Brown Capital Management Funds
105 North Washington Street
Post Office Box 69
Rocky Mount, North Carolina 27802-0069
Telephone 919-972-9922
U.S. WATTS 800-525 FUND
Facsimile 919-442-4226
May 16, 1997
Dear Shareholder:
Some of the best investment letters and commentary I have read didn't seem like
the typical investment "stuff" at all. They weren't boring or dull or filled
with jargon. In fact, they were unconventional and told an interesting and
compelling story that interwove effortlessly, like a spider weaving a beautiful
web, pearls of investment wisdom and insight.
Each quarter in our investment letter we share our thoughts regarding the
economy, financial markets, and investment strategy. We very seldom receive any
feedback. However, our mid 1994 letter, with the captions - - what we know, what
we know for sure, what we think we know, and what we don't know - - prompted a
rousing favorable response. Why? Perhaps, although it did not tell a story, it
did weave a web of investment wisdom and insight in an unconventional and
interesting way. With two of the best back-to-back years in the stock market
since the 70% increase of 1975/76, perhaps we can be a little unconventional
once again in our portfolio letter. Interestingly, there is a close comparison
between the 1975/76 period of 37.2% and 23.8% respectively to the 1995/96 period
of 37.4% and 23% respectively. The closeness of the numbers is almost scary. So
much for the once upon a time . . . Now for the pearls of investment wisdom and
insight.
Paraphrasing, Warren Buffet once said that what you want to do in investing is
wait for the right pitch, and when the fielders are asleep, step up to the plate
and hit it! The problem with this market now is all the fielders are awake, and
the pitcher is not throwing an intentional walk. Thus, it is going to be tougher
to drive in that winning run. We are firmly convinced of three things with
respect to fiscal 1998. First, the absolute magnitude of the runs, i.e. stock
market returns, will be much less than the last two years. Second, the gap
between stock market returns and bond market returns will be much narrower, but
stocks will have a definite edge. Third, we can maintain our competitive edge,
in a tougher, more volatile, and less forgiving environment, which we believe
will characterize fiscal 1998.
<PAGE>
We are at a critical stage in the financial markets in our opinion. Some of the
best investment minds on Wall Street have reached diametrically opposed
conclusions concerning the prospects for the stock market. One camp is saying it
is "overvalued", and the other, with equal conviction, is saying it is "fairly
valued". Why? The difference lies in their underlying assumptions. The
overvalued camp believes that the economy will pick up steam, inflation will
rise, the Federal Reserve will tighten and drive up interest rates, and the
stock market will have a significant correction. The fairly valued camp believes
that the economy will have modest growth, 2 - 2.5% real GDP, modest inflation 3
- - 3.5%, the Federal Reserve will not intervene, corporate profits will increase
moderately, 8 - 10%, P/E's will neither expand nor contract, and the stock
market will rise in line with the earnings increase. This is what makes markets!
We are solidly in the latter camp. It is noteworthy, that neither camp is
arguing that the market is cheap. We agree. If current interest rate levels
persist or decline slightly, which is what we expect, our valuation work
confirms our market outlook. More importantly, and offering additional comfort,
is that more than 90% of the companies we own or have an investment interest in
offer potential returns greater than the market , based on our valuation work.
The "fear of heights" certainly comes into play in the current market
environment. One only has to look to this past July to get a glimpse of how
nasty things can get when perceptions and sentiments change abruptly. In July,
when the sentiment shifted to a heating up of the economy followed by a rise in
interest rates, the S&P 500 Index declined 5.2% and the Russell 2000 Index lost
9% of its value.
Looking ahead, we will concentrate on, refine, and improve upon the things that
have given us the competitive performance edge in the past. These can be briefly
summarized as follows: (1) A research driven, bottoms-up approach to selecting
companies, (2) Maintain superior portfolio characteristics - - prospective
earnings per share growth, profitability - - and pay less, or not too much more
than the market on 12 month forward estimated earnings, i.e. a lot of "bang for
the buck", and (3) Keep the portfolio "freshened-up" with securities that are
not only attractively valued with good potential upside, but with greater upside
than the market. As the character in Forrest Gump said after going through the
long list of shrimp recipes: bubble gum shrimp, popcorn shrimp . . . - - "and
that's about it." This is our winning strategy.
