UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________
FORM N-CSR
________
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
INVESTMENT COMPANY ACT FILE NUMBER 811-8104
CONSTELLATION FUNDS
(Exact name of registrant as specified in charter)
________
1205 Westlakes Drive Suite 280
Berwyn, PA 19312-2414
(Address of principal executive offices) (Zip code)
Constellation Funds
P.O. Box 219520
Kansas City, MO 64105-9520
(Name and address of agent for service)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 1-866-242-5742
DATE OF FISCAL YEAR END: SEPTEMBER 30, 2005
DATE OF REPORTING PERIOD: DECEMBER 31, 2004
ITEM 1. REPORTS TO STOCKHOLDERS.
CONSTELLATION FUNDS
GROUP
ANNUAL REPORT
DECEMBER 31, 2004
Constellation HLAM Large Cap Quality Growth Fund
Contents
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Page Section
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2 Disclosure of Fund Expenses
3 Total Returns and Fund Investment Objective
4 Investment Review
7 Statement of Net Assets
9 Statement of Operations
10 Statements of Changes in Net Assets
11 Financial Highlights
13 Notes to Financial Statements
18 Report of Independent Registered Public Accounting Firm
19 Trustees and Officers of the Trust
22 Notice to Shareholders
23 Shareholder Voting Results
Constellation Funds
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The Constellation Funds offer the Constellation HLAM Large Cap Quality Growth
Fund (the "Fund"), a non-diversified mutual fund for individual and
institutional investors. The Fund curently offers one class of shares, Class II
Shares. The minimum initial investment in the Class II Shares is $2,500 and the
minimum amount for subsequent investments is $50. The Fund reserves the right to
waive the minimum initial investment, and may do so for financial intermediaries
who purchase shares through a brokerage firm or a mutual fund marketplace.
Constellation Investment Management Company, LP ("CIMCO"), located in Berwyn,
Pennsylvania, was formed on May 19, 2000, and serves as the Investment Adviser
to the Fund.
CIMCO has appointed Hilliard Lyons Asset Management ("HLAM") as sub-adviser to
the Fund.
HLAM is an SEC-registered adviser located at Hilliard Lyons Center, 501 South
Fourth Street, Louisville, KY 40202. As sub-adviser, HLAM makes investment
decisions for the Fund and ensures compliance with its investment policy and
guidelines. As of December 31, 2004, HLAM had approximately $4.8 billion in
assets under management.
In managing the Fund, HLAM focuses on common stocks of companies that it
believes are priced low in relation to the underlying value of the enterprise or
to its anticipated growth rate. HLAM emphasizes investments in common stocks of
"quality" growth companies -- those companies that HLAM believes have consistent
and sustainable revenue and earnings growth.
Shareholder Services
The Constellation Funds' shareholders receive annual and semi-annual reports and
quarterly account statements. Shareholders who have questions about their
accounts may call a toll-free telephone number, 1 (866) 242 5742. Or they may
write to Constellation Funds, P.O. Box 219520, Kansas City, Missouri 64105-9520
Disclosure of Fund Expenses (unaudited)
All mutual funds have operating expenses. As a shareholder of the Fund, your
investment is affected by these ongoing costs, which include (among others)
costs for portfolio management, administrative services, and shareholder reports
like this one. It is important for you to understand the impact of these costs
on your investment returns.
Operating expenses such as these are deducted from the Fund's gross income and
directly reduce your final investment return. These expenses are expressed as a
percentage of the Fund's average net assets; this percentage is known as the
Fund's expense ratio.
The following examples use the expense ratio and are intended to help you
understand the ongoing costs (in dollars) of investing in the Fund and to
compare these costs with those of other mutual funds. The examples are based on
an investment of $1,000 made at the beginning of the period shown and held for
the entire period.
The table below illustrates the Fund's costs in two ways:
Actual fund return. This section helps you to estimate the actual expenses that
the Fund incurred over the period. The "Expenses Paid During Period" column
shows the actual dollar expense cost incurred by a $1,000 investment in the
Fund, and the "Ending Account Value" number is derived from deducting that
expense cost from the Fund's gross investment return.
You can use this information, together with the actual amount you invested in
the Fund, to estimate the expenses you paid over that period. Simply divide your
actual account value by $1,000 to arrive at a ratio (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply that ratio by the number
shown for your Fund under "Expenses Paid During Period."
Hypothetical 5% return. This section helps you compare the Fund's costs with
those of other mutual funds. It assumes that the Fund had an annual 5% return
before expenses during the year, but that the expense ratio under "Annualized
Expense Ratios" for the period is unchanged. This example is useful in making
comparisons because the Securities and Exchange Commission requires all mutual
funds to make this 5% calculation. You can assess the Fund's comparative cost by
comparing the hypothetical result for the Fund in the "Expense Paid During
Period" column with those that appear in the same charts in the shareholder
reports for other mutual funds.
NOTE: Because the return is set at 5% for comparison purposes - NOT your Fund's
actual return - the account values shown do not apply to your specific
investment.
Beginning Ending Expense
Account Account Annualized Paid
Value Value Expense During
7/1/2004 12/31/2004 Ratios Period*
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Constellation HLAM Large Cap Quality Growth Fund
- -------------------------------------------------------------------------------------------------------------------------
Actual Fund Return $1,000.00 $1,027.00 1.29% $6.57
Hypothetical 5% Return $1,000.00 $1,018.65 1.29% $6.55
*Expenses are equal to the Fund's annualized expense ratio multiplied by the
average value over the period, multiplied by 184/366 (to reflect the one-half
year period).
2
Constellation HLAM Large Cap Quality Growth Fund
Total Returns
Through December 31, 2004
Current performance may be lower or higher than the performance data quoted.
Please call (866)242-5742 for most recent month-end performance information.
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1 Year 3 Year 5 Year 10 Year
Return Return Return Return
- -------------------------------------------------------------------------------------------------------------------------
Constellation HLAM Large Cap Quality
Growth Fund 4.73% (0.90)% (2.27)% 8.73%
Russell 1000 Growth Index 6.30% (0.18)% (9.29)% 9.59%
The investor should consider the investment objectives, risks, charges and
expenses before investing. This information can be found in the prospectus. A
free prospectus, which contains detailed information, including fees and
expenses, and the risks associated with investing in the Fund, can be obtained
by calling (866)242-5742. Read the prospectus carefully before investing. The
performance data quoted represents past performance and the principal value and
investment return will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost. Past performance is no
guarantee of future results. Returns shown, unless otherwise indicated, are
total returns, with dividends and income reinvested. Returns spanning more then
one year are annualized. Fee waivers are in effect; if they had not been in
effect, performance would have been lower. The index mentioned is an unmanaged
statistical composite of stock market performance. Investing in an index is not
possible. The holdings and sector weightings of the Fund are subject to change.
Fund Investment Objective
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The Constellation HLAM Large Cap Quality Growth Fund invests in common stocks.
