<PAGE>
AVALON CAPITAL, INC.
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SEMI-ANNUAL REPORT March 25, 1996
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Dear Shareholders,
We are pleased to present to you this report on the operations of Avalon
Capital, Inc., for the period from its initial public offering until February
29, 1996. Since the Fund commenced operations on November 20, 1995, its net
asset value per share has risen from $9.95 (the offering price of $10.00 less
$0.05 in offering expenses) to $10.31 on February 29th. The Fund also paid a
dividend of $0.04 per share on January 8, 1996. Thus, in little more than three
months, the Fund achieved a total return of 3.47 percent.
The Fund completed the first of its periodic repurchase offers and additional
offerings of shares on February 29th. In these offerings, few shares were
tendered for repurchase, and the Fund netted approximately $2.58 million in new
investments. As of the date of this report, the Fund maintained a large cash
position, due, in part, to this influx of cash. We also believe that given the
high valuations in the stock market today, it is more important than ever to be
careful about the price we pay for shares. The more care we exercise now, the
greater the potential for higher returns. Even under these circumstances, in our
first few months of operations we have been able to acquire a number of core
holdings for Avalon Capital.
Our goal is to find high-quality companies that offer prospects for substantial
appreciation if we hold them for a significant period of time. In coming months,
we expect to add to these holdings if their prices remain attractive. We also
have identified several other companies whose shares we'd like to buy when the
price is right.
To give you a better idea of the type of companies we're purchasing, we're
including on pages 11 and 12 of this report several brief profiles that describe
a representative company's business and provide some important financial
information. As most of you know, we look for businesses that have the following
characteristics:
- high profits,
- stable and growing earnings,
- little need for capital investments,
- a competitive advantage that protects the business,
- superior management.
Of course, such companies are not necessarily easy to find--particularly at an
attractive price. Therefore, once we find one we like, we tend to hold it for a
long time. (The major exception to our long-term strategy involves special
situation investments such as mergers, spin-offs, liquidations, etc.)
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2
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AVALON CAPITAL, INC.
SHAREHOLDER LETTER
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In our view, this approach to investing has some important advantages. Over a
number of years, we believe you will find that you are paying a minimal level of
capital gains taxes on your Avalon Capital shares. In addition, the other costs
associated with high turnover (brokerage commissions, custody fees, etc.) should
be reduced-- to say nothing of the investment mistakes so often made by those
with a trading mentality.
Instead of trying to maximize short-term performance, our goal is to maximize
the long-term economic value of Avalon Capital by owning a group of companies
whose earnings we expect to be substantially higher 5, 10, and 20 years from
now. In our annual reports, we plan to describe the earnings growth of the
companies in the Fund's portfolio in more detail. We believe earning power
(I.E., earnings per share growth) is one of the best indicators of progress
toward substantial long-term gains.
Given the volatile nature of the stock market, we can't predict exactly the
gains that may occur. And, of course, past performance is no guarantee of future
results. But, in our view, excellent economic performance, as measured by
increases in earnings, is often well-rewarded over time. Consider the following
comments about our largest current holding, Coca-Cola, related by Berkshire
Hathaway chairman Warren Buffett in his 1993 Annual Report:
Let me add a lesson from history: Coke went public in 1919 at $40 per
share. By the end of 1920 the market, coldly reevaluating Coke's future
prospects, had battered the stock down by more than 50%, to $19.50. At
yearend 1993, that single share, with dividends reinvested, was worth
more than $2.1 million. As Ben Graham said: "In the short-run, the
market is a voting machine--reflecting a voter-registration test that
requires only money, not intelligence or emotional stability--but in the
long-run, the market is a weighing machine."
In closing, I want to say how much we appreciate your recent support as our
shareholders. Our goal has been to have not only the best investment holdings of
any investment company, but the highest-quality group of shareholders as well.
From what I've seen so far, we're off to a great start.
[SIGNATURE]
Daniel E. Hutner
Chairman and President
3
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AVALON CAPITAL, INC.