For your convenience, each of the funds now has a NASDAQ ticker symbol which can
be used to obtain NAV numbers from your broker as well as various electronic
medians. The symbols are as follows:
The Brown Capital Equity Fund - BCEIX
The Brown Capital Balanced Fund - BCBIX
The Brown Capital Small Fund - BCSIX
Sincerely,
/s/ Eddie C. Brown
Eddie C. Brown
<PAGE>
THE BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
Performance Update - $10,000 Investment
For the period from September 30, 1992 to March 31, 1997
BCM Small Co Russell 2000 NASDAQ Ind
Sep-92 10,000.00 10,000.00 10,000.00
Dec-92 11,033.00 11,456.00 11,677.00
Mar-93 10,897.00 11,881.00 11,493.00
Jun-93 10,872.00 12,096.00 11,750.00
Sep-93 11,391.00 13,112.00 12,566.00
Dec-93 11,666.00 13,404.00 12,980.00
Mar-94 11,376.00 13,014.00 12,548.00
Jun-94 10,680.00 12,455.00 11,503.00
Sep-94 11,372.00 13,276.00 12,523.00
Dec-94 12,221.00 12,977.00 12,142.00
Mar-95 13,312.00 13,536.00 12,937.00
Jun-95 14,384.00 14,758.00 14,305.00
Sep-95 15,739.00 16,227.00 15,889.00
Dec-95 16,372.00 16,558.00 15,637.00
Mar-96 17,706.00 17,399.00 16,632.00
Jun-96 18,431.00 18,294.00 18,041.00
Sep-96 18,864.00 18,354.00 18,016.00
Dec-96 19,169.00 19,290.00 18,068.00
Mar-97 17,983.00 18,298.00 16,597.00
This graph depicts the performance of The Brown Capital Management Small Company
Fund versus the Russell 2000 Index and the NASDAQ Industrials Index. It is
important to note The Brown Capital Management Small Company Fund is a
professionally managed mutual fund while the indexes are not available for
investment and are unmanaged. The comparison is shown for illustrative purposes
only.
Average Annual Total Return
- ------------------------------------------------------
Since Inception One Year Three Years
- ------------------------------------------------------
13.92% 1.56% 16.49%
- ------------------------------------------------------
The graph assumes an initial $10,000 investment at September 30, 1992. All
dividends and distributions are reinvested.
At March 31, 1997, the Fund would have grown to $17,983- total investment return
of 79.83% since September 30, 1992.
At March 31, 1997, a similar investment in the Russell 2000 Index would have
grown to $18,298- total investment return of 82.98% and the NASDAQ Industrials
Index would have grown to $16,597 - total investment return of 65.97%, since
September 30, 1992.
Past performance is not a guarantee of future performance. A mutual fund's share
price and investment return will vary with market conditions, and the principal
value of shares, when redeemed, may be worth more or less than the original
cost. Average annual returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming
reinvestments of dividends.
<PAGE>
THE BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
PORTFOLIO OF INVESTMENTS
March 31, 1997
- --------------------------------------------------------------------------------
Value
Shares (note 1)
- --------------------------------------------------------------------------------
COMMON STOCKS - 87.17%
Advertising - 1.87%
(a)Catalina Marketing Corporation 3,000 $121,875
----- --------
Building Materials - 1.45%
Fastenal Company 2,700 94,500
----- ------
Chemicals - 1.31%
(a)Synthetech, Inc. 11,200 85,400
------ ------
Commercial Services - 3.86%
(a)ABR Information Services, Inc. 9,200 165,600
(a)Quintiles Transnational Corporation 1,600 86,200
----- ------
251,800
-------
Computers - 0.89%
(a)Bay Networks 3,250 57,688
----- ------
Computer Software & Services - 35.09%
(a)Acxiom Corporation 12,800 184,000
(a)Advent Software, Inc 4,600 101,200
(a)American Business Information, Inc. 8,200 159,900
BGS Systems, Inc. 3,300 97,350
(a)BISYS Group, Inc. 3,900 122,850
