LANCASTER FUNDS
CAPITAL BUILDER
CONVERTIBLE
CRESTONE SMALL CAP
GOVERNMENT/QUALITY BOND
ANNUAL REPORT
JUNE 30, 1997
<PAGE>
TABLE OF CONTENTS
Shareholder Letter................................. 1
Fund Review/Comparison Graphs
Capital Builder Fund............................ 2
Convertible Fund................................ 4
Crestone Small Cap Fund......................... 6
Government/Quality Bond Fund.................... 8
Independent Auditors' Report....................... 10
Schedule of Investments
Capital Builder Fund............................ 11
Convertible Fund................................ 14
Crestone Small Cap Fund......................... 18
Government/Quality Bond Fund.................... 22
Statement of Assets and Liabilities................ 23
Statement of Operations............................ 24
Statements of Changes in Net Assets
Capital Builder Fund............................ 25
Convertible Fund................................ 25
Crestone Small Cap Fund......................... 26
Government/Quality Bond Fund.................... 26
Financial Highlights
Capital Builder Fund............................ 27
Convertible Fund................................ 29
Crestone Small Cap Fund......................... 31
Government/Quality Bond Fund.................... 33
Notes to Financial Statements...................... 35
<PAGE>
LANCASTER FUNDS
FELLOW SHAREHOLDERS:
In early July 1996, the beginning of fiscal 1997, the Dow Jones Industrial
Average was at 5,600 and questions were raised about the Average breaking
through 6,000 by the end of the calendar year. As we know, the Dow ended the
year close to 6,500 and as this letter is written, the average exceeds 8,200.
With the exception of March 1997, when the Chairman of the Federal Reserve Bank
gave his "irrational exuberance" speech, stock prices have risen steadily
throughout 1997. Similarly, interest rates have generally declined throughout
the fiscal year. Using the 10 year government as a proxy, interest rates were
approximately 6.90% at the end of June 1996 and are currently yielding 6.25%.
In spite of the relatively favorable rate of growth in the economy and
corresponding low unemployment rate, inflation has remained under control. As a
consequence, interest rates declined, which along with the increase in corporate
earnings, has pushed price/earnings ratios to near record highs.
Where are stock prices going from here? Over the near term, we do not know.
However, we know that over the long term stock prices cannot continue to
increase in excess of 20% per annum when corporate earnings are growing in the
range of 8-10%. In addition, we know that historically equities have provided
excess returns over fixed income instruments. Therefore, we plan to remain
somewhat fully invested with a renewed emphasis upon investing in stocks which
are reasonably priced in relation to their internal growth rates as opposed to
measuring prices relative to the market.
At these levels our memories make us somewhat cautious, but we are also
cognizant of the fact that equities are long term investments, and it is
impossible to accurately predict the tops and bottoms of markets.
Sincerely,
John H. Conley
President August 6, 1997
<PAGE>
CAPITAL BUILDER FUND
OBJECTIVE:
Capital Builder Fund has as a primary investment objective to seek long-term
capital appreciation with a secondary objective of providing current income. The
Fund invests in a diversified portfolio of common and preferred stocks,
convertible securities, U.S. Government Securities, repurchase agreements,
mortgage-backed securities, corporate debt securities, and money market
instruments. At least 65% of the Fund's total assets will be invested in common
and preferred stocks and securities convertible into common stocks.
PERFORMANCE REVIEW:
For the twelve months ended June 30, 1997, the Capital Builder Fund increased
23.5% compared to 34.7% for the S&P 500, but in line with the increase of 23.3%
for the S&P 400 Midcap. The difference in performance between the two indices
reflects the disparity in performance between companies with large market
capitalizations and those with a small to mid-sized market cap. Similarly,
within the Capital Builder Fund, the majority of the better performing stocks
were the larger companies such as G.E., Merck, Freddie Mac and Gillette, a
repeat from fiscal 1996. However, having a large capitalization was not
sufficient in itself to insure favorable market performance as indicated by
underperformance of such well regarded companies as Eastman Kodak and McDonalds.
The lack of price appreciation from these two securities as well as several of
the smaller cap stocks such as Pall Corporation ($2.7 billion) and Worthington
Industries ($1.7 billion) restricted the overall performance of the fund.
However, the long-term outlook for these companies, which are leaders within
their respective industries, remains favorable and we believe will generate
above average long-term returns.
We have maintained some liquidity over the past several months, which we would
not hesitate using as individual securities meet our investment criteria.
<PAGE>
[GRAPHIC OMITTED]
Comparison of change in value of $10,000 investment in
Capital Builder Investor and the S&P 500
Avg. Annual Return
- ------------------ 06/30/97 Value
1 year 23.52% ---------------
5 year - Capital Builder Investor $14,851.36
Inception 23.81% S&P 500 $16,528.22
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Comparison of change in value of $10,000 investment in
Capital Builder Select and the S&P 500
Return*
- ------------------ 06/30/97 Value
1 year - ---------------
5 year - Capital Builder Select $10,534.27
Inception 5.31% S&P 500 $11,263.00
* Not annualized, as it may not be representative of the total return for the
year.
Results for Select Shares reflect payment of a maximum sales charge of 3.9% on
the $10,000 investment with dividends reinvested.
Past performance is not predictive of future performance.
Capital Builder Investor shares for the period August 24, 1995 (inception)
through June 30, 1997.
Capital Builder Select Shares for the period March 3, 1997 (inception) through
June 30, 1997.
<PAGE>
CONVERTIBLE FUND
OBJECTIVE:
The Convertible Fund has the investment objective of preservation of capital
while maximizing total return (a combination of capital gains, interest and
dividends) by investing in a portfolio of convertible corporate debt securities
and/or convertible preferred stock. In seeking to accomplish its objective, the
Fund normally invests at least 65% of its total assets in a diversified
portfolio of convertible securities, primarily bonds and preferred stocks which
are convertible into common stock.
PERFORMANCE REVIEW:
The Convertible Fund performed well, up 19.51% for the fiscal year ended June
30, 1997, and up 18.91% year-to-date through July 31, 1997 versus its benchmark,
the First Boston Convertible Securities Index which was up 15.13% for the fiscal
year ended June 30, 1997 and up 15.31% year-to-date through July 31, 1997.
The most positive influence on portfolio performance throughout the Fund's
fiscal year resulted from our exposure to the financial sector. By the middle of
1996, it became apparent that inflation was not a problem and the Fed would not
raise interest rates. The securities we held in financial firms benefitted along
with the bond market. This sector continued to provide positive returns in the
first quarter of 1997, although by then we were decreasing the size of our
position. The energy sector has also made an important contribution to
performance over the past year and we have begun to take profits in selected
names. Comprising as much as 18% of the portfolio earlier in the year, the
sector was reduced to 12% as of June 30, 1997. The structure of the exposure has
evolved. We are in the process of decreasing our exposure to integrated oil
companies while increasing our exposure to oil service and drilling companies.
We expect to see better than 2% annual growth rates in oil demand, which should
result in increased drilling activities.
We have slowly increased our technology exposure over the fiscal year. While we
believe that sector will continue to offer opportunities, we may have been a bit
premature in increasing our exposure in the Fund.
By the end of 1996, with market valuations at high levels, in the face of
declining earnings momentum and rising interest rates, we systematically lowered
the overall risk posture in the Fund as convertibles increased in value. That
meant we often sold convertibles that were priced in excess of 130% of par and
swapped them into other convertibles that were trading near par and had a good
balance of risk and reward. The result for the portfolio was improved credit
quality and reduced downside protection. This defensive posture had a beneficial
effect in the first quarter of 1997.
We continue to emphasize downside protection and good quality in the securities
we buy. The Fund remains approximately 60% investment grade, which has been
achieved through restructuring and upgrades risk/reward posture this year.
Consequently, we believe the Fund is well situated to endure the volatility that
has pervaded the market over the last few months, and at the same time, to
participate in any rise in the markets.
<PAGE>
[GRAPHIC OMITTED]
Comparison of change in value of $10,000 investment in
Convertible Investor and the First Boston Convertible Securities Index
Avg. Annual Return
- ------------------- 06/30/97 Value
1 year 19.51% --------------
5 year 14.22% Convertible Investor $24,219.06
Inception 10.30% First Boston Convertible Securities $28,387.13
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Comparison of change in value of $10,000 investment in
Convertible Select and the First Boston Convertible Securities Index
Return*
- ------------------- 06/30/97 Value
1 year - --------------
5 year - Convertible Select $9,730.00
Inception (2.71)% First Boston Convertible Securities $10,291.00
* Not annualized, as it may not be representative of the total return
for the year.
Results for Select Shares reflect payment of a maximum sales charge of
3.9% on the $10,000 investment with dividends reinvested.
Past performance is not predictive of future performance.
Convertible Investor Shares for the period June 23, 1988 (inception)
through June 30, 1997.
Convertible Select Shares for the period June 16, 1997 (inception)
through June 30, 1997.
<PAGE>
CRESTONE SMALL CAP FUND
OBJECTIVE:
The Crestone Small Cap Fund has an investment objective of long-term capital
appreciation. The Fund will normally invest at least 90% of its assets
(excluding Money Market Instruments) in stocks of companies which have market
capitalizations of between $50 million and $2 billion, with the average market
capitalization of these companies owned by the Fund in the aggregate normally
between $350 million to $600 million. Market capitalization is determined by
multiplying the per share market value of a company's shares by the total number
of shares outstanding.
The Fund's investment strategy is referred to as "growth at a discount."
Companies considered for inclusion in the portfolio will show an above average
growth, in general trade at a discount to the S&P 500 price-earnings ratio, have
consistent positive historical earnings over the last three to five years, have
debt to capital ratios of 35% or less, and either have cash exceeding 10% of
shareholder equity, employee ownership exceeding 10% or are currently paying a
dividend.
PERFORMANCE REVIEW:
The Fund's performance for the fiscal year was 15.93% versus the Russell 2000
index return of 16.28% for the same time period. As measured by the indexes, the
Small Cap world almost pulled even with the Big Caps in the second quarter after
a horrible April. A wonderful May produced about a 16.2% return in the second
quarter for the Russell 2000 versus a 17.4% rate for the S&P 500. The Crestone
Small Cap Fund returned approximately 18.9% for the quarter largely based on an
explosive May.
There is still plenty of work left to do this year as the Fund still trails the
Russell 2000 by 5.5% at the six month mark ending June 30, 1997 (+4.66% vs.
+10.16%). In the second quarter, Technology and Producer Durables were the best
performing groups within the Small Cap market. The worst performer were
Materials and Processing, Utilities and Financial Services with Healthcare and
Energy also slightly underperforming the index. For the six month period the
best performing groups have been Consumer Retailing and selected Technology
stocks. The worst groups year-to-date have been Healthcare, Financial Services
and Energy.
In an effort to reduce the volatility (and therefore the risk) of the Fund we
are instituting a series of weighting "collars" for the portfolio relative to
the S&P 600 (S&P Small Cap). As a result, we will be much less tolerant of large
divergences in sector weightings versus the index in the future. Therefore our
overweightings in Energy and Technology will come down by the end of the third
quarter. Small Caps still look good in a valuation sense.
<PAGE>
[GRAPHIC OMITTED]
Comparison of change in value of $10,000 investment in
Crestone Small Cap Investor and the Russell 2000
Avg. Annual Return
- ------------------- 06/30/97 Value
1 year 15.93% --------------
5 year - Crestone Small Cap Investor $20,358.29
Inception 15.29% Russell 2000 $22,757.39
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Comparison of change in value of $10,000 investment in
Crestone Small Cap Select and the Russell 2000
Return*
- ------------------- 06/30/97 Value
1 year - --------------
5 year - Crestone Small Cap Select $11,151.50
Inception 11.52% Russell 2000 $11,588.83
* Not annualized, as it may not be representative of the total return
for the year.
Results for Select Shares reflect payment of a maximum sales charge of
3.9% on the $10,000 investment with dividends reinvested.
Past performance is not predictive of future performance.
Crestone Small Cap Investor Shares for the period July 1, 1992
(inception) through June 30, 1995.
Crestone Small Cap Select Shares for the period October 1, 1996
(inception) through June 30, 1997.
<PAGE>
GOVERNMENT/QUALITY BOND FUND
OBJECTIVE:
The investment objective of the Government/Quality Bond Fund is income and
capital appreciation consistent with preservation of capital. The Fund attempts
to achieve its objective by investing solely in U.S. Government Securities,
repurchase agreements on U.S. Government Securities, and corporate bonds rated A
or better by Moody's or Standard & Poor's. The Fund's average maturity of all
U.S. Government Securities and corporate bonds will not exceed ten years.
PERFORMANCE REVIEW:
Interest rates trended lower through February 1997 and then increased in March
and April of 1997 resulting in the yield on the 10 year government being
essentially unchanged from the beginning of the fiscal year at approximately
6.0%. Subsequently as the fear of inflation faded, rates declined and ended the
year at approximately 6.45% and now, in early August, are 6.25%.
The total return on the Fund for the year was 6.4% versus 6.9% for the Merrill
Lynch U.S. Treasury Intermediate Term Bond Index. The Fund remains a sound
alternative for those investors seeking income and preservation of capital.
