AVALON CAPITAL, INC.
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SEMI-ANNUAL REPORT
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February 28, 1998
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AVALON CAPITAL, INC.
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SEMI-ANNUAL REPORT April 21, 1997
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Dear Shareholders,
For the six months ended February 27, 1998 Net Asset Value (NAV) rose from
$13.35 to $16.40 - an annualized gain of 51.43%. As of today, NAV has risen
further to $18.15, close to its all-time high. In addition, Avalon Capital was
cited recently by Lipper Analytical Services for ranking number 1 for 1997 in
its Capital Appreciation Closed-End Fund category.
On February 27, 1998, the Fund's second annual redemption took place, and 46,281
shares were redeemed. In addition, the Fund sold 5,288 new shares on September
30, 1997.
---------------------------------------------
While most investors focus on the performance of their investments - and rightly
so - they often overlook the importance of taxes. Now that another April 15th
has come and gone, it may be worth reviewing how our strategy not only provides
superior performance, but also reduces investment costs, especially your tax
bill.
The key to our strategy is to own a group of companies whose earnings are likely
to be much larger in 5, 10, and 20 years. If the earnings of these companies
grow at a rapid rate, we're likely to see similar gains in their share prices.
At times, the share prices will grow even faster than underlying earnings (i.e.
the bull market in recent years). At other times, the share prices will increase
more slowly - or even go down for a while.
But over long periods of time, if earnings grow substantially, share prices will
likely follow.
What Could Go Wrong The obvious question then is what could go wrong. While most
investors worry about what the stock market is going to do over the near term,
our concern is what the earnings for our companies are going to do over the next
decade or two. If the earnings aren't there, the capital gains won't
materialize.
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Avalon Capital, Inc.
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AVALON CAPITAL, INC.
SHAREHOLDER LETTER
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Assuming we're right about our earnings projections, what else can hurt our
results? The answer, for a taxable investor, is paying too much in capital gains
taxes.
For example, imagine that Avalon Capital's portfolio had annual turnover of
100%, not uncommon for mutual funds, instead of rates below 10% per year, and
that, as a result, all the gains were taxable realized gains. An average 15%
annual return would fall to 12% assuming long-term capital gains rates, and just
9% if all the gains were short-term and the investor was in the 40% bracket.
Now, $100,000 compounded at 15% for thirty years will grow to $6,621,177, but
just $1,326,768 at 9%. The difference - $5,294,409 - would be due solely to
taxes.
Hidden Dangers for Mutual Fund Investors
Consequently, two mutual funds with the exact same performance could give very
different long-term results after taxes. And it gets worse. The dangers of
taxable distributions from mutual funds are vividly described in a recent issue
of Morningstar. Most investors in funds don't realize they can get hit with a
particularly large tax bill even when a fund's NAV declines. As Morningstar
describes one such fund:
In 1997, many investors got socked with taxable capital gains on funds
that finished the year with significant losses, which means that they
effectively had to either sell shares of the fund at a loss or take money
out of pocket to pay the taxes. Invesco Asian Growth, for example, paid
out about 21% of its NAV in December, even though it finished the year
down 38.5%. Thus, investors who put $10,000 in the fund at the beginning
of 1997 would have finished the year with $6,150, and had to pay taxes on
almost $1,300 in distributions to boot.
Morningstar goes on to point out that panic selling by some shareholders can
aggravate the problem for remaining shareholders, since the fund manager must
raise cash for departing shareholders and any gains realized are spread over a
smaller base. Why aren't most mutual funds more sensitive to their shareholders'
tax liabilities? According to Morningstar:
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Avalon Capital, Inc.
<PAGE>
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AVALON CAPITAL, INC.
SHAREHOLDER LETTER
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The bigger issue, which goes well beyond the annoyance of funds that make
large one-time distributions, is funds that are chronically unfriendly to
their shareholders' tax forms. That happens more often than one might
expect. Portfolio managers are compensated based on raw returns, and
everyone wants to look good in rating and ranking systems (including
Morningstar's) based on pretax returns. When we interview portfolio
managers, they often gloss over tax considerations or wave off concerns
about large distributions by stating that tax considerations shouldn't
drive the investment process. A few tell us point-blank that they pay
absolutely no attention to tax implications when making their investment
decisions.
