<PAGE>
The Shelby Fund
- -------------------------------------------------------------------------------
Dear Shelby Fund Shareholder,
The latest six months have been a roller coaster ride for shareholders of
smaller companies, and for mutual funds which invest in them. For the six
months ending September 30, 1998, The Shelby Fund lost 20.32% versus a loss of
6.97% for the S&P 500 and a loss of 23.87% for the Russell 2000. Year-to-date
the fund lost 10.19% versus a gain of 6.00% for the S&P 500 and a loss of
16.21% for the Russell 2000. The one-year number is a loss of 22.35% versus a
return of 9.05% for the S&P 500 and a loss of 19.02% for the Russell 2000.
However, The Shelby Fund's five and ten year returns are a positive 7.89% and
15.73% respectively.*
As we have stated larger companies, as represented by the S&P 500, did very
well compared to small and medium sized companies, as measured by the Russell
2000, as they have for the last several years. It is important to note that
the objective of the Shelby Fund continues to be Aggressive Growth and Capital
Appreciation but in the future it will have a more flexible approach with
regard to capitalization size and hedging techniques. These changes will be
sent to you soon in the form of a revised prospectus.
POSITIVE CHANGES FOR THE FUND
For the benefit of the shareholders of The Shelby Fund, we have also
instituted some additional changes (without altering our Objective of
Aggressive Long-Term Growth).
First, the portfolio management team was changed to have two Chartered
Financial Analysts with years of experience; Jim Shircliff and Greg Deuser
joined Darrell Wells in the management of the Fund.
Second, recognizing that the predominant focus on small companies had hurt
performance; the Fund began to selectively and gradually invest in strong
growth companies of ALL sizes.
Over the past several years, Wall Street had bid up a limited universe of
small "momentum" companies growing at accelerating rates. Predictably, the
prices of these few companies had gotten too high for the risks involved,
which was proven by the disappointing effects of small misses in earnings
estimates. For these reasons, our selection criteria for companies with
earnings momentum has placed greater emphasis on ones who are run by
shareholder-oriented management, have free cash flow generation, improving
margins, and which we believe exhibit SUSTAINABLE growth at REASONABLE
prices relative to their growth rates.
RECENT RESULTS
The quarter ending September 30, 1998 saw what we believe may be the final
stage of capitulation in many of the small stocks. The Russell 2000 and the
S&P Small Cap 600 Indices dropped over 20% in the quarter. The Fund was also
off by a similar amount, down 21.1%. The problems which confronted the market
in the third quarter, are well known. Weaknesses in foreign economies (Asia,
Russia, South America), unstable foreign currencies, near failures in large
and leveraged hedge funds, turmoil in the asset-backed securities markets,
junk bond market weakness, wavering of consumer confidence, looming
impeachment proceedings, lowered earnings estimates indicating slower overall
growth, and concerns about a possible recession (which we believe can be
avoided) all fed the free fall in the small cap market.
POSITIVE CHANGES FOR THE PORTFOLIO
Over the last several months, we have been restructuring the portfolio in line
with the criteria mentioned above. Larger-sized, high quality growth companies
such as Microsoft (3.74% of the portfolio), MCI Worldcom
- -------------------------------------------------------------------------------
-1-
<PAGE>
The Shelby Fund
- --------------------------------------------------------------------------------
(2.65%), and Lucent (2.81%) were added. Mid-sized companies with sustainable
growth, free cash flow and shareholder-oriented managements such as Clear
Channel Communications (3.87%), Checkfree (2.71%) and Staples (1.68%) are
recent additions. The Fund also continues to invest in smaller-sized companies,
which have the potential to grow more rapidly.
OPTIMISTIC OUTLOOK
Our outlook is one of optimism as we look forward to the coming year. We
believe Alan Greenspan's surprise rate cuts in October may well mark the end of
the recent market correction and is the basis for our conclusion that a
recession can be avoided. The Fund has been positioned to benefit from
continued relative strength in the U.S. economy and the possibility of lower
interest rates on the horizon. Many stocks may have seen their lows as mutual
funds have probably finished their portfolio window dressing with respect to
their October tax year-end.