<PAGE>
[GRAPHIC OMITTED]
Comparison of change in value of $10,000 investment in
Gov't/Quality Bond Investor and the Merrill Lynch U.S. Treasury Inter-Term Bond
Avg. Annual Return
- ------------------- 06/30/97 Value
1 year 6.37% --------------
5 year 5.42% Gov't/Qualtiy Bond Investor $24,219.06
Inception 7.10% Merrill Lynch U.S. Treasury Inter-Term Bond $28,387.13
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Comparison of change in value of $10,000 investment in
Gov't/Quality Bond Select and the Merrill Lynch U.S. Treasury Inter-Term Bond
Return*
- ------------------- 06/30/97 Value
1 year - --------------
5 year - Gov't/Qualtiy Bond Select $9,820.58
Inception (1.80)% Merrill Lynch U.S. Treasury Inter-Term Bond $10,086.00
* Not annualized, as it may not be representative of the total return for the
year.
Results for Select Shares reflect payment of a maximum sales charge of 1.5% on
the $10,000 investment with dividends reinvested.
Past performance is not predictive of future performance.
Government/Quality Bond Investor Shares for the June 16, 1997 (inception)
through June 30, 1997.
Government/Quality Bond Select Shares for the period June 23, 1988 (inception)
through June 30, 1997.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Lancaster Funds
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Lancaster Funds (comprised respectively of
the Capital Builder, Convertible, Crestone Small Cap, and Government/Quality
Bond Funds) as of June 30, 1997, and the related statement of operations for the
year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
three years in the period then ended (period from August 24, 1995, commencement
of operations, to June 30, 1997 for the Capital Builder Fund). These financial
statements and financial highlights are the responsibility of the Funds'
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits. The financial
highlights for the period July 1, 1992 to June 30, 1994 were audited by other
auditors whose report dated July 22, 1994, expressed an unqualified opinion on
such financial highlights.
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 securities owned as of June
30, 1997 by correspondence with the custodian and brokers. 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 each of the
aforementioned portfolios constituting the Lancaster Funds as of June 30, 1997,
and the results of their operations for the year then ended, the changes in
their net assets for each of the two years in the period then ended, and their
financial highlights for each of the three years in the period then ended
(period from August 24, 1995, commencement of operations, to June 30, 1997 for
the Capital Builder Fund) in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Lincoln, Nebraska
July 25, 1997
<PAGE>
LANCASTER FUNDS
SCHEDULE OF INVESTMENTS
JUNE 30, 1997
CAPITAL BUILDER FUND
Percent
of Net Market
Shares Common Stock - 89.31% Assets Value
- --------- -------------------------------- ----------- ----------
Computer Related 3.00%
7,000 First Data Corporation $307,563
--------
Cosmetics & Toiletries 5.01%
5,424 Gillette Company 513,924
--------
Electronics 8.07%
8,000 General Electric Company 523,000
8,750 Molex Inc. 305,156
--------
828,156
--------
Entertainment/Leisure 3.27%
7,000 Harley-Davidson Inc. 335,563
--------
Financial Services 9.08%
3,000 Chase Manhattan Corporation 291,188
10,800 Federal Home Loan Mortgage Corporation 371,250
1,000 Wells Fargo & Company 269,500
--------
931,938
--------
Food-Processing 4.06%
6,500 ConAgra Inc. 416,813
--------
Household Products/Wares 7.70%
12,000 Newell Company 475,500
9,000 Libbey Inc. 315,000
--------
790,500
--------
Insurance 3.30%
3,000 MBIA Inc. 338,438
--------
*Indicates nonincome-producing security.
<PAGE>
LANCASTER FUNDS
Schedule of Investments (Continued)
CAPITAL BUILDER FUND
Percent
of Net Market
Shares Common Stock (Continued) Assets Value
- -------- ------------------------------------- ----------- ------------
Iron/Steel 3.02% $90,563
17,250 Kentucky Electric Steel Inc.* 219,750
12,000 Worthington Industries Inc. --------
310,313
--------
Linen Supply & Rel Items 2.10% 216,000
8,000 Unitog Company --------
Machine-Diversified 2.51% 257,813
7,500 Thermo Electron Corporation* --------
Manufacturing 6.16% 307,000
4,000 Eastman Kodak Company 325,500
14,000 Pall Corporation --------
632,500
--------
Oil Company - Integrated 3.02% 310,500
8,000 Unocal Corporation --------
Office/Business 4.47% 458,700
6,600 Pitney-Bowes Inc. --------
Pharmaceutical/Medical 5.04% 517,500
5,000 Merck & Company --------
Pipelines 3.72% 381,408
7,171 Coastal Corporation --------
Publishing/Printing 2.84% 291,375
7,000 Belo (A. H.) Corporation Series A --------
Real Estate 4.05% 416,000
13,000 Simon Property Group Inc. --------
*Indicates nonincome-producing security.
<PAGE>
LANCASTER FUNDS
Schedule of Investments (Continued)
CAPITAL BUILDER FUND
Percent
of Net Market
Shares Common Stock (Continued) Assets Value
- -------- ------------------------------------- ----------- ------------
Restaurant/Food Service 3.06%
6,500 McDonald's Corporation $314,031
--------
Retail Store/Apparel 4.74%
3,500 Payless Shoesource* 191,406
5,500 Sears Roebuck & Company 295,625
--------
487,031
--------
Telecommunication Equipment 1.09%
4,000 Andrew Corp* 112,500
--------
Total Common Stock 9,168,566
---------
CLOSED-END MANAGEMENT COMPANY - 3.92%
22,851 Global Health Sciences Fund 402,746
--------
Total Investment in Securities (cost $6,512,771) 93.23% 9,571,312
Cash Equivalents 6.82% 699,981
Other Assets, less Liabilities 0.05% (4,859)
------ ----------
NET ASSETS 100.00% $10,266,434
====== ==========
*Indicates nonincome-producing security.
See accompanying notes to financial statements.
<PAGE>
LANCASTER FUNDS
SCHEDULE OF INVESTMENTS
JUNE 30, 1997
CONVERTIBLE FUND
Principal Market
Amount Convertible Debentures - 44.61% Value
- -------- ------------------------------------- ------------
90,000 Automatic Data Processing, Inc. 0% due 2/20/12 $55,439
35,000 Alza Corporation 5.00% due 5/1/06 35,516
45,000 Beverly ENT 5.5% due 08/01/18 55,608
65,000 Baker Hughes, Inc 0% due 5/5/08 52,150
45,000 Comverse, 5.75% due 10/01/06 58,838
52,000 Diamond Offshore Drilling, 3.75% due 2/15/07 59,963
35,000 Hasbro, Inc. 6.00% due 11/15/98 51,208
45,000 Hilton Hotels, Inc 5.00% due 5/15/06 48,285
50,000 Integrated health, 6.00% due 1/01/03 61,359
30,000 Interpublic Group, Inc. 3.75% due 4/1/02 40,875
75,000 Jacor Comm, Inc. 0% due 6/12/11 41,531
50,000 Masco Corp, 5.25% due 2/15/12 53,063
65,000 Marriot International, Inc 0% due 3/25/11 39,525
85,000 Motorola, Inc. 0% due 9/27/13 76,962
60,000 Mascotech, Incorporated, 4.5% due 12/15/03 54,975
40,000 Nabors Industrial Inc. 5.00% due 5/15/06 60,425
70,000 Pharmaceutical Marketing Euro, 6.25% due 2/01/03 58,494
36,000 Pennzoil Company 4.75% due 10/1/03 46,250
50,000 Rouse Corporation 5.75% due 7/23/02 52,625
95,000 RPM, Inc. 0% due 9/30/12 45,481
55,000 Standard Commercial Corp., 7.25% due 3/31/07 49,225
70,000 Thermo Electron Corporation 5.00% due 4/15/01 77,180
140,000 USF&G. Inc. 0% due 3/3/09 101,217
---------
Total Convertible Debentures $1,276,194
----------
*Indicates nonincome-producing security.
<PAGE>
LANCASTER FUNDS
SCHEDULE OF INVESTMENTS (CONTINUED)
CONVERTIBLE FUND
Percent
of Net Market
Shares Assets Value
PREFERRED STOCK - 34.05%
- -------- ------------------------------------- ----------- ------------
Financial Services 11.87%
780 American Bankers Insurance $3.125 Pfd Series B $56,160
500 Ahmanson Co., Pfd Series D 46,250
250 Conseco, Inc. 7.00% Pfd 32,438
720 Finova Finance Trust 5.50% Pfd 41,400
300 First Union Real Estate 8.4% Pfd 13,650
1,625 Lehman Bros Holding 65,813
3,000 National Australia Bank 7.875% Pfd 83,813
--------
339,524
--------
Food/Beverage/Tobacco 1.98%
1,400 Dean Foods Co. 56,525
--------
Industrial Services 15.73%
1,000 AES Trust I 58,875
650 Corning Delaware 6.00% due 8/5/98 56,550
1,000 James River Corporation 3.5% Pfd Series L 54,000
920 Royal Carribean Cruises 7.25% Pfd Series A 56,810
975 Security Capital Industry 7.00% Pfd 27,178
950 Southdown Incorporated $2.875 Pfd Series D 62,938
600 Cooper Industries Inc. 6% Pfd due 10/1/99 13,800
65,000 Marriott International, due 3/25/11 39,525
50,000 National Data, 5.00% due 11/01/03 53,094
20,000 Robin & Meyers, 6.5% due 9/01/03 27,303
--------
450,073
--------
Oil-Field Services 0.99%
3,300 Matrix Service Co. 28,463
--------
*Indicates nonincome-producing security.
<PAGE>
LANCASTER FUNDS
SCHEDULE OF INVESTMENTS (CONTINUED)
CONVERTIBLE FUND
Percent
of Net Market
Shares Preferred Stock (Continued) Assets Value
- -------- ------------------------------------- ----------- ------------
Oil Company Exploration & Production 2.07%
1,200 Lomak Petroleum Inc. $2.03 Pfd Series C $59,212
--------
Telecommunications 1.41%
1,000 US West, Inc. 7.625% Pfd 40,375
--------
Total Preferred Stock $974,172
--------
COMMON STOCK - 19.55%
Aerospace/Defense 2.11%
2,614 Gencorp Inc $60,449
--------
Airlines 0.94%
375 United Airlines Corp.* 26,836
--------
Computer Related 3.29%
680 EMC Corporation* 26,520
1,350 Stratus Computers Inc.* 67,500
--------
94,020
--------
Cosmetics/Personal Care 2.27%
3,575 American Safety Razor Company* 64,797
--------
Fertilizers 2.23%
2,200 Scotts Company* 63,800
--------
Financial Services 1.92%
1,435 Community First Bankshares 55,068
--------
*Indicates nonincome-producing security.
<PAGE>
LANCASTER FUNDS
SCHEDULE OF INVESTMENTS (CONTINUED)
CONVERTIBLE FUND
Percent
of Net Market
Shares Common Stock (Continued) Assets Value
- -------- ------------------------------------- ----------- ------------
Pharmaceutical/Medical 1.94%
450 Warner-Lambert Co. 55,913
--------
Publishing/Printing 1.03%
300 Gannett Company 29,625
--------
Restaurant/Food Service 0.16%
242 Consolidated Products Inc.* 4,507
--------
Retail/Apparel 3.65%
3,000 Fingerhut Companies 52,313
1,028 Fabri Centers of America Class A* 28,013
1,028 Fabri Centers of America Class B* 24,025
--------
104,351
--------
Total Common Stocks $559,366
--------
Total Investments in Securities (Cost $2,408,142) 98.21% 2,809,732
Cash Equivalents 1.22% 34,760
Other Assets, less Liabilities 0.57% 16,294
------ ---------
TOTAL NET ASSETS 100.00% $2,860,786
====== =========
*Indicates nonincome-producing security.
See accompanying notes to financial statements.
<PAGE>
LANCASTER FUNDS
SCHEDULE OF INVESTMENTS
JUNE 30, 1997
CRESTONE SMALL CAP FUND
Percent
of Net Market
Shares Common Stock - 96.32% Assets Value
-------- ------------------------------------- ----------- ----------
Auto/Truck/Parts 3.43%
4,000 Keystone Automotive* $68,000
16,050 OEA Inc. 633,975
--------
701,975
--------
Chemicals 1.00%
6,200 OM Group 205,375
--------
Collectibles 0.96%
12,725 Racing Champions* 197,238
--------
Commercial Services 2.63%
16,300 AC Nielsen Corp.* 319,888
8,850 Service Experts Inc.* 216,825
--------
536,713
--------
Computer Related 15.12%
27,500 Accelr8 Technology Corporation* 409,063
10,700 Bell & Howell Co.* 329,694
5,450 Computer Horizons* 186,663
13,075 Ciber Incorporated* 447,002
8,850 Ikos Systrems Inc.* 189,169
3,825 Keane Incorporated* 198,900
10,550 Metro Info Services* 208,363
13,675 SEEC Inc.* 263,244
15,650 STB Systems Inc.* 512,538
9,350 Computer Task Group 348,288
--------
3,092,924
---------
*Indicates nonincome-producing security.
