LANCASTER FUNDS
CAPITAL BUILDER
CONVERTIBLE
CRESTONE SMALL CAP
GOVERNMENT/QUALITY BOND
ANNUAL REPORT
JUNE 30, 1998
<PAGE>
Dear Lancaster Funds Shareholder:
A year ago in the letter to shareholders, reference was made to a March 1997
speech by the Chairman of the Federal Reserve Board in which he made reference
to "irrational exuberance" in the marketplace. In addition, we commented upon
the declining level of interest rates and rising stock prices with relatively
high stock prices compared to underlying corporate earnings.
To quote Yogi Berra, "it is deja vu all over again." Interest rates continued to
decline and stock prices increased again during this most recent fiscal year and
are now selling at or near record valuation levels.
The markets generally ignored events which in other times put a damper on stock
prices. Economic turmoil spread throughout most of the Far East, including Japan
and Thailand, which has raised concerns regarding a possible currency
devaluation by major trade partners of the United States. On the domestic front,
the potential problems of the executive branch did not abate and there was an
increase in antitrust activity against such leading technology companies as
Intel and Microsoft. On the positive side, there was a reduction in capital
gains tax, and perhaps most importantly, there appears to be substantial
progress in reducing the budget deficit.
Over the past twelve months the yield on the 10 year government bond declined
approximately 100 basis points from 6.45% to 5.45%. Stock prices increased, but
there was a relatively large difference in the returns of the various indexes.
For example, for the twelve months ended June 30, 1998, the Dow Jones Industrial
Average increased 18.7%, the S & P 500, 30.0% and the Russell 2000, which is
composed of smaller companies, 16.8%
A report by the Federal Reserve of St. Louis stated that, "from a business cycle
perspective, the U.S. stock market has already far surpassed all previous
records for high levels of valuation." Accordingly, we remain somewhat cautious.
Mutual funds are designed to be long term investments and we must remember that
we may have some periods with declining prices just as we some times have very
strong markets as we have enjoyed that last few years. We will continue to do
our best to see that your investments are managed in accordance with your
objectives.
Sincerely, August 7, 1998
John H. Conley
President
1
<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 year ended June 30, 1998 the Capital Builder Fund investor shares
increased 16.7% compared to 30.1% for the S & P 500 and 18.7% for the Dow Jones
Industrial Average.
Better performances on an absolute as well as percentage basis were obtained
from the companies with the largest market capitalization. This list includes
such names as General Electric, Pitney Bowes, Merck and the Chase Manhattan
Company. Harley-Davidson provided the greatest return of any of the companies
owned (62%). Harley-Davidson, a manufacturer of heavyweight motorcycles is
somewhat unique in that in spite of constant increases in production, the
company is unable to satisfy either foreign or domestic demand on a current
basis.
Worthington Industries and Pall Corporation, leading companies in their
respective industries, continued to underperform in fiscal 1998. Worthington, a
leading independent processor of flat rolled steel, has recently eliminated
ancillary activities and has substantial new capacity coming into production.
Pall manufactures a variety of filters and is the leading manufacturer of
filters designed to remove the virus-carrying white blood cells from donated
blood. Subsequent to the end of the quarter, the United Kingdom announced that
it will require luekocyte (white blood cell) reduction in all donated units of
blood. As a consequence, the price of the stock of Pall has increased 10% since
June 30.
The most disappointing stock during the last fiscal year was the First Data
Corporation, again a leading company in its industry. First Data provides
information and transaction processing services to issuers of credit cards.
While recent results have been disappointing, we believe the long term outlook
for each of the companies is favorable and will continue to monitor the
respective investments.
As in any market environment, a portfolio will contain several stocks which
outperform while others will underperform a broad stock market index. The
Capital Builder Fund is diversified, but not widely diversified. As a result, it
is more heavily influenced by security selection and may therefore have periods
where the portfolio performance diverges from market averages.
The relatively high levels of valuation for the market create an atmosphere of
caution. However, as long term investors, we do not attempt to time the market,
but emphasize individual securities which we believe are selling at reasonable
prices. We believe the stocks within the Capital Builder Fund are well
positioned for the current market environment, but we must remain sensitive to
quickly changing economic variables.
2
<PAGE>
[GRAPHIC OMITTED]
Comparison of change in value of $10,000 investment in
Capital Builder Investor and the S&P 500
Avg. Annual Return
- ------------------ 06/30/98 Value
1 year 16.68% ---------------
5 year - Capital Builder Investor $17,329.06
Inception 21.26% S&P 500 $21,511.80
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Comparison of change in value of $10,000 investment in
Capital Builder Select and the S&P 500
Return*
- ------------------ 06/30/98 Value
1 year 17.21% ---------------
5 year - Capital Builder Select $11,861.92
Inception 20.80% S&P 500 $14,659.01
Results for Select Shares reflect payment of a maximum sales charge of 3.9% on
the $10,000 investment with dividends and capital gains reinvested.
Average annual return does not include payment of a sales charge and assumes
reinvestment of dividends and capital gains.
Past performance is not predictive of future performance.
Capital Builder Investor Shares for the period August 24, 1995 (inception)
through June 30, 1998.
Capital Builder Select Shares for the period March 3, 1997 (inception) through
June 30, 1998.
3
<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 Lancaster Funds - Convertible Fund investor shares performed positively, up
22.60% for the fiscal year ended June 30, 1998, and up 9.08% year-to-date
through July 31, 1998 versus its benchmark, the First Boston Convertible
Securities Index which was up 6.58% for the fiscal year ended June 30, 1998 and
up 4.15% year-to-date through July 31, 1998.
Convertibles performed well in the year off the back of a strong equity market.
Being positioned in the correct industry groups and economic sectors over the
past year positively impacted the Fund's performance. Throughout the year, the
Fund was overweighted in industry groups that were more dependent on consumer
spending than on capital goods or basic industries spending.
The consumer related industry goods performed very well during the year while
the more cyclical and basic industries commodity groups lagged. The Fund also
emphasized convertible issues of small- and mid-cap growth companies. This
sector of the convertible market performed well but also exhibited some wide
divergence in performance of many issues within the group. The Fund avoided the
disasters in the market while participating in the opportunities. It is
important to own the right issues and just as important to avoid certain issues.
Since the small- and mid-cap sectors of the convertible market and equity market
tend to be companies with lower bond ratings, it is also important to ensure
that the overall risk/reward trade-off of the convertible is favorable.
The Fund also benefited from the merger activity in the financial sector. The
Fund was overweighted in this sector throughout most of the year. Although with
the recent sharp rise in many of the convertible and stock prices, we have
lowered the overall exposure in this sector. Some of our positioning did not
work as well as planned. The Fund did not perform particularly well in regard to
a few of the technology-related issues. We were underweighted relative to the
market in this sector and, except for a few issues, we added little value in
this area. The Fund also did not have a significant portion of its assets in
large-cap growth issues, since the convertible market as a whole is
predominately a small- and mid-cap marketplace. Today, this is especially true
because most large growth companies are not raising capital but, instead, buying
back stock and paying down debt.
During the year, most of the significant changes in the portfolio regarding
industry group or sector participation were a result of finding good individual
companies and convertibles and not an overall bet on an industry group. We did
lower the Fund's financial and energy sectors exposure while increasing its
exposure to consumer growth and consumer cyclical issues.
4
<PAGE>
OUTLOOK: Looking
forward, we are positioning the Fund to be slightly more defensive as a result
of the recent run up in convertible prices and their increased equity
sensitivity. We are still excited about the opportunities that we are finding to
invest in, but they seem to be occurring on a less frequent basis and with more
severe punishment if the company falters in its growth plans.
[GRAPHIC OMITTED]
Comparison of change in value of $10,000 investment in
Convertible Investor and the First Boston Convertible Securities Index
Avg. Annual Return
- ------------------- 06/30/98 Value
1 year 22.60% --------------
5 year 13.95% Convertible Investor $29,709.41
Inception 11.50% First Boston Convertible Securities $32,357.72
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Comparison of change in value of $10,000 investment in
Convertible Select and the First Boston Convertible Securities Index
Return*
- ------------------- 06/30/98 Value
1 year 23.06% --------------
5 year - Convertible Select $11,505.60
Inception 23.59% First Boston Convertible Securities $11,730.43
Results for Select Shares reflect payment of a maximum sales charge of 3.9% on
the $10,000 investment with dividends and capital gains reinvested.
Average annual return does not include payment of a sales charge and assumes
reinvestment of dividends and capital gains.
Past performance is not predictive of future performance.
Convertible Investor Shares for the period June 23, 1988 (inception) through
June 30, 1998.
Convertible Select Shares for the period June 16, 1997 (inception) through June
30, 1998.
5
<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
capitalization 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 performance of the Crestone Small Cap Fund investor shares for the fiscal
year was 7.83% versus the Russell 2000 Index of 16.8% for the same period. The
fund's underperformance for this period was largely due to the hangover effect
of our underperformance from the fourth quarter of 1997. For the last six months
ending June 30, 1998, the fund's performance was 4.04% versus the Russell 2000
index of 4.93%. The second quarter of 1998 was disastrous for all Small Caps as
both the Russell 2000 index and the S&P 600 Small Cap Index had negative returns
in every economic sector. The fund managed one positive sector, Basic Materials,
but our weightings in Technology and Energy caused us to underperform the
Russell 2000.
As measured by the Small Cap market indices, Small Caps are not getting much
attention as the Large Caps continue to dominate the news and performance. As an
example, in the second quarter, Healthcare and Technology were big losers in
Small Caps while they were big winners in the Large Caps. While Large Caps have
beaten Small Caps in performance, it is not an across-the-board route. The
performance gap has largely been generated by 50 to 100 big name Large Caps as
well as some of the more speculative internet plays. From a valuation
standpoint, Small Caps offer greater growth potential with lower current prices.
At some point, the market will recognize this valuation gap and return to Small
Caps. Until that occurs, patience is and remains the watchword for Small Cap
investing.
