THE SHEFFIELD FUNDS, INC.
==============================================================================
October 31, 1996
Dear Shareholder:
We are pleased to report that the past twelve months have seen an environment
favorable to both domestic stock and bond markets. In last year's annual
report I wrote: "current macroeconomic and political trends including subdued
inflation, declining interest rates, federal budgetary constraints and the
potential for a capital gains tax cut bode well for financial markets as we
head into 1996."
We didn't get a tax cut, but the other conditions did, in fact, hold true
throughout the year. Now, as we head into 1997, the very same set of
characteristics continues to prevail. In fact, the odds for a capital gains
tax cut have improved. Should such a tax cut occur, the benefit to the economy
would be immense and equity markets could respond with further gains. Tax cuts
are not inflationary and capital generated for new investments would spur
economic growth.
IS THE STOCK MARKET OVERPRICED? No other question about investments generates
as much heat and diversity of opinion today. Unfortunately, much of the debate
ignores interest rates, which is one of the dominant factors affecting the
price level of stock markets, or the price level of most financial assets, for
that matter. No one, for example, believes bond prices become too high when
interest rates decline. A bond with a 9% coupon will sell at 100, or "par,"
when interest rates are at 9%. That same bond will rise in price to
approximately 150 if interest rates drop to 6%. The bond is not overpriced at
150; it simply reflects the current cost of capital, (sometimes called the
discount rate) relative to its fixed coupon rate. The stock market, in
principal, operates under a similar pricing mechanism. The current "price"
of the stock market represents the collective thinking of investors all over
the world regarding the present value of a future stream of economic benefits
from all the stocks that comprise a particular market. WHEN INTEREST RATES
DECLINE, THE PRICE INVESTORS COLLECTIVELY ARE WILLING TO PAY FOR STOCKS GOES
UP - ALL OTHER THINGS BEING EQUAL. This is axiomatic, not hypothetical.
Dividend yields, P/E levels, and other similar valuation tools aren't adjusted
for the cost of capital. Therefore, these tools fail to capture the
fundamental reasoning for the stock market's current level. Right now,
fortunately, the "all other things" continue to look good, as mentioned
above.
If interest rates continue to decline and the federal deficit and capital
gains rate are further reduced, look for stocks and bonds to enjoy another
solid year of gains in 1997.
TOTAL RETURN FUND
Philosophy
The Total Return Fund is a broadly diversified portfolio invested in
securities across all economic sectors as illustrated in the chart at the top
of the following page. Within each sector we attempt to select companies which
are experiencing increasing cash flow returns on their invested capital.
INDUSTRY SECTOR ANALYSIS
OCTOBER 31, 1996
Sheffield S&P 500
Funds Index
========= ========
Basic Materials 7.3% 5.8%
Energy 9.2% 8.8%
Industrial 12.3% 10.3%
Conglomerates 2.5% .3%
Consumer Cyclic 10.9% 13.3%
Consumer Non. Cyclic 19.0% 20.9%
Technology 19.8% 15.1%
Financial 11.2% 14.4%
Utility 7.8% 11.1%
Foreign 0.0% 0.0%
Furthermore, we seek out those companies experiencing faster earnings growth
rates and faster dividend growth rates than the overall stock market. Growth
rates alone, however, do not make for a superior investment opportunity as it
is easy to overpay for expected future growth. Our stock pricing model
therefore aides us in determining whether the current price of a stock is
reasonable relative to its expected growth rate.
Performance
This portion of the annual report is designed to "translate" or explain
various sections of the annual financial statements presented below. The Funds
operate on an October 31 fiscal year, and make certain distributions for a
given fiscal year in the subsequent fiscal year, creating the need for careful
examination to fully understand the results presented.
With these comments as a preface, the analysis on a per share basis of the
Total Return Fund is as follows. During its 1996 fiscal year, the Fund earned
$0.29 per share from interest and dividends. These earnings were reduced by
operating expenses totaling $0.20 per share. The balance of $0.09 per share is
described as the Fund's net investment income.
From its 1995 operations the Fund distributed $0.11 of net investment income
and $0.49 of capital gains. These reductions to net asset value per share took
place, and were offset by significant portfolio gains totaling $2.67, in the
current fiscal year. Putting all the figures together, the Total Return Fund's
net asset value per share increased for the year by a total of $2.16.
The total return for the Fund for the fiscal year was an increase of 22.4%.
The S&P 500 Index, by comparison, increased 24.1% during the same period of
time. This past fiscal year marks the Fund's second-highest annual return
since its inception. The chart on the left presents a comparison of the Fund's
performance since inception against that of the S&P 500 Index.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE TOTAL
RETURN FUND AND S&P 500 INDEX
Total Return S&P 500
Fund Index
============ =========
Apr 90 $10,000 $10,000
Oct 90 8,824 9,362
Oct 91 12,465 12,498
Oct 92 13,062 13,744
Oct 93 15,229 15,805
Oct 94 14,877 16,415
Oct 95 17,306 20,755
Oct 96 21,174 25,757
Average Annual Total Return for Sheffield Total Return Fund:
1 Year 22.36%
5 Year 11.18%
From Inception 11.40%
- -----------------------------
INTERMEDIATE BOND FUND
Philosophy
Our investment goals for this fund are twofold. First, we seek to manage a
portfolio of investment quality, intermediate-term corporate bonds.
