<PAGE>
- --------------------------------------------------------------------------------
Chairman's Letter
- --------------------------------------------------------------------------------
Dear Fellow Shareholders:
The year ended June 30, 1997 was another excellent year for Addison
Capital Shares. The total return on the Fund for this period was 32.2%. The
Fund paid dividends of $.1489 a share and made capital gain distributions of
$3.2383.
These results are certainly gratifying, however we must sound a
cautionary note. Gains of recent magnitude cannot realistically continue for an
extended period. There will come a time when share prices decline. Possibly for
an extended period. We have seen this type of environment before and therefore
recognize the importance of maintaining our discipline of value investing. We
remain long term bullish and encourage investors to stay focused on their
investment objectives.
We appreciate your support and we are confident that our focus on value
will continue to be successful in dealing with the challenges we face in the
year ahead.
Sincerely,
[GRAPHIC OMITTED]
Rudolph C. Sander
Chairman
Dated: July 31, 1997
1
<PAGE>
- --------------------------------------------------------------------------------
President's Letter
- --------------------------------------------------------------------------------
Dear Fellow Shareholders:
A year ago, the stock market was in the midst of a sharp but brief
correction of a speculative boom in high technology issues, and this year,
stock prices have surged after a quick 10% setback (as measured by the Dow
Industrials) in March and half of April. The worry in the spring was that the
economy was going to get another dose of the Fed's medicine to cool its
impending inflationary fever, notwithstanding two consecutive months of
deflationary producer price reports. As of this writing, we've had six months
in a row of wholesale price declines, and general price inflation scarcely
seems worth worrying about. Indeed, the oft-cited Goldilocks economic
environment is still with us and nearly everything seems to be "just right."
Even Fed Chairman Greenspan recently appeared to renounce his "irrational
exuberance" stance on the stock market and the economy. In such an environment,
with stable or lower interest rates and inflation in check, and corporate
earnings continuing to exceed expectations, it is hardly surprising that stock
prices are up. Nevertheless, many stocks' valuations are at levels that don't
allow a lot of leeway for disappointments. Large-cap multinational consumer
growth companies have been among the market leaders in the current advance and
the case for their continued growth is strong. Maybe it will sound like a case
of sour grapes, since we don't own Coke and P&G and their ilk, but we find
ourselves somewhat wary of the price earnings multiples that some of these
stocks are carrying. Our investment disciplines require that we be content with
owning multinational financial, capital goods, energy, and industrial companies
at much lower valuations, yet in many cases with comparable growth rates. Over
the last year, our diversified value approach has slightly trailed the S&P 500
and the Dow with their large-cap growth emphasis. On the other hand, we are
keeping pace with the S&P/BARRA Value Index and with our Growth & Income Fund
peers, and we hope you are comfortable as we are with the results of our value
philosophy when consistently applied over the long term. The recent total
return comparison is as follows:
Total returns for year ended June 30, 1997
Addison Capital Shares 32.2%
S&P 500 Index 34.7%
S&P/BARRA Value Index 30.9%
Lipper G&I Funds Index 28.1%
For the quarter just ended, the return on the S&P 500 was 17.5% and the
return for the first six months was 20.6% -- both exceed the historical average
return for a full year. Only time will tell, but our previous expectation for
stock returns in 1997 may be too modest -- roughly in line with the long-term
average of about 11%. That kind of final result for the year is still a
possibility, but it would require another correction of at least the magnitude
of the March-April decline between now and year-end. At some point, the bears
will be right and the bull market will end, but for now, the case for a
continuation of the bull market is being buttressed by both fundamental and
technical factors. Yes, it is true that earnings growth has slowed from the
unsustainable 22% pace of 1995 to something around 10% over the last 12 months,
but there isn't much evidence to suggest that earnings growth is slowing
further or that companies are relaxing their vigilance about costs. Instead,
what seems to have happened is that analysts have gradually lowered their
earnings estimates, while overall actual earnings reports have continued to
exceed those estimates.
