Semi-Annual Report to Shareholders
THIRD MILLENNIUM RUSSIA FUND
A Series of
The World Funds, Inc.
A "Series"Investment Company
For the Period Ended
February 29, 2000
<PAGE>
To the Shareholders of the
THIRD MILLENNIUM RUSSIA FUND
"Modern Russia's Debut on the World Stage"
The recent performance of your Fund has been outstanding and we Thank You
for your continued support.
Putin Administration.
In many ways Modern Russia is only now getting the hang of the serious
task of managing a Free Market Economy. The new President Vladimir Putin
instills confidence in his ability to steer his country on a course of competent
decision-making. He will establish the State's role in setting the "Rules of the
Game", much as our own regulatory agencies set the context for our economic
activity.
Russia is now enjoying strong Macro-economic Indicators: inflation is
lower than expected; the currency is more stable than predicted and there is no
deficit to narrow - a Surplus reflects strong export earnings and tax
collections. It seems Russia no longer needs IMF support and is servicing its
debt and coming to terms with its international creditors from the Soviet era.
Two main problems remain and need to be addressed during this period of
strength stemming from the high price of oil and other commodities and the
favorable effects of the dramatic devaluation of the Ruble, which has allowed
domestic producers to import substitute, supplying local demand:
o Growing Profit Focus? On the enterprise level, will companies focus
on earning a profit -- instead of eating, without paying the bills,
society's gas and electric resources -- so that inputs exceed
output, thus making economic growth a temporary phenomenon? Can
they shed their social expenses and liabilities, getting help from
the federal and regional governments for the medical clinics, the
subsidized housing, the auto bus route, etc. ?
o Money over Barter? Can a monetary system supplant predominant
barter practices, which help Russian companies hide their true
costs? Money as a percentage of GDP in Russia is less that 20%. In
the US and Japan, for example, is about 90% and 120%, respectively.
We will soon know whether the Putin Administration is capable of
tackling these fundamental problems. Otherwise, the current advantages
summarized above will not be capitalized upon and Russia will not prove to be a
long term Growth Economy.
Companies in the Fund.
Our criteria for owning Russia's leading companies are basic:
o Is the company in a strong sector?
o Is the company a market leader with growing profitability?
o Is the support for the stock relatively strong?
o Does the company have a strong management team?
o And, is the management shareholder focused/ investor friendly?
These criteria, at present, indicate that there are only 20-30 companies
in Russia in which we can invest. There are numerous other profitable,
well-managed firms which do not understand or value the role of public
shareholders, so the risk of mistreatment is unacceptably high. We recently sold
our position in Surgutneftegas, taking a strong profit from a lengthy holding,
due to its reorganization, which has been mis-handled (from an investor
perspective). The business goal of consolidating the public, operating company
into the holding company was OK, but even at this time, management has not
clarified the ratios and position of public shareholders in the new structure.
This sort of practice is simply unacceptable to your portfolio managers.
Frequently, the sort of competency issues which were displayed on the
Government level in 1998 arise with companies that, otherwise, meet our basic
investment criteria. We have to balance these issues with the fact that we want
to be fully invested in these leading companies and we understand that the
investor relations culture is in its early stages. Hopefully, these management
teams will gain more experience with investor relations and the level of
competence and professionalism will increase over time. Disclosure.
Transparency. "Yasnost." Investors such as we simply will not settle for less.
As of April 14, your Fund had a substantial cash position, in excess of 25%.
John T. Connor, Jr.
