<PAGE>
--------------------------------------------------------------------------------
Chairman's Letter
--------------------------------------------------------------------------------
Dear Fellow Shareholders:
The volitality of the stock market continued in the first 6 months of the
year 2000. The new investment advisor to our fund made substantial changes in
the structure of our portfolio. Among the additions made were, Cisco Systems,
Sun Microsystems, Worldcom, Hewlett Packard, Applied Materials and Wal-Mart
Stores.
We believe that the addition of growth stocks such as the above to the
portfolio will increase your opportunity for capital appreciation. The fund paid
a capital gain dividend of $4.3990 per share in July.
We appreciate your continued support and continue to believe the philosophy
of remaining invested in a quality portfolio will be well rewarded.
/s/ Rudolph C. Sander
----------------------
Rudolph C. Sander
1
<PAGE>
--------------------------------------------------------------------------------
President's Letter
--------------------------------------------------------------------------------
Dear Fellow Shareholders:
The fiscal year ended June 30 was a year of great change, not only for the
equity markets but for the Fund as well. Independence Capital Management took
over responsibility for the Fund on January 1, 2000. Our objective from the
outset has been to provide a Fund that was more reflective of the broad market
in its holdings than was the case previously. We also have and will continue to
strive for performance that is competitive with the major market averages. As
you can imagine this has required a significant amount of change in the
portfolio and is reflected in the increase in turnover of holdings for the year.
One of our other goals in this process of change has been to minimize the tax
impact of the changes for our shareholders subject to taxation. Much of the
change to Independence Capital's investment approach has been accomplished in
the first six months of our management and we look forward to providing a
rewarding investment to our shareholders in the years to come.
This was also a year of great change for the markets. Two of the four
quarters posted declines, the September and June quarters for the Fund, with the
December quarter producing a dramatic 14.9% advance for the S&P 500. For the
fiscal year as a whole, the S&P 500 returned 7.2%. The most significant
influence on the markets performance over the fiscal year was the Federal
Reserve. The year began with Fed Funds at 4.9% and ended with the rate up to
7.0%. This aggressive tightening on the part of the Fed was aimed at slowing
economic growth that threatened to revive inflation. The markets reacted
violently on several occasions as perceptions as to the intentions of the Fed
and issues of inflation changed. More optimism produced strong rallies including
the December quarter surge. Stronger economic news and inflation fears produced
sell-offs such as April's dramatic decline.
During the year the Fund also struggled. The annual return of -12.0% is
certainly disappointing in comparison to the S&P 500. However, for most of the
year a better comparison for the Fund would be against Funds and indices more
comparably positioned. The table below shows the Fund's return against not only
the S&P 500, but also the Lipper Equity Income Index.
Total Returns for periods ended 6/30/00
---------------------------------------
Year- 12
Qtr to-date months
------------------------------
Buttonwood Capital
Appreciation -5.9% -6.4% -12.0%
S&P 500 -2.7% -0.5% 7.2%
Lipper Equity Income
Index -1.4% -2.2% -6.6%
While this comparison provides some intellectual comfort, the absolute results
are still not satisfactory. Having substantially repositioned the Fund as of
June 30, we believe that in subsequent periods the S&P 500 will be a more
appropriate and achievable benchmark for the Fund.
With the experience of the past year and the first month of the current
fiscal year it is easy to predict continued volatility in the markets. The
Federal Reserve's intentions regarding interest rates remains the single most
important variable in forecasting not only market direction but the likely
winners as well. As we enter the September quarter, confidence that the economy
is slowing and that further rate increases may be avoided has been shaken by a
stronger than expected GDP report. This has aborted the June-July rally in the
market. Such periods of rally and failure are likely until there is consistent
evidence that the economy has slowed. Such evidence should be forthcoming as we
move deeper into the year and we believe that it is prudent to position the
portfolio for a period of slower economic growth.
2
<PAGE>
Our favorite companies are those that have produced a consistent record of
earnings growth. This consistency comes from being able to generate earnings in
a variety of different economic climates, not just one of accelerating growth.
In 1999 and early in 2000 many companies were able to produce earnings results
at or above expectations. Work we do indicates that positive earnings surprises
exceeded negative ones by a factor of 5 to 1. With a slowing economy, we expect
this relationship to return to a more normal 2 to 1. Identifying and owning
companies able to produce in this environment will be the key to performance
over the next several quarters.
Thank you for your continued support of the Fund.