Indeed, the major sources of investor worry remain that stock market
valuations are extended due to the rapidity of the market's rise, and that the
Federal Reserve could decide to strike preemptively or reactively to curb
expected or actual evidence of inflation pressures. We don't dispute that
stocks are valued outside of the historical norms, because the valuations are
clearly above average, however until there is a shift in the economic
environment or something that percipitates a change in investor sentiment, the
market can remain fully valued for a long time. As for the possibility of the
Fed raising interest rates to slow economic activity or to cool investors'
appetite for stocks, we can only observe that the current circumstances make
that
2
<PAGE>
highly improbable -- interest rates are already high relative to any of the
usual measures of inflation. Besides, the difficulty with taking a bearish
investment posture based on historic valuation levels is that one must
therefore be prepared to earn no more than historic rates of return in an
environment where extraordinary returns have been available to equity
investors. The obvious bearish response is that the inevitable market decline
will cause the recent high returns to regress to their historic mean. This
notion carries with it the presumption that the bearish investor has the vision
and the discipline to make asset allocation shifts at correct points in the
market cycle. Should he fail to make those shifts correctly, he may wind up
with a money market rate of return -- or worse. It is clear to us that
long-term investors ought not to attempt to alter their portfolios in
anticipation of a correction.
Could it be "different this time?" Because human nature never really
changes, we are inclined to be skeptical that the market and its participants
will act substantially differently at the critical junctures. Aside from
valuation, which may be attributed to factors such as lower inflation and
higher profitability, however, there are none of the usual precursors to a
substantial market decline. There may be a growing suspension of disbelief or a
naive confidence in the stock market, but we see little or no evidence of a
speculative frenzy. If a bull market "climbs a wall of worry," perhaps the
greatest concern in the current environment is that there are so few things to
worry about! As Robert Farrell of Merrill Lynch, put it, referring to the
current environment as 'The Virtuous Circle,' "rarely has there been such
confluence of favorable factors supporting a continuing bull market." He goes
on to say, "rising stock prices have become the engine that drives everything
from the economy to corporate earnings to employee and management motivation to
investor enthusiasm . . . but we should be on the alert for anything that
breaks the favorable linkages." Such a break could turn his 'Virtuous Circle'
into a vicious circle. We have always found Farrell to be insightful and
thoughtprovoking, and we agree that we want to be alert for changes in the
investment climate, but at the moment, we believe that the best course remains
'steady as she goes.'
Sincerely,
[GRAPHIC OMITTED]
Radcliffe Cheston
President
July, 1997
3
<PAGE>
[LINE GRAPH]
[Showing plot points for $10,000 Investments in Addison Capital Shares vs. the
S&P 500 Index and the Lipper Growth & Income Fund Index.]
Addison Capital Shares S&P 500 Lipper
9/15/86 $10,000 $10,000 $10,000
1987 $12,714 $13,449 $12,721
1988 $11,614 $12,532 $12,398
1989 $13,399 $15,082 $14,587
1990 $14,966 $17,578 $15,915
1991 $15,774 $18,901 $16,860
1992 $17,341 $21,427 $19,256
1993 $20,978 $24,351 $22,464
1994 $20,407 $24,694 $23,390
1995 $24,715 $31,117 $27,872
1996 $31,121 $39,203 $34,039
1997 $41,142 $52,805 $43,594
ADDISON CAPITAL SHARES
Average Annual Returns for period ended June 30, 1997
1 Year - 32.2% 5 Years - 18.9% Since 9/15/86 - 14.0%
4
<PAGE>
CAPITAL SHARES
GRAPH
Addison Capital Shares Portfolio Sector Weights
- ---------------------------
Utilities 10%
- ---------------------------
Transportation 4%
- ---------------------------
Cap. Goods 6%
- ---------------------------
Technology 17%
- ---------------------------
Materials & Services 10%
- ---------------------------
Energy 9%
- ---------------------------
Consumer Non-Durables 20%
- ---------------------------
Consumer Durables 5%
- ---------------------------
Finance 19%
- ---------------------------
5
<PAGE>
Q. During the first half of 1997, we have enjoyed an exceptionally strong
equity market on top of a better than average 1996. Discuss the Fund's
relative performance over the last 12 months.
