Dear Shareholder:
Again, the ZSA Asset Allocation Fund had a successful year. The return was
excellent considering the risk taken. As you know, this is a conservative fund.
Certainly, being 100% in the U.S. stock market would have been better
considering the returns on the Dow Jones 30 Industrials or the S&P 500. However,
the returns on these indexes are not a good description of the broader market
because so much of the return is concentrated in a few stocks. The top 25 stocks
in the S&P 500 accounted for 11.3% of the return in the year ended March 31,
1997 and the other 475 stocks accounted for only 8.5%. Also, the average general
stock fund only returned 10.82%. The 11.20% return from a diversified asset
allocation fund looks pretty good.
The following is the approximate individual asset class performance for the ZSA
Asset Allocation Fund versus some common benchmarks:
U.S. Equities ZSA AA 19.12% S&P 500 19.83%
Fixed Income ZSA AA 3.67% Lehman Corp/Gov 4.46%
REITs ZSA AA 37.00% NAREIT 33.20%
International ZSA AA 12.57% Dow World (ex-U.S.) - 1.20%
As you can see, we had some strong performance numbers in each class, though our
fixed income numbers were weaker than Lehman's Index. Unfortunately, we have had
a lower than average weighting in the U.S. stock market. Valuations overseas are
fundamentally stronger than domestic valuations. The nature of our approach is
to emphasize the assets that have lagged and de-emphasize the assets that have
soared. Our goal is to participate when times are good, but leave the last
dollar, and avoid as much of the downside as possible.
We have lost some assets in the past year due to redemptions. From our survey of
those who left the Fund, we have learned that most left in favor of more
aggressive stock funds. We do not plan to change our discipline or investment
policy to accommodate less risk averse investors. We believe that all asset
classes ultimately revert to their average performance trend.
It has been said that the average American believes he/she isn't. This tendency
to think that we are somehow exempt from the same rules that govern everyone
else seems somehow rooted in the American psyche. It is not limited to how we
view ourselves, it is hardwired into how we view just about everything. It has
manifested itself into the U.S. equity markets... we all know they will fall
some day, but many of us can't help wishing that somehow we have embarked on a
permanent growth trend. This is a dangerous departure from historic norms to
which we at ZSA do not subscribe.
For more information, please call us.
Respectfully,
Arthur E. Zaske
Chief Investment Officer
<PAGE>
ZSA ASSET ALLOCATION FUND
Performance Update - $10,000 Investment
For the period from August 10, 1992 (commencement of operations)
to March 31, 1997
ZSA Asset
Allocation S&P 500
10-Aug-92 10,000.00 10,000.00
30-Sep-92 10,007.00 10,246.00
31-Dec-92 10,286.00 10,508.00
31-Mar-93 10,793.00 10,982.00
30-Jun-93 11,449.00 11,174.00
30-Sep-93 11,955.00 11,503.00
31-Dec-93 12,009.00 11,620.00
31-Mar-94 11,139.00 11,217.00
30-Jun-94 10,551.00 11,172.00
30-Sep-94 10,804.00 11,473.00
31-Dec-94 10,475.00 11,493.00
31-Mar-95 11,070.00 12,339.00
30-Jun-95 11,816.00 13,327.00
30-Sep-95 12,300.00 13,983.00
31-Dec-95 12,821.00 14,731.00
31-Mar-96 13,040.00 14,947.00
30-Jun-96 13,324.00 15,317.00
30-Sep-96 13,706.00 15,345.00
31-Dec-96 14,593.00 16,592.00
31-Mar-97 14,500.00 16,750.00
This graph depicts the performance of the ZSA Asset Allocation Fund versus a
combined index of 50% S&P 500 and 50% Lehman Government/Corporate Long Term
Index. It is important to note the ZSA Asset Allocation 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.
Average Annual Total Return
- ------------------------------------------------------
Since Inception One Year Three Years
- ------------------------------------------------------
8.33% 11.20% 9.19%
- ------------------------------------------------------
The graph assumes an initial $10,000 investment at August 10, 1992. All
dividends and distributions are reinvested.
At March 31, 1997, the Fund would have grown to $14,500 - total investment
return of 45.00% since August 10, 1992.