Our Goal: Minimize Taxes!
In our years of managing assets for wealthy individuals and institutions, we
have always very carefully managed tax liabilities, and other investment costs
such as brokerage commissions, on an account by account basis. Our goal has been
to keep such costs to an absolute minimum.
Now that we're managing a closed-end interval fund, we follow the same approach.
Not only does our strategy result in relatively low tax bills, but we chose this
type of fund to manage because we felt it was far superior to an open-end fund
when it comes to lessening the impact of taxes.
Does this mean we'll never sell any of our companies? Of course not. We will
sell shares in any company - and pay the capital gains tax - if we feel its
earnings prospects have diminished and are unlikely to recover within a
reasonable period of time. We will also sell when we find another investment
that offers higher returns even after paying the tax.
But we are definitely "tax-efficient" in the way we invest. So far, Avalon
Capital shareholders have received no capital gains distributions since the
fund's first offering in November, 1995.
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Avalon Capital, Inc.
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AVALON CAPITAL, INC.
SHAREHOLDER LETTER
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The following article by David Dreman from his "The Contrarian" column in the
April 20, 1998 issue of Forbes discusses the issues raised above regarding taxes
as they relate to mutual funds. It also describes the importance of other
trading costs such as transaction charges. Investors in Avalon Capital should
note that due to the fund's normally large bid/ask spread, it may make sense to
place limit orders, as discussed in the article, when buying or selling the
fund's shares.
/s/ Daniel E. Hutner
Daniel E. Hutner
Chairman and President
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Avalon Capital, Inc.
<PAGE>
Two Costly Mistakes
By David Dreman
Reprinted by permission of FORBES Magazine (C) Forbes Inc. 1998
The best-performing mutual fund is not always the best investment. Investors,
especially novice investors, tend to pick mutual funds on the raw numbers,
ignoring the effect that frequent trading can have on their taxes. That's okay
in a tax-deferred or tax-free account, but it can poison your results in a
taxable account.
If, as an example, a fund turned its portfolio over 100% in a year, an investor
could face paying a federal tax of at least 20% and possibly as high as 40%
depending on whether the gains were long or short term - on the fund's asset
value. By contrast, a simple index fund that merely tracked the average would
have incurred few if any income taxes. So a fund with a high turnover could beat
the market, yet its shareholders would lag the averages.
Does this happen in the real world? The answer, unfortunately, is yes. Raw
performance is what gets media attention and often with it, gushers of new
money. Thus recently one major fund group brought in a new hired gun to pick up
the performance of its flagship fund. The fund's results were excellent over the
previous ten years, but had lagged in the past few. The new hand attacked the
portfolio guns ablazing, mowing down and replacing much of its portfolio. As a
result, this fund distributed in capital gains an amount equal to 33% of its
asset value. The high-bracket investor took a hit of as much as 13% of his or
her investment, including state taxes. What will the shareholder get in return
for all this asset-shuffling? Not enough, in my view, to justify shareholders'
taking this kind of haircut.
Another mistake a lot of investors make is to deal with the broker who offers
the lowest commission rate. I'm not against low commissions, but the few cents a
share you save can often cost 25 cents or more in the end. Here's why.
The lowest commissions available apply to market orders, which are executed on
the bid side of the stock's bid-ask spread if the investor is a seller, and the
asked side if he is a buyer. The larger the order and the thinner the volume in
the issue, the more such orders will cost. To take an example, if a stock is
thinly traded and the spread is 4 to 4 3/4, and you want to sell, you will get
4. If you have large size, you might get less, maybe 3 1/2 on average. Sure the
investor saves a few pennies, maybe more, on commissions, but he can lose up to
50 cents on the bid-ask spread.
Here's how you avoid that trap: Avoid market orders. Instead use limit orders
where you specify the price at which you will buy or sell the stock. Put the
price somewhere between the bid and the asked price. Discount brokers will
usually charge you an extra $5 per order for a limit order as opposed to a
market order, but if that five bucks saves you even 1/64th of a point on a
1,000-share order, it's one heck of a bargain.
