<PAGE>
The Shelby Fund
- -------------------------------------------------------------------------------
Dear Shareholder:
The last twelve months can be categorized as volatile to say the least. The
Shelby Fund enjoyed an enormous run during the Spring of 1996, only to
experience a violent correction during late June and July. We recouped those
losses and ended the third quarter ahead of the S&P 500. It was at this point
that the performance disparity between the small to mid-cap growth sector and
the S&P 500 started to take form. The Shelby Fund has not been immune to this
phenomenon. The fourth quarter of 1996 was difficult as we were barely
profitable with the fund returning .13%. This may not sound impressive but
most small to mid-cap funds lost a significant amount of money in the quarter.
Value of a $10,000 Investment
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
FUND/INDEX NAME 01/01/81 03/31/81 01/31/82 03/31/83 03/31/84 01/31/85 03/31/86 03/31/87 03/31/88
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
SHELBY FUND
- -----------------------------------------------------------------------------------------------------------
Shelby Fund $10,000 $10,393 $12,357 $16,633 $16,447 $16,800 $20,888 $24,001 $22,835
- -----------------------------------------------------------------------------------------------------------
S&P 500 $10,000 $10,596 $9,226 $13,287 $14,457 $17,189 $23,697 $29,860 $27,420
- -----------------------------------------------------------------------------------------------------------
Russell 2000 $10,000 $10,869 $9,287 $15,028 $15,416 $17,448 $22,915 $26,372 $23,045
- -----------------------------------------------------------------------------------------------------------
<CAPTION>
03/31/89 03/31/90 03/31/91 03/31/92 03/31/93 03/31/94 03/31/95 03/31/96 03/31/97
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$25,311 $31,849 $41,125 $47,666 $58,187 $66,912 $70,162 $92,201 $89,615
-------------------------------------------------------------------------------------------
$32,378 $38,567 $44,124 $48,999 $56,459 $57,276 $66,199 $87,412 $100,119
-------------------------------------------------------------------------------------------
$26,033 $27,475 $29,341 $35,508 $40,783 $45,272 $47,764 $61,656 $64,542
-------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Average Annual Return*
<S> <C> <C>
1 year: -2.80%
5 year: 13.46%
10 year: 14.08%
Since inception: 14.44%
</TABLE>
*The quoted performance of The Shelby Fund includes performance of certain
common trust funds and collective investment funds (the "Commingled Funds")
which were managed with full investment authority by principals of SMC
Capital, Inc. prior to the establishment of the Fund on July 1, 1994. The
assets of the Commingled Funds were converted into assets of the Fund upon the
establishment of the Fund. These Commingled Funds were operated with the same
investment objective and used investment strategies and techniques that are in
all material respects equivalent to those used for the Fund. During the time
period of their existence the Commingled Funds were not registered under the
Investment Company Act of 1940 (the "1940 Act") and therefore were not subject
to certain investment restrictions that are imposed under the 1940 Act. If the
Commingled Funds had been registered under the 1940 Act, the Commingled Funds'
performance may have been adversely affected.
The disparity began to widen in the first quarter of 1997. Retirement monies
flooded into index funds--the Vanguard S&P 500 Index fund alone garnered 6% of
all mutual fund inflows during the quarter. Forty-eight percent of the
capitalization of the S&P 500 could be found in the top 50 companies. We
believe investors who think they are well diversified by owning the S&P 500
index are subjecting themselves to risks which they may not be aware of in a
very narrow market dominated by the "nifty fifty". As the first quarter
unfolded the small to mid-cap sector was punished. Our performance was mostly
affected during February as our energy positions corrected quite hard off
their fifty-two week highs of January. These positions, however, came back
nicely in March as the Shelby Fund outperformed almost every index for that
month. While we are very disappointed by being down 14% at the end of the
first quarter of 1997 and down 3% for the trailing twelve month period, we are
optimistic about the potential performance of the small to mid-cap growth
sector over the next three years. Potential opportunities of this magnitude
come around only so often. The fall of 1994, the fourth quarter of 1990, the
crash of 1987 and the summer of 1984 were all periods of extreme pain in this
segment of the market. We believe the greatest potential, relative to growth
rates exists, not in the S&P 500, but in the small to mid-cap growth sector.
