia probably would have faired better had it shed Communism in the
earlier era of so-called "mixed" economies, when the world's leading
macro-economic advisors ascribed some leading role to the State.
After the December, 1999, State Duma legislative elections, the
Presidential Election in the year 2000 is also likely to focus in on a few
centrist candidates. And President Boris Yeltsin has clearly signaled he will
step down at the end of his second term.
Who Understood What? What "Who Lost Russia?" so well recounts is the
continuing failure of analysis among policy makers. Macro-economists all, both
Americans and Russians focus on currency stability, low inflation and narrower
budget deficits - all of which were achieved in 1996. Unfortunately, this
impressive financial superstructure was built on a foundation of sand. On the
micro-economic level, the building blocks for a modern economy are simply not
there. If enterprise after enterprise realizes losses, not profits, a growth
economy cannot result.
I, for one, do not second guess the early privatization of millions of
shops and small businesses which stands as the greatest achievement of the early
1990s. Later on, when larger oil and other resource rich enterprises were put
into the hands of financial firms on the premise they would be better managed,
"economic man" did not magically appear and "reinvestment" and internally
generated growth did not result. Asset stripping was the result and Swiss bank
accounts grew fat. The result made the reformer appear to be naive or, worse,
corrupt.
While civic virtue is not yet evident, in 1999, increased tax collections
and the "Nobody is Going to Help Us Except Ourselves" campaign does seem to be
working. "Who Lost Russia?" notes that in Poland, a clear self-identity to be
"in Europe" informs public policy. In Russia, the driving ideal is to be "a
normal country" and certainly it is Russia's turn to achieve normalcy - but the
"normal" appellation does not seem to attach itself to Europe or any other
single destination which would provide a road map there. A lack of vision, or
direction, is the result.
Much of the "business" economy remains in a pre-monetary "virtual" economy
stage where inter-enterprise transactions are conducted in a barter mode, and
most enterprises exhibit the Soviet-era characteristic that inputs exceed
outputs. In other words, these "businesses" are not profitable and survive on
continuing subsidy from the resource sectors (energy and public utilities),
which are not being paid.
The banking sector in Russia has never succeeded in attracting as deposits
the savings of the population, much of which remain in US Dollars in mattresses.
Lacking a deposit base, such banks are not in a position to perform the
financial inter-mediation functions they are supposed to perform; namely,
supplying capital to industry and the service sector through commercial lending
and to consumers for home and auto loans (more about that later).
Russian Roulette. The devastating mistakes made in the recent past in
Russia by Russians do reflect a dearth of experience with critical thinking and
decision making in economic and business affairs. A reform deputy prime minister
noted that, in the Summer of 1988, the Cabinet got conflicting advice from its
advisors, "and we took it!"..... Capital flight. Hot money. Currency collapses.
Excessive short term government borrowings. Debt defaults and investor
write-offs. Fraudulent and false financial reporting. Non-monetary economy.
Crony capitalism. Political instability. Crime and corruption....This was the
Russia of the Summer of 1998.
Russia has not yet developed the discipline of critical thinking as the
basis for making difficult choices, which pervades cultures in American and
Europe where managements, for example, are outstanding in their ability to focus
on certain goals, such as making a profit, and to achieve those goals. Whether
by increasing sales in high margin product lines, whether by cutting costs, by
whatever means, the goal is achieved quarter after quarter, year after year -
usually! It is not an excuse, but only an explanation, to say that critical
thinking in public and economic affairs was not of course even permitted in
Russia during the 70 years ending in 1990.
Russia and the West. While we have done much during the 1990s for Russia,
we have not done enough. There has certainly been no Marshall Plan for the
vanquished in the Cold War. And what was done was often based on inadequate or
faulty analysis.
For example, the world's great accounting firms today present themselves,
in addition to general accounting and auditing, as being consultants, lawyers
and more. They took huge World Bank and U.S. AID contracts and went into major
Russian firms, which were told that all they needed were three years of audited
financial statements, and that the investment Dollars would thereafter flow.
Wrong. Accountants only reflect reality. They did not change anything. If your
reality is ugly, you will not attract investors. In fact, these audits only
served to confirm to possible investors why they would never invest in such
enterprises.
Russia's Endemic Problems. The typical post-Soviet manager of a
manufacturing enterprise in Russia defines his role quite broadly. It is not
"wealth creation" in the focused, narrow sense we know in America. If an
American manager needs to reduce costs, he lets people go, he closes facilities.