&
A. For the fiscal year ended June 30, 1997, Addison Capital Shares had a
total return of 32.2%, which compares favorably to the Lipper Growth & Income
Fund Index return for the period of 28.1%, but trails the S&P 500 Index return
of 34.7%. The S&P 500 return was substantially influenced by the returns of the
largest companies, such as GE, Procter & Gamble, Coca Cola, Intel and so forth.
By contrast, the Fund has nearly equal weight devoted to every stock in the
portfolio, with the result that in a market where larger capitalization issues
are the stock performance leaders, Addison tends to have a hard time keeping
up with the return on the S&P 500. The Fund's relative performance was further
hindered by its value stock orientation in a market that was characteristically
dominated by growth stocks of the sort mentioned above.
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 that 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,
1997 the sector diversification of the Fund and the S&P 500 were as follows:
Portfolio Weighting
- ------------------------------
ADDISON S&P 500
--------- --------
Consumer Non-Durables ...... 19.5% 28.0%
Consumer Durables ......... 5.2% 4.6%
Finance ..................... 18.8% 14.2%
Utilities .................. 10.1% 9.0%
Transportation ............ 3.5% 2.2%
Capital Goods ............... 5.8% 4.6%
Technology .................. 17.4% 15.0%
Materials & Services ...... 10.4% 14.4%
Energy ..................... 9.3% 8.0%
Portfolio Characteristics
- -----------------------------
Price/Earnings Ratio ...... 17.8x 22.1x
Price/Book Ratio ............ 3.2x 5.2x
5 Year Earnings Growth
Rate ..................... 18.4% 17.0%
Portfolio Yield (before
expenses) ............... 2.4% 1.7%
Q. Could you give some examples of the Fund's recent stock sales and
purchases?
&
A. Three of the portfolio sales during the past year were the result of
merger or takeover activity. These accounted for a substantial portion of the
larger than usual capital gains distribution recently declared. Among these,
Standard Federal Bancorp was taken over for a cash price of $59 per share, and
PHH Corp. was merged into HFS Inc. and we received HFS stock at a substantial
premium over our cost. HFS was then sold because, unlike PHH, it failed to meet
our valuation criteria and the stock had been quite volatile after declining
substantially from higher prices. A more typical sale was Echlin Inc., which
had reported a couple of quarters of disappointing earnings, and we decided
that our exposure to auto and truck parts was too heavy, with General Motors
and TRW, so the stock was eliminated.
Some purchases made during the past several months are described below. Each of
these stocks was purchased with a statistically cheap valuation and positive
earnings surprise:
The purchase of Ethan Allen Interiors, a manufacturer and retailer of home
furnishings, was funded by our sale
6
<PAGE>
of Echlin. The stock had already performed well, but based on its valuation and
fundamental outlook, we felt it was attractive. We have been rewarded so far.
Standard Federal was replaced by RCSB Financial, a thrift holding company based
in Rochester, NY. Our choice turned out to be fortuitous, as the industry
consolidation trend led RCSB to be chosen as a merger partner for Charter One
Financial, and our unrealized gain is about 50% in less than two months.
Among technology issues, Compaq Computer stood out as being relatively
inexpensive, and we decided to increase our PC exposure beyond our existing
holding of Gateway 2000. The industry is likely to continue to grow at about a
20% rate, yet there is a lot of skepticism about profitability. We think Compaq
will remain the top PC maker and do well.
Q. What is your outlook for the market and the economy, and how does that
influence your management of the portfolio?