SUMMARY
We remain optimistic about the intermediate and long-term investment outlook
while recognizing the near-term uncertainties. We have, however, made the
changes in management and expanded the flexibility to include growth companies
of all capitalizations to try to improve our ability to attain our investment
objectives. Going forward we believe the securities we hold will continue to
show the possibility of such factors as sustainability of earnings,
shareholder-oriented managements and reasonable prices relative to the growth
rates. The bottom line to all of this is that the Shelby Fund remains committed
to its objective of Aggressive Long-Term Growth. We remain optimistic that
these refinements in management and strategy will produce enhanced
predictability and perhaps stronger performance in the days and years ahead.
Finally, thank you for your continued support during both up and down markets.
We believe that the Shelby Fund will return to its impressive long-term record
and will reward you well for your patience.
Sincerely,
/s/ Darrell R. Wells /s/ James C. Shircliff
Darrell R. Wells James C. Shircliff, CFA
Investment Advisor Investment Advisor
/s/ Greg E. Deuser, CFA
Greg E. Deuser, CFA
Investment Advisor
October 28, 1998
- --------------------------------------------------------------------------------
-2-
<PAGE>
The Shelby Fund
- -------------------------------------------------------------------------------
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 SHARE, WHEN REDEEMED, MAY BE WORTH
MORE OR LESS THAN THEIR ORIGINAL COST. THE COMPOSITION OF THE FUND'S HOLDINGS
IS SUBJECT TO CHANGE.
The performance of the Fund is measured against unmanaged indices, the
Standard & Poors 500 Index, generally representative of the U.S. stock market,
and the Russell 2000 and S&P Small Cap 600 Indices, which are representative
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.
*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.
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
Statements of Assets and Liabilities
Page 5
Statements of Operations
Page 6
Statements of Changes in Net Assets
Page 7
Schedules of Portfolio Investments
Page 8
Notes to Financial Statements
Page 10
Financial Highlights
Page 14
-4-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS:
Investments, at value................................................ $36,802,803
Repurchase agreements................................................ 55,339
-----------
Total Investments (cost $43,646,970)............................. 36,858,142
Interest and dividends receivable.................................... 10,622
Prepaid expenses and other assets.................................... 13,791
-----------
Total Assets..................................................... 36,882,555
-----------
LIABILITIES:
Accrued expenses and other payables:
Investment advisory fees........................................... 32,096
Administration fees................................................ 467
Other.............................................................. 35,797
-----------
Total Liabilities.................................................. 68,360
-----------
NET ASSETS:
Capital.............................................................. 41,203,787
Undistributed net investment income/(loss)........................... (239,540)
Net unrealized appreciation/(depreciation) from investments.......... (6,788,828)
Accumulated undistributed net realized gains/(losses) from investment
transactions......................................................... 2,638,776
-----------
Net Assets....................................................... $36,814,195
===========
Outstanding units of beneficial interest (shares).................... 4,439,683
===========
Net asset value--offering and redemption price per share............. $8.29
===========
</TABLE>
See notes to financial statements.
-5-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest income.................................................... $ 95,547
Dividend income.................................................... 101,453
------------
Total Income..................................................... 197,000
------------
EXPENSES:
Investment advisory fees........................................... 308,086
Administration fees................................................ 61,618
Custodian and accounting fees...................................... 21,376
Legal and audit fees............................................... 11,818
Trustees' fees..................................................... 9,059
Transfer agent fees................................................ 15,386
Registration and filing fees....................................... 1,894
Printing costs..................................................... 3,934
Insurance fees..................................................... 5,378
Other.............................................................. 1,043
------------
Total Expenses before expenses voluntarily reduced............... 439,592
Expenses voluntarily reduced..................................... (15,405)
------------
Net expenses..................................................... 424,187
------------
Net investment income/(loss)....................................... (227,187)
------------
REALIZED/UNREALIZED GAINS FROM INVESTMENTS:
Net realized gains/(losses) from investment transactions........... 20,230,952
Net change in unrealized appreciation/(depreciation) from
investments........................................................ (30,765,541)
------------
Net realized/unrealized gains/(losses) from investments............ (10,534,589)
------------
Change in net assets resulting from operations..................... $(10,761,776)
============
</TABLE>
See notes to financial statements.
