<PAGE>
The Shelby Fund
- -------------------------------------------------------------------------------
Dear Shareholder:
Despite a good absolute return over the last 12 months, the Shelby Fund has
continued to lag the S&P 500 and our benchmark Russell 2000 index. Assuming
dividends were reinvested, the total return on the Shelby Fund for the fiscal
year ended March 31, 1998, was 39.3%. The Russell 2000, an index of small and
mid-capitalization stocks most comparable to the Shelby Fund returned 42%
during the same period. The S&P 500, an index of large capitalization stocks
returned 48%. During the first quarter of 1998, the Shelby Fund had a 12.7%
return, while the Russell 2000 and S&P 500 were up 10.1% and 14.0%
respectively. It was clearly an outstanding year to be an investor and the
greatest rewards continue to accrue to those who invest in the largest stocks.
While this market environment has persisted for several years, we believe the
market will eventually find renewed interest in the superior revenue and
earnings growth characteristics available from small and mid-capitalization
stocks.
[GRAPH APPEARS HERE]
Value of a $10,000 Investment
<TABLE>
<CAPTION>
Shelby Fund S&P 500 Russell 2000
<S> <C> <C> <C>
1/1/81 10,000 10,000 10,000
3/31/81 10,393 10,596 10,869
3/31/82 12,357 9,226 9,287
3/31/83 16,633 13,287 15,028
3/31/84 16,447 14,457 15,416
3/31/85 16,800 17,189 17,448
3/31/86 20,888 23,697 22,915
3/31/87 24,001 29,860 26,372
3/31/88 22,835 27,420 23,045
3/31/89 25,311 32,378 26,033
3/31/90 31,849 38,576 27,475
3/31/91 41,125 44,124 29,341
3/31/92 47,666 48,999 35,508
3/31/93 58,187 56,459 40,783
3/31/94 66,912 57,276 45,272
3/31/95 70,182 66,199 47,764
3/31/96 92,201 67,412 61,656
3/31/97 89,615 100,119 64,542
3/31/98 125,044 148,273 91,659
</TABLE>
Average Annual Return*
<TABLE>
<S> <C>
1 year: 39.31%
5 year: 16.49%
10 year: 18.52%
Since inception: 15.75%
</TABLE>
Past performance is not predictive of future results.
*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 S&P 500 has proven to be a formidable benchmark to beat for the entire
investment management community. Most of the excess return provided by the S&P
500 comes from a growing awareness and interest on the part of investors in
the largest, most recognizable stocks. There are a variety of reasons for
investors' interest in the large companies. We've noted in the past, the
upward influence of money flowing into indexed investment funds on the stocks
that comprise those indices. A more compelling reason for investors' affinity
with
- -------------------------------------------------------------------------------
-1-
<PAGE>
The Shelby Fund
- -------------------------------------------------------------------------------
large stocks has been the predictability of their earnings growth. We believe
the premium paid for a more certain earnings stream for large-cap stocks has
had greater influence on stock prices than the premium paid for the superior,
but less predictable, growth of small and mid-cap issues.
Another factor contributing to the superior S&P 500 performance is contained
in the very structure of the index. The index is constructed of five hundred
of the largest companies traded on U.S. exchanges covering a broad range of
industries and sectors. The weighting of an individual company within the
index is determined by dividing its market capitalization by the sum of the
market capitalization of all of the stocks in the index. Therefore, a one
percent move in the stock price of General Electric (which represents over 3%
of the S&P 500 index) would have ten times the effect of a one percent move in
Chrysler Corp. (which represents about 0.3%). Consequently, if an S&P 500
stock performs well relative to the others, it grows larger and becomes
increasingly important to the performance of the index. The converse is also
true. Further, if a poor performer eventually becomes insignificant to the
performance of the index, it will eventually be replaced with another stock
that has performed well and grown large enough to influence the performance of
the index. This is called "survivorship bias".
Survivorship bias can be made to work in other portfolios as well, and we
intend to continue utilizing it in the Shelby Fund. While we still think the
best long-term opportunities for new investments are found in small and mid-
capitalization stocks, many of our best investments from years past are
growing larger and more important to the portfolio. The survivorship bias
makes the best investments increasingly more influential on Shelby Fund
returns, but it also leads to some category creep as witnessed by our recent
move from Morningstar's Small Capitalization classification to its Mid
Capitalization classification. From our perspective, this represents an
efficient use of the survivorship phenomenon and it is consistent with our
goal of capital growth.
We continue to be enthusiastic about the prospects for our individual
holdings. Companies like Landry's Seafood, Uniphase, and Genesco are
generating sequentially higher revenues and earnings, improved margins, and
they are consistently surpassing the consensus estimates upon which stock
prices are based. We will continue to attempt to identify the fast growing
small and medium sized companies with the expectation that the markets will
eventually reward stocks in this sector, and their investors, with superior
performance.
