ANNUAL REPORT
THE THURLOW GROWTH FUND
June 30, 1998
TABLE OF CONTENTS
Page
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Shareholder Letter 1
Statement of Assets and Liabilities 3
Statement of Operations 4
Statement of Changes in Net Assets 5
Financial Highlights 6
Schedule of Investments 7
Notes to the Financial Statements 9
Report of Independent Accountants 11
THE THURLOW GORWTH FUND
LETTER TO SHAREHOLDERS
August 1998
Dear Fellow Shareholder,
More excitement for the Thurlow Growth Fund! The Thurlow Growth
Fund is an aggressive growth mutual fund that seeks to beat its
peers in strong markets, and to be defensive and limit our
losses in weak markets.
This was proven again in the spring and summer of 1998.
Year-to-date through April 1998, Thurlow Growth Fund was ahead
of the Standard and Poor's 500 Index, although we generally
invest in the stocks that are more likely to make up the Russell
2000 Index (which consists of smaller stocks). In May and June
1998, the market experienced a volume-based correction, which
hit smaller stocks worse than the rest of the market. As the
market rebounded, shares in the Thurlow Growth Fund increased
16% in one four-week period.
Toward the end of July 1998, we at the Thurlow Growth Fund saw
the ominous signs in the market, so we switched to 55% cash,
which is astronomical for a mutual fund, and we were able to
miss the brunt of the correction that began in August.
Subsequent bounces in the market gave us opportunities to
lighten up in stocks even more, so that by the middle of August,
Thurlow Growth Fund was over 90% cash, cash equivalents, or U.S.
Treasury bonds. This way, Thurlow Growth Fund is able to
survive the later carnage in the market almost totally unscathed.
Our competitors were not so lucky, and they continue to be
beaten down almost on a daily basis. As I wrote above, this
shows that Thurlow Growth Fund is a smaller, aggressive growth
mutual fund with a keen eye on preservation of capital. Many of
our shareholders have their entire retirement invested in
Thurlow Growth Fund, and preservation of capital is very
important to them.
The reason why these shareholders have placed their investment
in the Thurlow Growth Fund is similar to the reason I myself
have invested much of my money in the Thurlow Growth Fund: when
the market rallies, Thurlow Growth Fund will participate,
investing in the fastest-growing companies. However, when the
market corrects or even crashes, Thurlow Growth Fund will
sidestep or even totally remove itself from the blood-letting on
Wall Street. Over a ten- or twenty-year period, that adds up to
quite a good mutual fund!
Thank you for your business and we wish you success for the
remainder of 1998 and into 1999.
Sincerely,
/s/ Thomas F. Thurlow
Thomas F. Thurlow
Fund Manager, Thurlow Growth Fund
THURLOW GROWTH FUND
8/8/97 9/30/97 12/31/97 3/31/98 6/30/98
Thurlow Growth Fund 10,000 11,190 8,630 9,469 9,090
Russell 2000 Index 10,000 10,977 10,609 11,677 11,132
S&P 500 10,000 10,176 10,468 11,928 12,322
This chart assumes an initial gross investment of $10,000 made on 8/8/97
(commencement of operations). Returns shown include the reinvestment of all
dividends. Performance reflects expense reimbursements and fee waivers in
effect. Absent expense reimbursements and fee waivers, total returns would be
reduced. Past performance is not predictive of future performance. Investment
return and principal value will fluctuate, so that your shares, when redeemed,
may be worth more or less than the original cost.
Russell 2000 Index - A stock market index comprised of the 2,000 smallest U.S.
domiciled publicly traded common stocks that are included in the Russell 3000
Index. These common stocks represent approximately 11% of the U.S. equity
market. The Russell 3000 Index in comprised of the 3,000 largest U.S. domiciled
publicly-traded common stocks by market capitalization representing
approximately 98% of the U.S. publicly traded equity market.