At March 31, 1997, a similar investment in a combined index of 50% S&P 500 and
50% Lehman Government/Corporate Long Term would have grown to $16,750 - total
investment return of 67.50% since August 10, 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 shares, 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>
ZSA ASSET ALLOCATION FUND
PORTFOLIO OF INVESTMENTS
March 31, 1997
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------
COMMON STOCKS - 52.53%
Auto & Trucks - 0.61%
Ford Motor Company 1,600 $50,200
----- -------
Beverages - 1.03%
The Coca-Cola Company 1,500 83,812
----- ------
Chemicals - 0.80%
Monsanto Company 1,700 65,025
----- ------
Computers - 1.22%
(a)Adaptec, Inc. 2,800 100,100
----- -------
Computer Software & Services - 1.91%
Adobe Systems, Inc. 1,600 64,200
(a)Microsoft Corporation 1,000 91,687
----- ------
155,887
Cosmetics & Personal Care - 0.89%
Gillette Company 1,000 72,750
----- ------
Electrical Equipment - 0.65%
Linear Technology Corporation 1,200 53,100
----- ------
Electronics - 0.85%
General Electric Company 700 69,475
--- ------
Engineering & Construction - 0.77%
Fluor Corporation 1,200 63,000
----- ------
Entertainment - 0.63%
The Walt Disney Company 700 51,100
--- ------
Financial - Banks, Commercial - 0.60%
First Chicago NBD Corporation 900 48,712
--- ------
Financial - Banks, Money Center - 0.82%
Chase Manhattan Corporation 718 67,223
--- ------
Financial Services - 0.74%
Green Tree Financial Corporation 1,800 60,750
----- ------
Food - Processing - 0.42%
Philip Morris Companies Inc. 300 34,237
--- ------
(Continued)
<PAGE>
ZSA ASSET ALLOCATION FUND
PORTFOLIO OF INVESTMENTS
March 31, 1997
- -----------------------------------------------------------------------------------------
Value
Shares (note 1)
- -----------------------------------------------------------------------------------------
COMMON STOCKS - (Continued)
Foreign Securities - 16.92%
ABB AB - ADR 400 $43,300
Banco Bilbao Vizcaya, S. A. - ADR 700 41,913
Bass PLC - ADR 1,850 48,563
Broken Hill Proprietary Company Limited - ADR 1,400 37,100
Canon, Inc. - ADR 400 42,600
Commerzbank AG - ADR 1,500 42,750
(a)Elan Corporation plc - ADR 1,300 44,362
Elsevier NV - ADR 1,550 48,825
Empresa Nacional De Electricidad, S. A. (Endesa) - AD 700 45,413
Fletcher Challenge Building - ADR 362 10,362
Fletcher Challenge Energy - ADR 362 9,593
Fletcher Challenge Forests - ADR 191 2,388
Fletcher Challenge Paper - ADR 725 14,409
Hitachi Ltd. - ADR 350 30,756
Honda Motor Company, Ltd. - ADR 700 40,950
HSBC Holdings plc - ADR 200 46,000
Ito-Yokado Co., Ltd. - ADR 200 35,650
Koninklijke Ahold NV - ADR 750 51,468
Luxottica Group S. p. A. - ADR 500 26,563
LVMH (Moet Hennessy Louis Vuitton) - ADR 1,000 47,750
Matsushita Electric Industrial Company, Ltd. - ADR 500 78,125
Norsk Hydro ASA - ADR 850 41,544
(a)Novartis - ADR 746 46,159
Rank Group Plc - ADR 2,700 38,475
Rhone-Poulenc - ADR 1,450 48,213
Roche Holding AG - ADR 550 46,888
Royal Dutch Petroleum Company 700 122,500
Siemens AG - ADR 700 37,275
Telefonaktiebolaget LM Ericsson - ADR 1,850 62,552
Telefonica de Espana - ADR 500 35,875
Tokio Marine & Fire Insurance Company - ADR 600 30,450
Toyota Motor Corporation - ADR 900 45,450
WMC Limited - ADR 1,550 38,750
----- ------
1,382,971
---------
Household Products & Housewares - 0.99%
The Procter & Gamble Company 700 80,500
--- ------
Insurance - Multiline - 0.86%
American International Group, Inc. 600 70,425
--- ------
Machine - Construction & Mining - 0.79%
Caterpillar Inc. 800 64,200
--- ------
(Continued)
<PAGE>
ZSA ASSET ALLOCATION FUND
PORTFOLIO OF INVESTMENTS
March 31, 1997
- -----------------------------------------------------------------------------------------
Value
Shares (note 1)