-6-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, MARCH 31,
1998 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment income/(loss)..................... $ (227,187) $ (971,641)
Net realized gains/(losses) from investment
transactions..................................... 20,230,952 9,905,503
Net change in unrealized
appreciation/(depreciation) from investments..... (30,765,541) 22,753,703
------------ ------------
Change in net assets resulting from operations.... (10,761,776) 31,687,565
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net realized gains from investment
transactions..................................... (17,033,347) (12,805,702)
------------ ------------
Change in net assets from distributions to
shareholders...................................... (17,033,347) (12,805,702)
------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued...................... 1,984,213 5,255,254
Dividends reinvested............................. 17,015,661 12,747,523
Cost of shares redeemed.......................... (44,934,812) (36,476,993)
------------ ------------
Change in net assets from capital transactions.... (25,934,938) (18,474,216)
------------ ------------
Change in net assets.............................. (53,730,061) 407,647
NET ASSETS:
Beginning of period.............................. 90,544,256 90,136,609
------------ ------------
End of period.................................... $ 36,814,195 $ 90,544,256
============ ============
SHARE TRANSACTIONS:
Issued........................................... 169,157 405,539
Reinvested....................................... 1,718,754 1,002,952
Redeemed......................................... (4,075,128) (2,883,553)
------------ ------------
Change in shares.................................. (2,187,217) (1,475,062)
============ ============
</TABLE>
See notes to financial statements.
-7-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
--------- ------------------------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS (98.1%):
Advertising (5.3%):
1,000 Grey Advertising, Inc.................................. $ 328,000
30,000 Lamar Advertising Co.(b)............................... 840,000
40,000 Outdoor Systems, Inc.(b)............................... 780,000
-----------
1,948,000
-----------
Aerospace/Defense--Equipment (1.6%):
10,000 Textron, Inc........................................... 606,250
-----------
Apparel Manufacturers (1.2%):
21,500 Polo Ralph Lauren, Corp.(b)............................ 428,656
-----------
Audio/Video Products (0.9%):
5,000 Sony Corporation Sponsored ADR......................... 343,750
-----------
Banks (7.9%):
20,000 Greenpoint Financial Corp.............................. 637,500
20,000 National City Corp..................................... 1,318,750
14,000 Pacific Bank N.A....................................... 609,000
30,000 Pointe Financial Corp.(b).............................. 345,000
-----------
2,910,250
-----------
Commercial Services (8.4%):
20,000 ABM Industries, Inc.................................... 585,000
40,000 Cendant Corp.(b)....................................... 465,000
20,000 Fiserv, Inc.(b)........................................ 921,250
20,000 Nova Corp.(b).......................................... 613,750
10,000 Paychex, Inc........................................... 515,625
-----------
3,100,625
-----------
Computer Services (3.5%):
101,000 Checkfree Holdings Corp.(b)............................ 997,375
40,000 Radiant Systems, Inc................................... 307,500
-----------
1,304,875
-----------
Computer Software (6.3%):
15,000 Cisco Systems, Inc.(b)................................. 927,188
12,500 Microsoft Corp.(b)..................................... 1,375,781
-----------
2,302,969
-----------
Computers--Peripheral Equipment (5.5%):
20,000 Compaq Computer Corp................................... 632,500
20,000 Lexmark International Group(b)......................... 1,386,250
-----------
2,018,750
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
--------- ------------------------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Distribution (0.2%):
10,000 Intercept Group, Inc.(b)............................... $ 60,000
-----------
Education Services (0.6%):
10,000 Sylvan Learning Systems, Inc.(b)....................... 233,750
-----------
Financial Services (1.9%):
23,400 Morgan Keegan, Inc..................................... 413,888
50,000 Towne Services, Inc.(b)................................ 275,000
-----------
688,888
-----------
Food Products & Services (6.6%):
