PROSPECTUS
Dated October 2, 1998
The Shepherd Street Equity Fund(TM)
480 Shepherd Street
Winston-Salem, North Carolina 27103
336-728-7230
The Shepherd Street Funds, Inc.(TM) (the "Company") is a newly organized,
diversified management investment company currently consisting of one portfolio,
The Shepherd Street Equity Fund(TM) (the Fund"). The investment objective of the
Fund is growth of capital. Current income is a secondary factor in considering
the selection of investments. The Fund attempts to achieve its investment
objective by investing primarily in a diversified portfolio of common stocks and
securities convertible into common stocks.
The minimum investment in the Fund is $1,000 for regular accounts and $1000 for
retirement accounts. The minimum subsequent investment is $500 for regular
accounts and $50 for retirement accounts. The Fund is a No-Load Fund. This means
that 100% of your initial investment is invested in shares of the Fund.
This Prospectus concisely sets forth the information you should know before you
invest. Please read this Prospectus and keep it for future reference. A
Statement of Additional Information (the "SAI") regarding the Fund, dated
October 2, 1998, has been filed with the Securities and Exchange Commission
("SEC") and is incorporated by reference into this Prospectus. You can get a
copy of the SAI at no charge by writing or calling the Fund at the address or
telephone number listed above. The SEC maintains a web site (www.sec.gov) that
contains the Statement of Additional Information and other information regarding
the Fund.
THE FUNDS DESCRIBED IN THIS PROSPECTUS SHALL NOT BE OFFERED IN ANY STATE IN
WHICH SUCH OFFERING IS UNAUTHORIZED. NO SALES REPRESENTATIVE, DEALER OR OTHER
PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
Fees And Expenses.
Investment Objectives And Policies
Primary Investments of the Fund
Risk Factors.
Federal Taxes.
Purchasing Shares.
Redeeming Shares.
Investment Adviser.
Management of the Fund.
Plan of Distribution
General Information.
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FEES AND EXPENSES
Shareholder Transaction Expenses:
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This is a No-Load Fund. This means that 100% of your initial investment is
invested in shares of the Fund.
Sales Loads NONE
Deferred Sales Loads NONE
Charges on Reinvested Dividends NONE
Redemption Fees* 0.50%
*Shares redeemed prior to being held for at least six months will be charged a
redemption fee equal to 0.50% of the NAV. This would have the effect of
increasing the expenses of such shares. This fee is not a fee to finance sales
or sales promotion expenses, but is imposed to discourage short-term trading of
Fund shares. Furthermore, such fees, when imposed, are credited directly to the
assets of the Fund to help defray the expense to the Fund of such short-term
trading activities.
Annual Fund Operating Expenses: (as a percentage of net assets)
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The following table sets forth the regular operating expenses that are paid out
of the Fund's average daily assets. These fees are used to pay for services such
as the investment management of the Fund, maintaining shareholder records and
furnishing shareholder statements. This is a new Fund without a prior operating
history, so the following expense figures are estimates. True expenses may be
greater or lower than those shown below.
Management Fees. 1.00%
12b-1 Fees. 0.25%*
Other Fees (estimated) 0.05%
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Total Fund Operating Expenses. 1.30%
(before any expense reimbursements)
*You should be aware that long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charge permitted by the NASD.
Example of Shareholder Expenses Over Time.
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Based on the fee schedule set forth above, you would pay the following expenses
on a $1,000 investment, assuming (1) a 5% annual rate of return and (2)
redemption at the end of each time period;
One Year Three Years
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$13.24 $14.24
The above example is intended to help you understand the various costs and
expenses you might incur over time when you invest in the Fund, but you should
be aware that this is only an example of anticipated future expenses. Actual
expenses may be greater or less than those shown. Because the Fund has no
operating history, the expense figures are based on estimated amounts for the
Fund's first fiscal year. The Fund's Adviser has agreed to waive receipt of its
fees and/or assume certain expenses of the Fund, to the extent possible, to
insure that the Fund's total expenses do not exceed 1.50% annually. If the
Advisor waives fees or assumes expenses of the Fund, such actions would have the
effect of lowering the expense ratio and increasing the yield to investors.
Also, the Fund is required by law to use a 5% assumed annual rate of return in
the example. The Fund's actual annual rate of return may be higher or lower than
the example.
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INVESTMENT OBJECTIVES AND POLICIES
The Fund is a diversified mutual fund whose primary investment objective is
growth of capital. Current income is a secondary factor in considering the
selection of investments. The Fund seeks to achieve its objective by investing
primarily in a diversified portfolio of common stock and securities convertible
into common stock. There can be no assurance that the Fund's investment
objective will be achieved.
Under normal circumstances, the Fund intends to invest not less than 65% of its
assets in the common stocks of companies whose stock trades on the New York
Stock Exchange, The American Stock Exchange, and the NASDAQ over-the-counter
market, or securities convertible into such common stocks. The Advisor to the
Fund will seek to invest in stocks that, in the Advisor's opinion, have an
above-average potential for future earnings growth. Generally, the Advisor will
select securities that have one or more of the following characteristics:
(1) Established companies with above-average prospects for growth. These
companies will have strong performance records, solid market positions,
high margins and return on equity, and reasonable financial strength;
(2) Small and medium-sized companies that may be out of favor or not closely
followed by investors and are selling at prices which do not reflect
adequately their long-term business potential;
(3) Companies in industries that are undergoing consolidation, where the
likelihood of acquisitions is high.
In addition to common stock, the Fund may invest up to 25% of its assets in
foreign equity securities when, in the Advisor's opinion, such investments would
be advantageous to the Fund and help the Fund to achieve its investment
objective.
The Fund may also, from time to time, invest a portion of its assets in other
securities, such as United States Government bonds, bills, and notes; money
market instruments, repurchase agreements, and options on equities. The Fund may
also hold a portion of its assets in cash. The Advisor may invest in such
securities in order to manage the Fund's cash flows, and for temporary and
defensive purposes.
The Fund will attempt to take prompt advantage of changes in market conditions.
This means that the Fund will purchase and sell securities without regard to the
length of time such securities have been held, whenever the Advisor believes
such actions will help the Fund achieve its investment objective. You should be
aware that certain purchases and sales of securities might result in the Fund
realizing short-term capital gains that may have an impact on your tax status.
Please see the SAI for a more detailed discussion of taxation issues, and
consult with your tax advisor to determine what impact the Fund's investment
policies may have on your personal tax situation.
PRIMARY INVESTMENTS OF THE FUND
COMMON STOCKS. The Fund will ordinarily invest at least 65% of its assets in
common stock or securities convertible into common stock. Common stock is issued
by companies to raise cash for business purposes and represents a proportionate
equity interest in the issuing companies. Therefore, the Fund participates in
the success or failure of any company in which it holds common stock. The market
value of common stock can
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fluctuate significantly, reflecting the business performance of the issuing
company, investor perceptions and general economic or financial market
movements. Smaller companies are especially sensitive to these factors. Despite
the risk of price volatility, however, common stocks historically have offered
the greatest potential for gain on investment, compared to other classes of
financial assets.
FOREIGN SECURITIES. The Fund may invest up to 25% of its assets in common stock
of foreign issuers which are publicly traded on U.S. exchanges, either directly
or in the form of American Depository Receipts (ADRs). The Fund will only invest
in ADRs that are issuer sponsored. Sponsored ADRs typically are issued by a U.S.
bank or trust company and evidence ownership of underlying securities issued by
a foreign corporation. Investments in foreign securities may involve greater
risks compared to domestic investments. Foreign companies are not subject to the
regulatory requirements of U.S. companies and, as a result, there may be less
publicly available information about issuers than is available in the reports
and ratings published about companies in the U.S. Additionally, foreign
companies are not subject to uniform accounting, auditing and financial
reporting standards. Dividends and interest on foreign securities may be subject
to foreign withholding taxes. Such taxes may reduce the net return to
shareholders. Although the Fund intends to invest in securities of foreign
issuers domiciled in nations which the Adviser considers as having stable and
friendly governments, there is the possibility of expropriation, confiscation,
taxation, currency blockage or political or social instability which could
affect investments of foreign issuers domiciled in such nations. Further, there
is the risk of loss due to fluctuations in the value of a foreign corporation's
currency relative to the U.S. dollar.