SCHEDULE OF INVESTMENTS
FEBRUARY 29, 1996
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<TABLE>
<CAPTION>
SECURITY
SHARES DESCRIPTION VALUE
- ------------------------------------------------------------ ----------
<C> <S> <C>
COMMON STOCKS (52.2%)
BEVERAGES (18.3%)
14,500 Coca-Cola Company....................... $1,170,875
----------
BROADCASTING (6.9%)
3,500 Capital Cities/ABC, Inc.*............... 444,500
----------
CONSUMER PRODUCTS (4.4%)
1,000 Philip Morris Companies, Inc............ 99,000
5,200 UST, Inc................................ 184,600
----------
283,600
----------
FINANCE (6.3%)
1,800 Federal Home Loan Mortgage
Corporation............................ 148,500
8,000 Federal National Mortgage Association... 253,000
----------
401,500
----------
FINANCIAL SERVICES (4.4%)
6,200 American Express Company................ 285,200
----------
INSURANCE (2.3%)
1,500 American International Group............ 144,938
----------
LEISURE/AMUSEMENT (3.8%)
850 International Speedway Corporation...... 246,500
----------
MINING (1.4%)
1,500 Franco-Nevada Mining Corporation,
Ltd.................................... 91,030
----------
PUBLISHING (3.6%)
2,000 Gannett Company, Inc.................... 136,000
2,000 Readers Digest Association, Inc......... 95,750
----------
231,750
----------
<CAPTION>
SECURITY
SHARES DESCRIPTION VALUE
- ------------------------------------------------------------ ----------
<C> <S> <C>
RESTAURANTS (0.8%)
1,000 McDonald's Corporation.................. $ 50,000
----------
TOTAL COMMON STOCKS (COST $3,110,867)....................... $3,349,893
----------
OPTIONS (0.2%)
PURCHASED PUTS (0.2%)
7,000 Standard & Poor's 500 Index Dec 552.5
Puts, expiring 12/20/96................ 2,625
7,000 Standard & Poor's 500 Index Dec 560
Puts, expiring 12/20/96................ 10,500
----------
TOTAL OPTIONS (COST $21,967)................................ $ 13,125
----------
<CAPTION>
FACE
AMOUNT
- --------------------
<C> <S> <C>
TREASURY BILLS (37.8%)
$1,650,000 5.445% yield, due 5/16/96............... 1,633,173
800,000 4.917% yield, due 5/23/96............... 791,054
----------
TOTAL TREASURY BILLS (COST $2,422,906)...................... $2,424,227
----------
SHORT-TERM HOLDINGS (9.8%)
300,624 1784 U.S. Treasury Money Market Fund.... 300,624
179,000 Dreyfus Government Cash Management
Fund................................... 179,000
148,039 Forum Daily Assets Treasury Fund........ 148,039
----------
TOTAL SHORT-TERM HOLDINGS (COST $627,663)................... $ 627,663
----------
TOTAL INVESTMENTS (100.0%) (COST $6,183,403)................ $6,414,908
----------
----------
</TABLE>
* Temporary restriction due to merger with Walt Disney Company.
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SEE NOTES TO FINANCIAL STATEMENTS AVALON CAPITAL, INC.
4
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AVALON CAPITAL, INC.
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 29, 1996
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<TABLE>
<S> <C>
ASSETS:
Investments, at value (cost $6,183,403)....... $6,414,908
Cash.......................................... 2,576,914
Interest, dividends and other receivables..... 1,486
Organization costs, net....................... 93,249
----------
Total assets...................................... 9,086,557
----------
LIABILITIES:
Accrued advisory fees......................... 5,134
Accrued management fees....................... 2,083
Accrued fees and other expenses............... 10,138
----------
Total liabilities................................. 17,355
----------
NET ASSETS........................................ $9,069,202
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----------
COMPONENTS OF NET ASSETS:
Capital paid in............................... $8,833,445
Undistributed net investment income........... 3,168
Net unrealized appreciation................... 231,505
Accumulated net realized gains................ 1,084
----------
NET ASSETS........................................ $9,069,202
----------
----------
SHARES OUTSTANDING................................ 879,902
----------
----------
NET ASSET VALUE PER SHARE......................... $ 10.31
----------
----------
</TABLE>
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SEE NOTES TO FINANCIAL STATEMENTS AVALON CAPITAL, INC.