6
<PAGE>
[GRAPHIC OMITTED]
Comparison of change in value of $10,000 investment in
Crestone Small Cap Investor and the Russell 2000
Avg. Annual Return
- ------------------- 06/30/98 Value
1 year 7.83% --------------
5 year 13.25% Crestone Small Cap Investor $21,952.24
Inception 14.01% Russell 2000 $26,579.97
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Comparison of change in value of $10,000 investment in
Crestone Small Cap Select and the Russell 2000
Return*
- ------------------- 06/30/98 Value
1 year 8.35% --------------
5 year - Crestone Small Cap Select $11,611.96
Inception 14.02% Russell 2000 $13,535.42
Results for Select Shares reflect payment of a maximum sales charge of 3.9% on
the $10,000 investment with dividends and capital gains reinvested.
Average annual return does not include payment of a sales charge and assumes
reinvestment of dividends and capital gains.
Past performance is not predictive of future performance.
Crestone Small Cap Investor Shares for the period July 1, 1992 (inception)
through June 30, 1998.
Crestone Small Cap Select Shares for the period October 1, 1996 (inception)
through June 30, 1998.
7
<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:
During the previous twelve months there were a number of events, both foreign
and domestic, which could have negatively affected our financial markets. In
addition to the economic problems which spread throughout the Far East,
including Japan, Western Europe was stagnant and Russia continues to struggle in
its transition to a market economy. On the domestic front, the executive bond
remained under siege.
As indicated by the favorable results in the financial markets, there had to be
some positive influences. The domestic economy remained vibrant, inflation was
subdued, and the budget deficit declined.
While short term interest rates were essentially unchanged for the year, rates
on the 10 year and 30 year bonds declined by approximately 100 basis points to
5.45% and 5.65% respectively as investors' concerns about inflation moderated
with the decrease in the federal deficit.
On June 30, 1998, the net asset value of investor shares was $10.29 as compared
to $10.19 at the end of fiscal 1997. The total return for the year, with
dividends and capital gain distributions reinvested, was 7.3%.
The Government Quality Bond Fund is available for investors seeking income and
preservation of capital.
8
<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
- ------------------- 06/30/98 Value
1 year 7.26% --------------
5 year 4.70% Gov't/Qualtiy Bond Investor $19,909.26
Inception 7.12% Merrill Lynch U.S. Treasury Inter-Term Bond $21,664.42
- --------------------------------------------------------------------------------
[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*
- ------------------- 06/30/98 Value
1 year 7.59% --------------
5 year - Gov't/Qualtiy Bond Select $10,407.23
Inception 6.99% Merrill Lynch U.S. Treasury Inter-Term Bond $10,937.86
Results for Select Shares reflect payment of a maximum sales charge of 1.5% on
the $10,000 investment with dividends and capital gains reinvested.
Average annual return does not include payment of a sales charge and assumes
reinvestment of dividends and capital gains.
Past performance is not predictive of future performance.
Government/Quality Bond Investor Shares for the June 23, 1988 (inception)
through June 30, 1998.
Government/Quality Bond Select Shares for the period June 16, 1997 (inception)
through June 30, 1998. 9
9
<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, 1998, 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
four years in the period then ended (period from August 24, 1995, commencement
of operations, to June 30, 1998 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 year ended 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, 1998 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, 1998,
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, 1998 for
the Capital Builder Fund) in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Lincoln, Nebraska
July 24, 1998
10
<PAGE>
LANCASTER FUNDS
SCHEDULE OF INVESTMENTS
JUNE 30, 1998
CAPITAL BUILDER FUND
PERCENT
OF NET MARKET
SHARES COMMON STOCK 97.35% ASSETS VALUE
------ ------------ ------ ------ -----
COMPUTER RELATED 2.98%
----------------
9,000 First Data Corp. $299,812
DIRECT MARKETING 0.66%
----------------
10,000 Sitel Corp.* 66,250
ELECTRICAL EQUIPMENT 3.95%
--------------------
7,000 Gillette Corp. 396,812
ENTERTAINMENT/LEISURE 5.40%
---------------------
14,000 Harley-Davidson, Inc. 542,500
FINANCIAL SERVICES 12.40%
------------------
6,000 Chase Manhattan Corp. 453,000
9,000 Federal Home Loan Mortgage Corp. 423,562
1,000 Wells Fargo & Co. 369,000
-------
1,245,562
FOOD PROCESSING 4.10%
---------------
13,000 ConAgra, Inc. 411,938
HOUSEHOLD PRODUCTS/HOUSEWARES 7.90%
-----------------------------
9,000 Libbey, Inc. 344,812
9,000 Newell Co. 448,313
-------
793,125
INSURANCE 4.47%
---------
6,000 MBIA, Inc. 449,250
11
<PAGE>
LANCASTER FUNDS
SCHEDULE OF INVESTMENTS (CONTINUED)
CAPITAL BUILDER FUND
PERCENT
OF NET MARKET
SHARES COMMON STOCK ASSETS VALUE
------ ------------ ------ -----
IRON/STEEL 2.34%
----------
17,250 Kentucky Electric Steel, Inc.* $84,094
10,000 Worthington Industries, Inc. 150,625
-------
234,719
LINEN SUPPLY & RELATED ITEMS 1.75%
----------------------------
8,000 Unitog Co. 176,000
MACHINE DIVERSIFIED 2.55%
-------------------
7,500 Thermo Electron Corp.* 256,406
MANUFACTURING 7.84%
-------------
5,500 General Electric Co. 500,500
14,000 Pall Corp. 287,000
-------
787,500
METALS/MINING 1.73%
-------------
8,707 Valmont Industries 173,596
OFFICE/BUSINESS 4.31%
---------------
9,000 Pitney-Bowes, Inc. 433,125
PHARMACEUTICAL/MEDICAL 5.33%
----------------------
4,000 Merck & Co. 535,000
PIPELINES 5.38%
---------
10,000 Enron Corp. 540,625
PUBLISHING/PRINTING 3.40%
-------------------
14,000 Belo A.H. Corp. Series A 341,250
REAL ESTATE 4.21%
-----------
13,000 Simon Property Group, Inc. 422,500
12
<PAGE>
LANCASTER FUNDS
SCHEDULE OF INVESTMENTS (CONTINUED)
CAPITAL BUILDER FUND
PERCENT
OF NET MARKET
SHARES COMMON STOCK ASSETS VALUE
------ ------------ ------ -----
RENTAL 2.26%
------
10,000 Aaron Rents, Inc. $200,000
1,500 Aaron Rents, Inc.- Class A 27,188
------
227,188
RESTURANT/FOOD SERVICE 4.46%
----------------------
6,500 McDonald's Corp. 448,500
RETAIL STORE 3.67%
------------
5,000 Payless Shoesource, Inc.* 368,438
UTILITIES-ELECTRIC 1.50%
------------------
5,000 CalEnergy Co., Inc.* 150,312
-------
TOTAL COMMON STOCK 9,300,408
CLOSED-END MANAGEMENT COMPANY 4.76%
-----------------------------
24,293 Global Health Sciences Fund 478,285
-------
Total Investment in Securities (Cost $6,718,829) 97.35% $9,778,693
Cash Equivalents 0.20% 20,263
Other Assets, less Liabilities 2.45% 246,807
----- -----------
NET ASSETS 100.00% $10,045,763
======= ===========
*Indicates non income-producing security.
13
<PAGE>
LANCASTER FUNDS
SCHEDULE OF INVESTMENTS
JUNE 30, 1998
CONVERTIBLE FUND
PRINCIPAL MARKET
AMOUNT CONVERTIBLE DEBENTURES 61.62% VALUE
------ ---------------------- ------ -----
$90,000 Automatic Data Processing 0% 2/20/12 $82,913
35,000 Alza Corp. 5% 5/1/06 44,275
60,000 Bankatlantic BNC 5.625% 12/01/07 65,625
65,000 Baker Hughes, Inc. 0% 5/5/08 47,613
105,000 Clear Channel Communictions, Inc. 2.625% 4/01/03 112,613
55,000 Seacor Holdings 5.375% 11/15/06 61,256
170,000 Costco Co. 0% 8/19/17 130,263
60,000 CUC International 3% 2/15/02 58,425
65,000 Athena Neurosciences, Inc. 4.75% 11/15/04 75,156
55,000 Family Golf Centers 5.75% 10/15/04 67,031
95,000 Fidelity National Financial 0% 2/15/09 95,356
45,000 Hilton Hotels, Inc. 5% 5/15/06 47,363
80,000 Interpublic Group 1.8% 9/16/04 74,800
160,000 Jacor Comm, Inc. 0% 2/09/18 70,200
60,000 Kellstrom Industries 5.75% 10/15/02 71,100
57,000 Loews Corp. 3.125% 9/15/07 52,654
65,000 Marriot International, Inc. 0% 3/25/11 42,250
65,000 Marriot International, Inc. 0% 3/25/11 42,088
85,000 Motorola, Inc. 0% 9/27/13 62,156
60,000 Mascotech, Inc. 4.5% 12/15/03 55,875
30,000 Mail-Well, Inc. 5% 11/01/02 39,338
50,000 National Data Corp. 5% 11/1/03 51,313
140,000 Office Depot, Inc. 0% 11/01/08 108,325
90,000 Omnicom Group 4.25% 1/06/13 108,450
70,000 Rite Aid Corp. 5.25% 9/15/02 86,275
50,000 Rouse Corp. 5.75% 7/23/02 56,750
95,000 RPM, Inc. 0% 9/30/12 50,469
60,000 System & Company 5% 10/15/04 73,575
50,000 Thermo FiberTek 4.5% 7/15/04 50,688
70,000 Thermo Europe 4.25% 1/1/03 74,025
140,000 USF&G, Inc. 0% 3/3/09 101,850
270,000 Whole Foods Market 0% 3/2/18 112,050
-------
TOTAL CONVERTIBLE DEBENTURES $2,272,120
14
<PAGE>
LANCASTER FUNDS
SCHEDULE OF INVESTMENTS (CONTINUED)
CONVERTIBLE FUND
PERCENT
OF NET MARKET
SHARES COMMON STOCK 12.63% ASSETS VALUE
------ ------------------- ------ -----
BUILDING MATERIALS/CONS 1.94%
-----------------------
1,182 Masco Corp. $71,511
FINANCIAL SERVICES 3.42%
------------------
1,625 Lehman Brothers Holdings, Inc. 126,039
MEDICAL SUPPLIES/SERVICES 2.63%
-------------------------
830 Biogen, Inc.* 40,670
1,900 Mallinckrodt, Inc. 56,406
------
97,076
PUBLISHING/PRINTING 1.16%
-------------------
600 Gannett Co. 42,638
RETAIL STORE 3.48%
------------
3,554 Best Buy Co., Inc.* 128,388
PREFERRED STOCK 24.42%
AUTO/TRUCK/PARTS 2.53%
----------------
500 Dura Auto Systems 5% Conv Pfd 12,688
1,900 Elsag Bailey Pr Auto 5.5% Conv Pfd 80,513
------
93,201
FINANCIAL SERVICES 9.54%
------------------
1,300 AES Trust II Conv Pfd 73,775
720 Finova Finance Trust 5.5% Conv Pfd 56,520
1,025 Life RE Capital Trust II 6.0% Conv Pfd 78,156
3,000 National Australia Bank 7.875% Conv Pfd 86,063
1,000 Vorondo Realty Trust 6.5% Conv Pfd 57,375
------
351,889
15
<PAGE>
LANCASTER FUNDS
SCHEDULE OF INVESTMENTS (CONTINUED)
CONVERTIBLE FUND
PERCENT
OF NET MARKET
SHARES PREFERRED STOCK (CONT'D) ASSETS VALUE
--------- ---------------------------- ---------- ------
INDUSTRIAL SERVICES 10.43%
-------------------
2,985 Beazer Homes USA $102,609
1,300 Premier Parks Inc. 7.5% Conv Pfd 82,550
1,100 QualComm Financial Trust 5.75% Conv Pfd 52,800
920 Royal Caribbean Cruises 7.25% Conv Pfd 115,920
975 Security Capital Industry 7.0% Conv Pfd 30,586
------
384,465
INSURANCE 1.92%
---------
2,500 Royal Group Tech-Decs 70,625
------
Total Investment in Securities (Cost $3,246,261) 98.67% $3,637,952
Cash Equivalents 0.91% 33,711
Other Assets, less Liabilities 0.42% 15,594
----- ------
NET ASSETS 100.00% $3,687,257
======= =========
* Indicates non income-producing security.
