Sparrow Funds
CROSS REFERENCE SHEET
FORM N-1A
SPARROW GROWTH FUND
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ITEM SECTION IN PROSPECTUS
1.............................. Cover Page
2.............................. Summary of Fund Expenses
3.............................. Performance Information
4.............................. The Fund, Investment Objective and Strategies and Risk Considerations, Operation
of the Fund, General Information
5.............................. Operation of the Fund
5A............................. None
6.............................. Cover Page, Dividends and Distributions, Taxes, General Information, How to
Redeem Shares
7.............................. Cover Page, How to Invest in the Fund, Share Price Calculation, Operation of the
Fund, How to Redeem Shares
8.............................. How to Redeem Shares
9.............................. None
13.............................. Investment Objective and Strategies and Risk Considerations
15.............................. General Information
SECTION IN STATEMENT OF
ITEM ADDITIONAL INFORMATION
10.............................. Cover Page
11.............................. Table of Contents
12.............................. None
13.............................. Additional Information About Fund Investments and Risk Considerations,
Investment Limitations
14.............................. Trustees and Officers
15.............................. Description of the Trust
16.............................. The Investment Adviser, Custodian, Transfer Agent, Accountants, Trustees and
Officers
17.............................. Portfolio Transactions and Brokerage
18.............................. Description of the Trust
19.............................. Determination of Share Price
20.............................. None
21.............................. Distributor
22.............................. Investment Performance
23.............................. Financial Statements
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<PAGE>
SPARROW GROWTH FUND
PROSPECTUS October 1, 1998
225 South Meramec Avenue
Suite 732 Tower
St. Louis, Missouri 63105
For Information, Shareholder Services and Requests:
1-888-727-3301
Sparrow Growth Fund (the "Fund") is a diversified, open-end mutual fund
whose investment objective is to provide long term capital appreciation. The
Fund seeks to achieve its objective by investing primarily in a broad range of
common stocks which the Adviser believes have above average prospects for
appreciation, based on a proprietary investment model developed by the Adviser.
The model looks at a variety of factors to select stocks which the Adviser
believes demonstrate strong earnings momentum.
This Prospectus provides the information a prospective investor ought to
know before investing and should be retained for future reference. A Statement
of Additional Information ("SAI") has been filed with the Securities and
Exchange Commission (the "SEC") dated October 1, 1998, which is incorporated
herein by reference and can be obtained without charge by calling the Fund at
the phone number listed above. The SEC maintains a Web Site (http://www.sec.gov)
that contains the Statement of Additional Information, material incorporated by
reference, and other information regarding registrants that file electronically
with the SEC.
Shares of the Fund are not deposits or obligations of any bank, are not
endorsed or guaranteed by any bank, and are not insured by the Federal Deposit
Insurance Corporation (FDIC), the Federal Reserve Board or any other government
agency, entity, or person. The purchase of Fund shares involves investment
risks, including the possible loss of principal.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SUMMARY OF FUND EXPENSES
The tables below are provided to assist an investor in understanding the
direct and indirect expenses that an investor may incur as a shareholder in the
Fund. The expense information is based on estimated expenses for the current
fiscal year. The expenses are expressed as a percentage of average net assets.
The Example should not be considered a representation of future Fund performance
or expenses, both of which may vary.
Shareholders should be aware that the Fund, unlike most other mutual funds,
does not pay directly for transfer agency, pricing, custodial, auditing or legal
services, nor does it pay directly any general administrative or other
significant operating expenses. The Adviser pays all of the expenses of the Fund
except brokerage, taxes, interest, fees and expenses of non-interested person
trustees and extraordinary expenses.
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Shareholder Transaction Expenses1
Maximum Sales Charge Imposed on Purchases
(as a percentage of offering price).....................................5.75%
Maximum Deferred Sales Charge (as a percentage
of the lower of original purchase price or redemption proceeds)2.........NONE
Sales Charge Imposed on Reinvested Dividends..............................NONE
Redemption Fee............................................................NONE
Exchange Fees.............................................................NONE
Annual Fund Operating Expenses (as a percentage of average net assets)
Management Fees..........................................................2.50%
12b-1 Charges3...........................................................0.00%
Other Expenses4..........................................................0.00%
Total Fund Operating Expenses5.............................................2.50%
1 Processing organizations may impose transactional fees on shareholders (See
"Purchases Without a Sales Charge" for a definite of "processing
organizations.").
2 A deferred sales charge of 1.00% is assessed on redemptions of shares that
were purchased without an initial sales charge because they were purchases of $1
million or more or purchases by qualified retirement plans with at least 200
eligible employees if the redemption occurs within 18 months of purchase.
3 Distribution expenses incurred by the Fund under the 12b-1 Distribution Plan
are paid by the Adviser.
4 The Fund estimates that other expenses (fees and expenses of the trustees who
are not "interested persons" as defined in the Investment Company Act) will be
less than 0.01% of average net assets for the first fiscal year.
5 The Fund's total operating expenses are equal to the management fee paid to
the Adviser because the Adviser pays all operating expenses (except as described
in footnote 4).
Example
You would pay the following expenses on a $1,000 investment, assuming (1) a
5% annual return and (2) redemption at the end of each time period:
1 Year 3 Years
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$81 $132
THE FUND
Sparrow Growth Fund (the "Fund") was organized as a series of Sparrow
Funds, an Ohio business trust (the "Trust") on July 14, 1998. This prospectus
offers shares of the Fund and each share represents an undivided, proportionate
interest in the Fund. The investment adviser to the Fund is Sparrow Capital
Management Incorporated (the "Adviser").
INVESTMENT OBJECTIVE AND STRATEGIES AND RISK CONSIDERATIONS
The investment objective of the Fund is to provide shareholders with long term
capital appreciation. The Fund seeks to achieve this objective by investing
primarily in a broad range of common stocks which the Adviser believes have
above average prospects for appreciation, based on a proprietary investment
model developed by the Adviser. The model looks at a variety of factors to
select stocks ("core momentum growth stocks") which the Adviser believes
demonstrate strong earnings momentum. Although the Fund may invest in stocks of
all market capitalization ranges, it is anticipated that the majority of the
Fund's investments will be in common stocks of large capitalization companies
(over $10 billion). The Adviser seeks to limit investment risk by diversifying
the Fund's investments across a broad range of economic sectors.
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Although the Fund will invest primarily in common stocks, the Fund may hold
warrants and rights issued in conjunction with common stocks. Warrants are
options to purchase equity securities at a specified price valid for a specific
time period. Rights are similar to warrants, but normally have a short duration
and are distributed by the issuer to its shareholders. The Fund may invest in
foreign equity securities through the purchase of American Depository Receipts.
American Depository Receipts are certificates of ownership issued by a U.S. bank
as a convenience to the investors in lieu of the underlying shares which it
holds in custody. To the extent that the Fund does invest in foreign securities,
such investments may be subject to special risks, such as changes in
restrictions on foreign currency transactions and rates of exchange, and changes
in the administrations or economic and monetary policies of foreign governments.
Equity securities are subject to price fluctuations depending on a variety of
factors, including market, business and economic conditions.
Past Performance of Similar Accounts
The Adviser has been managing equity accounts with investment objectives,
policies and strategies substantially similar to the Fund since January 1996.
The data provided below illustrates the past performance of the Adviser in
managing all such accounts, as compared to the S&P 500. Accounts managed by the
Adviser prior to 1996 have been excluded because the investment strategies used
were significantly different from those of the Fund. The persons responsible for
the performance of the accounts are the same as those responsible for the
investment management of the Fund. As of June 30, 1998, the assets in those
accounts totaled approximately $30 million.
Growth of an initial investment of $10,000 with reinvestment (1)
[Graph with the following plot points:
Sparrow S&P 500
------- -------
December 31, 1995 $10,000 $10,000
December 31, 1996 $12,800 $12,290
December 31, 1997 $17,613 $16,395
June 30, 1998 $23,495 $19,280]
1 Line graph shows value of $10,000 invested on December 31, 1995 and held
through June 30, 1998 compared to the unmanaged Standard & Poor's 500
Index. Please see footnotes and text following the chart below.
