May 20, 1998
Dear Shareholder:
It is our pleasure to report the results of the WST Growth & Income Fund for the
fiscal year ending March 31, 1998. This is the Fund's first annual report, and
we hope you have received the quarterly portfolio reviews. The Fund is off to a
successful start with a total return since inception of 12.72% versus the 12.58%
return of the Lipper Growth & Income Fund Index. We are especially pleased with
these returns as the Fund held an above average level of money market funds. The
average equity exposure was approximately 80% over this period versus the index
of 91%, so risk adjusted performance was quite strong.
The Fund ended the quarter with approximately $7 million in assets. Interest in
the Fund has increased as word has spread regarding its availability. The Fund
is designed to produce long term appreciation with lower volatility using the
firm's "Growth at a Reasonable Price" investment philosophy. Security selection
is driven by the firm's exhaustive research efforts which have been strengthened
recently with the addition of several new analysts. Research will drive returns
during the future. Intelligent decisions allow the Fund's managers to purchase
great businesses and sell companies which do not meet expectations.
Wilbanks, Smith & Thomas Asset Management Inc.'s view towards the financial
markets remains positive although our internal indicators suggest a market
correction is possible during the next several months. Rumors of a pending Fed
rate increase is the "raison du jour" for a concern, but the Fund holds a stable
of great businesses bought at reasonable prices with the majority of these
companies posting record profits. We remain very positive about the outlook for
your holdings for the next several years.
Interest rates will follow inflation and oil prices as they have historically.
Both of these indicators remain at levels which suggest that no change in Fed
policy is required. We continue to focus on our research efforts and will use
market weakness to add to our favorite positions.
We would like to thank our shareholders for their support and confidence in the
Fund. The principals of Wilbanks, Smith & Thomas remain among the largest
shareholders of the Fund, so our interests are truly aligned with yours. The
firm continues to invest in both personnel and technology so that we can
maintain our edge in the research process. We anticipate a gradual shift in
market leadership and managers will have an opportunity to more easily
outperform the indices as the market becomes more selective. Again, performance
will still be driven by strong research, and we are excited about the
opportunities that lay ahead.
Please visit our website at wstam.com as you are "surfing the net". We welcome
your comments and suggestions.
Wayne F. Wilbanks
L. Norfleet Smith, Jr.
Norwood A. Thomas, Jr.
T. Carl Turnage
Lawrence A. Bernert, III
<PAGE>
May 20, 1998
Dear Shareholder:
It is our pleasure to report the results of the WST Growth & Income Fund for the
fiscal year ending March 31, 1998. This is the Fund's first annual report, and
we hope you have received the quarterly portfolio reviews. The Fund is off to a
successful start with a total return since inception of 6.37% (net after 3.75%
sales charge). Without the deduction of the maximum sales load, the total return
of the Fund was 10.52%. We are especially pleased with these returns as the Fund
held an above average level of money market funds. The average equity exposure
was approximately 80% over this period versus the index of 91%, so risk adjusted
performance was quite strong.
The Fund ended the quarter with approximately $7 million in assets. Interest in
the Fund has increased as word has spread regarding its availability. The Fund
is designed to produce long term appreciation with lower volatility using the
firm's "Growth at a Reasonable Price" investment philosophy. Security selection
is driven by the firm's exhaustive research efforts which have been strengthened
recently with the addition of several new analysts. Research will drive returns
during the future. Intelligent decisions allow the Fund's managers to purchase
great businesses and sell companies which do not meet expectations.
Wilbanks, Smith & Thomas Asset Management Inc.'s view towards the financial
markets remains positive although our internal indicators suggest a market
correction is possible during the next several months. Rumors of a pending Fed
rate increase is the "raison du jour" for a concern, but the Fund holds a stable
of great businesses bought at reasonable prices with the majority of these
companies posting record profits. We remain very positive about the outlook for
your holdings for the next several years.
Interest rates will follow inflation and oil prices as they have historically.
Both of these indicators remain at levels which suggest that no change in Fed
policy is required. We continue to focus on our research efforts and will use
market weakness to add to our favorite positions.
We would like to thank our shareholders for their support and confidence in the
Fund. The principals of Wilbanks, Smith & Thomas remain among the largest
shareholders of the Fund, so our interests are truly aligned with yours. The
firm continues to invest in both personnel and technology so that we can
maintain our edge in the research process. We anticipate a gradual shift in
market leadership and managers will have an opportunity to more easily
outperform the indices as the market becomes more selective. Again, performance
will still be driven by strong research, and we are excited about the
opportunities that lay ahead.
Please visit our website at wstam.com as you are "surfing the net". We welcome
your comments and suggestions.
Wayne F. Wilbanks
L. Norfleet Smith, Jr.
Norwood A. Thomas, Jr.
T. Carl Turnage
Lawrence A. Bernert, III
<PAGE>
WST GROWTH & INCOME FUND
Institutional Shares
Performance Update - $25,000 Investment
For the period from September 30, 1997 to March 31, 1998
WST Growth & 70% S&P 500 Index
Income Fund 20% Lehman Inter Gov/Corp Bond Lipper Growth &
Inst. Shares 10% Russell 2000 Index Income Fund Index
9/30/97 25,000 25,000 25,000
10/31/97 24,202 24,367 24,170
11/30/97 24,775 25,147 24,844
12/31/97 25,502 25,539 25,264
1/31/98 25,428 25,778 25,312
2/28/98 27,000 27,264 26,899
3/31/98 28,180 28,390 28,145
This graph depicts the performance of the WST Growth & Income Fund Institutional
Shares versus the Lipper Growth and Income Fund Index and a combined index of
70% S&P 500 Index, 20% Lehman Intermediate Government/Corporate Bond Index, and
10% Russell 2000 Index. It is important to note that the WST Growth & Income
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.
Cumulative Total Return
- -----------------------
Since Inception
- -----------------------
12.72%
- -----------------------
The graph assumes an initial $25,000 investment at September 30, 1997. All
dividends and distributions are reinvested.
At March 31, 1998, the WST Growth & Income Fund Institutional Shares would have
grown to $28,180 - total investment return of 12.72% since September 30, 1997.
At March 31, 1998, a similar investment in the Lipper Growth and Income Fund
Index would have grown to $28,145 - total investment return of 12.58%; a
combined index of 70% S&P 500 Index, 20% Lehman Intermediate
Government/Corporate Bond Index, and 10% Russell 2000 Index would have grown to
$28,390 - total investment return of 13.56%; since September 30, 1997.
Past performance is not a guarantee of future results. 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>
WST GROWTH & INCOME FUND
Investor Shares
Performance Update - $10,000 Investment
For the period from October 3, 1997 to March 31, 1998
WST Growth & 70% S&P 500 Index
Income Fund 20% Lehman Inter Gov/Corp Bond Lipper Growth &
Inv. Shares 10% Russell 2000 Index Income Fund Index
10/3/97 9,625 10,000 10,000
10/31/97 9,153 9,610 9,507
11/30/97 9,370 9,916 9,772
12/31/97 9,636 10,070 9,937
1/31/98 9,607 10,164 9,956
2/28/98 10,193 10,748 10,580
3/31/98 10,637 11,191 11,070
This graph depicts the performance of the WST Growth & Income Fund Investor
Shares versus the Lipper Growth and Income Fund Index and a combined index of
70% S&P 500 Index, 20% Lehman Intermediate Government/Corporate Bond Index, and
10% Russell 2000 Index. It is important to note that the WST Growth & Income
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.
Cumulative Total Return
- -------------------------------------------------
Since Inception
- -------------------------------------------------
No Sales Load 10.52%
- -------------------------------------------------
Maximum 3.75% Sales Load 6.37%
- -------------------------------------------------
The graph assumes an initial $10,000 investment at October 3, 1997 ($9,625 after
maximum sales load of 3.75%). All dividends and distributions are reinvested.
At March 31, 1998, the WST Growth & Income Fund Investor Shares would have grown
to $10,637 - total investment return of 6.37% since October 3, 1997. Without the
deduction of the 3.75% maximum sales load, the WST Growth & Income Fund Investor
Shares would have grown to $11,052 - total investment return of 10.52% since
October 3, 1997.
At March 31, 1998, a similar investment in the Lipper Growth and Income Fund
Index would have grown to $11,070 - total investment return of 10.70%; a
combined index of 70% S&P 500 Index, 20% Lehman Intermediate
Government/Corporate Bond Index, and 10% Russell 2000 Index would have grown to
$11,191 - total investment return of 11.91%; since October 3, 1997.
Past performance is not a guarantee of future results. 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>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
WST GROWTH & INCOME FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - 77.35%
Aerospace & Defense - 4.43%
AlliedSignal, Inc. ................................................... 4,300 $ 180,600
The Boeing Company ................................................... 2,600 135,525
----------
316,125
----------
Beverages - 2.99%
PepsiCo, Inc. ........................................................ 5,000 213,437
----------
Chemicals - Specialty - 1.93%
Morton International ................................................. 4,200 137,812
----------
Computers - 2.22%
Hewlett-Packard Co. .................................................. 2,500 158,437
----------
Computer Software & Services - 0.66%
(a) Oracle Corporation ................................................... 1,500 47,344
----------
Cosmetics & Personal Care - 2.07%
(a) Playtex Products, Inc. ............................................... 10,000 147,500
----------
Direct Marketing - 2.53%
(a) TeleSpectrum Worldwide Inc. .......................................... 25,000 181,250
----------
Diversified Manufacturing - 0.60%
General Electric Company ............................................. 500 43,000
----------
Electronics - Semiconductor - 2.72%
Motorola, Inc. ....................................................... 3,200 194,000
----------
Financial - Banks, Commercial - 6.42%
NationsBank Corporation .............................................. 2,600 189,637
Resource Bank ........................................................ 6,400 268,800
----------
458,437
----------
Financial - Banks, Money Center - 2.12%
CCB Financial Corporation ............................................ 1,000 110,625
Chase Manhattan Corporation .......................................... 300 40,462
----------
151,087
----------
Financial Services - 3.02%
Equifax, Inc. ........................................................ 3,300 120,450
Fannie Mae ........................................................... 1,500 94,875
----------
215,325
----------
Holding Companies - Diversified - 3.23%
Mobil Corporation .................................................... 1,600 122,700
Travelers Group, Inc. ................................................ 1,800 108,000
----------
230,700
----------
Insurance - Life & Health - 1.87%
Jefferson-Pilot Corporation .......................................... 1,500 133,406
----------
(Continued)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
WST GROWTH & INCOME FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - (Continued)
Insurance - Multiline - 2.29%
American International Group, Inc. ................................... 1,300 $ 163,719
-----------
Manufactured Housing - 2.26%
Oakwood Homes Corporation ............................................ 4,400 161,150
-----------
Manufacturing - Miscellaneous - 2.83%
Tyco International Ltd. .............................................. 3,700 202,112
-----------
Medical Supplies - 2.05%
Johnson & Johnson .................................................... 2,000 146,125
-----------
Multimedia - 7.31%
The Walt Disney Company .............................................. 1,500 160,125
(a) Tele-Communications, Inc. ............................................ 7,000 217,657
Time Warner, Inc. .................................................... 2,000 144,000
-----------
521,782
-----------
Oil & Gas - Equipment & Services - 4.21%
Baker Hughes, Incorporated ........................................... 2,200 88,550
ENSCO International, Incorporated .................................... 4,000 111,500
Halliburton Company .................................................. 2,000 100,250
-----------
300,300
-----------
Pharmaceuticals - 5.22%
American Home Products Corporation ................................... 2,300 218,788
Merck & Co., Inc. .................................................... 1,200 154,050
-----------
372,838
-----------
Retail - Specialty Line - 2.46%
Lowe's Companies, Inc. ............................................... 2,500 175,469
-----------
Telecommunications - 6.23%
(a) 3Com Corporation ..................................................... 2,000 71,875
(a) LCI International, Inc. .............................................. 4,100 157,850
(a) WorldCom, Inc. ....................................................... 5,000 215,313
-----------
445,038
-----------
Tobacco - 3.31%
Philip Morris Companies, Inc. ........................................ 3,000 125,063
(a) Standard Commercial Corporation ...................................... 7,000 111,563
-----------
236,626
-----------
Utilities - Electric - 2.37%
(a) CalEnergy Company, Inc. .............................................. 6,000 169,500
-----------
Total Common Stocks (Cost $4,787,719) ................................ 5,522,519
-----------
(Continued)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
WST GROWTH & INCOME FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCKS - 3.92%
Insurance - Multiline - 1.96%
AICI CAPITAL TRUST, 9.00% ............................................ 5,500 $ 140,250
----------
Telecommunications - 1.96%
TCI Communications, 8.72% ............................................ 5,500 139,563
----------
Total Preferred Stocks (Cost $281,974) 279,813
----------
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Maturity
Principal Rate Date
- ------------------------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATION - 2.04%
Macsaver Financial Services ................... $150,000 7.875% 8/01/03 145,500
----------
(Cost $145,941)
US GOVERNMENT OBLIGATION - 3.63%
US Government National Strip ................... 400,000 0.000% 11/15/05 258,996
----------
(Cost $261,215)
- ------------------------------------------------------------------------------------------------------------------------------------
Shares
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANIES - 7.48%
Evergreen Money Market Treasury Institutional Money
Market Fund Institutional Service Shares ............................. 318,762 318,762
Evergreen Money Market Treasury Institutional Treasury Money
Market Fund Institutional Service Shares ............................. 215,583 215,583
----------
Total Investment Companies (Cost $534,345) ........................... 534,345
----------
Total Value of Investments (Cost $6,011,194 (b)) ................................. 94.42% $6,741,173
Other Assets Less Liabilities .................................................... 5.58% 398,206
------ ----------
Net Assets ................................................................ 100.00% $7,139,379
====== ==========
(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 taxes
purposes is as follows:
Unrealized appreciation $ 847,634
Unrealized depreciation (117,655)
----------
Net unrealized appreciation $ 729,979
==========
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
WST GROWTH & INCOME FUND
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1998
ASSETS
Investments, at value (cost $6,011,194) ...................................................... $6,741,173
Cash ......................................................................................... 17,801
Income receivable ............................................................................ 8,610
Receivable for investments sold .............................................................. 197,638
Receivable for fund shares sold .............................................................. 144,854
Due from advisor (note 2) .................................................................... 1,006
Deferred organization expense (note 4) ....................................................... 37,002
Other assets ................................................................................. 3,309
----------
Total assets ............................................................................ 7,151,393
----------
LIABILITIES
Accrued expenses ............................................................................. 12,014
----------
NET ASSETS $7,139,379
==========
NET ASSETS CONSIST OF
Paid-in capital .............................................................................. $ 6,451,586
Accumulated net realized loss on investments ................................................. (42,186)
Net unrealized appreciation on investments ................................................... 729,979
-----------
$ 7,139,379
===========
INSTITUTIONAL CLASS
Net asset value, redemption and maximum offering price per share
($6,376,193 / 564,801 shares outstanding) ............................................... $ 11.29
===========
INVESTOR CLASS
Net asset value, redemption and offering price per share ..................................... $ 11.26
===========
($763,186 / 67,770 shares outstanding)
Maximum offering price per share (100 / 96.25% of $11.26) .................................... $ 11.70
===========
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
WST GROWTH & INCOME FUND
STATEMENT OF OPERATIONS
For the period from September 9, 1997
(commencement of operations) to March 31, 1998
INVESTMENT INCOME
Income
Interest ........................................................................................... $ 7,087
Dividends .......................................................................................... 39,673
---------
Total income .................................................................................. 46,760
---------
Expenses
Investment advisory fees (note 2) .................................................................. 19,204
Fund administration fees (note 2) .................................................................. 4,481
Distribution fees and service fees - Investor Class (note 3) ....................................... 847
Custody fees ....................................................................................... 3,073
Registration and filing administration fees (note 2) ............................................... 1,484
Fund accounting fees (note 2) ...................................................................... 17,861
Audit fees ......................................................................................... 8,552
Legal fees ......................................................................................... 3,470
Securities pricing fees ............................................................................ 1,274
Shareholder recordkeeping fees ..................................................................... 3,031
Other fees ......................................................................................... 682
Shareholder servicing expenses ..................................................................... 1,148
Registration and filing expenses ................................................................... 6,135
Printing expenses .................................................................................. 1,889
Amortization of deferred organization expenses (note 4) ............................................ 2,998
Trustee fees and meeting expenses .................................................................. 2,424
Other operating expenses ........................................................................... 2,184
---------
Total expenses ................................................................................ 80,737
---------
Less:
Expense reimbursements (note 2) ......................................................... (5,047)
Investment advisory fees waived (note 2) ................................................ (18,741)
Fund administration fees waived (note 2) ................................................ (182)
Fund accounting fees waived (note 2) .................................................... (9,861)
Shareholder recordkeeping fees waived (note 2) .......................................... (1,031)
Other fees waived (note 2) .............................................................. (682)
---------
Net expenses .................................................................................. 45,193
---------
Net investment income ................................................................... 1,567
---------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss from investment transactions .......................................................... (42,186)
Increase in unrealized appreciation on investments ...................................................... 729,979
---------
Net realized and unrealized gain on investments .................................................... 687,793
---------
Net increase in net assets resulting from operations .......................................... $ 689,360
=========
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
WST GROWTH & INCOME FUND
STATEMENTS OF CHANGES IN NET ASSETS
For the period from September 9, 1997
(commencement of operations) to March 31, 1998
INCREASE IN NET ASSETS
Operations
Net investment income ............................................................................ $ 1,567
Net realized loss from investment transactions ................................................... (42,186)
Increase in unrealized appreciation on investments ............................................... 729,979
-----------
Net increase in net assets resulting from operations ........................................ 689,360
-----------
Distributions to shareholders from
Net investment income - Institutional Class ...................................................... (2,096)
Net investment income - Investor Class ........................................................... (40)
-----------
Decrease in net assets resulting from distributions ......................................... (2,136)
-----------
Capital share transactions
Increase in net assets resulting from capital share transactions (a) ............................. 6,452,155
-----------
Total increase in net assets ........................................................... 7,139,379
NET ASSETS
Beginning of period .................................................................................. 0
-----------
End of period ........................................................................................ $ 7,139,379
============
----------------------------------
(a) A summary of capital share activity follows: Shares Value
----------------------------------
- ------------------------------------------------------------
INSTITUTIONAL CLASS
- ------------------------------------------------------------
Shares sold ....................................................................... 564,741 $ 5,750,088
Shares issued for reinvestment of distributions ................................... 191 2,096
----------- -----------
564,932 5,752,184
Shares redeemed ................................................................... (131) (1,395)
----------- -----------
Net increase ................................................................. 564,801 $ 5,750,789
=========== ===========
- ------------------------------------------------------------
INVESTOR CLASS
- ------------------------------------------------------------
Shares sold ....................................................................... 67,766 $701,326
Shares issued for reinvestment of distributions ................................... 4 40
----------- -----------
67,770 701,366
Shares redeemed ................................................................... 0 0
----------- -----------
Net increase ................................................................. 67,770 $ 701,366
=========== ===========
- ------------------------------------------------------------
FUND SUMMARY
- ------------------------------------------------------------
Shares sold ....................................................................... 632,507 $ 6,451,414
Shares issued for reinvestment of distributions ................................... 195 2,136
----------- -----------
632,702 6,453,550
Shares redeemed ................................................................... (131) (1,395)
----------- -----------
Net increase ................................................................. 632,571 $ 6,452,155
=========== ===========
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
WST GROWTH & INCOME FUND
FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Period)
----------------------- -----------------------
INSTITUTIONAL INVESTOR
CLASS CLASS
----------------------- -----------------------
For the For the
period from period from
September 30, 1997 October 3, 1997
(date of initial public (date of initial public
investment) to investment) to
March 31, March 31,
1998 1998
----------------------- -----------------------
Net asset value, beginning of period .................................. $ 10.02 $ 10.22
Income from investment operations
Net investment income (loss) .................................. 0.00 (0.01)
Net realized and unrealized gain on investments ............... 1.27 1.05
----------------------- -----------------------
Total from investment operations ........................ 1.27 1.04
----------------------- -----------------------
Distributions to shareholders from
Net investment income ......................................... (0.00) (0.00)
----------------------- -----------------------
Net asset value, end of period ........................................ $ 11.29 $ 11.26
======================= =======================
Total return (a) ...................................................... 12.72 % 10.52 %
======================= =======================
Ratios/supplemental data
Net assets, end of period ........................................ $6,376,193 $ 763,186
======================= =======================
Ratio of expenses to average net assets
Before expense reimbursements and waived fees ................. 3.15 %(b) 3.63 %(b)
After expense reimbursements and waived fees .................. 1.75 %(b) 2.25 %(b)
Ratio of net investment income (loss) to average net assets
Before expense reimbursements and waived fees ................. (1.31)%(b) (1.70)%(b)
After expense reimbursements and waived fees .................. 0.09 %(b) (0.31)%(b)
Portfolio turnover rate .......................................... 23.64 % 23.64 %
Average broker commission per share (c) .......................... $ 0.0778 $ 0.0778
(a) Total return does not reflect payment of a sales charge
(b) Annualized.