16
<PAGE>
LANCASTER FUNDS
SCHEDULE OF INVESTMENTS
JUNE 30, 1998
CRESTONE SMALL CAP FUND
PERCENT
OF NET MARKET
SHARES COMMON STOCK 76.32% ASSETS VALUE
------ ------------------- ------ -----
AEROSPACE/DEFENSE 0.42%
-----------------
1,700 Orbital Sciences Corp.* $63,538
AUTO/TRUCK/PARTS 4.48%
----------------
9,700 Keystone Automotive Industries, Inc.* 224,313
10,200 Lithia Motors, Inc.* 150,450
8,035 Leasing Solutions, Inc.* 231,006
4,800 OEA, Inc. 76,800
------
682,569
CHEMICALS 0.01%
---------
300 Hauser, Inc.* 1,744
COMMERCIAL SERVICES 1.33%
-------------------
8,025 AC Neilson Corp.* 202,631
COMPUTER RELATED 14.78%
----------------
28,300 Accelr8 Technology Corp.* 346,675
6,430 Computer Horizions* 238,312
5,150 Ciber, Inc.* 195,700
3,960 Mapics, Inc.* 77,963
8,100 Mecklermedia Corp.* 181,238
4,600 Mercury Interact Corp.* 205,275
3,545 Quadramed Corp.* 96,823
16,300 SEEC, Inc.* 177,263
8,000 SPR, Inc* 249,000
7,400 Sykes Enterprises, Inc.* 148,463
17,010 Tava Tech, Inc.* 167,974
4,950 Computer Task Group, Inc. 165,825
-------
2,250,511
17
<PAGE>
LANCASTER FUNDS
SCHEDULE OF INVESTMENTS (CONTINUED)
CRESTONE SMALL CAP FUND
PERCENT
OF NET MARKET
SHARES COMMON STOCK ASSETS VALUE
---------- ------------------ -------- --------
COSMETICS/PERSONAL CARE 1.68%
-----------------------
7,150 Windmere-Durable Holdings, Inc.* $256,059
DISTRIBUTION/WHOLESALE 2.71%
----------------------
12,100 CHS Electron, Inc.* 216,288
8,000 SCP Pool Corp.* 196,000
-------
412,288
ELECTRONICS 2.75%
-----------
15,000 Berringer Technology, Inc.* 141,563
9,000 EFTC Corp.* 117,000
15,200 Faro Technology, Inc.* 160,550
-------
419,113
ENVIRONMENTAL CONTROL 1.37%
---------------------
8,593 Tetra Tech, Inc.* 208,380
FINANCIAL SERVICES 11.05%
------------------
9,000 American Capital Strategies Ltd. 205,875
5,785 Downey Financial Concepts Corp. 189,097
10,100 Franchise Mortgage Acceptance Co.* 263,231
9,000 First Sierra Financial, Inc.* 274,500
3,600 Imperial Credit Industries, Inc.* 84,600
3,685 People's Bank 127,593
14,050 Medallion Financial Corp. 386,375
4,540 Webster Finance Corp. 150,955
-------
1,682,226
FOOD/BEVERAGE/TOBACCO 1.48%
---------------------
1,980 Celestial Season, Inc.* 98,010
6,850 Fresh America Corp.* 126,725
-------
224,735
FOOD PROCESSING 0.96%
---------------
5,000 Michael Foods, Inc. 146,875
18
<PAGE>
LANCASTER FUNDS
SCHEDULE OF INVESTMENTS (CONTINUED)
CRESTONE SMALL CAP FUND
PERCENT
OF NET MARKET
SHARES COMMON STOCK CONT'D ASSETS VALUE
---------- ------------------ -------- --------
INVESTMENT COMPANIES 1.11%
--------------------
7,500 Consolidated Capital Corp.* $168,633
IRON/STEEL 1.33%
----------
6,700 Quanex Corp. 203,094
MANUFACTURING 1.61%
-------------
10,800 Rayovac Corp.* 245,025
MEDICAL SUPPLIES/SERVICES 4.44%
-------------------------
5,265 Access Health, Inc.* 134,258
6,685 Lifecore Biomedical, Inc.* 110,303
4,600 Maxxim Medical, Inc.* 133,400
7,600 Specialty Care Network, Inc.* 51,300
8,600 Stericycle, Inc.* 124,700
3,375 Trigon Healthcare, Inc.* 122,133
-------
676,094
OIL-FIELD SERVICES 1.11%
------------------
6,000 Stolt Comex Seaway S.A. ADR* 116,250
3,000 Stolt Comex Seaway Class A ADR 52,500
------
168,750
OIL COMPANY EXPLORATION/PRODUCTION 2.51%
----------------------------------
4,065 Basin Exploration, Inc.* 71,646
11,425 EEX Corp.* 107,109
10,200 Snyder Oil Company 203,363
-------
382,118
OIL/GAS DRILLING 1.42%
----------------
3,000 Atwood Oceanics, Inc.* 119,438
6,025 Marine Drilling Co.* 96,400
------
215,838
PACKAGING/CONTAINER 1.51%
-------------------
9,860 Ivex Packaging Corp.* 229,245
19
<PAGE>
LANCASTER FUNDS
SCHEDULE OF INVESTMENTS (CONTINUED)
CRESTONE SMALL CAP FUND
PERCENT
OF NET MARKET
SHARES COMMON STOCK CONT'D ASSETS VALUE
---------- ------------------ -------- --------
PUBLISHING/PRINTING 2.05%
-------------------
8,300 Mail-Well, Inc.* $180,006
3,425 Valassis, Inc.* 132,077
-------
312,083
REAL ESTATE 0.68%
-----------
7,800 Sunstone Hotel Investors, Inc. 103,838
RESTURANT/FOOD SERVICE 2.93%
----------------------
1,880 Showbiz Pizza Time, Inc.* 75,788
11,000 Rainforest Cafe, Inc.* 152,625
12,900 Foodmaker, Inc* 217,688
-------
446,101
RETAIL/APPAREL 3.16%
--------------
2,800 The Dress Barn, Inc.* 69,650
5,900 Oshkosh B'Gosh, Inc. 262,550
5,100 Stein Mart, Inc.* 68,850
1,760 Stage Stores, Inc.* 79,640
------
480,690
RETAIL STORE 3.65%
------------
10,300 Funco, Inc.* 145,488
10,800 Guitar Center, Inc.* 325,350
2,800 Wild Oats Markets, Inc.* 85,050
------
555,888
STEEL PIPE/TUBE 0.98%
---------------
5,750 The Shaw Group, Inc.* 149,500
TELECOMMUNICATIONS 2.93%
------------------
7,240 Comsat Corp. 204,983
7,135 Dycom Industries, Inc.* 240,806
-------
445,789
20
<PAGE>
LANCASTER FUNDS
SCHEDULE OF INVESTMENTS (CONTINUED)
CRESTONE SMALL CAP FUND
PERCENT
OF NET MARKET
SHARES COMMON STOCK CONT'D ASSETS VALUE
----------- ----------------------------- -------- --------
TRANSPORTATION 1.88%
--------------
7,700 Covenant Transport, Inc.* $150,150
12,000 Jevic Transportation* 136,500
-------
286,650
TOTAL COMMON STOCK $11,620,005
PRINCIPAL
AMOUNT SHORT TERM GOVERNMENT NOTE 19.65%
------ --------------------------
$3,000,000 Federal Home Loan 5.39% Due 7/20/98 2,991,379
---------
Total Investment in Securities (Cost $13,195,456) 95.97% $14,611,384
Cash Equivalents 4.44% 676,111
Other Assets, less Liabilities (0.41%) (63,708)
------- --------
NET ASSETS 100.00% $15,223,787
======= ===========
*Indicates non income-producing security.