CASH RESERVES. Although the Fund normally will invest its assets as described
above, it may also invest a portion of its assets in cash, money market
securities such as investment grade short-term notes and debentures,
certificates of deposit and bankers acceptances. The Fund may also enter into
repurchase agreements. The Fund will invest in such securities only to meet
liquidity needs or for temporary defensive purposes. If, in the Advisor's
opinion, it is appropriate for the Fund to assume a temporary defensive posture,
the Fund may invest up to 100% of its assets in these instruments.
PREFERRED STOCK. Preferred stock generally pays dividends at a specified rate
and generally has preference over common stock in the payments of dividends and
the liquidation of the issuer's assets. Dividends on preferred stock are
generally payable at the discretion of the issuer's board of directors.
Accordingly, Shareholders may suffer a loss of value if dividends are not paid.
The market prices of preferred stocks are also sensitive to changes in interest
rates and in the issuer's creditworthiness. Accordingly, shareholders may
experience a loss of value due to adverse interest rate movements or a decline
in the issuer's credit rating.
REAL ESTATE INVESTMENT TRUSTS. The Fund may invest in real estate investment
trusts (REITs). Equity REITs invest directly in real property while mortgage
REITs invest in mortgages on real property. REITs may be subject to certain
risks associated with the direct ownership of real estate, including declines in
the value of real estate, risks related to general and local economic
conditions, overbuilding and increased competition, increases in property taxes
and operating expenses, and variations in rental income. REITs pay dividends to
their shareholders based upon available funds from operations. It is quite
common for these dividends to exceed the REITs taxable earnings and profits
resulting in the excess portion of such dividends being designated as a return
of capital. The Fund intends to include the gross dividends from such REITs in
its distribution to its shareholders and, accordingly, a portion of the Fund's
distributions may also be designated as a return of capital. The Fund will not
invest more than 10% of its assets in REITS.
MONEY MARKET FUNDS. The Fund may invest in securities issued by other registered
investment companies that invest in short-term debt securities (i.e., money
market fund). As a shareholder of another registered investment company, the
Fund would bear its pro rata portion of that company's advisory fees and other
expenses. Such
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fees and expenses will be borne indirectly by the Fund's shareholders. The Fund
may invest in such instruments to the extent that such investments do not exceed
10% of the Fund's net assets and/or 3% of any investment company's outstanding
securities.
DEBT SECURITIES. The Fund may invest in corporate or U.S. Government debt
securities including zero coupon bonds. Corporate debt securities may be
convertible into preferred or common stock. In selecting corporate debt
securities for the Fund, the Adviser reviews and monitors the creditworthiness
of each issuer and issue. U.S. Government securities include direct obligations
of the U.S. Government and obligations issued by U.S. Government agencies and
instrumentalities. The market value of such securities fluctuates in response to
interest rates and the creditworthiness of the issuer. In the case of securities
backed by the full faith and credit of the United States Government,
shareholders are only exposed to interest rate risk.
Zero coupon bonds do not provide for cash interest payments but instead are
issued at a discount from face value. Each year, a holder of such bonds must
accrue a portion of the discount as income. Because issuers of zero coupon bonds
do not make periodic interest payments, their prices tend to be more volatile
than other types of debt securities when market interest rates change.
REPURCHASE AGREEMENTS. The Fund may invest a portion of its assets in repurchase
agreements ("Repos") with broker-dealers, banks and other financial
institutions, provided that the Fund's custodian always has possession of the
securities serving as collateral for the Repos or has proper evidence of book
entry receipt of said securities. In a Repo, the Fund purchases securities
subject to the seller's simultaneous agreement to repurchase those securities
from the Fund at a specified time (usually one day) and price. The repurchase
price reflects an agreed-upon interest rate during the time of investment. All
Repos entered into by the Fund must be collateralized by U.S. Government
Securities, the market values of which equal or exceed 102% of the principal
amount of the money invested by the Fund. If an institution with whom the Fund
has entered into a Repo enters insolvency proceedings, the resulting delay, if
any, in the Fund's ability to liquidate the securities serving as collateral
could cause the Fund some loss if the securities declined in value prior to
liquidation. To minimize the risk of such loss, the Fund will enter into Repos
only with institutions and dealers considered creditworthy.
OPTIONS ON EQUITIES. The Fund may write (i.e. sell) covered call options, and
may purchase put and call options, on equity securities traded on a United
States exchange or properly regulated over-the-counter market. The Fund may also
enter into such transactions on Indexes. Option contracts can include long-term
options with durations of up to three years. Although not normally anticipated
to be widely employed, the Fund may use options to increase or decrease its
exposure to the effects of changes in security prices, to hedge securities held,
to maintain cash reserves while remaining fully invested, to facilitate trading,
to reduce transaction costs, or to seek higher investment returns when an
options contract is priced more attractively than the underlying security or
index. The Fund may enter into these transactions so long as the value of the
underlying securities on which options contracts may be written at any one time
does not exceed 100% of the net assets of the Fund, and so long as the initial
margin required to enter into such contracts does not exceed ten percent (10%)
of the Fund's total net assets. When writing covered call options, to minimize
the risks of entering into these transactions, the Fund will maintain a
segregated account with its Custodian consisting of the underlying securities
upon which the option was written, cash, cash equivalents, U.S. Government
Securities or other high-grade liquid debt securities, denominated in U.S.
dollars or non-U.S. currencies, in an amount equal to the aggregate fair market
value of its commitments to such transactions.
Risk Factors. The primary risks associated with the use of options are; (1)
imperfect correlation between a change in the value of the underlying security
or index and a change in the price of the option or futures contract, and (2)
the possible lack of a liquid secondary market for an options or futures
contract and the
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resulting inability of the Fund to close out the position prior to the maturity
date. Investing only in those contracts whose price fluctuations are expected to
resemble those of the Fund's underlying securities will minimize the risk of
imperfect correlation. Entering into such transactions only on national
exchanges and over-the-counter markets with an active and liquid secondary
market will minimize the risk that the Fund will be unable to close out a
position.
RESTRICTED AND ILLIQUID SECURITIES. The Fund will not invest more than 15% of
its net assets in securities that the Advisor determines, under the supervision
of the Board of Directors, to be illiquid and/or restricted. Illiquid securities
are securities that may be difficult to sell promptly at an acceptable price
because of lack of available market and other factors. The sale of some illiquid
and other types of securities may be subject to legal restrictions. Because
illiquid and restricted securities may present a greater risk of loss than other
types of securities, the Fund will not invest in such securities in excess of
the limits set forth above.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. The Fund may purchase
securities on a when-issued basis, and it may purchase or sell securities for
delayed-delivery. These transactions occur when securities are purchased or sold
by the Fund with payment and delivery taking place at some future date. The Fund
may enter into such transactions when, in the Advisor's opinion, doing so may
secure an advantageous yield and/or price to the Fund that might otherwise be
unavailable. The Fund has not established any limit on the percentage of assets
it may commit to such transactions, but to minimize the risks of entering into
these transactions, the Fund will maintain a segregated account with its
Custodian consisting of cash, cash equivalents, U.S. Government Securities or
other high-grade liquid debt securities, denominated in U.S. dollars or non-U.S.
currencies, in an amount equal to the aggregate fair market value of its
commitments to such transactions.
A complete listing of the Fund's permissible investments, as well as the Fund's
fundamental investment policies and investment restrictions, is contained in the
SAI in the Section entitled, "Investment Policies and Restrictions".
RISK FACTORS
You may lose money by investing in the Fund. The likelihood of loss is greater
if you invest for a shorter period of time. Your investment in the Fund is not a
deposit or obligation of, or insured or guaranteed by, any entity or person,
including the U.S. Government and the Federal Deposit Insurance Corporation. The
Fund may be appropriate for long-term investors who understand the potential
risks and rewards of investing in common stocks. The value of the Fund's
investments will vary from day-to-day, reflecting changes in market conditions,
interest rates and other company, political, and economic news. Over the
short-term, stock prices can fluctuate dramatically in response to these
factors. However, over longer time periods, stocks, although more volatile, have
historically shown greater growth potential than other investments. Further, the
Fund has no operating history, and this may pose additional risks. There is no
assurance that the Fund can achieve its investment objective, since all
investments are inherently subject to market risk.