Intermediate-term bonds have demonstrated a history of generating higher total
returns with lower volatility over long periods of time than have long-term
bonds. Our Fund seeks to participate in this investment phenomena. Second, we
seek a modest degree of capital appreciation by investing a small portion of
our assets in two other types of investments. The first type is convertible
securities including convertible bonds and convertible preferred stocks.
Second, we invest a modest portion of the Bond Fund's assets in high- yielding
common stocks.
Out of the broad universe of bonds traded in the marketplace, our Fund limits
itself primarily to investment quality corporate bonds typically maturing in
from one-to-ten years. We can and do buy bonds with maturity dates exceeding
ten years, as long as the average maturity of our entire bond portfolio does
not exceed seven years. By concentrating on intermediate-term bonds rather
than longer-term bonds, our fund's current yield is never as high as it could
be, but we avoid the extreme volatility experienced by longer-term bonds when
interest rates fluctuate.
Our stock holdings are acquired for the purpose of obtaining long-term capital
gains coupled with high dividend yields relative to the yield of the overall
stock market. Our philosophy anticipates that the capital appreciation we seek
from our stock and convertible bond holdings will help to offset the operating
expenses incurred by the Fund over a three-to-five year period of time.
Finally, we can acquire adjustable rate securities, most commonly in the form
of adjustable rate preferred stocks. Typically, the dividends paid on these
securities will change as the general level of interest rates change.
Adjustable rate securities are attractive during periods of rising interest
rates as these securities are more likely to hold their value vis a vis fixed
rate bonds. On the contrary, when interest rates decline, fixed rate bonds
will generally realize more significant price appreciation than will
adjustable rate securities. The Bond Fund owned no such securities during its
recently completed fiscal year.
Performance
During the period comprising this Fund's fiscal year, interest rates rose for
securities maturing in two years or longer while they fell for those
securities whose maturities were less than two years. Whenever interest rates
rise, bond holders suffer declines in the market value of their holdings.
Intermediate-term bonds, therefore, outperformed long-term bonds during our
fiscal year.
The following information explains the Financial Highlights table of this
annual report. The Bond Fund earned $.63 per share in the past year from
interest and dividends. These earning were reduced by operating expenses
totaling $.17 per share. The balance of $.46 is described as the Fund's net
investment income. During the year, the Bond Fund distributed $.47 of net
investment income, decreasing the net asset value by $.01 per share before
portfolio transactions.
The Fund had gains of $.24 per share on investments which includes both
realized and unrealized gains. Additionally, the Fund distributed $.12 per
share of capital gains earned from the prior fiscal year, which reduced the
net asset value by that amount.
Summarizing these figures, the Bond Fund's net asset value increased for the
year by a total of $.11 per share. The increase in net asset value represents a
total return of 7.6% versus 6.3% for the Lehman Intermediate Corp. Index.
COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT IN THE INTERMEDIATE TERM
BOND FUND AND THE LEHMAN BROTHERS CORPORATE INTERMEDIATE TERM BOND INDEX
Sheffield Intermediate Lehman Brothers Corp.
Term Bond Fund Intermediate Term Bond Index
======================== ============================
Apr 90 $10,000 $10,000
Oct 90 9,986 10,522
Oct 91 11,431 12,189
Oct 92 12,320 13,489
Oct 93 13,396 15,204
Oct 94 13,071 14,780
Oct 95 14,756 17,082
Oct 96 15,883 18,161
Average Annual Total Return for Sheffield Intermediate Term Bond Fund:
1 Year 7.64%
5 Year 6.80%
From Inception 6.23%
- -----------------------------
It's quite unusual for a bond fund to outperform its proxy by this magnitude.
A significant portion of this outperformance was created by the group of high
yielding common stocks and convertible bonds owned during the year. You may
recall that these securities play a continuing role in the Fund as part of our
strategy to earn additional returns that will offset the Fund's cost of
operations. This past year the strategy paid off handsomely.
Other Characteristics
While the Fund maintains a portfolio primarily consisting of investment grade
bonds (BBB or better) we may drop below this level for the purchase of
convertible bonds. Furthermore, if bonds which had been investment grade when
we bought them subsequently drop below BBB while we own them, the portfolio
managers decide whether to maintain or sell the holdings. This situation arose
in 1995 when Kmart Corporation faced a liquidity problem, faced a drop in its
credit rating, and experienced a precipitous drop in the market value of its
bonds. We made the decision to maintain our position and have now ridden out
the storm. Although the company's prospects are now considerably improved, the
bonds, which have regained their prior losses, still have not recovered to
investment grade. The rating mix of the bonds in the Fund's portfolio is
presented in the chart on the right.
RATING MIX
AA 9%
A 50%
BBB 32%
BB 6%
B 3%
As 1996 draws to a close, the economic environment appears fairly benign.
Inflation expectations continue to decline and we are on a path of moderate
growth. Bipartisan action on a capital gains tax cut and budget deficit
reduction continue to be discussed. Those are very favorable indicators for
further positive economic growth. Barring a random shock to this economic
environment, 1997 is shaping up to be a good year for our domestic investment
markets.