5
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AVALON CAPITAL, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED FEBRUARY 29, 1996
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<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividend income............................................................ $ 4,966
Interest income............................................................ 62,689
---------
Total income................................................................... 67,655
---------
EXPENSES:
Advisory................................................................... 17,648
Administration............................................................. 7,014
Transfer agency............................................................ 5,479
Custodian.................................................................. 518
Accounting................................................................. 10,100
Legal...................................................................... 2,082
Amortization of organization costs......................................... 4,908
Other...................................................................... 1,456
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Total expenses................................................................. 49,205
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Advisory fees waived....................................................... (7,206)
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Net expenses................................................................... 41,999
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NET INVESTMENT INCOME.......................................................... 25,656
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REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain.......................................................... 1,084
Net change in unrealized appreciation...................................... 231,505
---------
Net realized and unrealized gain on investments................................ 232,589
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INCREASE IN NET ASSETS FROM OPERATIONS......................................... $ 258,245
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---------
</TABLE>
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SEE NOTES TO FINANCIAL STATEMENTS AVALON CAPITAL, INC.
6
<PAGE>
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AVALON CAPITAL, INC.
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD NOVEMBER 20, 1995 THROUGH FEBRUARY 29, 1996
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<TABLE>
<CAPTION>
AMOUNT SHARES
---------- -------
<S> <C> <C>
NET ASSETS--NOVEMBER 20, 1995 (a)................. $ 100,000
OPERATIONS:
Net investment income......................... 25,656
Net realized gain on investments.............. 1,084
Net change in unrealized appreciation......... 231,505
----------
258,245
----------
DISTRIBUTIONS TO SHAREHOLERS:
Net investment income......................... (22,488)
----------
CAPITAL SHARE TRANSACTIONS:
Sale of shares (b)............................ 8,754,396 871,933
Reinvested dividends.......................... 402 40
---------- -------
8,754,798 871,973
Shares repurchased............................ (21,353) (2,071)
---------- -------
8,733,445 869,902
---------- -------
-------
NET ASSETS--FEBRUARY 29, 1996..................... $9,069,202
----------
----------
</TABLE>
(a) See Note 1 of notes to financial statements for commencement of operations.
(b) Net of $43,055 offering costs.
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SEE NOTES TO FINANCIAL STATEMENTS AVALON CAPITAL, INC.
7
<PAGE>
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AVALON CAPITAL, INC.
FINANCIAL HIGHLIGHTS
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SELECTED DATA FOR A SHARE OUTSTANDING DURING THE PERIOD
<TABLE>
<CAPTION>
PERIOD ENDED
FEBRUARY 29,
1996(C)
--------------
<S> <C>
Beginning net asset value per share......................................... $ 10.00
------
Net investment income....................................................... 0.04
Net realized and unrealized gain on securities.............................. 0.36
Distributions from net investment income.................................... (0.04)
Offering cost............................................................... (0.05)
------
Ending net asset value per share............................................ $ 10.31
------
------
Ratios to average net assets:
Expenses (a)............................................................ 2.38%(b)
Net investment income................................................... 1.46%(b)
Total return................................................................ 3.47%
Portfolio turnover rate..................................................... 0.00%
Net assets at end of period (000's omitted)................................. $ 9,069
</TABLE>
<TABLE>
<S> <C>
(a) During the period, the Adviser waived certain of its fees. Had this waiver not occurred,
the ratio of expenses to average net assets would have been: 2.79%(b)
(b) Annualized.
(c) See Note 1 of notes to financial statements for commencement of operations.
</TABLE>
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SEE NOTES TO FINANCIAL STATEMENTS AVALON CAPITAL, INC.