Sincerely,
/s/ Darrell R. Wells
Darrell R. Wells
Investment Advisor
- -------------------------------------------------------------------------------
-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
Statements of Assets and Liabilities
Page 6
Statements of Operations
Page 7
Statements of Changes in Net Assets
Page 8
Schedules 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, 1998, 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, 1998, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, 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, 1998, 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 24, 1998
- -------------------------------------------------------------------------------
-5-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1998
<TABLE>
<S> <C>
ASSETS:
Investments, at value............................................. $90,277,922
Repurchase agreements............................................. 375,958
-----------
Total Investments (cost $66,677,167).......................... 90,653,880
Interest and dividends receivable................................. 53
Prepaid expenses and other assets................................. 17,315
-----------
Total Assets.................................................. 90,671,248
-----------
LIABILITIES:
Accrued expenses and other payables:
Investment advisory fees........................................ 77,898
Administration fees............................................. 1,917
Other........................................................... 47,177
-----------
Total Liabilities............................................... 126,992
-----------
NET ASSETS:
Capital........................................................... 67,138,725
Undistributed (distributions in excess of) net investment income
(loss)........................................................... (12,353)
Net unrealized appreciation from investments...................... 23,976,713
Accumulated undistributed net realized gains from investment
transactions...................................................... (558,829)
-----------
Net Assets.................................................... $90,544,256
===========
Outstanding units of beneficial interest (shares)................. 6,626,900
===========
Net asset value--offering and redemption price per share.......... $13.66
===========
</TABLE>
See notes to financial statements.
-6-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED MARCH 31, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest income................................................... $ 164,360
Dividend income................................................... 186,540
-----------
Total Income.................................................... 350,900
-----------
EXPENSES:
Investment advisory fees.......................................... 1,026,519
Administration fees............................................... 205,305
Custodian and accounting fees..................................... 48,167
Legal and audit fees.............................................. 33,065
Trustees' fees.................................................... 5,004
Transfer agent fees............................................... 24,059
Registration and filing fees...................................... 7,166
Printing costs.................................................... 17,558
Other............................................................. 7,025
-----------
Total Expenses before expenses voluntarily reduced.............. 1,373,868
Expenses voluntarily reduced.................................... (51,327)
-----------
Net expenses.................................................... 1,322,541
-----------
Net investment loss............................................... (971,641)
-----------
REALIZED/UNREALIZED GAINS FROM INVESTMENTS:
Net realized gains (losses) from investment transactions.......... 9,905,503
Net change in unrealized appreciation (depreciation) from
investments....................................................... 22,753,703
-----------
Net realized/unrealized gains (losses) from investments........... 32,659,206
-----------
Change in net assets resulting from operations.................... $31,687,565
===========
</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, MARCH 31,
1998 1997
------------ ------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
OPERATIONS:
Net investment loss............................... $ (971,641) $ (699,845)
Net realized gains from investment transactions... 9,905,503 5,614,714
Net change in unrealized appreciation
(depreciation) from investments................... 22,753,703 (7,698,343)
------------ ------------
Change in net assets resulting from operations..... 31,687,565 (2,783,474)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
From net realized gains from investment
transactions...................................... (12,805,702) (3,312,679)
------------ ------------
Change in net assets from shareholder
distributions...................................... (12,805,702) (3,312,679)
------------ ------------
CAPITAL TRANSACTIONS:
Proceeds from shares issued....................... 5,255,254 11,030,463
Dividends reinvested.............................. 12,747,523 3,303,173
Cost of shares redeemed........................... (36,476,993) (13,458,122)
------------ ------------
Change in net assets from share transactions....... (18,474,216) 875,514
------------ ------------
Change in net assets............................... 407,647 (5,220,639)
NET ASSETS:
Beginning of period............................... 90,136,609 95,357,248
------------ ------------
End of period..................................... $ 90,544,256 $ 90,136,609
============ ============
SHARE TRANSACTIONS:
Issued............................................ 405,539 864,830
Reinvested........................................ 1,002,952 261,120
Redeemed.......................................... (2,883,553) (1,091,777)
------------ ------------
Change in shares................................... (1,475,062) 34,173
============ ============
</TABLE>
See notes to financial statements.
