<PAGE>
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HUDSON CAPITAL
APPRECIATION FUND
(A Series of The Fahnestock Funds) 125 Broad Street
New York, New York 10004
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Dear Shareholders:
1997 was a very good year. The Fund's Class A Shares net asset value
increased approximately 43% (after an adjustment for capital gain
distributions.)
Our strategy is somewhat unconventional--we are a value-oriented growth
fund. We attempt to identify companies that are well managed, that have been
very successful at achieving their goals, that we believe have good
prospects for continued success, and that we believe are reasonably priced
given the prospects and the risks. This leads us to small and large
companies, to high growth and steady growth companies, to high technology
and to no technology companies. We invest in a broad range of industries
from semi-conductors to agriculture to personal services.
Currently, the makeup of our portfolio is more than 60% "small" and "mid-
cap" companies. For several years now, this group has under-performed the
larger capitalization companies. Individual investors have increasingly
focused on large mutual funds, which tend to invest in large companies.
Meanwhile, the supply of large company stocks has actually diminished
through buy-backs and mergers. The result of decreased supply and increased
demand is high prices. This is less true in smaller stocks where companies
tend to grow faster and need capital. Furthermore, there is far less
research effort by securities firms regarding smaller companies. This
provides us an opportunity to work harder, learn more and hopefully identify
undervalued opportunities. We believe that, in the long run, a more
traditional large cap versus small cap valuation will prevail.
Unfortunately, we don't know when this will happen. If history is any guide,
though, an upward revaluation of small company stocks will be both brief and
dramatic. Studies have shown, measured by month, that small caps under-
performed large caps 90% of the time. Over long periods of time, the
opposite is true; small stocks outperformed large stocks. While there is a
disparity between larger and smaller companies' valuations, we will probably
continue to be overweighted in smaller companies.
Another characteristic of our portfolio is that we have very limited
uninvested assets or cash. This is not a timing judgment. In fact, it is the
opposite. We intend to remain "fully invested." We do not attempt to predict
the action of the market and allocate assets. Our investors may allocate
assets themselves by buying or selling the Fund. I believe that it may be
impossible to predict "the market"; in any event, it certainly is beyond my
ability. By investing in well-managed companies
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<PAGE>
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that we believe are good values and have good prospects, we should be able
to enjoy success in the long run.
We recently reviewed some general characteristics of the Fund's portfolio
which may interest you and tend to confirm our strategy is working. Our
beta, a measure of the price volatility of our stocks, is approximately .9
compared to the S&P 500. (The S&P 500 is an unmanaged index of common stocks
and industry, transportation and financial and public utility companies.
Investments cannot be made in an index.) This suggests that our portfolio
may not be quite as volatile as the market. I believe this is due to our
focus on the value as well as the growth rate of our companies. Value tends
to provide some "shock absorbers" to the volatility of earnings. Our
trailing price to earnings ratio of the portfolio is below, but near, the
popular averages. On the other hand, the growth rates of earnings in our
portfolio are well above the broad market averages. This is appropriate for
a growth fund. The average price to book value of our portfolio is well
below broad market averages, again suggestive of our emphasis on value.
Since I became portfolio manager of the Fund in October of 1995, we have
enjoyed generous returns from Class A Shares (40.68% in 1996 and 42.88% in
1997). It is unrealistic to expect these results to continue, and of course,
our past results are not a basis that can be used to project results in the
future. However, we will continue to follow the same strategy and endeavor
to find well-managed, successful companies and try to buy them at prices
which we believe are attractive.