FEDERAL TAXES
The Fund intends to qualify each year as a regulated investment company under
the rules and regulations of the Internal Revenue Service (IRS). In any fiscal
year in which the Fund qualifies as a regulated investment company and
distributes to shareholders all of its net investment income and net capital
gains, the Fund will not have to pay any federal income tax.
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Generally, all dividends and capital gains are taxable whether they are
reinvested or received in cash, unless you are exempt from taxation or entitled
to a tax deferral. The Fund intends to pay out any dividends and/or capital
gains at least annually, usually in December. Early each following year, you
will be notified as to the amount and federal tax status of all income
distributions paid to you from the prior year. Such distributions may also be
subject to state or local taxes. The tax treatment of redemptions from a
retirement plan account may differ from redemptions from an ordinary shareholder
account.
You must provide the Fund with your correct taxpayer identification number, and
certify that you are not subject to backup withholding (your taxpayer
identification number is usually your Social Security number). If you fail to do
so, the IRS may require the Fund to withhold 31% of your taxable distributions
and redemptions. Federal law also requires the Fund to withhold 30% or the
applicable treaty rate from dividends paid to certain nonresident aliens,
non-U.S. partnerships, and non-U.S. corporations.
This is a brief summary of the tax laws that affect your investment in the Fund.
Please see the Section entitled "Tax Information" in the SAI for additional
information, and consult with your own tax advisor, since every investor's tax
situation is unique.
PURCHASING SHARES
To purchase shares of the Fund, first complete and sign a New Account Purchase
Application and mail it, together with your check for the total purchase price,
to THE SHEPHERD STREET FUNDS, INC.(TM), C/O DECLARATION DISTRIBUTOrs, INC., 555
NORTH LANE, SUITE 6160, CONSHOHOCKEN, PA 19428. Checks are accepted subject to
collection at full face value in United States currency. If your check does not
clear, your purchase will be cancelled and you will be subject to any losses or
fees incurred by the Fund with respect to the transaction. If shares are
purchased by check and redeemed by letter within seven business days of
purchase, the Fund may hold redemption proceeds until the purchase check has
cleared, a period of up to fifteen days. You will also be subject to a
redemption fee of 0.50% of total assets in such a circumstance.
You will receive a statement showing the number of shares purchased, the net
asset value at which your shares were purchased, and the new balance of Fund
shares owned each time you purchase shares of the Fund. The Fund does not issue
stock certificates. All full and fractional shares will be carried on the books
of the Fund.
Shares of the Fund are purchased at the net asset value next computed after the
receipt of your purchase order (See, "Determination of Net Asset Value." in the
SAI). The Fund's share price, also called its net asset value, is determined as
of the close of trading (normally 4:00 p.m., Eastern Time) every day the New
York Stock Exchange is open. The Fund calculates its net asset value per share
by dividing the total value of its assets after subtracting liabilities by the
number of its shares outstanding. The Fund generally determines the total value
of its shares by using market prices for the securities comprising its
portfolio. Securities for which quotations are not available and any other
assets are valued at a fair market value as determined in good faith by the
Advisor, subject to the review and supervision of the board of directors. The
Fund is a No-Load Fund. This means that you will not be charged any sales
commissions or underwriting discounts, so 100% of your initial investment is
invested in shares of the Fund. The minimum initial investment is $1,000 for
regular accounts and $1,000 for Individual Retirement Accounts (IRAs). Minimum
subsequent purchases for regular accounts are $500 and $50 for IRA accounts.
All applications to purchase shares of the Fund are subject to acceptance by
authorized officers of the Fund and are not binding until accepted. The Fund
reserves the right to reject purchase orders under circumstances or in amounts
considered disadvantageous to existing shareholders. Please see the SAI Sections
entitled "Purchasing and Redeeming Shares" and "Tax Information" for more
information concerning share purchases.
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REDEEMING SHARES
You may redeem your shares in the Fund at any time and for any reason. Upon
receipt by the Fund of a redemption request in proper form, your shares of the
Fund will be redeemed at their next determined net asset value (See the Sections
entitled "Determination of Net Asset Value" and "Purchasing and Redeeming
Shares" in the SAI). Redemption requests must be in writing and delivered to the
Fund at THE SHEPHERD STREET FUNDS, INC.(TM), c/o DECLARATION DISTRIBUTORS, INC.,
555 NORTH LANE, SUITE 6160, CONSHOHOCKEN, PA 19428. To be in "proper form," your
redemption request must:
1. Specify the number of shares or dollar amount to be redeemed, if less than
all shares are to be redeemed;
2. Be signed by all owners exactly as their names appear on the account;
3. If required, include a signature guarantee from any "eligible guarantor
institution" as defined by the rules under the Securities Exchange Act of
1934. Eligible guarantor institutions include banks, brokers, dealers,
credit unions, national securities exchanges, registered securities
associations, clearing agencies and savings associations. A notary public
is not an eligible guarantor.
Further documentation, such as copies of corporate resolutions and instruments
of authority may be requested from corporations, administrators, executors,
personal representatives, trustees, or custodians to evidence the authority of
the person or entity making the redemption request.
Signature Guarantees. A signature guarantee is designed to protect you and the
Fund by verifying your signature. SIGNATURE GUARANTEES ARE REQUIRED WHEN:
(1) establishing certain services after the account is opened;
(2) requesting redemptions in excess of $10,000;
(3) redeeming or exchanging shares, when proceeds are: (i) being mailed to an
address other than the address of record, (ii) made payable to other than
the registered owner(s); or
(4) transferring shares to another owner.
The redemption price per share is net asset value, determined as of the close of
business on the day your redemption order is accepted by the Fund (See the
Sections entitled, "Purchasing and Redeeming Shares" and "Determination of Net
Asset Value" in the SAI). When you redeem your shares, they may be worth more or
less than you paid for them, depending upon the value of the Fund's portfolio
securities at the time of redemption.
If the value of your account falls below $1,000 as a result of previous
redemptions and not market price declines, the Fund may redeem the shares in
your account. However, the Fund will notify you first if such an event occurs,
and you will have 60 days to bring your account balance up to the minimum levels
before the Fund may exercise its option to redeem.
Payment for shares redeemed is made within seven days after receipt by the Fund
of a request for redemption in proper form. The Fund reserves the right to
suspend or postpone redemptions during any period when (a) trading on any of the
major U.S. stock exchanges is restricted, as determined by the Securities and
Exchange
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Commission, or that the major exchanges are closed for other than customary
weekend and holiday closings, (b) the Commission has by order permitted such
suspension, or (c) an emergency, as determined by the Commission, exists making
disposal of portfolio securities or valuation of net assets of the Fund not
reasonably practicable.
Shares redeemed prior to being held for at least six months will be charged a
redemption fee equal to 0.50% of the NAV of the shares redeemed. This would have
the effect of increasing the expenses of such shares. This fee is not a fee to
finance sales or sales promotion expenses, but is imposed to discourage
short-term trading of Fund shares. Furthermore, such fees, when imposed, are
credited directly to the assets of the Fund to help defray the expense to the
Fund of such short-term trading activities.
MANAGEMENT OF THE FUND
The Company, an open-end, diversified management company, was incorporated in
Maryland on July 16, 1998. The Board of Directors approves all significant
agreements between the Company and the persons and companies that furnish
services to the Fund, including agreements with the Fund's custodian, transfer
agent, investment advisor and administrator. All such agreements are subject to
limitations imposed by state and/or federal securities laws, and to the extent
that any such contract may contradict such statutes, the contract would be
unenforceable. The day-to-day operations of the Fund are delegated to the
Advisor. The Statement of Additional Information contains background information
regarding each of the Company's Directors and Executive Officers. The Company's
Articles of Incorporation permit the Board of Directors to issue 500,000,000
shares of common stock. The Board of Directors has the power to designate one or
more classes ("series") of shares of common stock and to classify or reclassify
any unissued shares with respect to such series. Currently, the shares of the
Fund are the only class of shares being offered by the Company. Shareholders are
entitled: (i) to one vote per full share; (ii) to such distributions as may be
declared by the Company's Board of Directors out of funds legally available; and
(iii) upon liquidation, to participate ratably in the assets available for
distribution. There are no conversion or sinking fund provisions applicable to
the shares, and the holders have no preemptive rights and may not cumulate their
votes in the election of directors. The shares are redeemable and are fully
transferable. All shares issued and sold by the Fund will be fully paid and
nonassessable.