Under normal conditions, the Fund invests at least 80% of its assets in common
stocks of companies having a market capitalization in excess of $5 billion that
the sub-adviser, Hilliard Lyons Asset Management ("HLAM"), believes to have
long-term capital appreciation possibilities. This is a non-fundamental policy
that can be changed by the Fund upon 60 days' prior notice to shareholders. HLAM
emphasizes investments in common stocks of companies that it believes are priced
low in relation to the underlying value of the enterprise or to its anticipated
growth rate. HLAM further emphasizes investments in common stocks of "quality"
growth companies -- those companies that HLAM believes have consistent and
sustainable revenue and earnings growth. The Fund will typically own a smaller
number of stocks than other, more diversified funds. HLAM generally considers
selling a security when it reaches a target price, when it fails to perform as
expected, when its growth rate slows, or when other opportunities appear more
attractive.
The Fund's Investment Adviser, Constellation Investment Management Company, LP
("CIMCO"), can recommend the appointment of additional or replacement
sub-advisers to the Board of Trustees (the "Board").
3
Constellation HLAM Large Cap Quality Growth Fund
Investment Review:
Investment Philosophy & Process
Hilliard Lyons Asset Management ("HLAM") serves as sub-adviser to the
Constellation HLAM Large Cap Quality Growth Fund (the "Fund"). The investment
philosophy of the Fund focuses on the long-term ownership of high quality growth
companies. The Fund invests in equity securities of U.S. companies with large
market capitalizations that the manager believes to be high quality companies
selling at compelling valuations relative to their anticipated growth rates.
HLAM further emphasizes investments in common stocks of "quality" growth
companies. HLAM performs analysis designed to identify companies that have
produced consistent results and have a strong balance sheet. The Fund managers
select for investment only those companies that they believe are capable of
delivering above-market earnings and revenue growth, significant and expanding
free cash flow, industry leadership and which have specific characteristics
typically displayed by "great" companies, including long-term competitive
advantages, compelling future growth drivers and a superior management team.
HLAM uses this process to create a focused portfolio of 25 to 30 stocks. HLAM
emphasizes companies that they believe have an enduring competitive advantage
over their competition and strives to reduce the business risk of the portfolio.
Fund Performance & Positioning
For the one year period ending December 31, 2004, the Fund posted a return of
4.73%. Over the same period, the Fund's benchmark, the Russell 1000(R) Growth
Index returned 6.30%.
Several positive factors in the overall economy impacted the holdings in the
Fund during the year. These factors included the overall health of the domestic
economy, continued low inflation and interest rates, and the drop in the value
of the US dollar, which made exported goods more attractive to foreign buyers
and more profitable to US producers. Negative factors were the rising price of
crude oil and the prolonged difficulties in the Iraq war, both of which
curtailed investor enthusiasm. In addition, continued government planning for
Medicare and uninsured pharmaceutical pricing regulation had a negative
influence on Fund holdings related to the drug industry.
The Fund was overweighted relative to the benchmark in Waters, a medical
specialties company; Harley-Davidson, the producer of heavyweight motorcycles
and accessories; and Freddie Mac, the Federal Home Mortgage Corporation. These
individual stock positions were all significant contributors to overall Fund
performance. The Fund also benefited from not owning Intel and Cisco Systems.
Detractors from relative performance included semiconductor company, Applied
Materials; media conglomerate, Viacom and brokerage firm Morgan Stanley. All
three were significantly overweighted relative to their index positions and all
three were negative performers for the year. No significant changes were made to
the Fund's strategy or positioning during the fiscal year.
4
Constellation HLAM Large Cap Quality Growth Fund
Fund Profile
As of December 31, 2004
CUSIP 21038A695
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% of net assets in 10 largest holdings 49.3%
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# of holdings 25
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Weighted Average Market
Capitalization $70.6 billion
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Net assets $21 million
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Top 10 Holdings
1 American International Group
2 Allergan
3 Harley-Davidson
4 Waters
5 Omnicom Group
6 Morgan Stanley
7 Automatic Data Processing
8 Synovus Financial
9 Home Depot
10 PepsiCo
- --------------------------------------------------------------------
Sector Weightings*
- --------------------------------------------------------------------
24.2% Health Care
23.0% Consumer Discretionary
20.0% Financials
18.1% Information Technology
8.8% Consumer Staples
3.1 Industrials
2.8% Telecommunication Services
*Percentages based on Total Investments.
- --------------------------------------------------------------------
Lipper Inc. Performance Ranking
- --------------------------------------------------------------------
As of December 31, 2004
Lipper Large Cap Core Category
Period Rank Percentile
10 year (176 of 216 funds) 81%
5 year (281 of 592 funds) 47%
3 year (695 of 772 funds) 90%
1 year (750 of 914 funds) 82%
5
Constellation HLAM Large Cap Quality Growth Fund
Growth of a $10,000 Investment in the
Constellation HLAM Large Cap Quality Growth Fund:
December 31, 1994 - December 31, 2004*
Constellation HLAM
Large Cap Quality Russell 1000
Growth Fund Growth Index
------------------ ------------
Dec 94 $10,000 $10,000
Dec 95 $13,112 $13,719
Dec 96 $15,737 $16,891
Dec 97 $22,096 $22,041
Dec 98 $25,097 $30,573
Dec 99 $25,908 $40,711
Dec 00 $26,045 $31,583
Dec 01 $23,740 $25,134
Dec 02 $18,460 $18,127
Dec 03 $22,058 $23,519
Dec 04 $23,101 $25,001
Annualized Total Returns(1)
Past 1 year Past 3 Years Past 5 Years 10 Years
- ----------- ------------ ------------ --------
4.73% (0.90%) (2.27%) 8.73%
* These figures represent past performance, which is no guarantee of future
results. The investment return and principal value of an investment will
fluctuate, so that an investor's shares when redeemed, may be worth more or
less than their original cost. The performance in the above graph does not
reflect the deduction of taxes the shareholder will pay on fund distributions
or the redemption of fund shares.
(1) Returns prior to November 8, 2004, represent performance of the Hilliard
Lyons Growth Fund, Inc.
