THE CANANDAIGUA FUNDS
FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1998
TOGETHER WITH
REPORT OF INDEPENDENT ACCOUNTANTS
<PAGE>
Dear Shareholder:
THE EQUITY FUND
The Equity fund was up 17.53% in 1998, compared with the S&P 500 and
the CDA Weisenberger Domestic Growth Fund peer group performance of 28.6% and
19.5%, respectively. The largest companies within the index dominated the S&P
500 performance. Ten stocks accounted for almost half of the performance for the
entire index (Microsoft, WorldCom, Wal-Mart, Intel, Cisco, General Electric,
Lucent, IBM, Dell and Pfizer). The market capitalization weighted index was up
28.6%, while the average stock in the index was up only 11%. It is our hope that
our investors realize that being up "only 11%" for the year is still better than
the long-term average stock return over the past thirty years and that many
investors' expectations for consistent returns of more that 20% per year might
be unrealistic. At some point we expect the average returns in the equity market
to revert to the longer-term average rates of return. This "return to reality"
will occur only when we return to the historical average for inflation, domestic
economic growth and a commensurately higher real interest rate environment.
Until these key factors change from their unprecedented levels, we continue to
be very enthusiastic about the investment opportunities in the equity markets.
An interesting aspect about evaluating the investment performance of
the S&P 500 is the fact that the impact of a few stocks has such an enormous
impact on the index as a whole. This fact impairs the primary reason for using
an index as a performance benchmark. A common error is to assume that the
performance of the S&P 500 is representative of the "market" rather than the
performance of the aforementioned behemoths. The cumulative performance of the
ten largest companies in the S&P 500 index (Microsoft, General Electric, Intel,
Wal-Mart, Merck, Pfizer, Exxon, IBM, Coca-Cola and Cisco Systems) have a bigger
impact on the performance of the index as a whole than does the combined
influence of the bottom 350 companies in the index. The 30 largest companies
represent approximately 40% of the value of index as a whole. The Russell 2000,
which measures the performance of 2000 companies with an average capitalization
of approximately $421 million (commonly referred to as "small capitalization"
companies), lost more than 2.5% for 1998. In summary, the performance of a few
very large firms has masked the performance of the "market" as a whole, and in
some instances masked some rather dramatic losses across a variety of indices
and economic sectors. Thus, portfolio managers who had diversified holdings,
that included companies outside of the very largest companies in the
marketplace, were assured to underperform the "market" as defined by the S&P 500
index. We believe that there continue to be wonderful investment opportunities
outside of the fifty largest capitalization companies and will continue to
diversify the portfolio to take advantage of these opportunities. However, we
also recognize that investors continue to place a premium on the Goliaths in the
index due to the liquidity provided in their daily trading volumes and have
begun to selectively increase our exposure to these firms. This process may
change at our determination but at the time we are writing to you, we are
increasing our large capitalization exposure.
THE BOND FUND
The Bond fund was up 9.05% compared with the Lehman Brothers
Intermediate Government/Corporate Bond Index and the CDA Weisenberger General
Investment Grade Bond Fund Peer Group performance of 8.43% and 7.18%,
respectively. As we suggested in our semi-annual report, the inverted yield
curve suggested that investors were anticipating a cut in interest rates by the
Federal Reserve and in fact the Fed cut the Federal Funds rate three times. Over
the past few weeks we have seen the entire yield curve back-up around 50 basis
points over concerns that the domestic economic growth rate is expanding too
quickly and the labor markets are too tight to retain the current low inflation
rate environment. We believe that the benchmark thirty-year Treasury bond will
trade in a range between 5.5% and 4.75%. We don't believe that the Fed will cut
interest rates again this year unless there are some unforseen shocks in the
international marketplace. Domestic economic growth will continue to be strong
as domestic consumption gets another boost from tax returns that, based on
preliminary data, would appear to be affecting more tax payers and in larger
refund amounts. Typically, these tax refunds are used as downpayments on
automobiles, appliances or specialty retail purchases and we would expect 1999
second quarter gross domestic product growth to reflect this higher spending.
The Bond fund finished the year with a weighted average maturity of
5.27 years and was almost equally weighted between U.S. Treasury securities and
corporate bond issuance. If the yield curve continues its recent trend to
becoming more positively sloped with an improved sentiment toward stable
economic growth, there may be opportunities to both extend the weighted average
maturity and shift the balance more toward the corporate debt market, to improve
the overall performance of the portfolio. We do not anticipate generating a
similar return as last year without the help of further interest rate cuts by
the Federal Reserve. Absent that stimulus and our anticipation that the credit
markets will remain range bound, we would expect a slightly lower level of
performance for the bond market in 1999.
OVERVIEW FOR 1999
1998 was an extraordinary year in the capital markets due to a number
of events that we believe to be one-time non-recurring shocks to the financial
system. First, the spread of the Asian financial crisis around the globe almost
spread to a small segment of the domestic financial markets due to the lack of
supervision and the lax regulatory constraints imposed on investment
partnerships, better known as hedge funds, in this country. Hedge funds are
capable of using derivative securities, complex trading strategies and leverage
to generate enormous returns from relatively small movements in the underlying
securities markets. Unfortunately, leverage can work to your disadvantage as the
managers of the Long Term Capital hedge fund discovered in the fall of 1998. The
financial difficulties experienced in emerging markets around the world were
demonstrated by the fall from grace of funds that focus their investment
activity in those regions. Emerging Markets and investments in those funds that
had generally spectacular results in 1997 were pounded in 1998. For example, the
Lexington Troika Dialog Russia Fund had a 1997 performance of up 67.40 percent
but lost almost 83 percent in 1998.