The Company is aware of a potential problem that may occur when the year changes
from 1999 to 2000. Many computers and computer programs have been built where
dates are calculated using only two digits. As a result, these computers and
programs cannot tell the difference between 1900 and 2000, and when the year
changes from 1999 to 2000, there may be significant problems. The Company has
taken steps to address this problem, specifically by entering into contracts
only with vendors who are aggressively addressing the problem and by updating
the Company's own systems to address the problem. As of the date of this filing,
the Company does not foresee "The Year 2000 Problem" as having any significant
negative impact on the Company or the Fund.
INVESTMENT ADVISER
Salem Investment Counselors, Inc., an investment advisory company founded in
1979, is the investment advisor to the Fund. Salem Investment Counselors, Inc.
is headquartered at 480 Shepherd Street, Winston-Salem, North Carolina 27103.
Mr. David B. Rea is the portfolio manager for the Fund. Mr. Rea has been
managing investment portfolios for individuals, corporations, trusts and
retirement accounts since joining the Advisor in 1984. Mr. Rea has earned an
M.B.A. in finance, a law degree, and is a Chartered Financial Analyst. Mr. Rea
is President of the Adviser and President of the Company. Mr. Rea has also
served as Treasurer to the North
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Carolina Society of Chartered Financial analysts. You should be aware that,
although Mr. Rea has extensive experience in managing investment portfolios for
clients of the Adviser, neither he nor Salem Investment Counselors, Inc. has any
prior experience in managing a portfolio for an investment company, and this may
result in additional risks for the Fund.
Salem Investment Counselors, Inc. manages the investment portfolio and business
affairs of the Fund under an Investment Advisory Agreement with the Fund, and
manages, or arranges to manage, the daily operations of the Fund under an
Operational Services Agreement.
INVESTMENT ADVISORY AGREEMENT. Under the terms of the Advisory Agreement, the
Adviser, subject to the supervision of the Board of Directors, will manage the
investment operations of the Fund in accordance with the Fund's investment
policies. In consideration of the Adviser's investment advisory services, the
Fund will pay to the Adviser on the last day of each month a fee equal to 0.40%
of average net asset value of the Fund, such fee to be computed daily based upon
the net asset value of the Fund.
The Advisor furnishes an investment program for the Fund, determines, subject to
the overall supervision and review of the Board of Directors of the Company,
what investments should be purchased, sold and held, and makes changes on behalf
of the Company in the investments of the Fund.
OPERATIONAL SERVICES AGREEMENT. Under the terms of the Services Agreement, the
Adviser, subject to the supervision of the Board of Directors, will provide
day-to-day operational services to the Fund including, but not limited to,
providing or arranging to provide accounting, administrative, legal (except
litigation), dividend disbursing, transfer agent, registrar, custodial, fund
share distribution, shareholder reporting, sub-accounting and record keeping
services. The Services Agreement provides that the Adviser pays all fees and
expenses associated with these and other functions, including but not limited
to, expenses of legal compliance, shareholder communications, and meetings of
the shareholders. Under the Services Agreement, the Fund will pay to the Adviser
on the last day of each month a fee equal to 0.60% of average net asset value of
the Fund, such fee to be computed daily based upon the net asset value of the
Fund. The Adviser has entered into an Investment Company Services Agreement with
Declaration Service Company ("DSC") to provide Transfer Agent and essentially
all administrative services for the Fund. For these services, the Adviser will
pay DSC an annual fee equal to 0.20% of the average daily net assets of the
Fund. The Adviser has also entered into a Distribution Agreement with the Fund
and Declaration Distributors, Inc. ("DDI") wherein DDI will act as principal
underwriter for the Fund's shares. The Adviser will pay DDI an annual fee of
$20,000 for its services to the Fund.
From time to time, the Adviser may waive receipt of its fees and/ or voluntarily
assume certain fund expenses, which would have the effect of lowering the Fund's
expense ratio and increasing yield to investors during the time such amounts are
waived or assumed. The Fund will not be required to pay the Adviser for any
amounts voluntarily waived or assumed, nor will the Fund be required to
reimburse the Adviser for any amounts waived or assumed during a prior fiscal
year.
The Fund pays all expenses incident to its operations and business not
specifically assumed by the Adviser, including expenses relating to custodial,
legal, and auditing charges; printing and mailing of reports and prospectuses to
existing shareholders; taxes and corporate fees; maintaining registration of the
Fund under the Investment Company Act of 1940, and registration of its shares
under the Securities Act of 1933; and qualifying and maintaining qualification
of its shares under the securities laws of certain states.
9
<PAGE>
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution, or "12b-1 Plan" under which it may
finance activities primarily intended to sell shares. Under the 12b-1 Plan, the
Fund may pay a distribution fee at an annual rate of up to 0.25% of average
daily net assets of the Fund to the Adviser for services primarily intended to
sell shares and for providing certain shareholder services. These services
include, among other things, processing new shareholder account applications,
preparing and transmitting to the Fund's Transfer Agent computer processable
tapes of all transactions by customers, and serving as the primary source of
information to customers in answering questions concerning the Fund and their
transactions with the Fund.
Payments under the 12b-1 Plan are not tied exclusively to the distribution
and/or shareholder servicing expenses actually incurred by the Adviser, and such
payments may exceed the expenses actually incurred. The Company's Board of
Directors evaluates the Plan on a regular basis.
GENERAL INFORMATION
The Fund will not issue stock certificates evidencing shares. Instead, your
account will be credited with the number of shares purchased, relieving you of
responsibility for safekeeping of certificates and the need to deliver them upon
redemption. Written confirmations are issued to you for all purchases of shares.
You will be provided at least semi-annually with a report showing the Fund's
portfolio and other information and annually after the close of the Fund's
fiscal year, which ends September 30, with a report containing audited financial
statements.
In reports or other communications to investors, or in advertising material, the
Fund may describe general economic and market conditions affecting the Fund and
may compare its performance with other mutual funds as listed in the rankings
prepared by Lipper Analytical Services, Inc. or similar nationally recognized
rating services and financial publications that monitor mutual fund performance.
The Fund may also, from time to time, compare its performance to the Standard &
Poors Composite Index of 500 Stocks ("S&P 500"), a widely recognized, unmanaged
index of common stock prices.
According to the law of Maryland, under which the Company is incorporated, and
the Company's bylaws, the Company is not required to hold an annual meeting of
shareholders unless required to do so under the Investment Company Act of 1940.
Inquiries regarding the Fund should be directed to the Fund at its address or
telephone number shown on the front cover of this Prospectus.
The Company will call a meeting of shareholders for the purpose of voting upon
the removal of a director or directors when requested in writing to do so by
record holders of at least 10% of the Fund's outstanding common shares, and in
connection with such meeting will comply with the provisions of section 16(c) of
the Investment Company Act of 1940 concerning assistance with a record
shareholder communication asking other record shareholders to join in that
request.
10
<PAGE>
THE SHEPHERD STREET EQUITY FUND(TM)
(A No-Load Fund)
Investment Adviser:
- -------------------
Salem Investment Counselors, Inc.
480 Shepherd Street
Winston-Salem, North Carolina 27103
Custodian:
- ----------
CoreStates Bank, N.A.
1339 Chestnut Street
Philadelphia, PA 19101-7618
Distributor:
- ------------
Declaration Distributors, Inc.
555 North Lane, Suite 6160
Conshohocken, PA 19428
Management Services:
- --------------------
Salem Investment Counselors, Inc.
480 Shepherd Street
Winston-Salem, North Carolina 27114
Independent Auditors:
- ---------------------
Tait, Weller & Baker
8 Penn Center, Suite 800
Philadelphia, PA 19103-2108
Legal Counsel:
- --------------
The Law Offices of David D. Jones, P.C., Conshohocken, PA, has passed on certain
legal matters relating to this registration and serves as counsel to the
Company.
