Brown Capital Management Funds
105 North Washington Street
Post Office Box 69
Rocky Mount, North Carolina 27802-0069
Telephone 919-972-9922
U.S. WATTS 800-525 FUND
Facsimile 919-442-4226
April 15, 1996
Dear Shareholder:
Following last year's meteoric rise of the stock and bond markets, it would have
seemed only reasonable to have expected some pause in what had become an almost
uninterrupted pace of advance. After all, some of the major fundamental economic
underpinnings were becoming less robust. Both capital spending and corporate
profit growth appeared to be slackening at the end of December and in the fourth
quarter of fiscal 1996. But a pause was not the case, at least in the equity
markets. Demand for stocks seemed insatiable in the fourth quarter of fiscal
1996. As a follow-up to an extraordinary S&P 500 total return of 32.1% for all
of fiscal 1996, the index tacked on a fourth quarter fiscal 1996 total return of
5.4%. What's going on?
First of all, a growing segment of the American Public is acting decisively with
respect to their long-term financial needs by investing at record levels in
equity mutual funds. Second, Corporate America has added significantly to the
demand side of the equation by competing with the public through a record level
of share repurchase programs, or simply acquiring whole companies at premium
prices. Demand is up, supply is down! What could be better? Furthermore, the
Achilles heel of Bull markets, namely inflationary expectations, seems to be
well contained in a box. Hopefully, not Pandora's box. Investors often build
market expectations looking in rear view mirrors rather than over the horizon of
uncertainty. Have we arrived at the point where the stock market only goes up?
One need only recall Dutch tulip bulb mania as just one example of incorrectly
extrapolating into the future from the past. Current trends, either up or down,
should always be tempered by stepping back for sober considerations.
The time a year ago, we had a lot of conviction that the broad market was
fundamentally poised to move higher despite its strong showing in the fourth
quarter of fiscal 1996. There was growing evidence that the Federal Reserve had
achieved a "soft landing," corporate profit growth was robust, and valuations
seemed reasonable. At present, the S&P 500 is selling at a reasonable 16 times
calendar 1996 estimated earnings. Our fundamental outlook for fiscal 1997
remains relatively unchanged from the views we have held for sometime, and that
it, except for the prospect for interest rates, we expect the macro environment
to be similar to calendar 1995.
<PAGE>
We expect stock returns to be composed of an increase in S&P 500 earnings of
5-8%, and a modest expansion in P/E's as evidence of an economic expansion in
1997 becomes clearer. We expect dividend yield to provide a moderate return in
fiscal 1997.
In view of our aforementioned expectations for annual inflation, stock and bond
returns, what are some of the inviting areas of investment opportunity? We like
to say that sector emphasis is a by-product of our "bottoms-up" fundamental
analysis process, through from time to time we may also identify investable
themes that will guide our search process. Our investments in technology
companies could be viewed in this context in that we look to identify companies
that provide "productivity enhancing" differentiated products or services to
their customers.
We find that such companies as EMC Corp., Cisco Systems, and Microsoft fit this
theme, as does R.P. Scherer, a technology-based provider of drug delivery
systems. Speaking of drugs, we also believe the aging population trends bode
well for the health care and long-term care industries. In these areas, for
example, we identified Cardinal Health, a distributor of health care products,
and Health Care and Retirement in the long-term care segment. Another area that
has attracted our attention from the bottom up is the financial sector. We have
identified a number of exceptional companies that enjoy defensible positions of
leadership in their respective businesses including Aflac, Green Tree Financial,
and T. Rowe Price. We say we prefer to have the wind of the "macro" environment
to our backs, recognizing that sometimes this will not be the case. To this
point, during the fourth quarter of fiscal 1996, we reduced our investment in
companies likely to be adversely impacted by two potentially troubling
developments, one being the rising level of consumer installment debt service as
a percent of disposable income, and the other being the apparent slowdown in the
growth of personal computer shipments. Such companies include First USA, in the
credit card services business, and Adaptec, in the computer hardware industry.
