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AVALON CAPITAL, INC.
AVALON CAPITAL, INC.
34 CHAMBERS STREET, SUITE 200
PRINCETON, NJ 08542
609-683-3916
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AVALON CAPITAL, INC.
ANNUAL REPORT
AUGUST 31, 1997
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Avalon Capital, Inc. (the "Fund"), is a non-diversified closed-end investment
company whose primary investment objective is to provide investors with
long-term capital appreciation by investing in a portfolio of securities that
possess fundamental investment value and may be purchased at a reasonable cost.
To this end, the Fund applies the following investment principles:
- View each investment as a business
- Think independently
- Emphasize high returns
- Look for sustained business excellence
- Focus on businesses that consider shareholder interests
- Seek to pay a reasonable price
- Invest for the long term
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Avalon Capital, Inc. features a Dividend Reinvestment and Cash Purchase Plan
(the "Plan"), which allows shareholders to acquire additional shares directly
from the Fund by automatically reinvesting dividends or making additional
investments as often as each month. An Automatic Cash Investment feature allows
investors to set up direct investments from a bank account on a regular monthly
or quarterly basis. A more detailed description of the Plan appears on page 16
of this report and in the Fund's prospectus.
ADDITIONAL SALES OF SHARES
Avalon Capital, Inc. also has a unique interval feature which provides the
opportunity for non-shareholders to buy shares directly from the Fund. Unlike
most closed-end funds, which trade only over an exchange, Avalon Capital, Inc.
may periodically sell additional shares with no sales commission and no minimum
or maximum investment limit. The Fund currently makes such offerings on a
calendar quarterly basis.
REPURCHASE OF SHARES
Avalon Capital, Inc. trades on the NASDAQ Small Cap Market System under the
ticker symbol "MIST." To provide additional shareholder liquidity, each February
the Fund offers to repurchase between 5 percent and 25 percent of its
outstanding shares at the then-current net asset value. Before each repurchase
offer, the Fund will establish a deadline for receiving repurchase requests no
more than 14 days before the repurchase pricing date, which shall be the last
business day of February. No less than 21 days and no more than 42 days before
the repurchase request deadline, the Fund will give notice of the repurchase
offer, including the repurchase request deadline, to each shareholder of record.
The Fund has also been authorized by its Board of Directors, in accordance with
Section 23(c) of the Investment Company Act of 1940, to repurchase its shares in
the market from time to time as and when it is deemed advisable by the Fund.*
Such purchases will be made at a price not above the market value or the net
asset value, whichever is lower, at the time of such purchase. If such purchases
are made at prices below net asset value, they will increase the net asset value
of the remaining outstanding shares. Shares repurchased by the Fund are retired.
For additional information about Avalon Capital, Inc. or any of the above
programs, please call the Fund at (609) 683-3916.
* Meeting of the Board of Directors, October 18, 1996.
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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.
34 CHAMBERS STREET
SUITE 200
PRINCETON, NJ 08542
ADMINISTRATOR
AMERICAN DATA SERVICES, INC.
P.O. BOX 5536
HAUPPAUGE, NY 11788-0132
CUSTODIAN
STAR BANK, NA
425 WALNUT STREET
CINCINNATI, OH 45201
LEGAL COUNSEL
BATTLE FOWLER LLP
75 EAST 55TH STREET
NEW YORK, NY 10022
INDEPENDENT ACCOUNTANTS
DELOITTE & TOUCHE LLP
TWO WORLD FINANCIAL CENTER
NEW YORK, NY 10281-1414
INVESTOR INFORMATION: (516) 951-0500
THIS REPORT IS AUTHORIZED FOR DISTRIBUTION ONLY TO SHAREHOLDERS AND TO
OTHERS WHO HAVE RECEIVED A COPY OF THE AVALON CAPITAL, INC. FUND PROSPECTUS.
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AVALON CAPITAL, INC.
