Dear Valued Shareholder:
I am pleased to send you the Sparrow Growth Fund annual report for the fiscal
year ended August 31, 2000. The Fund's net asset value increased +34.08% between
September 1, 1999 and August 31, 2000. The comparative return for the S&P 500
was +16.31%. The Fund's share price increased from $13.38 to $17.94.
The factors that affected the Fund's performance include a rise in the stock
market, in general, and specifically, our investment in EMC Corporation and
Calpine Corporation. EMC Corporation manufactures computer hardware and
software. Calpine Corporation is an independent power company that is engaged in
the development, acquisition, ownership and operation of power generation
facilities and the sale of electricity. We have also invested in other Blue Chip
companies like General Electric and Sun Microsystems, Inc.
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. We believe
that 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
RETURNS FOR THE PERIODS ENDING AUGUST 31, 2000
Average
Annual Return
Since Inception
Fund/Index 1 Year (October 4, 1998)
---------- ------ -----------------
Sparrow Growth Fund - NAV (1) 34.08% 35.81%
- POP (2) 26.34% 31.66%
S&P 500 Index 16.31% 25.80%
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
REDEMPTION.
(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 applicable 5.75% maximum initial
sales charge.
[OBJECT OMITTED]
Sparrow
Growth Fund S&P 500 Index
Oct 4, 1998 $9,425 $10,000
Nov 30, 1998 $10,650 $11,633
Feb 28, 1999 $12,630 $12,419
May 31, 1999 $12,290 $13,099
Aug 31, 1999 $12,611 $13,328
Nov 30, 1999 $13,534 $14,063
Feb 29, 2000 $14,618 $13,876
May 31, 2000 $13,723 $14,471
Aug 31, 2000 $16,908 $15,501
This graph shows the value of a hypothetical initial investment of
$10,000 in the Fund and the S&P 500 Index on October 4, 1998 (inception
of the Fund) and held through August 31, 2000. The investment in the
Fund deducts the maximum sales load, whereas there is no sales load
deduction for the index. In addition, the index is an unmanaged group
of stocks whose total return includes the reinvestment of any dividends
and capital gain distributions, but does not reflect expenses, which
have lowered the Fund's return. THE FUND'S RETURN REPRESENTS PAST
PERFORMANCE AND IS NOT A GUARANTEE OF FUTURE RESULTS.
<TABLE>
<CAPTION>
SPARROW GROWTH FUND
SCHEDULE OF INVESTMENTS - AUGUST 31, 2000
<S> <C> <C>
COMMON STOCKS - 100.0% SHARES VALUE
BIOLOGICAL PRODUCTS - 4.9%
Amgen, Inc. (a) $ 424,550
-----------------
COMPUTER HARDWARE - 19.8%
Cisco Systems, Inc. (a) 6,420 440,572
EMC Corp. (a) 8,280 811,440
Sun Microsystems, Inc. (a) 3,600 456,975
-----------------
1,708,987
-----------------
COMPUTER SOFTWARE & SERVICES - 5.9%
Oracle Corp. (a) 5,600 509,250
-----------------
DIVERSIFIED CONGLOMERATE - 11.9%
General Electric Co. 8,040 471,848
Tyco International Ltd. 9,720 554,040
-----------------
1,025,888
-----------------
DRUGS & PHARMACEUTICALS - 3.4%
Pfizer, Inc. 6,800 294,100
-----------------
ELECTRONICS - 8.0%
Celestica, Inc. (a) 4,000 312,500
Intel Corp. 5,050 378,119
-----------------
690,619
-----------------
FINANCIAL SERVICES - 10.9%
American Express Co. 7,200 425,700
Morgan Stanley Dean Witter & Co. 4,840 520,602
-----------------
946,302
-----------------
FOOD & BEVERAGE - 7.9%
Keebler Foods Co. 7,600 348,175
Pepsi Bottling Group, Inc. 10,500 333,375
-----------------
681,550
-----------------
MEDIA - DIVERSIFIED - 3.0%
Disney (Walt) Co. 6,700 260,881
-----------------
OIL & NATURAL GAS - 3.5%
Kerr-McGee Corp. 4,800 303,300
-----------------
RETAIL - 6.0%
Best Buy Co., Inc. (a) 4,200 259,350
Wal-Mart Stores, Inc. 5,460 259,009
-----------------
518,359
-----------------
TRANSPORTATION - 2.9%
Southwest Airlines Co. 11,000 248,875
-----------------
UTILITIES - 11.9%
Calpine Corp. (a) 10,430 1,032,570
-----------------
TOTAL COMMON STOCKS (COST $5,537,936) 8,645,231
-----------------
SPARROW GROWTH FUND
SCHEDULE OF INVESTMENTS - AUGUST 31, 2000 - continued
PRINCIPAL
AMOUNT VALUE
Money Market Securities - 0.1%
Firstar Treasury Fund, 5.58% (b) (Cost $11,252) 11,252 11,252
-----------------
TOTAL INVESTMENTS - 100.1% (COST $5,549,188) 8,656,483
-----------------
LIABILITIES IN EXCESS OF OTHER ASSETS - (0.1)% (10,053)
-----------------
TOTAL NET ASSETS - 100.0% $ 8,646,430
=================
(a) Non-Income Producing
