AVALON CAPITAL, INC.
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SEMI-ANNUAL REPORT April 18, 1997
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"If you don't stand for something, you'll fall for anything."
Don Shula, NFL Hall of Fame,
Former coach of the Miami Dolphins
Dear Shareholders,
From May 20, 1996, the scheduled date for completing the investment of the
proceeds of our initial public offering, through today, April 18, 1997, the net
asset value per share (NAV) of Avalon Capital, Inc. has risen from $10.60 to
$12.36 - a gain of 16.60% compared to 15.99% for the S&P 500. For the year to
date, the NAV is up 6.18% compared to 4.01% for the S&P 500. Our returns compare
even more favorably to the Investor's Business Daily Mutual Fund Index, a
measure of a broad group of mutual funds, which returned -8.8% for the year to
date.
This performance was even better than it looks, since our expenses were higher
than expected during our first year of operations due to the Fund's initial
small size. We also maintained sizable cash positions through this period, first
for investment purposes and later to meet the requirements of the annual
repurchase offer in February. At the end of calendar 1996, the Board changed our
administrator and transfer agent, which will result in a reduction of the Fund's
expenses and thus increase returns for our shareholders.
While we are pleased with the progress of the Fund's NAV over this relatively
short period of time, please remember that our ultimate goal is substantial
long-term appreciation of your Avalon Capital shares, as I explain in the rest
of this letter.
On February 28, 1997, the Fund completed its second periodic repurchase offer
and 68,944 shares were repurchased. Since the number of shares tendered was
larger than the original repurchase offer, the Board increased the offer by the
maximum of 2% of the Fund's outstanding shares, and all shares were accepted for
tender on a pro-rata basis.
Although the annual repurchase offer provides a convenient way to sell shares,
we would like to remind anyone wishing to sell their shares that the Fund trades
on the NASDAQ SmallCap Market System (symbol "MIST"). The liquidity created by
such sales should benefit all shareholders as well as outsiders wishing to buy
Avalon Capital shares. We are currently preparing a handbook for shareholders
that will explain the mechanics of placing buy and sell orders as well as
providing other information about the Fund.
- 1 -
<PAGE>
AVALON CAPITAL, INC.
SHAREHOLDER LETTER
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Also, as you will discover later in this report, Avalon Capital is designed for
an investor who is willing to make a commitment to its strategy for a long
period of time (5, 10, or more years). For many current Avalon Capital
shareholders, the Fund could well remain a core holding for the rest of their
lives.
Such investors are the ones we want to encourage to buy and hold our shares. We
have made every effort to discourage investors who have a short-term focus or
who favor investment strategies that differ from ours, and we will continue to
do so.
----------------
Recently, a shareholder of Avalon Capital asked me for some literature that
would explain quickly and simply how we invest. Although he had a prospectus for
Avalon Capital and a copy of my book, The Rational Investor, which further
explains our strategy, he was looking for a refresher course. After reviewing my
collection of investment books and articles, I decided it might be best to use
this report to update all shareholders on our strategy. In particular, some of
you may wonder about recent comments by Alan Greenspan about "irrational
exuberance" and by Warren Buffett about an "overvalued market."
The key to understanding the way we invest is a concept Buffett calls
"look-through" earnings. These earnings are the total of the earnings of each
company you own, calculated on a per share basis. Since properly-computed
earnings represent the profits of any economic enterprise, they provide the best
measure of economic value.
Of course, this idea may come as a shock to most investors, since they rely
solely on one simple - and often inaccurate - measure of value: the market price
of their shares. However, as we'll see, such a focus exclusively on market price
can cause real problems for an investor, particularly when that market price
goes down. The result is usually a series of uncomfortable emotions, such as
fear and panic, followed by an irresistible urge to sell.
The best way to avoid this problem is not to allow market price, particularly
over the short-term, to be the arbiter of value for your portfolio. What we do
instead - company by company - is to look at earnings. In particular, we project
earnings out 5, 10, and 20 or more years. As I'll explain in a moment, such a
simple change in focus can both reduce investment risk and greatly increase
returns.
Now, you won't find brokers willing or interested in estimating earnings for
companies a decade or more from now. Such an approach wouldn't generate much in
the way of commissions. And most portfolio and mutual fund managers won't do it,
because short-term performance is what gets and keeps business. Of course, what
works for the advice-giver may not work for the one receiving the advice. Over
decades, data have shown that 80% or more of professional advisers underperform
the stock market averages. Furthermore, short-term strategies such as the recent
"momentum" craze in high-tech stocks, usually lead to disaster.