Very truly yours,
Roger A. Sheffield, CFA
President
SHEFFIELD TOTAL RETURN FUND
Portfolio of Investments
October 31, 1996
- ----------------------------------------------------------------------
SHORT-TERM INVESTMENTS (2.6%) PAR VALUE
- ----------------------------------------------------------------------
United Missouri Bank Money Market
(cost - $663,163) $663,163 $663,163
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
COMMON STOCKS (100.0%) SHARES
- ----------------------------------------------------------------------
AEROSPACE - 1.1%
Boeing Co. 2,800 267,050
-------
AUTO/TRUCK PARTS - 2.3%
Genuine Parts Co. 5,300 231,875
TRW, Inc 3,900 352,950
-------
584,825
-------
BANKING - 5.4%
BankAmerica Corp. 2,000 183,000
First Tennessee National Corp. 8,400 305,550
First Union Corp. 4,100 298,275
NationsBank Corp. 3,140 295,945
Summit Bancorp 6,900 282,038
-------
1,364,808
---------
BEVERAGES - 3.5%
ALCOHOLIC - 1.4%
Anheuser Busch Cos., Inc. 9,400 361,900
-------
SOFT DRINK - 2.1%
Coca-Cola Co. 5,600 282,800
Pepsico, Inc. 8,000 237,000
-------
519,800
-------
BUILDING MATERIALS/CONSTRUCTION - .7%
Masco Corporation 6,000 188,250
-------
CHEMICALS - 6.3%
BASIC - 3.7%
DuPont E.I. De Nemours & Co. 2,700 250,425
Monsanto Co. 10,000 396,250
Sherwin-Williams Co. 5,500 275,687
-------
922,362
-------
SPECIALTY - 2.6%
Avery Dennison Corp. 7,600 500,650
Engelhard Corp. 9,000 164,250
-------
664,900
-------
COMMERICAL SERVICES - .7%
Olsten Corp. 9,000 180,000
-------
COMPUTER HARDWARE - 2.4%
Cisco Systems, Inc.* 3,100 191,812
Hewlett Packard Co. 5,100 225,038
SCI Systems, Inc.* 4,000 199,000
-------
615,850
-------
- -----------------------------------------------------------------------
COMMON STOCKS - CONTINUED SHARES VALUE
- -----------------------------------------------------------------------
COMPUTER SOFTWARE - 3.6%
Computer Associates International Inc. 2,000 $118,250
Electronic Data Systems Corp. 4,000 181,000
Microsoft Corp.* 3,100 425,475
Parametric Technology Corp.* 3,570 174,484
-------
899,209
-------
COSMETICS - .7%
Avon Products, Inc. 4,000 217,000
-------
DIVERSIFIED - 5.7%
Allied Signal, Inc. 4,400 288,200
Johnson Controls Industries, Inc. 3,500 255,500
Morton International, Inc. 6,200 244,125
PPG Industries, Inc. 6,900 393,300
Raytheon Co. 5,000 246,250
-------
1,427,375
---------
ELECTRICAL EQUIPMENT - 2.3%
Honeywell, Inc. 5,100 316,838
Baldor Electric Co. 12,700 255,588
572,426
ELECTRONICS - 7.5%
Avnet, Inc. 10,000 503,750
Diebold, Inc. 7,950 457,125
Eastman Kodak Co.+ 4,500 358,312
Eaton Corp. 2,700 161,325
Motorola, Inc. 3,865 177,790
Rockwell International Corp. 4,100 225,500
-------
1,883,802
---------
ELECTRONICS - SEMICONDUCTOR - 2.7%
Applied Materials, Inc.* 6,130 162,062
Intel Corp. 3,450 379,069
Linear Technology Corp. 4,375 146,562
-------
687,693
-------
ENTERTAINMENT/LEISURE - .8%
Harley Davidson, Inc. 4,300 194,038
-------
FOOD PRODUCTS - 4.8%
Conagra, Inc. 4,000 199,500
Dole Food Co., Inc. 4,500 175,500
Hershey Foods Corp.+ 9,600 464,400
Philip Morris Cos. 4,000 369,500
-------
1,208,900
---------
HOTEL/MOTEL - .8%
La Quinta Inns, Inc. 10,300 206,000
-------
HOUSEHOLD/OFFICE FURNISHINGS - .7%
Herman Miller, Inc. 4,200 181,125
-------
- -----------------------------------------------------------------------
COMMON STOCKS - CONTINUED SHARES VALUE
- -----------------------------------------------------------------------
HOUSEHOLD PRODUCTS - 2.6%
Colgate Palmolive Co. 3,700 $ 340,862
Procter & Gamble Co. 3,300 326,700
-------
667,562
-------
INSURANCE - 3.9%
Allstate Corp. 5,898 330,288
Beneficial Corp. 5,000 292,500
Reliastar Financial Corp. 6,600 349,800
-------
972,588
-------
MANUFACTURING - 2.7%
Donaldson Co., Inc. 8,500 248,625
Dover Corp. 5,000 256,875
Illinois Tool Works Inc. 2,500 175,625
-------
681,125
-------
MEDICAL - PHARMACEUTICAL - 6.3%
Abbott Laboratories 5,000 253,750
Medtronic Inc. 4,000 257,500
Merck & Co. 4,000 295,500
Pfizer, Inc. 6,400 529,600
Schering Plough Corp. 4,000 256,000
-------
1,592,350
---------
OFFICE EQUIPMENT - 2.2%
Pitney Bowes, Inc. 4,700 262,612
Xerox Corp. 6,300 292,163
-------
554,775
-------
OIL & GAS - 6.8%
Amoco Corp. 2,750 208,312
Exxon Corp. 3,000 265,875
Global Marine, Inc.* 19,000 349,125
Mobil Corp. 2,390 279,032
Smith International Inc.* 4,600 174,800
Tidewater, Inc. 5,800 253,750
Tosco Corp. 3,500 196,438
-------
1,727,332
---------
PUBLISHING - .8%