Secondly, the collapse of oil prices had negative earnings
ramifications for the all of the companies in the energy sector. OPEC members
continued to fail in their attempts to maintain production discipline while the
global economic slowdown, excluding the United States, dampened global demand
for petroleum products. While we would not expect the price of oil to have a
similar fall in 1999, it is difficult to believe that there will be a rebound in
this industry to pre-1998 levels. The largest and best known companies in the
energy production and drilling segment are currently trading at about half their
52-week high and would appear to have limited upside potential until the oil
markets find some positive catalyst. Interestingly, the performance of Microsoft
in the S&P 500 index carries more significance than the cumulative performance
of Exxon, Royal Dutch Petroleum, Mobil and Chevron.
Lastly, the United AutoWorkers' strike at General Motors for
fifty-three days at mid-year had a meaningful and negative impact on GM's
earnings. As we don't anticipate a repeat of this strike, tax refunds appear to
be larger and more plentiful, we believe that the automobile industry could
enjoy a stronger 1999.
YEAR 2000
There has been a fair amount of discussion in the media about the
potential for problems occurring in information technology as a result of
software programming that is ill equipped to recognize date changes from 1999 to
2000. We are in contact with our vendors to determine what impact the year 2000
issue will have on our systems. At this point, we don't believe there will be
any effect on our systems due to this change but we will continue to review the
situation throughout the year and will report back to you at our semi-annual
report. If we approach this situation with a clear and calm perspective, perhaps
there will be attractive investment opportunities that result from the intense
media attention to this topic that is sure to grow as we progress through the
year.
Sincerely,
Robert J. Swartout
Vice President and Investment Officer
The Canandaigua National Bank and Trust Company
<PAGE>
<TABLE>
<CAPTION>
CANANDAIGUA EQUITY FUND PERFORMANCE
EQUITY FUND WEISENBERGER S&P 500
CANANDAIGUA GROWTH-DOMESTIC- COMPOSITE INDEX
EQUITY FUND MF VALUE WITH DIVIDENDS
<S> <C> <C> <C>
9/9/92 10,000 10,000 10,000
1992 10,250 10,905 10,504
1993 10,840 12,200 11,557
1994 10,900 12,024 11,710
1995 13,710 15,772 16,109
1996 16,680 16,819 19,808
1997 19,400 23,459 26,418
1998 22,800 27,953 33,904
</TABLE>
<TABLE>
<CAPTION>
CANANDAIGUA BOND FUND PERFORMANCE
WEISENBERGER LEHMAN BROTHERS
CORPRATE-INVESTMENT INTERMEDIATE
BOND FUND GRADE-MF VALUE GOVT/CORPORATE INDEX
<S> <C> <C> <C>
9/9/92 10,000 10,000 10,000
1992 10,060 9,971 9,954
1993 10,320 11,333 10,840
1994 9,980 10,774 10,631
1995 12,160 12,804 12,261
1996 12,540 13,188 12,758
1997 13,530 14,352 13,761
1998 14,754 15,383 14,920
</TABLE>
THE CANANDAIGUA FUNDS
FINANCIAL STATEMENTS AS OF
DECEMBER 31, 1998
TABLE OF CONTENTS
PAGE
Report of Independent Accountants 1
Statement of Assets and Liabilities as of December 31, 1998 2
Statement of Operations for the Year Ended
December 31, 1998 3
Statements of Changes in Net Assets for the Years Ended
December 31, 1998 and 1997 4
Schedule of Fund Investments as of December 31, 1998:
- Bond Fund 6
- Equity Fund 9
Notes to Financial Statements 12
Selected Per-Share Data and Ratios/Supplemental Data:
- Bond Fund 19
- Equity Fund 20
<PAGE>
<TABLE>
<CAPTION>
THE CANANDAIGUA FUNDS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
FUND
BOND EQUITY
ASSETS
<S> <C> <C>
INVESTMENT SECURITIES, AT MARKET (bond fund cost -
$861,212; equity fund cost - $18,932,946) $ 895,913 $22,889,813
--------- -----------
CASH AND CASH EQUIVALENT 46,510 598,668
--------- -----------
RECEIVABLES FOR:
Sales of fund's shares - 4,793
Sale of investments - 557,856
Dividends and accrued interest 15,162 19,283
--------- -----------
Total receivables 15,162 581,932
--------- -----------
PREPAID EXPENSES 345 7,772
--------- -----------
Total assets 957,930 24,078,185
--------- -----------
LIABILITIES
PAYABLES FOR:
Repurchases of fund's shares - 10,909
Purchase of investments - 468,954
Investment management fees - 18,374
Professional fees 458 11,548
Custodial fees 408 359
--------- -----------
Total liabilities 866 510,144
--------- -----------
NET ASSETS AT DECEMBER 31, 1998: (equivalent to $14.14 per
share for bond fund and $22.80 per share for equity fund, based on
67,689 shares and 1,033,870 shares outstanding for bond and
equity shares, respectively) $ 957,064 $23,568,041
========= ===========
NET ASSETS CONSIST OF:
Capital stock $ 922,363 $21,326,111
Undistributed net investment income - -
Accumulated net realized loss on investments - (1,714,937)
Net unrealized appreciation on investments 34,701 3,956,867
--------- -----------
NET ASSETS $ 957,064 $23,568,041
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 2 -
<PAGE>
<TABLE>
<CAPTION>
THE CANANDAIGUA FUNDS
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
DECEMBER 31, 1998
FUND
BOND EQUITY
INVESTMENT INCOME:
<S> <C> <C>
Interest income $ 46,488 $ 12,446
Dividend income - 157,736
--------- -----------
Total investment income 46,488 170,182
--------- -----------
EXPENSES:
Investment management fees 7,848 206,484
Administration fees 22,619 28,815
Fund accounting fees 10,068 17,619
Transfer agency fees 11,024 11,487
Custodial fees 2,562 2,840