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ANNUAL REPORT October 22, 1997
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Dear Shareholders,
For the fiscal year ended August 31, 1997, Avalon Capital Inc.'s net asset value
(NAV) rose from $10.51 to $13.35 - a gain of 27%. As of today, the NAV has risen
further to $14.51 - a gain of 45.1% since inception on November 20, 1995.
At the Fund's annual redemption on February 28, 1997, 68,944 shares were
redeemed. In addition, during fiscal 1997, 19,309 new shares were sold through
the Cash Purchase Plan and quarterly offerings.
COMPOUNDING YOUR WEALTH
We urge all current and prospective shareholders to consider our Cash Purchase
Plan as a way of purchasing additional shares. As many of you know, I serve as a
consultant to the National Association of Investors Corporation (NAIC), an
organization of investment clubs and individual investors. The NAIC has four
basic principles, similar to ours, that have served its investors well for
nearly 50 years. The principles are:
1. Invest regularly, regardless of the market outlook;
2. Reinvest all earnings;
3. Invest in growth companies; and
4. Diversify to reduce risk.
In particular, NAIC investors have benefitted substantially by reinvesting
dividends regularly and making periodic additional cash investments. These
regular investments provide the greatest reward for an investor during a
depressed stock market when shares are steadily accumulated at attractive
prices. Just when the majority of investors are panicking and selling out of
common stocks, these savvy investors are scooping up the bargains.
Moreover, investing in companies with high, steady growth rates, like those we
choose, offers the best way we know of achieving our long-term goal: large
compound gains in an investment in a manner that both maximizes safety and
minimizes capital gains taxes.
Consider the following table, which I consult regularly. It gives an indication
of how much an investment can grow over time if certain steady growth rates are
achieved:
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1
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AVALON CAPITAL, INC.
SHAREHOLDER LETTER
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COMPOUND GROWTH FACTORS
PERCENT ANNUAL GROWTH
---------------------
5% 10% 15% 20%
-- --- --- ---
5 1.3 1.6 2.0 2.5
NUMBER 10 1.6 2.6 4.0 6.2
OF 15 2.0 4.2 8.1 15.4
YEARS 20 2.7 6.7 16.4 38.3
25 3.4 10.8 32.9 95.4
30 4.3 17.4 66.2 237.4
For example, if your assets grow at 15% per year, after 5 years they will double
(x 2.0). The key is to keep your eye on achieving these long-term returns and
pay as little attention as possible to short-term volatility in a company's
shares or the stock market as a whole.
AVALON CAPITAL - DESIGNED FOR THE LONG-TERM INVESTOR
We have designed Avalon Capital carefully to embody all of the NAIC's
principles, as well as our own principles as described in my book, The Rational
Investor. Avalon Capital provides you with a diversified portfolio of what we
consider the best growth companies in the world.
The Cash Purchase Plan allows you to steadily add to your holdings of Avalon
Capital over the years. We have recently added an Automatic Cash Investment
feature that allows you to set up direct investments from your bank account in
whatever amount you choose on a regular monthly or quarterly basis. As the NAIC
has shown, even very modest investments made over a number of years can lead to
substantial wealth through the magic of the compound growth of superior
long-term investments.
For further information about the Cash Purchase Plan, please consult the
description in your prospectus. If you need additional information, or another
copy of the prospectus, feel free to call us at 609-683-3916.
THIS YEAR'S REPORT
As I mentioned in last year's report, we have now assembled what we consider a
championship-like team of companies. A look at our portfolio will show you
Michael Jordans like Coca-Cola and Gillette, as well as a number of lesser-known
but excellent "players" and a few rising stars.
For a detailed description of some of our newest acquisitions, please see the
Company Profiles in this report. These profiles appear in each of our
semi-annual and annual reports.
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AVALON CAPITAL, INC.