Consistent with our fiscal 1997 outlook, which opines that stocks will capture
center stage with very little competition from bonds, stocks recorded very
respectable performance in the fiscal year-end quarter. The S&P 500 and the
Russell 2000, increased 5.4% and 5.1%, respectively. Unlike the year ago fiscal
fourth quarter in which falling interest rates helped stimulate demand for
stocks (S&P 500 increased 9.8%), the fear of rising inflation pushed interest
rates higher in the fourth quarter of fiscal 1996. As a result, the bond market
offered meager returns relative to stocks in the fiscal fourth quarter as
evidenced by the Lehman Government/Corporate Bond Index and the Merrill Lynch
500 Municipal Bond Index, which declined 2.3% and 3.0%, respectively.
With respect to the bond market, the bears came out of hibernation in the fiscal
year-end quarter. Our strategy of not extending maturities was correct. Now, we
think there has been an overreaction and occasions will present themselves to
opportunistically extend maturities this quarter.
Over the next 3-5 years, in the context of 3-5% inflation, we expect the broad
stock market to provide returns on the order of 10-12% and long term bonds on
the order of 6-8%.
As always, we are pleased to have you as a shareholder and thank you for your
confidence in Brown Capital Management.
Sincerely,
/s/ EDDIE C. BROWN
Eddie C. Brown
President
<PAGE>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
Performance Update - $10,000 Investment
For the period from September 30, 1992 to March 31, 1996
[GRAPH]
BCM Balanced 75% S&P/25% Lehman
09/30/92 10,000 10,000
12/31/92 10,579 10,379
03/31/93 10,774 10,840
06/30/93 10,779 10,959
09/30/93 11,208 11,262
12/31/93 11,611 11,450
03/31/94 11,297 11,088
06/30/94 11,168 11,089
09/30/94 11,644 11,522
12/31/94 11,468 11,531
03/31/95 12,195 12,523
06/30/95 13,417 13,630
09/30/95 14,593 14,528
12/31/95 14,879 15,360
03/31/96 15,493 15,932
Average Annual Total Return
For the period 9/30/92 One year ended 3/31/96 Three years ended 3/31/96
through 3/31/96
13.32% 27.04% 12.86%
This graph depicts the performance of The Brown Capital Management Balanced Fund
versus a combined index of 75% S&P 500 w/Income Index and 25% Lehman
Government/Corporate Bond Index. It is important to note The Brown Capital
Management Balanced Fund is a professionally managed mutual fund while the
indexes are not available for investment and are unmanaged. The comparison is
shown for illustrative purposes only.
* The graph assumes an initial $10,000 investment at September 30, 1992. All
dividends and distributions are reinvested.
* At March 31, 1996, the Fund would have grown to $15,493 - total investment
return of 54.93% since September 30, 1992.
* At March 31, 1996, a similar investment a combined index of 75% S&P 500
w/Income and 25% Lehman Government/Corporate Bond Index would have grown to
$15,932 - total investment return of 59.32% since September 30, 1992.
* Past performance is not a guarantee of future performance. A mutual fund's
share price and investment return will vary with market conditions, and the
principal value of share, when redeemed, may be worth more or less than the
original cost. Average annual returns are historical in nature and measure net
investment income and capital gain or loss from portfolio investments assuming
reinvestments of dividends.
