<PAGE>
- --------------------------------------------------------------------------------
Chairman's Letter
- --------------------------------------------------------------------------------
August 9, 1999
Dear Fellow Shareholders:
As all but the most casual market observers know, the stock market over
the past year or two has been led by a relative handful of companies
characterized by high expected growth rates. Stocks characterized by the sorts
of measures used by value investors (low price/Earnings ratios, low price/Book
ratios, etc.) have been generally treated with suspicion or disdain.
We must ask ourselves, are stocks and their P/Es already reflecting an
ideal inflation and interest rate environment. If so, a return to more normal
P/Es may lie ahead, as ideal situations have a tendency to deteriorate. In that
sort of environment, doesn't it make sense, after an extraordinary period of
growth based largely on P/E multiple expansion, to invest in stocks with below
average P/E ratios, particularly if the stocks have better-than-average earnings
growth rates?
Addison Capital has a long history of successful value investing and
our portfolios are well positioned to benefit from a renewal of interest in some
less appreciated stocks. Our portfolios have average P/E and Price/Book Value
ratios that are about 60% of the same measures for the S&P 500. Yet our
portfolios also have earnings growth and profitability measures that are
comparable to or better than the average for the S&P 500.
We appreciate your continued confidence in our commitment to value and
believe this approach will be successful in dealing with the challenges in the
year ahead.
Sincerely,
/s/ Rudolph C. Sander
-----------------------------------
Rudolph C. Sander
<PAGE>
- --------------------------------------------------------------------------------
President's Letter
- --------------------------------------------------------------------------------
Dear Fellow Shareholders:
The fiscal year ended June 30 was a volatile period for equity
investors. The headline news was the robust returns experienced by the "Nifty
Fifty" and by high tech, Internet and telecommunications issues, but there have
been some dramatic changes in market leadership during the last few months.
Indeed, as the economy's remarkable strength has persisted, concern has grown
that such strong growth will inevitably lead to an upturn in inflation. Whether
the bond market reflected that concern in raising yields or merely anticipated
action by the Federal Reserve to raise rates may not matter, but the specter of
inflation suggested a return of "pricing power" for basic industry, and in
April, basic industry stocks took off. In a period of about three weeks many of
these industrial and commodity cyclical issues rose as much as 50% and small and
mid-cap issues also came to life. Energy stocks had already been strong,
beginning in the middle of February as the price of crude oil apparently began
to respond to OPEC production cutbacks. At the same time, the prior leadership,
the "Nifty Fifty" began to act as though their high valuations were suddenly
suspect. The market's leadership gradually shifted back to the old favorites in
June. Nevertheless, we believe that it is likely that the extraordinary rotation
of leadership that occurred late in the first quarter and early in the second
quarter heralds the long awaited broadening of the market that we referred to in
our Semi-Annual Report.
Earnings forecasts for the S&P 500, which had been revised downward
regularly last year, seem to be on a steadily upward course and two-thirds of
companies have reported earnings better than analysts' estimates for the recent
quarter. It appears that overseas economies are firming, and this has tended to
reinforce the expectation that commodity prices are bound to rise and further
interest rate hikes are in the offing. Thus far, however, outside of selected
commodities such as oil, which has risen substantially, most industrial
materials prices appear to have only stabilized from previous declines. On that
basis, it is a little early to say that there is price inflation on the way. The
employment picture
<PAGE>
and hourly earnings are another area of concern, as employment growth has been
so robust that higher wages are inevitable. If the last couple of years' growth
in productivity starts to erode, the higher wages will start to have an impact
on costs in the overall economy. Growth by itself is obviously not inflationary,
but some of its components can get out of balance. Alan Greenspan and the Fed
Governors must be given some credit for their "management" through the current
expansion. We can be reasonably certain that any inflation signs will trigger
action by the Fed. What that will mean for stocks is less certain, although on a
relative basis, history suggests better returns for value stocks than for growth
stocks in periods of higher interest rates.
Whether on an absolute or a relative basis, our performance over the
past fiscal year was undeniably disappointing. An honest self-appraisal reveals
these mistakes in our decision making:
1) Poor timing of sales and purchases in a year with sizeable price
volatility. We have begun to make more use of a variety of technical
indicators to aid in selecting entry and exit points more
effectively.