Sincerely,
/s/ James D. Gerson
James D. Gerson
Senior Vice President and
Portfolio Manager
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<PAGE>
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THE VALUE OF A $10,000 INVESTMENT IN THE HUDSON CAPITAL APPRECIATION FUND--
CLASS A
The graph below illustrates the hypothetical investment of $10,000* in the
Hudson Capital Appreciation Fund--Class A (the "Fund") from March 5, 1991
(start of performance) to December 31, 1997, compared to the Standard and
Poor's 500 Index (S&P 500).+
Hudson Capital Appreciation Fund
Class A Shares
HCAF S&P 500
3/5/91 9,550 10,000
12/31/91 11,221 11,664
12/31/92 12,180 12,550
12/31/93 14,344 13,813
12/31/94 12,734 13,995
12/31/95 15,130 19,255
12/31/96 21,266 23,676
12/31/97 30,386 31,574
Average Annual Total Returns** for the
Periods Ended December 31, 1997
1 Year...............................36.47%
5 Year...............................19.02%
Start of Performance (03/05/91)......17.75%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY
MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS
OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Represents a hypothetical investment of $10,000 in the Fund, after
deducting the maximum sales charge of 4.50% ($10,000 investment minus $450
sales charge = $9,550). The Fund's performance assumes the reinvestment of all
dividends and distributions.
**Total returns quoted reflect all applicable sales charges.
+Source: The S&P 500 is not adjusted to reflect sales charges, expenses, or
other fees that the SEC requires to be reflected in the Fund's performance.
The S&P 500 has been adjusted to reflect reinvestment of dividends on
securities in the index. This index is unmanaged.
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<PAGE>
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THE VALUE OF A $10,000 INVESTMENT IN THE HUDSON CAPITAL APPRECIATION FUND--
CLASS B
The graph below illustrates the hypothetical investment of $10,000* in the
Hudson Capital Appreciation Fund--Class B (the "Fund") from April 17, 1997
(start of performance) to December 31, 1997, compared to the Standard and
Poor's 500 Index (S&P 500).+
Hudson Capital Appreciation Fund
Class B Shares
HCAF S&P 500
4/17/97 10,000 10,000
12/31/97 13,078 12,890
Average Annual Total Return** for the
Period Ended December 31, 1997
Start of Performance (04/17/97)........................30.78%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY
MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS
OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*Represents a hypothetical investment of $10,000 in the Fund. The ending
value of the Fund reflects a 5.00% maximum contingent deferred sales charge on
any redemption less than one year from the purchase date. The Fund's
performance assumes the reinvestment of all dividends and distributions.
**Total returns quoted reflect all applicable contingent deferred sales
charges.
+Source: The S&P 500 is not adjusted to reflect sales charges, expenses, or
other fees that the SEC requires to be reflected in the Fund's performance.
The S&P 500 has been adjusted to reflect reinvestment of dividends on
securities in the index. This index is unmanaged.
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<PAGE>
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THE VALUE OF A $10,000 INVESTMENT IN THE HUDSON CAPITAL APPRECIATION FUND--
CLASS N
The graph below illustrates the hypothetical investment of $10,000* in the
Hudson Capital Appreciation Fund--Class N (the "Fund") from April 17, 1997
(start of performance) to December 31, 1997, compared to the Standard and
Poor's 500 Index (S&P 500).+
Hudson Capital Appreciation Fund
Class N Shares
HCAF S&P 500
4/17/97 10,000 10,000
12/31/97 13,709 12,890
Average Annual Total Return for the
Period Ended December 31, 1997
Start of Performance (04/17/97).....................37.09%
PAST PERFORMANCE IS NOT PREDICTIVE OF FUTURE PERFORMANCE. YOUR INVESTMENT
RETURN AND PRINCIPAL VALUE WILL FLUCTUATE SO WHEN SHARES ARE REDEEMED, THEY
MAY BE WORTH MORE OR LESS THAN ORIGINAL COST. MUTUAL FUNDS ARE NOT OBLIGATIONS
OF OR GUARANTEED BY ANY BANK AND ARE NOT FEDERALLY INSURED.
*The Fund's performance assumes the reinvestment of all dividends and
distributions.
+Source: The S&P 500 is not adjusted to reflect sales charges, expenses, or
other fees that the SEC requires to be reflected in the Fund's performance.