(c) 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>
WST GROWTH & INCOME FUND
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND OTHER INFORMATION
The WST Growth & Income 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 Fund began
operations on September 9, 1997. 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. The Fund has an unlimited number of authorized
shares, which are divided into two classes - Institutional Shares and
Investor Shares.
Each class of shares has equal rights as to assets of the Fund, and the
classes are identical except for differences in their sales charge
structures and ongoing distribution and service fees. Income, expenses
(other than distribution and service fees, which are only attributable
to the Investor Class), and realized and unrealized gains or losses on
investments are allocated to each class of shares based upon its
relative net assets. Investor Shares purchased are subject to a maximum
sales charge of three and three-quarters percent. Both classes have
equal voting privileges, except where otherwise required by law or when
the Board of Trustees determines that the matter to be voted on affects
only the interests of the shareholders of a particular class. 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. 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.
The Fund has capital loss carryforwards for federal income tax
purposes of $42,186, which expire in the year 2006. 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 to shareholders 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 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.
(Continued)
<PAGE>
WST GROWTH & INCOME FUND
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
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. Distributions to
shareholders are recorded on the ex-dividend date. In
addition, distributions may be made annually in December out
of net realized gains through October 31 of that year. The
Fund may make a supplemental distribution subsequent to the
end of its fiscal year ending March 31.
E. Use of Estimates - 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, Wilbanks, Smith & Thomas
Asset 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 0.75% of the first $250 million of
the Fund's average daily net assets and 0.65% of all assets over $250
million.
The Advisor currently intends to voluntarily waive all or a portion of
its fee and to reimburse expenses of the Fund to limit total Fund
operating expenses to a maximum of 1.75% of the average daily net
assets of the Fund's Institutional Class and a maximum of 2.25% of the
average daily net assets of the Fund's Investor Class. 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 $18,741 ($0.04 per share) and reimbursed $5,047 of the
operating expenses incurred by the Fund for the period ended March 31,
1998.
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 0.175% of the Fund's first $50 million of average daily
net assets, 0.15% of the next $50 million, 0.125% of the next $50
million, and 0.10% of average daily net assets over $150 million. The
Administrator also receives a monthly fee of $2,000 for accounting and
record-keeping services for the initial class of shares and $750 per
month for each additional class of shares. 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.
North Carolina Shareholder Services, LLC (the "Transfer Agent") serves
as the Fund's transfer, dividend paying, and shareholder servicing
agent. The Transfer Agent maintains the records of each shareholder's
account, answers shareholder inquiries concerning accounts, processes
purchases and redemptions of the Fund's shares, acts as dividend and
distribution disbursing agent, and performs other shareholder servicing
functions. The Transfer Agent is compensated for its services by the
Administrator and not directly by the Fund.
(Continued)
<PAGE>
WST GROWTH & INCOME FUND
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
Certain Trustees and officers of the Trust are also officers or
directors of the Advisor, the Distributor, or the Administrator.
NOTE 3 - DISTRIBUTION AND SERVICE FEES
The Board of Trustees, including the Trustees who are not "interested
persons" of the Trust as defined in the Investment Company Act of 1940
(the "Act"), adopted a distribution and service plan pursuant to Rule
12b-1 of the Act (the "Plan") applicable to the Investor Shares. The
Act regulates the manner in which a regulated investment company may
assume costs of distributing and promoting the sales of its shares and
servicing of its shareholder accounts.
The Plan provides that the Fund may incur certain costs, which may not
exceed 0.50% per annum of the Investor 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 in the Fund or support
servicing of Investor Share shareholder accounts. Such expenditures
incurred as service fees may not exceed 0.25% per annum of the Investor
Shares' average daily net assets. The Fund incurred $847 of such
expenses under the Plan for the period ended March 31, 1998.
NOTE 4 - DEFERRED ORGANIZATION EXPENSES
All expenses of the Fund 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 $6,507,371 and $991,675, respectively, for the period ended
March 31, 1998.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of The Nottingham Investment Trust II and Shareholders
of WST Growth & Income Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of WST Growth & Income Fund (a portfolio of The
Nottingham Investment Trust II) as of March 31, 1998, and the related statements
of operations and changes in net assets, for the period from September 9, 1997
(commencement of operations) to March 31, 1998 and financial highlights for the
periods presented. 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.
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, 1998 by
correspondence with the custodian and brokers; where replies were not received,
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, such financial statements and financial highlights present
fairly, in all material respects, the financial position of WST Growth & Income
Fund as of March 31, 1998, the results of its operations, the changes in its net
assets and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
April 24, 1998
<PAGE>
Capital Value Fund
MANAGER'S COMMENTS
The Capital Value Fund thrived in the first quarter of 1998. Fourth quarter 1997
was a difficult one, and the market looked set to continue its losing ways
during the first weeks of January. However, a decline in interest rates coupled
with less than expected damage from Asia have allowed the market to resume an
upward path.
Several of our purchases from late 1997 have been stellar performers for 1998.
They include Nationsbank, First Union, Brooktrout Technology, JB Hunt, and
Ascend Communications. Being contrarians, we took advantage of the market's
rapid descent in October and November. We were able to buy many of our favorite
companies at a steep discount. Many companies that do a majority of their
business in Asia have been hurt, but the damage has been limited to those
sectors. The widespread panic feared in December has simply not occurred.
Recently, I have heard the comment that the market is overvalued. This is true
to some extent. Excite, the Internet search engine had sales of $34 million last
year, but is being valued by the stock market at $1.39 billion. That valuation
is a cool 40 times sales. If we owned that type of company we too would be
worried. We are still able to find quality companies with strong balance sheets,
and our latest buy list looks to be one of the most promising yet. After double
digit gains in the first quarter, the stock market is due for a rest. However,
look for the market to move higher until rising interest rates rain on the
parade.
<PAGE>
Capital Value Fund
Performance Update - $10,000 Investment
For the period from December 31, 1991 to
March 31, 1998
60% S&P 500 Index
Capital Value 40% Lehman Aggregate
Fund Bond Index
12/31/91 9,650 10,000
3/31/92 9,541 9,797
6/30/92 9,729 10,068
9/30/92 9,929 10,432
12/31/92 10,159 10,753
3/31/93 10,616 11,213
6/30/93 10,739 11,364
9/30/93 10,898 11,659
12/31/93 11,255 11,823
3/31/94 11,099 11,418
6/30/94 10,927 11,400
9/30/94 11,395 11,763
12/31/94 11,363 11,779
3/31/95 12,084 12,711
6/30/95 13,050 13,759
9/30/95 13,474 14,547
12/31/95 13,802 15,331
3/31/96 14,037 15,767
6/30/96 14,438 16,266
9/30/96 14,473 16,702
12/31/96 15,164 17,803
3/31/97 15,031 18,098
6/30/97 16,691 20,487
9/30/97 18,987 21,780
12/31/97 18,415 22,410
3/31/98 19,975 24,773
This graph depicts the performance of the Capital Value Fund versus a combined
index of 60% S&P 500 Index and 40% Lehman Brothers Aggregate Bond Index. It is
important to note that the Capital Value 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 Five Years
- --------------------------------------------------------------------------------
No Sales Load 12.34% 32.89% 13.47%
- --------------------------------------------------------------------------------
Maximum 3.5% Sales Load 11.70% 28.23% 12.66%
- --------------------------------------------------------------------------------
The graph assumes an initial $10,000 investment at December 31, 1991 ($9,650
after maximum sales load of 3.5%). All dividends and distributions are
reinvested.
At March 31, 1998, the Fund would have grown to $19,975 - total investment
return of 99.75% since December 31, 1991. Without the deduction of the 3.5%
maximum sales load, the Fund would have grown to $20,699 - total investment
return of 106.99% since December 31, 1991. The sales load is reduced or
eliminated for larger purchases.
At March 31, 1998, a similar investment in a combined index of 60% S&P 500 and
40% Lehman Brothers Aggregate Bond Index would have grown to $24,773 - total
investment return of 147.73% since December 31, 1991.
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>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
CAPITAL VALUE FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - 65.97%
Aerospace & Defense - 1.05%
The Boeing Company .................................................... 2,000 $104,250
--------
Auto Parts - Replacement Equipment - 0.34%
(a) AutoZone, Inc. ........................................................ 1,000 33,875
--------
Auto & Trucks - 0.55%
Chrysler Corporation .................................................. 1,300 54,031
--------
Beverages - 0.86%
PepsiCo, Inc. ......................................................... 2,000 85,375
--------
Brewery - 0.71%
Adolph Coors Company .................................................. 2,000 70,000
--------
Broadcast - Radio & Television - 0.70%
(a) U S WEST Media Group .................................................. 2,000 69,500
--------
Building Materials - 1.29%
Louisiana-Pacific Corporation ......................................... 5,500 127,875
--------
Commercial Services - 0.35%
(a) Pinkerton's, Inc. ..................................................... 1,500 34,594
--------
Computers - 4.53%
Compaq Computer Corporation ........................................... 8,000 207,500
(a) EMC Corporation ....................................................... 6,000 226,875
(a) Silicon Graphics, Inc. ................................................ 1,000 13,937
--------
448,312
--------
Computer Software & Services - 14.70%
(a) 3Com Corporation ...................................................... 2,500 89,687
Adobe Systems, Incorporated ........................................... 1,000 45,187
(a) Ascend Communications, Inc. ........................................... 3,500 132,562
(a) Automatic Data Processing, Inc. ....................................... 1,000 68,062
(a) Brooktrout Technology, Inc. ........................................... 3,000 56,625
(a) Cadence Design Systems, Inc. .......................................... 2,000 69,250
(a) Cisco Systems, Inc. ................................................... 6,000 410,250
Hewlett-Packard Company ............................................... 3,000 190,125
(a) Intuit Inc. ........................................................... 1,700 82,237
(a) Novell, Inc. .......................................................... 8,000 85,750
(a) ObjectShare, Inc. ..................................................... 1,000 2,718
(Continued)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
CAPITAL VALUE FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - (Continued)
Computer Software & Services - (Continued)
(a) Parametric Technology Company ......................................... 4,000 $ 133,250
(a) Pomeroy Computer Resources, Inc. ...................................... 2,475 58,317
(a) Shiva Corporation ..................................................... 3,000 30,000
----------
1,454,020
----------
Electronics - Semiconductor - 1.54%
(a) Cree Research, Inc. ................................................... 3,000 49,875
(a) Integrated Device Technology, Inc. .................................... 5,500 77,344
(a) LSI Logic Corporation ................................................. 1,000 25,250
----------
152,469
----------
Emerging Technology - 1.35%
(a) FORE Systems, Inc. .................................................... 8,500 133,875
----------
Engineering & Construction - 0.75%
Fluor Corporation ..................................................... 1,500 74,625
----------
Entertainment - 1.40%
The Walt Disney Company ............................................... 1,300 138,775
----------
Financial - Banks, Commercial - 3.75%
First Union Corporation ............................................... 2,000 113,500
NationsBank Corporation ............................................... 1,200 87,525
Wachovia Corporation .................................................. 2,000 169,625
----------
370,650
----------
Foreign Securities - 3.44% (b)
Alcatel Alsthom - ADR ................................................. 2,000 76,000
(a) Business Objects S.A. - ADR ........................................... 5,400 81,675
Imperial Oil Ltd. ..................................................... 1,000 56,563
Norsk Hydro A.S.A. - ADR .............................................. 2,500 125,000
----------
339,238
----------
Forest Products & Paper - 0.51%
St. Joe Paper Company ................................................. 1,500 50,438
----------
Household Products & Housewares - 0.58%
Rubbermaid, Inc. ...................................................... 2,000 56,875
----------
Machine - Diversified - 0.49%
Stewart & Stevenson Services, Inc. .................................... 2,000 48,125
----------
(Continued)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
CAPITAL VALUE FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - (Continued)
Medical Supplies - 2.93%
Crawford & Company .................................................... 3,000 $ 57,188
(a) Datascope Corporation ................................................. 6,000 156,000
(a) ThermoTrex Corporation ................................................ 3,600 76,050
--------
289,238
--------
Miscellaneous - Manufacturing - 0.48%
(a) ACX Technologies, Inc. ................................................ 2,000 47,875
--------
Pharmaceuticals - 5.86%
Bristol-Myers Squibb Company .......................................... 2,000 208,625
Merck & Co., Inc. ..................................................... 1,000 128,375
Mylan Laboratories Inc. ............................................... 7,500 172,500
(a) Roberts Pharmaceutical Corporation .................................... 5,000 70,000
--------
579,500
--------
Retail - Apparel - 2.60%
(a) AnnTaylor Stores Corporation .......................................... 2,000 32,875
DEB Shops, Inc. ....................................................... 2,000 14,000
Liz Claiborne, Inc. ................................................... 2,000 99,625
The Cato Corporation .................................................. 2,000 23,750
The Limited, Inc. ..................................................... 3,000 86,063
--------
256,313
--------
Retail - Department Stores - 2.57%
Wal-Mart Stores, Inc. ................................................. 5,000 254,063
--------
Retail - Grocery - 1.80%
Food Lion, Inc. ....................................................... 10,000 106,875
Weis Markets, Inc. .................................................... 2,000 71,375
--------
178,250
--------
Shoes - Leather - 0.45%
Nike, Inc. ............................................................ 1,000 44,250
--------
Telecommunications - 0.96%
SBC Communications Inc. ............................................... 2,194 95,156
--------
Telecommunications Equipment - 1.21%
(a) Premisys Communications, Inc. ......................................... 1,000 28,688
(a) Westell Technologies, Inc. ............................................ 2,000 25,500
Wireless Telecom Group, Inc. .......................................... 9,000 65,250
--------
119,438
--------
Tire & Rubber - 0.77%
The Goodyear Tire & Rubber Company .................................... 1,000 75,750
--------
(Continued)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
CAPITAL VALUE FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - (Continued)
Transportation - Freight - 1.65%
(a) FDX Corporation ....................................................... 2,300 $163,588
--------
Utilities - Electric - 2.53%
Duke Energy Corporation ............................................... 2,000 119,250
Potomac Electric Power Company ........................................ 3,000 75,188
Southern Company ...................................................... 2,000 55,250
--------
249,688
--------
Utilities - Telecommunications - 3.27%
BellSouth Corporation ................................................. 2,000 135,125
GTE Corporation ....................................................... 2,000 119,750
Sprint Corporation .................................................... 1,000 67,813
--------
322,688
--------
Total Common Stocks (Cost $3,991,477) ................................. 6,522,699
----------
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Maturity
Principal Rate Date
- ------------------------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS - 21.35%
A T & T Corporation .................................. $ 50,000 7.500% 06/01/06 53,875
A T & T Corporation .................................. 50,000 8.125% 01/15/22 53,875
A T & T Corporation .................................. 50,000 8.125% 07/15/24 53,500
A T & T Corporation .................................. 100,000 8.625% 12/01/31 109,875
American Express Company ............................. 50,000 8.625% 05/15/22 54,200
Anheuser-Busch Companies, Inc. ....................... 13,000 8.625% 12/01/16 13,488
Anheuser-Busch Companies, Inc. ....................... 25,000 9.000% 12/01/09 30,433
Archer Daniels Midland Corporation ................... 100,000 6.250% 05/15/03 100,835
Archer Daniels Midland Corporation ................... 25,000 8.875% 04/15/11 30,579
BellSouth Telecommunications ......................... 50,000 6.250% 05/15/03 50,375
BellSouth Telecommunications ......................... 125,000 6.750% 10/15/33 122,656
BellSouth Telecommunications ......................... 50,000 7.000% 02/01/05 52,000
BellSouth Telecommunications ......................... 25,000 7.875% 08/01/32 26,469
Du Pont (E.I.) De Nemours & Company .................. 60,000 6.000% 12/01/01 59,700
Du Pont (E.I.) De Nemours & Company .................. 50,000 7.950% 01/15/23 53,429
Du Pont (E.I.) De Nemours & Company .................. 50,000 8.125% 03/15/04 54,852
Duke Power Company ................................... 20,000 6.375% 03/01/08 19,825
Duke Power Company ................................... 100,000 6.750% 08/01/25 98,125
General Electric Capital Corporation ................. 100,000 8.750% 05/21/07 117,613
International Business Machines ...................... 50,000 8.375% 11/01/19 58,688
Morgan Stanley Group, Inc. ........................... 75,000 7.500% 02/01/24 76,780
(Continued)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
CAPITAL VALUE FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Maturity Value
Principal Rate Date (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS - (Continued)
Pacific Bell ......................................... $100,000 6.250% 03/01/05 $100,500
Sears, Roebuck and Company ........................... 50,000 9.250% 04/15/98 50,055
The Boeing Company ................................... 150,000 8.750% 09/15/31 191,045
The Coca-Cola Company ................................ 70,000 8.500% 02/01/22 83,990
United Parcel Service of America ..................... 50,000 8.375% 04/01/20 60,813
U S West Communications Group ........................ 50,000 6.875% 09/15/33 48,305
Wachovia Corporation ................................. 75,000 6.375% 04/15/03 75,577
Wal-Mart Stores, Inc. ................................ 25,000 6.500% 06/01/03 25,514
Wal-Mart Stores, Inc. ................................ 25,000 8.500% 09/15/24 28,280
Wal-Mart Stores, Inc. ................................ 150,000 8.875% 06/29/11 156,477
--------
Total Corporate Obligations (Cost $1,912,391) ........ 2,111,728
---------
- ------------------------------------------------------------------------------------------------------------------------------------
Shares
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANIES - 9.00%
Evergreen Money Market Treasury Institutional Money
Market Fund Institutional Service Shares .............................. 443,954 443,954
Evergreen Money Market Treasury Institutional Treasury Money
Market Fund Institutional Service Shares .............................. 446,195 446,195
-------
Total Investment Companies (Cost $890,149) ............................ 890,149
-------
Total Value of Investments (Cost $6,794,017 (c)) ................................ 96.32% $9,524,576
Other Assets Less Liabilities ................................................... 3.68% 363,492
-------- ------------
Net Assets ................................................................. 100.00% $9,888,068
======== =============
(a) Non-income producing investment.
(b) Foreign securities represent securities issued in the United States
markets by non-domestic companies.