<PAGE>
LANCASTER FUNDS
SCHEDULE OF INVESTMENTS (CONTINUED)
CRESTONE SMALL CAP FUND
Percent
of Net Market
Shares Common Stock (Continued) Assets Value
-------- ------------------------------------- ----------- ------------
Data Processing/Mgmt 1.33%
29,750 Cellular Tech Service Co.* $271,469
--------
Distribution/Wholesale 2.11%
13,900 Inacom Corp* 432,638
--------
Electronics 14.68%
7,175 Altron Inc.* 107,625
6,425 CFM Technologies* 210,419
11,125 Etec Systems Inc.* 476,984
6,125 Plexus Corporation* 341,852
16,175 Speedfam International Inc.* 580,278
6,150 Veeco Instruments* 238,313
11,700 Vitesse Semiconductor Corporation* 382,444
21,650 Zygo Corporation* 665,738
--------
3,003,653
---------
Environmental Control 2.21%
19,050 Tetra Technologies* 452,438
--------
Financial Services 13.82%
13,050 Commonwealth Bancorp 213,694
4,725 Coast Savings Financial* 214,692
11,275 Haven Bancorp Inc. 422,813
11,075 Healthcare Finance Partners* 225,653
26,375 Imperial Credit Industries 542,336
16,350 People's Bank 423,056
14,250 Southern Pacific Funding* 236,906
16,400 Medallion Finance Corporation 313,650
12,300 Trenton Savings Bank 235,238
--------
2,828,038
---------
*Indicates nonincome-producing security.
<PAGE>
LANCASTER FUNDS
SCHEDULE OF INVESTMENTS (CONTINUED)
CRESTONE SMALL CAP FUND
Percent
of Net Market
Shares Common Stock (Continued) Assets Value
-------- ------------------------------------- ----------- -----------
Food, Beverage & Tobacco 2.68%
16,100 Canadaigua Wine Company* $547,400
--------
Machinery/Equipment 1.08%
9,900 Hirsch International* 220,275
--------
Manufacturing 3.63%
11,475 RMI Titanium Company* 312,694
13,600 Titanium Metals Corporation* 430,100
--------
742,794
--------
Medical Supplies/Services 11.08%
10,000 Arrow International Inc. 292,500
7,225 Arterial Vasc Engine* 232,555
20,375 FPA Med Management* 482,633
19,025 HCIA, Incorporated* 637,338
8,750 Spine-Tech Inc.* 324,844
12,475 VISX Inc.* 296,281
--------
2,266,151
---------
Oil Company Exploration & Production 7.30%
8,700 Devon Energy Corporation 319,725
8,600 Flores & Ruck Inc.* 397,750
10,050 KCS Energy Inc. 204,769
4,975 Nuevo Energy* 203,975
11,975 Vintage Petroleum Inc. 368,231
--------
1,494,450
---------
*Indicates nonincome-producing security.
<PAGE>
LANCASTER FUNDS
SCHEDULE OF INVESTMENTS (CONTINUED)
CRESTONE SMALL CAP FUND
Percent
of Net Market
Shares Common Stock (Continued) Assets Value
-------- ------------------------------------- ----------- ------------
Oil & Gas Drilling 7.53%
80,600 Abacan Resource Corporation* $256,913
6,075 Atwood Oceanics Inc.* 407,025
12,075 Cabot Oil & Gas Corp. 212,822
20,700 Fx Energy Inc. * 168,188
25,225 Marine Drilling Company* 495,041
--------
1,539,989
---------
Real Estate 0.88%
3,865 Redwood Trust Inc. 180,689
--------
Transportation 1.13%
14,100 Covenant Transport* 230,888
--------
Wholesale Special Line 3.72%
16,725 Cellstar Corp.* 512,203
11,825 United Natural Foods* 248,314
--------
760,517
--------
Total Investment in Securities (cost $17,138,103) 96.32% 19,705,614
Cash Equivalents 0.27% 55,472
Other Assets, less Liabilities 3.41% 697,278
------- ----------
NET ASSETS 100.00% $20,458,364
======= ==========
*Indicates nonincome-producing security.
See accompanying notes to financial statements
<PAGE>
LANCASTER FUNDS
SCHEDULE OF INVESTMENTS
JUNE 30, 1997
GOVERNMENT/QUALITY BOND FUND
ERCENT
OF NET
PRINCIPAL ASSETS MARKET
AMOUNT U.S. GOVERNMENT SECURITIES 87.12% VALUE
------ -------------------------- ------ -----
$180,302 Federal Home Loan Mtg. 7.00%, due 9/1/15 $178,781
150,000 Federal Home Loan Mtg. 7.00%, due 11/15/19 150,094
250,000 Federal Home Loan Bank 0% due 7/02/12 76,406
150,000 Federal National Mtg. Assn. 6.90%, due 10/ 09/01 149,990
249,558 Federal National Mtg. Assn. 6.00%, due 10/ 01/99 242,072
213,357 Federal National Mtg. Assn. 6.50%, due 10/01/02 210,558
105,225 Government National Mtg. Assn. 11.50%, due 10/15/10 118,641
135,084 Government National Mtg. Assn. 10.00%, due 12/15/18 147,960
3,112 Government National Mtg. Assn. 10.00%, due 5/15/19 3,409
14,527 Government National Mtg. Assn. 9.50%, due 9/15/19 15,658
25,063 Government National Mtg. Assn. 10.00%, due 5/15/20 27,452
72,268 Government National Mtg. Assn. 9.50%, due 9/15/21 77,892
111,578 Government National Mtg. Assn. 7.50%, due 4/15/22 111,858
71,239 Government National Mtg. Assn. 7.50%, due 5/15/23 71,417
165,392 Government National Mtg. Assn. 7.50%, due 1/15/24 165,806
250,000 U.S. Treasury Bond 10.75%, due 8/15/05 315,547
100,000 U.S. Treasury Bond 7.125%, due 2/15/23 103,125
-------
Total U.S. Government Securities 2,166,666
CORPORATE BONDS 8.64%
100,000 Bankamerica Corporation 8.375%, due 3/15/02 106,006
100,000 Banc One Corporation 8.74%, due 9/15/03 108,944
-------
Total Corporate Bonds 214,950
Total Investment in Securities (cost $2,356,264) 95.76% 2,381,616
Cash Equivalents 6.27% 155,964
Other Assets, less Liabilities (2.03%) (50,425)
----- ----------
NET ASSETS 100.00% $2,487,155
====== ==========
See accompanying notes to financial statements.
<PAGE>
<TABLE>
LANCASTER FUNDS
Statement of Assets and Liabilities
June 30, 1997
<CAPTION>
Capital Crestone Government/
Builder Convertible Small Cap Quality
Assets: Fund Fund Fund Bond Fund
Investments in securities, at market value -------------- ------------- ------------ -----------
<S> <C> <C> <C> <C>
(cost $6,512,771, 2,408,142, 17,138,103, and
2,356,264, respectively) $9,571,312 2,809,732 19,705,614 2,381,616
Cash equivalents 699,981 34,760 55,472 155,964
Accrued interest and dividends receivable 11,446 20,858 11,910 30,273
Receivable for investment securities sold - - 953,168 -
Receivable for fund shares sold - - 5,505 -
Organizational costs, net of accumulated amortization 3,944 - - -
---------- --------- ---------- ---------
Total assets 10,286,683 2,865,350 20,731,669 2,567,853
---------- --------- ---------- ---------
Liabilities:
Accrued expenses, including investment
management and distribution expense payable to
adviser, administrator and distributor (note 3) 15,249 4,564 22,750 3,910
Payable for securities purchased - - 206,158 76,788
Payable for fund shares redeemed 5,000 - 44,397 -
---------- --------- ---------- ---------
Total liabilities 20,249 4,564 273,305 80,698
---------- --------- ---------- ---------
Net assets applicable to outstanding capital stock 10,266,434 2,860,786 20,458,364 2,487,155
========== ========= ========== =========
Net assets are represented by:
Capital stock outstanding, at par (note 5) 753 207 1,265 244
Additional paid-in capital 6,865,348 2,386,685 16,616,685 2,725,113
Accumulated undistributed net
investment income (loss) (3,370) 91 - (219)
Accumulated undistributed net realized
gain (loss) on investments 345,162 72,213 1,272,903 (263,335)
Unrealized appreciation (note 4) 3,058,541 401,590 2,567,511 25,352
---------- --------- ---------- ---------
Total net assets applicable to shares outstanding $10,266,434 2,860,786 20,458,364 2,487,155
========== ========= ========== =========
Shares outstanding and net asset value per share
Investor shares of capital stock outstanding 733,409 202,720 485,772 239,656
Net asset value per share - Investor Shares $13.63 $13.82 $16.14 $10.19
========== ========= ========== =========
Select shares of capital stock outstanding 19,959 4,210 779,135 4,356
Net asset value per share - Select Shares $13.63 $13.83 $16.20 $10.19
========== ========= ========== =========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
LANCASTER FUNDS
Statement of Operations
Year Ended June 30, 1997
<CAPTION>
Capital Crestone Government/
Builder Convertible Small Cap Quality
Fund Fund Fund Bond Fund
Investment income: -------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Dividends $227,049 $36,103 $94,710 $ -
Interest 34,585 56,069 46,820 180,363
------- ------ ------- -------
Total investment income 261,634 92,172 141,530 180,363
------- ------ ------- -------
Expenses (note 3):
Investment advisory fees 67,907 17,757 135,851 16,365
Administration fees 22,635 5,920 45,296 6,819
Distribution expenses - Investor Class (note 6) 45,010 11,817 51,335 6,815
Custodial fees 1,944 3,461 20,989 2,891
Auditing and tax accounting fees 10,047 2,302 4,854 2,284
Blue Sky Registration fees 6,013 224 1,541 327
Legal fees 3,829 818 6,884 1,598
Other operating expenses 8,469 3,553 17,716 3,586
------- ------ ------- -------
Total expenses 165,854 45,852 284,466 40,685
------- ------ ------- -------
Net investment income (loss) 95,780 46,320 (142,936) 139,678
------- ------ ------- -------
Realized and unrealized gain (loss) on
investments (note 4):
Net realized gain (loss) 459,954 112,462 1,699,641 (38,250)
------- ------ ------- -------
Net unrealized appreciation (depreciation)
Beginning of period 1,681,241 106,940 1,256,185 (45,906)
End of period 3,058,541 401,590 2,567,511 25,352
--------- ------- --------- -------
Net unrealized appreciation 1,377,300 294,650 1,311,326 71,258
--------- ------- --------- -------
Net realized and unrealized gain
on investments 1,837,254 407,112 3,010,967 33,008
--------- ------- --------- -------
Net increase in net assets
resulting from operations $1,933,034 $453,432 $2,868,031 $172,686
========= ======= ========= =======
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
LANCASTER FUNDS
Statements of Changes in Net Assets
The Period from August 24, 1995 (commencement of operations) to June 30, 1996
and the Year Ended June 30, 1997
for the Capital Builder Fund and the
Years Ended June 30, 1997 and 1996 for the Convertible Fund
<CAPTION>
Convertible
Capital Builder Fund Fund
-------------------------- --------------------------
Year Ended Period Ended Year Ended Year Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------ ------------ ------------- ------------
Operations:
<S> <C> <C> <C> <C>
Net investment income $95,780 $27,240 $46,320 $46,537
Net realized gain on investments 459,954 522,893 112,462 322,618
Unrealized appreciation
(depreciation) 1,377,300 928,276 294,650 (72,118)
Net increase in net assets --------- --------- ------- -------
resulting from operations 1,933,034 1,478,409 453,432 297,037
--------- --------- ------- -------
Distributions to shareholders from:
Net investment income-Investor Shares 96,553 29,049 47,520 44,950
Net investment income-Select Shares 788 - 382 -
Net realized gains-Investor Shares 637,685 - 268,230 73,269
Net realized gains-Select Shares - - 13 -
--------- ------- ------- -------
Total distributions 735,026 29,049 316,145 118,219
--------- ------- ------- -------
Capital share transactions: (note 5)
Proceeds from sales 1,882,626 1,205,089 807,510 214,846
Net assets from limited
partnership (note 6) - 3,283,131 - -
Proceeds from fund conversion (note 6) - 5,386,699 - -
Payment for redemptions (2,069,290) (2,824,789) (200,965) (473,816)
Reinvestment of net investment
income and net realized
gain distributions
at net asset value 726,551 29,049 315,128 117,011
Total increase (decrease) --------- ------- ------- -------
from capital
share transactions 539,887 7,079,179 921,673 (141,959)
--------- ------- ------- -------
Total increase in net assets 1,737,895 8,528,539 1,058,960 36,859
Net assets:
Beginning of period 8,528,539 - 1,801,826 1,764,967
--------- --------- --------- ---------
End of period $10,266,434 $8,528,539 $2,860,786 $1,801,826
========== ========= ========= =========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
LANCASTER FUNDS
Statements of Changes in Net Assets Years
Ended June 30, 1997 and 1996
<CAPTION>
Crestone
Small Cap Government/Quality
Fund Bond Fund
------------------------- -------------------------
Year Ended Year Ended Year Ended Year Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
------------ ------------- -------------- -------------
Operations:
<S> <C> <C> <C> <C>
Net investment income (loss) ($142,936) ($85,392) $139,678 $224,969
Net realized gain (loss) on investment1,699,641 2,574,920 (38,250) (39,002)
Unrealized appreciation (depreciation)1,311,326 (69,786) 71,258 (42,125)
--------- ------- ------- -------
Net increase in net assets
resulting from operations 2,868,031 2,419,742 172,686 143,842
--------- ------- ------- -------
Distributions to shareholders from:
Net investment income-Investor Shares - - 143,641 224,047
Net investment income-Select Shares - - 1,142 -
Net realized gains - Investor Shares 779,224 897,261 - -
Net realized gains - Select Shares 969,425 - - -
--------- ------- ------- -------
Total distributions 1,748,649 897,261 144,783 224,047
--------- ------- ------- -------
Capital share transactions: (note 5)
Proceeds from sales 16,118,563 6,340,187 228,936 692,600
Payment for redemptions (14,811,156) (1,997,137) (1,423,269) (1,986,710)
Reinvestment of net investment
income and net realized
gain distributions
at net asset value 1,704,197 872,059 128,629 205,347
--------- ------- ------- -------
Total increase (decrease)
from capital share transactions 3,011,604 5,215,109 (1,065,704) (1,088,763)
Total increase (decrease) in net --------- ------- ------- -------
assets 4,130,986 6,737,590 (1,037,801) (1,168,968)
Net assets:
Beginning of period 16,327,378 9,589,788 3,524,956 4,693,924
---------- --------- --------- ---------
End of period $20,458,364 $16,327,378 $2,487,155 $3,524,956
========== ========== ========= =========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
LANCASTER FUNDS
FINANCIAL HIGHLIGHTS
YEAR ENDED JUNE 30, 1997 AND THE PERIOD FROM
AUGUST 24, 1995 (COMMENCEMENT OF OPERATIONS) TO JUNE 30, 1996
CAPITAL BUILDER FUND - INVESTOR SHARES (A)
--------------------------------------
YEAR ENDED PERIOD ENDED
JUNE 30, 1997 JUNE 30, 1996
NET ASSET VALUE: ------------- -------------
Beginning of period $11.98 10.00
------ -----
Income from investment operations:
Net investment income 0.13 0.04
Net realized and unrealized gain
on investments 2.53 1.98
---- ----
Total income from
investment operations 2.66 2.02
---- ----
Less Distributions:
Dividends from net investment income (0.13) (0.04)
Dividends from capital gains (0.88) 0.00
------ ----
End of period $13.63 11.98
====== =====
TOTAL RETURN 23.52% 24.(b)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $9,994,424 8,528,539
Ratio of expenses to average net assets 1.84% 1.82%(b)
Ratio of net income to average net assets 1.06% 0.42%(b)
Portfolio turnover rate 22.80% 31.35%
Average Commission Rate (c) $0.0922 N/A
(A) ALL CAPITAL SHARES ISSUED AND OUTSTANDING AS OF SEPTEMBER 30, 1996 WERE
RECLASSIFIED AS INVESTOR SHARES.