The S&P 500 has been adjusted to reflect reinvestment of dividends on
securities in the index. This index is unmanaged.
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<PAGE>
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HUDSON CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
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<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<C> <S> <C>
COMMON STOCKS--99.4%
AGRICULTURAL--4.7%
10,000 AGCO Corp. $ 292,500
40,000 Agrium, Inc. 487,500
30,000 ConAgra, Inc. 984,375
-----------
Total 1,764,375
-----------
BUILDING & CONSTRUCTION--13.1%
23,750 AFC Cable System, Inc. 706,563
30,000 Continental Homes Holdings Corp. 1,207,500
22,500 Genlyte Group, Inc. 399,375
10,000 Lone Star Industries, Inc. 531,250
20,000 NCI Buildings Systems, Inc. 710,000
35,400 Republic Group, Inc. 579,675
25,000 Southern Energy Homes, Inc. 200,000
20,000 Toll Brothers, Inc. 535,000
-----------
Total 4,869,363
-----------
COMPUTER PRODUCTS--6.7%
20,000 Cabletron Systems, Inc. 300,000
25,000 Electronic Data Systems Corp. 1,098,438
20,000(a) EMC Corporation 548,750
31,000(a) Phoenix Technologies Ltd. 375,875
20,000 Programmers Paradise, Inc. 187,500
-----------
Total 2,510,563
-----------
CONSUMER PRODUCTS--6.1%
54,000(a) Helen of Troy Ltd. 870,750
30,000 ITI Technologies, Inc. 652,500
15,000 Regis Corp. Minnesota 376,875
40,000 RockShox, Inc. 370,000
-----------
Total 2,270,125
-----------
</TABLE>
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The accompanying notes are an integral part of the financial statements.
<PAGE>
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HUDSON CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
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<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<C> <S> <C>
COMMON STOCKS (CONTINUED)
ELECTRONICS--15.0%
15,000 ASECO Corp. $ 127,968
15,000 Hadco Corp. 678,750
20,000 Innovex, Inc. 458,750
30,000 Learonal, Inc. 705,000
10,000(a) NU Horizons Electronics Corp. 62,500
15,000 PCD Inc. 352,500
50,000(a) Speedfam International, Inc. 1,325,000
20,000 Storage Technology Corp. 1,238,750
30,000 Unitrode Corp. 645,000
-----------
Total 5,594,218
-----------
FINANCIAL--6.6%
16,000 State Street Corp. 931,000
12,000 Travelers Group, Inc. 646,500
20,000 Travelers Property and Casualty, Corp.--Class A 880,000
-----------
Total 2,457,500
-----------
INDUSTRIAL PRODUCTS--19.9%
12,000 Blount International, Inc.--Class A 320,250
50,000 Checkpoint Systems, Inc. 875,000
30,000 DT Industries, Inc. 1,020,000
10,900 ESCO Electronics Corp. 183,937
8,000(a) Esterline Technologies Corp. 288,000
33,000 Gundle/SLT Environmental, Inc. 173,250
22,500(a) IFR Systems, Inc. 348,750
17,100(a) Jacobs Engineering Group, Inc. 433,912
20,212(a) New Brunswick Scientific, Inc. 179,381
5,000 Park Ohio Industries, Inc. 91,250
20,000 Raychem Corp. 861,250
70,297(a) Supreme Industries, Inc.--Class A 632,673
</TABLE>
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The accompanying notes are an integral part of the financial statements.