2) We failed to be as decisive in eliminating stocks where earnings
fell short of expectations as we should have been. The market
reaction to earnings disappointments has been swift and brutal,
knocking prices down 20% and more in a day or two. We have to pay
more attention to the direction of estimate revisions.
3) Incorrect sector weights. Our portfolio wasn't sufficiently
concentrated in industrial and commodity cyclical issues when the
market turned. Our cyclical stocks were primarily consumer
cyclicals. We had a large bet in financial issues, but not enough in
the money center banks and brokers.
4) We owned too many stocks that fell into or remained in that area we
try to avoid -- the "Value Trap" -- where stocks are cheap for good
reasons. There aren't catalysts for them to move up in price. We
look for improving earnings in a broadening market to provide that
catalyst.
2
<PAGE>
Some of these observed failures are more fixable than others. The task
of making the correct sector weight bets is one of the most difficult for us,
given our bottom-up stock picking based on quantitative and fundamental factors.
In the past, however, the stock selection process was sufficiently effective
that sector weights were less critical. In a broader stock market advance such
as that which we hope we have re-entered, with stronger overseas growth catching
up with the strong U.S. economy, we look forward to better performance.
Through the quarter just ended, the returns on the Fund and the various
indices were as follows:
Total Returns for periods ended 6/30/99
---------------------------------------
Year- 12
Qtr to-date months
--- ------- ------
Addison Capital Shares 5.0% 1.3% -6.0%
S&P 500 7.1% 12.4% 22.8%
S&P 500/BARRA Value 10.8% 14.0% 16.5%
MidCap 400/
BARRA Value 14.9% 5.7% 5.1%
Lipper G&I
Funds Index 9.0% 11.0% 14.5%
The past year has been a difficult and disappointing stretch for us,
where for most of the period our stock selection model had perverse results (the
most favorably ranked stocks performed worse than the unattractively ranked
stocks). The recent results suggest that things are back to a more normal
relationship, and the long-awaited rebound of value stocks may have just begun,
especially if the length of growth stocks' period of superior returns is any
indication. A normal cycle lasts anywhere from twelve months to three years, so
we may be in the early innings.
Sincerely,
/s/ Radcliffe Cheston
--------------------------------------
Radcliffe Cheston
<PAGE>
FUND PROFILE
Addison Capital Shares
As of June 30, 1999
Portfolio Characteristics
- -------------------------
S&P S&P 500/
Addison 500 BARRA Value
------- --- -----------
Number of Stocks 44 500 374
Median Market Cap $7.1B $8.6B $6.8B
Price/Earnings Ratio 21.2x 35.4x 29.6x
Price/Book Ratio 3.7x 5.9x 3.1x
Dividend Yield 2.0% 1.2% 1.7%
Return on Equity 18.6% 19.9% 14.4%
Earnings Growth Rate 15.1% 10.7% 7.5%
Ten Largest Holdings (% of total net assets)
- --------------------------------------------
American International
Group 2.9%
Chase Manhattan
Corporation 2.8
BP Amoco ADS 2.8
Ethan Allen Interiors 2.8
Premark International 2.8
Vulcan Materials Co. 2.7
Xerox Corp. 2.7
Pentair Industries Inc. 2.7
Morgan Stanley
Dean Witter Discover 2.7
Ross Stores Inc. 2.6
- -----------------------------------------------------------------
Top Ten 27.4%
Sector Diversification (% of Common Stocks)
- -------------------------------------------
S&P S&P 500/
Addison 500 BARRA Value
------- --- -----------
Basic Materials 8% 3% 9%
Capital Goods 11% 8% 6%
Consumer Cyclicals 19% 10% 16%
Consumer Staples 5% 13% 4%
Energy 8% 6% 12%
Financial Services 25% 16% 32%
Health Care 4% 11% 3%
Technology 9% 22% 9%
Utilities 11% 12% 9%
3
<PAGE>
Glossary of Terms
Dividend Yield: The current annualized rate of dividend divided by the current
price per share. For the fund or unmanaged index, the average of all the yields
of all the stocks held.
Earnings Growth Rate: The average annual rate of growth of earnings of stocks in
the fund or unmanaged index, measured over the past five years.