Professional fees 1,479 37,955
Trustee fees 131 3,469
Insurance expense 141 3,181
--------- -----------
Total expenses 55,872 311,850
Less reimbursed expenses (52,283) (77,096)
--------- -----------
Net expenses 3,589 234,754
--------- -----------
Net investment income (loss) 42,899 (64,572)
--------- -----------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS:
Net realized gain (loss) 294 (1,629,590)
Net unrealized gain 25,369 4,919,931
--------- -----------
Net realized and unrealized gain on investments 25,663 3,290,341
--------- -----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 68,562 $3,225,769
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
THE CANANDAIGUA FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998
AND DECEMBER 31, 1997
FUND
BOND EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998 -
OPERATIONS:
<S> <C> <C>
Net investment income (loss) $ 42,899 $ (64,572)
Net realized gain (loss) on investments 294 (1,629,590)
Net unrealized gain on investments 25,369 4,919,931
--------- -----------
Net increase in net assets resulting from operations 68,562 3,225,769
--------- -----------
DIVIDENDS AND DISTRIBUTIONS PAID
TO SHAREHOLDERS:
Dividends from net investment income (39,727) -
Distributions from net realized gain on investments - -
--------- -----------
Total dividends and distributions (39,727) -
--------- -----------
FUND SHARE TRANSACTIONS:
Proceeds from shares sold (26,858 and 212,466 shares in the
bond and equity funds, respectively) 378,457 4,543,920
Proceeds from shares issued in reinvestment of net investment
Income dividends and distributions of net realized gain on
investments (2,830 shares in the bond fund) 39,727 -
Cost of shares purchased (11,249 and 95,269 shares in the
bond and equity funds, respectively) (156,431) (1,988.934)
Net increase in net assets resulting from fund
share transactions 261,753 2,554,986
--------- -----------
TOTAL INCREASE IN NET ASSETS 290,588 5,780,755
NET ASSETS - beginning of year 666,476 17,787,286
--------- -----------
NET ASSETS - end of year $ 957,064 $23,568,041
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 4 -
<PAGE>
<TABLE>
<CAPTION>
THE CANANDAIGUA FUNDS
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998
AND DECEMBER 31, 1997
(continued)
FUND
BOND EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997 -
OPERATIONS:
<S> <C> <C>
Net investment income (loss) $ 31,853 $ (2,152)
Net realized gain (loss) on investments (107) 3,993,077
Net unrealized gain (loss) on investments 16,007 (1,742,549)
--------- -----------
Net increase in net assets resulting from operations 47,753 2,248,376
--------- -----------
FUND SHARE TRANSACTIONS:
Proceeds from shares sold (15,383 and 212,512 shares in the
bond and equity funds, respectively) 198,015 3,943,645
Cost of shares purchased (6,114 and 54,499 shares in the
bond and equity funds, respectively) (80,559) (1,048,542)
--------- -----------
Net increase in net assets resulting from fund
share transactions 117,456 2,895,103
--------- -----------
TOTAL INCREASE IN NET ASSETS 165,209 5,143,479
NET ASSETS - beginning of year 501,267 12,643,807
--------- -----------
NET ASSETS - end of year $ 666,476 $17,787,286
========= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 5 -
<PAGE>
<TABLE>
<CAPTION>
THE CANANDAIGUA FUNDS
CANANDIAGUA BOND FUND
SCHEDULE OF FUND INVESTMENTS
December 31, 1998
Market
Cost Value
- ------------------------------------------------------------------------------------
INVESTMENT SECURITIES:
U.S. GOVERNMENT NOTES & BONDS
<C> <S> <C> <C>
25,000 US Treasury Note, 5.375%, July 31, 2000 .......... $24,963 $25,273
25,000 US Treasury Note, 6.250%, August 31, 2000 ........ 24,957 25,633
25,000 US Treasury Note, 6.125%, September 30, 2000 ..... 24,989 25,617
20,000 US Treasury Note,4.000%, October 31, 2000 ........ 19,788 19,794
30,000 US Treasury Note, 5.500%, December 31, 2000 ...... 29,749 30,497
25,000 US Treasury Note, 5.250%, January 31, 2001 ....... 24,789 25,312
30,000 US Treasury Note, 6.375%, March 31, 2001 ......... 29,962 31,097
25,000 US Treasury Note, 5.500%, February 28, 2003 ...... 24,841 25,750
25,000 US Treasury Note, 5.750%, April 30, 2003 ......... 24,958 26,016
25,000 US Treasury Note, 5.875%, February 15, 2004 ...... 26,457 26,391
30,000 US Treasury Note, 5.875%, November 15, 2005 ...... 29,370 32,016
25,000 US Treasury Note, 5.625%, February 15, 2006 ...... 24,960 26,375
40,000 US Treasury Note, 6.875%, May 15, 2006 ........... 40,072 45,225
30,000 US Treasury Note, 7.000%, July 15, 2006 .......... 30,046 34,163
40,000 US Treasury Note, 5.500%, February 15, 2008 ...... 39,793 42,413
25,000 US Treasury Note, 5.625%, May 15, 2008 ........... 25,350 26,672
--------- ---------
Total U.S. Government Notes & Bonds - 48.93% ...... 445,044 468,244
--------- ---------
CORPORATE BONDS
Capital Equipment - 4.27%
Aerospace & Military Technology
15,000 Lockheed Martin Corporation,6.750%, March 15, 2003 15,727 15,585
Machinery Construction and Mining
25,000 Caterpillar Corp., Inc., 6.000%, May 1, 2007 ..... 23,985 25,322
--------- ---------
39,712 40,907
--------- ---------
Consumer Goods - 17.83%
Beverage & Tobacco
20,000 Coca-Cola Company, 6.000%, July 15, 2003 ......... 19,969 20,391
25,000 Anheuser Busch, 6.750%, November 1, 2006 ......... 25,126 26,184
Paper
25,000 International Paper Company, 7.625%, August 1, 2004 26,692 26,751
The accompanying notes are an integral part of these financial statements.