John H. Harland Co. 6,600 205,425
-------
REAL ESTATE - 1.0%
Washington Real Estate Investment Trust 15,250 242,092
-------
RESTAURANTS - 1.6%
Outback Steakhouse, Inc. * 7,100 164,631
Wendys Int'l, Inc. 11,600 239,250
-------
403,881
-------
- ------------------------------------------------------------------------
COMMON STOCKS - CONTINUED SHARES VALUE
- ------------------------------------------------------------------------
RETAIL - 5.5%
DEPARTMENT STORES - 2.1%
Dollar General Corp. 9,625 $ 269,500
Sears Roebuck & Co. 5,500 266,062
-------
535,562
-------
DRUG - .8%
Revco Drugs, Inc.* 6,830 205,754
-------
GROCERY - .9%
Albertsons, Inc. 6,500 223,438
-------
SPECIALTY - 1.7%
General Nutrition Cos., Inc.* 13,000 237,250
Zale Corp.* 9,000 174,375
-------
411,625
-------
SAVINGS AND LOANS - 1.0%
John Hancock Bank & Thrift Opportunity Fund 9,600 259,200
-------
TELEPHONE - 5.6%
Alltel Corp. 11,200 341,600
Ameritech Corp. 6,300 344,925
Cincinnati Bell, Inc. 7,000 345,625
Lucent Technologies, Inc. 1,912 90,342
Newbridge Networks Corp.* 6,000 190,500
Nynex Corp. 2,200 97,900
-------
1,410,892
---------
TRANSPORTATION - 3.4%
Canadian Pacific Ltd. 10,500 265,125
Conrail, Inc. 2,900 276,587
Illinois Central Corp. Ser-A 9,450 305,944
-------
847,656
-------
UTILITIES - 4.6%
ELECTRIC & GAS - 2.2%
Baltimore Gas & Electric Co. 11,200 305,200
TNP Enterprises, Inc. 10,000 258,750
-------
563,950
-------
NATURAL GAS - 2.4%
Panenergy Corp. 8,200 315,700
Williams Co., Inc. 5,500 287,375
-------
603,075
-------
- ------------------------------------------------------------------------
Total Common Stocks
(cost - $18,757,603) $25,255,595
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
TOTAL INVESTMENTS (102.6%)
(cost - $19,420,766) $25,918,758
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
WRITTEN CALL OPTIONS OUTSTANDING
(-.1%) SHARES VALUE
- ------------------------------------------------------------------------
Eastman Kodak Co Call Jan/80 1,000 ($3,375)
Hershey Foods Corp. Call Nov/42.50 3,000 (16,500)
-------
(19,875)
-------
- ------------------------------------------------------------------------
Total Short Options
(Premiums received - $11,920) ($19,875)
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
OTHER ASSETS, LESS LIABILITIES (-2.5%) ($641,512)
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
NET ASSETS (100%) $25,257,371
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $15.02
=====
- ------------------------------------------------------------------------
* Non-income producing.
+ Portion of the security is segragated as collateral for call options
written. Aggregate value of segregated securities - $22,475
SHEFFIELD INTERMEDIATE TERM BOND FUND
Portfolio of Investments
October 31, 1996
- ------------------------------------------------------------------------
SHORT-TERM INVESTMENTS (.3%) PAR VALUE
- ------------------------------------------------------------------------
UMB Bank Money Market
(cost - $21,207) $21,207 $21,207
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
COMMON STOCKS (11.6%) SHARES
- ------------------------------------------------------------------------
BANKING - 1.1%
JP Morgan & Co. 900 77,738
------
CHEMICALS - 3.5%
Arco Chemical Co. 1,400 66,850
DuPont (E.I.) Denemours & Co. 965 89,504
Minnesota Mining & Mfg. Co. 1,055 80,575
------
236,929
-------
ELECTRICAL EQUIPMENT - 1.3%
General Electric Co. 940 90,945
------
FOOD PRODUCTS - 1.1%
Philip Morris Cos. 825 76,209
------
OIL & GAS - 3.7%
Chevron Corp. 1,165 76,599
Exxon Corp. 845 74,888
Texaco, Inc. 980 99,592
------
251,079
-------
TELEPHONE - .9%
Southern New England Telecommunication Corp. 1,710 63,698
------
- ------------------------------------------------------------------------
Total Common Stocks
(cost - $595,937) $796,598
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
CORPORATE BONDS AND NOTES (85.1%) PAR VALUE
- ------------------------------------------------------------------------
AEROSPACE - 1.5%
Lockheed Martin Corp. 7.250% Guaranteed
Notes 5/15/06 $100,000 102,220
-------
BANKING - 10.2%
Banc One Corp. 7.25% Sub. Notes 8/1/02 250,000 257,570
Bankamerica Corp 9.2% Sub. Notes 5/15/03 200,000 225,822
Bankers Trust NY Corp. 9.0% Deb. 8/1/01 200,000 218,798
-------
702,190
-------
COMMERICAL SERVICES - 3.0%
Hertz Corp. 7.0% Sr. Notes 4/15/01 200,000 203,758
-------
COMPUTER SYSTEMS - 1.4%
International Business Machines Corp.