<PAGE>
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HUDSON CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
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<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<C> <S> <C>
COMMON STOCKS (CONTINUED)
INDUSTRIAL PRODUCTS (CONTINUED)
15,000 Titan International, Inc. $ 300,938
50,000 Valmont Industries, Inc. 975,000
25,700 VWR Scientific Products Corp. 726,025
-----------
Total 7,409,616
-----------
OIL, ENERGY & GAS EXPLORATION--12.4%
45,000(a) Abacan Resources Corp. 70,313
40,000 American Oilfield Divers, Inc. 510,000
24,000 Global Industries, Inc. 408,000
17,500(a) Hvide Marine, Inc.--Class A 450,625
31,700(a) Louis Dreyfus Natural Gas Corp. 592,393
35,000 Occidental Petroleum Corp. 1,025,938
36,000 Southern Mineral Corp. 184,500
30,133(a) Southern Union Company 719,425
12,000 Tidewater, Inc. 661,500
-----------
Total 4,622,694
-----------
PHARMACEUTICALS & HEALTH--3.6%
12,000 Amgen, Inc. 649,500
20,000 Coherent, Inc. 702,500
-----------
Total 1,352,000
-----------
RESTAURANTS--1.7%
26,000(a) Garden Fresh Restaurants Corp. 373,750
15,000(a) O'Charleys, Inc. 262,500
-----------
Total 636,250
-----------
RETAIL--3.5%
40,000 Sirena Apparel Group, Inc. 160,000
15,000(a) Travis Boats & Motors, Inc. 361,875
</TABLE>
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The accompanying notes are an integral part of the financial statements.
<PAGE>
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HUDSON CAPITAL APPRECIATION FUND
PORTFOLIO OF INVESTMENTS (CONTINUED)
DECEMBER 31, 1997
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<TABLE>
<CAPTION>
SHARES VALUE
------ -----
<C> <S> <C>
COMMON STOCKS (CONTINUED)
RETAIL (CONTINUED)
20,000 Wal-Mart Stores, Inc. $ 788,750
-----------
Total 1,310,625
-----------
TRANSPORTATION--6.1%
10,000 AMR Corp. 1,285,000
20,000(a) Celadon Group, Inc. 270,000
30,000(a) Simon Transportation Service, Inc. 720,001
-----------
Total 2,275,001
-----------
TOTAL COMMON STOCKS (cost $30,578,831) 37,072,330
-----------
<CAPTION>
PRINCIPAL
AMOUNT
---------
<C> <S> <C>
REPURCHASE AGREEMENT(C)--0.8%
$293,000 State Street Bank and Trust Co., 4.25%, dated
12/31/1997 due 1/2/1998 (cost $293,000) 293,000
-----------
TOTAL INVESTMENTS (cost $30,871,831)(b) $37,365,330
===========
</TABLE>
- --------
(a) Non-income producing security.
(b) The cost of investments for federal tax purposes amounts to $30,871,831.
The net unrealized appreciation of investments on a federal tax basis
amounts to $6,493,499, which is comprised of $8,467,010 appreciation and
$1,973,511 depreciation at December 31, 1997.
(c) Collateralized by U.S. Treasury Bill, par value of $300,000, coupon rate of
6.125%, due 5/15/1998, and value of $302,625.
Note: The categories of investments are shown as a percentage of net assets
($37,296,382) at December 31, 1997.
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the financial statements.
<PAGE>
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HUDSON CAPITAL APPRECIATION FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
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<TABLE>
<S> <C>
ASSETS:
Total investments in securities, at value (cost $30,871,831)
(Note 1)........................................................ $37,365,330
Income receivable................................................ 19,647
Receivable for Fund shares sold.................................. 458,465
-----------
Total assets................................................... 37,843,442
-----------
LIABILITIES:
Payable to Bank for cash overdraft............................... 157,368
Payable for investments purchased................................ 5,500
Payable for Fund shares redeemed................................. 165,744
Accrued expenses................................................. 218,448
-----------
Total liabilities.............................................. 547,060
-----------
Net Assets....................................................... $37,296,382
===========
NET ASSETS CONSIST OF:
Paid in capital.................................................. $30,880,894
Net unrealized appreciation of investments....................... 6,493,499
Accumulated net investment loss.................................. (347,769)
Accumulated net realized gain on investments..................... 269,758
-----------
Net Assets..................................................... $37,296,382
===========
Class A Shares:
Net Asset Value Per Share ($29,325,173 / 1,812,846 shares
outstanding).................................................... $ 16.18
-----------
Offering Price Per Share (100/95.50 of $16.18)*.................. $ 16.94
-----------
Redemption Proceeds Per Share.................................... $ 16.18
-----------
Class B Shares:
Net Asset Value Per Share ($2,125,491 / 131,929 shares
outstanding).................................................... $ 16.11
-----------
Offering Price Per Share......................................... $ 16.11
-----------
Redemption Proceeds Per Share (95/100 of $16.11)*................ $ 15.30
-----------
Class N Shares:
Net Asset Value Per Share ($5,845,718 / 361,383 shares
outstanding).................................................... $ 16.18
-----------
Offering Price Per Share......................................... $ 16.18
-----------
Redemption Proceeds Per Share.................................... $ 16.18
-----------
</TABLE>
- --------
* See "How to Buy Shares" in the Prospectus
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The accompanying notes are an integral part of the financial statements.
