The Avalon Capital
Appreciation Fund
A Series of The Avalon Fund
of Ann Arbor, Inc.
1350 Highland Drive
Suite A
Ann Arbor, MI 48108
1-877-228-2566
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ANNUAL REPORT
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September 30, 1999
October 29, 1999
Dear Shareholders,
We are pleased to provide the Avalon Capital Appreciation Fund annual
report, which covers the twelve month period ended September 30, 1999.
The Fund's total return since its inception on October 2, 1998,
increased 20.3%*, without effect of the front-end sales charge, versus
an increase of 22.07% for the Russell 2000 Index**.
During our initial year of fund operation, assets have grown to
$1,125,601. New and existing shareholders continue to invest in the Fund
as the number of shareholders has increased to 77. The Distributor,
Questar Capital Corporation, has established a sales force of over 150
licensed representatives to offer shares in the Fund to investors. The
Fund is registered in twelve states: CA, CO, IN, KS, KY, MI, NV, NM, OH,
TN, VA, WY.
The Fund's objective is to achieve long term growth through capital
appreciation. The portfolio will seek long-term capital growth by
investing mainly in stocks of small-to-mid capitalization companies
which have the potential to rise in price. Navellier Management Company
is currently the sub-advisor of the Fund. In an attempt to enhance
returns or hedge the long portion of the portfolio, the Avalon Capital
Appreciation Fund may use options and/or short sales.
During the last twelve months, the U.S. economy has experienced strong
growth and low inflation. Large capitalization growth stocks, technology
stocks in particular, have dominated market performance. However,
inflation fears persist. In June and in late August, the Federal Reserve
increased interest rates in an effort to contain stock and bond prices.
Despite the anxiety over interest rates, many experts agree that the
economy is still fundamentally strong, and we remain optimistic about
the prospects for continued growth in the markets.
If you have any questions, or need additional information, please call
1-877-228-2566. It will be our pleasure to assist you.
Sincerely,
/S/ROBERT BOONE
Robert Boone, President
* 14.59% is the load adjusted return reflecting the 4.75% front-end
sales charge.
** Russell 2000 returns are calculated with reinvested dividends and
assume no transaction costs.
THE AVALON CAPITAL APPRECIATION FUND
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[GRAPHIC OMITTED: PERFORMANCE UPDATE -- $10,000 INVESTMENT]
PERFORMANCE UPDATE -- $10,000 INVESTMENT
For the period from October 2, 1998 (commencement of operations)
to September 30, 1999
The Avalon Capital Russell
Appreciation Fund 2000
10/2/98 9,525 10,000
11/30/98 9,744 11,363
1/31/99 9,830 12,205
3/31/99 9,582 11,360
5/31/99 10,401 12,532
7/31/99 10,916 12,706
9/30/99 11,459 12,207
This graph depicts the performance of the Avalon Capital Appreciation
Fund versus the Russell 2000 Index. It is important to note that the
Avalon Capital Appreciation Fund is a professionally managed mutual fund
while the indexes are not available for investment and are unmanaged.
The comparison is shown for illustrative purposes only.
Annualized Total Return
Commencement of operations
through 9/30/99
- -----------------------------------------
with sales charge without sales charge
14.59% 20.30%
(bullet) This graph assumes an initial $10,000 investment on October 2,
1998. All dividends and distributions are reinvested.
(bullet) At September 30, 1999, the Fund would have grown to $11,459
with the front end sales charge ($12,030 without the front end sales
charge), total annualized investment return of 20.3% without sales
charge (14.59% with 4.75% front end sales charge) since inception
October 2, 1998.
(bullet) At September 30, 1999, a similar investment in the Russell 2000
Index would have grown to $12,207, total annualized investment return of
22.07% since October 2, 1998.
