THE SHEPHERD STREET EQUITY FUND
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SHEPHERD
STREET
EQUITY
FUND
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Dear Shareholder:
I am very pleased to present you with the annual report of the Shepherd
Street Equity Fund. On September 30, 2000, the Fund completed its second year of
investment activity with a one year return of 17.32% and a two year cumulative
return, including reinvested dividends, of 50.64%. This investment performance
calculates to an annualized rate of return of 22.74% for the past two years. By
comparison, the Standard & Poors 500 index gained 49.27% on a cumulative basis
and had an annualized two year return of 22.18%.
Your Fund's performance was achieved through a disciplined investment
strategy that includes a diverse portfolio of common stocks. We have also taken
advantage of some relatively short term opportunities in the equity markets. For
example, technology stocks contributed to our performance in the third and
fourth quarters of 1999. As we somewhat reduced our holdings in that sector in
early 2000, our investments in the health care, pharmaceutical, financial and
energy sectors helped the Fund achieve solid returns.
Over the past two years, we have witnessed extraordinary volatility in
various sectors of the financial markets. For example, when the Fund began in
October 1998 we were in the midst of an Asian financial crisis that many thought
would spill over to markets throughout the world. We then entered a period of
substantial over-performance for technology issues and under-performance in
traditional value and "old economy" stocks. Recently, as most technology stocks
have declined, other sectors have taken the lead. We will continue to own a
focused and diverse portfolio of value and growth companies that range from
small to large in capitalization, which we believe is the key to long-term
investment success.
As your portfolio manager, we are sensitive to the tax consequences of our
investment actions and the fees you pay for management of the Fund. During this
past fiscal year, $.24 was distributed to you by way of capital gains and
dividend distributions, and we are pleased to announce that the Board has
approved a 10% reduction in our management fees effective November 1, 2000.
We are also pleased to announce that your Fund is now serviced and
distributed by Ultimus Fund Solutions, LLC, located in Cincinnati, Ohio. We
believe that Ultimus is the premier provider of shareholder services for funds
like ours and that we will be able to further reduce shareholder expenses as a
result of this change. As an additional benefit to our shareholders, we expect
to announce soon the availability of Internet access to your Shepherd Street
Equity Fund account.
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We very much appreciate your investment, and promise to strive for
continued growth in your portfolio.
Sincerely yours,
/s/ David B. Rea
David B. Rea
President, The Shepherd Street Funds, Inc.
THE SHEPHERD STREET EQUITY FUND
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COMPARISON OF THE CHANGE IN VALUE OF A $10,000 INVESTMENT IN THE
SHEPHERD STREET EQUITY FUND AND THE STANDARD & POOR'S 500 INDEX
[GRAPHIC OMITTED]
9/2000
-------
Shepherd Street Equity Fund $15,064
S&P 500 Index $14,927
Past performance is not predictive of future performance.
-----------------------------
Shepherd Street Equity Fund
Average Annual Total Returns
1 Year Since Inception*
------ ----------------
17.32% 22.74%
-----------------------------
*Initial public offering of shares was October 2, 1998.