- -------------------------------------------------------------------------------
-1-
<PAGE>
The Shelby Fund
- -------------------------------------------------------------------------------
Our philosophy has always led us to companies which we believe exhibit
superior earnings momentum relative to their business plans and to investor
expectations, irrespective of where 401K money flows seem to be headed. Money
flows do not mean anything in terms of creating shareholder wealth over the
long term, but they can certainly affect events over a shorter time horizon as
we have seen. We have built fairly substantial positions in the energy sector,
primarily in the service and drilling areas. This is the only industry we know
of which has pricing flexibility and the worldwide demand for energy is only
increasing. In addition, these companies are reporting much better than
expected earnings and the leverage in their income statements, relative to
where this industry has come from over the past ten years, is enormous. The
management of Global Marine has indicated that they feel the current market
tightness for drilling rigs will be worse in three years than it is currently.
We feel that this area of the market is very under owned institutionally. Most
money managers say they won't own the energy group because they are too
cyclical. We can't argue with that point but this industry's operating margins
are as high, if not higher, than a lot of technology industries. We doubt that
anyone would refute the cyclical nature of a PC.
The Fund's total technology exposure, including telecommunications, is less
than 17%. This is the lowest level in many years. We still feel that bandwidth
expansion and the enhancement of the worldwide telecommunications
infrastructure will be exciting areas, however, the year 2000 problem is very
real and very large. Chase Manhattan stated in their 1996 10K that over the
next three years they plan on dedicating $250 million of their $750 million IT
(information technology) budget to the Year 2000 solutions. This is not an
incremental $250 million, but $250 million which will be taken out of the
marketplace, and Chase is but one player grappling with the Year 2000 problem.
Our best guess is that hardware will be affected the most. A 200MHZ pentium
processor with MMX technology can do a lot, but future upgrades will be less
likely to stimulate incremented demand. As a result, a lot of our newer ideas
revolve around special situations such as Genesco, the old shoe manufacturer.
We still have positions in several consumer niche companies such as Papa
John's Pizza and Landry's Seafood in the restaurant category and Cutter & Buck
and Ashworth in the golf apparel arena.
Periods such as the previous twelve months are difficult to endure, but we
would urge investors to view our segment of the market with a longer term
horizon. The kind of stocks we have held in the portfolio have exhibited
earnings growth of 36% and revenue growth of 37% over the last five years.
Analysts anticipate growth rates for these securities in the 25% range over
the next three years, yet the price-to-earnings multiples for 1997 and 1998
estimated earnings are 18 to 15 times earnings. This represents just 72% to
60% of the projected growth rates. The S&P 500, on the other hand, has shown
growth of 19% and 10% in earnings and revenues for the past five years. Most
of this earnings growth has come in the form of expense cuts. Looking forward,
we believe the projected growth from the S&P 500 is 10% in earnings and 7% in
revenues, yet the multiples for 1997 and 1998 are 17.6 and 16.7 times. This
represents 176% and 167% of its projected growth rate. The market ultimately
rewards real sales growth and unit volume expansion, which appears to us to be
less likely within the large-cap arena. It is numbers like these that make the
case for investing in small to mid-cap growth stocks so compelling. This is
why we feel that at some point during this year we will experience one of the
best buying opportunities among those stocks of the past fifteen years. Stocks
are ultimately driven by earnings and not money flows.
/S/ B. Anthony Weber /S/ Darrell R. Wells
B. Anthony Weber Darrell R. Wells
Investment Advisor Investment Advisor
April 21, 1997
- -------------------------------------------------------------------------------
-2-
<PAGE>
The Shelby Fund
- -------------------------------------------------------------------------------
The performance of the Fund is measured against the Standard & Poor's 500
Index, an unmanaged index generally representative of the U.S. stock market,
and the Russell 2000 Index, an index of small cap stocks. These indices do not
reflect the deduction of expenses associated with a mutual fund, such as
investment management and fund accounting fees. However, the Fund's
performance reflects the deduction of the fees for these value-added services.