-8-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS
MARCH 31, 1998
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
--------- ------------------------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS (99.7%):
Advertising (1.9%):
49,975 Outdoor Systems, Inc.(b)............................... $ 1,752,248
-----------
Airlines (4.4%):
63,400 Comair Holding, Inc.................................... 1,680,100
185,000 Trans World Airlines, Inc.(b).......................... 2,277,813
-----------
3,957,913
-----------
Apparel Manufacturers (5.7%):
63,100 Ashworth, Inc.(b)...................................... 1,080,588
24,100 Cato Corp.............................................. 286,188
85,200 Cutter & Buck, Inc.(b)................................. 2,204,549
53,100 Polo Ralph Lauren, Corp.(b)............................ 1,596,319
-----------
5,167,644
-----------
Audio/Video Products (0.9%):
28,000 Gemstar International Group Ltd........................ 840,000
-----------
Auto Related (0.5%):
13,300 Gentex Corp.(b)........................................ 451,369
-----------
Banks (3.0%):
55,800 Bank Plus Corp.(b)..................................... 833,513
66,400 Riggs National Corp.................................... 1,875,800
-----------
2,709,313
-----------
Cable TV (1.6%):
29,600 C Cor Electronics, Inc.(b)............................. 395,900
55,400 Jones Intercable, Inc.(b).............................. 1,011,050
-----------
1,406,950
-----------
Computer Services (1.4%):
34,300 Metamor Worldwide, Inc.(b)............................. 1,288,394
-----------
Education Services (1.3%):
24,800 Sylvan Learning Systems, Inc.(b)....................... 1,168,700
-----------
Entertainment (4.0%):
104,800 Signature Resorts, Inc.(b)............................. 2,069,800
59,600 Vistana, Inc.(b)....................................... 1,579,400
-----------
3,649,200
-----------
Financial Services (3.0%):
90,800 Sirrom Capital Corp.................................... 2,729,675
-----------
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
--------- ------------------------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Food Products & Services (1.7%):
81,300 Hain Food Group, Inc.(b)............................... $ 1,514,213
-----------
Household Goods-Appliances, Furnishings, Electric (0.9%):
97,500 TurboChef, Inc.(b)..................................... 780,000
-----------
Housing (3.7%):
46,200 NVR, Inc.(b)........................................... 1,458,188
68,600 Ryland Group, Inc...................................... 1,895,075
-----------
3,353,263
-----------
Medical Services (0.2%):
31,300 Renex Corp.(b)......................................... 207,363
-----------
Oil Field Equipment & Supplies (3.6%):
36,300 Cooper Cameron Corp.(b)................................ 2,191,613
41,400 Varco International, Inc.(b)........................... 1,066,050
-----------
3,257,663
-----------
Restaurants (14.9%):
50,110 CKE Restaurants, Inc................................... 1,841,543
178,200 Landry's Seafood Restaurants, Inc.(b).................. 5,479,649
69,400 Papa John's International, Inc.(b)..................... 2,663,225
73,300 PJ America, Inc.(b).................................... 1,319,400
48,400 Sonic Corp.(b)......................................... 1,621,400
84,200 Total Entertainment Restaurant Corp.(b)................ 589,400
-----------
13,514,617
-----------
Retail Stores (8.0%):
118,400 Ames Department Stores, Inc.(b)........................ 2,501,199
90,300 Garden Ridge Corp.(b).................................. 1,952,737
49,300 Just For Feet, Inc.(b)................................. 1,004,488
157,700 Musicland Stores Corp.(b).............................. 1,783,981
-----------
7,242,405
-----------
Shoes, Leathergood, Clothing & Accessories (7.7%):
288,800 Genesco, Inc.(b)....................................... 5,234,499
42,000 Pacific Sunwear, Inc.(b)............................... 1,743,000
-----------
6,977,499
-----------
Software & Computer Services (5.1%):
86,000 Business Objects, Inc.(b).............................. 1,300,750
44,300 Filenet Corp.(b)....................................... 2,165,163
</TABLE>
Continued
-9-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
SCHEDULE OF PORTFOLIO INVESTMENTS, CONTINUED
MARCH 31, 1998
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
--------- ------------------------------------------------------- -----------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Software & Computer Services, continued:
56,300 Infinium Software, Inc.(b)............................. $ 1,122,481
-----------
4,588,394
-----------
Technology (0.9%):
30,000 Hutchinson Tech, Inc.(b)............................... 795,000
-----------
Telecommunications (12.0%):
61,300 Ciena Corp.(b)......................................... 2,612,913
37,400 Premiere Technologies, Inc.(b)......................... 1,294,975
24,800 Tellabs, Inc.(b)....................................... 1,664,700
125,600 Uniphase Corp.(b)...................................... 5,283,049
-----------
10,855,637
-----------
Telecommunications Equipment (13.3%):
108,300 Ascend Communications, Inc.(b)......................... 4,101,862
71,600 Premisys Communications, Inc.(b)....................... 2,054,025
</TABLE>
<TABLE>
<CAPTION>
SHARES OR
PRINCIPAL SECURITY
AMOUNT DESCRIPTION VALUE
--------- ------------------------------------------------------ -----------
<C> <S> <C>
COMMON STOCKS, CONTINUED:
Telecommunications Equipment, continued:
63,200 Tekelec, Inc.(b)...................................... $ 2,867,700
125,000 Xylan Corp.(b)........................................ 3,046,875
-----------
12,070,462
-----------
Total Common Stocks 90,277,922
-----------
REPURCHASE AGREEMENTS (0.4%):
375,958 Fifth Third Bank, 5.07%, 4/01/98 (Collateralized by
$374,000 U.S. Government Agency Mortgages, 7.50%,
2/1/12, market value--$384,168)...................... 375,958
-----------
Total Repurchase Agreements 375,958
-----------
Total (Cost--$66,677,167) (a) $90,653,880
===========
</TABLE>
- ------
Percentages indicated are based on net assets of $90,544,256.