21
<PAGE>
LANCASTER FUNDS
SCHEDULE OF INVESTMENTS
JUNE 30,1998
GOVERNMENT\QUALITY BOND FUND
PERCENT
PRINCIPAL OF NET MARKET
AMOUNT U.S. GOVERNMENT SECURITIES ASSETS VALUE
- ----------- ------------------------------- ---------- --------
$314 Federal National Mtg. Assn. 6% Due 10/1/99 52.37% $314
134,708 Government National Mtg. Assn. 7.5% Due 1/15/24 138,371
99,525 Government National Mtg. Assn. 11.5% Due 10/15/10 111,811
40,110 Government National Mtg. Assn. 9.5% Due 9/15/21 43,307
48,002 Government National Mtg. Assn. 7.5% Due 5/15/23 49,308
9,471 Government National Mtg. Assn. 9.5% Due 9/15/19 10,227
2,545 Government National Mtg. Assn. 10% Due 5/15/19 2,780
7,013 Government National Mtg. Assn. 10% Due 5/15/20 7,658
99,647 Government National Mtg. Assn. 10% Due 12/15/18 108,803
-------
Total U.S. Government Securities 472,579
TREASURY BONDS 14.41%
100,000 U.S.Treasury Bond 10.75% Due 8/15/05 130,078
CORPORATE BONDS 24.23%
100,000 Bankamerica Corporation 8.375% Due 3/15/02 107,557
100,000 Banc One Corporation 8.74% Due 9/15/03 111,217
-------
218,774
-------
Total Investment in Securities (Cost $790,935) 91.01% $821,431
Cash Equivalents 7.68% 69,167
Other Assets, less Liabilities 1.31% 11,833
----- ------
NET ASSETS 100.00% $902,431
======= ========
22
<PAGE>
<TABLE>
<CAPTION>
LANCASTER FUNDS
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998
CAPITAL CRESTONE GOVERNMENT/
BUILDER CONVERTIBLE SMALL CAP QUALITY
ASSETS: FUND FUND FUND BOND FUND
------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Investments in securities, at market value
(cost $6,718,829, $3,246,261, $13,195,456 and
$790,935, respectively) $9,778,693 3,637,952 14,611,384 821,431
Cash equivalents 20,263 33,711 676,111 69,167
Accrued interest and dividends receivable 5,274 20,552 11,906 12,813
Receivable for investment securities sold 255,097 - 161,694 -
Receivable for fund shares sold - - 6,465 -
Organizational costs, net of
accumulated amortization 2,250 - - -
------ ------- -------- -------
Total assets 10,061,577 3,692,215 15,467,560 903,411
----------- ---------- ----------- -------
LIABILITIES:
Accrued expenses, including investment
management and distribution expense payable to
adviser, administrator and distributor
(note 3) 15,814 4,958 18,504 980
Payable for securities purchased - - 224,071 -
Payable for fund shares redeemed - - 1,198 -
-- -- ------ -
Total liabilities 15,814 4,958 243,773 980
------- ------ -------- ---
NET ASSETS APPLICABLE TO
OUTSTANDING CAPITAL STOCK 10,045,763 3,687,257 15,223,787 902,431
=========== ========== =========== =======
NET ASSETS ARE REPRESENTED BY:
Capital stock outstanding, at par (note 5) $733 237 1,088 88
Additional paid-in capital 6,467,060 2,830,891 13,704,433 1,098,421
Accumulated undistributed net
investment income (14,471) 613 (140,493) (57)
Accumulated undistributed net realized
gain (loss) on investments 532,577 463,825 242,831 (226,517)
Unrealized appreciation (note 4) 3,059,864 391,691 1,415,928 30,496
---------- -------- ---------- ------
Total net assets applicable
to shares outstanding $10,045,763 3,687,257 15,223,787 902,431
============ ========== =========== =======
SHARES OUTSTANDING AND NET ASSET VALUE PER SHARE
Investor shares of capital stock outstanding 687,459 221,213 437,569 83,841
Net asset value per share- Investor Shares $13.71 $15.53 $13.91 $10.29
====== ====== ====== ======
Select shares of capital stock outstanding 45,229 16,268 650,461 3,836
Net asset value per share- Select Shares $13.73 $15.53 $14.05 $10.30
====== ====== ====== ======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
LANCASTER FUNDS
STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1998
Capital Crestone Government/
Builder Convertible Small Cap Quality
Fund Fund Fund Bond Fund
------------- ----------- ---------- ----------
INVESTMENT INCOME:
<S> <C> <C> <C> <C>
Dividends $140,364 $42,830 $66,041 $ -
Interest 14,815 73,125 93,359 86,134
------- ------- ------- ------
Total investment income 155,179 115,955 159,400 86,134
-------- -------- -------- ------
EXPENSES (NOTE 3):
Investment advisory fees 75,522 25,183 156,788 8,175
Administration fees 25,174 8,394 52,263 3,406
Distribution expenses- Investor Class 47,833 15,860 38,030 3,277
Custodial fees 4,379 3,152 26,811 1,931
Auditing and tax accounting fees 3,629 2,913 5,292 3,145
Securities pricing 2,669 4,840 7,133 1,592
Other operating expenses 9,024 2,851 13,576 807
------ ------ ------- ---
Total expenses 168,230 63,193 299,893 22,333
-------- ------- -------- ------
Net investment income (loss) (13,051) 52,762 (140,493) 63,801
======== ======= ========= ======
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 4):
Net realized gain 1,558,675 622,372 2,982,911 36,818
---------- -------- ---------- ------
Net unrealized appreciation
Beginning of period 3,058,541 401,590 2,567,511 25,352
End of period 3,059,864 391,691 1,415,928 30,496
---------- -------- ---------- ------
Net unrealized appreciation
(depreciation) 1,323 (9,899) (1,151,583) 5,144
------ ------- ----------- -----
Net realized and unrealized gain
on investments 1,559,998 612,473 1,831,328 41,962
---------- -------- ---------- ------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $1,546,947 $665,235 $1,690,835 $105,763
========== ======== ========== ========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
LANCASTER FUNDS
STATEMENT OF CHANGES IN NET ASSETS
YEARS ENDED JUNE 30, 1998 AND 1997
CAPITAL BUILDER FUND CONVERTIBLE FUND
------------------------ ---------------------------
1998 1997 1998 1997
---- ---- ---- ----
OPERATIONS:
<S> <C> <C> <C> <C>
Net investment income (loss) ($13,051) $95,780 $52,762 $46,320
Net realized gain on investments 1,558,675 459,954 622,372 112,462
Unrealized appreciation (depreciation) 1,323 1,377,300 (9,899) 294,650
------ ---------- ------- -------
Net increase in net assets
resulting from operations 1,546,947 1,933,034 665,235 453,432
---------- ---------- -------- -------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income - Investor Shares - 96,553 46,569 47,520
Net investment income - Select Shares 2,043 788 5,672 382
Net realized gain- Investor Shares 1,281,467 637,685 216,835 268,230
Net realized gain- Select Shares 85,799 - 13,925 13
------- -- ------- --
Total Distributions 1,369,309 735,026 283,001 316,145
---------- -------- -------- -------
CAPITAL SHARE TRANSACTIONS: (NOTE 5)
Proceeds from sales 992,560 1,882,626 401,748 807,510
Payment for redemptions (2,721,086) (2,069,290) (239,162) (200,965)
Reinvestment of net investment
income and net realized gain
distributions at net asset value 1,330,217 726,551 281,651 315,128
---------- -------- -------- -------
Total increase (decrease) from
capital share transactions (398,309) 539,887 444,237 921,673
--------- -------- -------- -------
Total increase (decrease)
in net assets (220,671) 1,737,895 826,471 1,058,960
NET ASSETS:
Beginning of period 10,266,434 8,528,539 2,860,786 1,801,826
----------- ---------- ---------- ---------
End of period $10,045,763 $10,266,434 $3,687,257 $2,860,786
============ ============ =========== ==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
LANCASTER FUNDS
STATEMENT OF CHANGES IN NET ASSETS
YEARS ENDED JUNE 30, 1998 AND 1997
GOVERNMENT/QUALITY
CRESTONE SMALL CAP BOND
-------------------------- -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
OPERATIONS:
<S> <C> <C> <C> <C>
Net investment income (loss) ($140,493) ($142,936) $63,801 $139,678
Net realized gain (loss) on
investments 2,982,911 1,699,641 36,818 (38,250)
Unrealized appreciation
(depreciation) (1,151,583) 1,311,326 5,144 71,258
----------- ---------- ------ ------
Net increase in net assets
resulting from operations 1,690,835 2,868,031 105,763 172,686
---------- ---------- -------- -------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income- Investor Shares - - 60,790 143,641
Net investment income- Select Shares - - 2,849 1,142
Net realized gain- Investor Shares 1,492,781 779,224 - -
Net realized gain- Select Shares 2,615,367 969,425 - -
---------- -------- ----- ------
Total Distributions 4,108,148 1,748,649 63,639 144,783
---------- ---------- ------- -------
CAPITAL SHARE TRANSACTIONS: (NOTE 5)
Proceeds from sales 3,502,885 16,118,563 35,817 228,936
Payment for redemptions (10,290,099) (14,811,156) (1,720,862) (1,423,269)
Reinvestment of net investment
income and net realized gain
distributions at net asset value 3,969,950 1,704,197 58,197 128,629
---------- ---------- ------- -------
Total increase (decrease) from
capital share transactions (2,817,264) 3,011,604 (1,626,848) (1,065,704)
----------- ---------- ----------- -----------
Total increase (decrease)
in net assets (5,234,577) 4,130,986 (1,584,724) (1,037,801)
NET ASSETS:
Beginning of period 20,458,364 16,327,378 2,487,155 3,524,956
----------- ----------- ---------- ---------
End of period $15,223,787 $20,458,364 $902,431 $2,487,155
============ ============ ========= ==========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
26
<PAGE>
LANCASTER FUNDS
FINANCIAL HIGHLIGHTS
YEARS ENDED JUNE 30, 1998 AND 1997 AND THE
PERIOD FROM AUGUST 24, 1995 (COMMENCEMENT OF OPERATIONS) TO JUNE 30, 1996
CAPITAL BUILDER FUND - INVESTOR SHARES (A)
PERIOD ENDED
1998 1997 JUNE 30, 1996
NET ASSET VALUE: ------- ----- -------------
Beginning of period $13.63 $11.98 $10.00
------ ------- ------
