<PAGE>
CHAIRMAN'S LETTER
DEAR FELLOW SHAREHOLDERS:
The year ended June 30, 1996 was an excellent year for Addison Capital
Shares. The total return on the Fund for this period was 25.9%.
The Fund paid dividends of $.21 a share and made Capital Gain
distributions of $1.88 per share.
You have often heard the statement "past performance is no guarantee of
future results." That sentence is pertinent these days more than ever.
History shows that the average annual return on equities is between 9% and
10%. For the most part investors have seen nothing but a bull market since
1982. Except for the 1987 market crash, we experienced an almost uninterupted
rise in equity markets. The challenge for investors is not to panic at severe
market downturns. Over time the equity markets have proven the most effective
investment in beating inflation. The most successful investors take a
long-term view.
We appreciate your support and we are confident that our focus on value will
continue to be successful in dealing with challenges we face in 1996.
Sincerely,
/s/ Rudolph C. Sander
------------------------
Rudolph C. Sander
Chairman
Dated: July 20, 1996
1
<PAGE>
PRESIDENT'S LETTER
Dear Fellow Shareholders:
The Fund's fiscal year ended with the stock market in the early stages of
the long-awaited correction, although to date, the most severe damage has
been among the aggressive growth, small capitalization stocks where prices
had gotten frothy and speculative activity was evident. Despite an
environment in which interest rates have been pushed higher by traders afraid
of the perceived line between economic growth and inflation, the S&P 500
Index posted a total return for the second quarter of 4.5%, and 10.1% for the
six months. The year's big winners have been energy stocks, especially
drillers and service companies; selected high technology issues, even after
the substantial sell-off in June, and consumer growth companies; meanwhile,
utilities were, not surprisingly, given rising interest rates, the worst
performers, followed by consumer cyclical and basic industry issues. The
absolute returns on the kind of stocks which Addison emphasizes, with
below-market P/E's and similar value measures have been generally positive
this year, but on a relative basis they have lagged the returns on the major
market indices which are heavily influenced by consumer growth issues. As a
consequence, the Fund's return for the last six months, at 9.2%, trailed the
S&P 500, and for the fiscal year, at 25.9% versus the S&P return of 26.0%.
Comparing these returns to those of other relevant benchmarks, such as the
S&P/BARRA Value Group and the Lipper Index of Growth & Income Funds, confirms
that the Fund's performance was in line with and slightly ahead of its peer
group:
Total Returns for Periods ended June 30, 1996
Six Months Twelve Months
------------ ---------------
Addison
Capital
Shares 9.2% 25.9%
S&P/BARRA
Value 8.6% 24.8%
Lipper
Growth &
Income 9.2% 22.7%
When it hasn't been dominated by speculative excitement, the year has been
characterized by uncertainty and worry about the future, and the weekly
releases of various economic statistics, especially related to jobs or other
ostensible indicators of growth in the economy, seem to result in 180 degree
swings in sentiment. No matter what the economic news, there is always
someone who will make a case for the peril inherent in that situation. Recent
headlines have been filled with the sort of schizophrenic reactions to the
latest statistical releases, alternately citing the insufficient growth in
wages and the deluge of corporate layoffs, and the next moment fretting about
the too-rapid pace of job creation and wage increases, and the inflationary
implications. It's enough to confuse anyone, and we'd submit that the dismal
science of economics is not equipped to deal with the infinite variables and
permutations of human behavior well enough to attempt to manage economic
growth as accurately as many expect. Unfortunately, that overwhelming task
seems to be the one expected of the Federal Reserve Board, notwithstanding
the relatively limited devices available to them to deal with a global
economy. Even within the Fed, there is a diversity of opinion about whether
economic growth of greater than 2.5% (for example), assuming that it is
measured reliably, is per se inflationary. Most of us are in favor of the
concept of keeping inflation as low as possible, but the debate revolves
around the method of measuring and quantifying how fast is too fast, and then
what to do about it. The only tool that the Fed can use to keep inflation in
check is the bludgeon of interest rates, presenting an awful choice between
inflation and recession, although as history has shown, the two are not
mutually exclusive. The other tool which policy makers could use to influence
the economy is fiscal policy, but various Congresses and presidents have
argued for years whether this tool should be used to promote growth or
economic justice, rendering it virtually useless for either one. What we're
left with is a constant tug of war between the tendency of the economy to
grow and the desire of the govern-
2
<PAGE>
ment policy makers to control that growth despite imprecise measures of the
growth and an inability to fine-tune it.