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THE SHEPHERD STREET EQUITY FUND
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SCHEDULE OF INVESTMENTS
SEPTEMBER 30, 2000
MARKET
SHARES VALUE
------ -----
COMMON STOCKS -- 97.2%
BASIC MATERIALS -- 5.3%
7,000 Great Lakes Chemical Corp. ....................... $ 205,188
8,000 Martin Marietta Materials ........................ 306,240
------------
511,428
------------
CAPITAL GOODS -- 4.0%
4,865 Koninklijke Philips Electronics NV ............... 206,763
2,000 Minnesota Mining & Manufacturing Company ......... 182,250
------------
389,013
------------
CONSUMER CYCLICALS -- 7.0%
34,000 Clayton Homes, Inc ............................... 340,000
7,600 Tribune Company .................................. 331,550
------------
671,550
------------
CONSUMER STAPLES -- 10.0%
14,000 AT&T Corp. - Liberty Media Corporation (a) ....... 252,000
8,675 PepsiCo, Inc ..................................... 399,050
6,875 SYSCO Corporation ................................ 318,398
------------
969,448
------------
ENERGY -- 6.5%
2,000 Exxon Mobil Corporation .......................... 178,250
7,000 Houston Exploration Company (a) .................. 176,750
7,000 Louis Dreyfus Natural Gas Corp. (a) .............. 277,375
------------
632,375
------------
FINANCIAL -- 21.8%
11,000 BB&T Corporation ................................. 331,375
8,000 Capital One Financial Corporation ................ 560,500
15,500 CENIT Bancorp, Inc ............................... 228,625
7,333 Citigroup Inc .................................... 396,440
19,800 Triad Guaranty Inc. (a) .......................... 589,050
------------
2,105,990
------------
See accompanying notes to financial statements.
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THE SHEPHERD STREET EQUITY FUND
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SCHEDULE OF INVESTMENTS (CONTINUED)
SEPTEMBER 30, 2000
MARKET
SHARES VALUE
------ -----
HEALTH CARE -- 16.4%
4,100 Cardinal Health, Inc ............................. $ 361,569
5,250 Guidant Corporation .............................. 371,109
6,050 Merck & Co., Inc ................................. 450,347
21,000 PharmaNetics, Inc. (a) ........................... 399,000
------------
1,582,025
------------
TECHNOLOGY -- 26.2%
6,000 America Online, Inc. (a) ......................... 322,500
4,600 Cisco Systems, Inc. (a) .......................... 254,150
14,500 CommScope, Inc. (a) .............................. 355,250
2,500 EMC Corporation (a) .............................. 247,813
2,550 Hewlett-Packard Company .......................... 247,350
6,600 Intel Corporation ................................ 274,725
5,950 Microsoft Corporation (a) ........................ 358,487
6,200 Nokia Oyj ADR .................................... 246,838
7,000 RF Micro Devices, Inc. (a) ....................... 219,625
------------
2,526,738
------------
TOTAL COMMON STOCKS-- 97.2% (COST $8,407,771) .... $ 9,388,567
------------
FACE
AMOUNT
------
SHORT TERM MONEY MARKET SECURITIES -- 2.6%
$253,426 Evergreen Select Money Market Fund
(Cost $253,426)................................... $ 253,426
------------
TOTAL INVESTMENTS AT VALUE-- 99.8% (COST $8,661,197) $ 9,641,993
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.2% ... 15,832
------------
NET ASSETS -- 100.0% ............................. $ 9,657,825
============
(a) Non-income producing security.
See accompanying notes to financial statements.
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THE SHEPHERD STREET EQUITY FUND
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STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2000
ASSETS:
Investments, at market (identified cost $8,661,197)(note 1) .. $ 9,641,993
Receivables:
Dividends and interest ..................................... 4,656
Fund shares sold ........................................... 19,329
------------
Total assets ............................................. 9,665,978
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LIABILITIES:
Payables:
Due to Advisor ............................................. 6,164
Accrued distribution fees .................................. 1,989
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Total liabilities ........................................ 8,153
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NET ASSETS ..................................................... $ 9,657,825
============
NET ASSETS CONSIST OF:
Common stock (Unlimited shares of $.0001 par value
authorized, 652,327 shares outstanding)(note 2) ............ $ 65
Additional capital paid-in ................................... 8,404,100
Accumulated realized gain on investments ..................... 272,864
Net unrealized gain on investments ........................... 980,796
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Net Assets, for 652,327 shares outstanding ..................... $ 9,657,825
============
Net Asset Value, offering and redemption price per share ....... $ 14.81
============
See notes to financial statements.
