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Previous: CMA TREASURY MONEY FUND, NSAR-A, 1997-11-26 |
Next: SPSS INC, S-3, 1997-11-26 |
Capital Value Fund
MANAGER'S COMMENTS
The Chinese have an old blessing, "May you live in interesting times." In other
words, may you never be bored. We have been very blessed this year, as boredom
has been the last thing on our minds during 1997's up and down market. The
broader market averages suffered double-digit declines in both April and
October, but in the end, 1997 will be remembered as a good year for the Capital
Value Fund.
The stock market's decline in October was brought on by unrest in the Far East
economies. The uncertainty around the world triggered a "flight to quality"
rally which led to large price gains in the 30 Year United States Treasury Bond.
This rally has helped put a "floor" under the market's decline. The 30 year
Treasury is currently yielding a modest 6.02%. This is not much of an
alternative to the stock market's two year return of over twenty percent. The
Treasury Bond's six percent yield is also important psychologically. Six percent
is the lowest yield we have seen in nearly two years, and a continuation of the
rally could lead to substantially lower interest rates and a healthy stock
market.
The Capital Value Fund should thrive in the current economic environment. Any
further market strength would benefit our unique mix of large and small cap
stocks, and a continued decline in interest rates would bolster fixed income
assets. Our philosophy remains the same; buy cash rich, high quality assets that
are out of favor with the overall market. We are using any price dip in the
stock and bond markets to build a portfolio of the strongest companies in the
world.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
CAPITAL VALUE FUND
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Value
Shares (note 1)
--------------- ----------------
COMMON STOCKS - 71.22%
Aerospace & Defense - 0.68%
Rockwell International Corporation 1,000 $62,937
----------------
Auto Parts - Replacement Equipment - 0.32%
(a) AutoZone, Inc. 1,000 30,000
----------------
Auto & Trucks - 0.52%
Chrysler Corporation 1,300 47,856
----------------
Beverages - 0.88%
PepsiCo, Inc. 2,000 81,125
----------------
Brewery - 2.21%
Adolph Coors Company 3,000 113,625
Anheuser-Busch Companies, Inc. 2,000 90,250
----------------
203,875
----------------
Broadcast - Radio & Television - 0.48%
(a) U S West Media Group 2,000 44,625
----------------
Chemicals - 1.30%
WD-40 Company 4,000 120,500
----------------
Commercial Services - 1.12%
Crawford & Company 3,000 66,000
(a) InteliData Technologies Corporation 1,000 3,000
(a) Pinkerton's, Inc. 1,500 34,500
----------------
103,500
----------------
Computers - 9.50%
(a) Compaq Computer Corporation 7,500 562,031
(a) EMC Corporation 4,500 262,687
(a) MetaCreations Corp. 1,749 25,797
(a) Pinnacle Micro, Inc. 1,500 1,266
(a) Silicon Graphics, Inc. 1,000 26,250
----------------
878,031
----------------
Computer Software & Services - 10.37%
Adobe Systems, Incorporated 1,000 50,375
(a) Ascend Communications, Inc. 1,500 48,562
Automatic Data Processing, Inc. 1,000 50,000
(a) Avid Technology, Inc. 500 16,250
(a) Banyan Systems, Incorporated 2,000 4,875
(a) Brooktrout Technology, Inc. 3,000 47,625
(a) Cadence Design Systems, Inc. 1,000 53,500
(Continued)
<PAGE>
CAPITAL VALUE FUND
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Value
Shares (note 1)
--------------- ----------------
COMMON STOCKS - (Continued)
Computer Software & Services - (Continued)
(a) Cisco Systems, Inc. 4,000 $292,250
(a) Concentra Corporation 1,000 6,000
(a) Cornerstone Imaging, Inc. 500 3,375
(a) FTP Software, Inc. 2,000 7,750
(a) INTERSOLV, Inc. 3,000 46,500
(a) Interleaf, Inc. 2,000 5,875
(a) Intuit, Inc. 1,700 54,400
(a) Metatec Corporation 1,000 5,250
(a) NCR Corporation 1,000 34,875
(a) NETCOM On-Line Communication Services, Inc. 500 6,062
(a) Novell, Inc. 3,000 26,906
(a) Parametric Technology Company 2,000 88,250
(a) ParcPlace Digitalk, Inc. 1,000 1,094
(a) Santa Cruz Operation, Inc. 2,000 11,125
(a) Shiva Corporation 3,000 39,938
(a) Spyglass, Inc. 1,000 9,750
(a) Viewlogic Systems, Inc. 2,000 47,625
----------------
958,212
----------------
Electrical Equipment - 2.95%
(a) Brooks Automation, Inc. 1,000 38,375
Duke Energy Corp. 2,000 98,875
(a) Level One Communications, Inc. 2,250 90,562
Southern Company 2,000 45,125
----------------
272,937
----------------
Electronics - 2.67%
Hewlett-Packard Company 2,000 139,125
Motorola, Inc. 1,500 107,813
----------------
246,938
----------------
Electronics - Semiconductor - 4.30%
(a) Cree Research, Inc. 5,000 94,375
Intel Corporation 2,000 184,750
(a) LSI Logic Corporation 1,000 32,125
(a) PMC-Sierra, Inc. 1,000 25,500
(a) SpeedFam International, Inc. 1,000 60,375
----------------
397,125
----------------
Emerging Technology - 0.32%
(a) FORE Systems, Inc. 1,500 29,531
----------------
(Continued)
<PAGE>
CAPITAL VALUE FUND
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Value
Shares (note 1)
--------------- ----------------
COMMON STOCKS - (Continued)
Engineering & Construction - 1.46%
Fluor Corporation 1,500 $80,437
Stone & Webster, Inc. 1,000 54,875
----------------
135,312
----------------
Entertainment - 1.50%
(a) GTECH Holdings Corporation 1,000 34,187
The Walt Disney Company 1,300 104,812
----------------
138,999
----------------
Environmental Control - 0.11%
(a) Harding Lawson Associates Group, Inc. 1,000 9,750
----------------
Financial - Banks, Commercial - 2.36%
NationsBank Corporation 1,200 74,250
Wachovia Corporation 2,000 144,000
----------------
218,250
----------------
Food - Processing - 0.65%
(a) Grist Mill Co. 3,000 28,500
Lance, Inc. 1,500 31,125
----------------
59,625
----------------
Forest Products & Paper - 0.54%
St. Joe Paper Corporation 500 49,500
----------------
Foreign Securities - 1.29%
(a) Energy Group, PLC 250 10,406
Imperial Oil Ltd. 1,000 57,500
Moore Corporation Ltd. 1,500 28,500
Nintendo Company Ltd. 2,000 23,250
----------------
119,656
----------------
Household Products & Housewares - 0.55%
Rubbermaid, Inc. 2,000 51,125
----------------
Insurance - Life & Health - 1.07%
Jefferson-Pilot Corporation 1,250 98,750
----------------
Medical Supplies - 0.24%
(a) Datascope Corp. 1,000 22,000
----------------
(Continued)
<PAGE>
CAPITAL VALUE FUND
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Value
Shares (note 1)
--------------- ----------------
COMMON STOCKS - (Continued)
Miscellaneous - Manufacturing - 0.58%
(a) ACX Technologies, Inc. 2,000 $53,250
----------------
Oil & Gas - Domestic- 0.47%
Sun Company, Inc. 1,000 43,813
----------------
Oil & Gas - Equipment & Services - 1.82%
Schlumberger Ltd. 2,000 168,375
----------------
Oil & Gas - Exploration - 0.33%
(a) Parker Drilling Company 2,000 30,375
----------------
Pharmaceuticals - 3.36%
Bristol-Myers Squibb Company 2,000 165,500
Merck & Co., Inc. 1,000 99,875
Mylan Laboratories Inc. 2,000 44,875
----------------
310,250
----------------
Publishing - Printing - 0.65%
Readers Digest Association, Inc. 2,000 60,000
----------------
Real Estate - 0.21%
Price Enterprises, Inc. 1,000 19,188
----------------
Retail - Apparel - 1.16%
Cato Corporation 2,000 18,250
DEB Shops, Inc. 2,000 11,000
Designs, Inc. 1,000 4,750
The Limited, Inc. 3,000 73,313
----------------
107,313
----------------
Retail - Department Stores - 1.98%
Wal-Mart Stores, Inc. 5,000 183,125
----------------
Retail - General Merchandise - 0.05%
(a) PriceSmart, Inc. 250 4,563
----------------
Retail - Grocery - 1.66%
Food Lion, Inc. 10,000 83,437
Weis Markets, Inc. 2,000 70,000
----------------
153,437
----------------
(Continued)
<PAGE>
CAPITAL VALUE FUND
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Value
Shares (note 1)
--------------- ----------------
COMMON STOCKS - (Continued)
Retail - Specialty Line - 0.90%
Circuit City Stores-Circuit City Group 2,000 $80,625
Sun Television and Appliances, Inc. 1,000 2,938
----------------
83,563
----------------
Telecommunications - 0.73%
SBC Communications, Inc. 1,097 67,397
----------------
Telecommunications Equipment - 0.38%
(a) InterVoice, Inc. 1,000 10,125
(a) Premisys Communications, Inc. 1,000 25,438
----------------
35,563
----------------
Textiles - 1.60%
(a) Cone Mills Corporation 1,000 8,313
Liz Claiborne, Inc. 2,000 109,875
Russell Corporation 1,000 29,438
----------------
147,626
----------------
Tire & Rubber - 0.74%
The Goodyear Tire & Rubber Company 1,000 68,750
----------------
Transportation - Air - 1.30%
(a) Federal Express Corporation 1,500 120,000
----------------
Trucking & Leasing - 0.59%
Caliber System, Inc. 1,000 54,250
----------------
Utilities - Electric - 0.74%
Potomac Electric Power Company 3,000 68,250
----------------
Utilities - Telecommunications - 3.82%
A T & T Corporation 2,700 119,475
BellSouth Corporation 2,000 92,500
GTE Corporation 2,000 90,750
Sprint Corporation 1,000 50,000
----------------
352,725
----------------
Wholesale - Special Line - 0.76%
(a) Pomeroy Computer Resources, Inc. 1,650 70,538
----------------
Total Common Stocks (Cost $3,627,903) 6,582,510
----------------
(Continued)
<PAGE>
CAPITAL VALUE FUND
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Interest Maturity Value
Principal Rate Date (note 1)
---------------- ------------- ------------- ------------
CORPORATE OBLIGATIONS - 22.53%
A T & T Corporation $50,000 7.500% 06/01/06 $52,875
A T & T Corporation 50,000 8.125% 01/15/22 52,500
A T & T Corporation 50,000 8.125% 07/15/24 52,875
A T & T Corporation 100,000 8.625% 12/01/31 108,000
American Express Company 50,000 8.625% 05/15/22 53,202
Anheuser-Busch Companies, Inc. 25,000 8.625% 12/01/16 25,594
Anheuser-Busch Companies, Inc. 25,000 9.000% 12/01/09 29,786
Archer Daniels Midland Corporation 100,000 6.250% 05/15/03 99,550
Archer Daniels Midland Corporation 25,000 8.875% 04/15/11 29,704
BellSouth Telecommunications 50,000 6.250% 05/15/03 50,000
BellSouth Telecommunications 125,000 6.750% 10/15/33 118,593
BellSouth Telecommunications 50,000 7.000% 02/01/05 51,688
BellSouth Telecommunications 25,000 7.875% 08/01/32 26,094
Du Pont (E.I.) De Nemours & Company 60,000 6.000% 12/01/01 59,250
Du Pont (E.I.) De Nemours & Company 50,000 7.950% 01/15/23 52,503
Du Pont (E.I.) De Nemours & Company 50,000 8.125% 03/15/04 54,373
Duke Power Company 20,000 6.375% 03/01/08 19,600
Duke Power Company 100,000 6.750% 08/01/25 94,125
General Electric Capital Corporation 100,000 8.750% 05/21/07 115,597
International Business Machines 50,000 8.375% 11/01/19 57,250
Morgan Stanley Group, Inc. 75,000 7.500% 02/01/24 74,912
Pacific Bell 100,000 6.250% 03/01/05 98,125
Sears, Roebuck and Company 50,000 9.250% 04/15/98 50,827
The Boeing Company 150,000 8.750% 09/15/31 186,994
The Coca-Cola Company 70,000 8.500% 02/01/22 80,376
United Parcel Service of America 50,000 8.375% 04/01/20 58,586
U S West, Inc. 50,000 6.875% 09/15/33 46,423
Wachovia Corporation 75,000 6.375% 04/15/03 73,922
Wal-Mart Stores, Inc. 75,000 6.500% 06/01/03 25,133
Wal-Mart Stores, Inc. 25,000 8.500% 09/15/24 27,433
Wal-Mart Stores, Inc. 150,000 8.875% 06/29/11 156,682
----------------
Total Corporate Obligations (Cost $1,922,374) 2,082,572
----------------
(Continued)
<PAGE>
CAPITAL VALUE FUND
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Value
Shares (note 1)
--------------- ----------------
INVESTMENT COMPANIES - 5.59%
Evergreen Money Market Treasury Institutional Money
Market Fund Institutional Service Shares 468,252 $468,252
Evergreen Money Market Treasury Institutional Treasury Money
Market Fund Institutional Service Shares 48,101 48,101
----------------
Total Investment Companies (Cost $516,353) 516,353
----------------
Total Value of Investments (Cost $6,066,630 (b)) 99.34% $9,181,435
Other Assets Less Liabilities 0.66% 61,132
----------------- ----------------
Net Assets 100.00% $9,242,567
================= ================
(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 $3,299,989
Unrealized depreciation (185,184)
----------------
Net unrealized appreciation $3,114,805
================
(c) Foreign securities represent securities issued in the United States markets by non-domestic companies.