8
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AVALON CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 1996
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1. ORGANIZATION
Avalon Capital, Inc. (the "Fund") was incorporated in Maryland on March 14,
1995, as a non-diversified, closed-end management investment company. The Fund
had no operations until September 6, 1995, when it sold 10,000 shares of common
stock for $100,000 to Avalon Partners, L.P. Investment operations commenced on
November 20, 1995.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Fund's financial statements are prepared in accordance with generally
accepted accounting principles based upon the following significant accounting
policies:
SECURITY VALUATION -- Securities held by the Fund for which market
quotations are readily available are valued using the last reported sales
price provided by independent pricing services. If no sales are reported,
the last mean of the last bid and ask price is used. In the absence of
readily available market quotations, securities are valued at fair value
determined by the Board of Directors. Short-term securities, having a
maturity of 60 days or less, are valued at amortized cost.
INTEREST AND DIVIDEND INCOME AND DIVIDENDS TO SHAREHOLDERS -- Interest
income is accrued as earned. Dividend income is recorded on ex-dividend
date. Dividends to shareholders of net investment income are declared and
paid annually. Net capital gains are distributed to shareholders at least
annually.
Distributions from net investment income and realized capital gains are
based on amounts calculated in accordance with applicable income tax
regulations. Any differences between financial statement amounts available
for distribution and distributions made in accordance with income tax
regulations are primarily attributable to wash sales.
Discounts on Treasury Bills purchased are amortized over the life of the
respective securities.
ORGANIZATIONAL COSTS -- The Fund incurred costs in connection with its
organization in the amount of $98,157. These costs have been capitalized and
are being amortized using the straight-line method over a five year period
beginning on the commencement of the Fund's investment operations.
FEDERAL INCOME TAX -- The Fund intends to qualify as a regulated investment
company and distributes all of its taxable income. Therefore, no provision
for Federal income tax is required.
3. ADVISORY, SERVICING FEES AND OTHER TRANSACTIONS WITH AFFILIATES
The investment adviser to the Fund is Hutner Capital Management, Inc. (the
"Adviser"). The Adviser receives from the Fund an advisory fee at an annual rate
of 1% of the average daily net assets of the Fund.
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AVALON CAPITAL, INC.
9
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AVALON CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 29, 1996
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The administrator of the Fund is Forum Financial Services, Inc. ("Forum").
Pursuant to an Administration Agreement, Forum receives a fee at an annual rate
of .25% of the average daily net assets of the Fund. In addition, certain legal
expenses of $491 were charged to the Fund by Forum. Forum also serves as
distributor of the Fund's shares pursuant to a Distribution Agreement under
which it receives no fees.
Forum Financial Corp. ("FFC") serves as the Fund's transfer agent and dividend
disbursing agent, for which it receives $12,000 plus certain shareholder account
fees. FFC is authorized to subcontract any or all of its functions to one or
more qualified sub-transfer agents, shareholder servicing agents, or processing
agents, who may be affiliates of FFC, and who agree to comply with the terms of
FFC's agreement with the Fund. FFC also provides fund accounting services to the
Fund. For these services, FFC receives a fee of $36,000 per year plus certain
amounts based upon the number and types of portfolio transactions within the
Fund. Forum and FFC are affiliated companies.
For the period ended February 29, 1996, fees waived by the Fund's investment
adviser were $7,206.
4. SECURITIES TRANSACTIONS
Cost of purchases of securities (excluding short-term investments) during the
period ended February 29, 1996 amounted to $3,132,834. There were no long-term
sales or maturities during this period.
The cost basis of securities for Federal income tax purposes is the same as for
financial accounting purposes. Unrealized appreciation and depreciation as of
February 29, 1996 were $245,752 and $14,247, respectively.
Realized gains and losses on investments sold are recorded on the basis of
identified cost.
5. CAPITAL SHARE TRANSACTIONS
There are 100 million shares of $.001 par value common stock authorized. On
November 20, 1996, the Fund issued 619,918 shares in its initial offering. The
Fund has a Dividend Reinvestment and Cash Purchase Plan ("Plan") pursuant to
which shareholders may elect to have dividend payments or other distributions
invested in additional shares of the Fund. Participants in the Plan may also
make additional cash investments in shares of the Fund on a monthly basis.
