- --------------------------------------------------------------------------------
BOWES INVESTMENT TRUST
----------------------
BANK AND INSURANCE FUND
SEMI-ANNUAL REPORT
August 31, 1998
(Unaudited)
INVESTMENT ADVISER DISTRIBUTOR
------------------ -----------
BOWES FUNDS, LLC CW FUNDS DISTRIBUTORS, INC.
4520 East West Hwy 312 Walnut Street
Suite # 540 21st Floor
Bethesda, Maryland 20814 Cincinnati, Ohio 45202
1.301.654.9567 1.888.829.9973
- --------------------------------------------------------------------------------
<PAGE>
BOWES BANK AND INSURANCE FUND
PORTFOLIO MANAGER REPORT
Dear Fellow Shareholder:
As you know, it has been a difficult market environment for equity
investors. Investors in financial service stocks endured even tougher times with
prices correcting from their spectacular three year run-up. The bulk of the
Fund's $1.6 million of new inflows occurred during the market peaks of April and
July, 1998 and were deployed in what were deemed by us to be undervalued or
correction resistant stocks of the time. The Fund's approach to investing in the
past six months included the following strategies:
Pass up the larger capitalized stocks that were trading at
unprecedented valuation levels as measured by price to book value and by
price to earnings multiples.
Invest in the smaller and mid-size capitalized financial institutions
that were trading at multiples that then appeared to be much more
attractive valuations including issues valued at under 150% of book value
and at price to earnings multiples of less than 13 times earnings;
To invest in announced cash merger transactions that appeared at the
time to be certain and that had historically demonstrated much lower
volatility than general market issues.
Seed cash balances in certain mutual thrift institutions and in mutual
life insurance companies to position the Fund to benefit from the potential
investment opportunities associated with thrift conversions and insurance
demutualizations.
<TABLE>
<CAPTION>
<S> <C>
Unpredicted by most, a number of obstacles COMPARATIVE PERFORMANCE
came out of the woodwork to confound our FOR 6 MONTH PERIOD ENDED AUG. 31, 1998
investment plans in the Fund's first six --------------------------------------
months ended August 31, 1998. RUSSELL 2000 FINANCIAL INDEX -26.8%
KBW/PHILEXCHANGE BANK INDEX -19.0%
Among the market and economic factors NASDAQ COMPOSITE INDEX -14.7%
That occurred in 1998 were: BOWES BANK & INSURANCE -30.1%
</TABLE>
Profit-Taking
The equity markets had experienced 3 years of gains with margin loans to
hedge funds and emerging market investors stacking up. Increasing investment
losses in emerging markets, the mortgage backed securities market, and in
leveraged investment partnerships caused a cycle of margin calls and selling
waves. Investors sold off liquid and non-marginable small cap stocks to pay off
margin debt and to take profits before gains evaporated. With liquidity becoming
more valuable, small cap stock demand dropped off and prices depreciated as
measured by the performance of the Russell 2000 Index above.
<PAGE>
Global Turmoil Increased Investor Fear
Capital flight from collapsing foreign economies adversely affected the
global currency and credit markets. The conventional wisdom had been that the
U.S. economy was a safe haven and largely immune from the economic crises of
Russia, Venezuela, and emerging Asian nations. The Nobel prize winning
economists and former Federal Reserve officials that managed the hedge fund Long
Term Capital found themselves insolvent by shorting U.S. Treasuries as foreign
governments were cashing out of their own economies and were buying treasuries
driving the 30 year bond to record low yields of under 5%. Concurrently,
international financial and political organizations, blasted the airwaves with
cries of global economic doom demanding western nations to open their wallets to
bail out the emerging nations and their speculators. An environment of caution
replaced the frenzied buying of mid-year.