(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 $2,806,785
Unrealized depreciation (76,226)
----------
Net unrealized appreciation $2,730,559
==========
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
CAPITAL VALUE FUND
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1998
ASSETS
Investments, at value (cost $6,794,017) ..................................................... $ 9,524,576
Cash ........................................................................................ 447,853
Income receivable ........................................................................... 48,957
Other assets ................................................................................ 1,355
-----------
Total assets ........................................................................... 10,022,741
-----------
LIABILITIES
Accrued expenses ............................................................................ 16,939
Payable for investment purchases ............................................................ 117,734
-----------
Total liabilities ...................................................................... 134,673
-----------
NET ASSETS
(applicable to 681,586 Investor Class Shares outstanding; unlimited
shares of no par value beneficial interest authorized) ..................................... $ 9,888,068
===========
NET ASSET VALUE AND REDEMPTION PRICE PER INVESTOR CLASS SHARE
($9,888,068 / 681,586 shares) ............................................................... $ 14.51
===========
OFFERING PRICE PER INVESTOR CLASS SHARE
(100 / 96.5% of $14.51) ..................................................................... $ 15.04
===========
NET ASSETS CONSIST OF
Paid-in capital ............................................................................. $ 7,157,506
Undistributed net realized gain on investments .............................................. 3
Net unrealized appreciation on investments .................................................. 2,730,559
-----------
$ 9,888,068
===========
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
CAPITAL VALUE FUND
STATEMENT OF OPERATIONS
Year ended March 31, 1998
INVESTMENT INCOME
Income
Interest ................................................................................... $ 154,801
Dividends .................................................................................. 116,814
Miscellaneous .............................................................................. 189
-----------
Total income .......................................................................... 271,804
-----------
Expenses
Investment advisory fees (note 2) .......................................................... 53,764
Fund administration fees (note 2) .......................................................... 22,402
Distribution and service fees - Investor Class Shares (note 3) ............................. 44,611
Custody fees ............................................................................... 4,280
Registration and filing administration fees (note 2) ....................................... 2,701
Fund accounting fees (note 2) .............................................................. 21,000
Audit fees ................................................................................. 9,749
Legal fees ................................................................................. 4,929
Securities pricing fees .................................................................... 6,982
Shareholder recordkeeping fees ............................................................. 2,053
Shareholder servicing expenses ............................................................. 4,633
Registration and filing expenses ........................................................... 1,536
Printing expenses .......................................................................... 3,199
Trustee fees and meeting expenses .......................................................... 4,193
Other operating expenses ................................................................... 4,041
-----------
Total expenses ........................................................................ 190,073
-----------
Net investment income ........................................................... 81,731
-----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from investment transactions .................................................. 1,175,258
Increase in unrealized appreciation on investments .............................................. 1,240,206
-----------
Net realized and unrealized gain on investments ............................................ 2,415,464
-----------
Net increase in net assets resulting from operations .................................. $ 2,497,195
===========
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
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Year ended
March 31, March 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
Operations
Net investment income ......................................................... $ 81,731 $ 87,910
Net realized gain from investment transactions ................................ 1,175,258 98,880
Increase in unrealized appreciation on investments ............................ 1,240,206 356,911
------------ ------------
Net increase in net assets resulting from operations ................... 2,497,195 543,701
------------ ------------
Distributions to shareholders from
Net investment income ......................................................... (81,731) (87,910)
Tax return of capital ......................................................... 0 (8,006)
Net realized gain from investment transactions ................................ (1,175,255) (69,095)
------------ ------------
Decrease in net assets resulting from distributions ...................... (1,256,986) (165,011)
------------ ------------
Capital share transactions
Increase (decrease) in net assets resulting from capital share transactions (a) 909,604 (192,238)
------------ ------------
Total increase in net assets ..................................... 2,149,813 186,452
NET ASSETS
Beginning of year ............................................................... 7,738,255 7,551,803
------------ ------------
End of year ..................................................................... $ 9,888,068 $ 7,738,255
============ ============
(a) A summary of capital share activity follows:
---------------------------------------------------------------------------------
Year ended Year ended
March 31, 1998 March 31, 1997
Shares Value Shares Value
---------------------------------------------------------------------------------
Shares sold ..................................... 59,404 $ 887,599 44,461 $ 551,414
Shares issued for reinvestment
of distributions ........................... 86,177 1,254,982 13,109 163,984
---------- ---------- ---------- ----------
145,581 2,142,581 57,570 715,398
Shares redeemed ................................. (82,958) (1,232,977) (72,371) (907,636)
---------- ---------- ---------- ----------
Net increase (decrease) .................... 62,623 $ 909,604 (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 Year)
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Year ended Year ended Year ended Year ended
March 31, March 31, March 31, March 31, March 31,
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ............................... $12.50 $11.92 $10.75 $10.42 $10.59
Income from investment operations
Net investment income .......................... 0.13 0.15 0.19 0.17 0.15
Net realized and unrealized gain on investments 3.93 0.70 1.53 0.73 0.41
----------- ----------- ----------- ----------- -----------
Total from investment operations 4.06 0.85 1.72 0.90 0.56
----------- ----------- ----------- ----------- -----------
Distributions to shareholders from
Net investment income .......................... (0.13) (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 transactions (1.92) (0.11) (0.35) (0.36) (0.62)
----------- ----------- ----------- ----------- -----------
Total distributions ............. (2.05) (0.27) (0.55) (0.57) (0.73)
----------- ----------- ----------- ----------- -----------
Net asset value, end of year ..................................... $ 14.51 $ 12.50 $ 11.92 $ 10.75 $ 10.42
=========== =========== =========== =========== ===========
Total return (b) ................................................. 32.89 % 7.08 % 16.16 % 8.66 % 5.21 %
=========== =========== =========== =========== ===========
Ratios/supplemental data
Net assets, end of year .................................... $9,888,068 $7,738,255 $7,551,803 $6,775,562 $6,257,240
=========== =========== =========== =========== ===========
Ratio of expenses to average net assets
Before expense reimbursements and waived fees .. 2.12 % 2.38 % 2.56 % 2.58 % 2.64 %
After expense reimbursements and waived fees ... 2.12 % 2.38 % 2.33 % 2.47 % 2.43 %
Ratio of net investment income to average net assets
Before expense reimbursements and waived fees .. 0.91 % 1.12 % 1.44 % 1.55 % 1.22 %
After expense reimbursements and waived fees ... 0.91 % 1.12 % 1.66 % 1.66 % 1.43 %
Portfolio turnover rate .................................... 33.50 % 7.31 % 12.33 % 24.67 % 32.99 %
Average broker commissions per share (a) ................... $0.1000 $0.1000 - - -
(a) Represents total commissions paid on portfolio securities divided by total portfolio shares purchased or sold on
which commissions were charged.
(b) 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
March 31, 1998
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 - The Fund is considered a personal
holding company as defined under Section 542 of the Internal
Revenue Code since 50% of the value of the Fund's shares
were owned directly or indirectly by five or fewer
individuals at certain times during the last half of the
year. As a personal holding company, the Fund is subject to
federal income taxes on undistributed personal holding
company income at the maximum individual income tax rate. No
provision has been made for federal income taxes since
substantially all taxable income has been distributed to
shareholders. It is the policy of the Fund to comply with
the provisions of the Internal Revenue Code applicable to
regulated investment companies and to make sufficient
distributions of taxable income to relieve it from all
federal income taxes.
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>
CAPITAL VALUE FUND
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
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 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
March 31, 1998
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.
North Carolina Shareholder Services, LLC (the "Transfer Agent")
serves as the Funds' transfer, dividend paying, and shareholder
servicing agent. The Transfer Agent, subject to the authority of
the Board of Trustees, provides transfer agency services pursuant
to an agreement with the Administrator, which has been approved by
the Trust. The Transfer Agent maintains the records of each
shareholder's account, answers shareholder inquiries concerning
accounts, processes purchases and redemptions of the Fund shares,
acts as dividend and distribution disbursing agent, and performs
other shareholder servicing functions. The Transfer Agent is
compensated for its services by the Administrator and not directly
by the Funds.
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 year ended
March 31, 1998, the Distributor retained sales charges in the
amount of $2,316.
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 $44,611 of
such expenses under the Plan for the year ended March 31, 1998.
(Continued)
<PAGE>
CAPITAL VALUE FUND
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
NOTE 4 - PURCHASES AND SALES OF INVESTMENTS
Purchases and sales of investments, other than short-term
investments, aggregated $2,676,113 and $3,755,245, respectively,
for the year ended March 31, 1998.
The Fund's prospectus provides that the Fund will generally limit
foreign investments to those traded domestically as sponsored
American Depository Receipts (ADR's). At March 31, 1998, Fund
investments included non-ADR foreign securities valued at $56,563
or 0.59% of total investments at value
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of The Nottingham Investment Trust II and Shareholders
of Capital Value Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Capital Value Fund (a portfolio of The
Nottingham Investment Trust II) as of March 31, 1998 and the related statement
of operations for the year then ended, the statement of changes in net assets
for the years ended March 31, 1998 and 1997, and financial highlights for the
periods presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
March 31, 1998 by correspondence with the custodian and brokers; where replies
were not received, 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 audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Capital Value Fund
as of March 31, 1998, the results of its operations, the changes in its net
assets and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
April 24, 1998
<PAGE>
Dear Shareholders of Investek Fixed Income Trust:
Enclosed for your review is the annual report for the fiscal year ended
31 March 1998, including a report entitled "Portfolio of Investments." In what
was a strong year for the bond market, caused by a decline in yields from 61
basis points at the one-year Treasury to 116 basis points at 30-year, the fund
returned 9.91% versus the Lipper Intermediate Investment Grade Index at 10.72%.
This is the Lipper category in which the fund is categorized. Over the trailing
3-year period, annualized returns were 8.64% respectively. For the trailing
5-year period, annualized returns were 6.38% versus 6.28% respectively.
As the bond market rallied this fiscal year, we were in a defensive
position with the fund's effective duration shorter than the target duration of
the Lehman Brothers Aggregate Index. Consequently, we did not participate fully
in terms of price appreciation as rates fell. In the last quarter of the fiscal
year, we re-balanced the portfolio to bring the effective duration to 4.33 years
compared to the Aggregate's 4.55 years. We will maintain this match carefully in
order that our philosophy of buying high quality issues with incremental yield
can bear fruit as it has in the past.
We have maintained the portfolio's overall AAA rating. United States
Government and Agency guaranteed and insured obligations make up 75% of the
portfolio, with another 14% in AAA-rated issues. Thank you for your continued
confidence in the Investek Fixed Income Trust. Please call us if we can be of
further service to you.
Very truly yours.
INVESTEK CAPITAL MANAGEMENT
Douglas Folk, CFA
Vice President
<PAGE>
INVESTEK FIXED INCOME TRUST
Performance Update - $50,000 Investment
For the period from November 15, 1991 (commencement of operations)
to March 31, 1998
Investek Fixed Lehman Aggregate Lipper Intermediate
Income Trust Bond Index Grade Debt Fund Index
11/15/91 50,000 50,000 50,000
12/31/91 50,355 51,720 51,713
3/31/92 50,612 51,059 51,108
6/30/92 55,345 53,119 53,135
9/30/92 53,918 55,401 55,567
12/31/92 54,275 55,548 55,446
3/31/93 56,875 57,844 57,912
6/30/93 58,672 59,378 59,394
9/30/93 60,027 60,928 60,941
12/31/93 60,004 60,964 60,990
3/31/94 57,698 59,216 59,307
6/30/94 57,065 58,606 58,608
9/30/94 57,281 58,963 58,974
12/31/94 57,736 59,186 59,035
3/31/95 60,426 62,171 61,709
6/30/95 64,300 65,959 65,120
9/30/95 64,918 67,254 66,360
12/31/95 67,446 70,120 69,140
3/31/96 66,892 68,877 67,915
6/30/96 67,836 69,268 68,179
9/30/96 68,958 70,549 69,371
12/31/96 70,199 72,665 71,341
3/31/97 70,487 72,259 70,914
6/30/97 73,040 74,913 73,353
9/30/97 74,765 77,402 75,618
12/31/97 76,634 79,681 76,730
3/31/98 77,474 80,920 78,518
This graph depicts the performance of the Investek Fixed Income Trust versus the
Lehman Brothers Aggregate Bond Index and the Lipper Intermediate Investment
Grade Debt Fund Index. It is important to note that the Investek Fixed Income
Trust is a professionally managed mutual fund while the index is not available
for investment and is unmanaged. The comparison is shown for illustrative
purposes only.
Average Annual Total Return
- -------------------------------------------------
Since Inception One Year Five Years
- -------------------------------------------------
7.11% 9.91% 6.37%
- -------------------------------------------------
The graph assumes an initial $50,000 investment at November 15, 1991. All
dividends and distributions are reinvested.
At March 31, 1998, the Fund would have grown to $77,474 - total investment
return of 54.95% since November 15, 1991.
At March 31, 1998, a similar investment in the Lehman Brothers Aggregate Bond
Index would have grown to $80,920 - total investment return of 61.84% and the
Lipper Intermediate Investment Grade Debt Fund Index would have grown to $78,518
- - total investment return of 57.04%, since November 15, 1991.
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>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
INVESTEK FIXED INCOME TRUST
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Maturity Value
Principal Rate Date (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
U. S. GOVERNMENT AND AGENCY OBLIGATIONS - 64.54%
United States Treasury Note .............................................. $800,000 5.500% 02/15/08 $ 790,875
A.I.D. - Equador ......................................................... 85,366 7.050% 05/01/15 89,259
A.I.D. - Ivory Coast ..................................................... 280,105 8.100% 12/01/06 282,262
A.I.D. - Peru ............................................................ 174,335 8.350% 01/01/07 174,771
B.A.L.T. Conway Partnership Title XI ..................................... 145,616 10.750% 11/15/03 147,437
Chilbar Ship Co. Title XI ................................................ 63,894 6.980% 07/15/01 64,028
Federal Agricultural Mortgage Corporation
Series AM-1003 ....................................................... 672,835 6.822% 04/25/13 696,530
Series AM-1002 ....................................................... 248,602 6.922% 12/25/12 256,025
Federal Home Loan Mortgage Corporation
REMIC Series 1545 Class H ............................................ 200,000 6.000% 06/15/23 194,188
Pool #W10001 ......................................................... 64,000 6.420% 12/01/05 65,263
REMIC Series 1311 Class J ........................................... 500,000 7.500% 09/15/21 517,344
Federal National Mortgage Association
Pool #73401 .......................................................... 490,451 6.440% 03/01/06 498,172
REMIC Series 1993-117 Class K ........................................ 478,939 6.500% 07/25/08 473,402
Federal National Mortgage Association Strip
Series 66 Class 1 .................................................... 184,399 7.500% 01/01/20 187,657
Global Industries Ltd. Title XI .......................................... 1,204,000 8.300% 07/15/20 1,263,856
Government National Mortgage Association
Pool #16402 .......................................................... 258,975 8.500% 04/15/12 271,761
Pool #383137 ......................................................... 398,289 7.750% 03/15/11 408,495
Lawrence Steamship Company Title XI ...................................... 337,357 7.270% 09/01/03 343,801
Moore McCormack Leasing - Series B - Title XI ............................ 163,000 8.875% 07/15/01 163,815
Small Business Administration 98-B ....................................... 1,000,000 6.150% 02/01/18 985,278
Small Business Administration 97-E ....................................... 240,292 6.600% 09/01/07 242,900
Small Business Administration 97-H ....................................... 246,433 6.800% 08/01/17 250,397
Small Business Administration 97-F ....................................... 295,737 7.200% 06/01/17 306,732
Small Business Administration 92-A ....................................... 285,647 7.600% 01/01/12 295,645
-----------
Total U. S. Government and Agency Obligations (Cost $8,795,409) ...... 8,969,893
-----------
(Continued)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
INVESTEK FIXED INCOME TRUST
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Maturity Value
Principal Rate Date (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
U. S. GOVERNMENT INSURED OBLIGATIONS - 9.56%
Federal Housing Authority Project Loan
Crystal City ........................................................... $57,786 2.900% 01/01/06 $49,906
Downtowner Apartments .................................................. 163,978 8.375% 11/01/11 171,977
GMAC 32 ................................................................ 86,553 7.430% 12/01/21 88,542
Kinswood Apartments .................................................... 595,426 6.875% 10/01/14 589,323
USGI #87 ............................................................... 418,316 7.430% 08/01/23 428,543
-----------
Total U. S. Government Insured Obligations (Cost $1,316,762) ........... 1,328,291
-----------
CORPORATE OBLIGATIONS - 11.18%
California Infrastructure SDG&E Series 1997-1 .............................. 500,000 6.370% 12/26/09 504,219
GG1B Funding Corporation ................................................... 449,181 7.430% 01/15/11 459,849
Great Northern Railroad Series Q ........................................... 616,000 2.625% 01/01/10 420,420
Monon Railroad ............................................................. 175,000 6.000% 01/01/07 170,060
-----------
Total Corporate Obligations (Cost $1,543,033) .......................... 1,554,548
-----------
CONVENTIONAL MORTGAGE BACKED SECURITIES - 8.28%
GE Capital Mortgage Services, Inc.
REMIC Series 1993-17 Class A6 .......................................... 650,000 6.500% 12/25/23 652,031
Prudential Home Mortgage Securities
REMIC Series 1994-2 Class A8 ........................................... 500,000 6.750% 02/25/24 499,219
-----------
Total Conventional Mortgage Backed Securities (Cost $1,117,681) ........ 1,151,250
-----------
PRIVATE MORTGAGE BACKED SECURITIES - 1.61%
Krauss/Schwartz Properties, Ltd. ........................................... 136,431 7.740% 02/18/04 137,440
National Housing Partnership ............................................... 86,590 9.500% 05/01/03 85,950
-----------
Total Private Mortgage Backed Securities (Cost $223,020) ............... 223,390
-----------
PRIVATE PLACEMENT CORPORATE SECURITIES - 1.86%
Rosewood Care Center Capital Funding Corporation
First Mortgage Bonds (Cost $268,926).................................... 275,541 7.250% 11/01/13 258,320
-----------
(Continued)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
INVESTEK FIXED INCOME TRUST
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY - 1.52%
AIM Short Term Prime Fund A (Cost $211,854)................................. 211,854 $ 211,854
-----------
Total Value of Investments (Cost $13,476,685 (a)) ............................... 98.55 % $13,697,546
Other Assets in Excess of Liabilities ........................................... 1.45 % 201,683
------ -----------
Net Assets ................................................................. 100.00 % $13,899,229
====== ===========
(a) Aggregate cost for federal income tax purposes is $13,477,731. Unrealized appreciation (depreciation) of investments for
federal income tax purposes is as follows:
Unrealized appreciation $270,508
Unrealized depreciation (50,693)
--------
Net unrealized appreciation $219,815
========
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
March 31, 1998
ASSETS
Investments, at value (cost $13,476,685) ..................................................... $13,697,546
Cash ......................................................................................... 64,011
Income receivable ............................................................................ 143,622
Other asset .................................................................................. 7
-----------
Total assets ............................................................................ 13,905,186
-----------
LIABILITIES
Accrued expenses ............................................................................. 5,957
-----------
NET ASSETS
(applicable to 1,347,703 shares outstanding; unlimited
shares of no par value beneficial interest authorized) ...................................... $13,899,229
===========
NET ASSET VALUE, REDEMPTION AND OFFERING PRICE PER SHARE
($13,899,229 / 1,347,703 shares) ............................................................. $ 10.31
===========
NET ASSETS CONSIST OF
Paid-in capital .............................................................................. $14,190,014
Accumulated net realized loss on investments ................................................. (511,646)
Net unrealized appreciation on investments ................................................... 220,861
-----------
$13,899,229
===========
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
INVESTEK FIXED INCOME TRUST
STATEMENT OF OPERATIONS
Year ended March 31, 1998
INVESTMENT INCOME
Income
Interest ..................................................................................... $ 860,343
Dividends .................................................................................... 17,502
----------
Total income ............................................................................ 877,845
----------
Expenses
Investment advisory fees (note 2) ............................................................ 55,540
Fund administration fees (note 2) ............................................................ 18,513
Custody fees ................................................................................. 3,552
Registration and filing administration fees (note 2) ......................................... 2,569
Fund accounting fees (note 2) ................................................................ 21,000
Audit fees ................................................................................... 11,139
Legal fees ................................................................................... 4,336
Securities pricing fees ...................................................................... 2,088
Shareholder recordkeeping fees ............................................................... 587
Shareholder servicing expenses ............................................................... 3,218
Registration and filing expenses ............................................................. 2,969
Printing expenses ............................................................................ 1,661
Trustee fees and meeting expenses ............................................................ 4,244
Other operating expenses ..................................................................... 4,662
----------
Total expenses .......................................................................... 136,078
----------
Less investment advisory fees waived (note 2) ........................................... (25,063)
----------
Net expenses ............................................................................ 111,015
----------
Net investment income ............................................................. 766,830
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from investment transactions .................................................... 10,958
Decrease in unrealized depreciation on investments ................................................ 346,682
----------
Net realized and unrealized gain on investments .............................................. 357,640
----------
Net increase in net assets resulting from operations .................................... $1,124,470
==========
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
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Year ended
March 31, March 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income ................................................................... $ 766,830 $ 743,943
Net realized gain from investment transactions .......................................... 10,958 40,347
Increase (decrease) in unrealized appreciation (depreciation) on investments ............ 346,682 (171,926)
----------- -----------
Net increase in net assets resulting from operations ........... 1,124,470 612,364
----------- -----------
Distributions to shareholders from
Net investment income ................................................................... (767,000) (748,208)
----------- -----------
Capital share transactions
Increase (decrease) in net assets resulting from capital share transactions (a) ......... 2,314,618 (898,136)
----------- -----------
Total increase (decrease) in net assets ................... 2,672,088 (1,033,980)
NET ASSETS
Beginning of year ........................................................................... 11,227,141 12,261,121
---------- ----------
End of year (including undistributed net investment income
of $170 in 1997) ............................................................. $13,899,229 $11,227,141
=========== ===========
(a) A summary of capital share activity follows:
----------------------------------------------------------------------
Year ended Year ended
March 31, 1998 March 31, 1997
Shares Value Shares Value
----------------------------------------------------------------------
Shares sold .............................................. 282,314 $ 2,930,727 90,260 $ 912,132
Shares issued for reinvestment
of distributions .................................... 51,625 530,895 46,737 470,441
----------- ----------- ----------- -----------
333,939 3,461,622 136,997 1,382,573
Shares redeemed .......................................... (110,904) (1,147,004) (225,604) (2,280,709)
----------- ----------- ----------- -----------
Net increase (decrease) ............................. 223,035 $ 2,314,618 (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 Year)
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Year ended Year ended Year ended Year ended
March 31, March 31, March 31, March 31, March 31,
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ............................. $9.98 $10.11 $9.74 $9.93 $10.48
Income from investment operations
Net investment income ............................. 0.64 0.65 0.66 0.63 0.61
Net realized and unrealized gain (loss) on investments 0.33 (0.13) 0.37 (0.19) (0.43)
----------- ----------- ----------- ----------- -----------
Total from investment operations ......... 0.97 0.52 1.03 0.44 0.18
----------- ----------- ----------- ----------- -----------
Distributions to shareholders from
Net investment income ............................. (0.64) (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 ...................... (0.64) (0.65) (0.66) (0.63) (0.73)
----------- ----------- ----------- ----------- -----------
Net asset value, end of year ................................... $10.31 $9.98 $10.11 $9.74 $9.93
=========== =========== =========== =========== ===========
Total return ................................................... 9.91% 5.38% 10.70% 4.73% 1.43%
=========== =========== =========== =========== ===========
Ratios/supplemental data
Net assets, end of year .................................. $13,899,229 $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 ..... 1.10% 1.20% 1.08% 1.08% 1.41%
After expense reimbursements and waived fees ...... 0.90% 0.90% 0.87% 0.77% 0.77%
Ratio of net investment income to average net assets
Before expense reimbursements and waived fees ..... 6.01% 6.07% 6.20% 6.15% 5.45%
After expense reimbursements and waived fees ...... 6.21% 6.37% 6.41% 6.45% 5.82%
Portfolio turnover rate .................................. 38.46% 32.94% 16.57% 19.64% 34.42%
See accompanying notes to financial statements
</TABLE>
<PAGE>
INVESTEK FIXED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
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 $8,083,608
(58% 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 - The Fund is considered a personal holding
company as defined under Section 542 of the Internal Revenue Code
since 50% of the value of the Fund's shares were owned directly
or indirectly by five or fewer individuals at certain times
during the last half of the year. As a personal holding company,
the Fund is subject to federal income taxes on undistributed
personal holding company income at the maximum individual income
tax rate. No provision has been made for federal income taxes
since substantially all taxable income has been distributed to
shareholders. It is the policy of the Fund to comply with the
provisions of the Internal Revenue Code applicable to regulated
investment companies and to make sufficient distributions of
taxable income to relieve it from all federal income taxes.
