Dear Valued Shareholder:
I am pleased to send you the Sparrow Growth Fund annual report for the fiscal
year ended August 31, 1999. The Fund's net asset value started on October 4th at
$10.00 per share and ended at $13.38 on August 31st - a gain of 33.80%.
The factors that affected the funds performance include a rise in the stock
market in general and specifically our investments in EMC Corporation, a maker
of computer hardware and software and Wal Mart Stores Inc., the largest discount
retailer in the United States.
We have also invested in other Blue Chip Companies like General Electric and
Microsoft.
We employ an earnings growth approach to identify, invest and monitor these
companies because we believe the compounding of earnings over time will
eventually lead to higher stock prices and gains for our shareholders.
Looking forward, we expect the stock market to regain its footing and move
higher over the next six months as we move through the holiday season and into
the first half of the new year. The reasons why we are optimistic are because
corporate earnings are very strong and inflation is non-existent. Our expertise
should pay off during these prosperous times because we will survey the
landscape, consider all options and make judicious decisions about where to
invest your money.
We thank you for your support, and we pledge to remain diligent in helping you
achieve your financial goals.
Sincerely,
Gerald R. Sparrow
President
<PAGE>
Growth of $10,000 Investment
[Line Graph comparing the growth of a $10,000 investment in the Sparrow Growth
Fund from inception (10/4/98) through 8/31/99, as compared to a $10,000
investment in the S&P 500 for the same period.
Ending values: Sparrow Growth Fund: $12,611
S&P 500: $13,170]
Total Return for the Period
From Inception (10/4/98)
To 8/31/99
Sparrow Growth Fund - NAV 33.80%(1)
- POP 26.11%(2)
S&P 500 31.70%
Past performance does not predict future performance. The value of your
shares may fluctuate and be higher or lower than their original cost at the
time of redemtpion.
(1)The total return is shown without the effect of the applicable 5.75%
maximum initial sales charge.
(2)The total return is shown net of the applicable 5.75% maximum initial
sales charge.
<PAGE>
Year 2000 Discussion (Unaudited)
Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by the Adviser, Administrator or other service providers to the Fund do not
properly process and calculate date-related information and data from January 1,
2000. This is commonly known as the "Year 2000 Issue". The Adviser and
Administrator have taken steps that they believe are reasonably designed to
address the Year 2000 Issue with respect to computer systems that are used and
to obtained reasonable assurances that comparable steps are being taken by the
Fund's major service providers. At this time, however, there can be no assurance
that these steps will be sufficient to avoid any adverse impact on the Fund. In
addition, the Adviser cannot make any assurances that the Year 2000 issue will
not affect the companies in which the Fund invests or worldwide markets and
economies.
<PAGE>
SPARROW GROWTH FUND
SCHEDULE OF INVESTMENTS
- -----------------------
As of August 31, 1999
Number Market
of Shares Value
--------- -----
Common Stocks - 97.36%
- ----------------------
Banks - 4.09%
Providian Financial Corp. 2,805 217,738
Biological Products - 6.32%
Amgen Inc. * 4,040 336,078
Chemicals - 4.49%
Dow Chemical Company 2,100 238,613
Computers/Technology - 19.72%
Adaptec Inc* 7,010 273,390
EMC Corp. * 4,140 248,400
Lexmark Int'l Group* 3,620 285,075
Microsoft Corp. * 2,615 242,051
Diversified Conglomerate - 4.97%
Tyco International 2,610 264,426
Financial Services - 9.21%
Kansas City Southn Inds. Inc. 5,210 241,288
Morgan Stanley, Dean Witter &Co. 2,900 248,856
Food & Beverage - 5.04%
Quaker Oats 4,010 267,918
Oil & Natural Gas - 4.84%
Enron Corp. (Oregon) 6,150 257,531
Number Market
of Shares Value
--------- -----
Other Consumer Goods - 9.32%
Calpine Corp.* 2,770 251,031
General Electric Company 2,180 244,841
Retail - 10.76%
Best Buy Inc. * 4,700 330,175
Wal Mart Stores Inc. 5,460 241,946
Telecommunications -14.22%
Lucent Technology 3,780 242,156
MCI WorldCom Inc.* 3,120 236,340
Motorola Inc. 3,010 277,673
Transportation - 4.38%
Navistar Corp.* 4,795 233,157
Total Common Stocks
(Cost $4,822,632) 5,178,683
---------
Money Market - 2.25%
- --------------------
Firstar Money Market
(Cost $119,477) 119,477
-------
Total Investments
(Cost $4,942,109) 5,298,160
Other Assets and Liabilities, Net - .39% 20,897
- ---------------------------------------- ------
Net Assets - 100% $5,319,057
=== ==========
*Non-income producing security.