Perhaps we are guilty of minimizing the inflation threat, however, on the
evidence to date, inflation seems to be staying within a range of 2.5 - 3.0%.
That may not be cause for celebration, but neither does it seem to be
alarming, unless one takes the view that the Fed must achieve price stability
immediately, and it does offer the prospect that the next recession may push
the inflationary momentum lower. This not-too-hot, not-too-cold economic
environment may not continue, but at the moment, there doesn't appear to be
much to be concerned about from an economic standpoint. At the individual
company level, we are starting to see some evidence of earnings shortfalls
among some leading companies. What that suggests to us is that expectations
got a little ahead of reality and the stock market has been discounting some
of those expectations -- we have been due for a consolidation of the market's
gains for some time. However, with the exception of some of the high-flying,
concept-rather-than-earnings based IPO's, we do not view the market as being
overvalued. That appraisal is based on our expectation of continued good news
on the inflation front and on the bond market settling down. Unless the
current high level of real interest rates is going to rise to the sort of
level reached in 1994, when real short-term rates rose to more than 30 basis
points (vs 230 b.p. now) before the Fed reversed course, both the economy and
the stock market can continue to advance. If the Fed decides that another
"soft landing" is needed, then it is likely that equity valuations will
adjust downward. Obviously, we cannot rule out this possibility, but we also
do not believe that such a scenario should influence long-term investment
policy. As we contemplate the potential for worldwide economic growth and
investment and its impact on the highly competitive U.S. economy, it is hard
not to be sanguine about the long-term prospects for the stock market. We
believe that our portfolio is well positioned to participate.
Sincerely,
/s/ Radcliffe Cheston
---------------------------------
Radcliffe Cheston
President
July, 1996
3
<PAGE>
<TABLE>
<CAPTION>
Comparison of $10,000 Investments in Addison Capital Shares
vs. the S&P 500 Index and the Lipper Growth & Income Fund Index
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$45,000 -------------------------------------------------------------------------------------------------------------
Average Annual Total Return
for periods ended June 30, 1996
---------------------------------
$40,000 - Since $39,148
1 Year 5 Years 9/15/86* @
---------------------------------
25.9% 14.6% 12.3%
$35,000 - --------------------------------- $34,039
$
$30,000 - $31,121
@ #
$25,000 - $
@ @ #
$ $
@
$20,000 - $ # #
@
@ $ #
$15,000 - @$ $ #
# #
@
$# @$
$10,000 - @$# #
$5,000 -
- ---------------------------------------------------------------------------------------------------------------------
9/15/86 6/30/87 6/30/88 6/30/89 6/30/90 6/30/91 6/30/92 6/30/93 6/30/94 6/30/95 6/30/96
</TABLE>
# Addison Capital Shares @ S&P 500 $ Lipper Growth & Income Fund Index
*Reflects operations from the start of business of Addison Capital Shares.
4
<PAGE>
Q 1995 witnessed an exceptionally strong equity market, but the market has
shown some signs of fatigue recently. Discuss the Fund's relative
performance over the last 12 months.
&
A For the fiscal year ended June 30, 1996, Addison Capital Shares had a total
return of 25.9%, which compares favorably to the Lipper Growth & Income Fund
Index return for the period of 22.7%, and approximates the S&P 500 Index return
of 26.0%. As the market's advance matured, there was a shift in the relative
strength from large capitalization issues towards small cap issues -- an
increase in speculative activity is common in late stages of bull markets. This
was accompanied by poorer performance among basic industry and cyclical issues,
which comprise a sizable portion of value-oriented portfolios such as the Fund.
Our overweighting in financial issues and fortuitous decisions in the technology
sector helped to offset that drag, and we are generally pleased with the Fund's
results for the period.
Q Describe the Fund's investment philosophy.