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
CAPITAL VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1997
(Unaudited)
ASSETS
Investments, at value (cost $6,066,630) $9,181,435
Income receivable 49,619
Receivable for investments sold 106,621
Other assets 3,524
--------------
Total assets 9,341,199
--------------
LIABILITIES
Accrued expenses 19,299
Disbursements in excess of cash on demand deposit 79,333
--------------
Total liabilities 98,632
--------------
NET ASSETS
(applicable to 587,502 Investor Class Shares outstanding; unlimited
shares of no par value beneficial interest authorized) $9,242,567
==============
NET ASSET VALUE, REDEMPTION AND OFFERING PRICE PER
INVESTOR CLASS SHARE
($9,242,567 / 587,502 shares) $15.73
==============
MAXIMUM OFFERING PRICE PER INVESTOR CLASS SHARE
(100 / 96.5% of $15.73 ) $16.30
==============
NET ASSETS CONSIST OF
Paid-in capital $5,777,733
Undistributed net investment income 2,022
Undistributed net realized gain on investments 348,007
Net unrealized appreciation on investments 3,114,805
--------------
$9,242,567
==============
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
CAPITAL VALUE FUND
STATEMENT OF OPERATIONS
Period ended September 30, 1997
(Unaudited)
INVESTMENT INCOME
Income
Interest $91,007
Dividends 44,285
---------------
Total income 135,292
---------------
Expenses
Investment advisory fees (note 2) 25,843
Fund administration fees (note 2) 10,768
Distribution and service fees - Investor Class Shares (note 3) 21,542
Custody fees 4,935
Registration and filing administration fees (note 2) 1,379
Fund accounting fees (note 2) 10,500
Audit fees 5,765
Legal fees 3,082
Securities pricing fees 5,942
Shareholder recordkeeping fees 1,020
Shareholder servicing expenses 2,931
Registration and filing expenses 524
Printing expenses 1,072
Trustee fees and meeting expenses 2,341
Other operating expenses 2,430
---------------
Total expenses 100,074
---------------
Net investment income 35,218
---------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from investment transactions 348,007
Increase in unrealized appreciation on investments 1,624,452
---------------
Net realized and unrealized gain on investments 1,972,459
---------------
Net increase in net assets resulting from operations $2,007,677
===============
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
CAPITAL VALUE FUND
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
Period ended Year ended
September 30, March 31,
1997 1997
---- ----
INCREASE IN NET ASSETS
Operations
Net investment income $ 35,218 $ 87,910
Net realized gain from investment transactions 348,007 98,880
Increase in unrealized appreciation on investments 1,624,452 356,911
--------- -------
Net increase in net assets resulting from operations 2,007,677 543,701
========= =======
Distributions to shareholders from
Net investment income (33,196) (87,910)
Tax return of capital 0 (8,006)
Net realized gain from investment transactions 0 (69,095)
------- -------
Decrease in net assets resulting from distributions (33,196) (165,011)
======= ========
Capital share transactions
Decrease in net assets resulting from capital share transactions (a) (470,169) (192,238)
-------- --------
Total increase in net assets 1,504,312 186,452
NET ASSETS
Beginning of period 7,738,255 7,551,803
--------- ---------
End of period (including undistributed net investment income $ 9,242,567 $ 7,738,255
============ ============
of $2,022 at September 30, 1997)
(a) A summary of capital share activity follows:
Period ended Year ended
September 30, 1997 March 31, 1997
Shares Value Shares Value
------ ----- ------ -----
Shares sold 19,868 $ 277,864 44,461 $ 551,414
Shares issued for reinvestment
of distributions 2,253 32,938 13,109 163,984
----- ------ ------ -------
22,121 310,802 57,570 715,398
Shares redeemed (53,582) (780,971) (72,371) (907,636)
------- -------- ------- --------
Net decrease (31,461) $ (470,169) (14,801) $ (192,238)
======= ========== ======= ==========
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
CAPITAL VALUE FUND
FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
Period ended Year ended Year ended Year ended Year ended
September 30, March 31, March 31, March 31, March 31,
1997 1997 1996 1995 1994
---- ---- ---- ---- ----
Net asset value, beginning of period $12.50 $11.92 $10.75 $10.42 $10.59
Income from investment operations
Net investment income 0.06 0.15 0.19 0.17 0.15
Net realized and unrealized gain on inve 3.23 0.70 1.53 0.73 0.41
---- ---- ---- ---- ----
Total from investment operations 3.29 0.85 1.72 0.90 0.56
---- ---- ---- ---- ----
Distributions to shareholders from
Net investment income (0.06) (0.15) (0.20) (0.21) (0.11)
Tax return of capital 0.00 (0.01) 0.00 0.00 0.00
Net realized gain from investment transa 0.00 (0.11) (0.35) (0.36) (0.62)
---- ----- ----- ----- -----
Total distributions (0.06) (0.27) (0.55) (0.57) (0.73)
----- ----- ----- ----- -----
Net asset value, end of period $15.73 $12.50 $11.92 $10.75 $10.42
====== ====== ====== ====== ======
Total return (c) 26.31 % 7.08 % 16.16 % 8.66 % 5.21 %
===== ==== ===== ==== ====
Ratios/supplemental data
Net assets, end of period $9,242,567 $7,738,255 $7,551,803 $6,775,562 $6,257,240
========== ========== ========== ========== ==========
Ratio of expenses to average net assets
Before expense reimbursements and waived 2.31 % (a) 2.38 % 2.56 % 2.58 % 2.64 %
After expense reimbursements and waived 2.31 % (a) 2.38 % 2.33 % 2.47 % 2.43 %
Ratio of net investment income to average net assets
Before expense reimbursements and waived 0.82 % (a) 1.12 % 1.44 % 1.55 % 1.22 %
After expense reimbursements and waived 0.82 % (a) 1.12 % 1.66 % 1.66 % 1.43 %
Portfolio turnover rate 9.93 % 7.31 % 12.33 % 24.67 % 32.99 %
Average broker commissions per share (b) $0.0427 $0.1000
(a) Annualized.
(b) Represents total commissions paid on portfolio securities divided by total portfolio shares purchased or sold on which
commissions were charged.
(c) Total return does not reflect payment of a sales charge.
See accompanying notes to financial statements
</TABLE>
<PAGE>
CAPITAL VALUE FUND
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
The Capital Value 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 investment
objective of the Fund is to provide its shareholders with a maximum
total return consisting of any combination of capital appreciation,
both realized and unrealized, and income under the constantly varying
market conditions by investing in a flexible portfolio of equity
securities, fixed income securities, and money market instruments. The
Fund began operations on November 16, 1990.
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
Investor Class of shares of the Fund on June 15, 1995 and an additional
class of shares, the Institutional shares, was authorized. To date,
only Investor Class shares have been issued by the Fund. The
Institutional Class shares will be sold without a sales charge and will
bear no distribution and service fees. The Investor Class shares are
subject to a maximum 3.50% sales charge and 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 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 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.
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.
(Continued)
<PAGE>
CAPITAL VALUE FUND
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
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 amount of assets, liabilities, expenses and
revenues reported in the financial statements. Actual results
could differ from those estimated.
F. Repurchase Agreements - 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, Capital Investment
Counsel, 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 0.60% of the first $250 million of the
average daily net assets of the Fund and 0.50% of average daily net
assets over $250 million. The Advisor currently intends to voluntarily
waive all or a portion of its fee to limit total Fund operating
expenses to 2.50% of the average daily net assets of the Fund. There
can be no assurance that the foregoing voluntary fee waiver will
continue.
(Continued)
<PAGE>
CAPITAL VALUE FUND
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
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 investment securities.
Capital Investment Group, Inc. (the "Distributor"), an affiliate of the
Advisor, serves as the Fund's principal underwriter and distributor.
The Distributor receives any sales charges imposed on purchases of
shares and re-allocates a portion of such charges to dealers through
whom the sale was made, if any. For the period ended September 30,
1997, the Distributor retained sales charges in the amount of $219.
Certain Trustees and officers of the Trust are also officers of the
Advisor, the Distributor or the Administrator.
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 0.50% per annum of the Investor Class shares' 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 Investor shares of the Fund
or support servicing of shareholder accounts. Expenditures incurred as
service fees may not exceed 0.25% per annum of the Investor Class
shares' average daily net assets. The Fund incurred $21,542 of such
expenses under the Plan for the period ended September 30, 1997.
NOTE 4 - PURCHASES AND SALES OF INVESTMENTS
Purchases and sales of investments, other than short-term investments,
aggregated $797,736 and $1,402,239, respectively, for the period ended
September 30, 1997.
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
INVESTEK FIXED INCOME TRUST
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Interest Maturity Value
Principal Rate Date (note 1)
------------------ ------------ -------------- -------------
U. S. GOVERNMENT AND AGENCY OBLIGATIONS - 66.57%
United States Treasury Note $50,000 5.750% 08/15/03 $49,198
United States Treasury Note 200,000 6.125% 08/15/07 200,219
A.I.D. - Equador 87,805 7.050% 05/01/15 89,181
A.I.D. - Ivory Coast 290,292 8.100% 12/01/06 303,152
A.I.D. - Peru 180,595 8.350% 01/01/07 189,083
B.A.L.T. Conway Partnership Title XI 138,910 10.750% 11/15/03 145,824
Cambridge Tanker Title XI 209,630 8.450% 02/07/06 218,463
Chilbar Ship Co. Title XI 63,894 6.980% 07/15/01 64,208
Federal Home Loan Mortgage Corporation
REMIC Series 1545 Class H 200,000 6.000% 06/15/23 187,313
REMIC 1553 Class E 500,000 6.250% 04/15/07 496,875
Pool #W10001 64,000 6.420% 12/01/05 62,859
REMIC Pac-1(11) Class J 500,000 7.500% 09/15/21 514,218
Pool #240001 D 9,807 9.500% 11/01/97 9,776
Federal National Mortgage Association
Pool #73401 492,974 6.440% 03/01/06 482,829
REMIC Series 1993-117 Class K 478,939 6.500% 07/25/08 469,360
REMIC Trust G93-20 Class PG 243,000 6.500% 02/25/19 243,076
REMIC Trust 1992-169 Class J 250,000 6.500% 03/25/21 245,938
REMIC Trust 1992-G52 Class C 22,598 7.250% 08/25/20 22,768
Pool #250138 100,923 7.500% 07/01/04 102,753
REMIC Trust G95-2 Class L 250,000 8.000% 05/17/04 253,749
Federal National Mortgage Association Strip
Series 66 Class 1 213,923 7.500% 01/01/20 216,070
Global Industries Ltd. Title XI 1,231,000 8.300% 07/15/20 1,295,453
Government National Mortgage Association
Pool #16402 263,598 8.500% 04/15/12 278,080
Pool #383137 406,208 7.750% 03/15/11 416,795
Marine Vessel Buffalo Title XI 360,861 7.270% 09/01/03 376,627
Moore McCormack Leasing - Series B 185,000 8.875% 07/15/01 189,601
Small Business Administration 97-E 250,000 6.600% 09/01/07 251,294
Small Business Administration 97-H 250,000 6.800% 08/01/17 247,449
Small Business Administration 97-F 300,000 7.200% 06/01/17 304,133
Small Business Administration 92-A 302,099 7.600% 01/01/12 311,615
--------------
Total U. S. Government and Agency Obligations (Cost $8,045,622) 8,237,959
--------------
(Continued)
<PAGE>
INVESTEK FIXED INCOME TRUST
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Interest Maturity Value
Principal Rate Date (note 1)
------------------ ------------ -------------- -------------
U. S. GOVERNMENT INSURED OBLIGATIONS - 10.70%
Federal Housing Authority Project Loan
Crystal City $60,996 2.900% 01/01/06 $51,933
Downtowner Apartments 166,727 8.375% 11/01/11 172,551
GMAC 32 87,247 7.430% 12/01/21 88,318
Kinswood Apartments 604,786 6.875% 10/01/14 584,056
USGI #87 421,682 7.430% 08/01/23 427,566
--------------
Total U. S. Government Insured Obligations (Cost $1,335,074) 1,324,424
--------------
CORPORATE OBLIGATIONS - 5.02%
GG1B Funding Corporation 462,939 7.430% 01/15/11 458,878
Monon Railroad 175,000 6.000% 01/01/07 162,750
--------------
Total Corporate Obligations (Cost $627,533) 621,628
--------------
CONVENTIONAL MORTGAGE BACKED SECURITIES - 11.90%
GE Capital Mortgage Services, Inc.