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Core Growth Equity Accounts(1) S&P 500(2)
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1998(3) +33.4% + 17.6%
1997 +37.6% + 33.4%
1996 +28.0% + 22.9%
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1 The composite rate of return is weighted using beginning-of-quarter
market values plus weighted cash flows. Performance figures are net of
management fees and all expenses of the accounts, and include the reinvestment
of dividends and capital gains. Total expenses of the other accounts were in
some cases lower than Fund Expenses. To the extent Fund expenses are higher than
expenses of the other accounts, the rate of return for the other accounts would
be reduced. The presentation of the performance composite complies with the
Performance Presentation Standards of the Association for Investment Management
and Research (AIMR-PPS), which differs from and will produce a different result
than the standardized SEC calculation. AIMR was not involved with the
preparation or review of the performance composite.
<PAGE>
2 The S&P 500 Index is a widely recognized, unmanaged index of market
activity based upon the aggregate performance of a selected portfolio of
publicly traded common stocks, including monthly adjustments to reflect the
reinvestment of dividends and other distributions. The Index reflects the total
return of securities comprising the Index, including changes in market prices as
well as accrued investment income, which is presumed to be reinvested.
Performance figures for the Index does not reflect deduction of transaction
costs or expenses, including management fees.
3 1998 percentages represent the rates of return for the 6 month period
ended June 30, 1998.
The performance of the accounts managed by the Adviser does not represent
the historical performance of the Fund and should not be considered indicative
of future performance of the Fund. Results may differ because of, among other
things, differences in brokerage commissions, account expenses, including
management fees (the use of the Fund's expense structure possibly would have
lowered the performance results), any sales load imposed, the size of positions
taken in relation to account size and diversification of securities, timing of
purchases and sales, and availability of cash for new investments. In addition,
the managed accounts are not subject to certain investment limitations,
diversification requirements, and other restrictions imposed by the Investment
Company Act and the Internal Revenue Code which, if applicable, may have
adversely affected the performance results of the managed accounts composite.
The results for different periods may vary.
For temporary defensive purposes under abnormal market or economic
conditions, the Fund may hold all or a portion of its assets in money market
instruments (high quality income securities with maturities of less than one
year), securities of money market funds or U.S. government repurchase
agreements. The Fund may also invest in such investments at any time to maintain
liquidity or pending selection of investments in accordance with its policies.
If the Fund acquires securities of money market funds, the shareholders of the
Fund will be subject to duplicative management fees. A repurchase agreement is a
short- term investment in which the purchaser (i.e., the Fund) acquires
ownership of a U.S. Government obligation (which may be of any maturity) and the
seller agrees to repurchase the obligation at a future time at a set price,
thereby determining the yield during the purchaser's holding period (usually not
more than seven days from the date of purchase). Any repurchase transaction in
which the Fund engages will require full collateralization of the seller's
obligation during the entire term of the repurchase agreement.
As all investment securities are subject to inherent market risks and
fluctuations in value due to earnings, economic and political conditions and
other factors, the Fund cannot give any assurance that its investment objective
will be achieved. In addition, it should be noted that the Adviser has not
previously managed assets organized as a mutual fund, and the Fund has no
operating history. Rates of total return quoted by the Fund may be higher or
lower than past quotations, and there can be no assurance that any rate of total
return will be maintained. See the Fund's Statement of Additional Information
for a more detailed discussion of the Fund's investment practices.
HOW TO INVEST IN THE FUND
Shares of the Fund are sold on a continuous basis, and you may invest any
amount you choose, as often as you wish, subject to a minimum initial investment
of $10,000($2,000 for qualified retirment accounts)and minimum subsequent
investments of $500 ($250 for qualified retirement accounts and automatic
investment plans).
Initial Purchase
By Mail: You may open an account and make an initial investment through
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securities dealers having a sales agreement with Unified Management Corporation,
the Fund's distributor (the "Distributor"). You may also make a direct initial
investment by completing and signing the investment application form which
accompanies this Prospectus and mailing it, in proper form, together with a
check made payable to Sparrow Growth Fund to the P.O. Box listed below. If you
prefer overnight delivery, use the overnight address listed below.
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U.S. mail Overnight
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Sparrow Growth Fund Sparrow Growth Fund
c/o Unified Fund Services, Inc. c/o Unified Fund Services, Inc.
P.O. Box 6110 431 N. Pennsylvania Street
Indianapolis, Indiana 46206-6110 Indianapolis, Indiana 46204
By Wire: To purchase shares of the Fund by wire, call Unified Fund
---------
Services, Inc., the Fund's transfer agent (the "Transfer Agent") at (888)
727-3301 for instructions. Then, you should provide your bank with the following
information for purposes of wiring your investment:
Star Bank, N.A. Cinti/Trust
ABA #0420-0001-3
Attn: Sparrow Growth Fund
D.D.A. # 488921529
Account Name _________________ (write in shareholder name)
For Account # ______________ (write in account number)
Wire orders will be accepted only on a day on which the Fund, the Transfer
Agent and Star Bank, the Fund's custodian (the "Custodian"), are open for
business. A wire purchase will not be considered made until the wired money is
received and the purchase is accepted by the Fund. Any delays which may occur in
wiring money, including delays which may occur in processing by the banks, are
not the responsibility of the Fund or the Transfer Agent. There is presently no
fee for the receipt of wired funds, but the right to charge shareholders for
this service is reserved by the Fund.
Sales Charge
Shares of the Fund are purchased at the public offering price. The public
offering price is the next determined net asset value per share plus a sales
charge as shown in the following table. Certain persons may be entitled to
purchase shares of the Fund without paying a sales commission. See "Purchases
Without a Sales Charge".
Sales Charge as of % of:
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Public Net
Offering Amount Dealer Reallowance as % of
Amount of Investment Price Invested Public Offering Price
Less than $50,000 5.75% 6.10% 5.25%
$50,000 but less than $100,000 4.50% 4.71% 4.00%
$100,000 but less than $250,000 3.50% 3.63% 3.00%
$250,000 but less than $500,000 2.50% 2.56% 2.15%
$500,000 but less than $1,000,000 2.00% 2.04% 1.75%
$1,000,000 or more None None None
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There is no initial sales charge on purchases of $1 million or more, or
purchases by qualified retirement plans with at least 200 eligible employees.
However, a contingent deferred sales charge ("CDSC") of 1% will be imposed if
you redeem these shares within eighteen months of purchase, based on the lower
of the shares' cost or current net asset value. Any shares acquired by
reinvestment of distributions will be redeemed without a CDSC.
<PAGE>
In determining whether a CDSC is payable, the Fund will first redeem shares
not subject to any charge. The CDSC will be waived on redemptions of shares
arising out of the death or post-purchase disability of a shareholder or settlor
of a living trust account, and on redemptions in connection with certain
withdrawals from IRA or other retirement plans. The Distributor receives the
entire amount of any CDSC you pay. See the SAI for additional information about
the CDSC.
Except as stated below, the Distributor pays investment dealers of record
commissions on sales of $1 million or more based on an investor's cumulative
purchases during the one-year period beginning with the date of the initial
purchase at net asset value. Each subsequent one-year measuring period for these
purposes will begin with the first net asset value purchase following the end of
the prior period. Such commissions are paid at the rate of 1.00% of the amount
under $3 million, 0.50% of the next $47 million and 0.25% thereafter.
On sales to qualified retirement plans for which no sales charge was paid
because the plan had at least 200 eligible employees, the Distributor pays
commissions during each one-year measuring period, determined as described
above, at the rate of 1.00% of the first $2 million, 0.80% of the next $1
million, 0.50% of the next $16 million and 0.25% thereafter.
Under certain circumstances, the Distributor may change the reallowance to
dealers and may also compensate dealers out of its own assets. Dealers engaged
in the sale of shares of the Fund may be deemed to be underwriters under the
Securities Act of 1933. The Distributor retains the entire sales charge on all
direct initial investments in the Fund and on all investments in accounts with
no designated dealer of record.
For purposes of determining the applicable sales charge, a "purchaser"
includes an individual, his spouse and their children under the age of 21,
purchasing shares for his or their own account; or a trustee or other fiduciary
purchasing shares for a single fiduciary account although more than one
beneficiary may be involved; or employees of a common employer, provided that
economies of scale are realized through remittances from a single source and
quarterly confirmation of such purchases; or an organized group, provided that
the purchases are made through a central administration, or a single dealer, or
by other means which result in economy of sales effort or expense.
Shares of the Fund are sold on a continuous basis at the public offering
price next determined after receipt of a purchase order by the Trust. Purchase
orders received by dealers prior to 4:00 p.m., Eastern time, on any business day
and transmitted to the Distributor by 5:00 p.m., Eastern time, that day are
confirmed at the public offering price determined as of the close of the regular
session of trading on the New York Stock Exchange on that day. It is the
responsibility of dealers to transmit properly completed orders so that they
will be received by the Distributor by 5:00 p.m., Eastern time. Dealers may
charge a fee for effecting purchase orders. Direct purchase orders received by
4:00 p.m., Eastern time, are confirmed at that day's public offering price.