- 6 -
<PAGE>
THE CANANDAIGUA FUNDS
CANANDIAGUA BOND FUND
SCHEDULE OF FUND INVESTMENTS
December 31, 1998
Market
Cost Value
- ------------------------------------------------------------------------------------
Consumer Goods (continued) -
Retail Trading
25,000 Sears Roebuck & Company, 6.250%, January 15, 2004 23,898 25,708
20,000 Wal-Mart Company, 6.375%, March 1, 2003 .......... 20,898 20,946
Specialty Chemicals
25,000 Eastman Chemical Company, 6.375%, January 15, 2004 25,118 25,068
Multimedia
25,000 Disney, Walt & Co. 5.800%, October 27, 2008 ...... 23,367 25,633
--------- ---------
165,068 170,681
--------- ---------
Finance - 11.78%
Banking
30,000 Citicorp, 6.750%, August 15, 2005 ................ 30,741 31,538
Financial Services
10,000 Ford Motor Credit Co., 6.850%, August 15, 2000 ... 10,003 10,222
20,000 General Electric Capital Corp.
5.500%, November 1, 2001 ...................... 19,955 19,875
20,000 Salomon Inc., 6.750%, August 15, 2003 ............ 19,922 20,663
30,000 Merrill Lynch & Co., Inc., 6.250%, October 15, 2008 29,711 30,393
--------- ---------
110,332 112,691
--------- ---------
Services - 10.80%
Telecommunications
20,000 Pacific Bell, 6.250%, March 1, 2005 .............. 19,656 20,936
30,000 LCI, 7.250%, June 15, 2007 ....................... 30,799 30,853
Hotels and Motels
25,000 Marriott Corp., 6.750%, December 15, 2003 ........ 25,014 26,163
Waste Removal
25,000 Waste Management Inc., 6.375%, December 1, 2003 .. 25,587 25,438
--------- ---------
101,056 103,390
--------- ---------
Total Corporate Bonds - 44.68% .................... 416,168 427,669
--------- ---------
The accompanying notes are an integral part of these financial statements.
- 7 -
<PAGE>
THE CANANDAIGUA FUNDS
CANANDIAGUA BOND FUND
SCHEDULE OF FUND INVESTMENTS
December 31, 1998
Market
Cost Value
- ------------------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES - 93.61% 861,212 895,913
--------- ---------
CASH AND CASH EQUIVALENTS - 4.86%
46,510 Canandaigua National Bank Collective
Fixed Income ....................... 46,510 46,510
---------------------- ---------
TOTAL INVESTMENTS - 98.47% $907,722 942,423
=========
OTHER ASSETS LESS LIABILITIES - 1.53% 14,641
------ ---------
NET ASSETS - 100.00% $957,064
====== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 8 -
<PAGE>
<TABLE>
<CAPTION>
THE CANANDAIGUA FUNDS
CANANDIAGUA EQUITY FUND
SCHEDULE OF FUND INVESTMENTS
December 31, 1998
Market
Shares Cost Value
- --------------------------------------------------------------------------------
INVESTMENT SECURITIES:
COMMON STOCKS
AUTOMOTIVE - 3.55%
<C> <S> <C> <C>
10,000 Ford Motor Company ................... $456,040 $586,875
10,000 Tower Automotive Inc ................. 223,526 249,375 *
---------- ----------
679,566 836,250
---------- ----------
BROKERAG - 5.21%
12,000 Merrill Lynch & Co Inc ............... 645,410 801,000
6,000 Morgan Stanley Dean Witter & Co ...... 399,100 426,000
---------- ----------
1,044,510 1,227,000
---------- ----------
COMPUTERS - 5.87%
33,000 Compaq Computer Corp ................. 992,268 1,383,937
---------- ----------
CAPITAL GOODS & CONGLOMERATE - 4.33%
10,000 General Electric Co .................. 893,716 1,020,625
---------- ----------
CONSUMER GOODS - HOUSEHOLD
PRODUCTS - 0.79%
2,000 Colgate-Palmolive Co. ................ 170,720 185,750
---------- ----------
DRUGS - 6.84%
2,500 Bristol-Meyers Squibb Co ............. 252,293 334,530
12,000 Elan Corp PLC-Spons ADR .............. 766,552 834,750 *
3,000 Merck & Co Inc ....................... 348,864 443,063
---------- ----------
1,367,709 1,612,343
---------- ----------
ELECTRONICS - 2.65%
10,000 Sanmina Corp ......................... 215,395 625,000 *
---------- ----------
FINANCIAL - 5.65%
8,000 Chase Manhattan Corp ................. 385,820 544,500
5,000 J.P. Morgan & Co Inc ................. 439,546 525,312
3,000 Northern Trust Corp .................. 213,604 261,938
---------- ----------
1,038,970 1,331,750
---------- ----------
The accompanying notes are an integral part of these financial statements.
