<PAGE> 1
March 31, 1999
Dear Fellow Shareholder,
Thank you for your confidence and investment in the AVALON CAPITAL
APPRECIATION FUND. We are proud to announce the results of operations for the
period ending March 31, 1999.
THE AVALON CAPITAL APPRECIATION FUND, which started investing on November
2, 1998, has an SEC average annual total return of -3.81% from the Fund's
commencement of operations through March 31, 1999. This year from January 1st to
March 31st, the AVALON CAPITAL APPRECIATION FUND was down -6.42%, while the S&P
500 was up 4.65%.
During this time, stocks of small and mid-cap value have been out of favor.
Thus, generating above average results have been difficult. However, our
portfolio is well-structured and our long positions are all "deep value" and
undervalued stocks. Over time, stocks with similar characteristics have provided
investors with outstanding returns with less market risk. During the current
market environment however, it is the internet providers and large cap growth
stocks that are getting all the attention, as well as huge returns. As the
market breadth broadens, our undervalued holdings will participate in a more
significant manner. Patience truly is a virtue when it comes to investing in
undervalued equities.
Your management company is currently working on ways to improve the overall
performance of the fund. We are hopeful that in the second quarter of 1999
several changes will be made to identify more of the types of securities that
are generating today's market performance and position our fund to take
advantage of these trends.
We are grateful to be able to serve you and hope the AVALON CAPITAL
APPRECIATION FUND will meet your investment objectives. We are happy to have you
as an investor, as we work hard to produce confidence in our fund and its
performance over the long term.
For those of you who would like to invest, there is no time like the
present to get involved. If you have any questions, or would like more
information, please call your investment representative or call us at
877-228-2566. In the meantime, as always, thank you for your support of the
AVALON CAPITAL APPRECIATION FUND.
Sincerely,
/s/ ROBERT BOONE /s/ JOHN GAKENHEIMER
Robert E. Boone, President John H. Gakenheimer, Secretary
<PAGE> 2
THE AVALON CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
------ --------
<S> <C> <C>
COMMON STOCK -- 90.93%
AEROSPACE -- 4.80%
Boeing Co. ................................................. 200 $ 6,825
Raytheon Co. -- Class B..................................... 250 14,656
--------
21,481
--------
AGRICULTURAL -- 5.15%
Phillip Morris Co. ......................................... 300 10,556
RJR Nabisco Holdings Corp. ................................. 500 12,500
--------
23,056
--------
APPAREL -- 2.72%
Florsheim Group, Inc.*...................................... 500 2,750
V F Corp. .................................................. 200 9,437
--------
12,187
--------
AUTOMOBILE MANUFACTURERS -- 1.90%
Ford Motor Co. ............................................. 150 8,512
--------
AUTO PARTS & EQUIPMENT -- 1.43%
Noble International, Ltd.*.................................. 600 6,375
--------
BANKS -- 11.61%
Astoria Financial Corp. .................................... 75 3,750
Banc One Corp. ............................................. 100 5,506
Fleet Financial Group, Inc. ................................ 100 3,762
Toronto-Dominion Bank....................................... 300 13,781
Washington Mutual, Inc. .................................... 400 16,350
Wells Fargo & Co. .......................................... 250 8,766
--------
51,915
--------
BROADCASTING -- 1.82%
Fox Entertainment Group, Inc.*.............................. 300 8,138
--------
COMPUTER SERVICES -- 0.98%
Digital Courier Technologies, Inc.*......................... 800 4,400
--------
COMPUTER SYSTEMS -- 6.09%
Compaq Computer Corp. ...................................... 300 9,506
International Business Machines Corp. ...................... 100 17,725
--------
27,231
--------
</TABLE>
See notes to financial statements.