&
A The Fund employs a value-oriented, fully-invested philosophy emphasizing
stocks with P/E ratios which are below average compared to the market and their
respective economic sectors. Among those stocks identified as being attractively
valued, preference is given to those which exhibit positive earnings and price
momentum relative to the market and their economic sectors. The portfolio is
highly diversified and maintains investment exposure in all nine of the economic
sectors, with sector weighting determined by value and momentum factors relative
to the S&P 500 and the overall market. On June 30, 1996 the sector
diversification of the Fund and the S&P 500 were as follows:
Portfolio Weighting
- -------------------
(as of 6/30/96) ADDISON S&P 500
Consumer Non-Durables ... 19.5% 32.5%
Consumer Durables ....... 5.2% 3.9%
Finance ................. 18.8% 13.2%
Utilities ............... 10.1% 12.6%
Transportation .......... 3.5% 1.5%
Capital Goods ........... 5.8% 4.3%
Technology .............. 17.4% 14.6%
Materials & Services .... 10.4% 7.9%
Energy .................. 9.3% 9.5%
Portfolio Characteristics
- -------------------------
Price/Earnings Ratio .... 15.8 19.4
Price/Book Ratio ........ 3.0 4.7
5 Year Earnings Growth .. 23.9% 15.2%
Q Could you give some examples of the Fund's stock sales and purchases?
&
A
Technology was a hot sector of the stock market during much of 1995, but in the
middle of the year, semiconductor stocks such as Micron Technology came under
selling pressure. When we bought the stock in 1994, it was selling for 8 times
trailing earnings, and those earning grew rapidly, as did expectations for the
future. As the stock rose from our purchase price of about $20 to an eventual
peak near $94, we periodically sold a portion of our position, and when it began
to decline, our relative strength sell discipline prompted us to eliminate the
holding at $70. The stock has since declined below $20 again. U S Robotics was
another case of our being fortunate to have purchased a rapidly growing stock at
a low valuation (less then $8 adjusted for splits), and using our periodic
paring of that position to control risk and realize profits, followed by its
elimination from the portfolio at $84 based on a combination of deteriorating
relative strength and high valuation. We eventually realized gains from the sale
of these two stocks of $3,194,667 on a cost of $1,005,833. Most of that gain was
incurred during fiscal 1996, and comprised a major portion of the $1.88 per
share of capital gains distributed during the year.
Examples of some purchases made during the past few months are listed below.
Each of these stocks was purchased with a statistically cheap valuation and
positive earnings surprise:
5
<PAGE>
Rhone Poulenc Rorer is a major manufacturer of prescription pharmaceuticals
and over-the-counter medications (Maalox and Orudis are two of the brand name
products). The stock had a lower valuation than most of the drug group, where
P/E ratios are typically higher than the market, and also had favorable
earnings and price momentum.
Gateway 2000 is a developer, manufacturer, and direct marketer of IBM
compatible PC's. The stock sells at a discount to the market generally and to
the technology sector particularly. The direct marketing of computers to
businesses and households seems to be growing nicely and Gateway has been
capitalizing effectively on the wave of upgrading to faster Pentium-based
systems. Earnings have been growing in excess of 20%, and the company has an
enormous opportunity internationally, as overseas sales are only 7% of their
total, but the market continues to fear that PC's are a commodity and that
profit margins will inevitably erode. This stock was bought when we sold U.S.
Robotics, and so far it has been a good trade.
Citicorp fills what we saw as a need for a major international and consumer
banking operation. When we bought it, the stock was already up dramatically
from the single digit price it reached in 1991, but it continues to represent
a reasonable way to invest in the growth in consumer lending as well as
growth in emerging markets overseas. Meanwhile, the company continues to
restructure and repurchase shares.
Textron is a conglomerate that we have characterized as a technology stock
because of their aerospace, automtive, and industrial businesses, but until
recently their financial services businesses nearly equalled the others in
bottom line contribution. The company has sold 89% of its Paul Revere
insurance subsidiary for $1.2 billion in hopes of garnering a higher multiple
for the stock. We will be pleased if they are right about that, and with a
low teens earnings growth rate, we think the current multiple makes the stock
a reasonably attractive holding. The stock was purchased as we were selling
Micron Technology.