6
FINANCIAL STATEMENTS
STATEMENT OF NET ASSETS
CONSTELLATION HLAM LARGE CAP QUALITY GROWTH FUND
December 31, 2004
MARKET
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
COMMON STOCK -- 98.7%
- -------------------------------------------------------------------------------
CONSUMER DISCRETIONARY--22.7%
- -------------------------------------------------------------------------------
Comcast, Cl A* 20,600 $ 686
Harley-Davidson 17,290 1,050
Home Depot 21,560 922
International Game
Technology 17,165 590
Omnicom Group 11,875 1,002
Viacom, Cl B 13,645 497
-------
Total Consumer Discretionary 4,747
- -------------------------------------------------------------------------------
CONSUMER STAPLES -- 8.7%
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PepsiCo 17,655 922
Walgreen 23,420 898
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Total Consumer Staples 1,820
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FINANCIALS -- 19.7%
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American International
Group 21,591 1,418
Freddie Mac 10,585 780
Morgan Stanley 17,795 988
Synovus Financial 33,025 944
-------
Total Financials 4,130
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HEALTH CARE -- 23.9%
- -------------------------------------------------------------------------------
Allergan 13,755 1,115
Amgen* 11,965 768
Cardinal Health 11,365 661
Johnson & Johnson 13,380 849
Pfizer 22,470 604
Waters* 21,700 1,016
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Total Health Care 5,013
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MARKET
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
INDUSTRIALS -- 3.1%
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Dover 15,535 $ 651
-------
Total Industrials 651
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INFORMATION TECHNOLOGY -- 17.8%
- -------------------------------------------------------------------------------
Applied Materials* 53,010 906
Automatic Data Processing 21,700 962
First Data 14,405 612
International Business
Machines 4,810 474
Microsoft 29,290 782
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Total Information Technology 3,736
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TELECOMMUNICATION SERVICES -- 2.8%
- -------------------------------------------------------------------------------
Nokia ADR 37,145 582
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Total Telecommunication Services 582
===============================================================================
TOTAL COMMON STOCK
(COST $12,735) 20,679
===============================================================================
TOTAL INVESTMENTS -- 98.7%
(COST $12,735) 20,679
===============================================================================
OTHER ASSETS AND LIABILITIES -- 1.3%
- --------------------------------------------------------------------------------
Investment advisory fees payable (6)
Shareholder servicing fees payable (5)
Distribution fees payable (4)
Administration fees payable (3)
Other assets and liabilities, net 298
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TOTAL OTHER ASSETS AND LIABILITIES 280
===============================================================================
NET ASSETS -- 100.0% $20,959
===============================================================================
7
FINANCIAL STATEMENTS
STATEMENT OF NET ASSETS
CONSTELLATION HLAM LARGE CAP QUALITY GROWTH FUND
VALUE
(000)
- -------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
- -------------------------------------------------------------------------------
Portfolio Capital of Class II
Shares (unlimited authorization--no par value)
based on 971,286 of outstanding shares of
beneficial interest $12,059
Accumulated net realized gain on investments 956
Net unrealized appreciation on investments 7,944
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NET ASSETS $20,959
===============================================================================
NET ASSET VALUE, OFFERING AND REDEMPTION PRICE
PER SHARE--CLASS II SHARES $ 21.58
===============================================================================
* Non-income producing security.
ADR -- American Depository Receipt
Cl -- Class
The accompanying notes are an integral part of the financial statements.
8
FINANCIAL STATEMENTS
STATEMENT OF OPERATIONS (000)(1)
For the Year Ended December 31, 2004
Constellation
HLAM Large Cap
Quality
Growth Fund
- --------------------------------------------------------------------------------
Investment Income:
Dividend $ 432
Interest 3
Foreign Taxes Withheld (5)
- --------------------------------------------------------------------------------
Total Investment Income 430
- --------------------------------------------------------------------------------
Expenses:
Investment Advisory Fees 267
Distribution Fees--Investor A Shares(2) 65
Distribution Fees--Investor B Shares(2) 40
Trustee Fees 24
Shareholder Servicing Fees--Class II Shares 8
Administration Fees 5
Professional Fees 123
Transfer Agent Fees 80
Custodian Fees 47
Printing Fees 43
Registration Fees 19
Insurance and Other Fees 1
- --------------------------------------------------------------------------------
Total Expenses 722
Less: Investment Advisory Fees Waived (257)
- --------------------------------------------------------------------------------
Net Expenses 465
- --------------------------------------------------------------------------------
Net Investment Loss (35)
- --------------------------------------------------------------------------------
Net Realized Gain From Securities Sold 6,721
Net Change in Unrealized Depreciation of Investment Securities (5,981)
- --------------------------------------------------------------------------------
Net Realized and Unrealized Gain on Investments 740
- --------------------------------------------------------------------------------
Net Increase in Net Assets Resulting From Operations $ 705
================================================================================
(1) On November 8, 2004 the Constellation Funds acquired the assets and
liabilities of the Hilliard Lyons Growth Fund, Inc. in a tax-free
reorganization. See Note 1 in Notes to Financial Statements for additional
information.
(2) On November 8, 2004, Investor A Shares were converted into Class II Shares.
Subsequently, Investor B Shares were fully liquidated and exchanged for
Class II Shares. See Note 1 in Notes to Financial Statements for additional
information.
The accompanying notes are an integral part of the financial statements.
9
FINANCIAL STATEMENTS
STATEMENTS OF CHANGES IN NET ASSETS (000)(1)
For the Years Ended December 31,
Constellation
HLAM Large Cap
Quality Growth Fund
-----------------------
2004 2003
- -----------------------------------------------------------------------------------------------------------
Investment Activities:
Net Investment Loss $ (35) $ (155)
Net Realized Gain From Securities Sold 6,721 4,623
Net Change in Unrealized Appreciation (Depreciation) of Investment
Securities (5,981) 2,747
- -----------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting From Operations 705 7,215
- -----------------------------------------------------------------------------------------------------------
Distributions to Shareholders:
Net Realized Capital Gains
Investor A Shares/Class II Shares (3,543) (4,992)
Investor B Shares -- (873)
- -----------------------------------------------------------------------------------------------------------
Total Distributions (3,543) (5,865)
- -----------------------------------------------------------------------------------------------------------
Capital Share Transactions:
Investor A Shares/Class II Shares
Proceeds from Shares Issued 1,180 1,345
Proceeds from Shares Issued in Lieu of Cash Distributions 3,377 4,897
Proceeds from Shares Issued in Connection with Conversion into Class II
Shares(2) 3,415 --
Cost of Shares Redeemed (20,003) (6,591)
- -----------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets from Investor A Shares/Class II Shares (12,031) (349)
- -----------------------------------------------------------------------------------------------------------
Investor B Shares
Proceeds from Shares Issued 60 150
Proceeds from Shares Issued in Lieu of Cash Distributions -- 857
Cost of Shares Redeemed in Connection with Conversion into Class II
Shares(2) (3,415) --
Cost of Shares Redeemed (2,463) (2,152)
- -----------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets from Investor B Shares (5,818) (1,145)
- -----------------------------------------------------------------------------------------------------------
Net Decrease in Net Assets From Capital Share Transactions (17,849) (1,494)
- -----------------------------------------------------------------------------------------------------------
Total Decrease in Net Assets (20,687) (144)
- -----------------------------------------------------------------------------------------------------------
Net Assets:
Beginning of Year 41,646 41,790
- -----------------------------------------------------------------------------------------------------------
End of Year $ 20,959 $41,646
===========================================================================================================
Shares Issued and Redeemed:
Investor A Shares/Class II Shares
Issued 46 55
Issued in lieu of Cash Distributions 156 202
Issued in Connection with Conversion into Class II Shares(2) 137 --
Redeemed (816) (265)
- -----------------------------------------------------------------------------------------------------------
Net Decrease in Investor A Shares/Class II Shares (477) (8)
- -----------------------------------------------------------------------------------------------------------
Investor B Shares
Issued 3 6
Issued in lieu of Cash Distributions -- 37
Redeemed in Connection with Conversion into Class II Shares(2) (144) --
Redeemed (106) (89)
- -----------------------------------------------------------------------------------------------------------
Net Decrease in Investor B Shares (247) (46)
===========================================================================================================
(1) On November 8, 2004 the Constellation Funds acquired the assets and
liabilities of the Hilliard Lyons Growth Fund, Inc. in a tax-free
reorganization. See Note 1 in Notes to Financial Statements for additional
information.