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Avalon Capital, Inc.
- 2 -
<PAGE>
AVALON CAPITAL, INC.
SHAREHOLDER LETTER
- ------------------------------------------------------------------------------
So, what investment strategy actually works? How can you safely increase your
wealth over a period of years, without having to worry about your investments,
and at the same time, minimize capital gains taxes and brokerage commissions? I
believe the only way to achieve this goal is to constantly search for and find a
select group of companies that have certain superb economic characteristics -
and then to hold on to them for a long period of time. (This doesn't, by the
way, mean you never sell them. It just means you are far more selective about
such actions than most investors).
What are these economic characteristics? Well, if you're going to hold on to the
shares of a company for a long time, you don't want a business subject to a lot
of change. And if you want to make money, the company needs to be consistently
profitable, which means the company must have some sort of sustained competitive
advantage. A more detailed description of these characteristics would be the
subject of another letter; those who are interested can re-read my book (copies
can be ordered by calling 609-683-3916).
To show you exactly how we look at an investment, let's take a familiar example
- - Coca-Cola. If Coke has earnings of $1.65 per share in 1997 and we project,
based on a detailed analysis of its business, that its earnings will be $10.22
per share in 2007, we can estimate its value a decade from now: if you assume a
p/e of 25, that value in 2007 would be $255.
The more certain you are about this estimate of value, the less reason you have
for any concern about events between now and 2007. If you know your shares are
going to be worth somewhere around $255 in a decade, who cares what the stock
market does tomorrow, or next year? You'd probably be better off throwing out
your brokerage statements, blocking CNBC on your cable box, and avoiding
cocktail party conversations about investments for the next ten years.
If your focus isn't long-term, you're taking a substantial risk, because almost
anything can happen to a stock price in the short-term - and probably will. As
Warren Buffett writes in his 1996 Annual Report, "if you aren't willing to own a
stock for ten years, don't even think about owning it for ten minutes."
The next step is to make a series of such projections for a whole portfolio as
if it were a company that happened to own shares of other companies. Once you've
done that, you have an estimate of "look-through" earnings that you can use to
estimate the portfolio's future value. To keep this idea simple, let's say you
believe earnings will at least quadruple. Then, roughly, your portfolio could
well rise over time a like amount.
- ------------------------------------------------------------------------------
Avalon Capital, Inc.
- 3 -
<PAGE>
AVALON CAPITAL, INC.
SHAREHOLDER LETTER
- ------------------------------------------------------------------------------
Our job is to come up with these estimates of future value for you, and to be
right about them as often as possible. Your job as an investor with us is to
understand this strategy, believe it will work, and then make every effort to
avoid being swayed by the overflow of investment information and questionable
strategies being thrust on you from all directions. In other words, to stand for
something.
To put all this somewhat differently, most people overestimate what can be
accomplished in a quarter and underestimate what can be accomplished in a
decade. While it is human nature to focus on the short-term, the really large
rewards go ultimately to investors who can see today that Coca-Cola will likely
sell for $255 in ten years.
I hope these beliefs of mine about investing will help you when stock market
prices go down, as they inevitably will. We're enclosing in this report a
reprint of an editorial from the National Association of Investors Corporation's
magazine, Better Investing, that also describes a rational attitude toward the
stock market.
Finally, I recently came across the following passage from Jack Nicklaus'
autobiography, Jack Nicklaus: My Story, which describes how an attitude similar
to the one I've outlined above helped him become one of the most successful
golfers of all time. Nicklaus talks about how, when he was young and strong, he
would try to use his strength to hit a "hero" shot out of a difficult position,
all too frequently turning a small setback into a large disaster.
Then, he says,
Playing with the pros, I learned that the best of them had progressed far beyond
this kind of immaturity. They were able to stay cool, to remain in command of
their emotions at all times, to play one shot at a time without getting either
wildly excited or deeply depressed about its outcome. Inner self-control, I came
to realize, was a much larger factor in winning and losing than ball-striking
ability. That was because along with self-control came realism and patience, the
only bases from which a golfer can deal effectively with the endless challenges
and frustrations that the game of golf has always presented and always will.
/s/ Daniel E. Hutner
Daniel E. Hutner
Chairman and President
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Avalon Capital, Inc.