General Motors is a classic value stock -- it's a big, ugly company with lots
of reasons why its stock deserves to be cheap, but the auto industry is
changing and GM, as the world's largest auto company, is in a position to
make a lot of money if they make the right moves. It looks as though they're
just beginning, and they're still having difficulties, but the stock is cheap
and the earning are meeting or beating expectations. We think it's a decent
bet.
Q What is your outlook for the market and the economy, and how does that
influence your management of the portfolio?
&
A We hate making economic and stock market forecasts because there is a
natural tendency to expect that these short-term views should influence our
management of the portfolio. However, Addison's investment process is founded on
our philosophical aversion to anything that smacks of market timing, and we are
driven by a bottom-up approach to stock selection which looks at each stock
relative to every other stock, instead of relative to all the possible
investment alternatives. There are simply too many variables to be able to
correctly judge both when to invest and in what asset class (stocks, bonds,
cash, etc.). Addison's approach is well- defined and time-tested, and we are not
about to change our philosophy to suit short-term market moves.
We are concerned about many of the same variables which are so well
publicized: mutual fund inflows are slowing; earnings growth is slowing;
maybe inflation is heating up, or maybe is isn't; perhaps the Fed will raise
rates (we doubt it); the stock market isn't cheap, but neither is it wildly
overvalued, given the current level of interest rates and what we believe is
a likely downward bias; speculative activity has risen, but there is nothing
like the cold shower of a correction or two to dim that ardor! Essentially,
we don't see anything that strikes us as being terribly out of balance to
prompt concern about a recession or a new bear market. Unfortunately though,
such events seldom warn of their impending arrival. There will no doubt be a
hero who makes the call for this watershed event, thereby making a big name
and some money for himself, but the reality of it is that very few people are
able to profit from anticipating such changes. We'll stick to doing what we
know how to do.
6
<PAGE>
===============================================================================
ADDISON CAPITAL SHARES, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1996
===============================================================================
Number
of Value
Shares (Note A)
- ------------------------------------------------------------------------------
COMMON STOCK -- 96.0%
- ------------------------------------------------------------------------------
Aerospace -- 5.6%
Northrop Grumman Corporation . 13,413 $ 913,761
Raytheon Company ............ 18,624 961,464
Textron, Incorporated ....... 12,000 958,500
-----------
2,833,725
-----------
Automobiles & Related -- 1.8%
General Motors Corporation .. 17,000 890,375
-----------
Automotive Parts -- Equipment -- 3.3%
Echlin, Incorporated ........ 22,500 852,188
TRW, Incorporated ........... 9,000 808,875
-----------
1,661,063
-----------
Banking -- 9.2%
CitiCorp .................... 11,000 908,875
First Bank Systems, Incorporated 16,500 957,000
First Union Corporation ..... 15,750 958,782
Standard Federal Bancorporation 24,000 924,000
Zions Bancorporation ........ 12,500 909,375
-----------
4,658,032
-----------
Business Services -- 2.1%
Reynolds & Reynolds Company . 20,000 1,065,000
-----------
Capital Goods -- 5.6%
Briggs and Stratton Corporation 18,000 740,250
Harsco Corporation .......... 15,510 1,043,047
Precision Castparts Corporation 25,000 1,075,000
-----------
2,858,297
-----------
Chemicals -- 3.5%
Du Pont (E.I.) De Nemours and
Company ................... 11,000 870,375
Union Carbide Corporation ... 23,000 914,250