Median Market Cap: The midpoint of the range of market capitalization (market
price multiplied by shares outstanding) of the stocks in the fund or unmanaged
index. Half of the stocks in the fund or index have market capitalizations above
the median and half have smaller market capitalizations.
Price/Book Ratio: The ratio of the price of a share of a stock divided by its
book value, or net worth, per share. For a fund or index, the average of all the
stocks held.
Price/Earnings Ratio: The ratio of a stock's current price divided by its per
share earnings over the past year. For a fund or index, the average of the P/E
ratios held in the portfolio. P/E ratio is used as an indicator of expectations
about a company's prospects. A high P/E suggests a higher level of expectations
about a company's growth prospects.
Return on Equity: A measure of corporate profitability. The average annual rate
of return earned by a company over the past five years. The ratio of net income
divided by shareholder's equity. For a fund or unmanaged index, the average
return on equity of all stocks held.
Comparison of $10,000 Investments in Addison Capital Shares
vs. the S&P 500 Index and the Lipper Growth & Income Index
Addison Capital Shares S&P 500 Lipper G&I
---------------------- ------- ----------
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
1998 $49,122 $68,731 $53,560
1999 $46,160 $84,351 $61,315
4
<PAGE>
Addison Capital Shares
Equity Portfolio Sector Weights as of June 30, 1999
Basic Materials 8.0%
Capital Goods 11.0%
Consumer Cyclicals 19.0%
Consumer Staples 5.0%
Energy 8.0%
Financial Services 25.0%
Health Care 4.0%
Technology 9.0%
Utilities 11.0%
5
<PAGE>
- --------------------------------------------------------------------------------
ADDISON CAPITAL SHARES, INC.
Schedule of Portfolio Investments
June 30, 1999
- --------------------------------------------------------------------------------
Number
of Value
Shares (Note A)
- --------------------------------------------------------------------------------
COMMON STOCK -- 97.8%
- --------------------------------------------------------------------------------
Aerospace -- 2.4%
Textron, Incorporated ......................... 18,000 $ 1,481,625
-----------
Apparel -- 2.1%
VF Corporation ................................ 30,000 1,282,500
-----------
Automobiles & Related -- 2.0%
General Motors Corporation .................... 18,500 1,221,000
-----------
Automotive Parts-Equipment -- 0.4%
Delphi Automotive
Systems Corporation ......................... 12,930 240,013
-----------
Banking -- 7.4%
Charter One Financial,
Incorporated ................................ 52,659 1,464,578
Chase Manhattan Corporation ................... 20,000 1,732,500
First Union Corporation ....................... 28,000 1,316,000
-----------
4,513,078
-----------
Capital Goods -- 2.5%
Ingersoll Rand Corporation .................... 24,000 1,551,000
-----------
Chemicals -- 2.5%
DuPont (E.I.) De Nemours
and Company ................................. 22,000 1,502,875
-----------
Computers -- 3.6%
Compaq Computer, Incorporated ................. 40,200 952,237
Gateway, Incorporated*** ...................... 21,550 1,271,450
-----------
2,223,687
-----------
Construction Materials -- 2.7%
Vulcan Materials Company ...................... 34,640 1,671,380
-----------
Consumer Products -- 5.1%
Fortune Brands Incorporated ................... 35,000 1,448,125
Premark International,
Incorporated ................................ 45,000 1,687,500
-----------
3,135,625
-----------
Data Processing -- 1.3%
Sterling Software, Incorporated*** ............ 30,000 800,625
-----------
Electronics -- 2.5%
Central and South West
Corporation. ................................ 40,000 935,000
Intel Corporation ............................. 10,000 595,000
-----------
1,530,000
-----------
<PAGE>
Number
of Value
Shares (Note A)
- --------------------------------------------------------------------------------
Finance -- 3.8%
Citigroup, Incorporated ....................... 15,000 $ 712,500