2
<PAGE> 3
THE AVALON CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
------ --------
<S> <C> <C>
ELECTRONIC EQUIPMENT -- 5.13%
Emerson Electric Co. ....................................... 200 $ 10,587
Koninklijke Philips Electronics ADR......................... 150 12,366
--------
22,953
--------
FINANCIAL SERVICES -- 6.34%
Citigroup, Inc. ............................................ 200 12,775
Fannie Mae.................................................. 225 15,581
--------
28,356
--------
HEALTHCARE SERVICES -- 1.48%
Tenet Healthcare Corp.*..................................... 350 6,628
--------
HOME FURNISHINGS -- 0.36%
Pier 1 Imports, Inc. ....................................... 200 1,625
--------
INSURANCE -- 3.93%
American International Group, Inc. ......................... 100 12,063
Hartford Life, Inc. ........................................ 100 5,500
--------
17,563
--------
INVESTMENT COMPANIES -- 1.48%
Merrill Lynch & Co. ........................................ 75 6,633
--------
OFFICE EQUIPMENT -- 6.92%
Pitney Bowes Inc. .......................................... 150 9,563
Xerox Corp. ................................................ 400 21,350
--------
30,913
--------
OIL & GAS -- 1.63%
Atlantic Richfield Co. ..................................... 100 7,300
--------
REAL ESTATE CONSTRUCTION -- 3.66%
Captec Net Lease Realty Inc. ............................... 250 3,250
Newhall Land & Farm......................................... 550 13,131
--------
16,381
--------
RESTAURANT -- RETAIL -- 2.06%
PJ America, Inc.*........................................... 400 9,200
--------
</TABLE>
See notes to financial statements.
3
<PAGE> 4
THE AVALON CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
SCHEDULE OF INVESTMENTS (CONTINUED)
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
SHARES VALUE
------ --------
<S> <C> <C>
RETAIL STORES -- 7.00%
J.C. Penney Co. ............................................ 300 $ 12,150
May Department Stores Co. .................................. 400 15,650
Payless Shoesource, Inc.*................................... 75 3,487
--------
31,287
--------
STEEL -- 1.35%
British Steel ADR........................................... 300 6,056
--------
TELECOMMUNICATIONS -- 5.58%
Alpine Group (The), Inc.*................................... 300 3,038
Cisco Systems, Inc.*........................................ 200 21,913
--------
24,951
--------
TRANSPORTATION -- 6.32%
Avis Rent A Car, Inc.*...................................... 400 11,075
Burlington Northern Santa Fe Corp. ......................... 100 3,288
FDX Corp.*.................................................. 150 13,922
--------
28,285
--------
UTILITIES -- 1.19%
El Paso Electric Co.*....................................... 700 5,338
--------
Total Common Stock (Cost $414,964).......................... 406,764
--------
MISCELLANEOUS ASSETS -- 23.56%
Evergreen Money Market Trust (Cost $105,386)................ 105,386
--------
Total Investments (Cost $520,350) -- 114.49%................ 512,150
--------
Liabilities in Excess of Other Assets, Net -- (14.49)%...... (64,824)
--------
NET ASSETS -- 100.00%....................................... $447,326
========
</TABLE>
* Non-income producing security.
ADR -- American Depository Receipt
See notes to financial statements.
4
<PAGE> 5
THE AVALON CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<S> <C>
ASSETS:
Investments, at market (identified cost $520,350)......... $512,150
Receivables:
Dividends and interest................................. 786
Fund shares sold....................................... 1,904
--------
Total assets......................................... 514,840
--------
LIABILITIES:
Payables:
Investment securities purchased........................ 66,038
Accrued distribution fees.............................. 1,080
Other liabilities...................................... 396
--------
Total liabilities.................................... 67,514
--------
NET ASSETS.................................................. $447,326
========
NET ASSETS CONSIST OF:
Paid-in capital........................................... $450,481
Undistributed net investment income....................... 1,252
Accumulated realized gain on investments.................. 3,793
Net unrealized loss on investments........................ (8,200)
--------
Net Assets, for 44,444 shares outstanding................... $447,326
========
Net Asset Value and redemption price per share.............. $ 10.06
========
Offering price per share ($10.06/0.9525).................... $ 10.56
========
</TABLE>
See notes to financial statements.
5
<PAGE> 6
THE AVALON CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED MARCH 31, 1999* (UNAUDITED)
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest.................................................. $ 729
Dividends................................................. 1,603
-------
Total investment income................................ 2,332
-------
EXPENSES:
Investment advisory fees.................................. 472
Distribution fees......................................... 1,080
Administration fee........................................ 1,368
-------
Total expenses before fee waivers......................... 2,920
-------
Fees waived by Advisor................................. (1,840)
-------
Total expenses, net.................................... 1,080
-------
Net investment income..................................... 1,252
-------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments.......................... 3,793
Net change in unrealized depreciation on investments...... (8,200)
-------
(4,407)
-------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $(3,155)
=======
</TABLE>
* The Avalon Capital Appreciation Fund commenced operations on November 2, 1998.