<PAGE>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
PORTFOLIO OF INVESTMENTS
March 31, 1996
<TABLE>
<CAPTION>
Number of Value
Shares (note 1)
--------- ---------
<S> <C>
COMMON STOCKS - 66.34%
Biopharmaceuticals - 1.75%
(a) Amgen, Inc. 1,000 $58,125
---------
Commercial Services - 1.82%
Equifax, Inc. 3,000 60,375
---------
Computers - 3.19%
(a) Bay Networks 1,800 55,350
(a) EMC Corporation 2,300 50,312
---------
105,662
---------
Computer Software & Services - 9.66%
(a) Cheyenne Software, Inc. 2,700 42,862
(a) Cisco Systems, Inc. 1,600 74,200
(a) Compuware Corporation 1,900 43,700
(a) Microsoft Corporation 500 51,562
(a) Oracle Corporation 950 44,769
(a) Sterling Software, Inc. 900 63,450
---------
320,543
---------
Electronics - 4.78%
Motorola, Inc. 930 49,290
(a) Solectron Corporation 1,200 52,800
(a) Vishay Intertechnology, Inc. 2,100 56,700
---------
158,790
---------
Entertainment - 2.03%
Carnival Corporation 2,450 67,375
---------
Financial - Banks, Commercial - 1.55%
Chase Manhattan Corporation 700 51,450
---------
Financial - Savings/Loans/Thrift - 2.51%
(a) Glendale Federal Bank FSB 4,600 83,375
---------
Financial Services - 4.93%
Green Tree Financial Corporation 2,600 89,375
T. Rowe Price Associates 1,400 74,200
---------
163,575
---------
Household Products & Housewares - 2.10%
Newell Company 2,600 69,550
---------
Insurance - Life & Health - 1.86%
AFLAC, Inc. 1,975 61,719
---------
</TABLE>
(Continued)
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
<PAGE>
PORTFOLIO OF INVESTMENTS
March 31, 1996
<TABLE>
<CAPTION>
Number of Value
Shares (note 1)
-------- --------
<S> <C>
COMMON STOCKS (Continued)
Medical - Hospital Management & Service - 3.70%
(a) Health Care and Retirement Corporation 1,150 $43,412
Manor Care, Inc. 850 33,362
United Healthcare Corporation 750 46,125
----------
122,899
----------
Mining - 0.83%
Minerals Technologies, Inc. 800 27,700
----------
Pharmaceuticals - 5.96%
(a) Alza Corporation 600 18,450
Cardinal Health, Inc. 1,100 70,675
Pfizer, Inc. 900 60,525
(a) R.P. Scherer Corporation 1,100 48,262
----------
197,912
----------
Real Estate Investment Trust - 3.78%
General Growth Properties 2,550 59,925
Post Properties, Inc. 1,700 55,250
Prime Retail, Inc. 900 10,350
----------
125,525
----------
Restaurants & Food Service - 3.93%
Cracker Barrel Old Country Store, Inc. 2,700 62,775
(a) The Cheesecake Factory 2,500 67,500
----------
130,275
----------
Retail - Department Stores - 1.92%
Dollar General Corporation 2,200 63,800
----------
Retail - Drug Stores - 0.58%
Revco D.S., Inc. 700 19,250
----------
Retail - Grocery - 1.70%
Casey's General Stores, Inc. 2,400 56,400
----------
Retail - Specialty Line - 3.95%
(a) AutoZone, Inc. 2,600 88,075
Home Depot, Inc. 900 42,975
----------
131,050
----------
Telecommunications - 1.02%
(a) Tellabs, Inc. 700 33,863
----------
Telecommunications Equipment - 1.26%
(a) DSC Communications Corporation 1,550 41,850
----------
</TABLE>
(Continued)
<PAGE>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
PORTFOLIO OF INVESTMENTS
March 31, 1996
<TABLE>
<CAPTION>
Number of Value
Shares (note 1)
--------- -----------
<S> <C>
COMMON STOCKS (Continued)
Utilities - Gas - 1.53%
MCN Corporation 2,200 $50,875
---------
Total Common Stocks (Cost $1,749,481) 2,201,938
---------
</TABLE>
<TABLE>
<CAPTION>
Interest Maturity
Principal Rate Date
---------- --------- ---------
<S> <C>
U.S. GOVERNMENT OBLIGATIONS - 11.84%
United States Treasury Bond $20,000 6.250% 8/15/2023 18,506
United States Treasury Note 70,000 6.375% 7/15/1999 70,798
United States Treasury Note 90,000 6.375% 8/15/2002 90,633
United States Treasury Note 100,000 7.500% 2/15/2005 107,391
United States Treasury Note 100,000 7.750% 1/31/2000 105,609
-----------
392,937
-----------
Total U.S. Government Obligations (Cost $382,618)
CORPORATE OBLIGATIONS - 7.33%
Alabama Power Company 15,000 7.750% 2/01/2023 14,826