(B) ANNUALIZED FOR THOSE PERIODS LESS THAN TWELVE MONTHS IN DURATION.
(C) COMPUTED BY DIVIDING THE TOTAL AMOUNT OF COMMISSIONS PAID BY THE TOTAL
NUMBER OF SHARES PURCHASED AND SOLD DURING THE PERIOD FOR WHICH THERE WAS A
COMMISSION CHARGED.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LANCASTER FUNDS
FINANCIAL HIGHLIGHTS
THE PERIOD FROM OCTOBER 1, 1996 (COMMENCEMENT OF CLASS SHARES)
TO JUNE 30, 1997
CAPITAL BUILDER FUND
SELECT SHARES (A)
-----------------------
NET ASSET VALUE:
Beginning of period $12.47
-----
Income from investment operations:
Net investment income 0.00
Net realized and unrealized gain
on investments 1.23
Total income from -----
investment operations 1.23
-----
Distributions from capital gains (0.07)
-----
End of period $13.63 (b)
=====
TOTAL RETURN 9.62%(b)(c)
=====
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $272,010
Ratio of expenses to average net assets 0.96%(d)
Ratio of net income to average net assets 0.81%(d)
Portfolio turnover rate 22.80%
Average Commission Rate (e) $0.0922
(A) COMMENCING OCTOBER 1, 1996, THE FUND BEGAN OFFERING SELECT SHARES.
(B) EXCLUDES MAXIMUM SALES CHARGE OF 3.9%.
(C) TOTAL RETURN IS NOT ANNUALIZED, AS IT MAY NOT BE REPRESENTATIVE OF THE TOTAL
RETURN FOR THE YEAR.
(D) ANNUALIZED FOR THOSE PERIODS LESS THAN TWELVE MONTHS IN DURATION. (E)
COMPUTED BY DIVIDING THE TOTAL AMOUNT OF COMMISSIONS PAID BY THE TOTAL NUMBER OF
SHARES PURCHASED AND SOLD DURING THE PERIOD FOR WHICH THERE WAS A COMMISSION
CHARGED.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
LANCASTER FUNDS
FINANCIAL HIGHLIGHTS
YEARS ENDED JUNE 30, 1997, 1996, 1995, 1994, AND 1993
<CAPTION>
CONVERTIBLE FUND - INVESTOR SHARES (A)
--------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
NET ASSET VALUE:
<S> <C> <C> <C> <C> <C>
Beginning of period $13.20 11.97 11.69 12.58 10.76
------ ----- ----- ----- -----
Income (loss) from
investment operations:
Net investment income 0.26 0.33 0.30 0.29 0.33
Net realized and unrealized
gain (loss) on investments 2.10 1.73 1.01 (0.53) 2.16
---- ---- ---- ------ ----
Total income (loss) from
investment operations 2.36 2.06 1.31 (0.24) 2.49
---- ---- ---- ------ ----
Less distributions:
Dividends from net
investment income (0.26) (0.33) (0.30) (0.29) (0.33)
Distributions from capital gains (1.48) (0.50) (0.73) (0.36) (0.34)
------ ------ ------ ------ ------
Total distributions (1.74) (0.83) (1.03) (0.65) (0.67)
------ ------ ------ ------ ------
End of period $13.82 13.20 11.97 11.69 12.58
====== ===== ===== ===== =====
TOTAL RETURN 19.51% 17.60% 14.09% (2.26%) 24.06%
====== ====== ====== ======= ======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $2,860,786 1,801,826 1,764,967 2,708,104 2,368,876
Ratio of expenses to
average net assets 1.93% 1.93% 2.25% 2.06% 2.13%
Ratio of net income to
average net assets 1.95% 2.53% 2.58% 2.27% 2.91%
Portfolio turnover rate 100.15% 79.30% 51.31% 65.76% 69.72%
Average Commission Rate (b) $0.1206 N/A N/A N/A N/A
(A) ALL CAPITAL SHARES ISSUED AND OUTSTANDING AS OF SEPTEMBER 30, 1996 WERE
RECLASSIFIED AS INVESTOR SHARES.
(B) COMPUTED BY DIVIDING THE TOTAL AMOUNT OF COMMISSIONS PAID BY THE TOTAL
NUMBER OF SHARES PURCHASED AND SOLD DURING THE PERIOD FOR WHICH THERE WAS A
COMMISSION CHARGED.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
LANCASTER FUNDS
FINANCIAL HIGHLIGHTS
THE PERIOD FROM JUNE 16, 1997 (COMMENCEMENT OF CLASS SHARES)
TO JUNE 30, 1997
CONVERTIBLE FUND
SELECT SHARES (A)
-----------------------
NET ASSET VALUE:
Beginning of period $13.75
-----
Income from investment operations:
Net investment income 0.01
Net realized and unrealized gain
on investments 0.17
Total income from -----
investment operations 0.18
-----
Distributions from capital gains (0.10)
-----
End of period $13.83(b)
=====
TOTAL RETURN 1.25%(b)(c)
=====
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $57,682
Ratio of expenses to average net assets 0.96%(d)
Ratio of net income to average net assets 0.81%(d)
Portfolio turnover rate 22.80%
Average Commission Rate (e) $0.1206
(A) COMMENCING OCTOBER 1, 1996, THE FUND BEGAN OFFERING SELECT SHARES.
(B) EXCLUDES MAXIMUM SALES CHARGE OF 3.9%.
(C) TOTAL RETURN IS NOT ANNUALIZED, AS IT MAY NOT BE REPRESENTATIVE OF THE TOTAL
RETURN FOR THE YEAR.
(D) ANNUALIZED FOR THOSE PERIODS LESS THAN TWELVE MONTHS IN DURATION. (E)
COMPUTED BY DIVIDING THE TOTAL AMOUNT OF COMMISSIONS PAID BY THE TOTAL NUMBER OF
SHARES PURCHASED AND SOLD DURING THE PERIOD FOR WHICH THERE WAS A COMMISSION
CHARGED.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
<TABLE>
LANCASTER FUNDS
FINANCIAL HIGHLIGHTS
YEARS ENDED JUNE 30, 1997, 1996, 1995, 1994 AND 1993
<CAPTION>
CRESTONE SMALL CAP FUND - INVESTOR SHARES (A)
-----------------------------------------------------------------------
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994 JUNE 30, 1993
-------------- ------------- ------------- ------------- -------------
NET ASSET VALUE:
<S> <C> <C> <C> <C> <C>
Beginning of period $15.27 13.49 11.59 11.77 10.00
------ ----- ----- ----- -----
Income from investment operations:
Net investment loss (0.12) (0.10) (0.08) (0.07) (0.05)
Net realized and unrealized gain
on investments 2.45 2.91 2.34 0.20 1.83
---- ---- ---- ---- ----
Total income from
investment operations 2.33 2.81 2.26 0.13 1.78
---- ---- ---- ---- ----
Distributions from capital gains (1.46) (1.03) (0.36) (0.31) (0.01)
------ ------ ------ ------ ------
End of period $16.14 15.27 13.49 11.59 11.77
====== ===== ===== ===== =====
TOTAL RETURN 15.93% 22.33% 20.33% 1.21% 17.80%
====== ====== ====== ===== ======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $7,839,528 16,327,378 9,589,788 7,218,944 3,137,762
Ratio of expenses to
average net assets 1.87% 1.75% 1.93% 1.91% 2.18%
Ratio of net income to
average net assets (1.02%) (0.67%) (0.60%) (0.60%) (0.87%)
Portfolio turnover rate 226.30% 150.05% 86.50% 75.23% 47.55%
Average Commission Rate (b) $0.0592 N/A N/A N/A N/A
(A) ALL CAPITAL SHARES ISSUED AND OUTSTANDING AS OF SEPTEMBER 30, 1996 WERE
RECLASSIFIED AS INVESTOR SHARES.
(B) COMPUTED BY DIVIDING THE TOTAL AMOUNT OF COMMISSIONS PAID BY THE TOTAL
NUMBER OF SHARES PURCHASED AND SOLD DURING THE PERIOD FOR WHICH THERE WAS A
COMMISSION CHARGED.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
LANCASTER FUNDS
FINANCIAL HIGHLIGHTS
THE PERIOD FROM JUNE 16, 1997 (COMMENCEMENT OF CLASS SHARES)
TO JUNE 30, 1997
CRESTONE SMALL CAP FUND
SELECT SHARES (A)
-----------------------
NET ASSET VALUE:
Beginning of period $15.44
-----
Income from investment operations:
Net investment income (0.08)
Net realized and unrealized gain
on investments 2.26
Total income from -----
investment operations 2.18
-----
Distributions from capital gains (1.42)
-----
End of period $16.20(b)
=====
TOTAL RETURN 16.04%(b)(c)
=====
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $12,618,836
Ratio of expenses to average net assets 1.18%(d)
Ratio of net income to average net assets (0.48%)(d)
Portfolio turnover rate 226.30%
Average Commission Rate (e) $0.0592
(A) COMMENCING OCTOBER 1, 1996, THE FUND BEGAN OFFERING SELECT SHARES.
(B) EXCLUDES MAXIMUM SALES CHARGE OF 3.9%.
(C) TOTAL RETURN IS NOT ANNUALIZED, AS IT MAY NOT BE REPRESENTATIVE OF THE TOTAL
RETURN FOR THE YEAR.