The Merger Environment Changed Drastically
In the Fund's first fiscal half, the financial service company
consolidation juggernaut continued with mega-mergers galore. NationsBank buying
Bank of America, Banc One buying First Chicago, Norwest buying Wells Fargo. The
list ran on and on with cash rarely used. Acquirers could not issue shares fast
enough. However, the announced $70 billion stock swap merger of Citicorp and
Travelers marked a time of huge change in investor psychology. Investors put a
bid spiral on the price of both institutions running Citicorp shares up to $73
per share. The day after the announcement, the reality of stock for stock
mergers became apparent that once stocks are linked on the way up, it works in
reverse as well. Citicorp and Travelers shares plummeted while other deals such
as Conseco's stock merger with Greentree Financial were greeted with this new
skepticism and an era of deep discounts on companies announcing mergers using
stock. On August 31, 1998 Citicorp shares traded at $44 down 40% from their peak
while Conseco traded at $27.63 down 53% from its peak.
In another significant sign of the times, Berkshire Hathaway broke its
longstanding policy against using stock to acquire by agreeing to issue stock to
merge with General Re to create a company with the second largest net worth in
the world ($58 Billion) after Royal Dutch Shell. Warren Buffet believed it was
time to sell his stock to trade for General Re and its portfolio of $27 billion
of liquid fixed investments.
Year 2000 related computer reprogramming has recently become a higher
priority than the technology system integration and conversions that accompany a
merger. It is my view that merger activity will return in full force and will
spread on a wider level to the smaller companies and across industry subsector
lines as Y2K corrections are made and as markets regain confidence.
<PAGE>
The result of these market factors was a swing from frothy exuberant buying to
controlled panic selling of most stocks, with financial stocks bearing the
brunt. This market meltdown did not occur in an environment of dismal
macroeconomic forces of high inflation, high credit costs and high unemployment.
Very much unlike 1987, 1990 and 1994, the last times financial stocks were taken
out and shot, the market performance occurred against a backdrop of a banking
system that is awash in capital and with inflation non-existent. The driving
economic force currently in effect is a collateral crunch where global commodity
price deflation has ushered in a healthy new level of lending conservatism. Oil
and food price deflation has kept inflation at bay but has reduced the
collateral cushion when those commodities are pledged for loans. Asian and
emerging market countries as well as the politically unstable Soviet nations are
expected to continue to dump goods on the world markets to raise much needed
cash. A by-product of this de-leveraging has been a new marking to market
function based on higher equity at risk. Even the large domestic financial
institutions that were so enthusiastic in their overseas investments have taken
their losses and have hopefully become more realistic about the political and
structural instability of emerging market nations. It has been unfortunate that
the community banks and domestic insurers with no exposure to emerging markets
and that do not lend to hedge funds have seen their share prices fall because of
the global crisis and international investment problems. These institutions are
not able to turn directly to the U.S. Treasury Department and the Federal
Reserve for help.
But change is certain. Despite the global turmoil, the financial condition of
U.S. financial institutions is very good as measured by increasing capital
levels and record profitability and by relatively low levels of nonperforming
assets. Increased productivity by greater use of technology is making its way to
the bottom lines of the mid size and larger institutions.
Continued Thrift Conversions:
Near certain 30% plus gains had occurred up until mid-year in investments in the
initial public offerings ("IPOs") of converting thrift institutions. The routine
appreciation of these institutions had caused the Office of Thrift Supervision
to require certain companies coming public to increase the valuations to
percentages of book value pushing 80% to 85%, up from the 65% to 75% price to
book ratios of the past few years. Ironically, the market acceptance of these
institutions abated given the liquidity crunch and increasing market fears. The
opening day gains on the thrift conversion 1POs dropped substantially beginning
in June, 1998. In fact, there are now nearly two dozen recent conversions
trading at a price below their offering price with approximately 100 publicly
traded converted thrifts trading at less than their GAAP book values.
Consequently, recent valuation appraisals of announced conversions have drifted
back to the 65% to 75% of book value ranges making new investments more
attractive. The continuation of heightened competition among financial
institutions coupled with narrowing net interest margins in the current credit
yield curve environment are trends that will pressure many of the remaining
approximately 800 mutual thrifts to execute conversion as part of an exit or
merger strategy. The Fund is positioned well should this environment persist.