REMIC Series 1993-17 Class A6 650,000 6.500% 11/25/23 646,344
Prudential Home Mortgage Securities
REMIC Series 1992-50 Class A5 85,000 7.625% 02/25/23 85,638
REMIC Series 1994-2 Class A8 500,000 6.750% 02/25/24 490,157
Residential Funding Corporation
REMIC Series 1993-S16 Class A6 250,000 7.000% 05/25/23 249,610
--------------
Total Conventional Mortgage Backed Securities (Cost $1,447,822) 1,471,749
--------------
PRIVATE MORTGAGE BACKED SECURITIES - 1.98%
Krauss/Schwartz Properties, Ltd. 140,939 7.740% 02/18/04 138,347
National Housing Partnership 108,627 9.500% 05/01/03 107,101
--------------
Total Private Mortgage Backed Securities (Cost $249,566) 245,448
--------------
PRIVATE PLACEMENT CORPORATE SECURITIES - 2.19%
Rosewood Care Center Capital Funding Corporation
First Mortgage Bonds 289,513 7.250% 11/01/13 271,244
---------------
(Cost $282,532)
(Continued)
<PAGE>
INVESTEK FIXED INCOME TRUST
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Value
Shares (note 1)
---------- ---------------
INVESTMENT COMPANY - 0.85%
Performance Funds Trust Money Market Fund "A" 105,282 $105,282
---------------
(Cost $105,282)
Total Value of Investments (Cost $12,093,431 (a)) 99.21 % $12,277,734
Other assets in excess of liabilities 0.79 % 97,509
------------ ---------------
Net Assets 100.00 % $12,375,243
============ ===============
(a) 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 $239,613
Unrealized depreciation (55,310)
----------------
Net unrealized appreciation $184,303
================
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
INVESTEK FIXED INCOME TRUST
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1997
(Unaudited)
ASSETS
Investments, at value (cost $12,093,431) $12,277,734
Income receivable 120,028
Reserve premium 2,659
Other assets 3,151
-----------------------
Total assets 12,403,572
-----------------------
LIABILITIES
Accrued expenses 4,681
Disbursements in excess of cash on demand deposit 23,648
-----------------------
Total liabilities 28,329
-----------------------
NET ASSETS
(applicable to 1,206,030 Institutional Class Shares outstanding; unlimited
shares of no par value beneficial interest authorized) $12,375,243
=======================
NET ASSET VALUE, REDEMPTION AND OFFERING PRICE
PER INSTITUTIONAL CLASS SHARE
($12,375,243 / 1,206,030 shares) $10.26
=======================
NET ASSETS CONSIST OF
Paid-in capital $12,711,956
Undistributed net investment income 3,910
Accumulated net realized loss on investments (524,926)
Net unrealized appreciation on investments 184,303
-----------------------
$12,375,243
=======================
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
INVESTEK FIXED INCOME TRUST
STATEMENT OF OPERATIONS
Period ended September 30, 1997
(Unaudited)
INVESTMENT INCOME
Income
Interest $419,889
Dividends 6,249
-----------------------
Total income 426,138
-----------------------
Expenses
Investment advisory fees (note 2) 26,511
Fund administration fees (note 2) 8,837
Custody fees 974
Registration and filing administration fees 1,335
Fund accounting fees (note 2) 10,500
Audit fees 5,582
Legal fees 2,236
Securities pricing fees 1,048
Shareholder recordkeeping fees 295
Shareholder servicing expenses 2,189
Registration and filing expenses 1,423
Printing expenses 980
Trustee fees and meeting expenses 2,360
Other operating expenses 3,800
-----------------------
Total expenses 68,070
-----------------------
Less investment advisory fees waived (note 2) (15,079)
-----------------------
Net expenses 52,991
-----------------------
Net investment income 373,147
-----------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss from investment transactions (2,322)
Decrease in unrealized depreciation on investments 310,124
-----------------------
Net realized and unrealized gain on investments 307,802
-----------------------
Net increase in net assets resulting from operations $680,949
=======================
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
INVESTEK FIXED INCOME TRUST
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
Period ended Year ended
September 30, March 31,
1997 1997
---- ----
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income $ 373,147 $ 743,943
Net realized gain (loss) from investment transactions (2,322) 40,347
Increase (decrease) in unrealized appreciation (depreciation) on investments 310,124 (171,926)
------- --------
Net increase in net assets resulting from operations 680,949 612,364
------- -------
Distributions to shareholders from
Net investment income (369,407) (748,208)
-------- --------
Capital share transactions
Increase (decrease) in net assets resulting from capital share transactions (a) 836,560 (898,136)
------- --------
Total increase (decrease) in net assets 1,148,102 (1,033,980)
NET ASSETS
Beginning of period 11,227,141 12,261,121
---------- ----------
End of period (including undistributed net investment income $ 12,375,243 $ 11,227,141
============== =============
of $3,910 at September 30, 1997 and $170 at March 31, 1997)
(a) A summary of capital share activity follows:
Period ended Year ended
September 30, 1997 March 31, 1997
Shares Value Shares Value
------ ----- ------ -----
Shares sold 95,659 $ 983,728 90,260 $ 912,132
Shares issued for reinvestment
of distributions 24,859 253,933 46,737 470,441
------ ------- ------ -------
120,518 1,237,661 136,997 1,382,573
Shares redeemed (39,156) (401,101) (225,604) (2,280,709)
------- -------- -------- ----------
Net increase (decrease) 81,362 $ 836,560 (88,607) $ (898,136)
====== ============ ======= ============
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
INVESTEK FIXED INCOME TRUST
FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
(Unaudited)
Period ended Year ended Year ended Year ended Year ended
September 30, March 31, March 31, March 31, March 31,
1997 1997 1996 1995 1994
Net asset value, beginning of period $9.98 $10.11 $9.74 $9.93 $10.48
Income from investment operations
Net investment income 0.32 0.65 0.66 0.63 0.61
Net realized and unrealized gain (loss) on investments 0.28 (0.13) 0.37 (0.19) (0.43)
Total from investment operations 0.60 0.52 1.03 0.44 0.18
Distributions to shareholders from
Net investment income (0.32) (0.65) (0.66) (0.63) (0.60)
Net realized gain from investment transactions 0.00 0.00 0.00 0.00 (0.13)
Total distributions (0.32) (0.65) (0.66) (0.63) (0.73)
Net asset value, end of period $10.26 $9.98 $10.11 $9.74 $9.93
Total return 6.07% 5.38% 10.70% 4.73% 1.43%
Ratios/supplemental data
Net assets, end of period $12,375,243 $11,227,141 $12,261,121 $14,983,474 $17,641,814
Ratio of expenses to average net assets
Before expense reimbursements and waived fees 1.16%(a) 1.20% 1.08% 1.08% 1.41%
After expense reimbursements and waived fees 0.90%(a) 0.90% 0.87% 0.77% 0.77%
Ratio of net investment income to average net assets
Before expense reimbursements and waived fees 6.08%(a) 6.07% 6.20% 6.15% 5.45%
After expense reimbursements and waived fees 6.34%(a) 6.37% 6.41% 6.45% 5.82%
Portfolio turnover rate 4.23% 32.94% 16.57% 19.64% 34.42%
(a) Annualized.
See accompanying notes to financial statements
</TABLE>
<PAGE>
INVESTEK FIXED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
The Investek Fixed Income Trust (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, as amended. The investment
objective of the Fund is to preserve capital and maximize total returns
through active management of investment grade fixed income securities.
The Fund began operations on November 15, 1991.
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 Shares of the Fund on August 1, 1996, and an additional
class of shares, the Investor Shares, was authorized. To date, only
Institutional Shares have been issued by the Fund. The Investor Shares
will be sold with a sales charge and will bear potential distribution
expenses and service fees. The Institutional Shares are sold without a
sales charge and bears no shareholder servicing or distribution fees.
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. Securities for which market
quotations are not readily available are valued in good faith
using a method approved by the Trust's Board of Trustees,
taking into consideration institutional bid and last sale
prices, and securities prices, yields, estimated maturities,
call features, ratings, institutional trading in similar
groups of securities and developments related to specific
securities. Short-term investments are valued at cost which
approximates value.
The financial statements include securities valued at
$8,123,271 (66% of net assets) whose values have been
estimated using a method approved by the Trust's Board of
Trustees. Such securities are valued by using a matrix system,
which is based upon the factors described above and
particularly the spread between yields on the securities being
valued and yields on U. S. Treasury securities with similar
remaining years to maturity. Those estimated values may differ
from the values that would have resulted from actual purchase
and sale transactions.
B. Federal Income Taxes - 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.
The Fund has capital loss carryforwards for federal income tax
purposes of $562,951, $492,567 of which expires in the year
2003 and $70,384 of which expires in the year 2004. It is the
intention of the Board of Trustees of the Trust not to
distribute any realized gains until the carryforwards have
been offset or expire.
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.
(Continued)
<PAGE>
INVESTEK FIXED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
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 an accrual basis.
D. Distributions to Shareholders - The Fund generally declares
dividends monthly, 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.
NOTE 2 - INVESTMENT ADVISORY FEE AND OTHER RELATED PARTY TRANSACTIONS
Pursuant to an investment advisory agreement, Investek 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 0.45% of the Fund's average daily net assets.
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 0.90% 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 $15,079 ($0.01 per share) for
the period ended September 30, 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 0.15% of the Fund's average daily net assets. 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.
NOTE 3 - PURCHASES AND SALES OF INVESTMENTS
Purchases and sales of investments, other than short-term investments,
aggregated $1,351,262 and $484,328, respectively, for the period ended
September 30, 1997.
<PAGE>
[letterhead] Zaske, Sarafa, & Associates, Inc.
Investment Counsel
ZSA Asset Allocation Fund
Semi-annual Review
October 21, 1997
Dear Shareholder:
For the six month period ending September 30, 1997, the ZSA Asset Allocation
Fund continued to meet its objective as a multi-asset global fund which provides
a conservative strategy directed at consistent high quality returns.
There are few choices for the investor who seeks broad diversification in one
fund. There are some timing services that the investor can buy to mix and trade
funds, but that just adds another expense layer and another level of
uncertainty. The ZSA Asset Allocation Fund seeks to alleviate the problem of
deciding how much one should have in the US stock market, and when to increase
or decrease the exposure ... and where to put the proceeds of such a decision.
In the last six months, we had roaring markets in all sectors, and we kept pace
with the individual asset class benchmarks:
US Equities ZSA AA 25.96% S&P 500 26.25%
Fixed Income ZSA AA 7.75% Lehman Govt/Corp 7.61%
REIT's ZSA AA 14.16% NAREIT 17.39%
International ZSA AA 20.14% EAFE 11.35%
As you can see we had strong performance across the board. The exception being
the REITs. The NAREIT index contains hotel REITs which have had terrific
performance. As a rule, we do not use hotel REITs because of their extreme
volatility and because they really represent more of an operating business than
real estate. This is consistent with our objective of dampening the volatility
of returns where we can.
We are positioned well for the uncertainties ahead. Even in the peak, trough and
sharp rise that occurred between August 7, and the end of the quarter, this
conservative fund outperformed the mighty S&P 500. It is in these periods of
adversity that we should shine. Diversification is itself generally a defensive
strategy. We are not trying to be loaded in one investment that might or might
not be the best performer. That risk is outside the investment policy of the
fund.
Remember, it is not the potential return that is important, it is the
sustainability of reasonable returns that we seek. Some years ago, a great
speculator approaching his eightieth birthday shared his personal credo with me,
"Let's get rich slowly," he said.
For more information and analyses, please give me a call. My private line is
(248) 901-1518. As a result of the new tax law, there are many more people who
qualify for IRAs. This fund is an ideal place to start that new IRA, or transfer
a languishing rollover. Please contact your broker or me. We would be happy to
give you our personal attention in this matter.