See notes to financial statements.
6
<PAGE> 7
THE AVALON CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FOR THE PERIOD
ENDED
MARCH 31, 1999*
(UNAUDITED)
---------------
<S> <C>
INCREASE IN NET ASSETS
Operations:
Net investment income..................................... $ 1,252
Net realized gain on investments.......................... 3,793
Net change in unrealized depreciation on investments...... (8,200)
--------
Net decrease in net assets resulting from operations........ (3,155)
--------
Increase in net assets from Fund share transactions......... 450,481
--------
Increase in net assets...................................... 447,326
NET ASSETS:
Beginning of period....................................... 0
--------
End of period............................................. $447,326
========
</TABLE>
* The Avalon Capital Appreciation Fund commenced operations on November 2, 1998.
See notes to financial statements.
7
<PAGE> 8
THE AVALON CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Per Share Data (For a Share Outstanding from November 2, 1998 through March 31,
1999)
<TABLE>
<CAPTION>
FOR THE PERIOD
ENDED
MARCH 31, 1999
(UNAUDITED)
---------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $ 10.00
-------
INVESTMENT OPERATIONS:
Net investment income..................................... 0.03
Net realized and unrealized gain on investments........... 0.03
-------
Total from investment operations....................... 0.06
-------
NET ASSET VALUE, END OF PERIOD.............................. $ 10.06
-------
TOTAL RETURN................................................ 0.60%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's)...................... $ 447
Ratio of expenses to average net assets:
Before expense reimbursement........................... 2.71%(1)
After expense reimbursement............................ 1.00%(1)
Ratio of net investment income (loss) to average net
assets:
Before expense reimbursement........................... (0.55)%(1)
After expense reimbursement............................ 1.16%(1)
Portfolio turnover rate................................... 8.71%
</TABLE>
(1) Annualized
* The Avalon Capital Appreciation Fund commenced operations on November 2, 1998.
See notes to financial statements.
8
<PAGE> 9
THE AVALON CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS
MARCH 31, 1999 (UNAUDITED)
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 November
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.
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
realize 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 form 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.
9
<PAGE> 10
THE AVALON CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999 (UNAUDITED)
2. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund for the period ended March 31, 1999 were
as follows:
<TABLE>
<CAPTION>
SHARES AMOUNT
-------- --------
<S> <C> <C>
Sold........................................... 44,444 $450,481
Redeemed....................................... 0 0
-------- --------
Net Increase................................... 44,444 $450,481
======== ========
</TABLE>
3. INVESTMENT TRANSACTIONS
The aggregate purchases and sales of investments, excluding short-term
investments, by the Fund for the period ended March 31, 1999, were as follows:
<TABLE>
<S> <C> <C>
Purchases:
U.S. Government.............................. $ 0
Other........................................ 425,086
Sales:
U.S. Government.............................. 0
Other........................................ 13,915
</TABLE>
At March 31, 1999, net unrealized depreciation of investments for tax
purposes were as follows:
<TABLE>
<S> <C> <C>
Appreciation................................... $ 17,088
Depreciation................................... (25,288)
--------
Net depreciation on investments................ $ (8,200)
========
</TABLE>
At March 31, 1999, the cost of investments for federal income tax purposes
was $520,350.
10
<PAGE> 11
THE AVALON CAPITAL APPRECIATION FUND
- --------------------------------------------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS (CONTINUED)
MARCH 31, 1999 (UNAUDITED)
4. AGREEMENTS
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.
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.
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 Fund has entered into a Distribution Agreement with the Advisor to
provide distribution services as underwriter/distributor of the Fund.
First Union National Bank, Philadelphia, PA serves as custodian for the
Fund.
11
<PAGE> 12
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
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
------------------------------------
SEMI ANNUAL REPORT
------------------------------------
MARCH 31, 1999