S&P 500 Stock Index - An unmanaged capitalization-weighted index of 500 stocks
designed to measure performance of the broad domestic economy through changes in
the aggregate market value of the 500 stocks which represent all major
industries.
FOR THE PERIOD ENDED JUNE 30, 1998
CUMULATIVE SINCE
COMMENCEMENT
OF OPERATIONS
----------------
Thurlow Growth Fund (9.10%)
S&P 500 Index 23.22%
Russell 2000 Index 11.32%
THE THURLOW GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998
ASSETS:
Investments, at value (cost $396,170) $440,212
Receivable from securities sold 14,613
Interest receivable 388
Receivable from Adviser 23,844
Prepaid expenses 2,081
Organizational expenses, net of accumulated amortization 21,671
----------
Total assets 502,809
----------
LIABILITIES:
Payable for securities purchased 23,090
Accrued expenses and other liabilities 46,709
----------
Total liabilities 69,799
----------
NET ASSETS $433,010
----------
----------
NET ASSETS CONSIST OF:
Capital stock $453,130
Accumulated undistributed net
realized loss on investments (64,162)
Net unrealized appreciation on investments 44,042
----------
Total Net Assets $433,010
----------
----------
Shares outstanding
(500 million shares authorized, $ 0.0001 par value) 47,611
Net Asset Value, Redemption Price and
Offering Price Per Share $9.09
----------
----------
See Notes to the Financial Statements.
THE THURLOW GROWTH FUND
STATEMENT OF OPERATIONS
August 8, 1997 1<F1> through June 30, 1998
INVESTMENT INCOME:
Dividend income $300
Interest income 1,768
----------
Total investment income 2,068
----------
EXPENSES:
Investment advisory fees 3,611
Administration fees 27,440
Shareholder servicing and accounting costs 44,578
Distribution fees 664
Custody fees 7,073
Federal and state registration 2,602
Professional fees 13,150
Reports to shareholders 5,007
Amortization of organizational expenses 4,728
Other 5,200
----------
Total expenses before waiver and reimbursement 114,053
Less: Waiver of expenses and
reimbursement from Adviser (108,421)
----------
Net Expenses 5,632
----------
NET INVESTMENT LOSS (3,564)
----------
REALIZED AND UNREALIZED GAIN(LOSS) ON INVESTMENTS:
Net realized loss on investments (64,162)
Change in unrealized appreciation on investments 44,042
----------
Net realized and unrealized loss on investments (20,120)
----------
NET DECREASE IN NET ASSETS
RESULTING FROM OPERATIONS ($23,684)
----------
----------
1<F1> Commencement of Operations.
See Notes to the Financial Statements.
THE THURLOW GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
August 8, 1997 1<F2> through June 30, 1998
OPERATIONS:
Net investment loss ($3,564)
Net realized loss on investments (64,162)
Change in unrealized appreciation on investments 44,042
----------
Net decrease in net assets from operations (23,684)
----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 467,476
Cost of shares redeemed (10,782)
----------
Net increase in net assets from
capital share transactions 456,694
----------
TOTAL INCREASE IN NET ASSETS 433,010
----------
NET ASSETS:
Beginning of period 0
----------
End of period $433,010
----------
----------
CHANGES IN SHARES OUTSTANDING:
Shares sold 48,806
Shares redeemed (1,195)
----------
Net increase in shares outstanding 47,611
----------
----------
1<F2> Commencement of Operations.
See Notes to the Financial Statements.
THE THURLOW GROWTH FUND
FINANCIAL HIGHLIGHTS
August 8, 1997 1<F3> through June 30, 1998
PER SHARE DATA:
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
----------
LOSS FROM INVESTMENT OPERATIONS:
Net investment loss 3<F5> (0.07)
Net realized and unrealized loss on investments (0.84)
----------
Total loss from investment operations (0.91)
----------
NET ASSET VALUE, END OF PERIOD $9.09
----------
----------
TOTAL RETURN 2<F4> (9.10%)
SUPPLEMENTAL DATA AND RATIOS:
Net assets, end of period $433,010
Ratio of net expenses to average net assets 4<F6> 1.95%
Ratio of net investment income
to average net assets 4<F6> (1.23%)
Portfolio turnover rate 408.62%
1<F3> Commencement of Operations.