(a)BMC Software, Inc. 4,800 221,400
(a)CFI Proservices, Inc. 6,900 117,300
(a)Cerner Corporation 10,500 137,812
(a)Fair Isaac & Company, Inc. 5,700 205,912
(a)Hyperion Software Corporation 7,500 123,750
(a)MDL Information Systems, Inc. 6,400 200,000
(a)Network General Corporation 7,700 165,550
(a)Ovid Technologies, Inc. 200 1,450
Paychex, Inc. 1,050 43,181
(a)Parametric Technology Company 1,600 72,200
(a)Platinum Technology, Inc. 5,600 66,500
(a)Quick Response Services, Inc. 2,800 73,850
(a)SPSS, Inc. 4,100 101,988
(a)Structural Dynamics Research Corpora 4,400 91,300
----- ------
2,287,493
---------
Electronics - 2.34%
(a)Sanmina Corporation 3,400 152,150
----- -------
Financial Services - 2.96%
T. Rowe Price Associates 5,200 193,050
----- -------
(Continued)
<PAGE>
THE BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
PORTFOLIO OF INVESTMENTS
March 31, 1997
- --------------------------------------------------------------------------------
Value
Shares (note 1)
- --------------------------------------------------------------------------------
COMMON STOCKS - (Continued)
Furniture & Home Appliances - 1.56%
Juno Lighting, Incorporated 6,400 $101,600
----- --------
Industrial Materials - Specialty - 0.26%
Arden Industrial Products 4,000 16,750
----- ------
Machine - Diversified - 4.76%
Cognex Corporation 10,200 193,800
Flow International 12,100 116,462
------ -------
310,262
Medical Supplies - 14.90%
Ballard Medical Products 5,800 121,075
Biomet, Inc. 7,700 129,938
Diagnostic Products Corporation 5,300 158,337
Life Technologies, Inc. 7,000 183,750
Lynx Therapeutics Inc. 81 405
(a)Molecular Dynamics, Inc. 6,700 98,825
(a)PerSeptive Biosystem 12,448 98,028
(a)TECNOL Medical Products, Inc. 3,400 53,550
(a)Techne Corporation 5,500 127,188
----- -------
971,096
-------
Medical - Hospital Management & Service - 2.61%
(a)Dendrite International, Inc. 8,600 80,625
HBO & Company 1,890 89,775
----- ------
170,400
-------
Miscellaneous - Manufacturing - 0.77%
(a)Panavision, Inc. 2,900 50,388
----- ------
Pharmaceuticals - 3.57%
(a)Alza Corporation 8,400 231,000
(a)Therapeutic Discovery Corp. 150 1,612
--- -----
232,612
-------
Real Estate Investment Trust - 3.44%
General Growth Properties 2,500 79,375
Post Properties, Inc 3,800 144,875
----- -------
224,250
-------
Restaurants & Food Service - 4.95%
(a)Au Bon Pain Company, Inc. 29,300 188,619
(a)The Cheesecake Factory 6,800 134,300
----- -------
322,919
-------
Retail - Specialty Line - 0.58%
(a)Cosmetic Center, Inc. 6,600 37,950
----- ------
(Continued)
<PAGE>
THE BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
PORTFOLIO OF INVESTMENTS
March 31, 1997
- --------------------------------------------------------------------------------
Value
Shares (note 1)
- --------------------------------------------------------------------------------
COMMON STOCKS - (Continued)
Warrants - 0.00%
(a)Alza Corporation, expiration date De 150 $23
(a)PerSeptive Biosystems, Inc., expirat 27 64
-- --
87
Total Common Stocks (Cost $4,682,672) 5,682,270
---------
Principal
Amount
REPURCHASE AGREEMENT (b) - 0.19%
Wachovia Bank, dated March 31, 1997 $12,360 12,360
6.50%, due April 1, 1997 ------- ---------
(Cost $12,360)
Total Value of Investments (Cost $4,695,032 (c)) 87.36% $5,694,630
Other Assets Less Liabilities 12.64% 824,057
----- -------
Net Assets 100.00% $6,518,687
====== ==========
(a) Non-income producing investment.
(b) The repurchase agreement is fully collateralized by U. S. government and/or
agency obligations based on market prices at the date of the portfolio. The
investment in the repurchase agreement is through participation in a joint
account with other funds administered by The Nottingham Company (Note 1).