(2) On November 8, 2004, Investor A Shares were converted into Class II Shares.
Subsequently, Investor B Shares were fully liquidated and exchanged for
Class II Shares. See Note 1 in Notes to Financial Statements for additional
information.
The accompanying notes are an integral part of the financial statements.
10
FINANCIAL STATEMENTS
FINANCIAL HIGHLIGHTS
For a share outstanding throughout each year
Realized
and
Unrealized
Net Asset Net Gains Dividends Distributions Total
Value, Investment (Losses) Total From from Net from Dividends
Beginning Income on Investment Investment Capital and
of Year (Loss) Investments Activities Income Gains Distributions
- ------------------------------------------------------------------------------------------------------
Constellation HLAM Large Cap Quality Growth Fund(1)(2) -- Investor A Shares/Class II Shares
- -------------------------------------------------------------------------------------------------------
2004 $24.73 $ 0.01 $ 1.16 $ 1.17 $ -- $(4.32) $(4.32)
2003 24.02 (0.07) 4.58 4.51 -- (3.80) (3.80)
2002 30.89 (0.08) (6.79) (6.87) -- -- --
2001 33.89 (0.12) (2.88) (3.00) -- -- --
2000 33.71 (0.06) 0.24 0.18 -- -- --
+ Fee waivers are in effect; if they had not been in effect, performance would
have been lower.
++ Inclusive of waivers and/or reimbursements.
(1) On November 8, 2004 the Constellation Funds acquired the assets and
liabilities of the Hilliard Lyons Growth Fund, Inc. in a tax-free
reorganization. See Note 1 in Notes to Financial Statements for
additional information.
(2) On November 8, 2004, Investor A Shares converted into Class II Shares.
Subsequently, Investor B Shares were fully liquidated and exchanged for
Class II Shares. Investor A Shares were the accounting survivor in this
transaction, and as a result, its operating results for the periods prior to
November 8, 2004 have been carried forward in these financial highlights.
See Note 1 in Notes to Financial Statements for additional information.
Amounts designated as "--" are either $0 or have been rounded to $0.
The accompanying notes are an integral part of the financial statements.
11
FINANCIAL STATEMENTS
Ratio of Net
Net Ratio of Ratio of Investment
Asset Net Net Total Income
Value, Assets End Expenses Expenses (Loss) Portfolio
End Total of Year to Average to Average to Average Turnover
of Year Return+ (000) Net Assets++ Net Assets Net Assets++ Rate
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
$21.58 4.73% $20,959 1.30% 1.97% 0.04% 7%
24.73 19.07 35,806 1.30 1.82 (0.27) 28
24.02 (22.20) 34,963 1.29 1.46 (0.32) 19
30.89 (8.85) 51,402 1.25 1.44 (0.36) 19
33.89 0.53 62,884 1.29 1.37 (0.17) 34
12
NOTES OF FINANCIAL STATEMENTS CONSTELLATION FUNDS
December 31, 2004
1. ORGANIZATION:
CONSTELLATION FUNDS (the "Trust"), a Delaware business trust, is registered
under the Investment Company Act of 1940, as amended, as an open-end management
investment company with 24 active portfolios. The financial statements included
herein are those of the HLAM Large Cap Quality Growth Fund, the "Fund". The
financial statements of the remaining funds are presented separately. The Fund
will be changing its year end to September 30 to conform to the year end of the
Trust.
The Fund is registered as a non-diversified portfolio of the Trust and only
offers Class II Shares. The assets of the Fund are segregated, and a
shareholder's interest is limited to the Fund in which shares are held. The
Fund's prospectus provides a description of the Fund's investment objectives,
policies, and strategies along with information on the classes of shares
currently being offered.
The shareholders of the Hilliard Lyons Growth Fund, Inc. approved the
reorganization of the Hilliard Lyons Growth Fund, Inc. with and into the
Constellation HLAM Large Cap Quality Growth Fund, a newly-formed series of the
Constellation Funds in a tax-free reorganization effective November 8, 2004.
Each shareholder of the Hilliard Lyons Growth Fund, Inc. Investor A Shares
received a number of shares of the Constellation HLAM Large Cap Quality Growth
Fund equal in dollar value and in the number of shares of the Hilliard Lyons
Growth Fund, Inc. as of November 5, 2004. Each shareholder of the Hilliard Lyons
Growth Fund, Inc. Investor B Shares received a number of shares of the
Constellation HLAM Large Cap Quality Growth Fund equal in dollar value to
Hilliard Lyons Growth Fund, Inc. The Constellation HLAM Large Cap Quality Growth
Fund has the same investment objective and policies, and substantially the same
risks, policies, restrictions and limitations, as the Hilliard Lyons Growth
Fund, Inc.
Prior to November 8, 2004, the Fund offered Investor A and Investor B Shares. On
November 8, 2004, the Fund converted the Investor A Shares into Class II Shares.
Subsequently, the Investor B Shares were fully liquidated and exchanged for
Class II Shares. Investor A Shares were the accounting survivor in this
transaction.
2. SIGNIFICANT ACCOUNTING POLICIES:
The following is a summary of the significant accounting policies followed by
the Fund.
Use of Estimates- The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America 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 during the
reported period. Actual results could differ from those estimates.
Security Valuation- Securities listed on a securities exchange, market or
automated quotation system for which quotations are readily available
(except for securities traded on NASDAQ) are valued at the last quoted sale
price on the primary exchange or market (foreign or domestic) on which they
are traded, or, if there is no such reported sale, at the most recent
quoted bid price. For securities traded on NASDAQ, the NASDAQ Official
Closing Price will be used.
13
NOTES OF FINANCIAL STATEMENTS CONSTELLATION FUNDS
December 31, 2004
Securities for which market prices are not "readily available" are valued
in accordance with Fair Value Procedures established by the Fund's Board of
Trustees (the "Board"). The Fund's Fair Value Procedures are implemented
through a Fair Value Committee (the "Committee") designated by the Board.
Some of the more common reasons that may necessitate that a security be
valued using Fair Value Procedures include: the security's trading has been
halted or suspended; the security has been de-listed from a national
exchange; the security's primary trading market is temporarily closed at a
time when under normal conditions it would be open; the security's primary
pricing source is not able or willing to provide a price or a significant
event with respect to a security has occurred. When a security is valued in
accordance with the Fair Value Procedures, the Committee will determine the
value after taking into consideration relevant information reasonably
available to the Committee.
Security Transactions and Related Income- Security transactions are
accounted for on the date the security is purchased or sold (trade date).
Dividend income is recognized on the ex-dividend date, and interest income
is recognized on the accrual basis. Costs used in determining realized
gains and losses on the sales of investment securities are those of the
specific securities sold during the respective holding period.