2<F4> Not annualized.
3<F5> Net investment loss per share is calculated using ending balances prior to
consideration of adjustments for permanent financial reporting and tax
differences.
4<F6> Annualized for the period August 8, 1997 through June 30, 1998. Without
expense waivers of $108,421 for the period August 8, 1997 through June 30,
1998, the ratio of expenses to average net assets would have been 39.47%
and the ratio of net investment income to average net assets would have
been (38.75%).
See Notes to the Financial Statements.
THE THURLOW GROWTH FUND
SCHEDULE OF INVESTMENTS - June 30, 1998
Shares Value
- -------- -------
----------------------------------------------------
COMMON STOCKS - 91.4%
----------------------------------------------------
BUILDING- CONSTRUCTION PRODUCTS- 3.1%
500 Genlyte Group Incorporated*<F7> $13,250
-------------
COMMERCIAL SERVICES- 8.2%
100 FTI Consulting, Inc.*<F7> 1,700
450 Labor Ready, Inc.*<F7> 13,584
200 Outdoor Systems, Inc.*<F7> 5,600
200 Syntel, Inc.*<F7> 6,250
200 United Rentals, Inc.*<F7> 8,400
-------------
35,534
-------------
COMPUTER- INTEGRATED SYSTEMS- 6.5%
1,000 Unisys Corporation*<F7> 28,250
-------------
COMPUTER- NETWORKING PRODUCTS - 10.0%
300 Ascend Communications, Inc.*<F7> 14,869
500 FORE Systems, Inc.*<F7> 13,250
1,200 Novell, Inc.*<F7> 15,300
-------------
43,419
-------------
COMPUTER SOFTWARE- DESKTOP- 6.5%
700 Avant! Corporation*<F7> 17,325
100 Microsoft Corporation*<F7> 10,837
-------------
28,162
-------------
COMPUTER SOFTWARE- ENTERPRISE- 4.5%
500 Legato Systems, Inc.*<F7> 19,500
-------------
COMPUTER SOFTWARE- FINANCIAL- 2.7%
500 Timberline Software Corporation 11,781
-------------
COMPUTER SOFTWARE- INTERNET- 14.7%
200 America Online, Inc.*<F7> 21,200
400 Netscape Communications Corporation*<F7> 10,825
200 Yahoo! Inc.*<F7> 31,500
-------------
63,525
-------------
ELECTRONICS- SEMICONDUCTOR MANUFACTURING- 3.9%
100 PMC- Sierra, Inc.*<F7> 4,688
200 Rambus Inc.*<F7> 12,230
-------------
16,918
-------------
ENERGY- 1.5%
300 KTI, Inc.*<F7> 6,488
-------------
HEALTH CARE- 7.2%
1,000 CardioVascular Dynamics, Inc.*<F7> 5,563
200 Immune Response Corporation*<F7> 3,000
200 Medco Research, Inc.*<F7> 5,100
600 MedQuist Inc.*<F7> 17,325
-------------
30,988
-------------
MACHINERY- 4.2%
500 Gencor Industries, Inc. 10,062
400 JLG Industries, Inc. 8,100
-------------
18,162
-------------
RETAIL- 13.6%
900 Kmart Corporation*<F7> 17,325
700 Rent-Way, Inc.*<F7> 21,350
300 Rite Aid Corporation 11,269
600 Stride Rite Corporation 9,038
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58,982
-------------
TELECOMMUNICATION- EQUIPMENT- 4.8%
100 Advanced Fibre Communications, Inc.*<F7> 4,006
200 Lucent Technologies Inc. 16,637
-------------
20,643
-------------
TOTAL COMMON STOCKS (Cost of $351,560) 395,602
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----------------------------------------------------
SHORT-TERM INVESTMENTS - 10.3%
----------------------------------------------------
Principal
Amount
- ---------
VARIABLE RATE DEMAND NOTES - 10.3%
$ 19,000 General Mills, Inc. 19,000
19,000 Johnson Controls, Inc. 19,000
6,610 Pitney Bowes, Inc. 6,610
-------------
44,610
-------------
TOTAL SHORT-TERM INVESTMENTS (Cost of $44,610) 44,610
-------------
TOTAL INVESTMENTS - 101.7% (Cost of $396,170) 440,212
-------------
Liabilities in Excess of Other Assets - (1.7%) (7,202)
-------------
TOTAL NET ASSETS - 100.0% $433,010
-------------
-------------
*<F7> Non-income producing security.