SHAREHOLDER LETTER
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Last year, I talked a lot about our investment strategy in an attempt to explain
what we're doing for investors in our relatively new company. This year, I'd
like to explain some of the reasons we chose the closed-end fund format for
Avalon Capital. In particular, I believe Avalon Capital offers some significant
benefits for true long-term investors, both when the stock market is rising, and
particularly, in the event of a stock market decline.
The following article, which I wrote in the special October 1997 mutual fund
issue of Better Investing magazine, the official publication of the NAIC, gives
a detailed look at the risks many mutual fund investors are running today and
ways that an educated investor can avoid them. The article also explains why
both the NAIC and our firm selected closed-end investment companies as the best
pooled investment vehicle for our investors. I hope you find it informative.
/s/ Daniel E. Hutner
Daniel E. Hutner
Chairman and President
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3
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Reprinted from BETTER INVESTING, October 1997.
MUTUAL FUND RESEARCH AND INVESTING
A FEW GUIDELINES FOR PICKING THE BEST FUND POSSIBLE
UNDERSTANDING THE RISKS
BY DANIEL E. HUTNER, BI GUEST COLUMNIST
RECENTLY, I HAD DINNER WITH A PROFESSIONAL COUPLE WHO HAVE INVESTED IN MUTUAL
FUNDS FOR MANY YEARS. WHEN I POINTED OUT THAT MOST MUTUAL FUNDS (80-90 PERCENT)
NOT ONLY UNDERPERFORM THE S&P 500 OVER TIME, BUT ALSO RUN UP LARGE TAX BILLS FOR
THEIR SHAREHOLDERS (I.E. THROUGH LARGE CAPITAL GAINS DISTRIBUTIONS), THEY LOOKED
AT ME IN SHOCK. As we talked further, it became clear that nobody had ever told
them some important facts about mutual funds. In particular, they had simply
never factored in the negative effect of taxes on the performance of their
mutual funds.
Under the new tax law, this negative effect becomes even more significant.
Morningstar recently calculated that 29 percent of capital gains distributions
by mutual funds in 1996 were short term and taxed at the income tax rate of 39.6
percent. The new law would continue to tax such gains at the same rate, as
opposed to the new long-term rates of 20 percent, or just 18 percent for
holdings held five years or more starting in 2001. Furthermore, shareholders
must pay these taxes out of their current income or by liquidating other assets
if, following NAIC principles, they participate in a fund's DRP and
automatically reinvest their capital gains distributions in the fund.
HIDDEN COSTS AND OTHER DISADVANTAGES
Increasingly, investors are discovering to their dismay that there are
hidden costs, such as taxes, and other disadvantages to owning shares of a
standard mutual fund. Given the huge surge in the popularity of mutual funds in
recent years, and a roaring and record-setting bull market, the number of
investors affected has dramatically increased. And, as I explain shortly, a bear
market in the future could raise their dissatisfaction with certain aspects of
mutual funds to a fever pitch.
As long-time NAIC members know all too well, it has happened before. The
last mutual fund boom occurred in the mid-to-late 1960s when my parents'
generation was reaching their peak investing years. The aftermath of that boom
was a bust in the early 1970s that led to a double-whammy for funds of
collapsing NAVs and massive redemptions. The result: the mutual fund industry
shrank drastically and remained in disfavor for nearly a decade.
How could a weak stock market affect you as a mutual fund shareholder?
Unfortunately, the loyalty of the long-term investor is not always rewarded. Not
only do many shareholders get saddled with poor performance from funds that have
followed risky strategies, they often have to pay large tax bills at the same
time, as funds sell holdings to redeem departing shareholders. Given the much
lower long-term gain rates under the new tax law, such taxes become even more
costly.