(D) ANNUALIZED FOR THOSE PERIODS LESS THAN TWELVE MONTHS IN DURATION. (E)
COMPUTED BY DIVIDING THE TOTAL AMOUNT OF COMMISSIONS PAID BY THE TOTAL NUMBER OF
SHARES PURCHASED AND SOLD DURING THE PERIOD FOR WHICH THERE WAS A COMMISSION
CHARGED.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LANCASTER FUNDS
FINANCIAL HIGHLIGHTS
YEARS ENDED JUNE 30, 1997, 1996, 1995, 1994, AND 1993
GOVERNMENT/QUALITY BOND FUND - INVESTOR SHARES (A)
-------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
NET ASSET VALUE:
Beginning of period $10.15 10.43 10.21 11.17 10.93
------ ----- ----- ----- -----
Income (loss) from
investment operations:
Net investment income 0.53 0.55 0.60 0.54 0.64
Net realized and unrealized
gain (loss) on investments 0.06 (0.28) 0.22 (0.75) 0.43
---- ------ ---- ------ ----
Total income (loss) from
investment operations 0.59 0.27 0.82 (0.21) 1.07
---- ---- ---- ------ ----
Less distributions:
Dividends from net
investment income (0.55) (0.55) (0.60) (0.54) (0.64)
Distributions from
capital gains 0.00 0.00 0.00 (0.21) (0.19)
---- ---- ---- ------ ------
Total distributions (0.55) (0.55) (0.60) (0.75) (0.83)
------ ------ ------ ------ ------
End of period $10.19 10.15 10.43 10.21 11.17
====== ===== ===== ===== =====
TOTAL RETURN 6.37% 2.83% 9.42% (2.00%) 11.00%
===== ===== ===== ======= ======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $2,442,757 3,524,956 4,693,924 8,832,147 9,709,386
Ratio of expenses to
average net assets 1.49% 1.42% 1.47% 1.37% 1.38%
Ratio of net income to
average net assets 5.13% 5.21% 5.86% 4.94% 6.25%
Portfolio turnover rate 8.70% 36.11% 9.33% 218.11% 175.95%
(A) ALL CAPITAL SHARES ISSUED AND OUTSTANDING AS OF SEPTEMBER 30, 1996 WERE
RECLASSIFIED AS INVESTOR SHARES.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LANCASTER FUNDS
FINANCIAL HIGHLIGHTS
THE PERIOD FROM JUNE 16, 1997 (COMMENCEMENT OF CLASS SHARES)
TO JUNE 30, 1997
GOVERNMENT/QUALITY BOND FUND
SELECT SHARES (A)
-----------------------------
NET ASSET VALUE:
Beginning of period $10.49
-----
Income from investment operations:
Net investment income 0.01
Net realized and unrealized gain
on investments (0.04)
Total income from -----
investment operations (0.03)
-----
Distributions from
Net Investment Income (0.27)
-----
End of period $10.19(b)
=====
TOTAL RETURN (0.30)(b)(c)
=====
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $44,398
Ratio of expenses to average net assets 0.96%(d)
Ratio of net income to average net assets 4.52%(d)
Portfolio turnover rate 8.70%
(A) COMMENCING OCTOBER 1, 1996, THE FUND BEGAN OFFERING SELECT SHARES. (B)
EXCLUDES MAXIMUM SALES CHARGE OF 1.5%.
(C) TOTAL RETURN IS NOT ANNUALIZED, AS IT MAY NOT BE REPRESENTATIVE OF THE TOTAL
RETURN FOR THE YEAR.
(D) ANNUALIZED FOR THOSE PERIODS LESS THAN TWELVE MONTHS IN DURATION.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
<PAGE>
LANCASTER FUNDS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. ORGANIZATION
SMITH HAYES Trust, Inc., d/b/a Lancaster Funds, (the Trust) is registered
under the Investment Company Act of 1940, as amended, as a diversified,
open-end management investment company. The Trust issues its shares in
series, each series representing a distinct fund with its own investment
objectives and policies. These financial statements relate only to the
following funds:
Capital Builder Fund Crestone Small Cap Fund
Convertible Fund Government/Quality Bond Fund
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies employed by
the Trust in preparing its financial statements:
USE OF ESTIMATES: In preparing the financial statements in accordance with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the
date of the financial statements and changes in net assets for the period.
Actual results could differ from those estimates.
VALUATION OF INVESTMENTS
Investment securities are carried at market determined using the following
valuation methods:
o Securities traded on a national or regional stock exchange or included
in the NASDAQ National Market System are valued at the last quoted sales
price.
o Securities not listed on an exchange or securities for which a latest
quoted sales price is not readily available and securities traded
over-the-counter but not included in the NASDAQ National Market System
are valued at the mean of the closing bid and asked prices.
o Securities including bonds or other assets for which reliable recent
market quotations are not readily available are valued at fair market
value as determined in good faith or under the direction of The Board of
Directors. Determination of fair value involves, among other things,
reference to market indices, matrices and data from independent brokers
and pricing services.
All securities are valued in accordance with the above policies at the
close of each business day.
<PAGE>
LANCASTER FUNDS
NOTES TO FINANCIAL STATEMENTS
2. CONTINUED
At June 30, 1997, the cost of investment securities is identical for
financial reporting and income tax purposes.
When a call option is written on behalf of a fund, an amount equal to the
premium received by the fund is included by the fund in the fund's
statement of assets and liabilities as a liability. The amount of the
liability is subsequently marked to market to reflect the current value of
the option written. The current market value of a traded option is the last
sales price on the principal exchange on which such options are traded, or
in the absence of such a sale, at the latest ask quotation. When an option
expires on its stipulated expiration date or the fund enters into a closing
purchase transaction, the fund realizes a gain (or loss if the cost of a
closing transaction exceeds the premium received when the option was sold)
without regard to any unrealized gain or loss on the underlying security,
and the liability related to such option is extinguished. When an option is
exercised, the fund realizes a gain or loss from the sale of the underlying
security and the proceeds from such sale are increased by the premium
originally received.
When a put option is written, an amount equal to the premium paid by the
fund is included by the fund in the fund's statement of assets and
liabilities as an asset. The amount of the asset is subsequently marked to
market to reflect the current value of the option written. The current
market value of a traded option is the last sales price on the principal
exchange on which such options are traded, or in the absence of such a
sale, at the latest ask quotation. When an option expires on its stipulated
expiration date or the fund enters into a closing sales transaction, the
fund realizes a gain (or loss if the cost of a closing transaction is lower
than the premium paid when the option was sold) without regard to any
unrealized gain or loss on the underlying security, and the asset related
to such option is extinguished. When an option is exercised, the fund
realizes a gain or loss from the sale of the underlying security and the
proceeds from the sale are decreased by the premium originally paid.
At June 30, 1997, the funds authorized to write option contracts had no
such option contracts outstanding nor were any written during the year then
ended.
SECURITY TRANSACTIONS
Security transactions are accounted for on the date securities are
purchased or sold (trade date). Dividend income is recognized on the
ex-dividend date and interest income is accrued daily. Amortization of
premium and discount is accrued using both the constant yield and the
straight-line methods.
Realized investment gains and losses are determined by specifically
identifying the issue sold.
<PAGE>
LANCASTER FUNDS
NOTES TO FINANCIAL STATEMENTS
2. CONTINUED
FEDERAL INCOME TAXES
It is the policy of each fund to comply with requirements of the Internal
Revenue Code applicable to regulated investment companies and to distribute
virtually all of the taxable income generated by the funds to their
shareholders within the time period allowed by Federal law. Each fund is
treated as a separate entity for tax purposes, and on a calendar basis will
distribute substantially all of its net investment income and realized
gains, if any, to avoid payment of any federal excise tax. The funds will
not distribute net realized losses. Distributions will be made when capital
gains have been generated to cover these losses. Each fund prepares its tax
return on an accrual basis. The Government/Quality Bond Fund has unused
capital loss carry forwards of approximately $270,000 available for federal
income tax purposes at June 30, 1997. The loss begins expiring in 2003.
Internal Revenue Code requirements regarding distributions may differ from
amounts determined under generally accepted accounting principles. These
book/tax differences are either temporary or permanent in nature. To the
extent these differences are permanent, they are charged or credited to
paid-in-capital or accumulated net realized gain, as appropriate, in the
period that the differences arise. Accordingly, the Crestone Small Cap Fund
and Capital Builder Fund differences as of June 30, 1997, primarily
attributable to certain net operating losses which for tax purposes are not
available to offset future income and short-term capital gains offset
against net investment losses, have been reclassified to accumulated net
realized gain and to paid-in-capital in the amount of $323,492 and $26,205,
respectively.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders are recorded on the ex-dividend date.
CASH EQUIVALENTS
The Trust considers investments with a maturity of three months or less
when purchased to be cash equivalents.
3. RELATED PARTY TRANSACTIONS
The Trust and each fund have retained CONLEY SMITH, Inc. (the Adviser) as
their exclusive investment adviser. The agreement provides that each fund,
except the Government/Quality Bond Fund, will pay the Adviser a fee equal
to .75% per annum of the fund's average daily net assets. The
Government/Quality Bond Fund pays .60% per annum of its average daily net
assets.
<PAGE>
LANCASTER FUNDS
NOTES TO FINANCIAL STATEMENTS
3. CONTINUED
The Trust and each fund also retained Lancaster Administrative Services,
Inc. (the Administrator) to act as its administrator and transfer agent.
The agreement provides that each fund will pay an administrative fee to the
Administrator equal to .25% per annum of its average daily net assets.
In addition to the advisory and administrative services agreements, the
Trust and each fund have retained SMITH HAYES Financial Services
Corporation (the Distributor), a company related through common ownership
and management, to act as the underwriter and distributor of the fund's
shares. Pursuant to the shareholder approved distribution plan under Rule
12b-1, Investor shares of each fund will reimburse the distributor for
shareholder-related expenses incurred in connection with the distribution
of the fund's shares, however, under no circumstances shall such
reimbursement exceed .50% per annum of the fund's average daily net assets
(.25% for the Government/Quality Bond Fund).
Under the terms of the advisory, administrative and distribution agreements
outlined above, the funds collectively paid $237,880, $80,670, and
$114,977, respectively, for such services. Of the amount paid to the
Distributor, $109,535 was retained by them for sales of the Trust's shares
made by their agents and brokers. The distributor also received $5,277 as
its portion of the sales charges paid by purchasers of the Select shares of
the funds. Such sales charges are not an expense of the Funds and hence are
not reflected in the accompanying statement of operations.
At June 30, 1997, the following accrued investment management,
administrative fees and distribution expenses were payable to the Adviser,
Administrator and the Distributor:
Payable Payable Payable
to to to
Adviser Administrator Distributor Total
-------- -------------- ----------- -------
Capital Builder Fund $6,282 $2,094 $4,101 $12,477
Convertible Fund 1,733 578 1,147 3,458
Crestone Small Cap Fund 12,556 4,185 3,391 20,132
Government/Quality
Bond Fund 1,229 512 509 2,250
Under the terms of the adviser agreement, the Adviser may be obligated to
reimburse a fund up to the amount of the Adviser's fee paid to the Adviser
if during any year the expenses of the fund, including the Adviser's fee,
exceed certain limitations. At June 30, 1997, no expense reimbursement was
required.
<PAGE>
LANCASTER FUNDS
NOTES TO FINANCIAL STATEMENTS
4. SECURITIES TRANSACTIONS
In addition to the amounts paid by the funds under the adviser,
administrative and distribution plans, the funds primarily used SMITH HAYES
Financial Services Corporation (SMITH HAYES) to affect security trades on
their behalf. As is customary in the industry, the investment sub-advisers
evaluate the pricing and ability to execute the transaction in selecting
brokers to affect trades. SMITH HAYES was paid commissions in the amount of
$18,892 for their brokerage services during the year ended June 30, 1997.
Purchases of securities and proceeds from sales during the year ended June
30, 1997, were as follows for each fund:
Purchases of Proceeds
Securities from Sales
------------ -----------
Capital Builder Fund $1,892,587 $1,961,232
Convertible Fund 3,041,562 2,221,319
Small Cap Fund 40,019,242 38,944,342
Government/Quality Bond Fund 226,085 1,019,203
At June 30, 1997, the aggregate gross unrealized appreciation and the
aggregate gross unrealized depreciation of securities in each fund were as
follows:
Aggregate Gross
Unrealized
Appreciation Depreciation
------------ ------------
Capital Builder Fund $3,191,147 $132,606
Convertible Fund 412,997 11,407
Small Cap Fund 3,085,211 517,700
Government/Quality Bond Fund 48,455 23,103
5. CAPITAL SHARE TRANSACTIONS
The Trust is authorized to issue a total of one billion shares of common
stock in series with a par value of $.001 per share. The Board of Directors
authorized the issuance of 120,000,000 shares in three classes of
40,000,000 shares each designated Select, Investor and Market shares for
each of the funds. Market shares are currently not offered by the funds.
Effective October 1, 1996, the Funds offer shares in two classes: Investor
and Select. All outstanding shares were reclassified to Investor Shares on
September 30, 1996. Investor shares are sold without a sales load, but with
a Rule 12b-1 fee. Select shares are sold with a front-end sales load of up
to 3.90%. Select shares do not incur a Rule 12b-1 fee.