-----------
1,784,625
-----------
Computers --1.8%
Gateway 2000*** ............. 26,500 901,000
-----------
Computers Software -- 1.7%
Computer Associates
International, Incorporated . 12,000 855,000
-----------
Consumer Products -- 1.9%
Mattel, Incorporated ........ 32,812 939,243
-----------
Electronics -- 1.8%
Harris Corporation .......... 15,000 915,000
-----------
<PAGE>
Number
of Value
Shares (Note A)
- ------------------------------------------------------------------------------
Financial -- 3.9%
Chase Manhattan Corporation . 14,000 $ 988,750
Sunamerica, Incorporated .... 17,373 981,574
-----------
1,970,324
-----------
Food, Beverage and Tobacco -- 5.3%
American Brands, Incorporated . 18,000 816,750
IBP, Incorporated ........... 35,000 966,875
Philip Morris Companies,
Incorporated .............. 8,500 884,000
-----------
2,667,625
-----------
Healthcare Facilities -- 1.7%
Tenet Health Care Corporation . 40,000 855,000
-----------
Household Products -- 1.9%
First Brands Corporation .... 36,000 972,000
-----------
Insurance -- 3.5%
Allstate Corporation ........ 20,000 912,500
Reliastar Financial Corporation 20,000 862,500
-----------
1,775,000
-----------
International Oils -- 1.7%
Exxon Corporation ........... 10,000 868,750
-----------
Machinery -- 1.8%
Pentair, Incorporated ....... 30,000 900,000
-----------
Medical Supplies -- 1.9%
Becton Dickinson & Company .. 12,000 963,000
-----------
Metals and Mining -- 1.6%
Phelps Dodge Corporation .... 13,300 829,588
-----------
Natural Gas -- 2.0%
Panhandle Eastern Corporation . 30,000 986,250
-----------
Office Equipment -- 1.8%
Xerox Corporation ........... 17,358 928,653
-----------
Oil -- 3.5%
Amoco Corporation ........... 11,000 796,125
Royal Dutch Petroleum Company,
N.Y. ...................... 6,308 969,855
-----------
1,765,980
-----------
Oil Equipment & Services -- 1.7%
Halliburton Company ......... 16,000 888,000
-----------
Paper & Forest Products -- 1.6%
Rayonier, Incorporated ...... 22,000 836,000
-----------
7
<PAGE>
===============================================================================
ADDISON CAPITAL SHARES, INC.
SCHEDULE OF PORTFOLIO INVESTMENTS
JUNE 30, 1996
===============================================================================
Number
of Value
Shares (Note A)
- -------------------------------------------------------------------------------
Pharmaceuticals -- 2.0%
Rhone-Poulenc Rorer,
Incorporated ............. 15,000 $ 1,006,875
-------------
Rails/Trucking/Transportation -- 3.3%
Burlington Northern Sante Fe . 10,000 808,750
Norfolk Southern Corporation . 10,450 885,637
-------------
1,694,387
-------------
Real Estate -- 1.4%
Health Care Property Investors,
Incorporated ............. 21,778 735,008
-------------
Retail Merchandising - 1.9%
Sears, Roebuck and Company . 20,000 972,500
-------------
Services -- 2.0%
PHH Group, Incorporated .... 18,000 1,026,000
-------------
Steel -- 1.4%
Carpenter Technology
Corporation .............. 22,000 704,000
-------------
Textiles and Apparel -- 2.2%
Spring Industries,
Incorporated ............. 22,000 1,111,000
-------------
Utilities -- Electric -- 7.8%
DQE, Incorporated .......... 35,000 962,500
FPL Group, Incorporated .... 22,000 1,012,000
NIPSCO Industries,
Incorporated ............. 24,820 999,005
Portland General Corporation . 32,000 988,000
-------------
3,961,505
-------------
Utilities -- Natural Gas -- 1.8%
Nicor, Incorporated ........ 32,886 933,140
-------------
TOTAL COMMON STOCK
(Cost $34,152,773) ............ $48,711,945
-------------
Principal
Amount
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENTS** -- 3.9%
- -------------------------------------------------------------------------------
PNC Bank $2,010,000 at 4.50%
(Agreement dated 06/28/96, to
be repurchased at $2,010,754
on 07/01/96; collateralized by
$2,955,000 Federal Home Loan
Mortgage Corpporation Notes,
6.50%, due 10/15/08).