6.375% Notes 6/15/00 100,000 100,240
-------
- ------------------------------------------------------------------------
CORPORATE BONDS AND NOTES - CONTINUED PAR VALUE
- ------------------------------------------------------------------------
CONTAINERS - 3.7%
Crown Cork and Seal Co. 6.750%
Notes 4/15/03 $250,000 $251,795
-------
DIVERSIFIED - 1.7%
Allied Signal Inc. 9.875% Deb. 6/1/02 100,000 115,353
-------
ELECTRICAL EQUIPMENT - 4.1%
Eastman Kodak Co. 9.375% Deb. 3/15/03 100,000 114,564
Westinghouse Electric Corp. 8.875%
Deb. 6/1/01 160,000 168,013
-------
282,577
-------
ELECTRONICS - SEMICONDUCTOR - 1.5%
Applied Material 8.00% Sr. Notes 9/1/04 100,000 106,330
-------
FINANCIAL SERVICES - 2.9%
Bear Stearns Co. 6.7% Sr. Notes 8/1/03 200,000 197,888
-------
HEALTHCARE - 3.8%
Rhone-Poulenc 7.75% Notes 1/15/02 250,000 261,208
-------
HOUSEHOLD PRODUCTS - 4.7%
Black & Decker 6.625% Notes 11/15/00 320,000 321,187
-------
INSURANCE - 3.3%
Progressive Corp. 10.0% Deb. 12/15/00 200,000 225,026
-------
OFFICE EQUIPMENT - 4.0%
Xerox Credit Corp. 9.75% Deb. 3/15/00 250,000 275,445
-------
OTHER - .5%
Swedish Export Credit 9.875% Deb.
3/15/38 30,000 32,446
------
PERSONAL & BUSINESS CREDIT - 15.5%
Associate Corp. of N. America 6.375%
Sr. Notes 10/15/02 250,000 247,213
Ford Capital BV 9.375% Deb. 5/15/01 200,000 221,492
General Motors Acceptance Corp. 8.4%
Notes 10/15/99 200,000 211,160
Household Financial Corp. 6.7% Notes
6/15/02 180,000 180,662
Transamerica Financial Corp. 7.5% Sr.
Notes 3/15/04 200,000 207,384
-------
1,067,911
---------
RETAIL - 10.7%
DEPARTMENT STORES - 5.2%
K-Mart Inc. 9.8% Med. Term Notes
6/15/98 250,000 247,500
Wal-Mart Stores 9.1% Notes 7/15/00 100,000 109,144
-------
356,644
-------
- ------------------------------------------------------------------------
CORPORATE BONDS AND NOTES - CONTINUED PAR VALUE
- ------------------------------------------------------------------------
RETAIL - CONT.
SPECIALTY - 5.5%
Fruit of the Loom Inc. 7.875% Sr.
Notes 10/15/99 $210,000 $216,802
Limited Inc. 8.875% Notes 8/15/99 150,000 157,992
-------
374,794
-------
SAVINGS & LOANS - 2.4%
H.F. Ahmanson & Co. 9.875% Sub.
Notes 11/15/99 150,000 164,247
-------
UTILITIES - ELECTRIC & GAS - 7.4%
Baltimore Gas & Electric Co. 6.5%
1st Ref. Mortgage Bonds 2/15/03 140,000 139,385
Commonwealth Edison Co. Mortgage
9.375% Bonds 2/15/00 250,000 269,945
Public Service Oklahoma 7.25% 1st
Mortgage Bonds 1/1/99 100,000 100,441
-------
509,771
-------
UTILITIES - NATURAL GAS - 2.8
Williams Corp. 6.25% Deb. 2/1/06 200,000 189,578
-------
- ------------------------------------------------------------------------
Total Bonds and Notes
(cost - $5,672,124) $5,840,608
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
CONVERTIBLE BONDS - 1.5%
EMC Corp. 4.25% Conv. Sub. Note 1/1/01 75,000 100,125
-------
- ------------------------------------------------------------------------
Total Convertible Bonds
(cost - $75,462 ) $100,125
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
TOTAL INVESTMENTS (98.5%)
(cost - $6,364,730) $6,758,538
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
OTHER ASSETS, LESS LIABILITIES (1.5%) $101,450
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
NET ASSETS (100%) $6,859,988
- ------------------------------------------------------------------------
- ------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $9.70
====
- ------------------------------------------------------------------------
See accompanying notes to the financial statements.
FINANCIAL STATEMENTS
- ------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITES
OCTOBER 31, 1996
- ------------------------------------------------------------------------
Sheffield Sheffield
Total Intermediate
Return Term Bond
Fund Fund
--------------- -----------------
ASSETS:
Investments at value (cost of
$19,420,766 and $6,364,730,
respectively) $25,918,758 $6,758,538
Receivables:
Interest 457 119,668
Dividends 22,270 ---
Portfolio securities sold 397,532 ---
Prepaid insurance 4,092 954
-------- -------
Total assets 26,343,109 6,879,160
---------- ---------
LIABILITIES:
Investment securities purchased 979,746 ---
Oustanding call options written 19,875 ---
Redemptions payable 50,300 4,100
Accrued expenses 35,817 15,072
-------- ------
Total liabilities 1,085,738 19,172
--------- ------
NET ASSETS CONSISTING OF:
Undistributed net investment income 90,031 27,797
Accumulated net realized gain 1,393,921 246,509
Unrealized appreciation on
investments 6,490,037 393,808
Paid-in capital applicable to
1,681,086 and 707,244 shares
outstanding, respectively, of
$.001 par value capital stock;
5,000,000 shares authorized in
each fund 17,283,382 6,191,874
---------- ---------
Net Assets $25,257,371 $6,859,988
---------- ---------
NET ASSET VALUE PER SHARE $15.02 $9.70
===== ====
See accompanying notes to financial statements.