&
A. We are reluctant to make 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. 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 disciplined and time-tested, and we
are not about to change our philosophy to suit short-term market moves.
We are concerned about some of the same variables as at this time last year: at
the moment, inflation appears to be dormant or dead, but what if mutual fund
inflows slow, or earnings growth slows, or the Fed raises rates? The stock
market's valuation is undeniably high, but does the economic environment
justify it? Speculative activity heats up occasionally, but periodic
corrections seem to restore the equilibrium. Essentially, we don't see anything
that strikes us as being sufficiently out of balance to prompt concern about a
recession or a bear market. Unfortunately though, such events seldom warn of
their impending arrival. In fact, we suspect that the culprit responsible for a
market decline of more than 10% is likely to be some exogenous factor. As we've
said on numerous occasions, 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 is that very few people are able to profit from anticipating
such changes. We'll stick to doing what we know how to do and let others extol
the wonders of their crystal balls.
7
<PAGE>
- --------------------------------------------------------------------------------
ADDISON CAPITAL SHARES, INC.
Schedule of Portfolio Investments
June 30, 1997
- --------------------------------------------------------------------------------
Number
of Value
Shares (Note A)
-------- -----------
COMMON STOCK -- 95.6%
- ----------------------------------------------------------------------
Aerospace -- 3.8%
Northrop Grumman Corporation ......... 13,413 $1,177,829
Textron, Incorporated ............... 20,000 1,327,500
-----------
2,505,329
-----------
Automobiles & Related -- 1.4%
General Motors Corporation ............ 17,000 946,688
-----------
Automotive Parts -- 1.5%
TRW, Incorporated ..................... 18,000 1,022,625
-----------
Banking -- 8.4%
Bank of Boston Corporation ............ 18,000 1,297,125
Chase Manhattan Corporation ......... 14,000 1,358,875
First Union Corporation ............... 15,750 1,456,875
Zions Bancorporation .................. 40,000 1,505,000
-----------
5,617,875
-----------
Business Services -- 1.6%
Bowne and Company, Incorporated . 30,000 1,046,250
-----------
Capital Goods -- 5.9%
Harsco Corporation .................. 31,020 1,256,310
Ingersoll-Rand Company ............... 24,000 1,482,000
Precision Castparts Corporation ...... 20,000 1,192,500
-----------
3,930,810
-----------
Chemicals -- 3.7%
Du Pont (E.I.) De Nemours and
Company ........................... 22,000 1,383,250
Union Carbide Corporation ............ 23,000 1,082,438
-----------
2,465,688
-----------
Computers -- 1.8%
Gateway 2000*** ..................... 37,000 1,200,187
-----------
Computer Equipment -- 1.3%
Seagate Technology*** ............... 24,000 844,500
-----------
Consumer Products -- 2.0%
Fortune Brands Incorporated ......... 35,000 1,305,937
-----------
Electronics -- 1.9%
Harris Corporation .................. 15,000 1,260,000
-----------
Financial -- 2.0%
Sunamerica, Incorporated ............ 27,746 1,352,618
-----------
<PAGE>
Number
of Value
Shares (Note A)
-------- -----------
Food, Beverage and Tobacco -- 2.2%
Philip Morris Companies,
Incorporated ..................... 33,000 $1,464,375
-----------
Healthcare Facilities -- 2.0%