<PAGE>
LANCASTER FUNDS
NOTES TO FINANCIAL STATEMENTS
5. CONTINUED
Transactions in the capital stock of each fund for the year ended June 30,
1997, were as follows:
Capital Capital
Builder Builder
Fund Fund
Investor Shares Select Shares
Transactions in shares: --------------- -------------
Shares sold 128,415.514 21,158.190
Shares redeemed (166,796.110) (1,256.801)
Reinvested distributions 59,973.819 57.438
------------- -------------
Net increase 21,593.223 19,958.827
============= ==========
Convertible Convertible
Fund Fund
Investor Shares Select Shares
Transactions in shares: --------------- -------------
Shares sold 56,320.057 4,180.921
Shares redeemed (15,216.311) -
Reinvested distributions 25,077.919 28.601
------------ -----------
Net increase 66,181.665 4,209.522
========== =========
Crestone Crestone
Small Cap Small Cap
Fund Fund
Investor Shares Select Shares
Transactions in shares: --------------- --------------
Shares sold 225,280.277 827,202.858
Shares redeemed (858,059.519) (109,882.087)
Reinvested distributions 49,450.941 61,814.280
------------ -------------
Net increase (decrease) (583,328.301) 779,135.051
============= ===========
<PAGE>
LANCASTER FUNDS
NOTES TO FINANCIAL STATEMENTS
5. CONTINUED
Government/ Government/
Quality Bond Quality Bond
Fund Fund
Investor Shares Select Shares
Transactions in shares: -------------- -------------
Shares sold 17,456.818 4,689.401
Shares redeemed (137,514.250) (445.609)
Reinvested distributions 12,465.806 111.895
------------ ----------
Net increase (decrease) (107,591.626) 4,355.687
============= =========
At June 30, 1997, directors, officers and employees of the Trust, the
Adviser, Administrator and Distributor and their immediate families held
the following in each fund:
Shares Value
---------- --------
Capital Builder Fund Investor Shares 41,457.680 $565,068
Capital Builder Fund Select Shares 3,863.633 52,661
Convertible Fund Select Shares 3,018.610 41,747
Crestone Small Cap Fund Select Shares 7,518.007 121,792
Government/Quality Bond Fund Select Shares 423.815 4,319
6. BUSINESS CHANGES
On August 24, 1995, the Capital Builder Fund commenced operations. The net
assets of three SMITH HAYES Trust, Inc. pre-existing Funds (Asset
Allocation, Balanced, and Value Funds) were converted to cash of $5,386,699
and invested in Capital Builder. In addition, the net assets of a related
party limited partnership of $3,283,131, including securities with
unrealized appreciation of $752,965 were received by Capital Builder in a
tax-free exchange.
<PAGE>
LANCASTER FUNDS
NEBRASKA TAX-FREE FUND
ANNAUL REPORT
JUNE 30, 1997
<PAGE>
Shareholder Letter............................. 1
Comparison Graph............................... 2
Independent Auditors' Report .................. 3
Schedule of Investments........................ 4
Statement of Assets and Liabilities............ 12
Statement of Operations........................ 13
Statements of Changes in Net Assets............ 14
Financial Highlights........................... 15
Notes to Financial Statements.................. 16
<PAGE>
LANCASTER FUNDS
FELLOW SHAREHOLDERS:
Interest rates generally trended lower throughout the later part of 1996, the
first six months of fiscal 1997 of the Fund. On June 30, 1996 the ten year
government was approximately 6.90% and ended the calendar year at 6.35%. Early
in 1997 interest rates increased reflecting concern over inflation as growth in
the economy exceeded expectations. In March, the Federal Reserve Board increased
the Fed Funds rate by 25 basis points to 5.50%. Subsequently, rates moved back
to the 6.90% level. This reversal in downward trend of interest rates of short
lived as rates ended the year at 6.45% and are currently yielding 6.25%.
The decline in rates reflects the modest rate of inflation in spite of the
continued growth in the economy and low levels of unemployment. We believe the
low levels of inflation reflect a number of different factors including
expectations that the government budget is coming under control, the
globalization of competition which limits vendors ability to raise prices as
well as the fact that corporations are coming more efficient. Accordingly, most
economists anticipate that interest rates will not increase significantly over
the foreseeable future.
On June 30, 1997 the net asset value of the Fund was $9.87 as compared to $9.63
a year ago. The total return for the year, which includes dividends and capital
appreciation, was 7.7%. Based on the current monthly dividend of $.04, the yield
on the year end net asset value is 4.86%. For a Nebraska resident paying a
Federal Tax of 31%, the equivalent yield on a corporate bond is 7.56%.
The fund provides a premium yield to taxable securities for those investors
seeking yield and preservation of capitol.
Sincerely,
John H. Conley
President August 8, 1997
<PAGE>
OBJECTIVE:
Nebraska Tax-Free Fund seeks to provide investors with a high level of income
exempt from federal income tax and from Nebraska state income tax while seeking
preservation of capital consistent with prudent investing. Under normal market
conditions, the Fund will attempt to invest 100% and, as a matter of fundamental
policy, will invest at least 80% of the value of its net assets in municipal
securities, the interest on which is exempt from federal income taxes and from
the income taxes of the State of Nebraska.
[GRAPHIC OMITTED]
Comparison of change in value of $10,000 investment in
Nebraska Tax-Free and the Lipper Municipal
Avg. Annual Return 06/30/97 Value
1 year 3.15% Nebraska Tax-Free $11,523.22
5 Year - Lipper Municipal $12,683.87
Inception 3.60%
Past performance is not predictive of future performance.
Results reflect payment of a maximum sales charge of 3.9% on the $10,000
investment with dividends reinvested.
For the period July 12, 1993 through June 30, 1997.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Lancaster Funds
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the Lancaster Funds Nebraska Tax-Free Fund as of
June 30, 1997, and the related statement of operations for the year then ended,
the statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the three years in the
period then ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights for the period from July 12, 1993 (commencement
of operations) to June 30, 1994 were audited by other auditors whose report
dated July 22, 1994, expressed an unqualified opinion on such financial
highlights.
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 securities owned as of June
30, 1997 by correspondence with the custodian. 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 Lancaster Funds
Nebraska Tax-Free Fund as of June 30, 1997, and the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and its financial highlights for each of the three
years in the period then ended in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Lincoln, Nebraska
July 25, 1997
<PAGE>
NEBRASKA TAX-FREE FUND
SCHEDULE OF INVESTMENTS
June 30, 1997
Percent
of Net
Principal Assets Market
Amount Tax-Exempt Securities - 96.03% Value
- ------------ ----------------------------------------- ----------- ---------
Education 8.59%
----------------------------- ---------
$50,000 Lancaster County Schools District 001 (Lincoln Public Schools)
General Obligation Bonds, Series 1993, 6.00% due 1/15/12 $51,000
150,000 Lancaster County School District 001 (Lincoln Public Schools)
General Obligation Refunding Bonds, Series 1997, 5.00%
due 7/15/08 150,446
100,000 Nebraska Educational Finance Authority Revenue Bonds, Series
1994 (Dana College Project), 6.75% due 6/1/14 110,433
100,000 Nebraska Educational Finance Authority Revenue Bonds, Series
1995 (Concordia Teachers College), 5.90% due 12/15/15 103,787
200,000 Nebraska Educational Finance Authority Revenue Bonds, Series
1995 (Midland Lutheran College Project), 6.25% due 6/15/15 208,464
300,000 Nebraska Higher Education Loan Program, Inc. Junior Subordinate
Bonds, Series A-6, 6.40% due 6/1/13 311,814
-------
935,944
-------
Electric, Water, Sewer 8.02%
------------------------------- -------
300,000 City of Grand Island, Sewer System Revenue Bonds
Series 1994, 6.00% due 4/1/14 310,203
150,000 City of Grand Island Nebraska Electric Revenue Bonds
5.60% due 9/1/97 150,548
<PAGE>
NEBRASKA TAX-FREE FUND
SCHEDULE OF INVESTMENTS (Continued)
Percent
Principal of Net Market
Amount Tax-Exempt Securities (Continued) Assets Value
- ---------- -------------------------------------------- ------- --------
$100,000 City of Hastings, Nebraska Combined Utility Revenue Bonds
Series 1994, 6.875% due 10/15/14 $105,442
200,000 City of Kearney, Nebraska Combined Utilities Revenue Refunding
Bonds, Series 1994, 6.10% due 6/1/14 207,794
100,000 City of Lincoln, Nebraska Water Revenue & Refunding
Bonds, Series 1993 E, 5.30% due 8/15/11 99,429
-------
873,416
-------
General Obligation 23.66%
------------------------------- -------
50,000 Boyd County Nebraska School District No. 38 (Spencer - Naper)
General Obligation Bonds, 5.85% due 6/15/13 51,779
150,000 Buffalo County Nebraska School District No. 105 (Pleasanton)
General Obligation Bonds, Series 1993, 5.95% due 12/15/07 154,208
120,000 Colfax County Nebraska School District No. 2 (Schuyler)
General Obligation Bonds, Series 1993, 5.65% due 12/15/09 122,861
150,000 Colfax County Nebraska School District No. 2 (Schuyler)
General Obligation Bonds, Series 1993, 5.75% due 12/15/11 153,787
400,000 Douglas County School District No. 017 (Millard Public
Schools) Refunding Bonds, Series 1996A
4.65% due 10/01/01 401,144
100,000 Douglas County Nebraska Sanitary and Improvement
District No. 257 General Obligation Refunding Bonds
(Ramble Ridge), 6.25% due 5/15/09 104,116
<PAGE>
NEBRASKA TAX-FREE FUND
SCHEDULE OF INVESTMENTS (Continued)
Percent
Principal of Net Market
Amount Tax-Exempt Securities (Continued) Assets Value
- ---------- -------------------------------------------- ------- --------
General Obligation (Continued)
-------------------------------
$150,000 Douglas County Nebraska School District No. 010, (Elkhorn
Public Schools) General Obligation Bonds, Series of 1995
6.40% due 12/15/08 $156,784
100,000 Douglas County Nebraska School District No. 010, (Elkhorn
Public Schools) General Obligation Bonds, Series of 1994
6.60% due 12/15/10 105,190
100,000 Douglas County Nebraska School District No. 010, (Elkhorn
Public Schools) General Obligation Bonds, Series of 1994
6.75% due 12/15/14 105,536
100,000 Keith County School District 001 Nebraska, (Ogallala Public School)
General Obligation School Building Bond, Series 1994B,
6.30% due 11/15/09 104,349
460,000 Lancaster County School District 001 (Lincoln) Lease Purchase
General Obligation Bonds, 4.15% due 10/26/00 460,000
100,000 Lincoln-Lancaster County Public Building Commission
General Obligation Bonds, Series 1994, 6.20% due 10/15/11 106,559
100,000 Morrill County Nebraska School District No. 021, (Bayard)
General Obligation Bonds, 5.80% due 5/15/06 100,926
100,000 City of North Platte Nebraska General Obligation Various
Purpose Bonds, Series 1995, 6.20% due 3/15/15 104,541
175,000 Saunders County, Nebraska School District #107 Cedar Bluffs
Public Schools, General Obligation Bonds, 6.35% due 7/1/14 181,644
<PAGE>
NEBRASKA TAX-FREE FUND
SCHEDULE OF INVESTMENTS (Continued)
Percent
Principal of Net Market
Amount Tax-Exempt Securities (Continued) Assets Value
- ---------- -------------------------------------------- ------- --------
General Obligation (Continued)
-------------------------------
$150,000 Western Nebraska Community College Certificates of Participation
Lease Rentals, 6.55% due 10/15/13 $160,960
---------
2,574,384
---------
Hospital 10.47%
---------------- ------
100,000 Douglas County Nebraska Hospital Authority No. 2 Revenue
Bonds, Health Care Facilities (Catholic Health Care Corp. A),
5.85% due 11/15/03 104,683
125,000 Douglas County Nebraska Hospital Authority No. 2 Revenue
Bonds, Health Care Facilities (Catholic Health Care Corp. A),
6.00% due 11/15/15 130,854
100,000 Douglas County Nebraska Hospital Authority No. 1 Revenue
Bonds, Health Care Facilities (Archbishop Bergan Mercy),
6.25% due 11/15/22 101,793
150,000 Douglas County, Nebraska, Douglas County Hospital
Improvements Bonds, Series 1995, 5.10% due 07/01/04 153,480
100,000 Gage County Nebraska Hospital Authority No.1 Hospital Revenue
Bonds, (Beatrice Community Hospital and Health Center Project),
6.40% due 10/1/07 109,871
200,000 Gage County Nebraska Hospital Authority No.1 Hospital Revenue
Bonds, (Beatrice Community Hospital and Health Center Project),
6.75% due 10/1/14 224,866
<PAGE>
NEBRASKA TAX-FREE FUND
SCHEDULE OF INVESTMENTS (Continued)
Percent
Principal of Net Market
Amount Tax-Exempt Securities (Continued) Assets Value
- ---------- -------------------------------------------- ------- --------
Hospital (Continued)
-----------------------
$100,000 Kearney County Nebraska Hospital Authority No. 1 Revenue