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THE SHEPHERD STREET EQUITY FUND
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STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2000
INVESTMENT INCOME:
Interest .................................................... $ 11,104
Dividends ................................................... 58,534
------------
Total investment income ................................... 69,638
------------
EXPENSES:
Investment advisory fees (note 4) ........................... 31,540
Distribution fees (note 4) .................................. 19,713
Service fees (note 4) ....................................... 47,310
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Total expenses ............................................ 98,563
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Net investment loss ......................................... (28,925)
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REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments ............................ 301,788
Net change in unrealized appreciation on investments ........ 834,008
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1,135,796
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NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .......... $ 1,106,871
============
See notes to financial statements.
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THE SHEPHERD STREET EQUITY FUND
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STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD
ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999*
------------------ -------------------
INCREASE IN NET ASSETS
Operations:
<S> <C> <C>
Net investment income (loss) .......................... $ (28,925) $ 3,156
Net realized gain on investments ...................... 301,788 131,866
Net change in unrealized appreciation on investments .. 834,008 146,788
------------ ------------
Net increase in net assets resulting from operations .... 1,106,871 281,810
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income ................................. (3,156) --
Net realized gain on investments ...................... (131,866) --
------------ ------------
Total Distributions ..................................... (135,022) --
------------ ------------
Increase in net assets from Fund
share transactions (note 2) ........................... 2,978,722 5,325,444
------------ ------------
Increase in net assets .................................. 3,950,571 5,607,254
NET ASSETS:
Beginning of period ................................... 5,707,254 100,000
------------ ------------
End of period** ....................................... $ 9,657,825 $ 5,707,254
============ ============
</TABLE>
* The Shepherd Street Equity Fund commenced operations on October 2, 1998.
** Including undisributed net investment income of $0 and $3,156, respectively.
See notes to financial statements.
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THE SHEPHERD STREET EQUITY FUND
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FINANCIAL HIGHLIGHTS
Per Share Data (For a Share Outstanding Throughout Each Period)
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE PERIOD
ENDED ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999*
------------------ -------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ............... $ 12.84 $ 10.00
------------ ------------
INVESTMENT OPERATIONS:
Net investment income (loss) ..................... (0.04) 0.01
Net realized and unrealized gain on investments .. 2.26 2.83
------------ ------------
Total from investment operations ............... 2.22 2.84
------------ ------------
DISTRIBUTIONS:
From net investment income ....................... (0.01) --
From net realized gains .......................... (0.24) --
------------ ------------
Total distributions ........................... (0.25) --
------------ ------------
NET ASSET VALUE, END OF PERIOD ..................... $ 14.81 $ 12.84
============ ============
TOTAL RETURN ....................................... 17.32% 28.40%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) ............. $ 9,658 $ 5,707
Ratio of expenses to average net assets .......... 1.25% 1.25%(1)
Ratio of net investment income (loss)
to average net assets .......................... (0.37)% 0.10%(1)
Portfolio turnover rate .......................... 73.18% 28.10%
</TABLE>
(1) Annualized
* The Shepherd Street Equity Fund commenced operations on October 2, 1998.
See notes to financial statements.
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THE SHEPHERD STREET EQUITY FUND
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NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
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 currently offers one series
of shares, 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's
registration statement became effective with the Securities and Exchange
Commission on October 1, 1998 and the Fund 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 traded 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
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 provisions 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.
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THE SHEPHERD STREET EQUITY FUND
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NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
2. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund for the year ended September 30, 2000
were as follows:
SHARES AMOUNT
------------ ------------
Sold ............................... 284,907 $ 4,104,075
Reinvestments ...................... 9,454 135,002
Redeemed ........................... (86,499) (1,260,355)
------------ ------------
Net Increase ....................... 207,862 $ 2,978,722
============ ============
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 were $8,332,384 and $5,640,133, respectively, for the
year ended September 30, 2000.