Boston Edison Company 40,000 7.800% 5/15/2010 40,425
Chase Manhattan Corporation 30,000 6.500% 8/01/2005 28,388
Citicorp 15,000 7.125% 6/01/2003 15,113
Ford Motor Credit Corporation 40,000 7.250% 9/01/2010 38,700
NationsBank Corporation 15,000 6.875% 2/15/2005 14,864
Rouse Company 10,000 8.500% 1/15/2003 10,096
Time Warner, Inc. 20,000 9.150% 2/01/2023 21,300
USF&G Corporation 60,000 7.125% 6/01/2005 59,813
-----------
243,525
-----------
Total Corporate Obligations (Cost $245,768)
REPURCHASE AGREEMENT (b) - 13.85%
Wachovia Bank 459,799 5.380% 4/01/1996 459,799
-----------
(Cost $459,799)
Total Value of Investments (Cost $2,837,666 (c)) 99.36% 3,298,199
Other Assets Less Liabilities 0.64% 21,115
--------- ----------
Net Assets 100.00% $3,319,314
========= ==========
</TABLE>
(Continued)
<PAGE>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
PORTFOLIO OF INVESTMENTS
March 31, 1996
(a) Non-income producing investment.
(b) Joint repurchase agreement entered into March 31, 1996, with a
maturity value of $54,221,391 collateralized by $46,275,000 U.S.
Treasury Notes, due February 15, 2020. The aggregate market value of
the collateral at March 31, 1996 was $54,871,024. The Fund's pro rata
interest in the market value of the collateral at March 31, 1996 was
$472,165. The Fund's pro rata interest in the joint repurchase
agreement collateral is taken into possession by the Fund's custodian
upon entering into the repurchase agreement.
(c) Aggregate cost for federal income tax purposes is the same as for
financial reporting purposes. Unrealized appreciation (depreciation)
of investments for financial reporting and federal income tax purposes
is as follows:
Unrealized appreciation $510,882
Unrealized depreciation (50,349)
---------
Net unrealized appreciation $460,533
=========
See accompanying notes to financial statements
<PAGE>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1996
ASSETS
Cash $ 7,769
Investments, at value (cost $2,377,867) 2,838,400
Repurchase agreement (cost $459,799) 459,799
Interest receivable 10,241
Dividends receivable 1,501
Due from advisor (note 2) 2,059
Other assets 1,524
----------
Total assets 3,321,293
----------
LIABILITIES
Accrued custody fees 715
Accrued expenses 1,264
----------
Total liabilities 1,979
----------
NET ASSETS
(applicable to 241,178 Institutional Class shares
outstanding; unlimited shares of no par value
beneficial interest authorized) $3,319,314
==========
NET ASSET VALUE AND REPURCHASE PRICE PER INSTITUTIONAL
CLASS SHARE
($3,319,314 / 241,178 shares) $ 13.76
==========
NET ASSETS CONSIST OF
Paid-in capital $2,714,532
Undistributed net investment income 290
Undistributed net realized gain on investments 143,959
Net unrealized appreciation on investments 460,533
----------
$3,319,314
==========
See accompanying notes to financial statements
<PAGE>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
STATEMENT OF OPERATIONS
YEAR ENDED MARCH 31, 1996
<TABLE>
<S> <C>
INVESTMENT INCOME
INCOME
Interest $48,456
Dividends 22,376
--------------
TOTAL INCOME 70,832
--------------
EXPENSES
Fund accounting fees (note 2) 21,000
Investment advisory fees (note 2) 18,266
Professional fees 10,797
Fund administration fees (note 2) 7,025
Custody fees 6,000
Other administration fees (note 2) 5,787
Securities pricing fees 3,977
Registration and filing administration fees 2,938
Shareholder recordkeeping fees 445
Registration and filing expenses 6,504
Trustee fees and meeting expenses 5,617
Shareholder servicing expenses 4,358
Printing expenses 1,133
Other operating expenses 4,210
--------------
TOTAL EXPENSES 98,057
--------------
Less:
Expense reimbursements (note 2) (35,214)
Investment advisory fees waived (note 2) (18,266)
Fund administration fees waived (note 2) (12)
--------------
NET EXPENSES 44,565
--------------
NET INVESTMENT INCOME 26,267
--------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from investment transactions 313,572
