THE BANC STOCK
GROUP FUND
DIAMOND HILL
FOCUS FUND
SEMI-ANNUAL REPORT
August 31, 2000
[LOGO]
BANC STOCK GROUP
1105 Schrock Road
Suite 437
Columbus, OH 43229
<PAGE>
THE BANC STOCK GROUP FUND
October 23, 2000
Dear Shareholder:
Thank you for your investment in The Banc Stock Group Fund. This is our
semi-annual report, in which we will share with you our view of the activities
of the general stock market, the banking sector and community and small regional
banks.
THE MARKET
Major stock market averages in the U.S. are lower this year than at the end of
1999. A number of high profile companies have announced disappointing earnings
and prospects over the last three quarters. This trend seems most evident in
those companies with international business interests which have been adversely
affected by a strong U.S. dollar. Major market averages in Europe and Asia are
down 10% or more (adjusted for U.S. dollars), while interest rates raise the
specter of a global economic slowdown evidenced by lower growth and sales.
Despite the downturn, the major market averages, including the S&P 500 and the
NASDAQ Composite, continue to trade at historically high price to earnings
ratios.
BANK STOCKS
In spite of all these developments, the banking industry has enjoyed strong
earnings due to increasing non-interest income and high loan growth. But what of
inflation fears? The Federal Reserve Board, in an attempt to stem inflation, has
consistently raised the interest rates that banks charge each other four times
since August 1999. The financial sector has been generally affected by this
steady increase in rates. Banks have been operating with reduced interest
margins and resultant reductions in net interest income. The good news may be
that the coming year points to a possible slowing rate of inflation. In an
atmosphere of slowing economic growth the Fed. may once again begin a process of
lowering interest rates. Such moves would improve the prospects for earnings
within the financial sector.
THE BANC STOCK GROUP FUND
We believe that, in this environment, independent banks are good businesses in
which to invest for the long term. The earnings of many community and small
regional banks remain strong and P/E ratios are attractive. This is an important
concept when compared to the deterioration of loan quality associated with
larger banks having national and international exposure to the prevailing world
economies. The Banc Stock Group Fund's style of investing improves its prospects
over the long-run by concentrating its portfolio on well-run community and
regional banks with good earnings track records, clearly articulated plans for
sustained growth and high quality credit exposure. We believe that this clear
and precise method of investing will benefit our investors in the years to come.
On behalf of The Banc Stock Group Fund, we appreciate your investment and look
forward to serving you and your family for many years. Should you have any
questions, please feel free to call us at 1-800-733-2265.
Best Regards,
THE BANC STOCK GROUP FUND
Mark A. Davis
Fund Manager
<PAGE>
DIAMOND HILL FOCUS FUND
October 23, 2000
Dear Shareholder:
The Diamond Hill Focus Fund began operations on June 30, 2000 with seed money
provided by the parent company, The Bank Stock Group. The Fund was declared
effective August 1, 2000, allowing public participation in the Fund. The purpose
of the Fund is to provide long-term capital appreciation and will use the S&P
500 Index as a benchmark. Ric Dillon, CFA, and Tom Schindler, CFA, will
co-manage the Diamond Hill Focus Fund.
OUR STRATEGY
The Focus Fund invests in common stocks that the Fund's advisor believes to be
undervalued. The managers do not confine their search for undervalued securities
to a specific market capitalization range. The Fund normally "focuses" its
investments in approximately 20 companies across economic sectors. As managers,
we conduct fundamental research and attempt to understand the economics of the
underlying business and its management, and then only pay a price that is
rational. Our valuation approach is rooted in the concept that a stock has an
intrinsic value that is independent of its current market price. This intrinsic
value can be estimated by forecasting future cash flows generated by the
business and discounting them to the present at an appropriate rate. Neither
"market timing" nor "sector rotation" is actively employed.
THE MARKET
By the end of 1999, large dichotomies had emerged between companies the market
deemed "haves" and those considered "have-nots". The technology sector again led
the way in 1999 as "dot.com" mania persisted. While a lot of speculative
excesses have been wrung out this year, at this point we do not feel the overall
market is "cheap" by any means. Yet, we are finding what we believe are
attractive opportunities in many areas.