At September 30, 2000, the Fund's net unrealized appreciation on
investments of $980,796 consisted of gross unrealized appreciation of $1,702,819
and gross unrealized depreciation of $722,023, based on a total tax cost of
investments of $8,661,197.
4. ADVISORY FEE AND OTHER RELATED PARTY TRANSACTIONS
The Fund has entered into an Advisory Agreement with the Advisor to provide
investment management services to the Fund. Pursuant to the Advisory Agreement,
the Advisor receives a fee, calculated daily and paid monthly, at the annual
rate of 0.40% of the Fund's average daily net assets. For the year ended
September 30, 2000, the Advisor received fees of $31,540 under the Advisory
Agreement.
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 receives
a fee, calculated daily and paid monthly, at the annual rate of 0.60% of the
Fund's average daily net assets. For the year ended September 30, 2000, the
Advisor received fees of $47,310 under the Servicing Agreement.
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THE SHEPHERD STREET EQUITY FUND
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NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 2000
4. ADVISORY FEE AND OTHER RELATED PARTY TRANSACTIONS - CONTINUED
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 expenses, brokerage fees, taxes,
if any, legal fees relating to Fund litigation, and other extraordinary
expenses.
During the year ended September 30, 2000, the Fund and the Advisor were
parties to an Investment Company Services Agreement (the "ICSA") with
Declaration Service Company ("Declaration"), under which Declaration provided
day-to-day operational services to the Fund including, but not limited to,
accounting, administrative, transfer agent, dividend disbursing, and
recordkeeping services. The fees payable to Declaration under the ICSA were paid
by the Advisor (not the Fund). Effective October 5, 2000, the ICSA with
Declaration was terminated and a similar agreement was entered into with Ultimus
Fund Solutions, LLC.
During the year ended September 30, 2000, the Fund and the Advisor were
parties to a Distribution Agreement with Declaration Distributors, Inc., under
which Declaration Distributors, Inc. provided distribution services to the Fund
and served as principal underwriter to the Fund. Effective October 5, 2000, the
Distribution Agreement with Declaration Distributors, Inc. was terminated and a
similar agreement was entered into with Ultimus Fund Distributors, LLC.
The Fund has adopted a Plan of Distribution under which it may finance
activities primarily intended to result in the sale or retention of Fund shares.
Under the Plan, the Advisor is reimbursed for distribution-related expenditures
made pursuant to the Plan at an annual rate of 0.25% of the Fund's average daily
net assets. For the year ended September 30, 2000, the Advisor received payments
from the Fund of $19,713.
Certain directors and officers of the Fund are directors and officers of
the Advisor.
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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, as of September 30, 2000, of The Shepherd
Street Funds, Inc. (consisting of The Shepherd Street Equity Fund) and the
related statements of operations for the year then ended, and the statement of
changes in net assets and the financial highlights for the two years in 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 these 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, 2000, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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, 2000, the results of its
operations for the year then ended and the changes in its net assets and the
financial highlights for the two years in the period then ended, in conformity
with generally accepted accounting principles.
Tait, Weller & Baker
Philadelphia, Pennsylvania
October 18, 2000
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INVESTMENT ADVISER:
Salem Investment Counselors, Inc.
480 Shepherd Street
Winston-Salem, North Carolina 27103 --------------------------
SHAREHOLDER SERVICES: SHEHPERD
Ultimus Fund Solutions, LLC
135 Merchant Street, Suite 230 STREET
Cincinnati, Ohio 45246
EQUITY
LEGAL COUNSEL:
The Law Offices of David D. Jones, P.C. FUND
4747 Research Forest Drive
Suite 180 #303 --------------------------
The Woodlands, TX 77381
INDEPENDENT AUDITORS
Tait, Weller & Baker
8 Penn Center, Suite 800
Philadelphia, PA 19103-2108
==========================
THE SHEPHERD STREET FUNDS, INC.
ANNUAL REPORT
SEPTEMBER 30, 2000