<PAGE>
A Coming Wave of Demutualizations
As with the thrifts, a major catalyst in the continued consolidation of the
financial services industry will be the demutualization of insurance companies
over the next several years. Competitive forces have made it difficult for
mutual institutions to maintain their non-stock association status. By having
stock currency, these companies will be able to participate in mergers and offer
stock incentives to their employees and officers. Below is a listing of the
mutual life insurance companies that have disclosed plans to demutualize.
LIFE MUTUAL COMPANIES WITH DECEMBER, 1997
CONVERSION PLANS: STATUTORY ASSETS:
----------------- -----------------
PRUDENTIAL INS CO $193,987,388,000
METROPOLITAN LIFE 172,443,904,000
NORTHWESTERN MUTUAL 71,076,086,000
NEW YORK LIFE 65,274,905,000
PRINCIPAL MUTUAL 63,956,608,000
MASSACHUSETTS MUTUAL 57,634,627,000
JOHN HANCOCK 55,445,671,000
PACIFIC LIFE 31,835,744,000
GUARDIAN LIFE 14,352,266,000
MINNESOTA MUTUAL 13,286,726,000
GENERAL AMERICAN 12,370,497,000
MUTUAL OF NEW YORK 11,800,000,000
AMERICAN UNITED LIFE 7,600,000,000
MUTUAL OF AMERICA 7,600,000,000
SECURITY BENEFIT (KS) 6,200,000,000
NATIONAL LIFE OF VERMONT 6,000,000,000
PROVIDENT MUTUAL 5,700,000,000
STANDARD INSURANCE 4,500,000,000
The Fund has an annuity policy with nearly all of the above companies and
believes it is very well positioned to benefit if and when these companies
become publicly traded. The Fund may receive the benefit of a minimal amount of
free stock issues by mutual insurance companies that undertake a traditional
demutualization. In addition, the Fund may benefit by gaining the right to
subscribe for newly issued publicly traded shares of such companies if a
demutualizing company also issues stock for amounts in excess of the free shares
granted to policyholders. Thirdly, the Fund may benefit from being vested with
subscription rights to shares of mutual insurance holding companies that are
offered to policyholders. Lastly, the Fund will continue to retain the ability
to invest in demutualized insurers and converted thrifts that have become
publicly traded.
I am encouraged by recent improvement in the fundamentals of the financial
markets, the purging of excessive risk factors, the firming of pricing in the
small cap financial sector, and an evident resurgence in the merger trends in
our sector. I appreciate and value your investment in our Fund and look forward
to achieving long-term capital appreciation for our invested assets.
Very truly yours,
Robert B. Bowes
<PAGE>
BOWES INVESTMENT TRUST
BANK AND INSURANCE FUND
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1998 (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
ASSETS
Investment securities:
<S> <C>
At acquisition cost $ 1,377,182
===========
At market value (Note 1) $ 1,132,494
Cash 36,750
Receivable for capital shares sold 36,175
Receivable for securities sold 26,809
Dividends receivable 2,537
Organization expenses, net (Note 1) 7,376
Prepaid expenses and other assets 23,274
-----------
TOTAL ASSETS 1,265,415
-----------
LIABILITIES
Payable for capital shares redeemed 500
Payable for securities purchased 127,852
Payable to affiliates (Note 3) 4,942
Other accrued expenses and liabilities 3,119
Covered call option, at value (Notes 1 and 4) (premium received $2,719) 0
-----------
TOTAL LIABILITIES 136,413
-----------
NET ASSETS $ 1,129,002
===========
Net assets consist of:
Paid-in capital $ 1,581,171
Accumulated net investment loss (3,648)
Accumulated net realized losses from security transactions (206,552)
Net unrealized depreciation on investments (241,969)
-----------
Net assets $ 1,129,002
===========
Shares of beneficial interest outstanding (unlimited
number of shares authorized, no par value) 161,484
===========
Net asset value, offering price and redemption price per share (Note 1) $ 6.99
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
