The Avalon Capital
Appreciation Fund
A Series of The Avalon Fund
of Maryland, Inc.
1350 Highland Drive
Suite A
Ann Arbor, MI 48108
1-877-228-2566
-------------
ANNUAL REPORT
-------------
September 30, 2000
November 1, 2000
Dear Shareholders:
We are pleased to provide the Avalon Capital Appreciation Fund annual
report, which covers the twelve-month period ended September 30, 2000.
The Fund's total return was an increase of 55.20%*, without effect of
the front-end sales charge, versus an increase of 23.39% for the Russell
2000 Index**.
During our second year of fund operation, assets have grown to
$7,165,808. The Distributor, Questar Capital Corporation, has
established a sales force of 250 licensed representatives to offer
shares in the Fund to investors. In addition, we have selling agreements
with several other broker-dealers in order to increase the distribution
of the Fund. The Fund is registered in nineteen states: AZ, CA, CO, DC,
FL, GA, IN, KS, KY, MI, NC, NJ, NV, NY, OH, SD, SC, TN, 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.
Led by technology, stocks declined in September, as investors expressed
concern over several factors: high fuel prices; the Euro's continuing
decline against the dollar; and possible earnings disappointments by
some rapidly growing companies.
The market appears to be very concerned about earnings visibility given
the outlook for slowing economic conditions. There have also been signs
of "cracks" in the technology sector, especially in telecommunications-
related spending. We believe it is unlikely that there will be many
upside earnings surprises in the fourth quarter of 2000, but the market
may rally simply based on belief that the Fed is done raising interest
rates. Most stocks reflect more caution than they did one quarter ago,
and we think that's a healthy sign.
If you have any questions about your account, or need additional
information, please call shareholder services at 1-877-228-2566. If you
have any questions or comments about the Fund and would like to speak to
me personally, please call 1-800-568-7526. It will be our pleasure to
assist you.
Sincerely,
/S/ ROBERT BOONE
Robert E. Boone, President
* 47.82% 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.
This report is intended for the fund's shareholders. It may not be
distributed to prospective investors unless it is preceded or
accompanied by the current fund prospectus.
PORTFOLIO MANAGER'S DISCUSSION OF FUND'S PERFORMANCE
The Fund
The Avalon Fund generated a total return of 55.20% for its fiscal year
ended September 30, 2000 as compared to the Russell 2000 index, which
was up 22.02% during the same period. The Fund showed strong upside in
the month of August as it rose 18.07%.
The primary reason that the Fund has done so well compared to the
overall stock market this year is due to the tremendous rallies that our
stocks exhibited in February, May and August. Even though the stock
market reacted negatively to recent earnings warnings from several
flagship stocks, the stocks we favor have not been hit as hard.
Current Strategy
There were considerable changes to the portfolio over the year as our
quantitative stock selection screens continued to find the most
attractive stocks in the small and mid cap growth arena.
Currently, the most important fundamental stock selection variable in
our model is positive analyst earnings estimate revisions. This is not
surprising because the top 10% of stocks with positive earnings estimate
changes have had spectacular performance. The next most important
variable remains strong operating growth, which favors those companies
that have expanding operating margins and have not manufactured earnings
through acquisitions. Another important fundamental stock selection
criterion is strong earnings momentum, which favors stocks with
accelerating earnings growth. Finding stocks with accelerating earnings
is becoming increasingly difficult, because corporate earnings are
starting to decelerate slightly, from the over 20% annual pace set
during the past four quarters. However, we remain optimistic that the
market will recover from its current earnings driven malaise and finish
the year with positive returns.
Sincerely,
/S/ JOHN H. GAKENHEIMER
John H. Gakenheimer
Chief Operating Officer
Questar Capital Corporation
The Avalon Capital Appreciation Fund
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PERFORMANCE UPDATE -- $10,000 INVESTMENT
For the period from October 2, 1998 (commencement of operations) to
September 30, 2000
[GRAPHIC OMITTED: PERFORMANCE UPDATE -- $10,000 INVESTMENT]
The Avalon Capital Russell
Appreciation Fund 2000
10/2/98 9,525 10,000
3/31/99 9,582 11,360
6/30/99 10,973 13,075
9/30/99 11,459 12,207
12/31/99 16,688 14,420
3/31/00 19,869 15,401
6/30/00 17,002 14,776
9/30/00 17,783 14,895
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.
Average Annual Total Return
Commencement of operations
through 9/30/00
--------------------------------------------
Avalon Capital Appreciation Russell 2000
Fund Index
--------------------------------------------
with sales without sales
charge charge
33.35% 36.64% 22.04%
(bullet) This graph assumes an initial $10,000 investment on October 2,
1998. All dividends and distributions are reinvested.
(bullet) At September 30, 2000, the Fund would have grown to $17,783 with
the front end sales charge ($18,670 without the front end sales charge)
since inception October 2, 1998.