Bonds, Series 1993 (Bethpage Mission of the Great Plains, Inc.),
5.90% due 6/1/07 $103,007
200,000 Lancaster County Nebraska Hospital Authority Hospital
Revenue Bonds, Series 1992 A (Sisters of Charity Health Care
Systems, Inc.), 6.25% due 5/15/12 211,292
---------
1,139,846
---------
Housing 17.07%
------------------ ---------
150,000 Nebraska Investment Finance Authority Hospital Revenue Bonds,
(Great Plains Regional Medical Center Project), 6.50%
due 5/15/14 160,464
200,000 Nebraska Investment Finance Authority Hospital Revenue Bonds,
(Nebraska Methodist Healthcare System), 6.55% due 3/1/99 207,606
75,000 Nebraska Investment Finance Authority Revenue Bonds,
(Foundation Educational Building Fund), 7.00% due 11/1/09 75,000
210,000 Nebraska Investment Finance Authority Multi-Family Revenue
Bonds, (Waterbrook Apt. Project), 5.60% due 4/1/07 210,000
100,000 Nebraska Investment Finance Authority Single Family Housing
Revenue Bonds, 1995 Series A, 6.15% due 3/1/09 100,000
<PAGE>
NEBRASKA TAX-FREE FUND
SCHEDULE OF INVESTMENTS (Continued)
Percent
Principal of Net Market
Amount Tax-Exempt Securities (Continued) Assets Value
- ---------- -------------------------------------------- ------- --------
Housing (Continued)
-----------------------
$100,000 Nebraska Investment Finance Authority Single Family Housing
Revenue Bonds, 1995 Series A, 6.20% due 9/1/10 $100,000
185,000 Nebraska Investment Finance Authority Single Family Housing
Revenue Bonds, 1994 Series A-1, 6.30% due 3/1/17 185,000
100,000 Nebraska Investment Finance Authority Single Family Housing
Revenue Bonds, 1996 Series A, 5.95% due 3/1/27 100,000
250,000 Nebraska Investment Finance Authority Single Family Housing
Revenue Bonds, 1995 Series B, 6.40% due 9/1/26 250,000
470,000 Nebraska Investment Finance Authority Single Family Housing
Revenue Bonds, 1994 Series D-1, 7.30% due 9/1/26 470,000
---------
1,858,070
---------
Power 5.25%
------------------------------- -----
100,000 McCook Nebraska Public Power District Electric System Revenue
and Refunding Bonds, 6.75% due 12/15/09 105,149
200,000 Municipal Energy Agency of Nebraska Power Supply System
Revenue Refunding Bonds, 1992 Series A, 6.00% due 4/1/17 208,076
150,000 Nebraska Public Power District Electric System Revenue Bonds,
Series 1992 A, 6.25% due 1/1/12 157,872
100,000 Omaha Public Power District Electric System
Revenue Bonds Series 1997A, 4.30% due 2/01/00 100,178
---------
571,275
---------
<PAGE>
NEBRASKA TAX-FREE FUND
SCHEDULE OF INVESTMENTS (Continued)
Percent
Principal of Net Market
Amount Tax-Exempt Securities (Continued) Assets Value
- ---------- -------------------------------------------- ------- --------
Transportation 0.91%
------------------------------- ------
$100,000 Omaha, Nebraska Airport Authority Airport Facilities Revenue
Refunding Bonds, Series 1993, 5.50% due 1/1/13 $99,494
--------
Various Revenues 22.06%
---------------------------- -------
150,000 District Energy Corporation Nebraska Facility Revenue Bonds,
Series 1993 (City-County Building and County Correctional
Family Project), 5.50% due 7/1/13 154,594
130,000 City of Lincoln, Nebraska Parking Revenue Bonds,
Series 1994 A, 5.20% due 8/15/14 125,701
250,000 City of Lincoln, Nebraska Parking Revenue Bonds,
Series 1994 C, 6.10% due 8/15/09 264,891
100,000 City of Lincoln, Nebraska Parking Revenue Bonds,
Series 1994 C, 6.15% due 8/15/11 106,143
50,000 Lincoln-Lancaster County Public Building Commission
Tax Supported Lease Rental Rev Bldg Bonds 50,942
Series 1996, 6.10% due 10/15/99
100,000 Nebraska Investment Finance Authority Single Family
Housing Revenue Bonds, Series 1997A,
5.85% due 9/01/17 100,000
235,000 Nebraska Investment Finance Authority Single Family
Housing Revenue Bonds, Series 1996E, 6.25%
due 9/01/28 235,000
<PAGE>
NEBRASKA TAX-FREE FUND
SCHEDULE OF INVESTMENTS (Continued)
Percent
Principal of Net Market
Amount Tax-Exempt Securities (Continued) Assets Value
- ---------- -------------------------------------------- ------- --------
Various Revenues (Continued)
-------------------------------
$200,000 Nebraska Public Gas Agency Gas Supply System Revenue
Bonds, Series A, 6.25% due 4/1/05 $209,622
200,000 Nebraska Public Gas Agency Gas Supply System Revenue
Bonds, Series A, 5.65% due 4/1/06 204,334
425,000 City of Omaha Auditorium Facilities Corporation (Omaha
Civic Project), Series 1996, 4.35%, due 8/15/00 425,306
490,000 Nebraska Juvenile Services, Detention Facility Lease
Revenue Bonds, Series 1997, 6.375%, due 6/01/17 526,289
---------
2,402,822
---------
Total Investment in Securities (cost $10,178,381) 96.03% $10,455,251
Cash Equivalents 2.76% 300,272
Other Assets, less Liabilities 1.21% 131,663
------- ----------
NET ASSETS 100.00% $10,887,186
See accompanying notes to financial statements.
<PAGE>
LANCASTER FUNDS
NEBRASKA TAX-FREE FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997
ASSETS:
Investments in securities, at market value (cost $10,178,381) $10,455,251
Cash equivalents 300,272
Accrued interest and dividends receivable 139,950
------------
Total assets 10,895,473
------------
LIABILITIES:
Accrued expenses, including investment management,
administration and distribution expense reimbursements
payable to the adviser, administrator and distributor (note 3) 8,287
------------
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $10,887,186
============
NET ASSETS ARE REPRESENTED BY:
Capital stock outstanding, at par $1,103
Additional paid-in capital 11,008,288
Accumulated undistributed net investment income 18,109
Accumulated undistributed net realized loss on investments (417,184)
Unrealized appreciation (note 4) 276,870
------------
Total amount representing net assets applicable to
1,102,995 outstanding shares of $.001 par value
common stock (50,000,000 shares authorized) $10,887,186
=============
Net asset value per share $9.87
See accompanying notes to financial statements.
<PAGE>
NEBRASKA TAX-FREE FUND
STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1997
INVESTMENT INTEREST INCOME: $550,513
----------
EXPENSES (NOTE 3):
Investment advisory fees 14,681
Administration fees 12,234
Distribution expenses 24,449
Custodial fees 4,939
Other operating expenses 9,689
----------
Total expenses 65,992
----------
Net investment income 484,521
----------
REALIZED LOSS AND UNREALIZED APPRECIATION (DEPRECIATION)
ON INVESTMENTS (NOTE 4):
Net realized loss (30,380)
----------
Net unrealized appreciation (depreciation)
Beginning of period (2,162)
End of period 276,870
----------
Net unrealized appreciation 279,032
----------
Net realized and unrealized gain on investments 248,652
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $733,173
==========
See accompanying notes to financial statements.
<PAGE>
<TABLE>
LANCASTER FUNDS
NEBRASKA TAX-FREE FUND
STATEMENTS OF CHANGES IN NET ASSETS Years Ended
June 30, 1997 and 1996
<CAPTION>
Year Ended Year Ended
June 30, 1997 June 30, 1996
------------- -------------
Operations:
<S> <C> <C>
Net investment income $484,521 $523,615
Net realized loss on investments (30,380) (77,341)
Unrealized appreciation (depreciation) on investments 279,032 (4,154)
--------- --------
Net increase in net assets resulting from operations 733,173 442,120
--------- --------
Dividends paid to shareholders from net investment income: 486,874 527,052
--------- --------
Capital share transactions:
Proceeds from shares sold (334,533 and 244,434 shares) 3,277,247 2,401,890
Distributions reinvested (29,522 and 29,550 shares) 288,578 290,084
Payment for redemptions (269,196 and 349,802 shares) (2,628,675) (3,427,170)
--------- --------
Net increase (decrease) from capital share transactions
(94,859 and 75,818 shares) 937,150 (735,196)
--------- --------
Total increase (decrease) in net assets 1,183,449 (820,128)
Net assets:
Beginning of period 9,703,737 10,523,865
--------- --------
End of period $10,887,186 $9,703,737
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
LANCASTER FUNDS
NEBRASKA TAX-FREE FUND
FINANCIAL HIGHLIGHTS
YEARS ENDED JUNE 30, 1997, 1996 AND JUNE 30, 1995 AND FOR THE
PERIOD FROM JULY 2, 1993 (COMMENCEMENT OF OPERATIONS) TO JUNE 30, 1994
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
JUNE 30, 1997 JUNE 30, 1996 JUNE 30, 1995 JUNE 30, 1994
------------- ------------- ------------- -------------
NET ASSET VALUE:
<S> <C> <C> <C> <C>
Beginning of period $9.63 $9.71 $9.42 $10.00
----- ----- ----- ------
Income (loss) from investment operations:
Net investment income 0.48 0.49 0.48 0.50
Net realized and unrealized gain
(loss) on investments 0.24 (0.08) 0.29 (0.63)
---- ------ ---- ------
Total gain (loss) from investment operations 0.72 0.41 0.77 (0.13)
---- ---- ---- ------
Less distributions from net investment income 0.49 (0.49) (0.48) (0.45)
---- ------ ------ ------
End of period (1) $9.87 $9.63 $9.71 $9.42
===== ===== ===== =====
TOTAL RETURN (1) 7.1% 4.3% 8.5% (1.6)%*
==== ==== ==== ======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $10,887,186 $9,703,737 $10,523,865 $8,893,922
Ratio of expenses to average net assets 0.67% 0.76% 0.71% 0.41%*
Ratio of net income to average net assets 4.95% 4.96% 5.15% 4.99%*
Portfolio turnover rate 19.76% 17.53% 34.96% 7.45%
*Annualized
(1) Excludes maximum sales charge of 3.90%
See accompanying notes to financial statements.
</TABLE>
<PAGE>
LANCASTER FUNDS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. ORGANIZATION
SMITH HAYES Trust, Inc., d/b/a Lancaster Funds, (the Trust) is registered
under the Investment Company Act of 1940, as amended, as an open-end
management investment company. These financial statements apply only to the
Nebraska Tax-Free Fund (the Fund).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies employed by
the Fund in preparing its financial statements:
USE OF ESTIMATES: In preparing the financial statements in accordance with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the
date of the financial statements and changes in net assets for the period.
Actual results could differ from those estimates.
VALUATION OF INVESTMENTS: Fund securities are valued at fair market value as
determined in good faith or under the direction of the Board of Directors.
Determination of fair value involves, among other things, reference to
market indices, matrices and data from independent brokers and pricing
services.
All securities are valued in accordance with the above policies at the close
of each business day provided that the Fund has shareholder activity.
At June 30, 1997, the cost of investment securities is identical for
financial reporting and income tax purposes.
SECURITIES TRANSACTIONS: Securities transactions are accounted for on the
date securities are purchased or sold (trade date). Interest income is
accrued daily. Amortization of bond premium and discount is accrued daily
using both the constant yield and the straight-line methods. Realized
investment gains or losses are determined by specifically identifying the
security sold.
FEDERAL INCOME TAXES: It is the policy of the Fund to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute virtually all of its taxable income, including
any net realized gain on investments, to its shareholders. Therefore, no
Federal income tax provision is required. The Fund prepares its tax return
on an accrual basis. There will be no net
<PAGE>
LANCASTER FUNDS
NOTES TO FINANCIAL STATEMENTS
2. CONTINUED
realized gain distributions until the net realized loss carry forwards have
been offset or expired. The Fund has unused capital loss carry forwards of
approximately $417,000 available for federal income tax purposes at June 30,
1997. The loss begins expiring in 2003.
DISTRIBUTIONS TO SHAREHOLDERS: Dividends to shareholders are recorded on
the ex-dividend date.
CASH EQUIVALENTS: The Trust considers investments with a maturity of three
months or less when purchased to be cash equivalents.
3. RELATED PARTY TRANSACTIONS
The Fund has retained CONLEY SMITH, Inc. (the Adviser) as its exclusive
investment adviser. The agreement provides that the Fund will pay the
Adviser a fee equal to .15% per annum of its average daily net assets.
The Fund also retained Lancaster Administrative Services, Inc. (the
Administrator), to act as its administrator and transfer agent. The
agreement provides that the Fund will pay a fee to the Administrator equal
to .125% per annum of the average daily net assets.
In addition to the advisory and administrative services agreements, the Fund
has retained SMITH HAYES Financial Services Corporation (the Distributor), a
company related through common ownership and management, to act as the
underwriter and distributor of the Fund's shares. Pursuant to the
distribution plan under Rule 12b-1, the Fund will reimburse the Distributor
for shareholder-related expenses incurred in connection with the
distribution of the Fund's shares, however under no circumstances shall such
reimbursement exceed .25% per annum of the Fund's average daily net assets.