Performance data represents past performance and is not predictive of future
performance. Investment return and the principal value of an investment in the
Fund will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost. The composition of the Fund's holdings
is subject to change.
For more complete information, including charges and expenses, call 1-800-774-
3529 for a prospectus, which you should read carefully before you invest or
send money. Shares are distributed by BISYS Fund Services.
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, SHELBY COUNTY TRUST BANK OR ITS AFFILIATES, AND SHARES ARE NOT
FEDERALLY INSURED BY THE FDIC OR ANY OTHER AGENCY. AN INVESTMENT IN MUTUAL
FUND SHARES INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
- -------------------------------------------------------------------------------
-3-
<PAGE>
TABLE OF CONTENTS
Report of Independent Public Accountants
Page 5
Statement of Assets and Liabilities
Page 6
Statement of Operations
Page 7
Statements of Changes in Net Assets
Page 8
Schedule of Portfolio Investments
Page 9
Notes to Financial Statements
Page 11
Financial Highlights
Page 15
-4-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Shelby Fund
- -------------------------------------------------------------------------------
To the Shareholders and Board of Trustees
of The Shelby Fund of The Coventry Group:
We have audited the accompanying statement of assets and liabilities of The
Shelby Fund of The Coventry Group (a Massachusetts business trust), including
the portfolio of investments, as of March 31, 1997, and the related statements
of operations and changes in net assets and the financial highlights for the
periods indicated thereon. These financial statements and financial highlights
are the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 March 31, 1997, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of The
Shelby Fund as of March 31, 1997, the results of its operations and the
changes in its net assets and the financial highlights for the periods
indicated thereon, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Louisville, Kentucky,
April 30, 1997
- -------------------------------------------------------------------------------
-5-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1997
<TABLE>
<S> <C>
ASSETS:
Investments, at value............................................. $78,308,200
Repurchase agreements............................................. 9,123,674
-----------
Total Investments (cost $86,208,864).......................... 87,431,874
Interest and dividends receivable................................. 6,430
Receivable from brokers for investments sold...................... 2,810,779
Prepaid expenses and other assets................................. 1,469
-----------
Total Assets.................................................. 90,250,552
-----------
LIABILITIES:
Accrued expenses and other payables:
Investment advisory fees........................................ 80,346
Administration fees............................................. 2,275
Accounting and transfer agent fees.............................. 2,036
Legal and audit fees............................................ 17,735
Custodian....................................................... 1,047
Printing........................................................ 8,819
Other........................................................... 1,685
-----------
Total Liabilities............................................. 113,943
-----------
NET ASSETS:
Capital........................................................... 85,612,941
Undistributed (distributions in excess of) net investment income
(loss)............................................................ (22,323)
Net unrealized appreciation from investments...................... 1,223,010
Accumulated undistributed net realized gains from investment
transactions...................................................... 3,322,981
-----------
Net Assets.................................................... $90,136,609
===========
Outstanding units of beneficial interest (shares)................. 8,101,962
===========
Net asset value--offering and redemption price per share.......... $ 11.13
===========
</TABLE>
See notes to financial statements.
-6-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest income.................................................... $ 411,838
Dividend income.................................................... 243,989
-----------
Total Income..................................................... 655,827
-----------
EXPENSES:
Investment advisory fees........................................... 1,047,031
Administration fees................................................ 209,497
Custodian and accounting fees...................................... 47,156
Legal and audit fees............................................... 30,710
Organization costs................................................. 6,531
Trustees' fees..................................................... 5,634
Transfer agent fees................................................ 22,428
Registration and filing fees....................................... 12,966
Printing costs..................................................... 21,144
Insurance.......................................................... 5,017
-----------
Total Expenses before expenses voluntarily reduced............... 1,408,114
Expenses voluntarily reduced..................................... (52,442)
-----------
Net expenses..................................................... 1,355,672
-----------
Net investment loss................................................ (699,845)
-----------
REALIZED/UNREALIZED GAINS FROM INVESTMENTS:
Net realized gains from investment transactions.................... 5,614,714
Net change in unrealized appreciation from investments............. (7,698,343)
-----------
Net realized/unrealized loss from investments...................... (2,083,629)
-----------
Change in net assets resulting from operations..................... $(2,783,474)
===========
</TABLE>
See notes to financial statements.