Income from investment operations:
Net investment income (loss) (0.02) 0.13 0.04
Net realized and unrealized gain
on investments 2.10 2.53 1.98
---- ---- ----
Total income from
investment operations 2.08 2.66 2.02
---- ---- ----
Less Distributions:
Dividends from net investment income (0.01) (0.13) (0.04)
Dividends from capital gains (1.99) (0.88) 0.00
------ ------ ----
Total Distributions (2.00) (1.01) (0.04)
------ ------ ------
End of period $13.71 $13.63 $11.98
======= ======= ======
TOTAL RETURN: 16.68% 23.52% 24.14%(b)
====== ====== ======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $9,424,666 $9,994,424 $8,528,539
Ratio of expenses to average net assets 1.70% 1.84% 1.82%(b)
Ratio of net income to average net assets (0.15%) 1.06% 0.42%(b)
Portfolio turnover rate 26.29% 22.80% 31.35%
(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.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
27
<PAGE>
LANCASTER FUNDS
FINANCIAL HIGHLIGHTS
YEAR ENDED JUNE 30, 1998 AND THE PERIOD FROM
OCTOBER 1, 1996 ( COMMENCEMENT OF CLASS SHARES) TO JUNE 30, 1997
CAPITAL BUILDER FUND - SELECT SHARES (A)
PERIOD ENDED
1998 JUNE 30, 1997
---- -----------------
NET ASSET VALUE:
Beginning of period $13.63 $12.47
Income from investment operations: ----- -----
Net investment income 0.05 0.00
Net realized and unrealized gain
on investments 2.10 1.23
---- ----
Total income from
investment operations 2.15 1.23
---- ----
Less Distributions:
Distributions from net investment income (0.05) (0.07)
Distributions from capital gains (2.00) (0.00)
------ ------
Total Distributions (2.05) (0.07)
------ ------
End of period (b) $13.73(b) $13.63(b)
TOTAL RETURN: (B) 17.21%(b) 9.62%(b)(c)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $621,097 $272,010
Ratio of expenses to average net assets 1.20% 0.96%(d)
Ratio of net income to average net assets 0.35% 0.81%(d)
Portfolio turnover rate 26.29% 22.80%
(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.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
28
<PAGE>
<TABLE>
<CAPTION>
LANCASTER FUNDS
FINANCIAL HIGHLIGHTS
YEARS ENDED JUNE 30, 1998, 1997, 1996, 1995, AND 1994
CONVERTIBLE FUND - INVESTOR SHARES (A)
--------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
NET ASSET VALUE:
<S> <C> <C> <C> <C> <C>
Beginning of period $13.82 $13.20 $11.97 $11.69 $12.58
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income 0.23 0.26 0.33 0.30 0.29
Net realized and unrealized gain
(loss) on investments 2.72 2.10 1.73 1.01 (0.53)
---- ---- ----- ----- ------
Total income (loss) from
investment operations 2.95 2.36 2.06 1.31 (0.24)
---- ---- ---- ---- ------
Less Distributions:
Dividends from net
investment income (0.22) (0.26) (0.33) (0.30) (0.29)
Dividends from capital gains (1.02) (1.48) (0.50) (0.73) (0.36)
------ ------ ------ ------ ------
Total Distributions (1.24) (1.74) (0.83) (1.03) (0.65)
------ ------ ------ ------ ------
End of period $15.53 $13.82 $13.20 $11.97 $11.69
======= ======= ======= ======= ======
TOTAL RETURN: 22.60% 19.51% 17.60% 14.09% (2.26%)
====== ====== ====== ====== =======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $3,434,609 $2,860,786 $1,801,826 $1,764,967 $2,708,104
Ratio of expenses to average
net assets 1.91% 1.93% 1.93% 2.25% 2.06%
Ratio of net income to average
net assets 1.54% 1.95% 2.53% 2.58% 2.27%
Portfolio turnover rate 90.62% 100.15% 79.30% 51.31% 65.76%
(A) ALL CAPITAL SHARES ISSUED AND OUTSTANDING AS OF SEPTEMBER 30, 1996 WERE
RECLASSIFIED AS INVESTOR SHARES.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
29
<PAGE>
LANCASTER FUNDS
FINANCIAL HIGHLIGHTS
YEAR ENDED JUNE 30, 1998 AND THE PERIOD
FROM JUNE 16, 1997 (COMMENCEMENT OF
CLASS SHARES) TO JUNE 30, 1997
CONVERTIBLE FUND - SELECT SHARES (A)
1998 1997
---- ----
NET ASSET VALUE:
Beginning of period $13.83 $13.75
------ ------
Income from investment operations:
Net investment income 0.30 0.01
Net realized and unrealized gain
on investments 2.77 0.17
---- ----
Total income from
investment operations 3.07 0.18
---- ----
Less Distributions:
Dividends from net
investment income (0.45) (0.10)
------ ------
Dividends from capital gains (0.92) 0.00
------ ----
Total Distributions (1.37) (0.10)
------ ------
End of period $15.53(b) $13.83(b)
TOTAL RETURN: 23.06%(b) 1.25%(b)(c)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $252,648 $57,682
Ratio of expenses to average net assets 1.41% 1.41%(d)
Ratio of net income to average net assets 2.04% 3.11%(d)
Portfolio turnover rate 90.62% 22.80%
(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.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
30
<PAGE>
<TABLE>
<CAPTION>
LANCASTER FUNDS
FINANCIAL HIGHLIGHTS
YEARS ENDED JUNE 30, 1998, 1997, 1996, 1995, AND 1994
CRESTONE SMALL CAP FUND - INVESTOR SHARES (A)
-------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
NET ASSET VALUE:
<S> <C> <C> <C> <C> <C>
Beginning of period $16.14 $15.27 $13.49 $11.59 $11.77
------ ------ ------ ------ ------
Income from investment operations:
Net investment loss (0.15) (0.12) (0.10) (0.08) (0.07)
Net realized and unrealized gain
on investments 1.37 2.45 2.91 2.34 0.20
----- ----- ----- ----- ----
Total income from investment operations 1.22 2.33 2.81 2.26 0.13
----- ----- ----- ----- ----
Distributions from capital gains (3.45) (1.46) (1.03) (0.36) (0.31)
------ ------ ------ ------ ------
End of period $13.91 $16.14 $15.27 $13.49 $11.59
====== ====== ====== ====== ======
TOTAL RETURN: 7.83% 15.93% 22.33% 20.33% 1.21%
===== ====== ====== ====== =====
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $6,085,826 $7,839,528 $16,327,378 $9,589,788 $7,218,944
Ratio of expenses to average net assets 1.75% 1.87% 1.75% 1.93% 1.91%
Ratio of net loss to average net assets (.99%) (1.02%) (0.67%) (0.60%) (0.60%)
Portfolio turnover rate 164.41% 226.30% 150.05% 86.50% 75.23%
(A) ALL CAPITAL SHARES ISSUED AND OUTSTANDING AS OF SEPTEMBER 30, 1996 WERE
RECLASSIFIED AS INVESTOR SHARES.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
31
<PAGE>
LANCASTER FUNDS
FINANCIAL HIGHLIGHTS
YEAR ENDED JUNE 30, 1998 AND THE PERIOD
FROM JUNE 16, 1997 (COMMENCEMENT OF
CLASS SHARES) TO JUNE 30, 1997
CRESTONE SMALL CAP FUND- SELECT SHARES (A)
1998 1997
---- ----
NET ASSET VALUE:
Beginning of period $16.20 $15.44
------ ------
Income from investment operations:
Net investment loss (0.08) (0.08)
------ ------
Net realized and unrealized gain
on investments 1.37 2.26
---- ----
Total income from
investment operations 1.29 2.18
---- ----
Distributions from capital gains (3.44) (1.42)
====== ======
End of period $14.05(b) $16.20(b)
TOTAL RETURN: 8.35%(b) 16.04%(b)(c)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $9,137,961 $12,618,836
Ratio of expenses to average net assets 1.25% 1.18%(d)
Ratio of net income to average net assets (0.49%) (0.48%)(d))
Portfolio turnover rate 164.41% 226.30%
(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.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
32
<PAGE>
<TABLE>
<CAPTION>
LANCASTER FUNDS
FINANCIAL HIGHLIGHTS
YEARS ENDED JUNE 30, 1998, 1997, 1996, 1995, AND 1994
GOVERNMENT/QUALITY BOND FUND - INVESTOR SHARES (A)
----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
NET ASSET VALUE:
<S> <C> <C> <C> <C> <C>
Beginning of period $10.19 $10.15 $10.43 $10.21 $11.17
------ ------ ------ ------ ------
Income (loss) from investment operations:
Net investment income 0.49 0.53 0.55 0.60 0.54
Net realized and unrealized gain
(loss) on investments 0.10 0.06 (0.28) 0.22 (0.75)
----- ----- ------ ----- ------
Total income (loss) from
investment operations 0.59 0.59 0.27 0.82 (0.21)
----- ----- ----- ----- ------
Less Distributions:
Dividends from net
investment income (0.49) (0.55) (0.55) (0.60) (0.54)
Distribution from capital gains 0.00 0.00 0.00 0.00 (0.21)
Total Distributions (0.49) (0.55) (0.55) (0.60) (0.75)
------ ------ ------ ------ ------
End of period $10.29 $10.19 $10.15 $10.43 $10.21
====== ====== ====== ====== ======
TOTAL RETURN: 7.26% 6.37% 2.83% 9.42% (2.00%)
===== ===== ===== ===== =======
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $862,934 $2,442,757 $3,524,956 $4,693,924 $8,832,147
Ratio of expenses to average net assets 1.65% 1.49% 1.42% 1.47% 1.37%
Ratio of net income to average
net assets 4.69% 5.13% 5.21% 5.86% 4.94%
Portfolio turnover rate 0.00% 8.70% 36.11% 9.33% 218.11%
(a) ALL CAPITAL SHARES ISSUED AND OUTSTANDING AS OF SEPTEMBER 30, 1996 WERE
RECLASSIFIED AS INVESTOR SHARES.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
33
<PAGE>
LANCASTER FUNDS
FINANCIAL HIGHLIGHTS
YEAR ENDED JUNE 30, 1998 AND THE PERIOD
FROM JUNE 16, 1997 (COMMENCEMENT OF CLASS
SHARES) TO JUNE 30, 1997
GOVERNMENT/QUALITY BOND FUND
SELECT SHARES (A)
1998 1997
---- ----
NET ASSET VALUE:
Beginning of period $10.19 $10.49
------ ------
Income from investment operations:
Net investment income 0.51 0.01
----- ----
Net realized and unrealized gain
on investments 0.24 (0.04)
---- ------
Total income from
investment operations 0.75 (0.03)
---- ------
Distributions from net investment income (0.64) (0.27)
End of period $10.(b) $10.19(b)
TOTAL RETURN: 7.(b) (0.30)(b)(c)
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $39,497 $44,398
Ratio of expenses to average net assets 1.40% 0.96%(d)
Ratio of net income to average net assets 4.94% 4.52%(d)
Portfolio turnover rate 0.00% 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.