(Value $2,924,834 -- Cost
$2,010,000) ................ $2,010,000 2,010,000
-------------
- -------------------------------------------------------------------------------
<PAGE>
Number
of Value
Shares (Note A)
- -------------------------------------------------------------------------------
Total Investments
(Cost $36,162,773*) ........ 100.0% $50,721,945
Liabilities in excess of
other Assets ............... -0.0% (18,145)
------ -----------
Net Assets .................... 100.0% $50,703,800
===============================================================================
* Aggregate cost for federal income tax purposes was $36,162,773. The
aggregate gross unrealized appreciation (depreciation) for all securities
is as follows:
Gross Appreciation ................... $14,706,669
Gross Depreciation ................... (147,497)
----------
Net Appreciation ................... $14,559,172
==========
** It is the Fund's policy to always receive, as collateral, securities
whose value, including accrued interest, will be at least equal to 102%
of the dollar amount to be paid to the Fund under each agreement at its
maturity. The values of the securities are monitored daily. If the value
falls below 101% of the amount to be paid at maturity, additional
collateral is obtained. The Fund makes payment for such securities only
upon physical delivery of evidence of book entry transferred to the
account of its custodian.
*** Non-income producing security.
See Notes to Financial Statement.
8
<PAGE>
============================================================================
STATEMENT OF ASSETS AND LIABILITIES
============================================================================
June 30, 1996
- ----------------------------------------------------------------------------
ASSETS
Investments, at value (Cost $36,162,773) ........... $50,721,945
Cash ............................................... 2
Receivables:
Dividends ..................................... 64,395
Interest ...................................... 754
Fund shares sold .............................. 47,580
Prepaid insurance .................................. 14,538
-------------
- ----------------------------------------------------------------------------
TOTAL ASSETS ............................. 50,849,214
-------------
- ----------------------------------------------------------------------------
LIABILITIES
Payable:
Fund shares repurchased ............................ 72,734
Accrued expenses ................................... 72,680
-------------
- ----------------------------------------------------------------------------
TOTAL LIABILITIES ........................ 145,414
-------------
- ----------------------------------------------------------------------------
NET ASSETS .............................................. $50,703,800
=============
SHARES .................................................. 1,919,031
=============
============================================================================
NET ASSET VALUE PER SHARE ($50,703,800 / 1,919,031 shares) $26.42
=============
============================================================================
NET ASSETS CONSISTED OF THE FOLLOWING:
Paid-in capital .................................... $32,330,793
Undistributed net investment income ................ 146,276
Undistributed net realized gains ................... 3,667,559
Unrealized appreciation of investments ............. 14,559,172
-------------
$50,703,800
=============
============================================================================
See Notes to Financial Statements.
9
<PAGE>
============================================================================
STATEMENT OF OPERATIONS
============================================================================
For the Year Ended June 30, 1996
- ----------------------------------------------------------------------------
INVESTMENT INCOME:
Income:
Dividends ................................ $ 1,128,170
Interest ................................. 76,347
-------------
- ----------------------------------------------------------------------------
Total Income ........................ 1,204,517
-------------
- ----------------------------------------------------------------------------
Expenses:
Investment advisory fee .................. 340,192
Distribution fee ......................... 181,436
Shareholder servicing .................... 113,397
Administration fee ....................... 75,001
Transfer agent fee ....................... 49,698
Insurance ................................ 23,131
Audit .................................... 19,300
Printing ................................. 16,283
Federal and state registration fees ...... 15,760
Legal fee ................................ 15,781
Custodian fee ............................ 15,293
Directors' fee ........................... 15,000
State Taxes .............................. 5,722
Miscellaneous ............................ 4,346
-------------
- ----------------------------------------------------------------------------
Total Expenses ......................... 890,340
-------------
- ----------------------------------------------------------------------------
Net investment income ............... 314,177
-------------
- ----------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from security transactions .. 5,495,012
Change in unrealized appreciation of investments 4,333,438
-------------
- ----------------------------------------------------------------------------
Net gain on investments .................. 9,828,450
-------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS . $10,142,627
=============
============================================================================
See Notes to Financial Statements.