To get the best results from investing in mutual funds, it's crucial to
understand some of their disadvantages and risks. These include:
- - ORIENTATION TOWARD SHORT-TERM PERFORMANCE - NAIC members have learned the
importance of long-term investing. Unfortunately, most open-end funds are forced
to focus on short-term (i.e. quarterly) performance, since that's what draws in
new investors and increases management fees. This pursuit of quick returns leads
to speculative strategies that frequently end in disappointment, or worse. Two
recent examples: the collapse of international stock and bond funds in 1994, and
of technology funds late last year
- - HIGH TURNOVER AND EXPENSES - THE AVERAGE
mutual fund has turnover (purchases and sales) of roughly 90 percent per year.
That means the equivalent of nearly the whole portfolio is sold once a year.
NAIC, on the other hand, has long stood for very low, or even non-existent
turnover. The reason: true investing means buying high quality companies and
then benefitting from their earnings growth and consequent increase in market
value. Switching rapidly from one investment to another is simply a form of
speculation, and once you begin to speculate, you are taking big risks. In
addition, turnover increases trading costs such as commission and related fees.
- - HIGH TAXES - An enormous advantage of a true long-term investment strategy is
a minimal tax bill from your investments. Taxes can have an enormous impact on
your eventual returns. Consider the following remarks by Warren Buffett's close
business associate, Charles Munger:
"If you're going to buy something which compounds for 30 years at 15
percent per annum and you pay one 35 percent tax at the very end, . . .after
taxes you keep 13.3 percent per annum. In contrast, if you bought the same
investment, but had to pay taxes every year of 35 percent out of the 15 percent
that you earned, then your return would be 15 percent minus 35
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4
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percent of 15 percent - or only 9.75 percent per year compounded. So the
difference there is over 3.5 percent. And what 3.5 percent does to the numbers
over long holding periods like 30 years is truly eye-opening."
To make Munger's math more clear, $10,000 returning 13.3 percent per year
would be worth $423,543 after 30 years. At 9.75 percent over the same time
period, your $10,000 would be worth just $162,981.
Taxes are often high for most mutual fund shareholders for two reasons.
First, high turnover in pursuit of short-term performance can mean a lot of
capital gains, especially short-term gains, which are the most expensive under
the new tax laws. Second, redemptions at an open-end fund can penalize
shareholders who remain in the fund. To raise cash for departing shareholders,
the fund manager may have to sell shares with significant unrealized gains -
thus creating a large tax bill for those who remain behind.
- - GREATER RISK IN BEAR MARKETS - The combination of short-term investment
strategies and daily redemptions could combine to increase your risk as a
shareholder in a bear market. A significant market downturn could shake investor
confidence, causing large redemptions and the costs that often accompany them -
high taxes and expenses - sometimes accruing only to the shareholders remaining
in the fund. And redemptions are very likely in many open-end funds since they
tend to draw more and more investors as the market approaches a peak, leaving a
large number of discontented new investors as soon as the market heads south.
This investor behavior is the direct opposite of the NAIC's time-proven strategy
of regular investing through all types of markets.
GUIDELINES FOR PICKING THE BEST POSSIBLE FUND
Having pointed out these risks, it's also important to note that mutual
funds have a real purpose for investors - they allow the pooling of investor
funds to provide more effective and economic management of investment assets.
They are potentially useful for investors with smaller sums that they w ant
managed and for those who do not want to manage their own money actively. The
question then becomes, how do you get the benefits of a mutual fund and still
follow the type of long-term investment strategy favored by both my firm and
NAIC?
Here are a few guidelines to help you find a fund consistent with your
investment goals:
1. LOOK FOR FUNDS WITH A LONG-TERM STRATEGY. It's important to recognize that on
Wall Street, a year is often considered long term. However, this is not the kind
of true long-term investing that will weather all kinds of markets and provide
you with relatively tax-free returns. Read the prospec tus' description of the
fund's objective and investment strategy carefully to be sure they are
consistent with NAIC principles.