(b) Variable rate security; the coupon rate shown represents the rate at August 31, 2000.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
SPARROW GROWTH FUND AUGUST 31, 2000
STATEMENT OF ASSETS & LIABILITIES
ASSETS
Investment in securities (cost $5,549,188) $ 8,656,483
Cash 4,047
Dividends receivable 2,848
Interest receivable 31
------------------
TOTAL ASSETS 8,663,409
LIABILITIES
Accrued investment advisory fee payable $ 16,979
-----------------
TOTAL LIABILITIES 16,979
------------------
NET ASSETS $ 8,646,430
==================
Net Assets consist of:
Paid in capital $ 6,201,147
Accumulated realized loss on investments (662,012)
Net unrealized appreciation on investments 3,107,295
------------------
NET ASSETS, for 482,095 shares $ 8,646,430
==================
NET ASSET VALUE
Net Assets
Net asset value and redemption price per share ($8,646,430 / 482,095) $ 17.94
==================
Maximum offering price per share ($17.94 / 94.25%) $ 19.03
==================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SPARROW GROWTH FUND
STATEMENT OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 2000
<S> <C> <C>
INVESTMENT INCOME
Dividend income $ 27,838
Interest income 7,076
---------------
TOTAL INCOME 34,914
EXPENSES
Investment advisory fee $ 175,828
------------------
Total operating expenses 175,828
---------------
NET INVESTMENT LOSS (140,914)
---------------
REALIZED & UNREALIZED GAIN (LOSS)
Net realized loss on investment securities (569,909)
Change in net unrealized appreciation (depreciation)
on investment securities 2,751,244
------------------
Net gain on investment securities 2,181,335
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,040,421
===============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SPARROW GROWTH FUND
STATEMENT OF CHANGES IN NET ASSETS
<S> <C> <C>
YEAR ENDED PERIOD ENDED
AUGUST 31, 2000 AUGUST 31, 1999 (A)
-------------------- --------------------
Increase (Decrease) in Net Assets
OPERATIONS
Net investment loss $ (140,914) $ (27,936)
Net realized loss on investment securities (569,909) (92,103)
Change in net unrealized appreciation 2,751,244 356,051
-------------------- --------------------
Net increase in net assets resulting from operations 2,040,421 236,012
-------------------- --------------------
DISTRIBUTIONS TO SHAREHOLDERS
From net investment income 0 0
From net realized gain 0 0
-------------------- --------------------
Total distributions 0 0
-------------------- --------------------
SHARE TRANSACTIONS
Net proceeds from sale of shares 2,497,255 5,115,419
Shares issued in reinvestment 0 0
Shares redeemed (1,210,303) (132,374)
-------------------- --------------------
Net increase in net assets resulting
from share transactions 1,286,952 4,983,045
-------------------- --------------------
TOTAL INCREASE IN NET ASSETS 3,327,373 5,219,057
-------------------- --------------------
Net Assets
Beginning of period 5,319,057 100,000
-------------------- --------------------
End of period [including accumulated undistributed net
investment income of $0 and $0, respectively] $ 8,646,430 $ 5,319,057
==================== ====================
(a) October 4, 1998 (commencement of operations) through August 31, 1999
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SPARROW GROWTH FUND
FINANCIAL HIGHLIGHTS
<S> <C> <C>
YEAR ENDED PERIOD ENDED
AUGUST 31, 2000 AUGUST 31, 1999 (a)
----------------- -----------------
SELECTED PER SHARE DATA
Net asset value, beginning of period $ 13.38 $ 10.00
----------------- -----------------
Income from investment operations
Net investment loss (0.30) (0.13)
Net realized and unrealized gain 4.86 3.51
----------------- -----------------
Total from investment operations 4.56 3.38
----------------- -----------------
Less Distributions
From net investment income 0.00 0.00
From net realized gain 0.00 0.00
----------------- -----------------
Total distributions 0.00 0.00
----------------- -----------------
Net asset value, end of period $ 17.94 $ 13.38
================= =================
TOTAL RETURN 34.08% 33.80% (b)
RATIOS AND SUPPLEMENTAL DATA
Net assets, end of period $ 8,646,430 $ 5,319,057
Ratio of expenses to average net assets 2.50% 2.50% (c)
Ratio of net investment income to
average net assets (2.00)% (1.03)%(c)
Portfolio turnover rate 117.57% 166.41%
(a) For the period October 4, 1998 (commencement of operations) through August 31, 1999
(b) For periods of less than a full year, total returns are not annualized.