Increase in unrealized appreciation on investments 298,606
--------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 612,178
--------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $638,445
==============
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
<PAGE>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
Year ended Year ended
March 31, March 31,
1996 1995
<S> <C>
----------- -----------
INCREASE IN NET ASSETS
Operations
Net investment income $ 26,267 $ 14,538
Net realized gain from investment transactions 313,572 6,896
Increase in unrealized appreciation on investments 298,606 129,906
----------- -----------
Net increase in net assets resulting from operations 638,445 151,340
----------- -----------
Distributions to shareholders from
Net investment income (26,177) (14,671)
Net realized gain from investment transactions (176,122) (27,167)
----------- -----------
Decrease in net assets resulting from distributions (202,299) (41,838)
----------- -----------
Capital share transactions
Increase in net assets resulting from capital share transactions (a) 586,962 999,007
----------- -----------
Total increase in net assets 1,023,108 1,108,509
NET ASSETS
Beginning of year 2,296,206 1,187,697
----------- -----------
End of year (including undistributed net investment income $ 3,319,314 $ 2,296,206
=========== ===========
of $290 in 1996 and $200 in 1995)
</TABLE>
(a) A summary of capital share activity follows:
<TABLE>
<CAPTION>
Year ended Year ended
March 31, 1996 March 31, 1995
Shares Value Shares Value
----------- ----------- ----------- -----------
<S> <C>
Shares sold 43,696 $ 598,095 92,906 $ 1,021,047
Shares issued for reinvestment
of distributions 14,886 201,651 3,771 41,191
----------- ----------- ----------- -----------
58,582 799,746 96,677 1,062,238
Shares redeemed (16,078) (212,784) (5,751) (63,231)
----------- ----------- ----------- -----------
Net increase 42,504 $ 586,962 90,926 $ 999,007
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements
<PAGE>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM
AUGUST 11, 1992
(COMMENCEMENT
YEAR ENDED YEAR ENDED YEAR ENDED OF OPERATIONS)
MARCH 31, MARCH 31, MARCH 31, TO MARCH 31,
1996 1995 1994 1993
---------------- ---------------- ---------------- -----------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.56 $11.02 $10.62 $10.00
INCOME FROM INVESTMENT OPERATIONS
Net investment income 0.12 0.10 0.08 0.04
Net realized and unrealized
gain on investments 2.98 0.77 0.43 0.62
---------------- ---------------- ---------------- -------------
TOTAL FROM INVESTMENT OPERATION 3.10 0.87 0.51 0.66
---------------- ---------------- ---------------- -------------
DISTRIBUTIONS TO SHAREHOLDERS FROM
Net investment income (0.12) (0.11) (0.08) (0.04)
Net realized gain from investment
transactions (0.78) (0.22) (0.03) 0
---------------- ---------------- ---------------- -------------
TOTAL DISTRIBUTIONS (0.90) (0.33) (0.11) (0.04)
---------------- ---------------- ---------------- -------------
NET ASSET VALUE, END OF PERIOD $13.76 $11.56 $11.02 $10.62
================ ================ ================ =============
TOTAL RETURN 27.04% 8.04% 4.78% 6.60%
================ ================ ================ =============
RATIOS/SUPPLEMENTAL DATA
NET ASSETS, END OF PERIOD $3,319,314 $2,296,206 $1,187,697 $761,645
================ ================ ================ =============
RATIO OF EXPENSES TO AVERAGE NET ASSETS
Before expense reimbursements and waived fees 3.50% 5.43% 6.44% 9.56 (a)
After expense reimbursements and waived fees 1.59% 2.00% 2.00% 1.58 (a)
RATIO OF NET INVESTMENT INCOME (LOSS)
TO AVERAGE NET ASSETS
Before expense reimbursements and waived fees (0.97)% (2.44)% (3.69)% (7.13) (a)
After expense reimbursements and waived fees 0.94 % 1.00 % 0.74 % 0.85 (a)
PORTFOLIO TURNOVER RATE 43.59 % 9.51 % 28.56 % 20.90
</TABLE>
(a) Annualized.