2. CHECK TURNOVER RATES. This is a good indication of how long-term a manager's
strategy truly is, despite what the prospectus says. The average fund, with
turnover of nearly 90 percent, is selling almost every holding in its portfolio
every year. Turnover rates can range as high as 200 percent plus or as low as
single digits. Remember, though, that other factors can affect turnover rates,
such as portfolio restructuring under a new manager, so use this as only one of
several criteria for selecting a fund.
3. CONSIDER A CLOSED-END FUND. These funds reduce the risks and costs of
redemptions by limiting or eliminating them. Instead of selling and redeeming
shares on an ongoing basis, closed-end funds issue a fixed number of shares in
an initial offering and subsequently trade in the stock market like any other
common stock. Many sell additional shares through dividend reinvestment plans,
optional cash purchase plans, rights offerings and/or interval offerings, but
when investors want to sell their shares, they sell to other investors rather
than back to the fund. Some new closed-end funds, called "interval funds" even
have a limited periodic redemption feature. Because this fund structure is so
well-suited to a long-term investment strategy, both my firm and NAIC chose to
set up closed-end funds for our investors who wanted a fund (Avalon Capital,
Inc. and the NAIC Growth Fund). Closed-end funds have a broad range of
investment objectives, so be sure to evaluate investment strategy as described
in guideline #1, above.
Wealthy investors have long had money managers like me whose job is to earn
high returns on their capital by focusing on long-term investments that minimize
expenses, especially taxes. Savvy investors who follow the guidelines above can
approximate the same type of service with a mutual fund, but only if they're
willing to do their homework.
DANIEL E. HUTNER IS A CONSULTANT TO THE NAIC GROWTH FUND AND PRESIDENT OF
HUTNER CAPITAL MANAGEMENT, INC., WHERE HE MANAGES AVALON CAPITAL, INC., A
CLOSED-END FUND INVESTED FOR LONG-TERM APPRECIATION, AS WELL AS INDIVIDUAL
AND INSTITUTIONAL ACCOUNTS. HE IS ALSO AUTHOR OF THE RATIONAL INVESTOR: A
GUIDE TO PRESERVING AND INCREASING YOUR WEALTH.
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5
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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.
FIRST EMPIRE STATE CORPORATION is a regional bank based in Buffalo, New York
with offices in eight states and the Bahamas. It boasts an extraordinary rate of
earnings growth for a bank of 18.5% for the last 5 years and 17% for the last 10
years. Return on average common shareholder equity in 1996 was a high 17.60%. In
addition, income from non-interest sources has risen significantly in recent
years providing more stability to the company's income stream. First Empire
State has benefitted, in particular, from superior management. As Chairman
Robert G. Witmer puts it in the 1996 Annual Report, "The year-to-year parade of
pleasing numbers can only begin to suggest the process of innovation,
adaptation, venture and risk by which a banking enterprise grows and prospers."
YEAR NET PER
ENDED REVENUES INCOME SHARE
----- -------- ------ -----
(in millions) (in millions)
1997 (estimated) $770.0 $160.0 $24.70
1996 701.2 151.1 21.31
1995 635.9 131.0 18.79
1994 591.8 117.3 16.35
1993 581.3 102.0 13.87
SOURCE: FIRST EMPIRE STATE CORPORATION, VALUE LINE INVESTMENT SURVEY
CEDAR FAIR, L.P. owns and operates four well-established amusement parks: Cedar
Point on Lake Erie between Cleveland and Toronto has been in operation for 127
years; Valleyfair, near Minneapolis/St. Paul for 22 years; Dorney Park &
Wildwater Kingdom in Allentown Pennsylvania (acquired in 1992) fo r 114 years;
and Worlds of Fun and Oceans of Fun in Kansas City, Missouri (acquired in 1995)
for 25 years. With over 70 million people living within driving distance of one
of the company's parks, revenues have risen steadily over the years in good
times and bad. The new tax law allows Cedar Fair to maintain its status as a
publicly-traded master limited partnership, which means it will be able to
continue making sizeable cash distributions (currently at a 6% rate) to its unit
holders.