Dividends and distributions- The Fund declares and distributes net
investment income, if any, quarterly, as a dividend to shareholders. Any
net realized capital gains on sales of securities for the Fund is
distributed to shareholders at least annually.
Expenses- Expenses that are specifically attributed to the Fund are charged
to the Fund. Certain other expenses are prorated among the Trust on the
basis of relative daily net assets. Other common expenses of the Trust are
allocated among the Trust on the basis of relative daily net assets.
Classes- Class specific expenses are borne by the class. Income, non-class
specific expenses and realized/unrealized gains and losses are allocated to
the respective classes on the basis of the relative daily net assets.
Redemption fees- The Fund may charge a redemption fee up to 2% of
redemption proceeds, which will automatically be paid to the Fund. At this
time, the Fund is not subject to the redemption fee. The Fund will notify
all existing shareholders if and when it decides to implement the fee.
There were no redemption fees collected during the year ended December 31,
2004.
3. TRANSACTIONS WITH AFFILIATES:
Certain officers of the Trust are also officers of Constellation Investment
Management Company, LP ("CIMCO"), Constellation Investment Distribution Company,
Inc. (the "Distributor") and SEI Investments Global Funds Services ("SEI")
and/or SEI Investments Distribution Co. Such officers are paid no fees by the
Trust for serving as officers and trustees of the Trust.
Pursuant to an exemptive order issued by the Securities and Exchange Commission,
the Fund engages in a "Manager-of-Managers" platform.
4. ADMINISTRATION, SHAREHOLDER SERVICING, AND DISTRIBUTION AGREEMENTS:
Effective November 8, 2004, CIMCO began providing administrative services for
the Fund. For its services, CIMCO receives an annual fee of 0.15% of the
aggregate average daily net assets of the Trust up to $2 billion and 0.12% of
the aggregate average daily net assets of the Trust over $2 billion. The fee is
then allocated among the Trust on the basis of relative daily net assets.
14
NOTES OF FINANCIAL STATEMENTS CONSTELLATION FUNDS
December 31, 2004
Under a separate Sub-Administration Agreement between CIMCO and SEI, SEI
provides sub-administrative services to the Trust. For the period November 8,
2004 through December 31, 2004, SEI was paid $2,126 for its services to the
Fund.
The Distributor provides distribution services to the Funds under a Distribution
Agreement. The Distributor also provides shareholder servicing services to the
Funds under a Shareholder Servicing Plan and Agreement.
Prior to November 8, 2004, J.J.B. Hilliard, W.L. Lyons, Inc. (the "Former
Distributor") provided distribution services to the Fund.
The Fund has adopted a Distribution and Shareholder Service Plan for its Class
II Shares (the "Class II Plan"). Under the Class II Plan, the Distributor
receives aggregate fees of 0.25% of the Fund's Class II Shares' average daily
net assets in return for providing a broad range of shareholder services.
Prior to November 8, 2004, the Fund had a separate distribution plan pursuant to
Rule 12b-1 under the Investment Company Act of 1940. The Fund reimbursed the
Former Distributor quarterly at an annualized rate of up to 0.25% for Investor A
shares and up to 1.00% for Investor B shares of the Fund's average daily net
assets for distribution expenses actually incurred. As of December 31, 2004, a
payable to the Former Distributor of $3,989 is included on the Statement of Net
Assets.
DST Systems, Inc. serves as the transfer agent and dividend disbursing agent for
the Fund under a transfer agency agreement with the Trust. Prior to November 8,
2004, State Street Bank & Trust Co. served as the transfer agent and dividend
disbursing agent for the Fund.
5. INVESTMENT ADVISORY AGREEMENT:
The Trust and CIMCO are parties to an Investment Advisory Agreement dated March
4, 2004 under which CIMCO receives a fee that is calculated daily and paid
monthly. CIMCO has contractually agreed through October 1, 2007 to waive all or
a portion of its fees and to reimburse expenses in order to limit other expenses
to 0.50% of the average daily net assets of the Fund on an annualized basis. For
its services, CIMCO is entitled to receive a base investment advisory fee at an
annualized rate of 0.75% based on the average daily net assets of the Fund.
Prior to November 8, 2004, Hilliard Lyons Investment Advisors (the "Former
Adviser"), a division of J.J.B. Hilliard, W.L. Lyons, Inc. served as the
investment adviser and performed certain administrative services to the Fund.
The Former Adviser was entitled to receive a base investment advisory fee at an
annualized rate of 0.80% based on the average daily net assets of the Fund. The
Former Adviser voluntarily agreed to waive all or a portion of its fees and to
reimburse expenses in order to limit the Fund's total annualized operating
expenses to 1.30% forthe Investor A shares and 2.05% for the Investor B shares.
Beginning December 1, 2005 advisory fees will be subject to adjustment, up or
down, based on the Funds' performance relative to the performance of the Fund's
benchmark, the Russell 1000 Growth Index. See the Fund's Prospectus and
Statement of Additional Information for more information regarding the Fund's
benchmark.
Effective November 8, 2004, CIMCO has entered into an investment sub-advisory
agreement with Hilliard Lyons Asset Management. CIMCO pays sub-advisory fees
from its advisory fee, if any. Similar to the advisory fee paid to CIMCO, the
sub-advisory fee can increase or decrease depending on the Fund's performance
relative to its benchmark.
15
NOTES OF FINANCIAL STATEMENTS CONSTELLATION FUNDS
December 31, 2004
6. INVESTMENT TRANSACTIONS:
For the year ended December 31, 2004, purchases and sales and maturities from
sale of investment securities (excluding short-term securities) were $2,144,496
and $24,699,225, respectively.
7. FEDERAL TAX POLICIES INFORMATION:
The Fund is classified as a separate taxable entity for Federal income tax
purposes. The Fund intends to continue to qualify as a separate "regulated
investment company" under the Internal Revenue Code and make the requisite
distributions to shareholders that will be sufficient to relieve it from Federal
income tax and Federal excise tax. Therefore, no Federal tax provision is
required. To the extent that distributions from net investment income and net
realized capital gains exceed amounts reported in the financial statements, such
amounts are reported separately.
The amounts of distributions from net investment income and net realized capital
gains are determined in accordance with Federal income tax regulations, which
may differ from those amounts determined under accounting principles generally
accepted in the United States of America. These book/tax differences are either
temporary or permanent in nature. These differences are primarily due to net
operating loss and equalization. The Fund used a tax accounting practice to
treat a portion of the price of capital shares redeemed during the year as
distributions from realized capital gains. Accordingly, the Fund has
reclassified $2,205,849 from accumulated net realized gains to paid-in-capital.
The character of distributions made during the year from net investment income
or net realized gains, and the timing of distributions where the fiscal year in
which the amounts are distributed may differ from the year that the income or
realized gains (losses) were recorded by the Fund. To the extent these
differences are permanent, adjustments are made to the appropriate equity
accounts in the period that the differences arise.