The Fund has capital loss carryforwards for federal income tax
purposes of $510,600, $492,567 of which expires in the year 2003
and $18,033 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.
(Continued)
<PAGE>
INVESTEK FIXED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
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 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 $25,063 ($0.02 per share) for
the year ended March 31, 1998.
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.
(Continued)
<PAGE>
INVESTEK FIXED INCOME TRUST
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
NC Shareholder Services, LLC (the "Transfer Agent") has been retained
by the Administrator to serve as the Fund's transfer, dividend paying,
and shareholder servicing agent. The Transfer Agent maintains the
records of each shareholder's account, answers shareholder inquiries
concerning accounts, processes purchases and redemptions of Fund
shares, acts as dividend and distribution disbursing agent, and
performs other shareholder servicing functions. The Transfer Agent is
compensated for its services by the Administrator and not directly by
the Fund.
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 $6,716,183 and $4,592,770, respectively, for the year ended
March 31, 1998.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of The Nottingham Investment Trust II and Shareholders
of Investek Fixed Income Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Investek Fixed Income Fund (a portfolio of The
Nottingham Investment Trust II) as of March 31, 1998 and the related statement
of operations for the year then ended, the statement of changes in net assets
for the years ended March 31, 1998 and 1997, and financial highlights for the
periods presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
March 31, 1998 by correspondence with the custodian and brokers; where replies
were not received, 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 audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Investek Fixed
Income Fund as of March 31, 1998, the results of its operations, the changes in
its net assets and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
April 24, 1998
<PAGE>
April 23, 1998
Dear Shareholder:
The ZSA Asset Allocation Fund had a great year for a globally diversified
balanced fund. Hindsight would certainly reveal that one should have only owned
U.S. domestic large growth companies, but as we all know, everyone is not
suitable for that level of risk. Still, for a conservative fund, ZSA returned
20.09% net for the year ended March 31, 1998.
As you review the relative performance numbers below, you can see that U.S.
domestic equities is the only area where we underperformed. In spite of this
year's performance, the Fund's U.S. Equities have beaten the S&P 500 over the
last three years 33.29% to 31.77%. Recent media estimates have claimed that less
than 10% of equity managers have beaten the S&P 500 over that time period.
The following is the approximate individual asset class performance for the ZSA
Asset Allocation Fund versus some common benchmarks:
U.S. Equities ZSA AA 39.45% S&P 500 47.99%
Fixed Income ZSA AA 14.94% Lehman Corp/Gov 12.50%
REITs ZSA AA 17.33% NAREIT 15.61%
International ZSA AA 20.82% Dow World (ex-U.S.) 12.87%
The U.S. Equities numbers were most impacted by disappointments in three stocks:
Adaptec, Green Tree Financial and MedPartners. While Adaptec and MedPartners
have yet to rebound, Green Tree received a buy-out offer for about $45 in
Conseco stock after the end of this reporting period, so much of the
underperformance has been recovered in a few weeks.
One additional factor that impacted our U.S. Equities is our discipline of
reducing positions in high PE stocks that have advanced substantially and
replacing them with lower PE stocks that have similar earnings growth outlooks.
This does cause us to lag in rapidly rising markets, but should add to our
performance in more normal times.
I would like to cover some of the less apparent risks in the current
environment. It is my nature to focus first on the risks. The most profitable
style of investing recently has been momentum investing. The simplest definition
of this style is an investment process that focuses purchases on stocks that are
moving higher at the moment. Very often, purchases are triggered when a stock or
industry group breaks into new highs. The position is maintained only as long as
the stock maintains a certain rate of increase. If for any reason a stock loses
momentum, it is immediately sold. Momentum investing may also focus on earnings
momentum. Purchases are made when stocks exhibit a consistent high rate of
earnings growth and sold if that growth falters.
In either case, no consideration is given to current valuation. Price to
earnings ratios are typically not considered, because the portfolio manager will
simply sell if the momentum shifts. A skeptic might refer to this as an example
of the greater fool theory. But, one should not discount the length of time or
the extent to which such investing can carry the market higher. In the mid
1980's the Japanese market was carried from 15,000 to 38,000 before the bubble
burst.
One ultimate effect of the momentum style is that fewer and fewer industries and
eventually fewer and fewer stocks begin to attract all of the money. It is rare
that a shift in emphasis (a rotation) occurs while a market is rising, because
the emphasis is too concentrated. Only when the leaders finally falter does the
momentum investor look around for a place to reinvest. So, only when the leaders
falter, will the market consequently falter.
Are we there yet? I don't know. There is a lot of liquidity in the world ... a
lot of investable money looking for a home. This could carry us much higher.
During the last few years, the momentum investor has focused on technology
stocks (though fewer and fewer meet the test), pharmaceutical companies and most
evidently on the financial sector. The Asian situation has eroded support for
technology and this industry may be falling off the list. Pharmaceuticals
continue to be strong as do banks, brokers and mutual fund companies.
The one factor that would toll the end of the recent euphoria would be a hike in
interest rates. This would damage the financial sector as higher interest rates
would squeeze profits. It would also hurt the long term valuations on such
growth issues as pharmaceuticals and technology because the future earnings
would become worth less in a higher interest rate environment.
Guessing the direction of short term interest rates has a low probability of
success. Even the top economists are right less than 50% of the time! Presently,
the argument seems to be between the wage pressures of a tight employment
situation, and the shrinking export volume to Southeast Asia. In the last three
months, overall export orders have demonstrated a 5% to 8% decline per month
over last year. If this does continue, there is a much stronger likelihood of a
slower economy and lower interest rates, but the jury is still out.
The overall impact of this analysis proposes that we stay invested in domestic
equities with a slightly higher than average exposure, but also that we
recognize that there are cheaper stock markets around the world which we will
overweight somewhat. It indicates that there may be much more risk in longer
term bonds than the potential coupon return over the next few years, so we will
keep our maturities lower than average. Real estate generally prospers from high
employment levels. Even with the recent strength, rents are still at or below
levels they reached ten or twelve years ago, so there is still room for growth
there. An average to higher than average allocation is indicated.
During the last year, we have lost some assets in the Fund to redemptions, as
some shareholders have established higher levels of risk tolerance. Risk
tolerance normally goes up as the stock market rises and comes down when it
falls. But, we have also acquired many new long term conservative investors, and
we are excited about the Fund's prospects going forward.
I encourage you to call us with any questions. We do not have a "touch tone"
service mentality, so if you have a question for me or have a friend or family
member you might wish to refer, please call. My private line is (248) 901-1518,
or feel free to use our toll-free line (800) 526-6639.
Respectfully,
Arthur E. Zaske
Portfolio Manager
ZSA Asset Allocation Fund
<PAGE>
ZSA ASSET ALLOCATION FUND
Performance Update - $10,000 Investment
For the period from August 10, 1992 (commencement of operations)
to March 31, 1998
ZSA Asset 50% S&P 500 Index
Allocation Fund 50% Lehman Gov/Corp Bond Index
8/10/92 10,000 10,000
9/30/92 10,007 10,246
12/31/92 10,286 10,508
3/31/93 10,793 10,982
6/30/93 11,449 11,174
9/30/93 11,955 11,503
12/31/93 12,009 11,620
3/31/94 11,139 11,217
6/30/94 10,551 11,172
9/30/94 10,804 11,473
12/31/94 10,475 11,493
3/31/95 11,070 12,339
6/30/95 11,816 13,327
9/30/95 12,300 13,983
12/31/95 12,821 14,731
3/31/96 13,040 14,947
6/30/96 13,324 15,317
9/30/96 13,706 15,345
12/31/96 14,593 16,592
3/31/97 14,500 16,750
6/30/97 15,815 18,494
9/30/97 16,454 19,518
12/31/97 16,394 20,124
3/31/98 17,412 21,664
This graph depicts the performance of the ZSA Asset Allocation Fund versus a
combined index of 50% S&P 500 and 50% Lehman Government/Corporate Long Term
Index. It is important to note that the ZSA Asset Allocation Fund is a
professionally managed mutual fund while the indexes are not available for
investment and are unmanaged. The comparison is shown for illustrative purposes
only.
Average Annual Total Return
- --------------------------------------------------
Since Inception One Year Five Years
- --------------------------------------------------
10.33% 20.09% 10.03%
- --------------------------------------------------
The graph assumes an initial $10,000 investment at August 10, 1992. All
dividends and distributions are reinvested.
At March 31, 1998, the Fund would have grown to $17,412 - total investment
return of 74.12% since August 10, 1992.
At March 31, 1998, a similar investment in a combined index of 50% S&P 500 and
50% Lehman Government/Corporate Long Term would have grown to $21,664 - total
investment return of 116.64% since August 10, 1992.
Past performance is not a guarantee of future performance. A mutual fund's share
price and investment return will vary with market conditions, and the principal
value of shares, when redeemed, may be worth more or less than the original
cost. Average annual returns are historical in nature and measure net investment
income and capital gain or loss from portfolio investments assuming
reinvestments of dividends.
<PAGE>
<TABLE>
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ZSA ASSET ALLOCATION FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - 77.09%
Beverages - 1.25%
The Coca-Cola Company ................................................ 900 $ 69,580
----------
Chemicals - 0.93%
Monsanto Company ..................................................... 1,000 52,000
----------
Commercial Services - 0.83%
Ecolab, Inc. ......................................................... 1,600 46,400
----------
Computers - 3.54%
(a) Adaptec, Inc. ........................................................ 3,100 60,837
(a) Micron Electronics, Inc. ............................................. 6,800 86,275
(a) 3Com Corporation ..................................................... 1,400 50,312
----------
197,424
----------
Computer Software & Services - 2.01%
Adobe Systems Incorporated ........................................... 800 36,150
(a) Microsoft Corporation ................................................ 850 76,075
----------
112,225
----------
Cosmetics & Personal Care - 1.38%
Gillette Company ..................................................... 650 77,146
----------
Electrical Equipment - 0.74%
Linear Technology Corporation ........................................ 600 41,400
----------
Electronics - 1.08%
General Electric Company ............................................. 700 60,200
----------
Entertainment - 0.76%
The Walt Disney Company ............................................. 400 42,700
----------
Financial - Banks, Commercial - 1.03%
First Chicago NBD Corporation ........................................ 650 57,281
----------
Financial - Banks, Money Center - 1.25%
Chase Manhattan Corporation .......................................... 518 69,865
----------
Financial Services - 1.12%
Green Tree Financial Corporation ..................................... 2,200 62,562
----------
Food - Processing - 0.82%
Philip Morris Companies Inc. ......................................... 1,100 45,856
----------
(Continued)
</TABLE>
<PAGE>
<TABLE>
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ZSA ASSET ALLOCATION FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - (Continued)
Foreign Securities - 24.97%
ABB AB - ADR ................................................................... 200 $ 27,850
Akzo Nobel N.V. - ADR .......................................................... 200 20,375
Amvescap PLC - ADR ............................................................. 300 32,100
Australia & New Zealand Banking Group Limited - ADR ............................ 600 20,363
Banco Bilbao Vizcaya, S.A. - ADR ............................................... 450 21,150
The Bank of Tokyo- Mitsubishi, Ltd. - ADR ...................................... 2,400 28,950
Bass PLC - ADR ................................................................. 1,600 32,000
British Airways PLC - ADR ...................................................... 250 26,016
British Petroleum Company PLC - ADR ............................................ 350 30,122
British Telecommunications PLC - ADR ........................................... 300 32,813
Commerzbank AG - ADR ........................................................... 800 29,200
Daimler-Benz AG - ADR .......................................................... 400 37,150
(a) Elan Corporation PLC - ADR ..................................................... 1,300 84,012
Endesa S.A. - ADR .............................................................. 900 21,825
Fuji Photo Film - ADR .......................................................... 750 27,563
Fujitsu Limited - ADR .......................................................... 800 42,000
Glaxo Wellcome PLC - ADR ....................................................... 450 24,356
Honda Motor Co., Ltd. - ADR .................................................... 500 35,500
Hong Kong Telecommunications Ltd. - ADR ........................................ 2,165 45,330
HSBC Holdings PLC - ADR ........................................................ 150 46,350
Koninklijke Ahold N.V. - ADR ................................................... 660 21,615
Kyocera Corporation - ADR ...................................................... 200 21,450
Luxottica Group S.P.A. - ADR ................................................... 400 37,475
LVMH (Moet Hennessy Louis Vuitton) - ADR ....................................... 850 36,125
Minebea Company Ltd. - ADR ..................................................... 1,800 38,700
Novartis - ADR ................................................................. 496 43,772
Pioneer Electronic Corporation - ADR ........................................... 1,800 29,138
Rhone-Poulenc - ADR ............................................................ 750 37,781
Rio Tinto Limited - ADR ........................................................ 350 18,113
Roche Holding AG - ADR ......................................................... 375 39,938
Royal Dutch Petroleum Company .................................................. 1,400 79,537
RWE AG - ADR ................................................................... 500 27,000
Siemens AG - ADR ............................................................... 500 33,375
Smith (Howard) Limited - ADR ................................................... 1,100 16,913
TDK Corporation - ADR .......................................................... 400 30,700
Telecom Italia S.P.A. - ADR .................................................... 400 31,775
Telefonaktiebolaget LM Ericsson - ADR .......................................... 550 26,159
Telefonica de Espana - ADR ..................................................... 200 26,450
Total S.A. - ADR ............................................................... 800 48,050
(Continued)
</TABLE>
<PAGE>
<TABLE>
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ZSA ASSET ALLOCATION FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - (Continued)
Foreign Securities - (Continued)
Toyota Motor Corporation - ADR ....................................... 500 $ 26,375
Unilever PLC - ADR ................................................... 1,500 58,500
----------
1,393,966
----------
Household Products & Housewares - 2.07%
Libbey, Inc. ......................................................... 1,400 52,150
The Procter & Gamble Company ......................................... 750 63,280
----------
115,430
----------
Insurance - Multiline - 1.80%
American International Group, Inc. ................................... 800 100,750
----------
Machine - Construction & Mining - 1.09%
Caterpillar Inc. ..................................................... 1,100 60,568
----------
Manufactured Housing - 0.84%
Clayton Homes, Inc. .................................................. 2,327 47,122
----------
Medical - Biotechnology - 1.44%
Medtronic, Inc. ...................................................... 1,550 80,406
----------
Medical - Hospital Management & Service - 0.81%
(a) MedPartners, Inc. .................................................... 4,400 45,100
----------
Metal Fabrication & Hardware - 1.17%
Kaydon Corporation ................................................... 1,600 65,400
----------
Metals - Diversified - 1.04%
Phelps Dodge Corporation ............................................. 900 58,106
----------
Oil & Gas - Domestic - 1.25%
Enron Corporation .................................................... 1,500 69,562
----------
Oil & Gas - International - 1.15%
Chevron Corporation .................................................. 800 64,250
----------
Pharmaceuticals - 0.74%
Abbott Laboratories .................................................. 550 41,422
----------
Real Estate Investment Trusts - 13.97%
Avalon Properties, Inc. .............................................. 425 12,219
BRE Properties, Inc. ................................................. 900 25,594
Burnham Pacific Properties, Inc....................................... 2,200 32,175
(Continued)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ZSA ASSET ALLOCATION FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - (Continued)
Real Estate Investment Trusts - (Continued)
Camden Property Trust ................................................ 800 $ 23,700
CarrAmerica Realty Corporation ....................................... 1,450 43,500
Chateau Communities, Inc. ............................................ 1,422 42,305
Cousins Properties, Inc. ............................................. 1,300 40,138
Developers Diversified Realty Corporation ............................ 650 26,569
Duke Realty Investments, Inc. ........................................ 1,900 46,312
EastGroup Properties Inc. ............................................ 1,600 33,000
Equity Office Properties Trust ....................................... 1,076 32,953
Equity Residential Properties Trust .................................. 231 11,608
Federal Realty Investment Trust ...................................... 400 9,825
General Growth Properties ............................................ 350 12,775
Great Lakes REIT, Inc. ............................................... 2,400 46,200
Highwoods Properties, Inc. ........................................... 750 26,438
IRT Property Company ................................................. 1,000 11,625
Kimco Realty Corporation ............................................. 1,050 37,144
Liberty Property Trust ............................................... 1,400 37,625
Mack-Cali Realty Corporation ......................................... 500 19,531
Merry Land & Investment Company, Inc. ................................ 500 11,188
New Plan Realty Trust ................................................ 500 12,562
Oasis Residential, Inc. .............................................. 500 11,094
Post Properties, Inc ................................................. 275 10,983
Security Capital Pacific Trust ....................................... 1,000 24,063
Simon DeBartolo Group, Inc. .......................................... 800 27,450
Spieker Properties, Inc. ............................................. 1,000 41,250
Taubman Centers, Inc. ................................................ 1,650 21,450
United Dominion Realty Trust, Inc. ................................... 800 11,600
Washington Real Estate Investment Trust .............................. 650 11,172
Weingarten Realty Investors .......................................... 275 12,306
Western Investment Real Estate Trust ................................. 900 13,444
----------
779,798
----------
Retail - Specialty Line - 1.28%
(a) Borders Group, Inc. .................................................. 2,100 71,531
----------
Telecommunications - 1.28%
Lucent Technologies, Inc. ............................................ 560 71,610
----------
Toys - 1.21%
Mattel, Inc. ......................................................... 1,700 67,363
----------
Transportation - Miscellaneous - 0.96%
CSX Corporation ...................................................... 900 53,550
----------
(Continued)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ZSA ASSET ALLOCATION FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - (Continued)
Utilities - Electric - 1.37%
Edison International ................................................. 2,600 $ 76,375
----------
Utilities - Telecommunications - 1.91%
A T & T Corp. ........................................................ 800 52,500
GTE Corporation ...................................................... 900 53,888
----------
106,388
----------
Warrant - 0.00%
(a) Security Capital Group Incorporated (expiration date 09/18/98) ....... 52 172
----------
Total Common Stocks (Cost $2,979,741) ............................................ 4,303,508
----------
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Maturity
Principal Rate Date
- ------------------------------------------------------------------------------------------------------------------------------------
U. S. GOVERNMENT OBLIGATIONS - 22.28%
United States Treasury Note ........................ $550,000 7.00% 07/15/06 594,860
United States Treasury Note ........................ 600,000 7.25% 05/15/04 648,563
----------
Total U. S. Government Obligations (Cost $1,157,622) 1,243,423
----------
- ------------------------------------------------------------------------------------------------------------------------------------
Shares
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANY - 0.12%
Evergreen Money Market Treasury Institutional Money
Market Fund Institutional Service Shares ............................. 6,442 6,442
----------
(Cost $6,442)
Total Value of Investments (Cost $4,143,805 (b)) ................................. 99.49% $5,553,373
Other Assets Less Liabilities .................................................... 0.51% 28,681
------- ----------
Net Assets 100.00% $5,582,054
======= ==========
(Continued)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ZSA ASSET ALLOCATION FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
(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 $1,506,382
Unrealized depreciation (96,814)
----------
Net unrealized appreciation $1,409,568
==========
The following acronyms are used throughout this portfolio:
ADR - American Depository 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
March 31, 1998
ASSETS
Investments, at value (cost $4,143,805) ...................................................... $5,553,373
Cash ......................................................................................... 842
Income receivable ............................................................................ 35,024