YEAR NET PER
ENDED REVENUES INCOME SHARE
----- -------- ------ -----
(in millions) (in millions)
1997 (estimated) $270.0 $ 75.0 $ 3.25
1996 250.5 74.2 3.81
1995 218.2 66.1 2.90
1994 198.4 60.7 2.73
1993 178.9 50.3 2.26
SOURCE: CEDAR FAIR, L.P., VALUE LINE INVESTMENT SURVEY
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AVALON CAPITAL, INC.
COMPANY PROFILES
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FRANCO NEVADA MINING CORPORATION, LTD. specializes in gold and other natural
resource royalties. The company purchases royalties that allow it to benefit
from increased production or new discoveries without bearing the capital
expenses, legal liabilities, etc. associated with mining. In the past 5 years,
the company's earnings have soared at an annual rate of 49.5% due to the large
expansion of gold production at American Barrick's Goldstrike property. By May
1999, Franco Nevada expects to start production from a new discovery in Nevada,
the Ken Snyder Mine. Because of the high profitability and large size of this
new resource, the company has decided to make an exception to its royalty
strategy and to hire outside contractors to develop the mine. Franco Nevada also
has a rapidly growing oil and gas royalty business.
YEAR NET PER
ENDED REVENUES INCOME SHARE
----- -------- ------ -----
(in millions) (in millions)
1997 (estimated) $80.0 $55.0 $.75
1996 85.7 61.0 .85
1995 67.1 52.8 .79
1994 68.9 50.2 .78
1993 35.9 31.9 .51
SOURCE: FRANCO NEVADA MINING CORPORATION, LTD., VALUE LINE INVESTMENT SURVEY
PEPSICO, INC. recently spun off its restaurant businesses (Pizza Hut, KFC, and
Taco Bell) into a new company called Tricon Global Restaurants, Inc. (ticker
symbol: YUM). Tricon began trading as a separate company on October 7, 1997.
Pepsico's remaining businesses include beverages (Pepsi-Cola, D iet Pepsi,
Mountain Dew) and snack foods (Frito Lay products including Doritos, Ruffles,
Lays, Chee-tos, and Rold Gold). While Pepsico remains a distant number two to
Coca-Cola in the international beverage market, it dominates both the domestic
and global snack food industry. The spin-off should allow Pepsico to focus more
on its two core and most profitable businesses.
YEAR NET PER
ENDED REVENUES INCOME SHARE
----- -------- ------ -----
(in millions) (in millions)
1997 (estimated) $32,200 $2,275 $1.45
1996 31,645 1,865 1.17
1995 30,421 1,990 1.24
1994 28,472 1,784 1.11
1993 25,021 1,588 .98
SOURCE: PEPSICO, INC., VALUE LINE INVESTMENT SURVEY
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AVALON CAPITAL, INC.
SCHEDULE OF INVESTMENTS
AUGUST 31, 1997
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Shares Security Description Value
------ -------------------- -----
COMMON STOCKS (98.68%)
BANKS-REGIONAL (3.57%)
1,200 First Empire State ........................ $438,600
--------
BEVERAGES (24.72%)
5,000 Anheuser-Busch Companies, Inc. ............ 213,125
40,400 Coca-Cola Company ......................... 2,315,425
14,000 Pepsico Inc. .............................. 504,000
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3,032,550
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COMMERCIAL & INDUSTRIAL SERVICES (3.42%)
16,500 Servicemaster L.P. ....................... 419,719
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CONSUMER PRODUCTS (3.44%)
2,200 Gillette Company .......................... 182,188
8,300 UST, Inc. ................................. 239,663
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421,851
-------
DIVERSIFIED COMPANIES (6.76%)
20 Berkshire Hathaway, Inc.* ................. 830,000
-------
ENTERTAINMENT (8.81%)
14,072 The Walt Disney Company ................... 1,080,906
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FINANCIAL SERVICES (11.34%)
17,900 American Express Company .................. 1,391,725
---------
FOOD PRODUCTS (2.75%)
80 Earthgrains Company ....................... 3,280
4,600 Wrigley (Wm) Jr. Company .................. 333,500
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336,780
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INSURANCE (8.42%)
10,950 American International Group, Inc. ........ 1,033,406
---------
LEISURE/AMUSEMENT (6.73%)
4,400 Cedar Fair LP ............................. 193,600
10,000 EMI Group ADR* ............................ 184,844
20,325 International Speedway Corporation ........ 447,150
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825,594
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SEE NOTES TO FINANCIAL STATEMENTS
8
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AVALON CAPITAL, INC.