- 4 -
<PAGE>
BE CAREFUL
Reprinted from Better Investing, official publication of the
National Association of Investors Corporation, February and March 1997
No one really knows what the weeks, months and quarters ahead have in store for
us in the stock market. So, be careful. When it comes to investment performance,
the coming year could turn out to be another wonderful surprise, just like 1996
was. Or it could end up going the other way - taking us far lower in market
values than most of us might even want to think about today. So what's a
long-term investor to do?
We'd like to suggest a simple, not-too-surprising answer that people who know us
well will find as no surprise: keep investing a small amount of money on a
regular basis in growing companies.
You might say, "Yes, but...this can't go on forever. The market just can't have
another year of 20-plus percent performance. That's more than double historic
returns..." Yes, that's true. But be careful. The market has a way of humbling
Wall Street's best. It doesn't have to go south this year. Multiples are high by
historic standards, which means values have become harder and harder to find.
But with inflation in control, an economy that seems to have slowed down without
going into a recession, and optimism over progress toward a more balanced budget
and tax proposals more supportive of saving and investing, there are good
reasons why multiples should be at the high end of historic levels. That could
continue.
If you are planning to take some or all of your money out of stocks, be careful,
too. It's one thing if you know you'll need the funds sometime in the coming
year, because it's anyone's guess where the market will be in the months ahead -
current prices could prove to be a near-term high. But if you don't need the
funds and simply want to move out of stocks to try to second guess the market,
remember you could be wrong...and you're not done making decisions once you
leave. You still have to decide: 1) what to do with your funds (less taxes and
commissions, of course) while you're out of the market; 2) when to get back in;
and 3) what to buy once you do. Chances are you'll need to do a good job with
all those decisions to be further ahead of those who never leave.
...Holding stocks in a down market is not a disaster. The managers of good
businesses do not quit building the business when their stocks' prices go down.
They keep right on building the business so that when the market turns around,
their stocks will hit a new high.
And they will.
- ------------------------------------------------------------------------------
Avalon Capital, Inc.
- 5 -
<PAGE>
AVALON CAPITAL, INC.
COMPANY PROFILES
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These are a few 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.
SERVICEMASTER LIMITED PARTNERSHIP engages in a wide variety of service
businesses. Originally established as a provider of maintenance for health-care,
education, and industrial facilities, company-owned and franchise businesses
have expanded into lawn-care (Chem Lawn), pest control (Terminix),
disaster-recovery, health-care, maid services (Merry Maids), and home warranty
plans (American Home Shield). These businesses have been consistently profitable
and require little in the way of capital spending, leading to high cash flow and
an estimated return on partners' capital for 1997 of 29.5%. As a master limited
partnership, the company has been subject to minimal tax at the corporate level
in recent years. However, at the end of 1997, SVM will likely convert back to
corporate form due to the expiration of the law allowing such partnerships. The
company's shares should receive greater attention by institutional investors,
many of whom are now restricted from buying MLP's.
<TABLE>
<S> <C> <C> <C>
Year Net Per
Ended Revenues Income Share
(in millions) (in millions)
1997 (estimated) $3,825.0 $295.0 $2.00
1996 3,458.3 245.1 1.70
1995 3,202.5 172.0 1.45
1994 2,985.2 139.9 1.21
1993 2,758.9 115.8 1.01
</TABLE>
Source: ServiceMaster Limited Partnership, Value Line Investment Survey
- ------------------------------------------------------------------------------
Avalon Capital, Inc.
- 6 -
<PAGE>
AVALON CAPITAL, INC.
COMPANY PROFILES
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AMERICAN EXPRESS COMPANY, founded in 1850, is a global financial services
company with two major divisions: travel related services (traveler's checks,
charge and credit cards, travel agencies, etc.) and American Express Financial
Advisors (formerly IDS - financial planning, investment products such as mutual
funds and brokerage, insurance products). With the sale and spin-off of various
businesses (AMEX Life, Lehman Brothers, Fireman's Fund Corp.) several years ago,
the company has become much more focused on its highly profitable core
businesses. After failing to grow significantly in the 1980s, earnings have now
risen roughly 15% per year for the last four years.