10
<PAGE>
============================================================================
STATEMENT OF CHANGES IN NET ASSETS
============================================================================
<TABLE>
<CAPTION>
For the Year For the Year
ended ended
June 30, 1996 June 30, 1995
--------------- -------------
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income .................................................. $ 314,177 $ 369,706
Net realized gain from security transactions ........................... 5,495,012 2,340,110
Change in unrealized appreciation of investments ....................... 4,333,438 4,180,284
----------- -----------
- ----------------------------------------------------------------------------------------------------------------
Net increase in net assets resulting from operations ................. 10,142,627 6,890,100
----------- -----------
- ----------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
Net investment income ($0.21 and $0.20 per share, respectively) ........ (361,787) (349,936)
Capital gains ($1.88 and $1.32 per share, respectively) ................ (3,269,571) (2,332,298)
----------- -----------
Total distributions ................................................... (3,631,358) (2,682,234)
----------- -----------
Capital share transactions:
Net increase (decrease) in net assets derived from capital share transactions* 5,686,785 (1,873,420)
----------- -----------
Total increase in net assets ...................................... 12,198,054 2,334,446
----------- -----------
- ----------------------------------------------------------------------------------------------------------------
NET ASSETS:
- ----------------------------------------------------------------------------------------------------------------
Beginning of period ....................................................... 38,505,746 36,171,300
----------- -----------
End of period** ........................................................... $50,703,800 $38,505,746
=========== ===========
================================================================================================================
*Capital share transactions are as follows:
Shares Value
-------------- -------------
For the year ended June 30, 1996
Shares purchased ..................................................... 237,345 $ 5,838,906
Shares reinvested .................................................... 150,801 3,491,291
Shares redeemed ...................................................... (148,869) (3,643,412)
----------- -----------
Net Increase ...................................................... 239,277 $ 5,686,785
=========== ===========
For the year ended June 30, 1995
Shares purchased .................................................... 73,638 $ 1,509,748
Shares reinvested ................................................... 133,661 2,572,854
Shares redeemed ..................................................... (296,201) (5,956,022)
----------- -----------
Net decrease ...................................................... (88,902) $(1,873,420)
=========== ===========
</TABLE>
**Undistributed net investment income $146,276 & $193,886, respectively.
See Notes to Financial Statements.
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
A. Addison Capital Shares, Inc. (the "Fund") was organized as a Maryland
corporation on June 4, 1986. The Fund is registered under the Investment
Company Act of 1940, as amended, as a diversified, open-end management
investment company. Significant accounting policies relating to the Fund are
as follows:
Security Valuation -- Portfolio securities which are traded on a national
securities exchange or included in the NASDAQ National Market System are
valued at the last sales price. Securities traded on an exchange or NASDAQ
for which there has been no sale on that day and other over-the-counter
securities are valued at the mean between the closing bid and asked prices.
Debt instruments having a maturity of 60 days or less are valued at amortized
cost.
Securities Transactions and Investment Income -- Securities transactions are
accounted for on trade date. The cost of investments sold is determined by
use of the specific identification method for both financial reporting and
income tax purposes. Interest income is recorded on an accrual basis;
dividend income is recorded on the ex-dividend date.
Dividends and Distributions to Shareholders -- Substantially all of the
Fund's net investment income and net realized capital gains, if any, will be
distributed to shareholders on an annual basis.
Federal Income Taxes -- No provision is made for Federal income taxes as it
is the Fund's intention to qualify as a regulated investment company and to
make the requisite distributions to its shareholders which will be sufficient
to relieve it from all or substantially all Federal income taxes.
B. Addison Capital Management Company (Addison Capital), a wholly-owned
subsidiary of Janney Montgomery Scott Inc. (Janney), serves as the Fund's
investment adviser. For its services as adviser, Addison Capital receives a
fee, computed daily and paid monthly, at an annual rate of .75% of the Fund's
first $100 million in average net assets, .50% of the next $150 million in
average net assets, and .25% of average net assets in excess of $250 million.
PFPC, Inc., a wholly-owned, indirect subsidiary of PNC Bank, serves as the
Fund's administrative and accounting
<PAGE>
agent. As compensation for these services, PFPC receives a fee computed daily
and paid monthly, at an annual rate of .10% of the Fund's average net assets or
$100,000, whichever is greater, PFPC agreed to reduce its minimum annual fee to
$75,000 for the fiscal year ending June 30, 1996.