-7-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment loss............................. $ (699,845) $ (472,428)
Net realized gains from investment transactions. 5,614,714 18,737,990
Net change in unrealized appreciation
(depreciation) from investments................ (7,698,343) 2,503,779
------------ ------------
Change in net assets resulting from operations... (2,783,474) 20,769,341
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net realized gains from investment
transactions.................................... (3,312,679) (15,886,419)
------------ ------------
Change in net assets from shareholder
distributions.................................... (3,312,679) (15,886,419)
------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued..................... 11,030,463 17,304,965
Dividends reinvested............................ 3,303,173 15,832,397
Cost of shares redeemed......................... (13,458,122) (6,819,876)
------------ ------------
Change in net assets from share transactions..... 875,514 26,317,486
------------ ------------
Change in net assets............................. (5,220,639) 31,200,408
NET ASSETS:
Beginning of period............................. 95,357,248 64,156,840
------------ ------------
End of period................................... $ 90,136,609 $ 95,357,248
============ ============
End of year distributions in excess of net
investment income.............................. $ (22,323) $ (25,762)
============ ============
SHARE TRANSACTIONS:
Issued.......................................... 864,830 1,376,875
Reinvested...................................... 261,120 1,375,534
Redeemed........................................ (1,091,777) (521,057)
------------ ------------
Change in shares................................. 34,173 2,231,352
============ ============
</TABLE>
See notes to financial statements.
-8-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1997
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
--------- ------------------------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS (86.8%):
Apparel Manufacturers (1.9%):
32,100 Ashworth, Inc. (b)..................................... $ 256,800
97,200 Cutter & Buck, Inc. (b)................................ 1,482,300
-----------
1,739,100
-----------
Banks (1.8%):
81,400 Riggs National Corp.................................... 1,638,175
-----------
Chemicals--Plastics (0.9%):
120,500 Southwall Technologies, Inc. (b)....................... 798,312
-----------
Commercial Services (1.0%):
44,200 Whittman-Hart, Inc. (b)................................ 939,250
-----------
Communication Software (0.2%):
11,000 SeaChange International, Inc. (b)...................... 195,250
-----------
Computer & Peripherals (3.3%):
26,400 Advanced Logic Research, Inc. (b)...................... 247,500
112,200 Microage, Inc. (b)..................................... 1,514,700
60,700 Microtouch, Inc........................................ 1,198,825
-----------
2,961,025
-----------
Computer--Integrated Systems (2.5%):
51,150 Henry (Jack) & Associates.............................. 1,138,087
51,400 MTS Systems Corp....................................... 1,130,800
-----------
2,268,887
-----------
Computer Services (0.7%):
40,850 Computer Management Sciences,
Inc. (b).............................................. 602,537
-----------
Computer Software (2.3%):
25,900 Digex, Inc. (b)........................................ 181,300
29,200 JDA Software Group, Inc. (b)........................... 594,950
30,300 McAfee Associates, Inc. (b)............................ 1,340,775
-----------
2,117,025
-----------
Diversified--Conglomerates, Holding Companies (1.4%):
25,600 Kansas City Southern Industries, Inc................... 1,280,000
-----------
Financial Services (1.7%):
41,800 Sirrom Capital Corp.................................... 1,515,250
-----------
Home Furnishing (1.9%):
133,500 O'Sullivan Industries Holdings,
Inc. (b).............................................. 1,685,437
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
--------- ------------------------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Human Resources (1.6%):
74,825 COREStaff, Inc. (b).................................... $ 1,477,794
-----------