Respectfully,
/S/ Arthur E. Zaske
Arthur E. Zaske
Chief Investment Officer
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ZSA ASSET ALLOCATION FUND
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Value
Shares (note 1)
-------------- --------------
COMMON STOCKS - 67.81%
Beverages - 1.29%
The Coca-Cola Company 1,500 $91,500
--------------
Chemicals - 1.03%
Monsanto Company 1,700 66,194
(a) Solutia Inc. 340 6,800
--------------
72,994
--------------
Computers - 2.49%
(a) Adaptec, Inc. 3,800 177,650
--------------
Computer Software & Services - 2.42%
Adobe Systems Incorporated 800 40,300
(a) Microsoft Corporation 1,000 132,312
--------------
172,612
--------------
Cosmetics & Personal Care - 1.21%
Gillette Company 1,000 86,375
--------------
Electrical Equipment - 1.16%
Linear Technology Corporation 1,200 82,500
--------------
Electronics - 1.34%
General Electric Company 1,400 95,550
--------------
Entertainment - 0.79%
The Walt Disney Company 700 56,437
--------------
Financial - Banks, Commercial - 0.95%
First Chicago NBD Corporation 900 67,725
--------------
Financial - Banks, Money Center - 1.19%
Chase Manhattan Corporation 718 84,724
--------------
Financial Services - 1.19%
Green Tree Financial Corporation 1,800 84,600
--------------
Food - Processing - 0.53%
Philip Morris Companies Inc. 900 37,406
--------------
Foreign Securities - 19.73%
ABB AB - ADR 200 28,300
Banco Bilbao Vizcaya, S. A. - ADR 1,050 32,155
(Continued)
<PAGE>
ZSA ASSET ALLOCATION FUND
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Value
Shares (note 1)
-------------- --------------
COMMON STOCKS - (Continued)
Foreign Securities - (Continued)
British Airways plc - ADR 150 $16,388
British Telecommunications plc - ADR 150 9,994
Broken Hill Proprietary Company Limited - ADR 800 18,750
Commerzbank AG - ADR 1,500 54,750
(a) Elan Corporation plc - ADR 2,100 105,130
Elsevier NV - ADR 550 16,259
Endesa S.A. - ADR 1,400 30,100
Fletcher Challenge Building - ADR 362 11,922
Fletcher Challenge Energy - ADR 362 16,290
Fletcher Challenge Forests - ADR 248 3,100
Fletcher Challenge Paper - ADR 725 15,044
Fuji Photo Film - ADR 750 31,031
Hitachi Ltd. - ADR 100 8,819
Honda Motor Co., Ltd. - ADR 500 34,875
Hong Kong Telecommunications Ltd. - ADR 2,700 60,413
HSBC Holdings plc - ADR 200 67,400
Koninklijke Ahold NV - ADR 1,050 28,481
Kyocera Corporation - ADR 200 26,425
Luxottica Group S.p.A. - ADR 500 28,469
LVMH (Moet Hennessy Louis Vuitton) - ADR 550 23,581
Matsushita Electric Industrial Company, Ltd. - ADR 150 26,925
NKK Corporation - ADR 2,100 29,400
Norsk Hydro ASA - ADR 1,150 68,784
Novartis - ADR 396 30,837
Pioneer Electronic Corporation - ADR 2,300 49,019
Rhone-Poulenc - ADR 750 30,328
Roche Holding AG - ADR 550 49,638
Royal Dutch Petroleum Company 2,800 155,400
Sanyo Electric Company - ADR 1,300 20,475
Siemens AG - ADR 700 46,550
Telecom Italia SpA - ADR 500 33,563
Telefonaktiebolaget LM Ericsson - ADR 750 35,953
Telefonica de Espana - ADR 500 47,063
Tokio Marine & Fire Insurance Company - ADR 600 36,300
Total SA - ADR 600 34,388
Toyota Motor Corporation - ADR 500 30,500
WMC Limited - ADR 600 11,588
--------------
1,404,387
--------------
(Continued)
<PAGE>
ZSA ASSET ALLOCATION FUND
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Value
Shares (note 1)
-------------- --------------
COMMON STOCKS - (Continued)
Household Products & Housewares - 2.36%
Libbey, Inc. 2,000 $71,375
The Procter & Gamble Company 1,400 96,687
--------------
168,062
--------------
Insurance - Multiline - 1.30%
American International Group, Inc. 900 92,869
--------------
Machine - Construction & Mining - 1.21%
Caterpillar Inc. 1,600 86,300
--------------
Manufactured Housing - 1.00%
Clayton Homes, Inc. 3,827 71,038
--------------
Medical - Biotechnology - 1.32%
Medtronic, Inc. 2,000 94,250
--------------
Medical - Hospital Management & Service - 0.60%
(a) MedPartners, Inc. 2,000 42,875
--------------
Metal Fabrication & Hardware - 0.93%
Kaydon Corporation 1,100 65,863
--------------
Metals - Diversified - 0.98%
Phelps Dodge Corporation 900 69,862
--------------
Oil & Gas - Domestic - 0.81%
Enron Corporation 1,500 57,750
--------------
Oil & Gas - International - 1.87%
Chevron Corporation 1,600 133,100
--------------
Pharmaceuticals - 0.76%
Abbott Laboratories 850 54,347
--------------
Real Estate Investment Trust - 11.55%
Avalon Properties, Inc. 425 12,644
Beacon Properties Corporation 1,050 48,103
BRE Properties, Inc. 900 25,425
Burnham Pacific Properties, Inc. 2,700 39,825
Cali Realty Corporation 800 33,300
Camden Property Trust 800 24,500
(Continued)
<PAGE>
ZSA ASSET ALLOCATION FUND
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Value
Shares (note 1)
-------------- --------------
COMMON STOCKS - (Continued)
Real Estate Investment Trust - (Continued)
CarrAmerica Realty Corporation 1,750 $56,000
Chateau Properties, Inc. 1,922 56,699
Cousins Properties, Inc. 1,300 38,919
Developers Diversified Realty Corporation 650 26,000
Duke Realty Investments, Inc. 2,400 54,750
EastGroup Properties, Inc. 1,950 42,656
Equity Residential Properties Trust 231 12,604
Federal Realty Investment Trust 400 10,075
General Growth Properties 350 12,950
Highwoods Properties, Inc. 750 26,531
IRT Property Company 1,000 12,750
Kimco Realty Corporation 1,050 36,553
Liberty Property Trust 1,400 37,713
Merry Land & Investment Company, Inc. 500 11,031
New Plan Realty Trust 500 11,813
Oasis Residential, Inc. 500 12,188
Post Properties, Inc. 275 10,931
Security Capital Pacific Trust 1,000 23,500
Simon DeBartolo Group, Inc. 800 26,400
Spieker Properties, Inc. 1,000 40,563
Taubman Centers, Inc. 1,650 21,141
United Dominion Realty Trust, Inc. 1,500 22,500
Washington Real Estate Investment Trust 650 11,050
Weingarten Realty Investors 275 11,000
Western Investment Real Estate Trust 900 12,150
--------------
822,264
--------------
Retail - Specialty Line - 1.39%
(a) Borders Group, Inc. 3,600 99,000
--------------
Telecommunications - 0.47%
Lucent Technologies, Inc. 410 33,338
--------------
Toys - 1.40%
Mattel, Inc. 3,000 99,375
--------------
Transportation - Miscellaneous - 1.23%
CSX Corporation 1,500 87,750
--------------
Utilities - Electric - 1.67%
Edison International 4,700 118,675
--------------
(Continued)
<PAGE>
ZSA ASSET ALLOCATION FUND
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Value
Shares (note 1)
-------------- --------------
COMMON STOCKS - (Continued)
Utilities - Telecommunications - 1.64%
AT&T Corporation 1,000 $44,250
GTE Corporation 1,600 72,600
--------------
116,850
--------------
Warrant - 0.00%
Security Capital Group Incorporated (expiration date 09/18/98) 53 405
--------------
Total Common Stocks (Cost $3,096,809) 4,828,433
--------------
Interest Maturity
Principal Rate Date
-------------- -------------- --------------
U. S. GOVERNMENT OBLIGATIONS - 30.56%
United States Treasury Bill $350,000 0.00% 10/23/97 349,040
United States Treasury Note 750,000 7.00% 07/15/06 790,898
United States Treasury Note 975,000 7.25% 05/15/04 1,036,090
--------------
Total U. S. Government Obligations (Cost $2,082,622) 2,176,028
--------------
Shares
--------------
INVESTMENT COMPANIES - 6.52%
Evergreen Money Market Treasury Institutional Money
Market Fund Institutional Service Shares 363,248 363,248
Evergreen Money Market Treasury Institutional Treasury
Money Market Fund Institutional Service Shares 100,810 100,810
--------------
Total Investment Companies (Cost $464,058) 464,058
--------------
Total Value of Investments (Cost $5,643,489 (b)) 104.89 % $7,468,519
Liabilities In Excess of Other Assets (4.89)% (348,234)
-------------- --------------
Net Assets 100.00 % $7,120,285
============== ==============
(Continued)
<PAGE>
ZSA ASSET ALLOCATION FUND
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
(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 $1,887,962
Unrealized depreciation (62,932)
--------------
Net unrealized appreciation $1,825,030
==============
The following acronyms are used throughout this portfolio:
ADR - American Depositary Receipt
PLC - Public Liability Company
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ZSA ASSET ALLOCATION FUND
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1997
(Unaudited)
ASSETS
Investments, at value (cost $5,643,489) $7,468,519
Income receivable 50,297
Deferred organization expenses, net (note 4) 3,644
Other assets 7,717
--------------
Total assets 7,530,177
--------------
LIABILITIES
Accrued expenses 7,728
Disbursements in excess of cash on demand deposit 402,164
--------------
Total liabilities 409,892
--------------
NET ASSETS
(applicable to 471,018 shares outstanding; unlimited
shares of no par value beneficial interest authorized) $7,120,285
==============
NET ASSET VALUE, REDEMPTION AND OFFERING PRICE PER SHARE
($7,120,285 / 471,018 shares) $15.12
==============
NET ASSETS CONSIST OF
Paid-in capital $4,994,004
Undistributed net investment income 3,465
Undistributed net realized gain on investments 297,786
Net unrealized appreciation on investments 1,825,030
--------------
$7,120,285
==============
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ZSA ASSET ALLOCATION FUND
STATEMENT OF OPERATIONS
Period ended September 30, 1997
(Unaudited)
INVESTMENT INCOME
Income
Interest $96,665
Dividends 57,314
---------------
Total income 153,979
---------------
Expenses
Investment advisory fees (note 2) 39,741
Fund administration fees (note 2) 9,935
Distribution fees (note 3) 9,936
Custody fees 3,209
Registration and filing administration fees (note 2) 1,642
Fund accounting fees (note 2) 10,500
Audit fees 4,212
Legal fees 3,156
Securities pricing fees 3,955
Shareholder recordkeeping fees 599
Shareholder servicing expenses 2,670
Registration and filing expenses 2,776
Printing expenses 1,276
Amortization of deferred organization expenses (note 4) 3,911
Trustee fees and meeting expenses 2,361
Other operating expenses 1,883
---------------
Total expenses 101,762
---------------
Less investment advisory fees waived (note 2) (23,998)
---------------
Net expenses 77,764
---------------
Net investment income 76,215
---------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from investment transactions 159,241
Increase in unrealized appreciation on investments 780,808
---------------
Net realized and unrealized gain on investments 940,049
---------------
Net increase in net assets resulting from operations $1,016,264
===============
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ZSA ASSET ALLOCATION FUND
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
Period ended Year ended
September 30, March 31,
1997 1997
---- ----
DECREASE IN NET ASSETS
Operations
Net investment income $ 76,215 $ 196,480
Net realized gain from investment transactions 159,241 770,278
Increase in unrealized appreciation on investments 780,808 3,607
------- -----
Net increase in net assets resulting from operations 1,016,264 970,365
--------- -------
Distributions to shareholders from
Net investment income (72,250) (198,165)
Net realized gain from investment transactions 0 (200)
------ ----
Decrease in net assets resulting from distributions (72,250) (198,365)
------- --------
Capital share transactions
Decrease in net assets resulting from capital share transactions (a) (1,995,710) (2,225,412)
---------- ----------
Total decrease in net assets (1,052,196) (1,453,412)
NET ASSETS
Beginning of period 8,172,481 9,625,893
--------- ---------
End of period (including undistributed net investment income $ 7,120,285 $ 8,172,481
============= =============
of $3,465 at September 30, 1997)
(a) A summary of capital share activity follows:
Period ended Year ended
September 30, 1997 March 31, 1997
Shares Value Shares Value
------ ----- ------ -----
Shares sold 26,113 $ 385,964 138,546 $ 1,838,748
Shares issued for reinvestment
of distributions 4,855 72,003 14,919 194,507
----- ------ ------ -------
30,968 457,967 153,465 2,033,255
Shares redeemed (167,425) (2,453,677) (323,926) (4,258,667)
-------- ---------- -------- ----------
Net decrease (136,457) $ (1,995,710) (170,461) $ (2,225,412)
======== ============== ======== =============
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)
(Unaudited)
Period ended Year ended Year ended Year ended Year ended
September 30, March 31, March 31, March 31, March 31,
1997 1997 1996 1995 1994
Net asset value, beginning of period $13.45 $12.37 $10.76 $10.92 $10.77
Income (loss) from investment operations
Net investment income (loss) 0.15 0.29 0.30 0.15 (0.01)
Net realized and unrealized gain (loss) on investments 1.66 1.08 1.61 (0.17) 0.31
Total from investment operations 1.81 1.37 1.91 (0.02) 0.30
Distributions to shareholders from
Net investment income (0.14) (0.29) (0.30) (0.14) (0.01)
Net realized gain from investment transactions 0.00 0.00 0.00 0.00 (0.14)
Total distributions (0.14) (0.29) (0.30) (0.14) (0.15)
Net asset value, end of period $15.12 $13.45 $12.37 $10.76 $10.92
Total return 13.48% 11.20% 17.80% (0.62)% 2.67%
Ratios/supplemental data
Net assets, end of period $7,120,285 $8,172,481 $9,625,893 $10,564,778 $13,554,753
Ratio of expenses to average net assets
Before expense reimbursements and waived fees 2.55%(a) 2.37% 2.30% 2.03% 2.75%
After expense reimbursements and waived fees 1.95%(a) 1.95% 1.91% 1.95% 1.92%
Ratio of net investment income (loss) to average net assets
Before expense reimbursements and waived fees 1.32%(a) 1.77% 2.06% 1.18% (0.88)%
After expense reimbursements and waived fees 1.91%(a) 2.18% 2.45% 1.27% (0.05)%
Portfolio turnover rate 35.47% 9.57% 67.89% 130.53% 53.66%
Average broker commissions per share (b) $0.1033 $0.10 - - -
(a) Annualized.
(b) Represents total commissions paid on portfolio securities divided by total portfolio shares purchased or sold on which
commissions were charged
See accompanying notes to financial statements
</TABLE>
<PAGE>
ZSA ASSET ALLOCATION FUND
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
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
September 30, 1997
(Unaudited)
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 $23,998 ($0.04 per share) for the period ended September
30, 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
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.
(Continued)
<PAGE>
ZSA ASSET ALLOCATION FUND
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
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 $9,936 of such expenses
under the Plan for the period ended September 30, 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 $2,426,036 and $3,103,625, respectively, for the period
ended September 30, 1997.
<PAGE>
[letterhead} Brown Capital Management, Inc.
November 14, 1997
Dear Sharehholder:
The experts and pundits are beginning to run out of adjectives and superlatives
to describe the current state of the stock market. About all we can say is that
the surge of rising stock prices continues. Following a relatively volatile
first quarter and a modest S&P 500 Index total return of 2.7%, the market roared
through the second quarter with a robust total return of 17.4%. There have only
been sixteen quarters since 1926 when the gain has been more than 15% -- the
average quarterly return over this period being 2.1%.
Flash! Flash! As swiftly as London's paparazzi can snap an unflattering pose, so
can Wall Street's own paparazzi quickly dim the lights on "stars" from years
past. The third quarter saw investors' aperture narrow on such multinational
royalty as Coca-Cola and Gillette (down 10.1% and 8.7%, respectively), while
their lights shone brightly to illuminate such up and comers as EMC, up 49.7%,
and T. Rowe Price, up 30.5%.
Following the modest 1.5% decline in 1994, the S&P 500 Index has risen steadily,
achieving a total return of 37.4% in 1995, 22.0% in 1996 and 20.6% in the first
half of this year.
Our belief in the second quarter that revenue growth would be the determining
factor in reversing the recent trends of the "cap gap" did indeed develop in the
third quarter. Investors propelled the returns of small-and mid-capitalization
stocks well beyond those of the large capitalization stocks as it became
apparent that certain "highly dependable" multinational companies were not
infallible. In the third quarter, large companies measured by the S&P 500 Index
produced a total return of 7.2%, while small companies captured by the Russell
2000 Index returned 14.8%. Year-to-date, the "cap gap" has narrowed
significantly to roughly 300 basis points in favor of large capitalization
stocks (up 29.6%). Other indexes we usually note were as follows: Merrill Lynch
500 Municipal Bond Index up 4.2%, and the Lehman Government/Corporate Bond Index
up 3.51%.
This chain of extraordinary returns has been further enhanced by an unusually
low level of inflation. Rarely have the long term needs and obligations of
individual and institutional investment programs been so handsomely rewarded on
a real return basis. Does it get much better than this?