RESULTS FOR THE FIRST QUARTER
The Focus Fund had a closing NAV of $10.37 on September 29, 2000, representing
an increase of 3.70% from its initial price of $10.00 on June 30, 2000. The S&P
500 Index decreased by .97% on a total return basis over the same period. First
Republic Bank was the largest contributor to this positive performance, aided by
optimism that the Fed has finished raising rates in an attempt to head off
inflationary pressures. SunGard Data Systems, the Fund's largest holding as of
September 29, 2000, was the second largest contributor as the company's earnings
have resumed solid double digit gains following a slowdown in last year's 4th
and this year's 1st quarter.
Thank you again for your investment in the Diamond Hill Focus Fund. Our mission
is to execute a disciplined investment process in order to achieve superior
long-term investment results for our shareholders. Shareholder communication is
important to us, so that we may convey what we believe is a sound approach to
investing.
Sincerely,
DIAMOND HILL FOCUS FUND
2
<PAGE>
THE BANC STOCK GROUP FUND
SCHEDULE OF INVESTMENTS
August 31, 2000 (Unaudited)
MARKET
SHARES SECURITY DESCRIPTION VALUE
Common Bank Stocks - 96.1%
Alabama - 0.9%
9,146 Eufaula Bancorp, Inc. $75,454
California - 71.9%
52,784 Northern Empire Bancshares # 867,637
45,262 Quaker City Bancorp, Inc. # 780,770
30,900 First Republic Bank of San Francisco # 766,706
52,475 ITLA Capital Corp. # 734,650
48,475 BYL Bancorp 533,225
24,000 Imperial Bancorp # 522,000
12,113 SJNB Financial Corp. 377,017
35,173 MCB Financial Corp. 287,979
10,000 Pacific Capital Bancorp 268,125
5,000 City National Corp. 195,313
25,000 VIB Corp. # 151,562
11,000 North Coast Bank # 129,250
9,242 American River Holdings 118,413
9,105 Pacific Crest Capital, Inc. 114,951
3,400 Civic Bancorp # 105,000
3,000 BWC Financial Corp. # 78,200
3,000 Borel Bank & Trust 59,625
3,500 Capital Corp of the West # 40,688
---------
6,131,111
Connecticut - 1.2%
11,200 Alliance Bancorp 100,800
Hawaii - 2.7%
13,100 Bancwest Corp. 231,706
Massachusetts - 10%
9,000 FleetBoston Financial Corp. 378,000
17,000 CCBT Financial Companies, Inc. 306,000
19,050 Capital Crossing Bank # 166,687
-------
850,687
North Carolina - 1.3%
4,000 BB&T Corp. 108,250
New Mexico - 0.3%
2,000 First State Bancorp 25,250
New York - 7.3%
21,000 North Fork Bancorp 375,375
7,000 Hudson United Bancorp 176,313
3,200 Community Bank Sytem, Inc. 70,600
-------
622,288
Ohio - 4.5%
9,000 Provident Financial Group, Inc. 236,813
11,410 DCB Financial Corp. 148,330
-------
385,143
Total Bank Stocks 8,530,689
(Cost $9,065,368)
Total Common Bank Stocks 8,530,689
(Cost $9,065,368)
Registered Investment Companies - 4.1%
363,842 Flex-funds Money Market Fund 363,842
Total Registered Investment Companies 363,842
(Cost $363,842)
Total Investments - 100.2%
(Cost $9,429,210) (a) 8,894,531
Liabilities in Excess of Other Assets - 0.2% 15,628
Total Net Assets - 100.0% $8,878,903
State percentages indicated are based on total bank common stocks of $8,530,689.
3
<PAGE>
THE BANC STOCK GROUP FUND
SCHEDULE OF INVESTMENTS (Continued)
August 31, 2000 (Unaudited)
(a) For Federal income tax purposes the aggregate cost basis of investments was
$9,429,210 and differs from market value by net unrealized depreciation of
securities as follows:
Unrealized appreciation.................... $501,528
Unrealized depreciation.................... (1,036,207)
Net unrealized depreciation.................. ($534,679)
# Represents non-income producing securities.
See accompanying notes to financial statements.