He may have regrets, but he does it, takes a write-off, and moves on. His goal
is to make a profit.
In Russia, even assuming the boss is looking beyond his own position and
his own perks, his focus is usually too broad. Frequently, his enterprise is the
local town. He supplies subsidized housing to the workers. He runs the hospital.
The bus system. The kindergarten. This "ugliness" - in the form of social
liabilities and expenses - is described in an audit. And investors can see that
there is no way for such an enterprise to ever turn a profit unless such costs
are managed down.
What the Western accounting firms should have done, displaying their
self-professed universal competencies, was accompany the audit with some basic
restructuring advice and counsel - by the way, that's what the word
"Perestroika" means - thereby giving the enterprises a shot at profitability.
But the accounting firms were chasing the World Bank or other donor contracts,
and that's not what the contract called for because of the failure of analysis
of the underlying problems by the US Government and World Bank donors.
Disillusioned and bitter Russian business "clients" were left in the wake of
such useless and costly audits.
"Payments" Problems. Sometimes the Russian enterprise manager does realize
the box he is caught in and tries to negotiate with the local government to
assume social liabilities and costs which are causing the enterprise only
losses. Sometimes he is successful.
Other times we see mutual recrimination where the enterprise refuses to pay
taxes until the government takes over the social functions and the local
government threatens to put the enterprise into bankruptcy if taxes are not
paid. This actually happened in Izevsk, in the Republic of Udmutria, to Russia's
leading oil field pump manufacturer.
Several times in the last few years, I have presented to audiences of
Russian businessmen my Cyrillic slides on Business Planning, showing an annual
budget, and quarterly and monthly financial reporting. For many years, I have
been a member of the board of directors of the CIS-based Council for Trade and
Economic Co-operation (one of our fellow directors has been the President of
Ukraine), and have been asked to speak about securities markets and on business
planning. The audience reaction has generally been of the glazed-over eyes
variety, even though I would stress that these basic, Generally Accepted
Accounting Principles (GAAP) are what an enterprise manager needs to know in
order to qualify for a commercial loan, to attract equity investors, and, most
importantly, to run your own business profitably.
Their lack of interest, of course, reflects the reality of their world,
which is a barter-based, non-monetary world, far removed from GAAP. The "rents"
they seek are Government favors: permits and contracts. Competition and the
efficiencies it engenders are unknown.
What's Good for the Banks is Good for the Country. Given the continuing
lack of profit and cash flow in the Russian manufacturing sector, it is easy to
see why a commercial lending banking business has not been possible in Russia.
If the putative borrower cannot demonstrate a positive cash flow, or even a
business plan for a profit, it would be irresponsible for a bank to take its
depositors' money and donate it to such a "borrower". Calls on the banks to do
this are hollow. Ironically, the one major bank, SBS Agro, which did this well
in the agricultural and food processing sectors, was one of the first to become
insolvent when the Government froze their short-term T-bill assets in August
1998 due to their longer term loans to enterprises.
$50- $75 Billion - equivalent to a huge percent of current Russian GDP -
remains out of circulation in Russia's economy. These are US dollars sewn into
the mattresses of countless Russian citizens who understandably refuse to trust
Russia's banks. Pyramid schemes. High inflation. Frozen bank accounts. All of
these have made fools of those previously participating in their country's
financial "system". And, even if there had been Russian government deposit
insurance available, few would believe that the Russian Government had the
wherewithal to stand behind such guarantees.
How do you build a banking industry in a country where credit histories
based on cash flows and profits do not exist so banks cannot establish credit
worthiness? Where collateral in the form of real estate assets -- which could be
executed against in case of default in payment by the borrower -- is essentially
unavailable to lenders? Without these predicates for a commercial lending
business, without a deposit base, in fact you don't establish a banking industry
and financial inter-mediation does not take place.
Deposit Insurance. To draw these funds out into the Russian economy, the
international community should sponsor a program of deposit insurance for
Russian savers, with continuing dollar equivalency assured, so as to obviate
risk of loss of principal.
US and other foreign financial institutions should open offices across
Russia to take Dollar deposits from the Russian people. Some banks currently are
licensed to do this and other leading international banks would be welcomed
within Russia as deposit-taking institutions.