- -----------------------------------------------------------------------------------------
COMMON STOCKS - (Continued)
Manufactured Housing - 0.60%
Clayton Homes, Inc. 3,827 $48,794
----- -------
Medical - Biotechnology - 0.76%
Medtronic, Inc. 1,000 62,250
----- ------
Medical - Hospital Management & Service - 0.49%
Columbia/HCA Healthcare Corporation 1,200 40,350
----- ------
Metals - Diversified - 0.81%
Phelps Dodge Corporation 900 65,813
--- ------
Oil & Gas - Domestic - 1.02%
Enron Corporation 2,200 83,600
----- ------
Oil & Gas - International - 1.36%
Chevron Corporation 1,600 111,400
----- -------
Pharmaceuticals - 1.20%
Abbott Laboratories 850 47,706
Mylan Laboratories 3,400 50,150
----- ------
97,856
Real Estate Investment Trust - 8.72%
Avalon Properties, Inc. 425 11,688
BRE Properties, Inc. 900 22,275
Beacon Properties Corporation 1,050 34,780
Burnham Pacific Properties, Inc. 2,400 30,600
Camden Property Trust 400 10,900
CarrAmerica Realty Corporation 1,250 38,438
Chateau Properties, Inc. 1,922 50,693
Cousins Properties, Inc. 1,300 35,425
Developers Diversified Realty Corporation 650 24,456
Duke Realty Investments, Inc. 1,200 48,750
Eastgroup Properties 1,300 35,913
Equity Residential Properties Trust 300 13,313
Federal Realty Investment Trust 400 10,300
General Growth Properties 350 11,112
Highwoods Properties, Inc. 1,000 33,500
IRT Property Company 1,000 11,000
Kimco Realty Corporation 1,050 34,125
Liberty Property Trust 1,400 34,300
Merry Land & Investment Company, Inc. 500 10,250
(Continued)
<PAGE>
ZSA ASSET ALLOCATION FUND
PORTFOLIO OF INVESTMENTS
March 31, 1997
- -----------------------------------------------------------------------------------------
Value
Shares (note 1)
- ----------------------------------------------------------------------------------------
COMMON STOCKS - (Continued)
Real Estate Investment Trust - (Continued)
New Plan Realty Trust 500 $11,313
Oasis Residential, Inc. 500 11,250
Post Properties, Inc. 275 10,484
Security Capital Pacific Trust 500 12,188
Simon DeBartolo Group, Inc. 800 24,200
Spieker Properties, Inc. 1,000 39,000
Taubman Centers, Inc. 1,650 21,450
United Dominion Realty Trust, Inc. 1,500 22,125
Washington Real Estate Investment Trust 650 11,619
Weingarten Realty Investors 275 11,652
Wellsford Residential Property Trust 850 24,650
Western Investment Real Estate Trust 900 11,250
--- ------
712,999
Retail - Grocery - 0.62%
Albertson's, Inc. 1,500 51,000
----- ------
Retail - Specialty Line - 0.83%
(a)Borders Group, Inc. 3,600 67,950
----- ------
Telecommunications - 0.26%
Lucent Technologies, Inc. 410 21,628
--- ------
Toys - 0.88%
Mattel, Inc. 3,000 72,000
----- ------
Transportation - Miscellaneous - 0.85%
CSX Corporation 1,500 69,750
----- ------
Utilities - Electric - 1.29%
Edison International 4,700 105,163
----- -------
Utilities - Telecommunications - 1.34%
AT&T Corporation 1,000 34,750
GTE Corporation 1,600 74,600
----- ------
109,350
Total Common Stocks (Cost $3,225,391) 4,293,370
---------
(Continued)
<PAGE>
ZSA ASSET ALLOCATION FUND
PORTFOLIO OF INVESTMENTS
March 31, 1997
- -----------------------------------------------------------------------------------------
Interest Maturity Value
Principal Rate Date (note 1)
- -----------------------------------------------------------------------------------------
U. S. GOVERNMENT OBLIGATIONS - 25.69%
United States Treasury Note $1,250,000 5.75% 08/15/03 $1,181,055
United States Treasury Note 900,000 7.25% 05/15/04 918,282
---------
Total U. S. Government Obligations (Cost $2,123,094) 2,099,337
Total Value of Investments (Cost $5,348,485 (b)) 78.22% $6,392,707
Other Assets Less Liabilities 21.78% 1,779,774
----- ---------
Net Assets 100.00% $8,172,481
====== ==========
(a) Non-income producing investment.