(bullet) At September 30, 2000, a similar investment in the Russell 2000
Index would have grown to $14,895, average annual total return of 22.04%
since October 2, 1998.
<TABLE>
<CAPTION>
Avalon Capital Appreciation Fund
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SCHEDULE OF INVESTMENTS
September 30, 2000
Shares Value
------------ ------------
<S> <C> <C>
COMMON STOCK -- 92.81%
Commercial Services -- 1.57%
Plexus Corp.* 1,600 $ 112,800
------------
Computer Services and Software -- 22.77%
Adobe Systems, Inc. 1,800 279,450
Art Technology Group, Inc.* 1,500 142,125
Emulex Corp.* 1,800 220,500
i2 Technologies, Inc.* 1,550 289,947
Macrovision Corp.* 2,500 202,500
Mercury Interactive Corp.* 2,700 423,225
Oak Technology, Inc.* 2,700 73,912
------------
1,631,659
------------
Consulting Services -- 2.28%
Diamond Technology Partners, Inc.* 2,200 163,350
------------
Electronics and Electrical Equipment -- 24.31%
Applied Micro Circuits Corp.* 2,090 432,761
C & D Technologies, Inc. 1,600 90,800
International Rectifier Corp.* 2,400 121,350
Kemet Corp.* 4,800 132,600
Kopin Corp.* 3,600 64,800
Power-One, Inc.* 3,000 181,547
Silicon Storage Technology, Inc.* 6,600 179,437
Technitrol, Inc. 750 75,750
TriQuint Semiconductor, Inc.* 6,800 247,775
Varian, Inc.* 1,600 68,900
Vishay Intertechnology, Inc.* 4,750 146,062
------------
1,741,782
------------
Health Care -- 10.72%
Celgene Corp.* 2,250 133,875
Ivax Corp.* 3,200 147,200
Medimmune, Inc.* 4,520 349,170
Quest Diagnostics, Inc.* 1,200 137,700
------------
767,945
------------
Medical Supplies and Devices -- 3.84%
Cytyc Corp.* 3,000 129,375
Techne Corp.* 1,300 145,600
------------
274,975
------------
Oil & Gas -- 3.21%
BJ Services Co.* 2,300 140,588
Triton Energy Ltd.* 2,300 89,700
------------
230,288
------------
Pharmaceutical -- 7.53%
Aurora Biosciences Corp.* 1,200 81,600
Curagen Corp.* 1,600 85,250
Protein Design Labs, Inc.* 1,200 144,600
Vertex Pharmaceuticals, Inc.* 2,700 228,150
------------
539,600
------------
Retail -- 3.68%
Best Buy Co.* 25 1,591
CDW Computer Center, Inc.* 3,800 262,200
------------
263,791
------------
Telecommunications -- 9.67%
Digital Lightwave, Inc.* 1,600 116,200
Newport Corp. 1,550 246,862
Scientific-Atlanta, Inc. 3,000 190,875
Tollgrade Communications, Inc.* 1,000 138,812
------------
692,749
------------
Wireless Equipment -- 3.23%
Powerwave Technologies, Inc.* 6,100 231,610
------------
Total Common Stock (Cost $5,753,637) 6,650,549
------------
SHORT-TERM INVESTMENTS -- 6.44%
Evergreen Money Market Trust CL Y, 6.18% (Cost $461,615) 461,615 461,615
------------
Total Investments (Cost $6,215,252) 7,112,164
------------
Other Assets in Excess of Liabilities, Net -- 0.75% 53,644
------------
NET ASSETS -- 100.00% $ 7,165,808
============
* Non-income producing investment.
</TABLE>
See notes to financial statements.
<TABLE>
<CAPTION>
The Avalon Capital Appreciation Fund
-----------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES
September 30, 2000
<S> <C>
ASSETS:
Investments, at market (identified cost $6,215,252) $ 7,112,164
Receivables:
Dividends and interest 2,814
Fund shares sold 19,050
Investment securities sold 51,133
------------
Total assets 7,185,161
------------
LIABILITIES:
Payables:
Accrued distribution fees 5,687
Due to advisor 10,734
Other liabilities 2,932
------------
Total liabilities 19,353
------------
NET ASSETS $ 7,165,808
============
NET ASSETS CONSIST OF:
Paid-in capital $ 6,208,512
Accumulated realized gain on investments 60,384
Net unrealized gain on investments 896,912
------------
Net Assets (100,000,000 of $.001 par beneficial interest authorized;
383,796 shares outstanding) $ 7,165,808
============
Net Asset Value and redemption price per share $ 18.67
============
Offering price per share ($18.67 (divided by) 0.9525) $ 19.60
============
</TABLE>
See notes to financial statements.