34
<PAGE>
LANCASTER FUNDS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
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.
35
<PAGE>
LANCASTER FUNDS
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
At June 30, 1998, the cost of investment securities is identical for
financial reporting and income tax purposes.
The Capital Builder and Convertible Funds may write covered call put
options or purchase exchange-traded call put options.
At June 30, 1998, the funds authorized to write or purchase option
contracts had no options outstanding nor were any written or purchased
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.
FEDERAL INCOME TAXES
It is the policy of each fund to comply with requirements of the Internal
Revenue Code (the 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 $273,000 available for federal
income tax purposes at June 30, 1998. The loss begins expiring in 2004. For
purposes of Code Section 852 (b)(3)(C), the Crestone Small Cap Fund hereby
designates $1,019,234 as long-term capital gain distributions paid during
the taxable year.
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.
36
<PAGE>
LANCASTER FUNDS
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DISTRIBUTIONS TO SHAREHOLDERS
Dividends to shareholders are recorded on the ex-dividend date.
CASH EQUIVALENTS
Cash equivalents consist of money market funds which declare dividends
daily. As of June 30, 1998, the average yield on such funds was
approximately 5.00%.
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.
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 $265,668, $89,237, and
$105,000, respectively, for such services. Of the amount paid to the
Distributor, $100,901 was retained by them for sales of the Trust's shares
made by their agents and brokers. The distributor also received $4,247 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.
37
<PAGE>
LANCASTER FUNDS
NOTES TO FINANCIAL STATEMENTS
3. RELATED PARTY TRANSACTIONS (CONTINUED)
At June 30, 1998, 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 $6,044 $2,015 $3,787 $11,846
Convertible Fund 2,236 745 1,390 4,371
Crestone Small Cap Fund 9,436 3,145 2,498 15,079
Government/Quality
Bond Fund 450 188 179 817
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, 1998, no expense reimbursement was
required.
4. SECURITIES TRANSACTIONS
In addition to the amounts paid by the funds under the adviser,
administrative and distribution plans, the funds 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
$20,362 for their brokerage services during the year ended June 30, 1998.
Purchases of securities and proceeds from sales of securities during the
year ended June 30, 1998, were as follows for each fund:
Purchases of Proceeds
Securities from Sales
Capital Builder Fund $2,567,176 $3,843,755
Convertible Fund 3,563,307 3,360,738
Small Cap Fund 36,535,709 43,659,734
Government/Quality Bond Fund - 1,409,657
38
<PAGE>
LANCASTER FUNDS
NOTES TO FINANCIAL STATEMENTS
4. SECURITIES TRANSACTIONS (CONTINUED)
At June 30, 1998, 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 $3,344,013 $284,149
Convertible Fund 470,012 78,321
Small Cap Fund 1,736,701 320,773
Government/Quality Bond Fund 31,477 981
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.
Transactions in the capital stock of each fund for the year ended June 30,
1998, were as follows:
Capital Capital
Builder Builder
Fund Fund
Investor Shares Select Shares
Transactions in shares:
Shares sold 44,704.362 28,425.329
Shares redeemed (192,128.615) (8,673.968)
Reinvested distributions 101,474.854 5,518.328
------------ -----------
Net increase (decrease) (45,949.399) 25,269.689
=============== ==========
39
<PAGE>
LANCASTER FUNDS
NOTES TO FINANCIAL STATEMENTS
5. CAPITAL SHARE TRANSACTIONS (CONTINUED)
Convertible Convertible
Fund Fund
Investor Shares Select Shares
Transactions in shares:
Shares sold 14,985.733 11,500.510
Shares redeemed (15,044.749) (826.439)
Reinvested distributions 18,552.545 1,384.201
---------- ------------
Net increase 18,493.529 12,058.272
========== ===========
Crestone Crestone
Small Cap Small Cap
Fund Fund
Investor Shares Select Shares
Transactions in shares:
Shares sold 29,151.031 190,091.149
Shares redeemed (185,335.815) (513,042.190)
Reinvested distributions 107,981.909 194,276.888
----------- -----------
Net decrease (48,202.875) (128,674.153)
============== ============
Government/ Government/
Quality Bond Quality Bond
Fund Fund
Investor Shares Select Shares
Transactions in shares:
Shares sold 2,317.133 1,147.774
Shares redeemed (163,512.358) (1,944.182)
Reinvested distributions 5,380.816 276.977
-------------- ---------
Net decrease (155,814.409) (519.431)
============ ===========
At June 30, 1998, 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 41,408.519 $567,711
Capital Builder Fund Select Shares 6,601.169 90,634
Convertible Fund Select Shares 4,249.922 66,001
Crestone Small Cap Fund Select Shares 7,539.963 105,936
Government/Quality Bond Fund Select Shares 110.708 1,140
40
<PAGE>
- --------------------------------------------------------------------------------
LANCASTER FUNDS
NEBRASKA TAX-FREE FUND
ANNUAL REPORT
JUNE 30, 1998
- --------------------------------------------------------------------------------
<PAGE>
Lancaster Funds Nebraska Tax-Free Fund
Dear Shareholder:
During the previous twelve months there were a number of events, both foreign
and domestic, which could have negatively affected our financial markets. In
addition to the economic problems which spread throughout the Far East,
including Japan, Western Europe was stagnant and Russia continues to struggle in
its transition to a market economy. On the domestic front, the executive bond
remained under siege.
As indicated by the favorable results in the financial markets, there had to be
some positive influences. The domestic economy remained vibrant, inflation was
subdued, and the budget deficit declined.
While short term interest rates were essentially unchanged for the year, rates
on the 10-year and 30-year bonds declined by approximately 100 basis points to
5.45% and 5.65% respectively as investors' concerns about inflation moderated
with the decrease in the federal deficit.
On June 30, 1998, the net asset value of the Fund was $9.95 as compared to $9.87
at the end of fiscal 1997. The total return for the year, which includes
dividends and capital changes, was 5.8%.
The monthly dividend of $.04 provides a yield of 4.8%. For a Nebraska resident
in a 31% tax bracket, this is equivalent to a yield on a taxable bond of nearly
7.5%.
Accordingly, the Nebraska Tax Free Fund provides a premium yield to taxable
securities for those investors seeking yield and preservation of capital.
Sincerely,
/S/JOHN CONLEY
John H. Conley
President August 7, 1998
1
<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 Merrill Lynch Municipal
Avg. Annual Return 06/30/98 Value
1 year 5.79% Nebraska Tax-Free $11,710.68
5 Year - Merrill Lynch Municipal $12,709.33
Inception 4.90%
Past performance is not predictive of future performance.
Average annual return does not include payment of a sales charge and assumes
reinvestment of dividends and capital gains.
Results reflect payment of a maximum sales charge of 3.9% on the
$10,000 investment with dividends and capital gains reinvested. For the period
July 12, 1993 through June 30, 1998.
2
<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, 1998, 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 four 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, 1998 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, 1998, 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 four
years in the period then ended in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
Lincoln, Nebraska
July 24, 1998
3
<PAGE>
LANCASTER FUNDS
SCHEDULE OF INVESTMENTS
JUNE 30, 1998
NEBRASKA TAX FREE FUND
PERCENT
PRINCIPAL OF NET
AMOUNT TAX-EXEMPT SECURITIES- 95.45% ASSETS VALUE
------ ----------------------------- ------ -----
EDUCATION 9.71%
$250,000 Cass County Nebraska School District No. 1 $246,675
Refunding Bond 5.0% Due 12/15/19
300,000 Nebraska Higher Education Loan Program Junior
Subordinated Bonds, Series A-6, 6.40% Due 6/1/13 324,984
100,000 Nebraska Educational Finance Authority Revenue Bonds
Series 1995 (Concordia Teacher's College)
5.90% Due 12/15/15 103,693
200,000 Nebraska Educational Finance Authority Revenue Bonds
Series 1995 (Midland Lutheran College) 6.25% Due 6/15/15 207,245
100,000 Nebraska Educational Finance Authority Revenue Bonds
Series 1994 (Dana College Project) 6.75% Due 6/1/14 111,574
200,000 Omaha School District Lease Finance
4.2% Due 5/15/01 201,068
-------
1,195,239
ELECTRICAL, WATER, SEWER 5.12%
300,000 City Of Grand Island, Sewer System Revenue Bonds
Series 1994, 6.00% Due 4/1/14 319,179
100,000 City Of Hastings, Nebraska Combined Utility Revenue Bonds
Series 1994, 6.875% Due 10/15/14 103,576
200,000 City Of Kearney, Nebraska Combined Utilities Revenue
Refunding Bonds, Series 1994, 6.10% Due 6/1/14 207,354
-------
630,109
4
<PAGE>
NEBRASKA TAX FREE FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 1998
PERCENT
PRINCIPAL OF NET
AMOUNT ASSETS VALUE
------ ------ -----
GENERAL OBLIGATION 20.79%
$50,000 Boyd County Nebraska School District No. 38 (Spencer-Naper)
General Obligation Bonds, 5.85% Due 6/15/13 $51,534
120,000 Colfax County Nebraska School District No. 2 (Schuyler)
General Obligation Bonds, Series 1993, 5.65% Due 12/15/09 120,000
150,000 Colfax County Nebraska School District No. 2 (Schuyler)
General Obligation Bonds, Series 1993, 5.75% Due 12/15/11 150,000
400,000 Dawson County Sanitary & Improvement Dist #1 Refunding
Bond, Series 1997, IBP 5.65% Due 2/1/22 421,293
200,000 Douglas County School District No. 017