<PAGE>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
The Brown Capital Management Balanced Fund (the "FUND") is a
diversified series of shares of beneficial interest of The Nottingham
Investment Trust II (the "TRUST"). The Trust, an open-end investment
company, was organized on October 18, 1990 as a Massachusetts
Business Trust and is registered under the Investment Company Act of
1940. The Fund began operations on August 11, 1992. Pursuant to a
plan approved by the Board of Trustees of the Trust, the existing
single class of shares of the Fund was redesignated as the
Institutional Class shares of the Fund on June 15, 1995 and an
additional class of shares, the Investor Class shares, was
authorized. To date, only Institutional Class shares have been issued
by the Fund. The Institutional Class shares are sold without a sales
charge and bear no distribution and service fees. The Investor Class
shares will be subject to a maximum 3.50% sales charge and will bear
distribution and service fees which may not exceed 0.50% of the
Investor Class shares' average net assets annually. The following is
a summary of significant accounting policies followed by the Fund.
A. SECURITY VALUATION - The Fund's investments in securities are
carried at value. Securities listed on an exchange or quoted on
a national market system are valued at the last sales price as
of 4:00 p.m. New York time. Other securities traded in the
over-the-counter market and listed securities for which no sale
was reported on that date are valued at the most recent bid
price. Securities for which market quotations are not readily
available, if any, are valued by using an independent pricing
service or by following procedures approved by the Board of
Trustees. Short-term investments are valued at cost which
approximates value.
B. FEDERAL INCOME TAXES - The Fund is considered a personal holding
company as defined under Section 542 of the Internal Revenue
Code since 50% of the value of the Fund's shares were owned
directly or indirectly by five or fewer individuals at certain
times during the last half of the year. As a personal holding
company, the Fund is subject to federal income taxes on
undistributed personal holding company income at the maximum
individual income tax rate. No provision has been made for
federal income taxes since substantially all taxable income has
been distributed to shareholders. It is the policy of the Fund
to comply with the provisions of the Internal Revenue Code
applicable to regulated investment companies and to make
sufficient distributions of taxable income to relieve it from
all federal income taxes.
C. INVESTMENT TRANSACTIONS - Investment transactions are recorded
on the trade date. Realized gains and losses are determined
using the specific identification cost method. Interest income
is recorded daily on the accrual basis. Dividend income and
distributions to shareholders are recorded on the ex-dividend
date.
D. DISTRIBUTIONS TO SHAREHOLDERS - The Fund may declare dividends
quarterly, payable in March, June, September and December, on a
date selected by the Trust's Trustees. In addition,
distributions may be made annually in December out of net
realized gains through October 31 of that year. The Fund may
make a supplemental distribution subsequent to the end of its
fiscal year ending March 31.
E. USE OF ESTIMATES - Management makes a number of estimates in the
preparation of the Fund's financial statements. Actual results
could differ significantly from those estimates.