- 9 -
<PAGE>
THE CANANDAIGUA FUNDS
CANANDIAGUA EQUITY FUND
SCHEDULE OF FUND INVESTMENTS
December 31, 1998
Market
Shares Cost Value
- --------------------------------------------------------------------------------
HEALTHCARE - 1.00%
8,000 Total Renal Care Holdings Inc ........ 216,820 236,500 *
---------- ----------
INSURANCE - 1.99%
8,000 Marsh & McLennan Cos ................. 468,954 467,500
---------- ----------
MISCELLANEOUS - 3.61%
5,000 Deere & Co ........................... 167,073 165,625
4,000 Procter & Gamble ..................... 338,670 365,250
17,000 Timken Co ............................ 285,408 320,875
---------- ----------
791,151 851,750
---------- ----------
OIL FIELD SERVICE - 1.26%
10,000 Halliburton Co. ...................... 329,570 296,250
---------- ----------
POWE - 3.02%
15,000 AES Corp ............................. 619,978 710,625 *
---------- ----------
PUBLISHING/VIDEO/BROADCASTING - 1.08%
5,000 Knight Ridder Inc .................... 253,958 255,625
---------- ----------
RESTAURANT - 1.96%
10,000 Cracker Barrel Old Country Store Inc . 280,353 233,125
3,000 McDonalds Corp ....................... 189,060 229,875
---------- ----------
469,413 463,000
---------- ----------
RETAIL - 7.97%
17,000 Circuit City ......................... 623,078 848,938
10,000 Dayton Hudson Corp ................... 428,760 542,500
14,000 Nordstrom Inc ........................ 486,170 485,625
---------- ----------
1,538,008 1,877,063
---------- ----------
SEMICONDUCTOR - 6.33%
4,000 Intel Corp ........................... 386,115 474,250
5,500 Texas Instruments Inc ................ 338,581 470,594
12,000 Vitesse Semiconductor Corp ........... 369,540 547,500 *
---------- ----------
1,094,236 1,492,344
---------- ----------
The accompanying notes are an integral part of these financial statements.
- 10 -
<PAGE>
THE CANANDAIGUA FUNDS
CANANDIAGUA EQUITY FUND
SCHEDULE OF FUND INVESTMENTS
December 31, 1998
Market
Shares Cost Value
- --------------------------------------------------------------------------------
SEMICONDUCTOR CAPITAL EQUIPMENT - 5.95%
14,000 Applied Materials .................... 579,790 597,625 *
6,000 Dupont Photomask Inc ................. 248,870 254,625 *
13,000 Teradyne Inc ......................... 473,046 550,876 *
---------- ----------
1,301,706 1,403,126
---------- ----------
SERVICES - 5.52%
15,000 Metamor Worldwide Inc ................ 362,946 375,000 *
18,000 Paychex Inc .......................... 803,270 925,875
---------- ----------
1,166,216 1,300,875
---------- ----------
SPECIALTY FINANCE - 8.05%
10,000 Capital One Financial ................ 898,935 1,150,000
30,000 MBNA Corp ............................ 664,108 748,125
---------- ----------
1,563,043 1,898,125
---------- ----------
TELECOMMUNICATIONS - 12.74%
20,000 Frontier Corp ........................ 539,540 680,000
17,000 MCI Worldcom Inc ..................... 790,093 1,219,750 *
4,000 SBC Communications Inc ............... 172,228 214,500
60,000 US Lec Corp Cl A ..................... 968,920 888,750 *
---------- ----------
2,470,781 3,003,000
---------- ----------
TELECOMMUNICATION EQUIPMENT - 1.75%
------
6,000 Tellabs Inc ............ 246,258 411,375 *
---------- ----------
TOTAL COMMON STOCKS - 97.12% 18,932,946 22,889,813
---------- ----------
CASH AND CASH EQUIVALENTS - 2.54%
------
598,668 Canandaigua National Bank
Collective Equity Fund .... 598,668 598,668
---------- ----------
TOTAL INVESTMENTS - 99.66% $19,531,614 23,488,481
===========
OTHER ASSETS LESS LIABILITIES - 0.34% 79,560
------- ----------
NET ASSETS - 100.00% $23,568,041
======= ============
<FN>
* Non-Income producing securities
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements
- 11 -
<PAGE>
THE CANANDAIGUA FUNDS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(1) ORGANIZATION
The Canandaigua Funds (the Fund) is registered under the Investment
Company Act of 1940 as an open-end, diversified management investment
company. The Fund offers two no-load mutual funds: the Canandaigua Equity
Fund ("Equity Fund"), which seeks long term growth of asset values
through capital appreciation and dividend income, and the Canandaigua
Bond Fund ("Bond Fund"), which seeks to earn a high level of current
income with consideration also given to safety of principal.
From inception in September, 1992 through February 9, 1998, the Fund was
designed solely for the investment of retirement funds held in certain
qualified trusts. Effective February 9, 1998, the Fund was reorganized on
a tax free basis from a collective investment trust to a Delaware
business trust. Among other things, this change enabled the Fund to
expand its shareholders from certain qualified individual retirement
trust accounts, to the general public.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES -
The financial statements have been prepared in conformity with generally
accepted accounting principles and, as such, include amounts based on
informed estimates and judgments of management with consideration given
to materiality. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS -
Interest bearing cash accounts are considered cash equivalents.