<PAGE>
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HUDSON CAPITAL APPRECIATION FUND
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.......................................................... $ 120,382
Dividends......................................................... 47,975
----------
Total investment income......................................... 168,357
----------
Expenses: (Notes 2 and 3)
Investment management fee......................................... 252,355
Distribution expenses Class A Shares.............................. 60,222
Distribution expenses Class B Shares.............................. 6,411
Distribution expenses Class N Shares.............................. 4,728
Legal, compliance and filing fees................................. 162,285
Custodian fee..................................................... 9,809
Shareholder servicing and related shareholder expenses............ 154,486
Audit and accounting.............................................. 52,229
Trustees' fees and expenses....................................... 18,000
Other............................................................. 59,452
----------
Total expenses.................................................. 779,977
----------
Investment management fee waived.................................. (252,355)
Reimbursement of other operating expenses......................... (11,496)
----------
Net expenses...................................................... 516,126
----------
Net investment loss............................................... (347,769)
----------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments.................................... 4,615,862
Net change in unrealized appreciation of investments................ 3,300,887
----------
Net realized and unrealized gain on investments................... 7,916,749
----------
Net increase in net assets from operations.......................... $7,568,980
==========
</TABLE>
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The accompanying notes are an integral part of the financial statements.
<PAGE>
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HUDSON CAPITAL APPRECIATION FUND
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
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<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
Net investment loss........................ $ (347,769) $ (150,917)
Net realized gain on investments........... 4,615,862 2,958,488
Unrealized appreciation of investments..... 3,300,887 1,794,231
----------- -----------
Net increase in net assets from
operations.............................. 7,568,980 4,601,802
----------- -----------
Distributions to shareholders from net
realized gains:
Class A Shares........................... (3,480,078) (2,791,224)
Class B Shares........................... (233,027) --
Class N Shares........................... (649,346) --
----------- -----------
Total distributions to shareholders from
net realized gains........................ (4,362,451) (2,791,224)
----------- -----------
Share transactions--net (Note 4)........... 18,419,133 1,762,917
----------- -----------
Net increase in net assets............... 21,625,662 3,573,495
Net Assets:
Beginning of year........................ 15,670,720 12,097,225
----------- -----------
End of year.............................. $37,296,382 $15,670,720
=========== ===========
</TABLE>
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The accompanying notes are an integral part of the financial statements.
<PAGE>
- --------------------------------------------------------------------------------
HUDSON CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS
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- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Hudson Capital Appreciation Fund (the "Fund") is a series of The Fahnestock
Funds, a Massachusetts business trust (the "Trust"). The Trust is an open-end
diversified management investment company registered under the Investment
Company Act of 1940. Effective April 15, 1997, the Fund renamed its original
shares to Class A Shares and added Class B Shares and Class N Shares. Its
financial statements are prepared in accordance with generally accepted
accounting principles for investment companies as follows:
A) VALUATION OF SECURITIES
Securities traded on a national securities exchange are valued at the
price of the last sale on such exchange. If no sale has occurred, or if
the security is traded only in the over-the-counter market, it will
normally be valued at its current bid price. Short-term securities having
a remaining maturity of 60 days or less are valued at amortized cost,
which approximates market value. Portfolio securities for which current
quotations are not readily available are valued at fair value as
determined in good faith by the Board of Trustees.