BOWES INVESTMENT TRUST
BANK AND INSURANCE FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED AUGUST 31, 1998 (A) (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C>
Interest $ 1,243
Dividends 5,465
-----------
TOTAL INVESTMENT INCOME 6,708
-----------
EXPENSES
Registration fees 10,515
Accounting services fees (Note 3) 10,000
Transfer agent fees (Note 3) 7,500
Custodian fees 7,240
Investment advisory fees (Note 3) 5,230
Administrative services fees (Note 3) 5,000
Insurance expense 4,925
Postage and supplies 2,790
Legal fees 2,629
Trustees' fees and expenses 1,500
Amortization of organization expenses (Note 1) 820
Pricing expense 381
Distribution expense (Note 3) 157
-----------
TOTAL EXPENSES 58,687
Fees waived and expenses reimbursed by the Advisor (Note 3) (48,331)
-----------
NET EXPENSES 10,356
-----------
NET INVESTMENT LOSS (3,648)
-----------
REALIZED AND UNREALIZED LOSSES
ON INVESTMENTS
Net realized losses from security transactions (169,962)
Net realized losses on option contracts written (36,590)
Net change in unrealized appreciation/depreciation on investments (241,969)
-----------
NET REALIZED AND UNREALIZED
LOSSES ON INVESTMENTS (448,521)
-----------
NET DECREASE IN NET ASSETS FROM
OPERATIONS $ (452,169)
===========
</TABLE>
(A) Represents the period from the commencement of operations (March 2, 1998)
through August 31, 1998.
See accompanying notes to financial statements.
<PAGE>
BOWES INVESTMENT TRUST
BANK AND INSURANCE FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED AUGUST 31, 1998 (A) (UNAUDITED)
================================================================================
FROM OPERATIONS:
Net investment loss $ (3,648)
Net realized losses on:
Security transactions (169,962)
Option contracts written (36,590)
Net change in unrealized appreciation/depreciation
on investments (241,969)
-----------
Net decrease in net assets from operations (452,169)
-----------
FROM CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold 1,659,238
Payments for shares redeemed (178,067)
-----------
Net increase in net assets from capital share transactions 1,481,171
-----------
TOTAL INCREASE IN NET ASSETS 1,029,002
NET ASSETS:
Beginning of period (Note 1) 100,000
-----------
End of period $ 1,129,002
===========
ACCUMULATED NET INVESTMENT LOSS $ (3,648)
===========
CAPITAL SHARE ACTIVITY:
Shares sold 170,833
Shares redeemed (19,349)
-----------
Net increase in shares outstanding 151,484
Shares outstanding, beginning of period (Note 1) 10,000
-----------
Shares outstanding, end of period 161,484
===========
(A) Represents the period from the commencement of operations (March 2, 1998)
through August 31, 1998.
See accompanying notes to financial statements.
<PAGE>
BOWES INVESMENT TRUST
BANK AND INSURANCE FUND
FINANCIAL HIGHLIGHTS
FOR THE PERIOD ENDED AUGUST 31, 1998 (A) (UNAUDITED)
================================================================================
PER SHARE DATA FOR A SHARE OUTSTANDING
THROUGHOUT THE PERIOD:
Net asset value at beginning of period $ 10.00
-----------
Income(loss) from investment operations:
Net investment loss (0.02)
Net realized and unrealized losses on investments (2.99)
-----------
Total from investment operations (3.01)
-----------
Net asset value at end of period $ 6.99
===========
RATIOS AND SUPPLEMENTAL DATA:
Total return (30.10)%(C)
===========
Net assets at end of period $ 1,129,002
===========
Ratio of net expenses to average net assets (B) 1.98%(D)
Ratio of net investment income to average net assets (0.69)%(D)
Portfolio turnover rate 189%(C)
- --------------------------------------------------------------------------------
(A) Represents the period from the commencement of operations (March 2, 1998)
through August 31, 1998.
(B) Absent fee waivers and expense reimbursements by the Adviser, the ratio of
expenses to average net assets would have been 11.13% (D) for the period
ended August 31, 1998.