- -----------------------------------------------------------------------
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED OCTOBER 31, 1996
- -----------------------------------------------------------------------
Sheffield Sheffield
Total Intermediate
Return Term Bond
Fund Fund
--------------- -----------------
INVESTMENT INCOME:
Interest $ 13,725 $ 396,996
Dividends 485,888 27,356
------- ------
Total income 499,613 424,352
------- -------
EXPENSES:
Investment advisory fee 237,139 63,032
Investment advisory fee waived --- (15,882)
Administration fee 48,000 48,000
Administrative fee waived --- (23,000)
Transfer agency fee 10,000 10,000
12b-1 expenses 6,745 6,745
Custodian fees 12,016 5,035
Registration and filing fees 2,208 2,208
Professional fees 8,328 8,328
Directors fees 4,950 4,800
Printing and postage 3,962 3,974
Insurance expense 7,831 3,069
Other 1,439 807
------- ------
Total expenses 342,618 117,116
------- -------
Net investment income 156,995 307,236
------- -------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized gain on investments 1,446,749 244,750
Net realized gain (loss) on futures (52,828) 1,759
Change in unrealized appreciation
(depreciation) on investments 3,183,317 (55,492)
--------- -------
Net gain on investments 4,577,238 191,017
--------- -------
Net increase in net assets from
operations $4,734,233 $498,253
========= =======
- -----------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 1996 AND 1995
- -----------------------------------------------------------------------
Sheffield Total
Return Fund
Year ended Year ended
10/31/96 10/31/95
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $ 156,995 $ 166,160
Net realized gain on investments 1,446,749 829,162
Net realized loss on futures (52,828) ---
Change in unrealized appreciation
on investments 3,183,317 1,681,089
--------- ---------
Increase in net assets from
operations 4,734,233 2,676,411
--------- ---------
Dividends to shareholders from:
Net investment income (184,571) (178,351)
Realized gains (829,079) (507,787)
-------- --------
Total distributions to shareholders (1,013,650) (686,138)
---------- --------
Capital transactions:
Proceeds from shares issued
through exchange 1,148,180 2,992,306
Proceeds from reinvestment of
dividends 1,013,650 686,138
Proceeds from other shares sold 826,934 618,904
Cost of shares reacquired
through exchange (589,520) (1,199,058)
Cost of other shares reacquired (2,427,588) (1,708,560)
---------- ----------
Increase (decrease) in net assets
from capital share transactions (28,344) 1,389,730
------- ---------
TOTAL INCREASE 3,692,239 3,380,003
--------- ---------
NET ASSETS:
Beginning of period 21,565,132 18,185,129
---------- ----------
End of period $25,257,371 $21,565,132
=========== ===========
Capital transactions in number of shares:
Shares issued through exchange 87,222 235,685
Shares issued in connection with
reinvestment of dividends 79,878 64,791
Other shares sold 57,467 53,872
Shares reacquired through exchange (42,231) (108,650)
Other shares reacquired (177,948) (145,823)
-------- --------
Net increase in shares outstanding 4,388 99,875
===== ======
See accompanying notes to financial statements.
- ------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED OCTOBER 31, 1996 AND 1995
- ------------------------------------------------------------------------
Sheffield Intermediate
Term Bond Fund
Year ended Year ended
10/31/96 10/31/95
---------- ----------
INCREASE (DECREASE) IN NET ASSETS:
Operations:
Net investment income $307,236 $557,197
Net realized gain on investments 244,750 85,780
Net realized gain on futures 1,759 ---
Change in unrealized appreciation
on investments (55,492) 641,710
------- -------
Increase in net assets from operations 498,253 1,284,687
------- ---------
Dividends to shareholders from:
Net investment income (308,895) (574,726)
Realized gains (85,839) (32,510)
-------- --------
Total distributions to shareholders (394,734) (607,236)
-------- --------
Capital transactions:
Proceeds from shares issued
through exchange 589,520 1,199,058
Proceeds from reinvestment of
dividends 394,734 607,236
Proceeds from other shares sold 921,628 687,049
Cost of shares reacquired through
exchange (1,148,180) (2,992,306)
Cost of other shares reacquired (1,735,152) (1,728,501)
---------- ----------
Decrease in net assets from capital
share transactions (977,450) (2,227,464)
-------- ----------
TOTAL DECREASE (873,931) (1,550,013)
-------- ----------
NET ASSETS:
Beginning of period 7,733,919 9,283,932
--------- ---------
End of period $6,859,988 $7,733,919
========= =========
Capital transactions in number of shares:
Shares issued through exchange 62,061 133,877
Shares issued in connection with
reinvestment of dividends 41,663 65,650
Other shares sold 96,899 75,598
Shares reacquired through exchange (119,339) (309,849)
Other shares reacquired (180,660) (183,156)
-------- --------
Net decrease in shares outstanding (99,376) (217,880)
======= ========
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------
For a share outstanding throughout the period.