B) FEDERAL INCOME TAXES
It is the Trust's policy to comply with the requirements of the Internal
Revenue Code applicable to regulated investment companies and to
distribute all of its taxable income to its shareholders. Therefore, no
provision for federal income tax is required.
C) SECURITIES TRANSACTIONS AND INTEREST INCOME
Securities transactions are recorded on a trade date basis. Interest
income, including amortization of premium and discount, is accrued as
earned and dividend income is recorded on the ex-dividend date. Realized
gains and losses from securities transactions are recorded on the
identified cost basis.
D) DIVIDENDS AND DISTRIBUTIONS
Dividends and distributions to shareholders are recorded on the ex-
dividend date.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles. These differences are primarily due to
differing treatments for net operating losses.
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<PAGE>
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HUDSON CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
E) OTHER
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 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.
2.INVESTMENT MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES.
Under the Investment Management Agreement, the Fund pays an investment
management fee to Hudson Capital Advisors, Inc. (the "Advisor") equal to 1% of
the Fund's average daily net assets up to $25 million and 0.75% of annual
average net assets in excess of $25 million.
Under the Fund's Administration Agreement with Fahnestock & Co. Inc. (the
"Administrator"), the Administrator has agreed to provide administrative
services to the Fund at no charge.
Effective February 1, 1997, Class A Shares changed its expense limit from 2.5%
to 2.0%.
The Adviser has voluntarily agreed to limit expenses applicable to Class B
Shares to 2.5% and to 2.0% with respect to Class N Shares. During the year
ended December 31, 1997, the Fund incurred investment management fees of
$252,355. However, the Advisor has waived and reimbursed $252,355 and $11,496,
respectively, of expenses in order to comply with the agreement as stated
above.
In acting as Distributor during the year, Fahnestock & Co. Inc. earned $27,000
of commissions on sales of the Fund's shares.
Fees are paid to Trustees who are unaffiliated with the Advisor on the basis of
$3,000 per annum plus $750 per meeting attended.
At December 31, 1997, affiliated Trustees owned 19,744 shares (0.86%) of the
Fund.
3.DISTRIBUTION PLAN.
Pursuant to Rule 12b-1 under the Investment Company Act of 1940, the Trust has
adopted Distribution Plans (the "Plans") under which it may reimburse
Fahnestock & Co. Inc. (the "Distributor") for expenses relating to the
distribution of Class A Shares, Class B Shares, and Class N Shares at annual
rates not to exceed a percentage of average daily net assets according to
- --------------------------------------------------------------------------------
<PAGE>
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HUDSON CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
the schedule listed below. Distribution expenses incurred in a year in excess
of the amounts listed below may be carried forward and sought to be reimbursed
in future years. Interest at the prevailing broker loan rate may be charged to
the Fund on any expenses carried forward and those expenses and interest will
be reflected as current expenses on the Fund's statement of operations for the
year in which they become accounting liabilities.
<TABLE>
<CAPTION>
PERCENTAGE OF AVERAGE DAILY
SHARE CLASS NAME NET ASSETS OF THE CLASS
- ---------------- ---------------------------
<S> <C>
Class A Shares.. 0.50%
Class B Shares.. 1.00%
Class N Shares.. 0.25%
</TABLE>
4.TRANSACTIONS IN SHARES OF BENEFICIAL INTEREST.