Receivable for fund shares sold .............................................................. 1,900
Other assets ................................................................................. 14
----------
Total assets ............................................................................ 5,591,153
----------
LIABILITIES
Accrued expenses ............................................................................. 6,312
Payable to advisor (note 2) .................................................................. 2,787
----------
Total liabilities ....................................................................... 9,099
----------
NET ASSETS
(applicable to 368,622 shares outstanding; unlimited
shares of no par value beneficial interest authorized) ...................................... $5,582,054
==========
NET ASSET VALUE, REDEMPTION AND OFFERING PRICE PER SHARE
($5,582,054 / 368,622 shares) ................................................................ $ 15.14
==========
NET ASSETS CONSIST OF
Paid-in capital .............................................................................. $3,493,978
Undistributed net investment income .......................................................... 275
Undistributed net realized gain on investments ............................................... 678,233
Net unrealized oappreciation on investments .................................................. 1,409,568
----------
$5,582,054
==========
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
ZSA ASSET ALLOCATION FUND
STATEMENT OF OPERATIONS
Year ended March 31, 1998
INVESTMENT INCOME
Income
Interest ..................................................................................... $ 126,172
Dividends .................................................................................... 131,319
----------
Total income ............................................................................ 257,491
----------
Expenses
Investment advisory fees (note 2) ............................................................ 71,560
Fund administration fees (note 2) ............................................................ 17,880
Distribution fees (note 3) ................................................................... 17,879
Custody fees ................................................................................. 3,338
Registration and filing administration fees (note 2) ......................................... 3,212
Fund accounting fees (note 2) ................................................................ 21,000
Audit fees ................................................................................... 9,200
Legal fees ................................................................................... 5,663
Securities pricing fees ...................................................................... 6,455
Shareholder recordkeeping fees ............................................................... 1,100
Shareholder servicing expenses ............................................................... 3,987
Registration and filing expenses ............................................................. 3,594
Printing expenses ............................................................................ 4,543
Amortization of deferred organization expenses ............................................... 7,555
Trustee fees and meeting expenses ............................................................ 4,193
Other operating expenses ..................................................................... 4,705
----------
Total expenses .......................................................................... 185,864
----------
Less investment advisory fees waived (note 2) .......................................... (46,413)
----------
Net expenses ............................................................................ 139,451
----------
Net investment income ............................................................. 118,040
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from investment transactions .................................................... 845,982
Increase in unrealized appreciation on investments ................................................ 365,346
----------
Net realized and unrealized gain on investments .............................................. 1,211,328
----------
Net increase in net assets resulting from operations .................................... $1,329,368
==========
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
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Year ended
March 31, March 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
DECREASE IN NET ASSETS
Operations
Net investment income ............................................................. $ 118,040 $ 196,480
Net realized gain from investment transactions .................................... 845,982 770,278
Increase in unrealized appreciation on investments ................................ 365,346 3,607
----------- -----------
Net increase in net assets resulting from operations ......................... 1,329,368 970,365
----------- -----------
Distributions to shareholders from
Net investment income ............................................................. (117,765) (198,165)
Net realized gain from investment transactions .................................... (306,295) (200)
----------- -----------
Decrease in net assets resulting from distributions .......................... (424,060) (198,365)
----------- -----------
Capital share transactions
Decrease in net assets resulting from capital share transactions (a) .............. (3,495,735) (2,225,412)
----------- -----------
Total decrease in net assets ............................................ (2,590,427) (1,453,412)
NET ASSETS
Beginning of year ..................................................................... 8,172,481 9,625,893
----------- -----------
End of year (including undistributed net investment income of of $275 in 1998)........ $ 5,582,054 $ 8,172,481
=========== ===========
(a) A summary of capital share activity follows:
------------------------------------------------------------------
Year ended Year ended
March 31, 1998 March 31, 1997
Shares Value Shares Value
------------------------------------------------------------------
Shares sold ............................................ 32,396 $ 479,312 138,546 $ 1,838,748
Shares issued for reinvestment
of distributions .................................. 29,260 421,062 14,919 194,507
----------- ----------- ----------- -----------
61,656 900,374 153,465 2,033,255
Shares redeemed ........................................ (300,509) (4,396,109) (323,926) (4,258,667)
----------- ----------- ----------- -----------
Net decrease ...................................... (238,853) $(3,495,735) (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 Year)
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Year ended Year ended Year ended Year ended
March 31, March 31, March 31, March 31, March 31,
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ............................... $13.45 $12.37 $10.76 $10.92 $10.77
Income (loss) from investment operations
Net investment income (loss) .......................... 0.25 0.29 0.30 0.15 (0.01)
Net realized and unrealized gain (loss) on investments 2.39 1.08 1.61 (0.17) 0.31
----------- ----------- ----------- ----------- -----------
Total from investment operations ................. 2.64 1.37 1.91 (0.02) 0.30
----------- ----------- ----------- ----------- -----------
Distributions to shareholders from
Net investment income ................................. (0.25) (0.29) (0.30) (0.14) (0.01)
Net realized gain from investment transactions ........ (0.70) 0 0 0 (0.14)
----------- ----------- ----------- ----------- -----------
Total distributions .............................. (0.95) (0.29) (0.30) (0.14) (0.15)
----------- ----------- ----------- ----------- -----------
Net asset value, end of year ..................................... $15.14 $13.45 $12.37 $10.76 $10.92
=========== =========== =========== =========== ===========
Total return ..................................................... 20.09% 11.20% 17.80% (0.62)% 2.67%
=========== =========== =========== =========== ===========
Ratios/supplemental data
Net assets, end of year .................................... $ 5,582,054 $ 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 ......... 2.60% 2.37% 2.30% 2.03% 2.75%
After expense reimbursements and waived fees .......... 1.95% 1.95% 1.91% 1.95% 1.92%
Ratio of net investment income (loss) to average net assets
Before expense reimbursements and waived fees ......... 1.00% 1.77% 2.06% 1.18% (0.88)%
After expense reimbursements and waived fees .......... 1.65% 2.18% 2.45% 1.27% (0.05)%
Portfolio turnover rate .................................... 53.54% 9.57% 67.89% 130.53% 53.66%
Average broker commissions per share (a) ................... $0.1006 $0.9686 - - -
(a) 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
March 31, 1998
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 investment objective of the Fund is to seek total return
consisting of a combination of capital appreciation, both realized
and unrealized, and current income. 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 - The Fund is considered a personal
holding company as defined under Section 542 of the Internal
Revenue Code since 50% of the value of the Fund's shares
were owned directly or indirectly by five or fewer
individuals at certain times during the last half of the
year. As a personal holding company, the Fund is subject to
federal income taxes on undistributed personal holding
company income at the maximum individual income tax rate. No
provision has been made for federal income taxes since
substantially all taxable income has been distributed to
shareholders. It is the policy of the Fund to comply with
the provisions of the Internal Revenue Code applicable to
regulated investment companies and to make sufficient
distributions of taxable income to relieve it from all
federal income taxes.
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.
(Continued)
<PAGE>
ZSA ASSET ALLOCATION FUND
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
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 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.
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 $46,413
($0.09 per share) for the year ended March 31, 1998.
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>
ZSA ASSET ALLOCATION FUND
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
NC Shareholder Services, LLC (the "Transfer Agent") has been
retained by the Administrator to serve as the Fund's transfer,
dividend paying, and shareholder servicing agent. The Transfer
Agent maintains the records of each shareholder's account, answers
shareholder inquiries concerning accounts, processes purchases and
redemptions of Fund shares, acts as dividend and distribution
disbursing agent, and performs other shareholder servicing
functions. The Transfer Agent is compensated for its services by
the Administrator and not directly by the Fund.
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 0.25% 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 $17,879 of such expenses under the Plan for the year
ended March 31, 1998.
NOTE 4 - PURCHASES AND SALES OF INVESTMENTS
Purchases and sales of investments, other than short-term
investments, aggregated $3,480,791 and $5,537,646, respectively,
for the year ended March 31, 1998.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of The Nottingham Investment Trust II and Shareholders
of ZSA Asset Allocation Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of ZSA Asset Allocation Fund (a portfolio of The
Nottingham Investment Trust II) as of March 31, 1998 and the related statement
of operations for the year then ended, the statement of changes in net assets
for the years ended March 31, 1998 and 1997, and financial highlights for the
periods presented. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
March 31, 1998 by correspondence with the custodian and brokers; where replies
were not received, 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 audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of ZSA Asset Allocation
Fund as of March 31, 1998, the results of its operations, the changes in its net
assets and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
April 24, 1998
<PAGE>
Brown Capital Management Funds
105 North Washington Street
Post Office Box 69
Rocky Mount, North Carolina 27802-0069
Telephone 919-972-9922
U. S. WATTS 800-525- FUND
Facsimile 919-442-4226
April 15, 1998
Dear Shareholder:
I am sure you're tired of hearing about the unprecedented series of consecutive
years of 20+% gains in the broad stock market. Perhaps what isn't as widely
known, is that we have experienced an unprecedented streak of six years of
earnings increases for the S&P 500. The only period that has come close in the
last 50 years is 1962-1966. We expect the streak to continue, albeit at a slower
pace in 1998.
While the Washington press corps was ensconced in nosing out scandals (don't
worry this letter will not go there), the economy and the market continued its
upward trend. The S&P 500 Index increased 48.0%, on a total return basis, during
the fiscal year. Large capitalization indices still outperformed smaller
capitalization indices (the Russell 2000 Index was up 42.0%). The Lehman
Government/Corporate Bond Index returned 12.4% for the same period.
What hasn't been adequately discussed is the explanation behind the
unprecedented gains in the stock market. For the past couple of years, we (like
many others) have stated, at the beginning of the year, that we expect market
gains to revert to the historic norm of 10-11%. It hasn't happened, and the
reason can be traced to two primary factors-- greater than expected declines in
interest rates and an expansion in price earnings ratios. At the risk of
sounding redundant, in 1998 we expect - (1) the broad stock market to return the
historical returns of 10-11%, (2) the small and mid-cap companies to play
catch-up, and (3) bonds to offer very competitive returns with stocks.
The table below is helpful in providing some insights into the narrow and skewed
market performance in calendar year 1997.
- ------------------------- ----------------- ---------------- ------------------
12/31/96- 6/30/97- 10/27/97-
6/30/97 10/26/97 12/31/97
- ------------------------- ----------------- ---------------- ------------------
- ------------------------- ----------------- ---------------- ------------------
S&P 500 20.6% 6.9% 11.0%
- ------------------------- ----------------- ---------------- ------------------
- ------------------------- ----------------- ---------------- ------------------
Russell 1000 Growth 19.6% 6.4% 10.3%
- ------------------------- ----------------- ---------------- ------------------
- ------------------------- ----------------- ---------------- ------------------
Russell 2000 10.2% 13.4% 4.3%
- ------------------------- ----------------- ---------------- ------------------
- ------------------------- ----------------- ---------------- ------------------
Russell 2000 Growth 5.2% 14.4% 1.5%
- ------------------------- ----------------- ---------------- ------------------
- ------------------------- ----------------- ---------------- ------------------
Russell Mid-Cap Growth 10.5% 12.5% 6.5%
- ------------------------- ----------------- ---------------- ------------------
Clearly, the first half of calendar 1997 was dominated by large capitalization
companies, and the S&P 500 outperformed the Russell 2000 by 1040 basis points.
More specifically, what cannot be gleaned from the chart, but as indicated
above, the performance was fueled by the highly liquid "super market caps".
However, from mid-year up to the market setback on October 27, the tables
reversed just as dramatically. The Russell 2000 and Russell Mid-Cap Growth index
outperformed the S&P 500 by 650 and 750 basis points respectively. But, the
unexpected happened after the October 27 market setback. One would have expected
the leadership to have remained with the small and mid-cap companies that derive
the major portion of their sales and earnings domestically. It is clear from the
chart that this didn't occur. Rather, the S&P 500 outperformed the Russell 2000
and Russell 2000 Mid-Cap Growth indices by 670 and 950 basis points respectively
from October 27 through calendar year-end. Obviously to date, in the aftermath
of the Asian crisis, the perceived safety of the very large companies has
overwhelmed the international exposure of many of these companies.
<PAGE>
Calendar 1997 proved to be a challenging year for bottom-up stock pickers with a
growth investment approach for a couple of reasons. First, the gains in the
market were narrow and were fueled by the very large companies, referred to by a
newly coined term, "super market caps". Second, "bombs going off". Companies
reporting or "signaling" disappointing earnings were severely punished in the
marketplace. How did these phenomena directly affect the performance results
achieved in the Equity Fund and the equity portion of the Balanced Fund? With
respect to the first item, for the first six months of the year we considered
most of the companies (e.g., Coca Cola, Gillette, Proctor and Gamble), even
though growth companies, to be overvalued. Directionally, we were right on the
mark with respect to market capitalization in managing the Equity Fund. The
weighted market capitalization of the portfolio increased from approximately $10
billion at the beginning of 1997 to $26 billion by the end of the calendar year.
With respect to the second item, we were fortunate during the first nine months
of 1997 in that we escaped the "bombs" (instant price declines of 20% or more in
response to a news item--our definition) experienced by many investors. However,
we were not as fortunate in the third fiscal quarter. In fact, three stocks that
can be classified as "bombs" by the above definition explain almost all of the
underperformance in the third fiscal quarter. These three stocks declined by the
following amounts from the date of the specific news announcement to calendar
year-end: Green Tree Financial down 35%, Fastenal down 24%, and Wisconsin
Central Transportation down 22%. Our job of course is to assess whether anything
has changed fundamentally with these or any other holdings in your portfolio. We
are hard at work making these assessments, and evaluating new investment
opportunities that will produce superior returns in 1998 and beyond.
The Asian woes and their implications are serious, but not fatal. It is highly
likely that they will cause our GDP growth to be lower by an estimated 1/2-1%.
The good news is that the market's narrow focus and the Asian crisis will pass.
Additionally, we will have modest domestic real GDP accompanied by modest
inflation (not deflation in our opinion), and low interest rates. El Nino may
actually have aided the economy in the most recent quarter--lower energy costs,
due to warmer than usual weather, helped retail spending. The other good news is
that we have a portfolio of companies with superior characteristics relative to
the performance benchmark that are attractively priced. We have found that over
time this is a winning combination that translates into superior performance.
As usual, some economic sectors in the portfolio contributed to the performance
and others hindered the performance. For the mid/large capitalization equities
in the Equity and Balanced Funds, the top contributing sectors were Technology,
Consumer Cyclical and Consumer Staples, while the drags were Utilities and Basic
Materials. For the small companies in the Small Company Fund, the top
contributing sectors were Technology and Consumer Discretionary, while Energy
was the worst performing sector.
During the most recent quarter, we made few strategic changes. Outsourcing
continues to be a major trend. We took the following actions to increase our
exposure to an area that we have invested in for quite a while:
In the Equity Fund and the equity portion of the Balanced Fund, we sold Intel
Corp and we bought IBM. While both are technology companies, we decided to trim
our exposure to a hardware component-related company that may come under some
pricing pressure and to add a company that will benefit from outsourcing and
information technology. IBM has a stated goal to "turn IBM into the world's
premier knowledge management company". In 1997, 49.1% of IBM's revenue came from
Services, Software and Maintenance and we believe IBM can play a major role in
outsourcing by other companies. We added FiServ, a company that provides
financial data processing systems and information management services and
products to financial entities. While the Energy sector is traditionally not
thought of as a growth sector, we believe the current valuations of some
growth-oriented oil service companies are compelling. We added Schlumberger to
the portfolio.
<PAGE>
In the Small Company Fund, we added Applied Digital Access, a company that
provides network management software and services, Best Software, a company that
provides human resources and payroll management software solutions, and, Concord
Communications, a software-based company that provides performance analysis and
reporting solutions for the management of computer networks. Additionally, we
purchased Applied Analytical Industries, a company that provides product
development and support services to the pharmaceutical and biotechnology
industries.
The fixed income portion of the Balanced Fund found fixed income markets fairly
quiet in the most recent quarter. At the end of the quarter, the long-term
Treasury bond at 5.93% was about the same as at year-end. Considering the yield
curve, the spread relationships extant in the marketplace, and the fact that we
don't expect a significant decline in interest rates near-term, we think the
current portfolio structure is appropriate. Currently, we are emphasizing
intermediate-term maturity and high quality bonds.
Our overall view on the market has not changed. We still believe the market
(using the S&P500 as a proxy) to be fairly fully valued - trading at 21 times
estimated forward twelve months earnings. While P/E's may have expanded as far
as they can in the current interest rate environment, we believe steady earnings
growth and a low inflation environment create an upside potential at least equal
to the growth in earnings. However, the economic expansion is in its eighth year
and most to the benefits of restructuring are behind us. Rising labor costs may
limit margins, and earnings growth may be tied solely to revenue growth.
Companies may not be able to increase prices in the current environment of
inter-global competition and low inflation. We continue to believe stock
selection is key.
Sincerely,
Eddie C. Brown
President
<PAGE>
THE BROWN CAPITAL MANAGEMENT EQUITY FUND
Performance Update - $10,000 Investment
For the period from September 30, 1992 to March 31, 1998
BCM Equity S&P 500 w/Income
Fund Index
9/30/92 10,000 10,000
12/31/92 11,063 10,504
3/31/93 11,122 10,962
6/30/93 10,962 11,016
9/30/93 11,427 11,300
12/31/93 11,817 11,562
3/31/94 11,623 11,124
6/30/94 11,445 11,171
9/30/94 11,972 11,717
12/31/94 11,727 11,715
3/31/95 12,657 12,855
6/30/95 13,988 14,083
9/30/95 15,374 15,202
12/31/95 15,485 16,117
3/31/96 16,486 16,982
6/30/96 17,018 17,744
9/30/96 17,591 18,293
12/31/96 18,433 19,818
3/31/97 17,955 20,349
6/30/97 20,615 23,901
9/30/97 22,658 25,692
12/31/97 22,608 26,429
3/31/98 25,978 30,116
This graph depicts the performance of The Brown Capital Management Equity Fund
versus the S&P 500 w/Income Index. It is important to note that The Brown
Capital Management Equity Fund is a professionally managed mutual fund while the
index is not available for investment and are unmanaged. The comparison is shown
for illustrative purposes only.
Average Annual Total Return
- -------------------------------------------------
Since Inception One Year Five Years
- -------------------------------------------------
18.95% 44.68% 18.48%
- -------------------------------------------------
The graph assumes an initial $10,000 investment at September 30, 1992. All
dividends and distributions are reinvested.
At March 31, 1998, the Fund would have grown to $25,978 - total investment
return of 159.78% since September 30, 1992.