<PAGE>
Page 2
We do view the market as richly valued at a current price/earnings multiple of
19.1 times our twelve month forward earnings estimate. However, in an
environment of low inflation (2.5%-3.0%) and consequently low interest rates, we
do not believe the S&P 500 valuation is overextended. Based on 5 year bond
yields at 6% and our operating earnings estimate of $50 (next twelve months),
the S&P 500 at 947 (9/30/97) appears to be at least 7% below fair value.
Therefore, while we do see modest upside from multiple expansion, price
appreciation above that level is more likely to be driven by a sustained outlook
for strong earnings growth.
Why did it get this good to begin with? The easy answer is that the market's
progress reflects a reasonably balanced, steadily growing economy accompanied by
low inflation and improving profitability. This translates into rising earnings
and price earnings multiples. Obviously, there are a myriad of contributing
factors to the current set of strong economic fundamentals. In our view one of
the strongest forces at work is the compelling need to improve productivity,
which creates improved profitability. In the past couple of years Corporate
America has not only embraced the concept of "value creation", but, more
importantly, has put in place the criteria, programs, systems, procedures,
capital and people to make better "value creating" decisions. Products and
services that save users time, money and headaches have been in big demand and
are the basic reason why technology based companies have been strong
contributors to recent investment performance and represent a large portion of
your portfolio.
Traditionally, the S&P 500 Index, or any other "large cap" index, does not fully
account for the variety of currents and cross currents taking place in the
economy or the marketplace. Not all investment performance measures matched that
of the big companies. Some small company indices improved in the second quarter
compared to big company indices but still trail for the first half, as they did
for 1996. For the quarter the Russell 2000 Index, a performance index for small
companies, trailed the S&P 500 Index by a smidgen, 16.2% total return vs. 17.4%.
The first quarter was quite disappointing for small companies as the Russell
2000 Index return was negative 5.1% against a positive 2.7% return for the S&P
500 Index. Even within the S&P 500 Index, stocks of the bigger market
capitalization companies have outperformed the smaller capitalization components
of the Index. Big has not only been better, it's been best! Exuberant demand for
equities has lead many skittish managers to invest in what they perceive as the
most liquid and safest investments - the large cap representatives of Corporate
America. Since the S&P 500 Index is a market capitalization weighted index, the
25 largest capitalization companies of the 500 total in the Index represent a
disproportionate share of the Index's market value. These 25 large companies
currently account for about a third of the total market value of the Index. As
more and more dollars chase a limited number of individual stocks the big cap
versus small cap performance indices will continue to diverge.
<PAGE>
Page 3
Excessive wage expansion has often been the factor that put pressure on profit
margins and earnings expansion. If there was pressure on margins, then revenue
growth becomes the engine of earnings growth. Here we think the biggest
companies will lose some advantage to smaller companies, particularly those
smaller companies that through product and service innovation can gain
increasing share of existing markets or create altogether new markets. We
believe revenue growth will be the determining factor in reversing the recent
trends of the "cap gap".
Traditionally, revenue growth is an important component of our investment
selection process. Selection of individual investments based on the company's
level and durability of revenue growth, ability to create and defend market
presence, strong financial structure and seasoned management teams has gotten
lost as the demand for stocks surges to new heights. However, we don't think
this old fashion bottoms-up approach has lost any of its basic appeal or
strength. Additions to our portfolios in the second quarter were several new
companies that we believe represent excellent matches to our selection criteria
as well as attractive long term investment commitments. These include Acxiom and
BMC Software, whose products and services provide a wide range of data
processing and information integration activities, Danaher, an outstanding
manufacturer of tools and process/environmental control products and Perkin
Elmer, a major supplier of analytical systems for the biotech and pharmaceutical
industries.
The underlying fundamental drivers were favorable in the second quarter for the
fixed income markets. Inflation remained moderate, economic growth slowed, and
therefore the Federal Reserve left interest rates unchanged. We feel comfortable
with the present portfolio positioning. However, in retrospect, we would have
fared better by aggressively lengthening maturities. Spreads are still very
narrow, and except in special situations, it doesn't pay to downgrade in
quality.
Valuation is also a very important component of our GARP (Growth At A Reasonable
Price) investment philosophy. Recall that our valuation methodology is driven
principally by our expectation of a company's sustainable earnings growth rate
over the next 3-5 years, and by the prevailing level of interest rates. Our
portfolio companies continue to rank very attractive in terms of risk-adjusted
upside potential relative to the overall market.
<PAGE>
Page 4
One investment candidate that met both our fundamental and valuation selection
criteria and was added to the portfolios during the third quarter was Health
Management Associates. HMA is a rapidly growing acquirer and operator of
hospitals in non-urban areas in the southeast and southwest led by a lean,
centralized management team with a demonstrated successful track record.
Sincerely,
/S/ Eddie C. Brown
Eddie C. Brown
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT EQUITY FUND
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Value
Shares (note 1)
---------------- ----------------
COMMON STOCKS - 96.56%
Biopharmaceuticals - 1.43%
The Perkin-Elmer Corporation 1,300 $94,981
----------------
Chemicals - 1.47%
M. A. Hanna Company 3,675 97,618
----------------
Computers - 3.71%
(a) EMC Corporation 1,950 113,831
Hewlett-Packard Company 1,900 132,169
----------------
246,000
----------------
Computer Software & Services - 12.57%
(a) Acxiom Corporation 5,300 92,419
(a) BMC Software, Inc. 1,100 71,225
(a) Cisco Systems, Inc. 2,700 197,269
(a) Microsoft Corporation 600 79,387
(a) Oracle Corporation 3,787 137,989
(a) Sterling Commerce, Inc. 3,672 131,962
(a) Sterling Software, Inc. 3,450 123,769
----------------
834,020
----------------
Electrical Equipment - 5.78%
Belden, Inc. 3,300 124,369
Honeywell, Inc. 1,900 127,656
(a) Vishay Intertechnology, Inc. 4,988 131,870
----------------
383,895
----------------
Electronics - 4.09%
General Electric Company 1,300 88,725
(a) Solectron Corporation 4,100 182,450
----------------
271,175
----------------
Electronics - Semiconductor - 2.23%
Intel Corporation 1,600 147,800
----------------
Entertainment - 2.79%
Carnival Corporation 4,010 185,462
----------------
Financial - Banks, Money Center - 3.50%
Chase Manhattan Corporation 1,970 232,460
----------------
Financial Services - 8.15%
Equifax, Inc. 3,150 99,028
Green Tree Financial Corporation 5,250 246,750
T. Rowe Price Associates, Inc. 2,900 195,025
----------------
540,803
----------------
(Continued)
<PAGE>
THE BROWN CAPITAL MANAGEMENT EQUITY FUND
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Value
Shares (note 1)
---------------- ----------------
COMMON STOCKS - (Continued)
Hand & Machine Tools - 2.01%
Danaher Corporation 2,300 $133,400
----------------
Household Products & Housewares - 2.68%
Newell Company 4,450 178,000
----------------
Insurance - Life & Health - 2.22%
AFLAC, Incorporated 2,712 147,126
----------------
Medical - Biotechnology - 1.66%
(a) Amgen, Inc. 2,300 110,256
----------------
Medical - Hospital Management & Service - 4.03%
(a) Health Care and Retirement Corporation 3,550 132,016
(a) Health Management Associates, Inc. 1,900 60,087
United Healthcare Corporation 1,500 75,000
----------------
267,103
----------------
Medical Supplies - 1.82%
Johnson & Johnson 2,100 120,750
----------------
Miscellaneous - Manufacturing - 3.26%
Illinois Tool Works, Inc. 2,600 129,188
Pall Corporation 4,050 87,328
----------------
216,516
----------------
Pharmaceuticals - 7.65%
ALZA Corporation 3,900 113,100
Cardinal Health, Inc. 3,375 239,625
R.P. Scherer Corporation 2,500 154,844
----------------
507,569
----------------
Real Estate - 1.77%
The Rouse Company 3,800 117,800
----------------
Real Estate Investment Trust - 1.83%
Post Properties, Inc. 3,050 121,237
----------------
Restaurants & Food Service - 4.58%
(a) The Cheesecake Factory 4,100 113,006
Cracker Barrel Old Country Store, Inc. 5,900 191,013
----------------
304,019
----------------
Retail - Apparel - 1.54%
Nordstrom, Inc. 1,600 102,000
----------------
(Continued)
<PAGE>
THE BROWN CAPITAL MANAGEMENT EQUITY FUND
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Value
Shares (note 1)
---------------- ----------------
COMMON STOCKS - (Continued)
Retail - Department Stores - 2.69%
Dollar General Corporation 5,245 $178,658
----------------
Retail - Grocery - 1.82%
Casey's General Stores, Inc. 4,900 120,663
----------------
Retail - Specialty Line - 8.84%
(a) AutoZone, Inc. 6,700 201,000
Fastenal Company 2,500 133,125
Home Depot, Inc. 4,850 252,806
----------------
586,931
----------------
Utilities - Gas - 2.44%
MCN Energy Group, Inc. 5,050 161,600
----------------
Total Common Stocks (Cost $4,833,098) 6,407,842
----------------
INVESTMENT COMPANIES - 3.36%
Evergreen Money Market Treasury Institutional Money
Market Fund Institutional Service Shares
(Cost $222,724) 222,724 222,724
----------------
Total Value of Investments (Cost $5,055,822 (b)) 99.92% $6,630,566
Other Assets Less Liabilities 0.08% 5,030
---------------- ----------------
Net Assets 100.00% $6,635,596
================ ================
(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 $1,631,433
Unrealized depreciation (56,689)
----------------
Net unrealized appreciation $1,574,744
================
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1997
(Unaudited)
ASSETS
Investments, at value (cost $5,055,822) $6,630,566
Income receivable 4,393
Due from advisor (note 2) 2,786
Other assets 2,864
--------------
Total assets 6,640,609
--------------
LIABILITIES
Accrued expenses 1,836
Disbursements in excess of cash on demand deposit 3,177
--------------
Total liabilities 5,013
--------------
NET ASSETS
(applicable to 316,585 Institutional Class Shares outstanding; unlimited
shares of no par value beneficial interest authorized) $6,635,596
==============
NET ASSET VALUE, REDEMPTION AND OFFERING PRICE
PER INSTITUTIONAL CLASS SHARE
($6,635,596 / 316,585 shares) $20.96
==============
NET ASSETS CONSIST OF
Paid-in capital $4,798,329
Undistributed net realized gain on investments 262,523
Net unrealized appreciation on investments 1,574,744
--------------
$6,635,596
==============
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT EQUITY FUND
STATEMENT OF OPERATIONS
Period ended September 30, 1997
(Unaudited)
INVESTMENT LOSS
Income
Dividends $22,610
Interest 11,154
---------------
Total income 33,764
---------------
Expenses
Investment advisory fees (note 2) 19,180
Fund administration fees (note 2) 7,377
Custody fees 1,739
Registration and filing administration fees (note 2) 3,099
Fund accounting fees (note 2) 10,528
Audit fees 6,110
Legal fees 2,684
Securities pricing fees 1,404
Shareholder recordkeeping fees 426
Shareholder servicing expenses 2,461
Registration and filing expenses 3,142
Printing expenses 2,286
Trustee fees and meeting expenses 2,361
Other operating expenses 1,722
---------------
Total expenses 64,519
---------------
Less:
Expense reimbursements (note 2) (10,003)
Investment advisory fees waived (note 2) (19,180)
---------------
Net expenses 35,336
---------------
Net investment loss (1,572)
---------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from investment transactions 196,813
Increase in unrealized appreciation on investments 1,130,677
---------------
Net realized and unrealized gain on investments 1,327,490
---------------
Net increase in net assets resulting from operations $1,325,918
===============
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT EQUITY FUND
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
Period ended Year ended
September 30, March 31,
1997 1997
---- ----
INCREASE IN NET ASSETS
Operations
Net investment income (loss) $ (1,572) $ 9,751
Net realized gain from investment transactions 196,813 64,344
Increase in unrealized appreciation on investments 1,130,677 104,676
--------- -------
Net increase in net assets resulting from operations 1,325,918 178,771
--------- -------
Distributions to shareholders from
Net investment income 0 (9,794)
Net realized gain from investment transactions 0 (123,813)
--------- --------
Decrease in net assets resulting from distributions 0 (133,607)
--------- --------
Capital share transactions
Increase in net assets resulting from capital share transactions (a) 904,658 2,393,994
------- ---------
Total increase in net assets 2,230,576 2,439,158
NET ASSETS
Beginning of period 4,405,020 1,965,862
--------- ---------
End of period (including undistributed net investment income $ 6,635,596 $ 4,405,020
============ ===========
of $39 at March 31, 1997)
(a) A summary of capital share activity follows:
Period ended Year ended
September 30,1997 March 31, 1997
Shares Value Shares Value
------ ----- ------ -----
Shares sold 66,783 $ 1,194,691 151,410 $ 2,576,321
Shares issued for reinvestment
of distributions 0 0 8,025 133,540
------- -------- ----- -------
66,783 1,194,691 159,435 2,709,861
Shares redeemed (15,342) (290,033) (18,655) (315,867)
------- -------- ------- --------
Net increase 51,441 $ 904,658 140,780 $ 2,393,994
====== =========== ======= ===========
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT EQUITY FUND
FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
(Unaudited)
Period ended Year ended Year ended Year ended Year ended
September 30, March 31, March 31, March 31, March 31,
1997 1997 1996 1995 1994
---- ---- ---- ---- ----
Net asset value, beginning of period $16.61 $15.81 $12.36 $11.48 $11.05
Income from investment operations
Net investment income (loss) 0.00 0.05 0.00 0.00 (0.02)
Net realized and unrealized gain on investments 4.35 1.36 3.72 1.01 0.52
---- ---- ---- ---- ----
Total from investment operations 4.35 1.41 3.72 1.01 0.50
---- ---- ---- ---- ----
Distributions to shareholders from
Net investment income 0.00 (0.05) 0.00 0.00 0.00
Net realized gain from investment transactions 0.00 (0.56) (0.27) (0.13) (0.07)
---- ----- ----- ----- -----
Total distributions 0.00 (0.61) (0.27) (0.13) (0.07)
---- ----- ----- ----- -----
Net asset value, end of period $20.96 $16.61 $15.81 $12.36 $11.48
====== ====== ====== ====== ======
Total return 26.19 % 8.91 % 30.25 % 8.90 % 4.51 %
===== ==== ===== ==== ====
Ratios/supplemental data
Net assets, end of period $6,635,596 $4,405,020 $1,965,862 $1,130,020 $717,896
Ratio of expenses to average net assets
Before expense reimbursements and waived fees 2.19 % (a) 3.37 % 5.58 % 8.32 % 11.86 %
After expense reimbursements and waived fees 1.20 % (a) 1.20 % 1.56 % 2.00 % 2.00 %
Ratio of net investment income (loss) to average net assets
Before expense reimbursements and waived fees (1.04)% (a) (1.85)% (4.20)% (6.41)% (10.19)%
After expense reimbursements and waived fees (0.06)% (a) 0.32 % 0.01 % (0.11)% (0.36)%
Portfolio turnover rate 9.73 % 34.21 % 48.06 % 7.29 % 48.05 %
Average broker commissions per share (b) $0.0510 $0.05 - - -
(a) Annualized.