(b) Aggregate cost for financial reporting and federal income tax purposes is the same.
Unrealized appreciation (depreciation) of investments for financial reporting and
federal income tax purposes is as follows:
Unrealized appreciation $1,150,288
Unrealized depreciation (106,066)
--------
Net unrealized appreciation $1,044,222
==========
The following acronyms are used throughout this portfolio:
ADR - American Depositary Receipt
PLC - Public Liability Company
See accompanying notes to financial statements
</TABLE>
<PAGE>
ZSA ASSET ALLOCATION FUND
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1997
ASSETS
Investments, at value (cost $5,348,485) $6,392,707
Cash 1,719,585
Income receivable 52,459
Receivable for fund shares sold 2,500
Prepaid expenses 1,049
Deferred organization expenses, net (note 4) 7,555
Due from advisor (note 2) 954
Other asset 2,380
----------
Total assets 8,179,189
----------
LIABILITIES
Accrued expenses 6,708
----------
NET ASSETS
(applicable to 607,475 shares outstanding; unlimited
shares of no par value beneficial interest authorized) $8,172,481
==========
NET ASSET VALUE, REDEMPTION AND OFFERING PRICE PER SHARE
($8,172,481 / 607,475 shares) $13.45
==========
NET ASSETS CONSIST OF
Paid-in capital $6,989,714
Undistributed net realized gain on investments 138,545
Net unrealized appreciation on investments 1,044,222
----------
$8,172,481
==========
See accompanying notes to financial statements
<PAGE>
ZSA ASSET ALLOCATION FUND
STATEMENT OF OPERATIONS
Year ended March 31, 1997
INVESTMENT INCOME
Income
Interest $222,299
Dividends 149,477
------------
Total income 371,776
------------
Expenses
Investment advisory fees (note 2) 89,924
Fund administration fees (note 2) 22,481
Distribution and service fees (note 3) 22,481
Custody fees 6,802
Registration and filing administration fees (note 2) 2,697
Fund accounting fees (note 2) 21,000
Audit fees 9,592
Legal fees 3,771
Securities pricing fees 6,958
Shareholder recordkeeping fees 1,257
Shareholder servicing expenses 3,762
Registration and filing expenses 3,921
Printing expenses 1,228
Amortization of deferred organization expenses (note 4) 4,752
Trustee fees and meeting expenses 7,294
Other operating expenses 4,918
------------
Total expenses 212,838
------------
Less:
Expense reimbursements (note 2) (954)
Investment advisory fees waived (note 2) (36,588)
------------
Net expenses 175,296
------------
Net investment income 196,480
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from investment transactions 770,278
Increase in unrealized appreciation on investments 3,607
------------
Net realized and unrealized gain on investments 773,885
------------
Net increase in net assets resulting from operations $970,365
============
See accompanying notes to financial statements
<PAGE>
ZSA ASSET ALLOCATION FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Year ended Year ended
March 31, March 31,
1997 1996
- --------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS
Operations
Net investment income $196,480 $250,468
Net realized gain from investment transactions 770,278 986,366
Increase in unrealized appreciation on investments 3,607 460,669
-------- ---------
Net increase in net assets resulting from operations 970,365 1,697,503
------- ---------
Distributions to shareholders from
Net investment income (198,165) (251,227)
Net realized gain from investment transactions (200) 0
-------- ----------
Decrease in net assets resulting from distributions (198,365) (251,227)
-------- ----------
Capital share transactions
Decrease in net assets resulting from capital share transactions (a) (2,225,412) (2,385,161)
---------- ----------
Total decrease in net assets (1,453,412) (938,885)
NET ASSETS
Beginning of year 9,625,893 10,564,778
--------- ----------
End of year (including undistributed net investment income of $0 $8,172,481 $9,625,893
in 1997 and $1,685 in 1996) ========== ==========
(a) A summary of capital share activity follows:
------------------------------------------------------------
Year ended Year ended
March 31, 1997 March 31, 1996
------------------------------------------------------------
Shares Value Shares Value
---------- --------- ------- --------
Shares sold 138,546 $1,838,748 79,653 $936,518
Shares issued for reinvestment
of distributions 14,919 194,507 20,475 245,030
------ ------- ------ -------