SCHEDULE OF INVESTMENTS
AUGUST 31, 1997
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Shares Security Description Value
------ -------------------- -----
MINING (3.10%)
16,000 Franco Nevada Mining, Ltd ....................... 379,689
-----------
MORTGAGE FINANCE (9.33%)
9,200 Federal Home Loan Mortgage Corporation .... 299,575
19,200 Federal National Mortgage Association ........... 844,800
-----------
1,144,375
NEWSPAPER (2.14%)
2,700 Gannett Company, Inc. ........................... 263,081
-----------
PUBLISHING (0.14%)
600 Readers Digest Association, Inc. ................ 17,737
-----------
RESTAURANTS (4.01%)
10,400 McDonald's Corporation .......................... 492,050
-----------
TOTAL COMMON STOCKS (COST $8,831,565) ...................... 12,108,063
-----------
SHORT-TERM HOLDINGS (0.37%)
44,992 Star Treasury Fund .............................. 44,992
-----------
TOTAL INVESTMENTS (COST $8,876,557) ........................ $12,153,055
===========
*Denotes non-income producing securities
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SEE NOTES TO FINANCIAL STATEMENTS
9
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AVALON CAPITAL, INC.
STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 1997
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ASSETS:
Investments, at value (cost $8,876,557) ................. $12,153,055
Receivable for securities sold .......................... 394,322
Interest, dividends and other receivables ............... 7,429
Organization costs, net ................................. 63,213
----------
Total assets ................................................. 12,618,019
----------
LIABILITIES:
Payable for securities purchased ........................ 304,476
Accrued advisory fee .................................... 10,843
Accrued administration fees ............................. 3,700
Accrued fees and other expenses ......................... 29,560
-----------
Total liabilities............................................. 348,579
-----------
NET ASSETS.................................................... $12,269,440
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COMPOSITION OF NET ASSETS:
Paid-in capital ......................................... $9,090,883
Accumulated net investment loss ......................... (88,576)
Accumulated net realized losses on investments .......... (9,365)
Net unrealized appreciation on investments .............. 3,276,498
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NET ASSETS ................................................... $12,269,440
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SHARES OUTSTANDING............................................ 918,726
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NET ASSET VALUE PER SHARE (market value $13.75)............... $13.35
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AVALON CAPITAL, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED AUGUST 31, 1997
================================================================================
INVESTMENT INCOME:
Dividends ................................................... $139,840
Interest .................................................... 33,180
------
Total investment income........................................... 173,020
-------
EXPENSES:
Advisory ................................................... 118,194
Administration ............................................. 38,989
Accounting ................................................. 12,000
Transfer agency ............................................ 10,922
Auditing ................................................... 15,000
Legal ...................................................... 24,130
Directors .................................................. 3,368
Amortization of organization costs ......................... 20,220
Other ...................................................... 17,829
------
Total expenses................................................... 260,652
-------
NET INVESTMENT LOSS.............................................. (87,632)
-------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS:
Net realized loss on investments............................ (37,380)
Net change in unrealized appreciation....................... 2,859,839
---------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS.................. 2,822,459
---------
INCREASE IN NET ASSETS FROM OPERATIONS........................... $2,734,827
==========
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10
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AVALON CAPITAL, INC.