Diamond Hill Focus Fund
SCHEDULE OF INVESTMENTS
August 31, 2000 (Unaudited)
MARKET
SHARES SECURITY DESCRIPTION VALUE
Common Stocks - 80.2%
Broadcasting & Publishing - 5.3%
11,800 A.H. Belo Corp. $225,675
Commercial Banks -- Western U.S. - 7.1%
12,200 First Republic Bank of San Francisco # 302,713
Chemical -- Specialty - 5.2%
24,850 Crompton Corp. 223,650
Commercial Services - 12.3%
14,575 Pittston Brink's Group 226,823
10,100 Viad Corp. 296,056
-------
522,879
Computer Software & Services - 19.3%
10,100 Ceridian Corp. 244,294
22,150 Gartner Group, Inc. # 293,487
8,000 Sunguard Data Systems, Inc. # 288,000
-------
825,781
Drug - 6.6%
6,990 Schering-Plough Corp. 280,474
Finance - 9.9%
5,500 FleetBoston Financial Corp. 231,000
27,550 FINOVA Group, Inc. 192,516
-------
423,516
Financial Services - 5.9%
6,600 Countrywide Credit Industries, Inc. 249,975
Food--Diversified - 5.7%
13,100 Sara Lee Corp. 243,988
Homebuilding - 5.2%
12,000 Crossman Communities, Inc. # 219,750
4
<PAGE>
Diamond Hill Focus Fund
SCHEDULE OF INVESTMENTS (Continued)
August 31, 2000 (Unaudited)
Industrial Services - 5.4%
10,500 Kaydon Corp. 231,656
Manufacturing - 6.6%
7,000 The Black & Decker Corp. 280,875
Travel Services - 5.5%
8,400 Sabre Holdings Corp. 234,150
Total Common Stocks 4,265,082
(Cost $4,175,065)
Registered Investment Companies - 3.9%
207,410 Flex-funds Money Market Fund 207,410
Total Registered Investment Companies 207,410
(Cost $207,410)
Repurchase Agreements - 10.2%
539,000 Firstar Trust Co., 4.25%, 09/01/00,
(Collaterlized by $1,448,000 various
GNMA Midget, 6.00% - 6.50%,
03/15/00, market value - $550,057) 539,000
Total Repurchase Agreements 539,000
(Cost $539,000)
Treasury Obligations - 3.9%
207,975 Firstar Bank Treasury 207,975
Total Treasury Obligations 207,975
(Cost $207,975)
Total Investments - 98.2%
(Cost $5,129,450) (a) 5,219,467
Assets in Excess of Other Liabilities - 1.8% 97,343
Total Net Assets - 100.0% $5,316,810
Percentages indicated for common stock categories are based on total common
stocks of $4,265,082.
(a) For Federal income tax purposes the aggregate cost basis of investments was
$5,129,450 and differs from market value by net unrealized appreciation of
securities as follows:
Unrealized appreciation.................... $154,932
Unrealized depreciation.................... (64,915)
Net unrealized appreciation................ $90,017
# Represents non-income producing securities.
See accompanying notes to financial statements.
5
<PAGE>
STATEMENTS OF ASSETS & LIABILITIES
August 31, 2000 (Unaudited)
The Banc Stock Diamond Hill
Group Fund Focus Fund
Assets
Investments, at value (cost $9,429,210 and $8,894,531 $5,219,467
$5,129,450, respectively)
Receivable for securities sold 62,620 0
Receivable for fund shares sold 22,456 94,975
Receivable for dividends and interest 10,695 12,036
Prepaid expenses and other assets 5,581 0
--------- ---------
Total assets 8,995,883 5,326,478
Liabilities
Payable for securities purchased 62,867 0
Payable for fund shares redeemed 34,950 4,071
Payable to investment adviser 10,505 3,165
Payable for dealer/underwriter commissions 5,033 0
Accrued 12b-1 fees - Class A 3,023 850
Accrued 12b-1 and shareholder service fees-Class C 599 0
Other accrued liabilities 3 1,582
------- ------
Total liabilities 116,980 9,668
Total net assets $8,878,903 $5,316,810
Components of Net Assets
Paid-in capital 11,760,623 5,218,568
Accumulated net investment income (loss) (5,957) 8,225
Accumulated net realized gain (loss) (2,341,084) 0
Net unrealized appreciation (534,679) 90,017
---------- ----------
Total net assets $8,878,903 $5,316,810
Net Assets
Class A Shares $8,810,082 $5,316,810
Class C Shares 68,821
---------- ----------
Total $8,878,903 $5,316,810
Capital Stock Outstanding
(indefinite number of shares authorized,
$0.10 par value)
Class A Shares 926,559 523,291
Class C Shares 7,305
------- -------
Total 933,864 523,291
Net Asset Value, Redemption Price Per Share
Class A Shares $9.51 $10.16
Class C Shares $9.42 N/A
Maximum Sales Charge 5.75% N/A
Maximum Offering Price $10.09 N/A
(Class A Net Asset Value/(100% - Maximum Sales Charge))
See accompanying notes to financial statements.