See Notes to the Financial Statements.
THE THURLOW GROWTH FUND
NOTES TO THE FINANCIAL STATEMENTS
June 30, 1998
1. ORGANIZATION
The Thurlow Funds, Inc. (the "Company") was incorporated under the laws of
Maryland on April 30, 1997, and is registered as a no-load, open-end,
diversified management investment company under the Investment Company Act of
1940. The Company presently consists of one diversified investment portfolio,
The Thurlow Growth Fund (the "Fund"). The principal investment objective of the
Fund is capital appreciation, with current income as a secondary objective.
Thomas F. Thurlow and Thomas N. Thurlow held 10,069 shares of the Fund's capital
stock at $10 per share on July 28, 1997. The Fund commenced operations on
August 8,1997.
The costs incurred in connection with the organization, initial registration and
public offering of shares, aggregating $26,399, have been paid by the Fund.
These costs are being amortized over the period of benefit, but not to exceed
sixty months from the Fund's commencement of operations.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with generally accepted accounting principles.
a) Investment Valuation - Common stocks that are listed on a securities
exchange are valued at the last quoted sales price on the day the valuation
is made. Price information on listed securities is taken from the exchange
where the security is primarily traded. Common stocks which are listed on
an exchange but which are not traded on the valuation date are valued at
the current bid prices. Unlisted equity securities for which market
quotations are readily available and options are valued at the current bid
prices. Debt securities which will mature in more than 60 days will be
valued at the latest bid prices furnished by an independent pricing
service. Short-term instruments with a remaining maturity of 60 days or
less are valued at amortized cost, which approximates market value. Other
assets and securities for which no quotations are readily available are
valued at fair value as determined by the Adviser in accordance with
procedures approved by the Board of Directors.
b) Federal Income Taxes - No provision for federal income taxes or excise
taxes has been made since the Fund intends to comply with the provisions of
the Internal Revenue Code available to regulated investment companies in
the current and future years.
c) Distributions to Shareholders - Dividends from net investment income are
declared and paid annually. Distributions of the Fund's net realized
capital gains, if any, will be declared at least annually.
d) Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
e) Other - Investment and shareholder transactions are recorded on trade date.
The Fund determines the gain or loss realized from the investment
transactions by comparing the original cost of the security lot sold with
the net sales proceeds. Dividend income is recognized on the ex-dividend
date or as soon as information is available to the Fund, and interest
income is recognized on an accrual basis. Generally accepted accounting
principles require that permanent financial reporting and tax differences
be reclassified to capital stock.
3. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investments, excluding short-term
investments, by the Fund for the period August 8, 1997 through June 30, 1998,
were $1,486,110 and $1,070,388, respectively. There were no purchases or sales
of long-term U.S. Government securities.
At June 30, 1998, gross unrealized appreciation and depreciation of investments
for tax purposes were as follows:
Appreciation $ 49,664
(Depreciation) (6,528)
-----------
Net appreciation
on investments $ 43,136
-----------
-----------
At June 30, 1998, the cost of investments for federal income tax purposes was
$397,076.