Machinery--Thermal Process (2.8%):
164,800 TurboChef, Inc. (b).................................... 2,533,800
-----------
Manufacturing--Toys (1.5%):
78,000 Equity Marketing (b)................................... 1,345,500
-----------
Medical Equipment (1.4%):
41,900 Advanced Technology Labs, Inc. (b)..................... 1,241,287
-----------
Medical Services--Health Maintenance
Organization (1.6%):
25,100 Oxford Health Plans, Inc. (b).......................... 1,471,487
-----------
Networking Products (0.9%):
101,100 Larscom, Inc. (b)...................................... 846,713
-----------
Oil & Gas Exploration, Production & Services (20.9%):
93,300 Barrett Resources Corp. (b)............................ 2,787,338
100,700 Global Marine, Inc. (b)................................ 2,165,050
99,700 Marine Drilling Cos., Inc. (b)......................... 1,769,675
79,800 Noble Drilling Corp. (b)............................... 1,376,550
16,000 Offshore Energy Development
Corp. (b)............................................. 144,000
180,600 Oryx Energy Co. (b).................................... 3,476,550
24,300 Parker & Parsley Petroleum Co.......................... 716,850
68,200 Reading & Bates Corp. (b).............................. 1,543,025
139,000 Rowan Companies, Inc................................... 3,144,875
190,900 Unit Corp. (b)......................................... 1,718,100
-----------
18,842,013
-----------
Oil Field Equipment & Services (8.1%):
5,000 American Oilfield Divers, Inc. (b)..................... 56,250
69,100 Dreco Energy Service Ltd. (b).......................... 2,349,400
98,000 Pool Energy Services (b)............................... 1,445,500
19,200 Seacor Holdings, Inc. (b).............................. 1,029,600
95,000 Varco International, Inc. (b).......................... 2,375,000
-----------
7,255,750
-----------
Pharmaceuticals (2.2%):
46,000 BioChem Pharma, Inc. (b)............................... 1,978,000
-----------
Physical Therapy/Rehabilitation Centers (0.9%):
64,700 NovaCare, Inc. (b)..................................... 784,488
-----------
Resorts/Theme Parks (0.8%):
64,600 Vistana, Inc. (b)...................................... 726,750
-----------
</TABLE>
Continued
-9-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
MARCH 31, 1997
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
--------- ------------------------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Restaurants (8.9%):
206,600 Landry's Seafood Restaurants,
Inc. (b).............................................. $ 3,279,775
75,950 Logan's Roadhouse, Inc. (b)............................ 1,594,950
70,200 Papa John's International, Inc. (b).................... 1,851,525
89,000 PJ America, Inc. (b)................................... 1,279,375
-----------
8,005,625
-----------
Retail--Apparel/Shoes (5.4%):
194,100 Genesco, Inc........................................... 2,183,625
157,700 Just For Feet, Inc. (b)................................ 2,720,325
-----------
4,903,950
-----------
Telecommunication Equipment (6.1%):
24,400 Ascend Communications, Inc. (b)........................ 994,300
51,300 CIENA Corp. (b)........................................ 1,458,844
60,900 Tekelec (b)............................................ 1,157,100
49,800 Uniphase Corp. (b)..................................... 1,842,600
-----------
5,452,844
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
--------- ------------------------------------------------------ -----------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Textile Manufacturing (3.1%):
73,700 WestPoint Stevens, Inc. (b)........................... $ 2,809,813
-----------
Trucking Local & Long Distance (1.0%):
47,900 Yellow Corp. (b)...................................... 892,138
-----------
Total Common Stocks 78,308,200
-----------
REPURCHASE AGREEMENTS (10.1%):
9,123,674 Fifth Third Bank, 5.09%, dated 3/31/97 due 4/1/97
(Collateralized by $9,463,000 Federal Home Loan
Mortgage Corp., 7.00%, 2/1/11 market value--
$9,306,273).......................................... 9,123,674
-----------
Total Repurchase Agreements 9,123,674
-----------
Total (Cost--$87,012,675) (a) $87,431,874
===========
</TABLE>
- ------
Percentages indicated are based on net assets of $90,136,609.