6
<PAGE>
STATEMENTS OF OPERATIONS
For the six months ended
August 31, 2000 (Unaudited)
The Banc Stock Diamond Hill
Group Fund Focus Fund*
Investment Income (Loss)
Income
Dividends $32,841 $10,232
Interest 42,845 3,943
------ ------
Total income 75,686 14,175
Expenses
Investment management - Class A 70,045 3,400
Investment management - Class C 559 0
12b-1 distribution - Class A 10,698 850
12b-1 distribution - Class C 256 0
Shareholder servicing - Class C 85 0
Trustee 7,500 0
Miscellaneous 0 1,700
------ -----
Total expenses 89,143 5,950
------ -----
Expenses reimbursed by investment adviser (7,500) 0
------ -----
Net Expenses 81,643 5,950
Net investment income (loss) (5,957) 8,225
Realized and Unrealized Gain (Loss)
Net realized gain (loss) from securities transactions (1,760,633) --
Change in net unrealized gain or loss on securities 1,836,971 90,017
--------- ------
Net realized and unrealized gain (loss) 76,338 90,017
Net Increase (Decrease) in Net Assets Resulting
from Operations $70,381 $98,242
* Commenced operations on June 30, 2000.
See accompanying notes to financial statements.
7
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
(Unaudited)
<TABLE>
<CAPTION>
THE BANC STOCK THE BANC STOCK DIAMOND HILL
GROUP FUND GROUP FUND FOCUS FUND
For the six months For the year Period from
ended ended June 30, 2000*
August 31, 2000 February 29, 2000 to August 31, 2000
<S> <C> <C> <C>
Increase (Decrease) in Net Assets
Operations
Net investment income (loss) ($5,957) ($56,149) $8,225
Net realized gain (loss) from securities (1,760,633) (575,746) 0
transactions
Change in net unrealized gain or loss 1,836,971 (678,116) 90,017
on securities ---------- ---------- -------
Net increase (decrease) in net assets resulting 70,381 (1,310,011) 98,242
from operations
Distributions to Class A shareholders
From net realized gains on investments -- (76,735) --
---------- --------- -------
Net decrease in net assets resulting from dividends -- (76,735) --
and distributions
Distributions to Class C shareholders
From net realized gains on investments 0 (503) --
---------- --------- -------
Net decrease in net assets resulting from dividends 0 (503) --
and distributions
Capital transactions*
Issued 1,515,074 841,617 5,279,539
Reinvested 0 73,646 0
Redeemed (2,189,029) (5,761,225) (60,971)
Net increase in net assets resulting from capital (673,955) (4,845,962) 5,218,568
transactions
--------- ----------- ----------
Total increase in net assets (603,574) (6,233,211) 5,316,810
Net assets - beginning of period 9,482,477 15,715,688 --
Net assets - end of period $8,878,903 $9,482,477 $5,316,810
*Share information
Issued 165,867 78,775 529,331
Reinvested -- 7,157 --
Redeemed (240,937) (543,607) (6,040)
----------- ---------- ----------
Change in shares (75,070) (457,675) 523,291
<FN>
* Commencement of operations.