(Millard Public Schools) Refunding Bonds
Series 1996A 4.65% Due 10/01/01 203,154
150,000 Douglas County School District No. 66
5.00% Due 12/1/17 146,668
150,000 Douglas County School District No. 010
(Elkhorn Public Schools) Refunding Bonds
Series 1995 6.40% Due 12/15/08 155,122
100,000 Douglas County School District No. 010
(Elkhorn Public Schools) Refunding Bonds
Series 1994 6.60% Due 12/15/10 103,645
100,000 Douglas County School District No. 010
(Elkhorn Public Schools) Refunding Bonds
Series 1994 6.75% Due 12/15/14 103,856
5
<PAGE>
NEBRASKA TAX FREE FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 1998
PERCENT
PRINCIPAL OF NET
AMOUNT GENERAL OBLIGATION (CONT'D) ASSETS VALUE
------ ----------------------------- ------ -----
$100,000 Douglas County Sanitary & Improvement District No. 257
General Obligation Refunding Bond (Ramble Ridge)
6.25% due 5/15/09 $103,471
100,000 Keith County School District No. 001
(Ogallala Public Schools) School Building Bonds
Series 1994B 6.30% Due 11/15/09 103,042
350,000 Lancaster County School District 001 (Lincoln)
Lease Purchase 4.15% Due 10/26/00 350,000
100,000 Lincoln-Lancaster County Public Building Commission
Series 1994 6.20% Due 10/15/11 106,081
100,000 City Of North Platte Various Purpose Bonds
Series 1995 6.20% Due 3/15/15 103,424
175,000 Saunders County School District 107 (Cedar Bluffs)
Public Schools 6.35% Due 7/1/14 179,003
150,000 Western Nebraska Community College Certificates
Of Participation Lease Rentals 6.55% Due 10/15/13 160,244
-------
2,560,537
HOUSING 11.33%
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 1996 Series A, 5.95% Due 3/1/27 100,000
100,000 Nebraska Investment Finance Authority Single Family Housing
Revenue Bonds 1995 Series A, 6.15% Due 3/1/09 100,000
6
<PAGE>
NEBRASKA TAX FREE FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 1998
PERCENT
PRINCIPAL OF NET
AMOUNT HOUSING (CONT'D) ASSETS VALUE
------ ----------------------------- ------ -----
$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
250,000 Nebraska Investment Finance Authority Single Family Housing
Revenue Bonds 1995 Series B, 6.40% Due 9/1/26 250,000
450,000 Nebraska Investment Finance Authority Single Family Housing
Revenue Bonds 1994 Series D-1, 7.30% Due 9/1/26 450,000
-------
1,395,000
POWER 7.28%
100,000 McCook Public Power District Electric System Revenue
And Refunding Bonds 6.75% Due 12/15/09 103,676
200,000 Municipal Energy Agency Of Nebraska Power System
Revenue Refunding Bonds 1992 Series A 6.00% Due 4/1/17 210,066
325,000 Nebraska Public Power District Electric System Revenue
Bonds Series 5.00% Due 7/1/04 321,235
150,000 Nebraska Public Power District Electric System Revenue
Bonds Series 1992 A 6.25% Due 1/1/02 161,144
100,000 Omaha Public Power District Electric System Revenue
Bonds Series 1997A 4.30% Due 2/1/00 100,699
-------
896,820
TRANSPORTATION
100,000 Omaha Nebraska Airport Authority Facilities Revenue 0.81%
-----
Refunding Bonds Series 1993 5.50% Due 1/1/13 100,024
7
<PAGE>
NEBRASKA TAX FREE FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 1998
PERCENT
PRINCIPAL OF NET
AMOUNT ASSETS VALUE
- ----------- -------- -------
HOSPITAL 20.53%
$450,000 Douglas County Hospital Authority No. 2 Revenue Bonds
Health Care Facilities (Catholic Health Care Corp.)
5.00% Due 12/15/17 $441,524
150,000 Douglas County Hospital Authority No. 2 Revenue Bonds
Health Care Facilities (Catholic Health Care Corp.)
5.10% Due 7/1/04 155,069
275,000 Douglas County Hospital Authority No. 2 Revenue Bonds
Health Care Facilities (Catholic Health Care Corp.) 279,758
5.375% Due 11/15/15
100,000 Douglas County Hospital Authority No. 2 Revenue Bonds
Health Care Facilities (Catholic Health Care Corp.) 106,925
5.85% Due 11/15/03
125,000 Douglas County Hospital Authority No. 2 Revenue Bonds
Health Care Facilities (Catholic Health Care Corp.)
6% Due 11/15/15 133,724
100,000 Douglas County Hospital Authority No. 2 Revenue Bonds
Health Care Facilities (Catholic Health Care Corp.)
6.25% Due 11/15/22 107,141
100,000 Gage County Hospital Authority No. 1 Hospital Revenue Bonds
Beatrice Community Hospital And Health Care Project
6.75% Due 10/1/07 111,872
200,000 Gage County Hospital Authority No. 1 Hospital Revenue Bonds
Beatrice Community Hospital And Health Care Project
6.75% Due 10/1/14 228,496
8
<PAGE>
NEBRASKA TAX FREE FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 1998
PERCENT
PRINCIPAL OF NET
AMOUNT HOSPITAL (CONT'D) ASSETS VALUE
- --------------- ----------------------------- ------ ------
$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 $101,785
200,000 Lancaster County Nebraska Hospital Authority Hospital
Revenue Bonds Series 1992 A (Sister's Of Charity Health Care
Systems, Inc.) 6.25% Due 5/15/12 219,424
200,000 Nebraska Investment Finance Authority State Revolving Fund
Revenue Bonds Series 1997A (Catholic Health Initiatives)
5.125% Due 12/1/17 198,845
150,000 Nebraska Investment Finance Authority Hospital Revenue
Bonds (Great Plains Regional Medical Center Project)
6.50% Due 5/15/14 165,218
200,000 Nebraska Investment Finance Authority Hospital Revenue
Bonds (Nebraska Methodist Healthcare System)
6.55% Due 3/1/99 203,684
75,000 Nebraska Investment Finance Authority Hospital Revenue
Bonds (Foundation Educational Building Fund)
7.00% Due 11/1/09 75,000
------
2,528,465
VARIOUS REVENUES 19.88%
150,000 District Energy Corporation Facility Revenue Bonds
Series 1993 (City-County Building And County Correctional
Family Project) 5.50% Due 7/1/13 153,998
50,000 Lincoln-Lancaster County Public Building Commission Tax
Supported Lease Rental Revenue Building Bonds Series 1996
6.10% Due 10/15/99 50,712
9
<PAGE>
NEBRASKA TAX FREE FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 1998
PERCENT
PRINCIPAL OF NET
AMOUNT VARIOUS REVENUES (CONT'D) ASSETS VALUE
- ------------- -------------------------- ------- -------
$250,000 City Of Lincoln Parking Revenues Bonds Series 1994 C
6.10% Due 8/15/09 $263,761
100,000 City Of Lincoln Parking Revenues Bonds Series 1994 C
6.15% Due 8/15/11 105,649
490,000 Nebraska Juvenile Services, Detention Facility Lease
Revenue Bonds, Series 1997 6.375% Due 6/1/17 539,835
100,000 Nebraska Investment Finance Authority State Revolving
Revenue Bonds, Series 1998 4.60% Due 7/01/08 99,638
100,000 Nebraska Investment Finance Authority State Revolving
Revenue Bonds, Series 1998 4.70% Due 7/01/09 99,682
100,000 Nebraska Investment Finance Authority State Revolving
Revenue Bonds, Series 1998 4.80% Due 7/01/10 99,673
100,000 Nebraska Investment Finance Authority State Revolving
Revenue Bonds, Series 1998 4.90% Due 7/01/11 99,812
100,000 Nebraska Investment Finance Authority
Revenue Bonds, Series A 5.85% Due 9/1/17 100,000
235,000 Nebraska Investment Finance Authority
Revenue Bonds, Series E 6.25% Due 9/1/28 235,000
200,000 Nebraska Public Gas Agency Gas Supply System Revenue
Bonds, Series A 5.65% Due 4/1/06 209,904
200,000 Nebraska Public Gas Agency Gas Supply System Revenue
Bonds, Series A 6.25% Due 4/1/05 213,092
10
<PAGE>
NEBRASKA TAX FREE FUND
SCHEDULE OF INVESTMENTS
JUNE 30, 1998
PERCENT
PRINCIPAL OF NET
AMOUNT VARIOUS REVENUES (CONT'D) ASSETS VALUE
- -------------- --------------------------- ------ -----
$175,000 City of Omaha Auditorium Facilities Corporation $176,534
(Omaha Civic Project) Series 1996 4.35% Due 8/15/00 2,447,290
---------
Total Investment in Securities (Cost $11,399,454) 95.45% $11,753,484
Cash Equivalents 3.36% 413,320
Other Assets, less Liabilities 1.19% 146,594
----- -------
NET ASSETS 100.00% $12,313,398
========= ============
11
<PAGE>
LANCASTER FUNDS
NEBRASKA TAX-FREE FUND
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998
ASSETS:
Investments in securities, at market value (cost $11,399,454) $11,753,484
Cash equivalents 413,320
Accrued interest and dividends receivable 154,783
--------
Total assets 12,321,587
==========
LIABILITIES:
Accrued expenses, including investment
management and distribution expense payable to
adviser, administrator and distributor (note 3) 8,189
-----
NET ASSETS APPLICABLE TO OUTSTANDING CAPITAL STOCK $12,313,398
===========
NET ASSETS ARE REPRESENTED BY:
Capital stock outstanding, at par $1,237
Additional paid-in capital 12,348,107
Accumulated undistributed net investment income 22,558
Accumulated undistributed net realized loss on investments (412,534)
Unrealized appreciation (note 4) 354,030
Total amount representing net assets applicable to --------
1,237,310 outstanding shares of $0.001 par value
common stock (50,000,000 shares authorized) $12,313,398
===========
Net asset value per share $9.95
=====
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
LANCASTER FUNDS
NEBRASKA TAX-FREE FUND
STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1998
INVESTMENT INTEREST INCOME: $598,984
-------
EXPENSES (NOTE 3):
Investment advisory fees 16,235
Administration fees 13,529
Distribution expenses 27,041
Custodial fees 4,511
Auditing and tax accounting fees 3,128
Other Operating Expense 8,804
-----
Total expenses 73,248
------
Net investment income 525,736
-------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTE 4):
Net realized gain 4,650
Net unrealized appreciation -----
Beginning of period 276,870
End of period 354,030
-------
Net unrealized appreciation 77,160
------
Net realized and unrealized gain on investments 81,810
------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $607,546
=======
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
LANCASTER FUNDS
NEBRASKA TAX-FREE FUND
STATEMENT OF CHANGES IN NET ASSETS
YEARS ENDED JUNE 30, 1998 AND 1997
YEAR ENDED YEAR ENDED
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
FROM INVESTMENT OPERATIONS:
Net investment income $525,736 $484,521
Net realized gain (loss) on investments 4,650 (30,380)