Accordingly, the following permanent differences have been released to/from the
following accounts (000):
UNDISTRIBUTED ACCUMULATED
NET INVESTMENT NET REALIZED PAID-IN-
INCOME GAIN CAPITAL
-------------- ------------ --------
$35 $(2,222) $2,187
The tax character of dividends and distributions declared during the years ended
December 31, 2004 and December 31, 2003 were as follows (000):
2004 2003
------ ------
Ordinary Income ...................................... $ -- $ 4
Long-Term Capital Gain ............................... 3,543 5,861
------ ------
Total ................................................ $3,543 $5,865
====== ======
As of December 31, 2004, the components of distributable earnings on a tax basis
were as follows (000):
Undistributed Long-Term
Capital Gain ................................................ $ 956
Unrealized Appreciation .......................................... 7,944
------
Total Distributable Earnings ..................................... $8,900
======
For Federal income tax purposes, capital loss carryforwards may be carried
forward and applied against future capital gains. There were no capital loss
carryforwards as of December 31, 2004.
16
NOTES OF FINANCIAL STATEMENTS CONSTELLATION FUNDS
December 31, 2004
At December 31, 2004, the total cost of securities for Federal income tax
purposes and the aggregate gross unrealized appreciation and depreciation for
the securities held by the Fund were as follows (000):
Federal Tax Cost ................................................ $12,735
-------
Unrealized Appreciation ......................................... $ 8,311
Unrealized Depreciation ......................................... (367)
-------
Net Unrealized Appreciation ..................................... $ 7,944
=======
8. INDEMNIFICATIONS
The Fund enters into contracts that contain a variety of indemnifications. The
Fund's maximum exposure under these arrangements is unknown. However, the Fund
has not had prior claims or losses pursuant to these contracts and expects the
risk of loss to be remote.
17
Report of Independent Registered Public Accounting Firm
To the Board of Trustees and Shareholders of
Constellation Funds:
We have audited the accompanying statement of net assets of the Constellation
HLAM Large Cap Quality Growth Fund, one of the funds constituting the
Constellation Funds (the "Fund"), as of December 31, 2004 and the related
statement of operations, statement of changes in net assets and financial
highlights for the year then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit. The statement of changes in net assets for the year ended
December 31, 2003 and the financial highlights for the periods presented through
December 31, 2003, were audited by other auditors, whose report dated February
11, 2004 expressed an unqualified opinion thereon.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit 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 December 31, 2004, by correspondence with the custodian.
As to securities sold but not yet received or delivered, we performed other
appropriate auditing procedures. 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
audit provides 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
Constellation HLAM Large Cap Quality Growth Fund as of December 31, 2004, and
the results of its operations, the changes in its net assets and its financial
highlights for the year then ended, in conformity with U.S. generally accepted
accounting principles.
KPMG LLP
Philadelphia, Pennsylvania
February 25, 2005
18
Trustees and Officers of the Trust as of December 31, 2004
(unaudited)
Interested Trustee*
John H. Grady, Jr.
Address Constellation Investment Management Company, LP,
Berywn, PA 19312
Date of Birth 6/1/61
Position held with Fund Trustee and President; Chairman of the Board
Principal occupation(s)
during past 5 years President and CEO of CIMCO since 2003. Executive Vice
President & Secretary from 2001 to 2003 - General
Counsel, Chief Legal Officer of Turner from 2001 to
2003. CID President, Chief Operating Officer since
September 2001. Partner, Morgan, Lewis & Bockius LLP
(law firm) (October 1995-January 2001).
Number of Portfolios in
Complex Overseen
by Trustee 24
*Mr. Grady is deemed to be an "Interested Trustee" by virtue of his relationship
with Constellation Investment Management Company, LP.
Non-Interested Trustees
Ronald Filante
Address 51 Verdum Avenue, New Rochelle, NY 10804
Date of Birth 11/19/45
Position held with Fund Trustee
Principal occupation(s)
during past 5 years Associate Professor of Finance, Pace University, since
1987.
Number of Portfolios in
Complex Overseen
by Trustee 24
Alfred C. Salvato
Address 13 Fountain Court, Cherry Hill, NJ 08034
Date of Birth 1/9/58
Position held
with Fund Trustee
Principal occupation(s)
during past 5 years Treasurer, Thomas Jefferson University, since 1995,
and Assistant Treasurer, 1988-1995.
Number of Portfolios in
Complex Overseen by
Trustee 24
Janet F. Sansone
Address 1023 North Pitt Street, Alexandria, VA 22314-1525
Date of Birth 8/11/45
Position held with Fund Trustee since 2004
Principal occupation(s)
during past 5 years Executive Director, JFS Consulting. Consultant since
1999. Senior Vice President of Human Resources of
Frontier Corporation (telecommunications company),
(1993-1999).
Number of Portfolios in
Complex Overseen
by Trustee 24
19
Trustees and Officers of the Trust as of December 31, 2004
(unaudited)
Executive Officers
Peter Golden
Address SEI Investments, Oaks, PA, 19456
Date of Birth 6/27/64
Positions held with Fund Controller and Chief Financial Officer since 2001
Principal occupation(s)
during past 5 years Director of Fund Accounting of SEI Investments
(investment management company) since June 2001.
Previously, Vice President of Fund Administration,
J.P. Morgan Chase & Co. (investment bank), March 2000
to April 2001; Vice President, Fund and Pension
Accounting, Chase Manhattan Bank (investment bank),
June 1997 to March 2000.
Lydia A. Gavalis
Address SEI Investments, Oaks, PA, 19456
Date of Birth 6/5/64
Positions held with Fund Vice President and Assistant Secretary since 1999
Principal occupation(s)
during past 5 years Vice President and Assistant Secretary of SEI
Investments (investment management company) since
1998.
Timothy D. Barto
Address SEI Investments, Oaks, PA, 19456
Date of Birth 3/28/68
Positions held with Fund Vice President and Assistant Secretary since 2000
Principal occupation(s)
during past 5 years Employed by SEI Investments since October 1999. Vice
President and Assistant Secretary of SEI Investments
(investment management company) since December 1999.
Associate at Dechert Price & Rhoads (law firm)
(1997-1999).
Christine M. McCullough
Address SEI Investments, Oaks, PA, 19456
Date of Birth 12/2/60
Positions held with Fund Vice President and Assistant Secretary since 2000
Principal occupation(s)
during past 5 years Employed by SEI Investments (investment management
company) since November 1, 1999. Vice President and
Assistant Secretary of SEI Investments since December
1999. Associate at White and Williams LLP (law firm)
(1991-1999).
Antoinette C. Robbins
Address Constellation Investment Management Company, LP,
Berywn, PA 19312
Date of Birth 3/23/63
Position held with Fund Vice President since 2004
Principal occupation(s)
during past 5 years Employed by CIMCO as Vice President and Director of
Compliance since 2004. Previously, Vice President and
Director of Compliance of Turner Investment Partners,
Inc. (investment management company) (2002-2004).
Senior Gift Planning Officer, American Civil Liberties
Union (2001-2002). Assistant Vice President and
Counsel, Equitable Life Assurance Society of the
United States (insurance company) (1996-2002).