Morgan Stanley
Dean Witter & Company ....................... 16,000 1,640,000
-----------
2,352,500
-----------
Home Appliance -- 2.2%
Maytag Corporation ............................ 19,000 1,324,062
-----------
Home Furnishing/Housewares -- 2.8%
Ethan Allen Interiors,
Incorporated. ............................... 45,000 1,698,750
-----------
Insurance -- 12.2%
Allstate Corporation. ......................... 36,000 1,291,500
American General Corporation. ................. 19,000 1,432,125
American International Group,
Incorporated ................................ 15,049 1,761,674
Cigna Corporation. ............................ 18,000 1,602,000
Reliastar Financial Corporation. .............. 32,000 1,400,000
-----------
7,487,299
-----------
International Oils -- 2.4%
Exxon Corporation ............................. 19,000 1,465,375
-----------
Machinery -- 2.7%
Pentair, Incorporated ......................... 36,000 1,647,000
-----------
Medical Supplies -- 1.5%
Becton Dickinson and Company .................. 30,000 900,000
-----------
Natural Gas -- 5.0%
BP Amoco PLC Sponsored ADR .................... 15,880 1,722, 980
Columbia Energy Group. ........................ 21,100 1,322,706
-----------
3,045,686
-----------
Office Equipment -- 2.7%
Xerox Corporation. ............................ 28,000 1,653,750
-----------
Oil Equipment & Services -- 2.4%
Halliburton Company. .......................... 32,000 1,448,000
-----------
Paper & Forest Products -- 2.3%
Rayonier, Incorporated. ....................... 28,000 1,394,750
-----------
Publishing -- 2.1%
Knight Ridder, Incorporated. .................. 24,000 1,318,500
-----------
Real Estate -- 3.6%
Duke Realty Investments,
Incorporated ................................ 50,000 1,128,125
Health Care Property Investors,
Incorporated. ............................... 37,778 1,090,840
-----------
2,218,965
-----------
6
<PAGE>
- -------------------------------------------------------------------------------
ADDISON CAPITAL SHARES, INC.
Schedule of Portfolio Investments
June 30, 1999
- -------------------------------------------------------------------------------
Number
of Value
Shares (Note A)
- --------------------------------------------------------------------------------
Retail Food Chains -- 2.5%
Great Atlantic and
Pacific Tea Company ......................... 45,000 $ 1,521,563
-----------
Retail Merchandising -- 4.8%
BJ's Wholesale Club,
Incorporated*** ............................. 50,000 1,503,125
Dayton Hudson Corporation. .................... 22,200 1,443,000
-----------
2,946,125
-----------
Retail Store -- 2.6%
Ross Stores, Incorporated ..................... 32,000 1,612,000
-----------
Telecommunications -- 2.5%
AT&T Corporation .............................. 27,000 1,506,938
-----------
Utilities -- Electric -- 3.2%
Duke Energy Corporation. ...................... 19,332 1,051,178
Nisource, Incorporated ........................ 34,640 894,145
-----------
1,945,323
-----------
Utilities -- Natural Gas -- 2.0%
NICOR, Incorporated ........................... 32,886 1,251,723
-----------
TOTAL COMMON STOCK
(Cost $38,168,008) 59,891,717
-----------
<PAGE>
Principal Value
Amount (Note A)
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENTS** -- 2.7%
- -------------------------------------------------------------------------------
PNC Bank $1,633,000 at 3.75%
(Agreement dated 06/30/99, to
be repurchased at $1,633,170 on 07/01/99;
collateralized by $1,710,000 Federal
Home Loan Mortgage Corporation, 5.50%,
due 01/15/11) (Value $1,673,757 --
Cost $1,633,000) ............................ $ 1,633,000 $ 1,633,000
-----------
TOTAL INVESTMENTS
(Cost $39,801,008*) ........................... 100.5% 61,524,717
Liabilities in excess of
Other Assets ................................. (0.5%) (325,790)
----------- -----------
Net Assets ...................................... 100.0% $61,198,927
=========== ===========
* Aggregate cost for federal income tax purposes was $39,801,008.