Tenet Health Care Corporation*** ...... 44,000 1,300,750
-----------
Home Furnishing/Housewares -- 2.5%
Ethan Allen Interiors, Incorporated ... 29,000 1,653,000
-----------
Insurance -- 4.4%
Allstate Corporation .................. 20,000 1,460,000
Reliastar Financial Corporation ...... 20,000 1,462,500
-----------
2,922,500
-----------
International Oils -- 4.2%
Exxon Corporation ..................... 24,000 1,476,000
Royal Dutch Petroleum Company ......... 25,232 1,371,990
-----------
2,847,990
-----------
Investments -- 2.3%
RSCB Financial, Incorporated ......... 32,000 1,532,000
-----------
Machinery -- 1.5%
Pentair, Incorporated ............... 30,000 986,250
-----------
Medical Supplies -- 1.8%
Becton Dickinson & Company ............ 24,000 1,215,000
-----------
Metals and Mining -- 1.7%
Phelps Dodge Corporation ............ 13,300 1,132,994
-----------
Office Equipment -- 4.1%
Compaq Computer Corporation*** ...... 14,000 1,389,500
Xerox Corporation ..................... 17,358 1,369,112
-----------
2,758,612
-----------
Oil -- 1.8%
Amoco Corporation ..................... 14,000 1,217,125
-----------
Oil Equipment & Services -- 1.9%
Halliburton Company .................. 16,000 1,268,000
-----------
Paper & Forest Products -- 1.4%
Rayonier, Incorporated ............... 22,000 925,375
-----------
Pharmaceuticals -- 2.0%
Rhone-Poulenc Rorer, Incorporated ... 15,000 1,363,125
-----------
Rails/Trucking/Transportation -- 2.9%
Burlington Northern Sante Fe ......... 10,000 898,750
Norfolk Southern Corporation ......... 10,450 1,052,838
-----------
1,951,588
-----------
8
<PAGE>
- --------------------------------------------------------------------------------
ADDISON CAPITAL SHARES, INC.
Schedule of Portfolio Investments
June 30, 1997
- --------------------------------------------------------------------------------
Number
of Value
Shares (Note A)
--------------- -------------
Real Estate -- 2.0%
Health Care Property Investors,
Incorporated .................. 37,778 $ 1,331,674
-------------
Restaurants -- 1.9%
Wendy's International,
Incorporated .................. 48,000 1,245,000
-------------
Retail Merchandising -- 1.6%
Sears, Roebuck and Company ......... 20,000 1,075,000
-------------
Retail Store -- 3.9%
Ross Stores, Incorporated ......... 40,000 1,307,500
VF Corporation ..................... 15,000 1,271,250
-------------
2,578,750
-------------
Steel -- 2.2%
Carpenter Technology Corporation ... 32,000 1,464,000
-------------
Technology -- 1.8%
Comdisco, Incorporated ............ 45,000 1,170,000
-------------
Tobacco -- 1.6%
RJR Nabisco Holdings Corporation ... 33,000 1,089,000
-------------
Utilities -- Electric -- 6.8%
DQE, Incorporated .................. 35,000 988,750
Duke Power Company ............... 31,332 1,501,978
FPL Group, Incorporated ............ 22,000 1,013,375
NIPSCO Industries, Incorporated ... 24,820 1,025,376
-------------
4,529,479
-------------
Utilities -- Natural Gas -- 1.8%
Nicor, Incorporated ............... 32,886 1,179,785
-------------
TOTAL COMMON STOCK
(Cost $39,866,883).................. $ 63,699,879
-------------
<PAGE>
Value
Principal
REPURCHASE AGREEMENTS** -- 4.1% Amount (Note A)
- ---------------------------------------- --------------- -------------
PNC Bank $2,737,000 at 4.75%
(Agreement dated 06/30/97, to
be repurchased at $2,737,361
on 07/01/97; collateralized by
$2,860,000 Federal Home Loan
Mortgage Corporation Notes, 6.00%,
due 11/15/08).