<TABLE>
<CAPTION>
THE AVALON CAPITAL APPRECIATION FUND
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SCHEDULE OF INVESTMENTS
September 30, 1999
Shares Value
---------- ----------------
<S> <C> <C>
COMMON STOCK -- 85.38%
Business Equipment and Services -- 8.08%
Adaptec, Inc.* 700 $ 27,781
Alpha Industries, Inc.* 550 31,023
EMC Corp.* 450 32,147
------------
90,951
------------
Computer Services and Software -- 23.84%
Adobe Systems, Inc. 320 36,320
BroadVision, Inc.* 350 46,572
Citrix Systems, Inc.* 400 24,775
Clarify, Inc.* 600 30,187
Electronics for Imaging, Inc.* 400 20,563
Emulex Corp.* 250 21,469
Macromedia, Inc.* 500 20,437
Mercury Interactive Corp.* 700 45,194
Sandisk Corp.* 350 22,816
------------
268,333
------------
Consumer Services -- 1.58%
Catalina Marketing Corp.* 210 17,811
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Electronics and Electrical Equipment -- 23.60%
Applied Micro Circuits Corp.* 700 39,900
CommScope, Inc.* 800 26,000
Galileo Technology Ltd.* 1,000 25,000
Gemstar International Group Ltd.* 325 25,391
Jabil Circuit, Inc.* 450 22,275
Power Integrations, Inc.* 350 24,238
QLogic Corp.* 400 27,950
RF Micro Devices, Inc.* 950 43,463
TriQuint Semiconductor, Inc.* 550 31,453
------------
265,670
------------
Health Care -- 9.26%
Andrx Corp.* 325 19,023
Apria Healthcare Group, Inc.* 1,400 23,450
Arthrocare Corp.* 400 21,850
Medimmune, Inc.* 400 39,863
------------
104,186
------------
Materials and Processing -- 5.09%
Minimed Inc.* 325 31,931
Optical Coating Laboratory, Inc. 275 25,317
------------
57,248
------------
Medical Supplies and Devices -- 5.66%
VISX, Inc.* 500 39,547
Waters Corp.* 400 24,225
------------
63,772
------------
Miscellaneous Manufacturing -- 1.85%
Helix Technology Corp. 625 20,781
------------
Printing -- 2.54%
Valassis Communications, Inc.* 650 28,559
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Retail -- 3.88%
Abercrombie & Fitch Co.* 600 20,437
Best Buy Co.* 375 23,273
Gap, Inc. (The) 1 16
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43,726
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Total Common Stock (Cost $831,204) 961,037
------------
SHORT-TERM INVESTMENTS -- 8.88%
Evergreen Money Market Trust CL Y -- 3.95% (Cost $100,000) 100,000
------------
Total Investments -- 94.26% (Cost $931,204) 1,061,037
------------
Other Assets in Excess of Liabilities -- 5.74% 64,564
------------
NET ASSETS -- 100.00% $ 1,125,601
============
* Non-income producing investment.
</TABLE>
See notes to financial statements.
<TABLE>
<CAPTION>
THE AVALON CAPITAL APPRECIATION FUND
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STATEMENT OF ASSETS AND LIABILITIES
September 30, 1999
<S> <C>
ASSETS:
Investments, at market (identified cost $931,204) $ 1,061,037
Cash 67,887
Receivables:
Dividends and interest 278
Fund shares sold 2,482
------------
Total assets 1,131,684
------------
LIABILITIES:
Payables:
Accrued distribution fees 907
Due to advisor 1,748
Other liabilities 3,428
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Total liabilities 6,083
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NET ASSETS $ 1,125,601
============
NET ASSETS CONSIST OF:
Paid-in capital $ 995,768
Net unrealized gain on investments 129,833
------------
Net Assets (100,000,000 shares of $0.001 par beneficial interest authorized;
93,531 shares outstanding) $ 1,125,601
============
Net Asset Value and redemption price per share $ 12.03
============
Offering price per share ($12.03 (divided by) 0.9525) $ 12.63
============
</TABLE>
See notes to financial statements.