<TABLE>
SHEFFIELD TOTAL RETURN FUND
---------------------------
Year ended October 31,
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $12.86 $11.53 $12.71 $12.30 $11.82
----- ----- ----- ----- -----
Income from investment operations:
Net investment income .09 .11 .10 .12 .09
Net gains (losses) on securities
(both realized and unrealized) 2.67 1.68 (.38) 1.75 .47
---- ---- ---- ---- ---
Total from investment operations 2.76 1.79 (.28) 1.87 .56
---- ---- ---- ---- ---
Less Distributions:
Dividends (from net investment
income) (.11) (.12) (.11) (.12) (.08)
Distributions (from realized gains) (.49) (.34) (.79) (1.34) ---
---- ---- ---- ----- ----
Total distributions (.60) (.46) (.90) (1.46) (.08)
---- ---- ---- ----- ----
Net Asset Value, end of period $15.02 $12.86 $11.53 $12.71 $12.30
===== ===== ===== ===== =====
Total return 22.36% 16.33% -2.31% 16.59% 4.79%
Ratios/supplemental data:
Net assets, end of period (000's) $25,257 $21,565 $18,185 $27,504 $19,380
Ratio of expenses to average
net assets 1.44% 1.60% 1.50% 1.47% 1.66%
Ratio of net investment income
to average net assets .66% .90% .83% 1.00% .82%
Portfolio turnover rate 57.17% 55.16% 51.25% 100.28% 119.87%
Average commission per share+ $ .076 (a) (a) (a) (a)
</TABLE>
See accompanying notes to financial statements.
+ Computed by dividing total amount of commission paid by total number of
shares purchased and sold during the period for which there was a
commission charged.
(a) Disclosure not applicable to prior periods
- ------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------
For a share outstanding throughout the period.
<TABLE>
SHEFFIELD INTERMEDIATE TERM BOND FUND
---------------------------
Year ended October 31,
<CAPTION>
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $9.59 $9.06 $10.14 $9.98 $9.81
---- ---- ----- ---- ----
Income from investment operations:
Net investment income .46 .53 .48 .52 .58
Net gains (losses) on securities
(both realized and unrealized) .24 .60 (.71) .32 .17
---- ---- ----- ---- ----
Total from investment operations .70 1.13 (.23) .84 .75
---- ---- ----- ---- ----
Less Distributions:
Dividends (from net investment
income) (.47) (.57) (.45) (.58) (.58)
Distributions (from realized gains) (.12) (.03) (.40) (.10) ---
---- ---- ----- ---- ----
Total distributions (.59) (.60) (.85) (.68) (.58)
---- ---- ----- ---- ----
Net Asset Value, end of period $9.70 $9.59 $9.06 $10.14 $9.98
==== ==== ==== ===== ====
Total return 7.64% 12.89% -2.42% 8.73% 7.78%
Ratios/supplemental data:
Net assets, end of period (000's) $6,860 $7,734 $9,284 $7,698 $11,973
Ratio of expenses to average
net assets 1.86%+ 1.78%+ 2.08%+ 2.04%+ 1.91%
Ratio of net investment income
to average net assets 4.87% 5.61% 5.01% 5.19% 5.87%
Portfolio turnover rate 33.65% 34.99% 30.38% 21.70% 59.54%
Average commission per share++ $ .079 (a) (a) (a) (a)
</TABLE>
+ Without the waiver of advisory and administration fees, the ratios of
expenses to average net assets for the Intermediate Term Bond Fund would
have been 2.47%, 2.03%, 2.34%, and 2.17% for the years 1996, 1995, 1994,
and 1993, respectively.
++ Computed by dividing total amount of commission paid by total number of
shares purchased and sold during the period for which there was a
commission charged.
See accompanying notes to financial statements.
(a) Disclosure not applicable to prior periods.
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES. The Sheffield
Funds, Inc. (SFI) is registered under the Investment Company Act of 1940 as an
open-end diversified management investment company. SFI consists of two
separate funds, the Sheffield Total Return Fund (the "Total Return Fund")
and the Sheffield Intermediate Term Bond Fund (the "Bond Fund"), each of
which represents a separate portfolio of investments (collectively, "the
Funds"). SFI commenced operations on April 2, 1990. The following is a
summary of significant accounting policies followed by SFI:
A. SECURITY VALUATION - Equity securities listed or traded on a national
securities exchange are valued at the last sale price on the day of
valuation or, if no sale is reported, at the latest bid price. Bonds and
other fixed income securities are valued on the basis of prices furnished
by an independent pricing service. Convertible bonds are valued at the
mean of bid and asked prices if available, or if not available, on the
basis of prices furnished by an independent pricing service. Short-term
obligations with maturities of sixty days or less are valued at amortized
cost, which approximates market.
B. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME - Security transactions
are accounted for on the trade date and dividend income is recorded on the
ex-dividend date. Interest income is recorded on the accrual basis and
includes the amortization of discounts and premiums on the purchase of debt
securities. Realized gains and losses from investment transactions and
unrealized appreciation and depreciation of investments are reported on an
identified cost basis.
C. FUTURES CONTRACTS - The Funds may purchase financial futures contracts in
order to invest excess cash or to provide liquidity for redemption
requests. The Funds may sell financial futures as a means to reduce market
risk. Upon entering into a futures contract, the Fund is required to
deposit with a broker an amount ("initial margin") equal to a certain
percentage of the purchase price indicated in the futures contract.
Subsequent payments ("variation margin") are made or received by the Fund
dependent on the daily fluctuations in the value of the unrealized gains
and losses on the futures contracts. If the Fund enters into a closing
transaction, the Fund will realize, for book purposes, a gain or loss equal
to the difference between the value of the futures contract to sell and the
futures contract to buy. The Fund may be subject to risk upon entering
into futures contracts resulting from the imperfect correlation of prices
between the futures and securities markets. At October 31, 1996, there were
no unsettled futures contracts.