</FN>
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
THE BANC STOCK GROUP FUND
FINANCIAL HIGHLIGHTS
For a share outstanding throughout the period (Unaudited)
<TABLE>
<CAPTION>
Class A Class C Class A Class C Class A Class A
For the For the For the Period For the Period
six months six months year from year from
ended ended ended 6/3/00* ended 8/1/97*
8/31/00 8/31/00 2/29/00 to 2/29/00 2/28/99 to 2/28/98
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, beginning of period $9.40 $9.34 $10.72 $11.23 $12.75 $10.00
Income from investment operations
Net investment income (loss) (0.01) (0.04) (0.06) (0.05) (0.15) (0.07)
Net realized and unrealized gain 0.12 0.12 (1.19) (1.77) (1.22) 2.82
------ ------ ------ ------ ------ ------
Total from investment operations 0.11 0.08 (1.25) (1.82) (1.37) 2.75
Less dividends and distributions
From net realized gains -- -- (0.07) (0.07) (0.66) 0.00
------ ------ ------ ------ ------ ------
Total dividends and distributions -- -- (0.07) (0.07) (0.66) 0.00
Net Asset Value, end of period $9.51 $9.42 $9.40 $9.34 $10.72 $12.75
Total return (excludes sales charge) 1.17%(2) 1.60%(2) -11.75% -16.29%(2) -10.79% 27.50%(2)
Ratios/Supplemental Data
Net assets, end of period ($000) $8,810 $69 $9,411 $71 $15,716 $13,702
Ratio of expenses to average net assets 1.89%(1) 2.63%(1) 2.17% 2.74%(1) 2.50% 2.50%(1)
Ratio of net investment income (loss) -0.14%(1) -0.88%(1) -0.40% -0.82%(1) -1.27% -1.07%(1)
to average net assets
Ratio of expenses to average net 2.06%(1) 2.63%(1) 2.26% 2.84%(1) 2.50% 2.50%(1)
assets before reimbursement of fees
Ratio of net investment income (loss) -0.31%(1) -0.88%(1) -0.49% -0.92%(1) -1.27% -1.07%(1)
to average net assets before
reimbursement of fees
Portfolio turnover rate 108.46%(2) 108.46%(2) 119.13% 119.13%(2) 54.07% 26.65%(2)
<FN>
(1) Annualized.
(2) Not annualized.
* Commencement of operations.
</FN>
</TABLE>
See accompanying notes to financial statements.
9
<PAGE>
DIAMOND HILL FOCUS FUND
FINANCIAL HIGHLIGHTS
For a share outstanding throughout the period (Unaudited)
Period from
June 30, 2000* to
August 31, 2000
Net Asset Value, beginning of period $10.00
Income from investment operations
Net investment income (loss) 0.02
Net realized and unrealized gain 0.14
----
Total from investment operations 0.16
Net Asset Value, end of period $10.16
Total return 1.60% (2)
Ratios/Supplemental Data
Net assets, end of period ($000) $5,317
Ratio of expenses to average net assets 1.75% (1)
Ratio of net investment income (loss) 2.42% (1)
to average net assets
Portfolio turnover rate 0.00% (2)
(1) Annualized.
(2) Not annualized.
* Commencement of operations. The fund did not open for investors until
August 3, 2000. Highlights for the period from June 30 to August 2, 2000,
relate only to the initial shareholder.
See accompanying notes to financial statements.
10
<PAGE>
BSG FUNDS
NOTES TO FINANCIAL STATEMENTS
August 31, 2000 (Unaudited)
--------------------------------------------------------------------------------
ORGANIZATION
The BSG Funds, an Ohio business trust (the "Trust"), was organized on
January 14, 1997 and is registered under the Investment Company Act of 1940 (the
"Act"). The Trust offers two separate series comprised of The Banc Stock Group
Fund and the Diamond Hill Focus Fund (each a "Fund" and collectively the
"Funds").
The Trust is authorized to issue an unlimited number of shares of capital
stock in separate series, with each series representing interests in a separate
portfolio of securities and other assets, each with its own investment
objectives and policies. The Trust has an agreement with Diamond Hill Capital
Management, Inc., formerly known as Heartland Advisory Group, Inc., (the
"Adviser"), with whom certain officers and trustees of the Trust are affiliated,
to serve as investment adviser to the Funds.
The Banc Stock Group Fund's investment objective is to provide shareholders
with long-term capital appreciation. The Fund seeks to achieve its objective by
investing primarily in equity securities of community banks, lending
institutions, and financial services companies believed by the Adviser to offer
superior prospects for long-term growth. The Fund has issued two classes of Fund
shares. The Class A shares are subject to initial sales charges imposed at the
time of purchase, in accordance with the Fund's prospectus. Certain redemptions
of Class C shares made within two years of purchase are subject to contingent
deferred sales charges, in accordance with the Fund's prospectus. Each class of
shares for the Fund has identical rights and privileges except with respect to
distribution (12b-1) fees, voting rights on matters affecting a single class of
shares and the exchange privileges of each class of shares.