<TABLE>
<S> <C> <C> <C>
Year Net Per
Ended Revenues Income Share
(in millions) (in millions)
1997 (estimated) $17,200 $1,895 $4.00
1996 16,237 1,739 3.57
1995 15,841 1,564 3.11
1994 14,282 1,380 2.68
1993 14,173 1,172 2.30
</TABLE>
Source: American Express Company, Value Line Investment Survey
GANNETT CO., INC. is one of the largest diversified media companies in the U.S.,
with more than 190 newspapers in 38 states and in U.S. territories, 16
television stations, 5 major market radio stations, wire service bureaus and
cable television systems in major U.S. markets. Its largest newspaper is USA
Today with a circulation of 2.1 million, making it the largest-selling daily
newspaper in the country. In recent years, Gannett's radio and TV earnings have
been growing at an increasing rate and have become a much more significant
portion of the company's overall business.
<TABLE>
<S> <C> <C> <C>
Year Net Per
Ended Revenues Income Share
(in millions) (in millions)
1997 (estimated) $4,750.0 $610.0 $4.35
1996 4,421.1 530.9 3.77
1995 4,006.7 477.3 3.41
1994 3,824.5 465.4 3.23
1993 3,641.6 397.8 2.72
</TABLE>
Source: Gannett Co., Inc., Value Line Investment Survey
- ------------------------------------------------------------------------------
Avalon Capital, Inc.
- 7 -
<PAGE>
<TABLE>
<CAPTION>
AVALON CAPITAL, INC.
SCHEDULE OF INVESTMENTS
FEBRUARY 28, 1997
(Unaudited)
- ------------------------------------------------------------------------------
<C> <S> <C>
Security
Shares Description Value
Common Stocks (93.31%)
Beverages (24.15%)
2,000 Anheuser-Busch Companies, Inc. .......... $89,000
40,400 Coca-Cola Company........................ 2,464,400
13,000 Pepsico Inc. ............................ 427,375
-----------
2,980,775
-----------
Broadcasting (0.58%)
2,000 Renaissance Communications *............. 71,500
-----------
Consumer Products (7.92%)
2,200 Gillette Company......................... 174,075
3,000 Philip Morris Companies, Inc. ........... 405,375
12,900 UST, Inc. ............................... 398,287
-----------
977,737
-----------
Banks-Regional (3.14%)
1,200 First Empire State....................... 387,900
-----------
Diversified Companies (5.75%)
20 Berkshire Hathaway, Inc. *............... 710,000
-----------
Commercial & Industrial Services (2.29%)
11,000 Servicemaster L.P. ...................... 283,250
-----------
Entertainment (8.46%)
14,072 The Walt Disney Company.................. 1,044,846
-----------
Financial Services (9.48%)
17,900 American Express Company ................ 1,170,213
-----------
Food Products (2.25%)
40 Earthgrains Company...................... 2,190
4,600 Wrigley (Wm) Jr. Company................. 275,425
-----------
277,615
-----------
Security
Shares Description Value
Insurance (7.16%)
7,300 American International Group, Inc. ...... 883,300
-----------
Leisure/Amusement (3.44%)
20,325 International Speedway Corporation....... 424,284
-----------
Mining (3.05%)
8,000 Franco Nevada Mining, Ltd. .............. 376,869
-----------
Mortgage Finance (8.44%)
9,200 Federal Home Loan
Mortgage Corporation............... 273,700
19,200 Fannie Mae............................... 768,000
-----------
1,041,700
-----------
Newspaper (1.74%)
2,700 Gannett Company, Inc. ................... 215,325
-----------
Publishing (1.82%)
6,000 Readers Digest Association, Inc. ........ 224,250
-----------
Restaurants (3.64%)
10,400 McDonald's Corporation................... 449,800
-----------
Total Common Stocks (Cost $9,017,511).................. 11,519,364
-----------
Short-Term Holdings (6.45%)
561,439 Forum Daily Assets Treasury Fund.......... 561,439
235,460 Star Treasury Fund........................ 235,460
-----------
Total Short-term Holdings (Cost $796,899).............. 796,899
-----------
Total Investments ( Cost $9,814,410)...................$12,316,263
===========
<FN>
*Denotes non-income producing securities
</FN>
</TABLE>
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See Notes to Financial Statements Avalon Capital, Inc.
- 8 -
<PAGE>
<TABLE>
<CAPTION>
AVALON CAPITAL, INC.