153,465 2,033,255 100,128 1,181,548
Shares redeemed (323,926) (4,258,667) (303,697) (3,566,709)
-------- ---------- -------- ----------
Net decrease (170,461)$ (2,225,412) (203,569) $(2,385,161)
======== ============ ======== ===========
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ZSA ASSET ALLOCATION FUND
FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
- -----------------------------------------------------------------------------------------------------------------------------
For the
period from
August 10, 1992
(commencement
Year ended Year ended Year ended Year ended of operations)
March 31, March 31, March 31, March 31, March 31,
1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $12.37 $10.76 $10.92 $10.77 $10.00
Income (loss) from investment operations
Net investment income (loss) 0.29 0.30 0.15 (0.01) 0.04
Net realized and unrealized gain (loss) on
investments 1.08 1.61 (0.17) 0.31 0.77
---- ---- ----- ---- ----
Total from investment operations 1.37 1.91 (0.02) 0.30 0.81
---- ---- ----- ---- ----
Distributions to shareholders from
Net investment income (0.29) (0.30) (0.14) (0.01) (0.04)
Net realized gain from investment transactions 0 0 0 (0.14) 0
---- ---- ---- ----- ----
Total distributions (0.29) (0.30) (0.14) (0.15) (0.04)
----- ----- ----- ----- -----
Net asset value, end of period $13.45 $12.37 $10.76 $10.92 $10.77
====== ====== ====== ====== ======
Total return 11.20% 17.80% (0.62)% 2.67% 7.93%
===== ===== ===== ==== ====
Ratios/supplemental data
Net assets, end of period $8,172,481 $9,625,893 $10,564,778 $13,554,753 $2,033,819
========== ========== =========== =========== ==========
Ratio of expenses to average net assets
Before expense reimbursements and waived fees 2.37% 2.30% 2.03% 2.75% 4.11%
After expense reimbursements and waived fees 1.95% 1.91% 1.95% 1.92% 1.72%
Ratio of net investment income (loss) to average net assets
Before expense reimbursements and waived fees 1.77% 2.06% 1.18% (0.88)% (1.66)%(a)
After expense reimbursements and waived fees 2.18% 2.45% 1.27% (0.05)% 0.73 %(a)
Portfolio turnover rate 9.57% 67.89% 130.53% 53.66% 22.26%
Average broker commissions per share (b) $0.10
(a) Annualized.
(b) Represents total commission paid on portfolio securities divided by total
portfolio shares purchased or sold on which commissions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
See accompanying notes to financial statements
</TABLE>
<PAGE>
ZSA ASSET ALLOCATION FUND
NOTES TO FINANCIAL STATEMENTS
March 31, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
The ZSA Asset Allocation Fund (the "Fund") is a diversified series of shares of
beneficial interest of The Nottingham Investment Trust II (the "Trust"). The
Trust, an open-ended investment company, was organized on October 18, 1990 as a
Massachusetts Business Trust and is registered under the Investment Company Act
of 1940, as amended. The Fund began operations on August 10, 1992. 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 on
the day of valuation. 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 - No provision has been made for federal income taxes
since 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.
Net investment income (loss) and net realized gains (losses) may differ for
financial statement and income tax purposes primarily because of losses
incurred subsequent to October 31, which are deferred for income tax
purposes. The character of distributions made during the year from net
investment income or net realized gains may differ from their ultimate
characterization for federal income tax purposes. Also, due to the timing
of dividend distributions, the fiscal year in which amounts are distributed
may differ from the year that the income or realized gains were recorded by
the Fund.
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 is recorded on the ex-dividend date.
D. Distributions to Shareholders - The Fund generally declares 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. Distributions to shareholders are recorded on the ex-dividend date.
The Fund may make a supplemental distribution subsequent to the end of its
fiscal year ending March 31.
E. Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts of assets, liabilities,
expenses and revenues reported in the financial statements. Actual results
could differ from those estimated.