The accompanying notes are an integral part of these financial statements.
<PAGE>
SPARROW GROWTH FUND
STATEMENT OF ASSETS AND LIABILITIES
- -----------------------------------
As of August 31, 1999
ASSETS:
Investments, at value (cost 4,942,109) .................. $ 5,298,160
Cash..................................................... 29,891
Receivables:
Dividends ......................................... 1,193
Interest........................................... 531
-----------
Total assets ........................................ 5,329,775
LIABILITIES:
Accrued Management Fees ................................. 10,718
------
Total liabilities ....................................... 10,718
------
NET ASSETS ................................................... $ 5,319,057
==========
Net assets consist of:
Paid-in capital ......................................... 5,055,109
Net realized gain on investments ........................ (92,103)
Net unrealized appreciation on investments .............. 356,051
-------
Net assets ................................................... $ 5,319,057
==========
Shares of capital stock
outstanding (no par value,
unlimited shares authorized)............................. 397,647
Shares:
Net asset value and offering and redemption price per share (based on net
assets of $5,319,057 and 397,647 shares of beneficial interest
outstanding).................................................. $13.38
Offering price per share (NAV/94.25%)......................... $14.20
The accompanying notes are an integral part of these financial statements.
<PAGE>
SPARROW GROWTH FUND
STATEMENT OF OPERATIONS
- -----------------------
For the period October 4, 1998 (commencement of operations) to August 31, 1999
INVESTMENT INCOME:
Interest ................................................ $ 5,915
Dividends................................................ 33,586
Other ................................................... 6
--------
Total investment income ............................ 39,507
--------
EXPENSES:
Management Expense ...................................... 67,443
------
Total expenses ...................................... 67,443
------
NET INVESTMENT LOSS ......................................... (27,936)
---------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized depreciation on investments................. (92,103)
Net change in unrealized
appreciation on investments ........................ 356,051
---------
Net gain on investments ................................. 263,948
---------
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ............................... $ 236,012
==========
The accompanying notes are an integral part of these financial statements.
<PAGE>
SPARROW GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
- ----------------------------------
For the period October 4, 1998 (commencement of operations) to August 31, 1999
INCREASE IN NET ASSETS
Operations:
Net investment loss..................................... $ (27,936)
Net realized depreciation on investments................. (92,103)
Net change in unrealized appreciation on investments 356,051
---------
Increase in net assets from operations .................. 236,012
---------
Capital share transactions:
Proceeds from shares sold ............................... 5,115,419
Cost of shares repurchased............................... (132,374)
----------
Net increase in net assets from
capital share transactions ......................... 4,983,045
TOTAL INCREASE IN NET ASSETS ................................. 5,219,057
----------
NET ASSETS:
Beginning of period ..................................... 100,000
End of period............................................ $ 5,319,057
===========
OTHER INFORMATION:
Share transactions:
Sold .................................................... 396,883
Repurchased ............................................. (9,246)
NET INCREASE IN SHARES OUTSTANDING ........................... 387,637
=========
The accompanying notes are an integral part of these financial statements.
<PAGE>
SPARROW GROWTH FUND
FINANCIAL HIGHLIGHTS
- --------------------
1999(a)
-------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of period.......................... $ 10.00
Loss from investment operations:
Net investment income loss............................... (0.13)
Net realized and unrealized
gain on investments................................. 3.51
----
Total from investment operations.............................. 3.38
Less distributions:
Distributions from net
investment income .................................. 0.00
Distributions from net realized
gains on investments............................. 0.00
----
Total distributions .......................................... 0.00
----
Net asset value, end of period ............................... $ 13.38
=====
TOTAL RETURN ................................................. 33.80%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period ............................... $5,319,057
Ratio of expenses to average net assets (b).............. 2.50%
Ratio of net investment income to average net assets (b). (1.03)%
Portfolio turnover ...................................... 166.41%
(a) For the period October 4, 1998 (commencement of investment operations)
to August 31, 1999
(b) Annualized
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
Note 1 - General
The Sparrow Growth Fund (the "Fund") was organized as a series of Sparrow Funds,
an Ohio business trust (the "Trust") on July 14, 1998. The investment adviser to
the Fund is Sparrow Capital Management Incorporated (the "Adviser"). The
investment objective is to provide shareholders with long term capital
appreciation.