The Diamond Hill Focus Fund's investment objective is to provide
shareholders with long-term capital appreciation. The Fund pursues its objective
by investing in common stocks that the Fund's adviser believes are undervalued.
The Fund normally focuses its investments in a core of 20 to 30 companies.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed
by the Funds in the preparation of their financial statements. These policies
are in conformity with generally accepted accounting principles for investment
companies. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the period. Actual results could differ from these estimates.
SECURITY VALUATION - Securities which are traded on any exchange or on the
NASDAQ over-the-counter market are valued at the last quoted sale price. Lacking
a last sale price, a security is valued at its highest bid price on such
exchanges, or at the highest bid price in the over-the-counter market except
when, in the Adviser's opinion, the highest bid price does not accurately
reflect the current value of the security. Securities for which market
quotations are not readily available, or when the Adviser determines the highest
bid price does not accurately reflect the current value, or when restricted
11
<PAGE>
BSG FUNDS
NOTES TO FINANCIAL STATEMENTS (continued)
August 31, 2000 (Unaudited)
--------------------------------------------------------------------------------
securities are being valued, are valued as determined in good faith by the
Adviser, subject to review by the Board of Trustees of the Trust.
Fixed-income securities generally are valued by using market quotations,
but may be valued on the basis of prices furnished by an independent pricing
service which uses prices based upon yields or prices of comparable securities,
indications as to values from dealers, and general market conditions, when the
Adviser believes such prices accurately reflect the fair market value of the
security.
Short-term investments in fixed-income securities with maturities of less
than sixty days when acquired, or which subsequently are within sixty days of
maturity, are valued by using the amortized cost method of valuation, which the
Board has determined will represent fair value.
FEDERAL INCOME TAXES - The Funds intend to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all net investment income and any realized capital
gain. Therefore, no federal income tax provision is required.
DIVIDENDS AND DISTRIBUTIONS - The Funds intend to distribute substantially
all net investment income as dividends to shareholders on an annual basis. The
Funds intend to distribute net long-term capital gains and net short-term
capital gains at least once a year. Income and capital gain distributions to
shareholders are determined in accordance with income tax regulations, which may
differ from generally accepted accounting principles. Those differences are
primarily due to differing treatments for net operating losses and deferral of
wash sale losses.
SECURITY TRANSACTIONS AND RELATED INCOME - The Funds record security
transactions on trade date. The specific identification method is used for
determining gains or losses for financial statements and income tax purposes.
Dividend income is recorded on the ex-dividend date and interest income is
recorded on an accrual basis. Discount and premium on securities purchased are
amortized over the life of the respective securities.
INVESTMENT INCOME & EXPENSES - Income and realized and unrealized gains and
losses are allocated to the separate classes based on their relative net assets.
Expenses of the Funds, other than expenses incurred pursuant to the Class A and
Class C distribution and shareholder service plans, are allocated to the
separate classes, if applicable, based on their relative net assets or other
appropriate basis.
PURCHASES AND SALES OF SECURITIES
Investment transactions (other than short-term investments) for the six
months ended August 31, 2000, were as follows:
-------------- --------------------------------- ------------------------------
The Banc Stock Group Fund Diamond Hill Focus Fund
-------------- --------------------------------- ------------------------------
Purchases $8,914,001 $4,175,065
-------------- --------------------------------- ------------------------------
Sales 7,793,376 --
-------------- --------------------------------- ------------------------------
12
<PAGE>
BSG FUNDS
NOTES TO FINANCIAL STATEMENTS (continued)
August 31, 2000 (Unaudited)
--------------------------------------------------------------------------------
INVESTMENT ADVISORY AGREEMENT AND OTHER RELATED PARTY TRANSACTIONS
Under the Trust's agreement with the Adviser to serve as investment adviser
to the Funds, a monthly fee is paid to the Adviser at an annual rate of 1.50%
and 1.00% of the average daily net assets of The Banc Stock Group Fund and the
Diamond Hill Focus Fund, respectively. Prior to July 1, 2000 the Adviser was
paid at an annual rate of 1.70% for The Banc Stock Group Fund. The Adviser pays
all of the operating expenses of the Funds except distribution, shareholder
servicing, brokerage, taxes, interest, fees and expenses of non-interested
person trustees and extraordinary expenses. The Adviser has made an irrevocable
commitment to reimburse the Funds trustee expenses through June 1, 2003. After
the initial two years, this advisory agreement is subject to an annual approval
by the Trustees of the Trust.