At June 30, 1998, the Fund had accumulated net realized capital loss carryovers
of $24,239 expiring in 2006. To the extent the Fund realizes future net capital
gains, taxable distributions to its shareholders will be offset by any unused
capital loss carryover. In addition, the Fund realized, on a tax basis, post-
October losses of $39,017 which are not recognized for tax purposes until the
first day of the following fiscal year.
4. INVESTMENT ADVISORY AND OTHER AGREEMENTS
The Fund has entered into an Investment Advisory Agreement with Thurlow Capital
Management, Inc. ("Adviser"). Pursuant to its Investment Advisory Agreement
with the Fund, the Adviser is entitled to receive a fee, calculated daily and
payable monthly, at the annual rate of 1.25% as applied to the Fund's daily net
assets.
Firstar Trust Company, a subsidiary of Firstar Corporation, a publicly held bank
holding company, serves as custodian, transfer agent, administrator and
accounting services agent for the Fund.
The Fund has adopted a written plan of distribution (the "Plan") in accordance
with Rule 12b-1 under the Investment Company Act of 1940. The Plan authorizes
the Fund to make payments in connection with the distribution of shares at an
annual rate of up to 0.25% of the Fund's average daily net assets.
If the aggregate annual operating expenses (excluding interest, taxes, brokerage
commissions and other costs incurred in connection with the purchase or sale of
portfolio securities, and extraordinary items) exceed 1.95% of the Fund's
average daily net assets, the Adviser is obligated to reimburse the Fund for the
amount of such excess. Accordingly, for the period ended June 30, 1998, the
Adviser was obligated to reimburse the Fund $108,421. At June 30, 1998, the
outstanding reimbursement due from the Adviser was $23,844.
5. INVESTMENTS IN OPTIONS
As allowed in the Fund's prospectus, subsequent to June 30, 1998, the Fund began
investing in options.
THE THURLOW GROWTH FUND
REPORT OF INDEPENDENT PUBLIC ACCOUNANTS
June 30, 1998
To the Shareholders and Board of Directors of
The Thurlow Funds, Inc.:
We have audited the accompanying statement of assets and liabilities of The
Thurlow Funds, Inc. (a Maryland corporation which includes the Thurlow Growth
Fund), including the schedule of investments as of June 30, 1998, and the
related statements of operations and changes in net assets from August 8, 1997
(commencement of operations) through June 30, 1998, and the financial highlights
for the period from August 8, 1997 (commencement of operations) through June 30,
1998. These financial statements and financial highlights are the
responsibility of the Company'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 misstatement. 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 June 30, 1998 by
correspondence with the depositories, banks 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
Thurlow Funds, Inc. as of June 30, 1998, and the results of its operations and
changes in its net assets for the period from August 8, 1997 (commencement of
operations) through June 30, 1998, and its financial highlights for the period
from August 8, 1997 (commencement of operations) through June 30, 1998, in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Milwaukee, Wisconsin
July 17, 1998
INVESTMENT ADVISER
Thurlow Capital Management, Inc.
P.O. Box 50427
Palo Alto, CA 94303-0427
ADMINISTRATOR, DIVIDEND PAYING AGENT,
SHAREHOLDERS' SERVICING AGENT,
CUSTODIAN AND TRANSFER AGENT
Firstar Trust Company
Mutual Fund Services
615 East Michigan Street
Milwaukee, WI 53202
COUNSEL
Foley & Lardner
777 East Wisconsin Avenue
Milwaukee, WI 53202-5367
INDEPENDENT AUDITORS
Arthur Andersen LLP
100 East Wisconsin Avenue
Milwaukee, WI 53201-1215
DIRECTORS
Thomas F. Thurlow
Martina Hearn
Natasha L. McRee
Stephanie E. Rosendahl
R. Clint McRee