(a) Represents cost for federal tax purposes and differs from Value by net
unrealized appreciation of securities as follows:
<TABLE>
<S> <C>
Unrealized appreciation.. $25,471,645
Unrealized depreciation.. (1,494,932)
-----------
Net unrealized
appreciation............ $23,976,713
===========
</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, 1998
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 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, 1998
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, 1998, 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, 1998
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, 1998, the Fund has reclassified $981,611
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 $4,196 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.
3. PURCHASES AND SALES OF SECURITIES:
Purchases and sales of securities (excluding short-term securities) for the
year ended March 31, 1998 were $172,516,969 and $193,206,453, 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.
Continued
-13-
<PAGE>
THE COVENTRY GROUP
THE SHELBY FUND
NOTES TO FINANCIAL STATEMENTS, CONTINUED
MARCH 31, 1998
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, 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............................................. $51,327
TRANSFER AGENT & FUND ACCOUNTANT FEES:............................... $56,531
</TABLE>
5. FEDERAL TAX INFORMATION (UNAUDITED):
Subsequent to October 31, 1997, the Fund recognized net capital losses of
$820,910, which for tax purposes has been deferred to fiscal year 1999.
Therefore the year ended March 31, 1998 the Fund distributed long-term
capital gains of $5,377,394, while 3.22% 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 YEAR YEAR JULY 1,
ENDED ENDED ENDED 1994 TO
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
1998 1997 1996 1995(A)
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD.......................... $ 11.13 $ 11.82 $ 10.99 $ 10.00
------- ------- ------- -------
INVESTMENT ACTIVITIES:
Net investment income (loss).... (0.15) (0.09) (0.06) 0.06
Net realized and unrealized
gains (losses)
from investments............... 4.40 (0.19) 3.44 1.04
------- ------- ------- -------
Total from Investment
Activities.................... 4.25 (0.28) 3.38 1.10
------- ------- ------- -------
DISTRIBUTIONS:
Net investment income........... -- -- -- (0.06)
Net realized gains.............. (1.72) (0.41) (2.55) (0.05)
------- ------- ------- -------
Total Distributions............ (1.72) (0.41) (2.55) (0.11)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD... $ 13.66 $ 11.13 $ 11.82 $ 10.99
======= ======= ======= =======
Total Return..................... 39.31% (2.80)% 31.41% 11.04%(b)
RATIOS/SUPPLEMENTAL DATA
Net Assets at end of period
(000).......................... $90,544 $90,137 $95,357 $64,157
Ratio of expenses to average net
assets......................... 1.29% 1.29% 1.33% 1.41%(c)
Ratio of net investment income
(loss) to average net assets... (0.95)% (0.67)% (0.58)% 0.74%(c)
Ratio of expenses to average net
assets*........................ 1.34% 1.34% 1.38% 1.46%(c)
Ratio of net investment income
(loss)
to average net assets*......... (1.00)% (0.72)% (0.63)% 0.69%(c)
Portfolio turnover.............. 176.66% 204.06% 292.28% 101.86%
Average commission rate paid(d). $0.0622 $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 divided by total number of portfolio shares
purchased and sold for which commissions were charged.
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
1775 Eye Street, N.W.
Washington, D.C. 20006
AUDITORS
Arthur Andersen LLP
2300 Meidinger Tower
Louisville Galleria
Louisville, Kentucky 40202
5/98
LOGO
THE SHELBY FUND
SHELBY COUNTY TRUST BANK
INVESTMENT ADVISER
SMC CAPITAL, INC.
SUB-INVESTMENT ADVISER
ANNUAL REPORT
TO
SHAREHOLDERS
MARCH 31, 1998
BISYS FUND SERVICES
3435 STELZER ROAD
COLUMBUS, OHIO 43219