(c) 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 $1,263,124
Unrealized depreciation (263,526)
-----------
Net unrealized appreciation $999,598
===========
See accompanying notes to financial statements
<PAGE>
THE BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1997
ASSETS
Investments, at value (cost $4,695,032) $5,694,630
Cash 1,308,444
Income receivable 8,745
Prepaid expenses 37
Due from advisor (note 2) 1,144
Other assets 1,569
----------
Total assets 7,014,569
----------
LIABILITIES
Accrued expenses 2,979
Payable for investment purchases 492,903
----------
Total liabilities 495,882
----------
NET ASSETS
(applicable to 434,182 Institutional Class Shares $6,518,687
outstanding; unlimited shares of no par value ==========
beneficial interest authorized)
NET ASSET VALUE, REDEMPTION AND OFFERING PRICE
PER INSTITUTIONAL CLASS SHARE
($6,518,687 \ 434,182 shares) $15.01
==========
NET ASSETS CONSIST OF
Paid-in capital $5,584,824
Accumulated net realized loss on investments (65,735)
Net unrealized appreciation on investments 999,598
----------
$6,518,687
==========
See accompanying notes to financial statements
<PAGE>
THE BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
STATEMENT OF OPERATIONS
Year ended March 31, 1997
INVESTMENT INCOME
Income
Interest $38,156
Dividends 22,288
Miscellaneous 527
----------
Total income 60,971
----------
Expenses
Investment advisory fees (note 2) 50,754
Fund administration fees (note 2) 12,689
Custody fees 6,315
Registration and filing administration fees (note 2) 5,637
Fund accounting fees (note 2) 21,000
Audit fees 9,586
Legal fees 3,503
Securities pricing fees 3,621
Shareholder recordkeeping fees 1,258
Shareholder servicing expenses 3,701
Registration and filing expenses 6,617
Printing expenses 1,721
Trustee fees and meeting expenses 6,752
Other operating expenses 4,038
----------
Total expenses 137,192
----------
Less:
Expense reimbursements (note 2) (10,610)
Investment advisory fees waived (note 2) (50,549)
----------
Net expenses 76,033
----------
Net investment loss (15,062)
----------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss from investment transactions (66,449)
Increase in unrealized appreciation on investments 105,168
----------
Net realized and unrealized gain on investments 38,719
----------
Net increase in net assets resulting from operations $23,657
==========
See accompanying notes to financial statements
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
STATEMENTS OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------------
Year ended Year ended
March 31, March 31,
1997 1996
- ----------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
Operations
Net investment loss $(15,062) $(15,288)
Net realized gain (loss) from investment transactions (66,449) 310,770
Increase in unrealized appreciation on investments 105,168 591,974
------- -------
Net increase in net assets resulting from operations 23,657 887,456
------ -------
Distributions to shareholders from
Net realized gain from investment transactions (121,632) (232,386)
-------- --------
Capital share transactions
Increase in net assets resulting from capital share transactions (a) 2,876,454 475,777
--------- -------
Total increase in net assets 2,778,479 1,130,847
NET ASSETS
Beginning of year 3,740,208 2,609,361
--------- ---------
End of year $6,518,687 $3,740,208
========== ==========
(a) A summary of capital share activity follows:
---------------------------------------------------------------
Year ended Year ended
March 31, 1997 March 31, 1996
---------------------------------------------------------------
Shares Value Shares Value
---------- ---------- -------- --------
Shares sold 215,413 $3,325,355 21,823 $309,573
Shares issued for reinvestment
of distributions 7,902 121,296 16,876 232,386
----- ------- ------ -------
223,315 3,446,651 38,699 541,959
Shares redeemed (36,296) (570,197) (4,737) (66,182)
------- -------- ------ -------
Net increase 187,019 $2,876,454 33,962 $475,777
======= ========== ====== =========
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)
- ----------------------------------------------------------------------------------------------------------------------------------
For the
period from
July 23, 1992
(commencement
Year ended Year ended Year ended Year ended of operations)
March 31, March 31, March 31, March 31, to March 31,
1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period $15.13 $12.24 $10.69 $10.67 $10.00
Income from investment operations
Net investment loss (0.03) (0.06) (0.06) (0.11) (0.03)
Net realized and unrealized gain on investments 0.27 4.00 1.86 0.59 0.70
---- ---- ---- ---- ----
Total from investment operations 0.24 3.94 1.80 0.48 0.67
---- ---- ---- ---- ----
Distributions to shareholders from
Net realized gain from investment transactions (0.36) (1.05) (0.25) (0.46) 0.00
----- ----- ----- ----- ----