During the period ended February 29, 1996, the Fund issued an additional 40
shares in connection with the dividend reinvestment plan. The Fund annually
makes offers to holders of its stock to repurchase not less than 5% nor more the
25% of its stock pursuant to rule 23c-3 under the Investment Company Act of
1940. In addition, the Fund may periodically offer to sell additional shares to
current shareholders and other investors who are not currently shareholders. On
February 29, 1996, the Fund redeemed 2,071 shares in connection with its annual
repurchase of shares, and issued 252,015 shares in connection with its first
interval offering.
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AVALON CAPITAL, INC.
10
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AVALON CAPITAL, INC.
COMPANY PROFILES
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These are a few of the companies whose shares Avalon Capital, Inc. holds. These
profiles describe each company's business and provide some important financial
information. Although past performance does not guarantee future results, the
profiles describe the type of company we are seeking for the Avalon Capital
portfolio.
AMERICAN INTERNATIONAL GROUP, INC. is a holding company with insurance
operations including property and casualty, group life and health, and risk
management and agency services. Foreign operations in more than 100 countries
and jurisdictions accounted for 47% of total revenues in 1994. Value Line
describes the company as follows: "the envy of the insurance industry . . .
highest ratings industry-wide . . . combines operational strengths and financial
muscle due to its geographical reach, diversified product mix and conservative
investment posture . . . . A nearly uninterrupted record of earnings growth
merits this stock one of the highest ratings for Earnings Predictability (95)."
<TABLE>
<CAPTION>
YEAR PER
ENDED SHARE
- ------------------------------------------------------ NET INCOME -----
-----------
(IN
MILLIONS)
<S> <C> <C>
1995.................................................. 2,475.0 5.20
1994.................................................. 2,175.0 4.58
1993.................................................. 1,938.8 4.03
1992.................................................. 1,625.0 3.40
1991.................................................. 1,525.0 3.18
</TABLE>
THE COCA-COLA COMPANY dominates the world soft drink market due to both its
major brand names and a unique distribution system established over the
company's many decades of international growth. Foreign operations accounted for
82% of profits in 1995. In particular, the company is benefiting from the rapid
growth of economies and the improvements in living standards in Latin America,
Asia, and the former Communist countries of eastern Europe. The extraordinary
profitability of its business is reflected in a very high return on equity in
1995 of 56.2%.
<TABLE>
<CAPTION>
YEAR PER
ENDED SHARE
- ---------------------------------- REVENUES NET INCOME -----
------------- -------------
(IN MILLIONS) (IN MILLIONS)
<S> <C> <C> <C>
1995.............................. 18,018 2,985 2.37
1994.............................. 16,172 2,554 1.98
1993.............................. 13,957 2,188 1.68
1992.............................. 13,074 1,884 1.43
1991.............................. 11,572 1,618 1.22
</TABLE>
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AVALON CAPITAL, INC.
11
<PAGE>
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AVALON CAPITAL, INC.
COMPANY PROFILES
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INTERNATIONAL SPEEDWAY, headquartered in Daytona Beach, Florida, operates a
number of well-known motor speedways, including the "super-speedways" in
Daytona, Florida and Talledega, Alabama. These speedways are the sites of the
Daytona 500 and the Southern 500, two of stock car racing's most popular events.
The company also owns motor racing facilities in Darlington, South Carolina;
Tucson, Arizona; and Watkins Glen, New York. International Speedway has
benefited from the enormous increase in stock car (NASCAR) racing's popularity
and much greater spending by corporate America as stock car racing has become an
important advertising medium for the makers of brand-name consumer products
(i.e. Procter and Gamble's Tide, McDonald's, Coca-Cola, etc.).
<TABLE>
<CAPTION>
YEAR PER
ENDED SHARE
- ------------------------------ REVENUES NET INCOME -----
------------- -------------
(IN (IN
THOUSANDS) THOUSANDS)
<S> <C> <C> <C>
1995.......................... 83,893 18,363 8.01
1994.......................... 70,112 14,566 6.37
1993.......................... 59,937 12,763 5.59
1992.......................... 53,479 11,694 5.11
1991.......................... 47,789 10,287 4.24
</TABLE>
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AVALON CAPITAL, INC.