(C) Unannualized.
(D) Annualized.
See accompanying notes to financial statements.
<PAGE>
BOWES INVESTMENT TRUST
BANK AND INSURANCE FUND
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
==========================================================================================================
Market
Shares Cost Value
- ----------------------------------------------------------------------------------------------------------
COMMON STOCK - 94.2%
FINANCIAL SERVICES - 94.2%
<S> <C> <C> <C>
Acceptance Insurance Companies, Inc.* 100 $ 2,469 $ 1,900
Affiliated Managers Group, Inc.* 500 12,926 8,875
H.F. Ahmanson & Company 300 20,819 15,994
American Bankers Insurance Group 9,800 589,649 508,375
AmerUs Life Holdings, Inc. - Class A 300 8,281 7,987
Banc One Corporation 400 16,616 15,200
Bear Stearns Companies, Inc. 400 23,141 14,775
Brookline Bancorp, Inc. 1,300 20,309 13,244
Chase Manhattan Corporation 300 18,429 15,900
Citizens Financial Corporation - Class A* 500 5,550 5,250
Commercial Federal Corporation 1,000 27,228 22,000
Community Financial Warrants* 1,500 3,790 1,312
Community First Bankshares, Inc. 500 8,583 8,500
Compass Bancshares, Inc. 300 11,712 9,900
Conseco, Inc. 300 10,118 8,287
EFC Bancorp, Inc.* 2,000 26,375 20,000
Fidelity National Financial, Inc. 500 20,020 13,844
Financial Industries Corporation* 3,200 61,846 49,600
First Bell Bancorp, Inc. 500 9,500 8,312
Franklin Resources, Inc. 300 11,093 9,675
Golden State Bancorp, Inc.* 500 8,364 7,937
Harbor Florida Bancshares, Inc. 1,000 12,060 9,313
Home Bancorp of Elgin, Inc. 1,000 15,000 12,500
IMC Mortgage Company* 1,000 10,165 6,750
Independence Community Bank Corp.* 1,000 16,310 11,000
Independence Holding Company 5,700 85,944 72,675
InterContinental Life Corporation* 1,500 38,125 31,500
Jayhawk Acceptance Corporation* 34,000 27,250 14,875
Keycorp 400 12,841 10,200
Mercury General Corporation 400 17,066 14,625
North County Bancorp 700 11,163 9,450
North East Insurance Company* 3,000 7,558 6,938
PennCorp Financial Group, Inc. 4,000 14,910 14,000
Pilgrim America Capital Corp.* 300 6,162 5,325
Protective Life Corporation 300 10,737 9,263
Standard Management Corporation* 2,800 20,312 19,425
Union Community Bancorp 1,000 14,312 11,250
Vesta Insurance Group, Inc. 3,000 52,915 28,313
Washington Mutual, Inc. 300 13,763 9,600
------------ ------------
TOTAL COMMON STOCK $ 1,303,411 $ 1,063,869
------------ ------------
</TABLE>
<PAGE>
BOWES INVESTMENT TRUST
BANK AND INSURANCE FUND
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
==========================================================================================================
Face Market
Amount Cost Value
- ----------------------------------------------------------------------------------------------------------
ANNUITY CONTRACTS - 5.7%
<S> <C> <C> <C>
Ameritas Life Insurance Co. 2,000 $ 2,000 $ 2,000
American United Life Insurance Co. 1,200 1,200 1,080
Baltimore Life Insurance Co. 5,000 5,000 4,575
Farmers & Traders Life Insurance Co. 1,000 1,000 930
General American Life Insurance Co. 1,000 1,000 910
Golden State Mutual Life Insurance Co. 1,000 1,000 930
Illinois Mutual Life Insurance Co. 5,000 5,000 4,550
Indianapolis Mutual Life Insurance Co. 1,200 1,200 1,080
John Hancock Mutual Life Insurance Co. 1,030 1,030 1,030
Lafayette Life Insurance Co. 5,000 5,000 4,600
Mass Mutual Life Insurance Co. 600 600 552
Metropolitan Life Insurance Co. 5,000 5,000 4,650
Mutual Service Life Insurance Co. 500 500 460
Mutual Trust Life Insurance Co. 1,000 1,000 910
National Guardian Life Insurance Co. 1,000 1,000 900
National Travelers Life Insurance Co. 1,000 1,000 920
Mutual Life Insurance Co. of New York 5,000 5,000 4,650
North Carolina Mutual Life Insurance Co. 1,000 1,000 900
Northwestern Mutual Life Insurance Co. 3,500 3,500 3,255
Ohio National Life Insurance Co. 1,000 1,000 920