Direct investments received after 4:00 p.m. and others received from dealers
after 5:00 p.m. are confirmed at the public offering price next determined on
the following business day.
Subsequent Purchases
You may purchase additional shares of the Fund at any time (subject to
minimum investment requirements) through your securities dealer, or directly
from the Fund by mail or wire. If your securities dealer received concessions
for selling shares of the Fund to you, such securities dealer will receive the
concessions described above with respect to additional investments. Each
additional mail purchase request must contain the name of your account and your
account number. Checks should be made payable to the Sparrow Growth Fund and
should be sent to the Transfer Agent, as instructed above. A bank wire should be
sent as outlined above.
<PAGE>
Automatic Investment Plan
You may make regular investments in the Fund with an Automatic Investment
Plan by completing the appropriate section of the account application and
attaching a voided personal check. Investments may be made monthly to allow
dollar-cost averaging by automatically deducting $250 or more from your bank
checking account. You may change the amount of your monthly purchase at any
time.
Purchases Without a Sales Charge
The persons described below may purchase and redeem shares of the Fund
without paying a sales charge. In order to purchase shares without paying a
sales charge, you must notify the Transfer Agent as to which conditions apply.
o Trustees, directors, officers and employees of the Trust, the Adviser and
service providers of the Trust, including members of the immediate family
of such individuals and employee benefit plans of such entities;
o Broker-dealers with selling agreements with the Distributor or otherwise
entitled to be compensated under the Fund's 12b-1 Distribution Plan (and
employees, their immediate family members and employee benefit plans of
such entities);
o Registered representatives (and their immediate family members) of
broker-dealers with selling agreements with the Distributor;
o Tax-qualified plans when proceeds from repayments of loans to participants
are invested (or reinvested) in the Fund;
o Financial planners, registered investment advisers, bank trust departments
and other financial intermediaries with service agreements with the
Distributor (and employees, their immediate family members and employee
benefit plans of such entities);
o Clients (who pay a fee to the relevant administrator or financial
intermediary) of administrators of tax-qualified plans, financial planners,
registered investment advisers, bank trust departments and other financial
intermediaries, provided the administrator or financial intermediary has an
agreement with the Distributor or the Fund for this purpose;
o Clients of the Adviser who were not introduced to the Adviser by a
financial intermediary and, prior to the effective date of the Fund,
executed investment management agreements with the Adviser;
o Separate accounts of insurance companies, provided the insurance company
has an agreement with the Distributor or the Fund for this purpose;
o Participants in wrap account programs, provided the broker-dealer,
registered investment adviser or bank offering the program has an agreement
with the Distributor or the Fund for this purpose.
In addition, shares of the Fund may be purchased at net asset value through
processing organizations (broker-dealers, banks or other financial institutions)
that have a sales agreement or have made special arrangements with the
Distributor. When shares are purchased this way, the processing organization,
rather than its customer, may be the shareholder of record of the shares. The
minimum initial and subsequent investments in the Fund for shareholders who
invest through a processing organization generally will be set by the processing
organization. Processing organizations may also impose other charges and
restrictions in addition to or different from those applicable to investors who
remain the shareholder of record of their shares. Thus, an investor
contemplating investing with the Fund through a processing organization should
read materials provided by the processing organization in conjunction with this
Prospectus.
Right of Accumulation
Any "purchaser" (as defined above) may buy shares of the Fund at a reduced
sales charge by aggregating the dollar amount of the new purchase and the total
net asset value of all shares of the Fund then held by the purchaser and
applying the sales charge applicable to such aggregate. In order to obtain such
discount, the purchaser must provide sufficient information at the time of
purchase to permit verification that the purchase qualifies for the reduced
sales charge. The right of accumulation is subject to modification or
discontinuance at any time with respect to all shares purchased thereafter.
<PAGE>
Letter of Intent
A Letter of Intent for amounts of $50,000 or more provides an opportunity
for an investor to obtain a reduced sales charge by aggregating investments over
a 13 month period, provided that the investor refers to such Letter when placing
orders. For purposes of a Letter of Intent, the "Amount of Investment" as
referred to in the preceding sales charge table includes all purchases of shares
of the Fund over the 13 month period based on the total amount of intended
purchases plus the value of all shares previously purchased and still owned. An
alternative is to compute the 13 month period starting up to 90 days before the
date of execution of a Letter of Intent. Each investment made during the period
receives the reduced sales charge applicable to the total amount of the
investment goal. If the goal is not achieved within the period, the investor
must pay the difference between the sales charges applicable to the purchases
made and the charges previously paid, or an appropriate number of escrowed
shares will be redeemed. Please contact the Transfer Agent to obtain a Letter of
Intent application.
Tax Sheltered Retirement Plans
Since the Fund is oriented to longer term investments, shares of the Fund
may be an appropriate investment medium for tax sheltered retirement plans,
including: individual retirement plans (IRAs); simplified employee pensions
(SEPs); 401(k) plans; qualified corporate pension and profit sharing plans (for
employees); tax deferred investment plans (for employees of public school
systems and certain types of charitable organizations); and other qualified
retirement plans. You should contact Unified Fund Services, Inc. the Transfer
Agent at 888-727-3301 for the procedure to open an IRA or SEP plan, as well as
more specific information regarding these retirement plan options. Consultation
with an attorney or tax adviser regarding these plans is advisable. Custodial
fees for an IRA will be paid by the shareholder by redemption of sufficient
shares of the Fund from the IRA unless the fees are paid directly to the IRA
custodian. You can obtain information about the IRA custodial fees from the
Transfer Agent.
Other Purchase Information
Dividends begin to accrue after you become a shareholder. The Fund does not
issue share certificates. All shares are held in non-certificate form registered
on the books of the Fund and the Fund's Transfer Agent for the account of the
shareholder. The rights to limit the amount of purchases and to refuse to sell
to any person are reserved by the Fund. If your check or wire does not clear,
you will be responsible for any loss incurred by the Fund. If you are already a
shareholder, the Fund can redeem shares from any identically registered account
in the Fund as reimbursement for any loss incurred. You may be prohibited or
restricted from making future purchases in the Fund.
HOW TO REDEEM SHARES
All redemptions will be made at the net asset value determined after the
redemption request has been received by the Transfer Agent in proper order.
Shareholders may receive redemption payments in the form of a check or federal
wire transfer. The proceeds of the redemption may be more or less than the
purchase price of your shares, depending on the market value of the Fund's
securities at the time of your redemption. A broker may charge a transaction fee
for the redemption. Presently, there is no charge for wire redemptions; however,
the Fund reserves the right to charge for this service. Any charges for wire
redemptions will be deducted from the shareholder's Fund account by redemption
of shares.
<PAGE>
By Mail - You may redeem any part of your account in the Fund by mail. Your
request should be addressed to:
Sparrow Growth Fund
c/o Unified Fund Services, Inc.
431 North Pennsylvania Street
Indianapolis, IN 46204-1806
"Proper order" means your request for a redemption must include your letter
of instruction, including the Fund name, account number, account name(s), the
address and the dollar amount or number of shares you wish to redeem. This
request must be signed by all registered share owner(s) in the exact name(s) and
any special capacity in which they are registered. For all redemptions, the Fund
requires that signatures be guaranteed by an "eligible guarantor institution."
Such institutions generally include national or state banks, savings
associations, savings and loan associations, trust companies, savings banks,
credit unions and members of a recognized stock exchange. Signature guarantees
are for the protection of shareholders. At the discretion of the Fund or the
Transfer Agent, a shareholder, prior to redemption, may be required to furnish
additional legal documents to insure proper authorization.
By Telephone - You may redeem any part of your account in the Fund by
calling the Transfer Agent at (888) 727-3301. You must first complete the
Optional Telephone Redemption and Exchange section of the investment application
to institute this option. The Fund, the Transfer Agent and the Custodian are not
liable for following redemption or exchange instructions communicated by
telephone that they reasonably believe to be genuine. However, if they do not
employ reasonable procedures to confirm that telephone instructions are genuine,
they may be liable for any losses due to unauthorized or fraudulent
instructions. Procedures employed may include recording telephone instructions
and requiring a form of personal identification from the caller.