(a) Represents cost for federal tax purposes and differs from Value by net
unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.......... $ 8,133,306
Unrealized depreciation.......... (7,714,107)
-----------
Net unrealized appreciation...... $ 419,199
===========
</TABLE>
(b) Represents non-income producing securities.
See notes to financial statements.
-10-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
1.ORGANIZATION:
The Coventry Group (the "Group") was organized on January 8, 1992 as a
Massachusetts business trust, and is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as a diversified, open-end
management investment company. Between the date of organization and the date
of commencement of operations (July 1, 1994) of The Shelby Fund (the
"Fund"), a series of the Group, the Fund earned no investment income and had
no operations other than incurring organizational expenses. The Fund's
investment objective is to seek capital appreciation by investing primarily
in a diversified portfolio of equity securities.
The Fund is authorized to issue an unlimited number of shares which are
units of beneficial interest with a par value of $0.01 per share. Sale of
shares of the Fund may be made to the general public.
2. SIGNIFICANT ACCOUNTING PRINCIPLES:
The following is a summary of significant accounting policies followed by
the Fund in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles. The preparation of
financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of income and expenses for
the period. Actual results could differ from those estimates.
SECURITIES VALUATION:
Investments in common and preferred stocks, commercial paper, corporate
bonds, U.S. Government securities and U.S. Government agency securities
of The Shelby Fund are valued at their market values determined on the
basis of the latest available bid quotation in the principal market
(closing sales prices if the principal market is an exchange) in which
such securities are normally traded. Investments in investment companies
are valued at their respective net asset values as reported by such
companies. Securities, including restricted securities, for which market
quotations are not readily available, are valued at fair market value by
the investment adviser under the supervision of the Group's Board of
Trustees. The differences between the cost and market values of
investments held by the Fund are reflected as either unrealized
appreciation or depreciation.
SECURITY TRANSACTIONS AND RELATED INCOME:
Security transactions are accounted for on the date the security is
purchased or sold (trade date). Interest income is recognized on the
accrual basis and includes, where applicable, the pro rata amortization
of premium or discount. Dividend income is recorded on the ex-dividend
date. Gains or losses realized on sales of securities are determined by
comparing the identified cost of the security lot sold with the net sales
proceeds.
Continued
-11-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
NOTES TO FINANCIAL STATEMENTS, CONTINUED
MARCH 31, 1997
REPURCHASE AGREEMENTS:
The Fund may acquire repurchase agreements from financial institutions
such as banks and broker dealers which the investment adviser, Shelby
County Trust Bank, deems creditworthy under guidelines approved by the
Board of Trustees, subject to the seller's agreement to repurchase such
securities at a mutually agreed-upon date and price. The repurchase price
generally equals the price paid by the Fund plus interest negotiated on
the basis of current short-term rates, which may be more or less than the
rate on the underlying portfolio securities. The seller, under a
repurchase agreement, is required to maintain the value of collateral
held pursuant to the agreement at not less than the repurchase price
(including accrued interest). Securities subject to repurchase agreements
are held by the Fund's custodian or another qualified custodian or in the
Federal Reserve/Treasury book-entry system. Repurchase agreements are
considered to be loans by the Fund under the 1940 Act.
OPTIONS TRANSACTIONS:
The Fund enters into options transactions only as a hedge against
fluctuations in the value of securities which the Fund holds or intends
to purchase. During the year ended March 31, 1997, the Fund entered into
no options transactions.
When the Fund writes a covered call or put option, an amount equal to the
net premium received is included in the Fund's statement of assets and
liabilities as a liability. The amount of the liability is subsequently
marked-to-market to reflect the current market value of the option. If an
option expires on its stipulated expiration date or if the Fund enters
into a closing purchase transaction, a gain or loss is realized. If a
written call option is exercised, a gain or loss is realized for the sale
of the underlying security and the proceeds from the sale are increased
by the premium originally received. If a written put option is exercised,
the cost of the security acquired is decreased by the premium originally
received.