Sincerely,
/s/ Richardson T. Merriman
---------------------------
Richardson T. Merriman
FUND PROFILE
Buttonwood Capital Appreciation
As of June 30, 2000
Portfolio Characteristics
-------------------------
Buttonwood S&P 500
---------- -------
Price/Earnings Ratio 35.7x 25.3x
5 Yr EPS Growth 16.2% 9.0%
Price/Book Ratio 9.4x 5.0x
Return on Equity 19.7% 19.2%
Market Capitalization $130.7B $148.4B
Ten Largest Holdings (% of Common Stocks)
-----------------------------------------
Intel 4.5%
American International Group 4.4
Merck 4.1
Tyco International 4.0
Columbia Energy Group 4.0
Halliburton 3.8
General Electric 3.7
Texas Instruments 3.7
Duke Energy 3.7
MBNA 3.6
--------------------------------------------------------------------------------
Top Ten 39.5%
Sector Diversification (% of Common Stocks)
-------------------------------------------
Buttonwood S&P 500
---------- -------
Basic Materials 2.2% 1.9%
Capital Goods 7.7% 8.0%
Communication Services 0.0% 6.8%
Consumer Cyclicals 2.5% 7.4%
Consumer Staples 7.8% 10.3%
Energy 10.4% 5.4%
Financials 20.6% 12.7%
Health Care 14.0% 11.6%
Technology 27.1% 32.9%
Transportation 0.0% 0.6%
Utilities 7.7% 2.4%
3
<PAGE>
Comparison of $10,000 Investments in Buttonwood Capital Appreciation
vs. the S&P 500 Index and the Lipper Equity Income Fund Index
---------------------------------------------------
BUTTONWOOD CAPITAL APPRECIATION
Average Annual Total Returns for the periods ended
June 30, 2000
1 Year 5 Years 10 Years
------ ------- --------
-12.01% 10.45% 10.50%
---------------------------------------------------
Buttonwood S&P 500 Lipper Eq Inc
---------- ------- -------------
6/30/90 10000 10000 10000
6/30/91 10540 10735 10681
6/30/92 11587 12175 12351
6/30/93 14018 13833 14399
6/30/94 13636 14025 14818
6/30/95 16514 17680 17323
6/30/96 20794 22262 20925
6/30/97 27490 29991 26515
6/30/98 32822 39027 32151
6/30/99 30843 47913 35753
6/30/00 27140 51383 33405
4
<PAGE>
--------------------------------------------------------------------------------
BUTTONWOOD CAPITAL APPRECIATION
Schedule of Portfolio Investments
June 30, 2000
--------------------------------------------------------------------------------
Number
of Value
Shares (Note A)
--------------------------------------------------------------------------------
COMMON STOCK - 95.8%
--------------------------------------------------------------------------------
Banking -- 5.6%
Chase Manhattan Corporation ............... 22,500 $ 1,036,406
First Union Corporation ................... 28,000 694,750
-----------
1,731,156
-----------
Beverages -- 2.2%
PepsiCo, Incorporated ..................... 15,000 666,562
-----------
Biotechnology -- 3.0%
Amgen, Incorporated ....................... 13,000 913,250
-----------
Capital Goods -- 3.4%
General Electric Corporation .............. 21,000 1,071,000
-----------
Chemicals -- 2.1%
DuPont (E.I.) De Nemours
and Company ............................. 15,000 656,250
-----------
Computer Services -- 2.0%
SunGard Data Systems,
Incorporated** .......................... 20,000 620,000
-----------
Computer/Peripherals -- 3.2%
EMC Corporation ........................... 13,000 1,000,187
-----------
Conglomerates -- 3.8%
Tyco International Ltd .................... 25,000 1,184,375
-----------
Consumer Products -- 3.4%
CVS Corporation ........................... 15,000 1,062,187
-----------
Cosmetics - Toiletry -- 1.9%
Colgate-Palmolive Company ................. 10,000 598,750
-----------
Credit -- 3.5%
MBNA Corporation .......................... 40,000 1,085,000
-----------
Data Processing -- 2.1%
Automatic Data Processing,
Incorporated ............................ 12,000 642,750
-----------
Electronics -- 9.6%
Applied Materials, Incorporated ........... 6,000 543,750
Intel Corporation ......................... 10,000 1,336,875
Texas Instruments, Incorporated ........... 16,000 1,099,000
-----------
2,979,625
-----------
Finance -- 6.5%
Citigroup, Incorporated ................... 17,000 1,024,250
Morgan Stanley Dean Witter &
Company ................................. 12,000 999,000
-----------
2,023,250
-----------
Insurance -- 4.2%
American International Group,
Incorporated ............................ 11,061 1,299,668
-----------
International Oils -- 3.0%
Exxon Mobil Corporation ................... 12,000 942,750
-----------
Medical Supplies -- 3.2%
Medtronic, Incorporated ................... 20,000 996,250
-----------
Natural Gas -- 3.8%
Columbia Energy Group ..................... 18,000 1,181,250
-----------
See Notes to Financial Statements.