Pacific Life Insurance Co. 5,000 5,000 4,700
Pan-American Life Insurance Co. 1,000 1,000 910
Penn Mutual Life Insurance Co. 2,500 2,500 2,325
Pioneer Mutual Life Insurance Co. 500 500 440
Principal Mutual Life Insurance Co. 1,000 1,000 930
Provident Mutual Life Insurance Co. 1,400 1,400 1,260
Prudential Insurance Co. 5,000 5,000 4,650
Security Benefit Life Insurance Co. 2,000 2,000 1,840
Security Mutual Life Insurance Co. of New York 1,000 1,000 930
Shenendoah Life Insurance Co. 1,000 1,000 900
Standard Insurance Co. 3,500 3,500 3,255
State Life Insurance Co. 1,000 1,000 930
Union Central Life Insurance Co. 500 500 465
Unity Mutual Life Insurance Co. 750 750 697
------------ ------------
TOTAL ANNUITY CONTRACTS $ 69,180 $ 64,034
------------ ------------
</TABLE>
<PAGE>
BOWES INVESTMENT TRUST
BANK AND INSURANCE FUND
PORTFOLIO OF INVESTMENTS
AUGUST 31, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
==========================================================================================================
Market
Shares Cost Value
- ----------------------------------------------------------------------------------------------------------
CASH EQUIVALENTS - 0.4%
<S> <C> <C> <C>
Star Treasury Fund 4,591 $ 4,591 $ 4,591
------------ ------------
TOTAL INVESTMENTS SECURITIES - 100.3% $ 1,377,182 1,132,494
LIABILITIES IN EXCESS OF OTHER ASSETS - (0.3)% (3,492)
------------
NET ASSETS - 100.0% $ 1,129,002
============
* Non-income producing security.
SCHEDULE OF OPEN OPTIONS WRITTEN
AUGUST 31, 1998 (UNAUDITED)
==========================================================================================================
Market
COVERED CALL OPTION Contracts Value
- ----------------------------------------------------------------------------------------------------------
PennCorp Financial Group, Inc.,
11/21/98 at $15, premium received $2,719 15 $ 0
============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
BOWES INVESTMENT TRUST
BANK AND INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1998 (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The Bank and Insurance Fund (the Fund) is a diversified series of Bowes
Investment Trust (the Trust), an open-end management investment company
registered under the Investment Company Act of 1940. The Trust was organized as
a Delaware business trust on February 3, 1998. The Fund was capitalized on
February 3, 1998, when Bowes Funds, LLC (the Advisor), purchased the initial
10,000 shares of the Fund at $10.00 per share. The public offering of shares of
the Fund commenced on March 2, 1998. The Fund had no operations prior to the
public offering of shares except for the initial issuance of shares.
The Fund's investment objective is to achieve long term capital appreciation by
normally investing at least 65% of its total assets in the equity securities of
United States based companies involved in the banking and insurance industries.
The following is a summary of the Fund's significant accounting policies:
Securities valuation -- The Fund's portfolio securities are valued as of the
close of the regular session of trading on the New York Stock Exchange,
currently 4:00 p.m., Eastern time. Securities which are traded over-the-counter
are valued based on the last sales price, if available, otherwise, at the last
quoted bid price. Securities traded on stock exchanges (including options) or
quoted by NASDAQ are valued at their last sales price on the principal exchange
where the security is traded or, if not traded on a particular day, at the
closing bid price. Securities traded in the over-the-counter market, and which
are not quoted by NASDAQ, are valued at their last sales price or, if not
available, at their last quoted bid price. Investments in mutual insurance
company fixed general account annuities are valued at their cash surrender
value.