<TABLE>
<CAPTION>
The Avalon Capital Appreciation Fund
-----------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS
For the Year Ended September 30, 2000
<S> <C>
INVESTMENT INCOME:
Interest $ 23,378
Dividends 1,114
Other income 588
------------
Total investment income 25,080
------------
EXPENSES:
Investment advisory fees 22,420
Distribution fees 44,841
Service fee 65,019
------------
Total expenses 132,280
------------
Net investment loss (107,200)
------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments 60,384
Net change in unrealized appreciation on investments 767,079
------------
827,463
------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 720,263
============
</TABLE>
See notes to financial statements.
<TABLE>
<CAPTION>
The Avalon Capital Appreciation Fund
-----------------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
For the Year For the Period
Ended Ended
September 30, September 30,
2000 1999*
------------ --------------
<S> <C> <C>
INCREASE IN NET ASSETS
Operations:
Net investment loss $ (107,200) $ (7,917)
Net realized gain on investments 60,384 1,636
Net change in unrealized appreciation on investments 767,079 129,833
------------ ------------
Net increase in net assets resulting from operations 720,263 123,552
------------ ------------
Increase in net assets from Fund share transactions 5,319,944 1,002,049
------------ ------------
Increase in net assets 6,040,207 1,125,601
NET ASSETS:
Beginning of period 1,125,601 -
------------ ------------
End of period $ 7,165,808 $ 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
-----------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
Per Share Data (For a Share Outstanding Throughout Each Period)
For the Year For the Period
Ended Ended
September 30, September 30,
2000 1999*
------------ --------------
<S> <C> <C>
Net Asset Value, Beginning of Period $ 12.03 $ 10.00
------------ ------------
Investment Operations:
Net investment loss (0.44) (0.17)
Net realized and unrealized gain on investments 7.08 2.20
------------ ------------
Total from investment operations 6.64 2.03
------------ ------------
Net Asset Value, End of Period $ 18.67 $ 12.03
------------ ------------
Total Return 55.20% 20.30%
Ratios/Supplemental Data
Net assets, end of period (in 000's) $ 7,166 $ 1,126
Ratio of expenses to average net assets:
Before expense reimbursement 2.95% 2.95%(1)
After expense reimbursement 2.95% 2.54%(1)
Ratio of net investment income (loss) to average
net assets:
Before expense reimbursement (2.39)% (1.94)%(1)
After expense reimbursement (2.39)% (1.53)%(1)
Portfolio turnover rate 97.95% 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 each period.
</TABLE>
See notes to financial statements.
The Avalon Capital Appreciation Fund
------------------------------------------------------------------------
NOTES TO THE FINANCIAL STATEMENTS
September 30, 2000
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Avalon Fund of Maryland, 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 an 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 growth of capital. The Fund
became effective with the SEC on October 1, 1998 and commenced
operations on October 2, 1998.
The costs incurred in connection with the organization, initial
registration and public offering of shares have been paid by 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 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 the
trade date. The Fund determines the gain or loss realized from the
investment transactions on a first in-first out basis. 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.
Generally accepted accounting principles require that permanent financial
reporting defferences relating to shareholder distributions be
reclassified to net realized gains or paid-in capital.
2. CAPITAL SHARE TRANSACTIONS
Transactions in shares of the Fund for the year ended September 30, 2000
were as follows:
Shares Amount
-------------- --------------
Sold 307,431 $ 5,624,135
Redeemed (17,166) (304,191)
-------------- --------------
Net Increase 290,265 $ 5,319,944
============== ==============
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, 2000, were as
follows:
Purchases $ 8,721,808
Sales 3,859,759
At September 30, 2000, unrealized appreciation of investments for tax
purposes was composed of:
Appreciation $ 1,385,828
Depreciation (488,916)
--------------
Net appreciation on investments $ 896,912
==============
At September 30, 2000, the cost of investments for federal income tax
purposes was $6,215,252.
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 year ended
September 30, 2000, the advisor received advisory fees of $22,420.
The Fund has entered into an Operating Services Agreement (the
"Servicing Agreement") with the Advisor to provide 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 year ended September 30, 2000, the advisor received
Servicing Agreement fees of $65,019.
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
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, 2000, Questar Capital Corporation, the
Fund's underwriter, received $236,529 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,
2000, Questar Capital Corporation received 12b-1 fees of $44,841.
Certain directors and officers of the Advisor are directors, officers or
shareholders of the Fund.
The Avalon Capital Appreciation Fund
------------------------------------------------------------------------
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, 2000, and the related
statement of operations for the year then ended, the statement of
changes in net assets and financial highlights for the year then ended,
and 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, 2000 by
correspondence with the custodian and broker. 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, 2000, the results of its operations for the year then
ended, the changes in its net assets and the financial highlights for
the year then ended, and 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, 2000
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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