5
<PAGE>
--------------------------------------------------------------------------------
BUTTONWOOD CAPITAL APPRECIATION
Schedule of Portfolio Investments (Continued)
June 30, 2000
--------------------------------------------------------------------------------
Number
of Value
Shares (Note A)
--------------------------------------------------------------------------------
COMMON STOCK (Continued)
--------------------------------------------------------------------------------
Office Equipment -- 3.7%
International Business Machines
Corporation ............................... 6,000 $ 657,375
Xerox Corporation ......................... 25,000 500,000
-----------
1,157,375
-----------
Oil Equipment & Services -- 7.0%
Halliburton Corporation ................... 24,000 1,132,500
Schlumberger, Ltd ......................... 14,000 1,044,750
-----------
2,177,250
-----------
Pharmaceuticals -- 7.3%
Merck & Co., Incorporated ................. 16,000 1,226,000
Pfizer, Incorporated ...................... 22,000 1,056,000
-----------
2,282,000
-----------
Retail Merchandising -- 2.4%
Target Corporation ........................ 13,000 754,000
-----------
Telecommunications -- 5.4%
Nokia Corporation -- Sponsored
ADR ..................................... 20,000 998,750
Nortel Networks Corporation
(Canada) ................................ 10,000 682,500
-----------
1,681,250
-----------
Utilities -- Electric -- 3.5%
Duke Energy Corporation ................... 19,332 1,089,842
-----------
TOTAL COMMON STOCK
(Cost $21,462,345) ........................ 29,795,977
-----------
--------------------------------------------------------------------------------
Principal
Amount
--------------------------------------------------------------------------------
CORPORATE BONDS -- 2.9%
--------------------------------------------------------------------------------
Nextel Communications Senior
Discount Notes
5.250%, 01/15/2010
(Cost $905,204) ......................... $ 913,500 $ 913,500
-----------
--------------------------------------------------------------------------------
TEMPORARY INVESTMENTS -- 2.1%
--------------------------------------------------------------------------------
Temporary Investment Fund ................. 326,533 326,533
Temporary Investment Cash Fund ............ 326,533 326,533
-----------
TOTAL TEMPORARY INVESTMENTS
(Cost $653,066) ........................... 653,066
-----------
TOTAL INVESTMENTS
(Cost $23,020,615*) ....................... 100.8% 31,362,543
Liabilities in excess of
Other Assets .............................. (0.8%) (262,109)
----------- -----------
Net Assets ................................... 100.0% $31,100,434
=========== ===========
* Aggregate cost for federal income tax purposes was $23,020,615. The aggregate
gross unrealized appreciation (depreciation) for all securities is as follows:
Gross Appreciation ........................ $8,390,350
Gross Depreciation ........................ (48,422)
----------
Net Appreciation ........................ $8,341,928
==========
** Non-income producing security.
================================================================================
See Notes to Financial Statements.
6
<PAGE>
--------------------------------------------------------------------------------
Statement of Assets and Liabilities
--------------------------------------------------------------------------------
June 30, 2000
--------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost $23,020,615)...................... $31,362,543
Receivables:
Dividends ................................................... 20,327
Interest .................................................... 27,241
Investment securities sold .................................. 539,382
Prepaid expense .............................................. 10,198
-----------
--------------------------------------------------------------------------------
TOTAL ASSETS ............................................. 31,959,691
-----------
--------------------------------------------------------------------------------
LIABILITIES:
Payable:
Fund shares repurchased ..................................... 254,228
Investment securities purchased ............................. 537,375
Investment advisory fees .................................... 20,108
Distribution fees ........................................... 10,724
Shareholder servicing fees .................................. 6,702
Accrued expenses ............................................. 30,120
-----------
--------------------------------------------------------------------------------
TOTAL LIABILITIES ........................................ 859,257
-----------
--------------------------------------------------------------------------------
NET ASSETS ..................................................... $31,100,434
===========
SHARES OUTSTANDING ............................................. 1,302,690
===========
================================================================================
NET ASSET VALUE PER SHARE ($31,100,434 / 1,302,690 shares) ..... $23.87
======
================================================================================
NET ASSETS CONSISTED OF THE FOLLOWING:
Paid-in capital .............................................. $17,027,966
Undistributed net realized gains ............................. 5,730,540
Unrealized appreciation on investments ....................... 8,341,928
-----------
$31,100,434
===========
================================================================================
See Notes to Financial Statements.