Share valuation -- The net asset value per share of the Fund is calculated daily
by dividing the total value of the Fund's assets, less liabilities, by the
number of shares outstanding, rounded to the nearest cent. The offering price
and redemption price per share of the is equal to the net asset value per share.
Investment income -- Dividend income is recorded on the ex-dividend date.
Interest income is accrued as earned.
Distributions to shareholders -- Distributions to shareholders arising from net
investment income and realized capital gains are declared and paid annually.
Income dividends and capital gain distributions are determined in accordance
with income tax regulations.
Security transactions -- Security transactions are accounted for on the trade
date. Securities sold are valued on a specific identification basis.
Organization expenses - Expenses of organization, net of certain expenses paid
by the Advisor, have been capitalized and are being amortized on a straight-line
basis over five years.
<PAGE>
BOWES INVESTMENT TRUST
BANK AND INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1998 (UNAUDITED)
Options transactions -- The Fund may write call options for which premiums are
received and are recorded as liabilities, and are subsequently valued daily at
the closing prices on their primary exchanges. Premiums received from writing
options which expire are treated as realized gains. Premiums received from
writing options which are exercised increase the proceeds used to calculate the
realized gain or loss on the sale of the security. If a closing purchase
transaction is used to terminate the Fund's obligation on a call, a gain or loss
will be realized, depending upon whether the price of the closing purchase
transaction is more or less than the premium previously received on the call
written.
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 at
the date of the financial statements and the reported amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
Federal income tax -- During the current fiscal year, and because of the
circumstances described in Note 5, the Fund failed to comply with certain
diversification tests which are required to be met in order to qualify as a
regulated investment company under the Internal Revenue Code (the Code).
Consequently, the Fund will not be able to deduct its dividends paid to
shareholders, if any, in determining its taxable income for the year ended
February 28, 1999. However, considering the current net investment losses and
net realized capital losses in the Fund, management has determined that
imposition of federal income tax is remote and therefore, no provision for
income taxes should be made. The Fund intends to comply with the diversification
requirements in order to qualify as a regulated investment company in future
fiscal years.
As of August 31, 1998, net unrealized depreciation on investments was $241,969
for federal income tax purposes, of which $2,719 related to appreciated
securities and $244,688 related to depreciated securities based on a federal
income tax cost basis of $1,374,463.
2. INVESTMENT TRANSACTIONS
During the period ended August 31, 1998, purchases and proceeds from sales of
portfolio securities, other than short-term investments, amounted to $3,079,230
and $1,606,567, respectively.
3. TRANSACTIONS WITH AFFILIATES
Certain trustees and officers of the Trust are also officers of the Advisor, or
of Countrywide Fund Services, Inc. (CFS), the administrative services agent,
shareholder servicing and transfer agent, and accounting services agent for the
Trust, or of CW Fund Distributors, Inc., the distributor of the Fund's shares
under terms of a Distribution Agreement.
<PAGE>
BOWES INVESTMENT TRUST
BANK AND INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1998 (UNAUDITED)
ADVISORY AGREEMENT
The Advisor has overall supervisory responsibility for the general management
and investment of the Fund's assets and portfolio securities pursuant to the
terms of an Advisory Agreement. The Fund pays the Advisor an investment advisory
fee, computed and accrued daily and paid monthly, at an annual rate of 1.00% of
the average daily net assets of the Fund.
In order to reduce the operating expenses of the Fund, the Advisor voluntarily
waived its entire investment advisory fee of $5,230 and reimbursed the Fund for
$43,101 of other operating expenses during the period ended August 31, 1998. The
Advisor has made no commitments to waive advisory fees or reimburse the Fund for
other operating expenses in future periods.