The telephone redemption and exchange procedures may be terminated at any
time by the Fund or the Transfer Agent. During periods of extreme market
activity it is possible that shareholders may encounter some difficulty in
telephoning the Fund, although neither the Fund nor the Transfer Agent has ever
experienced difficulties in receiving or in a timely fashion responding to
telephone requests for redemptions or exchanges. If you are unable to reach the
Fund by telephone, you may request a redemption or exchange by mail.
Additional Information - If you are not certain of the requirements for a
redemption please call the Transfer Agent at (888)727-3301. Redemptions
specifying a certain date or share price cannot be accepted and will be
returned. You will be mailed the proceeds on or before the fifth business day
following the redemption. However, payment for redemption made against shares
purchased by check will be made only after the check has cleared, which normally
may take up to fifteen calendar days. Also, when the New York Stock Exchange is
closed (or when trading is restricted) for any reason other than its customary
weekend or holiday closing or under any emergency circumstances, as determined
by the Securities and Exchange Commission, the Fund may suspend redemptions or
postpone payment dates.
Because the Fund incurs certain fixed costs in maintaining shareholder
accounts, the Fund reserves the right to require any shareholder to redeem all
of his or her shares in the Fund on 30 days' written notice if the value of his
or her shares in the Fund is less than $2,500 ($2,000 for qualified retirement
accounts) due to redemption, or such other minimum amount as the Fund may
determine from time to time. An involuntary redemption constitutes a sale. You
should consult your tax adviser concerning the tax consequences of involuntary
redemptions. A shareholder may increase the value of his or her shares in the
Fund to the minimum amount within the 30 day period. Each share of the Fund is
subject to redemption at any time if the Board of Trustees determines in its
sole discretion that failure to so redeem may have materially adverse
consequences to all or any of the shareholders of the Fund.
SHARE PRICE CALCULATION
The value of an individual share in the Fund (the net asset value) is
calculated by dividing the total value of the Fund's investments and other
assets (including accrued income), less any liabilities (including estimated
accrued expenses), by the number of shares outstanding, rounded to the nearest
cent. Net asset value per share is determined as of the close of the New York
Stock Exchange (4:00 p.m., Eastern time) on each day that the exchange is open
for business, and on any other day on which there is sufficient trading in the
Fund's securities to materially affect the net asset value. The net asset value
per share of the Fund will fluctuate.
<PAGE>
Securities which are traded on any exchange or on the NASDAQ
over-the-counter market are valued at the last quoted sale price. Lacking a last
sale price, a security is valued at its last bid price except when, in the
Adviser's opinion, the last bid price does not accurately reflect the current
value of the security. All other securities for which over-the-counter market
quotations are readily available are valued at their last bid price. When market
quotations are not readily available, when the Adviser determines the last bid
price does not accurately reflect the current value or when restricted
securities are being valued, such securities are valued as determined in good
faith by the Adviser, subject to review of the Board of Trustees of the Trust.
Fixed income securities generally are valued by using market quotations,
but may be valued on the basis of prices furnished by a pricing service when the
Adviser believes such prices accurately reflect the fair market value of such
securities. A pricing service utilizes electronic data processing techniques
based on yield spreads relating to securities with similar characteristics to
determine prices for normal institutional-size trading units of debt securities
without regard to sale or bid prices. When prices are not readily available from
a pricing service, or when restricted or illiquid securities are being valued,
securities are valued at fair value as determined in good faith by the Adviser,
subject to review of the Board of Trustees. Short term investments in fixed
income securities with maturities of less than 60 days when acquired, or which
subsequently are within 60 days of maturity, are valued by using the amortized
cost method of valuation, which the Board has determined will represent fair
value.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to distribute substantially all of its net investment
income as dividends to its shareholders on an annual basis, and intends to
distribute its net long term capital gains and its net short term capital gains
at least once a year.
Income dividends and capital gain distributions are automatically
reinvested in additional shares at the net asset value per share on the
distribution date. An election to receive a cash payment of dividends and/or
capital gain distributions may be made in the application to purchase shares or
by separate written notice to the Transfer Agent. Shareholders will receive a
confirmation statement reflecting the payment and reinvestment of dividends and
summarizing all other transactions. If cash payment is requested, a check
normally will be mailed within five business days after the payable date. If you
withdraw your entire account, all dividends accrued to the time of withdrawal,
including the day of withdrawal, will be paid at that time. You may elect to
have distributions on shares held in IRAs and 403(b) plans paid in cash only if
you are 59 1/2 years old or permanently and totally disabled or if you otherwise
qualify under the applicable plan.
TAXES
The Fund intends to qualify each year as a "regulated investment
company" under the Internal Revenue Code of 1986, as amended. By so qualifying,
the Fund will not be subject to federal income taxes to the extent that it
distributes substantially all of its net investment income and any realized
capital gains.
For federal income tax purposes, dividends paid by the Fund from
ordinary income are taxable to shareholders as ordinary income, but may be
eligible in part for the dividends received deduction for corporations. Pursuant
to the Tax Reform Act of 1986 (the "Tax Reform Act"), all distributions of net
short term capital gains to individuals are taxed at the same rate as ordinary
income. All distributions of net capital gains to corporations are taxed at
regular corporate rates. Any distributions designated as being made from net
realized long term capital gains are taxable to shareholders as long term
capital gains regardless of the holding period of the shareholder.
The Fund will mail to each shareholder after the close of the calendar
year a statement setting forth the federal income tax status of distributions
made during the year. Dividends and capital gains distributions may also be
subject to state and local taxes. Shareholders are urged to consult their own
tax advisers regarding specific questions as to federal, state or local taxes
and the tax effect of distributions and withdrawals from the Fund.
<PAGE>
On the application or other appropriate form, the Fund will request the
shareholder's certified taxpayer identification number (social security number
for individuals) and a certification that the shareholder is not subject to
backup withholding. Unless the shareholder provides this information, the Fund
will be required to withhold and remit to the U.S. Treasury 31% of the
dividends, distributions and redemption proceeds payable to the shareholder.
Shareholders should be aware that, under regulations promulgated by the Internal
Revenue Service, the Fund may be fined $50 annually for each account for which a
certified taxpayer identification number is not provided. In the event that such
a fine is imposed with respect to a specific account in any year, the Fund may
make a corresponding charge against the account.
OPERATION OF THE FUND
The Fund is a diversified series of Sparrow Funds, an open-end
management investment company organized as an Ohio business trust on July 14,
1998. The Board of Trustees supervises the business activities of the Fund. Like
other mutual funds, the Fund retains various organizations to perform
specialized services.
The Fund retains Sparrow Capital Management Incorporated, 225 South Meramec
Avenue, Suite 732 Tower, St. Louis, Missouri 63105 (the "Adviser") to manage the
Fund's investments. The Adviser is an independent investment counselor and
registered investment adviser which, together with its affiliated minority owned
investment management firm, Buford, Dickson, Harper & Sparrow Inc., has over $70
million of core momentum growth stock assets under management. Clients primarily
include high net worth individuals and families, but also include a number of
institutional clients such as pension funds. The firm was founded in 1988 and is
100% owned by the President and founder, Gerald R. Sparrow. The sole investment
focus of the firm is "core momentum growth stocks" (as defined in "Investment
Objective and Stsrategies and Risk Considerations"). The investment decisions of
the Fund are made by the Adviser's investment committee, which is primarily
responsible for the day-to-day management of the Fund's portfolio.
The Fund is authorized to pay the Adviser a fee equal to an annual
average rate of 2.50% of its average daily net assets. The Adviser pays all of
the operating expenses of the Fund except brokerage, taxes, interest, fees and
expenses on non-interested person trustees and extraordinary expenses. It should
be noted that most investment companies pay their own operating expenses
directly, while the Fund's expenses, except those specified above, are paid by
the Adviser.
The Fund retains Unified Fund Services, Inc., 431 North Pennsylvania
Street, Indianapolis, Indiana 46204 (the "Administrator") to manage the Fund's
business affairs and provide the Fund with fund accounting and administrative
services, including all regulatory reporting and necessary office equipment,
personnel and facilities. The Fund also retains Unified Fund Services, Inc. (the
"Transfer Agent") to serve as transfer agent, dividend paying agent and
shareholder service agent. For its services as Administrator, Unified Fund
Services, Inc. receives a monthly fee from the Adviser equal to an annual
average rate of 0.10% of the Fund's average daily net assets, subject to an
annual minimum fee of $18,000. The Fund retains Unified Management Corporation,
431 North Pennsylvania Street, Indianapolis, Indiana 46204 (the "Distributor")
to act as the principal distributor of the Fund's shares. The services of the
Administrator, Transfer Agent and Distributor are operating expenses paid by the
Adviser.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc., and subject to its obligation of seeking best
qualitative execution, the Adviser may give consideration to sales of shares of
the Fund as a factor in the selection of brokers and dealers to execute
portfolio transactions.