At December 31, 1997, the Fund had authorized an unlimited number of shares of
beneficial interest ($0.01 par value). Transactions in shares of beneficial
interest were as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
--------------------- ---------------------
SHARES AMOUNT SHARES AMOUNT
-------- ----------- -------- -----------
<S> <C> <C> <C> <C>
CLASS A SHARES
Sold............................. 643,522 $10,576,390 223,039 $ 2,946,523
Issued on reinvestment of
dividends and distributions..... 215,020 3,317,928 213,111 2,755,522
Redeemed......................... (251,609) (4,108,076) (292,500) (3,939,128)
-------- ----------- -------- -----------
Net increase in Class A Shares. 606,933 $ 9,786,242 143,650 $ 1,762,917
======== =========== ======== ===========
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
HUDSON CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997(A)
----------------------
SHARES AMOUNT
--------- -----------
<S> <C> <C>
CLASS B SHARES
Sold.................................................... 118,105 $ 2,060,818
Issued on reinvestment of dividends and distributions... 14,954 229,987
Redeemed................................................ (1,130) (19,117)
--------- -----------
Net increase in Class B Shares........................ 131,929 $ 2,271,688
========= ===========
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1997(A)
----------------------
SHARES AMOUNT
--------- -----------
<S> <C> <C>
CLASS N SHARES
Sold.................................................... 386,089 $ 6,937,229
Issued on reinvestment of dividends and distributions... 41,696 642,949
Redeemed................................................ (66,402) (1,218,975)
--------- -----------
Net increase in Class N Shares........................ 361,383 $ 6,361,203
========= ===========
Net increase in Fund Share transactions............... 1,100,245 $18,419,133
========= ===========
</TABLE>
- --------
(a) Reflects operations from April 17, 1997 (date of initial public offering)
to December 31, 1997.
5.INVESTMENT TRANSACTIONS.
Purchases and sales of investment securities, other than short-term
investments, totaled $26,276,379 and $12,536,585, respectively. Fahnestock &
Co. Inc. did not earn any commissions for executing securities transactions of
the Fund during the year ended December 31, 1997.
- --------------------------------------------------------------------------------
<PAGE>
- -------------------------------------------------------------------------------
HUDSON CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
6.FINANCIAL HIGHLIGHTS.
CLASS A SHARES
(For a share outstanding throughout each period)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value,
beginning of period... $ 12.99 $ 11.39 $ 10.95 $ 13.72 $ 11.93
Income from investment
operations
Net investment income
(loss)................ (0.21)* (0.10) (0.03) (0.06) (0.13)
Net realized and
unrealized gain (loss)
on investments........ 5.67 4.72 2.09 (1.48) 2.25
------- ------- ------- ------- -------
Total income (loss)
from investment
operations............ 5.46 4.62 2.06 (1.54) 2.12
------- ------- ------- ------- -------
Less dividends paid to
shareholders:
Dividends paid from
net realized gain on
investments........... (2.27) (3.02) (1.62) (1.23) (0.33)
------- ------- ------- ------- -------
Net asset value, end of
period................ $ 16.18 $ 12.99 $ 11.39 $ 10.95 $ 13.72
======= ======= ======= ======= =======
Total return............ 42.88% 40.68% 18.94% (11.22%) 17.77%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000 omitted).. $29,325 $15,671 $12,097 $15,874 $19,227
Ratio of expenses to
average net assets.... 2.03%+ 2.50%+ 2.50%+ 2.49%+ 2.49%+
Ratio of net investment
income (loss) to
average
net assets............ (1.38%)+ (1.13%)+ (0.16%)+ (0.46%)+ (1.00%)+
Average commission rate
paid++................ $0.0600 $0.0597 -- -- --
Portfolio turnover
rate.................. 50.46% 85.37% 197.71% 194.55% 154.18%
</TABLE>
- --------
* Per share information presented is based on the average number of shares
outstanding.
+ The ratios of expenses and net investment income/(loss) to average net
assets are net of expenses voluntarily reimbursed by the Advisor,
Administrator and Distributor in the amount of 1.04%, 1.00%, 0.92%, 0.27%,
and 0.25%, respectively.
++ For the fiscal years beginning on or after September 1, 1995, the Fund is
required to disclose its average commission rate per share for purchases or
sales of equity securities.
