[GRAPHIC OMITTED: SHEPHERD STREET EQUITY FUND LOGO]
THE SHEPHERD STREET EQUITY FUND (TM)
Annual Report
September 30, 1999
Investment Adviser:
Salem Investment Counselors, Inc.
480 Shepherd Street
Winston-Salem, North Carolina 27103
Shareholder Services:
Declaration Service Company
555 North Lane, Suite 6160
Conshohocken, PA 19428
Legal Counsel:
The Law Offices of David D. Jones, P.C.
518 Kimberton, #134
Phoenixville, PA 19460
Independent Auditors:
Tait, Weller & Baker
8 Penn Center, Suite 800
Philadelphia, PA 19103-2108
Custodian:
First Union National Bank
1339 Chestnut Street
Philadelphia, PA 19101-7618
The Shepherd Street Equity Fund
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[GRAPHIC OMITTED: SHEPHERD STREET EQUITY FUND LOGO]
Fellow Shareholders:
We are pleased to announce the results of operations for the one-year
period ending September 30, 1999, and to provide you with this annual
report.
Over the last twelve months, the Shepherd Street Equity Fund has
obtained a total return of 28.4% (See graph on next page). The total
assets of the Fund grew over this period from $100,000 to $5,707,254.
Included in this report is a complete list of the companies owned in the
Fund on September 30, 1999.
We are particularly pleased with the investment performance of the Fund
during a period when the markets have been extraordinarily narrow with
only a few, large stocks holding up the indicies and most individual
stocks showing declines. As recently reported in the Wall Street
Journal, the value of the average stock on the New York Stock Exchange
has declined in 1999. On the Nasdaq, less than half of the stocks have a
gain this year. The markets' performance in 1999 has been similar to
1998, when 14 stocks accounted for 50% of the total gain in the Standard
& Poor's 500-Stock Index.
We continue to focus on the long term and to search for value in a
market that has been unforgiving to richly priced companies that miss
short-term earnings expectations. While overall valuations in the market
remain high, we will continue to identify companies with valuable
franchises that are selling at reasonable prices with excellent
opportunities for long-term growth. We will use any price declines of
such companies as buying opportunities for your fund.
We appreciate and thank you for your investment. If you know of someone
who might be interested in the Fund, please have them call or write for
a brochure and prospectus.
Sincerely yours,
/S/ David B. Rea
David B. Rea
President
The Shepherd Street Equity Fund
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PERFORMANCE UPDATE - $10,000 INVESTMENT
For the period from October 2, 1998 (commencement of operations) to
September 30, 1999
[GRAPHIC OMITTED: WORM CHART: PERFORMANCE UPDATE - $10,000 INVESTMENT]
The Shepherd Street Equity Fund S&P Total Return Index
10/2/98 $10,000 $10,000
11/30/98 $11,470 $11,825
1/31/99 $12,170 $13,029
3/31/99 $12,080 $13,129
5/31/99 $12,950 $13,316
7/31/99 $13,450 $13,616
9/30/99 $12,840 $13,030
The Shepherd Street S&P Total Return
Equity Fund Total Return --------------------------
- -------------------------- 10/2/98-9/30/99
Commencement of operations --------------------------
through 9/30/99 30.30%
- --------------------------
28.40%
[bullet] The graph assumes an initial $10,000 investment at October 2,
1998. All dividends and distributions are reinvested.
[bullet] At September 30, 1999, the Fund would have grown to $12,840 -
total annualized investment return of 28.40% since October 2, 1998.
[bullet] At September 30, 1999, a similar investment in the S&P Total
Return Index would have grown to $13,030 - total annualized investment
return of 30.30% since October 2, 1998.