20
Trustees and Officers of the Trust as of December 31, 2004
(unaudited)
John J. Canning
Address Constellation Investment Management Company, LP,
Berywn, PA 19312
Date of Birth 11/15/70
Positions held with Fund Vice President and Chief Compliance Officer since 2004
Principal occupation(s)
during past 5 years Employed by CIMCO as Vice President and Director of
Mutual Fund Administration and Operations since 2004.
Previously, Assistant Director of Mutual Fund
Administration and Operations, Sub-Advisory
Institutional Service Product Manager for Turner
Investment Partners, Inc. (investment management
company) (2000-2004). Portfolio Implementation
Analyst, SEI Investments (investment management
company) (1998-2000).
Rami Livelsberger
Address Constellation Investment Management Company, LP,
Berywn, PA 19312
Date of Birth 11/14/74
Positions held with Fund Vice President and Assistant Secretary since 2004
Principal occupation(s)
during past 5 years Employed by CIMCO as Vice President, Fund Governance
since 2004. Previously, Compliance Officer, Legal
Assistant for Turner Investment Partners, Inc.
(investment management company) (2001-2004). Legal
Assistant, Morgan Lewis & Bockius LLP (law firm)
(1999-2001).
Saeed A. Franklin
Address Constellation Investment Management Company, LP,
Berywn, PA 19312
Date of Birth 8/1/75
Position held with Fund Vice President since 2004
Principal occupation(s)
during past 5 years Employed by CIMCO as Vice President, Fund
Administration; previously, Broker Dealer Coordinator,
Turner Investment Partners, Inc. (investment
management company) (2003-2004). Performance Analyst,
ING Variable Annuities (an insurance company)
(2001-2003). Senior Fund Accountant, Bank of New York
(investment bank) (1999-2001). Fund Accountant, PFPC
Inc. (investment management company) (1997-1999).
The Trust's Statement of Additional Information ("SAI") includes additional
information about the Trustees and Officers. The SAI may be obtained without
charge by calling 1-866-242-5742.
21
Notice to Shareholders (unaudited)
For Shareholders who do not have a December 31, 2004 tax year end, this notice
is for informational purposes only. For shareholders with a December 31, 2004,
taxable year end, please consult your tax advisor as to the pertinence of this
notice. For the fiscal year ended December 31, 2004, the Fund is designating the
following items with regard to distributions paid during the year.
Dividends
Qualifying
Long Term for Corporate
(15% Rate) Ordinary Dividends Qualifying
Capital Gain Income Total Receivable Dividend
Distributions Distributions Distributions Deduction (1) Income (2)
- ------------- ------------- ------------- ------------- ----------
100% 0% 100% 0% 0%
(1) Qualifying dividends represent dividends which qualify for the corporate
dividends received deduction and is reflected as a percentage of "Ordinary
Income Distributions".
(2) The percentage in this column represents the amount of "Qualifying Dividend
Income" as created by the Jobs and Growth Tax Relief Reconciliation Act of
2003 and is reflected as a percentage of "Ordinary Income Distributions".
It is the intention of the aforementioned Fund to designate the maximum
amount permitted by law.
The Information reported herein may differ from the information and
distributions taxable to the shareholders for the calendar year ending December
31, 2004. Complete information will be computed and reported in conjunction with
your 2004 Form 1099-Div.
22
Shareholder Voting Results (unaudited)
There was a special meeting of shareholders held on October 7, 2004, at which
the shareholders of the Fund were asked to consider several proposals:
1. To approve the Agreement and Plan of Reorganization under which the Hilliard
Lyons Growth Fund, Inc. would be reorganized with and into the Constellation
HLAM Large Cap Quality Growth Fund, a newly-formed series of the Constellation
Funds, and the Hilliard Lyons Growth Fund, Inc. would be dissolved.
Shares % of Shares
Voted Voted
----- -----
For 726,795 96.02%
Against 24,498 3.24%
Abstain 5,626 0.74%
------- -------
756,919 100.00%
2. To approve an investment advisory agreement with Constellation Investment
Management Company, LP ("CIMCO").
Shares % of Shares
Voted Voted
----- -----
For 720,437 95.18%
Against 24,402 3.22%
Abstain 12,079 1.60%
------- -------
756,918 100.00%
3. To approve an investment sub-advisory agreement between CIMCO and Hilliard
Lyons Asset Management, a division of J.J.B. Hilliard, W.L. Lyons, Inc.
Shares % of Shares
Voted Voted
----- -----
For 720,821 95.23%
Against 24,067 3.18%
Abstain 12,030 1.59%
------- -------
756,918 100.00%
4. To act on any other business properly brought before the October 7, 2004
meeting, namely;
(a) To elect William G. Strench to serve as secretary of the meeting.
Shares % of Shares
Voted Voted
----- -----
For 756,918 100.00%
Against -- --%
Abstain -- --%
------- -------
756,918 100.00%
(b) To delegate the approval of the minutes of the meeting to the Board of
Directors.
Shares % of Shares
Voted Voted
----- -----
For 756,918 100.00%
Against -- --%
Abstain -- --%
------- -------
756,918 100.00%
23
The Trust's Form N-Q is available on the Commission's website at
http://www.sec.gov, and may be reviewed and copied at the Commission's Public
Reference Room in Washington, DC. Information on the operation of the Public
Reference Room may be obtained by calling 1-800-SEC-0330.
A description of the policies and procedures that the Trust uses to determine
how to vote proxies relating to portfolio securities, as well as information
relating to how a Fund voted proxies relating to portfolio securities during the
most recent 12-month period ended June 30, is available without charge, upon
request, (i) via the Fund's website, www.constellationfundsgroup.com; and (ii)
on the Commission's website at http://www.sec.gov.
24
CONSTELLATION FUNDS
Trust
Constellation Funds
P.O. Box 219520
Kansas City, MO 64105-9520
Investment Adviser
Constellation Investment Management Company, LP
Sub-Adviser
Hilliard Lyons Asset Management
Distributor
Constellation Investment Distribution Company, Inc.
Administrator
Constellation Investment Management Company, LP
Legal Counsel
Morgan, Lewis & Bockius, LLP
Independent Registered Public Accounting Firm
KPMG LLP
To open an account, receive account information, make inquiries, or request
literature: 1 (866) 242-5742
This report was prepared for shareholders of the Constellation HLAM Large Cap
Quality Growth Fund. It may be distributed to others only if preceded or
accompanied by a current Prospectus, which contains detailed information.
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to the registrant's
principal executive officer, principal financial officer and principal
accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Trustees of the Constellation Funds has determined that the Board's
Audit Committee does not have an "audit committee financial expert," as the
Securities and Exchange Commission has defined that term. After carefully
considering all of the factors involved in the definition of "audit committee
financial expert," the Board determined that none of the members of the audit
committee met all five qualifications in the definition, although some members
of the Audit Committees met many of the qualifications. The Board also
determined that, given the size and type of the Constellation Funds and of the
nature of the accounting and valuation issues they have presented, it did not
appear that the Audit Committee members lacked any necessary skills, and
concluded that it was not necessary to appoint an audit committee financial
expert to the Audit Committee. Finally, the Board of Trustees indicated that
whether a candidate for a new or replacement Trustee position qualified as an
audit committee financial expert would be given due consideration by the Board
in determining whether to nominate and/or select such candidate.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Effective April 9, 2004, the Board of Trustees of the Alpha Select Funds
approved a change in the name of the Trust to the Constellation Funds. On June
14, 2004 the Funds' Board of Trustees dismissed Ernst & Young LLP as independent
auditor for the Funds and selected KPMG LLP as independent auditors to the
Funds. For the current 2004 fiscal year, the aggregate Audit Fees billed by KPMG
LLP for professional services rendered for the audits of the financial
statements, or services that are normally provided in connection with statutory
and regulatory filings or engagements for the fiscal year for the Constellation
Funds are shown in the table below.