7
<PAGE>
--------------------------------------------------------------------------------
Statement of Operations
--------------------------------------------------------------------------------
For the Year Ended June 30, 2000
--------------------------------------------------------------------------------
INVESTMENT INCOME:
Income:
Dividends ................................................... $ 747,763
Interest .................................................... 80,515
----------
--------------------------------------------------------------------------------
Total Income ................................................ 828,278
----------
--------------------------------------------------------------------------------
Expenses:
Investment advisory fee ..................................... 324,979
Distribution fee ............................................ 173,322
Shareholder servicing ....................................... 108,326
Administration fee .......................................... 91,297
Transfer agent fee .......................................... 48,900
Insurance ................................................... 19,168
Federal and state registration fees ......................... 12,591
Audit ....................................................... 16,562
Custodian fee ............................................... 15,055
Printing .................................................... 27,945
Directors' fee .............................................. 14,570
Legal fee ................................................... 39,834
Miscellaneous ............................................... 3,758
State taxes ................................................. 4,644
----------
--------------------------------------------------------------------------------
Total Expenses .............................................. 900,951
----------
--------------------------------------------------------------------------------
Net Investment Deficit .................................... (72,673)
----------
--------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain from security transactions ................ 7,335,605
Change in unrealized appreciation of investments ............ (13,381,781)
----------
--------------------------------------------------------------------------------
Net Loss on Investments ..................................... (6,046,176)
----------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ........... ($6,118,849)
==========
--------------------------------------------------------------------------------
See Notes to Financial Statements.
8
<PAGE>
--------------------------------------------------------------------------------
Statement of Changes in Net Assets
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the year For the year
ended ended
June 30, 2000 June 30, 1999
------------- -------------
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS:
Operations:
Net investment income (deficit) ......................................... ($72,673) $ 167,249
Net realized gain from security transactions ............................ 7,335,605 2,880,655
Change in unrealized appreciation of investments ........................ (13,381,781) (8,536,960)
----------- -----------
---------------------------------------------------------------------------------------------------------------
Net decrease in net assets resulting from operations .................... (6,118,849) (5,489,056)
----------- -----------
---------------------------------------------------------------------------------------------------------------
Distributions to shareholders:
Net investment income ($0.03 and $0.09 per share respectively) .......... (54,515) (212,483)
Capital gains ($2.40 and $1.67 per share, respectively) ................. (4,485,774) (4,082,558)
----------- -----------
Total distributions ................................................... (4,540,289) (4,295,041)
----------- -----------
Capital share transactions:
Net decrease in net assets derived from capital
share transactions* ................................................... (19,439,355) (10,528,835)
----------- -----------
Total decrease in net assets .......................................... (30,098,493) (20,312,932)
---------------------------------------------------------------------------------------------------------------
NET ASSETS:
---------------------------------------------------------------------------------------------------------------
Beginning of year ........................................................ 61,198,927 81,511,859
----------- -----------
End of year** ............................................................ $31,100,434 $61,198,927
=========== ===========
===============================================================================================================
* Capital share transactions are as follows:
Shares Value
----------- -----------
For the year ended June 30, 2000
Shares purchased ........................................................ 33,205 $ 811,899
Shares reinvested ....................................................... 159,330 4,295,077
Shares redeemed ......................................................... (954,809) (24,546,331)
----------- -----------
Net decrease .......................................................... (762,274) ($19,439,355)
=========== ===========
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)
=========== ===========
</TABLE>
** Undistributed net investment income equals $0 and $54,534, respectively.
See Notes to Financial Statements.
9
<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,
--------------------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year ........................ $29.64 $33.28 $31.53 $26.42 $22.92
------ ------ ------ ------ ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income (deficit) ........................ (0.06) 0.08 0.09 0.15 0.17
Net gains (losses) on securities (both
realized and unrealized) ............................. (3.28) (1.96) 5.41 7.60 5.42
------ ------ ------ ------ ------
Total from investment
operations ......................................... (3.34) (1.88) 5.50 7.75 5.59
------ ------ ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment
income ............................................... (0.03) (0.09) (0.13) (0.15) (0.21)
Distributions from capital gains ....................... (2.40) (1.67) (3.62) (2.49) (1.88)
------ ------ ------ ------ ------
Total distributions .................................. (2.43) (1.76) (3.75) (2.64) (2.09)
------ ------ ------ ------ ------
Net asset value, end of year .............................. $23.87 $29.64 $33.28 $31.53 $26.42
====== ====== ====== ====== ======
Total Return .............................................. (12.01)% (6.03)% 19.40% 32.20% 25.92%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (in 000's) ..................... $31,100 $61,199 $81,512 $66,609 $50,704
Ratio of expenses to
average net assets ................................... 2.08% 1.83% 1.75% 1.83% 1.96%
Ratio of net investment income
(deficit) to average net assets ...................... (0.17)% 0.25% 0.30% 0.54% 0.69%
Portfolio Turnover ..................................... 71.23% 25.77% 28.14% 29.48% 38.97%
</TABLE>
--------------------------------------------------------------------------------
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.