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Avalon Capital, Inc.
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Security
Shares Description Value
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Common Stocks (105.09%)
Banks- Regional (3.93%)
1,200 First Empire State Corp........................ $ 566,400
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Beverages (25.46%)
8,200 Anheuser-Busch Companies, Inc.................. 384,375
40,400 Coca-Cola Company.............................. 2,774,975
14,000 Pepsico Inc.................................... 511,875
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3,671,225
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Commercial & Industrial Services (1.50%)
8,000 Servicemaster L.P.............................. 217,000
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Consumer Products (1.65%)
2,200 Gillette Company............................... 237,325
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Diversified Companies (7.74%)
20 Berkshire Hathaway, Inc. *..................... 1,116,000
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Entertainment (13.72%)
6,000 American Radio Systems Corp *.................. 358,500
1,500 Regal Cinemas, Inc. *.......................... 44,344
14,072 The Walt Disney Company........................ 1,575,185
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1,978,029
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Financial Services (11.18%)
17,900 American Express Company....................... 1,612,119
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Food Products (2.46%)
80 Earthgrains Company............................ 3,465
4,600 Wrigley (Wm) Jr. Company....................... 351,325
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354,790
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Security
Shares Description Value
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Insurance (9.13%)
10,950 American International Group, Inc.............. $ 1,316,053
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Leisure/Amusement (5.25%)
10,000 EMI Group ADR *................................ 177,500
20,325 International Speedway Corporation............. 579,262
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756,762
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Mining (2.38%)
16,000 Franco Nevada Mining, Ltd...................... 343,466
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Mortgage Finance (11.51%)
9,200 Federal Home Loan
Mortgage Corporation........................ 434,700
19,200 Federal National Mortgage
Association................................. 1,225,200
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1,659,900
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Newspaper (2.42%)
5,400 Gannett Company, Inc........................... 348,637
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Publishing (1.03%)
5,600 Readers Digest Association, Inc................ 148,750
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Restaurants (4.98%)
12,400 McDonald's Corporation......................... 678,900
1,400 Tricon Global Restaurants *.................... 39,725
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718,625
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Total Common Stocks (Cost $8,951,409).......................... 15,045,081
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Short-Term Holdings ( .75%)
108,796 Star Treasury Fund............................. 108,796
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Total Investments (Cost $9,060,205)............................ $ 15,153,877
============
* Denotes non-income producing securities
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See Notes to Financial Statements Avalon Capital, Inc.
<PAGE>
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AVALON CAPITAL, INC.
STATEMENT OF ASSETS AND LIABILITIES
February 28, 1998
(Unaudited)
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ASSETS:
Investments, at value (cost $9,060,205)..................... $ 15,153,877
Interest, dividends and other receivables................... 6,385
Organization costs, net..................................... 53,482
Other assets................................................ 4,507
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Total Assets..................................................... 15,218,251
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LIABILITIES:
Payable for Fund shares repurchased......................... 759,014
Accrued advisory fee........................................ 11,394
Accrued fees and other expenses............................. 27,264
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Total Liabilities................................................ 797,672
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NET ASSETS....................................................... $ 14,420,579
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COMPOSITION OF NET ASSETS:
Paid-in capital............................................. $ 8,429,861
Accumulated net investment loss............................. (171,468)
Accumulated net realized gains on investments............... 68,514
Net unrealized appreciation on investments.................. 6,093,672
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NET ASSETS....................................................... $ 14,420,579
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SHARES OUTSTANDING............................................... 879,333
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NET ASSET VALUE PER SHARE (market value $15.00).................. $ 16.40
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See Notes to Financial Statements Avalon Capital, Inc.
<PAGE>
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AVALON CAPITAL, INC.