(Continued)
<PAGE>
ZSA ASSET ALLOCATION FUND
NOTES TO FINANCIAL STATEMENTS
March 31, 1997
F. Repurchase Agreement - The Fund may acquire U. S. Government Securities or
corporate debt securities subject to repurchase agreements. A repurchase
agreement transaction occurs when the Fund acquires a security and
simultaneously resells it to the vendor (normally a member bank of the
Federal Reserve or a registered Government Securities dealer) for delivery
on an agreed upon future date. The repurchase price exceeds the purchase
price by an amount which reflects an agreed upon market interest rate
earned by the Fund effective for the period of time during which the
repurchase agreement is in effect. Delivery pursuant to the resale
typically will occur within one to five days of the purchase. The Fund will
not enter into repurchase agreement which will cause more than 10% of its
net assets to be invested in repurchase agreements which extend beyond
seven days. In the event of the bankruptcy of the other party to a
repurchase agreement, the Fund could experience delays in recovering its
cash or the securities lent. To the extent that in the interim the value of
the securities purchased may have declined, the Fund could experience a
loss. In all cases, the creditworthiness of the other party to a
transaction is reviewed and found satisfactory by the Advisor. Repurchase
agreements are, in effect, loans of Fund assets. The Fund will not engage
in reverse repurchase transactions, which are considered to be borrowings
under the Investment Company Act of 1940, as amended.
NOTE 2 - INVESTMENT ADVISORY FEE AND OTHER RELATED PARTY TRANSACTIONS
Pursuant to an investment advisory agreement, Zaske, Sarafa & Associates, 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 1.00% of the Fund's average daily
net assets.
Currently, the Fund does not offer its shares for sale in states which require
limitations to be placed on its expenses. The Advisor currently intends to
voluntarily waive all or a portion of its fee and reimburse expenses of the Fund
to limit total Fund operating expenses to 1.95% 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 a portion of
its fee amounting to $36,588 ($0.05 per share) and has reimbursed expenses
amounting to $954 for the year ended March 31, 1997.
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 feesfor 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.
(Continued)
<PAGE>
ZSA ASSET ALLOCATION FUND
NOTES TO FINANCIAL STATEMENTS
March 31, 1997
NOTE 3 - DISTRIBUTION AND SERVICE FEES
The Board of Trustees, including a majority of the Trustees who are not
"interested persons" of the Trust as defined in the Investment Company Act of
1940 (the "Act"), as amended, adopted a distribution plan pursuant to Rule 12b-1
of the Act (the "Plan"). The Act regulates the manner in which a regulated
investment company may assume expenses of distributing and promoting the sales
of its shares and servicing of its shareholder accounts.
The Plan provides that the Fund may incur certain expenses, which may not exceed
0.25% per annum of the Fund's average daily net assets for each year elapsed
subsequent to adoption of the Plan, for payment to the distributor and others
for items such as advertising expenses, selling expenses, commissions, travel or
other expenses reasonably intended to result in sales of shares of the Fund or
support servicing of shareholder accounts. The Fund incurred $22,481 of such
expenses under the Plan for the year ended March 31, 1997.
NOTE 4 - DEFERRED ORGANIZATION EXPENSES
Expenses totalling $23,750 incurred in connection with its organization and the
registration of its shares have been assumed by the Fund.
The organization expenses are being amortized over a period of sixty months.
Investors purchasing shares of the Fund bear such expenses only as they are
amortized against the Fund's investment income.
NOTE 5 - PURCHASES AND SALES OF INVESTMENTS
Purchases and sales of investments, other than short-term investments,
aggregated $701,309 and $2,992,814, respectively, for the year ended March 31,
1997.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders of
The Nottingham Investment Trust II:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the ZSA Asset Allocation Fund (a portfolio of
The Nottingham Investment Trust II) as of March 31, 1997, and the related
statements of operations and changes in net assets, and financial highlights for
the year 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
audit. The statement of changes in net assets for the year ended March 31, 1996
and the financial highlights for the four years in the period ended March 31,
1996 were audited by other auditors, whose reports thereon dated May 14, 1996,
expressed an unqualified opinion.
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 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 the securities owned as of March 31, 1997 by
correspondence with the custodian and brokers; where replies were not received
from brokers, we performed other auditing procedures. 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 audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
ZSA Asset Allocation Fund as of March 31, 1997, the results of its operations,
the changes in its net assets and its financial highlights for the year then
ended in conformity with generally accepted accounting principles.
/S/ DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
April 25, 1997