<TABLE>
<CAPTION>
THE AVALON CAPITAL APPRECIATION FUND
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STATEMENT OF OPERATIONS
For the Year Ended September 30, 1999*
<S> <C>
INVESTMENT INCOME:
Interest $ 2,268
Dividends 2,979
----------
Total investment income 5,247
----------
EXPENSES:
Investment advisory fees 2,589
Distribution fees 5,177
Service fee 7,507
----------
Total expenses before fee waivers 15,273
----------
Fees waived by Advisor (2,109)
----------
Total net expenses 13,164
----------
Net investment loss (7,917)
----------
REALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 1,636
Net change in unrealized appreciation on investments 129,833
----------
131,469
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 123,552
==========
* The Avalon Capital Appreciation Fund commenced operations on October 2, 1998.
</TABLE>
See notes to financial statements.
<TABLE>
<CAPTION>
THE AVALON CAPITAL APPRECIATION FUND
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STATEMENT OF CHANGES IN NET ASSETS
For the Year
Ended
September 30, 1999*
--------------------------
<S> <C>
INCREASE IN NET ASSETS
Operations:
Net investment loss $ (7,917)
Net realized gain on investments 1,636
Net change in unrealized appreciation on investments 129,833
------------
Net increase in net assets resulting from operations 123,552
------------
Increase in net assets from Fund share transactions 1,002,049
------------
Increase in net assets 1,125,601
NET ASSETS:
Beginning of period 0
------------
End of period (including accumulated undistributed
net investment income of $0) $ 1,125,601
------------
* The Avalon Capital Appreciation Fund commenced operations on October 2, 1998.
</TABLE>
See notes to financial statements.
<TABLE>
<CAPTION>
THE AVALON CAPITAL APPRECIATION FUND
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FINANCIAL HIGHLIGHTS
Per Share Data (For a Share Outstanding from October 2, 1998 through September 30, 1999)
For the Year
Ended
September 30, 1999*
--------------------------
<S> <C>
Net Asset Value, Beginning of Period $ 10.00
----------
Investment Operations:
Net investment loss (0.17)
Net realized and unrealized gain on investments 2.20
----------
Total from investment operations 2.03
----------
Net Asset Value, End of Period $ 12.03
----------
Total Return 20.30%
Ratios/Supplemental Data
Net assets, end of period (in 000's) $ 1,126
Ratio of expenses to average net assets:
Before expense reimbursement 2.95%(1)
After expense reimbursement 2.54%(1)
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement (1.94)%(1)
After expense reimbursement (1.53)%(1)
Portfolio turnover rate 183.71%
(1) Annualized
* The Avalon Capital Appreciation Fund commenced operations on October 2, 1998.
Per share data has been calculated based on the average daily number of shares
outstanding throughout the period.
</TABLE>
See notes to financial statements.
THE AVALON CAPITAL APPRECIATION FUND
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NOTES TO THE FINANCIAL STATEMENTS
September 30, 1999
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Avalon Fund of Ann Arbor, Inc. (the "Company") was incorporated
under the laws of the state of Maryland on March 17, 1998, and consists
solely of The Avalon Capital Appreciation 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 long-term growth through
capital appreciation. 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 Questar
Capital Corporation (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 manager 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
Paid-in capital at September 30, 1999 was $995,768.
Transactions in shares of the Fund for the year ended September 30, 1999
were as follows:
Shares Amount
-------------- --------------
Sold 94,838 $ 1,015,836
Redeemed (1,307) (13,787)
-------------- --------------
Net Increase 93,531 $ 1,002,049
============== ==============
3. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investments, excluding short-term
investments, by the Fund for the year ended September 30, 1999, were as
follows:
Purchases $1,701,238
Sales 871,671
At September 30, 1999, net unrealized appreciation of investments for
tax purposes were as follows:
Appreciation $ 160,486
Depreciation (30,653)
--------------
Net appreciation on investments $ 129,833
==============
At September 30, 1999, the cost of investments for federal income tax
purposes was $931,204.