At March 31, 1998, a similar investment in the S&P 500 w/Income Index would have
grown to $30,116 - total investment return of 201.16% 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>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT EQUITY FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - 93.22%
Beverages - 2.09%
The Coca-Cola Company .............................................. 2,200 $ 170,088
----------
Biopharmaceuticals - 1.42%
Perkin-Elmer Corporation ........................................... 1,600 115,700
----------
Building Materials - 2.07%
Illinois Tool Works, Inc. .......................................... 2,600 168,350
----------
Computers - 6.31%
(a) Bay Networks, Inc. ................................................. 2,800 75,950
(a) EMC Corporation .................................................... 5,100 192,844
Hewlett-Packard Company ............................................ 1,900 120,412
International Business Machines .................................... 1,200 124,650
----------
513,856
----------
Computer Software & Services - 15.39%
(a) Acxiom Corporation ................................................. 7,200 184,500
(a) BMC Software, Inc. ................................................. 2,000 167,625
(a) Cisco Systems, Inc. ................................................ 1,150 78,631
(a) Fiserv, Inc. ....................................................... 1,000 63,375
(a) Microsoft Corporation .............................................. 2,600 232,700
(a) Oracle Corporation ................................................. 4,787 151,090
(a) Sterling Commerce, Inc. ............................................ 3,672 170,289
(a) Sterling Software, Inc. ............................................ 3,650 206,225
----------
1,254,435
----------
Cosmetics & Personal Care - 1.02%
Gillette Company ................................................... 700 83,081
----------
Electrical Equipment - 3.78%
Belden, Inc. ....................................................... 3,600 150,750
Honeywell, Inc. .................................................... 1,900 157,106
----------
307,856
----------
Electronics - 3.81%
General Electric Company ........................................... 1,300 111,800
(a) Solectron Corporation .............................................. 4,700 198,575
----------
310,375
----------
Entertainment - 4.31%
Carnival Corporation ............................................... 2,610 180,743
The Walt Disney Company ............................................ 1,600 170,800
----------
351,543
----------
(Continued)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT EQUITY FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - (Continued)
Financial - Banks, Money Center - 2.76%
Chase Manhattan Corporation ........................................ 1,670 $ 225,241
----------
Financial Services - 6.92%
Equifax Inc. ....................................................... 3,450 125,925
Green Tree Financial Corporation ................................... 7,250 206,172
T. Rowe Price Associates, Inc. ..................................... 3,300 232,237
----------
564,334
----------
Hand & Machine Tools - 1.12%
Danaher Corporation ................................................ 1,200 91,275
----------
Household Products & Housewares - 2.17%
Newell Company ..................................................... 3,650 176,797
----------
Insurance - Life & Health - 1.41%
AFLAC Incorporated ................................................. 1,812 114,609
----------
Leisure - 1.01%
Harley-Davidson, Inc. .............................................. 2,500 82,500
----------
Medical - Hospital Management & Service - 3.31%
(a) Health Care and Retirement Corporation ............................. 3,450 148,134
(a) Health Management Associates, Inc. ................................. 4,250 121,656
----------
269,790
----------
Medical Supplies - 1.88%
Johnson & Johnson .................................................. 2,100 153,431
----------
Oil & Gas - Equipment & Services - 2.04%
Schlumberger Limited ............................................... 2,200 166,513
----------
Pharmaceuticals - 8.33%
(a) ALZA Corporation ................................................... 4,200 188,212
Cardinal Health, Inc. .............................................. 3,575 315,270
(a) R.P. Scherer Corporation ........................................... 2,600 175,500
----------
678,982
----------
Real Estate - 1.58%
The Rouse Company .................................................. 4,100 129,150
----------
Restaurants & Food Service - 3.61%
(a) The Cheesecake Factory ............................................. 2,700 89,944
Craker Barrel Old Country Store, Inc. .............................. 5,100 204,000
----------
293,944
----------
(Continued)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT EQUITY FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - (Continued)
Retail - Department Stores - 1.39%
Dollar General Corporation ......................................... 2,931 $ 113,393
----------
Retail - Grocery - 1.92%
Casey's General Stores, Inc. ....................................... 9,800 156,800
----------
Retail - Specialty Line - 7.74%
(a) AutoZone, Inc. ..................................................... 6,800 230,350
Fastenal Company ................................................... 3,100 134,463
The Home Depot, Inc. ............................................... 3,950 265,638
----------
630,451
----------
Telecommunications Equipment - 1.32%
(a) ADC Telecommunications, Inc. ....................................... 3,900 107,494
----------
Transportation - Rail - 1.87%
(a) Wisconsin Central Transportation Corporation ....................... 5,400 152,044
----------
Utilities - Gas - 2.64%
MCN Energy Group, Inc. ............................................. 5,750 214,906
----------
Total Common Stocks (Cost $5,412,662) .............................. 7,596,938
----------
INVESTMENT COMPANIES - 6.65%
Evergreen Money Market Treasury Institutional Money
Market Fund Institutional Service Shares ........................... 360,293 360,293
Evergreen Money Market Treasury Institutional Treasury
Money Market Fund Institutional Service Shares ..................... 182,012 182,012
----------
Total Investment Companies (Cost $542,305) ......................... 542,305
----------
Total Value of Investments (Cost $5,954,967 (b)) ............................... 99.87% $8,139,243
Other Assets Less Liabilities .................................................. 0.13% 10,527
------ ----------
Net Assets .............................................................. 100.00% $8,149,770
====== ==========
(Continued)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT EQUITY FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
(a) Non-income producing investment.
(b) Aggregate cost for federal income tax purposes is $5,969,342. Unrealized appreciation (depreciation) appreciation of
investments for federal income tax purposes in as follows:
Unrealized appreciation $2,197,294
Unrealized depreciation (27,393)
----------
Net unrealized appreciation $2,169,901
==========
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
March 31, 1998
ASSETS
Investments, at value (cost $5,954,967) ...................................................... $8,139,243
Cash ......................................................................................... 21,584
Income receivable ............................................................................ 4,396
----------
Total assets ............................................................................ 8,165,223
----------
LIABILITIES
Accrued expenses ............................................................................. 5,420
Payable for investment purchases ............................................................. 10,033
----------
Total liabilities ....................................................................... 15,453
----------
NET ASSETS
(applicable to 372,570 Institutional Class shares outstanding; unlimited
shares of no par value beneficial interest authorized) ...................................... $8,149,770
==========
NET ASSET VALUE, REDEMPTION AND OFFERING PRICE
PER INSTITUTIONAL CLASS SHARE
($8,149,770 / 372,570 shares) ............................................................... $ 21.87
==========
NET ASSETS CONSIST OF
Paid-in capital .............................................................................. $5,979,229
Distributions in excess of net realized gains ................................................ (13,735)
Net unrealized oappreciation on investments .................................................. 2,184,276
----------
$8,149,770
==========
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
Year ended March 31, 1998
INVESTMENT LOSS
Income
Interest ................................................................................ $ 22,473
Dividends ............................................................................... 44,020
----------
Total income ....................................................................... 66,493
----------
Expenses
Investment advisory fees (note 2) ....................................................... 41,626
Fund administration fees (note 2) ....................................................... 16,010
Custody fees ............................................................................ 4,413
Registration and filing administration fees (note 2) .................................... 5,169
Fund accounting fees (note 2) ........................................................... 21,000
Audit fees .............................................................................. 9,663
Legal fees .............................................................................. 5,103
Securities pricing fees ................................................................. 2,811
Shareholder recordkeeping fees .......................................................... 914
Shareholder servicing expenses .......................................................... 3,796
Registration and filing expenses ........................................................ 4,709
Printing expenses ....................................................................... 3,480
Trustee fees and meeting expenses ....................................................... 4,243
Other operating expenses ................................................................ 3,734
----------
Total expenses ..................................................................... 126,671
----------
Less:
Expense reimbursements (note 2) .............................................. (8,549)
Investment advisory fees waived (note 2) ..................................... (41,375)
----------
Net expenses ....................................................................... 76,747
----------
Net investment loss .......................................................... (10,254)
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realizedo gain from investment transactions .............................................. 603,519
Increase in unrealized appreciation on investments ........................................... 1,740,209
----------
Net realized and unrealized gain on investments ......................................... 2,343,728
----------
Net increase in net assets resulting from operations ............................... $2,333,474
==========
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
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Year ended
March 31, March 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
Operations
Net investment (loss) income ............................................... $ (10,254) $ 9,751
Net realized gain from investment transactions ............................. 603,519 64,344
Increase in unrealized appreciation on investments ......................... 1,740,209 104,676
---------- ----------
Net increase in net assets resulting from operations .................. 2,333,474 178,771
---------- ----------
Distributions to shareholders from
Net investment income ...................................................... 0 (9,794)
Net realized gain from investment transactions ............................. (660,547) (123,813)
Distributions in excess of net realized gains .............................. (13,735) 0
---------- ----------
Decrease in net assets resulting from distributions ................... (674,282) (133,607)
---------- ----------
Capital share transactions
Increase in net assets resulting from capital share transactions (a) ....... 2,085,558 2,393,994
---------- ----------
Total increase in net assets ..................................... 3,744,750 2,439,158
NET ASSETS
Beginning of year .............................................................. 4,405,020 1,965,862
---------- ----------
End of year (including undistributed net investment income of $39 in 1997) .... $8,149,770 $4,405,020
========== ==========
(a) A summary of capital share activity follows:
--------------------------------------------------------
Year ended Year ended
March 31, 1998 March 31, 1997
Shares Value Shares Value
--------------------------------------------------------
Shares sold ........................................................... 120,211 $2,302,970 151,410 $2,576,321
Shares issued for reinvestment
of distributions ................................................. 31,855 669,689 8,025 133,540
---------- ---------- ---------- ----------
152,066 2,972,659 159,435 2,709,861
Shares redeemed ....................................................... (44,640) (887,101) (18,655) (315,867)
---------- ---------- ---------- ----------
Net increase ..................................................... 107,426 $2,085,558 140,780 $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 Year)
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Year ended Year ended Year ended Year ended
March 31, March 31, March 31, March 31, March 31,
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year .............................. $16.61 $15.81 $12.36 $11.48 $11.05
Income from investment operations
Net investment income (loss) ......................... (0.03) 0.05 0.00 0.00 (0.02)
Net realized and unrealized gain on investments ...... 7.31 1.36 3.72 1.01 0.52
---------- ---------- ---------- ---------- ----------
Total from investment operations ................. 7.28 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 ....... (1.98) (0.56) (0.27) (0.13) (0.07)
Distributions in excess of net realized gains ........ (0.04) 0.00 0.00 0.00 0.00
---------- ---------- ---------- ---------- ----------
Total distributions .............................. (2.02) (0.61) (0.27) (0.13) (0.07)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year .................................... $21.87 $16.61 $15.81 $12.36 $11.48
========== ========== ========== ========== ==========
Total return .................................................... 44.68% 8.91% 30.25% 8.90% 4.51%
========== ========== ========== ========== ==========
Ratios/supplemental data
Net assets, end of year ................................... $8,149,770 $4,405,020 $1,965,862 $1,130,020 $ 717,896
========== ========== ========== ========== ==========
Ratio of expenses to average net assets
Before expense reimbursements and waived fees ........ 1.98% 3.37% 5.58% 8.32% 11.86%
After expense reimbursements and waived fees ......... 1.20% 1.20% 1.56% 2.00% 2.00%
Ratio of net investment income (loss) to average net assets
Before expense reimbursements and waived fees ........ (0.94)% (1.85)% (4.20)% (6.41)% (10.19)%
After expense reimbursements and waived fees ......... (0.16)% 0.32% 0.01% (0.11)% (0.36)%
Portfolio turnover rate ................................... 38.42% 34.21% 48.06% 7.29% 48.05%
Average broker commissions per share (a) ................. $0.0507 $0.0505 - - -
(a) 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 EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
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 - The Fund is considered a personal
holding company as defined under Section 542 of the Internal
Revenue Code since 50% of the value of the Fund's shares
were owned directly or indirectly by five or fewer
individuals at certain times during the last half of the
year. As a personal holding company, the Fund is subject to
federal income taxes on undistributed personal holding
company income at the maximum individual income tax rate. No
provision has been made for federal income taxes since
substantially all taxable income has been distributed to
shareholders. It is the policy of the Fund to comply with
the provisions of the Internal Revenue Code applicable to
regulated investment companies and to make sufficient
distributions of taxable income to relieve it from all
federal income taxes.
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.
As a result of the Fund's operating net investment loss, a
reclassification adjustment of $10,215 has been made on the
statement of assets and liabilities to decrease accumulated
net investment loss, bringing it to zero, and decrease net
realized short-term gains on investments.
(Continued)
<PAGE>
THE BROWN CAPITAL MANAGEMENT EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
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.
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 $41,375 ($0.13 per share)
and has voluntarily reimbursed $8,549 of the Fund's operating
expenses for the year ended March 31, 1998.
(Continued)
<PAGE>
THE BROWN CAPITAL MANAGEMENT EQUITY FUND
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
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.
NC Shareholder Services, LLC (the "Transfer Agent") has been
retained by the Administrator to serve as the Fund's transfer,
dividend paying, and shareholder servicing agent. The Transfer
Agent maintains the records of each shareholder's account, answers
shareholder inquiries concerning accounts, processes purchases and
redemptions of Fund shares, acts as dividend and distribution
disbursing agent, and performs other shareholder servicing
functions. The Transfer Agent is compensated for its services by
the Administrator and not directly by the Fund.
Certain Trustees and officers of the Trust are also officers of
the Advisor, the distributor or the Administrator.
At March 31, 1998, the Advisor and its officers held 32,095 shares
or 8.61% of the Fund shares outstanding.
NOTE 3 - PURCHASES AND SALES OF INVESTMENTS
Purchases and sales of investments, other than short-term
investments, aggregated $3,322,120 and $2,289,072, respectively,
for the year ended March 31, 1998.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of The Nottingham Investment Trust II and Shareholders
of The Brown Capital Management Equity Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Brown Capital Management Equity Fund (a
portfolio of The Nottingham Investment Trust II) as of March 31, 1998 and the
related statement of operations for the year then ended, the statement of
changes in net assets for the years ended March 31, 1998 and 1997, and financial
highlights for the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
March 31, 1998 by correspondence with the custodian and brokers; where replies
were not received, 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 audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Brown Capital
Management Equity Fund as of March 31, 1998, the results of its operations, the
changes in its net assets and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
April 24, 1998
<PAGE>
Brown Capital Management Funds
105 North Washington Street
Post Office Box 69
Rocky Mount, North Carolina 27802-0069
Telephone 919-972-9922
U. S. WATTS 800-525- FUND
Facsimile 919-442-4226
April 15, 1998
Dear Shareholder:
I am sure you're tired of hearing about the unprecedented series of consecutive
years of 20+% gains in the broad stock market. Perhaps what isn't as widely
known, is that we have experienced an unprecedented streak of six years of
earnings increases for the S&P 500. The only period that has come close in the
last 50 years is 1962-1966. We expect the streak to continue, albeit at a slower
pace in 1998.
While the Washington press corps was ensconced in nosing out scandals (don't
worry this letter will not go there), the economy and the market continued its
upward trend. The S&P 500 Index increased 48.0%, on a total return basis, during
the fiscal year. Large capitalization indices still outperformed smaller
capitalization indices (the Russell 2000 Index was up 42.0%). The Lehman
Government/Corporate Bond Index returned 12.4% for the same period.
What hasn't been adequately discussed is the explanation behind the
unprecedented gains in the stock market. For the past couple of years, we (like
many others) have stated, at the beginning of the year, that we expect market
gains to revert to the historic norm of 10-11%. It hasn't happened, and the
reason can be traced to two primary factors-- greater than expected declines in
interest rates and an expansion in price earnings ratios. At the risk of
sounding redundant, in 1998 we expect - (1) the broad stock market to return the
historical returns of 10-11%, (2) the small and mid-cap companies to play
catch-up, and (3) bonds to offer very competitive returns with stocks.
The table below is helpful in providing some insights into the narrow and skewed
market performance in calendar year 1997.
- ------------------------- ----------------- ---------------- ------------------
12/31/96- 6/30/97- 10/27/97-
6/30/97 10/26/97 12/31/97
- ------------------------- ----------------- ---------------- ------------------
- ------------------------- ----------------- ---------------- ------------------
S&P 500 20.6% 6.9% 11.0%
- ------------------------- ----------------- ---------------- ------------------
- ------------------------- ----------------- ---------------- ------------------
Russell 1000 Growth 19.6% 6.4% 10.3%
- ------------------------- ----------------- ---------------- ------------------
- ------------------------- ----------------- ---------------- ------------------
Russell 2000 10.2% 13.4% 4.3%
- ------------------------- ----------------- ---------------- ------------------
- ------------------------- ----------------- ---------------- ------------------
Russell 2000 Growth 5.2% 14.4% 1.5%
- ------------------------- ----------------- ---------------- ------------------
- ------------------------- ----------------- ---------------- ------------------
Russell Mid-Cap Growth 10.5% 12.5% 6.5%
- ------------------------- ----------------- ---------------- ------------------
Clearly, the first half of calendar 1997 was dominated by large capitalization
companies, and the S&P 500 outperformed the Russell 2000 by 1040 basis points.
More specifically, what cannot be gleaned from the chart, but as indicated
above, the performance was fueled by the highly liquid "super market caps".
However, from mid-year up to the market setback on October 27, the tables
reversed just as dramatically. The Russell 2000 and Russell Mid-Cap Growth index
outperformed the S&P 500 by 650 and 750 basis points respectively. But, the
unexpected happened after the October 27 market setback. One would have expected
the leadership to have remained with the small and mid-cap companies that derive
the major portion of their sales and earnings domestically. It is clear from the
chart that this didn't occur. Rather, the S&P 500 outperformed the Russell 2000
and Russell 2000 Mid-Cap Growth indices by 670 and 950 basis points respectively
from October 27 through calendar year-end. Obviously to date, in the aftermath
of the Asian crisis, the perceived safety of the very large companies has
overwhelmed the international exposure of many of these companies.
<PAGE>
Calendar 1997 proved to be a challenging year for bottom-up stock pickers with a
growth investment approach for a couple of reasons. First, the gains in the
market were narrow and were fueled by the very large companies, referred to by a
newly coined term, "super market caps". Second, "bombs going off". Companies
reporting or "signaling" disappointing earnings were severely punished in the
marketplace. How did these phenomena directly affect the performance results
achieved in the Equity Fund and the equity portion of the Balanced Fund? With
respect to the first item, for the first six months of the year we considered
most of the companies (e.g., Coca Cola, Gillette, Proctor and Gamble), even
though growth companies, to be overvalued. Directionally, we were right on the
mark with respect to market capitalization in managing the Equity Fund. The
weighted market capitalization of the portfolio increased from approximately $10
billion at the beginning of 1997 to $26 billion by the end of the calendar year.
With respect to the second item, we were fortunate during the first nine months
of 1997 in that we escaped the "bombs" (instant price declines of 20% or more in
response to a news item--our definition) experienced by many investors. However,
we were not as fortunate in the third fiscal quarter. In fact, three stocks that
can be classified as "bombs" by the above definition explain almost all of the
underperformance in the third fiscal quarter. These three stocks declined by the
following amounts from the date of the specific news announcement to calendar
year-end: Green Tree Financial down 35%, Fastenal down 24%, and Wisconsin
Central Transportation down 22%. Our job of course is to assess whether anything
has changed fundamentally with these or any other holdings in your portfolio. We
are hard at work making these assessments, and evaluating new investment
opportunities that will produce superior returns in 1998 and beyond.
The Asian woes and their implications are serious, but not fatal. It is highly
likely that they will cause our GDP growth to be lower by an estimated 1/2-1%.
The good news is that the market's narrow focus and the Asian crisis will pass.
Additionally, we will have modest domestic real GDP accompanied by modest
inflation (not deflation in our opinion), and low interest rates. El Nino may
actually have aided the economy in the most recent quarter--lower energy costs,
due to warmer than usual weather, helped retail spending. The other good news is
that we have a portfolio of companies with superior characteristics relative to
the performance benchmark that are attractively priced. We have found that over
time this is a winning combination that translates into superior performance.
As usual, some economic sectors in the portfolio contributed to the performance
and others hindered the performance. For the mid/large capitalization equities
in the Equity and Balanced Funds, the top contributing sectors were Technology,
Consumer Cyclical and Consumer Staples, while the drags were Utilities and Basic
Materials. For the small companies in the Small Company Fund, the top
contributing sectors were Technology and Consumer Discretionary, while Energy
was the worst performing sector.
During the most recent quarter, we made few strategic changes. Outsourcing
continues to be a major trend. We took the following actions to increase our
exposure to an area that we have invested in for quite a while:
In the Equity Fund and the equity portion of the Balanced Fund, we sold Intel
Corp and we bought IBM. While both are technology companies, we decided to trim
our exposure to a hardware component-related company that may come under some
pricing pressure and to add a company that will benefit from outsourcing and
information technology. IBM has a stated goal to "turn IBM into the world's
premier knowledge management company". In 1997, 49.1% of IBM's revenue came from
Services, Software and Maintenance and we believe IBM can play a major role in
outsourcing by other companies. We added FiServ, a company that provides
financial data processing systems and information management services and
products to financial entities. While the Energy sector is traditionally not
thought of as a growth sector, we believe the current valuations of some
growth-oriented oil service companies are compelling. We added Schlumberger to
the portfolio.
<PAGE>
In the Small Company Fund, we added Applied Digital Access, a company that
provides network management software and services, Best Software, a company that
provides human resources and payroll management software solutions, and, Concord
Communications, a software-based company that provides performance analysis and
reporting solutions for the management of computer networks. Additionally, we
purchased Applied Analytical Industries, a company that provides product
development and support services to the pharmaceutical and biotechnology
industries.
The fixed income portion of the Balanced Fund found fixed income markets fairly
quiet in the most recent quarter. At the end of the quarter, the long-term
Treasury bond at 5.93% was about the same as at year-end. Considering the yield
curve, the spread relationships extant in the marketplace, and the fact that we
don't expect a significant decline in interest rates near-term, we think the
current portfolio structure is appropriate. Currently, we are emphasizing
intermediate-term maturity and high quality bonds.
Our overall view on the market has not changed. We still believe the market
(using the S&P500 as a proxy) to be fairly fully valued - trading at 21 times
estimated forward twelve months earnings. While P/E's may have expanded as far
as they can in the current interest rate environment, we believe steady earnings
growth and a low inflation environment create an upside potential at least equal
to the growth in earnings. However, the economic expansion is in its eighth year
and most to the benefits of restructuring are behind us. Rising labor costs may
limit margins, and earnings growth may be tied solely to revenue growth.
Companies may not be able to increase prices in the current environment of
inter-global competition and low inflation. We continue to believe stock
selection is key.