VALUATION OF INVESTMENT SECURITIES AND INCOME RECOGNITION -
Investments consist of debt and equity investment securities of the
United States (U.S.) government and of corporations whose securities are
traded
- 12 -
<PAGE>
THE CANANDAIGUA FUNDS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
VALUATION OF INVESTMENT SECURITIES AND INCOME RECOGNITION - (continued)
on recognized U.S. securities exchanges. Investment securities are stated
at market value based upon closing sales prices reported on recognized
securities exchanges on the last business day of the year or, for listed
securities having no sales reported and for unlisted securities, upon
last reported bid prices on that date. The market value of investment
securities is subject to daily fluctuations. Short-term securities with
60 days or less to maturity are amortized to maturity based on their cost
to the Fund if acquired within 60 days of maturity or, if already held by
the Fund on the 60th day, based on the value determined on the 61st day.
Effective January 1, 1998, any purchase premiums or discounts are
amortized in investment interest ratably over the term of an investment
security with a remaining maturity over 60 days. Securities for which
quotations are not readily available are valued at fair value as
determined in good faith by the Supervisory Committee of the Fund.
The fair value of receivables for sale of investments and payables for
purchase of investments are based on fair values as of the date of sale
or purchase of the investment security.
The estimated fair value of individual investment securities held at
December 31, 1998 are disclosed in the accompanying Schedule of Fund
Investments.
As is customary in the industry, securities transactions are recorded no
later than the first business day after the securities are purchased or
sold. Interest income is reported on the accrual basis. Dividend income
is recorded on the ex-dividend date.
Realized gains and losses on sales of securities are calculated on the
identified cost basis.
Dividends and distributions to shareholders are recorded on the
ex-dividend date and are paid at least annually. Through February 9,
1998, when the Fund operated solely as a collective investment trust,
dividend
- 13 -
<PAGE>
THE CANANDAIGUA FUNDS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
VALUATION OF INVESTMENT SECURITIES AND INCOME RECOGNITION - (continued)
distributions were not relevant for tax compliance purposes. For the year
ended December 31, 1998, $39,727 of reinvested dividends were declared
and distributed to shareholders of the Bond Fund.
INCOME TAXES -
It is the policy of the Fund to comply with applicable requirements of
the Internal Revenue Code. Effective February 9, 1998, the Fund began
accepting investments attributable to sources other than individual
retirement trust accounts. As a result, net investment income and net
realized gains on investments beginning in fiscal 1998 from February 9,
1998 forward, is taxable to the Fund if not substantially distributed
annually to its shareholders. It has been the practice, policy and
future intention of the Fund to comply with the requirements of the
Internal Revenue Code applicable to regulated investment companies and
to distribute all of its annual net taxable income, including any net
realized gains on investments, to its shareholders. Accordingly, there
was no income tax provision recorded for the Fund as of December 31,
1998. In addition, in connection with the Fund reorganization,
accumulated net investment income (loss) of $3,861 in the Bond Fund and
$ (285) in the Equity Fund and accumulated net realized gain (loss) of
investments of $3 in the Bond Fund and $85,347 in the Equity Fund as of
February 9, 1998, were transferred to additional paid-in capital.
Prior to February 9, 1998, the Fund was exempt from Federal income tax
under Section 408 (e) of the Internal Revenue Code with respect to
interests in the Fund which are attributable to individual retirement
trust accounts maintained in conformity with Section 408 (e) of the
Internal Revenue Code, and exempt from Federal income tax under Section
501 (a) of the Internal Revenue Code with respect to interests in the
Fund which are attributable to pension or profit-sharing trusts
(including those benefiting self-employed individuals) maintained in
conformity with Section 401 (a) of the Internal Revenue Code. The Fund
was also not subject to taxation in New York State for these qualified
interests. For Federal income tax purposes, income earned by the Fund
for these qualified interests was not taxable to participating trusts or
participants until a
- 14 -
<PAGE>
THE CANANDAIGUA FUNDS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INCOME TAXES - (continued)
participant receives a distribution from the Fund. Withdrawals from the
Fund which are paid to participating trusts can be made at any time by
participating trusts without penalty and without the amount withdrawn
being subject to Federal income tax. Differences between financial and
tax bases methods of reporting transactions of the Fund are not
significant.
VALUATION OF SHARES -
The Declaration of Trust provides that the Fund may issue an unlimited
number of shares of beneficial interest without par value. Currently,
the Fund is offering shares in a Bond Fund and an Equity Fund. The
shares are voting, non-assessable and have no preemptive rights or
preferences as to conversion, exchange, dividends or retirement. The net
asset value per share of each fund is determined by dividing the total
value of the fund's net assets by the number of outstanding shares of
the fund. The net asset values per share in the accompanying financial
statements are calculated in consideration of all purchases and sales
transacted during the period. Share purchases are recorded when an
investor's request for a share purchase is accepted and share
distributions are recorded when an investor's request for distribution
is received. Accordingly, any accepted share purchase obligations for
which cash has not yet been received are reflected as a receivable for
sale of fund's shares and any approved distribution requests for which
cash has not yet been disbursed are reflected as a payable for
repurchases of fund's shares in the accompanying statement of assets and
liabilities.
(3) AGREEMENTS
The Canandaigua National Bank and Trust Company (the Company) is the
investment advisor and sponsor of the Fund. The individual portfolio
managers of the Fund are also officers of the Company. Subject to the
direction of the Supervisory Committee of the Fund, which performs the
duties and undertakes the responsibilities of the Board of Directors of
an investment company, the Company manages all of the business and
- 15 -
<PAGE>
THE CANANDAIGUA FUNDS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(3) AGREEMENTS (continued)
affairs of the Fund. The Fund has entered into an Investment Management
Agreement with the Company. Under the terms of the agreement, the
Company will manage the investment of the assets of each fund in
conformity with the stated objectives and policies of that fund. For
these services, the Fund will pay investment management fees to the
Company, at the rate of 1% of assets annually of each fund. In April,
1994, however, the Supervisory Committee authorized a temporary
reduction of this fee for the bond fund to .5%. On July 9, 1997, the
Supervisory Committee authorized a temporary suspension of the total
investment management fee it pays for the bond fund. These rate
reductions resulted in a savings to the bond fund of $7,848 for the year
ended December 31, 1998.