When the Fund purchases a call or put option, an amount equal to the
premium paid is included in the Fund's statement of assets and
liabilities as an investment, and is subsequently marked-to-market to
reflect the current market value of the option. If an option expires on
the stipulated expiration date or if the Fund enters into a closing sale
transaction, a gain or loss is realized. If the Fund exercises a call
option, the cost of the security acquired is increased by the premium
paid for the call. If the Fund exercises a put option, a gain or loss is
realized from the sale of the underlying security, and the proceeds from
such sale are decreased by the premium originally paid. Written and
purchased options are non- income producing securities.
DIVIDENDS TO SHAREHOLDERS:
Dividends from net investment income are declared and paid quarterly and
distributable net realized capital gains, if any, are declared and
distributed at least annually for the Fund.
Continued
-12-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
NOTES TO FINANCIAL STATEMENTS, CONTINUED
MARCH 31, 1997
Dividends from net investment income and from net realized capital gains
are determined in accordance with income tax regulations which may differ
from generally accepted accounting principles. These differences are
primarily due to differing treatments for organization costs and
deferrals of certain losses.
FEDERAL INCOME TAXES:
It is the policy of the Fund to qualify as a regulated investment company
by complying with the provisions available to certain investment
companies, as defined in applicable sections of the Internal Revenue
Code, and to make distributions of net investment income and net realized
capital gains sufficient to relieve it from all, or substantially all,
Federal income taxes.
During the year ended March 31, 1997, the Fund has reclassified $677,522
from accumulated undistributed net investment loss to accumulated
undistributed net realized gains from investments in compliance with
Statement of Position 93-2, "Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies". This reclassification, which has
no impact on the net asset value of the Fund, is primarily attributable
to certain differences in the computation of net investment income and
capital gains under federal tax rules and generally accepted accounting
principles. The difference of $803,811 between financial reporting and
tax cost for investments is due to certain timing differences in
recognizing capital losses under generally accepted accounting principles
and tax rules.
OTHER:
Expenses that are directly related to the Fund are charged directly to
the Fund. Expenses relating to the Group are prorated to all the
investment portfolios of the Group, including the Fund, on the basis of
each Fund's relative net assets.
ORGANIZATION COSTS:
All expenses in connection with the Fund's organization and registration
under the 1940 Act and the Securities Act of 1933 were paid by the Fund.
Such expenses are being amortized over a period of two years commencing
with the date of the initial public offering.
3.PURCHASES AND SALES OF SECURITIES:
Purchases and sales of securities (excluding short-term securities) for the
year ended March 31, 1997 were $194,470,917 and $205,198,167, respectively.
Continued
-13-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
NOTES TO FINANCIAL STATEMENTS, CONTINUED
MARCH 31, 1997
4.RELATED PARTY TRANSACTIONS:
Investment advisory services are provided to the Fund by Shelby County Trust
Bank. Under the terms of the investment advisory agreement, Shelby County
Trust Bank is entitled to receive fees computed daily based on a percentage
of the average net assets of the Fund. SMC Capital, Inc. is the sub-
investment adviser for the Fund.
BISYS Fund Services Limited Partnership d/b/a BISYS Fund Services ("BISYS"),
an Ohio limited partnership, and BISYS Fund Services Ohio, Inc. are
subsidiaries of The BISYS Group, Inc.
BISYS, with whom certain officers and trustees of the Group are affiliated,
serves the Fund as administrator. Such officers and trustees are paid no
fees directly by the Fund for serving as officers and trustees of the Group.
Under the terms of the administration agreement, BISYS' fees are computed
daily as a percentage of the average net assets of the Fund.
BISYS Fund Services Ohio, Inc. (the "Company"), serves the Fund as Transfer
Agent and Fund Accountant. Under the terms of the Transfer Agent and Fund
Accountant Agreements, the Company's fees are computed on the basis of the
number of shareholders and average net assets, respectively.