12
<PAGE>
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AVALON CAPITAL, INC.
AUTOMATIC DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
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The Dividend Reinvestment and Cash Purchase Plan (the "Plan") is a convenient
way to acquire additional shares of Avalon Capital's common stock directly from
the Fund by automatic reinvestment of cash distributions or additional
contributions of cash. Avalon Capital will distribute to shareholders
substantially all net investment income and any net realized short-term capital
gains on an annual basis. You may elect to have your dividends automatically
reinvested in shares of the Fund by completing and signing a form of
authorization. You may obtain this form by calling the Forum Financial Corp. at
(800) 943-6786.
Participation in the Plan also allows shareholders to make additional
investments in the Fund each month. Shareholders wishing to make additional
investments through the Plan should send a check to Avalon Capital, Inc.,
Securities Transfer Services, P.O. Box 8209, Boston, MA 02266-8209. Please make
your check payable to "Avalon Capital, Inc." and be sure to write your account
number on the face of the check. Funds received during a month are invested in
shares of the Fund on the last business day of the month in accordance with the
procedures set forth in the prospectus.
The Plan is available to all shareholders of Avalon Capital, Inc. whose shares
are held directly on the books of the Fund. If your shares are held by a bank,
broker or nominee and you wish to participate in the Plan, you should contact
the institution holding your shares to request that the shares be re-registered
in your name. This will enable you to participate in the Plan.
For more information about the Plan, please consult the prospectus.
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AVALON CAPITAL, INC.
13
<PAGE>
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AVALON CAPITAL, INC.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
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SHARE INFORMATION
Avalon Capital's net asset value is calculated as of the close of the New York
Stock Exchange (typically 4:00 p.m. Eastern Time) each Friday. You can obtain
the Fund's last calculated NAV by calling Forum Financial Corp. at (800)
943-6786 or (207) 879-0001.
Shares of Avalon Capital are listed for trading on the NASDAQ SmallCap Market
System, and trade prices can be found in newspaper tables on days following
trades in the Fund's shares. Current quotes are also available from quotation
systems or through brokers using the fund's ticker symbol, "MIST".
The net asset value and market price of Avalon Capital shares are also reported
weekly under the closed-end fund listings in Barron's, the Sunday New York Times
business section, and the Monday edition of the Wall Street Journal.
ACCOUNT INFORMATION
If your Avalon Capital shares are registered in the name of your bank or broker,
please contact that institution if you have changed your address, or if you have
any questions concerning your account. If your shares are registered in your own
name, you may write Forum Financial Corp., Two Portland Square, Portland, ME
04101, or call (800) 943-6786 or (207) 879-0001.
If you have other questions about Avalon Capital, you may write us at Avalon
Capital, Inc., 14 Wall Street, New York, NY 10005-2133, or call (212) 577-8400.
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AVALON CAPITAL, INC.
14
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AVALON CAPITAL, INC.
15
<PAGE>
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AVALON CAPITAL, INC.
DIRECTORS
William Endicott
Daniel E. Hutner
Nancy Watson Hutner
Edward Rosen
Donald Smith
INVESTMENT ADVISER
Hutner Capital Management, Inc.
14 Wall Street
New York, New York 10005
ADMINISTRATOR AND DISTRIBUTOR
Forum Financial Services, Inc.
Two Portland Square
Portland, Maine 04101
CUSTODIAN
The First National Bank of Boston, N.A.
150 Royall Street
Canton, Massachusetts 02021
LEGAL COUNSEL
Battle Fowler LLP
75 East 55th Street
New York, New York 10022
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281-1414
INVESTOR INFORMATION:(800) 943-6786 or
(207) 879-0001
THIS REPORT IS AUTHORIZED FOR DISTRIBUTION ONLY TO
SHAREHOLDERS AND TO OTHERS WHO HAVE RECEIVED A
COPY OF THE AVALON CAPITAL, INC. FUND PROSPECTUS.
AVALON CAPITAL,
INC.
-----------
SEMI-ANNUAL REPORT
---------------------
FEBRUARY 29, 1996
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