(b) Represents total commissions paid on portfolio securities divided by total portfolio shares purchased or sold on which
commissions were charged.
See accompanying notes to financial statements
</TABLE>
<PAGE>
THE BROWN CAPITAL MANAGEMENT EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
The Brown Capital Management Equity 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 investment objective of the Fund is to seek capital
appreciation principally through investments in equity securities,
such as common and preferred stocks and securities convertible into
common stocks. 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 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.
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 an accrual basis. Dividend income is 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. 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>
THE BROWN CAPITAL MANAGEMENT EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
F. Repurchase Agreements - 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 a 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, 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.
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. There
can be no assurance that the foregoing voluntary fee waivers or
reimbursements will continue. The Advisor has voluntarily waived its
fee amounting to $19,180 ($0.06 per share) and has voluntarily agreed
to reimburse $10,003 of the Fund's operating expenses for the period
ended September 30, 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 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.
(Continued)
<PAGE>
THE BROWN CAPITAL MANAGEMENT EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
Certain Trustees and officers of the Trust are also officers of the
Advisor, the distributor or the Administrator.
At September 30, 1997, the Advisor and its officers held 9241 shares
or 3.49% of the Fund shares outstanding.
NOTE 3 - PURCHASES AND SALES OF INVESTMENTS
Purchases and sales of investments, other than short-term investments,
aggregated $1,384,032 and $523,842, respectively, for the period ended
September 30, 1997.
<PAGE>
[letterhead} Brown Capital Management, Inc.
November 14, 1997
Dear Sharehholder:
The experts and pundits are beginning to run out of adjectives and superlatives
to describe the current state of the stock market. About all we can say is that
the surge of rising stock prices continues. Following a relatively volatile
first quarter and a modest S&P 500 Index total return of 2.7%, the market roared
through the second quarter with a robust total return of 17.4%. There have only
been sixteen quarters since 1926 when the gain has been more than 15% -- the
average quarterly return over this period being 2.1%.
Flash! Flash! As swiftly as London's paparazzi can snap an unflattering pose, so
can Wall Street's own paparazzi quickly dim the lights on "stars" from years
past. The third quarter saw investors' aperture narrow on such multinational
royalty as Coca-Cola and Gillette (down 10.1% and 8.7%, respectively), while
their lights shone brightly to illuminate such up and comers as EMC, up 49.7%,
and T. Rowe Price, up 30.5%.
Following the modest 1.5% decline in 1994, the S&P 500 Index has risen steadily,
achieving a total return of 37.4% in 1995, 22.0% in 1996 and 20.6% in the first
half of this year.
Our belief in the second quarter that revenue growth would be the determining
factor in reversing the recent trends of the "cap gap" did indeed develop in the
third quarter. Investors propelled the returns of small-and mid-capitalization
stocks well beyond those of the large capitalization stocks as it became
apparent that certain "highly dependable" multinational companies were not
infallible. In the third quarter, large companies measured by the S&P 500 Index
produced a total return of 7.2%, while small companies captured by the Russell
2000 Index returned 14.8%. Year-to-date, the "cap gap" has narrowed
significantly to roughly 300 basis points in favor of large capitalization
stocks (up 29.6%). Other indexes we usually note were as follows: Merrill Lynch
500 Municipal Bond Index up 4.2%, and the Lehman Government/Corporate Bond Index
up 3.51%.
This chain of extraordinary returns has been further enhanced by an unusually
low level of inflation. Rarely have the long term needs and obligations of
individual and institutional investment programs been so handsomely rewarded on
a real return basis. Does it get much better than this?
<PAGE>
Page 2
We do view the market as richly valued at a current price/earnings multiple of
19.1 times our twelve month forward earnings estimate. However, in an
environment of low inflation (2.5%-3.0%) and consequently low interest rates, we
do not believe the S&P 500 valuation is overextended. Based on 5 year bond
yields at 6% and our operating earnings estimate of $50 (next twelve months),
the S&P 500 at 947 (9/30/97) appears to be at least 7% below fair value.
Therefore, while we do see modest upside from multiple expansion, price
appreciation above that level is more likely to be driven by a sustained outlook
for strong earnings growth.
Why did it get this good to begin with? The easy answer is that the market's
progress reflects a reasonably balanced, steadily growing economy accompanied by
low inflation and improving profitability. This translates into rising earnings
and price earnings multiples. Obviously, there are a myriad of contributing
factors to the current set of strong economic fundamentals. In our view one of
the strongest forces at work is the compelling need to improve productivity,
which creates improved profitability. In the past couple of years Corporate
America has not only embraced the concept of "value creation", but, more
importantly, has put in place the criteria, programs, systems, procedures,
capital and people to make better "value creating" decisions. Products and
services that save users time, money and headaches have been in big demand and
are the basic reason why technology based companies have been strong
contributors to recent investment performance and represent a large portion of
your portfolio.
Traditionally, the S&P 500 Index, or any other "large cap" index, does not fully
account for the variety of currents and cross currents taking place in the
economy or the marketplace. Not all investment performance measures matched that
of the big companies. Some small company indices improved in the second quarter
compared to big company indices but still trail for the first half, as they did
for 1996. For the quarter the Russell 2000 Index, a performance index for small
companies, trailed the S&P 500 Index by a smidgen, 16.2% total return vs. 17.4%.
The first quarter was quite disappointing for small companies as the Russell
2000 Index return was negative 5.1% against a positive 2.7% return for the S&P
500 Index. Even within the S&P 500 Index, stocks of the bigger market
capitalization companies have outperformed the smaller capitalization components
of the Index. Big has not only been better, it's been best! Exuberant demand for
equities has lead many skittish managers to invest in what they perceive as the
most liquid and safest investments - the large cap representatives of Corporate
America. Since the S&P 500 Index is a market capitalization weighted index, the
25 largest capitalization companies of the 500 total in the Index represent a
disproportionate share of the Index's market value. These 25 large companies
currently account for about a third of the total market value of the Index. As
more and more dollars chase a limited number of individual stocks the big cap
versus small cap performance indices will continue to diverge.
<PAGE>
Page 3
Excessive wage expansion has often been the factor that put pressure on profit
margins and earnings expansion. If there was pressure on margins, then revenue
growth becomes the engine of earnings growth. Here we think the biggest
companies will lose some advantage to smaller companies, particularly those
smaller companies that through product and service innovation can gain
increasing share of existing markets or create altogether new markets. We
believe revenue growth will be the determining factor in reversing the recent
trends of the "cap gap".
Traditionally, revenue growth is an important component of our investment
selection process. Selection of individual investments based on the company's
level and durability of revenue growth, ability to create and defend market
presence, strong financial structure and seasoned management teams has gotten
lost as the demand for stocks surges to new heights. However, we don't think
this old fashion bottoms-up approach has lost any of its basic appeal or
strength. Additions to our portfolios in the second quarter were several new
companies that we believe represent excellent matches to our selection criteria
as well as attractive long term investment commitments. These include Acxiom and
BMC Software, whose products and services provide a wide range of data
processing and information integration activities, Danaher, an outstanding
manufacturer of tools and process/environmental control products and Perkin
Elmer, a major supplier of analytical systems for the biotech and pharmaceutical
industries.
The underlying fundamental drivers were favorable in the second quarter for the
fixed income markets. Inflation remained moderate, economic growth slowed, and
therefore the Federal Reserve left interest rates unchanged. We feel comfortable
with the present portfolio positioning. However, in retrospect, we would have
fared better by aggressively lengthening maturities. Spreads are still very
narrow, and except in special situations, it doesn't pay to downgrade in
quality.
Valuation is also a very important component of our GARP (Growth At A Reasonable
Price) investment philosophy. Recall that our valuation methodology is driven
principally by our expectation of a company's sustainable earnings growth rate
over the next 3-5 years, and by the prevailing level of interest rates. Our
portfolio companies continue to rank very attractive in terms of risk-adjusted
upside potential relative to the overall market.
<PAGE>
Page 4
One investment candidate that met both our fundamental and valuation selection
criteria and was added to the portfolios during the third quarter was Health
Management Associates. HMA is a rapidly growing acquirer and operator of
hospitals in non-urban areas in the southeast and southwest led by a lean,
centralized management team with a demonstrated successful track record.
Sincerely,
/S/ Eddie C. Brown
Eddie C. Brown
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Value
Shares (note 1)
-------------- ----------------
COMMON STOCKS - 73.56%
Biopharmaceuticals - 2.44%
(a) Amgen, Inc. 1,500 $71,906
The Perkin-Elmer Corporation 800 58,450
----------------
130,356
----------------
Chemicals - 1.14%
M. A. Hanna Company 2,300 61,094
----------------
Commercial Services - 1.35%
Equifax, Inc. 2,300 72,306
----------------
Computers - 2.90%
(a) EMC Corporation 1,100 64,212
Hewlett-Packard Company 1,300 90,431
----------------
154,643
----------------
Computer Software & Services - 10.60%
(a) Acxiom Corporation 3,200 55,800
(a) BMC Software, Inc. 700 45,325
(a) Cisco Systems, Inc. 2,100 153,431
(a) Microsoft Corporation 400 52,925
(a) Oracle Corporation 2,737 99,730
(a) Sterling Commerce, Inc. 2,211 79,458
(a) Sterling Software, Inc. 2,200 78,925
----------------
565,594
----------------
Electrical Equipment - 5.25%
Belden, Inc. 2,700 101,756
Honeywell, Inc. 1,200 80,625
(a) Vishay Intertechnology, Inc. 3,700 97,819
----------------
280,200
----------------
Electronics - 2.73%
General Electric Company 700 47,775
(a) Solectron Corporation 2,200 97,900
----------------
145,675
----------------
Electronics - Semiconductor - 1.38%
Intel Corporation 800 73,900
----------------
Entertainment - 1.95%
Carnival Corporation 2,250 104,062
----------------
Financial - Banks, Money Center - 2.94%
Chase Manhattan Corporation 1,328 156,704
----------------
(Continued)
<PAGE>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Value
Shares (note 1)
-------------- ----------------
COMMON STOCKS - (Continued)
Financial Services - 5.70%
Green Tree Financial Corporation 3,900 $183,300
T. Rowe Price Associates, Inc. 1,800 121,050
----------------
304,350
----------------
Hand & Machine Tools - 1.63%
Danaher Corporation 1,500 87,000
----------------
Household Products & Housewares - 2.10%
Newell Company 2,800 112,000
----------------
Insurance - Life & Health - 0.94%
AFLAC Incorporated 925 50,181
----------------
Medical - Hospital Management & Services - 3.26%
(a) Health Care and Retirement Corporation 2,325 86,461
(a) Health Management Associates, Inc. 1,500 47,438
United Healthcare Corporation 800 40,000
----------------
173,899
----------------
Medical Supplies - 1.40%
Johnson & Johnson 1,300 74,750
----------------
Miscellaneous - Manufacturing - 1.49%
Illinois Tool Works, Inc. 1,600 79,500
----------------
Pharmaceuticals - 6.13%
(a) Alza Corporation 2,600 75,400
Cardinal Health, Inc. 2,150 152,650
(a) R.P. Scherer Corporation 1,600 99,100
----------------
327,150
----------------
Real Estate - 1.51%
The Rouse Company 2,600 80,600
----------------
Restaurants & Food Service - 3.63%
(a) The Cheesecake Factory 2,450 67,528
Cracker Barrel Old Country Store, Inc. 3,900 126,263
----------------
193,791
----------------
Retail - Apparel - 1.08%
Nordstrom, Inc. 900 57,375
----------------
(Continued)
<PAGE>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Value
Shares (note 1)
-------------- ----------------
COMMON STOCKS - (Continued)
Retail - Department Stores - 1.50%
Dollar General Corporation 2,358 $80,319
----------------
Retail - Grocery - 1.52%
Casey's General Stores, Inc. 3,300 81,263
----------------
Retail - Specialty Line - 7.07%
(a) AutoZone, Inc. 4,300 129,000
Fastenal Company 1,600 85,200
Home Depot, Inc. 3,125 162,891
----------------
377,091
----------------
Utilities - Gas - 1.92%
MCN Energy Group, Inc. 3,200 102,400
----------------
Total Common Stocks (Cost $2,794,773) 3,926,203
----------------
Interest Maturity
Principal Rate Date
-------------- -------------- --------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS - 7.76%
United States Treasury Note $20,000 6.250% 08/15/23 19,409
United States Treasury Note 70,000 6.375% 07/15/99 70,678
United States Treasury Note 90,000 6.375% 08/15/02 91,378
United States Treasury Note 100,000 7.500% 02/15/05 107,969
United States Treasury Note 100,000 7.750% 01/31/00 104,047
Federal Home Loan Bank 100,000 0.00% 07/14/17 20,456
-------------
Total U.S. Government and Agency Obligations (Cost $403,110) 413,937
-------------
CORPORATE OBLIGATIONS - 9.89%
Alabama Power Company 15,000 7.750% 02/01/23 15,331
Boston Edison Company 40,000 7.800% 05/15/10 41,752
Chase Manhattan Corporation 30,000 6.500% 08/01/05 29,475
Chesapeake & Potomac Telephone of Virginia 50,000 7.250% 06/01/12 50,000
Citicorp 15,000 7.125% 06/01/03 15,398
Colgate Palmolive Company 50,000 7.150% 11/29/11 50,418