The Shepherd Street Equity Fund
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SCHEDULE OF INVESTMENTS
September 30, 1999
Shares Value
- -------- --------
COMMON STOCK - 94.35%
Airlines - 3.45%
7,500 US Airways Group, Inc.* $196,875
----------------
Banks - 3.73%
12,250 FirstFed Financial Corp. 212,844
----------------
Broadcasting - 8.06%
3,025 MediaOne Group, Inc.* 206,645
5,100 Tribune Co. 253,725
----------------
460,370
----------------
Building and Construction - 0.28%
500 ITXC Corp. 15,906
----------------
Chemicals - 3.47%
5,200 Great Lakes Chemical Corp. 197,925
----------------
Commercial Services - 3.93%
13,950 Servicemaster Co. 224,072
----------------
Computer Hardware - 4.11%
2,550 Hewlett-Packard Co. 234,600
----------------
Computer Services And Software - 8.18%
2,950 Microsoft Corp.* 267,159
9,875 Wallace Computer Services, Inc. 199,969
----------------
467,128
----------------
Containers - 3.35%
8,375 Sonoco Products Co. 191,055
----------------
Diversified Conglomerates - 8.48%
2,225 Minnesota Mining & Manufacturing Co. 213,739
20,000 Walter Industries, Inc.* 270,000
----------------
483,739
----------------
Electronics Equipment - 19.68%
7,000 Cree Research, Inc.* 237,562
5,775 Hubbell Inc. 184,078
3,300 Intel Corp. 245,231
2,254 Koninklijke Philips Electronics - ADR 227,654
5,000 RF Micro Devices, Inc.* 228,750
----------------
1,123,275
----------------
Finance - 2.70%
8,500 Cenit Bancorp, Inc. 154,062
----------------
Food & Beverage - 7.76%
6,675 Pepsico, Inc. 201,919
6,875 SYSCO Corp. 241,055
----------------
442,974
----------------
Insurance - 4.08%
13,800 Triad Guaranty, Inc.* 232,875
----------------
Linen Supply & Related Items - 3.34%
13,850 UniFirst Corp. 190,437
----------------
Medical Products - 7.55%
3,750 Guidant Corp. 201,094
3,550 Merck & Co. 230,084
----------------
431,178
----------------
Office Products - 2.20%
9,000 Steelcase Inc. 125,438
----------------
Total Common Stock (Cost $5,270,599) 5,384,753
----------------
MISCELLANEOUS ASSETS - 5.61%
144,197 Evergreen Money Market Trust Institutional
Shares (Cost $144,197) 144,197
21,800 Latin American Discovery Fund
(Cost $143,129) 175,763
----------------
319,960
----------------
Total Investments (Cost $5,557,925)
- 99.96% 5,704,713
Other Assets in Excess of Liabilities
- 0.04% 2,541
----------------
NET ASSETS - 100.00% $5,707,254
================
* Non-income producing investment.
ADR - American Depository Receipt
See notes to financial statements
<TABLE>
<CAPTION>
The Shepherd Street Equity Fund
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STATEMENT OF ASSETS AND LIABILITIES
September 30, 1999
<S> <C>
ASSETS:
Investments, at market (identified cost $5,557,925) (Note 1) $5,704,713
Cash 3,500
Receivables:
Dividends and interest 6,318
Fund shares sold 3,000
----------------
Total assets 5,717,531
----------------
LIABILITIES:
Payables:
Investment securities purchased 6,000
Due to Advisor 3,031
Accrued distribution fees 1,246
----------------
Total liabilities 10,277
----------------
NET ASSETS $5,707,254
================
NET ASSETS CONSIST OF:
Common stock (Unlimited shares of $.0001 par value
authorized, 444,465 shares outstanding) (Note 2) $44
Additional capital paid-in 5,425,400
Undistributed net investment income 3,156
Accumulated realized gain on investments 131,866
Net unrealized gain on investments 146,788
----------------
Net Assets $5,707,254
================
Net Asset Value, offering and redemption price per share $12.84
================
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
The Shepherd Street Equity Fund
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STATEMENT OF OPERATIONS
For the Period Ended September 30, 1999*
<S> <C>
INVESTMENT INCOME:
Interest $7,259
Dividends 37,378
----------------
Total investment income 44,637
----------------
EXPENSES:
Investment advisory fees (Note 4) 13,274
Distribution fees (Note 4) 8,296
Service fees (Note 4) 19,911
----------------
Total expenses 41,481
----------------
Net investment income 3,156
----------------
REALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 131,866
Net change in unrealized appreciation on investments 146,788
----------------
278,654
----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $281,810
================
* The Shepherd Street Equity Fund commenced operations on October 2,
1998.