STATEMENT OF ASSETS AND LIABILITIES
FEBRUARY 28, 1997
(Unaudited)
- ------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments, at value (cost $9,814,410).................... $12,316,263
Interest, dividends and other receivables.................. 13,686
Organization costs, net.................................... 76,890
-----------
Total Assets................................................... 12,406,839
-----------
LIABILITIES:
Accrued advisory fee....................................... 9,539
Accrued administration fees................................ 4,867
Accrued fees and other expenses............................ 46,938
-----------
Total Liabilities.............................................. 61,344
-----------
NET ASSETS..................................................... $12,345,495
===========
COMPOSITION OF NET ASSETS:
Paid-in capital............................................ $9,918,200
Undistributed net investment loss.......................... (65,714)
Undistributed capital losses............................... (8,844)
Net unrealized appreciation on investments................. 2,501,853
-----------
NET ASSETS..................................................... $12,345,495
===========
SHARES OUTSTANDING............................................. 984,912
===========
NET ASSET VALUE PER SHARE (market value $11.50)................ $12.53
===========
</TABLE>
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See Notes to Financial Statements Avalon Capital, Inc.
- 9 -
<PAGE>
<TABLE>
<CAPTION>
AVALON CAPITAL, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1997
(Unaudited)
- ------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends.................................................. $66,855
Interest................................................... 31,392
Total Investment income........................................ 98,247
EXPENSES:
Advisory................................................... 59,721
Administration............................................. 14,817
Accounting................................................. 19,363
Legal...................................................... 20,010
Auditing................................................... 8,067
Custodian.................................................. 1,613
Amortization of organization costs......................... 10,561
Transfer agency............................................ 11,332
Filing Fees................................................ 5,649
Directors.................................................. 1,511
Other...................................................... 10,372
Total expenses................................................. 163,016
NET INVESTMENT LOSS............................................ (64,769)
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS:
Net realized loss on investments........................... (36,859)
Net change in unrealized appreciation...................... 2,085,194
Net realized and unrealized gain
(loss) on investments........................................ 2,048,335
INCREASE IN NET ASSETS FROM OPERATIONS......................... $1,983,566
</TABLE>
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See Notes to Financial Statements Avalon Capital, Inc.
- 10 -
<PAGE>
<TABLE>
<CAPTION>
AVALON CAPITAL, INC.
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------
<S> <C> <C>
For the six months November 20, 1995*
ended February 28, 1997 through August 31, 1996
(Unaudited)
FROM INVESTMENT ACTIVITIES:
Net investment loss........................... $(64,769) $(115)
Net realized gain (loss) on investments....... (36,859) 29,655
Net unrealized appreciation................... 2,085,194 416,659
----------- -----------
Net increase in net assets resulting
from operations............................ 1,983,566 446,199
----------- -----------
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income......................... - (22,488)
----------- -----------
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares.................. 182,256 9,676,913**
Reinvested dividends.......................... 402
----------- -----------
182,256 9,677,315
Shares repurchased............................ - (21,353)
----------- -----------
Net increase in net assets from capital
share transactions......................... 182,256 9,655,962
----------- -----------
NET INCREASE IN NET ASSETS........................ 2,165,822 10,079,673
----------- -----------
NET ASSETS:
Beginning of period............................... 10,179,673 100,000
----------- -----------
End of period..................................... $12,345,495 $10,179,673
=========== ===========
<FN>
* Commencement of Operations
** Net of $43,055 offering costs
</FN>
</TABLE>
- ------------------------------------------------------------------------------
See Notes to Financial Statements Avalon Capital, Inc.
- 11 -
<PAGE>
<TABLE>
<CAPTION>
AVALON CAPITAL, INC.
FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------
Selected Data for a Share Outstanding During the Period
<S> <C> <C>
For the six months November 20, 1995*
ended February 28, 1997 through August 31, 1996
(Unaudited)
Beginning net asset value per share............... $10.51 $10.00
Net investment loss............................... (0.07) -
Net realized and unrealized gain on securities.... 2.09 0.60
Distribution from net investment income........... - (0.04)
Offering cost..................................... - (0.05)
----------- -----------
Ending net asset value per share.................. $12.53 $10.51
=========== ===========
Ending market value per share..................... $11.50 $10.88
=========== ===========
Ratios to average net assets:
Expenses...................................... 2.91%** 3.14%**
Total return:
Based upon net asset value.................... 42.55%** 5.48%
Based upon market value....................... 11.82%** 9.18%
Portfolio turnover rate........................... 2.48% 0.00%
Average brokerage commission rate +.............. $.0622 $.0450
Net assets at end of period (000's omitted)...... $12,345 $10,180
<FN>
* Commencement of operations
** Annualized
+ Amount represents average commission per share, paid to brokers, on the
purchase and sale of portfolio securities
</FN>
</TABLE>
- ------------------------------------------------------------------------------
See Notes to Financial Statements Avalon Capital, Inc.