10
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements
June 30, 2000
--------------------------------------------------------------------------------
A. Buttonwood Capital Appreciation (the "Fund"), a series of The Buttonwood
Funds, Inc. (the "Company"), formerly Addison Capital Shares, Inc., was
organized as a Maryland corporation on June 4, 1986. The Company 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 LLC (Janney), served as the Fund's
investment adviser for the period July 1, 1999 through December 31, 1999. For
its services as adviser, Addison Capital received 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. Total fee received by Addison
Capital for the period July 1, 1999 through December 31, 1999 was $192,959.
Effective January 1, 2000 the Company's Board of Directors approved
Independence Capital Management, Inc. to serve as the Fund's Advisor.
Independence Capital Management, Inc. is a wholly-owned subsidiary of The Penn
Mutual Life Insurance Co. For its services as adviser, Independence Capital
Management, Inc. 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. Total fee received by Independence Capital Management,
Inc. for the period January 1, 2000 through June 30, 2000 was $132,020.
PFPC Inc., an indirect subsidiary of PNC Bank Corp., serves as the Fund's
administrative and accounting agent. As compensation for these services, PFPC
Inc. 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 $65,000 effective April 1, 2000.
PFPC Trust Company 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 The 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 year
ended June 30, 2000.
Under a Services Agreement between the Fund and Janney, Janney will provide
office space to the Fund, will
11
<PAGE>
--------------------------------------------------------------------------------
Notes to Financial Statements
June 30, 2000 (Continued)
--------------------------------------------------------------------------------
supervise performance by PFPC Trust Company 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.
Certain officers and directors of the Fund are officers and/or directors of
Independence Capital Management, Inc. and Janney. The law firm of Morgan, Lewis
& Bockius LLP, a member of which is also an officer of the Fund, received
$39,834 from the Fund for legal services rendered during the year.
C. Purchases and sales of securities, other than short-term obligations,
aggregated $30,304,728 and $53,440,731, respectively, for the year ended June
30, 2000.
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. Buttonwood Capital Appreciation distributed a total long term capital gain
dividend of $4,485,774 or $2.3952 per share, during the fiscal year ending June
30, 2000.
Because the Fund's fiscal year is not the calendar year, Capital Gain
Dividend distributed amounts to be used by calendar year taxpayers on their
Federal income tax returns will be reflected on 1099-Div forms, which will be
mailed in January 2001.
On July 3, 2000, Buttonwood Capital Appreciation distributed to its
shareholders $4.3990 per share of Long Term Capital Gains.
12
<PAGE>
--------------------------------------------------------------------------------
Report of Independent Certified Public Accountants
--------------------------------------------------------------------------------
To the Shareholders and Board of Directors
The Buttonwood Funds, Inc.
We have audited the accompanying statement of assets and liabilities of
Buttonwood Capital Appreciation, including the schedule of portfolio
investments, as of June 30, 2000, 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, 2000 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
Buttonwood Capital Appreciation as of June 30, 2000, 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 14, 2000
13
<PAGE>
Directors & Officers
Rudolph C. Sander
Chairman of the Board
Richardson T. Merriman [LOGO]
President & Chief Executive
Margaret M. Healy
Director
Charles E. Mather, III
Director
Collin F. McNeil
Director
Barbara S. Wood
Treasurer, Chief Accounting Officer
& Chief Financial Officer
Charles J. Sullivan
Vice President
Willard N. Woolbert
Vice President
James W. Jennings
Secretary
Investment Adviser
INDEPENDENCE CAPITAL MANAGEMENT, INC.
Five Radnor Corporate Center, Suite 450
Radnor, PA. 19087
Distributor Distributed by:
JANNEY MONTGOMERY SCOTT LLC Janney A tradition of excellence since 1832
1801 Market Street Montgomery
Philadelphia, PA 19103 Scott LLC
Administrator
PFPC, INC.
103 Bellevue Parkway
Wilmington, DE 19809
Transfer Agent
PFPC, INC. Annual Report
103 Bellevue Parkway to Shareholders
Wilmington, DE 19809 June 30, 2000