(c) Annualized
</TABLE>
<PAGE>
SPARROW GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000
NOTE 1. ORGANIZATION
The Sparrow Growth Fund (the "Fund") was organized as a series of Sparrow
Funds (the "Trust") on July 14, 1998 and commenced operations on October 4,
1998. 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 Fund's investment objective is to provide long-term capital
appreciation. The Trust Agreement permits the Board of Trustees (the "Board") to
issue an unlimited number of shares of beneficial interest of separate series
without par value. The shares are subject to initial sales charges imposed at
the time of purchase, in accordance with the Fund's prospectus. Certain
redemptions of shares made within 18 months of purchase are subject to
contingent deferred sales charges, in accordance with the Fund's prospectus.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. These policies are in
conformity with generally accepted accounting principles.
SECURITIES 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 of the Board.
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. 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.
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.
SPARROW GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000 - CONTINUED
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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.
DIVIDENDS AND DISTRIBUTIONS - The Fund intends to distribute substantially all
of its net investment income as dividends to its shareholders on an annual
basis. The Fund 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 net asset value per share on the distribution
date, unless the shareholder has elected to receive payment in cash.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME - Security 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.
OTHER - Generally accepted accounting principles require that permanent
financial reporting tax differences relating to shareholder distributions be
reclassified to paid-in capital.
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 $150 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 "Principal Strategies" 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. Officers of the Adviser are also trustees of the Fund.
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 operating expenses of the Fund except brokerage, taxes,
interest, fees and expenses of 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. 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. For the year ended August
31, 2000 the Adviser received a fee of $175,828 from the Fund.
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
SPARROW GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000 - CONTINUED
NOTE 3. AGREEMENTS AND OTHER TRANSACTIONS WITH AFFILIATES - CONTINUED
an annual minimum fee of $18,000. The Fund retains Unified Management
Corporation (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.
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. SHARE TRANSACTIONS
As of August 31, 2000, there were an unlimited number of authorized shares
for the Fund. Paid in capital at August 31, 2000 was $6,201,147.
Transactions in shares were as follows:
<TABLE>
<S> <C> <C> <C> <C>
FOR THE PERIOD OCTOBER 4, 1998
FOR THE YEAR ENDED (COMMENCEMENT OF OPERATIONS) THROUGH
AUGUST 31, 2000 AUGUST 31, 1999
SHARES DOLLARS SHARES DOLLARS
Shares sold 164,412 $2,497,255 396,883 $5,115,419
Shares issued in
reinvestment of
dividends 0 0 0 0
Shares redeemed (79,963) (1,210,303) (9,246) (132,374)
--------- ------------ --------- -------------
84,449 $1,286,952 387,637 $4,983,045
========= ============ ========= =============
</TABLE>
<PAGE>
NOTE 5. INVESTMENT TRANSACTIONS
For the year ended August 31, 2000, purchases and sales of investment
securities, other than short-term investments, aggregated $9,389,889 and
$8,104,675, respectively. As of August 31, 2000, the gross unrealized
appreciation for all securities totaled $3,166,650 and the gross unrealized
depreciation for all securities totaled $59,355 for a net unrealized
appreciation of $3,107,295. The aggregate cost of securities for federal income
tax purposes at August 31, 2000 was $5,549,188.
SPARROW GROWTH FUND
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 2000 - CONTINUED
NOTE 6. 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.
<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,
2000, and the related statement of operations, the statement of changes in net
assets, and financial highlights for each of the periods indicated. 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, 2000, 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, 2000, and the results of its operations,
the changes in its net assets, and the financial highlights for each of the
periods indicated in conformity with generally accepted accounting principles.
McCurdy & Associates CPA's, Inc.
Westlake, Ohio
September 14, 2000