Ford Motor Credit Corporation 40,000 7.250% 09/01/10 40,473
ITT Corporation 50,000 7.375% 11/15/15 48,875
(Continued)
<PAGE>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Interest Maturity Value
Principal Rate Date (note 1)
-------------- -------------- -------------- --------------
CORPORATE OBLIGATIONS - (Continued)
Merrill Lynch & Company $75,000 7.150% 07/30/12 $75,597
Nationsbank Corporation 15,000 6.875% 02/15/05 15,072
Rouse Company 10,000 8.500% 01/15/03 10,153
The Walt Disney Company 50,000 7.750% 09/30/11 50,993
Time Warner, Inc. 20,000 9.150% 02/01/23 23,002
U. S. F. & G. Corporation 60,000 7.125% 06/01/05 61,285
-----------
Total Corporate Obligations (Cost $514,631) 527,824
-----------
Shares
--------------
INVESTMENT COMPANIES - 8.55%
Evergreen Money Market Treasury Institutional Money
Market Fund Institutional Service Shares 268,693 268,693
Evergreen Money Market Treasury Institutional Treasury
Money Market Fund Institutional Shares 187,373 187,373
------------
Total Investment Companies (Cost $456,066) 456,066
------------
Total Value of Investments (Cost $4,168,580 (b)) 99.76% $5,324,030
Other Assets Less Liabilities 0.24% 12,791
-------------- ------------
Net Assets 100.00% $5,336,821
============== ============
(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 $1,191,658
Unrealized depreciation (36,208)
----------------
Net unrealized appreciation $1,155,450
================
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1997
(Unaudited)
ASSETS
Investments, at value (cost $4,168,580) $5,324,030
Income receivable 14,626
Other assets 3,164
Due from advisor (note 2) 879
--------------
Total assets 5,342,699
--------------
LIABILITIES
Accrued expenses 2,311
Disbursements in excess of cash on demand deposit 3,567
--------------
Total liabilities 5,878
--------------
NET ASSETS
(applicable to 325,995 Institutional Class Shares outstanding; unlimited
shares of no par value beneficial interest authorized) $5,336,821
==============
NET ASSET VALUE, REDEMPTION AND OFFERING PRICE
PER INSTITUTIONAL CLASS SHARE
($5,336,821 / 325,995 shares) $16.37
==============
NET ASSETS CONSIST OF
Paid-in capital $3,970,253
Undistributed net realized gain on investments 211,118
Net unrealized appreciation on investments 1,155,450
--------------
$5,336,821
==============
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
STATEMENT OF OPERATIONS
Period ended September 30, 1997
(Unaudited)
INVESTMENT INCOME
Income
Interest $41,579
Dividends 12,931
---------------
Total income 54,510
---------------
Expenses
Investment advisory fees (note 2) 15,013
Fund administration fees (note 2) 5,774
Custody fees 2,232
Registration and filing administration fees (note 2) 3,036
Fund accounting fees (note 2) 10,500
Audit fees 4,262
Legal fees 3,209
Securities pricing fees 1,843
Shareholder recordkeeping fees 224
Shareholder servicing expenses 2,044
Registration and filing expenses 2,842
Printing expenses 2,231
Trustee fees and meeting expenses 2,361
Other operating expenses 1,759
---------------
Total expenses 57,330
---------------
Less:
Expense reimbursements (note 2) (14,653)
Investment advisory fees waived (note 2) (15,013)
---------------
Net expenses 27,664
---------------
Net investment income 26,846
---------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from investment transactions 219,629
Increase in unrealized appreciation on investments 590,582
---------------
Net realized and unrealized gain on investments 810,211
---------------
Net increase in net assets resulting from operations $837,057
===============
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
Period ended Year ended
September 30, March 31,
1997 1997
---- ----
INCREASE IN NET ASSETS
Operations
Net investment income $ 26,846 $ 57,822
Net realized gain from investment transactions 219,629 105,701
Increase in unrealized appreciation on investments 590,582 104,335
------- -------
Net increase in net assets resulting from operations 837,057 267,858
------- -------
Distributions to shareholders from
Net investment income (26,954) (58,004)
Net realized gain from investment transactions (8,534) (249,637)
------ --------
Decrease in net assets resulting from distributions (35,488) (307,641)
------- --------
Capital share transactions
Increase in net assets resulting from capital share transactions (a) 660,599 595,122
------- -------
Total increase in net assets 1,462,168 555,339
NET ASSETS
Beginning of period 3,874,653 3,319,314
--------- ---------
End of pe(including undistributed net investment income $ 5,336,821 $ 3,874,653
============ ============
of $108 at March 31, 1997)
(a) A summary of capital share activity follows:
Period ended Year ended
September 30, 1997 March 31, 1997
Shares Value Shares Value
------ ----- ------ -----
Shares sold 80,289 $ 1,250,338 69,993 $ 990,406
Shares issued for reinvestment
of distributions 2,243 34,916 22,002 306,322
----- ------ ------ -------
82,532 1,285,254 91,995 1,296,728
Shares redeemed (41,433) (624,655) (48,277) (701,606)
------- -------- ------- --------
Net increase 41,099 $ 660,599 43,718 $ 595,122
====== ============ ====== =============
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
(Unaudited)
Period ended Year ended Year ended Year ended Year ended
September 30, March 31, March 31, March 31, March 31,
1997 1997 1996 1995 1994
---- ---- ---- ---- ----
Net asset value, beginning of period $13.60 $13.76 $11.56 $11.02 $10.62
Income from investment operations
Net investment income 0.09 0.21 0.12 0.10 0.08
Net realized and unrealized gain on investments 2.80 0.76 2.98 0.77 0.43
---- ---- ---- ---- ----
Total from investment operations 2.89 0.97 3.10 0.87 0.51
---- ---- ---- ---- ----
Distributions to shareholders from
Net investment income (0.09) (0.21) (0.12) (0.11) (0.08)
Net realized gain from investment transactions (0.03) (0.92) (0.78) (0.22) (0.03)
----- ----- ----- ----- -----
Total distributions (0.12) (1.13) (0.90) (0.33) (0.11)
----- ----- ----- ----- -----
Net asset value, end of period $16.37 $13.60 $13.76 $11.56 $11.02
====== ====== ====== ====== ======
Total return 21.30 % 7.01 % 27.04 % 8.04 % 4.78 %
===== ==== ===== ==== ====
Ratios/supplemental data
Net assets, end of period $5,336,821 $3,874,653 $3,319,314 $2,296,206 $1,187,697
========== ========== ========== ========== ==========
Ratio of expenses to average net assets
Before expense reimbursements and waived fees 2.47 %(a) 2.85 % 3.50 % 5.43 % 6.44 %
After expense reimbursements and waived fees 1.20 %(a) 1.20 % 1.59 % 2.00 % 2.00 %
Ratio of net investment income (loss) to average net assets
Before expense reimbursements and waived fees (0.12)%(a) (0.13)% (0.97)% (2.44)% (3.69)%
After expense reimbursements and waived fees 1.16 %(a) 1.51 % 0.94 % 1.00 % 0.74 %
Portfolio turnover rate 13.58 % 45.58 % 43.59 % 9.51 % 28.56 %
Average broker commissions per share (b) $0.0514 $0.05
(a) Annualized.
(b) Represents total commission paid on portfolio securities divided by total portfolio shares purchased or sold on which
commissions were charged.
See accompanying notes to financial statements
</TABLE>
<PAGE>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
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-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 investment objective of the Fund is to provide its
shareholders with a maximum total return consisting of any combination
of capital appreciation by investing in a flexible portfolio of equity
securities, fixed income securities and money market instruments. 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 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 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 an accrual basis. Dividend income is 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. 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.
(Continued)
<PAGE>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
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.
F. Repurchase Agreements - 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 a 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, 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.
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. There
can be no assurance that the foregoing voluntary fee waivers or
reimbursements will continue. The Advisor has voluntarily waived its
fee amounting to $15,013 ($0.05 per share) and has voluntarily agreed
to reimburse $14,653 of the Fund's operating expenses for the period
ended September 30, 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
(Continued)
<PAGE>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
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 September 30, 1997, the Advisor and its officers held 18,193.785
shares or 5.581% of the Fund shares outstanding.
NOTE 3 - PURCHASES AND SALES OF INVESTMENTS
Purchases and sales of investments, other than short-term investments,
aggregated $1,222,040 and $552,577, respectively, for the period ended
September 30, 1997.
<PAGE>
[letterhead] Brown Capital Management, Inc.
November 14, 1997
Dear Sharehholder:
The experts and pundits are beginning to run out of adjectives and superlatives
to describe the current state of the stock market. About all we can say is that
the surge of rising stock prices continues. Following a relatively volatile
first quarter and a modest S&P 500 Index total return of 2.7%, the market roared
through the second quarter with a robust total return of 17.4%. There have only
been sixteen quarters since 1926 when the gain has been more than 15% -- the
average quarterly return over this period being 2.1%.
Flash! Flash! As swiftly as London's paparazzi can snap an unflattering pose, so
can Wall Street's own paparazzi quickly dim the lights on "stars" from years
past. The third quarter saw investors' aperture narrow on such multinational
royalty as Coca-Cola and Gillette (down 10.1% and 8.7%, respectively), while
their lights shone brightly to illuminate such up and comers as Perceptive
Biosystem, up 95.9%, American Software, up 94.4%, and T. Rowe Price, up 30.5%.
Following the modest 1.5% decline in 1994, the S&P 500 Index has risen steadily,
achieving a total return of 37.4% in 1995, 22.0% in 1996 and 20.6% in the first
half of this year.
Our belief in the second quarter that revenue growth would be the determining
factor in reversing the recent trends of the "cap gap" did indeed develop in the
third quarter. Investors propelled the returns of small-and mid-capitalization
stocks well beyond those of the large capitalization stocks as it became
apparent that certain "highly dependable" multinational companies were not
infallible. In the third quarter, large companies measured by the S&P 500 Index
produced a total return of 7.2%, while small companies captured by the Russell
2000 Index returned 14.8%. Year-to-date, the "cap gap" has narrowed
significantly to roughly 300 basis points in favor of large capitalization
stocks (up 29.6%). Other indexes we usually note were as follows: Merrill Lynch
500 Municipal Bond Index up 4.2%, and the Lehman Government/Corporate Bond Index
up 3.51%.
<PAGE>
Page 2
This chain of extraordinary returns has been further enhanced by an unusually
low level of inflation. Rarely have the long term needs and obligations of
individual and institutional investment programs been so handsomely rewarded on
a real return basis. Does it get much better than this?
We do view the market as richly valued at a current price/earnings multiple of
19.1 times our twelve month forward earnings estimate. However, in an
environment of low inflation (2.5%-3.0%) and consequently low interest rates, we
do not believe the S&P 500 valuation is overextended. Based on 5 year bond
yields at 6% and our operating earnings estimate of $50 (next twelve months),
the S&P 500 at 947 (9/30/97) appears to be at least 7% below fair value.
Therefore, while we do see modest upside from multiple expansion, price
appreciation above that level is more likely to be driven by a sustained outlook
for strong earnings growth.
Why did it get this good to begin with? The easy answer is that the market's
progress reflects a reasonably balanced, steadily growing economy accompanied by
low inflation and improving profitability. This translates into rising earnings
and price earnings multiples. Obviously, there are a myriad of contributing
factors to the current set of strong economic fundamentals. In our view one of
the strongest forces at work is the compelling need to improve productivity,
which creates improved profitability. In the past couple of years Corporate
America has not only embraced the concept of "value creation", but, more
importantly, has put in place the criteria, programs, systems, procedures,
capital and people to make better "value creating" decisions. Products and
services that save users time, money and headaches have been in big demand and
are the basic reason why technology based companies have been strong
contributors to recent investment performance and represent a large portion of
your portfolio.
Traditionally, the S&P 500 Index, or any other "large cap" index, does not fully
account for the variety of currents and cross currents taking place in the
economy or the marketplace. Not all investment performance measures matched that
of the big companies. Some small company indices improved in the second quarter
compared to big company indices but still trail for the first half, as they did
for 1996. For the quarter the Russell 2000 Index, a performance index for small
companies, trailed the S&P 500 Index by a smidgen, 16.2% total return vs. 17.4%.
The first quarter was quite disappointing for small companies as the Russell
2000 Index return was negative 5.1% against a positive 2.7% return for the S&P
500 Index. Even within the S&P 500 Index, stocks of the bigger market
capitalization companies have outperformed the smaller capitalization components
of the Index. Big has not only been better, it's been best! Exuberant demand for
equities has lead many skittish managers to invest in what they perceive as the
most liquid and safest investments - the large cap representatives of Corporate
America. Since the S&P 500 Index is a
<PAGE>
Page 3
market capitalization weighted index, the 25 largest capitalization companies of
the 500 total in the Index represent a disproportionate share of the Index's
market value. These 25 large companies currently account for about a third of
the total market value of the Index. As more and more dollars chase a limited
number of individual stocks the big cap versus small cap performance indices
will continue to diverge.
Excessive wage expansion has often been the factor that put pressure on profit
margins and earnings expansion. If there was pressure on margins, then revenue
growth becomes the engine of earnings growth. Here we think the biggest
companies will lose some advantage to smaller companies, particularly those
smaller companies that through product and service innovation can gain
increasing share of existing markets or create altogether new markets. We
believe revenue growth will be the determining factor in reversing the recent
trends of the "cap gap".