- -------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
HUDSON CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS.
CLASS B SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1997*
------------
<S> <C>
Net asset value, beginning of period.......................... $ 13.54
Income from investment operations
Net investment loss........................................... (0.09)**
Net realized and unrealized gain on investments............... 4.93
-------
Total income from investment operations.................... 4.84
-------
Less dividends paid to shareholders:
Dividends paid from net realized gain on investments.......... (2.27)
-------
Net asset value, end of period................................ $ 16.11
=======
Total return................................................... 36.54%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000 omitted)....................... $ 2,125
Ratio of expenses to average net assets....................... 2.50%+***
Ratio of net investment loss to average net assets............ (0.77%)+***
Average commission rate paid.................................. $0.0600
Portfolio turnover rate....................................... 50.46%
</TABLE>
- --------
* Reflects operations from April 17, 1997 (date of initial public offering) to
December 31, 1997.
** Per share information presented is based on the average number of shares
outstanding.
*** Annualized
+ The ratios of expenses and net investment loss to average net assets are net
of expenses voluntarily reimbursed by the Advisor in the amount of 1.04%.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
HUDSON CAPITAL APPRECIATION FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS.
CLASS N SHARES
(For a share outstanding throughout the period)
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1997*
------------
<S> <C>
Net asset value, beginning of period.......................... $ 13.54
Income from investment operations
Net investment loss........................................... (0.18)**
Net realized and unrealized gain on investments............... 5.59
-------
Total income from investment operations.................... 5.41
-------
Less dividends paid to shareholders:
Dividends paid from net realized gain on investments.......... (2.77)
-------
Net asset value, end of period................................ $ 16.18
=======
Total return................................................... 37.09%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000 omitted)....................... $ 5,846
Ratio of expenses to average net assets....................... 2.00%+***
Ratio of net investment loss to average net assets............ (1.48%)+***
Average commission rate paid.................................. $0.0600
Portfolio turnover rate....................................... 50.46%
</TABLE>
- --------
* Reflects operations from April 17, 1997 (date of initial public offering) to
December 31, 1997.
** Per share information presented is based on the average number of shares
outstanding.
*** Annualized
+ The ratios of expenses and net investment loss to average net assets are net
of expenses voluntarily reimbursed by the Advisor in the amount of 1.04%.
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
HUDSON CAPITAL APPRECIATION FUND
REPORT OF INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
To the Stockholders and Board of Trustees of
Hudson Capital Appreciation Fund:
We have audited the accompanying statement of assets and liabilities of
Hudson Capital Appreciation Fund, including the portfolio of investments, as of
December 31, 1997, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and financial highlights for each of the five years in the
period then ended. These financial statements and financial highlights are the
responsibility of Hudson Capital Appreciation Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material mistatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Hudson Capital Appreciation Fund as of December 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Kansas City, Missouri
February 18, 1998
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
HUDSON CAPITAL
APPRECIATION FUND
(A Series of The Fahnestock Funds)
125 Broad Street
New York, New York 10004
Telephone (800) 221-5588
INVESTMENT ADVISOR
Hudson Capital Advisors, Inc.
805 Third Avenue
New York, New York 10022
PRINCIPAL DISTRIBUTOR
Fahnestock & Co. Inc.
125 Broad Street
New York, New York 10004
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company
1004 Baltimore
Kansas City, Missouri 64105
- --------------------------------------------------------------------------------
This report is submitted for the general information of the shareholders of the
Fund. It is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective prospectus, which includes
information regarding the Fund's objectives and policies, experience of its
management, marketability of shares, and other information.
HUDSON CAPITAL
- --------------
APPRECIATION
- --------------
FUND
CLASS A SHARES
CLASS B SHARES
CLASS N SHARES
ANNUAL REPORT
DECEMBER 31, 1997
LOGO
FAHNESTOCK
ESTABLISHED 1881
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- --------------------------------------------------------------------------------
G02329-01 (2/98) HUD 802109