Sincerely,
Eddie C. Brown
President
<PAGE>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
Performance Update - $10,000 Investment
For the period from September 30, 1992 to March 31, 1998
BCM Balanced 75% S&P 500 w/Income Index
Fund 25% Lehman Gov/Corp Bond Index
9/30/92 10,000 10,000
12/31/92 10,579 10,380
3/31/93 10,774 10,840
6/30/93 10,779 10,959
9/30/93 11,208 11,262
12/31/93 11,611 11,450
3/31/94 11,297 11,034
6/30/94 11,168 11,036
9/30/94 11,644 11,459
12/31/94 11,468 11,467
3/31/95 12,195 12,456
6/30/95 13,417 13,559
9/30/95 14,593 14,456
12/31/95 14,880 15,285
3/31/96 15,493 15,859
6/30/96 15,887 16,445
9/30/96 16,339 16,912
12/31/96 16,938 18,159
3/31/97 16,579 18,529
6/30/97 18,557 21,312
9/30/97 20,114 22,773
12/31/97 20,136 23,439
3/31/98 22,582 26,259
This graph depicts the performance of The Brown Capital Management Balanced Fund
versus a combined index of 75% S&P 500 w/Income Index and 25% Lehman
Government/Corporate Bond Index. It is important to note that The Brown Capital
Management Balanced Fund is a professionally managed mutual fund while the
indexes are not available for investment and are unmanaged. The comparison is
shown for illustrative purposes only.
Average Annual Total Return
- -----------------------------------------------
Since Inception One Year Five Years
- -----------------------------------------------
15.96% 36.19% 15.94%
- -----------------------------------------------
The graph assumes an initial $10,000 investment at September 30, 1992. All
dividends and distributions are reinvested.
At March 31, 1998, the Fund would have grown to $22,582 - total investment
return of 125.82% since September 30, 1992.
At March 31, 1998, a similar investment in a combined index of 75% S&P 500
w/Income and 25% Lehman Government/Corporate Bond Index would have grown to
$26,259 - total investment return of 162.59% 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>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - 74.36%
Beverages - 1.78%
The Coca-Cola Company ................................................ 1,400 $ 108,238
----------
Building Materials - 1.28%
Fastenal Company ..................................................... 1,800 78,075
----------
Commercial Services - 1.38%
Equifax, Inc. ........................................................ 2,300 83,950
----------
Computers - 5.13%
(a) Bay Networks, Inc. ................................................... 1,600 43,400
(a) EMC Corporation ...................................................... 3,000 113,438
Hewlett-Packard Company .............................................. 1,300 82,388
International Business Machines ...................................... 700 72,713
----------
311,939
----------
Computer Software & Services - 11.92%
(a) Acxiom Corporation ................................................... 4,000 102,493
(a) BMC Software, Inc. ................................................... 1,100 92,194
(a) Cisco Systems, Inc. .................................................. 650 44,444
(a) Fiserv, Inc. ......................................................... 700 44,363
(a) Microsoft Corporation ................................................ 1,400 125,300
(a) Oracle Corporation ................................................... 2,837 89,543
(a) Sterling Commerce, Inc. .............................................. 2,211 102,535
(a) Sterling Software, Inc. .............................................. 2,200 124,300
----------
725,172
----------
Cosmetics & Personal Care - 0.78%
Gillette Company ..................................................... 400 47,475
----------
Electronics - 5.95%
Belden, Inc. ......................................................... 2,100 87,938
General Electric Company ............................................. 700 60,200
Honeywell Inc. ....................................................... 1,200 99,225
(a) Solectron Corporation ................................................ 2,700 114,075
----------
361,438
----------
Entertainment - 3.35%
Carnival Corporation ................................................. 1,550 107,338
The Walt Disney Company .............................................. 900 96,075
----------
203,413
----------
Financial - Banks, Money Center - 2.28%
Chase Manhattan Corporation .......................................... 1,028 138,652
----------
(Continued)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - (Continued)
Financial Services - 4.40%
Green Tree Financial Corporation ..................................... 4,200 $ 119,438
T. Rowe Price Associates, Inc. ....................................... 2,100 147,788
----------
267,226
----------
Hand & Machine Tools - 0.88%
Danaher Corporation .................................................. 700 53,244
----------
Household Products & Housewares - 1.75%
Newell Company ....................................................... 2,200 106,563
----------
Insurance - Life & Health - 0.96%
AFLAC Incorporated ................................................... 925 58,506
----------
Leisure - 0.76%
Harley-Davidson, Inc. ................................................ 1,400 46,200
----------
Medical - Hospital Management & Service - 2.80%
(a) Health Care and Retirement Corporation ............................... 2,325 99,830
(a) Health Management Associates, Inc. ................................... 2,450 70,131
----------
169,961
----------
Medical Supplies - 1.56%
Johnson & Johnson .................................................... 1,300 94,981
----------
Manufacturing - 2.78%
Illinois Tool Works, Inc. ............................................ 1,600 103,600
The Perkin-Elmer Corporation ......................................... 900 65,081
----------
168,681
----------
Oil & Gas - Equipment & Services - 1.50%
Schlumberger Limited ................................................. 1,200 90,900
----------
Pharmaceuticals - 6.81%
(a) Alza Corporation ..................................................... 2,600 116,513
Cardinal Health, Inc. ................................................ 2,150 189,603
(a) R.P. Scherer Corporation ............................................. 1,600 108,000
----------
414,116
----------
Real Estate - 1.35%
The Rouse Company .................................................... 2,600 81,900
----------
Restaurants & Food Service - 2.33%
(a) The Cheesecake Factory ............................................... 1,850 61,628
Cracker Barrel Old Country Store, Inc. ............................... 2,000 80,000
----------
141,628
----------
(Continued)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - (Continued)
Retail - Department Stores - 1.08%
Dollar General Corporation ........................................... 1,697 $ 65,653
----------
Retail - Grocery - 1.74%
Casey's General Stores, Inc. ......................................... 6,600 105,600
----------
Retail - Specialty Line - 5.30%
(a) AutoZone, Inc. ....................................................... 4,300 145,663
The Home Depot, Inc. ................................................. 2,625 176,531
----------
322,194
----------
Telecommunications Equipment - 1.04%
(a) ADC Telecommunications, Inc. ......................................... 2,300 63,394
----------
Transportation - Rail - 1.44%
(a) Wisconsin Central Transportation Corporation ......................... 3,100 87,285
----------
Utilities - Gas - 2.03%
MCN Energy Group Inc. ................................................ 3,300 123,338
----------
Total Common Stocks (Cost $3,042,927) ..................................... 4,519,722
----------
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Maturity
Principal Rate Date
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT AND AGENCY OBLIGATIONS - 6.91%
United States Treasury Note ...................... $ 20,000 6.250% 08/15/23 20,634
United States Treasury Note ...................... 70,000 6.375% 07/15/99 70,722
United States Treasury Note ...................... 90,000 6.375% 08/15/02 92,489
United States Treasury Note ...................... 100,000 7.500% 02/15/05 110,141
United States Treasury Note ...................... 100,000 7.750% 01/31/00 103,750
Federal Home Loan Bank ........................... 100,000 0.000% 07/14/17 21,983
----------
Total U.S. Government and Agency Obligations (Cost $404,593) ......... 419,719
----------
CORPORATE OBLIGATIONS - 9.58%
Alabama Power Company ............................ 15,000 7.750% 02/01/23 15,417
Boston Edison Company ............................ 40,000 7.800% 05/15/10 43,156
Chase Manhattan Corporation ...................... 30,000 6.500% 08/01/05 30,150
Chesapeake & Potomac Telephone of Virginia ....... 50,000 7.250% 06/01/12 50,250
Citicorp ......................................... 15,000 7.125% 06/01/03 15,551
(Continued)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Maturity Value
Principal Rate Date (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
CORPORATE OBLIGATIONS - (Continued)
Colgate-Palmolive Company ........................ $ 50,000 7.150% 11/29/11 $ 52,508
Ford Motor Credit Corporation .................... 40,000 7.250% 09/01/10 42,055
ITT Corporation .................................. 50,000 7.375% 11/15/15 47,875
Merrill Lynch .................................... 75,000 7.150% 07/30/12 76,380
Monsanto Company ................................. 45,000 6.210% 02/05/08 44,986
Nationsbank Corporation .......................... 15,000 6.875% 02/15/05 15,436
The Rouse Company ................................ 10,000 8.500% 01/15/03 10,293
The Walt Disney Company .......................... 50,000 7.750% 09/30/11 51,128
Time Warner, Inc. ................................ 20,000 9.150% 02/01/23 24,400
U. S. F. & G. Corporation ........................ 60,000 7.125% 06/01/05 62,371
----------
Total Corporate Obligations (Cost $559,828) .......................... 581,956
----------
- ------------------------------------------------------------------------------------------------------------------------------------
Shares
- ------------------------------------------------------------------------------------------------------------------------------------
INVESTMENT COMPANIES - 8.06%
Evergreen Money Market Treasury Institutional Money
Market Fund Institutional Service Shares ............................. 269,802 269,802
Evergreen Money Market Treasury Institutional Treasury
Money Market Fund Institutional Shares ............................... 220,219 220,219
----------
Total Investment Companies (Cost $490,021) ........................... 490,021
----------
Total Value of Investments (Cost $4,497,369 (b)) ................................. 98.91% $6,011,418
Other Assets Less Liabilities .................................................... 1.09% 66,319
------ ----------
Net Assets ................................................................ 100.00% $6,077,737
====== ==========
(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 $1,547,924
Unrealized depreciation (33,875)
-----------
Net unrealized appreciation $1,514,049
==========
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
March 31, 1998
ASSETS
Investments, at value (cost $4,497,369) ....................................................... $6,011,418
Cash .......................................................................................... 11,449
Income receivable ............................................................................. 16,018
Receivable for investments sold ............................................................... 51,998
----------
Total assets ............................................................................. 6,090,883
----------
LIABILITIES
Accrued expenses .............................................................................. 5,590
Payable for investment purchases .............................................................. 7,556
----------
Total liabilities ........................................................................ 13,146
----------
NET ASSETS
(applicable to 361,039 shares outstanding; unlimited
shares of no par value beneficial interest authorized) ....................................... $6,077,737
==========
NET ASSET VALUE, REDEMPTION AND OFFERING PRICE
PER INSTITUTIONAL CLASS SHARE
($6,077,737 / 361,039 shares) ................................................................. $ 16.83
==========
NET ASSETS CONSIST OF
Paid-in capital ............................................................................... $4,547,013
Distribution in excess of net investment income ............................................... (60)
Undistributed net realized gain on investments ................................................ 16,735
Net unrealized appreciation on investments .................................................... 1,514,049
----------
$6,077,737
==========
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
Year ended March 31, 1998
INVESTMENT INCOME
Income
Interest ..................................................................................... $ 67,266
Dividends .................................................................................... 47,157
----------
Total income ............................................................................ 114,423
----------
Expenses
Investment advisory fees (note 2) ............................................................ 32,686
Fund administration fees (note 2) ............................................................ 12,572
Custody fees ................................................................................. 3,993
Registration and filing administration fees (note 2) ......................................... 5,030
Fund accounting fees (note 2) ................................................................ 21,000
Audit fees ................................................................................... 9,200
Legal fees ................................................................................... 4,390
Securities pricing fees ...................................................................... 3,751
Shareholder recordkeeping fees ............................................................... 469
Shareholder servicing expenses ............................................................... 3,190
Registration and filing expenses ............................................................. 4,220
Printing expenses ............................................................................ 3,362
Trustee fees and meeting expenses ............................................................ 4,243
Other operating expenses ..................................................................... 3,755
----------
Total expenses .......................................................................... 111,861
----------
Less:
Expense reimbursements (note 2) ................................................... (18,899)
Investment advisory fees waived (note 2) .......................................... (32,686)
----------
Net expenses ............................................................................ 60,276
----------
Net investment income ............................................................. 54,147
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from investment transactions ..................................................... 493,452
Increase in unrealized appreciation on investments ................................................. 949,181
----------
Net realized and unrealized gain on investments ............................................... 1,442,633
----------
Net increase in net assets resulting from operations ..................................... $1,496,780
==========
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
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Year ended
March 31, March 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
Operations
Net investment income ............................................................. $ 54,147 $ 57,822
Net realized gain from investment transactions .................................... 493,452 105,701
Increase in unrealized appreciation on investments ................................ 949,181 104,335
---------- ----------
Net increase in net assets resulting from operations ......................... 1,496,780 267,858
---------- ----------
Distributions to shareholders from
Net investment income ............................................................. (54,255) (58,004)
Distribution in excess of net investment income ................................... (60) 0
Net realized gain from investment transactions .................................... (476,740) (249,637)
---------- ----------
Decrease in net assets resulting from distributions .......................... (531,055) (307,641)
---------- ----------
Capital share transactions
Increase in net assets resulting from capital share transactions (a) .............. 1,237,359 595,122
---------- ----------
Total increase in net assets ............................................ 2,203,084 555,339
NET ASSETS
Beginning of year ..................................................................... 3,874,653 3,319,314
---------- ----------
End of year (including undistributed net investment income of $108 in 1997) ......... $6,077,737 $3,874,653
========== ==========
(a) A summary of capital share activity follows:
-----------------------------------------------------------------------
Year ended Year ended
March 31, 1998 March 31, 1997
Shares Value Shares Value
-----------------------------------------------------------------------
Shares sold ............................................ 111,277 $1,757,479 69,993 $ 990,406
Shares issued for reinvestment
of distributions .................................. 32,554 529,963 22,002 306,322
---------- ---------- ---------- ----------
143,831 2,287,442 91,995 1,296,728
Shares redeemed ........................................ (67,688) (1,050,083) (48,277) (701,606)
---------- ---------- ---------- ----------
Net increase ...................................... 76,143 $1,237,359 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 Year)
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Year ended Year ended Year ended Year ended
March 31, March 31, March 31, March 31, March 31,
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ............................. $13.60 $13.76 $11.56 $11.02 $10.62
Income from investment operations
Net investment income ............................... 0.17 0.21 0.12 0.10 0.08
Net realized and unrealized gain on investments ..... 4.65 0.76 2.98 0.77 0.43
---------- ---------- ---------- ---------- ----------
Total from investment operations ................ 4.82 0.97 3.10 0.87 0.51
---------- ---------- ---------- ---------- ----------
Distributions to shareholders from
Net investment income ............................... (0.17) (0.21) (0.12) (0.11) (0.08)
Net realized gain from investment transactions ...... (1.42) (0.92) (0.78) (0.22) (0.03)
---------- ---------- ---------- ---------- ----------
Total distributions ............................. (1.59) (1.13) (0.90) (0.33) (0.11)
---------- ---------- ---------- ---------- ----------
Net asset value, end of year ................................... $16.83 $13.60 $13.76 $11.56 $11.02
========== ========== ========== ========== ==========
Total return ................................................... 36.19% 7.01% 27.04% 8.04% 4.78%
========== ========== ========== ========== ==========
Ratios/supplemental data
Net assets, end of year .................................. $6,077,737 $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 ....... 2.22% 2.85% 3.50% 5.43% 6.44%
After expense reimbursements and waived fees ........ 1.20% 1.20% 1.59% 2.00% 2.00%
Ratio of net investment income (loss) to average net assets
Before expense reimbursements and waived fees ....... 0.05% (0.13)% (0.97)% (2.44)% (3.69)%
After expense reimbursements and waived fees ........ 1.08% 1.51% 0.94% 1.00% 0.74%
Portfolio turnover rate .................................. 33.54% 45.58% 43.59% 9.51% 28.56%
Average broker commissions per share (a) ................ $0.0509 $0.0506 - - -
(a) 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
March 31, 1998
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 - The Fund is considered a personal
holding company as defined under Section 542 of the Internal
Revenue Code since 50% of the value of the Fund's shares
were owned directly or indirectly by five or fewer
individuals at certain times during the last half of the
year. As a personal holding company, the Fund is subject to
federal income taxes on undistributed personal holding
company income at the maximum individual income tax rate. No
provision has been made for federal income taxes since
substantially all taxable income has been distributed to
shareholders. It is the policy of the Fund to comply with
the provisions of the Internal Revenue Code applicable to
regulated investment companies and to make sufficient
distributions of taxable income to relieve it from all
federal income taxes.
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 an accrual basis.
Dividend income is recorded on the ex-dividend date.
(Continued)
<PAGE>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
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.
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 $32,686 ($0.10 per share)
and has voluntarily agreed to reimburse $18,899 of the Fund's
operating expenses for the year ended March 31, 1998.
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
(Continued)
<PAGE>
THE BROWN CAPITAL MANAGEMENT BALANCED FUND
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
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.
North Carolina Shareholder Services, LLC (the "Transfer Agent")
serves as the Funds' transfer, dividend paying, and shareholder
servicing agent. The Transfer Agent, subject to the authority of
the Board of Trustees, provides transfer agency services pursuant
to an agreement with the Administrator, which has been approved by
the Trust. The Transfer Agent maintains the records of each
shareholder's account, answers shareholder inquiries concerning
accounts, processes purchases and redemptions of the Fund shares,
acts as dividend and distribution disbursing agent, and performs
other shareholder servicing functions. The Transfer Agent is
compensated for its services by the Administrator and not directly
by the Funds.
Certain Trustees and officers of the Trust are also officers of
the Advisor, the distributor or the Administrator.
At March 31, 1998, the Advisor and its officers held 24,959 shares
or 6.913% of the Fund shares outstanding.
NOTE 3 - PURCHASES AND SALES OF INVESTMENTS
Purchases and sales of investments, other than short-term
investments, aggregated $2,203,989 and $1,515,195, respectively,
for the year ended March 31, 1998.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of The Nottingham Investment Trust II and Shareholders
of The Brown Capital Management Balanced Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The Brown Capital Management Balanced Fund (a
portfolio of The Nottingham Investment Trust II) as of March 31, 1998 and the
related statement of operations for the year then ended, the statement of
changes in net assets for the years ended March 31, 1998 and 1997, and financial
highlights for the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
March 31, 1998 by correspondence with the custodian and brokers; where replies
were not received, 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 audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Brown Capital
Management Balanced Fund as of March 31, 1998, the results of its operations,
the changes in its net assets and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
April 24, 1998
<PAGE>
Brown Capital Management Funds
105 North Washington Street
Post Office Box 69
Rocky Mount, North Carolina 27802-0069
Telephone 919-972-9922
U. S. WATTS 800-525- FUND
Facsimile 919-442-4226
April 15, 1998
Dear Shareholder:
I am sure you're tired of hearing about the unprecedented series of consecutive
years of 20+% gains in the broad stock market. Perhaps what isn't as widely
known, is that we have experienced an unprecedented streak of six years of
earnings increases for the S&P 500. The only period that has come close in the
last 50 years is 1962-1966. We expect the streak to continue, albeit at a slower
pace in 1998.
While the Washington press corps was ensconced in nosing out scandals (don't
worry this letter will not go there), the economy and the market continued its
upward trend. The S&P 500 Index increased 48.0%, on a total return basis, during
the fiscal year. Large capitalization indices still outperformed smaller
capitalization indices (the Russell 2000 Index was up 42.0%). The Lehman
Government/Corporate Bond Index returned 12.4% for the same period.
What hasn't been adequately discussed is the explanation behind the
unprecedented gains in the stock market. For the past couple of years, we (like
many others) have stated, at the beginning of the year, that we expect market
gains to revert to the historic norm of 10-11%. It hasn't happened, and the
reason can be traced to two primary factors-- greater than expected declines in
interest rates and an expansion in price earnings ratios. At the risk of
sounding redundant, in 1998 we expect - (1) the broad stock market to return the
historical returns of 10-11%, (2) the small and mid-cap companies to play
catch-up, and (3) bonds to offer very competitive returns with stocks.
The table below is helpful in providing some insights into the narrow and skewed
market performance in calendar year 1997.
- ------------------------- ----------------- ---------------- ------------------
12/31/96- 6/30/97- 10/27/97-
6/30/97 10/26/97 12/31/97
- ------------------------- ----------------- ---------------- ------------------
- ------------------------- ----------------- ---------------- ------------------
S&P 500 20.6% 6.9% 11.0%
- ------------------------- ----------------- ---------------- ------------------
- ------------------------- ----------------- ---------------- ------------------
Russell 1000 Growth 19.6% 6.4% 10.3%
- ------------------------- ----------------- ---------------- ------------------
- ------------------------- ----------------- ---------------- ------------------
Russell 2000 10.2% 13.4% 4.3%
- ------------------------- ----------------- ---------------- ------------------
- ------------------------- ----------------- ---------------- ------------------
Russell 2000 Growth 5.2% 14.4% 1.5%
- ------------------------- ----------------- ---------------- ------------------
- ------------------------- ----------------- ---------------- ------------------
Russell Mid-Cap Growth 10.5% 12.5% 6.5%
- ------------------------- ----------------- ---------------- ------------------
Clearly, the first half of calendar 1997 was dominated by large capitalization
companies, and the S&P 500 outperformed the Russell 2000 by 1040 basis points.
More specifically, what cannot be gleaned from the chart, but as indicated
above, the performance was fueled by the highly liquid "super market caps".
However, from mid-year up to the market setback on October 27, the tables
reversed just as dramatically. The Russell 2000 and Russell Mid-Cap Growth index
outperformed the S&P 500 by 650 and 750 basis points respectively. But, the
unexpected happened after the October 27 market setback. One would have expected
the leadership to have remained with the small and mid-cap companies that derive
the major portion of their sales and earnings domestically. It is clear from the
chart that this didn't occur. Rather, the S&P 500 outperformed the Russell 2000
and Russell 2000 Mid-Cap Growth indices by 670 and 950 basis points respectively
from October 27 through calendar year-end. Obviously to date, in the aftermath
of the Asian crisis, the perceived safety of the very large companies has
overwhelmed the international exposure of many of these companies.