PNC Bank, acts as the Fund's custodian. PFPC, Inc. also acts as the Fund's
transfer agent and dividend disbursing agent.
Pursuant to an Underwriting Agreement with the Fund, Janney, a wholly-owned
subsidiary of Independence Square Properties, Inc., which is in turn wholly
owned by Penn Mutual Life Insurance Company, serves as the Fund's
distributor. As compensation for these services, Janney receives a fee from
the Fund, computed daily and paid monthly, at an annual rate of .40% of the
Fund's average net assets. In addition, Janney received no brokerage
commissions for the fiscal year ended June 30, 1996.
Under a Services Agreement between the Fund and Janney, Janney will provide
office space to the Fund, will supervise performance by PNC Bank and PFPC, Inc.,
of their respective duties, and will respond to shareholders' inquiries for an
annual fee equal to .25% of the Fund's average daily net assets.
If expenses borne by the Fund in any fiscal year exceed expense limitations
imposed by applicable state securities regulations, Janney and Addison Capital
may reduce their fees on a pro-rata basis to the extent required by such
regulations. No such reduction was required for the year ended June 30, 1996.
Certain officers and directors of the Fund are officers and/or directors of
Addison Capital and Janney. The law firm of Morgan, Lewis & Bockius, a member of
which is also an officer of the Fund, received $17,666 from the Fund for legal
services rendered during the year.
C. Purchases and sales of securities, other than short-term obligations,
aggregated $18,200,880 and $17,055,278, respectively, for the year ended June
30, 1996.
D. As of July 3, 1995 Fund shares are sold at their net asset value. As of
that date all sales charges are eliminated for all Fund Share purchases.
12
<PAGE>
===============================================================================
FINANCIAL HIGHLIGHTS
===============================================================================
The Table below sets forth financial data for a share of capital stock
outstanding throughout each period presented.
<TABLE>
<CAPTION>
Years ended June 30,
----------------------------------------------------------
1996 1995 1994 1993 1992
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ............. $ 22.92 $ 20.45 $ 22.69 $ 19.64 $ 18.90
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ........................ $ .17 $ .22 $ .21 $ .24 $ .26
Net gains on securities (both realized
and unrealized) ........................... 5.42 3.77 (.76) 3.72 1.57
------- ------- ------- ------- -------
Total from investment operations ............ 5.59 3.99 (.55) 3.96 1.83
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income.......... (.21) (.20) (.23) (.24) (.27)
Distributions from capital gains ............. (1.88) (1.32) (1.46) (.67) (.82)
------- ------- ------- ------- -------
Total distributions ......................... (2.09) (1.52) (1.69) (.91) (1.09)
------- ------- ------- ------- -------
Net asset value, end of period ................. $ 26.42 $ 22.92 $ 20.45 $ 22.69 $ 19.64
======= ======= ======= ======= =======
Total Return (1) ............................... 25.92% 21.11% (2.73)% 20.98% 9.93%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's).......... $50,704 $38,506 $36,171 $37,621 $31,243
Ratio of expenses to average net assets....... 1.96% 2.06% 2.06% 2.13% 2.12%
Ratio of net investment income to
average net assets ........................ .69% 1.03% 1.00% 1.14% 1.32%
Portfolio Turnover ........................... 38.97% 42.82% 43.26% 30.01% 57.34%
</TABLE>
- -----------------------------------------------------------------------------
(1) Exclusive of deduction of sales charge on investment.
This report has been prepared for Shareholders and may be distributed to others
only preceded or accompanied by a current prospectus.
- -----------------------------------------------------------------------------
See Notes to Financial Statements.
13
<PAGE>
===============================================================================
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
===============================================================================
To the Shareholders and Board of Directors
Addison Capital Shares, Inc.
We have audited the accompanying statement of assets and liabilities of
Addison Capital Shares, Inc., including the schedule of portfolio
investments, as of June 30, 1996, 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 the financial highlights for each of
the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the company'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
securities owned as of June 30, 1996 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
Addison Capital Shares, Inc. as of June 30, 1996, 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 the financial highlights for each
of the five years in the period then ended, in conformity with generally
acepted accounting principles.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
July 18, 1996
14
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