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
The Shepherd Street Equity Fund
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STATEMENT OF CHANGES IN NET ASSETS
<S> <C>
For the Period
Ended
September 30, 1999*
--------------------
INCREASE IN NET ASSETS
Operations:
Net investment income $3,156
Net realized gain on investments 131,866
Net change in unrealized appreciation on investments 146,788
----------------
Net increase in net assets resulting from operations 281,810
----------------
Increase in net assets from Fund share transactions (Note 2) 5,325,444
----------------
Increase in net assets 5,607,254
NET ASSETS:
Beginning of period 100,000
----------------
End of period** $5,707,254
================
* The Shepherd Street Equity Fund commenced operations on October 2,
1998.
** Including undistributed net investment income of $3,156.
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
The Shepherd Street Equity Fund
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FINANCIAL HIGHLIGHTS
Per Share Data (For a Share Outstanding from October 2, 1998 through
September 30, 1999)
<S> <C>
For the Period
Ended
September 30, 1999*
--------------------
Net Asset Value, Beginning of Period $10.00
----------------
Investment Operations:
Net investment income 0.01
Net realized and unrealized gain on investments 2.83
----------------
Total from investment operations 2.84
----------------
Net Asset Value, End of Period $12.84
================
Total Return 28.40%
Ratios/Supplemental Data
Net assets, end of period (in 000's) $5,707
Ratio of expenses to average net assets 1.25%(1)
Ratio of net investment income to average net assets 0.10%(1)
Portfolio turnover rate 28.10%
(1) Annualized
* The Shepherd Street Equity Fund commenced operations on October 2,
1998.
See notes to financial statements
</TABLE>
The Shepherd Street Equity Fund
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NOTES TO THE FINANCIAL STATEMENTS
September 30, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Shepherd Street Funds, Inc. (the "Company") was incorporated under
the laws of the state of Maryland on July 16, 1998, and consists solely
of The Shepherd Street Equity Fund (the "Fund"). The Company is
registered as a no-load, open-end diversified management investment
company of the series type under the Investment Company Act of 1940 (the
"1940 Act"). The Fund's investment strategy is to emphasize growth of
capital. The Fund became effective with the SEC on October 1, 1998 and
commenced operations on October 2, 1998.
The costs incurred in connection with the organization, initial
registration and public offering of shares have been paid by Salem
Investment Counselors, Inc. (the "Advisor"). Accordingly, no
organization costs have been recorded by the Fund.
The following is a summary of significant accounting policies
consistently followed by the Fund.
a) Investment Valuation - Common stocks and other equity-type securities
listed on a securities exchange are valued at the last quoted sales
price on the day of the valuation. Price information on listed stocks is
taken from the exchange where the security is primarily traded.
Securities that are listed on an exchange but which are not rated on the
valuation date are valued at the most recent bid prices. Other assets
and securities for which no quotations are readily available are valued
at fair value as determined in good faith by the Investment advisor
under the supervision of the Board of Directors. Short-term instruments
(those with remaining maturities of 60 days or less) are valued at
amortized cost, which approximates market value.
b) Federal Income Taxes - No provision for federal income taxes has been
made since the Fund has complied to date with the provision of the
Internal Revenue Code applicable to regulated investment companies and
intends to so comply in the future and to distribute substantially all
of its net investment income and realized capital gains in order to
relieve the Fund from all federal income taxes.
c) Distributions to Shareholders - Dividends from net investment
income and distributions of net realized capital gains, if any, will be
declared and paid at least annually. Income and capital gain
distributions are determined in accordance with income tax regulations
that may differ from generally accepted accounting principles.
d) Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
e) Other - Investment and shareholder transactions are recorded on trade
date. The Fund determines the gain or loss realized from the investment
transactions by comparing the original cost of the security lot sold
with the net sales proceeds. Dividend income is recognized on the ex-
dividend date or as soon as information is available to the Fund, and
interest income is recognized on an accrual basis.
2. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund for the period ended September 30,
1999 were as follows:
Shares Amount
---------- ----------
Sold 443,757 $5,446,989
Redeemed (9,292) (121,545)
---------- ----------
Net Increase 434,465 $5,325,444
========== ==========
3. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investments, excluding short-term
investments, by the Fund for the period ended September 30, 1999, were
as follows:
Purchases $6,236,090
Sales $943,690
At September 30, 1999, unrealized appreciation of investments for tax
purposes was as follows:
Appreciation $593,623
Depreciation (446,835)
----------
Net appreciation on investments $146,788
==========
At September 30, 1999, the cost of investments for federal income tax
purposes was $5,557,925.
4. ADVISORY FEE AND OTHER RELATED PARTY TRANSACTIONS
The Fund has entered into an Advisory Agreement with Salem Investment
Counselors, Inc., (the "Advisor") to provide investment management
services to the Fund. Pursuant to the Advisory Agreement, the Advisor is
entitled to receive a fee, calculated daily and payable monthly at the
annual rate of 0.40% as applied to the Fund's daily net assets. For the
period ended September 30, 1999, the advisor received fees of $13,274.
The Fund has entered into an Operating Services Agreement (the
"Servicing Agreement") with the Advisor to provide or arrange for day-
to-day operational services to the Fund. Pursuant to the Servicing
Agreement, the Advisor is entitled to receive a fee, calculated daily
and payable monthly at the annual rate of 0.60% as applied to the Fund's
daily net assets. For the period ended September 30, 1999 the advisor
received fees of $19,911.
The Fund and the Advisor have entered into an Investment Company
Services Agreement (the "ICSA") with Declaration Service Company to
provide day-to-day operational services to the Fund including, but not
limited to, accounting, administrative, transfer agent, dividend
disbursing, registrar and recordkeeping services.
The effect of the Advisory Agreement and the Servicing Agreement is to
place a "cap" on the fund's normal operating expenses at 1.00%. The only
other expenses incurred by the fund are distribution fees, brokerage
fees, taxes, if any, legal fees relating to fund litigation, and other
extraordinary expenses.
The Fund and the Advisor have entered into a Distribution Agreement with
Declaration Distributors, Inc. to provide distribution services to the
Fund. Declaration Distributors, Inc. serves as underwriter/distributor
of the Fund.
The Fund has adopted a Plan of Distribution under which it may finance
activities primarily intended to sell shares. Under the Plan, the
Advisor, Salem Investment Counselors, Inc. is paid a distribution fee at
an annual rate of 0.25% of average daily net assets of the Fund for
distributing shares of the Fund and for providing certain shareholder
services. For the period ended September 30, 1999, the Advisor received
fees of $8,296.
Certain directors and officers of the Fund are directors and officers of
the Advisor.
The Shepherd Street Equity Fund
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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,
including the schedule of investments, of The Shepherd Street Funds,
Inc. (consisting of The Shepherd Street Equity Fund) and the related
statements of operations and of changes in net assets and the financial
highlights for the period then ended. These financial statements and
financial highlights are the responsibility of the Fund's management.
Our responsibility is to express an opinion on this financial statements
and financial highlights 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 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 September 30, 1999, by
correspondence with the custodian and brokers. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audit of the financial statements and
financial highlights provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above presents fairly, in all material respects, the
financial position of The Shepherd Street Equity Fund as of September
30, 1999, the results of its operations, the changes in its net assets
and the financial highlights for the period then ended, in conformity
with generally accepted accounting principles.
Tait, Weller & Baker
Philadelphia, Pennsylvania
October 29, 1999
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