No person has been authorized to give any information or to make any
representations other than those contained in this prospectus, the statement of
additional information or the fund's official sales literature in connection
with the offering of shares of the fund, and if given or made, such other
information or representations must not be relied upon as having been authorized
by the fund.
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
Dated October 2, 1998
THE SHEPHERD STREET FUNDS, INC.
480 Shepherd Street
Winston-Salem, North Carolina 27103
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectus of The Shepherd Street Equity Fund, dated
September 30 1998. You may obtain a copy of the Prospectus, free of charge, by
writing to The Shepherd Street Funds, Inc, c/o The Declaration Group, 555 North
Lane, Suite 6160, Conshohocken, PA 19428, phone number 888-575-4800.
TABLE OF CONTENTS
Investment Policies and Restrictions Custodian
Investment Adviser Transfer Agent
Directors and Officers Administration
Performance Information Distributor
Purchasing and Redeeming Shares Independent Accountants
Tax Information Independent Auditors Report
Portfolio Transactions Financial Statements
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS
The Fund's investment objective and the manner in which the Fund pursues its
investment objective is generally discussed in the prospectus under the captions
"Investment Objectives and Policies", "Primary Fund Investments" and "Risk
Factors", and all of that information is incorporated herein by reference.
The Fund is a diversified Fund, meaning that as to 75% of the Fund's assets
(valued at the time of investment), the Fund will not invest more than 5% of its
assets in securities of any one issuer, except in obligations of the United
States Government and its agencies and instrumentalities, thereby reducing the
risk of loss. The Fund normally will invest at least 65% of total assets in the
common stock of Companies whose stock trades on the New York Stock Exchange, The
American Stock Exchange, and the NASDAQ over-the-counter market. However, for
temporary and defensive purposes, the Fund may ordinarily invest in a variety of
other securities. The complete list of securities in which the Fund may
ordinarily invest is listed below, along with any restrictions on such
investments, and, where necessary, a brief discussion of any risks unique to the
particular security.
Cash Reserves. Although the Fund normally will invest its assets as described
above, it may, to meet liquidity needs or for temporary defensive purposes,
ordinarily invest a portion of its assets in cash, money market securities such
as short term notes issued by the United States Government, its agencies and/or
instrumentalities, and debentures, certificates of deposit or bankers
acceptances. The Fund may also enter into repurchase agreements. If, in the
Advisor's opinion, it is appropriate for the Fund to assume a temporary
defensive posture, the Fund may invest up to 100% of its assets in these
instruments.
Common Stocks. Common stock is issued by companies to raise cash for business
purposes and represents a proportionate equity interest in the issuing
companies. Therefore, the Fund participates in the success or failure of any
company in which it holds common stock. The market value of common stock can
fluctuate significantly, reflecting the business performance of the issuing
company, investor perception and general economic or financial market movements.
Smaller companies are especially sensitive to these factors. Despite the risk of
price volatility, however, common stocks historically have offered the greatest
potential for gain on investment, compared to other classes of financial assets.
1
<PAGE>
Preferred Stock. Preferred stock generally pays dividends at a specified rate
and generally has preference over common stock in the payments of dividends and
the liquidation of the issuer's assets. Dividends on preferred stock are
generally payable at the discretion of the issuer's board of directors.
Accordingly, Shareholders may suffer a loss of value if dividends are not paid.
The market prices of preferred stocks are also sensitive to changes in interest
rates and in the issuer's creditworthiness. Accordingly, shareholders may
experience a loss of value due to adverse interest rate movements or a decline
in the issuer's credit rating.
Foreign Securities. The Fund may invest up to 25% of its assets in common stock
of foreign issuers which are publicly traded on U.S. exchanges, either directly
or in the form of American Depository Receipts (ADRs). The Fund will only invest
in ADRs that are issuer sponsored. Sponsored ADRs typically are issued by a U.S.
bank or trust company and evidence ownership of underlying securities issued by
a foreign corporation.. Investments in foreign securities may involve greater
risks compared to domestic investments. Foreign companies are not subject to the
regulatory requirements of U.S. companies and, as a result, there may be less
publicly available information about issuers than is available in the reports
and ratings published about companies in the U.S. Additionally, foreign
companies are not subject to uniform accounting, auditing and financial
reporting standards. Dividends and interest on foreign securities may be subject
to foreign withholding taxes. Such taxes may reduce the net return to
shareholders. Although the Fund intends to invest in securities of foreign
issuers domiciled in nations which the Adviser considers as having stable and
friendly governments, there is the possibility of expropriation, confiscation,
taxation, currency blockage or political or social instability which could
affect investments of foreign issuers domiciled in such nations. Further, there
is the risk of loss due to fluctuations in the value of a foreign corporation's
currency relative to the U.S. dollar.
Real Estate Investment Trusts. The Fund may invest in real estate investment
trusts (REITs). Equity REITs invest directly in real property while mortgage
REITs invest in mortgages on real property. REITs may be subject to certain
risks associated with the direct ownership of real estate including declines in
the value of real estate, risks related to general and local economic
conditions, overbuilding and increased competition, increases in property taxes
and operating expenses, and variations in rental income. REITs pay dividends to
their shareholders based upon available funds from operations. It is quite
common for these dividends to exceed the REITs taxable earnings and profits
resulting in the excess portion of such dividends being designated as a return
of capital. The Fund intends to include the gross dividends from such REITs in
its distribution to its shareholders and, accordingly, a portion of the Fund's
distributions may also be designated as a return of capital. The Fund will not
invest more than 10% of its assets in REITS.
Money Market Funds. The Fund may invest in securities issued by other registered
investment companies that invest in short-term debt securities (i.e., money
market fund). As a shareholder of another registered investment company, the
Fund would bear its pro rata portion of that company's advisory fees and other
expenses. Such fees and expenses will be borne indirectly by the Fund's
shareholders. The Fund may invest in such instruments to the extent that such
investments do not exceed 10% of the Fund's net assets and/or 3% of any
investment company's outstanding securities.
2
<PAGE>
Debt Securities. The Fund may invest in corporate or U.S. Government debt
securities including zero coupon bonds. Corporate debt securities may be
convertible into preferred or common stock. In selecting corporate debt
securities for the Fund, the Adviser reviews and monitors the creditworthiness
of each issuer and issue. U.S. Government securities include direct obligations
of the U.S. Government and obligations issued by U.S. Government agencies and
instrumentalities. The market value of such securities fluctuates in response to
interest rates and the creditworthiness of the issuer. In the case of securities
backed by the full faith and credit of the United States Government,
shareholders are only exposed to interest rate risk.
Zero coupon bonds do not provide for cash interest payments but instead are
issued at a discount from face value. Each year, a holder of such bonds must
accrue a portion of the discount as income. Because issuers of zero coupon bonds
do not make periodic interest payments, their prices tend to be more volatile
than other types of debt securities when market interest rates change.
Repurchase Agreements. The Fund may invest a portion of its assets in repurchase
agreements ("Repos") with broker-dealers, banks and other financial
institutions, provided that the Fund's custodian always has possession of the
securities serving as collateral for the Repos or has proper evidence of book
entry receipt of said securities. In a Repo, the Fund purchases securities
subject to the seller's simultaneous agreement to repurchase those securities
from the Fund at a specified time (usually one day) and price. The repurchase
price reflects an agreed-upon interest rate during the time of investment. All
Repos entered into by the Fund must be collateralized by U.S. Government
Securities, the market values of which equal or exceed 102% of the principal
amount of the money invested by the Fund. If an institution with whom the Fund
has entered into a Repo enters insolvency proceedings, the resulting delay, if
any, in the Fund's ability to liquidate the securities serving as collateral
could cause the Fund some loss if the securities declined in value prior to
liquidation. To minimize the risk of such loss, the Fund will enter into Repos
only with institutions and dealers considered creditworthy.