Home loans. Car loans. In the meantime, on the personal financial level,
these lenders can help Russians unlock their personal balance sheets by making
conservative loan-to-value mortgage loans. A fifty percent mortgage loan could
fuel purchases, for example, of consumer durables. Of course, the Mayor of
Moscow would have to make it possible to more easily foreclose on defaulted
loans and support the lenders' need for collateral.
As in America, where homes and cars are the basis of our lifestyle,
Russians aspire to car ownership, at present only reaching 5% of the population.
Demand is great, with car purchases growing 24% a year, but Russia's car
manufacturers are currently capital poor and cannot finance their consumers'
purchases.
Regionalization. Competition. Also a continental county, Russia is
currently greatly benefiting from a devolution of power into the regions.
Ironically, many foreigners complain that it is not as easy to deal in Russia
today as in the past where you could do your business with one State Monopoly in
Moscow, to which the appropriate answer should be: tough! The long term benefits
of local government, of course, will be great, although at present, in many
regions, only incompetence and corruption are evident.
So too, privatization has actually meant only the corporatization of many
large monopolies where the State still owns a controlling interest. As with
Anatoly Chubais in RAO UES, the national power grid and wholesale electric
company, much can be done to make these companies more cost efficient and
profitable. Soviet style losing enterprises would have to shape up quickly if
the gas company and the electric company collected their receivables.
Competition exists only to a limited extent and State and regulatory
authority could do much more to encourage and engender competition. Many
rent-seeking enterprises have in fact turned to the State, successfully, to
shield them from competition. The import substitution opportunities offered by
the recent devaluation of the ruble are being taken up by numerous suppliers.
Finally, where enterprise cannot succeed, bankruptcy laws, which do exist,
should be administered effectively. The recent spectacle of Uneximbank, under
its politically connected chairman, being allowed to secret its assets away,
leaving its mostly foreign creditors holding the bag, tarnishes Russia's
reputation further.
Unhappy Alternatives. It is said increasingly that Russia must reform
itself as a condition for continuing international assistance. This is of course
correct. But, the endemic problems in the Russian economy are so great that,
even where the political will to attack them is generated, Russia must still
receive the constructive, innovative help from abroad or it will most probably
fail.
And we have all failed to properly understand the true nature of the
problems in Russia. Competence, not crime and corruption, is the core issue.
National identity and civic virtue are being generated. The devalued ruble has
led to some local firms succeeding in "import substitution" with quality
products, at a price, which consumers find acceptable, but given the realities
of Russia's current "virtual," barter-based economy, the remaining tasks are
tremendous. Further failures on the path to democracy and free markets do not
serve the national interests of Russia or its friends in America and Europe.
<PAGE>
COMPARISON OF $10,000 INVESTMENT IN
THIRD MILLENNIUM RUSSIA FUND VS. THE MOSCOW TIMES INDEX
[graph goes here]
Date Third Millennium The Moscow
Russia Fund Times Index
10/1/1998 $10,000 $10,000
8/31/1999 $14,170 $30,507
Past performance is not predictive of future performance.
[end graph]
------------------------------------------------
Total Return for Period ended August 31, 1999
Since Inception (October 1, 1998)
41.70%
-------------------------------------------------
- --------------------------------------------------------------------------------
The Moscow Times Index is an unmanaged index of the 50 most liquid and most
highly capitalized Russian stocks.
The index performance in Russia and actual performance can vary widely because
of illiquidity and the wide spreads in stock trading. The Moscow Times Index
does not take this factor into consideration.
(The comparative index is not adjusted to reflect expenses that the SEC
requires to be reflected in the Fund's performance.)