<PAGE>
THIRD MILLENNIUM RUSSIA FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
February 29, 2000
(Unaudited)
Number of Market
Shares Security Description Value
- --------- -------------------- --------
COMMON STOCK: 89.93%
BEVERAGES: 2.16%
8,690 Sun Breweries GDR* $39,105
8,690 Sun Interbrew Ltd GDR* 17,380
--------
56,485
--------
CELLULAR: 15.57%
9,500 Vimpel Communications Sponsored ADR* 407,906
--------
GAS: 1.94%
6,150 Rao Gazprom ADR* 50,738
--------
OIL: 17.34%
3,570 Lukoil Oil Co Sponsored ADR 149,048
8,200 Oil Co. Lukoil Sp ADR F/PFD SHS 94,300
20,000 Tatneft Sponsored ADR 211,000
--------
454,348
--------
RETAIL: 3.76%
157,000 Aeroflot 25,669
1,000 Gaz Auto Plant 35,100
17,600 Torgoviy Dom Gum Sponsored ADR* 23,936
3,000 Trading House Tsum ADR* 13,800
--------
98,505
--------
TELECOMMUNICATIONS: 24.99%
6,000 Golden Telecom Inc 252,000
17,000 Nizhnovsvyazinform Sponsored ADR* 39,100
13,500 Rostelecom Long Distance & International Telecom ADR* 236,250
20,000 Tyumentelecom Sponsored ADR* 20,000
37,000 Uralsvyasinform Sponsored ADR* 107,300
--------
654,650
--------
UTILITIES: 24.17%
23,520 AO Mosenergo Sponsored ADR 117,600
21,550 Irkutskenergo AO Sponsored ADR 70,038
1,180 Lenenergo GDR* 14,792
15,000 Norilsk Nickel 127,200
19,990 RAO Unified Energy System ADR 287,356
10,000 Rostovenergo Sponsored ADR* 16,000
--------
632,986
--------
TOTAL INVESTMENTS:
(Cost: $1,288,129)** 89.93% 2,355,618
Other assets, net 10.07% 263,692
------ ---------
NET ASSETS 100.00% $2,619,310
======== ==========
* Non-income producing
** Cost for Federal income tax purpose is $1,288,129 and net unrealized
appreciation consists of:
Gross unrealized appreciation $1,094,432
Gross unrealized depreciation (26,943)
----------
Net unrealized appreciation $1,067,489
==========
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
February 29, 2000 (Unaudited)
- -------------------------------------
ASSETS
Investments at value (identified cost of $1,288,129 )
(Notes 1 & 3) $2,355,618
Cash 195,834
Capital stock sold 25,500
Dividends receivable 537
Deferred organization costs (Note 1) 65,169
Prepaids and Other Assets 16,955
---------
TOTAL ASSETS 2,659,613
---------
LIABILITIES
Investments purchased 29,830
Accrued expenses 10,473
-------
TOTAL LIABILITIES 40,303
----------
NET ASSETS $2,619,310
==========
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE PER SHARE
($2,619,310 / 112,459 shares outstanding) $23.29
======
At February 29, 2000 there were 50,000,000 shares
of $.01 par value stock authorized and
components of net assets are:
Paid in capital $1,440,186
Accumulated net investment loss (25,349)
Net accumulated realized gain on investments 136,984
Net unrealized appreciation of investments 1,067,489
----------
Net Assets $2,619,310
==========
See Notes to Financial Statements
<PAGE>
THIRD MILLENNIUM RUSSIA FUND
STATEMENT OF OPERATIONS
Six months ended February 29, 2000 (Unaudited)
- ----------------------------------------------
INVESTMENT INCOME $ --
EXPENSES
Investment advisory fees (Note 2) $ 14,253
12b-1 fees 2,036
Custodian and accounting fees 25,600
Legal and audit 8,927
Registration fees 6,583
Organization expense amortization 9,115
Recordkeeping and administrative services (Note 2) 7,459
Transfer agent fees (Note 2) 4,545
Shareholder servicing and reports (Note 2) 4,632
Director fees 3,200
Miscellaneous 5,288
-------
Total expenses 91,638
Management fee waiver and expense reimbursements (66,289)
--------
Net expenses 25,349
--------
Net investment loss (25,349)
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain on investments 108,247
Net increase in unrealized appreciation on investments 833,215
--------
Net gain on investments 941,462
--------
Net increase in net assets resulting from operations $916,113
========
See Notes to Financial Statements
<PAGE>
THIRD MILLENNIUM RUSSIA FUND
STATEMENT OF CHANGES IN NET ASSETS
- -----------------------------------
Six Months Ended
February 29, 2000 Period ended
(Unaudited) August 31, 1999*