Under the terms of the advisory, administrative and distribution agreements
outlined above, the Fund paid $14,681, $12,234, and $24,449, respectively,
for such services. Of the amount paid to the Distributor, $16,304 was
retained by them for the sale of shares made by their agents and brokers.
The Distributor also received $7,988 and retained $6,397 (after allowances
to dealers) as its portion of the sales charges paid by purchasers of the
Fund shares. Such sales charges are not an expense of the Fund and hence are
not reflected in the accompanying statement of operations.
<PAGE>
LANCASTER FUNDS
NOTES TO FINANCIAL STATEMENTS
3. CONTINUED
Under the terms of the advisory agreement, the Adviser may be obligated to
reimburse the Fund up to the amount of the Adviser's fee paid to the Adviser
if during any year the expenses of the Fund, including the Adviser's fee,
exceed certain limitations. At June 30, 1997 no expense reimbursement was
required.
In addition to the amount paid by the Fund under the advisory,
administration and distribution plans, the Fund used SMITH HAYES Financial
Services Corporation (SMITH HAYES) to affect security trades on their
behalf. SMITH HAYES was paid commissions in the amount of $22,488 for their
brokerage services during the year ended June 30, 1997.
At June 30, 1997, the directors, officers, and employees of the Trust, the
Adviser, Administrator and Distributor and their immediate families held
12,759 shares at a value of $125,930.
4. SECURITIES TRANSACTIONS
The Fund made purchases and sales of investment securities of $2,834,119 and
$1,887,031, respectively, during the year ended June 30, 1997.
At June 30, 1997, the aggregate gross unrealized appreciation and the
aggregate gross unrealized depreciation of securities were $282,049 and
$5,179, respectively.
<PAGE>
<PAGE>
LANCASTER FUNDS
INSTITUTIONAL MONEY MARKET
ANNUAL REPORT
JUNE 30, 1997
<PAGE>
Independent Auditors' Report .................. 1
Statement of Net Assets........................ 2
Statement of Operations........................ 4
Statements of Changes in Net Assets............ 5
Financial Highlights........................... 6
Notes to Financial Statements.................. 7
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Lancaster Funds
We have audited the accompanying statement of net assets of the Lancaster Funds
Institutional Money Market Fund as of June 30, 1997, and the related statement
of operations for the year then ended, the statements of changes in net assets
for each of the two years in the period then ended, and the financial highlights
for each of the three years in the period then ended. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits. The financial highlights for the
period November 12, 1992 (commencement of operations) to June 30, 1994 were
audited by other auditors whose report dated July 22, 1994, expressed an
unqualified opinion on such financial highlights.
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 securities owned as of June
30, 1997 by correspondence with the custodian. 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 Lancaster Funds
Institutional Money Market Fund as of June 30, 1997, and the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and its financial highlights for each of
the three years in the period then ended in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Lincoln, Nebraska
July 25, 1997
<PAGE>
LANCASTER FUNDS
INSTITUTIONAL MONEY MARKET FUND
STATEMENT OF NET ASSETS
JUNE 30, 1997
YIELD AT
PAR TIME OF AMORTIZED
VALUE DESCRIPTION PURCHASE COST
- ---------------- ------------------------------------- ---------- ----------
CERTIFICATES OF DEPOSIT -- 1.1%
$95,000 First National Bank, 5.40% $95,000
Lewellen, Nebraska, due 11/23/97
95,000 First Bank & Trust Company,
Cozad, Nebraska, due 6/16/98 5.85% 95,000
95,000 Curtis State Bank,
Curtis Nebraska, due 3/16/98 6.00% 95,000
95,000 First National Bank
Holdrege Nebraska, due 11/10/97 6.00% 95,000
95,000 Havelock Bank
Lincoln Nebraska, due 8/6/97 5.15% 95,000
-------------
Total (cost $475,000) 475,000
-------------
GOVERNMENT SECURITIES -- 10.2%
3,000,000 Fannie Mae, due 7/22/97 2,990,365
1,388,925 Goldman Sachs MM 1,388,925
-------------
Total (cost $4,379,290) 4,379,290
-------------
TRUST CERTIFICATES -- U.S. GOVERNMENT GUARANTEED STUDENT LOANS -- 88.7%
38,000,000 Mid-America Student Finance Trust, due
9/16/97 to 6/29/98 (cost $38,000,000) 5.48%* $38,000,000
-------------
TOTAL INVESTMENTS -- 98% 42,854,290
<PAGE>
LANCASTER FUNDS
INSTITUTIONAL MONEY MARKET FUND
STATEMENT OF NET ASSETS
JUNE 30, 1997 (CONTINUED)
EXCESS OF OTHER ASSETS OVER TOTAL LIABILITIES -- 2%
(Includes $14,726 payable to investment adviser,
administrator and distributor and $168,343
dividends payable to shareholders) (10,773)
-------------
NET ASSETS -- 100%
Applicable to 42,843,517 outstanding shares of $.001
par value common stock (100,000,000 shares authorized) $42,843,517
=============
NET ASSET VALUE:
Offering and redemption price per share $1.00
=============
*Interest rate fluctuates with 3-month U.S. Treasury Bill rate, subject to no
longer than 5-day settlement.
See accompanying notes to financial statements.
<PAGE>
LANCASTER FUNDS
INSTITUTIONAL MONEY MARKET FUND
STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1997
Investment Interest Income $2,686,092
---------
Expenses (note 2):
Investment advisory fees 48,545
Administration fees 58,254
Distribution fee 96,972
Custodial fees 26,035
Other expenses 53,105
---------
Total expenses 282,911
---------
Net Investment Income $2,403,181
=========
See accompanying notes to financial statements.
<PAGE>
LANCASTER FUNDS
INSTITUTIONAL MONEY MARKET FUND
STATEMENTS OF CHANGES IN NET ASSETS YEARS
ENDED JUNE 30, 1997 AND 1996
Year Ended Year Ended
June 30, 1997 June 30, 1996
------------- -------------
From Investment Operations:
Net investment income
distributed to shareholders $2,403,181 $1,408,128
========= =========
From Share Transactions:
(at constant net asset value of $1 per share)
Shares sold 69,935,250 101,840,935
Shares issued in reinvestment of
dividends from net investment income 2,122,027 992,239
---------- -----------
72,057,277 102,833,174
Shares redeemed 95,976,861 60,407,009
---------- -----------
Total increase (decrease) in net assets
derived from share transactions (23,919,584) 42,426,165
Net Assets:
Beginning of period 66,763,101 24,336,936
---------- -----------
End of period $42,843,517 $66,763,101
========== ===========
See accompanying notes to financial statements.
<PAGE>
<TABLE>
LANCASTER FUNDS
INSTITUTIONAL MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
YEARS ENDED JUNE 30, 1997, 1996, 1995 AND 1994 AND THE
PERIOD FROM NOVEMBER 12, 1992 (COMMENCEMENT OF OPERATIONS) TO JUNE 30, 1993
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Period Ended
June 30, 1997 June 30, 1996 June 30, 1995 June 30, 1994 June 30, 1993
-------------- -------------- ------------- ------------- ------------
Net asset value:
<S> <C> <C> <C> <C> <C>
Beginning of period $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- -----
Income from investment operations,
Net investment income 0.050 0.052 0.054 0.040 0.009
Less distributions,
Dividends from net investment income (0.050) (0.052) (0.054) (0.040) (0.009)
----- ----- ----- ----- -----
End of period $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== =====
Yield 4.81% 5.02% 5.63% 4.52% 4.28%*
===== ===== ===== ===== =====
Effective yield 4.92% 5.14% 5.79% 4.62% 4.37%*
===== ===== ===== ===== =====
Ratios/Supplemental data:
Net assets, end of period $42,843,517 $66,763,101 $24,336,936 $28,008,803 $14,855,439
Ratio of expenses to average net assets 0.58% 0.57% 0.54% 0.61% 0.68%*
Ratio of net income to average
net assets 4.95% 5.17% 5.42% 4.05% 4.40%*
*Annualized for those periods less than twelve months in duration.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
LANCASTER FUNDS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
SMITH HAYES Trust, Inc., d/b/a Lancaster Funds, (the Company) is registered
under the Investment Company Act of 1940, as amended, as an open-end
management investment company. These financial statements relate only to the
Institutional Money Market Fund (the Fund).
The following is a summary of significant accounting policies employed by
the Company in preparing its financial statements.
USE OF ESTIMATES: In preparing the financial statements in accordance with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities as of the
date of the financial statements and changes in net assets for the period.
Actual results could differ from those estimates.
VALUATION OF INVESTMENTS: Fund securities are valued at amortized cost.
Pursuant to Rule 2a-7 of the Investment Company Act of 1940, amortized cost
as defined is a method of valuing securities at acquisition cost, adjusted
for amortization of premium or accretion of discount rather than at their
value based on current market factors. This method of valuation is used
consistently throughout the industry by money market funds wishing to
maintain a constant net asset value per share. The Fund maintains a constant
net asset value of $1 per share.
SECURITY TRANSACTIONS AND INVESTMENT INCOME: Security transactions are
recorded on a trade date basis. Realized gains or losses on sales of
investments are determined by specifically identifying the issue sold. In
computing net investment income, the Fund amortizes premiums and discounts
and accrues interest income daily.
FEDERAL INCOME TAXES: It is the policy of the Fund to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to have the Fund distribute virtually all of its taxable
income generated to it's shareholders. Therefore, no liability for Federal
income taxes is required. On a calendar year basis, the Fund will distribute
substantially all of its net investment income and realized gains, if any,
to avoid the payment of any Federal excise taxes. The Fund prepares its tax
return on an accrual basis.
<PAGE>
LANCASTER FUNDS
NOTES TO FINANCIAL STATEMENTS
1. CONTINUED
DISTRIBUTIONS TO SHAREHOLDERS: Dividends to shareholders are accrued and
declared daily from net investment income. Payments or reinvestments of
dividends are made monthly.
TRUST CERTIFICATES: The trust certificates represent U. S. Government
guaranteed student loans held by Mid-America Student Finance Trust (the
Trust). The Trust invests in eligible student loans issued under the Higher
Education Act of 1965 as amended (the Act) established by the U. S.
Government to provide access to funds for students attending post-secondary
institutions. The Trust purchases the student loans from Nebraska and Iowa
banks who are eligible lenders as defined by the Act. The terms of the
loans, which vary on an individual basis, generally provide for repayment in
monthly installments over a period normally not in excess of ten years.
All of the student loans are guaranteed by various authorized guarantee
agencies who have contracts of reinsurance with the Department of Education.
These guarantees are made subject to the performance of certain loan
servicing procedures stipulated by the Act. If these due diligence
requirements are not met, the affected loans may not be covered by the
guarantees should the borrower default.
For liquidity purposes, certain banks have entered into unconditional
agreements to repurchase a predetermined amount of student loans from the
Trust upon five days written notice. The maximum amount any bank is
obligated to repurchase is five percent of the total student loans owned by
the Trust. The repurchase agreements are cancelable with 30 days advance
written notice. At June 30, 1997, 18 banks have entered into repurchase
agreements for an aggregate total of $93,000,000.
2. MANAGEMENT FEE, DISTRIBUTION EXPENSE AND TRANSACTIONS WITH AFFILIATES
The Fund has retained CONLEY SMITH, Inc. (the Adviser) as its exclusive
investment adviser. Under the terms of the agreement the adviser is paid a
monthly fee computed at an annual rate of .10% of the average daily net
assets of the Fund.
The Fund has also retained Lancaster Administrative Services, Inc. (the
Administrator), to act as its administrator and transfer agent. The
agreements provide for a fee computed and paid monthly at an annual rate of
.12% of the average daily net assets of the Fund.
<PAGE>
LANCASTER FUNDS
NOTES TO FINANCIAL STATEMENTS
2. CONTINUED
The Fund has retained SMITH HAYES Financial Services Corporation (the
Distributor), a company related through common ownership and management, to
act as the underwriter and distributor of the Fund's shares. Pursuant to the
shareholder approved distribution plan under Rule 12b-1, the Fund will
reimburse the Distributor for shareholder-related expenses incurred in
connection with the distribution of the Fund's shares. Aggregate payments
cannot exceed the annual rate of .20% of the Fund's average daily net
assets.
Under the terms of the advisory, administrative and distribution agreements
outlined above, the Fund paid $48,545, $58,254 and $96,972, respectively,
for such services.
In addition to the amounts paid under the advisory, administration and
distribution plans, the Fund primarily used SMITH HAYES Financial Services
Corporation (SMITH HAYES) to affect security trades on its behalf. As is
customary in the industry, the adviser evaluates the pricing and ability to
execute the transaction in selecting brokers to affect trades. SMITH HAYES
was paid commissions in the amount of $469 for brokerage services during the
year ended June 30, 1997.
At June 30, 1997, the directors, officers, and employees of the Company, the
Adviser, Administrator, Distributor and their immediate families held
1,137,248 shares of the Fund, which constituted 2.65% of the Fund's
outstanding shares.
<PAGE>
LANCASTER FUNDS
200 CENTRE TERRACE
1225 L STREET
P.O. BOX 83000
LINCOLN, NE 68501-3000
(402) 476-3000
(800) 279-7437