4. ADVISORY FEES AND OTHER RELATED PARTY TRANSACTIONS
The Fund has entered into a Management Agreement with Questar Capital
Corporation (the "Advisor") to provide investment management services to
the Fund. Under the terms of the Advisory Agreement, the Advisor is
entitled to receive a fee, calculated daily and payable monthly, equal
to 0.50% of average net asset value of the Fund. For the period ended
March 31, 1999, the Advisor voluntarily waived their advisory fees. For
the year ended September 30, 1999, the advisor received advisory fees of
$2,051.
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 1.45% as applied to the Fund's
daily net assets. For the period ended March 31, 1999, the Advisor
voluntarily waived their service fees. For the year ended September 30,
1999, the advisor received Servicing Agreement fees of $5,936.
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 no
limited to, accounting, administrative, transfer agent, dividend
disbursement, registrar and recordkeeping services.
The Fund has entered into a Distribution Agreement with the Advisor to
provide distribution services as underwriter/distributor of the Fund.
For the year ended September 30, 1999, Questar Capital Corporation, the
Fund's underwriter, received $35,411 from commissions earned on sales of
shares of the Fund. The total amount was retained by the underwriter.
A separate plan of distribution has been adopted under Rule 12b-1 of the
Investment Company Act of 1940 for the Fund. The plan provides that the
Fund may pay a servicing or Rule 12b-1 fee of up to 0.75% of the Funds
average daily net assets (1/12 of 0.75% monthly) to pay or reimburse
expenditures in connection with sales and promotional services related
to distribution of the Funds shares. The distribution plan also allows
for a fee of up to 0.25% of average daily net assets, to be paid to
persons or institutions for providing certain servicing functions to
prospective and existing shareholders. For the year ended September 30,
1999, Questar Capital Corporation received 12b-1 fees of $5,177.
Certain directors and officers of the Fund are directors and officers of
the Advisor.
5. RECLASSIFICATIONS
In accordance with SOP 93-2, the fund has recorded a reclassification in
the capital accounts. As of September 30, 1999, the fund recorded
permanent book/tax differences of $1,636 from net investment loss to
accumulated undistributed net realized gain and $6,281 from net
investment loss to Paid-in capital. This reclassification has no impact
on the net asset value of the fund and is designed generally to present
undistributed income and realized gains on a tax basis which is
considered to be more informative to shareholders.
THE AVALON CAPITAL APPRECIATION FUND
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INDEPENDENT AUDITOR'S REPORT
To The Shareholders and
Board of Trustees
The Avalon Capital Appreciation Fund
We have audited the accompanying statement of assets and liabilities of
The Avalon Capital Appreciation Fund, including the schedule of
portfolio investments, as of September 30, 1999, and the related
statement of operations for the year then ended, the statement of
changes in net assets for the year then ended, and financial highlights
for the period from October 2, 1998 to September 30, 1999 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 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
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 investments and cash held as of September 30, 1999 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 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 The Avalon Capital Appreciation Fund as of
September 30, 1999, the results of its operations for the year then
ended, the changes in its net assets for the year then ended, and the
financial highlights for the period from October 2, 1998 to September
30, 1999 in the period then ended, in conformity with generally accepted
accounting principles.
/S/MCCURDY & ASSOCIATES CPA'S, INC.
McCurdy & Associates CPA's, Inc.
Westlake, Ohio 44145
October 20, 1999
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The Avalon Capital Appreciation Fund
INVESTMENT ADVISOR
Questar Capital Corporation
1350 Highland Drive
Suite A
Ann Arbor, MI 48108
ADMINISTRATOR & TRANSFER AGENT
Declaration Service Company
P.O. Box 844
Conshohocken, PA 19428
DISTRIBUTOR
Questar Capital Corporation
1350 Highland Drive
Suite A
Ann Arbor, MI 48108
CUSTODIAN BANK
First Union National Bank
1339 Chestnut Street
Philadelphia, PA 19107
INDEPENDENT ACCOUNTANTS
McCurdy & Associates CPA's Inc.
27955 Clemens Road
Westlake, OH 44145