<PAGE>
DISTRIBUTION PLAN
The Fund has adopted a Distribution Plan pursuant to Rule 12b-1 under the
Investment Company Act of 1940 (the "Plan") under which the Fund is authorized
to incur distribution expenses at a maximum annual rate of 0.50% of the average
daily net assets of the Fund. The Board of Trustees has currently authorized an
annual rate of 0.25%. All distribution expenses incurred by the Fund are paid by
the Adviser pursuant to the Management Agreement between the Fund and Adviser.
The expenses may include, but are not limited to, the following: (a) payments to
securities dealers and others that are engaged in the sale of Shares, that may
be advising shareholders of the Trust regarding the purchase of Fund shares,
that hold shares of the Fund in omnibus accounts or as shareholders of record,
or provide shareholder support or administrative services: (b) costs of
preparing, printing and distributing prospectuses and statements of additional
information and reports of the Fund for recipients other than existing
shareholders of the Fund: (c) costs of formulating and implementing marketing
and promotional activiities; (d) costs of preparing, printing and distributing
sales literature; and (e) costs of implementing and operating the Distribution
Plan. The Plan is designed to promote the sale of shares of the Fund.
GENERAL INFORMATION
Fundamental Policies. The investment limitations set forth in the
Statement of Additional Information as fundamental policies may not be changed
without the affirmative vote of the majority of the outstanding shares of the
Fund. The investment objective of the Fund may be changed without the
affirmative vote of a majority of the outstanding shares of the Fund. Any such
change may result in the Fund having an investment objective different from the
objective which the shareholders considered appropriate at the time of
investment in the Fund.
Fund Turnover. The Fund does not intend to purchase or sell securities
for short term trading purposes. However, if the objective the Fund would be
better served, short-term profits or losses may be realized from time to time.
It is anticipated that portfolio turnover will not exceed 200%. The brokerage
commissions incurred by the Fund will generally be higher than those incurred by
a fund with a lower portfolio turnover rate. The Fund does not anticipate any
adverse tax consequences as a result of its portfolio turnover rate, although
substantial net capital gains could be realized, and any distributions derived
from such gains may be ordinary income for federal tax purposes. Actual holding
period will vary by type of security and market conditions.
Shareholder Rights. Any Trustee of the Trust may be removed by vote of the
shareholders holding not less than two-thirds of the outstanding shares of the
Trust. The Trust does not hold an annual meeting of shareholders. When matters
are submitted to shareholders for a vote, each shareholder is entitled to one
vote for each whole share he owns and fractional votes for fractional shares he
owns. All shares of the Fund have equal voting rights and liquidation rights.
The Declaration of Trust can be amended by the Trustees, except that any
amendment that adversely effects the rights of shareholders must be approved by
the shareholders affected. Prior to the offering made by this Prospectus, Gerald
R. Sparrow purchased for investment all of the outstanding shares of the Fund
and as a result may be deemed to control the Fund.
PERFORMANCE INFORMATION
The Fund may periodically advertise "average annual total return." The
"average annual total return" of the Fund refers to the average annual
compounded rate of return over the stated period that would equate an initial
amount invested at the beginning of a stated period to the ending redeemable
value of the investment. The calculation of "average annual total return"
assumes the reinvestment of all dividends and distributions and the deduction of
the current maximum sales charge from the initial investment.
<PAGE>
The Fund may also advertise performance information (a
"non-standardized quotation") which is calculated differently from "average
annual total return." A non-standardized quotation of total return may be a
cumulative return which measures the percentage change in the value of an
account between the beginning and end of a period, assuming no activity in the
account other than reinvestment of dividends and capital gains distributions. A
non-standardized quotation may also be an average annual compounded rate of
return over a specified period, which may be a period different
from those specified for "average annual total return." In addition, a
non-standardized quotation may be an indication of the value of a $10,000
investment (made on the date of the initial public offering of the Fund's
shares) as of the end of a specified period. These non-standardized quotations
do not include the effect of the applicable sales charge which, if included,
would reduce the quoted performance. A non-standardized quotation will always be
accompanied by the Fund's "average annual total return" as described above.
The Fund may also include in advertisements data comparing performance
with other mutual funds as reported in non-related investment media, published
editorial comments and performance rankings compiled by independent
organizations and publications that monitor the performance of mutual funds
(such as Lipper Analytical Services, Inc., Morningstar, Inc., Fortune or
Barron's). Performance information may be quoted numerically or may be presented
in a table, graph or other illustration. In addition, Fund performance may be
compared to well-known indices of market performance including the Standard &
Poor's (S&P) 500 Index or the Dow Jones Industrial Average.
The advertised performance data of the Fund is based on historical
performance and is not intended to indicate future performance. Rates of total
return quoted by the Fund may be higher or lower than past quotations, and there
can be no assurance that any rate of total return will be maintained. The
principal value of an investment in the Fund will fluctuate so that a
shareholder's shares, when redeemed, may be worth more or less than the
shareholder's original investment.
<TABLE>
<S> <C>
Investment Adviser Transfer Agent and Administrator
Sparrow Capital Management Incorporated (all purchases and redemptions)
225 South Meramec Avenue Unified Fund Services, Inc.
Suite 732 Tower 431 North Pennsylvania Street
St. Louis, Missouri 63105 Indianapolis, IN 46204-1806
Custodian Auditors
Star Bank, N.A. McCurdy & Associates CPA's, Inc.
312 Walnut Street 27955 Clemens Road
Cincinnati, Ohio 45202 Westlake, Ohio 44145
Legal Counsel Distributor
Brown, Cummins & Brown Co., L.P.A. Unified Management Corporation
3500 Carew Tower, 441 Vine Street 431 N. Pennsylvania Street
Cincinnati, Ohio 45202 Indianapolis, Indiana 46204-1806
</TABLE>
No person has been authorized to give any information or to make any
representations, other than those contained in this Prospectus, in connection
with the offering contained in this Prospectus, and if given or made, such
information or representations must not be relied upon as being authorized by
the Fund. This Prospectus does not constitute an offer by the Fund to sell its
shares in any state to any person to whom it is unlawful to make such offer in
such state.
<PAGE>
TABLE OF CONTENTS PAGE
SUMMARY OF FUND EXPENSES.................................................... 2
Shareholder Transaction Expenses................................... 2
Annual Fund Operating Expenses..................................... 2
THE FUND ................................................................... 3
INVESTMENT OBJECTIVE AND STRATEGIES AND RISK CONSIDERATIONS................. 3
HOW TO INVEST IN THE FUND................................................... 5
Initial Purchase................................................... 5
Sales Charge....................................................... 5
Subsequent Purchases............................................... 7
Automatic Investment Plan.......................................... 7
Purchases Without a Sales Charge................................... 7
Right of Accumulation.............................................. 8
Letter of Intent................................................... 8
Tax Sheltered Retirement Plans..................................... 9
Other Purchase Information......................................... 9
HOW TO REDEEM SHARES........................................................ 9
By Mail .......................................................... 9
By Telephone....................................................... 10
Additional Information............................................. 10
SHARE PRICE CALCULATION..................................................... 11
DIVIDENDS AND DISTRIBUTIONS................................................. 11
TAXES ................................................................... 12
OPERATION OF THE FUND....................................................... 12
DISTRIBUTION PLAN........................................................... 13
GENERAL INFORMATION......................................................... 14
Fundamental Policies............................................... 14
Fund Turnover...................................................... 14
Shareholder Rights................................................. 14
PERFORMANCE INFORMATION..................................................... 14
<PAGE>
SPARROW GROWTH FUND
STATEMENT OF ADDITIONAL INFORMATION
October 1, 1998
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Prospectus of Sparrow Growth Fund dated October
1, 1998. A copy of the Prospectus can be obtained by writing the Transfer Agent
at P.O. Box 6110, Indianapolis, Indiana 46206-6110, or by calling
1-888-727-3301.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
PAGE
DESCRIPTION OF THE TRUST..................................................... 1
ADDITIONAL INFORMATION ABOUT FUND INVESTMENTS AND RISK
CONSIDERATIONS...................................................... 1
CONTINGENT DEFERRED SALES CHARGES............................................ 2
INVESTMENT LIMITATIONS....................................................... 2
THE INVESTMENT ADVISER....................................................... 4
TRUSTEES AND OFFICERS........................................................ 4
PORTFOLIO TRANSACTIONS AND BROKERAGE......................................... 5
DETERMINATION OF SHARE PRICE................................................. 6
INVESTMENT PERFORMANCE....................................................... 7
CUSTODIAN.................................................................... 8
TRANSFER AGENT............................................................... 8
ACCOUNTANTS.................................................................. 8
DISTRIBUTOR.................................................................. 8
<PAGE>
DESCRIPTION OF THE TRUST
Sparrow Growth Fund (the "Fund") was organized as a series of Sparrow
Funds (the "Trust"). The Trust is an open-end investment company established
under the laws of Ohio by an Agreement and Declaration of Trust dated July 14,
1998 (the "Trust Agreement"). The Trust Agreement permits the Trustees to issue
an unlimited number of shares of beneficial interest of separate series without
par value. The Fund is the only series currently authorized by the Trustees.