- --------------------------------------------------------------------------------
<PAGE>
SCHEDULE OF PORTFOLIO INVESTMENTS
AUGUST 31, 1999
Number of Market
Shares Security Description Value
------ -------------------- -----
COMMON STOCK: 87.10%
BEVERAGES: 5.77%
8,690 Sun Breweries GDR* $ 34,760
20,490 Sun Interbrew Ltd GDR* 40,980
-------
75,740
-------
CELLULAR: 14.52%
12,250 Vimpel Communications Sponsored ADR* 190,641
-------
GAS: 3.69%
6,150 Rao Gazprom ADR* 48,431
-------
OIL: 22.67%
3,570 Lukoil Oil Co Sponsored ADR 105,315
15,770 Surgutneftegaz ADR 118,275
20,000 Tatneft Sponsored ADR 74,000
-------
297,590
-------
RETAIL: 1.32%
7,600 Torgoviy Dom Gum Sponsored ADR* 12,160
3,000 Trading House Tsum ADR* 5,100
-------
17,260
-------
TELECOMMUNICATIONS: 15.36%
17,000 Nizhnovsvyazinform Sponsored ADR* 17,000
13,500 Rostelecom Long Distance & International Telecom ADR* 91,969
20,000 Tyumentelecom Sponsored ADR* 15,000
37,000 Uralsvyasinform Sponsored ADR* 77,700
-------
201,669
-------
UTILITIES: 23.77%
23,520 AO Mosenergo Sponsored ADR 64,680
21,550 Irkutskenergo AO Sponsored ADR 91,587
1,180 Lenenergo GDR* 10,239
19,990 RAO Unified Energy System ADR 134,932
10,000 Rostovenergo Sponsored ADR* 10,500
-------
311,938
-------
TOTAL INVESTMENTS:
(Cost: $909,239)** 87.10% $1,143,269
Other assets, net 12.90% 169,334
------- ----------
NET ASSETS 100.00% $1,312,603
======= ==========
* Non-income producing
** Cost for Federal income tax purpose is $909,239 and net unrealized
appreciation consists of:
Gross unrealized appreciation $276,206
Gross unrealized depreciation (42,176)
--------
Net unrealized appreciation $234,030
========
ADR--Security represented is held by the custodian bank in the form of American
Depository Receipts.
GDR--Security represented is held by the custodian bank in the form of Global
Depository Receipts.
See Notes to Financial Statements
<PAGE>
THIRD MILLENNIUM RUSSIA FUND
STATEMENT OF ASSETS AND LIABILITIES
August 31, 1999
- --------------------------------------------------------------------------------
ASSETS
Investments at value (identified cost of $909,239 )(Notes 1 & 3) $1,143,269
Cash 101,082
Dividends receivable 4,720
Prepaid expenses 2,417
Deferred organization costs (Note 1) 74,284
---------
TOTAL ASSETS 1,325,772
---------
LIABILITIES
Accrued expenses 13,169
-------
TOTAL LIABILITIES 13,169
--------
NET ASSETS $1,312,603
==========
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
($1,312,603 / 92,627 shares outstanding) $ 14.17
==========
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 $1,049,592
Net accumulated realized gain on investments 28,737
Net unrealized appreciation of investments 234,274
----------
Net Assets $1,312,603
==========
See Notes to Financial Statements
<PAGE>
THIRD MILLENNIUM RUSSIA FUND
STATEMENT OF OPERATIONS
Period ended August 31, 1999*
- --------------------------------------------------------------------------------
INVESTMENT INCOME
Dividend income $ 4,720
---------
EXPENSES
Investment advisory fees (Note 2) 12,305
12b-1 fees 1,813
Transfer agent fees (Note 2) 6,184
Registration fees 1,607
Custodian and accounting fees 52,195
Recordkeeping and administrative services (Note 2) 13,561
Shareholder servicing and reports (Note 2) 5,153
Director fees 6,375
Organization expense amortization 10,541
Miscellaneous 3,671
-------
Total expenses 113,405
Management fee waiver and expense reimbursements (93,858)
--------
Net expenses 19,547
--------
Net investment loss (14,827)
--------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 43,564
Net increase in unrealized appreciation on investments 234,274
--------
Net gain on investments 277,838
--------
Net increase in net assets resulting from operations $263,011
========
* Commencement of operations was October 1, 1998
See Notes to Financial Statements
<PAGE>
THIRD MILLENNIUM RUSSIA FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
Period ended
August 31, 1999 *
-----------------
OPERATIONS
Net investment loss $ (14,827)
Net realized gain on investments 43,564
Unrealized appreciation of investments 234,274
-----------
Net increase in net assets resulting from operations 263,011
CAPITAL SHARE TRANSACTIONS
Net increase in net assets resulting from
capital share transactions** 1,049,592
-----------
Net increase in net assets 1,312,603
Net assets at beginning of period -----
-----------
Net Assets at the end of the period $ 1,312,603
===========
** A summary of capital share transactions follows:
Period ended
August 31,1999*
-------------------------------------
Shares Value
------ -----
Shares sold 101,353 $1,172,886
Shares reinvested from distributions -- --
Shares redeemed (8,726) (123,294)
------- ----------
Net increase 92,627 $1,049,592
======= ==========
* Commencement of operation was October 1, 1998
See Notes to Financial Statements
<PAGE>
THIRD MILLENNIUM RUSSIA 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 (0.16)
Net realized and unrealized gain on investments 4.33
------
Total from investment operations 4.17
------
Less distributions-
Distributions from net investment income ---
Distributions from realized gains on investments ---
------
Total distributions ---
------
Net asset value, end of period $14.17
======
Total Return 41.70%***
Ratios/Supplemental Data
Net assets, end of period (000's) $1,313
Ratio of expenses to average net assets
Before expense waivers and reimbursements 15.92%**
After expense waivers and reimbursements 2.75%**
Ratio of net investment loss to average net assets
Before expense waivers and reimbursements (15.26%)**
After expense waivers and reimbursements (2.08%)**
Portfolio turnover rate 14.43%
* Commencement of operations was October 1, 1998
** Annualized
*** Non-annualized
See Notes to Financial Statements
<PAGE>
NOTES TO THE FINANCIAL STATEMENTS
August 31, 1999
- --------------------------------------------------------------------------------
NOTE 1-SIGNIFICANT ACCOUNTING POLICIES
The Third Millennium Russia 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 29, 1998.