The aggregate gross unrealized appreciation (depreciation) for all
securities is as follows:
Gross Appreciation .............. $22,153,736
Gross Depreciation .............. (430,027)
-----------
Net Appreciation ............. $21,723,709
===========
** 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.
7
<PAGE>
- -------------------------------------------------------------------------------
Statement of Assets and Liabilities
- -------------------------------------------------------------------------------
June 30, 1999
- -------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost $39,801,008) .................. $61,524,717
Cash ...................................................... 679
Receivables:
Dividends ............................................... 49,950
Interest ................................................ 170
Fund shares sold ........................................ 21,379
Prepaid expense ........................................... 11,065
-----------
- -------------------------------------------------------------------------------
TOTAL ASSETS .......................................... 61,607,960
-----------
- -------------------------------------------------------------------------------
LIABILITIES:
Payable:
Fund shares repurchased ................................. 303,899
Accrued expenses .......................................... 105,134
-----------
- -------------------------------------------------------------------------------
TOTAL LIABILITIES ..................................... 409,033
-----------
- -------------------------------------------------------------------------------
NET ASSETS .................................................. $61,198,927
===========
SHARES OUTSTANDING .......................................... 2,064,964
===========
===============================================================================
NET ASSET VALUE PER SHARE ($61,198,927 / 2,064,964 shares) .. $29.64
===========
===============================================================================
NET ASSETS CONSISTED OF THE FOLLOWING:
Paid-in capital ........................................... $36,539,975
Undistributed net investment income ....................... 54,534
Undistributed net realized gains .......................... 2,880,709
Unrealized appreciation on investments .................... 21,723,709
-----------
$61,198,927
===========
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
8
<PAGE>
- -------------------------------------------------------------------------------
Statement of Operations
- -------------------------------------------------------------------------------
For the Year Ended June 30, 1999
- -------------------------------------------------------------------------------
INVESTMENT INCOME:
Income:
Dividends ............................................... $1,280,798
Interest ................................................ 121,497
-----------
- -------------------------------------------------------------------------------
Total Income ............................................ 1,402,295
-----------
- -------------------------------------------------------------------------------
Expenses:
Investment advisory fee ................................. 506,771
Distribution fee ........................................ 270,278
Shareholder servicing ................................... 168,924
Administration fee ...................................... 87,696
Transfer agent fee ...................................... 48,500
Insurance ............................................... 16,609
Federal and state registration fees ..................... 21,000
Audit ................................................... 23,500
Custodian fee ........................................... 19,268
Printing ................................................ 18,500
Directors' fee .......................................... 17,000
Legal fee ............................................... 23,000
Miscellaneous ........................................... 8,000
State taxes ............................................. 6,000
-----------
- -------------------------------------------------------------------------------
Total Expenses .......................................... 1,235,046
-----------
- -------------------------------------------------------------------------------
Net Investment Income ................................. 167,249
-----------
- -------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain from security transactions ............ 2,880,655
Change in unrealized appreciation of investments ........ (8,536,960)
-----------
- -------------------------------------------------------------------------------
Net Loss on Investments ............................... (5,656,305)
-----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ........ ($5,489,056)
===========
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
9
<PAGE>
- -------------------------------------------------------------------------------
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year For the year
ended ended
June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income ............................................... $ 167,249 $ 223,065
Net realized gain from security transactions ........................ 2,880,655 6,325,657
Change in unrealized appreciation of investments .................... (8,536,960) 6,427,673
----------- -----------
- ----------------------------------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting from operations ..... (5,489,056) 12,976,395
----------- -----------
- ----------------------------------------------------------------------------------------------------------
Distributions to shareholders:
Net investment income ($0.09 and $0.13 per share, respectively) ..... (212,483) (283,838)
Capital gains ($1.67 and $3.62 per share, respectively) ............. (4,082,558) (7,862,175)
----------- -----------
Total distributions ............................................... (4,295,041) (8,146,013)
----------- -----------
Capital share transactions:
Net increase (decrease) in net assets derived from capital
share transactions* ............................................... (10,528,835) 10,072,025
----------- -----------
Total increase (decrease) in net assets ........................... (20,312,932) 14,902,407
----------- -----------
- ----------------------------------------------------------------------------------------------------------
NET ASSETS:
Beginning of year ..................................................... 81,511,859 66,609,452
----------- -----------
End of year** ......................................................... $61,198,927 $81,511,859
=========== ===========
==========================================================================================================
* Capital share transactions are as follows:
Shares Value
-------- -----------
For the year ended June 30, 1999
Shares purchased .................................................... 92,691 $ 2,689,318
Shares reinvested ................................................... 130,052 4,150,518
Shares redeemed ..................................................... (607,025) (17,368,671)
-------- -----------
Net decrease ...................................................... (384,282) (10,528,835)
======== ===========
For the year ended June 30, 1998
Shares purchased .................................................... 276,170 $ 8,769,576
Shares reinvested ................................................... 269,399 7,901,583
Shares redeemed ..................................................... (208,748) (6,599,134)
-------- -----------
Net increase ...................................................... 336,821 $10,072,025
======== ===========
** Undistributed net investment income $54,534 & $99,768, respectively
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The Table below sets forth financial data for a share of capital stock
outstanding throughout each year presented.