Each share of a series represents an equal proportionate interest in
the assets and liabilities belonging to that series with each other share of
that series and is entitled to such dividends and distributions out of income
belonging to the series as are declared by the Trustees. The shares do not have
cumulative voting rights or any preemptive or conversion rights, and the
Trustees have the authority from time to time to divide or combine the shares of
any series into a greater or lesser number of shares of that series so long as
the proportionate beneficial interest in the assets belonging to that series and
the rights of shares of any other series are in no way affected. In case of any
liquidation of a series, the holders of shares of the series being liquidated
will be entitled to receive as a class a distribution out of the assets, net of
the liabilities, belonging to that series. Expenses attributable to any series
are borne by that series. Any general expenses of the Trust not readily
identifiable as belonging to a particular series are allocated by or under the
direction of the Trustees in such manner as the Trustees determine to be fair
and equitable. No shareholder is liable to further calls or to assessment by the
Trust without his or her express consent.
Upon sixty days prior written notice to shareholders, the Fund may make
redemption payments in whole or in part in securities or other property if the
Trustees determine that existing conditions make cash payments undesirable. For
other information concerning the purchase and redemption of shares of the Fund,
see "How to Invest in the Fund" and "How to Redeem Shares" in the Fund's
Prospectus. For a description of the methods used to determine the share price
and value of the Fund's assets, see "Share Price Calculation" in the Fund's
Prospectus.
ADDITIONAL INFORMATION ABOUT FUND INVESTMENTS AND RISK
CONSIDERATIONS
This section contains a more detailed discussion of some of the
investments the Fund may make and some of the techniques it may use, as
described in the Prospectus (see "Investment Objective and Strategies and Risk
Considerations").
Repurchase Agreements. A repurchase agreement is a short-term
- ------------------------
investment in which the purchaser (i.e., the Fund) acquires ownership of a U.S.
Government obligation (which may be of any maturity) and the seller agrees to
repurchase the obligation at a future time at a set price, thereby determining
the yield during the purchaser's holding period (usually not more than seven
days from the date of purchase). Any repurchase transaction in which the Fund
engages will require full collateralization of the seller's obligation during
the entire term of the repurchase agreement. In the event of a bankruptcy or
other default of the seller, the Fund could experience both delays in
liquidating the underlying security and losses in value. However, the Fund
intends to enter into repurchase agreements only with the Custodian, other banks
with assets of $1 billion or more and registered securities dealers determined
by the Adviser (subject to review by the Board of Trustees) to be creditworthy.
The Adviser monitors the creditworthiness of the banks and securities dealers
with which the Fund engages in repurchase transactions.
<PAGE>
CONTINGENT DEFERRED SALES CHARGES
A contingent deferred sales charge ("CDSC") of 1.00%, based on the
lower of the shares' cost and current net asset value, will be imposed on
purchases of $1 million or more, or purchases by qualified retirement plans with
at least 200 eligible employees, if the shares are redeemed within eighteen
months of purchase. No CDSC is imposed on shares of any class subject to a CDSC
("CDSC Shares") to the extent that the CDSC Shares redeemed (i) are no longer
subject to the holding period therefor, or (ii) resulted from reinvestment of a
distribution on CDSC Shares. In determining whether the CDSC applied to each
redemption of CDSC Shares, CDSC Shares not subject to a CDSC are redeemed first.
The Fund will waive any CDSC on redemptions, (a) in the case of
individual, joint or Uniform Transfers to Minors Act accounts, in the event of
death or post-purchase disability of a shareholder, (b) for the purpose of
paying benefits pursuant to tax-qualified retirement plans ("Benefit Payments"),
or, (c) in the case of living trust accounts, in the event of death or
post-purchase disability of the settlor of the trust. Benefit payments currently
include, without limitaion, (1) distributions from an IRA due to death or
disability, (2) a return of excess contributions to an IRA or 401(k) plan, and
(3) distributions from retirements plans qualified under Section 401(a) of the
Code or from a 403(b) plan due to death, disability, retirement or separation
from service. These waivers may be changed at any time.
INVESTMENT LIMITATIONS
Fundamental. The investment limitations described below have been
------------
adopted by the Trust with respect to the Fund and are fundamental
("Fundamental"), i.e., they may not be changed without the affirmative vote of a
majority of the outstanding shares of the Fund. As used in the Prospectus and
this Statement of Additional Information, the term "majority" of the outstanding
shares of the Fund means the lesser of (1) 67% or more of the outstanding shares
of the Fund present at a meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented at such meeting; or
(2) more than 50% of the outstanding shares of the Fund. Other investment
practices which may be changed by the Board of Trustees without the approval of
shareholders to the extent permitted by applicable law, regulation or regulatory
policy are considered non-fundamental ("Non- Fundamental").
1. Borrowing Money. The Fund will not borrow money, except (a) from a
-------------------
bank, provided that immediately after such borrowing there is an asset coverage
of 300% for all borrowings of the Fund; or (b) from a bank or other persons for
temporary purposes only, provided that such temporary borrowings are in an
amount not exceeding 5% of the Fund's total assets at the time when the
borrowing is made. This limitation does not preclude the Fund from entering into
reverse repurchase transactions, provided that the Fund has an asset coverage of
300% for all borrowings and repurchase commitments of the Fund pursuant to
reverse repurchase transactions.
2. Senior Securities. The Fund will not issue senior securities. This
---------------------
limitation is not applicable to activities that may be deemed to involve the
issuance or sale of a senior security by the Fund, provided that the Fund's
engagement in such activities is consistent with or permitted by the Investment
Company Act of 1940, as amended, the rules and regulations promulgated
thereunder or interpretations of the Securities and Exchange Commission or its
staff.
<PAGE>
3. Underwriting. The Fund will not act as underwriter of securities
-------------
issued by other persons. This limitation is not applicable to the extent that,
in connection with the disposition of portfolio securities (including restricted
securities), the Fund may be deemed an underwriter under certain federal
securities laws.
4. Real Estate. The Fund will not purchase or sell real estate. This
---------------
limitation is not applicable to investments in marketable securities which are
secured by or represent interests in real estate. This limitation does not
preclude the Fund from investing in mortgage-related securities or investing in
companies engaged in the real estate business or that have a significant portion
of their assets in real estate (including real estate investment trusts).
5. Commodities. The Fund will not purchase or sell commodities unless
------------
acquired as a result of ownership of securities or other investments. This
limitation does not preclude the Fund from purchasing or selling options or
futures contracts, from investing in securities or other instruments backed by
commodities or from investing in companies which are engaged in a commodities
business or have a significant portion of their assets in commodities.
6. Loans. The Fund will not make loans to other persons, except (a) by
------
loaning portfolio securities, (b) by engaging in repurchase agreements, or (c)
by purchasing nonpublicly offered debt securities. For purposes of this
limitation, the term "loans" shall not include the purchase of a portion of an
issue of publicly distributed bonds, debentures or other securities.
7. Concentration. The Fund will not invest 25% or more of its total
--------------
assets in any particular industry. This limitation is not applicable to
investments in obligations issued or guaranteed by the U.S. government, its
agencies and instrumentalities or repurchase agreements with respect thereto.
With respect to the percentages adopted by the Trust as maximum
limitations on its investment policies and limitations, an excess above the
fixed percentage will not be a violation of the policy or limitation unless the
excess results immediately and directly from the acquisition of any security or
the action taken. This paragraph does not apply to the borrowing policy set
forth in paragraph 1 above.