D. OPTION WRITING - When the Company writes an option, an amount equal to the
premium received by the Company is recorded as a liability and is
subsequently adjusted to the current market value of the option written.
Premiums received from writing options which expire unexercised are treated
by the Company on the expiration date as realized gains from investments.
The difference between the premium and the amount paid on effecting a
closing purchase transaction, including brokerage commissions, is also
treated as a realized gain, or if the premium is less than the amount paid
for the closing purchase transaction, as a realized loss. If a call option
is exercised, the premium is added to the proceeds from the sale of the
underlying security or currency in determining whether the Company has
realized a gain or loss. If a put option is exercised, the premium reduces
the cost basis of the securities purchased by the Company. The Company as
writer of an option bears the market risk of an unfavorable change in the
price of the security underlying the written option.
E. FEDERAL INCOME TAXES - No provision for federal income taxes is required
since each Fund intends to continue to qualify as a regulated investment
company and make distributions of investment income and net realized
capital gain, if any, to relieve it from all federal income taxes.
At October 31, 1996, the aggregate cost of securities for federal income
tax and financial reporting purposes for the Total Return Fund was
$19,420,766 and net unrealized appreciation aggregated $6,497,992 of which
$6,719,258 related to appreciated securities and $221,266 related to
depreciated securities. Net depreciation on call options outstanding
amounted to $7,955. The aggregate tax cost of securities for the Bond Fund
was $6,364,730 and net unrealized appreciation aggregated $393,808, of
which $435,370 related to appreciated securities and $41,562 related to
depreciated securities.
F. DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends and distributions
are recorded by the Funds on the ex-dividend date. The primary reason for
the difference between net investment income and realized gains and the
related distributions relates to the regulatory timing and calculation of
distribution.
G. USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates
NOTE 2. INVESTMENT ADVISORY AND OTHER AGREEMENTS. Sheffield Investment
Management, Inc. (SIMI) serves as the investment adviser, transfer agent and
administrator for SFI. Pursuant to the terms of the Investment Advisory
Agreement between SIMI and SFI, SIMI receives an investment advisory fee from
each fund. This fee is accrued daily and paid monthly. The fee is based on an
annual rate of 1% of the first $50 million of each fund's net assets; .75% of
the next $50 million of net assets and .6% of net assets in excess of $100
million. Beginning April 1, 1993, SIMI has been waiving advisory fees for the
Bond Fund to a level of .75% of net assets. Total advisory fees waived during
the one-year period ended October 31, 1996, amounted to approximately $15,882.
SFI has entered into an Administrative Agreement with SIMI pursuant to which
SIMI provides various administrative services required by the funds. For its
services, SIMI receives a fee from each fund at the annual rate of the greater
of .15% of each fund's average daily net assets or the actual cost to SIMI to
provide such services up to $48,000 per fund. During the one-year period ended
October 31, 1996, SIMI waived administrative fees to the Bond Fund amounting
to approximately $23,000.
In accordance with a Transfer Agency Agreement with SFI and SIMI, various
services are provided to the stockholders of the funds. These services
include, in part, the processing of purchase and redemption requests, transfer
and exchange requests, distributions and general stockholder inquiries. For
its services SIMI receives from each fund a monthly fee at an annual rate of
the greater of $10,000 per fund or $15 per stockholder account.
Alpha-Line Investments, Inc. (the Underwriter), an affiliate of SIMI, is the
principal and underwriter for SFI pursuant to a Distribution Agreement. Each
fund has agreed to pay the Underwriter, pursuant to a Rule 12b-1 Plan of
Distribution, such amounts as necessary in order to reimburse distribution,
maintenance, and service cost with respect to marketing the shares of each
fund. The total allowable amount of fund reimbursement to the Underwriter is
limited to .0625% per quarter of each fund's net asset value.
NOTE 3. SECURITIES TRANSACTIONS. For the one-year period ended October 31,
1996, purchases and sales proceeds of securities, other than short-term and
U.S. Government Securities, for each of the funds were as follows:
Total Return Intermediate Term
Fund Bond Fund
- --------------------------------------------------------
Purchases Sales Purchases Sales
$ 13,431,564 $ 13,752,393 $ 2,631,693 $3,690,960
The Total Return Fund had transactions in call options as follows:
Number of
Contracts Premiums
Options outstanding at October 31, 1995 0 $ 0
Options written 174 30,006
Options bought back (94) (13,073)
Options purchased (30) (19,217)
Options sold 30 19,217
Options assigned (40) (5,013)
--- -------
Options outstanding at October 31, 1996 40 $ 11,920
=== ========
NOTE 4. RELATED PARTY STOCKHOLDERS. At October 31, 1996, the Sheffield
Investment Management, Inc. Profit Sharing Plan owned 5,224 shares of the Bond
Fund and 14,841 shares of the Total Return Fund. The President of SIMI and
related family members owned 2,515 shares of the Total Return Fund.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
The Sheffield Funds, Inc.
- ------------------------------------------------------------------------------
We have audited the accompanying statements of assets and liabilities of The
Sheffield Funds, Inc. (consisting of the Sheffield Total Return Fund and the
Sheffield Intermediate Term Bond Fund), including the portfolios of
investments, as of October 31, 1996, and the related statements 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 five years in the period then ended. 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.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 October 31, 1996, 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the respective portfolios constituting The Sheffield Funds, Inc. as of
October 31, 1996, the results of their operations, the changes in their net
assets and their financial highlights for each of the respective periods
stated in the first paragraph, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
December 19, 1996