Options On Equities. The Fund may write (i.e. sell) covered call options, and
may purchase put and call options, on equity securities traded on a United
States exchange or properly regulated over-the-counter market. The Fund may also
enter into such transactions on Indexes. Option contracts can include long-term
options with durations of up to three years. Although not normally anticipated
to be widely employed, the Fund may use options to increase or decrease its
exposure to the effects of changes in security prices, to hedge securities held,
to maintain cash reserves while remaining fully invested, to facilitate trading,
to reduce transaction costs, or to seek higher investment returns when an
options contract is priced more attractively than the underlying security or
index. The Fund may enter into these transactions so long as the value of the
underlying securities on which options contracts may be written at any one time
does not exceed 100% of the net assets of the Fund, and so long as the initial
margin required to enter into such contracts does not exceed ten percent (10%)
of the Fund's total net assets. When writing covered call options, to minimize
the risks of entering into these transactions, the Fund will maintain a
segregated account with its Custodian consisting of the underlying securities
upon which the option was written, cash, cash equivalents, U.S. Government
Securities or other high-grade liquid debt securities, denominated in U.S.
dollars or non-U.S. currencies, in an amount equal to the aggregate fair market
value of its commitments to such transactions.
Risk Factors. The primary risks associated with the use of options are; (1)
imperfect correlation between a change in the value of the underlying security
or index and a change in the price of the option or futures contract, and (2)
the possible lack of a liquid secondary market for an options or futures
contract and the resulting inability of the Fund to close out the position prior
to the maturity date. Investing only in those contracts whose price fluctuations
are expected to resemble those of the Fund's underlying securities will minimize
the risk of imperfect correlation. Entering into such transactions only on
national exchanges and over-the-counter markets with an active and liquid
secondary market will minimize the risk that the Fund will be unable to close
out a position.
3
<PAGE>
Restricted and Illiquid Securities. The Fund will not invest more than 15% of
its net assets in securities that the Advisor determines, under the supervision
of the Board of Directors, to be illiquid and/or restricted. Illiquid securities
are securities that may be difficult to sell promptly at an acceptable price
because of lack of available market and other factors. The sale of some illiquid
and other types of securities may be subject to legal restrictions. Because
illiquid and restricted securities may present a greater risk of loss than other
types of securities, the Fund will not invest in such securities in excess of
the limits set forth above.
When-Issued Securities and Delayed-Delivery Transactions. The Fund may purchase
securities on a when-issued basis, and it may purchase or sell securities for
delayed-delivery. These transactions occur when securities are purchased or sold
by the Fund with payment and delivery taking place at some future date. The Fund
may enter into such transactions when, in the Advisor's opinion, doing so may
secure an advantageous yield and/or price to the Fund that might otherwise be
unavailable. The Fund has not established any limit on the percentage of assets
it may commit to such transactions, but to minimize the risks of entering into
these transactions, the Fund will maintain a segregated account with its
Custodian consisting of cash, cash equivalents, U.S. Government Securities or
other high-grade liquid debt securities, denominated in U.S. dollars or non-U.S.
currencies, in an amount equal to the aggregate fair market value of its
commitments to such transactions.
Portfolio Turnover. The Fund has no operating history and therefore has no
reportable portfolio turnover. Higher portfolio turnover rates may result in
higher rates of net realized capital gains to the Fund, thus the portion of the
Fund's distributions constituting taxable gains may increase. In addition,
higher portfolio turnover activity can result in higher brokerage costs to the
Fund. The Fund anticipates that its annual portfolio turnover will be not
greater than 50%.
Under normal circumstances, the Fund will not invest more than 5% of its net
assets, in the aggregate, in money market instruments, repurchase agreements,
REITS, options, or debt securities. However, for temporary and defensive
purposes, the Fund may invest up to 100% The complete list of the Fund's
investment restrictions is as follows:
The Fund will not:
1. To the extent of 75% of its assets (valued at time of investment), invest
more than 5% of its assets in securities of any one issuer, except in
obligations of the United States Government and its agencies and
instrumentalities;
2. Acquire securities of any one issuer that at the time of investment (a)
represent more than 10% of the voting securities of the issuer or (b) have a
value greater than 10% of the value of the outstanding securities of the issuer;
3. Invest more than 25% of its assets (valued at time of investment) in
securities of companies in any one industry;
4. Borrow money, except from banks for temporary or emergency purposes in
amounts not exceeding 5% of the value of the Fund's assets at the time of
borrowing;
4
<PAGE>
5. Underwrite the distribution of securities of other issuers, or acquire
"restricted" securities that, in the event of a resale, might be required to be
registered under the Securities Act of 1933;
6. Make margin purchases or short sales of securities;
7. Invest in companies for the purpose of management or the exercise of control;
8. Lend money (but this restriction shall not prevent the Fund from investing in
debt securities or repurchase agreements, or lend its portfolio securities).
9. Acquire or retain any security issued by a company, an officer or director of
which is an officer or director of the Company or an officer, director or other
affiliated person of the Advisor.
10. Invest in oil, gas or other mineral exploration or development programs,
although it may invest in marketable securities of companies engaged in oil, gas
or mineral exploration;
11. Purchase or sell real estate or real estate loans or real estate limited
partnerships, although it may invest in marketable securities of companies that
invest in real estate or interests in real estate.
12. Purchase warrants on securities.
13. Issue senior securities.
14. Invest in commodities, or invest in futures or options on commodities.
Restrictions 1 through 14 listed above are fundamental policies, and may be
changed only with the approval of a "majority of the outstanding voting
securities" of the Fund as defined in the Investment Company Act of 1940.
The Fund has also adopted the following restrictions that may be changed by the
Board of Directors without shareholder approval:
The Fund may not:
a. Invest more than 25% of its assets (valued at time of investment) in
securities of issuers with less than three years' operation (including
predecessors);
b. Invest more than 15% of its net assets in securities that are not readily
marketable;
c. Acquire securities of other investment companies except (a) by purchase in
the open market, where no commission or profit to a sponsor or dealer
results from such purchase other than the customary broker's commission and
(b) where acquisition results from a dividend or merger, consolidation or
other reorganization.
d. purchase more than 3% of the voting securities of any one investment
company nor invest more than 10% of the Funds assets (valued at time of
investment) in all investment company securities purchased by the Fund;
e. Pledge, mortgage or hypothecate its assets, except for temporary or
emergency purposes and then to an extent not greater than 5% of its total
assets at cost;
f. Invest more than 10% of the Fund's assets (valued at time of investment) in
initial margin deposits of options or futures contracts;
5
<PAGE>
INVESTMENT ADVISER
Salem Investment Counselors, Inc. (the "Adviser") was organized under the laws
of the State of North Carolina as an investment advisory corporation in 1979.
The Advisor registered as an Investment Advisor with the Securities and Exchange
Commission in April 1979. The Advisor is one of the largest private financial
counseling firms in North Carolina, providing financial management services to
individuals, corporations, and professional organizations in North Carolina and
throughout the United States. The Advisor manages the investment portfolio and
the general business affairs of the Fund pursuant to an investment services
agreement with the Fund dated September 30, 1998 (the "Agreement").
The Agreement provides that the adviser shall not be liable for any loss
suffered by the Fund or its shareholders as a consequence of any act or omission
in connection with services under the Agreement, except by reason of the
adviser's willful misfeasance, bad faith, gross negligence, or reckless
disregard of its obligations and duties under the Advisory Agreement.
The Agreement has a term of two years, but may be continued from year to year so
long as its continuance is approved annually (a) by the vote of a majority of
the Directors of the Fund who are not "interested persons" of the Fund or the
adviser cast in person at a meeting called for the purpose of voting on such
approval, and (b) by the Board of Directors as a whole or by the vote of a
majority (as defined in the 1940 Act) of the outstanding shares of the Fund. The
Agreement will terminate automatically in the event of its assignment (as
defined in the 1940 Act).
DIRECTORS AND OFFICERS
The board of directors has overall responsibility for conduct of the Company's
affairs. The day-to-day operations of the Fund are managed by the Advisor,
subject to the bylaws of the Company and review by the Board of Directors. The
directors of the Company, including those directors who are also officers, are
listed below:
<TABLE>
<CAPTION>
Name, Age, Address, Position Principal Occupation For the
with Fund Last Five Years
<S> <C>
(1) David B. Rea*; (Age 42) President of Salem Investment Counselors,
480 Shepherd Street Inc. Chartered Financial Analyst (1987).
Winston-Salem, NC 27103 Undergraduate degree, Wabash College.