Fees may be voluntarily reduced to assist the Fund in maintaining
competitive expense ratios. Information regarding these transactions is as
follows for the year ended March 31, 1997:
<TABLE>
<S> <C>
INVESTMENT ADVISORY FEES:
Annual fee (percentage of average net assets)....................... 1.00%
ADMINISTRATION FEES:
Annual fee before voluntary fee reductions (percentage of average
net assets)......................................................... 0.20%
Voluntary fee reductions............................................ $52,442
TRANSFER AGENT & FUND ACCOUNTANT FEES:.............................. $55,468
</TABLE>
5.FEDERAL TAX INFORMATION (UNAUDITED)
During the year ended March 31, 1997 the Fund distributed long-term capital
gains of $764,687, while 4.21% of the income dividends paid by the Fund
qualify for the dividends received deduction available to corporations.
-14-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED JULY 1, 1994 TO
MARCH 31, 1997 MARCH 31, 1996 MARCH 31, 1995 (A)
-------------- -------------- ------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD........................ $ 11.82 $ 10.99 $ 10.00
------- ------- -------
INVESTMENT ACTIVITIES:
Net investment income (loss). (0.09) (0.06) 0.06
Net realized and unrealized
gains (losses) from
investments.................. (0.19) 3.44 1.04
------- ------- -------
Total from Investment
Activities................. (0.28) 3.38 1.10
------- ------- -------
DISTRIBUTIONS:
Net investment income........ -- -- (0.06)
Net realized gains........... (0.41) (2.55) (0.05)
------- ------- -------
Total Distributions......... (0.41) (2.55) (0.11)
------- ------- -------
NET ASSET VALUE, END OF
PERIOD........................ $ 11.13 $ 11.82 $ 10.99
======= ======= =======
Total Return.................. (2.80)% 31.41% 11.04%(b)
RATIOS/SUPPLEMENTAL DATA
Net Assets at end of period
(000)........................ $90,137 $95,357 $64,157
Ratio of expenses to average
net assets................... 1.29% 1.33% 1.41%(c)
Ratio of net investment
income (loss) to average net
assets....................... (0.67%) (0.58%) 0.74%(c)
Ratio of expenses to average
net assets*.................. 1.34% 1.38% 1.46%(c)
Ratio of net investment
income (loss) to average net
assets*..................... (0.72%) (0.63%) 0.69%(c)
Portfolio turnover........... 204.06% 292.28% 101.86%
Average commission rate paid
(d).......................... $0.0617
</TABLE>
- ------
* During the period, certain fees were voluntarily reduced. If such voluntary
fee reductions had not occurred, the ratios would have been as indicated.
(a) Period from commencement of operations.
(b) Not annualized.
(c) Annualized.
(d) Represents the total dollar amount of commissions paid on portfolio
transactions for the year ended March 31, 1997, divided by total number of
portfolio shares purchased and sold for which commissions were charged.
Disclosure is not required for prior periods.
See notes to financial statements.
-15-
<PAGE>
INVESTMENT ADVISER
Shelby County Trust Bank
P.O. Box 249
Shelbyville, Kentucky 40066
SUB-INVESTMENT ADVISER
SMC Capital, Inc.
4350 Brownsboro Rd.
Suite 310
Louisville, Kentucky 40207
ADMINISTRATOR AND DISTRIBUTOR
BISYS Fund Services
3435 Stelzer Road
Columbus, Ohio 43219
LEGAL COUNSEL
Dechert Price & Rhoads
1500 K Street, N.W.
Washington, D.C. 20005
AUDITORS
Arthur Andersen LLP
2300 Meidinger Tower
Louisville Galleria
Louisville, Kentucky 40202
5/97
[LOGO OF THE SHELBY FUND]
SHELBY COUNTY TRUST BANK INVESTMENT ADVISER
SMC CAPITAL, INC. SUB-INVESTMENT ADVISER
ANNUAL REPORT TO SHAREHOLDERS MARCH 31, 1997
BISYS FUND SERVICES 3435 STELZER ROAD COLUMBUS, OHIO 43219