- 12 -
<PAGE>
AVALON CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1997
(Unaudited)
- ------------------------------------------------------------------------------
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 which permit management to make certain estimates
and assumptions at the date of the financial statements and are based, in part,
on the following information:
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 mean of the last bid and ask price is used. In the absence of readily
available market quotations, securities are valued at fair value as
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 from 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 organizational cost and the
recognition of unrealized loss on options. 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 Federal
income tax provision 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 an advisory fee from the Fund at an annual rate
of 1% of the average weekly net assets of the Fund. The administrator of the
Fund is American Data Services, Inc. ("ADS"). Pursuant to an Administration
Agreement, ADS receives a fee equal to the greater of an annual rate of .10% of
the average weekly net assets of the Fund or $44,400 per year . ADS also
provides fund accounting services to the Fund pursuant to the administration
agreement under which it receives no fees.
- ------------------------------------------------------------------------------
See Notes to Financial Statements Avalon Capital, Inc.
- 13 -
<PAGE>
AVALON CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1997
(Unaudited)
- ------------------------------------------------------------------------------
American Stock Transfer & Trust Co. serves as the Fund's transfer agent and
dividend disbursing agent, for which it receives a fee of $6,000 per year plus
expenses.
4. Securities Transactions
Cost of purchases and proceeds from sales (excluding short-term investments)
during the six months ended February 28, 1997, amounted to $3,976,031 and
$246,000, respectively. The cost basis of securities for Federal income tax
purposes is the same as for financial accounting purposes. Gross unrealized
appreciation and depreciation as of February 28, 1997 was $2,620,761 and
$118,908, 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. The
Fund has a Dividend Reinvestment and Cash Purchase Plan ("Plan") pursuant to
which shareholders 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 six months
ended February 28, 1997, the Fund issued no additional 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 than 25% of its stock pursuant to
rule 23c-3 under the Investment Company Act of 1940. On February 28, 1997, the
Fund redeemed 68,944 shares in connection with its annual repurchase of shares.
On a calendar quarter basis, the Fund may offer to sell additional shares to
current shareholders and other investors who are not currently shareholders. On
September 30, 1996 and December 31, 1996, the Fund issued 12,748 and 3,804
shares, respectively.
- ------------------------------------------------------------------------------
See Notes to Financial Statements Avalon Capital, Inc.
- 14 -
<PAGE>
AVALON CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1997
(Unaudited)
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AUTOMATIC DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN 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. Shareholders wishing to make additional investments through the Plan
should send a check to American Data Services, 24 West Carver Street, 2nd Floor,
Huntington, NY 11743. Please make your check payable to "Avalon Capital, Inc."
and be sure to write your account number on the face of the check. You may
verify your account number by calling American Stock Transfer & Trust Co., the
Fund's transfer agent, at (800) 937-5449. 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.
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 American Data Services, Inc. at (516)
385-9580.
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 American Stock Transfer & Trust Co., 40 Wall Street, New
York, NY 10005, or call (800) 937-5449.
If you have other questions about Avalon Capital, you may write us at Avalon
Capital, Inc., 34 Chambers Street, Suite 200, Princeton, NJ 08542, or call (609)
683-3916.
<PAGE>
Avalon Capital,
Inc.
SEMI-ANNUAL REPORT
February 28, 1997
Avalon Capital, Inc.
DIRECTORS
William Endicott
Daniel E. Hutner
Nancy Watson Hutner
Edward Rosen
Donald Smith
INVESTMENT ADVISER
Hutner Capital Management, Inc.
34 Chambers Street
Suite 200
Princeton, NJ 08542
ADMINISTRATOR
American Data Services, Inc.
24 West Carver Street
2nd Floor
Huntington, New York 11743
DISTRIBUTOR
ADS Distributors, Inc.
101 Main Street
Safety Harbor, FL 34695
CUSTODIAN
Star Bank, NA
425 Walnut Street
Cincinnati, OH 45201
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: (516) 385-9580
This report is authorized for distribution only to shareholders and to others
who have received a copy of the Avalon Capital, Inc. Fund Prospectus.