President, Director MBA degree, Indiana University (1981)
Juris Doctorate degree, Wake Forest University
School of Law, (1979), Certified Public Accountant
(1982).
(2) Robert T. Beach*, (Age 51) Investment Counselor with Salem Investment
480 Shepherd Street Counselors since 1985. Undergraduate degree,
Winston-Salem, NC 27103 Dartmouth College. M.B.A. degree, Stanford
Director Graduate School of Business. Juris Doctorate
degree, Stanford Law School. Chartered Financial
Analyst (1988)
(3) William R. Watson*, (Age 57) Investment Counselor with Salem Investment
480 Shepherd Street Counselors since 1982. Undergraduate degree,
Winston-Salem, NC 27103 North Carolina State University, 1963. M.B.A.
Director Degree, University of North Carolina, 1976.
Chartered Financial Analyst (1975)
6
<PAGE>
(4) James T. Broyhill, (Age 70) Retired. Former Secretary of North Carolina Dept.
480 Shepherd Street of Economic & Community Development, 1989-91.
Winston-Salem, NC 27103 United States Senator, July 1996-November 1996.
Director Member of The United States House of
Representatives, 1963-1986.
(5) Ralph M. Stockton, Jr. (Age 71) Attorney, partner in firm of Kilpatrick Stockton
480 Shepherd Street Since 1952.Undergraduate degree, University of
Winston-Salem, NC 27103 North Carolina, 1948, Juris Doctorate degree, with
Director Honors, University of North Carolina School of
Law, Member, American Bar Association, U.S.
Supreme Court Historical Society, North Carolina
Bar Association. Inducted into North Carolina Bar
Association General Practice Hall of Fame, 1993.
(6) Helen C. Hanes (Age 80) Private Investor. Undergraduate degrees from
480 Shepherd Street Marion College and Wittenberg University.
Winston-Salem, N.C. 27103 Doctorate of Winston-Salem, NC 27103 Humane
Director Letters from Roanoke College.
</TABLE>
* Indicates an "interested person" as defined in the Investment Company Act of
1940.
The Shepherd Street Funds, Inc. (the "Company") was organized as a Maryland
Corporation on July 16, 1998 (See the Sections titled "Management of the Fund"
and "General Information" in the Fund's Prospectus). The table below sets forth
the compensation anticipated to be paid by the Company to each of the directors
of the Company during the fiscal year ending September 30, 1999.
Name of Director Compensation Pension Annual Total Compensation
from Company Benefits Benefits Paid to Director
- --------------------------------------------------------------------------------
David B. Rea* $0.00 $0.00 $0.00 $0.00
William R. Watson* $0.00 $0.00 $0.00 $0.00
Robert T. Beach* $0.00 $0.00 $0.00 $0.00
James T. Broyhill $0.00 $0.00 $0.00 $0.00
Ralph Stockton $0.00 $0.00 $0.00 $0.00
Helen C. Hanes $0.00 $0.00 $0.00 $0.00
William R. Watson, David B. Rea, Robert T. Beach, Dale M. Brown, and Jeffrey C.
Howard intend to purchase 2000 shares each of the Fund prior to the effective
date of the Fund's registration and will be deemed initially to control the
Fund.
7
<PAGE>
The Company will call a meeting of shareholders for the purpose of voting upon
the question of removal of a director or directors when requested in writing to
do so by record holders of at least 10% of the Fund's outstanding common shares.
The Company's bylaws contain procedures for the removal of directors by its
stockholders. At any meeting of stockholders, duly called and at which a quorum
is present, the stockholders may by the affirmative vote of the holders of a
majority of the votes entitled to be cast thereon, remove any director or
directors from office and may elect a successor or successors to fill any
resulting vacancies for the unexpired terms of the removed directors.
PERFORMANCE INFORMATION
From time to time the Fund may quote total return figures. "Total Return" for a
period is the percentage change in value during the period of an investment in
Fund shares, including the value of shares acquired through reinvestment of all
dividends and capital gains distributions. "Average Annual Total Return" is the
average annual compounded rate of change in value represented by the Total
Return Percentage for the period.
Average Annual Total Return is computed as follows: P(1+T)[n] = ERV
Where: P = a hypothetical initial investment of $1000
T = average annual total return
n = number of years
ERV = ending redeemable value of shares at the end of the period
Yield. The Fund may advertise performance in terms of a 30-day yield quotation.
The 30-day yield quotation is computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last day of the period, according to the following formula:
6
Yield = 2[(a-b/cd + 1) - 1]
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursement)
c = the average daily number of shares outstanding during the period
that they were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
The Fund imposes no sales charges. Income taxes are not taken into account. The
Fund's performance is a function of conditions in the securities markets,
portfolio management, and operating expenses. Although information such as that
shown above is useful in reviewing the Fund's performance and in providing some
basis for comparison with other investment alternatives, it should not be used
for comparison with other investments using different reinvestment assumptions
or time periods.
In sales literature, the Fund's performance may be compared with that of market
indices and other mutual funds. In addition to the above computations, the Fund
might use comparative performance as computed in a ranking determined by Lipper
Analytical Services, Morningstar, Inc., or that of another service.
8
<PAGE>
PURCHASING AND REDEEMING SHARES
Redemptions will be made at net asset value. The Fund's net asset value is
determined on days on which the New York Stock Exchange is open for trading. For
purposes of computing the net asset value of a share of the Fund, securities
traded on security exchanges, or in the over-the-counter market in which
transaction prices are reported, are valued at the last sales price at the time
of valuation or, lacking any reported sales on that day, at the most recent bid
quotations. Securities for which quotations are not available and any other
assets are valued at a fair market value as determined in good faith by the
Advisor, subject to the review and supervision of the board of directors. The
price per share for a purchase order or redemption request is the net asset
value next determined after receipt of the order.
The Fund is open for business on each day that the New York Stock Exchange
("NYSE") is open. The Fund's share price or net asset value per share ("NAV") is
normally determined as of 4:00 p.m., New York time. The Fund's share price is
calculated by subtracting its liabilities from the closing fair market value of
its total assets and dividing the result by the total number of shares
outstanding on that day. Fund liabilities include accrued expenses and dividends
payable, and its total assets include the market value of the portfolio
securities as well as income accrued but not yet received. Since the Fund
generally does not charge sales or redemption fees, the NAV is the offering
price for shares of the Fund. For shares redeemed prior to being held for at
least six months, the redemption value is the NAV less a redemption fee equal to
0.50% of the NAV.
TAX INFORMATION
The Fund intends to qualify as a regulated investment company under the Internal
Revenue Code so as to be relieved of federal income tax on its capital gains and
net investment income currently distributed to its shareholders. To qualify as a
regulated investment company, the Fund must, among other things, derive at least
90% of its gross income from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of stock, securities,
or other income derived with respect to its business of investing in such stock
or securities.
If the Fund qualifies as a regulated investment company and distributes at least
90% of its net investment income, the Fund will not be subject to Federal income
tax on the income so distributed. However, the Fund would be subject to
corporate income tax on any undistributed income other than tax-exempt income
from municipal securities.
The Fund intends to distribute to shareholders, at least annually, substantially
all net investment income and any net capital gains realized from sales of the
Fund's portfolio securities. Dividends from net investment income and
distributions from any net realized capital gains are reinvested in additional
shares of the Fund unless the shareholder has requested in writing to have them
paid by check.
Dividends from investment income and net short-term capital gains are generally
taxable to the shareholder as ordinary income. Distributions of long-term
capital gains are taxable as long-term capital gains regardless of the length of
time shares in the Fund have been held. Distributions are taxable, whether
received in cash or reinvested in shares of the Fund.
Each shareholder is advised annually of the source of distributions for federal
income tax purposes. A shareholder who is not subject to federal income tax will
not be required to pay tax on distributions received.
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If shares are purchased shortly before a record date for a distribution, the
shareholder will, in effect, receive a return of a portion of his investment,
but the distribution will be taxable to him even if the net asset value of the
shares is reduced below the shareholder's cost. However, for federal income tax
purposes the original cost would continue as the tax basis.