(Value $2,813,009 -- Cost
$2,737,000) ........................ $ 2,737,000 $ 2,737,000
-------------
TOTAL INVESTMENTS
(Cost $42,603,883*) ............... 99.7% 66,436,879
Other Assets in excess of
Liabilities ........................ 0.3% 172,573
----------- -------------
Net Assets ........................... 100.0% $ 66,609,452
=========== =============
* Aggregate cost for federal income tax purposes was $42,603,883. The
aggregate gross unrealized appreciation (depreciation) for all securities
is as follows:
Gross Appreciation ...... $24,069,936
Gross Depreciation ...... (236,940)
-----------
Net Appreciation ...... $23,832,996
===========
** 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 Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
June 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost$42,603,883) ..................... $66,436,879
Cash ......................................................... 342
Receivables:
Dividends ................................................... 74,227
Interest ................................................... 361
Fund shares sold .......................................... 212,084
Prepaid expense ............................................. 14,518
------------
TOTAL ASSETS .......................................... 66,738,411
------------
LIABILITIES:
Payable:
Fund shares repurchased .................................... 38,124
Accrued expenses .......................................... 90,835
------------
TOTAL LIABILITIES ....................................... 128,959
------------
NET ASSETS ................................................... $66,609,452
============
SHARES ......................................................... 2,112,426
============
NET ASSET VALUE PER SHARE ($66,609,452 / 2,112,426 shares) ...... $ 31.53
============
NET ASSETS CONSISTED OF THE FOLLOWING:
Paid-in capital ............................................. $36,996,785
Undistributed net investment income ........................ 160,541
Undistributed net realized gains ........................... 5,619,130
Unrealized appreciation on investments ..................... 23,832,996
------------
$66,609,452
============
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations
- --------------------------------------------------------------------------------
For the Year Ended June 30, 1997
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Income:
Dividends ............................................. $ 1,273,705
Interest ............................................. 84,389
-----------
Total Income ....................................... 1,358,094
-----------
Expenses:
Investment advisory fee .............................. 430,263
Distribution fee ....................................... 229,473
Shareholder servicing ................................. 143,421
Administration fee .................................... 75,000
Transfer agent fee .................................... 51,472
Insurance ............................................. 23,259
Federal and state registration fees .................. 20,867
Audit ................................................ 18,500
Printing ............................................. 17,126
Custodian fee ....................................... 16,993
Directors' fee ....................................... 13,810
Legal fee ............................................. 9,139
Miscellaneous .......................................... 938
State tax refund ....................................... (3,297)
-----------
Total Expenses .................................... 1,046,964
-----------
Net investment income .............................. 311,130
-----------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain from security transactions ............ 6,825,229
Change in unrealized appreciation of investments ...... 9,273,824
-----------
Net gain on investments .............................. 16,099,053
-----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ...... $16,410,183
===========
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
- --------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year For the Year
ended ended
June 30, 1997 June 30, 1996
--------------- --------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income ................................................ $ 311,130 $ 314,177
Net realized gain from security transactions ........................ 6,825,229 5,495,012
Change in unrealized appreciation of investments ..................... 9,273,824 4,333,438
------------ ------------
Net increase in net assets resulting from operations ............... 16,410,183 10,142,627
------------ ------------
Distributions to shareholders:
Net investment income ($0.15 and $0.21 per share, respectively) ...... (296,865) (361,787)
Capital gains ($2.49 and $1.88 per share, respectively) ............... (4,873,658) (3,269,571)
------------ ------------
Total distributions ................................................ (5,170,523) (3,631,358)
------------ ------------
Capital share transactions:
Net increase in net assets derived from capital share transactions* 4,665,992 5,686,785
------------ ------------
Total increase in net assets ....................................... 15,905,652 12,198,054
------------ ------------
NET ASSETS:
Beginning of period ................................................... 50,703,800 38,505,746
------------ ------------
End of period** ...................................................... $ 66,609,452 $50,703,800
============ ============
*Capital share transactions are as follows:
Shares Value
------------ ------------
For the year ended June 30, 1997
Shares purchased ................................................... 239,811 $ 6,477,547
Shares reinvested ................................................... 199,406 4,981,584
Shares redeemed ...................................................... (245,822) (6,793,139)
------------ ------------
Net Increase ...................................................... 193,395 $ 4,665,992
============ ============
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
============ ============
</TABLE>
**Undistributed net investment income of $160,541 and $146,276, respectively.
See Notes to Financial Statements.