The Fund has an administrative service agreement with American Data
Services, Inc. (ADS), for a three year period beginning December, 1997.
Monthly fees are based on a greater of: (1) a sliding scale of $1,500
for a fund with average net assets of under $5 million to $2,500 for a
fund with net assets of $20 million or more: or (2) 1/12 of 0.012% of
the average net assets of a fund for the month. These fees, $51,434 for
the year ended December 31, 1998, have historically been paid by the
Company.
In December, 1997, the Fund entered into a fund accounting agreement
with ADS for a three year period to calculate and transmit the Fund's
net asset value and maintain and keep current all books and records of
the Funds as required by Rule 31a-1 under the 1940 Act. Monthly fees are
based on the greater of; (1) a sliding scale of $800 for a fund with
average net assets of under $10 million to $1,400 for a fund with net
assets of $25 million to $30 million; or (2) 1/12 of 2.75 basis points
on nets assets in excess of $30 million. These fees, $27,687 for the
year ended December 31, 1998, have historically been paid by the
Company.
In December, 1997, the Fund entered into a transfer agency agreement
with ADS for a three year period to provide a shareholder record keeping
and reporting services and to act as the dividend disbursing agent for
the Fund. Monthly fees consist of a minimum of $900 maintenance fee plus
various transaction fees. The fees, $22,511, for the year ended December
31, 1998, have historically been paid by the Company.
- 16 -
<PAGE>
THE CANANDAIGUA FUNDS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(3) AGREEMENTS (continued)
The Northern Trust Company acts as a custodian of the assets of the
Fund. Custodial fees paid by the Fund are based on an agreed fee
schedule for asset holdings and transactions.
The Company has also historically assumed expenses, other than primarily
custodial and audit, incurred in the administration of the Fund. During
the year ended December 31, 1998, the Company assumed approximately
$16,300 of professional fees related to certain statutory filings of the
Fund and approximately $3,600 of Board of Trustee fees and expenses for
board and committee meeting attendance.
The Company will reimburse the Fund for the amount by which the expenses
exceed the lower of (1) 1.5% of the average daily value of the Fund's
net assets during its fiscal year or (2) the most restrictive expense
limitation applicable to the Fund imposed by the securities laws of any
state in which the shares of the Fund are sold.
The Company, as sponsor of the Fund, paid approximately $28,700 of legal
expenses in 1998 incurred primarily in connection with the
reorganization of the Fund. In addition, in December 1997 the Company
entered into a three year ninety day cancelable distributor agreement
with ADS Distributors, Inc. to act as the principal underwriter and
distributor of the Fund's shares. The annual 1998 fee for these services
of $22,750 plus expenses was paid by the Company.
Fees with ADS and ADS Distributors, Inc. are subject to annual increases
based on a defined increase in the Consumer Price Index for the
Northeast region.
(4) PURCHASES AND SALES OF SECURITIES
During the year ended December 31, 1998, purchases and sales of
investment securities, excluding cash and cash equivalent, amounted to
the following:
- 17 -
<PAGE>
THE CANANDAIGUA FUNDS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(4) PURCHASES AND SALES OF SECURITIES (continued)
FUND
----------------------------
BOND EQUITY
Purchases $284,292 $66,751,546
======== ===========
Sales $ 70,308 $64,858,698
========= ===========
Purchases and sales of government securities included in the Bond Fund
amounts were $211,072 and $70,308, respectively. All other purchases and
sales in the Bond Fund and Equity Fund were of investment securities,
excluding government securities. Transaction fees paid during the year
ended December 31, 1998 to the Company and The Northern Trust Company in
the amount of approximately $4,300 and $5,200 respectively, were
recorded as an adjustment to the basis of the related securities in the
amount of approximately $9,200 in the Equity Fund and $300 in the Bond
Fund.
UNREALIZED GAINS (LOSSES) ON INVESTMENTS -
As of December 31, 1998, gross unrealized gains (losses) on investments
with a cost of $861,212 in the Bond Fund and $18,932,946 in the Equity
Fund are as follows:
FUND
----------------------------
BOND EQUITY
Gross unrealized gains $ 35,18 $4,121,031
Gross unrealized (losses) (487) (164,164)
--------- ------------
Net unrealized gain $ 34,701 $3,956,867
========== ==========
- 18 -
<PAGE>
<TABLE>
<CAPTION>
THE CANANDAIGUA FUNDS
CANANDAIGUA BOND FUND
SELECTED PER-SHARE DATA AND RATIOS/SUPPLEMENTAL DATA
FOR THE YEARS ENDED DECEMBER 31
1998 1997 1996 1995 1994
----- ---- ---- ---- ----
PER SHARE DATA:
(For a share outstanding throughout
each period)
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning of
Period $ 13.53 $ 12.54 $12.25 $10.01 $10.48
----------- -------- ------ ------ ------
Income (Loss) From Investment Operations -
Net investment income (a) 0.77 0.70 0.62 0.81 0.62
Net realized and unrealized gain (loss)
on investments 0.45 0.29 (0.33) 1.43 (1.09)
----------- -------- ------ ------ ------
Total income (loss) from investment
operations 1.22 0.99 0.29 2.24 (0.47)
----------- -------- ------ ------ ------
Less Distributions (b)
Dividends from net investment
income (0.61)
Distributions from net realized
Gains -
-----------
Total distributions (0.61)
-----------
Net Asset Value, end of period $ 14.14 $ 13.53 $ 12.54 $ 12.25 $ 10.01
=========== ========= ========= ========= =========
Total Return (c) 9.05% 7.89% 2.37% 22.38% (4.48%)
=========== ========= ========= ========= =========
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period
(000 omitted) $ 957 $ 666 $ 501 $ 408 $ 298
Ratio of Net Expenses to Average
Net Assets (a) 0.46% 0.77% 1.09% 0.89% 0.77%
Ratio of Gross Expenses to Average
Net Assets (a) 7.13% 3.19% 4.15% 1.03% 0.95%
Ratio of Net Investment Income
to Average Net Assets 5.47% 5.38% 5.17% 7.11% 6.16%
Portfolio Turnover Rate 9.04% 8.44% 30.46% 14.13% 24.45%
<FN>
(a) The investment management fees for the Bond Fund were reduced from 1% to
.5% of assets annually from April, 1994 through July, 1997 and to zero
from August 1, 1997 through December 31, 1998. In addition, during the
periods presented, certain administrative expenses of the Fund, other than
primarily custodial and audit fees, have been assumed by the investment
manager of the Fund. The resulting per share savings to the Bond Fund
related to these fees and expenses were $.94, $ .31 , $.37 ,$.02 and $ .02
for the years ended December 31, 1998, 1997, 1996, 1995 and 1994,
respectively.