(CONTINUED)
<PAGE>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE 2 - INVESTMENT ADVISORY FEE AND OTHER RELATED PARTY TRANSACTIONS
Pursuant to an investment advisory agreement, Brown Capital
Management, Inc. (the "ADVISOR") provides the Fund with a continuous
program of supervision of the Fund's assets, including the
composition of its portfolio, and furnishes advice and
recommendations with respect to investments, investment policies and
the purchase and sale of securities. As compensation for its
services, the Advisor receives a fee at the annual rate of 0.65% of
the Fund's first $25 million of average daily net assets and 0.50% of
average daily net assets over $25 million.
Currently, the Fund does not offer its shares for sale in states
which require limitations to be placed on its expenses. The Advisor
intends to voluntarily waive all or a portion of its fee and
reimburse expenses of the Fund to limit total Fund operating expenses
to 1.20% of the average daily net assets of the Fund in future years.
This reflects a reduction during the current year of the Advisor's
voluntary expense limitation from 2.00% to 1.20% of the average daily
net assets of the Fund. There can be no assurance that the foregoing
voluntary fee waivers or reimbursements will continue. The Advisor
has voluntarily waived its fee amounting to $18,266 ($0.09 per share)
and has voluntarily agreed to reimburse $35,214 of the Fund's
operating expenses for the year ended March 31, 1996.
The Fund's administrator, The Nottingham Company (the
"ADMINISTRATOR"), provides administrative services to and is
generally responsible for the overall management and day-to-day
operations of the Fund pursuant to an accounting and administrative
agreement with the Trust. As compensation for its services, the
Administrator receives a fee at the annual rate of 0.25% of the
Fund's first $10 million of average daily net assets, 0.20% of the
next $40 million of average daily net assets, 0.175% of the next $50
million of average daily net assets, and 0.15% of average daily net
assets over $100 million. The Administrator also receives a monthly
fee of $1,750 for accounting and recordkeeping services.
Additionally, the Administrator charges the Fund for servicing of
shareholder accounts and registration of the Fund's shares. The
contract with the Administrator provides that the aggregate fees for
the aforementioned administration, accounting and recordkeeping
services shall not be less than $3,000 per month. The Administrator
also charges the Fund for certain expenses involved with the daily
valuation of portfolio securities.
Certain Trustees and officers of the Trust are also officers of the
Advisor, the distributor or the Administrator.
At March 31, 1996, the Advisor and its officers held 17,645 shares or
7.32% of the Fund shares outstanding.
NOTE 3 - PURCHASES AND SALES OF INVESTMENTS
Purchases and sales of investments, other than short-term
investments, aggregated $1,245,163 and $1,123,953, respectively, for
the year ended March 31, 1996.
NOTE 4 - DISTRIBUTIONS TO SHAREHOLDERS
For federal income tax purposes, the Fund must report distributions
from net realized gains from investment transactions that represent
long-term capital gain to its shareholders. All distributions from
net realized gains for the year ended March 31, 1996 represent
long-term capital gain. Shareholders should consult a tax advisor on
how to report distributions for state and local income tax purposes.
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders
The Nottingham Investment Trust II:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Brown Capital Management Balanced Fund (the
"Fund"), a series of The Nottingham Investment Trust II, as of March 31, 1996,
and the related statement of operations for the year then ended, the statements
of changes in net assets for each of the two years in the period then ended, and
financial highlights for each of the three years 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. The financial
statements for the period from August 11, 1992 (commencement of operations) to
March 31, 1993 were audited by other auditors whose report thereon dated May 6,
1993 expressed an unqualified opinion on those statements.
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 securities owned as of March
31, 1996 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 The
Brown Capital Management Balanced Fund as of March 31, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and financial highlights for each of the
three years in the period then ended in conformity with generally accepted
accounting principles.
Richmond, Virginia
May 14, 1996