Net asset value, end of period $15.01 $15.13 $12.24 $10.69 $10.67
====== ====== ====== ====== ======
Total return 1.56 % 33.00 % 16.95 % 4.39 % 6.70 %
==== ===== ===== ==== ====
Ratios/supplemental data
Net assets, end of period $6,518,687 $3,740,208 $2,609,361 $1,830,924 $1,225,645
========== ========== ========== ========== ==========
Ratio of expenses to average net assets
Before expense reimbursements and waived fees 2.70 % 3.49 % 4.49 % 4.73 % 5.45 %(a)
After expense reimbursements and waived fees 1.50 % 1.69 % 2.00 % 2.00 % 1.89 %(a)
Ratio of net investment loss to average net assets
Before expense reimbursements and waived fees (1.50) % (2.29)% (3.38)% (4.03)% (4.42)%(a)
After expense reimbursements and waived fees (0.30) % (0.50)% (0.90)% (1.34)% (0.86)%(a)
Portfolio turnover rate 13.39 % 23.43 % 32.79 % 23.47 % 4.14 %
Average broker commission per share (b) $0.05
(a) Annualized.
(b) Represents total commission paid on portfolio securities divided by total
portfolio shares purchased or sold on which commisions were charged. This
disclosure is required for fiscal years beginning on or after September 1,
1995.
See accompanying notes to financial statements
</TABLE>
<PAGE>
THE BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
NOTES TO FINANCIAL STATEMENTS
March 31, 1997
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 $15,062 has been made on the statement of assets and
liabilities to decrease accumulated net investment loss, bringing it to
zero, and decrease paid in capital.
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
March 31, 1997
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. This reflects a
reduction during the current year of the Advisor's voluntary expense limitation
from 2.00% to 1.50% 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 $50,549 ($0.16
per share) and has voluntarily agreed to reimburse $10,610 of the Fund's
operating expenses for the year ended March 31, 1997.
The Fund's administrator, The Nottingham Company (the"Administrator"), provides
administrative services to and is generally responsible for the overall
management and day-to-day operations of the Fund pursuant to an accounting and
administrative agreement with the Trust. As compensation for its services, the
Administrator receives a fee at the annual rate of 0.25% of the Fund's first $10
million of average daily net assets, 0.20% of the next $40 million of average
daily net assets, 0.175% of the next $50 million of average daily net assets,
and 0.15% of average daily net assets over $100 million. The Administrator also
receives a monthly fee of $1,750 for accounting and recordkeeping services.
Additionally, the Administrator charges the Fund for servicing of shareholder
accounts and
(Continued)
<PAGE>
THE BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
NOTES TO FINANCIAL STATEMENTS
March 31, 1997
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 $3,049,553 and $583,703, respectively, for the year ended March 31,
1997.
NOTE 4 - DISTRIBUTIONS TO SHAREHOLDERS
For federal income tax purposes, the Fund must report distributions from net
realized gains from investment transactions that represent long-term capital
gain to its shareholders. Of the total $0.36 per share of such distributions for
the year ended March 31, 1997, all represent long-term capital gains.
Shareholders should consult a tax advisor on how to report distributions for
state and local income tax purposes.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees and Shareholders of
The Nottingham Investment Trust II:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Brown Capital Management Small Company Fund
(a portfolio of The Nottingham Investment Trust II) as of March 31, 1997, and
the related statements of operations and changes in net assets, and financial
highlights for the year then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit. The statement of changes in net assets for the year ended
March 31, 1996 and the financial highlights for the four years in the period
ended March 31, 1996 were audited by other auditors, whose reports thereon dated
May 14, 1996, expressed an unqualified opinion.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and financial highlights are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of the securities owned as of March 31, 1997 by
correspondence with the custodian and brokers; where replies were not received
from brokers, we performed other auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1997 financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of The
Brown Capital Management Small Company Fund as of March 31, 1997, the results of
its operations, the changes in its net assets and its financial highlights for
the year then ended in conformity with generally accepted accounting principles.
/S/ DELOITTE & TOUCHE LLP
Pittsburgh, Pennsylvania
April 25, 1997