Traditionally, revenue growth is an important component of our investment
selection process. Selection of individual investments based on the company's
level and durability of revenue growth, ability to create and defend market
presence, strong financial structure and seasoned management teams has gotten
lost as the demand for stocks surges to new heights. However, we don't think
this old fashion bottoms-up approach has lost any of its basic appeal or
strength. Additions to our portfolios in the second quarter were several new
companies that we believe represent excellent matches to our selection criteria
as well as attractive long term investment commitments. In our Medical/Health
Care sector, these include Affymetrix and Incyte Pharmaceuticals, two companies
that identify and evaluate genetic information; and Pharmacopoeia, a company
that has developed a technology that accelerates the pace of drug discovery for
its pharmaceutical and biotechnology customers. We also added two new names to
our Information/Knowledge Management sector. They include Tripos, a computer
software/systems company, and American Software, a company that develops,
markets and supports applications for management and manufacturing solutions.
Valuation is also a very important component of our GARP (Growth At A Reasonable
Price) investment philosophy. Recall that our valuation methodology is driven
principally by our expectation of a company's sustainable earnings growth rate
over the next 3-5 years, and by the prevailing level of interest rates. Our
portfolio companies continue to rank very attractive in terms of risk-adjusted
upside potential relative to the overall market.
<PAGE>
Page 4
One investment candidate that met both our fundamental and valuation selection
criteria and was added to the portfolios during the third quarter was Datastream
Systems. Datastream Systems is a rapidly growing developer and marketer of
software that schedules preventive maintenance and records equipment maintenance
histories.
Sincerely,
/S/ Eddie C. Brown
Eddie C. Brown
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Value
Shares (note 1)
--------------- ----------------
COMMON STOCKS - 87.33%
Advertising - 2.20%
(a) Catalina Marketing Corporation 4,200 $219,187
----------------
Building Materials - 1.44%
(a) Fastenal Company 2,700 143,775
----------------
Chemicals - 0.95%
(a) Synthetech, Inc. 13,900 94,693
----------------
Commercial Services - 4.82%
(a) ABR Information Services, Inc. 10,500 290,063
Paychex, Inc. 1,575 54,928
(a) Quintiles Transnational Corporation 1,600 134,800
----------------
479,791
----------------
Computers - 2.89%
Fair, Isaac and Company, Incorporated 6,500 287,625
----------------
Computer Software & Services - 31.74%
(a) Acxiom Corporation 17,700 308,643
(a) Advent Software, Inc. 8,300 228,250
(a) American Business Information, Inc. 8,200 222,425
(a) American Software, Inc. 9,500 138,937
BGS Systems, Inc. 4,900 135,975
(a) BISYS Group, Inc. 4,500 144,563
(a) BMC Software, Inc. 4,800 310,800
(a) CFI Proservices, Inc. 9,600 154,800
(a) Cerner Corporation 10,500 251,344
(a) Datastream Systems, Inc. 1,400 52,368
(a) Hyperion Software Corporation 8,700 271,331
(a) Network General Corporation 18,300 354,563
(a) Parametric Technology Company 1,600 70,600
(a) Platinum Technology, Inc. 5,600 120,400
(a) QuickResponse Services, Inc. 2,800 95,900
(a) SPSS, Inc. 4,600 131,675
(a) Structural Dynamics Research Corporation 4,400 112,750
(a) Tripos, Inc. 3,000 57,000
----------------
3,162,324
----------------
Electronics - 2.95%
(a) Sanmina Corporation 3,400 294,313
----------------
Financial Services - 3.51%
T. Rowe Price Associates, Inc. 5,200 349,700
----------------
(Continued)
<PAGE>
THE BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Value
Shares (note 1)
--------------- ----------------
COMMON STOCKS - (Continued)
Furniture & Home Appliances - 1.19%
Juno Lighting, Inc. 6,900 $118,163
----------------
Machine - Diversified - 5.36%
(a) Cognex Corporation 10,200 335,325
(a) Flow International Corporation 18,300 199,013
----------------
534,338
----------------
Medical - Biotechnology - 2.22%
(a) Affymetrix, Inc. 1,300 59,800
(a) Human Genome Sciences, Inc. 1,100 47,369
(a) Incyte Pharmaceuticals, Inc. 600 50,400
(a) Pharmacopeia, Inc. 2,800 63,350
----------------
220,919
----------------
Medical - Hospital Management & Service - 2.28%
(a) Dendrite International, Inc. 14,200 227,200
----------------
Medical Supplies - 14.76%
Ballard Medical Products 7,400 178,525
Biomet, Inc. 8,400 201,600
(a) Diagnostic Products Corporation 8,800 265,650
Life Technologies, Inc. 7,600 229,900
(a) Lynx Therapeutics, Inc. 81 1,073
(a) Molecular Dynamics, Inc. 6,700 180,900
(a) PerSeptive Biosystems 12,448 149,376
(a) TECNOL Medical Products, Inc. 3,400 68,425
(a) Techne Corporation 5,500 195,250
----------------
1,470,699
----------------
Miscellaneous - Manufacturing - 1.53%
(a) Panavision Inc. 7,300 152,388
----------------
Pharmaceuticals - 2.45%
(a) Alza Corporation 8,400 243,600
----------------
Real Estate Investment Trust - 2.44%
(a) General Growth Properties 2,500 92,500
Post Properties, Inc. 3,800 151,050
----------------
243,550
----------------
Restaurants & Food Service - 4.53%
(a) Au Bon Pain Company, Inc. 29,300 263,700
(a) The Cheesecake Factory 6,800 187,425
----------------
451,125
----------------
(Continued)
<PAGE>
THE BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
PORTFOLIO OF INVESTMENTS
September 30, 1997
(Unaudited)
Value
Shares (note 1)
--------------- ----------------
COMMON STOCKS - (Continued)
Retail - General Merchandise - 0.07%
(a) The Cosmetic Center, Inc. 1,653 $7,233
----------------
Warrants - 0.00%
(a) Alza Corporation, expiration date December 31, 1999 150 28
(a) PerSeptive Biosystems, Inc., expiration date September 11, 2003 27 81
----------------
109
----------------
Total Common Stocks (Cost $5,699,054) 8,700,732
----------------
INVESTMENT COMPANIES - 10.12%
Evergreen Money Market Treasury Institutional Money
Market Fund Institutional Service Shares 504,110 504,110
Evergreen Money Market Treasury Institutional Treasury Money
Market Fund Institutional Service Shares 504,110 504,110
----------------
Total Investment Companies (Cost $1,008,220) 1,008,220
----------------
Total Value of Investments (Cost $6,707,274 (b)) 97.45% $9,708,952
Other Assets Less Liabilities 2.55% 253,954
--------------- ----------------
Net Assets 100.00% $9,962,906
=============== ================
(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 $3,156,252
Unrealized depreciation (154,574)
----------------
Net unrealized appreciation $3,001,678
================
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
STATEMENT OF ASSETS AND LIABILITIES
September 30, 1997
(Unaudited)
ASSETS
Investments, at value (cost $6,707,274) $9,708,952
Cash 263,069
Income receivable 9,603
Receivable for investments sold 1,845
Other assets 4,395
--------------
Total assets 9,987,864
--------------
LIABILITIES
Accrued expenses 3,215
Payable for investment purchases 17,263
Due to investment advisor (note 2) 1,187
Transaction gains payable 3,293
--------------
Total liabilities 24,958
--------------
NET ASSETS
(applicable to 518,655 Institutional Class Shares outstanding; unlimited
shares of no par value beneficial interest authorized) $9,962,906
==============
NET ASSET VALUE, REDEMPTION AND OFFERING PRICE
PER INSTITUTIONAL CLASS SHARE
($9,962,906 / 518,655 shares) $19.21
==============
NET ASSETS CONSIST OF
Paid-in capital $6,924,873
Undistributed net realized gain on investments 36,355
Net unrealized appreciation on investments 3,001,678
--------------
$9,962,906
==============
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
STATEMENT OF OPERATIONS
Period ended September 30, 1997
(Unaudited)
INVESTMENT LOSS
Income
Interest $23,945
Dividends 15,767
Miscellaneous 2,490
---------------
Total income 42,202
---------------
Expenses
Investment advisory fees (note 2) 43,311
Fund administration fees (note 2) 10,828
Custody fees 3,149
Registration and filing administration fees (note 2) 3,288
Fund accounting fees (note 2) 10,500
Audit fees 3,968
Legal fees 3,503
Securities pricing fees 2,025
Shareholder recordkeeping fees 837
Shareholder servicing expenses 2,661
Registration and filing expenses 3,092
Printing expenses 2,409
Trustee fees and meeting expenses 2,361
Other operating expenses 1,939
---------------
Total expenses 93,871
---------------
Less investment advisory fees waived (note 2) (29,046)
---------------
Net expenses 64,825
---------------
Net investment loss (22,623)
---------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from investment transactions 124,713
Increase in unrealized appreciation on investments 2,002,080
---------------
Net realized and unrealized gain on investments 2,126,793
---------------
Net increase in net assets resulting from operations $2,104,170
===============
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
Period ended Year ended
September 30, March 31,
1997 1997
---- ----
INCREASE IN NET ASSETS
Operations
Net investment loss $ (22,623) $ (15,062)
Net realized gain (loss) from investment transactions 124,713 (66,449)
Increase in unrealized appreciation on investments 2,002,080 105,168
--------- -------
Net increase in net assets resulting from operations 2,104,170 23,657
--------- ------
Distributions to shareholders from
Net realized gain from investment transactions 0 (121,632)
--------- --------
Capital share transactions
Increase in net assets resulting from capital share transactions (a) 1,340,049 2,876,454
--------- ---------
Total increase in net assets 3,444,219 2,778,479
NET ASSETS
Beginning of period 6,518,687 3,740,208
--------- ---------
End of period $ 9,962,906 $ 6,518,687
============= ============
(a) A summary of capital share activity follows:
Period ended Year ended
September 30, 1997 March 31, 1997
Shares Value Shares Value
------ ----- ------ -----
Shares sold 93,012 $ 1,479,674 215,413 $ 3,325,355
Shares issued for reinvestment
of distributions 0 0 7,902 121,296
------ -------- ----- -------
93,012 1,479,674 223,315 3,446,651
Shares redeemed (8,539) (139,625) (36,296) (570,197)
------ -------- ------- --------
Net increase 84,473 $ 1,340,049 187,019 $ 2,876,454
====== ============ ======= ============
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
(Unaudited)
Period ended Year ended Year ended Year ended Year ended
September 30, March 31, March 31, March 31, March 31,
1997 1997 1996 1995 1994
---- ---- ---- ---- ----
Net asset value, beginning of period $15.01 $15.13 $12.24 $10.69 $10.67
Income from investment operations
Net investment loss (0.04) (0.03) (0.06) (0.06) (0.11)
Net realized and unrealized gain on investments 4.24 0.27 4.00 1.86 0.59
---- ---- ---- ---- ----
Total from investment operations 4.20 0.24 3.94 1.80 0.48
---- ---- ---- ---- ----
Distributions to shareholders from
Net realized gain from investment transactions 0.00 (0.36) (1.05) (0.25) (0.46)
---- ----- ----- ----- -----
Net asset value, end of period $19.21 $15.01 $15.13 $12.24 $10.69
====== ====== ====== ====== ======
Total return 27.98 % 1.56 % 33.00 % 16.95 % 4.39 %
===== ==== ===== ===== ====
Ratios/supplemental data
Net assets, end of period $9,962,906 $6,518,687 $3,740,208 $2,609,361 $1,830,924
========== ========== ========== ========== ==========
Ratio of expenses to average net assets
Before expense reimbursements and waived fees 2.17 % (a) 2.70 % 3.49 % 4.49 % 4.73 %
After expense reimbursements and waived fees 1.50 % (a) 1.50 % 1.69 % 2.00 % 2.00 %
Ratio of net investment loss to average net assets
Before expense reimbursements and waived fees (1.20)% (a) (1.50)% (2.29)% (3.38)% (4.03)%
After expense reimbursements and waived fees (0.52)% (a) (0.30)% (0.50)% (0.90)% (1.34)%
Portfolio turnover rate 7.18 % 13.39 % 23.43 % 32.79 % 23.47 %
Average broker commission per share (b) $0.0549 $0.0482
(a) Annualized.
(b) Represents total commissions paid on portfolio securities divided by total portfolio share purchased or sold on which commisions
were charged.
See accompanying notes to financial statements
</TABLE>
<PAGE>
THE BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
The Brown Capital Management Small Company 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, as
amended. The investment objective of the Fund is to seek capital
appreciation principally through investment in the equity securities
of those companies with operating revenues of $250 million or less at
the time of the initial investment. The Fund began operations on July
23, 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 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.
As a result of the Fund's operating net investment loss, a
reclassification adjustment of $22,623 has been made on the
statement of assets and liabilities to decrease accumulated net
investment loss, bringing it to zero, and decrease undistributed
net realized gain on investments.
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.
(Continued)
<PAGE>
THE BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
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.
F. Repurchase Agreements - 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 a 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 l940, as amended.
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 1.00% of the Fund's average daily net
assets.
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 1.50% of the average daily net assets of the Fund in
future years. There can be no assurance that the foregoing voluntary
fee waivers or reimbursements will continue. The Advisor has
voluntarily waived its fee amounting to $29,046 ($0.06 per share) for
the period ended September 30, 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
(Continued)
<PAGE>
THE BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
NOTES TO FINANCIAL STATEMENTS
September 30, 1997
(Unaudited)
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 September 30, 1997, the Advisor and its officers held 18,463 shares
or 3.56% of the Fund shares outstanding.
NOTE 3 - PURCHASES AND SALES OF INVESTMENTS
Purchases and sales of investments, other than short-term investments,
aggregated $1,389,548 and $497,880, respectively, for the period ended
September 30, 1997.
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