2004(1)
-----------------------------------------------
All fees and All fees and All other
services to services to fees and
the Trust service services to
that were affiliates service
pre-approved that were affiliates
pre-approved that did not
require
pre-approval
--------------------------------------------------------------------
(a) Audit $389,500 $0 $0
Fees(2)
--------------------------------------------------------------------
(b) Audit-Related $0 $0 $0
Fees
--------------------------------------------------------------------
(c) Tax Fees $48,500 $0 $0
--------------------------------------------------------------------
(d) All Other $0 $0 $0
Fees
--------------------------------------------------------------------
Notes:
(1) Prior to April 9, 2004, the Constellation Funds (the "Trust") operated
as the Alpha Select Funds and consisted of only one mutual fund, the
Target Select Equity Fund. The name change was approved by the Trust's
Board of Trustees on January 26, 2004. As of December 31, 2004, the
Trust consisted of 24 mutual funds and generated higher audit costs in
2004 than were generated in 2003.
(2) Audit fees include amounts related to the audit of the registrant's
annual financial statements and services normally provided by the
accountant in connection with statutory and regulatory filings.
Ernst & Young LLP did not serve as the Constellation Funds auditor for the
fiscal year 2004. For the fiscal year ended 2003, the audit fees billed by Ernst
& Young LLP for professional services rendered for the audits of the financial
statements, or services that are normally provided in connection with statutory
and regulatory filings or engagements for the Alpha Select Funds are as follows:
Audit Fees (4a)
Audit fees for the Alpha Select Funds totaled $16,000 in 2003, including fees
associated with the annual audit and filing of the Trust's N-1A.
Audit Related Fees (4b)
None
Tax Fees (4c)
None
Other Fees (4d)
None
(e)(1) The trust's Audit Committee has adopted policies and procedures to, among
other purposes, provide a framework for the Audit Committee's consideration of
non-audit services by the Registrant's audit firms. The policies and procedures
require pre-approving all audit and permitted non-audit services the independent
auditor provides to the Fund, and all services that the independent auditor
provides to the Fund's investment adviser(s) and advisory affiliates (whether or
not directly related to the Fund's operations and financial reporting); except
that (a) services provided to a sub-adviser whose role is primarily portfolio
management and is sub-contracted or overseen by another investment adviser, and
(b) de minimis non-audit services, shall not require pre-approval. A non-audit
service is de minimis if: (a) the total amount of the non-audit service is not
more than 5% percent of the total amount of revenues paid to the auditor by the
Fund, its investment adviser, and advisory affiliates that provide ongoing
services to the Trust for services otherwise requiring audit committee
pre-approval during the fiscal year in which the non-audit service was provided;
(b) the Trust did not recognize these services as non-audit services at the time
they were provided; and (c) these services are promptly brought to the attention
of the Committee and the Committee approves them before the audit is complete.
(e)(2) Percentage of fees billed applicable to non-audit services pursuant to
waiver of pre-approval requirement were as follows:
-------------------------------------------------------
2004 2003
-------------------------------------------------------
Audit-Related Fees 0% 0%
-------------------------------------------------------
Tax Fees 0% 0%
-------------------------------------------------------
(f) Not applicable
(g) The aggregate non-audit fees and services billed by KPMG LLPfor fiscal year
ended 2004 were $0. The aggregate non-audit fees and services billed by Ernst &
Young LLP for the fiscal year ended 2003 were $229,512. These fees were
primarily for tax compliance and other services to the Registrant's former
investment adviser, Turner Investment Partners, Inc. and its subsidiaries.
(h) The audit committee is required to pre-approve services to certain entities
to the extent that the services are determined to have a direct impact on the
operations or financial reporting of the Funds. This includes services rendered
to the adviser (excluding sub-advisers) and any entity controlling, controlled
by or under common control with the adviser that provides ongoing services to
the registrant (hereafter referred to as "affiliates"). There were no services
provided to affiliates requiring pre-approval by the committee.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to open-end management investment companies.
ITEM 6. SCHEDULE OF INVESTMENTS
Not applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to open-end management investment companies.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES
Not applicable. Effective for closed-end management investment companies for
fiscal years ending on or after December 31, 2005
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT COMPANY AND
AFFILIATED PURCHASERS.
Not applicable to open-end management investment companies.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On October 7, 2004, the shareholders of the Constellation HLAM Large Cap Quality
Growth Fund approved (i) the Agreement and Plan of Reorganization under which
the Hilliard Lyons Growth Fund, Inc. would be reorganized with and into the
Constellation HLAM Large Cap Quality Growth Fund, a newly-formed series of the
Constellation Funds, and the Hilliard Lyons Growth Fund, Inc. would be dissolved
(ii) an investment advisory agreement with Constellation Investment Management
Company, LP ("CIMCO"), and (iii) approved an investment sub-advisory agreement
between CIMCO and Hilliard Lyons Asset Management, a division of J.J.B.
Hilliard, W.L. Lyons, Inc.
ITEM 11. CONTROLS AND PROCEDURES.
(a) The certifying officers, whose certifications are included herewith, have
evaluated the registrant's disclosure controls and procedures within 90 days of
the filing date of this report. In their opinion, based on their evaluation, the
registrant's disclosure controls and procedures are adequately designed, and are
operating effectively to ensure, that information required to be disclosed by
the registrant in the reports it files or submits under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
(b) There were no significant changes in the registrant's internal control over
financial reporting that occurred during the registrant's last fiscal half-year
that has materially affected, or is reasonably likely to materially affect, the
registrants internal control over financial reporting.
ITEMS 12. EXHIBITS.
(a)(1) Code of Ethics attached hereto.
(a)(2) A separate certification for the principal executive officer and
the principal financial officer of the registrant as required by
Rule 30a-2(a) under the Investment Company Act of 1940, as
amended (17 CFR 270.30a-2(a)), are filed herewith.
(b) Officer certifications as required by Rule 30a-2(b) under the
Investment Company Act of 1940, as amended (17 CFR 270.30a-2(b))
also accompany this filing as an Exhibit.
- --------------------------------------------------------------------------------
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Constellation Funds
By (Signature and Title)* ___________________________________
John H. Grady, Jr., President & CEO
Date 03/10/05
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* ___________________________________
John H. Grady, Jr., President & CEO
Date 03/10/05
By (Signature and Title)* ___________________________________
Eric Kleinschmidt, Controller & CFO
Date 03/10/05
* Print the name and title of each signing officer under his or her signature.