If a shareholder fails to furnish his social security or other tax
identification number or to certify properly that it is correct, the Fund may be
required to withhold federal income tax at the rate of 31% (backup withholding)
from dividend, capital gain and redemption payments to him. Dividend and capital
gain payments may also be subject to backup withholding if the shareholder fails
to certify properly that he is not subject to backup withholding due to the
under-reporting of certain income.
Taxation of the Shareholder. Taxable distributions generally are included in a
shareholder's gross income for the taxable year in which they are received.
However, dividends declared in October, November and December and made payable
to shareholders of record in such month will be deemed to have been received on
December 31st if paid by the Fund during the following January.
Distributions by the Fund will result in a reduction in the fair market value of
the Fund's shares. Should a distribution reduce the fair market value below a
shareholder's cost basis, such distribution would be taxable to the shareholder
as ordinary income or as a long-term capital gain, even though, from an
investment standpoint, it may constitute a partial return of capital. In
particular, investors should be careful to consider the tax implications of
buying shares of the Fund just prior to a distribution. The price of such shares
include the amount of any forthcoming distribution so that those investors may
receive a return of investment upon distribution which will, nevertheless, be
taxable to them.
A redemption of shares is a taxable event and, accordingly, a capital gain or
loss may be recognized. Each investor should consult a tax advisor regarding the
effect of federal, state, local, and foreign taxes on an investment in the Fund.
Dividends. A portion of the Fund's income may qualify for the dividends-received
deduction available to corporate shareholders to the extent that the Fund's
income is derived from qualifying dividends. Because the Fund may earn other
types of income, such as interest, income from securities loans, non-qualifying
dividends, and short-term capital gains, the percentage of dividends from the
Fund that qualifies for the deduction generally will be less than 100%. The Fund
will notify corporate shareholders annually of the percentage of Fund dividends
that qualifies for the dividend received deductions.
A portion of the Fund's dividends derived from certain U.S. Government
obligations may be exempt from state and local taxation. Short-term capital
gains are distributed as dividend income. The Fund will send each shareholder a
notice in January describing the tax status of dividends and capital gain
distributions for the prior year.
Capital Gain Distribution. Long-term capital gains earned by the Fund from the
sale of securities and distributed to shareholders are federally taxable as
long-term capital gains, regardless of the length of time shareholders have held
their shares. If a shareholder receives a long-term capital gain distribution on
shares of the Fund, and subsequently such shares are sold at a loss, the portion
of the loss equal to the amount of the long-term capital gain distribution may
be considered a long-term loss for tax purposes. Short-term capital gains
distributed by the Fund are taxable to shareholders as dividends, not as capital
gains. Taxation issues are complex and highly individual. You should consult
with your tax advisor concerning the effects of transactions in the Fund.
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PORTFOLIO TRANSACTIONS
The Fund will generally purchase and sell securities without regard to the
length of time the security has been held. Accordingly, the rate of portfolio
turnover may be substantial. However, the Fund expects that its annual portfolio
turnover rate will not exceed 50% under normal conditions. However, there can be
no assurance that the Fund will not exceed this rate, and the portfolio turnover
rate may vary from year to year.
High portfolio turnover in any year will result in the payment by the Fund of
above-average transaction costs and could result in the payment by shareholders
of above-average amounts of taxes on realized investment gains. Distributions to
shareholders of such investment gains, to the extent they consist of short-term
capital gains, will be considered ordinary income for federal income tax
purposes.
Decisions to buy and sell securities for the Fund are made by the Adviser
subject to review by the Company's Board of Directors. In placing purchase and
sale orders for portfolio securities for the Fund, it is the policy of the
Adviser to seek the best execution of orders at the most favorable price. In
selecting brokers to effect portfolio transactions, the determination of what is
expected to result in the best execution at the most favorable price involves a
number of largely judgmental considerations. Among these are the Adviser's
evaluations of the broker's efficiency in executing and clearing transactions.
Over-the-counter securities are generally purchased and sold directly with
principal market makers who retain the difference in their cost in the security
and its selling price. In some instances, the Adviser feels that better prices
are available from non-principal market makers that are paid commissions
directly.
CUSTODIAN
First Union Bank, N.A., acts as custodian for the Fund. As such, the Bank holds
all securities and cash of the Fund, delivers and receives payment for
securities sold, receives and pays for securities purchased, collects income
from investments and performs other duties, all as directed by officers of the
Company. CoreStates Bank does not exercise any supervisory function over the
management of the Fund, the purchase and sale of securities or the payment of
distributions to shareholders.
TRANSFER AGENT
Declaration Services Company ("DSC") acts as transfer, dividend disbursing, and
shareholder servicing agent for the Fund pursuant to a written agreement with
the Advisor and Fund. Under the agreement, DSC is responsible for administering
and performing transfer agent functions, dividend distribution, shareholder
administration, and maintaining necessary records in accordance with applicable
rules and regulations.
ADMINISTRATION
DSC also provides services as Administrator to the Fund pursuant to a written
agreement with the Advisor and Fund. The Administrator supervises all aspects of
the operations of the Fund except those performed by the Adviser under the
Fund's investment advisory agreement. The Administrator is responsible for:
(a) calculating the Fund's net asset value
(b) preparing and maintaining the books and accounts specified in Rule 31a-1
and 31a-2 of the Investment Company Act of 1940
(c) preparing financial statements contained in reports to stockholders of the
Fund
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(d) preparing the Fund's federal and state tax returns
(e) preparing reports and filings with the Securities and Exchange Commission
(f) preparing filings with state Blue Sky authorities
(g) maintaining the Fund's financial accounts and records
DISTRIBUTOR
Declaration Distributors, Inc., 555 North Lane, Suite 6160, Conshohocken, Pa
19428, a wholly-owned subsidiary of The Declaration Group, serves as distributor
and principal underwriter of the Fund's shares pursuant to a written agreement
with the Advisor and Fund.
INDEPENDENT ACCOUNTANTS
Tait, Weller & Baker, Inc., 8 Penn Center, Suite 800, Philadelphia, PA
19103-2108 will serve as the Company's independent auditors for its first fiscal
year.
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INDEPENDENT AUDITORS' REPORT
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
THE SHEPHERD STREET FUNDS, INC.
Winston-Salem, North Carolina
We have audited the accompanying statement of assets and liabilities of The
Shepherd Street Equity Fund, (a series of The Shepherd Street Funds, Inc.). This
financial statement is the responsibility of the Fund's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of assets and liabilities is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of assets and
liabilities. 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 of the statement of
assets and liabilities provides a reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of The
Shepherd Street Equity Fund as of September 23, 1998, in conformity with
generally accepted accounting principles.
Tait, Weller & Baker
PHILADELPHIA, PENNSYLVANIA
SEPTEMBER 23, 1998
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STATEMENT OF ASSETS AND LIABILITIES
THE SHEPHERD STREET EQUITY FUND
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 23, 1998
- --------------------------------------------------------------------------------
ASSETS
Cash $100,000
--------
LIABILITIES --
--------
NET ASSETS $100,000
========
Shares of $.0001 par value, capital stock
outstanding, 500,000,000 authorized 10,000
========
Net asset value, offering and redemption price per share $ 10.00
========
At September 23, 1998 the components of net assets were as follows:
Paid-in capital $100,000
========
- --------------------------------------------------------------------------------
SEE NOTE TO STATEMENT OF ASSETS AND LIABILITIES
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THE SHEPHERD STREET EQUITY FUND
NOTE TO STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 23, 1998
- --------------------------------------------------------------------------------
(1) ORGANIZATION
The Shepherd Street Funds, Inc. (the "COMPANY"), is registered under the
Investment Company Act of 1940, as amended (the "1940 ACT"), as an open-end
management investment company and is authorized to issue shares of capital
stock. The Company currently offers shares of capital stock in one
portfolio, The Shepherd Street Equity Fund.
The Company was organized on July 16, 1998, and between that date and
September 23, 1998, the Company had no operations other than those relating
to organizational matters and the registration of its shares under
applicable securities laws.
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