20,000 Hain Food Group, Inc.(b)............................... 300,000
15,000 Suiza Foods Corp.(b)................................... 468,750
26,250 Whole Foods Market(b).................................. 1,105,781
20,000 Wild Oats Markets, Inc.(b)............................. 542,500
-----------
2,417,031
-----------
Health Care--General Products (2.1%):
30,000 Twinlab Corp.(b)....................................... 768,750
-----------
Insurance (4.2%):
18,000 Chicago Title Corp..................................... 794,250
20,000 Hilb, Rogal & Hamilton Co.............................. 377,500
10,000 Travelers, Inc......................................... 375,000
-----------
1,546,750
-----------
Leisure & Recreation (1.0%):
20,000 Speedway Motorsports, Inc.(b).......................... 377,500
-----------
Medical & Hospital Management Services (1.0%):
23,600 Lab Holdings, Inc...................................... 359,900
-----------
Medical Equipment & Supplies (1.9%):
60,000 Pharmerica, Inc.(b).................................... 326,250
93,300 Vencor, Inc............................................ 373,200
-----------
699,450
-----------
Multimedia (8.8%):
40,000 CBS Corp............................................... 970,000
25,000 Chancellor Media Corp.(b).............................. 834,375
30,000 Clear Channel Communications, Inc.(b).................. 1,425,000
-----------
3,229,375
-----------
</TABLE>
Continued
-8-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
--------- ------------------------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Office Supplies, Automation & Equipment (1.7%):
21,000 Staples, Inc.(b)....................................... $ 616,875
-----------
Oil-Drilling & Gas Wells (1.6%):
40,000 Noble Drilling Corp.(b)................................ 590,000
-----------
Real Estate (1.7%):
20,000 Starwood Lodging Trust................................. 610,000
-----------
Restaurants (2.9%):
31,200 Papa John's International, Inc.(b)..................... 1,029,600
11,500 Total Entertainment Restaurant Corp.(b)................ 47,438
-----------
1,077,038
-----------
Retail Stores (2.8%):
20,000 Longs Drug Stores Corp................................. 803,750
18,825 Musicland Stores Corp.(b).............................. 232,959
-----------
1,036,709
-----------
Security Services (1.3%):
25,800 Wackenhut Corp......................................... 486,975
-----------
Telecommunications (9.3%):
20,000 MCI Worldcom, Inc.(b).................................. 977,500
40,000 Qwest Communications International, Inc.(b)............ 1,252,499
20,000 Sinclair Broadcasting Group............................ 970,000
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
--------- ------------------------------------------------------ -----------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Telecommunications, continued:
7,500 Young Broadcasting(b)................................. $ 255,000
-----------
3,454,999
-----------
Telecommunications Equipment (7.9%):
70,000 Advanced Fibre Communication(b)....................... 481,250
40,000 American Tower Systems(b)............................. 1,020,000
15,000 Lucent Technologies, Inc.............................. 1,035,938
20,000 Omniamerica, Inc.(b).................................. 377,500
-----------
2,914,688
-----------
Total Common Stocks (Cost $42,819,331) 36,132,803
-----------
PREFERRED STOCKS (1.8%):
Food Products & Services (1.8%):
20,000 Suiza Foods Preferred Stock, 5.50%, 4/1/28............ 670,000
-----------
Total Preferred Stocks (Cost $772,300) 670,000
-----------
REPURCHASE AGREEMENTS (0.2%):
55,339 Fifth Third Bank, 4.55%, 10/1/98 (Collateralized by
$57,000 Federal National Mortgage, 6.75%, 7/1/24,
market value--$57,000)............................... 55,339
-----------
Total Repurchase Agreements (Cost $55,339) 55,339
-----------
Total (Cost $43,646,970) (a) $36,858,142
===========
</TABLE>
- ------
Percentages indicated are based on net assets of $36,814,195.
(a) Represents cost for federal tax purposes and differs from value by net
unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation. $ 1,244,403
Unrealized depreciation. (8,033,231)
-----------
Net unrealized
depreciation............ $(6,788,828)
===========
</TABLE>
(b) Represents non-income producing securities.
ADR--American Depository Receipt
See notes to financial statements.
-9-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
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
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 value by the investment adviser
under the supervision of the Group's Board of Trustees.