For the six months ended August 31, 2000, the Adviser earned advisory fees
of $74,004. For this same time period, the Adviser paid all fees and expenses
relating to non-interested person trustees, and will not seek reimbursement from
the Funds.
The Trust has agreements with Mutual Funds Service Co. (the
"Administrator") to provide transfer agent, fund accounting and administrative
services to the Funds. The services to be provided under the agreements include
day-to-day administration of matters related to the corporate existence of the
Funds (other than rendering investment advice), maintenance of records,
preparation of reports, supervision of the Funds arrangement with the custodian
and assistance in the preparation of the Funds registration statement under
federal and state laws.
The Trust has an agreement with Banc Stock Financial Services, Inc. (the
"Distributor"), with whom certain officers and trustees of the Trust are
affiliated, to act as the principal underwriter of the Funds shares. The
Distributor also receives brokerage commissions from the Fund for executing
portfolio purchase and sale transactions. Both the Adviser and the Distributor
are wholly owned by Diamond Hill Capital Management, Inc. For the six months
ended August 31, 2000, the Distributor earned underwriter fees and brokerage
commissions in the amount of $1,248 and $168, respectively. In addition, Banc
Stock Financial Services, Inc. received brokerage commissions for the execution
of portfolio purchase and sale transactions in the amount of $57,220.
Pursuant to Rule 12b-1 of the Act, the Funds have adopted Distribution
Plans (the "Plans") that allow each class to pay distribution fees for the sale
and distribution of its shares. Additionally, the Plan for Class C shares also
allows the class to pay for services provided to shareholders. Class A shares
pay annual 12b-1 expenses of 0.25% and Class C shares pay annual 12b-1 and
service fee expenses of 1.00% (of which 0.75% is an asset based sales charge and
0.25% is a service fee) of average daily net assets.
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BSG FUNDS
NOTES TO FINANCIAL STATEMENTS (continued)
August 31, 2000 (Unaudited)
--------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (For the Banc Stock Group Fund)
--------------- ------------------------------- --------------------------------
CLASS A CLASS C
--------------- ------------------------------- --------------------------------
Shares Amount Shares Amount
--------------- -------------- ---------------- --------------- ----------------
Sold 165,867 $1,515,074 -- --
Redeemed (240,627) (2,186,232) (310) (2,797)
Net Increase (74,760) ($671,158) (310) ($2,797)
(Decrease)
--------------- ------------------------------- --------------------------------
CLASS A CLASS C
--------------- ------------------------------- --------------------------------
For the period June 3, 1999
(commencement of
For the year ended operations) through
February 29, 2000 February 29, 2000
--------------- ------------------------------- --------------------------------
Shares Amount Shares Amount
Sold 71,208 $757,142 7,567 $84,475
Reinvested 7,108 73,143 49 503
Redeemed (543,607) (5,761,225) -- --
--------- ------------ ---------- ---------
Net Increase
(Decrease) (465,291) ($4,930,940) 7,616 $84,978
========= ============ ========== =========
--------------------------------------------------------------------------------
RECLASSIFICATION OF CAPITAL ACCOUNTS
The Funds have adopted Statement of Position 93-2, Determination,
Disclosure and Financial Statement Presentation of Income, Capital Gain and
Return of Capital Distributions by Investment Companies. As a result of this
statement, the Funds have changed the classification of distributions to
shareholders to better disclose the differences between financial statement
amounts and distributions determined in accordance with income tax regulations
FEDERAL TAX INFORMATION
During the year ended February 29, 2000, the Fund declared long-term
capital gain distributions in the amount of $77,238.
At February 29, 2000, the Fund had unused capital loss carryforwards of
$574,249 available to offset future gains, if any, for Federal income tax
purposes. The capital loss carryforward expires in 2008.
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BANC STOCK GROUP
1105 Schrock Road
Suite 437
Columbus, OH 43229