<PAGE>
Calendar 1997 proved to be a challenging year for bottom-up stock pickers with a
growth investment approach for a couple of reasons. First, the gains in the
market were narrow and were fueled by the very large companies, referred to by a
newly coined term, "super market caps". Second, "bombs going off". Companies
reporting or "signaling" disappointing earnings were severely punished in the
marketplace. How did these phenomena directly affect the performance results
achieved in the Equity Fund and the equity portion of the Balanced Fund? With
respect to the first item, for the first six months of the year we considered
most of the companies (e.g., Coca Cola, Gillette, Proctor and Gamble), even
though growth companies, to be overvalued. Directionally, we were right on the
mark with respect to market capitalization in managing the Equity Fund. The
weighted market capitalization of the portfolio increased from approximately $10
billion at the beginning of 1997 to $26 billion by the end of the calendar year.
With respect to the second item, we were fortunate during the first nine months
of 1997 in that we escaped the "bombs" (instant price declines of 20% or more in
response to a news item--our definition) experienced by many investors. However,
we were not as fortunate in the third fiscal quarter. In fact, three stocks that
can be classified as "bombs" by the above definition explain almost all of the
underperformance in the third fiscal quarter. These three stocks declined by the
following amounts from the date of the specific news announcement to calendar
year-end: Green Tree Financial down 35%, Fastenal down 24%, and Wisconsin
Central Transportation down 22%. Our job of course is to assess whether anything
has changed fundamentally with these or any other holdings in your portfolio. We
are hard at work making these assessments, and evaluating new investment
opportunities that will produce superior returns in 1998 and beyond.
The Asian woes and their implications are serious, but not fatal. It is highly
likely that they will cause our GDP growth to be lower by an estimated 1/2-1%.
The good news is that the market's narrow focus and the Asian crisis will pass.
Additionally, we will have modest domestic real GDP accompanied by modest
inflation (not deflation in our opinion), and low interest rates. El Nino may
actually have aided the economy in the most recent quarter--lower energy costs,
due to warmer than usual weather, helped retail spending. The other good news is
that we have a portfolio of companies with superior characteristics relative to
the performance benchmark that are attractively priced. We have found that over
time this is a winning combination that translates into superior performance.
As usual, some economic sectors in the portfolio contributed to the performance
and others hindered the performance. For the mid/large capitalization equities
in the Equity and Balanced Funds, the top contributing sectors were Technology,
Consumer Cyclical and Consumer Staples, while the drags were Utilities and Basic
Materials. For the small companies in the Small Company Fund, the top
contributing sectors were Technology and Consumer Discretionary, while Energy
was the worst performing sector.
During the most recent quarter, we made few strategic changes. Outsourcing
continues to be a major trend. We took the following actions to increase our
exposure to an area that we have invested in for quite a while:
In the Equity Fund and the equity portion of the Balanced Fund, we sold Intel
Corp and we bought IBM. While both are technology companies, we decided to trim
our exposure to a hardware component-related company that may come under some
pricing pressure and to add a company that will benefit from outsourcing and
information technology. IBM has a stated goal to "turn IBM into the world's
premier knowledge management company". In 1997, 49.1% of IBM's revenue came from
Services, Software and Maintenance and we believe IBM can play a major role in
outsourcing by other companies. We added FiServ, a company that provides
financial data processing systems and information management services and
products to financial entities. While the Energy sector is traditionally not
thought of as a growth sector, we believe the current valuations of some
growth-oriented oil service companies are compelling. We added Schlumberger to
the portfolio.
<PAGE>
In the Small Company Fund, we added Applied Digital Access, a company that
provides network management software and services, Best Software, a company that
provides human resources and payroll management software solutions, and, Concord
Communications, a software-based company that provides performance analysis and
reporting solutions for the management of computer networks. Additionally, we
purchased Applied Analytical Industries, a company that provides product
development and support services to the pharmaceutical and biotechnology
industries.
The fixed income portion of the Balanced Fund found fixed income markets fairly
quiet in the most recent quarter. At the end of the quarter, the long-term
Treasury bond at 5.93% was about the same as at year-end. Considering the yield
curve, the spread relationships extant in the marketplace, and the fact that we
don't expect a significant decline in interest rates near-term, we think the
current portfolio structure is appropriate. Currently, we are emphasizing
intermediate-term maturity and high quality bonds.
Our overall view on the market has not changed. We still believe the market
(using the S&P500 as a proxy) to be fairly fully valued - trading at 21 times
estimated forward twelve months earnings. While P/E's may have expanded as far
as they can in the current interest rate environment, we believe steady earnings
growth and a low inflation environment create an upside potential at least equal
to the growth in earnings. However, the economic expansion is in its eighth year
and most to the benefits of restructuring are behind us. Rising labor costs may
limit margins, and earnings growth may be tied solely to revenue growth.
Companies may not be able to increase prices in the current environment of
inter-global competition and low inflation. We continue to believe stock
selection is key.
Sincerely,
Eddie C. Brown
President
<PAGE>
THE BROWN CAPITAL MANAGEMENT
SMALL COMPANY FUND
Performance Update - $10,000 Investment
For the period from December 31, 1992 to March 31, 1998
BCM Small Co Russell 2000 NASDAQ Industrials
Fund Index Index
12/31/92 10,000 10,000 10,000
3/31/93 9,877 10,371 9,843
6/30/93 9,855 10,558 10,063
9/30/93 10,325 11,445 10,761
12/31/93 10,574 11,700 11,116
3/31/94 10,311 11,340 10,746
6/30/94 9,680 10,872 9,852
9/30/94 10,307 11,589 10,724
12/31/94 11,077 11,328 10,398
3/31/95 12,066 11,816 11,079
6/30/95 13,037 12,882 12,251
9/30/95 14,266 14,164 13,607
12/31/95 14,839 14,453 13,391
3/31/96 16,048 15,188 14,244
6/30/96 16,706 15,968 15,450
9/30/96 17,098 16,020 15,429
12/31/96 17,374 16,838 15,474
3/31/97 16,299 15,973 14,214
6/30/97 18,742 18,550 16,536
9/30/97 20,860 21,300 19,239
12/31/97 20,116 20,577 17,101
3/31/98 23,119 22,695 19,090
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 that 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 Five Years
- ---------------------------------------------------
17.31% 41.84% 18.53%
- ---------------------------------------------------
The graph assumes an initial $10,000 investment at December 31, 1992. All
dividends and distributions are reinvested.
At March 31, 1998, the Fund would have grown to $23,119 - total investment
return of 131.19% since December 31, 1992.
At March 31, 1998, a similar investment in the Russell 2000 Index would have
grown to $22,695 - total investment return of 126.95% and the NASDAQ Industrials
Index would have grown to $19,090 - total investment return of 90.90%, since
December 31, 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>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - 96.51%
Advertising - 1.90%
(a) Catalina Marketing Corporation ....................................... 4,200 $ 220,237
-----------
Biopharmaceuticals - 1.50%
The Perkin-Elmer Corporation ......................................... 2,397 173,333
-----------
Chemicals - 0.97%
(a) Synthetech, Inc. ..................................................... 18,200 112,612
-----------
Commercial Services - 3.81%
Paychex, Inc. ........................................................ 2,375 137,008
(a) Quintiles Transnational Corp. ........................................ 6,200 298,762
(a) Walsh International Inc. ............................................. 300 4,650
-----------
440,420
-----------
Computers - 0.96%
(a) RadiSys Corporation .................................................. 4,400 110,550
-----------
Computer Software & Services - 44.89%
(a) Acxiom Corporation ................................................... 17,700 453,563
(a) Advent Software, Inc. ................................................ 8,300 394,250
(a) American Business Information, Inc. Cl-A ............................. 8,200 107,625
(a) American Business Information, Inc. Cl-B ............................. 8,200 116,850
(a) American Software, Inc. .............................................. 13,500 106,313
(a) Best Software, Inc. .................................................. 8,800 133,100
(a) BMC Software, Inc. ................................................... 7,573 634,746
(a) Cerner Corporation ................................................... 10,500 225,094
(a) CFI ProServices, Inc. ................................................ 12,100 178,475
(a) Concord Communications, Inc. ......................................... 4,000 104,500
(a) Datastream Systems, Inc. ............................................. 8,600 190,275
(a) Dendrite International, Inc. ......................................... 14,200 408,250
Fair, Isaac and Company, Incorporated ................................ 9,200 346,725
(a) Hyperion Software Corporation ........................................ 7,800 345,150
(a) Network Associates, Inc. ............................................. 5,725 379,281
(a) Platinum Technology, Inc. ............................................ 5,600 144,900
(a) QuickResponse Services, Inc. ......................................... 4,100 219,350
(a) SPSS, Inc. ........................................................... 4,600 108,100
(a) Structural Dynamics Research Corporation ............................. 10,400 260,650
(a) The BISYS Group, Inc. ................................................ 6,700 236,175
(a) Tripos, Inc. ......................................................... 7,600 98,800
-----------
5,192,172
-----------
Electronics - 2.48%
(a) Sanmina Corporation .................................................. 4,100 286,744
-----------
(Continued)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - (Continued)
Financial Services - 3.16%
T. Rowe Price Associates, Inc. ....................................... 5,200 $ 365,950
-----------
Furniture & Home Appliances - 1.26%
Juno Lighting, Inc. .................................................. 6,900 145,762
-----------
Hand & Machine Tools - 1.79%
(a) Flow International Corporation ....................................... 20,300 206,806
-----------
Machine - Diversified - 1.89%
(a) Cognex Corporation ................................................... 10,200 218,025
-----------
Medical - Biotechnology - 3.13%
(a) Affymetrix, Inc. ..................................................... 1,500 52,219
(a) Human Genome Sciences, Inc. .......................................... 1,100 43,794
(a) Incyte Pharmaceuticals, Inc. ......................................... 1,200 56,100
(a) Pharmacopeia, Inc. ................................................... 11,200 210,000
-----------
362,113
-----------
Medical - Hospital Management & Service - 3.40%
(a) ABR Information Services, Inc. ....................................... 14,000 393,750
-----------
Medical Supplies - 11.62%
Ballard Medical Products ............................................. 7,400 199,800
Biomet, Inc. ......................................................... 7,200 216,000
Diagnostic Products Corporation ...................................... 8,800 245,300
Life Technologies, Inc. .............................................. 9,700 373,450
(a) Molecular Dynamics, Inc. ............................................. 6,700 96,731
(a) Techne Corporation ................................................... 11,000 213,125
-----------
1,344,406
-----------
Miscellaneous - Manufacturing - 1.89%
(a) Panavision Inc. ...................................................... 8,300 218,394
-----------
Pharmaceuticals - 4.79%
(a) ALZA Corporation ..................................................... 9,600 430,200
(a) Applied Analytical Industries, Inc. .................................. 7,300 117,712
(a) Crescenco Pharmaceuticals Corporation ................................ 420 5,303
(a) Lynx Therapeutics, Inc. .............................................. 81 810
-----------
554,025
-----------
Real Estate Investment Trust - 1.31%
Post Properties, Inc. ................................................ 3,800 151,762
-----------
(Continued)
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
PORTFOLIO OF INVESTMENTS
March 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------------
Value
Shares (note 1)
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS - (Continued)
Restaurants & Food Service - 4.10%
(a) Au Bon Pain Company, Inc. ............................................ 29,300 $ 247,219
(a) The Cheesecake Factory ............................................... 6,800 226,525
-----------
473,744
-----------
Retail - Specialty Line - 1.28%
Fastenal Company ..................................................... 3,400 147,475
-----------
Telecommunications Equipment - 0.38%
(a) Applied Digital Access, Inc. ......................................... 5,500 44,000
-----------
Warrants - 0.00%
(a) ALZA Corporation, expiration date December 31, 1999 .................. 150 145
(a) The Perkin-Elmer Corporation, expiraton date September 11, 2003 ...... 27 130
-----------
275
-----------
Total Common Stocks (Cost $7,133,876) ................................ 11,162,555
-----------
INVESTMENT COMPANY - 3.49%
Evergreen Money Market Treasury Institutional Money
Market Fund Institutional Service Shares ............................ 403,845 403,845
(Cost $403,845) -----------
Total Value of Investments (Cost $7,537,721 (b)) ................................. 100.00 % 11,566,400
Liabilities In Excess of Other Assets ............................................ (0.00)% (456)
------ -----------
Net Assets ................................................................ 100.00 % $11,565,944
====== ===========
(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 $4,163,722
Unrealized depreciation (135,043)
----------
Net unrealized appreciation $4,028,679
==========
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1998
ASSETS
Investments, at value (cost $7,537,721) ..................................................... $11,566,400
Income receivable ........................................................................... 6,303
Other assets ................................................................................ 6,109
-----------
Total assets ........................................................................... 11,578,812
-----------
LIABILITIES
Accrued expenses ............................................................................ 5,873
Payable for investment purchases ............................................................ 1,859
Other liabilities ........................................................................... 5,136
-----------
Total liabilities ...................................................................... 12,868
-----------
NET ASSETS
(applicable to 550,128 Institutional shares outstanding; unlimited
shares of no par value beneficial interest authorized) ..................................... $11,565,944
===========
NET ASSET VALUE, REDEMPTION AND OFFERING PRICE
PER INSTITUTIONAL CLASS SHARE
($11,565,944 / 550,128 shares) .............................................................. $ 21.02
===========
NET ASSETS CONSIST OF
Paid-in capital ............................................................................. $ 7,495,546
Undistributed net realized gain on investments .............................................. 41,719
Net unrealized appreciation on investments .................................................. 4,028,679
-----------
$11,565,944
===========
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
BROWN CAPTIAL MANAGEMENT SMALL COMPANY FUND
STATEMENT OF OPERATIONS
Year ended March 31, 1998
INVESTMENT LOSS
Income
Dividends .................................................................................... $ 74,036
Miscellaneous ................................................................................ 2,615
----------
Total income ............................................................................ 76,651
----------
Expenses
Investment advisory fees (note 2) ............................................................ 93,370
Fund administration fees (note 2) ............................................................ 23,279
Custody fees ................................................................................. 4,810
Registration and filing administration fees (note 2) ......................................... 5,798
Fund accounting fees (note 2) ................................................................ 21,000
Audit fees ................................................................................... 9,200
Legal fees ................................................................................... 4,390
Securities pricing fees ...................................................................... 3,671
Shareholder recordkeeping fees ............................................................... 1,698
Shareholder servicing expenses ............................................................... 4,288
Registration and filing expenses ............................................................. 7,931
Printing expenses ............................................................................ 3,672
Trustee fees and meeting expenses ............................................................ 4,261
Other operating expenses ..................................................................... 4,073
----------
Total expenses .......................................................................... 191,441
----------
Less investment advisory fees waived (note 2) ........................................... (51,594)
----------
Net expenses ............................................................................ 139,847
----------
Net investment loss ............................................................... (63,196)
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
Net realized gain from investment transactions .................................................... 264,971
Increase in unrealized appreciation on investments ................................................ 3,029,081
----------
Net realized and unrealized gain on investments .............................................. 3,294,052
----------
Net increase in net assets resulting from operations .................................... $3,230,856
==========
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
STATEMENTS OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Year ended
March 31, March 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
INCREASE IN NET ASSETS
Operations
Net investment loss ............................................................... $ (63,196) $ (15,062)
Net realized gain (loss) from investment transactions ............................. 264,971 (66,449)
Increase in unrealized appreciation on investments ................................ 3,029,081 105,168
----------- -----------
Net increase in net assets resulting from operations ......................... 3,230,856 23,657
----------- -----------
Distributions to shareholders from
Net realized gain from investment transactions .................................... (122,662) (121,632)
----------- -----------
Capital share transactions
Increase in net assets resulting from capital share transactions (a) .............. 1,939,063 2,876,454
----------- -----------
Total increase in net assets ............................................ 5,047,257 2,778,479
NET ASSETS
Beginning of year ..................................................................... 6,518,687 3,740,208
----------- -----------
End of year ........................................................................... $11,565,944 $ 6,518,687
=========== ===========
(a) A summary of capital share activity follows:
------------------------------------------------------------------------
Year ended Year ended
March 31, 1998 March 31, 1997
Shares Value Shares Value
------------------------------------------------------------------------
Shares sold ............................................. 127,445 $ 2,137,857 215,413 $ 3,325,355
Shares issued for reinvestment
of distributions ................................... 6,686 122,282 7,902 121,296
----------- ----------- ----------- -----------
134,131 2,260,139 223,315 3,446,651
Shares redeemed ......................................... (18,185) (321,076) (36,296) (570,197)
----------- ----------- ----------- -----------
Net increase ....................................... 115,946 $ 1,939,063 187,019 $ 2,876,454
=========== =========== =========== ===========
See accompanying notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
BROWN CAPTIAL MANAGEMENT SMALL COMPANY FUND
FINANCIAL HIGHLIGHTS
(For a Share Outstanding Throughout the Year)
- ------------------------------------------------------------------------------------------------------------------------------------
Year ended Year ended Year ended Year ended Year ended
March 31, March 31, March 31, March 31, March 31,
1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of year ........................ $15.01 $15.13 $12.24 $10.69 $10.67
Income from investment operations
Net investment loss ............................ (0.11) (0.03) (0.06) (0.06) (0.11)
Net realized and unrealized gain on investments 6.36 0.27 4.00 1.86 0.59
----------- ----------- ----------- ----------- -----------
Total from investment operations ........... 6.25 0.24 3.94 1.80 0.48
----------- ----------- ----------- ----------- -----------
Distributions to shareholders from
Net realized gain from investment transactions (0.24) (0.36) (1.05) (0.25) (0.46)
----------- ----------- ----------- ----------- -----------
Net asset value, end of year .............................. $21.02 $15.01 $15.13 $12.24 $10.69
=========== =========== =========== =========== ===========
Total return .............................................. 41.84% 1.56% 33.00% 16.95% 4.39%
=========== =========== =========== =========== ===========
Ratios/supplemental data
Net assets, end of year ............................. $11,565,944 $ 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 2.05% 2.70% 3.49% 4.49% 4.73%
After expense reimbursements and waived fees 1.50% 1.50% 1.69% 2.00% 2.00%
Ratio of net investment loss to average net assets
Before expense reimbursements and waived fees (1.23)% (1.50)% (2.29)% (3.38)% (4.03)%
After expense reimbursements and waived fees (0.68)% (0.30)% (0.50)% (0.90)% (1.34)%
Portfolio turnover rate ............................. 11.64% 13.39% 23.43% 32.79% 23.47%
Average broker commissions per share (a) ............ $0.0520 $0.0482 - - -
(a) 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 SMALL COMPANY FUND
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
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-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 of those companies with
operating revenues of $250 million or less at the time of 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 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.
As a result of the Fund's operating net investment loss, a
reclassification adjustment of $34,855 has been made on the
statement of assets and liabilities to decrease accumulated
net investment loss, brining 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 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
(Continued)
<PAGE>
THE BROWN CAPITAL MANAGEMENT SMALL COMPANY FUND
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
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 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. There can be no assurance that the foregoing voluntary fee
waivers or reimbursements will continue. The Advisor has
voluntarily waived its fee amounting to $51,594 ($0.10 per share)
for the year ended March 31, 1998.
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 SMALL COMPANY FUND
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
NC Shareholder Services, LLC (the "Transfer Agent") has been
retained by the Administrator to serve as the Fund's transfer,
dividend paying, and shareholder servicing agent. The Transfer
Agent maintains the records of each shareholder's account, answers
shareholder inquiries concerning accounts, processes purchases and
redemptions of Fund shares, acts as dividend and distribution
disbursing agent, and performs other shareholder servicing
functions. The Transfer Agent is compensated for its services by
the Administrator and not directly by the Fund.
Certain Trustees and officers of the Trust are also officers of
the Advisor, the distributor or the Administrator.
At March 31, 1998, the Advisor and its officers held 29,970 shares
or 5.448% of the Fund shares outstanding.
NOTE 3 - PURCHASES AND SALES OF INVESTMENTS
Purchases and sales of investments, other than short-term
investments, aggregated $3,135,262 and $949,029, respectively, for
the year ended March 31, 1998.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Trustees of The Nottingham Investment Trust II and Shareholders
of The Brown Capital Management Small Company Fund:
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, 1998 and the
related statement of operations for the year then ended, the statement of
changes in net assets for the years ended March 31, 1998 and 1997, and financial
highlights for the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
March 31, 1998 by correspondence with the custodian and brokers; where replies
were not received, 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 audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The Brown Capital
Management Small Company Fund as of March 31, 1998, the results of its
operations, the changes in its net assets and its financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Pittsburgh, Pennsylvania
April 24, 1998