<TABLE>
<CAPTION>
Years ended June 30,
--------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year .................................. $ 33.28 $ 31.53 $ 26.42 $ 22.92 $ 20.45
------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income ............................................. $ 0.08 $ 0.09 $ 0.15 $ 0.17 $ 0.22
Net gains on securities (both
realized and unrealized) ........................................ (1.96) 5.41 7.60 5.42 3.77
------- ------- ------- ------- -------
Total from investment
operations .................................................... (1.88) 5.50 7.75 5.59 3.99
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment
income .......................................................... (0.09) (0.13) (0.15) (0.21) (0.20)
Distributions from capital gains .................................. (1.67) (3.62) (2.49) (1.88) (1.32)
------- ------- ------- ------- -------
Total distributions ............................................. (1.76) (3.75) (2.64) (2.09) (1.52)
------- ------- ------- ------- -------
Net asset value, end of year ........................................ $ 29.64 $ 33.28 $ 31.53 $ 26.42 $ 22.92
======= ======= ======= ======= =======
Total Return (1) .................................................... (6.03)% 19.40% 32.20% 25.92% 21.11%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's) ................................ $61,199 $81,512 $66,609 $50,704 $38,506
Ratio of expenses to average assets ............................... 1.83% 1.75% 1.83% 1.96% 2.06%
Ratio of net investment income to
average net assets .............................................. 0.25% 0.30% 0.54% 0.69% 1.03%
Portfolio Turnover ................................................ 25.77% 28.14% 29.48% 38.97% 42.82%
</TABLE>
- --------------------------------------------------------------------------------
(1) Exclusive of deduction of sales charge imposed on investments prior to
July 3, 1995
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.
11
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
June 30, 1999
- --------------------------------------------------------------------------------
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.
<PAGE>
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 six months ended
December 31, 1998. On January 1, 1999 PFPC resumed its minimum annual fee of
$100,000.
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. Janney did not receive brokerage commissions for the fiscal
year ended June 30, 1999.
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,
1999.
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 $23,000
from the Fund for legal services rendered during the year.
12
<PAGE>
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Notes to Financial Statements
June 30, 1999 (Continued)
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C. Purchases and sales of securities, other than short-term obligations,
aggregated $16,640,863 and $28,864,145, respectively, for the year ended June
30, 1999.
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.
E. Addison Capital Shares, Inc. distributed a total Long Term Capital Gain
Dividend of $4,082,558, or $1.6669 per share, during the fiscal year ending June
30, 1999.
Because the Fund's fiscal year is not the calendar year, Capital Gain
Dividend distributed amounts to be used by calendar year tax payers on their
Federal income tax returns will be reflected on 1099-DIV forms, which will be
mailed in January, 2000.
On July 1, 1999 Addison Capital Shares, Inc. distributed to its
shareholders, $.0264 per share of ordinary income, and $1.3950 per share of
Long Term Capital Gains.
13
<PAGE>
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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, 1999, 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 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, 1999 by correspondence with the custodian. An audit also includes assessing
the accounting principals 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, 1999, 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 principals.
TAIT, WELLER & BAKER
Philadelphia, Pennsylvania
July 9, 1998
14
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<PAGE>
Directors & Officers
Rudolph C. Sander
Chairman of the Board
Radcliff Cheston
President & Chief Executive
Margaret M. Healy
Director
Charles E. Mather, III
Director
William R. Dimeling
Director
James Wolitarsky
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.
1801 Market Street
Philadelphia, PA 19103
Administrator
PFPC, INC.
103 Bellevue Parkway
Wilmington, DE 19809
Transfer Agent PFPC, INC.
103 Bellevue Parkway
Wilmington, DE 19809
<PAGE>
Addison
==========================
Capital
==========================
Shares
Distributed by:
[LOGO]
Janney Montgomery Scott
INC.
Annual Report
to Shareholders
June 30, 1999