OPERATIONS ----------------- ----------------
Net investment loss $(25,349) $ (14,827)
Net realized gain on investments 108,247 43,564
Unrealized appreciation of investments 833,215 234,274
-------- --------
Net increase in net assets
resulting from operations 916,113 263,011
DISTRIBUTION TO SHAREHOLDERS FROM
Net investment income -- --
Net realized gain from investment
transactions ($.33 and, $.00 per
share, respectively) (32,285) --
CAPITAL SHARE TRANSACTIONS
Net increase in net assets resulting
from capital share transactions** 390,594 1,049,592
-------- ----------
Net increase in net assets 1,306,707 1,312,603
Net assets at beginning of period 1,312,603 --
---------- ----------
NET ASSETS at the end of the period $2,619,310 $1,312,603
========== ==========
** A summary of capital share transactions follows:
Six months ended
February 29, 2000 Period Ended
(Unuadited) August 31, 1999*
----------------- ----------------
Shares Value Shares Value
------ ----- ------ -----
Shares sold 33,594 $601,344 101,353 $1,172,886
Shares reinvested from d -- -- -- --
Shares redeemed (13,762) (210,750) (8,726) (123,294)
------- ------- ------- ---------
Net increase 19,832 $390,594 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 THROUGHTOUT THE PERIOD
- -----------------------------------------------
Six Months Ended
February 29, 2000 Period Ended
(Unaudited) August 31, 1999*
----------------- ---------------
Per Share Operating Performance
Net asset value, beginning of period $14.17 $10.00
--------- --------
Income from investment operations-
Net investment loss (0.23) (0.16)
Net realized and unrealized gain on
Investments 9.68 4.33
--------- --------
Total from investment operations 9.45 4.17
--------- --------
Less distributions-
Distributions from net investment income (0.33) --
Distributions from realized gains on
Investments -- --
--------- --------
Total distributions (0.33) --
--------- --------
Net asset value, end of period $23.29 $14.17
========= ========
Total Return 68.10%*** 41.70%
========= ========
Ratios/Supplemental Data
Net assets, end of period (000's) $2,619 $1,313
Ratio of expenses to average net assets
Before expense waivers and reimbursements 11.19%** 15.92%**
After expense waivers and reimbursements 3.10%** 2.75%**
Ratio of net investment loss to average
net assets
Before expense waivers and reimbursements (11.19%)** (15.26%)**
After expense waivers and reimbursements (3.10%)** (2.08%)**
Portfolio turnover rate 20.79% 14.43%
* Commencement of operations was October 1, 1998
** Annualized
*** Not annualized
See Notes to Financial Statements
<PAGE>
Third Millennium Russia Fund
Notes to the Financial Statements
February 29, 2000 (Unaudited)
- ----------------------------------
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 share 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 the 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 AND DISTRIBUTION AGREEMENTS
Pursuant to an Investment Advisory Agreement, the Advisor, Third
Millennium Investment Advisors LLC ("TMIA") provides investment services for an
annual fee of 1.75% of the first $125 million of average daily net 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 six months ended February 29, 2000, the
Advisor waived fees of $16,289 and reimbursed expenses of $50,000.
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 six months ended February
29, 2000, the Distributor waived fees of $2,036.
As provided in the Administrative Agreement, the Fund reimbursed
Commonwealth Shareholder Services, Inc. ("CSS"), its Administrative Agent,
$9,499 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 $4,545 for its services for the year ended
February 29, 2000.
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 for the period ended February 29, 2000, were $554,317 and
$315,714 respectively.
<PAGE>
Investment Adviser:
Third Millennium Investments Advisors LLC
1185 Avenue of the Americas
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.