ADMINISTRATION AGREEMENT
Under the terms of an Administration Agreement, CFS supplies administrative and
compliance services for the Fund. CFS supervises the preparation of tax returns,
reports to shareholders, reports to and filings with the Securities and Exchange
Commission and state securities commissions, and materials for meetings of the
Board of Trustees. For these services, CFS receives a monthly fee at an annual
rate of 0.10% of the Fund's average daily net assets up to $25 million; 0.075%
of such net assets from $25 million to $50 million; and 0.05% of such net assets
in excess of $50 million, subject to a $1,000 minimum monthly fee.
TRANSFER AGENT AND SHAREHOLDER SERVICING AGREEMENT
Under the terms of a Transfer, Dividend Disbursing, Shareholder Service and Plan
Agency Agreement, CFS maintains the records of each shareholder's account,
answers shareholders' inquiries concerning their accounts, processes purchases
and redemptions of the Fund's shares, acts as dividend and distribution
disbursing agent and performs other shareholder service functions. For these
services, CFS receives a monthly fee based on the number of shareholder accounts
in the Fund, subject to a minimum monthly fee. In addition, the Fund pays
out-of-pocket expenses including, but not limited to, postage and supplies.
ACCOUNTING SERVICES AGREEMENT
Under the terms of an Accounting Services Agreement, CFS calculates the daily
net asset value per share and maintains the financial books and records of the
Fund. For these services, CFS receives a monthly fee based on the Fund's average
daily net assets. In addition, the Fund pays certain out-of-pocket expenses
incurred by CFS in obtaining valuations of the Fund's portfolio securities.
PLAN OF DISTRIBUTION
The Fund has retained CW Fund Distributors, Inc. (Underwriter) to provide the
Fund with distribution services. The Trust has adopted a Plan of Distribution
(the Plan) pursuant to Rule 12b-1 under the 1940 Act. The Plan provides that the
Fund may directly incur or reimburse the Underwriter for certain costs related
to the distribution of the Fund's shares, not to exceed 0.25% of average daily
net assets. For the period ended August 31, 1998, the Fund incurred $157 of such
expenses under the Plan.
<PAGE>
BOWES INVESTMENT TRUST
BANK AND INSURANCE FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1998 (UNAUDITED)
4. OPTIONS
A summary of call/put option contracts during the period ended August 31, 1998
is as follows:
Number of Option
Options Premiums
--------- ---------
Options outstanding at beginning of period 0 $ 0
Options written 105 100,904
Options cancelled in closing purchase
transactions (79) (84,086)
Options expired (6) (7,662)
Options exercised (5) (6,437)
--------- ---------
Options outstanding at end of period 15 $ 2,719
--------- ---------
5. NET ASSET VALUE RECALCULATION
One of the Fund's investments has been the subject of an accounting adjustment
during the period ended August 31, 1998. Earlier this year, American Bankers
Insurance Group ("ABI") agreed to be acquired by Cendant Corporation for $67 per
share in a tender offer.
From April 19, 1998 until August 31, 1998 the Fund invested a significant
percentage of its assets in the shares of ABI at an average cost of $60 per
share. A total of 9,800 shares were purchased and tendered. The tendered
investments had been classified as unsettled sales of shares at $67 per share
not subject to the Fund's diversification limits for invested assets.
In September, the Trust's Board of Trustees determined that the ABI investment
should be valued at daily market values and as an invested asset rather than as
a receivable for each day ABI shares were owned during the period. The
revaluation occurred on September 28, 1998 at which time the ABI shares were
valued at $41.56 per share. Concurrently, the Fund's net asset value per share
was recalculated for each day during the period. In addition, shareholder
purchase transactions that occurred during the period were reprocessed to credit
each such shareholder with an increased number of shares based on the corrected
net asset value.
After the revaluation and reclassification, the Fund undertook an orderly
disposition of a sufficient number of ABI shares to allow the Fund to comply
with the diversification requirements of the Investment Company Act of 1940.
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<NAME> BOWES INVESTMENT TRUST
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