STATEMENTS OF CHANGES IN NET ASSETS
================================================================================
For the year ended November 20, 1995*
August 31, 1997 through August 31, 1996
--------------- -----------------------
FROM INVESTMENT ACTIVITIES:
Net investment loss $ (87,632) $ (115)
Net realized gain (loss)
on investments (37,380) 29,655
Net unrealized appreciation 2,859,839 416,659
--------- -------
Net increase in net assets
resulting from operations 2,734,827 446,199
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DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income - (22,488)
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CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares 218,806 9,676,913 **
Reinvested dividends - 402
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218,806 9,677,315
Shares repurchased (863,866) (21,353)
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Net increase (decrease) in net
assets from capital share
transactions (645,060) 9,655,962
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NET INCREASE IN NET ASSETS 2,089,767 10,079,673
NET ASSETS:
Beginning of period 10,179,673 100,000
---------- -------
End of period $12,269,440 $10,179,673
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* Commencement of Operations
** Net of $43,055 offering costs
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11
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AVALON CAPITAL, INC.
FINANCIAL HIGHLIGHTS
================================================================================
SELECTED DATA FOR A SHARE OUTSTANDING DURING THE PERIOD
For the year ended November 20, 1995*
August 31, 1997 through August 31, 1996
--------------- -----------------------
Beginning net asset value
per share $10.51 $10.00
Net investment loss (0.09) -
Net realized and unrealized
gain on securities 2.93 0.60
Distribution from net
investment income - (0.04)
Offering cost - (0.05)
----- -----
Ending net asset value per share $13.35 $10.51
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Ending market value per share $13.75 $10.88
====== ======
Ratios to average net assets:
Expenses 2.22% 3.14%**
Total return:
Based upon net asset value 27.02% 5.48%
Based upon market value 26.38% 9.18%
Portfolio turnover rate 8.89% 0.00%
Average brokerage commission rate + $0.0612 $.0450
Net assets at end of period
(000's omitted) $12,269 $10,180
* Commencement of operations
** Annualized
+ Amount represents average commission per share, paid to brokers, on the
purchase and sale of portfolio securities
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12
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AVALON CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 1997
================================================================================
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 require 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.
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
certain shareholder account fees.
4. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales (excluding short-term investments)
during the year ended August 31, 1997, amounted to $2,622,919 and $975,442,
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 August 31, 1997 was $3,329,702 and $53,204, respectively.
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AVALON CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 1997
================================================================================
Realized gains and losses on investments sold are recorded on the basis of
specific 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 (the "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 year ended
August 31, 1997, the Fund issued 1,103 shares in connection with the 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. The Fund issued 12,748 shares on
September 30, 1996, 3,804 shares on December 2, 1996 and 1,654 shares on June
30, 1997.
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14
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AVALON CAPITAL, INC.
OTHER INFORMATION
================================================================================
BOARD OF DIRECTORS AND SHAREHOLDERS OF
AVALON CAPITAL, INC.
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Avalon Capital, Inc. (the "Fund") as of August
31, 1997, and the related statements of operations and of changes in assets, and
financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an option on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
August 31, 1997 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our option.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Avalon Capital, Inc.
as of August 31, 1997, and the results of its operations, changes in its
operations, changes in its net assets and the financial highlights for each of
the periods presented in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
October 22, 1997
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AVALON CAPITAL, INC.
OTHER INFORMATION
================================================================================
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, Inc. (the "Fund") 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, Inc., P.O. Box 5536, Hauppauge, NY
11788-0132. 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
The Fund'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)
951-0500.
Shares of Avalon Capital, Inc. 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, Inc. 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, Inc. 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, Inc. you may write us at
Avalon Capital, Inc., 34 Chambers Street, Suite 200, Princeton, NJ 08542, or
call (609) 683-3916.
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