(b) Dividend distributions were not relevant for tax compliance purposes prior
to February 9, 1998 when the Fund operated solely as a collective
investment trust.
(c) Assumes reinvestment of dividends and capital gains distribution, if any.
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 19 -
<PAGE>
<TABLE>
<CAPTION>
THE CANANDAIGUA FUNDS
CANANDAIGUA EQUITY FUND
SELECTED PER-SHARE DATA AND RATIOS/SUPPLEMENTAL DATA
FOR THE YEARS ENDED DECEMBER 31
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
PER SHARE DATA:
(For a share outstanding throughout
each period)
<S> <C> <C> <C> <C> <C>
Net Asset Value, beginning of
Period $ 19.40 $ 16.67 $13.71 $10.89 $10.85
----------- -------- ------ ------ ------
Income (Loss) From Investment Operations -
Net investment income (loss) (a) (0.06) - 0.01 0.04 0.07
Net realized and unrealized gain (loss)
on investments 3.46 2.73 2.95 2.78 (0.03)
----------- -------- ------ ------ ------
Total income (loss) from investment
operations 3.40 2.73 2.96 2.82 0.04
----------- -------- ------ ------ ------
Less Distributions (b)
Dividends from net investment
income -
Distributions from net realized
Gains -
-----------
Total distributions -
-----------
Net Asset Value, end of period $ 22.80 $ 19.40 $ 16.67 $ 13.71 $ 10.89
=========== ========= ========= ========= =========
Total Return (c) 17.53% 16.38% 21.59% 25.90% 0.37%
=========== ========= ========= ========= =========
RATIOS/SUPPLEMENTAL DATA:
Net Assets, end of period
(000 omitted) $ 23,568 $ 17,787 $ 12,644 $ 8,433 $ 5,777
Ratio of Net Expenses to Average
Net Assets (a) 1.14% 1.15% 1.12% 1.11% 1.09%
Ratio of Gross Expenses to Average
Net Assets (a) 1.50% 1.44% 1.57% 1.25% 1.27%
Ratio of Net Investment Income
to Average Net Assets (.31%) 0.00% 0.03% 0.32% 0.69%
Portfolio Turnover Rate 314.28% 398.23% 337.27% 375.30% 234.81%
<FN>
(a) During the periods presented, certain administrative expenses of the
Equity Fund, other than primarily custodial and audit fees, have been
assumed by the investment manager of the Equity Fund, resulting in per
share savings of $.08, $ .05 , $ .07, $.02 and $.02 for the years ended
December 31, 1998, 1997, 1996, 1995 and 1994, respectively.
(b) Dividend distributions were not relevant for tax compliance purposes prior
to February 9, 1998 when the Fund operated solely as a collective
investment trust. There have been no Equity Fund dividends declared or
distributed through December 31, 1998.
(c) Assumes reinvestment of the dividends and capital gains distribution, if
any.
</FN>
</TABLE>
The accompanying notes are an integral part of these financial statements.
- 20 -
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
The Canandaigua Funds
We have audited the accompanying statement of assets and liabilities, including
the schedule of fund investments, of The Canandaigua Funds (The Fund previously
Canandaigua National Collective Investment Fund for Qualified Trusts; comprised
of the Bond and Equity Funds), as of December 31, 1998, and the related
statement of operations for the year then ended, the statements of changes in
net assets for the years ended December 31, 1998 and 1997 and the selected
per-share data and ratios/supplemental data for the years ended December 31,
1998, 1997, 1996, 1995 and 1994. These financial statements and per-share data
and ratios/supplemental data are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
per-share data and ratios/supplemental data based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and per-share data
and ratios/supplemental data 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 December 31, 1998, by correspondence with the custodian.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and selected per-share data and
ratios/supplemental data referred to above present fairly, in all material
respects, the financial position of each of the respective funds of The
Canandaigua Funds as of December 31, 1998, the results of their operations for
the year then ended, the changes in their net assets for the years ended
December 1998 and 1997, and the selected per-share data and ratios/supplemental
data for the years ended December 31, 1998, 1997, 1996, 1995 and 1994, in
conformity with generally accepted accounting principles.
MORGA, JONES & HUFSMITH, P.C.
Canandaigua, New York
January 15, 1999