Notwithstanding any of the foregoing limitations, any investment
company, whether organized as a trust, association or corporation, or a personal
holding company, may be merged or consolidated with or acquired by the Trust,
provided that if such merger, consolidation or acquisition results in an
investment in the securities of any issuer prohibited by said paragraphs, the
Trust shall, within ninety days after the consummation of such merger,
consolidation or acquisition, dispose of all of the securities of such issuer so
acquired or such portion thereof as shall bring the total investment therein
within the limitations imposed by said paragraphs above as of the date of
consummation.
Non-Fundamental. The following limitations have been adopted by the Trust
----------------
with respect to the Fund and are Non-Fundamental (see "Investment Restrictions"
above).
1. Pledging. The Fund will not mortgage, pledge, hypothecate or in any
---------
manner transfer, as security for indebtedness, any assets of the Fund except as
may be necessary in connection with borrowings described in limitation (1)
above. Margin deposits, security interests, liens and collateral arrangements
with respect to transactions involving options, futures contracts, short sales
and other permitted investments and techniques are not deemed to be a mortgage,
pledge or hypothecation of assets for purposes of this limitation.
2. Borrowing. The Fund will not engage in borrowing.
----------
<PAGE>
3. Margin Purchases. The Fund will not purchase securities or evidences
------------------
of interest thereon on "margin." This limitation is not applicable to short term
credit obtained by the Fund for the clearance of purchases and sales or
redemption of securities, or to arrangements with respect to transactions
involving options, futures contracts, short sales and other permitted
investments and techniques.
4. Options. The Fund will not purchase or sell puts, calls, options or
---------
straddles.
5. Loans. The Fund will not loan its portfolio securities.
------
6. Reverse Repurchase Agreements. The Fund will not enter into reverse
------------------------------
repurchase agreements.
THE INVESTMENT ADVISER
The Fund's investment adviser is Sparrow Capital Management
Incorporated (the "Adviser"). Under the terms of the management agreement (the
"Agreement"), the Adviser manages the Fund's investments subject to approval of
the Board of Trustees and pays all of the expenses of the Fund except brokerage,
taxes, interest, fees and expenses of the non-interested person trustees and
extraordinary expenses. As compensation for its management services and
agreement to pay the Fund's expenses, the Fund is obligated to pay the Adviser a
fee computed and accrued daily and paid monthly at an annual rate of 2.50% of
the average daily net assets of the Fund. The Adviser may waive all or part of
its fee, at any time, and at its sole discretion, but such action shall not
obligate the Adviser to waive any fees in the future.
The Adviser retains the right to use the name "Sparrow" in connection
with another investment company or business enterprise with which the Adviser is
or may become associated. The Trust's right to use the name "Sparrow"
automatically ceases ninety days after termination of the Agreement and may be
withdrawn by the Adviser on ninety days written notice.
The Adviser may make payments to banks or other financial institutions
that provide shareholder services and administer shareholder accounts. The
Glass-Steagall Act prohibits banks from engaging in the business of
underwriting, selling or distributing securities. Although the scope of this
prohibition under the Glass-Steagall Act has not been clearly defined by the
courts or appropriate regulatory agencies, management of the Fund believes that
the Glass-Steagall Act should not preclude a bank from providing such services.
However, state securities laws on this issue may differ from the interpretations
of federal law expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law. If a bank were prohibited
from continuing to perform all or a part of such services, management of the
Fund believes that there would be no material impact on the Fund or its
shareholders. Banks may charge their customers fees for offering these services
to the extent permitted by applicable regulatory authorities, and the overall
return to those shareholders availing themselves of the bank services will be
lower than to those shareholders who do not. The Fund may from time to time
purchase securities issued by banks which provide such services; however, in
selecting investments for the Fund, no preference will be shown for such
securities.
TRUSTEES AND OFFICERS
The names of the Trustees and executive officers of the Trust are shown
below. Each Trustee who is an "interested person" of the Trust, as defined in
the Investment Company Act of 1940, is indicated by an asterisk.
<PAGE>
<TABLE>
<S> <C> <C>
Name, Age Position Principal Occupations
and Address During Past 5 Years
Gerald R. Sparrow* Trustee, President Director, President and Treasurer of Sparrow Capital
Age: 39 and Treasurer Management Incorporated; President of Buford Dickson Harper
225 S. Meramec Avenue, #732 Sparrow, an advisory company; General partner of Sparrow
St. Louis, MO 63105 Fund L.P., an advisory company.
Alex Ramos* Trustee and Analyst for Sparrow Capital Management Incorporated from
Age: 24 Secretary August 1997 through present.
225 S. Meramec Avenue, #732
St. Louis, MO 63105
Dawn Michele Jones* Trustee Vice President of Sales & Marketing for Sparrow Capital
Age: 36 Management Incorporated; Project Manager for American
225 S. Meramec Avenue, #732 Express, an incentive service company, from June 10, 1998 to
St. Louis, MO 63105 July 10, 1998; Sales executive for Bridge Information Systems,
a financial software company, from April of 1995 through
December, 1997; Consultant for Systems Service Enterprise, a
consulting company, from June, 1993 through June, 1994.
Herschel W. Townsend Trustee Pharmacist for Schnucks, a grocery/pharmacy, from January,
Age: 58 1991 through present.
1589 Sierra Vista Plaza
St. Louis, MO 63138
Donald D. Woodruff Trustee President of Robinson, Inc. a retail (sales of hearing aids)
Age: 42 company from June, 1992 through present.
2526 Woodson Road
St. Louis, MO 63114
</TABLE>
Trustee fees are Trust expenses. The following table estimates the
Trustees' compensation for the first full year of the Trust ending August 31,
1999.
<PAGE>
Total Compensation
from Trust (the Trust is
Name not in a Fund Complex)
Gerald R. Sparrow 0
Alex Ramos 0
Dawn Michele Jones 0
Herschel W. Townsend 0
Donald D. Woodruff 0
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to policies established by the Board of Trustees of the Trust,
the Adviser is responsible for the Fund's portfolio decisions and the placing of
the Fund's portfolio transactions. In placing portfolio transactions, the
Adviser seeks the best qualitative execution for the Fund, taking into account
such factors as price (including the applicable brokerage commission or dealer
spread), the execution capability, financial responsibility and responsiveness
of the broker or dealer and the brokerage and research services provided by the
broker or dealer. The Adviser generally seeks favorable prices and commission
rates that are reasonable in relation to the benefits received.
The Adviser is specifically authorized to select brokers or dealers who
also provide brokerage and research services to the Fund and/or the other
accounts over which the Adviser exercises investment discretion and to pay such
brokers or dealers a commission in excess of the commission another broker or
dealer would charge if the Adviser determines in good faith that the commission
is reasonable in relation to the value of the brokerage and research services
provided. The determination may be viewed in terms of a particular transaction
or the Adviser's overall responsibilities with respect to the Trust and to other
accounts over which it exercises investment discretion.
Research services include supplemental research, securities and
economic analyses, statistical services and information with respect to the
availability of securities or purchasers or sellers of securities and analyses
of reports concerning performance of accounts. The research services and other
information furnished by brokers through whom the Fund effects securities
transactions may also be used by the Adviser in servicing all of its accounts.
Similarly, research and information provided by brokers or dealers serving other
clients may be useful to the Adviser in connection with its services to the
Fund. Although research services and other information are useful to the Fund
and the Adviser, it is not possible to place a dollar value on the research and
other information received. It is the opinion of the Board of Trustees and the
Adviser that the review and study of the research and other information will not
reduce the overall cost to the Adviser of performing its duties to the Fund
under the Agreement.
Over-the-counter transactions will be placed either directly with
principal market makers or with broker-dealers, if the same or a better price,
including commissions and executions, is available. Fixed income securities are
normally purchased directly from the issuer, an underwriter or a market maker.
To the extent that the Trust and another of the Adviser's clients seek
to acquire the same security at about the same time, the Trust may not be able
to acquire as large a position in such security as it desires or it may have to
pay a higher price for the security. Similarly, the Trust may not be able to
obtain as large an execution of an order to sell or as high a price for any
particular portfolio security if the other client desires to sell the same
portfolio security at the same time. On the other hand, if the same securities
are bought or sold at the same time by more than one client, the resulting
participation in volume transactions could produce better executions for
the Trust. In the event that more than one client wants to purchase or sell the
same security on a given date, the purchases and sales will normally be made by
random client selection.