Unrealized appreciation on investments 77,160 279,032
------- -------
Net increase in net assets resulting
from operations 607,546 733,173
------- -------
DIVIDENDS PAID TO SHAREHOLDERS
FROM NET INVESTMENT INCOME: 521,287 486,874
-------- -------
CAPITAL SHARE TRANSACTIONS:
Proceeds from shares sold
(286,828 and 334,533 shares) 2,854,515 3,277,247
Distributions reinvested (31,469 and 29,522 shares) 312,492 288,578
Payment for redemptions (183,982 and 269,196 shares)(1,827,054) (2,628,675)
Net increase from capital share transactions --------- ---------
(134,315 and 94,859 shares) 1,339,953 937,150
---------- -------
TOTAL INCREASE IN NET ASSETS: 1,426,212 1,183,449
NET ASSETS:
Beginning of period 10,887,186 9,703,737
----------- ---------
End of period $12,313,398 $10,887,186
============ ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
<TABLE>
<CAPTION>
LANCASTER FUNDS
NEBRASKA TAX-FREE FUND
FINANCIAL HIGHLIGHTS
YEARS ENDED JUNE 30, 1998, 1997, 1996, 1995 AND FOR THE PERIOD FROM
JULY 12, 1993 (COMMENCEMENT OF OPERATIONS) TO JUNE 30, 1994
Period Ended
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
NET ASSET VALUE:
<S> <C> <C> <C> <C> <C>
Beginning of period $9.87 $9.63 $9.71 $9.42 $10.00
----- ----- ----- ----- ------
Income (loss) from investment operations:
Net investment income 0.48 0.48 0.49 0.48 0.50
Net realized and unrealized gain
(loss) on investments 0.08 0.24 (0.08) 0.29 (0.63)
----- ----- ------ ----- ------
Total income (loss) from
investment operations 0.56 0.72 0.41 0.77 (0.13)
----- ----- ----- ----- ------
Less Distributions:
Dividends from net
investment income (0.48) (0.49) (0.49) (0.48) (0.45)
------ ------ ------ ------ ------
End of period (1) $9.95 $9.86 $9.63 $9.71 $9.42
===== ===== ===== ===== =====
TOTAL RETURN: (1) 5.8% 7.1% 4.3% 8.5% (1.6%)*
==== ==== ==== ==== =====
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period $12,313,398 10,887,186 9,703,737 10,523,865 8,893,922
Ratio of expenses to average net assets 0.68% 0.67% 0.76% 0.71% 0.41%*
Ratio of net income to average net assets 4.86% 4.95% 4.96% 5.15% 4.99%*
Portfolio turnover rate 12.35% 19.76% 17.53% 34.96% 7.45%
* ANNUALIZED FOR THOSE PERIODS LESS THAN TWELVE MONTHS IN DURATION.
(1) Excludes maximum sales charge of 3.90%
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
</TABLE>
15
<PAGE>
LANCASTER FUNDS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
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 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, 1998, 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
16
<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 $413,000 available for federal income tax purposes at June 30,
1998. The loss begins expiring in 2003.
DISTRIBUTIONS TO SHAREHOLDERS: Dividends to shareholders are recorded
on the ex-dividend date.
CASH EQUIVALENTS: Cash equivalents consist of money market funds which
declare dividends daily. As of June 30, 1998, the average yield on such
tax-free funds was approximately 3.10%
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 $16,235, $13,529, and $27,041, respectively,
for such services. Of the amount paid to the Distributor, $18,997 was
retained by them for the sale of shares made by their agents and brokers.
The Distributor also received $5,851 and retained $4,877 (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.
17
<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, 1998 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 $15,400 for their
brokerage services during the year ended June 30, 1998.
At June 30, 1998, 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 $126,950.
4. SECURITIES TRANSACTIONS
The Fund made purchases and sales of investment securities of $2,630,234 and
$1,295,518, respectively, during the year ended June 30, 1998.
At June 30, 1998, the aggregate gross unrealized appreciation and the
aggregate gross unrealized depreciation of securities were $359,529 and
$5,499, respectively.
18
<PAGE>
- --------------------------------------------------------------------------------
LANCASTER FUNDS
INSTITUTIONAL MONEY MARKET
ANNUAL REPORT
JUNE 30, 1998
- --------------------------------------------------------------------------------
<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, 1998, 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 four 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 year
ended 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, 1998 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, 1998, 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 four years in the period then ended in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Lincoln, Nebraska
July 24, 1998
1
<PAGE>
LANCASTER FUNDS
INSTITUTIONAL MONEY MARKET FUND
STATEMENT OF NET ASSETS
JUNE 30, 1998
YIELD AT
TIME OF AMORTIZED
PAR VALUE DESCRIPTION PURCHASE COST
- ---------------- ---------------------------------- ------------- -----------
CERTIFICATES OF DEPOSIT -- 1.1%
$95,000 First National Bank, 6.00% $95,000
Lewellen, Nebraska, due 3/23/99
95,000 First Cozad Bank 5.75% 95,000
Cozad, Nebraska, due 12/16/98
95,000 Curtis State Bank, 5.75% 95,000
Curtis Nebraska, due 3/16/99
95,000 First National Bank, 5.85% 95,000
Holdrege Nebraska, due 8/10/98
97,288 Burlington Credit Union, 6.22% 97,288
------
Lincoln Nebraska, due 8/12/98
Total (cost $477,288) 477,288
-------
GOVERNMENT AND AGENCY SECURITIES -- 99.3%
13,500,000 FNMA due 7/21/98 5.51% 13,459,582
13,500,000 FNMA due 8/21/98 5.38% 13,397,119
12,500,000 FNMA due 9/25/98 5.39% 12,339,069
Federated Investors
130,986 Government Obligations Tax Managed Fund 130,986
1,294,139 Goldman Sachs Money Market Fund 1,294,139
---------
Total (cost $40,620,895) 40,620,895
----------
TOTAL INVESTMENTS -- 100.4% 41,098,183
----------
2
<PAGE>
LANCASTER FUNDS
INSTITUTIONAL MONEY MARKET FUND
STATEMENT OF NET ASSETS
JUNE 30, 1998 (CONTINUED)
EXCESS OF OTHER ASSETS OVER TOTAL LIABILITIES -- (0.4%)
(Includes $14,458 payable to investment advisor, (177,276)
administrator and distributor and $169,499
dividends payable to shareholders)
NET ASSETS -- 100%
Applicable to 40,920,907 outstanding shares of $0.001
par value common stock (100,000,000 shares authorized) $40,920,907
===========
NET ASSET VALUE:
Offering and redemption price per share $1.00
=====
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
3
<PAGE>
LANCASTER FUNDS
INSTITUTIONAL MONEY MARKET FUND
STATEMENT OF OPERATIONS
YEAR ENDED JUNE 30, 1998
INVESTMENT INTEREST INCOME: $2,478,683
---------
EXPENSES (NOTE 2):
Investment advisory fees 44,835
Administration fees 53,802
Distribution expenses 89,676
Custodial fees 19,960
Other expenses 23,262
------
Total expenses 231,535
---------
Net investment income $2,247,148
=========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
LANCASTER FUNDS
INSTITUTIONAL MONEY MARKET FUND
STATEMENT OF CHANGES IN NET ASSETS
YEARS ENDED JUNE 30, 1998 AND 1997
1998 1997
---- ----
FROM INVESTMENT OPERATIONS:
Net investment income
distributed to shareholders $2,247,148 $2,403,181
=========== ==========
FROM SHARE TRANSACTIONS:
(at contant net asset value of
$1 per share)
Shares sold 89,998,583 69,935,250
Shares issued in reinvestment of
dividends from net investment income 2,042,769 2,122,027
---------- ----------
92,041,352 72,057,277
Shares redeemed 93,963,962 95,976,861
----------- ----------
Total decrease in net assets (1,922,610) (23,919,584)
NET ASSETS:
Beginning of period 42,843,517 66,763,101
----------- ----------
End of period $40,920,907 $42,843,517
============ ===========
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
LANCASTER FUNDS
INSTITUTIONAL MONEY MARKET FUND
FINANCIAL HIGHLIGHTS
YEARS ENDED JUNE 30, 1998, 1997, 1996, 1995 AND 1994
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
NET ASSET VALUE:
Beginning of period $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- -----
Income from investment operations:
Net investment income 0.050 0.050 0.052 0.054 0.040
Less Distributions:
Dividends from net investment
income (0.050) (0.050) (0.052)(0.054)(0.040)
----- ----- ----- ----- -----
End of period $1.00 $1.00 $1.00 $1.00 $1.00
===== ===== ===== ===== =====
YIELD: 4.96% 4.81% 5.02% 5.63% 4.52%
===== ===== ===== ===== =====
EFFECTIVE YIELD: 5.07% 4.92% 5.14% 5.79% 4.62%
===== ===== ===== ===== =====
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) $40,921 $42,844 $66,763 $24,337 $28,009
Ratio of expenses to average net assets 0.52% 0.58% 0.57% 0.54% 0.61%
Ratio of net income to average net assets 5.05% 4.95% 5.17% 5.42% 4.05%
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
LANCASTER FUNDS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
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.
7
<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.
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.
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 $44,835, $53,802, and $89,676, 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 $746 for brokerage services during the
year ended June 30, 1998.
At June 30, 1998, the directors, officers, and employees of the Company, the
Adviser, Administrator, Distributor and their immediate families held
1,984,087 shares of the Fund, which constituted 4.85% of the Fund's
outstanding shares.
8
<PAGE>
LANCASTER FUNDS
NOTES TO FINANCIAL STATEMENTS
3. BUSINESS CHANGES
During fiscal 1998, the Fund liquidated its holdings in fully insured
student loans held in trust by the Mid-America Student Finance Trust.
Proceeds from the liquidation were reinvested in short-term U.S. Government
Agency securities. The change in investment strategy and holdings was
principally the result of certain new accounting rules pertaining to
ownership of the insured student loans.
9