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED FEBRUARY 28, 1998
(Unaudited)
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INVESTMENT INCOME:
Dividends................................................... $ 63,655
Interest.................................................... 6,051
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Total Investment income.......................................... 69,706
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EXPENSES:
Advisory.................................................... 67,239
Administration.............................................. 22,200
Transfer agency............................................. 3,144
Auditing.................................................... 10,150
Legal....................................................... 27,510
Directors................................................... 3,781
Custody..................................................... 1,533
Amortization of organization costs.......................... 9,731
Other....................................................... 7,310
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Total expenses................................................... 152,598
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NET INVESTMENT LOSS.............................................. (82,892)
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REALIZED AND UNREALIZED GAIN
ON INVESTMENTS:
Net realized gain on investments............................ 77,879
Net change in unrealized appreciation....................... 2,817,175
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NET REALIZED AND UNREALIZED GAIN
ON INVESTMENTS................................................. 2,895,054
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INCREASE IN NET ASSETS FROM OPERATIONS........................... $ 2,812,162
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See Notes to Financial Statements Avalon Capital, Inc.
<PAGE>
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AVALON CAPITAL, INC
STATEMENT OF CHANGES IN NET ASSETS
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<TABLE>
<CAPTION>
For the six months For the year
ended ended
February 28, 1998 August 31, 1997
(Unaudited)
FROM INVESTMENT ACTIVITIES:
<S> <C> <C>
Net investment loss.......................... $ (82,892) $ (87,632)
Net realized gain (loss) on investments...... 77,879 (37,380)
Net unrealized appreciation.................. 2,817,175 2,859,839
Net increase in net assets
resulting from operations................ 2,812,162 2,734,827
DISTRIBUTION TO SHAREHOLDERS FROM:
Net investment income........................ -- --
CAPITAL SHARE TRANSACTIONS:
Proceeds from sale of shares................. 97,991 218,806
Shares repurchased........................... (759,014) (863,866)
Net increase/(decrease) in net assets from
capital share transactions............... (661,023) (645,060)
NET INCREASE IN NET ASSETS....................... 2,151,139 2,089,767
NET ASSETS:
Beginning of period............................... 12,269,440 10,179,673
End of period..................................... $ 14,420,579 $ 12,269,440
</TABLE>
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See Notes to Financial Statements Avalon Capital, Inc.
<PAGE>
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AVALON CAPITAL, INC.
FINANCIAL HIGHLIGHTS
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<TABLE>
<CAPTION>
Selected Data for a Share Outstanding During the Period
For the six month For the year November 20, 1995*
ended ended through
February 28, 1998 August 31, 1997 August 31, 1996 (Unaudited)
<S> <C> <C> <C>
Beginning net asset value per share $13.35 $10.51 $10.00
Net investment loss (0.09) (0.09) -
Net realized and unrealized gain on securities 3.14 2.93 0.60
Distribution from net investment income - - (0.04)
Offering cost - - (0.05)
Ending net asset value per share $16.40 $13.35 $10.51
Ending market value per share $15.00 $13.75 $10.88
Ratios to average net assets:
Expenses 2.29%** 2.22% 3.14%**
Total return:
Based upon net asset value 51.43%** 27.02% 5.48%
Based upon market value 19.18%** 26.38% 9.18%
Portfolio turnover rate 6.38% 8.89% 0.00%
Average brokerage commission rate + $0.0556 $0.0612 $ .0450
Net assets at end of period (000's omitted) $14,421 $12,269 $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>
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See Notes to Financial Statements Avalon Capital, Inc.
<PAGE>
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AVALON CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1998
(Unaudited)
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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 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.
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Avalon Capital, Inc.
<PAGE>
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AVALON CAPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
FEBRUARY 28, 1998
(Unaudited)
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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 six months ended February 28, 1998, amounted to $868,866 and
$844,767, 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, 1998 was $6,103,772 and
$10,100, 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 (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 six months
ended February 28, 1998, the Fund issued 1,601 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 27, 1998, the Fund redeemed 46,281
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 5,288 shares
on September 30, 1997.
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Avalon Capital, Inc.
<PAGE>
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AVALON CAPITAL, INC.
OTHER INFORMATION
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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, Inc., The Hauppauge Corporate Center, 150
Motor Parkway, Suite 109, Hauppauge, NY 11788. 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)
951-0500.
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.
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Avalon Capital, Inc.
<PAGE>
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.
150 Motor Parkway
Suite 109
Hauppauge, NY 11788
DISTRIBUTOR
ADS Distributors, Inc.
670 2nd Street, Suite A
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) 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.