<PAGE>
DETERMINATION OF SHARE PRICE
The price (net asset value) of the shares of the Fund is determined as
of 4:00 p.m., Eastern time on each day the Trust is open for business and on any
other day on which there is sufficient trading in the Fund's securities to
materially affect the net asset value. The Trust is open for business on every
day except Saturdays, Sundays and the following holidays: New Year's Day, Martin
Luther King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving and Christmas. For a description of the methods
used to determine the net asset value (share price), see "Share Price
Calculation" in the Prospectus.
The Fund's Prospectus, in the section "How to Invest in the Fund,"
describes certain types of investors for whom sales charges will be waived. The
Trustees have determined that the Fund incurs no appreciable distribution
expenses in connection with sales to these investors and that it is therefore
appropriate to waive sales charges for these investors.
INVESTMENT PERFORMANCE
"Average annual total return," as defined by the Securities and
Exchange Commission, is computed by finding the average annual compounded rates
of return (over the one, five and ten year periods) that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
P(1+T)n=ERV
Where: P = a hypothetical $1,000 initial investment
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the
applicable period of the hypothetical $1,000
investment made at the beginning of the
applicable period.
The computation assumes that all dividends and distributions are reinvested at
the net asset value on the reinvestment dates, that the maximum sales load is
deducted from the initial $1,000 and that a complete redemption occurs at the
end of the applicable period. If the Fund has been in existence less than one,
five or ten years, the time period since the date of the initial public offering
of shares will be substituted for the periods stated.
The Fund may also advertise performance information (a
"non-standardized quotation") which is calculated differently from average
annual total return. A non-standardized quotation of total return may be a
cumulative return which measures the percentage change in the value of an
account between the beginning and end of a period, assuming no activity in the
account other than reinvestment of dividends and capital gains distributions. A
non-standardized quotation may also be an average annual compounded rate of
return over a specified period, which may be a period different from those
specified for average annual total return. In addition, a non-standardized
quotation may be an indication of the value of a $10,000 investment (made on the
date of the initial public offering of the Fund's shares) as of the end of a
specified period. These non-standardized quotations do not include the effect of
the applicable sales load which, if included, would reduce the quoted
performance. A non-standardized quotation of total return will always be
accompanied by the Fund's average annual total return as described above.
The Fund's investment performance will vary depending upon market
conditions, the composition of the Fund's portfolio and operating expenses of
the Fund. These factors and possible differences in the methods and time periods
used in calculating non-standardized investment performance should be considered
when comparing the Fund's performance to those of other investment companies or
investment vehicles. The risks associated with the Fund's investment objective,
policies and techniques should also be considered. At any time in the future,
investment performance may be higher or lower than past performance, and there
can be no assurance that any performance will continue.
From time to time, in advertisements, sales literature and information
furnished to present or to prospective shareholders, the performance of the Fund
may be compared to indices of broad groups of unmanaged securities considered to
be representative of or similar to the portfolio holdings of the Fund or
considered to be representative of the stock market in general. The Fund may use
the Standard & Poor's 500 Stock Index or the Dow Jones Industrial Average.
<PAGE>
In addition, the performance of the Fund may be compared to other
groups of mutual funds tracked by any widely used independent research firm
which ranks mutual funds by overall performance, investment objectives and
assets, such as Lipper Analytical Services, Inc. or Morningstar, Inc. The
objectives, policies, limitations and expenses of other mutual funds in a group
may not be the same as those of the Fund. Performance rankings and ratings
reported periodically in national financial publications such as Barron's and
Fortune also may be used.
CUSTODIAN
Star Bank, N.A., 425 Walnut Street, Cincinnati, Ohio 45202, is
Custodian of the Fund's investments. The Custodian acts as the Fund's
depository, safekeeps its portfolio securities, collects all income and other
payments with respect thereto, disburses funds at the Fund's request and
maintains records in connection with its duties.
TRANSFER AGENT
Unified Fund Services, Inc., 431 North Pennsylvania Street,
Indianapolis, Indiana 46204, acts as the Fund's transfer agent and, in such
capacity, 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 accounting and shareholder service functions. In
addition, Unified Fund Services, Inc., in its capacity as Fund Administrator,
provides the Fund with certain monthly reports, record-keeping and other
management- related services. For a description of the fees paid by the Adviser
on behalf of the Fund for these administrative services, see "Operation of the
Fund" in the Fund's Prospectus.
ACCOUNTANTS
The firm of McCurdy & Associates CPA's, 27955 Clemens Road, Westlake,
Ohio 44145, has been selected as independent public accountants for the Trust
for the fiscal year ending August 31, 1999. McCurdy & Associates performs an
annual audit of the Fund's financial statements and provides financial, tax and
accounting consulting services as requested.
DISTRIBUTOR
Unified Management Corporation, Inc., 431 North Pennsylvania Street,
Indianapolis, Indiana 46204, is the exclusive agent for distribution of shares
of the Fund. The Distributor is obligated to sell shares of the Fund on a best
efforts basis only against purchase orders for the shares. Shares of the Fund
are offered to the public on a continuous basis.
<PAGE>
FINANCIAL STATEMENTS
SPARROW FUNDS
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 16, 1998
Sparrow
Growth Fund
ASSETS:
Cash in Bank $100,000
Total Assets $100,000
LIABILITIES: $ 0
Total Liabilities $ 0
NET ASSETS $100,000
NET ASSETS CONSIST OF:
Capital Paid In $100,000
OUTSTANDING SHARES
Unlimited Number of Shares
Authorized Without Par Value 10,000
NET ASSET VALUE PER SHARE $10
OFFERING PRICE PER SHARE $10
See Accountants' Audit Report
<PAGE>
SPARROW FUNDS
NOTES TO FINANCIAL STATEMENTS
September 16, 1998
1. ORGANIZATION
Sparrow Funds (the "Trust") is an open-end management invest- ment company
organized as a business trust under the laws of the State of Ohio by a
Declaration of Trust dated July 14, 1998. The Declaration of Trust provides
for an unlimited number of authorized shares of beneficial interest without
par value, which may, without shareholder approval, be divided into an
unlimited number of series of such shares, and which presently consist of
one series of shares for the Sparrow Growth Fund (the "Fund").
The Fund uses an independent custodian and transfer agent. No transactions
other than those relating to organizational matters and the sale of 10,000
Shares of the Sparrow Growth Fund have taken place to date.
2. RELATED PARTY TRANSACTIONS
As of September 16, 1998, all of the outstanding shares of the Fund were
owned by Gerald R. Sparrow. A shareholder who beneficially owns, directly
or indirectly, more than 25% of the Fund's voting securities may be deemed
a "control person" (as defined in the 1940 Act) of the Fund. Gerald R.
Sparrow is the President of the Fund.
Sparrow Capital Management Incorporated, the Fund's investment adviser, is
registered as an investment adviser under the Investment Advisers Act of
1940. Sparrow Capital Management Incorporated is owned by Gerald R.
Sparrow.
As compensation for Sparrow Capital Management Incorporated's services
rendered to the Fund, such Fund pays a fee equal to an annual average rate
of 2.50% of its average daily net assets. The adviser pays all of the
operating expenses of the Fund except brokerage fees and commissions,
taxes, interest, fees and expenses on non-interested person trustees and
extraordinary or non-recurring expenses. It should be noted that most
investment companies pay their own operating expenses directly, while the
Fund's expenses, except those specified above, are paid by the Adviser.
3. CAPITAL STOCK AND DISTRIBUTION
At September 16, 1998, an unlimited number of shares were authorized and
paid in capital amounted to $100,000 for the Sparrow Growth Fund.
Transactions in capital stock were as follows:
Shares Sold:
Sparrow Growth Fund 10,000
Shares Redeemed:
Sparrow Growth Fund 0
Net Increase:
Sparrow Growth Fund 10,000
Shares Outstanding:
Sparrow Growth Fund 10,000
<PAGE>
To The Shareholders and Trustees
Sparrow Funds:
We have audited the accompanying statement of assets and liabilities of the
Sparrow Funds (comprised of the Sparrow Growth Fund) as of September 16, 1998.
This financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement 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 statement of assets and liabilities is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of assets and
liabilities. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
statement of assets and liabilities presentation. Our procedures included
confirmation of cash held by the custodian as of September 16, 1998, by
correspondence with the custodian. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of the Sparrow
Growth Fund as of September 16, 1998, in conformity with generally accepted
accounting principles.
McCurdy & Associates CPA's, Inc.
Westlake, Ohio
September 16, 1998