However, investment operations of the Fund did not commence until October 1,
1998. 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 seek to achieve capital
appreciation by investing in a non-diversified portfolio consisting primarily of
equity securities (which includes securities convertible into equity securities,
such as warrants, convertible bonds, debentures or convertible preferred stock).
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. Russian securities are also valued at
the closing price on the principal exchange on which the security is traded,
or at the last reported bid price in the over-the-counter market. The Fund
reserves the right to value securities at fair market value when events occur
prior to the close of the NYSE, and cause a change in value from the price
determined as of the close of Russian markets.
Short-term debt securities (less than 60 days to maturity) are valued at
their fair market value using amortized cost pricing procedures set, and
determined to be fair, by the Board of Directors. Other assets for which
market prices are not readily available are valued at their fair value as
determined in good faith under procedures set by the Board of Directors.
ADR's, EDR's and GDR's will be valued at the closing price of the instrument
last determined prior to the valuation time unless TWF is aware of a material
change in value. Items for which such a value cannot be readily determined on
any day will be valued at the closing price of the underlying security
adjusted for the exchange rate.
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 the Fund incurred in
connection with its organization and the public offering of its shares have
been assumed by the Fund. The organization expenses allocable to the 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, DISTRIBUTION AGREEMENTS AND OTHER
Pursuant to an Investment Advisory Agreement, the Advisor, Third Millennium
Investment Advisors LLC ("TMIA") provides investment services for an annual fee
of 1.75% on the first $125 million of assets; 1.50% on assets in excess of $125
million and not more than $250 million; and, 1.25% on assets over $250 million
of average daily net assets of the Fund.
TMIA has contractually agreed to waive its fees and reimburse the fund for
expenses in order to limit operating expenses to 2.75% of average net assets
through September 30, 2001. For the period ended August 31, 1999, the Advisor
waived fees of $12,305 and reimbursed expenses of $79,740.
First Dominion Capital Corp. ("FDCC") acts as the Fund's principal
underwriter in the continuous public offering of the Fund's shares.
The Fund has adopted a Distribution Plan (the "Plan") in accordance with
Rule 12b-1 under the 1940 Act. The Plan provides that the Fund will pay a fee to
the Distributor at an annual rate of 0.25% of the Fund's average daily net
assets. The fee is paid to the Distributor as reimbursement for expenses
incurred for distribution-related activity. For the period ended August 31,
1999, the Distributor waived fees of $1,813.
As provided in the Administrative Agreement, the Fund reimbursed
Commonwealth Shareholder Services, Inc. ("CSS"), its Administrative Agent,
$18,584 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 $5,541 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 CSS and FSI.
NOTE 3- INVESTMENTS
The cost of purchases and proceeds from sales of securities other than
short-term notes aggregated $979,505 and $114,074, respectively.
<PAGE>
Report of Independent Certified Public Accountants
To the Shareholders and Board of Directors of The World Funds, Inc.
Richmond, Virginia
We have audited the accompanying statement of assets and liabilities of the
Third Millennium Russia 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. 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
Third Millennium Russia 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 Adviser:
Third Millennium Investment Advisors LLC
1185 Avenue of the Americas, 32nd Floor
New York, New York 10036
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 Third
Millennium Russia 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.