Note 2 - Significant Accounting Policies
The following is a summary of the significant accounting policies followed by
the Fund in the preparation of its financial statements. These policies are in
conformity with generally accepted accounting principles.
A) Security Valuations
The value of an individual share in the Fund (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 regular trading on the floor of the
New York Stock Exchange (currently 4:00 p.m., Eastern time); on each day that
the exchange is open for business and 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. 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 by the Board of Trustees of the Trust.
B) Securities Transactions and Investment Income
Securities transactions are recorded on a trade date basis. The cost of
securities sold is determined using the first-in-first-out method. Interest
income is recorded on the accrual basis and dividend income is recorded on the
ex-dividend date. Discounts and premiums on securities purchased are amortized
over the life of the respective securities.
C) Dividends and Distributions to Shareholders
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 dividend and capital gain distributions are automatically reinvested in
additional shares at net asset value per share on the distribution date, unless
the shareholder has elected to receive payment in cash.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (cont.)
- --------------------------------------
D) Federal Income 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 deductions 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. Net realized
gains or losses may differ for financial and tax reporting purposes for the Fund
primarily as a result of losses from wash sales which are not recognized for tax
purposes until the corresponding shares are sold.
E) Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 3 - Agreements and Other Transactions with Affiliates
The Fund retains Sparrow Capital Management Incorporated, (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 $100 million of core momentum growth stock assets under
management. 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 Strategies and
Risk Considerations" in the Fund's Prospectus). 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 of
non-interested person trustees and extraordinary expenses.
The Fund retains Unified Fund Services, Inc., (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 Mangement
Corporation, (the "Distributor") to act as the principal
<PAGE>
NOTES TO FINANCIAL STATEMENTS (cont.)
- --------------------------------------
Note 3 - Agreements and Other Transactions with Affiliates (cont.)
distributor of the Fund's shares. The services of the Administrator, Transfer
Agent and Distributor are operating expenses paid by the Adviser. For the
period-ended August 31, 1999 the Adviser was paid $67,443.00.
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 0.50%. 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 activities; (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.
Note 4- Investment Transactions
For the period-ended August 31, 1999, the cost of purchases and proceeds from
sales, excluding short-term investments, were $9,295,483 and $4,380,748
respectively.
Note 5- Unrealized Appreciation (Depreciation)
At August 31, 1999, the composition of gross unrealized appreciation
(depreciation) of investment securities is as follows:
Appreciation Depreciation Net Appreciation
------------ ------------ ----------------
The Sparrow Growth Fund $ 546,121 ($190,070) $ 356,051
Note 6- Reclassification of Capital Accounts
In accordance with AICPA Statement of Position 93-2, the components of net
assets of the Fund have been reclassified to the extent that the net investments
loss of ($27,936) sustained during the period ended August 31, 1999, which
represents a permanent difference for income tax purposes, has been reclassified
as a decrease in paid-in-capital.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
----------------------------
To The Shareholders and
Board of Trustees
Sparrow Growth Fund:
We have audited the accompanying statement of assets and liabilities of Sparrow
Growth Fund, including the schedule of portfolio investments, as of August 31,
1999, and the related statement of operations, the statement of changes in net
assets, and financial highlights for the period from October 4, 1998
(commencement of operations) to August 31, 1999 in the period then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of investments and cash owned
as of August 31, 1999, by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Sparrow Growth Fund as of August 31, 1999, and the results of its operations,
the changes in its net assets, and the financial highlights for the period from
October 4, 1998 (commencement of operations) to August 31, 1999 in the period
then ended, in conformity with generally accepted accounting principles.
McCurdy & Associates CPA's, Inc.
Westlake, Ohio
September 27, 1999