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,
-------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ...... $ 26.42 $ 22.92 $ 20.45 $ 22.69 $ 19.64
----------- -------- -------- ----------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income .................. $ 0.15 $ 0.17 $ 0.22 $ 0.21 $ 0.24
Net gains on securities (both
realized and unrealized) ............ 7.60 5.42 3.77 (0.76) 3.72
----------- -------- -------- ----------- --------
Total from investment
operations ........................... 7.75 5.59 3.99 (0.55) 3.96
----------- -------- -------- ----------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income .............................. (0.15) (0.21) (0.20) (0.23) (0.24)
Distributions from capital gains ...... (2.49) (1.88) (1.32) (1.46) (0.67)
----------- -------- -------- ----------- --------
Total distributions ..................... (2.64) (2.09) (1.52) (1.69) (0.91)
----------- -------- -------- ----------- --------
Net asset value, end of year ............ $ 31.53 $ 26.42 $ 22.92 $ 20.45 $ 22.69
=========== ======== ======== =========== ========
Total Return (1) ........................ 32.20% 25.92% 21.11% (2.73)% 20.98%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in 000's) . $ 57,368 $ 50,704 $ 38,506 $ 36,171 $ 37,621
Ratio of expenses to average assets . 1.82%* 1.96% 2.06% 2.06% 2.13%
Ratio of net investment income to
average net assets .................. 0.54% 0.69% 1.03% 1.00% 1.14%
Portfolio Turnover ..................... 29.48% 38.97% 42.82% 43.26% 30.01%
Average Commission Rate Per
Share (2) .............................. $ 0.0673
</TABLE>
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* Annualized
(1) Exclusive of deduction of sales charge on investment.
(2) For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged.
This report has been prepared for Shareholders and may be distributed to others
only preceded or accompanied by a current prospectus.
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See Notes to Financial Statements.
13
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Notes to Financial Statements
June 30, 1997
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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.
The Fund's investment objective is to seek to achieve long term capital
appreciation. The Fund invests principally in those equity securities which the
Fund's Adviser believes are undervalued and offer above-average potential for
capital appreciation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reported period. Actual results could differ from those estimates.
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.
<PAGE>
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 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,
1997.
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 brokerage commissions for the
fiscal year ended June 30, 1997 of $660.
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, 1997.
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 $11,828 from the Fund for
legal services rendered during the year.
C. Purchases and sales of securities, other than short-term obligations,
aggregated $16,388,671 and $17,499,791, respectively, for the year ended June
30, 1997.
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.
14
<PAGE>
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Report of Independent Certified Public Accountants
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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, 1997, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended and 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, 1997 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, 1997, the results of its operations
for the year then ended, the changes in its net assets for each of the two
years in the period then ended and the financial highlights for each of the
five years in the period then ended, in conformity with generally accepted
accounting principles.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
July 18, 1997
15
<PAGE>
Directors & Officers
Rudolph C. Sander
Chairman of the Board
Radcliffe Cheston
President & Chief Executive Officer
Margaret M. Healy
Director
Charles E. Mather, III
Director
William R. Dimeling
Director
James Wolitarsky [ADDISON LOGO]
Treasurer, Chief Accounting Officer
& Chief Financial Officer
James V. Kelly
Vice President
Michael R. Patitucci
Vice President
Charles J. Sullivan
Vice President
James W. Jennings
Secretary
Investment Adviser
ADDISON CAPITAL MANAGEMENT CO.
1608 Walnut Street
Philadelphia, PA 19103
Distributor
JANNEY MONTGOMERY SCOTT INC. [JANNEY MONTGOMERY SCOTT LOGO]
1801 Market Street
Philadelphia, PA 19103
Administrator
PFPC, INC.
103 Bellevue Parkway
Wilmington, DE 19809
Annual Report
Transfer Agent to Shareholders
PFPC, INC. June 30, 1997
103 Bellevue Parkway
Wilmington, DE 19809