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 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
-10-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
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.
Repurchase agreements are considered to be loans by the Fund under the
1940 Act.
OPTIONS TRANSACTIONS:
The Fund may enter into options only as a hedge against fluctuations in
the value of securities, which the Fund holds or intends to purchase.
During the six months ended September 30, 1998, the Fund entered into no
options.
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, if any, are declared and paid
quarterly and distributable net realized capital gains, if any, are
declared and distributed at least annually for the Fund.
Continued
-11-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
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.
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.
3. PURCHASES AND SALES OF SECURITIES:
Purchases and sales of securities (excluding short-term securities) for the
six months ended September 30, 1998 were $61,986,593 and $104,927,124,
respectively.
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 and has been engaged to provide day-to-day
investment advisory services to 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.
Continued
-12-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
Fees may be voluntarily reduced to assist the Fund in maintaining
competitive expense ratios. Information regarding these transactions is as
follows for the six months ended September 30, 1998
<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............................................ $15,405
FUND ACCOUNTANT FEES:............................................... $15,456
TRANSFER AGENT FEES:................................................ $15,386
</TABLE>
-13-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest
outstanding throughout the period indicated:
<TABLE>
<CAPTION>
SIX MONTHS YEAR YEAR YEAR JULY 1,
ENDED ENDED ENDED ENDED 1994 TO
SEPTEMBER 30, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1998 1997 1996 1995(A)
------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $ 13.66 $ 11.13 $ 11.82 $ 10.99 $ 10.00
------- ------- ------- ------- -------
INVESTMENT ACTIVITIES:
Net investment
income/(loss).......... (0.05) (0.15) (0.09) (0.06) 0.06
Net realized
gains/(losses) from
investment
transactions.......... (2.22) 4.40 (0.19) 3.44 1.04
------- ------- ------- ------- -------
Total from Investment
Activities........... (2.27) 4.25 (0.28) 3.38 1.10
------- ------- ------- ------- -------
DISTRIBUTIONS:
Net investment
income/(loss).......... -- -- -- -- (0.06)
Net realized
gains/(losses) from
investments........... (3.10) (1.72) (0.41) (2.55) (0.05)
------- ------- ------- ------- -------
Total Distributions... (3.10) (1.72) (0.41) (2.55) (0.11)
------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD.................. $ 8.29 $ 13.66 $ 11.13 $ 11.82 $ 10.99
======= ======= ======= ======= =======
Total Return............ (20.32)%(b) 39.31% (2.80)% 31.41% 11.04%(b)
RATIOS/SUPPLEMENTARY
DATA:
Net Assets, End of
Period (000).......... $36,814 $90,544 $90,137 $95,357 $64,157
Ratio of expenses to
average net assets.... 1.38%(c) 1.29% 1.29% 1.33% 1.41%(c)
Ratio of net investment
income (loss) to
average net assets.... (0.74)%(c) (0.95)% (0.67)% (0.58)% 0.74%(c)
Ratio of expenses to
average net assets*... 1.43%(c) 1.34% 1.34% 1.38% 1.46%(c)
Ratio of net investment
income (loss)
to average net
assets*............... (0.79)%(c) (1.00)% (0.72)% (0.63)% 0.69%(c)
Portfolio Turnover..... 106.24% 176.66% 204.06% 292.28% 101.86%
</TABLE>
- ------
* During the period, certain fees were voluntarily reduced and/or reimbursed.
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.
See notes to financial statements.
-14-
<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
1775 Eye Street, N.W.
Washington, D.C. 20006
AUDITORS
Arthur Andersen LLP
2300 Meidinger Tower
Louisville Galleria
Louisville, Kentucky 40202
11/98
LOGO
THE SHELBY FUND
SHELBY COUNTY TRUST BANK
INVESTMENT ADVISER
SMC CAPITAL, INC.
SUB-INVESTMENT ADVISER
SEMI ANNUAL REPORT
TO
SHAREHOLDERS
SEPTEMBER 30, 1998
BISYS FUND SERVICES
3435 STELZER ROAD
COLUMBUS, OHIO 43219
